MARIA KHALID BS (Hons) 3rd semester Section B Economics Assignment: Demand Dated: 23rd October 2013

Q 1. What is law of demand with respect to diagram and why demand curve has negative slope? Demand:
Willingness to purchase Power to purchase a commodity at a center price.

For the existence of demand above two conditions must be fulfilled.

LAW OF DEMAND:
According to Professor Marshall: Other things being equal, the amount demanded (of a product) increases with fall in price and diminishes with rise in price. The law of demand states that other factors being constant, price and quantity demand of any good and service are inversely related to each other. Description: Law of demand explains consumer choice behavior when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a good rises, it leads to a fall in the demand of that good. This is the natural consumer choice behavior. This happens because consumers dont want to spend more for the good with the fear of going out of cash.

Above diagram shows curve demand which is sloping downward. Whenever the price of the commodity increases from one point to another quantity demand also comes down from the above mentioned point of Q. Negative Slope of Demand Curve: Looking at the demand curve we see that it slopes from left down to right. This means that the demand curve has a negative slope and shows the negative co-relation between the price and the quantity demanded. Following are the reasons for the negative curve in demand curve: 1. Income Effect: when the price of a product falls, the purchasing power of the consumer increases with his given income and therefore he purchases at a low price. 2. Substitution Effect: when the price of a product falls and the price of its substitute remain same the product appears to be cheaper than its substitute. Hence, people purchase more quantity of the product and therefore its demand increases. 3. Entry of New Buyers: when the price of a product falls more people become interested in buying it. Hence, due to the entry of new buyers in the market, quantity demand of the product increases. In this way the demand curve of the product shows negative slope.

Q2: Explain changes in demand and cause. ANS2: A change in demand is a change in the entire price-quantity relation that makes up the demand curve. It means that a different demanded is paired with a given demand price or that a different demand price is paired with a given quantity demanded. The result of this repairing of prices and quantities is a repositioning, or a shift, of the demand curve. There are basically two kinds of changes involving demand. Change in Demand: A change in demand is a change in the ENTIRE demand relation. This means changing, moving, and shifting the entire demand curve. The entire set of prices and quantities is changing. In other words, this is a shift of the demand curve. Change in Quantity Demanded: A change in

quantity demanded is a change from one price-quantity pair on an existing demand curve to a new price-quantity pair on the SAME demand curve. In other words, this is a movement along the demand curve. A change in quantity demanded is caused by a change in price. Causes of change in demand: Change in demand can be caused by: Change in price of a compliment good. Rapid economic growth. Change in price for substitutes. Change in income. Change in number of consumers. Change in information/technology. Change in supply of money.

Q3: Define utility maximation approach with graphical explanation? ANS3:Utility Maximation approach is economics concept that, when making a purchase decision, a consumer attempts to get the greatest value possible from expenditure of least amount of money. His or her objective is to maximize the total value derived from the available money.

References
Economic Times. (2013, october 22). Retrieved october 22, 2013, from economictimes.indiatimes.com: http://economictimes.indiatimes.com/definition/law-of-demand Economics book by Haleem khuwaja