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INTRODUCATION TO MICRO ECONOMIC

MEANING OF MICRO ECONOMICS


THE TERM MICRO IS DERIVED FROM GREEK WORD MIKROS WHICH MEANS SMALL. IT IS CONCERNED MICROSCOPIC STUDY OF THE ECONOMY. SO MICRO ECONOMICS STUDIES ABOUT THE INDIVIDUAL ECONOMIC UNITS

THE STUDY OF MICRO ECONOMICS CAN BE PRESENTED WITH THE HELP OF FOLLOWING CHART MICRO-ECONOMIC THEORY

PRODUCT PRICING ECONOMIC

FACTOR PRICING (THEORY OF DISTRIBUTION)

THEORY OF WELFARE

[ THEORY OF THEORY OF SUPPLY DEMAND ] [ PRODUCTION & COST ]

RENT

WAGES

INTEREST PROFITS

DEFINITION : BY PROF KENNETH E BOULDING MICRO-ECONOMICS IS THE STUDY OF PARTICULARS FIRM, PARTICULAR HOUSEHOLD, INDIVIDUAL PRICES, WAGES, INCOME, INDIVIDUAL INDUSTRIES PARTICULAR COMMODITIES.

FEATURES OF MICRO ECONOMICS ( CHARACTERISTICS) 1) UNIT OF STUDY


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MICRO-ECONOMICS CONCERNED WITH THE MICROSCOPIC STUDY OF ECONOMIC BEHAVIOUR OF INDIVIDUAL UNITS. A) WHAT THEY BUY? B) WHY THEY BUY? C) HOW MUCH THEY BUY? D) FROM WHERE THEY BUY? E) HOW OFTEN THEY BUY? 2) METHOD WHAT IT REALLY DOES IS TO SLICE THE WHOLE INTO SMALLER INDIVIDUAL UNITS. SO ECONOMISTS POINT OUT THAT MICRO ECONOMICS USES THE SLICING METHOD FOR E.G. AN INDIVIDUAL, CONSUMER, A FIRM ETC. 3) SUBJECT MATTER IT CONCENTRATES MORE ON THE STUDY OF THE BEHAVIOUR OF INDIVIDUAL CONSUMPTION, INDIVIDUAL PRODUCTION OF A FIRM ABOUT ITS PRICING OF THE PRODUCT ETC. IT ALSO STUDIES ABOUT THE PRICING OF THE FACTORS OF PRODUCTION A) RENT FOR LAND B) WAGES FOR LABOUR C) INTEREST FOR CAPITAL D) PROFIT FOR ENTREPRENEURS

4) AREA OF STUDY THE MAIN AREA OF ITS STUDY IS THE THEORY OF PRODUCT AND FACTOR PRICING AND THEIR REACTION TO CHANGES IN DEMAND AND SUPPLY CONDITIONS. 5) PARTIAL EQUILIBRIUM ANALYSIS MICRO ECONOMICS IS BASED ON CETERIS PARIBUS ASSUMPTION [OTHER THINGS REMAIN THE SAME IS PARTIAL EQUILIBRIUM]

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IMPORTANCE OF MICRO ECONOMICS 1) IN FRAMING ECONOMIC POLICIES THE STUDY OF MICRO ECONOMIC IS HELP FUL IN FRAMING ECONOMIC POLICIES AND PROMOTING THE WELFARE OF THE MASSES 2) TO STUDY FREE MARKET ECONOMY MICRO ECONOMICS EXPLAINS IN DETAIL HOW THE FREE MARKET ECONOMY OPERATES. WHICH ARE BASED ON INDIVIDUALS BEHAVIOUR? 3) OPTIMUM ALLOCATION OF RESOURCES MICRO ECONOMICS THEORY PROVIDES USEFULL GUIDANCE TO INDIVIDUAL AND GOVERNMENT REGARDING HOW TO MAKE THE BEST USE OF LIMITED RESOURCES. 4) ECONOMIC FORCASTING MICRO ECONOMICS IS USEFUL IN FORECASTING DEMAND SALE ETC. 5) HELPFUL FOR OTHER BRANCHES OF ECONOMIC IT HELPS OTHER BRANCHES OF ECONOMICS LIKE INTERNATIONAL TRADE, PUBLIC FINANCE ETC. 6) BASIS FOR UNDERSTANDING MACRO THEORY MICRO ECONOMICS IS THE BASIS FOR UNDERSTANDING THE BEHAVIOUR OF MACRO.

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DISTINGUISH BETWEEN INDIVIDUAL PROBLEMS AND NATIONAL PROBLEM INDIVIDUAL PROBLEM 1 IT IS THE PROBLEM FACED BY THE INDIVIDUAL PERSON 2 IT IS MICRO ECONOMIC CONCEPT 3 THE DEGREE OF PROBLEM IS LESS NATIONAL PROBLEM IT IS THE PROBLEM FACED BY THE COUNTRY OR NATION IT IS THE MACRO ECONOMIC CONCEPT THE DEGREE OF PROBLEM IS LARGE 4 INDIVIDUAL PROBLEM IS SOLVED NATIONAL PROBLEM IS SOLVED BY THE FAMILY BUDGET. BY THE GOVERNMENT BUDGET. 5 E.G. A CHOICE OF A CONSUMER TO DECIDE BETWEEN MAKING HAVING RS. 10/- BETWEEN AN LAND AVAILABLE FOR ICE-CREAM AND A CHOCOLATE. AGRICULTURE OF SEZ.

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2. CONSUMERS BEHAVIOUR

INTRODUCTION
HUMAN WANTS ARE UNLIMITED. ALL WANTS CANNOT BE SATISFIED AT ONE POINT OF TIME. THIS IS BECAUSE LACK OF RESOURCES (INCOME) BUT WANTS CAN BE SATISFIED FULL WITH THE AVAILABLE RESOURCES, CONSUMERS TRY MAXIMIZE THEIR SATISFACTION THROUGH THE FULFILLMENT OF THEIR WANTS. I) II) LAW OF LDMU LAW OF EQUI-MARGINAL UTILITY

MEANING OF UTILITY
IN ECONOMIC CAPACITY OR POWER OF A COMMODITY TO SATISFY HUMAN WANTS IS CALLED UTILITY E.G. AIR, WATER, LAND, FOOD.

CHARACTERISTICS / FEATURE OF UTILITY 1) UTILITY IS A SUBJECTIVE FORM


UTILITY IS ASUBJECTIVE TERM BECAUSE IT DIFFERS FROM PERSON TO PERSON. EVERY PERSON HAS ITS OWN LIKES AND DISLIKES AND THEREFORE THERE IS A DIFFERENCE IN THE LEVEL OF SATISFACTION DERIVED FROM EACH COMMODITY E.G. (A) MEET GIVES UTILITY TO NON-VEGETARIAN BUT NOT TO VEGETRAIN (B) CINEMA GIVES US UTILITY BUT A BLIND MAN WILL NOT GET ANY UTILITY FROM IT.

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2) UTILITY IS A RELATIVE TERM


UTILITY IS A RELATIVE TERM BECAUSE . IT DIFFER FROM TIME TO TIME AND PLACE TO PLACE. THE COMMODITY MAY HAVE DIFFERENT UTILITY AT DIFFERENT TIMES, AT DIFFERENT PLACES. E.G (A) UMBERALLA HAS MORE UTILITY DURING RAINY SEASON BUT HAVE LESS UTILITY DURING OTHER SEASONS.

3) UTILITY DEPENDS UPON INTENSITY OF WANTS


UTILITY DEPENDS UPON THE INTENSITY OF WANT OF A PERSON E.G. (A) TO A THIRSTY PERSON THE GLASS OF WATER GIVES MORE UTILITY THEN TO A PERSON WHO IS NOT THIRSTY

4) UTILITY IS MULTIPURPOSE
A COMMODITY MAY HAVE THE CAPACITY TO SATISFY DIFFERENT WANTS E.G (A) MILK CAN BE USE FOR TEA, ICECREAM, SWEETS ETC

5) NEITHER VISIBLE NOR MEASURABLE


CAPACITY TO SATISFY A HUMAN WANT IS NEITHER VISIBLE NOR MEASURABLE IN TERMS OF NUMBERS. IT CAN ONLY BE FELT BECAUSE IT IS PSYCHOLOGICAL AND SUBJECTIVE.

6) NOT SAME AS PLEASURE


PLEASURE REFERS TO HAPPINESS WE GET FROM CONSUMPTION. CERTAIN COMMODITIES MAY HAVE UTILITY BUT ITS CONSUMPTION MAY NOT GIVE PLEASURE E.G. (A) BITTER MEDICINE DO HAVE UTILITY BUT ITS CONSUMPTION DOES
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NOT GIVE HIM PLEASURE.

7) NOT SAME AS USEFULLNESS


USEFULLNESS MEANS SOMETHING THAT IS BENEFICIAL . UTILITY IS DIFFERENT FROM USEFULLNESS. E.G. (A) CIGARETTE HAS UTILITY FOR A SMOKER BUT ITS CONSUMPTION IS HARMFUL FOR HIS HEALTH

8) NOT SAME AS SATISFACTION


UTILITY IS NOT SAME AS SATISFACTION EVERY COMMODITY HAS UTILITY BUT CONSUMERS GETS SATISFACTION AFTER CONSUMING THE COMMODITY E.G. (A) FOOD HAS UTILITY FOR A HUNGRY PERSON BUT SATISFACTION CAN ONLY BE DERIVED AFTER ITS CONSUMPTION.

9) BASIS OF DEMAND
USUALLY A PERSON BUYS A COMMODITY ONLY WHEN IT GIVES HIM UTILITY. THEREFORE UTILITY IS SAID TO BE THE BASIS OF DEMAND. HENCE THE LAW OF DEMAND IS BASED ON THE CONCEPT OF UTILITY

TYPES OF UTILITY
1) FORM UTILITY WHEN WE CHANGE THE FORM OR SHAPE OF COMMODITY ITS UTILITY INCREASES IT IS KNOWN AS FORM OF UTILITY. E.G. WHEN A SHIRT IS MADE FROM CLOTH 2) TIME UTILITY
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TIME UTILITY MEANS TO STORING OF GOODS OR COMMODITY BY SELLER AND SELLING THEM IN THE TIME OF NEEDS, IT IS KNOWN AS TIME UTILITY. E.G. UMBRELLAS HAVE MORE UTILITY DURING RAINY SEASON BUT HAS LESS UTILITY OR NO UTILITY DURING OTHER SEASONS. 3) PLACE UTILITY IT REFERS TO TRANSPORTING OF GOODS FROM PLACE OF PLENTING TO PLACE OF SCARCITY. E.G. APPLE ARE BROUGHT FROM KASHMIR TO MUMBAI 4) SERVICE UTILITY IT IS CREATED BY PROVIDING PERSONAL SERVICE DIRECTLY TO CONSUMER IS CALLED SERVICE UTILITY E.G. SERVICE OF DOCTOR, LAWERS, TEACHERS ETC. 5) POSSESSION UTILITY UTILITY IS CREATED BY TRANSFERRING THE OWNERSHIP OF GOODS. THIS IS CALLED POSSESSION UTILITY. E.G. WHEN THE SELLER SALES THE GOODS TO THE BUYER THE OWNERSHIP IS TRANSFERRED FROM SELLER TO BUYER. BUYER ENJOYS POSSESSION UTILITY. 6) KNOWLEDGE UTILITY IT CAN BE CREATED BY FILLING THE KNOWLEDGE GAP E.G. ALOEVERA CAN USED AS MEDICINE ONLY AFTER ITS MEDICAL BENEFITS.

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BASIC CONCEPT OF UTILITY


DEFINATION TOTAL UTILITY IS A SUM TOTAL UTILITIES DERIVED FROM ALL POSSIBLE UNITS OF A COMMODITY CONSUME BY A CONSUMER AT A POINT OF TIME.

TU IS THE ADDITIONAL OF MARGINAL UTILITY TUn = MUn+ MUn TUn = MU 1) MARGINAL UTILITY
MARGINAL UTILITY IS THE UTILITY DERIVED BY CONSUMING ONE EXTRA OR ADDITIONAL UNIT OF A COMMODITY.

MUn = TUn- TUn-1 THE LAW OF DIMINISHING MARGINAL UTILITY INTRODUCTION


THE LAW OF (DMU) IS EXPLAINED BY DR. ALFRED MARSHALL, A NEOCLASSICAL ECONOMIST TO EXPLAIN OUR DAY-TO-DAY BEHAVIOUR IN CONSUMPTION.

STATEMENT OF THE LAW


THE LAWS STATE THAT THE MORE WE HAVE AT A THING THE LESS WE WANT TO HAVE IT.

TU AND MU SCHEDULE
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UNITS OF MANGO 1 2 3 4 5 6

TU 10 18 22 23 23 20

TU 10 8 4 1 0 -3

OTHER THINGS BE EQUAL WITH THE INCREASE IN THE STOCK OF A COMMODITY ITS MARGINAL UTILITY DIMINISHES THE SCHEDULE SHOWS THAT AS THE CONSUMERS GOES ON CONSUMING MORE AND MORE UNITS OF A COMMODITY THE MARGINAL UTILITY GOES ON DIMINISHING THE SIXTH UNIT OF MANGO DOES NOT GIVE HIM ANY ADDITIONAL SATISFACTION . BECAUSE ITS MARGINAL UTILITY IS ZERO HE WILL NOT CONSUME THE SEVENTH UNIT EVEN IF IT IS AVAILABLE FREELY BECAUSE IT WILL GIVE HIM DIS UTILITY.

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EXPLAINATION TOTAL UTILITY TU IS MEASURED ON Y-AXIS AND UNITS OF MANGO IS MEASURED ON X-AXIS. WHEN TU AND MU ARE PLOTED ON THE GRAPH WE GET TU AND MU CURVED. 1) MU CURVED SLOPES DOWNWARD FROM LEFT TO RIGHT TOUCHES X-AXIS AND FURTHER SHOWS NEGATIVE UTILITIES. 2) TU CURVED SLOPED UPWARD FROM LEFT TO RIGHT REACHES ITS MAXIMUM AND THEN STARTS FOLLING POINT TO ZERO. MU OR MAXIMUM TU IS THE POINT OF MAXIMUM SATISFACTION FOR THE CONSUMERS. ASSUMPTION (CONDITION) 1) THE CONSUMERS CONSUMES. SINGLE UNITS OF A COMMODITY 2) ALL THE UNITS OF MANGO. ARE IDENTICAL OR HOMOGENIOUS (EQUAL)IN SHAPE, SIZE, COLOUR, FLAVOUR ETC.

CRITISM TO THE LAW OF DMU


1) THIS LAW IS BASED ON UNREALISTIC ASSUMPTION LIKE HOMOGENEITY, CONTINUITY, REASONABILITY, RATIONALITY ETC. 2) UTILITY CANNOT BE MEASURED IN CARDINAL NUMBERS. 3) IN CASE OF INDIVIDUAL COMMODITIES, LIKE CAR, WASHING MACHINE, TV ETC. A PERSON WOULD NOT BUY MORE THAN ONE AT A TIME. 4) THE LAW ASSUMED CONSTANTLY MARGINAL UTILITY OF MONEY BUT IT IS NOT TRUE. RICH HAD LOW MARGINAL UTILITY AND POOR HAD HIGH MARGINAL UTILITY

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5) THIS LAW IS APPLICABLE WHEN A PERSON SATISFY A SINGLE WANT AT A TIME. BUT IN REALITY A PERSON CONSUMES OR BUYS MORE THEN ONE COMMODITY AT A TIME. IMPORTANCE TO THE LAW OF (DMU) 1) THEORATICAL IMPORTANT A) UNIVERSAL TRUE B) MEASUREMENT OF UTILITY C) BASIS FOR OTHER ECO LAW D) PARADOX OF VALUE 2) PRATICAL IMPORTANT A) TO THE CONSUMERS B) TO THE PRODUCERS C) TO THE MONOPOLIST D) IN TAXATION E) IN WELFARE POLICYS

3. DEMAND ANALYSIS DEFINATION


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IN ECONOMIC (DEMAND IS DESIRE) BACKED BY ABILITY AND WILLINGNESS TO PURCHASE IN OTHER WORDS DEMAND = DESIRE + ABILITY TO PAY + WILLINGNESS TO PAY. FEATURES 1) DEMAND IS INVERSELY RELATED TO PRICE i.e WHEN PRICE , INCREASES DEMAND FALLS AND VISE-VERSA. 2) DEMAND IS EXPRESSED WITH REFERENCE TO PRICE AND TIME. 3) DEMAND MAY BE VIEWED EX-ANTE OR EX-POST i.e WHAT WE WISH TO BUY OR WHAT WE HAVE ALREADY PURCHASED. 4) DEMAND MAY BE DIRECT OR DERIVED. TYPES OF DEMAND 1) COMPLIMENTARY OR JOINT DEMAND WHEN DEMAND FOR ONE COMMODITY GIVE RISE TO DEMAND FOR ANOTHER COMMODITY AT THE SAME TIME, THERE IS SAID TO BE A JOINT DEMAND e.g. DEMAND FOR CAR AND PETROL, PEN AND INK,TOOTHBRUSH AND TOOTHPASTE etc. 2) COMPOSITE DEMAND WHEN ACOMMODITY IS DEMANDED FOR NUMBER OF USES THERE IS SAID TO BE COMPOSITE DEMAND. e.g COAL IS DEMANDED BY FACTORIES , RAILWAYS, HOUSEHOLDS etc. OR MILK IS USED FOR MAKING TEA, COFFEE, ICE-CREAMS, MILKSHAKES etc. 3) COMPETITIVE DEMAND WHEN TWO GOODS ARE CLOSE SUBSTITUTES OF EACH OTHER OR WHEN THE DEMAND FOR ONE COMMODITY COMPETES WITH ANOTHER, THERE IS SAID TO BE A COMPETITIOVE DEMAND e.g. WHETHER TO HAVE TEA OR COFFEE, PEPSI OR LIMCA ETC. 4) DERIVE DEMAND

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WHEN DEMAND FOR ONE COMMODITY GIVES RISE TO DEMAND FOR ANOTHER COMMMODITY INDIRECTLY THERE IS SAID TO BE DERIVED DEMAND. e.g. WHEN WOOD IS DEMANDED TO MAKE FURNITURE DEMAND FOR WOOD IS DERIVED DEMAND. INFACT, DEMAND FOR ALL FACTORS OF PRODUCTION IS DERIVED DEMAND. 5) DIRECT DEMAND WHEN GOODS AND SERVICES ARE DEMANDED TO SATISFY HUMAN WANTS DIRECTLY THRE IS SID TO BE DIRECT DEMAND. e.g. DEMAND FOR ALL CONSUMER GOODS IS DIRECT DEMAND. DETERMINANTS OF DEMAND / FACTORS DETERMINING DEMAND 1) PRICE MARKET DEMAND FOR A PRODUCT IS HIGH WHEN ITS PRICE IS LOW AND VISE-VERSA. 2) INCOME IT IS DIRECTLY RELATED TO DEMAND. IF INCOME RISES DEMAND IN GENERAL WILL ALSO RISE AND VISE-VERSA. 3) SIZE OF POPULATION LARGER THE SIZE OF POPULATION, GREATER WILL BE THE DEMANDED FOR ALL GOODS AND SERVICES. 4) TASTE A CHANGE IN TASTE ALSO CHANGES THE DEMAND FOR A PRODUCT. e.g. DEMAND FOR FAST FOOD HAS INCREASED IN RECENT YEARS. 5) FASHION IF A PRODUCT IS IN FASHION, DEMAND FOR THAT WILL INCREASE, EVEN IF THE PRICE IS HIGHER AND VISE-VERSA.
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6) ADVERTISEMENTS POWERFUL ADVERTISEMENTS CREATE DEMAND FOR A PRODUCT. e.g. CONSUMERS BUY NEW PRODUCTS LIKE SHAMPOOS, SOAP DUE TO ATTRACTIVE ADVERTISEMENTS. 7) WEATHER WEATHER ALSO AFFECTS DEMAND. e.g. RAINCOATS HAVE DEMAND ONLY IN RAINY SEASON OR MORE ICE CREAMS IN SUMMER. 8) MONEY CIRCULATION WHEN CIRCULATION OF MONEY IS MORE IN THE ECONOMY DUE TO LOWER RATE OF INTEREST, DEMAND FOR CONSUMER GOODS IN GENERAL WILL INCREASE . 9) COMPLIMENTARY GOODS IF GOODS ARE JOINTLY DEMANDED LIKE CAR AND PETROL, WHEN THE PRICE OF CAR RISES, DEMAND FOR CAR AND PETROL BOTH WILL FALL. 10) SUBSTITUTE GOODS IF A PRODUCT HAS SUBSTITUTES, FALL IN THE PRICE OF SUBSTITUTE GOODS AFFECT DEMAND. e.g . COLGATE OR CLOSE-UP. IF THE PRICE OF COLGATE FALLS THOSE WHO BUY COLGATE WILL BUY IT MORE AND THOSE WHO BUY CLOSE-UP WILL ALSO BUY COLGATE INSTEAD OF CLOSE-UP.SO DEMAND FOR COLGATE IN MARKET WILL RISE. 11)TECHNOLOGICAL PROGRESS WITH INVENTIONS AND RESEARCH, NEW PRODUCTS ARE INTRODUCED AND DEMAND FOR OLD PRODUCT FALL. e.g. WITH THE INTRODUCTION OF LCD TV, DEMAND FOR BIG MODELS OF TV IS FALLING. 12)FUTURE EXPECTATIONS

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IF PEOPLE EXPECT THE PRICE OF SUGAR TO RISE IN FUTURE, TODAY WITH LITTLE RISE IN PRICE ALSO,THEY WILL BUY MORE OF THAT. 13)CUSTOMS AND TRADITION CERTAIN COMMODITIES ARE DEMANDED IN THE MARKET DUE TO CUSTOMS AND TRADITIONS. SUCH DEMAND IS INELASTIC IN NATURE. e.g. DEMAND FOR CRACKERS DURING DIWALI FESTIVAL. 14)HABITS CERTAIN COMMODITIES ARE DEMANDED IN THE MARKET DUE TO HABITS OF PEOPLE. e.g. DEMAND FROM A DRUNKARD. LAW OF DEMAND THE LAW OF DEMAND IS BASED ON THE LAW OF DMU AND IT IS EXPLAINED BY DR . ALFRED MARSHALL . IT EXPLAINS GENERAL TENDENCY OF THE CONSUMERS REGARDING DEMAND AND PRICE OF COMMODITIES i.e. GENERALLY MOST OF THE PEOPLE DEMAND MORE WHEN PRICE IS LESS OR FALL AND DEMAND LESS WHEN PRICE RISE OR HIGHER. STATEMENT OF LAW ACCORDING TO ALFRED MARSHALL OTHER THINGS REMAINING EQUAL , THE HIGHER THE PRICE OF A COMMODITY THE SMALLER IS THE QUANTITY DEMANDED AND LOWER THE PRICE LARGER THE QUANTITY DEMANDED. IN OTHER WORDS, OTHER THINGS BEING EQUAL THE QUANTITY OF COMMODITY DEMANDED VARIES INVERSELY WITH THE PRICE.

MARKET DEMAND SCHEDULE PRICE IN RS DEMAND FOR WHEAT IN KG


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25 20 15 10 5

100 200 300 400 500

SCHEDULE EXPLANATION WHEN THE PRICE OF WHEAT IS RS. 25 PER KG 100 KG IS DEMANDED IN THE MARKET. WHEN THE PRICE FALLS TO RS 20 PER KG 200 KG IS DEMANDED. AND AS PRICE FALLS FURTHER, MORE IS DEMANDED. THIS SHOWS THE INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. MARKET DEMAND DIAGRAM

D
25 20 15 10 5

D
100 200 300 400 500

DIAGRAM EXPLANATION ON X AXIS WE MEASURE QUANTITY DEMANDED AND ON Y AXIS WE MEASURE PRICE. DD IS THE DEMAND CURVE WHICH SLOPES DOWNWARD FROM LEFT TO RIGHT SHOWING THE INVERSE RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. THIS MEANS THAT AT HIGHER PRICE LESS IS DEMANDED & AT LOWER PRICE MORE IS DEMANDED. HENCE , DEMAND CURVE SLOPES DOWNWARDS FROM LEFT TO RIGHT OR IT IS SAID TO HAVE NEGATIVE SLOPE.
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