Lesson # 40 : 'The law of Demand' Decoded

The Law of Demand states that there is an inverse relationship between the price of a commodity and its quantity demanded. Demand is a function of various variables, such as price of the commodity, income of the consumer, composition of the population, tastes & preferences of the consumers and so on. However, all the factors are kept constant (ceteres paribus) in the short time span except the price of the commodity. In fact, even in the long run, the factors remain more or less constant, but price may fluctuate. Hence it is reasonable to take only price as a variable factor.

Now, we must understand as to why there is an inverse relation between the function and its variable. A logical explanation can be that if a thing is cheap, we will naturally buy more of it. But such kind of explanations do not satisfy economists.

Why is it that we tend to buy more of things that are cheap? To explain this, i must first introduce the concept of Utility. Utility, as the word goes, means the amount of satisfaction we derive when we consume a unit of a commodity. You may say that satisfaction is a very subjective term. And yes it is. That is why we have two approaches: (1) Marshallian Approach of Cardinal Utility (which states that utility can be calculated mathematically for the sake of convenience); and (2) Hicks and Alan Approach of Ordinal Utility (which states that we can merely rank the satisfaction levels of different commodities as satisfaction is a very subjective thing, i.e., for eg, i prefer an egg over bacon strip because i feel that the egg can give me more satisfaction)

Hence the Ordinal Approach is more practical for assumption purposes.

Now, we know that commodities have an inherent trait of fulfilling our desires, and these desires are fulfilled when they are satisfied. Hence, the commodity provided us with a certain utility.

Money is a representative of the value of commodities. It is means of exchange. Since money represents our tendency to buy a commodity which would in future give us satisfaction, money, hence also represents satisfaction...that is money also has a certain amount of subjective utility. And this is precisely the reason for an inverse relation between price of a commodity and its quantity demanded. If we feel that the money we hold in hand can give us more satisfaction if we buy something else, rather than the good currently at hand, we say that the commodity is over-priced and hence consume less, or no quantity, of that commodity. And if we feel that the utility we derive from the consumption of the good at hand is more than what we have forgone in terms of money, we buy more of the commodity, as it is then under-priced. Hence the inverse relationship between price and the quantity demanded.

                                                            


Although Price is the variable here, when we construct the graph, it is represented on the Y-Axis and the Quantity Demanded on the X-Axis. It is a convention that we follow in Economics. But for other Function Graphs, the mathematical conventions hold true,i.e., variable on the X and function output on Y.

-Srijan Butola

The following article is written by a guest editor for doodle. Srijan is a first year student of Delhi University studying Economics Honours from Kirori Mal College.

Lesson # 39 : Yin and Yang and why the markets can never keep going up

The Chinese believe that Yin and Yang which literally means shadow and light connects seemingly extreme phenomenon. It is used to describe how seemingly contrary and opposite forces are interconnected and interdependent in the natural world.

Basically, they aren't opposites and neither are they advocates of good or bad. They simply represent two extreme forces and show that there is indeed a common or complementary point between them.

Hence, Ying and Yang advocates that for every right there is a wrong.

Looking at the Laws of Motion. Newton puts it rather simply

'For every action there is an equal and opposite reaction'

A lot of people question the working of the markets and ask why the markets can never stay on top. Or why can't they just keep going higher and higher? Or why after every rise there is bound to be a fall in the market.

There's  a lot of factors involved which would make this article rather technical. But simply put. The concept can be clearly explained through the Ying and Yang.

There's the upward movement which the indice is going to make which is the light that is the ying and then there is the downward movement which the indice is going to make which is the shadow that is the yang.

And there's a point of mutual coexistence between Ying and Yang. They aren't different from each other but are important for the each other's coexistence.

So there is a need for the market to correct every few bull runs. The idea is that when you have the light i.e. the market rising you  will have a shadow i.e. the market falling. 

And it will stabilize at a point where it's not too high and neither too low.

And that is why the markets can never keep going up.

-Doodle

Lesson # 38 : Are businessmen like footballers?

Imagine a football team. There's the goal keeper and then there's the line of defence, the mid fielders, the defenders and the strikers.

Now there's going to be a whole bunch of people on this team. There's going to be people who have a whole lot of skills that others don't posses. There are going to be some that a player himself doesn't have. And then there's going to be one of those star players whose in himself almost perfect. Probably someone like a Messi or a Pele.

Drawing a parallel and looking at the corporate sector as a whole. Imagine each and every businessman like a footballer.

There's going to be the goalkeeper whose the last line of defence. The guy on whom everyone's hope rests and whom everyone depends upon. When you look at the economy this guy is probably going to be the guy or gal running the banks. Be it private or government. Whether it's an SBI (State Bank of India) or an Axis or an ICICI. Like the goalkeepers these are the custodians of cash. 

Then there's a line of defence. Of businessmen who have been in a business for a very long time and like to play it safe. They have diversified over a period of time but they have never let go of their core business or have never really tried to go beyond their so called safe zone. These guys are the old war horses. Examples include Infosys's Nandan Nilekani and Narayan Murthy and Wipro's Azim Premji.

As the ball passes down from here it goes to the mid field. The midfielder controls a greater part of the way the game works and so the mid field is going to be a bunch of companies in the economy that are large. So large that a single malfunction can set the economy in turmoil. The midfielders in the economy are going to be Mukesh Ambani and Anil Ambani with their gems RIL and Reliance respectively. Coupled with Ratan Tata of the Tata group and Kumar Mangalam Birla of the Aditya Birla Group.

There's going to be the two wingers on either side who are going to be the guys who are forever reliable to launch an attack. These are the guys who will take a corner or a free kick. The guy or the company who does this has to have the same impact in the economy. An example would be that of Analjit Singh of Max and Malvinder and Shaivender Singh of Religare.

And finally there's the line of the Strikers. These guys are smart and magical both with their footwork and their technique. Often creating goal scoring opportunities out of nowhere and scoring goals out of not so brilliant balls. These guys are the star performers on the team. And as much as we would like to give it to a corporate. This award goes out to the Enterpreneur. The Big and the Small. He/she who dares to be different and who dares to make a difference. 

And finally there's the referee the decider of the wrong and the right. We'll give this to the RBI who takes all the major decisions and makes all the rules.

The playing stadium are the stock markets where each of these companies are listed.

The audience is the average consumer who must pick a brand. A side which he must remain loyal to.

So are businessmen like footballers? 

Perhaps yes.

- Doodle

Lesson # 37 : Why Money?

Let's imagine this not so hypothetical example. Imagine yourself to be a seven year old kid. Now imagine watching Ben 10 on Cartoon Network. Now imagine getting hooked onto Ben 10 to the extent that you remember every bloody dialogue from every episode there is. And now imagine FunSkool taking out an entire range of Ben 10 toys.

So as a 7 year old kid what are you going to do?

Go and buy those toys outright. Or start crying in front of your parents. Maybe blackmail them into buying those toys for you. Whatever extent you have to stoop to you will just to lay your hands on those Ben 10 toys.

Cut to the point where you have bought it already and have played with it for about a week or so. What happens?

You realize that with all those false promises you made. All that effort you put into crying and forcing your parents to buy this toy it wasn't really worth it. The toy is a huge waste of your time and effort and you feel you are not going to be using it again. You'll  probably use it once or twice in the coming months and then forget it again.

Now imagine this entire cycle happening till the age of let's say 27.

At 14 you will probably discover some fancy gaming device which will cost a bomb and force your parents into buying it.

And the cycle will go on. By the time you are 27 you have been a part of this cycle countless number of times but still you haven't learnt your lesson and so you go ahead and buy a Porsche. And after having driven it around for about a month or two you realize it's fine and all but there's always something better in the market.

So let's say a newer, better and faster version hits the market. All of a sudden that old cycle ends and a new one is going to start.

It's like a high school jock spoilt for choices who infatuates about a girl, dates her for a week or two then dumps her for some other girl who catches his eye.

The question however that I wish to raise is that

If all of the above holds true in every scenario there is. Then why the hell doesn't it apply to money?

Here's why:

Money in itself is the superior most asset that a person can hold. No matter what asset a person may hold there isn't anything more liquid than money.

Secondly, the desire to earn more money comes from the fact that no matter how much a person has it's never quite enough. Because unlike the above examples where a consumer is spoilt for choices the same does not apply to money. Because money in itself is a superior commodity with absolutely no close substitutes.

Thirdly, Money in itself is a means to an end. And this end may or may not be reached. Imagine a person walking on a road not knowing the length of the road. Here the length of the road is the level of wants a person has and the calories a person holds which will give him stamina for the journey is the money he holds.

Finally, It's a psychological thing. Gordon Gekko sums it up rather well

"Greed is good and the number is more"

Gordon Gekko : "Greed is good and the number is more"

- Doodle