Topics Of Economics

Relationship between Income and Demand Relationship between income and demand can be studied by taking into consideration these two types of goods. These are:  (a) Normal goods (b) Inferior goods (a) Normal Goods These goods are demanded more with the increase in the income of the consumer. There is a positive relationship between income and demand of normal goods. How Demand Curve of a Normal Good Changes When Income of the Buyer changes?  Income of the buyer may increase or decrease.  (a) Increase in Income: In a situation of increase in income, more of a normal good is purchased even when it's price is constant. This refers to a situation of increase in demand or forward shift in demand curve.  (b) Decrease in Income: In a situation of decrease in income, less of a normal good is purchased even when its price is constant. This refers to a situation of decrease in demand or backward shift in demand curve.  Following curve illustrates both these situations.  (b) Inferi

Cross Price Effect Effect of change in the price of a good on the demand of its related good is known as cross price effect.  We know related goods are of two types (1) Substitute goods, and (2) Complementary goods Accordingly we can split out discussion in two parts,  (1) Demand for a Commodity in relation to Price of the Substitute Good: Let us consider tea and coffee as two substitute goods. Let tea be the commodity demanded of which demand curve is D1.  (a) Increase in Price of Substitute Good: Initially, if price of tea is OP1, quantity purchased is OT1. Now suppose the price of tea remains constant but the price of coffee increases.  Reaction of Consumer As a rational consumer you may decide to ubstitute some tea in place of coffee. Or you are expected to buy more of tea even it's price is constant. Initially you were buying P1K1 quantity of tea. Now you are willing to buy P1K2. Greater purchase of a commodity at its constant price points to a situation of increas

Movements along a Demand Curve Movements along a demand curve refer to extension and contraction of demand. These are caused by change in own price of the commodity.  Extension of Demand (Downward movement along a demand curve)  Extension of demand is a situation when quantity demanded increases in response to a fall in own price of the commodity.  Contraction of Demand (Upward movement along a demand curve)  Contraction of demand is a situation when quantity demanded decreases in response to a rise in own price of the commodity.  Shifts in Demand Curve Shifts in demand curve include (1) forward shift, and (2) Backward shift.  Forward Shift in Demand Curve - Increase in Demand Forward shift in demand curve refers to a situation when quantity demanded of a commodity increases due to other than price factors of the commodity.  Causes of Increase in Demand Important causes of increase in demand are as follows:  (1) Wh

LAW OF DEMAND Lower the price, higher the demand. Higher the price, lower the demand. If other things remain constant. Demand curve D shows that demand for commodity-X extends from OQ to OQ1 when it's price falls from OP to OP1. In fact, downward slope of demand curve itself is an expression of the law of demand.   ASSUMPTIONS OF LAW OF DEMAND Law of demand holds good when "other things remain constant. Here other things refers to factors other than own price of the commodity.  (1) Tastes and preferences of the consumers           remain constant.  (2) There is no change in income of the            buyers.  (3) Prices of the related goods do not change.  (4) Consumers do not expect any significant        change in the availability of the commodity        in near future.  Why does Demand Curve Slope Downward?  Downward slope of demand curve indicates that more is purchased in response to fall in price. Thus there is inverse relationship between own price of a comm

Demand Demand refers to various quantities of a commodity that a consumer is ready to buy at different possible prices of the commodity at a point of time.  Quantity Demanded Quantity demanded is a specific quantity of a commodity to be purchased against a specific price of that commodity at a point of time.  Demand Schedule Tabular presentation of the price of a good and it's quantity demanded is called demand schedule.  Concept of Demand Schedule Concept of demand schedule includes:  (1) Individual Demand Schedule (2) Market Demand Schedule (1) Individual Demand Schedule Demand schedule of an individual buyer or consumer in the market is known as individual demand schedule. (2)  Market Demand Schedule Demand schedule of all the buyers or consumers in the market is known as market demand schedule. Demand Curve Graphical presentation of demand schedule is known as demand curve.  Like demand schedule, concept of demand curve includes:  (1) Individual Demand C

Indifference Set Indifference set is a set of different combinations of two goods which offers the consumer the same level of satisfaction. Indifference Curve Indifference curve is a curve which shows different combinations offering the same level of satisfaction to the consumer.  Properties Of Indifference Curve(IC)  (1) IC Slopes Downward- IC slopes downward from left to right. It means that IC has a negative slope. It implies if the consumer decides to have more of one good, he must have less of the other.  (2) IC is Convex to the Origin- It means that the slope of IC tends to decline, as we move along the IC from left to right. (3) Higher IC shows Higher Level of Satisfaction- A set of ICs drawn in a graph is known as Indifference map.Each IC in the indifference map corresponds to different level of consumer's income. Higher IC indicates higher level of satisfaction. (4) IC doesn't touch X-axis or Y-axis - This i

CONSUMER'S EQUILIBRIUM (Utility Analysis)  Consumer's equilibrium refers to a situation when a consumer maximises his satisfaction, spending his given income across different goods and services.  Different cases of consumer's equilibrium (1) When only one commodity is consumed (2) When two or more commodities are       consumed.  Consumer's Equilibrium: One Commodity Case Purchase of a commodity by a consumer depends on three factors:  (a) Price of a commodity.  (b) Marginal utility of commodity.  (c) Marginal utility of money.  Marginal Utility of Money Marginal utility of money refers to worth of a rupee to a consumer. A consumer defines it in terms of utility that he derives from a standard basket of goods that he can buy with a rupee.  Diagram: One Commodity Case From the above diagram it is clear that (1) MUx is a downward sloping curve showing       that MUx declines as consumption of       commodity-X increases.  (2)Px indicates market price of commod

Utility Capacity of a commodity to satisfy human wants is known as utility.  Measurement of utility (1) Cardinal measurement (2) Ordinal measurement (1) Cardinal measurement Cardinal means serial wise. When utility is measured in terms of serial numbers like 1,2 and 3 is known as cardinal measurement of utility.  (2) Ordinal measurement Ordinal means order wise. When utility is measured in terms of orders like first, second and third is known as ordinal measurement of utility. Total Utility (TU)  Aggregate of utility received from each additional unit of commodity is known as Total Utility.  Characteristics of Total Utility (a) Initially TU increased.  (b) At a certain point TU becomes maximum        or constant.  (c) Finally TU decreases.  Marginal Utility (MU)  Utility from each additional unit of commodity is known as Marginal Utility.   Characteristics of Marginal Utility (a) Initial