ISC Exam Notes : Content

Demand and Law of Demand

Demand for any commodity refers to deferent quantities which a person would be prepared to perches
at deferent prices in a given period of time.

FEATURES :

1. Demand is an effective desire it means demand = desire + means to fulfill the desire + willingness to
part with means.

2. Demand is always related to quantity price & time.

3. Demand is a flow because it is measured over a period of time.

4. Demand for a commodity depends on its utility.

Demand can be of 2 types :-

1. Individual Demand

2. Market Demand

FACTORS AFFECTING DEMAND (Individual demand) :

1. Price of the commodity : There is an increase relationship between price & quantity demanded. It
means when price increases quantity demanded decreases & with the decrease in the price quantity
demanded increases.

2. Price of related goods : There are 2 types of related goods :

(i) Substitute goods: - are those goods which are used in place of each other to satisfy same type of
wants. Demand curve in case of substitute goods is upward sloping which shows of the price of a
commodity increase the demand for its substitute will increase & vice – versa.

(ii) Complementary goods :- are whose goods which cannot be used separately they compliment each
other. Demand cure in this case will be downward sloping which shows that with the increase in the
price of a commodity demand for its complementary goods will be decreasing & vice – versa.
3. Income of the consumer :- can be explained with the help of 3 types of goods :

(i) Normal goods :- are those goods demand for which increase with increases with income &
decreases with decreases in income. It means Normal goods have positive income effect & demand
curve will be upward sloping
 (ii) Inferior goods :- are those goods which are poor in quality & they are demanded more at lower
income & less at higher income i.e. when income increases & demand decreases, vice –versa. In this
case income effect is Negative & demand curve is downward sloping.

(iii) Inexpensive necessities :- These are those commodities which are essential for our survival but we
spend very less income of ours. in this case initially demand increases to some extend & then it becomes
constant thus the shape of demand curve will be a verticals line.

4. Taste & preferences of consumer: - With the favorable change in taste & preferences demand for the
product increases on the other hand when there unfavorable change in taste & preferences of the
consumer the demand decreases.

5. Future expectations: - If price rise is expected is future then the demand for the product at present
will be more. On the other hand, if fall in price is expected in future then the demand for the product at
present will decrease.

FACTORS INFLUENCING MARKET DEMAND

1. Population :- Increase in population increases the market demand of the product & decrease in the
population decreases market demand. Composition of population also affects market demand. Eg :- If
the % of agriculturists is more in the population then the demand for goods used by them will be more.

2. Season & weather :- Demand of a commodity changes with the change in climate or weather
conditions. Eg : Demand for A.C. & Coolers will be more in summers in compassion to winters.

3. Govt. Policy :- is related to the imposition of taxes & granting subsidies More taxes higher prices &
lower will be demand. Lower taxes lower prices & higher will be the demand. More subsidies lower will
be the price & higher demand

4. State of business :- Good state of business means higher income & higher will be the demand & vice –
versa

5. Distribution of income :- In case of equal distribution demand for all the products will be the same. On
the other hand if there is inequality in the distribution for income in that case if more rich are these
demand for luxuries will be more & with more poor people demand for necessities will be more.

DEMAND FUNCTION :
Demand function is the functional relationship between demand & its determinants.

Dx = f (Px, Y, Pr, E, T, ………………………)

LAW OF DEMAND :
It states that other things remaining the same people will demand lesser quantity of goods at higher
prices & higher quantity of goods at lower prices. Main assumption is cetris paribus i. e. other things
remaining constant.

Law of demand can be explained with the help of demand schedule &graph ; demand curve.

Demand schedule is a table which shows various qty of commodities which can be purchased at various
prices during a given period of time It is of two types :

1. Individual demand schedule :- It is a table which shows various quantity of a commodity demanded by
an Individual consumer at various prices during a particular period of time.

2. Market schedule : is a table which shows various quantity of a commodity demanded by all the
consumers of that commodity during particular period of time at various prices.
Demand curve is the graphic presentation of demand schedule. It is also of 2 types

1. Individual demand curve

2. Market demand curve .

Inverse relation / Why does Demand curve slopes downward?

1. Law of diminishing marginal utility :- Utility of a commodity is a want satisfying power of a

commodity. The law of diminishing marginal utility states that when there is a continuous consumption
of a commodity the additional utility derived from the additional unit of commodity will go on
decreasing thus consumers will prefer to buy larger quantity of that commodity at lower prices only.

2. Income effect :- With the change in the price of the commodity real income or the purchasing power
of the consumer also changes due to that there will be change in the quantity demanded of that
commodity. Higher will be the price, lower will be the real income & the quantity demanded will
decrease and vice – versa.

3. Substitution effect :- is the effect that the change in relative prices of substitute goods has on quantity
demanded. When there is increase in the price of a commodity keeping the price of its substitutes
constant the demand for the commodity decreases & if there is fall in the price keeping the substitutes
price constant the demand of the commodity increases. The sum total of income & substitution effect is
known price effect.

4. New consumers :- Fall in the price leads to an increase in the quantity demanded of commodity due
to increase in number of consumers of that particular commodity in the market. On the other hand if
there is increase in the price of a commodity some consumers will stop buying that commodity & then
quantity demanded decreases thus the demand curve is downward sloping.

5. Different uses of the commodity: - When the price of a commodity which has several uses falls it can
be used for all possible uses thus the demand for this commodity increases. On the other hand if price
increase it will only be used for most important Use thus quantity demanded will be decreasing & the
demand curve will be downward sloping

Exceptions to law of Demand / Why does Demand curve slopes upward?

1. Inferior goods : are those poor quality goods demand for which increase with increase in price &
decreases with decrease in price. Thus demand curve will be upward sloping which is an exception to
law of demand.

2. Giffen goods :- are those inferior quality goods on which consumer spends large part of his income.
Demand for Giffen goods falls with the fall in price & increases. with increase in price thus the demand
curve will be upward sloping.

3. Articles of snob appeals :- In case of some commodities people like to buy them to show their status
& prestige such types of commodities are demanded only at very high prices. Thus higher is the price
higher will be the demand & lower is the price, lower will be the demand. Thus. Demand curve will be
upward sloping.

4. Quality – price relationship :- is also responsible for an upward sloping Demand curve It means few
consumers purchase a commodity only at high price because they feel quality of the product will then
only be good when its price is high.

5. Future expectations regarding Change in price :- If price rise is expected in future then quantity
demanded will be more even at higher prices. On the other hand if lower prices are expected in future
then the quantity demanded will be less even at lower prices.

6. Emergencies :- During emergencies people demand larger quantity of commodities even at higher
prices. It means during emergencies they never think about the prices they just make the demand for
commodities according to theirs need.

What are the different types of DEMAND ?

1. Price demand :- Other things being equal the relationship between the price of a commodity & its
demand is technically termed as price demand.

2. Income demand :- Other things being equal income demand indicates the functional relationship
between income of the consumer & the quantity of the commodity.

3. Cross demand :- Other things being equal cross demand indicates the functional relationship between
the price of a commodity & the demand for some other related commodity.

4. Composite demand:- The demand for the commodities which are demanded for the satisfaction of
various wants eg: electricity, milk etc.
5. Joint demand :- This demand is known as complementary demand also. It is the demand for
commodities which are demanded jointly. Eg: car & petrol, pen & ink etc.

6. Derived demand : Is a demand for factors of production. If a thing is needed for the production of a
commodity which we need for the satisfaction of wants is called derived demand also called indirect
demand.

Change in quantity demanded & change in demand (Movement of demand curve)

1. Change in quantity demanded or movement along the demand curve : Movement along the demand
curve is caused by a change in the price of the goods other things remaining constant. It is also known as
change in quantity demanded. There are 2 types of movement of it.

(i) Expansion or extension of demand :- It refers to rise in quantity demanded Due to fall in the price of
the good. It is the downward movement on same demand curve.

(ii) Contraction of demand :- It refers to fall in quantity demanded due to increase. in price of the
commodity. It is an upward movement on the same demand curve.

2. Change in demand or shift of demand curve : Shift of demand curve is caused by changes in factors
other than price of the commodity. These factors are consumers income price of related goods,
consumers taste & preferences this is of 2 types :-

(i) Increase in demand :- It refers to the change in demand or increase in demand at a given price. It
means in this case price remains same but due to some favorable changes among other factors demand
increases. Demand curve in this case shifts to the right hand side.

(ii) Decrease in demand :- If refers to decrease in demand due to change in factors other than price of
the commodity It means, keeping the price constant due to some unfavorable changes in the
determinants of demand, demand decreases, & Demand curve Shifts to the left hand side.

Basis of differences between change in demand & change in quantity demanded.

1. Meaning

2. Types of movement

3. Directions of movement

4. Causes.

5. Graph.

Long answer Questions :-

Q..1 What is demand? Explain its determinants.

Q.2. Explain Law of demand with the help of schedule & curve. (statement, assumption)

Q.3. Give reasons for downward sloping Demand curve /inverse relation between price & quantity /
operation of law of demand

Q.4. Explain the exceptions to law of demand.

Q.5. Difference between change in quantity demanded & change in demand.