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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 and demand 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 goods
too, 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 are
consumed.
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)
1975 76 36.9 168.9
1976 77 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 sloping positive 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
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 rises If 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 rise If 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.