Economics Term Report on the decision to buy a Watch

Economics Term Report on the decision to buy a Watch

Demand:

The demand curve for wrist watches shows high elasticity i.e. demand varies greatly with small changes in price.Wrist watches especially branded ones are luxury items so the aforementioned behaviour because people shift to unbranded items which are comparatively cheap and serves the basic purpose.

Supply:

Supply of wrist watches depends greatly upon factors like devaluation, smuggling, govt. policies. As most of the branded watches are imported so the supply is inversely proportional to the excise duties and barriers to smuggling. Devaluation of local currency results in the increase of the cost of production in terms of local money i.e. purchase of wrist watches from foreign countries so it shifts the supply curve to the left.

Utility for Brand

My utility was zero as I had no watch so my satisfaction level increases as I move from a low brand to a high brand. Marginal utility increases at an decreasing rate as shown in the table.

MARGINAL UTILITY FOR BRAND

FOR DESIGN:

The satisfaction from a watch is greatly affected by it’s design. With the improvement in design the utility increases. Marginal utility increases at a decreasing rate. This decreasing rate for the increase in marginal rate is due to the fact that buying a watch while improvement in design is secondary and just causes little increase in utility fulfils your basic requirement. After a certain degree improvement in design will not affect the satisfaction.

MARGINAL UTILITY FOR DESIGN

Brand vs. Design

Each indifference curve shows the various combinations with different consideration given to brand and design of the watch that provide the same satisfaction level. I drew different indifference curves showing different satisfaction levels. For each satisfaction level we have different brands in each category based on my own preferences. Like Rado is a high brand but gives me little satisfaction. Same is true for design.

The line cutting these indifference curves shows the income i.e. my budget for the watch. Different points on this line give various affordable combinations of brand and design for the watch. I chose the combination at the point of intersection of my budget line and the indifference curve at the maximum possible satisfaction level. As it is shown in the graph that this point is the combination of high brand and low design. So I bought a simple Dunhill watch without any additional features like diamonds, gold chain.

COST:

The table below shows the cost for different combinations of watch that I could have bought. The fixed cost is 0 as there is no base price of the watch. The prices, as clear from the graph increases at an increasing rate in the beginning and then at the decreasing rate in the end. This implies that marginal cost was first increasing and after reaching a particular point it starts decreasing. This is also shown in the graph for marginal cost.