Theory Of Demand, Consumer Behaviour, Supply And Price

No matter the structure, all market experience the pressure of the forces of utility, Price demand and supply. These are the market forces which exert their influences on difference markets (Imperfect or perfect markets). These forces are treated below:

1. Utility

Utility is the amount of satisfaction which is derived from the consumption of goods or services at any given time. Utility influences the consumers over choice of what to buy and the quantity to be bought.

Types Of Utility

We have the following types; Total utility and Marginal utility.

a. Total Utility (T.U)

This is the total amount of satisfaction which is derived from the total consumption of a given goods or service at any given time. Total Utility rises at decreasing rate as consumption is increased. In other words, it is subjected to the law of diminishing return. It declines after a point of optimum.

b. Marginal Utility (M.U)

This is the additional Utility gained from the consumption of one more unit of a given commodity per unit of time. It is the change in total utility which is brought about by the consumption of an additional unit of the commodity at any given time.

Marginal utility diminishes as consumption increases. Hence the marginal utility curve slopes downwards from left, to right.

The Law Of Diminishing Marginal Utility

It states that the marginal utility gained from the consumption of some units of a commodity per period of time declines with every increment in the amount of the commodity consumed, the consumption of other commodities held constant.

Relationship Between Demand And Marginal Utility

Marginal Utility affects consumption and therefore demand, it determines the additional quantity of the commodity that should be consumed and the price of the quantity. As marginal utility rises, demand rises and falls with a fall in marginal utility.

2. Demand

The term refers to the various quantity of goods and services which the people are willing and able to buy at any given price over a period of time.

Demand curve slopes downward from left to right. This indicates that more quantity of commodity X is demanded at low prices all things being equal.

Law Of Demand

The law states that the lower the price of a commodity or service, the higher the quantity of the commodity that is demanded, all things being equal and vice versa.

Exceptions To The Law Of Demand

The demand for certain commodities do not conform with the law of demand. This is because some consumers may act irrationally. They will demand more of a commodity when the price is high and less when the price is low. For example the demand for goods of luxury, giffen goods, fear of price rise in future, inferior goods etc. Their demand gives rise to Abnormal demand curve.

Reasons For Exceptional Demand Curve

1. Anticipation of future changes in price:

If people suspect that price will rise more in future, they will insist on buying more even if the price is high.

2. Giffen Goods or Inferior Goods:

Such goods attract the attention of richer people when their prices rise. Less of them are demanded at lower prices.

3. Prestige/Luxury Goods:

The possession of such goods adds to the owner’s prestige. More of them are demanded at higher prices.

Types Of Demand

The major types of demand include the following:

1. Competitive demand
2. Joint demand
3. Composite demand
4. Derived demand

Factors That Affect Demand

1. Consumer’s Income:

Increase in consumer’s income will increase consumer’s demand. This will lead to increased demand.

2. Population Size:

If the population of the consumers is increased, the demand for goods increases.

3. Taste And Fashion:

Demand changes with taste and fashion. If taste and fashion favours a particular product, the demand for the product increase.

4. Price Of The Commodity:

A rise in the price of a commodity will lead to contracted demand and vice versa.

5. Price Of The Other Commodities:

With jointly demanded goods, a rise in the price of one will lead to a fall in the demand of the other.

6. Government Policy

This can raise the price of commodity with the demand contracted.

Change In Demand

Change in demand refers to a shift of demand curve toward the right or left. A shift of demand curve right wards or left ward depicts increase or decrease.

With increase in demand more quantity is demanded at all prices. Conversely with decrease in demand less quantity is demand at all prices.

Changes In Quantity Demanded

This refers to extension or contraction of quantity demanded of a commodity due to fall or rise in price of the commodity.

Elasticity Of Demand

There are three types of elasticity of demand. They are the following:

1. Price Elasticity of demand
2. Income Elasticity of demand
3. Cross Elasticity of demand

Price Elasticity Of Demand

This is the degree of responsiveness of demand to a slight change in price.

Income Elasticity Of Demand

This is the degree of responsiveness of demand to slight change in income. Income elasticity of demand could be positive of negative.

Cross Elasticity Of Demand

This is the degree of responsiveness of demand of commodity A to changes in the price of commodity B. This is illustrated with goods that are close substitutes.

Factors That Determine Elasticity Of Demand

1. Availability of close substitutes
2. Luxurious Goods
3. The degree of necessity of the product
4. Consumer’s income
5. Influence of time

3. Supply

This refers to the quantity of commodity which the sellers are willing and able to offer for sale at various prices over a period of time.

Supply Schedule

This is a table which shows the relationship between the price of a commodity and the quantity of it supplied at certain time.

Supply Curve

This is the graphical presentation of the information on the supply schedule. The supply curve (SS) slopes upwards from left to right, indicating that quantity supplied rises with price.

Law Of Supply

All things being equal, the higher the price of a commodity the higher producers are willing to offer for sale.

It is however pertinent to note this law is valid with normal supply only.

Abnormal Supply Curve

These curves are exception to the law of supply. With abnormal supply curve the rise in price does not attract rise in quantity supplied.

Determinants Of Supply

The following factor affect the supply:

1. Price Of The Commodity

The higher the price of a commodity, the more profitable the production of the commodity is. Higher price leads to more supply.

2. Price Of Other Commodities

When two commodities are competitively supplied, a rise in the price of one will lead to increase in its supply and decrease in the supply of the other, e.g cow meat and cow milk, Bread and cake.

3. Cost Of Production

If the cost of producing a commodity falls, the quantity of the commodity supplied will be raised.

4. Natural Forces

Change in weather condition, attack of pest will reduce supply especially agricultural products.

5. State Of Technology

An advanced technological state will raise worker’s productivity and increases the supply.

6. Government Policy

Severe fiscal policy can discourage producers and thereby reduce supply of certain commodities.

7. Trade Agreement

Trade agreement among producing firms or country can curtail or raise supply e.g OPEC.

Change In Supply

This is an increase or decrease in the supply due to change in the determining factor.

Change in supply involves the bodily shift of the supply curve either leftwards or rightwards. When the shift is rightwards it indicate increase. When it is leftwards, it indicates decrease.

Change In Quantity Supplied

This refers to contraction or extension in the quantity supplied due to change in price only. The supply curve does not shift rather movement takes place along the same supply curve.

Elasticity Of Supply

This is the degree of responsiveness of the quantity supplied of a commodity to a slight change in price of the commodity.

Types Of Elasticity Of Supply

1. Elastic Supply:

This occurs when the elasticity of supply is greater than one or equal to infinity.

2. Inelastic Supply

This occurs when Elasticity is either less than one or equal to O. Elastic supply is of two types, namely: fairly inelastic supply and perfectly inelastic supply. Fairly inelastic supply occurs when the percentage change in Quantity supplied is less than percentage change in price. While perfectly inelastic supply occurs when the elasticity of supply is equal to zero.

3. Unitary Elasticity Of Supply:

This occurs when the price elasticity of supply is equal one. This is when the percentage in quantity supplied is equal to percentage change in price.

Determinants Of Elasticity Of Supply

1. Weather change
2. Period of production
3. Availability of input
4. Propensity to import
5. Durability of Products.

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