Q4. What Is the Law of Demand?

The law of demand is one of the most fundamental concepts in economics. It

works with the law of supply to explain how market economies allocate resources
and determine the prices of goods and services that we observe in everyday
transactions.

The law of demand states that the quantity purchased varies inversely with price.
In other words, the higher the price, the lower the quantity demanded. This occurs
because of diminishing marginal utility. That is, consumers use the first units of
an economic good they purchase to serve their most urgent needs first, then they
use each additional unit of the good to serve successively lower-valued ends.

 The law of demand is a fundamental principle of economics that states that

at a higher price, consumers will demand a lower quantity of a good.
 Demand is derived from the law of diminishing marginal utility, the fact
that consumers use economic goods to satisfy their most urgent needs first.
 A market demand curve expresses the sum of quantity demanded at each
price across all consumers in the market.
 Changes in price can be reflected in movement along a demand curve, but
by themselves, they do not increase or decrease demand.
 The shape and magnitude of demand shifts in response to changes in
consumer preferences, incomes, or related economic goods, NOT to
changes in price.

Understanding the Law of Demand

Economics involves the study of how people use limited means to satisfy
unlimited wants. The law of demand focuses on those unlimited wants. Naturally,
people prioritize more urgent wants and needs over less urgent ones in their
economic behavior, and this carries over into how people choose among the
limited means available to them. For any economic good, the first unit of that
good that a consumer gets their hands on will tend to be used to satisfy the most
urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island who obtains a six-pack of

bottled fresh water washed up onshore. The first bottle will be used to satisfy the
castaway’s most urgently felt need, most likely drinking water to avoid dying of
thirst. The second bottle might be used for bathing to stave off disease, an urgent
but less immediate need. The third bottle could be used for a less urgent need,
such as boiling some fish to have a hot meal, and on down to the last bottle, which
the castaway uses for a relatively low priority like watering a small potted plant to
keep him company on the island.

In our example, because each additional bottle of water is used for a successively
less highly valued want or need by our castaway, we can say that the castaway
values each additional bottle less than the one before. Similarly, when consumers
purchase goods on the market, each additional unit of any given good or service
that they buy will be put to a less valued use than the one before, so we can say
that they value each additional unit less and less. Because they value each
additional unit of the good less, they are willing to pay less for it. So the more
units of a good that consumers buy, the less they are willing to pay in terms of the
price.

By adding up all the units of a good that consumers are willing to buy at any given
price, we can describe a market demand curve, which is always sloping
downward, like the one shown in the chart below. Each point on the curve (A, B,
C) reflects the quantity demanded (Q) at a given price (P). At point A, for
example, the quantity demanded is low (Q1) and the price is high (P1). At higher
prices, consumers demand less of the good, and at lower prices, they demand
more.

Demand vs. Quantity Demanded

In economic thinking, it is important to understand the difference between the

phenomenon of demand and the quantity demanded. In the chart, the term
“demand” refers to the light blue line plotted through A, B, and C. It expresses the
relationship between the urgency of consumer wants and the number of units of
the economic good at hand. A change in demand means a shift of the position or
shape of this curve; it reflects a change in the underlying pattern of consumer
wants and needs vis-à-vis the means available to satisfy them.

On the other hand, the term “quantity demanded” refers to a point along the
horizontal axis. Changes in the quantity demanded strictly reflect changes in the
price, without implying any change in the pattern of consumer preferences.
Changes in quantity demanded just mean movement along the demand curve itself
because of a change in price. These two ideas are often conflated, but this is a
common error—rising (or falling) prices do not decrease (or increase) demand;
they change the quantity demanded.

Factors Affecting Demand

So what does change demand? The shape and position of the demand curve can be
impacted by several factors. Rising incomes tend to increase demand for normal
economic goods, as people are willing to spend more. The availability of close
substitute products that compete with a given economic good will tend to reduce
demand for that good, since they can satisfy the same kinds of consumer wants
and needs. Conversely, the availability of closely complementary goods will tend
to increase demand for an economic good, because the use of two goods together
can be even more valuable to consumers than using them separately, like peanut
butter and jelly.

Other factors such as future expectations, changes in background environmental

conditions, or changes in the actual or perceived quality of a good can change the
demand curve because they alter the pattern of consumer preferences for how the
good can be used and how urgently it is needed.

Law of Supply

Supply is the total amount of a specific good or service that is available to

consumers at a certain price point. As the supply of a product fluctuates, so does
the demand, which directly affects the price of the product. The law of supply,
then, is a microeconomic law stating that, all other factors being equal, as the
price of a good or service rises, the quantity that suppliers offer will rise in turn
(and vice versa). Ergo, when demand exceeds the available supply, the price of a
product will typically rise. Conversely, should the supply of an item increase
while the demand remains the same, the price will go down.

What is a simple explanation of the law of demand?

The law of demand tells us that if more people want to buy something, given a
limited supply, the price of that thing will be bid higher. Likewise, the higher the
price of a good, the lower the quantity that will be purchased by consumers.

Q5. Types of Market Structures on the Basis of Competition:

A market structure comprises a number of interrelated features or characteristics of
a market.

These features include number of buyers and sellers in the market, level and type
of competition, degree of differentiation in products, and entry and exit of
organizations from the market.
Among all these features, competition is the main characteristic of a market. It acts
as a guide for organizations to react and take decisions in a particular situation.
Therefore, market structures can be classified on the basis of degree of competition
in a market.:

Figure-1 shows different types of market structures on the basis of competition:

These different types of market structures (as shown in Figure-1).

1. Purely Competitive Market:

A purely competitive market is one in which there are a large number of
independent buyers and sellers dealing in standardized products. In pure
competition, the products are standardized because they are either identical to each
other or homogenous. Moreover, the price of products is same in the entire market.

Therefore, buyers can purchase products from any seller as there is no difference in
the price and quality of products of different sellers. Under pure competition,
sellers cannot influence the market price of products. This is because if a seller
increases the prices of its products, customers may switch to other sellers for
getting products at lower price with the same quality.

On the other hand, if a seller decreases the prices of its products, then customers
may become doubtful about the quality of products. Therefore, in pure
competition, sellers act as price takers. In addition, in a purely competitive market,
there are no legal, technological, financial, or other barriers for the entry and exit
for organizations.

In pure competition, the average revenue curve or demand curve is represented by

a horizontal straight line. This implies the homogeneity of products with fixed
market price.
Figure-2 shows the average revenue curve under pure competition curve:

In Figure-2, OP is the price level at which a seller can sell any quantity of products
at the fixed market price.

2. Perfectly Competitive Market:

In a purely competitive market, there are a large number of buyers and sellers
dealing in homogenous products. A perfectly competitive market is a wider term
than a purely competitive market. A perfectly competitive market is characterized
by a situation when there is perfect competition in the market.

Some of the definitions of perfect competition given by different economists are as

follows:
According to Robinson perfect competition can be defined as, “When the number
of firms being large, so that a change in the output of any of them has a negligible
effect upon the total output of the commodity, the commodity is perfectly
homogeneous in the sense that the buyers are alike in respect of their preferences
(or indifference) between one firm and its rivals, then competition is perfect, and
its rivals, then competition is perfect, and the elasticity of demand for the
individual firm is infinite.”

According to Spencer, “Perfect competition is the name given to an industry or to a

market characterized by a large number of buyers and sellers all engaged in the
purchase and sale of a homogeneous commodity, with perfect knowledge, of
market price and quantities, no discrimination and perfect mobility of resources.”
In the words of Prof. Leftwitch, “Perfect competition is a market in which there are
many firms selling identical products with no firm large enough relative to the
entire market to be able to influence market price.”

According to Bilas, “The perfect competition is characterized by the presence of

many firms. The all sell identical products. The seller is a price taker, not price
maker.”

In perfect competition, there are a large number of buyers and sellers in the market.
However, these buyers and sellers cannot influence the market price by increasing
or decreasing their purchases or output, respectively.

In addition to conditions implied in pure competition, perfect competition also

involves certain other conditions, which are as follows::
i. Large Number of Buyers and Sellers:
Refers to one of the primary conditions of perfect competition. In perfect
competition, the number of buyers and sellers is very large. However, level of
output produced by a seller or purchases made by a buyer are very less as
compared to the total output or total purchase in an economy.

Therefore, under perfect competition, sellers and buyers cannot influence the
market price. As a result, the market price remains unchanged, irrespective of any
activity of buyers or sellers. Consequently, buyers and sellers are bound to follow
the market price.

ii. Homogeneous Products::

Refer to another important characteristic of perfect competition. In perfect
competition, all the organizations produce identical products having same quality
and features. Therefore, a buyer is free to purchase the product from any seller in
the market. Consequently, the sellers are required to keep the same price for the
same product.

iii. Free Entry and Exit:

Constitutes a significant feature of perfect competition. Under perfect competition,
there are no legal, social, or technological barriers on the entry or exit of
organizations. In the condition of perfect competition, all organizations earn
normal profit. If the level of profit increases within a particular industry, then new
organizations would be attracted toward the particular industry.

In such a case, the extra profit would be transferred to new organizations. On the
contrary, if the total profit in an industry is normal, then some organizations may
prefer to exit from the industry. However, if there are restrictions on the entry of
new organizations, then the existing organizations may earn supernormal profit.
Therefore, organizations would earn normal profits, if there are no restrictions on
entry and exit.:

iv. Perfect Knowledge:

Implies that under perfect competition, buyers and sellers have perfect knowledge
about the prices of products prevailing in the market. In such a case, when the
sellers and buyers are fully aware about the current market price of a product, then
none of them would sell or buy at a higher rate. As a result, the same price would
prevail in the market.

v. Absence of Transport Cost:

Refers to one of the necessary condition for perfect competition. In perfect
competition, the transportation cost is zero, so that the rule of same price can be
applied. If transportation cost is present, then the prices of products would vary in
different sectors of the market.

vi. Perfect Mobility of Factors of Production:

Helps organizations in regulating their supply with respect to demand, so that
equilibrium can be maintained. This implies that the factors of production are free
to move from one industry to another.

3. Imperfectly Competitive Market:

:

In economic terms, imperfect competition is a market situation under which the

conditions necessary for perfect competition are not satisfied. In other words,
imperfect competition can be defined as a type of market that is free from the
stringent rules of perfect competition.
Unlike perfect competition, imperfect competition is characterized by
differentiated products. The concept of imperfect competition was firstly explained
by an English economist, Joan Robinson.

In addition, under imperfect competition, buyers and sellers do not have any
information related to the market as well as prices of goods and services. In
imperfect competition, organizations dealing in products or services can influence
the market prices of their output.

There are different forms of imperfect competition, which are shown in Figure-3:

The different forms of imperfect competition (as shown in Figure-3).

Monopoly::
The term monopoly has been derived from a Greek word Monopolian, which
signifies a single seller. Monopoly refers to a market structure in which there is a
single producer or seller that has a control on the entire market. This single seller
deals in the products that have no close substitutes.

Some of the definitions of monopoly given by different economists are as follows:

According to Prof. Thomas, “Broadly, the term monopoly is used to cover any
effective price control, whether of supply or demand of services or goods;
narrowly it is used to mean a combination of manufacturers or merchants to control
the supply price of commodities or services.”

According to Prof. Chamberlain, “Monopoly refers to the control over supply.”

According to Robert Triffin, “Monopoly is a market situation in which the firm is

independent of price changes in the product of each and every other firm.”
From aforementioned definitions, it can be concluded under monopoly the
demand, supply, and prices of a product are under the direct control of the seller. In
monopoly, the slope of the demand curve is downward to the right.

Following are the main features of the monopoly market structure:

i. Single Seller:
Refers to the main feature of monopoly.Under monopoly market conditions, there
is a single seller or producer of products. In such a case, buyers are not left with
any other option; therefore, they are required to purchase from the only seller.

This leads to a full control of the seller on the supply of products in the market. In
addition, under monopoly, the seller enjoys the power to decide the price of
products. Therefore, in monopoly, there is no distinction between an organization
and industry as one organization constitutes the whole industry.

ii. No Substitutes of the Product:

Implies that under monopoly, the seller deals in the product that is unique in nature
and does not have close substitutes. The differentiation of products is absent in
case of monopoly market.

iii. Barriers to Entry:

Refers to the main cause of the existence of monopoly market. Under monopoly,
there are a number of entry barriers that restrict the entry of new organizations.
These barriers include exclusive resource ownership, copyrights, high initial
investment, and other restrictions by government.

iv. Restriction on Information:

Implies that under monopoly, information is restricted to the organization and
people working within the organization. This information is not available to others
and can be transferred only in the form of copyrights and patents.

Monopoly is a condition that prevents the entry of new organizations in the

existing market due to various prevailing barriers.

Q7. Economics
 Definition: Economics is that branch of social science which is concerned with the
study of how individuals, households, firms, industries and government take
decision relating to the allocation of limited resources to productive uses, so as to
derive maximum gain or satisfaction.

Simply put, it is all about the choices we make concerning the use of scarce
resources that have alternative uses, with the aim of satisfying our most pressing
infinite wants and distribute it among ourselves.

Nature of Economics

1. Economics is a science: Science is an organised branch of knowledge, that

analyses cause and effect relationship between economic agents. Further,
economics helps in integrating various sciences such as mathematics, statistics, etc.
to identify the relationship between price, demand, supply and other economic
factors.
o Positive Economics: A positive science is one that studies the relationship between
two variables but does not give any value judgment, i.e. it states ‘what is’. It deals
with facts about the entire economy.
o Normative Economics: As a normative science, economics passes value
judgement, i.e. ‘what ought to be’. It is concerned with economic goals and
policies to attain these goals.
2. Economics is an art: Art is a discipline that expresses the way things are to be
done, so as to achieve the desired end. Economics has various branches like
production, distribution, consumption and economics, that provide general rules
and laws that are capable of solving different problems of society.
Therefore, economics is considered as science as well as art, i.e. science in terms
of its methodology and arts as in application. Hence, economics is concerned with
both theoretical and practical aspects of the economic problems which we
encounter in our day to day life.
 Scope of Economics

 Microeconomics: The part of economics whose subject matter of study

is individual units, i.e. a consumer, a household, a firm, an industry, etc. It analyses
the way in which the decisions are taken by the economic agents, concerning the
allocation of the resources that are limited in nature.
It studies consumer behaviour, product pricing, firm’s behaviour. Factor pricing,
etc.

 Macro Economics: It is that branch of economics which studies the entire

economy, instead of individual units, i.e. level of output, total investment, total
savings, total consumption, etc. Basically, it is the study of aggregates and
averages. It analyses the economic environment as a whole, wherein the firms,
consumers, households, and governments make decisions.
It covers areas like national income, general price level, the balance of trade and
balance of payment, level of employment, level of savings and investment.

The fundamental difference between micro and macro economics lies in the scale
of study. Further, in microeconomics, more importance is given to the
determination of price, whereas macroeconomics is concerned with the
determination of income of the economy as a whole.

Nevertheless, microeconomics and macroeconomics are complementary to one

another, as they both aimed at maximising the welfare of the economy as a whole.
From the standpoint of microeconomics, the objective can be achieved through
the best possible allocation of scarce resources. Conversely, if we talk about
macroeconomics, this goal can be attained through the effective use of the
resources of the economy.

Q8. What Is Marginal Utility With an Example?

Marginal utility is the enjoyment a consumer gets from each additional unit of
consumption. It calculates the utility beyond the first product consumed. If you
buy a bottle of water and then a second one, the utility gained from the second
bottle of water is the marginal utility.

What Is a Utility Example?

The utility is the degree of satisfaction or pleasure a consumer gets from an

economic act. For example, a consumer can purchase a sandwich so they are no
longer hungry, thus the sandwich provides some utility.

What Is the Law of Diminishing Marginal Utility?

The law of diminishing marginal utility states that all else equal, as consumption
increases, the marginal utility derived from each additional unit declines. Marginal
utility is the incremental increase in utility that results from the consumption of
one additional unit. "Utility" is an economic term used to represent satisfaction or
happiness.

 The law of diminishing marginal utility says that the marginal utility from
each additional unit declines as consumption increases.1
 The marginal utility can decline into negative utility, as it may become
entirely unfavorable to consume another unit of any product.
 The marginal utility may decrease into negative utility, as it may become
entirely unfavorable to consume another unit of any product.

Understanding the Law of Diminishing Marginal Utility

The marginal utility may decrease into negative utility, as it may become entirely
unfavorable to consume another unit of any product. Therefore, the first unit of
consumption for any product is typically highest, with every unit of consumption
to follow holding less and less utility. Consumers handle the law of diminishing
marginal utility by consuming numerous quantities of numerous goods.

The law of diminishing marginal utility directly relates to the concept of

diminishing prices. As the utility of a product decreases as its consumption
increases, consumers are willing to pay smaller dollar amounts for more of the
product. For example, assume an individual pays $100 for a vacuum cleaner.
Because he has little value for a second vacuum cleaner, the same individual is
willing to pay only $20 for a second vacuum cleaner.

The law of diminishing marginal utility directly impacts a company’s pricing

because the price charged for an item must correspond to the consumer’s marginal
utility and willingness to consume or utilize the good.

Example of Diminishing Utility

An individual can purchase a slice of pizza for $2, and is quite hungry, so they
decide to buy five slices of pizza. After doing so, the individual consumes the first
slice of pizza and gains a certain positive utility from eating the food. Because the
individual was hungry and this is the first food consumed, the first slice of pizza
has a high benefit.

Upon consuming the second slice of pizza, the individual’s appetite is becoming
satisfied. They are not as hungry as before, so the second slice of pizza had a
smaller benefit and enjoyment than the first. The third slice, as before, holds even
less utility as the individual is now not hungry anymore.

The fourth slice of pizza has experienced a diminished marginal utility as well, as
it is difficult to be consumed because the individual experiences discomfort upon
being full from food. Finally, the fifth slice of pizza cannot even be consumed.
The individual is so full from the first four slices that consuming the last slice of
pizza results in negative utility.

The five slices of pizza demonstrate the decreasing utility that is experienced upon
the consumption of any good. In a business application, a company may benefit
from having three accountants on its staff. However, if there is no need for another
accountant, hiring another accountant results in a diminished utility, as there is a
minimum benefit gained from the new hire.

What Is an Example of Diminishing Marginal Utility?

Diminishing marginal utility is the decline of enjoyment from consuming or
buying one additional good. For example, a consumer buys a bag of chocolate and
after one or two pieces their utility rises, but after a few pieces, their utility will
start to decline with each additional piece that's consumed—and eventually, after
enough pieces, will likely result in negative equity.

Q10. What is Demand Forecasting?

Demand forecasting is an amalgamation of two words; the first one is known as

demand, and another one is forecasting. The meaning of demand is the outside
requirements of a manufactured product or a useful service. In general aspects,
forecasting usually means making an approximation in the present for an event that
would be occurring in the future.

All the companies use these predictions to format their approach to marketing and
sales. It contributes hugely towards increasing their profit margins. Here, we are
stepping forward to elaborate on demand forecasting, its features and its
usefulness. Moreover, we will also see its applications.

Definition of Demand Forecasting

Demand forecasting is a technique that is used for the estimation of what can be
the demand for the upcoming product or services in the future. It is based upon the
real-time analysis of demand which was there in the past for that particular product
or service in the market present today. Demand forecasting must be done by a
scientific approach and facts, events which are related to the forecasting must be
considered.
Hence, in simple words, if someone asks what demand forecasting is, we can
answer that after fetching information about different aspects of the market and
demand which is dependent on the past, an attempt might be made to analyze the
future demand.
This whole concept of analyzing and approximations are collectively called
demand forecasting. In order to understand it more clearly, we can consider the
following equation so that we can understand the concept of demand forecasting
more easily.
For example, if we sold 100,150, 200 units of product Z in January, February, and
March respectively, now we can approximately say that there will be a demand for
150 units of product Z in April. However, there is also a clause that the condition
of the market should remain the same.

Methods of Demand Forecasting

There are two main methods of demand forecasting: 1) Based on Economy and 2)
Based on the period.
1. Based on Economy
There is a total of three methods of demand forecasting based on the economy:
 Macro-level Forecasting: It generally deals with the economic environment
which is related to the economy as calculated by the Index of Industrial
Production(IIP), national income and general level of employment, etc.
 Industry-level Forecasting: Industry-level forecasting usually deals with the
demand issued for the industry’s products as a whole. We can consider the
example where there is a demand for cement in India, Demand for clothes in
India, etc.
 Firm-level Forecasting: It is a major type of demand forecasting. Firm-level
forecasting means that we need to forecast the demand for a specific firm’s
product. We can consider the following examples as Demand for Birla
cement, Demand for Raymond clothes, etc.
2. Based on the Time
Forecasting based on time may be either short-term forecasting or long-term
forecasting.
 Short-term Forecasting: It generally covers a short period which depends
upon the nature of the industry. It is done generally for six months or can be
less than one year. Short-term forecasting is apt for making tactical
decisions.
 Long-term Forecasting: Long-term forecasts are generally for a longer
period. It can be from two to five years or more. It gives data for major
strategic decisions of the company. We can consider the example of the
expansion of plant capacity or on opening a new unit of business, etc.
Steps Used in Demand Forecasting
The process of demand forecasting can be divided into five simple steps:
 Setting an Objective: The first step involves clearly deciding on the purpose
of the analysis. That is, the manufacturers define their goals that are
achievable through the analysis and compatible with their needs.
 Determining the Time Period: In this step, the manufacturer decides whether
the analysis will be carried out for a short or long duration of time. Many
forecasts run for a long duration as they offer more and consistent data.
 Selecting a Demand Forecasting Method: In the next step, the manufacturer
decides along with the analysts which method will give the best results.
 Collection of Data: In the penultimate step, the data is collected according to
the preconceived attributes for the analysis.
 Evaluation of Data: In the last step, the collected data is evaluated to obtain
conclusions for the forecast