Land

Defination: Land is one factor amongst four factors of production. Land comprises all of natural resources that occur naturally,  these included all geographical locations, mineral deposits, soil, geostationary orbits and it also includes some portion of electromagnetic spectrum. Depending on the title, land ownership give holder the rights to all natural resources on the land. These may include water, plants, human and animal life, fossils, soil, minerals, electromagnetic features, geographical location, and geophysical occurrences.
*Land does not include building or equipments that not occur naturally.

Explanation of Land:

Land is any place or space you will use to produce goods or services, it is one of primary factors of production without it you cannot produces anything, for instances if you are going to produce any cold drink, you need to setup machineries, hire labours and invest capital and use entrepreneurship, so if you think for producing cold drink the idea that take the first place in your mind would be that where you should setup your industry ? so for setting up an industry you need to own or borrow a land. thats why it is called primary factor of production because all other factors are aside and land is aside.

Following Pictures are an example of land.

 

Capital

A capital is a durable good that is used in production of goods or services. Capital goods are acquired by a society by saving wealth which can be invested in the means of production.

Individuals, organizations and governments use capital goods in the production of other goods or commodities. Capital goods include factories, machinery, tools, equipment, and various buildings which are used to produce other products for consumption. Capital goods, then, are products which are not produced for immediate consumption; rather, they are objects that are used to produce other goods and services. These types of goods are important economic factors because they are the key to developing a positive return from manufacturing other products and commodities.

Manufacturing companies also use capital goods. Capital goods help their company make functional goods to sell individuals valuable services. As a result, capital goods are sometimes referred to as producers’ goods or means of production. An important distinction should also be made between capital goods and consumer goods, which are products directly purchased by consumers for personal or household use.

For example, cars are generally considered consumer goods because they are usually bought by an individual for personal use. Dump trucks, however, are usually considered capital goods, because they are used by construction and manufacturing companies to haul various materials in order to make other products such as roads, bridges, dams, and buildings. A chocolate bar is a consumer good, but the machines used to produce the chocolate bar are considered capital goods.

Capital goods are generally man-made. Natural resources such as land or minerals, or human capital—the intellectual and physical skills and labor provided by human workers—are not capital goods.

The economic term 'capital goods' is not to be confused with the financial or accounting usage of 'capital', which may mean simply wealth or financial capital.

Labour

Labour economics seeks to understand the functioning and dynamics of the markets for wage labour. Labour markets function through the interaction of workers and employers. Labour economics looks at the suppliers of labour services (workers), the demands of labour services (employers), and attempts to understand the resulting pattern of wages, employment, and income.

In economics, labour is a measure of the work done by human beings. It is conventionally contrasted with such other factors of production as land and capital. There are theories which have developed a concept called human capital (referring to the skills that workers possess, not necessarily their actual work), although there are also counter posing macro-economic system theories that think human capital is a contradiction in terms.

Machinery

Machines employ power to achieve desired forces and movement. A machine has a power source and actuators that generate forces and movement, and a system of mechanisms that shape the actuator input to achieve a specific application of output forces and movement. Modern machines often include computers and sensors that monitor performance and plan movement, and are called mechanical systems.

The meaning of the word "machine" is traced by the Oxford English Dictionary to an independently functioning structure and by Merriam-Webster Dictionary to something that has been constructed. This includes human design into the meaning of machine.

The adjective "mechanical" refers to skill in the practical application of an art or science, as well as relating to or caused by movement, physical forces, properties or agents such as is dealt with by mechanics. Similarly Merriam-Webster Dictionary defines "mechanical" as relating to machinery or tools.

Power flow through a machine provides a way to understand the performance of devices ranging from levers and gear trains to automobiles and robotic systems. The German mechanician Franz Reuleaux wrote "a machine is a combination of resistant bodies so arranged that by their means the mechanical forces of nature can be compelled to do work accompanied by certain determinate motion." Notice that forces and motion combine to define power.

More recently, Uicker et al. state that a machine is "a device for applying power or changing its direction." And McCarthy and Sohdescribe a machine as a system that "generally consists of a power source and a mechanism for the controlled use of this power."

Raw Material

A raw material or feedstock is the basic material from which goods, finished products or intermediate materials that are also feedstocks are manufactured or made. The term raw material is frequently used with an extended meaning.^[1] As feedstock, the term connotes it is a bottleneck asset critical to the production of other products. For example, crude oil is a feedstock raw material providing finished products in the fuels, plastics and industrial chemicalsand pharmaceuticals industries.

For example, the term 'Raw material' is used to denote material that came from nature and is in an unprocessed or minimally processed state; e.g., raw latex, coal, iron ore, logs, crude oil, airor seawater. The use of raw material by non-human species includes twigs and found objects as used by birds to make nests.

Factors of Production

Factors of Production

Defination: Factors of production are those resources that are used by the producer in the production process to produce goods and services for the consumer. There resources or inputs are also called "Producter Goods", in order to distinguish them from the goods and services (Finished goods) purchased by the consumers, which frequently labelled, "Consumer Goods". These factors of production are used in a combination at the time of production process.

*The amount of the various inputs used to determine the quantity of output this relationship is called production function.

There are four factors of production land, labour, capital and entrepreneurship.

Fig. 1

Figure below shows the relationship of these four factors between them; to complete the production process.

Production

Defination of Production

In economics, production is the act of creating output, a goods or service which has value and contributes to the utility of individuals.The act may or may not include factors of production other than labor. Any effort directed toward the realization of a desired product or service is a "productive" effort and the performance of such act is production. The relation between the amount of inputs used in production and the resulting amount of output is called the production function.

Stages of production

Primary producers directly extract natural resources.Production can be distinguished into three stages:

1. Secondary producers process resources to turn them into intermediate goods.
2. Tertiary producers provide final goods or services to the consumer.

Business Organization & Its Types

Economics-Chapter-3-Notes.pdf

Allocative Efficiency

Definition of allocative efficiency. This occurs when there is an optimal distribution of goods and services,  taking into account consumer’s preferences.

A more precise definition of allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production. This is because the price that consumer’s are willing to pay is equivalent to the marginal utility that they get. Therefore the optimal distribution is achieved when the marginal utility of the good equals the marginal cost.

Example using diagram

If the marginal cost was £10, and people were only willing to pay £5 for the good (at output 5), this is allocatively inefficient. This is because the value people get (£2) is less than the cost of producing. The cost is greater than the benefit and it is inefficient.

If the marginal cost of a good was £5, and the price was £10 . The price (MU) is greater than marginal cost – suggesting under-consumption. If output increased and price fell, society would benefit from enjoying more of the good.

Allocative efficiency occurs at an output of 8.

Perfect competition – allocatively efficient

• Firms in perfect competition are said to produce at an allocative efficient level because at Q1  – P=MC

Monopolies – allocatively inefficient

• Monopolies can increase price above the marginal cost of production and are allocatively inefficient. This is because monopolies have market power and can increase price to reduce consumer surplus.

Monopoly sets a price of Pm. This is allocatively inefficient because Price is greater than MC.

Alloactive efficiency would occur at the point where the MC cuts the Demand curve so Price = MC.

Allocative efficiency and productive efficiency

Productive Efficiency is concerned with producing goods with lowest cost. This occurs on the production possibility frontier (PPF).

(Note producing on the production possibility frontier is not necessarily allocatively efficient because a PPF only shows the potential output. Allocative efficiency is concerned with the distribution of goods and this requires the addition of indifference curves.

X-Efficiency

X-inefficiency is the difference between efficient behavior of businesses assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure. The concepts of x-inefficiency were introduced by Harvey Leibenstein.

Definition of 'X-Efficiency'

The degree of efficiency maintained by individuals and firms under conditions of imperfect competition. According to the neoclassical theory of economics, under perfect competition individuals and firms must maximize efficiency in order to succeed and make a profit; those who do not will fail and be forced to exit the market. However, x-efficiency theory asserts that under conditions of less-than-perfect competition, inefficiency may persist.

Economists explains 'X-Efficiency'

The concept of x-efficiency was proposed by economist Harvey Leibenstein in a 1966 paper. The theory of x-efficiency is controversial because it conflicts with the assumption of utility-maximizing behavior, a well-accepted axiom in economic theory. Instead, some economists argue that the concept of x-efficiency is merely the observance of workers' utility-maximizing tradeoff between effort and leisure. Empirical evidence for the theory of x-efficiency is mixed.

Social Efficiency

Definition of Social efficiency. This is the optimal distribution of resources in society, taking into account all external costs and benefits as well as internal costs and benefits. Social Efficiency occurs at an output where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC).

Social efficiency is closely related to the concept of Pareto efficiency – A point where it is impossible to make anyone better off without making someone worse off

Note:

• Social benefit = private benefit + external benefit
• Social Cost = private cost + external cost

Point of Social Efficiency

We say social efficiency occurs at an output where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC)

In a free market, consumers ignore the external costs of consumption (e.g. drive a car but don’t factor in the congestion you cause to other people). Therefore, free market equilibrium is at Q1 (where S=D).

However, at Q1 the Marginal Social Cost is greater than the Marginal Social Benefit. Therefore by consuming at this point, the cost to society is greater than benefit (e.g. think of traffic jams and pollution because too many people drive at once). We say there is a deadweight welfare loss – indicated by red triangle.

If output is less than equilibrium. The MSB is greater than MSC. If we increase output, the addition to social welfare (MSB) is greater than the cost of an extra unit, therefore, net social welfare increases.

Implications of Social efficiency

It is important to take into account externalities (both positive and negative) It can be difficult to measure externalities, but we need to make an effort.

Dynamic efficiency

Dynamic efficiency is a term in economics, which refers to an economy that appropriately balances short run concerns (static efficiency) with concerns in the long run (focusing on encouraging research and development).

Dynamic efficiency in growth model

The Ramsey-Cass-Koopmans model does not have dynamic efficiency problems, but the Diamond Growth model is dynamically inefficient because of the overlapping generation setup; there is an allocation point which is better than the competitive equilibrium allocation point.

Productive efficiency

Productive efficiency occurs when the economy is utilizing all of its resources efficiently. The concept is illustrated on a production possibility frontier (PPF) where all points on the curve are points of maximum productive efficiency (i.e., no more output can be achieved from the given inputs). An equilibrium may be productively efficient without being allocatively efficient— i.e. it may result in a distribution of goods where social welfare is not maximized.

Productive efficiency occurs when production of one good is achieved at the lowest resource (input) cost possible, given the level of production of the other good(s). Equivalently, it occurs when the highest possible output of one good is produced, given the production level of the other good(s). In long-run equilibrium for perfectly competitive markets, this is at the base of the average total cost curve—i.e. where marginal cost equals average total cost.

Productive efficiency requires that all firms operate using best-practice technological and managerial processes. By improving these processes, an economy or business can extend its production possibility frontier outward, so that efficient production yields more output.

Due to the nature of monopolistic companies, they may not be productively efficient, because of X-inefficiency, whereby companies operating in a monopoly have less of an incentive to maximize output due to lack of competition. However, due to economies of scale it can be possible for the profit-maximizing level of output of monopolistic companies to occur with a lower price to the consumer than perfectly competitive companies.

An example PPF: points B, C and D are all productively efficient, but an economy at A would not be.

Productive efficiency can also be illustrated by the intersection MC=A(T)C.

Efficiency

Definition of Economics Efficiency

In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:

• No one can be made better off without making someone else worse off (commonly referred to as Pareto efficiency).
• No additional output can be obtained without increasing the amount of inputs.
• Production proceeds at the lowest possible per-unit cost.

These definitions of efficiency are not exactly equivalent, but they are all encompassed by the idea that a system is efficient if nothing more can be achieved given the resources available.

Another Definition for more clear Understanding.

Definition of 'Economic Efficiency'

A broad term that implies an economic state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one person would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production. 

Some terms that encompass phases of economic efficiency include allocational efficiency, production efficiency and Pareto efficiency.

Economists explains 'Economic Efficiency'

A state of economic efficiency is essentially just a theoretical one; a limit that can be approached but never reached. Instead, economists look at the amount of waste (or loss) between pure efficiency and reality to see how efficiently an economy is functioning. 

Measuring economic efficiency is often subjective, relying on assumptions about the social good created and how well that serves consumers. Basic market forces like the level of prices, employment rates and interest rates can be analyzed to determine the relative improvements made toward economic efficiency from one point in time to another. 

Law of Equi Marginal Utility:

The law of equi marginal utility was presented in 19th century by an Australian economists H. H. Gossen. It is also known as law of maximum satisfaction or law of substitution or Gossen's second law. A consumer has number of wants. He tries to spend limited income on different things in such a way that marginal utility of all things is equal. When he buys several things with given money income he equalizes marginal utilities of all such things. The law of equi marginal utility is an extension of the law of diminishing marginal utility. The consumer can get maximum utility by allocating income among commodities in such a way that last dollar spent on each item provides the same marginal utility.

Definition:

"A person can get maximum utility with his given income when it is spent on different commodities in such a way that the marginal utility of money spent on each item is equal".

It is clear that consumer can get maximum utility from the expenditure of his limited income. He should purchase such amount of each commodity that the last unit of money spend on each item provides same marginal utility.

Assumptions of the Law of Equi Marginal Utility:

1. There is no change in the prices of the goods.
2. The income of consumer is fixed.
3. The marginal utility of money is constant.
4. Consumer has perfect knowledge of utility obtained from goods.
5. Consumer is normal person so he tries to seek maximum satisfaction.
6. The utility is measurable in cardinal terms.
7. Consumer has many wants.
8. The goods have substitutes.

Explanation With Schedule and Diagram:

The law of substitution can be explained with the help of an example. Suppose consumer has six dollars that he wants to spend on apples and bananas in order to obtain maximum total utility. The following table shows marginal utility (MU) of spending additional dollars of income on apples and bananas:

Money (Units)	MU of apples	MU of bananas
1	10	8
2	9	7
3	8	6
4	7	5
5	6	4
6	5	3

The above schedule shows that consumer can spend six dollars in different ways:

1. $1 on apples and $5 on bananas. The total utility he can get  is:
   [(10) + (8+7+6+5+4)] = 40.
2. $2 on apples and $4 on bananas. The total utility he can get is:
   [(10+9) + (8+7+6+5)] = 45.
3. $3 on apples and $3 on bananas. The total utility he can get is:
   [(10+9+8) + (8+7+6)] = 48.
4. $4 on apples and $2 on bananas. This way the total utility is:
   [(10+9+8+7) + (8+7)] = 49.
5. $5 on apples and $1 on bananas. The total utility he can get is:
   [(10+9+8+7+6) + (8)] = 48.

Total total utility for consumer is 49 utils that is the highest obtainable with expenditure of $4 on apples and $2 on bananas. Here the condition MU of apple = MU of banana i.e 7 = 7 is also satisfied. Any other allocation of the last dollar shall give less total utility to the consumer.

The same information can be used for graphical presentation of this law:

The diagram shows that consumer has income of six dollars. He wants to spend this money on apples and bananas in such a way that there is maximum satisfaction to the consumer.

Limitations:

1. The law is not applicable in case of knowledge. Reading of books provides more satisfaction and knowledge to the scholar. Different books provide variety of knowledge and satisfaction.
2. The law is not applicable in case of indivisible goods. The consumer is unable to divide the goods to adjust units of utility derived from consumption of goods.
3. There is no measurement of utility. It is psychological concept. It is not possible to express it into quantitative form.
4. The law does not hold well in case fashion and customs. The people like to spend money on birthdays, marriages and deaths.
5.  The does not hold well in case of very low income. The maximization of utility is not possible due to low income.
6. The law is not applicable in case of durable goods. The calculation of marginal utility of durable goods is impossible.
7. The law fails when goods of choice are not available. The consumer is bound to use commodity, which provides low utility due to non availability of goods having high utility.
8. There are certain lazy consumers. They do not care for maximum utility. The law fails to operate in case of laziness of consumers. They go on consuming goods with comparing utility.
9. It does not work when there are frequent prices changes. The consumer is unable to calculate utility of different commodities. Changing price levels create confusion in the minds of consumers.
10. There may be unlimited resources. The does not work due to unlimited resources. There is no need to change the direction of expenditure from one item to another when there are gifts of nature.

Importance:

1. The law of equi marginal utility is helpful in the field of production. The producer has limited resources. He uses limited resources to purchase production factors. He tries to equalize marginal utility of all factors. He wishes to get maximum output and profit.
2. National income is distributed among factors of production according to this law. An entrepreneur can pay factors of production equal to marginal product measured in money terms. He will substitute one factor for another until marginal productivity of all factors is equal to prices of their services.
3. The law is used in the field of exchange. The people like to exchange a commodity having low utility with a commodity having high utility. There is maximum benefit from exchange of commodities. The law is helpful in exchange of wealth, trade, import and export.
4. The law is applicable in consumption. A rational consumer tries to get maximum satisfaction when he spends his limited resources on various things. He tries to equalize weighted marginal utility of all the things.
5. The law is applicable in public finance. The government can spend its revenue to get maximum social advantage. The marginal utility of each dollar spent in one sector must be equal to marginal utility derived from all other sectors.
6. The law is useful for workers in allocating the time between work and rest. They can compare the marginal utility of work and the marginal utility of rest. They can decide working hours and rest hours.
7. The law holds well in case of saving and spending. The consumer can make choice between present wants and future wants. He can feel that a dollar saved has greater utility than a dollar spent, he can save more and spend less. He will substitute saving and spending till marginal utility of a dollar spent and a dollar saved are equal.
8. The law is helpful in prices. Due to scarcity of commodity its prices go up. The law tells us to use substitute commodity, which is less scarce. The result is that the price of commodity comes down.

Law Of Diminishing Marginal Utility

Definition of 'Law Of Diminishing Marginal Utility'

A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

Economists explains 'Law Of Diminishing Marginal Utility'

This is the premise on which buffet-style restaurants operate. They entice you with "all you can eat," all the while knowing each additional plate of food provides less utility than the one before. And despite their enticement, most people will eat only until the utility they derive from additional food is slightly lower than the original.

For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or 'dis-utility'.

Related Video for 'Law Of Diminishing Marginal Utility'

http://www.investopedia.com/video/play/law-of-diminishing-marginal-utility/

Total Utility

Definition of 'Total Utility' The aggregate level of satisfaction or fulfillment that a consumer receives through the consumption of a specific good or service. Each individual unit of a good or service has its own marginal utility, and the total utility is simply the sum of all the marginal utilities of the individual units. Classical economic theory suggests that all consumers want to get the highest possible level of total utility for the money they spend. Economists explains 'Total Utility' To better understand total utility, one must understand the law of diminishing marginal utility, which states that as more of a single good or service is consumed, the additional (marginal) satisfaction drops. The first good consumed provides the highest marginal utility, the second good has a lower marginal utility, and so on. Therefore, total utility grows less rapidly with each additional unit of the same good or service. In order to maximize total utility (which is the inherent goal of all consumers), consumers will look to combine different combinations of goods and services. Given their limited resources (money), consumers will make choices in an attempt to increase their total utility with each additional unit of consumption.

Marginal Utility

Marginal Utility

Definition of 'Marginal Utility'

The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important economic concept because economists use it to determine how much of an item a consumer will buy. Positive marginal utility is when the consumption of an additional item increases the total utility. Negative marginal utility is when the consumption of an additional item decreases the total utility.

Economists Explains 'Marginal Utility'

For example, if you were really thirsty you'd get a certain amount of satisfaction from a glass of water. This satisfaction would probably decrease with the second glass, and then decrease even more with the third glass. The additional amount of satisfaction that comes with each additional glass of water is marginal utility.

Approaches of Utility

Approaches of Utility
-----------------------

There are two approaches of Utility, Cardinal Utility & Ordinal Utility.

Approaches of Utility - Cardinal Utility
--------------------------------------------------------------------------------

Cardinal utility

In economics, a cardinal utility function or scale is a utility index that preserves preference orderings uniquely up to positive affine transformations. Two utility indices are related by an affine transformation if for every value  of one index u, occurring at quantity  of the goods bundle being evaluated, the corresponding value  of the other index v satisfies a relationship of the form

,

for fixed constants a and b. Thus the utility functions themselves are related by

The two indices differ only with respect to scale and origin.^[1]

The idea of Cardinal utility is considered outdated except for specific contexts such as decision making under risk, utilitarian welfare evaluations, and discounted utilities for intertemporal evaluationswhere it is still applied. Elsewhere, such as in general consumer theory, ordinal utility is preferred.

A simple example of two cardinal utility functions of y=2x+3

Ordinal Utility

Approaches of Utility - Ordinal Utility
------------------------------------------------------------

Ordinal utility theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative bundles (combinations) of goods can be ordered such that one is considered by an individual to be worse than, equal to, or better than the other. This contrasts with cardinal utility theory, which generally treats utility as something whose numerical value is meaningful in its own right. The concept was first introduced by Pareto in 1906.^[1]

When a large number of bundles of goods are compared, the preferences of the individual can be seen. This information is usually put together on a graph called an indifference map. One of these is shown below:Indifference curve mappings

Each indifference curve is a set of points, each representing a combination of quantities of two goods or services, all of which combinations the consumer is equally satisfied with. The further a curve is from the origin, the greater is the level of utility. The slope of the curve (the negative of the marginal rate of substitution of X for Y) at any point shows the rate at which the individual is willing to trade off good X against good Y maintaining the same level of utility. The curve is convex to the origin as shown assuming the consumer has a diminishing marginal rate of substitution. It can be shown that consumer analysis with indifference curves (an ordinal approach) gives the same results as that based on cardinal utility theory — i.e., consumers will consume at the point where the marginal rate of substitution between any two goods equals the ratio of the prices of those goods (the equi-marginal principle).

Revealed preference

Revealed preference theory addresses the problem of how to observe ordinal preference relations in the real world. The challenge of revealed preference theory lies in part in determining what goods bundles were foregone, on the basis of the being less liked, when individuals are observed choosing particular bundles of goods.

Ordinal utility functions

An ordinal utility function describing a consumer's preferences over, say, two goods can be written as

where x and y are the quantities of the goods consumed. Both partial derivatives of this function are positive if the consumer prefers more of both goods. But the same preferences could be expressed as another utility function that is a monotonic transformation of u:

where f is any globally increasing function. Utility functions g and u give rise to identical indifference curve mappings. Thus in ordinal utility theory, there is no concept of diminishing marginal utility, which would correspond to the second derivative of utility being negative. For example, even if u has a negative second derivative with respect to x, the equivalent utility function g may have a positive second derivative with respect to x.

Neo-Classical & Modern Economics

Adam Smith, known as the Father of Economics, established the first modern economic theory, called the Classical School, in 1776. Smith believed that people who acted in their own self-interest produced goods and wealth that benefited all of society. He believed that governments should not restrict or interfere in markets because they could regulate themselves and, thereby, produce wealth at maximum efficiency. Classical theory forms the basis of capitalism and is still prominent today.

A second theory known as Marxism states that capitalism will eventually fail because factory owners and CEOs exploit labor to generate wealth for themselves. Karl Marx, the theory’s namesake, believed that such exploitation leads to social unrest and class conflict. To ensure social and economic stability, he theorized, laborers should own and control the means of production. While Marxism has been widely rejected in capitalistic societies, its description of capitalism’s flaws remains relevant.

A more recent economic theory, the Keynesian School, describes how governments can act within capitalistic economies to promote economic stability. It calls for reduced taxes and increased government spending when the economy becomes stagnant, and increased taxes and reduced spending when the economy becomes overly active. This theory strongly influences U.S. economic policy today.

As one can see, economics shapes the world. Through economics, people and countries become wealthy. Because buying and selling are activities vital to survival and success, studying economics can help one understand human thought and behavior.

Consumer Behavior

Consumer behavior

One of the key analyses under the heading "consumer behavior" refers to the interaction between price changes and consumer demand. From introductory economics we know that a reduction in the price of X will result in an overall rise in the quantity demanded of good X. However, this rise in the quantity demanded is due to the total price effect, which can be subdivided into two separate parts, the substitution effect and the income effect.

Quantitative Behavior

Quantitative Behavior means when consumer focus on the quantity, because due to his limited resources.

For example: I have 1000 R.s in my pocket and I want to buy only 5 gifts for my friend at this time iam focus on my quantity b/c this is must for me, due to my limited resources.

Qualitative Behavior

Qualitative Behavior means when consumer focuses on quality.

For example: I have 10000 in my pocket and I want to buy 1 or 2 gifts for my friend at this time iam focus on quantity. B/c my resources are allowed to me for this.

Indifference curve

Definition: A curve used in economics which shows how consumers would react to different combinations of products. On the graph, a quantity of one product appears on the x axis and a quantity of another product appears on the y axis. Consumers would be equally satisfied at any point along a given curve, as each point brings the same level of utility to that consumer. The slope of the curve is referred to as the marginal rate of substitution.

A diagram depicting equal levels of utility (satisfaction) for a consumer faced with various combinations of goods.

Properties of Indifference Curves

1. Higher indifference curves are preferred to lower ones, since more is preferred to less (non-satiation).
2. Indifference curves are downward sloping. If the quantity of one goods is reduced, then you must have more of the other good to compensate for the loss.
3. Indifference curves do not cross (intersect), since this would imply a contradiction.
4. Indifference curves are bowed inward (in most cases). The slope of indifference curves represents the MRS (rate at which consumers are willing to substitute one good for the other). People are usually willing to trade away more of one good when they have a lot of it, and less willing to trade away goods which are in scarce supply. This implies that MRS must increase as we get less of a good.

Changes in Prices

A change in price will change the slope of the curve. A fall in price will rotate the budget constraint outwards, and an increase in price will rotate the budget constraint inwards. Thus a change in price will change both the relative prices of the two products and also the amount that can be bought, ceteris paribus (income). Changes in price have two effects:

1. Substitution Effect
• arises from the tendency to buy less of goods which are more expensive
• can be measured by keeping satisfaction constant (stay on same indifference curve and finding where MRS = new relative prices
2. Income Effect
• arises from change in price effect on total amount that can be purchased
• change in consumption when we shift to a new indifference curve as a result of the price change