Sri Sairam Institute of Technology 2

Prepared by :Dr. K. BARANIDHARAN

PROF.MBASRI SAIRAM INSTITUTE OF TECHNOLOGY

CHENNAI

ENGINEERING ECONOMICS

AND FINANCIAL

ACCOUNTING

Engineering Economics&

Financial Accounting

Ee&fa3April 7, 2023

law of demand

Law of demand

Statement of Law : “ Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded”.

The Law of Demand states the relationship between price and demand of a particular product or services

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Assumptions of the Law of DEMAND

• Other things being equal : include income level of the consumer, tastes and preferences of the consumer, prices of related goods, expectation about the prices or incomes in the future, size of population, advertising efforts and any other factor capable of affecting the demand

The Law of Demand

• When a good’s price is lower, consumers will buy more of it

• When a good’s price is higher, consumers will buy less of it

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DEMAND Curve

• The graph has two axis - vertical line is labeled as price and the horizontal line is for the quantity number.

• Remember to state the units used for price and quantity and name the graph.

99

DEMAND Curve• Demand reflects an inverse

relationship between price and quantity demanded.

• The Demand Curve is a graph reflecting the price consumers are willing to pay and the quantity consumers are willing buy.

Demand Curve

Copyright © 2004 South-Western

Price ofIce-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

3.00

12

1. A decrease in price ...

2. ... increases quantity of cones demanded.

10SUPPLY AND DEMAND

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Law of Demand and Income effect

• When there is a fall in the price of a commodity. It leads to a rise in the real income of the consumer.

• Rise in real income means the consumer will be able to buy more commodities for a given amount of money.

• Example:the price of fall in bananas

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Law of Demand and Substitution effect• The price of commodity falls, the prices of its

substitutes remaining the same, the commodity will now be cheaper when compared to substitutes.– When consumers react to an increase on a

good’s price by consuming less of that good and more of other goods.• Ex.- McDonalds raise prices, more people buy Burger

King

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Changes in demand

• The increase or decrease in demand due to change in the factor other than price is called change in demand.

• Change in demand leads to a shift in the demand curve to the right or to the left.

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Increase DEMAND• If the consumers are willing and

able to buy more of a particular brand of shirts (say.X) at the same price, the result will be an increase in demand.

• The demand curve will shift to the right

2-15

Increase Demand Curve

p,

Pric

e of

pro

duct

. X

220176

Effect of a 60¢ increase in the price of X

D1

D2

232Quantity demanded

0

3.30

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Decrease in DEMAND

• A decrease in demand occurs when buyers buy less of a product at each possible price rise because of factors like fall in income, rise in price of complementary goods etc.,

• Decrease in demand–At each and

every price Less of the good is demanded

–Shifts to the Left

D2

5

D1

A

B

Price

Quantity90 100

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Extension and Contraction in DEMAND• Extension is a downward movement

along the demand curve, which indicates that a higher quantity is demand for a given fall in the price of a good.

• Contraction is an upward movement along the demand curve which indicates that a lower quantity is demanded for a given increase in the price of the good

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Movements Along the Demand Curve

Price

Quantity

D1

P2

P1

P3

Q2 Q1 Q3

Contraction of Demand

Expansion of Demand