Law of Demand and Equi Marginal Utility
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4 2 5 1 0011 0010 1010 1101 0001 0100 1011 02/06/22 group 2 sec c 1 Law Of Demand Theory And Equi-marginal Utility Approach Presented by: Adrita Nath Ashwini Kumar Rohit Kishore
Transcript of Law of Demand and Equi Marginal Utility
42510011 0010 1010 1101 0001 0100 1011
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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
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.
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)
Q1 Q2
P1
P2
E1
E2
0
D
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.
Q1 Q2
P1
P2
Quantity demanded
PriceUpward sloping demand
curve
D
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 curveOR
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 CurveOR
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
Price
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`
bD`
D
D
D`
D
Da
D`
PricePrice
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
DecreaseD`
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 Negative
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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
Price
Price
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
Quantity demanded
Price Price
D`
D`
D`
D`
D
D
D
D
Pcar Dcar : Ppetrol
Dpetrol
Pcar Dcar : Ppetrol
Dpetrol
Decrease in price Increase in price
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g)Change in population :
Quantity demanded
Quantity demanded
PricePrice
D`
D`
D`
D`
D
D
D
D
Increase Decrease
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h) Advertisement and publicity persuasion :
Quantity demanded
Quantity demanded
Price PriceD
D
D
D
D`
D`
D`
D`
Aggressive Docile
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i) Change in value of money :
Quantity demanded
Quantity demanded
Price Price
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
PricePrice
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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 = TUn – TUn-1 ; where ∆Q = 1
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Utility ScheduleUnits of goods (n)
TUn MUn= (∆TUn / ∆Qn)
01
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
MUB
P =Rs3/unit
MUC
P =Rs 2/unit
1234567
120100806040200
100908070605040
50484644424038
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TU = Σ MUA + Σ MUB + Σ MUC
= 890
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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