NAME : - RISHABH BHAWNANI

SAP ID :7711918915

1. Calculate the following:

Quantity Total Fixed Total Total Cost Average Cost Marginal Cost
Cost Variable Cost
25 10 18
26 10 20
27 10 21

ANSWER: FIXED COST refers to the cost borne by a firm that d not change with changes in the output
level. Even if the firm does not produce anything ,its fixed cost would still remain the same . The total
money expenses incurred on fixed inputs like plant, machinery, tools and equipments in the short run.
Total fixed cost corresponds to the fixed inputs in the short run production function. Total fixed cost
remain same at all levels of output in the short run. It is the same when output is zero. It indicate that
whatever may be the quantity of output , whether 1 to 6 units , TFC remains constant .The TFC curve is
horizontal and parallel to OX axis indicating that the total fixed cost will be incurred even if the output is
zero.

TFC = TC – TVC

VARIABLE COST refers to money expenses incurred on the variable factor inputs like raw materials,
power, fuel,water,transport and communication etc. in the short run . Total variable cost corresponds to
variable inuts in the short run production function. It is obtained by summing up the production of
quantities of variable inputs multiplied by their prices.

Variable cost = Total cost - fixed cost

The total cost refers to the aggregate money expenditure incuured by the firm to produce a given
quantity of output . The cost is measured in relation to the production function by multiplying the factor
prices with their quantity. TC = f (Q) which means the T.C varies with the output. Theoretically speaking
TC includes all the kinds of money costs , both explicts and implicit cost. Normal profit is included in the
total cost as it is an implicit cost . it includes fixed as well as variable costs.

TC = TFC + TVC
AVERAGE FIXED COST is a fixed cost per unit of output. When TFC is divided by total units of output AFC
is obtained . AFC and output is have inverse relation ship. It is higher at smaller level and lower at the
higher levels of output in given plant. The reason is simple to understand . since AFC = TFC/Q , it is pure
mathematical result that the numerator remain unchanged , the increasing denominator causes
diminishing cost. Hence , TFC spreads over each unit of output with the increase in output
.Consequently , AFC continuesly diminishes . The relationships between output and fixed cost is
universal for all types of business concerns.

Average variable cost = Total variable cost/Q

AVERAGE TOTAL COST is refers to cost per unit of output.AC is also known as the unit cost since it is the
cost per unit of output produced . AC is the sum of AFC and AVC . Average total cost or average cost is
obtained by dividing the total cost by total output produced.

Average cost = Total cost/ Quantity

Average cost = Average fixed cost + Average variable cost

MARGINAL COST refers to the cost incurred on the production of another or one more unit . It implies
additional cost incurred to produce an additional unit of output. It has nothing to do with fixed cost and
is always associated with variable cost.

MCn = TCn – TC n-1

QUANTITY TOTAL FIXED Total variable Total Cost Average Cost Manginal Cost
COST cost
25 10 18 28 1.12 -
26 10 20 30 1.15 2
27 10 21 31 1.14 1

2.”Determinants of demand are the important factor which influences the decision of the consumers
to purchase commodity or a service”

With resepect to the above statement discuss any 5 determinants of the individual demand.

ANSWER: The determinanats of demand are the factorts that bcause fluctuations in thre economic
demand for a roduct or a service . A shift in the demand curve occurs when the curve moves from D to
D1, which can lead to a change in the quantity demanded and the price .

Here it should be noted that the individual demand and market demand for a commodity is influenced
by diffent factors . however , to extent to which these factors influence demand depends on the Nature
of commodity. While analyzing the effects of one particular determinantsn demand . An organization
needs to assume other determinant to the constant. This is because if all the determinants are allowed
to differ simuntanously it would be difficult to estimate the change in demand. Now here we talk about
any five factors of individual demand.
INDIVIDUAL DEMAND : When a individual intends to purchase a particular product , he/she may take
into consideration various factors such as the price of product , the price of substitutes , level of income
, tastes and preferences and the features of the product. This considerations determines the individual
demand of the product. Now lets discuss the factors that influence the individual demand as follow:

# PRICE OF A COMODITY: The price of a commodity or service is generally inversely proportional to the
quantity demanded while the other factors are constant . This implies that when the price f the
commodity or service rises , its demand falls and vice versa.

# PRICE OF RELATED GOODS: The demand for a good or service not only depends on its own price but
also on the price of related goods . Two items are said to be related to each other if the change in price
of one item affects the demand for the other item. Related goods can be categorized as follow:

Substitute or competitive goods: This goods can be used interchangeably as they serve the same
purpose thus are the competitors of each other. For example tea and coffee, cold drinks and juice, etc.
The demand for the goods and services is directly proportional to theprice of its substitute. Consider the
two brands of biscuits; Britainia’s Good day and Sunfeasts cookies. If the price of Good Day increases ,
consumers will tend to switch to sunfeast cookies. Therefore the demand of sunfeast cookies ia
influenced by the rise in the Good day . Therefore these are the substitutes and compititers are of each
other .

COMPLEMENTRY GOODS: Complimentry are used jointly ; For example , Car and Petrol.There are
inverse relationship between the demand and the price of complimentary goods.This implies that an
increase in price of one good will result in fall in demand of the other good. For example an increase in
price of mobile phone not only would lead to fall in quantity demnded but also lower the demand for
mobile covers and scratch guards.

# INCOME OF CONSUMERS: The level of income of individual determines their purchasing power.
Generally income and demand are directly proportional to each other. This implies that rise in the
comnsumrs income results in rise in demand for a commodity. However , the relationship depends on
the type of commodities. Related goods are categorized as follow:

Normal goods: These are goods whose demand rises with the increase in consumers income . for
example the demand clothes , furniture, cars, mobiles,etc. rises with an increases in individuals income

Inferiro goods: These are the goods whose demand falls in increase with the customers income .
for example the demand for cheaper grains such as maize and barley falls when individuals income
increases as they prefer to purchase higher quality grains. These goods are known as Giffen goods in
economic parlance.

Luxury goods: Demand for luxury goods rises with increase in the level of income of consumers .
for example the demand for luxury restaurant meals increases with an increase in individuals income of
consumers.
# TASTES AND PREFRENCES OF CONSUMERS: The demand for a non commodity changes with changes
in the tastes and preferences of consumers ( which depends on the customers customs, traditions ,
beliefs , habits and lifestyle) . For example the demand for burqas is higher in gulf countries . In such
countries there may less or no demand for short skirts.

# CONSUMERS EXPECTATIONS ; Demand for commodities also depends on the consumers expectations
regarding the future price of a commodity , availability of the commodity and the changes in income ,
etc . Such expectations usually causes the rise in demand for product . For example if a consumers
expects a rise in price of commodity in the future , he/she may purchase larger quantity of the
commodity in order to stock it . similarly if a consumer expects a rise in his/her income, he/she may
purchase a commodity that was relatively unaffordable earlier.

3 (a) Suppose the monthly income of an individual increases from Rs 10,000 to Rs 15000 which
increases his demand for clothes from 20 units to 25 units. Calculate the income elasticity of demand
and interpret the result.

Answer. INCOME ELASTICITY of demand means the ratio of the percentage change in the quantity
demanded to the percentage in income.

For example, the demand for the product increases with the increase in customer s income and vice
versa, while keeping other factors of demand at constant. The degree of responsiveness of demand with
respect to change in consumer s income is called income elasticity of demand . According to Watson, “
income elasticity of demand means the ratio of the percentage change in the quantity demanded to the
percentage in income.”

MEASUREMENT OF INCOME ELASTICITY OF DEMAND: The income elasticity of demand (ey) can be
measured by the following formula:

ey = Percentage change in quantity demanded/ percentage change in income

Percentage change in quantity demanded = New quantity demanded (∆Q)/Original quantity demanded
(Q)

Percentage change in income = New income (∆Y)/original income(Y)

Therefore the income elasticity of demand can be symbolically represented as:

ey= ∆Q/Q : ∆Y/Y

ey = ∆Q/Q * Y/∆Y

ey= ∆Q/Q*Y/Q

Change in demand (∆Q) is the difference between the new demand (Q1) and original demand(Q)
It can be calculated by the following formula:

∆Q = Q1 – Q

Similarly change in income is hthe difference between the new incme (Y1) and original income (Y)

It can be calculated by the following formula:

∆Y Y1 – Y

The formula for measuring the income the elasticity of demand is same as price elasticity of demand .
The only difrrence in the formula is that in the income elasticity of demand , income (y) is substituted as
a determinant of demand in place of price (P). Let us understand the concept of income elasticity of
demand with the help of an example.

SOLUTION OF ABOVE QUESTION:

Suppose the monthly income of an individual increases fom rs 10,000 to rs 15000 which increases his
demand for clothes from 20 units to 25 units .calculate the income elasticity of demand and interpret
the result.

Given that: Y= 10000

Y1 = 15000

∆Y = 15000 – 10000 = 5000

Q= 20 UNITS

Q1 = 25 UNITS

∆Q = 25 – 20 = 5

INCOME ELASTICITY OF DEMAND IS CALCULATED AS:

(∆Qd/Qd)/ (∆I/I) = (5/20)/(5000/10000)

= (1/4)/(1/2)

= IED = 0.5

3(B).Quantity demanded for tea has increased from 100 to 160 units with an increase in 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.

The cross elasticity of demand can be defined as a measure of proportionate change in the demand for
goods as a result of change in price of related goods. In the word of ferguson . the cross elasticity of
demand is the proportional change in the quantity demanded of good x divided by the proportional
change in the price of the related good Y”.The cross elasticity of demand can be measured as:

Ec = Percentage change in quantity demanded of X/ percentage change in price of y.

Thus mathametically the cross elasticity of demand is stated as :

Ec = ∆QX/∆PY * PY/QX

Here ,

Ec is the cross elasticity of demand

Qx = original quantity demanded of product X

∆Qx = change in quantity demanded of product x

Py = original price of product Y

∆Py = change the price of product Y

LETS SAY:-

Quantity demanded for tea has increased from 100 to 160 units with an increase in 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.

ANS. X = TEA

Y = COFFEE

Qx = 100

∆Qx = 60 ( 160 – 100)

Py = 40

∆Py = 10

The formula for calculating the cross elasticity of demand is:

Ec = ∆Qx/∆PY * PY/QX

By substituting the given values in the formula , we get

Ec = 60/10 * 40/100 = 2.4

#POSTIVE CROSS ELASTICITY OF DEMAND : When increase in the price of related products result in the
increase in the demand for the main product and vice versa, the cross elasticity of demand is said to be
positive. Cross elasticity of demand is positive in case of substitute goods.

# NEGATIVE CROSS ELASTICITY OF PRODUCT : When an increase in the price of related product result in
the decrease in demand of main product and vice versa, the elasticity of demand is said to be negative.
In complimentary goods cross elasticity of goods is negative.

# ZERO CROSS ELASTICITY OF DEMAND : When a proportionate change in a price of related product
does not bring any change in the demand for the main product, the negative elasticity of demand said to
be negative . in simple words, cross elasticity is zero in case of independent goods. In this case ec
becomes zero.

By studying the concept of cross elasticity of demand , the organizations can forecast the effect of
change in the price of good on the demand of its substitutes and complimentary goods. Thus it helps
organixzations in making pricing decisions by determining the excpected change in the demand for its
substitute and complimentary goods. Moreover it helps an organization to anticipate the degree of
competition in the market