Demand and the Law of Demand
Mangoes cost ₹150 a kg at the start of the season. You buy one kilo. When the price drops to ₹50, you buy three. Your shopping just followed a law.
Demand is the quantity of a good that people are willing and able to buy at a particular price. Wishing is not enough; you need purchasing power too. The Law of Demand says: when the price rises, the quantity demanded falls, and when the price falls, it rises. The two move in opposite directions.
Key idea 1: Individual demand — Srivalli buys 1 kg at ₹150, 2 kg at ₹100 and 3 kg at ₹50. A table of such numbers is a demand schedule. Plot price on the vertical axis and quantity on the horizontal axis, and the points join into a demand curve that slopes downward. Her income and taste are assumed constant, so only the price changes the quantity.
- Easy: Higher price, lower quantity demanded.
- Medium: A demand schedule is a table; a demand curve is its graph.
- Exam-type: Demand needs both willingness and purchasing power.
In the figure: Price and quantity demanded move in opposite directions.
Key idea 2: Market demand — Market demand is the sum of everyone's demand at each price. Suppose Alex buys 2, 4, 6 kg and Israt buys 3, 6, 9 kg at the same three prices. With Srivalli, the market demand is 6 kg at ₹150, 12 kg at ₹100 and 18 kg at ₹50. A fall of ₹100 changes Srivalli's demand by 2 kg but the market's by 12 kg, so the market demand curve is flatter than an individual one.
- Easy: Market demand = sum of individual demands.
- Medium: At ₹100: 2 + 4 + 6 = 12 kg.
- Exam-type: The market curve is flatter because many buyers respond together.
Price up, demand down. Market demand = add up all buyers.
Thinking a wish alone is demand. Demand needs the ability to pay.
Law of demand. Memory clue: 'Dear = Down' — dear (costly) price means quantity goes down.
Spot the difference
| Term | Meaning |
|---|---|
| Demand schedule | Table of price and quantity demanded |
| Demand curve | Downward-sloping graph of that table |
| Market demand | Sum of all buyers' demand |
Practice questions
- 1Define demand.
- 2State the Law of Demand.
- 3How does a demand curve slope?
- 4Why do we need purchasing power for demand?
- 5What is a demand schedule?
- 6Find market demand at ₹150 if the three buyers demand 1, 2 and 3 kg.
- 7Find market demand at ₹50 if they demand 3, 6 and 9 kg.
- 8Why is the market curve flatter than an individual curve?
Show answers (try them yourself first)
- 1The quantity people are willing and able to buy at a price.
- 2When price rises, quantity demanded falls, and the reverse.
- 3Downward from left to right.
- 4Because a wish without money does not become a purchase.
- 5A table of quantities demanded at different prices.
- 61 + 2 + 3 = 6 kg.
- 73 + 6 + 9 = 18 kg.
- 8Many buyers react at once, so the same price change causes a bigger total change.
What Changes Demand?
Tea gets costly, so your family drinks more coffee. Winter arrives and sweaters fly off the shelves. Something other than the price moved demand.
A change in the good's own price moves us along the same demand curve. A change in other factors shifts the whole curve: right means more demand at every price, left means less. These factors are the determinants of demand.
Key idea 1: Related goods, income and taste — Substitutes can replace each other, like tea and coffee. If tea becomes dearer, coffee demand rises. Complements are used together, like bread and butter. If butter becomes dearer, bread demand falls. When income rises, demand for normal goods rises. A shift in taste toward a product lifts its demand.
- Easy: Tea and coffee are substitutes.
- Medium: Bread and butter are complements.
- Exam-type: Higher income shifts the demand curve for normal goods to the right.
In the figure: Many factors besides price shift the demand curve.
Key idea 2: Population, utility, season and expectations — More people means more demand. Diminishing marginal utility says each extra unit gives less satisfaction than the one before; the fourth ice cream pleases less than the first, which is why people pay less for extra units. Seasons matter, as with woollens in winter. If people expect prices to rise soon, they buy now; if they expect prices to fall, they wait.
- Easy: More population, more demand.
- Medium: The fourth ice cream gives less joy than the first.
- Exam-type: Expected price rise increases present demand.
Own price = move along the curve. Other factors = shift the curve.
Mixing up a movement along the curve with a shift of the curve.
Substitute vs complement. Memory clue: Substitute = Switch, Complement = Companion.
Spot the difference
| Factor | Effect on demand |
|---|---|
| Price of substitute falls | Demand for the original falls |
| Price of complement rises | Demand for the other falls |
| Income rises (normal good) | Demand rises |
Practice questions
- 1Give a pair of substitutes.
- 2Give a pair of complements.
- 3What happens to coffee demand if tea becomes costlier?
- 4What does a rightward shift mean?
- 5Explain diminishing marginal utility.
- 6How does population affect demand?
- 7Why does demand for woollens rise in winter?
- 8What do buyers do if they expect prices to fall soon?
Show answers (try them yourself first)
- 1Tea and coffee.
- 2Bread and butter.
- 3It rises.
- 4More is demanded at every price.
- 5Each extra unit gives less satisfaction than the previous one.
- 6More people means higher demand.
- 7Cold weather makes people need more woollen clothes.
- 8They wait, so present demand falls.
Supply and the Law of Supply
A fruit seller gets ₹50 a kg and brings one kilo. At ₹150 she brings three. A better price gets more produce to market.
Supply is the quantity that producers are willing and able to sell at a particular price. The Law of Supply says: when the price rises, the quantity supplied rises, and when it falls, it falls. They move in the same direction, so the supply curve slopes upward.
Key idea 1: Supply schedule and market supply — One seller supplies 1 kg at ₹50, 2 kg at ₹100 and 3 kg at ₹150. A higher price means more profit, so she sells more. Market supply is the sum of what all sellers offer. If three such sellers exist, market supply is 3, 6 and 9 kg at the three prices.
- Easy: Higher price, higher supply.
- Medium: Market supply = sum of sellers' supplies.
- Exam-type: The supply curve slopes upward.
In the figure: A higher price encourages sellers to supply more.
Key idea 2: What shifts supply — The price of related goods matters: a farmer who earns more from wheat grows more wheat and less rice. More sellers shift supply right. Better technology lowers cost and also shifts it right. Costlier inputs like raw material shift it left. If sellers expect higher prices later, they hold stock now, so present supply falls.
- Easy: More sellers, more supply.
- Medium: Better technology shifts supply right.
- Exam-type: Costlier inputs shift supply left.
Price up, supply up. Own price = move along; other factors = shift.
Thinking supply and demand curves slope the same way. Supply slopes up, demand slopes down.
Law of supply. Memory clue: 'Sell more when it pays' — higher price pays, so sellers supply more.
Spot the difference
| Change | Effect on supply |
|---|---|
| More sellers | Shifts right |
| Better technology | Shifts right |
| Costlier inputs | Shifts left |
Practice questions
- 1Define supply.
- 2State the Law of Supply.
- 3How does the supply curve slope?
- 4Why do sellers supply more at a higher price?
- 5Find market supply at ₹100 for three sellers who each supply 2 kg.
- 6Name two factors that shift supply right.
- 7What shifts supply left?
- 8Why would sellers hold stock if they expect higher prices?
Show answers (try them yourself first)
- 1The quantity producers are willing and able to sell at a price.
- 2When price rises, quantity supplied rises.
- 3Upward from left to right.
- 4A higher price gives more profit.
- 53 × 2 = 6 kg.
- 6More sellers and better technology.
- 7Costlier inputs.
- 8They hope to sell later at a higher price.
Market Equilibrium
At a school fair, if lemonade is too cheap, the stall runs out in minutes. If it is too costly, jugs stay full. The right price empties the stall exactly.
Market equilibrium is the price at which quantity demanded equals quantity supplied. On a graph, the demand and supply curves cross at that point. It gives the equilibrium price and the equilibrium quantity.
Key idea 1: Shortage and surplus — In the chapter's table, at ₹40 buyers want 38 kg but sellers give only 6 kg: excess demand (shortage) of 32 kg, so the price tends to rise. At ₹150 buyers want 8 kg but sellers offer 43 kg: excess supply (surplus) of 35 kg, so the price tends to fall. At ₹100, both are 12 kg, which is the equilibrium.
- Easy: Equilibrium: demand = supply.
- Medium: Below equilibrium price there is a shortage.
- Exam-type: Above equilibrium price there is a surplus.
In the figure: Market forces push the price toward equilibrium.
Key idea 2: Markets keep moving — Demand and supply keep changing, so equilibrium keeps shifting. In COVID-19, mask demand surged and prices went up. Hotels in Goa charge more in the peak season because demand rises while rooms stay limited. If demand rises, price and quantity rise; if supply rises, price falls and quantity rises.
- Easy: Demand up, price up.
- Medium: Supply up, price down.
- Exam-type: Peak-season hotel prices come from higher demand against limited rooms.
Shortage pushes price up; surplus pushes price down.
Thinking equilibrium is permanent. It changes whenever demand or supply changes.
Equilibrium. Memory clue: 'Cross = Cost' — where the curves cross gives the cost (price) and the count (quantity).
Spot the difference
| Price | Situation |
|---|---|
| ₹40 | Excess demand, 32 kg shortage |
| ₹100 | Equilibrium, 12 kg |
| ₹150 | Excess supply, 35 kg surplus |
Practice questions
- 1Define market equilibrium.
- 2What is the equilibrium price in the chapter's table?
- 3What is the equilibrium quantity?
- 4What happens at ₹40?
- 5What is the surplus at ₹150?
- 6Where is equilibrium on a graph?
- 7Why did mask prices rise in COVID-19?
- 8Why are Goa hotels costlier in peak season?
Show answers (try them yourself first)
- 1The price where quantity demanded equals quantity supplied.
- 2₹100.
- 312 kg.
- 4Excess demand of 32 kg, so the price tends to rise.
- 543 − 8 = 35 kg.
- 6Where the demand and supply curves cross.
- 7Demand surged, which pushed prices up.
- 8Demand rises while the rooms are limited.
Role and Limits of Government in Markets
In the pandemic, sanitiser suddenly became costly. The government stepped in and fixed a top price. Markets sometimes need a referee.
Markets can fail when sellers abuse power or when goods cannot be sold to individuals. The government then steps in with price controls: a price ceiling is a legal maximum price, a price floor is a legal minimum price.
Key idea 1: Why government steps in — A monopoly has a single seller who can raise prices and cut quality. Regulators protect fair play: RBI for banking, SEBI for share markets, TRAI for telecom and CCPA for consumers. Under the Essential Commodities Act, 1955, sanitiser was capped at ₹100 per 200 ml; hoarding and black marketing were punished. Public goods, such as street lights and parks, are open to all, so people become free riders and private firms rarely supply them. The government provides them.
- Easy: A price ceiling is a maximum price.
- Medium: Regulators: RBI, SEBI, TRAI, CCPA.
- Exam-type: Public goods suffer from the free-rider problem.
In the figure: The government acts as a referee in the market.
Key idea 2: Limits of intervention — A ceiling below equilibrium causes shortages and black marketing. Price controls distort price signals and can discourage producers. Too many rules and paperwork hurt ease of doing business. Over-control can reduce innovation. So the best approach balances market freedom with sensible rules.
- Easy: Over-control reduces innovation.
- Medium: Ceiling below equilibrium causes shortage.
- Exam-type: Balance market freedom with regulation.
Government corrects market failures but too much control has costs.
Thinking price control always helps. It can create shortages and black markets.
Price ceiling. Memory clue: 'Ceiling = Cap on top' — like a roof, prices cannot go above it; floor is the ground, prices cannot go below.
Spot the difference
| Tool | Meaning |
|---|---|
| Price ceiling | Legal maximum price |
| Price floor | Legal minimum price |
| Public goods | Available to all, e.g. parks |
Practice questions
- 1Define price ceiling.
- 2Define price floor.
- 3What is a monopoly?
- 4Name four regulators.
- 5What was the sanitiser cap and under which law?
- 6What are hoarding and black marketing?
- 7Why are public goods provided by the government?
- 8Give two limits of government intervention.
Show answers (try them yourself first)
- 1A legal maximum price.
- 2A legal minimum price.
- 3A market with a single seller.
- 4RBI, SEBI, TRAI and CCPA.
- 5₹100 per 200 ml under the Essential Commodities Act, 1955.
- 6Hoarding is stocking goods to sell dearer; black marketing is selling above the legal price.
- 7Free riders mean private firms cannot easily charge users.
- 8Price distortion and heavy compliance that hurts innovation.