Deepak Economics

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Types of Income elasticity of demand

1) Negative income elasticity of demand: -

In this case demand of the product decreases with increase in the income of

the consumer. Those goods that have negative income elasticity of demand.

2) Positive income elasticity of demand:-In this case increase in income leads to increase in demand of products at all

price levels. Those are the normal goods. The increase in demand rises ut

not as fast as lu!urious goods.

") #ross price elasticity of demand:-

It is the study of change in the demand of $!% good due to the change in the

price of the $y% good. &or e!ample: the study of change in the price of petrol

on the demand of petrol fueled cars.

The following formula is used to calculate the price elasticity of demandEP=

Q

PP

Q

') The coefficient on the price of petrol in the regression of (uantity demanded of

automoile in millions of units) on the price of petrol is *1+.

#alculate the cross price elasticity on demand etween automoiles and the petrol

and the price of *1 per unit and sales of automoiles of , million units

ns. -1+1/,) 0 -1.#ross P3


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&actors determining price elasticity of supply

1) Time under consideration

time is put under " #ategories

a. 4ar5et period

this is considered when the supply has reached the mar5et6 i.e. supply

is constant. 7o the supply will remain inelastic here.

. 7hort period

short-period is regarded as a situation in which production can e

increased y using more (uantity of laor only. The time is so short6that the stoc5 of machines cannot e changed. 7o the supply of the

product ecomes relatively inelastic.

c. 8ong period

this refers to a situation in which the supply of the product is

relatively elastic ecause production can e increased y installing

more machines in the factory

2) vailaility of raw materials and the price at which they are availale are

also factors for price elasticity of supply.dditional formulae

percentage change in (uantity demanded can e calculated for a given change in

price

9 Q= PE


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Percentage change in price can e calculated for a given percentage change in

(uantity demanded

P=

%QD

E

4ethod of forecasting

) 'ualitative factors

a. #onsumer survey: uyers are as5ed aout future uying intentions of

products6 rand preferences and (uantities of purchase6 response to an

increase in price6 or comparison with competitor%s products

. 3elphi method: it is a structured communication techni(ue or method6originally developed as a systematic6 interactive forecasting method

which relies on a panel of e!perts.

c. !pert opinion method: an approach to demand forecasting is to as5

the e!perts in the field to provide their own estimates of li5ely sales.

!perts may include e!ecutives directly involved in the mar5et6 such

as dealers6 distriutors and suppliers or others whose maor interest is

in the forecast itself such as industry analyst6 specialist mar5eting

consultants etc.d. #ollective opinion method: sales persons are in direct contact with the

customers. 7alespersons are as5ed aout estimated sales target in their

respective sales territories in a given period of time

e. 4ar5et e!periment method: involves real mar5ets in which consumers

actually uy a product without the consciousness of eing oserved.

Product is actually sold in certain segments of mar5et6 regarded as

;test mar5et


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>) 'uantitative method

a. ?egression analysis: it is a statistical tool for estimating the

relationship among different variales. It includes many techni(ues

for modeling and analy@ing several variales6 when the focus is on the

relationship etween a dependent variale and one or moreindependent variales

. Time series analysis: is the use of a model to predict the future values

ased on previously oserved values.

?eturns to scale:

If the production is increased y using more (uantity of all factors then this type of

increase in production is 5nown as long period. In the long run the firm has to use

more (uantity of all factors i.e. more (uantity of fi!ed factors as well as of variale

factors. In other words in the long periods all factors are variale factor ecause

the (uantity of all factors have to e changed).

The returns to scale are e!plained with the help of following:

1) Increasing returns to scale

2) #onstant returns to scale

") 3iminishing returns to scale

Increasing returns to scale: this refers to a situation in which the output is increasedy using factors in a certain ration. The increase in the output is proportionately

greater than the increase in inputs.

#onstant returns to scale: in this case increase in output is e(ual to the increase in

the inputs. The proportionate increase in the inputs results in an e(ual increase in

the output.

3iminishing returns to scale: in this case the output is lower than the proportionate

increase in the inputs.

8aw of variale proportion ?eturns to scale

The law of variale proportion apply for

short period

This law is applied to long period

This law applies when the production is

increased y using more (uantity only

The (uantity of all factors change. The

production is increased y using more


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of laor. The (uantity of fi!ed factor is

fi!ed

(uantity of all the factors

This law applies when the proportion

etween variale factor and fi!ed

factors is altered i.e. output is increasedy changing the proportion etween

fi!ed and variale factors. Aowever6 the

scale of production remains constant.

This law applies when the output is

increased y increasing the scale of

production ut y 5eeping theproportion etween the variale factors

and fi!ed factors constant.

In this law we find three stages. These

are distinguished on the asis of the

ehavior of total product and marginal

product

In this case also we find three stages i.e.

increasing return6 constant return and

diminishing returns. These stages are

distinguished on the asis of the

relationship etween input and output.

Bligopoly

3iscriminating 4onopoly or Price 3iscrimination

3egrees of price discrimination

1) &irst degree perfect) price discrimination

2) 7econd degree price discrimination

") Third degree price discrimination

&irst degree perfect) price discrimination

The seller 5eeps on increasing the price till the consumer surplus is ta5en away


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3ifficulties:

?e(uires precise 5nowledge aout the consumer reaction to increase in

price.

7econd degree

8ower prices are offered for large (uantities and uyers can self-select the price y

choosing how much to uy.

Chen the same customer uys more than one unit of a good or service at a time6

the marginal value placed on additional unit declines as more units are consumed.

3eclining >loc5 pricing: -Bffers (uantity discounts over successive discrete loc5

of (uantities purchased.

Third degree price discrimination

#ase of 3umping

3umping is a case of charging high price in home country and low price in foreign

country.

" cases of dumping

3isposing e!cess stoc5

Aurting other country%s industry

4a5ing a foothold in other country

Important terms:

1) Dlutwhen a country has too much of stoc5 temporary)


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2) 7poradicdisposing e!cess stoc5

") Predatoryto harm industry in another country

+) Import dutyan anti-dumping ta!

) CTBgoverning ody to chec5 dumping

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