Get summaries, questions, answers, solutions, notes, extras, PDF and guide of Class 11 (first year) Economics textbook, chapter 3 Theory of Demand, which is part of the syllabus of students studying under AHSEC/ASSEB (Assam Board). These solutions, however, should only be treated as references and can be modified/changed.
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Summary
In this chapter, the concept of demand in economics is thoroughly explored. Demand refers to the quantity of a commodity that consumers are willing and able to purchase at various prices during a specific time period. It is important to distinguish between individual demand, which pertains to the amount a single consumer would buy, and market demand, which is the total quantity demanded by all consumers in the market.
The determinants of demand include the price of the commodity itself, consumer income, tastes and preferences, prices of related goods, consumer expectations, population size and composition, and government policy. These factors can cause the demand curve to shift either to the right, indicating an increase in demand, or to the left, indicating a decrease in demand.
A normal good is one where demand increases as consumer income rises. Conversely, an inferior good sees a decrease in demand as consumer income rises. Giffen goods are a special category of inferior goods where demand increases as the price rises, contrary to the law of demand.
The law of demand states that there is an inverse relationship between the price of a commodity and its quantity demanded, assuming all other factors remain constant. As prices fall, demand increases, and as prices rise, demand decreases. This relationship is typically represented by a downward-sloping demand curve on a graph.
There are exceptions to the law of demand, such as articles of distinction, ignorance of consumers, expectations of future price changes, and abnormal conditions like emergencies. These exceptions can lead to situations where the typical inverse relationship between price and demand does not hold.
Changes in demand can occur due to factors other than price, such as changes in consumer income, population, tastes, and prices of related goods. These changes shift the entire demand curve. For instance, an increase in consumer income generally shifts the demand curve to the right, indicating higher demand at all price levels.
The chapter also explains the difference between a movement along the demand curve and a shift of the demand curve. A movement along the demand curve, known as a change in quantity demanded, occurs in response to a change in the commodity’s price. In contrast, a shift of the demand curve, known as a change in demand, occurs due to changes in other determinants of demand.
Substitute goods and complementary goods are important concepts in understanding demand. Substitute goods are those that can be used in place of each other, such as tea and coffee. An increase in the price of one substitute leads to an increase in the demand for the other. Complementary goods, like cars and petrol, are used together. An increase in the price of one leads to a decrease in the demand for the other.
The chapter concludes by discussing how income effects and substitution effects contribute to the downward slope of the demand curve. When the price of a commodity falls, consumers’ real income increases, allowing them to buy more of the commodity, which is known as the income effect. Additionally, the substitution effect occurs when a fall in the price of a commodity makes it cheaper relative to its substitutes, leading consumers to purchase more of the cheaper commodity and less of the substitutes.
Textbook solutions
Very Short Answer Type Questions
1. Define the term demand.
Answer: Demand refers to the quantity of a commodity which a consumer is willing to buy at a given price during a given period of time.
2. Define substitute goods. Give examples.
Answer: Substitutes refer to those goods which can be used in place of one another for satisfaction of a particular want. For example: Cocacola and Pepsi.
3. Give an example of complemental goods.
Answer: Car and petrol.
4. Define complementary goods.
Answer: Complements refer to those goods which are used together to satisfy a particular want.
5. State one important factor which influences the demand for a commodity.
Answer: Price of the commodity.
6. What will be the effect on demand for tea, if the price of coffee rises?
Answer: The demand for tea will increase.
7. If the quantity demanded of a commodity X decreases as the household’s income increases, what type of good is X?
Answer: Inferior good.
8. If the demand for a commodity Y increases as the price of another commodity X rises, what is the relation between the two goods? Or What happens to the demand for a substitute good of a commodity when price of the commodity rises?
Answer: The two goods are substitutes. When the price of a commodity rises, the demand for its substitute good also rises.
9. How does an increase in income affect the quantity demanded of an inferior commodity?
Answer: The quantity demanded of an inferior commodity decreases.
10. What do you understand by change in demand?
Answer: Change in demand refers to an increase or decrease in demand of a commodity due to factors other than the price of the commodity.
11. What is meant by increase in quantity demanded?
Answer: Increase in quantity demanded refers to a rise in the quantity of a commodity purchased due to a fall in its price, other factors remaining constant.
12. What is meant by contraction in demand?
Answer: Contraction in demand refers to a fall in the quantity of a commodity purchased due to a rise in its price, other factors remaining constant.
13. Define increase in demand.
Answer: Increase in demand refers to a rise in the quantity demanded of a commodity at the same price due to factors other than the price of the commodity.
14. Define decrease in demand.
Answer: Decrease in demand refers to a fall in the quantity demanded of a commodity at the same price due to factors other than the price of the commodity.
15. What is law of demand?
Answer: Law of demand states that, other things being equal, quantity demanded of a commodity is inversely related to the price of the commodity, i.e., demand rises when price falls and demand falls when price rises.
16. Define income effect.
Answer: Income effect refers to the change in quantity demanded of a commodity due to a change in real income resulting from a change in the price of the commodity.
17. What is substitution effect?
Answer: Substitution effect refers to the change in quantity demanded of a commodity due to a change in its relative price compared to its substitutes.
18. Give two exceptions to the law of demand.
Answer: Giffen goods and Veblen goods.
Short Answer Type Questions
1. Explain three factors that can bring about an increase in the market demand for a commodity.
Answer: Three factors that can bring about an increase in the market demand for a commodity are:
(i) An increase in the income of consumers. (ii) A rise in the price of substitute goods. (iii) A fall in the price of complementary goods.
2. State the law of demand and the assumptions behind it.
Answer: The law of demand states that, other things being equal, the quantity demanded of a commodity increases when its price falls and decreases when its price rises. The assumptions behind the law of demand are:
(i) Tastes and preferences of the consumers remain unchanged. (ii) There is no change in the income of the consumers. (iii) Prices of related goods (complementary and substitute) do not change. (iv) Consumers do not expect any change in the price of the commodity in the near future.
3. Explain the law of demand with the help of a demand schedule.
Answer: The law of demand can be illustrated with the help of a demand schedule which shows the quantity of a commodity demanded at different prices. For example:
| Price (₹) | Quantity Demanded (units) |
|---|---|
| 10 | 100 |
| 8 | 150 |
| 6 | 200 |
| 4 | 300 |
| 2 | 400 |
The table shows that as the price of the commodity decreases from ₹10 to ₹2, the quantity demanded increases from 100 units to 400 units, thus demonstrating the inverse relationship between price and quantity demanded.
4. Explain the effect of increase in income of the consumer on the demand for a good.
Answer: When the income of a consumer increases, the demand for a good typically increases if the good is a normal good. This is because the consumer has more purchasing power and is willing to buy more of the good. However, if the good is an inferior good, the demand may decrease as the consumer may switch to a higher quality substitute.
5. State the law of diminishing marginal utility.
Answer: The law of diminishing marginal utility states that as a consumer consumes more and more units of a good, the additional satisfaction (marginal utility) derived from each additional unit decreases.
6. Explain the concept of marginal utility.
Answer: Marginal utility refers to the additional satisfaction or utility that a consumer derives from consuming one more unit of a good or service. It is the change in total utility resulting from a one-unit change in consumption.
7. State any three factors that cause an increase in demand of a commodity.
Answer: Three factors that cause an increase in demand of a commodity are:
(i) A rise in the price of substitute goods. (ii) A fall in the price of complementary goods. (iii) An increase in the number of its buyers.
8. Distinguish between change in demand and change in quantity demanded of a commodity.
Answer: Change in demand refers to a shift of the entire demand curve due to changes in factors other than the price of the commodity, such as income, tastes, or the prices of related goods. Change in quantity demanded refers to a movement along the same demand curve due to a change in the price of the commodity.
9. What is meant by expansion in demand? Explain it with the help of a schedule and a diagram.
Answer: Expansion in demand refers to an increase in the quantity demanded of a commodity as a result of a decrease in its price, other factors remaining constant. For example:
| Price (₹) | Quantity Demanded (units) |
|---|---|
| 10 | 50 |
| 8 | 75 |
| 6 | 100 |
The table shows that as the price decreases from ₹10 to ₹6, the quantity demanded increases from 50 units to 100 units. Graphically, this is shown as a downward movement along the same demand curve.
10. Define the following terms: (i) Increase in demand; (ii) Decrease in demand; (iii) Contraction in demand.
Answer: (i) Increase in demand: An increase in demand refers to a rightward shift of the demand curve, indicating that more quantity is demanded at the same price due to factors such as higher income or favorable changes in tastes.
(ii) Decrease in demand: A decrease in demand refers to a leftward shift of the demand curve, indicating that less quantity is demanded at the same price due to factors such as lower income or unfavorable changes in tastes.
(iii) Contraction in demand: Contraction in demand refers to a decrease in the quantity demanded of a commodity as a result of an increase in its price, other factors remaining constant. It is represented by an upward movement along the same demand curve.
11. Distinguish between expansion in demand and increase in demand.
Answer: Expansion in demand refers to an increase in the quantity demanded due to a decrease in the price of the commodity, represented by a movement along the same demand curve. Increase in demand refers to a rightward shift of the entire demand curve, indicating a higher quantity demanded at the same price due to changes in factors other than the price of the commodity.
12. Distinguish between decrease in demand and decrease in quantity demanded of a commodity.
Answer: Decrease in demand refers to a leftward shift of the entire demand curve, indicating a lower quantity demanded at the same price due to changes in factors other than the price of the commodity. Decrease in quantity demanded refers to a movement along the same demand curve, indicating a lower quantity demanded due to an increase in the price of the commodity.
13. Which changes can cause a leftward shift in the demand curve?
Answer: Changes that can cause a leftward shift in the demand curve include:
(i) A decrease in the income of consumers.
(ii) An increase in the price of substitute goods.
(iii) A decrease in the price of complementary goods.
14. How is the demand of a commodity affected by changes in the price of related goods? Explain with the help of diagrams.
Answer: The demand for a good depends not only on its own price but also on the prices of related goods. Related goods can be classified into complementary goods and substitute goods.
Complementary goods, such as pen-paper, sugar-milk, car-petrol, and shirt-trouser, are jointly demanded to satisfy wants. A fall in the price of one commodity (say petrol) increases the demand for the other complementary good (say car) and a rise in the price of one (say petrol) causes a decrease in demand for the other (say car).
Substitute goods, such as tea and coffee, jeans and trousers, coke-pepsi, and colgate-pepsodent, can be used with equal ease and satisfaction in place of another. They are competitive goods. In such a case, an increase in the price of one will encourage consumers to shift to the consumption of another commodity. For instance, demand for coffee will be reduced (even if its price remains the same) if the price of its substitute, say tea, falls. This is because tea has now become relatively cheaper. Hence, demand for tea will increase, and consequently, demand for coffee will decrease.
The demand curve shifts to the right (from DD to D1D1) when the price of the substitute good increases or the price of the complementary good decreases. Conversely, the demand curve shifts to the left (from DD to D2D2) when the price of the complementary good increases or the price of the substitute good decreases.
15. Goods X and Y are substitutes. Explain the effect of fall in price of Y on demand for X.
Answer: When goods X and Y are substitutes, a fall in the price of Y will decrease the demand for X. This is because consumers will switch from the more expensive substitute X to the now cheaper substitute Y. For example, if tea and coffee are substitutes, a fall in the price of tea will lead consumers to buy more tea instead of coffee, thereby reducing the demand for coffee. This effect is known as the substitution effect. The demand curve for X will shift to the left as consumers purchase less of X due to the lower price of Y.
16. Distinguish between substitute goods and complementary goods.
Answer: Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want. For example, Coca-Cola and Pepsi. When the price of one substitute good increases, the demand for the other substitute good also increases because consumers will switch to the cheaper alternative. Conversely, when the price of one substitute good decreases, the demand for the other substitute good decreases as consumers switch back to the now cheaper option.
Complementary goods, on the other hand, are those goods which are used together to satisfy a particular want. For example, a car and petrol. When the price of one complementary good increases, the demand for the other complementary good decreases because the overall cost of using both goods together becomes higher. Conversely, when the price of one complementary good decreases, the demand for the other complementary good increases as the overall cost of using both goods together becomes lower.
For example, if the price of petrol increases, the demand for cars might decrease because the overall cost of operating a car has become more expensive. Similarly, if the price of cars decreases, the demand for petrol might increase because more people can now afford to buy cars and will therefore need petrol to operate them.
17. Differentiate between inferior goods and giffen goods.
Answer: An increase in the price of a good may compel a consumer to increase its consumption of the commodity. Such a good is known as a Giffen good. On the other hand, an increase in the income of a consumer may induce him to cut down the consumption of an inferior good and substitute it by a superior good.
Income effect is negative in both kinds of goods. That is, quantity demanded moves in the opposite direction of change in income. But negative income effect is stronger in the case of Giffen goods compared to inferior goods. Strong negative income effect wipes out the positive substitution so that price and quantity demanded move in the same direction
18. State and explain the law of demand.
Answer: The law of demand explains the inverse relationship between the price and quantity demanded of a commodity. According to this law, other things being equal, price and quantity demanded of a commodity move in the opposite direction. In other words, when the price of a commodity increases, its demand falls, and when price falls, demand increases, provided factors other than price remain constant.
It should be kept in mind that change in quantity demanded is solely due to change in price. Remember, the law of demand indicates only the ‘direction’ of change and not the ‘magnitude’ of change in demand. Further, there is no proportionate relationship between price and demand.
The law of demand states that, other things remaining constant, the quantity demanded of a commodity increases with a fall in price and diminishes when the price increases.
The assumptions of the law of demand include:
(i) Tastes and preferences of the consumers remain unchanged.
(ii) There is no change in the income of the consumers.
(iii) Prices of the related goods – complementary and substitute do not change.
(iv) Consumers do not expect any change in the price of the commodity in the near future.
19. Suppose there are three consumers – Leander, Andre and Tim in a particular market. Their demand schedules are given in the following table.
Answer: (a) Derive the market demand schedule and plot the market demand curve.
Market Demand Schedule:
| Price (₹) | Leander’s Demand | Andre’s Demand | Tim’s Demand | Market Demand |
|---|---|---|---|---|
| 1 | 60 | 55 | 24 | 139 |
| 2 | 50 | 40 | 13 | 103 |
| 3 | 40 | 25 | 5 | 70 |
| 4 | 30 | 10 | 0 | 40 |
| 5 | 20 | 0 | 0 | 20 |
The market demand curve is plotted using the above table.
(b) Suppose Andre drops out of the market. Derive the new market demand and curve.
New Market Demand Schedule (without Andre):
| Price (₹) | Leander’s Demand | Tim’s Demand | Market Demand (without Andre) |
|---|---|---|---|
| 1 | 60 | 24 | 84 |
| 2 | 50 | 13 | 63 |
| 3 | 40 | 5 | 45 |
| 4 | 30 | 0 | 30 |
| 5 | 20 | 0 | 20 |
New Market Demand Curve (without Andre):
The new market demand curve is plotted using the above table.
(c) Suppose Andre stays in the market and another person Marat joins the market, whose quantity demanded at any given price is half that of Leander. Drive the new market demand curve.
New Market Demand Schedule (with Marat):
| Price (₹) | Leander’s Demand | Andre’s Demand | Tim’s Demand | Marat’s Demand | Market Demand (with Marat) |
|---|---|---|---|---|---|
| 1 | 60 | 55 | 24 | 30 | 169 |
| 2 | 50 | 40 | 13 | 25 | 128 |
| 3 | 40 | 25 | 5 | 20 | 90 |
| 4 | 30 | 10 | 0 | 15 | 55 |
| 5 | 20 | 0 | 0 | 10 | 30 |
New Market Demand Curve (with Marat):
The new market demand curve is plotted using the above table.
Market Demand Curve:
20. There are three consumers in the market. Their demand functions are
d₁(P) = 20 – 0.2P
d₂(P) = 10 – 0.6P
d₃(P) = 15 – 0.2P
Calculate the market demand function.
Answer: The market demand function can be found by summing the individual demand functions of all three consumers.
D(P) = d₁(P) + d₂(P) + d₃(P)
Substituting the given demand functions:
D(P) = (20 – 0.2P) + (10 – 0.6P) + (15 – 0.2P)
Combine the constants and the coefficients of P:
D(P) = 20 + 10 + 15 – 0.2P – 0.6P – 0.2P
D(P) = 45 – 1.0P
Therefore, the market demand function is:
D(P) = 45 – P
21. Suppose there are two consumers in a market. The demand function of the first consumer is: d₁(P) = 30 – P (where P < 30) and d₁(P) = 0 (where P > 30). The demand function of the second consumer is: d₂(P) = 20 – 2P (where P < 10) and d₂(P) = 0 (where P > 10). Find the market demand function.
Answer: The market demand function can be found by summing the individual demand functions of both consumers.
For P less than 10: d₁(P) = 30 – P d₂(P) = 20 – 2P
Market demand:
D(P) = d₁(P) + d₂(P) = (30 – P) + (20 – 2P) = 50 – 3P
For P between 10 and 30:
d₁(P) = 30 – P d₂(P) = 0
Market demand:
D(P) = d₁(P) + d₂(P) = (30 – P) + 0 = 30 – P
For P greater than or equal to 30:
d₁(P) = 0 d₂(P) = 0
Market demand:
D(P) = d₁(P) + d₂(P) = 0 + 0 = 0
Therefore, the market demand function is: D(P) = 50 – 3P,
if P is less than 10 D(P) = 30 – P,
if P is between 10 and 30 D(P) = 0,
if P is greater than or equal to 30
22. Let there be 10 consumers in a market and they have the similar demand function as given below:
d(P) = 20 – 2P, if P < 10 and d(P) = 0 if P > 10. Find out the market demand function.
Answer: The market demand function can be found by summing the individual demand functions of all 10 consumers.
For P less than 10:
d(P) = 20 – 2P
Since there are 10 consumers, the market demand is:
D(P) = 10 × d(P)
= 10 × (20 – 2P)
= 200 – 20P
For P greater than or equal to 10:
d(P) = 0
Therefore, the market demand is:
D(P) = 10 × 0 = 0
Thus, the market demand function is:
D(P) = 200 – 20P for P less than 10
D(P) = 0 for P greater than or equal to 10
Long Answer Type Questions
1. Distinguish between individual demand and market demand.
Answer: Individual demand refers to the amount of a commodity that a single consumer is willing to buy at a given price during a specific period. Market demand is the total quantity of a commodity that all consumers in the market are willing to buy at a given price during a specific period.
2. Explain the factors that affect the market demand for a commodity.
Answer: Several factors affect the market demand for a commodity:
- Price of the Commodity: Generally, there is an inverse relationship between the price of the commodity and its demand.
- Income of Consumers: With an increase in income, the demand for normal goods increases, while the demand for inferior goods decreases.
- Prices of Related Goods: The demand for a commodity can be affected by the prices of related goods, which include substitutes and complements.
- Tastes and Preferences: Changes in tastes and preferences can significantly influence demand.
- Population: The size and composition of the population affect the overall demand in the market.
- Future Expectations: If consumers expect prices to rise in the future, they may buy more now, increasing current demand.
- Government Policies: Taxes, subsidies, and regulations can impact demand.
- Seasonal Changes: Certain goods experience seasonal demand variations.
3. How is the demand of a commodity affected by changes in the prices of other commodities?
Answer: The demand for a commodity can be influenced by the prices of other commodities through two types of relationships:
- Substitute Goods: If the price of a substitute good rises, the demand for the commodity in question will increase as consumers switch to the cheaper alternative.
- Complementary Goods: If the price of a complementary good rises, the demand for the commodity will decrease because the overall cost of using both goods together becomes higher.
4. Below is a list of goods and services. Think and write some possible complements and substitutes for each of them.
| Goods and Services | Possible Substitutes | Goods and Services | Possible Complements |
|---|---|---|---|
| 1. Margarine | Butter | 1. Video recorder | Video tapes |
| 2. Rail transport | Bus transport | 2. Fountain pen | Ink |
| 3. Nokia cell phone | Samsung cell phone | 3. Toothbrushes | Toothpaste |
| 4. Pepsi | Coca-Cola | 4. Electricity | Electrical appliances |
Answer: Complements and substitutes vary for different goods and services. For example, margarine and butter are substitutes, while video recorders and video tapes are complements.
5. Explain the law of demand with the help of a demand schedule and a curve. Give two reasons why it slopes downwards to the right.
Answer: The law of demand states that, other things being equal, the quantity demanded of a commodity increases as its price falls and decreases as its price rises.
Demand Schedule:
| Price (₹) | Quantity Demanded |
|---|---|
| 10 | 30 |
| 8 | 40 |
| 6 | 50 |
| 4 | 60 |
| 2 | 70 |
Demand Curve: The demand curve is downward sloping, reflecting the inverse relationship between price and quantity demanded.
Reasons for Downward Slope:
- Income Effect: As the price falls, the real income of consumers increases, allowing them to buy more.
- Substitution Effect: As the price falls, the commodity becomes relatively cheaper compared to substitutes, leading consumers to buy more of it.
6. Why does the demand curve slope downward to the right? Is it always true?
Answer: The demand curve slopes downward to the right due to the income and substitution effects. The income effect means that a lower price increases the purchasing power of consumers, leading them to buy more. The substitution effect means that a lower price makes the commodity more attractive compared to its substitutes, leading to an increase in quantity demanded.
However, this is not always true. Exceptions include Giffen goods, where higher prices lead to higher demand due to their nature as inferior goods with a significant income effect, and Veblen goods, where higher prices may make the goods more desirable as status symbols.
Explain how the income effect and substitution effect are the reasons for the downward slope of the demand curve.
Answer: Income Effect: When the price of a good falls, the consumer’s real income effectively increases, allowing them to purchase more of the good. Conversely, when the price rises, the real income falls, reducing the quantity demanded.
Substitution Effect: When the price of a good falls, it becomes relatively cheaper compared to other goods. Consumers will substitute the cheaper good for more expensive ones, increasing the quantity demanded. Conversely, when the price rises, the good becomes relatively more expensive, leading consumers to substitute it with cheaper alternatives, reducing the quantity demanded.
7. How can a market demand curve be derived from individual demand curves?
Answer: The market demand curve is derived by horizontally summing the individual demand curves of all consumers in the market. At each price level, the quantities demanded by all individuals are added together to get the total market demand.
For example, if at price ₹10, individual A demands 2 units, individual B demands 3 units, and individual C demands 1 unit, the market demand at ₹10 would be 6 units.
8. State the law of demand with two assumptions. Briefly discuss two exceptions to the law of demand.
Answer: The law of demand states that, other things being equal, the quantity demanded of a commodity is inversely related to its price.
Assumptions:
- Ceteris Paribus: Other factors affecting demand, such as consumer preferences, income, and prices of related goods, remain constant.
- Rational Behavior: Consumers aim to maximize their satisfaction or utility.
Exceptions:
- Giffen Goods: These are inferior goods where an increase in price leads to an increase in quantity demanded due to the strong income effect outweighing the substitution effect.
- Veblen Goods: These are luxury goods where higher prices make them more desirable as status symbols, leading to an increase in quantity demanded.
9. State the effect of the following changes on the demand for a commodity by an individual household: (a) a rise in money income (b) a fall in the prices of other goods.
Answer: (a) A rise in money income: For normal goods, an increase in money income will lead to an increase in demand. For inferior goods, an increase in money income will lead to a decrease in demand.
(b) A fall in the prices of other goods: If the prices of substitute goods fall, the demand for the given commodity will decrease as consumers switch to the cheaper substitutes. If the prices of complementary goods fall, the demand for the given commodity will increase as the overall cost of using both goods together decreases.
10. How is demand for a commodity affected by: (a) a fall in prices of substitute goods, (b) a rise in prices of complementary goods?
Answer: (a) A fall in prices of substitute goods: When the price of a substitute good falls, the demand for the given commodity decreases as consumers switch to the cheaper substitute.
(b) A rise in prices of complementary goods: When the price of a complementary good rises, the demand for the given commodity decreases because the overall cost of using both goods together becomes higher.
11. Distinguish between the following: (i) Normal goods and inferior goods. (ii) Individual demand schedule and market demand schedule.
Answer: (i) Normal goods and inferior goods
| Basis | Normal goods | Inferior goods |
|---|---|---|
| Meaning | Normal goods refer to those goods whose demand increases with an increase in income. | Inferior goods refer to those goods whose demand decreases with an increase in income. |
| Income Effect | Income effect is positive in case of normal goods. | Income effect is negative in case of inferior goods. |
| Relation | There is a direct relation between income and demand for a normal good. | There is an inverse relation between income and demand for an inferior good. |
(ii) Individual demand schedule and market demand schedule
| Basis | Individual Demand Schedule | Market Demand Schedule |
|---|---|---|
| Meaning | Individual demand schedule shows the quantity of a commodity that an individual consumer is willing to buy at different prices. | Market demand schedule shows the total quantity of a commodity that all consumers in the market are willing to buy at different prices. |
| Scope | It is limited to an individual consumer. | It covers all consumers in the market. |
| Example | If an individual consumer’s demand schedule for ice cream is: <br> Price: ₹10, Quantity Demanded: 2 units <br> Price: ₹8, Quantity Demanded: 3 units | If the market demand schedule for ice cream (summed from multiple individual demand schedules) is: <br> Price: ₹10, Quantity Demanded: 20 units <br> Price: ₹8, Quantity Demanded: 30 units |
12. Explain with the help of diagrams the effect of the following changes on the demand of a commodity: (i) An unfavourable change in taste of the buyer for the commodity, (ii) A fall in the income of its buyer, if the commodity is inferior.
Answer: (i) An unfavourable change in taste of the buyer for the commodity: When consumers develop an unfavourable taste for a commodity, the demand curve shifts to the left, indicating a decrease in demand at every price level.
(ii) A fall in the income of its buyer, if the commodity is inferior: For an inferior good, a fall in income leads to an increase in demand. The demand curve shifts to the right, indicating an increase in demand at every price level.
13. Differentiate between movement along demand curve and shift of the demand curve.
Answer: Movement along the demand curve: This occurs when there is a change in the quantity demanded of a commodity due to a change in its own price. It is shown as a movement up or down the same demand curve.
Shift of the demand curve: This occurs when there is a change in demand due to factors other than the price of the commodity itself, such as changes in income, tastes, prices of related goods, etc. It is shown as a rightward or leftward shift of the entire demand curve.
14. Explain the differences between expansion of demand and increase in demand with the help of diagrams.
Answer: Expansion of demand refers to an increase in the quantity demanded of a commodity as a result of a fall in its price, other factors remaining constant. This is depicted as a downward movement along the same demand curve. Conversely, contraction of demand refers to a decrease in the quantity demanded of a commodity as a result of a rise in its price, other factors remaining constant. This is depicted as an upward movement along the same demand curve.
Graphically, the change in quantity demanded is shown by movements along the demand curve. When the price falls, leading to an increase in demand, it is called expansion of demand and is illustrated by a downward movement along the demand curve. Conversely, when the price rises, leading to a decrease in demand, it is called contraction of demand and is illustrated by an upward movement along the demand curve.
Increase in demand, on the other hand, refers to a rise in the quantity demanded of a commodity due to factors other than a change in its own price. This causes the entire demand curve to shift to the right. Factors causing an increase in demand include a rise in consumer income, a decrease in the price of complementary goods, an increase in the price of substitute goods, a rise in the number of consumers, a favorable change in consumer tastes and preferences, and favorable future expectations about the price of the commodity.
Graphically, an increase in demand is shown by a rightward shift of the demand curve. The entire curve shifts to a new position, indicating that more quantity is demanded at each price level.
15. Differentiate between contraction in demand and decrease in demand. Use diagrams.
Answer: Contraction in demand refers to a decrease in the quantity demanded of a commodity due to a rise in its own price, other factors remaining constant. This is depicted as an upward movement along the same demand curve. In contrast, a decrease in demand refers to a reduction in the quantity demanded of a commodity due to factors other than its own price, such as a fall in consumer income, an increase in the price of complementary goods, a decrease in the price of substitute goods, a decline in the number of consumers, an unfavorable change in consumer tastes and preferences, or unfavorable future expectations about the price of the commodity. This causes the entire demand curve to shift to the left.
Graphically, the contraction of demand is shown by an upward movement along the demand curve.
A decrease in demand is shown by a leftward shift of the entire demand curve.
16. When would a demand curve shift rightwards?
Answer: A demand curve shifts rightwards when there is an increase in demand due to factors other than the price of the commodity itself, such as:
- An increase in consumer income (for normal goods).
- A decrease in the price of complementary goods.
- An increase in the price of substitute goods.
- A favorable change in consumer tastes and preferences.
- An increase in population.
- Positive future expectations regarding prices.
17. There are 3 households – A, B & C in a market. From the following table, calculate demand for household B at various levels of Price.
| Price | Households A | Households B | Households C | Market Demand |
|---|---|---|---|---|
| 16 | 10 | – | 20 | 50 |
| 14 | 16 | – | 32 | 72 |
| 12 | 28 | – | 48 | 108 |
| 10 | 40 | – | 68 | 152 |
| 8 | 52 | – | 94 | 210 |
Answer: We need to calculate the demand for Household B at each price level. We can do this by subtracting the sum of demands of Households A and C from the Market Demand.
Calculations:
- Price = 16: Household B = Market Demand – (Household A + Household C) Household B = 50 – (10 + 20) = 50 – 30 = 20
- Price = 14: Household B = 72 – (16 + 32) = 72 – 48 = 24
- Price = 12: Household B = 108 – (28 + 48) = 108 – 76 = 32
- Price = 10: Household B = 152 – (40 + 68) = 152 – 108 = 44
- Price = 8: Household B = 210 – (52 + 94) = 210 – 146 = 64
Completed Table:
| Price | Households A | Households B | Households C | Market Demand |
|---|---|---|---|---|
| 16 | 10 | 20 | 20 | 50 |
| 14 | 16 | 24 | 32 | 72 |
| 12 | 28 | 32 | 48 | 108 |
| 10 | 40 | 44 | 68 | 152 |
| 8 | 52 | 64 | 94 | 210 |
18. The demand function of a commodity X is given as Qx=20-3 Px. Prepare the demand schedule if its price varies from 5 to 1. Complete the following table assuming that there are only 2 consumers in a market.
| Price | Consumer A | Consumer B | Market Demand (units) |
|---|---|---|---|
| 9 | – | 25 | 60 |
| 8 | 48 | 45 | 93 |
| 7 | 60 | – | 100 |
| 5 | – | 50 | 125 |
| 4 | 85 | 65 | – |
Answer: Demand Schedule for Commodity X:
- For P = 5: Qx=20−3(5)=20−15=5Q_x = 20 – 3(5) = 20 – 15 = 5Qx=20−3(5)=20−15=5
- For P = 4: Qx=20−3(4)=20−12=8Q_x = 20 – 3(4) = 20 – 12 = 8Qx=20−3(4)=20−12=8
- For P = 3: Qx=20−3(3)=20−9=11Q_x = 20 – 3(3) = 20 – 9 = 11Qx=20−3(3)=20−9=11
- For P = 2: Qx=20−3(2)=20−6=14Q_x = 20 – 3(2) = 20 – 6 = 14Qx=20−3(2)=20−6=14
- For P = 1: Qx=20−3(1)=20−3=17Q_x = 20 – 3(1) = 20 – 3 = 17Qx=20−3(1)=20−3=17
| Price (P_x) | Quantity Demanded (Q_x) |
|---|---|
| 5 | 5 |
| 4 | 8 |
| 3 | 11 |
| 2 | 14 |
| 1 | 17 |
We need to complete the table based on the information provided.
Calculations:
- Market Demand at Price 9: Given Consumer B = 25, so Consumer A’s demand = Market Demand – Consumer B’s demand = 60 – 25 = 35
- Market Demand at Price 8: Already provided correctly as Consumer A = 48, Consumer B = 45, and Market Demand = 93
- Market Demand at Price 7: Given Market Demand = 100, so Consumer B’s demand = Market Demand – Consumer A’s demand = 100 – 60 = 40
- Market Demand at Price 5: Given Consumer B = 50, so Consumer A’s demand = Market Demand – Consumer B’s demand = 125 – 50 = 75
- Market Demand at Price 4: Given Consumer A = 85, Consumer B = 65, so Market Demand = Consumer A’s demand + Consumer B’s demand = 85 + 65 = 150
| Price | Consumer A | Consumer B | Market Demand (units) |
|---|---|---|---|
| 9 | 35 | 25 | 60 |
| 8 | 48 | 45 | 93 |
| 7 | 60 | 40 | 100 |
| 5 | 75 | 50 | 125 |
| 4 | 85 | 65 | 150 |
Extra questions and answers
1. What is the meaning of demand?
Answer: By demand for a commodity, we mean the desire for the commodity backed by purchasing power and the willingness to spend. When a consumer wishes to consume a commodity and also has the necessary purchasing power, that is, income, along with willingness to spend, he is said to have a demand (or effective demand) for the commodity. Therefore, effective demand = desire for a commodity + purchasing power.
16. What is the difference between a movement along the same demand curve and a shift in the demand curve?
Answer:
- Movement along the Same Demand Curve: It implies a change in the quantity demanded due to a change in the price of the commodity itself, shown by movements along the demand curve. A downward movement is called an expansion in the quantity demanded, while an upward movement is called a contraction in the quantity demanded.
- Shift in the Demand Curve: It implies a change in the entire demand schedule due to changes in factors other than the commodity’s own price, such as income, tastes, or prices of related goods. A rightward shift indicates an increase in demand at each price, while a leftward shift indicates a decrease in demand at each price.
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