3the Demand Curve

7/31/2019 3the Demand Curve

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THE DEMAND CURVE

Q) Define demand?A) Demand is defined as the quantity of the commodity that a consumer is willing to buy

at different prices within a given period of time.

Q) What are the determinations of demand?OR

What factors influence demand for a commodity?A) (i) Own Price: The law of Demand: Law of Demand states that other things remainingunchanged, as the own price of a commodity increases, the quantity demanded of it by aconsumer falls. Other things refer to the prices of related goods, income and tastes.

(ii)Change in prices of related goods: Change in the prices of related goods also

affects the demand for a commodity. Related goods are of two types:-

(a)Substitute goods and(b) Complementary goods

(a)Substitute goods:- are those which can satisfy a given want with equal ease

Without redvention in our satisfaction. These can be used in place of each other. Forexample; tea, coffee, ball pen and fountain pens, coke and Pepsi. Substitute goods have

same/direct relationship, i.e., if the price of one goes up (tea), the demand for the other

(coffee) also goes up. Good A is a substitute of good B if an increase in the price of good Bincreases the demand for good A.

(b)Complementary goods:-Complementary goods are those which are used

together to satisfy a given want. For example: car and petrol, pen and ink. Complementarygoods have opposite relationship i.e., if the price of one commodity (petrol) rises it leads to

fall in the demand of other commodity (car). In other words, good A is said to be

complementary to good B if an increase in the price of good B decreases the demand forgood A.

(iii)A change in income: Generally, with the increase in income, the demand for the

commodity goes up and vice-versa. However, the affect of increase in demand is not

uniform on the demand of all commodities. Generally, as a result of increase in income, thedemand of normal goods goes up and that of inferior goods goes down.

(iv)A change in Tastes: The demand for a commodity depends upon tastes and

preference of consumers. If a consumer becomes habitual of a commodity, then inspite ofthe increase in price of that commodity he will not reduce its demand.

A favorable change in tastes shifts the demand curve to the right (increase in demand) and

an unfavourable change shifts the demand curve to the left.(decrease in demand)

Q) State and explain law of demand?A) Laws of demand states that other things unchanged, as the own price of a commodityincreases, the quantity demanded of it by a consumer falls. Other things increase and

tastes. For example: if price of apples falls, people will purchase more of it the law of

demand can be illustrated with the help of demand schedule and curve.


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Demand Schedule: - A demand schedule is a tabular statement which shows different

quantities of a commodity demanded at different prices. The demand schedule shows as the

price of apples increases the quantity demanded of it falls down.

OWN PRICEQty Demanded of

Apples

10 5

20 4

30 3

40 2

50 1

Demand curve: - A demand curve reflects graphically the relationship between the

quantities demanded of a commodity to its price. In this figure, price is measured at OX-

axis. DD is the demand curve. It slopes downwards. It shows the opposite relationship

between price and quantity demanded.

Q) State assumptions of law of Demand?A) The law of demand operates only when we keep all the other factors affecting demandconstant except price. The other things are prices of related goods, income of the consumer,

tastes, preferences and habits of the consumer, etc. These are called assumptions of the law

of demand.

Q) Why is the Demand Curve Downward Sloping? ORwhy do consumers buy more at a lower price than at ahigher price? Explain with law of Diminishing Marginal

Utility?

A) Usually, a demand curve slapes downwards to theright. This means the slope of demand curve isnegative. Download sloping demand curve shows the

inverse relationship between price and quantity

demanded. A demand curve slopes downwardsbecause of law of diminishing marginal utility. Indeed,

the curve is essentially the marginal utility curve. In

the below table marginal utility of T-shirts is shown.Here diminishing marginal utility sets in with the very

first unit of consumptions. Assume further that marginal utility of a rupee is equal to1 util.

Then, our consumers equilibrium condition can be stated as Marginal Utility = Price.

Suppose that the price of a T-shit is Rs. - 45. The consumers equilibrium condition hodesat 7 T-shirts consumed. This can be restated as follows. The quantity demanded of T-shirts

is 7 when the price is Rs. 45. Thus, the pair (45,7) will be on the demand curve. Similarly,

suppose that the price of T-shirts increases to Rs. 65. The consumers equilibriumcondition now holds at 3 T-shirts consumed, that is, at price Rs. 65, the quantity demanded

is 3. Hence the pair (65,3) will be on the demand curve too. Liskeulise, we can determine

all other points on the MU schedule are points on the demand schedule. This means that the

Qty of T-

Shirts

MU of T-

Shirts1 75

2 70

3 65

4 60

5 55

6 50

7 45


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marginal utility curve itself is the demand curve, and, demand curve is downward sloping

because of the law of diminishing marginal utility.

Q) What is meant by cross price effects? Give twonumerical examples to illustrate this.

A) Cross price effects is how the demand for one particular product is affected by achange in the price of another i.e., substitute or complementary goods.(i) Substitute goods:- Substitute goods are those which can satisfy a given want with equal

ease. For e.g. tea and coffee. Substitute goods have direct relationship i.e., if the price of

one goes up, the demand for other also goes up. Here the demand curve of tea shifts to theright when the price of coffee goes up. Hence an increase in the price of a substitute good

shifts the demand curve for a product to the right.

Price of

Tea

Qty

Demanded

of Tea

when price

of coffeeRs. 200/kg

Qty

Demanded

of Tea

when price

of coffeeRs. 300/kg

100 10 20

Here the quantity demanded of tea hasgone up at the same price because of

increase in the price of coffee.

(ii) Complementary goods: Complementary goods are those which are used together tosatisfy a given want. For example, car and petrol, pen and ink etc. complementary goods

have opposite relationship i.e., if the price of one commodity goes up, it leads to fall in the

demand for other commodity. Thus, an increase in the price of a complementary goodshifts the demand curve for a product to the left.

Price of

Car

(Rs.

Lakhs)

QtyDemanded

of Car

when price

of petrol

Rs. 30

QtyDemanded

of cars

when price

of petrol

Rs. 100

2.0 100 80

Here the demand for cars has come

down because of rise in price of petrol &vice versa.

Q) Differentiate between normal goods and inferiorgoods with numerical examples.


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A) (i)Normal goods are those, for which demand increases as income increases, for e.g.TV, refrigerator, car etc. in case of normal goods an increase in income shifts the demand

curve to the right.

Price of

Car

Qty

Demanded

of Carwhen

INCOME

= Rs. 500

Qty

Demanded

of carswhen

INCOME

= Rs. 1000

10 8 10

Here the demand has gone up because ofrise in income & vice versa.

(ii) Inferior goods:- Inferior goods are those whose demand falls as income rises. For e.g.

coarse grains like bajra, maize, jawar etc. Here with the increase in income shifts the

demand curve to the left.

Bajra

price

Qty

Demanded

INCOME

= Rs. 500

Qty

Demanded

INCOME

= Rs.1000

10 20 15

Here the qty demanded has come downwith the increase in income & vice -

versa.

Q) Explain extension and contraction in demand.

ORExplain the movement along a demand curve.

ORExplain the change in quantity demanded.A) Extension and contraction in demand is due to changes in price and not due to otherfactors affecting demand such as income of consumers, taste and preferences, prices of

related goods etc. it is also known as movement along a demand or changes in quantitydemanded.

(i) Extension in demand: If the quantity demanded rises with a fall in the price of a

commodity, it is called extension/expansion in demand. Here we move downwards /

rightwards along the same demand curve. This is shown in the below schedule anddiagram.

Price Demand

4 10


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2 15

(ii) Contraction of demand: When the quantity demanded falls with a rise in price, it isknown as contraction of demand. Here we move upwards / leftwards along the same

demand curve. This is shown in the below schedule and diagram.

Price Demand

2 10

4 5

Q) Explain increase and decrease in demand. ORExplain shifts in demand curve OR Explain changesin demand.A) When there is change in demand not due to changes in price but due to changes inother factors affecting demand like income of the consumer, prices of related goods, taste

and preferences of consumers etc. It is called increase or decrease in demand. This is alsocalled shift in demand curve because the demand curve shifts right or left.

(i) Increase in demand: When the quantity demanded rises not due to fall in price,

but due to other factors affecting demand, it is called increase in demand. Increase indemand can be by two ways:

(a) More quantity is demanded at the same price.

(b) Same quantity is demanded at the higher price

Price Demand Demand

(a) 10 40 60

Price Demand

(b

)

10 40

20 40

Increase in demand can be explained with the help of diagram. On the OX-axis demand

and on the OY-axis price is taken. Quantity demanded is OQ when price is OP. at this very

price OP, demand goes up to OQ1. the demand curve Demand shifts from its originalposition to the new demand curve D1D1 (rightwards shift). Again when price rises to OP1,

the demand remains the same i.e., OQ. Demand is the old demand curve, D1D1 depictsincrease in demand.

(ii) Decrease in demand: When demand falls not due to rise in price but due to other

factors affecting demand, it is called decrease in demand. Decrease in demand can be by

two ways:(a) Less quantity demanded at the same price

(b)


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PRICE QTY. DEMANDED QTY. DEMANDED

Rs. 10 30 Kg 20 Kg

(c) Some quantity demanded at the lower price.

PRICE QTY. DEMANDED

Rs. 10 30 KgRs. 5 30 Kg

Decrease in demand is explained with the helpof a diagram. On the OX-axis demand and on

the OY-axis price is taken. Demand in beginning

is OQ when price is OP. at this very price OP,

demand falls to OQ1. Again when the price falls to OP1,demand remains same i.e., OQ. D1D1 depicts decrease

in demand. DD is the old demand curve. Demand is

the old demand curve. In the case of decrease in demand,

the demand curve shifts to left.

Q) Differentiate between extension (expansion) indemand and increase in demand.

EXTENSION IN DEAMND INCREASE IN DEMAND

Extension and contraction in demand is due

to changes in price and not due to otherfactors affecting demand.

Increase in demand is not due to change in

price but due to changes in other factorsaffecting demand like income of the

consumer, prices of related goods, taste and

preferences of consumers etc.

Here more quantity is demanded with the

fall in price.

Here at the same price more quantity is

demanded.Here we move downwards along the same

demand curve.

Here the demand curve shifts to the right.

Here the quantity demanded changes. Here the demand changes.

PRICE Qty.DemandedRs.10 20

Rs. 5 40


Rs. 5 30


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Q) Differentiate between contraction in demand anddecrease in demand.

CONTRACTION IN DEAMND DECREASE IN DEMAND

Contraction in demand is due to changes in

price and not due to other factors affectingdemand.

Decrease in demand is not due to change in

price but due to changes in other factorsaffecting demand like income of the

consumer, prices of related goods, taste and


Here less quantity is demanded with a rise

in price.

Here at the same price less quantity is

demanded.

Here we move upwards along the same

demand curve.

Here the demand curve shifts to the left.

Here the quantity demanded changes. Here the demand changes.


Rs.30 10


Rs.10 10


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Q) Differentiate between movement along the

demand curve and shift in demand curve.OR

Differentiate between change in quantity demandedand change in demand.

MOVEMENT ALONG DEMAND

CURVE

(Change in quantity demanded)

SHIFT IN DEMAND CURVE

(Change in demand)

Change in quantity demanded is due to

changes in price and not due to other factors

affecting demand.

Change in demand is not due to change in

price but due to changes in other factors

affecting demand like income of theconsumer, prices of related goods, taste and


There are two movements:

(a) Upward movement when demandfalls with a rise in price.

(b) Downward movement when demand

rises with a fall in price.

There are two shifts:

(a) Rightwards shift when more quantitydemanded at the same.

(b) Leftwards shift when less quantity

demanded at the same price.


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Q) Explain a household demand schedule and marketdemand schedule.A) A household demand means the demand of a single household at a particular time andprice. A household demand schedule, therefore, is a tabular statement which showsdifferent quantities of a commodity that he would demand at different prices.

Market demand, on the other hand, is the aggregate of demand of all individuals or

households at each price. Therefore, market demand schedule is the aggregate on

individual demand schedules. Let us suppose there are three households, namely, A, B andC in the apple markets. Individual demand schedules and the resultant market demand

schedules for apples are given in the table. Market demand schedule is the horizontal

summation of individual demand schedules.

PRICE

Rs.

INDIVIDUAL DEMAND SCHEDULES MARKET

DEMND

(A+B+C)HOUSEHOLD

A

HOUSEHOLD

B

HOUSEHOLD

C

2 4 5 6 15

4 3 4 5 12

6 2 3 4 9

10 1 2 3 6

Q) What is market demand curve?

A) Graphic representation of market demand schedule is market demand curve. Theeconomy wide demand curve for a particular product is called the market demand curve. Itis obtained up the demand curves across consumers or households. The demand curves of

three households A, B and C are shown in the below graph. The market demand curve is

derived geometrically by horizontal summation demand curves.

Q) What are the determinations of the marketdemand?


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A) (i) Price of the commodity: The law of Demand: Law of Demand states that otherthings remaining unchanged, as the own price of a commodity increases, the quantity

demanded of it by a consumer falls. Other things refer to the prices of related goods,

income and tastes.(ii)Change in prices of related goods: Change in the prices of related goods also

Affects the demand for a commodity. Related goods are of two types:-(a)Substitute goods and (b) Complementary goods

(a)Substitute goods:- are those which can satisfy a given want with equal ease

Without retention in our satisfaction. These can be used in place of each other. For

example; tea, coffee, ball pen and fountain pens, coke and Pepsi. Substitute goods have

same/direct relationship, i.e., if the price of one goes up (tea), the demand for the other(coffee) also goes up. Good A is a substitute of good B if an increase in the price of good B

increases the demand for good A.

(b)Complementary goods:-Complementary goods are those which are usedtogether to satisfy a given want. For example: car and petrol, pen and ink. Complementary

goods have opposite relationship i.e., if the price of one commodity (petrol) rises it leads to

fall in the demand of other commodity (car). In other words, good A is said to becomplementary to good B if an increase in the price of good B decreases the demand for

good A.

(iii)A change in Tastes: The demand for a commodity depends upon tastes and

preference of consumers. If a consumer becomes habitual of a commodity, then in spite ofthe increase in price of that commodity he will not reduce its demand.

A favorable change in tastes shifts the demand curve to the right (increase in demand) and

an unfavorable change shifts the demand curve to the left.(decrease in demand).(iv) Distribution of Income: If national income is equitably distributed, there will be

more demand and vice versa. If there are more poor people, the demand for necessaries

of life will be more. Increase in the percentage of rich people, luxury goods will be

demanded more.(v) Fashions: If some commodity is in fashion, the demand for it will go up and

vice versa.(vi) Population: Increase in population increases the demand and vice versa. Like

size of population, its composition also affects the demand.

(vii) Government Policy: Govt. of a country can also affect the demand for a

particular commodity or commodities through taxation. It may reduce the demand for acommodity by imposing tax on it or increase the demand by lowering its price through

subsidies.

(viii) State of business: The prevailing business conditions in a country also affectthe level of income. For example, during boom periods, market demand will increase. On

the other hand, the level of demand goes down during depression.

Q) List the factors that cause changes in demand.A) (i) Change in the prices of related goods.(ii) Change in income.(iii) Change in tastes and preferences on consumers.


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Q) If the demand of good Y increases as the price ofanother X rises, how are the two goods related.A) X and Y are substitute goods.

Q) If the demand of good Y decreases on an increasein the income of a family. Which type of good is Y?A) Inferior good.

Q) Give an example of a pair of commodities that aresubstitute (and complementary) of each other.A) Substitute goods: Tea & Coffee, coke & pepsi or juiceComplementary goods: ink & pen, petrol & car

Q) If the price of good X rises and this leads to adecrease in demand for good Y, how are the twogoods related.A) The two goods are complementary goods.

Q) Distinguish between a change in quantitydemanded and a change in demand.A) A change in the quantity demanded is the movement along the given demand curve,i.e., the effect of a change in commoditys own price on its demand. On the other hand,

when a change in any other factor causes a (left or rightward) shift of a demand curve, wecan call this a change in demand.

Q) Identify the type of commodity in each case anddefineIncome of Qty Demand

ofQty Demandof

Qty Demandof

H.H. (Rs.) CommodityA

CommodityB

CommodityC

100 10 10 20

200 20 10 15300 30 10 12400 40 10 11

A) Commodity A is a normal (luxury) good since its demand is rising with a rise inincome. Commodity B is a necessity good since its demand remains same and commodity

C is inferior good since its demand falls with increase in income.


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Q) When does a consumer buy more of a commodityat the given / same price?A) (i) When the income of the consumer increases in case of normal / luxury goods.(ii) When the prices of substitute goods go up.

(iii) When the price of complementary goods goes down.(iv) When her tastes become favorable towards that commodity.

Q) When does a consumer buy less of a commodity atthe given / same price?A) (i) When the income of the consumer decreases in case of normal / luxury goods.(ii) When the prices of substitute goods go down.

(iii) When the price of complementary goods goes up.

(iv) When her tastes become unfavorable towards that commodity.(v) When the income of the consumer goes up in case of inferior goods.

Q) State three causes of a rightward shift of demandcurve of a commodity.A) (i) Increase in the income of the consumer results in increase in the demand for normalgoods. As a result, demand curve may have a rightward shift.

(ii) A rise in the price of substitute goods causes a rightward shift.

(iii) A fall in the price of complementary goods.(iv) A favorable taste towards a commodity..

Q) Why demand curve slope down to the right?A) The demand curve slopes downwards because it shows the inverse relationshipbetween price and quantity demanded. Consumers buy more quantity at lesser price

because of the following reasons:-(i) Diminishing Marginal Utility: According to this law a consumer consumes more and

more units of a commodity; every additional unit gives him declining utility. Hence the

marginal utility curve declines. Law of demand depends on law of diminishing marginalutility. Thus, demand curve also slopes downwards.

(ii) Income effect:- when the price of a commodity decreases, real income of the consumer

increases. As a result, they will find a position to buy more of quantity with same income.

This is called income effect. As a result demand curve slopes downwards.(iii) Substitution effect: When the price of a commodity falls, it looks cheaper compared to

its substitutes. Hence people prefer to buy more quantity and demand curve falls.

(iv) Number of consumer: when the price of a commodity falls, old consumers would be ina position to buy more quantity and new consumers are also attracted leading to increase in

demand and fall in demand curve towards down.

(v) Different uses of a commodity: When the price of a commodity falls, people put itdifferent uses leading to increase in its quantity demanded. For e.g., when price of milk

falls, it would be used to prepare tea, butter, cheese etc.


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3the Demand Curve

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