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2.8 Demand

Demand
•The amount of a good that the consumer chooses optimally, depends on the price of the good itself, the prices of other goods, the consumer’s income and her tastes and preferences.
•The quantity of a commodity that a consumer is willing to buy and is able to afford, given prices of goods and consumer’s tastes and preferences is called demand for the commodity.
•Demand changes whenever one or more of these variables change
 
Demand Curve and the Law of Demand
•If the prices of other goods, the consumer’s income and her tastes and preferences remain unchanged, the amount of a good that the consumer optimally chooses, becomes entirely dependent on its price.
•The relation between the consumer’s optimal choice of the quantity of a good and its price is called the demand function.
•The consumer’s demand for a good as a function of its price can be written as X = f (P), where X denotes the quantity and P denotes the price of the good.
 
Demand Curve
 

•The graphical representation of the demand function is called the demand curve.
•The demand curve is a relation between the quantity of the good chosen by a consumer and the price of the good.
•The demand curve gives the quantity demanded by the consumer at each price.
•The relation between the consumer’s demand for a good and the price of the good is likely to be negative in general.
 
Changes in the Set of Available Bundles from Changes in the Price & Optimum Choice
 

•If the price of bananas increases, the absolute value of the slope of the budget line increases.
•If the price of bananas decreases, the absolute value of the slope of the budget line decreases.
 
Deriving a Demand Curve from Indifference Curves and Budget Constraints
 

 
Why negative slope of the demand curve?
•This can also be explained in terms of the two effects namely,
     •substitution effect
     •income effect  
•Substitution Effect: When bananas become cheaper, the consumer maximises his utility by substituting bananas for mangoes in order to derive the same level of satisfaction of a price change, resulting in an increase in demand for bananas.
•Income Effect: As price of bananas drops, consumer’s purchasing power increases, which further increases demand for bananas (and mangoes).  
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