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106 views29 pagesUnit 1,2
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/ 29
1. INTRODUCTION To
BUSINESS ECONOMICS
lonning by management”.
The basic objective of business economics is to analyse economic problems of business, suggest
plutions and help the managers in decision-making.
The main objectives of business economics are outlined as below:
(i) To integrate the economic theory with business practice,
Li) To apply economic concepts and principles to solve business problems.
il) To employ the most modern instruments and tools to solve business problems.
(iv) To allocate the scarce resources in an optimal manner,
(v) To make overall development of a firm.
(vi) To help achieve other goals of a firm like attai
market share etc.
(vii) To minimise risk and uncertainty,
(viii) To help in demand and sales forecasting.
(0) To help in management of a firm by helping in planning, organising, controlling etc.
(x) To help in formulating business policies.
(xi) To help in profit maximisation and in sales maximisation.
ining industry leadership, expansion of the
Q. 2, Discuss the scope of Managerial or Business Economics.
Ans. The scope of business economics can be examined by considering the following fields:
(i) Demand analysis and forecasting. Demand forecasts serve as a guide to the management
for maintaining its market share in competition with its rivals, thereby securing its profit.
(ii) Cost and production analysis. A wise manager is expected to prepare cost estimates of
@ range of output, identify the factors causing variations in costs and choose the cost-
‘minimising output level, taking into consideration the degree of uncertainty in production
and cost calculations.
(ili) Pricing decisions, policies and practices. The important areas covered in this field by a
manager relate to market structure analysis, pricing practices and price forecasting.
(iv) Profit management. This is the most challenging area of business economics and relates
to the profit planning and profit measurement.
(v) Capital management. This field covers the task of planning capital investments made in
the plant and machinery and buildings which require top level decisions. It also deals wil
the cost of capital, rate of return and selection of projects.
(\) Inventory management. This is another extremely important area to main ‘2 @ SHIVDAS Delhy University Series
yar Prong and THT of GAEL NHE SO BHEN OI a gy
(o) Unear Prorat
arate maven These ises relate to general BUSINESS, socal ang
(ut Emironm rch a nes enters operates
sre se aue os aflect bunessdetons nd tet regular
(a os aepenon
oem and receson
3 How wou ou ere beeen Mo economia Mace econo
sod eter econamncs ona of tw Bars, ely Miro economia
08 The i ey dered or & Greek word “miro meaning smal aan
ce acaremis is tht branch of economies which dealt wth the
chee cst ant or smal unts suchas Brass ofan invidal, frm ge
ee ae
Shoeges shang and torl employment. in pordolar inches the following ees
‘> DEMAND
4 State and explain law of demand, Why does a demand curve slope downward
right?
‘Ans. Demand for 2 commodity Is defined as the quantity of the commodity the
Purchase ata given orice and given time.
Individual demand curve. An individual's demand curve is drawn by using his/her
Schedule which represents the relationship between quantity demanded and pi
‘commodity. A hypothetical demand schedule is given below for an individual fr Good:
Demand schedule of Good A
Price (2) Quontity demanded (kg)
ns | 20
5 16
Seal 2
‘Law of demand and demand curve. The gen demand
Schedule follows the law of demand. The Law states “Other
things being equel, 2 rise in price leads to fall in quantity
demanded of the commedity and vice versa.” A demand
curve 1s the graphic representation ofthe law of demand
wing inverse relationship between price measured along vertical axis and
ecity which is measured along the horizontal ais as shown inthe figure
Chapter 1 isticton 9 Busness eonamies #9
AS ven in the Figure, individual emand curve ds a downward loging cueve
Felationship between price and quantity demanded ofthe commonien
Because ofthese factors, normaly» deman
‘more ofa commodity is demanded tomer or
Incating verse
nd curve slopes downwards from left to right
ree and vce versa.
2. 5. Explain the aliterence between a demand schedule and 3 demand curve,
‘ans The auantity demanded of any good 1s the amount ofthe god that buyers are wing are
able to purchase, The gven table shows how many ie cream cones Karishma bay exch month ot
fiferen prices of ceeream it ce-cream is fee, Kasha ents 12 kecream cones or month
£20 per cone, Kaisha buys 10 ce-ceam cones each month. As the pce ses frthes she bu
fewer and fewer cones. When the price reaches £120, Karishma dowsnt buy any cecreon ap oh
‘Ths table ia demand schedule, a abe that shows the celationship between tre price of «good
Femsaining constant. that influence how much of 2
‘The demand schedule isatable
that shows the quantity
demanded at each price. The
demand cure 16 @. graphical
representation of the demand
Schedule Te ilstrates how the
‘quantity demanded of the god
changes as its price varies. As
‘quantity. demonded increases
With fol in price, the demand
curve slopes downwards
Demand curve
OPT TT aay
‘The graph in gute uses the numbers from the tl
comvention, the prie of ice-cream son the vera!
's on the horizontal axs. The downwardsoy
calles the demand curve
ble to Uustrate the Law of demand By
ls andthe quancty oe ream demandes
PINE line relating price and quay demandes
©. 6. Show how market demand is derived from individual demand
or
What Is Derived Demand? Give an example to explain i.
Ans. The quantity demanded in a market the sum ofthe quaneties demanded by a the
bers at each price, Thus, the market demand curves fund by ang heontaly te nde
demand curve. At a price of £80, Karishma demands 4 k=- X [>
oO ae
Maret demand forthe goods Ow WHER 2 ental summation of dy and dc ae EN
pres as even i the sched «6 @ SHIVDAS Beth Unversity Series
<1. iy dees demand crv aly DE oWTMaS t the iy
exceptions to?
vans usvaly, @ demand curve slopes downward to the
sight This means the slope ofthe demand curve i negative
‘downward sloping demand curve shows verse relationship
hetween the price and the quantity demanded. In the
gram, OD i the demand cure.
(On Yauis pre represented and on Kans demand is
represented. When price Is OP, demand is O When price
foes down from OP to OP,, demand goes up from 00 te 00,
Similar, when price rises from OP, to OP, demand comes
down from 00, to 00
Decline n price leads toa downward decline in the demand
cure, but at he same tine edt an increase quantity demanded which in
festen towards rght Thats why a demand curve sal slopes downward tthe
‘Demand Curve is @ graphical representation ofe demand schedue which ne
inverse relationship between price and quantity demanded, holding other
Thecefre fr the oper understanding tthe dowrward epg nature ofthe
wwe have to know as to why price and quantity demanded are inversely
relationship becomes carom the folowing sent teat Ti
2 Law of iminshing marginal uty. According to this law if consumer constant
theunis of commadiy, he ubity which he gets from the suecessive unt skal goo
other wards, maga tty of aconmeriy oes on dec om tesucnane ce
3 consumer consumes its units continuously. This means, someone has more of
he hl have nts having lesser aity arin the words marine ity of het eo
be es. However, rice oa conmoctyiequl tts marginal uty, AS such the cena,
have more ofthat commodity eniy when he pays les for tan vice-versa Ths sngin ne
‘demand Sal be more when pce it less and wceversa “7
2 Income effect. Change in pice imversly aflets the rea income fr s0 ale
onan when the none ince res these for cone pee Seece ac
income goes up. Tht means a consume is able to buy mre fa comedy when pre
3. Substitution effec, Changs inthe pice ofa commensty make it relatively dearer or
‘n comparison to its subsutes, with the result it is demanded either lessor move ae
if the pie ofa commotty gost down, it relatively becomes cheaper In rlaton to te
substitutes AS a result, now peope wil demand mote oft The epposte wil be the sare:
re ses,
4 Many uses of a commodity, There are commodities which are used in many deca
‘suchas electrity. Increase inthe price of sucha commodity would rst ts use to
uses For exomole, now eectricty may not be used for heating the wate o cooing te
reer tan here neh ceo sc armadyl ed
ins. Rs such, because of many uses ofa commodity, the demand of su» commedy
ote when is pie i less and vice-versa. me Dethoente ¢ oneat
{xceptions tothe nw of demand te owing cases, 2 eine npr oes noted oa
increase nthe quanty demanded and an increas in the price doesn
ince ne gun denade and the price does not ead to a decine in
1 Inferior goods These ae the goods whose quanty demanded falls when
Consumes snd weevasa. suit ofthese near pon ne toned nee ee
Giten gor
PEMAND
ot er netre om
tend if demand does not hold The law af demand awohs
fs stronger than the ngatve income fect
J about the future price. The slope ofa demand curve dems
diy sabes to revo dca
ects that pric of the commod
nt pice and gostoonet Ns
tat te lo
Tahose substitution effect
2 Expectation
veether the price of comma
rare expect hat the price ofa comedy
cornea ee Ov ten 1
Sonata be demand curve rises upwards to the “ight
* semana nore
ede
te tinry Maryan, 4 onnoat
ve
me ems
vee cet Sard os
a rand rch ath
vy On tee hs
wane an increase in its demand.
frat
Soy af war oh
Pesta of war
cette pg noe fe one
cr gg was ys of can
soe cng ns ave 9
Sinese sn aaaes
ie aes somcemes pie
eneripoance
receptor ess, 50
(ait beween canein demand an
fs. change ary
tana mevpinea
er cy one dma sung De
Sa anna te cone es
ca due ochre spr lve.
wate angen be ear Sen
Meine unt erunde of onmoty
er ot mand ne
Tr counetn cl end
ret oe
Sonpoe
eet anges sto en 02302
tne pce fangs
onary 353 eu ofr
cae oun to 2 pe en he seman
tot pm dozens to ors scaled he
camefon af demand. re we av ned tat
contain fin ne demand 2 commodity 18.
tn ten peel 8 he
reno cee
ee args smi ta
re ar wich a ec te ean WHR
ete the Na tN
feof as beng costo scarce There are many consroe
ances thel status Decline 9 the price of Sud
down Rare ana costly WoO
ren fasion, does
if the fashion of a commodity dsapDe3%.
ve neat future, there any poss
ty demanded’ or Movement 608
ho
mea meee
‘Demanded. As we know, thatthe demand af
fof demand, we conser only the effect ofthe changes
there sna change in othr factor,
reated goods, te Change nthe seman!
fextension and contraction in gemanc
the same demand curve
ses due (0 fal im R3 price alone, cad
‘other hand. ifthe quay demanded fas due toe 9 eS
have snobbery 20003!
decine even when
boty of 3 wat breaking
(youn ening tor cutrent pce Dec
not be aavable o ma
capenence of ths Phenomenon during the Avs
a commodity at higher orien. Thess sno
ted above, the slope of the demand curve wil nt be rewsee
thang in guantty demanded
ected by varus
inthe price of eranges trom £30 per dozen 10 £25 per dozen, he
"tcl extension of demand 4 SHIVOAS Debi UnerstySeres
ve hve era the deand cave OD which shows the diferent quanites op
sen ae aint pees, exvaring that othe Bor Which aso aft th
wre acre, tastes and preferences of the COASTS, pies of reat
eer tne figure when the prices OP the quant demanded is OS. the
eae the quantity camanded rises from OS 0 CT This rise in demand Ss calleg
demand Conversely fhe pce ofthe conmedit Xrses fram OP to OM, the quaney
arte 08 to OR Thi fl in the cuantty demande, ie, RSis called contraction gf
Thus the extension ad contraction of demand tates place only due to changes inthe
the comma ad ar represertd by the moverent onthe sre downmard opine
‘hange In Demand. The charge nthe demand fora commodity due to the f
than the pice ote conmodiy, for expe, changes in consumer's income, tastes,
pron raed pots ee oe cle ease and erezen cemand. Suppose
2 the consumer fas increased (essuing the price of commodity as remained ey
therfore be wil demand mre ofthe goed. The rise in his demand for goods scale
indemand On the other han, the income of the ersumer declines he demands les
‘his his demand is ald decrease in demand. Though the extension and ca
demand can be represerted onthe sre demand curve butte inreas or decrease na
dre represented y the upaard or downward shits demand curv. This is expained ing
Wiel, DD is the demard cure. At price OP the quanty demanded of commodity
suppose the pre ofthe commodity has remind constant But the consumers income
or the preferences fr 2 good na ceased, the consumer is zbe to buy more quant
{00 than before and therefore the demand curve OD wil sft upward to the right and
errand carve 6 0,0,
é
Quant densa
tia)
Th cone
tow by Oty ed OM unay te
called increase = a ad
ale meen ard. te te wen he onsen lng
ieee ena che dd cre wil ow ae
8 he cre iow slew bony Ok see
20d instead of OM quantity at theo
ei ‘wantty tthe ol rie OP and this decline in demand is called dec
room
* ios ad cna 9 Sena
SUPPLY
(13. Explain the law of supply and point out ts assumption.
soe tow of supply explains the relationship between price and quantity supplied of 2
conmnodity According te ths ia ther things remaining the same when price inereases, soppy
sho increases and when pre decreases, suply also decreases. nother words, supply slong
ant pace changes in the same drcton in wich price changes. Te relatonship between pice
nd quantity supoled of & commodity i direct; f price i ess, supply i also less and when pace
Increases, supply wil so Inerease
<[ssumptions. The lew of supply wil hold good only when other things remain the same, This
implies that certaln things are assumed tobe constant which are a follows:
{Prices of ather commodities remain constat
2 Prices of factor input remain the same.
3 Thete iso improvement inthe production technology
{There iso change in the abjectve of a produce.
‘The poste relationship between price and suppl fa commodity has been explained with the
help ef» supply curve anda suppl schedule. nthe Table the gven supply schedule expresses the
orous quantives supplied of a commodity at various prevaling market prices.
Ti tha schedule, on one hand, the pres, and on the other hand, quanttes of supply
comesponding tothe prices ae given. The given schedule makes it very clear that when price
aorerres tne supply of the commodty ao increases. nother words, the relationship between
vce and quntty supplied apparent loks direct For example, when price i &, the quantity
Fpplied i 50 and when price increases to €9, the suppl increases to 90.
‘Supply Schedule (in units)
Price ) -
Dei University Series
re pests tert BeWeth Ce and curt,
Ss ye supa 1 1 iM A A Sing cane
aan atap between two related economic variables. Given fire my
fae raion ne cen 8
Eee hn rt te rE pwn oa
cece 0, Sty whe ce ess om Oo
Sons fom 00100
10 6 SHIVDAS
om op
Sip
v
Se
Gest
(Quanity supplied (nuns)
Price®)
Causes ofthe application of the Law of Supply. A question arises a5 to why the relatonh
Between price and aioity supped is dec or why does a supply curve rises upwards tone
‘ar vy suppl es when price low and supply mote when price is more
‘The answers of all these queries become clear from the following points:
UH ces are igh Selers ae iting to Sel goods even om tel old tock. On he on
and if rie decreases, sles hod some prof the tock which thease ia
forsale
Ui pees ae gh, the po expectation Increases ata ret of which he order
inaeasts his output or prediction. On the eter hard, when pie dence en
‘pecan reduces so producer reduce the production output.
(iH rot expectations more, new fs tart production. On the cher had, inthe een
of dein inthe pot expectation or in a tution of ss even the exstng frre one
rede or top the productn.
. 14 Explain the factors affecting the supply of goods,
‘0s. Supply canbe influenced by @ no. of factors that are termed as determinants of supe
(0) Price refers tothe main factor that influences the supply ofa product to a great exter:
Unlike demand, there isa rect relationship between the price of a product and ts
‘ppl. the price of product increases, then the supply ofthe produt also increases
‘and vice versa. Change in supply with respect to the ch
change in price is termed asthe
‘arition in supply ofa product.
technology increases the prod
uction of a product, which resis i inthe
reps oe Product, which results in the inctease in th
;omale the production of fertiizers and good quality seeds
‘ons. This Further increases the supply of food grain inthe
Bm
Chapter 1 nroicton to Businass Economics @ 11
(¥) Prices of other goods. this factor comes into ply when a frm s engaged in production of
‘mare than one commodity A frm tends tajncrease the supply ofthat commodity which
can be sold at the high
‘commodities whose price remains unchanged starts decreasing, For example f price of
wheat increases the farmer would grow mare wheat a compared to other commod
produced by him, say rice
Brice to maximize its pratts Consequently supply of other
2.15, Eaplain the diference beween 3 supply schedule and supply curve
‘Ans he table andthe eure given show the quant of cecean cones upped each morth
by Sonu, an ieecream sll, at various grees of Kecream At price Below 210, Sonu does
rot suply any icecream at al AS the pice es, he supplies a grester anc arate gu
“The supply schedule sa table that shows the relatonship tet toed ar
‘quantity supplied, holding constant evesthieg ese that infuences how much arducers of
‘00d wart sell The graph een uses the numbers rom the abe tilt the aw 005
‘The curve relting to price and quantity supped is caled the sualy cure. The spay cine
slopes upwards because, otber things remairing equals ghee ance means» grevter quantity
supple
Price of keream cone (2)
°
5
10 |
5 |
20
8
30
Quantity of cones supped
‘The supply schedule is table that shows the quantity supplied at each price The supply
‘curve is a graphical representation of the supply schedule. Tt lstrates how the quontty
supplied of the good changes os its price varies. Because «higher price nereases the quantity
supplied, the supply curv slopes upwards.
reat ce
; pa upp carve
2B
annum =f
3 i)
18
|
5
ort
Inceas nquarty =
cones spins
Lise tesone
Oia
2 16, show how market supply is derive from individual suppy.
‘Ans. The quantity supplied ina market i the sum af the quant suplied by all the sellers
at each price, Thus, the market suppy curve i found by adding horontaly the indvdual supply
Curves At a price of €20, Sonu supplies 3ce-
6 » 120 a
sl 3 us
elec of demands coe qrearerthan one when aay on corey res
eta tin dt 28 PT ne ea we a tT ree
fam gt uly Set 1, eT Ee
te ty of demand ET 1 outa renas conse ore
oe en 906 (0 ea ice nse fom 510 (8 fay remains the
fat fase ocean ranen ue 102 a0
sa fe 2012 CS A "gn ay that when Br
sect fom e115 12620 ey eyo eran reat Po” =e
(24. Define the ancet of ea tasty of demand poss
‘ns. coe ame ie easy of ema & Met percetagt
sy of ed ye pein ree nT sven
change in uatY
income Estey of demand
atenpese Boag
ere = hares = cus re
ites for dierent types of £00
income Elesticty of dera
pr acome (or
1 consumed.
or inferior goods © <0 For necessities = 0
3} goods 0<€) <2 For luxury gods >
that due to # 20% increase
es by 10% ths
‘pp ie, 10%-+ 20% = 05) Nowa
‘he value of 6
0
sues the
rasnoty of demand f°
he consumers ICOM
rds except what xe KON? 25 HE goods In 38
pas tends to reauce the demand Ff
red for inferior goods. AS a ater of
se postive when te demand fo"
come. 1ncren
fin demand nthe
ease demand 1"
1 be negate
demand
4
ream iacome-t
sy, an increase nt
to increase dear
nd ie ken
changes i
gro a decreas
inferior goods an ierease
of ee derece ces tens
trem anon vaue of nee tas fT
rg beaves he norma Mand response £0
4 Soe to reense n demand and 2 ee incomes lea
tr se a, eas of nse! £8) ‘whe incomes of consi
igo decreases and vcees0, comely of demand 146"
125. apn cos ast of demand MoM is elasiy measured ata Ponto” 2
arenes of quay demanded of
ct ceterspenbus. HENCE
m ae pie of ONE
a Demand. the dere of 852%
price of note riatve BCG
the concept of cos Ie and expan te rlatnship See
jg af another cori
feammoeity and the vant demands
ee sty Sees
sured by
ty demanded of commodity X
10 @ SHIVOAS Det Unive
tasty of demand is Me
ge cong eer eM
ne ng mf oer eed ommedtyY
20410
20, 2% or et tt
nt oy
The cross
= ro sty fed 00d my,
"Sahay sented of comme
er tye Skt oe feo nether reed conmodly¥
pana "A. widens” means "change in”
1» two commodities helps us to specify the nature
vies are termed as substitutes if fallin price of ali
ther (say X} or vice versa, tly,
eawhert
of demand betwee
‘wo comme
demanded of ot
pa jimty demanded if fll in pice of one,
1 Two commodties willbe Independent yn
anded of the other {say x)
‘oss easy
berween two goods. AS
causes a decrease in gua
“wo commodities ae complementary
iminerease inte demand of another (39%
re (sa Y) does nat affect quantity dem
moaaton ee ueasures of cross elastaty Of demand prove
el
sity of Cross Elasticity of
dng rete Od 28 OMRON wth a,
ae Sys wear have low cross east. A manutoctirg
For example, men's wea 2 us aes
Frere pot in competion wth & manufacture of waren MeSt ereas Coke and Pe,
remand and hence products of Coke and Pepsi are in ste conan
eter
won oot 2808 of
ay Vidi chert coer emt
BO The trad fr messing cua
a. 6, Distr
clasicty of demard.
ans. Suppose X ar
demand fork with respect 9
oe ‘sichange inthe demond for X
chose elastey of demand foc X= See
‘yare two substitute goods and 2 10% reduction inthe pe
For example, suppose X and
crease by 15% In this case the cross-elasticity of demand fer
"causes the demand for X tod
wait equal 15% + 10% = 18. Gods may als be related to each other as complements, n
Sr sreitmertary goods,» reduction i the price of one wil cause the demand for theo
complementary good to increase. Thus, in cae ofsubsttute goods pice of one good ane ty
demand forthe other good move nthe same deci whereas Incase of complementary gs,
they move in opposite directions. However, a5 a mater of convention value of crosé-elsto,
istaten to be postwe when pce and demand move in the same drecton (ass the case wi
substtute goods) and vale ofcross-elstity is tken to be negative when price and denn
| ‘move in opposite directions ass the case wth complementary R000).
In other worts, value of crosselasicty of demand is treated as postive incase of sobs
| 004s and negative in case of complementary goods. Thus, on the bass of the vale o >
roses of demand we may ir out whether he oot a ed ot
2 setts or comple and wat he dee of subtly and comple
Q 27. Distinguish between arc and point elasticities of demand. oor
‘Ans. There are two measures of price elasticity of demand:
(i) Arc elasticiy I is measured over an arc of the demand curve. According to this methit
Proportionate changes in price and demand are ascertained nct asa ratio of AP?
aya but ase ratio of (4~= PB) ang {aa $02)
—ee—eE~Tii iets
haper 1 nroduton Busnes
Suplose the demand curv fr 8 commodity a
shown in eure
Let us assume at spree P, demand s Qy Free
then changes oP, when demand alo changes to \
(,, Here, ensly we can de 1, ~ Gy ad
AP =P, =P, But what about arce and quantity
since each of P and @ has two values itil value
aged value)? The ready made soln
Ie average of both the valves, (2, we
should take
+a)
ara
“Tus we mould get
easetyof Demand €, + "9
1 Demand: + New Gama? = ta > ;
sere
Here (Pp Ge) and (P,Q) are the two extreme point
‘he are elastty concept s vet since in reat, pice and quant
Jumps, Le, there are gas between any two vues of: alee
‘is cance vies only rough or appraxmate Measure we
anamear strech (asthe stretch Hom Aro 8 inthe avon gure) Detween
‘onthe demand curve bya sagt ine
{iy Point elasticity of demand. n contrast to
Peers to mezsutng elastic of demand at 2 paral point onthe der
erciny of demand onal the pons not the same on # demand cue Acorng
this method e, can be measured on a gven pon
rept of ac eas
ona demand
‘Recording to Point method: 3
We can coculate elasticity in this content:
1) When lower segment (BC) greater
the above segment (AC), elasity of
demand for Pont C shall be greater Pan 1
te more elastic. Ths happens when point
ies at the upper aif of straight ne AB.
i When lower segment 15 equal to vase
Segment (&8 = AE} elstiy unity. TS
happens when points mapa.
(i When lower segments ess than the poe" oS
segment, elastty shall be les than 1 TN .
pappens when point atthe lower Da of
straight ine AB
() When point ison
{u) When points 092
to ry a the lower part 80.
7
the Kans, easy ea -
cay (=), the upper Pa is
he Vans, lst 8 eg 1
Ss CELLS
ersy Series
sivoas vehi Un
nes ev pate seca carves have the sae lat,
28. Wo =
fas. No, consi oy
ope a
and have te 52 P14 compare te elasticities at this same pie, .
ye the ree of
Now ¢ "
Di
oh
a \
A Nop,
smmparing() and (i, we Bet BA
coment tte the rc of Sop 1
eB) ast me NG
oF Quan °
or
so, we know 02, > 02 Thsimlies Sopp
10, OF (20, OF.
hereto, 3p “0a; * SP “00;
when implies the result that with same slopes, the one farther from the
mpl 4 from the org
Je, Egis preter in case of D:D, demand curve as.
Mt
10.050)
tlastto the ore. x
“Ince 040, f mote elastic at each level of demand than 0:0,
1. 28 Compare dastities of demand at the point of intersection of two stay
downward sloping demand curves. 1
Tans Of the two (or more) intersecting straight-line demand curves, the Fater one
clastic at the point of intersection, than the steeper one. my
hie fg, cathe ao ithe se fo 0:2
get rer ale of sey aye
aa 3a
wih the valve of 4 long the two curves. Value of SP
is larger at each point along D,0; (ie, the latter curve)
than along 0,0, (le, the steeper curve). Therefore
cbstcity of B,D, at Ais greater than elasticity of 0,0, at
the same point A
0. 30. The slope of a demand curve is one ofthe ingredients of the
not the only one Explain.
‘Quay
ticity of demand bo
ercentage Change in Quantity Demanded
Sol, Elasticity of Demand, E
Percentage Changes in Price
9 300 ae
oo
00
See the gonty demande suntan a re, on an daw a dead cave wi
teen on eal os and quany demanded then on Rotor es
now, Swi indate the Sope of his demand eave Subsng ths spe ie
‘equation (implies thatthe elasticity of demand can be written as product of two compote
reciprocal ofslone of demand and P/Q ratio.
Chapter 1 Intoducton to Busiess Economics @ 23
» Fa | Secaftmanlte
ey E4 Sepeat emandcure” O|
ence we ny ht Soe of demand cave oof te eet of iyo
dena he ctr conporet beta
vn
The two strightline
and compare the elasticities ofthe two curves at this pric. Since the curves are paral,
2 {s the same on both the curves. Since we are comparing the elasticities on the same price, so
1 sree Now ein ihe 50 On he caveat me fg, ty
Teese 05200, anh smart ar
Th eal eae three whee demande edge sata
eon
ya My do wet th ope he mid ce or sero meta th
isien oon ron
“Ans. We should not use the slope ofthe demand curve or its reciprocal to measure the elassty
of demand, sine the rice elatcty of demand (e,)s given by the formula
a»
*
= S02 ante sopef the demand care
i ),e
Toate)“
Ths imps, that te pce eeey dows rt ony
depand oh spe ote era fe Sop) eu
tho onthe pre ay rato, Teele cn fr 2
Smet Ine owner’ lpg Soran owe
Scot soe oa here casa era oe
fhe pce esc of aman (eee fre
pons esPa\ato hangs ate ont
Tiss represented nh aig dram:
a2 (2
Ue.
> eps corstare ecg alr te demand cae 8
1, MR is postive
and, when 1 < 1, MR isnegative.
1.39, From the information given inthe
{X and Y before and aftr the change inthe price of good X. Caleulate the
‘demand between the two goods.
(Hence proves)
1 folowing table, draw the demand curves for goods
cross price elastic of ve sino pn nvr eit
ee | ne =
per ‘month) | _(@perunit) | (uy
ae er ur (units per | ever une) | cum
eon es
20
iON APR
ET) JN. ~
=e a
contraction emand Increase demand
cos elestty of demand between the gen two goods Is POSISVE and clang,
%
{folowing manne
tay = Meanelnguty ean
6
ross elastcy between X and ¥ Is 0.5.
Sine It is postive, shows that X and ¥ are substitute goods.
1), ain « Bae} vos
wea eB)
= ELASTICITY OF SUPPLY
40. brine price east of up Exam the factors affecting pie elastity of uy,
ee
‘Ans. Pee elastic of supply measures the degre of resvonsiveness of quantty suspeg
change In price ofthe commodity, i other words, supply easy is defined as the prem
change in quantty suppled divided by the percentage change in price
ett be denoted as ,, Then e, is defined as:
29.100
= Pecetae cane seni a
= SO.E hore and are orginal pie and quentty supped respectively, 3 = change
Since P and are postvely related on a supply curve, e, is normally sve
The range of 505
The supply curve may take diferent shapes depending on the value of e,
+ If 6.80, supply is perfect inelastic. The supply curve Is vertical as shown ia Fique 3
{Mee supply i inelastic and the supply curve cuts quantity axls as shown in Figure?
* He, 1 supply is unitary elastic and the supply curve passes through the origin ae shou
tn Figure 3
{]MU52 1 supply seasic and its supply curve cuts price ans as shown in Figure 4
‘Tee, supply s perfectly elastic and supply curve is horizontal as shown in Figure S
a
| a
0 Guan applied
Tiger igure
© Gunny spied 7° Oana appar °
Jasticty of supply depends on the Menibity of sellers to change the amount of the
The pr
so0ds they produce.
allowing ave the factors affecting the price elasicty of supply:
{i Time. Sepoly willbe differen m the shore and lang oun of sme. In the shor run, seme
Wiloniy be Wb fo Increase input of labour t9 increase supay of commocines Susy
Change wil e ite because ether lactars of production may not be inereased in the samme
proportion a the change in pice and may limit the supply However in the long run #
frm wil increase the Input of al factors of production and thus the supply becomes more
[uy Availabilty of resources. Ifthe economy is aeady using most of its scarce resources,
then firms will ra i efit to employ more (Le, workes) and 20 autBut wil not Be
fable to Increase. The supply of mast goods and service wil therefore be price neiaste
‘and vice versa
‘umber of producers. If there are more producers, this means that the output can be
Increased more easly. Thus Supply is more elaste as a result.
Ease of storing stocks. The type of good that © producer supplies wil atfect eis,
goods can be stocked with ease and have a long shelf fe, then supply will be elaso-
(Otherwise the ods wil b inelastic. For example, perishable goods suchas fash Aowers
vegetables and fruits have comparatively Inelastic supply because it aiticult to tore
them for longer period
(v) Increase in cost of production as compared to output. In case where thers i inifcan
Increase in cost of production when output i mereased, supply snelasne Tis is Because
Suppliers would have to make 2 significant Investment in order to inerease the output
This would take time and some suppliers may be hesitant in doing so
(v9 Improvements in Technology. Some industries will have improvement in technology th
affects the price elabcity of supply. Improvement ead to goods being more eiss5= =
firms are more efficient im preducton with better machinery so dutput increases th
Increate in price) as compared to industries where there are less improvements
wy
mw 28 © SHIVDAS Delhi University Series
(vil) Stock availabilty of finished goods. In some industries Be there are higher he
or stock fished goods te supper can suppY more asthe nce res Th) Mn,
elasticity of supply for these goods will be elastic. Nb,
41, Prove that any stright ne suPPHY curve PasINg EVOUBH the eign pa
: Mae,
elasticity equal to one. tn
fs ny rah in supply core pase tough he Fh Bae fg
cone The spy curve equed has been shown nthe gram. Consider tw tan
sides p,q and euwe ad dp, Aq and S curve, These ae similar tangles,
“Therefore, the rats of th sies are equa Le,
pd rc)
a” ag
aT
saat
vs
We know that
ae 2 . which by substitution of () gives
2. CONSUMER BEHAVIOUR
. 1. why law of Diminishing Marginal tity is considered to be a universal truth? Also
‘explain the relationship between Total and Marginal Uti, ois
‘Ans, The uty of the sme good may be diferent to dtferent persons, and may even be
different to the same person in diferent circumstances. But one important aspect cf tiny ¢
‘that at any given time all the untsof commodity that a consumer adds 0h stock, So rot ge
equal utility to him, Suppose, the fst orange that you cansume gves you utility worth £10 ne
second orenge will ve you uty worth iss than 210, and the hid one sil less ard soon ‘Ths
tendency ofthe marginal utes of successive units of a good diminish, when a consumer ats
‘more to his stock at given time, this s known a the ‘Law of Diminishing Marginal Usity’ ono
Is considered tobe @ universal truth
‘The Law of Diminishing Marginal Utity states that as 2 consumer consumes (acquires) more of
4 good at a given time, is marginal uty (or whats the same thing—the extra uty added by
‘suocesive units) tends to cimiish. This means that as you consume more oranges 3 any sven
time utlty derived from the successive oranges would diminish. You total utity undoubtech
increases but at a diminishing rate. Let us examine the important law withthe hel of 3 srnaie
example. maine a man's consuming oranges one by one and teling you exacty how much eity
he gets from each orange
‘The given tale records his statement about the ult ofeach orange separately ashe consumes
6 oranges.
No.of Oranges
Marginal and Total sity
Marginal Usity
Total Unity
4 4
re 3 7
x | 2 9
* 1 10
* ° 10
en on 9
‘Marginal tity means the unity of an “addtional” uni. The ist range isthe margnal orange
‘and the uslty from the frst orange is the marginal uit. The second orange s the marginal
‘orange and the utility from i isthe marginal uty. "Marginal snot fred, ts moving As 2
the units are identical, every addtional unit consumed should be considered 35 the marginal unit
‘and the satisfaction from that unt should be termed as marginal uti. clear from the above
‘table that marginal utility of oranges to a consumer i going Gow. Marginal unity can decine 0
2ero and can even become negative. Negative tity means thatthe consumer does nat antepate
positive satisfaction but hopes to et ony negative satsfacton. Total uty the ubity dered
from the consumption of al the unt. ti the sum of al te marginal eines
‘The table shows that the tta uty goes on creasing, but ata decreasing rate, so ong as
‘the marginal utility is postive, When marginal ublty becomes negative, the total uty abo stats
ecining. Total utility is maximum when the marginal uty 20.
a os es ee a een,
In the fur the quantty of oranges is measured along the Yas ang
‘The Marginal Usity Curve (MU) has a downward or negative slope ag ada An
hs the consumer ls ales, The consumer hpesto get ony 2! Ua
‘he ith orange and negative utity from the sith orange. The ms iY apn
real unity
ve (TU), onthe other hand, gg" Se
th the consumption ofadasnon'Ptag
Cuts through the X-axis at N, The Total Utlity Cur
‘ight to indicate that total utility Increases wit
ado, ‘
‘reaches a maximum point at Land then declines, Fa a
,
y
2.
10} Toul atte curve eb
5
3 tw
q
e
2 Marga ative
; i
& 1 Bain
Ni/ Say
Sar Negaive
Unt Orange SA ty
‘he relationship between marginal tity and tte tty can be su
(0 When marginal uty dedines but se es oa niet
'S posite, Total uty increases but at ae
irs
‘consumption of the different uni
* tastes fashions etc, ofthe consumer remain the same
2 Blain the law of equimarginalutity,
ns, Law of u
tote oem rst eau: marginal uty states that consumer wi