THE DEMAND CURVE

Q) Define demand? A) Demand is defined as the quantity of the commodity that a consumer is willing to buy
at different prices within a given period of time.

Q) What are the determinations of demand? OR What factors influence demand for a commodity? A) (i) Own Price: The law of Demand: Law of Demand states that other things remaining
unchanged, as the own price of a commodity increases, the quantity demanded of it by a consumer falls. Other things refer to the prices of related goods, income and tastes. (ii)Change in prices of related goods: Change in the prices of related goods also affects the demand for a commodity. Related goods are of two types:(a)Substitute goods and (b) Complementary goods (a)Substitute goods:- are those which can satisfy a given want with equal ease Without redvention in our satisfaction. These can be used in place of each other. For example; tea, coffee, ball pen and fountain pens, coke and Pepsi. Substitute goods have same/direct relationship, i.e., if the price of one goes up (tea), the demand for the other (coffee) also goes up. Good A is a substitute of good B if an increase in the price of good B increases the demand for good A. (b)Complementary goods:-Complementary goods are those which are used together to satisfy a given want. For example: car and petrol, pen and ink. Complementary goods have opposite relationship i.e., if the price of one commodity (petrol) rises it leads to fall in the demand of other commodity (car). In other words, good A is said to be complementary to good B if an increase in the price of good B decreases the demand for good A. (iii)A change in income: Generally, with the increase in income, the demand for the commodity goes up and vice-versa. However, the affect of increase in demand is not uniform on the demand of all commodities. Generally, as a result of increase in income, the demand of normal goods goes up and that of inferior goods goes down. (iv)A change in Tastes: The demand for a commodity depends upon tastes and preference of consumers. If a consumer becomes habitual of a commodity, then inspite of the increase in price of that commodity he will not reduce its demand. A favorable change in tastes shifts the demand curve to the right (increase in demand) and an unfavourable change shifts the demand curve to the left.(decrease in demand)

Q) State and explain law of demand? A) Laws of demand states that other things unchanged, as the own price of a commodity
increases, the quantity demanded of it by a consumer falls. Other things increase and tastes. For example: if price of apples falls, people will purchase more of it the law of demand can be illustrated with the help of demand schedule and curve.

Demand Schedule: - A demand schedule is a tabular statement which shows different quantities of a commodity demanded at different prices. The demand schedule shows as the price of apples increases the quantity demanded of it falls down.
OWN PRICE Qty Demanded of Apples

10 20 30 40 50

5 4 3 2 1

Demand curve: - A demand curve reflects graphically the relationship between the quantities demanded of a commodity to its price. In this figure, price is measured at OXaxis. DD is the demand curve. It slopes downwards. It shows the opposite relationship between price and quantity demanded.

Q) State assumptions of law of Demand? A) The law of demand operates only when we keep all the other factors affecting demand
constant except price. The other things are prices of related goods, income of the consumer, tastes, preferences and habits of the consumer, etc. These are called assumptions of the law of demand.

Q) Why is the Demand Curve Downward Sloping? OR why do consumers buy more at a lower price than at a higher price? Explain with law of Diminishing Marginal Utility? Qty of TMU of TA) Usually, a demand curve slapes downwards to the Shirts Shirts
right. This means the slope of demand curve is negative. Download sloping demand curve shows the inverse relationship between price and quantity demanded. A demand curve slopes downwards because of law of diminishing marginal utility. Indeed, the curve is essentially the marginal utility curve. In the below table marginal utility of T-shirts is shown. Here diminishing marginal utility sets in with the very first unit of consumptions. Assume further that marginal utility of a rupee is equal to1 util. Then, our consumers equilibrium condition can be stated as Marginal Utility = Price. Suppose that the price of a T-shit is Rs. - 45. The consumers equilibrium condition hodes at 7 T-shirts consumed. This can be restated as follows. The quantity demanded of T-shirts is 7 when the price is Rs. 45. Thus, the pair (45,7) will be on the demand curve. Similarly, suppose that the price of T-shirts increases to Rs. 65. The consumers equilibrium condition now holds at 3 T-shirts consumed, that is, at price Rs. 65, the quantity demanded is 3. Hence the pair (65,3) will be on the demand curve too. Liskeulise, we can determine all other points on the MU schedule are points on the demand schedule. This means that the 1 2 3 4 5 6 7 75 70 65 60 55 50 45

marginal utility curve itself is the demand curve, and, demand curve is downward sloping because of the law of diminishing marginal utility.

Q) What is meant by cross price effects? Give two numerical examples to illustrate this. A) Cross price effects is how the demand for one particular product is affected by a
change in the price of another i.e., substitute or complementary goods. (i) Substitute goods:- Substitute goods are those which can satisfy a given want with equal ease. For e.g. tea and coffee. Substitute goods have direct relationship i.e., if the price of one goes up, the demand for other also goes up. Here the demand curve of tea shifts to the right when the price of coffee goes up. Hence an increase in the price of a substitute good shifts the demand curve for a product to the right. Qty Qty Demanded Demanded Price of of Tea of Tea Tea when price when price of coffee of coffee Rs. 200/kg Rs. 300/kg 100 10 20 Here the quantity demanded of tea has gone up at the same price because of increase in the price of coffee. (ii) Complementary goods: Complementary goods are those which are used together to satisfy a given want. For example, car and petrol, pen and ink etc. complementary goods have opposite relationship i.e., if the price of one commodity goes up, it leads to fall in the demand for other commodity. Thus, an increase in the price of a complementary good shifts the demand curve for a product to the left. Qty Qty Price of Demanded Demanded Car of Car of cars (Rs. when price when price Lakhs) of petrol of petrol Rs. 30 Rs. 100 2.0 100 80 Here the demand for cars has come down because of rise in price of petrol & vice versa.

Q) Differentiate between normal goods and inferior goods with numerical examples.

A) (i)Normal goods are those, for which demand increases as income increases, for e.g.
TV, refrigerator, car etc. in case of normal goods an increase in income shifts the demand curve to the right. Qty Qty Demanded Demanded Price of of Car of cars Car when when INCOME INCOME = Rs. 500 = Rs. 1000 10 8 10 Here the demand has gone up because of rise in income & vice versa. (ii) Inferior goods:- Inferior goods are those whose demand falls as income rises. For e.g. coarse grains like bajra, maize, jawar etc. Here with the increase in income shifts the demand curve to the left. Qty Qty Bajra Demanded Demanded price INCOME INCOME = Rs. 500 = Rs.1000 10 20 15 Here the qty demanded has come down with the increase in income & vice versa.

Q) Explain extension and contraction in demand. OR Explain the movement along a demand curve. OR Explain the change in quantity demanded. A) Extension and contraction in demand is due to changes in price and not due to other
factors affecting demand such as income of consumers, taste and preferences, prices of related goods etc. it is also known as movement along a demand or changes in quantity demanded. (i) Extension in demand: If the quantity demanded rises with a fall in the price of a commodity, it is called extension/expansion in demand. Here we move downwards / rightwards along the same demand curve. This is shown in the below schedule and diagram.

Price 4

Demand 10

15

(ii) Contraction of demand: When the quantity demanded falls with a rise in price, it is known as contraction of demand. Here we move upwards / leftwards along the same demand curve. This is shown in the below schedule and diagram. Price 2 4 Demand 10 5

Q) Explain increase and decrease in demand. OR Explain shifts in demand curve OR Explain changes in demand. A) When there is change in demand not due to changes in price but due to changes in
other factors affecting demand like income of the consumer, prices of related goods, taste and preferences of consumers etc. It is called increase or decrease in demand. This is also called shift in demand curve because the demand curve shifts right or left. (i) Increase in demand: When the quantity demanded rises not due to fall in price, but due to other factors affecting demand, it is called increase in demand. Increase in demand can be by two ways: (a) More quantity is demanded at the same price. (b) Same quantity is demanded at the higher price Price Demand Demand (a 10 40 60 ) Price Demand (b 10 40 ) 20 40 Increase in demand can be explained with the help of diagram. On the OX-axis demand and on the OY-axis price is taken. Quantity demanded is OQ when price is OP. at this very price OP, demand goes up to OQ1. the demand curve Demand shifts from its original position to the new demand curve D1D1 (rightwards shift). Again when price rises to OP1, the demand remains the same i.e., OQ. Demand is the old demand curve, D1D1 depicts increase in demand. (ii) Decrease in demand: When demand falls not due to rise in price but due to other factors affecting demand, it is called decrease in demand. Decrease in demand can be by two ways: (a) Less quantity demanded at the same price (b)

PRICE Rs. 10

QTY. DEMANDED 30 Kg

QTY. DEMANDED 20 Kg

(c) Some quantity demanded at the lower price. PRICE QTY. DEMANDED Rs. 10 30 Kg Rs. 5 30 Kg Decrease in demand is explained with the help of a diagram. On the OX-axis demand and on the OY-axis price is taken. Demand in beginning is OQ when price is OP. at this very price OP, demand falls to OQ1. Again when the price falls to OP1, demand remains same i.e., OQ. D1D1 depicts decrease in demand. DD is the old demand curve. Demand is the old demand curve. In the case of decrease in demand, the demand curve shifts to left.

Q) Differentiate between extension (expansion) in demand and increase in demand.

EXTENSION IN DEAMND Extension and contraction in demand is due to changes in price and not due to other factors affecting demand. Here more quantity is demanded with the fall in price. Here we move downwards along the same demand curve. Here the quantity demanded changes. PRICE Qty.Demanded Rs.10 20 Rs. 5 40 INCREASE IN DEMAND Increase in demand is not due to change in price but due to changes in other factors affecting demand like income of the consumer, prices of related goods, taste and preferences of consumers etc. Here at the same price more quantity is demanded. Here the demand curve shifts to the right. Here the demand changes. PRICE Qty.Demanded Rs.10 20 Rs. 5 30

Q) Differentiate between contraction in demand and decrease in demand.

CONTRACTION IN DEAMND Contraction in demand is due to changes in price and not due to other factors affecting demand. Here less quantity is demanded with a rise in price. Here we move upwards along the same demand curve. Here the quantity demanded changes. PRICE Qty.Demanded Rs.10 20 Rs.30 10 DECREASE IN DEMAND Decrease in demand is not due to change in price but due to changes in other factors affecting demand like income of the consumer, prices of related goods, taste and preferences of consumers etc. Here at the same price less quantity is demanded. Here the demand curve shifts to the left. Here the demand changes. PRICE Qty.Demanded Rs.10 20 Rs.10 10

Q) Differentiate between movement along the demand curve and shift in demand curve. OR Differentiate between change in quantity demanded and change in demand.
MOVEMENT ALONG DEMAND CURVE (Change in quantity demanded) Change in quantity demanded is due to changes in price and not due to other factors affecting demand. SHIFT IN DEMAND CURVE (Change in demand)

Change in demand is not due to change in price but due to changes in other factors affecting demand like income of the consumer, prices of related goods, taste and preferences of consumers etc. There are two movements: There are two shifts: (a) Upward movement when demand (a) Rightwards shift when more quantity falls with a rise in price. demanded at the same. (b) Downward movement when demand (b) Leftwards shift when less quantity rises with a fall in price. demanded at the same price.

Q) Explain a household demand schedule and market demand schedule. A) A household demand means the demand of a single household at a particular time and
price. A household demand schedule, therefore, is a tabular statement which shows different quantities of a commodity that he would demand at different prices. Market demand, on the other hand, is the aggregate of demand of all individuals or households at each price. Therefore, market demand schedule is the aggregate on individual demand schedules. Let us suppose there are three households, namely, A, B and C in the apple markets. Individual demand schedules and the resultant market demand schedules for apples are given in the table. Market demand schedule is the horizontal summation of individual demand schedules. PRICE Rs. 2 4 6 10 INDIVIDUAL DEMAND SCHEDULES HOUSEHOLD HOUSEHOLD HOUSEHOLD A B C 4 5 6 3 4 5 2 3 4 1 2 3 MARKET DEMND (A+B+C) 15 12 9 6

Q) What is market demand curve? A) Graphic representation of market demand schedule is market demand curve. The
economy wide demand curve for a particular product is called the market demand curve. It is obtained up the demand curves across consumers or households. The demand curves of three households A, B and C are shown in the below graph. The market demand curve is derived geometrically by horizontal summation demand curves.

Q) What are the determinations of the market demand?

A) (i) Price of the commodity: The law of Demand: Law of Demand states that other
things remaining unchanged, as the own price of a commodity increases, the quantity demanded of it by a consumer falls. Other things refer to the prices of related goods, income and tastes. (ii)Change in prices of related goods: Change in the prices of related goods also Affects the demand for a commodity. Related goods are of two types:(a)Substitute goods and (b) Complementary goods (a)Substitute goods:- are those which can satisfy a given want with equal ease Without retention in our satisfaction. These can be used in place of each other. For example; tea, coffee, ball pen and fountain pens, coke and Pepsi. Substitute goods have same/direct relationship, i.e., if the price of one goes up (tea), the demand for the other (coffee) also goes up. Good A is a substitute of good B if an increase in the price of good B increases the demand for good A. (b)Complementary goods:-Complementary goods are those which are used together to satisfy a given want. For example: car and petrol, pen and ink. Complementary goods have opposite relationship i.e., if the price of one commodity (petrol) rises it leads to fall in the demand of other commodity (car). In other words, good A is said to be complementary to good B if an increase in the price of good B decreases the demand for good A. (iii)A change in Tastes: The demand for a commodity depends upon tastes and preference of consumers. If a consumer becomes habitual of a commodity, then in spite of the increase in price of that commodity he will not reduce its demand. A favorable change in tastes shifts the demand curve to the right (increase in demand) and an unfavorable change shifts the demand curve to the left.(decrease in demand). (iv) Distribution of Income: If national income is equitably distributed, there will be more demand and vice versa. If there are more poor people, the demand for necessaries of life will be more. Increase in the percentage of rich people, luxury goods will be demanded more. (v) Fashions: If some commodity is in fashion, the demand for it will go up and vice versa. (vi) Population: Increase in population increases the demand and vice versa. Like size of population, its composition also affects the demand. (vii) Government Policy: Govt. of a country can also affect the demand for a particular commodity or commodities through taxation. It may reduce the demand for a commodity by imposing tax on it or increase the demand by lowering its price through subsidies. (viii) State of business: The prevailing business conditions in a country also affect the level of income. For example, during boom periods, market demand will increase. On the other hand, the level of demand goes down during depression.

Q) List the factors that cause changes in demand. A) (i) Change in the prices of related goods.
(ii) Change in income. (iii) Change in tastes and preferences on consumers.

Q) If the demand of good Y increases as the price of another X rises, how are the two goods related. A) X and Y are substitute goods.

Q) If the demand of good Y decreases on an increase in the income of a family. Which type of good is Y? A) Inferior good. Q) Give an example of a pair of commodities that are substitute (and complementary) of each other. A) Substitute goods: Tea & Coffee, coke & pepsi or juice
Complementary goods: ink & pen, petrol & car

Q) If the price of good X rises and this leads to a decrease in demand for good Y, how are the two goods related. A) The two goods are complementary goods. Q) Distinguish between a change in quantity demanded and a change in demand. A) A change in the quantity demanded is the movement along the given demand curve,
i.e., the effect of a change in commoditys own price on its demand. On the other hand, when a change in any other factor causes a (left or rightward) shift of a demand curve, we can call this a change in demand.

Q) Identify the type of commodity in each case and define Income of Qty Demand Qty Demand Qty Demand of of of H.H. (Rs.) Commodity Commodity Commodity A B C 100 10 10 20 200 20 10 15 300 30 10 12 400 40 10 11 A) Commodity A is a normal (luxury) good since its demand is rising with a rise in
income. Commodity B is a necessity good since its demand remains same and commodity C is inferior good since its demand falls with increase in income.

Q) When does a consumer buy more of a commodity at the given / same price? A) (i) When the income of the consumer increases in case of normal / luxury goods.
(ii) When the prices of substitute goods go up. (iii) When the price of complementary goods goes down. (iv) When her tastes become favorable towards that commodity.

Q) When does a consumer buy less of a commodity at the given / same price? A) (i) When the income of the consumer decreases in case of normal / luxury goods.
(ii) When the prices of substitute goods go down. (iii) When the price of complementary goods goes up. (iv) When her tastes become unfavorable towards that commodity. (v) When the income of the consumer goes up in case of inferior goods.

Q) State three causes of a rightward shift of demand curve of a commodity. A) (i) Increase in the income of the consumer results in increase in the demand for normal
goods. As a result, demand curve may have a rightward shift. (ii) A rise in the price of substitute goods causes a rightward shift. (iii) A fall in the price of complementary goods. (iv) A favorable taste towards a commodity..

Q) Why demand curve slope down to the right? A) The demand curve slopes downwards because it shows the inverse relationship
between price and quantity demanded. Consumers buy more quantity at lesser price because of the following reasons:(i) Diminishing Marginal Utility: According to this law a consumer consumes more and more units of a commodity; every additional unit gives him declining utility. Hence the marginal utility curve declines. Law of demand depends on law of diminishing marginal utility. Thus, demand curve also slopes downwards. (ii) Income effect:- when the price of a commodity decreases, real income of the consumer increases. As a result, they will find a position to buy more of quantity with same income. This is called income effect. As a result demand curve slopes downwards. (iii) Substitution effect: When the price of a commodity falls, it looks cheaper compared to its substitutes. Hence people prefer to buy more quantity and demand curve falls. (iv) Number of consumer: when the price of a commodity falls, old consumers would be in a position to buy more quantity and new consumers are also attracted leading to increase in demand and fall in demand curve towards down. (v) Different uses of a commodity: When the price of a commodity falls, people put it different uses leading to increase in its quantity demanded. For e.g., when price of milk falls, it would be used to prepare tea, butter, cheese etc.