Quantity Total Total Fixed Total Variable Total Cost Average Cost Marginal Cost

(Q) Cost Cost (SRTC=TFC+TVC (SRAC=TC/Q) (SRMC= TC/

(TFC) (TVC) ) Q

25 10 18 28 1.12 -

26 10 20 30 1.15 2

27 10 21 31 1.14 1

2. “Determinant of demand are the important factor which influences the

decision of the consumers to purchase commodity or a service” With respect to
the above statement discuss any 5 determinants of the individual demand.
Answer:
Determinants of Individual demand of a commodity
 Price of a commodity-The price of a commodity or service is inversely proportional to the
quantity demanded, while other factors remain constant. This implies that when the price of a
commodity rises the demand decreases and vice versa.
 Income of Consumers-The level of income of a consumer determines the purchasing power of
the consumer, hence stating that the income of a person is directly proportional to the
demand of a commodity or service. This implies that when there is a rise in the income the
demand of commodities also increases.
 Price of related Goods-Demand not only depends on the price of the item but also depends on
the price of related goods. Two items are said to be related if the price of one affects the
demand of the other item. These goods can be categorized as 1. Substitute goods and 2.
Complementary goods.
 Taste and preference of consumers-The demand also changes with a change in the taste and
preference of a consumer. These preferences could be based on culture, traditions, beliefs,
customs and the lifestyle of the consumer. For example, there is less demand for western
clothes in rural parts of the country compared to the demand for Indian clothes especially the
villages.
 Credit Policy-The credit policy implemented by the banks or suppliers also effects the demand
of commodities. Depending on the credit policy consumer decide whether they are going to
purchase a particular product or not. There are some luxurious or expensive commodities
which consumers only decide to purchase when they are getting a good credit policy. The
most used example is any kind of loan that the bank gives. Consumers think about purchasing
some commodities which they would not think about if a loan was not available.
3 a. Suppose the monthly income of an individual increases from Rs. 10,000 to
Rs. 15,000 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 can be interpreted as

Ey =percentage change in quantity demanded

Percentage change in income

Where ,
Percentage change in quantity demanded
=New quantity demanded –Original quantity demand( Q)
Original quantity demand(Q)

Where ,
Percentage change in income
=New original income-Original income( Y)
Original Income(Y)

Thus, Elasticity of demand=( Q) (Y)

( Y) (Q)

Where,
Q=Original quantity demanded
Qı=Change in quantity
Q= Qı-Q
Y=Original income
Yı=Change in income
Y= Yı-Y
Y=10,000 Y=5,000 Q=20 Q=5
Yı=15,000 Qı=25

Ey=ΔQ х Y
ΔY Q
= 5 х 10,000
5000 20
= 1
2
=0.5(<1)…..(Ans)

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

Answer:

Cross elastictity of demand

Cross Elasticity of demand can be interpreted as

=Percentage change in quantity demanded of Product X
Percentage change in price of Y

Mathematically,
Ec=ΔQX х PY
ΔPY QX

QX=Original quantity demanded of product X

ΔQX=Change in quantity demanded of product X
PY=Original price of product Y
ΔPY=Change in price of product Y

X=Tea Y=Coffee
QX=100 PY=40
ΔQX=60(160-100) ΔPY=10(50-40)

Ec= ΔQX х PY
ΔPY QX
=60 х 40
10 100
=24
10
=2.4…..(Ans)