DEMAND

MEANING OF DEMAND
Demand is the quantity of a commodity that a consumer is willing and able to buy, at each possible
price during a given period of time. [Note: Desire means a mere wish to have a commodity]
Four essential elements of demand: (i) quantity of the commodity (ii) willingness to buy
(iii) price of the commodity (iv) period of time

TYPES OF DEMAND

INDIVIDUAL DEMAND MARKET DEMAND

Individual demand – refers to the quantity of a commodity that a consumer is willing and able to buy, at each
possible price during a given period of time.

Market demand – refers to the quantity of a commodity that all consumers are willing and able to buy, at each
possible price during a given period of time.
 DETERMINANTS OF DEMAND
(INDIVIUAL DEMAND)
Demand for a commodity increases or decreases due to a number of factors. The various factors affecting demand are:

1. Price of the given commodity – There exists an inverse relationship between price and quantity demanded. It
means, as price increases, quantity demanded falls due to decrease in the satisfaction level of consumers.
2. Price of related goods – Demand for the given commodity is also affected by change in price of the related
goods. Related goods are of two types :
(i) Substitute goods – are those goods which can be used in place of each other with equal ease and satisfaction.
An increase in the price of substitute leads to an increase in the demand for given commodity and vice – versa.
Thus demand for a given commodity is directly affected by change in price of substitute goods. Eg: Tea and
coffee, Limca and CocaCola.
(ii)Complementary goods – are those goods which are used together for satisfaction of wants. An increase in the
price of complementary goods leads to a decrease in the demand for given commodity and vice – versa. Thus
demand for a given commodity is inversely affected by change in price of complementary goods. Eg: tea and
sugar, pen and ink.
3. Income of the consumer – The demand for normal goods varies directly with the income of the consumer, i.e. the
demand for normal goods increases with the rise in income and decreases with the fall in income of the consumer.
Eg: normal good – Full cream milk.
The demand for inferior goods decreases with the rise in income and increases with the fall in income. Eg: inferior
good – toned milk.

4. Tastes and preferences – Demand for a particular commodity changes with the changes in taste, nature and
fashion. The demand for a commodity increases with the favourable change in tastes and preferences of a
consumer and vice versa. Eg: Due to the impact of western civilization, the demand for dhoti – kurta is decreasing
and the demand for pant – shirt is on the increase.

5. Expectation of change in the price in future – If the price of a certain commodity is expected to increase in
near future, then people will buy more of that commodity than what they normally buy. Eg: If the price of petrol is
expected to rise in future, its present demand will increase.
 DETERMINANTS OF DEMAND
(MARKET DEMAND)
Market demand is influenced by all the factors affecting individual demand for a commodity. In addition, it is
also affected by the following factors:

1. Size and composition of population: Market demand for a commodity is affected by size of population in the
country. Increase in population raises the market demand and vice versa. Composition of population i.e. ratio of
males, females, children and number of old people in the population also affects the demand for a commodity.
Eg: if a market has larger proportion of women, then there will be more demand for articles of their use as
lipsticks, sarees etc.
2. Season and weather: The seasonal and weather conditions affect the market
demand for a commodity. Eg: During winters, demand for woollen clothes and jackets
increases.
3. Distribution of income: If income in the country is equitably distributed, then market
demand for commodities will be more. However, if income distribution is uneven,
i.e. people are either very rich or very poor, then market demand will remain at
lower level.
 DEMAND FUNCTION
Demand function shows the relationship between quantity
demanded for a particular commodity and the factors influencing it. It
is of two types:
Individual demand function : It refers to the functional relationship
between individual demand and the factors affecting individual
demand.
It is expressed as: 𝐷𝑥 = 𝑓(𝑃𝑥 , 𝑃𝑟 , 𝑌, 𝑇, 𝐹)
Where,
𝐷𝑥 = demand for commodity 𝑥; 𝑃𝑥 = price of the given commodity 𝑥;
𝑃𝑟 = prices of related goods; Y = income of the consumer;
T = tastes and preferences; F = expectation of change in price in
future.
Market demand function : It refers to the functional relationship
between market demand and the factors affecting market demand.
It is expressed as: 𝐷𝑥 = 𝑓(𝑃𝑥 , 𝑃𝑟 , 𝑌, 𝑇, 𝐹, 𝑃𝑜 , 𝑆, 𝐷)
Where,
𝐷𝑥 = market demand for commodity 𝑥; 𝑃𝑥 = price of the given commodity 𝑥;
𝑃𝑟 = prices of related goods; Y = income of the consumers;
T = tastes and preferences; F = expectation of change in price in
future;
𝑃𝑜 = size and composition of population; S = season and weather;
D = distribution of income.
 DEMAND SCHEDULE
Demand schedule is a tabular statement showing various quantities of a commodity
being demanded at various levels of price, during a given period of time. It shows the
relationship between price of the commodity and its quantity demanded. It is of two
types:

Demand schedule

Individual demand Market demand

schedule schedule
 INDIVIDUAL DEMAND SCHEDULE
Individual demand schedule refers to a tabular statement showing various
quantities of a commodity that a consumer is willing to buy at various levels of price,
during a given period of time.

As seen in the schedule, quantity demanded of ‘x’ increases with decrease in its price.
The consumer is willing to buy 1 unit at Rs 5. When price falls to Rs 4, demand rises to
2 units.
 MARKET DEMAND SCHEDULE
Market demand schedule refers to a tabular statement showing various
quantities of a commodity that all consumers are willing to buy at various levels of price,
during a given period of time. It is the sum of all individual demand schedules at each
and every price.

As seen in the above table, market demand is obtained by adding demand of households
A and B. At Rs 5 per unit, market demand is 3 units. When price falls to Rs 4, market
demand rises to 5 units.
 DEMAND CURVE
Demand curve is a graphical representation of demand schedule. It is the locus
(Latin word for “place”, “location”) of all the points showing various quantities of a
commodity that a consumer is willing to buy at various levels of price, during a given
period of time, assuming no change in other factors. It is of two types:

Demand curve

Individual demand curve Market demand curve

 INDIVIDUAL DEMAND CURVE
Individual demand curve refers to a graphical representation of individual demand
schedule.

As seen in the diagram, price (independent variable) is taken on the vertical axis (y – axis)
and quantity demanded (dependant variable) on the horizontal axis (x – axis). At each
possible price, there is a quantity, which the consumer is willing to buy. By joining all the
points (P to T), we get a demand curve ‘DD’. The demand curve ‘DD’ slopes downwards
due to inverse relationship between price and quantity demanded.
 MARKET DEMAND CURVE
Market demand curve refers to a graphical representation of market demand
schedule. It is obtained by the horizontal summation on individual demand curves.

DA and DB are the individual demand curves. Market demand curve (DM) is obtained
by horizontal summation of the individual demand curves (DA and DB).
Market demand curve is flatter than the individual demand curves because as price
changes, proportionate change in market demand is more than proportionate change
in individual demand.
 SLOPE OF DEMAND CURVE
Slope of a curve is defined as the change in the variable on the y – axis divided by the change in the variable on
the x – axis. So, the slope of the demand curve equals the change in price divided by the change in quantity.

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 (∆𝑃)

Slope of demand curve = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (∆𝑄)
Due to inverse relationship between price and demand, the demand curve slopes downwards. So slope is
negative.
Slope of the demand curve measures the flatness or steepness of the demand curve. So, it is based on the
absolute change in price and quantity. [Note: Greater slope means a steeper demand curve while a lesser slope
means a flatter demand curve.]
 LAW OF DEMAND
Law of demand states the inverse relationship between price and quantity demanded, keeping other factors constant
(ceteris paribus). This law is also known as the ‘First Law of Purchase’.

Assumptions of Law of Demand:

While stating the Law of Demand, we use the phrase ‘keeping other factors constant or ceteris paribus’. ‘Keeping other
factors constant or ceteris paribus’ means that:
1. Prices of substitute goods do not change.
2. Prices of complementary goods remain constant.
3. Income of the consumer remains the same.
4. There is no expectation of change in price in the future.
5. Tastes and preferences of the consumer remain the same.

Law of demand can be better understood with the help of schedule and figure.

The given table shows that more and more units of commodity are demanded, when price of the
commodity falls. As seen in the figure, demand curve DD slopes downwards from left to right, indicating
inverse relationship between price and quantity demanded.
 Important Facts about Law of
Demand
1. Inverse Relationship:
It states the inverse relationship between price and quantity demanded. It simply affirms that an increase
in price will tend to reduce the quantity demanded and a fall in price will lead to an increase in the
quantity demanded.
2. Qualitative, not Quantitative:
It makes a qualitative statement only, i.e. it indicates the direction of change in the amount demanded
and does not indicate the magnitude of change.
3. No Proportional Relationship:
It does not establish any proportional relationship between change in price and the resultant change in
demand. If the price rises by 10%, quantity demanded may fall by any proportion.
4. One-Sided:
Law of demand is one sided as it only explains the effect of change in price on the quantity demanded. It
states nothing about the effect of change in quantity demanded on the price of the commodity.
IMPORTANCE OF LAW OF DEMAND
The study of Law of Demand is important for:
 Fixing/ determination of price by traders.

 Finance Ministry: If by increasing the tax, the price

increases to such an extent that the demand is
considerably reduced, then increasing the tax is of no
use because revenue will remain almost the same.
Those goods should be taxed whose demand is not
likely to fall substantially even when their price rises.
(Eg. Cigarettes, tobacco, alcohol etc.)

 Farmers: If a bumper harvest fails to increase demand

for the crop, price will fall heavily and farmers will have
no advantage of the good harvest.
 REASONS FOR OPERATION OF LAW OF DEMAND
1. Law of Diminishing Marginal Utility:
Law of diminishing marginal utility states that as we consume more and more units of a commodity, the utility derived from each successive unit goes
on decreasing. Accordingly, for every additional unit to be purchased, the consumer is willing to pay less and less price. So, demand for a commodity
depends on its utility. If the consumer gets more satisfaction, he will pay more. As a result, consumer will not be prepared to pay the same price for
additional units of the commodity. The consumer will buy more units of the commodity only when the price falls.
2. Substitution Effect:
Substitution effect refers to substituting one commodity in place of other when it becomes relatively cheaper. When price of the given commodity falls,
it becomes relatively cheaper as compared to its substitute (assuming no change in price of substitute). As a result, demand for the given commodity
rises.
For example, if price of given commodity (say, Pepsi) falls, with no change in price of its substitute (say, Coke), then Pepsi will become relatively
cheaper and will be substituted for coke, i.e. demand for Pepsi will rise.
3. Income Effect:
Income effect refers to effect on demand when real income of the consumer changes due to change in price of the given commodity. When price of the
given commodity falls, it increases the purchasing power (real income) of the consumer. As a result, he can purchase more of the given commodity
with the same money income.
For example, suppose Isha buys 4 chocolates @ Rs. 10 each with her pocket money of Rs. 40. If price of chocolate falls to Rs. 8 each, then with the
same money income, Isha can buy 5 chocolates due to an increase in her real income.
4. Additional Customers:
When price of a commodity falls, many new consumers, who were not in a position to buy it earlier due to its high price, starts purchasing it. In
addition to new customers, old consumers of the commodity start demanding more due to its reduced price.
For example, if price of ice-cream family pack falls from Rs. 100 to Rs. 50 per pack, then many consumers who were not in a position to afford the ice-
cream earlier can now buy it with decrease in its price. Moreover, the old customers of ice-cream can now consume more. As a result, its total demand
increases.
5. Different Uses:
Some commodities like milk, electricity, etc. have several uses, some of which are more important than the others. When price of such a good (say,
milk) increases, its uses get restricted to the most important purpose (say, drinking) and demand for less important uses (like cheese, butter, etc.) gets
reduced. However, when the price of such a commodity decreases, the commodity is put to all its uses, whether important or not.
 EXCEPTIONS TO LAW OF DEMAND
There are some situations in which the Law of Demand does not operate. Many times we notice that with the
increase in price, more quantity of a commodity is purchased and with the decrease in price, less is purchased. This
is contrary to the Law of Demand. These are known as Exceptions to the Law of Demand. Main exceptions are as
follows:
1. Giffen Goods:
These are special kind of inferior goods on which the consumer spends a large part of his income and their
demand rises with an increase in price and demand falls with decrease in price. For example, in our country, it is
often seen that when price of coarse cereals like jowar and bajra falls, the consumers have a tendency to spend
less on them and shift over to superior cereals like wheat and rice. This phenomenon, popularly known as’ Giffen’s
Paradox’ was first observed by Sir Robert Giffen.
2. Status Symbol Goods or Goods of Ostentation or Conspicuous Goods or Snob Goods or Veblen Goods :
The exception relates to certain prestige goods which are used as status symbols. For example, diamonds, gold,
antique paintings, etc. are bought due to the prestige they confer upon the possessor. These are wanted by the
rich persons for prestige and distinction. The higher the price, the higher will be the demand for such goods.
3. Fear of Shortage:
If the consumers expect a shortage or scarcity of a particular commodity in the near future, then they would start
buying more and more of that commodity in the current period even if their prices are rising. The consumers
demand more due to fear of further rise in prices. For example, during emergencies like war, famines, etc.,
consumers demand goods even at higher prices due to fear of shortage and general insecurity.
4. Ignorance:
Consumers may buy more of a commodity at a higher price when they are ignorant of the prevailing prices of the
commodity in the market.
5. Fashion related goods:
Goods related to fashion do not follow the law of demand and their demand increases even
with a rise in their prices. For example, if any particular type of dress is in fashion, then
demand for such dress will increase even if its price is rising.
6. Necessities of Life:
Another exception occurs in the use of such commodities, which become necessities of
life due to their constant use. For example, commodities like rice, wheat, salt, medicines,
etc. are purchased even if their prices increase.
7. Change in Weather:
With change in season/weather, demand for certain commodities also changes, irrespective of any change in their prices.
For example, demand for umbrellas increases in rainy season even with an increase in their prices. It must be noted that
in normal conditions and considering the given assumptions, ‘Law of Demand’ is universally applicable.
 MOVEMENT ALONG THE DEMAND CURVE (CHANGE IN QUANTITY DEMANDED)

When quantity demanded of a commodity changes due to a change in its price, keeping other factors constant, it is known
as change in quantity demanded. It is graphically expressed as a movement along the same demand curve.

 Upward movement: When price rises to OP1, quantity demanded falls to OQ1 (known as contraction in demand) leading
to an upward movement along the same demand curve DD.
 Downward movement: Fall in price from OP to OP2 leads to an increase in quantity demanded from OQ to OQ2 (known
as expansion in demand), resulting in a downward movement along the same demand curve DD.
 EXPANSION IN DEMAND
Expansion in demand refers to a rise in the quantity demanded due to a fall in the price of commodity, other factors
remaining constant.

• It leads to a downward movement along the same demand curve.

• It is also known as ‘Extension in demand’ or ‘Increase in quantity demanded’.

It is better understood from the given table and figure.

As seen in the given schedule and diagram, the quantity demanded rises from 100 units to 150 units with a fall in
the price from Rs 20 to Rs 15, resulting in a downward movement from A to B along the same demand curve DD.
 CONTRACTION IN DEMAND
Contraction in demand refers to a fall in the quantity demanded due to a rise in the price of commodity, other factors
remaining constant.

• It leads to an upward movement along the same demand curve.

• It is also known as ‘Decrease in quantity demanded’.

It is better understood from the given table and figure.

As seen in the given schedule and diagram, the quantity demanded falls from 100 units to 70 units with a rise in the price
from Rs 20 to Rs 25, resulting in an upward movement from A to B along the same demand curve DD.
 SHIFT IN DEMAND CURVE (CHANGE IN DEMAND)

When the demand of a commodity changes due to change in any factor other than the own price of the commodity, it is
known as change in demand. It is expressed as a shift in the demand curve.

 Rightward shift: When demand rises from OQ to OQ1 (known as increase in demand) at the same price OP, it leads to a
rightward shift in demand curve from D to D1.

 Leftward shift: Fall in demand from OQ to OQ2 (known as decrease in demand) at the same price of OP, leads to a
leftward shift in demand curve from D to D2.
 VARIOUS REASONS FOR SHIFT IN DEMAND
CURVE
Change in price of substitute goods
Change in price of complementary goods
Change in income of consumers
Change in tastes and preferences
Expectation of change in price in future
Change in population
Change in distribution of income
Change in season and weather
 INCREASE IN DEMAND
Increase in demand refers to a rise in the demand of a commodity caused due to any factor other than the own
price of the commodity. In this case, demand rises at the same price or demand remains same even at higher
price.

Increase in demand leads to a rightward shift in the demand curve.

As seen in the given schedule and diagram, demand rises from 100 units to 150 units at the same price of Rs 20,
resulting in a rightward shift in the demand curve from DD to D1D1.
 DECREASE IN DEMAND
Decrease in demand refers to a fall in the demand of a commodity caused due to any factor other than the own price of
the commodity. In this case, demand falls at the same price or demand remains same even at lower price.

Decrease in demand leads to a leftward shift in the demand curve.

As seen in the given schedule and diagram, demand falls from 100 units to 70 units at the same price of Rs 20, resulting
in a leftward shift in the demand curve from DD to D1D1.
 SUBSTITUTE GOODS AND COMPLEMENTARY GOODS
Substitute goods – Substitute goods are those goods which can be used in place of one another for satisfaction of a
particular want, like tea and coffee. Demand for a given commodity varies directly with the price of a substitute good.

As seen in the given diagram, price of coffee (substitute good) is shown on the
y – axis and demand for tea (given commodity) on the x – axis. When price of
Coffee rises from OP to OP1, demand for tea also rises from OQ to OQ1.

Complementary goods – Complementary goods are those goods which are used together to satisfy a particular want, like
tea and sugar. Demand for a given commodity varies inversely with the price of a complementary good.

As seen in the given diagram, price of sugar (complementary good) is shown on the
y – axis and demand for tea (given commodity) on the x – axis. When the price of sugar
rises from OP to OP1, demand for tea decreases from OQ to OQ1.
 NORMAL GOODS AND INFERIOR GOODS
Normal goods refer to those goods whose demand increases with an increase in income. For example, if the demand for
TV increases with a rise in income, then TV will be called a normal good. Income effect is positive in case of normal
goods.

In the given figure, income of the consumer is shown on the y – axis and
demand for a normal good (say, TV) is shown on the X – axis. When income
rises from OY to OY1, the demand for TV also rises from OQ to OQ1.

Inferior goods refer to those goods whose demand decreases with an increase in income. For example, if the income of a
consumer rises and he prefers to replace his black – and – white TV with a coloured one, the demand for B/W TV will fall.
In this case, B/W TV is an inferior good.

In the given figure, income of the consumer is shown on the y – axis and
demand for an inferior good (B/W TV) is shown on the X – axis. When income
rises from OY to OY1, the demand for B/W TV falls from OQ to OQ1 as the
consumer shifts to Colour TV.
 TYPES OF DEMAND
1. Price demand:
Price demand refers to a relationship between the price and demand of a commodity, assuming other factors constant. It can
be shown as Dx = f(Px), where Dx = Demand for the given commodity; f = functional relationship; Px = Price of the given
commodity.
2. Income demand:
Income demand refers to a relationship between the income of consumer and the quantity demanded of a commodity,
assuming other factors constant. It can be shown as Dx = f(Y), where Dx = Demand for the given commodity; f = functional
relationship; Y = Income of the consumer.
3. Cross demand:
Cross demand refers to a relationship between the demand of a given commodity and the prices of related commodities,
assuming other things remaining the same.
4. Joint demand:
When two or more goods are demanded simultaneously to satisfy a particular want, then such a demand is called joint
demand. For example, demand for sugar, milk, and tea leaves is a joint demand, as they are demanded together to prepare
tea.
5. Composite demand:
When a commodity can be put to several uses, its demand is known as composite demand. For example, demand for
electricity is a composite demand as it can be used for various purposes like lighting purposes, running the refrigerator, TV,
AC, etc.
6. Derived demand:
Demand for a commodity, which depends on the demand for other goods, is known as derived demand. For
example, demand for labour producing cloth is a derived demand as it depends on the demand for cloth.

7. Direct demand:
When a commodity satisfies the wants directly, its demand is termed as direct demand. For example, demand
for clothes, books, food is a direct demand as these items satisfy the wants directly.

8. Alternative demand:
Demand is known as alternative demand, when it can be satisfied by different alternatives. For example, there
are number of options (alternatives) to satisfy the demand for food like chapatti, rice, salad, fruits, burger,
pizza, etc.

9. Competitive demand:
When two goods are close substitutes of each other and increase in demand for one of them will decrease the
demand for the other, then the demand for any one of them is known as competitive demand. For example,
increase in demand for coffee might reduce the demand for tea. It happens because purchase of more of one
commodity (say, coffee) leads to a lesser requirement for the other commodity (say, tea).
CROSS PRICE EFFECT ON DEMAND CURVE
Cross Price Effect refers to effect on the demand for a given commodity due to a change in the price of a
related commodity. It means, cross price effect originates from substitute goods and complementary goods.
Let us understand the effect on the demand curve of a given commodity when there is change in the prices
of substitute and complementary goods.

Change in Prices of Substitute Goods:

A change (increase or decrease) in the price of substitutes directly affects the demand for a given commodity.
(i) Increase in Price of Substitute Goods:
When price of substitute goods (say, coffee) rises, demand for the given commodity (say, tea) also rises from OQ to
OQ1 at its same price of OP. It leads to a rightward shift in the demand curve of the given commodity from DD to D1D1
(ii) Decrease in Price of Substitute Goods:
With decrease in price of substitute goods (coffee), demand for the given commodity (tea) also decreases from OQ to OQ1 at
the same price of OP. It shifts the demand curve of the given commodity towards left from DD to D1D1.

Change in Price of Complementary Goods:

An increase or decrease in the prices of complementary goods inversely affects the demand for the given
commodity.
(i) Increase in Price of Complementary Goods:
When price of complementary goods (say, sugar) rises, demand for the given commodity (say, tea) falls from OQ to OQ1 at the
same price of OP. As a result, the demand curve of the given commodity shifts to the left from DD to D1D1.
(ii) Decrease in Price of Complementary Goods:
With decrease in price of complementary goods (sugar), demand for the given commodity (tea) increases from OQ to OQ1 at
the same price of OP. As a result, the demand curve of the given commodity shifts to the right from DD to D1D1.
 Effect on Demand Curve
(with change in Income):
A change in income causes a positive change in demand for normal goods, whereas, a negative change occurs in the case of
inferior goods. So, the demand curve of a given commodity is affected by change in income in case of normal goods and
inferior goods. It must be noted that there is no change in demand for the necessity goods with increase or decrease in
income.
Change in Income (Normal Goods):
A change (increase or decrease) in the income of consumer directly affects the demand for a given commodity.

(i) Increase in Income:

As income rises, the demand for normal goods (say, TV) also rises from OQ to OQ1 at the same price of OP. It leads to a
rightward shift in the demand curve of normal good from DD to D1D1.
(ii) Decrease in Income:

With fall in income, the demand for normal goods (TV) falls from OQ to OQ1 at the same price of OP. It shifts the demand curve
of normal good towards left from DD to D1D1.

Change in Income (Inferior Goods)

An increase or decrease in income affects the demand inversely, if the given commodity is an inferior good.
(i) Increase in Income:
As income increases, the demand for inferior goods (say, black-and-white TV) falls from OQ to OQ1 at the same
price of OP. It leads to a leftward shift in the demand curve of inferior good from DD to D1D1.

(ii) Decrease in Income:

As income decreases, the demand for inferior goods (say, black-and-white TV) rises from OQ to OQ1 at the
same price of OP. It leads to a rightward shift in the demand curve of inferior good from DD to D1D1.
ELASTICITY OF DEMAND
 CONCEPT OF ELASTICITY OF DEMAND
[Note: The Law of Demand gives us the direction of change in the quantity demanded as a result of change in
price, but it does not specify the magnitude, amount or the extent by which the quantity demanded changes
with a change in price i.e.it does not indicate ‘how much change’ in the quantity demanded due to a change in
price. Therefore, the concept of ‘Elasticity of Demand’ was developed to measure the magnitude of change in
the quantity demanded.]
Elasticity of demand refers to the percentage change in
demand for a commodity with respect to percentage change
in any of the factors affecting demand for that commodity.
Elasticity of demand can be calculated as:

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑋

𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑎 𝑓𝑎𝑐𝑡𝑜𝑟 𝑎𝑓𝑓𝑒𝑐𝑡𝑖𝑛𝑔 𝑡ℎ𝑒 𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑋
 DIMENSIONS OF ELASTICITY OF
DEMAND
Out of the various determinants of demand, there are three quantifiable determinants of demand: (1) Price
of the given commodity (2) Price of related goods (3) Income of the consumer. So we have 3 dimensions of
Price elasticity
elasticity of demand:
of demand – Price elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in the price of the given commodity.
Price elasticity of demand – Price elasticity of demand refers to the percentage change in demand for a
Cross elasticity
commodity withofrespect
demandto- percentage
Cross elasticity
change
of demand
in the price
refersoftothe
thegiven
percentage
commodity.
change in demand for a
commodity with respect to percentage change in the price of a related good (substitute good or
complementary
Cross elasticity ofgood).
demand - Cross elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in the price of a related good (substitute good or
Income elasticitygood).
complementary of demand - Income elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in the income of consumer.
Income elasticity of demand - Income elasticity of demand refers to the percentage change in demand for a
commodity with respect to percentage change in the income of consumer.
 PRICE ELASTICITY OF DEMAND
Price elasticity of demand means the degree of
responsiveness of demand for a commodity with
reference to change in the price of such commodity. For
example, if price elasticity of demand is (-2), it means
that one percent fall in price leads to 2 percent rise in
demand or one percent rise in price leads to 2 percent
fall in demand.
PERCENTAGE METHOD FOR MEASURING
PRICE ELASTICITY OF DEMAND
According to this method, elasticity is measured as the ratio of percentage change in the quantity demanded to
percentage change in the price.

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

Elasticity of demand (Ed) = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

Where:
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (∆𝑄)
1. Percentage change in quantity demanded = × 100
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄)
2. Change in quantity (∆𝑄) = 𝑄1 − 𝑄
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 (∆𝑃)
3. Percentage change in price = × 100
𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 (𝑃)
4. Change in price (∆𝑃) = 𝑃1 − 𝑃
 Illustration:

Calculate price elasticity of demand if demand increases from 4 units to 5 units due to fall in price from ₹10 to ₹8.

Solution:

𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

Elasticity of demand (Ed) = 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (∆𝑄)

Percentage change in quantity demanded = × 100
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄)

(5 −4)
= × 100 = 25%
4

𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 (∆𝑃)

Percentage change in price = × 100
𝑜𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 (𝑃)
(8−10)
= 10 × 100 = −20%
25%
Ed = −20% = (−)1.25 (0r 1.25 as only numerical value is taken)

[Note: Elasticity should always be measured and compared in absolute terms (ignoring the negative sign).
Thus elasticity of – 1.25 is taken to be higher than -0.8]
 Proportionate Method
The percentage method can also be converted into the proportionate method.

∆𝑄 ∆𝑄
𝑄
×100 𝑄
Ed= ∆𝑃 = ∆𝑃 [Here ∆𝑄 = Q1 - Q and ∆𝑃 = P1 - P]
𝑃
×100 𝑃

∆𝑄 𝑃
Ed= ×
∆𝑃 𝑄

Where:
Q = initial quantity demanded Q1= new quantity demanded ∆Q = change in quantity demanded
P = initial price P1 = new price ∆𝑃 = change in price
DEGREES OF ELASTICITY OF DEMAND
When prices of different commodities change, the quantity demanded of each commodity reacts in a
different manner. Thus, let us discuss the various kinds of price elasticities of demand:

1. Perfectly elastic demand – When there is an infinite demand at a particular price and demand
becomes zero with a slight rise in the price, then demand for such a commodity is said to be perfectly
elastic. In such a case, Ed = ∞ and demand curve DD is a horizontal straight line parallel to X – axis.
[Note: Perfectly elastic demand is an imaginary situation]

Price (in ₹) Demand (in units)

30 100
30 200
30 300

As seen in the schedule, the quantity demanded can be 100 units, 200 units, 300 units and so on at the
same price of ₹30. In the given figure, the quantity demanded can be OQ or OQ1 or OQ2 at the same price
OP.
2. Perfectly inelastic demand – When there is no change in demand with change in price, then demand for such a
commodity is said to be perfectly inelastic. In such a case, Ed = 0 and the demand curve DD is a vertical straight line
parallel to Y – axis. [Note: Perfectly inelastic demand is an imaginary situation]

Price (in ₹) Demand (in units)

20 100
30 100
40 100

As seen in the schedule, the quantity demanded remains constant at 100 units, whether the price is ₹20, ₹30 or ₹40. In
the given figure, the quantity demanded remains constant at OQ as the price changes from OP to OP1 or OP2.
3. Highly elastic demand – When percentage change in the quantity demanded is more than percentage change
in price, then demand for such a commodity is said to be highly elastic. In such a case, Ed > 1. This highly elastic
demand curve is flatter and its slope is incline more towards X – axis. Commodities like AC, four – wheeler etc.
generally have high elastic demand.

Price (in ₹) Demand (in units)

20 100
10 200

200−100
As seen in the schedule, the quantity demanded rises by 100% × 100% = 100% due to a 50%
100
10−20
× 100% = −50% fall in price. In the given figure, the quantity demanded rises from OQ to OQ1 with a
20
fall in price from OP to OP1 . As QQ1 is proportionately more than PP1, the elasticity of demand is more than 1.
4. Less elastic demand – When percentage change in the quantity demanded is less than percentage change in price, then
demand for such a commodity is said to be less elastic or inelastic. In such a case, Ed < 1. The less elastic demand curve is
steeper and its slope is inclined more towards Y - axis. Commodities like salt, vegetables, etc. generally have less elastic
demand.

Price (in ₹) Demand (in units)

20 100
10 120

120−100
As seen in the schedule, the quantity demanded rises by just 20% × 100% = 20% due to a 50%
100
10−20
× 100% = −50% fall in price. In the given figure, the quantity demanded rises from OQ to OQ1 with a fall in price
20
from OP to OP1 . QQ1 is proportionately less than PP1, the elasticity of demand is less than 1.

[Note: Flatter the demand curve, more is the elasticity and vice versa.]
5. Unitary elastic demand – When percentage change in quantity demanded is equal to percentage change in price, then
demand for such a commodity is said to be unitary elastic. In this case, Ed = 1 and the demand curve is a rectangular
hyperbola. Commodities like scooter, refrigerator, etc. generally have unitary elastic demand.
Rectangular hyperbola is a curve under which the total area at all points will be same. It means in the given
figure, area of OP1N1Q1 is equal to the area of OP2N2Q2

2 units

Price (in ₹) Demand (in units) ₹4

20 100 4 units
₹2
10 150

150−100
As seen in the schedule, the quantity demanded rises by 50% × 100% = 50% due to a 50%
100
10−20
20
× 100% = −50% fall in price. In the given figure, the quantity demanded rises from OQ1 to OQ2 with a fall in
price from OP1 to OP2 . Q1Q2 is proportionately equal toP1P2, the elasticity of demand is equal to1.
 FACTORS AFFECTING PRICE ELASTICITY OF
DEMAND
• Necessity/ habit: A necessary good has lesser elasticity of demand. However, necessity may also be habit. A
person used to travelling by his personal automobile considers it to be a necessity. Again, necessities may vary
according to choice. While wheat is a necessity in North India, rice is considered a bigger necessity in South
India.

• Substitutes: If a good has a number of substitutes, its elasticity of demand will be high. It is because a consumer
can easily shift from one substitute to another in case of a price change. If there is no substitute of a good, the
consumer has no option but to buy the given good, so its price elasticity of demand will be less.

• Income proportion: A good on which a person spends higher proportion of his income (e.g. cloth, scooter) has
higher elasticity than on which he spends lesser proportion of his income (e.g. toothpaste, newspaper etc.)

• Time period: Demand for a product is likely to be more elastic over a longer period. If price increases for a certain
good, consumer may not be able to decrease his consumption immediately as he is habituated with its
consumption (demand will be generally inelastic in the short period), but will decrease his demand over a longer
period of time.
• Number of uses: More the number of uses of a good, more likely is to be the elasticity
of demand of that good. It is because in case of price change, a consumer can easily
cut down or increase the uses.

• Luxury goods: Higher the price of a good, higher is the elasticity of demand. Luxuries
like ACs, costly furniture, fashionable garments etc. have elastic demand.

• Income level of the buyer: Richer the consumer is, more likely the demand for a good
by him is less elastic. A rich consumer is not likely to reduce the demand for a good
when its price goes high than a poor person.