Theory of demand-overall view

 ECONOMICS

Demand.

In ordinary language demand Means desire of a person for a particular commodity.or services.

But in Economics demand is something more than the desire to purchase.

Desire becomes demand only when it is backed up by 

a) ability to buy.

b) willingness to pay the price.

Determinants of demand.

a) price of the commodity

b) Price of the related commodity

            1. Substitutes .

            2. Complementary goods.

c) Income of the consumer.   

            1.Normal goods ( Direct relation)

            2. Inferior goods ( Inverse relation)

d) Tastes and preferences of consumer.

           1. Demonstration or Bandwagon effect.

          2. Veblen effect.

          3. Snob effect.

e) Consumer Expectations.

f) Level of National income

g) Size of population.

h) Composition of population.

DEMAND FUNCTION : 

Dx = f(Px, Py, M, Pc, T, A)

Law of Demand.

a) It is based on law of diminishing marginal utility.

b)Law of demand is a qualitative statement.

c) There is inverse relationship between price and quantity.

Assumptions of law :-

  1. Consumers are assumed to be rational.
  2. Consumers are assumed to be have knowledge about market conditions.
  3. The constancy of other factors other than price is an important assumption of law of demand.
  4. If other determinants also changes the Law may not hold.

Demand schedule

Demand curve

Here DD indicates demand curve. The demand curve is downward sloping.

Reasons for downward sloping demand curve.

  1. Arrival of new consumers.
  2. Law of diminishing marginal utility.
  3. Different uses.
  4. Price effect
  5. Income effect
  6. Substitution effect

Exceptions to Law of demand.

  1. Giffen goods (inferior goods) (note:- All giffen goods are inferior goods, but all inferior goods are not giffen goods.)
  2. Veblen goods, conspicuous goods
  3. Future expectations about prices.
  4. Sepculative goods
  5. Irrational consumer
  6. Ignorant consumer
  7. Demand for necessaries.
  8. Change in factors on which demand of commodity depends.

Expansion and contraction of demand curve.

When the demand raises due to fall in price then it is called expansion.
When the demand falls due to raise in price then it is called contraction.

For example :- if the price of an apple changes from 3/- to 5/- the demand will fall, then we have say there is contraction of demand. But we should not say it as decrease in demand. 

For example :- if the price of an apple changes from 5/- to 3/- the demand will raise, then we have say there is expansion of demand. But we should not say it as increase in demand. 

Then where should we use increase and decrease in demand wordings ?
If the there is a change in demand due to change in any factors like Tastes and preferences, income, substitutes, cplementaries other than price. Here price is constant. Price does not change at all. But other factors change and demand changes them we have to call it as increase or decrease in demand.

For example:- the income of a person increased from 10000/- to 15000/- then he buys more apples though the price is constant at 5/-. Then there exists increase in demand. But should not call it as expansion of demand.

Varieties in Demand.

There are various types of demands. They are
  1. Income demand
  2. Cross demand
  3. Joint demand
  4. Competative demand
  5. Composite demand
  6. Derived demand
  7. Autonomous demand
  8. Demand for durable and non-durable goods.
  9. Demand for firm's products
  10. Industry demand
  11. Short-run demand
  12. Long-run demand.


Elasticity of Demand.

Price elasticity of demand measures the degree of responsiveness of quantity demanded of a product for a change in its price other things remaining equal.














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