Stimulus to boost demand

Subject : Economy

Context: In an effort to propel the economy into positive territory in quick time, the Centre has come up with an innovative option to spur consumption demand in the economy without any fiscal impact.

Finance Minister announces interest free festive advance to all central government employees to boost demand in the economy.

Concept:

What is the Demand Curve?

• The demand curve is defined as the relationship between the price of the good and the amount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants–tastes, income, prices of related goods, expectations, and the number of buyers.

Determinants of Demand:

• Price of the good
• Taste or level of desire for the product by the buyer
• The income of the buyer
• Prices of related products:

Substitute products (directly competes with the good in the opinion of the buyer; e.g. tea & coffee).Complementary products (used with the good in the opinion of the buyer; e.g. car & petrol)

• Future expectations (both income and price expectations).

Changes That Decrease Demand

• The decrease in the price of a substitute
• Increase in price of a complement
• The decrease in income if good is normal good
• Increase in income if good is inferior good

Elasticity of Demand

• A measure of the sensitivity of the quantity variable (Q) to changes in the price variable (P.) Elasticity answers the question of how much the quantity will change in percentage terms for a 1% change in the price, and is thus important in determining how revenue will change.
• The inelastic demand curve is steep because even a large change in P causes little change in Q. An example is foodgrains – even if the price is increased a lot, people will not cut down on eating foodgrain; and if P decreases, people will not start eating more!