AGRICULTURAL ECONOMICS CLASS 2 demand, utility

FARM ASSISTANT GRADE II
(AGRI)
MOD.9 – AGRICULTURAL
ECONOMICS
CLASS 2

MODULE 9: AGRICULTURAL ECONOMICS (10 Marks)
Agricultural economics- Basic concepts: Goods and services,
desire, want, demand, utility, cost and price, wealth, tax,
capital, income and welfare. Theories- Utility theory; law of
diminishing marginal utility, equi-marginal utility principle.
Agricultural Marketing: Concepts and definitions of market,
marketing, agricultural marketing, market structure,
marketing mix and market segmentation, classification and
characteristics of agricultural markets- demand, supply and
producer’s surplus of agri-commodities: nature and
determinants of demand and supply of farm products,
producer’s surplus

Total Utility and Marginal Utility
• Total utility is the amount of utility derived from the
consumption of all the units of a commodity at the disposal of
the consumer. Economists measure utility in imaginary units
called utils.
• Marginal utility is the change in the total utility resulting from
one unit change in the consumption of a commodity

Marginal Utility formula
• Marginal Utility = MUx
Change in Total Utility Δ TUx
Change in Quantity Consumed Δ Qx

Theories of Utility
1. Cardinal approach – Quantitative approach, Utility is
calculated mathematically. Theories involved – LDMU,
LEMU
2. Ordinal approach – No quantitative measures used,
Comparative approach in which more than one product
are involved and thus compared between those. Uses
indifference curves, Budget line or price line.

1) Law of Diminishing Marginal Utility
• This law indicates the familiar behaviour of marginal utility, i.e., as a
consumer takes more and more units of a good, the additional
satisfaction that he derives from an extra unit of the good goes on
falling.
• Marshall stated the law of diminishing marginal utility as follows:
“The additional benefit which a person derives from a given increase
of
his stock of a thing diminishes with every increase in the stock that he
already has”.

2. Law of Equi - Marginal Utility or Law of Substitution or Law of Maximum
Satisfaction
If a consumer purchases more than one commodity with a give income level,
he applies the law of equi-marginal utility to attain maximum satisfaction.
Marshall stated this law as follows:
“If a person has a thing which can be put to several uses, he will distribute it
among these uses in such a way that it has the same marginal utility in
all”.

Ordinal approach - Indifference curve – characteristics
– budget line – equilibrium of consumer
• According to this indifference curve analysis, the utility
cannot be measured precisely but the consumer can state
which of the two combinations of goods he prefers without
describing the magnitude of strength of his preference.
• This means that if the consumer is presented with a
number of various combinations of goods, he can order or
rank them in a ‘scale of preferences’

Demand: meaning, law of demand,
demand schedule and demand curve,
determinants.

Concept of
Demand
Demand for a commodity refers to the desire to buy a commodity backed with sufficient
purchasing power and the willingness to spend.
For Example: You desire to have a Car, but you do not have enough money to buy it.
Then, this desire will remain just a wishful thinking, it will not be called demand.
If inspite of having enough money, you do not want to spend it on Car, demand does
not emerge.
The desire become demand only when you are ready to spend money to buy Car.

In Economics, demand refers to effective demand, which implies
three things:
a) Desire,
b) Means to purchase, and
c) On willingness to use those means for that purchase
• Demand is an effective desire, i.e., a
desire which is backed by willingness
and ability to pay for a commodity in
order to obtain it.
• Desire and ability to buy are the key
components of demand.

Features of Demand
1) Desires and Demand: Demand is the amount of commodity for which a
consumer has willingness and ability to buy.
2) Demand and Price: Demand is always at a price. Unless price is stated, the
commodity has no meaning. The consumer must know both the price and
the commodity.
3) Point of Time: The amount demanded must refer to some period of time.
Such as 10 kg of rice per week. The amount demanded and price must
refer to a particular date.
4) Utility: Demand depend upon utility of the commodity. A consumer is
rational and demands only those commodities which provide utility.

Individual demand
• The various quantities of a commodity that a consumer would be
willing to purchase at all possible prices in a given market at a given
point in time, other things being equal is called the individual demand.
• Individual demand schedule is merely a list of prices
together with the quantities that will be purchased by a
consumer
• It is a pairing of quantity and price relationship.

Hypothetical demand schedule for Tomatoes
Price (in
Rs./Kg)
Quantity demanded per week (in kg)
20 0.25
16 0.50
12 0.75
8 1.00
4 1.25
2 1.50

Demand curve
• Demand curve is a graphical representation of demand schedule.
• The demand curve will have a downward slope.
• DD is a demand curve

Market Demand
• Market demand is the sum of the demand of all the
consumers in a market for a given commodity at a
specific point of time.
Price (in
Rs./Kg)
Individual demand schedule /week (kg) Market
Demand
(A+B+C)
A B C
20 0.25 0.5 0 0.75
16 0.50 1.0 0 1.50
12 0.75 1.5 0 2.25
8 1.00 2.0 1 4.00
4 1.25 2.5 2 5.75
2 1.50 3.0 3 7.50
Market Demand Schedule for Tomatoes

Autonomous demand
• Autonomous demand is independent of the other product
or main product.
• It is not linked or tie-up with the demand of other goods.
Eg: food articles, clothes.
Derived demand
The demand for certain goods is related with the demand for
other goods, which is called derived demand.
The demand for fertilisers, pesticides, etc., is derived
demand, because it is linked with the demand of
agricultural products

Demand Function
Demand Function shows the relationship
between demand for a commodity and its various
determinants.
It shows how demand for a commodity is related to, say
price of the commodity or income of the consumer or
other determinants.
There are two types of Demand Function:
a)Individual Demand Function
b)Market Demand Function

Demand Function
Individual Demand Function
Individual Demand function
shows how demand for a
commodity, by an individual
consumer in the market, is
related to its various
determinants. It is Expressed
as:
Dx = f (Px, Pr, Y, T, E)
Market Demand Function
Market Demand Function
shows how market demand
for a commodity (or aggregate
demand for a commodity in
the market) is related to its
various determinants.
Mkt. Dx = f (Px, Pr, Y, T, E, N, Yd)
Here, Dx: Quantity Demanded of commodity X
Px : Price of the Commodity X
Y : Consumer’s Income
T : Consumer’s Taste & Preferences
E: Consumer’s Expectations
N : Population Size
Yd : Distribution of Income

Kinds of Demand
• Price Demand: It refers to various quantities of a good or
service that a consumer would be willing to purchase at all
possible prices in a given market at a given point in time,
ceteris paribus.
• Income Demand: It refers to various quantities of a good or
service that a consumer would be willing to purchase at
different levels of income, ceteris paribus.
• Cross Demand : It refers to various quantities of a good or
service that a consumer would be willing to purchase not
due to changes in the price of the commodity under
consideration but due to changes in the price of related
commodity.

Law of demand
• Law of demand explains the functional relationship between the
quantity demanded of a commodity and its unit price.
Qd= f (1/P)
• A rise in price of a commodity or service is followed by a reduction in
the quantity demanded and a fall in price is followed by an extension
in demand.
• Demand varies inversely with price.

• As price falls from P1 to P2 the quantity demanded increases from Q1
to Q2. There is a negative relation between price and quantity,

Assumptions Law of
Demand
1) Tastes and Preferences of the consumers remain constant.
2) There is no change in the income of the consumer.
3) Prices of the related goods do not change.
4) Consumers do not expect any change in the price of the
commodity in near future.

The reasons for a downward sloping demand curve
1. Income effect
2. Substitution effect
3. Law of diminishing marginal utility

Income effect
• With the fall in price of a commodity, the purchasing
power of consumer increases.
• Thus, he can buy same quantity of commodity with less
money or he can purchase greater quantities of same
commodity with same money.
• Similarly, if the price of a commodity rises, it is equivalent
to decrease in income of the consumer. Now he has to
spend more for buying the same quantity as before.
• This change in purchasing power due to price change is
known as income effect.

Substitution effect
• When price of a commodity falls, it becomes relatively cheaper
compared to other commodities whose prices have not changed.
• Thus, the consumer tend to consume more of the commodity
whose price has fallen ,i.e, they tend to substitute that
commodity for other commodities which have now become
relatively dearer.

Law of diminishing marginal utility
• It is the basic cause of the law of demand. The law of
diminishing marginal utility states that as an individual
consumes more and more, the utility derived from it goes
on decreasing.
• Accordingly, for every additional unit to be purchased, the
consumer is willing to pay less and less price.
• Thus, more is purchased only when price of the commodity
falls.

Exception to the Law of
Demand
In certain cases, the demand curve slopes up from left to
right, i.e., it has a positive slope.
Under certain circumstances, consumers buy more when
the price of a commodity rises, and less when price falls.
Many causes are attributed to an upward sloping
demand curve.

Exception to the Law of
Demand
1) Articles of Distinction: This exception was first of all
discussed by Veblen.
According to him, articles of distinction have more demand
only if their prices are sufficiently high.
Diamond, jewellery, etc; have more demand because their
prices are abnormally high. It is so because distinction
is bestowed in diamond, jewellery etc., by the society
because of their being costly.
If their prices fall, they will no longer be considered as
articles of distinction and so their demand will
decrease.

2) The Giffen Goods:
A study of poor farmers of Ireland by Sir Robert Giffen in the 19th
century revealed that the major portion of their income was
spent on potatoes and only a small amount was spent on meat.
Potatoes were cheap but meat was costly. When the price of potatoes tend
to increase consumption of meat was curtailed to economies and as a
result of this they saved money and spent more on potato to meet their
food deficiency.
In this way quantity purchase rises even when prices of potatoes rises.
For Example, Suppose the minimum monthly consumption of food grains by a
poor household is 20 Kg Bajra (Inferior good) and 10 Kg Rice (superior
good). The selling price of Bajra is Rs 5 per kg, and the rice is Rs 10 per kg,
and the household spends its total income of Rs 200 on the purchase of
these items. Suppose, the price of Bajra rose to Rs 6 per kg then the
household will be forced to reduce the consumption of rice by 5 Kg and
increase the quantity of Bajra to 25 Kg in order to meet the minimum
monthly requirement of food grains of 30 kg.

3) Highly Essential Good:
In case of certain highly essential items such as
life- saving drugs, people buy a fixed quantity at
all possible price. Heart patients will buy the
same quantity of ‘medicine’ whether price is
high or low. Their response to price change is
almost nil.
In cases of such commodities, the demand
curve is likely to be a vertical straight line . At a
price OP1, the heart patient consumer
demands OD amount of ‘medicine’. In spite
of its price rise to OP2, the consumer buys
the same quantity of it.

4) Emergencies: During emergencies such as war, natural calamity-
flood, drought, earthquake, etc., the law of demand becomes
ineffective. In such situations, people often fear the shortage of
the essentials and hence demand more goods and services even
at higher prices.
5) Bandwagon Effect: This is the most common type of exception to
the law of demand wherein the consumer tries to purchase those
commodities which are bought by his friends, relatives or
neighbors. Here, the person tries to emulate the buying behavior
and patterns of the group to which he belongs irrespective of the
price of the commodity
.For example, if the majority of group members have smart phones
then the consumer will also demand for the smartphone even if
the prices are high.

Movement along the demand curve
• It refers to change in the quantity demanded due to
change in price.
• It can be either extension or contraction of demand.
• Extension of demand means buying more quantity of
commodity at a lower price,
• Contraction of demand indicates buying less at a higher
price.
• The term extension and contraction refers to the
movement on the same demand curve.

• For example, consumers would reduce
the consumption of milk in case the
prices of milk increases and vice versa.
• Expansion and contraction are
represented by the movement along the
same demand curve.
• Movement from one point to another in
a downward direction shows the
expansion of demand, while an upward
movement demonstrates the
contraction of demand.

Shift in the demand curve
• It refers to the change in quantity demanded not due to the
change in price but due to the change in the values of
other variables influencing the demand.
• Increase and decrease in demand are referred to change in
demand due to changes in various other factors such as
change in income, distribution of income, change in
consumer’s tastes and preferences, change in the price of
related goods, while Price factor is kept constant.

It can be increase or decrease in demand.
• Increase and decrease in demand result in the shifting of the demand
curve.
• Increase in demand means more demand at the same price or same
demand at higher price.
• Decrease in demand means less demand at the same price or same
demand at lower price.

• Increase and decrease in demand is
represented as the shift in demand
curve.
• In the graphical representation of
demand curve, the shifting of demand is
demonstrated as the movement from
one demand curve to another demand
curve.
• In case of increase in demand, the
demand curve shifts to right, while in
case of decrease in demand, it shifts to
left of the original demand curve.

Determinants of Demand /
Factors Affecting
Demand
1) Price of the Commodity: The law of demand states that
other things being constant the demand of the commodity
is inversly related to its price. It implies that rise in price of
commodity brings about a fall in its purchase and vice
versa.

2) Price of Related Goods: Demand for a commodity is also influenced
by change in price of related goods. These are of two types:
a)Substitute Goods: These are the goods which can be substituted
for each other, such as tea and coffee, or ball pen and ink pen.
In case of such goods, increase in the price of one causes increase in
the demand for the other and decrease in the price of one causes
decrease in the demand for the other.

b) Complementary Goods: Complementary goods are those which
complement the demand for each other, and therefore, demanded
together.
For Example Pen and ink, Car and Petrol.
In case of complementary goods, a fall in the price of one causes
increases in the demand for the other and rise in the price of one
causes decrease in the demand for others.

3) Income of the Consumer: The ability to buy a
commodity depends upon the income of the
consumer. When the income of the consumer
increases, they buy more and when the income
falls they buy less.
4) Expectations: If the consumer expects that
price in future will rise, he will buy more
quantity in present, at the existing
price.Likewise, if he hopes that price in future
will fall, he will buy less quantity in present, or
may even postpone his demand.

5) Taste and Preferences: Taste and preferences can be
influenced by advertisement, change in fashion, climate,
new inventions, etc.
Other thing being equal, demand for those goods increases
for which consumer develop tastes and preferences.
Contrary to it, if a consumer has no taste or preference for a
product, its demand will decrease.
Bell bottom
To Pencil
cut

6) Population Size: Demand increases with the increase in
population and decreases with decrease in population.
Composition of population (male, female ratio) also affects
the demand.
E.g. Female population increases, demand for goods
meant for women will go up.
7) Distribution of Income: If income is equally
distributed, there will be more demand. If income is
not equally distributed, there will be less demand.
In case of unequal distribution, poor people will not have
enough money to buy things.

Determinants of demand
• Price of good
• Price of related goods
• Income
• Taste and Preference
• Expectation about future prices and income.
Complements
Substitutes

Elasticity of demand: concept degrees of elasticity and
measurement of price elasticity, income elasticity and
cross elasticity.

ELASTICITY OF DEMAND
• Alfred Marshall developed the concept
• Elasticity of demand indicates the degree of relationship
between quantity demanded and price.
• Elasticity of demand is defined as “the relative change in the
quantity demanded to the relative change in the price”.

Types of Elasticity of Demand
There are three types of elasticity of demand
• Price Elasticity of Demand (Ed)
• Income Elasticity of Demand (Ei)
• Cross Elasticity of Demand (Exy)

Price Elasticity of Demand (Ed)
• This shows the responsiveness of quantity demanded of a
commodity, when price of that commodity change, with other
factors being constant.
• Price elasticity of demand (Ed)
=
or
=
=

DEGREES OF ELASTICITY OF DEMAND
• Perfectly Elastic Demand,
• Perfectly Inelastic Demand,
• Relatively Elastic Demand,
• Relatively Inelastic Demand, and
• Unitary Elastic Demand.

Income Elasticity of Demand (Ei)
• It measures the responsiveness of demand due to changes in the income
of the consumers in terms of percentage, when other factors influencing
demand are kept at constant level.
• Income elasticity of demand (Ei)
=
or
=
=

Cross Elasticity of Demand (Exy)
• Demand for one good (X) is also influenced by the price of other related
good (Y). These may be substitutes or complements.
• Cross elasticity of demand is the ratio of percentage change in quantity
demand of a commodity (X) and percentage change in price of related
commodity (Y).
• Cross elasticity of demand (Exy)
=
or
=
=

Perfectly Elastic Demand (Ep = ∞)
• A slightest change in price of a commodity leads to an infinite
change in the quantity demanded.
• The demand is hypersensitive
• The elasticity of demand is infinite.
• The demand curve will be horizontal line parallel to X-axis.
• It is mostly a theoretical concept.
• Eg:-Diamond

Perfectly Inelastic Demand (Ep = 0)
• It is a situation in which change in price of a commodity
leaves the demand unaffected.
• The demand here is insensitive. Elasticity of demand is zero.
• The demand curve is vertical to X-axis.
• The case of perfectly inelastic demand is also a theoretical
concept.
• Eg:- salt, medicines
(not perfect examples)

Relatively Elastic Demand ( 1 < Ep < ∞)
• It means that lesser proportionate change in the price of a
commodity is followed by larger proportionate change in
the quantity demanded.
• Elasticity of demand is greater than unity.
• Eg: Comfort goods like TV, Regrigerator, etc.

Relatively Inelastic Demand (0 < Ep < 1)
• It means that large proportionate change in the price of a
commodity is followed by a smaller proportionate change in
the quantity demanded.
• Elasticity of demand is less than unity.
• Necessary goods like food, medicine, etc.

Unitary Elastic Demand (Ep = 1)
• When a given proportionate change in price results in the same
proportional change in the quantity demanded of a commodity,
the demand is said to be unitary elastic.
• The elasticity of demand is one.

Practical Importance of Elasticity of Demand
1. Determination of Wages
• The elasticity of demand for labour plays an important role in
the determination of wages.
• If the demand for labour is elastic, any pressure put up by a
labour in the form of strikes to get higher wages would be
unsuccessful. (if wage increases demand decreases, elastic)
• On the other hand if the demand for labour happens to be
inelastic, even a threat of strike would help the workers to get
the approval of their employers in raising their wages. (if wage
increases, demand of labour more or less remains the same)

2. The Elasticity of Promotional Activity
• The producers are well convinced that the advertisement makes the
demand for a product less elastic.
• Hence, they would not mind spending substantial amount of money
on advertising. The price increase therefore will not reduce the sales

3. Determination of Monopoly price
The monopolist considers the nature of demand for his products before
fixing the prices. If the demand is elastic, a lower price would help
him to realize more profits.
On the other hand, if the demand is inelastic, he is in a position to fix a
higher price.
The monopolist while practicing price discrimination also takes into
account the elasticity of demand. He fixes a lower price for the
product in the market in which the demand for the product is
elastic and he charges a higher price for the same product in the
market in which the demand is less elastic or inelastic

4. Undertaking the Public Utilities
• The government itself runs some enterprises or industries in
the interest of people. otherwise they are subjected to
exploitation by the private people. In the case of electricity,
the demand is inelastic and it is very essential item in the
lives of humans.
• In the interest of the public, electricity boards are run by the
government to supply power at reasonable rates.

5. Taxation
The nature of demand for a good helps the government,
looking in the possibilities of raising the revenue. If the
demand is less elastic for a good, by levying more indirect
tax on that good, the government would get larger
revenue

• International Trade:- The country gains in the International trade
by exporting those goods, for which the demand in the export
market is less elastic and by importing those good for which the
demand is elastic.
• Paradox of Poverty in Plenty:- A bumper crop instead of
bringing prosperity to the farmers,ruins their economic position. It
is a common phenomenon in agriculture. The inelastic demand for
a product in the years of bumper harvest brings down the prices,
consequent to which the farmer fails to realize prices of normal
years.

METHOD OF MEASURING PRICE ELASTICITY
1.Total Outlay or Expenditure Method
• In this method we compare total expenditure of the consumer before
and after change in price.
• The elasticity of demand is unity when the total expenditure remains
unaltered even though, there is price change.
• The demand is said to be elastic when the total expenditure increases
with fall in price and decreases with rise in price.
• Inelastic demand is observed when the total amount spent on the
commodity by the consumer increases with increase in price and
decrease with fall in price.

2. Point Elasticity of Demand
• Geometrical method for measuring elasticity at a point on the
demand curve.
• Point method is used when price and quantity changes are
extremely small.
• applicable only when we possess information on the minutest
changes in price and quantity demanded.
• Elasticity at any point on the demand curve is the ratio of lower
part of the straight line to the upper part.

3. Arc Elasticity of Demand
• The price elasticity of demand measured between two
distinct points on a demand curve is called arc elasticity of
demand.
• This method uses the mid points between the old and new
data in the case of price and quantity.
=
=
=

Factors determining Elasticity of
Demand
1. Type of Goods
2. Goods Having Several Uses
3. Existence of Substitutes
4. Possibilities of postponement
5. Range of Prices

AGRICULTURAL ECONOMICS CLASS 2 demand, utility

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