NIOS Economics (318) Notes/Answer| Chapter-15|What affects demand

NIOS Economics (318) Notes/Answer| Chapter-15|What affects demand. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-15|What affects demand

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-15|What affects demand

Intext Questions

1. State whether the following statement are true or false 

(a) My demand for milk is 10 litres

Ans. True

(b) My demand for milk is 10 litres per month when the price of milk is Rs.10 per litre. 

Ans. False

(c) My demand for milk is 10 litres per month, whatever may be the price of milk.

Ans. True 

(d) Hari is a rich man and can buy a car, so Hari has a demand for a car.

Ans. False

(e) Want for good means demand for good

Ans. False

(f) Want of a consumer for good becomes his demand for it when it is backed by ability and willingness of the consumer to pay for it.

Ans. True

2. State whether the following statements are true or false. 

(a) The law of demand applies only on essential goods.

Ans. False

(b) The law of demand states that other things remaining the same, the price of a commodity and its quantity demanded are inversely related. 

Ans. True

(c) Other things remaining the same means that other factors affecting demand do not change.

Ans. True

(d) The law of demand also applies on good that have prestige value.

Ans. False

(e) If the price of a commodity is rising and is expected to continue to rise in future, its quantity demanded will start falling.

Ans. False

(f) Price of a good is only one of the factors that affect the demand for a good.

Ans. True

(g) Demand curve slopes downward from left to right.

Ans. True

(h) Other things remain the same, when the price of a good rises its demand also rises. 

Ans. False

(i) An individual demand schedule shows the quantities demanded of a commodity at different prices.

Ans. True

(j) When the price of a good rises the purchasing power of its buyer also rises.

Ans. False

3. Fill in the blanks with appropriate words given in the brackets.

(a) The demand for a good is also affected by price of ________ (all goods, related goods).

Ans. related goods 

(b) In case of a________ Good the increase in income of its buyer leads to a fall in its demand (normal, inferior).

Ans. inferior

(c) The demand for a commodity________when the price of its substitute commodity rises. (decreases, increases). 

Ans. increases

(d) The demand for a commodity increases if the price of its complementary commodity________ (falls, rises). Ans. falls

4. Fill in the blanks with appropriate words given in the brackets.

(a) When demand rises due to a fall in price, it is called________of demand (expansion, contraction). 

Ans. expansion 

(b) A rightward shift in demand curve shows________ in demand (increase, decrease).

Ans. increase

(c) A decrease in demand will result in a ________ shift of demand curve (leftward, rightward).

Ans. leftward

(d) An upward movement along the same demand curve shows________of demand. (expansion, contraction) 

Ans. contraction

Terminal Exercise

1. What is meant by the term ‘demand’? Can want or desire for a commodity be treated as demand for the commodity?

Ans. By demand for a commodity we mean the desire for the commodity backed by purchasing power and the willingness to spend. When a consumer wishes to consume a commodity and has also the necessary purchasing power i.e. income along with willingness to spend, he is said to have demand for the commodity.

Demand for a commodity refers to the quantity of a commodity that a consumer is willing to buy at a given price during a given period of time.

Mere want or desire for a commodity by a person is not called his demand for the commodity. For example if our want or desire is for a car, it can’t be called our demand for a car. This want or desire for a car will become our demand if we have the ability to buy it and we are willing to buy it. Thus demand for a commodity is not mere want or desire for it. It is the want or desire for a good backed by the ability and willingness to pay for it. Thus demand for a commodity means want or desire for it and the ability and willingness to pay for it.

2. Explain the relationship between price of a commodity and its quantity demanded. Draw a demand curve on the basis of a hypothetical demand schedule.

Ans. The law of demand explains the relationship of price of a commodity and its quantity demanded, when all other factors affecting demand remain constant.

The law of demand states that other things remaining the same, quantity demanded of a commodity is inversely related to its price. In other words, demand for a commodity rises when its price falls and its demand falls when price rises provided other factors remain unchanged.

The law of demand can better be explained with the help of table and figure given below

Price in RsQuantity demand (in units)
110
28
36
44
52

As you see in table when price rises quantity demanded decreases. That is why the demand curve slopes downwards from left to right as shown in the figure. Downward slope of demand curve shows the inverse relationship of price and quantity demanded of a commodity.

3. Distinguish between normal goods and inferior goods. Give an example of each. 

Ans. Distinguish between normal goods and inferior goods are as follows: 

  1.  In case of some goods like full cream milk, fine quality of rice (Basmati rice) etc. demand for these commodities increases when income of the buyer increases and demand for these commodities decreases when income of the buyer decreases. Such goods, whose demand increases with the increase in income of the buyer and vice versa are called normal goods. But there are some goods like coarse rice, toned milk etc. whose demand decreases when the income of the buyer increases and their demand increases when the income of the buyer decreases. Such goods, whose demand decreases with the increase in income of the buyer and vice versa, are called inferior goods.
  2.  For example, as income increases, the demand for air travel (a normal good) increases while the demand for long distance bus trips (an inferior good) decreases. 
  3. Income effect of normal good is positive and income effect of inferior good is negative
  4. In the case of normal goods, an increase in income causes a forward shift in demand curve. On the other hand, in the case of inferior goods, an increase in income causes a backward shift in the demand curve. 

4. Distinguish between substitute goods and complementary goods. Give two examples of each. 

Ans. Distinguish between substitute goods and complementary goods are as follows: 

  1. Substitute goods are those goods which can easily be used in place of one another for satisfaction of a particular want, like tea and coffee. Complementary goods are those goods which are used together to satisfy a particular want like car and petrol.
  2. An increase in price of substitute good leads to an increase in demand for the given commodity and a decrease in price of substitute good leads to a decrease in demand for the given commodity. Whereas increase in the price of complementary goods leads to a decrease in demand for the given commodity and a decrease in the price of complementary goods leads to an increase in demand for the given commodity
  3. Example of Substitute goods, if price of coffee increases, the demand for tea will rise as tea will become relatively cheaper in comparison to coffee. On the other hand, for example complementary goods, if the price of petrol falls then the demand for cars will increase as it will be relatively cheaper to use both the goods together.
  4. Demand for a given commodity is directly affected by change in price of substitute goods whereas demand for a given commodity is inversely affected by change in price of complementary goods of substitute goods.

5. Distinguish between a movement along the demand curve and a shift in the demand curve and show this diagrammatically.

Ans. When quantity demanded of a commodity changes due to change in its price, keeping other factors constant, it is called change in quantity demanded. It is graphically expressed as a movement along the same demand curve.

There can be either a downward movement or an upward movement along the same demand curve. Upward movement along the same demand curve is called contraction of demand or decrease in quantity demanded and downward movement along the same demand curve is known as expansion of demand or increase in quantity demanded. These can better be explained with the help of figure given below

Movement along the demand curve

A fall in price from OP to OP1 leads to increase in quantity demanded from OQ to OQ1 (expansion of demand) resulting in a downward movement from point A to point B along the same demand curve DD.

When Price rises from OP to OP2, quantity demanded falls from OQ to OQ2 (contraction of demand) leading to an upward movement from point A to point C along the same demand curve DD.

In law of demand all factors other than price of the commodity are assumed to be constant. But what happens when other factors determining demand change but price remains constant? When the demand of a commodity changes at the same price, it means the change is due to change in anyone or more of the other factors that affect demand. When the demand for a commodity changes due to change in any factor other than the price of the commodity, it is known as change in demand. It is graphically expressed as a shift in demand curve.

Demand curve of a commodity may shift due to change in price of substitute goods, change in price of complementary goods, change in income of the buyer, change in tastes and preferences, change in population, change in distribution of income, change in season and weather etc.

The shift in demand curve can be explained with the help of the figure given below.

Fig. Shift in demand curve

we can see in figure that quantity demanded decreases from 0Q to 0Q1 at the same price OP. This decrease is due to unfavourable change in factors other than price of the commodity.

This is called decrease in demand. When there is decrease in

demand, the demand curve shifts towards the left. When quantity demanded increases from OQ to OQ2 at the same price OP, this is called increase in demand. Increase in demand is due to favourable change in factors other than price of the commodity. In case of increase in demand, the demand curve shifts towards the right. 

6. What are the factors which lead to a shift in the demand curve?

Ans. The factors that influence a consumer’s decision to purchase a commodity are also known as determinants of demand. The following factors affect the individual demand for a commodity:

  1.  Price of the commodity
  2. Price of related goods
  3. Income of buyer of the commodity
  4. Tastes and preferences of the buyer

1. Price of the Commodity

When the price of a commodity falls, we tend to buy more of it and when its price rises, we tend to buy less of it, when all other factors remain constant (“other things remaining the same”). In other words, other things remaining the same, there is an inverse relationship between the price of a commodity and its quantity demanded by its buyers. This statement is in accordance with the law of demand.

Price of a commodity and its quantity demanded by its buyers are inversely related only when other things remain the same. So, other things remaining the same’ is an assumption when we study the effect of changes in the price of a commodity on its quantity demanded.

2. Price of Related goods

A consumer may demand a particular good. But while buying that good he/she also asks the price of its related goods. Related goods can be of two types 

  1. Substitute goods
  2. Complementary goods

While purchasing a good, prices of its substitutes and complements do affect its quantity purchased.

(i) Price of Substitute Goods: 

Substitute goods are those goods which can easily be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in price of substitute good leads to an increase in demand for the given commodity and a decrease in price of substitute good leads to a decrease in demand for the given commodity. It means demand for a given commodity is directly affected by change in price of substitute goods. For example, if price of coffee increases, the demand for tea will rise as tea will become relatively cheaper in comparison to coffee.

(ii) Price of Complementary goods: 

Complementary goods are those goods which are used together to satisfy a particular want like car and petrol. An increase in the price of complementary goods leads to a decrease in demand for the given commodity and a decrease in the price of complementary goods leads to an increase in demand for the given commodity. For example, if price of petrol falls then the demand for cars will increase as it will be relatively cheaper to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods.

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

3. Income of the Buyer of Commodity

Demand for a commodity is also affected by income of its buyer. However, the effect of change in income on demand depends on the nature of the commodity under consideration. In case of some goods like full cream milk, fine quality of rice (Basmati rice) etc, demand for these commodities increases when income of the buyer increases and demand for these commodities decreases when income of the buyer decreases. Such goods, whose demand increases with the increase in income of the buyer, are called normal goods. But there are some goods like coarse rice, toned milk etc. that increase when the income of the buyer decreases. Such goods, whose demand decreases with the increase in income of the buyer, are called inferior goods. Suppose, a consumer buys 10 Kgs. of rice whose price is Rs.25 per Kg. He cannot afford to buy better quality rice because the price of such rice is Rs. 50 per Kg. The consumer is spending Rs.250 per month on the purchase of rice. Now, if the income of the consumer increases, he can afford Rs.350 on purchase of 10 Kg. of rice. Now he can afford to buy some quantity of rice, say 6 Kgs., whose price is Rs.25 per Kg, and may buy 4 Kgs. of rice whose price is Rs 50 per Kg. Thus he will buy 10 Kgs. of rice by spending Rs. 350 per month.

Therefore, we may conclude that demand for normal goods is directly related to the income of the buyer but demand for inferior goods is inversely related to the income of the buyer. 4. Tastes and Preferences of the Buyer

The demand for a commodity is also affected by the tastes and preferences of the buyers. They include changes in fashion, customs, habits etc. Those commodities are preferred by the consumers which are in fashion. So, demand for those commodities rises which are in fashion. On the other hand, if a commodity goes out of fashion, its demand falls because no consumer will like to buy it.

7. Define the term ‘market demand’.

Ans. Market demand is the total quantity of a commodity that all its buyers taken together are willing to buy at a given price during a given period of time.

8. Explain briefly the various determinants of demand.

Ans. The factors that influence a consumer’s decision to purchase a commodity are also known as determinants of demand. The following factors affect the individual demand for a commodity:

  1.  Price of the commodity
  2. Price of related goods
  3. Income of buyer of the commodity
  4. Tastes and preferences of the 

1. Price of the Commodity buyer

When the price of a commodity falls, we tend to buy more of it and when its price rises, we tend to buy less of it, when all other factors remain constant (‘other things remaining the same’). In other words; other things remaining the same, there is an inverse relationship between the price of a commodity and its quantity demanded by its buyers. This statement is in accordance with the law of demand.

Price of a commodity and its quantity demanded by its buyers are inversely related only when ‘other things remain the same’.

So, ‘other things remaining the same’ is an assumption when we study the effect of changes in the price of a commodity on its quantity demanded.

2. Price of Related goods

A consumer may demand a particular good. But while buying that good he/she also asks the price of its related goods. Related goods can be of two types

  1. Substitute goods
  2. Complementary goods

While purchasing a good, prices of its substitutes and complements do affect its quantity purchased.

(i) Price of Substitute Goods: 

Substitute goods are those goods which can easily be used in place of one another for satisfaction of a particular want, like tea and coffee. An increase in price of substitute good leads to an increase in demand for the given commodity and a decrease in price of substitute goods leads to a decrease in demand for the given commodity. It means demand for a given commodity is directly affected by change in price of substitute goods. For example, if the price of coffee increases, the demand for tea will rise as tea will become relatively cheaper in comparison to coffee.

(ii) Price of Complementary goods: 

Complementary goods are those goods which are used together to satisfy a particular want like car and petrol. An increase in the price of complementary goods leads to a decrease in demand for the given commodity and a decrease in the price of complementary goods leads to an increase in demand for the given commodity. For example, if price of petrol falls then the demand for cars will increase as it will be relatively cheaper to use both the goods together. So, demand for a given commodity is inversely affected by change in price of complementary goods.

3. Income of the Buyer of Commodity 

Demand for a commodity is also affected by income of its buyer. However, the effect of change in income on demand depends on the nature of the commodity under consideration.

In case of some goods like full cream milk, fine quality of rice (Basmati rice) etc, demand for these commodities increases when income of the buyer increases and demand for these commodities decreases when income of the buyer decreases. Such goods, whose demand increases with the increase in income of the buyer, are called normal goods. But there are some goods like coarse rice, toned milk etc. that increase when the income of the buyer decreases. Such goods, whose demand decreases with the increase in income of the buyer, are called inferior goods. Suppose, a consumer buys 10 Kgs. of rice whose price is Rs.25 per Kg. He cannot afford to buy better quality rice because the price of such rice is Rs. 50 per Kg. The consumer is spending Rs.250 per month on the purchase of rice. Now, if the income of the consumer increases, he can afford Rs.350 on purchase of 10 Kg. of rice. Now he can afford to buy some quantity of rice, say 6 Kgs., whose price is Rs.25 per Kg. and may buy 4 Kgs. of rice whose price is Rs 50 per Kg. Thus he will buy 10 Kgs. of rice by spending Rs. 350 per month.

Therefore, we may conclude that demand for normal goods is directly related to the income of the buyer but demand for inferior goods is inversely related to the income of the buyer. 

4. Tastes and Preferences of the Buyer

The demand for a commodity is also affected by the tastes and preferences of the buyers. They include changes in fashion, customs, habits etc. Those commodities are preferred by the consumers which are in fashion. So, demand for those commodities rises which are in fashion. On the other hand, if a commodity goes out of fashion, its demand falls because no consumer will like to buy it.

9. Explain the law of demand and its exceptions. 

Ans. The law of demand explains the relationship of price of a commodity and its quantity demanded, when all other factors affecting demand remain constant.

The law of demand states that other things remaining the same, quantity demanded of a commodity is inversely related to its price. In other words, demand for a commodity rises when its price falls and its demand falls when price rises provided other factors remain unchanged.

There are some situations in which the law of demand does not apply. These are called exceptions to the law of demand. The following are some of the exceptions to the law of demand.

1. Giffen Goods

Giffen goods are a special type of inferior goods in which the negative income effect is stronger than the negative substitution effect. Giffen goods do not follow the law of demand as their demand rises when their price rises. Examples of Giffen goods are jowar and bajra etc.

2. Status Symbol Goods

Some goods are used by rich people as status symbols, e.g. diamonds, gold jewellery etc. The higher the price, the higher will be the demand for these goods. When price of such goods falls, these goods are no longer looked at as status symbol goods and, therefore, their demand falls.

3. Necessities

Commodities such as medicines, salt, wheat etc. do not follow law of demand because we have to purchase them in minimum required quantity, whatever their price may be.

4. Goods Expected to be Scarce

When the buyers expect a scarcity of a particular good in the near future, they start buying more and more of that good even if their prices are rising. For example, during war, famines etc. people tend to buy more of some goods even at higher prices due to fear of their scarcity in near future.

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