Demand Contd To Obtain

Demand Contd To Obtain

Demand (cont�d)To obtain this relationship between demand and price all other variables were assumed to be unchanged. In turn they can be supposed to vary and their effects analysed. Thus if income rises (or falls) a consumer will tend to buy more (or less) of a commodity at any given price than before, the amount of increase (or decrease) depending on the pattern of his preferences. in a graph, this relationship would be represented by a shift of the whole demand curve to the right (or left). It is thus possible to measure the 'income elasticity of demand', that is, the responsiveness of demand to changes in income. Similarly if the price of a substitute commodity falls or if tastes change in favour of other commodities, the demand curve would again shift bodily to the left, indicating that at each price a smaller quantity of the commodity would be demanded.

The introduction of expectations complicates the analysis. A rise in price may not lead to a smaller amount demanded if buyers expect the price to rise further still; they may increase their purchases for a time. This possibility is best considered as the total effect of two simultaneous effects: first, a price rise inducing a normal contraction of demand; secondly, a shift to the right of the whole demand curve due to the change in expectations produced by the price change. The apparent contradiction of the basic demand law is thus explained.

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