The Price mechanism and Pricing Decision

Price Mechanism

🔹️Goods Market

Under price mechanism ,if there is an increase in demand of a good ,then prices will go higher until the demand for a good becomes equal to the supply of that good. The market situation when the demand and supply of a good are equal ,is known as Market equilibrium.

🔹️Factor Market

When the supply of a good increases, it leads to an increase in the demand of the factors of production. As the demand increases,the price of factors go higher until the demand and supply of factor becomes equal.

Pricing Decision

🔹️Consumer Surplus

The difference between the price a consumer is willing to pay and what the consumer actually pays.
For eg : The consumer is willing to pay Rs 700 for a product but he actually pays only Rs 500 then Rs 200 is the consumer surplus .

🔹️Producer Surplus

Difference between the price that the producer is willing to sell and the price that he actually sells.
For eg : The producer is willing to sell at minimum Rs 500 but he actually sells at Rs 600 then Rs 100 is the producer surplus.

Price elasticity

PRICE ELASTICITY

Price elasticity measures the quantity demanded in response to a change in price.

DEMAND IS SAID TO BE ELASTIC  if  there is change in price  in response to which quantity demanded responds substantially .

DEMAND IS SAID TO BE INELASTIC  if there is change in price in response to which quantity demanded responds only slightly .

Price elasticity can be calculated as follows :

Price elasticity of demand= percentage change in quantity /percentage change in price

Example::if there is increase in the price of the tea by 10% which causes the amount of tea we buy to fall by 30% then price elasticity =30%/10% =3(ans).

Non-price factors affecting demand.

We all know that demand is an important term in economics. There are many factors that affects the demand of the people with respect to its supply. Apart from price, there are many other non-price factors that affects the demand. 

Non-price factors affecting the demand are :-

INCOME~ When the earning capacity or income of the people rises, ultimately the demand rises as well. This is the time when people's interest shifts from the needs to their wants. But we have to take into consideration that there are certain goods or services which we will not buy even if the income doubles. For example- if we do not like certain brand, then no matter how much discount do the company offer or how much does our income increases, we will not buy the product.

PRICES OF COMPLEMENTARY GOOD/SERVICES~ The prices of complementary goods/services has direct impact on thr demand. If the price of a product increases, then it durectly reduces the demand of its complementary product as well. For example, if the cost of petrol increases, then the demand for vehicles gradually decreases. 

PRICES OF SUBSTITUTE GOODS~ In case of substitutes, if the price of a particular product increases and that product has substitutes of cheaper price, then the demand for the substitutes increases drastically. For example, if the price of coca cola increases, then people will buy pepsi instead. Or if the price of butter increases, then people will opt for margarine or cheese. 

TASTES~ The demand varies according to the need and preference of the consumer. So the companies spend huge amount in manufacturing the goods which are liked by the people in general in order to increase the demand. Customers are given first priority while manufacturing any product.

  Factors Affecting the Elasticity of  Demand

 So first let's talk about what is elasticity?

An elasticity is a measure of the sensitivity of one variable to another which implies that the percentage change that will occur in one variable in response to a percentage change in another variable.

So now let's look at some of the determinants of elasticity of demand.

1. Ability to produce substitute inputs: When a substitute is available of a good, the demand for that good is tend to be more elastic. This is because it becomes easier for consumers to switch from that good to its substitutes.

2. Time: Goods tend to have more elastic demand over longer time horizons as time also influences the elasticity of demand for a commodity. Demand tends to be more elastic because in long run substitutes of a good can be available.

3. Necessity and luxuries: If a good is a necessity then it will have inelastic demand where as if it is a luxury then it will have an elastic demand. For example, Food. Consumers will continue to buy food regardless of change in price.

4. The importance of the product's cost in one's budget: If a cost of product is lower or inexpensive then consumers are relatively indifferent about the price increase. Therefore the product will have inelastic demand. The best example for this is salt.
 On the other hand if we take a product like car which is expensive ,then a little increase in the price of the car may make a difference in its demand. Hence in this case we can say say that it has elasticity of demand. 

Quantitative analysis of Demand

Consumption of more good happens due to lower goods', price higher income of consumer, lower price of compliments of goods.

This is the qualitative discussion which gives us only the direction of quantity  demanded not the size change.

Economists brought the concept of elasticity to solve this.
Elasticity is the measure of responsiveness of quality demanded are supplied to a change in one of it's determinants.
Two different type of elasticity is-
1. Elasticity of demand
2. Elasticity of supply

Discussions about elasticity of demand:
Elasticity of demand has three types-

1. Price elasticity demand- It measures how much the quantity demanded respondes to a change in price.
PED varies with variation of incoming price.
               PED=(dQ/dP)×P/Q
P- product
Q- quantity of product

PED value                          Type of Demand
0 to -1                                  Inelastic    
<-1                                        Elastic
2.cross price Elasticity demand-It measures the quantity demanded of one good responds to a change in the price of another good.

CPED value                   Type of Demand
1                                     Unit
<1                                  Inelastic
>1                                   Elastic

3.Income elasticity demand-it is the measure of how much the quantity demanded of a good respondes to change in consumers income.

Interior goods- probability of purchasing decreases with increasing income. Elasticity is negative.
Normal goods- It has division on the basis of income.
When income is less we prioritise our necessity only.
With more income we go for luxury.

Example Of Consumer Surplus

Suppose, you went to a footwear shop as consumer. You selected one pair of shoes which marked price is Rs. 1000 but you willing to pay not more than Rs. 650, than you start bargaining with the owner and finally reached to the point where you and owner both agreed that is Rs. 450, now you as consumer got Rs. 200 consumer surplus on that pair of shoes.we can calculate consumer surplus by subtracting consumer actually pays (Rs. 450) from consumer is willing to pay (Rs. 650) which equals to consumer surplus (Rs. 200).

Affair Between Price & Quantity Supplied

What we know about Price & Supply?

Price: A place where two agents (buyer and seller) interact is called MARKET.But the term of interaction is known as PRICE.

In Modern economics, Prices are generally expressed in units of some form of currency.
Price is the main factor which drives buyers and sellers.

Supply: SUPPLY  is  the  willingness  and  ability  of  the  Producers  to  offer the  goods  or  services  in  the  market  for  sale  at  various  prices.

Holding all other factors constant, an increase in the price of a good and service will decrease demand and vice verse.

Relation between Price & Supply

The  Quantity  Supplied  of  any good or Service is the willingness and ability of the producers of the goods and services to offer in the market for sale at various prices. There is  a  DIRECT  relationship  between  Price  and Quantity  Supplied. This can be explained through Law of Supply, i.e, Other  things  equal,  when  the  price  of  a  good rises,  the  quantity  supplied  of  a  good  also  rises,  and  when  price  falls,  the  quantity  supplied  falls  as  well.  For  Example,  When  the  price  of  a  chocolate  was  $20,  the quantity  supplied  was 45  units.  But  when  the price  was  increased  to  $30,  the  quantity  supplied  increased  to  65  units  by  the producers,  So  that  they  can  generate  more  revenue  and  vice  verse. Through this we can say there is direct relationship between price and quantity supplied.

Veblen Against the Law!

Veblen goods are types of luxury goods. They are uniquely existing in economics and go against the law of demand. As law of demand states, the price of good increases, quantity demanded decreases and vice versa. Veblen goods, for them it is, as the price increases the quantity demanded also increases. The demand curve of these goods is an upward sloping curve.
Consumers prefer these goods more as the price rises because they are high quality products. Opposite to these veblen goods are Giffen goods which are low quality inferior goods.
The purchase of veblen goods are often considered as "abnormal market behaviour" because in the market low price substitutes are easily avialable but buyers stick to the belief that high price means high quality. These goods are often demanded to show a high status symbol.
Few examples of veblen goods are- 
rare paintings, luxury cars, designer jewellery, watches etc.
These goods are connected with exclusive brands and are sold in upscale shops rather than in every shop with normal goods.
Few effects that are related to veblen goods are-

1. The snob effect where the goods are preferred because they are different or it can be said they are exclusive.

2. The bandwagon effect where preference increase as the number of people demanding the good increases.

3. The network effect: As the number of buyers increase the price of the good also increases.

4. The common law of business balance: It suggests that if the good is of low price, the buyer have made a quality compromise. Thus high price means high quality.

(Souce: Wikipedia)

CONCEPT'S TO KNOW BEFORE YOU BARGAIN

 How many times have you faced a situation where you tried to bargain with a shopkeeper for a product and finally you were successful in bringing the quoted price down considerably or how many times have you come across a situation when you tried to do the same, but were not able to do it and finally gave up, cause the shopkeeper just would not lower the price after a certain amount.

It happens quite often isn’t it?

The terms associated with these instances are called as ‘CONSUMER SURPLUS’ and ‘PRODUCER SURPLUS’ respectively.

CONSUMER SURPLUS

We shall first see what consumer surplus is with the help of an example,

Suppose you are on a shopping spree and you land up at a store where you see the dress that you were madly searching around for hour’s , and when you spoke to the shopkeeper regarding the price , he quoted you ₹1200.Now after looking at the material and other factor’s you were willing to pay just ₹900 for it. Anything more than that would be a clear no .Accordingly you bring your bargaining skills into play and start at ₹600, even though you know that you can go up to ₹900. Finally after several minutes of justifications on your respective prices, the deal closes at ₹750.In this case the difference of the amount you were willing to pay (₹900) and the amount you actually paid (₹750) , that is ₹150 is the consumer surplus.

The amount OF MONEY THAT a buyer is willing to Part off for a good or service minus the amount the buyer actually pays to acquire that good.

Now that we know what consumer surplus is, can it happen to the producers too?

Well it is very much possible , this phenomenon is called as ‘PRODUCER’S SURPLUS’. Let us understand with an example.

PRODUCER SURPLUS

Producer’s surplus comes from the point of view of the seller. Suppose you are the owner of a hardware store. People approach you regularly for various tools. One such a person had come to buy a hammer. You quoted him a price of ₹ 450. The cost that you had paid to purchase it was ₹300. Therefore if a customer bargains for a price that is more than ₹ 300 , you will be willing to sell or you will not come below the cost price at all.

At this point after a long discussion the customer agrees to purchase the hammer at ₹ 400.This excess amount of ₹ 100 over the cost price of ₹ 300 is what is known as the “PRODUCER’S SURPLUS”.

THE AMOUNT which A SELLER IS PAID FOR A GOOD or service excluding THE SELLER’S COST OF PROVIDING IT or the cost price.

These two concepts are needed to be understood by both the customer as well as the seller in order to make the most out of the respective  situations they are in.

Demands and availability of various substitutes in goods : The competency of choice

Demands and availability of various substitutes in goods : The competency of choice

Demand is the major element that runs the market needs and enables the changes according to the preferences and requirements of the times and trends. This varies according to the requirements and necessity of a society and some influence involved. Demand is always inter-related with its' supply; whether the supply is being conducted smoothly or not. There are numbers of substitutes available, be it the substitutes for the goods in demand or be it the price of the goods which is being availed in the market. 

For eg:  A company "T" sells camomile tea packs at a price of $15 per sachet and there are 2 more companies named "G" and "P", selling the Oolong tea sachet for $11 and Green tea sachet for $11 simultaneously, there is a line of choice for the buyers as to which type of tea the buyer prefers, considering the facts like the taste and preference of the buyer or the purchasing power or the willingness to purchase.

MEASURE OF ELASTICITY AND ITS DETERMINATS FOR SUPPLY

Elasticity-It is a measure of the sensitivity of one variable to another. In other words it is the measure of degree of respose.
To understand better we can draw a simple example: Suppose I increase the advertising of a fastrack neon watch by 25% then what ercentage increase in sales I can expect for that fastrack neon watch. This response of the product to that advertisement is measured as elasticity.

Determinants of elasticity for supply:
1. Flexibility of inputs: Here we will consider the things or inputs which are ireplaceble.
Take an example of Columbia Asia. We all know that its a reputed hospital. But how a hospital gets its reputation? By the performance of its DOCTORS. So if the main doctors pf Columbia Asia is removed then it will tend to loose its reputation as well. The nurses or the other stuffs are replaceble but here the the doctors are not flexible.
2. Mobility of inputs: If both capital and labour are occupationally mobile then the elasticity of supply for a product is higher than if capital and labour cannot easily be switched. 
Take an example of a theatre group. The people working in a theatre group have the option to switch. If someday the theatre business fails they can move into movies,serials, advertisements etc. But if you are doing a business which involves lots of huge machinaries, it is not easy for you to move all those to some other place and start a new business.
3. Time: Here we are talking about that particular moment of time that cannot be replaced and it becomes inelastic input.
Supply is more price elastic the longer the time period that a firm is allowed to adjust its production levels. In some agricultural markets the momentary supply is fixed and is determined mainly by planting decisions made months before, and also climatic conditions, which affect the production yield. In contrast the supply of milk is price elastic because of a short time span from cows producing milk and products reaching the market place. [Ref: www.tutor2u.net ]
4. Availabity to produce substitues:
The more availability of substitute goods the supply will become more elastic.
Take a example of a Maruti suzuki and Hyundai. Suppose Maruti increased the price of Baleno. Then people will tend to go for i20 because i20 almost gives the same features as Baleno. People are getting substitutes here. The more people moving to i20 its afecting the sales of Maruti.

EFFECT OF DEMAND ON PRICING ELASTICITY

Effect of demand on price elasticity is also known as price elasticity demand. It can be expressed as percentage change in quantity upon percentage change in price. This two are heavily interrelated to each other by having dependency on each other. It shows the responsiveness of quantity needed with changing price of commodity & vice versa.

     There are three type of demand elasticity in market which is dependent on pricing.

1.    Elastic demand – when price is reduced to increase revenue.

2.    Inelastic demand- when price is increased to increase revenue

3.    Unitary demand- in such case price increase or decrease don’t have any effect on revenue .which suppose to hold the price as a constant.

           in case of

·         Price elasticity have the Ped( price elasticity demand) value <-1

·         Price in-elasticity have the Ped( price elasticity demand) value fluctuate I between 0 to-1

In most of the cases the normal market good have price elasticity is negative. In some of the cases the price elasticity does not get negative it shows positive effect. Such goods are called Veblen product. A lots of goods are consumed by public which are use as a luxury item, such as expensive model of car, some other luxury items. Consumer preferred those goods which have much expenses in market and this contribute positive ‘Ped’.

           As an example we can take an example of some of the fashion product. In now a days there are a segment of people who used to buy a product which usually cost higher then the other. Which lead us to the Veblen product.

          

WHO SHOULD DECIDE TAXI FARES “DEMAND AND SUPPLY" OR GOVERNMENT

WHO SHOULD DECIDE TAXI FARES  “DEMAND AND SUPPLY" OR  GOVERNMENT

As we all know that now-a-days taxi and cabs are very important entity for us or more over they become a part of our life.

But who is deciding the fares of taxi or who determine the fares. Till now the government of India deciding the fares of taxi but according to MERU’s ex CEO (Siddarth Pawha) fares should be decided according to demand and supply. Because this is the industry who is improving in so many factors and moving significantly ahead of regulation.

We can take example of Maharashtra where taxi business is more famous as compare to any other state of India and they are trying to improve their technology and trying to improve those services which they deliver. So they can deliver best of services.

Government was ignoring the on field factors which “Demand and Supply” will include.    One more very big problem is surge price. Surge price means when you have to pay more than the expected price, sometimes 3 or 4 times more than the expected because of some reasons like unfavourable weather, heavy traffic, and high demand of cabs e.t.c. But ex CEO of MERU thinks this is not a good idea for India. Because of surges no taxi business able to optimise initially.

So, finally we can say commission consumer behaviour depend on “Demand & Supply”. So, demand and supply should be deciding factors for the fares of taxi and cabs businesses.

Reference:-

https://www.entrepreneur.com/article/288801

Surplus of producer and consumer.

Surplus is a situation in the market in which quantity supplied is at a higher level than quantity demanded. It is also called a situation of excess supply looking at it from the Producers and Consumers point of view.
 Imagine you going to a handicraft fair which is selling items at a much lower price from that of market and that too directly by the makers so there's no problem of authenticity. You buy a stole from there for only Rs. 200 whose market price is Rs. 500. So you make a clean profit of Rs. 300. In other words, you save Rs. 300 which otherwise would have been spent had you bought the stole from market. This is what consumer surplus is- the amount buyer is willing to pay for a good minus the amount buyer pays for it. That is the implicit gain a consumer makes. A lower price in the market raises consumer surplus.

Now there is another side to the handicraft story . The person who sells you this has actually taken Rs. 150 in total including the fabric, colour and other items to manufacture the stole. He sells that for Rs. 200. So he is having a profit a Rs. 50. This is the benefit he is getting by selling in the market, in this case, the fair. This is called producer surplus- difference between the price producer is willing to sell at and the price actually sold at. That is the profit producer makes. A higher price in market raises producer surplus.

Do We See Demand And Supply Curve In The 4th Quadrant?

Demand Curve depicts law of Demand and the Supply Curve depicts law of Supply.

Demand Curve represents inverse relationship between price and quantity of goods purchased by a buyer at a particular time. 

Supply Curve on the other hand, represents the amount of goods that a seller is willing to sell at a particular price during a particular period of time. Supply Curve shows direct relationship between price and quantity. SINCE, THE PRICE OF A COMMODITY CAN NEVER BE NEGATIVE so, the supply curve and the demand curve can NEVER be seen in the 4th QUADRANT. 

But there can be shifts in demand curve as well as supply curve.

A rightward shift indicates positive or increase in Demand Curve, which is because price remains same and quantity demanded increases, and vice-versa for decrease or leftward shift in Demand Curve.

On the other hand, leftward shift in Supply Curve is observed when price of the commodity rises and quantity produced decreases.

Concepts Of Consumer Surplus and Producer Surplus

Concepts Of Consumer Surplus and Producer Surplus

CONSUMER SURPLUS

Consumer surplus refers to the difference between the price of goods and services that a consumer is willing to pay and the consumer actually pays.

Example: Suppose I went to a shop to buy a watch. The price of the watch told by the shop keeper is Rs. 1500. But the amount is out of my budget so I started bargaining and decided to pay Rs. 1000 for the watch. So, the consumer price here is Rs. 500 ( Rs. 1500 – Rs. 1000).  

DIAGRAM OF CONSUMER SURPLUS

Here in the diagram the horizontal axis indicates the quantity demand and the vertical axis indicates the price and A and B indicates the demand curve. The shaded portion below the demand curve and above the market price indicates the consumer surplus.

PRODUCER SURPLUS

Producer surplus refers to the difference between the price of goods and services the producer is willing to sell and the price actually sold.

Example: Suppose I am willing to sell a Calculator. The cost of production of the calculator is Rs. 150. And I sold the calculator in the market at a price of Rs. 400. So Rs. 250 (Rs. 400 – Rs. 150) is the Producer Surplus.

DIAGRAM OF PRODUCER SURPLUS:

Here in the diagram the horizontal axis indicates the quantity supply and the vertical axis indicates the price and C and D indicates the supply curve. The shaded portion below the market price and above the supply curve indicates the producer surplus.

PRICE ELASTICITY AND REVENUE EFFECT

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is the percentage change in quantity demanded of a good divided by percentage change in price.

PED= dQ\dP*P\Q

“Where (PED) is Price Elasticity of Demand , (d) is demand, (P) is price, (Q) is quantity".

PRICE ELASTIC:- Quantity demand is more sensitive with respective to price.

*When price falls revenue rises. This means that the percentage rise in quantity demanded is more than the percentage fall in price level i.e; price falls and revenue increases.

PRICE INELASTIC:- Quantity demand is less effective with respective to price.

*When price increases revenue also increases. This means that the percentage rise in quantity demanded rises with the percentage rise in price level.i.e; price increases and revenue also increases.

PRICE UNITARY ELASTIC:- Quantity demand changes with change in price .

*When price falls demand also falls and when price increases demand also increases.

CONCEPTS OF ELASTICITY OF DEMAND AND ECONOMIC SURPLUS

The  Elasticity of Demand:

                 Elasticity is defined as the change in the Quantity based on the product's price and consumer's income.

  

           Eg: A person wants to buy a mobile online. He checks the price of mobile in various websites and finally, he buys the mobile from the website which has a lower price compared to others.

Determinants of Elasticity of Demand:

• The income of a customer, whether he can afford the cost of the product.
• Price of the product.
• Brand - which has an impact on a lot of customers.
• Time and Durability.
• Multiple uses of a commodity.
• The existence of Substitutes - Goods which can be used in place of another.

Price Elasticity of Demand properties:

• If PED is less than 1, it is inelastic. If a good is inelastic reduce the price to increase revenues.
• If PED is greater than 1, it is elastic.  If a good is elastic increase price to increase revenues.
• If the price is held constant and has no effect on revenues then it is unitary elastic.

Economic Surplus:

        It is the sum of both consumer surplus and Producer Surplus.

Consumer Surplus:

         It is the difference between the price you are willing to pay and the actual price you paid.

Producer Surplus:

        It is the difference between the price the producer is willing to sell and actual sales he received.

   

                               

                                                        

Elasticity Of Demand & Its Types

In my previous blog I wrote about demand and law of demand. The law of Demand simply states the inverse relationship between price and quantity demanded. It tells us only the direction of change in price and quantity demanded of a commodity. But it doesn't specify about any quantitative changes or rate of changes in price and demand i.e., it does not specify how much more is purchased when price falls or how much less is purchased when price rises. Therefore to study quantitative changes in price and demand we study the concept of Elasticity of Demand.

▪Elasticity Of Demand :

What is Elasticity ?
Elasticity refers to a ratio of the relative changes in two quantities. It measures the responsiveness of one variable to the changes in another variable.
So Elasticity of Demand refers to the responsiveness of quantity demanded to a given change in the price of commodity.

▪Types of Elasticity of Demand :

1. Price Elasticity of Demand :
     Price elasticity of demand is described    
     as the degree of responsiveness of the
     demand for a good to a change in its
     Price.

2. Income Elasticity Of Demand :
     Income elasticity of demand can be
     defined as the ratio of change in the
     quantity demanded of a commodity
     to a given proportionate change in the
     income. In simple words , it indicates
     the extent to which demand changes
     with a variation in consumers income.
      

3. Cross Elasticity Of Demand :
     Cross elasticity of demand refers to
     the proportionate change in the
     quantity demanded of a commodity
     of a particular commodity in response
     to a change in the price of another
     related commodity.

▪cross elasticity of demand is positive in  
    case of substitutes.
    e.g., coffee and tea.
    With the increase in the price of coffee
    the quantity demanded of tea would
    increase. 
▪cross elasticity of demand is zero when
    independent of each other.
▪cross elasticity of demand is negative
    when goods are complementaries.
    e.g., car and petrol
    With the increase in the price of petrol
    the demand for cars would come
    down.
    
     
  

ARTIFICIAL SCARCITY IN PRICE MECHANISM

PRICE MECHANISM

Price mechanism is a tool of setting price with relating to demand and supply when demand of any product increase price is also increase for a certain time period till the market equilibrium.

ARTIFICIAL SCARCITY IN PRICE MECHANISM:

As every one knows Artificial scarcity is a illegal practice and here price mechanism has a major role to do that practice. 

For example ; some supplier stores the commodity products in warehouse and didn't supply the good or products to the local vendor, so that there became a Artificial scarcity of that product or goods. But demand remains constant so where demand > supply so automatically price of the product increases  in the market, At the time that supplier sell the goods or products in higher price in market for their own benefit to get profit of the product to them. Which is a illegal practice according to law. this is also a process of price mechanism is related to artificial scarcity

study of opportunity cost

opportunity cost

• Opportunity cost is the value of what you have to give up in order to choose something else.
• Opportunity cost is the opportunity lost.
• The cost of sacrificing  one opportunity for another opportunity known as opportunity cost.

Example of opportunity cost

1) There is a farmer who wants to cultivate crops . He has two choices either he can produce rice for rupee 500 per kg or he can produce wheat for rupee 450 per kg.If he produces rice for rupee 500 per kg then he have to definitely leave production of wheat . Production of wheat for rupee 450 per kg is the opportunity cost for that farmer.

2) There is a person he has two choices either he can do a job in a company for rupee 50000 per month or he can teach in school for rupee 45000 per month. If he start doing job in a company for rupee 50000 per month then teaching in a school for rupee 45000 is a opportunity cost for that person.

3) A person have two choices for doing  job first job in company-A for rupee 50000 per month and second job in company-B for rupee 40000 per month.he chooses company-A for rupee  50000 then company-B for rupee 40000  is opportunity cost because he is sacrificing one opportunity for another opportunity .

Non price determinants play important roles

We all know that price can influence demand but there are some other factors which also can create impact on demand. They are known as non-price determinants.
Imagine you used to consume Miniket rice, but few months ago you got promotion and now started using Basmati rice. So when your income increase, you start neglecting inferior goods which means  when income increase, demand of inferior goods decrease and demand of superior goods increase.
Imagine the price of tea start decreasing. As a result the demand of tea also will be increase. And people drink tea with sugar. So the demand of sugar will also increase. So in case of compliment goods, change in the price of one goods, can be reason of change in demand for the other goods.
If the number of buyers in any market increase, the demand also will increase.
Imagine you live in a remote location where only tea was available in the market, but recently coffee also introduced on that area and you noticed that the demand of tea is decreasing gradually. So availability and price of substitute goods also create impact on demand.
Imagine you expect price of petrol will increase in next week. So you'll start resurve petrol from this week. That means expectations of buyers can also influence demand.
Seasonality also can influence demand. For example, demand of AC will increase in summer and decrease in winter.
So apart from price, those non-price determinants can also influence demand.

Economic Measure Of Consumer Benefit

MEANING OF CONSUMER SURPLUS

Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. It measures the benefit buyer receives from participating in a market.

For understanding it clearly we take one example :-
Suppose you are going for a shopping and your budget is Rs.15,000. But when you reached to mall you saw a huge discounts and offers on clothing and products that you have to buy and the same thing for which you have willing to pay Rs.15,000 you actually paid Rs.10,000 . So (rs.15,000-rs.10,000)Rs.5,000 is consumer surplus .

Quantity Damand Change with change in income

As I talked earlier about "Elasticity Of Demand & IT'S TYPES" in my previous blog.

Let's discuss about INCOME ELASTICITY OF DEMAND & IT'S TYPES.

> Income Elasaticity Of Demand says, ratio of the percentage change in the quantity demand with the percentage change in income.

Ey = Percentage change in quantity demand/Percentage change in income

Percentage change in quantity demand =
New quantity demand (^Q)/ Original quantity demand(Q)

For example:- when income level of particular family increases, that family tend to increase their consumption level and viva-versa. Hence Quantity demand increase or decrease with changes occur in income level.

TYPES

There are 3 types of Income Elasticity Of Demand, Which are Following.

1-- Positive Income Elasticity Of Demand.

3-- Zero Income Elasticity Of Demand.

2-- Negative Income Elasticity Of Demand.

What is scarcity and impact on economics

       

every body has different needs and wants .all the wants are fulfilling by the different resources. Are ever think that a day will be come when we will have a willing ness and ability also but we wont get that because of the unavailability of sufficient resources.
Its happening due to the "scarcity",which mean the human needs and wants are unlimited but resources are limited to full fill it.                                                                                                         There is nothing in world which can satisfy a particular wants for a unlimited time period.                The whole economics depends upon the scarcity ,because if a good is more scarce then the demad of the product is more the automaticaly the price is more. If any thing which is easily available so what ever the demand may be it will fulfill so price of that is less.                             
Example: water is a basic need of human being but its a unlimited resource so its price is less as compared to any scarce good like diamond,gold, silver which are not the bsic needs of human beings but due to the scrcity these have the high price.
Scarcity have 3 distinctive catagories.
1. Demand -induced scarcity ; population and demand increase but  supply remains same.
2. Suppy -induced  scarcity; supply is very low as compare to demands.
3. Structural  scarcity ;declieng stage of a resource.
 The scarcity heuristic is a mental shortcut that places a value on an item based on how easily it might be lost, especially to competitors. The scarcity heuristic stems from the idea that the more difficult it is to acquire an item the more value that item has. In many situations we use an item’s availability, its perceived abundance, to quickly estimate quality and/or utility,which is a gongnitive bias also.
So we should  have to behave like a rational person so that we cn manage our needs and wants for a longer period with the limited resources.

How to overcome the trade-offs

Many times, while shopping, we face a situation where we fail to take a decision in buying something. What to buy, what not to buy and from where to buy? Is the product right for me? Am I getting it at the right price?
These are the questions that arises in our minds. These confusions are called Trade-offs.

A trade-off is a common situation where a consumer face difficulties in making a buying decision. They cannot decide what exactly they want. Sometimes they also end up not buying anything or even if they buy something, they compromise with what they get. They may not get all the features and qualities that they want in the product they are buying.

To resolve the trade-off:

The best and most common method to overcome the situation of trade-off is Cost Benefit Analysis.

Cost is something what we give up to get it. And Cost benefit analysis is the most effective method which helps consumers to find all the cost and what are all the profit possibilities in buying a certain product.

The main purposes of doing a cost benefit analysis before taking a buying decision are:

Measuring the cost of the product: By cost benefit analysis, we can compare all the cost involved in all the products we are choosing from.

Finding the benefit of the product: Through cost benefit analysis, we can find out whether our buying decision will give us the best possible benefit or not.

Trade Off

People faces trade off -is  a situation that we  almost face every day in our life. While we make every purchase we are doing a trade off. When we buy a particular product we are actually letting go of the other products that we could have bought . Now this product we let off not only includes similar products ,it includes also products that can be brought with the same amount of money. For example when you go to purchase a mobile phone the other options are not only other smartphones but also things that could be bought with the same budget . People faces trade off means choosing from alternatives. Sometimes we might go to buy one thing and end up buying other things . This is also part off people faces trade off.  Sometimes we might go to buy a churidar and end up buying saree at last. Now the trade off decision is usually taken using cost benefit analysis. We bought saree thinking that if I buy saree my mother can also use it .Therefore there is many benefits in the same price.Whenever we have to choose from options we go with the one that gives us more benefits or profits.

PRICE ELASTICITY OF DEMAND

           PRICE ELASTICITY OF DEMAND FOR NEW SECTOR

Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes.

We think of many ways to cut the fuel consumption in response to high price we bear. We use several methods like carpool for official work and same for school students or when going for shopping and parties. So, the main thing is “price elasticity of demand” of new sector GAS fuel.

Price elasticity for gas is just like a imaginary situation, if gas price rise, what will happen to quantity demanded?

There are many studies who researched and determined what price elasticity of demand for gas is. One study published in ENERGY JOURNAL which explains variation in price elasticity of demand estimates of gas demand in United States.

This study tells about 101 different studies for short term (1 year or less), the average price elasticity of demand for gas fuel is -2.06. That is a 10% hike in the price of gas lower quantity demanded by 2.06%.

On the other hand in long run (longer than one year) price elasticity of demand is -5.08. Meaning 10% hike in gas fuel causes quantity demanded to decline by 5.8% in the long run.

Another analysis conducted by PHIL GOODWIN and JOYCE DRAGY and give title “Review of income and price elasticity in the demand for road traffic ”. In it they summarize their finding on the price elasticity of demand of gas. If the real price of fuel goes up, and stays up by 10% the result is , the volume of traffic will go down by roundly 1% within about a year, and in long run down fall is about 3%.

CONCLUSION

Whlie one cannot say with certainty what the direction of rise in gas fuel tax will have on quantity demandedit can be assured that a rise in gas tax , all else being equal, will cause consumption to decrease.

CBA:A Decision-making tool!!

Cost Benefit Analysis:It is a decision making tool for accounting for the social costs and social benefits of a project over time to establish a Net present value(NPA).
Example- Lets take 3 jars named as A,B and C.In jarA there is $15,Jar B -$12,Jar C-$10.Which one will the economist choose??
Rationally he would pick JarA because ...
In case of Jar A:
Benefit $15
OPP cost -$12(next best alternative)
Economic surplus-$3
In case of Jar B:
Benefit-$12
OPP cost-$15(best of the rest)
Economic surplus-(-$3)
In case of Jar C:
Benefit-$10
OPP cost-$15(best of the rest)
Economic surplus-(-$5)
From this we came to know that Cost benefit Analysis (CBA) allows us to think like economists.
And we should choose the option where benefits outweight cost. 

Exceptions to law of demand..

Normally law of demand defination tells when the price of good increases/rises the consumption/buying power of the individual of products increases.similarly as the price falls the people buy more of it,other things keeping constant.                                                                                For example:As the price of apple increases from 30 to45 rs so,the demand for that product decreases due to increase in price of the good .                                                                                                         As one of the exceptional goods to law of demand is giffen goods as in case of giffen products(essential goods) demad increases as the price increases.It voilates the law of demand as essential goods like rice,and vegetables like pulses...etc 

•  Lets take a real senario where law of demand wont be followed:                                                                                                                                                                                                            In a residential campus there is a single xerox shop/single grocery store which comes under college premises and college was situated in outskirts of the city where u cannot go anywhere so,any item which you will be taken from the grocery will be costly compared to outside,even though you will purchase the product without any question. this is exceptioal to law of demand where even though price of goods/products high demand in purchasing also will be high.!!                                                                      

People face trade off

It is act of choosing, giving up one for the other.
Examples if we are having money (fees) then we can either study in Iba or  any other college (assuming that we are selected in all colleges ) it is a trade off, as we have to select one over the other, we have to sacrifice and over the other
, we have to give one for the other.

Rational People Think at the Margin.

Economists normally assume that people are rational. Rational people are the one who systematically and purposefully do the best they can to achieve the objective.

Decision in life are rarely black and white, but usually involves shades of grey. In most situations, people make the best decision by thinking at margin. Margin refers to a small incremental adjustment to a plan of action
For example: Start up requires lots of Important decisions to make and only Rational people can think at Margin. So Rational decision is required to make the plan successful.

For example : Economy's important decisions are taken by Economist who are  Rational. That's Economy is stepping towards the path of Development.

In 1991,LPG( Liberalisation Privatisation Globalization)  by then Finance Minister Mr. Manmohan Singh is considered as one of the most successful Strategy for the Indian Economy. 

Role Of Opportunity Cost In Economics

With the increasing demand for goods and services, the quantity of resources is getting reduced day by day. Now in order to overcome the phase of scarcity, consumers must plan the next best alternative. Here comes the role of Opportunity Cost, which refers to the cost of all the items or products which we give up in order to meet our alternative needs and demands. Therefore as per the Opportunity Cost Principle, we must be aware of the profit which we will receive from the next alternative.

The Opportunity Cost Concept plays a major role while making the managerial decisions. With the help of opportunity cost, we can make the best use of the alternative to get the scare resources. We can, therefore, say that the opportunity cost not only refers to the price of our activity but at the same time defines the price of the price of products which we have already given up.

Examples of Opportunity Cost

• We can consider the fact that a man decides to go by bus to his office instead of driving his car. To reach office by bus it takes 60 minutes while driving it takes hardly 40 minutes. Hence his Opportunity cost is 20 minutes.

• Mohan buys a burger with the amount of that money, he could have bought cold drinks or a pizza. Now the opportunity cost is the pizza and cold drink.

• A student might drop the idea of going to the movie in order to study for his exams. Hence the opportunity cost is the cost of the movie and the fun of seeing it.

Therefore we can say that Opportunity Cost refers to the basic concepts of economics.

Demand and Demand curve

        In economics, relationship between the quantity of a commodity that produces wish to sell at various prices and the quantity that consumers wish to buy. It is the main model of price determination used in economic theory. The price of a commodity is determined by the interaction of supply and demand in a market. The resulting price is referred to as the equilibrium price and represents an agreement between producers and consumers of the good. In equilibrium the quantity of a good supplied by producers equals the quantity demanded by consumers.
        The quantity of a commodity demanded depends on the price of that commodity and potentially on many other factors, such as the prices of other commodities the incomes and the preferences of consumer and seasonal effects. In basic economic analysis, all factors except the price of commodity are offen held constant, the analysis then involves the examining the relationship between various price levels and the maximum quantity that would potentially be purchased by consumers at each of those prices. The price quantity combinations may he plotted on a curve known as a Demand curve.

Supply, Demand and Elasticity

Consumer interview or surveys market studies and experiment regression analysis -

Supply:- Willingness and ability of the producers to offer the goods in the market for sale at given process.
Demand:- Consumers desire, ability and will to purchase goods at various price.
Elasticity:- It is a measure of the sensitivity of one variable to another.

• Percentage change that will occur in one variable in response to a percentage change in another variable.
• Point elasticity - Elasticity at a given point on a function.
• Arc elasticity - Average elasticity over a given range of a function.

BREAKING DOWN DEMAND THEORY

Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. People demand goods and services in an economy to satisfy their wants such as food, health care, clothing, entertainment, shelter etc.
The demand for the product at a certain price reflects the satisfaction that an individual expects from consuming the product. This level of satisfaction is referred to as utility and it differs from consumer to consumer.

LAW OF DEMAND :-

The law of demand introduces an inverse relationship between price and demand for a good or service. It simply states as the price of a commodity increases, demand decreases, provided other factors remain constant. Also as the price decreases, demand increases.

The Monopoly of cement industry and it's relationship with elasticity of demand

Cement is an important commodity in construction and if the cement price is changed, many things get affected in the economy. For example, cost of buildings will change also the building cost of Roads, fly over, bridges canals  etc will be dependent on cement price changes . In India we got monopoly in cement industry and the cement factories are deciding prices of the cement not based on the production costs but by not producing on their full capacity and by declaring packing holidays etc they are taking the price of cement up.  This is illegal according to the Competition Commission of India laws and there were times when the cement producers were fined.
                According to Alfred Marshall‘s theory of demand and elasticity, three questions arise. "If I lower the price of my product, will the sale increase?"
"If I raise the price, will it affect my profit?"
“If sales tax rate is increased will it have an effect on the revenue collection?"
As we can see that the demand is limited, the decreasing of price can be ruled out
Coming to second question,  If the price is raised , as the demand is constant and there is not much competition in cement industry, there will be no alternative and so the profits will be raised.
If the sales tax is increased Now we can replace it with GST, the government will be blamed and so the government is not ready to do so for political and also welfare causes.
             

Ceteris Paribus Vision in Demand

An important concept in the real world of economics - Ceteris Paribus
Ceteris Paribus is a latin term which means "all other things remains constant" .Let us take Law Of Demand in consideration which states, Ceteris paribus, price of any goods and services and quantity demand of any goods and services are inversely related to each other i.e. When the price of a commodity increases the demand decrease and when the price of the commodity decreases it's demand increases.

Now here we use "Ceteris Paribus"  as in the real world there comes many variables that might effect the outcome that economists study. It is helpful when study regarding relative tendencies in a particular market is observed.

In Law Of Demand, we assume other things remain constant and only price factor is considered. These other things or ceteris paribus  in case demand are :

* Taste and Preference of the customer remains same.
* Income of the customer remains same.
* No change in price of the commodity in future.
* No changes in price of related commodity.
* Population's size and composition remains same.

Thus ceteris paribus in Law Of Demand is used by economist to produce  a much more accurate result regarding Demand for commodity. 

Supply in elasticity

Supply in elastic:if the supply is difficult to replace the product by a substitute goods then that is known as supply-in-elastic.
Example: profit of NDTV goes down after Arnab Goswami’s departure to Republic TV.

Theory Of Demand

What is Demand ?

Demand = Desire to buy + Willingness to pay + ability to pay
For e.g; A person wants to buy something but he does not have the ability to pay i.e. the required money to purchase that product then this is not demand. Similarly if a person has the ability to pay but does not have the desire to buy something then this is also not demand. For demand to occur all the three parameters i.e. desire to buy , willingness and ability to pay are necessary.

Theoretical Definition of Demand:
Demand refers to the total or a given quantity of a commodity that are purchased by consumers in the market at a particular price at a particular time.

The Law of Demand:     
The law of demand states that quantity demanded of a commodity varies inversely with the price of that commodity , ceteris paribus.
In simple words, people will buy more at lower prices and buy less at higher prices , other things remaining constant.

Important Features Of The Law Of Demand:

1. Inverse relation
There is an inverse relationship between price and quantity demanded of a commodity.

2. Price is an independent variable and demand is a dependent variable
In this case we study the effect of price on quantity demanded only.

3. Negative slope of the curve
The demand curve slopes downwards from left to right to show the inverse relationship between price and quantity demanded of a commodity.

Assumptions of The Law Of Demand:
1. Tastes and preferences, customs and habits of consumers should remain constant.
2. Price of related goods should not undergo changes.
3. Income of consumers should remain the same.
4. No new substitutes should be discovered.
5. Consumers should not anticipate change in prices.
6. Goods should not have prestige value.
7. No change in government policy.

People respond to incentives

An incentive is something that makes people benefit at the time of purchasing. Everyone wants an reward against purchase. Normally people takes decision on the basis of cost and benefits and they respond accordingly. Incentives is important part to consider while doing study of economics. A public policymakers never forget about incentives.For example,In an era of digital marketing such a good offers we see that attracts customer i.e. Cashback policies,free coupons etc. A good incentives increase seller's sales more frequently in comparison to their competitors.one good example to incentives a person dislike to one particular brand but get a job in that brand as marketing manager now a person have to find a good incentives to increase the sales of that brand.

Human nature of thinking at the margin

Economists normally assume that people are rational. "It means to think about your next step forwad". The word "marginal" means "additional". The first glass of water on a hot day satisfies your thirst but next glass, may not so much.

Rational people know that decisions in life are rarely black and white but usually involves shades of gray. At dinnertime, the decision you face is not between fasting or eating like a pig but whether to take that extra spoonful of mashed potatoes.

Example, A person wants to buy mobile phone, he has two options in the same range, he will choose a phone which is of better quality and has extra features.

No! Trade-Offs and Opportunity Costs are not same.

Many of us has the misconception that trade-offs and opportunity costs are two different words having similar meanings. But no, it is not. Rather, they are two sides of the coin. In other words, they are inter-related to each other. Let us see the difference between the two:-

Trade-Offs~

Defination-

Trade-Offs is basically the sacrifice that we make to get a certain product or experince. It is when we have to choose any one out of the given alternatives.

Example-

You have a certain amount of money and you have two options, either you can go out for a dinner or you can save the money and go for a picnic during the weekend. Here, you have to choose one out of the two options. So this is a trade-off where you have to either compromise going for the dinner or to the picnic.

Thus, trade-off represents what is renounced,to get what is wanted or desired.

Opportunity~

Defination-

Opportunity cost or alternative cost is the cost of the other best alternatives that we give up while making a choice. In other words, it is the value of choice foregone to get something else. There can be many reasons for losing an opportunity. These are paucity of resources such as money, raw material, capital and so on.

Example-

You get  placed in Delloite with a package of 8 Lakhs per annum and Congnizant with a package of 6 Lakhs per annum. But you chose to work with Cognizant beacuse of the better work environment. So  this 8 Lakhs is the opportunity cost which you lost by not joining Delloite.

Thus, an opportunity cost represents what amount you could have received if you would have chosen the next highest value alternative.

Macroeconomics : An overview on large scale wealth studies

Macroeconomics started with John Maynard Keynes and the publication of his book " The general theory of employment, interest and money.

It is the study study of economics with reference to the larger segments of the wealth factors, deals with economic behavior as a whole of dimensions of a country. Some of the key elements determining the study of macroeconomics are as follows :

• Looks at total size, shape and functioning of economics as a whole 
• Factors like GDP, national income, international imports and exports revenue

Some of the key determinants that has affected the macroeconomics are as follows:

• Inflation
• Sudden stop in flow of cash.
• Rise or fall in the international currency

People face Trade-Offs -Decision making

People face Trade-offs:-

Ill be discussing about the very first principle of economics, i.e. people face Trade-Offs.

"There is no such things as a free lunch". We have to give up something in order to get something. To make decisions we go thorough many types of phase for example.

What to buy? What not to buy? Will this be ok , or will that be ok.?

This types of questions comes in every people's mind in a shopping mall.

Another example includes how students spend their time, how to utilize time,how a family decides to spend its income ,how they will save for a particular month, how the government spends revenue, how they will fix the anual budget and how regulations may protect the environment at a cost to firm owners. In each and every aspect of life people have to make this decisions.

Another trade-Off society faces in between efficiency and

Equality.

Equality means the benefits are distributed equally and uniformly among society's members.

Efficiency means the society is getting maximum benefits from there own resources.

In other words we can say efficiency refers to the size of the economic cake and equality refers to how the cake will be divided equally.

Recognising that people face Trade-offs does not by itself tell us what decisions they will or should make.

So our study of economics, therefore ,starts by acknowledging life's trade-offs.

-Ankit Talukdar

Microeconomics or slicing method

Microeconomics is a branch of economics that deals with study of individual unit's behavior and actions exclusively. Since Microeconomics splits everything into small parts for convenience, therefore is referred as slicing method. Under microeconomics we study about the following:-

• we study about the income earned by one person
• we study about family income
• we study about the expenditure incurred by a customer, firm or family
• we study about the wages given one firm to its worker
• we study about the profits earned by a firm
• we study about the profits of a firm

For example, a shopkeeper wants to include a new product in his shop. For including a new product he needs to consider the nature of the market, the need and demand of the product. He also needs to take care of the monetary parameters. If he has enough savings for the new product or he requires a loan. He also needs to take care of the space available in his shop for the new product.

Microeconomics deals with such type of affairs of small scale or on individual aspects.