Q.1. What are the determinates of Demand? Explain them in brief. (2002-03, 07-08)
Ans. Determinants of Demand: -
There are many economic, social and political factors or determinats, which greayly influence the demand for commodity. Some of these factors are discussed below –
(i) Price of Commodity: -
The most significant factor which influences the demand is the price of the commodity. As the price of a commodity changes, it causes an inversa change in the-demand for commodity. In other words, the demand or a commodity rises when its prices fall and vice versa, other things remaining unchanged.
(ii) Price of Related Commodities: -
Related goods are of two types, namely, substitute goods and complementary goods. How do their price affect the demand is shown below.
(a) Substitute Goods: -
Substitute goods are those goods, which can be used (substituted) in place of one another, e.g. – tea and coffee, car and scooter, Coca and pepsi.
For example, a fall in price of coffee (substitute good) will reduce the demand for tea becomes the consumers will substitute coffee for tea. This is called direct relationship between of its substitute good.
(b) Complementary Goods : -
Complementary goods are those, which are used together to satisfy a given wants. In such cases, utility of a good depends upon the availability of an other related good. They are complementary to each other and are jointly demanded, e.g. scooter and petrol torch and cells. What is the relationship between the house hold demand for a commodity (say scooter) and price of its complementary good (say petrol) ? it is inverse relationship because a fall in the price of petrol will increase the demand of one commodity is negatively related to the price of other.
(iii) Level of Income: -
Other things being equal, the demand for a commodity depends upon the income of the household. In most cases, the larger average income of household, the larger is the quantity demanded of a particular good. However, there are certain commodities for which quantities demanded decrease within an increase in income. These goods are called inferior goods. Even the case of other goods, the response of quantities demanded to changes in their prices is not of same proportions.
(iv) Tastes and Preferences of Consumers: -
The demand for a commodity also depends upon tastes and preferences of consumers and changes in them over a period of time. Goods, which are more in fashion command higher demand than good which are out of fashion.
(v) Distribution of Wealth: -
The quantity demanded of a commodity is also influenced by the distribution of wealth in the society. If there is an equal distribution of income in the society demand will be higher and in case of inequality demand will be less.
(vi) Government Policy: -
Government policy is also responsible to influence the demand for commodity. If the government imposes additional taxes on various commodities, it would lead to an increase in the price of the commodity. This would bring down the demand for such commodities.
Q.2. Why do demand curves always slope downward to right? Will it always happen? (2002-03)
Ans. Why Demand Curve Slopes Downwards: -
Generally, the demand curve slopes downwards, this is in accordance with the law of diminishing marginal utility. This law governs the purchase of most of us. When the prices falls, new purchasers enter the market and old purchases will probably purchase more. Since this particular commodity has some between cheaper, some people in preference to other commodities will purchase it. Only in a curve of this slope shall we find shorter price lines cutting longer pieces on the quantity axis. If the law of diminishing marginal utility is true and it is generally true the curve must, slope downward, for only then the phenomenon of increasing demand with falling prices can be represented.
There are three obvious reasons why people buy more when the price falls.
(i) A unit of money goes father and a consumer can afford to by more. He is able and willing to buy more because the thing being cheaper, his real income increases. It is called income effect.
(ii) When the commodity becomes cheaper, it tends to be substituted wholly or partly for other commodities. This is called substitution effect. The income effect and substitution effect combine to increase the ability and willingness of the consumers to buy more of the commodity whose price has fallen.
(iii) A commodity tends to be put to more uses or less urgent, uses when it becomes cheaper.
For example ; if water is clear, we shall use it for drinking only ; but when it becomes cheaper, we shall use it for washing and other less urgent uses.
Thus, the old buyers buy more and some new buyers enter the market. The cumulative effect is an extension of demand when price falls.
Q.3. Show, how the price effect is combination of two effects-
(i) Income effect, and (ii) Substitution effect (2002-03)
Ans. Price Effect : -
Price effect denotes in demand of a commodity censed by change in its price. Iot is the combined effect of income effect and substitution effect. Thus,
Price effect = Income effect + substitution effect when the price of a commodity falls, real income of the consumer goes up leading to rise in demand (income effect). When price of a commodity falls, it becomes relatively cheaper than its substitute goods leading to rise in demand (substitution effect) clearly, rise in demand due to fall in price is the result of income effect and substitution effect thus,change in demand of a commodity cancel by changes in its price is known as price effect.
(i) Income Effect: -
A change in quantity of a commodity demanded as a result of change in real income censed by change in price is called income effect. Alternatively effect on demand for a commodity falls, less has to be spent, on purpose of the same quantity of that commodity. With money thus saved, a consumer can purchase more quantity of the said commodity. In other words, fall in price increases purchasing power of a consumer, which enables him to purchase more quantity with the same income. Thus, effect on demand for a commodity due to change in real income for a commodity due to change in real income effect. It should be noted that income effect is related to change in real income censed by change in price and not related to change in money income.
(ii) Substitution Effect: -
Substitute goods are those goods, which can be used in place of each other to satisfy a given want e.g. coffee and tea or shee and oil. They are also called competitive good. Between substitute goods, use of one in place of other when the former becomes relatively cheaper is called substitution effect. In other words, when price of a commodity falls, demand for it rises becomes of substitution effect. Reverse happens when price of a commodity rises; demand for it falls because of substitution effect. In short, substitution effect refers to substitution of one commodity in place of other commodity when the former is relatively cheaper.