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LAW OF DEMAND

LAW OF DEMAND. “A RISE IN THE PRICE OF A COMMODITY OR SERVICE IS FOLLOWED BY A REDUCTION IN THE QUANTITY DEMANDED & FALL IN THE PRICE IS FOLLOWED BY A EXTENSION IN QUANTITY DEMANDED, WITH OTHER CONDITIONS REMAINING THE SAME.”. Limitation. Change in taste or fashion. Change in income

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LAW OF DEMAND

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  1. LAW OF DEMAND “A RISE IN THE PRICE OF A COMMODITY OR SERVICE IS FOLLOWED BY A REDUCTION IN THE QUANTITY DEMANDED & FALL IN THE PRICE IS FOLLOWED BY A EXTENSION IN QUANTITY DEMANDED, WITH OTHER CONDITIONS REMAINING THE SAME.”

  2. Limitation • Change in taste or fashion. • Change in income • Change in other prices. • Discovery of substitution. • Anticipatory change in prices. • Rare or distinction goods.

  3. EXCEPTIONS TO THE LAW OF DEMAND • INFERIOR GOODS • Price of bajra • PRESTIGIOUS GOODS • Price of Diamonds • HIGH PRICE COMMODITIES • Price of superior products • FEAR OF SHORTAGE

  4. A Demand Curve • The numbers in the graph below are what one expects in a demand curve: as price goes up, the amount people are willing to buy decreases.

  5. It can be observed that with a fall in price every individual consumer buys a larger quantity than before as a result of which the total market demand also rises. In case of an increase in price the situation will be reserved. Thus the demand schedule reveals the inverse price-demand relationship, i.e. the Law of Demand.

  6. EXTENSION & CONTRACTION IN DEMAND • Buying more quantity of commodity at a lower price (EXTENSION) • Buying less quantity of commodity at higher price. “Change in quantity demanded due to change in price.”

  7. Extension of Demand: This refers to rise in demand due to a fall in price of the commodity. It is shown by a downwards movement on a given demand curve.Contraction of Demand: This means fall in demand due to increase in price and can be shown by an upwards movement on a given demand curve.

  8. SHIFT IN DEMAND “Change in demand due to change in the values of other variables influencing demand” • More demand at the same price or same demand at higher price.(Increase) • Less demand at the same price or same demand at lower price.

  9. Increase in Demand: This refers to higher demand at the same price and results from rise in income, population etc., this is shown on a new demand curve lying above the original one.Decrease in demand: It means less quantity demanded at the same price. This is the result of factors like fall in income, population etc. this is shown on a new demand lying below the original one.

  10. LAW OF DEMAND • FACTORS AFFECTING DEMAND • TASTE & PREFERENCES: • Influenced by fashions, ads ,custom ,habits ,season & population changes. • INCOME: • Changes in the income leads to the shift in demand. • PRICE OF OTHER RELATED GOODS: • Substitutes • Rise in price of one good result in increase in demand for the other good • Complements • Rise in price of one good brings down the demand for the other good .

  11. LAW OF DEMAND • HABITS: • Tobacco. • REGION: • Demand for high woolen clothing, meat in high altitude regions. • SEASON: • Demand for eggs.

  12. ELASTICITY OF DEMAND “The relative change in the quantity demanded to the relative change in the price” “Rate at which quantity demanded changes because of change in price”

  13. ELASTICITY OF DEMAND • TYPES: • Price elasticity of demand(Ed) • Income elasticity of demand(Ei) • Cross elasticity of demand(Exy)

  14. ELASTICITY OF DEMAND • PRICE ELASTICITY OF DEMAND(Ed) • It shows the responsiveness of quantity demanded of a commodity when the price of that commodity changes. • Ed = % change in quantity demand / % change in PRICE • Ed = change in quantity ÷ initial quantity x 100 / change in price ÷ initial price x 100

  15. ELASTICITY OF DEMAND • INCOME ELASTICITY OF DEMAND (Ei): • It shows the responsiveness of quantity demanded due to change in the income. • Ei = % change in quantity demand / % change in INCOME • Ei = change in quantity ÷ initial quantity x 100 / change in income ÷ initial income x 100

  16. ELASTICITY OF DEMAND • CROSS ELASTICITY OF DEMAND(Exy) • Demand for one good (X) is influenced by the price of other related good (Y). • Substitute or Complements. • Exy = % change in quantity demand of commodity (X) / % change in price of related commodity (Y) • Exy = change in quantity (X) ÷ initial quantity (X) x 100 / change in income (Y) ÷ initial income (Y) x 100

  17. DEGREES OF ELASTICITY OF DEMAND • PERFECTLY ELASTIC DEMAND • A slightest change in price of a commodity leads to an indefinite change in quantity demanded. • Demand in such a situation is said to be perfectly elastic. • Parallel to X-axis • PERFECTLY INELASTIC DEMAND • Change in price of a commodity leaves the quantity demanded unaffected. • Demand in such a situation is said to be inelastic(Insensitive) • Vertical to X-axis

  18. DEGREES OF ELASTICITY OF DEMAND • RELATIVELY ELASTIC DEMAND: • A small proportionate fall in the price is accompanied by a larger proportionate increase in demand. • RELATIVELY INELASTIC DEMAND: • A large proportionate fall in the price is accompanied by a smaller proportionate increase in demand. • UNITARY ELASTIC DEMAND: • A given proportionate fall in the price is followed by a same proportionate increase in demand.

  19. FACTORS DETERMINING ELASTICITY OF DEMAND • TYPE OF GOOD • Demand is inelastic for necessaries & elastic for luxuries. • GOODS HAVING SEVERAL USES • Demand is elastic.eg. coal electricity, water etc. • EXISTENCE OF SUBSTITUTES • Demand is elastic • RANGE OF PRICES • Demand is inelastic

  20. SUPPLY • SUPPLY: • Quantity of good or service offered by a producer for sale at different unit prices in a given market at a point of time. • A schedule which shows the various amount of a product which a producer is willing to & able to produce & make available for sale in a market at each specific price in a set of possible prices during some given period.

  21. STOCK • Stock is the amount of output that exists in market. • Depending on the demand for commodity stock is converted into supply. • Stock for perishable commodities(same) • Stock for durable commodities

  22. INDIVIDUAL SUPPLY • Supply schedule depicts the list of quantities-price relationships of a commodity in a market at a specific point of time by an individual seller.

  23. MARKET SUPPLY • It is the sum of quantity of commodity that is brought into a market for sale by sellers at a specific point of time.

  24. LAW OF SUPPLY “As the price of commodity rises its supply extends & as the price falls its supply contracts, with other things remaining the same”

  25. LAW OF SUPPLY • As price increases sellers are committed to increase their sales. • When a supply schedule plotted on a graph it becomes a supply curve.

  26. LAW OF SUPPLY • CHANGE IN QUANTITY SUPPLIED: Movement of product supply on the same supply curve • EXTENSION • Offering more quantity for sale at higher price • CONTRACTION • Offering less quantity for sale at lower price

  27. LAW OF SUPPLY • SHIFT IN SUPPLY: • INCREASE • More supply at the same price • DECREASE • Less supply at the same price.

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