MANAGERIAL ECONOMICS AND

INDIAN ECONOMIC POLICY

What is Economics?
Set 1
*Economics is the study of how people allocate scarce resources for production,
distribution, and consumption, both individually and collectively.
*Example: Lucy has a limited amount of money in her bank account. She prioritizes and
plans what she needs to buy with the available funds. Lucy starts purchasing less
expensive utilities instead of purchasing goods of a luxurious brand.

Set 2
*Economics is a social science which deals with human wants and their
satisfaction.
*It is mainly concerned with the way in which a society chooses to employ its scarce
resources which have alternative uses, for the production of goods for present and
future consumption
*Example: Lucy has a limited amount of money in her bank account. She prioritizes and
plans what she needs to buy with the available funds. Lucy starts purchasing less
expensive utilities instead of purchasing goods of a luxurious brand.

Definition of Managerial Economics

Definition 1
“Managerial economics is concerned with the application of economic concepts and
economic analysis to the problems of formulating rational managerial decisions.”
- Edwin Mansfield, Economics Professor, University of Pennsylvania

Definition 2
According to Prof. Evan J Douglas, ‘Managerial economics’ is concerned with the
application of economic principles and methodologies to the decision making process
within the firm or organization under the conditions of uncertainty”.

Source : Google Search

Definition 3
Spencer and Siegelman have defined Managerial Economics as " The Integration of
Economic theory with business practice for the purpose of facilitating decision making
and forward planning by management "

Source : Managerial Economics Text, Problems & Cases by Sultan Chand & Sons
Scope of Managerial Economics
1. Demand Analysis and Forecasting: Managerial economics focuses on analyzing and
forecasting demand, which is a key factor in decision-making. By understanding
consumer behavior and market conditions, managers can determine the demand for
their products or services and make informed decisions regarding pricing, production,
and marketing strategies.

2. Production and Cost Analysis : Another important aspect of managerial economics

is the analysis of production and cost. Managers need to optimize the production
process and minimize costs to achieve maximum profitability. This involves studying
production functions, economies of scale, cost functions, and cost estimation
techniques.

3. Pricing Decisions: Pricing decisions play a crucial role in the success of a business.
Managerial economics helps managers determine the optimal pricing strategy by
considering factors such as demand elasticity, competition, production costs, and
market conditions. It provides tools like pricing models and pricing strategies to assist
managers in setting prices that maximize revenue and profitability.

4. Market Structure and Competition Understanding : the market structure and

competition is essential for managers to devise effective business strategies.
Managerial economics analyzes different market structures, such as perfect
competition, monopoly, oligopoly, and monopolistic competition. It helps managers
assess market conditions, competitive forces, and potential barriers to entry, enabling
them to make informed decisions regarding market positioning and strategic planning.

5. Risk Analysis and Decision-Making: Managerial economics also incorporates risk

analysis and decision-making under uncertainty. Managers often face situations where
outcomes are uncertain, and they need to assess risks and make decisions accordingly.
This involves techniques like decision trees, expected value analysis, and risk
assessment to evaluate alternative courses of action and choose the most favorable
option.

6. Capital Budgeting: Capital budgeting is a critical aspect of managerial economics,

especially for long-term investment decisions. Managers need to evaluate investment
opportunities and allocate resources efficiently. Managerial economics provides tools
like net present value (NPV), internal rate of return (IRR), and payback period analysis
to assess the profitability and feasibility of investment projects.

7. Government Policies and Regulations: Managerial economics considers the impact

of government policies and regulations on business operations. Managers need to be
aware of legal and regulatory constraints that may affect their decision-making.
Understanding the implications of taxes, trade policies, environmental regulations, and
other government interventions helps managers navigate the business environment
effectively.

Source :
https://edurev.in/question/1500509/Explain-the-scope-of-managerial-economics--

What is Production?
Set 1
*Production is the process of producing goods and services to satisfy human wants.
*The product is the result of the process. *The four factors of production are land,
capital, labor, and organization
*An example of production is the manufacturing of cars. Cars are made by assembling
parts together. For example, rubber tires are added to metal bodies to make seats
installed before the car is driven off the production line.

Source: Google Search

Set 2
*Production is a process of transforming tangible and intangible inputs into goods or
services.
*Raw materials, land, labor and capital are the tangible inputs, whereas ideas,
information and knowledge are the intangible inputs.
*These inputs are also known as factors of production.
*The four factors of production are land, capital, labor, and organization

Source : Lekha Mam Notes

What is Demand ?
*Demand for a commodity refers to the desire backed by ability to pay and
willingness to buy it.
*If a person below poverty line wants to buy a car, it is only a
desire but not a demand as he cannot pay for the car.
*If a rich man wants to buy
a car, it is demanded as he will be able to pay for the car. Thus, desire backed by
purchasing power is demand.

Source : Old Samacheer Book

What are the Factors Determining Demand ?

Set 1
1. Tastes and preferences of the consumer
Demand for a commodity may change due to a change in tastes, preferences
and fashion. For example, the demand for dhotis has come down and demand for
Trouser clothes and jeans have gone up due to change in fashion.

2. Income of the consumer

When the income of the consumer increases, more will be demanded.
Therefore, we can say that as income increases, other things being equal, the
demand for a commodity also increases. Comforts and luxuries belong to this
category.

3. Price of substitutes
Some goods can be substituted for other goods. For example, tea and coffee are
substitutes. If the price of coffee increases while the price of tea remains the same,
there will be an increase in the demand for tea and decrease in the demand for coffee.
The demand for substitutes moves in the opposite direction.

4. Number of consumers
Size of the population of a country is an important determinant of demand. For
instance, larger the population, more will be the demand for certain goods like food
grains, pulses etc. When the number of consumers increases, there will be greater
demand for goods.

5. Expectation of future price change

If the consumer believes that the price of a commodity will rise in the future,
he may buy a larger quantity in the present. Suppose he expects the price to fall, he
may defer some of his purchases to a future date.

6. Distribution of income
Distribution of income affects consumption patterns and hence the demand for various
goods. If the government attempts redistribution of income to make it equitable, the
demand for luxuries will decline and the demand for necessities of life will increase.

7. Climate and weather conditions

Demand for a commodity may change due to a change in climatic conditions.
For example, during summer, demand for cool drinks, cotton clothes and air
conditioners will increase. In winter, demand for woolen clothes increases.

8. State of business
During boom, demand will expand and during depression demand will contract.

9. Consumer Innovativeness
When the price of wheat flour or price of electricity falls, the consumer identifies new
uses for the product. It creates new demand for the product.

Source : Old Samacheer Book

Set 2
#1 – The Prices of Goods or Services
When the price of goods and services rises, the quantity demanded falls. When the
price of goods and services falls, the quantity demanded will increase. It is also called
the Law of Demand .If demand does not change even in the price change, that is called
inelastic demand. On the other hand, elastic demand is called if the quantity demanded
changes more than the price change.

#2 – Price of Substitute/Complementary Goods & Services

Substitute goods are goods that satisfy the same needs. For example, groundnut
oil-sunflower oil and tea-coffee are substitutes. Hence, a rise in groundnut oil price can
increase the demand for sunflower oil and vice-versa.
Complementary goods are those goods consumed together. For example, car and
diesel or tea and sugar, so the vehicle price decreases the demand for diesel and car.

#3 – Buyers’ Tastes and Preferences

The demand for any product can change based on buyers’ tastes and preferences;
brand advertising plays a vital role in changing buyers’ tastes and preferences. For
example, earlier, people thought chocolates were mainly for kids. But the advertising
industry has changed this concept by showing that chocolates are for everyone from
kids to very older adults.

#4 – Buyers’ Expectations of the Goods’ Future Price

When people expect the price of something to rise in the future, they tend to buy those
products more, increasing demand for those goods. For example, when people expect
gold to grow, they will buy more and more gold and vice versa.

#5 – A Change in Buyers’ Real Incomes or Wealth

Buyers’ purchasing power is dependent on their incomes and wealth. Suppose we see it
in the non-developed areas where jobs are not easily available, and people do not have
much income. Hence, the demand for goods and services is much lower than the
developed cities like New York, where many jobs are available. Therefore, people have
good income and purchasing power, and demand for goods and services is high.

#6 – Buyers’ Expectations of their Future Income and Wealth

The higher expectation of future income & wealth increases consumption, and a lower
expectation of future revenue will reduce consumption.
For example, students who will complete higher studies and are about to join the job
will start spending more than the salaries of people who will retire in the coming years.

#7 – The Number of Buyers

If there is an increase in the number of buyers willing to buy goods or services affects
the overall demand. The population has a large influence on the market. Population
increase can create a makeshift in the demand curve. The new buyers help raise the
quantity demand, so demand changes even if the price does not change.

#8 – Government Policies
For many products, demand is dependent on government policies. For example, a
decrease in the borrowing interest rate leads to raising housing loan demands because
people will start buying houses since the loan interest rate is reduced.
Another example is the U.S. government has banned a few models of Volkswagen due
to pollution issues. Hence, there is no demand for those models in the U.S.

#9 – Climate Changes
There are many products for which demand is seasonal or dependent on the climate.
For example, demand for winter clothes is high in the winter season, and demand for
ice creams is higher in the summer season. So, when winter is going to end, and there is
no need for winter clothes, companies sell winter clothes at discounted prices. There are
discount sales in the shops and malls after the season ends. This discounted offer helps
the sellers to increase the demand.

#10 – Income Distribution

Luxurious goods are high in the area where very rich people are staying. On the other
hand, in non-developed places where middle-income groups people visit, the demand
for luxury goods is less.

Source : Lekha Mam Notes

Cost of Production
*Costs of production refer to all the expenses incurred in the process of creating and
delivering a product or service.
*These expenses can include raw materials, labor, equipment, rent, and marketing
costs.

Source: Google Search

*Cost of production refers to the total cost incurred by a business to produce a specific
quantity of a product or offer a service.
*Production costs may include things such as labor, raw materials, or consumable
supplies
*For example, the production costs for a motor vehicle tire may include expenses such
as rubber, labor needed to produce the product, and various manufacturing supplies.

Source: Lekha Mam Notes

Types of Cost Of Production

Set 1
1. Fixed costs
Fixed costs are expenses that do not change with the amount of output produced. This
means that the costs remain unchanged even when there is zero production or when
the business has reached its maximum production capacity. For example, a restaurant
business must pay its monthly, quarterly, or yearly rent regardless of the number of
customers it serves. Other examples of fixed costs include salaries and equipment
leases.
Fixed costs tend to be time-limited, and they are only fixed in relation to the production
for a certain period. In the long term, the costs of producing a product are variable and
will change from one period to another.

2. Variable costs
Variable costs are costs that change with the changes in the level of production. That is,
they rise as the production volume increases and decrease as the production volume
decreases. If the production volume is zero, then no variable costs are incurred.
Examples of variable costs include sales commissions, utility costs, raw materials, and
direct labor costs.
For example, in a clothing manufacturing facility, the variable costs may include raw
materials used in the production process and direct labor costs. If the raw materials
and direct labor costs incurred in the production of shirts are $9 per unit and the
company produces 1000 units, then the total variable costs are $9,000.

3. Total cost
Total cost encompasses both variable and fixed costs. It takes into account all the costs
incurred in the production process or when offering a service. For example, assume
that a textile company incurs a production cost of $9 per shirt, and it produced 1,000
units during the last month. The company also pays a rent of $1,500 per month. The
total cost includes the variable cost of $9,000 ($9 x 1,000) and a fixed cost of $1,500 per
month, bringing the total cost to $10,500.

4. Average cost
The average cost refers to the total cost of production divided by the number of units
produced. It can also be obtained by summing the average variable costs and the
average fixed costs. Management uses average costs to make decisions about pricing
its products for maximum revenue or profit.
The goal of the company should be to minimize the average cost per unit so that it can
increase the profit margin without increasing costs.

5. Marginal cost
Marginal cost is the cost of producing one additional unit of output. It shows the
increase in total cost coming from the production of one more product unit. Since fixed
costs remain constant regardless of any increase in output, marginal cost is mainly
affected by changes in variable costs. The management of a company relies on
marginal costing to make decisions on resource allocation, looking to allocate
production resources in a way that is optimally profitable.
For example, if the company wants to increase production capacity, it will compare the
marginal cost vis-à-vis the marginal revenue that will be realized by producing one
more unit of output. Marginal costs vary with the volume of output being produced.
They are affected by various factors, such as price discrimination, externalities,
information asymmetry, and transaction costs.
Source : Lekha Mam Notes

Set 2
1. Fixed costs
Fixed costs (also referred to as overhead or indirect costs) remain the same, regardless
of how many products or services a business produces.

They are not dependent on production volume but are usually recurring and
time-based. Examples of fixed costs are monthly salaries or rent.

2. Variable costs
Variable costs are expenses that change in direct proportion to any changes in
production. They increase when production volume rises and decrease when production
volume falls. Examples of variable costs are raw materials, packaging, or shipping
costs.

3. Total cost
Total cost is the sum of both fixed and variable costs accrued during production. In
other words, it’s the total cost of production and changes according to production
volume.

4. Average cost
Average cost is the total cost of production divided by the total unit of output.

The average cost (or unit cost) is how much it costs a business to produce a single unit
and helps determine its selling price.

5. Marginal cost
Marginal cost is the incremental increase in total cost when one additional unit is
produced.

As fixed costs aren’t changed by production volume, marginal costs mostly have to do
with variable costs.

Calculating marginal costs helps a business determine its optimal level of production.
When the marginal cost to produce one additional unit is lower than the average
cost-per-unit, the business has reached economies of scale and an increased potential
to maximize profit margins

Source https://quickbooks.intuit.com/r/midsize-business/production-costs/

The Determinants of a Cost of Production

1. **Input Costs:** The costs of inputs such as raw materials, labor, energy, and capital
play a fundamental role in determining production costs. Fluctuations in input prices,
availability, and quality can significantly impact overall production expenses. For
example, an increase in the price of raw materials can lead to higher production costs.

2. **Technology and Productivity:** Technological advancements and changes in

production methods can affect costs. More efficient technologies often reduce labor
requirements, increase production output, and lower costs per unit. Conversely,
outdated or inefficient technology may result in higher production costs.

3. **Economies of Scale:** The scale of production can influence costs. As production

volume increases, many businesses experience economies of scale, which means that
the average cost of production per unit decreases. This occurs due to factors like better
utilization of resources, bulk purchasing discounts, and improved specialization of labor.

4. **Labor Skill and Wages:** Labor costs depend on the skill level of the workforce
and prevailing wage rates. Skilled labor may command higher wages, but it can also be
more productive, potentially reducing labor costs per unit. Additionally, labor unions
and labor regulations can impact wage rates and labor-related costs.

5. **Overhead Expenses:** Overhead costs include expenses not directly tied to the
production process but necessary for business operations, such as rent, utilities,
administrative salaries, and equipment maintenance. These costs are allocated to the
production process, affecting the total cost per unit.

6. **Location and Geography:** The geographical location of a business can influence

production costs. For example, businesses in regions with high land and labor costs
may face higher production expenses than those located in areas with lower costs.

7. **Regulations and Compliance:** Government regulations, such as environmental,

safety, and health regulations, can increase production costs by necessitating
additional investments in compliance measures, equipment, and reporting.

8. **Market Conditions:** Fluctuations in market conditions, such as changes in demand

and supply, can influence costs. A surge in demand may lead to higher input prices due
to increased competition for resources, potentially raising production costs.

9. **Exchange Rates:** For businesses engaged in international trade, fluctuations in

exchange rates can affect the cost of imported inputs. A stronger domestic currency
may reduce the cost of imported materials, while a weaker currency can increase costs.

10. **Quality and Customization:** The quality and level of customization demanded
by customers can impact production costs. Higher-quality materials and customization
often lead to increased costs, but they can also justify premium pricing.

11. **Supplier Relationships:** The reliability and cost-effectiveness of suppliers can

affect input costs. Long-term relationships with reliable suppliers may result in better
prices and more favorable credit terms, reducing production costs.
12. **Transportation Costs:** The cost of transporting raw materials and finished
products can be significant, especially for businesses with extensive supply chains.
Distance, transportation modes, and fuel prices all contribute to transportation
expenses.

13. **Energy Costs:** The price of energy sources like electricity, gas, and oil can
fluctuate, impacting both operating and production costs. Energy-efficient
technologies and practices can help mitigate these costs.

14. **Innovation and Research:** Investment in research and development (R&D) and
innovation can lead to cost reductions over time. New technologies or production
processes may improve efficiency and reduce production costs.

15. **Taxation and Incentives:** Tax policies and government incentives can influence
costs. Tax credits, deductions, or subsidies may be available to businesses in certain
industries or regions, reducing their overall cost burden.

Source: Chapgpt

Types of Demand
Set 1
1. Price Demand:
Assuming other factors as constant, a relationship between the price and demand of a
commodity is known as Price Demand. Price Demand can be shown as:
Dx = f(Px)
Where,
Dx = Demand for the given Commodity
f = Functional Relationship
Px = Price of the given Commodity

2. Cross Demand:
Assuming other things remaining as constant, a relationship between the demand of a
given commodity and the price of related commodities is known as Cross Demand.

3. Income Demand:
Assuming other factors as constant, a relationship between the consumer’s income and
the quantity demanded for a commodity is known as Income Demand. Income
Demand can be shown as:
Dx = f(Y)
Where,
Dx = Demand for the given Commodity
f = Functional Relationship
Y = Income of the Consumer
4. Joint Demand:
When demand for two or more goods arises simultaneously for satisfying a particular
want of the consumer, then such type of demand is known as Joint Demand. For
example, the demand for milk, coffee beans, and sugar is a joint demand as all these
goods are demanded together to prepare coffee.

5. Composite Demand:
When a commodity can be used for more than one purpose, then such type of demand
is known as Composite Demand. For example, the demand for water is a composite
demand as it can be used for various purposes like bathing, drinking, cooking, etc.

6. Derived Demand:
The kind of demand for a commodity, which depends on the demand for other goods, is
known as Derived Demand. For example, demand for workers/labor, producing bags is
a derived demand as it depends on the demand for bags.

7. Direct Demand:
When a commodity directly satisfies the demand of consumers, then its demand is
known as Direct Demand. For example, demand for books, stationery, clothes, food,
etc., is a direct demand as these goods directly satisfy the wants.

8. Competitive Demand:
When two commodities are close substitutes of each other and an increase in the
demand for one commodity will decrease the demand for the other commodity, then
the demand for any one of the commodities is known as Competitive Demand. For
example, an increase in demand for tea might decrease the demand for coffee, which
makes the demand for these goods competitive. This happens because when
consumers purchase more of one commodity (say tea), it leads to a lesser requirement
for the other commodity (say coffee).

9. Alternative Demand:
Demand for a commodity is known as alternative demand when it can be satisfied by
using different alternatives. For example, there are a number of alternatives to satisfy
the demand for clothes like jeans, shirts, trousers, suits, saree, pants, etc.

Source : https://www.geeksforgeeks.org/types-of-demand/

10. Derived Demand :

When a product is demanded consequent on the purchase of a parent product, it is
called the derived demand For example : if the demand for a good such as wheat
increases, then this leads to an increase in the demand for labor, as well as demand for
other factors of production such as fertilizer.

11. Autonomous Demand :

The demand for a product that is not associated with the demand of other products is
known as autonomous or direct demand. The autonomous demand arises due to the
natural desire of an individual to consume the product. For Example : the demand for
food, shelter, clothes, and vehicles is autonomous as it arises due to biological, physical,
and other personal needs of consumers.

12. Firm’s Demand & Industry Demand :

Firm demand is defined as the particular demand that the consumers indicate over
specific products or services offered by a specific firm.
Industry demand is the aggregate demand for products that different firms make. The
industry considers all the firms that produce products that are categorized as similar.
For Example : Cars in India are manufactured by Maruti Udyog, Hindustan Motors,
Premier Automobiles and Standard Motor Products of India. Demand for Maruti Car is
a firm's (Company) demand whereas demand for all kinds of cars is industry's demand.

Source : Google Search

Set 2

1.Direct and indirect demand: (or) Producers’ goods and consumers’ goods:
demand for goods that are directly used for consumption by the ultimate consumer is
known as direct demand (example: Demand for T shirts). On the other hand demand for
goods that are used by producers for producing goods and services. (example: Demand
for cotton by a textile mill)

2.Derived demand and autonomous demand: when a product derives its usage from
the use of some primary product it is known as derived demand. (example: demand for
tires derived from demand for cars) Autonomous demand is the demand for a product
that can be independently used. (example: demand for a washing machine)

3.Durable and nondurable goods demand: durable goods are those that can be used
more than once, over a period of time (example: Microwave oven) Non durable goods
can be used only once (example: Band-aid)

4.Firm and industry demand: firm demand is the demand for the product of a
particular firm. (example: Dove soap) The demand for the product of a particular
industry is industry demand (example: demand for steel in India )

5.Total market and market segment demand: a particular segment of the market's
demand is called segment demand (example: demand for laptops by engineering
students) . The sum total of the demand for laptops by various segments in India is the
total market demand. (example: demand for laptops in India)

6.Short run and long run demand: short run demand refers to demand with its
immediate reaction to price changes and income fluctuations. Long run demand is that
which will ultimately exist as a result of the changes in pricing, promotion or product
improvement after market adjustment with sufficient time.

7.Joint demand and Composite demand: when two goods are demanded in
conjunction with one another at the same time to satisfy a single want, it is called joint
or complementary demand. (example: demand for petrol and two wheelers) A
composite demand is one in which a good is wanted for several different uses. (
example: demand for iron rods for various purposes)

8.Price demand, income demand and cross demand: demand for commodities by the
consumers at alternative prices are called price demand. Quantity demanded by the
consumers at alternative levels of income is income demand. Cross demand refers to
the quantity demanded of commodity ‘X’ at a price of a related commodity ‘Y’ which
may be a substitute or complementary to X.

Price Demand: The ability and willingness to buy specific quantities of a good at the
prevailing price in a given time period.

Income Demand: The ability and willingness to buy a commodity at the available
income in a given period of time.

Market Demand: The total quantity of a good or service that people are willing and
able to buy at prevailing prices in a given time period. It is the sum of individual
demands.

Cross Demand: The ability and willingness to buy a commodity or service at the
prevailing price of the related commodity i.e. substitutes or complementary products.
For example, people buy more wheat when the price of rice increases.

Source : Lekha Mam Notes

Law of Demand
The law of demand states that there is a negative or inverse relationship
between the price and quantity demanded of a commodity over a period of time.

Definition of Law of Demand

Alfred Marshall stated that “ the greater the amount sold, the smaller must be the price
at which it is offered, in order that it may find purchasers; or in other words, the amount
demanded increases with a fall in price and diminishes with rise in price”.

According to Ferguson, the law of demand is that the quantity demanded varies
inversely with price.

Assumptions of the Law of Demand

1. No change in the consumer’s income

2. No change in consumer’s tastes and preferences
3. No changes in the prices of other goods
4. No new substitutes for the goods have been discovered
5. People do not feel that the present fall in price is a prelude to a further decline in
price

Demand Schedule

Table 4.1 is a hypothetical demand schedule of an individual consumer. It

shows a list of prices and corresponding quantities demanded by an individual
consumer. This is an individual demand schedule.

Demand Curve

The demand schedule can be converted into a demand curve by measuring

price on vertical axis and quantity on horizontal axis as shown in Figure 4.1.
In Figure, 4.1 DD1

is the demand curve. The curve slopes downwards from

left to right showing that, when price rises, less is demanded and vice versa. Thus
the demand curve represents the inverse relationship between the price and quantity
demanded, other things remaining constant.
Why does the demand curve slope downwards?
The demand curve slopes downwards mainly due to the law of diminishing
marginal utility. The law of diminishing marginal utility states that an additional unit of
a commodity gives a lesser satisfaction. Therefore, the consumer will buy more only at
a lower price. The demand curve slopes downwards because the marginal utility curve
also slopes downwards.

Source : Old Samacheer Book

Exceptions of Law of Demand

Set 1
Veblen goods
Veblen goods are goods whose price does not affect demand despite the increase; the
higher the price, the higher the demand. Veblen goods even become more valuable
when their price increases and are believed to be more useful and authentic. Hence, the
demand for those goods increases even when their prices go up, for example, gold, cars
and precious stones.

Giffen goods
The price for Giffen goods also does not affect the demand. As it increases, the
demand also increases. The general idea is that Giffen goods are cheap goods like
staple food and what consumers with lower income can afford. If the price goes up, the
consumers would spend less on other goods and purchase more of Giffen goods to
meet up their needs.

Necessary goods
The prices for necessary goods do not affect the demand for them. The demand
remains the same even when the price increases. Consumers continue to buy necessary
goods like medicines and basic food staples like milk, fruits and vegetables, even if the
price increases.
Luxury goods
The price increase or decrease for luxury goods does not change the demand for them.
The demand remains the same, the market remains stable and the consumption for
such goods continues despite the price. Examples include liquors and tobacco products,
people continue to buy them whether the price rises or falls.

Emergencies
During emergencies, the price of goods does not determine the demand. People tend to
buy more goods for future use if there's a natural disaster like drought, flood or
pandemic. Even if the price for the goods is relatively high, the demand would also be
high.

Price change exception

When the prices of goods increase and the market gives a future increase signal,
demand may increase as well to save cost for that particular goods in the future. Also,
when the price drops or the market shows a further decrease, the demand by
consumers might drop to get the lowest price possible for that good. Changes in the
price of goods both now and in the future go a long way to determine the demand for
that good.

Income change exception

The demand for goods may increase or decrease when the income of the consumer
changes. If the income increases, the demand for goods increases no matter the price
and if the income decreases, the demand for goods might also decrease. Demand is
therefore subject to change depending on the income of the consumer.

Source :
https://uk.indeed.com/career-advice/career-development/what-is-law-of-demand

Set 2
1. Giffen Goods:
Some special varieties of inferior goods are termed as Giffen goods. Cheaper varieties
millets like bajra, cheaper vegetables like potato etc come under this category. Sir
Robert Giffen of Ireland first observed that people used to spend more of their income
on inferior goods like potato and less of their income on meat. After purchasing potato
the staple food, they did not have a staple food potato surplus to buy meat. So the rise
in price of potatoes compelled people to buy more potatoes and thus raised the
demand for potatoes. This is against the law of demand. This is also known as the
Giffen paradox.

2. Conspicuous Consumption / Veblen Effect:

This exception to the law of demand is associated with the doctrine propounded by
Thorsten Veblen. A few goods like diamonds etc are purchased by the rich and wealthy
sections of society. The prices of these goods are so high that they are beyond the
reach of the common man. The higher the price of the diamond, the higher its prestige
value. So when the price of these goods falls, the consumers think that the prestige
value of these goods comes down. So quantity demanded of these goods falls with a
fall in their price. So the law of demand does not hold good here.

3. Conspicuous Necessities:
Certain things become the necessities of modern life. So we have to purchase them
despite their high price. The demand for T.V. sets, automobiles and refrigerators etc.
have not gone down in spite of the increase in their price. These things have become
the symbol of status. So they are purchased despite their rising price.

4. Ignorance:
A consumer’s ignorance is another factor that at times induces him to purchase more
of the commodity at a higher price. This is especially true, when the consumer believes
that a high-priced and branded commodity is better in quality than a low-priced one.

5. Emergencies:
During emergencies like war, famine etc, households behave in an abnormal way.
Households accentuate scarcities and induce further price rise by making increased
purchases even at higher prices because of the apprehension that they may not be
available. . On the other hand during depression , fall in prices is not a sufficient
condition for consumers to demand more if they are needed.

6. Future Changes In Prices:

Households also act as speculators. When the prices are rising households tend to
purchase large quantities of the commodity out of the apprehension that prices may
still go up. When prices are expected to fall further, they wait to buy goods in future at
still lower prices. So quantity demanded falls when prices are falling.

7. Change In Fashion:
A change in fashion and tastes affects the market for a commodity. When a digital
camera replaces a normal manual camera, no amount of reduction in the price of the
latter is sufficient to clear the stocks. Digital cameras on the other hand, will have more
customers even though its price may be going up. The law of demand becomes
ineffective.

8. Demonstration Effect:
It refers to a tendency of low income groups to imitate the consumption pattern of high
income groups. They will buy a commodity to imitate the consumption of their
neighbors even if they do not have the purchasing power.

9. Snob Effect:
Some buyers have a desire to own unusual or unique products to show that they are
different from others. In this situation even when the price rises the demand for the
commodity will be more.

10. Speculative Goods/ Outdated Goods/ Seasonal Goods:

Speculative goods such as shares do not follow the law of demand. Whenever the
prices rise, the traders expect the prices to rise further so they buy more.
Outdated Goods are those that go out of use due to advancement in the underlying
technology are called outdated goods. The demand for such goods does not rise even
with fall in prices
Seasonal Goods: Goods which are not used during the off-season (seasonal goods) will
also be subject to similar demand behavior.

12. Goods In Short Supply:

Goods that are available in limited quantities or whose future availability is uncertain
also violate the law of demand.
Source : Lekha Mam Notes

What is Elasticity of demand ?

*The elasticity of demand, or demand elasticity, measures how demand responds to a
change in price or income.
*Many factors influence elasticity, such as price, availability of substitutes, necessity,
brand loyalty and urgency.
*Understanding elasticity of demand can help guide a business’s marketing and selling
strategies to maximize profitability.
*The concept of elasticity of demand was introduced by Alfred Marshall.
*According to him “the elasticity (or responsiveness) of demand in a market is great or
small as the amount demanded increases much or little for a given fall in price, and
diminishes much or little for a given rise in price”.

Types of Elasticity of Demand

1. Price elasticity of demand;
“The degree of responsiveness of quantity demanded to a change in price is called
price elasticity of demand”

Formula to find out ep through Price elasticity of method is,

Measurement of price elasticity of demand

Important methods for calculating price elasticity of demand are

1. Percentage method
This is measured as the relative change in demand divided by relative change in price
(or) percentage change in demand divided by percentage change in price.

For example, the price of rice rises by 10% and the demand for rice falls by 15%
Then ep = 15/10 = 1.5
This means that the demand for rice is elastic.
If the demand falls to 5% for a 10% rise in price, then ep = 5/10 = 0.5. This
means that the demand for rice is inelastic.

There are five measures of elasticity.

a) Relatively Elastic demand, if the value of elasticity is greater than 1

b) Relatively Inelastic demand, if the value of elasticity is less than 1
c) Unitary elastic demand, if the value of elasticity is equal to 1.
d) Perfectly inelastic demand, if the value of elasticity is zero.
e) Perfectly elastic demand, if the value of elasticity is infinity.
2. Point method
We can calculate the price elasticity of demand at a point on the linear
demand curve. Formula to find out ep through point method is,
In figure 4.12 we can measure arc elasticity between points A and B on the demand
curve; we will have to take the average prices of OP1 and OP2 and average of the two
quantities demanded (original and the new).

2. Income elasticity of demand;

Income elasticity of demand is the degree of responsiveness of demand to the change
in income.

3. Cross-elasticity of demand;
The responsiveness of demand to changes in prices of related goods is called
cross-elasticity of demand (related goods may be substitutes or complementary
goods). In other words, it is the responsiveness of demand for commodity x to the
change in the price of commodity y
The relationship between x and y commodities may be substitutive as in the case of tea
and coffee (or) complementary as in the case of pen and ink

Measures of cross-elasticity of demand

Infinity - Commodity x is nearly a perfect substitute for commodity y

Zero - Commodities x and y are not related.
Negative - Commodities x and y are complementary.

4. Advertising Elasticity of Demand

It is also known as 'Promotional Elasticity of Demand'.
This means the responsiveness of demand to the changes in advertising or other
promotional expenses.
The Advertisement elasticity of demand is always positive as advertisements are used
for increasing the sales.
The formula is :
Source: Old Samacheer book & Business Economics, Dr S Sankaran