Question

How the demand of a commodity is affected by changes in the price of the commodity? Explain with the help of a diagram.

Hint:

Remember the difference: A change in the commodity's own price causes a change in quantity demanded (movement along the curve). A change in other factors (like income, tastes, price of related goods) causes a change in demand (a shift of the entire curve).

Answer 1

Step 1: Understanding the Concept:
The relationship between the price of a commodity and the quantity demanded is explained by the Law of Demand. The law states that, other things being equal (ceteris paribus), the quantity demanded of a commodity is inversely related to its price.
This means: \begin{itemize} \item When the price of a commodity falls, its quantity demanded rises. \item When the price of a commodity rises, its quantity demanded falls. \end{itemize}

Step 2: Detailed Explanation:
This inverse relationship occurs due to two main effects: \begin{enumerate} \item Income Effect: When the price of a commodity falls, the real income (or purchasing power) of the consumer increases. They can now buy more of the same commodity with the same amount of money. \item Substitution Effect: When the price of a commodity falls, it becomes relatively cheaper compared to its substitutes. Consumers will therefore substitute this cheaper good for other, now relatively more expensive, goods. \end{enumerate} The combined result of the income and substitution effects is that a lower price leads to a higher quantity demanded, and vice versa.

Step 3: Explanation with Diagram:
The relationship is represented by a downward-sloping demand curve. \begin{center} \begin{tikzpicture} \draw[->] (0,0) -- (6,0) node[right] {Quantity Demanded}; \draw[->] (0,0) -- (0,5) node[above] {Price}; \draw[thick, color=blue] (1,4) -- (4,1) node[right] {DD (Demand Curve)}; \draw[dashed] (1.5, 3.5) -- (1.5, 0) node[below] {$Q_1$}; \draw[dashed] (1.5, 3.5) -- (0, 3.5) node[left] {$P_1$}; \draw[dashed] (3.5, 1.5) -- (3.5, 0) node[below] {$Q_2$}; \draw[dashed] (3.5, 1.5) -- (0, 1.5) node[left] {$P_2$}; \fill (1.5, 3.5) circle (2pt) node[above right] {A}; \fill (3.5, 1.5) circle (2pt) node[above right] {B}; \end{tikzpicture} \end{center} In the diagram above: \begin{itemize} \item The Y-axis represents the Price and the X-axis represents the Quantity Demanded. \item DD is the demand curve, which slopes downwards from left to right. \item At the initial price \(P_1\), the quantity demanded is \(Q_1\) (Point A). \item When the price falls from \(P_1\) to \(P_2\), the quantity demanded expands from \(Q_1\) to \(Q_2\) (a movement along the curve from Point A to Point B). This is called extension or expansion of demand. \item Conversely, if the price were to rise from \(P_2\) to \(P_1\), the quantity demanded would contract from \(Q_2\) to \(Q_1\). This is called contraction of demand. \end{itemize}

Step 4: Final Answer:
Changes in the price of a commodity cause a change in the quantity demanded, leading to a movement along the same demand curve. A decrease in price causes an expansion in demand, while an increase in price causes a contraction in demand, illustrating an inverse relationship.