Greatest Learning from Economics

“Economics is just a subject, maximum concepts of it is hypothetical, there is no connection with real world and maximum decisions are taken on the basis of assumption.” – this was my concept on economics before joining IBA. But it didn’t take much time to change this concept. In the first day of Business Economics class, when sir described how the concepts of economics worked even in my college selection, I became astonished. That was the starting and after that I never feel that it’s a worthless subject. I started applying various types of economics concept in different situation. From a junk subject, it turned into a fun subject. Now when I read newspaper, I find how concepts of economics are applied in industries, companies and corporate, how those concepts help marketers to take decisions in marketing field and how we apply economics in our daily life.

          I learned so many concepts of micro economics. Among them, “Diminishing Marginal Utility” and “Economies of Scale & Diseconomies of Scale” are two concepts which I like most.

          It is very interesting when you learned that you can’t eat your favourite food for a long time because of diminishing marginal utility! You also become amazed when you learned that companies marge for getting the advantage of economies of scale but when they become too large they suffer from diseconomies of scale!

          So economics is totally fun and interesting. Now I’m eager to learn ‘Business Economics 2’ which is Macro Economics.

Economies of scale and Diseconomies of scale

Economies of scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. There are two types of cost, fixed cost and variable cost. Fixed cost remain same. It does not depend on output. And variable cost change with the number of output. Which means when output increase, variable cost also increases and when output decrease, it will also decrease.

So a company or industry can achieve ‘economies of scale’ by reducing its fixed cost. The only way to reduce the fixed cost is to increase the production.

There are two types of economies of scale- i) internal economies of scale and ii) external economies of scale.

Example: Many educational institute start operating in metro cities and industrial area so that many students can take admission. As a result, their fixed cost per student will decrease and they will achieve economies of scale.

Diseconomies of scale

From the above discussion we can say that company or business can achieve economies of scale by growing their business. But when the company or business grows so large, the cost per unit increase. It is defined as diseconomies of scale.

Example: Many govt. organisations like BSNL, Air India grew so high, that they didn’t control their cost. So they face difficulties.

Disclaimer: The definition of ‘Economies of Scale’ were taken from ‘Investopedia’.

DIMINISHING MARGINAL UTILITY IN COMPANIES

Law of Diminishing marginal utility
As consumption increases the marginal utility derived from every additional unit keeps on declining. 
Example :
1.PIZZA WORLD, Mumbai
Pizza world offers unlimited pizza @500 for  two people. Here they  attract customer  by providing pizza at nominal rate but uses law of diminishing marginal utility i.e. Consumers gets less utility after every additional pizza they eat. 
2.TAJ HOTELS
When we book a room for a day for two, the hotel provides breakfast in a buffet system to you. One can have all that they want free of cost, here they use law of diminishing marginal utility as a consumer cannot eat the whole even when they provide a large quantity.

Mid-term's Economical situations

1. Often unseasonal price fluctuations are observed in the case of fruits.

Concept : Price Mechanism

It refers to the system where forces of demand and supply determines the prices of commodities. Here the unseasonal fluctuation of fruit is due to unavailability or surplus availability of fruit in seasonal or unseasonal time.

2. The No. of tourists visiting hill station is comparatively high that that of religious places.

Concept : Marginal Utility

This situation refers to marginal utility because the satisfaction when a consumer gets while visiting a hill station is much higher than compared to going to a religious place. The facilities provided at hill stations are much more than religious places like comfortable accommodation, hygiene, good food so once a consumer experiences these facilities in a hill station he then prefers going to a hill station rather than to a religious place.

3. The artist or performers performing at different cities or events

Concept : Law of Demand

This situation is related to Law of Demand as the artists are performing at different cities because of the increase in demand for their performance.
One of the law of demand is satisfaction of customers, by performing in different cities they are satisfying the demand of their fans.

4. As the usage of skilled labour along with technology increases the output in expected to be high.

Concept: Increased return to scale

This situation is being referred to this concept because when the input i.e. skilled labour with technology is being increased the output will also increase according to increased return to scale.

5. 3 Prospective locations for large retail outlet location A offers 750net benefit units, location B offers 900 net benefit units & location C offers 850 net benefit units.

Concept : opportunity cost

It refers to choosing the best alternative possible.
Here we will choose the location B because it is giving the maximum net benefit unit that is 900.

Look Around! Economics is Everywhere

1.     Principle of Diminishing Marginal Utility

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.

Example: A movie can’t be run for a long time like six month or more. After each time watching the movie, the marginal utility start decreasing. And one day it will be negative. Then no one will watch the movie. This is the reason underlying behind the fact.

2.     Opportunity Cost

Opportunity cost is the cost of something what you gave up to get an another alternative thing.

Example: People are leaving villages and settling down in town or city. They are doing this for extra benefit which they will get from town or city and for getting the extra benefit they are giving up the opportunity which they can get from village.

3.     Law of Demand

When the demand increases, price of any product also increase and when demand decreases, the price also decreases.

Example: In hot summer days, Price of ACs increase sharply. Because at that time, demand stays in pick.

4.     People Respond to Incentive

Example: People always go to that shop from where they get maximum discount. The discount is incentive to the customer. Some shop also offers easy EMI scheme. That is also an incentive to the customer,

5.     Marginal Rate of Substitution

MRS is a measure of number of units of Y that must be given up per unit of X added so as to maintain a constant level of utility.

Example: Some people travel from their work place to home every day to save money. They sacrifice their family life to save money. Some people stay at city, nearer to their work place, to save time. They’re able to give a quality time to their family, but they sacrifice their savings because the ‘cost of living’ in city is high.

Experience: The Greatest Teacher

Experiences are the greatest tutor. Experience teaches us so many things in every strides of our life. And those lessons repercussions our personality. Experiences can teach us economics also. Let’s delineate such a real life experience of mine.

After appearing in a national level entrance exam, I applied in a few b-school for pursuing PGDM and got an opportunity to study PGDM from 5 b-schools. IBA Bangalore and Globsyn Kolkata are two colleges among them. For me, both of these two colleges situate in a same indifference curve. Both of them can give me same level of utility. I thought that, IBA is able to give me good quality of education, but Globsyn is only 118 km away from my home, so I can stay in touch with my family, friends and relatives. So the locus of Globsyn and IBA are in a same Iso-utility curve for me. Eventually, I selected IBA for good quality of education. The graph attached here will clarify this economics concept.

From the mentioned graph, it is clear that both of the two colleges are situate in same indifference curve U0. So both of them will give same level of utility, only the combination of dimensions are different. For good quality of education, I’ll have to sacrifice family life or vice-versa.

hypothesis of economics

1. OPPORTUNITY COST  

Opportunity cost is the next best alternative foregone. Scarcity is the basic problem of economics. Therefore, we are concerned with the best use and distribution of these scarce resources. Wherever there is scarcity there we are forced to make choices.

Example 1

One day I have gone to a famous hotel and there I was forced to make a choice in between limited veg thali and unlimited non-veg thali, where both of them costs 500 each and I got only 500 in my pocket. Then I choose unlimited non-veg thali, the opportunity cost is the limited veg thali which is supplied in limited quantity.

Example 2   

      Once I have been into a situation where I had to choose between whether to buy a   JBL Bluetooth speaker or a Phone where both of them are same price. Then I choose to buy phone rather than buying JBL Bluetooth speaker as phone can be used for using internet as well playing music and other functions and instead of JBL Bluetooth speakers I can make use of other company Bluetooth speakers which costs less. Here opportunity cost is the Bluetooth speakers I cannot afford to buy.

2. DEMAND

 Demand is the want or desire to possess a good or service with the necessary goods, services, or financial instruments necessary to make a legal transaction for those goods or service.

In general, demand is the quantity of goods or services that people are willing or able to buy at a given price. Price of the goods, Income of the consumers, Price of substitutes and complementary goods, Tastes of the people and expectations are the five determinants of demand.

Law of demand is the relationship between the quantity demanded at a given price while all other factors remain constant. If the price of a commodity rises, then the quantity demanded decreases and vice versa. In economics it is known as the ceteris paribus, which means the quantity demanded for a good or service is inversely related to price.

Example 1

              Once I went to market to purchase 1kg of onions. There I came to know that the price of onions has been decreased to half, therefore I bought 2kgs rather than buying 1kg. Here due to the decrease in price of commodity I demanded for more quantity.

Example 2

              Once I went to a retail shop to purchase 5 Maggie packets which costs 10/- each. There I found that price of the Maggie has been increased to 12/- and I got only 50/- with me. So, I bought only 4 packets rather than buying 5 packets. This is because of the increase in the price of the commodity and demand for the commodity has been decreased. 

                                      

3. SUPPLY

Supply is the total amount of a given product or service that is available for purchase at a set price. This component of economics may seem unclear, but you can find examples of supply in everyday life situations.

Example 1

           Wheat is very plentiful over the year & there is more wheat than people would normally buy.to get rid of the excess supply farmers need to lower the price of wheat & thus the price will low for everyone.

Example 2

Many new, unskilled workers come to city & all the workers are willing to take jobs at a low wage because there are available jobs, the excess supply of workers drives wages downwards

4.MOBILITY OF INPUTS

 There are some inputs which can be moved and some which cannot be.

 Example 1

           If kalanikethan shop owner wants to shift his shop from JP nagar to Jaya nagar, he can only shift the goods in it but not the building.

Example 2

          There is famous dosa bandi in Hyderabad called ramki bandi. He started with a hotel, later to expanded his business, he updated himself to food trucks which can be moved easily to everyplace.

  

5.PRICE MECHANISM (GOODS MARKET):

Price mechanism is the system where the law of demand & supply determines the prices of commodity & the changes there itself. it is the buyers & sellers who actually determine the price of a commodity.

 Examples 1

           Whenever there is shortage of Apple, the demand increases. The price gets increased automatically like about 150 rupees for 1kg. Then the demand decreases, many people stop buying and supply increases because of increase in the price. This happens until the demand and supply comes to same level.

Example 2

          Whenever there is shortage of electricity especially in rural area, the demand increases. Then people will pay 2000 which is more compared to base price. Then the demand decreases, people stop buying and supply increases because of increase in the price. This happens until the demand and supply comes to same level.

5 Concepts of Economics and real life example

1.     Rational people think at marginal

Example 1: You go to a restaurant, and noticed that the price of Chicken Biriani and the price of Chicken Fried Rice is same and you order for Chicken Biriani. The reason behind it is, Biriani gives you more satisfaction than Chicken Fried Rice. The extra satisfaction which you get from Briani, that is called margin.

Example 2: When you return home from outside in a hot summer noon, you prefer cold water instead of hot milk, the extra satisfaction which you get from cold water, that is margin.

2.     When Income increase, demand of inferior goods will decrease

Example 1: If your current income is Rs. 30000/- per month, then you buy Miniket Rice, and when your income will be Rs. 60000/- per month you will buy Basmati Rice. Here Miniket Rice is an inferior goods and its demand decrease when consumer’s income increase.

Example 2: You daily commute to your office from home by bus. Now you get a promotion. From the next day, you will start commuting via taxi. In this example, bus is an inferior good.

3.     Utility

Utility means the satisfaction derived or expected to be derived from the consumption of goods and services.

Example 1: In a cold winter night, after reaching your home from outside, you drink a glass of lukewarm milk. The satisfaction you get from the milk is called utility

Example 2: You took admission in a college. After completing the course, the satisfaction you will get from the course, that is utility.

4.     Principle of diminishing marginal utility

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 goods.

Example 1: If you consume your favourite food everyday, then you will not like the food after one week. And if you consume that food three or four times in a day for everyday, then you will not like the food after three or four day.

Example 2: Many hotels provide unlimited free breakfast, because they know you can’t be able to consume more than a certain amount of food because of diminishing marginal utility.

5.     Marginal rate of substitution (MRS)

It is the rate at which a consumer can give up some amount of one good in exchange for another good to maintain the same level of utility.

Example 1: If you want to get good marks, you have to study well, so you should increase the time of studying in a day, and decrease the time of playing.

Example 2: If you want to earn more money, you have to work hard and for a long time. So you have to compromise your time which you give to your family.

The Supply Elasticity

Elasticity of Supply

Definition of Elasticity:

Ever think of finding out the comparison level of two variable? Well, Elasticity is the best option. Elasticity refers to the measure of the sensitivity of one variable if the other changes. For example, Advertising elasticity is the relationship between the ad budget and the changes in sales volume.

Economists are often  interested in elasticity of demand and elasticity of supply.

The scenario of elasticity can be of three types mainly
1. When elasticity is greater than 1 i.e elastic situation
2. When elasticity is less than one i.e inelastic situation
3. When elasticity is equal to one i.e unitary elastic situation

Elasticity has various determinants which are as below

Elasticity is one of the prime factor to consider in managerial as well as business decision making.
It helps in deciding proper price, channeling the supply and handling the demand to make business successful.

Elasticity of Supply

The elasticity of supply is a measure of a company’s ability to increase or decrease production in response to a price change. It is also referred to as the price elasticity of supply.

Why it matters

Elasticity of supply tells us how fast supply responds to quantity demand and price increase. When there is a popular product that is in short supply for instance, the price may rise as a result. The manufacturers of that product will increase output (the supply) to keep up with the demand. The higher the elasticity of supply, the faster the supply will increase when demand and price increase. Some goods/services are more supply inelastic however, whenever there is a supply shortage. Limited tickets to a concert may have a very inelastic supply. The price of the concert tickets can be raised to any amount, but because there is a fixed number of seats and tickets, the supply (of tickets sold) may not be increased by much if at all.

Supply Determinants

• Flexibility of inputs

When you go to hotel, the most important person is chef. If chef is absent nothing will go, chef cant be replaced.

• Mobility of inputs

Theater group, they will be performing in different countries, different events. But the machineries are not easy to relocate.

• Durability

• Time

Drivers are elastic inputs but if you have a urgent meeting and that driver become unavailable for that time period that moment he cant be replaced.

• Ability to produce substitutes inputs

If anything can be substituted then inelastic goods is turned into elastic.

Micro Economics : People Face Trade Off

When people have too many choices, they tend to get confused while making a decision on what to choose and what to eliminate. This phenomenon in perspective of economics is called as "Cost Benefit Analysis".

The cost of something is what you give up to to get it. This may also be called as "Opportunity Cost". This means what an individual is willing to give to get something better or extra

Rational people always think of the margin. In simple words when people have to choose between two similar choices they always choose the one, which gives them something extra or provide some extra benefit

For Example: A person wants to buy a car, but is confused between 2 cars of similar price range, he would then, prefer the car which has some extra accessories or better amenities.

People like getting a better offer or better services.

"People Respond To Incentives".

Cost Benefit Analysis

Concept of Cost Benefit Analysis:

• Cost benefit is a tool which modern financial analysts adopt before undertaking any financial operations or commercial activity.
• The ultimate aim of a business organization is to make profits.
• Therefore, any system in the organization must produce more benefits as compared to its costs for the organization to survive and prosper.

What is Cost Benefit Analysis?

•  A cost benefit analysis is done to determine how well a planned action will turn out.
• The analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result.
• Cost Benefit Analysis has been established primarily as a tool for use by governments in making their social and economic decisions.
• Cost Benefit Analysis measures costs and benefits to the community of adopting a particular course of action.

COST	BENEFIT
Any negative effect on an organization resulting from the implementation of the project. Examples: Maintenance costs Environment Research and development Labour Costs	A benefit is any positive effect on the organization resulting from the implementation of the project. Examples: Increase in productivity. Reduction in Costs. Saving Time.

The General Steps of Cost Benefit Analysis are:

1.        Specifying the project clearly
2.        Describe quantitatively the inputs and outputs of the program
3.        Estimate the Social cost and benefits of these inputs and outputs of the program
4.        Compare these benefits and costs