UNIT 2: DEMAND ANALYSIS

•Individual demand refers to the quantities of a particular commodity that an individual consumer is
willing and able to buy at possible prices during a given period of time. Its determinants are:
a. Own price
b. Price of related goods
c. Income of the consumer
d. Tastes and preferences
e. Expectations of future prices
• Market demand refers to the sum total of the quantities of a particular commodity that all the
consumers are willing and able to buy at possible prices during a given period of time. It is affected
by all factors affecting individual demand and also affected by additional factors like:
a. Population
b. Distribution of income
c. Seasonal variations
The market demand is the sum of the individual demand curve. It is flatter than the individual demand curve
proportionate change in market demand is more than proportionate changes in individual demand.

• Demand Function: A mathematical relationship between demand for a commodity and its various
determinants.
• Law of demand states that ceteris paribus, there is an inverse relationship between quantity
demanded and own price of the commodity.
• Slope of the demand curve is negative and is given by ∆𝑝/∆𝑞.
• Law of demand is violated when demand curve slopes upwards.
• Movement along a demand curve occurs due to changes in own price. It may lead to extension
or contraction of demand. Extension of demand occurs due to decrease in own price whereas
contraction of demand occurs due to increase in own price.
• Shift of demand curve is due to determinants other than own price. It may lead to increase or
decrease in quantity demanded at the prevailing price.
Rightward shift of the demand curve may be due to:
i. Increase in income
ii. Increase in price of substitute good/ decrease in price of complementary good
iii. Favourable change in tastes and preferences
iv. Expectation of future price to rise
v. Increase in population of the locality
Leftward shift in the demand curve may be due to:
i. Decrease in income
 ii. Decrease in price of substitute good/ increase in price of complementary
iii. Unfavourable change in tastes and preferences
iv. Expectation of future price to fall
v. Decrease in population of the locality
• Substitutes and complements: If quantity demand varies directly with price of related good, they
are substitutes and if they vary inversely with price of related goods, then they are complements. If
price of one good has no effect on demand for the other good, the goods are unrelated.
• Normal and Inferior goods: If quantity demanded for a good is positively related to its income, the
good is a Normal Good. If quantity demand for a good is inversely related to its income, the good is
an inferior good.
• Giffen goods are a special class of inferior goods which have no close substitutes, so they violate the
law of demand. They have a negative income effect like inferior goods but quantity demanded is
directly related to price.

• Price Elasticity of demand is a measure of the responsiveness of the quantity of a good demanded to
changes in its price. It is expressed in terms of a percentage.
Mathematically,
Δ𝑞
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑞 1 𝑝
𝐸𝑑 = = Δ𝑝 = 𝑠𝑙𝑜𝑝𝑒 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 𝑐𝑢𝑟𝑣𝑒 𝑋
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑞
𝑝

Depending on the range of values from 0 to ∞, a demand curve may be perfectly inelastic or
perfectly elastic.
Elasticity of demand is free from units and is conventionally taken as negative because the demand curve
has a negative slope. The value of elasticity of demand is expressed in absolute terms.

• Factors affecting elasticity of demand:

a. Nature of the commodity- Necessities are inelastic
b. Availability of substitutes- Goods with close substitutes are more elastic
c. Number of uses-Elasticity increases with number of uses of the item
d. Ability to postpone consumption- Demand is more elastic for goods whose consumption can be
postponed
e. Income of the consumers- High income groups show low elasticity of demand for most goods
than low income group of consumers
f. Habits – Goods which are consumed out of habit are relatively inelastic
g. Share of the commodity in the person’s expenditure- If the good occupies a small share in the
consumer’s income, the good is inelastic and if it takes a large share of the consumer’s income it
is elastic.
h. Price level- Elasticity of demand is higher at high price levels of the good
i. Time period- Elasticity is greater as the time period expands. It is relatively inelastic in the short
run.
If two demand curves intersect, the flatter of the two is more elastic in nature. Slope and elasticity are
distinct concepts. Two demand curves which are straight lines can have a constant slope but elasticity of
demand may not be uniform at all points on the demand curve.

In case of the unitary elastic demand curve, the elasticity of demand is the same at all points but the slope
decreases as we move from left to right along the demand curve. Perfectly elastic and perfectly inelastic
demand curves show constant elasticity and constant slope at all points of the demand curve.

The slope of the demand curve measures the responsiveness of quantity demanded to changes in price
in absolute terms, while elasticity of demand measures the same responsiveness in percentage terms.
By computing changes in quantity and changes in price as percentages, we express them in common
terms, thereby making it possible to compare responsiveness for different goods.
SHORT ANSWER TYPE QUESTIONS

1. As we move along a downward sloping straight line demand curve from left to right, price elasticity
of demand: (choose the correct alternative)
a) Remains unchanged b) goes on falling c) goes on rising d) falls initially then rises
Ans b) goes on falling

2. Any statement about the demand for a good is considered complete only when the following is/are
mentioned in it: (Choose the correct alternative)
a) Price of the good b) quantity of the good c) period of time d) All of the above
Ans d) All of the above

3. State the Law of Demand.

Ans: The law of demand governs the inverse relationship between the quantity demanded and the price of a
commodity. It states that other things remaining the same as price rises the demand falls and vice versa.
4. Give one reason for a rightward shift in demand curve.
OR
What does a rightward shift of demand curve indicate?
Ans:
a) A rise in consumer’s income
b) Increase in price of substitute good
c) A Fall in price of complementary good
d) Favourable change in consumer’s taste for the good [Any One]

5. When income of the consumer falls, the impact on demand curve of an inferior good is (Choose the
correct alternative):
a) Shifts to the right b) Shifts to the left c) there is upward movement along the demand curve
d) there is downward movement along the demand curve
Ans: a) Shifts to the right

6. If due to fall in the price of good X, demand for good Y rises, the two goods are:
a) Substitutes b) Complements c) Not related d) Competitive
Ans: a) Complements

7. If with rise in price of good Y, demand for good X rises, the two goods are (Choose the correct
alternative):
a) Substitutes b) Complements c) Not related d) Jointly demanded
Ans: a) Substitutes

8. A consumer consumes only two goods. If price of one of the goods falls, the indifference curve
(Choose the correct alternative):
a) Shifts upward b) shifts downward c) Can shift both upward and downward d) Does not shift
Ans: d) Does not shift

9. Give the meaning of inelastic demand.

OR
When is the demand for a good said to be inelastic?
Ans: When percentage change in quantity demanded is less than percentage change in price of the good,
demand is inelastic. Here the value of price elasticity of demand is less than unity.

10. When is demand called perfectly inelastic?

Ans: When with any change in price of the good, quantity demanded of the good does not change at all,
demand is said to be perfectly inelastic. Here the value of price elasticity of demand is zero.
 11. What is meant by price elasticity of demand?
Ans: It refers to the degree of responsiveness of demand towards change in price of the good. It is expressed
as a ratio of percentage change in quantity demanded and percentage change in price of the good.

12. Give one reason for a shift in demand curve.

Ans: Any one:
a) change in consumer’s income
b) change in price of substitute good
c) change in price of complementary good
d) change in consumer’s taste for the good

13. What is meant by normal good in economics?

Ans: If demand for a good increase with increase in income and decreases with a fall in income, the good is
known as normal good for the concerned consumer.

14. Why is demand for water inelastic?

Ans: Water is essential for our survival so people will buy a certain amount of water at any price. Generally,
water is also inexpensive compared to most other items, so at low prices quantity demanded is less
responsive to changes in price.

LONG QUESTIONS [3/4/6 MARKS]

15. Give any three factors causing rightward shift of the demand curve.
OR
Give one reason for a rightward shift in demand curve.
Ans: Three factors are:
a) A rise in consumer’s income
b) Increase in price of substitute good
c) A Fall in price of complementary good
e) Favourable change in consumer’s taste for the good [Any Three with explanation]

16. Explain the effect of change in prices of the related goods on demand for the given good.
OR
Explain the change in demand of a good on account of change in price of related goods.
OR
How does change in price of a complementary good affect the demand of the given good? Explain with the
help of an example.
OR
How does change in price of a substitute good affect the demand of the given good? Explain with the help of
an example.
OR
How is the demand of a good affected by the rise/fall in price of related goods/other goods? Explain.
OR
Explain the relationship between price of other goods and demand for the given good.

Ans: Related goods may be of two types:

a) Substitutes: Substitute goods are those which are an alternative to one another in consumption, have
similar price and can satisfy same human wants. Such as tea and coffee, ball pen and gel pen. If price
of a substitute good changes demand for the given good will change in the same direction. If price of
coffee, a substitute of tea rises, coffee becomes comparatively expensive and demand for tea will rise
and vice versa. Thus, price of a good and demand for its substitute move in the same direction and
they are directly related.
 b) Complementary goods: Complementary goods are those goods which are jointly used to satisfy
human demand. Such as car and petrol, pen and refill. If price of a complementary good changes,
demand for the given good will change in the opposite direction. If price of petrol rises, running car
becomes expensive and demand for car will fall and vice versa. Thus, price of a good and demand
for its complementary move in the opposite direction and they are inversely related.

17. Explain the effect of change in income on the demand for a good.
OR
What happens to the demand of a good when consumer’s income changes? Explain.
OR
Explain the relationship between Income of the buyer and demand for a good.
OR
Explain how rise in income of a consumer affects the demand of a good. Give examples.

Ans: The effect of change in income on the demand for a good will depend on the nature of the commodity,
whether it is a normal good or an inferior good assuming prices are constant. Income and quantity
demanded are positively related for a normal good and inversely related for an inferior good.
 a) Normal good: A rise in income of the buyer will increase the purchasing power of the consumer
and his demand will increase. The demand curve for normal good will shift to the right if we
assume prices are unchanged.
A fall in income of the buyer will decrease the purchasing power of the consumer and his
demand will decrease. The demand curve for normal good will shift to the left if we assume
prices are unchanged.

Inferior good: A rise in income of the buyer will result in fall demand for inferior good as he
will shift to superior variety of the good and the demand curve for inferior good will shift
leftward. At unchanged price demand for inferior good will be less.

A fall in income of the buyer will result in rise in demand for inferior good and the demand
curve for inferior good will shift rightward. At unchanged price demand for inferior good will
be more.

18. Explain the effect of a) Change in own price b) change in price of substitute on demand of a good.
OR

Good X and Y are substitutes. Explain the effect of fall in the price of good Y on the demand for X.
Ans: a) If own price of a good rises its demand will fall provided the good is a normal good and vice versa.
Such inverse relation is represented by the law of demand.
b)Substitutes: Substitute goods are those which are an alternative to one another in consumption, have
similar price and can satisfy same human wants. Such as tea and coffee, ball pen and gel pen. If price of a
substitute good changes demand for the given good will change in the same direction. If price of coffee, a
substitute of tea rises, coffee becomes comparatively expensive and demand for tea will rise and vice versa.
Thus, price of a good and demand for its substitute move in the same direction and they are directly related.
Also, at the given price, demand for a commodity will shift to the right due to increase in price of
substitutes.

19. Price elasticity of demand for good X is (-) 2 and of good Y is (-) 3. Which of the two goods is more
price elastic and why?

Ans: Good Y is more price elastic as for 1% fall in price of good Y, its demand will rise by 3% whereas for
good X the rise is lesser at 2% only. So Good Y is more responsive towards change in price.

20. Distinguish between individual demand and market demand. Name the factors affecting demand for
a good by an individual.

Ans: Individual demand refers to the quantities of a particular commodity that an individual consumer is
willing and able to buy at all possible prices during a given period of time.

Market demand is the sum total of the quantities of a particular commodity that all the consumers are willing
and able to buy at all possible prices during a given period of time.

Factors affecting individual demand are:

a) Own price of the good

b) Income of the consumer
c) price of substitute good
d) price of complementary good
e) Taste and preference of the consumer
f) Expectation regarding future price change etc.

21. Define demand. Name/State the factors affecting market demand.

Ans: Individual demand refers to the quantities of a particular commodity that an individual consumer is
willing and able to buy at possible prices during a given period of time.
Factors affecting market demand are:
a) Own price of the good
b) Income of the consumer
c) price of substitute good
d) price of complementary good
e) Taste and preference of the consumer
f) Expectation regarding future price change
g) Size and composition of population
h) Distribution of income
i) Season and weather etc.

22. Price elasticity of demand for two goods X and Y are zero and (-) 1 respectively. Which of the two
is more elastic and why?

Ans: Good Y has greater price elasticity of demand because a 1% change in price for both the goods will
bring 1% change in its quantity demanded for Y whereas for good X there will be no change in demand.

23. Distinguish between an inferior good and a normal good. Is a good which is inferior for one
consumer also inferior for all the consumers?

Ans: If demand for a good increase with increase in income and decreases with a fall in income, the good is
known as normal good for the concerned consumer. But if demand for a good fall with rise in income and
rises with a fall in income, the good is known as an inferior good for the concerned consumer.

A particular good which is inferior for one consumer may not be inferior for another consumer. A good may
seem to be inferior for a high-income consumer whereas the same good may seem to be normal good to a
low-income consumer. Thus, not the good but the income level of the consumer will determine the good to
be normal or inferior. Toned milk may be a normal good for a low-income consumer but it may be regarded
as an inferior good to a rich consumer as to him full cream milk is a normal good.

24. Distinguish between demand by an individual consumer and market demand of a good. Also state the
factors leading to fall in demand by an individual consumer.

Ans: Individual demand refers to the quantities of a particular commodity that an individual consumer is
willing and able to buy at possible prices during a given period of time.

Market demand is the sum total of the quantities of a particular commodity that all the consumers are willing
and able to buy at possible prices during a given period of time.

Factors leading to fall in individual demand are:

a) Rise in own price of the good
b) Fall in Income of the consumer
c) Fall in price of substitute good
d) Rise in price of complementary good
e) Unfavourable change in Taste and preference of the consumer
f) Expectation regarding future price to fall

25. Price elasticity of demand for two goods A and B are (-) 3 and (-) 4 respectively. Which of the two
goods has higher elasticity and why?

Ans: Good B has greater price elasticity of demand because a 1% change in price for both the goods will
bring 3% change in its quantity demanded for A whereas for good B there will be 4% change in quantity
demand. Thus, good B is more responsive towards price change and hence has higher price elasticity.
 26. Explain any two factors that affect the price elasticity of demand. Give suitable examples.
OR
How is price elasticity of demand affected by:
a) Number of Substitutes available
b) Nature of the good

Explain the effect of the following on the price elasticity of demand of a commodity:
a) Number of Substitutes available
b) Nature of the commodity

Ans: a) Number of Substitutes available: A good having close substitutes being available in the market will
have an elastic demand and good with no close substitutes will have inelastic demand. Commodity like
Pepsi has Coke as a substitute in the market. As price of Pepsi rises, consumers will readily shift to coke
resulting in a highly elastic demand for Pepsi. Goods like prescribed medicine and salt have no close
substitute in the market. If their prices rise in the market demand will not respond much making the demand
inelastic.

b) Nature of the good: Goods are mainly of two types, Luxuries and Necessities For luxuries, demand is
highly elastic whereas it is inelastic for necessities.

A necessity is essential for a consumer like bread, food grains. If price of necessities rise, demand will not
fall or fluctuate by a greater proportion as their consumption cannot be delayed. So, price elasticity of
demand will be low for them.

Luxury is enjoyable though not that important. When price of such commodities rise consumer reduce
consumption and demand will be elastic.

27. Distinguish between “change in demand” and “change in quantity demanded”.

Change in Demand Change in Quantity Demanded

1. Defined as the change in demand at same 1. Defined as the change in demand due to change
price of the commodity in price of the commodity

2. A shift in demand curve takes place to the 2. Movement downward along the same
left or right of the original demand curve, demand curve upward or downward, no new
new demand curve is generated demand curve is generated.

3. It happens due to 3. It happens due to change in own price of the

a) change in consumer’s income good.
b) change in price of substitute good 4. Graph
c) change in price of complementary good It may be extension or contraction in
d) change in consumer’s taste for the good demand.

4. Graph
It may be increase or decrease in demand
TEST YOURSELF: TRUE/FALSE WITH REASONS

1. Increase in demand means extension in demand

2. Law of demand applies only on necessary goods

3. Demand curve need not be a straight line.

4. Due to fall in cost of making mobile phones its price has reduced. It will shift the demand of mobile
phones towards right

5. Price of Coke has changed but its demand curve will not change

6. Law of demand may not apply on the demand curve of a good if price of substitute goods rises.

7. Decrease in population cause decrease in demand of a normal good

8. Demand for a good always increases with increase in income of its buyer

9. Movement along demand curve is caused by change in income of its buyer

ANSWERS

1. FALSE: Increase in demand takes place when price is constant but expansion in demand occurs
when price of the commodity decreases

2. FALSE: It is true in case of normal goods which has a positive income effect

3. TRUE: For a unitary elastic demand curve, the shape is a rectangular hyperbola. So demand curve
need not be a straight line.

4. FALSE: Fall in price of mobile phones will lead to a downward movement along the same demand
curve.

5. TRUE: As price of Coke has changed, there will be movement along the same demand curve. So,
demand curve will not change
 6. TRUE: Demand curve is drawn on the assumption that other things will remain constant. So, if price
of substitute goods rises, the demand curve of the good will shift to the right.

7. TRUE: Decrease in population will result in fall in market demand. So, at unchanged price of the
commodity demand will fall and the demand curve will shift to the left

8. FALSE: With the increase in income, demand for normal good increases but demand for inferior
good decreases

9. FALSE: Change in income of the buyer will shift the demand curve

UNSOLVED NUMERICALS

1. The coefficient of price elasticity of demand for a commodity is 0.2. When price was Rs 10 per unit,
the quantity demanded was 40 units. If the price falls to Rs 5 per unit, how much will be the quantity
demanded? Ans: 44 Units

2. A household increases its demand for a commodity from 40 to 50 units when its price falls by 10%.
What is the price elasticity of demand for the commodity? Ans: Ed= (-)2.5

3. Price elasticity of demand for a commodity is (-1). Calculate the percentage change in price that will
raise the demand from 20 to 30 units. Ans: Price falls by 50%

4. What will be the effect of a 10 % rise in price of a good on its demand if price elasticity of demand is
a) Zero b) (-1) c) (-2)? Ans: a) No change b) 10% fall c) 20% fall

5. The demand curve for the commodity is given as Dx= 10+2P. If slope of the demand curve is (-2),
calculate price elasticity of demand for the commodity when the price of the commodity is Rs 5/unit.
Ans: (-0.125)