basic demand analysis in chapter

1. DEMAND–
Analysis
K.Krishnakumar,
Ph.D., Research Scholar,
Arignar Anna Govt.Arts College,
Namakkal

2. INTRODUCTION
Demand for a commodity refers to the desire backed by
ability to pay and willingness to buy it.
The demand for any commodity mainly depends on the
price of that commodity. The other determinants include
price of related commodities, the income of consumers,
tastes and preferences of consumers, and the wealth of
consumers.

3. DEMAND FUNCTION
Dx = F (Px , Ps , Y, T, W)
Dx represents demand for good x
Px is price of good X
Ps is price of related goods
Y is income T refers to tastes and preferences of the
consumers
W refers to wealth of the consumer

4. Law of Demand
 The law of demand states that there is a
negative or inverse relationship between
the price and quantity demanded of a
commodity over a period of time.

5. Definition
Alfred Marshall, says “ the greater the
amount sold, the smaller must be the price at
which it is offered, in order that it may find
purchasers; or in other words, the amount
demanded increases with a fall in price and
diminishes with rise in price”

6. Assumptions of the Law of Demand
No change in the consumer’s income.
No change in consumer’s tastes and preferences.
No changes in the prices of other goods.
No new substitutes for the goods have been discovered
People do not feel that the present fall in price is a
prelude to a further decline in price.

7. Demand Curve
– The curve slopes downwards from left to right showing that,
when price rises, less is demanded and vice versa.
Thus the demand curve represents the inverse
relationship between the price and quantity
demanded, other things remaining constant.

8. Why does the demand curve slope
downwards?
– The demand curve slopes downwards mainly due to the
law of diminishing marginal utility.
– The law of diminishing marginal utility states that an
additional unit of a commodity gives a lesser satisfaction.
– Therefore, the consumer will buy more only at a lower
price.
– The demand curve slopes downwards because the
marginal utility curve also slopes downwards

9. Exceptions to the Law of Demand
– The Law of demand is a general statement telling
that prices and quantities of a commodity are
inversely related. There are certain peculiar cases
in which the law of demand will not hold good. In
those cases, more will be demanded at a higher
price and less will be demanded at a lower price.

10. Shifts in demand or Increase and
decrease in demand
 The basic assumptions of economic theory is ‘other things being equal’.
 Other things are income, tastes, population, government policy,
technology, price of related goods etc.
 Change in such factors will bring about
increase or decrease in demand.
 The increase and decrease in
demand are shifts in the demand curves.

11. Factors determining demand
 Tastes and preferences of the consumer
 Income of the consumer
 Price of substitutes
 Number of consumers
 Expectation of future price change
 Distribution of income
 Climate and weather conditions
 State of business
 Consumer Innovativeness

12. Elasticity of Demand
– Elasticity of demand was introduced by Alfred
Marshall.
“The elasticity (or responsiveness) of demand in a
market is great or small according as the amount
demanded increases much or little for a given fall in
price, and diminishes much or little for a given rise in
price”

13. Types of Elasticity of Demand
Price elasticity of demand
Income elasticity of demand
Cross-elasticity of demand

14. Factors determining elasticity of
demand
Nature of the commodity
Uses of commodity
Existence of substitutes
Postponement of demand
Amount of money spent
Habits
Range of prices of commodity.

15. Importance of Elasticity of demand
– Price discrimination
– Levy of taxes
– International Trade
– Determination of volume of output
– Fixation of wages for labourers
– Poverty in the midst of plenty