Understanding 5 basic Economics Concepts

1. People respond to Incentives

Incentives influence the behavior of individual in terms of buying things. For example: Five Star hotels these days offer unlimited buffets and several discount offers. This is a marketing strategy to just attract more customers and increase their sale. However, the products of five star hotels are anyways price inelastic. So, the hotels keep the prices of the buffets high to earn more revenues.  

2. Law of Diminishing Marginal Product

It’s true that increasing one input (labor) of production will lead to an increase in the output. However, with increase in the input, the marginal product declines. For Example: 1 worker produces 50 units. An addition of another labor increases the production from 50 to 90 units. Therefore, marginal product of second worker is 40. However, on adding a third labor, the production only increases from 90 to 120 units. Therefore, marginal product of third worker is 30 units, which is declining. This is known as law of diminishing marginal product. Hence, as more and more workers are added, each additional worker contributes fewer additional units to total output. 

3. Income effect

The income effect implies how a consumer spends money due to an increase or decrease in his income. An increase in income results in demand for more goods and services and thus, spends more money. A decrease in income results in the exact opposite. ! Example: one of the months you suddenly noticed that the salary paid to you is significantly higher than usual. You've been given a raise! Now, since your income has increased, aren't you capable of spending more on goods or services than usual? This is referred to as an Income Effect.

4. Price Elasticity

When the quantity demanded is higher than the proportional with response to change in the price of the product, the product is said to be elastic. For Example: Ice-creams. At lower prices, people will demand more ice-creams. But if the price increases, people will start having lesser amount of the same ice-cream or switch to substitutes like chocolate fudge. Since these two are easily available substitutes, they are highly elastic, i.e. a change in price of one results in higher demand of the other. 

5. Law of Supply

A “direct” relationship exists between the price and the quantity of a product that a supplier is willing and able to supply at the given period of time (while assuming all other things remain constant). Basically when price increases, demand increases and vice-versa. Suppliers are induced to produce more of a product when the prices go ↑ that they can generate more revenue. For Example: When a city becomes an industry hub, more & more people move to that city for opportunities. And the price of office spaces or residential spaces go ↑ as the demand goes ↑.