Market Forces of Demand And Supply : RAS Economics
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Baljit Dhaka

Market Forces of Demand And Supply : RAS Economics

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Market Forces of Demand And Supply : RAS Economics

Demand 

  • The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.

Law of Demand:

Other things equal (ceteris paribus), when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises.

Demand curve:

The downward-sloping line relating the price and quantity demanded is called the demand curve

Market Forces of Demand And Supply : RAS Economics

Market Demand vs Individual Demand 

  • Market Demand is the sum of all the individual demands for a particular good or service.
  • To find the quantity demanded at any price, we add the individual quantities found on the horizontal axis of the individual demand curves.
  • Market demand curve shows how the quantity demanded of a good varies as the price of the good varies, while all other factors are held constant.

Market Demand curve & Individual Demand curve

Market Forces of Demand And Supply : RAS Economics

Shifts In The Demand Curve 

  • Any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand.
  • Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand.

Market Forces of Demand And Supply : RAS Economics

Variables Affecting Shifts In The Demand Curve 

Income:

Normal goods:

  • A good for which, other things equal, an increase in income leads to an increase in demand.
  • For ex. if income of an individual increases, then his demand for ice cream will increase

Inferior goods:

  • A good for which, other things equal, an increase in income leads to a decrease in demand.
  • For ex., if income falls we will not try to buy a car and more likely to ride in a bus.

Price of related goods:

Substitute goods:

  • Two goods for which increase in the price of one will lead to an increase in the demand for another.
  • For ex., if the price of frozen yogurt rises, then people will demand less of yogurt and the demand for its nearest substitute i.e. ice cream will increase.

Complementary goods:

  • Two goods for which an increase in the price of one leads to a decrease in the demand for the other.
  • For ex. if the price of petrol increases, the demand of car will decrease.

Tastes and Preferences:

If an individual likes ice cream, then he will buy more of it.

Expectations:

If one expects to earn a higher income next month, then he may save less and spend more of his current income on buying any good he likes.

Number of buyers:

If there are more buyers, then demand of a good will increase and demand curve would shift to the right

Exceptions To The Law Of The Demand 

Giffen goods:

  • It is a good for which demand increases as the price increases, and falls when the price decreases.
  • It has an upward-sloping demand curve.
  • It is typically an Giffen product that does not have easily available substitutes.
  • Ex. Irish potato famine in the 19th century. During the famine, as the price of potatoes rose, impoverished consumers had little money left for more nutritious but expensive food items like meat (the income effect). So even though they would have preferred to buy more meat and fewer potatoes (the substitution effect), the lack of money led them to buy more potatoes and less meat. In this case income effect dominated the substitution effect, which is a characteristic of giffen good.

Natural calamities:

In the situations like flood and famine people usually stock up the goods to avoid any shortages even though there may be a price increase.

Latest fashion trends:

Latest products are bought by people even if they witness a price increase.

Anticipation of prices:

If consumers are expecting the prices to rise further then they will buy more in present to avoid buying at higher prices in the near future.

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