E-commerce Features

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 E-commerce has the following features:

1. Individual Communication
Communication is individualized and interaction is with carefully selected individual customer. E-name is used for this purpose.

2. Data Depository 
Internet is a central depository of huge amounts of data. It can be accessed all over the world through search engines. Websites contain information and they can be downloaded as needed.

3. E-mail and Electronic Platforms
E-mail and computer faxing is used for speedy transfer of messages to conduct business. Electronic platforms can be :

- EDI : Electronic data interchange for placing orders to suppliers. It is business to business exchange of data.

- ATM : Automatic teller machine to facilitate receiving digital cash. Smart cards are used to make payments.

- Computers : They receive orders from customers.

4. On-line Selling
E-commerce uses on-line selling. It has revolutionized selling through E-tailing, specially for:
- Airlines tickets and hotel bookings.
- Shares and financial services
- Cars and other vehicles 
- Computer hardware and software
- Books and music
- Consumer electronics
- Fashion goods

5. Relationship Marketing
E-commerce builds long-term mutually satisfying relations. This leads to life time loyal customers. The relations are based on superior customer value and satisfaction. Long term profits are made by lifetime customer loyalty.

Functions Of An Entrepreneur

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Entrepreneurial qualities consist of vision, inspiration, creativity, risk taking and achievement orientation. An entrepreneur is a visionary individual who takes risks by starting a new venture through assembling and coordinating various resources for the sake of uncertain rewards.
Entrepreneurs perform several functions to carry out their activities. The important functions of an entrepreneur are as follows:

1. Planning
Planning is predetermining future which sets target to convert new idea into reality. By planning, entrepreneurs carry out the following functions:
Setting goals
Goals are set for new venture which can be in terms of growth, profit, leadership and services. Goals are set for long-term.

Developing business plan
Business plan is developed for the new venture which consists of action plans related to production, marketing and finance. Contingency plans are developed to cope with risks.

2. Organizing
Organizing establishes a structure for the new venture. Through organizing, entrepreneurs carry out the following functions:
Grouping of tasks
Tasks required to achieve goals are defined and they are grouped into positions. Authority and responsibility of each position is established.

Coordination
Coordination is the key to entrepreneurial success. So, mechanisms are established to achieve harmony of efforts.

3. Mobilizing resources
Entrepreneurs determine the required resources and mobilize them. Resources can be:
Financial resources
Financial resources can be existing resources of the entrepreneurs or can be mobilized from friends, relatives, banks or other sources.

Human resources
Entrepreneurs acquire the needed human resources to fill-up the positions provided in the organization structure.

Technology resources
Entrepreneurs deal with new technologies. They establish production facilities and procure machinery and equipment. They upgrade technology to keep up with technological changes.

4. Relationship Management
Entrepreneurs manage a variety of relationship which are as follows:
Exchange relationship
They are related with procurement of inputs and marketing of outputs. These relationships are mainly concerned with suppliers and customers. Exchange relationships are business oriented.

Professional relationship
Entrepreneurs manage professional relationship within the venture. This is essential to motivate employees for higher productivity. They provide leadership and tackle labor problems. Such relationships are with employees, bankers, insurance companies, accountants, lawyers and consultants.

Government relationship
Entrepreneurs manage relationship with government and regulatory agencies to get licences, facilities, financing and tax concessions. Dealing with public bureaucracy is an important function of entrepreneurs.

Social relationship
Membership in clubs, professional associations and relation with local community are used to manage social relationship.

5. Control
Control is measurement and correction of performance to achieve the foals of the new venture which is based on feedback.  Control can be :
Financial control
Entrepreneurs ensure proper allocation and utilization of financial resources which is needed to control cost and minimize wastage. 

Production control
Entrepreneurs achieve proper combination of inputs for production. Quality control is ensured and efficiency is improved.

Managerial control
Entrepreneurs ensure management control in the new venture. They make key decisions themselves to solve problems.

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Characteristics Of Entrepreneurship

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Entrepreneurship has the following characteristics:

1. Creating New Venture
Entrepreneurship is concerned with creation of new venture with new ideas. Such ventures starts as a small business to satisfy the unfulfilled needs in the market. These new ventures produce something new of value, create new market and new customers.

2. Hard Work And Commitment
Entrepreneurship requires hard work and commitment through devotion of time and efforts. Hard work with enthusiasm is needed to make new ideas, developing plan, determination of required resources. Entrepreneurs have deep sense of personal responsibility and high level of energy.

3. Risk Assumption
Entrepreneurship involves assumption of risks which implies possibility of loss. Probability estimates of the outcome of risk situations are made to calculate risk. Generally, new ventures tend to have high risk and high failure rate. Financial risk, career risk, social risk and psychic risk are involved in entrepreneurship.

4. Reaping Of Rewards
Entrepreneurship results in reaping of rewards. Rewards can be monetary benefits in terms of profit or non-monetary benefits in terms of personal satisfaction, self development, fame, reputation and independence in work. Monetary rewards serve as symbol of achievement and non-monetary rewards provide opportunities to make contribution toward social well-being and get social recognition.

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Concept And Meaning Of Entrepreneurship

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The process of discovering new venture with creativity and innovation is called entrepreneurship. Entrepreneurship requires assumption of risk and reaping of awards. It brings resources together and provides option for self-employment to an individual. Entrepreneurship also creates employment opportunity for others.

Entrepreneurship is a mind set of creativity and risk taking. It is a process of identifying opportunities and bringing together factors of production to exploit these opportunities.Entrepreneurship results in creation of new venture by planning, organizing, operating and assuming the risk. It always aims for innovation, profitability and growth.

The entrepreneurial spirit has appeared as the engine of economic development. Entrepreneurship has resulted in millions of new ventures in the world. Entrepreneurship has appeared as the driving force for industrial and economic development. Therefore, the interest in the concept of entrepreneurship is growing in today's world.

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Concept And Meaning Of Investment

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Investment

Generally, income and expenditure of an individual never equals.If current income exceeds current desires, people intend to save their surplus. With this surplus they plan to use the saving in another way. In this connections, individuals may have various alternatives. They can deposit the money in bank or purchase government or corporate bonds or invest in stocks or contribute the fund to a provident fund or purchase the real assets like land, building, plants etc. In this way what people think about the use of saving that is known as investment.

Investment refers to the sacrifice of present financial resources with the view to get additional benefit in future. Therefore, investment can be defined as a alternative or best use of the saving. Purchase of real or financial assets is considered as the investment. Such use takes place at present and almost certain. However, returns are generated in future and that are generally uncertain. Therefore, every investment involves some degree of risk which occurs due to several reasons.

Therefore, we conclude that, invest is a sacrifice of current fund or money or other resources for future benefits. It is the employment of saving or funds with the view of achieving additional income . It involves the commitment of resources that have been saved  from current consumption, in the hope that some benefit will produce in future. It involves long term commitment and waiting for a reward. The sacrifice takes place in the present and reward comes later and uncertain.

Limitations Of The Law Of Substitution

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The law of substitution has several limitations as follows:

1. Ignorance Of Consumer
If the consumer is ignorant or blindly follows custom or fashion, he will make a wrong use of money. Due to his ignorance, he may not be aware of other more alternatives. In this case no substitution takes place and this law does not apply.

2. Commodities Indivisible
The law of substitution is based on the assumption that commodities are divisible and substituable. This is an unrealistic assumption. Though commodities may be divided according to the convenience of the consumer, it is not possible to divide all commodities in small units. There are certain commodities like fan or a radio which cannot be used in case of the indivisible commodities.

3. Utility Not Measurable
This principle of maximum satisfaction is based on the unrealistic assumption of the cardinal measurement of utility and the constancy of the marginal utility of money.

4. Customs And Fashion
Sometimes people are slave of customs or fashion and they are unable to become rational.Without being rational a consumer cannot substitute one thing for another. This is another limitation of this law.

5. Unlimited Resources
The law of substitution has no place when the resources are unlimited as in the case of free gift of nature. In such cases, there is no need to re-arrange expenditure because they can be used without any cost.

6. Choice Uncertain
The alternatives open to the consumer also assumed to be certain. But consumer choices are uncertain and even risky. In fact, it is expected utilities that determine consumer's choices of the various combinations he can buy with a given money income.

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Significance Of The Law Of Substitution

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The law of substitution is of great practical importance in economics which are given below:

1. Basis Of Consumption
Consumer is assumed to be rational. He always tries to maximize his utility subject to budget constraint. The law of substitution helps every consumer to maximize his utility by equalizing the marginal utilities obtained from different commodities.

2. Important In The Field Of Production
The law of substitution is also of great importance in the field of production. The producer has to use several factors of production in order to maximize net profit. For this purpose, he will substitutes one factor for another till their marginal productivity are  made the same. For example, if the marginal productivity of one factor say labor, is greater than that of capital, he may substitute labor for capital. In this way, he will be able to maximize his profit.

3. Important In The Field Of Exchange
This law of substitution also applies in exchange, because exchange is nothing but the principle of substitution itself. When we sell a commodity say, sugar, we get money. With this money we buy another commodity, say, wheat.Therefore, we have really substituted sugar for wheat. We continue to substitute one factor for the other till their marginal returns from all factors are equalized.

4. Importance In Distribution
In the distribution, we are concerned with the determination of rewards of the various factors of production, i.e. determination of rent, wages, interest and profit.The use of each factors of production is pushed by the firm to a point where marginal productivity of one factor is equal of other factor's marginal productivity. The law of substitute helps to equalize their marginal productivity.

5. Importance In Public Finance
The law of substitution is also applies in public finance. Government must try to maximize welfare of the community. For this, the government must down all wasteful expenditure where the return is not proportionate and instead divert the resources on more productive sector.

6. Price Determination
The principle of substitution is also applicable in the determination of prices when a commodity becomes scarce and its price becomes high. In order to bring its price down, we start substituting an abundant commodity for it, its scarcity will end.

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Concept Of The Law Of Substitution

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Law Of Substitution

The law of substitution is also known as the law of equi-marginal utility or the law of maximum satisfaction. This law was first developed by H.H Gossen. Therefore, this law is also known as second law of Gossen. Prof. Marshall has developed and given the present shape of this law.

This law states that in order to get maximum satisfaction, a consumer should spend his limited income on different commodities in such a way that the last dollar spent on each commodity yield him equal marginal utility.

The law of substitution  is also known as " The Law Of Maximum Satisfaction" because the consumer can maximize his/her satisfaction by spending income in accordance with this law. It is called " The Law Of Substitution" because the consumer will go on substituting one commodity with higher marginal utility for another commodity with lower marginal utility till the marginal utility of each commodity is equal. Suppose, there are two commodities X and Y on which a consumer has to spend a given income. If he finds that the marginal utility of commodity X is higher than the marginal utility of commodity Y, he will substitute the former for the latter till their marginal utilities are equalized.

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Concept Of Consumer's Surplus

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The concept of consumer's surplus is one of the most important idea in economic theory especially in demand and welfare economics.

This law was first developed by French engineer A.J Dupuit in 1844 to measure the social benefits of public commodities like canals, bridges, national highways, etc. This concept was further refined and popularized by Dr. Alfred Marshall in 1890.
The essence of the concept of consumer's surplus is that people generally get more satisfaction or utility from the consumption of commodities than the actual price they pay for them. It has been found that people are willing to pay more price for the commodity than they actually pay for them. This extra satisfaction which the consumers obtain from buying a commodity has been called consumer's surplus by Marshall.

The amount of money which a person is prepared to pay for a commodity indicates the amount of utility he derives from that commodity. Greater the amount of money he is willing to pay, greater the satisfaction or utility he will obtain from it. Therefore, the marginal utility of a unit of a commodity determines the price a consumer will prepare to pay for that unit.
The total utility which a person will get from a commodity will be given by the sum of marginal utilities of the units of commodities purchased or the total price which he actually pays equal to the price per unit multiplied by the number of units purchased. Thus,
Consumer's surplus = what a consumer is prepared to pay minus what he actually pays.
So, C.S = Total Utility- Total amount spent


The concept of consumer's surplus is based on the law of diminishing marginal utility. As we purchase more units of a commodity, its marginal utility goes on diminishing. The consumer is in equilibrium when marginal utility become equal to the given price.

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Criticisms Of Consumer's Surplus

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The concept of consumer's surplus has been criticized on several grounds as follows:

1. Imaginary
The concept of consumer's surplus is a purely imaginary idea. We just imagine what we are prepared to pay and subtract what we actually pay. It is all hypothetical.

2. Utility is not measurable
The concept of consumer's surplus is based on the assumption that utility can be measured quantitatively in term of money. But utility is a subjective concept. Therefore, utility cannot be measured quantitatively.

3. Marginal utility of money not constant
The concept of consumer's surplus supposes that the marginal utility of money remains constant throughout the process of exchange. But the marginal utility of money does not remain constant. When a consumer spends his given money income on the purchase of a commodity, the amount of money left him is reduced and its marginal utility to him increases. While calculating consumer's surplus, we do not take into consideration this change in the marginal utility of money.

4. Not applicable to necessaries
The concept of consumer's surplus does not apply to necessaries of life or conventional necessaries. The price of necessaries is very low whereas utility derived from them is very high. Therefore, consumer's surplus from them is infinite when a man is dying of thirst, he may be prepared to pay any amount of money for a glass of water.

5. Neglect complementary commodities
Marshall assumes that the utility of a commodity depends upon the supply of that commodity alone. He neglect the problem of complementary of commodities. Thus, he considers one commodity as independent of the others.

6. Neglect Substitutes
This concept assumes the absence of substitutes of the commodity from which the consumer derives the surplus because the presence of substitutes like tea and coffee would make the measurement of consumer's surplus difficult.

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Significance Of Consumer's Surplus

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The concept of consumer's surplus has great practical importance, which are as follows:

1. Importance in public finance
Consumer's surplus is useful to a finance minister in imposing taxes and fixing their rates. He will tax those commodities in which the consumers enjoying much surplus. In such cases, the people would be willing to pay more than they actually pay. Such tax will bring more revenue to the state.

2. Importance to businessman and monopolist
The concept of consumer's surplus is very useful to the businessman. He can raise price of those commodities in which there is a large consumer's surplus. The seller will be able to raise price if he is monopolist and control the supply of the commodity.

3. Comparing advantages of different places
The concept of consumer's surplus enables us to compare the advantages of environment and opportunities. A person living in a developed area enjoys greater consumer's surplus than a person living in a remote area because the former is able to get all the amenities of life cheaply and easily. It also enables us ti compare standard of living of the people living in different parts of the world. The larger the consumer's surplus the better off is the people.

4. Measuring benefits from international trade
We can measure the benefit from international trade with the idea of consumer's surplus. Suppose that before entering into trade with another country we are prepared to pay $ 1000 for a computer. But after establishing trade relation, we get it for $ 750. The difference between what we were prepared to pay for the computer and what we actually pay is the consumer's surplus which measures the benefit fro international trade.

5. Distinction between value in use and value in exchange
The concept of consumer's surplus helps us to distinguish between value in use and value in exchange. Value in use means utility and value in exchange means the price of a commodity. Commodities like salt, post card, match box etc. have a great value in use but a very small value in exchange. Consumer's surplus from such commodities is very large because we are prepared to pay much more for such commodities than we actually pay.

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Significance Of The Law Of Diminishing Marginal Utility

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The law of diminishing marginal utility is of great importance in economics:

1. Basis Of Economic Laws
Several very important laws of economics are based on the law of diminishing marginal utility e.g. the law of demand, consumer's surplus, elasticity of demand, the law of substitution, etc.

2. Basis Of Theory Of  Taxation
The law of diminishing marginal utility is applicable in the sphere of taxation. As a person's income increases, the rate of tax rises because the marginal utility of money to him falls with the rise in his income. The principle of progressive taxation is based on this law.

3. Basis Of Price Determination
This law also applies to the determination of market price. The price of a commodity falls when its supply increases. It is because with the increase in the stock of a commodity, its marginal utility decreases..

4. Basis For Consumer Expenditure
The law of diminishing marginal utility regulates our daily expenditure. We know that as we go on buying more of a commodity, its marginal utility falls.Having only a limited amount of money at our disposal, we cannot waste it unnecessarily on a large quantity of a particular commodity. Therefore, we stop further purchases at a point where marginal utility equals price.

5. Basis Of Distribution Of Wealth
According to socialists, the distribution of wealth and national income should be done on the basis of this law. They argued that excessive wealth in the hand of rich is not so useful from the social point of view. The excess wealth should be transferred to the poor. In the hand of poor, it will satisfy needs that are more urgent. It is due to diminishing marginal utility that beyond a certain point, wealth will have less utility
.of a rich man. If it is transferred to the poor, it will have greater utility.

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Exceptions Of The Law Of Diminishing Marginal Utility

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There are various limitations / exceptions of the law of diminishing marginal utility. Major limitations are as follows:

1. Homogeneous Commodity
The law of diminishing marginal utility assumes that there should be single commodity with homogeneous units. All units of the commodity should be of the same same size and quality. If the units are not identical, this law will not be applied.

2. No change in tastes, habits, customs, fashion and income of the consumer
There should not be changed in tastes, habits, customs, fashion and income of the consumer. If the income of a consumer increases, the marginal utility of a certain goods will increase. In such case, increase in consumption may yield greater satisfaction or utility.

3. Continuity
There should be continuity in the consumption of the commodity; otherwise the law of diminishing marginal utility will not apply. Units of the commodity should be consumed in succession at one particular time. If the interval between the various units of consumption is too long, marginal utility may become higher..

4. Suitable size of units
Units of the commodity should be of a suitable size. It must not be too small. For example, giving water to a thirsty man by spoon will increase the utility of the successive spoon of water.

5. Ordinary commodities
Commodities should be of an ordinary types. If the commodities are likes diamonds and jewels or hobby commodities like stamps, coins or paintings, the law of diminishing marginal utility does not apply.

6. Marginal utility of money not constant
Our intensity for money increases as we have more of it. No doubt the marginal utility of money does not become zero, but it definitely falls as a person gets more and more money.The marginal utility of money for a rich is less than a poor man.

7. Rational consumer
The consumer should be an economic man, who acts rationally. This law does  not apply to persons of special nature such as drunkard, druggist etc. Marginal utility of wine for drunkard increases with every peg of drinks.

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Concept Of The Law Of Diminishing Marginal Utility And Its Assumptions

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Concept Of The Law Of Diminishing Marginal Utility
This law was first developed by a German economist Hermann Heinrich Gossen. This law is also known as the first law of Gosse. The law of diminishing marginal utility states that the marginal utility derived from the consumption of every additional unit goes on diminishing, other thing remaining the same.

The law of diminishing marginal utility is based on two important facts :
1. Though human wants are unlimited, each single want is satiable.
2. Commodities are not perfect substitute for each other.

Therefore, as a consumer consumes more and more units of a commodity, intensity of his/her want for the commodity goes on falling and reaches a point where a consumer do not want any more units of the commodity. That is, when saturation point is reached marginal utility of a commodity becomes zero. Thus, as the amount of consumption of a commodity increases, marginal utility decreases. The second fact is that the different commodities are not perfect substitutes for each other. Hence, when an individual consumes more and more units of a commodity, the intensity of his particular want for the commodity diminishes.

Assumptions Of The Law Of Diminishing Marginal Utility

- Consumer should be rational.
- Utility can be measured in the cardinal number.
- Marginal utility of money remains constant.
- All the units of consumption are homogeneous.
- There is continuous consumption of the commodity i.e, there is no time gap between the successive units of consumption.
- The units of consumptions are suitable in size.
- There is no change in tastes, nature, fashion and habits of the consumer.

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Concept Of Marginal Utility And Total Utility And Their Relationship

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 Concept Of Marginal Utility
Marginal utility is the change in total utility by the consumption of an additional unit of a commodity. In other words, marginal utility is the addition to the total utility derived from the consumption of one additional unit. It is also called additional utility. Marginal utility can be explained with the help of an example. When a consumer consumes one orange, he gets total utility equal to 8 utils. By consuming second orange, total utility becomes 14 utils i.e 8+6. Therefore the marginal utility of the second orange is 6 utils i.e. 14-8.

 Concept Of Total Utility
The total satisfaction received from the consumption of given quantities of a commodity by a consumer within a given time period is called total utility. In other words, total utility is the sum of all marginal utilities obtained from the consumption of different units of  a commodity. For example, suppose a consumer consumes first unit of an orange and gets 8 utils utility. As he consumes second unit of orange his total utility increases to 14 utils i.e 8+6 if he gets 6 utils utility from second orange.In the same way total utility increases to 18 utils (8+6+4) as he consumes third orange and gets 4 utils from it.

Relationship Between Total Utility And Marginal Utility

1. Total utility is the sum total of marginal utility whereas marginal utility is the change in total utility.

2. Total utility generally remains positive while marginal utility may be positive, zero or even negative.

3. When marginal utility is positive, total utility rises.

4. When marginal utility is zero, total utility is the maximum.

5. When marginal utility is negative, total utility falls.

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Determinants Of Elasticity Of Demand

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The elasticity of demand of any commodity is determined by a number of factors which are explained below:

1. Nature of commodity
The elasticity of demand for any commodity depends upon the nature of the commodity i.e. whether it is a necessity, comfort, or luxury. The demand for necessary of life generally less elastic. The demand for comfort products have neither very elastic nor very inelastic because with the rise or fall in their prices, the demand for them decrease or increase moderately. On the other hand, demand for luxurious product is more elastic because with a small change in their prices, there is a large change in their demand. But the demand for prestige goods is inelastic because they possess unique utility for the buyers who are prepared to buy them at all costs.

2. Substitutes
Commodities having substitutes have more elastic demand because with the change in the price of one commodity, the demand for its substitute is immediately affected. For example, if the price of coffee rises, the demand for coffee decreases and the demand for tea increases and vice-versa.

3.Goods having several uses
If the commodity has several uses, it has an elastic demand. For example, electricity has multiple uses. It is used for lighting, heating, cooking etc. If the tariffs of electricity increases, its uses will be restricted to important uses. On the other hand, it will be withdrawn for less important uses.

4. Joint demand
There are certain commodities which are jointly demanded such as car and petrol, pen and ink, bread and jam etc. The elasticity of demand of second commodity depends upon the elasticity of demand of the major commodity. If the demand for car is less elastic, the demand for petrol will be also less elastic. On the other hand, if the demand for bread is elastic, the demand for jam will also be elastic.

5. Postpone of the consumption
Those commodities whose consumption can be postponed will be elastic. For example, demand for constructing a house can be postponed. As a result, demand for bricks, cement, sand etc will be elastic. On the other hand, goods whose demand cannot be postponed, their demand will be inelastic.

6. Income of the consumer
The elasticity of demand also depends on income of the consumer. If the income of consumers is high, the elasticity of demand is less elastic. It is because change in the price will not affect the quantity demanded by a greater proportion. But in low income groups, the elasticity of demand is elastic. Because a rise or fall in the price of commodities will reduce or increase the demand. But this does not apply in the case of necessities.

7. Proportion of income spent
Goods on which a consumer spends a very small proportion of his income, e.g. salt, newspaper, tooth paste etc. the demand will nor be much affected by a change in the price. Hence, it will be inelastic. On the other hand, goods on which the consumer spends a large proportion of his income e.g clothes, food etc. their demand will be elastic.

8. Price level
The price level also influences the elasticity of demand for commodities. When price level is too high or too low, the demand will be comparatively inelastic.

9. Habits
People who are habituated to the consumption of a particular commodity like coffee, tea, cigarette of a particular brand, the demand for it will be inelastic.

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Concept Of Cardinal Utility Analysis And Its Assumptions

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Concept Of Cardinal Utility Analysis
Cardinal utility analysis is based on the cardinal measurement of utility which assumes that utility is measurable and additive. This theory was developed by neo-classical economists like Marshall, Pigou, Robertson etc. It is expressed as a quantity measured in hypothetical units which called utils. If a consumer imagines that one mango has 8 utils and an apple 4 utils, it implies that the utility of mango is twice than of an apple.

Assumptions Of Cardinal Utility Analysis

1. Rationality
The consumer is assumed to the rational. He tries to maximize his total utility under the income constraint.

2. Cardinal Utility
The utility of each commodity is measurable. Utility is cardinal concept. The most convenient measure is money. Thus utility can be measured quantitatively in monetary units or cardinal units.

3. Constant Marginal Utility Of Money
The utility derived from commodities are measured in terms of money. So, money is a unit of measurement in cardinal approach. Hence, marginal utility of money should be constant.

4. Diminishing Marginal Utility
If the stock of commodities increases with the consumer, each additional stock or unit of the commodity gives him less and less satisfaction. It means utility increases at a decreasing rate.

5. Independent Utilities
It means utility obtained from commodity X is not dependent on utility obtained from commodity Y. It does not affected by the consumption of other commodities.

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Concept Of Cross Elasticity Of Demand And Its Types

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Concept Of Cross Elasticity Of Demand

Cross elasticity of demand is the relation between the percentage change in demand for a commodity to the percentage change in the price of related commodity. The cross elasticity of demand between good A and B is :



Cross elasticity (exy) = % change in quantity demanded for A good / % change to price of B good.

Types Of Cross Elasticity Of Demand
Theoretically, there are two types of cross elasticity of demand:

1. Positive Cross Elasticity Of Demand (exy>0)
In the case of substitute goods, the cross elasticity of demand is positive. If the price of tea rises, it will lead to increase in the demand for coffee. Similarly, a fall in price of tea will cause a decrease in the demand for coffee.

2. Negative Cross Elasticity Of Demand (exy<0 comment-0--="">
In the case of complementary goods, cross elasticity of demand is negative. If the price of car rises, it will lead to decrease in the demand for petrol. Similarly, the fall in the price of car will bring the increase in the demand for petrol. Since, the price and demand change in opposite direction, the cross elasticity of demand is negative.

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Concept Of Income Elasticity Of Demand and Its Types

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Concept Of Income Elasticity Of Demand
The income elasticity of demand shows the responsiveness of quantity demanded of a certain commodity to the change in income of the consumer. The income elasticity of demand is also defined as ' the ratio of the percentage change in the demand for a commodity to the percentage change in income'. Income elasticity of demand can be expressed as follows:

Income elasticity (ey) = Percentage change in quantity demanded / Percentage change in income

For example, consumer's income rises from $ 100 to $ 102, his demand for good X increases from 25 units per week to 30 units per week then his income elasticity of demand X is:

ey = 5/25 x 100/2 = 10

It means that 1 percent increase in income results 10 percent increase in demand and vice versa.

The income elasticity may be positive or negative or zero depending upon the nature of a commodity. As a rise in income leads to an increase in demand, the income elasticity is positive. A commodity which has positive income elasticity is a normal good. On the other hand, when a rise in income leads to a decrease in demand for a commodity, its income elasticity is negative. Such a commodity is called inferior good. If the quantity of a commodity purchased remains unchanged, even at the change in income, the income elasticity of demand is zero.

Types Of Income Elasticity Of Demand
There are five types of income elasticity of demand as follows:

1. Income elasticity greater than unity (ey>1)
The income elasticity of demand is greater than the unity when the demand for a commodity increases more than percentage rise in income.

2. Income elasticity less than unity(ey< 1)
Income elasticity of demand is less than the unity when the demand for a commodity increases less than proportionate to the rise in income.

3.Income elasticity equal to unity (ey=1)
Income elasticity is unity when the demand for a commodity increases in the same proportion as the rise in income.

4. Zero income elasticity (ey=0)
If the rise in income, the quantity demanded remains unchanged, the income elasticity is called zero income elasticity.

5. Negative income elasticity (ey <0>
In the case of inferior goods, the income elasticity of demand is negative. The consumer will reduce his purchase of it when income rises and vice versa.

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Concept And Types Of Price Elasticity Of Demand

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Concept Of Price Elasticity Of Demand
The price elasticity of demand measures the degree of responsiveness of quantity demanded for a certain commodity to the change in its price. In other words, the price elasticity of demand is defined as the 'ratio of percentage change in the quantity demanded to the percentage change in price . It can be expressed as follows:

Price elasticity of demand (ep) = Percentage change in quantity of demand / Percentage change in price

Where, ep = Coefficient of price elasticity of demand.

The price elasticity of demand is always negative due to the inverse relationship between the price and quantity demanded. But for the sake of simplicity in understanding the magnitude of response of quantity demanded to the change in the price we ignore the negative sign and take into account only the numerical value of the price elasticity of demand.

Types Of Price Elasticity Of Demand
There are five types of price elasticity of demand. They are as follows:

1. Perfectly Elastic Demand
Demand is said to be perfectly elastic if negligible change in price would lead to infinite change in the quantity demanded. Visibly, no change in price causes in infinite change in demand.

2. Perfectly Inelastic Demand
When the demand for a commodity does not change despite change in price, the demand is said to be perfectly inelastic.

3. Unitary Elastic Demand
When the percentage change in the quantity demanded is equal to the percentage change in price, the demand for a commodity is said to be unitary elastic demand. For example, 10% change in price causes 10% change in demand.

4. Relatively Elastic Demand
When the percentage change in the quantity demanded for a commodity is more than percentage change in price, it is called relatively elastic demand. For example, if 10% change in price results, 20% change in quantity demanded.

5. Relatively Inelastic Demand
When the percentage change in the quantity demanded of a commodity is less than percentage change in the price, it is called relatively inelastic demand. For example, when 20% change in price causes 10% change in demand.

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