The Law of Demand explains the relationship between the price of Quantity demanded of a commodity assuming other factors affecting the demand to be constant.
Price and demand move in the opposite direction. In other words , when the price of a commodity rises, demand falls , and when price falls , demand rises provide factors other than the price remain unchanged.
According to Prof. Marshall , "The amount demanded increases with the fall in price and diminishes with the rise in price".
In our daily life we come across certain situations where more of commodity is purchased with rise in price and less of it with the fall in prices. This indicates that the law of demand is not operating. Such situation is called on exception of law of demand. Following are the certain examples where the law does not works.
Necessities: The law of demand is not seen operating in case of necessities of life such as food grain, salt, milk for children etc . A minimum quantity of these goods has to be bought whether the prices are high or low.
Emergency: In time of emergency like flood, war, the households do not behave in a normal way and consequently low of demand may not operate.
Goods of ostentation: status symbol goods are purchased not because of there value but because of the prestige value.
Inferior goods and griffin goods:
The goods whose demand falls with the fall in price are called griffin goods. Griffin goods are those inferior goods whose price effect is positive (i.e. when price falls , demand also falls) and income effect is negative ( i.e. when income rises demand falls).
In case of inferior goods when the income increases, the demand decreases i.e. there is a inverse relationship between price and demand. And in case of griffin goods there is inverse relation between income and demand and positive relationship between price and demand. Thus , all griffin goods are inferior but inferior goods are not griffin goods. For instance take an example:
{a} If price of inferior food grain like 'JOWAR' falls in India , people may demand less of it and instead start eating wheat or rice(Superior food grain) . Here JOWAR is a Griffin good whose fall in demand due to negative income effect is more than the rise in demand due to substitution effect.
{b} A rise in price of commodity , say coffee ,also means that price of its substitute , say tea , has fallen in relation to that of coffee even though price of tea remain unchanged . As a result , if people buy more of tea and less of coffee , it will be a case of substitute effect since coffee has been substituted by tea. This explains why a commodity (here coffee) is demanded less when its price goes up. The effect operates reverse when price of the commodity falls. Thus , when the price of good falls , the good becomes cheaper and more price attractive.
Simply, the change in demand due to change in relative prices is called substitute effect. The change due to change in purchasing power is called in income effect.
Q 2. When there is only one spring catering to the drinking water requirement of a village in a remote area. This spring happens to be under control of one individual or we can say under Monopoly.
Meaning of Monopoly : Monopoly is a market situation in which a product that does not have close substitute is being produced and sold by a single seller. "mono" literally means one, "poly" implies seller and so "monopoly" means single seller .
Main features of monopoly :
Single seller - there is only one producer of a commodity . as a result the monopoly firm has full control over the supply of commodity .a monopolist may be a individual , a firm or a group of firms or a govt. corporation or even govt. itself. Monopoly firm itself is a price maker and do not price taker.
Difficult entry of a new firm- the monopolist controls the situation in such a way that it becomes very difficult for a new firm to enter the monopoly market and compete with the monopolist by producing the homogeneous or identical product. A monopoly firm earns abnormal profits in the long run due to blocked entry for a new firm.
Price discrimination- unlike price at which a product is sold in perfect competition , a monopolist can charge different prices for his product from different person and in different market areas. In other words , price discrimination takes place in monopoly.
Absence of close substitute- The product sold by the monopolist has no close substitute. Though, as a result , the consumer will have to buy the commodity from monopolist or go without it altogether. In other words a monopolist doer not face competition.
Total Revenue ,Average Revenue , Marginal Revenue under monopoly
TR increase when MR is positive , decreases when MR is negative and becomes maximum when MR is Zero.
MR decreases with an increase in output because more of product can be sold by reducing its price . In the beginning , MR is positive and after a certain level of output, MR becomes negative.
TR increases with output initially & then it decrease. Thus , graphically TR curve rises initially & then falls . As a result , TR curve is inversely U -Shaped.
AR curve is downward sloping which means more can be sold at lower price.
MR<AR and therefore ,MR curve lies below AR curve.
TR curve is inverse U-shaped because TR increases in the beginning & decreases with output.
Output
Price(Rs.)
TR(Rs.)
AR(Rs.)
MR(Rs.)
1
20
20
20
20
2
18
36
18
16
3
16
48
16
12
4
14
56
14
8
5
12
60
12
4
6
10
60
10
0
7
8
56
8
-4
8
6
48
6
-8
Conditions of equilibrium in monopoly
The necessary condition of equilibrium is the equality of marginal cost and marginal revenue. Therefore equilibrium of a firm is established at point where MC=MR.
However , the following points should be noted with regard to short and long run equilibrium
In short run period monopoly firm can also sustain losses.
In long run a monopoly firm can have abnormal loses.
Q.3 Latest Changes in the economies of different countries:
United states of America: - The great recession of 2008-2009 has battered America's families .The rate of unemployment was more than double since the start of recession, topping 10%- the highest level in over a quarter of a century. In addition, families capacity to a century. In addition, families capacity to whether economic downturns has been saving and assets have eroded due to simultaneous collapses in the housing and stock markets and tightening of consumer credit.
Even though the economy started growing again in the 2nd half of 2009 , most forecasters expect that it will take years for unemployment & family incomes to return to their pre - recession level.
President Barak Obama has often remarked that great recession is the greatest economic crisis.
The methods used by America to fight the recession:- to fight this recession the govt. used both fiscal and monetary policies merchanism. First of all the u.s. Congress passed in October act of 2008 which adopted the troubled asset relief program(TARP) . This program gave rights to the U.S treasury to buy mortgage & some other financial instruments for the amount of 700 billion dollars. But TRAP has not been able to recover lending activities of banks which have received monies from federal govt.
After that in feb. of 2009 the american recovery and reinvestment act was passed. According to this act 787 billion dollars should be spent to help economy to get out of the crisis, including health care, unumployment etc. The stimules package was intend to create jobs and promote the investment and consumer spending during recession.
Two year after the Recovery act was implemented we can observe some positive conseqenses its stimulus package.
GDP was not falling.
The rate of unemloyment dropped in dec. 2010 compare with dac.2009 from 10% to 9%.
The extention of the terms of unemployment benefits payment upto 99 weeks helps to support families of almost 15 million americans who lost their jobs as a result of recession.
Economy of India: The economy of India is the 11th in the world by nominal GDP and the third largest by purchasing power parity (PPP). On a per capita income basis, India ranked 140th by nominal GDP and 129th GDP (PPP).
After the independence Indian economy was inspired by the Soviet model of economic development, with a large public sector, high import duties combined with interventionist policies, leading to massive inefficiencies and widespread corruption. However, later on India adopted free market principles and liberalized its economy to international trade.
India recorded the highest growth rates in the mid of 2000s, and is one of the fastest-growing economies in the world. India has recorded a growth of over 200 times in per capita income in a period from 1947 (Rs 249.6) to 2011. The growth was led primarily due to a huge increase in the size of the middle class consumer, a large labour force, growth in the manufacturing sector due to rising education levels and engineering skills. India is the nineteenth largest exporter and tenth largest importer in the world. Economic growth rate stood at around 6.5% for the 2011-12 fiscal year.
Economy of China:- China had one of the worlds largest and most advanced economies prior to the 19th century. While national product per capita income remained average in global terms.
Economic reforms introducing capitalist market principles in 1978 and were carried out in two stages. The 1st stage in the late 1970's of agriculture. The 2nd stage of reform , in the late 1980s and a990s, involved the privatization and contracting out of much state-owned industry and lifting of price control, policies and regulations, although state monopolist in sector such as banking and petroleum remained.
The private sector grew remarkably , accounting for as 70% of China GDP by 2005, a figure larger in comparision to many western nations from 1978 to 2010, unpredented growth occurred with the economy increases by 9.5% a year .China's economy became the 2nd largest after the united states.
The success of China's economy policies and the manner of their implementation has resulted in immense change in Chinese society.
For 2010 china was ranked 140th among 179 countries in economy freedom index of would ranking , which is an improvement from preceding years.
