DEVELOPED VERSUS UNDERDEVELOPED ECONOMIES

Countries are divided into two major categories by the United Nations, which are
developed countries and developing countries. The classification of countries as a
Developed and Developing country is based on the economic status like GDP, GNP, per
capita income, industrialization, standard of living, etc. Developed Countries is a country
which provides free, healthy and secured atmosphere to live but the countries which
lack the same is known as Developing Countries.

Features of underdeveloped economies:

1) Low Level of Income: Underdeveloped countries are maintaining a very low level
of income in comparison to that of developed countries. The per capita incomes
of these groups of countries are extremely low if we compare it with that of
developed countries.
2) Mass Poverty: Existence of chronic mass poverty is another characteristic of
underdeveloped economies. The degree of poverty in these economies gradually
increases due to increase in its size of population, growing inequality in income
and increasing price level.
3) Lack of Capital Formation: As the level of per capita income in these countries is
very low thus their volume and rate of savings are also very poor. This has
resulted lack of capital formation and which is again responsible for low rate of
investment in these countries.

As for example, the rate of investment in countries like India and Pakistan
is lower than even 10 per cent but, on the other hand, the same rate is ranging
between 15 to 30 per cent in developed countries like U.S.A., Canada etc.

4) Heavy Population Pressure: The natural growth rate of population in these

countries is very high due to its prevailing high birth rate and falling death rate.
5) Agricultural Backwardness: Although being the most important sector,
agricultural sector in these countries remains totally underdeveloped. But what is
 more peculiar is that these countries are depending too much on this agricultural
sector.
6) Unemployment Problem: Excessive population pressure and lack of alternative
occupations have resulted in huge unemployment and underemployment
problem in these underdeveloped countries.
7) Unexploited Natural Resources: For maintaining a rapid pace of economic
growth in these underdeveloped countries, possession of different types of
natural resources in sufficient quantity and its utilisation are very important. But
under-developed countries are either suffering from scarcity of raw materials or
from un-exploited natural resources of its own.
8) Shortage of Technology and Skills: Underdeveloped countries are facing low level
of technology and acute shortage of skilled manpower’s. Poor technology and
lower skills are responsible for inefficient and insufficient production which leads
to poverty of masses. The pace of economic growth in these countries is very
slow due to application of poor technologies.
9) Lack of Infrastructural Development: In respect of transportation, communication,
generation and distribution of electricity, credit facilities, social overheads etc.
these countries are very much backward than most of the developed countries.
10) Lack of Industrialization: The pace of industrialization in these countries is very
slow due to lack of capital formation, paucity in the supply of machinery and
tools and also due to lack of initiative and enterprise on the part of people of
these countries.
11) Lack of Proper Markets: Markets in underdeveloped countries are suffering from
number of limitations viz. lack of market information, lack of diversification, lack of
proper relation or connection between markets, lack of adequate demand etc.
12) Mass Illiteracy: Educational institutions are few and far between. Due to illiteracy
the people in these countries are very much superstitious and conservative which
is again responsible for lack of initiative and enterprise on the part of people of
these countries.
13) Inefficient Administrative Set Up: Due the absence of efficient and sound
administrative set up, these countries are suffering from lack of proper economic
 organisation, lack of investments and lack of appropriate decisions leading to
total mismanagement of these economies.

The following are the names of some developing countries: China, Colombia,
India, Kenya, Pakistan, Sri Lanka, Thailand, Turkey, U.A.E.

Features of developed economies:

1) Dominance of industrial sector: Industrial and service sectors dominated the

economy. Agriculture remains a subsidiary occupation. The major part of national
income is obtained through industrial production.
2) Large scale production: Commodities are produced and manufactured on very
large scale, mechanization is adopted in the industrial production.
3) Better infrastructure facilities: They have advanced and developed social
infrastructure like roads, bridges, and dams etc. which not only ease the
production of goods and services, but also help in the rapid growth of markets.
4) Division of work: The work to be performed is divided and subdivided into small
pieces and individuals or group is required to perform only a part of the work.
The worker becomes specialised in his job by doing the same work again and
again. Division of labour and specialisation increase the quantity of work and
improves the quality of production.
5) High level of literacy: majority of the population have higher degrees of
education. Educational institutions are everywhere.
6) Supremacy of capital: Capital plays a dominant role in the economy. Capital
intensive industries are installed. Village, cottage and small scale industries are
neglected.
7) Profit motive: Human efforts are directed towards earning more and more
income.
8) The political, social, cultural and economic environment is stable and certain. This
is a major catalyst to growth and development.
Economies of America, U.K., Russia, France, Germany and Japan etc. are the examples of
developed economy.

Key Differences Between Developed and Developing Countries

Basis for Comparison Developed Countries Developing Countries

Meaning A country having an effective Developing Country is a

rate of industrialization and
individual income is known as
Developed Country.
Unemployment and Low
Poverty
Rates Infant mortality rate, death rate
and birth rate is low while the
life expectancy rate is high.
Living conditions Good
Generates more Industrial sector
revenue from
Growth High industrial growth
Standard of living High
Distribution of Income Equal
Factors of Production Effectively utilized
country which has a slow
rate of industrialization and
low per capita income.
High
High infant mortality rate,
death rate and birth rate,
along with low life
expectancy rate.
Moderate
Service sector
They rely on the developed
countries for their growth.
Low
Unequal
Ineffectively utilized
KINKED DEMAND CURVE

The kinked demand curve hypothesis is developed by Paul M Sweezy in1939.

Kinked demand curve hypothesis is used for explaining the price and output
determination under oligopoly with product differentiation.

Assumptions:
The kinked demand curve hypothesis of price rigidity is based on the following
assumptions:
(1) There are few firms in the oligopolistic industry.
(2) The product produced by one firm is a close substitute for the other firms.
(3) The product is of the same quality. There is slight product differentiation.
(4) There is an established or prevailing market price for the product at which all the
sellers are satisfied.
(6) Each seller’s attitude depends on the attitude of his rivals.
(7) Any attempt on the part of a seller to push up his sales by reducing the price of his
product will be counteracted by the other sellers who will follow his move.
(8) If he raises the price, others will not follow him. Rather they will stick to the prevailing
price and cater to the customers, leaving the price-raising seller.

On the basis of above assumption, demand curve facing an oligopolistic has a

kink at the prevailing price. The kink is formed at the prevailing price because above kink
the segment of the demand curve is more elastic and below it less elastic. A kinked
demand curve dD with a kink at point K is shown in figure below .The prevailing price is
OP and the firm is producing quantity OQ. The upper segment of this demand curve dk
is more elastic as any rise in price will bring a greater reduction in quantity sold and
lower segment KD is less elastic indicates that any reduction in price will bring a small
rise in quantity sold. The difference in elasticity is due to a particular competitive reaction
pattern assumed by kinked demand curve hypotheses.

An oligopolist believes that there is no possibility of increase in price or reduction

in price. Thus each oligopolist will adhere to the prevailing price as there is no gain in
increasing or decreasing the price. The kink is formed at prevailing price. Thus according
to kinked demand curve hypothesis the price is rigid or sticky at point K.