Business Economics Law of Demand Meaning of Demand

Business Economics Law of Demand

Meaning of Demand v Demand for any commodity refers to the amount of that commodity that will be purchased, i. e. the amount which consumer are willing and able to purchase at a particular price during a particular period of time.

Types of Demand 1. 2. 3. 4. 5. Individual and Market Demand Ex ante and Ex post Demand Joint Demand Derived Demand Composite Demand

Individual and Market Demand v the quantity of a commodity that an individual consumer is willing to purchase at a given price during a given period of time is known as individual demand. v Market demand refers to the total quantity of a commodity that all the households are willing to buy at a given price during a given period of time.

Ex ante and Ex post Demand v Ex ante demand refers to the amount of goods that consumers want to or willing to buy during a particular time period, v Ex post demand, on the other hand , refers to the amount of goods that the consumers actually purchase during a specific periood.

Joint Demand v Joint demand refers to the demand for two or more goods which are used jointly or demanded together. Example: Car and Petrol, Butter and Bread, Milk and Sugar, etc.

Derived Demands v The Demand for a commodity that arises because of the demand for some other commodity is called derived demand. Example : Demand for Steel, Bricks, Cement, Stones, Woods, for the construction of Houses.

Composite Demand v Demand for goods that have multiple uses is called composite demand. Example: Demand for steel arises from various uses of steel, such as use of steel in making utensils, bus bodies, room coolers, cars and so on.

Factors Affecting Demand 1. 2. 3. 4. 5. 6. 7. 8. 9. Price of Commodity Income of the Consumers’ Taste and Preferences Price of Related Goods Consumers’ Expectations Consumer-credit facility Size and composition of population Distribution of Income Government Policy

Types of Goods on the basis Price of Related Goods Substitute Goods: Substitute goods are those goods which satisfy the same type of demand hence can be used in place of one an other. 2. 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. 1.

Types of Goods on the Basis of Income v Normal Goods : Demand for goods increases with INCREASE in income. . v Inferior Goods: Demand for goods decreases with INCREASE in income. . v Inexpensive goods of Necessities: Demand for goods increases with INCREASE in income Up to a certain level.

Demand function states the relationship between the demand for a product and its determinants. Algebraic expression of Demand Function: Dn=f(Pn, P 1………Pn-1, Y, T, E, H, Yd, G…. )

Law of Demand Statement of the law: The law of demand states that other things remaining equal , the quantity demanded of a commodity increases when its price falls and decreases when its price rises.

Demand Schedule It is a tabular statement of a commodity that shows different quantities of a commodity that would be demanded at a different prices. v Two types of Demand Schedule: 1. 2. Individual Demand Schedule Market Demand Schedule

Individual Demand Schedule Individual Demand schedule is a table which shows various quantities of a commodity that would be purchased at a different prices by a house hold. Price (per kg Rs ) Quantity Demanded(kg per week ) 60 1 50 2 40 4 30 6

Market Demand Schedule Market demand Schedule is a table which shows various quantities of a commodity that all the buyers will purchase.

Market Demand Schedule Price (per kg Rs. ) Qty Demanded By ‘A’ (kg per week ) Qty Demanded By ‘B’ (kg per week) Total Market Demand (A+B) (kg per week ) 60 1 2 1+2=3 50 2 3 2+3=5 40 4 5 4+5=9 30 6 7 6+7=13

Demand Curve and its Derivation Demand Curve is a graphic presentation of the low of demand. The picturization of the demand schedule is called the ‘demand curve’. It is the curve showing different quantities demanded at various alternatives prices during a given period.

Individual Demand curve Individual Demand Curve for a goods is the curve that shows different quantities of the goods which a consumer is willing to buy at a different prices during a given period of time.

Market Demand Curve It is a curve that represents different quantities of goods which all the consumers in the market are willing to buy at a different prices during a specified period. In other words, It is the horizontal summation of the demand curves of all the households.

Why Does Demand Curve Slope Downwards to the Right 1. 2. 3. 4. 5. Law of Diminishing Marginal Utility Income Effect Substitute Effect Increase in Number of Consumers Several Uses of Commodity

Exceptions to the Law of Demand 1. Giffen Goods 2. Articles of Snob Appeal 3. Expectations Regarding Future Prices 4. Emergencies 5. Quality-Price Relationship 6. Change in Fashion

Giffen Goods and Veblen Effect 1. Giffen Goods: Giffen goods are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. 2. Veblen Effect: These Goods are goods of ‘Conspicuous consumption’. These goods are demanded because of the enjoyment they give to their possessor from the feeling that other people envy him/her for the possessing these high-priced items.

Movement Along The Demand curve and Shift of the Demand Curve 1. Extension of Demand: When the Quantity demanded of a commodity rises due to fall in its price, other things remaining the same, it is called ‘rise in quantity demanded’ or ‘extension of demand’. 2. Contraction of demand: ‘Contraction of demand’ or ‘fall in the quantity demanded’ refers to a decrease in the quantity demanded of a commodity as a result of rise in its price, other things remaining the same.

Shift in Demand Curve 1. Increase In Demand : Increase in demand refers to a situation when the consumers buy larger amount of a commodity at the same price. 2. Decrease in Demand: Decrease in demand refers to a situation when the consumers buy a smaller quantity of the commodity at the same price.

Factors Which Cause Change in Demand Shift Factors In Demand curve Shifts towards right Shifts to the left 1. Income 1. Increase in Income. 1. Decrease in income. 2. Rise in the price of 2. Fall in the price of Substitute goods substitute goods. . 3. Fall in the price of complementary goods. 3. Rise in the price of complementary goods. 4. Favourable Change 4 Unfavourable in tastes and change in tastes and preferences. 2. Price of Substitutes 3. Price of complements 4. Taste and Preference 5. Increase in 5. Decrease in

Difference Between Extension of Demand Increase in Demand Extension in Demand 1. It refers to the larger quantity being purchased due to fall in the price of a commodity. Increase in Demand 1. It refers to more purchased at the same price. 2. It is due to fall in a commodity’s 2. It is due to change in other own price. factors affecting demand. 3. Extension of demand simply involves a downward movement along the same demand curve. 3. Increase in demand results in rightward shift of the entire demand curve.

Difference Between Contraction and Decrease in Demand Contraction in Demand Decrease in Demand 1. It means a fall in the amount purchased due to rise in a commodity’s own price. 1. Decrease in demand means smaller amount being purchased at the same price. 2. Contraction of demand is due to a rise in a commodity ‘s own price. 2. Decrease in demand is due to changes in other factors’ affecting demand. 3. It simply means upward movement along the same demand curve. 3. Decrease in demand results in the leftward shift of the entire demand curve.