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Question Sir,
please Discuss this statement with the help of an example. “The Equi-Marginal Principle can be applied to both consumption as well as production.”
regards,
joseph
Answer JOSEPH,
HERE IS SOME USEFUL MATERIAL.
REGARDS
LEO LINGHAM
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1‘Determinants of demand include factors that determine the amount that will be purchased at each price.’ Briefly explain.
Economic analysis has recognized the role of key variables in determining demand and consumption. In practice, the distinction between demand (as a schedule of quantities as a function of price, other factors held constant) and consumption as an equilibrium quantity at a given price, is frequently ignored. The development of "gap" type models illustrate the common approach of projecting 'demand' as a fixed quantity independent of price.
Demand, as the relationship between price and quantity, is subject to change over time due to changes in the underlying factors held constant by the static notion of demand. Changes in demand "shifters" are often included in economic estimation of demand representing anticipated dynamics in these determinants.
Levels of income
A key determinant of demand is the level of income evident in the appropriate country or region under analysis. As a generality, the higher the level of aggregate and/or personal income the higher the demand for a typical commodity, including forest products. More of a good or service will be chosen at a given price where income is higher. Thus determinants of demand normally utilize some form of income measure, including Gross Domestic Product (GDP).
Population
Population is of course a key determinant of demand. Although all forest products do not necessarily enter final consumer markets, the actual markets are largely presumed to be functionally related to population. Growing populations are positively correlated to timber demands in the aggregate, as well as specifically to individual forest products. Frequently, population and income estimators are combined, as in the case of the use of Gross Domestic Product per capita.
End market indicators
The use of end market indicators as determinants of demand is frequently incorporated into demand analysis. For example, much of the final use of forest products is linked to construction (residential and total). Indicators and trends related to construction activities, or which are determinants of construction, provide indirect estimates of the influence of these activities as the source of derived demand for wood. Housing starts, public investments, interest rates, etc. can be highly correlated to timber demand.
Availability and price of substitute goods
Consumption choices related to timber are also influenced by the alternative options facing users in the relevant marketplace. The availability of potential substitute products, and their prices, weigh heavily in determining the elasticity of demand, both in the short run (static) sense and over time (long run). Fuelwood, as a dominant use of timber in the Asia Pacific Region, reflects conditions of very limited options for energy sources at 'reasonable' prices. Rural low income or subsistence populations simply do not have 'options' regarding energy - they use wood or go without. Demand, at this basic level, in almost perfectly inelastic. The cost (if only implicit in terms of gathering time) does not materially affect consumption quantity.
Suitability of alternative goods and services is, in part, a question of knowledge as well as availability. Market information regarding alternative products, quality, convenience, and dependability all influence choices. Under conditions of increased scarcity and rising prices for tropical hardwood panels, for example, users have a positive incentive to search for and investigate the suitability of alternatives that were previously overlooked or ignored.
Tastes and preferences
All markets are shaped by collective and individual tastes and preferences. These patterns are partly shaped by culture and partly implanted by information and knowledge of products and services (including the influence of advertising). Different societies use forest products differently because of these differences in taste and preferences. For example, markets for wood products in Japan are commonly recognized as requiring very high product quality standards, the importance of visual attributes of wood, and other preferences not commonly found in many other markets.
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THE RELATIONSHIP BETWEEN PRICE AND DEMAND
The relationship between price and the amount of a product people want to buy is what economists call the demand curve. This relationship is inverse or indirect because as price gets higher, people want less of a particular product. This inverse relationship is almost always found in studies of particular products, and its very widespread occurrence has given it a special name: the law of demand. The word "law" in this case does refer to an observed regularity.
There are various ways to express the relationship between price and the quantity that people will buy. Mathematically, one can say that quantity demanded is a function of price, with other factors held constant, or:
Qd = f(Price, other factors held constant)
A more elementary way to capture the relationship is in the form of a table. The numbers in the table below are what one expects in a demand curve: as price goes up, the amount people are willing to buy decreases.
A Demand Curve
Price of
Widgets Number of Widgets
People Want to Buy
$1.00 100
$2.00 90
$3.00 70
$4.00 40
The same information can also be plotted on a graph, where it will look like the graph
with X axis is the units and Y-axis is the PRICE.
If one of the factors being held constant becomes unstuck, changes, and then is held constant again, the relationship between price and quantity will change. For example, suppose the price of getwids, a substitute for widgets, falls. Then, people who previously were buying widgets will reconsider their choices, and some may decide to switch to getwids. This would be true at all possible prices for widgets. These changes in the way people will behave at each price will change the demand curve to look like the table below.
A Demand Curve Can Shift
Price of
Widgets Number of Widgets
People Want to Buy
$1.00 [100] becomes 80
$2.00 [90] becomes 70
$3.00 [70] becomes 50
$4.00 [40] becomes 10
