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ASSIGNMENT# 01 BUS 525 Section 02

Prepared by

Mazharul Islam 103 0341 060

Prepared for

Mir Obaidur Rahman

Course Instructor: Managerial Economics

School of Business


I have found the law of demand most interesting during my course of Managerial Economics (BUS525) as its not only related to economics but also with real life situation and we observe it in our everyday life. In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases (ceteris paribus). The greater the amount to be sold, the smaller the price at which it is offered must be, in order for it to find purchasers. Law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumers demand for the good will move opposite to the movement in the price of the good. Law of demand and changes in demand The law of demand states that, other things remaining same, the quantity demanded of a good increases when its price falls and vice-versa. Note that demand for goods changes as a consequence of changes in income, tastes etc. Hence, the demand may sometime expand or contract and increase or decrease. In this context, let us make a distinction between two different types of changes that affect quantity demanded, viz., expansion and contraction; and increase and decrease. While stating the law of demand i.e., while treating price as the causative factor, the relevant terms are Expansion and Contraction in demand. When demand is changing due to a price change alone, we should not say increase or decrease but expansion or contraction. If one of the non price determinants of demand, such as the prices of other goods, income, etc. change & thereby demand changes, the relevant terms are increase and decrease in demand. Determinants of demand After having understood the nature of demand and law of demand, it is easy to ascertain the determinants of demand. We have mentioned above that an individual demand for a commodity depends on desire for the commodity and the capability to purchase it. The desire to purchase is revealed by tastes and preferences of the individuals. The capability to purchase depends upon his purchasing power, which in turn depends upon his income and price of the commodity. Since an individual purchases a number of commodities, the quantity of a particular commodity he chooses to purchase depends on the price of that particular commodity and prices of the other commodities, as well as the relative amount of his income, or purchasing power. So, the amount demanded (per unit of time) of a commodity depends upon: Prices of related commodities When a change in price of the other commodity leaves the amount demanded of the commodity under consideration unchanged, we say that the two commodities are unrelated, otherwise these are related. The related commodities are of two types substitutes and complements. When the price of one commodity and the quantity demanded of the other commodity move in the same direction (i.e., both increase together and decrease together). Income of the individual The amount demanded of a commodity also depends upon the income of an individual. With an increase in income, increased amount of most of the commodities in his consumption bundle, though the extent of the increase may differ between commodities.

Tastes and preferences It is quite well that the change in tastes and preferences of consumers in favor of a commodity results in smaller demand for the commodity. Modern business firms, which sell product with different brand names, rely a great deal on influencing tastes and preferences of households in favor of their products (with the help of advertisements, etc.) in order to bring about increase in demand of their products. Tastes of the consumers The amount demanded also depends on consumers taste. Tastes include fashion, habit, customs, etc. A consumers taste is also affected by advertisement. If the taste for a commodity goes up, its amount demanded is more even at the same price and vice-versa. Wealth The amount demanded of a commodity is also affected by the amount of wealth as well as its distribution. The wealthier are the people, higher is the demand for normal commodities. If wealth is more equally distributed, the demand for necessaries and comforts is more. On the other hand, if some people are rich, while the majority is poor, the demand for luxuries is generally less. Expectations regarding the future If consumers expect changes in price of a commodity in future, they will change the demand at present even when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near future, they may increase the demand for a commodity just now. Climate and weather The climate of an area and the weather prevailing there has a decisive effect on consumers demand. In cold areas, woolen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day, ice-cream is not so much demanded. State of business The level of demand for different commodities also depends upon the business conditions in the country. If the country is passing through boom conditions, there will be a marked increase in demand. On the other hand, the level of demand goes down during depression. Aggregate consumer demand or market demand The market (also aggregate consumer) demand function is derived by adding all individual consumer demand functions. Aggregation adds three other non price determinants of demand - the number of consumers "the distribution of tastes among consumers" and "the distribution of income among consumers of different tastes." Thus if the population of consumers increases all other things being held constant the market demand curve will shift out. Likewise, if the income distribution were to change in favor of a group of consumers with strong taste for same good "there would be an increase in demand for that good relative to other goods. The factors that affect individual demand also affect market demand although the net effect can be ambiguous. Macro concepts of demand Individual demand, firms demand and industry demand are the micro concepts of demand. This is useful to manager in decision making as to determination of size of supplies etc. However, a manger has to know the macro concepts of demand as he operates within the macroeconomic environment. As such he much understands a few macro concepts of demand. As a matter of fact, national demand may influence the industry demand which in its turn may influence the firms demand.