Law of demand

Law of demand - the consumer (Z). In order to satisfy...

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Law of demand: The law of demand explains the inverse relation between quantity and price in general. It can be stated as follows: "Ceteris Paribus (other things remaining equal), the quantity of a good demanded will rise (expand) with every fall in its price and the quantity of a good demanded will fall (contract) with every rise in its price." In a functional form this can be stated as, q d = f (P) [ Y, Ps, N, Z ] const . This explains that q d , the quantity of a good demanded functionally depends on its price P. However, the quantity demanded is also causally related to other factors such as income of an individual (Y), prices of substitutes (Ps), number of members in the family (N) and the tastes of
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Unformatted text preview: the consumer (Z). In order to satisfy price-demand relation, the effect of these other variables has been restrained by assuming them to be constant . Initially, the law of demand was based on the principle of diminishing marginal utility (DMU). But in that case it was implied that utility is cardinally or absolutely measurable . There were other practical difficulties in the DMU approach as well. Therefore recently attempts have been made to place the law of demand on the empirical and realistic basis. One such attempt is in the form of Indifference Curve (IC) analysis. Under the IC approach it is enough to measure utility in ordinal or relative terms....
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This note was uploaded on 11/17/2011 for the course EC ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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