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ASSIGNMENT_1

# ASSIGNMENT_1

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09/09/2013

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MANAGERIAL ECONOMICS
(Assignment set-2)
Page 1 of 9

Ans
. no.1INCOME ELASTICITY OF DEMANDIncome elasticity of demand may be defined as the ratio or proportionatechange in the quantity demanded of a commodity to a given proportionatechange in the income.
In short, it indicates the extent to which demand changeswith a variation in consumers income. The following formula helps to measure Ey.

Percentage change in demandEY = Percentage change in income
∆
D Y 300 4000Symbolically EY ------ X --- ------ X ------- =1.5
∆ Y
D 2000 400Original demand = 400 units Original Income = 400000New demand = 700 units New Income = 600000Generally speaking, Ey is positive. This is because there is a direct relationship betweenincome and
demand, i.e. higher the income; higher would be the demand and
viceversa.On the basis of the numerical value of the coefficient,Ey is classified asgreater than one, less than one, equal to one,equal to zero, and negative. The conceptof Ey helps us in classifying commodities into different categories.1. When Ey is positive, the commodity is normal [used in daytodaylife]2. When Ey is negative, the commodity is inferior. .For example Jowar, beedi etc.3. When Ey is positive and greater than one, the commodity is luxury.4. When Ey is positive, but less than one, the commodity is essential.5. When Ey is zero, the commodity is neutral e.g. salt, match box etc.
Practical application of income elasticity of demand
1.
Helps in determining the rate of growth of the firm.
If the growth rate of the economy and income growth of the people is reasonablyforecasted, in that case it is possible to predict expected increase in the sales of a firmand viceversa
.

2. Helps in the demand forecasting of a firm.
It can be used in estimating future demand provided the rate of increase in income andEy for the products are known. Thus, it helps in demand forecasting activities of a firm.
3. Helps in production planning and marketing

Page 2 of 9
The knowledge of Ey is essential for production planning, formulating marketingstrategy, deciding advertising expenditure and nature of distribution channel etc in thelong run.
4. Helps in ensuring stability in production
Proper estimation of different degrees of income elasticity of demand for different typesof productshelps in avoiding overproductionor under production of a firm. One should also knowwhether rise or fall in come is permanent or temporary.
5. Helps in estimating construction of houses.
The rate of growth in incomes of the people also helps in housing programs in acountry. Thus, it helps a lot in managerial decisions of a firm.End of answer no.1--------------------------------------------------------------------------------------------------------

Ans. no.2Opinion survey method & its effectiveness.
This is a variant of the survey method. This method is also known as
―Sales
force
polling‖ or

―Opinion poll method‖.
Under this method, sales representatives, professionalexperts and the market consultants and others are asked to express theirconsidered opinions about the volume of sales expected in the future
. Thelogic and reasoning behind the method is that these

salesmen and other peopleconnected with the sales department are directly involved in the

marketing and sellingof the products in different regions. Salesmen, being very close to the

customers, willbe
in a position to know and feel the customer‘s reactions towards the product. They

can study the pulse of the people and identify the specific views of the customers.These people are

quite capable of estimating the likely demand for the products withthe help of their intimate and

friendly contact with the customers and their personal judgments based on the past experience.

Thus, they provide approximate, if not accurate estimates. Then, the views of allsalesmen areaggregated to get the overall probable demand for a product.Further, these opinions or estimates collected from the various experts are considered,consolidatedand reviewed by the top executives to eliminate the bias or optimism and

Page 3 of 9
pessimism of different salesmen. These revised estimates are further examined in thelight of factors like proposed change in selling prices, product designs andadvertisement programs, expected changes in the degree of competition, incomedistribution, population etc. The final sales forecast would emerge after these factorshave been taken into account. This method heavily depends on the collective wisdom of salesmen, departmental heads and the top executives.It is simple, less expensive and useful for short run forecasting particularly in case of new products.The main drawback is that it is subjective and depends on the intelligence andawareness of thesalesmen. It cannot be relied upon for long term business planning.End of the answer no.2-----------------------------------------------------------------------------------------------------------

Ans. no.3Forces of Equilibrium between demand and supply pricing determination:
Equilibrium between demand and supply price is obtained by the interaction of thesetwo forces. Price is an independent variable. Demand and supply are dependentvariables. They depend on price. Demand varies inversely with price, a rise in pricecauses a fall in demand and a fall in price causes a rise in demand. Thus the demandcurve will have a downward slope indicating the expansion of demand with a fall inprice and contraction of demand with a rise in price. On the other hand supply variesdirectly with the changes in price, a rise in price causes a rise in supply and a fall inprice causes a fall in supply. Thus the supply curve will have an upward slope.
At apoint where

these two curves intersect with each other the equilibrium priceis established. At this price

quantity demanded equals the quantity supplied.
This we can explain with the help of a table and a diagram*