Business Economics

December 2021 Examination

Answer 1.

Introduction
Indifference curve: 

The indifference curve illustrates how consumers behave supported their indifference towards
certain groups of products and services. the buyer is equally satisfied by all combinations in an
indifference curve. Normally, an indifference curve is intended to be convex to the origin.
Assuming that marginal utility/marginal fulfilment lessens, this statement is exact. The
additional utility we gain from consuming extra units decreases because the total utility increases
at a diminishing rate. We assume that the combined utility of products farther from the origin are
greater. Analyzing difference curves typically relies on an easy two-dimensional graph. The axes
represent differing kinds of economic goods. Any combination of products on an indifference
curve offers the identical level of utility to the patron, that the consumer is indifferent between
any combination of products on the curve. Studying the indifference curve requires one to
assume the curve's ordinal theory. A rational customer shops for goods. it's possible to possess
ordinal utility, non-satiety, and transitivity. There are only commodities that a consumer is
inclined to get, and marginal rates of substitution diminish as time passes. A complementary
good isn't a perfect substitute for an appropriate substitute. The substitution could also be partial.
In spite of this, there's no perfect substitution between the 2 commodities purchased by the buyer
and displayed within the graph.

Concept and application

The indifference curve has a lucid value at the DMRS precept, which we were informed about
earlier within the phase. Right here, the Diminishing Marginal price of Substitution is that the
charge at which a consumer sacrifices some proportions of a commodity to grow the number of
another thing. so as to confirm that the software derived from the mixture of those commodities
remains constant, the purchaser does so so as to stay it from changing. As a result, the slope of an
indifference curve relies upon a purchaser's willingness to permit go of 1 item for increasing the
quantity of each other thing.

Let's study an example to achieve a more robust understanding of the concept of the difference
curve. Assume that a purchaser intended to buy food and grocery from the combination of those
categories. There are four plausible mixtures for him to decide on from in keeping with the stage
of pride he would love still because the constant income. during this section, you may find a
explicit picture of the difference curve using the four mixtures we inspected earlier.

The insignificance curve shows that when the procurer is shopping 1 unit of food, he prefers 12
devices of grocery. The pleasure level at the primary combination is just like the pleasure degree
when the buyer buys two units of meals and 6 devices of grocery. Similarly, the pleasure level
will stay consistent in any respect four combinations. Besides those four mixtures, another
opportunity of the 2 commodities that lies during this indifference curve will offer the identical
level of delight to the buyer.

With this, we'll be ready to easily distinguish between the various houses of an insignificance
curve. so as of implication, the succeeding are the five characteristics:

1. it's always convex to the origin when an indifference curve is taken into account. As seen
within the instance, the patron substitutes or sacrifices grocery units for more excellent food
units. it is referred to as the Diminishing Marginal Rate of Substitution. This charge is that the
purpose behind the solid of the indifference curve. But if commodities bought by way of the
client are the simplest substitutes, then the indifference curve could be an on the spot line with
constant MRS. Additionally, if the 2 commodities are perfectly complementary, the indifference
curve are often convex to the origin and in L shape.

2. The indifference curves of two equal distributions never intersect with each other. To a client,
each indifference curve provides a unique level of enjoyment or dissatisfaction. Hence, two
indifference arcs can never meet or intersect each otherwise. the 2 indifference curves can by no
means provide the equal application or delight stage to the customer. Think the 2 indifference
curves intersect one another. therein case, and it'll suggest that one or more mixtures within the 2
curves offer an equal degree of satisfaction. That's unacceptable.

3. Asymptotically to the axes: within the indifference curve, we estimate the client shopping the
commodities spending cash on each merchandise from among the possible combinations
supplying the equal satisfaction level. It way that no entity could have zero units of quantity; and
hence, an indifference curve can in no way contact the x-axis and y-axis.

4. An indifference curve has an without delay proportional degree of pride. If an indifference

curve is higher, then the pleasure degree from those combinations is also extra. It's lots because
an unnecessary indifference curve illustrates greater or enormous measures of two goods.

5. The slope of an indifference curve is lousy. the complete utility stage derived from distinctive
combinations of two items is equal, leading to a downward indifference curve slope. Because the
boom in intake of 1 commodity will increase the pleasure level, the discount within the
information of the second commodity reduces the satisfaction stage. This reduction and
increment inside the pleasure degree balance the full pride stage of a mix.
Conclusion

Subsequently is predicated on the applying level, we will conclude that an indifference curve is
an inspiration which states that after there is a growth in an exceedingly single trues software,
decreases the opposite commodity's software stage respectively, the application from both
entities remains equal at each aggregate or possibility of two goods. Additionally, the
indifference curve is another to the utility analysis of a commodity's demand. the concept
believes that one can't degree the human delight level in phrases of money. 

Answer 2.

Introduction

The elasticity of demand: In contrast, the elasticity of demand measures the impact of a change
in a very economic variable on the number demanded in a market. Demand for a product is
influenced by a spread of things, like income levels within a segment, price of the merchandise,
and also the price of other products in this segment. This measure assesses what quantity change
is observed in demand in response to changes in any of the variables within the market, like
price, income, etc. Demand changes when other factors within the economy change. The
elasticity of demand is defined because the difference between the quantity of things demanded
and another economic variable divided by the quantity of things demanded. In other phrases, the
elasticity of demand for a thing is that the sensitivity at which the direction of a commodity
alternates with the change in specific monetary elements affecting the market. A commodity or
carrier may have five forms of elasticity of demand. These are flawlessly elastic, elastic, unitary,
inelastic, and flawlessly inelastic. based totally on the pliability of the market, the products may
be labeled, as usual, inferior, luxurious, necessity, replacement, or complementary items. As
demand regulation states an inverse relationship between the demand and price of a commodity,
the elasticity of demand for a thing is also acceptable or terrible. In contrast, the difficulty
affecting the market is price.

Concept and application:

Price elasticity of demand: a personality's demand changes in response to a change within the
price of a product. this is often referred to as price elasticity of demand. in numerous words, rate
elasticity of demand is that the percentage alternate in demand of a commodity thanks to the
proportion change in its price. the value elasticity of demand for particular items is exclusively
based totally on the factor affecting the charge of the products. Various factors that affect the
speed elasticity of demand are the availability of the close substitutes of the best(a good with
more substitutes have extra elasticity than an honest with no close substitutes), the character of
the commodity whose elasticity of demand is being decided(a good is also a desire, luxurious,
regular, inferior, or comfort right), the share of profits spent through the patron at the
commodity(if the client spends extra cash on accurate then the elasticity might be more), the
worth level of the item inside the market (usually the elasticity of a commodity with high price is
extra), taste, preference, and habits of the purchaser, and earnings stage of the client.

The given question states that the worth of a awfully good has modified from Rs. 4 to Rs. 5,
which has dropped the demand for the nice from 25 units to twenty units. We are speculated to
calculate the charge elasticity of demand for the nice. For this, the system that we are able to use
is,

Price elasticity of demand= (Percentage change in quantity demanded)/(Percentage change

within the price of the product)

Percentage change in quantity demanded= (Q_1- Q)/Q x 100

Percentage change in price= (P_1- P)/P x 100

Q is that the original quantity demanded by the customer for a decent or service,

Q_1 does the customer demand the new quantity,

P is that the original price of the commodity,

and P_1 is that the new price of the commodity.

As per the given question, Q = 25 units, Q_1 = 20 units, P = Rs 4, and P_1= Rs 5

Percentage change in quantity demanded= (Q_1- Q)/Q x 100

= (20- 25)/25 x 100

= (-5)/25 x 100

= -20%

Percentage change in price= (P_1- P)/P x 100

= (5- 4)/4 x 100

= 1/4 x 100

= 25%

Now we will calculate the speed elasticity of demand for the most effective with the assistance of
computed values of percentage exchange within the amount demanded and percent exchange
within the fee of the stated items.

Price elasticity of demand= (Percentage change in quantity demanded)/(Percentage change

within the price of the product)

= (-20%)/(25%)

= - 0.8

The price elasticity of demand for the nice is – 0.8 or 0.8. The charge elasticity of demand is a
smaller amount than one, which states that the most effective bought by using the patron has
inelastic demand. at the same time as determining the elasticity of a commodity, a private should
preserve one element in thoughts: the incorrect sign of the worth of rate elasticity of demand is
neglected because it depicts the inverse dating between the charge and direction of a commodity.
For this reason, we've taken into consideration the worth of price elasticity of demand as 0.8.
Also, a comparatively inelastic demand means the value of the commodity adjustments at a
higher price than the value at which quantity demanded the commodity adjustments. It may be
due to the shortage of substitutes, infrequent buyers, purchaser necessities, realms, or other
seasonal elements.

Conclusion

After the above explanation of the way to estimate the value elasticity of demand for a
tremendous product, and also the calculation of the worth elasticity of demand specifically
stated, we are going to conclude that six different aspects of human behavior might affect the
worth elasticity. Also, the worth elasticity of demand may differ for distinct commodities
supported the factors affecting their market inside the clients. we've also learned that the speed
elasticity of demand for an entity could also be capable zero, infinite, adore one, but one, or over
one. It categorizes the elasticity of demand as unit elastic, perfectly elastic, flawlessly inelastic,
elastic, or inelastic demand. 

Answer 3a.

Introduction
The elasticity of demand: A commodity's demand elasticity refers to how it responds to
alterations in elements affecting the direction of its demand supported adjustments in elements
affecting its direction. variety of things influence consumer choice and taste, consumer earnings,
the worth of other products, the worth of the products, etc.

Concept and application

Cross elasticity of demand: The cross elasticity of demand is employed as an instance the
sensitivity of a commodity's demand when there's a shift within the price of the corresponding
product. In other words, the go elasticity of demand is that the proportion exchange within the
direction of a commodity due to the proportion exchange within the price of other alternative or
complementary goods.
Replacement items is replaced if one offers a much better software level than the choice, like tea,
coffee, etc. the increase within the price of 1 accurate will grow the demand for its substitute
precise and vice-versa.

Complementary items are goods that cannot be replaced with every other. Instead, those goods
are typically used together—for instance, bread and butter and lots of others. the increase within
the price of 1 goodwill decreases the demand for the complementary product.

a) The go elasticity of demand for the given goods is positive 1.2. thanks to this, the products are
replacement items. the wonderful value depicts that an upward thrust inside the value of 1
goodwill grows the quantity demanded of the opposite related accurately.

b) Now, it's on condition that there is also a 5% rise within the price of 1 commodity with 1.2
cross elasticity of demand, and that we should calculate the change within the amount demanded
of another commodity while retaining other factors constant. For this cause, we are able to use
the subsequent formula, 

Percentage change ∈quantity demanded( X)

Cross Elasticity of Demand=
Percentage change ∈the price of other goods(Y )

∆Q X
Percentage change ∈quantity demanded= x 100
QX

∆ PY
Percentage change ∈ price= x 100
PY

Where,

∆ Q X is the change in quantity demanded of commodity X

Q X is the quantity demanded of commodity X

∆ P X is the change in the price of commodity Y

P X is the price of commodity Y

 Percentage change ∈quantity demanded ( X )
1.2=
5%

Percentage change in quantity demanded = 6%

 
Conclusion

By comparing the share change in quantity demanded to the proportion change in quantity
supplied, we will confirm that the products remain substitute items. Those goods could also be
either close substitutes or susceptible substitutes. The associated products will have either
positive or negative move elasticity of involve. Then again, the move elasticity of demand for
unrelated products are zero. 

3.b. Calculate Marginal Utility and Average Utility from the information given in the below
table: (5 Marks)

Quantity Consumed Total Utility

1 20

2 35

3 47

4 55

5 60

Answer 3b.

Introduction

Utility: an honest or service's utility is that the level of total satisfaction it gives when consumed.
in step with economic theories supported rational choice, consumers strive to maximize utility.
Economic utility is crucial for understanding because it directly affects demand and thus price.
The utility of a consumer cannot be measured or quantified. Yet some economists believe they'll
indirectly estimate a product's utility by applying various models.

Concept and application

Marginal utility: the extra satisfaction level a consumer gains from consuming an additional unit
of the commodity. and since of diminishing utility, because the consumer increases the
consumption of products or services, the utility declines. The formula for calculating utility is,

Marginal Utility= (Change in total utility)/ (Change in quantity consumed)

Average utility: it's the satisfaction level of a consumer by consuming one unit of a commodity.
It will be derived by dividing the entire utility by the number consumed by the buyer. The
formula for calculating average utility is,

Average Utility= (Total Utility)/ (Quantity Consumed)

In the given question, we've the main points a few goods’ total utility and therefore the number
of units consumed by the buyer. allow us to determine the utility and average utility for the five
consumption levels with the assistance of the formula mentioned above.
For 1 unit,
Average Utility = 20/1 = 20
Marginal Utility = (20-0)/(1-0) = 20
For 2 units,
Average Utility = 35/2 = 17.5
Marginal Utility = (35-20)/(2-1) = 15
For 3 unit,
Average Utility = 47/3 = 15.67
Marginal Utility = (47-35)/ (3-2) = 12

In the same way, we will calculate the utility and average utility for the subsequent two
consumption levels of the buyer.

Quantity Consumed Total Utility Average Utility Marginal Utility

1 20 20 20

2 35 17.5 15

3 47 15.67 12

4 55 13.75 8

5 60 12 5

With the assistance of the table, we are able to see that the utility of the patron declines with the
rise within the number of units consumed but remains optimistic. It implies that one extra team
of the commodity provides more satisfaction to the patron. the common utility also decreases
with the rise within the number of units consumed and therefore the consumer's total utility.

Conclusion

From the above discussion, we will conclude that utility is that the satisfaction power of a
commodity. Having said that, different consumers are different, and it's not true that a disciple
will ever enjoy himself to the fullest, irrespective of the quantity of cocaine he may consume.
Non-addicts, in contrast, will obtain some level of satisfaction within quite an short period of
your time. Also, the satisfying power of a commodity doesn't prove its usefulness. To conclude,
we are able to say that utility is psychological in nature and can't be measured objectively.