Demand Analysis (VSAQs)
Economics-1 | 3. Demand Analysis – VSAQs:
Welcome to VSAQs in Chapter 3: Demand Analysis. This page includes the most important FAQs from previous exams. Each answer is provided in simple English and presented in the exam format. This approach helps you prepare effectively and aim for top marks in your final exams.
VSAQ-1: What is Price Demand? (OR) Law of Demand
The Law of Demand explains a basic principle of economics: when the price of a good or service goes up, the quantity demanded usually goes down, assuming everything else stays the same. Similarly, when the price decreases, the quantity demanded tends to increase. This inverse relationship between price and quantity is at the heart of how markets work. For example, if the price of a movie ticket drops, more people are likely to go to the movies.
VSAQ-2: Prepare Individual Demand Schedule (OR) Individual Demand Schedule
An Individual Demand Schedule is a table that shows how much of a product a single person is willing to buy at different prices. It helps us see how demand changes with price. Here’s a simple example:
| Price (in Rupees) | Quantity Demanded |
| ₹500 | 10 |
| ₹400 | 15 |
| ₹300 | 20 |
| ₹200 | 25 |
| ₹100 | 30 |
In this example, as the price of the product goes down, the person wants to buy more of it. For instance, when the price drops from ₹500 to ₹100, the quantity demanded increases from 10 to 30 units.
VSAQ-3: What is Demand Function? (OR) Write a Note on Demand Function (OR) What is ‘Demand Function’? (OR) Demand Function
A Demand Function is a mathematical formula that shows how the quantity demanded of a good changes based on factors like price, income, and consumer preferences. It helps in predicting how changes in these factors will affect consumer demand. For example, if the price of smartphones decreases, the demand function can show how much more people will buy based on their income levels and preferences for different brands.
VSAQ-4: Explain Giffen’s Paradox. (OR) What is ‘Giffen’s Paradox’?
Giffen’s Paradox is a rare situation where the demand for a basic necessity like bread increases when its price rises, which is the opposite of what we usually expect. This happens because people with low incomes might buy more of this cheaper staple when prices rise, as they can no longer afford more expensive foods. For example, in 19th-century Britain, when the price of bread went up, poorer people bought even more bread because they couldn’t afford to buy meat or other foods.
VSAQ-5: Explain Veblen Goods (Prestigious Goods)
Veblen Goods, also known as prestigious goods, are products where demand increases as the price goes up. This is because these goods are seen as symbols of luxury and status. People buy them not just for their usefulness but to show off their wealth. For example, luxury cars, designer clothes, and expensive watches become more desirable as their prices rise because owning them signals high social status.
VSAQ-6: What is Cross Demand?
Cross Demand, or cross-price elasticity of demand, is like noticing how a change in the price of one item affects how much people want to buy of a related item. Imagine you love both tea and coffee. If the price of coffee suddenly goes up, you might start buying more tea instead. This reaction shows that tea and coffee are substitutes—when the price of one rises, the demand for the other increases. On the other hand, if the price of smartphones goes up, you might buy fewer phone cases, showing that they are complements—items often used together. Understanding cross demand helps businesses figure out how changes in prices can affect sales of related products, which is crucial for making smart pricing and marketing decisions.
VSAQ-7: Explain Complementary Goods.
Complementary Goods are like best friends that always go together. Imagine you buy a car; you’ll also need petrol to run it. If the price of cars goes up and fewer people buy them, the demand for petrol will likely decrease too, because fewer cars mean less driving. This is because cars and petrol are complements—products that are typically used together. When the price of one goes up, the demand for its complement usually falls, and when the price of one goes down, the demand for the other often increases. Businesses use this relationship to make pricing decisions that can help increase the sales of both products.
VSAQ-8: Explain Income Elasticity of Demand.
Income Elasticity of Demand (Ey) is like seeing how much more (or less) of something people buy when they have more (or less) money. Imagine you get a raise at work, and you start buying more organic food because you can afford it now. This indicates that organic food is a normal good—demand for it increases as income rises. But if you stop buying budget items because you can now afford better alternatives, those budget items are considered inferior goods—demand decreases as income increases. If your buying habits don’t change much with your income, the item is likely a necessity, something you’ll buy regardless of how much money you make. Income elasticity helps businesses predict how changes in the economy can affect demand for different products.
VSAQ-9: Explain Cross Elasticity of Demand.
Cross Elasticity of Demand (Exy) is like measuring how much more (or less) of one product people buy when the price of another related product changes. Think about tea and coffee again. If coffee prices go up, people might start buying more tea, indicating that these two goods are substitutes—when the price of one increases, the demand for the other also increases. But if the price of printers goes up, fewer people might buy them, which would likely reduce the demand for printer ink as well. This shows they are complements—when the price of one goes up, the demand for the other goes down. If there’s no strong relationship between the products, changes in the price of one won’t affect the other much, meaning they are unrelated. Understanding cross elasticity helps companies anticipate how the pricing of one product might impact the demand for another.
VSAQ-10: Explain Substitute Goods.
Substitute Goods are like backup options for each other. Imagine you love coffee, but the price of coffee suddenly spikes. You might start drinking tea instead because it’s cheaper and still satisfies your need for a hot beverage. Tea and coffee are substitutes—when the price of one goes up, the demand for the other tends to increase because people switch to the cheaper alternative. This is true for many pairs of products, like butter and margarine or bus and subway transportation. When consumers find one product too expensive, they often look for a substitute, which keeps their satisfaction level steady while saving money. The positive cross elasticity of demand between substitutes shows that as the price of one rises, the demand for the other also rises, helping businesses understand and respond to consumer behavior.
VSAQ-11: What are the Types of Price Elasticity of Demand?
Price Elasticity of Demand tells us how much the quantity demanded of a product changes when its price changes. Imagine you’re shopping, and the price of your favorite snacks suddenly goes up. Depending on the type of price elasticity, you might buy a lot less, just a little less, or even the same amount. Here are the five types of price elasticity of demand:
- Perfectly Elastic Demand (Ed = ∞): This is like saying you’ll only buy your favorite snack at a specific price—no more, no less. If the price changes even a little, you might stop buying it altogether. This type of demand is very sensitive to price changes, and the demand curve is a horizontal line.
- Perfectly Inelastic Demand (Ed = 0): Imagine needing a life-saving medicine—no matter how much the price increases, you’ll buy the same amount because you need it. In this case, the quantity demanded doesn’t change at all with the price. The demand curve is vertical, showing that price changes don’t affect how much is bought.
- Unitary Elastic Demand (Ed = 1): Think of this as a balanced situation where the percentage change in the quantity demanded is exactly the same as the percentage change in price. If the price goes up by 10%, you buy 10% less, and if the price drops by 10%, you buy 10% more. The total spending on the product remains the same.
- Relatively Elastic Demand (Ed > 1): This is when consumers are quite responsive to price changes. For example, if a brand of coffee becomes more expensive, you might quickly switch to a cheaper alternative. Here, a small change in price leads to a larger change in the quantity demanded.
- Relatively Inelastic Demand (Ed < 1): In this case, consumers are less sensitive to price changes. For instance, if the price of salt goes up, you probably won’t change how much you buy because it’s a small part of your overall budget. Even significant price changes lead to only a slight change in the quantity demanded.
VSAQ-12: What is Perfectly Inelastic Demand?
Perfectly Inelastic Demand is like being in a situation where no matter what happens to the price, you’ll keep buying the same amount. Imagine you’re addicted to a rare kind of chocolate, and it’s the only one you’ll eat. Whether the price doubles or triples, you’ll still buy the same amount because nothing else will satisfy you. In this case, the quantity demanded doesn’t change at all with the price, making the price elasticity of demand (Ed) equal to zero. The demand curve for perfectly inelastic demand is a vertical line, showing that price changes don’t influence how much of the product is purchased.