DEMAND

Because we live in a world of scarcity; we must choose among alternative uses of scarce resources. We must decide how best to use our own resources to meet our individual goals. You are the decision maker directly when you buy goods and services and sell your skills. You also make decision indirectly when you vote for your mayor or congressman base on their proposal. The chief characteristic of our economic system is that it is market oriented. This means that many of the decisions pertaining to what is produced, how things are produced, who does what, and who receives what are made in a decentralized fashion by million of people like yourself.

In a market-oriented economic system, price is the key mechanism in determining the answer to the question above. To understand this important concept of price, you must understand demand and supply.

Concept of Demand:

A. Demand is defined as the purchasing behavior of people when they are confronted with different prices for a specific good or service during a given period of time. Demand always implies willingness and ability to sacrifice something, money or other commodities, in order to obtain a specific good or service.

B. A Demand Schedule is a table that shows the quantity of good or service that is demanded at each different price level during some specified period of time. Quantity demanded is the amount people are both willing and able to buy at a given price. As can be seen in Table 1, there is a unique quantity demanded corresponding to each given price.

Table 1

Demand for Fish During July

Price per kilo	Quantity Demanded (Kilo)
75.00	10
65.00	20
60.00	30
55.00	40
50.00	50

C. The demand curve is derived by plotting the points from the demand schedule and joining them. The resulting line is called the demand curve.

The price is placed on the vertical axis and the quantity demanded on the horizontal axis. See figure 1 in which the data from Table 1 are plotted.

Figure 1

D. The Law of Demand

The Law of Demand expresses the relationship between price and the quantity demanded.

The Law of Demand assumes that all other factors, e.g., income, tastes and preferences, utility, prices of substitute and complementary goods and future expectations, are held constant (ceteris paribus). Each of these factors will be explained shortly.

As you can see from the graph, the demand curve slopes downward and to the right.

The relationship between price and quantity is called an inverse relationship—as price becomes higher, the quantity demanded becomes smaller.

There are two basic reasons for the Law of Demand:

a. At the higher prices other goods will used as substitutes and potential buyers are lost. This is called substitution effect.

b. When the price increase, it now takes more income to buy the same quantity of the good as before the price rise. This involves a loss of real income (purchasing power). Less of all goods will be brought because of this income loss. This is called the income effect.

Now that you have read about the law of demand and the reasons for it., consider the following examples which illustrate what underlies the Law of Demand.

Ella : Say Ellen, there is a great sale at SM Shoemart today. The price of pants is marked down 50%; in fact, I bought two pairs!

Ellen : I usually don’t wear pants, but at those prices I think I’ll buy a pair.

The lower prices coaxed extra purchases from Ella and brought in Ellen as a new buyer. Here is another example.

Ella : Japanese food is so expensive this week. I’m going to buy hamburger instead.

Ellen : I’ll have to stay with a noodle for this week’s menu. I certainly am tired of noodles, but they’re even cheaper than hamburger.

Ella is going to substitute hamburger for ground chuck this week. Ellen hasn’t been able to buy hamburger for a long time even though she would like to buy it. Therefore, at the higher price a potential buyer is lost because both purchasing power is reduced and other goods are used as substitutes.

E. The market demand for a good is the sum of all individuals demand schedules for that good. Table 3 shows how the market demand is calculated. Figure 2 shows how it is plotted.

Table 3

The Method of Obtaining the

Market Demand for Banana in August

Price per unit	Quantity demanded buyer 1	Quantity demanded buyer 2	Quantity demanded buyer 3	Market Quantity Demanded
1.25	1 +	0 +	0	= 1
1.00	2 +	1 +	1	= 4
.75	3 +	2 +	2	= 7
.50	4 +	3 +	3	= 10

In Table 3, notice that the quantity demanded for Banana when its price is P1.25 is 1 piece for buyer 1, 0 for buyer 2. And 0 for buyer 3. Adding these up gives a total quantity demanded or market demand of 1 at P1.25 per piece. At P1.00 per piece, buyer 1 demands 2, buyer 2 demands 1 and buyer 3 demands 1. This gives a total quantity demanded or market demand of 4 pieces of Banana at P1.00. The market demand at .75c and .50c is derive the same way.

In Figure 2, the demand schedule of each buyer is plotted using each demand schedule. The market demand curve is plotted using the schedule of the total quantity demanded.

Figure 2

F. The factors underlying demand are the following:

Income

Utility

Price of Substitute Goods

Price of Complementary Goods

Future Expectation

Taste and preferences

A very important factor underlying demand is INCOME. At every possible price, people with a low income demand fewer goods and fewer units of most goods than they would with a larger income. Additional income allows a person to buy more and different kinds of goods. An increase in income means a greater ability and willingness to pay for a good.

Have you heard anything resembling the following conversations lately?

“I got a raise today. I’m going out to buy that stereo cassette that I’ve always wanted.”

“I just lost my job; I won’t be able to buy that stereo cassette I wanted this year.”

Therefore, an increase in income causes the demand for most goods increase, and a decrease in income causes the demand for most goods to decline.

The second factor underlying demand is UTILITY. People’s demand for any good at any time will depend on the number of units of that good they already own. Before buying an additional unit of any good, a person normally considers what would be the utility or usefulness of another unit of a good. One unit maybe very useful. A second unit may be less useful. For instance, a car may be of great use to me. A second car, however, is of much less use you can’t use two cars at the same time. Therefore, the greater the utility or the usefulness of a good, the greater will be the demand, and vice versa.

The third factor underlying demand is the PRICE OF SUBSTITUTE GOODS. Goods are considered substitute when they provide almost the same kind in degree of utility or usefulness. Buyers choose among substitutes guided mainly by price. What are some examples of substitutes? margarine is a substitute for butter, tea is a substitute for coffee. If a price of a good increases, the demand for its substitute is very likely to increase.

The forth factor underlying demand is the PRICE OF COMPLEMENTARY GOODS. Goods are considered complementary when they go together or can be use together. Buyers will increase their purchase of certain goods when their compliments fall in price. Examples of complementary goods are Bacon and eggs, automobiles and gasoline, lettuce and salad dressing. If the price of lettuce rises, for example, less salad dressing will be purchased. Therefore, if two goods are compliments, if the price of one rises the demand for the other will decrease.

The fifth factor is FUTURE EXPECTATIONS. People anticipate what will happen at a certain time in the future. Buyers may consider the following before they make a major purchase. Will I loose my job? Will prices increase or decrease? Will there be a surplus or shortage of this good in the near future? All these factor influence whether people will make a purchase now and how much they are willing to pay. Therefore, if the price of the good is expected to rise, the demand for it will increase because people hope to purchase the item before the price goes up.

The sixth factor underlying demand is TASTE AND PREFERENCES or personal preference for something. You may prefer one color to another. Or, you may like to wear sandals instead of shoes, or prefer modern furniture, to traditional furniture. All these reflect taste. The term taste is a catch-all which reflects changes in preferences.

A change of any of these six factors can cause a change in the demand schedule and, therefore, cause a shift in the demand curve.

G. A change in demand occurs when the entire demand schedule changes graphically; if any of the determinants of demand change, demand and the demand curve will shift.

figure 4 shows that the demand curve for banana has shifted to the left from original demand to new demand curve.

Introductory Comments

In order to begin our discussion of supply, let us pretend that you are a producer of a good or services. We will often refer to a good or service as a commodity. Question which will concern you are: how much will you produce, at what price will you charge, how will you react if the price of your commodity increases or decreases, and how will other producers react?

More specially , how will you, as the producer of commodity, be affected if:

· The price of raw materials increases?

· The cost of labor increase?

· The interest rate rises?

· The weather is bad

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