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.