Transcript Concept of Demand

CONCEPT OF DEMAND
DEMAND FOR A COMMODITY
REFERS TO THE
NUMBER OF UNITS OF A PARTICULAR GOODS OR
SERVICE THAT CONSUMERS ARE WILLING AND ABLE
TO PURCHASE DURING A SPECIFIED PERIOD AT A
GIVEN PRICE.
CONCEPT OF DD DEMONSTRATES THE FOLLOWING
CHARACTERISTICS :




DEMAND IS ALWAYS WITH REFERENCE TO A PRICE.
DEMAND IS REFERRED TO IN A GIVEN PERIOD OF
TIME.
CONSUMER
MUST
HAVE
THE
NECESSARY
PURCHASING POWER TO BACK HIS DESIRE FOR THE
COMMODITY.
CONSUMER MUST ALSO BE READY TO EXCHANGE
HIS MONEY FOR THE COMMODITY IN QUESTION.
DEMAND DETERMINANTS
 PRICE OF THE COMMODITY :
P
1
Q
LAW OF DEMAND
 PRICE OF THE RELATED COMMODITIES
• SUBSTITUTE GOODS. DN  PR.
• COMPLIMENTARY GOODS.
DN  1
PR
 INCOME OF THE CONSUMER DN  Y
• NORMAL GOODS.
• NECESSITES.
• INFERIOR GOODS.
 TASTES & PREFERENCES OF CONSUMER.
 EXPECTATIONS ABOUT FUTURE PRICE.
• OTHER FACTORS:
•
SIZE AND REGIONAL DISTRIBUTION OF
POPULATION.
•
COMPOSITION OF POPULATION.
•
DISTRIBUTION OF INCOME.
LAW OF DEMAND
THE LAW OF DEMAND EXPRESS THE INVERSE
RELATIONSHIP BETWEEN THE PRICE AND
QUANTITY DEMANDED OF A COMMODITY,
OTHER THINGS REMAINING THE SAME. IN OTHER
WORDS, WHEN THE PRICE OF GOODS S, DD S
AND WHEN P , DD , PROVIDED FACTORS OTHER
THAN THE PRICE CHANGED.
THE LAW IS BASED ON THE ASSUMPTION THAT THE
DETERMINANTS OF DD i.e.
– INCOME OF CONSUMER.
– TASTES & PREFERENCES OF THE CONSUMER.
– PRICE OF THE RELATED GOODS.
– FUTURE EXPECTATIONS, DO NOT CHANGE
DURING THE OPERATION OF LAW.
Y
D
P1
PRICE
P2
D
X
Q1
Q2
QUANTITY
WHY DEMAND CURVE SLOPES DOWNWARDS ?
1.
2.
3.
LAW OF DIMINISHING MARGINAL UTILITY.
INCOME EFFECT.
SUBSTITUTION EFFECT.
4.
5.
CHANGES IN THE NUMBER OF CONSUMERS.
DIVERSE USES OF COMMODITY.
EXCEPTIONS OF LAW OF DEMAND :
1.
2.
3.
4.
VEBLEN EFFECT
CONSPICIOUS CONSUMPTION
(SNOB APPEAL)
PRESTIGE IS DIRECTLY ASSOCIATED WITH PRICE OF
GOODS.
GIFFEN PARADOX :
EMERGENCY.
EXPECTATIONS ABOUT FUTURE PRICE.
DEMAND FUNCTION
THE DD FUNCTION IS AN ALGEBRIC EXPRESSIN OF THE
RELATION BETWEEN THE DEMAND FOR A COMMODITY
AND ITS VARIOUS DETERMINANTS LIKE THE PRICE OF
THE COMMODITY, THE PRICE OF THE RELATED
GOODS, THE LEVEL OF DISPOSABLE INCOME, TASTES
AND PREFERENCES.
DN = f (PN, PR, Y, T, E, O)
WHERE
DN = QUANTITY DEMANDED OF COMMODITY N.
PN = PRICE OF THE COMMODITY N.
PR = PRICE OF A RELATED COMMODITY.
Y = INCOME OF THE HOUSEHOLD.
T = TASTES & PREFERENCES OF THE HOUSEHOLD.
E = EXPECTATION
CAUSES OF CHANGE IN DEMAND

INCREASE IN DEMAND:
IN INCOME & WEALTH OF THE PEOPLE.
IN THE POPULATION.
IN THE PRICES OF SUBSITITUTE GOODS.
IN THE PRICES OF COMPLEMENTARY GOODS.
EXPECTATIONS OF RISE IN PRICES IN FUTURE.
CHANGES IN TASTES, PREFERENCES, HABIT,
CUSTOMS IN FAVOUR OF A COMMODITY.

DECREASE IN DEMAND:
IN INCOME & WEALTH OF THE PEOPLE.
IN THE POPULATION.
IN THE PRICES OF SUBSITITUTE GOODS.
IN THE PRICES OF RELATED GOODS.
EXPECTATIONS OF FALL IN PRICES IN FUTURE.
S IN TASTES, PREFERENCES, HABIT, CUSTOMS,
AGAINST A COMMODITY.
SHIFT IN DEMAND
 CHANGE IN QUANTITY DEMANDED :
WHEN PRICE
S, OTHER VARIABLES (Y, PR, T) ARE
HELD CONSTANT – IT IS CALLED CHANGE IN QUANTITY
DEMANDED.
 UPWARD
MOVEMENT
IS
CONTRACTION OF DEMAND.
 DOWNWARD
MOVEMENT
EXPANSION OF DEMAND.
KNOWN
IS
KNOWN
AS
AS
 CHANGE IN DEMAND :
IF THE PRICE HELD CONSTANT, OTHER
VARIABLES
(i.e. Y,
PR, T) CHANGES, THEN IT IS CALLED CHANGE IN
DEMAND.
PRICE
PRICE
D
P2
P
D1
E2
D
E1
D2
E
E2
E
D2
P1
E1
D
D
Q2 Q
Q1
QUANTITY
CHANGE IN
QUANTITY DEMANDED
D1
Q1
Q
Q2
QUANTITY
CHANGE IN
DEMAND
(i)
Increase in Demand
Decrease in Demand
(Upward or Rightward Shift in Demand)
(Downward of Leftward Shift in Demand)
Increase in income and wealth of (i)
the people.
(ii) Increase in the population.
(iii) Increase in the
substitute goods.
prices
(iv) Decrease in the prices
complementary goods.
(v)
Decrease in income or wealth of
the people.
(ii) Decrease in the population.
of (iii) Decrease in the
substitute goods.
prices
of
of (iv) Increase in the prices
complementary goods.
of
Expectations of rise in prices in (v)
future.
Expectation of fall in prices in
future.
(vi) Changes in tastes, preferences, (vi) Changes in tastes, preferences,
fashions, customs, habits, etc. in
fashions customs, habits, etc.
favour of a commodity.
against a commodity.
DEMAND CLASSIFICATIONS
*
AUTONOMOUS DEMAND & DERIVED DEMAND.
*
NON DURABLE GOODS DEMAND & DURABLE
GOODS
DEMAND.
*
COMPANY DEMAND & INDUSTRY DEMAND.
*
SHORT RUN & LONG RUN DEMAND.
* MARKET SEGEMENT DEMAND AND TOTAL MARKET
DEMAND.