Professional Documents
Culture Documents
The Demand For A Good Depends On Several Factors
The Demand For A Good Depends On Several Factors
Economists had a deep study and emphasized all about utility by using 2 approaches
namely cardinal and ordinal. Cardinality states that utility is measurable by cardinal
numbers, whereas ordinals states that utility cannot be measured rather its level can be
expressed internsrank the various basket of goods of ranking the alternatives baskets of
goods. Both theories have their own importantutility analysisassumptions. What are these
assumptions for each of these theories? Describe as much as you can.
2. What are the well identified factors affecting Demand and Supply?
The demand for a good depends on several factors, such as price of the good, perceived quality,
advertising, income, confidence of consumers and changes in taste and fashion.
The seven factors which affect the changes of supply are as follows: (i) Natural Conditions (ii)
Technical Progress (iii) Change in Factor Prices (iv) Transport Improvements (v) Calamities (vi)
Monopolies (vii) Fiscal Policy.
What are the 5 factors that affect supply?
changes in non-price factors that will cause an entire supply curve to shift (increasing or
decreasing market supply); these include 1) the number of sellers in a market, 2) the level of
technology used in a good's production, 3) the prices of inputs used to produce a good, 4) the
amount of government regulation, .
3. Explain about Perfectly Competitive Market and list out its corresponding assumptions
Perfect competition is an ideal type of market structure where all producers and consumers have
full and symmetric information and no transaction costs. There are a large number of producers
and consumers competing with one another in this kind of environment.
A perfectly competitive market has following assumptions:
Large Number of Buyers and Sellers: ADVERTISEMENTS: .
The second assumption of perfect competition is that all sellers sell homogeneous product. In
such a situation, the buyers have no reason to prefer the product of one seller to another. This
condition is present only when the commodity is a substance of definite chemical and physical
composition i.e., salt, tin, specified grade of wheat etc
Homogeneous Products:
A competitive market is (me in which the buyers and sellers are in close contact with each other.
It means that, there is perfect knowledge of the market on the part of buyers and sellers. It
implies that a large number of buyers and sellers in the market exactly know how much is the
price of the commodity in different parts of the market.
No Discrimination: ...
Under perfectly competitive market, buyers and sellers must buy and sell freely among
themselves. It implies that buyers and sellers must be willing to deal openly with one another to
buy and sell at the market price. This may be true of one and all that may wish to do so without
offering any special deals, discounts, or favours to selected individuals.
Perfect Knowledge: ...
A competitive market is (me in which the buyers and sellers are in close contact with each other.
It means that, there is perfect knowledge of the market on the part of buyers and sellers. It
implies that a large number of buyers and sellers in the market exactly know how much is the
price of the commodity in different parts of the market.
Free Entry or Exit of Firms:
In the long run, under perfect competition, firm can enter into or exit from the industry. There is
no let or hindrance on firms as far as their entry into or exit from the market. In other words,
there are no legal or social restrictions on the firm. Large number of sellers can be possible only
if there is free entry of firms.
Perfect Mobility:
There must be perfect mobility of factors of production within the country which ensures
uniform cost of production in the whole economy. It implies that different factors of production
are free to seek employment in any industry that they may like.
Profit Maximization:
Under perfect competition, all firms have a common goal of profit maximization. Thus, there is
absence of social welfare of the general masses.
No Selling Cost:
Under perfect competition, there are no selling costs.
9. No Transport Costs:
4. Define the term “Consumer Equilibrium”, take Y-axis and X-axis, and
show its graphical representation by your own example.
A consumer is in equilibrium when he derives maximum satisfaction from the goods and is in no
position to rearrange his purchases.
A rational consumer will purchase a commodity up to the point where price of the commodity is
equal to the marginal utility obtained from the thing. ... If this condition is not fulfilled the
consumer will either purchase more or less.
Consumer equilibrium is a point at which a consumer's derived utility from a commodity is at
its maximum, given a fixed level of income and price of that commodity. A rational consumer
would not deviate from this point.
Inferior goods‚ Increased income leads to fall in demand e.g. cheap substitutes (supermarket
coffee)
Inferior good
An inferior good means an increase in income causes a fall in demand. It is a good with a
negative income elasticity of demand (YED). An example of an inferior good is Tesco value
bread. When your income rises you buy less Tesco value bread and more high quality, organic
bread.
Giffen goods‚
Giffen good. A rare type of good, where an increase in price causes an increase in demand.
The reason is that the income effect of a rise in the price causes you to buy more of this cheap
good because you can’t afford more expensive goods. For example, if the price of wheat rises, a
poor peasant may not be able to afford meat anymore, so has to buy more wheat. See: Giffen
goods
Possible examples of Giffen good – rice, potatoes, bread.
Luxury goods‚ Increased income leads to bigger percentage increase in demand e.g. sports
care.
A luxury good means an increase in income causes a bigger percentage increase in demand. It
means that the income elasticity of demand is greater than one. For example, HD TV’s would be
a luxury good. When income rises, people spend a higher percentage of their income on the
luxury good.
YED calculations
In the above example of a luxury good, income rises (500-550) 10%, demand rises 100/800
– 12.5% YED = 12.5/10 = 1.125
In the above example of a normal good, income rises (500-700) 40%, demand rises 100/800 –
12.5% YED – 12.5/40 = 0.3125
Necessity good – something needed for basic human existence, e.g. food, water, housing,
electricity.