Exceptions to the law of demand

1) Veblen Effect: The law of demand does not hold on goods that have a snob appeal or prestige value. Economist Veblen calls this as conspicuous consumption. Certain goods are demanded by rich people because of their social prestige.

2) Speculative Effect: It applies in stock market when people buy maximum stocks when the price is the lowest. Although it's a short term phenomenon.

3) Giffen Goods or Giffen paradox:  He poor people will buy more of inferior goods if there price rises and demand less if the price rises. In the 19 th century, in Ireland, Giffen observed that a major part of their income was spent on  potatoes ( inferior good). When the price of potato increased they reduced the purchase of meat to continue buying the same amount of potato.

4) Scarcity, inflation, price delusion...  etc: Expectation of price to increase in the future, buyers will buy more at higher price .

Types of Demand

There are three types of demand 1) price demand 2); Income demand 3) cross demand.

1) Price demand refers to various quantities of a commodity that a consumer buys  at a given point of time at different prices in a

 market.it is assume that other things like income of the consumer, prices of other related goods etc. remain the same. 

2) income demand refers to different quantities of commodity on service which consumer will be at different levels of income other things remaining the same. Income demand changes with the change in the nature of the commodity . For normal goods the income demand will be positive meaning thereby when the income increases people buy more of these goods. For inferior goods the slope will be negative, which means as income increases people buy less of these goods.

3) Cross demand refers tothe quantities of the commodities or service which would be purchased with reference to change in not of that particular commodity but of other inter- related commodities other things remaining the same. For eg. Quantity Demanded for tea changes when price of coffee changes .(substitute goods). Likewise if the price of pen increases then the quantity demanded for ink also falls ( complementary goods).

Negative slope of the demand curve.

Why is the demand curve downward sloping?

 The demand curve is downward sloping because of two effects;

 1) Income effect  and 2) Substitution effect 

1) Income effect is because of a fall in the price of a commodity, there is a  rise  in the real income of the  consumers. As his real income increases he can buy the same good or other goods from the same income. Likewise when the price of the commodity increases his real income falls and therefore the consumer purchases less commodities. 

2 . Substitution effect:  Likewise when the price of a commodity falls but the price of its substitutes does not fall, then the commodity becomes more attractive for the consumer and there is an extension in its demand.

Law of demand

Law of demand :

 Under the same conditions of demand, the quantity of a commodity bought tends to vary e inversely with its price.  At  a higher price less of the commodity would be purchased and at a lower price more of it will be bought, provided  the conditions of demand remain unchanged.

Assumptions of the law are :

People's income, taste, prices of other related goods remain unchanged. No substitute of the commodity being consumed, no expectations of future increase in price.......

Meaning of Demand

The demand for any commodity at a given price is the the quantity of it which will be bought per unit of time at that price. Two things become important first is the price of the commodity and second is the importance of time element in the concept of demand.

Demand function : it shows the functional relationship between two variables i.e. price of the commodity and the physical quantity demanded.

Dx=f(Px)

Law of diminishing marginal utility

Law of Diminishing Marginal Utility.

In the words of Boulding , " As a consumer increases the consumption of any commodity keeping constant the consumption of all other commodities, Marginal Utility of the variable commodity must eventually decline." 

In other words ,as more and more of a commodity is consumed, at a given point of time, its utility starts diminishing.

Total Utility and Marginal Utility

Total Utility is the amount of utility derived from the consumption of all the units of the commodity at the disposal of the consumer.

Marginal Utility is the utility of an additional or extra unit or change in total Utility due to consumption of one extra unit.

Types of Utility

Cardinal Utility: 

It gives numbers 1,2,3,.... It assumes that utility can be measured and utility from the two  i commodities can be compared. For eg. Let's take two commodities orange and apple. Orange gives utility of 20 units where as apple gives utility of 10 units. Orange is giving 2 X  more utility as compared to apples.

Ordinal Utility: 

The consumer gives order or rank to the utility. It does not give numbers but order, for eg , 1st, 2nd,3rd........etc. It gives the preference of the consumer when he ranks commodities according to the utility derived.

Utility Analysis

Cardinal Utility: 

It gives numbers 1,2,3,.... It assumes that utility can be measured and utility from the two  i commodities can be compared. For eg. Let's take two commodities orange and apple. Orange gives utility of 20 units where as apple gives utility of 10 units. Orange is giving 2 X  more utility as compared to apples.

Ordinal Utility: 

The consumer gives order or rank to the utility. It does not give numbers but order, for eg , 1st, 2nd,3rd........etc. It gives the preference of the consumer when he ranks commodities according to the utility derived .

Concept of Utility.

Utility : means the power of a commodity or service to satisfy a human want. It relates to inner sentiments. It is a subjective concept.

Difference between utility and satisfaction.

Utility is expected satisfaction whereas satisfaction is realised satisfaction. Utility is before consuming a commodity or service while satisfaction is after.

Methodology in Economics

Inductive Method: relates to the historical School. For analysis of economic problem this method follows the practical approach. It uses experiments and statistical tools for analysis This method bridges the gap between theory and practice.

Deductive Method: This method has a very abstract approach towards analysis of economic problems. Inferences are drawn  starting from indisputable human behaviour.

Concept of Equilibrium.

Equilibrium is an important part of Economics also known as Equilibrium Analysis. It signifies a state of rest or balance. Equilibrium , in Economics, means as professor, JK Mehta says "equilibrium denotes in economics, absence of change in movement while in physical sciences it denotes absence of movement  itself.

 Stable, unstable and neutral equilibrium.

 Equilibrium can be stable neutral and unstable. As professor AC Pigou summarised ;"a system is in stable equilibrium if when any small disturbance takes place forces come into play to re-establish the initial position.

 It is Neutral equilibrium, if when such a disturbance takes place, no re-establishing forces but it also know for the disturbing forces are evolved, so that the system remains at rest in the position to which it has moved; and it is unstable equilibrium if the small disturbance calls out for the disturbing forces which act in a cumulative manner to drive the system from its initial position". 

Approaches to Economics

Approaches to economics:

Micro and macro economics

1) Micro economics : Micro means a millionth part. It is defined as that branch of economic analysis which studies the economic behaviour of an individual unit maybe a person, a particular household or a specific firm. It is the study of one /single/ particular unit than all the units combined together. It gives a worm view of the entire economy.

2) Macro economics: it is that branch of economic analysis which studies the behaviour of not one particular unit but all the units combined together. It is a study of 'aggregates'.

A brief note on the classification of definitions in Economics.

A brief understanding of the plethora of definitions given by the economists-

1) Wealth definition : it was considered to be a study of people who were engaged in the production and consumption of wealth. It unfortunately was viewed in a very narrow sense because it seemed to exclude people not engaged in wealth creation activity. So this definition was rejected by the end of 19th century.

2) Welfare definition : focus shifted from wealth to welfare wealth was not the end but a means to attain welfare. Marshall who was the first economist who shifted the focus from wealth to welfare this definition was also criticized for being rigid as it talked only of humans coma more in nature rather than analytical.

3) Scarcity definition: marshalls definition seemed to be accepted largely until Robins came up with the new concept of scarcity which are billed to many thinkers as more real and logical. He studies human behaviour in relationship between ends and scares means, having alternative uses. he highlighted the concept of cost and choice as the basis of the study of Economics.

4) Growth definition: scarcity definition was also criticized for being static in nature. Also mention give the most popular definition of growth in economics which was widely accepted the great merit of examinations definition is is that he takes into consideration the dynamic changes taking place both in the means as well as the end with respect to time.

Introduction to Economics

My blog, Fundamentals of Economics, aims to help students understand the complex and abstract concepts, theories and models in Economics. As the subject is very comprehensive, therefore the scope of elaboration increases.The blog will be using real life examples to help you understand the key concepts of Economics.

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DEFINITION OF ECONOMICS

Economics as a science was born in 1776, with Adam Smith's magnum opus- An Inquiry into the nature and causes of Wealth of Nations. Economics was derived from the Greek words 'Oikos' (a house) and  'nemein' ( to manage) which meant, managing a household with the limited available resources in the best possible manner. 

There are are there are are plenty of definitions of Economics but broadly they can be classified into four groups;

1) Wealth,

2) Welfare,

3) Scarcity and

4) Growth.