5 Economic concepts

CONSUMER SURPLUS

Consumer Surplus is the difference between the price of a product which consumer actually wants to pay and what consumer actually pays.

Consumer Surplus :- Amount, a consumer wants tom pay – Amount, a consumer actually pays

For Example :-

1.One year ago, I went to a mall for purchasing a Fossil Watch and my budget to buy a Fossil Watch is Rs.8000. But when I entered into a Fossil showroom, I saw several options. After sometime I chose a watch which I liked the most. And the price of that watch was just Rs.7000. I immediately purchased that watch as it was under my budget. So, Rs.1000 is my consumer surplus.

2.Few days ago, I went to Reliance Trend to shop for a shirt for         Fresher’s Party. My budget to purchase a shirt was Rs.1000. I saw many shirts, tried many pieces. After sometime, I liked one shirt that suits me a lot. And when I saw the price tag of that shirt, it was just Rs.700. So, I purchased that shirt at once and saved Rs.300. These Rs.300 is my consumer surplus.

PRODUCER SURPLUS

Producer Surplus is the difference between the price of a product which producer wants to sell and what price producer actually sold.

Producer Surplus :- The amount, a seller is paid for a product – The seller’s cost of providing it

For Example :-

1.    Two years ago, I wanted to sell my Apple iphone 6s for Rs.20000 which is just 1 month old. I was searching for a customer who can actually pay Rs.20000 for this iphone. But what happens, after few days I met a person who is my friend’s friend. He was ready to pay to me Rs.23000 for that iphone. So, I immediately sold my iphone to him and collected Rs.23000. These extra Rs.3000 was my producer surplus.

2.    Three years ago, I went for an interview. And after giving the interview, I was thinking that I would be selected with salary of Rs.30,000 per month. But when the result was announced, I was selected. When I called by recruiter to his cabin for discussing the salary, he offered me for Rs.40,000 per month. I accepted the job. This Rs.10,000 is my producer surplus.

OPPORTUNITY COST

Opportunity Cost is also known as Alternative Cost. It is the cost of something is what we give up to get it. While making a decision, person should be aware of the opportunity costs that accompany each possible action. A choice need to be done among best alternative options. We have to choose such type of alternative from which we can get benefit.

For Example :-

1.    Six months ago, I went to market for purchasing a new phone. Shopkeeper showed me several options which are having different features. And among those options, I found 2 phones are good according to my needs. 1st one is one plus which costs around Rs.25,000 and another one is iphone which costs around Rs.30,000. But in iphone I was getting some extra features. So, I give up the one plus to get the iphone which were having extra features. So here, one plus is my Opportunity cost.

2.    Two years ago, I completed my BCA and I was placed with Rs.40,000 per month. And that time I was having 2 options. Whether I could enter into the corporate world, or else, I could join my father’s business. If I would join my father’s business, than I would be able to earn Rs.35,000 per month. So, I attracted towards extra Rs.5000. So, I gave up to join my father’s business and entered into the corporate world.

          Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility states that with the consumption of extra one unit of product, the utility of product goes down. Marginal utility is derived as the change in utility as an additional unit is consumed. The more of a good that one obtains in a specific period of time, the less the additional utility derived from an additional unit of the good. During the course of consumption, as more and more units of a commodity are used, every successive unit gives utility with a diminishing rate, provided other things remaining the same. Although, the total utility increases.

Assumptions:-

1.  It should be applied on the same consumer at the same time.

2.  The product size, shape should be the same.

3.  Unit of good should not be very few or small. In such a case, the utility may not be measured accurately.

For example :-

1.  Two days ago, I was very hungry. I went to market to eat something. Then I saw a restaurant near D-mart. I went there and ordered paneer butter masala and 5 chapattis. As I ate 1st chapatti, amount of utility derived from eating 1^st chapatti was 10 units. When I ate 2^nd chapatti, amount of utility was 8 units. When I had my 3^rd chapatti, amount of utility was 6 units. Likewise it was keep on decreasing and sometimes it may go to negative also.

2.  Yesterday , I was very hungry. I went to market to eat something. Then I saw a shop of momo. I went there and ordered 1 plate of momo which were having 10 pieces . As I ate 1st momo, amount of utility derived from eating 1^st momo was 10 units. When I ate 2^nd momo, amount of utility was 9 units. When I had my 3^rd momo, amount of utility was 8 units. Likewise it was keep on decreasing and sometimes it may go to negative also.  

INCENTIVES

An incentive is something that induces a person to act, such as the prospect of a punishment or a reward. Because rational people make decisions by comparing costs & benefits, they respond to Incentives. It motivates people to work harder to satisfy their needs and wants. Incentives increases the productivity of people.

Price, quality, quantity, satisfaction, discount, service, brand review, location, income levels, needs, attractiveness, resale value, trends etc.

For example :-

1.  Few days ago, I went to market for shopping. I picked 1 t-shirt. But then I get to know that if I buy 2 t-shirts, I’ll get 40% discount. Then to get 40% discount, I purchased 2 t-shirts. I attracted towards discount.

2.  Whole sellers give more preference to retailers who are their regular customers. They give some extra discounts and offers like free delivery.