Demand and Supply Analysis
Senior 4 · Economics
Demand and Supply Analysis
Lesson 2 of 5
30 min
Almost every family in Rwanda would like to eat meat every day, but far fewer buy it every day. Economists draw a sharp line here: a wish that is not backed by money and a decision to buy is not demand. This lesson defines demand precisely, shows how it is recorded in a schedule and drawn as a curve, and explains the law that links price to the quantity people buy, along with the unusual cases where that law seems to break.
Definition
Demand (effective demand): the quantity of a good that consumers are willing and able to buy at each possible price, over a given period, ceteris paribus.
Quantity demanded: the amount bought at one particular price.
Example: "At Frw 800 per kg, household A buys 6 kg of beans a week" is a quantity demanded; the whole list of prices and quantities is household A's demand.
| Type | Meaning | Example |
|---|---|---|
| Individual demand | The demand of one consumer or household | One family's weekly demand for beans |
| Market demand | The total demand of all consumers of a good | All households' demand for beans in Huye |
| Joint (complementary) demand | Goods demanded together | A motorcycle and fuel; a phone and airtime |
| Competitive demand | Goods that are substitutes; more of one means less of the other | Tea and coffee; buses and motorcycle taxis |
| Derived demand | Demand for a good or factor because of the demand for what it helps produce | Demand for cement and builders derived from demand for houses |
| Composite demand | Demand for a good that has several uses | Milk for drinking, yoghurt and cheese; land for farming or housing |
| Independent demand | Demand unrelated to that for other goods | Salt and textbooks |
Definition
The law of demand: ceteris paribus, the higher the price of a good, the lower the quantity demanded, and the lower the price, the higher the quantity demanded. Price and quantity demanded are inversely related.
A demand schedule is a table of the quantities demanded at different prices. The table shows three households' weekly demand for beans (illustrative figures).
| Point | Price (Frw per kg) | Household A (kg) | Household B (kg) | Household C (kg) | Market (kg) |
|---|---|---|---|---|---|
| a | 1,200 | 2 | 1 | 3 | 6 |
| b | 1,000 | 4 | 2 | 5 | 11 |
| c | 800 | 6 | 3 | 7 | 16 |
| d | 600 | 8 | 4 | 9 | 21 |
| e | 400 | 10 | 5 | 11 | 26 |
Plotting each pair of price (vertical axis) and quantity (horizontal axis) and joining the points gives the demand curve.
Market demand is found by adding the quantities demanded by all buyers at each price: on a graph, the individual curves are added horizontally.
Worked example 1: the slope of the demand curve
The slope of a curve is the change in the vertical variable divided by the change in the horizontal one. Between points b and c on household A's curve:
The price must fall by Frw 100 for household A to buy one more kilogram a week. The slope is negative, which is the law of demand in numbers. Because household A's curve is a straight line, the slope is the same between any two points (check a and e: ).
Worked example 2: the demand function
A straight-line demand curve can be written as a demand function, , where is the quantity demanded at a zero price and shows how much falls when price rises by one franc. For the market schedule above:
Check at : kg, as in the table.
Use it at a price not in the table, :
Rearranged for price, , so the market curve's slope is francs per kg: flatter than household A's, because many buyers together respond more to each franc.
In a few cases the quantity demanded rises as the price rises, and the curve slopes upwards.
| Case | Why more is bought at a higher price |
|---|---|
| Giffen goods | A very poor household spends most of its income on a cheap staple. When its price rises, the household can no longer afford dearer foods, so it buys more of the staple to fill the gap. Robert Jensen and Nolan Miller found this behaviour with rice among very poor households in Hunan, China (American Economic Review, 2008). |
| Goods of ostentation (Veblen goods) | Luxury goods bought to display wealth, such as designer brands; a higher price makes them more desirable. Named after Thorstein Veblen, The Theory of the Leisure Class (1899). |
| Expectations of further price rises | If buyers expect the price to keep rising (shares, land, or food before a shortage), they buy more now. |
| Ignorance and price as a sign of quality | Some buyers judge quality by price and assume the dearer product is better. |
| Necessities in an emergency | Panic buying of basic goods during a crisis continues even as prices rise. |
Warning
Most "abnormal demand" is not abnormal. If more is bought at a higher price because incomes rose or because buyers expect a shortage, other things have changed, so the demand curve has shifted (Lesson 3). Only a true Giffen or Veblen good has an upward-sloping curve with everything else held constant. Say this in an essay to earn the analysis marks.
Tip
Axes: "P up, Q along". Price always goes on the vertical axis and quantity on the horizontal axis. Label both, with units, before drawing any curve.
Important
Discuss. A shopkeeper notices that she sells more of an expensive imported perfume than of a cheaper one. Does this prove that the perfume is a Veblen good? What else would you need to know?
Khan Academy, "Substitution and income effects and the Law of Demand". Watch for the two separate reasons a lower price raises the quantity demanded, and compare them with section 3 above.
Practice
Key points
Sources and credits
Written by Ganzaa: the text, the three demand diagrams (drawn to scale from the schedules), the tables, the worked examples and the practice items. All bean and maize-flour figures are illustrative.
Quick check
Match each type of demand to its example.
Tap one on the left, then its partner on the right.
