Demand, supply and elasticity explained (with Nigerian examples)

Demand and supply sit at the heart of Economics. They explain why the price of tomatoes rises in the dry season, why fuel queues form when prices are fixed below the market level, and why some price increases hurt sellers' revenue while others raise it. They also appear in every WAEC, NECO and JAMB Economics paper.

Demand

Demand is the quantity of a good that consumers are willing and able to buy at various prices over a given period. Both parts matter: wanting a car without the money to buy it is not effective demand.

The law of demand

The higher the price of a good, the lower the quantity demanded, and the lower the price, the higher the quantity demanded, ceteris paribus (all other things being equal).

This gives a downward-sloping demand curve.

Why the demand curve slopes downwards

• Income effect: when price falls, consumers' real income rises, so they can buy more.
• Substitution effect: when a good becomes cheaper, consumers switch to it from substitutes.
• Diminishing marginal utility: each extra unit gives less satisfaction, so consumers buy more only if the price falls.

What shifts the demand curve

A change in price causes a movement along the demand curve (a change in quantity demanded). A change in any other factor shifts the whole curve (a change in demand):

Supply

Supply is the quantity of a good producers are willing and able to offer for sale at various prices over a given period.

The law of supply

The higher the price, the greater the quantity supplied, and the lower the price, the smaller the quantity supplied, ceteris paribus.

This gives an upward-sloping supply curve: higher prices make production more profitable.

What shifts the supply curve

Nigerian example: during the dry season, the supply of tomatoes in southern markets falls, which shifts the supply curve left and raises prices. During the peak harvest season, supply increases and prices drop sharply.

Market equilibrium

Equilibrium is where quantity demanded equals quantity supplied. The price at this point is the equilibrium price, and the quantity is the equilibrium quantity.

• If the price is above equilibrium, there is a surplus (excess supply). Sellers cut prices to clear stock.
• If the price is below equilibrium, there is a shortage (excess demand). Buyers compete, and prices rise.

Worked example

The equilibrium price is ₦300, where quantity demanded = quantity supplied = 50 units. At ₦200 there is a shortage of 20 units; at ₦400 there is a surplus of 40 units.

Price controls

Governments sometimes fix prices:

• A maximum price (price ceiling) is set below equilibrium to protect consumers. Result: shortages, queues, rationing and black markets. Long fuel queues when pump prices are held below market levels are a classic example.
• A minimum price (price floor) is set above equilibrium to protect producers or workers. Result: surpluses. A minimum wage is an example applied to labour.

Price elasticity of demand

Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price:

PED = % change in quantity demanded ÷ % change in price

PED is usually negative (price and quantity move in opposite directions), but examiners generally accept the absolute value.

Interpreting PED

Worked example 1

The price of a bag of rice rises from ₦40,000 to ₦44,000, and quantity demanded falls from 500 bags to 400 bags. Calculate the PED.

• % change in quantity = (400 − 500) ÷ 500 × 100 = −20%
• % change in price = (44,000 − 40,000) ÷ 40,000 × 100 = 10%
• PED = −20 ÷ 10 = −2, so demand is elastic (|PED| = 2 > 1).

Worked example 2

When the price of salt falls from ₦500 to ₦400, quantity demanded rises from 100 to 105 packets. Calculate the PED.

• % change in quantity = 5 ÷ 100 × 100 = 5%
• % change in price = −100 ÷ 500 × 100 = −20%
• PED = 5 ÷ −20 = −0.25, so demand is inelastic.

This makes sense: salt is a cheap necessity with few substitutes, so people buy about the same amount whatever the price.

Factors affecting elasticity

• Availability of substitutes: more substitutes make demand more elastic.
• Necessity versus luxury: necessities tend to be inelastic, luxuries elastic.
• Proportion of income spent: goods taking a large share of income tend to be more elastic.
• Time: demand is usually more elastic in the long run, as consumers find alternatives.
• Habit and addiction: these make demand inelastic.

Elasticity and total revenue

This is a favourite exam question:

• If demand is elastic, a price rise reduces total revenue, and a price cut increases it.
• If demand is inelastic, a price rise increases total revenue, and a price cut reduces it.

In worked example 2, total revenue at ₦500 is ₦500 × 100 = ₦50,000; at ₦400 it is ₦400 × 105 = ₦42,000. The price cut reduced revenue, as expected for inelastic demand.

Common mistakes

• Confusing "change in demand" with "change in quantity demanded". Only price changes cause movements along the curve.
• Drawing graphs without labels. Label both axes (price and quantity), each curve (D and S) and the equilibrium point (E, P₀, Q₀).
• Dividing the wrong way round in elasticity calculations. Quantity goes on top.
• Forgetting to calculate percentage changes and using raw changes instead.

Practise with explanations

Demand, supply and elasticity form Levia's Economics Level 2 (Demand, Supply and Price). Every question explains the concept or calculation, often with Nigerian market examples.