Economics in Neighbourhood

1.     Law of Equi-marginal utility

Example 1: To understand this theory let us consider an example of a consumer i.e., my friend, let’s call her Ms. Elena. Elena works as an apprentice & earns ₹ 8000 per month. She is a creative person & likes to paint during her free time for which she needs poster colours & beautiful frames to display in her collection. She is willing to spend approx. of ₹ 1000 pm on her interests.

The price of a poster colour (25 ml) is ₹ 40 whereas, The price of a wooden frame of small size is ₹ 300.

The utility of these 2 products are as under (in utils) (assumed).

Units	Poster Colours		Frames
	TU	MU	TU	MU
1	240	240	1200	1200
2	400	160	2100	900
3	520	120	2700	600
4	600	80	3150	450
5	672	72	3450	300

Now she must find out how much additional satisfaction she gets per rupee spent on these 2 goods, wherever she gets additional satisfaction per rupee spent, she should spend there to maximize her total satisfaction with her limited income.

Marginal utility (MU) of Money spent on poster colours & frames (in utils)

Units	MUP/PP	MUF/PF
1	240/40 = 6	1200/300 = 4
2	160/40 = 4	900/300 = 3
3	120/40 = 3	600/300 = 2
4	80/40 = 2	450/300 = 1.5
5	72/40 = 1.8	300/300 = 1

Now from poster colour she gets 240 utils with 1 unit, on which she spent ₹40. Therefore per rupee spent on colour = satisfaction is 6 utils (>4 utils). Refer the table above & same goes for 2,3,4 & 5 units.

Now, If she had 1 rupee to spend, she would spend on poster colour than on frame due to high satisfaction in utils. Likewise she can spend on 3 Units of poster colours & 3 units of frames [(3x40 + 3x300) = 1020] to get Maximum satisfaction from ₹1000 she is willing to spend.

*[The above content (example 1) is based on my understanding with ref. to book from IBA library – Microeconomics for management students, published by oxford, authors – Ravindra H. Dholakia & Ajay N. Oza]

Example 2: The best example for this would be Income Tax department. Though the ultimate goal is to collect the tax on income earned, they ensure that the tax collected from different income levels of people are charged at different rates but are of same value to the payers in respects of their income. For example, tax collected from income below 250000 is 10%, while tax collected from income above 1000000 is 30%. But since they are charged as per their income earned, it signifies a fair collection of tax, where the satisfaction to income tax department from collecting tax is same from all the people on either slabs.

2.     Income Elasticity

Example 1: For a company like Amazon, which is in a good market position the expenses like private jets to travel for top management, company perquisites & other benefits are considered to be paid regardless of its income. - Inelastic.

                But for companies like Air India Ltd. Which has no good market position & incomes, the unnecessary costs are not paid & avoided. – Elastic.

Example 2: State budget of Andhra Pradesh shows the allocation of expenses throughout the state based on its importance with limited income from state government, but with central government funds coming in, the demand for services also increase. – Elastic

3.     Production Possibility Curve

Example 1: A Farmer with given inputs like Land & other resources (water, fertilizers, tools, etc.,) can produce two crops by shifting the same resources like Tomato & Beans to produce varies outputs.

Example 2: Investments made in government bonds & high yield corporate bonds (keeping the risk factor constant) would yield good amount of income with the amount of money invested on both.

4.     Returns to scale

Example 1: (a) In a Newly established hotel there are 3 chefs working in the kitchen to cook food & on hiring 2 more chefs the output that can be produced by chefs is more than proportionately increased.

(b) With increase in number of branches of State bank of India the number of customers & accounts have more than proportionately increased. – Increasing returns to scale.

Example 2: while preparing a lime juice, if we had to prepare a additional glass of it, then on adding one glass of water would proportionately add one glass of juice (output). – Constant returns to scale.

Example 3: While preparing a spinach curry the amount of spinach that you add & the amount of curry that is ready to serve is less than proportionate. – Decreasing returns to scale.

5.     Trade-offs

Example 1: Choosing one vertical for the upcoming event of independence day among singing, dancing, speech, anchoring, invitation, decoration, etc., where the students with multiple credentials have to trade-off between them.

Example 2: Among different best airline facilities these days, if a passenger has to choose one airline then he/she has to trade-off.