Unit-2 Law of Demand POE | BBA First year 2023

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Theory Of Demand, Law Of Demand

 Definition Theory Of Demand

• Demand theory is a theory concerned with the relationship between consumer demand for goods and services and their prices. Demand theory forms the basis of the demand curve, which links consumer desires to the quantity of goods available.  As a good or service becomes more available, demand decreases and the equilibrium price also decreases.
• Demand is the quantity of a good or service that consumers are willing and able to purchase at a certain price in a certain time period. People in an economy demand goods and services to satisfy their needs, such as food, health care, clothing, entertainment, shelter, etc.  The demand for a product at a certain price reflects the satisfaction that a person expects from consuming the product.  it level of satisfaction is called utility and varies from consumer to consumer.  The demand for a good or service depends on two factors:

2 Definition of Theory of Demand

1. Its usefulness in satisfying some want or need, and
2. The ability of the consumer to pay for the good or service. In fact, real demand occurs when the readiness to satisfy a desire is supported by the individual’s ability and willingness to pay.

• Underlying demand are factors such as consumer preferences, tastes, preferences, etc. Therefore, evaluating the demand in an economy is one of the most important decision-making variables that a business must analyze to survive and grow in the competitive market.  ,  The market system is governed by the laws of supply and demand, which determine the prices of goods and services.  When supply equals demand, prices are in equilibrium.  When demand exceeds supply, prices rise to reflect the shortage.  Conversely, when demand is less than supply, prices fall due to a surplus.

3 Definition of Theory of Demand

• The law of demand presents an inverse relationship between the price and demand of a good or service. It simply says that as the price of a good increases, the demand decreases, provided other factors remain constant.  Also, as the price decreases, demand increases.  This relationship can be depicted graphically using a tool called a demand curve.
• The demand curve has a negative slope as it charts downwards from left to right to reflect the inverse relationship between the price of a good and the quantity demanded over a period of time. Expansion or contraction of demand occurs as a result of income effect or substitution effect.  When the price of a good falls, a person can get the same level of satisfaction for less expenditure, provided it is a normal good.  In this case, the consumer can purchase more goods at a given budget.  This is the income effect.  The substitution effect is observed when consumers switch from more expensive goods to substitutes that have declined in price. From goods to substitutes whose price has declined.  As more people buy goods at lower prices, demand increases.

4 Definition of Theory of Demand

• Sometimes, consumers buy more or less of a good or service because of factors other than price. This is called change in demand.  Change in demand refers to a rightward or leftward shift in the demand curve following changes in consumers’ preferences, tastes, income, etc.  For example, a consumer who receives an increase in income at work will have more disposable income to spend.  For goods in markets, even if prices fall, the demand curve shifts to the right.
• The law of demand is violated when dealing with Giffen or inferior goods. Giffen goods are inferior goods that people consume more of when prices rise, and vice versa.  Since a Giffen good does not have readily available substitutes, the income effect dominates the substitution effect.
• Demand theory is one of the basic principles of microeconomics. Its purpose is to answer basic questions about how badly people want things, and how demand is affected by income level and satisfaction (utility).  Based on the perceived utility of goods and services by consumers, companies adjust the available supply and prices charged.

Law Of Demand

• The law of demand is one of the most basic concepts of economics. It works with the law of supply to explain how market economies allocate resources and set the prices of goods and services that we see in everyday transactions.  The law of demand states that the quantity purchased varies inversely with the price.  In other words, the higher the price, the lower the quantity demanded.  This happens due to diminishing marginal utility.  That is, consumers use the first units of an economic good they purchase to satisfy their most urgent needs first, and use each additional unit of the good to satisfy successively lower-value objectives.  .
• The law of demand is a fundamental principle of economics that states that consumers will demand less quantity of a good at a higher price.
  

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2Law Of Demand

• Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.
• The market demand curve expresses the sum of the quantity demanded by all consumers in the market at each price.
• Changes in price may be reflected in movement along the demand curve, but does not automatically increase or decrease demand.
• The size and quantity of demand changes in response to changes in consumer preferences, income, or related economic goods, not due to changes in price.

Understanding the Law of Demand

• Economics involves the study of how people use limited resources to satisfy unlimited wants. The law of demand focuses on those unlimited wants.  Naturally, people give priority to more immediate wants and needs over less urgent needs in their economic behavior, and this depends on how people choose among the limited resources available to them.  For any economic good, the first unit of that good that reaches a consumer is used to satisfy the consumer’s most urgent need that the good can satisfy.

For example

• consider a castaway on a desert island who finds a six-pack of bottled, fresh water washed up on shore. The first bottle would be used to meet the victim’s most immediately felt need, possibly drinking water to avoid dying of thirst.  The second bottle can be used for bathing to prevent illness, which is an urgent but less immediate need.   Potted to keep him company on the island

2For example

• In our example, because each additional bottle of water is used by us to satisfy an increasingly less valued want or need, we can say that the castaway values ​​each additional bottle less than before. Similarly, when consumers buy goods from the market then each additional unit of any good or service that they buy will be put to less valuable use than before, so we can say that they will consume each additional unit at least. Give less importance. Because they value each additional unit of the good less, they are willing to pay less for it. Therefore the more units good consumers buy, the less they are willing to pay in terms of price.

3For example

• Adding up all the units of a good that consumers are willing to buy at any price, We can describe a market demand curve that is always downward sloping, as shown in the chart below. Each point on the curve (A, B, C) represents the quantity demanded (Q) at a given price (P). For example, at point A, the quantity demanded is low (01) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

Factors Affecting Demand

• So what is the demand for change? The shape and position of the demand curve can be affected by many factors. Rising income increases the demand for general economic goods, as people are willing to spend more. The availability of close substitute products that compete with a given economic good will reduce the demand for that good, because They can satisfy the same types of consumer wants and needs.