Demand and Law of Demand PDF

Demand and Law of Demand  Meaning of Demand Demand for a commodity refers to the quantities of a commodity which consumers are will and able to purchase at various possible prices during a particular period to time. 3 Dimensions of the definition 1. Effective Desire...

Demand and Law of Demand  Meaning of Demand Demand for a commodity refers to the quantities of a commodity which consumers are will and able to purchase at various possible prices during a particular period to time. 3 Dimensions of the definition 1. Effective Desire 2. Particular Price 3. Flow concept (measured over a period of time)  Individual Demand and Market Demand Ex ante Demand and Ex post Demand Types of Joint Demand Demand Derived Demand Composite Demand Determinants of Demand / Factors influencing Demand Consumer Price of the Income of the Prices of Taste and Commodity Consumer Related Goods Preferences Size and Consumers Consumer Demonstration Composition of Expectations Credit Facilities Effect Population Distribution of Government Climate Factors Income Policy  Price of the commodity Inverse relationship between price and demand Price Demand Price Demand  Income of the Consumer Relationship between income and demand is direct Income Demand Income Demand  Income of the Consumer Normal Goods Income Demand Income Demand Examples: Clothes, Television, Mobile Phone  Income of the Consumer Inferior Goods Income Demand Income Demand Examples: Black and white television  Income of the Consumer Inexpensive goods Income Demand Income Demand Example: Salt, Match Box Relation between Income and Demand Consumers Taste and Preferences People shift from cheaper old fashioned goods to costlier modern goods.  Expectations on Price. Consumers Expectations Expectations on Income. Expectation on Scarcity.  Example: Demand for cars in India has increased Consumer partly because people are Credit Facility able to get loans from the banks to purchase cars.  Demonstration effect refers to the tendency of a person Demonstration Effect to emulate the consumption style of other persons such as his friend, neighbours etc. Size and Composition of Population COMPOSITION: TYPE (MEN, SIZE: NUMBER WOMEN, CHILDREN, OLD)  Unequal: Demand for Luxuries will be Distribution more of Income Equal: Demand for necessities will be more Climatic Factors SUMMER SEASON: Demand for Ice Creams, air conditioners, cold drinks, cotton clothes will be more WINTER SEASON: Demand for heaters, hot drinks, woolen clothes increases  Tax: An increase in tax will lead to increase in price Government Expenditure: Increase in Government expenditure will lead Government to an increase in demand. Policy Example: If the government incurs more expenditure on the construction of roads, bridges, in setting up of industries, etc. the demand for the goods needed for construction will increase  Price of Related Goods Related goods can be classified into two categories: Substitute Goods Complementary Goods  Substitute Goods Substitute goods are those goods which satisfy the same type of need and hence can be used on in place of another to satisfy the given want. Example: Tea & Coffee, Pepsi & Coke (i) Substitute Goods  Complementary Goods Complementary goods are those goods which are complementary to one another in the sense that they are used jointly or consumed together to satisfy a given want. Example: Car and Petrol (dsfdfi) Substitute Goods  Cross Demand shows the Cross Price relationship between Effect / price of a commodity and Cross the demand for some Demand other related commodity.  Demand Function A demand function states the relationship between demand for a product and its determinants in the form of an equation. Dn= f (Pn, Pn-1, Y, T,E,H, Y, G…) Dn denotes the demand for commodity n F shows functional relationship Pn is the price of the commodity Pn-1 is the price of related commodity Y is income T stands for taste and preferences E stands for expectations H is the size of the population Y stands for distribution of income G is the government policy  The law of demand states that, other things remaining equal, the LAW OF quantity demanded of a commodity increases DEMAND when its price falls and decreases when it price rises.  Other factors remaining the same: There should be no change in the income of the consumer. Assumptions There should be no change in the taste and of Law of preferences. Demand Price of related commodities should remain unchanged. Size of the population should not change. There is no expectation of change in the prices in future. Demand Schedule The demand schedule is a tabular statement that shows different quantitates of a commodity that would be demanded at different prices during a given period  Individual Demand Schedule Individual demand schedule is the table which shows various quantities of a commodity that would be purchased at different prices by a household during a given period of time.  Market demand schedule is a table which shows various quantities of a commodity that all the Market Demand buyers (consumers) are willing to purchase at Schedule different prices during a given period.  Demand Curve Demand curve is a The picturization of graphic the demand presentation of the schedule is called as Law of Demand. the Demand Curve  Individual Demand Demand Curve Curve Types Market Demand Curve  Individual demand curve for a good is a curve that shows Individual different quantities Demand of the good which a Curve consumer is willing to buy at different prices during a given period of time. Demand Schedule & Demand Curve  It is curve that represents different quantities of goods Market which all the Demand consumers in the Curve market are willing to buy at different prices during a specified period.  Market demand schedule is a table which shows Market Demand various quantities of a commodity that all the buyers (consumers) are willing to purchase at Schedule different prices during a given period.  Market Demand Curve It is a Horizontal summation of the demand curves of all the Households Market Demand Curve and its Derivation from Individual Demand Curves CHANGE IN QUANTITY DEMANDED & CHANGE IN DEMAND  When the amount demanded of a commodity changes (rises or falls) as a result of change in its CHANGE IN own prices, while other determinants of demand (like QUANTITY income, tastes and prices of DEMANDED related goods) remain constant, it is known as change in quantity demanded.  Change in Quantity Demanded / Movement of along the Demand Curve  When the quantity demanded of a commodity Expansion rises due to fall in its price, other things remaining the of Demand same, it is called as rise in quantity demanded or Expansion of demand.  Contraction of demand or fall in quantity demanded Contraction refers to the decrease in the quantity demanded as of Demand a result of rise in its price, other things remaining the same. CHANGE IN DEMAND  When the amount demanded of a commodity changes Change in (rises or falls) because of Demand. change in factors other than the own price of the commodity, it is called Change in Demand  Increase in demand Increase refers to a situation in when the consumers Demand buy larger amount of commodity at the same price.  Decrease in demand refers to a situation Decrease when the consumers in buy a smaller Demand quantity of the commodity at the same price. Change in Demand / Shift in the A2 A A1 Demand Curve REASONS FOR DOWNWARD SLOPE OF THE DEMAND CURVE Why is there an inverse relationship between price and quantity demanded? Why does a Demand Curve Slope Downwards?  1. Income Effect A change in demand on account of change in the real income resulting from a change in price of the commodity is known as the income effect.  2. Substitution Effect The substitution effect is the effect that a change in the relative prices of substitute goods has on the quantity demanded.  3. Increase in Number of Consumers. When the price of a commodity falls, many new consumers will start purchasing the commodity. At a very high price of the commodity only a few rich can afford the to buy the commodity. When the price of the commodity falls a little, people with moderate income will also be able to purchase the commodity. At a still lower price ever the poor can afford it.  4. Several Uses of a Commodity. There are goods which can be put to number of uses. Electricity, Milk are examples of such commodities. When the price of such commodities are high, they will be used for more important purpose only and therefore a small quantity will be demanded. But when the price falls, these commodities will be put to less important uses also. Exceptions to the Law of Demand Whys is a Demand curve positively sloped?  Giffen goods are those inferior goods on which 1. Giffen consumer spends a Goods larger part of his income and the demand for it falls with a fall in price. 2. Articles of Snob Appeal The law of demand does not apply to the commodities which serve as a status symbol, increase in social prestige or a source of display of wealth. These goods are demanded because of the enjoyment they give to their possessor from the feeling that other people envy him/her for possessing these high-priced items. The higher price makes possession of diamond more prestigious. 3. Expectations about future prices. If the price of the commodity is likely to rise in the future, people will buy more even at the existing price and store it up. They will do it in order to avoid the pinch of higher prices in the future. Similarly, if the consumers anticipate a large fall in the price of a commodity in future, they will postpone their purchase to purchase this commodity at a lower price in the future.  4. Emergencies Law of Demand does not hold good during They would buy more and emergencies like, war, hoard the goods even at famines etc. At such times, higher prices. consumers behave in an abnormal way. 5. Quality-Price Relationship Sometimes consumers assume that high priced goods are of higher quality than the low-priced goods. They take price as an index of quality. In such cases, more of the goods will be demanded at higher price. 6. Change in Fashion When a commodity goes out of fashion, consumer will not purchase a larger quantity of this commodity even when its price is reduced. For instance, if the fashion of some ladies' wear changes, ladies will not purchase it in large quantity even if the price is reduced.