GSEB STD.
11 • ECONOMICS
Chapter 3: Demand
Quick Revision Notes — 2/3 Mark Answers
3.1 Meaning
Demand = quantity of a commodity a buyer desires, is able and willing to buy at a given price at a given point of time.
Depends on 5 factors: desire, willingness, ability, price, time.
3.2 Factors Affecting Demand
Two categories: (1) Price of commodity (2) Other determinants.
3.2.1 Price of Commodity/Service
Most important determinant. Price falls → demand expands; price rises → demand contracts.
3.2.2 Other Determinants
[Link] Tastes and Preferences
Demand changes with likes/dislikes, which change with age, fashion, habits.
[Link] Income of Consumer
Direct relation: income rises → demand rises. Exception: inferior goods (demand falls as income rises).
[Link] Prices of Related Goods
Substitute Goods: goods used in place of one another (e.g., Pepsi–Coke). If substitute's price falls, demand for original good
falls.
Complementary Goods: goods consumed jointly (e.g., mobile & SIM). If price of one rises, demand for both falls.
[Link] Expectations about Future Prices
If price expected to rise, current demand increases (and vice versa).
[Link] Size and Demographic Profile of Population
Larger population → more market demand; age-group composition affects demand for specific goods.
3.3 Demand Function
Mathematical relationship between demand and its determinants:
Dx = f(Px, Py, Pe, T, Y, U)
3.4 Law of Demand
Given by Alfred Marshall. States inverse relationship: price falls → demand expands; price rises → demand contracts (other
factors constant).
3.4.1 Assumptions
Tastes/preferences, income, prices of related goods, future price expectations, population size — all remain unchanged.
3.4.2 Explanation of Law of Demand
[Link] Income Effect
When price of good falls, real income (purchasing power) of consumer rises, so consumer buys more. Normal goods: positive
income effect; Inferior goods: negative income effect.
[Link] Substitution Effect
When price of a good falls, it becomes cheaper than its substitutes, so consumer reduces substitute consumption and buys more
of this good.
3.5 Exceptions to Law of Demand
Cases where demand does NOT move inversely with price.
3.5.1 Prestigious Goods
Expensive goods (jewellery, cars) used as status symbols by rich; demand rises even when price rises.
3.5.2 Extremely Low-Priced Goods
Goods like pins, staplers; price change doesn't affect demand as expenditure share is negligible.
3.5.3 Giffen Goods
Named after Robert Giffen; inferior goods (e.g., Jowar/Bajra) whose demand falls when price falls, because rising real income
makes consumer shift to superior goods (wheat).
3.5.4 Special Preferences of People
Strong brand habit (toothpaste, shoes) — demand doesn't fall even if price rises.
3.6 Expansion and Contraction of Demand
Occurs due to price change only, other factors constant; movement along the same demand curve.
Expansion = downward movement (price falls, demand rises)
Contraction = upward movement (price rises, demand falls)
3.7 Increase and Decrease in Demand
Occurs due to change in factors other than price, price constant; shown by shift of demand curve.
Increase = rightward shift
Decrease = leftward shift
3.8 Individual Demand and Market Demand
Individual Demand: demand by one consumer at given price at a point of time.
Market Demand: sum total of individual demands of all consumers at given price at a point of time.
3.9 Elasticity of Demand
Extent to which demand responds to change in its determinants (price, income, tastes).
3.10 Price Elasticity of Demand
3.10.1 Meaning
Proportion by which demand changes due to change in price.
εp = % change in demand ÷ % change in price
3.11 Degrees of Price Elasticity of Demand
3.11.1 Perfectly Elastic Demand (εp = ∞)
Infinite change in demand with negligible/zero change in price. Demand curve = horizontal straight line. Theoretical (perfect
competition).
3.11.2 Perfectly Inelastic Demand (εp = 0)
No change in demand however much price changes. Demand curve = vertical straight line.
3.11.3 Unitary Elastic Demand (εp = 1)
% change in demand = % change in price.
3.11.4 Relatively Elastic Demand (εp > 1)
% change in demand > % change in price. Seen in luxury goods (TVs, cars).
3.11.5 Relatively Inelastic Demand (εp < 1)
% change in demand < % change in price. Seen in necessities (food grains, milk, oil).
3.12 Income Elasticity of Demand
3.12.1 Meaning
Extent of change in demand due to change in consumer's income.
εy = % change in demand ÷ % change in income
3.13 Types of Income Elasticity of Demand
3.13.1 Positive Income Elastic Demand
Demand and income move in same direction. Three degrees:
(A) Unit Income Elastic (εy = 1)
(B) Greater than Unity (εy > 1)
(C) Less than Unity (εy < 1)
3.13.2 Negative Income Elastic Demand
Demand moves opposite to income (inferior/Giffen goods, e.g., Bajra, vegetable ghee).
3.13.3 Zero Income Elastic Demand
Demand unchanged despite income change (low-priced goods: salt, postcard, matchsticks).
3.14 Cross-Price Elasticity of Demand
Change in demand of good X due to change in price of related good Y (substitute/complementary).
Cross Elasticity = % change in demand for X ÷ % change in price of Y
3.15 Methods of Measuring Elasticity of Demand
Three methods: (1) Proportionate/Percentage change method (2) Total outlay (expenditure) method (3) Geometric method.
Prepared for quick revision • GSEB Std. 11 Economics • Chapter 3 - Demand