Theory of Demand
Q1. Define demand.
Ans:- Demand refers to the willingness and capacity to purchase a commodity. In other words, demand refers to the desire for a commodity backed by adequate purchasing power.
Q2. Define substitute good with examples.
Ans:- Substitute goods refers to those products or services which can be used in place one another for satisfaction of particular wants. In other words, a good is a substitute in consumption for another good if the goods fulfill the same basic purpose.
Examples of substitute goods:- apples and oranges, tea and coffee, etc.
Q3. Define complementary good with examples.
Ans:- Complementary goods refer to those products and services which are generally consumed or used jointly for the satisfaction of particular wants.
Examples of complementary goods:- car and gasoline, shoes and socks, etc.
Q4. What is meant by inferior good in economics?
Ans:- An inferior good is a good the demand for which increases as income decreases, and decreases as income increases at a given price.
Q5. Define normal good.
Ans:- A normal good is a good the demand for which increases as income increases, and decreases as income decreases at a given price.
Q6. Define individual demand.
Ans:- An individual consumer's demand refers to the quantities of a community demanded by him at various prices, other things remaining constant.
Q7. Define market demand.
Ans:- The market demand refers to the aggregation of a set of individual demand for a commodity at a particular price. In other words, the market demand is the summation of the individual consumer's demands for a homogeneous commodity at a particular price.
Q8. States the assumptions of the law of demand.
Ans:- The assumptions of the law of demand are:-
a. There is no change in the tastes and preferences of the consumer.
b. The income of the consumer remains constant.
c. There is no change in customs.
d. The price of other goods remain the same.
e. There should not be any possibility of change in the price of the product being used.
f. There should not be any substitute of the commodity.
g. The habits of the consumer should remain unchanged.
Q9. Explain two exceptions to the law of Demand.
Ans:- In some cases, the demand curve slopes upward from left to right, i.e. , it has a positive slope. Under certain circumstances, consumers buy more when the price of a commodity rises, and less when the price fall, as shown in the figure below ;
Two causes that are attributed to an upward sloping demand curve are:
a. War:- If shortage is feared in anticipation of war, people may start buying more even when the price rises.
b. Depression:- During depression the prices of commodities are very low and the demand for them is also less. This is because of the lack of purchasing power of the people.
Q10. Explain the factors that effect the demand for a commodity.
Ans:- The factors that determine the demand for a commodity are the following:
a. Price:
The higher the price of a commodity, the lower the quantity demanded. The lower the price, the higher the quantity demanded.
b. Prices of other commodities:
In case of substitutes, a rise in the price of one commodity leads to an increase in the demand for another commodity. For example, if the price of coffee rises, it's demand will fall but the demand for tea will rise.
In case of complementary goods, a rise in the price of car will leads to a fall in the demand for them and their complementary good's (petrol) demand will decline.
c. Income:
A rise in the consumer's income raises the demand for a commodity, but a fall in his income reduces the demand for it.
d. Tastes and Preferences:
When there is a change in the tastes of consumers in favour of a commodity its demand will rise and vice versa.
Q11. Define income effect.
Ans:- When the price of a commodity falls, the real income of the consumer increases because he has to spend less in order to buy the same quantity. On the contrary, with the rise in the price of the commodity, the real income of the consumer falls. This is known as the income effect.
Q12. Define substitution effect.
Ans:- When the price of a commodity fall, the price of its substitutes remaining the same, consumers will buy more of this commodity rather than the substitutes. As a result, its demand will increase. On the contrary, with the rise in the price of the commodity its demand will fall, given the prices of the substitutes. This is known as the substitution effect.
Q13. What is law of demand?
Ans:- The law of demand expresses a relationship between the quantity demanded and its price. The law of demand states that when the price of a commodity increases the demand for the commodity decreases and conversely, when the price of a commodity decreases the demand for the commodity increases. In the words of Alfred Marshall "the amount demanded increases with a fall in price and diminishes with a rise in price". This, the law of demand expresses an inverse relationship between quantity demanded and its price.
Q14. Write the assumption of the law of demand.
Ans:- The main assumption of the law of demand are given below -
a. Income of the consumer remain unchanged.
b. There is no changes in the tastes and preferences of the consumers.
c. Prices of complementary and substitute goods remain unchanged.
d. There is no expectation of the change in the price of the commodity in near future.
Q. Define increase in demand.
Ans:- An increase in demand is defined as a situation where the consumer buys more of the commodity at a given price. In other words, when the demand for a commodity increases due to a change in some other factor ( taste, habit, income, etc ) other than its own price, it is called increase in demand.
Q. Define decrease in demand.
Ans:- Decrease in demand is defined as a situation where the consumer buys less of the commodity at a given price. In other words, when the demand for a commodity decreases due to a change in some other factor ( taste, habit, income, etc ) other than its own price, it is called decrease in demand.
Q. What is meant by extension in quantity demanded?
Ans:- A downward movement along a demand curve takes place when there is a change in the quantity demanded due to a change in the commodity's own price. This is called extension in demand.
Q. What is meant by contraction in quantity demanded?
Ans:- A upward movement along a demand curve takes place when there is a change in the quantity demanded due to a change in the commodity's own price. This is called contraction in demand
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