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Desire
Demand Need
Willingness to Want/
pay/ backed by Willingness
monetary power to Buy
: Individual Demand
Market Demand
Industry Demand
Quantity
Individual Demand Curve with
reservation price Rs200
Price
$200
1 Quantity
A Market demand Curve
Price Number of
Demanders
Rs300 10
Rs200 25
Rs300 35
Price
300
200
100
10 25 35 Quantity
Market demand
• For any price, market demand is sum of
quantities demanded by individuals.
Person 1 Person 2
Demand Curve Demand Market demand
Curve Curve
Price
Law Of Demand: Other things being the same, increase in
price of commodity decreases the demand of that commodity.
II. Income effect: When the price of a commodity falls, other things remaining
constant, then the real income of a consumer increases inducing him to buy more
quantities of the product.
Example: Price of sugar falls from Rs 50 to Rs 30 per kg. consumer buying one kg
a month will now be buying 1.5kg being the proportion of expenditure decreased
and letting the consumer to buy more quantities of sugar if he is willing to spend
the same budget of Rs 50.
III. Utility Maximizing behavior: Consumer continues to buy more quantities
of a product so long the marginal utility of money(MUM) is equal to marginal
utility of the commodity(MUX).
Example: MUX increases with the fall in price of commodity X. To bring
equilibrium in consumer utility, he will buy more quantities of X to bring down the
marginal Utility derived from X so long to bring its utility equal to MUM.
Exceptions To Law Of Demand
Some times, we find that with a fall in the price demand also falls and with
a rise in price demand also rises. These cases are referred to as exceptions
to the general law of demand. The demand curve in these cases will be an
upward sloping. Some of these exceptions are:
• Inferior goods/Giffen Goods:
Some goods are of lowest quality generally consumed by poor households &
are called inferior goods. In the case of these goods with the rise in its prices,
even then also its demand increases( income being constant) as the increased
price is much lesser than switching cost of inferior goods to superior goods.
Example: Price of Bajra increased from Rs 5/KG to Rs 6/KG & Price of Wheat
Rs10/KG. Poor consumer buying 20kg of Bajra & 10kg of Wheat @ the budget
of Rs 2000 will now be buying 25kg of Bajra & 5kg of Wheat to make the
budget constant.