The demand schedule

The demand schedule is one way of showing the relationship between quantity demanded and the price of that commodity, other things being equal. It is a numerical tabulation showing the quantity that is demanded at selected prices. There is a demand for the good X which is equal to Q1 when its price is P1. When the price decreases to P2, the demand of X will rise to Q2 (points A and B). The demand curve represents the relationship between quantity demanded and the price, other things being equal. A rise average household income shifts the demand curve for most commodities to the right. This indicates that more will be demanded at each price.

* Other prices

We saw that the negative slope of a commodities demand curve occursbecause the lower its price, the cheaper the commodity becomes relative to othercommodities that can satisfy the same needs or desires. These other commoditiesare called substitutes. Another way for the same change to come about is for theprice of substitute commodity to rise. For example, carrots can become cheaprelative to cabbage either because the price of carrots falls or because the price ofcabbage rises. Either change will increase the amount of carrots that householdswish to buy.A rise in the price of substitute for a commodity shifts the demand curve forthe commodity to the right. More will be purchased at each price.

Complements are commodities that tend to be used jointly. Cars and gasoline are complements; so are golf clubs and golf balls, electric stoves and electricity, and so on. Because complements tend to be consumed together, a fall in the price of either one will increase the demand for both. A fall in the price of complementary commodity will shift a commodity’s demand curve to the right. More will be purchased at each price.

* Tastes.

Tastes have an effect on people’s desired purchase. A change in tastes may be long-lasting, such as the shift from fountain pens to ballpoint pens or from typewriters to word processors; or it may be a fad such as hula hoops or CB radios. In either case, a change in tastes in favour of a commodity shifts the demand curve to the right. More will be bought at each price.

* Distribution of income. If constant total of income is redistributed among the population, demands may change. If, for example, the government increases the deductions that may be taken for children on income tax returns and compensates by raising basic tax

rates, income will be transferred from childless persons to households with large families. Demands for commodities more heavily bought by childless persons will decline, while demands for commodities more heavily bought by households with large families will increase. A change in the distribution of income will cause a rightward shift in the demand curves for commodities bought most by households whose incomes increase and a leftward shift in the demand curves for commodities bought most by the households whose incomes decrease.

* Population.

Population growth does not by itself create new demand. The additional people must have purchasing power before demand is changed. Extra people of working age who are employed, however, will earn new income. When this happens, the demands for all the commodities purchased by the new income earners will rise. Thus the following statement is usually true: An increase in population will shift the demand curves for most commodities to the right, indicating that more will be bought at each price. Economists reserve the term change in demand to describe a shift in the whole demand curve, that is, a change in the amount that will be bought at every price. The term change in quantity demanded refers to a change from one point on a demand curve to another point, either on the original demand curve or on a new one. A change in quantity demanded can result from a change in demand, with

the price constant; from a movement along a given demand curve due to a change in the price; or from a combination of the two. An increase in demand means that the whole demand curve shifts to the right; a decrease in demand means that the whole demand curve shifts to the left. At a given price, an increase in demand causes an increase in quantity demanded, whereas a decrease in demand causes a decrease in quantity demanded. A movement down and to the right along, a demand curve causes an increase in quantity demanded; a movement up and to the left along a demand curve causes a decrease in quantity demanded. When there is a change in demand and a change in the price, the change in quantity demanded is the net effect of the shift in demand curve and the movement along the new demand curve:

An increase in demand means that the demand curve shifts to the right, and hence quantity demanded will be higher at each price. The curve moves from D0 to D1. At a given price, P1, the demand will be higher (Q0 to Q1). A rise in price causes an upward movement to the left along the same demand curve; the quantity demanded will fall. On the demand curve D0, the price P1 moves to P2, and hence the quantity demanded fall from Q0 to Q0’.

Supply

The amount of a commodity that firms wish to sell in some time period is called the quantity supplied of that commodity. Quantity supplied is a flow; it is so much per unit of time. Note also that quantity supplied is the amount that firms are willing to offer for sale; it is not necessarily the amount they succeed in selling, which is expressed by the term quantity actually sold or the term quantity exchanged. Although households may desire to purchase an amount that differs from what firms desire to sell, they obviously cannot succeed in buying what someone else does not sell. A purchase and a sale are merely two sides of the same transaction.

Viewed from the buyer’s side, there is a purchase; viewed from the seller’s side, there is a sale. Because desired purchases do not have to equal desired sales, quantity demanded does not have to equal quantity supplied. However, the quantity actually purchased must equal the quantity actually sold because whatever someone buys, someone else must sell. The amount of the commodity that firms will be willing to produce and offerfor sale is influenced by the following important variables:

- Commodity’s own price;

- Prices of inputs (determining in part the cost of production, and hence the price

of the commodity on the market);

- Goals of firms (firm’s strategies);

- State of technology (techniques of production, production possibilities).

The situation with supply is the same as with demand. There are several influencing variables, and we will not get far if we try to discover what happens when they all change at the same time. So, again, we use the convenient ceteris paribus technique to study the influence of the variables one at a time.