School for Continuing Education (NGA-SCE) Course: Business Economics

Internal Assignment Applicable for December 2021 Examination

Submitted by – Bhaskar Paliwal
Roll No - 77121510927

Ans.1.

Introduction

Indifference curve: An indifference curve can be explained as a set of points that represent
different pairs of goods, but which provide the same amount of utility or satisfaction. Since each
combination of two products provides the same degree of utility, a consumer will not be able to
distinguish between two options when choosing between them. One is frequently encountering
this type of scenario in everyday life.

The reason for this is that the person consumes a lot of products and services and frequently
discovers that one commodity serves as a substitute for another. This provides him with an
opportunity to substitute one commodity for an alternative and to create different combinations
of the two commodities. He can't estimate how much utility a particular combination gives, but it
is an option to be able to identify which of two combinations is best for him. Furthermore, it's
feasible to identify which combinations give an equal amount of satisfaction. If a consumer is
presented with the same combinations, he would be indifferent between the choices. If the
combination is plotted graphically, the resultant pattern is known as the indifference curve.
Indifference curve is also called Iso-utility Curve as well as equal Utility Curve.

Concept and its application

The indifference line has an apparent value at the DMRS precept which we have been told about
earlier in the phase. The Diminishing Marginal Cost of Substitution is the cost at which a consumer
sacrifices a few proportions of a commodity to grow the amount of another thing. In order to make
sure that the software that is derived by the combination of these components remains consistent
the purchaser sacrifices a certain amount to prevent the software from changing. This is why the
slope of an indifference curve relies on the ability of the purchaser to let go of a particular item for
the sake of increasing the quantity of the other items.
Let's look at an illustration to get a greater understanding of the concept of a difference curve.
Assume that a purchaser intended to buy groceries and food from the aggregation of these
categories. There are four possibilities for him to choose according to the stage of pride he would
like as well as his constant income. This section you will see a graphic representation of this curve,
which includes all four of the mixtures we have studied earlier.

Indifference
14

12

10
Indifference
6

2 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

The indifference curve indicates that when an individual is shopping for 1 unit of food items,
he'd prefer 12 grocery stores. The pleasure level in the first set of combinations is identical as the
enjoyment level for a buyer who purchases two meals, and six devices of grocery. Additionally,
the degree of pleasure will be the same in every combination. Other than those four combinations
another possibility of the two items that lie within this indifference graph will offer similar pleasure
to the consumer.

With this, we will be able quickly distinguish from the different houses that make up Indifference-
curve. In order of importance, the following are the five traits:
 1. The curve is convex to the origin when an indifference arc is considered.

As shown in the example that the consumer is a substitute or sacrifices grocery units for higher
quality food units. This is often referred to as the Diminishing Marginal Rate of Substitution.
This is the primary reason for the convex form of the indifference curve. But if commodities bought
by through the client are the most suitable substitutes, then the indifference curve couldbe a
straight line, with constant MRS. In addition, if the two products are completely compatible this
curve can be convex with respect to the origin and in an L-shaped.

2. The indifference curves of two equally distributed distributions do not intersect with one
another.

To a client, each differing curve gives a particular level of enjoyment or dissatisfaction. So, two
indifferences cannot ever meet or cross one way or the other. The two indifference curves can at
no time provide equivalent level of satisfaction or application for the client. The two indifference
curves are in a cross-section. In that scenario, it will suggest that one or more combinations within
the two curves give an equal amount of satisfaction. This isn't possible.

3. Asymptotically on the axes.

In the indifference curve we consider the consumer shopping the commodities spending cash for
each item from the possible combinations, resulting in a similar level of satisfaction. This is
because no entity could have zero units of quantity. Thus, an indifference graph cannot be in any
way in contact with both axes.

4. Indifference curves exhibit equally proportional amount of pride.

If an indifference curve is higher than its pleasure value, then the enjoyment from these
combinations could be extra. This is because an overly indifference plots higher or massive
quantities of two things.

5. Its slope in an indifference curve is not good.

The entire utility stage, which results from the distinct combination of two items is equaled results
as a downward-facing slope. Because the boom in intake of 1 commodity will increasethe
pleasure level but the loss in data of the second decreases satisfaction. The increase and decrease
in that pleasure level are balanced by the stage of total pride of the mixture.

Conclusion

Therefore, it's based upon the application level. It is possible to conclude that an indifference curve
is a concept which states that after there's an increase in a single real's software and decreases in
the level of software for the other product however, the overall usage of bothentities remains
equal at every aggregate or the possibility of two commodities. Additionally, the Indifference
Curve provides an alternate to the analysis that evaluates marginal utility of the commodity's
demand. It's a belief that one cannot assess the degree of happiness of a person in terms of money.

Ans.2.

Introduction

Elasticity of Demand: The elasticity of demand, however, determines the impact of changes in
an economic parameter on the quantity that is demanded on the market. Demand for a particular
product is determined by a myriad of factors, such as the level of income within a certain
segment and the price of the item as well as the cost of the other products within that segment.
This measure measures the extent of changes in demand are observed when there is a change in
any variable that affect the market, such as price, income, and so on. Demand shifts when other
factors influence the economy. The elasticity of demand can be defined as the ratio between the
quantity of items that are demanded, and another economic variable multiplied bythe quantity
of products demanded. In other words, elastic demand for an item is the sensitivity that makes the
direction of a commodity shifts depending on the changes in certain financial elements that affect
the market. A commodity or carrier may be characterized by five types of
elastic demand. These are flawlessly elastic, uniform, elastic, inelastic, and flawlessly inelastic.
They are primarily based on the flexibility of the market, items can be classified as common, less
than, luxurious, essential substitute, or even complementary items. As demand regulation states an
inverted relation between demand and price of a product or product, the demand elasticity for a
product could be either acceptable or horrendous. In contrast, the issue impacting pricing in
markets revolves around price.

Concept and Application:

Pricing elasticity: Demand for an individual fluctuates when there is a change in the cost of a
product. This is commonly referred to as price elasticity of demand. In simpler terms, the rate
elasticity of demand refers to the percentage of change in demand of a particular item due to the
change in its price. The demand elasticity of the price of a specific product is based totally on the
factor affecting the charge of the goods. Various factors that affect the rate elasticity of demand
include the availability of close alternatives to the best(a good with more substitutes has more
elasticity than a one with no close substitutes) and the character of the product for which the
elasticity of demands are being decided(a product might be a demand, luxury, regular in quality,
inferior, or simply comfort right) or the percentage of profits spent through the buyer at the
commodity(if you spend more money on accurate then the elasticity might be greater) as well as
the pricing of the item inside the markets (usually the elasticity of an item that has a the highest
price is higher) and the taste, preference and habits of consumer, and the income stage that the
client is in.

According to the words of Prof. Stonier and Hague Price elasticity of demand is a concept used by
economists to describe the flexibility of demand for something to a change in its price. It means
that, at the current level, at every price change there will be changes in demand four times as
inversely. Generally, the co-efficient of price elasticity of demand always is negative because there
is an opposing relationship between price and amount demanded.

The question posed states that the price of a very item has increased from Rs. 4 to Rs. 5, which has
lowered its demand between 25 and just 20 units. The goal is to calculate the charge
elasticity of demand for the good. To do this, the method that we must utilize is
 Percentage change in quantity demanded
Price elasticity of demand = Percentage change in the price of the product

Q1 ― Q
Percentage change in quantity demanded = x 100
Q

P1 ― P
Percentage change in price = x 100
P

Q is the original quantity demanded by the customer for a good or service,

𝑄𝑄1 does the customer demand the new quantity,

P is the original price of the commodity,

and 𝑃𝑃1 is the new price of the commodity.

As per the given question, Q = 25 units, Q1 = 20 units, P = Rs 4, and P1= Rs 5

Q1 ― Q
Percentage change in quantity demanded = x 100
Q

20 ― 25
= x 100
25

―5
= 2
x 100

= -20%

P1 ― P
Percentage change in price = x 100
P

5― 4
= 4 x 100

1
= x 100
4

= 25%
We can now calculate the rate elasticity of demand for top quality products with the help of
computed values of percentage exchange for the quantity demanded and percent exchange for
the cost of the items listed.

Percentage change in quantity demanded

Price elasticity of demand =
Percentage change in the price of the product

―20%
= 25%

= - 0.8

Price elasticity demand for the good is - 0.8 0.8. The charge elasticity of demand is less than 1,
which means that the item bought by using the consumer has inelastic demand. If determining the
elasticity of a merchandise, you must bear the following aspect in mind to avoid the incorrect
representation of the price of rate the elasticity of demand is overlooked since it reveals the reverse
dating between the direction and charge of a product. To avoid this, we've taken into consideration
the value that price elasticity of demand as 0.8. Also, a relatively inelastic demand means that the
price of the adjustment to the commodity was at an increaseover it was at the time that quantity
required the adjustments to the commodity. It could be dueto the lack of substitutes customers
who are not frequent, requirements for buyers, geographical regions, or other factors that can be
seasonal.

Conclusion

After the above explanation of how to determine the price elasticity of demand for a fantastic
product, and the calculation of the price elasticity of demand specifically stated, we will conclude
that six different aspects of human behavior can affect pricing elasticity. In addition,the price
elasticity of demand may differ for distinct commodities based on the elements that influence their
market inside the clients. We also discovered that the rate elasticity of demand foran individual
could be the value of zero or infinite. It could be equal to one less than or equal to one or even
more than one. It categorizes elasticity as demand as unit elastic, completely elastic, flawlessly
inelastic, elastic, and inelastic.
Ans.3a.

Introduction

The elasticity of the demand: The elasticity of demand for a commodity can be defined as its
reaction to changes in elements that alter the direction of its demand as a result of changes in
elements affecting its direction. A variety of elements influence consumer choice and taste like
earnings of the consumer, price of other merchandise as well as the cost of products, etc.

Concept and its application

Cross-elasticity of demand: It could be defined as the proportional change in quantity demanded

of a particular commodity in response to an increase or decrease in price for a second related
commodity. According to Prof. Watson cross-elasticity of demand is the percentage change in
quantity that occurs with a percentage change in the price of the related product. In general, it is
observed in the event of substitutes and complements. The formula for calculating the cross
elasticity is as follows.

Replacement items can be replaced by a replacement if it has a higher level of software than the
one you have which includes tea, coffee, and so on. The price increase for a specific item will
increase the demand for a replacement precisely, and vice versa.

Complementary items are goods that are not able to be substituted by all other items. Instead, those
goods are often used in combination, such as butter and bread, among others. The rising cost of
one item reduces demand for the product that is complementary.

A) It is known that two goods can have a cross-price-elasticity of demand +1.2. This indicates that
the two goods are excellent substitutes for each other because Cross elasticity of Demand is
positive in the instance of substitutes with good quality e.g., coffee and tea. The highest cross-
elasticity of demand occurs for those products that have a close relationship with.In other words,
if commodities can be substituted for perfect, for the example of Bata or Lakhani Shoes close-up
or Pepsodent toothpaste, beans and ladies ' fingers Pepsi and coca cola etc. The cross-elasticity is
zero when commodities are independent of each other. For example, stainless steel, aluminum
vessels etc. The cross-elasticity of two products has negative value when they
related goods. In these cases, rise in the price of one will result in a decline in the demand for
another commodity for example, car and petrol, the pen or ink.etc.

b) Now, it is known that there might be five percent rise in the price for one commodity with 1.2
cross elasticity of demand, and we must figure out the change in the price of other commodities
while keeping the other elements constant. In this case you can utilize the followingformula,

Where,

∆Q𝑋𝑋 is the change in quantity demanded of commodity X

Q𝑋𝑋 is the quantity demanded of commodity X

∆𝑃𝑃𝑋𝑋 is the change in the price of commodity Y

𝑃𝑃𝑋𝑋 is the price of commodity Y

Percentage change in quantity demanded(X)

1.2 =
5%

Percentage change in quantity demanded = 6%

Conclusion

In comparing the percentage shift in the amount demanded and the percentage change in quantity
supplied, we can confirm that the items are substitute items. Those goods may be either very
similar or susceptible substitutes. These products are likely to have either positive or negative
elasticity of call for. In contrast, the movement elasticity of demand in non-related product will
fall to zero.
Ans.3b.

Introduction

Utility: The degree to which a good or service provides total satisfaction when consumed is
referred to as its utility. Consumers are compelled to maximize their utility, according to economic
theories that are based on rational decision-making. Understanding economic utility is critical
because it has a direct impact on demand and, consequently, on price, and therefore on
understanding. The utility provided by a consumer cannot be measured or quantified. According
to some economists, they can estimate the indirect utility of a product by employing a variety of
modeling techniques.

Concept and its application

Marginal utility: The extra satisfaction a consumer gains from consuming an extra unit of the
commodity. And because of diminishing marginal utility as the consumer consumes more products
or services, their marginal utility declines. The formula to calculate marginal utility is

Change in total utility

Marginal Utility =
Change in quantity consumed

Average utility: It is the satisfaction the consumer gets from consumption of one unit of
commodity. It can be derived via dividing the value of utility with the amount consumed by the
consumer. The formula for calculating the average utility is

Total Utility
Average Utility =
Quantity Consumed
In the above question, you will find information about a good's total utility and the amount
consumption units by the consumer. Let's find the marginal utility as well as the average utility for
five consumption levels with the aid of the formula described above.

Calculation of Marginal Utility

Marginal Utility = Change in Total Utility/Change in Quantity= TUn - TUn - 1

MU when consumed quantity is 1 = TU1 -1- 1 = 20 0.20 = 20

The MU for MU is = Tu2 - TU2-1 = 35 20 = 15.

MU when consumed quantity is 3 = TU3 - - 1 = 47 - 35 = 12

MU when the quantity consumed is 4 = TU4 - TU4- 1= 55+47 =8

MU when the quantity consumed is 5 = TU5-TU5- 1= 60 - 55 = 5

Quantity Consumed Total Utility Marginal Utility

1 20 20
2 35 15
3 47 12
4 55 8
5 60 5

Calculation of Average Utility

The Average Utility is the one in which the total quantity of goods consumed is divided by Total
Units. The Quotient can be referred to as Average Utility.

For example--If the Total Utility of 4 breads is 40. Then the mean utility for 3 breads will be 12
If the total utility of three pieces is 36 i.e., (36 / 3 = 12).

Formula,

Average Utility = Total Utility/Quantity consuming

Quantity Consumed Total Utility Average Utility
1 20 (20/1) = 20
2 35 (35/2) = 17.5
3 47 (47/3) = 15.66
4 55 (55/4) = 13.75
5 60 (60/5) = 12

With the aid of the table It is evident that the marginal value of the consumer decreases with
the rise in the amount of units consumed, however, it remains optimistic. This means that a
second unit of the commodity offers more satisfaction to the buyer. The average utility will
alsodecrease by the rise in the number of units consumed as well as the total utility consumed
by the consumer.

Conclusion

From the above analysis, we can conclude that utility is the pleasure quality of a product.
However, all consumers have different needs, and it's not true that addicts will feel satisfied
tothe max regardless of how much of cocaine he consumes. Conversely, those who do not use
drugs are likely to experience some degree of satisfaction over brief time. Furthermore, the
power of satisfaction is not enough to show its utility. In conclusion, we could say that utility
is psychological in nature and cannot be assessed objectively.