CONSUMER SURPLUS
Consumer surplus may be defined as the amount a consumer or
a buyer is willing to pay for a good or a commodity minus the price the
consumer or buyer actually pays for it. Consumer surplus can be measured using
the graphical representation of a demand curve, where quantity of a product
desired to be bought is plotted along the x-axis and the price of the product
is plotted along the y-axis. The measure of consumer surplus is the area of the
region above the particular price and below the demand curve in the graph. In
the figure shown below the blue shaded region shows the consumer surplus. A
decrease in the price of the article raises the consumer surplus of the customer.
Examples-
11.
Suppose you went to buy a mobile and the maximum
price you allocate to buy it is INR 20000. At the mobile store however due to a
special offer the same mobile is purchasable at INR 18000. Hence the consumer
surplus for the customer is (20000-18000)= INR 2000.
22.
Suppose, two friends go to the mega store to buy
a shirt for a party. Both have different tastes and cost constraints for buying
a shirt. As B is willing to pay rs 1200 for the shirt whereas B is willing to
pay a maximum of rs 1000. At the store they come to know that brand x has a
special offer of 2 shirts at rs 1200 instead of its former offer of an
individual price of rs 900 for each shirt. Hence after buying two shirts for rs
1000, the consumer surplus for A becomes rs (1200-600)= 600 instead of his
former consumer surplus of rs(1200-1000)= 200. Similarly B has a consumer
surplus of rs(1000-600)= 400 instead of the previous case where he would not
have incurred any consumer surplus at all.
PRODUCTION FUNCTION
Production function may be defined as the functional
relationship between the goods produced or as:
Q= f( K,L)
Where Q is the output of production and K and L are capital
and labour respectively that are the main factors considered for the production
of the output. Here Q has been expressed as the function of capital and labour
respectively.
Examples:
11.
Suppose the price of an android mobile handset
depends on the type of processor of the latest technology and the quality of
camera installed in the mobile handset. So, if P be considered as the price of
the mobile handset , Pr be considered as the type of processor being used and C
be the type of camera being installed on the phone, then the production
function of the aforesaid example may be expressed as:
P= f(Pr, C)
22.
A simpler example may be taken as: the score of
a student appearing for CAT depends on the amount of hardwork he devotes on the
subjects, the practice he does to adapt to the exam scenario and the detailed
analysis of the scores he gets from the practice sets for each sections. So, if
S be the score of the CAT exam, H be the hardwork devoted by the student, P be
the hours of practice one puts in, and A be the amount of detailed analysis one
makes on the performance, then the production function may be expressed as:
S= f(H,P,A).
LAW OF MARGINAL
UTILITY
In economics, utility is defined as the satisfaction or
benefits a consumer or a buyer derives from their consumption activities.
Marginal utility refers to the change in value of satisfaction or benefits in
the particular good or service due to excessive consumption or purchase of the
particular good or service. According to the law of marginal utility, the first
unit of good or service consumed by a person yields more value than the second
or the consequent units of the same item and the reduction of utility follows
in the subsequent units of purchase.
MU1>MU2>MU3>MU4
Where MU1 is the marginal utility of the first unit of the
product and MU2, MU3, MU4 are the marginal utilities of the subsequent units of
the same product i.e. second, third and fourth item respectively.
Examples:
1.
Suppose you are hungry and you go a restaurant
and order a plate of biryani. The first plate of biryani gets finished in a
matter of minutes owing to the fact that you were starving. Now, if you order a
second plate of biryani, you might not get as much satisfaction or utility from
it. This shows that repeated consumption of the same item reduces the utility
of the second unit being consumed by the consumer.
2.
The first salary a person gets from his first
job is always special for him and he values it as a very significant moment in
his life. But the salary received in the second month is not celebrated as
gloriously as in the first case, inspite of the salary amount being same as the
first month.
OPPORTUNITY COST
Opportunity cost is defined as the price or amount that must
be given up to obtain another.it is the key concept in economics and can be
described as the benefit not enjoyed or rejected while taking the second best
alternative while making a decision or a choice. Since one has to make a
choice, they inevitably face trade-offs in which they have to give up things
they desire in order to attain more.
Examples:
1.
Suppose you had to choose between a veg burger
and a chicken burger at KFC which cost rs.100 and rs.120 respectively. But
there is an offer that you will get a brownie worth rs 15 free if you order a
veg burger. Now if you choose to order the former(veg burger), then the cost of
the chicken burger or rs.120 will be the opportunity cost.
2.
Suppose you had to choose to buy a air-ticket
either from jet airways or indigo airways. Jet airways offers tickets at a
price of 5000 and indigo airways offers a price of 5500 which includes a free
lunch on flight. If you chose to avail the latter option, then 5000 is the
opportunity cost and vice-versa.
LAW OF DEMAND
The law of demand states that- other factors remaining
constant, the demand of a particular good/product/ service will fall or
deteriorate if the price of the same increases. The law states price and demand of a particular good/product are
inversely proportional to one another. The following is a graphical
representation that shows the change in the demand of an article with respect
to the change in price of the article. The price is plotted along the y- axis
and the demand is plotted along the x-axis. The line drawn along the points
plotted P,Q,R,S,T depict the demand
curve or the change in demand of the consumer with respect to the change in
price of the aricle.
Examples:
1.
The increase in the price of rice (per kg) in
the market will decrease the demand of rice in the market by the consumer.
Owing to several factors, there is a change in consumer behaviour and he would
restrict himself to buy a lesser quantity of rice as there has been a
significant increase in the price of rice.
2.
Suppose you are a regular customer of airtel 4g
data recharge which used to cost you rs 200 for 2gb data . but suddenly there
is a price hike and the same service costs you rs 300. As a result , from the
next time you opt for a smaller data recharge of 1.5 gb data which will cost
you the same rs 200 as per the revised price tariffs. This is an example of the
law of demand.
References:
images or graphs have been taken from economicsdiscussion.net.
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