Business Economics Unit 2: Demand Analysis Notes [FYUGP BCom 2nd Sem. Gauhati University]

In this post, we have provided Gauhati University BCom 2nd Semester NEP FYUGP Business Economics Unit 2: Theory of Demand and Analysis Chapter 2: Demand Analysis Notes  with most important questions and previous year questions (PYQs). Each question is answered perfectly to help you boost your preparation to the next level.

Must Visit: GU Business Economics Important Notes, Solution Main Page

Unit 2: Theory of Demand and Analysis

CHAPTER 2: DEMAND ANALYSIS

 

1 Mark Questions (Choose the correct answer)

1. An inferior good is a commodity whose ___ with an increase in income. (GU BCom 2024)
(i) demand falls
(ii) demand rises
(iii) supply falls
(iv) supply rises
Answer: (i) demand falls

2. Mention one factor affecting the individual demand for a commodity. (GU BCom 2013, 2017)
Answer: Price of the commodity.

3. Name a commodity which has inelastic demand. (GU BCom 2013, 2017)
Answer: Salt.
4. What is demand function? (GU BCom 2015, 2019)
Answer: A demand function expresses the relationship between the quantity demanded of a commodity and its various determinants, such as price, income, and prices of related goods.
5. Draw a demand curve showing cross elasticity of demand for substitutes. (GU BCom 2014)
Answer: A demand curve showing cross elasticity for substitutes slopes upward, indicating that as the price of one good rises, the demand for its substitute also increases.
(Diagram should be drawn separately: A typical graph with an upward-sloping demand curve indicating substitutes like tea and coffee.)
6. Define demand. (GU BCom 2016)
Answer: Demand refers to the quantity of a commodity that consumers are willing and able to purchase at a given price over a specific period.
7. Explain individual demand schedule.
Answer: An individual demand schedule is a table that shows the different quantities of a commodity that a single consumer is willing to buy at different prices over a given period.
9. Explain individual demand curve.
Answer: An individual demand curve is a graphical representation of the relationship between the price of a commodity and the quantity demanded by a single consumer. It generally slopes downward from left to right, indicating an inverse relationship between price and demand.
10. Explain market demand schedule.
Answer: A market demand schedule is a table that shows the total quantity of a commodity demanded by all consumers in the market at different price levels. It is derived by summing up individual demand schedules.
11. Explain market demand curve.
Answer: A market demand curve is a graphical representation of the total quantity of a good demanded by all consumers in the market at different prices. It slopes downward, indicating that as the price decreases, the total demand increases.

2 Mark Questions (Short Answer)

1. "Change in demand and change in quantity demanded are the same." Comment. (GU BCom 2024)
Answer: No, change in demand and change in quantity demanded are not the same. A change in quantity demanded occurs due to a change in the price of the commodity, leading to movement along the demand curve. In contrast, a change in demand occurs due to factors other than price (such as income, tastes, or prices of related goods), causing a shift of the entire demand curve.
2. State any two exceptions to the law of demand. (GU BCom 2024)
Answer: Giffen Goods: For inferior goods known as Giffen goods, demand increases as price rises due to the income effect outweighing the substitution effect.

Veblen Goods: Luxury goods, such as designer brands, may see higher demand at higher prices because they are perceived as status symbols.

3. If X and Y are complementary goods, how does a rise in the price of Y affect the demand for X? (GU BCom 2024)
Answer: If X and Y are complementary goods (e.g., tea and sugar), a rise in the price of Y reduces its demand. Since complementary goods are consumed together, the demand for X will also decrease as fewer people buy Y, leading to a fall in the overall consumption of both goods.
4. The demand curve slopes downwards. Why? (GU BCom 2013, 2017)
Answer: The demand curve slopes downward due to:
Law of Diminishing Marginal Utility: As more units of a good are consumed, the additional satisfaction from each unit decreases, so consumers are willing to pay less.

Income Effect: When the price of a good falls, consumers' purchasing power increases, allowing them to buy more.

Substitution Effect: If the price of a good decreases, it becomes relatively cheaper than substitutes, leading to an increase in its demand.

5. State the determinants of demand. (GU BCom 2014, 2016)
Answer: The major determinants of demand include:
Price of the commodity

Income of consumers

Prices of related goods (substitutes and complements)

Tastes and preferences

Future expectations about price changes

Number of buyers in the market

5 Mark Questions (Descriptive)

1. Discuss the main features/characteristics of demand. (VVI)
Answer: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price over a specific period. The main characteristics of demand are:
i. Dependence on Price: Demand varies with price; generally, a lower price leads to higher demand and vice versa.

ii. Dependence on Income: A consumer’s purchasing power influences demand. Higher income increases demand for normal goods and decreases demand for inferior goods.

iii. Dependence on Related Goods: Demand is affected by the prices of substitute and complementary goods.

iv. Time Factor: Demand changes over time due to seasonal variations, trends, and economic conditions.

v. Nature of the Commodity: Necessities (like food) have inelastic demand, while luxuries (like jewelry) have elastic demand.

vi.Tastes and Preferences: Consumer choices, trends, and advertisements influence demand significantly.

vii. Future Expectations: If consumers expect prices to rise, they may buy more now, increasing current demand.

2. What is the Law of Demand? What are the characteristics of the Law of Demand?
Answer: The Law of Demand states that, other things remaining constant (ceteris paribus), the quantity demanded of a good falls when its price rises and increases when its price falls. This establishes an inverse relationship between price and demand.

Characteristics of the Law of Demand:

1. Inverse Relationship: As price increases, demand decreases, and vice versa.

2. Ceteris Paribus Assumption: The law holds only when other factors (income, preferences, prices of related goods) remain unchanged.

3. Graphical Representation: The demand curve slopes downward from left to right, showing the negative price-demand relationship.

4. Applicable to Most Goods: The law applies to normal goods, but exceptions exist (e.g., Giffen goods).

5. Explained by Two Effects: The law works due to the income effect (higher purchasing power when prices fall) and substitution effect (preference for cheaper substitutes).

3. Give exceptions of the Law of Demand.
Answer: The Law of Demand does not apply in certain cases, known as exceptions. These include:
1. Giffen Goods: These are inferior goods where a price rise increases demand due to the strong income effect, e.g., staple foods like bread and rice in poor households.

2. Veblen Goods (Prestige Goods): Expensive luxury goods (like designer clothes, high-end cars) may see higher demand as price increases, due to their status symbol effect.

3. Speculative Goods: In stock markets or real estate, a rising price may attract more buyers who expect further price increases.

4. Necessities: Essential goods like medicines, salt, and electricity have inelastic demand; consumers buy them regardless of price changes.

5. Future Price Expectations: If consumers expect prices to rise further, they may buy more even at higher prices (e.g., gold during inflation).

Thus, while the Law of Demand is a fundamental economic principle, these exceptions highlight its limitations in certain real-world scenarios.

4. Why does the demand curve slope downward?
Answer: The demand curve slopes downward from left to right, showing an inverse relationship between price and quantity demanded. This happens due to the following reasons:

1. Law of Diminishing Marginal Utility: As consumers consume more units of a good, the additional satisfaction (marginal utility) from each extra unit decreases. So, they are willing to pay less for additional units, leading to lower demand at higher prices.

2. Income Effect: A fall in the price of a good increases consumers’ real income, allowing them to buy more of the good, thereby increasing demand.

3. Substitution Effect: When the price of a good falls, it becomes relatively cheaper compared to substitutes, making consumers switch from expensive alternatives to the cheaper good, increasing its demand.

4. Increase in Buyers: At lower prices, more consumers can afford to buy the product, expanding the market demand.

5. Consumer Expectations: If consumers expect prices to rise in the future, they may buy more at lower prices, increasing demand.

6. Variety of Uses: Some goods, like milk and sugar, have multiple uses. When their price falls, consumers may increase consumption in different ways, increasing demand.

5. Mention the reasons for the upward slope of the demand curve.
Answer: While demand curves generally slope downward, in certain situations, they may slope upward. The reasons for an upward-sloping demand curve include:
1. Giffen Goods Effect: Giffen goods are inferior goods where a price rise leads to increased demand. This happens when the income effect dominates the substitution effect (e.g., staple foods like bread or rice among low-income groups).

2. Veblen Goods (Prestige Goods Effect): Some luxury goods (like designer clothes, expensive watches) have higher demand at higher prices because they serve as status symbols. Consumers associate higher prices with exclusivity and prestige.

3. Speculative Demand: In financial markets or real estate, rising prices can attract more buyers who expect prices to rise further, leading to an upward-sloping demand curve.

4. Necessity Goods with No Close Substitutes: Certain essential goods (e.g., life-saving medicines) have an upward-sloping demand curve because consumers buy them regardless of price increases.

5. Future Price Expectations: If consumers expect a further price increase, they may buy more even at higher prices to avoid future costs (e.g., gold during inflation).

These exceptions show that while the law of demand generally holds, real-world conditions sometimes create situations where demand increases with price.

10 Mark Questions (Detailed Answer)

1) Explain the term Demand OR Define the concept of Demand. Discuss the determinants of Demand.

Answer: Definition of Demand: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price over a specific period, keeping other factors constant. It is an essential concept in economics as it determines the market price of goods and services.

Types of Demand:

i. Individual Demand: The demand for a commodity by a single consumer at different prices.

ii. Market Demand: The total demand for a commodity by all consumers in the market.

iii. Joint Demand: Demand for goods that are used together (e.g., car and petrol).

iv. Composite Demand: Demand for goods that have multiple uses (e.g., electricity for lighting, heating, etc.).

v. Derived Demand: Demand for goods that depend on the demand for another good (e.g., demand for steel depends on the demand for cars).

Determinants of Demand:

The demand for a commodity depends on several factors:

i. Price of the Commodity: There is an inverse relationship between price and demand. As price increases, demand falls, and vice versa.

ii. Income of Consumers: Higher income increases demand for normal goods and decreases demand for inferior goods.

iii. Price of Related Goods:

Substitutes: If the price of a substitute (e.g., tea) rises, demand for the other good (e.g., coffee) increases.

Complements: If the price of a complementary good (e.g., petrol) rises, demand for the related good (e.g., cars) falls.

iv. Consumer Preferences and Tastes: Advertising, fashion, and cultural factors influence demand.

v. Future Price Expectations: If consumers expect prices to rise, they may buy more now, increasing current demand.

vi. Number of Buyers: More consumers in the market increase total demand.

vii. Seasonal and Climatic Factors: Certain goods (e.g., woolen clothes) have higher demand in specific seasons.

viii. Government Policies: Taxes and subsidies affect the affordability of goods, impacting demand.

Thus, demand is influenced by multiple economic, social, and psychological factors, shaping market behavior.

2) State and explain the law of demand, giving its assumptions and importance. (GU BCom 2024)

Answer: Law of Demand: The Law of Demand states that, ceteris paribus (other things remaining constant), the quantity demanded of a commodity decreases when its price increases and increases when its price decreases. This indicates an inverse relationship between price and demand.

Explanation with Demand Curve:

1. When the price of a good falls, consumers can afford to buy more, increasing demand.

2. Conversely, when the price rises, consumers buy less, decreasing demand.

3. This relationship is represented graphically by a downward-sloping demand curve from left to right.

Assumptions of the Law of Demand:

The law of demand holds true only under certain conditions:

i. Ceteris Paribus: All other factors affecting demand (income, preferences, prices of substitutes/complements) remain unchanged.

ii. No Change in Income: The consumer’s income should remain constant.

iii. No Change in Preferences: Consumer tastes and fashion should remain stable.

iii. No Change in Prices of Related Goods: The prices of substitute and complementary goods should not change.

iv. No Expectations of Future Price Changes: If consumers expect future price hikes, they may buy more even at higher prices, violating the law.

v. No Speculative Goods: The law does not apply to assets like stocks or real estate, where rising prices may attract more buyers.

Importance of the Law of Demand:

The law of demand is a fundamental principle in economics and has several practical applications:

i. Price Determination: Businesses set prices based on demand patterns to maximize sales.

ii. Business Decisions: Firms analyze demand to adjust production levels and marketing strategies.

iii. Government Policies: Policymakers use demand analysis to regulate taxes, subsidies, and price controls (e.g., controlling inflation).

iv. Consumer Behavior Analysis: It helps understand how consumers react to price changes, guiding product pricing and promotional strategies.

v. Market Demand Forecasting: Helps in predicting consumer demand trends, essential for economic planning.

Thus, the law of demand is a crucial concept in economics, explaining consumer purchasing behavior and helping in decision-making for businesses and governments alike.

3. What is the demand curve? Why does the demand curve slope downward? Are there any exceptions to the demand curve?

What is the Demand Curve?

The demand curve is a graphical representation of the relationship between the price of a commodity and the quantity demanded by consumers over a specific period of time. It is typically downward sloping, indicating an inverse relationship between price and quantity demanded.

Why Does the Demand Curve Slope Downward?

The demand curve slopes downward due to the following reasons:

i) Law of Diminishing Marginal Utility: As consumers consume more units of a good, the additional satisfaction (marginal utility) derived from each extra unit decreases. As a result, consumers are willing to pay less for additional units, leading to higher demand at lower prices.

ii) Income Effect: When the price of a good falls, consumers’ real income (purchasing power) increases. This allows them to buy more of the good, thus increasing its demand.

iii) Substitution Effect: When the price of a good falls, it becomes relatively cheaper compared to other substitute goods. As a result, consumers tend to switch from the more expensive substitutes to the now cheaper good, increasing its demand.

Are There Any Exceptions to the Demand Curve?

Yes, there are certain exceptions to the general downward slope of the demand curve:

i) Giffen Goods: These are inferior goods where a rise in the price of the good leads to an increase in its demand. This occurs because the income effect outweighs the substitution effect, particularly among low-income groups. For example, when the price of basic staples like bread or rice rises, consumers may buy more due to the limited availability of substitutes.

ii) Veblen Goods (Prestige Goods): Some luxury goods like designer clothes, expensive watches, and high-end cars may see higher demand when their prices rise because they are perceived as symbols of wealth and status.

iii) Speculative Goods: In cases like stocks or real estate, rising prices may attract more buyers who expect the prices to rise even further, resulting in increased demand despite higher prices.

iv) Necessity Goods: For certain essential goods like medicines or basic utilities, demand may not decrease with higher prices. These goods are necessary for survival or health, so consumers continue purchasing them regardless of price increases.

Thus, while the demand curve typically slopes downward, there are exceptions based on specific circumstances and types of goods.

4. Explain critically the Law of Demand? Why does the demand curve slope downwards?

Explanation of the Law of Demand:

The Law of Demand states that, ceteris paribus (all other factors being equal), the quantity demanded of a commodity decreases as its price increases, and conversely, the quantity demanded increases as the price decreases. This law assumes that there are no changes in consumer income, preferences, or the prices of related goods, which are key factors influencing demand.

Why Does the Demand Curve Slope Downward?

The demand curve slopes downward for the following reasons:

i) Law of Diminishing Marginal Utility: As consumers consume more units of a good, the satisfaction (or utility) from each additional unit decreases. To induce consumers to buy more, the price must fall to reflect the lower value they place on additional units.

ii) Income Effect: When the price of a good falls, consumers' effective income increases, allowing them to buy more of the good. The lower price increases their purchasing power, thereby boosting demand.

iii) Substitution Effect: If the price of a good falls, it becomes more attractive relative to substitutes, leading to an increase in demand for that good as consumers switch from more expensive alternatives.

Critically Analyzing the Law of Demand:

While the Law of Demand is a fundamental principle in economics, it has certain limitations and exceptions that should be considered:

i) Giffen Goods: For certain inferior goods, such as basic food items for low-income households, a rise in price may lead to an increase in demand. This counter-intuitive behavior occurs due to the income effect being stronger than the substitution effect.

ii) Veblen Goods: Some luxury goods, such as designer handbags or exclusive cars, may have higher demand when their prices increase. This occurs because consumers view higher prices as a signal of exclusivity, status, or prestige, leading them to purchase more.

iii) Speculative Demand: In markets for assets like real estate or stocks, rising prices may attract more buyers who expect prices to continue increasing. This speculative behavior leads to increased demand even as prices rise.

iv) Necessity Goods: For essential goods like life-saving drugs or basic utilities, demand remains relatively constant, or may even increase, as prices rise. These goods are essential, and consumers are less sensitive to price changes.

Despite these exceptions, the Law of Demand generally holds for most goods and provides a foundational understanding of consumer behavior in economics. It helps to predict how price changes will affect market demand, thus guiding business and policy decisions. However, the exceptions highlight the complexity of real-world markets, where demand may not always behave as the law suggests.

6. Distinguish between: (a) Extension and contraction in Demand (b) Increase and Decrease in Demand.

Answer:

(a) Distinction Between Extension and Contraction in Demand

Basis of Difference	Extension in Demand	Contraction in Demand
Meaning	When the quantity demanded increases due to a fall in price.	When the quantity demanded decreases due to a rise in price.
Cause	Caused by a decrease in the price of the commodity.	Caused by an increase in the price of the commodity.
Graphical Representation	Movement downward along the same demand curve.	Movement upward along the same demand curve.
Nature of Change	No shift in the demand curve, only a movement along it.	No shift in the demand curve, only a movement along it.
Example	If the price of a product decreases from ₹50 to ₹40, more quantity is demanded.	If the price of a product increases from ₹40 to ₹50, less quantity is demanded.

(b) Distinction Between Increase and Decrease in Demand

Basis of Difference	Increase in Demand	Decrease in Demand
Meaning	When the demand for a commodity rises due to factors other than its price.	When the demand for a commodity falls due to factors other than its price.
Cause	Caused by factors like higher income, favorable consumer preferences, lower price of complementary goods, etc.	Caused by factors like lower income, unfavorable consumer preferences, higher price of complementary goods, etc.
Graphical Representation	The demand curve shifts to the right.	The demand curve shifts to the left.
Price Factor	Occurs even when the price of the good remains unchanged.	Occurs even when the price of the good remains unchanged.
Example	If consumers’ income increases, the demand for normal goods rises, shifting the demand curve to the right.	If consumers’ income decreases, the demand for normal goods falls, shifting the demand curve to the left.

-0000-

Must Visit: Gauhati University FYUGP BCom 2nd Sem Main Page