Question

Explain elasticity, elasticity of demand, elasticity of supply , market structures, marginal utility, consumer (household) and diminishing return.

Answer 1

Elasticity: Elasticity is the ratio of the percentage change of one variable to the percentage change of another variable. It is predominantly used to find the percentage change in quantity per unit percentage change in price usually.

Elasticity of Demand: The ratio of the percentage change in quantity demanded to the percentage change of price is known as elasticity of demand. It is defined as (ΔQd/Qd1) / (ΔP/P1) where suffix 1 denotes initial stage, Qd is quantity demanded and P is price.

Elasticity of Supply: The ratio of the percentage change in quantity supplied in a market to the percentage change of price is known as elasticity of supply. It is defined as (ΔQs/Qs1) / (ΔP/P1) where suffix 1 denotes initial stage, Qs is quantity demanded and P is price.

Market Structure:Depending on the nature of interaction between firms and the competition between firms, there are organizational characteristics of a market. This classification based on organizational characteristics is called Market structure. It is of the following types:

1. Perfect Competition: Many firms and many buyers

2. Monopoly: Single seller and many buyers

3. Duopoly: 2 Sellers and Many buyers

4. Oligopoly: Few firms selling homogenous or differentiated products

5. Monopolistic Competition: Many firms selling differentiated products which are close but not perfect substitutes.

Marginal Utility: The additional utility gained by a consumer bu consuming one additional unit of a good or service is known as marginal Utility. For example, a customer may have consumed 10 chocolates and has a utility of 25. If he has one more chocolate, if his utility becomes 28, then the additional 3 units is his marginal utility of having one additional chocolate when he already has had 10 chocolates.

Consumer (Household): The buyer of a good or service which is available in the market. They form the demand curve in a market and is responsible for consuming the goods or services produced by a producer.

Diminishing Return: If the return of consuming a good goes down, it is called diminishing return. Let us say that a customer wants to have chocolates. If he has 1 chocolate, he has a utility of 10. If he has the second chocolate his utility is an adiitional 9. WHen he has the third chocolate, his utility increases by 8. So we see that with every additional chocolate that the customer is having, his marginal utility or additional utility is going down. This is known as diminishing return.

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