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Question

With the help of appropriate diagram, explain the meaning of contraction in demand and extension in demand.

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Solution

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.


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