Theory question 105
Theory of Demand(a) What is a demand schedule?
(b) Explain each of the following terms: (i) effective demand; (ii) composite demand; (iii) derived demand.
(c) Using appropriate diagrams, explain how a change in the price of a commodity would influence the demand of its: (i) substitute; (ii) complement.
Show the model answer
(a) A demand schedule is a table showing the quantities of a commodity consumers are willing and able to buy at various prices at a given time.
(b)(i) Effective demand: desire backed by ability and willingness to pay.
(ii) Composite demand: a commodity demanded for several different uses (e.g. sugar for drinks, bakery and home use).
(iii) Derived demand: a good or factor wanted for what it helps to produce (e.g. labour, cement).
(c)(i) If the price of a commodity rises, demand for its substitute increases: the substitute's demand curve shifts right (a fall in price shifts it left).
(ii) If the price of a commodity rises, demand for its complement falls: the complement's demand curve shifts left (a fall in price shifts it right). Diagrams show D0 and D1 with labelled price and quantity axes.
Substitutes move in the same direction as the other good's price; complements move opposite.