This document discusses concepts related to demand, the law of demand, utility, and the law of equi-marginal utility. It defines demand as the quantity of a good or service people are willing and able to purchase at a given price. The law of demand states that, all else equal, demand decreases when price rises and increases when price falls. Utility refers to the satisfaction received from consuming a good, with marginal utility declining with each additional unit consumed due to diminishing returns. The law of equi-marginal utility holds that consumers maximize utility by allocating spending such that the marginal utility per unit of currency is equal across all goods purchased. This ensures no reallocation could further increase total utility. The concepts

1. ECONOMICS FOR BUSINESS
UNIT 2
Dr.D.Leelavathi
Assistant Professor
SRM University, RMP, Chennai

2. DEMAND CONCEPTS
• Demand refers to the quantity of a commodity or a service that
people are willing to buy at a certain price during a certain time
interval. It can be termed as a desire with the ‘willingness’ and ‘ability’
to pay for a commodity.
 DEFINITION OF DEMAND
• Demand can be defined as the quantity of a commodity (goods and
services) that consumers are willing and able to buy at a given price
and at a particular place and time. Demand is quite different from
wants, need or desire. ‘Effective Demand’ in economics must meet
three conditions which are:
1. Ability to pay
2. Willingness to pay
3. Authority to buy a commodity
• Demand must be related to price because to a great extent, price
determines the quantity which consumers are willing to buy

4. LAW OF DEMAND
• Law of demand is the concept used in the economics
according to which other things remaining the same demand
for a product will increase when the price of the product is
decreased and when the price of the product is increased the
demand for a product will decrease.As one can see from the
above that law of demand is based on many assumptions but
still it is one of the basic and important concept as far as
economics is concerned.

5. ASSUMPTIONS AND EXPLANATIONS
• Income of the Consumer
• The first and foremIost assumption of law of demand is
that income of the consumer remains constant hence if
the income of the consumer increases then even when
the price of product rises it will have no effect on the
demand for product as increased income can be used to
purchase the higher priced products and if the income of
the consumer decreases than even without price rise
demand for product will decline.
• Consumer Taste and Preference
• Expectation about Future Price

6. IMPORTANCE AND LIMITATIONS
 Importance of Law of Demand:
• Determination of price. The study of law of demand is helpful for a trader to fox
up the price of a commodity. He knows how much demand will fall by increase in
price to a particular level and how much it will rise by decrease in price of the
commodity. The schedule of market demand can provide the information about
total market demand at different prices. It helps the management in deciding
whether how much increase or decrease in the price of commodity is desirable.
• Importance to Finance Minister. The study of this law is of great advantage to
the finance minister. If by raising the tax the price increase to such an extent
than the demand is reduced considerably. And then it is of no use to raise the
tax, because revenue will almost remain in the same. The tax will be levied at a
higher rate only on those goods whose demand is not likely to fall substantially
with the increase in price.
• Importance to the Farmers. Good or bad crop affects the economic condition of
the farmers. If a good crop fails to increase the demand, the price of the crop will
fall heavily. The farmer will have no advantage of the good crop and vice- versa.

7.  Definition and Explanation:
“The individual demand for a commodity is the amount of a commodity
which the consumer is willing to purchase at any given price over a
specified period of time”.
The individual’s demand for a commodity varies inversely with
price(Ceteris paribus). As the price of a goods rises, other things
remaining the same, the quantity demanded increase.
Some special varieties of inferior goods are termed as giffen goods.
Cheaper varieties of goods like low priced rice, low priced bread, etc.
are some examples of Giffen goods.
This exception was pointed out by Robert Giffen who observed that
when the price of bread increased, the low paid British workers
purchased lesser quantity of bread, which is against the law of demand.
Thus, in case of Giffen goods, there is indirect relationship between
price and quantity demanded.
• Goods having prestige value
This exception is associated with the name of the economist, T.Velben
and his doctrine of conspicuous conception. Few goods like diamond
can be purchased only by rich people. The prices of these goods are so
high that they are beyond the capacity of common people. The higher
the price of the diamond the higher the prestige value

8. • Price expectation
When the consumer expects that the price of the commodity is going to fall in the
near future, they do not buy more even if the price is lower. On the other hand,
when they expect further rise in price of the commodity, they will buy more even
if the price is higher. Both of these conditions are against the law of demand.
• Fear of shortage
When people feel that a commodity is going to be scarce in the near future, they
buy more of it even if there is a current rise in price
• Change in income
The demand for goods and services is also affected by change in income of the
consumers. If the consumers’ income increases, they will demand more goods or
services even at a higher price.
• Change in fashion
The law of demand is not applicable when the goods are considered to be out of
fashion.
If the commodity goes out of fashion, people do not buy more even if the price
falls. For example: People do not purchase old fashioned shirts and pants
nowadays even though they’ve become cheap. Similarly, people buy fashionable
goods in spite of price rise.
• Basic necessities of life
In case of basic necessities of life such as salt, rice, medicine, etc. the law of
demand is not applicable as the demand for such necessary goods does not
change with the rise or fall in price.

9. • The utility is the degree of satisfaction or pleasure a consumer gets from an
economic act. For example, a consumer can purchase a sandwich so they
are no longer hungry, thus the sandwich provides some utility.
• “Total utility (TU) is the total satisfaction obtained from all units of a
particular commodity consumed over a period of time”
• “Marginal utility means an additional or incremental utility. Marginal utility is
the change in the total utility that results from one unit change in
consumption of the commodity within a given period of time”Marginal utility
is the enjoyment a consumer gets from each additional unit of consumption.
It calculates the utility beyond the first product consumed. If you buy a bottle
of water and then a second one, the utility gained from the second bottle of
water is the marginal utility
Utility (marginal totality)

10. Law of diminishing marginal utility
• The law of diminishing marginal utility directly relates to the concept
of diminishing prices. As the utility of a product decreases as its
consumption increases, consumers are willing to pay smaller dollar
amounts for more of the product. For example, assume an individual
pays $100 for a vacuum cleaner.
• Law of diminishing marginal utility is based upon following three facts
(conditions):
• First, total wants of a man are unlimited but each single want can be
satisfied. As a man gets more and more units of a commodity, the
desire of his for that good goes on falling. A point is reached when the
consumer no longer wants any more units of that good.
• Secondly, different goods are not perfect substitutes for each other in
the satisfaction of various particular wants. As such the marginal utility
will decline as the consumer gets additional units of a specific good.
• Thirdly, the marginal utility of money is constant given the consumer’s
wealth.

12.  The law of diminishing utility has great practical importance and
uses in economics and daily life. The law of demand, the theory of
consumer’s surplus, and the equilibrium in the distribution of
expenditure are derived from the law of diminishing marginal utility.
• THE BASIS OF LAW OF DEMAND
The law of marginal diminishing utility and the law of demand are very
closely related to each other. In fact they law of diminishing marginal
utility, the more we have of a thing, and the less we want additional
increment of it. In other words, we can say that as a person gets more
and more of a particular commodity, the marginal utility of the
successive units begins to diminish. So every consumer while buying a
particular commodity compares the marginal utility of the commodity
and the price of the commodity which he has to pay.
If the marginal utility of the commodity is higher than that of price, he
purchases that commodity. As he buys more and more, the marginal
utility of the successive units begins to diminish. Then he pays fewer
amounts for the successive units.

13. • Consumer’s surplus concept:
• The theory of consumer’s surplus is also based on the law of
diminishing marginal utility. A consumer while purchasing the
commodity compares the utility of the commodity with that of the price
which he has to pay.
• Importance to the consumer: A consumer in order to get the
maximum satisfaction from his relatively scare resources distributes his
income on commodities and services in such a way that the marginal
utility from all the uses are the same. Here again the concept of
marginal utility helps the consumer in arranging his scale of preference
for the commodities and services.
• Importance to finance minister: Sometimes it is pointed out that the
law of diminishing marginal utility does not apply on money. As a
person collects money, the desires to accumulate more money
increases. This view is superficial. It is true that wealth is acquired for
the procurement of goods and services and man is always anxious in
getting more and more of money.

14. IMPORTANCE AND LIMITATIONS OF LAW OF
DMU
 Importance:
• Useful to the consumers: This law creates awareness among the
consumers. To obtain maximum utility from the limited resources, it
is necessary to ‘diversify’ the consumption.
• Useful to the government: The law is useful to the government in
framing various policies such as progressive tax policy, trade policy,
pricing policy, etc.
• Basis of the paradox of values: The law of diminishing marginal
utility helps us to understand the paradox of values. It includes
goods that have more value-in-use and zero or less value-in-
exchange such as air, water, sunshine, etc. as well as goods that
have more value-in-exchange and less value-in-use such as gold,
diamonds, etc.
• Basis of the law of demand: The law of demand is based on the
law of diminishing marginal utility. According to the law of demand,
the quantity demanded of goods rises with a fall in price and falls
with an increase in price. When a consumer purchases more and
more units of a good, its marginal utility steadily declines. Hence, he
would buy additional units of a commodity only at a lower price.

15.  Limitations:
• Measurability of utility:
The law assumes that utility of a commodity can be measured with
the measuring rod of money. If a consumer goes on consuming
several units of the commodity then from each successive units of
commodity he derives some satisfaction. Those are measured in
our example 25, 20, 15 and so on. But utility is a subjective concept.
It is not objective like a matter in the laboratory. It is a short of
feeling and introspection.
• Abnormal persons:
The law is not applicable to abnormal persons. If a man is drunkard
the more liquor he drinks the more he is tempted to drink. The law
does not operate here. In case of miser the more he gets more
happy he becomes or in other words he gets more marginal utility.
• The law assumes that ‘other things’ must remain constant:
It implies that the habits, tastes, temperament and income of the
consumer remain constant for the operation of the law. If any of
these things changes, the consumer will behave differently and the
law will not operate.

16. • The law is not applicable in case of rare collections:
• It is said that the law is not applicable in case of rare collection of
stamps, coins and artistic objects. As one gets more and more of it lie
will be interested in getting still more. But this is not true.
• The law does not apply in the initial stages. If the successive units
of the commodity consumed are very small as drops of water to thirsty
persons then initially the marginal utility may increase rather than
decrease.
• The law depends on the supply of the substitutes and
complements:
• The law does not depend upon the supply of the commodity a
consumer consumes but also on its substitutes and complements. If
the green cocoanuts are available in plenty the utility of Sarabat win
decrease rapidly.
• Indivisible Goods:
The law is difficult” to operate in case of indivisible goods like
automobiles, television sets and over coats.

18. Law of equi-marginal utility
• The Law of Equi-Marginal Utility is described as
the Proportionality Rule because the consumer
substitute’s one commodity for the other until the
marginal utility of each commodity is in proportion to its
price.
• The equi-marginal principle is based on the law of
diminishing marginal utility. The equi-marginal principle
states that a consumer will be maximizing his total utility
when he allocates his fixed money income in such a way
that the utility derived from the last unit of money spent
on each good is equal.
• Suppose a man purchases two goods X and Y whose
prices are PX and PY, respectively. As he purchases
more of X, his MUX declines while MUY rises

19. • Only when this is true, the consumer will not be
distributing his money in buying good X and Y, since by
reallocating his expenditure he cannot increase his
total utility.
• This condition for a consumer to maximize utility is
usually written in the following form:
• MUX/PX = MUY/PY
• So long as MUY/PY is higher than MUX/PX, the
consumer will go on substituting Y for X until the
marginal utilities of both X and Y are equalized.
• The marginal utility per rupee spent is the marginal
utility obtained from the last unit of good consumed
divided by the price of good (i.e., MUX/PX or MUY/PY).
A consumer thus gets maximum utility from his limited
income when the marginal utility per rupee spent is
equal for all goods.

21. IMPORTANCE AND LIMITATIONS OF LAW OF
EMU
 Importance
• Producer’s equilibrium: A wise producer combines different factors of
production and substitutes one for the other to secure maximum
profits. He continues his activity until the marginal returns from all
factors equalized.
• Marginal productivity of Goods A/Price of A =Marginal Productivity of
goods B/Price of B
• 2. Distribution: This law is also useful in the sphere of distribution. It
determines the rewards to be paid to the different factors of
production. A prudent producer continues to substitute one factor
service for the other till the cost of employing each factor equals the
marginal productivity of each factor.
• 3. Exchange: This law has importance in the determination of the
prices of goods and services. In the case of substitutes, when the price
of one goods increases the demand for the other goods increases.
When the supply is limited, people like to purchase more quantity of a
goods. Then its price increases. When the supply of a goods is greater
than its demand, the price falls.

22. 4. Public Finance: This law is also applicable in the sphere of Public
Finance. Government imposes taxes in such a manner that the
marginal sacrifice of each tax player is equal. Similarly in deciding
about the projects and their total outlays, it implements only those
projects which yield greater social marginal utility.
5. International Trade: This law is of Special importance in the
domain of International Trade. This law helps the government in
devising proper export and import policy for the promotion of economic
development of the country. The government devises such a policy
aiming at the export of lower marginal utility goods and import of higher
marginal utility goods.
6. Planning: In Planning also this law has practical importance .
Government follows this principle in allocating the scarce resources
between different sectors. The plan objectives like social justice,
economic progress, decentralization of industries, fair distribution of
national income and wealth.
7. Distribution of Assets: This law is a boon to the speculators
businessmen and entrepreneurs in acquiring the assets for different
use. They compare the marginal returns and decide the distribution of
assets.

23. LIMITATIONS OF EMU
 Limitions of law of demand
• When the prices of normal goods rises, the demand for them decrease,
there are few cases where the law cannot operated. Following are the
limitations of law of demand
1.Prestige Goods
• There are certain commodities like sports car or diamond, which are the
sign of distinction and honor in any society. If the price of these goods
increases the demand for them may be increase instead of falling
2. Price Expectations
• Expect a further increase in the price of a specific commodity they will go
to buy more and more in spite of rising in price. In this case the violation
of law is temporary.
3. Ignorance of Customer
• If the consumer is ignorant about the rise in price of goods, he may buy
more of the commodity at higher price.

24. 4. Giffen Goods
If the prices of basic goods like (sugar, wheat etc) on which the poor spend a large part
of their income declining the poor increase the demand for superior goods. When the
price of giffen goods fall it demand will also falls. There is a positive price effect in the
case of giffen goods.

25. APPLICATIONS OF EMU
• Emu oil prepared from the fat of this bird and is used to make medicine.
People use emu oil for conditions such as high cholesterol, dry skin,
wound healing, sore muscles, and other conditions, but there is no
scientific evidence to support these use.
• emu oil is also used topically for athlete's foot; diaper rash; canker sores;
chapped lips; poor circulation; and skin conditions, including cancer, dry
skin, dandruff, eczema, psoriasis, wrinkles or age spots. It is also used to
protect skin from sun damage and to promote more youthful looking skin.