Economics Class

Demand concepts



                    
What is a demand schedule?

Answer:

Demand Schedule is a tabular presentation of the inverse relationship between quantity demanded and price per unit of the commodity, other factors effecting demand remaining constant.

         Price of X (in Rs.)                           Quantity Demanded of X in units

                     10                                                      1000

                      9                                                       2000

                      8                                                       3000

                      7                                                       4000

                      6                                                       5000


Above demand schedule shows the various quantities demanded of the product X at different prices of X.

We can observe that as price of X falls, its quantity demanded increases.




Why does the demand curve slope downwards towards the right?

What is the law of diminishing marginal utility?

Answer:

The slope of the demand curve is always negative, i.e. it slopes downwards from left towards the right. This is because of the human tendency to consume more at lower prices than at higher prices. The reason lies in the law of diminishing marginal utility.

Law of diminishing marginal utility proposes that as more and more units of a commodity are consumed, the satisfaction derived from the successive levels consumed keeps diminishing. Thus, the consumer is willing to pay a higher price for the initial units of the commodity consumed than for the latter units. To make the consumer pay for the latter units the price has to be lowered down. Example: a hungry person would pay a certain price for the initial plate of food, but he would not buy another plate at the same price because the second plate does not have the same utility for him as the first one. Thus, some incentive, like that of a reduced price, has to be offered to him to make him buy further.

Therefore, more units of a commodity are consumed at lower prices than that at higher prices. Due to this inverse relationship between price of the commodity and its quantity demanded, the slope of demand curve is always negative i.e. it slopes downwards towards the right.




What is utility? Explain cardinal and ordinal utilities.

Answer:

The extent to which a commodity or a service can satisfy human want determines its utility. So, utility is the power of a commodity or service to satisfy a human want.

Utility can be cardinal or ordinal.

Cardinal utility can also be called marginal utility. According to this concept, utility is measurable in imaginary units called ‘utils’, it is believed that a consumer is capable to describe utility in measurable terms. Due to measurability it is possible to compare utilities of different commodities.

On the other hand, ordinal utility cannot be measured. Utility can be experienced but not measured because it is a subjective concept.