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title: "Law of Demand and Elasticity of Demand Notes for CA Foundation Economics | Meaning, Key Points, Exam Focus | Chanakya Commerce Classes"
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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
### Complete Unit – Crux
- 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.
- 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.
- 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.
- Taxes can reduce demand.
- Subsidies can increase demand.
- Expectations → if future price is expected to rise, present demand may rise.
### 3. Demand Function
- 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.
- 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
### Demand – Quick Revision
- Demand = desire + ability + willingness.
- 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)
#### Types
- Value | Meaning
- > 1 | Elastic
- = 1 | Unitary Elastic
- < 1 | Inelastic
- 0 | Perfectly Inelastic
- ∞ | Perfectly Elastic
### 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
- This method is one of the easiest scoring areas in elasticity.
### 4. Factors Affecting Elasticity
- Nature of good Necessity → inelastic Luxury → elastic
- 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
- Positive → normal goods
- Negative → inferior goods
- High positive → luxury goods
### 6. Cross Elasticity of Demand
#### Interpretation
- Positive → substitutes
- Negative → complements
### Elasticity – Quick Revision
- 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
- Law of Demand = inverse relationship.
- Movement vs shift = one of the most important concepts.
- Elasticity = responsiveness.
- Total expenditure method is a scoring shortcut.
### Law of Demand and Elasticity of Demand notes built for concept clarity and exam recall.
This chapter page is written for CA Foundation Business Economics students who want quick understanding first and revision support later. Use it to revise definitions, logic, distinctions, traps, and answer-writing points before moving to objective practice.
- Meaning, definitions and core concepts in simple language
- Important distinctions and exam-oriented traps
- Quick revision support before classroom tests or self-study
- Direct bridge from theory revision to chapter-wise MCQ practice
### What students should be able to answer after revising this topic.
- Explain the meaning and importance of Law of Demand and Elasticity of Demand.
- Identify the most common conceptual differences linked to this unit.
- Write short exam answers using the right terminology and logic.
- Solve chapter-wise objective questions without confusion on keywords.
#### Related chapters for stronger internal revision
- Basic Problems of an Economy and Role of Price Mechanism
- Theory of Consumer Behaviour
- Introduction to Business Economics