MICROECONOMICS

Answer-1
INTRODUCTION
The social science of microeconomics examines the effects of incentives and choices,
particularly how they affect the allocation and use of resources. Microeconomics explains how
and why different things have varying values, how people behave and profit from efficient
production and trading, and how people may work together and coordinate best. In general,
microeconomics offers a fuller and more thorough understanding than macroeconomics.

Neha, a recent MBA graduate, is employed in the start-up sector. For her, determining the
demand and supply for the business becomes crucial. To boost productivity in their
organisations, startups must implement specific strategies. Making every effort to be as effective
is the benchmark. For instance, a debate that can be handled by email does not necessarily
need to be brought up in a team meeting, and a small group of people who have problems at
work can receive specialised help without involving the entire department. Making the most of
technology could be another way to increase productivity in a start-up setting. Applications for
management and time monitoring could be used to digitise business operations partially.
The theory of demand and supply
We know that a market is a system that makes it possible for buyers and sellers to exchange
information and transact business. In a competitive market, neither a single buyer nor seller can
control the price because there are several buyers and sellers. The sum of money required to
purchase a good is known as its money price. The opportunity cost of a good is its relative price
or the difference between its money price and the money price of the next best alternative good.
The Demand Categories

Individual Demand

Individual demand for a commodity is defined as the amount of that commodity that an
individual is willing and able to buy at a given price, during a given period, given their income,
their preferences, and the prices of similar commodities (such as alternatives and
complements), among other factors.

Market Demand

The market demand for a commodity is defined as the total amount that all of its consumers are
willing and able to buy at a specific price per time unit, given their respective incomes,
preferences, and the costs of comparable goods.
Demand for Autonomy

A natural desire to consume or possess an item naturally gives rise to an independent demand,
also known as a direct demand, for that commodity. The demand for this kind is separate from
the demand for other commodities.

Durable Demand
Durable products have a comprehensive utility or usefulness that is not exhausted during short-
term use. Over time, these products can be used again.

Non-Durable Demands

Non-durable goods' current costs, consumer income, and fashion significantly determine
customer demand. Additionally, it is frequently altered.

Demand both now and in the future

The term "short-term demand" describes the need for commodities during a brief period.

The term "long-term demand" refers to demand that is present over a long period.
Various types of Markets
● Factor Markets
The markets that sell all the production factors are referred to as the factor markets. The
production factors are land, labour, physical capital, and the materials employed. These markets
also allow for the trade of such items. The most crucial type of market for a company is a factor
market because labour is the real power behind all businesses.
● Good Markets
These markets are crucial because they allow the production output to be sold. The finished
goods that leave a business are the output of the production process.
Even though they are a part of factor markets, labour markets (intermediary goods and
services) are where employees deal with manufacturers.
● Labour Markets (Intermediate goods and services)
These are the markets where workers engage with producers or businesspeople, despite being
a part of factor markets.

Factors effecting demand and supply

To comprehend the different factors that shape our economy, economists examine supply and
demand. Demand and supply are impacted by several things, both positively and negatively.
The most recent advancements in digital cameras may enhance demand, a price reduction on
gym memberships may boost demand for exercise equipment, or price rises on organic goods
may boost vendor supply but decrease demand from price-sensitive consumers. In some ways,
supply and demand behave like a seesaw, always reacting to market pressures.
Price variations
Price changes have a significant impact on supply and demand. Demand falls when a product
becomes so expensive that the typical consumer decides it is no longer worthwhile. As a result,
manufacturing is reduced, which should steady the product's price. The public may perceive
that the product is suddenly a fantastic deal if the price of a product is decreased, as evidenced
by a surge in demand. To meet the demand, this can also lead to an increase in production
adjustments.
Income and Credit
Changes in credit availability and income levels can have a significant impact on supply and
demand. The property market is a good illustration of this kind of effect. The cost of homes
typically decreases during a recession because fewer jobs are available, and there is less
money to spend. Due to the average person's inability to obtain a loan, there may also be less
credit available. Prices drop to encourage those who can afford to buy, which can increase
sales. If interest rates go down, this effect will be amplified. The cost of homes and other major
purchases tends to increase, and so do interest rates; when there is an economic boom,
unemployment is very low, and people are willing to spend money.
Availability of alternatives or competition
The competition between an alternative product and the one already on the market may result in
a decline in demand for the original product. A sizable part of those who choose to purchase the
competing brand could be purchasing the product in the same numbers. As a result, price wars
ultimately drive down the cost of the product. It might also be necessary to reduce supply to
keep up with the decline in demand.
Trends
In many instances, demand fluctuates based on trends. There are just a select few items that
civilisation will always need. Shifting trends can affect even the provision of food and shelter. If
eating bean sprouts is unhealthy is a topic that receives a lot of media attention, so eventually, it
will have an impact on bean sprout demand. The bean sprout market could recover once
everyone's attention is diverted to something else.
Commercial promotion
Radio, internet, and television advertisements have an impact on supply and demand because
they raise consumer awareness of a product's availability. What people are unaware is for sale
will not be purchased. If the advertisement is compelling, there is a significant possibility that
demand will rise and supply will have to keep pace.
Seasons
Seasonal variations can have a big impact on supply and demand. Toy demand and supply
reach their highest points around Christmas, and Thanksgiving is when turkeys sell like
hotcakes. The Fourth of July is a boom time for fireworks in America. In Minnesota, it's
challenging to boost the demand for bikinis in January.

Answer-2
Price elasticity
One of the most fundamental economic ideas that every business owner and salesperson
should comprehend is price elasticity. A strong pricing strategy, accurate forecasting, and the
development of an adaptable, successful business all depend on having a handle on the price
elasticity of your products.

Price elasticity can be divided into three categories:

● Price elastic: When there is a condition in which price changes significantly impact a
good or service's supply or demand.
● Price inelastic: When prices change, supply and demand will change in the opposite
direction.
 ● Price unit elastic: Price changes are proportional to changes in supply and demand, and
they occur at the same rate in a price unit elastic market.

Price elasticity of supply

The price elasticity of supply (PES) gauges how sensitive a good or service's supply is to price
changes.
A corporation may not have enough employees to meet demand, require a longer lead time to
create more of its product, or lack the funds to expand its facilities if supply is inelastic.
If demand is elastic, a business might have an excess of personnel to boost demand.
Businesses can assess if a price change will have a positive or negative impact on the demand
for their product or service by knowing Price elasticity of supply.
The Price elasticity of supply is less than one if supply is inelastic, which results in a change in
supply that is smaller than the price rise. The price change results in a higher increase in supply
if the supply is elastic, increasing the Price elasticity of supply above one.
For instance, the Price elas of supply is.5 and is seen as inelastic if the price of "World's
Greatest Boss" mugs drops 10% while the supply drops 5%. The price elasticity of supply (PES)
is 1.3 and elastic if bobblehead prices rise by 15% while supply rises by 20%.
Law of supply
A market is a competitive place for producers of goods, and profits are not always guaranteed.
They change periodically based on a variety of circumstances. The law of supply refers to the
propensity for a relationship between quantity and price. For instance, if there are more oranges
on the market than grapes, the price of oranges will increase relative to the price of grapes.

Utilising the following formula, one can determine the price elasticity of supply:
Price elasticity of supply = Percentage in the change of supply
Percentage in the change in price

Types of Supply Elasticity

● Perfectly elastic supply:
When a commodity's supply elasticity is infinite, it is said to have perfect elasticity. This implies
that the supply becomes limitless even at a minor price increase. In the case of a fully elastic
supply, any change in the quantity delivered does not affect the price.
● More than unit supply:
Price Elasticity of Supply > 1: When the percentage change in supply exceeds the percentage
change in price, the commodity has a price elasticity of supply >1.
Solution for the Numerical
The item has a price of INR 100.
The product's price has increased by INR 120.
400 units are required for the product.
Decreased Product Demand = 250 units
As the price elasticity of demand is calculated by the following formula:-
PED = % change in quantity
% change in price
We must compute both the percentage change in price and quantity and the percentage change
in price.
The calculation indicates that the product's price elasticity is -2.5. Demand Elasticity is the sort
of elasticity.
Answer-3
(a)
Law of demand
According to the Law of Demand, demand for a product drops when its price rises and vice
versa, all other things being equal. Let's say a customer pays Rs. 80 for a dozen fruits. He can
only buy six of them if the price increases to Rs. 90. The rule of demand in economics therefore
depicts an inverse relationship between the price and quantity of a specific good or service.

Income change
The shift in a family's or consumer's income also affects the demand for a specific product. A
household may decide to purchase a certain commodity in greater quantities, regardless of
price, if their income rises. Again, if the family's income drops, they have the option of
somewhat reducing their product consumption. It rejects the Demand Law.
Example
If we have 4 options to chose the necessary good , the option is
1. Gold
2. Salt
3. Car
4. Mobile

Salt is a common household product. The need for salt won't decrease even if the price rises.
This theory is a direct contradiction to the rule of demand. Even with price increases, demand
remains constant for all necessities. Examples of products that are exempt from the law of
demand include both necessities and luxuries.
(b)The difference between expansion and contraction of demand are as follows:-
Meaning of expansion of demand: When the quantity demanded rises due to a decrease in the
price, keeping other factors constant, it is known as expansion in demand. There is a downward
movement along the same demand curve. It occurs due to a decrease in the price of the given
commodity.

Meaning of contraction of demand: When the quantity demanded falls due to a increase in the
price, keeping other factors constant, it is known as contraction in demand. There is an upward
movement along the same demand curve. It occurs due to a increase in the price of the given
commodity.