class 12 economics Demand and law of demand notes

 Demand and law of demand..........short and easy notes for board exam.

1. What do you mean by demand? What are its Essential elements?
> demand is an amount of a things which a person is willing to buy at a given price during a given time.
Following are its Essential elements;

• Desire of a goods.
• Sufficient resources to buy a goods.
• Willing to spend.
• At a given price.
• At a given time.

2. What is demand function?
> functional relationship between demand of a goods and factor affecting it.
There are two demand function;
Individual demand function- it is the relation between demand for a goods and its factors affecting it for a consumer.

It can be express through following equation;

Dx = F(Px,Pr,T,Y)

or Dx = F(Px)
Where,
Dx = demand for goods X.
Px = price of goods X.
Pr = price of related goods.
T = Test of consumer.
Y = income of consumer.
F = expectation of change in price in future.

Market demand function - it is the relationship between market demand of any goods and factors affecting it.
Dx = (Px,Pr,T,Y,E,P,Yd)
where,
Dx = demand of goods x
Px = price of goods x
Pr = price of related goods
Y = income of consumer
T = test of consumer
E = Expectations of consumers
P = size of population
Yd = distribution of income

3. Write the factors affecting demand.

• utility of goods.
• Income of consumer.
• Distribution of wealth.
• Price of goods.
• Price of related goods.
• Taste and fashion of consumers.
• Expected future change in price.

4. What is demand schedule?

> Tabular relation between price and quantity of goods is called demand schedule.

There are two types of demand schedule;

• Individual demand schedule- It is express the relation between price of goods and its demand of a consumer.

• Market demand schedule- it can be constructed through various individual demand schedules. Market demand schedule represent the total market demand at various prices.

5. What do you mean by demand curve?

> when demand schedule is stone on the graph, we get a demand curve.

There are two type of demand curve;

• Individual demand curve- individual demand curve shows various combination of the quantity of goods demanded by an individual consumer at a different price.

• Market demand curve-  By representing market demand schedule on the graph we can obtain market demand curve.

6. What are the kinds of demand?

1. Price demand- price demand refers to those quantity of goods which are demanded by the consumer at various places during a particular time period. When price of goods increases its demand decreases and vice versa.
2. Income demand- When income of consumer affect the quantity of goods and services, it is called income demand.

There are two type of income demand;

• Income demand of normal or superior goods- when income of consumer increases demand of goods also increases and vice versa.
  
  
  
• Income demand of inferior goods- Inferior goods are those which are consumed by a consumer due to insufficient level of income. When income of consumer increases, its demand increases and vice versa.
  

3. Cross demand- Change in demand of Y goods, price of goods X also be changed. It is called cross demand.

There are two type of cross demand;

• Substitute goods- substitute goods are those which have two capacity to satisfy the same needs. They can be used for same purpose.   e.g, tea and coffee, in this case, when price of one goods increases, demand of its substitute goods also increases and vice versa.                  

                              

• Complementary goods- These goods are used together for satisfying a particular wants.   e.g., scooter and petrol, if the price of petrol increases, demand of scooter decreases and vice versa.

4. Joint demand- Joint demand appears in case of complementary goods. When two commodity are complementary to one another and cannot be use separately. They have joint demand. 

e.g., bread and butter, sugar and tea, pen and ink, etc.

5. Derived demand- Derived demand is a demand which arises from the demand of some other factors, it is an indirect demand.

e.g., Demand of cotton cloth increase the demand of labour, machine, cotton and other allied goods.

6. composite demand- when a goods can be put to variety of use, the total market demand for such goods is called composite demand.

e.g., electricity, light, industrial energy services, etc.

7. What is law of demand? What are its assumptions?

> Law of demand explains qualitative relation between price of goods and quantity demanded. There is an inverse relation between price of goods and its demand. When price increases, demand decreases and vice versa. This law locates the direction of Price and Demand.

Assumption of law of demand;

• Consumer's income should remain constant.
• Consumer's taste, nature, etc you should remain constant.
• Price of related goods should remain constant.
• Consumer remains unknown with new substitutes.
• There is no possibility of price changes in future

8. Why demand curve slopes downward?

> slope of demand curve is negative due to following reasons;

• Law of diminishing marginal utility- it means that, the total utility increases at decreasing rate. At low price, more unit of goods is demanded and vice versa.
• Increase in purchasing power- when price of goods decreases, purchasing power of consumer increases. In this way, at the lower price, more goods can be purchase.
• Substitution effect- whenever there is a change in relative price of goods, A rational consumer will be induced to substitute the relatively dearer commodity by buying the cheaper one.
• Change in number of consumers- when price decreases, number of consumers increases as cheaper goods can be purchased by many consumers.

9. Exception of law of demand.

> law of demand is not applicable in following cases;

• Expected change in future price- in fewer unexpected circumstances like natural calamities, war, etc, consumers continue to demand goods even after price increases because they expect future increase in price.
• Law of demand is not applicable in prestigious goods- To show Prestige and social status which persons of the society purchased dear goods, i.e., change in price does not affect demand of prestige goods as diamond, jewellery, etc. In fact, act rich people increased the consumption of prestige goods when price increase because they show false Prestige.
• Ignorance of consumer- when a consumer due to ignorance considers that by giving high prices, he has purchased superior and durable goods, then high price does not affect demand.
• Giffen's Paradox- when price of inferior goods decreases then consumer decreases consumption of inferior goods due to their increased purchasing power. In this way, decrease in price of inferior goods decrease its consumption.

10. Difference between normal goods and Giffen goods.

> Normal goods;

• Normal goods are those which consumed by all income group.
• Law of demand is applicable in case of normal goods.
• Demand curve of normal goods is negatively sloped.
• Income effect of normal good is positive.

Giffin goods;

• Giffen goods are those which are consumed by the lower income group.
• Law of demand is not applicable in the case of giffen goods.
• Demand curve of giffen goods is positively sloped.
• Income effect of giffen goods is negative.

11. What do you mean by extension of demand?

> More quantity of goods is demanded due to decrease in price. The demand curve shift left to right on same demand curve.

12. What do you mean by contraction of demand?

> When due to price increases, demand of goods decreases and demand curve shift upward.

13. What do you mean by increase in demand?

> Due to other factors, more quantity of goods is demanded at that price or same quantity of goods is demanded at Higher price. Demand curve shift from left to right.

more demand at same price

same demand at higher price

14. What is decrease in demand?

> Due to other factors, less quantity of goods is demanded at that price or same quantity of goods is demanded at less price, demand curve shift downward from left to right.

Less demand at same price

Same demand at less price

15. Write the causes of increase in demand.

• When income of a consumer increases.
• When price of substitute goods increases.
• When price of complementary goods in decreases.
• When taste, hobbies and priorities of consumer changed due to change in fashion or season.
• Increase in number of buyers.
• When there is possibility of price raise in future.
• When there is possibility of increase in income in future.

16. Write the causes of decrease in demand.

• when income of a consumer decreases.
• When price of substitute goods decreases.
• When price of complementary good increases.
• Will taste, hobbies and priorities of consumer decreases due to change in fashion or climate.
• Decrease in number of buyers.
• When there is possibility of decrease in price in future.
• When there is possibility of income decrease in near future.

17. What do you mean by giffin Paradox?

> Giffen's paradox arises when one of the two goods of consumption is superior and other is inferior. Inferior goods are those which are consumed by the consumer due to their low income level. This paradox was first observed by an English economist 'Robert Giffen' and named after him as 'Giffen's Paradox'. In 19th century, inspite of rise in bread price, people demand it more because it remained comparatively cheaper as compared to its substitute like fish, mutton, etc. As a result, poor people consumed more of bread with every increase in price of bread and reduced intake of fish, mutton, etc. This paradox is known as 'Giffen Paradox'.

POINTS;

• Law of demand is a qualitative statement.
• Elasticity of demand is a quantitative statement.
• Demand curve generally sloped downward from left to right.
• Demand function is, Dx = F(Px).
• For Normal goods, demand curve is negative.
• For Giffen goods, demand curve is positive.
• Income effect of normal good is positive.
• Income effect of Giffen goods is negative.
• The quantity of goods which the seller is ready to sell in a market at a fixed price and time, is called supply.
• Tabular relation between price and quantity is called demand schedule.
• Demand curve slope downward from left to right.

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