Explain the inverse relationship between price and quantity demanded of a commodity

explain the inverse relationship between price and quantity demanded of a commodity

Analysis of theory of demand determine that the inverse relation b/w price and the demand. When the price of commodity is increased then the quantity of. explain the inverse relationship between price of a commodity and its quantity demanded guys pls answer i really need your help - Economics - Theory of. Responsiveness in quantity demanded of a commodity to a change in its price. Hence it is defined as ratio of proportionate change in quantity demanded, measured as difference between new demand & original demand ΔP = P2 - P1 Because of inverse price & demand relationship, the.

They move in opposite directions. If one increases, the other falls.

explain the inverse relationship between price and quantity demanded of a commodity

The reason is simple. When the price of a commodity falls it becomes cheaper relative to other goods.

explain the inverse relationship between price and quantity demanded of a commodity

So a consumer prefers to buy more of it and less of others its substitutes whose prices remain unchanged. At 50 paise a kg, carrots are cheap relative not only to potatoes, but cauliflowers and brinjals. So the consumer would buy more of other vegetables and less of carrots.

The inverse relationship between price and quantity demanded of a Essay

Here, however, we are making the ceteris paribus assumption, i. Reasons underlying the Law of Demand: The inverse variation between price and demand can be explained by the following reasons: Law of Diminishing Margined Utility: The purchase of a commodity involves a sacrifice. The sacrifice is measured by the price paid. The consumer will never pay for a commodity more than the money value of its marginal utility to him. Therefore, the consumer will not buy a large quantity unless the price is low.

This follows from the Law of Diminishing Marginal Utility. Suppose that a man derives utility worth 50 p from the first orange consumed and 30 p from the second. If the price of orange is 50 p each, he will buy only one. If the price is 30 p, he will buy two. When price falls, the consumer increases his purchases for thereby he increases his total utility.

When price rises, the consumer must reduce his purchases by cutting out those units of the commodity which yield to him less utility than the price.

explain the inverse relationship between price and quantity demanded of a commodity

The fall in the price of a commodity is equivalent to an increase in the income of the consumer because now he has to spend less for purchasing the same quantity as before. A part of the money, so gained, can be used for purchasing some more units of the commodity. Therefore, when price falls the amount purchased increases.

So the amount purchased falls. When the price of a commodity falls it will be substituted for costlier things because thereby the consumer will gain. If the price of coffee falls it will be used by some people in place of other beverages to some extent. Therefore, a fall in the price of a commodity increases demand and a rise in its price reduces demand. Change of the number of buyers: When the price of a commodity falls some people, who were formerly unable to buy it, would be able to do so.

Therefore, the total demand will rise. Conversely, when the price of a commodity rises, some people will find it impossible to buy it and will go out of the market.

The inverse relationship between price and quantity demanded of a commodity - Essay Example

Change of the number of uses: When the price of a commodity falls it is used for various uses. For example, when the price of mango falls it is used not only for more consumption and also for preparing chutney. Similarly, when price rises, the uses of the commodity are restricted. Assumptions of the Law of Demand: The Law of Demand is based upon the following assumptions: The habits and tastes of the demanders remain unchanged: If they change, the amount consumed will also change.

The demand curve is drawn on the basis of a particular level of habits and tastes.

explain the inverse relationship between price and quantity demanded of a commodity

When tastes and habits change, the demand curve has to be redrawn. But, at the new level, the curve will have a downward slope.

The income remains the same: He may purchase more of a commodity at the same price.

Functional Relationship between Price and Commodity Demanded

But there are some situations under which there may be direct relationship between price and quantity demanded of a commodity. These exceptions are known as exceptions to the law of demand.

Sometimes they think like high price commodity is better in the quality.

explain the inverse relationship between price and quantity demanded of a commodity

Thus with the increase in price, demand increases. LPG gas, Petrol, etc. Prices of such commodities increases, demand does not show any tendency to contract and it negatives the law. If consumers measure the desired ability of the utility of a commodity, solely by its price and nothing else, then they tend to buy more of the commodity at higher price and less of it at lower price.

Gold ornaments, Diamonds, hair paintings. Higher the price of the good, greater will be the prestige of the buyer in the society and vice-versa.

When price falls, the commodity comes within the reach of lower class people and they tend to demand more because of demonstration effect. If people expect the price of good to rise in near future, they demand more even at higher price.

Functional Relationship between Price and Commodity Demanded

And if they expect the price to fall in near future, they demand less of it even at lower price. Thus more quantity of goods is demanded at rising prices and less quantity of goods is demanded at falling prices.

This seems contrary to law of demand. These are special type of inferior goods named after Sir Robert Giffen.