THEORY OF DEMAND

Meaning of a theory

A theory is simply defined as follows:-

“It is an organized body of ideas (reasoned or well coordinated ideas) designed to explain facts or events (especially economic problems) that often occur in our society”.

Good examples of economic theories are: theory of demand, theory of supply, theory of cost. Theory of demand is a theory designed to explain all important aspects of demand, especially law of demand, abnormal demand, etc.

Definition of demand

Literally, demand means “ask for”, “request for”, what a person wishes to have or buy. In economics, demand is defined as follows:-

“It is a quantity of a commodity a consumer wishes to buy at a given price in a specific period and in a particular place”.

Difference between (ordinary) demand and effective demand

The above definition applies to (ordinary) demand. It is an expression of willingness to buy a commodity; it may be paid for or it may not be paid for. While effective demand is both expression of willingness to buy a commodity as well as being able to pay for it immediately; and the buyer takes possession of the item. That is, it is a demand backed up by purchasing power (payment).

Mrs. Paul asks for ten baskets of onion which cost N100. This is the quantity she demands or wishes to buy. ‘If she does not have up to N100, she can therefore go with the quantity she can pay for. Perhaps, she has only N50 and she paid for only five baskets.

Quantity demanded, i.e. ordinary demand = N10 baskets of onion

Effective demand or quantity actually paid for = 5 baskets of onion.

Price System

Price

Price is the money value of a unit of a commodity or service.
It is an exchange value of a commodity expressed in monetary term.

Price system

Price system is determination (fixing) of prices by the interaction of the forces of supply and demand.
It is allocation of prices to goods and services by the invisible hands of the market. That is, sellers and buyers haggle (negotiate) prices; and they may agree at a particular price. If demand is high relative to supply; i.e. if forces (or level) of demand are more than that of supply, prices tend to go up; sellers have upper hand, and vice versa.

You should note that this is how forces of supply and demand operate. Price system is also referred to as price mechanism.

Price mechanism (price system) operates in a free enterprise, monetized or market economy where all goods and services have prices. And it is those who can afford paying the prices that are entitled to, or given, the goods and services. While people who can’t pay the prices are deprived of important goods and services.

Summary

Price system It is a system in which goods and services have prices; and the prices are fixed by sellers and buyers through haggling (negotiations, bargaining).

Demand Schedule

“It is a table that shows the various quantities of a commodity which a consumer wishes to buy at selected prices in a particular market ina given period”
Briefly, it is a table that shows relationship between quantity demanded and price of commodity.