4law of demand
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4 2 5 1 0011 0010 1010 1101 0001 0100 1011 1 Law Of Demand Theory Sonu Chowdhury
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Transcript of 4law of demand
42510011 0010 1010 1101 0001 0100 1011
1
Law Of Demand Theory
Sonu Chowdhury
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ContentsRationale behind demand theory Meaning of Demand The law of Demand.Movement & Shift
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Why the Theory of Demand Studied?
Demand is the basis of Production.Business manager wants to know:- (i) What are the sources of demand? (ii) What are the determinants of demand? (iii)How do buyers decide the quantity of a product? (iv)How do buyers respond to price change
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Why Demand ?
SATISFACTION
NEED
WANTS
DEMAND
PURCHASE
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What is Demand ?“ When the desire for a commodity is backed by
the willingness and the ability to spend 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”.
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Elements of Demand
• The quantity demanded• The price at which a commodity
is demanded• Time period over which a
commodity is demanded• Market area in which the
commodity is demanded
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Determinants of Demand
1.Price of the product.2.Income3.Tastes, habits and preferences.4.Relative prices of other goods
Substitute products. Complementary products.
5.Consumers satisfaction.6. Quality7.Advertisements effects.8.Growth of population.9.Climatic or weather conditions.10.Special occasions.
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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.”
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Assumptions
1. Income of consumer remains same.2. No change in taste, nature and fashion.3. No change in prices of related commodities4. Consumer has no knowledge of any substitute
commodity, if it exists5. The commodity should not be prestigious or of
show or whose use may create feeling of social prestige.
6. No change in size of population, age composition & sex ratio.
7. No change in quality of the commodity8. No change in government policy
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The Demand Curve
• The market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demand– Each point on the curve shows the total
buyers would choose to buy at a specific price
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Demand Schedule (Hypothetical)
Price of commodity (in Rs)
Quantity demanded (unit per week)
5 4 3 2 1
100 200 300 400 500
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Quantity demanded (Q)
Q1 Q2
P1
P2
E1
E2
0
D
DPrice(P)
P1 - old price
P2 - new price
Q1 – old quantity demanded
Q2 – new quantity demanded
DD – demand curve
A Linear Demand Curve
Demand Curve
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Exceptions To The Law a) Giffen goods.b) Articles of snob appeal.c) Speculation.d) Consumer psychological bias or illusione) Bandwagon & Demonstrations Effectf) Ignorance of Consumer
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MOVEMENT & SHIFT
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Extension of demand /Increase in quantity demanded:
‘ With a decrease in price, there is increase in the quantity demand of the product’.
Movement along the curveOR
Change in quantity demanded
P1
P2
Q1 Q2
E
E`
D
D
Quantity demanded
Price
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Contraction of demand /Decrease in quantity demanded:
‘ With a increase in price, there is a decrease in quantity demanded’.’
Quantity demanded
P2
Q2
P1
Q1
E
E`
Price
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The Demand Curve
Number of Bottles per Month
Price per Bottl
e
A
B
Rs40.00
Rs.20.00
D40,00060,000
At Rs20.00 per bottle, 60,000 bottles are demanded (point B).
When the price is Rs.40.00 per
bottle, 40,000 bottles are
demanded (point A).
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Movement:• When the quantity demanded of any commodity
increases or decreases due to the change in its price.
• It is termed as expansion or contraction of demand.
• In this changes in demand takes place on the same demand curve.
• It happens due to the law of demand
• It is change in quantity demanded
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Shift of Demand CurveOR Change in demand
Increase in demand:a) More quantity demanded ------ at a
given price.b) Same quantity demanded ------ at a
higher price.
P1
Q1 Q2
a b
D
D
D`
D`
Q1
P1
P2
D
D
D`
D`a
b
Quantity demanded
Quantity demanded
Price
Price
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Decrease in demand :a) Less quantity demanded ---- at
same price.b) Same quantity demanded ---- lower
price.
Q2 Q1
P1
a b
Q1
Quantity demanded
P1
D`
bD`
D
D
D`
D
Da
D`
PricePrice
Quantity demanded
P2
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A Shift of The Demand Curve
B CRs20.00
60,00080,000
D1D2
An increase in income shifts the demand curve for maple syrup from
D1 to D2.
Number of Bottles per Month
Price
per Bottl
eAt each price,
more bottles are demanded after the shift
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(a) Change in fashion and customs :
D
D
D`
D`
D
D
D`
D`
Quantity demanded
Quantity demanded
Price Price
Favorable Unfavorable
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(b) Change in substitutes :
D`D`
D`
D`
D
D
D
D
Quantity demanded
Quantity demanded
Price
Price
Increase in price of substitute goods
Decrease in price of substitute goods
Ptea Dtea : Pcoffee
Dcoffee
Ptea Dtea : Pcoffee
Dcoffee
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(c) Change in demand of complementary goods :
Quantity demanded
Quantity demanded
Price Price
D`
D`
D`
D`
D
D
D
D
Pcar Dcar : Ppetrol
Dpetrol
Pcar Dcar : Ppetrol
Dpetrol
Decrease in price Increase in price
