Theory of Demand

When price increases from OP, to OP2, demand extends from OQ to

0Q. Conversely, when price decreases from OP, to OP, demand shrinks
from OQ, to OQ1. As already stated, positive relationship between demand
and price of the commodity is established in case of Giffen goods or when
goods are demanded simply because of their high price, or when consumers
judge the quality of a commodity by its price.

6. Movements along a Demand Curve

and Shifts in Demand Curve

Movements along a demand curve refer to moving 'up or down' the

demand curve. When we move down the curve, it is a situation of extension
of demand: buying more in response to decrease in own price of the
commodity. When we move up the curve, it is a situation of contraction of
demand: buying less in response to increase in own price of the commodity.
Thus, movements along the demand curve refer to extension or contraction
of demand.

Movements along the demand curve refer to extension or contraction ofdemand.

Extension of demand occurs when quantity demanded increases in response to a fall in own price of the
commodity
Contraction of demand occurs when quantity demanded decreases in response to a rise in own price of
the commodity.

Shifts in demand curve refer to all such situations when demand for a
commodity increases or decreases due to changes in other determinants of
demand, other than own price of the commodity. In such situations, quantity
demanded of a commodity increases or decreases even when own price of the

Commodity remains constant. Example: A consumer may buy more T-shirts

when his income rises, price ofa T-shirt remaining the same. A consumer
Bow draws his fresh demand schedule, showing higher number of T-shirts
his demand (for
against each possible price than before. Accordingly,
curve

shifts to the right. Likewise, when income of a decreases,

consumer
shirts)
he may decide to buy less number of T-shirts, price of a T-shirt remaining
onstant. A fresh demand schedule is again drawn, but showing lower number

oshirtsagainst each possible price than before. So that, hisindemand

curve

factors (other
-shirts) would shift to the left. Thus, owing to changea

th:
w n price of the commodity) consumers demand curve may shitt to
shitts to the right is
ght or to the left. A situation when demand curve

4s a situation of increase in demand (when more is purchased at the

$atle Pe of the commodity). On the other hand,a situation when demand

Curve t s the lefr is known
to as a situation of
deucase in denm.and (when
ess is purchased at the ame price of the commoduy).

113
 Check the following How chart for a complete picture:

Movements along a Demand Curve Shifts in Demand Curve

Changes in Quantity Demanded Changes in Demand

Extension of Contraction of
Demand Decrease in Demand Increase in Deman
Demand
or Backward Shift or Forward Shift
in Demand Curve in Demand Curve
Caused by decrease demand curve (demand curve
in own price of the Caused
in
by increase shifting to the left) shifting to the righ=
own price of the
commodity Commodity
Caused by change in factors other
than own price of the commodity

Tabular and
Diagrammatic llustrations
Following are the tabular and
situations relating to diagrammatic
movements along a demand illustrations of differs
curve. curve and shifts in
dema
Movements along a Demand
Extension and Contraction Curve:
of Demand
Movements along demand a
demand. These are caused curve refer
extension and contractio" to
changes by in own
Extension of Demand price of the commodity
Extension (Downward movement
when
of
demand (also called a along demand curve
quantity demanded expansion of demand) is a iatic
commodity. Table 4 and Fig.increases in siru
illustrateresponse
6 to a fall in
this situation. own pr
Table 4.
Extension of Demand
5 (Units) Description
Fall in Own
Price of the
Commodity
5
Rise in
When the price of Demanded Quantity
price reduces to I per Good-X is 5 per
unit, demand e unit, 1 unit is manded. W
Extension of demand extends
is to 5
indicated by units.
demand curve, as from
point A to B in Fio downward moverement along
a
 Theory of Demand

Extension of Demand

2-

X
2 3 4
Qx (units)
demanded
Extension of demand refers to increase in quantity
of a commodity due to a fall in its own price.
the demand
Diagrammatically, it means a movement down
curve, like from A to B.

demand curve)
Contraction of Demand (Upward movement along
a

Contraction of demand is a situation when quantity demanded decreases

in response to a rise in own price of the commodity. Table 5 and Fig. 7
illustrate this situation.
Table 5. Contraction of Demand
Description
Px
() (Units
Rise in Own Price of the Commodity
1

Fall in Quantity Demanded

5 1

units demanded. When

per unit, 5
are
When the price of Good-X is1
to l unit only.
price rises to unit, demand contracts
5 per
Similar to extension of demand, contraction
of demand is indicated by
to A in Fig. 7.
as from point B
pward movement along the demand curve,

Contraction of Demand

X
Qx (units)
Contraction of demand refers to decrease in quantity
demanded of a commodity due to a rise in its own price.
movement up the demand
Diagrammatically, it means a
curve, like from B to A.

115
 e=

economicS
Curve: Forward
and Backward Shift
Demand
Shifts in forward shift, and (ii) backward shik
demand curve include (i)
Shifts in demand. While backwa
c u r v e refers
to increase in
demand
Forward shift in in demand. Shifts in demand cun
refers to decrease
shift in demand
curve

other tactors, other than

own price of the commodin
to change in
occur due

CurveIncrease in Demand
Demand
Forward Shift in reters situation
to a
(increase in demand)
Forward shift in demand
curve

increases, even when own price o

of a commodity
when quantity demanded in demand occurs wher
c o n s t a n t . In other
words, increase
the commodity is factors, other
increases because of the
of commodity
quantity demanded
a
and Fig. 8.
It is illustrated by Table 6
than 'own price of the commodity.
Demand
Table 6. Increase in
Q (Units)
Px)
20
10
30
10

Increase in Demandd

0- A B Price

D2
10 20 30

Qx (units)
demand
increase in demand refers to increase in quantity
of a commodity at its existing price. It is caused by factors
other than 'own price of the commodity.
Diagrammaticaly, it means a forward shift in demand cure
from D to
as
Da
Table 6 and Fig. 8 show that when price of Good-X is 7 10 per unit
20 units are demanded. Even when price remains constant, consumers star
demanding 30 units. It may be due to increase in their income or shift
tastes in favour of the commodity, or other such factors.
It is important to note that increase in demand is indicated
by a shift "
demand curve to the right, also called forward shift in demand curve. Fig.
shows demand curve shifting from D, to D2 when the consumers decide to
buy 30 units (instead of 20) even when own price of the commodity remain
c o n s t a n t at ? 10 per
unit..The consumer shifts from ntB
point A on to D, point
on D.
Demand
Causes of Increase in
Demand Curve Shifts Forward]
Situations when
of increase in demand are as under:
causes
Important
increases.
i) When income of the consumer

When price of
substitute good increases.
ii) falls.
complementary good
Ht) When price of
 Theory of Demand
consumer shifts in favour of the
(iv) When taste/preference of the
o r climate).
commodity (due to change in fashion
is expected to reduce in the
(v) When availability of the commodity
near future.

in Demand
Backward Shift in Demand Curve -Decrease
demand) refers to a situation
Backward shift in demand curve (decrease in even when own price
of
demanded of a commodity decreases,
when quantity decrease in demand o c c u r s when
constant. In other words,
the commodity is of the factors, other
quantity
demanded of a commodity decreases because
9.
of the commodity. It is illustrated by Table 7 and Fig.
than 'own price
Table 7. Decrease in Demandd
Qx (Units)
Px ()
30
10
10 20

Decrease in Demandd

A -Price
10
D2 D1
X
O 10 20 30
Qx (units)
demanded
to decrease in quantity
Decrease in demand refers factors other
price. It is caused by
of a commodity at its existing
than 'own price of the commodity.
means a
backward shift in demand curve,
Diagrammatically, it
as from Di to D2.

isR10 per unit, 30 units

show that when price of Good-X
able 7and Fig. 9 remains constant,
decide to buy consumers

demanded. Even when price in

are commodity. It may be
due to decrease
units rather than 30 units of the
0 or other such factors.
cir Income loss of taste for the commodity,
the left,
or
demand curve to

in demand is indicated by a shift in

Decrease 9 shows demand curve
demand c u r v e . Fig.
Called backward shift in decide to buy only 20 units
when the
consumers

n g from D, to D, remains constant at

when price of the commodity

ead of 30) even own
on D, to point
B on D,.
shifts from point A
PE unit. The
consumer

Auses of Decrease in Demand

ations when Demand Curve Shifts Backward
demand as under: are
in
"ortant causes of decrease
falls.
When income of the consumer
decreases.
When price of the substitute good increases.
When price of the complementary goodshifts
the against the commodity
When taste/preference of consumer

(due to change in fashion or climate).

to rise in the near future.
W h e n availability ofthe commodity expected
is
117
 Movement along the Demand Curve and Shift in Demand Curve-The Differe
ena
Movement along the Demand Curve Shift in Demand Curve
)Movement along the demand curve () Shift in demand curve refers to all sud
refers to all such situations when change situations when change in
in demand is related to change in own is
deman
related to factors other than
price of the commodity. It is also called own
price of the commodity. It is also
Focus change in quantity demanded. change in demand. calle
Zone (ii) Other determinants of demand (other
than own price of the
(i) Own price ofthe commodity is assumed
commodity) are as constant, while any of the
assumed as constant.
determinants of demand changes. otherl
(ii) Diagrammatically, it is shown as
downward or upward movement
a
(ii) Diagrammatically, it is shown as a
the same demand curve.
along forward or backward shift in
Curve.
demand |
Extension of Demand and Increase in
Extension of Demand
Demand-The Difference
(i) Extension of Increase in Demand
in
demand refers to increase (i) Increase in demand
quantity demanded due to decrease refers to increase
in own in quantity
price of the commodity demanded even when own
Focus (ii) Extension of demand is price of the commodity is constant.
studied the on
(i) Increase in demand is
Zone assumptionthat other
determinants studied on the
demand (other than own of assumption that own
commodity) are constant. price of the price of the
commodity is constant.
(ii) Extension of
demand leads to downward
movement along the (ii) Increase in demand
demand curve leads to forward
from left to right. shift in demand curve.
Contraction of Demand and
Decrease in Demand-The
Contraction of Demand Difference
(i) Contraction Decrease in Demand
of demand refers to
decrease in () Decrease
quantity demanded due to
increase in own
in demand refers to decrease
in
FOcUS (ii) Contraction
price of the
commodity.
of demand is studied
quantity demanded
price of the
even when own

Zone on the
assumption that other determinants (i) Decrease in
commodity is constant.
demand (other than of the demand is
studied
own price
commodity) are constant. of the assumption that
(iii) Contraction commodity, is constant.own price of e

of demand leads to
movement along the demandupward (ii) Decrease in
from right to left. curve demand
shift in demand curve.leads to
backWu
HOTS V
O. 1. Answer in one serntence thie
dsunptions On which a
Ans. That all other
determinants (other than own priCe ot demand
the
curve is
constrcted
Q. 2. Give one reason, more whyot a
commodity)
1s
are constant
commodity demanded even when
rise. Support your answer with arn example own nr price of the
Ans. More of a commodity may be demanded even when own
commodity happe
price of the
fear that the concerned commodity (wnich ldppeisDe acueSSILy ot
commodity
near future. lite) may not be
easilv available in the
Example: In curfew bound areas, demand for salt and Ceredis o E n Sioots
up even
tend to rise. when prices of these goo0
 Theory of Demand

Price of Related Goods

Cros Price Effects: How
7, affects Demand for
(Substitute/Complementary)

a Commodity?
for a commodity
of a related good o n the demand
Efect of change price
in

cross price effect.

is called
We know
related goods are:
Substitute goods, and
(1)
(2) Complementary goods.
as under:
discussion into two parts,
Accordingly, w e can split our
Substitute
Price of the
a Commodity
in relation to
Demand for substitute goods. Let
tea
(1) as two
consider tea and coffee
Good: Let us
demand curve is D, as
shown in
demanded of which
be the commodity
Fig. 10.

D(Tea)
D,(Tea)
X
T1 2
Quantity
the right when price of the
Demand curve for tea shifts to
(coffee) increases. Thus, the c o n s u m e r
substitute commodity
more of tea even when its price
shifts from Di to D2, buying
is constant.

Good: Initially, if price of tea is OP

0 Increase in Price of Substitute
the price of tea remains
quantity purchased is OT1. Now, suppose
increases.
constant but the price of coffee
consumer? As a rational consumer, you
How would you react as a
place
s o m e tea in of coffee. Or, you are
may decide to substitute
when its price is constant (Fig. 10).
Cxpected to buy m o r e of tea even
quantity of tea (which is equal
to
nitially were
you buying P,K,
).Now you are willing to buy P,K2 (=OT2). Greater purchase
situation of increase
commodity at its c o n s t a n t price points
to a
of a

in demand, or forward shift in demand curve. Accordingly,

demand
Curve for tea shifts to the right, from D, to D2.
1) Decrease in Price of Substitute Good: If price of coffee decreases,
will tend to substitute some coffee in place of tea. Or, you will
you
demand less tea even when its price is constant. Fig. 1 1 illustrates
this situation.
uoductory Micro omics

D,(Tea)
D(Tea)
T2 T X
Quantity
Demand curve for tea shifts to
substitute commodity (coffee) the left when price of the
consumer shifts from decreases. Thus, the
when price of tea is D1 D2, buying less of tea even
to
constant.
Initially you were
buying P K, (=
P K (= OT,) OT) of tea. Now,
of tea when
even you are
buying
situation of backward shift in price of tea is constant (= OP). This isa
D to D2. demand curve. Demand curve shifts from
IfX and Yare substitutes and
-demand curve for X would
price of Xremains constant:
shift to the right if price of Y
shift to the left if price of Y increases
-demand curve for X would
decreases
(2) Demand for a
Commodity in relation to Price of the
Good: Let us consider car and Complementar
petrol as complementary goods. Let ca
be the
commodity demanded of which the demand curve is as shown
in Fig. 12. D,

D,(Cars)
D,(Cars)
T2
QuantityY
Demand curve for cars shifts to the the
left when
price o
complementary
shift
good (petrol) increases. Thus, the conrice
from D,
to
is constant.
Da, buying less of cars even when
 Ineory Or Demand

Price of Complementary
Good: if price of
Initially,
(i Increase in
Swift) is OP,, number of
cars purchased is P,K, (= OT,).
cars (say
this price remains c o n s t a n t
but the price of petrol
Now, suppose
increases.

the consumers react to such a situation? They

How would of the is
would tend buy
to less cars, even when price cars

constant (Fig. 12).

price of cars is constant, P,K2 (= OT,)
cars are
when
Now, even
has increased. This is a situation
purchased, because price petrol
of
demand in demand curve.
backward shift
of decrease in
or

Accordingly, demand curve shifts from D, to D2.

in Price of Complementary Good:
If price petrol of
(ii) Decrease
decreases, people will have
the tendency to buy m o r e cars, even
This is a situation ot increase in
when price of cars is constant.
forward shift in demand curve, as illustrated in Fig. 13.
demand, or

D2(Cars)

D,(Cars)
>X
1 12
Quantity
Demand curve for cars right when price of
shifts to the
decreases. Thus, the
the complementary good (petrol)
to D, buying more of cars
even
consumers shift from Di
when their price is constant.

As price of petrol
Initially P,K, (= OT,) cars were purchased.even when
price of
decreases, P,K» (= OT,) cars are purchased from
curve shifts forward
is constant. Accordingly, demand
cars
D, to D.
constant:
and price of Xremains
d a r e complementary goods
demand curve for X would shiftforward if price of Y reduces.
Y increases.
and curve for X would shift backward ifprice of

HOTS
What is cross price effect?
Ans Cro in the price of commodity-X on the demand for commodity-Y
price effect refers to the effect of change substitute
goods or complementary goods).
a n d Y are related goods (X and Y are either

121
economics
Demand
8. Relationship between Income and
If income rises, we generally tend to buy more
more ot
our

would mcan more pens,

more shirts, goods, Me
more shQa
income noes, more
But there are exceptions,
If initially you cars,
are
so on.
buying
(simply because you cannot afford to buy a finer grain), coarse .
a-

take vour increase in income now: rerhaps, as a first sten vo

how wouldy
the consumption of inferiors: you will reduce (or give n would disa u

of coarse grains and shift to the

consumption of superior nsumptio
grains. Su
c in the deserts of Rajasthan where, the rich
bajra minority eats wheat
the poor majority eats as their
staple food. This suggests divisiowhi
goods into two categories:(1) normal goods, and (2) inferior goods.
(1) Normal Goods
These are the goods the demand for which
increases
buyers rises. There is a positive relationship between income income t
as
of
and deman
Or, in case of normal goods, income effect is positive.

How Demand Curve of a Normal Good changes

when Income of the Buyers changes?
Income of the buyer may increase or decrease.
Increase in Income: In a situation of increase in income, mon
of a (normal) good is purchased even when its price is constam
or forward shift ir
a situation of increase in demand
This refers to
demand curve.
of decrease in income, less
o

(ii) Decrease in Income: In a situation

even when its price
is constant. 1hi
a (normal) good
is purchased backward shift t
situation of decrease in demand or
reters to a

demand curve.
situations.
illustrates both these
Diagram (Fig. 14)
For a normal good

When income
decreases: a > C

When income
a b increases: a

D2
D3
X
fitive. M o r eb

whe
economics
8. Relationship between Income and Demand
tend to
If our income rises, we generally buy more of
income would mean more pens,more goods. M.
snirts, more
shoes
so on. But there are
exceptions. initially you are buvim.
It more cars,
(simply because you cannot afford to
buy a finer ying coarse gr
take your increase in income now?
the consumption of interiors: erhaps, as a hrst
grain), how would
will you
reduce step, you would
of (or give up) the di
of coarse grains
coa and shift
the to
consumption
happens in the deserts of
the poor majority eats Rajasthan where, the rich
of
superior grains.consum
Sure pio
bajra as their
goods into two categories: (1) staple minority eats rely,
wheat
th
normal goods, food. This
suggests
wl
whi
(1) Normal Goods and (2) inferior
goods.
divisionion
These are the
buyers rises. Theregoods the demand for
is a which
Or, in case of positive relationship
normal increases as income of th
goods, income effect isbetween income and
How Demand demani
when Income Curve of a positive.
of the Normal Good
Income of the Buyers changes? changes
buyer may increase
) Increase
of
in
Income: In
or
decrease.
a
(normal) good is situation of increase
a

situationpurchased
This refers to even when
in
income,
a mor
demand curve. of its
increase in demand price is constam
(i) Decrease in or
forward shift in
Income: In
(normal) good is
a
situation of decrease
a

refers
to purchased
situation
a even when
of decrease its
in
income, less
demand curve. in price is
constant. Thi
demand backward
Diagram (Fig. 14) ilustrates shift i
or

both these
situations.
For a
normal good

When income
decreases: ac
When income
b increases: ab

D3 D D2
Quantity
In case
of normal
purchased goods, income
income falls,when income rises, andeffect is posiv
even less is
constant. when
when income price of the
pur
a to b. comi eman
when income falls,rises,
the
the
consumerS s from
consumer shiftsu a to
 neory O Demand

( 2 ) Inferior Goods
income of
the goods the
demand forwhrch decreases as
and
These are inverse/negative
elationship between income
relati
sFises. There is income effect is negative.
buyers
in case of i n f e r i o r goods,
demand. Or,
Good changes
of an Inferior
How Demand Curve changes?
of the Buyers
Income
when situations as
under.
are two
Here also,
there
increase in income, less of
situation of
Income: In a
G) Increase
in
The consumer/buyer prefers
is purchased.
good can afford
the (inferior) substitutes,
because now he
on to superior implies a
to shift at its existing price
of commodity
Buying less
a
them. demand.
decrease in
demand curve, or
backward shift in c o n s u m e r , already
decreases, the
Income: If income
Decrease in to depend
(i) is further compelled
an inferior good,
consuming of superior
cut his consumption
on it. May
be he has to further
inferior goods. It implies
a
more of the
substitute and buy in demand
forward shift in demand c u r v e or increase
situation of
for inferior goods.
these situations.
Diagram (Fig. 15)illustrates both
For an inferior good

When income
decreases: a > b

When income
increases:a>C

D1
D2
D3
X
Quantity
In case of inferior goods, income effect is negative. Less is
purchased when income rises, and more is purchased when
income falls, even when price of the commodity remains
constant. When income rises, the consumer shifts from
a to c.When income falls, the consumer shifts from a to b.

HOTS
Q1. What typ
Anc dtype of goods find a rise in their demand even when income of the buyers reduces?
erior goods. When income of
the buyers reduces they tend to increase the
O2. Do youagree consumption of inferior goods.
agree with the view that a good may be 'inferior' to one but 'normal' to the other?
Ans. .It is
v
true that
80od
a good
may be 'inferior to one and 'normal' to the other. The
distinction between inferior
and normal
good is drawn with reference to the level of income.
People with low level of income would
d Coarse grain as a normal good for their consumption. On the other hand,
sider coarse grain as an inferior people with high income would
good. They would consider finer qualities of
Consumption. grain as their normal good for

123
 9. Impact of Tastes and Preferences on
Demand for a Commodity
Tastes and
as under: preferences of the buyers are determined
by thre
(1) Individual'sLikes and Dislikes: You tend facto
commodity simply because your likes and
to
buy more or les
(2) Trends and Fashions:
You dislikes tend toof ess
fashions. You
simply want to be
are
infuenced by the change.
more of a
commodity. trendy; emerging tren and
accordingly,
(3) Climatic Environment: you prefer to
Your tastes and b
change in climatic
ike, tea and coffee environment. Winterpreferences tend to change
drink and ice cream.while summer season season induces you to wit with
induces you to got
Favourable and Unfavourable goods like, col
Favourable change Change in Tastes and
in tastes
more of a
commodity even when
and
preferences induces
Preferences
situation of increase its
price the
buyers
On the other in
demand, continues to be the buy to

hand, implying forward shift in

a same. This isa
of the unfavourable change in tastes
an
lesser demand curve
purchase
decrease in demand or commodity at its and
backward shift existing price. preferences
This is
causa
Fig. 16 ilustrates these in demand
curve.
situation d a

situations.

Backward shift in
demand curve

Forward shift in
demand curve

D D2
D3
Quantity X

Backward shift in
shift in tastes and demand curve (a-c) owing to untavo
urable

preferences for commodity.

a
Forward shift in demand curve
(a-b) owing le

preferences for a commodity.to favouro

shift intastes and
A favourable change
tastes and in
preferences
demand curve from D, to D, (or from 'd' to 'b).
causes a forward shilt
An unfavourable change in tastes and preferences ca
ises a backward shi"
curve irom Di to
ls (or trom'a to').
in demand