Econometrics And Econometricians December 01, 2021

Revenue curves under Different markets

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Broadly markets are of three types as follows: 1. Perfectly competitive market 2.Monopoly market 3.Monopolistic competitive market 1.Revenue curve under perfectly competitive market or Perfect competition: Under perfect competition, a firm is a price taker. It cannot influence /change the market price. AR and MR curve 2. Revenue Curve Under Monopoly: A monopolist is a price maker. He is the single seller of the product in the market. Under monopoly, however, if a firm desires to sell more , he has to reduce price of the product. Thus, there is  negative relationship  between price of the product na ddemand for the product in a monopoly market. Accordingly, a Firm’s AR curve (or the demand curve or the priice line) slopes downaward.  3. Revenue Curve Under Monopolistic Competition: In a Monopolistic Competitive market, producers sell “differentiated product” which means products whose close substitutes are easily available in the market. Under Monopolistic Compet...
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What are the Factors affecting Demand?

Demand Functions: Demand function shows the relationship between demand for a commodity and its various factors (determinants) that affect the demand.

There are two types of demand functions:

(1) Individual Demand Function: Individual demand functions shows how demand for a commodity by an individual consumer in the market, is related to its various determinants(affecting)factors. Individual demand function can be written as the following:

DX = f (PX, Pr, Y, T, E),           

     Where, DX = Quantity demanded of the commodity X

  PX = Price of X

  Pr= Prices of related commodities

  Y= Income of the consumer

  T=Tastes and Preferences of the consumer

  E= Consumer’s expectations

(2) Market Demand Functions: market Demand function shows how market demand for a commodity (or total demand for a commodity in the market) is related to its various determinants.

Mkt. DX = f (PX, Pr, Y, T, E, N, Yd),

Where, Mkt. DX = Market demand for commodity X

 PX = Price of X

 Pr= Prices of related commodities

 Y= Income of the consumer

 T=Tastes and Preferences of the consumer

 E= Consumer’s expectations

 N= Population Size/ Number of buyers

 Yd = Distribution of Income


Determinants (Factors) of Demand

1. Own Price of commodity (PX = Price of X): Other things remaining constant, rise in prices of a commodity leads to its lower demand and fall in the price of a commodity leads to its higher demand.

2. Prices of related commodities (Pr)= Demand of a commodity is influenced not only by changes in its own price but also by changes in the price of the related commodity.

Related commodities are of two types:

1. Substitute Goods: Substitute Goods are those goods which can be inter-changed for use, such as Tea and Coffee or ball-pen and Ink-pen etc. (can you think of some more examples??).

In case of substitute goods, increase in the price of one good (say coffee) will lead to increase in the demand for the other good (such as tea) and vice-versa. Hence, we find that there is a direct relationship between the Price and the quantity demanded of the substitute goods.

2.Complementary Goods: Complementary goods are those goods which complete the demand for each other, and are, therefore, demanded together. Some examples are Pen and ink, bread and butter (I am sure you can think of many other such examples).

In case of complementary goods, a fall in the price of one cause increase in the demand for the other and a rise in the price of one cause decrease in the demand for the other. Hence, we find that in case of complementary goods, there is an inverse relationship between the price of one good and the quantity demanded of the other good.

3. Income of the consumer (Y): Change in the income of the consumer also influences the quantity demanded. The demand for normal goods tends to increase with increase in income and vice-versa. On the other hand, the demand for inferior goods (like coarse grain) tends to decrease with increase in income and vice-versa.

4. Tastes and Preferences of the consumer (T): The demand for goods and services also depends on individual’s tastes and preferences. Tastes and preferences of the consumers are influenced by advertisement, change in fashion, climate, new inventions, etc. Other things remaining the same, demand for those goods increase for which consumers develop strong tastes and preferences and vice-versa.

5. Expectations (E): If the consumer expects a significant change in the availability of the concerned commodity in the near future, he may decide to change his present demand for the commodity. Particularly, if the consumer fears acute shortage of the commodity in the near future, he may raise his present demand for the commodity at its existing price.

6. Population Size/ Number of Buyers: Demand increase with the increase in the number of buyers for a commodity. For instance, owing to substantial increase in the number of the buyers, the demand for cars has substantially risen in India.

7. Distribution of Income: Market demand is also influenced by the distribution of income in the society. If redistribution of income increases inequality (rich becoming richer and poor becoming poorer), the demand for luxury goods is expected to rise.               



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