The document discusses the law of demand, which states that greater prices lead to lower quantities demanded and vice versa, considering factors like consumer preferences and related goods. It explains the demand curve, illustrating the inverse relationship between price and quantity demanded, and mentions effects such as the income effect and substitution effect that shift demand. Additionally, it describes concepts like changes in demand, including increase, decrease, extension, and contraction along the demand curve.

2. Prepared by :
Dr. K. BARANIDHARAN
PROF.MBA
SRI SAIRAM INSTITUTE OF TECHNOLOGY
CHENNAI
ENGINEERING ECONOMICS
AND
FINANCIAL ACCOUNTING
Sri Sairam Institute of Technology 2

3. Engineering Economics&
Financial Accounting
Ee&fa
310 August 2014

4. law of demand

5. Law of demand
Statement of Law : “ Other things
being equal, the higher the price of
a commodity, the smaller is the
quantity demanded and lower the
price, larger the quantity
demanded”.
The Law of Demand states the relationship
between price and demand of a
particular product or services

6. Assumptions of the Law of DEMAND
• Other things being equal : include
income level of the consumer, tastes
and preferences of the consumer,
prices of related goods, expectation
about the prices or incomes in the
future, size of population, advertising
efforts and any other factor capable of
affecting the demand
6

7. The Law of Demand
•When a good’s price is lower,
consumers will buy more of it
•When a good’s price is higher,
consumers will buy less of it

8. 88
DEMAND Curve
• The graph has two axis - vertical
line is labeled as price and the
horizontal line is for the quantity
number.
• Remember to state the units used
for price and quantity and name the
graph.

9. 99
DEMAND Curve
• Demand reflects an inverse
relationship between price and
quantity demanded.
• The Demand Curve is a graph
reflecting the price consumers
are willing to pay and the
quantity consumers are willing
buy.

10. Demand Curve
Copyright © 2004 South-Western
Price of
Ice-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity of
Ice-Cream Cones
3.00
12
1. A decrease
in price ...
2. ... increases quantity
of cones demanded.
10SUPPLY AND DEMAND

11. Law of Demand and Income effect
• When there is a fall in the price of a
commodity. It leads to a rise in the
real income of the consumer.
• Rise in real income means the
consumer will be able to buy more
commodities for a given amount of
money.
• Example:the price of fall in bananas
11

12. Law of Demand and Substitution effect
• The price of commodity falls, the prices of its
substitutes remaining the same, the commodity
will now be cheaper when compared to
substitutes.
–When consumers react to an increase on a
good’s price by consuming less of that good
and more of other goods.
• Ex.- McDonalds raise prices, more people buy
Burger King
12

13. Changes in demand
• The increase or decrease in demand
due to change in the factor other
than price is called change in
demand.
• Change in demand leads to a shift
in the demand curve to the right or
to the left. 13

14. Increase DEMAND
• If the consumers are willing and
able to buy more of a particular
brand of shirts (say.X) at the same
price, the result will be an increase
in demand.
• The demand curve will shift to the
right
14

15. 2-15
Increase
Demand Curvep,Priceofproduct.X
220176
Effect of a 60¢ increase in the price of X
D1
D2
232
Quantity demanded
0
3.30

16. Decrease in DEMAND
• A decrease in demand occurs
when buyers buy less of a
product at each possible
price rise because of factors
like fall in income, rise in
price of complementary
goods etc.,
16

17. • Decrease in
demand
–At each and
every price
Less of the
good is
demanded
–Shifts to the
Left
D2
5
D1
B
Price
Quantity
90 100

18. Extension and Contraction in DEMAND
• Extension is a downward movement
along the demand curve, which indicates
that a higher quantity is demand for a
given fall in the price of a good.
• Contraction is an upward movement
along the demand curve which indicates
that a lower quantity is demanded for a
given increase in the price of the good
18

19. 19
Movements Along the Demand Curve
Price
Quantity
D1
P2
P1
P3
Q2 Q1 Q3
Contraction of Demand
Expansion of Demand