DEMAND ANALYSIS Many economists have considered demand and supply as the core of economics.

This is because basis of economics is built around it. As Thomas Carlyle - was quoted to have said teach a parrot to say demand and supply and you have made an economist of him.

NEED Need in economics refers to an urgent requirement or something essential or necessity which someone is lacking and which in normal sense is supposed to possess. For instance, a sick parson needs medical attention.

WANT This refers to a mere desire to have something. Thus the wish of a consumer to have a commodity which in actual sense may not be backed by the ability and willingness to purchase. For example, Mr. Fauzan may desire to have Sala dress for the celebration of Idil fitr. However, the money to pay for this dress is not there. So we say this is a mere desire. Mr. Fauzan can live without this dress and this therefore distinguishes a want from a need. It means that a need is a necessity which a consumer cannot live without while in the case of the want a customer can live without it.

DEMAND Demand refers to the quantities of goods and services that consumers are willing and are able to buy at various prices over a given period of time. DEMAND SCHEDULE: It is a table showing} the relationship between quantities demanded of a commodity at various prices at a particular time. This can be shown below. We have the individual and market demand schedule.

PRICES OF PINEAPPLE 10 20 30 40 50

QUANTITY DEMANDED 100 80 60 50 30

DEMAND CURVE: It is a graphical representation showing the relationship between quantities demanded of a commodity at various prices at a particular time. This can be shown below.

DEMAND FUNCTIONS: This is also a mathematical representation showing the relationship between price and quantity demanded at a particular period. Demand function can be shown as follows; Qd = 60 - 4px Where Qd = Quality demanded Px = price of the commodity X Given the demand function above, find the quantity demanded when price is; i. ii. iii. Px = 2 Px=5 Px = 10

Solution Given Qd = 60 -4px s x x = 60 - 4px If Px = 2 = 60-4(2) = 60-8 = 52 units if Px = 5 = 60-4 (5) = 40 If Px = 20 = 60-4(10) =20

From the above ii can be observed that as the price increases, less of the commodity is demanded. This shows that there is an inverse relationship between quantity demanded and price.

MARKET DEMAND SCHEDULE: This is referred to as the total demand schedule. Thus, the summation of all demand schedules of all consumers of a commodity. The table below shows the total quantities of a commodity which ail consumers of that commodity are willing to buy at various prices, at a particular period of time. This is shown on the table below.

Price

Individual consumer (A)

Individual consumer(B) 300 450 550 650 750

Market demand

10 8 6 4 2

100 200 300 400 500

400 650 850 1050 1250

The summation of consumer A and B demands gives the market demand.

INDIVIDUAL DEMAND SCHEDULE: It is a table showing the various quantities demanded by a particular or individual consumer at various prices at a particular period. INDIVIDUAL DEMAND: This is defined as the quantity of a commodity the individual consumer is willing and able to buy during a given period of time. MARKET DEMAND: This is the sum total of the various quantities of a commodity demanded by all consumers in the market at various prices and at a particular time period.

TYPES OF GOODS 1. Normal goods: These are goods whose demand increases as the consumer's income level increases. 2. Inferior goods: These are goods and services whose demand decrease as the level of income of consumer increases. 3. Giffen goods: These are goods whose demand decrease as the prices falls and as prices increase more is demanded. 4. Necessity or goods subjects to satiety: These are goods whose demand remains the same as the income of the consumer increase.

THE FUNDAMENTAL LAW OF DEMAND The law states that, all things being equal the lower the price, the higher the quantity demanded and the higher the price, the lower: the quantity demanded of a commodity or a service.

Factors that affect or determine the demand of any given commodity or service in an economy 1. Price of the commodity: The demand for a particular commodity in most cases depends on the price of the commodity itself. If the price of the commodity falls it means that demand is going to be high. This is attributed to the feet that as the price is falling many consumers can now afford to buy more of the commodity and the existing consumers can also buy more hence demand would be increased. When there is a fall in price consumers substitute cheaper goods for expensive ones as a result more of the good whose price has fallen is demanded. Any time there is a fall in price the real income of the consumer increase as such more normal goods are demanded and vice versa. And increase in price will also result in decrease in demand, since that commodity becomes expensive in the eyes of the consumer.

2. Price of other commodities in addition: The price of other commodities also determines the demand for a particular commodity, especially when the commodities are substitutes or complements. Complementary goods are the goods that are jointly demanded to achieve a particular level of satisfaction. With such commodities a change in price of one affects the demand of the other as in the case of car and fuel. If price of one falls demand will increase and this may cause an increase in demand for the other and vice versa.

In the case of substitutes it can be considered as where two or more commodities serve the same purpose. Change in the price of one will affect* the demand of the other. An increase in the price in of a commodity will lead to an increase in the demand for its substitute and vice versa. A good example is Milo and Bourn vita. If the price of Milo falls whilst that of Bournvita whose price remains the same, consumers will look at Bourn vita whose price remains as being expensive hence they will tend to demand more of Milo.

3. Taste and preference: Consumers taste and preference also determines how much of a commodity or service that should be demanded. If consumers taste increase for a particular commodity then more of it will be demanded. On the other hand, if the taste and preference fall less of that commodity would be demanded. Taste and preference are influenced by fashion, custom, education, sex, religion etc.

4. Expectation of future changes in prices: In most case, if consumers expect price to increase, demand will be high, since consumers will like to buy more before the increment in price takes place. On the other hand, if they expect price to fall, they will demand less of the commodity. Here consumers being rational will wait for the fall in price before they can increase their demand. 5. Population size: The population of a country also determines the demand for a commodity. If the population is high demand is more likely to be high but where the population is small demand is likely to be low. E.g. Ghana and Nigeria. 6. Income of the consumer: The income level of the consumer also affects demand. But this however depends on whether the commodity is an inferior or normal good. If the commodity is a normal good more will be demanded if income increases and a fall in income also leads to a fall in demand. Meanwhile if it is an inferior, as income increases less is demanded and a fall in income brings less to demand and a fall in income brings about an increase in demand. Good subject to satiation: the quantity demanded remains unchanged once the consumers income increases. 7. Income distribution: if the distribution of income favours the few rich in the society demand will be low than where the income is fairly distributed. Where income is fairly distributed everyone has a fair share of the national cake, therefore the purchasing power will be high, hence increase in demand. 8. Advertisement: Increase in advertisement may also bring about an increase demand for a particular commodity. And low advertisement may bring about low demand for a particular commodity. Since advertisement will always inform consumers of the existence of a particular and also go on to persuade these consumers to prefer such commodities to others.

STUDY QUESTION Discuss the effects of the following on the demand for commodity Y. 1. An increase in the income of the consumer. 2. A fall in price of its substitute. 3. An increase in price of its compliments. 4. An increase in supply of its substitute.

THE DEFERENCE BETWEEN CHANGE IN QUANTITY DEMAND AND CHANGE IN DEMAND CHANGE IN QUANTITY DEMAND This is the situation where more or less of a commodity is bought at different prices. It is also known as movement along the same demand curve. The major underlying factor is a change in the price of the commodity itself while all other factors remain the same. This can be illustrated on the diagram below. (Price induced) This is also known as a movement along the same demand curve.

As shown in the diagram above, as the price of the commodity increase from P0 to P2 it resulted in a movement on the same demand curve from A to B, qty demanded of the commodity reduces from Q0 to Q2. While a fall in price from P0 to P1 resulted in a movement on the demand curve from A to C, quantity demanded of the commodity increases from Q0 to Q1. The above situation can be dichotomize into increase in quantity demanded and decrease in quantity demanded.

INCREASE IN QUANTITY DEMANDED This is the situation where more of the commodity is bought as the prices falls. This is shown on the diagram below.

The fall in price from P0 to P3 has resulted in an increase in quantity demanded from Q0 to Q1 resulting in a movement on the same demand curve from A to C.

DECREASE IN QUANTITY DEMANDED This is also the situation where less of the commodity is bought as the price increases. This can be shown on the diagram below.

The increase in price from P0 to P2 has resulted in a decrease in quantity demanded from Q0 to Q2, resulting in a movement on the same demand curve from A to B.

CHANGE IN DEMAND This involves a boldly shift of the demand curve either to the left or to the right. Simply put it is situation where more, or less of a commodity is demanded at the same price. It implies a fundamental change in the entire demand situation of the consumer for that particular commodity. This diagram below illustrates the situation.

With the price of the commodity remaining at same at P0 it is possible for the demand to increase from Q0 to Q2 or decrease from Q0 to Q1. Resulting in a bodily shift of the demand curve either from D0 Do to D1D1 or from D0D0to D2D2

INCREASE IN DEMAND This is the situation where more of the commodity is demanded at the same price. This involves a bodily shift of the demand curve to the right.

From the diagram, at t the same price of Po, quantity demanded increases from Q0 to Q2. There are several factors that have caused this, apart from the price of the commodity. These include: 1. An increase in the price of a substitute or a fall in the price of its jointly demanded goods. 2. An increase in the income of the consumer will increase their demand for inferior goods. 3. An increase in taste for the commodity or where a commodity becomes fashionable. 4. Consumer's expectation that the price of a commodity is to rise in the near future. 5. An increase in population. 6. An increase in advertisement. A DECREASE IN DEMAND This is the situation where less is demanded at the same price. Thus it involves bodily shift of the demand curve to the left. This is also known as autonomous change in demand.

The boldly shift has resulted in a decrease in demand from Q0 to Q2. Such a situation arises not because the prices of the commodity has risen, what actually causes this decrease in demand is also either one or more of the following factors;

1. Decrease in the price of a substitute or an increase in the price of a jointly demand commodity. 2. A decrease in consumers taste for the commodity or where the commodity falls out fashion. 3. Consumers' expectation that price of the commodity is going to fall in the near future. 4. A decrease in population and hence a decrease in the number of consumers for the commodity. 5. A decrease in consumer's income decreases demands for inferior goods. 6. Decrease in advertisement.

FACTORS THAT MAY CAUSE CHANGE I N DEMAND i. Change in the price of other goods which are related ( i.e substitutes or compliments) ii. Change in taste and fashions

iii. Changes in income iv. v. vi. Change in population ie changes in the number of buyers. Change in weather conditions Consumers expectation.

vii. Advertisement i.e information in commodities viii. Availability of credit, ix. Taxation on commodities.

TYPES OF DEMAND There are basically four types of demand, these include the following; (1) Composite demand: this occurs when a single product is wanted for a number of different uses. Simply put when a commodity serves several different uses. A good example is. Timber which is demanded for making chairs, tables, windows. Bread Hour which can be used for bread, cake, pie, rough bands etc. When a commodity has composite demand, an increase in demand for any one of its uses will raise the commodity's price and this will reflect in the price of timber and affect the price of other commodities made from timber. (2) Derived demand: Some goods are needed not for the satisfaction that the) yield but for the reason that they help in the production of another commodity. For example, the demand for cement, block is derived from the demand for House. In most cases the demand for F.O.B (factor of production) is derived demand. When the demand for a commodity increases the demand for F.O.P (Factors of Production) increase.

(3)

Competitive demand: This is where two or more goods serves the same purpose, and for that matter compete for the same income of the consumer. In other words we say that the commodities give the consumer the same satisfaction. Examples of such commodities include beef and mutton, Milo and Bourn vita, Margarine and Butter etc. Some of these commodities are close substitutes others are not. Whether the commodities are close substitute or not will depend much on the consumer's taste for the commodity. Since the consumer may decide to buy one relative to other, if the price of Bourn vita increases, while that of Milo remains the same, consumers may shift their demand from Bourn vita to Milo as shown in the diagrams below. A. Bournvita Price B. Milo

From the diagrams, an increase in price of Bourn vita from PO to PI has resulted in a fall in quantity demanded of Bourn vita from Q0 to Q1 with the price of Milo remaining the same there is increase in demand from Q0 to Q1. On the other hand when the price of Bourn vita falls while that of Milo remains the same consumers are likely to shift their demand from Milo to Bourn vita as show in the diagram below.

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The fall in price of Bournvita causes an increase in demand of Bourn vita while the price of Milo remaining the same has resulted in a decrease in demand of Milo for Q1 to Q2. (4) Joint or complementary demand: Where two or more commodities are jointly demanded then they are complementary to each other or consumed together to give certain level of satisfaction. Very common examples are chair and table, TV and player, car and fuel and many others. For instance when the price of car falls more is demanded and bought and since petrol is needed to move cars more petrol would also be demanded.

So here there is an inverse relationship between the price and demanded for complementary demand goods. This is shown on the diagrams below.

From the diagram, a fail in the price of Cars from P 0 to P 1 has resulted in an increase in the quantity demanded of car to increase from Q 0 to Q 1 with the price of petrol remaining the same,

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more of fuel is going to be demanded. On the other hand there could be an increac ear as shown in the diagram below.

EXCEPTIONAL/ABNORMAL DEMAND CURVES Exceptional/abnormal demand is any demand situation which does not obey the fundamental of demand. It is not always that consumers will behave according to the general rule of den exceptional demand curves are curves that do not behave like the normal demand curves and this curve normally illustrates these abnormal situations. (1) POSITIVE SLOPED DEMAND CURVE Here the consumer buys more of the commodity when the price of the commodity use of it is demanded when the price falls. The demand for ostentatious and Giffen goods ire very good examples. This is shown diagram below.

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(3) The demand for an inferior good; these are goods which are demanded by the poor, for instance Gari may be considered inferior to rice among many people. Here, when the income of the consumer increases he demands less of such commodities. (4) Habit, where a consumer has developed a very strong habit to consume a particular commodity his demand for it will be perfectly inelastic within a certain price range. That is, for instance, if the price of commodity increases his demand for it remains unchanged. (5) Perfect market, in a perfect market where there are many buyers and sellers selling homogenous goods, the demand for the product of a seller is price perfectly elastic, if a seller sells at a price slightly higher than the market price, there will be no demand for the product or commodity at all. (6) Ignorance about the existence of substitute. If consumers are not aware of the existence of a substitute good somewhere there will tend to demand more of a particular commodity even when the price is high.

THE REASONS WHY THE DEMAND CURVE IS NEGATIVELY SLOPED (1) The first reason is the fundamental law of demand, as the price of the commodity falls it appears cheap in the eyes of consumers and those who could not buy it at all can now afford it. This implies that the number of consumers for a commodity increase when the price of the commodity falls and vice versa. (2) The second reason is Marginal Utility Theory, which is used to explain the nature of the curve. Utility is the Satisfaction derived from consuming a particular commodity, which is measured in psychological sense using a unit call Utils. Marginal Utility is the extra satisfaction derived from consuming n additional unit of a commodity. It means that when the marginal utility is high, the consumer will demand more of the commodity, and if the income of the consumer increases and as a result of this, they can now buy more quantities of the commodity with their given level of income and the reserve is the case. (3) The third is the substitution effect occurring, if the price of commodity changes, normally consumers being rational, often tries to compare the prices of goods that they have been

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(2) PERFECTLY INELASTIC DEMAND Here the consumer demands the same amount of the commodity irrespective of the price level. This goes with the demand for very basic essential commodities within a certain price range as shown on this demand curve. Again habit forming commodities also show this behavior. Example is alcohol.

(3) PERFECTLY ELASTIC This is the 'situation where at a fixed price consumers may increase or decrease quantity demanded of the commodity. Here as soon as there is an increase in price consumers will entirely refuse to buy the commodity. This is shown on the diagram below.

This situation happens where government fixes prices of goods or under perfect market situations where price is fixed and there is prefect flow of information. REASONS FOR OCCURRENCE OF EXCEPTIONAL DEMAND (1) Where the quality of a good is judged by its price. Here more of the commodity is bought at a higher price and less is bought at a lower price. Examples are ostentatious goods. (2) Expectation of future change in price; here consumers ma) expect a fall in the

price of the commodity and withhold their income, though the price of the commodity is low they will still expect price to fall in the near future. And consumers may also decide to buy a commodity now though at a high price because they expect price to rise.
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buying with the price of others. La a situation where substitutes of the goods exist, when the price of the commodity fails it may be relatively cheaper than the substitute whose prices have remained the same. As a result consumers will shift their demand to the commodity whose price has fallen and the reverse is the case. ELASTICITY OF DEMAND When price falls, quantity demanded generally increase. It is useful to know the degree of increase. Again when price rises, quantity demanded generally decreases. To measure the extent to which changes in prices affects the quantity demanded of the commodity we use elasticity of demand. Elasticity of demand therefore, is defined as the degree of responsiveness of quantity demanded of a commodity to a change in price of the commodity in question, price of other commodity and consumers income. TYPES OF ELASTICITY (1) Price elasticity of demand (own elasticity of demand) (2) Cross elasticity of demand (3) Income elasticity of demand

PRICE ELASTICITY OF DEMAND This is the degree of responsiveness of quantity demanded to a change in price of the commodity itself. MEASUREMENT OF PRICE ELASTICITY (1) PED = Proportionate change in quantity demanded Proportionate change in price of the commodity itself (2) PED = Relative change in quantity demanded Relative change in price of the commodity itself (3) PED = Percentage change in quantity demanded Percentage change in price of the commodity itself

PED = Q P Q P = Q x P AP Q

Note: Always deduct the new price and new quantity from original price and original quantity respectively. Where: Q = Change in quantity (Q 2 Q1) P = Change in price P = Initial price Q = Initial quantity NB: For example the table below relates the quantity demanded of a KAAKO at various prices. Use it to determine the price elasticity of demand. (P 2 -P 1 )

Price of KAAKO Period 1 Period 2 Q = 1 0 0 - 100=10 P = 99-100 = -1 P = 100 Q = 100 100 99

Quantity Demanded of Kaako 110 100

PED = 10 x 100 -1 = -10 = 10 100

Note: with price elasticity of demand we ignore the negative sign and take the absolute figure.

The formula we have used above is the point elasticity. The second formula is Arc, which is given as: PED = Q x (P1+ P2) P (Q1+P2)

Let us consider this example; again to determine the price elasticity of demand by using the second formulae.

Periods Period 1 Period 2

Price 100 80

Quantity demanded of KAAKO 100 150

PED = 50 x (100 + 80) -20 x (100+150) = -1.8 = 1.8

From the above example, the negative sign show the demand curve slopes negatively, which I implies that there is an inverse relationship between price and quantity demanded. But in elasticity we don't consider the negative signs hence the co - efficient of elasticity is 10 and 18.

NB The co-efficient (answer) from any of the above examples would give an indication of the elasticity of demand facing the commodity.

INTERPRETATION OF PRICE ELASTICITY OF D E M A N D (1) Where the co - efficient is less than 1 ; i.e. ED<1 then the commodity is regarded as having inelastic demand. (2) Where ED > 1 = price elastic (3) Where ED = I price unitary elastic (4) Where ED = 0 price perfectly inelastic demand (5) Where ED = price perfectly elastic demand

ILLUSTRATIONS (a) Inelastic demand: This is where a large proportionate change in price of a commodity leads to a small proportionate change in quantity demanded. This is shown on the diagram below.

From the diagram, due to a decrease in price of fee commodity from 20 to 5, quantity demanded of the commodity increase from 2 to 3. Calculate the price elasticity of demand. E = Q x P P Q = Q = 3 2 = 1 P = 5 20 = -15 P1 = 20 Q1 = 2 PED = 1 x 20 -15 x 2 (b) Elastic demand: This is where a small proportionate change in price of the commoc leads to more than a proportionate change in quantity demanded. This can be shown the diagram below. Price = -0.6 = 0.6

Q = 2 0 - 5 = 15 P = 2 -3 = 1 P1 = 3 Q1 = 5 PED = PED = -9 = 9 Which is more than 1 , hence it is price ELASTICE

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(c) Unitary elastic demand; this is where a proportionate change in the price of the commodity leads to almost the same proportionate change in quantity demanded of the commodity.

P = 1 Q = -1 P1 = 100 Q1 = 99

PED = PED = 1.0 PED = 1, meaning that the quantity demanded has Unitary price Elastic. (d) Perfectly inelastic: This is the situation where a change in price has no effect on quantity demanded. This can be shown below.

Q = 0 P = 5 P1 = 10 Q1 = 6 PED = = 0 (e) Perfectly elastic demand: this is the Situation where consumers are highly sensitive to a slightest increase in price. A smallest increase in price of the commodity will cause the consumers to entirely refuse buying the commodity. But at the ruling price the consumers are willing to buy any quantity of the commodity. This is shown on the diagram below.

Q = 10 5 = 5 P = 0 P1 = 8 Q1 = 5 PED = = 0

DETERMINANTS OF PRICE ELASTICITY OF DEMAND (1) Availability of substitutes: Where a commodity has a substitute the demand for it will be elastic. The closer the relationship between the substitute goods, the more elastic their demand would be. For instance if commodity A and B are closely related as substitutes , a very small increase in the price of say commodity A will result in consumers shifting to the other closely related commodity B and vice versa. A commodity however, may have inelastic demand where it has not close substitute.

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(2) Necessity: This is yet another strong factor and therefore even where a commodity has no substitute, its demand could be elastic if it is nut a necessity. A commodity which is very essential may have inelastic demand because even where the price of the commodity increases consumers would still look for money to buy them, except may be, where the consumer is very poor, that he will go without such an essential commodity. In this case the entire demand will fall by a smaller proportion. On die other hand if the commodity is a luxury the demand for it will be elastic. Any small increase in the price may cause many consumers to refrain from buying such a commodity but a small fall in price will induce several consumers to buy such a commodity. (3) Habit/taste: If a consumer has developed a very Strong taste or habit for a particular commodity it makes them to have inelastic demand for such commodity. It simply means that if a consumer develops a strong habit for a commodity it is difficult to change his demand irrespective of what happens to price. Example is cigarettes and necessities. (Unless the consumer is poor and may decide to do without the commodity. (4) The time period: It is an accepted fact that, it takes consumers time to adjust their taste or spending habits or patterns when price changes. This makes demand to be inelastic in the short run because the consumer finds it very difficult to adjust their purchase or taste for any new commodity when price of the commodity changes so in the short run, consumers do not reduce their purchase by a greater margin since they are not prepared to take other substitutes when the price changes. On the other hand, demand is elastic in the long run. (5) The number of uses of the commodity: If commodity has so many uses; it tends to have elastic demand. The reason is that, any increase in the price of the commodity will lead to a small fall in each of the numerous uses resulting in a greater fall in quantity demanded of commodity since die change in demand may come from only source. (6) Occasion: It is known that certain specific items or commodities are demanded during certain occasions, demand for such commodities tends to be inelastic. For instance the demand for Christmas cards, seasons, this is because they are needed during the reason, so if even the price increases people would still buy them. (7) The consumer's income: The income of the consumer will determine his responsiveness to price changes. The larger the income of a consumer, the more inelastic his demand for commodities. A consumer with a high income will complain less about any price increase. A small increase in price of a commodity will mean little to him. He will still buy the commodity, since he can afford. On the other hand, the demand for a commodity with low income tends to be elastic. He will react sharply to price changes. A little increase in price will discourage him from purchasing i t and his

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demand for it will decrease appreciably but if the price falls he is likely to increase the quantity demanded. (8) Durability of the commodity: Goods that last for a longer time and such commodities, for example television sets, video decks, are goods that the consumers required only one at any given period of time with all things being equal. In this wise if there happen to be change in price, it is prospective consumers that come and not Old Ones, so few people would buy such commodities if the price changes, so demand tend to be inelastic. THE IMPORTANCE OF PRICE ELASTICITY OF DEMAND (1) Importance to the businessman The concept of price elasticity helps the businessman to price their commodities. The concept enables the businessman or producers to know how to raise their revenue, since it is the aim of every producer to increase his total revenue and hence maximize profit. We know that is given as PROFIT is given as TR = P X QTY A seller who wants to increase the revenue will have to consider the price elasticity of demand for his commodity. If the commodity has elastic demand, then a small reduction in price will induce a greater increase in quantity demanded. That will bring about an increase in Total revenue. Example if the price of a commodity is 150 and the quantity demanded is 300 units, hence TR - 45,000 i.e. (P x Qty) - 150 x 300 if pace fells to 140 and quantity demanded increased 500. The total revenue after the fall in price will now be 140x500 = 70,000. On the other hand, if the commodity has inelastic demand, then an increase in price will not result in a big change in quantity demanded and the seller will increase his total revenue by doing so. It therefore means that the seller is likely to loss than gain when he reduces price, in other words, the seller will gain if he charges higher prices for his commodity, since increase in price will result in a small change in quantity demanded. For example if the price of the commodity is 40 and the quantity demanded is 200 units the TR x 40 x 200 = 8,000. But if price should increase to 060 and the quantity demand fails to amounts, then the new Total Revenue = 60 x 160 = 9,600. This has shown on increase in the total for 8000 to 9600.
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(2) Devaluation This is deliberate reduction of the value of a country's currency in terms of other currencies. The main aim of such a policy is to solve balance of payments problem and increase production. Devaluation in most cases lead to a reduction in imports and increase in export s but the effectiveness of this policy depends on the price elasticity of demand for imports and exports because for devaluation to be effective demand for exports must be elastic and demand for imports must be inelastic. (3) It determines incidence of taxation Price elasticity of demand also helps to determine how the burden of an indirect tax is shared between the consumer and producer. If demand is fairly elastic, the producer bears the greater part of the tax but if demand is fairly inelastic, the consumer will bear a greater part of the indirect tax. But in case, where demand is unitary elastic both the producer and consumer bear the tax, on one hand if demand is perfectly inelastic consumers would bear the whole tax burden. (4) It Determines the terms of Trade The terms of trade are the rate at which a country exchanges her goods and services for other goods from other countries. This is mostly determined by the magnitude of elasticity of demand for export and imports. In most case, if demand for imports is inelastic and that of export is elastic there will be unfavorable terms of trade. But where demand exports is inelastic and that of imports is elastic there will be favourable terms of trade. (5) Indirect Taxation Policy of the Government Price elasticity of demand also helps to ensure effective implementation of the government tax policy means to raise revenue or control consumption. To obtain or raise revenue the government must impose tax on commodities with inelastic demand. This is because if tax rate is raised and as a result price increases quantity demanded will fall by less than proportionate increase in price of the quantity. On the other hand, if indirect tax is meant to control consumption there is the need to impose tax on goods having elastic demand. This is because with the imposition of the indirect tax, price increases and as a result quantity demanded will fall by more than proportionate increase in price.
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INCOME ELASTICITY OF DEMAND It is the degree of responsiveness of quantity demanded to change in die consumer's income. MEASUREMENT OF INCOME ELASTICITY It is measured by the following: YED = Proportionate change in quantity demanded Proportionate change in income YED = Percentage change in Quantity Demanded Percentage change in income Where; Q = change in quantity demanded Y = change in income of the consumer Y = is the initial income Q = is the initial quantity Q = is the initial quantity YED = ILLUSTRATION When a consumer income was GHl00 quantity demanded was 20 units. As his income increase to 150, quantity demanded also increased to 25 umts. Calculate the income elasticity of demand. Quantity Y (income GH) X

20 100 25 150 Q = 25-20 = 5 Y = 150- 100 = 50 Given the formula; YED =

ARC = YED

=
X

X = X

INTERPRETATION OF CO-EFFICIENT OF INCOME ELASTICITY OF DEMAND A good is said to be inferior, superior or necessity depending upon its numerical value in income elasticity of demand.
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If the income elasticity is positive, then the commodity is a normal or superior commodity. If the elasticity is negative then it means the good is inferior, also if the elasticity is less than one or equal to zero, the commodity is a necessity oh the other hand if income elasticity is greater than one or elastic the commodity is considered luxurious. IMPORTANCE OF INCOME ELASTICITY 1. Businessman If income elasticity is positive and large in the case of normal goods, in that case the trader will offer more goods for sale when income rises. 2. Income elasticity may be negative as in the case of inferior goods. In that case it is advisable for the traders to reduce the quantity of inferior goods they offer for sales when income rises. 3. Government The knowledge of income elasticity of demand helps the government to determine which item/ products need to be emphasized during a development process. 4. If the government effort results in the increase in income levels then the government must encourage the production of goods with higher income elasticity. 5. A guide to the government with respect to which commodity to tax more.

CROSS ELASTICITY OF DEMAND It is the degree of responsiveness of quantity demanded of a commodity (X) to a change in price of another commodity (Y) this is measured by: -

CED = Proportionate change in quantity demand o f commodity (X) Proportionate change in price o f commodity (Y) CED = Where; X = change in quantity demanded commodity (X) = change in price of commodity (Y) ILLUSTRATION (1) A decrease in price of Milo from 01500 to 01200 a tin cause quantity demanded of Bourvita to decrease from 50to 40 tin a day. Find the cross price elasticity of demand between the two commodities.
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CPED =

=1 X

Midpoint or ARC = CPED =

From the above it means that the two commodities are unitary, cross price elastic. The co -efficient (answer) obtained from any of the above mathematical methods would give an indication of the type of relationship existing between the two commodities (X) and (Y). It would at the same time indicate the degree of relationship existing between the two commodities. ILLUSTRATION The price of a commodity Y increase from GH30 to GH341 per unit and all the quantity of another commodity X bought increased from 120 to 150 units. a. b. What type of demand relationship does commodity X and Y have? Is demand for commodity x elastic or inelastic?

INTERPRETATION OF CROSS PRICE ELASTICITY OF DEMAND i. Where the co - efficient is positive, k indicates that the commodities under consideration are related as substitutes. ii. Where the co - efficient is negative it indicates that the goods exist complements. iii. The co - efficient is equal to zero it means that there exists no relationship at all, between the goods under consideration. iv. Where the co- efficient is a small figure, it is an indication that very little relationship exist between the good under consideration. v. Where the co -efficient is a large it is an indication that there exists a close relationship between the goods. vi. Again where the co - efficient is unitary, it means that the goods are perfect substitutes, they are perfectly the same and very substitutable. In the same vein, we can classify cross elasticity into a. Cross elastic b. Cross inelastic c. Cross unitary elastic d. Cross perfectly elastic e. Cross perfectly inelastic
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SUPPLY ANALYSIS Supply is the quantities of goods and services that sellers are willing and able to offer for sales at various prices over a given period of time in a given market.

DIFFERENCE BETWEEN SUPPLY AND TOTAL OUTPUT Total output is the total amount of goods which producers are able to bring out as output after successfully combining factors of production in an economic activity while supply is that part of total output that producers are willing to offer for sale whether there is market for the goods or not.
RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED OF A COMMODITY

There is an appositive relationship between price and quantity supplied. This implies that all other things being equal, the higher the price of the commodity, the higher the quantity supplied. There are three different ways through which this relationship can be presented. A tabular form which is called the supply schedule; a graphical form that is also called the supply curve; a mathematical form and this is also known, as the supply equation.

SUPPLY SCHEDULE This is a tabular presentation which shows the relationship between quantities supplied of a commodity at various prices over a given period of time. Price of yam Quantity supplied SUPPLY CURVE This s a graphical presentation which shows the relationship between quantities supplied of a commodity at various prices over a given a period of time. The supply curve has a positive slope, indicating that more of a commodity is supplied at higher prices, while less is supplied at lower prices. This can be illustrated blow on the diagram.
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GH 10 tubes

GH 10 15 tubes

GH 20 46 rubes

From the diagram it can be clearly seen that when price was 10, quantity supplied was 25 units. As price falls to 5, quantity supplied falls to 10 units. However, when price increased to 20 quantity supplied increase to 46 units. This shows that, there is a positive relationship between price and quantity supplied of a commodity. SUPPLY EQUATION This also a mathematical presentation of the relationship between price and quantity supplied of a commodity. This is normally put in an equation form, where quantity supplied is the dependant variable and the various prices of the commodity is the independent variable. E g Qs = 40 + 4 Px Where Qs = quantity supplied of the commodity Px = is the price of the commodity ILLUSTRATION Given supply function as Qs = 40 + 4Px, find the quantity supplied of the commodity. When price is: i. Px = 04 ii. Px = 08 iii. Px-020 SOLUTION GIVEN Qx = 40 + 4Px ii) If price = 4 Qx = 40 + 4(4) 40 + 16 Qx = 56 units
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