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# CA Foundation | Law of Demand and Elasticity of Demand | Chanakya Commerce Classes

CA Foundation Paper 4 Business Economics Law of Demand and Elasticity of Demand chapter-wise study material for May 2026 exam onwards by Chanakya Commerce Classes.

Canonical URL: https://www.chanakyaclasses.com/notes/law-of-demand-and-elasticity-of-demand

CA Foundation · Paper 4 · Business Economics
Law of Demand and
Elasticity of Demand
Unit 1 · Chapter 2 · Complete MCQ-focused revision sheet for May 2026 exam onwards
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Study material aligned with the current Business Economics section.
All Economics Units
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Law of Demand and
Elasticity of Demand
Unit 1 · Chapter 2 · Complete MCQ-focused revision sheet for May 2026 exam onwards
High Weightage
Concept + Application
Quick Revision
Complete Unit – Crux
What you must lock in for MCQs
Demand = desire + ability + willingness + time.
Law of Demand = inverse relationship between price and quantity demanded.
Movement is not the same as shift.
Elasticity tells how much demand reacts.
Scoring area = concept + interpretation, not just formula.
Part 1: Demand
1. Meaning of Demand
Demand means the quantity consumers are
willing and able
to buy at different prices during a period of time.
Essentials of Demand
Desire
Ability to pay
Willingness to buy
MCQ Traps
If any one of desire, ability or willingness is missing, there is no demand.
Demand is always linked to price.
Demand is always a flow concept, such as per day, per week or per month.
2. Determinants of Demand
Price of the commodity
→ inverse relation with demand.
Price of related goods
Substitutes → price of Y rises, demand for X rises.
Complements → price of Y rises, demand for X falls.
Income
Normal goods → demand rises with income.
Inferior goods → demand falls with income.
Tastes, habits and fashion
Population
Income distribution
→ more equality generally raises demand.
Credit and interest rate
→ easy credit raises demand.
Government policy
Taxes can reduce demand.
Subsidies can increase demand.
Expectations
→ if future price is expected to rise, present demand may rise.
3. Demand Function
Qx = f (Px, Y, Pr)
Demand depends on multiple variables, not only on own price.
4. Law of Demand
Statement
When price rises, quantity demanded falls, other things remaining the same.
Reasons
Diminishing utility
Substitution effect
Income effect
5. Demand Curve
Demand curve is
downward sloping
.
It shows the inverse relationship between price and quantity demanded.
6. Movement vs Shift in Demand
Movement in Demand
Movement happens on the
same demand curve
.
It is caused by
price change only
.
Case
Meaning
Price falls
Expansion of demand
Price rises
Contraction of demand
Shift in Demand
Shift happens because of
other factors
besides own price.
The entire demand curve shifts.
Case
Meaning
Increase in demand
Rightward shift
Decrease in demand
Leftward shift
Very Important
Movement = because of price.
Shift = because of other determinants.
7. Exceptions to the Law of Demand
Giffen goods
→ price rises and demand may also rise.
Conspicuous goods
→ demand linked to status.
Expectations
→ if price is expected to rise further, people may buy more now.
Necessaries
→ demand may not fall much even when price rises.
Speculative goods
→ for example, shares where rising price may attract more demand.
Ignorance or irrational behaviour
Key Exception:
Giffen goods are one of the most tested exceptions.
Demand – Quick Revision
Fast recall for the first half of the unit
Demand = desire + ability + willingness.
Movement = because of price.
Shift = because of other factors.
Know substitutes vs complements clearly.
Giffen goods = key exception.
Part 2: Elasticity of Demand
1. Meaning
Elasticity means the
responsiveness of demand
to change in factors, mainly price.
2. Price Elasticity of Demand (PED)
PED = % change in Qd / % change in Price
Types
Value
Meaning
> 1
Elastic
= 1
Unitary Elastic
< 1
Inelastic
0
Perfectly Inelastic
∞
Perfectly Elastic
Key Insight:
In MCQs, focus on the degree of elasticity, not the negative sign.
3. Total Expenditure Method
Price Change
Total Expenditure
Elasticity
Price falls
Expenditure rises
Elastic
Price falls
Expenditure falls
Inelastic
Price changes
No change in expenditure
Unitary
Very Frequently Asked
This method is one of the easiest scoring areas in elasticity.
4. Factors Affecting Elasticity
Nature of good
Necessity → inelastic
Luxury → elastic
Substitutes
→ more substitutes, more elastic demand.
Income level
→ higher income often reduces price sensitivity.
Time period
→ demand is usually more elastic in the long run.
Number of uses
→ more uses, more elastic demand.
5. Income Elasticity of Demand
YED = % change in demand / % change in income
Types
Positive → normal goods
Negative → inferior goods
High positive → luxury goods
6. Cross Elasticity of Demand
XED = % change in demand of X / % change in price of Y
Interpretation
Positive → substitutes
Negative → complements
Elasticity – Quick Revision
Fast recall for the second half of the unit
PED = responsiveness of demand to price.
Total expenditure trick is a favourite exam area.
Substitutes make demand more elastic.
Necessities usually have inelastic demand.
Cross elasticity shows the relation between goods.
Final 1-Min Master Revision
Last scan before MCQs
Demand = desire + ability + willingness.
Law of Demand = inverse relationship.
Movement vs shift = one of the most important concepts.
Elasticity = responsiveness.
Total expenditure method is a scoring shortcut.
Know substitutes vs complements clearly.
Chanakya Commerce Classes
Ajmera Complex, Fusion Park, Pimpri – 411018
CA Foundation · Paper 4 · Business Economics · Unit 1: Law of Demand and Elasticity of Demand
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