ABOUT UTILITY

UTILITY:
            By economist, the word utility means satisfaction.
The amount of satisfaction that we get from the consumption of a product or services , called UTILITY.
       In simple words,
Utility means usefulness, the product that gives us the positive impact in which we satisy, called UTILITY.

ULTILITY is measured in "UTILS".

For example - when a person is hungry and want to eat pizza and he goes to pizza hut and consumes pizza , where as his hungryness is over, which gives him satisfaction, this type of example is termed as UTILITY.

KINDS OF UTILITY:
                           1. MARGINAL UTILITY
                           2. TOTAL UTILITY
                           3. AVERAGE UTILITY

1.MARGINAL UTILITY - An extra or     additional unit of the product is consumed by customer till the last unit of consumption , called MARGINAL UTILITY.

For example - suppose, Rahul consuming bread and he takes 4 bread, By consuming 1 bread he derives utility up to 10 in 2 bread he derives utility up to 8 in 3 bread he derives utility upto 6 and in 4 bread he derives utility upto 4. In this example marginal utility is 4th bread and marginal utility derives is 4. If he consumes only 3 bread then marginal utility be 6 bread and utility derive will be 6.

2.TOTAL UTILITY - The utility which we get from all unit of consumption, called TOTAL UTILITY.

For example - Suppose, Rahul consumes 5 bread at a time. He derives from 1st bread 10 unit of satisfaction from 2nd is 8 in 3rd is 6 and in 4th is 4,  then total utility will be 28.

3.AVERAVE UTILITY - The utility in which the total unit of consumption of goods is divided by number of total units known as AVERAGE UTILITY.

For example - If 1 bread utility is 10, 2nd bread utility is 8, 3rd bread utility is 6, then
10+8+6 divided by 3 ,then the average  utility will be 8

Willingness to pay (consumer and producer)

CONSUMER SURPLUS: Consumer is the one who take decisions about what to buy for satisfaction of bonds consumer take decisions on the basis of this preference his income and the price of the commodity which are prevailing in the market.

 We can also denote the monetary gain obtained by the consumer because they are they are capable of consuming that product of which the price is less than that of the highest price.

Example: let's imagine you went to a store to buy some clothes that you wanted to buy from very long time, but you also know that this kind of cloth is usually expensive because of its brand. So you neglected it because of its cost after that you came to know that it's already on sale with the discount that means you are going to buy it by paying the willing amount .

PRODUCER SURPLUS:Producer is the one who produces and sell the product at that level of output at which his profit or maximum the amount which he gets in the form of profit or gain is known as surplus producer surplus is also producer welfare.
In the day today market the pricing of the product is set according to the demand that the consumer is going to consume. The manufacturers always try to produce the product for various sectors of people that is high low and Middle to meet the consumer demand according to which the supply.

EXAMPLE: we can take the example of iPhones as we all know that it's expensive but still most of the people purchase it and wait for the next model. And never the demand of iPhone Falls because the manufacturers always no knows about the consumer behaviour of the customer.

Relation between income of customer and inferior goods

 Income of consumer has a great impact on the demand of a product.  If income of a person will increase his demand will increase for the goods and that particular goods is called as superior goods ,which demand is directly proportional to income.
But there are some goods which demand  decreases according to increase in demand these types of goods are called as inferior goods.
it can also called as negative income elasticity of demand .

this theory depended on affordability, that means which can you afford at what income. if your income is high you can afford a BMW car but if your income is not high then you can wish only for a nano car so in high income demand of the nano car is decreased .

With change in income of the customer, taste and preference  also change.So there value also change

there self esteem change, so they shift there preference from cheaper goods to costlier goods  or valuable goods so that the demand of cheaper product decreases.

"Elasticity"- A degree of responsiveness

Meaning of Elasticity:

An Elasticity is a measure of the sensitivity of changes of one variable to another. 

It is the percentage change that occur on one variable in response with the changes in the other variable.

Types of Elasticities:

1. Price elasticity of demand
2. Income elasticity of demand

Methods of calculating the elasticity:

• Point elasticity: Calculated at a given point of time.

• Arc elasticity: Average elasticity over a given range of functions on a curve between the two points.

1. Price elasticity of demand:  It is the degree of responsiveness in the changes in demand to the changes in the price.

    There are five types of price elasticity of demand

• Perfectly elastic demand: There will be a greater change in the demand to the small change in price.(EP=∞)
  

• Perfectly inelastic demand: consumers don't respond to the changes in the price. This is the place where the demand remains almost the same.(Ep=0)
  

• Unitary elastic demand: It is the place where the changes in the demand and the price are the same (Ep=1)
  

• Relatively elastic demand: The change in the demand is less than the change in the price(Ep>1)
  

• Relatively inelastic demand: The change in the quantity demanded is more than the percentage change in the price i.e.., the rate of change of quantity demaded is more than the rate of change in price. This is the place where consumers general have a temdeten to shift so that it increases the demand of it.(EP<1)
  

2. Income elasticity of demand: It is the responsiveness of the quantity demanded for a good to a change in the income of the consumer. It is the genrgen concept where the consumer tries to spent money if there are changes in the income of the respective.

https://www.google.co.in/search?client=ms-android-xiaomi&biw=360&bih=315&tbm=isch&sa=1&ei=KctcW9nHEJKgvQTWqZSQCg&q=perfectly+elastic+demand+curve&oq=perfectly+elastic+demand+curve&gs_l=mobile-gws-wiz-img.3..0l3j0i7i30j0i5i30.3651.3799..4220...0.0...176.311.0j2......0....1.uVt-AFLQ_pc#imgdii=t_Y_frjTXfpsoM:&imgrc=8pgpseZ03RbhSM: 

The images are drawn fron the above site.

DETERMINANTS OF DEMAND ELASTICITY

DETERMINANTS OF DEMAND ELASTICITY:-

As we have discussed in the class there are many determinants of Demand Elasticity:-

Mostly we will discuss about four major determinants of Demand Elasticity

1. Price of own good
2. Price of substitutes / complimentary goods 
3. Income of consumers
4. Advertisements & other promotional measures

Price elasticity of demand (PED) = dQ/dP * P/Q

The formula says "If there is a change in percentage of price by 100% then, it will effect the percentage of  quantity demanded by some %."

Price of own good:-

If the price of the good increases then, the demand of the good decreases.

If the price of the good decreases then, the demand of the good increases.

Therefore the relation between price of the good and demand of the good are inversely proportional.

Eg:- As we discussed in the class if we look at the data projected 

+0.567- If the price raises by 100% then the quantity demanded also raises by 56.7% [+ve PED denotes price is directly proportional to quantity demanded] 

-0.567- If the price raises by 100% then the quantity demanded reduces by 56.7% [-ve PED denotes price is inversely proportional to quantity demanded] 

If the value of PED lies between 0 and -1 then, in all such cases the product is to be called as price inelastic. 

If the quantity demanded is more than proportionately change than the change in price it is inelastic.

If the value of PED is <-1 then, in all such cases the product is to be called as price elastic. 

Ex: High-end cars, Paintings, Jewellery, Costly House - these type of goods are called as veblen goods which are having positive elasticity. 

Price of Substitute and Compliments:-

Generally it is called as cross price elasticity of demand (CPED).

If the cross price elasticity of demand is +ve then it is related to Substitutes and if it is -ve then it is related to compliments.

Ex:- 

SUBSTITUTES

• If price of the tea increases then the quantity demand of the coffee is increased.
• If the price of ola is changed then, the quantity demand of uber is effected.
• Similarly in the case of pepsi and Cococola.

COMPLIMENTS

• If price of the petrol increases then the demand for usage of vehicles gets effected.
• If rates of electricity raises then the demand for bulbs and fans get effected.

In all the above cases the price of one good is effecting the quantity demand of the another good.

Income of consumer:-

It is denoted by Ied

If income of consumer raises by 100% then the factors like Food, Beverages, Housing, Clothing, Footwear, Transport, Medical & Health, Tobacco ...etc will get effected by some percentage.

Generally Ied will be positive only except in case of Inferior goods.

If Qd respond more proportionately than change in price then, it is called as Inelastic.[Ied lies between 0-1]

If Qd respond less proportionately than change in price then, it is called as Elastic.[Ied is >1]

Advertisements and other Promotional Measures:-

Generally the sales of a company is measure by number of footprints in the company.

The company measures the impact of advertisements basing on the foot prints.

They will calculate number of sales before advertisements and after advertisements. So that the impact of promotions can me quantified.

If there is 60 sales & 85 sales, before advertisements and after advertisements respectively then the impact of promotions is 25 extra sales.

ELASTICITIES OF DEMAND

        Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in it's price. It is computed as the percentage change in quantity demanded or supplied divided by the percentage change in price. Elasticity can be described as elastic, unit elastic, inelastic.

If quantity demanded is < proportional to the change in price, it is Price Inelastic. Range(0 to -1).
If quantity demanded is > proportional to the change in price, it is Price Elastic. Range (<-1)

        In addition to the price elasticity of demand, economists use other elasticities to describe the behaviour of buyers in a market.
- The income elasticity of demand
- The cross-price elasticity of demand

The income elasticity of demand measures how the quantity demanded changes as consumer income changes.
If quantity demanded is < proportional to the change in the income,it is Income Inelastic.
If quantity demanded is > proportional to change in income, it is Income Elastic.

The cross-price elasticity of demand (CPED)  measures how the quantity demanded of one good response to a change in the price of another good.
If CPED= negative,both goods are compliments.
If CPED= positive,both goods are substitutes.

Factors of flexibility

   DETERMINANTS OF ELASTICITY 

                 Elasticity means ability to adapt the change. Elasticity is also called as flexibility. Determinants means element that helps to take a decision. 

     DETERMINANTS OF ELASTICITY OF DEMAND:- 

         1) PRICE OF OWN GOOD:   If the price of good decreases then the demand will be more. If the price of good increases demand will be less. 

    

        2) PRICE OF SUBSTITUTES:  If price of a good increases then the demand for a substitute good increases and vice versa.  Example if the price of a coffee increases then the demand demand for tea increases. 

      3) INCOME OF CONSUMERS:  Demand also depends upon the income of buyers/consumers. 

      4) TASTES  :  Tastes and preferences also matters for a demand of a good. 

      5) ADVERTISING OTHER PROMOTIONAL MEASURES:  If the good is advertised or promoted in a great way then the demand for the good may increase. 

    DETERMINANTS OF ELASTICITY OF SUPPLY:-

      1) FLEXIBILITY OF INPUTS:  Ability of change in the goods they produce 

 

      2) MOBILITY OF INPUTS:  Ability to move inputs from one use to another. 

      3) TIME:  Time is the most main factor of elasticity of supply. Elasticity of supply defers long run  to short run. 

      4) SUBSTITUTE INPUTS:  Ability to produce substitute inputs. 

DEMAND ELASTICITIES

DEMAND  ELASTICITIES

Other than price elasticity of demand there are other elasticity's to describe the behavior of buyers in a market. They are:

1) Income elasticity of demand

2) Cross-price elasticity of demand

1) INCOME ELASTICITY OF DEMAND   

    Income elasticity of demand is defined as the percentage change in quantity demanded divided by percentage change in income. The income elasticity of demand measures how the quantity demanded changes as consumer income changes.

Income elasticity of demand = percentage change in quantity demanded/percentage change in income

2) CROSS-PRICE ELASTICITY OF DEMAND

     Cross-price elasticity of demand is defined as percentage change in quantity demanded of good  1 divided by percentage change in the price of good 2.The cost-price elasticity of demand measures how the quantity demanded of 1 good responds to a change in the price of another good.

Cross-price elasticity of demand= percentage change in quantity demanded of good 1/percentage change in the price of good 2.

PRICING DECISIONS

PRICE : Price plays an important role in the economy as it generates revenue to orgainzation . It is the value paid for a product or service in the market . It is one of the key element that can be quickly change to react market changes. So that decisions about price must be considered in the context of overall business objectives.

There are two kinds of decisions made on pricing :
1. Consumer surplus
2. Producer surplus

Consumer surplus: It is an economic measure of consumer benefit. It is measured by analyzing the difference between what consumers are willing and able to pay for good/service relative to its market price .
CONSUMER SURPLUS = WILLIGNESS TO PAY - ACTUAL PRICE

 Example : Actual price of product is Rs.30 and he is willing to pay Rs.50. Here the consumer benefit is Rs.20 .

Producer surplus: It is a measure of producer welfare. It is measured as the differrnce between producers are willing and able to supply a good/service and the price they actually receive.
PRODUCER SURPLUS = WILLINGNESS TO PAY - AMOUNT A BUYER ACTUALLY PAYS

Example : Willigness to sell for a good is Rs.10; he is able to sell the good for Rs.15. Here the producer surplus is Rs.5 .

INCOME ELASTICITY DEMAND

The price of a product and its substitutes of consumer’s income in the bases of demand for the product the relation ship between quantity demanded and income of positive nature and income elasticity .The demand of goods and services increases with the increases of the costomer income .the respectiveness  of demand to the change income is know as income elastic demand.    
        If the consumer income is increases the demand is also increases.                                                  
         if the consumer income decreases  the demand is also decreases.                    
 The reason is that when income increases consumer switch over the consumption of superior subsititutes for instance when income rises people prefer to travel mor by plane and less in train

Willingness of seller and consumer about the product

Consumer surplus:
The amount that a consumer is paying according to the willingness which minus the original amount paid by the consumer.
Example: in a clothing shop each and every consumer will pay according to the willingness about that particular product,so product price will minus according to consumer.

Producer surplus:
The amount that a producer is selling according to the willingness which minus the original amount sold by the producer.
Example: in a clothing shop every seller will sell according to the willingness about a particular product to the customer by seller.

PRICE ELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND:

                     Price elasticity of demand is defined as the percentage change in the quantity demanded divided by the percentage change in the price.

 Price elasticity of demand (ped) = Percentage change in the quantity demanded / Percentage change in price.

Example: Suppose if there is 20 percent increase in price of cold drinks then the demand for the cold drinks will fall by 40 percent. Then elasticity of demand is

Price elasticity of demand = 40 percent /20 percent=2

Then the elasticity for this example is 2.

If the price elasticity of demand for a product is <-1 then it is price elastic.

If the price elasticity of demand for a product is 0 to -1 then it is price inelastic.

• ·         The price elasticity of demand for fish in India is -0.484. it means, if price of fish in India is increased by 100% then their demand falls to -0.484%.  

CPED - Cross Price Elastic Demand

The Cross Price Elastic Demand measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2. Whether the cross price elastic demand is a Positive or negative number depends on whether the two goods are substitutes or complements.

Basically there are two cross price elastic demand:-

1) Positive CPED - The Graph shows Positive CPED when the goods are substitute of each other then Cross price elastic demand is positive. For an example an increase in hot dog prices induces people to grill hamburgers instead because the price of hot dogs and the quantity of hamburgers demanded move in the same direction. Or an increase in price of tea, demand of coffee will increase.

2) Negative CPED - Cross elastic price quantity is negative in case of complementary goods. A proportionate increase in the price of one commodity leads to fall in the demand of anothers commodity because both are demanded jointly. For an example increase in the price of computers reduces the quantity of software demanded.

A gist on Supply and Demand's market force.

• Each of the buyers and sellers in a competitive market is little or not influenced on the market price.
• To analyze competitive markets, economists use the model of demand and supply.
• Determinants of demand include buyer's taste, income, expectation, price of substitute and complement.
• Supply totally depends on input prices, technology and expectations.
• In a demand and supply graph if both the curves intersect, it represents the market equilibrium.
• At the point of equilibrium, quantity demanded equals quantity supplied. 
• When the market price is above equilibrium, price falls.
• When the market price is below equilibrium, price rises.
• Three things how we need to analyze the supply demand diagram during an event on a market:

1.  See whether due to the event, which of the curve is shifted.
2. See the direction of the shift
3. Compare the new equilibrium to the initial one. 

INCOME EFFECTS ON ECONOMY

First question for all of you. If one person lost his job or decrease his salary then what would happen to his demand for ice cream in one summer?
       If your salary would decrease or your source of income would decrease then you have less to spend in total, you would have decrease your expensive demand.

       When your income decrease or falls and at that Same time demand for a goods or cost of goods falls then it is called a NORMAL GOOD.
       Every goods are not normal goods. If the income decrease but cost of goods or demand of goods increase then it's called inferior good.
    We can take the example of if someone's income decrease then that person would prefer bus for traveling instead of car and bike.

CONSUMER SURPLUS AND PRODUCER SURPLUS

Consumer Surplus

Consumer surplus defined as the difference between the price consumer willing to pay and the consumer actually pays.

Producer Surplus

Producer surplus defined as the difference between the price producer is willing to sell and the price he actually sells.

Ex-

Ram wants to buy a pair of shoes which is in the range between 800 to 1200 rupees. But the cost of the shoe is 1899 rupees. So Ram starts bargaining starting from 700 rupees. And at last convince the shop keeper with 1100 rupees. Here the manufacturer cost of the shoe is 700 and the wants to sell it above 700 for his profit.
So here
1200 - 1100 = 100 is the consumer surplus and
1100 - 700 = 400 is the producer surplus.

From the above example it shows that consumer surplus measures the benefits of a buyer after buying the product. And the producer surplus measures the benefit seller receives after selling the product.

CONSUMER SURPLUS AND PRODUCER SURPLUS

Consumer Surplus:

It is difference between the prices at which he bought the product and he is willing to pay.

Example:

For example you are interested to buy a house in bangalore for Rs.50 lakhs and searched some websites and visited some constructed houses and finally bought a house for Rs. 48 lakhs .

The difference amount Rs.2 lakhs is called consumer surplus

Producer Surplus:

It is difference between the prices at which the producer sol the product and he is willing to sell the producer

Example:

For example you are producer of the laptop and you want to sell the laptop for Rs.35000 and keep that in the market. But you sold the laptop for Rs.40000. The difference between the two prices is Rs.5000 this amount is called the producer surplus 

Basic Of Elasticity

AElasticity means the effect on the demand or supply when the price of good change called elasticity

ELASTICITY:-
Elasticity varies from product to product. If the elasticity of good high it means the change in price effect sharp change in the quantity demanded or supplied.

INELASTIC:-
INELASTIC means the change in prices of good will not effect quantity demanded or supplied.

To determine the elasticity of the supply

   Elasticity=(%change in quality/%change        in price)

If the elasticity is greater than or equal to 1 the curve is considered to be elastic.

If it is less than one the curve is said to elastic.

The graph will be flatter or more horizontal it small change in price effect large change in production of the goods

In inelastic large change in price will not effect that much on price.

Understanding Consumer Surplus

Consumer Surplus

The Price which a consumer pays for a commodity is always less than he is willing to pay for it, so that the satisfaction which he gets from its purchase is more than the price paid for it.

Consumer’s surplus can be defines as the difference between what a consumer is willing to pay for a commodity and what he actually does pay for it.

Consumers always like to feel like they are getting a good deal on the goods and services they buy. 

For Example, assume a consumer goes out for shopping for a DVD player and he or she is willing to spend Rs 2500. When this individual finds that the DVD players is on sale for Rs 1500, So we can say that this person has a consumer surplus of Rs 1000

Markets in the Hands of Mechanism of The Price

The Interdependence of Market

Goods Market:

Demand of good increases if shortage is there then price of that increases therefore supply of good increases and the demand falls until Dg =Sg 

Example: 

when diwali festival comes then  the day before  festivals prices of the items will be increasing. Normally demand for flowers , pooja materials , clothes are increasing .when supply is not covering the demand then price will be increased. By seeing the price more and more will come to supply.

some people will decide not to celebrate diwali and slowly it scaledown and it continues until Dg=Sg

this is know as Equilibrium

Factor Market:

Supply of the good increases and demand of the factor increases if shortage is there the price of factor increases therefore supply of factor increases and demand of the factor decreases until Df=Sf

Example:

Manufacturing company is in equilibrium then the people in it are more happy they don't want to leave the industry as the people outside the industry don't want to go inside 

  

  

Relation between Complementary goods

The basic definition says that the good which experiences a surge in demand when the price of another good plunge are called complements or complementary goods.

To elaborate on the phenomenon, let us take the example of printers and ink cartridges. If the price of printers falls, people tend to buy more printers, resulting in an increase in demand for ink cartridges as well. The reverse is also true. If there is a hike in the price of printers it will result in a decrease in demand for ink cartridges.

Computers/Laptops and software programs can be considered a classic example of complementary goods. When a new computer is bought we end up buying some software programs, specifically antivirus software programs. The laptop models with DOS version is usually bought with an OS program as a complementary good.

How price mechanism works in stock market

Stock market is the backbone of Indian economy and there are two major or main stock market .
They are NSE and BSE due to various reason the demand of the share of the company some times decreases and some time increases .
and when demand of share increases price of share increases and when demand of share decreases the price also increases. => demand is directly proportional to price.

But according to law of demand "when price increases demand decreases and when price decreases demand increases" . that means there are a inverse relation between price and demand which is fully different from 1st case. So to understand how it happens in stock market we have to know about price mechanism .
 Price mechanism is a tool of setting the price of a goods with respect to demand of that particular product and the supply of the product .

When demand of a particular product increases then supplier become unable to satisfy all
 customer due to shortage of the goods and when he realizes that there is a shortage of goods gradually he increases the price with respect to increase of demand, and at last price of that product reaches to a certain limit when consumer think that its very costly he should have to decrease his demand and then again law of demand works.

in above picture D= demand  ,G=goods

          P= PRICE     ,S=supply 

So this same things happen in stock market. when price of a particular share in a stock market is less than in another market then investors buy the share from lower one and sell it in another market on higher price . so that demand of the low price market  increases so gradually the price is also increases till the price of the share become same in both market.

EXAMPLE : lets price of a share is  rs 100  in BSE  and 105 in NSE so all investor will start buying that share from BSE  to sell in NSE for making profit of  5 rupees. but due to the high demand of BSE the price of Share in BSE will also increase. And due to excess supply in NSE the price of the NSE will decrease till the price of BSE=NSE .

consumer Buying Behavior

Consumer buying behavior with respect to elasticity of income: 

Elasticity of income is the percent change in quantity demand with percent change in income of the customer and it has a major role to know the buying behavior of customer. 

Generally if the income of a person increases then the purchasing power of the customer also increases. 

Impact: this situation is not similar in all the cases.

Example: in increase of income , demand of general commodities will also increase. 

In case of decrease of income the quantity demand of general commodities will also decrease. 

Example: daily use commodities.

If price of some product increases but it doesn’t affect the quantity of that particular product.

Example: medicine.

But it has also negative impact. 

If income of customer will increase then there are few products which demand will decrease.

Reason:

After increase in the income, life style of people also change and they tend to buy comparatively costlier product and high value product. So demand of certain product decreases.

Example: when income is less , people will prefer chicken.  When income increases, people will go for mutton in place of chicken even if the price of chicken decreases. 

Price Mechanism

Price Mechanism

                Price Mechanism defined as price of goods and services acts according to demand and supply.Actually it describe the price of commodity by the buyers and sellers.In this price plays an important role towards functioning of consumers,producers.If the demand increases then simultaneously price also increases towards change in the supply curve.Based on market price ,resources and distribution takes place.

     Three main functions of price mechanism:-

                  1.Rationing function
                  2. signalling function
                  3.Incentive function

                          For example if the price of the petrol goes up then the companies start to producing electrical cars and bio fuel cars.This can be determined using the different factors like what to produce,determination of income distribution.Price mechanism is the new track from producers and consumers and consumers to producers and the any achievement for the factor services  can determine by this price mechanism.
   
                            price mechanism uses in the 1.Mixed economy
                                                                          2.Controlled economy
                                                                          3.To determine income distribution.

Cross price elasticity of demand

Cross price elasticity of demand

Defination:The measure of responsiveness of the demand for a good towards the change in price of related good is called cross price elasticity of demand(Cped)

Cross price elasticity is measured in percentage terms.It is related on consumption behaviour
There are two kinds of related goods like

1. Complementary 
2. Substitutes

If the goods are not related their cofficient is ZERO

        CPED is generally calculated on %change in quantity by %change in price

• The cross price elasticity of demand is negative for complementary goods

Eg:when the price of coffee increases the quantity demand for tea decreases 

• The cross price elasticity of demand is positive for substitute goods

Eg:when price of coffee increases the quantity demand for tea also increases 

Economic Surplus-Pricing Game

Definition: Economic surplus is also known as total welfare or total surplus, it is a combination of consumer surplus and producer surplus in an economy, refers to two related quantities.

Consumer surplus: Consumer surplus is the difference between the consumer pays actually and what he would have been willing to pay .

Producer surplus: Producer surplus is the difference between the price a firm receives and the price it would be willing to sell it at .

For example :Mr.X wants to buy a activa scooty, but he is not willing to pay more than ₹85,000.He visits a activa showroom, while browsing around he sees a scooty which he thinks is ideal for his needs. Mr.X asks the salesperson the features about the scooty and he finds out that this would be best. The final price is ₹75,000 and Mr.X can have 5 years guarantee, good mileage . So Mr.X buys the scooty for ₹75000 although he was willing to pay maximum price of ₹85,000, Mr.X has consumer surplus of ₹10,000.
   
From the firm's perspective,the minimum selling price for the scooty was ₹60,000, eventually the firm sold the scooty for ₹75000.The firm has a producer surplus of ₹15,000.

The Economic surplus of this transaction is ₹10,000 + ₹15,000= ₹25,000.
    

Why the Price of Air Conditioners is high in summer ?

Example on Price Mechanism:

In Summer everyone wants to buy A/C 's in order to protect themselves from the hot sun in the summer but during the summer the prices of A/C's will rise very high, we wonder why there is rise in price, the actual reason behind this during summer the demand of A/C's will be very high so there will be a shortage in the number of A/C's to meet the demand.So,the seller will increase the price of the AC's in order to decrease the demand so the demand will decrease gradually and the supply of A/C's will gradually increase and at some point  both Demand and Supply of A/C's will be equal where market of A/C's will be at equilibrium.

And the Factors of production also effects the price of the product, In view of the same example above In summer the demand of A/C's will be high, to meet the demand the producer tries to increase the demand in order to meet the demand, so the need of raw materials, workers and technicians will also increase which results in increase in their demand and by this there will be shortage of the factors which increase the price of the factors which leads to increase in price of the A/C's

Pricing strategies for benefits when consumer and producers are in surplus

                People have volatile personality. They grab the opportunity when it comes to them. They tend to change from time to time based on their needs,demands and income levels. They choose goods or services which blow up their convenience within there income levels. And according  to surplus in consumers and producers we've curves which represents on demand and supply.

Consumer surplus : 

                  It is the difference in the price consumer is willing to pay for a product or service and he actually ends up in paying for a product. Here the consumer prepares to pay some amount but due to less number of producers demand of customer increases and he pays less than what he expected to or vice versa. By this consumers gets benefited as the producers are less and consumers are more.  

                  For example lets say you go for shopping and you find some really pretty branded dress. Based on the brand we already know that it is very expensive, as it is very good you ant to buy even though it is expensive i.e., willingness to pay the price. And suddenly you see that there is a discount of 50% on the dress. 

Producer Surplus : 

                   It is the difference between the price which is producer or supplier is willing to sell and the price the product is actually sold at. Here the producers are more and consumers are less and because of this producers get benefited than the customers.

                   For example lets say air plane fares are more during weekends but higher during holidays and festival seasons.

                    

Demand Curve: Downward Sloping

Demand curve is a downward-sloping curve, which shows the relationship between the price and the quantity demanded of a commodity. It is downward sloping because when the price of a commodity is high quantity demanded is low and vice versa. Fir example: If the money income is fixed, when the price of a commodity falls the real income of the consumer increases and their demand to buy commodities increases i.e. (If the price of butter decreases the demand for it increases and vice versa) which shows an inverse relationship between price and quantity demanded of a commodity which leads to a negatively sloping demand curve.

Elasticity of Demand

What is elasticity of Demand?

Demand elasticity means how a demand for something relies on other economic variables like price of a product and what the income of a consumer is. Demand elasticity is calculated as the percent change in the quantity demanded divided by percent change in other economic variable.

Types of Demand Elasticities

One common type of demand elasticity is the price elasticity of demand; it shows how the change in the quantity demanded for a good is related to change in its price. Companies collect data on change in price and how consumers respond to such changes. They then adjust their prices accordingly to maximise profit.

Another type of Demand Elasticity is cross elasticity of demand it shows how a quantity demanded of one good reacts when the price of another good changes.

If demand elasticity is greater than 1 then it is sensitive to economic change (like price). If demand elasticity is less than 1 then it is not sensitive to economic change and if the demand elasticity is equal to 1 then that means its demand will change proportionally to economic change.

Example

Suppose a company calculated that a demand for that companies chips increased from 500 to 550 because they decreased their price from 25Rs to 20Rs.

The price elasticity of demand is calculated as the percentage change in quantity demanded (550-500/500=10%) divided by percentage change in price (25-20/25=20%) so, the price elasticity of demand for this example is 0.5. Since the result is less than 1, it is inelastic i.e. the change in price has little effect on the quantity demanded.

Referred from (https://www.investopedia.com/terms/d/demand-elasticity.asp

And principles of microeconomics by N.Gregory Mankiw)

HOW PEOPLE SPEND THEIR INCOME ON BASIC NEEDS

           All the needs of the human being directly or indirectly depend upon income. we use that type of thing that we can manage with our income. So what is income, it is defined as money earned by people or government or company etc. over a time by doing some work or received from investment.

   People spend their income on buying food, clothes and many things that they need but what happen when there is a change in income, how it affects the People's behaviour, how they make changes in their buying behaviour.

  To measure the changes in people's consuming behaviour we use parameter call income effect, it is defined as the change in the demand of goods and services with respect to the change in income of the people.

There are Three Types of  income effect

 -Positive income effect

-zero income effect

- negative income effect

  When people income increases the demand for normal goods also increases and this is called the positive income effect.

ex- luxury and comfort goods when people income more they buy more expensive and more comfortable goods which leads to the increase the demand of the goods.

   The zero income effect is in case of neutral goods where consumer quantity demanded is fixed .like drug, we buy it irrespective of our income.

 When there is an increase in the people's income, the demand for cheaper things decreases and they shift to the costlier things and it is called negative income effect and that type of good is called inferior good. 

                     

INFERIOR GOODS

Inferior Goods:

             when the income of the consumer increases/raises with the fall in the prices of the commodities then the consumer buys lesser inferior goods and moves towards superior goods, as now he can afford that.The price effect the income and substitute goods together.As substitution arises always whether it is inferior (or) superior.

   Demand of inferior goods is inversely related to the income of the consumer.

Ex:

  When your income is low then the consumer prefers bus or train to go to long destinations.But when the income increases he used to plan to go through flight as he can afford it.

   

  Consumer used to drink a coffee in Starbucks every time but when the income decreases then the consumer prefers to go the small coffee shops as now he cannot afford it. 

Ultimately it all Depends on me! - Price

Change in price of one product will change the demand of other products.

Change in price of one product will change the demand of other products Yes I am talking about cross price elasticity of demand. First let us know what is elasticity. Elasticity? An elasticity is a measure of the sensitivity of one variable to another. Percent change that will occur in one variable in response to a percent change in another variable. PRICE ELASTICITY OF DEMAND (PED) The variation in demand in response to a variation in price is called the price elasticity of demand PED % CHANGE IN DEMAND TO % CHANGE IN PRICE OF A PARTICULAR COMMODITY PED=(DQ/DP)(Q/P) CROSS PRICE ELASTICITY OF DEMAND(CPED):- It is measured as the % change in quantity demand for the first good that occurs in response to %change in price of second good. If CPED is negative we call them as complimetaries. If CPED is positive we call them as substitutes. For example: Coffee and tea are substitute goods, i.e. they are used in the place of each other. An increase or a decrease in the price of coffee will lead to an increase or a decrease in the demand for tea respectively.

CONSUMER SURPLUS AND PRODUCER SURPLUS

CONSUMER SURPLUS
      Consumer surplus means the difference of conusmer willing to pay and actually he pays 
  For example:- A person went to garments shop     and want to buy a shirt which is rs 800 but he want to pay rs 600 only so he asked it for rs 400.Then seller says take it for rs 500 then he took the shirt for rs 500.
  From the above example we can observe that customer willing  to pay rs 600 but he pays rs 500 the balance rs 100 is called conusmer surplus
PRODUCER SURPLUS
  Producer surplus means the difference of producer willing to sell and actually sold
  For example:- A person came to store and asked a shirt then producer willing to sell it for rs 1000 so he said it is rs 1200 and customer paid it without bargaining.
  From the above example we can observe that producer willing to sell the shirt for rs1000 but he actually get rs1200 it means the balance rs200 is producer surplus

  

UNDERSTANDING POSITIVE PRICE ELASTICITY

VEBLEN GOODS:-

Veblen goods is named after American economist "Thorstein Veblen".Veblen good is a good where demand increases as price increases because people feel its higher price reflects greater status. Veblen goods are considered exceptions to the law of demand, which states that the demand for a good must decrease as its price increases and vice versa.

Luxury goods like diamonds is an example of veblen goods.

Veblen good is different. Veblen good is a luxury product that is socially recognized as being exclusive and expensive. In addition to any other any other more tangible benefits(the good itself may be of high quality)possession or consumption of these goods serves as a public display of wealth. Such goods experience greater demand as their price goes up.

Veblen goods are very different, utility of consuming a veblen good is somehow conditional on how many people own the good. If everybody wears Armani suits then they loose their value status.Veblen goods are desired because few people have them.They happen to be expensive because they are very scarce.It's not that demand for veblen goods is upward sloping for each person, is that utility is conditional on consumption of others so aggregation may result in upward sloping demand.

How to determine Equilibrium price

                                   EQUILIBRIUM PRICE

                  If we plot the supply graph and demand graph for an product on same graph we get equilibrium price,through this graph we determine quantity demand equal to quantity supply.

Demand curve

Supply curve

Equilibrium price

example:

Lets take the example of apple farmer,he want to know the equilibrium price of apples.

PRICE	QUANTITY DEMANDED	QUANTITY SUPPLIED
500	200	1000
400	400	800
300	600	600
200	800	400
100	1000	200

from above table the quantity demanded equals to quantity supplied at price of 300.so, 300 is the equilibrium price.

Equilibrium price

REVENUE PRICING AND ELASTICITY

If good is elastic, reduce the price to increase revenues

Eg: consider any small restaurant where the prices of individual item of food is low, so low prices indicates the more number of customers. Here price decreases and the quantity demand increases. Hence if prices are reduced volumes are increased. Hence revenue increases

If good is inelastic, increase price to increase revenues.

Eg: consider any 5 star hotel, here the prices are high the quantity demanded is low. Here per unit contribution of customer is important.

-> At some point  of time goods turns elastic to inelastic. Additional customers give no more volume

PRICE MECHANISM :

GOODS MARKET :

When demand of the good increases, if  demand is greater than supply of goods then the shortage occurs. So the price of the goods increases, due to this supply of goods increases and demand decreases until demand and supply of goods becomes equal

Eg : for instance take any festival season, so the demand of goods (clothes, sweets etc) increases. If quantity supply is not increased, even if quantity demand is increased then there is a shortage. So the price of goods goes up. At higher prices customers tend to scale down the celebration. So hence demand and supply becomes equal

THE DEMAND AND SUPPLY

                                            DEMAND

DEFINITION:

To analze the market using a model of supply and demand.we are first seen that which product demand in public.Demand can be defined that good for whose fulfilment a person has enough purchasing power and prepared to pay for the good.In simple words demand is a needs to public.

THE DEMAND SCHEDULE EXAMPLE FOR PANTS:

Price in Rs                                             Pants in thousand

    800                                                               8

    550                                                             15

    450                                                             25

    300                                                             40

    250                                                             55

    100                                                             70

There is a data given in the table shows,the demand for pants increases as its price decrease.when time  price 800 per pants that's time  8 thousand pants are demand,when time price is decrease to 300,demand for pants increases to 40 thousand and when time price further to Rs 100,demand rises to 70 thousand.this is example of demand schedule.(REFERENCED FROM D.N.DWIVEDI's BOOK)

                                           SUPPLY

DEFINITION:

The total amount of productavailable for purchase specified price.Market supply ,like market demand ,is the some of supplies of a commodity made by all individual firms.

Eight Factors Responsible for Variation in Demand!

Demand: Affordability and willingness of a customer to buy a product or service at a given price are called demand in economics.

Price: Price of a product is inversely proportional to the demand, as the price rises automatically demand the product decreases and price decreases automatically demand of the product increases.

Expectations of price hike: If there is any possibility of a price hike in the future, then present demand increases automatically.

Income: If the income of consumer increases demand also increase as people can consume the number of products or services they want.

Taste, habit and fashion: Consumer's taste, habit and fashion are the key parameters of demand for any goods.

Climate: Climate plays a vital role in demand for certain goods in specific areas.

Complementary goods: Demand of a commodity can be impacted by complimentary goods.

Advertisement: It always attracts people to buy any goods.

Government taxes: Taxes plays a vital role in price, and the price is the key factor of demand for any product.

Bargaining by Consumer and Benefit get by Producer

Consumer surplus

The amount of the product the buyer give the maximum amount that buyer will pay for the product that has been deducted in the amount buyer actually pays for it at the time.
example:-
           if a person buys some vegetable;
                          potato-rs.15
                          carrot-rs.15
                          tomato-rs.20
                          brinjal-rs.50         
the total of all vegetable price was rs.100 and we are asking to deduct and give at rs.85 and we are getting consumer benefit of rs.15.

Producer surplus

The seller has been given some cost to the product and actually, he sold at some price to the buyer the surplus amount will get benefit by the seller is known as producer surplus.

example:-
         If we sell a shirt the M.R.P of that shirt was rs.1500 and shopkeeper he has to buy at rs.1200 and sell to the buyer at rs.1450. The seller will get the benefit of rs.250 

MARKET EQUILIBRIUM & MARKET CLEARING PRICE

Market equilibrium is defined as a price at which both of the parties producers and consumers are agreed to exchange when both producer and consumer interact with each other in the market.And as a result both of them tries to react differently. The consumers wants more things at lower prices .But producer look forward to supplying more at higher prices.

Ex:- imagine you are a consumer .you went to a vegetable market and wanted to buy tomato.That's wht you Bargen with the shopkeeper to give you at low price but he denied by saying i will only sold it with this price .Here the price by the producer must be higher than the asked price.

Market clearing price:-
This is the price at which both consumers and producers are agreed to exchange is called market clearing price or market equilibriums and this is the point at which producer are agreed to supply the  exact amount of quantity what consumer demands  as per his requirement.

IS CONSUMER SURPLUS MEASURES THE BENEFIT OF BUYERS

Consumer surplus is the difference between the price which consumer willing to pay and actually pays for a good

Example:

There are three consumers gopal,amith and Vijay. They wanted to buy a secondhand car. They went for an auction and their individual budget as followes.

Gopal-Rs.150000/-

Amith-Rs.160000/-

Vijay-Rs. 175000/-

These are the amount which they are willing to pay. The auction started from Rs80000/- when it crossed Rs.165000/-gopal and amith have dropped out of auction.Because they are unwilling to pay that amount. At this point Vijay has opted the car .Rs.100000/- is benfit for amith while participating in auction. Because he is willing to pay Rs.175000/- but he actually pays Rs.165000/-

From this examples we can say that consumer surplus measures the benefits of buyers while participating in market. 

How Demand and Income are related to price mechanism?

Price mechanism in economics is the technique or the process in which the prices of goods or services totally affect the supply and demands of goods and also services.In this technique price plays an important or key role between the consumers,producers and resource providers.

Under this mechanism if the demand of the good increases then price of the goods also increases and thereby a shortage of goods starts.So this is the signal to suppliers to provide more goods or expand production to meet the higher demand.Perhaps for some good when the price increases,the demand gradually decreases.And thats the reason why price mechanism affects every economic situation in the long term.

                                                        

Changes in consumers income is the cause for a shift in demands.As income rise consumers will be able to pay more,while a fall in incomes will cause demand to fall.But it depends on the type of product concerned.

How demand affects different types of Goods?
•Normal goods-If the demand for a product tends to rise as income rise,the product is called as             normal goods
Example: LCD,expensive cars,branded clothes diamonds etc demand increases when the income of the consumer increase.

•Inferior goods-If demand tends to fall as income rise,the product is said to be an inferior good.In other words it is also called as Negative income elasticity.
Example:A CCD’s coffee can be an inferior goods compared to Starbucks coffee.When a consumers income drops,he opt for CCD’s coffee on the other hand when the income increases he may be able to  afford for Starbucks which is more expensive.

•Substitute goods-It refers to one good that can be used instead of another i.e two goods for which an increase in the price of one leads to an increase in the demand of the other.
Example-Tea and Coffee,if the price of coffee increases the consumers demand will shift to tea and the demand of tea will increase even without the price of tea being changed.

                       

VERSATILE RELATIONSHIP BETWEEN DEMAND OF SUBSTITUTE GOODS

When there is a fall in price of a particular good and because of which demand of another good is reduced is known as Substitute goods. As the name suggests substitute goods are the goods which substitute the previous goods. For example, fall in E-Rickshaw price will attract more E-Rickshaw driver which will automatically reduce the demand of Rickshaw. Just like introduction of Rickshaw nearly reduced the demand of hand pulled Rickshaw to endangering its survivability. Let's take another example, during any festive season when the high end products cost reduces the demand of mid range products gets lower like lower in price of Woodland shoes will attract more customers which will automatically reduce the demand of mid range shoes.

What is equilibirum in economics

In economics, economics equilibrium is a situation in which supply and demand are balanced and the market price is also relevant towards buyers.

For Example -

Suppose a XYZ company is willing to sell their laptops at ₹ 30000. But buyers are not willing to buy at that price in the market. So company will bring down the price to ₹ 25000 at which laptops will get sold.

What happens when consumer gets more than what he is willing to buy

Suppose,
Mr. Kharidar is buyer who wants to buy a smartphone within rs.8000,he decides he will pay maximum rs.8000 for the smartphone.
He went to a shop and asked for a phone, the shopkeeper showed some phones in that range.He selected one of the phone and started bargaining, he said he will pay rs. 6,500 ,at the end shopkeeper agreed to sell that phone in rs.7,200.
Mr. Kharidar got that phone within the amount he decided to pay. So, that difference of rs.800 is nothing but consumer surplus.
So "the difference between the price consumer is willing to pay and consumer actually pays. "is called consumer surplus.

Understanding the Price Elasticity of Supply

It is understandable from the law of supply that- if price goes up, the supply will also increase. But the law of supply cannot determine how much the supply will rise with respect to the increase in the price. For this we need the concept of the elasticity of supply in order to measure the extent of the quantity supplied in response to the price change. In simpler words, price elasticity of supply is defined as the percentage change in quantity supplied by the percentage change in the price.
The price elasticity of supply can be formulated as:
Es = %change in quantity of supply/%change in the price of the article, where Es is the price elasticity of supply.
If Q be the quantity of supply of the article and P be price of the same, then price elasticity of supply (pes) may be expressed as:
Es = dQ/Q ÷ dP/P
     = (dQ/dP)×(P/Q)
where dQ and dP are the percentage change in the quantity of supply and the percentage change in price of the article respectively.

ELASTICITY AND INELASTICITY OF DEMAND

PRICE ELASTICITY OF DEMAND

It is a percent change in quantity demanded by percent change in price of a good.

We can determine whether good is elastic or inelastic by formula.

Price Elasticity of Demand=(% Change in quantity demanded )/(%change in price)

If Ped>1 Good Is Elastic
If Ped=1 Unit Elastic
If Ped<1 Good is Inelastic

For example
Inelastic
If you increase the price of rice by 10% then quantity demand  may decrease by 2% or 3%.If we calculate this

Price Elasticity Of Deamand=(2%/10%)
                                                   =0.2
Here 0.2 is less then 1 it means goods is inelastic.It means if we increase the price of rice there will be very little effect on quantity demanded.Because it is a necessity.Price change is not going to effect too much on quantity demanded.
Petrol is also an example of inelasticity.

Elastic
If you increase the price of speakers by 10% then quantity demand may decrease by  20% to 30%.If we calculate this

Price Elasticity Of Demand=(30%/10%)=3

Here 3 is greater then 1 it means good is elastic.It means if we increase the price of speaker there will be decrease in quantity demanded.Because it is not a primary  necessity of once.Hike in price effects quantity demand.

How people respond to incentives

We as people have a tendency to respond to incentives. Incentivee gives rise to actions which could be either positive or negative. This is why these incentives play a major role in the study of economics.
For example : Let us assume you are a manager leading a project and you notice that employees under you are not working upto the level, even after consistent verbal warnings the work level did not increase, and then you decide to introduce a cash award and certificate for the employees who work the best and achieve targets on time and you will notice that everyone would start competing to work better. This is how people respond to incentives. Incentives always drives us to act. That is why it plays an important role in understanding how market works.
For example : Let us assume there is an increase in the price of coffee, as a result as the consumer of coffee this price increase will make us shift towards other compliments like tea and consume less of coffee, whereas the sellers will start to produce more. So over here price as incentive has different impacts on buyers and sellers.
Hence, the influence of price (as an incentive) on the behaviour of consumer and seller is important to understand the market economy and resource allocation as we see how people respond to incentives in a different way.