MCom I Semester Managerial Economics Demand Law Demand Study Material Notes

MCom I Semester Managerial Economics Demand Law Demand study Material Notes : Meaning and Definition fo Demand Essential elements of DemandFunctions Types of Demand Explanation of Law of Demand Demand Schedule and Demand Curve Exceptions to  the Law of DemadnOr Can Demand Curve Slope Upward Assumptions of Law of Demand Difference between Changes In-demand and Changes in Quantity Demanded Difference Between Expansion of Deamnad and Increase in Demand Factors Affecting Demand Or Determinations of Demand :

CTET Paper level 2 Previous Year Social Science Model Paper in Hindi

DEMAND AND LAW OF DEMAND

 MEANING AND DEFINITION OF DEMAND

In common usage, demand means a desire or want but in economics, every desire is not a want and every want is not a demand. In economics, the term “Desire” has been used in three forms as under:

(1) Demand is an Effective Desire. Prof. Pension stated that demand is an effective desire. A desire becomes an effective desire only when it is supported by following three factors : (i) Desire for a commodity and the availability of desired commodity, (ii) Ability to pay for the desired commodity, (ii) Willingness to spend for the desired commodity.

(2) Demand is the Quantity of a Commodity Demanded at a Particular Price. Prof. Mill suggested that the demand of a commodity should be related to a particular price.

In the words of Prof. Waugh, “The demand for a commodity is the relationship between price and quantity that will be purchased at that price.”

(3) Demand is the Quantity of a Commodity Demanded at a Particular Time and at a Particular Price. Prof. Bentham has related the demand of commodity with a particular time and also a particular price. In his words, “The demand for a commodity at a given price is the quantity of it which is thought at a particular time at that price.”

Thus, demand is an effective desire of a commodity-related to a particular time and a particular price.

Explanation with Example :

Anu is an industrialist and wants to purchase a car. It is only a desire. If Anu has sufficient money to purchase the car and she is ready to spare this money for the purchase of car, it is only a want. If Anu says, “I am ready to purchase the car,” it cannot be regarded as a demand because there is a lack of a particular price and a particular time. If Anu says, “I am ready to purchase the car today for Rs. 5 Lakhs”, it is a demand.

ESSENTIAL ELEMENTS OF DEMAND

There are six essential elements of demand : (i) There must be a desire for a particular commodity, (ii) the Desired commodity must be available in the market. The consumer must have sufficient money to purchase the commodity, (iv) The consumer must be ready to spare the money for the purchase of a commodity, (v) The demand must be expressed at a particular price, (vi) The demand must be expressed with reference to a particular time.

DEMAND FUNCTIONS

The demand function is an algebric expression of the relationship between demand for a commodity and its various determinants that offer this quantity

There are two types of demand functions:

(1) Individual Demand Function. It refers to the quantities of a commodity demanded at various prices, given his income, prices of related good and tastes are constant. It is expressed as

D=f(P) where D = Demand, P = Price, f = Function.

(2) Market Demand Function. It refers to the total demand for good or service of all buyer taken together. An individual demand function is the basis of demand theory but it is the market demand function that is main interest to managers. The market demand function is expressed as

D = f (

PPM T, A, U)

where,

D = Quantity demanded for commodity x.

f = Functional relation

P = Price of commodity x.

P = Price of commodity y.

M = The money income of the consumer

T = The taste of the consumer

A = The advertisement effect

U = Unknown variables.

TYPES OF DEMAND

 (1) Price Demand. Price demand is the demand of a commodity at a given price. While explaining price demand, it is assumed that income, habits, tastes etc. of consumers remain constant. Demand of a commodity increases on a fall in its price and vice-versa. Price demand can be illustrated with the help of following diagram :

In this diagram, quantity of demand has been presented on OX axis and the price of commodity on OY axis. When price of commodity was OP, its demand was OQ. Price increases to OP, demand decreases to OQ, Thus, on an increase in price, demand decreases and vice-versa.

(2) Income Demand. Income demand explains difference quantities of a commodity purchased by a consumer at different levels of income. While explaining income demand, it is assumed that price of commodity, prices of substitute goods, habits and tastes of consumers etc. remain constant.

Income demand can be studied in two forms :

(a) Superior Goods. There is a direct relationship between income and demand of superior goods. Demand of these goods increases on, an increase in the income of consumers and decrease on a fall in the income of consumers.

(b) Inferior Goods. There is inverse relationship between the demand of inferior goods and income of consumers. Demand of inferior goods decrease on an increase in income and vice-versa. Example: Deshi Ghee and Vanaspati Ghee. Deshi Ghee is a superior good and Vanaspati Ghee is an inferior good. On an increase in income, consumers would like to increase the consumption of Deshi Ghee and decrease the consumption of Vanaspati Ghee. It can be illustrated with the help of following two diagrams:

In diagram A, demand of superior goods has been presented on OX axis and income of consumers on OY axis. Demand of superior goods was OQ at Ol level of income. Income increases to OI, and as a result, demand increases to 00. Thus, demand of superior goods bears a direct relationship with the income of consumers.

In diagram B, demand of inferior goods has been presented on OX axis and income of consumers on OY axis. Demand of superior goods was OQ at Ol level of income. Income increases to Ol, and as a result, demand increases to OQ. Thus, the demand of inferior goods bears a inverse relationship with the income of consumers.

(3) Cross Demand. Cross demand studies effect on the demand of a particular commodity of changes in the prices of other commodities related with that commodity. While explaining cross demand, it is assumed that price of commodity, income, habits and tastes of consumers remain constant. Cross demand can be explained in following three forms:

(a) Complementary Goods Complementary goods are the goods that are used with a particular goods such as pen and ink, scooter and petrol, bread and butter etc. When price of a commodity increases, demand of its complementary goods will also decrease alongwith the demand of original goods. Example: If price of car increases, not only the demand for car will decrease but the demand of petrol will also decrease.

(b) Substitute Goods. Substitute goods are the goods that can be used in place of a particular goods such as tea and coffee. If price of a particular commodity increases, demand of its substitute goods will increase. Example If price of coffee increases, demand of coffee will decrease but the demand of tea will increase

Cross demand for both the substitute and complementary goods can be made clear with the help of following two diagrams:

In diagram A, demand of complementary goods has been presented on OX axis and the price of original commodity on OY axis. Demand of complementary goods was OQ when the price of original commodity was OP. Price of original commodity increases to OP, and as a result, the demand of complementary goods decreases to OQ. Thus, demand of complementary goods bears an inverse relationship with the price of original commodity.

(Demand of original commodity and complementary goods move in the same direction).

In diagram B, demand of substitute goods has been presented on OX axis and the price of original commodity on OY axis. Demand of substitute goods was 00 when the price of original commodity was OP. Price of original commodity increases to OP, and as a result, the demand of substitute goods increases to 00. Thus, the demand of substitute goods bears an direct relationship with the price of original commodity, (Demand of Original commodity and substitute goods move in opposite direction).

(c) Independent Goods. Independent goods are the goods that are not related with each other such as furniture, cloth, medicines etc. Price of any of these commodities does not affect the demand of other commodities.

(4) Demand for Consumer Goods. Demand for consumer goods means the demand of goods and services that are demanded by ultimate consumers. These goods and services are supposed to satisfy human wants directly such as food, cloth, T.V., furniture etc. Demand of consumer goods can again be divided into two parts: durable consumer goods and non-durable consumer goods.

(5) Demand for Producer Goods. Producer goods are the goods that are used in the production of other goods such as raw materials, machines, factory, building etc. Demand for producer goods can again be divided into two parts: autonomous demand and derived demand.

(6) Demand for Perishable (non-durable) Goods. Consumer’s and producer’s goods have been classified further into perishable or non-durable and durable goods. Non-durable or perishable goods are the goods which are used up in a single act of consumption. It include all types of services, foodshift, raw materials etc. Non-durable goods are often sold to meet the current demand which is based on existing conditions.

(7) Demand for Durable Goods. These goods are the goods which can be used time and again for a considerable period of time. Durable goods consist of buildings, machines, furnitures, etc. The sale of durable goods increases the stock of available goods whose services are consumed over a period of time. According to J. Dean, the demand for durable goods is more unstable in relation to the business conditions. Postponement, replacement, storage and expansions are inter-related problems which are included in the determination of demand for durable goods.

This distinction has great importance because in the demand analysis durable goods create more complex problems than non-durable (perishable) goods.

(8) Industry’s Demand and Firm’s Demand. Industry’s demand means the demand of all firms engaged in a particular line of production. Firm’s demand means the demand of a particular firm of an industry. Example : Demand of rubber by JK Rubber Ltd. is the demand of firm while the demand of rubber by all firms engaged in the production of tyres and tubes is the demand of industry.

(9) Short-run and Long-run Demand. Short-run demand means the demand that is expected to continue in short-run. Such demand is influenced by short-run economic fluctuations. Long-run demand means the demand that is expected to continue for long-run. Such demand is influenced by long-run economic variables.

(10) Joint Demand. When two or more commodities are demanded for a common purpose, it is called joint demand. Example : All complementary goods have joint demand such as pen and ink, scooter and petrol, bread and butter, tooth paste and tooth brush, shoes and socks etc. Availability of one good in the absence of another does not serve any purpose. Demand of such goods bears an inverse relationship with price.

(11) Derived Demand. Derived demand means indirect demand. When demand of a particular good or service depends upon the demand of other goods and services, it is called derived demand. Example: Demand of labour is derived demand because it depends upon the demand of goods and services produced by labour.

(12) Collective Demand. When a particular good or service is demanded for a number of uses, it is called collective demand. Example : Demand of electricity is a collective demand. It is demanded for industrial, domestic as well as general purposes. Q. 2. Explain in detail the law of demand.

EXPLANATION OF LAW OF DEMAND

Law of demand explains the relationship between price and demand of a commodity. Demand of a commodity decreases if its price increases and increases if its prica falls, other things being equal. Thus, law of demand explains inverse relationship between price and quantity demanded. Law of demand has been defined as follows:

Thus, law of demand explains inverse relationship between price and demand of a commodity. Other things being equal, demand increase on a fall in price and decreases on a rise in price.

Relationship Between Price and Demand is Inverse but not Necessarily Proportionate. It is very important that it is only a qualitative statement and not a quantitative statement. This law explains that demand of a commodity increases on a fall in price and decreases on an increase in price but it does not tell how much demand will increase on a certain fall in price and vice-versa. Thus, law of demand indicates only the direction of change in demand but it does not establish any arithmetical relationship between price and demand.

DEMAND SCHEDULE AND DEMAND CURVE

Law of demand can be illustrated with the help of a demand schedule and demand curve. Demand schedule is the schedule which expresses different quanuties of a commodity demanded at its different prices. Demand schedule may be of following two types:

(1) Individual Demand Schedule. Individual demand schedule expre ses different quantities of a commodity that in individual consumer can agree to buy at its different prices. It can be made clear with the help of following schedule and curve :

(2) Market Demand Schedule. Market demand schedule expresses different quantities of a commodity that can be sold in a market at its different prices. A market demand schedule is an aggregate of individual demand schedules of all individual consumers of a commodity in a market. Following is an imaginary market demand schedule of a commodity :

ASSUMPTIONS OF LAW OF DEMAND

Other thing being equal’ is an important clause of the law of demand. This clause explains assumptions or on which it is based. According to Prof. Mayers, assumptions of law of demand are as follows:

1 Income of consumers should remain constant.

2. There should be no change in the habits or tastes of consumers.

3. There should be no change in the prices of related commodities.

4. No new substitute of the commodity should be developed.

5. There should be no hope of further change in prices. 6. The commodity should not be a commodity of prestige.

WHY DOES DEMAND CURVE SLOPE

DOWNWARDS TO THE RIGHT OR, CAUSES OF THE APPLICATION

OF LAW DEMAND

(1) Law of Diminishing Marginal Utility. Law of diminishing marginal utility states that as a consumer increases the consumption of a particular commodity, keeping constant the consumption of other commodities, every! additional unit of the commodity provides him declining utility. Due to this reason, consumer will purchase additional unit of a commodity only when he gets it at a lower price. For this reason, demand at higher price is less and at lower price is more.

(2) Substitution Effect. Substitution effect is an important cause of the application of law of demand. When price of a commodity increases, consumers prefer to purchase its substitute goods because they find these goods relatively cheaper. Similarly, when price of a commodity falls, consumers prefer to consume this commodity in place of its substitute goods.

(3) Income Effect. Decrease in price is equal to an increase in income. Now consumers will have to spend less to purchase the same quantity of commodity. Example: Price of sugar is Rs. 16 per kg. and 5 kgs. sugar is used in a family in a month. Price decreases to Rs. 14 per kg., consumer will be saving Rs. 10 in purchasing the same quantity of sugar. He can consume more sugar and the demand of sugar will increase. Similarly, increase in price will result a decrease in demand.

(4) Change in the Number of Consumers. Change in the price of a commodity brings important change in the number of its consumers. An increase in price will affect the demand in two ways: (i) Many consumers who were using this commodity, will now change over to its substitutes. (ii) Consumers who continue to use this commodity, will reduce the quantity of their consumption. As a result, demand will decrease. Similarly, if price falls its demand will increase.

EXCEPTIONS TO THE LAW OF DEMAND OR, CAN DEMAND CURVE SLOPE UPWARDS ?

(1) Giffin’s Paradox. Most important criticism of the law of demand is Giffin’s paradox. Giffin was a great statistician of Britain during 19th century. Giffin’s goods are the inferior goods such as bread in comparison to meat and butter, vanaspati ghee in comparison to deshi ghee, green vegtables of the season in comparison to pulses etc. Sir Robert Giffin claimed that law of demand does not apply on inferior goods. Demand of inferior goods increases on an increase in their price and decreases on a fall in their price.

(2) Conspicuous Necessities. Demand of the commodities which were necessary for life is not affected by a change in their prices. Example: If salt is Rs. 6 per kg. and the price falls to Rs. 4 per kg., quantity of its consumption cannot be increased or if the price increases to Rs. 8 per kg., it cannot be decreased

(3) Commodities of Prestige. Law of demand does not apply on the commodities of prestige also because such commodities are used by very rich people for whom the price does not matter.

(4) Expectation of Further Change in Price. Law of demand does not apply when prices are expected to change further. Example : If price of a commodity increases and there is an expectation of further increase in its price, demand of such commodity will further increase.

(5) Ignorance of Consumers. Prof. Benham stated that ignorance of consumers is also a factor that induces them to purchase more of a commodity at a higher price. Some are the consumers who feel that high priced goods are better.

(6) Emergencies. Law of demand does not apply in case of emergencies such as war, femine, curfew etc.

Thus, there are certain exceptions to the law of demand but it does not mean that it is baseless. The fact is that this law is universally applicable. Almost all exceptions are not the normal situations of economic world.

DIFFERENCE BETWEEN EXPANSION OF

DEMAND AND CONTRACTION OF DEMAND

OR

CHANGES IN QUANTITY DEMANDED

When quantity demanded of a commodity changes due to a change in its price, it is called either expansion of demand or contraction of demand. It is based upon the law of demand. Law of demand states that the demand of a commodity increases due to a fall in its price and decreases due to an increase in its price. Such increase in demand is called contraction of demand. Both of these changes can be presented on a single demand curve as follows:

In above diagram, quantity demanded of commodity is presented on OX axis and its price has been presented on OY axis. OP is original price and O is original quantity demanded. Price increases to OP, and as a result, quantity demanded decreases to 0 . Price falls to OP, and as a result, quantity demanded increases to OQ2.

[II] DIFFERENCE BETWEEN INCREASE IN DEMAND AND DECREASE IN DEMAND

OR, CHANGES IN DEMAND

Demand of a commodity is affected by many factors such as-Price of commodity, nature of commodity, uses of commodity, substitutes of commodity, price of substitutes etc. When demand of a commodity changes in response to a factor other than price, it is called either increase in demand or decrease in demand.

When demand of a commodity increases due to any factor other than price, it is called increase in demand (Consumers demand more even at same price). When demand of a commodity decreases due to any factor other than price, it is called decrease in demand (Consumers demand less even at same price). Demand curve changes in both of these conditions. It can be made clear with the help of following two diagrams:

When demand of a commodity increases When demand of a commodity decreases even at the same price due to a change coven at the same price due to a change in any factor other than price, it is called in any factor other than price, it is called increase in demand.

Demand Law Demand study

In both the above diagrams, quantity demanded of a commodity has been presented on OX axis and its price has been presented on OY axis. OP is the original price and OQ is the original quantity demanded. DD is the original demand curve. Price remains constant. In diagram A, demand increases to D’ D’and in diagram B, demand decreases to DD’. This change in demand is due to a change in any factor, other than price.

III DIFFERENCE BETWEEN CHANGES IN-DEMAND

AND CHANGES IN QUANTITY DEMANDED

To answer this question, you should give both parts: (ii) and (iii). Because changes in ‘quantity demand are known as ‘Expansion of Demand and ‘Contraction of Demand’. On the other hand, changes in demand’ are known as “Increase in Demand’ and ‘Decrease in demand

(IV) DIFFERENCE BETWEEN EXPANSION OF

DEMAND AND INCREASE IN DEMAND

(i) When demand of a commodity increases due to a fall in its price, it is called expansion of demand. When demand of a commodity increases due to a change in any factor affecting demand except price, it is called increase in demand. (ii) In case of expansion of demand, the demand curve does not change but in case of increase in demand, it changes (Moves upwards to the right)

 [V] DIFFERENCE BETWEEN CONTRACTION OF DEMAND AND DECREASE IN DEMAND

(i) When demand of a commodity decreases due to an increase in its price, it is called contraction of demand. When demand of a commodity decreases due to a change in any factor affecting demand other than price, it is called decrease in demand. (ii) In case of contraction of demand, demand curve does not change but in case of decrease in demand, demand curve changes (Moves downwards to the left).

Demand Law Demand study

FACTORS AFFECTING DEMAND OR DETERMINANTS OF DEMAND

(A) Factors Affecting the Demand of Consumer Goods :

Consumer goods are the goods which are used for the direct satisfaction of human wants such as food, clothes, milk, books, stationery, cycle, T.V., etc. These goods can broadly be divided into two parts-durable consumer goods and non-durable consumer goods.

(1) Factors Affecting the Demand of Durable Consumer Goods. Durable consumer goods are the goods which are used in the process of consumption again and again for a long time. Example : Clothes, house, cycle, furniture, T.V. etc. Following are the important factors affecting the demand of these goods :

(1) Income of Consumers. Consumers of high income group demand more of these goods than the consumers of low income group. Demand of these goods increases on an increase in the income of consumers and vice-versa.

(2) Life Period of Goods. Higher the life period of goods, more will be the confidence with which the consumers can buy them. Higher the life period of goods, less will be their demand.

(3) Probability of Technical Advancement. On technical advancement, the demand of new goods increases and that of obsolete goods decreases.

(4) Cost of Repair and Maintenance. Higher the cost of repairs and maintenance, less will be the demand.

(ii) Factors Affecting the Demand of Non-durable Consumer Goods. Non-durable consumer goods are the goods that are used in the process of consumption only for one time such as milk, furits, flour, gas, soaps, medicines etc. Following are the important factors affecting the demand of these goods :

(1) Prices of Goods. Higher the price less will be the demand and vice-versa. Demand decreases on an increase in price and increases on a fall in price.

(2) Income of Consumers. Higher the income of consumers, more will be the demand and vice-versa. Demand of these goods increases on an increase in the income of consumers and vice-versa.

(3) Habits and Tastes. If a consumer is habitual of a particular commodity or a particular brand, he will purchase more of it.

(4) Social Customs. If a particular commodity is a part of social customs and conventions, demand of it will be more.

(5) Effects of Advertisement and Demonstration. If a commodity is properly advertised and demonstrated, it becomes popular among consumers and as a result, its demand increases.

(B) Factors Affecting the Demand of Capital Goods :

Capital goods are the goods that are used in the production of other goods and services. Following are the important factors affecting the demand of these goods :

(1) Demand of Goods and Services to be Produced. Demand of capital goods is a derived demand. It depends upon the demand of goods and services that will be produced with the help of these goods. Example : Demand of a machine producing pens depends upon the demand of pens.

(2) Size of Population. More the population, more will be the demand of capital goods because the level of industrial activities depends directly upon population.

(3) Probability of Technical Advancement. Higher the probability of technical advancement, more will be the demand of capital goods.

(4) Propensity to Consume. More the propensity to consume, more will be the demand of capital goods because the consumers will demand more goods and services.

(5) Government Policy. If government is promoting capital investment in the country, demand of capital goods will increase.

Demand Law Demand study