09.

Demand
Total Utility of a product is the total satisfaction or benefit a person receives from all the units which are consumed of that particular commodity. Marginal Utility of a product is the extra utility or satisfaction which a person gets from consuming the last unit of that commodity. The Law of Diminishing Marginal Utility states that as a person consumes more and more units of a good, the extra or marginal utility derived from each additional unit consumed diminishes. Assumptions: Ceteris Paribus- all other things remain equal It applies after a certain point called the origin It doesnt apply to addictive goods Sufficient time has not elapsed for circumstances to change Consumer Demand is the quantity of a commodity demanded by an individual consumer at different prices. Market Demand is the total quantity of a commodity which is demanded by all consumers in the market at different prices. To derive the market demand: add the quantity demanded by each individual consumer at each price to calculate overall quantity demanded by the market at each price. Assumptions governing consumer behaviour: Rational Behaviour- It is expected that consumers will act rationally, with common sense and according to their preferences. Limited Income- Very few people have an income large enough to satisfy all their wants and needs. Even very wealthy people are economically limited by their income, i.e. forced to make choices. Maximising Utility- We assume that everyone tries to derive the maximum utility from their income i.e. to get the best value or satisfaction. Diminishing Utility- We assume that consumers are subject to LDMU. The Law of Equi-Marginal Returns states to to obtain maximum utility a consumer must spend his/her income in such a way that the ratio of marginal utility to price is the same for all commodities purchased.

The general Law of Demand states that for normal goods, the lower the price of a commodity, the greater the demand for it and vica versa.

Exceptions to the Law of Demand: Status Symbols/Snob Items- Some commodities, by their exclusiveness or their expensiveness, are attractive to some buyers. If price drops, its snob status would diminish (less attractive for this wealthy group) and quantity demanded could decrease (lower income families would still not be able to afford these items). Commodities whose prices are affected by expectations- When the prices of such commodities rise, the quantity demanded may also rise because of the expectation of further increases e.g. stocks and shares, land, property, art. Goods of addiction- A person that becomes addicted to a commodity may no longer act rationally. If price increases, quantity demanded will not necessarily decrease e.g. drugs, cigarettes. Giffen Goods- These are commodities of relatively low quality which form an important element in the expenditure of low-income families e.g. bread, potatoes etc. As price increases quantity demanded will not necessarily decrease. Consumer Surplus is the benefit to the consumer due to the difference between what they actually pay for a commodity and the maximum price they would have been willing to pay rather than do without the product. Paradox of Value- Some goods have huge value in use low value in exchange e.g. water, and some goods have a huge value in exchange but low value in use e.g. gold. Effective Demand is the desire for a commodity backed up by the necessary purchasing power. Factors which influence consumers demand:

Complimentary Goods- If the price of a complimentary good rises then the demand for this good falls. Substitute Goods- If the price of a substitute good rises, then demand for this good rises, as it has become relatively cheaper. Expectations of future price changes Tastes/Fashion Government Regulation Unplanned factors Income These factors all cause a shift in the demand curve except for PX which causes a movement (ceteris paribus). Inferior goods are non-luxurious goods that have a negative income effect.(All giffen goods are inferior goods).

Shifts and Movements

Substitution and Income Effect: A consumer spends all income on two goods (A+B). Both goods are normal but not complimentary. The price of a good A is reduced and the price of good B remains unchanged. The consumer continues to spend all income on the two goods. Explain, using the substitution effect and the income effect, how this price reduction will affect demand for Good A. Income Effect- A reduction in the price of normal goods has a positive income effectreal income increases as the price of Good A falls. The consumer will therefore buy more of Good A. Substitution Effect- The price of Good a makes it relatively more attractive to the consumer than Good B. The substitution effect for Good A is the change in demand for it that arises because it is relatively cheaper than Good B (ceteris paribus). The consumer will demand more of Good A (and less of Good B).