Demand Function:
As the quantity demanded of commodity X is a function of about eleven variables listed above, the function can be written as,
Qxd = f(Px,P1, Yd, U,Q,T,A . . . . etc)
Where, Px is price of X, P1 is price of substitute of X, Yd is disposable income of consumer, and U is utility etc.
As this is a complex functional relationship, we assume that all the other variables are held constant and establish relation between Price of X and Quantity demanded of X.
The Law of Demand
As stated above the law of demand assumes factors other than price of commodity remain constant.
The law states, “Other things remaining the same the quantity demanded of a commodity X is inversely related to its price.”
Demand schedule indicates different quantities of commodity X demanded at various prices. When these are plotted on a graph we get a demand curve as below. This curve slopes down from left to right indicating the inverse relationship.
As the quantity demanded of commodity X is a function of about eleven variables listed above, the function can be written as,
Qxd = f(Px,P1, Yd, U,Q,T,A . . . . etc)
Where, Px is price of X, P1 is price of substitute of X, Yd is disposable income of consumer, and U is utility etc.
As this is a complex functional relationship, we assume that all the other variables are held constant and establish relation between Price of X and Quantity demanded of X.
Or
Qxd = f(Px) where, P1 =P0; Yd =Yd0; U=U0; etc.
The Law of Demand
As stated above the law of demand assumes factors other than price of commodity remain constant.
The law states, “Other things remaining the same the quantity demanded of a commodity X is inversely related to its price.”
Demand schedule indicates different quantities of commodity X demanded at various prices. When these are plotted on a graph we get a demand curve as below. This curve slopes down from left to right indicating the inverse relationship.
Exceptions to the Law of Demand:
1. Expectations of further changes in prices and speculation.
When prices are rising, more quantities are demanded with the expectations that prices will rise further. This happens on Stock Exchanges.
2. Giffen’s Paradox.
In case of inferior good when the price falls, real income of consumer goes up and this increase is used to buy some other goods in stead of that inferior good [like bread]. This paradox is known as Giffen’s Paradox.
3. Qualitative Changes.
If the price is taken as a yardstick for quality, mere rise in price of a commodity may increase demand for it.
4. Price Illusions.
Consumer these days believes that higher the price better is the product, thus greater demand for it.
5. Display of Standard of Living.
Demonstration effect makes consumer buy high priced items like cars, jewelry to display his wealth.
1. Expectations of further changes in prices and speculation.
When prices are rising, more quantities are demanded with the expectations that prices will rise further. This happens on Stock Exchanges.
2. Giffen’s Paradox.
In case of inferior good when the price falls, real income of consumer goes up and this increase is used to buy some other goods in stead of that inferior good [like bread]. This paradox is known as Giffen’s Paradox.
3. Qualitative Changes.
If the price is taken as a yardstick for quality, mere rise in price of a commodity may increase demand for it.
4. Price Illusions.
Consumer these days believes that higher the price better is the product, thus greater demand for it.
5. Display of Standard of Living.
Demonstration effect makes consumer buy high priced items like cars, jewelry to display his wealth.
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