Demand: ISC Class 12 Economics Notes on the Law of Demand and Consumer Equilibrium

What Demand is about

Weightage: Demand is part of the unit Microeconomic Theory: Demand, Elasticity of Demand, Supply, which carries 16 of the 80 theory marks, shared with 2 other chapters. Questions on it can appear in any section of the paper.Source: CISCE ISC Economics syllabus, examination year 2027, distribution of marks

Key concepts

Meaning of demand, its determinants and the demand function

Demand for a good is the quantity of it that a consumer is willing and able to buy at a particular price during a particular period. Three elements are essential: desire, ability to pay (purchasing power) and willingness to spend.

Factors affecting demand (determinants):

• Price of the good itself (Px).
• Prices of related goods: substitutes (tea and coffee) and complements (cars and petrol).
• Income of the consumer (Y).
• Tastes and preferences (T).
• Expectations of future prices or income (E).
• For market demand: size and composition of population, distribution of income, season, government policy.

Demand function: Dx = f(Px, Pr, Y, T, E), where Dx is the demand for good X and Pr the prices of related goods. The law of demand isolates Px by holding the others constant (*ceteris paribus*).

Worked example

Suppose the price of petrol rises sharply while car prices stay the same. Write the demand function for cars and state how this change affects demand for cars. [2 marks]

Try it first, then show the solutionSolution

1. Dcars = f(Pcars, Pr, Y, T, E); petrol is a complement (Pr).
2. A rise in the price of a complement makes using a car costlier, so demand for cars falls at every car price: the demand curve shifts to the left.

Answer: Demand for cars decreases (leftward shift), because petrol and cars are complements.

Law of demand, demand schedule and curve, market demand

Law of demand: other things remaining constant, the quantity demanded of a good varies inversely with its price.

Assumptions: income, tastes, prices of related goods and expectations remain unchanged; the good is not a Giffen or prestige good.

An individual demand schedule lists quantities a consumer buys at different prices; plotting it gives the demand curve, sloping downwards from left to right (price on the Y-axis, quantity on the X-axis).

Market demand is the sum of all individual demands at each price; the market demand curve is the horizontal summation of individual demand curves.

Why the demand curve slopes downwards:

• Law of diminishing marginal utility: a consumer buys more only at a lower price, as each extra unit gives less utility.
• Income effect: a fall in price raises real income, so more is bought.
• Substitution effect: the good becomes cheaper relative to substitutes.
• New buyers enter the market at a lower price.
• Multiple uses: at a lower price a good is used for more purposes (milk, electricity).

Worked example

Suppose Asha and Bina are the only buyers of apples. Derive the market demand schedule and state what the market demand curve shows. [2 marks]

Price (₹)	Asha (kg)	Bina (kg)	Market demand (kg)
50	2	3	5
40	3	4	7
30	4	6	10
20	6	8	14

Try it first, then show the solutionSolution

1. Market demand = Asha's + Bina's quantity at each price (horizontal summation).
2. As price falls from ₹50 to ₹20, market demand rises from 5 kg to 14 kg: the market demand curve slopes downwards.

Answer: Market demand 5, 7, 10 and 14 kg at ₹50, ₹40, ₹30 and ₹20.

Movement along versus shift of the demand curve

Movement along the demand curve (change in quantity demanded) happens only because of a change in the good's own price, other things constant:

• Extension (expansion): price falls → move down the same curve.
• Contraction: price rises → move up the same curve.

Shift of the demand curve (change in demand) happens because of a change in a factor other than own price:

• Increase in demand (rightward shift): rise in income (normal good), rise in price of a substitute, fall in price of a complement, favourable change in tastes, expected price rise.
• Decrease in demand (leftward shift): the opposite changes; for an inferior good, a rise in income decreases demand.

In a diagram, a movement is shown by arrows on one curve; a shift by drawing a new curve D1 to the right or left of D.

Worked example

Suppose the price of tea rises. Show, with reasons, what happens to (i) the demand curve for tea and (ii) the demand curve for coffee. [2 marks]

Try it first, then show the solutionSolution

1. (i) Tea's own price changed: a contraction, an upward movement along the tea demand curve.
2. (ii) Coffee is a substitute; coffee is now relatively cheaper, so demand for coffee increases at every coffee price: the coffee demand curve shifts to the right.

Answer: (i) Movement up along the tea curve; (ii) rightward shift of the coffee curve.

Exceptions to the law of demand and types of demand

Exceptions (more demanded at a higher price, or not less):

• Giffen goods: inferior staples on which poor households spend a large share of income; a rise in price cuts real income so much that they buy more of the staple and less of costlier foods.
• Veblen (prestige) goods: diamonds, luxury cars, bought for status; a higher price raises their appeal.
• Expectation of further price rise (shares, gold): people buy more as prices rise.
• Ignorance: a higher price is taken as a sign of better quality.
• Necessities: life-saving drugs, salt: quantity hardly changes with price.
• Emergencies: war or shortages lead to panic buying at high prices.

Types of demand:

• Direct demand: for goods that satisfy wants directly (bread).
• Derived demand: for a good because another good is demanded (labour, cement for houses).
• Joint demand: two goods demanded together for one want (pen and ink).
• Composite demand: a good with several uses (milk for curd, sweets and chocolates; electricity).
• Competitive demand: for substitutes that compete for the same want (tea and coffee).

Worked example

Suppose steel is used for cars, bridges, utensils and railway tracks. What type of demand does steel have? Give the reason. [1 mark]

Try it first, then show the solutionSolution

1. A good demanded for several different uses has composite demand.

Answer: Composite demand, because steel has several alternative uses.

Cardinal utility: TU, MU and the law of diminishing marginal utility

Utility is the want-satisfying power of a good; cardinal analysis assumes it can be measured in utils.

• Total utility (TU) = sum of utility from all units consumed.
• Marginal utility (MU) = change in TU from one more unit: MUn = TUn − TUn−1.

Relationship: when MU is positive, TU rises; when MU is zero, TU is maximum (point of satiety); when MU is negative, TU falls.

Law of diminishing marginal utility: as a consumer consumes more units of a good continuously, the marginal utility from each successive unit goes on falling.

Assumptions (the only part the syllabus asks for): units are standard and homogeneous; consumption is continuous (no time gap); the consumer is rational; utility is measurable in utils; tastes, income and fashion remain unchanged; the marginal utility of money is constant.

Worked example

Suppose a child's total utility from successive ice creams is as shown. Calculate MU and identify the point of satiety. [2 marks]

Units of ice cream	1	2	3	4	5	6	7
Total utility	10	18	24	28	30	30	28
Marginal utility	10	8	6	4	2	0	−2

Try it first, then show the solutionSolution

1. MU = TUn − TUn−1: 10, 8, 6, 4, 2, 0, −2.
2. TU is maximum (30) when MU = 0, at the 6th unit; the 7th gives negative MU.

Answer: Point of satiety at the 6th unit (TU 30, MU 0).

Consumer's equilibrium with utility analysis

One commodity: the consumer is in equilibrium when MUx (in rupees) = Px, i.e. MUx/MUm = Px where MUm is the marginal utility of a rupee. If MU > P, he buys more; if MU < P, he buys less; diminishing MU guarantees he stops.

Two commodities: Law of equi-marginal utility: a consumer gets maximum satisfaction when he allocates his given income so that the marginal utility of the last rupee spent on each good is equal:

MUx/Px = MUy/Py = MUm, and the whole income is spent (Px·X + Py·Y = M).

If MUx/Px > MUy/Py, he shifts spending from Y to X until the ratios are equal (MU of X falls, MU of Y rises).

Worked example

Suppose Px = ₹4, Py = ₹2 and income is ₹20. Using the schedule below, find the equilibrium combination. [4 marks]

Units	1	2	3	4	5	6
MUx (utils)	32	28	24	20	16	12
MUx ÷ Px (Px = ₹4)	8	7	6	5	4	3
MUy (utils)	18	16	14	12	10	8
MUy ÷ Py (Py = ₹2)	9	8	7	6	5	4

Try it first, then show the solutionSolution

1. Compute MU per rupee for each good (rows 2 and 4).
2. MUx/Px = MUy/Py = 6 at 3 units of X and 4 units of Y.
3. Expenditure = 3 × 4 + 4 × 2 = ₹20 = income. Other equal-ratio combinations (for example 2X with 3Y at 7) do not use the whole income.

Answer: 3 units of X and 4 units of Y, where MUx/Px = MUy/Py = 6 and the ₹20 is fully spent.

Ordinal analysis: indifference curves, MRS and the indifference map

Ordinal analysis only ranks combinations. An indifference curve (IC) shows combinations of two goods that give the consumer the same level of satisfaction.

Marginal rate of substitution (MRSxy) = the amount of Y the consumer is willing to give up for one more unit of X while staying on the same IC = ΔY/ΔX. It diminishes as more X is consumed (DMRS), because X becomes less valuable and Y more valuable to him.

Properties of ICs:

• Slope downwards from left to right (more X needs less Y to keep satisfaction the same).
• Convex to the origin, because of diminishing MRS.
• A higher IC represents a higher level of satisfaction (monotonic preferences).
• Two ICs never intersect.
• ICs do not touch either axis (in general).

An indifference map is a set (family) of indifference curves, each representing a different level of satisfaction. An upward-sloping or concave IC is not common because it would violate monotonic preferences or diminishing MRS.

Worked example

Suppose a consumer is indifferent among (1X, 12Y), (2X, 8Y), (3X, 5Y) and (4X, 3Y). Calculate MRSxy and state what it shows. [2 marks]

Try it first, then show the solutionSolution

1. MRS = ΔY/ΔX: 4, 3, 2.
2. It falls as X rises: diminishing MRS, which makes the IC convex to the origin.

Answer: MRS falls 4 → 3 → 2: diminishing MRS.

Budget line and consumer's equilibrium (ordinal)

The budget line shows all combinations of two goods a consumer can buy by spending all his money income at given prices: Px·X + Py·Y = M. Its slope is −Px/Py; it slopes downwards because, with a fixed income, buying more of one good means buying less of the other.

• A point on the line: all income spent.
• A point below (inside): income not fully spent.
• A point above (outside): unattainable.

A change in income shifts the line parallel; a change in one price rotates it.

Consumer's equilibrium: at the point where the budget line is tangent to the highest attainable IC:

1. MRSxy = Px/Py (slopes equal).
2. The IC is convex to the origin at that point (MRS diminishing).

Points where the budget line cuts a lower IC are attainable but give less satisfaction; points on a higher IC are unattainable.

Worked example

Suppose income is ₹600, Px = ₹30 and Py = ₹20. Find the intercepts and slope of the budget line, and say whether (10X, 12Y) is on, below or above it. [2 marks]

Try it first, then show the solutionSolution

1. Intercepts: X = 600 ÷ 30 = 20; Y = 600 ÷ 20 = 30. Slope = −30/20 = −1.5.
2. Cost of (10, 12) = 300 + 240 = ₹540 < 600: below the budget line (income not fully spent).

Answer: Intercepts 20X and 30Y; slope −1.5; the combination lies below the line.

Demand in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Consumer's Equilibrium: Cardinal Utility Analysis
• Indifference Curves, Budget Line and Consumer's Equilibrium

Demand: key facts

Demand function

Dx = f(Px, Pr, Y, T, E)

Marginal utility

MUn = TUn − TUn−1

One-good equilibrium

MUx (in rupees) = Px

Law of equi-marginal utility

MUx/Px = MUy/Py = MUm, with Px·X + Py·Y = M

Marginal rate of substitution

MRSxy = ΔY/ΔX (units of Y given up for one more X)

Budget line

Px·X + Py·Y = M; slope = −Px/Py

IC equilibrium

MRSxy = Px/Py and IC convex to the origin

How the board asks Demand

The question patterns to expect, and the method that works for each.

Tricks to remember Demand

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Determinants: "PRY-TEP"

  Price of the good, Related prices, Your income, Tastes, Expectations, Population.

  Use it when: Factors affecting demand.

• Own price moves, others shift

  Own price: movement along. Anything else: shift of the curve.

  Use it when: Movement versus shift.

• IC properties: "Down, Bowed, Higher-better, Never cross"

  Downward slope, convex (bowed in), higher IC better, never intersect.

  Use it when: Properties of indifference curves.

Demand: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section C style)

Read the situation, then answer every part. In the board paper this is a 8-mark question split into 2 + 2 + 2 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Demand

The slips examiners see most often, and what to write instead.

• ✗Mistake: Comparing MU directly instead of MU per rupee

  CISCE examiners' comments, 2025: "Compared marginal utilities directly without computing MU per rupee for each commodity"; "Gave weak logical explanation and did not eliminate other combinations using the ₹11 budget".

  ✓Do this: Divide MU by price for every unit; then check the budget.

  Usually costs: 2-3 marks.

• ✗Mistake: Confusing composite and derived demand

  CISCE examiners' comments, 2024: "Confused composite demand with derived demand"; "Quoted the example from the question instead of mentioning 'various uses'".

  ✓Do this: Composite = one good, many uses; derived = demand arising from demand for something else. Give the reason in general terms.

  Usually costs: 1 mark.

• ✗Mistake: Movement drawn where a shift is needed

  CISCE examiners' comments, 2025: "Described the effect in words instead of drawing the diagram"; "Showed a movement along the demand curve instead of a rightward shift".

  ✓Do this: A change in the price of a related good shifts the curve; draw D and D1.

  Usually costs: 1 mark.

• ✗Mistake: Weak IC answers

  CISCE examiners' comments, 2024: "Did not use terms like set, family or group for an indifference map"; "Identified the equilibrium point but did not state the tangency conditions"; "Mentioned names of economists as points of difference between cardinal and ordinal utility".

  ✓Do this: Use precise terms; state MRS = Px/Py and convexity; compare on measurement and tools, not names.

  Usually costs: 1-2 marks.

• ✗Mistake: Misreading points relative to the budget line; wrong MU sign

  CISCE examiners' comments, 2025: "Chose option (a) or (d) instead of recognising that a point below the budget line means spending less than income"; "Chose (a) or (b) instead of (d), mishandling the change in total utility".

  ✓Do this: Inside the line = income left over; MU = TUn − TUn−1 can be negative.

  Usually costs: 1 mark each.

Practice questions on Demand

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   A point inside the budget line shows a combination on which the consumer:
   (a) spends all his income
   (b) spends less than his income
   (c) spends more than his income
   (d) spends all on one good

   Hint

   Inside means cheaper.

   Answer

   (b)

2. Q2 · 1 mark · Very short answerBoard level

   State the condition of consumer's equilibrium in the indifference curve approach.

   Hint

   Two conditions.

   Answer

   MRSxy = Px/Py, and the IC is convex to the origin at that point.

3. Q3 · 1 mark · Very short answerHarder board level

   What is an indifference map?

   Hint

   Use the word "set" or "family".

   Answer

   A set (family) of indifference curves, each representing a different level of satisfaction; a higher curve shows higher satisfaction.

4. Q4 · 2 marks · Short answerHarder board level

   Give two differences between cardinal and ordinal utility analysis.

   Hint

   Measurement and tools.

   Answer

   Cardinal: utility measured in utils; uses MU and the law of equi-marginal utility. Ordinal: utility only ranked; uses indifference curves and the budget line.

5. Q5 · 2 marks · Short answerBoard level

   State the assumptions of the law of diminishing marginal utility (any four).

   Hint

   Syllabus asks only these.

   Answer

   Homogeneous units; continuous consumption; rational consumer; utility measurable; constant tastes and income; constant MU of money.

6. Q6 · 2 marks · Short answerHarder board level

   Explain why a consumer buying one good stops buying when MU (in rupees) equals price.

   Hint

   Compare MU and P.

   Answer

   While MU > P, an extra unit adds more satisfaction than the money it costs, so he buys more; MU falls with each unit; when MU = P, further purchase would give less satisfaction than the price, so he stops.

7. Q7 · 2 marks · Short answerHarder board level

   With the help of a diagram description, show the effect of a rise in the price of coffee on the demand for tea.

   Hint

   Substitutes.

   Answer

   Tea's demand curve shifts from D to D1 to the right: at the same price OP, quantity rises from OQ to OQ1, because tea is now relatively cheaper.

8. Q8 · 2 marks · Short answerHOTS / competency

   Why is an upward-sloping indifference curve not possible under the usual assumptions?

   Hint

   More is better.

   Answer

   Along an upward-sloping curve the consumer has more of both goods at higher points; with monotonic preferences he must be better off, so those points cannot give the same satisfaction.

9. Q9 · 2 marks · Short answerHOTS / competency

   Explain the Giffen paradox.

   Hint

   Strong negative income effect.

   Answer

   For an inferior staple that takes a large share of a poor household's budget, a price rise cuts real income so much that the household gives up costlier foods and buys more of the staple: quantity demanded rises with price.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Law of demand?Show answer

   Other things constant, quantity demanded varies inversely with price.

2. 2.Market demand curve is obtained by?Show answer

   Horizontal summation of individual demand curves.

3. 3.MU when TU is maximum?Show answer

   Zero.

4. 4.Equi-marginal condition?Show answer

   MUx/Px = MUy/Py = MUm.

5. 5.Why is an IC convex?Show answer

   Diminishing MRS.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Demand = desire + ability + willingness, at a price, over a period.
• ☐Own price → movement; other factors → shift.
• ☐Exceptions: Giffen, Veblen, expectations, ignorance, necessities.
• ☐MU falls; TU max when MU = 0.
• ☐MUx/Px = MUy/Py = MUm and full income spent.
• ☐IC equilibrium: MRSxy = Px/Py with convex IC.

Demand: frequently asked questions