Recall

• Meaning of demand
• Individual demand
• Household demand
• Market demand

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 DEMAND SCHEDULE
• Demand Schedule is a table listing the quantity
demanded at various prices.
Price of Dairy milk (in Rs) Quantity of Dairy milk
demanded ( in units)
10 60
15 40
25 20
50 10

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 Drawing a Demand Curve
• Price on vertical axis
• Quantity on horizontal axis
• It shows the relationship between the price and
quantity demanded.

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 LAW OF DEMAND
• Law of Demand states that lower the price,
higher the quantity demanded, and vice versa,
other things remaining constant.

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 Law of Demand
AS THE PRICE DECREASES ,QUANTITY DEMANDED INCREASES.

Price (Rs) Quantity

Demanded Price
(units)
60 10
P1
50 20
P2
40 30
30 40 Q1 Q2

20 50 Quantity Demanded
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 Why the demand curve slopes downward?

Law of
Substitution
Income effect diminishing
effect
marginal utility

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 The Income effect
• Real income= the actual buying power of a
consumer.
• As the price of a good decreases, the quantity
demanded increases because consumers now
have more real income to spend.

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 The Substitution effect
• As the price of a good decreases, consumers
switch from other substitute goods to this good
because of its low price. Thus the quantity
demanded increases.

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 The Law of Diminishing Marginal utility

• As we consume additional units of something,

the satisfaction(utility) we derive for each
additional unit(marginal unit) diminishes.

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 Assumptions of the Law
• No change in the consumer’s income
• No change in consumer’s tastes and
preferences
• No change in the prices of other goods
• No new substitutes for the goods have been
discovered
• No Expectations of future price changes or
shortages

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 Exceptions to Law of Demand
• A good for which demand increases as
Giffen Goods the price increases, and falls when the
price decreases.
• A Giffen good has an upward-sloping
demand curve.
• A Giffen good is typically an inferior
product that does not have easily
available substitutes, as a result of
which the income effect dominates the
substitution effect.
• Giffen goods are quite rare, to the
extent that there is some debate about
their actual existence.

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 Example
• Imagine the consumer has a budget of $30, and the cost of a potato
begins at $0.50 and the price of a steak is $10.00.  Also consider
that the consumer needs to buy meals for 10 days.
• With the original budget and prices, the consumer may choose to
consume 2 steaks, at $20, and 20 potatoes for $10 over this time
frame to use up their entire budget.  This is a satisfactory amount
because they will have on average 2 potatoes a day, and 2 steaks
over the period.
• Now imagine a price increase of potatoes to $1 each.  The
consumer could still buy 2 steaks, but could now only buy 10
potatoes.  This might leave them hungry, so it is possible they will
buy less steak, and more potatoes in order to get their calories. 
This means that 20 potatoes will still be purchased, but now only 1
steak is purchased. Aruna.P.Remeshn, AP/MBA - Unit 2-
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 Cont…
• If the price of a potato increased again, say to $1.25, then the
consumer would only be able to get 16 potatoes for $20, which may
not be enough calories to survive.  They will decrease their steak
consumption by one, and use that money to buy more potatoes in
order to get the necessary energy.  In this example, potato
consumption would rise to 24 ($30/$1.25) and steak consumption
would drop to zero.  This shows how consumption of a good would
rise with a price increase (thus an upward sloping demand curve).
• At this point, the consumer’s entire budget is taken up by the giffen
good, so any price increase now will result in a decrease of the
amount of good the consumer is able to buy.  Thus, we will have our
typical downward sloping demand curve.

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 Exceptions to Law of Demand
Veblen Goods
• A good for which demand increases as the price increases, because of
its exclusive nature and appeal as a status symbol. A Veblen good, like
a Giffen good, has an upward-sloping demand curve.
• However, a Veblen good is generally a high-quality, coveted product.
• As well, the increase in demand for a Veblen good reflects consumer
tastes and preferences.
• Very expensive products – such as designer jewelry, pricey watches,
and luxury cars – that are marketed as being “exclusive,” or which
convey the appearance of success, can be classified as Veblen goods.

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 Summary
• Demand schedule
• Demand curve
• Law of Demand
• Income effect
• Substitution effect
• Law of diminishing marginal utility
• Exceptions to Law of Demand

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 Thanks…

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