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
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.