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Table of Contents
Change in Demand vs Change in Quantity Demanded
Change in quantity demanded refers to the increase or decrease in the amount of a product as a result of a change in the price of the commodity itself, while all other factors remain constant.
It is shown by a movement along the same demand curve. When prices fall, quantity demanded increases, and this is called the extension of demand. When prices rise, quantity demanded decreases, and this is called the contraction of demand.
For example, if the price of rice falls, more people will buy rice, but this does not mean their overall demand for rice has changed, only the quantity they purchase as a result of the new price.
Change in demand refers to a situation where the entire demand curve shifts either to the right or to the left due to factors other than the price of the commodity.
These factors include changes in income, taste and fashion, population, prices of related items, and expectations about the future. An increase in demand means consumers are willing to buy more at every price level, which causes a rightward shift of the demand curve. A decrease in demand means consumers are willing to buy less at every price level, which causes a leftward shift.
For example, if consumers’ income increases, they may demand more normal items like rice even when the price remains the same.
Exceptional (Abnormal) Demand
Exceptional or abnormal demand occurs when the usual relationship between price and quantity demanded is reversed, meaning that as the price of a product rises, the quantity demanded also increases, instead of falling.
This usually happens in cases of Giffen goods, where low-income consumers buy more of an inferior good as its price rises because they cannot afford better alternatives, or Veblen goods, luxury items purchased for status, where higher prices make the product more desirable.
Other causes include speculation, where consumers expect prices to rise further, ignorance of price changes, or emergencies that force increased demand despite higher costs.
Causes of Exceptional (Abnormal) Demand
- Giffen Goods: Inferior goods that are consumed more as their price rises are called Giffen goods. Inferior goods that sell out fast are mostly for low-income consumers that cannot afford better alternatives. For example, if the price of a staple food like rice increases, poor households may buy more of it because they can no longer afford more expensive foods. This goes against the normal law of demand, creating an abnormal increase in quantity demanded when price rises.
- Veblen Goods: Have you noticed that those that sell high end or luxury items do not sell to everybody? Veblen goods are luxury items that a certain class of people buy to show status or prestige. The higher the price, the more desirable they appear. For instance, designer clothes, expensive cars, or luxury watches may see increased demand as their prices increase, because consumers perceive them as more valuable or exclusive. This is a type of exceptional demand because higher prices attract buyers rather than deter them.
- Speculation: Speculative demand happens when buyers purchase goods expecting prices to rise further in the future. For example, people might buy fuel, gold, or land if they believe prices will increase soon. This causes an unusual increase in demand even as prices rise, since consumers are motivated by potential profits rather than immediate consumption needs.
- Ignorance: Consumers may not fully understand the true value of a product or may mistakenly believe that higher prices mean better quality. This ignorance can lead to abnormal demand, where buyers purchase more as prices rise, thinking they are getting a superior or more desirable product.
- Emergencies: During emergencies, demand for certain goods can increase sharply regardless of price. For instance, during a flood or drought, people may buy large quantities of food, water, or medicine even if prices are high. The urgency of the situation overrides normal price considerations, creating exceptional demand.
Relationship Between The Law of Diminishing Marginal Utility and Normal Demand Curve
The law of diminishing marginal utility states that as a consumer consumes more units of a good, the additional satisfaction (marginal utility) from each extra unit decreases. Because each extra unit gives less satisfaction, consumers are only willing to buy more if the price falls.
This explains why the normal demand curve slopes downwards: as price decreases, quantity demanded increases, reflecting the consumer’s need to compensate for the lower utility gained from additional units.
Change in Supply vs Change in Quantity Supplied
Change in Quantity Supplied: It occurs most times when there is a movement along the same supply curve due to a change in the price of the good. When the price of the commodity rises, producers are willing to supply more, causing an upwards movement along the curve.
When the price falls, producers supply less, resulting in a downwards movement along the same curve. This change is strictly caused by price and does not involve other factors.
Change in Supply: Change in supply most times occur when the entire supply curve shifts due to factors other than the price of the good. An increase in supply, caused by factors like improved technology, lower production costs, or favourable weather, shifts the supply curve to the right.
A decrease in supply, caused by higher production costs, taxes, or natural disasters, shifts the curve to the left. Unlike a change in quantity supplied, this reflects a change in the ability or willingness of producers to supply at every price.
Exceptional (Abnormal) Supply
Exceptional or abnormal supply occurs when the normal law of supply does not hold, meaning that instead of supplying more as prices rise, producers may supply less or fail to increase supply. This can happen in situations such as perishable goods, where sellers rush to sell quickly even at lower prices, or when storage facilities are inadequate, limiting the amount that can be offered. It may also occur if producers expect future price drops or face unexpected production challenges, causing supply behaviour that contradicts the usual upwards-sloping supply curve.
Causes of Exceptional (Abnormal) Supply
- Perishable Goods: Fruits, vegetables, milk, and fish are examples of perishable goods that spoil quickly if not sold immediately. Producers of such perishable goods may supply a smaller quantity even when the price is high because they fear the goods may go bad before being sold. This leads to abnormal supply behaviour because it does not rise with price.
- Fear of Future Price Fall: Sometimes, producers may reduce the quantity supplied if they expect prices to fall in the near future. They might hold back supply to sell later at a better price or to avoid losses. This behaviour is contrary to the normal law of supply, where higher prices usually encourage more production.
- Agricultural Products During Bumper Harvest: Farmers may supply less produce to the market during bumper harvest when they anticipate storage for future sales or better prices later. Even if the market price is high, the immediate supply may decrease due to strategic planning or the inability to sell all products at once.
- Lack of Storage Facilities: Producers cannot increase supply even when prices rise due to inadequate storage facilities. For example, storing grains, fruits, or dairy products requires space and proper conditions. Without these, producers cannot offer more to the market, leading to abnormal supply where quantity supplied does not follow price increases.
Final Thoughts
Demand and supply are the basic tools used in economics to explain how prices are determined in the market. The interaction of demand and supply determines equilibrium price and quantity. Understanding these concepts helps students explain real-life market situations.
Read also: concept of supply
