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INTRODUCTION TO INDIAN ECONOMY 1.6 CONCEPT OF DEMAND PRESENTED BY AYUSSH SANGHI
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VARIABLES AFFECTING SHIFT IN DEMAND CURVE Substitute Goods: Two goods for which increase in the price of one leads to an increase in the demand for the other. Example: Tea and Coffee. If the price of Coffee rises, then people will demand less and less of Coffee and the demand for its nearest substitute i.e. Tea will increase. This will shift the demand curve for Tea to the right.
VARIABLES AFFECTING SHIFT IN DEMAND CURVE Complementary Goods: Two goods for which an increase in the price of one leads to a decrease in the demand for the other. Example: If the price of coffee falls, according to the law of demand, people will buy more coffee. Yet in this case the demand for sugar will also increase because coffee and sugar is used together. Similarly with petrol and car and computers and software.
VARIABLES AFFECTING SHIFT IN DEMAND CURVE Taste & Preference: One of the most important determinant of demand is the taste of an individual. If an individual likes ice cream, then he will buy more of it. Thus, change in taste shifts the demand curve as well
VARIABLES AFFECTING SHIFT IN DEMAND CURVE o Expectation: Expectations about the future may affect the demand for a good or service today. Example: If one expects to earn a higher income next month, one may choose to save less now and spend more of current income on buying some goods.
VARIABLES AFFECTING SHIFT IN DEMAND CURVE o Number of Buyers: Since market demand is derived from individual demands, it depends on all those factors that influence individual demand (the factors mentioned above) In addition, it also depends on number of buyers o Example: If A, another consumer of ice cream was to join B and C, the quantity demanded in the market would be higher at every price, and the demand curve would shift to the right.
EXCEPTION TO THE LAW OF DEMAND Giffen Goods: Those goods that do not comply with the law of demand. It is a good for which demand increases as the price increases, and falls when the price decreases.
EXCEPTION TO THE LAW OF DEMAND A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand, which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes.
EXCEPTION TO THE LAW OF DEMAND o Example: Giffen good is related to Irish potato famine in th the 19 century During the famine, as the price of potatoes rose, impoverished consumers had little money left for nutritious but expensive food items like meat (the income effect). So even though they would have preferred to buy more meat and fewer potatoes (the substitution effect), the lack of money led them to buy more potatoes and less meat. more