RECAP

Demand for a
commodity
Demand for a
commodity refers to the quantity of the commodity that a consumer is willing to buy and is able to
given price during a period of time, other factors remaining unchanged. afford at
Demand schedule
Demand schedule is a tabular presentation showing the different quantities of
buy at different prices during a period of time.
a good that a consumer is willing and able t

Demand curve
Demand curve is a graphical
presentation of various quantities of a commodity that a consumer is willing and able to buv at
different prices during a period of time, other factors
remaining the same. A linear demand curve can be written as qp =a-h at
where-b' is the slope of the demand curve. It measures the rate at which demand due to its Dp,
changes i.e. price, Aq/Ap.
Law of Demand
Law of Demand states that other things
remaining unchanged, there is a negative (or inverse) relation between price
commodity and its quantity demanded. In other words, when price of the commodity increases, demand for it falls and of a
price of the commodity decreases, demand for it rises, other factors remaining the same. when
Derivation of law of demand from the law of diminishing marginal
A consumer
utility
buys a good only up to the point where MU =Price. Now, suppose price falls. The situation now changes to:
Price. This induces the consumer to buy more of the good. This shows that when MUs
price of a good falls, the consumer demands
more of that good. This establishes the inverse relationship between price of a good and its quantity demanded.
Using the law of equi-marginal utility: Suppose a only two goods X and Y. Let their respective prices be
consumer consumes
Px and Py. Other things remaining unchanged, the will be in equilibrium when MUx/Px MUy/Py. Now,
consumer =

price of good X(Px) falls. Then, MUx/Px > MUy/Py. It means that per rupee marginal utility from consumption of X issuppose
than from consumption of Y. This induces the consumer to greater
buy more of X and less of Y. The consumer now demands more of
X. This shows that when price of a good falls, the consumer demands more of that
good. So, the demand curve for good X is
negatively sloped.
Change in Quantity Demanded (Movements along the Demand Curve
Change in quantity demanded refers to a increase (decrease) in quantity demanded due to fall (rise) in own price of the
good,
other things remaining unchanged. Here, increase in quantity demanded is called expansion of demand whereas decrease in
quantity demanded is called contraction of demand.
Diagrammatically, a change quantity demanded implies a
in movement along the demand curve. A fall (rise) in the price of the
good leads to downward (upward) movement along the demand curve.
Change in Demand (Shifts in the Demand Curve)
Change in demand refers to rise/fall in quantity demanded due to change in any factor, other than the own price of the
Here, rise in quantity demanded is called increase in demand whereas the fall in quantity demanded is called decrease good.
demand. in
Diagrammatically, a change in demand implies a shift in the demand curve. Increase (decrease) in demand leads to a rightward
(leftward) shift in the demand curve.
Determinants of Demand (Shift factors)
1. Change in income of the consumer: The effect of change in income on demand for
normal good or an inferior good. Normal good is any good whose demand increases as the depends
a good on whether it is
a
consumer's income increases,
and decreases as the consumer's income decreases. Inferior good is any
good whose demand falls as the consumer's
income increases, and as the consumer's income decreases, the demand for it
rises. Examples of inferior goods include
low quality food items like toned milk, coarse cereals, etc.
Thus, increase in consumer's income results in increase in demand for a normal
inferior good. Explanation: A rise in income increases the consumer's good and decease in demand for an
disposable income. So, he is able to spend more ou
the normal good X. Therefore, the price-demand curve of the normal
On the other hand, rise in income increases the consumer's
good X shifts to the right at the same price.
ability to buy normal goods. So he prefers to buy less quanu
of the inferior good Y. Therefore, the price-demand curve of the inferior
good Y shifts to the left at the same price.
Note: The same good can be inferior for one person and normal for another. Whether a
good is normal or inferior
determined by the income level of the consumer. A good which is a normal good for a consumer with a lower income, mo
become an inferior good for a consumer with higher income. For
example, coarse cloth may be a normal good for a
income consumer, but for a high income consumer it may be an inferior good as he can afford a better quality cloth. lo
Also, when a consumer moves to a higher
level, he may consider coarse cloth as being below their income
income
and has the ability to buy more expensive ine cloth, thus considering coarse cloth as being inferior. statu
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UNIT 2: Consumer's Equilibrium and Demand

change in prices of related goods: Related goods are either substitutes or complements. Substitureo
2. ich can be used in place ofone another, for satisfaction of a given want, e.g., () Pepsi and Coca-Lola ( e d d
which

Complementary gooas are those goods which are consumed (or used) jointly/together to saisry d gve
and Sugar () Scooter and Petrol.
.There is a direct relation between change in price of a substitute good and change in demand for the given goo T
example, an increase in price of a substitute good makes the given good relatively cheaper. As a result, demana tor u

given good increases at the same

price, and hence demand curve shifts rightwards.
.There is an inverse relation between price of the complementary good and demand for the given good. For example,
an increase in price or the complementary good reduces its demand, which in turn decreases the demand for the given
good at the same price. As a result, demand curve of the given good shifts leftwards.
3. Change in tastes and preferences for the good: Due to favourable (unfavourable) change in taste and preference for the

good X, the consumerdemands more (les)

quantity demanded of it at the same price. So, the demand curve of good X
will shift to the right (left).
Market Demand
Market demand is the sum of quantity demanded which all the consumers are willing to buy at a given price during a perio0a

of time.

Factoraffecting marketdemand ofa commodity:

() Number of consumers or buyers
(i) Price of the commodity
(ii) Income of its buyers
(iv) Prices of the substitute goods
(v)Price of the complementarY good (vi) Tastes and preferences of the consumers.
The market demand for a good at each price can be derived by adding up the demands of all the consumers at that price.
Market demand curve is derived by the horizontal summation of individual demand curves in the market.
Price Elasticity of Demand
Price elasticity of demand measures the degree of responsiveness of quantity demanded of good to change in its price.
Price elasticity of demand for a good is defined as the percentage change in quantity demanded for the good divided by the
percentage change in its price. Price elasticity of demand has a minus sign because there is negative (inverse) relation between
price and quantity demanded of a good, other factors remaining the samne.
Degrees/Kinds of Price Elasticity of Demand
1. Inelastic demand: When the percentage change in demand for a good is less than the percentage change in price, then
ep<1 and the demand for the good is said to be inelastic.
Elastic demand: When the percentage change in demand for a good is greater than the percentage change in price, then
ep1 and the demand for the good is said to be elastic.
Unitary elastic demand: When the percentage change in demand for a good is equal to the percentage change in price,
then ep = 1 and the demand for the good is said to be unitary elastic. Unitary elastic demand curve has the shape of a
rectangular hyperbola. It is called rectangular hyperbola demand curve because for any point on this demand curve, the
area under the demand curve, i.e., total expenditure on the good remains unchanged.
4.
Perfectiv inelasticdemand: When with the change in price there is no change in demand for the good, it is called perfectly
inelastic demand, ep = 0. A vertical demand curve (i.e., parallel to Y-axis) is perfectly inelastic. Demand remains constant at
all prices.
5. Perfectly elastic demand: When the buyers of a good are willing to buy any quantity of it at the given market price, it is
called perfectly elastic demand, ep = co (infinity). Demand curve is a horizontal line.
Factors affecting Price Elasticity of Demand
1.
Nature ofthegood: If the good is a necessity like food, its demand is not likely to be affected much by change in its price.
So, demand for necessities is price-inelastic (ep< 1). On the other hand, demand for luxuries, eg. a luxury car is price-
elastic (ep> 1), because with rise in price, consumers may reduce demand for luxuries.
2. Availability of close substitutes ofthegood: If close substitutes are easily available, e.g. pulses; if the price of a variety of

pulses rises, consumers can shift to some other variety of pulses which is a close substitute. So, demand for such a good is
price-elastic. On the other hand, if close substitutes are not available, e.g. salt, water etc., the demand is price-inelastic.
Proportion of income spent on the good/Own price of the good: Higher the proportion of income spent on a good, higher is its
price elasticity of demand. It is because a change in price of a high priced good (e.g. expensive clothes, mobile phones, etc.) has
Substantial effect on the budget ofthe consumer. So, demand is price-elastic, ep> 1. On the other hand, demand for a low priced
Bood (e.g. salt, match box, etc.) is price-inelastic, ep< 1 because a very small proportion ofa consumer's income is spent on it.
4 LIme period ofresponse: Longer the time period of response, more elastic the demand because habits change but normally
Over longer periods. When a consumer is habituated to consuming a good and its price rises, it is very difficult for the consumer
to reduce the consumption of the good immediately. Thus, demand is price-inelastic, ep < 1 in the short period. However, over
a longer time period, the consumer may change habits. Thus, demand is relatively more price-elastic, ep > 1 in the long run.