Business Economics

April 2023 Examination

Q1. “The technique of indifference curves has been used not only to explain consumer’s
behavior and demand but also to analyses and explain several other economic problems
“In view to the above statement elaborate about indifference curve and its properties.
(10 Marks)

Ans 1.

Introduction

A detachment bend is a shape line where utility remaining parts consistent across all focuses
on the line. In financial matters, a lack of concern bend is a line drawn between various
utilization packs, on a diagram graphing the amount of good A consumed versus the amount
of good B consumed. At every one of the utilization packages, the individual is supposed to
be aloof.

At the point when an individual consumes labor and products, the fulfillment acquired or lost
from utilization is called utility. Shopper inclinations are characterized by the utilization
packages that buyers face. An assortment group is a pack that boosts the shopper's complete
utility, given the buyer's spending plan requirements. One unit of utility is known as a util.

Concepts and applications

A detachment bend uncovers numerous mixes of two merchandise a buyer likes to consume.
In its examination, center standards of microeconomics are involved. It involves individual
decisions, minor utility hypothesis, the emotional hypothesis of significant worth,
replacement impacts, pay, ordinal utility, and so on. Minor paces of replacement and
opportunity costs assume a pivotal part in the bend examination. Any remaining factors stay
consistent.
On account of any customer, the utility alludes to acquire from the utilization of two
products. Allow us to think about items B1 and B2. In the bend, the amount consumed by B2
will make up for the expansion in the sum consumed by B2.

Assuming the sum subbed is flawed, the minor pace of replacement will be steady. The
minimal pace of replacement shows the purchaser's inclination for one great over one more
while keeping up with a similar degree of utility.

A detachment bend is a shape line where utility remaining parts consistent across all focuses
on the line. Each point on a lack of concern bend addresses a utilization pack, and the buyer
is uninterested among all utilization groups on the detachment bend. In our model, the
purchaser yields 250 utils.
A whole utility capability can be graphically addressed by a lack of interest bend map, where
a few detachment bends compare to various degrees of utility. In the diagram underneath,
there are three unique detachment bends, marked A, B, and C. The farther from the
beginning, the more noteworthy utility is created across all utilization packs on the bend.

On the off chance that a decent fulfills every one of the four properties of lack of concern
bends, the products are alluded to as standard merchandise. They can be summed up as the
customer requires a greater amount of one great to make up for less utilization of another
great, and the purchaser encounters a decreasing negligible pace of replacement while settling
on two merchandise.

1.Indifference bends won't ever cross. In the event that they could cross, it would make a lot
of uncertainty with regards to what the genuine utility is.

2.The further away an aloofness bend lies, the farther it is from the beginning, and the higher
the degree of utility it shows. As shown above on the aloofness bend map, the further away
from the beginning, the greater utility the individual produces while consuming.

3.Indifference bends slant downwards. The main way an individual can increment utilization
in one great without acquiring utility is to consume another great and produce a similar
measure of utility. Accordingly, the slant is downwards inclining.

4.Indifference bends expect a curved shape. As outlined above in the aloofness bend map, the
bend gets compliment as you drop down the bend to one side. It outlines that all people
experience decreasing minimal utility, where extra utilization of another kindness produce a
lesser measure of utility than the earlier.

5.Indifference Bends are not be guaranteed to resemble to one another:

We know that slant of an IC = MRSxy.

The two lack of interest bends are not be guaranteed to resemble to one another on the
grounds that MRSxy and two apathy bends could conceivably be equivalent.

Reactions of the Apathy Bend

The significant analysis of this hypothesis is that it depends on ridiculous suppositions which
question its monetary suitability.
Besides, it is simply appropriate to integral merchandise where both the favored items are not
the ideal substitutes of one another. All things considered, they go about as a halfway
replacement.

Some negligence the idea guaranteeing that an inward lack of concern bend is even
conceivable hypothetically. In the commonsense situation, the inclination of a buyer
continues to change, which makes this idea obscure.

Conclusion

The slant of the lack of concern bend anytime is the negative minimal utility of good An as
an extent of the peripheral utility of good B. It shows that the ideal utilization pack - the
peripheral pace of replacement between products An and B - is the proportion of their costs.

Q2. Find below hypothetical data for total production costs of a manufacturing firm at
various levels of output. Complete the following: (10 Marks)

Output Total cost Fixed cost Variable cost Average Average Average

fixed cost variable cost

0 1000 1000 cost
20 1200 1000
40 1300 1000
60 1380 1000
100 1600 1000

Ans 2.

Introduction

The expenses of creation are the costs that an organization causes when it produces labor and
products, sells those labor and products, and conveys them to its clients.

Concepts and applications

There are different kinds of expenses of creation that organizations might cause over
assembling an item or offering a help. They incorporate the accompanying:
1. Fixed costs

Fixed costs are costs that don't change with how much result created. This implies that the
expenses stay unaltered in any event, when there is zero creation or when the business has
arrived at its most extreme creation limit. For instance, a café business should pay its month
to month, quarterly, or yearly lease no matter what the quantity of clients it serves. Different
instances of fixed costs incorporate pay rates and hardware leases.

Fixed costs will quite often be time-restricted, and they are just fixed comparable to the
creation for a specific period. In the long haul, the expenses of creating an item are variable
and will change starting with one period then onto the next.

2. Variable expenses

Variable expenses are costs that change with the progressions in the degree of creation. That
is, they ascend as the creation volume increments and lessening as the creation volume
diminishes. In the event that the creation volume is zero, no factor costs are brought about.
Instances of variable expenses incorporate deals commissions, utility expenses, unrefined
components, and direct work costs.

3. All out cost

Complete expense incorporates both variable and fixed costs. It considers every one of the
costs caused in the creation cycle or while offering a help. For instance, expect that a material
organization causes a creation cost of $9 per shirt, and it delivered 1,000 units during the last
month. The organization likewise pays a lease of $1,500 each month. The complete expense
incorporates the variable expense of $9,000 ($9 x 1,000) and a proper expense of $1,500 each
month, carrying the all out cost to $10,500.

4. Normal expense

The typical expense alludes to the absolute expense of creation partitioned by the quantity of
units delivered. It can likewise be acquired by adding the typical variable expenses and the
typical fixed costs. The executives utilizes normal expenses to settle on conclusions about
estimating its items for greatest income or benefit.

The objective of the organization ought to be to limit the typical expense per unit so it can
expand the overall revenue without inflating costs.
 Output Total cost Fixed cost Variable Average Average Average
cost fixed cost variable cost
cost
0 1000 1000 0 0 0 1000
20 1200 1000 200 50 10 60
40 1300 1000 300 25 7.5 32.5
60 1380 1000 380 16.6 6.3 23
100 1600 1000 600 10 6 16

VC (Variable cost) = Total cost-fixed cost.

When output is 0, TC=1000 and fixed cost is 1000 then VC=0.

Output=20, TC=1200 and Fixed cost=1000 then VC=200.

TC=1300 and fixed cost= 1000 then VC=300.

TC=1380 and fixed cost=1000 then VC=380.

TC=1600 and fixed cost=1000 then VC= 600.

AFC, average fixed cost=Fixed cost/output

When FC=1000, output=0 then AFC=0.

When output= 20 then AFC=50.

When output=40 then AFC=25

When output=60 then AFC=16.6

When output=100 then AFC=10.

AVC, Average variable cost=VC/output.

When output=0, then AVC=0

When output= 20 then AVC=10

When output= 40 then AVC=7.5

When output=60 then AVC=6.3

When output=100 then AVC= 6.

AC=TC/Output

When output= 0, 1000/0= 1000

AC=1200/20=60

AC=1300/40=32.5

AC=1380/60=23

AC=1600/100=16.

Conclusion

Creation costs are at the center of each and every business, affecting its choice of providers
and the sort of items and costs it offers to clients.

Working out creation costs likewise illuminates key independent direction, uncovering
expected areas of progress, whether a creation change can accomplish economies of scale and
the most ideal way to boost benefit.

Q3a. Large scale production is considered to be economical in the sense of per unit cost.
Explain the statement by describing different types of economies of scale. Give
examples to substantiate your answer (5 Marks)

Ans 3a.

Introduction

Economies of scale are cost benefits procured by organizations when creation becomes
effective. Organizations can accomplish economies of scale by expanding creation and
bringing down costs. This happens in light of the fact that expenses are spread over a bigger
number of products. Expenses can be both fixed and variable.

Concepts and applications

The size of the business by and large matters with regards to economies of scale. The bigger
the business, the more the expense reserve funds. Economies of scale can be both interior
and outer. Inward economies of scale depend on administration choices, while outer ones
have to do with outside factors. Inner versus Outside Economies of Scale

As referenced above, there are two distinct sorts of economies of scale.

Inside economies of scale: Begin inside the organization, because of changes in how that
organization works or delivers merchandise

Outer economies of scale: In light of elements that influence the whole business, as
opposed to a solitary organization

Inside Economies of Scale

Inside economies of scale happen when an organization reduces expenses inside, so they're
interesting to that specific firm. This might be the consequence of the sheer size of an
organization or in view of choices from the company's administration. There are various
types of interior economies of scale. These include:

Specialized: huge scope machines or creation processes that increment efficiency

Buying: limits on cost because of buying in mass

Administrative: utilizing experts to regulate and work on various pieces of the creation
cycle

Risk-Bearing: spreading gambles out across numerous financial backers

Monetary: higher reliability, which builds admittance to capital and better loan fees

Showcasing: really publicizing power spread out across a bigger market, as well as a
situation in the market to arrange

Bigger organizations are frequently ready to accomplish inside economies of scale —

bringing down their expenses and raising their creation levels — on the grounds that they
would be able, for instance, purchase assets in mass, have a patent or exceptional innovation,
or access more capital.

Outside Economies of Scale

Outside economies of scale, then again, are accomplished on account of outer factors, or
factors that influence a whole industry. That implies nobody organization controls costs all
alone. These happen when there is a profoundly gifted work pool, endowments and/or
charge decreases, and organizations and joint endeavors — whatever can reduce down on
expenses to many organizations in a particular industry.

Conclusion

Economies of scale, as a rule, can be accomplished in two ways. Initial, an organization can
understand inward economies of scale by rearranging the way their assets — like gear and
faculty — are dispersed and utilized inside the organization. Second, an organization can
understand outside economies of scale by filling in size comparative with their rivals
utilizing that expanded scale to take part in cutthroat practices, for example, arranging limits
for mass buys.

Q3b. Elaborate Cross Demand, Composite Demand and Inferred Demand and refer to a
guide to count these sorts of demand. (5 Imprints)

Ans 3b.

Introduction

The cross value flexibility of demand alludes to how responsive or versatile the demand for
one item is with the reaction to the adjustment of cost of another item. As such, the cross
value flexibility of demand tracks the connection among cost and demand.

By ascertaining cross cost flexibility, it very well not entirely set in stone assuming that the
items are substitutes, supplements, or are not connected with one another.

In such a circumstance, on the off chance that the items are substitutes of one another, a
positive cross versatility of demand is noticed, while in the event that the items are
supplements of one another, a negative cross flexibility of demand is noticed.

Concepts and applications

A circumstance where a decent is demanded for a wide range of reasons for example lumber
is demanded to make houses, furniture, paper and numerous different purposes.
The following is a graph to delineate composite demand for an item that has many purposes
in elective business sectors, oil. In the outlines under an expansion in demand for oil from
plastic delivering firms, needs to bring about a fall in the stock of oil in the petroleum
market as oil is a composite item has loads of elective purposes. This rationale could be
applied to different items like bread and steel.

Determined Demand will be demand for a decent or administration that emerges because of
demand for one more related great or administration. One illustration of inferred demand
might be demand for a specific size and design of cell phone case for a new cell phone that
just came available. The more famous that cell phone is, the higher inferred demand there is
for those cell phone cases. The demand for public transportation is driven by individuals
expecting to arrive at their work environments. This need is driven by their managers'
demand for work, which itself is a gotten from demand for an item that representative's work
is utilized to make. One more illustration of inferred demand would be specially crafted work
areas. The demand is started by the demand of purchasers for specially crafted work areas.
From that, inferred demand is made for the work that forms those work areas and the
materials used to assemble them.

Conclusion

Demand is an idea that buyers and organizations are exceptionally acquainted with on the
grounds that it seems OK and happens normally throughout essentially quickly. For instance,
customers with an eye on items that they need will purchase more when the items' costs are
low. When something ends up raising the costs, for example, a difference in season,
customers purchase less or maybe none by any means.