of the commodity, i, if price of good X increases, then demand for good X falls. (ii) Price of Related goods (P,): Two types of related goods are: (a) Substitute goods: Two goods X and Y are said to be substitute goods if price of good X is directed related with quantity demanded of good Y, i.e., if price of good X increases then quantity demanded of good Y also increases and vice versa, For example, tea and coffee, coke and pepsi, ete. (b) Complementary goods: Two goods X and Y are said to be complementary goods if price of good Y is inversely related with quantity demanded of good Y, ie,, price of good X increases, then quantity demanded of good Y decreases and vice versa. For example, car and petrol, shoes and socks, pen and ink ete. (iii) Income of the consumer (¥): As the income of the consumer changes, the quantity demanded of various goods increases, decreases or remains constant. It depends on the nature of the commodity: (a) Normal goods: Goods which exhibit positive income effect, i.e., as the income of the consumer increases, demand for normal goods also increases. For example, clothes, food items, ete. (b) Inferior goods: Goods which exhibit negative income effect, ie., ifincome of consumer increases, demand fof inferior goods decreases and vice versa, These goods are generally demanded by lower income group. Inferior goods have better substitutes for them available in the market. For ypared to wheat, black and example, bajra_com| white TV as compared to coloured TV, toned milk as compared to full cream milk. Price of Complementary Good (Car) ea [{__| ___l_,x Quantity of Good Concerned (Coke) Fig. 3.1(b) oL______—-> x Quantity of Good Concerned (Petrol) Fig. 3.1(0) Y : a = = t : 2 > ° >x Quantity of normal goods Fig. 3.1(d) Ya 5 5 g > 5 > >x ° Quantity of inferior goods= | __© Necessity goods: As the income of the Sale increases, demand for necessity goods does not change. For example, salt, etc. Income of the consumer ° Quantity of nesessity googs * (iv) Taste and Preferences: Taste and preferences of ea the consumer also affect the quantity demanded of Boods. In case of favourable taste the demand for tiers the good will be higher and in case of unfavourable taste, the demand for the goods wil generally be lower. S (©) Other factors: For example, goods which are in fashion are generally have a higher demang Increase in population generally leads to increase in demand. 3.3 DETERMINANTS OF MARKET DEMAND. All the factors that affect individual household's demand also affect the market demands. These are: (}) Price of the commodity (#) Changes in consumers’ income Lai) Changes in the prices of related goods (2) Changes in taste. Besides these factors, other important factors which affect the market demand are as follows: (2) Population and Number of Households: Changes in population or number of households in the market also affect the market demand for goods. For example, with the increase in Population or number of households, the demand for goods also increases. Moreover, if with the increase in population, the ratio of children in the total Population increases, the demand for goods used by the children such as milk, toys, tofees, eter alse increases (ci) Distribution of Income and Wealth: If there is ‘unequal distribution, those goods which are Purchased by the rich people are in greater demand, As distribution becomes equal, the demand for goods of the rich decreases and the demand for goods of the POor increases, (0) Government Policy: Government policy also influences the demand for a commodity in the market: For instance, if government increases the sales tax or excise duty on a particular commodity, its.demand comes down. On the other hand, if government gives subsidy on a particular commodity, its demand goes up. (iil) Seasonal and Climatic Conditions: The demand for cold drinks is higher in summers and ower in winters. Demand for winter cloths will be higher in Himachal Pradesh than in Goa, 3.4 DEMAND SCHEDULE s f good that people are prepared to Demand schedule means a table showing different quantities of g le ¢ buy at different levels of price. In short, the table showing the price-demand relationship is known as demand schedule. In other words, the law of demand or demand function stated in a tabuilan form is termed as demand schedule ; Types of Demand Schedule: Demand schedule is of two types: Individual demand schedule and market demand schedule.() Individual Demand Schedule: The schedule (or table) that shows the demand by a household for a commodity at different prices is known as individual demand schedule. It is shown in Table 3.1. Table 3.1: Example of Individual Demand Schedule | Price of Milk @ per litre) ‘Mohan’s Demand for Milk (litre) | cuss ea Oe ji | wa >—— eS je aera 5 8 (ii) Market Demand Schedule: The schedule (or table) that shows the demand of the whole market for a commodity at different prices is known as market demand schedule. Market demand schedule can be constructed by horizontally adding all individual demand schedules. It is shown in Table 3.2, ‘Table 3.2: Construction of a Market Demand Schedule Price of Milk Mohan's Demand | Sohan’s Demand for | Market Demand for & per litre) for Milk (litre) Milk (litre) Milk (litre) (a) (2) (3) (4) = (2#3) 5 2 1 2+1=3 4 3 2 34+2=5 3 5 4 5+4=9 2 8 7 847215 For the sake of simplicity, we have assumed that there are only two consumer households (Mohan and Sohan) in the market. Hence, market demand schedule is constructed by adding these two individual demand schedules. In economics, we often use market demand schedule to explain our famous law of demand. 3.5 DEMAND CURVE When a demand schedule or demand function is depicted on the graph paper, it becomes the demand curve. Thus, a demand curve is the graphical representation of the demand schedule showing the inverse relationship between price of the commodity and its demand. Like demand schedule, demand curve is also of two types: Individual demand curve and market demand curve. ()) Individual demand curve: A curve which shows the various quantities of demand for a commodity by a particular household at various levels of price is known as’ individual demand curve. Or Individual demand curve is the graphical representation of individual demand schedule. It is generally a downward sloping curve and drawn on the basis of individual demand schedule. (ii) Market demand curve: A curve which shows the demand of the whole market for a commodity at its various prices is known as market demand curve. Or, Market demand curve is the graphical representation of market demand schedule. It is always a downward sloping curve. Market demand curve is the horizontal summation of all individual demand curves. It is drawn on the basis of market demand schedule or geometrically, it can be constructed by the horizontal summation of all individual demand curves. This is explained below:3.7 LAW OF DEMAND Itis our general experience that when the Price of a commodity is high, lesser quantity of the good is purchased and when the price is low, greater quantity of the good is purchased. This inverse relationstup between the! price andiieinaiiiieveatiil the law of demand. Price and demand move in the opposite directions and hence, both of them have negative relationships. Prof Marstall has dlebined the law offdemandi thee ois as “The amount demanded increases with a fall in price and diminishes with a rise in price ” According to Prof. Meyers, “Under the same conditions of demand, the quantity of a commodity ‘which Wall Despurchased| tends loaner inversely wii ic price,” Thus, # Simple: words, the Jaw. of dehtarid tates, that ouce things remaining the same, the demand for a commodity expands with fall in its Price and contracts with a rise in its price. In short it shows inverse relationship between the price of a commodity and its demand. 3.7.1 Assumptions of the Law of Demand Law of demand depends on the basic assumption ‘other things remaining the same’ (or ceteris Paribus). Now let us see what we include in this phrase ‘other things remaining the same’. They are: (@ No change in the level and distribution of income; (ii) No change in the taste, nature and fashion of the consumers; (iil) No change in the prices of related goods; (2) No new substitutes of the commodity; (©) No expectation of further changes in the price of a commodity; (vi) No change in the total asse (vit) No change in population. The law of demand can be explained with the help of following example and Fig. 3.4. It must also be remembered that the law of demand is always expressed through market demand schedule and market demand curve. Law of Demand Price of Milk Demand for Milk a ts € per litre) (in litres) Bs 3 | é e 5 1 9 15 oe aie iar pats Quantity of milk (in litres) Fig. 3.4 3.7.2 Why does the Law of Demand Operate? Or Why does Demand Curve Slope Downwards? The law of demand or the downward sloping demand curve indicates more demand as price falls ind less demand as Price rises. Now the question is: Why does it so happen? The reasons are as ollows: () Law of diminishing marginal utility: The law of diminishing marginal utility is the basis for downward sloping of demand curve. The law of diminishing marginal utility tells us thatthe marginal utility of the good falls with the increase in its aun arta a |B also shown by a downward sloping curve. A consumer pays for a commodity Detause it 7 Possesses utility and he would purchase a commodity to the extent where its SarBin i Becomes equal to its price. From this, it follows that a consumer would purchase mote of commodity only when the price falls. Thus, the diminishing marginal utility curve itself takes the form of a demand curve and that is why it is sloping downwards, (ii) Income effect: When the price of a commodity falls, a consumer has to spend less on the purchase of the same quantity of the commodity. Thus, it increases his purchasing power or real income which, in turn, enables him to purchase more of the commodity. Reverse happens with the rise in prices. Thus, the effect on demand for good due to change in the real income of consumers, as a result of change in the price of the commodity is known as income effect This we can understand with the help of an example. Suppose at the price of €3 per kg, the demand for rice was 50 kg. In this situation, consumers were spending % 150 on rice. Now if the price of rice falls to € 2.50 per kg, the consumers can purchase 60 kg rice with the same amount of money, i., % 150. Thus, the demand for rice rises with the fall in prices and falls with the rise in prices. (iii) Substitution effect: When the price of a commodity falls, it becomes cheaper in comparison to other commodities. So, now consumers start to substitute this commodity in place of other commodities. Thus, the demand for this commodity increases with the fall in prices and vice versa. This is substitution effect. Hence, the effect related with the purchase of cheaper commodity in place of dearer one due to change in price is known as substitution effect. This can also be explained with the help of an example. Suppose, the prices of rice and wheat in the market were %3 per kg and @ 2 per kg respectively. If the price of rice falls to % 2.50 per kg, it means rice has become relatively cheaper in comparison to wheat. As a result of it, consumers would start to substitute rice in place of wheat. Reverse will happen when the price of rice rises. Thus, price change has two effects in the form of income and substitution effects. These two effects (ie, income and substitution effects) together explain the downward sloping of the demand curve. Besides these reasons, other reasons are also given for the downward slope of the demand curve. They are: (iv) New Consumers: It is possible that at a particular price some consumers may not be able or may not be willing to purchase the commodity. But as price falls, to purchase the commodity. Contrary to it, when the purchase of the said commodity. (2) Different Uses of a Commodity: A commodity can be put to several uses. Some of them are more important and others are less so. When the price of a commodity increases, consumers reduce the use of this commodity for less important uses, hence purchase is reduced. Contrary to this, when the price of the good decreases, consumers start to use the commodity even in less important uses and thus, the purchase is increased. For instance, when electricity becomes cheaper, its use in kitchen and in other less important daily routine functions is increased and if it becomes dearer, its use in the minor functions is reduced. It is because of all these reasons that the law of demand operates or the demand curve slopes downwards. some new customers start price rises some old customers may stop 3.7.3 Exceptions to the Law of Demand There are some situations in which the law of demand does not operate. Many times we notice that with the increase in price, more quantity of a commodity is purchased and with the decrease in price, less of it is purchased. This is contrary to the law of demand. It means the law of deman.. is not operating, Therefore, in the cases given below, demand curve will be positively sloping curve {as shown in the diagram). These are known as exceptions to the law of demand. Main exceptions are as follows: ae ee() Giffen goods: The theory of Giffenn goods was propounded by Sir Robert Giffen. Giffen goods are those goods whose demand falls with the fall in its price, e.g., bajra. (ii) Conspicuous goods/snob goods/veblen goods: These goods are very expensive goods and are used as status symbol. Their quantity demanded increases with increase in their price, eg. diamonds. (iii) Necessity goods: These goods are consumed by the buyer irrespective of the change in their price. For example, salt. (jv) Emergency goods: The demand for goods in case of emergencies is not affected by its price For example, medicines. (v) Future expectation: Goods which are expected to become costlier aré purchased in large quantities even if their prices are rising. For example, land, gold, etc. (vi) Habitual goods: Goods which are in habit are not affected by the change in their price. For example, alcohol, cigarettes, drugs, etc. 3.8 MOVEMENT ALONG A DEMAND CURVE OR CHANGE IN QUANTITY DEMANDED Other things being equal, if the quantity demanded increases Movement along a Demand Curve or decreases due to fall or rise in the price of a commodity Pee alone, it is known as movement along a demand curve or P change in quantity demanded. Here the movement is — either z downward or upward — along the same demand curve. p, Change in quantity demanded occurs due to change only in iy the prices of the commodity itself. a ax Downward movement along the demand curve is called Quantity demanded expansion of demand while the upward movement as Fig. 3.5 contraction of demand. See Fig. 3.5. Vi 3.8.1 Expansion in Demand ie Reason: Fall in the price of the commodity. fc Explanation: Initially, at price P, the quantity demanded mdse Genk was Qy. With the fall in price from P to P,, the quantity Pp, \dumane curdee demanded rises from Q, to Qy. This rise is known as S| V 3 expansion in demand. Sel & —_ 3 D. QO Qa, >X pelea) Expansion Quantity demanded Fig. 3.6 Schedule:i nd 3.8.2 Contracton in Dema) Reason: Rise in price of the commodity: i i ice Pp the qua tion: Initially, at price Po FP aastty demand falls from Qo t© Qy intity demand was Qy, With the rise in price from Pp to P, This fall is known as contraction of demand the quantity Ya Schedule: é [Price of Good XP) | Quantity demanded of . = © | G00d XQ) 5 ee ks | ¥ 100 Brg Se Sen a » =r, , | 12 380 ¢ | iS eee 3 (ae a : 2 a, may 3.9 SHIFT IN DEMAND CURVE OR CHANGE IN DEMAND If more or less quantity of a commodity is demanded, at the same price, due to change in factors other than the price of the commodity concerned (such as change in income, or taste or prices of other related goods, etc.), it is called shift in the demand curve or change in demand. In this situation, there is either rightward shift or leftward shift in the demand curve itself. Here rightward shift in the demand curve indicates increase in demand while the leftward shift indicates decrease in demand. This is shown in Fig. 38 3.9.1 Increase in Demand 7 Reasons: * Rise in price of substitute goods. * Fall in price of complementary goods. * Rise in income (normal goods). * Fall in income (inferior goods) * Favourable change in taste. Price of Good X Explanation: Initially at price Py, quantity demanded is Q,, for demand curve DD, With the shift in demand curve from DD to D,D,, demand increase from Q, to Q,, with mo change in price. This shift from DD to D,D, is called rightwards shift or increase in demand. Contraction Quantity demanded < Fig. 3.7 Shift in the Demand Curve D, © Quantity demanded Fig. 3.8 Rightwards (or Forway Shit in Demand Quantity of Good x Fig.Schedule: | Price of Good X (P,) || Quantity demanded of Good X (Q) 10 110 10 120 10 130 | 10 150 | 10 | 170 3.9.2 Decrease in Demand Reasons: « Fall in price of subtitute goods. Rise in price of complementary goods. « Fall in income (normal goods). « Increase in income (inferior goods). * Unfavourable change in taste. Explanation: Initially, at Po, quantity demand was Q, for demand curve DD. With the shift in demand curve from DD to D,D,, demand decreases from Q, to Q,, with no change in price. This shift in demand curve from DD to D,D, is known as leftward shift or decrease in demand curve. Schedule: Ya Price eh Goo a et Re nC Leftwards (or Backward) XP) z __ Good X (Q,) BS io Shift in Demand seg 208 = , 10 100 lean 8: 10 90 > Po 10 80 3 10 70 a 10 60 D OarO; 05 as es Decrease Quantity of Good X Fig. 3.10 3.9.3 Distinction between Expansion of Demand and Increase in Demand Expansion of demand and increase in demand can be distinguished on the following grounds: ¢ Dom Basis S Expansion of Demand ed Meaning 1, It means more demand at a lower 1, It means more demand at the same price of the commodity. price (or higher price) or same demand at a higher price. Reason 2, The main reason isthe fallin the price | 2. The main reason is the change in the of the commodity concerned, while | factors other than the price of the all other factors remain constant. commodity concerned. | Movement or 3, Here, we move downwards (or 3. Here, we shift rightward to a new shift rightward) along the same demand | demand curve. i curve.This distinction is shown in th Expansion of Demand Price Quantity Demanded Fig. 3.11(a) e following Figs. _ 3.11 (a) and mand Increase in Det Quantity Demanded Fig. 3.11(b) i ind 3.9.4 Distinction between Contraction of Demand and Decrease in Dema oe Contraction of demand and decrease in demand can be differentiated on the following 8) 2 Contraction of Demand price of the commodity. 1. It means less demand at a higher | 1. It means less demand at the same price (or lower price) or same demand at a lower price. Reason 2. The main reason is rise in the price of the commodity concerned, while | other factors remain constant, 2. The main reason is change in the factors other than the price of the commodity concerned. Movement | 3. Here, we move upward (or leftward) | or shift along the same demand curve. 3. Here, we shift leftward to a new demand curve. This distinction is shown in the following Figs. 3.12 (a) and (b): Contraction of Demand Decrease in Demand YA D. oP e = D = >x oO We a >x Quantity Demanded Quantitty Demanded Fig. 3.12(a) Fig, 3.12(b)3.10 DIFFERENCE BETWEEN MOVEMENT ALONG A DEMAND CURVE (OR CHANGE IN QUANTITY DEMANDED) AND SHIFT IN THE DEMAND CURVE (OR CHANGE IN DEMAND) : (@ Movement along a demand curve or change in quantity demanded: Other things being equal, if the quantity demanded increases or decreases due to fall or rise in the price of a commodity alone, it is known as movement along a demand curve or change in quantity demanded. Here the movement is — either downward or upward — along the same demand curve. Change in quantity demanded occurs due to change only in the prices of the commodity itself. Downward movement along the demand curve is called expansion of demand while the upward movement as contraction of demand. See Fig. 3.13(a). (i) Shift in the demand curve or change in demand: If more or less quantity of a commodity is demanded, at the same price, due to change in factors other than the price of the commodity concerned (such as change in income, or taste or prices of other related goods, etc.), it is called shift in the demand curve or change in demand. In this situation, there is either rightward shift or leftward shift of the demand curve itself. Here, rightward shift of the demand curve indicates increase in demand while the leftward shift indicates decrease in demand. This is shown in Fig. 3.13(b). Thus, we must clearly understand the difference between a movement along a demand curve and a shift of the whole demand curve. A movement along a demand curve occurs when the quantity demanded changes in response to a change in the commodity’s own prices. On the other hand, a shift in the whole demand curve occurs when a change in the factors, other than the commodity’ own price, causes a different quantity to be demanded at every price. Thus, in short, a movement along a demand curve represents the change in amounts purchased at different prices within the same demand schedule while the shift of the demand curve indicates a change in the entire demand schedule. This difference has been shown in Figs. 3.13 (a) and (b). Movement along a Demand Curve Shift In the Demand Curve Price >x oO! Q Q, Quantity Demanded Quantity Demanded Fig, 3.13{a) Fig. 3.13(b) Fig. 3.13(a) shows movement along a demand curve. Movement along the demand curve DD from point A to B represents expansion of demand and movement from point B to A represents dentsction of demand. On the other hand, Fig, 3.13(b) shows shift in the demand carve Original demand curve is DD. When DD demand curve shifts to the tight and becomes D,D, curve, it is D pret in demand. On the other hand, when DD demand curve shifts to the left snd becomes D:D; demand curve, there is decrease in demand.3.10.1 Change in Quantity Demand vs. Change in Demand i REMI OL ; ; e [Change in quantity demand Change in demand | 1, Due to change in price. 1. Due to change in the factor other than price. Movement or shift | 2. It is also known as Movement along 2. It is also known as Shift in Demand Curve. Demand. Types 3. Types: 3. Types: (a) Expansion in Demand (a) Increase in Demand (b) Contraction in Demand _|___(b) Decrease in Demand (@ Effect of Change in Income (Rise or Fall in Income) on the Demand for Normal Goods (a) If there is rise in income, the demand curve shifts to the right which shows increase in demand for normal goods at a given price. Shift of demand curve in case (®) If there is fall in income, the demand curve shifts to % ot perma goods the left which shows decrease in demand for normal goods at a given price. The shifting of demand curve for the normal goods to the right and left with the tise and fall in income is shown in the following Fig. 3.14, From the Fig. 3.14, we learn that when there is rise . in income, demand curve shifts to the right from DD (Fallin to D,D,. It indicates increase in demand with the rise income) in income. On the other hand, if there is fall in income, demand curve shifts to the left from DD to D;D,. It Quantity Demanded shows decrease in demand with the fall in income. Fig. 3.18 Price (ii) Effect of Change in Income (Rise or Fall in Income) on the Demand for Inferior Goods (a) If there is rise in income, the demand curve shifts to Shift of demand curve in case the left which shows decrease in demand at a given NY; of inferior goods price. 2 (b) If there is fall in income, the demand curve shifts to the right which shows increase in demand at a given price. The shifting of demand curve for inferior goods to the left and right with the rise and fall in income is shown in the Fig. 3.15. From Fig. 3.15, we learn that when there is rise in income, demand curve shifts to the left from DD to D,D,. It indicates decrease in demand with the rise in income. On the other hand, if there is fall in income, demand Quantity Demanded curve shifts to the right from DD to D;D,. It shows Fig. 2.5 increase in demand with the fall in income. a In the real world, we find fewer examples of inferior goods than normal goods. Yet some of the goods fall under this category. Coarse grain (Jowar, Bajra, Maize, etc.), coarse cloth, bidi, etc, come under the category of inferior goods. (Fallin Price 3.10.2 Changes in the Prices of Related Goods (Cross Price Effect) Demand for goods also changes with the change in prices of the related goods. In this case, we study the relationship between the price of a related goods and the demand for a commedit’The demand for a commodity can increase or decrease with the rise in the price of a related good depending on the nature of the commodity. How the demand for a commodity is affected by the changes in the prices of related goods? The effect depends on the nature of related goods. Related goods are of two types: substitute goods and complementary goods. @) Effect of Change in the Price (Rise or Fall in Price) of a Substitute Good on the Demand for a Commodity The demand for a commodity increases with the rise in the prices of substitute goods and decreases with the fall in the price of substitute goods. It is explained below with the help of Fig. 3.16. (@) If there is rise in the prices of substitute goods, the demand curve shifts to the right which shows increase in demand at a given price of the commodity itself. (b) If there is fall in the prices of substitute goods, the demand curve shifts to the left which shows decrease in demand at a given price of the commodity itself. The shifting of demand curve for a commodity to the right and left with the rise and fall in the prices of substitute goods is shown in the following Fig. 3.16. (ii) Effect of Change in the Price (Rise or Fall in Price) the Demand for a Commodity The demand for a commodity decreases with the rise in the prices of complementary goods and increases with the fall in the prices of complementary goods. It is explained in the Fig. 3.17. (@) If there is rise in the prices of complementary goods, the demand curve shifts to the left which shows decrease in demand at a given price of the commodity itself. (0) If there is fall in the prices of complementary goods, the demand curve shifts to the right which shows increase in demand at a given price of the commodity itself. The shifting of demand curve for a commodity to the left and right with the rise and fall in the prices of complementary goods is shown in Fig. 3.17. Shift of demand curve in case of substitute goods (Rise in Cotte price) Price of Tea (Fall in. (Coffee price). Quantity of Tea Fig. 3.16 of a Complementary Good on Shifting of demand curve for , ‘complementary goods Price of Sugar Quantity of Sugar Fig. 3.17