Income Effect on Demand

An inverse relationship exists between the price of a good and the quantity demanded.

Reasons:

  • income effect
  • substitution effect
  • Change in the number of buyers

Determinants of Demand

  • Price of the good or service
  • tastes and preferences
  • prices of substitute goods and services
  • Prices of complementary goods and services
  • income
  • number of consumers

D = f(p, t, PR, I, c, e, etc.)

Tastes and Preferences:

Greater the taste for a good or a service greater will be its demand.

Ex. If people’s preference or taste for allopathic is greater, more will be its demand.

Prices of Related Goods

Substitute goods – an increase in the price of one result in an increase in the demand for the other. (Positive relationship)

Ex: If the price of CABG increases, heart patients will view balloon angioplasty as a more viable solution

Complementary goods – an increase in the price of one results in a decrease in the demand for the other.(Negative relationship)

Ex: If the price of injectable medicines increases the demand for the disposable syringe decreases

Change In Price of a Substitute Good

Change in price of a complementary good:

Normal goods:

A good is a normal good if an increase in income results in an increase in the demand for the good.

Inferior good:

A good is an inferior good if an increase in income results in a reduction in the demand for the good.

Demand and Number of Buyers

An increase in the number of buyers results in an increase in demand. For Ex. An addition of an infant to a family increases the demand for the visits to the pediatrician.

Exceptions to The Law Of Demand

  • Expectations of future rise in price
  • Expectations of future fall in price
  • Articles of ostentatious consumption

 

Change in Quantity Demanded

Change in the quantity demanded means change in the amount demanded as a result of a change in price, other things remaining the same. It is also known as expansion and contraction of demand. There is movement along the same demand curve.

Change in Demand

Change in demand means a change in the amount demanded as a result of a change in the other factors other than the price. It is also known as increase and decrease in demand. Different demand curves are required.

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