Demand Chapter.pdf

A. CONCEPT OF DEMAND I. Desire II. Want III. Demand Desire is a wish to possess something. Desire + (Ability to Pay & Willingness to Pay) = Want Want+ (Time & Price) = Demand NOTE: WHEN A WANT HAS THESE TWO FEATURES TIME & PRICE, IT BECOMES A DEMAND. A decision Taken by a Consu...

A. CONCEPT OF DEMAND I. Desire II. Want III. Demand Desire is a wish to possess something. Desire + (Ability to Pay & Willingness to Pay) = Want Want+ (Time & Price) = Demand NOTE: WHEN A WANT HAS THESE TWO FEATURES TIME & PRICE, IT BECOMES A DEMAND. A decision Taken by a Consumer Where he decides Quantity or no. of units of a commodity to be purchased In the light of time & price In other words- The demand for a commodity means its quantity which a consumer is willing to buy at a given price in a given period of time.  B. DETERMINANTS OF DEMAND 1. Price of a commodity: There is a negative rapport between price (cause) and demand (effect) Schedule Price Per Unit Demand Rs.10 100Us Rs.18 20Us P= Rs.8 q= 80 Us 2. Income of a consumer: As we know increase in income INCREASES PURCHASING POWER, there is a positive rapport between income(cause) and demand(effect) 3. Price of related goods  RELATED GOODS Price Per Deman Price Per Demand Price Per Litre of Fuel Demand for Unit d for Unit for Vehicles coke Pepsi Rs.70 1,00,000 Rs.15 100Us Rs.15 100Us Rs.150 20,000 Rs.17 20Us Rs.15 180Us 4. Tastes, Preferences and habits of a consumer 5. Demand for a commodity is DIRECTLY related to the taste, preferences and habits of a consumer. Example: When Black & White TV set went out of taste, its demand fell 6. Other Factors:  (a) Size of Population: Larger the size of population of a country, more will be the demand of all commodities. Example: If the number of youngsters is large, the demand for fashionable apparels, goggles etc will be high. (b) Advertisement: An intelligent, continuous advertisement creates demand. (c) Weather Conditions: When changes take place in weather, demand for commodities also change accordingly I. Demonstration/Bandwagon Effect: It is a psychological effect in which people do the same what others are doing. II. Snob Effect: It is understood as the desire to possess a unique commodity having a prestige value. It is quite opposite to the bandwagon or demonstration effect. III. Veblen Effect: Highly priced goods are consumed by status seeking rich people to satisfy their needs for Distinction between Veblen and Snob Effect: The distinction between the snob effect and the Veblen effect is that the former is a function of the consumption of others and the latter is a function of price. IV. C. MEANING OF MARKET DEMAND Price D1 D2 Market Demand 10 10 12 22 12 8 10 18  14 6 8 14 16 4 6 10 D. LAW OF DEMAND Price Per Unit Demand(Us) Income per Month 10 100 Rs.50,000 14 60 Rs.50,000 16 60 Rs.70,000 WHY DOES DEMAND CURVE SLOPE FROM LEFT TO THE RIGHT? A demand curve is the graphical representation of the demand schedule for a commodity. It is the graphic statement of an individual buyer's reaction on amount demanded at a given price in the given point of time. A demand curve has got a negative slope. It slopes downwards from left to right. In the words of Richard Lipsey "The curve which shows the relation between the price of a commodity and the amount of that commodity the consumer wishes to purchase is called Demand Curve. (1) Law of diminishing marginal utility A consumer always equalises marginal utility with price. The law states that a consumer derives less and less satisfaction (utility) from every additional increase in the stock of a commodity. When price of a commodity falls the consumer's price utility equilibrium is disturbed i.e., price becomes smaller than utility.  The consumer in order to restore the new equilibrium between price and utility buys more of it so that the marginal utility falls with the rise in the amount demanded. SO LONG THE PRICE OF A COMMODITY FALLS, THE CONSUMER WILL GO ON BUYING MORE AMOUNT OF IT SO AS TO REDUCE THE MARGINAL UTILITY AND MAKE IT EQUAL WITH NEW PRICE. Thus, the shape and slope of a demand curve is derived from the slope of marginal utility curve. (2) Income effect Another cause behind the operation of law of demand is income effect. As the price of a commodity falls, the consumer has to buy the same amount of the commodity at less amount of money. After buying his required quantity he is left with some amount of money. This constitutes his rise in his real income. This rise in real income is known as income effect. This increase in real income induces the consumer to buy more of that commodity. Thus, income effect is one of the reasons why a consumer buys more at falling prices. (3) Substitution effect When the price of a commodity falls, it becomes relatively cheaper than other commodities. The consumer substitutes the commodity whose price has fallen for other commodities which becomes relatively dearer. For example, with the fall in price of tea, coffee Price being constant, tea will be substituted for coffee. Therefore, the demand for tea will go up. CONCLUSION INCOME EFFECT + SUBSTITUTION EFFECT = PRICE EFFECT (4) New consumers When the price of a commodity falls many other consumers who were deprived of that commodity at the previous price become able to buy it now as the price comes within their reach. For example, the units of colour TV. increases with a remarkable fall in price of it. The opposite will happen with a rise in prices. (5) Multiple use of commodity There are some commodities which have multiple uses. Their uses depend upon their respective, prices. When their prices rise, they are used only for certain selected purposes. That is why their demand goes down. For example, electricity can be put to different uses like heating, lighting, cooling, cooking etc. If its price falls people use it for other uses other than that. A rise in price of electricity will force the consumer to minimise its use. Thus, with a fall and rise in price of electricity its demand rises and falls accordingly. The law of demand does not apply in every case and situation. The circumstances when the law of demand fails, are known as exceptions to the law of demand. Some of these important exceptions are as under: 1. Giffen goods Those inferior goods on which a consumer spends a significant or large part of his income, are called Giffen Goods. It is often observed when price of coarse cereals like Jwar & Bajra falls, poor consumers spend less on them (Giffen Goods) and use their surplus in buying superior commodities like wheat and rice. ROBERT GIFFEN.  6. Future changes in prices Households also act speculators. When the prices are rising households tend to purchase large quantities of the commodity out of the apprehension that prices may still go up. When prices are expected to fall further, they wait to buy goods in future, so quantity demanded falls when prices are falling. Price(Rs) Demand(Us) Price(Rs) Demand(Us) Price(Rs) Demand(Us) Price(Rs) Demand(Us) 10 100 10 100 10 100 10 100 6 140 14 60 10 140 10 60 Ep Or Price Per Unit Demand Rs.10 100Us Rs.14 60Us Price Per Unit Demand Rs.10 100Us Rs.14 60Us Point Ep A AE = Infinity AA B BE i.e., > 1 BA C CE i.e., =1 CA D DE i.e., < 1 DA E EE = 0(zero) EA Situation Quantity Demanded Price Total Outlay=Quantity X Price A 1000 units Rs 50.00 Rs 50,000 B 1500 units Rs 40.00 Rs 60,00 C 2000 units Rs 37.50 Rs 75,000 D 2500 units Rs 30.00 Rs 75,000 E 3000 units Rs 25.00 Rs 75,000 F 3500 units Rs 20.00 Rs 70,000 G 4000 units Rs 15.00 Rs 60,000  Price Per Unit Demand for Commodity 1 Demand for Commodity 2 Rs.10 100Us 100 Rs.16 80Us 40 p=Rs.6(60%) =20Us(20%) =60Us(60%) Some of the major factors affecting the elasticity of demand of a commodity are as follows: A change in price does not always lead to the same proportionate change in demand. For example, a small change in price of AC may affect its demand to a considerable extent, whereas, large change in price of salt may not affect its demand. So, elasticity of demand is different for different goods. 3. Income Level: 4.Level of price: 5. Postponement of Consumption: 6. Number of Uses: 7. Share in Total Expenditure: 8. Time Period: 9. Habits: