The supply schedule:
A schedule, in a table form, showing the various quantities of a commodity in the market at various prices per period of time. See the example in the Table 1.
Table 1: Supply Schedule for Beef
The Supply Curve:
A curve indicating the quantity of a good that producers (sellers) are willing to supply (sell) at a given prices (holding other factors that might affect quantity supplied). Normally, the supply curve slopes upwards from left to right indicating that the higher the price the higher is the quantity supplied – ceteris paribus. This is respecting the law of supply.
The theory of Supply
- The law states that, ceteris paribus, the higher the price the higher the quantity supplied. And vice versa.
- A higher price may enable a producer to produce more by hiring extra workers or by having existing workers work overtime.
- And may also invest in better equipment, and increasing the size of its plant .
Determinants of Supply
- Price
- The available technology of production
- Prices of resources used in the production the product being supplied
- Prices of substitutes
- Price of related goods and services
- Producer expectations about future prices and technology
The theory of Demand
Demand: This refers to the desire of an individual or firm backed by the ability and willingness to acquire the commodity desired. Demand is the relationship between the quantities of a good or service consumers will purchase and the price charged for that good or service.
Types of demand
- Derived demand: an item not for its own sake but due to demand for another item. E.g., demand for cotton material is derived from the demand for the shirts, dresses, trousers and other items made out of it. If the demand for these products declines, the demand for cotton material will also decline.
- Complementary (joint) demand: This refers to demand for commodities that are used together and therefore an increase in the demand for one leads to an increase in the demand for the other. E.g., include tires and vehicles, arms and ammunitions, vehicles and petroleum products, etc.
- Competitive demand: This refers to the demand for commodities that serve almost the same purpose (as substitutes) such that an increase in the demand for one results into a decrease in the demand for another. E.g., example coffee and tea, iron sheets and roofing tiles.
- Composite demand: The total demand for a commodity is got by adding up quantity demanded for several uses. For example steel is demanded for making steel bars, bodies of vehicles, rail, etc.
- Independent demand: Here the demand for one product does not affect or is not affected by the demand for other commodities. In real life, such commodities are rare.
Demand Schedule:
A schedule shows, in a table form, the quantity of a commodity inthe market that buyers are willing to purchase at each possible price. See example in the Table 2.
Table : Demand Schedule for Beef
Effective Demand
- Effective demand is what is important to sellers, and the entire economy, because it is the actual buying of the commodity or service that matters to GDP. Demand is not simply a quantity consumers wish to purchase such as ’10 mangoes’ or ’20 shares of Coca Cola’.
- It is the people who are willing and able to pay the given prices for the good (and use the good) that matter to production – effective demand.
- There is an English adage that “If wishes were horses, beggars would rid them”, and there was a Ugandan satirist who remarked that if wished were beer bottles, he would have died a long time ago.
- Wishes (expressed as wants or needs) are not what matters in the market. Adam Smith, more than two centuries ago, also referred to effectual demand.
- A very poor man may be said, in some sense, to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it. (Adam Smith, The Wealth of
Nations, Chap.7, p.52)
Demand curve
- The demand curve shows the quantities that buyers are ready to purchase at various prices. The vertical axis of the graph shows the price of a good, P, measured in US dollars per unit.
- This is the price at which the buyers are willing to purchase a given quantity of the good. The horizontal axis shows the quantity, Q, measured in the number of unit per period.
- The demand curve represents the relationship between quantity demanded of a good and all possible prices charged for that good. The demand curve, therefore, expresses the relationship between quantity demanded and price.
- We can express this relationship in an equation: Qd = Qd (P)
Determinants of quantity demanded
Quantity demanded refers to the specific quantity desired for a good at a given price. It is typical to give a time period when describing quantity demanded. In order to identify the factors that determine quantity demanded of a commodity, we need first to assume that other factors are constant, ceteris paribus. These are the factors:
- The price of substitutes: Substitutes are different goods that compete with the good under consideration.
Examples of substitutes include Coca-Cola and Pepsi Cola, butter and margarine, owning homes and renting apartments European cars and Japanese cars. It is likely that the demand for Coca Cola rises if the price of Pepsi Cola rises. It is also likely that the demand for Coca Cola fall if the price of Pepsi Cola falls. - The prices of compliments: The demand for one product encourages the demand for a complementary product. Such products complement each other either in common usage, or are products where buying one of them would either necessitate (or encourage) the buying of the other. Complementary products can be products that are sold together, bought together, or used together. One aids or enhances the other. Examples of these goods include paint and paint brushes, car and fuel, tires and cars, pen and ink, Printers and toner cartridges, and soup and crackers. Take the example of cars and fuel. If demand for cars rises, then there will also be a rise in demand for fuel.
- Level of income of potential buyers: We normally can expect that as one’s income rises, the demand for the product that he usually consumes will rise. The reverse is also a likely situation. A good which follows this rule as presented here is called a normal good. There are also inferior good. For these goods, as income rises, the demand for the product falls. Alternatively, as income consumers of these goods falls, the demand for the product rises. As income rises, people are less likely to use the bus and more likely to own a car.
- Tastes and preferences: involve the psychological reasons for liking or disliking a particular good. The more (less) we like a good or service, the greater (less) is our demand for it. Tastes and preferences change for different goods and services and overtime.
- Fashions and fads: Hot weather usually increases the demand for swimwear. Advertising and branding can help change fashions.
- The population (number of buyers): The market demand is simply the sum of the individual demands. If there are more buyers, there must be more market demand.
- Expectations (about prices, income, and availability): Expectations affect people’s demand for various products. The principle here is that if buyers expect the price to rise, the demand rises today. And vice versa.
