Changes in Demand and Quantity Demanded – (With Diagram)

In economics the terms change in quantity demanded and change in demand are two different concepts.Change in quantity

demanded refers to change in the quantity purchased due to increase or decrease in the price of a product.In such a case, it is

incorrect to say increase or decrease in demand rather it is increase or decrease in the quantity demanded.On the other hand,

change in demand refers to increase or decrease in demand of a product due to various determinants of demand, while keeping

price at constant.Changes in quantity demanded can be measured by the movement of demand curve, while changes in demand

are measured by shifts in demand curve. The terms, change in quantity demanded refers to expansion or contraction of

demand, while change in demand means increase or decrease in demand.

1. Expansion and Contraction of Demand:

The variations in the quantities demanded of a product with change in its price, while other factors are at constant, are termed

as expansion or contraction of demand. Expansion of demand refers to the period when quantity demanded is more because of

the fall in prices of a product. However, contraction of demand takes place when the quantity demanded is less due to rise in the

price of a product. For example, consumers would reduce the consumption of milk in case the prices of milk increases and vice

versa. Expansion and contraction are represented by the movement along the same demand curve. Movement from one point to

another in a downward direction shows the expansion of demand, while an upward movement demonstrates the contraction of

demand. Figure-11 demonstrates the expansion and contraction of demand:

When the price changes from OP to OP1 and demand moves from OQ to OQ1, it shows the expansion of demand. However, the

movement of price from OP to OP2 and movement of demand from OQ to OQ2 show the contraction of demand.

2. Increase and Decrease in Demand:

Increase and decrease in demand are referred to change in demand due to changes in various other factors such as change in

income, distribution of income, change in consumer’s tastes and preferences, change in the price of related goods, while Price

factor is kept constant Increase in demand refers to the rise in demand of a product at a given price. On the other hand,

decrease in demand refers to the fall in demand of a product at a given price. For example, essential goods, such as salt would

be consumed in equal quantity, irrespective of increase or decrease in its price. Therefore, increase in demand implies that there

is an increase in demand for a product at any price. Similarly, decrease in demand can also be referred as same quantity

demanded at lower price, as the quantity demanded at higher price.

Increase and decrease in demand is represented as the shift in demand curve. In the graphical representation of demand curve,

the shifting of demand is demonstrated as the movement from one demand curve to another demand curve. In case of increase

in demand, the demand curve shifts to right, while in case of decrease in demand, it shifts to left of the original demand curve.

Figure-12 shows the increase and decrease in demand:

In Figure-12, the movement from DD to D1D1 shows the increase in demand with price at constant (OP). However, the quantity

has also increased from OQ to OQ1.

Figure-13 shows the decrease in demand:

In Figure-13, the movement from DD to D2D2 shows the decrease in demand with price at constant (OP). However, the

quantity has also decreased from OQ to OQ2.

1. CASE STUDY The first seven rows of Table 3-3 give the estimated value of the short-run and long-run price
elasticity's of demand (Ep) for selected commodities in New Delhi. These elasticity's are computed based on primary
survey with a sample of 115 consumers from different regions of Delhi. The rest of the table shows elasticity's for
selected commodities in the United States. The table shows that the long-run price elasticity of demand for most
commodities is much larger than the corresponding short- run price elasticity. For example, the table shows that the
price elasticity of demand for clothing in Delhi is 1.1 in the short run but becomes Price elasticity of demand in real
world
2. 30. Commodity Short Run Long Run Urban India" Butter 1.478 2.78 Petrol 0.3 0.9 Tea 0.712 1.14 Coffee* 0.292
0.685 Beer 0.85 1.18 Burger 1.49 2.79 Clothing 1.1 2.88 US Clothing" 0.90 2.90 Tobacco products'' 0.46 1.89 Beer"
1.72 2.17 Electricity (household)'' 0.13 1.89 Gasoline^ 0.25 0.92 Elasticity chart
3. 31. 2.88 in the long run. This means that a 1 percent increase in price leads to a reproduction in the quantity
demanded of clothing of 1.1 percent in the short run but 2.88 percent in the long run. Although the price elasticity of
demand for petrol is about three times higher in the long run than in the short run, the demand for petrol remains
price inelastic. It should be noted that the estimated price elasticity of demand for any commodity is likely to vary
(sometimes widely) depending on the nation under consideration, the time period examined, and the estimation
technique used. Thus, estimated price elasticity values should be used with caution
 Law of diminishing returns explains that when more and more units of a variable input are employed on a given quantity of

fixed inputs, the total output may initially increase at increasing rate and then at a constant rate, but it will eventually increase

at diminishing rates. In other words, the total output initially increases with an increase in variable input at given quantity of

fixed inputs, but it starts decreasing after a point of time.

The law of diminishing returns is described by different economists in different ways, which are as follows:

According to G. Stigler, “As equal increments of one input are added; the inputs of other productive services being held,

constant, beyond a certain point the resulting increments of product will decrease, i.e., the marginal product will diminish.”

According to F. Benham, “As the proportion of one factor in a combination of factors is increased, after a point, first the

marginal and then the average product of that factor will diminish.” In the words of Alfred Marshall, “An increase in the Capital

and Labour applied in the cultivation of land causes, in general, less than proportionate increase in the amount of produce

raised unless it happens to coincide with an improvement in the art of agriculture.

Law of diminishing marginal returns explained

 Assume the wage rate is £10, then an extra worker costs £10.
 The Marginal Cost (MC) of a sandwich will be the cost of the worker divided by the number of extra sandwiches that are
produced
 Therefore as MP increases MC declines and vice versa
 Total Product (TP) This is the total output produced by workers
 Marginal Product (MP) This is the output produced by an extra worker.
 The first worker adds two goods. If a worker costs £20. The MC of those two units is 20/2 = 10.
 The 3rd worker adds six goods. The MC of those six units are 20/6 = 3.3
 The 5th worker adds an extra ten goods. The MC of these 10 is just 2.
 After the 5th worker, diminishing returns sets in, as the MP declines. As extra workers produce less, the MC
increases.

The assumptions made for the application of law of diminishing returns are as follows:

 i. Assumes labor as an only variable input, while capital is constant

 ii. Assumes labor to be homogeneous

 iii. Assumes that state of technology is given

 iv. Assumes that input prices are given

Accounting Profit vs. Economic Profit:

The two important concepts of profit that figure in business decisions are ‘economic profit’ and ‘accounting profit’. It will be

useful to understand the difference between the two concepts of profit. In accounting sense, profit is surplus of revenue over

and above all paid- out costs, including both manufacturing and overhead expenses.

Accounting profit may be calculated as:

Accounting Profit = TR – (W + R + I + M)

where TR = total revenue,

W = wages and salaries,

R = rent,

M = cost of materials.

Obviously, while calculating accounting profit, only explicit or book costs, i.e., the cost recoded in the books of accounts, are

considered. The concept of ‘economic profit’ differs from that of ‘accounting profit’. Economic profit takes into account also the

implicit or imputed costs. The implicit cost is opportunity cost. Opportunity cost is defined as the payment that would be

‘necessary to draw forth the factors of production from their most remunerative alternative employment.

Alternatively, opportunity cost is the income foregone which a businessman could expect from the second best alternative use of

his resources. For example, if an entrepreneur uses his capital in his own business, he foregoes interest which he might earn by

purchasing debentures of other companies or by depositing his money with joint stock companies for a period.

Furthermore, if an entrepreneur uses his labour in his own business, he foregoes his income (salary) which he might earn by

working as a manager in another firm. Similarly, by using productive assets (land and building) in his own business, he

sacrifices his market rent. These foregone incomes-interest, salary and rent-are called opportunity cost or transfer costs.

Accounting profit does not take into account the opportunity cost.

It should also be noted that the economic or pure profit makes provision also for:

(a) Insurable risks,

(b) Depreciation, and

(c) Necessary minimum payment to shareholders to prevent them from withdrawing their capital.

Pure profit may thus be defined as ‘a residual left after all contractual costs have been met, including the transfer costs of

management, insurable risks, depreciation and payments to shareholders sufficient to maintain investment, at its current level.

Thus: Pure profit = Total revenue – (explicit costs + implicit costs)

Pure profit so defined may not be necessarily positive for a single firm in a single year- it may be even negative, since it may not

be possible to decide beforehand the best way of using the resources. Besides, in economics, pure profit is considered to be a

short-term phenomenon-it does not exist in the long run, especially under perfectly competitive conditions.