Part two:MICROECONOMICS

21. The Theory of Demand

There are two main forces that determine the price of a commodity in a market: demand and
supply. The actual price of the commodity is determined by the intensity with which potential
buyers and potential sellers operate in the market.
The theory of demand is concerned with the influence that potential buyers exert on price. The
behavior of potential buyers in a market is called demand and the amount of a commodity that
buyers are willing and able to purchase at a certain price in a given period of time, keeping all
other influences constant, is called quantity demanded. Demand exists only if someone is
willing and able to pay for a good-that is, exchange dollars for a good or service in the
marketplace. Note that demand is an expression of consumer buying intentions not a statement
of actual purchases.
In defining the demand for a commodity, it would be of paramount importance to distinguish
between such core elements as the willingness to buy and the ability to pay for a certain product.
The willingness to buy, which is not backed by the necessary birr (dollar) is called nominal
demand. If the willingness to buy is backed by the ability to pay (purchasing power), it is called
effective demand.
Thus demand shows the expression of consumer buying intentions, quantity demanded is the
various quantities of the commodity consumers (buyers) are willing and able to buy at each
specific price, over a given period of time. Thus, unlike quantity demanded, demand is not a
fixed number. Quantity demanded is a flow concept and does not refer only to the quantity of a
commodity consumers buy. The quantity demanded of a commodity must, therefore, be
understood with respect to a time period (day, week, month, year, etc). Hence, the quantity
demanded of a commodity is the various quantities of the commodity, which buyers are willing
and able to purchase at each specific price, over a given period of time.