DEMAND

Definition: - Demand in Economics refers to a want or a desire backed by the capacity

and willingness to pay. It is related to time, price and place.

DETERMINANTS OR FACTORS AFFECTING DEMAND

1.Price of the commodity: - According to the Law of Demand “Other things remaining
constant, if the price of the commodity increases, the quantity demanded of that
commodity will decrease and vice versa.”
This means that there is an inverse relation between price of the commodity and the
quantity demanded of that commodity.
E.g. If the commodity is TEA and price of tea decreases, it demand will increase and
vice versa. (Use table a Price of the commodity: - According to the Law of Demand
“Other things remaining constant, if the price of the commodity increases, the quantity
demanded of that commodity will decrease and vice versa.”
This means that there is an inverse relation between price of the commodity and the
quantity demanded of that commodity.
E.g. If the commodity is TEA and price of tea decreases, it demand will increase and
vice versa. (Use table and diagram for more marks)

2.Price of Related Goods.: -

Related goods may be of two types
[i] Substitute goods: These are commodities which are used in place of each other.
They have competing demands.
Eg. Tea and Coffee, Coke and Pepsi
Let Tea be the Original good and Coffee be the Substitute good.
If the price of coffee increases, the demand for tea will increase and vice versa.
This indicates a direct relation between price of substitute good and demand of original
commodity.

[ii] Complementary goods: These are goods which are used together to satisfy a want.
They have a Joint demand.
Eg. Car and petrol, Tea, milk and sugar.
Let Tea be the Original good and Milk be the Complementary good.
If the price of Milk increases, the demand for Tea will decrease and vice versa.
This indicates an inverse relation between price of complementary good and demand of
original commodity.

3.Income of the Consumer: - Based on the Income of consumers, commodities can be

of two types.
[i] Normal goods: These are goods for which demand increases with increase in income
of the consumer.
There is a direct relation between income of consumer and demand of normal goods.
Eg. Sugar
[ii] Inferior goods: - These are goods for which demand decreases with increase in
income of the consumer.
There is an inverse relation between income of consumer and demand of inferior goods.
Eg. Jaggery

4.Taste and preferences of consumers: -

Favourable change Increase in Demand
Unfavourable change Decrease in Demand

5.Advertisements: - Attractive advertisements, free samples, endorsements by famous

people, leads to increase in demand of a commodity.

6.Taxes: -
Increase in Taxes Decrease in demand
Decrease in Taxes Increase in demand

7.Future expectations of prices: -

Expected to increase in future Increase in demand at present
Expected to decrease in future Decrease in demand at present

8.Technology: -
Latest technology Increase in demand
Outdated technology Decrease in demand
Eg. Laptops, cell phones, etc.

LAW OF DEMAND
Statement of the Law: - Other factors remaining constant, the quantity demanded of a
commodity varies inversely to the price of the commodity. When price increases,
demand decreases and when price decreases, demand increases.

Demand schedule: - is a table representing quantities demanded of a commodity by an

individual consumer at different prices.
The schedule indicates that as price of the commodity decreases from Rs. 5 to Re.1,
the quantity demanded of the commodity increases from 10 units to 50 units.

Demand Curve: - is a graphical representation of the Demand schedule.

We plot price on the Y axis and quantity demanded of the commodity on the X axis.
Joining the demand points a,b,c,d,e we get the Demand curve DD sloping downwards.
It indicates the inverse relation between Price and Quantity demanded of a commodity.

Demand Price Quantity

Points (Rs.) demanded
(Units)
 a 5 10

b 4 20

c 3 30

d 2 40

e 1 50

Assumptions: - The following determinants remain constant

1. Prices of related goods
2. Income of the consumer,
3. Tastes, preferences and habits of consumers
4. Advertisements
5. Technology
6. Taxes
7. Future expectations of prices

Exceptions to the Law: -

Griffins goods, Share market, Prestige goods, Price illusion.

Market Demand
Definition: - Refers to the total demand for a commodity by all consumers in the
market at different prices. It is the horizontal summation of individual demands.

Market Demand Schedule: -

Demand Price Individual Demands Market demand

Points (Rs.) (Units)
Consumer A Consumer B Consumer C

a 50 1 - - 1

b 40 2 1 - 3

c 30 3 2 1 6

d 20 4 3 2 9

e 10 5 4 3 12
Market Demand Curve: -

Explanation: -

MOVEMENTS AND SHIFTS IN DEMAND

Movement along the Demand Curve / Change in Quantity Demanded

1. Definition: - Is when quantity demanded of a commodity changes due to change

in price of that commodity. (other factors remaining constant)
2. Types: - a) Expansion/Extension and b) Contraction
3. a) Expansion is when Quantity demanded of a commodity increases due to
decrease in price of that commodity. (P↓, D↑)
b) Contraction is when Quantity demanded of a commodity decreases due to
increase in price of that commodity. (P↑, D↓)
4. Diagram and Explanation
a) Expansion in demand
We plot price on the Y-axis and quantity demanded on the X-axis. p0 is the Original
price and q0 is the original quantity demanded, giving the original demand point ‘a’.
If price decreases from p0 to p1, quantity demanded increases from q0 to q1, giving the
new demand point ‘b’. The demand points lie on the original demand curve D0D0. We
notice that expansion in demand leads to a Downward Movement of the demand point
along the same demand curve from ‘a’ to ‘b’.

b) Contraction in demand

We plot price on the Y-axis and quantity demanded on the X-axis. p0 is the Original
price and q0 is the original quantity demanded, giving the original demand point ‘a’.
If price increases from p0 to p2, quantity demanded decreases from q0 to q2, giving the
new demand point ‘c’. The demand points lie on the original demand curve D0D0. We
notice that contraction in demand leads to an Upward Movement of the demand point
along the same demand curve from ‘a’ to ‘c’.

COMBINED DIAGRAM FOR MOVEMENT

Shift in the Demand Curve / Change in Demanded

1. Definition: - Is when quantity demanded of a commodity changes due to factors
other than price of that commodity.
2. Types: - a) Increase and b) Decrease
a) Increase is when more quantity is demanded at a constant price (PX, D↑)
b) Decrease is when less quantity is demanded at the same price (PX, D↓)

Diagram and Explanation

a) Increase in demand

We plot price on the Y-axis and quantity demanded on the X-axis. p0 is the original price
and q0 is the original quantity demanded, giving the original demand point ‘a’. Point ‘a’
lies on the original demand curve D0D0.
If quantity demanded increases from q0 to q1 due to factors other than price, Price
remaining unchanged at p0. It will give us the demand point ‘b’.
The new demand point lie on the new demand curve D1D1. We notice that increase in
demand leads to a Parallel Rightward Shift in the demand curve from D0D0 to D1D1.

b) Decrease in demand

We plot price on the Y-axis and quantity demanded on the X-axis. p0 is the original price
and q0 is the original quantity demanded, giving the original demand point ‘a’. Point ‘a’
lies on the original demand curve D0D0.
If quantity demanded decreases from q0 to q2 due to factors other than price, Price
remaining unchanged at p0. It will give us the demand point ‘c’.
The new demand point lie on the new demand curve D2D2. We notice that decrease in
demand leads to a Parallel leftward Shift in the demand curve from D0D0 to D2D2.

COMBINED DIAGRAM FOR SHIFT

EXERCISE
Q.1. Demand for a commodity will increase when: -

1. Price of Substitute goods:

2. Price Complementary goods:
3. Income of the Consumer:
4. Taste and preferences of consumers:
5. Advertisements
6. Taxes:
7. Future expectations of prices:
8. Technology:

Q.2. Demand for a commodity will decrease when: -

1. Price of Substitute goods:

2. Price Complementary goods:
3. Income of the Consumer:
4. Taste and preferences of consumers:
5. Advertisements
6. Taxes:
7. Future expectations of prices:
8. Technology:

Q. 3. Which of the following is not a determinant of individual demand function?

(a) Distribution of Income (b) Price (c) Income of Consumer (d) Taste and preferences

Q. Price (Rs.) Demand (Units)

 20 80

20 10

Q.4.Name the type of demand by the above example

(a) contraction of demand (b) expansion of demand (c) increase in demand (d)
decrease in demand

Q. 5. State whether the following statements are true or false? Give reasons.

Increase in number of consumers shifts the demand curve rightward.

PRICE ELASTICITY OF DEMAND

Price Elasticity of Demand: - refers to the responsiveness of quantity demanded of a

commodity to change in price of that commodity.

Formula: - Ed = % change in Quantity demanded / % change in Price

TYPES OF PRICE ELASTICITY OF DEMAND

1) Perfectly Elastic Demand: - is when a slight change in price brings about an

infinite change in quantity demanded. (Not practically possible but of theoretical
importance)
Diagram: -

Ed= %∆QD / %∆P i.e. Any No / 0 = ∞ (Infinity)

The demand curve is a horizontal straight line parallel to the X axis

2.Perfectly Inelastic Demand: - is when, demand does not respond at all to the change
in price.

Diagram: -
 Ed= %∆QD / %∆P i.e. 0 / 10 = 0
The demand curve is a vertical straight line parallel to the Y axis.

2) Relatively Elastic Demand: - is when the proportionate change in quantity

demanded is greater than the change in price.
Diagram: -

Ed= %∆QD / %∆P i.e. 20 / 10 = 2

The demand curve has a Broad and Gradual slope.

3) Relatively Inelastic Demand: - is when the proportionate change in quantity

demanded is less than the change in price.
Diagram: -

Ed= %∆QD / %∆P i.e. 10 / 20 = 0.5

 The demand curve has a Narrow and Steep slope.
4) Unit Elastic Demand: - is when the proportionate change in quantity demanded is
equal to the change in price.

Diagram: -

Ed= %∆QD / %∆P i.e. 10 / 10 = 1 (Unitary)

The demand curve forms 45-degree angles when extended to X and Y axis.

METHODS OF MEASURING PRICE ELASTICITY OF DEMAND

1) Percentage / Proportionate/ Ratio Method: - In this method Ed is calculated by

comparing the percentage change in Quantity demanded of the commodity with the
percentage change in Price of the commodity.
Formula: - Ed= %∆QD / %∆P
When value of co-efficient Ed is: -
>1 Relatively elastic
< 1 Relatively Inelastic
= 1 Unit elastic

2) Expenditure or Outlay method:- In this method we measure elasticity by comparing

the change in price and outlay.
TABLE:
 Ed = 1 when a change in price brings no change in outlay
Ed > 1 when price and outlay move in opposite directions
Ed < 1 when price and outlay move in same direction

DETERMINANTS OF ELASTICITY OF DEMAND

Five factors affecting the elasticity of demand are:

1) Nature of commodity: Necessaries have less than unitary elastic demand
whereas, luxuries have more than unitary elastic demand.

2) Time period: Demand is inelastic in short period but elastic in long

period.

3) Price level: elasticity of demand will be high at higher level of the price of
the commodity and low at lower level of price.

4) Diversity of uses: Commodities that can be put to variety uses have

elastic demand. On the other hand, if a commodity has only few uses, its
demand is likely to be less elastic.

5) Habit of consumers: Goods to which consumers become habitual will

have inelastic demand.

Q. 1. State whether the following statements are true or false? Give reasons.

The demand of a commodity becomes elastic if its substitute good is available in the
market.

Q. 2.The demand for electricity is not falling in spite of regular hike in the price

of electricity. What will be the elasticity of demand for electricity?