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Balbharati, solutions, for Economics, HSC, 12th, latest, Edison, Standard, Maharashtra State Board, Chapter 5, Forms of Market, with solution,

Q.1.Choose the correct option:

1. In economic sense, market includes following activities

a)The place where goods are sold and purchased.

b)An arrangement through which buyers and sellers come in close contact with each other directly or indirectly.

c)A shop where goods are sold.

d)All of the above.

a and b

b and c

a, b and c

only b


2. Classification of markets on the basis of place

a) Local market, National market, International market

b) Very short period market, Local market, National market.

c) Short period market, National market, International market.

d) Local market, National market, Short period market.

a, b and c

b, c and d

only a

a and d


3. Homogeneous products are a feature of this market.

a) Monopoly

b) Monopolistic competition

c) Perfect competition

d) Oligopoly

c and d

a, b and c

a, c and d

only c


4. Under Perfect competition, sellers are

a) Price makers

b) Price takers

c) Price discriminators

d) None of these

a, b and c

only b

only c

a and c


Q.2. Give economic term:

1. The market where there are few sellers.

ANS: – Oligopoly

2. The point where demand and supply curve intersect.

ANS: – Equilibrium point/price

3. The cost incurred by the firm to promote sales.

ANS: – Selling Cost

4. Number of firms producing identical product

ANS:- Homogeneous Product

5. Charging different prices to different consumers for the same product or services.

ANS:- Price Discrimination


Q.3. Complete the Correlation:

1. Perfect competition : Free entry and exit :: Monopoly : Barriers to entry.

2. Price taker : Perfect competition :: Price maker :: Monopoly.

3. Single price : Perfect competition :: Discriminated prices : Monopoly.


Q.4. Find the odd word out:

1. Selling cost: Free gifts, Advertisement hoardings, Window displays, Patents.

ANS: – Patents.

2. Market structure on the basis of competition: Monopoly, Oligopoly, Very Short Period market, Perfect competition.

ANS: – Very Short Period market

3.Features of monopoly: Price maker, Entrybarriers, Many sellers, Lack of substitutes.

ANS: – Many sellers

4. Legal monopoly: Patent, OPEC, Copyright, Trademark.

ANS: OPEC


Q.5. Answer the following:

1. Explain the features of Oligopoly.

Meaning:

The term oligopoly is derived from the Greek words ‘Oligo’ which means few and ‘poly’ which means sellers. It is that market where there are a few firms (sellers) in the market producing either a homogeneous product or a differentiated product. For example, mobile service providers, cement companies, etc.

Features of oligopoly:

Few firms or sellers: Under an oligopoly market, there are few firms or sellers. These few firms dominate the market and enjoy considerable control over the price of a product.

Interdependence: The seller has to be cautious with respect to any action taken by the competing firms. Since there are few sellers in the market, if any firm makes a change in the price, all other firms in the industry also try to follow the same to remain in the competition.

Advertising: Advertising is a powerful instrument in the hands of oligopolists. A firm under oligopoly can start an aggressive and attractive advertising campaign with the intention of capturing a large part of the market.

Entry barriers: The firm can easily exit from the industry whenever it wants. But has to face certain entry barriers such as Government license, patents etc.

Lack of uniformity: here is a lack of uniformity among the firms in terms of their size. Some firms may be small while others may be of a bigger size.

Uncertainty: There is a considerable element of uncertainty in this type of market due to different behavior patterns. Rivals may join hands and co-operate or may try to fight each other.


2. Types of monopoly/Explain the types of Monopoly.

Meaning: –

The term “MONOPOLY” is derived from two Greek words “Mono” which means “Single” and “Poly” which means “Sellers”. Thus Monopoly refers to “market structure in which a single seller controls the entire market”. And therefore the seller is a price maker and not the price taker. 

The following are some of the types of monopolies:

Pure, perfect or Absolute Monopoly: –

A pure or perfect monopoly means that the firm controls the supply of a product for which there is not even a remote (close) substitute. Such a monopoly is very rare.

Natural Monopoly: –

The monopoly power is acquired due to natural advantages such as good location, control over scarce resources, involvement of huge investment, etc.

Legal monopoly: –

It arises due to legal protection given to the producer in the form of patents, trade marks, copyrights, etc. The law prevents potential competitors from  producing identical products.

Technological monopoly: –

Big firms enjoy technological monopoly due to their superior technology and economies of scale. Other firms do not have the access to such technology cannot produce the quality goods produced by big firms.

Simple monopoly: –

In a simple monopoly the firm has monopoly power over a product or service, but it charges a uniform price to all the buyers.

Discriminating monopoly: –

In a discriminating monopoly, the firm charges different prices to different buyers in the same market or in different markets fir the same product.

Private monopoly: –

When an individual or a private firm controls the production it is regarded as private monopoly.

State or Social Monopoly: –

When the government owns and controls the production of a good or services it is called state or social monopoly.

Q.6. Observe the table and answer the question.

1. Fill in the blanks in the above schedule.

Price of banana (per dozen) in ₹Demand (in dozen)Supply (in dozen)Relation between DD and SS
10500100DD > SS
20400_____DD > SS
30_____300DD = SS
40200_____DD < SS
50______500DD < SS

ANSWER

Price of banana (per dozen) in ₹Demand (in dozen)Supply (in dozen)Relation between DD and SS
10500100DD > SS
20400200DD > SS
30300300DD = SS
40200400DD < SS
50100500DD < SS

2. Observe the table and answer the question:

ANSWER

Price of banana (per dozen) in ₹Demand (in dozen)Supply (in dozen)Relation between DD and SS
10500100DD > SS
20400_____DD > SS
30_____300DD = SS
40200_____DD < SS
50______500DD < SS

Derive the equilibrium price from the above schedule with the help of a suitable diagram.

Diagram

Q.7. Answer in detail

1. What is Monopolistic Competition? Explain in detail the features of Monopolistic Competition.

ANSWER: –

Meaning:

Monopolistic competition is very realistic in nature. In this market there are some features of perfect competition and some features of monopoly acting together. Prof. E. H. Chamberlin coined this concept in his book “Theory of Monopolistic Competition” which was published in 1933.

Definition:

According to Chamberlin, “Monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes.” 

Following are the main features of monopolistic competition:

Fairly large number of sellers:

In monopolistic competition, the number of sellers is large but comparatively, it is less than that of perfect competition. Due to this reason, sellers’ behaviour is like a monopoly.

Fairly large number of buyers:

In this market, there are fairly large numbers of buyers. Consequently, no single buyer can influence the price of the product by changing his individual demand.

Product differentiation:

Product differentiation is the main feature of monopolistic competition. In this market, there are many firms producing a particular product, but the product of each firm is in some way differentiated from the product of every other firm in the market. This is known as product differentiation. Product differentiation may take the form of brand names, trademarks, a peculiarity of package or container, shape, quality, cover, design, colour etc. This means that the product of a firm may find close substitutes and its cross elasticity of demand is very high. For example, mobile handsets, cold drinks etc.

Free entry and exit:

Under monopolistic competition there is freedom of entry and exit, that is new firms are free to enter the market if there is profit. Similarly, they can leave the market, if they find it difficult to survive.

Selling Cost:

Selling cost is peculiar to monopolistic competition only. It refers to the cost incurred by the firm to create more demand for its product and thus increase the volume of sales. It includes expenditure on advertisements, radio and television broadcasts, hoardings, exhibitions, window display, free gifts, free samples etc.

Close substitutes:

In monopolistic competition, goods have close substitutes to each other. For example, different brands of soaps, toothpastes etc.

Concept of group:

Under monopolistic competition, Chamberlin introduced the concept of ‘Group’ in place of industry.

Industry means the number of firms producing identical products.

A ‘Group’ means a number of firms producing differentiated products which are closely related.

For example, a group of firms producing medicines, automobiles etc.

2. What is meant by Perfect competitions? State its features. 

ANSWER: – 

FOR PERFECT COMPETITION

Perfect competition is defined as a market structure that consists of a large number of buyers and sellers such that no individual seller can influence the existing market price of the product. All the sellers in a perfect competition market produce homogenous products; that is, the output of all sellers is similar to each other and each firm sells its output at a uniform price.

The following are the features of perfect competition:

i. Large number of buyers and sellers- Under perfect competition, there are a large number of buyers and sellers. The number of sellers is so large that no individual firm has control over the market price of the commodity.

ii. Free entry and exit of firms- There is no restriction on the entry and exit of firms. This free entry and exit of the firms ensure that no firm earns either abnormal losses or abnormal profits in the long run.

iii. Homogeneous product- The product of each and every firm in the perfectly competitive market is a perfect substitute to others’ products in terms of quantity, quality, colour, size, features, etc.

iv. Perfect knowledge- In a perfectly competitive market, the buyers are aware of the prevailing market price of the product at different places and the sellers are aware of the prices at which the buyers are willing to buy the product.

v. Perfect mobility of factors of productions- In a perfect competition the factors of production are perfectly mobile. Such mobility implies that there is optimum utilisation of the factors of production.

vi. Absence of transport cost- In a perfect competition it is assumed that there is no transport cost. This further ensures that there is uniform price in the market.

ANSWER: – 

FEATURES PERFECT COMPETITION

Perfect competition is defined as a market structure that consists of a large number of buyers and sellers such that no individual seller can influence the existing market price of the product. All the sellers in a perfect competition market produce homogenous products; that is, the output of all sellers is similar to each other and each firm sells its output at a uniform price.

The following are the features of perfect competition:

i. Large number of buyers and sellers- Under perfect competition, there are a large number of buyers and sellers. The number of sellers is so large that no individual firm has control over the market price of the commodity.

ii. Free entry and exit of firms- There is no restriction on the entry and exit of firms. This free entry and exit of the firms ensure that no firm earns either abnormal losses or abnormal profits in the long run.

iii. Homogeneous product- The product of each and every firm in the perfectly competitive market is a perfect substitute to others’ products in terms of quantity, quality, colour, size, features, etc.

iv. Perfect knowledge- In a perfectly competitive market, the buyers are aware of the prevailing market price of the product at different places and the sellers are aware of the prices at which the buyers are willing to buy the product.

v. Perfect mobility of factors of productions- In perfect competition, the factors of production are perfectly mobile. Such mobility implies that there is optimum utilization of the factors of production.

vi. Absence of transport cost- In a perfect competition it is assumed that there is no transport cost. This further ensures that there is a uniform price in the market.

vii. Single price: A single uniform price prevails under perfect competition which is determined by the interaction of demand and supply.

Balbharati, solutions, for Economics, HSC, 12th Standard, Maharashtra State Board, Chapter Chapter 3, – (B) ELASTICITY OF DEMAND, with solutiong,

Q.1. Complete the following statement:

1. Price elasticity of demand on a linear demand curve at the X-axis is ________.

zero

one

infinity

less than one

2. Price elasticity of demand on a linear demand curve at the Y-axis is ________.

zero

one

infinity

greater than one

3. Demand curve is parallel to X-axis, in the case of ______.

perfectly elastic demand

perfectly inelastic demand

relatively elastic demand

relatively inelastic demand

4. When the percentage change in quantity demanded is more than the percentage change in price, the demand curve is ______.

flatter

steeper

rectangular

Horizontal

5. Ed = 0 in case of ______.

luxuries

normal goods

necessities

comforts

Q.2 Give economic term:

1. Degree of responsiveness of quantity demanded to change in income only.

Sol: – Income elasticity

2. Degree of responsiveness of a change in quantity demanded of one commodity due to change in the price of another commodity.

Sol: – Cross elasticity

3. Degree of responsiveness of a change of quantity demanded of a good to a change in its price.

Sol: – Elasticity demand

4. Elasticity resulting from infinite change in quantity demanded.

Sol: – Perfectly Elasticity of demand

5. Elasticity resulting from a proportionate change in quantity  

    demanded due to a proportionate change in price.

Sol: – Price Elasticity

Q.3. Complete the correlation:

1. Perfectly elastic demand : Ed = ∞ :: perfectly inelastic : Ed = 0

2. Rectangular hyperbola : Unitary elastic : Steeper demand curve : Relatively inelastic demand.

3. Straight line demand curve : Linear demand curve :: demand  

     curve is convex to the origin : non-linear demand curve.

4. Pen and ink : Complementary :: Tea and Coffee : Substitutes.

5. Ratio method : Ed =  %△Q/%△P

 :: Percentage change in quantity demanded/Percentage change in price : Ed  

   = Lower segment/ Upper segment

Q.4. Assertion and Reasoning type of question

1. Assertion (A): Degree of price elasticity is less than one in case of relatively inelastic demand.

Reasoning (R): Change in demand is less than the change in price. 

SOL: – Assertion (A): Degree of price elasticity is less than one in case of relatively inelastic demand.

Reasoning (R): Change in demand is less than the change in price.

Options

(A) is true, but (R) is false

(A) is false, but (R) is true

Both (A) and (R) are true and (R) is the correct explanation of (A)

Both (A) and (R) are true and (R) is not the correct explanation of (A)

2. Assertion (A): A change in quantity demanded of one commodity due to a change in the price of other commodity is cross elasticity

Reasoning (R): Changes in consumer income leads to a change in the quantity demanded.

SOL: – 2. Assertion (A): A change in quantity demanded of one commodity due to a change in the price of other commodity is cross elasticity

Reasoning (R): Changes in consumer income leads to a change in the quantity demanded.

(A) is true, but (R) is false

(A) is false, but (R) is true

Both (A) and (R) are true and (R) is the correct explanation of (A)

Both (A) and (R) are true and (R) is not the correct explanation of (A)

3. Assertion (A): Elasticity of demand explains that one variable is influenced by another variable.

Reasoning (R): The concept of elasticity of demand indicates the effect of price and changes in other factors on demand.

SOL: – 1. Assertion (A): Elasticity of demand explains that one variable is influenced by another variable.

Reasoning (R): The concept of elasticity of demand indicates the effect of price and changes in other factors on demand.

(A) is true, but (R) is false

(A) is false, but (R) is true

Both (A) and (R) are true and (R) is the correct explanation of (A)

Both (A) and (R) are true and (R) is not the correct explanation of (A)

Q.5. Distinguish between:

1. Relatively elastic demand and relatively inelastic demand.

Relatively elastic demandRelatively inelastic demand
In this case, the change in price leads to a proportionately large change in the quantity demanded.In this case, the change in price leads to a proportionately less change in the quantity demanded. 
It represents a flatter demand curve.It represents a steeper demand curve.
Symbolically it is represented as  Ed > 1Symbolically it is represented as Ed < 1
For example- 50% fall in price leads to 100% rise in quantity demanded.For example- 50% fall in price leads to 25% rise in quantity demanded.

2. Perfectly elastic demand and perfectly inelastic demand.

Perfectly elastic demandPerfectly inelastic demand
It implies that the demand is infinitely responsive to any change in the price of the good.It implies that the demand is completely unresponsive to any change in the price of the good.
The perfectly elastic demand curve is parallel to the OX axis.The perfectly elastic demand curve is parallel to the OY axis.
Symbolically it is represented as  Ed = ∞Symbolically it is represented as Ed = 0
For example- 10% fall in price may lead to an infinite rise in demand.For example- 20% fall in price will have no effect on quantity demanded.

Q.6. ANSWER THE FOLLOWING QUESTIONS.

1. What is ‘elasticity of demand’? Explain the factors determining elasticity of demand.

ANSWER: -Elasticity of Demand: Elasticity of demand means responsiveness of demand due to change in the price of the commodity, income of the consumer and price of the related goods.

Factors Determining Elasticity of Demand:-

Meaning:- There are several factors that influence the price elasticity of demand. The factors make the demand for a commodity either elastic or inelastic.

Factors are as follows:-

Nature of the commodity:- Demand tends to be relatively elastic for luxuries and comforts such as “Air Conditioners”. And demand is inelastic for necessary items such as Salt.

Availability of substitutes:- the greater the number of substitutes available for a commodity, the greater would be the elasticity of demand for that commodity. In other words, the demand for a product that has close substitutes is relatively elastic. However, salt has no substitute and therefore, its demand is always inelastic.

Composite Commodities:- Commodity having several uses tends to be more elastic in demand. For example; electricity can be used for several uses such as lighting, cooking, heating, etc however, a single- use commodity has inelastic demand.

Urgency:- If wants are more urgent, demand becomes relatively inelastic. If wants can be postponed, demand becomes relatively elastic.

Habits:- Habits make a demand for certain goods inelastic, for examples; cigarettes, drugs, liquor.

Income:- Demand for goods is usually inelastic if the consumer has high income.

Postponement of Consumption:- The demand is elastic if we could postpone the purchase of goods and services such as in the case of electronic goods. But purchase of essential items like food grains, salt, etc., cannot be postponed, and therefore, the demand for such goods is inelastic.

Complementary Goods:- When a good is linked with the use of other goods, demand may be inelastic or elastic depending on the demand for complementary goods. For example, the demand for petrol or diesel depends on the use of automobiles, agricultural equipment like water pumps, etc.

Durability: The demand for durable goods is relatively elastic. For example, furniture, washing machines, etc. Demand for perishable goods is inelastic. For example, milk, vegetables, etc.


2. Explain the total outlay method of measuring elasticity of demand?

The total outlay method is also known as “Total expenditure method“. This method was developed by Prof. Marshall. In this method, the total amount of expenditure before and after the price change is compared.

Here the total expenditure refers to the product of price and quantity demanded.

Total expenditure = Price × Quantity demanded

In this connection, Marshall has given the following propositions:

Relatively elastic demand (Ed >1): When with a given change in the price of a commodity total outlay increases, the elasticity of demand is greater than one.

Unitary elastic demand (Ed = 1): When the price falls or rises, the total outlay does not change or remains constant, the elasticity of demand is equal to one.

Relatively inelastic demand (Ed <1): When with a given change in the price of a commodity total outlay decreases, the elasticity of demand is less than one.

This can be explained with the help of the following example.

Total outlay method

Price in ₹ (P)Quantity demanded in units (Q)Total outlay (P × Q)Elasticity of demand
A10660Ed > 1
205100
B304120Ed = 1
403120
C502100Ed < 1
60160

In the above table example ‘A’ original price is  ₹ 10 per unit and the quantity demanded is 6 units.

Therefore, total expenditure incurred is ₹ 60.

When the price rises to ₹ 20 quantity demanded fall to 5 units, the total expenditure incurred is ₹ 100.

In this case, total outlay is greater than the original expenditure.

Hence, in this example elasticity of demand is greater than one.

(Ed >1) that is relatively elastic demand.

In example ‘B’, original price is ₹ 30 per unit and the quantity demanded is 4 units.

Therefore total expenditure is ₹ 120.

When price rises to ₹ 40 quantity demanded fall to ‘3’ units.

Total expenditure incurred is ₹ 120. In this case total outlay is the same (equal) to original expenditure.

Hence, in this example, elasticity of demand is equal to one (Ed = 1) which is unitary elastic demand.

In example ‘C’, original price is ₹ per unit and the quantity demanded is 2 units.

Therefore total expenditure is ₹ 100. When price rises to ₹ 60, quantity demand falls to 1 unit and total expenditure incurred is ₹ 60.

In this case total outlay is less than original expenditure.

Hence, elasticity of demand is less than one (Ed <1) that is relatively inelastic demand.


3. Explain the importance of elasticity of demand.

The term elasticity indicates the responsiveness of one variable to a change in the other variable. The elasticity of demand refers to the degree of responsiveness of quantity demanded to a change in its price or any other factor.

The concept of elasticity of demand is of great importance to producers, farmers, workers, and the Government. Lord Keynes considered this concept to be the most important contribution of Alfred Marshall. Significance of the concept becomes clear from the following applications:

Importance to a Producer: Every producer has to decide the price of his product at which he has to sell it. For this purpose, the elasticity of demand becomes important. If the demand for a product is relatively inelastic, he will fix up a higher price and vice-versa. The concept of elasticity of demand is also useful to a monopolist to practice price discrimination.

Importance to Government: The taxation policy of the Government is based on the concept of elasticity of demand. Those commodities whose demand is relatively inelastic will be taxed more because it will not affect their demand much and vice-versa.

Important in Factor Pricing: The concept of elasticity of demand is useful in the determination of factor prices. The factor of production for which demand is relatively inelastic can command a higher price as compared to those having elastic demand. For example, workers can ask for higher wages, if the demand for the product produced by them is relatively inelastic.

Importance in Foreign Trade: The concept of elasticity of demand is useful to determine terms and conditions in foreign trade. The countries exporting commodities for which demand is relatively inelastic can raise their prices. For example, the Organization of Petroleum Exporting Countries (OPEC) has increased the price of oil several times. The concept is also useful in formulating export and import policy of a country.

Public Utilities: In the case of public utilities like railways which have inelastic demand, the Government can either subsidize or nationalize them to avoid consumer’s exploitation.

Proportion of expenditure: If the proportion of expenditure in a person’s income is small, then demand for the product is relatively inelastic. For example, newspapers. If the proportion of expenditure is large, then demand for the product is relatively elastic.

Q.7. Observe the following figure and answer the questions:

1. Identify and define the degrees of elasticity of demand from the following demand curve. Diagram ‘A’

Sol: – Relatively elastic demand

Identify and define the degrees of elasticity of demand from the following demand curve. Diagram ‘B’

Sol: -Perfectly inelastic demand

Identify and define the degrees of elasticity of demand from the following demand curve. Diagram ‘C’

Sol: -Perfectly elastic demand

Identify and define the degrees of elasticity of demand from the following demand curve. Diagram ‘D’

Sol: -Unitary elastic demand

2. In the following diagram, AE is the linear demand curve of a commodity. On the basis of the given diagram state whether the following statement is True or False.

Give a reason for your answer.

1. Demand at point ‘C’ is relatively elastic demand.

Options

True

False

Reason: – Demand at point ‘C’ is relatively inelastic.

2. Demand at point ‘B’ is unitary elastic demand.

Options

True

False

Reason: – Demand at point ‘B’ is relatively elastic

3. Demand at point ‘D’ is perfectly inelastic demand.

Options

True

False

Reason: -Demand at point ‘D’ is unitary elastic demand.

4. Demand at point ‘A’ is perfectly elastic demand.

Options

True

False

Reason: – Demand at point ‘A’ is perfectly elastic demand

Balbharati solutions, for Economics, HSC, 12th Standard, Maharashtra State Board, Chapter- 3 (A), Demand Analysis, [Latest edition],

Chapter 3 – (A) Demand Analysis [Latest edition]

Q.1. Complete the following statement:

The relationship between demand for a good and price of its substitute is ______.

direct

inverse

no effect

can be direct and inverse


The relationship between income and demand for inferior goods is ______.

direct

inverse

no effect

can be direct and inverse


Symbolically, the functional relationship between Demand and Price can be expressed as ______.

Dx = f(Px)

Dx = f(Pz)

Dx = f(y)

Dx = f(T)


When less units are demanded at a high price it shows ______.

increase in demand

expansion of demand

decrease in demand

contraction in demand


Q.2. Give economic term:

1. A situation where more quantity is demanded at lower price ______.

A situation where more quantity is demanded at lower price expansion of demand.

Explanation:

Expansion of demand refers to a rise in quantity demanded due to falling in price alone while other factors like tastes, income of the consumer, size of the population, etc. remain unchanged.

Demand moves in a downward direction on the same demand curve.


2. Graphical representation of demand schedule _____.

Graphical representation of demand schedule demand curve.

Explanation:

Demand curve is a graphical representation of the individual demand schedule


3. A commodity which can be put to several uses ______.

A commodity which can be put to several uses composite demand.

Explanation:

The demand for a commodity which can be put to several uses is known as composite demand.

For example:

Electricity is demanded by several uses such as light, washing machines, etc.


4. More quantity is demanded due to changes in the factors determining demand other than price _____.

More quantity is demanded due to changes in the factors determining demand other than price increase in demand.

Explanation:

increase in demand: It refers to increase in quantity demanded due to favourable changes in other factors like tastes, income of the consumer, climatic conditions etc. and price remains constant.

Demand curve shifts to the right-hand side of the original demand curve.


5. A desire which is backed by willingness to purchase and ability to pay _______.

A desire which is backed by willingness to purchase and ability to pay demand.

Explanation:

Demand: According to Benham, “the demand for anything at a given price is the amount of it, which will be bought per unit of time at that price.”

In ordinary language, demand means a desire. 

Desire means an urge to have something. In Economics, demand means a desire which is backed by a willingness and ability to pay.


Q.3. Distinguish between:

1. Desire and demand.

DesireDemand
Desires refer to those wishes that a human being cherishes.Demand refers to the quantity of goods that individuals are willing to buy.
They may or may not be backed by financial power.It should be backed by financial power.
For example: Walking on the moonFor example, a consumer demands 2 kg sugar at Rs 10 per kg and 3 kg sugar at Rs 8 per kg.

2. Extension of Demand contraction of Demand

EXTENSION OF DEMANDCONTRACTION OF DEMAND
1. Meaning: – Extension of demand is a case of variation of demand. It takes place when quantity demanded is more due to a fall in price alone. Other factors remain constant.Contraction is also a case of variation of demand. It takes place when quantity demanded is less due to rise in price alone. Other factors remain constant.
2. Movement: –The movement is downwards along the same demand curve. The movement is upward along the same demand curve.

3. Increase in demand and Decrease in demand.

Increase in DemandDecrease in Demand
a) An increase in demand refers to a rise in demand due to changes in other factors, price remaining constant.a) A decrease in demand refers to fall in demand due to changes in other factors, price remaining constant.
b) An increase in demand occurs when more are purchased at the same price and the same quantity is purchased at a higher price.b) A decrease in demand occurs when less is purchased at the same price or the same quantity at a lower price.
c) Increase in demand is a result of(1) Increase in income(2) Increase in price of substitutes(3) Decrease in price of complementary goods(4) Increase in population/(5) When goods are in fashion.c) Decrease in demand is a result of(1) Decrease in income.(2) Decrease in price of substitutes.(3) Increase in price of complementary goods.(4) Decrease in population.(5) When goods go out of fashion.
d) When there is an increase in demand, the demand curve shifts to the right from DD to D1​D2​ as shown in the figure.d) When there is decrease in demand the demand curve shifts to the left from DD to D2​D2​ as shown in the figure.

Q.4. State with reason, whether you Agree or Disagree with the following statement. 

1. Demand curve slopes downward from left to right. 

Agree

Disagree

I agree with the given statement.

Yes, we agree that the demand curve slopes downward from left to right.

Demand curve is the graphical representation of the relationship between the demand for a good and its price, for a given income, price of related goods, tastes, and preferences.

This curve slopes downwards from left to right because of the negative relationship between the price of the commodity and its demand. 

The following are the main reasons as to why demand curve is downward sloping:

i. Law of diminishing marginal utility– Due to this law, consumers tend to buy more quantity of a good when price falls.

ii. Income effect– With a fall in price, the purchasing power of a person rises. As a result, he demands more of a good.

iii. Substitution effect– With a rise in price, the substitutes of good become cheaper in comparison. As a result, person demands less of that good and more substitute goods.

iv. Multipurpose uses– The demand for goods having multipurpose uses rise with a fall in price and vice-versa.


2. price is the only determinant of demand

Price is not the only factor that affects demand of a commodity.

Agree

Disagree

No, we do not agree with the given statement.

This is because there are various factors that determine demand other than price. 

The following are a few determinants:

Income of the consumer– Change in the income of the consumer also affects the market demand for goods. The effect of the change in income on the market demand depends on the type of the good.

Type of Good– The market demand for normal goods shares a positive relationship with the consumer’s income. The market demand for inferior goods (such as coarse cereals) has a negative relationship with the consumer’s income. The market demand for Giffen goods also has a negative relationship with the income.

Consumers tastes and preferences– Consumers’ tastes and preferences highly influence the demand for goods. Other things being constant, if all consumers prefer a commodity over another, then the market demand for that commodity increases and vice versa.

Population size– The market demand for a commodity is also affected by the population size.

Other things being equal, an increase in the population size increases the market demand for a commodity and vice-versa.

This is because with the change in population size, the number of consumers in the market changes.


3. When the price of Giffen goods fall, the demand for it increases.

Options

Agree

Disagree

I Disagree with the statement. 

Explanation:

When the price of Giffen goods falls, the demand for it decreases.

Inferior goods or low-quality goods are those goods whose demand does not rise even if their price falls.

At times, demand decreases when the price of such commodities fall. 

Sir Robert Giffen observed this behaviour in England in relation to bread declined, people did not buy more because of an increase in their real income or purchasing power. 

They preferred to buy superior-good like meat.

This is known as Giffen’s paradox.


Q.5. 1. Observe the following table and answer the following question:

Quantity demanded
Price per kg in ₹Consumer AConsumer BConsumer CMarket demand (in kgs.)(A + B + C)
25161512 
30121110 
35100908 
40080604 

Draw market demand curve based on above market demand schedule.

SOLUTION: –

Quantity demanded
Price per kg in ₹Consumer AConsumer BConsumer CMar
ket dem
and (in kgs.)(A + B + C)
2516151243
3012111033
3510090827
4008060418

Q.5. 2. Observe the following table and answer the following question

2. Observe the given diagram and answer the following question:

DIAGRAM (REF. TEXT BOOK)

SOLUTION: –

1. Rightward shift in demand curve increase in the quantity demanded.

2.Leftward shift in demand curve decrease in the quantity demanded.

3. Price remains constant.

4. Increase and decrease in demand comes under changes in demand.

Q.5. 3. Observe the following table and answer the following question

3. Explain the diagram:

SOLUTION FOR ‘A’

1) The diagram represents contraction in demand.

2) In the diagram, A movement of the demand curve is in upward direction.

SOLUTION FOR ‘B’

1) The diagram represents expansion in demand.

2) In the diagram, A movement of the demand curve is in downward direction.

Q.6. Answer in detail:

1. State and explain the ‘law of demand’ with its exceptions.

         Law of Demand:-

Law of demand is one of the important basic laws of consumption. Dr Alfred Marshall, in his book “Principles of Economics“, has explained the law of demand as follows.

Other things being constant the higher the price of the commodity, smaller is the quantity demanded and lower the price of the commodity larger is the quantity demanded.”

The law of demand explains a change in the behaviour of consumer demand due to various changes in price.

Marshall’s Law of demand describes the functional relation between demand and price.

It can be expressed as D = f (P) that is demand is a function of price.

The relation between price and demand is inverse because larger quantity is demanded when a price falls and smaller quantity will be demanded when the price rises.

The law of demand is explained with the help of the following schedule and diagram.

      Table No. 3.3 = Demand Schedule

Price of Mangoes
Per Kg. (Rs.)
Demand for Mangoes
(Kg.)
501
402
303
204
10

As shown in the schedule when the price of mangoes is Rs. 5O/- per kg. demand is 1 kg. When the price falls to the level of Rs. 40/- per kg. and demand rises to 2 kg. Similarly, at the price Rs. 10/- per kg. The demand for mangoes is 5 kg., whereas 4 kg. of mangoes are demanded at price Rs. 20/- per kg. This shows an inverse relationship between price and demand.

In this diagram, X-axis represents demand for mangoes, whereas Y” axis represents the price of mangoes.

DD is demand! a curve which slopes downwards from left to right.

In other words, its slope is negative because of an inverse relationship between price and demand.

Exceptions to the Law of Demand:-

The Law of Demand explains an inverse relationship between the price of a commodity and the quantity demanded of it.

Sometimes, however, we see a direct relationship between price and quantity demanded of a commodity.

Under exceptions to the Law of Demand, the demand curve slopes upwards from left to right which shows a direct relationship between price and quantity demanded. 

It can be shown in the following diagram. REF. T.B

1. Giffen goods:-

Certain inferior goods are-ca1Md Giffen goods, when the price falls, quite often less quantity will be purchased than before because of the negative income effect and people’s increasing preference for a superior commodity with the rise in their real income.

Sir Robert Giffen observed the situation related to demand for bread & meat in England.

When the price of bread was decreasing, less bread was purchased.

Here surplus money was transferred to purchase meat, as a result, demand for meat increased.

This behaviour is known as Giffen’s paradox.

Thus Giffen goods are inferior goods which have a direct relationship between price and quantity demanded, In this case, the demand curve slopes \ upwards from left to right as shown in the above diagram.

2. Prestige goods:-

Diamonds, high priced motor cars, luxurious bungalows are prestige goods. Such goods have a “snob appeal”. Rich people consume such goods as a status symbol. Therefore, when the price of such goods rises their demand also rises.

3. Price illusions or  Consumers Psychological bias:-

Consumers have an illusion that high priced goods are of a better quality. Therefore the demand for such goods tends to increase with a rise in their price. e.g. Branded products which are expensive are demanded at a high price

4. Demonstration effect:-

The tendency of the low-income group to imitate the consumption pattern of high-income groups is known as Demonstration effect. For example demand for consumer durables such as washing machines, latest mobile etc.

5. Ignorance:-

Sometimes people do not have proper market knowledge. They may not be aware of the fall in the price of a commodity and thus they tend to purchase more at a higher price.

6. Speculation:-

When people speculate a change in the price of a commodity in the future, they may not act according to the Law of demand. People may tend to buy more at rising prices, when they anticipate further price rise. For example, in the stock market, people tend to buy more shares at rising prices. Even if prices of some goods like sugar, oil etc. are rising before Diwali, people go on purchasing more of these things at rising prices, because they think that prices of these goods may increase further during Diwali.

7. Habitual Goods:-

Due to a habit of consumption certain goods like tobacco, cigarettes etc are purchased even if prices are rising. Thus it is an exception.

2. Explain in detail the determinants of demand.

Introduction: –

In ordinary language, demand means a desire. Desire means an urge to have something. In Economics, demand means a desire which is backed by a willingness and ability to pay.

Definition of Demand:

According to Benham, “the demand for anything at a given price is the amount of it, which will be bought per unit of time at that price.”

The demand for goods is determined by the following factors:

Price: Price determines the demand for a commodity to a large extent. Consumers prefer to purchase a product in large quantities when the price of a product is less and they purchase a product in small quantities when the price of a product is high.

Income: Income of a consumer decides purchasing power which in turn influences the demand for the product. The rise in income will lead to a rise in demand for the commodity and a fall in income will lead to a fall in demand for the commodity.

Prices of Substitute Goods: If a substitute good is available at a lower price then people will demand cheaper substitute good than costly goods. For example, if the price of sugar rises then demand jaggery will rise.

Price of Complementary Goods: Change in the price of one commodity would also affect the demand for other commodities. For example, cars and fuel. If the price of fuel rises, then demand for cars will fall.

Nature of product: If a commodity is a necessity and its use is unavoidable, then its demand will continue to be the same irrespective of the corresponding price. For example, medicine to control blood pressure.

Size of population: Larger the size of population, greater will be the demand for a commodity and smaller the size of population smaller will be the demand for a commodity.

Expectations about future prices: If the consumer expects the price to fall in future, he will buy less in the present at the prevailing price. Similarly, if he expects the price to rise in future, he will buy more in the present at the prevailing price.

Advertisement: Advertisement, sales promotion scheme, and effective sales-manship tend to change the preferences of the consumers and lead to demand for many products. For example, cosmetics, toothbrush, etc.

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