Two important forces of market are Demand & Supply
Can be defined as the desire for a good for whose fulfillment, a person has sufficient resources & willingness to buy the good.
Desire – without money income, is a mere desire
Potential demand - Desire with resources but without willingness to spend
Effective demand - Desire accompanied by ability & willingness to pay
Individual Demand –
Quantity of a commodity that a person is willing buy at a given price over a specified period of time, say per day, per week, per month etc.
Total quantity that all the users of a commodity are prepared to buy at a given price over a specified period of ...view middle of the document...
Price of a commodity falls, real income of its consumers increases in terms of this commodity
- they are required to pay less for the same quantity
- demand for the commodity increases
- increase in demand on account of increase in real income is known as income effect
- income effect is negative in case of inferior goods
- when price of an inferior good falls, consumer’s real income increases
- they substitute the superior goods for inferior goods
2. Substitution effect
- When price of a commodity falls, it becomes relatively cheaper compared to its substitutes, if their prices remain constant
- Consumers substitute cheaper goods for costlier ones
- Therefore demand for the cheaper commodity increases
3. A commodity tends to be put to more uses or less urgent uses when it becomes cheaper. eg: water
Chief characteristics of Law of Demand
1. Inverse relationship
The relationship between the price & qty demanded in inverse. ie., if the price rises, demand falls, & if the price falls, demand goes up.
2. Price is an independent variable & demand a dependent variable
Under law of demand, it is the effect of price on demand and not the effect of demand on price.
3. Other things remain the same
There should be no change in other factors influencing demand, except price.
If the other factors, say income, substitute’s price, consumer’s taste & preference, advertisement, etc vary, the demand may change.
Exceptions to Law of Demand
1. Expectations regarding future prices
When consumers expect a continuous increase in the price of a durable commodity, they buy more of it, despite increase in its price. Eg. Shares Similarly when consumers anticipate a considerable decrease in future, they postpone their purchase & wait for the price to fall to the expected level.
2. Prestigious goods
The Law does not apply to the commodities which serve as status symbol.
Eg. Gold, antiques
Rich people buy such goods mainly because their prices are high.
3. Giffon goods
Giffon goods may be any commodity much cheaper than its substitutes, consumed mostly by the poor households
Eg. Poor people spent a major part of their income on wheat & meat.
When price of wheat rises, they reduce the consumption of meat & increase the consumption wheat because wheat is still cheapest. Thus rise in price of wheat led to increased sales of wheat.
LAW OF DIMINISHING MARGINAL UTILITY
Law states that as the quantity consumed of a commodity increases, over a unit of time, the utility derived by the consumer from the successive units goes on decreasing, provided the consumption of all other goods remains constant.
Units Total Utility Marginal Utility
1 20 20
2 38 18
3 53 15
4 64 11
5 70 6
6 70 0
7 62 -8
8 46 -16
Extra satisfaction that he gets by the consumption of each successive toast goes on...