Chapter 1 : theory of Demand and Supply

Explanation that the need Curve (reasons why demand curve slopes bottom from left to right)

The downward sloping nature the the demand curve is defined by three financial reasons I. E. The law of diminishing marginal utility, the substitution and also the income effects.

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Law of Diminishing Marginal utility

The law states the the satisfaction a customer gets from consuming secondary unit of an excellent decreases as an ext and an ext of the good is consumed I. E. The marginal energy of great decreases as an ext and much more of the good is consumed. This method that consumers will be ready to buy much more of a good if the price falls.

This is because the good yields less and also less satisfaction as more of that is bought. People's willingness to pay relies on the satisfaction lock get. If satisfaction (MU) reduces, your willingness to pay also reduces. Consequently, much more of a good is demanded at a reduced price 보다 at a higher price, make the need curve come slope downward from left to right.

The substitution effect: The substitution effect defines the actions of consumers when the price that a good falls or rises relative to the price of its substitutes. Once the price the a good falls, consumer of that good find it cheaper than its substitute who price remains unchanged. The tendency is the the consumers will certainly buy an ext of it as the price has actually fallen. The fall in the price will likewise make it feasible for those who, hitherto, might not bought the good to sign up with in the purchase of the good. This boosts the quantity demanded in response to the collapse price. On the other hand, once the price of the good rises, consumers will buy much less of it as they switch over to cheaper substitutes. This again describes the inverse relationship in between price and also quantity inquiry of a an excellent as depicted in the demand curve.

The Income result

The revenue effect likewise explains the behavior of the consumers from the allude of check out of changes in genuine income developing from changes in the price of a good. Given that over there is a fall in the price the a good, ceteris paribus, the real earnings of the consumers will increase. This boosts the purchasing strength of the consumers permitting them to have the ability to buy more of it with the same amount that income. More consumers who might not afford come buy the an excellent are now able come buy it. This increases the amount demanded as the price that the good has fallen. This again describes the bottom sloping need curve from left come right.


A adjust in quantity Demanded

A readjust in amount demanded is a motion along the same need curve brought about by a adjust in price only. A to decrease in price will certainly cause an increase in quantity demanded. This is known as an extension in demand. An boost demanded in price will reason a to decrease in quantity demanded. This is called a contraction in demand. This is illustrated on number below;


Movement from

A - B = extension in demand or an increase in amount demanded

A – C = convulsion in need or a decrease in quantity demanded

An rise in demand

This is a complete change of the need curve of a an excellent to the right, v the price remaining unchanged. This means that an ext of a product is demanded in ~ the exact same price. This increase is brought about by the positive effects of determinants that room responsible for boost in people's desire to buy much more of the good other than price. Because that instance, boost in revenue of consumers, an increase in taste and also fashion, a effective advertisement, an increase in household size, among others. Rise in any type of of these components will transition the need curve come the right.

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on the figure above the change of the demand curve indigenous DD to D1 D1 as presented by the arrow is called rise in demand. This boosts the quantity demanded native 20kg to 30kg in ~ the exact same price

A decrease in need

This is a complete change of a demand curve that a an excellent to the left, if the price that the great remains unchanged. This method that less of a product is demanded in ~ the same price. This diminish is brought about by unfavourable effects of determinants that affect demand such together a fall in consumers’ income, a decrease in family members size, not successful advertisement, an unfavorable changes in taste and fashion, amongst others when price continue to be unchanged.


On the figure above the change of the demand curve native DD come D2 D2 as shown by the arrowhead is called a decrease in demand. This leader to a diminish on the quantity demanded the the an excellent from 20kg come 10kg in ~ the same price level (500frs).