3-Chapter Law Of Demand Prepared by Ghanshyam M.Bhuva1 INTRODUCTION: In the ordinary sense, the term ‘demand’ is taken to mean ‘want’ for thing. But in economics, want for a thing does not consider as ‘demand’ May want a scooter but if he does not have the necessary resources(money) to buy it, his want will not be considered as ‘demand’ in economics DEFINITION: Desire + purchasing power + readiness to purchase at a given price and given time is demand. DEMAND IN ECONOMICS IMPLIES THREE THINGS: a.Want for a commodity b.Willingness to pay its price c.Ability to pay DETERMINANTS OF DEMAND: 1.Price (Px) 2.Income (Y) 3.Taste and Preferences (T) 4.Price of Related Commodities (Py…….PX) 5.Size of the Population (D) 6.Expectation about Future Price (E) 7.Income Distribution

Demand Schedule Prepared by Ghanshyam M.Bhuva2 Demand schedule is tabular statement showing quantities of a commodity demanded at different prices. It presents functional relationship between price and demand schedule. There are two types of Demand Schedule: 1.Individual Demand Schedule: Individual demand schedule shows the quantities of a commodity that a person will buy at different prices. PriceQuantity Demanded Units 12 Units 9 Units 6 Units 3 Units PriceQuantity Demanded Units 12 Units 9 Units 6 Units 3 Units

Prepared by Ghanshyam M.Bhuva3 2. Market Demand Schedule: Sum of Individual Demand Schedule is known as Market Demand Schedule PriceUnits Purchased by Mr.A Units Purchased by Mr.B Units Purchased by Mr.C Total Market Demand

Law of Demand Prepared by Ghanshyam M.Bhuva4 Law of Demand indicate that Other things remain constant people will buy more of a quantity at a lower price and less quantity at a higher price. It slopes from left to the right downward (Negative Slope) Inverse relationship between price and demand Explanation: 1. Increase in Population 2. Existing Population (Substitute Effect, Income Effect) PriceQuantity demanded (Wheat) Kgs

3-Chapter Law of demand ASSUMPTION OF THE LAW OF DEMAND 1. Consumers’ income must remain constant 2. Consumers’ tastes and preferences must remain constant 3. The number of consumers must remain constant 4. The price of related goods must remain constant 5. There must be no expectation about further change in price in the same direction

Shift in Demand Prepared by Ghanshyam M.Bhuva6 1.EXPANSION AND CONTRACTION OF DEMAND PriceQuantity demanded (Wheat) Kgs Expansion of Demand Contraction of Demand

Prepared by Ghanshyam M.Bhuva7 INCREASE AND DECREASE IN DEMAND PriceQuantity demanded (Wheat) Kgs Decrease in Demand Increase in Demand DecreaseIncrease

Prepared by Ghanshyam M.Bhuva8 EXCEPTIONS OF THE LAW OF DEMAND 1.Articles of Prestige Values 2.Giffen Goods(Inferior Articles) 3.Low Priced Goods 4.Anticipating Regarding Future Changes in Prices USEFULNESS OF THE LAW OF DEMAND 1.Joint Demand 2.Alternative Demand 3.Composite Demand

4 - Chapter Utility Analysis Prepared by Ghanshyam M.Bhuva9 MEANING OF UTILITY: “The term utility means the power of a commodity or services of satisfy a human want” ASSUMPTION OF UTILITY ANALYSIS: 1.Utility is measurable and quantifiable 2.Utility is independent 3.Marginal utility of money remains constant TOTAL UTILITY: Total utility refers to the sum total of utilities derived by a consumer from the different units of a commodity. Ex: if the first apple gives 10 units of utility to a consumer, and the second 5 units of utility, the total utility of two apples would be 10+5 = 15. MARGINAL UTILITY: Marginal utility refers to a change in the total utility caused by the consumption of an additional unit of that commodity.

4 - Chapter Utility Analysis Prepared by Ghanshyam M.Bhuva10 RELATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL UTILITY: 1.Though marginal utility is positive, it diminishes with increase in total utility 2.When marginal utility is zero, total utility is maximum 3.Marginal utility is negative, total utility is Diminishes PRICE MEASURES MARGINAL UTILITY AND NOT TOTAL UTILITY The price which a person actually pays for an article measures its marginal utility and not the total utility. A consumer will go on purchasing more and more units of a commodity as long as its marginal utility to him is greater than the price which he has to pay, till a stage is reached when the marginal utility derived from the article is equal to the price paid for it. After this point the satisfaction derived from the articles will be less than the price to be paid for it. Total utility has only a theoretical significance, while that of marginal utility is one of grater practical importance.

4-Chapter Utility Analysis LAW OF DIMINISHING MARGINAL UTILITY The law of diminishing marginal utility presents the common and basic tendency of human nature This law was made after examination of people’s behavior To understand this law, we have to have primary knowledge of three matters. A. Total Utility B. Marginal Utility C. Relationship between total utility and marginal utility

4-Chapter Utility Analysis Units of X Marginal Utility Total Utilit y

4-Chapter Utility Analysis WHY DOES THE LAW OPERATE? A. In the first place, while the total wants of a man are unlimited. B. Different goods are not perfect substitutes for each other in the satisfaction of various particular wants. ASSUMPTION OF THE LAW 1. The consumer behaves in rational manner 2. There is no change in the taste and preferences, fashion and habits of consumer 3. The different units of commodity are homogeneous 4. The different unit of the commodity must be in proper size, nature 5. The period of consumption should be a continuous 6. Utility can be measures and it is quantifiable

4-Chapter Utility Analysis EXCEPTIONS TO THE LAW 1. Collection of rare articles 2. Reading habit 3. Consumption of liquor 4. Love of music 5. The case of money PRACTICAL IMPORTANCE OF THE LAW 1. The law forms the basis for the modern theory of taxation and public expenditure 2. The law explains the paradox( વિરોધાભાસ ) of values 3. The law of demand is directly based on the law of diminishing marginal utility 4. The law also guides a consumer to spend his income in such a manner so as to maximize his total satisfaction

4-Chapter Utility Analysis LAW OF DEMAND DERIVED FROM THE LAW OF DIMINISHING MARGINAL UTILITY Units of A PriceMargin al Utility

4-Chapter Utility Analysis CONSUMER’S EQUILIBRIUM: Consumer’s Equilibrium refers to situation in which a consumer derives maximum utility from the quantity purchased, so that he is not willing to make any change in it According to law of diminishing marginal utility, there are two conditions of consumers equilibrium: 1. Marginal utility of the commodity purchased must be equal to its price 2. Marginal utility must be diminishing LIMITATION OF UTILITY ANALYSIS: 1. Utility cannot be cardinally (Fundamental) measured 2. Money is an imperfect measure of utility (Two person spend the same amount) 3. Marginal utility of money does not remain constant 4. Utilities derived from various goods are inter-dependent 5. No clear cut distinction is made between the income effect and the substitution effect of the price change 6. The Utility analysis does not explain the giffen paradox 7. The utility analysis is based on the assumption that a consumer always buys more units of the same commodity when its price falls (Car)

4-Chapter Utility Analysis CONSUMER’S SURPLUS: The concept of consumer’s surplus is developed by Marshall. Consumer Surplus is the excess of total utility on actual pay Consumer’s Surplus=Price that the consumer is prepared to pay (Consumption Utility)-price that he actually does pay A consumer surplus derives surplus satisfaction from the consumption of a commodity if the total utility obtained from the consumption of the commodity is more than the price pay for it. 1. Derivation of consumer’s surplus: Units of the Commodity Marginal Utility Price the Consumer is prepared to pay Actual Pay Total Utility Consumer Surplus

4-Chapter Utility Analysis LIMITATION OF THE CONCEPT: This is totally depended on marshall assumption (Constant marginal utility of price & measurability of utility) For measure the consumer surplus we have to obtain information of entire demand schedule but the complete list of demand price is not available Ex: Air and water is immeasurable

4-Chapter Utility Analysis SIGNIFICANCE OF THE CONCEPT To be useful in formulating economic policies It is useful to compare the relative economic welfare of two different sets of people residing in different territories The concept is useful for monopolist (Interested in maximum profit) for determining the price policy The concept is useful for finance minister ( Interested in maximum revenue) The concept helps us to understand the distinction between value in use and value in exchange