ASSIGNMENT-1 MANAGERIAL ECONOMICS

VIDHARSHANA.E

Question 1. Companies often change colour, 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.

Marginal utility is the utility experienced by consumption of one additional unit of the
good or service when compared to the previous one.
The law of diminishing marginal utility means the marginal utility from usage of
each additional unit declines as consumption of that good or service increases. The
marginal utility can decline into negative utility, as it may become entirely unfavorable to
consume another unit of any product.
Example:consumption of chocolate gives us more utility, but after having 3-4 pieces
of chocolate, we may not enjoy the same way of having initial 3 piece consumption
though total utility is more but marginal utility will reduce.

MARGINA
NO OF L
CHOCOLATE
PIECES UTILITY UTILITY
0 0 0
1 15 15
2 20 5
3 23 3
4 25 0
5 22 -3
6 18 -4
7 15 -3
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With the above table and graph shows that, having 1st piece of chocolate gives 15 utils of
marginal utility and 2nd gives marginal utility of 5 utils and go on it is reducing, from 5th
onwards it’s started giving –ve marginal utility and hence total utility curve starts
declining.To counter the impact of diminishing marginal utility, companies often change
colour, package,design and advertisements for their products to increase the sales.

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.

CONCEPT OF ELASTICITY
Elasticity means the change in the measure/percentage of price of a goods/service will
determine the percentage change of demand of that goods/service.If the price of the
product is higher or lower then there will be a huge impact on the demand this means the
product has higher elasticity.

This may vary with different aspects with other aspects being constant .Based on the
factors there are 3 types of elasticity

OWN PRICE ELASTICITY

When a change in percentage of price of its own product has impact on its quantity of
demand then it is called own price elasticity
Example: When the price of TV decreases a period after its new launch then the demand
will be high for the TV while during launch time the demand is lower due to higher price.

ELASTICITY=P/Q*((Q2-Q1)/(P2-P1))
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PRICE Demand Elasticity

40000 0 NOT DEFINED
38000 100 -12.7
35000 200 -2.5
28000 300 -4.7
26000 400 -3.3
24000 500 -1.2
20000 600 1.0
Here the elasticity is high when E>-1 with the decrease in the price and increase in
demand .

CROSS PRICE ELASTICITY

When a percentage change of its substitute products changes the quantity of demand of
other product then it is called cross price elasticity
For substitutes the E>0 where demand of a product increases with the increase in price of
its substitute
For complement the E<0 where demand of a product decreases with the its complement
goods
Example:When sunsilk and pantene are shampoo competitors the price increase of
pantene will lead to increase in demand for sunsilk.And if the sunsilk provides
conditioner free for the shampoo then automatically the demand goes down and it will
lead to decline the elasticity of both shampoo and conditioner.

PRICE - Demand-
PANTENE SUNSILK Elasticity -SUNSILK
0 0 NOT DEFINED
1 1 1
2 2 1
3 3 1
4 4 1
5 5 1
6 6 0
Here the price of pantene increases and this leads to elasticity of the demand to be 1 and
more than 1 .And if the price falls then the demand also decreases than 0.

INCOME BASED ELASTICITY

When the income of the consumer can greatly impact the quantity demand of a product
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then it is called income based elasticity.

For normal goods E>0.Which means the demand increase with increase of income
For inferior goodsE<0 which means the demand decreases with increase of income

Example:A shop that sells android phones estimates that when the average income of its
customers falls from RS60,000 to RS40,000, the demand for phones falls from 5,000 to
4,000 units sold, with all other things remaining the same.

Using the income elasticity of demand formula,

YED = (New Quantity Demanded – Old Quantity Demand)/(Old Quantity Demand) /

(New Income – Old Income)/(Old Income)

= (4,000 – 5,000)/(5,000) / (40,000-60,000)/(60,000)

= 0.67

This produces an elasticity of 0.67, which indicates customers are not particularly
sensitive to changes in their income when it comes to purchasing phones. The demand
does not decrease with a fall in income.

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?

STRENGTH OF BUSINESS DEMAND

The purpose of buying the car determines the demand of new vehicle.For example the
need of new cars for hiring cabs,public sectors ,companies or personal use.If suddenly
any one market rises then the demand of buying new cars also will increase.

INCOME IMPACT
Based on the income of the consumers the demand is determined.If the consumer income
rises then the demand of buying new car increases.In somecases if the government
charges high tax detection it may lead to drop off of car demand

PRICE OF COMPETITIVE VEHICLES

If the car has more number of competitors then it will lead for the consumer to opt for the
brand that gives less price and higher values

ADVERTISING IMPACT
Due to the advertising techniques involved and cost incurred for advertising through
agencies and social media the company reaches the higher demand in the market.

AVAILABILITY OF FINANCE
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Some new car buyers pay in cash but many prefer secured finance agreement and
EMI options. It remains tough to get a new loan to pay for a car and the average
The rate of interest on unsecured credit has been rising. The high real rate of interest on
car loans will not attract new buyers.

VEHICLE USAGE
Based on the fuel cost the demand of cars differs.For example if there is a higher
difference in diesel and petrol it leads the consumer to move towards the vehicle with
high fuel efficiency to save money.

MACROECONOMIC CONDITION
Based on inflation,GDP and unemployment the demand for purchasing new cars
reduces.Sometimes due to these macroeconomic conditions the insecure feeling in private
or public jobs the purchase of new cars gets postponed.

Overall
The demand determinants as income,competitor price,vehicle usage /cost of running
directly impacts the demand for buying cars.

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.

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

a.AVERAGE COST
To capture the market along with many competitors' entry the swiggy can increase the
variable cost.And they can give more offers and discounts to customers to capture the
market that would finally lead to increase in total average cost.
Average cost=Total production cost/Quantity produced.

b.PRICE/COMMISION FROM CUSTOMERS

And also as the competition increases, price/commission they charge from their
customers will reduce.And this will lead to reduce the profit of the company even at
MC=0,still can be reduced upto Profit=MC.

c.PROFITABILITY
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The reduction in price and increase of average cost will lead to normal profit or loss in
the short run ,which in turn will cause zero economic profit in the long run.As the market
has perfect competition the homogeneity in service leads to infinite elasticity in demand.
PROFIT=TOTAL COST/QUANTITY PRODUCED

d.BREAK-EVEN POINT
As the firms reach break-even point at where their total cost is increased until they reach
out to zero profit/loss to capture market and sell products the total revenue is equals to
the
total cost.

Total Revenue = Total Cost

P*Q = TFC+TVC = TFC+AVC*Q
Q(P-AVC) =TFC 0r Q = TFC/(P-AVC), Where P-AVC is Contribution margin
Average Cost has increased and profits are coming down to reach the break-even point.
And as the competitors cannot go beyond the break even point it may lead to put off its
competitors.