Theory of Demand I supply

Unit 1 Law of Demand and Elasticity

of Demand
Demand

l
Desire ability to willingness to

wa
pay pay
ra
Ag
To constitute effective demand at the
am

above 3 essentials should be present

h
ub
Sh

e A beggar sitting beside the temple wants

g
CA

to buy sports car worth 21 crores

Here beggar cannot create demand
forsports car
in market because
Desire Ability to pay Willingness to pay
x x
The demanded is always expressed
qty
at a
given price
 Qty demanded is a flow concept

e.g demand for apples will be soo dozens

per day if price of apples is 2100 dozen
time period
flow concept

l
Determinants of Demand

wa
i Price of ra PT Add
Ag
a commodity
Pt Id 9
am

demand for commodity is inversely related

a
h
ub

to it's price provided other things remains

Sh

Constant celesisparibus
CA

Iii Price of related commodity

Complementary substitutes
Goods
competing goods

goods that are bought goods that can replaced

or consumed
together othergoods with ease
 e
g card fuel ink pen e.g coke or pepsi
and ink bottles ink pen or ball pen
tea andsugar Lays or Balaji wafers
indirect relationship btw a
direct relationship
btw
qty demanded of a demanded
qty of
commodity and price of
a
commodity and
it's complementary price of it's substitute

l
Ipad Pt e Coke PT

wa
e
g g
t t
ApplePencil Adt
ra Pepsi ddt
Ag
am

Iii Disposable Income of the consumer

h
ub

IT dd't
Sh

It dd t
CA

demand for is
a commodity
directly reated
to the disposable income level of the consumer

Exceptions
Inferior goods IT ddt
e
g As income level increases demand for
street food decreases person can now

afford to visit fancy restaurants

 I

Necessity It Od const
e
g salt water etc

Iv Other factors

size
of population
Demographics
age distribution of

l
wa
y population

ra
level of national income
and it's distribution
Ag
a Size of population
h am
ub

For normal goods

Sh

population 4 dd t
t da t
CA

population
Direct relationship btw size
of population
and qty demanded

b Age distribution of population

Old age persons 4 Demand

for hospitals
walkingsticks medical y
shops etc
 Yount gadgets shopping malls

children 4 Demand for tops

chocolates etc
f

l
wa
C level of national income and it's distribution
ra
Ag
MPC MPC rich
am

poor
e.g
h

Income Expenditure
ub
Sh

Poor 1000 t 9004

Rich 10004 t
CA

200

majority t
ofnational Uneven distribution
income comes dd t
of national income
from small
no
of households
like in India

even distribution of ddt

national income
 d Consumer credit and interest rates
facility

Consumer credit facility

available
Adt
easily

Interest rate 4 Add

l
Interest rate d dd t

wa
Gout policies and regulations ra
Ag
e
am

Gout provide incentives Id M

h
ub

subsidies
e.g subsidies on installation
Sh

of Solarpanel etc
CA

Govt
introducing policy Adt
unfavourable for product
e
g T in tax rates on
cigarette etc
V Tastes and preferences of buyers
if Demonstration effect Dekha Dekhi kina
 o
term coined by James Dusenberry

Mr X mu X's
Mr friend
I phone 13
already
y
Purchased latest
hai uske paas I phone 14 max
pro

Here Mr X also purchased the same smartphone

model which his friend bought even though he

l
has smartphone which he purchased
just 5

wa
months back

ra
Ag
ily Bandwagon effect it quantifies the
am

demonstration
effect
h
ub
Sh

tf Mr purchased a smartphone
Raj
CA

and because of this 3 of his friends

out of to also purchased the same
Smartphone
Here Conversion rate 30
X 100

30

Iii Snob effect Sab me sabsealag dikhne

ki iccha tkhna
 Oneplus will manufacture But will manufacture
100,000 units 5000 units

of one plus 10 of MARVEL edition

250,000 unit 55,000 unit

l
in Veblen effect show off kina

wa
named after the ra
American economist
Ag
Thorstein Veblen
h am
ub

tf rich person will buy mon of prestige

Sh

goods like luxury cars precious

CA

stones gold etc because these goods

have attached to it's value
utility
 Law of Demand

Prof Alfred Marshall defined the law

The
qty demanded increases with
a fall in price and diminishes with a
rise in price

It

l
is qualitative statement

wa
a

Rationale of the law ra

of demand
Ag
am

i Price effect of a fall in

price
h
ub
Sh

a Substitution effect
CA

Coke Pepsi
100 persons n
Initially 20 persons
were
consuming coke
shift to Pepsi
Now price increases

80 persons are consuming

coke and
 b Income effect

Income month 4 240.000

allocated for Rice
monthly ant 300

April month Price of Rice kg 2251kg

Qty demanded

l
339 12kg

wa
ra
Ag
Price of Rice
May month hg 2301kg
am

Qty demanded
33010 10kg
h
ub
Sh

Because of increase in price of Rice

CA

demanded falls
qty
Note At the time of inflation purchasing
power of money decreases

Actual income const Nominal terms

Real income decreases Real terms
ily Arrival of new consumer

Earlier when price was high some people

were not able to purchase that commodity

But now as price those people who

falls
were not able to purchase it earlier can now

purchase it

l
Priced Qty demanded I

wa
ra
Ag
iiiy Different uses
am

e
g Electricity
h
ub

Geyser
Sh

Wen
Refrigerator
Fang light
CA

unit decreases
Electricity charges
consumption of electricity increases

electricity for
Earlier we were using
fan light refrigerator only but now
as charges unit decreases we start
using it for geyser Acf owen also
 ing Utility maximising behaviour of consumers

No of units total'itility margitatutility

I 10 utils to utils
2 18 utils 8 utils
3 25 utils 7 utils
4 30 utils 5 utils

l
wa
P MU I
ra
Consumption Ag
law of diminishing marginal
utility
h am

Amt ready Consumer Total

ub

No of units Price unit to surplus

pay
Sh

1 10 12 2 2
CA

2 10 11.75 1.75 3.75

3 10 11.25 1.25 5
4 10 10.75 0.75 5.75
5 10 10 0 5.75
6 10 9.75 0.25 5.50

Consumer surplus Amt ready Amt actually

to paid
pay
 A consumer is in equilibrium when marginal
to it's i.e when total
utility is equal price
Consumer surplus is maximum

Exceptions to the law of Demand

Ii Demand for necessaries

l
wa
Salt water cooking oil etc
ra
Ag
PM'd dd const
am

Iii Giffen Goods

h
ub

Sat
Before f Mon Bread
Sh

price meat
increase 2 Sunday
CA

Price of bread T
Mon Sat Bread
Sunday Bread
Price
of bread 4 Ad of bread 9

NOTE All Giffen goods are inferior goods but

all inferior goods are not Giffen goods
 Giffengoods goods having direct relationship
btw price and demanded
qty

iii Speculative Goods

e
Stock market

Reliance Industries Limited RIL

l
wa
ra
Stock price 4 Ag Demand
for RIL Stocks
am

Stock price I Demand for f

RIL Stocks
h
ub
Sh

Iv Future expectations about price

CA

mix
4 in
future Essig Essig
price
Demand T
pre poned

current future

Mr Y infuture 309 2271kg

Demand I
prat post pored
 Iu Incomplete information and irrational
behaviour

Mr prevailing price
25 hg
no knowledge of
price prevailing in But he purchased goods
market at price of 2301kg

l
wa
Vi Conspicuous Goods Veblen effect

ra
Ag
Prestige goods like Diamond expensive cars
am

precious stones etc

h
ub

Price 4 Demand T
Sh

here utility is attached to it's value

CA

since

Hii Conspicuous necessities have become necessaries

bcuz of it's constant
usage
The demand for goods is affected by the
demonstration effect the consumption pattern
of
of a social groups to which an individual
belongs
 e
Refrigerator two wheeler television
smartphones etc

Demand function

In f Pr Pr M
dependent

l
where In X
Qty demanded of commodity

wa
variable
Poe Price
of commodity
Pr Price
ra independent
Ag
of related goods variable
M Income level f
h am
ub

F On 100 2 Pre
assuming otherfactors
Sh

Here In depends only on Pa remains const

CA

slope is negative b coz of inverse relationship

btw
price and qty demanded