Page 20 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 2: Demand Analysis

This shows that demand for x is inversely proportional to price of x. This means- as price Notes
of x increases, the quantity demanded of x falls.
2. Substitution effect on demand: If y is a substitute of x, then as price of y increases, demand
for x also increases. For example, tea and coffee, cold drinks and juice etc. are substitutes.

This can be shown as:
D x ∝ P y

This shows that the demand for x is directly proportional to price of substitute commodity
y. This means -demand for x and price of substitute commodity y are directly related.
3. Complementary effect on demand: If z is a complement of x, then as the price of z falls, the
demand for z goes up and thus the demand for x also tends to rise. For example, ink and
pen, bread and butter etc. are complements.

This can be shown as:
1
D x ∝
P z
This shows that the demand for x is inversely proportional to the price of complementary
commodity z. This means – demand for x and price for complementary commodity y are
inversely directly related.
4. Price expectation effect on demand: Here the relation may not be definite as the psychology

of the consumer comes into play. Your expectations of a price increase might be different
from your friends’.

5. Income effect on demand: As income rises, consumers buy more of normal goods (positive
effect) and less of inferior goods (negative effect). Examples of normal goods are t-shirts,
tea, sugar, noodles, watches etc. and examples of inferior goods are low quality rice, jowar,
second hand goods etc.
This can be shown as:
D ∝ B, if X is a normal good.
x
And,

1
D x ∝ , if X is an inferior good.
B
6. Promotional effect on demand: Advertisement increases the sale of a firm up to a point.

This can be shown as:
D ∝ A
x
This means that, demand for x is directly proportional to advertisement expenditure of the
firm producing x. (Note: advertisements do not that powerful effect on demand)

Socio-psychological determinants of demand like tastes and preferences, custom, habits,

etc., is difficult to explanation theoretically.

Did u know? If there is an increase in GDP, will the demand be affected?
Yes. An increase in GDP means that the total output of products and services have increased.
Since, it represents the economy of a country, so any increase will have a positive effect on
demand.

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