MODULE-2

DEMAND & ELASTICITY ANALYSIS

DEMAND MEANING
• It is attitude of consumers towards the product.

• Desire or want for something

• Demand is always related to price & time.

• Demand refers to the Qty of a goods or services that consumers are willing
& able to purchase at various price.

• Demand = Desire + Ability to pay + willingness to pay

• It means wants/desire backed up by adequate purchasing power &

willingness to pay

Individual demand

Individual Demand refers to the demand for a commodity from the individual
point of view.

• Individual Demand is considered from one person’s point of view or family

point of view.

Market Demand

Market demand for a product refers to the total demand of all buyers, taken
together.

Determinants of Demand/Factors which determines the Demand (VIMP)

• Price

• Income

• Tastes, habits and preferences

• Relative prices of other goods (Complimentary & Substitute goods)

• Consumer’s expectation (Income & Price)

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 • Advertisement

• Weather conditions (Rainy Season & Umbrella Price)

• Govt Policies (Tax Rate, Interest Rate)

• Income Distributions

Determinants of Demand

Law of Demand

• It explains the relationship b/w change in qty demanded & change in price.

• It says that price & qty demanded are inversed related & all other things
remain same.

• Definition: According to ‘Marshall’, “If other things remain the same, the
amount demanded increases with a fall in and diminishes with a rise in
price.”

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 “ THE HIGHER THE PRICE OF A COMMODITY, THE SMALLER
IS THE QUANTITY DEMANDED AND LOWER THE PRICE,
LARGER THE QUANTITY DEMANDED”.

Assumptions

• No change in consumers income

• No change in consumer’s taste, habit & preferences

• No change in the price of related goods

• No new substitutes for the commodity

• No expectation of future price changes

• Perfect competition in the market

Demand Schedule & Demand Curve

• Law of demand explained in terms of demand schedule & demand curve.

• Demand schedule is a table or chart which shows the relationship b/w the
price & demand of a commodity.

• Demand Curve is the graphical representation of the demand schedule.

The Law Of Demand will be explained with a diagram:

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PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE UJIRE(AUTONOMUS),
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 Exceptions to the Law of Demand

• Status Goods/Conspicuous Consumption

• Necessities of life

• Giffen Goods (British Economist Sir Robert Giffin) (Bread).

• Expectation of price rice

• Outdated goods

• Fear of shortage/In case of an Emergency

• Fashion Goods(in fashion/out of fashion)

Giffen Goods : Examples

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Price of Rice increases to Rs 6

Elasticity of Demand

Meaning

• The quantity demanded of a good or service depends on multiple factors,

such as price, income, and preference. Whenever there is a change in these
variables, it causes a change in the quantity demanded of the good or
service.

• Percentage change in quantity demanded with respect to percentage change

in determinant of demand.

• It is % changes in qty demanded divided by % changes in one of the

Variables on which demand depends.

• The elasticity of demand refers to the responsiveness of the demand due to

the change in the determinants of the demand.

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 Kinds of Elasticity of Demand

• Price Elasticity

• Income Elasticity

• Cross elasticity

• Advertising & Promotional Elasticity of Demand

Price Elasticity of Demand

• It means the percentage change in quantity demanded with respect to

percentage change in price.

• It is always negative.

• Price elasticity of demand measures the relationship between the

proportionate change in demand and the proportionate change in price.

• In other words, it shows how much change in price will cause how much
change in demand.

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 Types of price elasticity

• Perfectly elastic demand

• Perfectly inelastic demand

• Relatively elastic demand

• Relatively inelastic demand

• Unitary inelastic demand

Perfectly Elastic Demand

• It refers to a situation where the slightest change in the price of a commodity

leads to infinite or rapid change in quantity demanded.

• In this case a small rise in price leads to a rapid fall in demand and a small
fall in price leads to a big expansion in demand.

• Here, EP = ∞

• Example: When consumers are extremely sensitive to changes in price, you

can think about perfectly elastic demand as “all or nothing.” For example, if

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 the price of cruises to the Caribbean decreased, everyone would buy
tickets (i.e., quantity demanded would increase to infinity).

• Horizontal Demand line.

Perfectly inelastic Demand

• Demand is said to be perfectly inelastic when a substantial change in the

price does not lead to any change in demand.

• Whatever the changes in price may be, the amount demanded remains the
same.

• Vertical Demand Line

• Example: Demand for salt, lifesaving drug that people will pay any price to
obtain.

• Here, EP = 0

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Relatively elastic demand

• Demand for a commodity is relatively elastic when a change in price leads to

more than proportionate change in the quantity demanded.

• In other words, this means that a little change in the price shall cause more
change in demand.

• Thus, the demand curve slopes downward from left to right. Slant Demand
line

• An example of this is luxury goods. TV, Branded items etc

• Here, EP ˃ 1

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Relatively inelastic demand

• Relatively inelastic demand is when the proportionate change in demand is

less than the proportionate change in the price.

• In other words, this means that more change in price shall cause less change
in demand.

• Thus, the demand curve slopes downward from left to right but is steeper.

• An example of this is the necessary goods. Petrol

• Here, EP ˂ 1

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Unitary elastic demand

• Price elasticity of demand is unity when the change in demand is exactly

proportionate to the change in price.

• Unitary elastic demand is when the proportionate change in demand

is equal to the proportionate change in price.

• Thus, the demand curve slopes downward from left to right.

• An example of this is comfort goods. Mobile Phones, Home appliances etc.

• Here, EP = 1

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 Income elasticity of Demand

• It is defined as the ratio of percentage or proportional change in the quantity

to the percentage or proportional change in income.

• It is calculated as % changes in qty demanded of a goods divided by the %

changes in income of the consumer.

• Here price remains constant

• It is positive for all normal goods.

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 Types of Income Elasticity

• High Income Elasticity(Income elasticity of demand greater than unity.)

• Low Income Elasticity(less than unity.)

• Unitary income elasticity of demand.

• Zero income elasticity of demand.

• Negative income elasticity of demand.

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Unitary income elasticity

• When the percentage change in demand is equal to the percentage change in

income, the demand is unitary income elastic.

Income elasticity greater than unity

• When the percentage change in quantity demanded is greater than the

percentage change in income, the income elasticity of demand is greater than
unity.

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Income elasticity less than unity

• When the percentage change in demand is less than the percentage change in
income, the income elasticity of demand is less than unity.

Zero income elasticity

• When the income change in any direction or in any proportion but carries no
effect on demand, so that the quantity demanded remains unchanged, it is
referred to as zero income elasticity.

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Negative income elasticity

• When an increase in income causes a decrease in the demand for a

commodity, the demand is said to be negative income elasticity.

• Example Inferior Goods

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 Cross elasticity of demand

• It is the ratio of % changes in the qty demanded for one goods(X) to the %
changes in the prices of some other related commodity(Y)

• In cross elasticity of demand, we take into account the change in the price
of commodity Y and its effect on the demand for the commodity X.

• It implies either to substitute products or complementary products.

Formula

• Substitute goods (Positive)

• Complementary goods(Negative)
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 Advertising/Promotional Elasticity of Demand

• It is the ratio of % changes in qty demanded to the % changes in expenditure

on Advt & promotional efforts.

• The degree of responsiveness of demand to changes in advertising or

promotional expenditure.

• Formula

• Ea=0(demand do not respond to the Advertisement)

• Ea<1(% changes in qty demanded is lower than % changes in Advt.)

• Ea>1(Greater changes in qty demanded than changes in advt.)

• Ea=1(demand increases in equal proportion to advt.)

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 Factors influencing elasticity of demand/Determinants of Elasticity of
Demand

• Nature of commodity- FOOD, CLOTH

• Availability of substitutes- TEA/COFFEE

• Consumer’s income

• Height of price & range of price change - fridge, t.v etc..

• Postponement of consumption

• Durability of commodity- perishable/non perishable

• Habits

• Complementary goods

• Time

• Number of uses- single use/multi use

Practical applications/Uses of Elasticity of Demand for Managerial decision

making

• To businessmen
• To the government
• International trade
• Trade unionist
Uses
• Determination of price policy

• Price discrimination

• Taxation

• Importance in international trade

• Output decision
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 Demand Forecasting

• It is estimation of demand/predicting demand for a product or service

• Demand forecasting refers to prediction of future market demand on the

basis of statistical data and empirical measurement of functional relationship
between demand and its determinants.

• Demand is related to sales. So its also called as “Sales Forecasting”

• It is just an estimate of the future demand. It can’t be 100% precise.

Significance of demand forecasting

• Production planning- to avoid over and under production

• Sales forecasting

• Man-power/labour requirements-

• Inventory control

• Financial requirements/arrangement of finance

• Formulation of price policy

• Control of business

Methods of demand forecasting

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 I. Opinion polling Methods

II. Statistical Methods

1. Consumer survey methods

a) Complete enumeration method

In this method the firm has to go for door to door for collecting the
information. They have to meet all the households in the area.

b) Sample survey method

Only a few potential consumers and users selected from the relevant market on
random basis through sampling method & their opinion is gathered for forecasting.

c) End-Use Method

• The end-use method applies for forecasting the demand for intermediate
products. These are products used in the manufacture of some other final
goods.

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 • Once the demand for the final goods estimated, the demand for the
intermediate product can be easily estimate.

2. Sales force opinion method

• Collective opinion method

• Individual salesperson opinion is collected

• Then preparing organization forecasting

3. Delphi method

• Expert opinion method

• Taking the opinion of experts for forecasting

• Then opinions are exchanged among various experts & their reactions are
collected & analyzed

STATISTICAL METHODS

• Quantitative Method

• This method considered as Superior bcs;

• Estimation is scientific

• Estimates are more reliable

• It involves smaller cost

Various statistical methods

1. Trend projection methods

2. Barometric Methods

3. Regression methods

4. Econometric methods

1. Trend Projection Methods

• It uses own data of past years regarding its sales
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 • This method is also known as time series method
• 3 techniques of trend projection
a. Graphical method
b. Moving Averages Method
c. Exponential smoothing

2. Barometric method

Barometric method uses economic indicators as barometer to forecast trends in

business activities.

Barometric forecasting is based on the relationships between different economic

indicators.

3. Regression method

• More common method of forecasting

• There will be a dependent variable and an independent variable.

• After this we write the regression equation

• Y=A+BX

4. Econometric method
Also known as simultaneous equation method

It uses sophisticated mathematical & statistical tools

Business Environment

• Internal Environment

• External Environment

– Microenvironment

– Macro environment

Internal Environment

– Value System
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 – Goals and Objectives

– Management Structure

– Internal Power Relationship

– Physical resources and the technology

– Human resources

External Environment /Microenvironment

• Suppliers

• Workers and their Union

• Customers

• Market Intermediaries

– Wholesalers, retailers, agents, distribution firms

• Competitors

• Publics

External Environment/ Macro environment

• Economic Environment

– Rate of Growth, Savings and Investment, Inflation, Prosperity,

Recession, Industrial policy, Trade Policy,

• Noneconomic Environment

– Political environment

– Socio cultural environment

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 – Demographic environment

– Technological environment

– Natural environment

National Income

• National Income is aggregate money value of all goods & services produced
by the people in an economy during the time.

• Total amount of income accruing in a country from all kinds of economic

activities in a year is known as national Income.

• National income provides information about nation’s productive capacity &

economic stability.

• National Income represents flow of total factor earnings in an economy

during any period of time.

Concepts of National Income

• Gross Domestic Product (GDP)

• Gross National Product (GNP)

• Net National Product (NNP)

• National Income at Factor Cost

• Personal Income

• Personal Disposable Income

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 GDP

• GDP is money value of all goods & services produced in the domestic
territory of a country in a years time.

• Money value of all the goods & services taken together for calculating the
value of GDP

• Counts only the goods and services produced within the country's borders
during the year, whether by citizens or foreigners.

GDP=C+I+G+(X−M)

Where:

• C = Consumer spending

• I = Investment by businesses

• G = Government spending

• X = Exports

• M = Imports

The following expenditures are added to in order to find out GDP:

• Personal Consumption Expenditure

• Gross Investment

• Government Expenditure

• Net Foreign Investment(net income from abroad)

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 GNP

• The total value of all goods and services produced by the residents of a
country, regardless of where they are located.

• GNP may be defined as money value of national production for any specific
period of time.

• Here all sales to household, firms & Govt are treated as final goods.

• The money value of the final goods only to be considered not the value of
intermediate goods.

GNP=GDP+Net Income from Abroad

• (Net Income from Abroad = Income earned by residents abroad -

Income earned by foreigners in the country)

NDP

• The value of all goods and services produced in a country, minus

depreciation (the loss of value of capital goods over time).
NDP=GDP−Depreciation

NNP

• The total value of all goods and services produced by the residents of a
country, minus depreciation.

• It is sum of domestic income & income from abroad.

• It is market value of all final goods and services after proving for
depreciations.

• It is also called as National income at market price.

• NNP=GNP-Dep

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 Summary

GDP measures all production in a country.

GNP measures production by a country's residents, wherever they are.

NDP adjusts GDP for depreciation.

NNP adjusts GNP for depreciation.

National Income at Factor Cost

• It refers to the all income earned by resource owners(owners of factors of

production) for their contribution to the production of different goods &
services.

• NI=NNP-Indirect Tax + subsidy

Personal Income

• PI refers to aggregate money payment actually received by the individuals or

household with in domestic territory of a country from all source.

• In simple it is amount available to them for spending, Paying taxes& saving

purposes.

• PI=NI-corporate tax-savings

Personal Disposable Income

• It is sum of the consumption & savings of the Individuals.

• It is part of personal income which is actually available to individuals for

consumption & for saving purposes.

• The whole PI is not available for the consumers to spend on consumption.

The reason is that out of the income received the individual has to pay
personal income taxes. The part of income which is left behind after the
payment of direct taxes is called DPI which is spend on consumption or
savings.
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 PDI=PI-(Direct Tax + fines, fees etc)

PDI = Consumption + savings

Price Index/Price Indices

• A price Index or price indices is a average of prices of a given class of

goods & services during a time.

• It is a statistics designed to help for compare how these prices differ b/w
time period or geographical locations.

• The main purpose of Price Indices is, it helps in explaining the purchasing
power or Inflation/ Deflation from one period to another.

• In simple Price index help to measure the price changes.

Kinds/Types of Price Indices

1. Consumer price Index(CPI): A measure of price changes in consumer

goods as well as services. Ex: Food, Cloth, Automobiles etc. It measure
price changes from the prospective of purchaser.

2. Producer Price Index(PPI):A family of indexes that measures the average

change over time in selling price by domestic producers of goods as well as
services.

3. Wholesale price Index(WPI):It is an indication of price movements in all

markets other than retail market. It is worked out for whole country or for a
very large area. Here prices are collected from wholesale dealers.

Consumers’ Goods and Producers’ goods:

Economics goods are further divided into consumers’ goods and producers’ goods.

a. Consumers’ Goods:

Consumers’ goods are those final goods which directly satisfy the wants of
consumers. Such goods are bread, milk, pen, clothes, furniture, etc. Consumers’

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goods are further sub-divided into single-use consumers’ goods and durable use
consumers’ goods.
(i) Single-use Consumers’ Goods:

These are goods which are used up in a single act of consumption. Such goods are
foodstuffs, matches, fuel, etc. They are the articles of direct consumption because
they satisfy human want directly. Similarly, the services of all types such as those
of doctors, actors, lawyers, waiters, etc. are included under single use goods.
(ii) Durable-use Consumers’ Goods:

These goods can be used for a considerable period of time. It is immaterial whether
the period is short or long. Such goods are pens, tooth brushes, clothes, scooters,
TV sets, etc.
Capital or Producers’ Goods:
Capital goods are those goods which help in the production of other goods that
satisfy the wants of the consumers directly or indirectly, such as machines, plants,
agricultural and industrial raw materials, etc. Producers’ goods are also classified
into single-use producers’ goods and durable- use producers’ goods.

(i) Single-use Producers’ Goods:

Theses goods are used up in a single act of production. Such goods are raw cotton,
coal used in factories, paper used for printing books, etc. When once used, these
goods lose their original shape.
(ii) Durable-use Producers’ Goods:

These goods can be used time and again. They do not lose their usability through a
single use but are used over a long period of time. Capital goods of all types such
as machines, plants, factory buildings, tools, implements, tractors, etc. are
examples of durable-use producers’ goods.

Intermediate Goods

Goods sold by one firm to another for resale or for further production are called
intermediate goods. They are single-use producers’ goods that are transformed to
manufacture final goods. Intermediate goods are also termed as inputs. Cotton
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from the fields is sold to the spinning mill where it is transformed into yarn. In
turn, the yarn leaves the spinning mill by way of sale to the textile mill where it
disappears into a new product, cloth. Again, cloth is sold by the mill to the trader to
be sold as final goods.

Final Goods
On the other hand, goods sold not for resale or for further production but for
personal consumption are called final goods. On the basis of this definition, a
particular good or service may be classified intermediate good or final good. For
instance, the water sold by the municipal corporation to commercial and industrial
undertaking is an intermediate good because it is used by them for further
production.
On the other hand, the water sold to individual households is final good because it
is used for personal consumption.

Fiscal Policy

• The Fiscal Policy is concerned with the raising of govt revenue & incurring
of govt expenditure

• To generate revenue & to incur expenditure, the govt frames a policy called
Fiscal policy or Budgetary Policy

• Fiscal policy is concerned with govt expenditure & govt revenues

• Fiscal Policy is a powerful weapon in the hands of govt for decide on the
size & pattern of flow of expenditure from the govt to the economy & from
economy back to the govt.

• Fiscal Policy refers to the policy of the govt regarding public revenue, public
expenditure & public debt

Objectives of Fiscal Policy

• Efficient & Rational allocation of economics

• Increasing/Accelerating rate of capital formation

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 • Maintaining economic stability

• Full employment

• Minimizing income & wealth inequalities

• Reduction of unemployment & under employment

• Developing a socially optimum pattern of investment

• Control of inflation

• Increasing national income

• Development of infrastructure

Instruments/Tools of Fiscal policy

• Taxation

• Public Borrowings

• Forced savings or Deficit financing

• Public expenditure

Monetary Policy

• It refers to measures adopted by the central monetary authority of the

country to control money supply in order to achieve the objectives of general
economic policy

• It means the regulations of the monetary supply & control of the cost &
availability of the credit by the central bank of the country through the use of
deliberate & discretionary action for achieving the objectives of general
economic policy.

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 CREDIT CONTROL BY RESERVE BANK OF INDIA/MONETARY
POLICY (VIMP)

Quantitative & Qualitative Measures of Credit Control

The various methods employed by the RBI to control credit creation power of the
commercial banks can be classified in two groups, viz., quantitative controls and
qualitative controls. Quantitative controls are designed to regulate the volume of
credit created by the banking system qualitative measures or selective methods are
designed to regulate the flow of credit in specific uses.

IMPORTANCE OF CREDIT CONTROL

1) To obtain stability in the internal price level.

2) To attain stability in exchange rate.

3) To stabilize money market of a country.

4) To eliminate business cycles –inflation & depression –by controlling supply

of credit.

5) To maximize income, employment & output in a country.

6) To meet the financial requirements of an economy not only during normal

times but also during emergency or war

7) To help the economic growth of a country within specified period of time.

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A. Quantitative methods:-

Quantitative methods are those which aim at controlling the total volume of credit.
They are used to regulate the quantity of credit created by banks. By using these
methods the central banks controls the amount of credit.

These includes:-

1. Bank rate

2. Open market operations

3. Variable cash reserve ratio

4. Statutory liquidity ratio

1. Bank Rate
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Bank rate is the rate at which central bank ( RBI in India ) grant loans to the
commercial banks against the Govt. security & other approved first class
securities. Reserve Bank adopts Cheap & Dear Monetary Policy according to
economic condition of the country

➢ Cheap Monetary Policy :-

RBI decreases bank rate to increase the quantity of credit in the country, this is
called cheap monetary policy.

Decrease in bank rate » decrease cost of credit i.e. Decrease in interest rate … As
a result of this quantity of credit increases.

➢ Dear Monetary Policy :-

RBI increases bank rate to decrease the quantity of credit in the country, this is
called dear monetary policy.

increase in bank rate » increase cost of credit i.e. increase in interest rate …

This will result in decrease in quantity of credit.

2. Open market operations

Open Market Operations refers to the deliberate & direct buying & selling of
securities & bills in the money market by the central bank.

Purchase & sells of securities may lead to expansion & contraction of money
supply in the money market. It influences the cash reserves with the commercial
banks & hence these operation control their credit creation power.

Inflationary pressure:- the central bank would sell the govt. securities to the
commercial banks. the banks would transfer a part of their cash reserves to the
central bank towards the payments of these securities. Consequently the cash
reserves with the commercial banks will be reduced. It would lead to a contraction
in the credit creation power of the commercial banks.

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Deflationary pressure :- in this situation the central bank will purchase securities
from the commercial banks. In the process the cash reserves with the commercial
bank will increase & they would be enable to create more credit

This weapon is used to fulfill the seasonal credit requirements of commercial

banks.

3. Cash Reserve Ratio

• The RBI controls credit through change in Cash Reserve Ratio (CRR ) of
commercial banks.

• Every commercial bank is required by law to maintain certain percentage of

its deposit with the central bank which is called cash reserve ratio.

• The central bank has a power to change the percentage of cash reserve to be
kept with it.

• If the ratio increases, the credit creation capacity of commercial banks

decreases. On the other hand if the ratio decreases the credit creation
capacity if commercial banks increases.

• This ratio can be varied from 3 % to 15% as directed by the RBI.

( Current CRR is 3% )

4. Statutory liquidity ratio

• Every scheduled bank is required by law to maintain a minimum of 18.50%

as cash , gold or unencumbered securities of its total demand & time
liabilities, which is called Statutory liquidity ratio ( SLR )

• The RBI is empowered to change this ratio.

• It is also influence the credit creation capacity of the banks

• The effect of both CRR & SLR on credit expansion is similar.

• As on Oct 21, 1997, it was fixed to 25% of the total deposit of the
commercial banks.

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE UJIRE(AUTONOMUS),

UJIRE. 9686919392 pravi1988@[Link]
 • Penalties are levied by RBI for not maintaining these ratio’s from scheduled
banks.

(Current SLR is 18.50% )

B. QUALITATIVE METHODS :-

Qualitative methods are used to affect the use, distribution & direction of credit.

• It is used to encourage such economic authorities as desirable & to

discourage those which are injurious for the economy.

RBI from time to time had adopted the following qualitative methods of credit
control:-

1. Rationing Of Credit

2. Margin Requirements

3. Regulation Of Consumer Credit

4. Control Through Directives

5. Publicity

6. Moral Suasion

7. Direct Action

1. Rationing Of Credit

In this method RBI seeks to limit the maximum or ceiling of loans & advances
and also in certain cases, fixes ceiling for specific categories of loans & advances.

It aims to control & regulate the purposes for which the credit is granted by
commercial banks.

a) Variable portfolio ceiling:-

According to this the central bank fixes a ceiling on the amount of loans &
advances for each bank & the bank cannot advance loans beyond this limit.
b) Variable capital asset ratio :-
This is the ratio which the central bank fixes in relation to the capital of
PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE UJIRE(AUTONOMUS),
UJIRE. 9686919392 pravi1988@[Link]
 a bank to its total assets.

2. Margin Requirements

• Commercial banks do not lend up to the full amount of the value of security.
the loan amount is lass than the securities value. It keeps a ‘margin’ as a
cushion against fall in the value of the security.
• ‘margin’ refers to the difference between the current market value and the
loan value of a security. It is a portion of the value of the security charged to
a bank, which the borrower is expected to pay out of his own resources.
• a rise in the margin requirement restricts the amount of loan that a bank can
grant against a security , while a lower margin increases it.
• In this way, the amount of fixing margin requirements has a direct impact on
the
amount of credit for speculation purposes.
• during depression, the margin can be reduced so that there is increase in the
level of economic activity through an increase in demand for bank credit.
conversely, during inflation, margin requirements can be raised by the
monetary authorities so as to contain the boom in the stock market.

3. Regulation Of Consumer Credit

With the introduction of installment trading, the trading in non-essential consumer

products like motor vehicles, electrical & electronic goods have gone up to an
unpredicted level.

• The RBI may restrict consumer expenses on non-essential items by directing

the commercial banks to fix the minimum percentage of down payment,
length of period over which installment payment may be spread, etc.
• Example :-
suppose, to buy a washing machine, the buyer is required to make a down
payment of one-fourth of its total price & the rest is to be paid in 15 equal
monthly installment.
PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE UJIRE(AUTONOMUS),
UJIRE. 9686919392 pravi1988@[Link]
 under regulation of consumer’ credit, the down payment amount may be
increased & number of installments reduced. This reduce demand for the
product & controls consumer spending which is necessary for controlling
prices.
• During inflation, more restrictions can be prescribed to control prices by
controlling demands, while during depression they can be relaxed in order
to stimulate demand for goods.

4. Control Through Directives

• RBI have been empowered to issue directives to commercial banks in

respect of their lending policies, purposes for which loans may or may not
be granted , margin to be kept in case of secured loan ,etc.
• The power to issue directives may be given either by statute or by mutual
agreement between the central banks and the commercial banks.
• Directives may be issued to encourage the flow of credit to certain areas or
to prevent the flow of credit in undesirable directions.

5. Publicity

• The RBI may also follow the policy of publicity in order to make known to
the public its view about the credit expansion or contraction.
• RBI regularly publish statements of assets & liabilities of commercial banks
for information to the public. They also publish reports of general money
market & banking condition.
• This is a way of exerting moral pressure on the commercial banks & also
making the public aware of the policies being adopted by banks & the
central bank in the light of prevailing economic conditions in the country.

6. Moral Suasion

• It refers to the advise or request made by the central bank to the commercial
banks to follow the monetary policy and carry out their lending activities &
other operations in such a way as to achieve the objective of the central
banks policy.

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE UJIRE(AUTONOMUS),

UJIRE. 9686919392 pravi1988@[Link]
 • It can be in the form of advise to commercial banks regarding their
investments or care to be taken while granting loans & advances against
such commodities the prices of which may rise due to speculative activity.
• Being an apex institution & lender of the last resort , the RBI can used its
more pressure & persuade the commercial bank to follow its policy.

7. Direct Action

Direct action refers to the direction & controls which the central bank may enforce
on all banks or a particular bank concerning their lending & investments.

In such case:-
1) RBI may refuse to sanction further accommodation to a bank.
2) The RBI may reject altogether any application for grant of discounting
facilities to the bank.
3) It may change penal rate of interest on loans taken by a bank beyond the
prescribed limit.

Praveena D
Assistant Professor
Dept of [Link]
SDM College (Autonomous), Ujire
9686919392
Pravi1988@[Link]

PRAVEENA D, ASSISTANT PROFESSOR, SDM COLLEGE UJIRE(AUTONOMUS),

UJIRE. 9686919392 pravi1988@[Link]