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slide 1
The Law of Demand states that the demand
for a commodity increases when its price
decreases and falls when its price rises, other
things remaining constant.
It states the nature of relationship between
the quantity demanded of a product and the
price of the product.
slide 3
The DEPENDENT variable is the quantity
demanded.
The INDEPENDENT variable is the good’s own price.
Demand
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2) Income Effect : When the price of a
commodity falls, other things remaining
the same, then the real income of the
consumer increases. The increase in
demand on account of an increase in
real income is known as the income
effect.
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(a) Expectations regarding further prices:
When consumer expect a continuous
increase in the price of durable
commodity ,they buy more of it despite the
increase in its price with a view to avoiding
the pinch of a much higher price in future.
(b) Status Goods: The law of does not apply
to the commodities which are used as a
status symbol for enhancing social prestige
or for displaying wealth and riches. For e.g.
gold.
(c) Giffen Goods: If the price of giffen goods
increases, (price of its substitute remaining
constant), its demand increases instead of
decreasing because ,in case of these
goods, income effect of price rise is greater
than the substitution effect.
slide 7
Shift in the Demand Curve
slide 8
Factors that shift the demand curve
include:
• Consumer preferences
slide
11
The degree of responsiveness of
demand to the change in its
determinants, is called elasticity of
demand.
It is the measurement of the
percentage change in one variable that
results from a 1% change in another
variable.
Price elasticity
Cross-elasticity
Income elasticity
Price elasticity of demand is a measure of how
much the quantity demanded of a good responds
to a change in the price of that good.
Percentage Change in Quantity
Ep =
Percentage Change in Price
Change in Quantity
Quantity
Ep =
Change in Price
Price
P
a
25 b
30
Q
40 24
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21
Demand
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22
Demand
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23
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24
Arc elasticity
Point Elasticity
The measure of elasticity of demand
between any two finite points on a
demand curve is known as arc
elasticity.
Q2 − Q1 P2 − P1
Ep = ÷
(Q1 + Q2 ) / 2 ( P1 + P2 ) / 2
Price
Μ
Α
20
Β
10
43 75 Quantit
y
Point Elasticity on a linear demand
curve
Point Elasticity on a non-linear demand
curve
Point elasticity is the elasticity of demand at a
finite point on a demand curve, e.g., at a point A or
B on the linear demand curve in contrast to the arc
elasticity between points A and B.
Ep = AN
AM
Ep = Lower segment
Upper segment
Μ
Price
Ν
Quantity
Draw a tangent AB on the demand
Price curve at point R
D
ep = Lower Segment Slope of AB = OB/OA
Upper Segment
A
Ep = (OB/OA)* (RN/RM)
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41
Demand
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Demand
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43
3. Maximization of satisfaction: Every rational
consumer intends to maximize his/her satisfaction
from his/her given money income.
slid
6.Constant marginal utility of money: The cardinal utility
approach assumes that the marginal utility of money
remains constant whatever the level of a consumer’s
income.
7.Utility is additive : Cardinalists assumed not only that
utility is cardinally measurable but also that utility derived
from various goods and services consumed by a consumer
can be added together to obtain the total utility.