ECONOMICS [CLASS XI]

CHAPTER 3 and 4 – DEMAND AND ELASTICITY OF DEMAND

Concept of Demand:
Desire -It means just a wish to have a commodity. E.g., a person with 200 Rs in
pocket wishes to have a car.
Want – It is that desire which is backed by the ability and willingness to satisfy
it.
Demand -It is the extension of want with two extended features, so defined as;

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.

Demand may be in respect to INDIVIDUAL DEMAND or MARKET DEMAND.

Individual demand -It 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 -It refers to the quantity of a commodity that all the
consumers are willing and able to buy, at each possible price during a given
period of time.

Determinants of Demand (Individual Demand)

1. Px Price of the given Commodity

There is an inverse relationship between price and quantity demanded. If price
increases, quantity demanded falls due to decrease in the satisfaction level of
the consumer. E.g., Price of tea increases, its demand falls. (↑ P - ↓ D)
2. Pr
Price of Related Goods

Demand of a given commodity is also affected by change in the price of the

related goods. Related goods are of two types.
(i) (ii)
Complementary Goods
Substitute Goods

(i) Substitute goods are those goods which can be used in place of one another
for the satisfaction of a particular want, For e.g., tea and coffee or coke and
Pepsi etc. An increase in the price of a substitute leads to the increase in the
demand for given commodity and vice versa.
E.g.-If price of a substitute good (coffee)increases, then demand for the given
commodity(tea)will rise as tea will become cheaper.
(ii) Complementary Goods are those goods which are used together to satisfy a
particular want, for e.g., tea and sugar. An increase in the price of
complementary good leads to decrease in the demand for given commodity
and vice versa.
E.g., If a price of complementary good(sugar)increases, then demand for given
commodity(tea)will fall as it will be relatively costlier to use both the goods
together.

3. Y Income of the Consumer

Demand for a commodity is also affected by income of the consumer.

However, the effect of change in income on demand depends on the nature of
the commodity under consideration.
Normal or Inferior
Good Good
(i) Normal Good- If the given commodity is a Normal Good, then an increase
in income leads to rise in its demand, while a decrease in income reduces its
demand.
(ii) Inferior Good- If the given good is an Inferior Good, then an increase in
income reduces the demand, while a decrease in income leads to rise in
demand.
For e.g., Full cream milk and toned milk.

4.
Taste and Preference

Taste and preferences of the consumer directly influence the demand of the
commodity. They include changes in fashion, customs, habits etc. If a
commodity is in fashion or is preferred by the consumers, the demand for such
a commodity rises. On the other hand, demand for a commodity falls, if the
consumers have no taste for that commodity.

5.
Future Expectation of change in the price

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. There
exists a direct relationship between expectation of change in the prices in
future and change in demand in the current period. For e.g., if the price of
petrol is expected to rise in future, its present demand will increase.
Determinants of Market Demand

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 while decrease in
population reduces the market demand.
Composition of population i.e, ratio of males, females, children and no. of old
people in the population also affects the demand for a commodity.For e.g,if
there is larger population of women then demand for lipstick , sarees etc will
be more.
2.
Season and Weather

The seasonal and weather conditions also affect the market demand for a
commodity. For example, during rainy season demand for umbrellas and
raincoats will be more.
3.
Distribution of Income

If income in the country is equitably distributed, then market demand for

commodities will be more .However if income is not equally distributed, i.e,
people are either very rich or very poor, then market demand will remain low.
DEMAND FUNCTION :
Demand function shows the relationship between quantity demanded of a
particular commodity and the factors influencing it.

Demand
function

Market
Individual demand
demand function
function
*It refers to the functional relationship * It refers to functional relationship
between individual demand and factors between market demand and factor
affecting it. affecting it.
Dx = f (Px, P r, Y, T, F) Dx = f ( Px ,P r , Y, T ,F ,Po ,S ,Dy )

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.
Demand schedule is of two types:
1.Individual demand schedule. 2. Market demand schedule.

Price (in Rs) Quantity Price Household A Household B Demand

demanded ( Rs) of A & B
5 1 5 1 2 1+2=3
4 2 4 2 3 2+3=5
3 3 3 3 4 3+4=7
2 4 2 4 5 4+5=9
1 5 1 5 6 5+6=11

DEMAND CURVE
It is a graphical representation of demand schedule. It is the locus of all the
points showing 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 shows the inverse relation between the quantity demanded of a

commodity with its price , keeping other factors constant.

* Demand curve is of two types………

1. Individual Demand Curve.

 Price is an independent variable so

it is taken on Y axis, and quantity
demanded is dependent variable so
taken on X axis.
*By joining all the points (P to T ),we get
demand curve DD.
* The demand curve DD slopes
downwards due to inverse relation.
2. Market Demand Curve.

* DA and DB are individual demand curves.

*DM is Market demand curve.
* DM is flatter as due to change in price, change in market demand is more
than change in individual demand.
Demand VS Quantity demanded
**Demand is not a particular quantity,it describes the behaviour of buyers at
every possible price.
**Quantity demanded refers to specific quantity of the demand schedule
that is demanded against a specific price.

Slope of Demand Curve

It is defined as the change in the variable on the Y axis divided by the change in
the variable on the X axis.
i.e. Slope od Demand Curve = Change in Price (∆ P) /Change in Quantity (∆Q)
*Due to inverse relationship between price and quantity demanded,the slope
is negative.

It is calculated with the help of the following diagram.

 LAW OF DEMAND Dx = f ( Px ,Pr ,Y, T ,F )

Law of demand states the inverse relationship between price and

quantity demanded ,keeping other factors constant.
Assumptions of Law of demand :
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 future.
5.Taste and preference of the consumer remains the same.
Demand Schedule:
Price (Rs.) Qt.Demanded(units)
5 1
4 2
3 3
2 4
1 5

Reasons for Law of Demand

1. Law of Diminishing Marginal Utility.-Law of DMU states that as we consume

more and more of a commodity ,the utility derived from each successive unit
keeps on decreasing. So if the consumer gets more satisfaction ,he will pay
more.
As a result ,consumer will not be prepared to pay same price for additional
unit of the commodities. He will buy more unit only when the price falls.

2. Substitution Effect : It refers to substituting one commodity in place of the

other when it becomes relatively cheaper. So when price of a commodity falls,
it becomes cheaper than the substitute. As a result, demand for the given
commodity rises.

3. Income Effect : It refers to effect on demand when REAL INCOME of the

consumer changes due to change in the price of a given commodity.
Example, Nancy buys 4 chocolate for Rs. 10 each out of pocket money of Rs.
40,now when price of chocolates becomes 8each ,she will be able to buy 5
chocolates with the same money ,as her real income increases.
4. Additional Consumers :When price of a commodity falls, many new
customers who were not in the position to buy earlier due to its high price,
start purchasing it.Even old customers demand more. So demand increases.
5. Different Uses : Some commodities like milk, electricity etc have several uses.
When price of such goods decreases, it can be put to other uses also. For eg
milk can be used to make sweets, paneer, curd etc. when its price reduces and
vice versa in case when price increases.

Exceptions to the Law of Demand

1. Giffen Goods - These are special kind of inferior goods on which the
consumer spends large amount of their income and their demand rises with
increase in price and demand falls with decrease in price.
For eg , when price of coarse grains like jawar and bajra falls, the consumer has
a tendency to spend less on them and have a tendency to shift to superior
cereals like wheat and rice.
This phenomenon is known as “ Giffen’s Paradox” was first observed by Sir
Robert Giffen.

2. Status symbol Goods -The exception relates to certain prestigious items of

status symbol. For example ,diamond , gold ,antique paintings etc. If price
increases ,demand also increases.

3. Ignorance -The consumer may buy more goods at a higher price when
they are ignorant of the prevailing prices of the commodity in the market.
4. Necessities of life – Law of demand also fails in case of necessities of life like
medicines ,sanitizers ,oxygen cylinder ,mask, water ,salt ,food grains etc.
5. Fashion related goods -Goods related to fashion do not follow the law of
demand and their demand increases with rise in price. For eg ,new designs.

MOVEMENT ALONG THE DEMAND CURVE

( CHANGE IN QUANTITY DEMANDED)

When quantity demanded of a commodity changes due to 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 demand curve
*There can be either downward movement ( Expansion in demand ) OR an
upward movement ( Contraction in demand ).
 EXPANSION OF DEMAND :
 It refers to rise in quantity demanded due to a fall in the price
of commodity, other factors remaining constant.
 It leads to downward movement along the demand curve.
 It is known as “EXTENSION IN DEMAND” or “INCREASE IN QUANTITY
DEMAND”.
Price Demand
(units)
20 100
15 150
↓ ↑
CONTRACTION IN DEMAND:
 It refers to a fall in the quantity demanded due to rise in price of
a commodity, other factors remaining constant.
 It leads to upward movement along the demand curve.
 It is also known as “CONTRACTION OF DEMAND” or “DECREASE IN
QUANTITY DEMANDED”.

Price Demand
(in units)
20 100
25 70

↑ ↓
FLOW CHART OF MOVEMENT ALONG THE DEMAND CURVE

Change in quantity demanded

Occurs due to

Change in price

This leads to

Either Or

Downward Upward
Movement Movement

Known as Known as

Expansion in Contraction in
demand (due to demand(due to
decrease in price) increase in price)
 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 demand curve.
* Shift can either be “rightward shift” or “leftward shift”.
* Rightward shift is also known as “increase in demand” and leftward shift is
also known as “decrease in demand”.

Various reasons for shift in demand curve are:

a)Change in price of substitute good. b)Change in income of a consumer.

c)Change in price of complementary good. d)Change in taste and preference.
e)Expectation of change in price in future. f)Change in Population.
g) Change in season and weather. h)Change in distribution of income
INCREASE IN DEMAND
 It refers to rise in the demand of a commodity caused due to any factor
other than the own price of the commodity.
 It will increase the demand for a commodity even at the same price.
 Increase in demand will lead to rightward shift in the demand curve.

Price Demand
(units)
20 100
20 150

DECREASE IN DEMAND
 It refers to fall in the demand of a commodity caused due to any other
factor other than price of the commodity.
 In this case ,demand falls at the same price.
 Decrease in demand will lead to leftward shift in the demand curve.
 Price Demand
20 100
20 70

FLOW CHART OF CHANGE IN DEMAND

CHANGE IN DEMAND

It occurs due to

Change in factors other than

price

Leads to

Shift in demand curve

Leftward
Shift or
Decrease in
demand
Increase in
demand
SUBSTITUTE GOODS :
It refers to those goods which can be used in place of one another for
satisfaction of a particular want ,like tea or coffee.

Increase in price

CHANGE
IN PRICE

Decrease in price

CHANGE IN PRICES OF SUBSTITUTE GOODS :

A change ( increase or decrease) in the price of substitute directly affects the
demand for a given commodity.

(i) Increase in Price of Substitute Goods : When price of

substitute goods (coffee) rises, demand for the given good
(tea)also rises. It leads to rightward shift in the demand
curve.
 (ii) Decrease in price of Substitute Goods: With decrease in
price of substitute goods( coffee), demand for given
commodity also decreases. It leads to leftward shift in the
demand curve.

COMPLEMENTARY GOODS :
It refers to those goods which are used together to satisfy a
particular want. For example, car and petrol , sugar and tea ,pen and
ink etc.

Increase in Price

CHANGE IN
PRICE

Decrease in Price
(i) Increase in Price of Complementary Good: When price of
complementary goods (sugar) rises ,demand for the given
commodity (tea) falls. The demand curve will shift to the left.

(ii) Decrease in Price of Complementary Good : With decrease in price

of complementary goods(sugar),demand for the given commodity
(tea) increases. The demand curve of the given commodity shift to
the right.
Effect on demand Curve due to decrease in price of Complementary Goods
NORMAL GOOD :
It refers to those goods whose demand increases with an increase in
income and vice versa.

Increase in income

CHANGE IN INCOME

Decrease in income

(i) Increase in Income :As income rises, demand for normal good
(LCD) also rises at the same price of OP. It leads to rightwards shift in
the demand curve from DD to D1D1 of normal good.

(ii) Decrease in Income :With fall in income,the demand for normal

goods (LCD) falls at the same price of OP.It shifts the demand curve
to the left from DD to D1D1.
INFERIOR GOODS:
It refers to those goods which gets inversely affected with increase
or decrease in income.

Increase in
income

CHANGE IN INCOME

Decrease in
income

(i) Increase in Income :As income increases ,the demand for

inferior goods falls (for eg,black and white TV )at the
same price.Its demand curve will shift to the left.
 (ii) Decrease in Income :As income decreases,the demand for
inferior good rises(black and white TV) at the same price.
It leads to rightwards shift in the demand curve.

ELASTICITY OF DEMAND

CONCEPT OF ELASTICITY OF DEMAND:

It 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.

Ed = % change in demand for X

% change in a factor affecting the demand for X

Types of Elasticity :
1. Price elasticity of Demand.
2. Cross elasticity of Demand.
3. Income elasticity of Demand.
 PRICE ELASTICITY OF DEMAND

It refers to 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 1 % fall in price
leads to 2 % rise in demand.
OR

price demand
100 1000
99 1020

DEGREES OF ELASTICITY OF
DEMAND

1. Perfectly Elastic Demand – When there is an infinite demand at a

particular price and demand becomes zero with the slight rise in
the price, the demand is said to be Perfectly elastic. Ed = ∞

Price Demand (units)

30 100
30 200
30 300
  It must be noted that perfectly elastic demand is an imaginary
situation.
Perfectly Elastic Demand (Ed = ∞ )

2. Perfectly Inelastic Demand -When there is no change in demand

with change in price, then demand for such commodity is said to
be perfectly inelastic. Ed = 0. It is applicable for certain
necessities.

Price Demand (units)

20 100
30 100
40 100
3. Highly Elastic Demand -When percentage change in quantity
demanded is more than the percentage change in price, then
demand is said to be highly elastic. Ed > 1. The highly elastic demand
curve is flatter. For eg, AC , LCD etc.

Price Demand (units)

20 100
10 200

↓ 50% ------- ↑ 100%

4. Less Elastic Demand – When percentage change in quantity

demanded is less than percentage change in price, then demand is
said to be less elastic or inelastic. Ed < 1. The less elastic demand
curve is steeper. For eg vegetables etc.

Price Demand (units)

20 100
10 120

↓ 50 % ---------- ↑ 20 %
 Less Elastic Demand

5. Unitary Elastic Demand – When percentage change in quantity

demanded is equal to percentage change in price, then demand for
such commodity is said to be Unitary elastic. The curve we get is a
Rectangular hyperbola. For eg , Commodities like Scooter
refrigerator etc. Ed = 1

Price Demand (units)

20 100
10 150

↓ 50 % ------- ↑ 50 %
 FACTORS AFFECTING PRICE ELASTICITY OF DEMAND

1.
Nature of the commodity

A commodity may be necessity, comfort or luxury for a person.

 When a commodity is necessity like foodgrains , vegetables or medicines
etc its demand is generally inelastic as it is required for human survival
and demand does not get influence by change in price.
 When a commodity is a comfort like fan, refrigerator etc,its demand is
generally elastic as consumer can postpone its consumption.
 When a commodity is a luxury like AC’s ,LCD etc , its demand is generally
more elastic as compared to demand for comforts.
A luxury is a relative term(like AC ) ,may be a luxury for a poor but a
necessity for a rich person.

Availability of Substitutes
2.

Demand for commodity with large number of substitutes will be more

elastic. The reason is that even a small rise in prices will induce the
buyers to go for its substitutes. For eg, Pepsi and Coke.
On the other hand the commodities with few or no substitutes like
wheat or salt have less price elasticity of demand.

3. Income Level

Elasticity of demand for any commodity is generally less for high

income level groups in comparison to people with low income group people.It
is because rich people are not influenced much by changes in the prices as
compared to poor people. As a result ,demand for lower group people are
highly elastic.
 Level of Price
4.

Level of price also affects elasticity of demand.Costly goods like laptop, AC etc
have highly elastic demand. However
demand for inexpensive goods like needle,matchbox etc, is inelastic as change
in price of such goods do not affect the demand.

Postponement of
5. Consumption

Commodities whose demand is not urgent (like buiscuts,chips,soft drinks) have

highly elastic demand as their consumption can be postponed in case of an
increase in price.
However, commodities with urgent demand like life saving drugs have inelastic
demand due to their immediate requirement.

6. Number of Uses

If the commodity under consideration has more uses, then its demand will
be elastic. When price of such commodities increases, it is put only to more
urgent uses.
On the other hand, a commodity with no or few alternative uses has less
elastic demand.
7.
Share in Total Expenditure

Proportion of consumer’s income that is spent on a particular commodity also

influences the elasticity of demand. Greater the proportion of income spent on
the commodity ,more is the elasticity of demand for it and vice versa.
For eg, demand for goods like salt ,soap ,oil etc are less elastic as compared to
petrol ,school fee etc which is more elastic.

Time Period
8.

Price elasticity of demand is always related to the time period.It can be

day,week,a month, a year or a period of several years. DEMAND IS GENERALLY
INELASTIC in the short period. It happens because consumer finds it difficult to
change their habits in the short period. Demand is more elastic in a long run.

9. Habits

Commodities which are habitual necessities have less elastic demand.It is

because such commodities becomes a necessity for the consumer. For eg,
alcohol ,tobacco , cigarette etc.
 PERCENTAGE METHOD OF MEASURING PRICE ELASTICITY OF DEMAND
According to this method ,elasticity is measured as a ratio of percentage
change in the quantity demanded to percentage change in the price.
Elasticity of demand is calculated with the following formulae:
Ed =

% change in Qt demanded
% change in price

Formulae

Ed = - ∆Q × P
∆P Q
×

Q =Initial quantity , P = Initial price , Q1 =New quantity , P1 = New price

Change in quantity (∆Q) = Q1 - Q Change in price ( ∆P) = P1 – P

Percentage change in price = change in price (∆P) × 100

Original price (P)

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

Original quantity(Q )
Numericals:
1. Calculate price elasticity of demand if demand increases from 4 units to
5 units due to fall in the price from Rs 10 to Rs 8.
Sol: P = 10 , Q = 4 , P1 =8 , Q1 =5 ,
∆P = P1 -P ( 8 –10 = -2) , ∆Q = Q1 – Q (5-4=1)

Ed = ∆Q × P
∆P Q
1 × 10 / -2 × 4 = - 1.25
OR
= change in quantity demanded (∆Q) × 100 = ( 5 – 4 ) × 100 = 25 %
Original quantity (Q) 4

= change in price (∆P) × 100 = ( 8 – 10 ) × 100 =20%

Original price(P ) 10

Ed= % change in Qt demanded

% change in price

= 25% = - 1.25 ( Demand is more elastic )

- 20%

2. A consumer buys 20 units of a good at Rs 10 per unit. When its price falls by 10 % ,its
demand rises to 22 units. Find out price elasticity of demand.

% change in quantity = ∆ Q × 100 2 × 100 = 10 %

Q 20

Ed = % change in Qt demanded 10 % = - 1 ( Demand is Unitary

% change in price - 10 % elastic .)
3 .The demand for a good at Rs 10 per unit is Rs 40 units. Price falls by Rs 5.
If price elasticity of demand is (-) 3, Calculate the new quantity demanded.
Sol : Given -
Q – 40 units , P = Rs 10 , ∆ P = -Rs 5 , P1 = Rs 5 , Ed = (-) 3
Q1 - ? ∆Q = ?
Ed = ∆Q × P
oP Q

-3 = ∆Q × 10 =∆Q =60 units.

-5 40
As price is decreasing ,the quantity demanded will increase .It means,
New Quantity = Original Qt + Change in Qt
40 + 60 = 100 units.

4 .When the price of good X is Rs 5,the consumer buys 100 units of good X. At
what price would he be willing to purchase 140 units of good X ? The price
elasticity of demand for good X is 2.
Sol : Given –
Q = 100 units , P = Rs 5 , Q1 = 140 units , ∆ Q = 40 units, Ed = 2
New price ( P1 ) = ? ∆P=?

Ed = ∆Q × P
∆P Q
= 40 × 5
∆P 100 = ∆P = Rs 1
As the quantity demanded is increasing,price will decrease.so
New price = original price – change in price.( P - ∆P) , 5-1=4 New price is Rs 4.
5. The initial demand for a commodity is 80 units, the demand falls by 4 units
due to rise in price by Rs 10. If the price elasticity is 1.5,calculate the price
before change in demand.
Sol: Given –
Q = 80 units, ∆Q = 4 units , Q1 = 76 units , ∆P = Rs 10 , Ed = 1.5
P=?
Ed = ∆ Q × P
∆P Q
= 4 × P
10 80 = Rs 300
Original Price = Rs 300

6. The demand function of commodity ‘X’ is given as : Qx = 20 - 2Px. Calculate

its price elasticity of demand when price falls from Rs 5 to Rs 3.
Sol : Given - Qx = 20 – 2Px
Demand at price of Rs 5 = 20 - 2× 5 = 10 units. ( Q )
Demand at price of Rs 3 = 20 – 2 × 3 = 14 units. ( Q 1)
Q = 10 units, Q1 = 14 units , P = Rs 5 , P1 = Rs 3 ,
∆ Q = 4 units , ∆ P = - Rs 2 , Ed = ?
Ed = ∆Q × P
∆P Q
= 4 × 5
-2 10 = -1
Ed = -1 ( Demand is unitary elastic.)