Chapter 10: Consumer’s Demand and Elasticity

Demand refers to the quantity of a commodity that a consumer is willing and able to purchase at various given prices during a given period of time. It requires two things: Desire to buy AND Ability to pay (purchasing power).

Determinants of Demand

The demand for a commodity depends on several factors:

1. Price of the commodity (\(P_x\)).
2. Price of related goods (Substitute Goods like tea and coffee; Complementary Goods like cars and petrol).
3. Income of the consumer (\(Y\)).
4. Tastes and Preferences.

Demand Schedule and Demand Curve

A Demand Schedule is a tabular statement showing different quantities demanded at different prices. A Demand Curve is the graphical representation of the demand schedule. Due to the inverse relationship between price and quantity demanded (Law of Demand), the curve slopes downward from left to right.

Movement vs. Shift in the Demand Curve

Movement along the Demand Curve

When change in quantity demanded occurs strictly due to a change in the product’s own price (keeping all other factors constant), it leads to a movement along the same curve.

• Expansion of demand: Downward movement due to a fall in price.
• Contraction of demand: Upward movement due to a rise in price.

Shift in the Demand Curve

When quantity demanded changes due to factors other than the product’s own price (e.g., an increase in consumer income), the entire curve shifts.

• Increase in Demand: Curve shifts completely to the right.
• Decrease in Demand: Curve shifts completely to the left.

Price Elasticity of Demand (\(E_d\))

Price elasticity of demand measures the degree of responsiveness of quantity demanded to a change in the price of the commodity.

Measurement using Percentage Change Method

$$ E_d = -\frac{%\text{ change in Quantity Demanded}}{%\text{ change in price}} $$ $$ E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} $$ Where:

• \(\Delta Q = Q_1 - Q_0\) (Change in Quantity)
• \(\Delta P = P_1 - P_0\) (Change in Price)

Factors Affecting Elasticity

• Availability of substitutes (High substitutes = Highly elastic)
• Nature of commodity (Necessities = Inelastic, Luxuries = Elastic)
• Proportion of income spent (High proportion = Elastic)

Competency-Based Questions

Data-Based Question

Q1. The price of a smartphone drops from ₹20,000 to ₹16,000. As a result, its monthly demand scales up from 5,000 units to 6,250 units. Calculate the price elasticity of demand using the percentage method. Based on the value, comment on the nature of its elasticity.

Answer: Given: \(P = 20,000\); \(P_1 = 16,000\) \(\implies\Delta P = -4,000\) \(Q = 5,000\); \(Q_1 = 6,250\) \(\implies\Delta Q = +1,250\)

$$ E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} $$ $$ E_d = \frac{1,250}{-4,000} \times \frac{20,000}{5,000} $$ $$ E_d = -0.3125 \times 4 = -1.25 $$

Since \(|E_d| > 1\), the demand for the smartphone is highly elastic. A small percentage drop in price led to a proportionately larger increase in demand.

Analytical Question

Q2. The price of Coffee rises in the global market. Using a diagrammatic explanation or clear reasoning, state what will happen to the demand curve for Tea.

Answer: Tea and Coffee are substitute goods. If the price of coffee rises, coffee becomes relatively more expensive to consumers, prompting many to switch their consumption from coffee to tea, even though the price of tea itself has not changed. Consequently, the demand for tea will increase at its existing price. Graphically, this is represented by a rightward shift of the entire demand curve for tea (an “Increase in Demand”).