Law of Demand - Managerial Economics

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Managerial EconomicsLaw Of Demand

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2 December 2016Law Of Demand Group 12New Delhi Institute of ManagementTughlakabad-New Delhi2016--2018Shikha Tyagi- 357Shivambi Mishra- 358Shubhanshi Mishra- 359Shubham Bhatia- 360Snehashish Mandal- 361Shweta Gahlot- 361

The Basic Decision-Making UnitsA firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economyAn entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful businessHouseholds are the consuming units in an economy2 December 2016Law Of Demand Group 13

The Circular Flow of Economic Activity

The circular flow of economic activity shows the connections between firms and households in input and output markets

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DemandDemand for a particular product or service represents how much people are willing to purchase at various prices. Demand is represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis

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Determinants of Household DemandThe price of the product in question.The income available to the household.The households amount of accumulated wealth.The prices of related products available to the household.The households tastes and preferences.The households expectations about future income, wealth, and prices.2 December 2016Law Of Demand Group 16

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Law OF DemandThe law of demand states, all other factors being constant, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa

The law of demandsays that the higher the price, the lower the quantity demanded, because consumersopportunity cost to acquire that good or service increases, and they must make more trade offs to acquire the more expensive product

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Cont..The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price.This means that demand curves slope downward.

Price2 December 2016Law Of Demand Group 18

The Demand CurveThe demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.

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Individual Consumers DemandQdX = f(PX, I, PY, T)Quantity demanded of commodity X by an individual per time periodPrice per unit of commodity XConsumers incomePrice of related (substitute or complementary) commodityTastes of the consumerQdX =

PX =I =PY =

T =2 December 2016Law Of Demand Group 110

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Household to Market DemandDemand for a good or service can be defined for an individual household, or for a group of households that make up a marketMarket demand is the sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service2 December 2016Law Of Demand Group 111

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Market Demand FunctionQDX = f(PX, N, I, PY, T)Quantity demanded of commodity XPrice per unit of commodity XNumber of consumers in the marketConsumer incomePrice of related (substitute or complementary) commodityConsumer tastesQDX =PX =N =I =PY =

T =2 December 2016Law Of Demand Group 112

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Market Demand CurveAssuming there are only two households in the market, market demand is derived as follows:

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Factors Affecting Demand Curve

Change in consumer real incomes- A consumer's demand for goods and services is limited by income, higher income levels allow the consumer to purchase more products, and the opposite occurs when a decrease in real incomeWhen the economy enters a recession and more people become unemployed, the demand for many goods and services shifts to the left

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Contd.Normal Goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower

Inferior Goods are goods for which demand falls when income rises2 December 2016Law Of Demand Group 115

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Contd.Substitutes are goods that can serve as replacements for one another; when the price of one increases, demand for the other goes up. Perfect substitutes are identical products.Complements are goods that go together; a decrease in the price of one results in an increase in demand for the other, and vice versa.2 December 2016Law Of Demand Group 116

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Shift of Demand V/S Movement Along a Demand CurveA change in demand is not the same as a change in quantity demanded.In this example, a higher price causes lower quantity demanded.Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.

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When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level.A Change in Demand V/S a Change in Quantity Demanded

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Contd..To summarize:Change in price of a good or service leads to

Change in quantity demanded(Movement along the curve).

Change in income, preferences, orprices of other goods or services leads to

Change in demand(Shift of curve).

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Thank You2 December 2016Law Of Demand Group 120

Sheet1ANNA'S DEMAND SCHEDULE FOR TELEPHONE CALLSPRICE (PER CALL)QUANTITY DEMANDED (CALLS PER MONTH)$0300.50253.5077.00310.00115.000

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