SUPPLY AND DEMAND
The law of supply and demand, briefly, states that when demand is high, prices will rise, and when supply is high, prices will drop. In other words, The Law of Demand holds that other things remaining equal, as the price of a good rises, its quantity(supply) demanded will fall, and vice versa. The Law of Supply holds that other things being equal, as the price of a good rises, its quantity supplied will rise, and vice versa. Did anyone ever think why do teachers earn say Rs.3 lakh per year and a Filmy Hero earns say 100 times more (conservatively) than teachers? Isn't education more important than Movies? In the month of March, mangoes are sold at Rs.1000/- a dozen (roughly 3 kgs.) and yet people have strong urge to buy them. In contrast, perhaps better quality mangoes are available at Rs.100 per 3 kgs during May-June, yet people pay relatively less attention to them. Why?
DEMAND FACTOR AND RECESSION
Some economists are of strong view that 'what goes up must come down'. It seems that either they are not aware of the catastrophe and panic of the suspected recession/ depression or they are carelessly trying to avoid the worry. Neglecting a problem is no solution. They must try and find out the cause.
Lord Keynes applied the logic that recessions are caused by a lack of Effective Demand.
The effective demand comprises of consumption demand and investment demand. Therefore, the lack of effective demand may come about due to the lack of either the consumption demand or the investment demand or both. Hence, to increase effective demand the consumption demand or the investment demand or both should be increased. Let us see one by one how the effective demand can be increased:
TO INCREASE CONSUMPTION DEMAND
There is a functional relationship between consumption and income. People mostly increase their consumption as their income increases, but not by as much as the increase in their income.
Consumption expenditure is determined by disposable income more correctly than by total earnings.
Consumption function depends upon the nature of consumption which is again dependent upon the consumption behavior of the people throughout the variation in income. This behaviour study can be for shorter or longer term, but it must correspond actual observation and experiments. Short term is sufficient enough to experience a significant change in the parameters of the economy, especially in case of a developing economy where the entire socio-economic setup is being changed fast on account of rapid economic development through development plans.
The law of supply and demand, briefly, states that when demand is high, prices will rise, and when supply is high, prices will drop. In other words, The Law of Demand holds that other things remaining equal, as the price of a good rises, its quantity(supply) demanded will fall, and vice versa. The Law of Supply holds that other things being equal, as the price of a good rises, its quantity supplied will rise, and vice versa. Did anyone ever think why do teachers earn say Rs.3 lakh per year and a Filmy Hero earns say 100 times more (conservatively) than teachers? Isn't education more important than Movies? In the month of March, mangoes are sold at Rs.1000/- a dozen (roughly 3 kgs.) and yet people have strong urge to buy them. In contrast, perhaps better quality mangoes are available at Rs.100 per 3 kgs during May-June, yet people pay relatively less attention to them. Why?
DEMAND FACTOR AND RECESSION
Some economists are of strong view that 'what goes up must come down'. It seems that either they are not aware of the catastrophe and panic of the suspected recession/ depression or they are carelessly trying to avoid the worry. Neglecting a problem is no solution. They must try and find out the cause.
Lord Keynes applied the logic that recessions are caused by a lack of Effective Demand.
The effective demand comprises of consumption demand and investment demand. Therefore, the lack of effective demand may come about due to the lack of either the consumption demand or the investment demand or both. Hence, to increase effective demand the consumption demand or the investment demand or both should be increased. Let us see one by one how the effective demand can be increased:
TO INCREASE CONSUMPTION DEMAND
There is a functional relationship between consumption and income. People mostly increase their consumption as their income increases, but not by as much as the increase in their income.
Consumption expenditure is determined by disposable income more correctly than by total earnings.
Consumption function depends upon the nature of consumption which is again dependent upon the consumption behavior of the people throughout the variation in income. This behaviour study can be for shorter or longer term, but it must correspond actual observation and experiments. Short term is sufficient enough to experience a significant change in the parameters of the economy, especially in case of a developing economy where the entire socio-economic setup is being changed fast on account of rapid economic development through development plans.
Now, consumption behaviour solely depends upon the Marginal Propensity to consume (MPC). What this MPC mean? It is a metric that quantifies induced consumption with every increase in disposable income after taxes and transfers. If a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the household will spend 65 cents and save 35 cents. If person borrows money to finance his expenditure, definitely, MPC is more than 1. Also, MPC varies from individual to individual and their respective circumstances. For example, a thirsty man in the middle of desert has a very high MPC for Water than the man pillowing in his A.C. room. With this, it becomes more obvious that MPC goes on declining at higher levels of income and approaches to zero at a very high level of income where all available consumption goods are already available in list of items which gives maximum possible satisfaction to the people. If you have plenty of what you want, MPC is perhaps Minus 1. At higher level of income where you have plenty of everything, MPC corresponds to other factors like tastes, habits, fashion, traditions, technology etc. that may prevent the consumption from increasing. These factors are determined by the entire social, political and religious way of living of the people.
Today, when there is a panic and panic only the world over on account of unbearable recession, when even the developed economies are also suffering from considerable level of inequalities in income distribution, consumption demand can be increased by introducing new consumption items, improving quality of existing items and making income distribution more equal will help to increase consumption demand almost equally in both the developed and the developing economies.
TO INCREASE INVESTMENT DEMAND
How Investment Demand can be increased to enhance effective demand? Situation for induced investment differs both in Developed and Developing Economies.
Developed economies are required to only preserve the existing productive investment in the time of slow-down period. It can well be done by raising the purchasing power of the middle income group, the dominating group in the consumption goods market, through the measures for increasing consumption as discussed hereinbefore. Also, the easy consumer loans either free of interest or at an insignificant rate of interest and restriction on both commodity speculation and non-commodity speculation activities would be proved most helpful to preserve the existing productive investment.
But, in the situation of economic recession, economies of developing countries need not only to preserve the existing productive investment but also to increase it. It depends upon the excess of Marginal Efficiency of Capital (the rate of profit earning on investment) over the prevailing rate of interest' always holds good.
Therefore, the developing economies apart from increasing consumption demand have to bring interest rates significantly lower and to increase the 'Marginal Efficiency of Capital' to fight against recession. The restriction on speculation will help very much in the developing economies because they are always short of capital and the liquidity engaged in speculation not only makes a dent on the supply of capital but also makes the interest rate high. It should be noted that supply of capital (money) depends not only on physical money printed in the economy but on the Velocity of Money Circulation (turnover ratio) which declines drastically on account of recession – rising unemployment, falling investment and consumption. In such insecure time, confidence is at its lowest ebb and people tend to hoard cash rather than spending it.
Apart from this, actions should be taken to mitigate the inequalities of income distribution. A part of the flow of income from high income group (the group having insignificant MPC) should be diverted to the middle income group (the group having high MPC) whereby the consumption demand will improve by raising income, employment and induced investment.
Thus for increasing Effective Demand and thereby recovering from recession phase, the income of the middle income group and the low income group should be preserved against unemployment. The inequality of income distribution should be alleviated fast so as to divert a considerable portion of income of the high income group towards the middle income group and the low income group who actually constitute a real effective demand. A wide range of consumer loans at negligible interest rate or interest free should be floated in the market. A subsidy scheme for the consumption goods should be launched in a way that consumption goods pertaining to high income group may become under the reach of middle income group and consumption goods pertaining to middle income group may become under the reach of low income group. Speculation activities should be stopped. The flow of funds towards enhancement of trade and commerce should be restricted.
But,,,,, it may also happen……………….. Strong economy causes an increase in the demand for housing; the increased demand for housing drives real-estate prices and rentals through the roof. And then affordable housing becomes completely inaccessible. During the boom, a speculative fervor gripped homeowners, particularly in the United States, where they got hooked on cheap, gimmicky mortgages. They believed that they could buy low, sell high, and could always get out at the peak, instead of being the last player in the game to hold the old maid card. Unfortunately economists don't see this — including their voodoo economic theories and strategies that helped causing the recession, such as the belief that economic good times could go on forever. This leads to a very important cause of the present recession. There is no shortage of expert opinion, particularly from economists and financial analysts — too often, however, the wrong ones prevail.
Ultimately, Rulers are the reasons of growth and also the remedy of slow-down. In both conditions, they gain and people loose. Why? Reply is simple: They have to support money owners in both conditions for mutual benefit. Though being regulators, they are paid to deregulate and they do so! Why should a common man break his head for understanding Demand-Supply fallacy?
Many say : World Economy is on the path of recovery, Recession is Over, because statistical figures says so. Some cautiously say: Recovery is there but it would be slow. Very few attribute the improvement appearing on the screen, to the relentless increase in money supply by currency printing. How many care to study the effects of remedial measures taken in 2008-09 and make systematic economic forecast for 2015 without getting carried away by hearsays ?
Amidst all these, fact that remains universal is ," There can not be a sustainable economic recovery and growth unless there is an increase in Real Effective Demand. " Purpose of presenting this articles was to simply convey this fact.
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