EGR3101: ENGINEER IN SOCIETY II

CHAPTER THREE & FIVE:

THEORY OF DEMAND AND COST OF CAPITAL
INVESTMENT

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INTRODUCTION
• Human want are finite and diverse
• Some people want shoes, others want shirts, some desired to own
television sets, others need cars, motorbike and so on.
• Some in Kano want travel to Malaysia, Saudi Arabia or America.
• Human aspirations are endless, we regard all these aspirations as
wants which may or may not be attained due to resource constrains

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DEMAND
 Definition: “A schedule of the quantities of a good that buyers
are willing and able to purchase at each possible price during a
period of time, [all other things held constant]”
 Demand can also be perceived as a schedule of the maximum
prices buyers are willing and able to pay for each unit of a
good.

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Demand can be classified in two Effective and
ineffective demand
EFFECTIVE DEMAND:
 Is a function of the ability to pay by a consumer.

 That is, its the demand backed up with the ability.

 Example, Usman demand for 50 litres of gasoline @ a unit price of
#225. Thus, this man can only make it effective by paying the sum of
#11250(effective demand).
 If Usman can not pay @ all but just desiring. Then his demand is said
to be INEFFECTIVE DEMAND.

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Laws of Demand
First Law:
State that; the higher the price of a commodity, the lower the quantity
demanded and the lower the price, the higher the quantity demanded.
Second Law:
This also called abnormal or exceptional demand
State that; the higher the price of a commodity, the higher the demand
and the lower the price, the lower the demand.

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Demand Function
Is the functional relationship between the price of the good
and the quantity of that good purchased in a given time
period [UT], income, other prices and preferences being held
constant.
A change in income, prices of other goods or preferences will
alter [‘shift’] the demand function.

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Demand Schedule and Demand curve
 The demand schedule, in economics, is a table of the
quantity demanded of a good at different price levels.
 Thus, given the price level, it is easy to determine the
expected quantity demanded.

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The demand curve is the graphical representation of the economic
entity's willingness to pay for a good or service. It is derived from a
demand schedule, which is the table view of the price and quantity
pairs that comprise the demand curve.

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Factors that can cause changes in demand
Income: An increase in disposable income enabling consumers to be
able to afford more goods. Higher income could occur for a variety
of reasons, such as higher wages and lower taxes.
Quality: An increase in the quality of the good e.g. better
quality digital cameras encourage people to buy one.
Advertising: This can increase brand loyalty to the goods and
increase demand. For example, higher spending on advertising
by Coca Cola has increased global sales.
Substitutes: An increase in the price of substitutes, e.g. if the price of
Samsung mobile phones increases, this will increase the demand for
Apple iPhones – a major substitute for the Samsung.
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Change in demand Cont…
Price: Demand is inversely proportional to price.
The higher the price, the lower the demand and vice
versa
Weather: In cold weather there will be increased
demand for fuel and warm weather clothes.
Expectations of future price increases: A commodity like
gold may be bought due to speculative reasons; if you
think it might go up in the future, you will buy now.

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 Basic concept of capital investment
Investment Definition:
 According to economists, investment refers to any physical or tangible
asset, for example, a building or machinery and equipment.
 According to finance professionals, investment refers to the buying of a
financial product or any valued item with an anticipation that positive
returns will be received in the future.
 According to business theories, investment is that activity in which a
manufacturer buys a physical asset, for example, stock or production
equipment, in expectation that this will help the business to prosper in the
long run.
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Time value of money
 When we borrow a certain sum of money over a period of time, we
agree that we will pay it back, along with a fee, known as the
INTEREST.
 Similarly, when we invest a sum of money in a savings account, the
account earns us interest.
 This lesson will show you how to calculate a certain types of interest
called simple and compound interest.

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 Time value of money cont…
Simple Interest:
 Interest paid only on the original amount of money and not on the interest it has
already earned.
 Is a type of interest that is applied to the amount borrowed or invested for the
entire duration of the loan, without taking any other factors into account, such as
past interest (paid or charged) or any other financial considerations.
 Simple interest is generally applied to short-term loans, usually one year or less,
that are administered by financial companies.
 The same applies to money invested for a similarly short period of time.

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Simple Interest Example
 If you invested #10,000.00 in an account that paid
simple interest of 4%, find the interest earned in 2
years.
How long does Nura Bala needs to invest
#400,000, at 5% pa to earn #120,000 of interest
money.

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 Compound interest
• Is the interest calculated on the initial principal and also on the
accumulated interest of previous periods of a deposit or loan.
• Is added to the principal of a deposit or loan so that the added interest also
earns interest from then on.
• This addition of interest to the principal is called compounding.
• A kind of interest in which the bank calculates interest based on the previous
balance plus the last period's interest.

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Compound interest Example

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