Law of Demand and Equi Marginal Utility

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Law Of Demand TheoryAnd

Equi-marginal Utility Approach

Presented by:

Adrita Nath

Ashwini Kumar

Rohit Kishore

Shritama Sarkar

Upasana Roy

Varun Kalra

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ContentsWhy demand ?What is demand ?Determinants of demand.The law of Demand.Demand Schedule.Demand curve.Characteristics of a typical demand curve.Assumptions.Exceptions to the law.Movement along the curve.Movement of demand curve.

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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.Use for managerial purposes.

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Why Demand ?

SATISFACTION

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.

5.Consumers satisfaction.6.Advertisements effects.7.Growth of population.8.Level of taxation.9.Climatic or weather conditions.10.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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Quantity demanded (Q)

DPrice(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/Qd )

Linear Non - linear

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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.

e) No expectation of future price changes or shortages.

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

g) 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.

Quantity demanded

PriceUpward sloping demand

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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 curveOR

Change in quantity demanded

Quantity demanded

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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

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Movement of Demand CurveOR

Change in demand

Increase in demand:a) More quantity demanded ------ at a

given price.b) Same quantity demanded ------ at a

higher price.

Quantity demanded

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Decrease in demand :a) Less quantity demanded ---- at

same price.b) Same quantity demanded ---- lower

price.

Quantity demanded

PricePrice

Quantity demanded

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Factors And Effects of Change

(increase or decrease) in demand

a) Change in income :

Quantity demanded

Increase

Quantity demanded

DecreaseD`

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b) Change in taste, habit and preference :

Quantity demanded

Positive Negative

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c) Change in fashion and customs :

Quantity demanded

Price Price

Favorable Unfavorable

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d) Change in distribution of wealth :

Quantity demanded

Price Price

Fiscal measures (welfare)

Fiscal measures (particular)

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e) Change in substitutes :

Quantity demanded

Increase in price of substitute goods

Decrease in price of substitute goods

Ptea Dtea : Pcoffee

Dcoffee

Ptea Dtea : Pcoffee

Dcoffee

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f) Change in demand of complementary goods :

Quantity demanded

Price Price

Pcar Dcar : Ppetrol

Dpetrol

Pcar Dcar : Ppetrol

Dpetrol

Decrease in price Increase in price

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g)Change in population :

Quantity demanded

PricePrice

Increase Decrease

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h) Advertisement and publicity persuasion :

Quantity demanded

Price PriceD

Aggressive Docile

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i) Change in value of money :

Quantity demanded

Price Price

Deflationary Inflationary

( Value of money )

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j) Change in level of taxation :

Quantity demanded

Low High

PricePrice

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k)Expectation of future changes in prices :

Quantity demanded

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 = TUn – TUn-1 ; where ∆Q = 1

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Utility ScheduleUnits of goods (n)

TUn MUn= (∆TUn / ∆Qn)

2 34567

09162124252421

-97531-1-3

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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 / Px = MUy / Py

Generalizing , MUx1/ Px1 = MUx2 / Px2 = ……= MUxn / Pxn

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Assumptions

a) Cardinal utilityb) Independent utilityc) Additive utilityd) Constant marginal utility of moneye) Diminishing marginal utilityf) Rationalityg) Introspective analysis

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Example Money Income =

Rs37/-Units MUA

P =Rs5/unit

P =Rs3/unit

P =Rs 2/unit

1234567

120100806040200

100908070605040

50484644424038

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TU = Σ MUA + Σ MUB + Σ MUC

So, MUA / PA = MUB / PB = MUC / PC = 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

Demand X increased

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Income Effect : Price constant Income increased

Money income riseDemand rises

In case of normal goods +ve I.E + S.E = Law

of demand

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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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