1

Business economics (2)

What is Equilibrium?

Definition: Equilibrium refers to

the economic situation where supply and demand for a certain
good or service in the market is equal, which represents a stable
market price to purchase and sell. In other words, consumers are
purchasing the same value of goods or services that suppliers are
willing to supply at the current, stable market price.

What Does Economic Equilibrium Mean?

Equilibrium is used mostly by economists in

order to explain rational market behavior: buyers and sellers
continually purchase and sell goods until a point is reached
where the market price is set so that the demand from
consumers, and the supply from suppliers, is exactly equal. This
naturally happens in the course of business. As consumers desire
more products, prices increase because of the lack of supply. In
turn manufacturers start producing more products to meet the
market’s needs, thus, lowering the price and creating a new
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equilibrium at the new price and quantity levels.

In the actual market, equilibrium is very hard to
achieve, but the same interaction between supply and demand
can occur: demand for food during a natural disaster when
supply is low automatically raises the price.
Define consumer
A consumer is the person who satisfies a want or
need by buying a good or service
Define Producer
A producer is a person or business who uses
resources to make goods or provide services
Consumer equilibrium
The state of balance achieved by an end user of
products that refers to the amount of goods and services them
can purchase given their present level of income and the current
level of prices. Consumer equilibrium allows a consumer to
obtain the most satisfaction possible from their income.
What is the condition of consumer equilibrium?
The solution to the consumer's problem, which
entails decisions about how much the consumer will consume of
a number of goods and services, is referred to as consumer
equilibrium. .

Consumer equilibrium
Definition
The state of balance achieved by an end user of
products that refers to the amount of goods and services them
can purchase given their present level of income and the current
level of prices. Consumer equilibrium allows a consumer to
obtain the most satisfaction possible from their income.
 3

Consumer equilibrium, it is the situation where a

consumer secures maximum satisfaction with minimum budget
.Also known as “Point of balance”.
There are two cases in consumer equilibrium
1) In case of 1 commodity
2) In case of 2 Commodity
Consumer equilibrium in case of 1 Commodity
MUx in terms =Px
Of money
Or
MUx=MUm
Px

1) MUx
2) Px
3) MUx
Px
4) MUm
5) MUx in terms of money

a) MUx – Marginal Utility of good x

Marginal utility is the incremental utility increase in the
total utility due to an additional unit consumes or the utility
derived from the particular unit is marginal utility
b) Px(constant )
Price of good x
 4

6) MUx = Marginal Utility of good x

Px Price of good x
Utility per rupees
c) MUm
Marginal Utility of 1 Unit of money
d) MUx in terms of money

1) Consumer equilibrium(In case of 1 commodity first

approach)
Equilibrium Condition
MUx in terms of money =Px
A consumer is said to be equilibrium when
marginal utility of good in terms of money equal to price
Units MUx MUm MUx in terms of Px
money
1 20 2 10 5 Gain
2 16 2 8 5 Gain
3 10 2 5 5 Equilibrium
4 8 2 4 5
5 2 2 1 5
Graph
 5

Consumer equilibrium( in case of 1 Commodity second

approach)
Equilibrium condition:-

1) MUx = Marginal Utility of good x =MUm

Px Price of good x
A consumer is said to be in equilibrium when utility
per Rs from spending one good becomes equal to unity of
money

Unit MUx(In unit Px (In Rs) MUX MUm

Px
1 90 10 9 4 Gain
2 80 10 8 4 Gain
3 70 10 7 4 Gain
4 60 10 6 4 Gain
5 50 10 5 4 Gain
6 40 10 4 4 Equilibrium
7 30 10 3 4 Loss
8 20 10 2 4 Loss
9 10 10 1 4 Loss

Consumer equilibrium
What is equilibrium concept?
Economic equilibrium is a condition or state in which
economic forces are balanced. ... Economic equilibrium may
also be defined as the point at which supply equals demand for a
product, with the equilibrium price existing where the
hypothetical supply and demand curves intersect.
 6

General equilibrium theory

In economics, general equilibrium theory
attempts to explain the behavior of supply, demand, and prices
in a whole economy with several or many interacting markets,
by seeking to prove that the interaction of demand and supply
will result in an overall general equilibrium. General equilibrium
theory contrasts to the theory of partial equilibrium, which only
analyzes single markets.

What are the 3 types of equilibrium?

There are three types of equilibrium: stable,
unstable, and neutral.

Alfred Marshall is the father of modern orthodox

microeconomic theory (neoclassicism) along with Walras
 7

Types of Utility
There are two approaches of utility, which are ordinal and
cardinal utility
The basic idea behind ordinal utility approach is
that a consumer keeps number of pairs of two commodities in
his mind which give him equal level of satisfaction. This means
that the utility can be ranked qualitatively.
The ordinal utility approach differs from the
cardinal utility approach (also called classical theory) in the
sense that the satisfaction derived from various commodities
cannot be measured objectively.
Ordinal theory is also known as neo-classical theory of
consumer equilibrium, Hicksian theory of consumer
behavior, indifference curve theory, and optimal choice theory.
This approach also explains the consumer's equilibrium who is
confronted with the multiplicity of objectives and scarcity of
money income.
The important tools of ordinal utility are:
1) The concept of indifference curves.
2) The slop of I.C. i.e. marginal rate of substitution.
3) The budget line.
Assumptions:
The ordinal utility approach is based on the following
assumptions:
1) A consumer substitutes commodities rationally in order to
maximize his level of satisfaction.
2) A consumer can rank his preferences according to the
satisfaction of each basket of goods.
3) The consumer is consistent in his choices.
4) It is assumed that each of the good is divisible.
5) It is assumed that the consumer has full knowledge of
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prices in the market.

6) The consumer's scale of preferences is so complete that
consumer is indifferent between them.
7) Two commodities are used by the consumer. It is also
known as two commodities model.
8) Two commodities X and Y are substitutes of each other.
These commodities can be easily substituted in various
pairs.
The Theory of Consumer Behavior studies how a
consumer spends his income so as to attain the highest
satisfaction or utility. This utility maximization behavior of the
consumer is subject to the constraint imposed by his limited
income and the prices of the various commodities he desires to
consume.
Marshallian and Hicksian demand curves meet
where the quantity demanded is equal for both sides of the
consumer choice problem (maximizing utility or minimizing
cost). ... This is why Marshallian demand curves are more
'stable': they reflect both rent effect and substitution effect.
The hicksian method
a) It is totally depends on the real income of the consumer
b) This method states that if the income of the consumer
increases then the level of consumption power of remain
same
c) The utility remains constant.
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Indifference curve
In economics, an indifference curve connects points on a
graph representing different quantities of two goods, points
between which a consumer is indifferent. That is, the consumer
has no preference for one combination or bundle of goods over a
different combination on the same curve. One can also refer to
each point on the indifference curve as rendering the same level
of utility (satisfaction) for the consumer. In other words, an
indifference curve is the locus of various points showing
different combinations of two goods providing equal utility to
the consumer. Utility is then a device to represent preferences
rather than something from which preferences come. The main
use of indifference curves is in the representation of potentially
observable demand patterns for individual consumers over
commodity bundles.
There are infinitely many indifference curves: one
passes through each combination. A collection of (selected)
indifference curves, illustrated graphically, is referred to as an
indifference map.
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An indifference curve is a curve showing

combination of two goods that give the consumer equal
satisfaction and utility.
In other words it is loci of combination (bundle) that
give equal satisfaction to the customer
Each point on an indifference curve indicates that a
consumer is indifferent between the two and all points given him
same utility

Optimal decision. An optimal decision is a decision

that leads to at least as good a known or expected outcome as all
other available decision options. It is an important concept in
decision theory. In order to compare the different decision
outcomes, one commonly assigns a utility value to each of them

Paul Samuelson is an American economist (1915-2009) Paul

Anthony Samuelson was an American economist and the first
American to win the Nobel Memorial Prize in Economic
Sciences. The Swedish Royal Academies stated, when awarding
the prize in 1970, that he "has done more than any other
contemporary economist to raise the level of scientific analysis
in economic theory
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Definitions of Economics
1. INTRODUCTION • Economics is a study of ‘Choices’
or ‘Choice- Making’ • Choice-making is relevant for every
individuals, families, societies, institutions, areas, state and
nations and for the whole world. • Hence, Economics has
wide applications and relevance to all individuals and
institutions.
2. Meaning of the word ‘Economics’ • The word ‘Economics’
originates from a Greek word ‘Oikonomikos’ • This Greek word
has two parts:
1) ‘Oikos’ meaning ‘Home’
2) ‘Nomos’ meaning ‘Management’
Hence, Economics means ‘Home Management’
3. • Economics emerged as a subject with high level of
applications in all other disciplines due to its basic principle
of ‘Choice making for optimization with the given
resources of scarcity and surplus’. • To arrive at this
phenomenon in the definition of economics, it has taken
almost 235 years.
4. Evolution in the Definitions of Economics • A. Wealth
Definition (1776) Adam Smith • B. Welfare Definition
(1890) Alfred Marshall • C. Scarcity Definition (1932)
Lionel Robbins • D. Growth Definition (1948) P.A.
Samuelson • E. Modern Definition (2011) A.C. Dhas
5. Wealth Definition (1776) • Adam Smith, who is regarded
as Father of Economics, published a book titled ‘An
Inquiry into the Nature and Causes of the Wealth of
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Nations’ in 1776. • He defined economics as “a science

which inquires into the nature and cause of wealth of
nations”. • He emphasized the production and growth of
wealth as the subject matter of economics.
6. ADAM SMITH Wealth of Nations (1776)
7. Features of Wealth Definition • Characteristics: It takes
into account only material goods Exaggerated the emphasis
on wealth It inquires the caused behind creation of wealth •
Criticisms: It considered economics as a dismal or selfish
science. It defined wealth in a very narrow and restricted
sense. It considered only material and tangible goods. It
gave emphasis only to wealth and reduced man to
secondary place.
8. Welfare Definition (1890): • In 1890, Alfred Marshall
stated that “Economics is a study of mankind in the
ordinary business of life; it examines that part of individual
and social action which is most closely connected with the
attainment and with the use of material requisites of
wellbeing”. • It is on one side a study of wealth; and on the
other side, a study of human welfare based on wealth.
9. ALFRED MARSHALL Principles of Economics (1890)
10. Features of Welfare Definition • Characteristics: It is
primarily the study of mankind. It is on one side a study of
wealth; and on other side the study of man. It takes into
account ordinary business of life – It is not concerned with
social, religious and political aspects of man’s life. It
emphasises on material welfare i.e., human welfare which
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is related to wealth. It limits the scope to activities

amenable to measurement in terms of money • Criticisms:
It considers economics as a social science rather than a
human science. It restricts the scope of economics to the
study of persons living in organized communities only.
Welfare in itself has a wide meaning which is not made
clear in definition.
11. Scarcity Definition (1932 • According to Lionel
Robbins: “Economics is the science which studies human
behavior as a relationship between ends and scarce means
which have alternative uses.” • He emphasized on ‘choice
under scarcity’. In his own words, “Economics ,,, is
concerned with that aspect of behaviour which arises from
the scarcity of means to achieve given ends.”
12. LIONEL ROBBINS An Essay on the Nature and
Significance of Economic Science (1932)
13. Features of Scarcity Definition • Characteristics:
Economics is a positive science. New concepts: Unlimited
ends, scarce means, and alternate uses of means. It
emphases on Choice – A study of human behavior It tried
to bring the economic problem which forms the foundation
of economics as a social science. It takes into account all
human activities. • Criticisms: It does not focus on many
important economic issues of cyclical instability,
unemployment, income determination and economic
growth and development. It did not take into account the
possibility of increase in resources over time. It has treated
economics as a science of scarcity only.
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14. Growth Definition (1948) • According to Prof. Paul A

Samuelson “Economics is the study of how men and
society choose with or without the use of money, to employ
the scarce productive resources which have alternative
uses, to produce various commodities over time and
distribute them for consumption now and in future among
various people and groups of society. It analyses the costs
and benefits of improving pattern of resource allocation”. •
This definition introduced the dimension of growth under
scarce situation.
15. PAUL A SAMUELSON Economics: An Introductory
Analysis (1948)
16. Features of Scarcity Definition • Characteristics: It is
not merely concerned with the allocation of resources but
also with the expansion of resources. It analysed how the
expansion and growth of resources to be used to cope with
increasing human wants. It is a more dynamic approach. It
considers the problem of resource allocation as a universal
problem. It focused on both production and consumption
activities. It is comprehensive in nature as it is both growth-
oriented as well as future-oriented. It incorporated the
features of all the earlier definitions • Criticisms: It assumes
that economics is relevant for scarcity situations and it
ignored surplus resource conditions.
17. Modern Definition of Economics (2011) • According to
Prof.A.C.Dhas, “Economics is the study of choice making
by individuals, institutions, societies, nations and globe
under conditions of scarcity and surplus towards
maximizing benefits and satisfying their unlimited needs at
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present and future”. • In short, the subject Economics is

defined as the “Study of choices by all in maximizing
production and consumption benefits with the given
resources of scarce and surplus,
18. A. C. DHAS Modern Definition of Economics (2011)
19. Features of Modern Definition • Characteristics: • It
takes into account all the earlier definitions – wealth,
welfare, scarcity and growth. • It covers both micro and
macro aspects of economics. • It considers both production
and consumption activities. • It emphasises Choice Making
dimension as crucial in economics. • It aims at obtaining
maximum benefits with given resources • It is suitable in
conditions of both scarcity and surplus. • It takes in to
account the present and future –Time dimension – Growth
dimension. • It is relevant in the context of globalisation
and sustainable development.
20. In Sum • A review of all these definitions and their
evolution indicate that the core of the subject economics is
‘choice making’. • It is a subject concerned about achieving
growth by optimizing the given resources, based on
choices. • The evolution of the definition of economics has
taken 235 years, with the origin of Adam Smith in 1776.
21. – Adam Smith (1776) emphasized on wealth
(Production Activity), – Alfred Marshall (1890) focused on
(Production and Consumption Activities), – Lionel
Robbins(1932) highlighted the problem of scarcity
(Choices under scarcity), – Paul A Samuelson(1948)
focused on production and consumption activities and
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achieving growth under scarcity (choices under scarcity

and growth), – A.C.Dhas(2011) gave emphasis on choice
making in maximizing production and consumption
benefits under scarce and surplus, and achieving growth
(choices under scarcity and surplus, and growth).
22. • The core of economics is ‘Choices’ • The fundamental
economic activities are production and consumption • The
aim of economics is optimizing given resources (both
scarce and surplus) and achieving growth
The point at which the customer is satisfied for a
commodity is all about customer equilibrium

5 *

Price 4 *

3 *Equilibrium

0
1 2 3 4 5 6 7 8 9
Quantity of demand
 17

Cardinal Utility. Definition: The Cardinal Utility

approach is propounded by neo-classical economists, who
believe that utility is measurable, and the customer can
express his satisfaction in cardinal or quantitative
numbers, such as 1,2,3, and so on.
What is cardinal and ordinal utility in economics?
Cardinal utility is the utility wherein the
satisfaction derived by the consumers from the consumption of
good or service can be measured numerically. Ordinal utility
states that the satisfaction which a consumer derives from the
consumption of product or service cannot be measured
numerically

Basic Cardinal Utility Ordinal Utility

Meaning It means Satisfaction that can be measured It refers to satisfaction that
in number such as 1,2,3,etc. cannot be measured in
numbers.eg A Glass of milk
must yield some satisfaction.
Used This concept was by Marshall This concept was used by J. R
Hicks
Realistic It is less realistic It is more realistic
Measurement Utility is measured in “Utils” Utility is ranked based on
satisfaction

Consumption Bundle
A consumption bundle is a set of goods that a
consumer may choose to consume.
A consumption bundle is a set of goods that a
consumer may choose to consume. Suppose the only goods
available in the world are tea and coffee. Then a consumption
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bundle is any combination of cups of tea and coffee that the

person could choose, and you can write
(tea, coffee)
For the bundle containing one cup of tea and one cup of coffee,
the bundle would be written as
(1 tea, 1 coffee)
What do you mean by consumer budget?
A budget set refers to all those quantities of two
goods that a consumer can buy, given the prices of the goods
and his money income.
Budget set
A budget set or opportunity set includes all
possible consumption bundles that someone can afford given the
prices of goods and the person's income level. The budget set is
bounded above by the budget line. in other words a set of
concussion bundle purchased with the limited income
In economics, the marginal rate of substitution
(MRS) is the rate at which a consumer can give up some
amount of one good in exchange for another good while
maintaining the same level of utility. At equilibrium
consumption levels (assuming no externalities), marginal rates
of substitution are identical. In other words the rate at which
the rate is substituted for another acceptance of a customer to
purchase one with a substation of other

Ordinal Utility Approach: ... This means that the

utility can be ranked qualitatively. The ordinal utility
approach differs from the cardinal utility approach (also called
classical theory) in the sense that the satisfaction derived from
various commodities cannot be measured objectively.
 19

What is meant by ordinal utility?

In economics, an ordinal utility function is a
function representing the preferences of an agent on an ordinal
scale. The ordinal utility theory claims that it is only
meaningful to ask which option is better than the other, but it is
meaningless to ask how much better it is or how good it is.

Difference between cardinal Utility and ordinal utility

1) Cardinal Utility
a) Pizza gives me more satisfaction as I get 60 Utils after
eating it in comparison to burger which gives me 40 Utils
Utils =Util is the imaginary unit by which we measure
utility

2) Ordinal utility
a) My first preference is pizza which gives me more
satisfaction than burger thus my second preference is
burger
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Revealed preference theory, pioneered by

economist Paul Samuelson, is a method of analyzing choices
made by individuals, mostly used for comparing the influence of
policies on consumer behavior. Revealed preference models
assume that the preferences of consumers can be revealed by
their purchasing habits.
Rate of substitution
In economics, the marginal rate of substitution
(MRS) is the rate at which a consumer can give up some
amount of one good in exchange for another good while
maintaining the same level of utility. At equilibrium
consumption levels (assuming no externalities), marginal rates
of substitution are identical. In other words the rate at which the
rate is substituted for another acceptable of a customer to
purchase one with a substation of other
Marginal rate of substitution
In economics, the marginal rate of substitution is
the rate at which a consumer can give up some amount of one
good in exchange for another good while maintaining the same
level of utility. At equilibrium consumption levels, marginal
rates of substitution are identical. In another words the amount
of goods sacrifice to purchase one more unit of the commodity

Definition of 'Revealed Preferences'

Definition: This is a theory of economics
laid down by Paul Samuelson which aims at revealing the
preference of consumers by monitoring their purchasing habits.
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Description: The theory basically

seeks to study consumer behavior. Samuelson made a basic
assumption that a consumer, while making purchase decisions,
evaluates a number of alternatives and chooses the product
which best satisfies his needs, given the budget constraint.
Therefore, the product/service that
he chooses to buy can be referred to as his preferred choice.
Utility analysis (Cardinal utility approach)
The want capacity to fulfill our
needs .The want satisfying capacity of a particular product is
called utility analysis.
Utility analysis is a quantitative
method that estimates the dollar value of benefits generated by
an intervention based on the improvement it produces in worker
productivity.
Total utility
Total utility is 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.
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The total amount of satisfaction derive from the concussion

about the same commodity
Marginal utility
In economics, utility is the satisfaction or
benefit derived by consuming a product; thus the marginal
utility of a good or service is the change in the utility from an
increase in the consumption of that good or service. In other
words Additional utility to utility to consuming to one more
extra unit .It is the additional law of dimension marginal utility
Unit µ Tµ mµ
1 10 10 -
2 8 18 8
3 5 23 5
4 2 25 2
5 0 25 0
6 -1 24 -1
7 -2 22 -2
Total Utility
30

25 * *
* *
Total 20 * *
Utility 15

10 *

0
1 2 3 4 5 6 7 8 9 Quantity
 23

Marginal Utility

30

25

Total 20
Utility 15

10 *
*
5
*
*
0
1 2 3 4 5 6 7 8 9 Quantity
-1 - *
-2 - *
 24

The increase in consumption may decrease the satisfaction

The Ordinal utility approach

Indifference curve
In economics, an indifference curve connects
points on a graph representing different quantities of two goods,
points between which a consumer is indifferent. ... In other
words, an indifference curve is the locus of various points
showing different combinations of two goods providing equal
utility to the consumer.

The combination of two goods Purchase from different

commodity to get a satisfaction equally
 25

Food Cloth satisfaction MRS

A 1 12 Same -
B 2 6 Same 6
C 3 4 Same 2
D 4 3 Same 1
The Graphical representation of the tabular
form in the indifferent curve
Indifference curve

Cloth
I 1 I2 I3
12

10

0 1 2 3 4 5 6 7 8 9

Food
 26

Indifference Map
An indifference map is a combination of
indifference curves, which allows understanding how changes
in the quantity or the type of goods may change consumption
patterns

A set of indifference curve is known as indifferent map

Marginal rate of substitution
In economics, the marginal rate of substitution
is the rate at which a consumer can give up some amount of one
good in exchange for another good while maintaining the same
level of utility. At equilibrium consumption levels, marginal
rates of substitution are identical
 27

The rate at which the customer is prepared the exchange a good

“X” for “Y”

Properties of indifference curve

There are four important properties of indifference curves that
describe most of them:
(1) Indifference curves are downward sloping,
(2) Higher indifference curves are preferred to lower ones,
(3) Indifference curves cannot intersect, and
(4) Indifference curves are convex (i.e. bowed inward).
What are the features of indifference curve?
The following are some of the important features.
Indifference curves slop downward to the right. ...
Every indifference curve to the right represents a higher level of
satisfaction. ...
a) Indifference curves cannot intersect each other. ...

b) Indifference curve will not touch the axis. ...

c) Indifference curves are convex to the origin.

Indifference curves are graphs that represent

various combinations of two commodities which
an individual considers equally valuable. The axes of those
graphs represent one commodity each (e.g. good A and
good B). Indifference curves are widely used in
microeconomics to analyze consumer preferences, the
effects of subsidies and taxes, and a few other concepts.
Although indifference curves come in many shapes and
sizes, most of them share a few important properties. Thus,
we will look at the four most important properties of
indifference curves in more detail below.
 28

1. Indifference Curves are Downward Sloping

Virtually all indifference curves have a negative
slope. That is, they slope downward from left to right. The slope
of an indifference curve shows the rate of substitution between
two goods, i.e. the rate at which an individual is willing to give
up some quantity of good A to get more of good B. If we
assume that the individual likes both goods, the quantity of good
B has to increase as the quantity of good A decreases, to keep
the overall level of satisfaction the same. Because both axes
each represent one of the two goods, this relationship results in a
downward sloping curve. This becomes pretty obvious if we
look at the illustration below.

2. Higher Indifference Curves Are Preferred to Lower Ones

Consumers will always prefer a higher
indifference curve to a lower one. This is due to the basic
economic assumption that “more is always better“. Just think
about it, if someone were to ask you if you wanted a free slice of
pizza or an entire pizza for free, what would you say? Who says
no to free pizza, right? Now, of course it’s not always that
simple, but in basic economic theory we can assume that
consumers have a preference for larger quantities. This is
reflected in the indifference curves. The higher the indifference
curves are, the larger the quantities of both goods. And thus, the
 29

more preferable the indifference curve becomes. Check out the

illustration below to see this.

3. Indifference Curves Cannot Intersect

It is impossible for two indifference curves to
cross. To understand why this is the case, we can look at what
would happen if they did intersect. As we know, all
combinations of good A and good B that lie on the same
indifference curve make the consumer equally happy. Therefore,
if two indifference curves were to cross, they would both have to
provide the consumer with the same level of satisfaction,
because the exact point where they intersect (i.e. point A) is on
both curves. Thus, all other combinations on both curves would
have to provide the same level of satisfaction as well. However,
if we compare point B and point C, we can clearly see that point
C offers more of good A and good B (90 and 140) as compared
to point B (80 and 130). As we already learned above,
consumers always prefer larger quantities. Therefore it is
impossible for both curves to provide the same level of
satisfaction, which means they can never intersect.
 30

4. Indifference Curves are convex (i.e. bowed inward)

In most cases indifference curves are bowed inward.
This has to do with the marginal rate of substitution (MRS). We
know that the marginal utility of consuming a good decreases as
its supply increases (see also diminishing marginal utility).
Therefore consumers are willing to give up more of this good in
order to get another good of which they have little. Let’s look at
the graph below to illustrate this. If a consumer has a lot of good
B, the MRS is 3 units of good B per unit of good A. If she has
more of good A, the MRS is 0.5 units of good B per unit of good
A. In other words, if they have a lot of good B, they are more
willing to trade some of it in to get an additional unit of good A
and vice versa. Because of this relationship, the indifference
curve is bowed inward (i.e. convex).
 31

In a Nutshell
Indifference curves are graphical representations
of various combinations of two commodities which
an individual considers equally valuable. They are used to
analyze consumer preferences and a number of other concepts.
There are four important properties of indifference curves that
describe most of them:
(1) Indifference curves are downward sloping,
(2) Higher indifference curves are preferred to lower ones,
(3) Indifference curves cannot intersect, and
(4) Indifference curves are convex (i.e. bowed inward).
Properties of indifferent curve
a) Always downwards to the right,
b) It will be convex to the origin. Because of the dimension
margin rate of substation
c) Indifferent curve never intercept each other
d) And it does not touch axis
 32

Production function or production analysis

Production function
In economics, a production function gives the
technological relation between quantities of physical inputs and
quantities of output of goods
Production function

Shot run Long Run

One Variable
Two Variables
Production analysis
Production is a process of transformation of the
factors of production into the economic goods. So in term of
production analysis we are dealing with the physical
relationships between inputs and outputs (i.e. we are observing
the dependence of physical production volume on physical
quantity of the inputs).
Services
What do you mean by services?
A type of economic activity that is intangible is
not stored and does not result in ownership. A service is
consumed at the point of sale. ... Examples of services include
the transfer of goods, such as the postal service delivering mail,
and the use of expertise or experience, such as a person visiting
a doctor.
 33

Productivity
Productivity describes various measures of the
efficiency of production. A productivity measure is expressed as
the ratio of output to inputs used in a production process, i.e.
output per unit of input. Productivity is a crucial factor in
production performance of firms and nations
Productivity is the ratio between the output of
goods and services and the input of resources used to produce
them. On a national basis, productivity is an important indicator
of a country's economic strength. Regardless of national
employment levels, the higher the productivity, the higher the
living standards
What are the 4 P's?
The marketing mix is a crucial tool to help
understand what the product or service can offer and how to
plan for a successful product offering. The marketing mix is
most commonly executed through the 4 P's of marketing:
1) Price,
2) Product,
3) Promotion, and
4) Place

What are the 7 P's of service marketing?

Here is a quick guide to the seven Ps of service marketing
along with a few ideas that might help you apply them to
your own marketing strategy.
1) Product. Even though you don't have a tangible product,
that doesn't mean that you don't have something to sell! ...
2) Pricing. ...
3) Place. ...
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4) Promotion. ...
5) People. ...
6) Process. ...
7) Physical evidence.
It’s an unbreakable rule of business that if you
want to get customers, you have to market yourself. Marketing
can seem like a chore when you have many other things to do
but it’s important that you do it, and you do it well.

Understanding the best way to market your

business can save you time and money in wasted effort and
ensure that you have the best chance of success. Unfortunately,
much of the information that is available to help businesses
trying to market themselves is aimed at product-based
businesses, so what should you do if you are marketing
something more elusive and hard to define?

As a financial advisor you aren’t selling a

tangible product. The customer isn’t going to walk away with
something they can hold in their hand and show off to their
friends. What you are selling is your own knowledge and
expertise, along with the experience of dealing with you or your
business.

Product marketing strategy often centres on four main factors

known as the four Ps. When it comes to marketing a service-
based business, things get a bit more complex and instead of
four, there are a total of seven main factors you will need to
think about if you want to have a complete, effective marketing
strategy.
 35

Here is a quick guide to the

seven Ps of service marketing along with a few ideas that might
help you apply them to your own marketing strategy.

1. Product

Even though you don’t have a tangible product, that

doesn’t mean that you don’t have something to sell! When you
are selling a service, what you have to offer is usually more fluid
than a solid, physical item. It can be adjusted and tailored to
each purchaser. Unlike products, you don’t produce what you
are selling until the client is ready to consume it.

If you want to market your service

successfully the first step is to define what it is you’re actually
selling. How much is it customizable for different customers and
how much of what you offer needs to be the same for the sake of
consistency? Although you have flexibility around what you are
offering, you need to differentiate yourself from the rest of the
market. How will you stand out and make sure that your main
selling points remain the same even as you adapt your services
to the needs of each individual client?

2. Pricing

Pricing is an important element of successful

marketing. Charge too much and you are likely to struggle to
find customers, price yourself too low and you may end up
selling yourself short as well as earn a reputation for being
cheap. Getting the balance right can be tricky.
 36

There are a number

of factors you need to think about when pricing your services.
When you are pricing products you can calculate a charge from
the cost of the raw materials, production and distribution, but
pricing your services is a more complex process.

When considering how much to charge

you will need to think about the market rates, your level of
expertise and the benefit to the client as well as your overheads,
paying employees and any other expenses. Don’t forget to
include a reasonable mark-up so you get a profit.

3. Place

Where you offer a service is

important. Regardless of what you do, your location or office
premises will form part of your overall image. Will you work
from an office or meet clients at their home? If you are
considering your options for physical premises, think about
where is it located. Is there adequate parking, is it appealing to
look at and will it create the right professional image?

Your office or business premises

are like the packaging on your product. Clients will form an
instant impression of you and your abilities based on what they
see. Make sure their impression is a good one!

As well as a physical location it’s

important to think about your online location. In most cases your
website will be the first contact that your potential clients have
 37

with your business, so think of it as your virtual shopfront. With

so many people turning to online facilities to find services, it’s
even possible that your clients may never actually visit your
physical premises. Your website should create a positive,
memorable impression and be easy to use.

4. Promotion

Promotion is essential when you

are marketing a service-based business. Services, unlike
products, aren’t unique. Chances are you are not the only person
in your area to offer the same service. Why are people going to
choose you and how are they going to find you?

Even with the best skills, the

most up to date software and a plush office or website, if you
don’t take a proactive approach to promoting yourself, nobody
will know you’re there. If you are going to be successful you
will need to think about how and where to advertise your
services, plan a promotional strategy and regularly analyse the
results.

5. People

Unlike a
product, which exists independently of the person selling it, a
service is indistinct from its provider. This means that people
become a crucial factor in the marketing of any service. In fact,
the quality of customer experience is likely to be a determining
factor in whether or not your clients refer you to their friends
and/or use your services again in the future.
 38

Whether you are a one-person operation

or you have a team of employees, it’s important that customer
service is the priority and a high standard of professionalism is
maintained at all times. Contact employees should be given
specific customer service training and the way they deal with the
public should be aligned with your brand values.

6. Process

To present a consistent
image and brand you will need to make sure your level of
service is consistent, reliable and your clients know what to
expect from you every time they use your services. This usually
requires some level of process implementation, especially if you
have a large team of advisors and support staff.

Even if you are a small

business or a one-person operation, you can probably benefit by
creating a few basic processes to allow you to keep on top of
everything. By creating systems and processes you can ensure
that your clients receive a consistent experience every time they
deal with you, and that you continue to live up to their
expectations.

Showing that you

are efficient and reliable can build customer confidence and
make it more likely that your clients will refer you to others. If
you have multiple staff members, good systems equate to more
consistent service delivery and happy clients.
 39

7. Physical evidence

Physical evidence is still

important when you are selling something intangible like a
service. Although there may be no physical product to associate
with your business, think about the physical experience your
clients have when they visit you. Is your office set up to be
client friendly? Do they have comfortable chairs and magazines
to read while they wait and does the décor and general setting
match the image you are trying to present?

As well as the environment

your clients will spend time in, think about the way you present
your services. Your advice and expertise may not have a
physical manifestation, but you can create physical evidence in
the form of reports, case studies and fact sheets. Physical
brochures and marketing materials can be reassuring to clients
as they give them something tangible to see and hold on to.

When you think about marketing

your service there is a lot to take into consideration, from
defining what it is you provide, where you provide it and what
systems are involved in the delivery to promotion, customer
service and pricing. Services marketing do require a different
approach to marketing a product but with a bit of thought you
can successfully market yourself to clients, increase your leads
and sales and watch your business go from strength to strength.
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Value added services

A value-added service is a popular
telecommunications industry term for non-core services, or, in
short, all services beyond standard voice calls and fax
transmissions. However, it can be used in any service industry,
for services available at little or no cost, to promote their
primary business
What is VAS services in Vodafone?
Vodafone launches 'START STOP' service for
easier VAS management. ... Customers can then reply with the
selected service number to send activation request. To
deactivate, customers can SMS STOP to 321 to receive a list of
currently active services and reply with the selected service
number to send deactivation request.
Servitization
In essence servitization is a transformation journey
- it involves firms (often manufacturing firms) developing the
capabilities they need to provide services and solutions that
supplement their traditional product offerings

Servitization production is the convection of input to output

.Input may be human resources, Raw material, Land and
machinery etc.
Factors of production
In economics, factors of production, resources, or
inputs are what is used in the production process to produce
output—that is, finished goods and services. The utilized
amounts of the various inputs determine the quantity of output
according to the relationship called the production function
 41

Production

Production is a process of combining

various material inputs and immaterial inputs in order to make
something for consumption. It is the act of creating output, a
good or service which has value and contributes to the utility of
individuals. In other words production is the convection of input
to output .Input may be human resources, Raw material, Land,
Machinery etc
Factors of production
Resources required for generation of goods or services,
generally classified into four major groups:

a) Land (including all natural resources),

b) Labor (including all human resources),
c) Capital (including all man-made resources), and
d) Enterprise (which brings all the previous resources together
for production).

These factors
are classified also as management, machines, materials, and
money (this, the 4 Ms), or other such nomenclature. More
recently, knowledge has come to be recognized as distinct from
labor, and as a factor of production in its own right.
 42

Entrepreneurship
Entrepreneurship is the process of designing,
launching and running a new business, which is often initially a
small business. The people who create these businesses are
called entrepreneurs.
Production decision
The production decision is one of the basic
decisions made in the economy, since total output and
employment depend on the aggregate of all the production
decisions made in firms large and small across the land.
Number of decision taken by production
manager to convert the available resumes to output to fulfill the
need and wants of the customer .Production include two or more
input to an output
1) How should the farm produces output
2) How much should be supply
3) How much is the demand
4) How to promote the product
Production Decision
1) The basic production decision
a) What to produce
b) How much to produce
c) When to produce
d) How much input to use to produce output at least cost
2) The supplier must consider the profit formula at the margin
Incremental (Marginal) Profit =Additional
(Marginal ) Revenue – Additional (Marinal ) Cost
 43

The e process of production is normally described as a

transformation of input into output
A Production function is a table, graph or mathematical
formula showing the maximum output that can be produced
from a given level of input
A Simple Input-Output relationship of one output and two inputs
(Capital-machines and labour –operatives) is considered first
Every combination of inputs is called a technique of production
All these techniques comprise the technology of production
The supplier’s production capacity is determined by the
maximum output that could be produced using different
techniques, given the production technology