Law Of Demand Theory

And
Equi-marginal Utility
Approach

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2
Presented by:

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0011 0010 1010 1101 0001 0100 1011 Adrita Nath
Ashwini
Kumar
Rohit
Kishore
Shritama
Sarkar
11/02/21 group 2 sec c Upasana Roy
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 Contents
 Why demand ?
0 0 1
1 0 What
0 1 0 1 0 1is
0 1demand
1 0 1 0 0 0 1 0?1 0 0 1 0 1 1
 Determinants of demand.
 The law of Demand.

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 Demand Schedule.
 Demand curve.

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4
 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.
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 The law of equi marginal utility.

 Utility schedule.

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2
 About the law.

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 Example.
 Assumptions.
 Equi marginal utility and law of demand.
 Use for managerial purposes.

11/02/21 group 2 sec c 3

 Why Demand ?
NEED
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SATISFACTION

2
WANTS

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PURCHASE

DEMAND

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 What is Demand ?
“ When the desire for a commodity is backed by the
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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

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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.
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2.Income and wealth distribution.
3.Tastes, habits and preferences.

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4.Relative prices of other goods

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 Substitute products.

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 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
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“Other factors remaining same (habits, tastes etc.) as

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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.”

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

1
2
5 100

4
4 200
3 300
2 400
1 500

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 Demand Curve
D
P1 - old price
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0 11 0 0 1 0 1 1
P1
P2 - new price

2
P2 E2 Q1 – old quantity

1
Price(P demanded
) D

4
Q2 – new quantity
0 Q1 Q2 demanded
Quantity demanded
DD – demand curve
(Q)

A Linear Demand Curve

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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 Non - linear

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 Assumptions (Other things)
a) No change in consumer’s income.
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b) No change in consumer’s preferences.
c) No change in the fashion.

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d) No change in the price of related goods :
 Substitute goods.
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 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…
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h) No change in the distribution of income and wealth.
i) No change in the government policy.

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j) No change in weather conditions.

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 Exceptions To The Law
a) Giffen goods.
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b) Articles of snob appeal.
c) Speculation.

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d) Consumer psychological bias or illusion.
D
1
4
P2
Upward sloping
Price P1
demand curve
D
Q1 Q2

Quantity demanded
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 Movement along the curve
OR
Change in quantity demanded
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 Extension of demand /Increase in quantity

demanded:

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‘ With a decrease in price, there is increase in the

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quantity D demand of the product’.
E
P1
Price E`
P2

Q1 Q2

11/02/21
Quantity demanded
group 2 sec c 14
  Contraction of demand /Decrease in quantity
demanded:
‘ With a increase in price, there is a decrease in
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quantity demanded’.’

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2
E`

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P2

Price P 1
E

Q2 Q1

Quantity
demanded
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 Movement of Demand Curve
OR
Change
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in demand
 Increase in demand:

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

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4
D` D`
D D
b
P2
a b
P1 Price
Pric P1 a D`
e D`
D D

Q1 Q2 Q1
11/02/21 group 2 sec c Quantity demanded 16
Quantity demanded
  Decrease in demand :
a) Less quantity demanded ---- at same price.
0 0 1 1 0 0 1 0 1 0 1 0 1 1 0b)
1 0 0Same
0 1 0 1 0 0quantity
1011 demanded ---- lower price.

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D

1
D` D`

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b
P1
Price
a b Price D
P1
D a
P2
D` D`

Q2 Q1 Q1
Quantity demanded Quantity demanded

11/02/21 group 2 sec c 17

 Factors And Effects of Change
(increase or decrease) in demand
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a) Change in income :

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2
Increase D
Decrease
D`

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D`
Price
Price D

D
D D` D`

Quantity Quantity
demanded demanded
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 b) Change in taste, habit and preference :
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Positive D Negative
D`

2
D`

1
D
Price

4
Price

D` D
D D`

Quantity demanded Quantity

demanded

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 c) Change in fashion and customs :

0 0 1 1 0 0 1 0 1 0 1 0 1 1 0 Favorable
1 0001 0100 1011 Unfavorable
D
D`

2
D`

1
D
Price Price

4
D` D
D D`

Quantity Quantity
demanded demanded

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 d) Change in distribution of wealth :

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Fiscal measures Fiscal measures
(welfare) D (particular)
D`

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2
D`
Price D Price

4
D
D` D`
D

Quantity Quantity
demanded demanded

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 e) Change in substitutes :

0 0 1 1 0 0 1 0 1 0 1 0Increase
1 1 0 1 0 0 0in
1 0price
1 0 0 1 0of
11 Decrease in price of
substitute goods D substitute goods
D`

1
2
D Pric D`
Pric
e

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e

D` D
D D`

Quantity demanded Quantity demanded

Ptea Dtea : Pcoffee Dcoffee Ptea Dtea : Pcoffee Dcoffee

11/02/21 group 2 sec c 22
 f) Change in demand of complementary
goods :
Decrease in price Increase in price
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D
D`

2
Price Price D`

1
D

4
D` D
D`
D

Quantity demanded Quantity demanded

Pcar Dcar : Ppetrol Dpetrol Pcar Dcar : Ppetrol Dpetrol

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 g) Change in population :
0 0 1 1 0 0 1 0 1 0 1 0 1 1 0 1Increase
0001 0100 1011 Decrease
D
D`

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2
D`
D Price

4
Price
D`
D
D D`

Quantity demanded Quantity demanded

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 h) Advertisement and publicity persuasion :

0 0 1 1 0 0 1 0 1 0 1 0 1 1 Aggressive
01 0001 0100 1011 Docile
D
D`

2
Price D`

1
D
Price

4
D` D
D D`

Quantity demanded Quantity demanded

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 i) Change in value of money :
Inflationary
0 0 1 1 0 0 1 0 1 0 1 0 1 1 0Deflationary
1 0001 0100 1011
D
D`

2
D`

1
Price
Price D

4
D`
D

D D`

Quantity demanded Quantity demanded

( Value of ( Value of
11/02/21 money ) group 2 sec c money ) 26
 j) Change in level of taxation :
High
0 0 1 1 0 0 1 0 1 0 1 0 1 1 0 1 0 Low
001 0100 1011
D
D`

2
Price

1
Price D D`

4
D` D

D D`

Quantity demanded Quantity demanded

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 k) Expectation of future changes in prices :

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Rise D Fall
D`

2
Price D`

1
Price D

4
D
D`
D`
D

Quantity demanded Quantity demanded

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 Law of Equi marginal Utility
 Utility :
0 0 1 1 0 0 1 0‘ 1The
0 1 0 satisfaction
1 1 0 1 0 0 0 1 0 1 0that
0 1 0 1a1consumer gets by having or
consuming goods or services is called utility’.

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 Total Utility (TU) :

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‘ 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
11/02/21 group 2 sec c 29
 Utility Schedule
0 0 1 1 Units
0 0 1 0 1of
0 1goods
0 1 1 0 1 (n)
0001 0100 1011 TUn MUn= (∆TUn /
∆Qn)
0 0 -

1
2
1 9 9

4
2 16 7
3 21 5
4 24 3
5 25 1
6 24 -1
7 21 -3
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 About The Law
‘ A consumer maximizes his total utility by allocating his
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income among goods and services ( including savings )
available to him in such a way that the marginal utility

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

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 Assumptions
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a) Cardinal utility
b) Independent utility

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c) Additive utility

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d) Constant marginal utility of money
e) Diminishing marginal utility
f) Rationality
g) Introspective analysis

11/02/21 group 2 sec c 32

 Example
Money Income = Rs37/-
Units MU
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A MUB MUC
P =Rs5/unit P =Rs3/unit P =Rs

2
2/unit

1
1 120 100 50

4
2 100 90 48
3 80 80 46
4 60 70 44
5 40 60 42
6 20 50 40
11/02/217 0 group 2 sec c40 38 33
 TU = Σ MUA + Σ MUB + Σ MUC
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= 890

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

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= 100/5 = 60/3 = 40/2 = 20

This is Consumer’s Equilibrium.

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 Equi marginal Utility
And
0 0 1 1 0 0 1 0 1 0 1 0 1 1 0 1 0 0 Law
0 1 0 1 0 0 1 of
0 1 1 Demand

 Substitution effect :

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Income constant If price x fall MUx fall

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Demand X increased

group 2 sec c 4
Real income increased

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  Income Effect :
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Price constant Income increased

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Demand rises Money income rise

In case of normal goods

+ve I.E + S.E = Law of
demand
11/02/21 group 2 sec c 36
 Use for managerial purposes
a) Sales forecasting with sound base and greater
accuracy.
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b) Demand manipulation.

2
c) Product planning.

1
d) Product improvement.

4
e) Determining sales quotas.
f) Appraisal of performance.
g) Pricing policy.
h) Market share.
i) Scope for expansion.
j) Competitive position.
11/02/21 group 2 sec c 37
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