Numbers for Business

This time I will tell you about numbers which are the very foundation of Economics.When I make my Businessmen friends understand the importance of knowing numbers before making business decisions, their immediate reaction would be – Patty do you think I can really understand numbers? Do you think I can read a financial statement? I was not good at math when I was in school. I did not study any subject related to accounting, when I was in my college. Well friends let me tell you something. Even I do not have commerce or accounting background. I am a Civil Engineer. I did my masters in Entrepreneurship but finance was not my main elective. What I am trying to say is you do not have to be a mathematics genius. You do not need to have any kind of finance or accounting background to understand reading financial statements.

It was an article that got me excited about finance, and then I started my journey to learn more about it. I spent more than 200 hours with senior chartered accountants to understand numbers, to demystify numbers for a layman. Throughout this blog I will be using my philosophy which is KISS – Keeping Information Simple and Specific. Albert Einstein very beautifully said – “If you can’t explain it simply, you don’t understand it well enough”.

It is very simple if you can read numbers as scores in cricket match, or a tennis match you can understand numbers. So do not get misled by people who say numbers are difficult. Reading Financial statements is as easy as reading a magazine or a newspaper. Just need to know how.

Some Basic Economics for Consumers

As a consumer you should know some basic economic concepts. It will help you in spending and ultimately you will be wiser and richer.

• Scarcity – the most basic concept of economics. In simple words it means that there are fewer resources or things in the world and wants are unlimited. For example the wheat production is increasing every year but the demand is increasing more. Hence wheat is a scarce resource.
• Supply and Demand – This is basic concept that drives the prices. The more the demand supply gap the more fluctuation in price. You can read more about this here.
• Cost and Benefits – The cost and benefit concept is another basic concept. We unknowingly use this concept in all our purchases. We will always want more for less cost. Hence we look for fuel-efficient cars and appliances which will save electricity. The rational concept is to maximize the benefits for a particular cost.
• Opportunity Cost – When we buy something we forgo another option available at the same price. This is the opportunity cost of buying anything.
• Premium price – We always see that when a new product is launched it will be having more price on it. As the time goes by the price will go down. With time the premium price of the article comes down and you can buy the same for less. So wait watch and save money.

Price Elasticity of Demand

Price Elasticity is a measure of change in demand as compared to the subsequent change in price. It is a measure of proportionate change in the quantity demanded of a commodity in response to a proportionate change in price. While calculating price elasticity no other factors are considered. It can be represented in formula form.

Elasticity of demand may be of the following types:

Unitary Elastic Demand (Elasticity is equal to 1): In unitary elastic demand proportionate change in price of a commodity and the proportionate change in demand are equal.

Unitary Elastic Demand

The percentage change in demand and percentage change in price are equal in this case.

Relatively Elastic Demand (Price Elasticity is greater than 1): In relatively elastic demand percentage in demand is more than a relative percentage change in price.

The percentage change in demand is more than percentage change in price in this case.

Relatively Inelastic Demand (Price Elasticity is less than 1): In relatively inelastic demand percentage in demand is less than a relative percentage change in price.

The percentage change in demand is less than percentage change in price in this case.

Perfectly Elastic Demand ( Price Elasticity is equal to infinity) : In Perfectly Elastic demand there is increase or decrease in demand of a commodity with no change in price.

In unitary elastic demand proportionate change in price of a commodity and the proportionate change in demand are equal.

There is change in demand with no change in price in this case.

Perfectly Inelastic Demand ( Price Elasticity is equal to zero) : In Perfectly inelastic demand there is no change in demand of a commodity with increase or decrease in price of a commodity.

Perfectly Inelastic Demand

There is no change in demand with change in price in this case.

What is the Law Of Demand?

This is the first economic question most students have to tackle- what is the law of demand? But before we address that question, we need to understand what demand is.

In economics, demand is not just the want for a particular item or a service, it is want for a particular item combined with a means to pay for it. For instance, if you want to buy a car, it will not be considered demand, if you don’t have the money for it. However, if you want to buy a car, and you have the money for it, or you can apply for a loan, it will be considered demand.

Now that we know what demand is, we can study the law of demand. Simply put, the law of demand states that ceteris paribus (all other things constant), the price and quantity of a demanded product or service is inversely related to each other. This means that when all other factors are kept constant, the price of a product will decrease as the demand rises, and increase as the demand falls.

So, essentially, things that are more expensive have less demand by virtue of them being that expensive. We would want to buy 6 or 7 beers because they are rather cheap- so the demand is high. But since diamonds are expensive, we would either not want to buy a diamond, or we would just buy one- which is why the demand is low.