Ch:2 Demand Flashcards
What is meant by demand?
Demand means the quantity of a commodity which a consumer is ready to purchase at different prices. So demand has two conditions :
1) desire to purchase
2) purchasing power
What is meant by individual demand?
Individual demand means the quantity of commodity which a consumer is ready to purchase at different prices. Decrease in price causes an increase in demand.
What is meant by market demand?
The total quantity of a commodity demanded by all the consumers in the market at various prices is called market demand. A fall in price causes an increase in market demand.
What is the tendency or slope of demand curve?
The demand curve has always tendency to move from the left to the right. It
means that the demand curve has always a negative slope.
Why has demand curve negative slope?
There are three reasons of negative slope of demand curve:-
1-Increase in the number of consumers due to the fall in price.
2-Income effect: Due to the fall in price of a commodity , real income/purchasing power of the consumers increases and they purchase more of the commodity with the same amount of money.
3-Substitution effect: When the price of a particular commodity falls, it becomes
relatively cheaper than its substitutes. So, people increase its demand.
Define law of demand.
If other things remain constant, when the price of a commodity decreases, its demand increases and when its price increases, its
demand decreases. The curve is left to right downwards
Here the term “other things” means all the factors which cause a change in
demand besides price. But we suppose while describing law of demand that there will be no change in these factors.
Assumptions of law of demand: 9
1- units should be of same nature
2- taste of consumers should not change
3-the income of consumers should not change
4- prices of substitutes should remain constant
5-no new substitutes of a commodity should be discovered
6- population should not change
7- there should be no change in value of currency
8- no chance of further change in price
9- the use of the commodity should not be a cause of distinction
What is meant by exceptions of law of demand.
The goods or circumstances on which law of demand is not applied. Under these circumstances the result is opposite to the law of demand and the demand curve rises up instead of falling down.
Or
*Increase in price also causes an increase in demand and vice versa.
*in case of limitations, demand curve is positive.
* Robert giffin was the first economist who discovered this problem.
*According to prof benham, law of demand does not prove true in case of these limitations : 7
On which commodities the law of demand does not apply?
OR
Write the exceptions of the law of demand.
Following are the exceptions of law of demand.(price+ demand +)( price- demand-)
1- distinctive goods (goods of symbol of status)
2-rare commodities (bc of covid, war)
3- basic necessities of life (petrol, food)
4-inferior goods( millet compared to wheat, pulses and beef)
5- ignorance ( grocery shopping)
6- demostration effect ( following trends)
7- festivals
What is meant by extension and contraction of demand?
Extraction and contraction ofdemand is due to infulence of change in price.it is also called “movement along demand curve”
extension of demand:
According to law of demand, when price of a commodity decreases, its demand
increases. It is called extension of demand.
contraction of demand:
On the other hand when price of a commodity increases, its demand decreases. It is called contraction of demand.
Difference between rise and fall of demand
Intro: rise and fall in demand due to influence of changes in other factors. It is also called shift of the demand curve
If the price of a commodity remains constant, but demand for it increases due to some other cause, it is called rise of demand.
If the price of a commodity remains constant, but demand for it decreases due to some other cause, it is called fall of demand.
Write five causes of change in demand. ( 8)
1- change in price ( price+ demand+ vice versa)
2- change in income( income + demand +)
3-change in fashion ( more trendy+ demand+) ( out of trend- demand- )
4-change in weather (hot–demand of ac +)(cold–demand of ac - )
5-change in population ( population 🔝- drmand🔝)
6-change in the distribution of money ( 💰from rich to poor —income of poor + —demand+ )
7-change in supply of money (circulation of 💴+ —demand + )
8-change in price of substitutes ( pepsi price+ then coke demand+) vice versa
9-change in business conditions( business boom + then demand +) ( business in depression- , demand - )
10-tendency of saving( savings+ , demand-, expenditures -)
Definition of elasticity of demand
Elasticity of demand is the rate of change in
quantity demanded of a commodity to a change in its price (by alfred marshall)
Elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to a change in its price (by prof. Ferguson)
Elasticity of demand is a technical term that economists use to show the degree of responsiveness of quantity demanded of a commodity to change in its price (stonier and hague)
What are the forms/degrees of elasticity of demand
There are 4 (5) forms of elasticity of demand
1- more elastic demand
2-less elastic demand (inelastic demand)
3-infinite elasticity or (perfectly elastic demand)
4-zero elastic or perfectly inelastic demand
5-unit elastic demand
Differentiate between more elastic and less elastic (inelastic) demand.
More elastic demand: %🔼p<%🔼Qd
When a small change in price causes a big change in demand, it is called more elastic demand. The demand for comforts and luxury
goods is more elastic.
Less elastic demand or inelastic demand: %🔼p>%🔼Qd
If a big change in price causes a very
small change in demand, it is called less elastic demand. The demand for
necessities of life is less elastic.
What is meant by infinite elasticity of demand or perfectly elastic demand?
Infinite elasticity of demand: %🔼p=0
At slight rise in price demand becomes zero and a very slight decrease in price causes an
infinite increase in demand, it is called infinite elasticity of demand or perfectly
elastic demand.
The curve of this type of elasticity of demand is always parallel to ox (horizontal) axis.
What is meant by zero elasticity of demand or perfectly inelastic demand?
Perfectly inelastic demand:
If the demand for a commodity is not influenced by the change in price or the demand does not change irrespective of the fall or rise in price, it is called perfectly inelastic demand or elasticity of demand is zero.
The curve of zero elasticity of demand is parallel to oy (vertical) axis.
Measurements/aspects of elasticity of demand( scale of unity given my marshall)
1-equal to unity Ed=1 (unit elasticity )
2-less than unity Ed<1 (less elastic)
3-more than unity Ed>1 (more elastic)
Imaginary
4- Ed=∞ infinite elasticity
5- Ed= 0 zero elasticity
What are the methods of measurements of Ed
1- percentage method
2-mathematical method
3-total outlay (expenditures) method
Types of elasticity
1- price elasticity
2-income elasticity
3-cross elasticity
Define elasticity of demand equal to unity.
Elasticity of demand equal to unity: If the ratio of change in demand is equal to the ratio of change in price, elasticity of demand is said to be equal to unity.
Define elasticity of demand more than unity
If the ratio of change in demand is greater than the ratio of change in price, elasticity of demand is said to be more than unity.
Define elasticity of demand less than unity.
Elasticity of demand less than unity: If the ratio of change in demand is less than the ration of change in price, elasticity of demand is said to be less than unity. Ed<1
Define income elasticity of demand.
Ratio of percentage change in
demand for a commodity in response to a percentage change in income, is called
income elasticity of demand.
Income elasticity is negative for inferior goods
(income+ , demand of inferior goods- )
Income elasticity is positive for normal goods (income + , demands of goods +) more buying
Define cross elasticity of demand.
If as a result of change in price of one
commodity, demand for some other commodity changes while price of the other
commodity remains constant.
For example, demand for commodity X changes due to the change in price of commodity Y. Then it is called cross elasticity of demand.
Cross elasticity of substitutes is positive (eg.pepsi, coke)
(Price of good A + , demand of good B +)
Cross elasticity of compliementary goods is negative (eg. Petrol, car)
(price of good A + , demand of good B -)
Cross elasticity in case of two goods:
Cross elasticity appears in case of two goods:
1- substitutes
2- joint demanded goods( complimentary goods)
Cross elasticity of substitutes is positive (eg.pepsi, coke)
(Price of good A + , demand of good B +)
Cross elasticity of compliementary goods is negative (eg. Petrol, car)
(price of good A + , demand of good B -)
Differenciate subtitute goods and compliments
Substitute goods: The goods which can be used in place of each other, are called
substitutes or substitute goods. For instance, pepsi and cola, tea and coffee
etc are substitutes of each other.
Complements or Joint demanded good: The goods that are demanded jointly to
satisfy a want are called joint demanded goods or complements e.g. Bat and ball,
car and petrol, pen and ink etc.
Differentiate joint demand and composite demand
Joint Demand: In order to satisfy some wants, more than one commodities are needed. For example bat and ball, racket and shuttle cock, car and petrol etc. These are jointly demanded goods. Demand for such commodities is
called joint demand. Jointly demanded goods are also called complements.
composite demand: Some commodities are used for different purposes. Demand for such commodities for all of their purposes is called
composite demand
For example electricity is used for light, to run different types of machines and for so many other purposes. Demand for electricity for all these purposes will be composite demand.
What is meant by Giffin goods?
The goods whose demand rises with the rise in price and their demand falls with the fall in price, are called Giffin goods.
In other words Giffin goods are such goods, on which law of demand does not apply.
Point elasticity
If there is very small change in demand as a result of a very small change in price, this type of change in demand is called point elasticity of demand. %🔼p is small —> %🔼Qd is small
In this case, both the points on the demand
curve are so closed to each other that they look like one point.
Point elasticity —> Negative slope (-sign)
Write formula of point elasticity of demand.
Point elasticity = Δq/ q / Δp/p
Define arc elasticity of demand.
Arc elasticity of demand:
If there is a big change in demand as a result of a big change in price, then this type of change in demand is called arc elasticity of
demand.
In this case two distinct points appear on the demand curve.
Slope of arc elasticity is negative (-sign)
Write formula of arc elasticity of demand.
Arc elasticity = Δ q/ q1+q2 / Δ p/ p1+ p2
Formula of income elasticity
Following is the formula to measure income elasticity of demand:
Income elasticity: Δ q/q / Δ y/y
Formula of cross elasticity
Cross elasticity= Δ qx/ qx / Δ py / py
Total expenditure method
In this method, we see the influence of change in the price of a commodity on the
total expenditure of a consumer made on that commodity.
Equal to unity: T.E=1 despite p+ or p-
If the consumer’s expenditure remains the same after the rise or fall in price then the elasticity of demand is called equal
to unity
Greater than unity: (p+, T.E-) (p- , T.E + ) meaning p∝1/T.E
If the consumer’s expenditure decreases with the rise in price and his expenditure increases with the fall in price then the elasticity of demand is called greater
than unity.
Less than unity: (p+,T.E +) (p-, T.E-) meaning p∝T.E
If consumer’s expenditure increases with the rise in price and it decreases with the fall in price, then elasticity of demand is called less than unity
Determinants or factors of Ed
Factors that influence the elasticity of demand of a commodity are called determinants of Ed
1-nature of commodity (basic necessities- less elastic, luxuries-more elastic)
2-availability of substitutes ( available substitutes- more elastic, no substitute—zero elastic)
3-level of prices: (dearer goods-less elastic , too cheap goods- less elastic)
4- deferred demand ( deferred(microwave) goods- more elastic, urgent goods(oil, wheat)-less elasticity)
5-habits/customs of consumers: cigarettes/beer -less elastics
6-relative importance in domestic T.E:
Major part of T.E—oil,meat —more elastic
Minor part of T.E– salt, matches- less elastic
7-commodities having various uses-(composite demand) diff uses- more elastic
8-durable and perishable: durable-more elastic
Perishable-less elastic
Write four points of importance of elasticity of demand.
Ans: Following are four points of importance of elasticity of demand:
1-It helps the finance minister to levy taxes.
2-It provides guidance to the entrepreneurs for the determination of prices of
their goods.
3-It provides guidance to a monopolist for the determination of price of his
good.
4- It helps in the determination of prices of jointly produced goods.
5-guidance in foreign trade
