Page 31 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes

Price of x

Demand of x

Demand Curve
The Demand curve is negatively sloped, indicating that the individual purchases more of the
commodity per time period at lower prices (other factors being constant).
The inverse relationship between the price of the commodity and the quantity demanded per
time period is referred to as the Law of Demand.
A fall in P leads to an increase in D (so that the slope is negative) because of the substitution
x x
effect and income effect.
The first reason for the validity of downward sloping demand curve is that the lower prices
bring in new buyers. Secondary, when the price of a commodity declines, the real income or
purchasing power of the consumers increases which induced them to buy of this commodity.
This is known as the income effect. Thirdly, when the price of a commodity falls while prices of
all other goods remain constant, the commodity becomes relatively cheaper. This induces the
consumers to substitute this commodity in place of other commodities which have been relatively
dearer. This is known as substitution effect.

Task Do you come across instances where you see that law of demand is not
being followed? Quote such instances.

Caselet Cardamom Prices Drop on Low Demand

C ardamom prices declined in the last week of January 2011, on bearish sentiments
resulting from reports of increased availability at auctions.

“It might have dropped on correction after ruling at moderately higher levels. An
artificially created over supply situation also aided the price decline,” dealers in
Bodinayakannur said.

Upcountry demand was low as nobody was interested to buy from the declining market,
Mr P.C. Punnoose, General Manager, CPMC, told Business Line.
Contd...

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