Acquaint with Economics: UNIT – II THEORY OF DEMAND

UNIT – II Theory of Demand

Basic Concepts:-

Demand:- It is defined as the quantity of a good a person is willing to buy at a given price at a given point of time
Law of demand:- Other things remains constant, demand of a quantity falls with rise in price, and vice versa.
Normal goods :- Normal goods are those goods which are positively. That means their demand increases with increase in income.
Inferior goods :- Are those goods with are negatively related with increase in income i.e. their demand falls with rise in income.
Substitute goods :- Substitute goods are those goods which are substitute each other ex. Tea and coffee.
Complementary goods :- Are those goods which are used together eg. Car & petrol.
Demand function :- It explains relationship between demand of a commodity and its determinants.

Dx = f(Px,Pa,Pb ………….Pn,income, taste, fashion etc.)

Demand Schedule :- It is a tabular presentation which shows the different quantities of a commodity bought at various price levels.
Changes in quantity demanded:- It is a movement along the same demand curve.
Change in demand:- It shows the shift to the demand curve.
Elasticity of demand :- It is the responsiveness of quantity demanded of a good to the change in its price.
Increase in demand :- The demand increases due to the change in other factors like increases in the income of the consumer. In this case the demand curve shift to the right.
Decrease in demand :- Same price-less demand due to change in other factors which affecting demand.

Very Short Answers( 1 mark)

Q1. Give the meaning of demand.

Ans. It refers to the quantity of a commodity which a consumer is willing to buy at a given price at is given point of time.

Q2. Give the factors that affect demand.

Ans. Price of commodity, income , price of related goods, taste etc.

Q3. What is law of demand?

Ans. It states that at a higher price, consumer will buy less of commodity and vice versa, other factors remaining constant.

Q4. What is a demand schedule?

Ans. It is a tabular presentation which shows different quantities of a commodity demanded at different prices in a given period of time.

Q5. What is demand Curve?

Ans. It is a graphical representation of change in demand due to change in price of a commodity.

Q6. What happens to the demand for a good when the price of the substitute good falls?

Ans. The demand of the good will fall.

Q7. When does a consumers buy less of a commodity at a given price?

Ans. A consumer buys less of a commodity when income decreases or consumer develops unfavourable taste.

Q8. Define market demand?

Ans. It refers to the sum total of the quantities demanded by all the individuals households in the market at a given price and at a given point of time.

Q9. What is changes in demand?

Ans. Changes in demand is when demand changes due to other factors than price.

Q10. Give two examples of substitute goods.

Ans. eg.1) Tea & Coffee 2) Colgate tooth paste & Pepsodent Tooth paste.

Short Answer Questions (3/4 Marks)

Q1. What are the determinants of demand?

Ans. (a) Price of a commodity (b) Income of a consumer.

Q2. Give three reasons of a rightward shift of demand curve.

Ans. It refers to that at the same price quantity demands is increase because:-

(a) Increase in income of the consumer.

(b) Rise in the price of substitute goods.

(d) Favorable Change in Taste & Preference.

(e) Favorable change in Weather.

(f) Expectation of rise in price in future.

(g) Favorable change in Population Composition.

(h)

Q3. What is market demand? How is market demand curve derived from the individual demand curve?

Ans. Market demand refers to the sum total of the quantities demanded by all the individual households in the market at given price and time.

Market demand curve:- It is a horizontal summation of individual demand curves.

Q4. Explain briefly any three factors which lead to decrease in demand.

Ans. It refers to that at the same price quantity demands is less because:-

(a) Decrease in income of the consumer.

(b) Fall in the price of substitute goods.

(d) Unfavorable Change in Taste & Preference.

(e) Unfavorable change in Weather.

(f) Expectation of fall in price in future.

(g) Unfavorable change in Population Composition.

(h)

Q5. What are the exceptions to the law of demand?

Ans. Law of demand is not applicable in the following case

(1) Geffen goods

(2) Ignorance

(3) Luxury goods( goods having demonstration effect)

Very long Answer( 6 Marks )

Q1. Explain with the help of diagrams, the effect of the following Changes on the demand of a commodity.

a) A fall in the price of substitute goods. / A rise in the price of substitute goods.

b) A rise in Price of Comp. Goods / A fall in Price of Comp. Goods.

c) An unfavorable change in other factors / A favorable change in other factors.

Ans. a) A fall in the price of substitute goods:- The demand of a commodity and the price of its substitute goods are directly related to each other. When the price of one substitute good falls, the demand for the goods falls and vice- versa. As a result the demand curve of the commodity shifts to the left (d”).

A rise in the price of substitute goods:- The demand of a commodity and the price of its substitute goods are directly related to each other. When the price of substitute goods rises then demand for given commodity rises. As a result demand curve of commodity will shift to the right (d’).

(b) A fall in the price of Complementary goods:- The demand of a commodity and the price of its complementary goods are inversely related to each other. When the price of one complementary good falls, the demand for the given goods rises. As a result the demand curve of the commodity shifts to the right (d’).

A rise in the price of Complementary goods:- The demand of a commodity and the price of its complementary goods are inversely related to each other. When the price of one complementary good rises, the demand for the given goods falls. As a result the demand curve of the commodity shifts to the Left (d”).

b) A fall in the income of its buyer:- The demand of a commodity and the income of the buyer are directly related to each other. A fall in the income of buyer will lead to decrease in the demand for the given commodity as buyers purchasing capacity will reduce. In this case the demand curve of the commodity will shift to left side (d”).

A rise in the income of its buyer:-The demand of a commodity and the income of the buyer are directly related to each other. A rise in the income of buyer will lead to increase in the demand for the given commodity as buyers purchasing capacity will increase. In this case the demand curve of the commodity will shift to right side (d’).

(c) An unfavourable change in other factors:- The demand of a commodity and the Unfavorable change in other factors are directly related to each other. An unfavorable change in the other factors will lead to decrease in the demand for the given commodity. In this case the demand curve of the commodity will shift to left side (d”).

A favorable change in other factors :- The demand of a commodity and the favorable change in other factors are directly related to each other. A favorable change in the other factors will lead to increase in the demand for the given commodity. In this case the demand curve of the commodity will shift to right side (d’).

Q2. Why does demand curve slope downwards? Explain.

Ans. A demand curve shows in curse relationship between price and quantity demanded because of following causes.

(a) Law of diminishing marginal utility:- Marginal utility of a commodity goes on declining from its successive units, whenever, a consumer consumes its units continuously. This simply means that demand shall be more when price is less and vice-versa.

(b) Price Effect - If the price of the product falls the real income of the consumer increases, so consumer will buy more.

(c) Substitution effect:- If the price of the product falls, it becomes cheaper in comparison to its substitutes, so the consumer will buy more.

(d) Uses of the commodities :- If the commodity has many uses, consumer will more with the fall in price.

Q3. Distinguish between change in demand and change in quantity demand. And show the diagrams.

Ans.

Basis	Expantion in Demand	Increase in Demand
	When there is change in Quantity demanded due to fall in Price of its own.	When change in demand due to rise in income, fall in price of comp. Goods, rise in price of substitute goods etc.
	In this situation consumer move downward on the same demand curve.	In this situation demand curve shift rightward.
	It is known as “Change in Quantity Demanded”	It is known as “Change in Demand”

Basis	Contraction in Demand	Decrease in Demand
	When there is change in Quantity demanded due to rise in Price of its own.	When change in demand due to fall in income, rise in price of comp. Goods, fall in price of substitute goods etc.
	In this situation consumer move upward on the same demand curve.	In this situation demand curve shift leftward.
	It is known as “Change in Quantity Demanded”	It is known as “Change in Demand”

(a) Change in quantity demand :- When change in demand for a commodity is caused by change in its own price, it is called change in quantity demanded. It is expressed in the form of either expansion or contraction of demand. A change in quantity demand graphically means movement along a given demand curve.

(b)Change in demand :- When change in demand is caused by Factors other than the price , it is called change in demand. It is expressed in the firm of either ‘increase’ or ‘decrease’ in demand .In fact change in demand refers to a shift of a demand curve.