1.

Demand - an economic term that refers to the amount of products or services that consumers wish to
purchase at any given price level. The mere desire of a consumer for a product is not demand. Demand
includes the purchasing power of the consumer to acquire a given product at a given period. In other words,
it’s the amount of products or services that consumers are willing and able to purchase. Economic demand
means the total quantity of products and services consumers are willing and able to purchase in a market.
2. Individual Demand- is the amount of a product an individual (or single buyer) is willing to purchase with
his or her limited income at the prevailing set of relative prices over a specified period of time. Have you
ever been shopping and chose to purchase an item your friends did not purchase? Perhaps you did not buy
something because you could not afford it. The price is the same, so why did your behavior differ from
your friend's. One answer is that you have different individual demand curves. All of us have an individual
demand for every good or service. The slope and quantity demanded at each price depend upon the
individual's personal circumstances.
3. Market- a medium that allows buyers and sellers of a specific good or service to interact in order to
facilitate an exchange. This type of market may either be a physical marketplace where people come
together to exchange goods and services in person, as in a bazaar or shopping center, or a virtual market
wherein buyers and sellers do not interact, as in an online market. Market can also refer to the general
market where securities are traded. This form of the term may also refer to specific securities markets and
may take place in person or online. The term "market" can also refer to people with the desire and ability to
buy a specific product or service.
4. Price Elasticity of Demand- shows the relationship between price and quantity demanded and provides a
precise calculation of the effect of a change in price on quantity demanded. The formula for price elasticity
is:
Price Elasticity = (% Change in Quantity) / (% Change in Price)
Let's look at an example. Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using
the formula above, we can calculate that the price elasticity of gasoline is:
Price Elasticity = (-25%) / (50%) = -0.50
5. Income Elasticity of Demand- Income elasticity of demand is an economic measurement that shows how
consumer demand changes as consumer income levels change. In other words, it shows the relationship
between what consumers are willing and able to buy and their income. his is an important concept because
it shows what consumers and demographics purchase specific products. For example, luxury goods have a
positive correlation between income and demand meaning the demand for these products increases as
consumer income increases. An example of this might be high-end car. Inferior goods, on the other hand,
have an inverse correlation between income and demand. As income increases, demand for these products
decreases. A good example of this is public transportation. As consumers’ income increases, they purchase
a car and stop riding the bus.
A normal good has completely constant demand no matter the income level of consumers. For instance, all
people purchase bread and milk regardless of their income.The income elasticity of demand formula is
calculated by dividing the change in demand by the change in income.
IED = (percent change quantity in demanded) / (percent change in income)
6. Cross Elasticity of Demand- is the responsiveness of demand for one product to a change in the price of
another product. Many products are related, and XED indicates just how they are related.
7. Advertising Elasticity of Demand- a measure of an advertising campaign's effectiveness in generating
new sales. It is calculated by dividing the percentage change in the quantity demanded by the percentage
change in advertising expenditures. A positive advertising elasticity indicates that an increase in advertising
leads to an increase in demand for the advertised good or service.
8. Kinds of Goods
a. Inferior Goods- a product that’s demand is inversely related to consumer income. In other words,
when consumer income increases, the demand for inferior goods decreases. A common
misconception is that inferior goods are simply junkie products that people don’t want. This isn’t
true at all. IG can be expensive or inexpensive and can be quality or junkie products. Inferior
 simply means that consumers with more money typically purchase less of these products. In some
cases, IG can have better quality substitutes that consumers prefer when their income increases,
but not always. For instance, when people have less income, they eat at fast food restaurants.
When their income increases, they prefer to eat out at better, fancier restaurants.
Therefore, fast food could be considered an IG. These goods are products or services that
consumers prefer less of as they make more money. During a recession, though, the demand for
inferior goods typically increases because consumer income usually falls during a recession.
b. Normal Goods- a product or service whose quantity demanded increases as consumer income
increases. The elasticity of demand for a normal good is always positive but less than 1 (0 < E <
1). Normal goods have a positive correlation with price, and they are elastic because the quantity
demanded changes to the same direction with the change in real income. A pay raise or extra
money in the pocket cause the quantity demanded to increase. A layoff causes the quantity
demanded to decrease.
It all comes down to the purchasing power of consumers and the ability to spend so much
money as to satisfy the need for a product or a service. Examples of normal goods include food,
clothing, and household appliances.
c. Complementary Goods- those goods that are demanded together. There is no use of one good
without the other. When other things remain the same increasing the price of one goods leads to
reduce the demand for another good. On the other hand, when other things remain the same
decreasing price of one goods leads to increases the demand for other goods.
For example, fountain pen and ink are complementary goods; because without ink,
fountain pen is useless and without fountain pen ink is useless. If only the price of fountain pen
(Ink) increases, then the demand for ink (fountain pen) is decreases along with decreasing the
demand for fountain pen (ink). On the other hand, If only the price of fountain pen (Ink)
decreases, then the demand for ink (fountain pen) is increases along with increasing the demand
for fountain pen (ink).
d. Substitute Goods- substitute goods are two alternative goods that could be used for the same
purpose.
e. Giffen Goods- a good which people demand more of when its price rises. It is an inferior good
without a close substitute.

9. Elastic- a term used in economics to describe a change in the behaviour of buyers and sellers in response to
a price change for a good or service. How the demand for the good or service reacts in response to a change
in price determines the demand elasticity or inelasticity for that good. The elasticity of a good or service
can vary according to the number of close substitutes, its relative cost and the amount of time that has
elapsed since the price change occurred.
10. Inelastic- an economic term referring to the static quantity of a good or service when its price changes.
Inelastic means that when the price goes up, consumers’ buying habits stay about the same, and when the
price goes down, consumers’ buying habits also remain unchanged.
11. Perfectly Elastic- a demand where any price increase would cause the quantity demanded to fall to zero,
and reducing the price of a good or service will not increase sales. A perfectly elastic demand curve is
horizontal at the market price. It is important to distinguish between the market demand and a producer's
demand. The market demand is the sum of individual demands. The market demand curve slopes
downward. An individual producer's demand curve usually has a different slope. A buyer may need a
specific good or service, but may not care which business provides it. A business's demand depends on the
number of competitors it has, and if it can differentiate its product. If many producers offer identical
products, then a buyer would make a decision based solely on price.
12. Imperfectly Elastic
13. Unit Elastic- an economic theory that assumes a change in price will cause an equal proportional change in
quantity demanded. Put simply unitary elastic describes a demand or supply that is perfectly responsive to
price changes by the same percentage. You can think of it as a unit per unit basis. The demand that changes
 proportionally to a change in price is elastic. A unit elastic demand follows a change in price when
consumers have close substitute products to meet their needs.
Similarly, a unit elastic supply follows a change in price when supplies have close substitute
products to produce. Because a change in the price of goods causes a same percentage change in the
quantity demanded, or supplied, the elasticity of demand is equal to -1 (Ed = -1), and the unit elasticity of
supply is equal to 1 (Es = 1).
14. Explain the factors affecting demand
Price of the Given Commodity: It is the most important factor affecting demand for the given
commodity. Generally, there exists an inverse relationship between price and quantity demanded. It means,
as price increases, quantity demanded falls due to decrease in the satisfaction level of consumers.
Price of Related Goods: Demand for the given commodity is also affected by change in prices of
the related goods. Related goods are of two types:

(i) Substitute Goods:

Substitute goods are those goods which can be used in place of one another for satisfaction of a
particular want, like tea and coffee. An increase in the price of substitute leads to an increase in the demand
for given commodity and vice-versa. For example, if price of a substitute good (say, coffee) increases, then
demand for given commodity (say, tea) will rise as tea will become relatively cheaper in comparison to
coffee. So, demand for a given commodity is directly affected by change in price of substitute goods.
(ii) Complementary Goods:
Complementary goods are those goods which are used together to satisfy a particular want, like
tea and sugar. An increase in the price of complementary good leads to a decrease in the demand for given
commodity and vice-versa. For example, if price of a complementary good (say, sugar) increases, then
demand for given commodity (say, tea) will fall as it will be relatively costlier to use both the goods
together. So, demand for a given commodity is inversely affected by change in price of complementary
goods.
Examples of Substitute and Complementary Goods:

Substitute Goods

1. Tea and Coffee 2. Coke and Pepsi 3. Pen and Pencil

4. CD and DVD 5. Ink pen and Ball Pen 6. Rice and Wheat

Complementary Goods: ADVERTISEMENTS:

1. Tea and Sugar 2. Pen and Ink 3. Car and Petrol

4. Bread and Butter 5. Pen and Refill 6. Brick and Cement

Income of the Consumer:

Demand for a commodity is also affected by income of the consumer. However, the effect of
change in income on demand depends on the nature of the commodity under consideration.
i. If the given commodity is a normal good, then an increase in income leads to rise in its demand,
while a decrease in income reduces the demand.
ii. If the given commodity is an inferior good, then an increase in income reduces the demand,
while a decrease in income leads to rise in demand.
Example: Suppose, income of a consumer increases. As a result, the consumer reduces
consumption of toned milk and increases consumption of full cream milk. In this case, ‘Toned Milk’ is an
inferior good for the consumer and ‘Full Cream Milk’ is a normal good. For detailed discussion on normal
goods and inferior goods, refer Section 3.12.

Tastes and Preferences:

Tastes and preferences of the consumer directly influence the demand for a commodity. They
include changes in fashion, customs, habits, etc. If a commodity is in fashion or is preferred by the
 consumers, then demand for such a commodity rises. On the other hand, demand for a commodity falls, if
the consumers have no taste for that commodity.

Expectation of Change in the Price in Future:

If the price of a certain commodity is expected to increase in near future, then people will buy
more of that commodity than what they normally buy. There exists a direct relationship between
expectation of change in the prices in future and change in demand in the current period. For example, if
the price of petrol is expected to rise in future, its present demand will increase.
15. Factors affecting elasticity of demand
Nature of commodity:
Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be a
necessity, a comfort or a luxury.
i. When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is
generally inelastic as it is required for human survival and its demand does not fluctuate much with
change in price.

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ii. When a commodity is a comfort like fan, refrigerator, etc., its demand is generally elastic as
consumer can postpone its consumption.
iii. When a commodity is a luxury like AC, DVD player, etc., its demand is generally more elastic as
compared to demand for comforts.
iv. The term ‘luxury’ is a relative term as any item (like AC), may be a luxury for a poor person but
a necessity for a rich person.
Availability of substitutes:
Demand for a commodity with large number of substitutes will be more elastic. The reason is that
even a small rise in its prices will induce the buyers to go for its substitutes. For example, a rise in the price
of Pepsi encourages buyers to buy Coke and vice-versa.

Thus, availability of close substitutes makes the demand sensitive to change in the prices. On the other
hand, commodities with few or no substitutes like wheat and salt have less price elasticity of demand.

Income Level:

Elasticity of demand for any commodity is generally less for higher income level groups in
comparison to people with low incomes. It happens because rich people are not influenced much by
changes in the price of goods. But, poor people are highly affected by increase or decrease in the price of
goods. As a result, demand for lower income group is highly elastic.

Level of price:

Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV,
etc. have highly elastic demand as their demand is very sensitive to changes in their prices. However,
demand for inexpensive goods like needle, match box, etc. is inelastic as change in prices of such goods do
not change their demand by a considerable amount.
Postponement of Consumption:
Commodities like biscuits, soft drinks, etc. whose demand is not urgent, have highly elastic
demand as their consumption can be postponed in case of an increase in their prices. However,
commodities with urgent demand like life saving drugs, have inelastic demand because of their immediate
requirement.

Number of Uses:
 If the commodity under consideration has several uses, then its demand will be elastic. When price
of such a commodity increases, then it is generally put to only more urgent uses and, as a result, its demand
falls. When the prices fall, then it is used for satisfying even less urgent needs and demand rises.

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For example, electricity is a multiple-use commodity. Fall in its price will result in substantial increase in
its demand, particularly in those uses (like AC, Heat convector, etc.), where it was not employed formerly
due to its high price. On the other hand, a commodity with no or few alternative uses has less elastic
demand.

Share in Total Expenditure:

Proportion of consumer’s income that is spent on a particular commodity also influences the
elasticity of demand for it. Greater the proportion of income spent on the commodity, more is the elasticity
of demand for it and vice-versa.

Demand for goods like salt, needle, soap, match box, etc. tends to be inelastic as consumers spend a small
proportion of their income on such goods. When prices of such goods change, consumers continue to
purchase almost the same quantity of these goods. However, if the proportion of income spent on a
commodity is large, then demand for such a commodity will be elastic.

Time Period:
Price elasticity of demand is always related to a period of time. It can be a day, a week, a month, a
year or a period of several years. Elasticity of demand varies directly with the time period. Demand is
generally inelastic in the short period.

It happens because consumers find it difficult to change their habits, in the short period, in order to respond
to a change in the price of the given commodity. However, demand is more elastic in long rim as it is
comparatively easier to shift to other substitutes, if the price of the given commodity rises.

Habits:
Commodities, which have become habitual necessities for the consumers, have less elastic
demand. It happens because such a commodity becomes a necessity for the consumer and he continues to
purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples of habit forming
commodities.

Finally it can be concluded that elasticity of demand for a commodity is affected by number of factors.
However, it is difficult to say, which particular factor or combination of factors determines the elasticity. It
all depends upon circumstances of each case.