Economics demand

CPT 684 views 3 replies

rajiv

student

197 Points Joined April 2012

Dear friends, in economics, factors determining the demand, can somebody explain the following point?

"The wealth of a country may be distributed so that there are a few very rich people while the majority are very poor. Under such conditions the propensity to consume of the country will be relatively less, for the for the propensity to consume of the rich people is less than that of the poor people. Consequently, the demand for consumer goods will be comparatively less. If the distribution of income is more equal, then the propensity to consume of the country as a whole will be relatively high indicating higher demand for goods".

Replies (3)

mahesh

Junior

43 Points Joined March 2012

Hi Venkata Rajiv,

This is the way it happens.

For Example:

We have Rs.1000 and there are 10 people. Distribute Rs.90 in equal way to 9 people and the balance Rs.910 to the 10th guy. See what happens:

We have 3 types of needs. 1) Most basic: Food Clothing and shelter 2) Necessity: In the position we were in, we need those goods. For a doctor, a car if required but for a student it isn't. 3) Luxury: It states itself.

So, in the above, if we need Rs.3 for basic needs, Rs.10 for necessities and Rs.40 for luxuries. then find out the total consumption

Re.1 from 9 people because they dont have more

Rs.53 by the rich one

So, total consumption is Rs. 53+Rs.9 equals Rs. 63.

In this way, when there is a huge wealth of Rs.1000/- only Rs.63 is the consumption.

On the other hand, if 100 distributed to each then there would be consumption of 53*10 equals Rs.530 consumption level.

There could be slight changes where some would try to spend all Rs. 100 on speculation and GDP could end up at Rs.530 to Rs700 or even Rs.1000.

In this way, Propensity to consume increases with the equitable distribution of wealth.

In our country, we have socialist pattern of society. When there is a huge concentration of wealth in few hands........then Government steps in and nationalises the respective company or takes out wealth from those few individuals. For now, no steps in the coming future. Again this steps would encourage distribution of wealth amont people.