O

IJNI1U DEMAND4NLSCEEIXJLE
Pad=A
1.lYhat is the meaning ofDemand?
Demand is a desire to buy, a deoision to buy, supported by adequate purchasing
power, A more desirc to purchase an),thing without being backed by purchasing power will
not be treated as demand in economics.
2. Defitre Demand.
"The demand for anlhing at a given p ce is the amount of it which will be bought
per unit ofthe price." - Benham
3. Write the statement ofthe Law ofDemand.
"The
greatei the amount to be sold, the smaller must be the price at which it is offered
in order that it may find purchasers; or in other words, the arnount demanded increases with a
fall in price and diminishes with a rise in price.."
4. What is Market Dematrd? (May/June 2012)
The Market demand is the sum total ofdemands of all consumers in the market for a
commodity at va ous prices.
5. Giv reasons for dematrd curae slope dowtrward.
l. Opemtion ofthe law ofdiminishing marginal utility
2. Price elfeot
3. Substitution eflect
4. Income effect
5. Diflerent uss and
6. Entry ofnew consumers
6. What is Veblen EIIect?
Some pople buy some goods not for their use value but for their prestige value.
Normally, if price of such goods inoreases, rich people have tendency to buy mo.e ofthem.
This is called Veblen effect.
7. What is Giffen's Paradox.
Suprior goods are those goods where when their prices increase, their demand also
increases. Inferior goods are those goods where their demand falls with a fall in p ce.
8, Whaa is income dematrd?
Income is a powerful factor that influence demand. The positive relationship between
income rise and its resultant dmand rise is known as income demand.
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9. List out the factors determiring
demand.
l. Income
ofthe consumer,
2. Taste and fashions
ofthe consumers-
3. Changes in the price
ofthe related goods.
4. Complcmcntary
goods.
5. Consumers, expectations.
6. Income distribution.
10. DeIiDe elasticity ofdemand. (May/Jutre
2012)
.
'Ihe
elasticity ofdemand
market is great
or small according as the amount demanded
increases much or little for a given
rise in price.,, _
Manhall
ll. What is perfecfly
elastic dernand?
It refers to infinite changes in demand for very small change in price.
12. What is ahe concept ofperfectly inelastic dematrd?
-
It refers to zero elasticiq/
of demand. Whatever be the change in price, there is ao
change in the quantity
demarde4
this is known as perfectly inelastic dlemand.
13 What is the cotrcept ofunit elasticity demand?
It refers to equal or proportionate
change in domand for a given change in price, so that
money spent on the commodity remains constant.
14, What is Elastic Dematrd?
It represents a more man proportionate
change m dema.d for a small change in price.
15. ExplaiD inelastic dematrd.
. _It
.epresents a small change in quantity
demanded for a big change in price. Elasticity is
less than unity.
16, List out the methods to m.sure elasticity ofdemand.
l. Percentage Measure
2. Graphical Measure
3. Total Ourlay Method
4. Ceometric Method
17. Write dowr the factor.s alTecting price elasticity ofdemard.
1. Number ofclose substitutes.
2. Nature ofcommodity.
3. Number ofuses ofthe commodity.
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4. Time factor in elasticitY.
5. lncome ofthe consumers.
18. Delitre cross elasticity ofilematrd.
The cross elasticity of demand may be defined as the proportionate change in the
quantity demanded for a good to a change in the p ce ofother goods"
19. List out the importance of elasticity of dematrd.
l. Determining Pricing Policy
2. lmpottance ofthe Govemment
3, lmpofta[ce to a Monopolist
4. Importance in Intemational Trade
5. Importance in the determination ofFactor Pticing
6. tt explains the Paradox ofPoverty amidst Plenty
20. What is the meaning ofsuPPlY?
It can be defined as the quantity of a good or service that a seller wishes to sell on the
market at a particular price at a particular time.
21. Write down the factors detQrmini[g elasticity ofsupply'
l. Spare CapacitY
2. Stocks
3. Time Period
4. Production TechnologY
5. Prices ofinputs
6, Taxes and Subsidies
'
7. Fnture P ce Expectations
8. State ofTechnology
22. Write down the classification of pricing of products foi time element'
l. Ma*et period or very short
Period
2. Short period
3. Long period
4. Secular period
23. What is Duopoly?
Duopoly in which therc are only two sellers in the market and the actions ofone seller
severely affcts another.
24. What is Oligopoly?
Oligopoly occurs in markets where ther are a few sellers'
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25. List out t the advantages ofmonopoly.
l. Emcient
Eoduction
and distribution.
2. Efficient opemtion.
3. Reduction in avemge cost.
26. Write disadvantrges of monopoly.
I . Exploitation of oonsumers is possiblo,
2. Consumers lost their freedom ofchoice.
3. Restrictive trade practice.
27. What is moropoly?
Monopoly that market struoture where therc exists one, and only one seller.
, 28. List out any three differeDces of market price and nomal price. (Nov/Dec 2012)
S.No
Market Price
Normal Price
It is more influenced by ilemand. It is inlluenced by supply.
2 It is tempo.ary p ce. It is permanent price.
3 Change continuously.
Stable
4 Real price
Imaginary or hypotheticalp ce
30, List out the factors of moDopolistic competitiol.
l. Many sellers
2. Productdifferentiation
3. Brand loyalty
4. Equilibrium
5. Selling
29. Bring out any four di(ftrenc.s bet ..tr motropoly rnd moropotistic competilion. (M!y/Jua. 2013)
S,No Monopoly
Monopolistic CompetitioD
Only one producer.
Large number of producrs
2 No difference botween mongpoly firm and
industry.
There are many firms and ildustries
are called a group
3 No selling cost.
Selling cost is essential
4 Demand curve is less elastic
Demand curve is more elastic
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32. Delin'law ofmrrginol utility'. (Nov/Dec 2012)
The law of diminishing nlarginal utility is one of the fimdamcntal lows in economics.
It has been developed by Jevon, Karl Menger and Leon Walras and was popularised by Prol:
Alted Marshall.
The law states te:L "the additional benefl which d person de ves
Irom
a given
increase in the stock o/ a thing diminisl@s uith erery irrcrease i the stock that he already
has".
ln other words, "other things remaining the same, the utility derived from the
consumption of additional unit of a commodity always diminishes".
33. State the conditions ofduopoly competition. (Nov/Dec 2013)
l. No. ofscllcrs
-Two
2. Product - Similar ofproduct differentiation
3. Pric - Similar or Different
4. Entry - Not rstricted and absolute Freedom
5. Pdce determination - Uniformity
34. Name the factors influencing demand.
a) Changes in the price ofother goods.
b) State oftrade
c) Changes irl the taste and fashion
d) Advertisement expenditure
35. Why does the demand curve slope downwards to the right?
A normal demand curve slopes downwards from Ieft to right and it means that more
units ofa good are brought when price falls and less number ofunits are brought when rises.
That is, when price falls, demand expands. So the demand curve as a rule, slope downwards
from left to right.
31. Dlfferentiate between substation effect end income effect in demand. (May/June 2013)
Substatio[ Ellect Incom Effect
Ifthe price oftea falls, while the price of
coffee remains unchanged.
Money income is the amormt of income, pay
or salary, a person gets in terms ofcoins and
curencies.
A change in the pric ofthe commodity allects
the demand for its substitutes.
Real income deperds not only upon the size of
money inoome, but also prvailing prices in the
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l) State the law ofdetn.nd. Erplain the demard schedule aud demand curve-
Alfred Marshall stated
.The
greater
the amount to be sold, the smaller must be the
price
at which it is offered in order that it may find purchasers;
or in other words, the amount
demanded increases with a fall in price
and diminishes with a rise in price ...
,,
Law ofDemand stetes that there is a negative relationship between price and demand.
This means that whenever price
@)
increases, quantity
demanded (e) falls and when price
falls, quantity
demanded increases.
The quanriry
demanded depends rlot only on price, but also on other factors as well.
For bringing out the inverse relationship between
p
and q
we have to assume other things
are equal which means that all factors olher than the price of the good remain unchangJ.
This is called the Ceteris
paribus
assumption.
Assuming that factors other than price (p) remain constan! then
Qx =
f(&)
Wlore,
Qx
=
Quantity
demanded ofcommodity X
f = Function
Px = Price of commodity X
Asrumptions of law dema[d:
The law ofdemand has been developd on the basis ofthe following assumptions.
l. No change in thc income ofthe consumers.
2. No change in the pric ofsubsditutes and other related goods.
3. No change m the tastes and
Eefereoces
ofthe consumea.
4. Absence of substitutes.
5. Existence ofconlinuous demand for goods, wheaever price changes.
Demand Schedule sud Demand Curve
The law of demand can be illustrated thrcugh a demand schedule and a demand
curve. The demand schedulers presnted in Table 2.1. lt will be seen from this demand
schedule that when price
ofa commodity is Rs. 5 per unit, consumer pfichases 2 units ofthe
commodity. When the price of the commodity falls to Rs. 4, he purchases
3 units ofthe
commodity. Similarly, when price further Alls, quantity demanded by him goes on rising
until at price Rs. l, the quantity demanded by him rises to 9 units. We cai convert this
demand schedule into a demand curve by gmphically plotting the various price
_
quantity
combinations and this has been done in Fig.2.1
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In the Figure, quantity demanded is measured along the X-axis and along the Y-axis,
price ofthe commodity is measured. By plotting 2 units ofthe commodity at p o 25, we get
point
A in Fig.2.l.
Table 2.1. Demand Schedule oIatr Individual Consumer
Price (Rs.)
Quantity
Demanded (Units)
5 2
4 3
3 4
2 6
I l0
Likewise, by plotting 3 units of the commodity demanded at price Rs. 4, we plot
point B. Similarly, points C, E and F are plotted. Byjoining these various points, A, B, C, E
and F, we get a curve DD, which is known as the demand curve. Thus demand curve is a
graphic statement or presentation of quantities of a good demanded by the consumer at
various possible prices in a period of time. It should be noted that a demand schedule or a
demand curve does not tell us what the price is.
y'
It only tells us how much quafltity ofthe good would be purchased by the consumer
at various possible prices.
r'
lt could be seen both from the demand schedule and the demard cuNe that as price of
a commodity falls: more quantity ofit will be purchased ordemanded.
/
Since more commodity is demanded at a lower price and less is demanded at a higher
price, the demand curve slopes downwa.d to the right.
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6 A
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Thus, the downward sloping demand curve is in accordance with the law of demand
describes inverse price demand relationship.
2) Describe
the exceptions of the law. of deirand.
(Nov/Dec 2013)
Tho tendency ofthe deman(l curve IS usually slow downwards to the righl' It slopes
upwardq under c.ertain exceptional cases. It is explained in the following diagram'
Fig- 2,L
QuantitY
Demanded
In Fig.2.4, Pr, Pu, P: are vadous prices.
Quantity
demanded also goes on i[cfeasing to
Q1, Q2, Q3
in response each price rise respectively' Points a, b, c indioate the larious poitrts
oi
prioe
-
Quantity
retationship. The demand curve shows an exceptional tendency of rising
upwards fiom left to righl. This is known as exceptional demand curve'
I[ exceptional c{$es, consumer buy more of a commodity
even wten its price
increases. Here, demand cu e moves upwards to the Tight' The following factors can be
athibuted to such exoeptional upward movement ofa demand curve' They are:
(i) voblen effect
(ii) Giffen's
Pamdox
and
(iii) Speculative tendoncies
(i) Veblen Elfect
Thorstein Veblen explained that rich people buy certain luxurious
goods (i'e
'
omaments made of gold or diamond or platinum) because they give them more psychic
satisfaotion or psyohio income. They buy these goods not for their use value but for their
prstige value. Normally, if price of suoh goods incteases, rioh people have a tendency to
Luy more of the.. This is called Veblen effect. The demand curve moves upwards to the
right due to this effect.
A3 Qz Q1
w1
(ii) Giffenrs Paradox
Giffen goods can be divided into two categories:
(a) Superior goods,
and
(b) lnferior goods.
-
Superior goods
are those goods
where when theh pdces increase, thei demand also
increases. For example, when French Intimate Scent Company advertised
,Intimate
Scent
is the costliest itr the world' - its sales shot up.
-Inferior
goods
are those goods where their demand falrs with a far in price.
For
example, when the price ofragi falls, traditional consumerc ofragi, give ,p.ugi consu-ption
and start buying rice because, ragi has now become an inferior go-od.
_
(ii, Speculative Tendetrcies
.
Speculation means forccasting the future rends of price movements, particularly,
in
shares and stocks and purchasing
and selring them. If the prices of shares anJ stocts a.e
xpected to rise in future, people
will buy more ofthem now. Ifpeople expect a fall in price
in future, they will buy less number ofshares and stocks. etc-
3) What are the factors determining
demand.
Demand changes as a resl t ofchanges in price. Demand schedule and law ofdemand
state the relationship
between price
and qMntity
demanded
by assuming Ceteros
paioo
us
that is other things remaining the same.
When there is a change in other things, the whole demand schedule or demand cu e
undergoes a change. If other things or the determinance
of demand changg the whole
demand schedule or the demand curve will change. The following are rhe ?actors wtrlch
determine demand for goods.
l. Income of the Consumer
r'
The size ofthe income ofa consumer is a powerful
factor in determining the level of
demand for a commodity.
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Normally, higher the income more will be the demand for a commodity.
'/
The greater
income means the greater purchasing power.
r'
Therefore, when income of the people increases, they can afford to buy more.
r'
It is because ofthis reason, that the increase in iocome usually has a positive effect on
the demand for a good.
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When the income
of the people fall, they would demand less of the goods and as a
result the demand curve will shifi be low.
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2. Taste Preferences atrd Fashions ofthe Consumers
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People's tastes preferences and fashions do not remain oonstarnt over a period oftime.
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For instance, people who were using black and white T.v sets may like to use colou.
T.V sets as a mark ofchanged taste.
v'
The changes in demand for vadous goods occut due to the changes in fashion and
also due to the pressure of advertisements by the manufacturers and sellers of
. different products.
3. Changes in the Price ofthe Related Goods
v'
The demand for a good, is also affected by the prices of other goods, especially those
which are related to it as substitutes or complements.
/
when we dmw a demand schedule or a demand curve for a good. we take the p ces
oflhe related goods as rcmaining constant.
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Thereforo, when the prics ofthe related goods, substitutes change, tho whole demand
curve would change its position. lt will shift upward or downward as the case may be.
,'
When the rise in prices of a good causes increase in demand for another good, the
two' goods are called substitute goods.
','
For example, tea and coffee, cococola and limca" rice aad wheat' ale very olose
substitutes.
/
lf pice of coffee is higher, people nomally prefer to consume tea whose price is
cheaper than that ofcofTee. The demand for tea increases as a rcsult ofincrease in the
pricc ofcoffcc, even whcn thc pricc ofteo does not foll.
r'
Thus the price ofa substitute via its price change determioes the demand for the other
product.
4. Complementary Goods
Goods which aro complemgntary with each other rise in price ofany ofthem will lead
to the decrease in the dernand for the other good and cause a leftwaad shift in its demand
curve.
Example: If price of tea rises, it will cause decrease in demand for sugar. This is
shown in Fig.2.5, as a result of rise in price of tea" the demand for sugar decreases and its
demand curve shifts to lefl.
In Fig.2.6, a fall in pric oftea causes increase in demand for sugar (a complementary
good with tea) and therefore demand curve ofsugar shifts to the right from DD to D"D".
The goods which are complementary with each other, tho change in the price of any
ofthem would affect the demand ofthe other.
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Clrandty Ocdanded or
S,rsa
Ouarriy Demanded of
S"Sr.
.Fl& 2.t. Lfit orn shyl ,'t
lh. demdad c,t E oJ
srtor d4. lo .it. in
p.icc ollr.o
Frg- 2.6. ktghrwar', shlfi in
the danond cury. of
sugor d,.. loJdu in prlcc
of compkfia ory good tca
Example:
Ifthe price
ofmilk falls, the demand for sugar would also be affected.
.
Likewise,
when p ce of cars fallq the demand for fiem will increase which in turn will
idcrease the demand
for petrol.
Cars and petrol
are complementary
wt,h ;; ;;;.
5. The number
ofconsumeas
in the market
r'
The market demand for a good is obtained by adding up the individual
demands
oflhe
present
as well as prospective
consurners
or buyers of a good
at various possiUle
prices.
'/
The greater
the numtrer
ofconsumers
ofa good,
the greater
the market deriand for it.
r'
Wherr the seller ofa good
succeeds in finding
out new markets for his good and as a
:::l:-1"
.*0" for his good
expands, the number of consum"..
oitiut gooa
Ulf
tncrease.
6. Consumer's
Expectations
r'
Anothea factor which influences the demand for good
is consumer,s
expectation
about
the future.
"
Ifa person
expects
a significant
increase in his income next month oa next year,
he
would be willing to spend mor6 out ofhis curent income.
/
Usually, when peopre prao to buy a durabre-use good such as a car or a housg they
take into account not only their cu.rent income b-ut also *fr" ir"orn"',n"ri")(o*,
a
earn its future.
o'a oo'
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7. Itrcome Distribution
/
Distribution of income in a society also aflects the demand for goods.
/
Ifdishibution ofincome IS more equal, then the propensity to corsume ofthe society
as a whole will be relatively high which means greeter demands for goods.
/
lfdistribution of income is morc unequal, rhen the
Fopensity
to consume the society
will be relatively less for the propensity to consu&e the rich people is less than that of
the poor people.
4) Explain demand funclirrn and demand curve,
Individual's demand for a commodity depnds on the own price of a commodity, his
income prices of related commodities (which may be either substitutes or complements) his
tastes and preferences. Individual demand for a commodity can be expressed mathematically
in the following general functional form.
Qa:
f(Pa I, r.,T,A) ... (1)
&
:
Own price of the coolmodity X
I
:
Income ofthe individual
Pr
:
Prices ofrelated comrnodities
T
:
Tastes and preferences
ofthe individual consurner
A
:
Advertising expenditure made by the producers
of
the commodity,
ln economics, it is usfu| to focus on the relationship between quantity demanded ofa
good and its own price, while keeping other determining facton such as income, prices of
othor goods, tastes ard preferences
constanl
We can write the demand function ofan individual in the following way.
Qa=(PJ-(2)
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It implies that quantity demanded of a good X is function of its own price, other
determinanls remaining constant.
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When fiere is a change in the other determining factoN r hich are held constant such
as income, tastes, prices
ofrelated commodities, the whole demand curve will shift. If
income increases, the whole demand curve will shift to the right and on the conhary if
income decreases, the whole demand cuve shifts to tle left. Similarly, ohanges in
other determining factors such as tastes, prices of related comrnoditie;, ua"*iring
cause shift in the demand curve and thereforc, they are called as shift factors.
For the purpose
ofactual estimation ofdemand for a commodity we need a specific fo.m of
the demand function. Generally, demand function is co sidered to be of a linear lbrm. The
specific demand function ofa linear form is written as
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-,
y"t
u * u:onstant int".cept
r"rm onQi;j,."i.
";j'1,,
-" coerricienr showins
the
slope of rhe demand curve. lf on esrimating
the demand
f,rr"i",
Ai
t"rn',f,i ;r,f""r",i".
about monthly quantities
demanded ofsugar
at is various prices
by
"n
irairra*,
"on.rr"r,
wc find rhe constant a to be equal to 12 and the constant 6 tj U"
"Orl,i"
,.-'
---'
We can write individual
demand
function as
Qd:
l2
-2
P,
This is interpreted
as one rupee fall in price
ofsugar will cause its quantity
demanded
to increase by 2 units ofsugar.
5) Erplain the concept
ofelasticity
ofdemard.
.
The concept
of elasticity
of demand
is a measwe
of sensitiveness
of demand
to a
change
in any ofthe causal factors. Ir shows
how rf.," u.*r,
oii".ura iln"".-,n,*
."rr"",
to the variations
in any ofthe faotor affecting
the aemana
may ie
0,i"",
,rJ"_"
".
rn"
O,r*
of a related product.
ln precise
term, demand
elasticity
is a percentage
change in quantity
demanded
atlributable
to a percentage
change in an independ"nt
,ariail.
Deti i(ion of Elasticity
ofl)emanrl
According
to Marshall,
,'the
elasticity
of demand rna.iket is
$eat-
or small
according
as the amount demanded inc(eases
much o.little for a gir"r.l.i
in p;"".
.
In the words of
paul
A. Samuelson,
,,The
pric
Elasticity
of Demand indicates the
responsiveness
ofquantity
demanded
to changes in market price.
,i
Price El.sticity
of Demand
Price elastioity
of demand
mav he
,r," q"",i;i,-a".1"#
;;;:ffi
#ii f,::'fi:fi
ffi:;"""r,#r:,T#Xio;:f
chanee in
Ea=
Percentage
change in guantity
demanded
of commodity
X
percenrage
change in the price
of cimiiafi]-
Percentage
change in the quantity
demanded
ofa commoditv x
Change in the quantity
demanded
ofcommodiryX
(AQx)
Original
demand (Qx)
Percentage
ohange in the price
commodity
X
Change in the price
ofcommodityX
(Ap)
Original price (p)
P.g.
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A&. A?,
Ed=d=n
-4&*&
Q*
aP*
?x
-A&
A,
ae
-
&
A-a^
*
Qta?*
Qx
= origimt quaotrty demaaded of X
AQx
:
Change iu quartity demanded of X
Px= Original Pric
ofx
APx = Chongp in
Price
of X
E-r = Price Elastioity of Dmand for commodity
X
6) Elplair the classilicetion
(lypes) of price elasticity'
(Miy[uDe 2013)
l. Perfctly Etastic Demand or Infinite Elasticity of Dmand
(Ed
:
@)
2. Perfectly lnelastic Demand
(ft: 0)
3. Unit Elasticity of Demaod
(Ea
= l)
4. Elastio Demand
(Ed >
l)
5. lnelastic Demand
(Ed <
l)
t. Perfectly Eltstic Demtad
([d
-
00)
Itrferstoinfmitechargsin&r*andforaverysmallchatrgeinpricelnFig'27'DD
refers to perfectly elastic domaed clrve. It is a stralght line padllet to X-axis' When a small
"in
,g" ii p.io" ** an iifinite iicras in the quantity demanded'
thn the price elasticity
ofdemand for the comnrodE is infinite'
Whcre,
Ftg. 2,7,
Qumttlf
d.r&ndcd
4"1,,
o
Ed
:
oo in practical life, we find such perfect elasticity of demand on some special
occasions.
For example, in the large gattrerings of political meetings, vendors of goundnuts,
cool d nks, etc., reduc fte p.ice slightly so that demand increases infinitely.
2, Perfectly Inelastic Demand (Ed = 0)
It also referc to zero elasticity ofdemand. Whatever be the change in price, there is no
change in the quantity demanded, this is known as perfer;tly inelastic demand.
x
o
Ctrlantty Oemanoca
89.2E, Perfcaty
Incfasie Denaad
ln Fig.2.8, DD is the perfectly inelastic demand cuve. Demand does lrot change for
changes in price fiom OP to OPr, OPz, etc. The demand curve DD remains a vertical staight
line, parallel to Y-axis. Elasticity is equal to zero i.e., Ed= 0.
For example, a family does not buy and accumulate salt more and more on acoou ofa
fall in its price.
3. Unit Elasticity Demand (ti= f)
It refels to equal or proportionate change in dehand for-a given change in price, so
that money spent on the commodity remains constant:
For example, in the family budget, a family may spend the same account ofmoney on
a particular good whatever be the price change. Price elasticity ofdemand is unity when the
change in demand is exactly equal and pmportionate to change in price so that total
exp9nditure remains constant.
ln Fi9.2.9, DD curve rfers to Unit Elasticity Demand. When lhe price is OP, quantity
demanded is OQ. When the price falls to OPr the quantity demanded proportionately
increases to
QQr
i.e., change in demand is propo.tionate to change in price. i,e., PPr
:
QQr
Let us assume, there is 2oZ change in price, the quantity demanded also changes by the same
2%.
ry,lo
o
r-t-&-U:t
H-
A?
Therefore, elastioity ofderBand is said to be uitary or equal to I (Ed = l).
4, El.stlc Demard (Ed > l)
It rep.esents a mor man proportionate change in demand for a small change in price.
ql.d,
D.n&dcd
In Fig.2.lo, DD rcpeser*s the elastic demard cffve. As chaige in demand
QQ1
is
geater than change in prioe PP I (QQI > PPr) demaad is said to be clastic. I-t us assume
there is I
oZ
change in pricr, the quanlity demanded changes by 2%.
u=43a='l
=
z
AP
IY,
@,zl.u"uaaxayD.ti^n"ctdtc
Pyl'r
5. Inelaslic Demand (Ed <
l)
It represents a small change in quantity demanded fo. a big change in price. Elasticity
here is less than unity.
FE 21L tneldsrtcA.dand C$re
In Fig.2.ll, DD represents inelastic demand. For a big change in price
pp1,
the
change in demand is small
QQr
(i.e.,
QQr
<
PP). Let us assume the change in price is 2%,
change in demand is I
o/o.
H,ff"\.=o's
There is a dilierence between, the slope and th elasticity of a demand curve. Slope
pertains to the rate of change in quantity due to price change. Elasticity rcfers to the ratio
between change in price and change in quantity.
7) Illustrate the methods ofmeasuring lie elasticity. (Nov/Dec 2012, Mayflutr 2013)
The notions of elastic, inelastic and unitary elastic demand are indicators of
percentage responsiveness ofthe demand to given percentage change in price. Many however
will be interested in knowing how much such qualitative cases can be given exact numerical
measurements. There are three methods employed for the measurement of elasticity of
demand.
1. Percentage Measure
2. Graphical Measure
3. Total Outlay Method
4. Ceometric Method
1. Geometric Melhod or Point Method
The point elasticity of demand may be defined as the proportionato change in the
quantity demanded resulting from a very small proportionate change in price. The formula is
as follows:
k'f lt8
a
eP=
e?
=.
amqt^t
l.l,"^t
A,nev,*4
ng. 2.12. Ambun' dc'na dcd
We oan mea8ure point elasticity of demand at a point El or a demand cuwe (seo
Fig.2.D) by making ur" of thu ubo"e formula in Fig 2'12' The point elasticity of demand is
equal to
-
dLq'
:9
k
-?:
i\qt._
aE
Weshouldrernernberthatusuallywetaketheo.iginalPricearrdtheoriginalquantity
demanded as lhe de[ominalor in this fraction. St ctly speaking, as we are interested in elastic
of demand at a point on dErnand ourve. We should use Calculus and ]vrite the formulia as
follows:
[A*
aots*Yeo=4!+!
I
r
a-'P
But for most practical purposeg where the percentage ohange in price is not large' the
first formula is good enough.
2. Arc Elasticity ofDemrid
Arc elasticity of demand measu.ed elasticity of demand over a mnge or an arc of
dernand curve, like the mnge El, E2 in Fig.2.12. The formula for arc elasticity ofdemand may
be
given as:
,
tf 1,,
a
Arc elasticiry ofdeman4
- 9,
-
9t )<
Pr+&
P2-P1
"Qr+Qr
Pr =Original pricd
p2
= The new pdce
Qr
:
Quantity demanded at original price and
Q2
:
The amount ofdemanded
at the new price
_
In case ofarc elasticity
ofdemand.
we take rhe change in the price as a proportion
of
the average ofthe original and the new pric.
Similarly,
the-ohonge i. qr*riry?
"U
*
"
proportion
ofthe avemge ofthe original and the new quantity.
3. Total Outlay Method
Total outlay method is also known as total expenditure method or totar rcvenue
method. Total outlay means the total arnount spent by a codsumer
on the puchase
of a
commodity._
Total expenditure
of a buyer is compared
both before ana after'the cfraage in
price. On this basis, demand is asceitained to be elastic, unitary or ler"
"l*ti".-
---
Total outlay =
price
x
euantity
Delnanded
To:
pxQ
In other words, total outlay or total revenue
explained in the following demand schedule.
is price times the quantity.
This is
S.hedule ofTotat Ouday Method
From the following schedule, it can be seen that when price decreases fiom 9 to
g,
total expenditure
increases fiom Rs. lg0 to Rs. 240. Iftotal expendit,re inc."ases mo." ttran
price
change, elasticity
ofdemand is greater
than unity. Demanj is elastic
&
>
1
Price in
Rs.
(l)
Quantity
demand in
(2)
Total
outlay in
Rs.
(3)
Type of
price
Elasticity
9
20
180
Ed>l
8
30
240
7
40
280
6
s0
300
Ed: I
5
60
300
4
75
300
3 BO
.240
Ed< I
2
90
t00
r00
100
I
When price falls from Rs. 6 to Rs. 5 and from Rs. 5 to Rs. 4, total expenditure
remains the same at Rs. 30.0. lf total expenditure remains unchanged inspite of changes in
p ce, elasticity ofdemand is rmitary-
Ed: l
When price falls fiom Rs. 3 to Rs.2 and from Rs.2 to Rs. 1, total expenditue also
falls ftom Rs. 240 to Rs. 180 and fioh Rs. 180 to Rs. 100. Ifrotal expenditure deqeases less
than change in price, elasticity of demand is said to be less than unity. Demand is therefore
inelaslio or less elastic.
Ed<1
8) f,rplah the frctoK ttrocti g (govcmirg) p ce elssticity of dcmand. (May/June 2013)
1. Number of Close Substiiutes
r'
Larger the number of olose subsritutes available for a good. greater is its price
elasticity of demand.
y'
Ifthere aro many clos substitutes, the overall demand for commodity is shared by the
substitutes.
r'
When the price of anyone ofthe substitutes increases the buyers will switch over to
othe. bmnds of the producl and there will be a substantial fall in the demand for the
goods in question),
/
Consider for inslancg the p c of meat, if it goes up, peopte would substitute it by
chicken whose price remains relatively unchanged.
v'
Quite
a few pople, who wete earlier buying meat will now shift to chicken. Demand
for meat will falt to a considerable extent. Thtls the prioe elasticity of dema[d for
meat is quite high.
2. Nature of Commodlty
/
The good may be either a necessary or comfort or luxury.
/
The consumption ofa necessary is inevitable whereas th consumption ofa comfort
or luxury can be poslponed.
y'
The necessary is consumed either for subsistence or for maintaining minimum
efficiency in working or as a matter ofhabit.
r'
They will have to be consumed in the same quantity even if their prices go uP- Thu-s
the demand for such goods will be inelastic.
y'
The consumption ofa comfort can be postponed whenever its prioe increases. This is
particularly so in case ofluxuries, whose consumption can even be avoided.
Page
121
I
/
Thus, when the price of the comfofi ol luxury rises, their consumption can be
postponed.
/
Thercfore, the demand for them will fall quite significantly when the p ce has a slight
rise.
/
The price elasticity of demand therefore for comforts and luxury goods will be high
indeed.
3. Number ofuses ofthe Commodity
y'
Many goods have seveBl uss while some others have rclatively les's number ofuses'
/
Greater the numbr of uses a good has, higher will be the price elasticity of demand'
y'
Electricity can be used for heating, cooking, lighti[g, ventillation, entertainment'
/
A rise in the charge of electricity would make the consumers to stop using it for less
important applications and use it only for more important ones.
y'
The demand for electricity would decline considerably when its price rises: it has
more price elasticity demand.
4. Time tractor in ElasticitY
"
Time plays a very important part III determining elasticity of demand'
/
Elasticity will be less in the short period and more in the long period'
/
The following are the reasons for long period elasticity being more thafl short priod
elasticitY.
l. Changes in habits, consumption, e/c., take some time.
2. It will take some time for consumers to know the fall in the price Therefore,
demand may not inorease immediately after the fall in the price'
3. It may some time for oonsumers to make adjustments to new oommodilies'
4. lt may take some time for the prics of complementary
goods to fall'
For example, the
price of electricity may' fall but unless the price of electric
heaters, refrigeratoN, r.., also fall, demand for electricity may not expand for
domestic consumption.
5. New substitutes for a commodity may be found out in the long period'
5. Income of the Consumer
/
Elasticity ofdemand depends upon the income ofthe consumers'
a
Pe3.
|
2?
I
r'
For those in high income group, some commodities will have inelastic demand.
v'
But for others in the low income groups, the sirme commodities will have elastic
demand.
/
For example, the sugar will be puchased by rich at any price whereas in lhe oase of
poor, if its price goes up, they will go for cheapjaggery.
6. Iossibility of postponement
r'
Ifthe use ofa good can be poslponed, it will have elastio demand.
/
For example, if the prices ofTV sets or fans go up, there may be a fall in demand for
them because they are not absolutely necessary for life. But if the price of salt goes
up, we cannot postpone its use.
7. Durable Goods
r'
Duable goods have higher price elasticity of demand than the non-durable ones.
/
Dumble goods mean that the goods have a long life and they wear out very slowly
over a nuhber ofyears.
r'
Ifthe prioe of suoh goods goes up, the people can postpone its purchases, oyer demand
will therefore fall.
r'
If its price falls, more people would replace the existing ones by the new goods,
r'
This is in the case of durable goods like washing machines, refrigerators and
frrmiture. In thse cases, price elasticity of demand is high.
8) What is meaDt by incorne eed gross elasticity ofdemand?
lncome Elasticity of Demaid
y'
lncnfie elasticity of demand may be defined as the proportionate change in the
quantity derDanded resulting from a proportionate change in incomo.
The formula is
Percentage (o/o) change in the quantity demanded
' Percentage (o/o) change in income
/
Goods can be olassified as "necessaries" and "luxuries" on the trasis of inoome.
y'
A commodity is considered as "necessity" if its income elasticity is very high.
/
A commodity is oonsidered as
"luxury"
ifits income elasticity is greater than one.
/
The relationship between quantity demanded and income is positive nature, unlike
prioe demand relationship. That is, the demand for goods and services incrcases with
increase in consumer's income aird vice versa
Page
I
23
a
Cross Elasticity ol Demand
/
The cross elasticity of dmand may be defined as the "Pronortionate
change itr the
quantity demanded for a good to a change in the price ofother goods".
The formula for oross elasticity ofdemand is
Percentage (o/o) change in the quantity demanded ofgood X
e.=
r'
The coefficient of cross elasticity may be positive or negative. lf two goods are the
sign ofthe cross elasticity will be positive.
'/
For example, an increase in.the price ofcoffee will increase ihe demand for tea.
r'
complementary goods will have negative cross elasticities. For example, rise in price
of photographic hlm will reduce the demand for camera.
9) What are the importatrces of elasticity of demand?
The importance of elasticity of demand is of geat significance to the producers,
selleN for govemment in formulating their pricing policies. It has practical applications in
managerial decision-making.
1. Dctermining Pricing Policy
While revising the price ofhis produc! a businessman has to considei the elasticity of
its demand. He should know the implications ofprice change on the demand ofhis product.
He should consider whether a lowering ofprice will stimulate the demand ofhis
Foduct
and
ifso to what extent and whether his profits ]vill also incrcase as a result. In general, for items
having inelastic demand, the producer or sellq can be better offwith a higher price, while on
these items whose demand is elastig the businessman cannotcharge higher prices and cannot
shift the burden ofadditional cost.
2. Importance lor the Government
Elasticity of demand influences the taxation policy of the govemmenl. The
govemment can impose higher taxes and collect higher amounts if the demand for the
commodity on which a tax is to be levied inelastic. On the other hand, in case ofcommodity
with elastio demand, high mte for the govemment.
3. Importance to a Monopolist
A monopolist will have to oonsider the nature of demand while fixing price of his
products. lncase, it is inelastic for certain goods, it will pay him to charge a high price and
sell a slightly smaller quantity. lf on the other hand, the demand is elastic for some other
goods, he will lower the price, stimulate the demand and this maximises his monopoly in net
."r.rir".
P.r!
|
24
c
4. IDportarce ir Internatiotral Trade
The concept of elasticity of demand plays a very important role in the intemational
trade.
(D
(ii)
An idca of the conccpt of elasticity of demand cnables the govemment to fix a
propar
rate ofexchange for its cunency in relation to other currencies.
T.nIs of ir(cmuiional tradc to bc sgreed upon by the two panies
arc closely
0ssociatad with conccpt of eldstioity of demand. If thc demand is irelastic terms
would be in favou. ofthg sller.
Rules of iariff are also fixd taking into account the elasticity of demand of the
products on which ta.iff are to be levied. Tariffs will be higher if demand is
inelastic and lower ifit is elastic.
5. Importance in the determin.tion oftr'rctor Pricitrg
Sharc of each factor of production
in national product is determined in propo.tion to
is demand in the productivc activity. A factor with an inelastic dcmand can always command
a higher price as compared to a factor with relatively elastic demand.
6.It erplaios the Parudor ofPover8 amldst Pledty
A bumper orop instead of a cause of prosperity may spell disaster if dcmald for the
comnodity is inclastic. This spccially occurs when lhe goduct is perishable, A rich harvest
may actually fetch less money than a
f,oor
crop. In case of stockable goods however demand
is less inelastic. A fall in price may lead to increasd purchascs and hoarding. While deciding
the agricultural income policy, it is imprative for the govemment to take a stock of the
situation.
10) What ls the meaning ofsupply? Er?hin.
Supply and demand are the dual forccs which detprmine the price of 8 good in the
markea. As AlfrEd Marshall argued, only whan both an objcct,s scarpity, namely supply and
th intensity ofwanting it viz., demand are known. It will bc possible to undcrstand how its
price is dctcrmined, The concopt of supply which is onc of thc two
,bladcs
ofthe scissors,,
that determines price is similar in many ways to the other blade, viz., demand.
Meaning ofSupply
The meaning of slpply is symmctrical with that of demand. It can be defined 8s the
quantity ofa good or srvice that a seller wishs to sell on the market at a particular price at a
particular timc. Supply of a good is difTercnt from ils stock. Tle quantity of a good that a
seller can bring out to sll immediately on demand in his stock. But it should be noted that
thc scllcr is not always rosdy to sell thc whole ofhis stock. As the market conditions change,
(iii)
Page
| 25
O
he varies the quantity of the good he is prepared to sell ftom time to time. Therefore,
generally a seller offers only a portion or part ofhis stock for sale as supply ln short, supply
is lhat part of the stock which a seller offers for sale at a particular price at a pa icular time'
While stock refers to potential supply, supply means the quantity which is actually brought in
lhe markel.
Nature of Suppty
r'
Supply ofa commodity is the amount ofit that sellers are willing to sell at each
conceivable
Price,
r'
Supply is a desired flow; how much firms are willing to sell per period oftime at
vadous pices.
/
supply refers to the behaviour of sellers at every price, but quantity supplied is alvays
wi!h reference lo a particular price.
/
Supply is a flow over a period oftime. It is the quantity; firms desire to sell for a
period oftime.
1l) Explaitr the law of supply with supply curve'
Supply has functional relationship with price,
"other
things remaining the same, as the
price of a commodity rises, its supply is extended, and as the price falls, its supply is
contracted". The quantity offered for sales varies directly with prices i.e., the higher the price,
the larger is the supply and vice ve$a.
Supply Function
Among the deteminants of supply, the own price of the commodity, the prices of
inputs (i.e., resources) used to produce the commodity, and the technology
arc thrce
important factors and therefore the supply function of a commodity is often written taking
these factors as indpendent variables. Thus, supply function ofa commodity is w tten as
Qi =
s(&, rr, F2,.... r.)
Qi
is the quantity supplied ofthe commodity X, P* is its own price. Fr, Fz, F m are
the prices of inpLrts usd to produce lhe commodity X and the state oftechnology
daermines
the form ofsupply function S.
Therefore, supply function refers to the precise quantitative rclation between the
independent variables such as tlrc own price ofthe commodity X and prices offactors such as
Fr, Fr, et.
P.8r
|
26
e
Shifts in Supply Curve
The most important factor bdnging about ohanges in supply is the change in price,
Sellers plan their production and supply, taking into consideration rhe price ofthe
Foduct
io
the market. With a rise in price, the amount supplied extends and with a fall m price, the
afiount of supply contracts. The changes m price induces extension and contraotion in
supply.
FE 2I3, (it)
In$coehrsa !
If the amount offered for sale rises without any change in price
amount is supplied even at a lower prioe, it is called increase in supply.
or when the same
Fig. Ztj.(b) Detu$e tn nrpply
In Fig.2.13 (a), ma*et supply is the same (OI\O even at a lower p ce Opr. Looked at
another way at the same price OP2, the amount supplied increases from OM to OMr as the
supply curve shifts from is position SS to SrSt. This is the case ofan increase in supply. If
the sarne amount is supplied at a higher price or at the sarne price, a lower amount is offercd
for sale. Supply is said to have decreased. In Fig.2.t3(b), the sarne amount (OMr) is being
o{Tred for sale at the same price OPl, Increase in supply means a shift ofthe supply cuwe to
the right aod a decrease in supply involves a shift ofthe slpply curve to the left.
(\cln
a
12) Explain the factors aletermidng elasticity of supply.
(May/Ju ne 20l2ili4d
lfiuq
9oB)
l he elasticity ofsupply depe s on the following factorc'
1. Spare capacitY
How much sparc capacity a firm has, if there is plenty of spare capacity' the firm
should be able to increase output quite quickly without a rise in costs and therefore supply
will be elastic.
2. Stocks
ThE level ofstocks or inventories' ifstocks of raw materials, components and finished
prcducts are high, then the ability to rcspond to change in demand quickly by supplyiog these
stocks onto the ma.ket-supply will be elastic.
3. Time Period
Supply is likely to be more elastic, the longer the time period, a firm has to adjust its
production. In the short-run, the firm may not be able to change its factor inputs' ln some
agricultural industries, the supply is fixed and determined by planting decisions made months
bcfore and climatic conditions which affect the production yield'
4. Production Technology
The change in technology significantly affects the supply funotion by alte ng the cost
of production. [f there occurs an improvement h production due to the technology used by
the firm, its production efficiency increases which reduce the unit cost of production and
consequently the lirm would supply more thaIr before at the given price'
5. Prices ofiDputs
Changes in prices of factors or inputs used in production also cause a change in oost
of production and consequently bring about a change in supply lf either wages of labour
increase or prices of raw materials go up, the unit cost of p'oduction will rise with higher unit
cost ofproduction it will be profitable to produce less.
6. Taxes and Subsidies
Taxes and subsidies also influence the supply of a product' If an excise duty or sales
tax is levied on a product, the firms will supply lhe same amount of it at a higher price or less
quantity ofit at the same price. When govemment provides subsidy on a commodity, it will
reduce the supply price ofcommodity.
?. Future Price Expectations
Supply is affected by expectations of changes io prices in future' For examplg
farmerswouldnotofferforsalethentircquantityoftheirpresentharvest,iftheyexpecta
rise in price in future. As the stock kept by farmers increases the current supply ofpaddy will
be low in the market.
a
Page
I
28
e
8. State of Technolog/
The volume ofproduction depends upon the state oftechnology that is being used. If
advanoed technology is used, then productior iflcrcases. This raises the level of supply of
such good.
fl .NoD-Econonic tr'actors
Non-eqromic factors such as war, political changos, lloods, draught and changes in
alimate, etc., cause chances
-n
th. supply of goods. Agriculturc is said to be a gambling m
monsoon in India- If monsoon fails, agdcultural output is affected, leading to a fall in its
supply.
El&rticity ofSrpply
A change in the quontity supplicd in rcsponse to a clBoge ifl thc price is called
elasticity of supply. Elasticity of supply can be measured by usiflg the formula given below.
^
Proportionate changc in guantity supplied AQs
""
=
Pr"p".tiorate ch""g" in p.i."
=
AP,
Wlere. propoftionate change in quantity supplied
_
Change in guantity supplied
_
Aos
Originalsupply
Qs
Proportionate change in pric
_
Change in price
_
APs
Originalsupply Ps
_
A0s aPs aQs Ps Ao,Ps
"" -
Q,
ps -
Qs
^Aps -
apQs
Where,
QS:
Otiginal quantity supplied
A0s = Change in quantity supplied
Ps = Origioal price
A Ps = Change in price
13) Discuss about the various typs of elasticity of supply. (May/June 2012)
Elasticity ofsupply has been olassified as:
(i) Perfectly elastic supply (Es
:
(0)
(ii) Perfectly inelastic supply (Es: 0)
(iii) Unitary elasticity supply (Es
:
l)
(iv) Relatively elastic supply (Es >
I
)
(v) Relatively inelastio supply (Es< 1)
Page
|
29
a'
(i) Perfectly elastic supply
(Es
:
(0)
Fig. 2.U. Pad.dlt El,{,lc S$ppb C$te
lnFig.2.l4,forasmallchangeolnochangeinprice,guantitlsuPPliedohanges
infrnltely froir OQ to OQi 0Q, OQr' tc' This is called perfeotly elastic supply'
G
:
c')'
(ii) Perfectly
inelastic supply
@5:
0)
acQ
Pz
Pdca
Pr
P
FE 21s. P.fcctb Lr4Nr';$ryP!!
cm'
In Fig.2.l5, when price changes from OP to OPI OP2 etc
'
quantity supplied
does not
change at ali lt remains inelastic. This is calle.d perfectly inelastic supply
(E s = 0)'
(iii) Unitary elasticity supply
(Es: l)
lntheFig.2.l6,itcarlbeseenthatwhnpriceinorcasesby2o/o'i'e"ftom.OPtoOPr
ttr" qu-iity .upili"a ulso increases by 2yo i'e
,
from oQ to OQr i e" PPr
-
QQi
Change in
price is equal lo change in quantity supplied'
Y"el =
I
,Lf
Elasticity ofsuPPIY -
|
t
lzo
a
This
is called
Unitary
Elasticiry
of Supply
(E, :
(iv)
Relativety
elasiic
supply
(Es >
l)
o"iit,GGfr_"
l). The
supply
curve
SS is a 45.
line.
*sftffi
,s"ffi*.,pffi
*Hix;;,J,niffi
QQ' PPl
or
pp,
3 qq,
bLv
u'=fi
--2
Elasticity
ofsupply:
2
HemE
supply
is said to be elasric (E
s >
l). This is called
rlarively
elastic
supply.
PXelzr
a"
(v) Relatively inelastic supply (Es< 1)
frg 2l& lntla a8anb CrtN'
In Fig.2.18, pric6 inqeases by 2% from P to PI' but quantity supplied increases only
by I
o/o.
In other words, for a big change in price, there is a small change irl qualtity supplied
i.e.,
QQr
<
PPr.
&"
l'l
=o.>
)t:
L,L
Hence supply is said to be relatively inelastic or less elastic (Es < l). This is called relatively
inelastic supply.
14) Explain the steps for scietrtific approach to dematrd forecesting.
(May/June 2012)
Generally, the.e is uncertainty in over every decision-making
prccess. The producer
of some goods or any other decision,making authority or the govemment must keep in view
the existing level of demand for the product in question and eslimate the prevalent gap
between demand and supply. The decision maker, whether a firm or a state planning agency,
must not only estimate the present level of demand but also forecast the demand for a future
date. Degree of risk depends upon the nature ofbusiness. All the risks oannot be completely
emdicated but by proper planning these risks can be minimized. Demand forccasting is also
one ofthe techniques to minimize the risk and uncertainty.
Cotrcept of I)emand trorecasting
Forecasting of demand is the art of predicting demand for a product or a service at
some future date on the basis of certain present and past t ehaviour
Pattems
of some related
events. Please remember that forecasting is no simple guessing but it refers to stimating
scientifically and objectively on the basis of certain facts and events rclevant to the art of
forecasting.
Ptrolzz-
3
Cundif
atrd
Still:_
..
Accordins
tr:f
*ffi
*j*ffi
[#;:.T}l,,
#[:n::T1Til"3.""j,]i5:;fl";
According
to
plitip
Kofler!
"o_p_y.ur".
uu"Jl,ffi;
;ffi
,;.#,r;r"i::f#ff#,*"",Trff:,Ir,,
I'eatures
of Demand
ForecastiDg
From
the
above
discussionr
t. o"muna
ro.""a"t]
e following
featu'es
ofdemand
forecasting
emerge:
z. o"r-a
ro.""usili
is based
on past
data
and p'esent
positions'
: Demand
rorecastir,
may
be monetary
or physical'
+. Demana
forecastirn
gives
basis
to future
planning'
s. Ft ture
sares
and pi
is
made
fot a certain period'
!fit estimate
can
be made
by demand
foiecasting.
fmportatrce
of Dcmand
Forecasting
fl"i1,,-.-,-
"*tr
fti#tr,::#ffi
il
j#$fr
#i:ffi
l. Importance
for the producers.
2. Importance
for policy
makers
and planne6.
3. Importance
for estimating
financial
requirements.
4. Utility
for deterhinalion
ofsales
target
& incentive.
5. Importance
for regular
suoDl
demand
forecasiing.
y oflabour
and raw
material
is made possible
by
6. hoduction
planning
is possit
7.-use
for
olher groups
or,n"
.o1l
:"n
*t n"lp ofdemand
forecasting'
a tuturistic
approach.
'ciety
rcsearchers,
social
wo.kers
and other
who
have
Scope
of DemaDd
Forecrsting
_
Demand
forecasting
can be ar
;tri**Tih:t*,#;i:;iil*t*ii*irtr#fr
:r,j*#
Pege
I
33
a
involved in relation to the benelit of the infomatiol acquircd through the study of demand'
The facto$ determining the scope ofdernand forecasling are as followsi
I . Period conversed under demand forecasting.
2. Levels ofdemand forecasting.
3. Purpose ofdemand foreoasting.
4. Naturc ofproduct.
5. Miscellaneous factors- socio-psychological factors, dgrce of competition impact
of risk and uncertainty.
15) Explair methods ofdemand forecastitrg. (May/June 2012)
(A)
Qualitalive
Method:-
l) Expert Opinion
2) Survey Method
i
)
Complete Enumeration Suvey Method
ii) Sarnple Survey Method
iii) End Use Method
(B)
Quantitrtive
Method!
l) Trend Method
2) Regression Method
3) Simultaneous Equation Method
4) Graphical Method
(A)
Qualitative
Methodi
(1) Expert Opinion Methodr
Under this method the researcher identifies the experts on the commodity whose
demand forecast is being attempted and prcbes with them on the likely demand for the
Eoduct
in the forecast period. The word 'E
(pert'
is a high powered term but it should be
taken to stand for those who possess the requisite expertise on the subject.
A specialised form of panel opinion is the Delphi method, Instead of going in for
direct identification. This method seeks the opinion ofa group ofexperts tlrough mail about
the expectd level of demand. The responses so received are analysed by an independent
body. The method thus takes care of the disadvantage of panel consensus where some
powerful individual could have influenced th
t
I
a
Advatrtages
l. Forecast can be made quickly
and economically
2. This is a reliable
method because estimates
are made on the basis ofknowledge
and expedence
of sales experts.
3. The firm need not spare its time on prcparing
estimates of demand.
4. This method is suitable for new products.
Disadvantages
l. This method is expensive.
2. This method sometimes lacks reliability
(2) Survey Method!
According to this method a few consumers
are selected and their views on the
probable
demand are collected. The sample is considered
to l"
"
*" *p.".*,",i.,
"f,fr"
entire population.
The demand
ofthe sample
so ascertained
is then magnii"Ja g"*.,",,,"
total demand ofall the consumem for that commodity
irl the forecast piriod.
'I.he
setection of
an opinion sample size is orucial to this method,
while .
" "U
.".fi" *.rfd b easily
managed and less costly.
(l) EDlmeration
Survey Method:.
.-^^,-rld:"
*tr,a"hnique
either consurners
are divided in several groups
on the basis of
rncome,
caste, sex, education or any otha variable or they may b;divided
according to
geographical
.regions.
Through appropriately
selected sample i*ig; *_pi" ,ri,
"*
slected and daia are collccted either through direct interview
or by mui-ifirg q;"';io*ui.""
o.
filling up schedules.
The results of sample survey .ay u" ."fiuit"
f.ffiJo
,f," ,*r0," *
representative
of the popula(ion.
(ii) Sample Survey Methodi
.
Under this method only a few consumeE are selected and their views on the probable
demard
are colleoted. The sample is considered
to by a true ."p."."r,u,L,
'of
,f," *ri."
population.
The demand of the sample so ascerhined
is then magninea to gene.ate
tte totat
demand ofall consumers
fo. that commodity in the forecast perioj.
(iii)
End Use Survey Method:-
Under this method commodity
that is used for the production
of some other finally
consumable goods
is also known as an intemediary
good.
White fi,e ae.Jfor goods
usea
for final consumption
can b forecasted
using any other method th"
"ra
u"" ."trr'oa tir"u.",
Page
| 35
a
on forecasting the demand for intermediary goods. Such goods can also b exported or
imported besides being used for domestic production of other goods. Fot example milk is a
commodity which can be used as an intermediary good for the production of ICE Cream,
paner and other dairy products. We can anal)ze end use method with the help offollowing
formula:-
Dm= Dmc + Dme
-
lm + XI.OI+ XP.OP+---+XN+ON
Where -
Dme
:
Export Demand for Milk
Im = Import of Milk
)C = Per Unit Milk Requirdment- ofthe ICE- Cream Industry
OI = Outpul ofICE Crearn Industry
XP and OP Notations are similar to xI and OI for paneer
The equation above can be genemlized to calculate the projected demand for any commodity.
D = Dc + De-l + Xl.Ol f X2 )O{ + ON
(B)
Quanlitative
Methodl
(3) Simultaneous Equalions Method-
This method, also called the complete system approach to forecasting, is the most
sophisticated econometric method offorecasting. Since it involves complicated mathematical
and statistical tools, its detail discussion is beyond rhe scop of this text, Thus the
simultaneous equations method overoomes the major problem ofthe regression method, viz.,
forerasts for the independent va.iable.
(4) Graphical Method-
Under this method trend is estimared with the help of a gaph. Time &
euantity
demanded are taken on both the axis and demand forecasting is made for future. This method
is completely subjective, as in this method graph is dmwn and on the basis of Oris graph
demand forecasting is made Expansion ofthis graph is completely imaginary & subjective so
it can be different for different pe6ons. According to graphical method, the p6st data will be
plotted on a graph and the indentified trend/ behaviour will be extended further in the same
pattem to asce(ain the demand itr the forccast period. The following diagran sho\,r's the past
data in bold lines and the forecasted data in dotted lines.
Page
I 16
i
Past data
>
Demaod
ForecaetiBg
Trerlds
Advantages
of
euaditrtive Methods
Projected
data
rend 1
rc,.d. 2
I The method ofestimation
is scientilic
2 Estimation
is based on the theoretioal
relationship
between sales (dependent
variable) and prioe, advedising,
income
etc. (independent
variables)
3 These are less expensive.
4 Results are relatively
more reliable.
Disadvatrtages
of
euaDtitative Melhods
I These methods
involve complicated
calculations.
2 These do not rely much on personal
skill and experience.
3 These methods require
considerable
tochnical
skil I and experience
in order to be
effective.
16) Explain the process
ofdenrand
forecasting.
Process for demand forecastinp
dopends on the scope ofdemand forecasting.
We may
lollow the following
sequence
in proje-cting
th" a"rnura fo. u p.ar"i,
1.
SeTifying
the
-objedives-
The person
or agency assigned
the task of forecasting
rhe
demand
must specifiy rhe purpose
for which
d.rnuna lor".u.i,
ur" U"lr;';;.'"''
2. Selection
of Appropriate
Method_Once
the purpose
of demand forecasting
has been
specified, we must select the methods which will be used for the purpo.".'
--"" ,
3' collection
of Appropriate
Data-The quarity
and adequacy
of data wir determirc
rhe
quality
of our results and their reliability.
l. iu. u, po".iit",
i"," ,r.i'i"
"ro","O
t,
experienced persons.
4. Estimation
and rnterpreration
of resurts-
Having colected
the relevant data we have to
compile them and obtain results manually
or with the help ofcomputers.
These resutts must
be interpreted
and their correspondence
with the objective examined
Pl'137
5. Evaluation of the f,'orecasts- lf the method or model used in demand forecasting has
obiectivity; we may expect to receive good results. Yet the result so obtained must be verihed
by persons having professional acurnen and expertise.
17) what is a market? IIow they are classified?
(Nov/Dec 2012)
In geneml, market means a place where there are many buyers and sellers of different
products who are actively engaged in buying and selling acts. The firm's demand curve is
expected to depend on such things as the numbrs of sellers in the market and the simila ty
oftheir products.
According to Coumo! "Ecooomists
understand by the telm market not any particular
market place in which things are bought and sold but thc whole ofany region in which buyers
and sellers are in such free intercourse with each other that the price ofthe same goods tcnds
to uniformity, easily and quickly."
According to J.C. Edwards, "A
market is that mechanism by which buyers and sellers
are brought together. It is not necessarily a fixed place."
chapman defines as "The term market refe$ not necessarily to placq but always to a
commodity and the buyers and sellem who are in direct competitio, with one another'"
Characteristics of mtrket
(i) Ara: Market does not mean any particular place where buyers and sellers meet
rather, it means the entire area within which buye$ and sellers are spread and have close
contacts with each other.
For example Bata Shoes has malket all ovea lndia-, because its buyeN and sellels are
found in every city and state.
(ii) Buyers & Sellers: For exchange at least one buyer and one seller are needed'
Thus, the existence ofbuyers and sellers is a must. If one of the two does not exist in a
rcgion, it dos not satisfy the function of market. lt is not necessary that buyeN and sellers
should be physically present to exchange or transact the things. They can come in contact
through corespondence.
(iii) One Commodity. For the existence ofthe market there must b olle commodity
like wheat, sugar, ghee, vegetables and utensils. Thus they can be termed as wheat ma'ket,
sugar market, ghee market, vegetables marke! utensils market respectively'
(i9 Fre Competition: There must be healthy and free competition among the buyers
and sellers. Thus in pmctice, there should not be any restrictions on them' There rnust be free
competition.
(v) One Price: Generally it is remarked that in a market one price prevails which is
the main feature and testimony ofa market
;
Page
|
38
r
Classifi crtion of Market
(l) Orl the basis ofarea or region:
The economists have classified the market on thc basis of area or region which further
can bg summarised as rmder.
(i) lacal Ma*et
(ii)
Regional or Provinciai Market
(iii) National Market
(iv) Intemational Market
(i) Locrl Market:
If the buyers arrd sellers ofa certain commodity are limited to certain arca or regioi,
then it is called local market. The perishable goods and low prioe goods have their local
market like milk, ghe, hand-made fans, basket, cots etc.
(ii) Regional or Provincial Market!
If the buyers and sellers ofa oommodity are oonfmed to oertain region, say a province
like Rajasthan or Haryana, then it is known as regional or provincial market. The area of
regional market is greater than that of local market e.g. the demand for Red Bangles in
Rajasthan or the demand for Laharia in Raiasthan.
(iii)
NatioDal Market:
When thg buyers and sellers arc not confined to state boundary, but are spread
throughout the count y e.g., th market of sarees aod dhotis o. of Gandhian cap or of Nehru
cut
jacket
etc. have nati,onal market. These are demanded throughout the nation. Hence they
come under lhe purview of national market.
(iv) Internatioml Market:
When the buyers and sellers are spread acrcss the geographical boundary ofa nation
and the demand for such product is worldwide or universal demMd then its market is known
as intemational mafket e.g. msrket for gold and silver.
(2) On the basis of time:
On the basis of time the economist have classified the market as under:
(i) Very short period Market.
(ii)
Short period Market.
(iii) Lory period Market.
(iv) Very long period Market.
(i) Very short period Marketr
Page
I
39
This market can further b classified into Daily Markt or weekly market. Very short
period market is rhat markct which taks part in tratlsaction for a very short
period of time
say a few hours a day or so. ln very short
priod lhe supply of the product cannot be
increased e,g. of milk. Here the demand detcrmines the price. ln very short period market
gencrally perishable commodities are exchanged.
Daily M.rket- The market for perishable commodities come under daily marka e.g.
milk and vegetables.
Wcckly Markct- Somctimca o morkct operotcs on any spccific dsy of wcck lt is
generslly found in those areas in which main mdrket has its closed day for the week, say
Sunday market, or Tuesday markct or whatever the case may be according to the closing day
ofthe main market.
(ii) Sho period Markct!
Its lime period is greater than that of the previous one in which the supply of the
product can be increasd but we cannot make any change in production plant according to the
changed demand. In short period also the demand side plays a major role in determining the
price as change in the plant and machinery is rlot possible from the point of view of
production.
(iii) Long Period Markeil
It is such a market in which we can makc necssa.y changes in thc plant and
machinery as wcll to increase the supply of the p.oduct according to its demand. The supply
of the product plays I vital role in price determination resulting in normal price for the
product in such market.
(iv) Very long pedod Mrrkett
Therc can b an enormous change in the supply of the product in very long period
market. New teahniqucs of production, innovations and th new models of products can be
produced because ofa vcry long pcriod. And in very long periods the demand also ilcrcasps
because ofchange in population, habits, customq fashions etc.
(3) On thc basis ofFunctions!
On the basis offunctions the markcts can be classified as underl
(i) Mixed or gcneral Ma.ket.
(ii) Specialised Ma.ket
(iii) Marketing by samples.
(iv) Merketing by grading.
P.8.
I
40
(i) Mixed or
getreral Market:
When different types of commodities are transacted simultaneously in a market then il
is kno*r as mixed or general market e.g. Charrdd Chowk market in Delhi.
(ii) Specialised Marketl
When only one product or any of the special product is tlallsacted in a market then it
is known as specialised market. In such marke! a particular thing is taded with its differcnt
brand names of possibly different kinds, e.g. bathing soap is bought and sold in soap market
could be Lu& Liril, Hamam, Rexoda" Lifebuoy, etc.
(iii) Marketing by Samples:
ln such maiket the firms need not show whole of their product. They only send
samples through their agents or they may themselves show the samples ofthel product, e.g.
in c&se ofwool, clqth, paints etc.
(i, Marketing by Gradirg:
The product is first graded accoding to its quality and then put forth for selling is
known as marketing by grading e.g. in an Ag cultuml product market the product is graded
accordingly and then sold. It is knovn as Marketing by gading.
(4) On the basis ofnature ofcommodity:
The market can also be classified on lhe basis ofnature ofcommodity.
(D Product Ma*et.
(iD Stock Market.
(iii) Bullion Market.
(i) Product Marketr
The production goods aie exohanged in these market e.g. Agriculture product is
bought and sold in Agriculture produce marl(et.
(ii) Stock Markot:
Stock market is a market where stook and shares, bonds, securities, debdtues etc' are
bought aod sold. Bulls and Bears do tBnsactions in the stock maiket as per their ma*et
reading.
(iii) Bullion Market:
This is suoh a market in which Metallio trading exists e.g. the goods like silver and
gold better known as Bullion are traded and transacted.
Page |
41
oo
(O On the basis of LegalitY:
On the basis the market can be sub-divided as under:
(i) Legal or fair Market.
(ii) lllegal Market.
(i) Legal and Fair Markel:
When the goods are transacted in a market under certain norms and rules' the market
is known as legal malket which also has a legal sanotity behird it issucd by drc lcgal
authorities in a country. Here every consumer
ge$ commodities at fair plices' These markels
are also known as Fair Market.
(ii) lllegal Market:
When the transaction of certain commodities is taking
Plac
in more than or less than
quantity prescribed by the legat authorities in opeBtion s{ry a govemment and then it is
termel as ittegat trade. The Hong Kong Ma*et is an illegal market at Intemational level'
Generally it is also termed as Chor Market.
18) Describ about the various markel forms' (NoY/Dec 2012)
Market Structure
The level of produotion of any commodity depends upon structurE of its market'
Possible outcomes of sales, revenues, profits are prices and structured
under market
stnrctures.ThefiImsdemandcurvetotheindustrydemandculveisexpectedtodependon
such things as the number of sellers in the market and the similarity oftheir
products'
The price and level ofproduction ofa commodity depends upon the market structure
of its conditions. Market demand depends orl the following factos :
(i) Nature of the commodity: lt is to be taken into account whether the goods are
homogeneous or hetelogeneous.
(ii) Number of buyers atrd sellers ofthe product in the markel'
(iii) Mutual inter-depeDdetrce ofbuyers and sellrs.
In brief the market structure depends on the level or forms of competition
which are as unde':
(l
)
Perfect Competition
(2) Monopoly
(3) lmperfect Competition
P.Be
I
4?
e
PERI'TCT
COMPETITION:
It is such a market
staucture wlle&
tlere are large number of buyers aad sellers ofa
homoseneous
producr
and rhe price
of the pr"drJi;;;:;;;;;y
*J,,iil,il
,n*. ,, *.
price
that prevails
in the market.
All firms sell the produo
at the prer"r,"_
"r*,1,
According
to Leftwitch,
,perfec1
cornpetition
is a market in which there are rnany
firms selling identical product
with no firm being rarge enough rerative to the entire market
so as to be able to influence
mar*et price,,,
,
In.other
words a perfectry
competitive
firm is too smalr and insignificant
to affect the
market price rike a whear farmer.
He is a price
taker who can sel att i"'*i.iir'to
,"rr ut tt
"
rulins market price.
rn terms of etasticity
of d"._d
"
p;;;;;;;;"r;
i"""'.
"
n"*"ro,
demand
curve (paralet
to the x-axis) for his p."ar"t,
"*m"i"ri"i;i^i'"irr-*r,
,ru.,r".
The main characteristics
ofperfect
competition
are as follows:
(t)
Large number
ofbuyers
and sellcrs:
(2) Homogeneous product:
(.1)
Absence
ofartificial
Resrrictions:
(4) Free entry and exit:
(5) Perfcct knowledge
about the market:
(6) Perfect
mobiiity
ofthe factors of production:
(7) Non-Existenc
oftransportation
cost:
MONOPOLY:
-
It is a market shucture
in which lhere is only a single seller ofthe product.
Here one
firm is slling the product
and has full control
over rhe sufply of ,fr" p."a,i"i"a.
,rr" *ppfy
of electricity
by the Raiasthan
$ate Ele_crriciry
B""rj
'";
;;.#'
.;;,"po"t
"-ar,
envelopes
Indian
postal
Orders etc. are supplied
by the
postal
Dept. dis is suih a'situation nr
market
lvh:re,
there is only one poducer_of
a commoditv
,oitf, ,o
"fo" "ri.tiutes,
Hence,
monopoly
is a ma*et
structure in which the." i. oofy on" pJu"o
"i, "".rrrr,
*l* ,"
close substitute.
Thus, the analysis
ofmonopoly
bgins with two simple assumptions:
(i) Firs! that an entire industry
in supplied
by a single seller who is called a monopolist;
l;l
intJt
bv the monopolist
sets a single pric
and supplies aI buyers who wish to buy at
,
According
to Ferguson,
"A pure
monopoly
exists when there is only one producer
in a
market. There are no direot competitors.,,
Page
|
43
t
According to A. Koutsoyiannis' "Monopoly
is a market situation in which rhere is a
single seller, therc are no close suhstitutes for commodity it producs, there are bar ers to
entry-"
For the smooth functioning ofa monopoly market situation it is necssary to have the
following chamcte stics or feafures.
l. Solc supplier ofthe product and larye mrmber ofbuyer
2. No close substitutes
3. One firm industry
4. Monopoly may vary from industry to industry
5. Absence ofEntrY
6. Monopolist is a Price maker
IMPERFECT COMPETITION:
The market structure may be impefect beoause ofthe number of fiIms in the industry
may be relatively small, and the commodity or service may not be homogeneous
A small
number of firms may compete vigomusly wirh one another, Thus, in real life, it is imperfect
by competitive market that exists.
The concEpt of imperfect competition was developed in 1933 by Mrs Joan Robinson
and Prof. Chamberlin. lt is such a market structure where there are many sellers of the
products, but the product of each seller is different from the product of other sellers This
product differentiation manifests itself in trade marlq name ofthe brand, patent, rights' colour
composition of goods, chemical composition, packaging, advertising, incentive schemes' or
different facilities and senices offercd to the consumers.
Thus, imperfect competition can be of various t)?es as follows:
(l
)
Monopolistic Competition
(2) Oligopoly
(3) Duopoly
(T) MONOPOLISTIC COMPETITION:
As a matter of fact, monopolistic competition is a mid-way btween
pedect
competition and monopoly. Under perfect comptition the number ofsellers is very large and
unlimited and under monopoly there is only single seller of lhe produc! v'hile under
monopolistic competition the numbr of sellers is relatively Iimited Some main definitions of
monopolistic competition are as follows:
PaSe
|
44
fl
According to J.s. Bain,
"Monopolistic competition
is a market structure lbund in the
industry where there are large number of smali sellers, setting aifferentiai"a
Uut ctose
substitute
Froducts."
.
According
to Lim chungyoh,
"Monopolistic competition is a market situation where
there are many producers
but each offers a slightly dilferentiated product.,,
(1) Large number of lirrrls:
There is a large number of firms or sellers operating under monopolistic
competition
but a relatively
small fraction ofthe total market is shared by each firm or seller-
(2) Product dilferentiatiotr:
The seoond distinct feature of monopolistio
compotitive
market shucture is product
dilferentiation.
The number of firms is large but their producs
aiff". f.o_ il" urotfr". in
colours, shape and size, brand, chemical
.
composftio;, qruf;ty,
tua"
^*f.,
packaging,
dur-ability
etc. For example, firms pmduce
different tnas oitattri"g.*p
".g.
;*r"., L*,
Lifebloy.
Rexona, Liril. Dove, Canga,
pears,
Le Sancy etc. Uut
"*".JpJiuJ.
ur"
"tor"
substitutes.
(3) I'reedom
ofentry and exit:
.
-Under
monopolistic
competitio!
the firms are relatively free to enter the industry and
to exit ftom the industry,
but they have no absolute freedom
ofenrry tf," inar"f.
N"* no..
are free to enter into the market with new brands as close substitute
ir""
",Cr"r*
Uara".
(4) Notr-price
competiaion:
., .
Und:, monopolistic
competition
fiIms compete with one another without changing
the price
of their producrs.
The firms attract the potential
buye.s by offering-tfrem gifts,
incentives,
credit schemes,
selring schemes and other services. Thus, th" ir.rni
"o.po"
u,
other than price front,
(5) Price poticy:
Every_ firm has its own price policy.
As under monopoly and monopolistic
competition
the average revenue
curye and marginal *u"nr"
"o.""
u*
"tofing'ao*n*a.a
il:iL,U,,J"
t- wi have ro fix row price for futfilting.a",.*iri*ioi*i
r,igr, p.i."
(6)
Le$r Mobirig:
..
There is_no perfect
mobility
of factors
of production
and of goods
and services in
practical
life. The factors are less mohile
because of psychologi""f
i"".-.'"ri
ai.p".lty
among
th
r
regions.
(7)
No perfect
knowledge:
Under ronopolistic
competition
the buyers and sellers do not have perfect
knowledge
about the marke. conditions.
The buvers and sellers ofthe products
and owners
ofthe Actors
of production
are lgnorant
about the prices
ofthe products
and factor services.
Page
|
45
a
(8) Selling Costs:
Under monopolistic competition each firm wants to promote ihe sales of its products
by incuning selling costs, The expenditue incurrcd on adve ismed and publicity to
increase sales is called selling costs. The selling costs shift the demand for a firm's product
and the rival firms also retaliate by incuning moie and more selling costs.
(9) Close Substitutes:
Under monopolistic competitions the
Foduct
are not homogeneous products but they
are close substitutes to each other which tends to create competition among the firms
regarding their products.
(10) Group f,quilibriumr
Under monopolistic comptition the industry is not said to be in equilibrium but there
is a position of grcup equilibrium for the group as whole e.g. soap manufacturing group
combine a group of soap manufacturcrs and that group itself needs to b in equilibrium
position. Grcup denotes the collection offirms producing unidentical but close substitutes.
(2) OLTGOPOLY:
An oligopoly is a market sttucture in whioh drcrc are a few slllcrs ofa product sclling
identical or dillerentiated products. If thcy are sellirg idcntical products, it is o case of pure
oligopoly and if they are selling differentiated products, it is a case of differentiated
oligopoly. ln this case each firm has to take into account the price being charged by the
others. One studies the reaction curves of the othq firms and in this way the firms are
interdependent. They may even oharge high price if they enter into agreement and there is no
pricing policy under oligopoly because ofthe kinky shape ofdemand curve which is a broken
one.
Thus, price rigidity and price war are the common features ofoligopoly. The various
features ofoligopoly are discussed as follows:
(1) Relatively small number ofsellers:
There are relatively small number of sellers under oligopoly market structure selling
identical or dillerentiated products. Each seller controls a large part of the dmand and the
policies ofevery seller influence the price and output ofthe industry as a whole.
(2) Interdependence ofthe Iirmsi
Under the oligopoly market structure all the firms are sailing in the same boat and
every tilting position influences each of the firm as well with equal proportion. No finn can
be neuhal. They depend on each otherwhile determining the price and output ofthe firm.
(3) Price rigidity and price rvar:
Price rigidity and price was are the common features ofan oligopoly market structute.
Each firm retaliates and acts according to the actions ofthe o$er Iirms and a tug oflv.r starts
betwien them which is better known as'Price War'which further paves way to
Price
rigidity.
PaBe
I
45
e
(4) Dilficutty
iu etrtry and exit:
,
Under oligopoly
the entry and exit ofthe fims is banned, The new firms cannot enter
the ma*er as the otd firms have comotete
hold o"". rh" .;.k;;;;riii,"""'*o
*" urr,
"*
also reluctanl
to leave because ofthe huge investment
made bv them-
(5) Selling
costs:
Under oligopoly
market
skucfure,
each firm pursues
an aggaessive and defensive
marketing
strategy to control the market.
Advertis"."n
i, an i.p"i"'ri
^",f,a
*"a ty ,fr"
oligopolists
to coatrol the bigger part
ofthe ma*et.
(6)
Indeterminateness
ofthe demand
ctrrye:
Under oligopoly
market structure
the shape of the demand curve is broken and is
indeterminate
because the lirms cannot assume
that the rival lirms will not make a change in
their pdce poticy in_rcsponsc
to ohange in price
aff."t"d
by tt. ii;", ;" i"i',i)irr,"
."u"rion
pattem
of the rivat firms are indetermiiate
l*r". th" l";;J;;;]i
a'lnoeterminate
position.
(7)
Complex
Market Structure:
_*_
-r*
ITO:,.l.cture
of oligopoly is quite
complex.
As there is a possibitity
of rival
llms !o end rivalry by working
out some policy
of collusion ura th"
"i
u.i* olgopoty
manifests itself in the form of combination
of rivat n*. to n* tl" surn"
J""
*O uOo.n."
in output as in case of cartols. sesia"" it, non_.uilu;i;;
;,,;"*,r;'il';;la
io p."t""
which presents
a complex
market structur.
(3) DUOPOLY:
When there are only two firms in a market having complte hold over the supply of
the product
it is te.med as a case of duopory.
It is suoh a market structure when two lirms
produce
a standardised
pioduct
or produce
two products
which are very much simirar to each
oJher and price of borh the produus
is also uniro.rn. una".
"u"i
.J.t"ilult'rr.rn
,* ,o
think over the possible
impact
on rhe rival firm of its p.ic p"fi"ia'ii"*-ri
oro,
*a
production
techniques.
Both lhe tirms try to maximize
the profits
of eactr other ana Uy pacts
and collusion they rry to come in monopoly pow",
.it
"tio,
orJ
"rptit
J"
";;;;".".
19) Detail the time elemeEts in the determination
ofvslue/pricc. (Nov/Dec
2013)
Importatrce
of Time element in
price
Determination:
Marshall was th first economist
to introduce
the importance
of time element in price
theory. The time period
is involved ro make changes in the size and;le-oii;e p.oduct.
Also.time-is
involved
in the pricing
of perishable
g"oa.
"ra
ar*Uf" g*a".'n"."fo."
Manhall classified the pricing
ofproducts
into fou, ti.-e p"rioa..
fi;r;;;,
**-
l. Market period
or very short period
2. Short period
Page
|
47
o
3. I-ong period
4. Secular period
1. Market Period Price
It is a very short period price. It refers to one day or a few days or weeks in which the
supply of a oommodity cannot be increased. Supply is fixed in market period. The market
price isdetermined by the forces of demand and supply in the ma.ket at a given time. The
perishable goods such as fish. Milk cannot be stored for a long time. The whole product has
to he sunplied to the ma*at. The supply eurve is perfectly elastic or a vertical shaight line.
nB Zl9. D..annndion E
Dto'kd P'fud hki
In the above ligure, MPS rcfers to the market pedod supply curve of a perishable
commodity. The curve is perfecdy elastic. DD is the demand curve. DD intersects the MPS at
E and OP is the market price. Any change in DD to Dr Dr or Du Dr will change the prioe, if
demand increases the new demand curve Dr Dr intersects the MPS at Er. The
P.ice
rises to
OPr. Similarly when demand falls.to D2D2 the new demand curve interseols MPS at E2 and
the market price falls to OP2. Thus change in demand ptoduces changes in price as the supply
is fixed in the market poriod.
2. Short Priod Price
Ft.21 Daenlaatbn of Shod
Nrbd
,rb.
ruufw
o
The short period price
is determined
by both demand and supply facror.
Short period
::l::
r"
"
ft:..:r,hs
in which
supply can be changed
according
to dcmand.
The variable
Tactors
are utilised
more in order to in,
lsrrnn ee.ioa s,pf ry I;;,,;,:rffi:T;ffi,lJl,#H: j
trlll"TJl,l1"#,i..i',i
the intersection
of SpS curve wirh the I
and at oM output.
,"*."
i"t.",."?.;1J'J,":
;:"":T[H".*T;ilffiI.H
increases
to Opr When the demand
falts toD2D2
rhe supply ai* f"irc a blZi_o ,r," p.i*
falh to oP2 Thus suppry is more Important
In the short period
and suppry can be increased
or
decreased
by changing
lhe variable
factors.
3. Irng Period orNontr.l
price
-.
Long period
is o[ many years
and suppry can be Ir ry changed accoiding
to dem-d.
The.fixed
facrors
are changed.
New firms wiri .** rr," i"a,ioo,lfi.
,"ili'i'o*,jiu",io,
urro
can be changed. Long period
price is also kno*,
u, no_ut p.i"".
lon;;;;;H;
a
determined
by the equilibrium
ofdemand
and supply.
I fb.22l.D.t oln4'iott of t-ong Poiod
prL.
. _^ .
In the above figure, market price,
short period price
and long period prices
are shown.
MPS is the marker period
supprv curve._spS
short period
,.00,,
"',rl*"
*iia,
",r,"
r"",
period
supply curve. The DD curve intersectsti"
Irps
'",rrv"-
"i-
g
'inl
6"
,r""
*
letelnined.
when
the demand rises to DrDr the market price
rises to op3. In the short run
Supply increases
and rhe increased sunnty
wilt Urng ao*n tt" pri""
i" Oai. i, ,f," a"*.r,
funher the supply is increased
and price
is further brought down to Opt.
4. Secular Period
price
According
to Marshall
Secular neriod
consists
ofmore than ten years.
The changes
taking place
fully both in demahd and supply.
Changes
occur due to changes in population,
mw materials
and techniques
ofproduction.
The secuiar period price
i""r"fr."O
Ui,"^f,"ff.
Thus the above amlysis
brings ont the importance
oftime element in the price theory.
Pf'l+r
a
The demand and supply depending on the time period influence the price' Shorter the time
period, higher the influence of demand; longer the time period, greater will be the influence
of supply on the determination of price of the commodities. Thus Marshall brings out the
impoftance of lime in the price determination
20) Compare the trormal pdce anal market pnce under
Perfect
competition'
(Nov/Dec
20lJ)
Long period price is called normal price. The ma*et period p ce when the supply is
fixed is called market price. Long period price differs from the market price in the following
respects.
l. Market price is the price, that exists in the market period as a result of market
equilibrium of demand and supply. Normallt p ce is the price, that tends to prelail
in the loag period as a result ofequilibrium of long period demand and supply'
2. Market price is influenced more by demand bcause the supply is fixed' But normal
price is influenced more by supply that is the cost of production'
3. Market price is a temporary price and it is influenced by temporary or p'tssing evetrts'
It may chtuige lnany times a day or o week. But the nomal price is the result of
peftnanent changes in demand and supply.
4. Markt prirc I ay clEngc continuously. But the normol pdce is more stable'
5. Mqrket price oan be above or below the avemge cost ofptoduction' But normal price
is always equal to the long period aveEge cost at the minimum point'
6. Market price is the real price. It is the pdce that really exists in the market' But
normal price is an imaginary or hypothetical price.
7. All commodities will have market price. But \rcproducible commodities only have
omal price. For example, a painting done by Tagorc cannot havo a nomal p ce,
because it cannot be reproduced.
8. Normal price is the standald price round which the market price oscillates'
2l) What is Engel Curve? Draw the Engel Curves for necessi8' luxury a[d inferior
good. (Nov/Dec 2012)
The Engel Curve
. Definition: Curve plotting Expenditure on Cood X (which is the same as the
Quantity
ofx times a constant price) veEus Income.
.
a
general refernce to the line which shows the relationship between various
quantities ofa good a consumer is williog to purchase at varying income levels'
a
Page
|
50
'
"Engel's Law,, (associated
with Ernst Engel, a
[19dr
century]
Germatr statisticiaD)
With rising incomes,
the share of expenditures
for food (and,
by extension, other)
ploducts
decli.es (=
Enget found,
based on surveys .f f"_ili;.,';;;;.;;
expenature
lattems,
that the income elasticity
ofdemand for food was relatively foJl.'n," ."ruftirg
.f,in
in expnditurcs
affects demand pattems
and emplolmenr
shucturesl
Brg"L i; a*" NoT
suggest that the consumption
of food products
remains
unchanged as ir"rrJin"."u."rr
rt
suggests
that consume.s inqease
their exF,enditures
for food prju"t"
1io
Z i"-rrng f".s tfrun
their inoreases in incomel
An economic
theory introduced
in 1857 by Emst Engel, a German statistician,
stating that
the percentage
of income allocated
for food purchasJs
d"c."us""
a. in"o-ni''.ir"".
a" u
household's
incomc increascs,
the pEnuentage
of income spent on tbod decreases while the
proportion
spent oo other goods (such
as luxury goods)
increases,
--^lo-1"Y0'",
a famiry that spends 250lo of their income
on food at an income lever of
$5Q000 will spend
$12,500 on food. Ifrheir
in"o." in"..u"., ,o-ii*,il0,
,i ," r",,,uo,
*:::I^:l1l
spend
$2s,000 (25olo)
on food, but wil spend
"
r"rr".
".*""e"
*n,,"
r0creastng
spending in olher arcas.
Etrgel Curve for atr Lurury Good:
*Hlf *
.._ |
lluv
s*a
is a spcific type ofnormal good
and is sometimes classified
differently.
It is a good that behaves like
p",nntog"
or torui in"*,","
;;;;;;;::illj f#,}}l,?,::ff;Il"j,;1,*;*".
includejewelry,
lashionable
clothin&
and tine alcohols.
Inferior
Goods
.
Definition:
As income rises, consumers purohase
less ofan inferior good
Below we have the I.E.p, for an inferior good,
arong with the standard
indilrerence
curves
and budget lines.
Page
|
51
I
ad
Good x
A$sume a pdcc of$l for good X. Note the ncgative stope ofthe curve, a characteristic ofan
infrior good. Exarnples include used carg Ramen noodlcs' aad bus fare.
s
P.8r
|
52
3
22) Explain
how supply and demand
delermine_lhe
equilibrium price,
What happeDs
if tbe supply
curve shifls to ahe lefl? (May/June
Z{IJ)
Price is derived
by the inreraction
ofsuppry
and demund.
The resur,unr
market price
is dependent
upon borh ofthese fundamenral
co.i"i,*"
"1"
,*.1"i. * .rii_*i"rg."a.
* services
will occur whenever
buvers and
."tt.o."u,
ugr..
il.i.p.i"".
wili".-
*",r*g. occurs.
lhe agreed
upon price
is caued Lhe
,,e_quitibrium
;rico;:
o;;:Lr*t?i'iil#rg
pA*,
. r nrs can be graphically
illushated
as follows: ( Figure
J)
-. -
...-^..
-,!d
r
d$nrD Prhc
4h
I
J.
5;t',;,tlti,-fii',."dei#{,;ifi[t*T*:'1l",:rl,
:trt,..s:
il fi,#i; consumers
would be anxious to acouiri product
the producer
is,**ifii.rf
io.*prly ,"rultlng rn.a product
shotage.
ln order ro rarionihe
sr,"*gi
""^r..^l"riiiLi""",#"y
"
nigr,* pnce
m ofthr ro ger rhe producl
rhev wanr:
*r,ir" p-.a*."
*oura
a".#j"",iiin*
p.i*
i,
il'"T"':,il1f#T#ffi*"
"*i#-!'"1
In.
",4
*",rt i,
".i*i"'ii"J.',T,r,"
p"i",
p,
p.'r,",*i."',,,o,rJ
ii;;il,;:,H"*,':ht:jffi
".;i;:T,rdJ::[:::H:,1:Jf
;,i:[ have to lower their prices
in order to cl,
be induced
;y ;;; ffi;;;;;;:;,ffiI
[:,fi.]:if"::.ffi;,fr
iit,i;li,iffi,]"Ij
c,emafid
are again in equilibrium
at poinr
p.
A markel price
is nol a fair nrhe
to all parlicipants
in $e marketplace.
lt does not guarantee
total satisfaction
on lhe oan of borh.buyer
and seller or all buyJrs and all sellers. lhis will depend
on rheir individual
competitire'positions
*irf,i, ,i"- ,i*1"?,irr"^
,riff atlempr to maximize rheir individual *"tt
u.ing *itt in
""rlui,
""rp"ir,,*
llr.L,r".
t* low-l price will result in excess profits
for the buyer anmcting
competition.
Likewise
sellers are atso considered
ro be profir
maximiTe*
r*j,iet
"
p.i";iriiiiii"*'i"*."-,r,lli
"00,,i.""r
producer
comperirion
wirhin rhe marker.
n
"..ro.J.
,r,J."-*irr""_iiiiiii"Ii]i.Jr*
r"*r,
where individuat
buyers and selers ,*
.utirn"a
uro rt
"
sr;';J;ii;i'ill,;
I market
or equilibrium price.
Page
I 53
t90
I
too
AtMg
-
When either demand or supply changes, the equilibrium price will change. For
example, good weather nomally increases tho supply of grains and oilseeds, with more
product being made available over a mnge of pdces. With no inqease in the quantity of
product demanded, there will be movement along the demand curve to a new equilibdum
price in order to clear the excess supplies offthe market. Consumers will buy more but only
at a lower price. This can be illustrated g.aphically as follows: (see Figure 4.)
Likewise a shift in demand due to chatrging consumet pteferences will also influence
the market price. In recent years there has been a shift in dema[d on the part of overseas
Canadian wheat buyers toward the Canada Prairie Spring varieties, away from tho Hatd Red
Spring varieties. A decline in the preference for Hard Red Spring wheat shifts the demand
curve inward, to the left, as illushated in figure 5.
flgitt , $ift ln D..rmd
I
t
Sdsnttg
*
With no reduction in supply, the effect on price rcsults from a movement along the
supply curve to & lower equilibrium price where supply and demand is onc again in balance.
ln order for prices to increase producers will have to reduce the quantity of hard red spring
-
Prr.
I 5a
wheat
broughl
to the market
Dlace or
"ho
*irhd,;;
i;; ;;;il$H"L:,,:
fi
Hi,fi?[i.:,T::l ;"#fl
,1"":SX;:.,.""
Changes
in supply and demand
can be short run or long run in nature.
Wealler
tends
[J::1igTflf,#,;:ij;ilfl
?;J
*. .r,o,.r
',o.
o,ung"; in1o^,,i,"irlr"..n".,
"-
"*.pr"
*r,.tr'.i
tr,{
; il:;;: ;;':::^":^prics
dependins
upon the
soods
or services,
for
in demand
due to chin;fu
.,il;ilffT;XI,i#iJ#::#.1?J?ini:i"Ji[T
t{:
ff:1"{*"11.GH"#::Jtfl
s3t"';il::*il:"fi;i,Jfl
m:kl;tytl,,:"j,r
costs
ot producrion
on a per
unir basis.
Ar the ."
"
,i.l,.ti,",i'a",,li,IraJJ.
no, ,r"..ur"
Hi"H;
; iltiTil::
;[:"j'_ifiods.produced
"
r"*"i'"",i..
li"'ilni'in
i.pu",
or
con-pled
;ilh
".r"**
r.;:"* a".-"j-to-lower
prices
.The
rapidly
shiftiig
supply curve
agricurturar
ourput wh.;;r"",ii,lirlJ#i
iil,ijJ,:f;[o",T['outed
to ro=wer prices
ror
23) Ertumerate
lhe causes ofcharges
in supply. (Nov/Dec
2013)
Cha[ges
in Demand
catr be caused
bv:
l) Change ib prica
ofa compliment good
2) Change
in price
for substitutes
3) change in income...for
normar goods,
a change will cause an inorease in demand
4) Change in the number
ofconsumers
5) Change in information /technology
Chanses
ip Suoply
car be caused
by:
I
)
Change in input costs (labor/natu.al
resourceyeto.)
2) Change
in rchnology
3) Change
in number
ofsupplies
-^*,
,l"n
,.,""
:Enges.
quanrity
supplied
will change. That is a movement
along rhe
same suppty curve. when faoors
orher rhan price
changJs,
st pptf
cu;;;;l
.#;"."
"*
some determinants
ofthe supply curve.
Page
I
55
e
o
1. Productiotr
cost:
Since most
privatc compaties'
goal is profit maximizatioo'
't{"1
ry-:gt
*'
,riff fo*"r
p.oi,t, thu" hina"r suppty'
Factors affectitrg
production cost atE: input
pnces' wage
rate, government regulation
and taxes' etc'
2. Technolos/:
Technological
improvements
help rcduce
production cost ard inqosE
profit' lbus
stiflulate
higher suPPlY .
3. Number
of sllersl
Moie sollers in the m6rket
iicrase thc market supply'
4. Erpect.tiotr
for future
Prics:
lf
Eoducers
expeDt futurc price m be higher' they will try to hold on to their inveDtories
6rd
"d,
,ft" ,-ar"o
a,fte buyers in dre future' thus they cao capture the higber
price'
Pt
|s5