CLASS XII ECONOMICS

THEORY OF DEMAND 1
CLASS I-XII All Subject & B.Com/BBA

THEORY OF DEMAND
WARM UP:
i). Desire: Desire for a commodity is the willingness of the person to get that commodity to satisfy himself.

ii) Want: An intense desire to have a commodity is want.

In ordinary course of life, people use “desire” and “want” as synonyms, but in Economics, they are two different
terms. ‘Desire’ of a commodity arises mainly from the physical needs and/or mental attitudes of man. In
Economics, ‘want’ means effective desire, i.e., a desire which compels a person to put in some effort so that the
desire could be satisfied.

POINT 1: DEFINITION OF DEMAND.

 Demand for any commodity refers to
 the amount of that commodity
 which a consumer
 is willing to purchase
 at a given price
 over a given period of time.

POINT 2: TYPES OF DEMAND

i) INDIVIDUAL DEMAND
Individual Demand for any commodity refers to the amount of that commodity which an individual
consumer is willing to purchase at a given price over a given period of time.

ii) MARKET DEMAND

Market Demand for any commodity refers to the amount of that commodity which all the individuals
(households) in the market are willing to purchase at a given price over a given period of time.

Some Other Types Of Demand

i) JOINT DEMAND
It refers to the demand of two or more goods which are used together or demanded jointly. E.g.- Bat, ball
and stumps, chalk, board and duster, etc.

ii) COMPOSITE DEMAND

Demand for goods that have multiple uses is called composite Demand. E.g. – Milk, electricity, etc.

iii) DERIVED DEMAND

It refers to the demand for a commodity that arises because of the demand of some other commodity.
E.g. – Bricks, cement, etc is derived from the demand of building.

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THEORY OF DEMAND 2
CLASS I-XII All Subject & B.Com/BBA

iv) EX-ANTE DEMAND

It refers to the amount of goods that consumers want to or willing to buy during a particular time period in
future.
v) EX-POST DEMAND
It refers to the amount of goods that consumers actually purchased during a specified period.

POINT 3: TYPES OF GOODS

i) NORMAL GOODS
These goods are those goods the demand for which increases with the increase in income of consumer
and decreases with the fall in income .E.g. – Mobile Phone, LED TVs, etc.

ii) INFERIOR GOODS

These goods are those goods the demand for which falls as the income of the consumer increases.
E.g. – toned milk, broiler chicken, etc.

iii) SUBSTITUTE GOODS

These goods are those goods which satisfy the same kind of demand and can be used in place of one
another. E.g. - tea and coffee, etc.

iv) COMPLEMENTARY GOODS

These are used jointly or together and which complement each other. E.g. – Car and petrol, pen and ink,
etc.

POINT 4: FACTORS AFFECTING DEMAND

A. FACTORS AFFECTING INDIVIDUAL DEMAND

i) PRICE OF THE COMMODITY

There is an inverse relationship between the price of the commodity and the quantity demanded. Lower
the price of the commodity, larger is the quantity demanded and higher the price, lower will be the quantity
demanded.

P QD Inverse

P QD Relationship

ii) INCOME OF THE CONSUMER

Change in income of the consumer influences demand for different goods. The demand for normal
goods increases with the increase in income and on the other hand demand for inferior goods decreases with
the increase in income.
FOR NORMAL GOODS FOR INFERIOR GOODS

Y QD Direct Y QD Inverse

Y QD Relationship Y QD Relationship

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THEORY OF DEMAND 3
CLASS I-XII All Subject & B.Com/BBA

iii) CONSUMER’S TASTES AND PREFERENCES

The demands for goods depend on individual’s tastes and preferences. Other things remaining the same
demand for goods increases for which consumers develop tastes and preferences and if a consumer has no
taste and preference for a product, its demand will decrease.

iv) PRICES OF RELATED GOODS

If a change in the price of one commodity affects the demand for other commodity, we say that these two
goods are related.
(a) SUBSTITUTE GOODS: In case of such goods, increase in price of one goods (Goods X) causes
increase in demand for other goods (Goods Y).Example:- Tea and Coffee etc.

Px QDy Direct

Px QDy Relationship.

(a) COMPLEMENTARY GOODS

In case of such goods, fall in price of one goods (Good X) causes increase in demand of other goods
(Good Y).Example:-Car and Petrol etc.

Px QDy Inverse

Px QDy Relationship.

v) CONSUMER’S EXPECTATION:
If the consumer expects the price to rise in future they will buy more commodities in present at existing
price and store the goods, and if the consumer expects the price to fall in future, they will buy less commodities
in present and will postpone their demand.

vi) CREDIT FACILITY:

If credit facilities are available to purchase a product the demand for the product will increase and if there
is no credit facility, the demand for the product remains the same.

vii) ECONOMIC CONDITIONS:

The demand for a commodity also depends upon prevailing business conditions in the country. For e.g. ,
during the inflationary period (a continuous rise in the price level of a commodity), more money is in circulation
and people have more purchasing power. This causes an increase in demand of various goods even at higher
prices. Similarly, during deflation (depression), the demand for various goods reduces, in spite of lower prices
because people do not enough money to buy the things.

B. FACTORS AFFECTING MARKET DEMAND:

i) CLIMATIC FACTORS:
Demand for different goods depends upon climatic factor because different goods are needed for
different climate, like in winter demand for woolen clothes increases.

ii) PATTERN OF INCOME DISTRIBUTION:

If the income is equitably distributed, there will be more demand. If the income is not equitably
distributed, there will be less demand. For e.g., if national income falls in the hands of rich people, and poor

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THEORY OF DEMAND 4
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people gets less income, the demand for luxury goods will increase as major portion of the national income is
falling under rich people.

iii) POPULATION (DEMOGRAPHIC STRUCTURE):

Demand increases with increase in population and falls with decrease in the population size, the number
of buyers of the product also tends to increase.

iv)GOVERNMENT POLICY:
If the government imposes tax on various commodities, the prices of the commodities will increase and if
the government incurs expenditure for public welfare, the demand for cement, bricks, iron, steel, etc, will
increase.

v)STATE OF BUSINESS:
The level of demand in a market for different goods depends upon the business conditions of the country.
If the country is passing through boom period, trade is active. The demand for all commodities tends to rise. But,
in the days of depression, when trade is dull, demand tends to fall.

POINT 5: DEMAND FUNCTION.

‘DEMAND FUNCTION’ is the functional relationship between quantity demanded of a commodity and its various
factors.
Symbolically:
Quantity demanded (QDx) = f (factors of demand).

= f (Px, Y, Py, Tastes and Preferences, Govt. policy, etc.)

POINT 6: LAW OF DEMAND: ‘

The ‘LAW OF DEMAND’ states that, other things remaining the same, the quantity demanded of a
commodity increases when its price falls and decreases when price rises.

ASSUMPTIONS TO THE LAW OF DEMAND

i) Tastes and preferences of the consumer remains constant.
ii) There is no change in the income of the consumer.
iii) Prices of the related goods remains constant.
iv) Consumer do not expect any change in the price of the commodity in the near future.
v) etc, etc.

Q) Why does law of demand operate?

OR,
Q) Why does demand curve slopes downwards to the right?
OR,
Q) Why more of goods is purchased when its price falls?
OR,
Q) Why do households demand more of a commodity at lower price?

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THEORY OF DEMAND 5
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Answer:
(i) LAW OF DIMINISHING MARGINAL UTILITY:
We know that the satisfaction derived from the consumption of successive units goes on falling, as earlier
units have partly satisfied our wants. In this way, every additional unit of the commodity will give us lesser utility
(satisfaction).As the consumer is rational, he would like to maximize his satisfaction by the consumption of the
commodity reaching the equilibrium, i.e, the point where marginal utility of the commodity is equal to the price of
the commodity. It shows the dependence of law of demand on the law of diminishing marginal utility.

(ii) INCOME EFFECT:

Due to change in the price of the commodity, if the purchasing power of the consumer also changes,
then it is called income effect. Change in the price of the commodity cause a change in the real income of the
consumer. Real Income is that income which is measured in terms of goods and services. With a fall in price real
income increases. The increased real income is used to buy more units of the commodity.

[Explanation: Miss C goes to market every day with ` 50 in her pocket to buy a dairy milk costing `50 for her best
friend Miss S.
Today when she goes to market, she finds that the cost of the dairy milk has fallen to `10. She buys one
dairy milk for her best and she is still left with `40, which is well known as real income. Now, she is thinking to
buy more four dairy milks for her friends V, A, R, P, increasing the demand for dairy milk.

Caution:
Income is not increasing. Rather Real Income is increasing.

(iii) SUBSTITUTION EFFECT:

This is the effect on the demand for a commodity as a real for the change in relative price. When the
price of other goods (substitution goods) remains unchanged, this commodity becomes relatively cheaper,
increasing the demand, by shift in the customers.

(iv) SEVERAL USES OF THE COMMODITY:

Many goods have alternative or multiple uses, when the price of such goods are very high, It will be
used for more important uses only and therefore the demand for the commodity decreases. But when the price
falls, the commodity may be put to several uses and therefore the demand increases. E.g.- milk being for cake,
butter, curd, etc.

(v) CHANGE IN THE NUMBER OF CONSUMERS:

When the price of the commodity falls, many consumers who were not buying it at previous price begin
to purchase it and consequently the demand increases. On the other hand, when the price rises, some of the
consumers will withdraw from the market and the demand will decrease.

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 CLASS XII ECONOMICS
THEORY OF DEMAND 6
CLASS I-XII All Subject & B.Com/BBA

DEMAND SCHEDULE
A demand schedule is a numerical table that shows different quantities of a commodity, demand at
different price, during a given period of time, other things remaining constant.

INDIVIDUAL DEMAND SCHEDULE MARKET DEMAND SCHEDULE

It is a numerical table that shows different
quantities of a commodity that would be demanded
by or individual at different price during a given
period of time, other things remaining constant.
It is a numerical table that shows different quantities of
a commodity that would be demanded by all the
individuals or households (market) at different prices,
during a given period of time, other things remaining
constant.

PRICE Q.D. Px A B C M.D.

`5 20 `5 20 25 30 75
` 10 15 ` 10 15 20 25 60
` 15 10 ` 15 10 15 20 45
` 20 5 ` 20 5 10 15 30

DEMAND CURVE
Graphical representation of a demand schedule is known as demand curve. Therefore, a demand curve
is a curve which shows different quantities demanded at different price during a given period of a commodity of
time, other thing remaining constant.
INDIVIDUAL DEMAND CURVE MARKET DEMAND CURVE

It is a graphical representation of Individual Demand It is a graphical representation of Market Demand

Schedule that shows different quantitiess of a
commodity that would be demanded by an
individual at different prices during a given period of
time, other things remaining constant.
Schedule that shows different quantities of a
commodity that would be demanded by all the
individuals or households (market) at different price,
during a given period of time, other things remaining
constant.

PRICE PRICE
D1 D2 D 3 MD CURVE
D

D D1 D 2 D3 MD CURVE
O QUANTITY DEMANDED O QUANTITY DEMANDED

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THEORY OF DEMAND 7
CLASS I-XII All Subject & B.Com/BBA

POINT 7: EXCEPTIONS TO THE LAW OF DEMAND.

i) GIFFEN GOODS:
Giffen goods may be defined as those goods whose price effect is positive and income effect is negative.
Giffen goods are those inferior goods in the case where income effect is negative and stronger than the
substitution effect of a change in price. As a result, when the price of such commodity falls the demand also falls.

Giffen goods (named after the 19th century Economist Sir Robert Giffen who pointed out this
phenomenon for the first time) are those inferior goods on which the consumer spends a large part of his income
and the demand for which falls with a fall in its price. For example, maize and jowar are inferior goods for an
average consumer. They are consumed largely by poor people. As the price of maize falls, real income of the
consumer increases. With an increase in real income, the consumer may afford to purchase superior food like
rice and wheat.

Toned milk ` 50. Normal milk `80. Income of the consumer ` 100.

PRICE Q.D.
CASE I
Toned milk - ` 50 2ltr ` 100

CASE II
Toned milk - ` 20 1ltr ` 100
Normal milk - ` 80 1ltr

So, we can see that when the price of toned milk decreases, people use the money to buy superior
goods

ii) ARTICLES OF SNOB APPEAL:

The law of Demand does not apply to the commodities which serve as ‘status symbol’. Articles of
distinction has more demand only if the price are sufficiently high. E.g. – Diamond, jewellery, costly carpets have
more demand because the price are abnormally high. These goods are purchased for the social symbol. This
effect is known as VEBLEN EFFECT.

iii) PRICE AND QUALITY EFFECT:

If the goods are priced high, consumer feels that it is of good quality and will purchase it even at higher
prices.

iv) EMERGENCIES:
In case of emergencies like wars, strikes, etc, people purchase more of goods even though the prices
are high.
v) CHANGE IN FASHION:
When a commodity goes out of fashion, consumer will not purchase a larger quantity of this commodity
even when its price is reduced.

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THEORY OF DEMAND 8
CLASS I-XII All Subject & B.Com/BBA

vi) EXPECTIONS:
If a price of a commodity is rising today and it is likely to rise more in the future, people will buy more
even at the existing higher price and store it up.

vii) IGNORANCE:
If the consumer is not aware he may purchase more of the commodity even at the higher price.

POINT 8: DIFFERENCES.
1.
BASIS EXTENSION OF DEMAND INCREASE IN DEMAND

(i) Meaning It is a situation when the demand rises with It is a situation when demand rises due to
the fall in its price, other things remaining change in factors other than price.
constant.

(ii) Movement Demand curve slopes downward. Demand curve shifts rightward.
of curve

(iii) Causes Fall in price. Consumer’s income, change in price of

substitute goods, etc.

(iv)Example By fall in price of a commodity form `10 to ` By price remaining constant at `10, the
8, the demand increases from 20 to 25 demand increases from 20 to 25 units
units.

(v) Graphical
Representation
PRICE PRICE
D D D1

P1 P
D D1
D
O Q Q1 O Q Q1
QUANTITY DEMANDED QUANTITY DEMANDED

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THEORY OF DEMAND 9
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2.
BASIS CONTRACTION OF DEMAND DECREASE IN DEMAND

(i) Meaning It is a situation when the demand falls with It is a situation when the quantity demanded
the rise in its price, other things remaining falls because of factors other than price.
constant.

(ii) Movement The demand curve moves from downwards The demand curve shifts leftward.
of curve to upwards.
Consumer’s income, change in price of
(iii) Causes Rise in price. substitute goods, etc.

(iv) Example By rise in the price of a commodity from `10 By price remaining constant at `10, the
to `12, the demand decreases from 20 to demand decreases to 15 from 20 units.
15 units.

(v) Graphical
Representation PRICE PRICE
D D1 D

P1

P P
D1 D
D
O Q1 Q O Q1 Q
QUANTITY DEMANDED QUANTITY DEMANDED

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THEORY OF DEMAND 10
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3.
BASIS CHANGE IN QUANTITY DEMANDED CHANGE IN DEMAND

(i) Meaning Other things being equal, if the quantity If more or less quantity of a commodity is
demanded increases or decreases due to fall demanded at the same price due to
or rise in the price of the commodity alone, it change in the factors other than price,
is known as change in quantity demanded. then, it is known as change in demand.

(ii) Alternate
Movement along the demand curve. Shift in demand curve.
Name

(iii) Cause It occurs due to change in price. It occurs due to factors other than price.

(iv) Example PRICE DEMAND PRICE DEMAND

` 10 20 units ` 10 20 units

` 15 10 units ` 10 10 units

` 20 5 units ` 10 5 units

(v) Graphical
Representation PRICE PRICE

D D1 D D2

P1 P
P
P2 D1 D D
D
O Q1 Q Q2 O Q1 Q Q2
QUANTITY DEMANDED QUANTITY DEMANDED

(vi) Leads to Extension and Contraction of Demand. Increase and Decrease in Demand.

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THEORY OF DEMAND 11
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4.
BASIS NORMAL GOODS INFERIOR GOODS

(i) Meaning Normal goods are those goods whose Inferior goods are those goods whose
demand increases with the rise in demands have inverse relation with
income and decreases with the fall in income of the consumer.
income.
NEGATIVE
(ii) Income effect POSITIVE

(iii) EXAMPLE Reynolds pen, etc. Maize, grain, etc.

(iv)DEMAND CURVE PRICE PRICE

D D

D D

O QUANTITY DEMANDED O QUANTITY DEMANDED

(v)DEMAND CURVE
WITH RESPECT TO INCOME
INCOME INCOME
D D

D D

O QUANTITY DEMANDED O QUANTITY DEMANDED

POINT 9: DEMAND CLASSIFICATION.

CLASSIFICATION OF DEMAND

KINDS OF DEMAND KINDS OF DEMAND ON THE OTHER TYPES OF DEMAND/

BASIS OF NO. OF CONSUMER INTERRELATED DEMAND

i) Price Demand i) Individual Demand i) Joint Demand

ii) Income Demand ii) Market Demand ii) Composite Demand

iii) Cross Demand iii) Derived Demand

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THEORY OF DEMAND 12
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PRICE DEMAND INCOME DEMAND CROSS DEMAND

It refers to various quantities of
commodities or services that are
purchased at a given time and at
given prices from the market.
Factors other than price like
consumer’s tastes and
preferences, consumer’s income,
price of related goods, are
constant. Price demand has an
inverse relationship with the price.
It refers to various quantities of
commodities or services purchased
by the consumer at different income
levels. Factors other than income,
like price of the commodity, price of
related goods, consumer’s tastes
and preferences, etc are constant.
Income demand has positive
relationship with the income.
It refers to the quantity of a
commodity which would be
demanded as a result of changes
in the price of related goods, i.e.,
complementary or substitute.
In case of substitute goods
PRICE (Px) DEMAND (DY)

` 10 5 units
PRICE (Px) DEMAND (Dx) INCOME DEMAND
` 15 10 units
` 10 20 units ` 10 20 units
` 20 20 units
` 15 10 units ` 15 10 units
PRICE
` 20 5 units ` 20 5 units
D

PRICE D

D INCOME D O QUANTITY DEMANDED

In case of complementary
goods

PRICE (Px) DEMAND (DY)

D ` 10 20 units
O QUANTITY DEMANDED
O QUANTITY DEMANDED ` 15 10 units

` 20 5 units

PRICE
D

O QUANTITY DEMANDED

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THEORY OF DEMAND 13
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POINT 10: EXTRA INNINGS

1. IMPORTANCE OF LAW OF DEMAND
i) DETERMINATION OF PRICES
The study of law of demand is helpful for the demand to fix the price of the commodity. It can help the
management in deciding whether how much increase or decrease on the price of the commodity is desirable.

ii) IMPORTANCE TO FINANCE MINISTRY

The study of the law is the great advantage to the finance ministry,if by raising the tax the price increases
to such an extent that the demand is reduced consistently then it is of no use to increase the tax because
revenue will remain the same.

iii) IMPORTANCE FOR PLANNING

The law of demand has a great importance for the planning commission.

iv) IMPORTANCE FOR PRODUCERS

The Law of Demand provides guidelines to the producers regarding the production of those goods
whose prices have reduced. The law of demand has a great importance for the planning commission.

v) IMPORTANCE FOR THE CONSUMER

The Law of Demand tells us that with the fall in price, the consumer will buy more of the commodity and
vice versa to maximize his satisfaction.

QUESTION BANK
1 Mark Questions

1) A rise in the income of the consumer X leads to a fall in the demand for that good by that consumer. What is
the good X called?
2)When demand for a good falls due to rise in its own price, what is the change in demand called?
3)What happens to the demand for a good when the price of substitute goods falls?
4) How does an increase in the income affect the demand curve for an inferior good?
5)What causes an upward movement along the demand curve?
6) What do you mean by Real Income?
7)When will rise in demand be called expansion of Demand and when will it be called an increase in demand?
8)Mention one factor that causes a leftward shift of the demand curve?
9) What is the shape of Demand Curve?
10) What do you mean by Derived Demand?
11) Explain Composite Demand.
12)Explain with an example, what kind of a commodity will have an inverse relationship between income and
demand?
13) What do you mean by Demand function.

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3/4 Mark Questions

1)How does the change in the price of related goods affect the demand of a commodity? Explain.
OR
Explain the effects of the rise in the prices of related goods on the demand of a good.
2) X and Y are substitute goods. Explain the effect of a fall in the price of X on demand of Y.
3)How will an increase in the price of tea affect the demand for sugar? Explain with diagram.
4) When is a good called i)normal good, and ii) an inferior good.
OR
Give meanings of normal goods and inferior goods. Give two example of each.
5) Can the same good be normal for some body and inferior for others. Explain with appropriate examples.
6) Give three reasons (or causes) of a leftward shift of demand curve.
7) Deduce Market Demand Curve from Individual Demand Curves.
8)Explain Giffen goods.
9) What do you mean by ‘other things remaining constant’ in the definition of Law of Demand?

6 Marks Questions
1)Explain with the help of diagram the effect of the following changes on the demand of a commodity:
i) a fall in the price of substitute goods ii) a fall in the income of its buyer.
2)Explain with the help of diagrams the effect of the following changes on the demand of a commodity:
i) a fall in the price of related goods ii) a rise in the income of its buyer.
3)Differentiate between i) Normal and Inferior Goods ii) Complementary and Substitute Goods
4)Differentiate between i) Giffen and Inferior Goods ii) Income and Substitution Effect.
5)Explain the effects of increase in income of the buyers of the good X on the demand of Good X. Use diagram
showing demand for good X on the x-axis and is price on y-axis.

THE END

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