Unit-ii_law of Demand

8/8/2019 Unit-ii_law of Demand

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LAW OF DEMAND


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The law of demand expressesthe nature of functional

relationship between twovariables of the demand

relation viz; theprice and the

quantity demanded.


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LAW OF DEMAND

Price and demand are inversely proportionate.

Otherthings constant, quantity demanded rises aspricefalls.

Otherthings constant, quantity demanded falls aspricesrise.

Other things remain constant, when

price of a commodity or services

rises, its demand falls & vice-versa.


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Assumptions of the Law The main assumptions of the law are as

follows

Tastes and preferences of the consumersremain constant.

There is no change in the income of theconsumer.

Prices of the related goods do not change.

Consumers do not expect any change in theprice of the commodity in the near future.


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Demand Schedule

It is a tabularpresentation showing different quantities of acommodity that would be demanded at differentprices.

Price in

Rs

Quantity

demandedBy Avisek

10 10

9 12

8 14

7 16

6 18

5 20

Price

in Rs

Quantity demanded by different

consumer

Total

Market

DemandAvisek Hrithik Aamir Salman

10 10 12 8 9 39

9 12 15 11 13 52

8 14 17 15 18 64

7 16 19 18 20 73

6 18 20 20 21 79

5 20 21 22 22 85


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Demand Curve

It is a graphicalpresentation of

different

quantities of acommodity that

would be

demanded at

different prices.

Quantity

P

r

i

c

e

4 8 12 16 20

10

8

4

2

6

D

D


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Why does Demand Curve Slopes

Downward from left to right

Modern Approach:

Income Effect Substitution Effect

Traditional Approach:

Law of diminishing marginal utility Increase in numberof consumers

Several orvarious uses of commodity

Modern Approach:

Income Effect Substitution Effect

Traditional Approach:

Law of diminishing marginal utility Increase in numberof consumers

Several orvarious uses of commodity


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Substitution effect when therelative

price (opportunity cost) of a good orservicerises, peopleseeksubstitutes forit, so the

quantity demanded decreases.

Income effect when theprice of a good

orservicerisesrelative to income, people

cannot afford all the things they previously

bought, so the quantity demanded

decreases.


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Law of diminishing marginal utility:

Otherthingsremain constant, the utility

derived by a person from the consumption

of additional units of a commodity

decreases ashis consumption increases.


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Exceptions to the law of demand

The upward sloping curve is contrary to the law of demand,where there is a direct relationship betweenprice and demand

Theseexceptional cases can be listed as

Giff en goods : In the case of certain inferiorgoods called

Giffen goods (named afterSirRobert Giffen), in spite ofpricerise, demand will also rise. It wasseen in Ireland in 19th.

Centurypeople wereso poorthat they spent a majorpart of

income on potatoes and a small part on meat, asprice of

potatoes, rose the demand also rosesince they could not

substitute it formeat which was very expensive. Giffens

paradox isseen the case of inferiorgoods likepotatoes, cheap

bread etc.


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Speculation : whenpeoplespeculate about prices on the

commodity in the future they may not act according to the

laws of demand. Speculating theprices of the commodity willfurtherincrease they will demand more of the commodity for

hoarding etc. In thestockmarket, people tend to buy more

shares whenprices arerising in thehope of bull runs in

anticipation of futureprofits.

Article ofsnob appeal: Certain commodities are demanded

because they happen to beexpensive orprestige goods orsnob

valuehaving a statussymbol. So increase in price will lead to

increase in demand forsuch goods. E.g. Diamonds ,exclusive

carsetc. Consumerpsychological Bias: when a customeris wrongly

biased against quality of a commodity a fall in pricemay not

lead to an increase in demand example clearance ofstock,

discounted sale , etc.

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Unit-ii_law of Demand