Business Economics Assignment Nmims

NMIMS Global Access
School for Continuing Education (NGA-SCE)

Course: Business economics
Assignment Answers
Q1.
Answer 1:
When a consumer wants to consume one good more then he or she has to sacrifice
the other good to get the same level of satisfaction. The rate at which he substitutes
one good for the other is called the ‘Marginal Rate of Substitution (MRS)’.
Over the time a consumer consumes different types of goods and realises that one
good can be substituted with another keeping the same satisfactory level. When
these combinations of goods are plotted on graph, the resulting curve formed is
called the indifference curve. One of the basic postulates of indifference curve
analysis is that (MRS) diminishes and is always negative.
Measuring Marginal Rate of Substitution (MRS)

MRS is the rate at which the consumer can substitute one good for another without
changing the level of satisfaction. It indicates the slope of indifference curve.
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 𝑜𝑜𝑜𝑜 𝑌𝑌 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 ∆𝑌𝑌
MRXY = = (-)
𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺 𝑜𝑜𝑜𝑜 𝑋𝑋 𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔 ∆𝑋𝑋
In simple words we can say that MRSXY is the ratio of the amount of Y-good that
must be sacrificed per unit of X-good gained, if the consumer has to remain at the
same level of satisfaction.
Combination X Y Change in X Change in Y MRS

∆𝑿𝑿 ∆𝒀𝒀 - (∆𝒀𝒀⁄∆𝑿𝑿)
A 25 3
B 20 5 -5 2 0.4
C 16 10 -4 5 1.25
D 13 18 -3 8 2.67
E 11 28 -2 10 5
Conclusion:
In the second combination, the consumer is prepared to sacrifice 5 units of X to get 2
units of Y. The marginal rate of substitution of X for Y is 5:2. The rate of substitution
will then be the number of units of X for which one unit of Y is a substitute. As the
consumer proceeds to have additional units of Y, he is willing to give away less and
less units of X so that the marginal rate of substitution increases from 5:2 to 2:10 or
1:5 in the fifth combination.
Q2.
Answer 2:
Total revenue (TR)
The term ‘revenue’ refers to the receipts obtained by a firm from the sale of certain
quantities of a commodity at various prices. It is a form of income that is earned by
the sale of goods or services.
Total revenue is the total income of a producer after selling his given quantity of
commodity. It is also referred to as the total income of the firm. Total revenue is
calculated by multiplying the quantity of the commodity sold with the price of the
commodity. Symbolically,
Total revenue = Quantity x Price
For example: If a seller sells 5 units of commodity at Rs.20/-, Its total revenue is 5 x
20 = Rs.100/-.
Therefore, total revenue is the price per unit multiplied by the no. of unit sold.
i.e., TR = P x Q TR – Total revenue
P – Price per unit
Q – Quantity or no. of units
Marginal Revenue (MR)

Marginal revenue is the change in total revenue when the output or quantity is
increased by one unit. In other words, Marginal Revenue (MR) of a firm refers to the
revenue earned by selling an additional unit of the commodity.
Analysing marginal revenue helps a company identify the revenue generated from
one additional unit of production. A company that is looking to maximize its profits
will produce up to the point where marginal cost equals marginal revenue. When
marginal revenue falls below marginal cost, firms typically do a cost-benefit analysis
and halt production.
For example: Suppose, a company is selling 5 units of commodity at Rs.20/-, its total
revenue is then Rs.100/-. Now it sells one more unit i.e., it sells a total of 6 units at
Rs.20/- per unit. Now the new total revenue is Rs.120/-.
Marginal revenue will be Rs.100/- subtracted from Rs.120/-. That is Rs.20/-
Calculation of Total revenue and Marginal revenue
Price Output (In units) Total revenue Marginal

revenue
20 1 20 -
18 2 36 16
16 3 48 12
14 4 56 8
12 5 60 4
Total revenue = Output x Price

Marginal revenue = Total revenue from n units – Total revenue from (n-1) units.
Q3.
Answer 3:
(3a) Elasticity of demand
Elasticity of demand refers to the percentage change in demand for a commodity
with respect to percentage change in any of the factors affecting demand for that
commodity.
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑓𝑓𝑓𝑓𝑓𝑓 𝑋𝑋
Elasticity of demand = 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑎𝑎 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑡𝑡ℎ𝑒𝑒 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑓𝑓𝑓𝑓𝑓𝑓 𝑋𝑋
Elasticity of demand has three types:
• Price elasticity of demand – Refers to the percentage change in demand for
a commodity with respect to percentage change in the price of the given
commodity.
• Cross elasticity of demand – Refers to the percentage change in demand
for a commodity with respect to percentage change in price of related goods.
• Income elasticity of demand – Refers to the percentage change in demand
for a commodity with respect to percentage change in the income of the
consumer.
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑛𝑛𝑡𝑡𝑡𝑡𝑡𝑡𝑡𝑡 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
Price elasticity demand =
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
∆𝑸𝑸 𝑷𝑷
Ep = x Ep = Price elasticity of demand
∆𝑷𝑷 𝑸𝑸
P = Initial price
Q = Initial quantity demanded
∆ P = Change in price
∆ Q = Change in quantity demanded
Given,
P = Rs.100000
∆ P = Rs.20000 (100000-120000)
Q = 5000 units
∆ Q = 1500 (5000-3500)
Substituting these values in the formula:

1500 100000
Ep = x = 0.0075 x 20
20000 5000
Ep = 1.5
So, the price of elasticity of demand is 1.5

(3b)
Supply is a fundamental economic concept that describes the amount of goods or
services available for consumption by the consumers. While supply can refer to
anything in demand that is sold in a competitive marketplace, supply is most used to
refer to goods, services, or labour.
The supply of a product depends on factors such as price of the product, prices of
factors of production, technology etc. However, these factors are not sufficient.
Organisations needs to measure how much these factors affect the demand and
supply. Elasticity is a measure of how much the quantity demanded or supplied
would be affected by a proportionate change in its determinants.
Elasticity of supply
Elasticity of supply is defined as the responsiveness of the quantity supplied of a
good to a change in its price. The concept of elasticity of supply helps organisations
to estimate the impact of change in the supply of a product with respect to its price.
In other words, 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.
It is a parallel concept to elasticity of demand. It refers to the sensitiveness or
responsiveness of supply to a given change in price. In short, it measures the degree
of adjustability of supply to a given change in price of a product. The formula to
calculate elasticity of supply is as follows:
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑋𝑋

Es =
𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐ℎ𝑎𝑎𝑛𝑛𝑛𝑛𝑛𝑛 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑜𝑜𝑜𝑜 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝑋𝑋
𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 (∆𝑆𝑆)

Percentage change in quantity supplied =
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠 (𝑆𝑆)
∆𝑆𝑆 𝑃𝑃 ∆𝑆𝑆 𝑃𝑃
Es = x = x
𝑆𝑆 ∆𝑃𝑃 ∆𝑃𝑃 𝑆𝑆
Where,
∆S = S1 – S
∆P = P1 – P
For example: Suppose a business has supplied 500 units at the price of Rs.5000/-.
The firm has decided to increase the price of the product to Rs.6000/-.
Consequently, the supply of the product increased to 600 units.
Here, P = Rs. 5000/-
∆P = Rs. 1000/-
S = 500 units
∆S = 100 units
Now,
∆𝑆𝑆 𝑃𝑃 100 5000
Es = x = x
∆𝑃𝑃 𝑆𝑆 1000 500
Es = 1

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NMIMS Global Access

School for Continuing Education (NGA-SCE)

Measuring Marginal Rate of Substitution (MRS)

Combination X Y Change in X Change in Y MRS

Marginal Revenue (MR)

Calculation of Total revenue and Marginal revenue

Price Output (In units) Total revenue Marginal

Total revenue = Output x Price

Substituting these values in the formula:

So, the price of elasticity of demand is 1.5

𝐶𝐶ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 (∆𝑆𝑆)

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