Five Fingers of Economics
1. What is the Law of Demand?
If the price of any product or services increase, the quantity of consumption decreases and if the price of any product or services decreases, the quantity of consumption decreases
Example 1: - Average price of onion is 30 rupees per kg, but when price of onion goes up to 100 rupees per kg, people start consuming less amount of onion in opposite when the prices decrease to 15 per kg people consume more onions than they consume normally, that is an example of law of demand, Demand of a product inversely proportional to the price of the product.
Example 2: - Festival time flight fair get increased because of the high demand of tickets, normal people those who cannot afford the fair, try to travel in train rather than air to save money, in this case, we can see that increase in fair of air ticket result in people travelling other modes of transport, so we can see that the demand for air ticket is inversely proportional to the price of air tickets
2. What is the Law of Supply?
If all other conditions are constant and if the price of a good or services increases, then the quantity of supply of good or services from the producer also increases, the supplier will try to maximize the profit.
Example 1: - We know the availability of air tickets at festival time is very low due to the high demand and the price also increases, so to maximize the profit airlines companies try to increase the number of flight so that they can generate more revenue by using high price of tickets with more customers.
Example 2: - If the price of laptops increases from 30000 to 35000, manufacture will always try to supply and sell more number of laptops in the market because that will maximize the profit of the company. For every laptop company will earn 5000 extra profit.
3. What is Elasticity?
Elasticity is used to determine the change in demand for any product and supply to the change in consumer’s income and price offered by the producer.
Elasticity = % change in quantity / % change in price
The Elasticity of Demand: - Change in Demand for a product quantity in the market to the change in the price of that product.
Determinants of The Elasticity of Demand: -
1. Income of the consumer
2. Nature of Commodity
3. Availability of Substitute
4. Price of Substitute
5. Advertising and promotion
The elasticity of demand = % change in quantity demand / % change in the price of the product
Example: - Assume the price of petrol has increased by 40 % as a result of consumption as fall by 20 %
Elasticity of demand = -20 % / % 40 = -0.50
The Elasticity of Supply: - Change in quantity supplies from the producer to the change in the price of the product.
Determinants of The Elasticity of Supply: -
1. Nature of good
2. Durability
3. Flexibility of inputs
4. Nature of the industry
5. Length of the production period.
The elasticity of Supply = % change in quantity supply/change in the price of the product
Example: - Assume the price of Potatoes has gone up by 40% as a result supply of the potatoes also rises by 25%
Elasticity of Supply = 25 % / % 40 = 0.625
4. What is Consumer Surplus?
The difference between the amount consumer willingly and able to pay to buy any goods or services, and the amount consumer actually pays to buy the product or services.
Example 1: - Joy went to Esplanade (Kolkata) to buy a T-shirt for him, he wants to buy a T-shirt of rupees 500 but ultimately after bargaining he brought a shirt of price 400, so the difference in price (500-400 = 100), the amount he saves, rupees 100 is the consumer surplus.
Example 2: -Rahul wants to go for a vacation to Switzerland and he has fixed his budget to rupees 100000 but he got some discount and fixed the deal with the travel agency rupees 90000, so the amount he saves, (100000-90000 = 10000) rupees10000 is the customer surplus.
5. What is Producer Surplus?
The difference between the amount the producer willingly wants to supply good in the market and the amount he actually receives after the trade.
Example 1: - Assume during festival time due to high demand a tailor increases the price of stitching a shirt and a trouser from 800 to 1000 rupees per pair, so the amount (1000-800 = 200) he is earning more to increase in the price of rupees 200 is the producer surplus.
Example 2: - AI Technology is in high demand, suppose REVA AI training institutes has increased the fees for a one month course on AI from rupees 5000 to rupees 6000 due to market demand, so the training institute is earing rupees 1000 more per customer, that 1000 rupees is producer surplus.
