PRACTICAL ASPECTS OF ECONOMICS

1.   Law of diminishing marginal utility

Law states that the more you consume a good in a specific period of time, the less the additional utility is derived from an additional unit of good. It simply means that the more you consume a good the less amount of satisfaction you derive from consuming an additional unit of that good.

For example-

-          Having dinner at a particular restaurant week after week will lead us to diminishing utility. We won’t have the same amount of satisfaction as we had when we first when there.

-          Theatre artists perform at multiple cities so that they capture new audiences and people are a particular one city does not feel diminishing satisfaction because of watching them over and over again.

2.    People respond to incentives.

       An incentive is a reward that motivates people to act towards it. People make a purchase according to what they are receiving in addition to that product.

      For example

-          Discount offers at malls. Various brands give discounts on products so customers buy their product.

-          Many start hotels routinely offer unlimited buffet meals. As consumers think they are getting unlimited food by paying less amount. But this soon results in diminishing returns and hotels earn a huge profit.

3.    People face trade offs

       Trade-offs is situation customers face when they have too many options. They get confused on what to buy. Here they do cost benefit analysis and decide.

                         For example

-          Too many similar types of dresses available at one store. Ultimately we get confused and end up buying nothing from that store.

-          Stores where product assortment is diverse will have less sales as compared to stores having a narrow assortment. There people can make quick decisions.

4.     Opportunity cost

        The cost of something is what we give up to get another good. You have to make sacrifice. Cost of the next best alternative.

      For example

-          Choosing between various colleges. This is a very critical decision. Students face trade-offs on which college is better. They compare the colleges by doing cost benefit analysis and then identify the opportunity cost to be given to select the best college.

-          Three prospective location- A, B, C having 750,900,850 net benefits respectively. Best location will be B because it has additional net benefits as compared to A and C.

5.     Taste and preferences

        Taste and preferences are individual’s choice over goods and interests. Taste and preferences play a large role in decision making. They vary from individual to individual.

        For example

-          There are two friends. One likes going out and trying new places to eat. While the other doesn’t likes change and stick to limited places only. Here the choice of restaurants is different between two friends.

-          Young men and women having keen interest to participate in fashion shows because fashion shows are trending. Young men and women prefer them and recline towards them and enjoy their preferences.