Demand Elasticities for Pulses and Public Policy Options

The case is based on demand and supply forecasting of pulses. The information about the nature of the
good, expected increase in production, expected rise in demand (due to disposable income, consumer
price inflation and population) and price elasticity is given.

1. Should we import pulses during this year or do we have enough to export?

Since, supply is increasing, we may not need to import pulses this year, however, there’s also an increase
in demand (lesser in magnitude than supply) therefore we cannot assume that there will be enough to
export. There may only be enough to satisfy the domestic demand for pulses.

2. If we do not want to export or import pulses, by how much would the domestic prices of pulses change
in relative terms and in absolute terms?

Since the supply of pulses is increasing considerably this year, the price will fall. As the price falls, the
demand will increase. Moreover, there will also be a rise in demand due to increase in population and
disposable income so both price and quantity demanded will increase.

3. Let the Minimum Support Price (MSP) of pulses be the current equilibrium price. Then, by how much
does it need to be changed if the government wants to create a buffer stock of about 2% of the domestic
production of pulses for future needs?

The government will need to hike up the price of the pulses to lower demand and create a buffer stock.
The exact magnitude of the same is not calculable with the given data.

Margarine and Butter are substitutes, Entertainment and Food are

Complements
The case highlights the importance of complements and substitutes.

Substitutes are goods which can take each other’s place, so an increase in price of one can lead to increase
in demand of other. For example: 1% increase in price of butter leads to 1.53% increase in price of
margarine.

Complements are goods which are often bought together, so an increase in price of one can lead to
decrease in demand of other. For example, 1% increase in price of entertainment leads to decrease in food
demand by 0.72%.

It is important to understand the complements and substitutes of any product to fully understand its
position in the market.