Demand for Goods and Services

Dear learner, welcome to Section 2. Do you know that Demand, or what people want to buy drives everyday decisions for consumers and businesses? Ranging from the price of foodstuffs to the cost of services, various factors influence how much of a product people want to buy. But what exactly causes demand to change and how do economists tell the difference between changes in quantity demanded and changes in demand?

In this section, you will explore the key factors that affect demand, such as price, income, and consumer preferences, and how they affect your purchasing decisions. You will also learn the important distinction between a change in quantity demanded and a change in demand. By learning more about these two concepts, you will gain a deeper understanding of how markets operate and how different economic forces shape the demand for goods and services in Ghana.

KEY IDEAS

• Factors that affect demand include price, income, taste and preference, price of related commodities, population, and the nature of the commodity.

• Change in quantity demanded refers to the situation where changes in the price of a commodity lead to changes in the quantity demanded of that commodity.

• Change in demand is a bodily shift in the entire demand curve due to factors other than the price of the commodity itself.

The relationship between Price and Demand is explained in the Law of Demand which states that “All things being equal, more of a commodity is demanded at lower prices than at higher prices and vice versa”.

The Law of Demand shows there is an inverse relationship between the price of a commodity and the quantity demanded for the commodity. This relationship is the result of the fact that a price reduction is an encouragement to the rational consumer as he/she can buy more of the commodity. An increase in the price is an upset to the consumer so he/she buys less of the commodity.

The demand curve stays in the same place on a price/quantity demanded graph and all points along it represent the quantity demanded at a specific price. So, the relationship between the two variables can be seen as a movement along the curve. The curve in an inverse relationship slopes downwards from left to right.

Any change in demand as a result of either an increase or decrease in price is known as a change in quantity demanded. Study the table below which is known as a demand schedule

Table 2.1: Demand Schedule

1 12 2 8 3 5 4 2 From this demand schedule, a graph can be drawn to visualise the relationship between price and quantity demanded as shown in Figure 2.1.

Figure 2.1: Relationship between price and quantity demanded From Figure 2.1,

• Can you see the inverse relationship between price and quantity demanded?

• What is the quantity demanded when the price is 1.5 cedis?

• What is the price when the quantity demanded is 14?

Activity 2.1 Effect of Price on Quantity Demanded

Instructions: The following activity investigates your own behaviour as a rational consumer. A rational consumer is someone who makes purchasing decisions based on the available information to maximise their satisfaction. In this case there is only piece of information – price.

Do this activity with a friend.

1. Choose and agree on a Ghanaian commodity of your choice that you both like to eat regularly (e.g., plantain, maize, or fresh carrot)

2. Use your pen or pencil to divide your paper into two.

3. Create a table on each side of the paper, with two columns and 6 rows for each table.

4. On the left-hand table copy the 5 separate possible prices for the commodity you have chosen. These increase from 5 to 20 cedis.

5. On the right-hand table copy the 5 separate possible prices for the commodity you have chosen. These decrease from 30 to 10 cedis.

6. Next to each price, think about the law of demand and write the quantity you would be prepared to buy at that price.

Suggested table to be drawn on each side of the paper:

Price of

commodity (Ghc) Quantity bought (pieces) 5 8 10 15 20 Price of commodity (Ghc) Quantity bought (pieces) 30 24 21 17 10 Look at the two tables you have completed and answer the following questions.

a. Describe how your quantity demanded changes when price increases?

b. Describe how your quantity demanded changes when price decreases?

c. Do you agree that the changes in the quantity demanded were made because of the changes in the price of the commodity?

d. On graph paper draw two demand curves. Remember that price is always the Y-axis and quantity demanded the X-axis. You can use a different colour for each curve.

e. Explain how your infographic shows the Law of Demand.

f. In what two ways might farmers/producers respond to price changes?

7. Compare your work with others who have done this activity.

8. Be honest when completing the tables and answering the questions.

Consumers Not Only Consider Price When Buying

What factors, other than price, might you consider when you are going to buy an item?

Read this example:

Taking GH¢ 6000, a person went to the Bolgatanga market intending to buy six bags of maize at GH¢ 600 each. When they arrived at the market, they noticed that due to good growing conditions in the rainy season there was much more maize for sale than usual.

They decided to use all their money to buy 10 bags. That way when prices rose in the dry season when maize did not grow very well, they would not need to buy any, so would save money.

In this example the person that bought 10 bags instead of the six bags also considered the seasonal differences in the quantity of maize available. So other factors such as weather conditions, expectation of future changes in price, income level of consumers, competition from other buyers and so on influence people to buy more or less of a commodity.

A change in demand refers to the increase or decrease in the quantity of goods and services that can be purchased at a fixed price due to changes in factors other than the price of the commodity. This results in a complete shift of the demand curve. The curve shifts to the right when more is demanded and to the left when less is demanded. This effect is also known as a shift in demand.

Figure 2.2: Change in Demand

The first graph shows a right-hand shift in the curve, D to D1, representing an increase in demand. The second graph shows a left-hand shift in the curve, D to D1, representing a decrease in demand. In both graphs, price stays the same so the demand must be influenced by other factors.

Other Factors That Affect the Demand of a Commodity ₁. The income of the buyers: At a fixed price of the commodity, when buyers’ income increases their demand for normal goods also increases but their demand for inferior goods decreases. (see glossary for definitions of normal and inferior goods)

2. The taste and preference of the buyer: A change in the preference or taste of the consumer due to varieties in the market will lead to a change in the demand for the commodity. For example, the availability of a variety of soft drinks has changed consumers’ tastes and preferences.

3. The number of buyers: If the number of consumers in the market increases, the demand for commodities also increases but if the number of consumers decreases, the demand for commodities also decreases.

4. The weather and climate: During the rainy season, the demand for raincoats and umbrellas increases and is opposite in the dry season.

5. Expectation of future price change: Demand will increase when consumers anticipate that there will be an increase in the price level of goods in the future.

For instance, parents will buy more exercise books at a price of GHC 5.00 now if they anticipate that the price of exercise books will increase soon.

6. The price of a related commodity: When the price of a commodity rises, the demand for its substitute increases because consumers opt for the cheaper option. For example, if all lemonade drinks are priced the same and the price of one brand increases, people will buy more of the other brands, which are now relatively cheaper.

7. Government policy on taxation: When the tax is raised on certain goods by the government, demand falls because the extra tax might stop consumers buying.

Activity 2.2 Identifying the Factors That Affect Demand (Other Than Price)

1. Imagine there is a local drink shop in your neighbourhood called “Peace and Comfort”. The shop sells different flavours of a local soft drink at a fixed price of GHC 5 per bottle.

2. Consider the following statements and explain how consumers might respond in each case to change the demand. The first one has been done for you.

a. If people in the neighbourhood get higher-paid jobs or receive bonuses E.g. Response to demand: Consumers will have more money to spend, hence demand for local drinks will increase.

b. If a popular social media influencer shares a post about how good one flavour of Peace and Comfort’s unique local drink is.

Response to demand:

c. If some families move out of the neighbourhood.

Response to demand:

d. If people see a poster that states prices at Peace and Comfort will fall the next day.

Response to demand:

e. If a nearby bakery starts selling cookies that can be consumed together with the drinks.

Response to demand:

f. If another shop that sells the same kind of local drinks for GHC 5 per bottle decides to give a special discount to customers for a month Response to demand:

3. Identify the type of demand factor in each of the statements in question 1 above (1a to f) E.g., a: The demand factor is ‘changes in the income of consumers’

4. Write a short paragraph to summarise how the factors identified in question 2 above (other than price) can affect the demand for a product like local drinks.

5. Compare your findings with your friends in class. Be polite and open-minded as you share your work with your friends.

Summary of the Two Ideas Covered in this Section on DEMAND The following table shows the differences between Change in Quantity Demanded and Change in Demand

Table 2.2: Change in Quantity Demanded vs Change in Demand Change in Quantity Demanded Change in Demand Definition It is the change in how much of a commodity that consumers want to buy when the price changes.

It is the change in how much of a commodity that consumers want to buy due to factors other than price.

Cause It is caused only by changes in the price of the good.

It is caused by changes in factors like income, tastes, price of related goods, expectations, or number of buyers.

Visualisation using a line graph It shows the movement along the same demand curve (up or down).

It shows a bodily shift of the entire demand curve either to the right (increase in demand) or to the left (decrease in demand).

Example If the price of a torchlight increases, the quantity demanded will fall.

The rainy season increases the demand for umbrellas while the dry season decreases the demand for them.

Effect on

Market Quantity demanded increases or decreases.

Demand increases or decreases.

Examples

1. Change in Quantity Demanded (Movement along the same curve) When the price of oranges increases or decreases, it will lead to a corresponding change in the quantity demanded. For example, if the price of an orange falls from GH¢2 to GH¢1.50, the quantity demanded for oranges will increase.

This change shows the downward movement along the same curve.

2. Change in Demand (Shift of the Curve)

For example, if people earn more money, they will buy more luxury goods like high-end mobile phones regardless of price changes, so the demand curve shifts to the right.

Activity 2.3 Differences between ‘Change in Demand’ and ‘Change in Quantity Demanded’ Instructions: Do this activity with a friend of your choice.

1. Choose a Ghanaian commodity that is a staple food (e.g., fufu, kenkey, gari).

2. Write down definitions for

a. Change in Demand

b. Change in Quantity Demanded

3. Sketch

a. Two curves to show a change in demand for your selected staple food, e.g. Kenkey because important health benefits of eating it have been discovered.

b. A curve to show what happens to the change in quantity demanded when there is a surplus of your staple food in the market.

c. Label your sketches with axes, key features and add titles.

d. Explain the differences between your two sketches in terms of change in demand and change in quantity demanded.