Economics And Econometrics

  Production Function and Returns to a Factor T here are four factors of production: Land, Labour, Capital and Entrepreneurship. For contributing their factor services, factor payments for the four factors of productions are as follows: Rent (land), wages and salaries (Labour), Interest (capital) and Profit (entrepreneurship).   I. Production Function: Production function is the function relationship between physical inputs and physical output of a commodity for a given technology. It is purely a technical relationship. Production function is expressed in terms of the following equation: Q X = f (L, K) For example, if physical inputs (say 10 units of capital and 5 units of labor) are required to produce physical output(say 100 units of the commodity), the production function for the same will be written as : 100 X = f(5L, 10K). II. Fixed Factors and Variable Factors Factors of productions are classified as: (i) Fixed factors (ii) Variable Factors. (i) ...

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 ...