CONCEPTS OF ECONOMIES

1.UTILITY:

Utility has a great significance in economics. "The capacity of goods or services to satisfy a human want is known as utility."

Example: 

The utility of a cigarettes is zero to a non-smoker, while the same packet may have a very high utility for a smoker.

Therefore, the utility depends upon two things: -

(I) The inherent quality of goods or services.

(ii) The intensity of the want of the consumer for that good or service at that point of time.

Cardinal Utility: -

According to this analysis we can measure utilities derived from the consumption of different commodities in terms of arbitrary units called utils.1,2,3,4 are called cardinal numbers. ‘Alfred Marshall' followed cardinal utility approach to explain the theory of consumer behaviour.

In simple terms cardinal utility analysis gives numerical expression to utility.

Example: Law of diminishing marginal utility 

Ordinal Utility: -

According to this approach utility cannot be measured in numerical terms it is a subjective concept. The ordinal numbers ranked utilities are arranged in a serial order such as 1st, 2nd, 3rd etc. The indifference curves analysis based on ordinal utility analysis.

Example-

In a class of 5 students their ranks are as follows based on their marks in all subjects

1 st            Akhil

2 nd           Mohit

3 rd            Harika

4 th             Asha

5 th             seshu

2.VEBLEN GOODS: -

Veblen goods is named after American economist "Torstein 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 lose 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.

  Example -

 Suppose consider that I have the WOODS purse. Handmade in INDIA, the purses cost RS.10,000 and are often seen on the arms of celebrities. They have a distinctive red bottom, which is trademarked, and so everyone who sees the purse knows it's an WOODS and was therefore very expensive. The buyers of these purses believe that the cost of the purse conveys a positive message about themselves to the public and creates the perception of having status. Accordingly, more people want the purses because they are so expensive i.e; rather than because they are of a certain quality.

3.Meaning of Demand: 

The concept of demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period of time. Demand in economics, is something more than the desire to purchase, though desire is one element of it. A beggar, for instance may desire food but due to lack of means to purchase it, his demand is not effective. Effective demand for a thing depends on

(I) Desire

(ii) Means to purchase &

(iii) Willingness to use those means for that purchase.

Two things are to be noted about the quantity demanded:

1.The quantity demanded is always expressed at a given price. At different prices different quantities of a commodity are generally demanded.

2. The quantity demanded is a flow. We are concerned not with a single isolated purchase, but with a continuous flow of purchases and we must therefore express demand.

Example -

Think of the IPhone 4th generation that came out recently. When it first came out there were lineups of people wanting to get the product. So a large amount were being produced and the prices were able to be maintained very high because they were being bought out so quickly. 
As the demand an hype over the IPhone diminished and more people purchased one, a lesser amount need to be produced, so the price will eventually fall.

DETERMINANTS OF A DEMAND: -

There are number of factors which influence demand for a commodity. All these factors are not equally important. Some of these factors cannot be easily measured or quantified. The important factors that determine demand are as follows:

(i) Price of the commodity

(ii) Price of related commodities

(iii) Income of the consumer

(iv) Tastes and preferences of consumers

(v) Consumer's Expectations

   

   Other factors:

            (a) Size of population

            (b)Composition of population

             (c) The level of national income and its distribution

             (d) Consumer-credit facility and interest rates

4.ELASTICITY OF DEMAND:

Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to change in one of the variables on which demand depends. Elasticity of demand is the percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends.

(I) Price Elasticity

(ii) Point Elasticity

(iii)Arc Elasticity

(1) Income Elasticity of demand

(2) Cross Elasticity of demand

        (a) price of related goods and demand,

        (b) Substitute products&

        (c) Complementary goods

5.OPPORTUNITY COST :

Opportunity is defined as next best alternative use. A trade off involves a sacrifice that must be made to get a certain product or experience.

Example

 If  I invested in tata Company's stock and it returned only 3 percent over the year, and I gave up the opportunity of another investment yielding 8 percent, my opportunity costs are 5 % (8 % - 3 %). I would also have an opportunity cost if I chose an investment in bonds over an investment in stocks.

6.Law of diminishing marginal utility :

It means the additional benefit which a person derives from a given increase  of his stock of a thing diminishes with every increase in the stock that he already has.

Example -

If we eat one kalakandhi sweet it gives taste, so that we continue to eat one more and so on, as we increases the quantity we eat that sweet the taste diminishes with adding more sweets one after the other.