Consumer demand

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Information about Consumer demand

Published on October 15, 2014

Author: yogeshkapoor


PowerPoint Presentation: Consumer Demand “ Units of a commodity demanded by an individual at a certain price & at certain period of time” PowerPoint Presentation: : Drawing demand curve : Drawing demand curve Economics tradition: Put quantity on horizontal axis, price on vertical axis. Typically demand curve slopes down: Higher price means lower quantity demanded. Quantity Price Individual Demand Curve with reservation price Rs200: Individual Demand Curve with reservation price Rs200 Quantity Price $200 1 A Market demand Curve: A Market demand Curve Price Number of Demanders Rs300 10 Rs200 25 Rs300 35 300 100 200 10 25 35 Price Quantity Market demand: Market demand For any price, market demand is sum of quantities demanded by individuals. Person 1 Demand Curve Person 2 Demand Curve Market demand Curve Price PowerPoint Presentation: Law Of Demand: Other things being the same, increase in price of commodity decreases the demand of that commodity. Factors behind law of demand : Substitution effect : When the price of a commodity falls, being the substitute’s price remaining constant, the substitute become relatively costlier. Example : Fall in price of coffee will make its substitute tea relatively costlier though there is no change in price of tea. II . Income effect : When the price of a commodity falls, other things remaining constant, then the real income of a consumer increases inducing him to buy more quantities of the product. Example : Price of sugar falls from Rs 50 to Rs 30 per kg. consumer buying one kg a month will now be buying 1.5kg being the proportion of expenditure decreased and letting the consumer to buy more quantities of sugar if he is willing to spend the same budget of Rs 50. PowerPoint Presentation: III . Utility Maximizing behavior : Consumer continues to buy more quantities of a product so long the marginal utility of money(MU M ) is equal to marginal utility of the commodity(MU X ). Example : MU X increases with the fall in price of commodity X. To bring equilibrium in consumer utility, he will buy more quantities of X to bring down the marginal Utility derived from X so long to bring its utility equal to MU M . Exceptions To Law Of Demand: Exceptions To Law Of Demand Some times, we find that with a fall in the price demand also falls and with a rise in price demand also rises. These cases are referred to as exceptions to the general law of demand. The demand curve in these cases will be an upward sloping. Some of these exceptions are: Inferior goods/Giffen Goods: Some goods are of lowest quality generally consumed by poor households & are called inferior goods. In the case of these goods with the rise in its prices, even then also its demand increases( income being constant) as the increased price is much lesser than switching cost of inferior goods to superior goods. Example: Price of Bajra increased from Rs 5/KG to Rs 6/KG & Price of Wheat Rs10/KG. Poor consumer buying 20kg of Bajra & 10kg of Wheat @ the budget of Rs 2000 will now be buying 25kg of Bajra & 5kg of Wheat to make the budget constant. Expectations and speculations: When people expect a rise or fall in price in the near future, the law of demand does not hold good. If a price rise is expected by next week, then they will buy more now itself though at present the prices are quite high. PowerPoint Presentation: Price illusion: There are certain consumers those who are always guided by the price of the commodity. They always believe that higher the price, better the quality. Hence they purchase larger quantities of high priced goods. Demonstration effect: It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. They will buy a commodity to imitate the consumption of their neighbors even if they don't have the purchasing power. Quality and Branded Goods: Commodities of good standard and quality give proper value for money. They last long and give good service. So people prefer to buy them even at a higher price. Snob effect - some buyers have a desire to own unusual or unique products to show that they are different from others Life saving drugs or emergency products : Consumer will go on purchasing emergency products even at higher prices for the sake of necessity of his life. Prestige goods: Rich people like to show off their economic status. So they buy prestige goods like color T.V., diamond etc. even at a higher price.

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