In
Economics the term Market means
any arrangement which enable buyers and sellers to exchange goods and services.
Demand and supply are the most vital concepts in the market. In a free
market, the prices are determined by price mechanism.
Price mechanism is a system which allocates scarce resources for the
production of goods and services according to the demand and
supply.
All
economic laws (principles) have assumptions.
The most important among them is “citirus
paribus” which mean other things remain the same. All the economic laws
are followed with assumptions.
Utility is the power of the goods or services to satisfy wants at a
given time. A person buys a commodity because it gives satisfaction. When
more is bought, the total utility derived increases, but the increase in total
utility is not proportionate to the increase in consumption. The
additional utility derived from the last unit bought is the marginal utility. It is
generally accepted that marginal utility diminishes as consumption
increases.
Demand is “the amount of goods or service that consumers are
willing and able to buy at a given price over a period of time”.
The
law of demand is that “other
things remaining the same, more of a good or service will be demanded at lower
prices than at higher prices.
Individual demand is the demand of just one consumer while the market demand is the total demand for
a product from all its consumers.
Effective Demand is “the amount of goods or service that consumers are
willing and able to buy at a given price over a period of time”.
Wants are simply the desire, but demand is the desire backed up by the willingness and ability to
pay a price. Since demand shows the actions of a consumer it is also
known as consumer’s bahaviour.
Individual Demand schedule is the table showing the quantities
of a product or service demanded by an individual at various prices, over
a given period of time. The following table is showing the individual
demand of two persons
Individual Demand curve is a curve showing the relationship
between price and quantity demanded by an individual. It is generally downward
sloping towards right hand side.
The price
and quantity demanded move in opposite direction, and they are inversely related.
The
following demand curve is the diagrammatic representation of the individual demand
at respective prices as shown in the above demand schedule.
Market Demand schedule is the table showing the quantities of a product or service
demanded at various prices by all the individuals in the market, over a given
period of time. The following table is showing the market demand [sum
total of all the individual demand]
Market Demand curve is a curve showing the relationship
between price and quantity demanded by all the individuals in the market [sum
total of all the individual demand]. It is also sloping downward towards right
hand side like individual demand curve. The price and quantity
demanded move in opposite direction, and they are inversely related.
The
following demand curve is the diagrammatic representation of the market demand
schedule at respective prices as shown in the above market demand schedule.
The reason for the downwards right hand side slope because of the income effect and substitution effect.
It
can also be explained by the action of diminishing
marginal utility. The price and quantity demanded move in
opposite direction, and they are inversely related.
When,
other things being equal, and price changes the real income of the consumer
also changes. The purchasing power of the money income will increase
when price of good falls, and it will be less when the price rises.
Therefore when price good falls consumers can afford to buy more and it is
known as income effect.
A
fall in price of a commodity also makes it relatively cheaper compared
with competing goods or substitutes ( a pair of goods which are considered
as alternative to each other). When price of one such good falls, the
demand for the other tends to falls. This is called substitution effect.
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