Business Economics Assignment

Q1. Ans) INTRODUCTION- Price Elasticity Of Demand

Proportionate Change∈the Quantity Demanded

Price elasticity of demand =
Proportionate Change∈Price

A percentage change in demand and price is denoted with a symbol Δ.

Thus, the formula for calculating the price elasticity of demand is as follows:
ΔQ P
ep = × , where,
ΔP Q
ep = Price elasticity of demand
P = Initial price
ΔP = Change in price
Q = Initial quantity demanded
ΔQ = Change in quantity demanded

Given Data:
S.no Price Quantity
1 6 0
2 5 100
3 4 200
4 3 300
5 2 400
6 1 500
7 0 600
From data given we can find that:-
1)
P1=6 Q1=0
P2=5 Q2=100
Now according to formulae:-
( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
( 100−0 )∗6
ep= = ∞
( 6−5 )∗0

2)
P1=5 Q1=100
P2=4 Q2=200
Now according to formulae:-
( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
( 200−100 )∗5
ep= = -5
( 4−5 )∗100
3)
P1=4 Q1=200
P2=3 Q2=300
Now according to formulae:-
( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
( 300−200 )∗4
ep= =-2
( 3−4 )∗200
4)
P1=3 Q1=300
P2=2 Q2=400
Now according to formulae:-
( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
( 400−300 )∗3
ep= = -1
( 2−3 )∗300
5)
P1=2 Q1=400
P2=1 Q2=500
Now according to formulae:-
( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
( 500−400 )∗2
ep= = - 0.5
( 1−2 )∗400
6)
P1=1 Q1=500
P2=0 Q2=600
Now according to formulae:-
( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
( 600−500 )∗1
ep= = - 0.2
( 0−1 )∗500

if ep < 0 then price and demand are inversely related and move in opposing directions, therefore
negative sign can be ignored.

S.no Price Quantity Elasticity(ep )

1 6 0 -
2 5 100 ∞
3 4 200 -5
4 3 300 -2
5 2 400 -1
6 1 500 -0.5
7 0 600 -0.2
Quantity = 0 having price 6 and price=0 having quantity 600 is not valid and not logical. So
by removing these two data we found that:
Initial Price(P1) = 6 Initial Quantity(Q1) = 100
Final Price(P2) = 1 Final Quantity(Q2) = 00

Now according to formulae:-

( Q2−Q1 )∗P1
ep =
( P 2−P 1 )∗Q 1
Overall elasticity by total change in price and quantity is:-
( 500−100 )∗5
ep= = -5
( 1−5 )∗100
ep= -5 , price and demand are inversely related and move in opposing directions, therefore
negative sign can be ignored.
Now, ep>1
Therefore, this is a Relatively elastic demand which means percentage of quantity change is
greater than percentage of price change and change in demand is greater than change in
price.

Total Revenue:
• Total Revenue (TR) of a firm refers to total receipts from the sale of a given quantity of a
commodity.
• Total revenue is calculated by multiplying the quantity of the commodity sold with the
price of the commodity.
Total Revenue = Quantity × Price

Total Revenue Calculations:

1) TR0 = P0 * Q0 = 6*0=0
2) TR1 = P1* Q1 = 5*100=500
3) TR2 = P2* Q2 = 4*200=800
4) TR3 = P3* Q3 = 3*300=900
5) TR4 = P4 * Q4 = 2*400=800
6) TR5 = P5 * Q5 = 1*500=500
 7) TR6 = P6 * Q6 = 0*600=0

Average Revenue:
Average revenue is revenue earned per unit of output. Average revenue can be obtained by
dividing the total revenue by the number of units sold.
Average Revenue = Total Revenue/Quantity

Average Revenue Calculations:-

1) AR0 = TR0/Q0 = 0/0 = not defined
2) AR1 = TR1/Q1 = 500/100 = 5
3) AR2 = TR2/Q2 =800/200 = 4
4) AR3 = TR3/Q3 = 900/300 =3
5) AR4 = TR4/Q4 = 800/400 =2
6) AR5 = TR5/Q5 =500/500 =1
7) AR6 = TR6/Q6 = 0/600 = 0
Marginal Revenue:
Marginal revenue (MR) is the increase in revenue that results from the sale of one additional unit
of output. It is change in total revenue per unit change in quantity.
ΔTR
MR =
ΔQ
Marginal Revenue Calculations:

T R1−T R 0 0−500
1) MR1 = = =5
Q1−Q0 0−100
T R2−T R 1 500−800
2) MR2 = = =3
Q 2−Q 1 100−200
T R3−T R 2 800−900
3) MR3 = = =1
Q3−Q2 200−300
 T R4 −T R3 900−800
4) MR4 = = = -1
Q4 −Q3 300−400
T R5−T R 4 800−500
5) MR5 = = = -3
Q 5−Q 4 400−500
T R6−T R5 500−0
6) MR6 = = = -5
Q6−Q5 500−600

Finally, we get the following table:-

S.no Price Quantity Total Average Marginal Elasticity of Price
Revenue Revenue Revenue

1 6 0 0 - 5 -
2 5 100 500 5 3 ∞
3 4 200 800 4 1 -5
4 3 300 900 3 -1 -2
5 2 400 800 2 -3 -1
6 1 500 500 1 -5 -0.5
7 0 600 0 0 - -0.2

Relation Between AR and MR :-

MR < AR => Monopoly in the market
As we can see from the table, the marginal revenue is lower than the average revenue. Given the
demand for his product, the monopolist can increase his sales by lowering the price and the
marginal revenue also falls.

Q2.Ans.
Introduction – Demand Forcasting

Demand Forcasting: It is a process of predicting the demand for an organisation’s product or

services in a specified period of time in the future.
Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable
judgement of future probabilities of the market events based on scientific background and some
steps need to be followed for demand forcasting.
Steps are as follows:
1.Specifying the objective and be clear with the goals.
2.Determine Time perspective according to the goals wheather it is short-term or long-term
3.Select optimize method for forcasting depending on objectives and goals
4.Analyse the data and Interpret the Outcomes .
Now the Demand Forcasting generally consist of two Techniques as follows:
 Demand Forecasting
Techniques

Quantitative
Qualitative Techniques Techniques

Time Series Barometric Econometric

Smoothing methods methods
Survey Opinion analysis techniques
Methods Polls
Regression
Analysis
Complete
Enumeration
Survey

Sample
Survey

Qualitative and Quantitative Techniques:-

1.Qualitative Technique: It depends upon on the buying behavior of customers from experts or
through conducting surveys in order to forecast demand.These techniques are used to make
short-term forecasts of demand. Qualitative techniques are especially useful in situations when
historical data is not available; for example, introduction of a new product or service. These
techniques are based on experience judgment, intuition etc.
1.1 Survey Methods: These methods depends on future purchase plans of consumers and their
intentions to anticipate demand.
1.1.1 Complete Enumeration Survey : In this method, almost all potential users of the product
are contacted and surveyed about their purchasing plans and based on surveys demand forcast
made.
1.1.2 Sample Survey: In this method a sample of potential customers selected and surveyed. In
this method the demand forcast made by calculating average demand.
1.2 Opinion Polls : Taking the opinion of those who poseses knowledge of market trends, the
commonly used polls are:-
1.2.1 Sales force composite: In this Sales representatives get in touch with consumers and
gather information related to consumer buying behavior and provide estimate of probable
demand.
1.2.2 Delphi Method: In this method the assumptions is circulated to all the experts and each
expert modifies the assumption and the consensus of all the experts on demand forcasts
constitutes the final demand forcast.
1.2.3 Test marketing: This is used by company at the time of launch of new products.if positive
feedback comes from market then company launch the product on large scale.

2.Quantitative Techniques:
Quantitative forecasting methods can be used when there is reason to believe that activity in the
past had a certain trend that can be continued in the future, and when the available information is
sufficient to identify statistically significant trends or relationships
2.1 Time series analysis (Trend projection): It is based on the assumption that what happened
in the past gives a good approximation in assessing the future. This analysis is a method of
identifying patterns and trends from the past and extending them into the future. The more
reliable the assumption about the similarity of the future to the past, the more likely the forecast
accuracy. So time series analysis will be useless in situations with high levels of mobility or
when there has been a significant, well-known change.
There are four components of Trend projection:
2.1.1.Secular trend: It represents the certain conditions due to which the graph of time series
moves in a particular direction with relatively higher or lower value.
2.1.2.Cyclic variations: These are phases that every business faces a economic downturns
during its journey of success.These downturns are prosperity (or peak), recession, depression and
recovery.
2.1.3. Seasonal variations: These are short-term fluctuations that occur within the period of one
year on continuous and repeating basis year after year. These variations may occur in the form of
whether type, rituals and customs, festive seasons, etc. For example, the demand for umbrella
and raincoats significantly increases during rainy seasons.
2.1.4. Irregular variations: These are unpredictable and non-recurring short-term fluctuations
that affect the values of time series. These variations have no regular patterns regarding their
occurrence. For ex:- floods earthquake, famines, war, large strike etc.

3. Smoothing Techniques:
In cases where the time series lacks significant trends,smoothing techniques c can be used for
demand forecasting.smoothing techniques are used to eliminate a random variation from the
historical demand. This helps in identifying demand patterns and demand levels that can be used
to estimate future demand, The most common methods used smoothing techniques of demand
forecasting are simple moving age method and weighted moving age method.

4.Barometric Methods:
The barometric method is used to speculate future trends based on current developments and it is
also known as leading indicators approach to demand forecasting. Under this method, demand
forecasting relevant economic and statistical indicators are formed and these indicators function
as the base of demand forecasting. Barometric methods make use of the following indicators:
4.1 Leading indicators: When already occurred event is used to predict the future event,the past
event act as a leading indiactor.
4.2 Coincidental indicators: indicators which move simultaneously with current event.
4.3 Lagging indicators: These indicators include events that follow a change.

5. Econometric Methods:
Econometric methods make use of statistical tools combined with economic theories to assess
various economic variables (for example, price change, income level of consumers, changes in
economic policies, and so on) for forecasting demand.
An econometric model for demand forecasting could be single equation regression analysis or a
system of simultaneous equations.
Regression Analysis
The regression analysis method for demand forecasting measures the relationship between two
variables. Using regression analysis a relationship is established between the dependent (quantity
demanded) and independent variable (income of the consumer, price of related goods,
advertisements, etc.). For example, regression analysis may be used to establish a relationship
between the income of consumers and their demand for a luxury product.
1.Simple linear regression: This method explains the relationship between single independent
variable with multiple variables. For ex:- relation between quantity demanded and price. Y=a+bx
2.Multiple Linear Regression : This method explains the relationship between more than one
independent variables with one dependent variable.ex:-relation between production of crops and
rainfall,irrigation,labours etc.

Conclusion:
Qualitative and Quantitative methods often complement each other. Qualitative method allows
one to use their judgement and subjective knowledge in forecasting. One can make good use of
qualitative method especially when data are sparse for quantitative analysis.
Quantitative method relies on past data and tries to model a complex and dynamic situation.
Economic and business models can be tested, and policy analysis can be done using a whole
system of equations. Quantitative method tends to explain past behavior well, but forecasting is a
different problem.
Q3.Ans)
INTRODUCTION – Elasticity of Supply

The elasticity of supply is a measure of the degree of change in the quantity supplied of a
product in response to a change in its price.
Mathematically, the elasticity of supply is expressed as:
Percentage change∈quantity supplied of commodity X
es =
Percentage change∈ price of commodity X
change∈quantity (∆ S)
Percentage change in quantity supplied =
Original quantity supplied (S)
Change∈Price( ∆ P)
Percentage change in price =
Original Price(P)
The elasticity of supply can be calculated with the help of the following formula:
∆S ∆ P ∆S P ∆S P
e s= : or e s = × or e s = ×
S P S ∆P ∆P S
Where, ∆S = S1–S and ∆P = P1–P

Q3 a) Ans:
Given Data:
Elasticity of Supply (Es) = 2
Initial Quantity of Supply(S1) = 200 units
Initial Price (P1) of S1 = 8 /unit
Final Quantity of Supply(S2) = 250 units
To find :
Final Price (P2) of S2= ?
Calculations:
∆S P
According to Formulae e s = ×
∆P S
2 = ((S ¿ ¿ 2−S1 )∗P1) /(( P2 −P 1)∗S 1)=((250−200)∗8)/(( P2−8)∗200)¿

2=400/((P 2−8)∗200)∗¿
P2 - 8= 1
P2 = 9 , Therefore Price of 250 units is Rs 9 per unit.
Q3) b. Ans
Mathematically, the elasticity of supply is expressed as:
Percentage change∈quantity supplied of commodity X
es =
Percentage change∈ price of commodity X
change∈quantity (∆ S)
Percentage change in quantity supplied =
Original quantity supplied (S)

Change∈Price( ∆ P)
Percentage change in price =
Original Price(P)
The elasticity of supply can be calculated with the help of the following formula:
 ∆S ∆ P ∆S P ∆S P
e s= : or e s = × or e s = ×
S P S ∆P ∆P S
Where, ∆S = S1–S and ∆P = P1–P

Given Data:
Initial Quantity of Supply(S1) = 300 units
Change in Price (∆P/P1) = 15%
Final Quantity of Supply(S2) = 345 units
To find :
Elasticity of Supply (Es) = ?
Calculations:
∆S P
According to Formulae e s = ×
∆P S
( S 2−S 1 )∗100
∆S/S1= = 4500/300=15%
S1
Es=(∆S/S1)/ (∆P/P1)
Es=15/15
Es=1
As Es=1 Therefore, this concludes it is an Unitary Elasticy of Supply.

REFRENCES

1.) For Diagrams PPT Provided In the portal Of NMIMS.

2.) Business Economics Text Book Written By Pratibha Bagga.