(a) What is a demand schedule? (b) Explain each of the following terms: → effective demand → composite demand → derived demand (ci) Using appropriate diagra...

Answer Details

(a) A demand schedule is a table or chart that shows the quantity of a good or service that consumers are willing and able to purchase at different price levels, while other factors remain constant. It represents the relationship between price and quantity demanded, demonstrating the amount of a product consumers are willing to buy at various price points.

(b) Here are explanations for each of the terms mentioned:

• Effective demand: Effective demand refers to the desire and ability of consumers to purchase a product or service at a given price level. It takes into account both the willingness and the financial capability of individuals to buy goods or services. Effective demand considers the affordability aspect in addition to the desire to purchase.
• Composite demand: Composite demand occurs when a good or resource has multiple uses or serves different purposes. In other words, a product or resource is in demand for various reasons or by different industries or consumers. The demand for the good or resource is influenced by multiple factors and markets, making it a composite demand.
• Derived demand: Derived demand refers to the demand for a good or service that arises as a result of the demand for another related good or service. It occurs when the demand for one product is dependent on the demand for another product that it is used to produce or complement. The demand for derived goods is derived from the demand for the final product or the primary goods it supports.

(ci) A change in the price of a commodity can influence the demand for its substitute. Let's consider the scenario of coffee and tea as substitutes. If the price of coffee increases, it becomes relatively more expensive compared to tea. As a result, consumers may switch their preference from coffee to tea due to the lower price. This change in price creates an incentive for consumers to substitute one product (coffee) with its alternative (tea), leading to an increase in the demand for tea.

To illustrate this on a demand diagram, we would see a shift in the demand curve for tea to the right. The new equilibrium quantity of tea would increase, indicating higher demand, while the equilibrium quantity of coffee would decrease.

(ii) A change in the price of a commodity can influence the demand for its complement. Let's take the example of cars and gasoline as complements. If the price of cars decreases, it becomes more affordable for consumers, leading to an increase in car purchases. As a result, the demand for gasoline, which is necessary to fuel and operate the cars, would also increase.

On a demand diagram, we would observe a rightward shift in the demand curve for gasoline, indicating an increase in demand. The equilibrium quantity of gasoline would rise as consumers require more fuel to meet the increased demand for cars.

In both cases, the change in the price of a commodity influences the demand for its substitute or complement due to the relationship and interdependence between the products.