Table of Contents

Introduction

Demand is one of the most fundamental concepts in economics. It explains how consumers behave when faced with choices in the market. Every economic system must answer questions such as: What to produce? How much to produce? and For whom to produce? — and the theory of demand provides part of the answer.

This chapter examines demand, its laws, types, determinants, elasticity, and its importance to consumers, producers, and government.

1. Concept of Demand and Law of Demand

Definition of Demand:
In economics, demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price over a period of time.
- “Willingness” alone is not enough; the consumer must also have the ability to pay.
- Example: A man who admires a new car but cannot afford it does not “demand” it.
Law of Demand:
The law states that: “The higher the price of a commodity, the lower the quantity demanded, and the lower the price, the higher the quantity demanded, ceteris paribus (all other factors being equal).”
- This means demand and price move in opposite directions.
- Example: If bread price rises from ₦200 to ₦300, consumers will likely reduce their purchases, assuming income and taste remain constant.
Graphical Illustration:
- Demand curve slopes downward from left to right.
- Y-axis = Price, X-axis = Quantity.

2. Demand Schedules and Curves

Demand Schedule:
A table showing various quantities of a commodity demanded at different prices.
- Example:

Price (₦)	Quantity Demanded
100	50
200	40
300	30
400	20

Demand Curve:
When the schedule is plotted on a graph, it gives a curve sloping downward, demonstrating the inverse relationship between price and quantity demanded.

3. Reasons for Exceptional Demand Curves

Although the law of demand generally holds, there are exceptions where the demand curve slopes upward. These include:

Giffen Goods
- Low-quality staples (e.g., yam, garri) consumed more when prices rise because people cannot afford alternatives.
Veblen (Luxury) Goods
- Expensive goods (e.g., designer bags, gold jewelry) demanded more as price rises because they confer prestige.
Expectation of Future Price Increase
- If consumers expect prices to rise tomorrow, they may buy more today at higher prices.
Addictive Goods
- Items like alcohol and tobacco may experience increased demand even when prices rise.

4. Types of Demand

Derived Demand
- Demand for a factor of production resulting from demand for final goods.
- Example: Demand for cement depends on demand for houses.
Composite Demand
- When a commodity is demanded for multiple purposes.
- Example: Sugar is demanded for baking, tea, and soft drinks.
Joint/Complementary Demand
- Two goods used together.
- Example: Cars and petrol.
Competitive Demand
- Goods that substitute for each other.
- Example: Butter vs margarine, rice vs yam.

5. Factors Determining Demand

Price of the Commodity – higher prices reduce demand, lower prices increase demand.
Income of Consumers – more income increases demand for normal goods, reduces demand for inferior goods.
Prices of Related Commodities – substitutes and complements affect demand.
Tastes and Preferences – changes in fashion/trends influence demand.
Expectations of Future Prices – if prices are expected to rise, current demand increases.
Population Size and Structure – larger populations demand more.
Government Policy – taxes/subsidies affect demand.

6. Distinction Between Movement Along and Shift of the Demand Curve

Movement Along Demand Curve:
- Caused by a change in price of the good itself.
- Price increase = contraction of demand.
- Price decrease = extension of demand.
Shift of Demand Curve:
- Caused by other factors (income, taste, population, etc.).
- Increase in demand → curve shifts rightward.
- Decrease in demand → curve shifts leftward.

7. Elasticity of Demand

Elasticity measures how sensitive demand is to changes in price, income, or the price of related goods.

Types of Elasticity

Price Elasticity of Demand
- Measures response of demand to changes in price.
- $Ep=%ΔQ/%ΔP$
- Elastic (>1), Inelastic (<1), Unitary (=1).
Income Elasticity of Demand
- Measures response of demand to income changes.
- Positive for normal goods, negative for inferior goods.
Cross Elasticity of Demand
- Measures response of demand for one good to price changes of another good.
- Positive for substitutes, negative for complements.

Importance of Elasticity

Consumers: Helps in choice and budgeting.
Producers: Guides pricing decisions.
Government: Helps in tax policy and revenue prediction.

Key Points to Master for Examinations

State and explain the law of demand with examples.
Construct demand schedules and curves; know how to interpret them.
Know the exceptions to the law of demand (Giffen, Veblen, etc.).
Explain types of demand with examples.
List and explain factors influencing demand.
Distinguish between movements along and shifts of the demand curve.
Define, calculate, and interpret elasticity of demand.
Know the practical importance of elasticity for consumers, producers, and government.

30 Objective Questions

1. Demand in economics means:
A. Desire for goods only
B. Willingness to buy goods only
C. Ability to buy goods only
D. Willingness and ability to buy goods at a given price

2. The law of demand shows that:
A. Demand and price move in the same direction
B. Demand and price are unrelated
C. Demand and price move in opposite directions
D. Higher prices increase demand

3. A demand schedule is:
A. A graph showing price and quantity supplied
B. A table showing price and quantity demanded
C. A record of consumers’ income levels
D. A list of consumer tastes and preferences

4. The curve that shows the inverse relationship between price and demand is called:
A. Supply curve
B. Production curve
C. Demand curve
D. Indifference curve

5. An upward sloping demand curve may be caused by:
A. The law of diminishing returns
B. Giffen goods and prestige goods
C. Substitution effect only
D. Complementary goods

6. If the price of tea increases, the demand for coffee (a substitute) will:
A. Fall
B. Rise
C. Remain constant
D. Become zero

7. A fall in the price of cars will lead to increased demand for petrol. This is an example of:
A. Joint demand
B. Derived demand
C. Competitive demand
D. Composite demand

8. Which of the following is an example of composite demand?
A. Bread and butter
B. Sugar for tea, baking, and soft drinks
C. Tea and coffee
D. Pen and pencil

9. Demand for labour is an example of:
A. Joint demand
B. Derived demand
C. Competitive demand
D. Effective demand

10. Which of the following will cause a shift in the demand curve?
A. Change in price of the good itself
B. Change in consumer’s income
C. Contraction of demand
D. Extension of demand

11. When demand contracts, the consumer buys:
A. More goods at lower price
B. Less goods at higher price
C. More goods at higher price
D. Less goods at lower price

12. The slope of a normal demand curve is:
A. Upward from left to right
B. Vertical
C. Downward from left to right
D. Horizontal

13. The demand for a good is said to be inelastic if:
A. A small change in price leads to large change in demand
B. A large change in price leads to small change in demand
C. Demand changes equally with price
D. Demand does not respond to changes in price at all

14. If price elasticity of demand is greater than 1, demand is:
A. Perfectly elastic
B. Elastic
C. Inelastic
D. Unitary

15. Which of these goods is likely to have perfectly inelastic demand?
A. Bread
B. Insulin for diabetics
C. Soft drinks
D. Shoes

16. Cross elasticity of demand measures the response of demand for a commodity to:
A. Its own price
B. Income changes
C. Price of related goods
D. Government taxes

17. Income elasticity of demand for inferior goods is usually:
A. Positive
B. Zero
C. Negative
D. Perfectly elastic

18. A rightward shift of the demand curve means:
A. A fall in demand
B. An increase in demand at all prices
C. Contraction of demand
D. Extension of demand

19. Government may impose higher tax on goods with:
A. Highly elastic demand
B. Inelastic demand
C. Unitary elastic demand
D. Perfectly elastic demand

20. Which of the following best explains derived demand?
A. Demand for milk and bread
B. Demand for leather to make shoes
C. Demand for Pepsi and Coke
D. Demand for luxury cars

21. The exception to the law of demand includes all EXCEPT:
A. Giffen goods
B. Normal goods
C. Prestige goods
D. Expectation of higher future price

22. Which of the following factors will not affect the demand for rice?
A. Consumers’ income
B. Government policy
C. Population changes
D. Cost of fertilizer

23. The demand for kerosene in Nigeria is likely to:
A. Be perfectly elastic
B. Be inelastic
C. Be unitary elastic
D. Not exist

24. The area under the demand curve represents:
A. Consumer surplus
B. Total revenue
C. Producer surplus
D. Market price

25. If the demand for pencils increases as the price of pens rises, this illustrates:
A. Joint demand
B. Competitive demand
C. Composite demand
D. Derived demand

26. If at ₦10 the quantity demanded is 50, and at ₦20 the quantity demanded is 40, the demand is:
A. Elastic
B. Inelastic
C. Unitary
D. Perfectly elastic

27. When an increase in consumer’s income leads to an increase in demand, the good is:
A. Normal
B. Inferior
C. Prestige
D. Composite

28. Which of these is NOT a determinant of demand?
A. Population size
B. Consumer’s income
C. Consumer’s taste
D. Producer’s cost of production

29. An extension in demand is caused by:
A. A fall in price
B. An increase in population
C. A change in consumer’s income
D. A shift in taste

30. When the demand curve is horizontal, it shows:
A. Perfectly elastic demand
B. Perfectly inelastic demand
C. Unitary elasticity
D. Abnormal demand

Essay / Structured Questions (15)

Instructions (for exam use): Answer any five (5) questions. Where required, draw and label diagrams. Show all calculations and explain your reasoning.

(a) Define the economic concept of demand.
(b) State and explain the law of demand, making sure to include the ceteris paribus clause.
(c) Give two real-life examples from the Nigerian market that illustrate the law of demand.
(a) What is a demand schedule and how is it constructed?
(b) Given the demand schedule below, plot the demand curve on graph paper (Price on vertical axis, Quantity on horizontal axis) and explain the shape of the curve.
```
Price (₦) :  50  |  100  |  150  |  200
Quantity  : 120  |   90  |   60  |   30
```
(c) Using your graph, explain what happens to quantity demanded if price falls from ₦150 to ₦100.
(a) Explain three reasons why the demand curve might be upward sloping (i.e., exceptions to the law of demand).
(b) For each reason given above, provide a concrete Nigerian or West African example.
(a) Distinguish between derived demand, composite demand, joint (complementary) demand, and competitive (substitute) demand.
(b) For each type, give one clear example and explain the implications for producers and policy-makers.
(a) List and explain six non-price determinants of demand. For each determinant explain the direction of the effect on demand (i.e., will demand increase or decrease?).
(b) Using two determinants, show how a change could shift the demand curve for locally-produced rice.
(a) Define movement along the demand curve and shift of the demand curve, and explain the difference between them.
(b) With a diagram, show (i) extension, (ii) contraction, (iii) rightward shift, and (iv) leftward shift of a demand curve and explain what each movement signifies in policy terms.
(a) Define price elasticity of demand (PED) and state the formula for calculating the PED using percentage change.
(b) A commodity’s price increases from ₦80 to ₦100 and its quantity demanded falls from 200 units to 160 units. Calculate (i) the percentage changes (use the midpoint/arc method) and (ii) the PED. Interpret your result (elastic, inelastic, or unitary). Show all steps.
(a) Explain income elasticity of demand (YED) and cross-price elasticity of demand (XED), including what positive and negative signs imply.
(b) Give one practical policy implication for government when (i) a good has high positive YED, and (ii) two goods have a large positive XED.
(a) Explain the concepts of consumer surplus and total revenue.
(b) Using a simple demand curve (linear) and price change, show graphically and numerically how a fall in price can increase total revenue when demand is elastic, and decrease total revenue when demand is inelastic.
(a) Describe three practical factors that make demand for essential energy sources (e.g., kerosene, electricity) inelastic in many West African countries.
(b) Discuss the implications of inelastic demand for government policy on taxation and subsidy in this sector.
(a) Explain the total revenue test for elasticity and demonstrate it with a short example (numerical).
(b) What are the limitations of using the total revenue test compared to the midpoint elasticity formula?
(a) A small bakery sells bread. Historically, when the price of bread was ₦120, the bakery sold 250 loaves per day; when price fell to ₦100, sales rose to 300 loaves per day. Compute the price elasticity of demand using the arc (midpoint) method and interpret your result.
(b) Based on your answer, advise the bakery owner whether reducing price further would increase or decrease total revenue.
(a) Discuss how expectations of future price changes and speculation can influence current demand.
(b) Provide an example from agriculture (e.g., yam, maize) showing how harvest forecasts and expectations can distort market demand and affect prices.
(a) Explain how advertising and consumer preferences affect demand for branded goods.
(b) Using a hypothetical example, show how a successful advertising campaign shifts the demand curve and discuss short-run vs long-run effects for the firm.
(a) Consider the following policy: government plans to impose a significant excise tax on sugary drinks to reduce consumption. Using demand theory, explain under what conditions (i.e., elasticity assumptions) this tax will (i) generate substantial revenue, and (ii) significantly reduce consumption.
(b) Discuss potential unintended consequences of this tax for low-income households and for producers.

The Law of Demand – Answer Key

Objective Questions (30)

1. D – Willingness and ability to buy goods at a given price
Explanation: In economics, mere desire is not enough. Demand = desire + willingness + purchasing power.

2. C – Demand and price move in opposite directions
Explanation: The law of demand states that as price rises, quantity demanded falls, ceteris paribus.

3. B – A table showing price and quantity demanded
Demand schedule is a tabular representation of the law of demand.

4. C – Demand curve
The curve is downward sloping, showing inverse relation between price and demand.

5. B – Giffen goods and prestige goods
Exceptions: Giffen goods (inferior staple foods), Veblen/prestige goods, expectations of higher prices.

6. B – Rise
Tea and coffee are substitutes. Higher tea price → higher demand for coffee.

7. A – Joint demand
Cars and petrol are complements. A fall in car prices → more cars bought → more petrol demanded.

8. B – Sugar for tea, baking, and soft drinks
Composite demand means one good is used for several purposes.

9. B – Derived demand
Labour demand depends on demand for goods/services labour produces.

10. B – Change in consumer’s income
Price changes cause movement along the curve, not a shift. Shifts occur due to income, tastes, etc.

11. B – Less goods at higher price
Contraction = fall in demand due to rising price.

12. C – Downward from left to right
Normal demand curves slope downwards.

13. B – A large change in price leads to small change in demand
That’s inelastic demand.

14. B – Elastic
Elastic demand occurs when PED > 1.

15. B – Insulin for diabetics
Demand is perfectly inelastic — price changes don’t affect demand.

16. C – Price of related goods
Cross elasticity measures effect of one good’s price change on another good’s demand.

17. C – Negative
Inferior goods: demand falls as income rises → negative YED.

18. B – An increase in demand at all prices
A rightward shift means more demanded at every price level.

19. B – Inelastic demand
Government taxes goods with inelastic demand (e.g., fuel, cigarettes) to raise steady revenue.

20. B – Demand for leather to make shoes
Derived demand: demand for input depends on demand for final good.

21. B – Normal goods
Normal goods obey the law of demand; they are not exceptions.

22. D – Cost of fertilizer
Fertilizer affects supply of rice, not demand.

23. B – Be inelastic
Kerosene is essential, with few substitutes.

24. A – Consumer surplus
The demand curve area above market price represents consumer surplus.

25. B – Competitive demand
Pens and pencils are substitutes.

26. B – Inelastic
Small change in quantity demanded compared to price change → inelastic.

27. A – Normal
Income rises → demand rises for normal goods.

28. D – Producer’s cost of production
This affects supply, not demand.

29. A – A fall in price
Extension means more demanded due to lower price.

30. A – Perfectly elastic demand
Horizontal demand curve = consumers will buy any quantity at that price, but none if price rises.

Essay Questions – Model Answers

1. Demand and Law of Demand

Definition: Demand is the quantity of a commodity consumers are willing and able to buy at various prices during a given period.
Law: States that quantity demanded varies inversely with price, ceteris paribus.
Examples: Price of garri falls → more purchased. Price of petrol rises → less demanded.
Diagram: Downward sloping demand curve.

2. Demand Schedule & Curve

Schedule: Table showing price–quantity combinations.
Graph: Downward sloping demand curve from top left to bottom right.
Explanation: When price falls from ₦150 to ₦100, demand rises from 60 to 90 units. Shows inverse relationship.

3. Exceptions to Law of Demand

Giffen goods: Staple inferior goods (e.g., yam, garri). Poorer households buy more as price rises due to income effect.
Prestige/Veblen goods: Luxury items (e.g., designer clothes). Higher prices = higher status demand.
Expectations: If people expect future prices to rise, they buy more now at higher prices.

4. Types of Demand

Derived: Inputs demanded for final goods (e.g., labour for construction).
Composite: One good used for many purposes (e.g., sugar for tea, baking).
Joint: Complementary goods (cars and petrol).
Competitive: Substitutes (Coke vs Pepsi).
Implications: Policy must consider linkages between goods.

5. Determinants of Demand

Income: ↑ income → ↑ demand (normal goods).
Price of other goods: Substitutes/complements.
Taste & fashion: Ads, trends.
Population: More people → higher demand.
Expectations: Anticipation of shortages → stockpiling.
Government policy: Subsidy or taxation affects demand.

6. Movements vs Shifts

Movement along curve: Caused by price change → extension or contraction.
Shift of curve: Caused by other factors → increase (rightward shift) or decrease (leftward shift).
Diagram: Four curves showing extension, contraction, rightward, leftward shifts.

7. Price Elasticity of Demand (PED)

Formula: %∆Q / %∆P.
Calculation:
- Initial Q = 200, final Q = 160 → ∆Q = -40 → average Q = 180 → %∆Q = -22.2%.
- Initial P = 80, final P = 100 → ∆P = +20 → average P = 90 → %∆P = +22.2%.
- PED = -22.2 / 22.2 = -1 → Unitary elasticity.
Interpretation: Demand is unitary elastic.

8. YED and XED

YED: Responsiveness of demand to income changes. Positive → normal goods, negative → inferior.
XED: Responsiveness of demand for one good to price of another. Positive → substitutes; negative → complements.
Policy: High YED goods → volatile demand, government taxes luxury goods. High positive XED → competition regulation.

9. Consumer Surplus & Total Revenue

Consumer surplus: Difference between what consumer is willing to pay and actual price.
Total revenue: Price × quantity.
Elastic demand: Price fall → TR rises.
Inelastic demand: Price fall → TR falls.
Diagram: Rectangles showing revenue changes.

10. Inelastic Demand for Energy

Reasons: Few substitutes, essential for daily life, habit-forming goods.
Implications: Government can raise revenue with fuel tax but risks inflation/social unrest.

11. Total Revenue Test

Principle: If price fall increases TR → demand elastic; if TR falls → demand inelastic.
Example: Price drops from ₦100 to ₦80, demand rises 50 → TR rises → elastic.
Limitations: Only approximate; does not measure degree of elasticity.

12. Bakery Bread Example

Data: P1 = ₦120, Q1 = 250; P2 = ₦100, Q2 = 300.
∆Q = 50, avg Q = 275 → %∆Q = 18.2%.
∆P = -20, avg P = 110 → %∆P = -18.2%.
PED = -18.2 / -18.2 = 1 → Unitary elastic.
Advice: Revenue will not change much; bakery must consider costs.

13. Expectations & Speculation

Explanation: If consumers expect future price rise, they buy more now. If they expect fall, they delay purchases.
Agriculture example: Farmers hoard maize if bad harvest expected → pushes current demand higher.

14. Advertising & Preferences

Effect: Strong ads shift demand rightwards. Consumers influenced by fashion/status.
Example: Indomie noodles campaigns increase demand.
Diagram: Rightward shift of demand curve.
Short-run: Boosts sales.
Long-run: Creates brand loyalty.

15. Tax on Sugary Drinks

If demand inelastic: Tax generates high revenue but little reduction in consumption.
If demand elastic: Tax reduces consumption but generates less revenue.
Unintended effects: Burden on poor households, reduced employment in soft drink sector.