Law of Demand and Equi Marginal Utility

Law Of Demand Theory And Equi-marginal Utility Approach 0011 0010 1010 1101 0001 0100 1011

Adrita Nath

Ashwini Kumar Rohit Kishore 11/29/09

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Presented by:

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Contents  Why demand ?  What is demand ? of 0001 demand.  Determinants 0011 0010 1010 1101 0100 1011  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 ? NEED 0011 0010 1010 1101 0001 0100 1011

SATISFACTION WANTS

PURCHASE DEMAND

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What is Demand ? “ When the desire for a commodity is backed by the 0011 0010 1010 1101 0001 willingness and0100 the 1011 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”

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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 0011 0010 1010 1101 0001 0100 1011

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

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Marshall

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“Ceteris paribus, higher the price of a commodity, smaller is the quantity demanded and lower the price, larger the quantity demanded.” 11/29/09

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Demand Schedule (Hypothetical) 0011 0010 1010 1101 0001 0100 1011

Price of commodity (in Quantity demanded Rs) (unit per week)

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100 200 300 400 500

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Demand Curve D

P1 - old price

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Price( P)

P2 - new price

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D 0

Q1

Q2

DD – demand curve

A Linear Demand Curve group 2

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Q2 – new quantity demanded

Quantity demanded (Q)

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Q1 – old quantity demanded

E2

P2

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Characteristics of A Typical Demand Curve  Drawn by joining different loci.

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 Downward sloping.

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 Reciprocal relationship between price and quantity demanded ( P α 1/Qd )  Linear linear 11/29/09

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Assumptions (Other things)

a) No change in consumer’s income. 0011 1101 0001 0100 1011 b)0010 No1010 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… 0011 0010 1010 1101 0001 0100 1011

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. 0011 0010 1010 1101 0001 0100 1011 b) Articles of snob appeal. c) Speculation. d) Consumer psychological bias or illusion. D

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Price

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Quantity demanded

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Movement along the curve OR Change in quantity 0011 0010 1010 1101 0001 0100 1011 demanded  Extension of demand /Increase in

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quantity demanded:

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‘ With a decrease in price, there is increaseDin the quantity demand of the product’. E P 1

Price

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 Contraction of demand /Decrease in quantity demanded: ‘ With a increase in price, there is a decrease in quantity demanded’.’

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P2

PriceP

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Q2

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Movement of Demand Curve OR Change in demand 0011 0010 1010 1101 0001 0100 1011 Increase in demand: a) More quantity demanded ------ at a given price. b) D` Same quantity demandedD`------ at a D D higher price. b



P1

a

P2

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Pric e

Price P1

D`

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Quantity

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 Decrease in demand : a) Less quantity demanded ---- at same price. 0011 0010 1010 1101 0001 0100 1011 b) Same quantity demanded ---- lower price. D D D`

D`

Price

a

P1

Price

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Factors And Effects of Change (increase or decrease) in 0011 0010 1010 1101 0001 0100 1011 demand a) Change in income : D`

D

Increase

D` Price

Price D

D

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Decrease

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b) Change in taste, habit and preference : 0011 0010 1010 1101 0001 0100 1011 D`

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Positive

D`

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Price D`

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c) Change in fashion and customs : 0011 0010 1010 1101 0001 0100 1011 Favorable

Unfavorable D

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d) Change in distribution of wealt Fiscal measures (particular) D

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Fiscal measures D` (welfare)

Price D

Price

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D`

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e) Change in substitutes : Increase in0100 price of 0011 0010 1010 1101 0001 1011

Decrease in price of substitute goods D

substitute goods

D`

Pric e

Pric D` e

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Quantity demanded Dtea : Pcoffee Dcoffee

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f) Change in demand of complementary goods : Decrease in price

Increase in price

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D

D`

Price

Price D`

D D`

Quantity demanded Dcar

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Quantity demanded

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g)Change in population : 0011 0010 1010 1101 0001 0100 1011 Increase

Decrease D

D` D`

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Price

Price

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h) Advertisement and publicity persuasion : Aggressive 0011 0010 1010 1101 0001 0100 1011

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D`

Price

Price D`

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D` D

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i) Change in value of money : Inflationary

Deflationary 0011 0010 1010 1101 0001 0100 1011

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D`

Price

Pric e

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( Value of money )

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j) Change in level of taxation : High

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D`

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Price

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Quantity demanded

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k)Expectation of future changes in prices : 0011 0010 1010 1101 0001 0100 1011

D`

Price

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Rise

Price D`

D

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Quantity demanded

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D`

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Law of Equi marginal Utility  Utility : The1101 satisfaction that a consumer gets by having 0011 0010‘1010 0001 0100 1011 or consuming goods or services is called utility’.

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 Total Utility (TU) : ‘ It is the sum total of satisfaction which a consumer receives by consuming the various units of the commodity’.

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 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 11/29/09

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Utility Schedule Units of goods (n)

TUn

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MUn= (∆TUn / ∆Qn)

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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.’

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MUx / Px

=

MUy / Py

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Generalizing , MUx1/ Px1 = MUx2 / Px2 = ……= MUxn / Pxn 11/29/09

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Assumptions 0011 0010 1010 1101 0001 0100 1011

a) b) c) d) e) f) g)

Cardinal utility Independent utility Additive utility Constant marginal utility of money Diminishing marginal utility Rationality Introspective analysis

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Example Money Income = Rs37/-

Units

MU

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MUB

MUC

P P P =Rs =Rs5/unit =Rs3/unit 2/unit 1 2 3 4 5 6 11/29/09 7

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TU = Σ MUA + Σ MUB + Σ MUC 0011 0010 1010 1101 0001 0100 1011

= 890

= 100/5 = 60/3

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= 40/2 = 20

This is Consumer’s Equilibrium. 11/29/09

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So, MUA / PA = MUB / PB = MUC / PC = MU (Money)

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Equi marginal Utility And Law 0011 0010 1010 1101 0001 0100of 1011 Demand  Substitution effect : Income constant

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MUx fall

If price x fall

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Demand X increased Real income increased

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 Income Effect : 0011 0010 1010 1101 0001 0100 1011

Price constant

Income increased

Demand rises

Money income rise

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In case of normal goods +ve I.E + S.E = Law of demand 11/29/09

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a)

Use for managerial purposes Sales forecasting with sound base and greater

b) c) d) e) f) g) h) i) j)

Demand manipulation. Product planning. Product improvement. Determining sales quotas. Appraisal of performance. Pricing policy. Market share. Scope for expansion. Competitive position.

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