Assuming other factors (or determinants) remain constant (don’t change), the change seen in the demand due to a change in the price is called Extension and Contraction of Demand.
The concept of extension and contraction of demand in economics can be studied and best understood with the help of the following graph.
In the above graph:
- It is assumed other factors affecting demand remain constant.
- The X-axis or OX represents Demand.
- The Y-axis or OY represents Price.
- Points M1, M, and M2 on OX represent an increase in demand.
- Points P1, P, and P2 on OY represent an increase in the price.
- The line DD’ represents the Demand Curve.
- AB is the Contraction of Demand.
- BC is the Extension of Demand.
Consider or refer to the above graph for the following explanation:
- Extension of Demand:
- If the price decreases from OP to OP1, then the demand increases (rises) from OM to OM2. This growth of the demand is called Extension of Demand and is represented by BC.
- For example, say, the prices of Indian Alphonso Mangoes fall in the local markets due to a higher yield and ban on their exports to other countries. As a result, their local demand automatically increases. It is so, since, with lower prices now even ordinary people with little income can now afford to enjoy them.
- Contraction of Demand:
- If the price increases from OP to OP2, then the demand decreases (falls) from OM to OM1. This fall of the demand is called Contraction of Demand and is represented by AB.
- For example, if the prices of apples rise their demand in the market falls. It is so, since, with the skyrocketing prices of apples the ordinary people can’t afford to buy them with their limited income. As a result, the demand for apples automatically falls.
Conclusion
The concept of extension and contraction of demand in economics helps us to conclude that the price and demand are inversely proportional to each other. In other words, if the price of a commodity increase then its demand decreases and vice versa.