E-LESSON-2 MICRO ECONOMICS

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BBA/BCOM 2 All right are reserved with CU-IDOL Microeconomics Course Code: BBA103/BCM103 Semester: First e-Lesson: 2 SLM Unit: 2 www.cuidol.in Unit-2(BBA103/BCM103)

WHAT IS DEMAND??? 3 Demand refers to the quantity of the commodity which the consumer is willing to buy at a particular price during a particular time period. Desire to have a Rolex, but do not have enough money – wishful thinking In spite of having the money you do not want to spend on Rolex – Want Your desire to have a Rolex with the ability and willingness to pay for it combined together will be - Demand www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

WHAT IS DEMAND??? 4 Demand for a commodity refers to the quantity of the commodity which an individual household is willing and able to purchase per unit of time at a particular price. Demand for a commodity implies: 1. Desire to acquire it, 2. Willingness to pay for it, 3. Ability to pay for it. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

FACTORS DETERMINING DEMAND & 5 DEMAND FUNCTION • Dx = f (Px, PR,Y, T, E) Dx = Demand for commodity X Px = Price of commodity X PR= Price of related goods (Substitute and Complementary) Y = Income of the consumers T = Taste and preference E = Expectations of the buyers www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

The impact of these determinants 6 on demand is:  Price effect on demand: Demand for x is inversely related to its own price.  Substitution effect on demand: If y is a substitute of x, then as price of y increases, demand for x also increases. For example, tea and coffee, cold drinks and juice etc. are substitutes.  Complementary effect on demand: If z is a complement of x, then as the price of z falls, the demand for z goes up and thus the demand for x also tends to rise. For example, ink and pen, bread and butter etc. are complements  Price expectation effect on demand: Here the relation may not be defi nite as the psychology of the consumer comes into play. Your expectations of a price increase might be different from your friends’.  Income effect on demand: As income rises, consumers buy more of normal goods (positive effect) and less of inferior goods (negative effect). Examples of normal goods are t-shirts, tea, sugar, noodles, watches etc. and examples of inferior goods are low quality rice, jowar, second hand goods etc.  Promotional effect on demand: Advertisement increases the sale of a fi rm up to a point www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

DEMAND AND PRICES OF 7 OTHER GOODS Substitute Goods: These are those goods Complementary Goods: They are those goods which are an alternative to one another in which are jointly used or consumed together to consumption eg. Tea or coffee, Pepsi or Coca satisfy a want eg. Tea and sugar, bread and cola butter, A fall in the price of substitute good say Y, A fall in the price of complementary good say Y, leads to a fall in the quantity demanded of leads to a rise in the quantity demanded of good good X and vice versa X and vice versa Demand and Income of the consumer If X is a Normal Good, then with the increase in the income, consumer buys more of the good. It has positive income effect. If X is an Inferior Good, then with the increase n the income, consumer buys less of the good. Eg. Coarse Grains. It has negative income effect. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

The Law of Demand 8 The law of demand expresses a relationship between the quantity demanded and its price. It may be defined in Marshall’s words as “the amount demanded increases with a fall in price, and diminishes with a rise in price.” Thus it expresses an inverse relation between price and demand. The law refers to the direction in which quantity demanded changes with a change in price. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

LAW OF DEMAND 9 There is an inverse relationship between the price of a commodity and the quantity demanded of that commodity. Dx = f (Px) where, Dx = quantity demanded of good X Px = price of the good X As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises. Price Quantity www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

ASSUMPTIONS OF 10 THE LAW OF DEMAND  Price of related goods is constant  The income of the consumers remain unchanged.  Consumers tastes and preferences remains same.  Expectations of the customers is constant  Number of population remains same.  All the units of the goods are homogenous.  Commodity should be normal good. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

DEMAND CURVE 11 Downward Slopping Demand Curve It’s a graphical representation of the demand schedule showing the different quantities of a good that the consumers are willing to pay at different levels of prices during a given period of time. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

Law of Diminishing Marginal 12 Utility According to this law, when a consumer buys more units of a commodity, the marginal utility of that commodity continues to decline. Therefore, the consumer will buy more units of that commodity only when its price falls. When less units are available, utility will be high and the consumer will be prepared to pay more for the commodity. This proves that the demand will be more at a lower price and it will be less at a higher price. That is why the demand curve is downward sloping. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

WHY DEMAND CURVE ALWAYS 13 SLOPES DOWNWARDS? New Consumers Creating Demand As price of a commodity falls, a new consumer class appears who can now afford the good. Thus, the demand increases. Different Uses With the fall in the price of a good, it is put to various uses and demand for that commodity increases and vice versa. Eg. Milk can be used for making butter, cheese, curd and drinking purposes etc. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

EXCEPTIONS TO 14 THE LAW OF DEMAND  Expectation of price rise in future If the price of a commodity rises and the consumer expects further rise in price, it leads to an increase in the demand for that commodity and vice versa. Eg. Shares.  Demonstration Effect: If people are buying the goods by imitating the consumption pattern of the higher income group – the demand will be higher even at higher price.  Emergency In case of emergency like war, drought or famine, the law of demand does not hold. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

SUMMARY 15  Demand for any commodity implies: desire to acquire it, willingness to pay for it, ability to pay for it and at a particular time. Demand depends on not only the price of a commodity, but also income, price of related goods – both substitutes and complements – taste of consumer, price expectation and all other factors.  Law of Demand:- there is an inverse relationship between the price of a commodity and the quantity demanded (other things remaining equal)  Changing demand curve-A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL www.cuidol.in

Multiple Choice Questions 16 1. The law of demand states that an increase in the price of a good: a. Increases the supply of that good. b. Decreases the quantity demanded for that good. c. Increases the quantity supplied of that good. d. None of these answers. 2. Demand for a product should have the following pre-requisite a. Ability to buy b. Willingness c. Need d. All of these 3. A single point on the demand curve shows a. Demand and supply relationship b. Price and supply relationship c. Price and demand relationship d. None of these Answers: 1.b. 2. d. 3. c. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

FAQ’S 17 Q.1 Define law of demand? Ans:-The law 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. Q.2 . What are Substitute Goods? Ans: These are those goods which are an alternative to one another in consumption eg. Tea or coffee, Pepsi or Coca cola. Q3.What are Complementary Goods ? Ans :They are those goods which are jointly used or consumed together to satisfy a want eg. Tea and sugar, bread and butter. Q4. Why does Demand Curve Slope Downward? Ans:- Price has an inverse relationship with demand leads the demand curve to slope downwards. www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

REFERENCES 18 1. Dwivedi D.N. , Managerial Economic, Vikas Publications, New Delhi. 2. Mithani D.M. , Managerial Economics Theory and Applications, Himalaya Publication, Mumbai. 3. https://economictimes.indiatimes.com/definition/law-of-demand 4. http://www.economicsdiscussion.net/law-of-demand/the-law-of-demand-with-diagram/21903 www.cuidol.in Unit-2(BBA103/BCM103) All right are reserved with CU-IDOL

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