Consumer surplus and demand

Consumer surplus for a given quantity us therefore the difference between your maximum willingness to pay (reservation price) and what you actually paid (actual price).
Consumer surplus = the sum of the difference between MB and MC (price) for all units.

For eg : if we purchase something for a price that is less than your maximum willingness to pay.

Importance of Consumer Surplus in Economics

 While considering the day to day activities we as a buyer always tend to think about the utility we can derive while buying any commodity. In general, it is often seen that the amount which we pay as a buyer to purchase a product is always less than the satisfaction gained while consuming it. On the other hand, there comes a situation at times when the consumer pays a higher amount for commodity then he actually wants to pay. Hence when a consumer receives high utility in compared to the sacrifice made for the commodity, the concept of Consumer Surplus occurs. We can, therefore, say that Consumer Surplus In Economics is the difference between the price consumer is willing to pay and the consumer actually pays.

Often at times, we come across a situation when an individual is ready to pay an extra amount to buy a particular product. This is because he/she gets extra satisfaction for the price they have paid. Hence this is what called as Consumer Surplus.

Consumer Surplus Example

To understand the concept of Consumer Surplus, we can consider the following table mentioned below:

Units	Ready to pay	Actual Amount	Consumer Surplus
1	14	5	9
2	12	5	7
3	10	5	5
4	9	5	4
Total	45	20	25

In the above table, it is shown that when a consumer buys the first unit of product, he is ready to make a payment of Rs 14, whereas the actual price is Rs 5. Hence Consumer Surplus occurs here. Similarly, the consumer is ready to pay Rs 12, 10, 9 for the 2nd, 3rd and 4th commodity, where the original prices are Rs 5 each and thus they get 7, 5 and 4 as Consumer Surplus.

CAUSAL FACTORS OF DEMAND

Following are the most important factors that affects demand of a product:

1) TASTES: Tastes of the consumer is the most prominent factors that affects demand of a product. Different consumers have different tastes and preferences. The tastes and preferences depends upon their standard of living, habits, culture and fashion trends.

2) INCOME: Income of the consumer is another important factor that affects demand of the product. If a consumer has lower income, he will spend less for a product. The relationship between the income of consumers and demand of a product depends upon type of goods.

a) Normal goods: In case of normal goods, others things remaining equal, if income of the consumer increases, the demand of the product rises. And if income of the consumer decrease, the demand for the product will fall.

b) Inferior goods: In case of inferior goods, other things remaining equal, if the income of the consumer increases, the demand for the product falls. And if the income of the consumer decreases, the demand for the product rises.

3) PRICE OF RELATED GOODS: Related goods are of 2 types:

a) Substitute goods: Substitute goods are those goods for which, if there is an increase in price of one product there is an increase in demand for the other. And if there is decrease in price of one product, there is a decrease in the demand for other. For example: Maggi and Yippee.

b) Complementary goods: Complementary goods are those goods for which, if there is an increase in price of one product there is an decrease in demand for the other. And if there is decrease in price of one product, there is an increase in demand for other. For example: Bread and butter.

4) DISTRIBUTION OF INCOME: Distribution of income also affects the demand of the product. The demand of a product will be higher if the income is equally distributed. The demand for luxury goods will be higher in only high income society and in low income society will focus only on necessary goods.

5) EXPECTATIONS: Future expectations of consumers also determines the demand of the product. If a consumer is expecting a higher income next month, he will spend more money to buy a product. Then the demand of the product will increase.

Time as a tool from Luxury to Need: Rationing function of Price Mechanism

Time as a tool from Luxury to Need: Rationing function of Price Mechanism

Price Mechanism in simple terms means the determination of the price of a commodity or a service based on the determinants of supply and demand.

In general we observe that the price of a  commodity or a service tends to rise when there is high demand for it and vice versa

.

But with change in time ,the needs of the people have changed. There was a saying that there are only three basic needs of a man Food , Shelter and clothing. But this doesn’t seems to be the scenario now.

People need Gadgets, they need a Car, they need a Smartphone and the list goes on. With this increase in demand there needs to increase in supply and to meet the supply we need resources. Here comes the crucial part which is inevitable “Time”. Most of the resources need time to grow or to regenerate. And here comes the need of rationing commodities.

So whenever the resources are in scarcity, demand exceeds supply and the prices go up. The motive of the price rise was to control the demand and conserve resources.

With this I can sum up that the Rationing function of the Price Mechanism is one of the crucial factors to maintain the Supply and Demand Equilibrium.

Refered Wbesite: www.economicsonline.co.uk

http://www.economicsonline.co.uk//Competitive_markets/Rationing_and_incentives.html

Concept of Production Function

Production:
Transformation of input into output is called production
Eg:conversion of milk into curd is called production here input is milk and output is curd

Production function :
Technological relationship between physical input and physical output is called production function
Eg:the activities which are helping in input to convert in output is called production function because it is happening in physical input and it outcomes also in physical output
Factors of production :
1.Fixed factor
2.Variable factor

Fixed factor:which cannot be changed with the production (capital)
Eg:in a class there are 20 students but the capacity of class is 30 students here the fixed factor is desk which cannot be changed and the production is students which are increasing
          It means even if the production also increases the fixed factor remains same

Variable factor:which can be changed(labour)
     
It Is a factor which changes along with production it means if the production increases the variable factor are also increases
Eg:If I am  teaching in the class with the help of marker writing on the board if I take 2 hours class then  the marker also use 2 hours it means production increases and variable factor also increases

Determinants of price elasticity of demand

 Determinants Of Price Elasticity Of Demand

Price elasticity of demand measures the change in demand in reaction to change in price by keeping others factors remains unchanged. Demand of goods can be termed as elastic if change in demand of goods is very high in reaction to change to change in price. Inelastic demand of goods means very slight change in demand of goods in reaction to change in price.

Determinants are:

1)Types of goods: Demand of luxury goods decreases with decrease in price and vice versa. On the other hand demand for necessary goods have slight change with change in price.

Example: Blackberry was used as status symbols by corporate personnel and others belonging to high income group. But due to the decision by Blackberry to introduce low priced mobile sets and introduction of Apple changed the whole scenario for Blackberry

2)Substitution effect : If any good has any close substitute good than the price of substitute good has effect on demand of that good. If substitute good is not good in terms of quality then it has little effect on demand of main good.

Example: Coffee and tea are perfectly interchangeable drinks therefore change in price of one item can have effect on demand of other good.

A Brief Study On Consumer And Producer Surplus

Consumer Surplus- When a consumer has a definite price in his mind,but when he buys the product he actually buys it less than what he expected is known as consumer surplus.


Producer Surplus- When a producer wants to sell a product on a certain price but due to market demand the consumer is willing to buy the product on a higher price,this difference of the customer willing to buy the product and the amount in which the producer wanted to sell is known as producer surplus.

For example:Suppose Shyam went to buy a product to a certain producer,and the producer asks for a price of Rs.10000,but after bargaining he gets ready to sell the product for a amount of Rs.7000. So,here the consumer gets an amount of Rs.3000 as consumer surplus. And the price which the producer made the product or expecting at least Rs.5000 for the product but he actually got an amount of Rs.7000. This difference of Rs.2000 is the producers surplus. 

Computation of price elasticity of demand

Price elasticity of demand is percentage change in quantity demanded in response to percentage change in price.
For ex :-
If there is increase in price of petrol by 20% which causes the amount of petrol we buy fall by 40% then the price elasticity would be 2.

Determinants of price elasticity of demand :-

i) Substitute products : Factors determining price elasticity of demand depends upon the availability of substitute products. If the price of such product increases, customer will shift to close substitutes.

ii) Income of consumer: Another factor is income of the customer as what portion of income customer want to spent in commodities. The greater the portion of income spent the greater will be price elasticity.

iii) Complementary products: Complementary goods also affects the price elasticity of the demand. For ex- when the price of oil increases, then it mean very small increase in the cost of running any automobile, as oil is used less as compared to petrol.

Consumer surplus

Students at Iba is willing to pay₹x for a facility, but has to pay only x-y for that facility, y being positive, then y is consumer surplus.
Students that does not pay ₹x-y or are willing  to pay less than that does not get that facility. Consumer surplus will be an area on the diagram bordered by
Demand curve, price axis and price  level.
When there is a rise in the cost of production, supply curve shift upward, consumer surplus shirk. The difference between the above area represents the fall in consumer surplus. When the cost of production is reduced, there is a rise in consumer surplus.

Concise grasp on Consumer surplus & Producer Surplus:

Pricing Decisions

Consumer surplus:- we can say that the difference in price which consumer is willing to pay and which consumer actually pays is called as consumer surplus.

Producer Surplus:- The difference between the price which producer is willing to sell and the price which he actually sold is called producer surplus.

There are some goods which have negative income elasticity those goods are called Inferior Goods.

And the positive price elasticity of goods is called Veblen.

Revenue,pricing & elasticity

* Goods is elastic it will reduce price to increase revenue.

* Goods is inelastic it will increase price to increase revenue.

* Unitary elastic will hold price constant with no effect and revenues.

                            Budget set.                  Rough note

Cost Of Production

What is Cost Of production ?

  It is important to understand the cost of production. It help in business to figure out profit of production and also helps to how many units to be produce.

Different Types of Cost :-

Fixed Cost:- Cost that Don't Change with the amount of produce.

 e.g. Salary of Manager

Variable Cost:- Cost that change with the amount of production.
   e.g. Raw material

Total Cost:- Fixed Cost + Variable Cost

Marginal Cost:- Additional cost of one additional output.

   Marginal Cost = Change in total Cost ÷ Change in output

NEGATIVE INCOME ELASTICITY OF DEMAND

In Negative income Elasticity of demand the demand for a product or services will  decreases as the income of consumer's increases.We can also say that, A rapid increase in the incomes of customer's or Consumers will leads to the decrease in the quantity demanded.The Income Elasticity of demand is Negative for Inferior goods.
Example: 1. If there is increase in the income of a Consumer he would prefer to Purchase Nescafe coffee instead of Tata Tea, the Tata Tea would be inferior to Nescafe Coffee for the Consumer.
                 
FACTORS AFFECTING NEGATIVE INCOME ELASTICITY OF DEMAND:-
1. Usage of different types &Nature of Commodities.
2. Availableness of Substitutes
3.Human habits to Consume Commodities in different different regions.
4.Different Range of Prices
5.Income Group of People living in a particular area.
6.Element of Time.

The LOC Of Income

Budget line is a line showing different combination of two goods that a consumer can attain at a given income and price of the goods.

Budget set refer to set of all possible combination of budget line Consumer can afford at his given income.
Actually the collection of different budget line is called the budget set.

Factors affecting Budget Line :-

When, level of income changes ….   with increase or decrease in income of the consumer new combination of a set of two goods will be attained.

When price of one good changes…. If the price of one good changes the consumer can increase or decrease the consumption of Other goods depending on the nature of change.

When price of both good changes... When The price of both good changes the consumer can increase or decrease the consumption of both the goods and new combination of sets of two goods will be attained.

Note.... A budget line is constructed on the basis of the consumer income price of one goods and price of another good therefore if any one of the determinant changes the budget line changes.

consumer surplus how it makes a benefit to consumers ?

It is the difference between the amount that a consumer is willing to pay and the amount that he actually pays for the commodity.

• willingness to pay : the maximum amount that a buyer pay for commodity.

for example :- if a consumer go to buy a denim worth of 600 rs but he gets that denim at the rate of 500 rs , in that case the consumer gets a surplus of 100 rs.

formula find consumer surplus : what is consumer to ready to pay MINUS what he actually pay.

DOWNWARD SLOPING IN A DEMAND CURVE

There are three reasons why the demand curve is downward sloping , it is reason for the LAW OF DEMAND .

1. Substitution effect: changes in price, motivate consumers to buy relatively cheaper substitutes goods. For example: if the price of a product goes down, people will opt for that product instead of the expensive product.
2. Income effect: changes in price affect the purchasing power of consumers's income. For example: if you go to a store and find out the product is on sale for 10 rupees, then you will buy more of the product.
3. The law of diminishing marginal(addition) utility: As you continue to consume a given product, you will eventually get less addiction utility (satisfaction) from each unit you consume. For example: As you continue to use a product for a long period of time ,eventually you get less satisfaction from consuming that product.

succinct of market equilibrium

MARKET EQUILIBRIUM - It is a state in which the market supply or quantity supplied and market demand or quantity demanded is equal.
In a particular situation , when there might be too much supply of goods or services the cost(price) goes down ,due to which it increase higher demand. The balancing outcome of supply & demand results in a state of equilibrium.

In order to study how a market work these points are considered :-
1.equilibrium is when supply repay demand and vice versa
2.every goods produced in the market will be sold
3.They are equal , and there should be no tendency for the market to change.

example - a manufacturer produced different types of cars. His best seller was the convertible car. It cost around 2500000 to all retailers. unexpectly new improved technology used for faster shipping processes.It led competitors offer the same converitible cars.Then the manufacturer lowered his cost price to 2000000 to see how the consumer react to this situation. At the end it appeared that the solution have worked.He had no unsold cars and managed to get ridd of all convertible cars in his inventory. The supply was perfectly right to meet the demand at that cost (price) point.

Non price determinants of demand

Demand, refers to the consumer's desire, ability and willingness to purchase goods at various prices.

Non price determinants of demand are-:
1) Tastes and preferences- This is one of the major non price determinant of demand. This is concerned with specific likes and dislikes of an individual that is, whether the individual is willing to pay higher price for his favourite goods and services. For eg-: if an individual likes ice cream, he tends to buy more of it.

2) Price of related goods- Price of substitute as well as complimentary goods. No. Of substitutes available, for eg:- if price of tea leaves increases then people will shift to coffee increasing the demand for coffee. Whereas complimentary goods are those goods that go hand in hand. For instance if there is an increase in price of petrol demand for cars will automatically decrease.

3) Income- People with lower income level consume inferior goods whereas people with higher income will consume normal goods. In other words if demand for a good falls when income falls it is termed as normal goods. On the other hand if demand for a good rises if price falls then it is termed as inferior goods. For eg-: A family consumes 1 litre full cream milk a day. But as soon as their income level tends to be unstable, they purchase toned milk that is cheaper than full cream ones.

4) Expectations- Expectations about future may affect demand for a good or service today. For instance if we are expecting that the price of petrol will increase in the nearby future, we are likely to go today and fill the tank. 

5) No. Of buyers- As more number of buyers enter the market as a result of population growth, market demand rises irrespective of prices.

Conceptual Understanding Of Determinants Of Price Elasticity Of Demand

To understand determinants of PED, we have to understand what is PED first. So the price elasticity of demand is the estimate of change in price of a particular good to the change in price of that good which can be known from the Law Of Demand which states that a fall in price of a good, leads to increase in quantity demanded or it poses an inverse relationship with price. If there is elasticity in demand revenue will increase by reducing price, whereas if it is inelastic the price will rise and revenue will be less.

Determinants Of Price Elasticity Of Demand

1. Nature of product- Classified as basic needs, luxurious & comfort.                                                           Basic needs are the products which have no substitutes (Electricity, Salt, etc.) and the customer is ready to pay for it no matter if price rise or fall, so it is inelastic in nature. Whereas luxurious product are more elastic because it changes as price increases or decreases, suppose a car, if price decreases the sales increases and vice-versa and comfort products are those products which are essential but vary according to price.
2. Price of substitute product- Demand of the product may vary according to the changes in substitutes products price decreases the price of the product should also go down otherwise it will not exist in the market.
3. Income Of Consumers- According to income of consumers the demand of product vary because low income consumer cannot purchase the high value products  and high income consumer were not likely to use the low value products.
4. Advertisement- Suppose X brand of toothpaste advertises more with different famous personalities as compared to Y brand of toothpaste but the product is more relevant than X brand, so people still buy X brand of toothpaste because some famous personality is their in advertisement so consumer made their mind that if a famous personality is using the product so they think it is a better product and they will purchase the product.

Supply Elasticity

If the supply is easy to replace by multiple suppliers then it’s known as supply elasticity. Any unskilled worker is an example of supply elasticity.
Example- security or watch man is an example of supply elasticity 

Demand and supply

Supply and Demand is an economic model which determines the price of any object.
Coming to demand, it can be explained as how much a buyer desires.
The law of demand states that higher the price of a good,the less is the demand.For example if the price of a particular brand of edible oil increases then less will be the demand because oil is needed in day to day life of a human being and if the price goes up then the demand will decrease as maximum people tends to buy the product of a less price.
And coming to supply, it can be defined as the quantity sold at a particular price.
It depends on the amount of a certain goods producers supply after receiving a particular price.
In this case if price of a product increases then supply also increases. This happens because selling more product of higher price can create a more revenue.
For example if the price of apple increases by 20 on its actual price then supply will be high in order to gain more revenue on it ,on the other hand if the price gets lowered by rs 20 then supply will be less and demand will increase then price can again get a hike. This is the basic concept of supply.

ELASTICITY TO TOTAL INCOME

       Price elasticity is a broader or connected concept of law of demand and law of supply. In law of demand and law of supply we have studied; as the price changes demand for the product reduces or price increases, demand increases but; we can't determine how much it has been changed or increased in law of demand. Now this elasticity concept can tell us how much other things have been been changed with respect to change in price price in price price change in price price in price price to change in price price in price price change in price price of that product changes. 

     For example: we can take an example of a restaurant who is good at providing "chicken biryani" all of a sudden they increased their price from Rs-200 to 250 with the same quantity  of biryani. So by seing that the regular customers will not wish to go and have biryani. So, by that the 'total revenue' of the restaurant  decreased  from 300000-250000. Here, the demand curve is 'elastic'.

    In same example if the price of 'biryani' increases  a little from Rs.200-220 then only less number of customers shifts, due to little changes in price so, "total revenue" will come down to 300000-280000.Here demand curve is inelastic!!

Relation between consumer buying behaviour and factors of economics (price and income)

There are some factors of economics (price,income,inflation,etc.) which control the demand and supply of a goods but it has also a major role which influnce the buying behaviour of a customer.
According to purchasing power of the customers they buy  different goods.
A rational customer always compare the goods and analyze the cost benefit analysis and choose one product and leave another  and whats he give up for getting the best alternative that is called opportunity cost. By elasticity of demand we can know the % change in demand with % change in the factors of the demand. From all the factors, change in price and income influence the buying behaviour of the customer.
Price
According to law of demand when price increases demand of the particular product decreases and vice versa. But it acts differently for different type of product.        For example price of a generally or frequently use product(rice ,wheat, fmcg) will increase then consumption of such product will decrease. But for rarely use product like medicines consumer durables are not affected to the customer that much if price of the product increase.
Income
Income of the customer  also influence the buying behaviour of the customer.Resources are limited but human needs and wants are unlimited so rational customer allocate their money in different necessity goods according to price .
Example: if there are two necessity things of a consumer like food and cloth at that time he has to decide how much amount he has to spend on which product so that he can get different quantity of both product.  => total spend = price of cloth*quantity + price of food*quantity   so if he want to buy more food then he has to sacrifice some cloth and vice versa .
So if income of the person will increase then the demand of quality goods and costlier good will increase and demand of cheaper goods and less quality goods will decrease.
If income will decrease then demands of the basic needs will increase and demand of other costlier goods will decrease.

OPPORTUNITY COST

Opportunity Cost is also known as Alternative Cost. It is something which we give for something else. A best choice is need to be made among several alternative options. We have to chose such type of alternatives from which we can get benefit. 

For example

You have Rs 5,00,000 and choose to invest it in a product line that will generate a return of 6%. If you could have spent the money on a different investment that would have generated a return of 8%, then the 2% difference between the two alternatives is the foregone opportunity cost of  this decision. 

ELASTICITY APPLIED IN ECONOMICS.

Elasticity of demand is mathematically known as the percentage change in quantity of demand of a commodity to a percentage change in any of the independent variables that determine demand of a commodity.

                                               Formula = % change in quantity demand

                                                                 % change in price

Now lets talk about petroleum industry, suppose price of the petroleum increases by 20% and quantity demand  decreases by 10% then elasticity will be 10/20 .

Determinants of Price Elasticity of demand depends across commodities - luxury to necessity to neutral. Nature of commodity is all about necessity and luxury. Suppose mobile is a necessity for person but iphone and Blackberry is a luxury. What may be luxury for a person may be necessity for another person. 

Alternative uses of the commodity is another determinants of elasticity. It is also called availability of substitute. Imagine price of a consumable item (sugar) rises then itz substitute's (honey) demand will increase.

PRICE MECHANISM IN TERMS OF ECONOMICS

Price Mechan m ism in terms of Economics

Price mechanism is generally the interpendence of market forces. Market is usually governed by demand and supply curve. The prices of goods and services affects the demand and supply of that goods and servuces. This behaviour in which prices affect demand and supply curve of goods and services are known as price mechanism.

For example, let us suppose that there is any festival this month then the demand for festive goods will go up and once the demand rises supply tends to fall down due to sudden increase in demand. There occurs shortage of goods. Shortages leads to increase in the prices of goods. Once the price increases, supply tends to rise. This will further lead to decrease in the demand of that goods or services. This increase and decrease of demand and supply curve keeps on happening until the demand and supply curves are equal. Once they are equal then it is known as market equilibrium. For more clear view i would like to add a diagramatic image:

Surplus in the economy

The combined surplus benefits enjoyed by both the consumers and the producers is known as economic surplus. It is the case in which consumers and producers both enjoy the maximum financial benefits from buying and selling of goods. The point at which there is a stable price for a good in the economy so that the consumer and the producer both enjoy maximum surplus is known as market equilibrium .
Consumer Surplus
If a consumer is prepared to pay as much as 300 rupees for a book but is able to get it at 240 rupees she pays 60 rupees less, this difference between the price that he is willing to pay and the price that he actually pays is  called consumer surplus. Each consumer has a different surplus since the maximum price each person is prepared to pay for a product differs but the product is offered at the same price to everyone .
Producer Surplus
Similarly there is a concept of producer surplus. Let's say a producer is willing to sell a book at 400 rupees but sells it at 450 rupees ,the difference will be called  producers surplus .Each producer has a different surplus since it has a different manufacturing cost . Hence ,each producers surplus is different.

EQUILIBRIUM

                                       EQUILIBRIUM

LET US SAY THERE IS A SITUATION IN THE MARKET WHERE THERE IS A HUGE DEMAND FOR MOTOROLA MOBILE PHONES IN THE MARKET AND THE COMPANY ANALYZES THE SITUATION AND PRODUCES A QUANTITY THAT HELPS THEM TO FULFILL THE MARKET DEMAND. SO IF THE COMPANY PLOTS THE WHOLE SCENARIO IN A GRAPH THERE IS A SITUATION WHERE THE DEMAND CURVE INTERSECTS WITH THE SUPPLY CURVE. THIS POINT OF INTERSECTION IS CALLED EQUILIBRIUM.
WE CAN ALSO SAY EQUILIBRIUM IS A SITUATION IN WHICH THE QUANTITY SUPPLIED MEETS THE QUANTITY DEMANDED.
IF THE SUPPLY CURVE EXCEEDS THE DEMAND CURVE AFTER EQUILIBRIUM POSITION WE CAN SAY THAT THERE IS A SURPLUS OF PRODUCT IN THE MARKET AND VICE VERSA IF THE SUPPLY CURVE FALLS SHORTER THAN THE DEMAND CURVE WE CAN SAY THAT THERE IS A SHORTAGE OF THE PRODUCT IN THE MARKET.

How Consumer and Producer Surplus Differ

Consumer Surplus

It is the difference between the total amount that consumer are willing to pay for a good or service and the total amount that they actually do pay (i.e. the market price)

Consumer Surplus is indicated by the area under the demand curve and above the market price

For Example – A consumer willing to pay Rs.10 for a salt packet but after going to market he pays Rs.8. So consumer surplus on a salt packet is (10-8) Rs.2.

Producer Surplus

It is the difference between what producers are willing and able to supply a good for and the price they actually receive.

Producer surplus shown by area above the supply curve and below the market price.

For Example – A Seller willing to sell a salt packet for Rs.8 but after he sells it at Rs.10. So producer surplus on a salt packet is (10-8) Rs.2.

How you spend according to your income

How you spend according to your income

Budget:

Generally, budget means an estimation of costs, revenues and resources available to a person or organisation or a general body over a specified period of time and planning accordingly.

Budget line:

•  It is the representation of the combination of two products that a consumer can afford with a given income using all the amount available to him.
•   It represents the relative prices of the two products. 
•  The budget line will shift when there is a:                                                                     a): change in the level of income but there is no change in the price of the two products.                                                                                                                         b): change in the price of one or both the products with the income remaining the same.

Reference : my book

Let’s take an example;

Let the income of a person Shankar be 800 rupees per week. The prices of the two products he buys regularly rice – 40 rupees per kg and vegetables – 80 rupees per kg.

Shankar could buy 10 kg of rice and 5 kg of vegetables with his initial budget. Or any combination that lies along the budget line (A). for example he can buy 20 kg of rice without any vegetables or 10 kg of vegetables without any rice.

1.  A FALL IN INCOME:

If the weekly income falls to 600 rupees and the price of the two products remain the same then the budget line moves as shown in the figure. It is represented by line (B).

     2.  A CHANGE IN PRICE:

If there is a change in the price of any of the product or both the products the shift in the budget line is accordingly. Here the price of the vegetables fall to 50 rupees and the change is shown by line (C).

Elasticity and Revenue and its types

Elasticity:

Elasticity is defined as change in the quantity based on the products price and consumers income.For example if we want to purchase a product which is  available at multiple places automatically we will go to whoever is giving the lowest price.

                              Elasticity =% change in quantity/% change in quality

Elasticities can be divided into 3 broad categories.They are:

1.Elastic

2.Inelastic

3.Unitary Elastic

1.Elastic:

In this category there is an reduction in price to increase the revenue.

                            

                           %Change in Quantity/% Change in Quality >1

2.Inelastic:

In this category there is an interest in price to increase the revenues of the purchase.

                            %Change in Quantity/% Change in Quality <1

3.Unitary Elastic:

In this category the hold price is constant and there will be no effect on revenues.

                     

                            % Change in Quantity/% Change in Quantity=1

CONSUMERS SWITCHING TO CLOSE SUBSTITUTES

                                    CONSUMERS SWITCHING TO CLOSE SUBSTITUTES

  The goods with close substitutes have more elastic demand than other products, because consumers easily changes their mind to buy substitute products. Consumers are more focused on incentives. When a substitute product with same quantity of less price always attracts the consumers to purchase. Increase in price of one product leads to increase in the demand of other product.

Example:  Sprite and 7up are close substitutes. If a small price change in Sprite will lead consumers to purchase 7up. As 7up is the close substitute and provide the same quantity. The sales of sprite decrease as the result were 7up sales quantity will be increased

Imagine, you are a employee and you use your bike to go office daily. As the sudden rise in petrol rate end-up you to use public transport. By using public transport you can save money. Along with you there are many who started using public transport. Now the demand of public transport is high.

Effect on Producers

Elasticity: It is a measure of the sensitivity of one variable to another.

Supply : Ability and willingness of producers to offer the goods in market for sale at various prices.

Determinants of Elasticity 

Supply 

1) Flexibility of inputs: 

Flexibility means where the inputs in manufacturing process or services can be replaced by other inputs. Consider any best restaurant where the food served is tasty enough, in that place the chef is very important. The chef/cook is not flexible( irreplaceable). But on other side bearer is flexible (replaceable). Now take few more examples: 

Hospital : Doctor(inflexible) and clerk(flexible)

Airplane : Pilot(inflexible) and Airhostess(flexible) 

Movies : Actor(inflexible) and side artists(flexible)

Hence flexibility of inputs influences the elasticity of supply.

2) Mobility of inputs:

Mobility means the inputs that can be relocated from one place to another. 

Examples of immobile inputs: labour, machinery, steel and aluminium plants, land, capital. 

Examples of mobile inputs: circus artists, cheer leaders, theatre artists, actors, maid servants.

3) Durability: 

Durability means the inputs that can be used over long period of time or cannot be used. For machinery’s it is the capability to withstand wear and tear for long time period. 

For example take chemical industry, construction industry, software industry. 

4) Time: 

Time plays a crucial role in the supply. For example consider mobile inputs like drivers they turn out inelastic at particular moment of time which means there is a need of driver at that particular time so then the elastic input also become inelastic. Can also consider some other mobile inputs like maid servants, cleaners, laundry. 

5) Ability to produce substitute inputs: 

It is the capability or ease of creating a substitute.

For example consider production of milk powder to replace milk, creating artificial leather. 

Here price decreases if substitute a cheap input. 

Micro Economics: Consumer and Producer Surplus

Consumer Surplus

Consumer surplus can be defined as the difference between the price, the consumer is willing to pay and the actual price paid by the consumer.

For Ex: A lady goes to buy a suit, the actual cost of the suit is Rs 1200 but the lady is willing to pay only Rs 700 after negotiating, she ends up paying Rs 850. The difference between the price the lady is willing to pay and ends up paying is called as Consumer Surplus.

Producer Surplus

It can be defined as difference between the price the producer is willing to sell the goods and the actual price he ends up selling.

For Ex: A shopkeeper is willing to sell a product at a minimum of Rs 5 but ends up selling it at Rs. 8. The Rs. 3 which he gains extra may be defined as producer surplus.

  

Does Price Effect Supply & Demand ?

DOES PRICE EFFECTS SUPPLY & DEMAND ?

Yes price effect the supply and demand. Before going to their relation of price with demand and supply let us know what is price.

Price:

Price is an amount of money that you have to pay in order to buy it. Generally price include cost of production plus profit 

Demand:

Consumer's desire,ability and willingness to buy a goods at various prices.

Supply:

Ability of producers to offer the goods in the market for a sale at various prices 

How Price Effect Demand ?

Let us take a example of a shirt. If a consumer want to buy a shirt value of 500 per piece the consumer can buy 2 shirts. If the shirts go on sale the consumer can tend to buy more shirts,if the cost of shirt double the consumer can buy fewer shirts only. As goods become expensive people tend to demand less on them.

The above example says that if a price of a product decreases the consumer tend to buy more shirt and vice versa. This shows a inverse relationship between demand and price

                                                        P ∝ 1/D

How Price Effect Supply ?

Let us take an example of shirts the price of shirt rises automatically the profit of a company increases and this leads to increase the supply of shirts.

The above example says that if the price of an product increases the producers tend to produce more shirts product and vice versa. This shows direct relation between supply and price. 

                                                         P ∝ S

Conclusion: 

But in general when supply of a product increases the product will become more cheaper in market than before. This tends to decrease or fall in price

At same point, too much of demand for a product will cause supply to diminish as a result price will rise and product demand will go down.

Due to this the supply & demand should reach an equilibrium. The amount of goods produce should be equal to the amount of goods are demanded.

     

  

  

DETERMINANT OF THE PRICE ELASTICITY OF DEMAND

As we have mentioned about the laws of demand earlier now we are going discuss about the determinant of the price elasticity. Earlier we knew how  with the increase of the product of the price the quantity of the product decreases. The price elasticity of demand generally deals with how the customers are not willing to buy the product with the increase of the price of the product.Elastic generally deals with the increase of the price of the product the quantity decreases whereas in inelastic we will find that with the increase of the price of the product the quantity does not decreases.
1.) Replacing by close substitute
we will see that when the two items are of same and one of the item is having some rise in pricing then we will find that the quantity of that product will eventually decrease.
eg:Imagine the pricing of butter and curd are same. So if the price of butter increases then we will find that the people will be buy more of the substitute of that of butter.
2.)Necessity against luxuries
Suppose let us consider that the price of buying water increases but we will find that people will be buying that. In case of luxuries we will see that the same people will be buying fruit juice but with the rise of the price of fruit juice the customer will hesitate to buy. The earlier example is necessity and the later example is luxury.

MICRO-ECONOMICS: DETERMINANTS OF ELASTICITY

Determinants Of Elasticity Of Demands.

1.Consumer Income:

The income of a consumer may also affects the elasticity of demand. For a consumer with high income, the elasticity of demand would not affect to that extent as it effects the consumers with lower incomes.

For Ex: If the prices of oil/petroleum products goes up, it would effect largely to the consumers with lower income but would not effect that much to rich class.

2.Amount Of Money Spent:

The price of a particular product may also effect the elasticity of demand. For a product with less value, the elasticity of demand would not effect whereas with a huge value product it may effect massively.

For Ex: If price of a pen increases from Rs.8 to Rs.10 its demand may still be same, Similarly if the price of a car increases from Rs.7lakhs to Rs 9lakhs its demand might go down.

3.Price Of Substitutes.

The elasticity of demands also depends on the substitutes available in the market

For Ex; If the price of milk from a dairy is comparatively high to others, the consumer may turn to other dairy as a substitute stating that the prices are too high. Hence the demand of the first dairy may reduce.

Cross Elasticity

Now cross elasticity of demand is the change in demand of one good with change in price of another. Now you will be wondering how can demand of one good affect the price of another .
So now let's take a real life example suppose the price of petrol increases so now what happens is if you are planning to purchase a car automatically we would go for the diesel car instead of the petrol car this is because the price of petrol rose .Now here the price of car did not change for its sales to come down  but  the demand for the petrol cars was actually affected by the increase in price of the petrol . Now take up a situation , suppose a person who drinks coffee often , suddenly price of coffee increase drastically and now this has forced the user to switch over to tea . The demand for tea here rose not because its price was lowered instead it changed due to the change in price of coffee. Now this is what is learnt by cross elasticity.

E-ELASTICITY OF D-DEMAND

Brief About Elasticity Of Demand

Price elasticity of demand measure the correspondence size and amount changes in the quantity demanded of a commodity to a given change in its price. The price elasticity of demand positively measures the response of the quantity demanded of a good to a change in its price when all other effect on buyers plan remain same.

It means the percentage change in quantity demanded of a commodity to a percentage change in any of the variable. Its human nature to find a substitute for himself at certain period of time when his/her wants are not fulfilled. Basically price elasticity of demand means substitute to other goods according to the time and budget of the customer.

Suppose, lets take a example of tomato, if a consumer does't gets tomato in the market he/ she substitute it with tamarind. Consumer always goes for the availability of close substitute within a short period of time and in his/her budget.

Effects of Technology on supply and Demand

EFFECTS OF TECHNOLOGY ON SUPPLY AND DEMAND

Every Business is run by the Demand and supply of a commodity. Demand and supply forms the basis of any organization.
Demand is basically refers to how much product did buyers want that is also known as quantity.
Supply refers to how much of the product is available for sale to consumer at a specified price at a given point of time.
Today technology has dramatically impacted the market leading to either positive or negative impact on business. It has effected in variety of ways.
Better and advanced technology to produce goods will bring the cost of production down and therefore increased supply of a product. This results in increase of economies of scale and will lead to shift of supply curve. Moreover quality of a product increases that satisfies customer. So, demand of a product also increases. For eg. Mobile sector is growing at a high pace because of lower cost and multiple features which discard their older phone. This increases profit for manufacturer and demand also increases.
On the other hand if technology used is outdated or obsolete then supply will trickle down as a result of increasing cost of Production. This will lead to increase of price of product and demand will decrease which in turn can negatively impact the business.
For eg- Earlier Maruti company was the only Automobile company but lack of technology upgradation, its value was degraded. Therefore it got merged and formed Maruti Suzuki now.

Interpretation of elasticity of demand in case of Income

We can say income elasticity as the change in demand of a commodity in respect to the change in consumer's income.
Now as a normal consumer, what would you do when you are backed up with purchasing power? You would  be purchasing quality goods. And in the reverse situation as a customer you would cut down  your preferences and purchase inferior goods.

This particular concept of Income elasticity is important for a firm to estimate -  how the demand for its products will change.
Now for this economist use
    %change in demand /%change in income

All the consumer goods are classified into some category .
What is the income elasticity for baked beans,bus, railway?  NECESSITIES,here impact on expenditure is, less change in income.
How high is the income elasticity for fine wine? COMFORT GOODS, here the impact on expenditure, is almost change in income.
What about the elasticity for an antique, an executive plane, a painting?LUXURY, here more than increase in income.

In all these cases of normal goods income elasticity is positive.
But in case of INFERIOR GOODS it is negative i.e. Negative income effect which means when income rises you switch to superior quality good.

Consumer surplus

Consumer surplus
It is defined as difference of total amount and the amount that consumer is willing and able to pay for goods.
Example if  three different tshirts offered for sale at 500 rupees per tshirt.there are 3 people in the shop.A1,B2,and C3
A1 is willing to pay 800 rupees.
B2 is willing to pay 700 rupees.
C3 is willing to pay 500 rupees.
Therefore,A1's consumer surplus is 300 rupees.B2's consumer surplus is 200 rupees.C3 is a marginal buyer.

An example related to Demand Schedule and Demand Curve

         
   
         Price of                           Quantity of
         Darjeeling Tea              Darjeeling Tea               
                (Rs)                                 (Kg)
             
               250                                      1
               200                                      2
               150                                      3       
               100                                      4
                 50                                      5

In the below figure, the horizontal axis represents quantity and the vertical Axis represents price of a commodity.Considering the demand for tea the law of demand can be shown to a demand schedule and a demand curve. The graphical presentation has done below, where we will see the demand schedule when the price of of a good rises up  simultaneously the demand of that good will fall down. Suppose when the price of commodity is Rs 250 per kg, consumer purchase 1 kg of Darjeeling tea.So, when the price for Darjeeling tea falls to Rs 200 per kg, consumer purchased 2 kg of Darjeeling tea.As the price of a commodity are falling, quantity demanded goes on rising. Now when the price of the Darjeeling tea goes to Rs 50 per kg then the consumer purchase 5kg of Darjeeling tea.
       Now, this demand schedule presented into the demand curve by graphically plotting where as X-axis represents to quantity demanded and Y-axis represents to price (kg) of the commodity. By plotting 2 kg of Darjeeling tea at a price of Rs 250, we get A point, similarly by plotting 2 kg of Darjeeling tea at a price of Rs 200 we get point B and as on we will get C,D and E that are plotted in the graph, representing the other combination of price and quantity demanded. By joining A,B,C,D and E we will get a curve DD which is known as demand curve.

Price Elasticity Of Demand!

The price elasticity of demand is the ratio of the percentage change in quantity demanded to the percentage change in price that caused the quantity demanded to change.This ratio measures the relative responsiveness of quantity demanded to a change in the products products price.
The Price elasticity of demand is calculated as shown below:-
Price elasticity of demand=Percentage change in quantity demanded/Percentage change in price

From the Law of demand ,We know that price and quantity demanded move in opposite directions.As a result, the price elasticity is always negative(-ve),reflecting the inverse relationship between price and sales.

Non-monetary determinants of demand and supply

The demand and supply are usually compared monetarily, keeping all the other factors constant. Here is a piece of writing which shows the non-monetary determinants which effect the demand and supply of a product. Let the product be Maggi.

Various factors that effect the demand of the product are:

Taste

The most important determinant of demand is the taste of customer. Because of the taste of customer, Maggi has been in the market unbeatably since a long time and still rules the market with 60% of market share.

Expectations

If the price of Maggi is expected to fall in upcoming days, all the Maggi lovers will try to keep a stock for themselves in advance so as to enjoy their Maggi at the same old price and keep up with the budget.

Population

Demand depends upon the number of buyers. If the number of people increase as consumer of Maggi, the demand will go up.

Consumer income

If the income of a consumer goes down, he/she will try to manage his/her expenditure and will try to cut the non-compulsory expenses. This will effect the demand of Maggi.

Various factors that effect the supply of the product are:

Technology

Technology has a major role in manufacturing firms. Better technology leads to more number of products made in less number of time and less costs. Thus, more number of items can be produced in less time.

Expectation

The amount of Maggi being supplied depends upon the future expectations. If their is an expectation that the competing noodle brands will increase the rate of their noodles, Nestle will try to dispatch less number of packets so as to gain profit.

Population of sellers

If a popular mart or some shops close down, the supply of Maggi will be effected as market supply depends upon the number of these sellers.

Input cost

If the input cost of one or two ingredients of Maggi goes up, the product will become less profitable and firms will supply less Maggi.

Referred from- Principles of Microeconomics. By N. Gregory Mankiw

Market equilibrium and it's application in real life

Market equilibrium is a position where quantity demanded is equal to quantity supplied. Suppose you're a led television manufacturer. You manufacture 70 inch television and sell it to retailer at 70,000 INR. Because of increase in intensity of competition your sales turnover ration has decreased. You decided to reduce the price of the television to 60,000 INR and to also cut down the production of television for next month. Your sales turnover ratio began to increase but your warehouse still has unsold goods. You further decrease the cost to 55000 INR at same level of production. When you reviewed the sales turnover ratio next month you found out that you have barely any unsold stock and purchase order of your televisions have started going up. This stage is referred to as market equilibrium. 55000 INR is the equilibrium price because at this price the quantity demanded is equal to quantity supplied.       

Surplus; only for which producer work

Imagine that you have a wedding in your house. So you have to hire a sweet maker. And you approach many sweet makers according to your budget,out of them three is ready to do work for you on your budget. Because they would receive the exceed amount than they would put to make sweets i.e raw material. Now you have to choose right person for your work.The cost that will occur to sweet maker is opportunity cost.producer surplus is the difference between the amount seller paid and cost that occurred to seller (as for sweet maker).ln other words at a market price,producer who are ready to supply goods at lower price that difference is called producer surplus.
                                 Producers always want higher prices for their products that they sell in a market.we use producer surplus to measure the well being of sellers in much the same way as we use consumer surplus to well being of buyers. Because these two measures of economic welfare are so similar, it is natural to use them together.
               Producer surplus is closely related to  the supply curve. The height of supply curve measure seller's costs and the difference between price and cost of production is  each seller's producer surplus.

Consumer Surplus Producer Surplus.

Consumer Surplus
It is the difference between the price consumer is willing to pay and consumer actually pays.
When demand is inelastic there is a greater chances of consumer surplus as there are some consumers who will pay high price to continue consuming the product.
A fall in market price of any product leads to an increase in demand which leads to consumer surplus.

Producer Surplus
It is the difference between the price producer is willing to sell and the price at which the goods are sold.
When a price of any product increases it will increase the producer surplus and vice versa.

Does Law of Demand satisfy Veblin Goods?

As we all know that the Law of Demand says that there is an inverse relationship between price and demand.
But is it true for all cases?
  No, some goods like veblin goods does not satisfy this, rather when price increases the demand also increases.
    We all are very much familiar with brand called The Body Shop, which is a very luxurious brand in the market. Still people prefer to buy such goods as they want to maintain their status in the society by showing  off their wealth through these luxurious products. They just want the products should be very costly.
So, price is not the factor here and creating such kinds of veblin goods, makes the company profitable.