Class - XII

Sub : Economics
Chapter 2 : Demand and Law of demand

Meaning of Demand:

The quantity that a consumer is able and willing to purchase at a specific price and within a
specific time period.

Different types of DEMAND :

1. Individual Demand : Individual demand refers to the

quantities of a commodity that an individual consumer
is willing to purchase at various prices during a given
period of time.

2. Market Demand :It is the total quantity of the

commodity demanded in the market by all consumers at
different prices at a point of time.

3. Composite demand:- The demand for the

commodities which are demanded for the satisfaction of
various wants eg: electricity, milk etc. Demand for goods
that have multiple uses is called composite demand. For
example, the demand for steel arises from various uses of
steel such as use of steel in making utensils, bus bodies, room coolers, cars.

4. Joint demand :- This demand is known as complementary demand also. It is the demand
for commodities which are demanded jointly. Eg: car & petrol, pen & ink etc.

5. Derived demand : The demand for a commodity that arises because of the demand for
some other commodity is called derived demand. For example, demand for steel, bricks, cement,
stones, wood, etc. arise because of the demand for houses and other building.

6. Ex-ante demand : ••Ex-ante demand means the amount of any commodity or service that a
consumer is willing or expected to consume or purchase.

•• It is the desired measures planned in an economy during the period of an accounting year.

•• This is the market demand which is intended to be expected in the economy during the period
of one year by the consumers.

7. Ex-Post demand : ••Ex-post demand indicates the amount of the commodity or service that
is actually purchased or consumed by the consumer or buyer.
••These measures are considered into the calculation of national income in an economy.

•• This aspect of demand is considered in the estimation of equilibrium price and output in the
economy.

Demand Function:

The demand function represents the functional relationship taking place between a
commodity's quantity demanded and its various determinants.
Dx= f(Px, PR, Y, T, E, H, G)
Here,
Dx= Quantity Demand
f= Functional Relationship
Px= Own price of good
PR= Related price of good
Y = Income
T= Taste and Preferences
E= Expectations
H = Population
G = Government Policy
Factors affecting Demand / Determinent of demand :

1. Price of the Commodity : The price of a commodity has an inverse (negative) relationship
with the quantity demand of that commodity. Consumers prefer to buy more of a low-priced
commodity and less of a high-priced commodity. The inverse relationship between price and the
amount of money people are willing and able to spend is known as The Law of Demand.

2. Consumer’s Income: The relationship between income of the consumer and the demand for
a commodity may differ in three types of goods:

•• Normal goods : Normal goods are those goods the demand for which increases with
increase in income of the consumers, and decreases with fall in income.For example, a
consumer may increase his demand for clothes, refrigerators, television sets and cars as his
income increases.

•• Inferior goods : Inferior goods are those goods the demand for which falls with increase in
income of the consumer and increases with fall in income. For example, the demand for coarse
cereals like maize or jowar may decrease when income increases beyond a particular level
because the consumers may substitute it by a superior cereals like wheat or rice.

•• Necessity Goods: In case of inexpensive necessities of life such as salt and matchbox, the
quantity purchased increases with increase in income up to a certain level and thereafter it
remains constant irrespective of the level of income.

3. Price of related Goods: The demand for a commodity is affected by the prices of related
goods is as well. If the change in the price of one particular goods affect the demand for
another goods. Related goods can be categorised into two categories:

•• Substitute Goods: Substitute goods are commodities that are opposed to one another. As a
result, if demand for one of the two products increases, demand for the other product falls even
though the price of this product stays constant, and vice versa. For example, if the price of
sugar rises then demand for jaggery will rise.

•• Complementary Goods: Complementary goods are linked products that are consumed
together because their utility is reduced if consumed alone. As a result, if demand for one of the
two products rises, demand for the other rises as well, even though the price of this commodity
stays unchanged, and vice versa. For example, car and fuel. If the price of fuel falls, then
demand for cars will rise like fuel.

4. Taste and preferences of consumer: A favourable change in tastes and preferences of

consumer leads to increase in demand, while the opposite happens when there is a negative
change in taste and preference of consumers.

5. Expectation: If the consumer expects that the availability of a good in the future is going to
fall, his present demand of that good would increase, and vice versa, keeping the price constant.

6. Size of population: Larger the size of population, greater will be the demand for a
commodity and smaller the size of population smaller will be the demand for a commodity.

7. Government Policy: If the government imposes taxes on various commodities in the form of
GST, excise duty etc, the price of these commodity will increase. As a result, demand for these
commodity will fall.

Law of demand :

The law of demand states that, other things remaining equal, the quantity demanded of a
commodity increases when its price falls and decreases when its price rises.

Assumptions:

 There should be no change in the income of the consumer.

 There should be no change in the tastes and preferences of the consumers.
 Prices of the related commodities should remain unchanged.
 The commodity should be a normal commodity.
 Size of population and age composition of population should not change.
 The distribution of income should not change.
 There is no expectation of change in prices in future.
Reasons for downward slope of the Demand Curve :

1. Law of diminishing marginal utility :- Utility of a commodity is a want satisfying power of a

commodity. The law of diminishing marginal utility states that when there is a continuous
consumption of a commodity the additional utility derived from the additional unit of commodity
will go on decreasing thus consumers will prefer to buy larger quantity of that commodity at
lower prices only.

2. Income effect :- With the change in the price of the commodity real income or the
purchasing power of the consumer also changes, due to that there will be change in the quantity
demanded of that commodity. Higher will be the price, lower will be the real income & the
quantity demanded will decrease and vice – versa.

3. Substitution effect :- is the effect that the change in relative prices of substitute goods has
on quantity demanded. When there is increase in the price of a commodity keeping the price of
its substitutes constant the demand for the commodity decreases & if there is fall in the price
keeping the substitutes price constant the demand of the commodity increases. The sum total
of income & substitution effect is known price effect.

4. New consumers :- Fall in the price leads to an increase in the quantity demanded of
commodity due to increase in number of consumers of that particular commodity in the market.
On the other hand if there is increase in the price of a commodity some consumers will stop
buying that commodity & then quantity demanded decreases thus the demand curve is
downward sloping.

5. Different uses of the commodity: - When the price of a commodity which has several
uses falls it can be used for all possible uses thus the demand for this commodity increases. On
the other hand if price increase it will only be used for most important Use thus quantity
demanded will be decreasing & the demand curve will be downward sloping.

Exceptions / Exemption to law of Demand / Why does Demand curve slopes

upward?

1. Giffen goods :- Those inferior quality goods on which consumer spends large part of his
income. Demand for Giffen goods falls with the fall in price & increases. with increase in price
thus the demand curve will be upward sloping.

2. Articles of snob appeals :- In case of some commodities people like to buy them to show
their status & prestige such types of commodities are demanded only at very high prices. Thus
higher is the price higher will be the demand & lower is the price, lower will be the demand. Thus.
Demand curve will be upward sloping.

3. Quality – price relationship :- is also responsible for an upward sloping Demand curve It
means few consumers purchase a commodity only at high price because they feel quality of the
product will then only be good when its price is high.

4. Future expectations regarding Change in price :- If price rise is expected in future then
quantity demanded will be more even at higher prices. On the other hand if lower prices are
expected in future then the quantity demanded will be less even at lower prices.

5. Emergencies :- During emergencies people demand larger quantity of commodities even at

higher prices. It means during emergencies they never think about the prices they just make the
demand for commodities according to theirs need.

6. Change in Fashion: When a commodity goes out of fashion, consumers will not purchase a
larger quantity of this commodity even when its price is reduced. For instance, if the fashion of
some ladies wear changes, ladies will not purchase it in large quantity even if the price is
reduced.

Change in quantity demanded & change in demand (Movement of demand curve)

A. Change in quantity demanded or movement along the demand curve : Movement

along the demand curve is caused by a change in the price of the goods other things remaining
constant. It is also known as change in quantity demanded. There are 2 types of movement of it.

(i) Expansion or extension of demand :- It refers to rise in quantity demanded Due to fall in
the price of the good, known as Expension of Demand. It is the downward movement on same
demand curve.

(ii) Contraction of demand :- It refers to fall in quantity demanded due to increase in price of
the commodity, known as Contraction of Demand. It is an upward movement on the same
demand curve.

B. Change in demand or shift of demand curve : Shift of demand curve is caused by

changes in factors other than price of the commodity. These factors are consumers
income,price of related goods, consumers taste & preferences etc. This is of 2 types :-

1. Increase in demand :- It refers to the change in demand or increase in demand at a given

price. It means in this case price remains same but due to some favorable changes among
other factors demand increases. Demand curve in this case shifts to the right hand side.

Main causes of increase in demand or rightward shift in demand of a commodity are

as under:

(i) Income of the Consumer: With increase in income of the consumer, the demand curve for
normal goods, shifts to the right.

(ii) Price of Related Goods: In case of substitute goods, demand for a commodity rises (or
demand curve shifts to the right) with rise in price of the substitute commodity. In case of
complementary goods, demand for the commodity rises with a fall in the price of
complementary commodity.

(iii) Taste and Preferences: If consumer's tastes and preferences change in favour of the
commodity, the quantity demanded of the commodity rises (and demand curve shifts to the
right).

(iv) Expectations: If the consumer expects that price in the near future will rise, he will buy more
quantity at the prevailing price and hence demand curve shifts to the right.

2. Decrease in demand :- If refers to decrease in demand due to change in factors other than
price of the commodity It means, keeping the price constant due to some unfavorable changes
in the determinants of demand, demand decreases, & Demand curve Shifts to the left hand side.

Main causes of decrease in demand or leftward shift in demand curve of a commodity

are as under:

(i) Income of the Consumer: With decrease in income of the consumer the demand curve for
normal goods shifts to the left.

(ii) Price of Related Goods: In case of substitute goods demand for a commodity falls and
demand curve shifts to the left with fall in price of the substitute commodity. In case of
complementary goods demand for the commodity falls with a rise in the price of
complementary commodity.

(iii) Tastes and Preferences: If consumers tastes and preferences change against the
commodity the quantity demanded of the commodity falls implying a shift in demand curve to
the left.

(iv) Expectations: If the consumer expects that price in the near future will fall he will but less
quantity at the prevailing price and hence demand curve shifts to the left.
 Difference between Contraction of Demand and Decrease of Demand.

Difference between Contraction of Demand and Decrease of Demand.

Difference between Extraction of Demand and Increase of Demand.

Difference between change of demand (Shift of demand) and Change of Quantity of
demand (Movement of demand curve)