NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Business Economics

Internal Assignment Applicable for December 2019 Examination

1. Calculate the following: (10 Marks)

Quantity Total Fixed Total Variable Total Cost Average Marginal

Cost Cost Cost Cost

25 10 18 ? ? ?

26 10 20 ? ? ?

27 10 21 ? ? ?

FORMULA = 1. TC = TFC + TVC

2. AC = TC/QTY OF UNITS
3. MC = ∆TC/∆Q
 Quantity Total Fixed Total Total Cost Average Marginal
Cost Variable Cost Cost
Cost
25 10 18 28 1.12 -

26 10 20 30 1.15 2
27 10 21 31 1.14 1

2. “Determinant of demand are the important factor which influences the

decision of the consumers to purchase commodity or a service”
With respect to the above statement discuss any 5 determinants of the
individual demand.

Answer :

Demand in terms of political economy is also explained because the consumers’

disposition and skill to get or consume a given item/good. What is more, the
determinants of demand go an extended method in explaining the demand for a
specific sensible.

For instance, a rise within the worth of an honest can cause a decrease within the
amount which will be demanded by shoppers. Similarly, a decrease within the
price or terms of an honest can presumably cause a rise within the demanded
amount of the products.

This indicates the existence of AN inverse relationship between the worth of the
article and therefore the amount demanded by shoppers. This can be
unremarkably called the law of demand and may be diagrammatically delineate
by a line with a downward slope.
The graphical representation is known as the demand curve. The determinants of
demand square measure factors that cause fluctuations within the economic
demand for a product or a service.

The Five Determinants of Demand are:

1. Price of the Product

People use price as a parameter to make decisions if all other factors remain
constant or equal. According to the law of demand, this implies an increase in
demand follows a reduction in price and a decrease in demand follows an
increase in the price of similar goods.

The demand curve and the demand schedule help determine the demand
quantity at a price level. An elastic demand implies a robust change quantity
accompanied by a change in price. Similarly, an inelastic demand implies that
volume does not change much even when there is a change in price.

2. Financial gain of the customers

Rising incomes cause an increase within the variety of products demanded by
customers. Similarly, a call in financial gain is in the course of reduced
consumption levels. This relationship between financial gain and demand isn't
linear in nature. Utility determines the proportion of amendment within the
demand levels.

3. Prices of related goods or services

 Complementary products – An increase in the price of one product will cause a
decrease in the quantity demanded of a complementary product. Example:
Rise in the price of bread will reduce the demand for butter. This arises
because the products are complementary in nature.

 Substitute Product – An increase in the price of one product will cause an

increase in the demand for a substitute product. Example: Rise in price of tea
will increase the demand for coffee and decrease the demand for tea.
 4. Consumer Expectations
Expectations of a higher income or expecting an increase in prices of goods will
lead to an increase the quantity demanded. Similarly, expectations of a reduced
income or a lowering in prices of goods will decrease the quantity demanded.

5. Number of Buyers in the Market

The number of buyers has a major effect on the total or net demand. As the
number increases, the demand rises. Furthermore, this is true irrespective of
changes in the price of commodities.

3.
a. Suppose the monthly income of an individual increases from Rs.
10,000 to Rs. 15,000 which increases his demand for clothes from 20
units to 25 units. Calculate the income elasticity of demand and
interpret the result. (5 Marks)

answer
Income elasticity of demand refers to the sensitivity of the quantity
demanded for a certain good to a change in real income of consumers
who buy this good, keeping all other things constant.

The formula for calculating income elasticity of demand is the percent

change in quantity demanded divided by the percent change in income.

Ey = change in quantity/change in income × initial income/initial

quantity

Ey = ∆q/∆y × Y/Q
Here, ∆q = 5 units

∆y = 5,000 rs

Q = 20

Y = 10,000 rs

Ey = 5/5,000 × 10,000/20

= 50,000/ 1, 00,000

Ey = 0.5

Types of Income Elasticity of Demand

There are five types of income elasticity of demand:

1. High: A rise in income comes with bigger increases in the quantity

demanded.
2. Unitary: The rise in income is proportionate to the increase in the
quantity demanded.
3. Low: A jump in income is less than proportionate than the
increase in the quantity demanded.
4. Zero: The quantity bought/demanded is the same even if income
changes
5. Negative: An increase in income comes with a decrease in the
quantity demanded.
b. Quantity demanded for tea has increased from 100 to 160 units with
an increase in the price of the coffee powder from Rs. 40 to Rs. 50.
Calculate the cross elasticity of demand between tea and coffee and
explain the relationship between the goods. (5 Marks)

Answer:

In economic terms, cross elasticity of demand is the responsiveness of

demand for a product in relation to the change in the price of another
related product. The relevant word here is “related” product. Unrelated
products have zero elasticity of demand. An increase in the price of pulses
will have no effect on the demand for chocolates. The most important
concept to understand in terms of cross elasticity is the type of related
product. The cross elasticity of demand depends on whether the related
product is a substitute product or a complementary product.
Let us understand the difference between the two:

Substitute Products
Substitute products are goods that are in direct competition. An increase
in the price of one product will lead to an increase in demand for the
competing product.

Complementary Products

Complementary goods, on the other hand, are products that are in

demand together.

We can measure the cross elasticity of demand by dividing the percentage

of change in the demand for one product by the percent of change in the
price of another product.
Cross Elasticity of Demand (Ec) = % of the change in the demand for
Product A / % of the change in the price of Product B

Ec = ∆qx /Qx × 100 ÷ ∆py / Py × 100

= ∆qx /Qx ÷ ∆py / Py

= ∆qx /Qx × py /∆Py

Ec = ∆qx /∆py × Py / Qx

Where, Ec stands for cross elasticity of demand of X for Y

Qx stands for the original quantity demanded of X
∆qx stands for change in quantity demanded of good X
Py stands for the original price of good Y
∆py stands for a small change in the price of good Y
Here , Qx = 100

∆qx = 160-100 = 60

Py = 40

∆py = 50-40 = 10

Ec = 60/10 × 40 /100
= 2400/1000
Ec = = 2.4
 As we know cross elasticity of the demand here is Positive. Therefore
the related product is Substitute product.