Understanding 5 Concepts of Economics Via Real Life Scenario
Consumer Behaviour
Would you prefer to buy a branded packet of Chocolate chip cookies or a handmade one for the same price?
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Who cares I’m feeling hungry give me anything! Voice of Gluttony. Since the assets are restricted feelings are overwhelming, a man needs to pick between two items unwittingly.
No preferences if the cost of both the items are same. If costs are different then making a choice which has an optimal level of benefit or utility which can be brand or a homemade. Voice of Rational. Economics define this as wants which is the desire, taste, and motives of a human being. Needs may emerge because of basic and mental causes.
Consumer theory is the investigation of how individuals choose to spend their cash, given their inclinations and spending imperatives. A branch of microeconomics, Consumer theory indicates how people settle on decisions, given restrictions, for example, their pay and the costs of goods and services. Consumer theory, we are better ready to see how people's tastes and wages impact the request bend. These decisions are among the most basic elements, forming the general economy. Buyers can pick distinctive groups of products and services; intelligently, they pick those that bring the best benefit to them.
Difficulties in building up a practical formula for this situation are numerous. Individuals are not constantly sound for instance, and at times they are not interested in the decisions accessible. A few choices are especially hard to make since customers are not comfortable with the items or the choice has an enthusiastic part that can't be caught in a financial capacity.
Every once in a while unique theories have been progressed to clarify buyer’s conduct and in this manner to clarify his interest for the item. Two important theories are - Marginal Utility Analysis propounded by Marshall and Indifference Curve Analysis propounded by Hicks and Allen.
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Supply Curves
Your parents will pay you ₹20 each time you mow the lawn; you decide to mow the lawn twice a month. If your parents offer to pay you ₹50 each time you mow the lawn, will you mow the lawn more than twice a month?
All curves are lines where two things meet on a graph. There are X and Y axis, every one of which is a variable, a number that vacillates relying on conditions. For every X, there is a Y, and when you put all the X, Y convergence focuses together on the diagram and draw a line through them, you get a curve. For this situation, the X is the amount of something is being provided. The Y is the cost. The curve should be more precisely known as the "value supply" curve.
The price-supply curve demonstrates the amount of something will probably be accessible at any given cost. As costs go up, providers are urged to make more accessible. Note this doesn't generally happen every time in the real market.
It ought to be remembered that the essential supply curve isn't at all practical. Time is a major consideration, for instance, costs show "stickiness", or a propensity to oppose change. A few resources can change cost quickly, similar to gold or stocks, while others, a new car's, can't. However, as an idea, the value supply curve is pleasantly illustrative.
Mankiw’s third principle: Rational People Think at The Margin
Water is essential for life, but it's cheap. Jewels are an extravagance but they are exceptionally costly!
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The reason is that a person's ability to pay for goods depends on the marginal benefit that an additional unit of the great would yield. The marginal benefit, thus, relies upon what number of units a man as of now has. Water is basic, yet the minimal advantage of an additional container is little since water is copious. By differentiating, nobody needs precious stones to survive, but since jewels are so uncommon, individuals think about the marginal benefit of an additional precious stone to be huge.
It can require some time to become accustomed to the rationale of minor reasoning, however, the study of financial aspects will give you adequate chance to rehearse.
‘A rational decision maker takes an action only if the marginal benefit of the action exceeds the marginal cost’
Production–Possibility Frontier
How to determine various production possibilities with the help of given limited resources and technology?
A production possibility frontier (PPF) demonstrates the greatest conceivable output combinations of two products or services an economy can accomplish when all assets are completely and proficiently utilized.
Opportunity Cost and PPF:
Reallocating rare assets starting with one item then onto the next includes an opportunity cost.
If we increment our output of buyer products (i.e. moving along the PPF from indicating A to B point) at that point fewer assets are accessible to create capital goods.
Creating a greater amount of the two products would speak to a change in welfare and a gain which is called allocative effectiveness.
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We ordinarily draw a PPF on an outline as inward to the source. This is on account of the additional output coming about because of apportioning more assets to one specific great may fall. I.e. as we move down the PPF, as more assets are distributed towards Good Y, the additional output gets smaller – and a greater amount of Good X must be surrendered keeping in mind the end goal to deliver the additional output of Good Y. This is known as the principle of diminishing returns.
The production possibility frontier will shift when:
There are upgrades in profitability and effectiveness because of the presentation of new innovation or advances in the procedures of generation.
In the outline beneath, there is a change in innovation which moves the PPF outwards. Thus, yield potential outcomes have expanded and we can finish up (giving the great gives positive fulfillment to customers) that there is a change in the creation with different conceivable outcomes bits of knowledge.
Follow the link to refer my previous post on Production possibility curve
The Law of Diminishing Marginal Utility
Is friendship a special case to the Law of Diminishing Marginal Utility?
The Law of DMU has no exceptions, you can return to a similar place with similar individuals and do similar things however it can never match the same excitement continuously and also change is constant in nature.
Take a look at the 'Hierarchy of Needs' created by psychologist Abraham Maslow. Needs at the bottom of pyramid-like air, water, food, shelter, sleep, clothing, reproduction.
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| Maslow Hierarchy of Needs: Psychologist~Abraham Maslow |
Need for belonging or love may have somewhat constant utility. The requirement of having a belonging or love may have to some degree steady utility/constant utility. However, the quest for self-realization is ceaseless. The desire for learning and comprehension of the universe and our own reality has increasing marginal utility.
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If all other things remaining the same when a consumer consumes the additional unit of product the marginal utility will decline. So let's move to the assumption of marginal utility first, we have to assume that the income and prices should be fixed for the specific commodity and then no change in the quality. The quality should be the same and then continuous consumption and the consumption of reasonable quantity which means that there should be no change in the quantity. Cardinal measurement of utility which says that the utility should be in a measurable form and the last one we have a monetary measurement of utility which again says that the utility should be in measurable form. In terms of monetary now we will move towards the schedule of diminishing marginal utility here we assume that a person who is hungry and wants to eat bread so when he starts consuming slice of bread the marginal utility will goes up and then reach to the maximum level and again declines to 0 and goes to negative so this was the schedule of DMU in graphical representation. We can clearly see that it starts the marginal utility go up and then reach to the maximum level and again declines.
Follow the link to refer my previous post on The Law of Diminishing Return
‘The love of economy is the root of all virtue ~ George Bernard Shaw’
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