Demand is a fundamental concept in economics that directly influences the financial and operational decisions of accountancy professionals in Kenya. Understanding demand enables accountants to interpret market signals, forecast revenues, and advise businesses on pricing and production strategies. For instance, an accountant at a retail firm in Nairobi must grasp how consumer demand changes with income levels or price variations to prepare accurate financial projections. This chapter explores the concept of demand as it applies to market analysis, equipping accountancy students with practical insights critical for strategic decision-making.

2.1 Meaning of Terms Demand in Market

Grasping the terminology related to demand is essential for accountants who analyze market behaviors and contribute to business planning. The terms associated with demand clarify how consumer preferences and economic factors shape purchasing patterns. This section breaks down the key terms that define demand in market analysis, offering a solid foundation for applying demand concepts in accounting contexts such as budgeting, financial reporting, and investment appraisal.

2.1.1 Demand: Definition and Core Attributes

Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices over a given period. For accountancy professionals, understanding demand involves recognizing both the willingness and the purchasing power of buyers, which affects revenue forecasts and cost management. Demand is not static; it varies with price, consumer income, tastes, and expectations, all of which must be considered when analyzing financial data.

Characteristics of Demand

• Price Sensitivity: Demand typically decreases as prices rise, reflecting consumer responsiveness to price changes. An accountant advising a supermarket chain must consider how price adjustments on staple goods affect overall sales volumes.
• Income Effect: Changes in consumers' income levels influence their ability to buy goods. For example, a SACCO accountant analyzing loan repayment trends may link increased demand for loans to rising household incomes.
• Substitutability: Availability of alternative products affects demand for a specific item. In financial services, if a bank offers better interest rates, it may attract more customers, reducing demand for competitors.
• Time Period: Demand fluctuates over different time frames; seasonal demand peaks can impact cash flow management in hospitality businesses.
• Market Size: The number of potential buyers defines total demand. An accountant working with a cooperative must assess the demographic growth to project future demand for agricultural inputs.

2.1.2 Demand Curve and Demand Schedule in Market Analysis

The demand schedule and the demand curve are two presentations of the same information. The schedule is a table listing the quantity demanded at each price. The curve is that same table plotted on a graph. An accountant works with both: the schedule feeds the sales budget and the curve shows at a glance what a proposed price change will do to volume.

The Demand Schedule

A supermarket branch in Nakuru records how many 2 kg packets of maize flour it sells in a week at each of six price points. The result is a demand schedule.

Reading the table from top to bottom, every drop of KSh 20 in price adds 100 packets to weekly sales. That constant relationship can be written as an equation:

Quantity demanded = 1300 − 5 × Price

Checking the equation against point A: 1300 − (5 × 220) = 1300 − 1100 = 200 packets, which matches the table. Checking against point F: 1300 − (5 × 120) = 1300 − 600 = 700 packets, which also matches. The figure 5 is the slope, meaning each KSh 1 reduction in price brings 5 extra packets of weekly sales.

The Demand Curve

Figure: he six points of the demand schedule plotted as a demand curve. Price is on the vertical axis and quantity demanded on the horizontal axis.

Note the convention, which is the opposite of the usual mathematical practice: price goes on the vertical axis even though it is the cause, and quantity on the horizontal axis even though it is the effect. Every demand curve you meet in CDACC assessments and in published market reports follows this arrangement.

How to Plot a Demand Curve

1. Draw the two axes. Label the vertical axis Price and the horizontal axis Quantity demanded, each with its unit.
2. Choose a scale for each axis that covers the full range in the schedule without cramping the points.
3. Plot each row of the schedule as a point, reading the price up the vertical axis and the quantity across the horizontal axis.
4. Join the points with a smooth line.
5. Label the line D or Demand, and give the whole diagram a title stating the product and the market.

Reading the Curve for Revenue

The schedule becomes a financial tool once total revenue is calculated at each price, since total revenue is price multiplied by quantity.

Two results in that table matter to an accountant.

First, cutting the price from KSh 200 to KSh 160 raises revenue from KSh 60 000 to KSh 80 000, an increase of KSh 20 000, which is 20 000 ÷ 60 000 = 0.3333, or 33.3 per cent. The price cut pays for itself in volume.

Second, cutting the price further from KSh 140 to KSh 120 leaves revenue unchanged at KSh 84 000 even though 100 extra packets are sold each week. Those extra packets carry extra purchase cost, extra handling and extra shelf space, so the branch is working harder for the same money and earning less profit. This is the point at which further price cutting stops helping.

The highest revenue on this curve lies between those two prices. Writing total revenue as a formula:

Total revenue = Price × (1300 − 5 × Price) = 1300P − 5P²

This reaches its maximum where 1300 − 10P = 0, giving P = 130. At that price the quantity is 1300 − (5 × 130) = 650 packets, and total revenue is 130 × 650 = KSh 84 500. Any price above or below KSh 130 earns less.

Movement Along the Curve Against a Shift of the Curve

Figure: A movement along the curve, caused by a price change, compared with a shift of the whole curve, caused by a change in any other determinant.

The distinction decides how an accountant explains a change in sales volume.

• A movement along the curve happens when the price changes and nothing else does. In the left panel the price falls from KSh 200 to KSh 140, so weekly sales rise from 300 to 600 packets. The curve itself has not moved. The business caused this change, through its own pricing decision.
• A shift of the curve happens when a determinant other than price changes: incomes, tastes, population, the price of a substitute. In the right panel the whole curve moves right to D2, so at the unchanged price of KSh 160 weekly sales rise from 500 to 700 packets. The business did not cause this change, and the old schedule is now out of date.

This matters in a variance report. If sales volume rises after the branch cut its price, the variance is explained by the pricing decision and the old schedule still holds. If sales volume rises with no price change, the schedule itself must be rebuilt before it is used for next period's budget.

Components of the Demand Curve and Schedule

• Price Axis: Vertical axis showing different price levels. Accountants use this to evaluate how price changes impact revenue.
• Quantity Axis: Horizontal axis indicating quantity demanded. It assists in forecasting sales volume.
• Downward Slope: Reflects the inverse relationship between price and demand. For instance, a county hospital's procurement officer may note reduced demand for certain medical supplies when prices increase.
• Data Points: Each point on the curve corresponds to quantity demanded at a specific price, informing budgeting and inventory decisions.
• Shifts versus Movements: Movements along the curve occur due to price changes, while shifts result from factors like income or preferences, which accountants must distinguish when analyzing market trends.

2.1.3 Determinants of Demand Relevant to Accountancy Practice

Demand is influenced by several factors beyond price, each holding significance for accountants engaged in market and financial analysis. Identifying these determinants allows accountants to anticipate changes in demand that affect sales forecasts, cost control, and profitability assessments.

Key Determinants of Demand

• Consumer Income Levels: Higher incomes generally increase demand for normal goods, influencing revenue projections in sectors like education or retail.
• Consumer Preferences and Tastes: Shifts in consumer tastes can affect product demand, impacting inventory valuation and marketing budgets for businesses such as hotels.
• Prices of Related Goods: The demand for a product can increase or decrease depending on the prices of substitutes or complements, affecting cross-product financial analysis in banking or insurance.
• Expectations of Future Prices: Anticipation of price rises may lead to increased current demand, which accountants must consider in cash flow and working capital management.
• Population and Demographics: Changes in population size or structure affect market demand, critical for long-term financial planning in sectors like healthcare or agriculture.

Each of these determinants shifts the whole demand curve, as shown in Figure 2.1.2b. None of them moves a business along its existing curve: only a price change does that.

2.1.4 Law of Demand and Its Exceptions in Market Context

The law of demand states that, ceteris paribus, quantity demanded falls as price rises and vice versa. This principle guides pricing and sales strategies, but accountants must also recognize exceptions where demand does not follow this pattern, ensuring accurate market analysis and financial reporting.

Exceptions to the Law of Demand

• Giffen Goods: Some inferior goods may see increased demand as prices rise due to their necessity, a scenario relevant when analyzing low-income consumer behavior in rural cooperatives.
• Veblen Goods: Luxury items may experience higher demand with higher prices because of their status symbol value, impacting revenue forecasts for premium product lines.
• Speculative Demand: Expectations of future price increases can cause demand to rise even as prices increase, affecting investment decisions in sectors like real estate.
• Essential Goods: Demand for necessities such as basic foodstuffs or medications tends to be inelastic, a factor crucial for budgeting in public health institutions.
• Quality Perceptions: Sometimes higher prices are associated with better quality, leading to increased demand, which accountants must factor into pricing analyses for branded products.

Where an exception applies, the demand curve for that good slopes upward from left to right rather than downward, and a schedule built on the normal assumption will understate sales at higher prices.

Chapter Summary

This chapter explored the concept of demand in the market, clarifying its meaning and distinguishing between individual demand and market demand analysis. It examined the various factors that influence demand, including income levels, tastes, and prices of related goods. The discussion included exceptional demand curves that deviate from the typical downward slope, highlighting unique market behaviors. Different types of demand were outlined to provide a comprehensive understanding of consumer purchasing patterns. The chapter also explained the difference between movements along the demand curve and shifts of the entire curve, emphasizing their causes. The concept of elasticity of demand was introduced, followed by an analysis of its types: price elasticity, income elasticity, and cross elasticity. Methods for measuring elasticity, such as point elasticity and arc elasticity, were detailed, along with the factors that affect elasticity in different markets. Finally, the chapter demonstrated how elasticity of demand informs management strategies and economic policy decisions, enabling more effective responses to market changes.