Ch-5
Theory of Demand
QUE 1: WHAT DO YOU MEAN BY DEMAND?
ANS: It is the quantity of goods that the consumer is willing and able to buy at each possible
price during the given period of time.
QUE 2: WHAT DO YOU MEAN INDIVIDUAL DEMAND? EXPLAIN WITH THE HELP OF
SCHEDULE AND CURVE.
ANS: It is the quantity of goods that a consumer is willing and able to buy at each possible
price during the given period of time.
Individual demand schedule: It is a tabular statement showing various quantity of good
that a consumer is willing and able to buy at each possible price during the given period of
time.
Px Q.D(units)
1 4
2 3
3 2
4 1
Individual demand curve: It is a graphical representation showing various quantity of the
good that a consumer is willing and able to buy at each possible price during a given period
of time.
QUE 3: WHAT DO YOU MEAN MARKET DEMAND? EXPLAIN WITH THE HELP OF SCHEDULE
AND CURVE.
ANS: It is the quantity of goods that All the consumers are willing and able to buy at each
possible price during the given period of time.
Market demand schedule:
PX Q.D(consumer A) Q.D(Consumer B) Market demand
1 4 5 4+5=9
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2 3 4 7
3 2 3 5
4 1 2 3
QUE 4: WHAT ARE THE FACTORS/ DETERMINANTS OF DEMAND?
OR
EXPLAIN DEMAND FUNCTION?
ANS: The following are the factors affecting demand
1. Price of own good: Other things being constant with a rise in on price of the good, its
demand contracts (decrease), and with the fall in its own price, demand extends. There
is an inverse relationship between own price of the good and its demand.
2. Price of related goods: There are two types of related goods:
• Substitute goods: Substitute goods are those goods, which can be used in place of
one another. For example, satisfaction of a particular want, say Tea and coffee. An
increase in the price of substitute good leads to an increase in the demand for
given good, and vice versa.
• Complementary goods: Complementary goods are those goods which are used
together to satisfy a particular want, like tea and sugar. An increase in the price of
complementary goods leads to decrease in the demand for a given good and vice
versa.
3. Income of the consumer: If the given good is normal good, then increase in income will
increase its demand and vice versa.
If the given good is inferior good, then increase in income will reduce the demand, and vice
versa.
4. Taste and Preferences: Demand for a good rises if the consumer develops a favourable
taste and preferences for that good and vice versa.
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5. Future Expectations: If the price of a certain good is expected to increase in future, the
demand for that good will increase in the current period and vice versa.
QUE 5: EXPLAIN THE LAW OF DEMAND?
ANS: L aw of demand states that other factors remaining same or constant(ceteris paribus).
There is an inverse relationship between price and quantity demanded.
Assumptions:
• There is no change in price of related goods.
• There is no change in income of the consumer.
• There is no change in taste and preferences.
• There is no change in future prices.
• Prices of complimentary goods remain constant.
Schedule :
PX Q.D.
1 4
2 3
3 2
4 1
QUE 6: WHAT ARE THE EXCEPTIONS TO LAW OF DEMAND?
OR
WHY DOES DEMAND CURVE SLOPES UPWARD?
ANS: The following are the exceptions to law of demand.
• Status symbol goods: This exception relates to prestige goods which are used as
status symbol. Example, Diamonds, Antique paintings. Higher demand higher the
price.
• Ignorance: Consumer may buy more of a goods at a higher prices when they are
ignorant of the prevailing prices of the goods in the market.
• Fashion related goods: The demand of fashion related goods increase with the
increase in the prices.
• Giffen goods: These are those goods whose price effect is positive and income effect
is negative. Eg: Jowar, Bajra. They are special kind of inferior goods on which the
consumer spends a large part of his income and their demand rises with increase in
prices and demand falls with decrease in prices.
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QUE 7: WHY DOES DEMAND CURVE SLOPES DOWNWARD?
ANS: The following are the reasons:
• Law of DMU: It states that as we consume more and more units of a commodity the
utility derived from each successive unit goes on decreasing. So, demand for the
commodity depends on its utility. If the consumer gets more satisfaction he will pay
more as a result consumer will not ready to pay the same price for additional unit of
the commodity. So, consumer will buy more units of goods only when price falls.
• Substitution effect: It refers to substituting one good in place of other when it
becomes relatively cheaper. When the price of given good falls, it becomes cheaper
as compared to their substitute. As a result, demand for the given good rises.
• Income effect: It refers to the effect on demand when real income of the consumer
changes due to change in the price of the given commodity. When price of the given
commodity falls, it increases the purchasing power of the consumer. As a result, he
can purchase more of the given commodity with the same money income.
• Additional customer: When price of the given good 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 customers of the goods start demanding more due to
its reduced price.
• Different uses: Some goods like milk, electricity have several uses, some of which are
more important than others. When the prices of good increases its uses get restricted
to the most important purpose and demand for less important uses gets reduced.
However, when the price of such a good decreases, the good is put to all its uses,
whether important or not.
QUE 8: EXPLAIN CHANGE IN QUANTITY DEMANDED/MOVEMENT ALONG THE DEMAND
CURVE?
ANS: 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 movement along the same demand curve. Movement along the demand
curve are of two types:
• Expansion in demand/ Upward movement: Expansion and 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’.
P Q.D.
10 5
5 10
• Contraction in demand/ Downward movement: Contraction of demand refers to a fall in
the quantity demanded due to a rise in the price of commodity. Other factors remaining
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constant. It leads to an upward movement along the same demand curve It is also
known as ‘decrease in quantity demanded’.
P Q.D.
5 10
10 5
QUE 9: EXPLAIN CHANGE IN DEMAND/SHIFTING IN DEMAND CURVE?
ANS: 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. Shift in demand curve are of two types:
• Increase in demand/Rightward shift: Increase in demand refers to 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.
P Q.D.
10 10
10 15
• Decrease in demand/ leftward shift: 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 remain same even at lower price. It
leads to a ‘leftward shift’ in the demand curve.
P Q.D.
10 10
10 5
QUE 10: DIFFERENCE BETWEEN NORMAL, INFERIOR AND GIFFEN GOODS?
ANS:
BASIS NORMAL GOODS INFERIOR GOODS GIFFEN GOODS
Substitution effect It is positive. It is positive. It is positive.
Income effect It is positive. It is negative. It is negative.
Price effect It is positive, as both It is positive, as It Is negative as
the substitution and positive substitution negative income effect
income effects are effect is stronger than is stronger than
positive. So, demand negative income positive substitution
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for normal good riseseffect. So, its demand effect As a result, its
with fall in its price.
rises with fall in its demand falls with fall
price. in its price.
Law of demand It applies i.e. their It applies i.e. their It does not apply, i.e.
demand curve slopes demand curve slopes their demand curve
downwards. downwards. slope upwards.
Example ‘Pepsi’ Is a normal ‘Amul Toned Milk’ Is ‘jowar’ is a giffen good
good if will fall in its an inferior good if if fall in its price:
price: with fall in its price: • Positive
• Positive • Positive substitution
substitution effect substitution effect effect Increases
increases its increases its its demand as it
demand as it demand as it becomes
becomes relatively becomes relatively relatively
cheaper as cheaper as cheaper as
compared to its compared to its compared to its
substitute(say substitute(say substitute.
coke) mother dairy • Negative income
• Positive income toned milk) effect Reduces
effect increases its • Negative income its demand as
demand due to effect reduces its increased real
rise in real income. demand as income induces
increased real the consumer to
income induces shift to superior
consumer to shift commodities(say
to superior rice)
commodities(say The negative income
Amul full cream effect is stronger than
milk) the positive
The positive substitution effect. As a
substitution effect is result, demand for
stronger than negative jowar falls with fall in
income effect. As a its price.
result, demand for
‘Amul toned milk’
rises with fall in its
price.
QUE11: DIFFERENCE BETWEEN SUBSTITUTE AND COMPLEMENTARY GOODS?
ANS:
BASIS Substitute goods Complementary goods
Meaning Substitute goods refer to those Complementary goods refer to
goods which can be used in those goods which are used
place of one another to satisfy together to satisfy a particular
a particular want. demand.
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Nature of demand Substitute goods have
Complimentary goods have
competitive demand.joint demand.
Relation Price of one substitute good
Price of a complementary
has positive relationship with
good has a negative
quantity demanded of another
relationship with quantity
substitute good. demanded of other
complementary good.
Examples Tea and coffee. Tea and sugar.
Coke and Pepsi. Car and petrol.
QUE 12: DIFFERENCE BETWEEN MOVEMENT ALONG DEMAND CURVE AND SHIFT IN DEMAND
CURVE?
ANS:
BASIS Movement along demand curve Shift in demand curve
Meaning When the quantity demanded When the demand changes
changes due to change in the due to change in any factor
price, keeping other factors other than the own price of
constant, it leads to movement the commodity, it leads to a
along the same demand curve. shift in the demand curve.
Effect on demand curve The movement along the same Shift in demand curve is either
demand curve is either rightward(increase) Or
upward(contraction) Or leftward(decrease)
downward(expansion).
Reason It occurs due to an increase or
It occurs due to change in
decrease in the price of the given
other factors like change in
commodity. price of the substitute, change
in prices of complementary
goods, change in income, etc.
QUE 13: DIFFERENCE BETWEEN CHANGE IN QUANTITY DEMANDED AND CHANGE IN DEMAND?
ANS:
Basis Change in quantity demanded Change in demand
Meaning When the quantity demanded When the demand changes
changes due to a change in the due to change in any factor
price keeping other factors other than the own price of
constant, it is known as the commodity, it is termed as
change in quantity demanded. change in demand.
Effect on demand curve It leads to a movement along It leads to a shift in the
the same demand curve, demand curve either
either upward or downward. rightward or leftward.
Reason It occurs due to an increase or It occurs due to change in
decrease in the price of the other factors like change in
riven commodity. price of the substitute, change
in prices of complementary
goods, change in income, etc.
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QUE 14: DIFFERENCE BETWEEN EXPANSION IN DEMAND AND INCREASE IN DEMAND?
ANS:
Basis Expansion in demand Increase in demand
Meaning When the quantity demanded Increase in demand refers to a
rises due to a decrease in the rise in the demand of a
price keeping other factors commodity caused due to any
constant, it is known as factor other than the own
expansion in demand. price of the commodity.
Tabular presentation Price(Rs.) Demand(units) Price(Rs.) Demand(units)
12 100 12 100
10 150 12 150
Effect on demand curve There is a downward There is a rightward shift in
movement along the same demand curve.
demand curve.
Reason It occurs due to decrease in
It occurs due to favourable
the price of the given change in the other factors like
commodity. increase in the price of
substitute, decrease in the
price of complementary
goods, increase in income in
case of normal goods etc.
QUE 15: DIFFERENCE BETWEEN CONTRACTION IN DEMAND AND DECREASE IN DEMAND?
ANS:
Basis Contraction in demand Decrease in demand
Meaning When the quantity demanded Decrease in demand refers to
falls due to an increase in the a fall in the demand of the
price, keeping other factors commodity caused due to any
constant, it is known as factor other than the own
contraction in demand. price of the commodity.
Tabular presentation Price(Rs.) Demand(units) Price(Rs.) Demand(units)
10 150 10 150
12 100 10 100
Effect on demand curve There is an upward movement There is a leftward shift in the
along the same demand curve. demand curve.
Reason It occurs due to an increase in It occurs due to an
the price of the given unfavourable change in the
commodity. other factors like decrease in
the price of substitutes,
increase in the price of
complementary goods,
decrease in the income in case
of normal goods, etc.
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QUE 16: DIFFERENCE BETWEEN INDIVIDUAL DEMAND AND MARKET DEMAND?
ANS:
Individual demand Market demand
It is the quantity demanded of a commodity by It is the quantity demanded of a commodity by
an individual consumer at a given price during all the consumers at a given price during a
a given period of time. given period of time.
It may or may not follow the law of demand i.e. It always follows the law of demand i.e. Market
It is possible that an individual consumer may demand always falls with the rise in price and
demand more even at higher price. vice versa.
Individual demand is not affected by all the Market demand is affected by all the factors
factors affecting market demand. affecting individual demand.s
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