FIVE SHADES OF ECONOMICS

RESPOND TO INCENTIVES~

Incentive is something that makes a person to act. Rational people compare the price of the particular product and then the benefit that they are going to get out of that product before making a purchasing decision. Then they react to incentives.

EXAMPLE- When the price of the food of a particular restaurant increases, then I am less likely to go there again even if I am the regular customer of that restaurant.

OPPORTUNITY COST~

The price of the next best alternative that we give up to choose one out of the given alternative is called opportunity cost. 

EXAMPLE- Imagine that there is a land and you can either build an apartment and give it on rent or can start a restaurant in that land.You prefer to start a restaurant. So the cost of the rent that you would have get if you would have build an apartment instead is called as opportunity cost.

SUPPLY CURVE~

Supply curve is a curve that shows a relation between the price of a product and the quantity of the product that the seller is willing to supply within a given period.

EXAMPLE- A seller named Ravi is selling dosa at an equilibrium price of Rs 50 and manage to sell 200 dosa per day. The increase in the quantity supply of dosa will shift the curve towards right side. If the price is reduced to Rs 40, the quantity demanded will increase to 400 per day. So the supply of dosa will be increases and Ravi has to supply as per the quantity in order to avoid supply shortage. A decline in the supple  of dosa will shift the curve towards the left. Similarly, if the price of the dosa increases to Rs 70, then the demand will decrease and so is the supply.

MARGINAL RATE OF SUBSTITUTION~

The rate at which an individual is ready to substitute a good for another good is called as marginal rate of substitution. 

EXAMPLE- I went to Mc Donald to have a burger. But unfortunately, it was closed on that day. So i went to Burger King instead and a burger. Here, the substitution that i did by having a burger from another place instead of Mc Donald is the marginal rate of substitution.

LAW OF DEMAND~

When the price of a particular good increases, then the quantity of that good decreases or shrinks as there is a fall in the demand of that particular good. This is known as law of demand.

EXAMPLE- I went to a sweet shop to buy 150 pieces of Kaju Katli for Rs 15 per piece. But the seller says that from the last two days, they have changed the price of all the sweets and now the cos of Kaj Katli has increased to Rs 25. So as I see that the price has been increased, so I will decide to buy only 100 pieces of it, thereby decreasing my purchase quantity. This is known as law of demand.