Assignment#1

Managerial Economics

By: Akshat Bansal

Question 1. Companies often change color, package, design, and advertisements
for their products. Is it because the companies wish to counter the impact of
diminishing marginal utility? Explain with suitable examples that you may have
witnessed, heard, or read. Explain the law of Diminishing Marginal Utility.

Answer:

Marginal utility is the utility experienced by consumption of one additional unit of

the good or service as every individual is continuously consuming a particular good
or service, each additional unit of consumption will give lesser utility compare to
consumption of the previous one where other factor will be constant is known
as the law of diminishing marginal utility. For example, buying the first car for a
person gives us more utility, but buying the second car may not excite an individual
in the same way. The utility experienced by buying the first car is always more
than buying a second or third or hundred cars. The more units we buy, the less
utility we will experience.

For Example:

Companies around the world are working toward changing or upgrading their
products time to time. Ford Motors launched the product named Mustang in 1965,
even after more than 50 years, Ford motors is still selling their most likable
product mustang. However, the product Mustang in 2021 is vastly different from
the mustang launched in 1965. In 2021 the Mustang is equipped with latest
technology, safety measures and features which are not available in 1965. 2021
Mustang comes with Airbags, ABS, EBD, Power windows, LEDs, DRLs, Air
conditioner, more refined and powerful engine and so on.
Another recent example is Tropicana juice that undergoes the rebranding process
and we witnessed the change in packaging of the product. However, the tropicana
change in packaging design failed miserably and goes against the company’s
expectation. Instead of increase in sale, it resulted in decrease of sale as the
utility experienced by buying first product is much more than buying the first
product after change in packaging. Hence, the marginal unitality kept on decreasing
resulted into failed strategy of repackaging.
Question 2. Any change in product price done by the company will require the
company to assess the impact on its quantity demanded. Competitor price changes
can also influence the demand of the product of the respondent company. This is
because of cross-price elasticity. A change in our income tends to make us less
price sensitive. Explain the concept of Elasticity - own price elasticity, cross-
price elasticity, and Income elasticity with help of suitable examples.

Answer:

Own price elasticity of demand is characterized as a proportionate change in the

amount requested/demanded to a change in value/price, keeping any remaining
demand determinants consistent.

Numerically Own price elasticity of demand at a point can be composed as

Ep=(△Q/Q)/(△P/P)=P/Q*(△Q/△P)=% of △Q/% of △P
As we are ascertaining the rate change in amount against rate change in the cost
of a specific item, we will call it as own price elasticity of demand.

Ep=%△Q/%△P >1, implies a little change in cost influence the significant change in
the amount of an item, henceforth it is known as the specific item is elastic in
nature.

In the event that Ep=%△Q/%△P <1, implies a significant change in cost influence
the little change in the amount of a item, subsequently it is known as the specific
item is inelastic in nature.

For Example: When a particular product has lot of substitutes. If the price of
formal shirt of Luiss Phillips increase, the demand will decrease and it will increase
the demand of Blackberry or similar brand formal shirt. At same situation the
demand of Luiss Phillips formal shirt decreases. Hence, the product is highly
elastic.

Income Elasticity of Demand:

Income Elasticity of demand is characterized as proportionate change in the

amount demanded to a

change in income, keeping any remaining demand determinants consistent.

Numerically income elasticity of demand at a point can be composed as

EI=(△Q/Q)/(△Y/Y) =Y/Q*(△Q/△Y) =% of △Q/% of △Y

For example: As the income increases, the more people tend to buy personal vehicle
particularly in India.
Cross Price Elasticity of Demand:

It is a proportion of the responsiveness of the demand for an item to the change

of the price of another item, could be a substitute or free item

The cross-price elasticity of demand at a point is determined as

Exy= (△Qx/Qx)/(△Py/Py)=Py/Qx*(△Qx/△Py)

For Substitute items, the cross-price elasticity of demand of item is high, since
the price of one item builds their substitute item demand increments.

For example: Drastic change in increase in the price of Toyota Fortuner will result
in increase the demand of competitive products such as Ford Endeavour.

Question 3. Let’s assume you are planning to buy a new car. Explain the demand
determinants. Which of the demand determinant will have higher weightage and
why?

Answer:

The factors taken into account when purchasing a product or factors which will
have direct impact on the demand of a product are known as demand determinants.

Below are few demand determinants while purchasing a new car:

1. Safety
2. Features
3. Good design
4. Distribution network
5. Comfort
6. Reliability
7. Price of product
8. Finance option
9. Ease of Driving
 The above highlighted features are demand determinants if I go to buy Tata
Tiago Car. The below is the list of top 4 demand determinants to go for
TATA Tiago in hatchback car segment.
1. Safety: Tata Tiago is GNCAP 4* rated car and one of the safest car in
the segment.
2. Distribution Network: Tata Motors is present is every district of the
country whereas other automobile manufacturers such as Skoda, VW
aren’t.
3. Ease of Driving: Compact size and AMT/Automatic transmission option
are must for me to buy a new car.
4. Price of Product: Tata Tiago falls into right price range considering the
satisfaction of other demand determinants.

Question 4. Assume food delivery firms like Swiggy are making huge profits.
Higher profits may attract the entry of new firms into the food delivery industry.
Explain what could be the impact of entry on the firms and the industry as a
whole.  

 The average cost of rendering the delivery service for the existing players 
 Price/commissions that they charge from their customers 
 Profitability 
 How would the break-even point impact due to entry of new firms? 

Answer:

Swiggy entered the Indian app-based food delivery market and is making huge
profits. It can be assumed that Swiggy has no competition or less competition in
the industry. The number of customers is the same and as the competitor enters
the market, the new competitor says Zomato will capture few customers of Swiggy.
Till Swiggy had no competitor, Swiggy enjoys the profit as the operating profit is
more than the average cost. As long as marginal cost is equal to their marginal
revenue, Swiggy continues to make a profit.

1. As the industry is making huge profits, it will attract more competitors

and it will be a perfect competitor market situation. Due to more
competition, the companies will offer discounts and invest more to
 capture more customers. Hence, the average cost of rendering the
delivery service for the existing players will increase.
2. The price/commission that they charge from their customers will
eventually decrease. In a situation, if Swiggy is the only player in the
market, Swiggy can charge any price. Once competitors enter the market,
to capture/hold the market share, Swiggy will charge a competitive
price/commission as of new player.
3. Profitability will decrease if given the situation that the demand remains
the same despite entering new players into the market. Some customers
will shift from Swiggy to the new player and the profitability of Swiggy
will decrease.
4. Break Even Point
Total Revenue = Total Cost
P*Q = TFC+TVC = TFC+AVC*Q
Q(P-AVC) =TFC 0r Q = TFC/(P-AVC)
Due to more number of competitors in the industry, the profitability will
decrease. Hence, the break-even point will extend or comes at a later
stage due to more competition in the industry.