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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Why does Demand Curve Slopes Downward?

 Why More of a good is purchased when its price fall?

Or

Why does Demand Curve Slope Downward?

 

Downward slope of demand curve indicates that more is purchased in response to fall in price. There is an inverse relationship between own price of a commodity and its quantity demanded. This may be explained in terms of the following factors:

(i) Law of diminishing marginal utility: According to this law, as consumption of a commodity increases, marginal utility from each successive unit goes on diminishing. Accordingly, for every additional unit to be purchased, the consumer is willing to pay less and less price.

 

(ii) Real Income Effect: Income effect refers to the effect on quantity demanded when real income of the buyer changes owing to change in price of the commodity. With a fall in price, real income increases. Accordingly, demand for the commodity expands.

 

(iii) Substitution Effect: Substitution effect refers to substitution of one commodity for the other when it becomes relatively cheaper. Thus, when own price of the commodity -X falls, it becomes cheaper in relation to commodity-Y. It is expansion of demand (for commodity -X) due to substitution effect.

 

(iv) Size of consumer group: When price of the commodity falls, many more buyers to can afford to buy it. Accordingly, demand for the commodity expands.

 

Exception to the Law of Demand

There are some commodities whose demand rises even when their price rise and falls when their price falls, thus violating the Law of demand. The demand curve for such commodities will slope upwards from left to right. Following are some notable exceptions to the law of demand:

 

1. Articles of Social Distinction: (Veblen Goods): According to Professor Veblen, there are certain goods which are articles of social distinction. These articles are demanded only because their prices are high. If prices fall, they are no longer be considered an article of distinction and their demand shrinks. Thus, these goods defy the Law of demand. Examples: Precious diamond, Vintage Cars and Very expensive branded watches such as Patek Phillip watches etc.

2. Giffen Goods: Giffen goods are highly inferior goods, showing a very high negative income effect. As, a result, when prices of such commodities falls, their demand also falls even when they are relatively cheaper than other goods. This is popularly known as Giffen Paradox.

3. Irrational Judgement: Law of demand fails when consumers judge quality of commodity by its price. This is result of irrational judgement. For example, richer section of society considers organic product as of very high quality. As a consequence, even when their prices rise, they demand more of these commodities. 

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