Unit 3

Demand Analysis - II

Objectives:

After going through this unit, you will be able to explain:

Meaning and factors influencing demand

Law of demand, its explanations, applications and exceptions

Types of changes in demand

Concept and types of elasticity of demand

Meaning and uses of price, income, and cross elasticity of demand

Structure:

1.1 Introduction

1.2 Demand Concepts

1.3 Law of demand

1.4 Exceptions to the Law of demand

1.5 Factors affecting Demand

1.6 Changes in Demand – Expansion/Contraction and Increase/Decrease

1.7 Elasticity and Demand

1.8 Price elasticity of demand

1.9 Factors affecting price elasticity of demand

1.10 Types of price elasticity of demand

1.11 Business applications of price elasticity of demand

1.12 Other types of elasticity of demand

1.13 Income elasticity of demand

1.14 Factors affecting income elasticity of demand

1.15 Cross elasticity of demand

1.16 Summary

1.17 Key words

1.18 Self assessment questions

1.1 Introduction

Managerial decision making necessarily occurs within any of the organizational forms

that modern business enterprises may take. Managers may make a myriad of decisions

ranging from day to day operational decisions to long term tactical decisions. Managerial

economics aids in rational decision making by managers of business enterprises. One

important tool in this regard helps managers understand consumer needs and wants, so as

to enable building innate capabilities in businesses to fulfill them in the best possible

manner. This requires knowing more about the economic concept of Demand.

1.2 Demand – Concepts

The study of economics makes it necessary to distinguish between demand and the desire

or need. To keep it simple, let us think of buyers as consumers. The buyers want or need

the product or service, but there is more to demand then just the need or desire for goods

and services. To say that a person has a demand for a particular product is to say that the

person also,

a) has the money with which to buy, and

b) is eager to exchange the money for the specific commodity

People will not demand what they do not want or need, but a want or a need not

supported by purchasing power is not consumer demand. This leads us to the definition

of demand which is as follows,

a) Demand refers to how much (quantity) of a product or service is desired by

buyers at a given price.

b) Demand is the relationship between price and quantity demanded for a particular

good and service in particular circumstances.

c) The word demand refers to the willingness and ability of people to purchase

goods or services in the market.

All definitions and perspectives on demand highlight two important characteristics of

economic demand, viz,

a) Ability to purchase

b) Willingness to purchase

Demand or the demand relationship is popularly depicted through the Law of Demand

and can be expressed in the form of a demand schedule and a demand curve.

1.3 Law of Demand

We have already established that a consumer’s demand cannot be expressed independent

of the price of the product. How much of a commodity the consumer will be willing to

buy is dependent on its price. We will add to it now by saying that it is only logical that a

consumer will tend to buy more of a commodity if the price is less, and less of it if the

price is more. This is called the Law of Demand. To put it more formally,

The law of demand states that, if all other factors remain equal, the higher the price of a

good, the less people will demand that good. In other words, at higher prices, a lower

quantity will be demanded than at lower prices, other things being equal. Alternatively, at

lower prices, a higher quantity will be demanded, other things being equal.

An elementary way to capture the relationship is in the form of a demand schedule as

shown in the following table. The numbers in the table below are what one expects in a

demand curve: as price goes up, the amount people are willing to buy decreases.

Demand SchedulePrice

(in Rs.)

Quantity demanded

(in units)10 10020 90

30 8040 7050 6060 5070 40

The same information can also be presented diagrammatically, where it will look like the

graph below.

In the above diagram, when price is taken on y-axis, and quantity demanded of a

commodity is taken on x-axis, the law of demand expresses the demand relationship in

terms of a downward sloping demand curve ‘D’. This relationship between price and the

amount of a product people want to buy is what economists call the demand curve. This

relationship is inverse or indirect because as price gets higher, people want less of a

particular product. This inverse relationship is almost always found in studies of

particular products, and has a very widespread occurrence.

The inverse relationship between quantity demand and price as reflected in the downward

sloping demand curve exists because of the some reasons summarized as follows:

a) Substitution Effect

b) Real Income Effect

c) Multiple uses of a product

d) Diminishing Marginal Utility for the product

Here is an explanation of each of the above factors causing the demand curve to slope

downwards,

a) Substitution effect : Consumers have a tendency to shift to cheaper commodities

when the price of a commodity increases. This results in reduction in demand of

the expensive commodity causing an inverse relationship between quantity

demanded and price.

b) Real-income effect: Change in purchasing power occurs when the price of a

commodity changes. Purchasing power increase when price of a commodity falls

and it declines when the price rises. Consumer’s affordability accordingly

changes reflecting this in the downward sloping demand curve.

The income and substitution effect are shown in the following diagram,

c) Multiple uses of a product: If a product has more than one use, then when the

price of the product increases the consumer starts restricting the usage of the

product only to important uses. Hence, the quantity demanded lowers as price

increases.

d) Diminishing Marginal Utility: As a consumer consumes subsequent units of a

commodity the utility diminishes. This is the famous Law of diminishing

marginal utility, which describes that a consumer equates the price paid for a

commodity with the satisfaction derived from the commodity. This is why if price

increases consumer reduces the quantities of the commodity consumed.

1.4 Exceptions to the law of demand

The law of Demand may not hold true even under ceteris paribus conditions. Consider

the following situations where law of demand may not hold true.

a) War or war like conditions

b) Economic Depression

c) Speculation

d) Natural Calamities

e) Giffen’s paradox

f) Demonstration effect

All the above situations do not allow an inverse relationship between the demand for a

product and its price to function even when everything else is kept constant. This is

explained as follows:

a) During war or war like conditions there are great possibilities of potential

scarcities or doubts of scarcities. Under such a situation people may buy

commodities even at higher prices and law of demand may not hold true.

b) When there is economic depression the economy is low and everything goes

down, which is why even if prices are falling people may not buy more.

c) When consumers speculate they anticipate price movements. In a situation when

prices are lower, the consumer demand may not rise because they anticipate

further lowering of prices and, hence, may postpone purchase.

d) Natural calamities may also cause demand to be high at higher prices and low at

lower prices because of abnormal economic conditions.

e) As Giffen’s paradox states that the consumers attach status to commodities

referring them as superior or inferior. For inferior commodities, for instance,

demand may not be higher even if prices are falling because the impact of falling

prices would enhance consumer affordability and this enhanced affordability

could get spent on superior goods rather than inferior goods. So the law of

demand may not hold true.

f) Every product has a demonstration effect, meaning that consumer purchase

pattern is influenced by the purchase patterns in the society in general.

1.5 Factors affecting Demand

We already know the dependency of demand on the price of the commodity. There are

some other factors which affect demand. It is imperative for the marketers to know about

these factors to understand consumer demand and what could cause it to change. This

dependency of demand on various factors is described as Demand Function which can be

expressed as,

Q = f (Price, Income, Price of related commodities, tastes and preferences)

Where Q is the Quantity of goods demanded.

The response of demand to each of these factors can be discussed in detail as follows:

a) Price : The relationship between price and quantity demanded has been discussed

in detail under the Law of Demand. We can recollect that quantity demanded is

inversely proportional to a change in price, ceteris paribus (everything remaining

constant). This implies an increase in price causes an increase in quantity

demanded and vice-versa.

b) Income: The relationship between income and price of a commodity is positive.

Ceteris paribus, a rise in consumer income will increase his affordability thereby

having a positive impact on quantity demanded of a product.

c) Tastes and preferences : Consumers tastes and preferences change with time and

with trends and fashion, causing demand for goods and services to fluctuate

accordingly.

d) Prices of related goods: Commodities may be related to each other and the

demand for a commodity is influenced by the price of the related commodity in

following ways:

(i) Substitutes: Substitutes are those commodities which are used in place of

each other. Brands in the same product category such as Pepsi and Coke, or

some products like tea and coffee can be viewed as substitutes of each other.

If commodities are substitutes, a change in the price of one causes a change

in demand for the other in the same direction. Suppose commodities A an B

are substitutes of each other. The relationship between their price and

quantity demanded is exhibited in the following figure:

(ii) Complements: Complements are those commodities which have to be

consumed simultaneously for greater satisfaction or any satisfaction at all.

Ink and pen, Car and petrol are examples of complement goods. When

commodities are complements, a change in the price of one good causes a

shift in demand for the other in the opposite direction. The relationship

between their price and quantity demanded is exhibited in the following

figure:

Increase in Price of A

Increase in quantity demanded of B

Decrease in Price of A

Decrease in quantity demanded of B

Increase in Price of A

Decrease in quantity demanded of B

Decrease in Price of A

Increase in quantity demanded of B

The degree to which goods complement each other or can be substituted for

each other varies.

e) Changes in expectations of future relative prices: People, extensively,

anticipate about the future. When they make such anticipations about price

movements in the future their current demand for various commodities gets

influenced. It is common to see people pre-pone their purchases before the

implementation of contentions of the budget in anticipation of a future price

increase as a result of changes in taxation policy.

f) Population: The size of the market in general influences the demand for a

commodity. The larger the size the greater is the demand.

1.6 Changes in Demand

A marketer is interested in knowing what causes the demand to change in order to

anticipate the demand for the product or alter the consumer demand in his favor. We have

discussed in the earlier sections various factors that affect demand for a commodity. To

understand the impact of these factors on demand it will be useful to, broadly classify,

them into two categories, viz.,

a) Price factors

b) Non Price factors

This classification is done because of the varying response of the demand to the

influencing variable – an expansion/contraction or increase/decrease in demand.

a) Change in Quantity demanded or expansion or contraction of demand means

that a greater or lesser number of units are bought because of a change in price.

An expansion in quantity demanded means that a greater number of units are

bought because the price has been lowered. We are moving down a particular

demand curve. A contraction in quantity demanded means that a lesser number of

units are bought because the price has been raised.

b) Increase or decrease in demand means that a greater or lesser number of units

are bought without changing price. This means that there is a shift in the demand

curve. If it shifts up and to the right, a greater number of units are demanded at

any given price. If it shifts down and to the left, a lesser number of units are

demanded at any given price. Consider the following figure,

From the above figure, it is clear that demand can change because of price and non-price

factors and such demand changes have differing reflections This is shown in the

following figures,

Changes in Demand

Expansion/Contraction in Demand

Increase/decrease in Demand

Characteristics:

Impact of a change in price

Movement along the demand curve

Characteristics:

Impact of a change in non-price factors

Shift of the Demand curve rightwards or leftwards

Quantity

Price Price

Quantity

Contraction

Expansion

Increase

Decrease

1.7 Elasticity and Demand

An understanding of demand enables managers to know more about what, why and how

much of the consumers purchase of goods and services. In this context knowledge of all

the factors that influence demand also helps, in order to find out the changes in demand

and the underlying reasons. Each of these factors has varying impact on the demand for a

commodity. Economics provides managers with an important tool called Elasticity which

highlights the degree of impact that individual influencing factors has on demand.

Elasticity, in general, can be understood as a measure of the responsiveness of one

variable to changes in another variable.

In the theory of consumer behavior it highlights demand changes in response to various

stimuli. In case of demand we can consider Price, Income, and Prices of related goods as

important influencing variables. The following section analyses the degree of demand’s

responsiveness to changes in these variables.

1.8 Price Elasticity of Demand

Price elasticity of demand measures the response of the quantity demanded to a change in

price. Formally,

The price elasticity of demand is the ratio of the proportionate change in quantity

demanded of a commodity with respect to a proportionate change in its price.

It is an important concept in understanding consumer demand theory. Price is the single

most important determining factor of consumer’s demand and price elasticity of demand

brings out the total response of demand to a change in price quantitatively. Price

elasticity of demand can be can be calculated and expressed as,

Ep = Proportionate change in quantity demandedProportionate change in Price

Where Ep is the coefficient of price elasticity of demand

Elasticity of demand is often calculated by taking an average the prices and quantities

given by the following formula:

Ep = ( Q2 - Q1 ) x P1( P2 - P1 ) Q

1

Ep = (Q1 + Q2)/2 (P1 + P2)/2

Suppose, when commodity A’s price is Rs.10 per unit its quantity demanded is 50 units.

When the price changes to Rs.5 its demand increases to 100 units. The price elasticity can

be calculated as follows:

In this example, P1= Rs.10, P2= Rs.5, Q1= Rs.50, Q2=Rs.100. We substitute the values

in equation for calculating the elasticity coefficient.

Ep = (100- 50 ) x 10( 5 - 10 ) 50

Ep = -2

It is important to note here that when one calculates price elasticity of demand using the

given equation the value of coefficient of price elasticity will always have negative value.

This is because of the inverse relationship between price and quantity demand of the

commodity. While making a decision regarding the price elasticity the absolute value of

the coefficient of price elasticity has to be considered. Hence in the above example,

ignoring the negative sign the value of coefficient of price elasticity is 2, or,

|Ep| = 2

For all calculation and decision making purposes a mod value or absolute value of the

coefficient of price elasticity has to be considered.

1.9 Factors affecting price elasticity of demand

The degree of demand’s dependency on price is not same for all products. The intensity

of relationship between price and quantity demanded of a product or price elasticity of

demand varies depending on certain factors. They are:

a) Existence of substitutes - the closer the substitutes for a particular commodity,

the greater will be its price elasticity of demand

b) Importance of the commodity in the consumers budget - the greater the

percentage of a total budget spent on the commodity, the greater the person’s

price elasticity of demand for that commodity

c) Time for adjustment in rate of purchase - the longer any price change persists,

the greater the price elasticity of demand

d) Nature of the commodity - the commodity’s demand is relatively more elastic if

it is a necessity as against a luxury good.

e) Number of uses of the product - the greater the number of uses a commodity

can be put to use the greater is its elasticity.

f) Durability - the greater the durability of the product the greater will be its

elasticity.

g) Addiction - where the products have addictive ability, the elasticity will reduce

h) Economic and human constraints - such constraints as posed by availability of

resources, government policy, etc. reduce price elasticity of demand.

Based on the above factors the response of demand for a commodity to a change in its

price will be high or low. Further, depending on whether the response is high or low one

can classify various types of price elasticity. This is discussed in the following section:

1.10 Types of price elasticity of demand

Depending on the degree of demand’s dependency on price and value of coefficient of

price elasticity of demand there can be five cases of price elasticity of demand. They are:

a) Relatively Elastic Demand: Proportionate change in demand is more than the

proportionate change in price.

b) Relatively Inelastic Demand: Proportionate change in demand is less than the

proportionate change in price.

c) Perfectly Elastic Demand: Change in demand is infinitely possible even when

there may not be any change in price.

d) Perfectly Inelastic Demand: Change in demand is not possible even when any

changes in price.

e) Unitary Elasticity: A change in demand is exactly proportionate to a change in

price.

The various cases of price elasticity of demand are summarized in the following table:

S.No. Price elasticity of demand Numerical

value

Shape of the demand

curve1. Relatively Elastic Demand Ep>1 Downward sloping

demand curve which is

relatively flatter2. Relatively Inelastic Demand Ep<1 Downward sloping

demand curve which is

relatively steeper3. Perfectly Elastic Demand Ep=∝ Perfectly horizontal

demand curve4. Perfectly Inelastic Demand Ep=0 Perfectly vertical demand

curve5. Unitary Elasticity Ep=1 Rectangular hyperbole

The above elasticity can be shown through diagrams as follows:

P

Q

P

Q 0

1.

2

0

P

Q0

34P

0Q

P

0Q

5

The different price elasticity of demand can also be depicted in same figure as follows,

In the above figure,

D1 - Perfectly inelastic demand curve

D2 - Perfectly elastic demand curve

D3 - Relatively elastic demand curve

D4 - Relatively inelastic demand curve

The above demand curves show that as the slope of the demand curve increases price

elasticity of demand also increases. In other words, the flatter the demand curve the

greater is the price elasticity and the steeper the demand curve the lesser is the elasticity.

1.11 Business applications of price elasticity of demand

The concept of elasticity is very widely used by business and government. Some specific

situations where the concept is of particular importance are discussed below:

a) Pricing policy: The seller can have a high price policy for commodities which

have relatively inelastic demand and a low price policy for commodities which

have relatively elastic demand.

Price

Quantity

D1

D4

D3

D2

b) Joint demand: Commodities can have joint demand whereby the source of the

products is the same. For example fruit juice and jam, or meat and wool. In such

cases the prices of the products can be fixed so that a higher price can be charged

for the product whose demand is relatively inelastic and lower price for the

product whose demand is relatively elastic.

c) Taxation Policy: While deciding on the taxation policy for various commodities,

particularly the indirect taxes like sales tax, octroi, etc, government makes use of

the concept of price elasticity of demand in order to know who will bear the

burden of the tax between the buyer and the seller. If the demand for the

commodity is relatively elastic the seller may have to bear he burden of the tax,

while if the demand is relatively inelastic there are greater chances that the buyer

has to bear the burden of the tax. For example the government may decide to have

minimum taxation on essential commodities for the common good for their

demand is highly price inelastic. On the other hand, government may levy heavy

taxation on commodities having addictive value so as to discourage their

consumption for their demand is again relatively inelastic.

d) Public Utility: Government renders those services under public utility whose

demand is highly inelastic such as sewage, garbage disposal etc. If these services

were not under public utility there would be great chances of user exploitation.

e) International Trade: A country benefits from international trade if its imports

are price elastic while its exports are price elastic. If this happens the country

operates in buyers market when importing and in a sellers market when exporting.

The gulf countries enjoy this advantage when exporting petroleum.

1.12 Other types of Elasticity

Apart from price there are certain other factors that affect demand which marketers take

significant cognizance of. We have already established the relationship between demand

and several non-price factors. The concept of elasticity can be further used to arrive at the

degree of demand’s dependency on each of these factors.

The following section analyzes two elasticity concepts,

a) Income Elasticity of demand

b) Cross elasticity of demand

1.13 Income Elasticity of demand

Income elasticity of demand measures the relationship between changes in quantity

demanded as a result of a change in consumer income. The coefficient of income

elasticity of demand can be, formally, defined as is:

Percentage change in quantity demanded of good X divided by the percentage

change in real consumers’ income

Income elasticity of demand can be calculated using the following equation,

Ey = Proportionate change in quantity demandedProportionate change in Income

Where Ey is the coefficient of income elasticity of demand

Based on the value of the coefficient of income elasticity of demand one can conclude

about the nature of the commodity. This can be drawn out from the response of demand

for a commodity to a change in income. For instance, the demand for necessities will

increase with income, but at a slower rate. This is because consumers, instead of buying

more of only the necessity, will want to use their increased income to buy more of a

luxury. During a period of increasing income, demand for luxury products tends to

increase at a higher rate than the demand for necessities.

Here is a classification of various types of goods based on their income elasticity of

demand.

a) Normal Goods: Normal goods have a positive income elasticity of demand so

that as income rise more is demanded at each price level. We make a distinction

between normal necessities and normal luxuries.

(i) Necessities have an income elasticity of demand of between 0 and +1. For

such goods demand of the commodity rises with income, but less than

proportionately.

(ii) Luxuries on the other hand are said to have an income elasticity of demand

greater than +1 i.e., demand rises more than proportionate to a change in

income.

b) Inferior Goods: Inferior goods have a negative income elasticity of demand i.e.,

demand falls as income rises.

Consider the following table which cites examples of various types of goods based on

their income elasticity.

Luxury Goods Necessities Inferior goodsInternational Air travel Fresh vegetables Bus travel

Fine vines Expenditure on Utilities SaltAntique furniture Shampoo/toothpaste/detergent Tinned meat

1.14 Factors affecting income elasticity of demand

Classification of goods based on income elasticity of demand

Normal goodsEy is positive

Inferior goodsEy is negative

Necessities0<Ey<1

LuxuriesEy>1

Within a given market, the income elasticity of demand for various products can vary.

Consider the following factors:

a) Perception of a product : Perception of a product must differ from consumer to

consumer. What to some people is a necessity might be a luxury to others.

b) Income and spending decisions : For many products, the final income elasticity

of demand might be close to zero, in other words there is a very weak link at best

between fluctuations in income and spending decisions. In this case the “real

income effect” arising from a fall in prices is likely to be relatively small. Most of

the impact on demand following a change in price will be due to changes in the

relative prices of substitute goods and services. Consider the following diagram,

c) Time: The above diagram also shows that the income elasticity of demand for a

product will also change over time – the vast majority of products have a finite

life-cycle. Consumer perceptions of the value and desirability of a good or service

will be influenced not just by their own experiences of consuming it but also the

appearance of new products onto the market. One can take the example of the

income elasticity of demand for flat-screen color televisions as the market for

plasma screens develops and the income elasticity of demand for TV services

provided through satellite dishes set against the growing availability and falling

cost (in nominal and real terms) of integrated digital televisions.

1.15. Cross Elasticity of demand

Commodities may be related to each other. They can be substitutes or complements. Such

relationships imply that changes or price movements of one commodity invites response

in quantity demanded of the related commodity. The concept of cross elasticity of

demand can be used to establish this relation between commodities that of substitutes and

complements. It can be defined as,

Cross price elasticity (Ec) measures the degree of responsiveness of demand for

commodity X following a change in the price of another commodity Y.

It can be calculated as,

Ec = Proportionate change in quantity demandedProportionate change in price of related

goods

Where Ec is the coefficient of cross elasticity of demand.

We have already discussed the concept of substitutes and complements earlier, with cross

price elasticity we make an important distinction between substitute products and

complementary goods and services as shown in the following table:

Nature of the commodity Coefficient of cross

elasticity of demandSubstitutes PositiveComplements Negative

As shown in the above table if coefficient of cross elasticity of demand is positive the

commodities are substitutes and if coefficient of cross elasticity of demand is negative

then commodities are complements to each other. Unrelated products have a zero cross

elasticity

Besides the higher is the co-efficient of cross-price elasticity of demand, the stronger the

relationship between two products. For example with two close substitutes, the cross-

price elasticity coefficient will be strongly positive. Likewise when there is a strong

complementary relationship between two products, the cross-price elasticity coefficient

will be highly negative. Consider the following diagram,

1.16 Summary

This unit discusses a very important economic tool for managers that are demand.

Various concepts and issues related to demand are explained to enable skills to better

understand consumer demand and what motivates it. The concept of elasticity further

clarifies demand and its degree of dependency on price, income, and related

commodities. The applications of elasticity in day to day and strategic business decisions

make it very vital for managers to be equipped with the knowledge of the concept.

1.17 Key words

a) Demand: Willingness and ability of people to purchase goods or services in the

market for a given price.

b) Law of demand: If all other factors remain equal, the higher the price of a good,

the less people will demand that good.

c) Substitution effect : Consumers have a tendency to shift to cheaper commodities

when the price of a commodity increases.

d) Real-income effect: Change in purchasing power occurs when the price of a

commodity changes.

e) Substitutes: Substitutes are those commodities which are used in place of each

other.

f) Complements: Complements are those commodities which have to be consumed

simultaneously for greater satisfaction or any satisfaction at all.

g) Expansion or contraction of demand: Greater or lesser number of units of a

product is bought because of a change in price.

h) Increase or decrease in demand: Greater or lesser number of units of a product

is bought because of changes in factors other than the price.

i) Elasticity: A measure of the degree of responsiveness of one variable to changes

in another variable.

j) Price elasticity of demand: Degree of responsiveness of quantity demanded of a

commodity to a change in its price.

k) Income elasticity of demand: Degree of responsiveness of quantity demanded of

a commodity to a change in consumer’s income.

l) Normal Goods: Goods having a positive income elasticity of demand.

m) Inferior Goods: Goods having a negative income elasticity of demand.

n) Cross elasticity of demand: Degree of responsiveness of quantity demanded of a

commodity to a change in price of related goods.

1.18 Self assessment questions

1. Explain the concept of economic demand. What factors determine consumer’s

demand?

2. Discuss in detail the law of demand and its exceptions

3. Distinguish between:

a) Substitution effect and real-income effect

b) Substitutes and complements

4. What is price elasticity of demand? What factors determine the value of

coefficient of price elasticity?

5. Consider the following table and answer the questions that follow:

Commodity P1 Q1 P2 Q2X 50 25 60 20Y 10 10

0

5 200

Z 20 80 25 60

For each of the above the above commodities X, Y, and Z,

a) Calculate the price elasticity of demand

b) Show that the commodities follow the law of demand

c) Suggest an appropriate price policy

6. Write short notes on:

a) Cross elasticity of demand

b) Superior and inferior goods

7. The law of demand states that, if all other factors remain equal, the higher the

price of a good,

a) Higher is the demand

b) Lesser is the demand

c) Demand is the same

d) Can’t say

8. Consumers have a tendency to shift to cheaper commodities when the price of a

commodity increases.

a) Mostly true

b) Never true

c) Can’t say

d) None of the above

9. When consumers speculate they anticipate

a) Price movements

b) Elasticity movements

c) Both a and b

d) Neither a nor b

10. Giffen’s paradox states that the consumers attach status to commodities referring

them as

a) Superior or inferior

b) Substitutes or Complements

c) Necessities or luxuries

d) None of the above

11. Demonstration effect means that consumer purchase pattern is influenced by the

purchase patterns in the society in general.

a) True

b) False

c) They are not related

d) Can’t say

12. Fill in the blanks:

a) Consumer’s tastes and preferences change with time and with trends and

fashion, causing demand for goods and services to ________________

accordingly.

b) The size of the market ________________ the demand for a commodity.

c) Expansion or contraction of demand means that a greater or lesser number

of units are bought because of a change in________________ .

d) Elasticity highlights the degree of impact that individual influencing

factors has on ________________.

e) The price elasticity of demand is the ratio of the proportionate change in

________________ of a commodity with respect to a proportionate

change in its________________.

f) The commodity’s demand is relatively more elastic if it is a

________________ as against a luxury good.

g) The greater the number of uses a commodity can be put to use the

________________ is its elasticity.

h) Commodities can have joint demand whereby the ________________ of

the products is the same.

i) Income elasticity of demand measures the relationship between changes in

quantity demanded as a result of a change in ________________.

j) Cross price elasticity measures the degree of responsiveness of

________________ for commodity X following a change in

the________________ of another commodity Y.