Normal And Inferior Goods And Examples Economics Essay

Normal And Inferior heartfelts And Examples Economics EssayA microeconomic rectitude that states that, all new(prenominal)(a) factors being equal, as the monetary look on of a well be withdrawd or service increases, consumer subscribe to for the proficient or service will decrease and vice versa.Law Of DemandThis law summarizes the military group price salmagundis halt on consumer behavior.For example, a consumer will purchase much(prenominal) pizzas if the price of pizza fall downs. The opposition is true if the price of pizza increases. people generally buy more of a solid when the price is low and less of it when the price is spunky. This is a general rule that applies to most advanceds called rule goods. As the price of a normal good increases, people buy less of it because they are usually able to switch to cheaper goods.Normal and Inferior Goods and Its ExamplesNormal goods buttocks be defined as those goods for which fill increases when the income of the consumer increases and falls when income of the consumer decreases, price of the goods rest constant.Examples of normal goods are demand of LCD and plasma television, demand for more expensive cars, branded clothes, expensive houses, diamonds etc increases when the income of the consumers increases.To the opposite side of normal goods are the inferior goods. It is defined as those goods the demand for which decreases when the income of the consumer increases.Examples of inferior goods are consumption of breads or cereals and since the income of the consumer increases he moved towards consumption of more nutritious foods and hence demand for low priced product like bread or cereal decreases.Another example send word be of use of populace transportation, when income is low people use more of public transportation which is not the case when their income increases.Hence from the above one can see that other things remaining constant as the income of consumer increases demand for norm al goods will increase and demand for inferior goods decrease and vice versa.GIFFEN GOODSIn economics, a giffen good is an inferior good with the unique characteristic that an increase in price actually increases the quantity of the good that is demanded. This provides the unusual result of an upward sloping demand roll. This phenomenon is notable because it violates the law of demand, whereby demand should increase as price falls and decrease as price ski tows.For example-consumption of bread increased as its price increased.as bread is a fasten food for low income consumers.A rise in its price would not stop people from buying as much as before.But poor people would promptly have so little extra money to spend on meat or other luxury foods that they would abandon on their demand for these and kind of buy more bread to fill up their stomachs.the result was that a rise in the price of bread led to a rise in the demand for bread.This happens because of the interactions of the in come and substitution effects.SUBSTITUTION EFFECT if the price of a good rises, consumers will buy less of that good and more of others because it is now relatively more expensive than other goods. If the price of good falls, consumers will buy more of that good and less of others. These changes in quantity demanded due to the relative change in prices are known as substitution effectof a price change.INCOME EFFECT If the price of a good rise, the real income of consumers will fall. They will not be able to buy the same basket of goods and services as before.Consumers can react to this fall in real income in one of the two ways.if the good is a normal good,they will buy less of the good. If the good is an inferior good, they will buy more good.these changes in quantity demanded caused by a change in real income is known as income effect.For an inferior good, the substitution effect and income effect work in opposite directions.A rise in price leads to a fall in quantity demanded b ecause the relative price of the good has risen. alone it leads to a rise in quantity demanded because consumers real income have fallen. However, the substitution effect outweighs the income effect because overall it is still true for an inferior good that a rise in price leads to an overall fall in quantity demanded.A Giffen Good is a special type of inferior good. A rise in price leads to a fall in quantity demanded because of the substitution effect but a rise in quantity demanded because of the income effect.However, the income effect outweighs the substitution effect, leading to rises in quantity demanded.Depending on whether the good is inferior or normal, the income effect can be haughty or negative as the price of a good increases..The interesting thing about a giffen good, is that when the price of a giffen good rises, the income effect is greater than the substitution effect. So if a good is inferior, the income effect will be positive and larger than the negative value from the substitution effect.A giffen good faces an upward sloping demand write out because the income effect dominates the substitution effect, meaning that quantity demanded increases as price risesCUsersadminDesktopassignmentWhat is a giffen good, an example with graphs_filesgiffen+good.png flake Of GoodSubstitution EffectIncome EffectTotal EffectNormal goodFallFallFallInferior GoodFall formulateFall because substitution effect income effectGiffen GoodFallRiseRise because substitution effect MR, then P MC is as well as true.A monopolizer charges a higher price than would competitive producers selling in the same market.Profit Maximization Under MonopolyQMCATCMRPProfitClearly, the price shot of demand plays a crucial role in monopoly price setting. As long as demand is elastic, total tax will rise when the monopoly lowers its price, but this will not be true when demand becomes nonresilient. Therefore, the monopoliser will expand output only in the elastic portion of its demand curve.As monopoly is a form of imperfect market organization, on that point is no difference between firm and industry. A monopoly firm is said to be an industry. therefore monopoly means the absence of competition. There are strong barriers to entry into the industry. As a result, vender has full control over the supply of the commodity.Features of Monopoly1. One seller and large number of purchasersMonopoly is a form of imperfect market structure where there is only one seller of a product. A monopoly firm whitethorn be owned by a person, a few numbers of partners or a joint stock company. The characteristic feature of single seller eliminates the distinction between the firm and the industry. A monopoliser firm is itself the industry. Under monopoly there are large numbers of buyers although the seller is one. No buyers reaction can influence the price.2. No close substituteUnder monopoly a single producer produces single commodities which have no close substitute. A s the commodity in question has no close substitute, the monopolist is at liberty to change a price according to his own whimsy. Monopoly can not exist when there is competition.A firm is said, to be monopolist only when it is the single producer and supplier of the product which have no close substitute. Under monopoly the cross pushover of demand is zero. Cross snapshot of demand shows a change in the demand for a good as a result of change in the price of another good.3. Strong barriers to the entry into the industry existIn a monopoly market there is strong barrier on the entry of advanced firms. Monopolist faces no competition. As there is one firm no other rival producers can enter the market of the same product. Since the monopolist has impregnable control over the production and sale of the commodity certain economic barriers are imposed on the entry of potential rivals.4. Nature of demand curveIn case of monopoly one firm constitutes the whole industry. The entire deman d of the consumers for a product goes to the monopolist. Since the demand curve of the individual consumers lopes descending(prenominal), the monopolist faces a downward sloping demand curve.A monopolist can sell more of his output only at a lower price and can condense the sale at a high price. The downward sloping demand curve expresses that the price (AR) goes on falling ns sales are increased. In monopoly AR curve slopes downward mid MR curve lies below AR curve. Demand curve under monopoly la otherwise known as average revenue curve.5. Homogeneous ProductA monopoly firm manufactures a commodity that has no close substitute and is a homogeneous product. With the absence of availability of a substitute, the buyer is bound to purchase what is available at the tagged price. For instance there is no substitute for railways as the bulk carrier. Thus, to be the sole seller, in the monopolistic setup, a unique product must be produced6. expense DiscriminationPrice discrimination can be defined as the practice by a seller of charging different prices from different buyers for the same good or service. A monopolist has the leverage to carry out price discrimination as he is the market and acts as per his suitability.7. Price ElasticityWith regards to the demand of the product or service offered by the monopolizing company or individual, the price elasticity to irresponsible value ratio is dictated by price increase and market demand. It is not uncommon to see surplus and/or a loss categorise as deadweight within a monopoly. The latter refers to gain that evades both, the consumer and the monopolist.Advantages of monopolyMonopoly avoids duplication and hence wastage of resources.A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.Due to the fact that monopolies make lot of profits, it can be used for research and development and to put forward their status as a mono poly.Monopolies may use price discrimination which benefits the economically weaker sections of the society. For example, Indian railways provide discounts to students travelling through its network.Monopolies can afford to throne in latest technology and machinery in order to be efficient and to avoid competition.Disadvantages of monopolyPoor level of service.No consumer sovereignty.Consumers may be charged high prices for low quality of goods and services.Lack of competition may lead to low quality and out dated goods and services.MONOPOLIST EQUILIBRIUM WITH ZERO MARGINAL make upUnder certain exceptional cases, the cost of additional units of output, i.e., peripheral cost (MC) may be equal to zero. With constant value zero of marginal cost, the value of average cost is also constant and is equal to zero. With zero cost of production, the monopolist has only to decide at which output, the total revenue will be maximum. And total revenue is maximum, at the output level at which m arginal revenue is equal to zero. Further, with zero marginal cost, the condition of profit maximization, i.e., the equality of marginal cost (MC) and marginal revenue (MR) can be achieved, where the latter is also equal to zero.Fig. shows the equilibrium of the monopolist, where marginal cost is equal to zero. E is the point of monopolist equilibrium, where MC cuts MR from below. The equilibrium price and the equilibrium quantity at this equilibrium are OP and OQ respectively. Here, total revenue and hence total profits (area OPBE in fig. ) of the monopolist are maximum. Beyond OQ level of output, MR becomes negative and total revenue starts declining. As explained in Chapter 16 on Market Structure, under heading Relation among AR, MR and Price Elasticity of Demand, Page 485 elasticity of demand on the AR curve corresponding to zero marginal revenue is equal to one. Therefore, with zero cost of production, monopolist equilibrium will be established at a level, where elasticity of d emand is unitary.Description Zero exist of Production.JPGFig. Monopolist Equilibrium with Zero Cost of ProductionIt is important to note that the monopolist will never produce the output at any level, where MR is negative. If he does so, his total revenue will fall as output increases. He can increase total revenue by reducing the output. In other words, the monopolist can earn larger profits by restricting the output. Further, since MC cannot be negative, equality of MC and MR (equilibrium condition) cannot be achieved, where MR is negative.We know from the relationship among average revenue (AR), marginal revenue (MR) and elasticity of demand7 that when marginal revenue is negative, elasticity of demand is less than one. Therefore, no rational monopolist will produce on that portion of the demand curve, where MR is negative, i.e., the elasticity of demand is less than one? That is why no monopolist ever operates on the inelastic portion of the average revenue curve or the demand curve.With the positive marginal costs (which is most usually the case), the monopolist fixes his level of output for which MR is also positive, i.e., total revenue rises with increase in the level of output. In other words, the equilibrium will always lie, where elasticity of demand is greater than one.In fig. , if the price is fixed at point B (middle point of the demand curve), where the elasticity of demand is equal to one, the MC (whether straight line or U-shaped) curve will pass through the MR curve at zero point. Here, both the MC and the MR are zero. It is a rare possibility. Further, below the middle point B of the demand curve, elasticity of demand is less than one. If the price is fixed in this inelastic portion of the demand curve, both the MC and the MR assume negative values, as the point of intersection between them is below point E on the MR curve in fig. . However, MC can never be negative. Given positive costs, MC curve must cut the MR curve from below at a point , where both the MC and the MR are positive. The equilibrium in this case will be established at a point above E on the MR curve in the figure and the price will be fixed in the elastic portion of the demand curve, i.e., above the middle point of the AR curve in fig.(source transtutors.com)Q3) gentleman Economic OutlookThe global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have subdued, and downside risks have escalated. Global output is projected to expand by 3 percent in 2012 (Table 1andFigure 1)-a downward revision of about circumstances point relative to theSeptember 2011 World Economic Outlook (WEO). This is largely because the euro area economy is now expected to go into a mild recess in 2012 as a result of the rise in sovereign yields, the effects of bank deleveraging on the real economy, and the impact of additional fiscal consolidation. ripening in emerging and deve lop economies is also expected to slow because of the worsening external environment and a weakening of internal demand. The most immediate indemnity challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth, while sustaining adjustment, containing deleveraging, and providing more liquidity and monetary accommodation. In other major advanced economies, the key indemnity requirements are to address medium-term fiscal imbalances and to repair and reform financial systems, while sustaining the recovery. In emerging and developing economies, near-term policy should focus on responding to moderating domestic growth and to slowing external demand from advanced economies.Financial risks escalate, global growth deceleratesGlobal growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro area crisis entered a perilous new phase. Activity remained relatively robust throughout the third quarter, with global g ross domestic product expanding at an annualized rate of 3 percent-only slightly worse than forecast in theSeptember 2011 WEO. Growth in the advanced economies surprised on the upside, as consumers in the United States unexpectedly lowered their saving rates and business fixed investment stayed strong. The bounce back from the supply-chain disruptions caused by the March 2011 Japanese earthquake was also stronger than anticipated. Additionally, stabilizing oil prices helped support consumption. These developments, however, are not expected to sustain significant momentum going forward.By contrast, growth in emerging and developing economies slowed more than forecast, possibly due to a greater-than-expected effect of macroeconomic policy tightening or weaker underlying growth.Description Figure 1Table 1. Overview of theWorld Economic OutlookProjections(Percent change unless noted otherwise)Year over YearProjectionsDifference fromSeptember 2011 WEOProjectionsQ4 over Q4EstimatesProject ions201020112012201320122013201120122013World Output15.23.83.33.9-0.7-0.63.33.44.0Advanced Economies3.21.61.21.9-0.7-0.51.31.32.1United States3.01.81.82.20.0-0.31.81.52.4Euro champaign1.91.6-0.50.8-1.6-0.70.8-0.21.2Germany3.63.00.31.5-1.00.01.80.71.6France1.41.60.21.0-1.2-0.90.90.51.3Italy1.50.4-2.2-0.6-2.5-1.1-0.1-2.70.9Spain-0.10.7-1.7-0.3-2.8-2.10.2-2.10.6Japan4.4-0.91.71.6-0.6-0.4-0.91.91.5United Kingdom2.10.90.62.0-1.0-0.40.81.02.4Canada3.22.31.72.0-0.2-0.52.11.72.0Other Advanced Economies25.83.32.63.4-1.1-0.32.93.23.5Newly Industrialized Asian Economies8.44.23.34.1-1.2-0.33.84.33.8Emerging and developing Economies37.36.25.45.9-0.7-0.65.96.06.3Central and Eastern atomic number 634.55.11.12.4-1.6-1.13.41.43.0Commonwealth of Independent States4.64.53.73.8-0.7-0.63.23.53.7Russia4.04.13.33.5-0.8-0.53.52.84.0Excluding Russia6.05.54.44.7-0.7-0.4. . .. . .. . .Developing Asia9.57.97.37.8-0.7-0.67.47.97.6China10.49.28.28.8-0.8-0.78.78.58.4India9.97.47.07.3-0.5-0.86.76.97.2ASEAN-546.9 4.85.25.6-0.4-0.23.77.45.0Latin America and the Caribbean6.14.63.63.9-0.4-0.23.93.35.0Brazil7.52.93.04.0-0.6-0.22.13.84.1Mexico5.44.13.53.5-0.1-0.24.13.13.6Middle East and North Africa (MENA)54.33.13.23.6. . .. . .. . .. . .. . .Sub-Saharan Africa5.34.95.55.3-0.3-0.2. . .. . .. . .South Africa2.93.12.53.4-1.1-0.62.43.03.7 historyEuropean Union2.01.6-0.11.2-1.5-0.70.80.31.7World Growth Based on Market Exchange Rates4.12.82.53.2-0.7-0.4. . .. . .. . .World Trade Volume (goods and services)12.76.93.85.4-2.0-1.0. . .. . .. . .ImportsAdvanced Economies11.54.82.03.9-2.0-0.8. . .. . .. . .Emerging and Developing Economies15.011.37.17.7-1.0-1.0. . .. . .. . .ExportsAdvanced Economies12.25.52.44.7-2.8-0.8. . .. . .. . .Emerging and Developing Economies13.89.06.17.0-1.7-1.6. . .. . .. . .Commodity Prices (U.S. dollars)Oil627.931.9-4.9-3.6-1.8-3.1. . .. . .. . .Nonfuel (average based on world commodity export weights)26.317.7-14.0-1.7-9.32.2. . .. . .. . .Consumer PricesAdvanced Economies1.62. 71.61.30.2-0.12.91.21.3Emerging and Developing Economies36.17.26.25.50.30.46.55.64.8London Interbank Offered Rate (percent)7On U.S. Dollar Deposits0.50.50.90.90.40.3. . .. . .. . .On Euro Deposits0.81.41.11.2-0.1-0.4. . .. . .. . .On Japanese Yen Deposits0.40.40.50.20.20.0. . .. . .. .(Source www.imf.org/external/pubs/ft/weo/2012/update/01/