23331465 law-of-demand-and-equi-marginal-utility


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23331465 law-of-demand-and-equi-marginal-utility

  1. 1. Law Of Demand Theory And Equi-marginal Utility Approach Presented by: Adrita Nath Ashwini Kumar Rohit Kishore Shritama Sarkar Upasana Roy Varun Kalra
  2. 2. Contents <ul><li>Why demand ? </li></ul><ul><li>What is demand ? </li></ul><ul><li>Determinants of demand. </li></ul><ul><li>The law of Demand. </li></ul><ul><li>Demand Schedule. </li></ul><ul><li>Demand curve. </li></ul><ul><li>Characteristics of a typical demand curve. </li></ul><ul><li>Assumptions. </li></ul><ul><li>Exceptions to the law. </li></ul><ul><li>Movement along the curve. </li></ul><ul><li>Movement of demand curve. </li></ul>
  3. 3. Contd… <ul><li>Factors and effect of change in demand. </li></ul><ul><li>The law of equi marginal utility. </li></ul><ul><li>Utility schedule. </li></ul><ul><li>About the law. </li></ul><ul><li>Example. </li></ul><ul><li>Assumptions. </li></ul><ul><li>Equi marginal utility and law of demand. </li></ul><ul><li>Use for managerial purposes. </li></ul>
  5. 5. What is Demand ? <ul><li>“ When the desire for a commodity is backed by the willingness and the ability to spent adequate sums of money, it becomes demand or effective demand in the economic sense of the curve. Only desire for commodity or having money for the same cannot give rise to its demand” </li></ul><ul><li>Marshall </li></ul><ul><li>“ Demand for a product refers the amount of it which will be bought per unit of time at a particular price”. </li></ul>
  6. 6. Determinants of Demand <ul><li>Price of the product. </li></ul><ul><li>Income and wealth distribution. </li></ul><ul><li>Tastes, habits and preferences. </li></ul><ul><li>Relative prices of other goods </li></ul><ul><ul><li>Substitute products. </li></ul></ul><ul><ul><li>Complementary products. </li></ul></ul><ul><li>Consumers satisfaction. </li></ul><ul><li>Advertisements effects. </li></ul><ul><li>Growth of population. </li></ul><ul><li>Level of taxation. </li></ul><ul><li>Climatic or weather conditions. </li></ul><ul><li>Special occasions. </li></ul>
  7. 7. The Law of Demand <ul><li>“ Other factors remaining same (habits, tastes etc.) as price decreases demand increases and vice versa” </li></ul><ul><li>Marshall </li></ul><ul><li>“ Ceteris paribus, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded.” </li></ul>
  8. 8. Demand Schedule (Hypothetical) 100 200 300 400 500 5 4 3 2 1 Quantity demanded (unit per week) Price of commodity (in Rs)
  9. 9. Quantity demanded (Q) Q 1 Q 2 P 1 P 2 E 1 E 2 0 D D Price(P) P 1 - old price P 2 - new price Q 1 – old quantity demanded Q 2 – new quantity demanded DD – demand curve A Linear Demand Curve Demand Curve
  10. 10. Characteristics of A Typical Demand Curve <ul><li>Drawn by joining different loci. </li></ul><ul><li>Downward sloping. </li></ul><ul><li>Reciprocal relationship between price and quantity demanded ( P α 1/Q d ) </li></ul><ul><li>Linear Non - linear </li></ul>
  11. 11. Assumptions (Other things) <ul><li>No change in consumer’s income. </li></ul><ul><li>No change in consumer’s preferences. </li></ul><ul><li>No change in the fashion. </li></ul><ul><li>No change in the price of related goods : </li></ul><ul><ul><li>Substitute goods. </li></ul></ul><ul><ul><li>Complementary goods. </li></ul></ul><ul><li>No expectation of future price changes or shortages. </li></ul><ul><li>No change in size, age, composition and sex ratio of the population. </li></ul><ul><li>No change in the range of goods available to the consumers. </li></ul>
  12. 12. Contd… <ul><li>No change in the distribution of income and wealth. </li></ul><ul><li>No change in the government policy. </li></ul><ul><li>No change in weather conditions. </li></ul>
  13. 13. Exceptions To The Law <ul><li>Giffen goods. </li></ul><ul><li>Articles of snob appeal. </li></ul><ul><li>Speculation. </li></ul><ul><li>Consumer psychological bias or illusion. </li></ul>Q 1 Q 2 P 1 P 2 Quantity demanded Price Upward sloping demand curve D D
  14. 14. <ul><li>Extension of demand /Increase in quantity demanded: </li></ul><ul><li>‘ With a decrease in price, there is increase in the quantity demand of the product’. </li></ul>Movement along the curve OR Change in quantity demanded P 1 P 2 Q 1 Q 2 E E` D D Quantity demanded Price
  15. 15. <ul><li>Contraction of demand /Decrease in quantity demanded: </li></ul><ul><li>‘ With a increase in price, there is a decrease in quantity demanded’.’ </li></ul>Quantity demanded P 2 Q 2 P 1 Q 1 E E` Price
  16. 16. Movement of Demand Curve OR Change in demand <ul><li>Increase in demand: </li></ul><ul><ul><ul><li>More quantity demanded ------ at a given price. </li></ul></ul></ul><ul><ul><ul><li>Same quantity demanded ------ at a higher price. </li></ul></ul></ul>P 1 Q 1 Q 2 a b D D D` D` Q 1 P 1 P 2 D D D` D` a b Quantity demanded Quantity demanded Price Price
  17. 17. <ul><li>Decrease in demand : </li></ul><ul><ul><ul><li>Less quantity demanded ---- at same price. </li></ul></ul></ul><ul><ul><ul><li>Same quantity demanded ---- lower price. </li></ul></ul></ul>Q 2 Q 1 P 1 a b Q 1 Quantity demanded P 1 D` b D` D D D` D D a D` Price Price Quantity demanded P 2
  18. 18. Factors And Effects of Change (increase or decrease) in demand <ul><li>Change in income : </li></ul>Quantity demanded Price Increase Quantity demanded Price Decrease D` D` D D D D D` D`
  19. 19. <ul><li>Change in taste, habit and preference : </li></ul>D D D` D` D D D` D` Quantity demanded Price Quantity demanded Price Positive Negative
  20. 20. <ul><li>Change in fashion and customs : </li></ul>D D D` D` D D D` D` Quantity demanded Quantity demanded Price Price Favorable Unfavorable
  21. 21. <ul><li>Change in distribution of wealth : </li></ul>Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D Fiscal measures (welfare) Fiscal measures (particular)
  22. 22. <ul><li>Change in substitutes : </li></ul>D` D` D` D` D D D D Quantity demanded Quantity demanded Price Price Increase in price of substitute goods Decrease in price of substitute goods P tea D tea : P coffee D coffee P tea D tea : P coffee D coffee
  23. 23. <ul><li>Change in demand of complementary goods : </li></ul>Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D P car D car : P petrol D petrol P car D car : P petrol D petrol Decrease in price Increase in price
  24. 24. <ul><li>Change in population : </li></ul>Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D Increase Decrease
  25. 25. <ul><li>Advertisement and publicity persuasion : </li></ul>Quantity demanded Quantity demanded Price Price D D D D D` D` D` D` Aggressive Docile
  26. 26. <ul><li>Change in value of money : </li></ul>Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D Deflationary Inflationary ( Value of money ) ( Value of money )
  27. 27. <ul><li>Change in level of taxation : </li></ul>Quantity demanded Quantity demanded D D` D` D` D D` D D Low High Price Price
  28. 28. <ul><li>Expectation of future changes in prices : </li></ul>Quantity demanded Quantity demanded D` D` D` D` D D D D Rise Fall Price Price
  29. 29. Law of Equi marginal Utility <ul><li>Utility : </li></ul><ul><li>‘ The satisfaction that a consumer gets by having or consuming goods or services is called utility’. </li></ul><ul><li>Total Utility (TU) : </li></ul><ul><li>‘ It is the sum total of satisfaction which a consumer receives by consuming the various units of the commodity’. </li></ul><ul><li>Marginal Utility (MU) : </li></ul><ul><li>‘ It is the change in total utility resulting from one unit change in consumption of good’. </li></ul><ul><li>MU = ∆TU / ∆Q </li></ul><ul><li>MU = TU n – TU n-1 ; where ∆Q = 1 </li></ul>
  30. 30. Utility Schedule - 9 7 5 3 1 -1 -3 0 9 16 21 24 25 24 21 0 1 2 3 4 5 6 7 MUn= (∆TUn / ∆Qn) TUn Units of goods (n)
  31. 31. About The Law <ul><li>‘ A consumer maximizes his total utility by allocating his income among goods and services ( including savings ) available to him in such a way that the marginal utility per rupees worth of one good equals the marginal utility per rupees worth of any other good.’ </li></ul><ul><li>MUx / P x = MUy / P y </li></ul><ul><li>Generalizing , </li></ul><ul><li>MU x 1 / P x 1 = MU x 2 / P x 2 = ……= MU x n / P x n </li></ul>
  32. 32. Assumptions <ul><li>Cardinal utility </li></ul><ul><li>Independent utility </li></ul><ul><li>Additive utility </li></ul><ul><li>Constant marginal utility of money </li></ul><ul><li>Diminishing marginal utility </li></ul><ul><li>Rationality </li></ul><ul><li>Introspective analysis </li></ul>
  33. 33. Example <ul><li>Money Income = Rs37/- </li></ul>50 48 46 44 42 40 38 100 90 80 70 60 50 40 120 100 80 60 40 20 0 1 2 3 4 5 6 7 MU C P =Rs 2/unit MU B P =Rs3/unit MU A P =Rs5/unit Units
  34. 34. <ul><li>TU = Σ MU A + Σ MU B + Σ MU C </li></ul><ul><li>= 890 </li></ul><ul><li>So, MU A / P A = MU B / P B = MU C / P C = MU (Money) </li></ul><ul><li>= 100/5 = 60/3 = 40/2 = 20 </li></ul><ul><li>This is Consumer’s Equilibrium. </li></ul>
  35. 35. Equi marginal Utility And Law of Demand <ul><li>Substitution effect : </li></ul>Income constant If price x fall Real income increased MUx fall Demand X increased
  36. 36. <ul><li>Income Effect : </li></ul>Price constant Income increased Money income rise Demand rises In case of normal goods +ve I.E + S.E = Law of demand
  37. 37. Use for managerial purposes <ul><li>Sales forecasting with sound base and greater accuracy. </li></ul><ul><li>Demand manipulation. </li></ul><ul><li>Product planning. </li></ul><ul><li>Product improvement. </li></ul><ul><li>Determining sales quotas. </li></ul><ul><li>Appraisal of performance. </li></ul><ul><li>Pricing policy. </li></ul><ul><li>Market share. </li></ul><ul><li>Scope for expansion. </li></ul><ul><li>Competitive position. </li></ul>
  38. 38. THANK YOU