•Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price (other factors remaining the same)
•When price of the commodity increases, demand for it falls and
•when price of the commodity decreases, demand for it rises,
•A linear demand curve can be written as d(p) = a – bp 0<p<a/b
•where a is the vertical intercept, –b is the slope of the demand curve.
•At price 0, the demand is a, and at price equal to a/b , the demand is 0.
•The slope of the demand curve measures the rate at which demand changes with respect to its price.
•For a unit increase in the price of the good, the demand falls by b units.
Normal and Inferior Goods
•The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good.
•Normal Goods: The quantity increases as the consumer’s income increases and decreases as the consumer’s income decreases.
•Demand moves in the same direction as the income of the consumer.
•Inferior goods: Demands for which move in the opposite direction of the income of the consumer.
•Examples of inferior goods include low quality food items like coarse cereals.
Why different trend observed in inferior goods
•A good can be a normal good for the consumer at some levels of income and an inferior good for her at other levels of income.
•At very low levels of income, a consumer’s demand for low quality cereals can increase with income.
•Beyond a level, any increase in income of the consumer is likely to reduce her consumption of such food items as she switches to better quality cereals.
Substitutes and Complements
•The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other.
•Goods which are consumed together are called complementary goods.
•Examples: tea and sugar, shoes and socks, pen and ink, etc.
•Since tea and sugar are used together, an increase in the price of sugar is likely to decrease the demand for tea and vice versa.
•The demand for a compliment good moves in the opposite direction of the price of its complementary goods.
•Goods like tea and coffee are not consumed together as they are substitutes for each other.
•If the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up.
•If the price of coffee decreases, the consumption of tea is likely to go down.
•The demand for a substitute good usually moves in the direction of the price of its substitutes.