LAW OF DEMAND

DEFINITE INVERSE RELATIONSH IP –

DEMAND & PRICE
 DEMAND CURVE

Linear demand curve is given as:

• q= a – bp

P =Price (Independent variable)

a = Intercept

b = Slope of the demand curve (∆p/∆q)

q = Quantity (Dependent variable)

 When p = 0

•q = a – b.zero
PRICE

a/b •q = a

When p = a/b
a

QUANTITY
•q = a – b.a/b
•q = 0
 Law of diminishing
marginal utility
REASONS Substitution effect
BEHIND
DOWNWARD
SLOPE OF
DEMAND Income effect
CURVE

New consumers creating

demand
 CHANGE IN QUANTITY DEMANDED

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1.
2.
EXPANSION OR
EXTENSION OF
DEMAND
CONTRACTI ON OF DEMAND
EXPANSION & CONTRACTI ON
SHIFT :CHANGE IN DEMAND

1.
2.
 More demand at a given price.

Causes of increase in demand:

INCREASE IN • Increase in income(normal goods)
DEMAND
• Decrease in income(inferior goods)
• Increase in price of substitute goods
• Fall in price of complementary goods.
• Taste and preferences
 Refers to less demand at given price

Reasons for decrease in demand:

DECREASE IN
• Decrease in income(normal goods)
DEMAND • Increase in income(inferior goods)
• Fall in price of substitute goods
• Increase in price of complementary goods.
• Taste and preferences are unfavourable
ELASTICITY OF DEMAND
PRICE ELASTICITY OF DEMAND

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FACTORS AFFECTING PRICE ELASTICITY OF
DEMAND

Availability of Income of the Luxuries vs.

close substitute consumers Necessities

Proportion of
Number of uses
total expenditure
of the Time period
spent on the
commodity
product
TYPES OF ELASTICITY

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