Download Theory of Demand

Theory of Demand
Contents: Meaning of Demand and Determinants of Demand – Demand
Functions.
 Law of Demand, Expansion and Contraction of Demand,
Increase and Decrease in Demand, Usefulness of Law of
Demand, Exceptions to the Law of Demand
 Utility Analysis: Concept of Utility, Law of Diminishing
Marginal Utility, Derivation of Demand Curve on the basis of
the Utility analysis , Consumer’s Surplus
Meaning of Demand
 Difference between desire and demand
 Desire backed by purchasing power and willingness to buy
 Prof. J Harvey “Demand in economics is the desire to possess
something and the willingness and the ability to pay a certain
price in order to possess it”
 Prof. Benham “The demand for a thing at a given price is the
amount of it which will be bought per unit of time at that
price”
 Stonier and Hague “Demand in economics means demand
backed up by enough money to pay for the good demanded”
Characteristics of Demand
 Price
 Time
 Market
 Amount
Demand Function
Price of the products
2. Income of the consumer
3. Taste and preferences
4. Availability of substitute and complements and their
relative prices
1.
Demand Schedule and Demand Curve
 Demand schedule is a list of prices and corresponding
quantities.
Market Demand Curve
 The market demand curve is the sum of the demand curve of
all the consumers.
Types of Demand
 Price Demand
 Income Demand
 Cross Demand
Law of Demand
 The inverse relationship between the price of a commodity
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and its quantity demanded per unit of time is referred to as
the law of demand
Other thing remaining constant
No change in consumers income
No change in consumer test and preferences
No change is the prices of substitute and complements
No future expectations about the prices
No prestigious commodities
Why Demand Curve Slopes Downward
 Law of Diminishing Marginal Utility
 Substitution Effect
 Income Effect
 Entry of Buyers
 Less Urgent Needs
Exception to the Law of Demand
 Geffen Paradox
 Veblen Goods or Goods with Snob Appeal
 Future expectations about the prices
 Consumer’s psychological bias or illusion
 Demonstration effect
 Brand Loyalty
 Panic Buying
 Insignificant proportion of income spent
 Goods with no substitutes
 Outdated Goods
Movement along
and
Shift in Demand Curve
Determinant of Demand
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Tastes and Fashions
Price of the product
Weather
Income and distribution of income
Expectations
Savings
Sate of trade activities
Real income
Consumer credit policy
Demonstration effect
Advertisement
Taxation and subsidies
Change in the value of money
Change in population
Price of related products
Usefulness of Law of Demand
 Determination of prices
 Importance to finance minister
 Importance to farmers
Cardinal Utility Theory
 Neo Classical Utility Theory or Marshallian Utility Theory
 Utility is a consumer’s perception of his or her own
happiness or satisfaction
 Utility has no moral, legal or ethical connotation
 Utility is subjective and not objective : varies from person to
person, time to time, place to place
 Cardinal and Ordinal Utility Concepts
Assumptions of Cardinal Utility Theory
 Rationality
 Cardinal Utility
 Constancy of Marginal Utility of Money
 Utilities are Independent
 Diminishing Marginal Utility
The Law of Diminishing Marginal Utility
 As we have more of a thing, the less is the utility we
derive from the additional increment of it – Gossen
 The additional benefit which a person derives from a
given increase of his stock of a thing diminishes with
every increase in the stock that he already has –
Marshall
 Law of satiable wants
Assumptions of the Law
 Reasonability
 Homogeneous
 Continuity
 Constancy
 Rationality
Exceptions to the Law of Diminishing
Marginal Utility
 Rare Collections
 Conspicuous consumption
 Stock of other goods – telephone or mobile
Importance of Law of Diminishing
Marginal Utility
 Basic of Economic Laws
 Taxation
 Socialistic plea
 Determination of value
 Downward sloping demand curve
 Diamond –Water Paradox
 Determination of household expenditure
Consumer Surplus
 Prof Marshall :- “The excess of the price which he consumer)
would be willing to pay rather than go without the thing,
over which he actually does pay, it the economic measure of
the surplus satisfaction. I t may be called consumer’s surplus”
 Prof. Samuelson “ The gap between the total utility of a good
and its total market value is called consumer’s surplus”
 Prof Hick “It (consumer surplus) is the difference between
the marginal valuation of a unit and the price which actually
paid for it”