Concept of Indifference Curve (IC) In the microeconomic analysis, an indifference curve (IC) is a graph that shows different combinations of two goods or services that provides the same level of total satisfaction to the consumers. A consumer is always indifferent among any of the bundles of two goods on an indifference curve as they […]
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Learning Objective To explain the concept and assumptions of ordinal utility analysis Concept of Ordinal Utility Analysis The theory of consumer behavior helps us to observe and predict consumers’ responses to changes in prices, income, tastes and preferences, price of related goods, and promotional expenditures. Understanding the consumer’s responses to changes in such variables helps
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Meaning of Utility The term utility refers to the want satisfying capacity of a commodity or service. In another word, utility deals with the pleasure or satisfaction that individuals get from their economic activity. When a person has a desire for a commodity or for a service and if he contracts it and consumes it,
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The concept and theory of elasticity of demand play a vital role in the solution of economic problems and the determination of various economic policies. Mainly there are four types of elasticity of demand (price, income, cross, and advertisement). Here we will talk about the importance or uses of price elasticity of demand. The concept
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Different degrees of price elasticity of supply describes the different nature of the product and their volume of supply as a reflection of the change in price. For example, the zero price elasticity of supply indicates that the volume of supply will not change with change in price. This means elasticity of supply is zero
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Meaning of Price Elasticity of Supply The Law of supply tells the direction in which the supply of a product will change as a result of the change in the price, but it does not give us the magnitude of change in supply. Price elasticity of supply gives us this information concerning the magnitude of
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Concept of Advertisement Elasticity of Demand The advertisement expenditure has a direct effect on the demand for goods and services. In all modern businesses, advertisement plays a very important role. An increase in advertisement expenditure leads to an increase in the sale of a commodity. As advertisement has a saturation point, sales quantity increases up
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Cross elasticity of demand measures the degree of responsiveness of the quantity demand for one good to the change in the price of any other related good, keeping other things the same. For the business firms, cross elasticity of demand is useful to see the competitors and determine their strategy accordingly. Goods and services can
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Concept of Cross Elasticity of Demand The quantity demand of anyone commodity is affected by the change in not only its price but also by a change in the prices of related commodities. The effect changes in quantity demand of any one particular good due to the change in prices of other related goods is
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The degree of price elasticity of demand for different goods is different. So, it is important to measure the elasticity of demand to compare the elasticity of demand for different goods. Economists have developed different, methods of measurement of price elasticity of demand. Here we will discuss all the major methods of measurement of price
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