Differentiate between and explain the ordinary and compensated demand

functions

Ordinary Demand Function:

A consumer’s ordinary demand curve for a good, also called a Marshallian demand curve, gives the
quantity of the good he will buy as a function of its price.
The shape of the ordinary demand curve for a good depends upon the properties of the consumer’s
utility function, viz., diminishing marginal utility (dMU) in the case of Marshallian utility theory
and the diminishing marginal rate of substitution (dMRS) in the case of the indifference curve
theory.

For a non-giffen good, the ordinary demand curve would be negatively sloped. The ordinary
demand curve may be negatively sloped even in the case of an inferior good if the magnitude of the
substitution effect of a change in the price of the good is greater than that of the income effect. A
negatively sloped ordinary demand curve for any good, X, has been shown in Fig

PX

DX
O DX
A consumers ordinary demand curve for any good X

Compensated Demand Function :-

Compensated demand function for a good is his quantity demanded as part of the solution to
minimizing his expenditure on all goods while delivering a fixed level of utility. Essentially, a
Hicksian demand function shows how an economic agent would react to the change in the price of a
good, if the agent's income was compensated to guarantee the agent the same utility previous to the
change in the price of the good—the agent will remain on the same indifference curve before and
after the change in the price of the good. The function is named after John Hicks also known as
Hicksian demand function.
Mathematically,
h ( p , u¯ ) = arg ⁡min x ∑ p i x i
i
s u b j e c t to u ( x ) ≥ u¯
 where h(p,u) is the Hicksian demand function, or commodity bundle demanded, at price
vector p and utility level u¯ .Here p is a vector of prices, and x is a vector of quantities
demanded, so the sum of all pixi is total expenditure on all goods.

Compensated demand functions are useful for isolating the effect of relative prices on
quantities demanded of goods, in contrast to Marshallian demand function, which combine
that with the effect of the real income of the consumer being reduced by a price increase

Opportunity cost is both subjective and speculative. As such the concept of

opportunity cost has no place in the scientific decision making process.' Discuss.

The opportunity cost of a choice is the value of the best alternative given up. Choices involve
trading off the expected value of one opportunity against the expected value of its best alternative.
The evaluation of choices and opportunity costs is subjective; such evaluations differ across
individuals and societies.
Opportunity costs represent the potential benefits that an individual, investor, or business misses out
on when choosing one alternative over another. Because opportunity costs are unseen by definition,
they can be easily overlooked. Understanding the potential missed opportunities when a business or
individual chooses one investment over another allows for better decision making.

Formula and Calculation of Opportunity Cost

Opportunity Cost=FO−CO
where: FO=Return on best forgone option
CO=Return on chosen point
The formula for calculating an opportunity cost is simply the difference between the expected
returns of each option. Say that you have option A—to invest in the stock market, hoping to
generate capital gain returns. Meanwhile, option B is to reinvest your money back into the business,
expecting that newer equipment will increase production efficiency, leading to lower operational
expenses and a higher profit margin.
Opportunity cost analysis plays a crucial role in determining a business’s capital structure. A firm
incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for
the risk of investment, yet each also carries an opportunity cost.
Funds used to make payments on loans, for example, cannot be invested in stocks or bonds, which
offer the potential for investment income. The company must decide if the expansion made by the
leveraging power of debt will generate greater profits than it could make through investments.
A firm tries to weigh the costs and benefits of issuing debt and stock, including both monetary and
nonmonetary considerations, to arrive at an optimal balance that minimizes opportunity costs.
Because opportunity cost is a forward-looking consideration, the actual rate of return (RoR) for
both options is unknown today, making this evaluation tricky in practice.
Assume that the company in the above example forgoes new equipment and instead invests in the
stock market. If the selected securities decrease in value, the company could end up losing money
rather than enjoying the expected 12% return.
For the sake of simplicity, assume that the investment yields a return of 0%, meaning the company
gets out exactly what is put in. The opportunity cost of choosing this option is 10% to 0%, or 10%.
It is equally possible that, had the company chosen new equipment, there would be no effect on
production efficiency, and profits would remain stable. The opportunity cost of choosing this option
is then 12% rather than the expected 2%.
It is important to compare investment options that have a similar risk. Comparing a Treasury bill,
which is virtually risk free, to investment in a highly volatile stock can cause a misleading
calculation. Both options may have expected returns of 5%, but the government backs the RoR of
the T-bill, while there is no such guarantee in the stock market. While the opportunity cost of either
option is 0%, the T-bill is the safer bet when you consider the relative risk of each investment.

Examine the role and consequences of advertising, contrasting the

market expansion and re distributional implications of advertising.

Advertising performs the following functions:

 Describing new products and what they do
 Alerting consumers to product availability and purchase locations
 Showing consumers what to look for on store shelves
 Helping them differentiate among competitive choices
 Advising them of pricing information and promotional opportunities
 Saving consumers money by encouraging competition that exerts downward pricing
pressures
The main role of advertising and re-distributional implications in promotion of the product are as
follows: 1. Awareness 2. Information 3. Persuasion 4. Attitudes 5. Reminder 6. Brand Loyalty 7.
Brand Image 8. Counter Competitors’ Claims 9. Expansion of Markets 10. Educating the
Customers.
1. Awareness:
One of the important roles of advertising is to create awareness of the product or services such as
brand name and price. The awareness of the product or services can be created through highlighting
the unique features of the brand. Nowadays, due to intense competition it is not just enough to
create awareness, but top of mind awareness is needed.

2. Information:
Advertising helps to inform the target audience about the product. Providing information is closely
related to creating awareness of the product. Potential customers must know about a product, such
as product features and uses.
Product information is very much required, especially when the product is introduced in the market,
or when product modification is undertaken. Proper product information can help the consumers in
their purchase decision.

3. Persuasion:
When business firms offer similar products, the firm must not only inform the customers about the
product’s availability, but also persuade them to buy it. Through persuasive messages, the marketers
try to provide reasons regarding the superiority of their products as compared to others available in
the market. Persuasion can be undertaken through creative advertising messages, product
demonstration at trade fairs, offering free gifts, premium offers and organizing contests.

4. Attitudes:
Promotion is required to build or reinforce attitudes in the minds of target audience. The marketers
expect the target audience to develop a favourable attitude towards their brands. Positive attitude
towards the brand helps to increase its sales. Through promotional techniques like advertising, the
marketer can correct negative attitude towards the product, if any. Negative attitude can also be
corrected through public relations and advertising.

5. Reminder:
If target customers already have a positive attitude towards a firm’s product or service, then a
reminder objective may be necessary. The reminder objective is necessary because the satisfied
customers can be targets for competitors’ appeals. Well-established brands need to remind the
customers about their presence in the market. For instance, ‘Raymond – the complete man’
campaign is designed to remind the customers.

6. Brand Loyalty:
Advertising helps to develop brand loyalty. Brand loyalty results in repeat purchases and favourable
recommendations to others by existing customers. Sales promotion, effective personal selling,
timely and efficient direct marketing, and other techniques help to develop brand loyalty.

7. Brand Image:
An advertiser helps to develop a good image of the brand in the minds of target audience. There are
several factors that can be of help to audience. There are several factors, such as the character of the
personality that endorses the brand, the content of the advertising message, the nature and type of
packaging and the type of programmes or events sponsored, that can help to develop brand image in
the minds of target audience.

8. Counter Competitors’ Claims:

The marketer may counter the claims made by the major competitors. For instance, competitive
advertising is undertaken to counter the claims made by competitors either directly or indirectly.
With the help of creative advertising, the marketers can claim the superiority of their brand. The
marketer may also undertake aggressive sales promotion to counter the competition in the market.
9. Expansion of Markets:
Successful ads results in expansion of the markets. A marketer may intend to expand markets from
the local level to the regional level, from the regional level to the national level, and from the
national level to the international level. For this purpose, the marketer may undertake various
techniques of promotion.

10. Educating the Customers:

Promotion may be undertaken to educate the customers. For instance, some of the advertising is
undertaken to educate the audience regarding the use of the product, handling operations, and so on.
Public awareness campaigns also educate the public regarding the negative effects of noise, air and
dirt pollution, social evils, and so on.
Consequences of Advertising – 1. Adds to the Cost of Production and Product 2. Leads to Price
War 3. Deceptive Advertising 4. Leads to Unequal Competition 5. Creates a Monopolistic Market 6.
Promotes Unnecessary Consumption 7. Decline in Moral Values.

'The market allocates resources to the firms that best meet the needs of
consumers.' Discuss

Markets use prices as signals to allocate resources to their highest valued uses. Consumers will pay
higher prices for goods and services that they value more highly. Producers will devote more
resources to the production of goods and services that have higher prices, other things being
equal.And otherthings being equal, workers will provide more hours of labor to jobs that pay higher
salaries.
This allocation principle applies both to product markets for items such as cars, houses, and haircuts
and to resource markets for items such as labor, land, and equipment. Households play two
important roles in an economy,they demand goods and services and supply resources. Businesses
also have dual roles,they supply goods and services and demand resources. The interaction of
demand and supply in product and resource markets generates prices that serve to allocate items to
their highest valued alternatives. Factors that interfere with the workings of a competitive market
result in an inefficient allocation of resources,causing a reduction in society’s overall well-being.
In a free market economy, resources are allocated through the interaction of free and self-directed
market forces. This means that what to produce is determined consumers, how to produce is
determined by producers, and who gets the products depends upon the purchasing power of
consumers.
Effective allocation of resources helps project managers to plan to assign resources to project and
manage them effectively. So whether it is about 1 project or 10 projects, if you are allocating
resources properly, then you can handle them all without any hassle.
Market System Cannot Allocate Resources Efficiently. A market can be defined as a place where the
forces of demand and supply operate or where buyers and sellers can interact -directly or indirectly-
to trade goods and services.
Markets will not generate an efficient allocation of resources if they are not competitive or if
property rights are not well defined and fully transferable. Either condition will mean that decision
makers are not faced with the marginal benefits and costs of their choices.
Perfect competition is an idealized market structure that achieves an efficient allocation of
resources.This efficiency is achieved because the profit-maximizing quantity of output produced by
a perfectly competitive firm results in the equality between price and marginal cost.

List down key highlights of Economic Survey 2020-21 of Indian Economy

Key Points

India’s strategy flattened the curve, pushed the peak to September, 2020
• After the September peak, India has been unique in experiencing declining daily cases despite
increasing mobility
• V-shaped recovery, as seen in 7.5% decline in GDP in Q2 and recovery across all key economic
indicators showed the 23.9% GDP contraction in Q1

Indian Economy and Covid:

Strategy to face the pandemic:

Response stemmed from the humane principle that:

Human lives lost cannot be brought back.

Gross Domestic Product (GDP) growth will recover from the temporary shock caused by the
Covid-19 Panndemic.

India’s policy response also derived from extensive research on epidemiology, especially
that looked at Spanish Flu of 1918.

One of the key insights was that pandemic spreads faster in higher and denser population
and intensity of lockdown matters most at the beginning of the pandemic.
Covid pandemic affected both demand and supply:
India was the only country to announce structural reforms to expand supply in the medium-
long term and avoid long-term damage to productive capacities.

The Rs. 1.46-lakh crore Production Linked Incentive (PLI) Scheme is expected to make
India an integral part of the global supply chain and create huge employment opportunities

Demand-side measures have been announced in a calibrated manner.

 A public investment programme centered around the National Infrastructure Pipeline to
accelerate the demand push and further the recovery

GDP’s Estimation:
India’s real GDP to record a growth of 11% in 2021-22 and nominal GDP by 15.4% - the highest
since independence.
These projections are in line with International Monetary Fund estimates.
India’s GDP is estimated to contract by 7.7% in the Financial Yeat (FY) 2020-21, composed of a
sharp 15.7% decline in the first half and a modest 0.1% fall in the second half.
Sector-wise, agriculture has remained the silver lining while contact-based services,
manufacturing, construction were hit hardest, and have been recovering steadily.
The external sector provided an effective cushion to growth with India recording a Current
account Surplus of 3.1% of GDP in the first half of FY 2020-21.
Foreign Investment:
Net Foreign Direct Investmen (FDI) inflows of USD 27.5 billion during April-October, 2020 -
14.8% higher as compared to the first seven months of FY 2019-20.
Net Foreign Portfolio Investment (FPI) Inflows recorded an all-time monthly high of 9.8 Billion
Dollars in November 2020.

Conculsion from the survey:

1. The survey expects indian economy to grow by 11 per cent during 2021-22 which is close to the
growth forecast of 11.5 per cent made by the International Monetary Fund (IMF). This means that
the Indian GDP in 2021-22 is expected to be at ₹149.2 lakh crore.
2. The gross tax revenue earned by the government during the period April to November 2020 fell
by 12.6% to ₹10.26 lakh crore which can be attributed to the contraction of the economy.
3. Disinvestment which was targeted at ₹2.1 lakh crore has only been ₹15,220 crore, 7.2 per cent of
the targeted amount which according to the survey happened due to the coronavirus pandemic.