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Law Of Demand Theory And Equi-marginal Utility Approach 0011 0010 1010 1101 0001 0100 1011
Adrita Nath
Ashwini Kumar Rohit Kishore 11/29/09
Shritama group 2 sec cSarkar
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Presented by:
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Contents Why demand ? What is demand ? of 0001 demand. Determinants 0011 0010 1010 1101 0100 1011 The law of Demand. Demand Schedule. Demand curve. Characteristics of a typical demand curve. Assumptions. Exceptions to the law. Movement along the curve. Movement of demand curve.
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Contd… Factors and effect of change in demand. The law of equi marginal utility. Utility schedule. About the law. Example. Assumptions. Equi marginal utility and law of demand. Use for managerial purposes.
What is Demand ? “ When the desire for a commodity is backed by the 0011 0010 1010 1101 0001 willingness and0100 the 1011 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”
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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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Determinants of Demand
1.Price of the product. 2.Income and wealth distribution. 3.Tastes, habits and preferences. 4.Relative prices of other goods Substitute products. Complementary products. 1.Consumers satisfaction. 2.Advertisements effects. 3.Growth of population. 4.Level of taxation. 5.Climatic or weather conditions. 6.Special occasions.
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The Law of Demand 0011 0010 1010 1101 0001 0100 1011
“Other factors remaining same (habits, tastes etc.) as price decreases demand increases and vice versa”
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Marshall
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“Ceteris paribus, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded.” 11/29/09
Price of commodity (in Quantity demanded Rs) (unit per week)
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100 200 300 400 500
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Demand Curve D
P1 - old price
E1 0011 0010 1010 1101 0001 0100 1011 P1
Price( P)
P2 - new price
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D 0
Q1
Q2
DD – demand curve
A Linear Demand Curve group 2
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Q2 – new quantity demanded
Quantity demanded (Q)
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Q1 – old quantity demanded
E2
P2
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Characteristics of A Typical Demand Curve Drawn by joining different loci.
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Downward sloping.
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Reciprocal relationship between price and quantity demanded ( P α 1/Qd ) Linear linear 11/29/09
Non -
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Assumptions (Other things)
a) No change in consumer’s income. 0011 1101 0001 0100 1011 b)0010 No1010 change in consumer’s preferences. c) No change in the fashion. d) No change in the price of related goods : Substitute goods. Complementary goods. a) No expectation of future price changes or shortages. b) No change in size, age, composition and sex ratio of the population. c) No change in the range of goods available to the consumers.
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Contd… 0011 0010 1010 1101 0001 0100 1011
h) No change in the distribution of income and wealth. i) No change in the government policy. j) No change in weather conditions.
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Exceptions To The Law a) Giffen goods. 0011 0010 1010 1101 0001 0100 1011 b) Articles of snob appeal. c) Speculation. d) Consumer psychological bias or illusion. D
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P2
Price
P1
D Q1 11/29/09
Quantity demanded
Q2 group 2
4 Upward sloping demand curve
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Movement along the curve OR Change in quantity 0011 0010 1010 1101 0001 0100 1011 demanded Extension of demand /Increase in
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quantity demanded:
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‘ With a decrease in price, there is increaseDin the quantity demand of the product’. E P 1
Price
E`
P2
D Q1 11/29/09
Q2
Quantity group 2 demanded
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Contraction of demand /Decrease in quantity demanded: ‘ With a increase in price, there is a decrease in quantity demanded’.’
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P2
PriceP
E
1
Q2
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E`
Q1
Quantity demanded group 2
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Movement of Demand Curve OR Change in demand 0011 0010 1010 1101 0001 0100 1011 Increase in demand: a) More quantity demanded ------ at a given price. b) D` Same quantity demandedD`------ at a D D higher price. b
P1
a
P2
b
Pric e
Price P1
D`
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Q1
Q2
Quantity
4 a
D`
D
D group 2
sec
2
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c Quantity
Q1
demanded
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Decrease in demand : a) Less quantity demanded ---- at same price. 0011 0010 1010 1101 0001 0100 1011 b) Same quantity demanded ---- lower price. D D D`
D`
Price
a
P1
Price
b D
D
a
P2
D`
D` Q2
Q1
Q1
Quantity demanded 11/29/09
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P1
Quantity demanded group 2
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Factors And Effects of Change (increase or decrease) in 0011 0010 1010 1101 0001 0100 1011 demand a) Change in income : D`
D
Increase
D` Price
Price D
D
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Quantity demanded
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Decrease
4 D
D`
D`
Quantity demanded group 2
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b) Change in taste, habit and preference : 0011 0010 1010 1101 0001 0100 1011 D`
D
Positive
D`
D
Price
Price D`
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4 D
D`
D
Quantity demanded 11/29/09
Negativ e
Quantity demanded group 2
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c) Change in fashion and customs : 0011 0010 1010 1101 0001 0100 1011 Favorable
Unfavorable D
D`
Price
D`
D
Price D`
Quantity demanded 11/29/09
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D
Quantity demanded group 2
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D
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d) Change in distribution of wealt Fiscal measures (particular) D
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Fiscal measures D` (welfare)
Price D
Price
D
D`
D`
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Quantity demanded
Quantity demanded group 2
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D
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e) Change in substitutes : Increase in0100 price of 0011 0010 1010 1101 0001 1011
Decrease in price of substitute goods D
substitute goods
D`
Pric e
Pric D` e
D
D`
D
Ptea 11/29/09
Dcoffee
group 2
4 D`
Quantity demanded Dtea : Pcoffee
Ptea sec
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Quantity demanded Dtea : Pcoffee Dcoffee
D
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f) Change in demand of complementary goods : Decrease in price
Increase in price
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D
D`
Price
Price D`
D D`
Quantity demanded Dcar
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Quantity demanded
: Ppetrol
Dpetrol
4 D`
D
Pcar
Pcar group 2
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D
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Dcar
: Ppetrol
Dpetrol
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g)Change in population : 0011 0010 1010 1101 0001 0100 1011 Increase
k)Expectation of future changes in prices : 0011 0010 1010 1101 0001 0100 1011
D`
Price
D
Rise
Price D`
D
D`
Quantity demanded
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Quantity demanded group 2
2
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D
D`
D
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Fall
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Law of Equi marginal Utility Utility : The1101 satisfaction that a consumer gets by having 0011 0010‘1010 0001 0100 1011 or consuming goods or services is called utility’.
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Total Utility (TU) : ‘ It is the sum total of satisfaction which a consumer receives by consuming the various units of the commodity’.
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Marginal Utility (MU) : ‘ It is the change in total utility resulting from one unit change in consumption of good’. MU = ∆TU / ∆Q MU = TUn – TUn-1 ; where ∆Q = 1 11/29/09
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Utility Schedule Units of goods (n)
TUn
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0 1 2 3 4 5 6 7 11/29/09
MUn= (∆TUn / ∆Qn)
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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.’
