Discuss how these variables can affect the demand for your product or industry a

Question

Discuss how these variables can affect the demand for your product or industry and what methods could be used to estimate the effect of these variables. To correctly assess the demand for their products, managers must determine the effect of all relevant variables. Select a particular industry or product and define the following variables:

Inferior versus normal goods

Substitution and income effects

Derived demand

Changes in real and projected incomes

Consider this statement: Long-run cost curves are planning curves, while short-run cost curves are operating curves.

Do you agree or disagree with this statement? Support your answer with an appropriate rationale. In your response, use the various cost concepts you have learned, as well as the concepts of economies and diseconomies of scale, incremental costs, and sunk costs. Provide examples and applications of these costs in your response.

Explanation / Answer

1. Inferior versus normal goods : The distinction between these two types of goods occurs due to different effect of change in the income of the consumer. When demand of good increases due to increase in the income of the consumer then good is normal while when increase in income decreases the demand of good then, that good is inferior in nature. Inferior good has negative income effect while normal good has positive income effect.

Industry of jawar, bajra shows the market of inferior goods whose demand decreases when income of the consumer increases. On the other hand, market of rice, wheat, etc under which when income of consumer increases then, demand of rice and wheat increases and vice-versa.

2. Substitution and income effects :

When price of a good changes then there are two types of effects:

(i) The rate at which we can exchange one good for another changes.

(ii) Purchasing power of income changes.

The change in demand due to change in rate of exchange is called substitution effect. While change in demand due to change in purchasing power is called income effect.

3. Derived demand : Derived demand describes the demand placed on one good or service as a result of changes in the price for some other related good or service. In this, demand of one good is derived from the price of other good. For example, demand of coffee is determined by the price of tea. When price of tea increases then demand of coffee increases in the market.

4. Change in real income : Real income shows income in terms of goods and services. Real income shows how much goods and services a person can purchase with his or her income.

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