Economics For Executives Unit-II

Economics for Executives
Unit-II
Law of demand-meaning-definition-demand schedule and

demand curve-Exception to law of demand
Definitions:
“Demand for a commodity is the quantity which a consumer is willing to
buy at a particular price at a particular time.”
The demand arises out of the following three things:
i. Desire or want of the commodity.
ii. Ability to pay,
iii. Willingness to pay.
Only when all these three things are present then the consumer presents his
demand in the market
Demand Schedule:
The demand schedule in economics is a table of quantity demanded of a
good at different price levels. Given the price level, it is easy to determine
the expected quantity demanded. This demand schedule can be graphed as
a continuous demand curve on a chart where the Y-axis represents price
and the X-axis represents the quantity.
According to PROF. ALFRED MARSHALL, “Demand schedule is a list
of prices and quantities”. In other words, a tabular statement of price-
quantity relationship between two variables is known as the demand
schedule.
The demand schedule in the table represents different quantities of
commodities that are purchased at different prices during a certain
specified period (it can be a day or a week or a month).
The demand schedule can be classified into two categories:
1. Individual demand schedule;
2. Market demand schedule.
1. Individual Demand Schedule:
It represents the demand of an individual’ for a commodity at different
prices at a particular time period. The adjoining table 7.1 shows a demand
schedule for oranges on 7th July, 2009.
2. Market Demand Schedule:
Market Demand Schedule is defined as the quantities of a given
commodity which all consumers will buy at all possible prices at given
moment of time. In a market, there are several consumers, and each has a
different liking, taste, preference and income. Every consumer has a
different demand.
The market demand actually represents the demand of all the consumers
combined together. When a particular commodity has several brands or
types of commodities, the market demand schedule becomes very
complicated because of various factors. However, for a single item, the
market demand schedule is rather simple. Study the market demand
schedule for milk in table 7.2.
Demand Curves (Diagram):

The demand curve is a graphic statement or presentation of the
relationship between product price and the quantity of the product
demanded. It is drawn with price on the vertical axis of the graph and
quantity demanded on the horizontal axis.
Demand curve does not tell us the price. It only tells us how much quantity
of goods would be purchased by the consumer at various possible prices.
Depending upon the demand schedule, the demand curve can be as
follows:
1. Individual Demand Curve
2. Market Demand Curve
1. Individual Demand Curve:
An Individual Demand Curve is a graphical representation of the
quantities of a commodity that an individual (a particular consumer) stands
ready to take off the market at a given instant of time against different
prices. In Fig. 7.1, an Individual Demand Curve is drawn on the basis of
Individual Demand Schedule given above in table 7.1.
2. Market Demand Curve:

A Market Demand Curve is a graphical representation of the quantities of
a commodity which all the buyers in the market stand ready to take off at
all possible prices at a given moment of time. In Figure 7.2 a Market
Demand Curve is drawn on the basis of Market Demand Schedule given in
Table 7.2.
Both, the individual consumer’s demand curve is a straight line. A demand

curve will slope downward to the right.
It is not necessary, that the demand curve is a straight line. A demand
curve may be a convex curve or a concave curve. It may take any shape
provided it is negatively sloped.
Law of Demand:
The law of demand expresses functional relationship between price
and the quantity. It has been universally observed that people buy more
quantity of goods when, they are available at a lower price and the
quantity purchased declines with an increase in its price.
“A rise in the price of a commodity or service is followed by a fall in
quantity demanded, and a fall in price is followed by an increase in
quantity demanded”. Thus, lower the price, the larger is the quantity
demanded of a commodity and vice-versa.
The law thus, states that other things being equal the quantity demanded
varies inversely with price. Lower the price, greater is the effective
demand; higher the price; lesser is the effective demand.
Characteristics of Law of Demand:
The law of demand has three specific characteristics:
1. General Tendency,
2. Relation to Time, and
3. Price and Demand Relationship.
1. General Tendency:
The law simply indicates a general tendency of changes in quantity
demanded with the changes in prices. However, it does not mention any
specific propositions of changes in quantity demanded with changes in
prices.
2. Relation to Time:
The law of demand is always related to time, because the price changes
from time to time and these are never fixed. Thus, the co-relation between
the prices and the quantities demanded should be considered for a specific
time or at particular instant.
3. Price and Demand Relationship:
The increase or decrease in the prices does affect the quantity demanded at
a particular time. Thus, the change in the quantity demanded cannot be
considered without change in prices. It must, therefore, be noted that the
relationship between price and quantity demanded is relative.
Assumptions of Law of Demand:
i. The income of the consumer remains same during the period under
consideration.
ii. The prices of related goods remain unchanged during the period.
iii. The preferences and tastes of consumers must remain the same during
the period of consumption.
iv. The quality of similar goods available in the market is almost
unchanged.
v. During the period under study, it is presumed that prices are not likely
to change in near future.
vi. No substitutes for the commodity in question are available.
Exceptions to the Law of Demand:
There are certain exceptions to the law of demand. It means that under
certain circumstances, consumers buy more when the price of a
commodity rises and less when the price falls. In such case the demand
curve slopes upward from left to right i.e. demand curve has a positive
slope as is shown in Fig. 7.5. Many causes can be attributed to an upward
sloping demand curve.
1. Ignorance:
Sometimes consumers are fascinated with the high priced goods from the
idea of getting a superior quality. However, this may not be always true.
Superior/deceptive packing and high price deceive the people. This can be
called as ‘Ignorance effect’.
2. Speculative Effect:
When the price of a commodity goes up, people may buy larger quantity
than before, if they anticipate or speculate a further rise in its price. On the
other hand, when the price falls, people may not react immediately and
may still purchase the same quantity as before, waiting for another fall in
the price. In both the cases, the law of demand fails to operate. This is
known as speculative effect.
3. The Giffen Effect:
A fall in the price of inferior goods (Giffen Goods) tends to reduce its
demand and a rise in its price tends to extend its demand. This
phenomenon was first observed by SIR ROBERT GIFFEN, popularly
known as Giffen effect.
He observed that the working class families of U.K. were compelled to
curtail their consumption of meat in order to be able to spend more on
bread Mr. Giffen, British economist, observed that rise in the price of
bread caused the low paid British workers to buy more bread.
These workers lived mainly on the diet of bread, when price rose, as they
had to spend more for a given quantity of bread, they could not buy as
much meat as before. Bread still being comparatively cheaper was
substituted for meat even at its high price.
4. Fear of Shortage:
People may buy more of a commodity even at higher prices when they fear
of a shortage of that commodity in near future. This is contrary to the law
of demand. It may happen during times of war and inflation and mostly in
the case of goods which fall in the category of necessities of life like sugar,
kerosene oil, etc.
5. Prestigious Goods:
This is explained by Prof. Thorsfein Vebler Veblen. If consumers measure
the desirability of a good entirely by its price and not by its use, then they
buy more of a good at high price and less of a good at low price, Diamond,
Jewellery and big cars etc., are such prestigious goods. In their case
demand relates to consumers who use them as status symbol.
As their prices go up and become costlier, rich people think it is more
prestigious to have them. So they purchase more. On the other hand, when
their prices fall sharply, they buy less, as they are no more prestigious
goods. This is known as (Veblen effect) or (Demonstration effect).
6. Conspicuous Necessities:
Another exception occurs in use of such commodities as due to their
constant use, have become necessities of life. For example, inspite of the
fact that the prices of television sets, refrigerators, washing machines,
cooking gas, scooters, etc., have been continuously rising, their demand
does not show any tendency to fall. More or less same tendency can be
observed in case of most of other commodities that can be termed as
‘Upper-Sector Goods’.
7. Bandwagon Effect:
The consumer’s demand for a good may be affected by the tastes &
preferences of the social class to which he belongs. If purchasing diamond
becomes fashionable, then, as the price of diamond rises, rich people may
increase their demand for diamonds in order to show that they are rich.
8. Snob Effect:
People sometimes buy certain commodities like diamonds at high prices
not due to their intrinsic worth but for a different reason. The basic object
is to display their riches to the other members of the community to which
they themselves belong. This is known as Snob appeal.

Economics For Executives Unit-II

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Economics for Executives

Law of demand-meaning-definition-demand schedule and

Demand Curves (Diagram):

2. Market Demand Curve:

Both, the individual consumer’s demand curve is a straight line. A demand

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