Question

d. Suppose Oliver now reduces the budget spent on chocolates to $50. Present this effect graphically and find the new slope of the new budget line (assume that prices of X and Y do not change.) Question 2 Explain clearly why an exogenous parameter, such as a shift in consumer preferences or government regulations do not affect quantity demanded along a demand curve, but cause a shift of the demand curve for a commodity. In general, what are the variables and parameters that may affect a demand function? You may illustrate your answer with examples of your choice.

Answer 1

Introduction

Meaning of Demand:-

Demand for a commodity refers to the amount of goods or services which any person can buy at a given period of time. It is a known fact, that at a lower price, people tend to buy more of the goods and services being offered whereas at a higher price the quantity demanded decreases. This happens primarily because of the budget constraints of people. People have limited budgets and thus, for purchasing additional goods if they need to pay more some tend to go towards alternatives and the demand gets effected while other do not purchase the product at all with price rise.

Demand Curve:-

A demand curve represents the variation in quantity demanded over a period of time when compared to the prices charged by the supplier. The slope is usually downward sloping indicating lower purchase at higher price and vice versa.

An example of the same is follows:-

Demand Curve Price Quantity Demanded

Case Specifics

While, demand also gets effected by external sources, since price is the most key determinant, the relationship of the demand curve is only limited to the price of the commodity. With tastes and preferences of the consumer changing, meaning that consumers now do not desire the products or services being offered by the seller, or have a keen interest in the product, the demand curve shifts rightward or leftward as is the case. Government regulations being favorable or unfavorable for business owners is another example of the same.

The biggest reason for this shift is the fact, that the change in demand has not happened because of change in prices charged by the suppliers. The change is independent of the prices charged by the producers. That change can be easily represented on the graph as above in which a fall in price indicates a rise in the consumption of the commodity.

On the Contrary, in case of shift in demand, the entire demand curve shifts regardless of the prices charged. This is as indicated.

Final Demand Price Initial Demand Price Quantity

The above graph, illustrates how a shift in the quantity demanded takes place independent of the price of the commodity which stays same.

Parameters effecting Demand:-

The parameters that effect demand are as follows:-

1) The price of the goods and services being offered is the biggest determinant of demand. It is a known factor that reduced prices increase demand, whereas increase in prices tend to do the opposite for normal goods and services.

(2) The Price of related goods and services is another factor which effects the demand for the product. These goods are basically divided into two categories. Complementary the demand for which moves in a similar manner eg car and petrol. Whereas Suplimentary tends to move in the opposite direction eg-Tea and coffee.

(3) Income of the consumers is another factor. In countries with higher incomes, the overall demand tends to be much higher than in countries where income patterns are relatively low. This happens because with higher income, people tend to buy more products or services being offered.

(4) Taste or Preferences of the consumers, is another important factor with changes in preferences, the demand curves shifts towards the right or left depending on the mood of the customers. This is independent of the price charged for the product.

(5) Government Regulations are another critical factor, which if in favor of the supplier shift the demand curve towards the right and vice versa.

(6) Future expectations are another key determinant of demand. With the expected prices rising, people tend to demand more of the goods today.

Please feel free to ask your doubts in the comments section if any.