Basic Elements of Demand Questions and Answers [With PDF]
Why does the price of mangoes fall in season and rise out of season? Why do shops run sales? The answer starts with demand, one of the two forces that set prices in a market. Here are 25 important questions on the basic elements of demand, answered in plain language, with a worked demand schedule, the correct demand equation and a clear diagram.
This is Chapter 5 of our Economics course. It follows Theory of Consumer Behavior and comes before Basic Elements of Supply.
Meaning, Features and Determinants
Q1. What is demand?
In everyday language, demand means a wish for something. In economics, demand is the quantity of a good or service that consumers are willing and able to buy at a given price, in a given period. A wish without the money to buy is not demand.
Q2. What conditions must be met for there to be demand?
- A desire to have the good.
- The ability (purchasing power) to pay for it.
- The willingness to spend that money on it.
Q3. What are the key features of demand?
- Demand is always linked to a price. We say “demand at a price”, never just “demand”.
- It is always measured over a period of time, such as a day, a week or a month.
- It depends on consumers’ tastes, income and the prices of substitutes and complements.
- Individual demand is what one person is willing to buy. Market demand is the total of all consumers’ demands.
Q4. What is the demand function?
The demand function shows how the quantity demanded of good X depends on its determinants:
Dx = f(Px, Py, Y, T, …)
- Px is the price of good X.
- Py is the price of related goods.
- Y is the consumer’s income.
- T is the consumer’s tastes and preferences.
Q5. What are the main determinants of demand?
- The price of the good itself
- Prices of related goods (substitutes and complements)
- Consumer income and its distribution
- Tastes, habits and preferences
- Expected future prices and income
- Size of the population
- Advertising and sales promotion
- Cost of living
Law of Demand
Q6. What is the law of demand?
Other things remaining equal, when the price of a good falls, its quantity demanded rises, and when the price rises, quantity demanded falls. Price and quantity demanded move in opposite directions.
Q7. What are the assumptions of the law of demand?
- The consumer is rational.
- Tastes and habits do not change.
- Income does not change.
- Prices of related goods do not change.
- The number of buyers in the market does not change.
- No change is expected in future prices.
Q8. What are the exceptions to the law of demand?
- Giffen goods: very poor people’s staple foods. When their price rises, people cut other food and buy more of the staple.
- Veblen (prestige) goods: luxury items such as expensive jewellery that people buy because the price is high.
- Expectation of future price changes: if prices are expected to rise further, people may buy more now at the higher price.
- Ignorance of quality: buyers who cannot judge quality may assume a high price means high quality.
- Necessities: demand for essentials such as salt changes little when prices change.
- Speculation: traders may buy more shares or property as prices rise, hoping to sell higher.
Q9. What are substitute goods?
Goods that can be used in place of each other. If the price of one rises, the demand for the other rises. Examples: tea and coffee, pen and pencil.
Q10. What are complementary goods?
Goods used together. If the price of one rises, the demand for the other falls. Examples: tea and sugar, petrol and cars, shoes and socks, pen and ink.
Demand Schedule, Curve and Equation
Q11. What is a demand schedule?
A table that shows the quantity of a good consumers would buy at each of several prices, other things remaining the same.
| Price (per unit) | Quantity demanded |
|---|---|
| 10 | 10 |
| 8 | 20 |
| 6 | 30 |
| 4 | 40 |
| 2 | 50 |
Q12. What are the types of demand schedules?
- Individual demand schedule
- Market demand schedule
Q13. What is a market demand schedule?
The sum of all individual demand schedules, found by adding up the quantities all buyers want at each price.
| Price | Buyer A | Buyer B | Market demand |
|---|---|---|---|
| 10 | 4 | 6 | 10 |
| 8 | 8 | 12 | 20 |
| 6 | 12 | 18 | 30 |
| 4 | 16 | 24 | 40 |
| 2 | 20 | 30 | 50 |
Q14. What is a demand curve?
A graph of the demand schedule. It plots price on the vertical axis and quantity demanded on the horizontal axis. Each point on the curve shows the quantity demanded at one price.
Q15. What is market demand?
The total quantity of a good that all consumers in the market are willing and able to buy at a given price, in a given period.
Q16. What is the market demand curve?
The curve that shows the total quantity all consumers will buy at each price. It is found by adding the individual demand curves horizontally.
Q17. Why does the demand curve slope downward?
- Diminishing marginal utility: each extra unit gives less satisfaction, so consumers will buy more only if the price falls.
- Income effect: when a price falls, the consumer’s real income (purchasing power) rises, so he can buy more.
- Substitution effect: when a good becomes cheaper, consumers switch from relatively dearer substitutes to it.
- New buyers: a lower price brings in buyers who could not afford it before.
- Different uses: a cheaper good can be put to more uses, such as electricity or milk.
Q18. What is the demand function in equation form?
According to the law of demand, quantity demanded (Qd) depends on price (P). Price is the independent variable and Qd is the dependent variable. The relationship can be written as Qd = f(P).
Q19. What is the demand equation?
The linear demand equation is Qd = a – bP, where:
- Qd is the quantity demanded.
- P is the price.
- a is the intercept: the quantity demanded when the price is zero.
- b shows the slope: how much Qd falls when price rises by one unit.
Example: The schedule in Q11 fits Qd = 60 – 5P. At P = 10, Qd = 60 – 50 = 10. At P = 2, Qd = 60 – 10 = 50. Each 1-unit rise in price cuts quantity demanded by 5 units.
Changes in Quantity Demanded and in Demand
Q20. What is a change in quantity demanded?
It happens when the price of the good itself changes, while everything else stays the same. The result is a movement along the same demand curve, not a shift of the curve.
Q21. What is a change in demand?
It happens when any determinant other than the good’s own price changes, such as income, tastes or the price of related goods. The result is that the whole demand curve shifts to the right (increase in demand) or to the left (decrease in demand).
| Point | Change in quantity demanded | Change in demand |
|---|---|---|
| Cause | Change in the good’s own price | Change in income, tastes, related prices and so on |
| Effect on the curve | Movement along the same curve | The curve shifts |
| Types | Expansion and contraction | Increase and decrease |
Q22. What is an expansion in demand?
When the price of a good falls and, other things being equal, quantity demanded rises, it is an expansion in demand (a movement down along the demand curve).
Q23. What is a contraction in demand?
When the price of a good rises and, other things being equal, quantity demanded falls, it is a contraction in demand (a movement up along the demand curve).
Q24. What are the causes of an increase in demand?
- A rise in consumer income (for normal goods)
- A change in tastes in favour of the good
- A rise in the price of a substitute
- A fall in the price of a complement
- An increase in population
- Expectation that the price will rise in future
- Successful advertising
Q25. What are the causes of a decrease in demand?
- A fall in consumer income (for normal goods)
- A change in tastes away from the good
- A fall in the price of a substitute
- A rise in the price of a complement
- A decrease in population
- Expectation that the price will fall in future
Quick Revision Points
- Demand = desire + ability + willingness to pay, at a price and over a period.
- Law of demand: price up, quantity demanded down (other things equal).
- Demand equation: Qd = a – bP. Here a is the intercept and b shows the slope.
- Own-price change: movement along the curve. Other factors: shift of the curve.
- Substitutes: price of one up, demand for the other up. Complements: price of one up, demand for the other down.
Test yourself with the chapter quiz below, then continue to Basic Elements of Supply.
