3a Demand Analysis Notes

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SKY EDUCATION
ECONOMICS
CHAPTER 3A : DEMAND ANALYSIS
Q. 1. Complete the following statments :

1) The relationship between demand for a good and price of its substitute is……..
a) direct
b) inverse
c) no effect
d) can be direct and inverse
2) The relationship between income and demandfor inferior goods is…….

a) direct
b) inverse
c) no effect
d) can be direct and inverse
3) Symbolically, the functional relationship between Demand and Price can be expressed as ................
a) Dx = f(Px)
b) Dx = f(Pz)
c) Dx = f(y)
d) Dx = f(T)
4) When less units are demanded at high price it shows ...............

a) increase in demand
b) expansion of demand
c) decrease in demand
d) contraction in demand
Q. 2. Give economic terms :

1) A situation where more quantity is demanded at lower price Expansion of Demand
2) Graphical representation of demand schedule Demand Curve
3) A commodity which can be put to several uses Composite Demand
4) More quantity is demanded due to changes in the factors determining demand other than price Increase in
Demand
5) A desire which is backed by willingness to purchase and ability to pay Demand
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Q. 3. Distinguish between :
1) Desire and Demand
Desire Demand
1. Desire simply refers to a mere wish of a person to 1. Demand refers to a desire backed by the ability and
have a particular commodity willingness to pay for a particular commodity.
2. A person can desire anything at any point of time. 2. There are several limitations affecting demand like
There are no limitations for a desire. ability to pay, willingness to buy, etc.
3. There is no relation between desire with price, 3. Demand has relation with price, place and time.
place and Time.
4. Desire has a wider scope as it includes demand. 4. Demand has a narrow scope as it is a part of desire.
2) Expansion of demand and Contraction of demand

Expansion of Demand Contraction of Demand
1. Expansion of Demand is a case of variation of 1. Contraction is also a case of variation of demand. It
Demand. It takes place when quantity demanded is takes place when quantity demanded is less due to
more due to a fall in price alone. Other factors remain rise in price alone. Other factors remaining constant.
constant.
2. The movement is downwards along the same 2. The movement is upward along the same demand
demand curve. curve.
3) Increase in demand and Decrease in demand

Increase in Demand Decrease in Demand
1.Increase in demand refers to a rise in demand due 1. Decrease in demand refers to fall in demand due to
to changes in other factors, price remaining constant. changes in other factors, price remaining constant.
2. Increase in demand occurs when more is purchased 2. Decrease in demand occurs when less is purchased
at the same price and same quantity is purchased at a at the same price or same quantity at lower price.
higher price.
3. Increase in demand is a result of 3. Decrease in demand is a result of
(1) Increase in income (1) Decrease in income.
(2) Increase in price of substitutes (2) Decrease in price of substitutes.
(3) Decrease in price of complementary goods (3) Increase in price of complementary goods.
(4) Increase in population/ (4) Decrease in population.
(5) When goods are in fashion. (5) When goods go out of fashion.
4. When there is an increase in demand, the demand 4. When there is decrease in demand the demand
curve shifts to the right from DD to curve shift to the left from DD to D2D2
D1D2 as shown in the figure as shown in the figure.

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5. 5.
Q. 4. State with reasons whether you agree or disagree with the following statements :
1) Demand curve slopes downward from left to right.
Ans : Yes, I Agree with the above statement.
Reasons:
1. Due to Law of Diminishing Marginal Utility, consumer tends to buy more quantity of a good when price falls.
2. With a fall in price the purchasing power of a person rises. As a result, he demands more of a good.
3. With a rise in price, the substitutes of goods become cheaper in comparison. As a result, person demands
less of that good and more of substitute goods.
4. The demand of goods having multipurpose uses rise with a fall in price and vice-versa.
2) Price is the only determinant of demand.

Ans : No, I Disagree with the above statement.
Correct Statement: There are various determinants of demand.
Reasons:
1. Change in the income of the consumers also affects the market demands for goods.
2. The market demand for normal goods shares a positive relationships with the consumers income. The
market demand for inferior goods has a negative relationship with the consumers income.
3. Consumers tastes and preferences , highly influence the demand for goods. Other things being constant, if
all consumers prefer a commodity over another, then the market demand for that commodity increases and
vice-versa.
4. The market demand for the commodity is also affected by the population size. Other things being equal, an
increase in the population sizes increases the market demand for a commodity and vice-versa.
3) When price of Giffen goods fall, the demand for it increases.

Ans : No, I Disagree with the above statement.
Correct Statement : When price of Giffen goods fall, the demand for it decreases.
Reasons:
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1. Inferior goods or low quality goods are those goods whose demand does not rise even if their price falls.
2. At times, demand decreases when the price of such commodities fall.
3. Robert Giffen observed this behaviour in England in relation to bread. He noted that, when the price of
bread declined, people did not buy more because of an increase in their real income or purchasing power.
4. They preferred to buy superior good like meat.
Q. 5. Observe the following table and answer the following questions :

1.
Quantity Demanded
Price Consumer Consumer Consumer Market
per kg A B C Demand
In ₹ In kgs
(A+B+C)
25 16 15 12 ________
30 12 11 10 ________
35 10 09 08 ________
40 08 06 04 ________
A) Complete the market demand schedule

Ans:
Quantity Demanded
Price Consumer Consumer Consumer Market
per kg A B C Demand
In ₹ In kgs
(A+B+C)
25 16 15 12 43
30 12 11 10 33
35 10 09 08 27
40 08 06 04 18

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B) Draw market demand curve based on above market demand schedule.
2. Observe the given diagram and Answer the following questions :
1. Rigthward shift in demand curve Increase in Demand

2. Leftward shift in demand curve Decrease in Demand
3. Price Remains Constant
4. Increase and Decrease in Demand comes under Changes in Demand

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3. Explain the Diagram :

A B
A. B
1. Diagram A represents Decrease in Demand. 1. Diagram B represents Increase in Demand.
2. In Diagram A movement of Demand Curve 2. In Diagram B movement of Demand Curve
is in Downward Direction. is in Upward Direction.
Q. 6. Answer in detail :
1) State and explain the law of demand with exceptions.
Ans:
Introduction :
The law of demand was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’, which was
published in 1890. The law explains the functional relationship between price and quantity demanded.
Statement of the Law :
According to Prof. Alfred Marshall, “Other things being equal, higher the price of a commodity, smaller is the
quantity demanded and lower the price of a commodity, larger is the quantity demanded.”
In other words, other factors remaining constant, if the price of a commodity rises, demand for it falls and
when price of a commodity falls demand for the commodity rises. Thus, there is an inverse relationship
between price and quantity demanded.
Symbolically, the functional relationship between demand and price is expressed as :
Dx = f (Px)
Where D = Demand for a commodity
x = Commodity
f = Function
Px = Price of a commodity

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Demand schedule :
Price of Quantity 'x' (₹) Quantity demanded of a
commodity 'x' (on kgs)
50 1
40 2
30 3
20 4
10 5
As shown in Table when price of commodity ‘x’ is ₹ 50, quantity demanded is 1 kg. When price falls from ₹ 50
to ₹ 40, quantity demanded rises from 1 kg to 2 kgs. Similarly, at price ₹ 30, quantity demanded is 3 kgs and
when price falls from ₹ 20 to ₹ 10, quantity demanded rises from 4 kgs to 5 kgs Thus, as the price of a
commodity falls, quantity demanded rises and when price of
commodity rises, quantity demanded falls. This shows an inverse relationship between price and quantity
demanded.
Demand Curve :
In fig., X axis represents the demand for the commodity and Y axis represents the price of commodity x. DD is
the demand curve which slopes downward from left to right due to an inverse relationship between price and
quantity demanded.
Following are the exceptions to the law of demand: (HI GPS)
1) Habitual goods :
Due to habit of consumption, certain goods like tea is purchased in required quantities even at a higher price.
2) Ignorance :
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Sometimes, due to ignorance people buy more of a commodity at high price. This may happen when consumer
is ignorant about the price of that commodity at other places.
3)Giffen's paradox :
Inferior goods or low quality goods are those goods whose demand does not rise even if their price falls. At
times, demand decreases when the price of such commodities fall. Sir Robert Giffen observed this behaviour in
England in relation to bread. He noted that, when the price of bread declined, people did not buy more
because of an increase in their real income or purchasing power. They preferred to buy superior good like meat.
This is known as Giffen's paradox.
4) Price illusion :
Consumers have an illusion that high priced goods are of a better quality. Therefore, the demand for such
goods tend to increase with a rise in their prices. For example, branded products
which are expensive are demanded even at a high price.
5) Prestige goods :
Expensive goods like diamond, gold etc. are status symbol. So rich people buy more of it, even when their
prices are high.
6) Speculation :
The law of demand does not hold true when people expect prices to rise still further. In this case, although the
prices have risen today, consumers will demand more in anticipation of further rise in price. For example,
prices of oil, sugar etc. tend to rise before Diwali. So people go on purchasing more at a high price as they
anticipate that prices may rise during Diwali.
2) Explain in detail the determinants of demand.

Ans : The demand for goods is determined by the following factors : (PINS EAT LOT)
1) Price :
Price determines the demand for a commodity to a large extent. Consumers prefer to purchase a product in
large quantities when price of a product is less and they purchase a product in small quantities when price of a
product is high.
2) Prices of Substitute Goods :
If a substitute good is available at a lower price then people will demand cheaper substitute good than costly
good. For example, if the price of sugar rises then demand for jaggery will rise.
3)Price of Complementary Goods :
Change in the price of one commodity would also affect the demand for other commodity. For example, car
and fuel. If the price of fuel rises, then demand for cars will fall.
4) Income :
Income of a consumer decides purchasing power which in turn influences the demand for the product. Rise in
income will lead to a rise in demand for the commodity and a fall in income will lead to a fall in demand for the
commodity.
5) Nature of product :

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If a commodity is a necessity and its use is unavoidable, then its demand will continue to be the same
irrespective of the corresponding price. For example, medicine to control blood pressure.
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) Expectations about future prices :
If the consumer expects the price to fall in future, he will buy less in the present at the prevailing price.
Similarly, if he expects the price to rise in future, he will buy more in the present at the prevailing price.
8) Advertisement :
Advertisement, sales promotion scheme and effective sales�manship tend to change the preferencesof the
consumers and lead to demand for many products. For example, cosmetics, tooth brush etc.
9) Tastes, Habits and Fashions :
Taste and habits of a consumer influence the demand for a commodity. If a consumer likes to eat chocolates or
consume tea, he will demand more of them. Similarly, when a new fashion hits the market, the consumer
demands that particular type of commodity. If a commodity goes out of fashion then suddenly the demand for
that product tends
to fall.
10) Level of Taxation :
High rates of taxes on goods or services would increase the price of the goods or services. This, in turn would
result in a decrease in demand for goods or services and vice-versa.
11) Other factors :
1) Climatic conditions
2) Changes in technology
3) Government policy
4) Customs and traditions etc.

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JAYESH RAJGOR

Inspiring Mentor, Engaging Orator & A Life Long Learner…

Q. 1. Complete the following statments :

2) The relationship between income and demandfor inferior goods is…….

4) When less units are demanded at high price it shows ...............

Q. 2. Give economic terms :

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2) Expansion of demand and Contraction of demand

3) Increase in demand and Decrease in demand

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2) Price is the only determinant of demand.

3) When price of Giffen goods fall, the demand for it increases.

Q. 5. Observe the following table and answer the following questions :

A) Complete the market demand schedule

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B) Draw market demand curve based on above market demand schedule.

2. Observe the given diagram and Answer the following questions :

1. Rigthward shift in demand curve Increase in Demand

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3. Explain the Diagram :

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2) Explain in detail the determinants of demand.

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