Demand refers to how much of a good or service consumers want at a given price. According to the law of demand, the higher the price of a good, the lower the quantity demanded, and vice versa. This shows an inverse relationship between price and quantity demanded. The demand curve slopes downward to illustrate this. There are several reasons for this downward slope, including the income and substitution effects. However, there are some exceptions, such as Giffen goods, where an increase in price can paradoxically increase the quantity demanded for very cheap necessities by poor consumers. The law of demand generally holds true except for rare cases involving prestige goods, speculative behavior, or necessities.
TEST BANK For Corporate Finance, 13th Edition By Stephen Ross, Randolph Weste...
economics
1. What is DEMAND??
• Everyone wants goods or services to satisfy his needs that kind
of want is usually considered as demand for goods and services.
2. LAW OF DEMAND
• According to law of demand, if the price of commodity falls, the
quantity demanded of it will rise and if the price of commodity
rises, its quantity demanded will decline.
• Thus, there is an inverse relationship between price and quantity
demanded
3. According to Prof. Alfred Marshall,
• The amount demanded increase with fall in price and diminishes
with a rise in price.
So, it is said that when price is high, demand is low and in
opposite to that, when price is low demand is high.
4. Demand schedule
• To illustrate the relation between the quantity of a commodity
demanded and its price, we may take a hypothetical data for
prices and quantities of ‘Rice’.
• The Data is shown below
5. Demand Curve
• We can now plot the data of QUANTITY DEMANDED OF
RICE from above data on a graph with
PRICE on the VERTICAL AXIS
QUANTITY on the HORIZONTAL AXIS
6. Demand schedule
• Now we have various quantities demanded by the number of consumers
in the market we can obtain the market demand schedule.
• Here we have 3 individual buyers
7. Market demand curve
• If we pot the market demand schedule on a graph, we get a
market demand curve with
PRICE on the VERTICAL AXIS
QUANTITY on the HORIZONTAL AXIS
8. Fundamental Reason of The Law of Demand
• Why does demand curve slope downward???
There are different reason behind that. That are explain below.
(1) Income effect:
• When the price of a commodity decreases, the customers can
buy the same quantity of the commodity with lesser money or
he can buy more of the same commodity with the same amount
of money. That cause increase in purchasing power. So,
demand for the commodity increases. This is called as Income
effect.
9. (2) Entrance of new customers:
• When the price of a commodity decreases, more customers
start buying it because some of those who could not afford to
buy it previously may now afford to buy it. This raises the
number of customers of a commodity at a lesser price.
(3) Substitution effect:
• Hicks and allen have explained the law in terms of
substitution effect and income effect. When the price of a
commodity decreases it become relatively cheaper than other. It
encourage consumers to substitute the commodity whose price
has decreased compared to costlier commodity, the result in
total demand will increase.
10. (4) Dissimilar or Different users:
• Certain commodities have many users. If their prices drop
they will be used for varied purpose and demand for such
commodities will raise. When the price of such commodities are
high, they will be put to limited uses only. This makes and react
the slope of demand curve downward.
11. EXCEPTIONS TO THE LAW OF
DEMAND
• The LAW OF DEMAND is valid in most cases; however there
are certain cases where this law does not hold good.
there are important exception to the law of demand
(1) Prestigious goods:
• Some high priced goods like REAL PEARLS,DIAMONDS OR
GOLD contains prestige value. At high price, high income group
increases its demand for those goods and in reverse it decreases its
demand at low price. However it can be possible for middle class to
increase their demand for such goods.
12. (2) Future prospective regarding prices:
• It has been observed that when the prices are increasing,
household expecting that the prices in the future will be still
higher tend to buy larger quantities of the commodities.
(3) Giffen goods:
• The poor class society comparatively use lesser quality rice
than Basmati rice. People always desire to consume goods of
better quality. With the reduction in price and income increase
that cause of buying good quality Basmati rice. ROBERT
GIFFEN drew attention toward this so it is called as GIFFEN
GOODS .
13. (4) Speculative goods:
• In the speculative market, particularly in the market for stocks
and shares, more will be demanded when prices are rising and
less will be demanded when prices decline.
(5) Low priced goods:
• Low priced goods like SALT, PIN, MATCH BOX,etc. for
which customer spend small part of his income so, change in
price will not change in total expenditure, the demand is not
influenced by a change in price.
14. (6)Demand for necessaries:
• The law of demand does not apply much in the case of
necessaries of life. Irrespective of price changes, people have to
consume the minimum quantities of necessary commodities.
• The law of demand will also be unsuccessful if there is any
significant variation in other factors on which demand of a
commodity depends.