February 25, 2012

Principles of Economics & Bangladesh Economy

Banking Diploma Courses in Bangladesh under The Institute of Bankers, Bangladesh (IBB)

Principles of Economics & Bangladesh Economy-JAIBB
Q.5 What is a Demand Curve?
Ans.: Meaning : Demand Curve is simply a graphic representation of demand schedule. It expresses the
relationship between different quantities demanded at different possible prices of the given commodity.
(i) Individual Demand Curve : The graphic representation of Individual
Demand is known is Individual Demand Curve.
Thus individual demand curve is the one that represent different quantities of a commodity demanded by a consumer at different prices.
(ii) Market Demand Curve : The graphic representation of market demand
schedule is known as Market Demand Curve.
Thus market demand curve is the one that represents total quantities of a commodity demanded by all the consumers in the market at different prices. It is the horizontal summation of the individual demand curves.
Fig.(i) shows A’s Demand Curve, fig.(ii) shows B’s Demand Curve and fig. (iii) shows the Market Demand Curve. Thus by adding the different points on individual demand curves one get the market Demand Curve.

Q.6 Why do Demand Curve slopes downwards?
Ans.: Reasons are :-
(i) Law of Diminishing Marginal Utility : The law of demand is based on the law of diminishing marginal utility which states that as the consumer purchases more and more units of a commodity, the satisfaction derived
by him from each successive unit goes on decreasing. Hence at a lesser price, he would purchase more. Being a rational human beings the consumer always tries to maximize his satisfaction and does so equalizing the marginal utility of a commodity with its price i.e. Mux = px.
 It means that now the consumer will buy additional units only when the price falls.

(ii) New Consumers : When the price of a commodity falls many consumers who could not begin to purchase the commodity e.g. suppose when price of a certain good ‘x’ was Tk. 50 market demand was 60 units now when the price falls to Tk. 40, new consumers enter the market and the overall
market demand rises to 80 units.
(iii) Several Use of Commodity : There are many commodities which can be put to several uses e.g. coal, electricity etc. When the prices of such commodities go up, they will be used for important purpose only and their demand will be limited. On the other hand, when their price fall they are used for varied purpose and as a result their demand extends. Such inverse relation between demand and price makes the demand curve
slope downwards.
(iv) Income Effect : When price of a commodity changes, the real income of a consumer also undergoes a changes. Hence real income means the consumer’s purchasing power. As the price of a commodity falls the real income of a consumer goes up and he purchases more units of a commodity eg. Suppose a consumer buys units wheat at a price Tk. 40/kg now, when the price falls to Tk. 30/kg. his purchasing power or the real
income increase which induces him to buy more units of wheat. 

(v) Substitution Effect : As the price of a commodity falls the consumer wants to substitute this good for those good which now have become relatively expensive e.g. among the two substitute goods tea and coffee, price of tea falls then consumer substitutes tea for coffee. This is caused the ‘Substitution effect’ which makes the demand curve sloped downwards.
In a nutshell, with a fall in price more units are demanded partly due to income effect and partly due to substitution effect. Both of these are jointly known as the ‘price effect’. Due to this negative price effect the demand curve slopes downwards.

Q.7 What are the exceptions to the Law of Demand?
Ans.: Exceptions to the law of demand refers to such cases where the law of demand does not operate, i.e., a positive relationship is established between price and quantity demanded.

(i) Giffen Goods : Sir Giffen made an interesting observation in 1845 during famine in Ireland. When price of potatoes went up, poor people purchased more quantity of potatoes instead of less quantity as expected
from the law of demand. The reason was that between two items of food consumption meat and potatoes- potatoes were still cheaper, with the result that the poor families purchased more of potatoes and less of meat. This is known as Giffen effect which is seen in cheap necessary foodstuffs. Again, the word ‘Giffen’ is not synonymous with ‘inferior’. It simply refers to those goods which have a positive relationship with price.

(ii) Conspicuous Goods or Goods of Ostentation
(iii) Conspicuous Necessities
(iv) Future Expectations About Prices
(v) Change in Fashion
(vi) Ignorance
(vii) Emergency