Law of Demand and Equi Marginal Utility

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Law Of Demand Theory

And

Equi-marginal Utility

Approach

Presented by: Adrita Nath Ashwini Kumar Rohit Kishore Shritama Sarkar Upasana Roy Varun Kalra

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Contd…



_{Factors and effect of change in demand.}



_{The law of equi marginal utility.}



_{Utility schedule.}



_{About the law.}



_Example.



_Assumptions.



_{Equi marginal utility and law of demand.}

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Why Demand ?

SATISFACTION NEED WANTS DEMAND PURCHASE

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What is Demand ?

“ When the desire for a commodity is backed by the willingness and the ability to spent adequate sums of money, it becomes demand or effective demand in the economic sense of the curve. Only desire for commodity or having money for the same cannot give rise to its demand”

Marshall

“ Demand for a product refers the amount of it which will be bought per unit of time at a particular price”.

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Determinants of

Demand

1.Price of the product.

2.Income and wealth distribution. 3.Tastes, habits and preferences. 4.Relative prices of other goods

 _{Substitute products.}  _{Complementary products.} 1.Consumers satisfaction. 2.Advertisements effects. 3.Growth of population. 4.Level of taxation.

5.Climatic or weather conditions. 6.Special occasions.

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The Law of Demand

“Other factors remaining same (habits, tastes etc.) as price decreases demand increases and vice

versa”

Marshall

“Ceteris paribus, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded.”

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Demand Schedule

(Hypothetical)

Price of commodity (in

Rs)

Quantity demanded

(unit per week)

5

4

3

2

1

100

200

300

400

500

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0011 0010 1010 1101 0001 0100 1011 11/29/09 group 2 sec c 9 Quantity demanded (Q) Q₁ Q₂ P₁ P₂ E₁ E₂ 0 D D Price( P) P₁ - old price P₂ - new price Q₁ – old quantity demanded Q₂ – new quantity demanded DD – demand curve

A Linear Demand

Curve

Demand Curve

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Characteristics of A Typical

Demand Curve



_{Drawn by joining different loci.}



_{Downward sloping.}



_{Reciprocal relationship between price and}

quantity demanded ( P α 1/Q

_d

)



_{Linear Non -}

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Assumptions (Other

things)

a) No change in consumer’s income.

b) No change in consumer’s preferences. c) No change in the fashion.

d) No change in the price of related goods :  Substitute goods.

 Complementary goods.

a) No expectation of future price changes or shortages.

b) No change in size, age, composition and sex ratio of the population.

c) No change in the range of goods available to the consumers.

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Contd…

h) No change in the distribution of income

and wealth.

i) No change in the government policy.

j) No change in weather conditions.

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Exceptions To The Law

a) Giffen goods.

b) Articles of snob appeal.

c) Speculation.

d) Consumer psychological bias or illusion.

Q₁ Q₂ P₁ P₂ Quantity demanded Price

Upward

sloping

demand

curve

D

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

Extension of demand /Increase in

quantity demanded:

‘ With a decrease in price, there is

increase in the quantity demand of the

product’.

Movement along the curve

OR

Change in quantity

demanded

P₁ P₂ Q₁ Q₂ E E` D D Quantity demanded Price

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

_{Contraction of demand /Decrease in}

quantity demanded:

‘ With a increase in price, there is a

decrease in quantity demanded’.’

Quantity demanded P₂ Q₂ P₁ Q₁ E E` Price

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Movement of Demand Curve

OR

Change in demand



_{Increase in demand:}

a) More quantity demanded --- at a

given price.

b) Same quantity demanded --- at a

higher price.

P₁ Q₁ Q₂ a b D D D` D` Q₁ P₁ P₂ D D D` D` a b Quantity demanded Quantity demanded Pric e Price

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

_{Decrease in demand :}

a) Less quantity demanded ---- at

same price.

b) Same quantity demanded ---- lower

price.

Q₂ Q₁ P₁ a b Q1 Quantity demanded P1 D` b D` D D D` D D a D` Price _Price Quantity demanded P2

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Factors And Effects of

Change

(increase or decrease) in

demand

a) Change in income :

Quantity demanded Price Increase Quantity demanded Price Decrease D` D` D D D D D` D`

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b) Change in taste, habit and

preference :

D D D` D` D D D` D` Quantity demanded Price Quantity demanded Price Positive Negativ e

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c) Change in fashion and

customs :

D D D` D` D D D` D` Quantity demanded Quantity demanded Price Price Favorable Unfavorable

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d) Change in distribution of wealth :

Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D Fiscal measures (welfare) Fiscal measures (particular)

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e) Change in substitutes :

D` D` D` D` D D D D Quantity demanded Quantity demanded Pric e Pric e Increase in price of substitute goods Decrease in price of substitute goods

P_tea D_tea : P_coffee D_coffee

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f) Change in demand of

complementary goods :

Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D

P_car D_car : P_petrol D_petrol

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g)Change in population :

Quantity demanded Quantity demanded Price Price D` D` D` D` D D D D Increase Decrease

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h) Advertisement and publicity

persuasion :

Quantity demanded Quantity demanded Price D Price D D D D` D` D` D` Aggressive Docile

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i) Change in value of money :

Quantity demanded Quantity demanded Price Pric e D` D` D` D` D D D D Deflationary Inflationary ( Value of money ) ( Value of money )

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j) Change in level of taxation :

Quantity demanded Quantity demanded D D` D` D` D D` D D Low High Price Price

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k)Expectation of future changes

in prices :

Quantity demanded Quantity demanded D` D` D` D` D D D D Rise Fall Price Price

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Law of Equi marginal Utility

 Utility :

‘ The satisfaction that a consumer gets by having or consuming goods or services is called utility’.

 Total Utility (TU) :

‘ It is the sum total of satisfaction which a

consumer receives by consuming the various units of the commodity’.

 Marginal Utility (MU) :

‘ It is the change in total utility resulting from one unit change in consumption of good’.

MU = ∆TU / ∆Q

MU = TU_n – TU_n-1 ; where∆Q = 1

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Utility Schedule

Units of goods (n) TUn MUn= (∆TUn / ∆Qn)

0

1

2

3

4

5

6

7

0

9

16

21

24

25

24

21 -9

7

5

3

1 -1

-3

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About The Law

‘ A consumer maximizes his total utility by

allocating his income among goods and services (

including savings ) available to him in such a way

that the marginal utility per rupees worth of one

good equals the marginal utility per rupees worth

of any other good.’

MUx / P

_x

= MUy / P

_y

Generalizing ,

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Assumptions

a) Cardinal utility b) Independent utility c) Additive utility

d) Constant marginal utility of money e) Diminishing marginal utility

f) Rationality

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Example

Money Income =

Rs37/-Units

MU

_A

P

=Rs5/unit

MU

_B

P

=Rs3/unit

MU

_C

P =Rs

2/unit

1

2

3

4

5

6

7

120

100

80

60

40

20

0

100

90

80

70

60

50

40

50

48

46

44

42

40

38

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TU = Σ MU

_A

+ Σ MU

_B

+ Σ MU

_C

= 890

So, MU

_A

/ P

_A

= MU

_B

/ P

_B

= MU

_C

/ P

_C

= MU

(Money)

= 100/5 = 60/3 = 40/2 = 20

This is Consumer’s Equilibrium.

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Equi marginal Utility

And

Law of Demand



_{Substitution effect :}

Income constant _{If price x fall}

Real income increased MUx fall

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

_{Income Effect :}

_{Price constant} _{Income increased}

Money income rise Demand rises

In case of normal goods

+ve I.E + S.E = Law

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Use for managerial

purposes

a) Sales forecasting with sound base and greater accuracy.

b) Demand manipulation. c) Product planning.

d) Product improvement.

e) Determining sales quotas. f) Appraisal of performance. g) Pricing policy.

h) Market share.

i) Scope for expansion. j) Competitive position.

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Law of Demand and Equi Marginal Utility

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Law Of Demand Theory

And

Equi-marginal Utility

Approach

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3

Contents

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Contd…



Factors and effect of change in demand.



The law of equi marginal utility.



Utility schedule.



About the law.



Example.



Assumptions.



Equi marginal utility and law of demand.

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Why Demand ?

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What is Demand ?

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Determinants of

Demand

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The Law of Demand

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Demand Schedule

(Hypothetical)

Price of commodity (in

Rs)

Quantity demanded

(unit per week)

5

4

3

2

1

100

200

300

₅

₅

₅

_{Factors and effect of change in demand.}

_{The law of equi marginal utility.}

_{Utility schedule.}

_{About the law.}

_Example.

_Assumptions.

_{Equi marginal utility and law of demand.}

₅

₅

₅

₅

₅

₅

₅

_{Drawn by joining different loci.}

_{Downward sloping.}

_{Reciprocal relationship between price and}

_{Linear Non -}

₅

₅

₅

₅