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Extension and Contraction in Demand for Goods!
In economics, the extension and contraction in demand are used when the quantity demanded rises or falls as a result of changes in price and we move along a given demand curve. When the quantity demanded of a good rises due to the fall in price, it is called extension of demand and when the quantity demanded falls due to the rise in price, it is called contraction of demand.
For instance, suppose the price of bananas in the market at any given time is Rs.12 per dozen and a consumer buys one dozen of them at that price. Now, if other things such as tastes of the consumer, his income, prices of other goods remain the same and price of bananas falls to Rs. 8 per dozen and the consumer now buys 2 dozen bananas, then extension in demand is said to have occurred. On the contrary, if the price of bananas rises to Rs. 15 per dozen and consequently the consumer now buys half a dozen of the bananas, then contraction in demand is said to have occurred.
It should be remembered that extension and contraction in the demand takes place as a result of changes in the price alone when other determinants of demand such as tastes, income, propensity to consume and prices of the related goods remain constant. These other factors remaining constant means that the demand curve remains the same, that is, it does not change its position; only the consumer moves downward or upward on it.
The extension and contraction in demand is illustrated in Figure 7.3. Assuming other things such as income, tastes and fashion, prices of related goods remaining constant, a demand curve DD goods remaining constant, a demand curve DD has been drawn. It will be seen in this figure that when the price of the good is OP, then the quantity demanded of the good is OM.
Now, if the price of the good falls to OP’ the quantity demanded of the good rises to ON. Thus, there is extension in demand by the amount MN. On the other hand, if price of the good rises from OP to OP” the quantity demanded of the good falls to OL. Thus, there is contraction in demand by ML. We thus see that as a result of changes in price of a good the consumers move along the given demand curve; the demand curve remains the same and does not change its position.
Demand and Quantity Demanded:
It is important to understand the distinction between the concepts of demand and quantity demanded as they are often confused with each other. Demand represents the whole demand schedule or demand curve and shows how price of a good is related to quantity which the consumers are willing and able to buy, other factors which determine demand being held constant.
On the other hand, quantity
demanded refers to the quantity which the consumers buy at a particular price. The quantity demanded of a good varies with changes in its price; it increases when price falls and decreases when price rises. The changes in demand for a commodity occur when there is a change in the factors other than price, namely, tastes and preferences the people, incomes of the consumers, and prices of related
goods.
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and prices of the related goods remain constant. c) Increase and Decrease in Demand: Now, if the other things, that is, determinants of demand other than price such as consumer’s tastes and preferences, income and prices of the related goods change, the whole demand curve will shift upward or downward. Increase in demand means that the consumer buys more of the good at various prices than before. For example, if the income of a consumer increases, or if the fashion for a good E F particular commodity. A fall in the price of the commodity will not, therefore, increase his real income in any substantial measure. The substitution effect, on the contrary, is stronger than the income effect, because the consumer will always substitute the inexpensive for the expensive commodity. Further more, the income effect is positive only in case of a superior commodity. A superior commodity is one, which is consumed, in increased quantities when income of the consumer rises. For example, rice is a superior commodity because people consume more of it when their incomes rise. This is due to the fact that the consumer’s real income would increase, if price of such a commodity falls. On the other hand, the income effect is negative in case of an inferior commodity. An inferior commodity is one, which is consumed, in smaller quantities when the income of the consumer rises. Its consumption is a symbol of low status and therefore, if the price of such a commodity falls, the consumer’s real income increases, but he buys less of inferior commodity. For example, jaggery is an inferior commodity because people consume less of it when their incomes rise. b) Extension and Contraction of Demand: When the quantity demanded of a good rises due to the fall in price, it is called extension of demand. When the price falls from OP0 to OP2, the quantity demanded increases from OQ0 to OQ2. When the quantity demanded of a good decrease due to rise in the price, it is called contraction of demand. When the price rises from OP0 to OP1, the quantity demanded of the good decreases from OQ0 to OQ1. The extension and OQ0 - OQ1-Contraction of demand OQ0 - OQ2 -Extension of demand Principles of Agricultural Economics 42 www.AgriMoon.Com Quantity Demanded Fig.3.5 Exceptional Demand Curve P ri ce D D OQ0 - OQ4 -Decrease in demand OQ0 - OQ5 -Increase in demand improves, the consumer will buy greater quantities of the good than before at various given prices. The consumer will buy OQ5 rather than OQ0 due to upward shift or increase in demand (see Fig.3.4). Similarly, the consumer will buy OQ4 instead of OQ0 due to downward shift or decrease in demand. This increase and decrease in demand happen due to the changes in factors other than price of the commodity. d) Exceptions to the Law of Demand 1.According to Thorstein Veblen, some consumers measure the utility of a commodity entirely based on its price i.e., for them, the greater the price of a commodity, the greater is its utility for them. For example, diamonds are considered as prestigious good in the society. However, the consumer will buy less of the diamonds, even if its price is low, because with the fall in price its prestige value will go down. Similarly, at higher price, quantity demanded of diamonds by a consumer will rise. 2) Another exception to the law of demand was pointed out by Sir Robert Giffen who observed that when the prices of bread/potatoes increased, the low-paid British workers, in the early 19th century, purchased more of bread/potatoes and not less of them. This is contrary to the law of demand. The reason for this is that these British workers consumed a diet of mainly bread/potatoes and when their prices went up they were compelled to spend more on given quantities of bread/potatoes. Therefore, they could not afford to purchase as much meat as before. Hence, after the name of Robert Giffen, such goods (bread/potatoes) are called Giffen goods. their incomes, tastes and preferences and prices of related goods remain constant. The law of demand explains to price demand. 3) Some times, people expect that the prices of certain goods would still rise in the future and hence, they demand greater quantities of such goods, even if their prices are higher at present. iv) Types of Demand: There are three different types of demand which are discussed below: a) Price demand: Price demand refers to various quantities of a commodity that consumers demand per unit of time at different prices, assuming that Principles of Agricultural Economics 43 www.AgriMoon.Com D D I1 I0 I nc om e 0 Q1 Q0 Quantity Demanded Fig. 3.6(a) Income Demand for an Inferior Good I1 I0 In co m e 0 QoQ1 Quantity Demanded Fig. 3.6(a) Income Demand for a Normal or Superior Good D D D D D D P1 P0 P ri ce o f T ea P1 P0 P ri ce o f B re ad 0 Q0 Q1 0 Q1 Q0 Quantity Demanded of Coffee Quantity Demanded of Butter Fig.3.7 (a) Demand for Substitute Good.Fig.3.7 (b) Demand for Complementary Good b) Income demand: Income demand refers to the different quantities of a commodity which consumers will buy at different levels of income, other things remaining the same. Other things, here, refer to price of the commodity, prices of related goods and tastes and preferences of the consumer. As income of the consumer increases, his demand for a normal or superior commodity also rises. Thus, there is a positive relationship between income and quantity demanded. The income demand curve slopes upward from left to right. For inferior goods, the quantity demanded will be more, if income of the consumer declines, while other determinants of demand remain constant and vice versa. Thus, the income demand curve slopes downward and it indicates that there is an inverse or negative relationship between income and quantity demanded. c) Cross demand: It refers to the different quantities of a commodity that consumers purchase per unit of time at different prices of a related commodity, other things remaining the same. The other things, here, include consumer’s income, his tastes and preferences and the price of the commodity itself. The related commodity may be either substitute or complementary good. For example, tea and coffee are substitutes. Principles of Agricultural Economics 44 www.AgriMoon.Com Substitutes satisfy the same want. If the price of tea rises, the consumer buys less of it. Instead, they may buy more of coffee. Thus, a rise in the price of tea increases the demand for coffee. The cross demand curve of coffee in relation to the price of tea will have a positive slope (or, slopes upward to the right). On the contrary, if both the commodities are jointly demanded to satisfy the same want they are called complementary goods. For example, bread and butter are complementary goods. A fall in the price of bread will increase the demand for butter and vice-versa. The cross demand curve of butter in relation to the price of bread will have a negative slope (or slopes downward to the right). Complementary demand is also known as Joint demand. Joint demand takes place when two or more goods are jointly demanded for the satisfaction of a particular want. E.g. bread and butter, shoes and shoe-laces, cup and saucer, tea, milk and sugar, etc. d) Derived demand is another types of demand. The demand for a factor of production that results from the demand for the final form of the commodity which it helps to produce. For example, a consumer buys bread. To bake the bread, bakers have to buy flour. Their derived