DHRUV SIRS ECONOMICS CLASSES (9719515194)

Demand: The quantity of a commodity that a consumer is willing and able to buy, at a particular price during a given period of time. 1. Individual demand: The quantity of a commodity that a consumer is willing and able to buy, at a particular price during a given period of time. 2. Market demand: The quantity of a commodity that all consumers are willing and able to buy, at a particular price during a given period of time.

Factors Determining demand / Determinants of demand (individual) 1. Price of the given commodity:- There is a negative relationship between quantity demanded and price. As price increases quantity demanded decreases and vice versa. 2. Price of related Goods : Demand is also affected by related goods. They are of two types: (i) Complementary goods- are those goods which are used together to satisfy a particular want like pen-ink. If there is increase in the price of complementary good, the demand curve shifts P x leftward. Eg. Tea & sugar, car & petrol

D e m o n d f o r in k

r ic e o f p e n = R s . 4 0 / -

D D
1

e m

o n d

f o r

in k

DHRUV SIRS ECONOMICS CLASSES (9719515194)

P r ic e o f C o ffe e

(ii) Substitute goods- These are those goods which can be used in place of one another eg. tea or coffee. An increase in the price of substitute good increases the quantity demanded of the other good. If there is an increase in the price of substitute. Good the demand curve shifts rightward. Eg. Coke & Pepsi, rice and wheat

Pr

ic e

of

Te

Rs

.2

.5

3. Income of the consumer: -The effect of income on quantity D1 demanded depends upon the nature of goods. D (a)Normal goods-There is a positive relationship between income of Q u a n t it y o f C the consumer and demand for a good. Income increases demand also increase & vice versa. Eg. Rice, wheat , milk etc. (b)Inferior goods-There is a negative relationship between income of the consumer and a demand for a good. Income increases demand decreases and vice versa .Eg. Cheap goods.
P
P x

o r m

a l G

o o d

I n f e

r i o r

o o d

D D O

D
1

D
Q x

4. Taste & Preferences:- If there is a change in tastes in favour of a good, then it will lead to increase in demand and any unfavourable change will lead to decrease in demand. They include fashion, customs, habits etc. 5. Expectation of change in the price in Future: . If people expect a rise in prices of the commodities in future they may buy more & demand curve will shift rightward & Vice versa.
P x

D D D Q
1 1

DHRUV SIRS ECONOMICS CLASSES (9719515194)

Factors Determining demand / Determinants of demand (Market) 6. Size & Composition of Population: Increase in population raises the market demand & vice versa. Composition, i.e. ratio of males, females, children & no. of old people in population in the country. Eg. If more females are there then demand for sarees, lipstick etc will increase. 7. Season & Weather: It also affects market demand as eg. During winters, demand for woolen clothes and jackets increases, where as in rainy season demand for raincoat increases. 8. Distribution of Income: If income in the country is equitably distributed, then market demand for goods will be more. However if it is uneven then market demand will remain at lower level. Demand schedule: a tabular presentation showing ve relation between price & Quantity demanded of a commodity. Individual demand schedule: a tabular presentation showing ve relation between price & Quantity demanded of a commodity by a consumer.

Market demand Schedule: a tabular presentation showing ve relation between price & Quantity demanded of a commodity by all consumers.

Demand Curve: Graphical representation of demand schedule Individual Demand Curve: Graphical representation of Individual demand schedule

Market Demand Curve: Graphical representation of Market demand schedule. Horizontal summation of individual demand curves.

LAW OF DEMAND (same individual demand schedule & individual demand curve)

DHRUV SIRS ECONOMICS CLASSES (9719515194) Assumptions of Law of Demand (Keeping other factors constant or ceteris paribus): 1. Prices of substitute goods do not change. 2. Prices of Complementary goods remain constant. 3. Income of the consumer remains the same. 4. There is no expectation of change in price in the future. 5. Tastes & Preferences of the consumer remain the same. Reasons for Law Of Demand Or why demand curve slopes downward: 1. Law of diminishing Marginal Utility:- It states that as the consumer has more and more of a good its MU goes on declining. He is not interested in buying more units of the same commodity at the same price. 2.Substitution Effect:- It means with the fall in price of a good consumer feels a rise in relative price of other good, which in turn leads to more demand for the good. 3. Income Effect:- It means with fall in the price of good consumers real income or purchasing power rises and he demands more units of the good. 4. New consumers:- As price of a commodity falls new consumer class appears, who can afford the commodity. 5. Different Uses:- Many commodities have alternative uses like milk, sugar. With fall in price, it can be put in various uses. Exceptions to Law of Demand: 1. Giffen Goods: These are special kind of inferior goods on which the consumer spends a large part of his income and their demand rises with an increase in price & vice versa. 2. Status symbol goods : Higher the price, higher will be the demand for such goods, as they are used as status symbol. Eg. Diamonds, gold, antique paintings etc. 3. Fear of Shortage: If the consumer expects a shortage or scarcity of a good in near future, then they would start buying it more even at high prices. Eg. During emergencies like war, famines etc. 4. Ignorance: Consumers may buy more of a commodity at a higher price when they are ignorant of the prevailing prices of the commodity in the market. 5. Fashion related goods: Goods related to fashion do not follow the law of demand and their demand increases even with a rise in their prices. Eg. Dress, latest trends etc. Expansion in Demand: a rise in quantity demanded due to a fall in the price of commodity, other factors remaining constant. It leads to a downward movement along demand curve.

DHRUV SIRS ECONOMICS CLASSES (9719515194) Contraction in demand: a fall in the quantity demanded due to a rise in the price of the commodity, other factors remaining constant. It leads to an upward movement along demand curve.

Increase in demand: a rise in the demand of a commodity caused due to any factor other than the price of the commodity. It leads to a rightward shift in demand curve.

DHRUV SIRS ECONOMICS CLASSES (9719515194)

Decrease in Demand: a fall in demand of a commodity caused due to any factor other than the price of the commodity. It leads to a leftward shift in demand curve.

DHRUV SIRS ECONOMICS CLASSES (9719515194)

Elasticity of demand: % change in demand of a good due to % change in any of the factors affecting of that good. Price Elasticity of Demand:-It measures the responsiveness of demand of a good to a change in its price. OR It refers to % change in demand of a good due to % change in its price. Measurement of Price Elasticity of demand: three methods of measuring price elasticity of demand. I) Total outlay or Expenditure Method:- When the price of a good falls and, as a result, if the total expenditure of consumers on the commodity rises then ed > 1; if it remains unchanged then ed = 1; and if it falls then ed < 1. The situation reverses when the price of a good rises. Price I 8 7 II 6 5 III 4 3 Demand 3 4 5 6 7 8 T.E. 24 28 30 30 28 24 ed < 1
O

Elasticity ed > 1
e > 1 Inverse Relation B e=1
e< 1

ed = 1

Direct Relation

Total outlay is (TQ = p q) where TQ stands for total outlay, p and q for price and quantity respectively

DHRUV SIRS ECONOMICS CLASSES (9719515194)

II) Percentage Method or Proportionate Method: - Ed is calculated by the following formula:

ep =

% change in Q.D. % change in price.

Q P P Q

OR

(Note: The elasticity of demand is always negative. This is because price and quantity are inversely related. But by convention, for the sake of simplicity, the minus sign is dropped in economics.) III) Geometric Method: The elasticity of demand is measured by using the following formula.

Elasticity of demand =

Lower segment of demand curve Upper segment of demand curve

DHRUV SIRS ECONOMICS CLASSES (9719515194)

Factors affecting Price Elasticity of demand 1. Availability of substitutes:- A good having close substitutes will have an elastic demand. 2. Nature of the commodity:- Demand for necessities and essential goods are inelastic because consumers are restricted to buy those goods. 3. Different uses of commodity:- If the commodity has different uses its demand will be elastic. 4. (Habits) Taste & preferences:- If a consumer is bound to use particular brand of a commodity then its demand will be inelastic because the consumer will buy that particular commodity only, even at higher price. 5. Level of income:- If consumer belongs to richer section then his demand will not be affected by change in price, hence demand will be inelastic. 6. Proportion of total expenditure spent on the product:- Higher the cost of the good relative to total income of the consumer, more will be the price elasticity of demand. DEGREES OF PRICE ELASTICITY OF DEMAND:

axis.

DHRUV SIRS ECONOMICS CLASSES (9719515194)

axis

DHRUV SIRS ECONOMICS CLASSES (9719515194)

Value based question: 1. Even high price of electricity has failed to reduce the demand This statement is a newspaper heading. Keeping in mind the Law of Demand and elasticity of demand answer the following questions: (a) Why even after the rise in price of electricity the demand has fallen? Give two reasons. (b) Mention any two ways through which we save power.

4.