Académique Documents
Professionnel Documents
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individual consumption
FIGURE 1 The
Circular Flow of
Economic Activity
The Law of
Demand
For example, the demand for milk is 100 liters per day at a price of
Rs. 50 litre in Mangalore city.
Therefore, the demand for the services of durable consumer goods may
also be visualised as a demand per unit of time.
2.
3.
4.
5.
Law of Demand
The law of demand states that the quantity of a product demanded per unit
of time increases when its price falls, and decreases when its price
increases , other factors remaining constant.
2.
3.
4.
5.
6.
Demand Schedule
Individual Demand
Dx = f (Px Pr M, T, A, U)
Dx = Quantity demanded for commodity x
f
= functional relationship
Px = Price of commodity x
Pr = Prices of related commodities
M
= unknown variable
100
90
80
70
60
11
13
Market
Demand for
Oranges (kg)
100
90
14
80
25
70
11
12
10
37
60
13
14
12
45
Examples 1
The demand function for beer in a city Qd = 400 4P where Qd = quantity
demanded of beer per week) P = the price of beer per bottle
Solution
P = 10 : Qd = 400 4 x 10 = 360
P = 12 : Qd = 400 4 x 12 = 352
P = 15 : Qd = 400 4 x 15 = 340
P = 20 : Qd = 400 4 x 20 = 320
P = 25 : Qd = 400 4 x 25 = 300
DD
DD
Therefore, at price Rs. 100 per bottle, the demand for beer will be zero
Qd = 400 4P
Qd = 380
380 = 400 4P
By Manipulation
4P = 400 380 = 20
P = 20/4 = 5
Example 2
Truett and Truett (1980), started the following demand function for a brand X
of Microwave Ovens
Qx = f (PX, PZ, NW, Y, A), Where
PX = Price of X Brand
PZ = Price of Z brand
PX = Rs. 800
PZ = Rs. 9,000
NW = 8,00,000 in a city
Y = Rs. 1,00,000
A = Rs. 60,000
Example 3
Rajkumar & Co. the cabinet-maker has estimated the following demand
function for the steel cabinets produced by them
All date are on a quarterly basis. The firm currently spends Rs. 10,000 per
quarter on advertising
State the demand curve equation for the price-demand relationship. Give
graphical representation assuming rice variable values to be Rs. 10,000, Rs.
9,000, Rs. 8,000, Rs. 7,000 & Rs. 6,000
Thus,
Downward Sloping
Demand Curve and
Exception to the Law of
Demand
Dx = f (Px)
2.
Substitution effect.
3.
Income effect
4.
5.
6.
Psychological effects
Marginal Utility
Total Utility
20
20
16
36
12
48
56
60
60
-4
56
2. Substitution effect
3. Income effect
After falling prices, - he has spend less money for purchasing the
same amount of commodity as before.
A part of this money can be used for purchasing some more units of
that commodity.
4. New consumers
When the price of commodities falls new consumer can enter into
market.
5. Several uses
When the price of such commodities goes up they will be used for
important purposes.
When price falls, the commodities will be uses for various purpose For
example electricity/power
6. Psychological effects
When the price of a commodity falls, people favour to buy more which is
natural & psychological entity.
Prices of Commodities
P2
P1
Q1
Quantity of Demanded
Q2
2.
3.
Speculative goods.
4.
5.
6.
7.
War or emergency
When prices of such goods rise, their status will increases and they are
purchase in larger quantities.
On the other hand, as the price of Veblen goods falls, their capacity to
perform the function of ostentation diminishes.
2. Speculative goods
Let us assume
Sir Robert Giffen or Ireland first observed that people used to spend more
their income on inferior goods like potato and less of their income on meat.
But potatoes constitute their staple food. When the price of potato increased,
after purchasing potato they did not have so many surpluses to buy meat.
So the rise in price of potato compelled people to buy more potato and thus
raised the demand for potato.
This is against the law of demand. This is also known as Giffen paradox.
Meat
Superior Goods
6. Consumers ignorance
Sometimes, people buy more of a commodities at a higher
price out of sheer of ignorance.
7. War or emergency
During the period of war, if there is fear of shortage,
people may start buying for hoarding & building stocks
even at higher prices.
On the other hand, if there is depression, they will buy
less at low prices.
Figure. 2
Figure. 1
Y
Y
D
D1
D1
A
Price
D1
D1
D
O
Increased Demand
Q1
Q1
Quantity of Demanded
Decreased Demand
2.
Prices
P2
P
P
P1
Contraction demand
Expansion demand
D
M2 M M1
Quantity Demanded
Determinants of demand
Quantity Supplied
(Bushels per Year)
$1.50
1.75
10,000
2.25
20,000
3.00
30,000
4.00
45,000
5.00
45,000