Theory of Demand Class 12 Economics Notes and Questions

Please refer to Economics Theory of Demand Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Theory of Demand Class 12 Economics Notes and Questions

The below Class 12 Theory of Demand notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

Theory of Demand

Desire —– Only a Wish
Want —— Desire + Purchasing power
Demand —— Want/Willing & able to buy + Quantity of the product + price of the product + time period

Demand refers to that quantity of a product which a consumer is willing and able to buy, at each possible price and given period of time.

Market Demand refers to that quantity of a product which all the consumers are willing and able to buy, at each possible price and given period of time.

Question. Explain the factors which affect demand of a product.
Or
What are the determinants of Individual demand of a product?
Ans. a) Price of a product [P_x]
Quantity demanded of a product is inversely affected by its price. Thus, consumer buy more quantity when price of product falls and vice versa.
Example: If price of a commodity (say TV) decreases, quantity demanded of TV will increase.

b) Price of related products [P_r]
(i) Substitute goods: Those goods which can be used in place of one another.
Example: Ball Pen and Gel Pen, Bisleri and Kinley, Coca Cola and Pepsi, etc.
There is direct relationship between demand of a product on the price of substitute goods. Thus, demand of a product (say Frooti) will increase if price of substitute good (Maaza) increase and viceversa.
(ii) Complimentary goods: Those goods which are always used together to satisfy a particular want.
Example: Pen and Ink, Bike and Petrol, Tea and Sugar, etc.
There is inverse relationship between demand of a product and price of complimentary goods. Thus, demand of a product (say petrol) increases if the price of complimentary goods (bike) decreases and vice versa.

c) Income of consumer [Y]
Demand of a product is also affected by change in income of consumer which further depends upon the nature of the product.
• In case of Normal goods, demand of a product is directly related to income level. Thus, higher the income, higher the demand for normal goods and vice versa.
• In case of Inferior goods, demand of a product is inversely related to income of consumer. So, increase in income decreases the demand of inferior goods and vice versa.

d) Taste and Preferences [T]
If there is a favourable change in taste and preferences of consumer for a particular product, then it will increase the demand, whereas unfavourable change will decrease the demand.

e) Future Expectations [F_e]
Demand of a product is also affected by change in future expectations. If price of a product is expected to increase in near future, then demand of such product will increase at present and vice versa.

Question. Explain the factors which affect Market demand of a product.
Or
What are the determinants of Market demand of a product?
Ans. a) Size and composition of population [P₀]
Market demand of a product is also affected by size of population in the country. Increase in population increases the market demand and vice versa. Composition of population, i.e. ratio of male, female, children also affects market demand. For example, if market has large number of children, market demand of toys will increase.

b) Season and Weather [S]
The season and weather conditions also affect the market demand of a product. For example, during summers, market demand of ice-creams will increase and woollen clothes will decrease.

c) Distribution of Income [D]
If income is equitably distributed, then market demand of product will be more, but if income distribution is uneven, i.e. people are either very rich or very poor, market demand will be low.

Question. Define Demand Function.
Ans. The functional relationship between demand and factors affecting demand of a product is called
Demand Function.
D_x=f (P_x, P_y, Y, T, F_e)

Question. Define Market Demand Function.
Ans. The functional relationship between market demand and factors affecting market demand is called Market Demand Function.
D_x=f (P_x, P_y, Y, T, F_e, P₀, D, S)

Law of Demand (also known as First Law of Purchase)
Law of Demand states that other factors remain constant, there is inverse relationship between price and quantity demanded.
In other words, if factors other than price of the product like income, taste, price of other goods, etc does not change, then consumer increases quantity demanded with decrease in price of product and vice versa.

Question. What do you mean by Demand Schedule and Demand Curve?
Ans. Demand Schedule – Numerical Tabulation of law of demand. It shows quantity demanded by a consumer at the different price of a product.
Demand Curve – Graphical representation of law of demand.

Question. What do you mean by Market Demand Schedule and Market Demand Curve?
Ans. Market Demand Schedule – Numerical Tabulation showing quantities demanded by all the consumers at different price of a product.
Market Demand Curve – Graphical representation of Market Demand Schedule.

Question. Why consumer buy more quantity at less price?
OR
Why is there inverse relationship between price and quantity demanded?
OR
Reasons behind Law of Demand?
OR
Why does Demand Curve slope downward from left to right?
Ans. 1. Law of Diminishing Marginal Utility
This law states that when a consumer consumes more and more units of a product, his marginal utility from the consumption of each successive unit goes on diminishing.
A rational consumer is always ready to pay the price equals to marginal utility which keeps on diminishing. So, consumer buy more quantity when price of the product also decreases.

2. Income Effect
It refers to change in quantity demanded due to change in real income of consumer resulting from change in the price of product.
When the price of a product decreases, real income (Purchasing power) of consumer will increase. It means consumer can buy more quantity of the product with the same expenditure. It is called income effect.

3. Substitution Effect
It refers to change in quantity demanded due to relative change in the price of product keeping real income constant. When the price of a product decreases, such product become relatively cheaper in comparison to other substitute goods. So, consumer increases the demand of given product and decrease the demand of substitute good. It is called substitution effect.

4. Change in the no. of consumers
Another reason for inverse relationship between price and quantity demanded is the change in number of consumers. When the price of a product decreases, new consumers also enters in the market along with old customers who can now afford the product. So, it will increase market demand of such product.

5. Multiple uses of product
There are many products which have alternative/multiple use like milk, electricity, etc. Thus, consumer buy more quantity of such products when their price falls as large quantity can be put up to their alternative uses.

Question. What do you mean by change in quantity demanded/movement along the same demand curve?
Ans. When quantity demanded of a product increases or decreases due to change in the price of product keeping other factors constant, it is called change in quantity demanded.

There will be movement along the same demand curve.

a) Increase in Quantity Demanded
When quantity demanded of a product increases due to decrease in the price of product, keeping other factors constant, it is called increase in quantity demanded. It is also known as Extension of Demand.
There will be downward movement along the same demand curve.

b) Decrease in Quantity Demanded
When quantity demanded of a product decreases due to increase in price of product, keeping other factors constant, it is called decrease in quantity demanded. It is also known as Contraction of Demand.
There will be upward movement along the same demand curve.

Question. What do you mean by change in demand/ increase or decrease in demand/ shift in demand curve?
Ans. When demand of a product increases or decreases due to change in other factors keeping price of the product constant, it is called change in demand.

There will be rightward or leftward shift in the demand curve.
a) Increase in Demand
When demand of a product increases due to favourable change in other factors like increase in the price of substitute goods, decrease in the price of complimentary goods etc., keeping price of the product constant, it is called increase in demand.
There will be rightward shift in the demand curve.

b) Decrease in Demand
When demand of a product decreases due to unfavourable change in other factors like decrease in price of substitute goods, increase in price of complimentary goods etc., keeping price of the product constant, it is called decrease in demand.
There will be leftward shift in the demand curve.

Question. What are the causes for increase in demand/ rightward shift?
Ans. Increase in demand, i.e. rightward shift in the demand curve is caused by change in the factors other than price of the product which are as follows:
1. Increase in price of substitute goods
When the price of substitute goods increases, the consumer buys less of that substitute good and increases the demand for given product which become relatively cheaper.
2. Decrease in the price of complimentary goods
When the price of complimentary goods decreases, then demand of given product increases.
3. Change in income of consumer
In case of normal goods, consumer increases the demand with increase in income of consumer. But in case of inferior goods, consumer increases the demand when income decreases.
4. Favourable change in taste and preferences
When there is favourable change in taste of consumer for a particular product, then the demand of such product will increase.

Question. Distinguish between normal goods and inferior goods.
Ans. 1) Normal Goods: Those goods which are demanded more as income of consumer increases and demanded less as income of consumer decreases, are called normal goods. Thus, income effect is positive for normal goods.
2) Inferior Goods: Those goods which are demanded more as income of consumer decreases and demanded less as income of consumer increases, are called inferior goods. Thus, income effect is negative for inferior goods.

Exceptions to the Law of Demand
I) Necessary Goods: Demand of necessary goods like salt, medicine, etc. does not change with either increase or decrease in their prices. So, law of demand is not applicable on such necessary goods.
II) Giffen Goods: It refers to those inferior goods whose demand decreases with decrease in their prices and demand increases with increase in their prices. The reason for positive price effect is that when price of giffen goods decreases, real income of consumer will increase but consumer will spend that real income on superior goods. So, demand of giffen goods will decrease.
III) Goods of Status: It refers to those prestigious goods which are purchased by people to show off their status in the society. So, consumer increases the demand of such products when their price increases, like diamond, luxury cars, etc.
IV) Ignorance: Consumers may buy more of a commodity at a higher price when they are ignorant of prevailing prices of the commodity in the market.

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