Law Of Demand Theory And Equimarginal Utility Approach

Law Of Demand Theory And Equi-marginal Utility Approach Presented by: Adrita Nath Ashwini Kumar Rohit Kishore Shritama Sarkar Upasana Roy Varun Kalra 9/26/2020 group 2 sec c 1

Contents Ø Why demand ? Ø What is demand ? Ø Determinants of demand. Ø The law of Demand. Ø Demand Schedule. Ø Demand curve. Ø Characteristics of a typical demand curve. Ø Assumptions. Ø Exceptions to the law. Ø Movement along the curve. Ø Movement of demand curve. 9/26/2020 group 2 sec c 2

Contd… Ø Factors and effect of change in demand. Ø The law of equi marginal utility. Ø Utility schedule. Ø About the law. Ø Example. Ø Assumptions. Ø Equi marginal utility and law of demand. Ø Use for managerial purposes. 9/26/2020 group 2 sec c 3

Why Demand ? NEED SATISFACTION WANTS PURCHASE DEMAND 9/26/2020 group 2 sec c 4

What is Demand ? “ When the desire for a commodity is backed by the willingness and the ability to spent adequate sums of money, it becomes demand or effective demand in the economic sense of the curve. Only desire for commodity or having money for the same cannot give rise to its demand” Marshall “ Demand for a product refers the amount of it which will be bought per unit of time at a particular price”. 9/26/2020 group 2 sec c 5

Determinants of Demand 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Price of the product. Income and wealth distribution. Tastes, habits and preferences. Relative prices of other goods Ø Substitute products. Ø Complementary products. Consumers satisfaction. Advertisements effects. Growth of population. Level of taxation. Climatic or weather conditions. Special occasions. 9/26/2020 group 2 sec c 6

The Law of Demand “Other factors remaining same (habits, tastes etc. ) as price decreases demand increases and vice versa” Marshall “Ceteris paribus, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded. ” 9/26/2020 group 2 sec c 7

Demand Schedule (Hypothetical) Price of commodity (in Rs) Quantity demanded (unit per week) 5 4 3 2 1 9/26/2020 100 200 300 400 500 group 2 sec c 8

Demand Curve D E 1 Price(P) P 1 - old price P 2 - new price Q 1 – old quantity demanded E 2 P 2 D 0 Q 1 Q 2 – new quantity demanded DD – demand curve Quantity demanded (Q) A Linear Demand Curve 9/26/2020 group 2 sec c 9

Characteristics of A Typical Demand Curve Ø Drawn by joining different loci. Ø Downward sloping. Ø Reciprocal relationship between price and quantity demanded ( P α 1/Qd ) Ø Linear 9/26/2020 Non - linear group 2 sec c 10

Assumptions (Other things) a) b) c) d) No change in consumer’s income. No change in consumer’s preferences. No change in the fashion. No change in the price of related goods : Ø Substitute goods. Ø Complementary goods. e) No expectation of future price changes or shortages. f) No change in size, age, composition and sex ratio of the population. g) No change in the range of goods available to the consumers. 9/26/2020 group 2 sec c 11

Contd… h) No change in the distribution of income and wealth. i) No change in the government policy. j) No change in weather conditions. 9/26/2020 group 2 sec c 12

Exceptions To The Law a) b) c) d) Giffen goods. Articles of snob appeal. Speculation. Consumer psychological bias or illusion. D P 2 Price Upward sloping demand curve P 1 D Q 1 Q 2 Quantity demanded 9/26/2020 group 2 sec c 13

Movement along the curve OR Change in quantity demanded Ø Extension of demand /Increase in quantity demanded: ‘ With a decrease in price, there is increase in the quantity Ddemand of the product’. P 1 E Price E` P 2 D Q 1 9/26/2020 Q 2 Quantity group 2 demanded sec c 14

Ø Contraction of demand /Decrease in quantity demanded: ‘ With a increase in price, there is a decrease in quantity demanded’. ’ E` P 2 Price P 1 E Q 2 9/26/2020 Q 1 Quantity demanded group 2 sec c 15

Movement of Demand Curve OR Change in demand Ø Increase in demand: a) More quantity demanded ------ at a given price. b) Same quantity demanded ------ at a higher price. D` D` D D a P 1 P 2 b Price P 1 D` a D D 9/26/2020 Q 1 Q 2 Quantity demanded D` group 2 sec c Q 1 Quantity demanded 16

Ø Decrease in demand : a) Less quantity demanded ---- at same price. b) Same quantity demanded ---- lower price. D D D` D` P 1 Price a P 1 b Price b D P 2 D a D` D` Q 2 Q 1 Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 17

Factors And Effects of Change (increase or decrease) in demand a) Change in income : D` D Increase Decrease D` Price D D 9/26/2020 Quantity demanded D D` D` Quantity demanded group 2 sec c 18

b) Change in taste, habit and preference : D` D Positive Negative D` D Price D` D Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 19

c) Change in fashion and customs : Favorable Unfavorable D D` Price D` D Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 20

d) Change in distribution of wealth : Fiscal measures (welfare) D` Price D D` D` Quantity demanded 9/26/2020 Fiscal measures (particular) group 2 sec c 21

e) Change in substitutes : Increase in price of substitute goods D D` Pric e D D` Quantity demanded Ptea Dtea : Pcoffee 9/26/2020 Dcoffee group 2 Decrease in price of substitute goods Quantity demanded Ptea Dtea : Pcoffee sec c Dcoffee 22

f) Change in demand of complementary goods Decrease in price Increase in price D D` Price D D` D` D Quantity demanded Pcar Dcar : Ppetrol 9/26/2020 Quantity demanded Dpetrol group 2 Pcar sec c Dcar : Ppetrol Dpetrol 23

g) Change in population : Increase Decrease D D` D` D Price D` D D D` Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 24

h) Advertisement and publicity persuasion : Aggressive D D` Price Docile Price D` D D D` Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 25

i) Change in value of money : Inflationary Deflationary D D` Price D D` D Quantity demanded ( Value of money ) 9/26/2020 group 2 sec c 26

j) Change in level of taxation : High Low D D` Price D D` D` D Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 27

k) Expectation of future changes in prices : D` Price D Rise Price D Fall D` D` D Quantity demanded 9/26/2020 Quantity demanded group 2 sec c 28

Law of Equi marginal Utility Ø Utility : ‘ The satisfaction that a consumer gets by having or consuming goods or services is called utility’. Ø Total Utility (TU) : ‘ It is the sum total of satisfaction which a consumer receives by consuming the various units of the commodity’. Ø Marginal Utility (MU) : ‘ It is the change in total utility resulting from one unit change in consumption of good’. MU = ∆TU / ∆Q 9/26/2020 group 2 sec c 29 MU = TUn – TU ; where ∆Q = 1 n-1

Utility Schedule Units of goods (n) 0 1 2 3 4 5 6 7 9/26/2020 TUn MUn= (∆TUn / ∆Qn) 0 9 16 21 24 25 24 21 group 2 sec c 9 7 5 3 1 -1 -3 30

About The Law ‘ A consumer maximizes his total utility by allocating his income among goods and services ( including savings ) available to him in such a way that the marginal utility per rupees worth of one good equals the marginal utility per rupees worth of any other good. ’ MUx / Px = MUy / Py Generalizing , MUx 1/ Px 1 = MUx 2 / Px 2 = ……= MUxn / Pxn 9/26/2020 group 2 sec c 31

Assumptions a) b) c) d) e) f) g) Cardinal utility Independent utility Additive utility Constant marginal utility of money Diminishing marginal utility Rationality Introspective analysis 9/26/2020 group 2 sec c 32

Example Money Income = Rs 37/Units MUA MUB MUC P =Rs 5/unit P =Rs 3/unit P =Rs 2/unit 1 2 3 4 5 6 7 9/26/2020 100 80 60 40 20 0 100 90 80 70 60 50 40 group 2 sec c 50 48 46 44 42 40 38 33

TU = Σ MUA + Σ MUB + Σ MUC = 890 So, MUA / PA = MUB / PB = MUC / PC = MU (Money) = 100/5 = 60/3 = 40/2 = 20 This is Consumer’s Equilibrium. 9/26/2020 group 2 sec c 34

Equi marginal Utility And Law of Demand Ø Substitution effect : Income constant If price x fall Demand X increased 9/26/2020 group 2 sec c MUx fall Real income increased 35

Ø Income Effect : Price constant Income increased Demand rises Money income rise In case of normal goods +ve I. E + S. E = Law of demand 9/26/2020 group 2 sec c 36

Use for managerial purposes a) Sales forecasting with sound base and greater accuracy. b) Demand manipulation. c) Product planning. d) Product improvement. e) Determining sales quotas. f) Appraisal of performance. g) Pricing policy. h) Market share. i) Scope for expansion. j) Competitive position. 9/26/2020 group 2 sec c 37

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