OIJNI1U DEMAND4NLSCEEIXJLE

Pad=A1.lYhat is the meaning ofDemand?

Demand is a desire to buy, a deoision to buy, supported by adequate purchasingpower, A more desirc to purchase an),thing without being backed by purchasing power willnot 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 boughtper 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 offeredin order that it may find purchasers; or in other words, the arnount demanded increases with afall 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 us€s and

6. Entry ofnew consumers

6. What is Veblen EIIect?

Some p€ople 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.

Sup€rior 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 betweenincome rise and its resultant d€mand rise is known as income demand.

Paee | 2

o9. 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.,, _ Manhallll. 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 aochange 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 thatmoney 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.

i

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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 aff€cts another.

24. What is Oligopoly?

Oligopoly occurs in markets where ther€ are a few sellers'

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C25. 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 produc€rs

2 No difference botween mongpoly firm and

industry.There are many firms and ildustriesare 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 -Two2. Product - Similar ofproduct differentiation

3. Pric€ - Similar or Different

4. Entry - Not r€stricted 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 ofcoffee 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 ofmoney inoome, but also pr€vailing prices in the

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oParLn

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 amountdemanded 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 pricefalls, 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 thingsare 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 develop€d 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 demandcurve. The demand schedulers pres€nted in Table 2.1. lt will be seen from this demandschedule that when price ofa commodity is Rs. 5 per unit, consumer pfichases 2 units ofthecommodity. When the price of the commodity falls to Rs. 4, he purchases 3 units ofthecommodity. Similarly, when price further Alls, quantity demanded by him goes on risinguntil at price Rs. l, the quantity demanded by him rises to 9 units. We cai convert thisdemand schedule into a demand curve by gmphically plotting the various price _ quantitycombinations and this has been done in Fig.2.1

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v ,$r , , ns. zr-

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 getpoint 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 plotpoint B. Similarly, points C, E and F are plotted. Byjoining these various points, A, B, C, Eand F, we get a curve DD, which is known as the demand curve. Thus demand curve is agraphic 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 ademand 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 ofa commodity falls: more quantity ofit will be purchased ordemanded.

/ Since more commodity is demanded at a lower price and less is demanded at a higherprice, the demand curve slopes downwa.d to the right.

i

o 2 r.a 6 A

h,lr

oy' 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

pr€stige 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.

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(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 alsoincreases. For example, when French Intimate Scent Company advertised ,Intimate Scentis 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-ptionand 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, inshares 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 pricein 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 ofdemandstate the relationship between price and qMntity demanded by assuming Ceteros paioo usthat is other things remaining the same.

When there is a change in other things, the whole demand schedule or demand cu eundergoes a change. If other things or the determinance of demand changg the wholedemand schedule or the demand curve will change. The following are rhe ?actors wtrlchdetermine demand for goods.

l. Income of the Consumer

r' The size ofthe income ofa consumer is a powerful factor in determining the level ofdemand for a commodity.

r' 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.

r' When the income of the people fall, they would demand less of the goods and as aresult the demand curve will shifi be low.

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o2. Taste Preferences atrd Fashions ofthe Consumers

y' People's tastes preferences and fashions do not remain oonstarnt over a period oftime.

/ 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.

/ Thereforo, when the pric€s 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 isshown 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 complementarygood 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 orS,rsa

Ouarriy Demanded ofS"Sr.

.Fl& 2.t. Lfit orn shyl ,'tlh. demdad c,t E oJsrtor d4. lo .it. in

p.icc ollr.o

Frg- 2.6. ktghrwar', shlfi inthe danond cury. of

sugor d,.. loJdu in prlccof 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 willidcrease the demand for petrol. Cars and petrol are complementary wt,h ;; ;;;.

5. The number ofconsumeas in the marketr' The market demand for a good is obtained by adding up the individual demands oflhepresent as well as prospective consurners or buyers of a good at various possiUleprices.

'/ 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 Ulftncrease.

6. Consumer's Expectations

r' Anothea factor which influences the demand for good is consumer,s expectation aboutthe future.

" Ifa person expects a significant increase in his income next month oa next year, hewould 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 theytake into account not only their cu.rent income b-ut also *fr" ir"orn"',n"ri")(o*, aearn its future.

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o7. 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 societyas a whole will be relatively high which means greeter demands for goods.

/ lfdistribution of income is morc unequal, rhen the Fopensity to consume the societywill be relatively less for the propensity to consu&e the rich people is less than that ofthe poor people.

4) Explain demand funclirrn and demand curve,

Individual's demand for a commodity dep€nds on the own price of a commodity, hisincome prices of related commodities (which may be either substitutes or complements) histastes and preferences. Individual demand for a commodity can be expressed mathematicallyin the following general functional form.

Qa: f(Pa I, r.,T,A) ... (1)

& : Own price of the coolmodity XI : Income ofthe individualPr : Prices ofrelated comrnoditiesT : Tastes and preferences ofthe individual consurnerA : Advertising expenditure made by the producers of

the commodity,

ln economics, it is us€fu| to focus on the relationship between quantity demanded ofagood and its own price, while keeping other determining facton such as income, prices ofothor goods, tastes ard preferences constanl

We can write the demand function ofan individual in the following way.

Qa=(PJ-(2)'/ It implies that quantity demanded of a good X is function of its own price, other

determinanls remaining constant.

r' When fiere is a change in the other determining factoN r hich are held constant suchas income, tastes, prices ofrelated commodities, the whole demand curve will shift. Ifincome increases, the whole demand curve will shift to the right and on the conhary ifincome decreases, the whole demand cuve shifts to tle left. Similarly, ohanges inother determining factors such as tastes, prices of related comrnoditie;, ua"*iringcause 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 ofthe demand function. Generally, demand function is co sidered to be of a linear lbrm. Thespecific 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 theslope 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 demandedto 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 achange 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 demandedatlributable 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 smallaccording 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 theresponsiveness 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. | 14

o. , 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 D€mand for commodity X

6) Elplair the classilicetion (lypes) of price elasticity' (Miy[uDe 2013)

l. Perf€ctly Etastic Demand or Infinite Elasticity of D€mand (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)

Itr€ferstoinfmitecharg€sin&r*andforaverysmallchatrgeinpricelnFig'27'DDrefers to perfectly elastic domaed clrve. It is a stralght line padllet to X-axis' When a small

"in ,g" ii p.io" ** an iifinite iicr€as€ in the quantity demanded' th€n 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.

xo

Ctrlantty Oemanoca

89.2E, Perfcaty Incfasie Denaad

ln Fig.2.8, DD is the perfectly inelastic demand cuve. Demand does lrot change forchanges in price fiom OP to OPr, OPz, etc. The demand curve DD remains a vertical staightline, 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 ofafall 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 r€fers 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:tH- 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 isgeater 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 = zAP 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, thechange 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'sThere 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 ratiobetween 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 ofpercentage responsiveness ofthe demand to given percentage change in price. Many howeverwill be interested in knowing how much such qualitative cases can be given exact numericalmeasurements. There are three methods employed for the measurement of elasticity ofdemand.

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 thequantity demanded resulting from a very small proportionate change in price. The formula isas follows:

k'f lt8

aeP=

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._ aEWeshouldrernernberthatusuallywetaketheo.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-'PBut 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+QrPr =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 ofthe 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 rcvenuemethod. Total outlay means the total arnount spent by a codsumer on the puchase of acommodity._ Total expenditure of a buyer is compared both before ana after'the cfraage inprice. 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 revenueexplained 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." ttranprice change, elasticity ofdemand is greater than unity. Demanj is elastic & > 1

Price in

Rs.

(l)

Quantity

demand in

(2)

Total

outlay inRs.

(3)

Type ofprice

Elasticity

9 20 180

Ed>l8 30 2407 40 2806 s0 300

Ed: I5 60 3004 75 3003 BO .240

Ed< I2 90 t00r00 100

IWhen 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: lWhen 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 p€ople, 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 us€s while some others have rclatively les's number ofuses'

/ Greater the numb€r 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 p€riod

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 pric€s 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 ofpoor, 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 forthem 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 slowlyover 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 th€se 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 d€mand 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 Xe.=

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 ofits 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

c4. IDportarce ir Internatiotral Trade

The concept of elasticity of demand plays a very important role in the intemationaltrade.

(D

(ii)

An idca of the conccpt of elasticity of demand cnables the govemment to fix apropar 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 closely0ssociatad with conccpt of eldstioity of demand. If thc demand is irelastic termswould be in favou. ofthg s€ller.

Rules of iariff are also fix€d taking into account the elasticity of demand of theproducts on which ta.iff are to be levied. Tariffs will be higher if demand isinelastic 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 tois demand in the productivc activity. A factor with an inelastic dcmand can always commanda 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 thecomnodity is inclastic. This spccially occurs when lhe goduct is perishable, A rich harvestmay actually fetch less money than a f,oor crop. In case of stockable goods however demandis less inelastic. A fall in price may lead to increas€d purchascs and hoarding. While decidingthe agricultural income policy, it is imp€rative for the govemment to take a stock of thesituation.

10) What ls the meaning ofsupply? Er?hin.

Supply and demand are the dual forccs which detprmine the price of 8 good in themarkea. As AlfrEd Marshall argued, only whan both an objcct,s scarpity, namely supply andth€ intensity ofwanting it viz., demand are known. It will bc possible to undcrstand how itsprice 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 thequantity ofa good or s€rvice that a seller wish€s to sell on the market at a particular price at aparticular timc. Supply of a good is difTercnt from ils stock. Tle quantity of a good that aseller can bring out to s€ll immediately on demand in his stock. But it should be noted thatthc 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 ofinputs (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 ind€pendent 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 us€d 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

eShifts 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 iothe market. With a rise in price, the amount supplied extends and with a fall m price, theafiount of supply contracts. The changes m price induces extension and contraotion insupply.

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 atanother way at the same price OP2, the amount supplied increases from OM to OMr as thesupply curve shifts from is position SS to SrSt. This is the case ofan increase in supply. Ifthe sarne amount is supplied at a higher price or at the sarne price, a lower amount is offercdfor sale. Supply is said to have decreased. In Fig.2.t3(b), the sarne amount (OMr) is beingo{T€red for sale at the same price OPl, Increase in supply means a shift ofthe supply cuwe tothe 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

farmerswouldnotofferforsalethe€ntircquantityoftheirpresentharvest,iftheyexpectarise 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

e8. State of Technolog/

The volume ofproduction depends upon the state oftechnology that is being used. Ifadvanoed technology is used, then productior iflcrcases. This raises the level of supply ofsuch good.

fl .NoD-Econonic tr'actors

Non-eqromic factors such as war, political changos, lloods, draught and changes inalimate, etc., cause chances -n th. supply of goods. Agriculturc is said to be a gambling mmonsoon in India- If monsoon fails, agdcultural output is affected, leading to a fall in itssupply.

El&rticity ofSrpply

A change in the quontity supplicd in rcsponse to a clBoge ifl thc price is calledelasticity 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 typ€s 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,guantitlsuPPliedohangesinfrnltely 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,itcarlbeseenthatwh€npriceinorcasesby2o/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,LfElasticity 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,niffiQQ' PPl or pp, 3 qq,

bLvu'=fi --2Elasticity ofsupply: 2

HemE supply is said to be elasric (E s > l). This is called r€larively 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,LHence 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-

3Cundif 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 suoDldemand forecasiing. y oflabour and raw material is made possible by6. hoduction planning is possit7.-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, d€grce 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 expect€d 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

aAdvatrtages

l. Forecast can be made quickly and economically

2. This is a reliable method because estimates are made on the basis ofknowledgeand 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 theprobable 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 ofan opinion sample size is orucial to this method, while . " "U

.".fi" *.rfd b€ easilymanaged and less costly.

(l) EDlmeration Survey Method:.

.-^^,-rld:" *tr,a"hnique either consurners are divided in several groups on the basis ofrncome, caste, sex, education or any otha variable or they may b;divided according togeographical .regions. Through appropriately selected sample i*ig; *_pi" ,ri, "*s€lected 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 probabledemard 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 totatdemand 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 finallyconsumable goods is also known as an intemediary good. White fi,e ae.Jfor goods useafor 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 orimported besides being used for domestic production of other goods. Fot example milk is acommodity which can be used as an intermediary good for the production of ICE Cream,pane€r and other dairy products. We can anal)ze end use method with the help offollowingformula:-

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 mostsophisticated econometric method offorecasting. Since it involves complicated mathematicaland statistical tools, its detail discussion is beyond rhe scop€ of this text, Thus thesimultaneous 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 & euantitydemanded are taken on both the axis and demand forecasting is made for future. This methodis completely subjective, as in this method graph is dmwn and on the basis of Oris graphdemand forecasting is made Expansion ofthis graph is completely imaginary & subjective soit can be different for different pe6ons. According to graphical method, the p6st data will beplotted on a graph and the indentified trend/ behaviour will be extended further in the samepattem to asce(ain the demand itr the forccast period. The following diagran sho\,r's the pastdata 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 (dependentvariable) 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 beeffective.

16) Explain the process ofdenrand forecasting.

Process for demand forecastinp dopends on the scope ofdemand forecasting. We maylollow 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 rhedemand 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 beenspecified, 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 rhequality 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 tocompile them and obtain results manually or with the help ofcomputers. These resutts mustbe 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 numb€rs 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) Ar€a: 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 do€s 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 Fr€e 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

rClassifi crtion of Market

(l) Orl the basis ofarea or region:

The economists have classified the market on thc basis of area or region which furthercan 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 localmarket 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 provincelike Rajasthan or Haryana, then it is known as regional or provincial market. The area ofregional market is greater than that of local market e.g. the demand for Red Bangles inRajasthan or the demand for Laharia in Raiasthan.

(iii) NatioDal Market:

When thg buyers and sellers arc not confined to state boundary, but are spreadthroughout the count y e.g., th€ market of sarees aod dhotis o. of Gandhian cap or of Nehrucut jacket etc. have nati,onal market. These are demanded throughout the nation. Hence theycome under lhe purview of national market.

(iv) Internatioml Market:

When the buyers and sellers are spread acrcss the geographical boundary ofa nationand the demand for such product is worldwide or universal demMd then its market is knownas 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 Mark€t or weekly market. Very short

period market is rhat markct which tak€s part in tratlsaction for a very short period of time

say a few hours a day or so. ln very short p€riod 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 increas€d 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 ofproduction.

(iii) Long Period Markeil

It is such a market in which we can makc nec€ssa.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 ilis 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 itis 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, deb€dtues 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.ThefiImsdemandcurvetotheindustrydemandculveisexpectedtodependonsuch 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 sell€rs.

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?

ePERI'TCT COMPETITION:

It is such a market staucture wlle& tlere are large number of buyers aad sellers ofahomoseneous 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 rnanyfirms selling identical product with no firm being rarge enough rerative to the entire marketso as to be able to influence mar*et price,,,

, In.other words a perfectry competitive firm is too smalr and insignificant to affect themarket 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 onefirm is s€lling the product and has full control over rhe sufply of ,fr" p."a,i"i"a. ,rr" *ppfyof 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 nrmarket 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 b€gins 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 amarket. 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 produc€s, there are bar ers to

entry-"

For the smooth functioning ofa monopoly market situation it is nec€ssary 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 b€tween pedect

competition and monopoly. Under perfect comp€tition 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 numb€r of sellers is relatively Iimited Some main definitions of

monopolistic competition are as follows:

PaSe | 44

flAccording to J.s. Bain, "Monopolistic competition is a market structure lbund in theindustry 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 wherethere 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 competitionbut 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 productdilferentiation. The number of firms is large but their producs aiff". f.o_ il" urotfr". incolours, 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 andto 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 changingthe 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 monopolisticcompetition 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 inpractical life. The factors are less mohile because of psychologi""f i"".-.'"ri ai.p".ltyamong th r regions.

(7) No perfect knowledge:

Under ronopolistic competition the buyers and sellers do not have perfect knowledgeabout the marke. conditions. The buvers and sellers ofthe products and owners ofthe Actorsof 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 is€med 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 comp€tition 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 d€mand 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 enterthe 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 defensivemarketing 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 isindeterminate because the lirms cannot assume that the rival lirms will not make a change intheir pdce poticy in_rcsponsc to ohange in price aff."t"d by tt. ii;", ;" i"i',i)irr," ."u"rionpattem of the rivat firms are indetermiiate l*r". th" l";;J;;;]i a'lnoeterminateposition.

(7) Complex Market Structure:

_*_ -r* ITO:,.l.cture of oligopoly is quite complex. As there is a possibitity of rivalllms !o end rivalry by working out some policy of collusion ura th" "i u.i* olgopotymanifests 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 compl€te hold over the supply ofthe product it is te.med as a case of duopory. It is suoh a market structure when two lirmsproduce a standardised pioduct or produce two products which are very much simirar to eachoJher and price of borh the produus is also uniro.rn. una". "u"i

.J.t"ilult'rr.rn ,* ,othink over the possible impact on rhe rival firm of its p.ic€ p"fi"ia'ii"*-ri oro, *aproduction techniques. Both lhe tirms try to maximize the profits of eactr other ana Uy pactsand 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 pricetheory. 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, ifdemand 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 P€riod Price

Ft.21 Daenlaatbn of Shod Nrbd ,rb.

ruufw

oThe 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 variableTactors 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',ithe intersection of SpS curve wirh the Iand at oM output. ,"*." i"t.",."?.;1J'J,": ;:"":T[H".*T;ilffiI.Hincreases 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 ordecreased 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, urrocan be changed. Long period price is also kno*, u, no_ut p.i"". lon;;;;;H; adetermined 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 runSupply 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 changestaking 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 b€cause 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 ofpeftnanent changes in demand and supply.

4. Mark€t 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 refer€nce to the line which shows the relationship between various

quantities ofa good a consumer is williog to purchase at varying income levels'

a

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'

"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,inin exp€nditurcs affects demand pattems and emplolmenr shucturesl Brg"L i; a*" NoTsuggest that the consumption of food products remains unchanged as ir"rrJin"."u."rr rtsuggests that consume.s inqease their exF,enditures for food prju"t" 1io Z i"-rrng f".s tfruntheir inoreases in incomel

An economic theory introduced in 1857 by Emst Engel, a German statistician, stating thatthe percentage of income allocated for food purchasJs d"c."us"" a. in"o-ni''.ir"". a" uhousehold's incomc increascs, the pEnuentage of income spent on tbod decreases while theproportion 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 sp€cific type ofnormal good and is sometimes classifieddifferently. It is a good that behaves likep",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 curvesand budget lines.

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I

ad

Good x

A$sume a pdcc of$l for good X. Note the ncgative stope ofthe curve, a characteristic ofan

inf€rior good. Exarnples include used carg Ramen noodlcs' aad bus fare.

s

P.8r | 52

322) Explain how supply and demand delermine_lhe equilibrium price, What happeDs iftbe supply curve shifls to ahe lefl? (May/June Z{IJ)

Price is derived by the inreraction ofsuppry and demund. The resur,unr market price isdependent 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

IJ.

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 ,"rultlngrn.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,]"Ijc,emafid are again in equilibrium at poinr p.

A markel price is nol a fair nrhe to all parlicipants in $e marketplace. lt does notguarantee 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"^ ,riffatlempr 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 sellersare atso considered ro be profir maximiTe* r*j,iet

" p.i";iriiiiii"*'i"*."-,r,lli

"00,,i.""rproducer 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 orequilibrium 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 ofproduct demanded, there will be movement along the demand curve to a new equilibdumprice 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:;;: ;;':::^":^pric€s

dependins upon the soods or services, forin 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,rcosts 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", orcon-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 demand4) 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 r€chnology

3) Change in number ofsupplies

-^*, ,l"n ,.,"" :Enges.

quanrity supplied will change. That is a movement along rhesame suppty curve. when faoors orher rhan price changJs, st pptf cu;;;;l .#;"." "*some determinants ofthe supply curve.

Page I 55

eo

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 inq€osE profit' lbus

stiflulate higher suPPlY .

3. Number of s€llersl

Moie sollers in the m6rket iicr€ase thc market supply'

4. Erpect.tiotr for future Pric€s:

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