
Question 1. Explain diagrammatically the movement along a demand curve and shift in demand curve.
Answer: Movement along a demand curve is of two types:
(i)
Extension of Demand : Extension of demand is shown by the table given below and
curves. When the price of chocolate is ₹ 5, one chocolate is demanded. When
price reduces to ₹ 1, demand extends to 5 chocolates.
Price (in ₹) |
Quantity (Units) |
Description |
5 |
1 |
Fall in price |
1 |
5 |
Rise in quantity demanded |
Extension
of demand is indicated by a movement along the same demand curve, as from point
A to B on the demand curve-D.
(ii)
Contraction of Demand: Contraction of demand is shown with the help of table and given
below curve, when the price of chocolate is ₹ 1 per chocolate, demand is for 5
chocolates; when price rises from ₹ 1 to ₹ 5 per unit, demand contracts to 1
chocolate only.
Price (in₹) |
Quantity (Units) |
Description |
1 |
5 |
Rise in price |
5 |
1 |
Fall in quantity demanded |
Contraction
of demand is also indicated by a movement along the same demand curve.
Shift
in demand curve is of two types:
(i)
Increase in Demand : Increase in demand shows that when more of a commodity is
purchased at its existing price, (when prices of chocolate is ₹ 10), then
demand of chocolate is 20 units, but if the price is constant, then the demand
increases to 30 units. It is better understood by the given below table and
curve :
Price
(in ₹) |
Quantity Demanded (Units) |
10 |
20 |
10 |
30 |
Demand
curve shifts from D1 to D2 when the consumers decide to purchase 30 units (instead of
20) even when price of the commodity remains constant at ₹ 10 per unit. The
consumer shifts from point A on D1 to point B on D2.
(ii) Decrease in Demand : Decrease in demand is the condition in which less of a commodity is purchased at its existing price. If the price of commodity is ₹ 10 per unit, 30 units are demanded. Even, when price remains constant, consumers decide to buy only 20 units.
Price (in ₹) |
Quantity Demanded (Units) |
10 |
30 |
10 |
20 |
The
decrease in demand causes the demand curve to shift on the left, which is also
called the Backward shift in the Demand Curve.
Inferior
goods are those goods whose demand decreases when the income of a consumer
increases. Examples of inferior goods are consumption of breads or cereals and
since the income of the consumer increases he moves towards consumption of more
nutritious foods and hence demand for low-priced products like bread or cereal,
decreases.
It
is clear from the figure that when the price of commodity Y was OP the
demand for commodity X was OQ When the price of commodity Y decreases to
OP1 the demand for commodity X becomes OQ1 The demand curve for
substitution goods is positive.
- Desire for
a commodity.
- Money to
fulfil that desire.
- Readiness
to spend money.
- Tastes and
preferences
- Income of
the consumer
- Price of
related goods
- Expectations
- Number of
consumers
- Government
regulations.
(ii)
Decrease in demand occurs due to the following determinants:
Assumptions
of law of demand are the following:
Ø
Income level should remain stable.
Ø
Taste of consumer should not change.
Ø
Value of related goods should be constant.
Ø
Any new substitute should not come in the market.
Ø
Expectation of risen value should be negligible.
Ø
Advertisement expenditure has to be same.
Price (in ₹) |
Quantity
Demanded of X (Units) |
10 |
20 |
10 |
30 |

When
price of the commodity is ₹ 10 per unit, 20 units are demanded. Even when price
remains constant, consumers continue demanding 30 units. It may be due to more
alternative uses of a commodity or other such variables. It shows that when the
price remains constant, the demand of commodity increases.
Ø
When income of the consumer increases.
Ø
When price of substitute goods increases.
Ø
When price of complementary goods falls.
Ø
When taste of the consumer shifts in favour of the goods due to
change in fashion or climate.
Ø
When price of the commodity is expected to increase in the near
future.
Ø
Increase in number of consumers.
Ø
When the income of the consumer is expected to increase in the
future.
(ii) The Demand is a Dependent Variable : Under the law of demand, the price is an independent variable and demand is a dependent variable. Thus, it is the effect of price on demand which is examined, and not the effect of demand on price.
(iii)
Other Things Remain the Same : The law of demand assumes that the other things remain the same.
In other words, there should be no change in other factors affecting the demand
except the price. If, however, any other or more one other factors, say the
income, alternative price, consumer taste and preferences, advertising outlets,
etc. change, despite the increase in their price, demand may increase or
alternatively decrease in demand may be seen in spite of price decline.
(ii)
Income Effect :
When price of a commodity falls, real income of its consumer increases in terms
of this commodity. In other words, his purchasing power increases since he is
required to pay less for the purchase. This is called Income Effect.
(iii)
Substitution Effect: When price of a commodity falls, it becomes cheaper, while the
prices of its substitutes remain constant. In other words, when price of a
commodity falls, then its substitutes’ price remains the same, and it becomes
relatively expensive. Consequently, rational consumers tend to substitute
cheaper goods for costlier ones within the range of normal goods, goods whose
demand increases with increase in consumer’s income, other things remaining the
same. Therefore, demand for the relatively cheaper commodity increases. The
increase in demand on account of this factor is known as Substitution Effect.
- When income
of the consumer falls.
- When price
of the substitute good decreases.
- When price
of the complementary good increases.
- When taste
of the consumer shifts against the commodity due to change in fashion or
climate.
- When price
of the commodity is expected to decrease in the near future.
- When the
income of the consumer is expected to fall in the near future.
- Consumer’s
income is fixed and stable.
- Tastes and
preferences of the consumer remain constant.
- The given
price change for the commodity is a normal one, it is not imaginary.
- Prices of
other goods like substitutes and complementaries remain constant.
- There is no
change in the distribution of the community income and wealth.
- The size of
population is unchanged.
- The level
of taxation and other fiscal measures undergo no significant changes.
Market
demand curve can be drawn by aggregating together individual demand curves.
Thus, the demand curve is horizontal summation of individual demand curves.
(ii)
Distribution of Income : Market demand is also influenced by changes in income
distribution in society. If income is evenly distributed, then there will be
more demand. If the income is distributed unequally, then the more demand will
concentrate with rich people. If a large area of society is poor then due to
its low income, the demand of the market will also be reduced.
Question
37. From the following table, prepare demand
schedule for household B, given demand schedule of household A, C and market
demand schedule.
Price (in ₹) |
Household A |
Household B |
Household C |
Market Demand |
7 |
8 |
– |
11 |
26 |
6 |
10 |
– |
16 |
36 |
5 |
14 |
– |
22 |
51 |
4 |
19 |
– |
30 |
71 |
3 |
26 |
– |
42 |
98 |
Answer: Household B’s Demand Schedule
Price (in ₹) |
Quantity |
7 |
26 – (8 +11) = 7 |
6 |
36 – (10 + 16) = 10 |
5 |
51 – (14 + 22) = 15 |
4 |
71 – (19 + 30) = 22 |
3 |
98 – (26 + 42) = 30 |
Question 38. Demand schedule for three consumers such as Ram, Rahim and Rehmat for a commodity is given below. Derive the market demand schedule.
Price (in ₹) |
Demand Schedule of Ram |
Demand Schedule of Rahim |
Demand Schedule of Rehmat |
1 |
65 |
60 |
29 |
2 |
55 |
45 |
18 |
3 |
45 |
30 |
10 |
4 |
35 |
15 |
5 |
5 |
25 |
5 |
5 |
Answer:
Market Demand Schedule
Price (in ₹) |
Quantity |
1 |
65 + 60 + 29 = 154 |
2 |
55 + 45 + 18 = 118 |
3 |
45 + 30 + 10 = 85 |
4 |
35 + 15 + 05 = 55 |
5 |
25 + 05 + 05 = 35 |
A
fall in the price of tea, on the contrary, may reduce the demand for coffee
because the consumer will now increase his intake of tea. Thus, a change in
price of tea effects the demand for coffee. On the contrary, if both the
commodities are jointly demanded to satisfy the same want they may be said to
be complementary. For example, bread and butter are complementary goods. A fall
in the price of bread will increase the demand for butter and vice-versa.
Decrease in
Demand or Left Shift Curve |
Increase in Demand or Right
Shift Curve |
Income declines, for normal
goods. Income increases, for inferior goods. |
Income rises, for normal goods.
Income falls, for inferior goods. |
Buyers quantity decreases. |
Quantity of buyers increases. |
Long Type Questions
Law
of demand can be explained with the help of demand schedules and demand curve:
Demand
Schedule
Price (in ₹) Px |
Quantity Demanded (Units) Qx |
6 |
100 |
5 |
200 |
4 |
300 |
The schedule shows extension of demand in response to decrease in price of the commodity. Thus, demand stretches from 100 to 200 units when price declines from ₹ 6 to ₹ 5 per unit, and from 200 to 300 units when price further declines from ₹ 5 to ₹ 4. This can be clarified with the help of adjoining demand curve.
(i)
Movement Along a Demand Curve or Change in Quantity Demanded : When the quantity demanded
of a commodity changes due to the change in its price only, it is expressed by
different points on the same demand curve and it is known as Movement Along a
Demand Curve or Change in Quantity Demanded. It is of two types:
(a) Extension-of Demand : When the quantity demanded of a good rises due to the fall in price, while other things remaining constant, it is called Extension of Demand. Extension of demand is shown by the given below table and curve, when the price of chocolate is ₹ 5, one chocolate is demanded. When price reduces to ₹ 1, demand extends to 5 chocolates.
Price (in ₹) |
Quantity (Units) |
Description |
5 |
1 |
Fall in price |
1 |
5 |
Rise in quantity demanded |
Extension
of demand is indicated by a movement along the same demand curve, as from point
A to B on the demand curve-D-D’.
(b)
Contraction of Demand : When the quantity demanded falls due to the rise in price, it is
called Contraction of Demand. Contraction of demand is shown with the help of
table and given below curve, when the price of chocolate is ₹ 1 per chocolate,
demand is for 5 chocolates; when price rises from ₹ 1 to ₹ 5 per unit, demand
contracts to 1 chocolate only.
Price (in ₹) |
Quantity (Units) |
Description |
1 |
5 |
Rice in price |
5 |
1 |
Fall in quantity demanded |
Contraction
of demand is also indicated by a movement along the same demand curve from B to
A on demand curve DD’.
(ii)
Shifting of the Demand Curve or Changes in Demand : In this condition, the
whole demand curve shifts either upward or downward. When quantity demanded
changes due to the change in variables other than the price of the same
commodity, it is called Change in Demand. Example – income, fashion, etc. When
the demand decreasees due to the change in other variables, it is called
Decrease in Demand and when the demand increases due to the change in other
variables, it is called Increase in Demand.
(a)
Increase in Demand : When more of a goods is purchased at its current price, it is a
situation of increase in demand. It is illustrated by the given figure.
Increase in demand shows that more of a commodity is purchased at its existing
price, when prices of chocolate is ? 10, then demand of chocolate is 20 emits,
but if the price is constant, then the demand is increases to 30 units. It is
better understood by the given below table and curve:
Price (in ₹) |
Quantity Demanded (Units) |
10 |
20 |
10 |
30 |
Demand
curve shifts from D1 to D2 when the consumers decide to purchase 30 units (instead of
20) even when price of the commodity remains constant at ₹ 10 per unit. The
consumer shifts from point A on D1 to point B on D2. This is also called the
forward shift in Demand curve.
(b)
Decrease in Demand : It is the condition in which when less of a commodity is
purchased at its existing price. If the price of commodity is ₹ 10 per unit, 30
units are demanded. Even, when price remains constant, consumers decide to buy
only 20 units.
Price (in ₹) |
Quantity Demanded (Units) |
10 |
30 |
10 |
20 |
The
decrease in demand is due to changes in the demdnd curve on the left, which is
also called the Backward shift in the Demand Curve.
In
the case of increase in income, more of a (normal) good is purchased even when
its price is stable. It reflects to a situation of increase in demand or
forward shift in demand curve. On the other hand, in this condition of decrease
in income, less of a (normal) good is purchased even when its price is
constant. This refers to a situation of decrease in demand or backward shift in
demand curve.
(ii)
Increases in Price of Related Goods : The impact of change in the price of related good on a demand of
commodity is called the Cross-Price Effect. The figure indicates that when the
price of tea is OP1 the quantity purchased is OT1 Now, suppose the
price of tea is stable but the price of cbffee increases. How will you respond
as a consumer?
Initially
you were purchasing OT1 quantity of tea = P1K1. Now you are ready to
purchase OT2 = P1K2 even when price of tea remains stable at OP1 Greater purchase of
a commodity at its constant price points to a situation of increase in demand,
or forward shift in demand curve. Accordingly, demand curve for tea shifts to
the right, from D1 to D2.
Price (in ₹) |
No. of Pepsi Cans Demanded by |
Market Demand = A + B + C |
||
A |
B |
C |
||
12 |
0 |
0 |
0 |
0 |
10 |
0 |
0 |
4 |
4 |
8 |
0 |
4 |
8 |
12 |
6 |
3 |
8 |
12 |
23 |
4 |
5 |
12 |
16 |
33 |
2 |
8 |
16 |
20 |
44 |
0 |
11 |
20 |
24 |
55 |
The
last column of table shows weekly market demand for Pepsi. The market demand
curve can be obtained by plotting the data in the last column of the table.
Graphical
Derivation : Alternatively, market demand curve can be derived graphically by
horizontal summation of the individual demand curve at each price of Pepsi.
Graphical derivation of the market demand curve is illustrated in the figure
given below. The individual demand curves of buyers A, B and C are shown by the
demand curves DA, DB and DC respectively. Horizontal summation of these demand curves
produces weekly market demand curve for Pepsi as shown by the curve DM.
Some
important determinants of market demand are as given below :
(i)
Price of Substitutes and Complementary Goods : The demand for a commodity depends also on
the prices of its substitute and complementary goods. Two commodities are
considered as substitutes for one another, if change in price of one affects
the demand for the other in the same direction. For example, commodity X and Y
are in economic sense substitute for one another if a rise in the price of X
increases the demand for Y and vice-versa. Commodity is deemed to be a
complement of another when it encourages the use of the other. For example,
petrol is a complement to motor vehicles; butter and jam are complements to
bread; milk and sugar are compliments to tea and coffee and so on.
(ii)
Consumer’s Income and Engle Curves : Consumer’s income is a fundamental determinant of the quantity
demanded of a product. It is common belief that the people with the higher
disposable income spend huge amounts on goods and services compared to
low-income people. Income-demand relationship between demand and its other
determinants is of another diverse nature. For the purpose of goods and
services of income-demand analysis, it can be grouped under four broad
categories, such as:
(iii)
Consumer’s Taste and Preferences : When there is a change in consumers’ interest, taste and
preferences for certain goods and services following the change in fashion,
people switch their consumption pattern from cheaper and old fashioned goods
over to costlier ‘mod’ goods, so long as price differentials commensurate with
their preferences.
(iv)
Expected Utility at Equilibrium : A consumer maximizes his total satisfaction or his total utility
when marginal utility per unit of expenditure derived from each commodity is
the same.
(v)
Consumer’s Expectations : If consumers expect a rise in the price of a commodity, they
would buy more of it at its current price, with a view to avoiding the pinch of
price rise in future. On the contrary, if consumers expect prices of certain
goods to fall, they postpone their purchases of such goods with a view to
taking advantage of lower prices in future, mainly in case -of non-essential
goods. This behaviour of consumers reduces (or increases) the demand in future.
Similarly, an expected increase in income on account of the announcement of
revision of pay-scales, dearness allowance, bonus, etc. induces increase in
current purchase and vice-versa.
(vi)
Demonstration Effect : When new commodities or new models of existing ones appear in
the market, rich people buy them first. Some people buy new goods or new model
of goods because they have genuine need for them, while others buy because they
want to exhibit their affluence. But once new commodities come in vogue, many
households buy them, not because they have a genuine need for them, but because
others or neighbours have bought these goods. Purchase made on account of these
variables are the result of ‘demonstration effect’ or the ‘bandwagon effect.’ These
effects have a positive effect on the demand.
(vii)Consumer
Credit Facility :
Availability of credit to the consumers from the sellers, banks, relations and
friends or from any other source, encourages the consumers to buy more than
that what they would buy in the partial or complete absence of such credit.
Credit facility affects mostly the demand for consumer durables, particularly
those which require bulk payment at the time of purchase.
(viii)
Population of the Country : The total domestic demand for a product depends also on the
size of population. Given the price, per capita income, taste and preferences
etc. the larger the population, the larger the demand for a product of common
use. With an increase (or decrease) in the size of population, employment
percentage remaining the same, demand for the product increases (or decreases).
The relation between market demand for a product (normal) and the size of
population is similar to the income-demand relationship.
(ix)
Distribution of National income : The distribution pattern of national income also affects the
demand for a commodity. If national income is evenly distributed, market demand
for normal goods will be the largest. If national income is unevenly
distributed, i.e., if majority of population belongs to the lower income
groups, market demand for essential goods will be the largest, whereas the same
for other kinds of goods will be relatively low.
Price (in
dollars) |
Demand (in kilograms) |
5 |
5 |
4 |
10 |
3 |
15 |
2 |
20 |
Price in dollars |
Demand of Individual ‘A’ |
Demand of Individual ‘B’ |
Demand of Individual ‘C’ |
Demand of Individual A+B+C |
5 |
20 |
30 |
50 |
100 |
4 |
40 |
60 |
100 |
200 |
3 |
60 |
90 |
150 |
300 |
2 |
80 |
120 |
200 |
400 |
The
diagram shows that when the price is ₹ 5, then the market demand is 100
kilograms. When the price is ₹ 4, then the demand is 200 kilograms. When the
price is fixed at ₹ 3, then the demand is 300 kilograms, When the price is ₹ 2,
then the demand increases to. 400 kg that means there is an inverse
relationship between demand for goods and their price. When price decreases,
the market demand for goods increases and vice-versa.
S.No. |
Basis of Difference |
Extension of Demand |
Increase in Demand |
1. |
Meaning |
It is increase in demand due to
fall in price when other things remain same. |
It is rise in demand due to
change in variables other than the price of the commodity. |
2. |
Demand schedule |
There is a single demand
schedule. |
There is more than one demand schedule. |
3. |
Movement of the curve |
The demand curve moves downward. |
The demand curve shifts towards
right. |
4. |
Causes |
Decline in price. |
Due to rise in income, increase
in price of substitute goods and change in taste, increase etc. |
5. |
Examples |
It will be a case of extension
of demand if by fall in the price of commodity from ₹ 5 to ₹ 1, the demand
increases from 1 unit to 5 units. |
It will be a case of increase in
demand if the price remains stable at ₹ 3 per unit but the demand increases
from 3 units to 4 units. It may also happen that the price may increase from
₹ 3 to ₹ 4 but the demand remains constant at 3 units. |
(ii)
Price of the Commodity : Ceteris Paribus i.e., other things being the same, the demand
of a commodity is inversely propertional to its price, which means that the
increase in the price of a commodity decreases its purchases and vice-versa.
This is due to income and substitution effect.
(iii)
Price of Related Goods: Complementary goods are those goods that are consumed together
or simultaneously. For example, tea and sugar, automobiles and petrol, pen and
ink are used together. When commodities are complements, a fall in the price of
one (other things being equal) will cause the demand of the other to rise. For
example, a fall in the price of cars would lead to a rise in the demand for
petrol. Similarly, a fall in the price of pens, will cause a rise in the demand
for ink. The reverse will be the case when the price of a complement rises.
Substitute
goods are those goods which can be used easily in place of one another. For
example, tea and coffee, ink pen and ball pen, are substitutes for each other
and can be used in place of one another easily. When goods are substitutes, a
fall in the price of one (Ceteris Paribus) leads to a fall in the quantity
demanded of its substitutes. For example, if the price of tea falls, people
will try to substitute it for coffee and demand more of it and less of coffee,
i.e., the demand for tea will rise and that of coffee will fall.
(iv)
Level of Income of the Household : Other things being equal, the demand for a commodity depends
upon the money income sf the household. In most cases, the larger the average
money income of the household, the larger is the quantity demanded of a
particular good. However, there are certain commodities for which quantities
demanded decrease with an increase in money income.
These
goods are called Inferior Goods. Even in the case of other goods, the response
of quantities demanded to changes in their prices is not of same proportions.
If goods are such that they satisfy the basic necessity (food, clothing,
shelter) of life, a change in their prices although will cause an increase in
demand for these necessities this increase will be less than proportionate to
the increase in income, as compared to other non-durable goods in the overall
consumption pattern and a rise in importance of durable goods such as a TV,
car, house, etc.
Very Short Answer Type Questions
- Law of
diminishing marginal utility
- Income
effect
- Substitution
Effect
- New
consumers
- Different alternative
uses of product.