THE ARTS ACADEMY

ECONOMICS
3. A. DEMAND ANALYSIS
BY ANUJA INAMDAR

Q. Explain the types of demand. ( 4 marks )

Definition:
According to Benham, “ the demand for anything at a given
price is the amount of it, which will bought per unit of time at that price.”

The types of demand are as follows :

1. Direct demand : explanation & example
2. Indirect / Derived demand : explanation & example
3. Complementary / Joint demand : explanation & example
4. Composite demand: explanation & example
5. Competitive demand : explanation & example

Q. Explain the determinants of demand or Explain the factors affecting

demand or Explain the determinants of Market demand. ( 4 marks)

Definition:
According to Benham, “ the demand for anything at a given
price is the amount of it, which will bought per unit of time at that price.”

The factors are as follows :

1. Price : explanation
2. Income: explanation
3. Prices of substitute goods: explanation
4. Price of complementary good : explanation
5. Nature of product: explanation
6. Size of population: explanation
7. Expectations about future prices: explanation
8. Advertisement : explanation
9. Taste, Habits and Fashions: explanation
10. Level of taxation: explanation
11. Other factors : 1) Climatic conditions
2) Changes in technology
3) Government policy
4) Customs and traditions etc.
Q. Explain the Law of demand with its assumptions ( 8 marks )

1) Introduction :
The law of demand is one of the important basic laws of
consumption. The law of demand was introduced by Prof. Alfred
Marshall in his book “ Principles of Economics” which was published in
1890.

2) Statement of the law :

According to Prof. Alfred Marshall, “ Other things being equal,
higher the price of a commodity, smaller is the quantity demanded and
lower the price of a commodity, larger is the quantity demanded.”
The law shows an inverse relation between price and quantity
demanded. Symbolically, the functional relationship between demand and
price is :
Dx = f ( Px )

3) Schedule: draw the schedule along with its explanation.

4) Diagram : draw the diagram along with its explanation.

5) Assumptions :
1) Constant level of income : explanation
2) No change in size of population : explanation
3) Prices of substitute goods remain constant: explanation
4) Prices of complementary goods remain constant: explanation
5) No expectations about future changes in prices: explanation
6) No change in tastes, habits, preferences, fashions etc. : explanation
7) No change in taxation policy : explanation

Exceptions : ( Mention only pointers )

1. Giffen’s paradox
2. Prestige goods
3. Speculations
4. Price illusion
5. Ignorance
6. Habitual goods

Q. Explain the law of demand along with its exceptions. ( 8 marks )

1) Introduction :
The law of demand is one of the important basic laws of
consumption. The law of demand was introduced by Prof. Alfred
Marshall in his book “ Principles of Economics” which was published in
1890.
 2) Statement of the law :
According to Prof. Alfred Marshall, “ Other things being equal,
higher the price of a commodity, smaller is the quantity demanded and
lower the price of a commodity, larger is the quantity demanded.”
The law shows an inverse relation between price and quantity
demanded. Symbolically, the functional relationship between demand and
price is :
Dx = f ( Px )

3) Schedule: draw the schedule along with its explanation.

4) Diagram: draw the diagram along with its explanation.

5) Exceptions : draw the exception diagram

1. Giffen’s paradox : explanation
2. Prestige goods : explanation
3. Speculations : explanation
4. Price illusion: explanation
5. Ignorance: explanation
6. Habitual goods : explanation

6) Assumptions : ( mention only in pointers)

1) Constant level of income
2) No change in size of population
3) Prices of substitute goods remain constant
4) Prices of complementary goods remain constant
5) No expectations about future changes in prices
6) No change in tastes, habits, preferences, fashions etc.
7) No change in taxation policy

Q. Distinguish between.

1. Desire Demand
1. Desire is a mere wish for 1. Demand refers to desire backed by
something. ability and willingness to pay for a
particular commodity.
2. Desire has no limits. 2. Demand is limited by ability to pay
and willingness to pay.
3. Desire is not related or 3. Demand is inversely related to
dependent on price. price.
4. Desire is wider in scope as it 4. Demand is narrow in scope as it is
includes demand. a part of desire.
5. Example, desire of beggar to have 5. Example, demand for luxurious
sea facing bungalow in Mumbai. car by Ambani’s son.
6. All desires are not demand. 6. All demands are desires.
 7. Desire has no reference with 7. Demand is always related price,
price, time & place. time, market, quantity etc.
2. Individual demand Market demand
1. Individual demand refers to total 1. Market demand refers to total
quantities of a commodity demanded quantities of a commodity demanded
by an individual or household at a by all the individuals in the market
given price during a period of time. at a given period of time.
2. It is a micro or narrow concept 2. It is a macro or broader concept
and not very useful in framing and is very useful in framing
business, production and price business, production and price
policies. policies. Even the law of demand is
based on market demand.
3. Individual demand is influenced 3. Market demand is influenced by
by tastes and preferences of customers, fashions etc.
individuals.
4. Non – price factors play a 4. Price plays a more dominant role.
‘ dominant role’
5. It can be presented with the help 5. It can be presented with the help
of individual demand schedule and of market demand schedule and
individual demand curve. market demand curve.

3. Direct demand Derived demand / Indirect demand

1. When a commodity is demanded 1. When a commodity is demanded
directly to satisfy a human want, it to produce other goods which are
is called as direct demand. demanded in market, it is known as
derived demand.
2. Demand for consumers goods are 2. Demand for factors of production
directly for consumption. are further production.
3. All consumer goods are having 3. All capital goods and factors of
direct demand. production are having derived
demand.
4. Direct demand is made by 4. Derived demand is made by
consumers to satisfy human wants. producers or entrepreneurs to run
business.
5. Direct demand depends on price, 5. Derived demand depends on
income, taste, and habits etc. of demand for final goods and services.
consumers.
6. All consumers goods like fan, 6. Example, when demand for Khadi
biscuits, Umbrellas , TV etc. clothes will increase, then demand
for raw cotton increases.

4. Joint demand/ Complementary dd Composite demand

1. When two or more goods are 1. When a commodity is demanded
demanded jointly to satisfy a want, it for several uses, it is called
is called as Joint demand. composite demand.
 2. A rise in demand for one product 2. A change in demand for on use
will lead to rise in demand for the will affect its supply in other uses.
other products and vice versa.
3. The demand for joint products is 3. The demand for composite
inelastic. commodities is elastic.
4. Examples, to make a tea, Sugar, 4. Examples, Coal, electricity, steel
milk, tea powder are jointly are having composite demand.
demanded. Sim card and smart
phone, car and petrol etc.
5. In case of Joint demand, an 5. In case of composite demand, an
increase in price of one good will increase in price of good will reduce
reduce the demand for its joint its demand for different uses.
commodity.

5. Joint demand/ Complementary dd Competitive demand

1. When two or more goods are 1. It is a demand for those goods
demanded jointly to satisfy one which are substitute for each other,
want, it is called Joint demand. such a demand is called competitive
demand.
2. A rise in demand for one product 2. Rise in demand for one product
will lead to a rise in the demand for will lead to fall in the demand for
other and vice versa. other and vice versa.
3. Example, to make a tea, tea 3. Example, tea and coffee are
powder, sugar, milk are jointly substitute to one another. In the
demanded. So, it will simultaneously same case, if the price of tea rises,
increase the demand for things then it will increase the demand for
which are required to make a tea. coffee ( demand for tea follows
according to law of demand)
4. In case Joint demand, the 4. In case of competitive demand,
commodities which are jointly commodities are substitutes of each
demanded not necessarily be other.
substitutes.
5. When price of one commodity 5. When the price of one commodity
rises the demand for jointly rises the demand for the substitute
demanded commodities falls. commodity rises.
Example, Example, Petrol and diesel
↑ price of petrol > ↓ demand for cars ↑ Price of petrol > ↑ demand for
diesel
6. Joint demand curve has a 6. Competitive demand curve has a
negative slope. positive slope.

6. Normal demand curve Exceptional demand curve

1. Normal demand curve represents 1. Exceptional demand curve
an inverse relationship between represents a direct relationship
price and demand for a commodity.
 between price and demand for a
commodity.
2. The normal demand curve slopes 2. The exceptional demand curve
downwards from left to right. slopes upwards from left to right.
3. The normal demand curve has a 3. The exceptional demand curve
negative slope. has a positive slope.
4. Normal goods like books, clothes, 4. Giffen goods, habitual goods,
cars have a normal demand curve. prestige goods, branded goods have
an exceptional demand curve.
5. Diagram 5. Diagram

7. Normal goods Inferior / giffen goods

1. Goods to which law of demand is 1. Goods to which law of demand is
applicable are called as normal not applicable are called as Giffen
goods. goods.
2. Normal goods are those goods 2. Giffen’s goods refers to inferior
which are better quality and goods which are purchased by lower
purchased by higher income group. income group / poor people such as
low quality potatoes, rice, cheap
quality oil etc.
3. In case of normal goods, demand 3. In case of Inferior goods, demand
curve slopes downwards from left to curve slopes upwards from left to
right. right.
4. Diagram – ( law of demand 4. Diagram ( Exception’s diagram )
diagram)

8. Variation in demand Changes in demand

1. Variation in demand refers to 2. Changes in demand refers to
changes in quantity demanded due changes in quantity demanded due
to changes in price, other factors to changes in other factors than
remaining constant. price like income, population, prices
of substitutes and complementary
commodities, taxation policy etc.
2. In variation in demand, other 2. In changes in demand, price of
factors affecting price such as commodity remains constant.
income, taxation policy, prices of
substitute and complementary goods
etc. remain constant.
3. There are two types of variation in 3. There are two types of Changes in
demand: demand:
a) Extension / Expansion of demand a) Increase in demand
b) Contraction of demand b) decrease in demand
4. When price falls and of which 4. When more quantity is demanded
quantity demanded rises, then its at the same price due to favourable
Expansion / Extension of demand.
 On the other hand, when price rises changes in other factors than price,
due to which there is a fall in then it’s called Increase in demand.
quantity demanded then it’s called On the other hand, when less
as contraction of demand. quantity is demanded at the same
price due to unfavourable changes
in other factors then it’s called as
Decrease in demand.
5. Variation in demand can be 5. The changes in demand is usually
shown on the same demand curve. shown by shift in demand curve.
The upward movement on the curve When the original demand curve
is called contraction and the shifts right side we called increase in
downward movement is called demand When original demand
Expansion of demand. curve shifts left side then its
decrease in demand.
6. Diagram 6. Diagram

9. Expansion/ Extension of demand Contraction of demand

1. Extension of demand refers to a 1. Contraction of demand means fall
rise in quantity demanded due to fall in quantity demanded due to rise in
in price. price of a commodity.
2. The extension can be shown by 2. Contraction can be shown by an
downward movement on the demand upward movement on the demand
curve. curve.
3. Diagram 3. Diagram

10. Increase in demand Decrease in demand

1. Increase in demand takes place 2. Decrease in demand takes place
when more quantity is demanded when less quantity is demanded due
due to favourable changes in other to unfavourable changes other
factors than price such as rise in factors than price such as fall in
income of the consumer, fall in tax income of people due to rising
rates, increase in population etc. unemployment, rise in tax rates,
limited population etc.
 2. In case of Increase in demand, 2. In case of decrease in demand,
demand curve shifts right side of the demand curve shifts left side of the
original demand curve. original demand curve.
3. Increase in demand occurs when 3. Decrease in demand occurs when
more quantity is demanded at the less quantity is demanded at the
same price. same price.
4. Diagram 4. Diagram
11. Extension/ Expansion of demand Increase in demand
1. Extension of demand refers to a 1. Increase in demand takes place
rise in demand due to fall in price. when more quantity is demanded at
due to favourable changes in other
factors like income, population,
taxation policy, price of substitute
goods etc.
2. Price plays important role in 2. Price remains constant in
extension, low price more quantity is increase in demand.
demanded.
3. It is a case of variation in 3. It is a case of changes in demand.
demand.
4. When there is extension in 4. When there is an increase in
demand the demand curve moves demand, demand curve shifts to the
downward on the same demand right side of the original demand
curve. curve.
5. Diagram 5. Diagram

12. Contraction of demand Decrease in demand

1. Contraction of demand means fall 1. Decrease in demand means when
in demand due to rise in price alone, less quantity is demanded due to
other factors remaining constant. unfavourable changes in other
factors like income, population,
taxation policy etc. while price
remains constant.
2. Contraction of demand is a case 2. Decrease in demand is a case of
of variation of demand. changes in demand.
3. Price plays important role in 3. Price remains constant in
contraction, high price less quantity decrease in demand.
is demanded.
4. When there is contraction of 4. When there is a decrease in
demand curve the demand curve demand, demand curve shifts to the
moves upward on the same demand left side of the original demand
curve. curve.
5. Diagram 5. Diagram

13. Demand Aggregate demand

1. Demand is a micro concept. 1. Demand is a macro concept.
 2. It refers to that quantity of a 2. It refers to the amount of sales
commodity which person is ready to proceeds which an entrepreneur
buy at a particular price and during actually expects from the sale of
a specific period of time. output produced at a given level of
employment during the year.

Q. State with reasons whether you agree or disagree with the following
statements.

1. Demand curve slopes downward from left to right.

Ans: Yes, I do agree with this statement.
Reasons: According to Prof. Alfred Marshall, “ Other things are being equal,
higher the price of a commodity, smaller is the quantity demanded and lower
the price of a commodity, larger is the quantity demanded.”
The law states inverse relationship between price and quantity demanded
because of which the demand curve slopes downward from left to right.
There are few reasons for it, they are as follows:
1. Law of diminishing marginal utility: explanation
2. Income effect: explanation
3. Substitution effect: explanation
4. Multi-purpose uses: explanation
5. New consumers: explanation

2. Price is the only determinant of demand.

Ans: No, I disagree with this statement.
Reasons: Price is the most important factor affecting the demand. It has an
inverse relation with demand. There are some other determinants of demand
other than price, which are as follows : (explain any 5 determinants other
than price in detail.)
1. Income : explanation
2. Prices of substitute goods: explanation
3. Price of complementary goods: explanation
4. Nature of product: explanation
5. Size of population: explanation
6. Expectations about future prices: explanation
7. Advertisement: explanation
8. Tastes, Habits, fashions: explanation
9. Level of Taxation: explanation
10. Other factors: explanation

3. When price of Giffen goods fall, the demand for it increases.

Ans: No, I disagree with this statement.
Reasons: Giffen goods are low quality or inferior goods like low quality rice,
 ghee etc. There is a direct relationship between prices of Inferior goods and its
quantity demanded. Demand for Inferior goods decreases even if there is a
fall in prices of inferior goods. When the price of inferior goods falls buyers’
real income gets increased. As its effect, buyers demand more of super quality
goods. Thus, a fall in the prices of Giffen goods leads to fall in their demand.
Sir Robert Giffen observed the situation related to demand for bread and
meat in England. As the price of bread decreased , surplus money was
transferred to purchase meat, as a result demand for meat increased. In this
case, the demand curve slopes upward from left to right. This can be shown
in following diagram:

4. There are no exceptions to the law of demand.

Ans: No, I disagree with this statement.
The law of demand explains an inverse relationship between price and
quantity demanded. But in some cases, we see the direct relationship
between price and quantity demanded. Under exceptions to the law of
demand, the demand curve slopes upward from left to right which shows a
direct relationship between price and quantity demanded.
Diagram of Exceptional demand curve
Following are the exceptions to the law of demand:
1. Giffen goods: explanation
2. Prestige goods: explanation
3. speculation: explanation
4. Price illusion: explanation
5. Ignorance: explanation
6. Habitual goods: explanation

5. All desires are not demand.

Ans: Yes, I do agree with this statement.
Reasons: 1) Desire means an individual’s wish to acquire a commodity.
In Economics, demand means desire which is backed by willingness and
ability to pay. Willingness depends on consumer’s liking, preference for
commodity and ability to pay or purchasing power depends on the income
of the consumer.
Symbolically,
Demand = Desire + Ability to pay + Willingness to pay
 2) Desire is wider in scope as it includes demand but demand is narrow
in scope as it is a part of desire.
3) Desire has no limit and it is not dependent of price.
E.g. Beggar’s desire to have a luxurious car.
But, demand is limited by ability to pay i.e. purchasing power and willingness
to pay as it is related to price.
In the above example, it is only wish of a beggar to have a luxurious car but
in reality he cannot demand it as it is expensive and he doesn’t have that
much of money.
Thus, it shows that demand is an effective desire but all desires are not
demand.

Q. Identify and explain the concepts from the given illustrations.

1. Meera, who is fond of gardening, demanded earthen pot, manure and

seedlings together.

Ans: Joint demand

meaning and explanation of Joint demand.

2. Whenever there is decrease in price of gold, demand for gold rises.

Ans: Expansion/ Extension of demand

Explanation of Expansion of demand.

3. Sanjay has bought 1 kg of Tea powder instead of expensive Coffee powder.

Ans: Competitive demand.

Meaning and explanation of competitive demand.

4. Due to the Government’s Digitalization policy, the demand for computers

rose despite the prices of computers remained constant.

Ans: Increase in demand

Explanation of Increase in demand

5. Rishika has bought most desirable Apple iPhone 11 pro.

Ans: Demand
Meaning and explanation of demand.

6. Since Madhura’s salary has increased she has purchased 10 kgs of wheat
instead of 6 kgs wheat which she purchases normally.

Ans: Increase in demand

 Explanation of Increase in demand.

7. Due to rise in the prices of Apples, Akshay demanded only 2 dozens Apples
instead of 5 dozens.

Ans: Contraction in demand

Explanation of contraction in demand

8. Due to increase in population of Mumbai, demand for electricity is rising

day by day.
Ans: Composite demand
Explanation of composite demand

9. Due to Floods in Kerala, the demand for various commodities declined even
though prices remained constant.

Ans: Decrease in demand.

Explanation of Decrease in demand

10. As Ice cream of Rs. 100 was available at Rs. 60, Ronit demanded four Ice
creams instead of two.

Ans: Expansion of demand

Explanation of Expansion of demand