Demand Contd Another

Demand Contd Another

Demand (cont�d )Another apparent contradiction is the case of 'inferior' goods. If at low income levels a large part of a consumer's total spending has to go on, say, bread to sustain him, then a marked fail in the price of bread may release income for spending on other goods to such an extent that the demand for bread fails as it is replaced by more palatable and nutritious forms of food. For any one consumer this response to a fall in price may be feasible: for all consumers considered together it does not appear likely. It is true that a fall in price might in this way induce some people to buy less of a commodity rather than more; but it would also encourage others to buy more who could not previously afford to buy all they would have liked at the higher price.

This introduction of market demand, that is demand from all consumers, reinforces the basic law, for reductions in price not only encourage existing buyers to extend their purchases but also bring into the market new customers who previously could not buy any of the commodity at all. Conversely, a rise in price causes contraction in the demand of existing buyers, some to the point of buying none at all.

The basic 'law' of demand could be derived from observation of markets in real life. A more satisfactory theory of consumer demand (that is, of a more general kind) can be derived from certain basic assumptions: first, that consumers always act so as to maximize the total satisfaction (utility) they obtain from spending a given income; secondly, that the more of a commodity a consumer possesses relatively to other commodities, the smaller the additional utility he derives from further units of it (this is the principle of diminishing marginal utility). From these assumptions it can be deduced that a consumer will at all times tend to distribute his income among various commodities available at given prices in such a way that the marginal (additional) utility he derives from a marginal unit of expenditure is the same for every commodity. If then the price of one commodity falls, the marginal utility per unit of expenditure on it will rise. To restore equilibrium will call for a shift of expenditure to it from others until the marginal utilities per unit of expenditure on all commodities are again equal. This leads once more to the basic law of demand that the lower the price the larger the quantity demanded, and conversely.

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