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Economics
This blog intends to share topics on Micro and Macroeconomics that a
college student requires while he is preparing him/herself for
examination. Introduction to Microeconomics, Demand, Law of Demand,
Elasticity of Demand, Supply, Cost and cost curves, Production, Market
structures, Distribution, Classical Theory of Employment, Effective
demand, National Income, Circular flow of income and expenditure,
Fiscal and monetary policy, Income and employment determination etc can
be found in this blog.
Economics
This blog intends to share topics on Micro and Macroeconomics that a
college student requires while he is preparing him/herself for
examination. Introduction to Microeconomics, Demand, Law of Demand,
Elasticity of Demand, Supply, Cost and cost curves, Production, Market
structures, Distribution, Classical Theory of Employment, Effective
demand, National Income, Circular flow of income and expenditure,
Fiscal and monetary policy, Income and employment determination etc can
be found in this blog.
[3]Meaning and Concept of Demand
1- Meaning & Concept of Demand
Generally, demand refers to a desire or want of anything, but a mere
desire or want of anything is not a demand. In economics, to be a
demand for any goods or services three of the elements are required
i.e. a strong desire for goods or services, ability to pay the prices
and willingness to pay. So the demand can be defined as the desire for
a good or service which is backed up by ability and willingness to pay.
Demand always signifies price, time and place. The demand for a
commodity can only be effective if it has a price and is demanded in a
market during a certain point or period of time. For example, John's
demand for sugar is 5 kg. It can be his demand for sugar but it is not
his effective demand because it just contains quantity but not the
price and time. Similarly, Hary's demand for sugar is 5 kg at $2 per kg
for week. Hary's demand for sugar is an effective demand because it not
only contains quantity but also price and time. Thus, demand can be
defined as the desire for the quantity of a commodity that a consumer
willing and able to buy at a price in a market at a specific time.
2- Types of Demand
There are various types of demand. They are as given below;
1- Price Demand
2- Income Demand
3- Cross Demand
4- Composite Demand
5- Direct Demand
6- Derived Demand
7- Joint Demand
1- Price Demand
Price demand refers to the various goods or services that a consumer
demands at various prices in a market at a certain time, other things
remaining the same. There is a negative relationship between the price
and goods demanded.
Symbolically,
Qd = fP
Where;
Qd = Quantity demanded of a commodity,
f = Function,
P = Price of the commodity,
2-Income demand
Income demand refers to the various quantity of goods or services that
a consumer demands at a various level of income in a market at a
specific period of time, other things remaining the same. There is a
positive relationship between income and quantity demanded but in case
of inferior goods, there is an inverse relationship.
Symbolically,
Qd = fY
Where;
Qd = Quantity demanded of a commodity,
f = Function,
Y = Income of consumer,
3-Cross Demand
Cross demand refers to the quantity of a commodity that a
consumer ready to purchase or demand due to change in the price of some
related commodities. The related commodities are of two types,
substitutes and complements. There is direct relationship between
substitute goods and inverse relationship between complementary goods.
Cross demand can be expressed symbolically as;
Qdx = fPx
Where;
Qdx = Quantity demanded of X commodity,
f = Function,
Px= Price of x good,
4-Composite Demand
Composite demand is the demand for a commodity which can be put to
several uses, such as demand for electricity, coal, building, packed
water etc.
5- Direct Demand
The demand for a commodity is said to be direct demand when it is
demanded for a direct consumption. Demand for biscuits, chow-men etc.
is the direct demand.
6- Derived Demand
The demand for a commodity or service is said to be derived demand when
it is demanded for producing a final commodity. Demand for raw
material, demand for labor etc are the examples of derived demand.
7- Joint Demand
The demand for several goods for a joint purpose is said to be joint
demand. Demand for potatoes, salt, oil, chili for vegetable is the
example of joint demand.
3- Determinants of Demand
There are various factors which influence consumers demand. These
factors or determinants are explained as below.
3.1-Price of the same commodity
One of the most important determinants of consumers' demand is the
price of the commodity that the consumer demands. When the price of the
commodity rises, the consumer purchases less and less quantity of that
commodity and vice versa. So price is the one which determines how much
quantity of a commodity is demanded.
3.2-Income of the consumer
A change in income of the consumer also affects the demand for a good.
When income of the consumer increases, generally demand for normal
goods increases but the demand for inferior commodity falls. On the
other hand, demand for normal goods falls with a decrease in income but
at the same time the demand for inferior goods like millet, coarse rice
etc. increases. Hence income of the consumer is an important
determinant of demand.
3.3-Price of related goods
Another determinant of consumers' demand is the price of related goods.
The related goods are of two types, i.e. substitutes and complements.
In case of substitute goods, quantity demanded of one commodity, say
Fanta, increases due to rise in the price of another commodity, say
Pepsi and vice-versa (positively sloping demand curve). Likewise, in
case of complementary goods, the demand for one commodity, say torch
falls due to rise in the price of another commodity, say batteries and
vice-versa (negatively sloping demand curve).
3.4-Taste, Habit and Fashion
Taste, habit and fashion also play important role to determine the
consumer's demand. The demand for a particular commodity changes due
to change in taste, habit and fashion of the consumer. When the
consumer is habitual for any goods or the goods that are flavoring to
him, demand for those goods increases. Similarly, when a particular
commodity exists on fashion, its demand increases but demand for that
commodity falls when it goes out of fashion.
3.5-Advertisement
Advertisement is a medium of motivating and attracting the consumers
towards a commodity. When the advertisement of a commodity is
repeatedly done, the consumers are naturally attracted towards the
commodity and demand for it. Consequently demand for that commodity
rises but reverse will be the case for the commodity without
advertisement. So advertisement is one of the determinants of
consumers' demand.
3.6-Seasons
The seasons also are determinants of consumers' demand for goods and
services. In some particular seasons, demand for some certain goods get
changed whereas in some other seasons demand for those good falls to
the lowest level. For example, demand for cold drinks, cotton clothes
etc. goes high in summer season but low in winter season. Likewise
demand for woolen clothes, hot drinks etc. goes high in winter but low
in summer. Similarly, there is an increase in demand for umbrellas and
gumboots in rainy seasons but fall in other seasons. Thus, demand for a
commodity is also influenced by seasons.
3.7-Size of population
Size of population is also an influencing factor for quantity demanded
of a commodity. When the size of population is big, naturally demand
for normal goods is high and vice-versa. Similarly increase or decrease
the number of certain age groups determine the demand for particular
commodity. For example, increase in the number of children causes
demand for playing items like dolls, toys, swings etc.
3.8-Expectation to change in price in future
Expectation to change in price in future also affects demands for a
commodity. Demand for a commodity increases when there in an
expectation to rise in the price of that commodity in near future and
vice-versa.
3.9-Distribution of national income
Distribution of national income also affects the quantity demanded of a
commodity. When the distribution of national income is unequal, some
people are rich but a majority of people are poor. In such a situation
demand for luxurious goods is high but at the same time demand for
inferior goods is also high and demand for normal goods is low. When
income is equally distributed, the purchasing power of all the people
is similar to one another and in such a situation demand for luxurious
goods declines, and demand for normal goods increases.
3.9-Taxes
Tax system is also one of the determinants of demand. Imposition of
higher rate of direct and indirect taxes to the consumer reduces their
purchasing power. Consequently, demand for goods falls whereas tax
release increases the real income of the consumer and demand for goods
goes up.
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[11]Fundamental Principles of Economics
6. Fundamental Principles of Economics
There are ten fundamental principles of economics and these principles
of economics have been divided under the three categories as given
below.
6.1- How People Make Decisions
6.2- How People Interact
6.3- How the economy as a whole works
6.1- How People make decision
Under this category, there are four principles as given below.
6.1.1-People face trade-offs
Facing tradeoff means how to make a balance between two things that we
need or want in exchange with our limited resources. These two things
are opposite to each other. In our real life we always face trade off
while making decision about something. It is because to get one thing
that we like, we usually have to give up another thing that we like. So
making decisions requires trading off one goal against another.
6.1.2- Cost of something is what you give up to get something
People face tradeoffs, so making decisions requires comparing the
costs and benefits of alternative courses of action. When you spend a
year listening to lectures, reading textbooks, and writing papers, you
cannot spend that time working at a job. For you, the wages given up to
attend school are the cost of your education. The opportunity cost to
attend school or having education are the wages given up. So the
opportunity cost of an item is what you give up to get that item. When
making any decision, decision makers should be aware of the opportunity
costs.
6.1.3- Rational people think at the margin
In economics it is assumed that people are rational and
rational people make the best decisions by thinking at the margin
(edge) or comparing additional costs for extra benefits. Suppose you
have been to the market for shopping from your house by bus by paying
Rs.50 bus-fare. There is also a circus-show at one corner in the
market. You like to watch it but whether to watch it today or come to
the next day to watch it, to decide it, you compare the cost for coming
in the next day, that is Rs.50 bus-fare + Rs.20 circus charge against
benefit or utility from watching circus today or the next day. This is,
individuals and firms can make better decisions by thinking at the
margin. A rational decision maker takes an action if and only if the
marginal benefit of the action exceeds the marginal cost.
6.1.4-People respond to incentives
Incentive means something that encourages people to do
something. People make decisions by comparing costs and benefits, their
behavior may change when the costs or benefits change. That is, people
respond to incentives. When the price of an apple rises, for instance,
people decide to eat more pears and fewer apples, because the cost of
buying an apple is higher. At the same time, apple orchards decide to
hire more workers and harvest more apples, because the benefit of
selling an apple is also higher. Thus people respond to incentives.
6.2-How People interact
Under this category, there are three principles as given below.
6.2.1-Trade can make everyone better off
Either we talk about individuals, society or countries,
trade can make everyone better off. If there were no trade, we would
make everything that we need by ourselves. Perhaps we would lack to
get much that we require but it is trade that allows individuals, firms
or countries to specialize in what they do best and enjoy a wider
variety of goods. Therefore, trade is the one that can make everyone
better off.
6.2.2-Markets are usually a good way to organize economic activity
Markets are usually a good way to organize economic
activity. Today, most countries that once had centrally planned
economies have abandoned this system and are trying to develop market
economies. In a market economy, the decisions of a central planner are
replaced by the decisions of millions of firms and households. Firms
decide whom to hire and what to make. Households decide which firms to
work for and what to buy with their incomes. These firms and households
interact in the marketplace, where prices and self-interest guide their
decisions of making economic activities. Thus markets are usually a
good way to organize economic activities.
6.2.3- Government can sometimes improve market outcomes
Markets are usually a good way to organize economic
activity. It is true if only the government plays a crucial role to
settle markets. Govt. provide legal safety to the economic agents i.e.
producers, firms and consumers. Importantly, markets work only if
property rights are enforced. For example, a farmer won't grow food if
he expects his crops to be stolen, a restaurant won't serve meals
unless it is assured that customers will pay before they leave. We will
rely on the government provided police & courts to enforce our rights
over the things we produce.
And sometimes markets fail to work due to some external
effects. There is less efficiency, less equality, lack of efficient
allocation of resources. In such a condition, the government can
intervene and improve market outcomes by its public policy.
6.3-How the economy as a whole works
Under this category, there are three principles as given below.
6.3.1- Country's standard of living depends on its ability to produce
goods and services
The living standard of a country or its people primarily
depends on its ability to produce goods and services. The more the
ability to produce goods and services, the more people can enjoy
required goods and services and maintain a high standard of living.
Conversely, where there is low productivity, most of the people are
compelled to spend a miserly life.
6.3.2- Prices rise when government prints too much money
The variation in prices of goods and services also depends
on the quantity of money supply in the economy. When the govt. creates
large amounts of money and lets them go in circulation, the value of
money goes down and the prices of goods and services rises. The
continuous and sustained rise in price level is called inflation. If
such a situation is not timely checked, it brings an adverse effect in
the economy.
6.3.3- Society faces a short-run tradeoff between inflation and
unemployment,
There is a short-run trade-off between inflation and
unemployment. With the increase in the quantity of money supply, the
demand for goods and services goes up. It is because there is more
money in the hands of the buyers. Consequently, there is an increase in
the price level (inflation) and in the meantime it also encourages
producers to increase the quantity of goods and services they produce.
So the producers employ more workers to produce more goods and services
and supply them. It is, employing more workers means lower
unemployment. Thus there is a short-run trade-off between inflation and
unemployment.
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Labels: [19]Comparative and Dynamics, [20]Concept and Scope of
Economics, [21]Concept of Normative and Positive Economics,
[22]Importance of Microeconomics, [23]Types of Micro-economic Analysis
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Concept and Scope of Economics
[27]Meaning and Concept of Demand
1- Meaning & Concept of Demand Generally, demand refers to a desire
or want of anything, but a mere desire or want of anything i...
* [28]Types of Micro-economic Analysis
1. Types of micro-economic analysis On the basis of time, the
equilibrium between two variables in microeconomics is divided into
three part...
* [29]Fundamental Principles of Economics
6. Fundamental Principles of Economics There are ten fundamental
principles of economics and these principles of economics have been
d...
* [30]Concept and Scope of Economics
1. Concept and Scope of Economics The basic economic problem that
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