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Law of Demand
Law of Demand
Law of Demand
ANALYSIS
DEMAND DETERMINANTS
PRICE OF COMMODITY INCOME, PREFERENCES PRICE OF RELATED GOODS ADVERTISEMENT CONSUMER EXPECTATIONS
INDIVIDUAL DEMAND
MARKET DEMAND DEMAND FUNCTION DEMAND SCHEDULE
Y
D1
P2
P
P1
ASSUMPTIONS: FACTORS SHOULD REMAIN CONSTANT 1. Tastes, preferences,customs, Habit of buyers. 2. Income of buyers. 3. Price of substitutes-compliments 4. Quality of Product 5. Government Policy 6. Future expected price 7. Arrival of New substitutes in the Market.
SHIFT IN DEMAND
INCREASE IN DEMAND
Y
PRICE
R1
PRICE
X1
P1
D2 D1
D2
D1
O X M1 QUANTITY X
M1
QUANTITY
DECREASE IN DEMAND
P
y D
R1
PRICE
PRICE
M
P1
M1
D1 D2
QUANTITY
DEMAND DISTINCTIONS
PRODUCERS GOODS- CONSUMERS GOODS
ELASTICITY OF DEMAND
TYPES OR KINDS 1. PRICE ELASTICITY OF DEMAND
2. INCOME
ELASTICITY OF DEMAND
% Change in Price
A. ED>1 50%/20% =5/2 B. ED<1 10%/20%=1/2
C. ED=1 20%/20%=1
PRICE
I.
10 8
II.
10 8 10 8
Ed=1
III.
Ed<1
Y
B
ED=1 PRICE
TOTAL OUTLAY
POINT METHOD
EP=Lower Part of the Demand Curve Upper Part of the Demand Curve
Y
S
ED>1
PRICE
ED=1
R
ED<1
X QUANTITY DEMANDED
ARC ELASTICITY
Y
35 33 30 25
PRICE (P) 20 15 10
5
J K
20
40 43
60
75 80
100
108
QUANTITY(Q)
Importance of Price-elasticity
Production Planning, Producers of
Goods/services, Price determination, Public utility, Joint Supply, Super-Markets, FactorPricing, International Trade(export-Import), Taxation Policy, Shifting of Tax-burden.
SUPPLY
SUPPLY ANALYSIS
Assumptions:
Constant Items 1.Number of Firms, The scale of Production, The speed of Production. 2. Techniques of Production. 3. Supply of substitutes. 4. Cost of production.
PRICE
QUANTITY SUPPLIED
COST CONCEPTS
MONEY COST REAL COST FIXED COST VARIABLE COST OPPORTUNITY COST IMPLICIT EXPLICIT COSTS
TC
TVC
TFC
COST
OUTPUT
COST CONCEPTS Y
B
AFC
COST CONCEPTS
AVC
COST CONCEPTS
Y
MC AC
Q
R
O
X
COST CONCEPTS MC
Y
AC
AVC
AFC
LAC
COST
OUTPUT
REASONS
MANAGERIAL,MARKETING,FINANCIAL, RISK SPREADING) EXTERNAL ECONOMIES( ECONOMIES OF CONCENTRATION, INFORMATION) DISECONOMIES- DISPUTES, STRIKES,LOCKOUTS,TRADE-UNION, CORRUPTION,INFFENCIENCY,INFLATION
PRODUCTION FUNCTION
INPUTS PRODUCTION FUNCTION OUTPUTS
CONSTANT FACTORS OF PRODUCTION-VARIABLE UNITS USING THE BEST TECHNIQUES TWO FACTORS --K,L LIMITED SUBSTITUTION OF ONE FACTOR FOR THE OTHER
NATURE OF PRODUCTION TECHNICAL RELATIONSHIPBETWEEN THE PHYSICAL INPUTS AND OUTPUTS- NOTHIG TO DO WITH THE PRICE OF THE COMMODITY. COMBINED EFFORTS OF FACTORS TECHNICAL KNOWLEDGE DIVISIBILITY OR INDIVISIBILITY OF FACTORS
TYPES
LAW OF VARIABLEPROPORTION LAWS OF RETURNS
ISOQUANTS . PRO FUNCTION WITH ALL VARIABLE INPUTS THE LAWS OF RETURNS TO SCALE
Assumptions: 1. One factor is fixed-others variable. 2. Quality of variable factors is identical 3. Production technique-constant. 4. Land is used efficiently.
Laws of returns
Labour and Capital cost Rs. 1000 2000 3000 4000 5000 6000 7000 Total Returns (rice) 20 QHs 36 48 56 60 60 56 Average Returns 20 QHs 18 16 14 12 10 08 Marginal returns 20QHs. 16 12 08 04 0 -4
SIGNIFICANCE: 1. AGRICULTURE, EXTRACTIVE, MANUFACTURING INDUSTRIES. 2. SCARCITY OF A SINGLE FACTOR AND ITS IMPERFECTLY SUBSTITUTABLE. 3. BUSINESS DECISIONS- HOW MUCH TO PRODUCE WHAT NUMBER OF WORKERS TO APPLY TO A GIVEN FIXED INPUT HOW MANY WORKERS TO EMPLOY.
INCREASING RETURNS
DOSES OF LABOUR+CAPITAL FIRST SECOND THIRD MARGINAL RETURNS (SCOOTERS) 100 150 200 TOTAL RETURNS 100 250 450
FOUTH
FIFTH SIXTH
250
300 350
700
1000 1350
technology-constant, variable factors are homogeneous-applicable in Fixed Average Marginal the short run.Variable Total
Factor Factor (Machine (Labour) ) Producti on Producti on Producti on
1 1 1 1 1 1 1 1 1 1
1 2 3 4 5 6 7 8 9 10
5 units 11 18 26 33 38 40 41 41 39
5 units 6 7 8 7 5 2 1 0 -2
ISOQUANT CURVE
ASSUMPTIONS:
There are two inputs-Labour (L) and Capital (K) to produce A commodity X. 2. L and K- (An substitute each other but at a diminishing rate. 3. The technology of production is given.
1.
ISOQUANT CURVE
K
CAPITAL (K)
K 4 K3
K 2 K 1
A B C D IQ1=10 0 IQ2
L1
L2
L3
L4 LABOUR (L)
Properties of Isoquants
1. 2. 3.
A negative slope. Convex to the origin. No two Iso quants intersect or touch each other.
CAPITAL (K)
K J L
LABOUR(L)
200 100
L2
D
A IQ2=20 0
IQ1=100
X QUANTITY OFL
Sl.No
Scale (Land+Labour)
1 2 3 4 5 6 7 8
1 Acre+2 workers 2 Acres+4 workers 3 Acres+6 workers 4 acres+8 workers 5 acres+10 workers 6 acres+12 workers 7 acres+14 workers 8 acres+16 workers
9 acres+18 workers
24
Marginal production
3 2 1 A
D
1 2 3 4 5 6 7 8 9 10
scale
D
P3 P 3 D3
PRICE
P 2
P 1
T O
P2
D2 P 1
D 1
X
QUANTITY
P1 P2 P
Q2
D1 Q
D
O M M1 x
Perfect Competition:
Features or Characteristics:
A large number of buyers and sellers Identical products Perfect knowledge Perfect mobility of products Perfect mobility of factors. Free entry or free exit No transport cost Single Price
S
D
E
D D
E
E 1
M1
monopoly
profit
q
R
sm c
sac
ar mr
Monopolistic competition
Features- Large number of firms, Product
MONOPOLISTIC COMPETITION
SHORT PERIOD
MC
P 1
B T AR
AC
MR MC=MR
LONG PERIOD
LMC
P1 B LAC
LAR Q LMR
PRICE DESCRIMINTATION Types, personal, trade When it is possible? 1. 2. 3. 4. 5. 6. 7. 8. Differences in price elasticities Market Segmentations. Monopolist No Resale Agreement between rival sellers Geographical conditions Artificial difference between goods. Government regulations
p1
E 1
P2
A2
MC
AMR
AR MR2 2 M2 M
mr1 AR 1 M1
Features of oligopololy
1.Monopoly power 2.Inter-dependence of the firms 3.Uncertain demand curve 4.Aggressive marketing methods 5.Conflicting attitudes 6.Price rigidity
monopoly
y
HETEROGENEOUS
ac
ar p
A C
AR
mc
T K P B
COLLUSION: PERFECT, IMPERFECT, ORAL WRITTEN AGREEMENTS, CARTELS 3. LEADERSHIP DOMINANT TYPE PARAMETRIC TYPE
Theories of profit
1. Risk Theory- Prof. Hawley A. Insurable- Fire, floods, earth-quake B. Non-Insurable-Marketing of the products, price fluctuations, changes in demand-supply 2. Uncertainity Theory-Prof Knight A. Insurable or Foreseeable B. Non-Insurable or Unforseeble Risk of competition, technical risks, Risk of Governments, Intervention, Business Cycle Risks.