Business Economics Assignment

June 2022 Examination

Ans 1.
Introduction:

The marginal rate of substitution (MRS) is the rate at which certain units of one item may be
replaced by another while maintaining the same level of customer satisfaction. When
consumers make rational decisions, the MRS idea defines the link between consumption of
two products or resources. Each company bases its operations on the feedback it receives
from customers. The more customers enjoy its products and services, the more revenue it will
produce and market share it will gain. It's referred to as the joy a customer gets from
consuming a product in economics. As a result, the manufacturers must adopt a specific way
to quantify this joy and operate in accordance with it in order to achieve a much greater
market share. As a result, there are a variety of ways for determining this level of
contentment, including the Indifference Curve.

Concept & Application:

Marginal rate of substitution:

In any marketplace, there exist many items for the consumer's benefit. Homogeneous and
heterogeneous commodities are the two categories of products. Every effort is taken to
accommodate the client's intake. The buyer may compare the items based on a range of
criteria to choose which one will provide him the greatest satisfaction. After all, the entire
sport of economics production and consumption revolves around the client's pleasure.
Something items will more significantly satisfy the consumer, and the greater the demand for
that product, the greater the production of that product, and the more production, the more
revenue generation, and thus market equilibrium will be maintained as an advanced
marketplace alongside the final GDP. Many factors of this analysis that could help boost the
market's GDP are not included in this analysis. The utility principle lies at the heart of this
satisfaction principle.
Where:

• X and Y represent two different goods

• d’y / d’x = derivative of y with respect to x

• MU = marginal utility of two goods, i.e., good Y and good X.

The marginal rate of substitution is shown as a slope on the indifference curve, with each
point along the curve representing the number of units of one good that may be substituted
for another.

The indifference curve has a bad slope: the indifference curve has a bad slope because of the
Marginal Charge of Substitution. It is the proportion of two commodities' marginal utility.
MRS x,y = – Y / X = MUx/MUy is how it's written. The consumption of appropriate B falls
as the use of accurate A rises. The marginal cost of substitution is dropping, which has a
negative impact on the dreadful slope.
Combination Units of X Units of Y

A 25 3
B 20 5

C 16 10

D 13 18

E 11 28

For combination A, the MRS is 25/3,

= 8.33
For combination B, the MRS is -5/2
= -2.5
For combination C, the MRS is -4/5
= -0.8
For combination D, the MRS is -3/8
= -3.7
For combination E, the MRS is -2/10
= -0.2
It's worth noting that the Marginal Price of Substitution is low due to the indifference curve's
negative slope. It's because once you start increasing the intake of one thing, say X, you can't
stop. Because the extent of or amount of pleasure being experienced at all of the points or any
of the factors over the curve is the same, you will begin to reduce your consumption of some
other true, say Y. This is because the extent of or amount of pleasure being experienced at all
of the points or any of the factors over the curve is the same.

Conclusion:

The marginal rate of substitution formula, or MRS formula, is used by economists to

complete this type of indifference curve research. Economists can use this calculation to see
if the consumer replacements are equally desired, or if the two commodities or services even
have the same utility function. The cardinal and ordinal techniques are two common
approaches for determining a client's satisfaction/utility. The cardinal tactics are usually used
in situations when pride is expressed in terms of numerals or numbers. The ordinal approach,
which measures usefulness in terms of ranking, is the polar opposite. The indifference curve
is one of the most used approaches for determining a buyer's utility. The level of client
delight in the two communities is evaluated here. The consumer's satisfaction level is then
determined to be the same at each point. When a customer consumes more than one product,
their consumption of the other product decreases, and vice versa.

Ans 2.
Introduction:
The revenue created by a firm or an organisation from the selling of a product or service by a
manufacturer to its clients is known as sales. Sales are computed by multiplying the price of a
commodity by the quantity of the product. In monetary terms, a company aims to supply a
growing quantity of products until the marginal income of the goods exceeds the price of the
product. It implies that the manufacturer can cover its standard variable value, that the
manufacturer is in the process of generating money, and that he can thus keep the production
going in the future. Any producer's only motive for existence is to make money.

Concept & application:

TOTAL REVENUE:
The earnings made by the manufacturer from the whole production of all devices are referred
to as overall sales. The total sales may be calculated by multiplying the commodity's price by
the producer's output. TR = P * Q, where P is the commodity's price and Q is its quantity.

Q denotes the product's amount provided.

Total Revenue = TR

MARGINAL REVENUE:

Marginal revenue, on the other hand, is the revenue or profit earned by the producer for each
additional unit produced. It is estimated in addition to the core product's manufacturing. A
marginal product, for example, refers to the sales that a manufacturer would make by
producing an extra unit of textiles.

It's calculated on the basis:

MR=change in TR from each extra unit generated/change in numerous parts created

Any company's or organization's primary goal is to make money. The higher the profit, the
better the producer's long-term survival prospects. A corporation is considered to be
maximising profits if its output is such that marginal sales and marginal value for the final
unit produced are equal.

Change in revenue divided by the change in quantity equals marginal revenue.

Price Output (In Units ) Total Revenue Marginal

Revenue
20 1 20 20
18 2 36 16
16 3 48 12
14 4 56 8
12 5 60 4

In the preceding table, it is clear that when overall income declines, marginal revenue
declines as well. We must keep in mind that total sales cannot be zero since neither the rate
nor the amount generated in the general environment can be zero. However, depending on the
money gained from the creation of each new unit, the marginal revenue might be zero or even
low. The marginal revenue may be zero if revenue collected at two prices with exceptional
commodities is similar in accounting years. However, if the manufacturing technique is
lowered due to internal or external circumstances, and the commodity rate is also reduced, the
revenue era may be reduced. As a result, marginal revenue is reduced to zero. As a result, the
overall sales graph will always be top-notch. The marginal revenue graph, on the other hand,
might be positive, zero, or even bad.

Conclusion:

The manufacturer's income from the complete manufacturing of all units is referred to as total
sales. Because the rate of the commodity and the amount produced by the manufacturer are
multiplied, the total sales may be calculated. The revenue or income that the manufacturer
will receive from generating each more unit is known as marginal sales. Its miles are counted
after the primary product's manufacture has been completed.

Answer 3a
Introduction:

Demand is a negative remark about the price, meaning that as the price of an item varies, so
does its demand. That's a dreadful deal. The rate elasticity of demand determines the extent to
which that trade is required. The concept of price elasticity of demand is an important part of
the law of demand. It's a crucial advertising exercise for forecasting how customers will react
to a one-of-a-kind stimulus form. The term "charge elasticity of demand" refers to the
financial dimension of how the quantity demanded is affected by changes in its rate.

Concept & Application:

Elasticity of demand:

Price When there is a charge alternate, elasticity of demand is an economic concept applied to
assess the degree to which any alternate has been added up within the demand for the
product. It is utilised to keep the market in balance, and it also aids the producer in producing
just the commodities with the least elasticity. It typically relies on the product's nature, such
as whether it's a high-priced item, an important item, a replacement item, or a complimentary
item.
In economics, there are five degrees of delivery for each deal in the demand for a commodity.

Items that are used or consumed in close proximity to one another are referred to be
substitutes. Tea and coffee, for example. When the price of tea rises, customers will switch to
espresso, and vice versa.

Complementary things, on the other hand, are goods that may be consumed together, such as
bread and butter. When the price of bread rises, demand for butter may fall, and vice versa.

The price elasticity of demand in this situation may be calculated as follows: when the price
is 1,00,000 the demand is for 5000 units; when the price is 1,20,000, the demand is for 3500
units.
The price elasticity may be calculated using the following formula:
Ed = percent change in required quantity / percent change in price = (-) 30 percent minus
20% equals -1.5 percent.

Conclusion:

If you wish to recommend in what quantity the manufacturer should deliver the specified
product, price elasticity of demand serves as a measurement unit in their hands. The dreadful
sign in the immediate instance denotes a demand curve with a negative slope. The ed is -1.5,
which is less than 1, indicating that the product is inelastic in terms of price.

Answer 3b
Introduction:

The supply elasticity of a product provides a quantifiable link between supply and price. As a
result, we may use the idea of elasticity to define the numerical change in supply as a
function of a commodity's price change. It's worth noting that elasticity may be computed in
conjunction with other supply drivers. The ratio of percent trade-in amount provided with the
share exchange inside the rate of the commodity is referred to as supply elasticity. It refers to
the responsiveness of the amount given to changes in the price of the item.
Concept & Application:

Elasticity of supply:

The elasticity of delivery is the proportion of a percent change in the amount provided to a
percentage change in the price of the commodity. It relates to the amount provided's response
to the alternative price of the product. Es=percentage change in quantity supplied/percentage
change in price might be used to calculate it.

It should be noted that the charge of the personal commodity has a substantial impact on the
quantity given of any product. The term "rate elasticity of supply" was used to describe this
phenomenon.

Aspects to consider while determining supply elasticity:

The following elements play a first-rate function in figuring out the price elasticity of supply:

1. The number of manufacturers: The number of homogeneous product manufacturers

in the market/industry has an important role in determining supply. Competitiveness will
result if there are more manufacturers on the market. As a result, the commodity's price must
be cut in order to boost delivery and so attract a larger customer base. However, if there are
fewer producers, the price difference may be substantially smaller.
2. Factor Adaptability: It relates to the fact that the rate elasticity of supply may be
higher if it is easy to move the thing sources inside the market. The deliver elasticity may be
inelastic if the market's aspect mobility is low.

3. Additional training period: When a company invests in its own capital, the supply is
more elastic as the rate rises.

4. Storage convenience: If the manufactured item is easy to shop for, it will have more
elasticity, however if the item is perishable, it will have less elasticity.

5. Aid from the state: The elasticity of supply would be larger if the authorities
provided subsidies to manufacturers for the manufacture of positive commodities, and
considerably less if subsidies were not available.

Conclusion:

Demand or delivery elasticity refers to how sensitive demand or delivery is to the price of the
own commodity. When the amount of a commodity is inelastic, the quantity delivered varies
when the rate of the commodity changes by a percentage. According to the law of supply, the
amount provided and the price of an item have a direct connection. This is a really high-
quality statement, to be clear. Different commodities' marketplaces, on the other hand, differ
in ways we can't even fathom. Surprisingly, supply elasticity takes care of all of this.