Understanding the Theory of Demand in Microeconomics

 
Theory of Demand
 
Soico Economic Bases for Planning
Aditi Arora
 
M
I
C
R
O
E
C
O
N
O
M
I
C
S
Demand
 
The concept ‘demand’ refers to the quantity of a good or
service that consumers are 
willing and able 
to purchase at
various prices during a period of time.
It is more than a 
desire to purchase: needs
to be backed by purchasing power/ ability to pay ; 
that is
effective demand
Effective demand depends on (i) desire (ii) means to
purchase and (iii) willingness to use those means for that
purchase
Quantity demanded is always expressed at a given price – as
price change, so does demand
Determinants of demand
 
Price of the commodity
Prices of other related commodities
Substitutes – tea and coffee
Complements – tea and sugar
Level of income – budget constraint
Tastes and preferences of the consumer
Size and composition of the population
Distribution of income
Demand Function
 
Qd = 
f
 (Pc, Pr, Y, T, D)      
ceteris paribus
Pc - Rise in price 
Pr - Rise in price of related items 
Y - Level of income 
Exception – inferior goods i.e. basic necessities
T - Taste and preference 
Goods in fashion – mobiles, tablets, ipads etc
‘demonstration effect’
D - Other factors – size of population, composition of
population, distribution of income
Law of Demand
 
Other things being equal, if the price of a commodity falls,
the quantity demanded will rise and vice-versa
Inverse relationship between price and quantity
demanded, other things remaining same
Drawing a Demand curve for an individual
Market demand curve
Law of Demand
 
Rationale for the law of demand
When price falls the good becomes relatively cheaper
substitution effect
Consumer’s purchasing power increases as s/he is able
to buy more of the good at the same price – 
income
effect
Entry of more buyers in the market due to price fall
 
Exceptions to the Law of Demand
 
Conspicuous goods – higher price increases the prestige
value of the good – antique goods, paintings
Giffen goods – inferior goods that occupy substantial place
in consumer’s budget e.g. – as price of bread increased,
British workers purchased more of it
Future expectations about prices – hoarding of grains during
droughts
Impulsive purchases
Ignorance effect
 
Movement along the DD curve
 
Other things remaining constant, if there is a change in
the price, quantity demanded changes
 
What about shift of the DD curve?
 
Shift of the Demand Curve
 
Change in income
Change in prices of other goods – substitutes and
complementary goods
Change in tastes
Change in population
 
Elasticity of Demand
 
Defined as the responsiveness of the quantity demanded of
a good to changes in one of the variables on which demand
depends
Price elasticity 
= Ep = 
% change in quantity demanded
    
         % change in price
 
    
          
Change in quantity
 
X 100
    
          Original quantity
    
   =     
Change in price
 
X 100
    
          Original price
The numerical value of elasticity of demand can assume any
value between 0 and infinity (
α
)
We ignore the negative sign and take the absolute value of
elasticity for convenience
Price elasticity of demand
Price elasticity of demand
 
Determinants of price elasticity
 
Availability of substitutes – goods with close
substitutes have high price elasticity.  i.e. tea/ coffee;
vegetables are inelastic
Position of a commodity in the consumer’s budget –
greater the proportion of income spent on a
commodity greater is its elasticity
Nature of need – luxury goods are price elastic while
necessities are price inelastic
Consumer habits – addiction is inelastic
Slide Note
Embed
Share

The theory of demand in microeconomics explores the concept of consumer willingness and ability to purchase goods and services at various prices. Factors influencing demand include price, related commodity prices, income levels, consumer preferences, population size, and distribution of income. The law of demand states that there is an inverse relationship between price and quantity demanded. However, exceptions to this law exist, such as with conspicuous goods, Giffen goods, and hoarding behavior.


Uploaded on Sep 07, 2024 | 1 Views


Download Presentation

Please find below an Image/Link to download the presentation.

The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.

E N D

Presentation Transcript


  1. MICROECONOMICS Theory of Demand Soico Economic Bases for Planning Aditi Arora

  2. Demand The concept demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a period of time. It is more than a desire to purchase: needs to be backed by purchasing power/ ability to pay ; that is effective demand Effective demand depends on (i) desire (ii) means to purchase and (iii) willingness to use those means for that purchase Quantity demanded is always expressed at a given price as price change, so does demand

  3. Determinants of demand Price of the commodity Prices of other related commodities Substitutes tea and coffee Complements tea and sugar Level of income budget constraint Tastes and preferences of the consumer Size and composition of the population Distribution of income

  4. Demand Function Qd = f (Pc, Pr, Y, T, D) ceteris paribus Pc - Rise in price Pr - Rise in price of related items Y - Level of income Exception inferior goods i.e. basic necessities T - Taste and preference Goods in fashion mobiles, tablets, ipads etc demonstration effect D - Other factors size of population, composition of population, distribution of income

  5. Law of Demand Other things being equal, if the price of a commodity falls, the quantity demanded will rise and vice-versa Inverse relationship between price and quantity demanded, other things remaining same Drawing a Demand curve for an individual Market demand curve

  6. Law of Demand Rationale for the law of demand When price falls the good becomes relatively cheaper substitution effect Consumer s purchasing power increases as s/he is able to buy more of the good at the same price income effect Entry of more buyers in the market due to price fall

  7. Exceptions to the Law of Demand Conspicuous goods higher price increases the prestige value of the good antique goods, paintings Giffen goods inferior goods that occupy substantial place in consumer s budget e.g. as price of bread increased, British workers purchased more of it Future expectations about prices hoarding of grains during droughts Impulsive purchases Ignorance effect

  8. Movement along the DD curve Other things remaining constant, if there is a change in the price, quantity demanded changes What about shift of the DD curve?

  9. Shift of the Demand Curve Change in income Change in prices of other goods substitutes and complementary goods Change in tastes Change in population

  10. Elasticity of Demand Defined as the responsiveness of the quantity demanded of a good to changes in one of the variables on which demand depends Price elasticity = Ep = % change in quantity demanded % change in price Change in quantity Original quantity = Change in price Original price X 100 X 100 The numerical value of elasticity of demand can assume any value between 0 and infinity ( ) We ignore the negative sign and take the absolute value of elasticity for convenience

  11. Price elasticity of demand Value of elasticity Description Terminology Example of goods E = 0 Quantity demanded does not change as price changes Completely inelastic Salt/ life saving drugs 0 < E < 1 Quantity demanded changes by a smaller % than the price change Inelastic Wheat/ Rice E = 1 Quantity demanded changes by exactly the same % as the price change Unit elasticity

  12. Price elasticity of demand Value of elasticity Description Terminology Example of goods 1 < E < Quantity demanded changes by a larger % than the price change Elastic Clothes, TV etc E Purchasers are prepared to buy all they can at some price and none at all Perfectly elastic

  13. Determinants of price elasticity Availability of substitutes goods with close substitutes have high price elasticity. i.e. tea/ coffee; vegetables are inelastic Position of a commodity in the consumer s budget greater the proportion of income spent on a commodity greater is its elasticity Nature of need luxury goods are price elastic while necessities are price inelastic Consumer habits addiction is inelastic

More Related Content

giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#