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Law of Demand & Limitations of Demand Phenomenon

Demand – Any want that comes under my purchasing power.

Law of Demand – Is one of the basic principles that define how consumer needs the product and the behavior of the consumer

Producers Equilibrium- Maximizing profit and reducing the cost of production

Interaction of buyer and seller is Market.

Law of Demand

Keeping other things constant except money. Quantity and demand are inversely related to each other.

Law of Diminishing Marginal Utility

Qd= 1/Mu or Qd = 1/p, Mu=p

This is how Law of Demand is explained by Law of diminishing Marginal Utility.

Law of Demand Phenomenon

(i)- Value Paradox – The value of paradox can be explained with the help of the Water Diamond Paradox.

Diamond is a scarce resource. Marginal Utility (Mu) is going to be higher (Mu=P). So the diamond is expensive whereas Water is plenty so the Mu is less & Price is less.

(ii). Law of demand drive from Mu concept

(iii). Understanding the Concept of Social Welfare – Small amount from rich and giving to the poor so that Marginal Utility (Mu) increases.

Limitations of Law of Demand Concept by Marshall

(i)- Cardinal Measurement

(ii)- Independent of Utility – Marshall told that commodities are independent of each other but it is false.

Ex – Use of pen (the use of pen depends on quality of paper, ink, etc)

(iii)- Marginal Utility of Money is constant – Surplus money, less Utility. Resource less utility of money is more.

Ex – 10000 Rs given to a boy who lives in a hostel for a month and he spends 9000 rs in the first 6 days. so the remaining days he has to manage in 1000 Rs due to which he will have to use his money wisely.

(iv)- Introspection – Everyone has different assumptions therefore it is also failed.

(v)- Number of Assumptions are more but the explanation are less.

Price Effect

The effect of price on quantity demanded.

Price Effect = income effect + Substitution effect

Substitution effect – Whenever we use a commodity at a lower price and it gives a substitute. Ex- if Cheap Light accessible to us, we will use induction and it will be a substitution of Gas.

Marshall was not able to tell the role of Income Effect + Substitution Effect.

Giffen Paradox

Giffen Pradox states that whenever the Quantity will increase the price will also increase.

Giffen Goods – Giffen Goods are a special category of inferior goods which are price positive and income negative (-ve)

Marshall didn’t able to explain giffen goods.

Category of Goods

  1. Inferior Goods
  2. Prestige Goods

Inferior Goods or Income negative Goods – When Income increases, the demand decreases.

Ex – if our income is less, we will use sunflower oil, and when our income increases we will start using Palm oil.

Special Inferior Goods – Quantity demand is directly proportional to the price.

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