Transcript Slides for Week 3

Demand:
It is the quantity of a good or service that
customers are willing and able to
purchase during a specified period under
a given set of economic conditions.
Direct Demand
Derived Demand
Demand Function:
Qx = f (Px , I , Py , T )
Demand Curve:
It shows the relationship between the
quantity demanded of a commodity with
variations in its own price while
everything else is considered constant.
The Law of Demand:
The inverse relationship between the price of
a commodity and the quantity demanded per
time period is referred to as the law of
demand.
P1
P2
0
Q1
Q2
Q
Utility Theory
Utility is a measure of the satisfaction a
consumer derives from consuming goods and
services.
Marginal Utility:
Whereas total utility measures the consumer’s
overall level of satisfaction derived from
consumption activities, marginal utility measures
the added satisfaction derived from a one unit
increase in consumption of a particular good or
service, holding consumption of all other goods
and services constant.
Indifference Curve:
It represents different combinations of two
commodities which gives the consumer the
same level of satisfaction.
The Law of Diminishing Marginal Utility:
This simply says that as a consumer increases
the consumption of a particular commodity, the
marginal utility gained from consumption
eventually declines.
Y
9
5
3
1
1 2 3
Indifference Curves
X
Budget Line : I = PxQx + PyQy
Y
I
Py
Y*
0
X*
I
Px
X
Y
x1
x2
x3
Y
P1
X
P2
P3
x1
x2
x3
X
Qx = f (Px , I , Py , T )
P1
0
Q3
Q1
Normal Good
Q2
Inferior Good
Market Demand Curve:
It is the horizontal summation of all the individual
demand curves for a commodity.
Market Demand
Individual 2
Individual 1
P1
P1
P1
P2
Q1
Q2
Q1+Q2