Q4#

Answer: Change in Demand vs. Change in Quantity Demanded

(A) In economics the terms change in quantity demanded and change

in demand are two different concepts.

Change in quantity demanded refers to change in the quantity

purchased due to increase or decrease in the price of a product.

In such a case, it is incorrect to say increase or decrease in demand

rather it is increase or decrease in the quantity demanded.

On the other hand, change in demand refers to increase or decrease in

demand of a product due to various determinants of demand, while
keeping price at constant.

Changes in quantity demanded can be measured by the movement of

demand curve, while changes in demand are measured by shifts in
demand curve. The terms, change in quantity demanded refers to
expansion or contraction of demand, while change in demand means
increase or decrease in demand.

1. Expansion and Contraction of Demand:

The variations in the quantities demanded of a product with change in
its price, while other factors are at constant, are termed as expansion
or contraction of demand. Expansion of demand refers to the period
when quantity demanded is more because of the fall in prices of a
product. However, contraction of demand takes place when the
quantity demanded is less due to rise in the price o a product.

For example, consumers would reduce the consumption of milk in

case the prices of milk increases and vice versa. Expansion and
contraction are represented by the movement along the same demand
curve. Movement from one point to another in a downward direction
shows the expansion of demand, while an upward movement
demonstrates the contraction of demand.
When the price changes from OP to OP1 and demand moves from OQ
to OQ1, it shows the expansion of demand. However, the movement of
price from OP to OP2 and movement of demand from OQ to OQ2
show the contraction of demand.
2. Increase and Decrease in Demand:
Increase and decrease in demand are referred to change in demand
due to changes in various other factors such as change in income,
distribution of income, change in consumer’s tastes and preferences,
change in the price of related goods, while Price factor is kept constant
Increase in demand refers to the rise in demand of a product at a given
price.

On the other hand, decrease in demand refers to the fall in demand of

a product at a given price. For example, essential goods, such as salt
would be consumed in equal quantity, irrespective of increase or
decrease in its price. Therefore, increase in demand implies that there
is an increase in demand for a product at any price. Similarly, decrease
in demand can also be referred as same quantity demanded at lower
price, as the quantity demanded at higher price.

Increase and decrease in demand is represented as the shift in demand

curve. In the graphical representation of demand curve, the shifting of
demand is demonstrated as the movement from one demand curve to
another demand curve. In case of increase in demand, the demand
curve shifts to right, while in case of decrease in demand, it shifts to
left of the original demand curve.
In Figure-12, the movement from DD to D1D1 shows the increase in
demand with price at constant (OP). However, the quantity has also
increased from OQ to OQ1.

In Figure-13, the movement from DD to D2D2 shows the decrease in

demand with price at constant (OP). However, the quantity has also
decreased from OQ to OQ2.

(B)

What Is Price Elasticity of Demand?

Price elasticity of demand is an economic measure of the change in the quantity
demanded or purchased of a product in relation to its price change. Expressed
mathematically, it is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change

in Price
Price elasticity is used by economists to understand how supply or demand
changes given changes in price to understand the workings of the real economy.
For instance, some goods are very inelastic, that is, their prices do not change
very much given changes in supply or demand, for example people need to buy
gasoline to get to work or travel around the world, and so if oil prices rise, people
will likely still buy just the same amount of gas. On the other hand, certain goods
are very elastic, their price moves cause substantial changes in its demand or its
supply. (Arc elasticity is the elasticity of one variable with respect to another
between two given points.) Here, we will look just at how the demand side of the
equation is impacted by fluctuations in price by considering the price elasticity of
demand – which you can contrast with price elasticity of supply.

Price Elasticity of Demand Explained

If the quantity demanded of a product exhibits a large change in response to
changes in its price, it is termed "elastic," that is, quantity stretched far from its
prior point. If the quantity purchased has a small change in response to its price,
it is termed "inelastic"; or quantity didn't stretch much from its prior point.

Examples of Price Elasticity of Demand

Generally as rules of thumb, if the quantity of a good demanded or purchased
changes more than the price change, the product is termed elastic. (The price
changes by +5%, but the demand falls by -10%). If the change in quantity
purchased is the same as the price change (say, 10%/10% = 1), the product is
said to have unit (or unitary) price elasticity. Finally, if the quantity purchased
changes less than the price (say, -5% demanded for a +10% change in price),
then the product is termed inelastic.

To calculate the elasticity of demand, let's take a very simple example: Suppose
that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In
response, grocery shoppers increase their apple purchases by 20%. The
elasticity of apples would thus be: 0.20/0.06 = 3.33 indicating that apples are
quite elastic in terms of their demand.

Q: 2
The indifference curve analysis is based on the assumption that
there are two related goods which may be substitutes or complements.
Pareto explained the relation between substitute and complementary
goods as reversible which means that if X is a substitute of Y, Y is a
substitute of X, and if X is a complement to Y then Y is complement to
X.
The shape of an indifference curve is convex to the origin and this is
based on the principle of diminishing marginal rate of substitution.
This principle makes it possible to substitute one good for another in
order to achieve any particular level of satisfaction or utility. Thus
when two goods X and Y are imperfect substitutes; the indifference
curve has its usual negatively sloping shape,
b) Two perfect substitutes:
If two goods X and Y are perfect substitutes, the indifference curve is a
straight line with negative slope.
because the MRSXY is constant. The value of this slope is throughout
minus 1, and MRSXY = 1.
In the figure, ab of Y = bc of X, and cd of Y = de of X. In this case, the
consumer does not distinguish between these two goods and regards
them as the same commodity, such as two brands of tea. The
consumer is obsessed with the purchase of only one good. This is
called monomania for that good.

If the two goods are close substitutes, such as

coarse rice and wheat, there is the high degree of substitutability of the
two goods.

a) Two goods perfect complements

If the two goods are perfect complements the indifference curve is
right-angled or L shaped, as shown in Figure 43 (A). The vertical
portion of the I1, curve reveals that no amount of reduction in good Y
will lead even to a slight increase in good X. For example, point’s A, M
and В are all on the curve It but point В involves the same amount of Y
but more of X than point M
Thus MRSXY is zero. The two goods X and Y are consumed in the
desired ratio, as indicated by the slope of the ray OR at point M. Such
complementary goods are left and right shoes which are used in the 1:1
fixed ratio.

In the case of highly or close complementary goods, the indifference

curve has a sharp curvature near the bend. The consumer substitute X
for Y at and near the bend of the curve. In Figure 43 (В), X and Y will
be substituted for each other within the narrow range A and В of the
indifference curve I1 .Such close complements are tyres and tubes,
electricity and electric appliances, etc.