CONCEPTS OF ECONOMICS

Price Elasticity of Demand :-

The Percentage of change in Quantity demanded to the Percentage of change in Price is known as Price Elasticity of Demand.

-Price and Quantity demanded are inversely proportional to each other.

Eg:-1.

Last time when I did shopping, I have selected three pairs of dresses and went for billing.

The bill was around 5500/- and my budget for that shopping was 6000/- in my pocket.

After negotiation with the shop keeper, the price was reduced to 5000/-

I decided to shop one more shirt so that I can make use of all funds which I planned to shop at that time.

Here, because of change in price by the shop keeper I have changed my Quantity of demand to purchase one more shirt.

Eg :-2.

When ever the government of India declares there is Raise in price of Petrol, I will minimize the use of my bike and demand less as compared to previous demand.

This has happened with me many times.

Here because of raise in price the quantity demanded by me is reduced.

Effect of Availability of Substitutes to PED :-

The availability of substitute “s” to a product “p” will make an impact of quantity demanded of the product “p”.

Eg :-1.
When I planned to book a ticket to Hyderabad from Vijayawada.

The ticket fare by bus is 900/- and by train is 480/-

I opted to go by train as the ticket fare is less.

Here I’m having another substitute way to reach Hyderabad and it made an impact on demand of transportation through Bus.

Eg :-2.

One day I was very hungry and I wish to have lunch in restaurant but I have only 100/- in my pocket and for excess amount I have bring my wallet from hostel.

I have two options in my hand.

·        I have to get my wallet from hostel and go to restaurant &

·        I have to go directly go to Andhra hotel and have my lunch.

I opted to go for Andhra mess and have lunch there.

Here I have a substitute to restaurant.

Therefore the availability of Andhra mess is making an impact of demand towards restaurant.

Diminishing Marginal Utility :-

1.The satisfaction that the consumer is getting by consuming a unit of product is known as utility.

2.The additional utility generated by the consumer, by consuming one additional input is known as marginal utility.

3.The decrease of marginal utility of a consumer after consuming more number of units is known as Diminishing marginal utility.

Eg:-1.
There is an occasion in my home where I have plenty of sweets on dining table.

Generally, I love sweets a lot but on that day, I was fed up by consuming more sweets at a time and after having 7-8 sweets I stopped eating sweets.

Here after consuming some sweets my marginal utility on sweets got saturated and I can not consume more sweets.

Eg :-2.

In the initial stages, I like to surf more on Facebook.

But after exploring all the options available on Facebook, I got bored by using it.

Here my interest in surfing Facebook got saturated and now I just use it for only some purposes.

As my marginal utility got diminished by using it many times in the past.

Consumer Surplus :-

The difference between the price consumer willing to pay and consumer actually pays is known as Consumer Surplus.

Eg :-1.
Before coming to IBA I went to buy a pair of shoes.

I prepared myself to buy within 1300/-

When I reached the billing counter after selecting a pair of shoes, the owner is quoting me the price of shoes as 1800/-

I started negotiating starting from 900/- and finally convinced him to sell me at 1050/-

Here the excess of amount I’m saving (1300-1050) 250/- is the consumer surplus for me.

Eg :-2.

When I was about to book a taxi and start to railway station.

The taxi driver quoted me 250/- and I was prepared to pay 220/-

After negotiation with him, he agreed to drop me in railway station for 200/- only.

Here the excess of my willingness of amount to the actual amount paid (220-200) 20/- is the consumer surplus I’m gaining.

Income effect on Indifference curve :-

The effect of shift in indifference curve with the change in the Income of consumer is known as Income effect on Indifference curve.

Eg:-1.
When I was getting my pocket money of 8000/- per month in my under graduation, I used to drink daily a pulpy orange. But now I’m getting only 6000/- per month as pocket money.

Now I’m drinking pulpy orange only twice or thrice a week.

Here the pocket money I’m getting is having an impact on my indifference curve and it shifts towards the origin.

Eg :-2.

6 months back my brother income was 25000/- per month, he used to shop for 3000/- every month.

Now he got promoted and his salary is 38000/- per month, now he shops for 5000/- every month.

Here by increase in his income, his indifference curve is shifting away from the origin.