Concepts of Economics

1. LAW OF DEMAND:

    The law of demand states that, other things remaining constant, when the price of a good rises , the quantity demanded of the good falls and vice-versa.

E.g., when the nearby CCD raises the price of coffee from $1.75 to $2.25, the quantity demanded of coffee will go down.

When any particular fruit or vegetable is in season their prices are low and therefore people buy more.

2. Price elasticity of demand:

The price elasticity of demand measures how much quantity demanded of a commodity changes in response to a change in price.

E.g., Insulin is a product that is highly inelastic. For diabetics who need insulin the demand is so huge that price increase have very little effect on the quantity demanded.

Online streaming services is a highly elastic service .if the subscription charges of these services go up ,the demand for them will go down as they are not basic necessities.

3. Income elasticity of demand

  The income elasticity of demand measures how the quantity demanded of a commodity changes as consumer income changes.
 
E.g.,consider an example of car dealership. When the average real income of consumer goes up from rs. 40,000 to rs 50,000 , the demand for car increases from 5000 units to 10,000 units .

4. Cross elasticity of demand:

The cross elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good.
The cross elasticity of demand is positive or negative depends upon whether the goods are substitutes or complements.

E.g., tea and coffee are substitutes. Assume that you drink coffee and the price of coffee goes up so you substitute coffee with tea. So as we can see with the increase in price of coffee, the quantity demanded of tea goes up. Therefore substitues have positive cross elasticity of demand.

Let us take another example of car and petrol. They are complementary to each other. If the price of petrol goes up the demand for cars will go down. So with the increase in the price of one commodity the demand for another commodity goes down. So complementary goods have negative cross elasticity of demand.

5. The law of diminshing marginal utility:

The law of diminishing marginal utility states that ' when a consumer goes on consuming a particular commodity without any time gap , the additional units of the same commodity will give him less and less satisfaction.'

E.g.,suppose you are hungry and you buy a pizza for $2. When you eat the first slice of pizza you gain certain positive utility from eating it. Because you are hungry the first slice will give you huge satisfaction but as you consume the subsequent slices , the utility/satisfaction derived from each slice goes on decreasing as your hunger goes on decreasing and the last slice of pizza will give you negative utility as you are already full.

Suppose chocolate cake is your favourite. So in a week of 7 days when you are given cake continously for 7 days let us see what happens .on the 1st day the cake will give you immense satisfaction but with every subsequeny day your satisfaction goes on decreasing.  This is diminshing marginal utility.