GSEB Class 11 Economics Important Questions Chapter 3 Demand

Gujarat Board GSEB Class 11 Commerce Economics Important Questions Chapter 3 Demand Important Questions and Answers.

GSEB Class 11 Economics Important Questions Chapter 3 Demand

Short Answer Type Questions

Question 1.
Name the factors that define or determine demand.
Answer:

• Desire
• Willingness to buy
• Ability to buy
• A particular price and
• A particular point of time.

Question 2.
Name the types into which we can divide the determinants of demand
Answer:

• Price of commodity/service
• Factors other than price (i.e. other determinants)

Question 3.
How does price of a good affects its demand?
Answer:
When price of a good falls, a rational consumer buys more and the demand expands. When price falls rational consumers buys less and so demand contracts.

Question 4.
On what does taste and preference of a consumer depends?
Answer:
Tastes and preferences are associated with the likes and dislikes of a consumer as well as several other factors such as age, trends, etc.

Question 5.
State an example that explains how taste and preference of a consumer will affect demand?
Answer:
If a person is fond of reading, his preference for reading will change with age. At a young age, a person prefers to read story books, at adolescence he may prefer to read novels and in old age may prefer to read spiritual books.

Question 6.
How does income of a consumer affects demand? State the relationship between consumer’s income and demand.
Answer:
The demand for a commodity increases with increase in the consumer’s income. Similarly, when his income falls, his demand for a good falls. Thus, there is a direct relationship between income and demand.

Question 7.
Define inferior gods (or Giffen goods).
Answer:
In economics, an inferior good is a good whose demand decreases when consumer income rises or whose demand increases when consumer income decreases. These goods are also known as Giffen goods.

Question 8.
Explain giving example how direct relationship between income and demand does not hold true in case of inferior goods.
Answer:
Travelling through inter-city bus is a cheaper (inferior) mode than air or rail travel, but is more time-consuming. When a consumer has less money he prefers traveling by bus i.e. demand for bus travel is more. However, when his income rises he prefers faster and more comfortable transport system such as private car or by air i.e. demand for bus travel decreases.

Question 9.
What are related goods?
Answer:
Goods such as french fries and ketchup that are closely related to each other are called related goods.

Question 10.
State the types of related goods.
Answer:

• Substitute goods and
• Complementary goods.

Question 11.
How a person’s expectations about future prices affect demand?
Answer:
An individual’s expectation about the future price of a good affects his current demand for that good. If the consumer expects the price of a good to rise in the future, his its demand expands and if price of a good rises, its demand contracts.”

Question 12.
What are substitute goods?
Answer:
Goods which can be easily used in place of one another are called substitute goods. Such goods have similar characteristics. They can be us.ed in place of each other to satisfy the want

Question 13.
State few examples of substitute goods.
Answer:
Very closely competing brands of soft drink such as Coke and Pepsi, televisions such as Sony and Samsung or motorcycles such as Honda and Bajaj, Pure ghee and Vanaspati ghee, etc. are substitute of one another.

Question 14.
How does demand for a good falls when price of its substitute good falls?
Answer:
If the price of a substitute good falls then the consumer may choose to replace his current brand with the substitute which has become cheaper. Hence, demand for a good falls when price of its substitute falls.

Question 15.
What are complementary goods? State one example.
Answer:
Complementary goods are goods which are consumed together. This means one good cannot be consumed without the other, example: Car and fuel, mobile phone and SIM card are examples.

Question 16.
How does price rise of complementary goods affect demand?
Answer:
Since complementary goods are jointly consumed, price rise in even one of these goods makes the joint consumption expensive and so the consumer demands lesser of both and vice-versa.

Question 17.
What is demand function? Provide its mathematical form.
Answer:
The demand function is a mathematical function between demand for a good and the determinants of this demand.
D_x = f(P_x, P_y, P_e, T, Y, U)

Question 18.
What is the law of a demand?
Answer:
The principle that explains the relationship between price and demand for a good, assuming the effect of all other determinants as constant is called the ‘Law of Demand’.

Question 19.
State law of demand as given by Alfred Marshall.
Answer:
“When other factors influencing demand remain unchanged, if price of a good falls,

Question 20.
What is demand schedule?
Answer:
A demand schedule is a table that shows the willingness of a consumer to buy different quantities of a good at various prices.

Question 21.
What is demand curve?
Answer:
The graphical representation of a demand schedule is called a demand curve.

Question 22.
What does the downward slope of the demand curve from left to right indicates?
Answer:
It indicates that there is an inverse relationship between price and demand.

Question 23.
Why there is an inverse relationship between price and demand?
Answer:
This inverse relationship between price and demand occurs because of two reasons. They are:

1. Income effect and
2. Substitution effect.

Question 24.
State the income effect on demand.
Answer:
When real income rises, a consumer can buy more quantity of a good and therefore its demand may rise. This is known as income effect on demand.

Question 25.
State the substitution effect on demand.
Answer:
When price of the concerned good falls, it becomes relatively cheaper than its substitutes. Hence, a consumer will reduce the consumption of substitute goods and increase the demand for the concerned good. This is called substitution effect on demand.

Question 26.
What are prestigious goods?
Answer:
Certain goods which are priced very high and are generally consumed by very rich people like, expensive jewelry, expensive cars, expensive mobile phones, etc. are considered prestigious goods.

Question 27.
How does special preference of people affect the demand?
Answer:
At times, people get very accustomed and used to certain goods. They cannot do with any other good. Even if there is some rise in the price of their preferred goods, their demand may not decrease.

Question 28.
What is expansion of demand? How is it represented by demand curve?
Answer:
Keeping other factors constant if price falls, expansion of demand occurs. Expansion is represented by downward movement on demand curve.

Question 29.
What is contraction of demand? How is it represented by demand curve?
Answer:
Keeping other factors constant if price rises, contraction of demand occurs. Contraction of demand is represented by upward movement on demand curve.

Question 30.
What is rightward shift of demand?
Answer:
Keeping price factor as constant, if demand increases due to any other factor, the demand curve will shift towards right which is called rightward shift in demand curve.

Question 31.
What is leftward shift of demand?
Answer:
Keeping price factor as constant, if demand decreases due to any other factor, the demand curve will shift towards left which is called leftward shift in demand curve.

Question 32.
Define individual demand.
Answer:
The demand of a good by an individual consumer at a given price at a particular point of time is called individual demand.

Question 33.
Define market demand.
Answer:
The sum total of all individual demands of all existing consumers in the market at a given price at a particular point of time is called market demand.

Question 34.
What is elasticity of demand?
Answer:
The extent to which demand responds to changes in any of its determinants such as price, income, tastes and preference, etc. is called elasticity of demand.

Question 35.
What is price elasticity of demand?
Answer:
A measure that shows the proportion (extent) to which demand changes with respect to change in price is called price elasticity of demand. It is denote by εp

Question 36.
Express Marshall’s view on price elasticity of demand.
Answer:
According to Marshall, the degree of elasticity of demand depends upon the extent of rise in demand because of a fall in price and upon the extent of fall in demand because of a rise in price.

Question 37.
State the formula for price elasticity of demand.
Answer:
Price elasticity of demand (ε_p) = \(\frac{\text { Propoitionate change in demand }}{\text { Proportionate change in price }}\)

Question 38.
State the types of elasticity of demand.
Answer:

1. Price Elasticity of Demand
2. Income Elasticity of Demand,
3. Cross Elasticity of Demand.

Question 39.
What do you mean by degrees of price elasticity of demand?
Answer:
The extent of change in demand because of a change in price can be expressed in five degrees. This is known as degrees of price elasticity of demand.

Question 40.
State the various values and range of price elasticity of demand.
Answer:
The price elasticity of demand ranges from 0 (zero) to ∞ infinity. Price elasticity can be 0, <1, =1 , >1 and infinity.

Question 41.
Define perfectly elastic demand.
Answer:
When there is an infinite change in demand for commodity ‘T’ because of even a very little change in its price (which may be as low as zero) then such a demand is called perfectly elastic demand. In this case the elasticity of demand becomes infinite i.e. ∞.

Question 42.
Express elasticity of demand when demand becomes infinite.
Answer:
ε_p = \(\frac{\text { Proportionate change in demand }}{\text { Pr oportionate change in price }}\)
\(\frac{\infty}{1}\) = ∞ (infinite)

Question 43.
What is perfectly inelastic demand?
Answer:
When price of a commodity say commodity ‘K’ changes by any amount, say 10% but there is absolutely no change in its demand then such a demand is called perfectly inelastic demand.

Question 44.
What is unitary elastic demand?
Answer:
When the percentage change in demand is equally proportionate to percentage change in price then it is called unitary elastic demand.

Question 45.
What is relatively elastic demand?
Answer:
When a percentage change in demand is proportionately more than percentage change in price then such demand is called relatively elastic demand.

Question 46.
What is relatively inelastic demand?
Answer:
When percentage change in demand is proportionately lesser than percentage change in price then such demand is called relatively inelastic demand.

Question 47.
State the main types of income elasticity of demand.
Answer:

• Positive income elastic demand,
• Negative income elastic demand and
• Zero income elastic demand.

Question 48.
State the degrees (types) of positive income elasticity of demand?
Answer:
(A) Unit income elastic demand (ε_y = 1),
(B) Elasticity of demand greater than unity (ε_y > 1) and
(C) Elasticity of demand less than unity (ε_y < 1)]

Question 49.
What do you mean by positive income elastic demand?
Answer:
When demand increases, due to a rise in income of the consumer or demand decreases due to a fall in income of the consumer, then such a change in demand is known as positive income elasticity of demand.

Question 50.
Define unitary income elastic demand.
Answer:
When change of demand and change of income of consumer are proportionately equal, than it is known as unitary income elastic demand. In such a case, elasticity of demand ε_y = 1.

Question 51.
Define elasticity of demand greater than unity.
Answer:
when change in demand is proportionately greater than the change in income of the consumer then this type of income elasticity of demand is known to be greater than unity, in such a case, elasticity of demand ε_y > 1.

Question 52.
Define elasticity of demand lesser than unity.
Answer:
When change in demand is proportionately lesser than change in income of the consumer then this type of income elasticity of demand is known to be lesser than unity. In such a case, elasticity of demand ε_y < 1.

Question 53.
What is negative income elastic demand?
Answer:
When demand decreases, due to the rise in income of a consumer or demand increases due to fall of income then such elasticity of demand is known as negative income elasticity of demand.

Question 54.
What is zero income elastic demand? State examples in which it is observed?
Answer:
When there is no change in the demand with the change in income of consumer than such demand is known to have zero income elasticity of demand. Usually, this type of income elasticity can is observed in low priced goods like salt, post card, pins, match sticks, stapler pins, etc.

Question 55.
What does cross-elasticity of demand measures?
Answer:
The cross-price elasticity of demand measures the change in demand for one good in response to a change in price of another good.

Question 56.
Define negative cross-price elasticity of demand.
Answer:
If two products are complementary, an increase in price of one product will lead to decrease in demand of another product. This is ……

Question 57.
Define positive cross-price elasticity of demand.
Answer:
If two products are substitutes, increase in price of one good will increase the demand of other good. This is called positive cross-price elasticity of demand.

Question 58.
State the equation for cross elasticity of demand.
Answer:
Cross elasticity of demand = \(=\frac{\% \text { change in demand for good } \mathrm{X}}{\% \text { change in demand for good } \mathrm{Y}}\)

Question 59.
State the commonly used methods
Answer:

• Method of proportionate change
• Total for measuring elasticity of demand. – outlay method (total expenditure method)
• Geometric method

Question 60.
What is the main assumption during expansion/contraction of demand?
Answer:
The main assumption during expansion-contraction of demand is that all other determinants are constant.

Long Answer Type Questions

Question 1.
Explain substitute goods and complementary goods and their impact on demand.
Answer:
1. Substitute goods:

• Goods which can be easily used in place of one another are called substitute goods.
• Such goods have similar characteristics. They can be used in place of each other to satisfy the want.
• In this sense we can also say that substitute goods severely compete with each other.

Example:

• Very closely competing brands of soft drink such as Coke and Pepsi, televisions such as Sony and Samsung or motorcycles such as Honda and Bajaj, pure ghee and vanaspati ghee, etc. are. substitute of one another.
• If the price of a substitute good falls then the consumer may choose to replace hia current brand with the substitute which has become cheaper. Hence, demand for a good falls when price of its substitute falls.

2. Complementary goods:

• Complementary goods ard goods which are consumed together.
• This means one good cannot be consumed without the other. Complimentary goods must be consumed jointly to satisfy the want/need.

Example:

• Mobile phone and SIM card, air conditioner and electricity, spectacle frame and spectacle glasses, etc.
• If the price of complementary good rises, the demand for the original good falls and vice-versa.
• Since complimentary goods are jointly consumed, price rise in even one of these goods makes the joint consumption expensive and so the consumer demands lesser of both and vice-versa.

Question 2.
Explain the law of demand and state its assumptions.
Answer:
Law of demand:

• The principle that explains the relationship between price and demand for a good, assuming the effect of all other determinants as constant is called the ‘Law of Demand’.
• This law was given by Prof. Alfred Marshall As per him “When other factors influencing demand remain unchanged, if price of a good falls, its demand expands and if price of a good rises, its demand contracts.”
• Thus, the law expresses an inverse relationship between price and demand.
• In this law, ‘price’ is the cause variable and demand is the effect variable.

Assumptions of law of demand:

• Tastes and preferences of the consumer remain unchanged.
• Income of consumer remains unchanged.
• Price of substitute and complementary goods remain unchanged.
• Consumers do not make anticipation regarding future prices.
• Size of population remains the same.

Question 3.
Explain the causes of inverse relationship between price and demand.
Answer:
The inverse relationship between price and demand occurs because of two reasons. They are:

1. Income effect and
2. Substitution effect.

1. Income effect: When the monetary income of the consumer remains constant, but price of- the good falls then his real income rises. Real income means the purchasing power of money income. When real income rises, a consumer can buy more quantity of a good and therefore its demand may rise. This is known as income effect on demand.

Example:

• If the amount of money that a consumer has is ₹ 50 and the price of milk is ₹ 50 per litre than the consumer can buy (demand) only 1 litre of rriilk.
• If the price of milk falls to ₹ 10, the consumer can demand 5 litres of milk with money income of ₹ 50.
• Here, money income of consumer has not risen but because of fall in demand his purchasing power i.e. his real income has indirectly increased.
• Mostly, normal goods have a positive income effect whereas inferior goods have a negative income effect. This means when the price of inferior goods fall, the real income of the consumer increases but the demand for these goods falls. Coarse food grains and bus-transportation are two such examples of inferior goods.

2. Substitution effect:

• When price of the concerned good falls, it becomes relatively cheaper than its substitutes.
• Hence, a consumer wHI reduce the consumption of substitute goods and increase the demand for the concerned good. This is called substitution effect.

Example:
Consider two varieties of pants, namely, a pair of cotton pants and denim pants. If the price of cotton pants falls and that of denim pants remains the same .then the consumer finds the cotton pants cheaper compared to the denim pants. Hence, the demand for cotton pants will rise.

Question 4.
What are prestigious goods? Why does the law of demand does not hold true for these goods?
Answer:
Prestigious goods:

• Certain goods which are priced very high and are generally consumed by very rich people like, expensive jewelry, expensive cars, expensive mobile phones, etc. are considered prestigious goods.
• Such goods are used by the rich as status symbols. Even if their price rises their demand expands instead of contracting.
• On the other hand, if their price falls, the rich may contract their demand and avoid buying such goods with a mindset that a fall in price means that the good is losing its prestige and will now be in reach of even common people.
• Examples of such products are Mercedes car, iPhone, etc.

Question 5.
What is elasticity of demand? Give one example and state its types.
Answer:
Elasticity of demand:
The extent to which demand responds to changes in any of its determinants such as price, income, tastes and preference, etc. is called elasticity of demand.

Types:
There are mainly three determinants of demand. They are:

1. Price of the good
2. Income of the consumer
3. Price of the related goods

Based on these three determinants, we can have three types of elasticity of demands. They are:

1. Price Elasticity of Demand (i.e. change in demand due to price)
2. Income Elasticity of Demand (i.e. change in demand due to income)
3. Cross Elasticity of Demahd (i.e. change in demand of one good with respect to change in price of another good)

Question 6.
Explain the degrees (types) of price elasticity of demand.
Answer:
Degrees (types) of price elasticity of demand:

• The extent of change in demand because of a change in price can be expressed in five degrees. This is known as degrees of price elasticity of demand.
• Demands are not fix and possess elasticity.
• All commodities do not have same price elasticity. It varies from one good to another.
• The price elasticity of demand ranges from 0 (zero) to ∞ (infinity).
• Price elasticity can be 0, <1, = 1, >1 and infinity.

Based upon these five situations, their are five degrees of demand. They are:

1. Perfectly elastic demand (ε_p = ∞)
2. Perfectly inelastic demand (ε_p = 0)
3. Unitary elastic demand (ε_p – 1)
4. Relatively elastic demand (ε_p > 1)
5. Relatively inelastic demand (ε_p < 1)

Question 7.
What is perfectly elastic demand? Explain with the help of an example and diagram.
Answer:
Perfectly Elastic Demand (ε_p = ∞) ;

• When there is an infinite change in demand for commodity T because of even a very little change in its price (which may be as low as zero) then such a demand is called perfectly elastic demand.
• In this case the elasticity of demand becomes infinite i.e. ∞.

Example:

• As shown below, suppose price of a commodity changes by only ₹ 1, its demand may have infinite change.
• ε_p = \(\frac{\text { Proportionate change in demand }}{\text { Proportionate change in price }}\)
  = \(\frac{\infty}{1}\) ∞ (infinite)

Explanation:

• Such elasticity of demand is not found in reality.
• In economic theory, such demand is explained in a perfectly competitive market.
• As shown in the diagram the demand curve ‘DD₁’ is horizontal straight line parallel to X-axis.
• Such a curve represents infinite change in demand at the same i.e. constant price.

Question 8.
What is perfectly inelastic demand? Explain with the help of an example and diagram.
Answer:
Perfectly inelastic demand (ε_p = 0):

• Perfectly inelastic demand is opposite of perfectly elastic demand.
• When price of a commodity say commodity ‘K’ changes by any amount, say 10% but there is absolutely no change in its demand then such a demand is called perfectly inelastic demand.
• ε_p = \(\frac{\text { Proportionate change in demand }}{\text { Proportionate change in price }}\)
  = \(\frac{0 \%}{+10 \%}\) = 0 (zero)
• In perfectly elastic demand, price elasticity i.e. ε_p = 0
• As shown in the diagram, ‘DD’ demand curve is a vertical straight line parallel to Y-axis. The curve shows that whatever be the change in price, the demand remains constant. Such elasticity of demand is always zero.

Question 9.
What is unitary elastic demand? Explain with the help of an example and diagram.
Answer:
Unitary elastic demand (ε_p = 1)

• When the percentage (proportionate) change in demand is equally proportionate to percentage (proportionate) change in price then it is called unitary elastic demand.
• For example, if price of commodity ‘S’ falls by 5% and its demand also by changes by 5%, then it is called unitary change in demand.
• ε_p = \(\frac{\text { Proportionate change in demand }}{\text { Proportionate change in price }}\)
  = \(\frac{+5 \%}{-5 \%}\) = |1|
• In unitary elastic demand, price elasticity i.e. = 1.

As shown in the diagram, on the demand curve ‘DD’, when price falls by PP₁, demand expands by MM₁. Note that PP₁ = MM₁.

Question 10.
What is relatively elastic demand? Explain with the help of an example and diagram.
Answer:
Relatively elastic demand (ε_p > 1):
1. When price elasticity i.e. ε_p> 1, it is called relatively, elastic demand. When a percentage change in demand is proportionately more than percentage change in price then such demand is called relatively elastic demand.

2. This type of elasticity is observed for luxury goods like televisions, cars etc. For example, if price of commodity ‘R’ rises by 10 % and its demand falls by 30 %, than its demand is called relatively elastic demand.
ε_p = \(\frac{\text { Proportionate change in demand }}{\text { Proportionate change in price }}\)
= \(\frac{-30 \%}{+10 \%}\) = |3|

3. As can be seen from the calculation, a small rise (change) of 10% in the price made a large change of 30% in the demand of the commodity.

4. In the diagram, on the Demand for the commodity demand curve DD₁, when price rises by PP₁ amount, demand falls by MM₁ amount which is proportionately greater than that of price.

Question 11.
What is relatively inelastic demand? Explain with the help of an example and diagram.
Answer:
Relatively inelastic demand (ε_p < 1):

• When percentage change in demand is proportionately lesser than percentage change in price then such demand is called relatively inelastic demand.
• For example, when price of commodity ‘G’ rises by 20 % and as a result its demand falls only by 5 % then its demand is called relatively inelastic demand.
• When price elasticity is less than 1, 0 then the demand is called inelastic demand and ε₀ < 1.
• This type of elasticity is found for g goods of daily needs such as food grains, milk, oil, etc.

ε_p = \(\frac{\text { Pr oportionate change in demand }}{\text { Proportionate change in price }}\)
= \(=\frac{-5 \%}{+20 \%}=-\frac{1}{4}\) |0.25|

In the diagram, on demand curve ‘DD₁’, when price rises by PP₁ amount, demand falls by MM₁ amount which is proportionately lesser than that of price.

Question 12.
Write a short note on types/degrees of income elasticity of demand.
Answer:
Types/degrees of income elasticity of demand:
There are three main types of income elasticity of demand. They are:
1. Positive income elastic demand:
When demand increases, due to a rise in income of the consumer or demand decreases due to a fall in income of the consumer, then such a change in demand is known as positive income elasticity of demand.

There are three degrees of positive income elasticity of demand. They are:
(A) Unit income elastic demand (ε_y = 1):

• When change of demand and change of income of consumer are proportionately equal, than it is known as unitary income elastic demand.
• In such case, elasticity of demand ε_y = 1.

(B) Elasticity of demand greater than unity (ε_y >1):

• When change in demand is proportionately greater than the change in income of the consumer then this type of income elasticity of demand is greater than unity.
• In such case, elasticity of demand ε_y > 1.

(C) Elasticity of demand less than unity (ε_y < 1):

• When change in demand is proportionately lesser than change in income of the consumer then this type of income elasticity of demand is known to be lesser than unity.
• In such case, elasticity of demand ε_y < 1.

2. Negative income elastic demand:

• When demand decreases, due to the rise in income of a consum x or demand increases due to fall of income then such elasticity of demand is known as negative income elasticity of demand.
• Normally, negative income elasticity of demand is seen in some types of inferior goods.
• This concept was given by Robert Giffen and thus such goods are known as Giffen goods.
• Example of inferior goods are bajra, kodari (coarse grain), coarse cloth, palmolein oil, vegetable ghee, etc.

3. Zero income elastic demand:

• When there is no change in the demand irrespective of the change in income of consumer than such demand is known to have zero income elasticity of demand.
• Usually, this type of income elasticity can is observed in low priced goods like salt, post card, pins, match sticks, stapler pins, etc.

Question 13.
What do you mean by cross elasticity or cross-price elasticity of demand? Explain.
Answer:
Cross elasticity or Cross-Price elasticity of demand:

• When the demand of the concerned commodity changes in response to the change in price of its related good (either substitute or complementary good), then the- extent of such change in demand is called cross elasticity or cross-price elasticity of demand.
• Cross elasticity of demand = \(\frac{\text { Percentage change in demand for good } X}{\text { Percentage change in price for good } \mathrm{Y}}\)
• The cross-price elasticity of demand measures the change in demand for one good in response to a change in price of another good.
• The cross-price elasticity may be a positive value or negative value, depending on whether the goods are complementary or substitutes.

(A) Negative cross-price elasticity:

• If the cross-price elasticity is a negative value, it means the products for which cross-price elasticity is measured are complementary products.
• If two products are complementary, an increase in price of one product will lead to decrease in demand of another product.

Example:

• Petrol and cars are complementary products. If the price of petrol rises by 20%, the demand for cars that have poor fuel efficiency will fall.
• Complementary products are such products which needs to be consumed jointly.

(B) Positive cross-price elasticity:

• If the cross-price elasticity is a positive value, it means the products for which cross-price elasticity is measured are substitute products.
• If two products are substitutes, increase in price of one good will increase the demand of other good.

Example:

• Pure ghee and vanaspati ghee are substitute products. If price of pure ghee increases considerably, people may consume less of pure ghee and increase their consumption of vanaspati ghee will increase.
• Substitute goods are goods that can be used in place of one another.

Question 14.
Differentiate between income effect and substitution effect.
Answer:

Income effect	Substitution effect
1. When the monetary income of the consumer remains constant, but price of the good falls then his real income rises. When real income rises, a consumer can buy more quantity of a good and therefore its demand may rise. This is known as income effect on demand.	1. When price of the concerned good falls, it becomes relatively cheaper than its substitutes. Hence, a consumer will reduce ; the consumption of substitute goods and increase the demand for the concerned good. This is called substitution effect.
2. Example: If the amount of money that a consumer has is 50 and the price of milk is  50 per litre than the consumer can  buy (demand) only 1 litre of milk. It the price of milk falls to  lo, the consumer can now demand 5 litres of milk with money income of 50.	2. Example: Consider two varieties of pants, namely, a pair of cotton pants and denim pants. If the price of cotton pants falls and that of denim pants remains the same then the consumer finds the regular pants cheaper compared to the denim pants. Hence, the demand for cotton pants will rise.
3. This effect can be. either positive or negative.	3. This effect is always positive.

Question 15.
Differentiate between price elasticity of demand and cross elasticity of demand.
Answer:

Price elasticity of demand	Cross elasticity of demand
1. A measure that shows the proportion (extent) to which demand changes with respect to e in price is called price elasticity of demand.	1. When the demand of the concerned commodity changes in response to the change in price of its related good (either substitute or complementary good), then the extent of such change in demand is called cross elasticity or cross price elasticity of demand.
2. Price elasticity of demand = \(\frac{\text { Proportionate change in demand }}{\text { Proportionate change in price }}\)	2. Cross elasticity of demand = \(\frac{\text { Percentage change in demand for good } X}{\text { Percentage change in price for good } \mathrm{Y}}\)
3. Price elasticity is useful in measuring responsiveness of demand.	3. The cross price elasticity of demand is useful in measuring the change in demand for one good in response to a change in price of another good.
4. Price elasticity of demand can be negative but it is always represented as positive for simplicity.	4. The cross price elasticity may be a positive value or negative value, depending on whether the goods are complementary or substitutes.

Question 16.
Differentiate between expansion-contraction and increase-decrease in demand.
Answer:

Expansion and contraction of demand	Increase and decrease in demand
1. Expansion and contraction of demand occurs due to change in price of a commodity.	1. Increase and decrease in demand occurs due to changes in factors other than price.
2. Factors other than price remain constant.	2. Price remains constant.
3. Expansion contraction indicates movement on the same demand curve.	3. Increase decrease in demand are shown on separate demand curves.
4. Expansion and contraction shows downward and upward movement respectively on the demand curve.	4. Increase and decrease in demand shows rightward and leftward movement respectively on the demand curve.

Question 17.
Differentiate between negative/positive cross-price elasticity.
Answer:

Negative cross price elasticity	Positive cross price elasticity
1. If the cross price elasticity is a negative value, it means the products for which cross price elasticity is measured are complementary products	1. If the cross price elasticity is a positive value, it means the products for which cross price elasticity is measured are substitute products.
2. If two products are complementary, an increase in price of one product will lead to decrease in demand of another product.	2. If two products are substitutes, increase in price of one good will increase the demand of other good.
3. Example: Petrol and cars are complementary products. If the price of petrol rises by 20%, the demand for cars that have poor fuel efficiency will fall.	3. Example: Pure ghee and Vanaspati ghee are substitute products. If price of pure ghee increases considerably, people may consume less of pure ghee and increase their consumption of vanaspati ghee will increase.
4. Complementary products are such products which needs to be consumed jointly.	4. Substitute goods are goods that can be used in place of one another.

Multiple Choice Questions

Question 1.
Demand is determined by _______ factors.
(A) 2
(B) 3
(C) 5
(D) 6
Answer:
(C) 5

Question 2.
There is _______ relation between income and demand.
(A) Direct
(B) Exponential
(C) Inverse
(D) Both (A) and (C)
Answer:
(A) Direct

Question 3.
Demand of _______ goods decreases with increase in income
(A) Substitute
(B) Inferior
(C) Complementary
(D) Both (A) and (C)
Answer:
(B) Inferior

Question 4.
Which of the following does not fall into category of related goods?
(A) Substitute goods
(B) Inferior goods
(C) Complementary
(D) Prestigious goods
Answer:
(B) Inferior goods

Question 5.
Which goods severely compete with each other?
(A) Inferior goods
(B) Complementary goods
(C) Substitute goods
(D) Prestigious goods
Answer:
(C) Substitute goods

Question 6.
Demand of a good _______ when price of its substitute falls.
(A) Rises
(B) Remains unaffected
(C) Falls
(D) Can be any of these
Answer:
(C) Falls

Question 7.
If price of one of the complementary goods rises, the consumer
(A) Will switch over to other brand
(B) Will decrease its demand for both complementary goods
(C) Will not be affected much
(D) Will buy the complementary of that good
Answer:
(B) Will decrease its demand for both complementary goods

Question 8.
Demand function shows a functional relationship between demand of a good and
(A) Price of a commodity
(B) Expectations regarding future price
(C) Consumer’s income
(D) All of these
Answer:
(D) All of these

Question 9.
In the law of demand,
(A) Price Is effect variable and demand is cause variable
(B) Price is cause variable and demand is effect variable
(C) Income is cause variable and demand is effect variable
(D) Price and demand are cause variable and income is- effect variable
Answer:
(B) Price is cause variable and demand is effect variable

Question 10.
Who gave the law of demand?
(A) Alfred Marshall
(B) Paul Samuelson
(C) Adam Smith
(D) Gibbins
Answer:
(A) Alfred Marshall

Question 11.
There is _______ relation between price and demand.
(A) Direct
(B) Inverse
(C) Squared
(D) Indirect
Answer:
(B) Inverse

Question 12.
Demand schedule is a type of
(A) Chart
(B) Descriptive figures
(C) Data table
(D) Demand curve
Answer:
(C) Data table

Question 13.
Due to which of the following factor does the inverse relationship between price and demand occur?
(A) Income effect
(B) Price effect
(C) Substitution effect
(D) Both (A) and (C)
Answer:
(D) Both (A) and (C)

Question 14.
Real income refers to the
(A) Purchasing power of money income
(B) Actual demand of good that will occur
(C) Net income that a. person earns
(D) Legal income of a person
Answer:
(A) Purchasing power of money income

Question 15.
Exception to law of demand means
(A) When price of a good falls, its demand rises
(B) When price of a good falls, its demand contracts
(C) When price of a good rises, its demand contracts
(D) Both (A) and (C)
Answer:
(B) When price of a good falls, its demand contracts

Question 16.
Which of the following class of good go against the law of demand?
(A) Giffen goods
(B) Extremely low-priced goods
(C) Prestigious goods
(D) All of these
Answer:
(D) All of these

Question 17.
Who gave the concept of inferior goods?
(A) Smith
(B) Paul
(C) Giffen
(D) Robbins
Answer:
(C) Giffen

Question 18.
Expansion is _______ movement on demand curve where as contraction is _______ movement.
(A) Upward ; Sideways
(B) Upward ; Downward
(C) Downward ; Upward
(D) Leftwards ; Rightwards
Answer:
(C) Downward ; Upward

Question 19.
Decrease in demand is represented by _______ whereas increase in demand is represented by _______
(A) Upward movement ; Downward movement
(B) Rightward shift ; leftward shift
(C) Upward movement ; Rightward shift
(D) Leftward shift ; Rightward shift
Answer:
(D) Leftward shift ; Rightward shift

Question 20.
The price elasticity of demand is expressed in _______
(A) Percentage
(B) Modulus
(C) It has no unit
(D) Both (A) and (B)
Answer:
(D) Both (A) and (B)

Question 21.
Who gave the definition of price elasticity of demand?
(A) Giffen
(B) Paul
(C) Marshall
(D) Smith
Answer:
(C) Marshall

Question 22.
There are _______ degrees to express price elasticity of demand.
(A) 2
(B) 4
(C) 6
(D) 5
Answer:
(D) 5

Question 23.
Which of the following is not a degree of price elasticity of demand?
(A) Unitary elastic demand
(B) Perfectly inelastic demand
(C) Relatively elastic demand
(D) Moderately elastic demand
Answer:
(D) Moderately elastic demand

Question 24.
Under perfectly elastic demand, a negligible change in price of a commodity results in _______ change in demand.
(A) Infinite
(B) Proportionate
(C) No
(D) Proportionately more
Answer:
(A) Infinite

Question 25.
Which elasticity of demand does not exist in reality?
(A) Perfectly inelastic demand
(B) Unitary elastic demand
(C) Perfectly elastic demand
(D) Relatively inelastic demand
Answer:
(C) Perfectly elastic demand

Question 26.
What do you call a demand where in irrespective of any change in price there is no change in demand?
(A) Perfectly elastic demand
(B) Unitary elastic demand
(C) Relatively inelastic demand
(D) Perfectly inelastic demand
Answer:
(D) Perfectly inelastic demand

Question 27.
What is true for unitary elastic demand?
(A) εP =1
(B) εp < 1
(C) εp > 1
(D) εP = 0
Answer:
(A) εP =1

Question 28.
In relatively elastic demand
(A) Percentage change in demand is less than percentage change in price
(B) Percentage change in demand is more than percentage change in price
(C) There is infinite change in demand
(D) None of these
Answer:
(B) Percentage change in demand is more than percentage change in price

Question 29.
Income elasticity is represented as
(A) εp
(B) εy
(C) εj
(D) εC
Answer:
(B) εy

Question 30.
How many types of income elasticity of demand are there?
(A) 2
(B) 3
(C) 4
(D) 5
Answer:
(B) 3

Question 31.
Which of the following is not a type of positive income elastic demand?
(A) Elasticity of demand greater than unity
(B) Unit income elastic demand
(C) Elasticity of demand less than unity
(D) Perfectly elastic demand
Answer:
(D) Perfectly elastic demand

Question 32.
In unit income elastic demand,
(A) Change of demand and change of income of consumer are proportionately equal
(B) Change in demand is greater than change in income of consumer
(C) Change in demand is less then change in income of consumer
(D) With change in income of consumer the demand remains unchanged
Answer:
(A) Change of demand and change of income of consumer are proportionately equal

Question 33.
Any good in economic analysis can be studied or compared in context of its
(A) Substitute goods
(B) Inferior goods
(C) Complementary goods
(D) Both (A) and (C)
Answer:
(D) Both (A) and (C)