2nd PUC Economics Question Bank Chapter 3 Demand Analysis

Karnataka 2nd PUC Economics Question Bank Chapter 3 Demand Analysis

2nd PUC Economics Demand Analysis One Mark Questions and Answers

Question 1.
What is Demand?
The concept ‘demand’ refers to the quantity of a good or service that a consumer is willing and able to purchase at various prices, during a period of time. It includes desire for a commodity, ability to pay and willingness to pay.

Question 2.
Qd = f(p) is the demand function. Identify the independent variable in it.
In Qd = f(p), the independent variable is ‘p’ (price).

Question 3.
State the Law of Demand.
The law can be explained in the following manner: “Other things being equal, a fall in price leads to expansion in demand and a rise in price leads to contraction in demand”.

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Question 4.
What is the relationship between price and demand for complementary goods?
There is an inverse relationship between price and demand for complementary goods. (When the price of a product becomes more, the demand for its complementary good falls).

Question 5.
What are normal goods?
Normal goods are those goods for which the demand increases with rise in income of consumers , and decreases with fall in their income.

Question 6.
Why does the demand curve shift?
The shift in demand curve occurs because of changes in all the determinants of demand except price.

Question 7.
Name the method of adding two individual demand curves horizontally.
The method of adding two individual demand curves is ‘Horizontal summation’.

Question 8.
Give the meaning of elasticity of demand.
Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price of commodity.

Question 9.
Write the simplified formula of income elasticity of demand.

Question 10.
If change in price and change in expenditure are in the same direction, then what will be the price elasticity of demand?
If change in price and change in expenditure are in the same direction, the price elasticity of demand is less than one, i.e., less elastic demand. (Ped <1).

Question 11.
What is Cross Elasticity of Demand?
It may be defined as the proportionate change in the quantity demanded of a particular commodity in response to a change in the price of another related commodity.

Question 12.
What is demand function?
The Demand Function refers to a functional relationship between quantities demanded and its determinants. It can be expressed as follows:
Qd = f(P, Pr ,Y, T,………….. ).
Where Qd stands for Quantity demanded, f is function, P is Price of commodity, Pr – price of related/substitutes, Y is income of consumers, T is tastes and preferences of consumers.

2nd PUC Economics Demand Analysis Two Marks Questions and Answers

Question 1.
Mention any four determinants of demand.

1. Price of the product
2. Price of related goods
3. Income of consumers and
4. Tastes and preferences of consumers.

Question 2.
In Qd = 20 – 2p, identify independent variable, dependent variable, constant and co-efficient in it.
Qd is dependent variable, P is independent variable, 20 is constant, -2 is coefficient of ‘p’

Question 3.
If Qd = 30 – 2p is the demand function. Suppose the price of onion in the market is Rs.10 per kg. Calculate the quantity demanded.
Qd = 30 – 2p; If price is Rs. 10,
Qd = 30 – 2(10)
= 30 – 20
= 10.
The quantity demanded of onion is 10 kgs.

Question 4.
Why does the demand curve slope downwards?
The demand curve slopes downwards because of price effect, substitution effect, income effect and operation of law of diminishing marginal utility.

Question 5.
Write the meaning of cross elasticity of demand and its formula.
It may be defined as the proportionate change in the quantity demanded of a particular commodity in response to a change in the price of another related commodity

Question 6.
What are complementary goods? Give examples.
Complementary goods are those goods which are consumed together or jointly to satisfy human wants. Example, Shoes and socks, vehicles and petrol, bat and ball etc.

Question 7.
Consider the demand for onion. At Rs.10 per kg, demand for onion is 15 kgs. Suppose the price increases to Rs.20 per kg, the demand decreases to 10 kgs. Calculate the price elasticity of demand.
Solution:
∆q = 10 – 15 = -5; ∆p = 20 – 10 = 10; then PED is

= -0.33 (the Price Elasticity is 0.33)

Question 8.
There are only two consumers in a market X and Y. Their demand for a good is given below. Calculate the market demand for the goods and draw the market demand curve.

 Price Demand- X Demand-Y Market Demand (x + y) 2 16 20 36 4 14 18 32 6 12 15 27 8 10 12 22 10 8 10 18 12 6 8 14

Question 9.
If there are two consumers in a market and their individual demand functions are Qd1 = 15 – 2p and Qd2 = 25 – 3p. Find the Market demand function.
The market demand function Qd = Qd1+ Qd2
Therefore,
Qd = 15 – 2p + 25 – 3p
Qd = 40 – 5p

When the price is ‘0’, quantity demanded will be
Qd = 40 – 5p
= 40 – 5(0)
=40

When the quantity demanded is ‘0’, the price will be
0 = 40 – 5p
40 – 5p = 0
40 = 5p
P = 40/5
P = 8
So the Market demand is ‘40’ and Market price is Rs.8.

Question 10.
How do the movements along the demand curve occur?
The movements along the demand curve occur on the basis of the inverse relationship between price and quantities demanded. When the price is less, demand will be more and when the price is more, demand will be less. So, any changes in price lead to movement on the demand line.

2nd PUC Economics Demand Analysis Five Marks Questions and Answers

Question 1.
Why does the demand curve slope downwards? Explain.
In order to represent the inverse relationship between price and demand, the demand curve must slope downwards. Apart from this basic reason, there are many other factors which make the demand curve to slope downwards. They are as follows:

(a) Operation of the law of Diminishing Marginal Utility:
The law of DMU states that as the consumer acquires larger quantities of any commodity, the additional units of        the same product will give him lower utility, and as such he gets a less value for the additional under The law of        demand states that in order to induce the consumer to buy more less price must be offered.

(b) Operation of the law of Equi – Marginal Utility:
This law states that utility of the product must be equal to its price in general. As price falls, the equality between the two will be disturbed and in order to re-establish this equality the consumer buys more. Now utility comes to the level of reduced price. Hence, as price falls, a consumer buys more.

(c) Income effect:
A change in demand as a result of change in income is called as Income effect. As price falls, the real income of the consumer increases. With this increased real income (gets more purchasing power with more money in his hands), he buys more.

(d) Substitution effect:
When the price of one product falls, it becomes cheaper when compared to other products ’ for which price remains constant. Hence, a consumer will substitute low priced product to high priced product. The result is that demand for a product rises as price falls.

(e) Price Effect:
When the change in quantities demanded is caused by the change in price, it is called as Price effect. When the price of a product falls, it becomes cheaper and consumer buys more of that and vice versa.
Hence, the demand curve always slopes downwards from left to right.

Question 2.
How does the demand curve shift? Explain with a diagram.
(a) Shift in demand curve – Increase and Decrease in Demand:
The increase and decrease in demand are caused by all the determinants of demand except price. When there is change in consumer’s income, tastes and preferences, price of related goods, there may be increase or decrease in demand.

(b) Increase in Demand:
When the income of consumer increases, the demand for the product increases and there will be shift in demand line towards right. For normal goods, the demand, curve shifts to the right. In the diagram given below, D:                  represents shift in demand line towards right indicating increase in demand.

(c) Decrease in Demand:
When the price of related goods rise, the demand for the product falls and the demand curve shifts towards left.      For example, if there is rise in price of petrol, the demand for vehicle decreases, representing backward shift of demand line. In the diagram below, D2 represents shift in demand towards left indicating decrease in demand.

Question 3.
What is income elasticity of demand? Calculate the income elasticity of demand when income of consumer increases from Rs.10,000 to Rs.12,000 and demand for rice increases from 30 to 40 kgs.
Income elasticity of demand may be defined as the ratio or proportionate change in the quantity demanded of a commodity to a given proportionate change in the income. In short, it indicates the extent to which demand changes with a variation in consumers income.

The following formula helps to measure Yed

Here, ∆q stands for change in quantity, ∆y is change in Income of consumer, ‘y’ is initial income and ‘q’ is initial quantity.

Solution:
∆q = 40 -30 = 10;       ∆y = 12,000 – 10,000 = 2000; then Yed is ;

= 1.66 Therefore the Income Elasticity of Demand is greater than one.

Question 4.
What are the factors determining price elasticity of demand?
(i) Nature of the Commodity:
In case of comforts and luxuries, demand tends to be elastic because people buy those more only when their prices are low. e.g. TV sets.

In case of necessaries, demand is inelastic because whatever may be the price, people have to buy and use them.      e.g. Rice.

(ii) Existence of Substitutes:
If a product has substitutes, demand tends to become elastic because people compare tho prices of substitute goods and cheaper products are purchased, eg. Blades, Soaps.

If a product has no substitutes, demand becomes inelastic because in that case whatever may be the price,                people have to buy them. e.g. Onion.

(iii) Durability of the commodity:
If a product is perishable or non durable, demand tends to be inelastic, because people buy them again and again.
If a product is durable, demand tends to be elastic because people buy them occasionally.

(iv) Number of uses of a commodity:
If a product has multiple uses, demand tends to become elastic because, with a fall in price, the same product can be used for many purposes, e.g. Electricity, coal etc.

If a product has only one use, in that case demand becomes inelastic because people have to buy them for a            specific single purpose whatever may be the price, e.g. All eatables, seeds, fertilizers, pesticides etc.

(v) Possibility of postponing the use of product:
If there is a possibility to postpone the use of particular product, demand tends to become elastic, e.g. Buying a          scooter, motorcycle, TV sets etc. people generally buy these articles when they are cheaper. .

If it is not possible to postpone, demand tends to become inelastic. In this case, whatever may be the price,                people have to buy them. e.g. Medicine.

(vi) Level of income of the people:
Generally speaking, demand will be elastic in case of the poor people because even a small change in price will affect the demand for various products.

On the other hand demand will be inelastic in case of rich people because they are ready to spend any amount on buying a product.

(vii) Habits:
If people are not habituated for the use of certain products, then demand tends to be elastic. If products are cheaper, they buy more and if they become costly, they may buy less or may not buy them at all.

When people are habituated for the use of a particular commodity, they do not care for price changes over a              certain range, e.g. Cigarettes,, liquor etc. In that case, demand tends to become inelastic.

(viii) Complementary goods:
Goods which are jointly demanded are inelastic in nature, e.g., ink and pens, vehicles and petrol etc. This is because, if people buy one product, they have to buy the supplementary products also without which they cannot make use of the first item.

Demand tends to be elastic in case of independent products, e.g., biscuits, chocolates, ice-creams etc. In this case, consumption or use of a product is not linked to any other products. Hence, they may or may not buy a              product.

2nd PUC Economics Demand Analysis Ten Marks Questions and Answers

Question 1.
Explain the law of demand with the help of demand schedule and demand curve.
The law can be explained in the following manner: “Other things being equal, a fall in price leads to expansion in demand and a rise in price leads to contraction in demand”.

According to Prof.Samuelson, the law of demand states that ‘People buy more at lower prices and buy less at higher prices, other things remaining the same’.

Demand schedule:
Demand schedule represents the quantities demanded by an individual consumer at different levels of price.

Individual Demand Schedule

 Price P (in Rs.) Demand (Qd) (in Kg) 3 30 4 25 5 20 6 15 7 10

In the above individual demand schedule, the consumer is purchasing different quantities at different price levels. At Rs.3 he buys 30 kgs, and at Rs. 4, 25 kgs are bought and so on. As the price increases, the quantities demanded falls.

Demand Curve: The graphical presentation of the demand schedule is called demand curved

In the above diagram, price is measured along y axis and quantities demanded are measured along x axis. The various points on Demand line represent the respective quantities demanded. For example, point ‘c’, quantities demanded is 20 at price Rs.5.

The demand curve slopes downwards from left to right. It shows the rate at which demand changes with respect to change in price. As there is an inverse relationship between price and quantities demanded, the curve is negatively sloped.

Question 2.
Classify the price elasticity of demand and explain them with diagrams.
In the words of Prof. Stonier and Hague, “Price elasticity of demand is a technical term used by economists to describe the degree of responsiveness of the demand for a good to a change in its price.”
It is measured by using the following formula.

The rate of change in demand may not always be proportionate to the change in price. A small change in price may lead to very great change in demand. It is called as Elastic Demand. Sometimes even a big change in price may not cause any change in demand. Such a demand is known as Inelastic Demand.

The following formula is used to calculate Price Elasticity of Demand (Ped):

Here, ∆q stands for change in quantity, ∆p is change in price, ‘p’ is the initial price and ‘q’ is the initial quantity.

Classification of Price Elasticity of Demand:
On the basis of the degree of price elasticity for different goods, we classify Ped as follows:

1. Perfectly Elastic Demand:
In this case, a very small change in price leads to an infinite change in demand. The demand curve is a horizontal curve and parallel to x axis. The numerical co-efficient of perfectly elastic demanded is infinity (ED = ∞).

2. Perfectly Inelastic Demand:
In this case, whatever may be the change in price, quantity demanded will remain perfectly constant. The demand curve is a vertical straight line and parallel to Y axis. Quantity demanded would be 10 units, irrespective of price change from Rs. 10.00 to Rs.2.00. Hence, the numerical co-efficient of perfectly inelastic demand is zero. ED = 0.

3.Relatively Elastic Demand: More elastic demand.
In this case, a slight change in price leads to more than proportionate change in demand. One can notice here that a change in demand is more than that of change in price. Hence, the elasticity is greater than one. For e.g., price falls by 3% and demand rises by 9%. Hence, the numerical co-efficient of demand is greater than one.

Here, the percentage change in quantities demanded will be more than percentage change in price,                        i.e., ∆q > ∆p. M M1 > P P1.

4. Relatively Inelastic Demand: Less elastic demand. In this case, a large change in price, say 8% price fall, leads to less than proportionate change in demand: say 4% rise in demand. One can notice here that change in demand is less than that of change in price. This can be represented by a steeper demand curve. Here, elasticity is less than one. (Ped <1)

Here, the percentage change in quantities demanded will be less than percentage change in price, i.e., ∆q > ∆p, M M1 > P P1

5. Unitary Elastic Demand:
In this case, proportionate change in price leads to Equal proportionate change in demand. For e.g., 5% fall in price leads to exactly 5% increase in demand. Hence, elasticity is equal to unity. It is possible to come across unitary elastic demand, but it is a rare phenomenon.

Here, the percentage change in quantities demanded will be equal to percentage change in price.                            i.e., ∆q > ∆p, M M 1 > P P1.

Out of the five different degrees, the first two are theoretical and the last one is a rare possibility. Hence, in all our general discussions, we make reference only to two terms- relatively classic demand and relatively inelastic demand.

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