Distribution of the National Income among the Population

THEORY OF DEMAND

What is Demand?

Demand entails the willingness and ability to buy a specific quantity of a good at a certain price, at a given period of time, ceteris paribus (all things being equal).

What affects Demand?

Factors that will affect demand: (Also called determinants of demand)

An individual’s demand for a specific product is determined by

(a) Price of the Commodity

(b) Consumers’ Income

(c) Price of other commodities

· Complementary goods (goods which are consumed together. When the demand for one rises, so does the demand for the other)

· Substitutes (goods which are competitive. A fall in the price of one good, will cause a drop in the demand for its rival)

(d) Consumer tastes and preferences

(e) Number of consumers/Changes in population

(f) Distribution of the National Income among the Population

THE LAW OF DEMAND

The law of demand states that as price increases the quantity demanded decreases and as price decreases the quantity demanded increases. Thus, there is an inverse relationship between price and quantity demanded.

The table below shows the inverse relationship between price and quantity. It shows an individual’s demand schedule for apples at varies.

DEMAND SCHEDULE FOR APPLES

Price (Per Pound of Apples) Quantity Demanded (Pounds)
$ 10 1
$ 8 2
$ 6 3
$ 4 4
$ 2 5
$1 6

The demand schedule shows the inverse relationship between price and quantity demanded. When the price of apples increases the quantity demanded decreases. When apples are $10 per pound only one pound is demanded. When the price reduced for example to $2 per pound five pounds are demanded.

Demand Curve for Apples Demand curve for Rice

The demand curve also shows the inverse relationship between price and quantity demanded. The demand curve is said to be downward sloping or negatively curved.

The demand schedule shows an individual’s preferences, however a market demand curve can be obtained by summing up everyone’s individual demand curve.

Question. Construct the demand curve for rice using the schedule below.

DEMAND SCHEDULE FOR RICE

Price (Per Pound of Rice) Quantity Demanded (Pounds)
$ 25 100
$ 20 200
$ 15 350
$ 10 500
$ 5 700
$1 850

CHANGES IN DEMAND VS. CHANGES IN QUANTITY DEMANDED

Changes in Demand

If any of the determinants of demand changes except the price of the commodity itself, this results in a change in demand, thus, causing movement of the entire demand curve.

An increase in the total demand for a commodity means that all levels of demand increases and the demand curve will move to the right. (EXTENSION = FORWARD MOVEMENT).

A decrease in the total demand for a commodity means that all levels of demand decreases and the demand curve will move to the left. (CONTRACTION = BACKWARD MOVEMENT)

Changes in Demand

In the diagram above assume the demand for apples was D and consumer’s income increases, this will cause the demand curve for apples to move from D to D1. If household incomes fall, this will cause the demand curve to move from D to D2.

Remember, changes in demand come about due to changes in the determinants of demand except the price of the commodity.

Changes in the Quantity Demanded

Changes in the quantity demanded are due to changes in the price of a commodity. It is represented by movement along the demand curve.

Changes in the Quantity Demanded

In the diagram above the price of apples was $10 and the quantity demanded was 15 pounds. However, when the price decreases to $5 the quantity demanded increases from 15 pounds to 20 pounds.

Questions

  1. Distinguish between changes in demand and changes in quantity demanded with the aid of diagrams.

2.

DEMAND SCHEDULE FOR ONIONS

PRICE PER POUND OF ONIONS QUANTITY DEMANDED PER POUND

$10 50
$8 100
$6 150
$4 200
$2 250

a. Given the above demand schedule draw and label a demand curve for onions

b. Assume that there is an increase in the population of the BVI; show how this would affect the demand curve for onions using a curve labeled D2.

c. Assume there is a decrease in consumer’s income; show how this would affect the demand for onions using a curve labeled D1.

THEORY OF SUPPLY

What is Supply?

Supply refers to amount of a commodity that producers are willing to put on the market at a certain price, over a given period of time, ceteris paribus.

What determines supply?

The following are the determinants of supply:

a. Price of the Commodity

b. Costs of Production

c. Price of Other Commodities

d. Attitude of firms

e. Government Policy

f. Unpredictable Production Problems (e.g. weather conditions)

THE LAW OF SUPPLY

The law of supply is opposite to that of demand. The law of supply states that as price increases quantity supplied also increases. Thus, price and quantity supplied moves in the same direction.

SUPPLY SCHEDULE FOR APPLES

Price (Per Pound of Apples) Quantity Supplied (Pounds)
$ 10 80
$ 8 70
$ 6 60
$ 4 50
$ 2 30
$1 10

The supply schedule shows the relationship between price and quantity. When price increases the quantity supplied also increases. When the price per pound is $10, 80 pounds are supplied, when the price decreases to $1 only 10 pounds of apples is supplied.

Supply Curve for Apples

CHANGES IN SUPPLY

This occurs when there is movement of the entire supply curve. This is caused by changes in the determinants of supply other than the price of the commodity.

An increase in total supply will lead to a shift in the supply curve to the right and a decrease in total supply will lead to a shift in the supply curve to the left.

Changes in Supply

EQUILIBRIUM

When the quantity demanded and the quantity supplied are the same we have equilibrium. In other words where the demand and supply curves intersect is known as the equilibrium.

Equilibrium price and quantity: the price and quantity at which the amount demanded equals the amount supplied. In the schedule below the equilibrium price is $15 and the equilibrium quantity is 300 burgers.

MARKET FOR BURGERS

Price Quantity Demanded Quantity Supplied
$25 100 500
20

200 400
15 300 300
10 400 200
5 500 100

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