BUSINESS ECONOMICS

(23MBACC101)

Dr. Xavier V K
 Course Outcome
Sl. Course Description Bloom’s
No. Outcome Taxonomy Level
1. CO1 Explain the concepts and theories of Understand (2)
demand and supply.
2. CO2 Implement the production, cost, and Apply (3)
revenue function in profit making of the
business
3. CO3 Differentiate competitive market structures Analyse (4)
for the price-output determination.

4. CO4 Examine macroeconomic concepts of Analyse (4)

National income, inflation, exchange rate,
and the business cycle.
5. CO5 Appraise the international trade theories Evaluate (5)
from the global business perspective.
 Assessment Scheme (CA: UE - 50: 50)
Sl. Assessment Details Formative Frequency Weightag CO
No. / e
Summativ
e
1 Class Participation Formative Continuous 10% CO1, CO2, CO3,
BP Session 3, Workshop, CO4 and CO5
Swayam/LinkedIn course,
MCQ Test
2 Group Assignment: Formative 1 10% CO1, CO2, CO3,
Case study analysis. Submit CO4 and CO5
an individual report.
3 Group Assignment: War Formative 1 10% CO2, CO3, CO4
Game: Learners have to and CO5
identify the companies based
on different market
structures and understand
and analyse their
competition, Break-even
analysis, the implications of
Managerial economics on
their business decisions and
 Assessment Scheme (CA: UE - 50: 50)

Sl. Assessment Details Formative / Frequency Weightag CO

No. Summative e

4 Individual Assignment: Formative 1 10% CO1, CO2,

Individual contribution CO3, CO4 and
on CO5
Research Paper
Publication
5 Block End Test (BET) Summative 1 10% CO1, CO2 and
CO3
5 End Semester Summative 1 50% CO1, CO2,
Examination (UE) CO3, CO4 and
CO5
 Module-1
Demand & Supply
Analysis
 DEMAND ANALYSIS

• Demand is an effective desire, as it is backed by a willingness

to pay and the ability to pay.

Demand = Desire + Ability to pay + Willingness to pay

• The demand for a product refers to the amount of it which

will be bought per unit of time at a particular price.
TYPES OF DEMAND
 Individual Demand
Amul’s Demand: Ice Cream Cones

Price/cones Daily quantity

_________________________________
Rs10.00 12
Rs15.00 10
Rs20.00 8
Rs25.00 6
Rs30.00 4
 Market Demand
• Market demand is the sum of all individual demands at each
possible price.
• Assume the ice cream market has two buyers as follows:

Price Per Cone Amul Vadilal Market Demand

Rs10.00 12 + 7 = 19
Rs15.00 10 + 6 = 16
Rs20.00 8 + 5 = 13
Rs25.00 6 + 4 = 10
Rs30.00 4 + 3 = 7
Change Advertise Climate
Distribution Inventions and
in ment and
of Income and weather
populati Salesman
and Wealth Innovation conditions
on ship
 LAW OF DEMAND
• It explains the inverse relationship between price and
quantity demanded assuming all other factors affecting
demand remain constant.
• When the price of a good falls, the demand for the good rises,
and when the price rises, the demand falls.

• Statement of the law of demand:- “Ceteris paribus, the

higher the price of a commodity, the smaller is the quantity
demanded, and the lower the price, the larger the quantity
demanded”.
 DEMAND SCHEDULE
• The law of demand can be illustrated with the help of a demand
schedule.

Quantity
Price of
demanded of
Commodity 'X'
commodity 'X‘
Px
Dx

5 100
4 200
3 300
2 400
1 500
 ASSUMPTION OF LAW OF
DEMAND
No change in taste, habits,
preferences No change in taxation
No change in the income
level: No introduction of new
product
No change in population
No change in technology
No change in prices of
related goods No change in weather
No expectation of future conditions
change in the price
EXCEPTIONS TO THE LAW OF
DEMAND
Prestigious
goods/Veblen Effect Change in Fashion
Giffen goods
Demonstration effect
Ignorance
Snob effect
Speculative goods

Seasonal goods
Conspicuous Necessities
ELASTICITY
 ELASTICITY OF DEMAND
• According to Alfred Marshall: "Elasticity of
demand may be defined as the percentage change
in quantity demanded to the percentage change in
price.“ Type of
Elasticity of
Demand
 1. PRICE ELASTICITY OF DEMAND
• Price elasticity can be defined as the proportionate change in
demand for a product in response to the proportionate change in
the price of that product.
• Ep = % change in Qty demanded of X
% change in the price of X
• Price Elasticity of Demand = Percentage Change in Quantity
(∆q/q) / Percentage Change in Price (∆p/p)
• Further, the equation for price elasticity of demand can be
elaborated into

• Where Q0 = Initial quantity, Q1 = Final quantity, P0 = Initial price

and P1 = Final price
 NUMERICAL
1. The price of petrol surged to 60 % due to inflation and that
decreased the demand to 15 %. Calculate the Price Elasticity
of Demand.
2. Calculate the price elasticity of demand if the quantity
demanded of a commodity rises by 20% due to an 8% fall in
its price.
 SOLUTION
1. The price of petrol surged to 60 % due to inflation and that
decreased the demand to 15 %. Calculate the Price Elasticity of
Demand.
• Price Elasticity of Demand = Percentage change in quantity /
Percentage change in price
• Price Elasticity of Demand = -15% ÷ 60%
• Price Elasticity of Demand = -1/4 or -0.25

2. Price elasticity of demand = Percentage change in quantity

demanded/ Percentage change in the price of the commodity
= 20/-8 = (–) 2.5
 NUMERICAL
3. When the price of a commodity is Rs 10 per unit, its demand is
100 units. When the price falls to Rs 8 per unit, demand expands
to 150 units. Calculate the price elasticity of demand

4. Price elasticity of demand of a commodity is (–) 2. A consumer

demands 50 units of this commodity when its price is Rs 10 per
unit. At what price he will demand 40 units of this commodity?
 SOLUTION
3. When the price of a commodity is Rs. 10 per unit, its demand
is 100 units. When the price falls to Rs. 8 per unit, demand
expands to 150 units. Calculate the price elasticity of demand
 SOLUTION
3. When the price of a commodity is Rs. 10 per unit, its demand
is 100 units. When the price falls to Rs. 8 per unit, demand
expands to 150 units. Calculate the price elasticity of demand
DEGREES OF PRICE ELASTICITY OF
DEMAND
1. PERFECTLY ELASTIC DEMAND
The demand for the commodity is Ed =∞
called perfectly elastic when its
demand expands or contracts to
any extent without or very little
change in its price
2. PERFECTLY INELASTIC DEMAND
The demand for a commodity is
called perfectly inelastic when the
(Ed =0)
quantity demanded does not
change at all in response to a
change in its prices.
3. UNIT ELASTIC DEMAND
When the percentage change in
quantity demanded of a commodity
equals the percentage change in its (Ed =1)
price, the demand for the commodity is
called unit elastic. Graphically, the
demand curve is a rectangular
hyperbola.
4. RELATIVELY ELASTIC DEMAND
When the percentage change in
quantity demanded of a
commodity is more than the
percentage change in its price,
the demand for the commodity is
called more than unit elastic or
highly elastic.
(Ed >1)
Example-Luxury goods, like TVs
and designer brands.
5. RELATIVELY INELASTIC DEMAND is
one when the percentage change
produced in demand is less than the
(Ed < 1)
percentage change in the price of a
product.
The demand for necessary goods like
medicines and food items etc. is less
than unit elastic.
 INCOME ELASTICITY OF DEMAND
• The income elasticity of demand is the percentage change in
quantity demanded divided by the percentage change in
income
• ey = Proportionate change in quantity demanded/Proportionate
change in income.
• Income elasticity may be positive or negative.
DEGREES OF INCOME ELASTICITY OF DEMAND
• Positive Income Elasticity: A good that has positive income
elasticity is regarded as a normal good. A normal good is one
that a consumer buys in more quantities when his income
increases. Ex: Clothes, fruits, jewelry, etc.
 DEGREES OF INCOME ELASTICITY
OF DEMAND
• Zero Income Elasticity: Zero income elasticity implies that there
is no change in the demand for a commodity when there is a
change in income. Such goods are called neutral goods. Ex:
matchbox, salt, needles, postcard, etc.
• Negative Income Elasticity: A good that has a negative income
elasticity of demand is regarded as an inferior good. i.e. The
consumer buys less of such a good when his income increases
and the consumer would switch over consumption to the
superior quality of good with an increase in income. Ex: Poor
quality of food, clothes etc.
EXAMPLE OF INCOME ELASTICITY OF
DEMAND
Suppose, the income of a buyer rises by 10% and his demand for a
commodity rises by 20%.

ey = Proportionate change in quantity demanded/Proportionate change in

income.
= 20/10= 2
 CROSS ELASTICITY OF DEMAND
• Cross elasticity of demand means the degree of
responsiveness of demand for a commodity to the change in
the price of its related goods (substitute goods or
complementary goods).
• Suppose, demand for commodity A rises by 10% due to a 5%
rise in the price of its substitute good B, then Cross elasticity
of demand (ec) =
Cross elasticity of demand​=​ %change in quantity demanded of A
​ %change in the price of good B
= 10/5
=2
 TYPES OF CROSS ELASTICITY OF
DEMAND
•Positive • Zero • Negative
No relation Complementary
Substitutes
 PROMOTIONAL ELASTICITY OF
DEMAND
It refers to the extent of change in Qty. demanded of a product
due to the change in its advertisement expenditure keeping
other factors constant.
EA = % change in Qty dd ÷ % change in Advertisement Expdr.

= ΔQx Δ PA
Qx PA

= ΔQx PA
Δ PA Qx
MEASUREMENT OF PRICE
ELASTICITY OF DEMAND
 1. PERCENTAGE METHOD
• This method is also called the ‘proportionate method’ or flux
method. According to this method price elasticity of demand
is measured as a ratio of the percentage change in quantity
demanded to the percentage change in price of the
commodity.
Percentage Method
 Numerical practice

1. Let us measure elasticity by moving in the reverse direction.

Suppose the price of A rises from Rs. 3 per kg. to Rs. 5 per kg.
and the quantity demanded falls from 30 kgs. to 10 kgs. Ep =?

2. P1 =Rs. 100 Q1 = 1000 units

P2 = Rs. 150 Q2 = 500 units find Ep.

3. When the price of a commodity was Rs. 10 per unit, its

demand in the market was 50 units per day. When the price of the
commodity fell to Rs. 8, the demand rose to 60 units. Ep=?
 2. TOTAL EXPENDITURE METHOD
The responsiveness of demand in relation to change in price i.e.
price elasticity of demand determines the change in expenditure.
(i) Elasticity is less than one (ed <1): When the demand for a
commodity is less than unit elastic, a fall in price leads to a fall in
total expenditure, and a rise in price leads to a rise in total
expenditure on the commodity. (Price of the commodity and total
expenditure move in the same direction).
 TOTAL EXPENDITURE METHOD
• (ii) Elasticity is more than one (ed <1): When the demand for a
commodity is more than unit elastic, a fall in price leads to a rise
in total expenditure, and a rise in price leads to a fall in total
expenditure on the commodity. (Price of the commodity and
total expenditure move in opposite directions).
 TOTAL EXPENDITURE METHOD
• (iii) Elasticity is equal to one (ed =1): When the demand for a
commodity is unit elastic, total expenditure incurred on the
commodity does not change with the change in its price.
TOTAL EXPENDITURE METHOD
Diagrammatical representation
 3. POINT METHOD
• This method also known as the ‘Geometric method’ is used
to measure the elasticity at a point on the straight-line
demand curve.
• The elasticity of demand is different at different points on
the same straight-line demand curve.
• According to the geometric method, the elasticity of
demand at any point of a straight-line demand curve is
measured as a ratio of the lower segment of the demand
curve and the upper segment of the demand curve.
• Let us consider a straight line demand curve AB at which
elasticity of demand is to be measured at point C, D, M, N,
and P.
M is the mid-point of the demand curve AB.

Point N is below point M so NP is less than

NC and elasticity will be less than one.
 Here, lower segment is 0

Point D is above point M. So, DP is

more than DC. Elasticity at this
point will be more than one.
The elasticity at the mid-point of a straight-
line demand curve will be 1, the elasticity at
every point below the mid-point will be less The upper segment is 0
than one, and the elasticity at every point
above the mid-point will be greater than one.
 4. ARC METHOD
Prof. Baumol defines, “Arc elasticity is a measure of the average
responsiveness to price change exhibited by a demand curve over
some finite stretch of the curve.”
•Arc elasticity of demand measures elasticity between two points on
a curve – using a mid-point between the two curves.
•To calculate the arc elasticity of demand we first take the midpoint
in between.
•
ARC METHOD
•The mid point of Q = (80+88)/2 = 84
•The mid-point of P =(10+14)/2 =12

•% change in Q = 88-80/84 = -0.09524

•% change in price = (14-10)/12 = 0.3333
•PED = -0.09524 /0.3333 = -0.28571
OR
Q1-Q0/Q1+ Q0/2 = [(80-88)/(80+88)]/2
P1-P0/P1+P0/2 [(14-10)/(14+10)]/2
= -0.09524 = -0.28571
0.3333
 NUMERICAL ARC METHOD

6. Calculate the PED using the ARC method for the following:
•The price of a product decreases from $7 to $6. As a result, the
quantity demanded increases from 18 to 20 units.
 DEMAND FORECAST
• Anticipation of demand implies demand forecasting.
• Demand forecasting refers to the estimation or projection of
future demand for goods and services.
• Demand forecasting is the scientific and analytical estimation of
demand for a product or service for a particular period.
• Demand forecasting is a process of determining what products
are needed, where, when, and in what quantities – Customer-
focused activity
• The process of demand estimation/forecasting can be broken
into two parts i.e. analysis of the past conditions and analysis of
current conditions concerning a probable future trend.
• It helps in estimating the most likely demand for a good or
service under given business conditions.
 FEATURES OF DEMAND FORECAST
• Demand Forecasting is a process to investigate and measure the
forces that determine sales for existing and new products.
• It is an estimation of the most likely future demand for a product
under given business conditions.
• It is an educated and well-thought-out guesswork in terms of specific
quantities
• Demand Forecasting is done in an uncertain business environment.
• Demand Forecasting is done for a specific period (i.e. the sufficient
time required to take a decision and put it into action).
• It is based on historical and present information and data.
• It tells us only the approximate expected future demand for a
product based on certain assumptions and cannot be 100% precise.
STEPS IN DEMAND FORECASTING
Specifying the Objective

Determining the time

perspective

Making choice of method

of DF
Collection of Data and
Data adjustment
Estimation and
Interpretation of results
 OPINION POLLING METHOD
1. Consumer Survey Methods
 Survey methods help us in obtaining information about
the future purchase plans of potential buyers by collecting
the opinions of experts or by interviewing the consumers.
 These methods are extensively used in the short run and
estimate the demand for new products.
 There are different approaches to survey methods. They
are –
 Consumer interview method
 Survey of buyer’s intentions or preferences:
 Direct Interview Method:
 Complete enumeration method
Consumers interview method
 Under this method, efforts are made to collect the relevant
information directly from the consumers with regard to their
future purchase plans.
 In order to gather information from consumers, a number of
alternative techniques are developed from time to time.-
Survey of buyer’s intentions or preferences:
 Under this method, consumer-buyers are requested to indicate
their preferences and willingness about particular products.
 They are asked to reveal their ‘future purchase plans with
respect to specific items.
Direct Interview Method:
 Under this method, customers are directly contacted and
interviewed. Direct and simple questions are asked to them.
Complete enumeration method:
 Under this method, all potential customers are interviewed in a
particular city or a region
 OPINION POLLING METHOD
(Cont.)
2. Sales Force Opinion Method:
 This is also known as the collective opinion method. In this method,
instead of consumers, the opinion of the salesmen is sought.
 It is sometimes referred to as the “grassroots approach” as it is a
bottom-up method that requires each salesperson in the company
to make an individual forecast for his or her particular sales territory.
 These individual forecasts are discussed and agreed upon with the
sales manager.
 The advantages of this method are that it is easy and cheap.
 It does not involve any elaborate statistical treatment.
 The main merit of this method lies in the collective wisdom of
salesmen. This method is more useful in forecasting sales of new
products.
 OPINION POLLING METHOD
(Cont.)
3. Expert Opinion Polling Method
 Apart from salesmen and consumers, distributors, the
outside expert’s opinion may also be used for forecasting.
 Under this method, the salesmen have to report to the
head office their estimates of expectations of sales in their
territories.
 Such information can also be obtained from retailers and
wholesalers by the company.
 In fact, an expert opinion poll is a very much popularized
method of demand forecasting in advanced countries.
 Delphi method is an expert opinion method.
• Delphi Method
 Delphi method of demand forecasting is an extension of
the expert opinion poll method. Olaf Helmer originated
the Delphi method in the late 1940s.
 The Delphi method requires a panel of experts or a group
of experts, who are interrogated through a sequence of
questionnaires in which the responses to one
questionnaire are used to produce the next questionnaire.
 Under this method, a group of experts have been
repeatedly questioned for their opinion/comments on
some issues & their agreements & disagreements are
clearly identified.
 It is a highly sophisticated statistical method and It is a
time-saving device
 STATISTICAL METHOD
 Statistical method is used for long run forecasting. Statistical &
mathematical techniques are used to forecast demand.

 Statistical methods have been used to explain time-series & cross-

section data for estimating long-term demand.

 Statistical methods are considered to be superior techniques of

demand estimation for the following reasons
1. In the statistical methods, the element of subjectivity (biased) is
minimum
2. It is based on the theoretical relationship between the
dependent and independent variables
3. Estimates are relatively more reliable
4. Estimation involves smaller cost
 STATISTICAL METHOD
1. Trend Projection Method:
 Many forecasting techniques can help predict future
demand for a product. Trend projection is a technique that
uses data from past trends to project future markets. They
are instrumental in retail settings because they allow
retailers and consumers to plan for upcoming seasons.

 The trend can be estimated by using any one of the

following methods:
a. The Graphical Method,
b. The Least Square Method
 STATISTICAL METHOD
2. Barometric Technique: This method is based on the notion
that “the future can be predicted from certain happenings in
the present.”
 In other words, barometric techniques are based on the
idea that certain events of the present can be used to
predict the direction of change in the future.
3. Regression Analysis: It attempts to assess the relationship
between at least two variables (one or more independent
and one dependent), the purpose being to predict the value
of the dependent variable from the specific value of the
independent variable.
4. Econometric Models: Econometric models are an extension
of the regression technique whereby a system of independ­
ent regression equations is solved.
 SUPPLY ANALYSIS
• In economics, supply means the amount of that commodity
that producers are able to and willing to offer for sale at a
given price.

• Supply analysis is related to the behavior of the producer.

• In the ordinary language supply means the stock of goods &

services in existence.

• One important point worth noting is that supply is related to

scarcity. This means that it is only the scarce goods which
have a supply price.
 FACTORS DETERMINING SUPPLY
• The cost of production
• Weather condition
• Price of related commodities
• The prices of factors production – land, labour & capital
• The goal of producers – profit
• Government policies
• The state of technology – capital-intensive or labour intensive
Supply Function: It refers to the functional relationship between
the Supply & its determinants.

Sx = f (Px,Pyz..,C,T,…)
Simplified S f: Sx = f ( Px)
 THE LAW OF SUPPLY
 The Law of supply explains the relationship between the price
of a commodity and its quantity supplied.

 Other things remaining the same, as the price of a commodity

rise, its supply increases, and as the price falls, its supply
declines.

 Price and supply are directly related. A rise in price induces

producers to supply more quantity of the commodity and a
fall in prices, makes them reduce the supply.

 Thus the quantity offered for sale varies directly with price
i.e., the higher the price, the larger the supply, and vice-versa.
 ASSUMPTIONS OF THE LAW

• The number of firms in the market remains the same.

• The scale of production does not change.
• Market prices of related goods remain constant over a period
of time.
• The cost of Production does not change.
• Climatic conditions remain the same.
• The taste and preferences of consumers remain constant.
• Government policies such as taxation policy, trade policy
remains the same.
• No changes in transport costs
 Y S

4
Prices

O 300 60 900 1,200 X

0
Quantities of Supplied
 INDIVIDUAL SUPPLY SCHEDULE

Prices (per kgs) in Rs Quantities of supplied

4 300
6 400
8 500
10 600
12 700
14 900
 MARKET SUPPLY SCHEDULE OF
PRODUCT
Commodity is identical
Price ( in Rs.) Aggregate of A,
A Firm B Firm C Firm
B, and C

4 300 100 50 450

6 400 200 200 800
8 500 400 300 1200
10 600 500 400 1500
12 700 600 500 1800
14 900 800 750 2450
 MARKET EQUILIBRIUM
• Market equilibrium refers to the stage where the quantity
demanded for a product is equal to the quantity supplied for
the product.

• The price when the quantity demanded is equal to the

quantity supplied for the product is known as the equilibrium
price.

• The equilibrium price is that price at which the quantity

demanded is equal to the quantity supplied at a given price –
both buyers and sellers are satisfied
 EQUILIBRIUM BETWEEN
DEMAND AND SUPPLY
Price of Pressure on
commodities Demand Supply price
(price of Rice)
5 12 01
10 10 02 Excess Demand
15 08 04
20 06 06 Equilibrium
25 04 08
30 02 10 Excess Supply
35 01 12
 Y
D
S

Excess Supply

D1 S1
P1

P E

Excess Demand
Price

P2 S2 D2

D
S

O X
Demand & Supply

Graphical representation of equilibrium of demand and supply

If demand > supply there will be a shortage
If demand < there will be surplus