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    MICROECONOMICS Notes

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    MICROECONOMICS Notes

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    1 views3 pages

    MICROECONOMICS Notes

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    shivam270902

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    © All Rights Reserved
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    MICROECONOMICS

    Law of Demand
    Key points of the law of demand include:

    1. Inverse Relationship: There is an inverse relationship between price and quantity demanded.

    2. Ceteris Paribus: The law of demand holds true when all other factors affecting demand (such
    as consumer income, tastes and preferences, prices of related goods, etc.) are held constant.

    3. Substitution Effect: When the price of a good falls, it becomes relatively cheaper compared
    to other goods, leading consumers to substitute it for more expensive alternatives.

    4. Income Effect: A lower price increases the real purchasing power of consumers, allowing them
    to buy more of the good.

    Assumptions of the Law of Demand

     Constant Income
     Constant Preferences
     Prices of Related Goods are Constant
     No Change in Future Expectations
     No Change in the Number of Buyers
     No Change in Seasonality
     Constant Quality and Availability

    Exceptions to the law of demand

     Giffen Goods: These are inferior goods for which an increase in price leads to an increase in
    quantity demanded due to the strong income effect outweighing the substitution effect. This
    usually occurs in situations of poverty.
    Example: During a famine, if the price of a staple food like bread rises, poor consumers might
    buy more bread instead of more expensive substitutes (like meat) because bread still remains the
    cheapest way to get calories.
     Veblen Goods: These are luxury goods for which higher prices make the goods more desirable.
    The high price itself becomes a part of the attraction, often due to their status symbol.
    Example: Designer handbags or luxury cars, where higher prices can lead to increased demand
    because they signal higher status.
     Essential Goods: For certain essential goods, quantity demanded might remain constant or
    even increase irrespective of price changes because they are necessary for daily life.
    Example: Medicines or basic food items like salt. Even if the price of salt rises, people will
    continue to buy it because it is essential for cooking.
     Speculative Demand: When consumers expect prices to rise further, they may buy more at
    higher prices in anticipation of future price increases.
    Example: During a housing market boom, people might buy houses at increasing prices expecting
    that the prices will continue to rise, leading to speculative bubbles.
     Addictive Goods: For goods that cause addiction, such as tobacco or drugs, the quantity
    demanded might not decrease even if prices rise.
    Example: Cigarettes. Smokers may continue to buy cigarettes even at higher prices due to
    addiction.
     Price Expectations: If consumers expect prices to rise in the future, they might increase their
    current demand even if the current price is high.
    Example: If people expect the price of gasoline to increase significantly in the near future, they
    might fill up their tanks more frequently now despite current high prices.
     Necessities: Some necessities have inelastic demand, meaning that consumers will buy a
    certain quantity regardless of price changes because they need them for survival or daily
    functioning.
    Example: Electricity or water. Even if the price increases, households will continue to consume
    these utilities to a certain extent because they are essential.

    Movement in demand curve


    Shift in demand curve

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