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ANSWER 1.

I agree to the fact that the law of demand is not operating in the market, but I dont agree with the

fact that we cant rely on the economic concepts that are still used for market analysis.

The law of demand expresses a relationship between the quantity demanded and its price.According to Marshall the amount demanded increases with a fall in price, and diminishes with a

rise in price. Thus it expresses an inverse relation between price anddemand with other things

remaining constant. The graph below will represent the demand law:

Y

(P1)

(P)

Price (D)

(Q1) (Q) X

Quantity demanded

Here, the rise in price from P to P1, will cause a decrease in the quantity demanded from Q to Q1. D

is the demand curve.

But that is only applicable in case of normal goods. In economics goods which are of daily necessity,

are classified under Giffen goods, such as salt and sugar. These goods do not follow the law of

demand. A Giffen good is a product that people consume the same or more, as the price rises,

violating the law of demand. If there is an increase in the consumers income, the quantity

demanded of that good may also increase even due to prise rise, because of increase in the real

income of the consumers, which is called the income effect. Due to the rise of prices of other goodstoo, the consumer might curtail the consumption of other goods and increase the demand for a

specific good, as in the case of sugar here.

There are three situations where this sort of a violation of the law of demand can arise:

There are three necessary preconditions for this situation to arise:

1. The good in question must be a necessary good

2.

There must be a lack of close substitute goods, and

3.

The goods must constitute a substantial percentage of the buyer's income, but not such a

substantial percentage of the buyer's income that none of the associated normal goods areconsumed.

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Therefore in the Indian market, sugar is a Giffen good.

Now, as according to the table:

Year Demand (Lakh in tones) Price (1970-71 = 100)

197576 36.9 168.9197677 37.5 173.1

The demand curve would be:

Price(Y)

1976-77Rs. 173.1

1975-76Rs. 168.9

36.9 37.5 (X) Quantity Demanded

Here, the X axis shows the quantity demanded (lakh in tones) with the increase in price as shown in

the Y axis accordingly. The demand curve D for sugar here is an upward slopingpositive curve

which shows the price rise from 1976-77 to 1975-76 has led to an increase in demand from 36.9 to

37.5 respectively, violating the law of demand.

ANSWER 2

1) The market where the 12 firms are operating is an oligopoly.

Some of the features of oligopoly are

a. There are few firms operating, but the number of buyers is large

b. The products are close substitutes and are of the same quality.

c. Each sellers attitude depends on the attitude of his rivals.

d.

As put forward in the question, any attempt by a seller to push up his sales by reducing the

price of the product will be copied by other sellers and if a seller raises the price, others will

not follow him.

EXAMPLE:Example of an oligopoly can be the sale of SUV cars in the market by different car

manufacturers, where we see the car prices of different companies in the market to be more or

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less the same. If one company decreases the price of its SUV, others follow suit, or may even

come up with a new SUV design to be in the competition.

2) Price rigidity can be eliminated if the price of the product is raised.

This can be done in 3 ways:

a)

If the production cost risesIf the cost of production rises, then the sellers will

obviously have to increase the price of the products as well. In that case, the profit

margin more or less may remain the same for the firms.

b) If the quantity demanded by the consumers riseIf the quantity demanded rises, then

the firms can raise the price of the product, knowing that the demand will not go down

c) Reduce the supply of goods- The sellers can also reduce the supply of the goods in

respect to the demand, and raise the price of the good so that the consumers will have

to buy the product at a higher price.

Whatever the situation or reason is in the market for the rise of price, the consumers will

not be benefitted anyhow. It is the sellers who are the price makers and will control the

market.