GCE Economics 2022 Theory — Question 5

Model answer

(a) A demand schedule can be defined as a table which shows the relationship between the price of a commodity and the quantity of that commodity demanded. It shows the quantity of a commodity that can be purchased as the price changes. There are two types of demand schedule: (i) an Individual Demand Schedule, which shows the units of a particular commodity purchased at different prices by an individual; and (ii) a Market (or Aggregate/Composite) Demand Schedule, which shows the units of a particular commodity purchased by different buyers at different prices. (b)(i) Effective demand: demand is said to be effective where there is willingness and ability to pay. In this case, someone has both the desire and the monetary means to pay for a good/service; if the reverse is the case, then it is ineffective demand. (ii) Composite demand: demand is said to be composite when a commodity is wanted for several purposes or uses. For example, palm oil can be demanded/wanted for several purposes such as cooking, frying, production of soap, cream, and other products. (iii) Derived demand: demand is said to be derived when a commodity is not wanted for its own sake but for the sake of another commodity it can be used to produce; that is, when a commodity is wanted as a result of the demand for another commodity. Derived demand is applicable to the factors of production, e.g. demand for labour, capital, land and entrepreneurship. Demand for money is also a derived demand. Derived demand is also known as Circuitous Demand. (c)(i) Substitute goods are those goods that are used in place of one another (e.g. close-up and Oral B toothpaste, Milo and Bournvita, meat and fish). For this type of demand, an increase in the price of a commodity will result in an increase in the quantity demanded of its substitute, and vice versa. DIAGRAM: for Commodity A (whose price rises from p1 to p2), its own demand curve (D0-D1) shows quantity demanded falling from q2 to q1; for the substitute, Commodity B, its demand curve shifts rightward (D0 to D1), so the quantity demanded of B increases from q1 to q2 at the same price, because buyers switch to the substitute as A becomes more expensive. (ii) Complementary goods are goods that are used together for the purpose of satisfying a want (e.g. car and petrol, stove and kerosene, shirt and trouser); such a product cannot be used in isolation. DIAGRAM: for Commodity A (whose price falls from p1 to p2), quantity demanded increases; for its complement, Commodity B, the demand curve shifts rightward (D0 to D1), so the quantity demanded of B also increases (from q1 to q2), because a fall in the price of A increases demand for both A and its complement B. Conversely, a rise in the price of commodity A results in a decrease in the demand for its complement, B.