Demand law of Demand SARBJEET KAUR Lecturer in

Demand law of Demand SARBJEET KAUR Lecturer in Economics

Demand & The Law of Demand • Meaning of Demand • Demand function • Demand curve • Law of demand

§ Economics is a “behavioral science” in that it describes the behavior of economic agents. § Demand - Total quantity customers are willing and able to purchase § A demand function is a behavior function for consumers. § A supply function is a behavior function for producers. § Two types- Direct Demand Vs Derived Demand

Direct Demand § Demand for consumption goods § Goods and services that satisfy consumer desires § Determinants: product characteristics, tastes, ability to pay

§ These are sometimes called intermediate goods. § For example, demand for steel (an intermediate good) is derived from the demand for final goods (e. g. , automobiles). § These models may also include sales of the final good produced.

The Demand Function • A demand function is a causal relationship between a dependent variable (i. e. , quantity demanded) and various independent variables (i. e. , factors which are believed to influence quantity demanded)

The Demand Curve § The relationship between the quantity demanded of a good and the price of that good is referred to as the demand curve. Graphically, we have § The demand curve gives the relationship between price & the quantity consumers will desire to purchase at that price.

§ The Law of Demand is simply the statement that as the price of a good decreases (increases), more (less) of it will be purchased. § That is, the demand curve is downward sloping. There are two factors that explain this relationship: 1. As the price of a good increases, consumers will substitute into other goods (substitution effect); 2. As the price of a good increases, consumers will have less real income to purchase all goods (income effect).

§ The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. § In other words, the higher the price, the lower the quantity demanded. § The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. § As a result, people will naturally avoid buying a product. The chart below shows that the curve is a downward slope.

§ A, B and C are points on the demand curve. § Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). § So, at point A, the quantity demanded will be Q 1 and the price will be P 1, and so on. § The demand relationship curve illustrates the negative relationship between price and quantity demanded. § The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C).

Chief characteristics of the Law of demand are as follows: § Inverse Relationship § Price, an independent variable, & Demand, a dependent variable § Other things remain the same § Reasons underlying the Law of demand- 2 reasons are there § Income effect § Substitution effect