Chapter 2

Inferior goods

- Are those goods the demand for which falls with increase in income of the consumers and increase with fall in income. - So there is an inverse relationship between the income of the consumer and the demand for inferior goods

Complementary goods

- Are those goods which are complementary to one another -They are used jointly or consumed together to satisfy a given want

Quality price relationship

- Consumers believes that high priced goods are of higher quality than low priced goods

The law of demand can be illustrated through

- Demand Schedule (numerically) - Demand Curve (graphically)

Demand cure and its derivation

- Demand curve is the graphical representation showing the relationship between the price of the commodity and quantity demanded.

Climate Factors

- Demand for different goods depends on the climatic factors because different goods are needed for different climate .

Two types of change in the quantity demanded

- Expansion (Extension) of demand -Contraction of demand

Expectations to law of demand

- Giffen goods - Articles of snob appeal -Expectation about future prices -Emergencies -Quality price relationship -Change in Fashion

Future prices

- If consumers expect a rise in the price of a commodity in the future, they will demand more amount of commodity today in-order to avoid buying at higher prices in the future.

Expectation about future prices

- If consumers expect a rise in the price of a commodity in the future, they will demand more amount of the commodity today in-order to avoid buying at a higher price in the future - On the other hand if the consumers expect the prices to fall in the future, they will postpone their purchase in order to buy at a lower price in future.

Income

- If consumers expect increase in their income, they will buy more commodities

Availability of goods

- If consumers expect scarcity of certain goods in the future expecting a fall in the production, the demand today will increase.

Distribution of Income

- If the distribution of income in the country is unequal, rich people will have larger purchasing power with them. Therefore there will be more demand for luxury goods. - If the income is evenly distributed there will be less demand for luxury goods and more demand for essential goods {Necessities}

Two types of demand curve

- Individual demand curve -Market demand curve

demand schedule is of two types :

- Individual demand schedule -Market demand schedule

Size and composition of population

- It determines the number of consumers. -If the size of the population is large, the demand for goods will be more and if the size of the population is small the demand for good will be less

Consumers taste and preferences

- It is the individual taste of consumers as measured by utility of various goods. - Consumers various taste and preference depends on lifestyle, fashion, habits. etc -Some of the factors like fashion keeps on changing leading to change in consumers taste and preference

Demand Function

- States the relationship between the demand for a product and its various determinate. - It gives functional relationship between the demand for a commodity and various factor affecting demand

Articles of snob Appeal

- The law of demand does not apply to those goods which are used to show off ones wealth and status in the society. - Thorstein Veblen -These goods are demanded because of the enjoyment the give to the possessor

Law of Demand

- The law of demand states that as the price increases the quantity demanded for a commodity decreases and as the price decreases the quantity demanded for a commodity increases.

demonstration effect

- The tendency of a person to emulate the consumption style of other person.

Assumption

- There should be no change in the income of the consumers - There should be no change in the tastes and preferences of the consumers - Prices of related commodities should remain unchanged - The commodity should be a normal commodity - There is no expectation of change in prices in future

Law of diminishing marginal utility

- This law states that as we consume more and more of a commodity, every additional unit gives lesser satisfaction. In other word, marginal utility of the commodity falls with an increase in the consumption.

Movement along the demand curve/change in quantity demanded

- When the amount demanded of a commodity changes as a result of change in its own price, while other determinants remain constant it is known as change in the quantity demanded.

Contraction of demand

- When the quantity demanded of a commodity falls due to the rise in its own price and other things remaining same.

Expansion ( extension ) of demand

- When the quantity demanded of a commodity rises due to the fall in its own price and other things remaining same .

derived demand

- demand for a commodity that arises because of the demand for some other commodity

market demand schedule

- is a table which shows various quantities of a commodity that all the consumers are willing to purchase at different prices during a given period.

individual demand

- refers to the amount of commodity that an individual consumer is willing to buy at various price over a given period of time

ex ante demand

- refers to the amount of goods that consumers want to or willing buy during a particular period of time

joint demand

- refers to the demand for two or more good which are used jointly or demanded together.

market demand

- refers to the total amount of commodity that all households are willing to buy at various prices over a give period of time

Relation between price and demand for related good

- substitute goods: the figure is represented by upward sloping curve showing the demand for tea varies directly with the price of the coffee - complementary goods: the figure is represented by downward sloping curve showing that an increase in price of petrol causes decrease in demand for cars.

Inexpensive goods

- the quantity purchased increases with increase in income up to a certain level and thereafter it remains constant irrespective of the level of income

Price of related goods

--The demand for a commodity is affected by the prices pf related goods. -If a change in the price of one particular good affects the demand for another good, these two good are related.

Income effect

-A change in demand on account of a change in the real income resulting from a change in the price of a commodity is known as income effect - The income effects occurs when the price change affects consumers purchasing power leading to the change in the quantity demanded

Increase in number of consumers

-A fall in the price of a commodity leads to an increase in the quantity demanded by existing consumers as well as those consumers who could not afford to buy at a higher price. Therefore there will be an increase in demand for the commodity leading to increase in consumers

Normal goods

-Are those goods the demand for which increases with increase in income of the consumers and decreases with the fall in income. -So there is a positive relation between the consumers income and the quantity demanded -goods which make our life more comfortable and enjoyable- as our income increases we can afford to purchase a large quantities of these goods -Eg- demand for cloths, foods

substitute goods

-Are those goods which satisfy the same type of need -Can be used in place of one another to satisfy a given want

Consumers expectations

-Consumers expectation with regard to future prices, income and availability of goods.

Price Demand

-Different quantities of a commodity which are purchased at different prices

Demand may decrease due to

-Fall in income -Fall in price of substitutes -Rise in the price of complements -Decrease in population

Income demanded

-Functional relationship between the demand for a commodity and the level of income

Government Policy

-If the government imposes taxes on various commodities the price of commodities will increase and as a result demand falls.

Giffen goods

-It is an inferior good on which consumers spend a large part of its income and the demand for which falls with the fall in the price.

Reasons for downward sloping demand curve

-Law of diminishing marginal utility -Income effect -Substitution effect -Increase in number of consumers -Several uses of a commodity

Three types of goods

-Normal goods -Inferior goods -Inexpensive necessities/goods

Example of Complementary goods

-Petrol and Car - An increase in the price of petrol causes the decrease in demand for petrol and also cause the decrease in demand for cars.

Composition of population

-Refers to the various factors like the number of children, adults, male, females etc in the population -Composition of population affects demand because the types of goods demanded by different people are different.

Demand may increase due to

-Rise in income -Rise in price of substitute goods -Fall in price of complements -Redistribution of income -Increase in population

Two types of related goods

-Substitute goods -Complementary goods

Example of substitute goods

-Tea and Coffee -If the price of the coffee increases, consumers will prefer tea over coffee because tea will be cheaper than coffee -So the demand for tea will increase whereas the demand for coffee will decrease - The demand for tea did not increase because of the fall in its price but due to the increase in price of the coffee

Emergencies

-The law of demand does not apply during emergencies like wars and epidemics, since consumers buys more even at higher prices due to shortage of supply.

Several uses of a commodity

-There are some goods which can be put to a number of uses. - The demand for commodities which have several uses like electricity will increase if the price falls since it can be put to many uses like cooking, washing, etc

Shift along the demand curve/ change in demand

-When the amount purchased of a commodity rises or falls because of the change in factors other than the own price of the commodity, it is called change in demand.

Decrease in demand

-When the demand decreases due to change in other factors with price remaining the same.

Increase in demand (Shifts to the right)

-When the demand increases due to change in other factors with price remaining the same.

Substitution effect

-When the quantity demanded of a commodity changes due to the change in the relative price of substitute goods.

individual demand schedule

-a schedule that shows various quantities of a commodity that would be purchased at different prices by an individual household or a consumer during a given period.

Economic good

-are those goods which have price because they are useful as well as it is scarce in availability

composite demand

-demand for goods that have multiple uses.

Types of Demand

-individual demand -market demand - ex ante demand -ex post demand -joint demand -derived demand -composite demand

determinants of demand-factors affecting demand

-price of a commodity -income of the consumers -consumers tastes and preferences -price of related goods -consumers expectation -consumers credit facilities -demonstration effect -size and composition of population -distribution of income -climate factors -government policy

Income of consumers

-quantity demanded of a product as it determines the purchasing power of the consumers. - There is a direct relationship between the income of the consumers and his demand for a product -With an increase in income, the demand for the commodity increases.

ex post demand

-refers to the amount of goods that the consumers actually purchased during a specific period.

Cross Demand- Cross price effect

-shows the functional relationship between the price of a commodity and the demand for some other related commodity

Consumers Credit facilities

If the consumers are able to get credit facilities pr they are able to borrow from the banks, it enables the consumers to purchase goods immediately and pay off the cost over time with interest.

price of a commodity

When the price of a commodity increases the demand for that commodity decreases, and when the price of a commodity decreases the demand for that commodity increases there for there is an inverse relation between the price of the commodity and its quantity

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded

Demand

the effective desire and the willingness to purchase something with the ability to pay for it during a particular period of time. -demand in economics is always at a price -demand is always expressed with reference to a particular period of time 3p: product price particular period of time