ChapterTheory of Demand Q1.Define Law of Demand.Also Write Expectations or limitations. Ans. Part 1 Introduction This law states the relationship b/w Price & demand.It is inverse relationship b/w Price & Demand.Price inversely depends upon demand.As price increases,the demand decreases & viceversa.This relationship can be explained by the following equation: Dx = f(Px,P,Y,T,E,U Where, Dx = demand for commodity X , Px = price of commodity Y , P = price of related commodity, Y = Income of Consumer , T = Taste , E = Expectation ,U = Uncertainity etc Part 2 Definition "The amount demanded increases with fall in price and diminshes with rise in price" Marshall. Part 3 Assumptions 1.Income remains Constant :The income of the consumers does not change(constant) 2.Taste & Fashion remains constant : 3.Price remains constant : 4.Normal commodities : 5. Size of Population : 6.Perfect Knowledge : Part 4 Explanation Of The Law (i) Tabular Representation: As it clear from the table , As the price decreases ,the demand increases.When price is 5 than demand is 10 and when price is 4 then demand is 20 and so on. At the end when the price 1 then demand is 50. (ii)Graphical Representation:
As it clear from the graph, As the price diminshes the demend increases. Xaxis indicates the quantity demanded and Yaxis indicates the price of commodity.DD/ is the demand curve.At 'a' The price is 5 and quantity demanded is 1 and so on at 'b' 'c' 'd' 'e' pts.As the demand curve slopes downward. Part 5 Imortance to this Law 1.Importance in price determination : 2.Importance for consumers: 3.Importance for finance Minister: 4.Imortance for Planners: 5.Need for subsidies: Part 6 Exceptions/Limitations to this Law 'Robert Giffen' States the Exceptions of this law by giving "Giffen Paradox" These are the following: (i)War or Emergency: (ii)Articles of Distinction: (iii)Ignorance: (iv)Purchase in Anicipation: (v)Necessities of Life: Part 7 Conclusion In this above topic,We understood that price and demand are interelated to each other. With the help of "Law of demand",we come to know that price is a inverse function of demand with some exceptions.
Published on Jun 2, 2012