Macroecono

mics

Microeconomics

Definition

Macroeconomics is a branch of
economics dealing with the
performance, structure,
behavior, and decision-making
of an economy as a whole.

Microeconomics is the
branch of economy which is
concerned with the
behavior of individual
entities such as market,
firms and households.

Foundation

The foundation of
macroeconomics is
microeconomics.

Microeconomics consists of
individual entities.

Basic
Concepts

Output and income,

unemployment, inflation and
deflation.

Preference relations, supply

and demand, opportunity
cost.

Applications

Used to determine an
economy's overall health,
standard of living, and needs for
improvement.

Used to determine methods

of improvement for
individual business entities.

Careers

Economist (general), professor,

researcher, financial advisor.

Economist (general),
professor, researcher,
financial advisor.

Macroeconomics is the branch of economics that looks at economy in a broad

sense and deals with factors affecting the national, regional, or global economy as
a whole.
Microeconomics looks at the economy on a smaller scale and deals with specific
entities like businesses, households and individuals.
Definition
Macroeconomics is a branch of economics dealing with the performance, structure,
behavior, and decision-making of an economy as a whole, as opposed to individual
markets. This includes national, regional, and global economies. Macroeconomics
involves the study of aggregated indicators such as GDP, unemployment rates,
and price indices for the purpose of understanding how the whole economy
functions, as well as the relationships between such factors as national income,
output, consumption, unemployment, inflation, savings, investment, international
trade and international finance.
Microeconomics, on the other hand, is the branch of economics that is primarily
focused on the actions of individual agents, such as firms and consumers, and how
their behavior determines prices and quantities in specific markets. One of
the goals of microeconomics is to analyze market mechanisms that establish
relative prices among goods and services and the allocation of limited resources
among many alternative uses. Significant fields of study in microeconomics include
general equilibrium, markets under asymmetric information, choice under
uncertainty, and economic applications of game theory.

What are positive statements?

Positive statements are objective statements that can be tested, amended or
rejected by referring to the available evidence. Positive economics deals
with objective explanationand the testing and rejection of theories. For
example:

A fall in incomes will lead to a rise in demand for own-label supermarket

foods

If the government raises the tax on beer, this will lead to a fall in profits
of the brewers.

The rising price of crude oil on world markets will lead to an increase in
cycling to work

A reduction in income tax will improve the incentives of the unemployed

to find work.

A rise in average temperatures will increase the demand for sun screen
products.

Higher interest rates will reduce house prices

Cut-price alcohol has increased the demand for alcohol among

teenagers

A car scrappage scheme will lead to fall in the price of second hand cars

What are Normative Statements?

A value judgement is a subjective statement of opinion rather than a
fact that can be tested by looking at the available evidence
Normative statements are subjective statements i.e. they carry value
judgments. For example:

Pollution is the most serious economic problem

Unemployment is more harmful than inflation

The congestion charge for drivers of petrol-guzzling cars should increase

to 25

The government should increase the minimum wage to 7 per hour to

reduce poverty.

The government is right to introduce a ban on smoking in public places.

The retirement age should be raised to 70 to combat the effects of our

ageing population.

Resources are best allocated by allowing the market mechanism to work

freely

The government should enforce minimum prices for beers and lagers
sold in supermarkets and off-licences in a bid to control alcohol
consumption

Focusing on the evidence is called adopting an empirical approach evidencebased work is becoming more and more important in shaping different government
policies and how much funding to give to each.
Key point:
Most economic decisions and policy are influenced by value judgements, which
vary from person to person, resulting in fierce debate between competing political
parties.
Partial equilibrium theory-the stuff of Part I-focuses on the effects that one change,
such as a shift in consumer preferences, has on a one or two markets, disregarding
the wider ripples. A partial equilibrium analysis makes sense when the wider
ripples are unlikely to be earth-shakingly large. To be precise, when cross-price,
cross-income, cross-everything elasticities are at or near zero. For example, with a
little imagination you may find a reason why a change in American preference
towards low fat food might have in some way or another a effect on the Italian
shoe industry or the demand for Dutch tulips. Who knows? Producers of low fat
food may like Italian shoes more than the producers of high fat foods. And Italian
shoe makers may use their extra earnings to buy more tulips. Ripples can move in
funny and unexpected ways. However, the effects on Italian shoes and Dutch tulips
will be so small that they are better ignored to keep the analysis simple. Partial
equilibrium theory, therefore, asks you to limit the scope of your analysis,
reasonably.
Partial equilibrium theory considers the effects of a change on one or a few
markets only.
But some problems require a general equilibrium theory. If Saddam Hussein, the
deposed ruler of Iraq, had succeeded some years ago in grabbing the oil riches of
the Persian Gulf, then the price of oil would have gone up dramatically. In this case
the ripple effects would be big and far-reaching. After all, the Persian Gulf counts
for enough of production to significantly affect the price of oil. And the price of oil
counts for enough in the economy of the world that a rise in its price has big ripple
effects. Not ripples; waves. For one, you will pay more at the pump. You also may
stay forsake a trip home for Thanksgivings because of a steep rise in the price of a
ticket. Your rent may go up as well because a rise in heating expenses.
Consequently, an analysis of the effects of Hussein's putative action would have to
consider many markets and determine to which new equilibrium all these markets
would move. We might even go so far and aspire to include all possible markets to
determine the new equilibrium all around, that is, the general equilibrium. In 20052006 the price of oil did go up abundantly, rippling across distant foreign markets,

so much so that politicians in remote areas of the United States began talking
(irrationally, we might add) about price controls.
General Equilibrium Analysis:
As against partial equilibrium analysis, general equilibrium analysis is concerned
with economic system as a whole.
It recognises the fact that economic system is a network in which all the parts are
mutually dependent on one another and in mutual interaction with one another.
Goods are either competitive or substitutes. Some goods are used in the
manufacture of other goods. Factors of production are complementary to each
other to the extent they can be substituted for each other, they are competitive
also. Resources also face competitive demand from producers.
Therefore, change in the demand or supply of any commodity or factor of
production sets in motion a chain reaction. A disturbance in one sector of the
economy produces its repercussions on all sides. General equilibrium analysis is
concerned with the overall effects of a disturbance.
Instead of taking only a few variables at a time, we take into consideration all the
relevant variables which may affect the particular phenomenon in hand. In this
type of analysis, all the side-affects of an economic disturbance are analysed in
full.
An example will make the concept of general equilibrium clearer. Suppose the
demand for India-manufactured consumer goods suddenly increases in Western
Europe. Indian exports will increase thereby increasing output, employment and
profits in the export industries. Resources will be diverted from other industries to
the export industries.
The demand and prices of the substitute commodities will also increase. The
increased demand for exports will have economy-wide effects. An all-round
analysis of the repercussions of the economic disturbance increased demand for
manufactured consumer goods for export can be done only through general
equilibrium theory.
General equilibrium analysis deals with the equilibrium of the whole organisation in
the economy consumers, producers, resource-owners, firms and industries. Not
only should individual consumers and firms be in equilibrium in themselves but
also in relation to each other.
Managerial Economics : Definition, Nature, Scope
Managerial economics is a discipline which deals with the application of economic
theory to business management. It deals with the use of economic concepts and
principles of business decision making. Formerly it was known as Business
Economics but the term has now been discarded in favour of Managerial
Economics.

Managerial Economics may be defined as the study of economic theories, logic and
methodology which are generally applied to seek solution to the practical problems
of business. Managerial Economics is thus constituted of that part of economic
knowledge or economic theories which is used as a tool of analysing business
problems for rational business decisions. Managerial Economics is often called as
Business Economics or Economic for Firms.
Nature of Managerial Economics:

The primary function of management executive in a business

organisation is decision making and forward planning.
Decision making and forward planning go hand in hand with each other.
Decision making means the process of selecting one action from two or
more alternative courses of action. Forward planning means establishing
plans for the future to carry out the decision so taken.
The problem of choice arises because resources at the disposal of a
business unit (land, labour, capital, and managerial capacity) are limited
and the firm has to make the most profitable use of these resources.
The decision making function is that of the business executive, he takes
the decision which will ensure the most efficient means of attaining a
desired objective, say profit maximisation. After taking the decision
about the particular output, pricing, capital, raw-materials and power
etc., are prepared. Forward planning and decision-making thus go on at
the same time.
A business managers task is made difficult by the uncertainty which
surrounds business decision-making. Nobody can predict the future
course of business conditions. He prepares the best possible plans for
the future depending on past experience and future outlook and yet he
has to go on revising his plans in the light of new experience to
minimise the failure. Managers are thus engaged in a continuous
process of decision-making through an uncertain future and the overall
problem confronting them is one of adjusting to uncertainty.
In fulfilling the function of decision-making in an uncertainty
framework, economic theory can be, pressed into service with
considerable advantage as it deals with a number of concepts and
principles which can be used to solve or at least throw some light upon
the problems of business management. E.g are profit, demand, cost,
pricing, production, competition, business cycles, national income etc.
The way economic analysis can be used towards solving business
problems, constitutes the subject-matter of Managerial Economics.
Thus in brief we can say that Managerial Economics is both a science
and an art.
Scope of Managerial Economics:
The scope of managerial economics is not yet clearly laid out because it is a
developing
science. Even then the following fields may be said to generally fall
under Managerial Economics:
These divisions of business economics constitute its subject matter.
Recently, managerial economists have started making increased use of Operation
Research methods like Linear programming, inventory models, Games theory,

queuing up theory etc., have also come to be regarded as part of Managerial

Economics.
1.Demand Analysis and Forecasting: A business firm is an economic
organisation which is engaged in transforming productive resources into goods
that are to be sold in the market. A major part of managerial decision making
depends on accurate estimates of demand. A forecast of future sales serves as a
guide to management for preparing production schedules and employing
resources. It will help management to maintain or strengthen its market position
and profit base. Demand analysis also identifies a number of other factors
influencing the demand for a product. Demand analysis and forecasting occupies a
strategic place in Managerial Economics.
2.Cost and production analysis: A firms profitability depends much on its cost of
production. A wise manager would prepare cost estimates of a range of output,
identify the factors causing are cause variations in cost estimates and choose the
cost-minimising output level, taking also into consideration the degree of
uncertainty in production and cost calculations. Production processes are under the
charge of engineers but the business manager is supposed to carry out the
production function analysis in order to avoid wastages of materials and time.
Sound pricing practices depend much on cost control. The main topics discussed
under cost and production analysis are: Cost concepts, cost-output relationships,
Economics and Diseconomies of scale and cost control.
3.Pricing decisions, policies and practices: Pricing is a very important area of
Managerial Economics. In fact, price is the genesis of the revenue of a firm ad as
such the success of a business firm largely depends on the correctness of the price
decisions taken by it. The important aspects dealt with this area are: Price
determination in various market forms, pricing methods, differential pricing,
product-line pricing and price forecasting.
4.Profit management: Business firms are generally organized for earning profit
and in the long period, it is profit which provides the chief measure of success of a
firm. Economics tells us that profits are the reward for uncertainty bearing and risk
taking. A successful business manager is one who can form more or less correct
estimates of costs and revenues likely to accrue to the firm at different levels of
output. The more successful a manager is in reducing uncertainty, the higher are
the profits earned by him. In fact, profit-planning and profit measurement
constitute the most challenging area of Managerial Economics.
5.Capital management: The problems relating to firms capital investments are
perhaps the most complex and troublesome. Capital management implies planning
and control of capital expenditure because it involves a large sum and moreover
the problems in disposing the capital assets off are so complex that they require
considerable time and labour. The main topics dealt with under capital
management are cost of capital, rate of return and selection of projects.
Market Demand: 8 Important Elements of Market Demand
Introduction:
Market demand is similar to industry demand. It is a broader concept and it
involves total demand of a product in an industry. For example, demand of two
wheelers in India implies demand of two wheelers produced and marketed by all
the companies. It reveals the broader picture of demand. Marketer should keep in

mind the wider scenario of industry/market demand to see his position, often
called market share of company in an industry. Market demand plays a vital role in
formulating the broad marketing programme.
Definitions:
Term market demand can be defined as:
1. Philip Kotler: Market demand for the product is the total volume that would be
bought by a defined customer group in a defined geographical area in a defined
time period in a defined marketing environment under a defined marketing
programme.
2. Thus, market demand indicates total sales of the product to the specific groups
of buyers in a specific period and in defined geographical areas in a given
marketing environment.
Elements of Market Demand:
Systematic analysis of above stated definitions necessarily reveals
following elements:
1. Product:
Market demand indicates the total demand of specific products in an industry. The
place or scope of product must be specified. In which category or industry the
product of company falls. It can be decided on the basis of who are the users and
the purpose of using the product. Thus, we must mention the market demand in
relation to the specific product.
2. Total Volume:
It shows the total volume of sales in form of unit or value. It suggests the total
sales of the product in the industry. For example, total volume means the amount
(or units) of total demand of refrigerator in India.
3. Purchase or Buying:
Only the quantity, that is ordered and purchased is included in market demand.
Market demand includes units, which are ordered, delivered, or consumed.
4. Customer Groups:
Market demand is expressed in term of different users. Total volume demanded by
different groups of customers, such as industrial customers, institutional
customers, and individual customers.

5. Geographic Area:
Market demand can be specified in term of different geographical areas or
localities. It may be in term of country, state, region, district, or any geographic
unit.
6. Fixed Time Duration:
Market demand is meaningful only if it is expressed in relation to time. For
example, demand of two-wheeler during the year 2007. Time may be in term of
week, months, quarter, or year.
7. Marketing Environment:
Obviously, market demand is influenced by several factors. These factors
constitute the marketing environment. So, it is necessary to mention assumptions
about marketing environment comprising economic, cultural, social, political, etc.,
forces.
8. Definition of Marketing Programme:
Market demand is affected by marketing programme/strategy. So, it is clarified
with reference to a specific marketing programme including product, price,
promotion, and distribution. Thus, market demand is stated in context with the
definite marketing programme.
While estimating market demand, these all elements should be considered for
meaningful picture of total demand. Here, we must distinguish market demand
from company demand. Market demand is total demand of the product in an
industry, and company demand means demand of the individual business units
products. Market forecast relates with market demand and sales forecast relates
with company demand. However, market demand forecast and sales forecast are
taken loosely (i.e., more or less similar).
Demand, a chief economic principle, is the effective want for something and the
willingness and ability to pay for it. A relative concept, demand is always attached
to a certain price point at a particular point in time. Quantitative demand analysis
provides useful guidance to companies and investors trying to determine their
market strategy and the growth potential of a product. There are two basic types
of demand: individual and market. While both principles overlap in many ways, the
scope of individual demand is much narrower than market demand.
Individual Demand
The individual demand is the demand of one individual or firm. It represents the
quantity of a good that a single consumer would buy at a specific price point at a
specific point in time. While the term is somewhat vague, individual demand can
be represented by the point of view of one person, a single family, or a single
household.

Market Demand
Market demand provides the total quantity demanded by all consumers. In other
words, it represents the aggregate of all individual demands. There are two basic
types of market demand: primary and selective. Primary demand is the total
demand for all of the brands that represent a given product or service, such as all
phones or all high-end watches. Selective demand is the demand for one particular
brand of product or service, such as the iPhone or a Michele watch. Market
demand is an important economic marker because it reflects the competitiveness
of a marketplace, a consumers willingness to buy certain products and the ability
of a company to leverage itself in a competitive landscape. If market demand is
low, it signals to a company that they should terminate a product or service, or
restructure it so that it is more appealing to consumers.
Factors Influencing Demand
There are several factors that influence individual and market demand. Individual
demand is influenced by an individuals age, sex, income, habits, expectations and
the prices of competing goods in the marketplace. Market demand is influenced by
the same factors, but on a broader scalethe taste, habits and expectations of a
community and so on. It also considers the number of buyers in the market, the
rate at which a certain community is growing and the level of innovation erupting
in the marketplace. Market demand can be measured on an international, national,
regional, local, or even smaller level.
Other Considerations
Note that where you have a sizable market demand for a product or service, there
may be several individuals included in the market who won't buy the service or
product. Often, companies will use several pieces of demographic information to
parse out very specific subsets of the market they wish to target, such as middleincome middle-aged stay-at-home mothers or urban youths in coastal
metropolises. In a monophonic market, where there is only buyer, individual
demand and market demand collapse. Since the market encapsulates one person,
that individual represents the entire market.
Market Demand Curve is Flatter:
Market demand curve is flatter than the individual demand curves. It happens
because as price changes, proportionate change in market demand is more than
proportionate change in individual demand.
Determinants of individual demand for a commodity:
1.
Price: -Demand for a commodity is mainly influenced by its price. Demand
varies inversely with price. Normally, more quantity is demanded at lower prices
and less quantity is demanded at higher price.
2.
Price of substitute: -If a substitute is available at a lower price, people will
demand cheaper substitute goods than costly goods.

3.

Price of complementary goods: -Complementary goods have joint demand.

More than two or more gods are jointly demanded to satisfy a want. for example,
car and petrol, paper and pen, etc. in such a case, a change in the price of one
commodity would also affect the demand for other commodity. If the prices of the
petrol rise, the demand for car would fall and vie versa.
4.
Income: -Purchasing power or ability to pay is the basic requirement for a
demand. Disposable income is the income at the disposal of the people after paying
direct taxes such as income tax. Generally, rich consumers buy more goods and
service than the poor people do.
5.
Utility: -Utility is the basic purpose for demanding a commodity. If a commodity
does not provide utility to the consumer, he will not demand it. For examples,
there is no demand for cigarettes for a non-smoker.
6.
Quality: -The better the quality, the higher is the demand. Individual will buy a
product of better quality even if the price is more.
7.
Taste and Habit: -Demand for a commodity depends on taste, fashion and
habit. A consumer will buy certain goods on account of force of habit e.g.
Cigarette, tobacco, pan masala, wines etc. Therefore the quantity demands of
these goods would change when there is a change in habit, such as giving up
smoking, wines etc.
8.
Advertisement and salesmanship: -Advertising and salesmanship have a
tremendous influence on consumers; choice. The demand for many products such
as cosmetics, soft drinks, home appliances and consumer durables etc. is
promoted through these methods.
Determinants of Market Demand
Definition: The Market Demand is defined as the sum of individual demands for
a product per unit of time, at a given price. Simply, the total quantity of a
commodity demanded by all the buyers/individuals at a given price, other things
remaining same is called the market demand.
There are several factors that determine the demand for a product. These are:
1. Price of the Product: The price of a product is the most important
determinant of market demand in the long-run and the only determinant
in the short-run. As per the law of demand, the price of a product and
its quantity demanded are inversely related, i.e. the quantity demanded
increases when the price falls and decreases when the price rises, other
things remaining the same.
Here, other things imply that the income of the consumer, the price of the
substitute and complementary goods, tastes and preferences and the number of
consumers, all remains constant. The price-demand relationship has more
significance in the oligopolistic market structure in which the result of a price war
among the firm and its rival decides the level of success of the firm.
2. Price of the Related Goods: The market demand for a commodity is
also affected by the changes in the price of the related goods. The
related goods may be the substitute or complementary goods. Two
commodities are said to be a substitute for one another if they satisfy
the same want of an individual and the change in the price of one
commodity affects the demand for another in the same

direction. Such as, tea and coffee, Maggi and Yippie, Pepsi and CocaCola are close substitutes for each other. The increase in the price of
either commodity the demand for the other also increases and viceversa.
A commodity is said to be a complement for another if the use of two goods goes
together such that their demand changes (increases or decreases)
simultaneously. For example, bread and butter, car and petrol, mattress and cot,
etc. are complementary goods. The increase in the price of either commodity the
demand for another decreases and vice-versa.
3. Consumers Income: The income is the basic determinant of the
quantity demanded of a product as it decides the purchasing power of
the consumers. Thus, people with higher disposable income spend a
larger amount of income on consumer goods and services as
compared to those with lower disposable income. Consumer goods and
services can be grouped under four categories: essential goods, inferior
goods, normal goods, and prestige or luxury goods. The relationship
between the consumers income and these goods is explained below:

Essential Consumer Goods: The essential goods are the basic

necessities of the life and are consumed by all the persons of the
society. Such as food grains, salt, cooking oil, clothing, housing, etc., the
demand for such commodities increases with the increase in consumers
income but only up to a certain limit, although the total expenditure
may increase with respect to the quality of goods consumed, other
things remaining the same.

Inferior Goods: A commodity is deemed to be inferior if its demand

decreases with the increases in the consumers income beyond a
certain level of income and vice-versa. For example, Bajra, millet, bidi
are the inferior goods.

Normal Goods: The normal goods are those goods whose demand
increases with the increase in the consumers income, such as
clothing, household furniture, automobiles, etc. It is to be noted that,
demand for the normal goods increases rapidly with the increase in the
consumers income but slows down with a further increase in the
income.

Luxury Goods: The luxury goods are those goods which add to
the prestige and pleasure of the consumer without enhancing the
earnings. For example, jewelry, stone, gem, luxury cars, etc. The
demand for such goods increases with the increase in the consumers
income.

4. Consumers tastes and preferences: Consumers Tastes and

preferences play a vital role in determining a demand for a product.
Tastes and preferences often depend on the lifestyle, culture, social
customs, hobbies, age and sex of the consumers and the religious
sentiments attached to a commodity. The change in any of these factors
results in the change in the consumers tastes and preferences, thereby
resulting in either increase or decrease in the demand for a product.

5. Advertisement Expenditure: Advertisement is done to promote sales

of a product. It helps in stimulating demand for a product in four
ways; by informing the prospective consumers about the availability of
a product, by showing its superiority over the competitors brand, by
influencing the consumers choice against the rival product and by
setting new fashion and changing tastes of the consumers. The effect of
advertisement is said to be fruitful if it leads to the upward shift in the
demand curve, i.e. the demand increases with the increase in the
advertisement expenditure, other things remaining constant.
6. Consumers Expectations: In the short run, the consumers
expectation with respect to the income, future prices of the product
and its supply position plays a vital role in determining the demand
for a commodity. If the consumer expects a high rise in the price of the
commodity, shall purchase it today at a high current price so as to avoid
the pinch of the high price in the future. On the contrary, if the prices
are expected to fall in the future the consumer will postpone their
purchase with a view to avail benefits of lower prices in the future,
especially in case of nonessential goods.
Likewise, an expected increase in the income increases the demand for a product
and vice-versa. Also, in the case of scarce goods, if its production is expected to
fall short in the future, the consumer will buy it at current higher prices.
7. Demonstration Effect: Often, the new commodities or new models of
an existing product are bought by the rich people. Some people buy
goods due to their genuine need for them or have excess purchasing
power. While some others do so because they want to exhibit their
affluence. Once the commodity is in very much fashion, many
households buy them not because they have a genuine need for them
but their neighbors have purchased it. Thus, the purchase made by such
people arises out of feelings as jealousy, equality in society,
competition, social inferiority, status consciousness. The
purchases made on the account of these factors results in the
demonstration effect, also called as Bandwagon Effect.
8. Consumer-Credit Facility: The availability of credit to the consumer
also determines the demand for a product. The credit extended by
sellers, banks, friends, relatives or from other sources induces a
consumer to buy more than what would have not been possible in the
absence of the credit. Thus, the consumers with more borrowing
capacity consumes more than the ones who borrow less.
9. Population of the Country: The population of the country also
determines the total domestic demand for a product of mass
consumption. For a given level of per capita income, tastes and
preferences, price, income, etc., the larger the size of the
population the larger the demand for a product and vice-versa.
10.
Distribution of National Income: The national income is one of
the basic determinants of the market demand for a product, such as
the higher the national income, the higher the demand for all
the normal goods. Apart from its level, the distribution pattern of

the national income also determines the overall demand for a product.
Such as, if the national income is unevenly distributed, i.e., the majority
of the population falls under the low-income groups, then the market
demand for the inferior goods will be more than the other category
goods.
Thus, the demand for a commodity can be estimated or analyzed by studying the
determinants of market demand and the nature of the relationship between the
demand and its determinants.
Demand Equation or Function
This equation expresses the relationship between demand and its five
determinants:
qD = f (price, income, prices of related goods, tastes, expectations)
It says that the quantity demanded of a product is a function of its price,
the income of the buyer, the price of related goods (substitutes or complements),
the tastes of the consumer, and any expectation the consumer has of
future supply, prices, etc.
Law of Demand
The relationship between the quantity demanded and the price is governed by
the law of demand. This economic principle describes something you already
intuitively know -- if the price goes up, people buy less. The reverse is, of course,
true -- if the price drops, people buy more. However, price is not the only
determining factor. Therefore, the law of demand is only true if all other
determinants don't change. In economics, this is known as ceteris paribus.
Therefore, the law of demand formally states that, ceteribus paribus, the quantity
demanded for a good or service is inversely related to the price.
8 Assumptions of Law of Demands Explained!
Some of the major assumptions of law of demands are: 1. No change in habits,
customs and income of consumers, 2. This law does not apply on necessaries of
life, 3. Joint demand, 4. Articles of distinction, 5. Fear of shortage in future, 6.
Change in the price of substitutes, 7. Fear of a rise in price in future and 8.
Ignorance:
1. No change in habits, customs and income of consumers:
Law of demand tells us that demand goes with a fall in price and goes down with a
rise in price. But an increase in price will not bring down the demand if at the same
time the income of the buyer has also increased.
2. This law does not apply on necessaries of life:

It is assumed that this law is not applicable in the case of necessaries of life.
Because, an increase in the price of flour will not bring down its demand. Likewise
a fall in its price will not vary much increase the demand for it.
3. Joint demand:
Goods which have joint demand also falsify the law. Thus, an increase in the
demand of cars will lead to more demand for petrol. Whereas the law of demand
states that the demand for petrol should increase on it its price falls.
4. Articles of distinction:
Law of demand does not hold goods in case of those goods which confer social
distinction. When the price of such goods goes up, their demand shall also
increase. For instance, an increase in the price of diamond will raise its demand
and a fall in price will lower the demand.
5. Fear of shortage in future:
If there is a fear of shortage of a good in future its demand will increase in present
as people would start storing. But according to law of demand its demand should
go it when its price falls.
6. Change in the price of substitutes:
This law does not apply in the case of tea and coffee, because these goods are
substitutes of each other. When the price of coffee goes up the demand for tea
shall increase although there has been no fall in the price of tea.
7. Fear of a rise in price in future:
If consumers think that the price of particular goods will increase in future, they
will store it. In other words, the demand of those goods shall increase at the same
price. But this law states that demand should go up only if price falls.
8. Ignorance:
It is possible that a consumer may not be aware of the previous price of a good. In
this case consumer might start purchasing more of a commodity when its price has
actually gone up. A new approach called the ordinal utility approach, developed by
Edgeworth, Pareto. Slutsky, Johnson, Hicks and Allen are easier and more helpful in
solving the problem of consumers demand. The ordinal theory not only requires
fewer assumptions but possesses greater predictive power than does its cardinal
cousin.
The assumption of cardinally measurable utility has been dispensed with not
because utility is not cardinally measurable, but simply because such

measurement is not at all required for analyzing consumers behavior. The points
of distinction between the cardinal and the ordinal measures of utility.
Extension and Contraction in Demand
In economics, the extension and contraction in demand are used when the
quantity demanded rises or falls as a result of changes in price and we move along
a given demand curve. When the quantity demanded of a good rises due to the fall
in price, it is called extension of demand and when the quantity demanded falls
due to the rise in price, it is called contraction of demand.
For instance, suppose the price of bananas in the market at any given time is
Rs.12 per dozen and a consumer buys one dozen of them at that price. Now, if
other things such as tastes of the consumer, his income, prices of other goods
remain the same and price of bananas falls to Rs. 8 per dozen and the consumer
now buys 2 dozen bananas, then extension in demand is said to have occurred. On
the contrary, if the price of bananas rises to Rs. 15 per dozen and consequently
the consumer now buys half a dozen of the bananas, then contraction in demand
is said to have occurred.
It should be remembered that extension and contraction in the demand takes
place as a result of changes in the price alone when other determinants of demand
such as tastes, income, propensity to consume and prices of the related goods
remain constant. These other factors remaining constant means that the demand
curve remains the same, that is, it does not change its position; only the consumer
moves downward or upward on it.
Increase and decrease in demand In case of expansion and contraction of demand,
we have seen that the change takes place as a result of changes in price, all other
factors remaining constant. When all the other factors influencing demand also
change, there is an increase or decrease in demand and the demand curve shifts
either to its right or left. If the income of a consumer rises, he would be able to
purchase the commodities which he earlier could not afford. This would result in an
increase in demand and therefore, the demand curve shifts to the right. If, on the
other hand, the goods are out of fashion, the demand of that good will decline,
resulting in the shift of the demand curve to the left. Demand may also increase
and decrease due to the following reasons:
Increase in demand (A shift in the demand curve towards the right)
Rise in income Rise in the price of substitutes Fall in the price of a complement
Favourable change in tastes of a good Increase in population Goods in fashion
Decrease in demand (A shift in the demand curve towards the left)
Rise in income Rise in the price of substitutes Fall in the price of a complement
Favourable change in tastes of a good Increase in population Goods in fashion
The different types of demand

ii. Organization and Industry Demand:

Refers to the classification of demand on the basis of market. The demand for the
products of an organization at given price over a point of time is known as
organization demand. For example, the demand for Toyota cars is organization
demand. The sum total of demand for products of all organizations in a particular
industry is known as industry demand.
For example, the demand for cars of various brands, such as Toyota, Maruti Suzuki,
Tata, and Hyundai, in India constitutes the industry demand. The distinction
between organization demand and industry demand is not so useful in a highly
competitive market.
This is due to the fact that in a highly competitive market, organizations have
insignificant market share. Therefore, the demand for an organizations product is
of no importance. However, an organization can forecast the demand for its
products only by analyzing the industry demand.
iii. Autonomous and Derived Demand:
Refers to the classification of demand on the basis of dependency on other
products. The demand for a product that is not associated with the demand of
other products is known as autonomous or direct demand. The autonomous
demand arises due to the natural desire of an individual to consume the product.
For example, the demand for food, shelter, clothes, and vehicles is autonomous as
it arises due to biological, physical, and other personal needs of consumers. On the
other hand, derived demand refers to the demand for a product that arises due to
the demand for other products.
For example, the demand for petrol, diesel, and other lubricants depends on the
demand of vehicles. Apart from this, the demand for raw materials is also derived
demand as it is dependent on the production of other products. Moreover, the
demand for substitutes and complementary goods is also derived demand.
iv. Demand for Perishable and Durable Goods:
Refers to the classification of demand on the basis of usage of goods. The goods
are divided into two categories, perishable goods and durable goods. Perishable or
non-durable goods refer to the goods that have a single use. For example, cement,
coal, fuel, and eatables. On the other hand, durable goods refer to goods that can
be used repeatedly.
For example, clothes, shoes, machines, and buildings. Perishable goods satisfy the
present demand of individuals. However, durable goods satisfy both present as
well as future demand of individuals. Therefore, consumers purchase durable items
by considering its durability.

In addition, durable goods need replacement because of their continuous use. The
demand for perishable goods depends on the current price of goods and
customers income, tastes, and preferences and changes frequently, while the
demand for durable goods changes over a longer period of time.
v. Short-term and Long-term Demand:
Refers to the classification of demand on the basis of time period. Short-term
demand refers to the demand for products that are used for a shorter duration of
time or for current period. This demand depends on the current tastes and
preferences of consumers.
For example, demand for umbrellas, raincoats, sweaters, long boots is short term
and seasonal in nature. On the other hand, long-term demand refers to the
demand for products over a longer period of time.
Generally, durable goods have long-term demand. The long-term demand of a
product depends on a number of factors, such as change in technology, type of
competition, promotional activities, and availability of substitutes. The short-term
and long-term concepts of demand are essential for an organization to design a
new product.
6. Joint demand:
In finished products as in case of bread, there is need for so many thingsthe
services of the flour mill, oven, fuel, etc. The demand for them is called joint
demand. Similarly for the construction of a house we require land, labor, capital,
organization and materials like cement, bricks, lime, etc. The demand for them is,
thus, called a joint demand.
7. Composite demand:
A commodity is said to have a composite demand when its use is made in more
than one purpose. For example the demand for coal is composite demand as coal
has many usesas fuel for a boiler of a factory, for domestic fuel, for oven for
steam-making in railways engine, etc.
1. Price demand:
Price demand refers to the different quantities of the commodity or service which
consumers will purchase at a given time and at given prices, assuming other
things remaining the same. It is the price demand with which people are mostly
concerned and as such price demand is an important notion in economics. Price
demand has inverse relation with the price. As the price of commodity increases its
demand falls and as the price decreases, its demand rises.

2. Income demand:
Income demand refers to the different quantities of a commodity or service which
consumers will buy at different levels of income, assuming other things remaining
constant. Usually the demand for a commodity increases as the income of a
person increases unless the commodity happens to be an inferior product. For
example, coarse grain is a cheap or inferior commodity. The demand for such
commodities decreases as the income of a person increases. Thus, the demand for
inferior or cheap goods is inversely related with the income.
3. Cross demand:
When the demand for a commodity depends not on its price but on the price of
other related commodities, it is called cross demand. Here we take closely
connected or related goods which are substitutes for one another.
For example, tea and coffee are substitutes for one another. If the price of coffee
rises, the consumer will be induced to buy more of tea and, hence, the demand of
tea will increase. Thus in case of substitutes, when the price of one related
commodity rises, the demand of the other related commodity increases and viceversa.
But in case of complimentary or joint demand goods, e.g., pen and ink, horses and
carriages etc. when the price of one commodity rises, the demand for it will fall
and as a result of it the demand for the other joint commodity also falls (even
though its price remains the same). For example, if the price of horses increases,
their demand will fall and as a result of it the demand for carriages will also fall
even though their price does not change.
Network Externalities: Bandwagon Effect and Snob Effect
Network externalities are the effects on a user of a product or service of others
using the same or compatible products or services. Positive network externalities
exist if the benefits (or, more technically, marginal utility) are an increasing
function of the number of other users. Negative network externalities exist if the
benefits are a decreasing function of the number of other users. For example,
Facebook likely confers positive network externalities since it is more useful to a
user if more people are using it as well. Conversely, a road probably confers
negative network externalities since a consumer of the road creates traffic for
other consumers of the road.
What is Monopoly ? Meaning and Concept
The term monopoly is derived from Greek words 'mono' which means single and
'poly' which means seller. So, monopoly is a market structure, where there only a
single seller producing a product having no close substitute.
This single seller may be in the form of an individual owner or a single partnership
or a Joint Stock Company. Such a single firm in market is called monopolist.
Monopolist is price maker and has a control over the market supply of goods. But it

does not mean that he can set both price and output level. A monopolist can do
either of the two things i.e. price or output. It means he can fix either price or
output but not both at a time.
Characteristics / Features of Monopoly
Following are the features or characteristics of Monopoly :A single seller has complete control over the supply of the commodity.
There are no close substitutes for the product.
There is no free entry and exit because of some restrictions.
There is a complete negation of competition.
Monopolist is a price maker.
Since there is a single firm, the firm and industry are one and same i.e. firm
coincides the industry.
Monopoly firm faces downward sloping demand curve. It means he can sell more
at lower price and vice versa. Therefore, elasticity of demand factor is very
important for him.
Definition and Classification of Oligopoly!
The term Oligopoly is coined from two Greek words Oligoi meaning a few and
pollein means to sell.
It occurs when an industry is made up of a few firms producing either an identical
product or differentiated product.
In simple words, Oligopoly is a situation in which there are so few sellers that each
of them is conscious of the results upon the price of the supply which he
individually places upon the market-The number of sellers is greater than one, yet
not big enough to render negligible the influence of any one upon the market
price.
Definition:
Oligopoly is that situation in which a firm bases its markets policy in part on the
expected behaviour of a few close rivals. J. Stigier
Oligopoly is a market structure characterized by a small number of firms and a
great deal of interdependence. -Mansfield
Classification of Oligopoly:
Oligopoly situation can be classified on different bases:
1. Basis of Product Differentiation:
On the basis of product differentiation, oligopoly may be classified as Pure or
Perfect Oligopoly and Imperfect or Differentiated Oligopoly. In the case of pure
oligopoly, the product of different firms in the industry is identical or homogeneous
while in the case of differentiated oligopoly, the products of different firms are not
identical but rather differentiated products. Thus, differentiated oligopoly will exist

where the competing firms produce products which are close substitutes but not
perfect substitutes.
The distinction between pure oligopoly and differentiated oligopoly does not play a
significant role in the analysis. In real situation, firms in most oligopolistic
industries produce differentiated products. But theoretically we may determine
price and output in both kinds of oligopoly.
2. Basis of Entry of Firms:
On the basis of the possibility of entry of new firms into the industry, oligopoly may
be classified as Open Oligopoly and Closed Oligopoly. An open oligopoly provides
full freedom to new firms to enter into the industry. In the situation of open
oligopoly there is no restriction of any kind for the desiring firms to enter into the
market. A closed oligopoly, on the other hand, refers to that market situation
where only the few firms control the entire market and new firms are not allowed
to enter the industry.
3. Basis of Price Leadership:
On the basis of presence or absence of price leadership, oligopoly may be
classified as Partial Oligopoly and Full Oligopoly. Partial oligopoly refers to that
market situation where the industry is dominated by one large firm (known as the
leader) and the other firms (known as the followers) of the industry follow the price
policy determined by their leader. Full oligopoly, on the other hand, refers to that
market situation where there is no leader and no followers.
4. Basis of Agreement:
On the basis of agreement, oligopoly is classified as Collusive Oligopoly and Noncollusive Oligopoly. A collusive oligopoly refers to that market situation where the
firms of the industry follow a common policy of pricing. In other words, they
combine together to avoid competition among themselves regarding the price and
output of the industry. A non- collusive oligopoly refers to that market situation
where there is no agreement among the firms regarding the price and output of
the entire market. In other words, the firms under non-collusive oligopoly act
independently.
Collusive Oligopoly: Price and Output Determination under Cartel!
In order to avoid uncertainty arising out of interdependence and to avoid price
wars and cut throat competition, firms working under oligopolistic conditions often
enter into agreement regarding a uniform price-output policy to be pursued by
them.
The agreement may be either formal (open) or tacit (secret). But since formal or
open agreements to form monopolies are illegal in most countries, agreements
reached between oligopolists are generally tacit or secret. When the firms enter
into such collusive agreements formally or secretly, collusive oligopoly prevails.
Reasons for the Possible Breakdowns of Cartels
Most cartel arrangements experience difficulties and tensions and some cartels
collapse completely. Several factors can create problems within a collusive
agreement between suppliers:

Enforcement problems: The cartel aims to restrict production to maximize total

profits of members. But each individual seller finds it profitable to expand
production. It may become difficult for the cartel to enforce its output quotas and
there may be disputes about how to share out the profits. Other firms not
members of the cartel may opt to take a free ride by selling just under the
cartel price.
Falling market demand creates excess capacity in the industry and puts
pressure on individual firms to discount prices to maintain their revenue
The successful entry of non-cartel firms into the industry undermines a
cartel's control of the market. Rapid technological change can often undermine a
cartel e.g. a new entrant with an innovative and success alternative business
model.
The exposure of illegal price-fixing by market regulators such as the
European Union Competition Commission and the UK's Competition and Markets
Authority.
The exposure of price-fixing by whistle-blowing firms these are firms
previously engaged in a cartel that decides to withdraw from it and pass on
information to the competition authorities
Foundation of De Beers Diamond Cartel
In 1867, the accidental discovery of diamonds in South Africa laid the foundation of
the modern diamond industry. Within months of the first discovery, prospectors
from around the world rushed to pan the waters of the Vaal River.
However, the bulk of the diamonds did not lie on bed of the river, but instead
inside deep volcanic pipes. This forced the miners to pool their resources and
cooperate with each other.
In 1874, an Englishman named Cecil Rhodes arrived at Kimberley Mine and began
renting very effective steam-powered pump to the miners which was used to pump
out water from the mines. He soon installed pumps at other mines in the area and
shortly thereafter began purchasing claims in the mines themselves.
As Rhodes acquired these mines, he started facing following challenges of the
diamond trade:
The sheer volume of diamonds flowing from the South African mines to other parts
of world threatened to destroy the scarcity that had long defined the stones value.
This would definitely tarnish the luxury value associated with diamond.
South Africas individual miners were unable to control their production. They
mined the stones they found and tried to sell them all. On the contrary, their
buyers preferred to purchase only the largest and most beautiful stones.
Solution to these problems was to form a well-integrated organization to manage
the flow of diamonds from South Africa. Idea behind this was to keep supplies low
and prices high. And if excess supply ever hovered on the market, De Beers itself
would acquire and stockpile these stones.
So, Rhodes signed a formal agreement with his buyers (local diamond distributors)
to form a Diamond Syndicate. Under its terms, the distributors would buy

diamonds exclusively from Rhodes and sell them in agreed-upon numbers, at

agreed-upon prices.
In 1880, Rhodes formed the De Beers Mining Company and by 1890, Rhodes
controlled all of South Africas major mines, along with the distribution channels for
their output.
These mechanisms remained in place until Rhodes death in 1902. Then, Ernest
Oppenheimer, a German who had risen to prominence in South Africas diamond
industry, began to worry that the Diamond Syndicate was still too independent.
Syndicate had the potential to challenge the producers by shifting either supply or
price.
So, as Oppenheimer advanced through the ranks of the diamond trade, he started
tightening the noose on channels of production and distribution. In 1925,
Oppenheimer gained control of the Diamond Syndicate. In 1929, he also
took control of De Beers, thus achieving near total integration of South
Africas diamond trade.
He now controlled a system that brought diamond from mine to the end-customer.
At the core of this diamond cartel was the Central Selling Organization (CSO) which
was later re-structured to Diamond Trading Company (DTC), a London-based group.
It acted as the chief intermediary between the stones mined in any given year and
the consumers who would eventually purchase or polish or wear them.
Ten times a year, an elite group of dealers ("sightholders") would gather at CSO
headquarters. There, the dealers would each be presented with an individual
parcel of stones, chosen by the CSO to reflect both what the dealer was hoping to
sell in the subsequent weeks and what De Beers wanted to place into the market.
Through this mechanism, De Beers was able to determine not only the precise size
and quality of diamonds available each year, but also their price. Dealers were
encouraged not to purchase diamonds from any sources outside the CSO, nor even
to repurchase a "used" stone.
DTC Sightholders are amongst the world's leading diamond dealers. They
collectively handle approximately 75% of the Worlds diamonds. These are based
mainly in the traditional cutting centers of Antwerp, Tel Aviv, Mumbai,
Johannesburg and New York, as well as in Botswana, Namibia, Russia, China and
Canada.
Managing Production
By 1950s, South Africas vast stock of diamonds began to diminish. Also, new
discoveries of diamond deposits were made in other countries across Africa,
Australia and Soviet Union.
For De Beers, these new players raised the challenged that had long haunted
Rhodes and Oppenheimer: the threat of diamonds flooding the market and
destroying the hard-won "illusion of scarcity" and thus depressing prices.
So, De Beers moved swiftly to bring the new producers into the fold of its diamond
cartel. The South African company signed long-term contracts with the diamondproducing countries, guaranteeing to purchase a fixed proportion of the countrys
output at a fixed price. This ensured De Beers to maintain strong control on
diamond production.

Managing Demand
In 1948, De Beers came up with its famous and clever slogan "A diamond is
forever", later hailed byAdvertising Age as the slogan of the century.
This slogan told diamond customers that their purchases were heirlooms, too
valuable ever to be sold. This effectively killed the resale market while maintaining
the demand of new diamond always high.
Through fine print and other media campaigns, De Beers conveyed to its
customers (mostly male) that several months salary was the recommended price,
with attention duly paid to the diamond cartels own criteria
of color, cut, clarity and carat.
Benefit of Kimberley Process Certification
In order to flush out Conflict Diamonds from supply chain, the Kimberley Process
Certification System (KPCS) was formed in 2003 by joint effort of various countries,
NGOs and diamond industry.
Per rules laid by KPCS, every individual who handles a diamond (from the miner to
the jeweler) is responsible for maintaining an identity tag affixed to the stone at
the time of extraction. With such a system, theoretically at least, no warlord in
Liberia or Sierra Leone can slip diamonds into the pipeline.
KPCS proved exceedingly good for De Beers. It strengthened the De Beers
principle of curbing excess supply of diamond and preventing new suppliers from
entering the business. Like the diamond cartel itself, this new international system
restricts supply and enhances the power of big, established players.
Kimberley Process keeps the warlords, small diggers and the shady traders out of
the acceptable stream of commerce. It also imposes costs (for tagging, monitoring
and auditing) that make it even more difficult for new or smaller players to enter
the global market.
Conclusion
In the diamond market, (unlike oil market) sharp changes in price could mean a
long-term shift in how consumers view diamonds, and how consumers think about
the price that they pay.
It can be safely said that since Rhodess time, the diamond cartel has managed to
impress upon consumers that diamonds are both valuable and scarce and that
these should be purchased based on quality rather than price.
Much of this cartels success can be attributed to its leading player, De Beers which has enforced the rules - and its ability to bring new producers into the fold
and convince them not to sell outside its confines.
Note: In 2011, Oppenheimer family sold their 40% stake in De Beers to AngloAmerican which earlier had 45% shares. So, with 85% stakes owned by AngloAmerican, in 2012 De Beers became the member of Anglo American plc group.