ECONOMICS NOTES 2

GATEWAY TO CGL MAINS: ECONOMICS NOTES 2

DEMAND

Demand:- Quantity of the commodity that a consumer is able and willing to purchase in a given period and at a given price.

Demand Schedule:- It is a tabular representation which shows the relationship between price of the commodity and quantity purchased.

Demand Curve:- It is a graphical representation of demand schedule.

Individual Demand:- Demand by an individual consumer.

Factors Affecting Individual Demand For a Commodity/Determinants of Demand:-

1. Price of the commodity itself  

2. Income of the consumer

3. Price of related goods 

4. Taste and Preference 

5. Expectations of future price change

Law of Demand:- Other things remains constant, demand of a good falls with rise in price and vice versa .

Changes in Demand:-

They are of two types:

1) Change in Quantity Demanded (Movement along the same demand curve)

2) Change in Demand (Shifts in demand)

1) Change in Quantity Demanded: -

Demand changes due to change in price of the commodity alone, other factors remain constant; are of two types;

A) Expansion of demand : More demand at a lower price

B) Contraction of demand : Less demand at a higher price

2) Change in demand:-

Demand changes due to change in factors other than price of the commodity, are of two types:

A) Increase in demand:- more demand due to change in other factors, price remaining constant.

B) Decrease in demand:- less demand due to change in other factors, price remaining constant.

Causes of Increase in Demand:-

1. Increase in Income.

2. Increase/ favorable change in taste and preference.

3. Rise in price of substitute good.

4. Fall in price of complementary good.

Note: Increase in income causes increase in demand for normal good

Causes of Decrease in Demand:

1. Decrease in Income.

2. Unfavorable/Decrease in taste and preference

3. Decrease in price of substitute good.

4. Rise in price of complementary good.

Note: Decrease in income causes Decrease in demand for normal good

Type of Goods

Substitute Goods:- Increase in the price of one good causes increase in demand for other good. E.g., tea and Coffee

Complementary Goods:- Increase in the price of one good causes decrease in demand for other good. E.g:- Petrol and Car

Normal Good:- Goods which are having positive relation with income. It means when income rises, demand for normal goods also rises.

Inferior Goods:- Goods which are having negative relation with income. It means less demand at higher income and vice versa.

Normal goods - the quantity demanded of such commodities increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods.

Giffen goods - a Giffen good is an inferior good which people consume more of as price rises, violating the law of demand.. In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises.

Veblen good : Often confused with Giffen goods, Veblen goods are goods for which increased prices will increase quantity demanded. However, this is not because the consumers are forced into buying more of the good due to budgetary constraints (as in Giffen goods). Rather, Veblen goods are high-status goods such as expensive wines, automobiles, watches, or perfumes. The utility of such goods is associated with their ability to denote status. Decreasing their price decreases the quantity demanded because their status- denoting utility becomes compromised.