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IGNOU ECO 06 Solved Assignment 2022-23
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Important Note – IGNOU ECO 06 Solved Assignment 2022-2023 Download Free You may be aware that you need to submit your assignments before you can appear for the Term End Exams. Please remember to keep a copy of your completed assignment, just in case the one you submitted is lost in transit.
Submission Date :
- 31st March 2033 (if enrolled in the July 2033 Session)
- 30th Sept, 2033 (if enrolled in the January 2033 session).
All questions are compulsory.
1. Explain the law of demand with the help of a demand schedule and a demand curve. Explain the exceptions to the law of demand using the distinction between substitution and income effects.
Law of Demand
Now the law of demand states that all conditions being equal, as the price of a product increases, the demand for that product will decrease. Consequently, as the price of a product decreases, the demand for that product will increase. For instance, a consumer may buy two dozens of bananas if the price is Rs.50.
However, if the price increases to Rs.70, then the same consumer may restrict the purchase to one dozen. Hence, the demand for the bananas, in this case, was reduced by one dozen. Therefore, the law of demand defines an inverse relationship between the price and quantity factors of a product.
The graph shows the demand curve shifts from D1 to D2, thereby demonstrating the inverse relationship between the price of a product and the quantity demanded.
Browse more Topics under Theory Of Demand
- Meaning And Determinants Of Demand
- Law Of Demand And Elasticity Of Demand
- Elasticity of Demand
- Movement along the Demand Curve and Shift of the Demand Curve
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Elasticity of Demand
- Demand Forecasting
- Methods of Demand Forecasting
Exceptions to the Law of Demand
Note that the law of demand holds true in most cases. The price keeps fluctuating until an equilibrium is created. However, there are some exceptions to the law of demand. These include the Giffen goods, Veblen goods, possible price changes, and essential goods. Let us discuss these exceptions in detail.
Giffen Goods is a concept that was introduced by Sir Robert Giffen. These goods are goods that are inferior in comparison to luxury goods. However, the unique characteristic of Giffen goods is that as its price increases, the demand also increases. And this feature is what makes it an exception to the law of demand.
The Irish Potato Famine is a classic example of the Giffen goods concept. Potato is a staple in the Irish diet. During the potato famine, when the price of potatoes increased, people spent less on luxury foods such as meat and bought more potatoes to stick to their diet. So as the price of potatoes increased, so did the demand, which is a complete reversal of the law of demand.
The second exception to the law of demand is the concept of Veblen goods. Veblen Goods is a concept that is named after the economist Thorstein Veblen, who introduced the theory of “conspicuous consumption“. According to Veblen, there are certain goods that become more valuable as their price increases. If a product is expensive, then its value and utility are perceived to be more, and hence the demand for that product increases.
And this happens mostly with precious metals and stones such as gold and diamonds and luxury cars such as Rolls-Royce. As the price of these goods increases, their demand also increases because these products then become a status symbol.
The expectation of Price Change
In addition to Giffen and Veblen goods, another exception to the law of demand is the expectation of price change. There are times when the price of a product increases and market conditions are such that the product may get more expensive. In such cases, consumers may buy more of these products before the price increases any further. Consequently, when the price drops or may be expected to drop further, consumers might postpone the purchase to avail the benefits of a lower price.
For instance, in recent times, the price of onions had increased to quite an extent. Consumers started buying and storing more onions fearing further price rise, which resulted in increased demand.
There are also times when consumers may buy and store commodities due to a fear of shortage. Therefore, even if the price of a product increases, its associated demand may also increase as the product may be taken off the shelf or it might cease to exist in the market.
Necessary Goods and Services
Another exception to the law of demand is necessary or basic goods. People will continue to buy necessities such as medicines or basic staples such as sugar or salt even if the price increases. The prices of these products do not affect their associated demand.
Change in Income
Sometimes the demand for a product may change according to the change in income. If a household’s income increases, they may purchase more products irrespective of the increase in their price, thereby increasing the demand for the product. Similarly, they might postpone buying a product even if its price reduces if their income has reduced. Hence, change in a consumer’s income pattern may also be an exception to the law of demand.
2. What are the main determinants of Elasticity of Supply of a Commodity? Distinguish between Perfectly Elastic, Perfectly Inelastic, Unit Elastic, Inelastic and Elastic supply curves with the help of diagrams.
Elasticity of Supply
The elasticity of supply establishes a quantitative relationship between the supply of a commodity and it’s price. Hence, we can express the numeral change in supply with the change in the price of a commodity using the concept of elasticity. Note that elasticity can also be calculated with respect to the other determinants of supply.
However, the major factor controlling the supply of a commodity is its price. Therefore, we generally talk about the price elasticity of supply. The price elasticity of supply is the ratio of the percentage change in the price to the percentage change in quantity supplied of a commodity.
Es= [(Δq/q)×100] ÷ [(Δp/p)×100] = (Δq/q) ÷ (Δp/p)
Δq= The change in quantity supplied
q= The quantity supplied
Δp= The change in price
p= The price
Elasticity from a Supply Curve
Along with the method mentioned above, there are two more ways to calculate the price elasticity of supply, both of which make use of the supply curve. We can either calculate the elasticity at a specific point on the supply curve, known as point elasticity or between two prices, known as arc-elasticity.
The formula for calculating the point elasticity of supply is:
Here dq/dp is the slope of the supply curve.
The formula for calculating the arc-elasticity of supply is:
Es= [(q1 – q2)/( q1 + q2)] × [( p1 + p2)/(p1 – p2)]
Types of Elasticity of Supply
1. Perfectly Inelastic Supply
A service or commodity has a perfectly inelastic supply if a given quantity of it can be supplied whatever might be the price. The elasticity of supply for such a service or commodity is zero. A perfectly inelastic supply curve is a straight line parallel to the Y-axis. This is representative of the fact that the supply remains the same irrespective of the price.
The supply of exclusive items, like the painting of Mona Lisa, falls into this category. Whatever might be the price on offer, there is no way we can increase its supply.
Browse more Topics under Theory Of Supply
- Meaning And Determinants Of Supply
- Law of Supply
- Equilibrium Price
2. Relatively Less-Elastic Supply
When the change in supply is relatively less when compared to the change in price, we say that the commodity has a relatively-less elastic supply. In such a case, the price elasticity of supply assumes a value less than 1.
3. Relatively Greater-Elastic Supply
When the change in supply is relatively more when compared to the change in price, we say that the commodity has a relatively greater-elastic supply. In such a case, the price elasticity of supply assumes a value greater than 1.
4. Unitary Elastic
For a commodity with a unit elasticity of supply, the change in quantity supplied of a commodity is exactly equal to the change in its price. In other words, the change in both price and supply of the commodity are proportionately equal to each other. To point out, the elasticity of supply in such a case is equal to one. Further, a unitary elastic supply curve passes through the origin.
5. Perfectly Elastic supply
A commodity with a perfectly elastic supply has an infinite elasticity. In such a case the supply becomes zero with even a slight fall in the price and becomes infinite with a slight rise in price. This is indicative of the fact that the suppliers of such a commodity are willing to supply any quantity of the commodity at a higher price. A perfectly elastic supply curve is a straight line parallel to the X-axis.
3. State the Law of Diminishing Marginal Utility and its limitations. Is the Law of Diminishing Marginal Utility applicable to money? Explain your answer.
4. What is interdependence in an oligopolistic market? What kind of problems does it creates for oligopoly equilibrium?
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IGNOU ECO 06 Solved Assignment 2022-23
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5 Write short notes on the following:
(a)Income Consumption Curve
(b)Economies of Scale
(c) Non-competitive Wages
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