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Theory of Demand, Demand Curve, Assignment Help
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>> Theory of Demand, Demand Curve
The concept of Demand
The concept of demand signifies the total quantity of goods or services that a person is willing to buy at a definite price and point of time.
Determinants of Demand
Law of Demand
The law of demand states if the price of a certain good augments keeping the other factors same; the demand of that particular commodity will come down. In other words, there prevails inverse relation between demand and price which implies that an increase in the price of a good is accompanied by the decline of quantity demanded of it and vice-versa. Additionally, due to price rise people might bring down their demand for that particular product and move over to some other product offered at lower price.
The law of demand can be illustrated with the help of demand schedule. The demand schedule is a table which represents change in demand due to change in price. A demand curve can be easily drawn with the help of demand schedule.
The figure below, represents the association between Price (P) and Quantity demanded (Q). Initially, at price P, Quantity demanded was Q1. Whereas, with a increase in price from P1 to P2, the Quantity demanded decreased from Q1 to Q2. This shows that with increase in price from P1 to P2, the quantity demanded decreases from Q1 to Q2.
Assumptions of the law
• Income of the individual remains constant.
• Prices of the related goods remain unchanged.
• The taste and preferences for a given good remains same.
• The composition and size of the overall population in the country remains constant.
• The degree of taxation and fiscal policy of the government remains unchanged throughout the operation of the law
• No new product is introduced in the market.
• There are no climatic variations.
Exceptions of the law
• Giffen goods
A decrease in the price of giffen goods also called inferior goods, leads to a decrease in their demand whereas an increase in the price results in an increase in their demand.
Speculations and Expectations
In a situation when people expect a rise in the price of a particular commodity in near future they will purchase more of that good in advance even if the present prices are high.
• Prestige goods:
Rich people like to show off their financial status by purchasing expensive things even if they are offered at comparatively higher prices and they don’t need it. Such things add up to their prestige and social status.
• Price illusion:
Sometimes people feel that the quality of the good depends on its price i.e. more price will offer better quality. It results in their purchase of goods that are priced high and expensive.
• Demonstration effect:
It implies inclination of low income groups to mimic the consumption pattern of high income groups even if they are not financially strong enough to afford it.
At times, due to unawareness of prevailing market price, people buy more at a comparatively higher price.
Downward sloping demand curve
The main reasons for the downward slope of demand curve are:
• Diminishing Marginal Utility
• Income and substitution effect
• Emergence of potential buyers
• Alternate uses
Movement in Demand Curve
Extension in demand
A decrease in a price of a commodity with other factors remaining constant leads to an increase in its demand. The extension of demand is represented on the same demand curve.
Contraction in Demand
An increase in the price of a commodity with other factors remaining constant leads to a decrease in its demand. The contraction of demand is represented on the same demand curve.
Shift in Demand curve
• Increase in Demand
It means an increase in demand due to various factors other than price.
The factors that lead to increase in demand are:
• Increase in the number of consumers.
• Rise in income and wealth.
• Change in taste and preferences of the consumer.
• Expectation of future rise in price of a commodity.
• Rise in the price of substitute good.
• Fall in the price of complementary good.
Fig. A shift in demand curve from D1 to D2 represents an increase in demand
Decrease in Demand
It means decrease in demand due to various factors other than price.
The factors that lead to decrease in demand are:
• Decrease in the number of consumers.
• Fall in income and wealth.
• Change in taste and preferences of the consumer.
• Expectation of future fall in price of a commodity.
• Fall in the price of substitute good.
• Increase in the price of complementary good.
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