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The modern version in the car industry is ‘NANO’, which has been launched by

TATA MOTORS. Each aspect of this new version of the car is so interesting that
an attempt has been made to illustrate each of them in the following way:

Consider an individual who has two oppurtunities:

A) To buy a car at Rs. 2 lakh and

B) To buy a car at Rs. 1.3 lakh.

Considering the demand we may expect that the consumer would buy the new
version of the car as its price is quite low and leaves the customer with a surplus
which is known as “ consumer surplus”. He can use this surplus in some other
sphere of expenditure.

On the other hand if we take the demand and price of a group of consumers
where

X=(X1 + X2 +X3+_ _ _ _ _ _ _+ Xn)

X=> whole group of consumers

X1,X2,_ _ _ _ _,Xn => Individuals comprising the group.

Then when the price is P1 [ price of the other cars ] the quantity demanded is
Q1[ quantity with respect to the price of the other cars. When the price of the
car is P2[ price of the car “Nano”] quantity demanded increases to Q2 [ quantity
with respect to the price of ‘Nano’].

When the price is taken on the vertical axis and quantity on the horizontal axis,
we can infer that when the price is P1 quantity demanded is Q1. When the price
falls to P2 quantity demanded falls to Q2.This shows that there is a negative
relationship between the price of a commodity and quantity demanded of the
commodity.

Generally while defining the negative relationship between the price of “Nano”
and the quantity demanded of it, we take the ceteris peribus assumption, where
all the other variables say , taste of the consumer, time period , prices of
substitutes and complimentary goods are generally kept constant

Thus, “Nano” being a good substitute of other cars, it may be said that when the
price of Nano is less compared to the price of the other competing cars in the
market, consumers would shift their demand towards Nano and as a result of
which the demand for “Nano” would rise and that of the demand for the other
cars would fall.

CONSUMER SURPLUS

Consumer surplus is defined as the excess satisfaction that the consumer gets
when he might be willing to pay a more for a good than he actually has to pay.
Thus, in the present case a consumer might be willing to pay Rs.2 lakh for any
other car in the market, but he actually pays Rs.1.5 lakh for the car “Nano”. So,
the difference i.e.Rs.5 lakh [ Rs2 lakh- Rs.1.5 lakh] is his excess satisfaction and
it is known as consumer surplus.
ELASTICITY OF DEMAND

Elasticity of demand refers to the relative responsiveness of the changes in


demand to the changes in the price or income or price of substitutes and
complementary goods. The elasticity which gives a relationship between the
price of the commodity X and the quantity of commodity Y is known as price
elasticity of demand. If this concept of elasticity of demand is used in our
example, we can say that with the rise in the price of the other cars the demand
falls and the demand for the car “Nano” increases. Thus, there is a positive
relationship as in our case we have taken two commodities which are good
substitute of each other.

PRODUCER SURPLUS

Producer surplus is the amount that the producer would be willing to sell rather
than forgo a sale.

TYPE OF THE MARKET

The market for the car “Nano” characterises a monopolistic competition type of
market . The output (car) of one firm is a close but not perfect substitute of the
car Nano. Differentiation grants each firm saome monopoly , power, where as
the presence of close substitutes provides competition.

The elasticity of demand for the car “Nano” is positive , which shows that for this
elasticity the total revenue is rising and marginal revenue ( i.e. additional
revenue accrued by selling each Nano) is greater than zero.

Relationship with supply

When the price of Nano is comparatively less as compared to the price of the
other cars the demand for “Nano is quite high”. In such a situation the producer
is encouraged to produce more and supply more in to the market. Hence the
supply rises. Thus, there is a positive relationship between the price of Nano and
the supply of it. This excess demand would cause the producers to charge more
price for the car in the days to come.

Technological relationship between output of Nano and the inputs applied:-

It is generally said that the output produced generally depends on two factors of
production i.e. labour (L) and capital(k). Thus in case of production of Nano , its
owner Tata Motors would employ the given level of inputs from which they can
produce the maximum level of output or say Nano cars. Also if Tata Motors uses
the latest modern technologies , it would further increase the production of cars.
All these factors help in having the profit and an excess revenue.

Social cost-benefit analysis:

The Tata’s started out with this ambitious project to cater to needs of those customers who
used a two-wheeler for a family of four. While the needs of that family are now met, the
million dollar question on all the environmentalists minds is the Nano’s adding to the already
chaotic traffic woes of Indian roads and while infrastructure is lagging far behind
development, can it play catch up before the Nano’s start hitting the road in thousands? Time
is the only test of this as I don’t expect much to change with any political party at the center
or state. Politics will always supercede infrastructure needs in this country. The real social
cost-benefit is as yet unknown in real terms.