(b): What are the determinant of Demand.? Answer: Demand for a commodity depends upon number of factors.

Factors influencing individual demand. An individuals demand for a commodity is generally determined by factors such as: Price of the Product: Price is always a basic consideration in determining the demand for a commodity. Normally a larger quantity is demanded at a lower price than at a higher price. ncome: ncome is an equally important determinant of demand. !bviously with the increase in income one can buy more goods. "hus a rich consumer usually demands more goods than poor consumer. "astes and #abits: Demand for many goods depend on the persons tastes$ habits and preferences. Demand for several products li%e ice&creams$ chocolates$ cool drin%s etc.$ depend on an individuals taste. Demand for tea$ betel$ tobacco etc.$ is a matter of habit. People with different tastes and habits have different preferences for different goods. A strict vegetarian will have no demand for meat at any price.$ whereas a non&vegetarian who has li%ing for chic%en may demand it even at a high price. 'imilar is the case with demand for cigarettes by smo%ers and non&smo%ers. (elative prices of !ther )oods: #ow much the consumer would li%e to buy of a given commodity$ however also depends on the relative prices of other related goods such as substitutes or complementary goods to a commodity. *hen a want can be satisfied by alternate similar goods$ they are called substitutes. For e+ample$ peas and beans$ ground nuts oil and sun&flower oil$ tea and coffee etc.$ are substitutes of each other. "he demand for commodity depends on the relative process f its substitutes. f the substitutes are relatively costly$ then there will be more demand for the commodity is question at a given price than in case its substitutes are relatively cheaper. 'ubstitutes and ,omplementary Products: "he demand for a commodity is also affected by its complementary products. n order to satisfy a given want$ two or more goods are needed in combination$ these goods are referred as complementary goods. For e+ample car and petrol$ pen and in%$ tea and sugar$ shoes and sac%s$ gun and bullets etc.$ are complementary products to each other. ,omplementary goods are always in -oint demand. "hus if a given commodity is a complementary product$ its demand will be relatively high when its related commoditys price is lower$ than otherwise. *hen the price of one commodity decreases the demand for its complementary product will tend to increase and vice versa. For e+ample$ a fall in price of cars will lead to increase in the demand for petrol. 'imilarly a steep rise in the price of petrol will cause a decrease in demand of petrol driven cars and its accessories. ,onsumers .+pectations: ,onsumers e+pectations about the future changes in the price of a given commodity also may affect its demand. *hen consumer e+pects its prices to fall in future$ they will tend to buy less at the present prevailing price. 'imilarly if they e+pects its prices to rise in future they will tend to buy more at present. Advertisement .ffect: n modern times the preferences of a consumer can be altered by advertisement and sales propaganda$ albeit to certain e+tent only. "hus demand for many products li%e tooth pastes$ toilet soaps$ washing powder$ processed foods etc. is particularly caused by the advertisement effect. Q.No. 2(c): Explain the feat res of !onopol".? Answer: "he following features are seen under simple or limited monopoly. 'ingle Producer: For monopoly to e+ist only one producer should be in the mar%et. "he producer may be an individual$ a partnership firm$ an enterprise$ the government or a -oint stoc% company. No close 'ubstitute: "o avoid any possibility of competition in the mar%et$ there should be no close substitutes for the product of the monopolist. "his means that the cross&elasticity of demand for the monopolists product is low. /arriers to entry of firm: "he basis of monopoly is the barriers or restrictions of new firms into the mar%et$ those can be either natural barriers or artificial barriers. Demand curve under monopoly: "he above mentioned features e+plain the demand curve or the average revenue0A(1 curve under the monopoly.

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"he demand curve for a firm0which means the industry under monopoly1 is downward sloping. t is the monopolist who is the price& mar%et in the mar%et.

2
Demand ,urve under 7onopoly

Average (evenue Price

3uantity Demanded

5nder the monopoly$ there is only one seller who controls the entire supply in the mar%et. 'ince this is the only producer and seller$ he can fi+ the price of his product. n order to ma+imi6e his profit$ he may rise the price frequently. #e may e+ploit the consumers by charging an e+cessive price. 'ince there are no sellers$ the buyers have no alternative than to buy from the monopolist. ndeed all buyers are put at that mercy of the monopolist. 7any times$ monopolies are created under law. 5rban transport$ supply of gas and electricity$ nowadays cable television system and such other public utilities are usually managed as monopolies. 'uch monopolies are called natural monopolies. !n the other hand if a producer acquires monopoly on the basis of patent laws$ it is called an artificial monopoly.

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Q Explain how price is determined Answer:

nder monopol".?

Pure monopoly or simply monopoly is a mar%et situation where there is only a single seller of goods with no close substitutes. )ood e+ample are public unit utility such as water $ electricity $ telephone underta%ing /eing the sole seller of goods without close substitute the monopolist has substantial control over the price he charges. #e may lower the price and increase the quantity soled or he may lower the quantity soled and raise the price thus a monopolist is a price ma%er or price searcher who is in search of the price 8 quality combination that will ma+imi6e his profit. 5nder the monopoly$ there is only one seller who controls the entire supply in the mar%et. 'ince this is the only producer and seller$ he can fi+ the price of his product. n order to ma+imi6e his profit$ he may rise the price frequently. #e may e+ploit the consumers by charging an e+cessive price. 'ince there are no sellers$ the buyers have no alternative than to buy from the monopolist. 7onopoly price during the short run : During the short run a monopolist cannot e+pand or contract the si6e of his plan. "hus in the equilibrium situation in the short run a monopolist firm may li%ely to face three situation : & t may earn abnormal profit$ when firm A( 9 A, . t may suffer losses$ when firm A( : A,. t may earned normal profit$ when firm A( ; A,

Abnormal Profit: At equilibrium level of output a monopoly firm may earned abnormal profits when the firms average revenue e+ceeds the average cost of production.
y MC AC

D Cost/ Revenue A

C B

AR

Q MR OUTPUT

"he equilibrium level is determined at the point % where marginal cost ; marginal revenue . the firm get profit per unit equal to ,/. "he total profit en-oy by the firm is shown by the shaded area DA/, ."hus the monopolist will produce !3 output at ,3 price . <osses: At equilibrium level of output a firm may suffer losses when is average revenue is less than average cost .
y MC AC

D Cost/ Revenue A

C B

AR

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Q MR OUTPUT

"he equilibrium level is determined at point and where marginal cost is equal to marginal revenue. "he total loss suffered by the firm is equal to the shaded portion A/,D . .quilibrium output is !3 Normal Profit: At equilibrium output is determined at the point a firm may earned normal profit when its average revenue is equal to average cost of production.
y MC AC

D Cost/ Revenue A

C B

AR

Q MR OUTPUT

"he equilibrium level is determined at point = where marginal cost is equal to marginal revenue . equilibrium output is !3 . at this our put firms average revenue is equal to average cost . there for firm earns only normal profit . 7onopoly price during long period: A monopoly firm during the long run will necessarily receive abnormal profit . "he two reason for this are : & .ntry of new firm is difficult . f the monopolist does not receive profit he will have no attraction to stay in the mar%et .
y LMC LAC

D Cost/ Revenue A

C B K LAR

Q LMR OUTPUT

"he long run equilibrium of the monopoly firm is obtained where the long run marginal cost is equal to long term marginal revenue "he equilibrium level is determined at point = where <7( ; <7, . the equilibrium level of output is !3 . the total shaded area A/,D represent the profit earned by the firm. Managerial Economics Page 4 of 6

7onopoly price during the long run is always more than long run average cost 0P9<A,1.

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