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CHAPTER- 2 (LAW OF DEMAND)

Q1. Define desire?

Desire means a wishful thinking of a consumer when a consumer wants to buy a commodity but he does not have a money to buy it.

Q2. Define want?

When a consumer wants to have a commodity and also have a money to buy it but he is not ready to spend that money to purchase a commodity. It remains a want only.

Q3. Define demand?

Demand refers to that quantity of a commodity when the consumer is able and willing to buy at a given price at a given time.

Q4. What are the essential elements of demand?

a)    Desire for a commodity

b)   Money to fulfill desire

c)    Ready to part with money

Q5. Explain the determinants of demand or factors affecting demand?

There are two types of factors/determinants which affects demand:

I)            Factors affecting individual demand:

a)    Price of the commodity = price of the commodity is inversely affects the demand for the commodity i.e. demand for a good rises with a fall in the price and demand for a good fall with the rise in price of that good.

b)   Income of the consumer = by income is meant disposable income, for studying the affect of income on demand a distinction is between normal goods and inferior goods.

i)     Normal goods – when with the rise in income of a consumer, the demand for the goods rises. It is said to be a normal goods. Example: cotton cloths, basmati rice etc.

ii)    Inferior goods – a good whose demand by the consumer falls with the with the rise in income of that consumer. Example: synthetic cloths, permal rice etc.

c)    Price of related goods = Related goods are of two types:

i)     Substitute goods – substitute goods are those goods which can be used in place of each other to satisfy one particular want. Example: pepsi and coke. With the rise in price of substitute goods (pepsi), the demand for the given commodity (coke) will increase.

ii)    Complementary goods – complementary goods are those goods which are demanded jointly to satisfy one particular want. Example: car and petrol. With the rise in price of complementary good (car), the demand for the given commodity (petrol) will fall.

d)   Taste and preference = every consumer wants to buy a commodity according to his taste and preferences. If taste and preference of the consumer are in the favor of the commodity, demand will increase and if taste and preference of the consumer are not in the favor of the commodity, demand will fall.

e)    Future expectation = if the consumer is expecting rise in price of the commodity in near future, he will buy more at the existing price in the present time and vice-versa.

II)         Factors affecting market demand:

a)    Population = if size and population increases, market demand of the commodity will also increase. And if size and population decreases, market demand will also decrease.

b)   Distribution of income = if distribution of income is equal, the demand of the commodity will come from all the sections of  the society causing market demand to the rise. When the distribution of income is unequal, market demand will be less.

c)    Season or climate = the seasonal or weather condition affect the market demand for the commodity. Example: during winters demand for woolens increases.

Q6. State and explain law of demand with schedule and diagram?

Keeping other factors to be constant, when with the rise in price, demand fall and with the fall in price demand rise. That is, quantity demanded of a commodity is inversely related to the price of a commodity.

Price	Demand
10	5
20	4
30	3
40	2
50	1

In the above diagram, p2 is the normal price and Q2 is the normal quantity. When prices rises from P2 to P1, demand fall from Q2 to Q1. When prices fall from P2 to P3, demand rises from Q2 to Q3. Hence demand curve made.

Q7. Define demand schedule? Explain its types?

Demand schedule refers to the table showing quantity demanded at different price levels of a particular commodity in the market.

Demand schedule is of two types:

a)    Individual demand schedule = individual demand schedule refers to the table showing different quantities of a commodity. A consumer is willing to buy at different prices assuming no change in other factors.

Price	Demand
10	5
20	4
30	3
40	2

b)   Market demand schedule = market demand schedule refers to the table shoeing different quantities of a commodity which all the consumers of a particular commodity are willing to buy at different prices assuming no change in other factors.

Prices	Quantity A	Quantity B	Quantity (A+B)
10	5	6	11
20	4	4	8
30	3	3	6
40	2	2	4
50	1	1	2

Q8. Define demand curve? Explain its types?

Demand curve refers to the graphic presentation showing quantity of demanded at different price levels of a particular commodity in the market.

Demand curve are of two types:

a)    Individual demand curve = individual demand curve refers to the graphic presentation showing different quantities of a commodity. A consumer is willing to buy at different prices assuming no change in other factors.

Price	Demand
10	15
15	10
20	6
25	4
30	2

b)   Market demand curve = market demand curve refers to the graphic presentation showing different quantities of a commodity which all the consumers of a particular commodity are willing to buy at different prices assuming no change in other factors.

Prices	Quantity A	Quantity B	Quantity (A+B)
10	5	6	11
20	4	4	8
30	3	3	6
40	2	2	4
50	1	1	2

Q9. What are the causes of law of demand? , or

Why does demand curve slopes downward? , or

Why is there a negative relation between price and quantity demanded? , or

Why more is demanded at a less price and less is demanded at a high price?

a)    Size of consumer group = with the fall in price of a commodity, many new consumers enter in to the market because they can afford to buy at a less price which leads to rise in demand. With the rise in price, many consumers leave the market who cannot afford to buy at a high price so demand falls.

b)   Alternative uses = those commodities which can be put to many uses, with the rise in price of such commodity its demand falls because a consumer starts using it only for an important purposes. Example: electricity. Whereas with the fall in price, consumer use the commodity for different purposes, so its demand rises.

c)    Substitution effect = it refers to the use of cheaper commodity in place of the dearer one. With the rise in price of a given commodity, its demand falls because consumer shifts their demand to its close substitute and vice – versa.

d)   Real income effect = real income effect refers to the effect of change in income due to change in price on the quantity demanded of a commodity. With the fall in price, real income of the consumer increases leads to rise in demand and vice –versa.

e)    Law of diminishing marginal utility = according to this law, when the consumer consumes more and more unit of a same commodity, utility derived from every additional unit goes on diminishing. A consumer equates price of the commodity with its marginal utility. Since more units of the commodity gives him less and less marginal utility, so, he will demand more only when the price is less.

Q10. What are the exceptions to the law of demand? , or,

When does demand curve have a positive slope or upward slope? , or,

When will more is demanded at a high price and less is demanded at a low price?

a)    Articles of distinction = articles of distinction are the social status goods which are demanded more only when their price rises. Example: diamonds, costly cars, rare painting etc.

b)   Ignorance = sometimes, out of ignorance, a consumer buys  more of a commodity when its price is high and may even buy less at a low price by thinking that the quality of a commodity is not that good.

c)    Giffen goods = giffen goods are the special type of inferior goods in case of which price effect is positive and income effect is negative. Example: dalda ghee, bajra, poor quality of rice.

Q11. Differentiate between change in quantity demanded and change in demand?

Change in quantity demanded, or, movement on or along demand curve

Change in demand, or, movement of demand curve, or, shifts in demand curve

Keeping other factors to be constant, when demand changes due to change in price. It has two situation: a)    Expansion of demand: keeping other factors to be constant, when with the fall in price, demand rises There is a downward movement along with demand curve. b)   Contraction of demand: keeping other  factors to be constant, when with the rise in price, demand falls. There is upward movement along with demand curve.

Keeping price to be constant, when demand changes due to change in other factors. It has two situation: a)    Increase in demand = keeping price to be constant, when demand increases due to change in other  factors in favor of commodity.        There is a rightward shift in demand curve. b)   Decrease in demand = keeping price to be constant, when demand decrease due to change in other Factor in disfavor of commodity. There is a leftward shift in demand curve.

Q12. What are the causes of increase in demand?

a)    When there is increase in income of the consumer for normal goods.

b)   When there is fall in the income if the consumer for inferior goods.

c)    When there is increase in the price of substitute goods.

d)   When there is fall in the price of complementary goods.

e)    When consumer expects rise in price of the commodity in near future.

f)    When taste, habit and preferences of the consumer are in favor of commodity.

g)    When there is change in season or climate in favor of commodity.

Q13. What are the causes of decrease in demand?

h)   When there is fall in income of the consumer for normal goods.

i)     When there is rise in the income if the consumer for inferior goods.

j)    When there is fall in the price of substitute goods.

k)    When there is rise in the price of complementary goods.

l)     When consumer expects fall in price of the commodity in near future.

m)  When taste, habit and preferences of the consumer are in disfavor of commodity.

n)    When there is change in season or climate in disfavor of commodity.

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