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TOPIC : LAW OF DEMAND AND ELASTICITY OF DEMAND

UNDER THE GUIDANCE OF : PROFESSOR DR. INDRANI SAHA

SUBMITTED BY:

NAME: BHUMKAR ROHAN KUMARDATT

CLASS: F.Y. B.A. LLB

SEM: FIRST SEMESTER

SUBJECT: ECONOMICS

ROLL NUMBER: 23509

DATE OF SUBMISSION: 18/12/2023

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INDEX

SERIAL PAGE

NUMBERS TOPICS NUMBERS

1 Introduction to economics 2
2 What is demand 3
3 Law of demand 4-5
4 Factors affecting law of demand 6
5 Elasticity of demand and its types 7-8
6 Degrees of elasticity of demand 8-12
7 Conclusion 13
8 Bibliography 14
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INTRODUCTION TO ECONOMICS

Economics is the social science that examines how societies allocate limited resources to
satisfy their unlimited wants and needs. It delves into the study of production, distribution,
and consumption of goods and services, making it a crucial field for understanding how
individuals, businesses, and governments make decisions that impact the global economy.
By analyzing the complicate web of supply and demand, resource allocation, and economic
systems, economics provides valuable insights into the functioning of our complex,
interconnected world.

In this introduction, we will explore the fundamental concepts and principles that underlie
the fascinating discipline of economics. Economics is a multifaceted discipline that seeks
to understand how societies manage their scarce resources to fulfill the diverse needs and
desires of their members. This field is divided into two main branches: microeconomics
and macroeconomics.

Microeconomics: This branch focuses on the smaller-scale interactions within an economy,

such as individual consumers, firms, and specific markets. Key topics in microeconomics
include: Supply and Demand, Consumer Behavior, Firm Behavior and many more.

Macroeconomics: This branch takes a broader perspective, studying the economy as a

whole. It deals with aggregate measures like Gross Domestic Product (GDP), inflation, and
unemployment. Key macroeconomic concepts include: Gross Domestic Product, Monetary
and Fiscal Policy etc.

Furthermore, economists employ various models and tools to analyze and predict
economic behavior, such as mathematical models, graphs, and statistical techniques. They
also consider external factors like globalization, trade, technological advancements, and
environmental sustainability, as these elements profoundly impact economic decision-
making.

In summary, economics is the study of how societies navigate the intricate balance of
resources, choices, and human desires. It provides essential insights into how individuals,
businesses, and governments make decisions that influence economic growth, prosperity,
and the overall well-being of societies around the world.
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WHAT IS DEMAND ?
In common language the terms ‘demand’ and desire’ convey the same meaning, but
according to language of economics the term demand and desire are both different things.
Desire is just a wishful thinking whereas demand for a commodity arises when there is
both willingness to purchase and ability to pay.

Demand in economics is always related to price, as it is written above demand arises only
when there is willingness to pay, the price of commodity is important for this condition to
be fulfilled. When a person knows at what price the product is being sold and if he is
willing to pay for it, the demand for that product is sure to arise.

For eg :- the price of a shirt in market is ₨.500 and a consumer is ready to buy it but if
the same shirt is available for ₨.800 he may not be willing to buy it at that price.

To explain demand in a proper definition, “ Demand for a commodity refers to the

quantities of a commodity which consumers are willing and able to purchase at various
possible prices during a particular period of time”.

According to the definition demand also has a relation with time. In simple language
demand for a commodity changes with change in time, the demand for the commodity
should always be expressed in time.

If we say demand for a car is 200, it is an incomplete sentence and does not make sense
but if we say demand for a car is 200 per day, per month, per year, it totally makes sense
as it is expressing the demand for that car in a particular time period.

Demand can be classified into two types i.e. aggregate demand and market demand.
Market demand refers to the amount of goods and services demanded by all the
consumers in the market whereas aggregate demand refers to the total demand for a
commodity in the economy.

Demand is something which is affected by various things and these things are called as
determinants of demand. These determinants include price, income, taste and preferences,
seasons and many more. 1

1
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.8
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LAW OF DEMAND
The law of demand states that other things remaining equal, the quantity demanded of a
commodity increases with fall in price and diminishes with rise in prices.

This definition given by Marshall states there is an inverse relationship between quantity
demanded and the price of the commodity, other things remaining equal. 2

For eg :- a commodity is being sold in market for 60 .Rs if the price of the commodity
falls to 50 .Rs then demand for it will surely rise according to the law of demand as the
customers will get the commodity at a cheaper rate and the reverse will happen when
the price of the commodity rises to 70 .Rs.

ASSUMPTIONS TO THE LAW OF DEMAND

The law of demand assumes other things as equal or “other things remain unchanged”
i.e. cetris paribus.

1. There should be no change in the income of the consumer.

2. There should be no change in the taste and preferences of the consumer.
3. Prices of related commodities should remain unchanged.
4. Incomes distribution should not change.
5. The consumer should be a rational person.

There are many more of these assumptions, in short all the individual and market
determinants of demand shall remain unchanged or equal except price of the
commdity for the law of demand to take effect.

DEMAND SCHEDULE:- The law of demand can be numerically illustrated through a

demand schedule. It is a tabular statement that shows different quantities of a
commodity that would be demanded at different prices at a given period. 3

2
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.15
3
Arora Surbhi, Economics for Law Students, Darbhanga Castle Allahabad,Central Law
Publications,2021,P.58
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DEMAND CURVE:- The law of demand can be illustrated graphically in the form of a
curve. It shows different quantities of a commodity demanded at a particular time period.

The above shown diagram of the demand curve in connected to the demand schedule
shown in previous page, the demand curve is illustrated based on that schedule. It shows
how the price rises from 5$ to 35$ and at the same the time the demand decreases for that
commodity from 610 to 150. This explains the law of demand and how demand is
inversely related to price.

4
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.16
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FACTORS BEHIND THE LAW OF DEMAND

1. Income effect:- This effect in normal term refers to the increase in

demand of a commodity due to increase in the purchasing power of,
this is called as income effect. When the price of a good falls the
demand for it will increase as the customers will have to pay less for
the same quantity of goods, which results in increase in the
purchasing power i.e. real income.
However in case of inferior goods income effect is negative as the
fall in the price of those goods would lead to reduced demand for it
and the consumers shift to substitute superior goods.

2. Substitution effect:- As the name suggests substitution effect refers

to substituting from one costlier good to other cheaper substitute
good. If the price of a good A falls the customer using its substitute
good B will shift from B to A, as it increases the purchasing power
of the customer to shift to a cheaper substitute.

3. Diminishing marginal utility:- Marginal utitlity refers to the

additional utility or satisfaction derived from consuming an
additional unit of the commodity. Therefore the customer adjusts his
buying of the goods according to his marginal utility i.e MU, as the
MU starts decreasing after a certain point from consuming more and
more of that commodity. 5

There are also certain exceptions to the law of demand. Firstly, Giffen
goods, demand for these goods tends to rise with rise in the price of the
good. Secondly, Prestigious goods the law of demand does not apply to
these goods as they are used as status symbols in the society, therefore
higher the price of such goods higher will be its demand in rich people. 6

5
Dwivedi, D N, MICROECONOMICS THEORY AND APPLICATIONS, Noida UP, VIKAS PUBLISHING
HOUSE PVT LTD, 2016, P.37
6
Ex. Ibid, P.37,38
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ELASTICITY OF DEMAND
The law of demand states that there is an inverse relationship between price and the
quantity demand of a commodity. However we don’t know to how extent there will be
change in demand of a commodity when there is change in its price, we do not know the
magnitude of change, in simple words we do not know the exact quantity of change.

Demand for some commodities may increase too much with just slight fall in its price,
whereas in case of other commodities there might be huge fall in price for the demand for
it to rise slightly.

Therefore to solve this problem and to definitely measure to how extent the demand
change responds to change in price of the commodity elasticity of demand was introduced
by one of the greatest economists Alfred Marshall. 7

TYPES OF ELASTICITIES OF DEMAND

1. Price elasticity of demand

It is defined as the degree of responsiveness of quantity demanded of a commodity in

response to a change in its price. It means the ration of proportionate change in demand to
proportionate change in the price of the commodity.

e ∆Q×P
p=
Proportionate change∈demand e p= 8
Proportionate change ∈Price ∆ P ×Q

2. Income elasticity of demand

Income elasticity of demand measures the degree of responsiveness of the quantity

demanded of a commodity to changes in income of the consumers. It explains as to what
will be the effect on demand of a commodity when the income of the consumer changes.

Proportionate change ∈demand ∆ Q ×Y

e p= e p= 9
Proportionate change∈income ∆ Y ×Q

7
Arora Surbhi, Economics for Law Students, Darbhanga Castle Allahabad,Central Law
Publications,2021,P.67
8
Ex Ibi, P.67
9
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.67,68
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3. Cross elasticity of demand

Cross elasticity of demand is defined as the percentage change in quantity

demanded of a commodity with respect to the percentage change in the price
of its related commodity. Therefore it takes place in the price of one
commodity and the demand of the other commodity.

Percentage change∈the quantity demanded of commodity X

e xy =
Percentage change∈the price of commodity Y
∆ Qx × Px
e xy = 10
∆ Py ×Qx

DEGREES OF PRICE ELASTICITY OF DEMAND

1. Perfectly inelastic demand

When quantity demanded of a commodity does not respond to a change in
its price, then the elasticity of demand is zero. In this case, the quantity
demanded remains the same, irrespective of any rise or fall in the price of
the commodity. It is a case of perfectly inelastic demand. A demand curve
of zero elasticity is known as perfectly or completely inelastic demand
curve. This is illustrated in the following diagram. 11

10
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.69
11
Ex.Ibid, P.53
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Vertical straight line demand curve D 1, which is parallel to Y-axis, is perfectly

inelastic demand curve. The amount purchased remains OQ irrespective of
whether price is OP or OP1. Cases of perfectly inelastic demand are very rare even
in the case of the basic necessities of life like food as demand for even basic
necessities also changes because of a change in their price. However, in case of
life-saving medicines the demand for such medicines is perfectly inelastic. 12

2. Perfectly elastic demand

When consumers are prepared to purchase all that they can get at a
particular price but nothing at all a slightly higher price, then the price
elasticity of demand for a commodity is said to be infinite. In this case, a
very small fall in the price of a commodity causes the demand to increase to
infinity. A demand curve of infinite elasticity is known as perfectly or
completely elastic demand curve. In this case demand is perfectly elastic.

P0

A horizontal straight line demand curve D in fig which is parallel to X-axis

illustrates perfectly elastic demand. At price OP0 nothing is demanded, but at
a slightly lower price OP an infinitely large quantity is demanded. This the
extreme or upper limit of price elasticity. Cases of perfectly elastic demand
are extremely rare. 13

12
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.53
13
Ex.Ibid, P.53
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3. Unitary Elastic Demand

When a given percentage change in the price of a commodity causes an
equivalent percentage change in the quantity demanded, then the elasticity
of demand is said to be unitary. For examlle, if a fall in the price of the
commodity by 10 percent causes an increase in the amount purchased of it
by 10 percent, the elasticity of demand is equal to one. A demand curve
having a unitary elasticity over its whole range is shown in fig below.

Demand curve D has unitary elasticity at all the points on the curve. Such a
curve is known as a rectangular hyperbola curve. Therefore, the demand
curve representing unitary elasticity of demand on each of its point assumes
the shape of a rectangular hyperbola. Cases of unitary elastic demand are
very rare indeed. 14
4. Elastic Demand
When the percentage change in the quantity demanded of a commodity
exceeds the percentage change in its price, the elasticity of demand is
greater than unitary. The elasticity of demand here is greater than unity.
Demand is said to be relatively elastic here. For example, if a fall in the
price of the commodity by 10 percent causes an increase in amount
demanded by 15 percent, the demand is said to be elastic. Generally the
demand for luxury goods is elastic in nature. 15

14
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.53
15
Ex.Ibid, P.54
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5. Inelastic Demand

Demand is inelastic when the percentage change in the quantity demanded

of a commodity is less than the percentage change in its price. The
elasticity of demand here is less than unity. We say that demand for this
good is relatively inelastic. For instance if a fall in the price of a
commodity by 10 percent leads an increase in quantity demanded by 5
percent the demand is inelastic. 16

16
Sethi, D.K., Frank ISC ECONOMICS Std 12th, Patullos road Chennai, Frank Bros. & Co.
Publications ,2022,P.54
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CONCLUSION

In conclusion, the law of demand and elasticity of demand are fundamental

concepts in economics that help us understand how consumers respond to changes
in prices. The law of demand states that, all else being equal, as the price of a
good or service decreases, the quantity demanded increases, and vice versa. This
inverse relationship between price and quantity demanded is a basic principle that
underlies many economic models.
Elasticity of demand further refines our understanding by quantifying the
sensitivity of quantity demanded to changes in price. Elasticity measures the
percentage change in quantity demanded in response to a one percent change in
price. If demand is elastic, a small change in price leads to a proportionally larger
change in quantity demanded, and vice versa for inelastic demand.
The concept of elasticity is crucial for businesses and policymakers. Inelastic
goods, for example, are less responsive to price changes, making them less
sensitive to market fluctuations. On the other hand, elastic goods are more
responsive, and changes in price can significantly impact quantity demanded.
Understanding the law of demand and elasticity of demand is essential for
businesses to set optimal prices, forecast sales accurately, and make informed
decisions about production and marketing strategies. Additionally, policymakers
use these concepts to design effective taxation policies and regulations that can
influence consumer behaviour without causing unintended consequences.
In essence, the law of demand and elasticity of demand provide a framework for
comprehending how consumers make choices in response to changes in price, and
this knowledge is indispensable for both economic analysis and practical decision-
making.
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BIBLIOGRAPHY

 BOOKS

 Arora, Surbhi, Economics for Law Students ,2021,2nd Edition,

Darbhanga Castle, Prayagraj, 2022, Central Law Publications, P.
58,67.
 Sethi, D.K. . Frank ISC Economics, Patullos road Chennai, Frank
Bros. & Co. Publications P. 8,15,16,53,54,67-69.
 Dwivedi, D N, MICROECONOMICS THEORY AND APPLICATIONS,
Noida UP, VIKAS PUBLISHING HOUSE PVT LTD, 2016, P.37,38.