NMIMS Global Access School for Continuing Education (NGA-SCE)

Course: Business Economics

Answer 1:

Indifference curve can be defined as locus of points. It is a graphical representation curve

which represents the various combination of two goods which give some level of satisfaction,
such curve is called Indifference curve. This curve is also called iso-utility curve or equal
utility curve.

Indifference Map:

An indifference map is a set of indifference curves. It represents the full picture of a

consumer's preferences. The following diagram shows an indifference map that consists of
three curves:

We know that a consumer will be indifferent between the combinations that are in the same
indifference curve, but it is important to note that he prefers the combinations of the highest
indifference curves over the lowest.

This is because a higher indifference curve implies a higher level of satisfaction, so all
combinations in IC1 give the same satisfaction, but all combinations in IC2 give greater
satisfaction than those in IC1.

Example:
 Combinations Snacks Cloths
A 1 12
B 2 6
C 3 4
D 4 3

A Consumers indifference curve

Assumptions:

- Consumer takes different combination of goods until he/she gets maximum satisfaction.

- Consumer should know the market price of the product

- Consumer should have all in constant i.e., taste, preference, habit and income.

- He/she should prefer more of ‘p’ less of ‘q’ and vice versa

- Goods are divisible

Properties

- Indifference curve slopes downwards towards right side

This slope means that as the amount of one good in combination increases, the amount of
the other good decreases, which is essential for the satisfaction level to stay the same on
an indifference curve.
- Indifference curves have convex shape from origin

Due to decreasing marginal role of substitution.

- Indifference curve never intersect each other

Two integrated circuits never cross each other. In addition, they do not have to be parallel
to each other. Look at the following diagram:

Intersecting indifference curves

Two ICs that cross at point A. Since the points A and B meet at IC1, the same results.
Satisfaction level of a person Likewise, points A and C give the same level of
satisfaction, since they can be found in IC2.

- Higher indifference curve represents higher level of satisfaction than a lower indifference
curve

A higher IC states that a consumer prefers more goods than not.

Let’s us learn the indifference curve. Assume that a consumer two commodities p and q and
makes five combinations for the two commodities a, b, c, d and e shown below

When the indifference curve schedule for p and q us plotted on a graph a curve is obtained.

When more than one indifference curves are plotted on the same graph, the family / group of
curves is called an indifference map.
Answer 2:

Price elasticity:

Conversely, elasticity of demand measures the impact of a change in an economic variable on

the quantity demanded in a market. The demand for a product is affected by various factors,
such as income levels within a segment, the price of the product, and the price of other
products in that segment. This measure assesses the magnitude of the observed change in
demand in response to changes in one of the market variables, such as price, income, etc. The
question changes when other factors.

Way to calculate the price elasticity of demand

Ep = ΔQ / ΔP * P / Q

Where,

Ep = Price elasticity of demand

P = Initial price

ΔP = Change in price

Q = Initial quantity demanded

ΔQ = Change in quantity demanded

Given,

Original quantity (Q1) = 25 units,

New quantity (Q) = 20 units

Fall in quantity (ΔQ) = Q1 – Q

= (20 – 25) units

= - 5 units

Original price (P) = Rs.4,

New price (P1) = Rs.5

Rise in price (ΔP) = P1 – P

 =5–4

= Rs.1

Price elasticity of demand (Ep) = ΔQ / ΔP * P / Q

= - 5 / 1 * 4 / 25

= - 0.8

Price elasticity of demand (Ep) is - 0.8

Demand is less elastic as,

Ep < 1

Therefore, Negative sign implies inverse relationship between the price and quantity demand.

Answer 3(a):

The demand elasticity of a commodity refers to how it reacts to changes in the elements that
affect the direction of its demand, based on adjustments in the elements that affect its
direction. Several factors influence consumer choice and taste, consumer revenue, the price
of other products that.

a) Goods will be substitutes because a positive cross-elasticity of demand measures the

percentage change in the quantity of one good compared to the percentage change in the price
of another.

b) When the price of one of two good increases by 5%, the demand of the other increases
with positive cross-price elasticity equal to 1.2 and the total quantity of the other goods will
be increased by 1.2 * 5% = 6 %

6 percentage and these are called complementary goods.

Example: meat and seafood

Answer 3(b):

Utility: the utility of a good or service is the level of total satisfaction that it provides when
consumed. According to economic theories of rational choice, consumers strive to maximize
utility. Economic utility is crucial for understanding because it directly affects demand and
therefore price. The usefulness of a consumer cannot be measured or quantified. Yet some of
the economists believe.

Quantity (Q) Total utility (TQ) Marginal Utility Average Utility

(MU): (AU):
MU = ΔTU / ΔX AU = TU/ Q
1 20 20 – 0 / 1 – 0 20 / 1 = 20
= 20
2 35 35 – 20 / 2 – 1 35 / 2 = 17
= 15
3 47 47 – 35 / 3 – 2 47 / 3 = 15.6
= 12
4 55 55 – 47 / 4 – 3 55 / 4 = 13.75
=8
5 60 60 – 55 / 5 – 4 60 / 5 = 12
=5

Marginal Utility (M.U):

ΔTU = TU1 – TU0 = 20 – 0 = 20

ΔTU= TU2 – TU1 = 35 – 20 = 15

ΔTU = TU3 – TU2 = 47 – 35 = 12

ΔTU = TU4 – TU3 = 55 – 47 = 8

ΔTU = TU5 – TU4 = 60 – 55 = 5