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 Income of the consumer Taste and preferences Availability of substitute and complements and their relative prices

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 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Demonstration effect Brand Loyalty Panic Buying Insignificant proportion of income spent Goods with no substitutes Outdated Goods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 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”

Thanks