MICROECONOMICS

PGPM-20-21-G/C-T1-ME

Group A2
AIYUSHI GANDHI (P212A002)
AVINASH SAHOO (P212A008)
KHUSHBOO TOMAR (P212A021)
VAIBHAV ARORA (P212A069)
VIVEK KUMAR (P212A071)

Guided by Dr. VP Singh, GLIM

 Contents
Contents ........................................................................................................................................................ 1
1 Introduction .......................................................................................................................................... 2
2 Determinants of price elasticity of demand ......................................................................................... 4
3 Elasticity of Demand ............................................................................................................................. 4
3.1 Price Elasticity ............................................................................................................................... 4
3.2 Cross Price Elasticity...................................................................................................................... 6
3.2.1 Substitutes ............................................................................................................................ 6
3.2.2 Compliments ......................................................................................................................... 6
3.3 Income Price Elasticity .................................................................................................................. 7
4 Conclusion ........................................................................................................................................... 10
5 References ............................................................................................................................................... 11

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1 Introduction

The selling and purchasing prices of any commodity in the market is determined by the demand
and supply forces of market and hence, microeconomics plays a vital role in assisting the business
firms and business makers to take key decisions. With the implementation of various concepts
like law of demand analysis, price elasticity, income effect, cross price elasticity and various other
measures, firms can easily forecast their level of demand with certain time interval.

The supply and demand model of microeconomics assumes that market is perfect which means
due to the presence of a large number of buyers and sellers, the price of products and services
cannot be influenced. Price elasticity, cross price elasticity and income effect have been discussed
in details in the project along the relevant examples for the same.

Automotive industry in India is considered to be an oligopoly as there is dominance of 3-4 firms

namely Maruti, Mahindra and Mahindra, Tata Motors and Hyundai. Maruti is considered to be
the undisputed king in the passenger category vehicles in India. It offers affordable cars to its
customers in all segments and even premium cars are also affordable and cheaper than the
competitors and provides the best mileage.

In 2020, more than 1.60 lacs units of Maruti Suzuki’s Swift models were sold across India and the
four-door compact hatchback was the best-selling model of that year. Maruti Suzuki held a share
of 51 percent of the overall Indian passenger car market in 2020.
Since its launch in early 21st century, Maruti Suzuki Swift has always carried on being the market
leader over the Indian roads due to its keen specifications, wide popularity and affordability
among the middle-class population.

Maruti Suzuki Swift has sold over 2.2 million units within 15 years of its launch. After its launch in
2005, Swift has undergone three facelifts over in its life cycle. The third-generation of Maruti
Suzuki Swift comes with a bold and distraction look, sweptback LED headlamps, aggressive front
Grille and best in class cockpit-style interiors makes it very sporty. Partnered with i-create, it
enables consumers to create their own uniquely designed swift, it has become favorite among
young Indian car buyers.

These features have helped the swift earn close to 30% market share and also capture the number
one position in the premium hatchback segment in FY 2019-20.

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The main focus areas of our project will be:

• To determine the own price elasticity and how it has affected the quantity demanded.
• To determine the cross-price elasticity with respect to the substitutes and the
complements.
• To determine how change in income affected the quantity demanded (Due to covid there
had been a huge impact in the incomes of the population and hence the demand was
affected at a greater strength).

Sales volume of Maruti Suzuki cars across India in 2020, by model

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2 Determinants of price elasticity of demand
a. Availability of Substitutes

The demand of a good will be highly elastic if consumers can find a close substitute of the
product which satisfied their need. So a small increase in the price of the good will lead to
reduction in demand of the good.

b. Good is Necessity or luxury

The demand elasticity of a product also depends upon whether the product is Necessity or
luxury. Necessity goods have lower elasticity of demand, such as Insulin whereas the price
elasticity of demand is higher for luxury products.

c. The proportion of Income spent on the good

Consumers Income play a vital role in determining the elasticity of demand for a good. Impact
of income on different good is different. Inferior goods might have negative Income elasticity,
like generic medicines. Superior good behaves in opposite manner.

d. Time elapsed since a change in price

Demand is inelastic in short run but tends to become elastic in long run.

3 Elasticity of Demand
3.1 Price Elasticity
Price Elasticity of demand is a measurement of change in the demand of the product in relation
to the change in its price, considering ceteris paribus

Formula,
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑(𝐸𝑃 ) = Equation( 1)
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

If, I𝐸𝑃 I > 1, Demand is Elastic in nature

If, I𝐸𝑃 I = 1, Demand is Unit Elastic
If, I𝐸𝑃 I < 1, Demand is Inelastic in nature

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 Demand
12

10
|E| > 1
8
|E| = 1
6
|E| < 1
4

0
0 2 4 6 8 10 12

Graph 1: Categories of Elasticity

Calculating Price Elasticity of demand for Swift, due to increase in its own price from Period Y to
X.

Table 1: Sales and Price figures of swift during X and Y year

SWIFT
Period Sales Price (Lakhs)
X 1,60,765 5.81
Y 1,91,901 5.73

−0.16225
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑆𝑤𝑖𝑓𝑡 = = −11.620
0.013962

Increase in the price of Swift car has led to decline in the demand in India. This shows the elastic
relationship between the quantity demanded of Swift and Its increasing price.
Car prices do not usually change. The percentage change in cars price will be small and causing
the elasticity to be very large, despite a relatively small change in the quantity bought.

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3.2 Cross Price Elasticity
Cross Price Elasticity of demand is a measurement of change in the demand of the product in
relation to the change in the price of another commodity, considering ceteris paribus

Formula,

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑 𝑜𝑓 𝑋

𝐶𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦(𝐸𝑋𝑌 ) = Equation (2)
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑌

If, 𝐸𝑋𝑌 is positive then products are substitute

If, 𝐸𝑋𝑌 is negative then products are compliments
If, 𝐸𝑋𝑌 is Zero then products are not related

3.2.1 Substitutes
Two goods are said to be substitutes if the price of good Y rises, the demand for good X rises.
Calculating Cross price elasticity of demand for Swift, due to change in price of Santro

Table 2:Quantity of Swift and Price of Santro

Swift (Quantity, X) Santro (Price in lakhs, Y)

March 21 15300 5.17
June 21 17720 5.4

0.158
𝐶𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦(𝐸𝑋𝑌 ) = = 3.5
0.044

As Cross price elasticity (𝐸𝑋𝑌 ) is positive, which means that the increase in the price of Santro
leads to decline in its own demand. So, for some of the customers utility of Swift might become
higher than the utility of Santro and they will purchase Swift instead of Santro. This also makes
Swift and Santro as substitutes.

3.2.2 Compliments
As the price for one item increases, an item closely associated with that item and necessary for
its consumption decreases because the demand for the main good has also dropped.
Calculating Cross price elasticity of demand for Swift, due to change in price of steel

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 Table 3:Quantity of Swift and Steel Price

Swift (Quantity, X) Steel (Price, Z)

May 21 19570 66000
June 21 17720 69000

−0.094
𝐶𝑟𝑜𝑠𝑠 𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 (𝐸𝑋𝑍 ) = = −2.08
0.045

As Cross Price Elasticity is negative, which means as the price of steel increases, it increases the
cost of raw material(as steel being major component for raw materials of Automotive industry)
and hence leads to price hike of Swift car and reduction in the demand of the car. This implies
Swift and Steel are compliments.

3.3 Income Price Elasticity

Income Price Elasticity of demand is a measurement of change in the demand of the product in
relation to the change in consumers income, considering ceteris paribus

Formula
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦(𝐸𝐼 ) = Equation (3)
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

If, 𝐸𝐼 < 0, then it is inferior product

If, 𝐸𝐼 > 0, then it is superior product

Considering the Income elasticity for the demand of Swift car

Table 4:Tota Swift sold and Income Per Capita: India

Total Sales Income Per

Year Figure('X10) capita
2007 100000 33283
2008 200000 40141
2010 500000 54835
2013 1000000 74920
2015 1300000 93293
2018 1890000 126406
2020 2200000 128829

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250000

200000

150000

100000

50000

0
2006 2008 2010 2012 2014 2016 2018 2020 2022

Income per capita Total Sales Figure('X10)

Graph 2: Cumulative Sales vs Income per Capita

𝑄2 − 𝑄1
𝑄1
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑓𝑜𝑟 𝑆𝑤𝑖𝑓𝑡(𝐸𝐼 ) =
𝐼2 − 𝐼1
𝐼1
Where,
𝑄1 : Quantity of Swift car sold in year 2015
𝑄2 : Quantity of Swift car sold in year 2019
𝐼1 : Per capita Income of India in year 2015
𝐼2 : Per capita Income of India in year 2019

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 Table 5: Yearly Swift sold and Income Per Capita: India

Income Sales
per Total Sales Figure
Year capita Figure('X10) ('X10)
2010 54835 50000 12,563
2011 61,498 65432 15,432
2012 68,540 82434 17,002
2013 74920 100000 17,566
2014 82657 114353 14,353
2015 93293 130000 15,647
2016 103514 150800 20,800
2017 115986 170356 19,556
2018 126406 189000 18,644
2019 136534 209878 20,878

0.33
𝐼𝑛𝑐𝑜𝑚𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑓𝑜𝑟 𝑆𝑤𝑖𝑓𝑡(𝐸𝐼 ) = = 0.717
0.46

Income Per capita Vs Quantity sold

160000
140000
120000
100000
80000
60000
40000
20000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Income per capita Sales Figure ('X10)

Graph 3: Income Per capita Vs Quantity sold

Income Elasticity of demand of Swift is positive which indicates that the quantity sold of the car
has increased as the income per capita of the nation increased. So, we can interpret that it is a
superior product.
As, Car consumption is not only dependent on income. There are factors such as popularity, sales
promotion, and the continuously launch of new cars. People may tend to appreciate newly
released cars more.

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4 Conclusion

After calculating various elasticities of demand of Swift such as own price elasticity of demand,
cross elasticity of demand and income elasticity of demand, we can conclude that Swift is price
elastic. It is because a little increase in price of Swift will cause a decline in its quantity demanded.
When it comes to close competitors of Swift then there are many other car manufacturers in
Indian market, so if Swift makers compromises with price and quality, then the customers will
prefer its substitutes like Santro, etc.
Similarly, if the price of Santro increases with no change in price of Swift, then consumers will
definitely opt for Swift cars. Also, Swift has now become a necessity product which means there
is an increase in demand with an increase in income.
Customers are willing to buy or have their own cars, but due to lower income they cannot afford
to buy unless their income rises then they will surely be able to buy one. As swift is the best in
quality in its price segment which automatically becomes a more preferrable choice for many
customers in India.

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5 References

https://www.carwale.com/hyundai-cars/santro-xing-2008-2015/
https://auto.economictimes.indiatimes.com/cars/maruti-suzuki-swift/price
https://www.rushlane.com/top-20-cars-2020-sales-india-12390289.html
https://gaadiwaadi.com/maruti-swift-sales-dropped-by-26-in-march-after-new-wagon-r-launch/
https://gaadiwaadi.com/maruti-suzuki-model-wise-jan-2021-sales-swift-baleno-brezza-wagon-r/
https://www.autocarindia.com/
https://www.marutisuzuki.com/
https://www.hyundai.com/in/en
https://www.investopedia.com/
https://www.statista.com/
Managerial Economics by Salvatore

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