Theory of Demand

Theory of Demand Contents:-Meaning of Demand and Determinants of Demand Demand Functions. Law of Demand, Expansion and Contraction of Demand, Increase and Decrease in Demand, Usefulness of Law of Demand, Exceptions to the Law of DemandUtility Analysis: Concept of Utility, Law of Diminishing Marginal Utility, Derivation of Demand Curve on the basis of the Utility analysis , Consumers Surplus

Meaning of DemandDifference between desire and demandDesire backed by purchasing power and willingness to buyProf. J Harvey Demand in economics is the desire to possess something and the willingness and the ability to pay a certain price in order to possess itProf. Benham The demand for a thing at a given price is the amount of it which will be bought per unit of time at that priceStonier and Hague Demand in economics means demand backed up by enough money to pay for the good demandedCharacteristics of DemandPriceTimeMarketAmountDemand FunctionPrice of the productsIncome of the consumerTaste and preferencesAvailability of substitute and complements and their relative pricesDemand Schedule and Demand Curve Demand schedule is a list of prices and corresponding quantities.

Market Demand CurveThe market demand curve is the sum of the demand curve of all the consumers.

Types of DemandPrice DemandIncome DemandCross DemandLaw of DemandThe inverse relationship between the price of a commodity and its quantity demanded per unit of time is referred to as the law of demandOther thing remaining constant No change in consumers incomeNo change in consumer test and preferencesNo change is the prices of substitute and complementsNo future expectations about the pricesNo prestigious commoditiesWhy Demand Curve Slopes Downward Law of Diminishing Marginal UtilitySubstitution EffectIncome EffectEntry of BuyersLess Urgent Needs

Exception to the Law of DemandGeffen Paradox Veblen Goods or Goods with Snob AppealFuture expectations about the pricesConsumers psychological bias or illusionDemonstration effectBrand LoyaltyPanic BuyingInsignificant proportion of income spentGoods with no substitutesOutdated GoodsMovement along and Shift in Demand Curve

Determinant of DemandTastes and FashionsPrice of the productWeatherIncome and distribution of incomeExpectationsSavingsSate of trade activitiesReal incomeConsumer credit policyDemonstration effectAdvertisementTaxation and subsidiesChange in the value of moneyChange in populationPrice of related products

Usefulness of Law of DemandDetermination of pricesImportance to finance ministerImportance to farmers

Cardinal Utility Theory Neo Classical Utility Theory or Marshallian Utility TheoryUtility is a consumers perception of his or her own happiness or satisfaction Utility has no moral, legal or ethical connotationUtility is subjective and not objective : varies from person to person, time to time, place to placeCardinal and Ordinal Utility Concepts Assumptions of Cardinal Utility Theory Rationality Cardinal UtilityConstancy of Marginal Utility of Money Utilities are IndependentDiminishing Marginal Utility

The Law of Diminishing Marginal Utility As we have more of a thing, the less is the utility we derive from the additional increment of it Gossen

The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has Marshall

Law of satiable wants

Assumptions of the LawReasonability HomogeneousContinuityConstancyRatinality

Exceptions to the Law of Diminishing Marginal Utility Rare CollectionsConspicuous consumptionStock of other goods telephone or mobile

Importance of Law of Diminishing Marginal Utility Basic of Economic LawsTaxationSocialistic pleaDetermination of valueDownward sloping demand curveDiamond Water ParadoxDetermination of household expenditureConsumer SurplusProf Marshall :- The excess of the price which he consumer) would be willing to pay rather than go without the thing, over which he actually does pay, it the economic measure of the surplus satisfaction. I t may be called consumers surplus

Prof. Samuelson The gap between the total utility of a good and its total market value is called consumers surplus

Prof Hick It (consumer surplus) is the difference between the marginal valuation of a unit and the price which actually paid for it

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