CHAPTER 3 THEORY OF DEMAND

Contents:-
(I) Basic introduction and definitions
(II) Concept of individual demand
(III) Concept of market demand
(IV) Demand function-individual and market demand function
(V) Law of demand
(VI) Causes of law demand
(VII) Exceptions to law of demand
(VIII) Change in demand and change in quantity demanded
(ix) Effect of change in other factors on the demand of a commodity
(x) Miscellaneous

I) Basic Introduction and definition

A) MEANING OF DEMAND
Demand refers to the quantity of a commodity that a consumer is willing and able to buy at
different/various possible prices during a given period of time.

B) COMPONENTS OF DEMAND/EFFECTIVE DEMAND

1) Desire/Willingness to purchase the commodity
2) Sufficient Purchasing power
3) Willingness to spend

C) MEANING OF QUANTITY DEMANDED

Quantity demanded refers to a particular/specific quantity of a commodity which buyers are
willing and able to buy at a given price during a given period of time.

D) MEANING OF INDIVIDUAL DEMAND

Individual demand refers to the quantity of a commodity that a consumer is willing and able
to buy at different/various possible prices during a given period of time

E) MEANING OF MARKET DEMAND

Market demand refers to the quantity of a commodity that all consumers are willing and able
to buy at different/various possible prices during a given period of time.
(II) Concept of individual demand with the help of
individual demand schedule and individual demand curve
Q) What do you mean by individual demand? Explain the concept of individual demand
with the help of a schedule and diagram?
Or
Explain the concept of individual demand numerically [or mathematically] and graphically
[or geometrically]?
Ans:-
Meaning of Individual demand:-
Individual demand refers to the quantity of a commodity that a consumer is willing and able
to buy at different/various possible prices during a given period of time.

Explanation:- The concept of individual demand can be explained with the help of following
individual demand schedule and individual demand curve.

Individual demand schedule:- It is a schedule/table which shows different/various quantities

of a commodity that a consumer is willing and able to buy at different/various possible
prices during a given period of time. It is given below:-

Price of ‘x’ Good Quantity demanded of ‘x’ good

(in ₹) (in kg)
1 4
2 3
3 2
4 1

Individual demand Curve:- It is the graphical representation of individual demand schedule.

It is given below:-
The above schedule and diagram shows various/different quantities (4 units, 3units, 2units &
1 unit) of ‘x’ good that a consumer is willing and able to buy at various/different possible
prices (₹1, ₹2, ₹3, ₹4) during a given period of time.
After joining various combinations A, B, C & D in above diagram, we get DxDx individual
demand curve. It is negatively sloped linear demand curve.

(III) Concept of Market demand with the help of

market demand schedule and market demand curve

Q) What do you mean by market demand? Explain the concept of market demand with the
help of a schedule and diagram?
Or
Explain the concept of market demand numerically [mathematically] and graphically
[geometrically]?
Or
Graphically prove that market demand curve is the horizontal summation of individual
demand curves?
Ans:- Meaning of Market demand:-
Market demand refers to the quantity of a commodity that all consumers are willing and
able to buy at different/various possible prices during a given period of time.

Explanation:-
The concept of market demand can be explained with the help of following market demand
schedule and market demand curve.

Market demand schedule:-

It is a schedule/table which shows various/different quantities of a commodity that all
consumer are willing and able to buy at different/various possible prices during a given
period of time. It is given below:-

Price of ‘x’ good (in ₹) A’s demand for ‘x’ B’s demand for ‘x’ Market demand of ‘x’
good [in units] good [in units] good (A+B)
[in units]
1 4 5 4+5= 9
2 3 4 3+4= 7
3 2 3 2+3=5
4 1 2 1+2=3
Market demand Curve:- It is the graphical representation of Market demand schedule. It is
given below:-

The above schedule and diagram shows various quantities (9 units, 7units, 5units & 3units) of
‘x’ good that the consumers A&B are willing and able to buy at various possible prices
(₹1,₹2,₹3,& ₹4) during a given period of time.
After joining various combinations A, B, C & D in figure 3 we get DxDx negatively sloped linear
demand curve. It is the horizontal summation (combination) of A’s demand curve & B’s
demand curve which are given in figure 1 & 2.
(IV) Demand function- Individual demand function and market demand function

Meaning and types of demand function

Q) What is demand function? What are its types?

Ans:-
Demand function shows a functional relationship between demand of a good and its various
determinants.
Types of demand function

i) Individual demand function:-

It shows functional relationship between individual demand of a good and its various
determinants. It is expressed as under:-
Dx = f (Px, Pr, Y, T, E, Gp)
Where, Dx = Individual demand of x good
Px = Price of ‘x’ good
Pr = Price of related goods
Y = Income of the consumer
T = Taste & preferences
E = Future expectations of consumer
Gp = Government policies

ii) Market demand function:-

It shows functional relationship between market demand of a good and its various
determinants. It is expressed as under:-
Dx = f (Px, Pr, Y, T, E, Gp, N, Yd)
Where, Dx = Individual demand of x good
Px = Price of ‘x’ good
Pr = Price of related goods
Y = Income of the consumers
T = Taste & preferences
E = Future expectations of the consumers
Gp = Government policies
N = Population size
Yd = Distribution of income
 Determinants/Components of individual demand function
Or
Factors affecting individual demand of a commodity

Q) Briefly explain various determinants/components of individual demand function?

OR
Briefly explain the various factors which determine the individual demand of a commodity?
Ans:-Following are the main factors which determine the individual demand of a commodity:-
1) Own price of the commodity:-
➢ Other factors remaining constant/same/unchanged, there is an inverse relationship
between quantity demanded of a commodity & its own price.
➢ It means that with rise in own price of the commodity, its quantity demanded falls and
with fall in own price of the commodity, its quantity demanded rises.
➢ This negative relationship between price and quantity demanded of a commodity is
known as the law of demand in economics.
2) Price of related goods:-
Individual demand of a commodity depends upon the change in price of its related goods.
Related goods are of two types:-
i) Substitute goods
➢ Substitute goods are those goods which can be used at the place of each other.
For example:-Tea and coffee, Coke and Pepsi.
➢ There is a positive/direct relationship between price of substitute goods and demand
of a given commodity. It means that with rise in price of substitute goods, demand of a
given commodity rises and with fall in price of substitute goods, demand of a given
commodity falls. For example:- If Coke and Pepsi are two substitute goods then with
rise in price of Pepsi demand of Coke rises and with fall in price of Pepsi demand of
Coke falls.

ii) Complimentary goods:-

➢ Complimentary goods are those goods which jointly satisfy a particular want.
For example:-Car and Petrol, Pen and ink, Sand and Cement, Pen and refill, Brick and cement etc.
➢ There is an inverse/negative/indirect relationship between price of complimentary
goods and demand of a given commodity.
It means that with rise in price of complimentary goods demand of a given commodity
rises and with fall in price of complimentary goods demand of a given commodity falls.
For example:- If Car and Petrol are two complimentary goods then with rise in price of
petrol demand of Car falls and with fall in price of petrol demand of Car rises.
3) Income of the consumer(Y):-
Change in income of the consumer effects the demand for different goods differently which
can be explained as under:-
i) Normal goods
➢ Normal goods are those goods whose income effect is positive.
If income effect of a consumer in case of ‘x’ good is positive then it is a normal good for
that consumer.
➢ It means that with rise in income of the consumer the demand for normal goods rises
and with fall in income of the consumer the demand for normal goods falls.

For example:-
If demand of ‘full cream milk’ increases with increase in income of the
consumer and decreases with decrease in income of the consumer
then ‘full cream milk’ is a normal good for that consumer

ii) Inferior goods:-

➢ Inferior goods are those goods whose income effect is negative.
If income effect of a consumer in case of ‘x’ good is negative then it is an inferior good
for that consumer.
➢ It means that with rise in income of the consumer the demand for inferior goods falls
and with fall in income of the consumer the demand for inferior goods rises.

For example:-
If demand of ‘Toned milk’ decreases with increase in income
of the consumer and increases with decrease in income of
the consumer then ‘Toned milk’ is an inferior good for that
consumer.

➢ Example of inferior good:- Toned Milk, Coarse grain like jowar and bajra,

Note:-
➢ No commodity is inferior.
➢ If any commodity is purchased by a consumer just because of his low income level, then this commodity is
termed as an inferior commodity for that person.
For example, Bajra is a normal commodity for a rich person. But, if low income of a poor person forces
him to consume bajra every day, then bajra will be an inferior commodity for him.
It is not the consumer but the income level of the consumer which determines whether a good is normal or
inferior.
 iii) Necessity of life or Necessaries of life:-
➢ Necessaries of life are those goods whose income effect is zero.
➢ It means that the rise or fall in income of the consumer causes no effect on the demand
for necessaries of life.
➢ Examples of necessaries of life:-Wheat, salt, sugar etc.

4) Taste and preferences of the consumer:-

➢ Change in taste and preferences of a consumer also determine the individual demand
of a commodity.
➢ Taste and preference of a consumer are influenced by fashion, new trends in the
market, advertisement etc.
➢ Favourable change in taste and preferences of a consumer towards a product causes
rise in demand of that product.
On the other hand, unfavourable change in taste and preferences of a consumer
towards a product causes fall in demand of that product.

5) Future expectations of consumer:-

➢ Future expectations of the consumer about change in price of a good determine its
individual demand.
➢ If a consumer expects that the market price of a good will rise in future then its
present demand will rise. On the other hand, if a consumer expect that the future
price of a good will fall then its present demand will fall.

Rise in present demand of petrol when it is announced that petrol prices will rise
from midnight

6) Government Policies:-
Tax and subsidies policy of the government determine the individual demand of a good.
If government imposes taxes on a commodity then its demand falls. On the other hand, if
government provide subsidy on a commodity then its demand rises
Q) What is market demand function? Explain its determinants/components?
Or
Briefly explain any six factors which determine the market demand of a good?
Ans:-
7) Population size/Number of buyers (N):-
Market demand of a commodity also depends upon population size of the country.
Market demand of a commodity rises with increase in population size and falls with decrease
in population size. This is because with increase (or decrease) in population size, the number
of buyers of the commodity also increases (or decreases).

8) Composition of population:-
Composition of population also determines/affects the market demand of a commodity in the
economy. For example:-If the % of children is high in total population, then the demand for
toys, milk, chocolates etc. will rise. Similarly, if the % of women is high in total population,
then the demand for cosmetic items will rise.

9) Distribution of Income (Yd):-

➢ Market demand of a commodity depends upon the nature and distribution of national
income in the country.
➢ If the distribution of income in the country/economy is more in favour of rich people,
then the demand for luxory goods and comfort goods like i-phone, tablets, computers,
A.C etc. will rise.
On the other hand, if the distribution of income is more in favour of poor people, then
the demand for normal goods will rise.
 (IV) LAW OF DEMAND

Q:-Define law of demand? What are its assumptions? Explain it with the help of a schedule
and diagram?
OR
Numerically and graphically explain the concept of law of demand?
OR
Briefly explain the inverse relationship between price and quantity demanded of a good?
Ans:- Statement of the law
Other things remaining constant/unchanged/same, law of demand states that there is an
inverse relationship between price and quantity demanded of a good. It means that with rise
in price of a good its quantity demanded falls and with fall in price of a good its quantity
demanded rises.
Assumptions
The law of demand is based upon the following assumptions:-
i) Income of the consumers remain unchanged.
ii) Price of substitute goods remains unchanged.
iii) Price of complimentary goods remains unchanged.
iv) There is no change in taste & preferences of the consumers.
v) Distribution of national income and national resources remain unchanged.
vi) Size and composition of population remain unchanged.
vii) Future expectations about change in price remain unchanged.
vii) Tax and subsidies policies of government remain unchanged.
Explanation
The concept of law of demand can be explained with the help of following schedule and
diagram:-
Price of ‘X’ good Quantity demanded
[in ₹] of ‘X’ good [in units]
10 100
15 50

5 150

The above schedule and diagram indicates that with rise in price of ‘x’ good (from ₹10 to ₹15
per) its quantity demanded falls [from 100 units to 50 units]. On the other hand, with fall in
price of ‘x’ good [from ₹10 to ₹5] its quantity demanded rises [from 100 units to 150 units].
After joining various combinations A, B, & C we get DxDx demand curve which reflects the
inverse/negative relationship between price and quantity demanded of ‘X’ good.
 (V) CAUSES OF LAW OF DEMAND

Q:-What are the main causes of law of demand?

OR
Why does law of demand operate?
OR
Why there is an inverse relationship between price and quantity demanded of a good?
OR
Why the demand curve is downward sloping from left to right? Explain.
OR
Why a consumer purchases more quantity of a good at lesser price? Explain.
OR
A household purchase more quantity of a good when its price falls in the market? Why? Explain.
Ans:- There is an inverse relationship between price & quantity demanded of a good due to
following reasons:-
1) Substitution effect:-
➢ Substitute goods are those goods which can be used at the place of each other.
For example:- Coke and Pepsi, Tea and Coffee, Sand and Cement
➢ Substitution of ‘X’ good at the place of ‘Y’ good when ‘X’ good becomes cheaper than
‘Y’ good is known as substitution effect.
For example:- If tea and coffee are 2 substitute goods then increase in price of tea
causes to increase in demand for its substitute good coffee because coffee becomes
relatively cheaper than tea.
So, it is clear that more units of a good can be purchased at lesser prices due to the
substitution effect.
2) Law of diminishing marginal utility:-
Law of diminishing marginal utility states that as the consumer increases the consumption of
a good the marginal utility from every successive unit goes on diminishing/declining/falling.
A consumer purchases/consumes more units of a good up to a point where the marginal
utility of the good is equal to its price.
The consumer can purchase more units of the good after this point if he has to pay less and
less price for every successive unit.
So, it is clear that there is an inverse relationship between price and quantity demanded of a
good.

3) Income effect:-
Income effect refers to change in demand of a good due to change in real income of the
consumer caused by change in price of the good.
For example:-With fall in price of a good the real income (purchasing power) of the consumer
will rise.
The consumer can purchase more units of a commodity with the help of this extra
income/money.
So, it is clear that more can be purchased at lesser price due to the income effect.
4) Different uses:-
➢ There is an inverse relationship between price and quantity demanded of a good due to
the different uses of that good.
➢ Some goods like milk, electricity, etc. have different uses and some of their uses are
more important than the others.
When price of such a good (say, milk) rises, it is purchased only for the most important
purpose/use (say, drinking) and not for less important uses (like making cheese, butter,
etc). Consequently, its demand falls. On the other hand, when the price of such a good
falls, it is purchased for its different uses, weather important or not. Consequently its
demand rises.
So, it is clear that more can be purchased at lesser price.

5) New customers creating demand/Additional customers:-

When price of a good falls, many new consumers (who were not in a position to buy it earlier
due to its high price) can afford to buy it. In addition to new customers, old consumers of the
good start demanding more due to its reduced price. Accordingly quantity demanded rises

(VI) LIMITATIONS/EXCEPTIONS OF LAW OF DEMAND

Q1:- What are the limitations/Exceptions of law of demand?

OR
In what circumstances there is positive relationship between price and quantity demanded?
Ans:-In following circumstances law of demand does not operate/work/apply and there is
positive relationship between price and quantity demanded:-
1) Article of distinction/ Veblen goods/Commodities related to social status:-
➢ The law of demand is not applicable in case of article of distinction.
➢ The concept of articles of distinction was firstly developed by Professor Veblen.
Therefore, these goods are known as Veblen goods.
➢ According to Professor Veblen, certain goods are article of distinction. Examples of
these goods are:- Diamond, precious paintings, scarce stones, vintage cars etc. These
goods are demanded only because their prices are very high.
➢ With rise in price of these goods their demand rises and with fall in price of these
goods their demand falls. It means that the price effect in case of Article of distinction
is positive.
2) Ignorance/Irrational judgement:-
Sometimes the law of demand is not applicable due to the ignorance of the consumers
because some consumers judge the quality of a good by its price. They think that a good is
superior at higher price and inferior at lower price. Therefore, they purchase more at higher
price and less at lower price. Due to this reason, the law of demand is not applicable in case
of such consumers.

3) Loss of faith:-
➢ Law of demand is not applicable if consumers have lost their faith in quality of a
commodity.
➢ In this case, any fall in price of the commodity cannot lead to rise in the demand of the
commodity.

4) Emergency:-
➢ In case of emergencies like war, curfew, drought, famine etc, the law of demand does
not operate.
➢ In such situations, there is general insecurity and fear of shortage of necessities.
Therefore, consumers demand more goods even at higher prices.

WAR Curfew Drought, Famine

5) Demonstration effect:-
➢ Sometimes, a section of society follow the consumption pattern of higher income
groups or some politicians or some popular film star.
➢ In this case, the law of demand does not operate because people demand more of that
good which the upper class people are buying, even at higher prices.
CHANGE IN QUANTITY DEMAND AND CHANGE IN DEMAND
 1) Change in Quantity demand
a) Extension in demand

Q What is extension/expansion in demand? Explain it with the help of a schedule and

diagram.
Ans.
Other factors remaining constant, when quantity demanded of a commodity rises due to fall
in its own price, it is called extension/expansion in demand.
It is also known as downward movement along with the same demand curve.

Explanation:-
The concept of extension/expansion in demand can be explained with the help of following
schedule and diagram:-

PRICE OF X GOOD Quantity demanded of ‘X’ Good

[₹] [units]
15 50
5 150

The above schedule and diagram indicates/shows that with fall in price of X good from ₹15 to
₹5 per unit its quantity demanded rises from 50 units to 150 units.
After joining combination A and B we get DXDX demand curve which indicates a downward
movement from point A to point B of the consumer. Therefore, it is also known as downward
movement along the same demand curve.
b) Contraction in demand

Q What is contraction in demand? Explain the concept of contraction in demand with the
help of a schedule and diagram.
Ans.
Other factors remaining constant, when quantity demanded of a commodity falls due to rise
in its own price, it is called contraction in demand.
It is also known as upward movement along with the same demand curve or decrease in
quantity demanded
Explanation:-
The concept of contraction in demand can be explained with the help of following schedule
and diagram:-

PRICE OF X GOOD Quantity demanded of ‘X’ Good

[₹] [units]
5 150
10 100

The above schedule and diagram indicates/shows that with rise in price of X good from ₹5 to
₹15 per unit its quantity demanded falls from 150 units to 50 units.
After joining combination A and B we get DXDX demand curve which indicates a upward
movement from point A to point B of the consumer. Therefore, it is also known as upward
movement along with the same demand curve.
 (2) Change in Demand
a) Increase in demand

Q What do you mean by increase in demand? What are its causes? Explain it with the help
of a schedule and diagram?
Or
Numerically or graphically explain the concept of rightward shifting/upward shifting of the
demand curve?
Ans.Meaning of increase in demand
Price remaining constant, when demand of a commodity rises due to change in other factors,
it is called increase in demand.
Causes of increase in demand [Causes of rightward/upward shifting of the demand curve]
i) When price of substitute goods rises
ii) When price of complimentary goods falls
iii) when income of consumers:-
a) Increase in case of normal goods
b) Decrease in case of inferior goods
iv) When population of the country increases
v) When there is favourable change in taste and preferences of the consumers towards a
given commodity
vi) If the consumers expect that the future price of the commodity will rise.
Explanation:-
The concept of increase in demand can be explained with the help of following schedule and diagram:-

PRICE OF X GOOD [₹] Demand of ‘X’ Good [units]

10 50
10 100

The above schedule and diagram indicate that demand for x good rises from 50 units to 100 units even at the
same price which is ₹10 per unit. It happens due to change in other factors and it is known as increase in
demand.
In this situation, the demand curve for x good shift rightward from Dx to Dx in upward direction. Therefore, it
is also known as upward shifting or rightward shifting of the demand curve.
b) Decrease in demand

Q What do you mean by decrease in demand? What are its causes? Explain it with the help
of a schedule and diagram?
Or
Numerically or graphically explain the concept of leftward shifting/downward shifting of
the demand curve?
Ans.Meaning of decrease in demand
Price remaining constant, when demand of a commodity falls due to change in other factors,
it is called decrease in demand.
Causes of decrease in demand/Causes of
i) When price of substitute goods falls.
ii) When price of complimentary goods rises.
iii) when income of consumers:-
c) Decreases in case of normal goods
d) Increases in case of inferior goods
iv) When population of the country decreases
v) When there is unfavourable change in taste and preferences of the consumers towards a
given commodity
vi) If the consumers expect that the future price of the commodity will fall.
Explanation:-
The concept of increase in demand can be explained with the help of following schedule and diagram:-

PRICE OF X GOOD [₹] Demand of ‘X’ Good [units]

10 100
10 50

The above schedule and diagram indicate that demand for x good falls from 100 units to 50 units even at the
same price which is ₹10 per unit. It happens due to change in other factors and it is known as decrease in
demand.
In this situation, the demand curve for x good shift leftward from Dx to Dx in downward direction. Therefore,
it is also known as downward shifting or leftward shifting of the demand curve
Q Differentiate between change in quantity demanded and change in demand
Ans.
change in quantity demanded change in demand
Meaning Other factors remaining constant, Own price of the commodity
when quantity demand of a remaining constant, when demand of
commodity changes due to change in a commodity changes due to change
its own price, it is called as change in in any other factor, it is called change
quantity demanded. in demand.
Reason It occurs due to rise or fall in price of It occurs due to change in other
the given commodity. factors, like change in prices of
substitute goods, change in prices of
complimentary goods, change in
income of consumers etc.
Effect on It leads to a movement along the same It leads to a shift in the demand
Demand demand curve, either upwards [known curve, either rightwards [known as
Curve as contraction in demand] or increase in demand] or leftwards
downwards [known as expansion in [known as decrease in demand]
demand]
Tabular
Presentation Px Qx Px Qx
10 100 10 100

5 150 10 150

15 50 10 50

Graphical
Presentation

Alternative It is also known as “movement along It is also known as “shifting of the

Term the same demand curve” demand curve”
Q Differentiate between Extension in demand and Contraction in demand
Ans.
Basis Expansion in demand Contraction in demand
Meaning Other factors remaining constant, Other things remaining constant,
when quantity demanded of a when quantity demanded of a
commodity rises due to fall in its commodity falls due to rise in its own
own price, it is called price, it is called contraction in
expansion/extension in demand. demand.
Reason It occurs due to fall in own price of It occurs due to rise in own price of
the given commodity. the given commodity.
Effect on There is a downward movement There is an upward movement along
Demand along the same demand curve the same demand curve
curve
Tabular
presentation Px Qx Px Qx
10 100 5 150
5 150 10 100

Graphical
Presentation

Alternative It is also known as:- It is also known as:-

term ➢ Downward movement along ➢ Upward movement along with
the same demand curve the same demand curve
Or or
➢ Increase in quantity ➢ Decrease in quantity
demanded demanded
Q Differentiate between Increase in demand and Decrease in demand
Ans.
Increase in demand Decrease in demand
Meaning Price remaining constant, when Price remaining constant, when
demand of a commodity rises due to demand of a commodity falls due to
change in other factors, it is called change in other factors, it is called
increase in demand. decrease in demand.
Reason It occurs due to favourable change in It occurs due to an unfavourable
other factors like increase in prices of change in the other factors like
substitute goods, decrease in price of decrease in prices of substitute goods,
complimentary goods, increase in increase in price of complimentary
income of the consumer in case of goods, decrease in income of the
normal goods, etc. consumer in case of normal goods, etc.
Effect on There is rightward/upward shift in There is leftward/downward shift in
demand the demand curve. the demand curve.
curve
Tabular
Presentation Px Qx Px Qx
10 100 10 100
10 150 10 50
Graphical
Presentation

Alternative
term
Q Differentiate between Substitute goods and Complimentary goods
Ans
Substitute goods Complimentary goods
Meaning Substitute goods are those goods Complimentary goods are those goods
which can be used at the place of which jointly satisfy a particular want.
each other.
Examples For example:- Coke and Pepsi, Tea For example:-Car and Petrol, Pen and ink,
and Coffee, Sand and Cement Sand and Cement, Pen and refill, Brick and
cement etc.
Relationship There is a direct/positive There is an inverse/negative/indirect
relationship between demand of relationship between demand of a given
a given commodity and price of its commodity and price of its complimentary
substitute goods. goods.
Cross price Cross price effect is positive in Cross price effect is negative in case of
effect case of substitute goods complimentary goods.
Nature of Substitute goods have Complimentary goods have joint demand
demand competitive demand

Q Differentiate between Normal goods and Inferior goods

Ans.
Normal Goods Inferior Goods
Meaning Normal goods are those goods Inferior goods are those goods whose
whose income effect is positive. income effect is negative.
It means that with rise in income of It means that with rise in income of the
the consumer the demand for these consumer the demand for these goods
goods rises and with fall in income falls and with fall in income of the
of the consumer the demand for consumer the demand for these goods
these goods falls. rises.

Example Full Cream milk is a normal good if Toned milk is an inferior good if its
its demand increases with an demand decreases with an increase in
increase in income. income.
Relationship There is positive/direct relationship There is an inverse/negative relationship
between income of the consumer between income of the consumer and
and demand for normal good demand for inferior goods
Law of Law of demand is applicable in case Law of demand is not applicable in case
demand of normal goods of inferior goods.
 EFFECT OF CHANGE IN OTHER FACTORS ON THE DEMAND OF A COMMODITY

Change in price of substitute Goods

Q:-Explain the effect of rise in price of substitute goods on the demand of a commodity with
the help of a diagram.
Ans.
➢ Substitute goods are those goods which can be used at the place of each other.
For example:- Tea and coffee, Coke and Pepsi.
➢ There is a positive/direct relationship between price of substitute goods and demand
of a given commodity.
It means that with rise in price of substitute goods, demand of a given commodity rises
and with fall in price of substitute goods, demand of a given commodity falls.
Explanation:-
The effect of change [rise or fall] in price of substitute good [say, pepsi] on the demand of a
given commodity [say, coke] can be explained with the help of following diagram:-

Rise in price of substitute goods

This diagram indicates that
with rise in price of substitute good
[say, pepsi] demand of the given
commodity [say, tea] rises from OQ to
OQ1 at the same price of OP.
As a result, demand curve of the given
commodity [coke] shifts in the
rightward/upward direction from DxDx
to Dx1Dx1. It is known as
rightward/upward shifting of the
demand curve.
Fall in price of substitute goods
This diagram indicates that with fall in
price of substitute good [say, pepsi],
demand of the given commodity [say,
coke] falls from OQ to OQ2 at the same
price of OP.
As a result, demand curve of the given
commodity [coke] shifts in the
leftward/downward direction from
DxDx to Dx2Dx2. It is known as
leftward/downward shifting of the
demand curve.
 Change in price of Complimentary goods

Q:-Explain the effect of change in price of complimentary goods on the demand of a

commodity with the help of a diagram.
Ans. Complimentary goods are those goods which jointly satisfy a particular want.
For example:- Car and Petrol, Pen and ink, Sand and Cement, Pen and refill, Brick and cement
etc.
There is an indirect/inverse/negative relationship between price of complimentary goods
and demand of a given commodity.
It means with rise in price of complimentary goods, demand of a given commodity falls and
with fall in price of complimentary goods, demand of the given commodity rises.
Explanation:-
The effect of change [rise or fall] in price of complimentary goods on the demand of a given
commodity can be explained with the help of following diagram:-

Rise in price of complimentary goods

This diagram indicates that
when price of complimentary goods
[say, petrol] rises, demand of the given
commodity [say, Car] falls from OQ to
OQ1 at the same price of OP.
It leads to a leftward/downward
shifting of the demand curve of the
given commodity from from DXDX to
DX1DX1.
Fall in price of complimentary goods
This diagram indicates that
with fall in price of complimentary
goods [say, petrol] from ₹100 per litre
to ₹90 per litre, demand for the given
commodity [say, Car] rises from OQ to
OQ2 at the same price of OP.
As a result, the demand curve of the
given commodity shifts in the
rightward/upward direction from DXDX
to DX2DX2.
 Change in income of the consumer in case of Normal Goods

Q:- Explain the effect of change in income of the consumer on the demand of a normal good
with the help of a diagram.
Ans. Normal goods are those goods whose income effect is positive.
It means that with rise in income of the consumer the demand of normal goods rises and with
fall in income of the consumer the demand for normal goods falls.
Explanation:-
The effect [rise or fall] of change in income of the consumer on the demand of normal goods
can be explained with the help of following diagram:-

Rise in income of the consumer

This diagram indicates that
with rise in income of the
consumer, the demand of normal
good [say, Full cream milk] rises
from OQ to OQ1 at the same
price of OP.
As a result, the demand curve of
normal good [Full cream milk]
shifts in the rightward/upward
direction from DXDX to DX1DX1.
Fall in income of the consumer
This diagram indicates that
with fall in income of the
consumer, the demand of normal
good [say, full cream] falls from
OQ to OQ2 at the same price of
OP.
As a result, the demand curve of
normal good [full cream
milk]shifts in the
leftward/downward direction
from DXDX to DX2DX2.
 Change in income of the consumer in case of Inferior Goods

Q:- Define Inferior goods? Explain the effect of change in income of the consumer on the
demand of an inferior good with the help of a diagram.
Ans. Inferior goods are those goods whose income effect is negative.
It means that with rise in income of the consumer the demand of inferior goods falls and with
fall in income of the consumer the demand of inferior goods rises.
Explanation:-
The effect of change [rise or fall] in income of the consumer on the demand of inferior goods
can be explained with the help of following diagram:-

Rise in income of the consumer

This diagram indicates that
with rise in income of the consumer,
the demand of inferior good [say,
toned milk] falls from OQ to OQ1 at
the same price of OP.
As a result, the demand curve of
inferior good [toned milk] shifts in
the leftward/downward direction
from DXDX to DX1DX1.
Fall in income of the consumer
This diagram indicates that
with fall in income of the consumer,
the demand of inferior good [say,
toned milk] rises from OQ to OQ2 at
the same price of OP.
As a result, the demand curve of
inferior good [toned milk] shifts in
the rightward/upward direction
from DXDX to DX2DX2.
 Change in taste and preferences of the consumer

Q:- Explain the effect of change in taste and preferences of the consumer on the demand of
a commodity with the help of a diagram.
Ans.
➢ Change in taste and preferences of a consumer effect the demand of a commodity.
Taste and preferences of a consumer are influenced by fashion, new trends in the
market, advertisement etc.
➢ Favourable change in taste and preferences of a consumer towards a commodity
causes to rise in demand of that commodity.
On the other hand, unfavourable change in taste and preferences of a consumer
towards a commodity causes to fall in demand of that commodity.
Explanation:-
The effect of change [favourable change or unfavourable change] in taste and preference of
the consumer on the demand of a commodity can be explained with the help of following
diagram:-