Economics And Econometrics

Pr ice Elasticity of demand depends upon various factors. Some of the important determinants of price elasticity of demand are as follows: 1. Nature of Commodity: Necessity goods like salt, kerosene oil, match boxes, textbooks, seasonal vegetables etc. have inelastic demand. Whereas, luxuries like air conditioners, costly furniture, fashionable garments, etc. have elastic demand. 2. Availability of Substitutes: Demand for those goods whose substitute are readily available, is relatively more elastic. Example tea and coffee. On the other hand, goods without close substitutes like Cigarettes, and liquor, are generally less elastic.    3. Multiple Uses: Goods which can be put to multiple uses have elastic demand. Example electricity. 4. Postponement of Use: Demand for those goods, the consumption of which can be postponed, is elastic. Eg: Demand for residential houses. 5. Income Level of the buyers: The degree of elasticity also depends upon whether consumers of the goo...

  Price Elasticity of Demand: The concept We learnt that during movement along the demand, decrease in own price of the commodity causes extension of demand and increase in own price of commodity causes contraction of demand .  However, we did not discuss the magnitude of change or the extent or degree of change in quantity demanded due to change in the own price of the commodity.    We only discussed the direction of change. Definition:  Price Elasticity of demand is a measurement of the  degree of change  in demand in response to a change in own price of commodity.  Measurement of Price Elasticity of demand: Percentage Change Method According to Percentage Change method, elasticity of demand (say of commodity X) is measured as the ratio between percentage change in quantity demanded of commodity -X and percentage change in price of commodity-X. Thus, for a given commodity (say-X), the  Price Elasticity of Demand  is given by: E d ...

  Movement along the Demand Curve and Shift in Demand Curve: The Difference Movement along the Demand Curve Shift in Demand Curve Extension of Demand refers to all such situations when change in demand is related to change in own price of the commodity. It is also called change in quantity demanded. Shift in Demand refers to all such situations when change in demand is related to factors other than own price of the commodity. It is also called “change in demand.” Other determinants of demand (other than own price of the commodity) are assumed as constant. Own price of the commodity is assumed as constant while any of the other determinants of demand changes Diagrammatically it is shown as a downward or upward along the same demand curve. Diagrammatically it is shown as a forward or backward shift in demand curve. Extension of Demand and Incre...

  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 commod...

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: D X = f ( P X, Pr, Y, T, E ),                 Where, D X = Quantity demanded of the commodity X   P X = 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. M...

LAW OF DEMAND Law of demand states that assuming other things remaining constant (Cetris paribus), there is an inverse relationship between quantity demand of a commodity and the price of the commodity.   Assumptions of the Law of Demand Law of demand holds good when “ other things remaining the same ”. Quantity demanded function is given by:  D X = f ( P X, Pr, Y, T, E, N, Y d ), Here, other things refer to other factors, other than own price of the commodity. These other things remaining constant are as following: 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 Y d = Distribution of Income  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 ...

  Demand Curve and Its Slope Demand curve  is a graphic presentation of demand schedule showing how quantity demanded of a commodity is related to its own price. Like demand Schedule, concept of demand curve includes the following two types: 1. Individual Demand Curve:  Individual Demand Curve is a curve showing different quantitates of a commodity that one particular buyer is ready to buy at different possible prices of a commodity at a point of time. 2. Market Demand Curve:  Market Demand Curve is the horizontal summation of the individual demand curves. It shows the various quantities of a commodity that all the buyers in the market are ready to buy at different possible prices of the commodity at a point of time. Slope of the Demand Curve Demand curve normally slopes downward, indicating negative (or inverse) relationship between price of a commodity and its quantity demanded. Slope of the demand curve is estimated as:(-) Change in Price/ Change in Quantity...

Demand for a commodity is the desire, ability and willingness to pay for a commodity at a given point of time or during a period of time.     Difference between Demand and Quantity Demanded Demand : Demand refers to different possible quantities of a commodity that the consumer is ready to buy at different possible prices of that commodity. For example, demand for commodity-X refers to say 10 units of X if price of X is Rs. 5 per unit, 8 unit of X if price of X is Rs. 6 per unit, 6 units of X if price of X is Rs. 7 per unit and so on. Quantity Demanded: Quantity demanded refers to a specific quantity to be purchased against a specific price of the commodity. For example, quantity demanded of commodity-X refers to say 8 units of X if price of X happens to be Rs. 6 per unit.    Demand Schedule According to Professor Paul Samuelson, “ The table relating to price and quantity demanded is called the demand schedule.” Demand Schedules are of the following two ...

  Consumer’s equilibrium refers to optimum choice of the consumer. It is reached when he maximizes his satisfaction. According to Indifference Curve analysis, the consumer reaches his equilibrium (optimum choice or commodity bundle) when the following two conditions are satisfied: (1) MRS XY  (Slope of the IC) = ( Slope of the budget line/ Price Line) (2) IC is convex at the point of equilibrium Or MRS falls continuously as more is consumed of one good in place of another.   Rationale Behind Conditions of Equilibrium Condition1 :MRS XY  = Px/Py  [Slope of IC = Slope of Price line   OR  IC and price line are tangent to each other] The consumer will strike his equilibrium only when  MRS XY  =  Px/Py . Because at no other point (within the range of available/feasible combinations of Good-X and Good -Y) can he maximize satisfaction. E is the point of consumer equilibrium Condition 2: IC is convex at the point of equilibrium Or ...

Budget of a Consumer Budget Set of a consumer refers to attainable combinations of a set of two goods, given prices of two goods and the consumer of the Income. The Budget set equation or Budget equation is: P 1 X 1 +P 2 X 2 Where P 1 =Price of Good-1, X 1 = Quantity of Good-1;             P 2 = Price of Good-2 and X 2 = Quantity of Good-2;             Y is the total expenditure or total budget  Budget Line: Budget line is a line showing different possible combinations of Good-1 and Good -2, which a consumer can buy, given his budget and the prices of Good-1 and Good-2. Anywhere on the budget line, a consumer is spending his entire income either on Good-1 or on Good-2 or on both Good-1 and Good-2.  Slope of the budget line/Price Line is also given by Market Rate of Exchange (MRE).   It must be noted that the...

C onsumer’s equilibrium is defined as a situation when he maximizes his satisfaction spending his given income across different goods with given prices. In indifference curve (IC) analysis, level of satisfaction is never expressed in numbers or satisfaction is never measured. The level of satisfaction derived by the consumer consuming various commodity bundles are only ranked or compared as equal, less than or more than in different situations. Following are the differences between Utility analysis and Indifference Curve Analysis: Utility Analysis Indifference Curve Analysis Utility Analysis assumes utility to be cardinal which can be expressed and measured in exact units. In Indifference Curve analysis, the level of satisfaction is only ranked or compared as equal, less than or more than in different situations. Utility Analysis is not realistic as nobody measures level of satisfaction in numerical terms. ...