Mention any four factors other than price of the commodity which affect the demand for that commodity

Answer :

Four factors other than price of the commodity that influence the demand for the commodity are as follows:

1. The price of substitute goods.

2. Income of the consumer.

3. Tastes and preferences of the consumers.

4. Consumer’s expectations with regard to future prices.

To read in detail - Factors affecting demand

State the Law of Demand

Answer:

The law of demand states that other thing remaining equal, the quantity demanded of a commodity increases when its price falls and decreases when its price rises.The law indicates an inverse relationship between the price and quantity demanded of a commodity.

The law of demand is based on the following main assumptions:

1) There should be no change in income of the consumer.

2) There should be no change in tastes and preferences of the consumers.

3) Prices of the related commodities should remain unchanged.

4) Size of the population should not change.

5) The distribution of income should not change.

6) The commodity should be a normal commodity.

Why demand curve slope downwards to the right? - to know read: Law of demand

What is substitution effect

Why demand of CNG increases as price of petrol increases?

Answer :

The change in quantity demanded of a commodity resulting from a change in its relative price is known as Substitution effect. It reflects the tendency of people to substitute in favour of cheaper commodities and away from more expensive commodities.

As the price of petrol increases with the price of CNG remaining the same, CNG will become relatively cheaper.CNG becomes more attractive to people in comparison with petrol (both satisfy the same type of demand and hence can be used in place of one another).Consumers will normally like to shift from the consumption of petrol to CNG.

What is income effect? When is income effect positive or negative

Answer :

A change in demand on account of change in real income resulting from the change in the price of a commodity is known as income effect.

For example, A consumer buys 1 kg apples at Rs.20, now if the price of apples falls to Rs.15 and still he buys 1 kg apples, he is saving Rs. 5.It means his real income (in terms of apples) has increased. The consumer may use this increased real income (i.e. Rs. 5 saved in purchasing the original quantity of apples at a lower price) in purchasing more apples.

Price - falls , real income - rises , Quantity demanded - rises

Income effect is positive when increase in income cause increase in demand.It occurs in case of normal goods.

Income effect is negative when increase in income cause decrease in demand. It occurs in case of inferior goods.

Also read : Law of demand

Why are goods demanded

Answer :

We demand goods and services because these have the capacity to satisfy our wants.The capacity to satisfy human wants is called “Utility”.Thus, we can state that goods are demanded because these possess utility.

What is Giffen Paradox

Answer :

Named after economist Sir Robert Giffen, he said giffen goods are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price for example-maize and jowar are considered to be inferior food grains for average consumers.

As the price of maize falls, real income(income effect) rises, know the consumer may afford to purchase superior foods like wheat or rice. Since there is a limit to intake of food, quantity demanded for maize would be lower.

Similarly, if the price of maize rises, poor consumers will be forced to spend more on the purchase of maize because it is essential for their survival. They cannot afford to purchase the same quantity of superior food items that they purchased earlier because they would be left with lesser money to spend on other commodities.

Thus, they will increase the demand for maize at the cost of wheat or rice.

Giffen’s Paradox refers to this situation of exception to the law of demand.

when demand curve slopes upward curve – 

To Know read Exception to the law of Demand/when demand curve slopes upward /a positive slope demand curve.

How do we distinguish between Normal goods and Inferior goods

Answer :

Normal goods are those in case of which there is a positive relationship between income and quantity demanded.Quantity demanded increases in response to increase in consumer’s income and quantity demanded fall with fall in consumer’s income.

Inferior goods are those in case of which there is a negative or inverse relationship between income and quantity demanded. Quantity demanded decreases in response to increase in consumer’s income and quantity demanded rise with fall in consumer’s income.

For example, the demand for an inferior food like maize may decrease when income of the consumer increases beyond a particular level as he may substitute maize by a superior food like wheat or rice.

Briefly, in case of normal goods income effect is positive, while in case of inferior goods income effect is negative.

Also read factors affecting demand

How do we distinguish between Related goods and Unrelated goods

Answer :

Goods are said to be related when demand for one changes in response to change in price of the other. For example, increase in the price of coffee is expected to cause increase in demand for tea. So tea and coffee are related goods.

Goods are unrelated when demand for is independent of any change in the price of the other. Demand for bags for example, is not affected by change in price of oils. Oils and bags are unrelated goods.

What do understand by complementary goods

Answer :

Complementary goods are those goods which are used jointly or consumed together like car and petrol, gas and gas stoves, pen and ink.

In case of such goods increase in the price of one causes decrease in demand for the other and decrease in the price of one cause the increase in the demand for the other.

Complementary goods show indirect relation between each other i.e. quantity demanded of one good is inversely related to the change in the price of the other good. For example if the price of petrol rises, its demand will fall (as price of a commodity rises its demand started falling), as a result demand for car will also fall(as both are jointly used).

Conversely, if the price of petrol falls, its demand will rise, also will rise the demand for car.

Price of petrol- rises , demand for cars- falls

Price of petrol- falls , demand for cars- rises

( Read: factors affecting demand- substitute goods )

What do understand by substitute goods

Answer :

Substitute goods are those goods which satisfy the same type of demand and hence can be used in place of one another like tea and coffee or ball pen and ink pen.In case of such goods increase in the price of one causes increase in demand for the other and decrease in the price of one cause the decrease in the demand for the other.

Substitute goods show direct relation between each other i.e quantity demanded of one good is positively related to the change in the price of the other good. For example if the price of coffee rises, consumer will shift from consumption of coffee to the consumption of tea (to avoid extra expense)as both provide same level of satisfaction.

Price of coffee- rises , demand for tea- rises

Price of coffee- falls , demand for tea- falls

( Read: factors affecting demand- substitute goods )

Differentiate between price demand and income demand

Answer :

The functional relationship between the demand for a commodity and its price is known as price demand. There is an inverse relationship between the price of the commodity and the quantity demanded of it, this means that lower the price of the commodity, larger is the quantity demanded and higher the price, lesser is the quantity demanded.

Price- rises demand- falls

Price-falls demand- rises

The functional relationship between the demand for a commodity and the level of income is known as income demand. The income demand shows how much quantity of a commodity a consumer will buy at different levels of his income. Income determines the purchasing of the consumer. Generally there is a direct relationship between the income of the consumer and his demand for a product.

Income- rises demand- rises

(Read : factors affecting demand)

What is meant by derived demand

Answer :

Demand for a commodity that arises due to the demand for some other commodity is derived demand for example demand for house or building leads to the derived demand of bricks, sand, cement, labour, wood etc. Derived demand generally relates to the demand for factors of production.

What is composite demand

Answer :

demand for goods that have multiple uses is called composite demand. A commodity is said to have composite demand when it can be used to several alternative uses for example the demand for steel arises from various uses of steel, such as in making utensils, bus bodies, cars and so on.

A change in the price of such products would lead to a large change in its demand because its demand for all the uses would change. Moreover, an increase in the demand for the product in one use decreases its availability for another use. For example, an increased demand for electricity for domestic use would reduce the availability of electricity for commercial use.

What is joint demand

Answer :

It refers to the demand for two or more goods which are used jointly or demanded together for example car and petrol, bread and butter, pen and refill, milk and sugar etc.change in any one commodity affects the other like increase in demand for cars leads to increase in demand for petrol, since both are used together, a car without petrol is of no use.Also a rise in the price of cars will lead to not only a fall in the demand for cars, but also a fall in the demand of petrol and vice versa.When the price of car rises it become more costly so people will demand less cars and thereby leading to fall in the demand of petrol.When the price of car falls it become relatively cheaper so people will demand more cars and thereby leading to increase in the demand of petrol.

Distinguish between ex ante and ex post demand

Answer :

Ex ante Demand Refers to the amount of goods that consumer want to or willing to buy during a particular time period.It is the planned or desired amount of demand. Ex post Demand Refers to the amount of goods that consumer actually purchase during a specific period.

For Example, you want to buy a 4bhk house by the end of this year, that is your ex ante demand but due to non availability you end up buying a 3bhk house during this period, this is your actual purchase or ex post demand.

How does demand differs from desire

Answer :

Though both terms desire and demand can be used interchangeably but in economics, they both are different. If we say you desire to have a car, but you do not have enough money to buy it. Then this desire will be just a wishful thinking, it will not be called demand. And also if you have enough money but you are not willing to spend it on car, demand does not emerge. The desire becomes demand only when you are ready to spend money to buy car.

Thus demand for a commodity refers to the desire to buy a commodity backed with sufficient purchasing power and willingness to spend. In other words, demand is an effective desire, a desire accompanied by the will to purchase and the power to purchase.

What do you mean by demand for a commodity

Answer :

The demand for a commodity refers to the amount of the commodity which will be purchased at a particular price during a particular period of time.

For example:

Demand for a commodity –X refers to (say) 10 units of X if price of X is Rs. 5 per unit, 8units of X if price is Rs.6 per unit, 6 unit of X if price is Rs. 7 per unit.

Quantity demanded of a commodity-X refers to 8 units of X if price happens to be Rs. 6 per unit.

Demand refers to all quantities of a commodity that the consumer is ready to buy at different possible price of that commodity.Quantity demanded refers to specific quantity to be purchased against a specific price of the commodity.

What is microeconomics? State its vital components?

Answer :

When economic problems or economic issues are studied considering small economic units like an individual consumer or an individual producer, we are referring to microeconomics.

Vital components of Microeconomics are:

1. Theory of Consumer Behaviour : It analysis how a consumer allocates his income to different uses so that he maximizes his satisfaction.

2. Theory of Producer Behaviour : It analysis how producer make a choice on the uses of different input and decides what to produce and how much. The producer focuses on maximization of profit.

3. Theory of Price : It explains how prices of goods and services are determined in the product market and how prices of factor services are determined in the factor market.

(Read: branches of economics)