Business Economics

Question:
1. Rohan is appointed an economics ‘professor in a reputed university. In his first lecture,
students asked him to elaborate on Gross Domestic Product (GDP) and Gross National
Product (GNP). Help Rohan to prepare his first lecture on the given topic with relevant
example and highlight the differences between the two concepts.
Answer:
INTRODUCTION
Gross Domestic Product (GDP) is the total monetary or market value of all the finished
goods and services produced within a country's borders in a specific time period. It is the
monetary value of all finished goods and services made within a country during a specific
period. GDP provides an economic snapshot of a country, used to estimate the size of an
economy and growth rate. During the calculation of GDP, the primary focus is to capture the
goods produced or services rendered within the nation’s border, whether the output is
produced by the residents or non-residents of the country. The output produced outside the
geographical boundaries of the country are not included in GDP. GDP is an indicator of the
size of the economy. It reflects the aggregate of consumption, investments, spending by the
government and net export. In general, the GDP is calculated for one year. However, it can
also be calculated for any term to forecast economic trends.
Gross National Product (GNP) is the total market value of everything (i.e. goods and
services) produced by the residents of the country during a particular accounting year. GNP
includes the income earned by the country’s nationals within and outside the country, but it
excludes the income earned by the foreign citizens and companies within the country. For
example - There are many enterprises which are operating outside the country. Many citizens
of a country work in another country. The income earned by all these persons is known as
factor income earned from abroad.
CONCEPT AND APPLICATION
Below is the explanation of Gross Domestic Product (GDP) and Gross National Product
(GNP) which would help professor Rohan to explain the concept to students with an example
-
It is easy to get GNP and GDP confused because GNP predominantly derives from GDP.
However, there is a slight difference between the two. This is because GNP only factors in
the income that is derived from its citizens. So, if an American company earns $10 million in
China – that is considered as part of American GNP. At the same time, if a Chinese company
earns $20 million in the US, that is taken away from its GNP. This is because it is not a
product that is produced by an American company or citizen. We can look at GNP as what
the nation’s citizens and companies produce. We can look at GDP as the economic output
produced within the nation’s borders. So, the $20 million that the Chinese company earns in
the US is considered within GDP. This is because it is produced within the border, whilst
GNP refers to a product that is produced by the citizen of a nation. We can look at GNP as
 what the nation’s citizens and companies produce. We can look at GDP as the economic
output produced within the nation’s borders. So, the $20 million that the Chinese company
earns in the US is considered within GDP. This is because it is produced within the border,
whilst GNP refers to a product that is produced by the citizen of a nation.

Below is the comparison chart which professor Rohan could use as a reference to clear the
concept of GDP and GNP to students –

GDP vs GNP Comparison Chart

Basis for Comparison GDP GNP

The worth of goods and services
produced within the geographical
Meaning
limits of the country is known as
Gross Domestic Product (GDP).
The worth of goods and services produced
by the country's citizens irrespective of the
geographical location is known as Gross
National Product (GNP).

Production of products within the Production of products by the enterprises

What is it?
country's boundary. owned by the residents of the country.
Basis Location Citizenship
GNP = GDP + NR (Net income inflow
GDP = consumption + investment +
from assets abroad or Net Income
Calculation (government spending) + (exports −
Receipts) - NP (Net payment outflow to
imports).
foreign assets).
Focus on Domestic production. Production by nationals.
The strength of the country's How the residents are contributing towards
Outlines
domestic economy. the country's economy.

Conclusion
The most important distinguishing point between these two is that while we calculate GDP,
we take into consideration whatever is produced within the local borders of the country and
so it includes the goods and services produced by the foreign nationals also but if we talk
about GNP, only the production done by the country’s citizens is considered whether they are
inside or outside the country and the contribution of foreign citizens are completely excluded.
Using above definition and examples shared, Professor Rohan would now be able to explain
students on GDP and GNP product in much easier way using examples and comparison chart
and this would lead to better understanding of concept between students.

Question:
2. Suppose the demand equation for computers by Teetan Ltd for the year 2017 is given by
Qd= 1200-P and the supply equation is given by Qs= 120+3P. Find the equilibrium price and
analyze what would be the excess demand or supply if the price changes to Rs 400 and Rs
120.
Answer:
INTRODUCTION
Demand and supply in economics are the major concepts and unavoidable element of market
economy. Demand for a good or service is that quantity of the good or service which
purchases will be prepared to buy at a given price in a given period of time. So, it is willing
and power to purchase a commodity at a certain price. In economics Supply mean “an
amount of a commodity or service, a seller is willing to sell is a certain price and time period.
The quantity of a good demanded by buyers tend to increase as price of the good decreases
and tends to decrease as the price increases, other thing being equal. Whereas supply offered
for sale tends to expand as price rises and contract as price falls. An expected rise or fall
might have a contrary effect. Supply and demand in economics are relationship between the
quantity of a commodity that producers wish to sell at various prices and the quantity that
consumers wish to buy. It is the main model of price determination used. The price of a
commodity is determined by the interaction of supply and demand in a market. The resulting
price is referred to as the equilibrium price and represents an agreement between producers
and consumers of the good. In equilibrium the quantity of a good supplied by producers
equals the quantity demanded by consumers.
CONCEPT AND APPLICATION
An equilibrium price is a market price that represents a state of perfect balance between
supply and demand known as a state of economic equilibrium, this price is achieved when the
quantity of an item that is demanded by consumers is equal to the supply currently on hand.
As a result, consumers are likely to consider the current price to be acceptable and move
forward with the process of purchasing the goods on hand.

Referring to above question, Let’s understand what would be access if the price changes i.e.
demand or supply–

Formula –
Demand curve equation: Qd = a-b(P)
Qd = quantity demand
a = all factors affecting price other than price (e.g. income, fashion)
b = slope of the demand curve
P = Price of the good.

Supply curve equation: Qs = a+b(P)

Qs= Quantity supply
a = plots the starting point of the supply curve on the Y-axis intercept.
b = slope of the supply curve.
P = Price of the good.

The demand curve equation and supply curve equation in the question is Qd = 1200 -P and
Qs = 120+3P
We will now calculate the equilibrium price by putting the demand curve equation equal to
the supply curve equation.
1200 – P = 120 + 3P
1200 – 120 = 3P + P
1080 = 4P
P = 270
The equilibrium price of the given product is Rs. 270. Which means that at Rs. 270 the
quantity is demanded and the quantity supplied of the product will be the same. The quantity
demanded and supplied at equilibrium price is
Qd = 1200 – P,
i.e. Qd = 1200 - 270
= 930 units
and
Qs = 120 + 3P
i.e. 120 + 3(270)
= 930 units.
We have now received the quantity demanded and supplied which is 930 units.
To calculate the excess demand and supply at a price = Rs 400, let us put P = 400 in the
quantity equation and supply equation.

Quantity demand equation = Qd = 1200 – P

i.e. Qd = 1200 – 400
= 800 units.

Quantity supply equation = Qs= 120 +3P

i.e. Qs = 120 + 3(400)
= 1320
Referring to above we can say that quantity demanded would decrease and quantity supplied
would be increased when price changes to Rs. 400.

To calculate the excess demand and supply at a price = Rs 120, let us put P = 120 in the
quantity equation and supply equation.
Quantity demand equation = Qd = 1200 – P
i.e. Qd = 1200 – 120
= 1080 units.
Quantity supply equation = Qs= 120 +3P
i.e. Qs = 120 + 3(120)
= 480
Referring to above we can say that quantity demanded will increase and quantity supplied
will be decreased when price changes to Rs. 120.

CONCLUSION
We can now conclude that if the price changes to Rs. 400 the quantity of computers supplied
will increase by thrice and there would be decrease in quantity demanded. As in this case the
computers supply by Teetan Ltd is more than the commodity or service demand.
Similarly, if the price changes to Rs. 120 then quantity of computers demanded will be
increased and quality supplied will decreased by thrice. As in this case the supply of
computer is less by Teetan Ltd than the commodity or service's demand due to a decrease in
the price of the commodity or service.

Question
3. a. A business firm sells a good at the price of Rs 450.The firm has decided to reduce the
price of a good to Rs 350.Consequently, the quantity demanded for the goods rose from
25,000 units to 35,000 units. Calculate the price elasticity of demand.
Answer

INTRODUCTION
Elasticity of demand: 
Elasticity of demand is the responsiveness of the quantity demanded of a commodity to
changes in one of the variables on which demand depends. In other words, it is the percentage
change in quantity demanded divided by the percentage in one of the variables on which
demand depends. The variables on which demand can depend on are Price of the commodity,
Prices of related commodities, Consumer’s income etc.
Price elasticity of demand: 
The elasticity of demand measures how factors such as price and income affect the demand
for a product. Price elasticity of demand measures how the change in a product’s price affects
its associated demand.
Price Elasticity of Demand (PED) = % change in quantity demanded divided by % change
in price.

CONCEPT AND APPLICATION

The law of demand tells us when the price of a good rises, its quantity demanded will fall all
other things held constant. The law does not indicate as to how much the quantity demanded
will fall with the rise in price or how much responsive demand is to a rise price.
Referring to above –
Original Price = Rs 450 per unit
Original Quantity = 25000 units
New Price = Rs 350 per unit
New Quantity = 35000 units
Price Elasticity of Demand (PED) = % change in quantity demanded
% change in price

% change in quantity demanded = New Qty demanded – Old Qty demanded x 100
Old Qty demanded
% change in price = New price – Old price x 100
Old price
Percentage change in quantity demanded = 35000 – 25000 x 100 = 40%
25000

Percentage change in price = 350 – 450 x 100 = -22.22%

450

Price Elasticity of Demand (PED) = 40%

-22.22%
= -1.8 or 1.8
CONCLUSION
Here 1.8 is called the coefficient of price elasticity of demand and is always a pure number
because it is the ratio of two percentage changes. Note that Price Elasticity must always be a
negative number because quantity demanded and price move in the opposite direction to one
another i.e., if price rises quantity demanded falls, if price falls quantity demanded rises. Here
price elasticity of demand for the given commodity is 1.8, which means demand is elastic.

Question

3. b. “There is high cross elasticity of demand between new and old cars”. Discuss the
statement by explaining the features of the cross elasticity of demand. Also, compare and
contrast cross elasticity with other types of elasticities of demand.

Answer
INTRODUCTION
Cross elasticity of demand is the responsiveness of demand for a product in relation to the
change in the price of another related product. The relevant word here is “related” product.
Unrelated products have zero elasticity of demand. An increase in the price of pulses will
have no effect on the demand for chocolates. You can measure the cross elasticity of demand
by dividing the percentage of change in the demand for one product by the percentage of
change in the price of another product. The cross elasticity of demand is an economic concept
that measures the responsiveness in the quantity demanded of one good when the price for
another good changes. The cross elasticity of demand for substitute goods is always positive
because the demand for one good increase when the price for the substitute good increases.
Alternatively, the cross elasticity of demand for complementary goods is negative.

CONCEPT AND APPLICATION

The most important concept to understand in terms of cross elasticity is the type of related
product. The cross elasticity of demand depends on whether the related product is a substitute
product or a complementary product. This would help us to understand the statement
mentioned in the question, "There is high cross elasticity of demand between new and old
cars," in much better way.
Substitute products are goods that are in direct competition. An increase in the price of one
product will lead to an increase in demand for the competing product. For instance, an
increase in the price of new car will force consumers to go for old car and increases the
demand for old car. Now, the cross-elasticity value for two substitute goods is always
positive.
Complementary goods on the other hand, are products that are in demand together. An ideal
example would be new cars and old cars. If the price of new car increases, then the demand
for old cars would reduce because the demand for new cars will reduce. The cross elasticity
of demand for two complementary products is always negative.

Comparing cross elasticity of demand with price elasticity and income elasticity of demand.
Cross elasticity of demand measures the change in demand for a commodity due to change
in other related commodities' prices.
Whereas, Price elasticity of demand refers to how the quantity demanded or supplied of a
good changes when its price changes. In other words, it measures how much people react to a
change in the price of an item.
Income elasticity of demand is an economic measurement that shows how consumer demand
changes as consumer income levels change.

CONCLUSION
Referring to above concepts we could conclude that price elasticity of demand means refers
to how the quantity demanded or supplied of a good changes when its price changes. Income
elasticity of demand refers to an economic measurement that shows how consumer demand
changes as consumer income levels change. And cross elasticity of demand refers to the
change in demand for a commodity due to changes in other related commodities' prices.