Some Principles and Concepts of Economics

Some Principles and Concepts of Economics

LAW OF DEMAND

The Law of Demand states that as price of the goods or services rises the quantity demand falls and vice versa, other things remaining constant.

Example 1: Suppose, I went to market to buy apples and I may demand 1 kg for apples at 160 per kg, but I may demand 500 grams of apples if the price rises to 180 per kg.

Example 2: Suppose let’s take an example of Gold Jewellery. When the price of Gold increases the quantity demand of it get decrease and people buy less. On the other hand, if the price of the Gold decreases the quantity demand of it increases.

LAW OF SUPPLY

The Law of Supply states that as price of the goods or services rises the quantity supply rises and vice versa other things remaining constant.

Example 1: Suppose let’s take an example of Coco Cola Company. They supplied 500 coco cola at price of RS. 12 each.  But if the price increase beyond Rs 12, and the consumer is willing to pay, then the company will manufacture more than 500 in quantity, to increase more profit.

Example 2: If the price of the of laptops increase, the laptop manufacturer will manufacture more and more laptops to earn move revenue.

CONSUMER SURPLUS

Consumer Surplus is the difference between the price that consumer is willing to pay and the consumer actually pays.

Example 1: Suppose I went to buy a smart phone and the market price of that smart phone is Rs.30000. The amount was out of my budget and I want to buy that particular smart phone only , so I started bargaining and paid Rs 28000. So her Rs 2000( Rs 30000 - Rs 28000) is the consumer surplus.

Example 2: Suppose I went to a shop to buy shirt. The original price of the shirt is Rs. 1000. I started to bargain and paid Rs. 700. So here Rs. 300 ( Rs. 1000 - Rs. 700)  is the consumer surplus.

PRODUCER SURPLUS

Producer Surplus is the difference between the price the producer is willing to sell and the consumer actually sold.

Example 1: Suppose I'm a factory owner wants to sell a product, lets say a shoe. The cost of production of that shoe is Rs 300. But I offered and sold in the market at Rs 700. So Rs 400 (Rs. 700 - Rs. 300) is the producer surplus.

Example 2: Suppose I want to sell a pen and I expect a minimum amount of Rs 15 for that pen. But I received Rs. 20 by selling that pen. That Rs. 5 (Rs. 20 – Rs. 15) is my Producer Surplus.

LAW OF DIMINISHING MARGINAL UTILITY

With every additional unit of consumption of a particular commodity at a particular period of time, the utility level keeps on decreasing. 

Example 1: Suppose I came from gym and want to have some Glucon D. I took one glass of Glucon D which gives me great satisfaction and great utility. Then I took second glass of Glucon D. Now this time the utility of the second glass is less than the first one. Now after taking the third glass, the utility of the third glass will be less than the second one. In this way the utility goes down to zero with every consumption of glasses of Glucon D.

Example 2: Suppose let’s take an example of a 4 years’ baby. On his birthday his aunt gave him a present which was a toy car. His interest towards the toy car will be maximum at the beginning but day by day the utility of the toy car declines.

INCOME EFFECT

When change in demand of goods or services gets affected by the change in real disposable income is known as Income Effect.

Example 1: The income effect influences the demand for luxuries goods. Suppose someone prefer wearing expensive watches depends on his income capacity. If his disposable income falls, demand for expensive watches will also fall.

Example 2: Suppose take another example like if a person’s disposable income is less he may go to office by bus. But on the other hand if the person’s have more disposable income then in that case he may prefer Ola Cabs or Uber.

 SUBSTITUTION EFFECT

It is when the consumer replaces higher price items with lower price due to the change in price of goods or services.

Example 1: Let’s take an example of Coffee and Tea. Suppose I use to have coffee on regular basis. But after some days it has been seen that the price of coffee has slightly increase. So in that case I will change my demand towards Tea which is the cheaper product than the previous one. 

Example 2: Suppose let’s take an example Cheese and Butter. Let’s say a person who like to have cheese and bread 3-4 days a week. But it has been seen that the price of cheese has been increased by huge amount. In that case he might change his demand towards the product to Butter which is less cheap and in his budget.