NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Business Economics

Internal Assignment Applicable for June 2022 Examination

Answer 1.

The table mentioned in the question throws light upon the Marginal Rate of Substitution.

Marginal rate of substitution:

The marginal rate of substitution (MRS) is the quantity of one good that a consumer sacrifices
for additional units of another good at the same utility level. MRS is one of the mostly observed
thing in the modern theory of consumer behavior as it measures the relative marginal utility.
Marginal rates of substitutions are similar at equilibrium consumption levels and are calculated
between commodity bundles at indifference curves. Combinations of two different goods that
give consumers equal utility and satisfaction can be plotted on a graph using an indifference
curve. The MRS is based on the idea that changes in two substitute goods do not alter utility.
In economics, MRS is used to show the quantity of good Y and good X that is substitutable for
another. MRS is the combination of two commodity bundles that give a notion of compensation,
which is founded in the feature of the uniform property.

MRS includes phenomenon in which consumers make purchasing decisions to satisfy their needs
rather than to achieve an optimal solution. It is linked to the indifference curve, from where
consumer behavior is analyzed.

MRS Formula

The marginal rate of substitution is calculated using this formula:

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
 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

Marginal price of Substitution is less due to the negative slope of the indifference curve. It is
because as quickly as one start increasing the consumption of 1 good, say X, the consumption of
the other reduces, say Y. It's due the extent of being performed at all of the points or any of the
factors over the curve is same.

CONCLUSION:
There are few methods by which one can measure the satisfaction or utility of the consumer.
▪ Cardinal: The cardinal strategies are primarily where the pride is measured in phrases of
numerals/ numbers.
▪ Ordinal: The opposite method is the ordinal approach, in which the utility is measured in
phrases of ranking.
▪ Indifference curve: The indifference curve is one of the ordinal methods of measuring
the utility of the purchasers. On this, the customer's delight stage from the two given
communities is assessed. Then at each point, it is found that the satisfaction stage of the
consumer remains identical.

The moment the consumer starts consuming extra than 1 product, it'll reduce the amount
of consumption of the other and vice versa. That is how a customer can divide its
application and satisfy its pride from the two available products to devour.

Answer 2.

INTRODUCTION:

Revenue is very crucial component of a business's finances, It refers to how much money a
company earns by selling its products and services. Companies use revenue as a basis on which
it determines how much net income it earns in once taxes, deductions and expenses are
accounted for. There are two types of revenue which are frequently used when gaining insight
into a company's profitability:
▪ Total revenue
▪ Marginal revenue

TOTAL REVENUE
Total revenue is a term used to describe the total amount of money a company brings in by
selling its services or products during a set period of time. This sum is typically derived by
multiplying a company's price of goods by the number of goods sold.

Most companies focus on maximizing the difference between the total cost of producing goods
and their total revenue from selling those goods. The difference between cost and revenue allows
marketing and business managers to create business plans that increase production. Increased
production ultimately leads to higher total revenue, which results in more money for the
company, also thereby increasing the reputation of the company thereby increasing sales.

Factors affecting Total Revenue are as follows:

Production rates

Price elasticity of demand of a

product or service

Opportunity costs

Total cost of production

Overall sales refer to the earnings generated using the producer from the total manufacturing of
all the sources. The full sales can be computed as the multiplication of the commodity's price and
the amount produced by the producer. This can be written as:
TR = P * Q; where
P= price of the commodity
Q= quantity supplied of the product
TR= total revenue
It prefers not to the charge calculated by combining the costs of all the factors, but it is the fee
price inclusive of the internet or gross profit through the manufacturer. The sales consist of each
cost price and the earnings margin done via the producer. The profit may be computed later. In
any other case, the computation of general revenue shall be disturbed.
MARGINAL REVENUE

Marginal revenue is a term used to describe an increase in revenue as a result of selling one
additional unit of output. Marginal revenue typically changes incrementally in response to
increased output levels. However, due to the law of diminishing returns, the more output a
company produces, the slower the increase in marginal revenue will be.

Companies that wish to maximize their profits will continue to increase output until the
marginal cost is equal to the marginal revenue. When marginal revenue is less than
marginal cost, companies will typically perform a cost-benefit analysis and pause
production of goods.

Competitive companies usually have marginal revenues which are consistent. This is because the
market determines the best price level and companies have little say regarding the price of a
good or service. Competitive companies use this to their favor and experience maximized profits
when the marginal costs are equivalent to marginal revenue and market price of a good or
service.

It is computed as:

MR= change in TR from each extra unit produced/ exchange in several portions produced.
Marginal Revenue= Change in Revenue/ Change in quantity

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
The above table depicts that as revenue decreases, marginal revenue becomes very less. We
know that total sales cannot be reduced to 0 because neither the rate nor the quantity produced
can be 0. However, the marginal revenue maybe 0 or even poor depending upon the revenue
generated from the production of every additional unit. If the revenue generated at two prices
with exceptional commodities is identical in accounting years, the marginal revenue might be
zero. However, if because of any internal or external factors, the production procedure receives
reduced and the rate of the commodity also decreases, the revenue era could be decreased. As a
result, making the marginal revenue goes into the negatives. So, the graph of total sales shall
constantly remain high-quality.
However, the graph of marginal revenue may be positive, zero, and even poor.

CONCLUSION:
Total sales refer back to the manufacturer's income from the entire production of all of the units.
The whole sales can be computed because of the multiplication of the rate of the commodity and
the quantity produced by the manufacturer. Marginal sales is the revenue or the income that the
producer will benefit from producing each additional unit.

Answer 3 a

INTRODUCTION:

Elasticity of demand is an important variation on the concept of demand. Demand can be

classified as elastic, inelastic or unitary. An inelastic demand is one in which the change in
quantity demanded due to a change in price is small. An elastic demand is one in which the
change in quantity demanded due to a change in price is large.

Elasticity of demand:

The elasticity of demand, or demand elasticity, refers to how demand for a good is compared to
changes in other economic factors, such as price or income. It is commonly referred to as price
elasticity of demand because the price of a good or service is the most important factor that
affects demand. In economics, there are five ways of degree wherein any trade may be find out
in the demand of a commodity.
An elastic good is defined as one where a change in price leads to a change in demand. When
there are more substitutes the demand is more elastic as customers have multiple options to
choose from.
There are five forms of rate elasticity of demand:
1. Unitary Elastic (ed=1)
2. Highly Elastic (ed >1)
3. Highly Inelastic (ed < 1)
4. Perfectly Elastic (ed= infinity)
5. Perfectly Inelastic (ed=0)

The formula for elasticity of demand is:

(Q1 – Q2) / (Q1 + Q2)

(P1 – P2) / (P1 + P2)

If the elasticity of demand is greater than 1, the demand is elastic. In other words, quantity
changes faster than price. If the value is less than 1, demand is inelastic. In other words, quantity
changes slower than price. If the number is equal to 1, elasticity of demand is unitary. In other
words, quantity changes at the same rate as price.

Price of Air Ticket Quantity Demanded (Tickets per month)

(Per Ticket)

1,00,000 5,000

1,20,000 3,500

In the above case, price elasticity of demand can be computed as:

When the price is 1,00,000, the demand is for 5000 units;

When the price rises to 1,20,000, the demand reduces to 3500 units.

The price elasticity can be computed as:

Ed = % change in Quantity demanded/ % change in price
= (-) 30/ 20

Ed = - 1.5

CONCLUSION:
Price elasticity of demand acts as an instrument for the producer to know in what quantity they
need to supply the given product. The negative sign within the immediate case suggests the
negative slope of the demand curve. The ed is -1.5, which is less than 1, which means that the
product is high prices inelastic in nature. A moderate upward thrust inside the charge has brought
a greater significant trade in the amount demanded of the product.
Answer 3 b

INTRODUCTION:

In a free market, producers compete with each other for profits. Profits are never constant across
time or across different goods, entrepreneurs shift resources and labor efforts towards those
goods which are more profitable and away from goods which are less profitable. This causes an
increase in the supply of highly valued goods and a decrease in supply for less-valued goods.

Economists refer to the tendency for price and quantity supplied to be related to the law of
supply. To illustrate, suppose that consumers begin demanding more oranges and fewer apples.
There are more dollars bidding for oranges and fewer for apples, which causes orange prices to
rise and apple prices to drop. Producers of fruit, seeing the shift in demand, decide to grow more
oranges and fewer apples because it can result in higher profits.

Elasticity of supply:

Price elasticity of supply measures the responsiveness to the supply of a good or service after a
change in its market price. According to basic economic theory, the supply of a good will
increase when its price rises. Conversely, the supply of a good will decrease when its price
decreases.

There’s also price elasticity of demand. This measures how responsive the quantity demanded is
affected by a price change. Overall, price elasticity measures how much the supply or demand of
a product changes based on a given change in price. Elastic means the product is considered
sensitive to price changes. Inelastic means the product is not sensitive to price movements

Price elasticity of supply = % Change in Supply / % Change in Price

Factors affecting determination of elasticity of supply:

Government Subsidies

Factor Mobility

The number of producers

The period of more training

Ease of storage
1. The number of producers: The number of producers in the market/ industry of the
homogenous product perform a vital function for the determination of supply. If the market has
more producers, it will create competitiveness. Therefore the charge of the commodity needs to
be reduced to increase the delivery so that the consumer base may be attracted. But, if there are
fewer manufacturers, the price change could be significantly much less.
2. Factor Mobility: It refers to the reality that if it is simple to shift the thing sources within the
market, the rate elasticity of supply might be extra. However, if the aspect mobility is less within
the market, the deliver elasticity could be inelastic.
3. The period of more training: If a firm invests inside the capital, the supply is more elastic
when the rate increases.
4. Ease of storage: if the produced good is simple to shop, it shall have extra elasticity, and if
the product is perishable, it shall have less elasticity.
5. Government Subsidies: if the authorities are supplying subsidies to the producers for the
manufacturing of positive items, the elasticity of supply would be greater elastic, and if there
could be no subsidies, the elasticity of supply would be much less.

CONCLUSION

Companies hope to keep their price elasticity of supply high as they want to be able to capture
more profit should prices rise, or trim production should prices fall. To help boost Price elasticity
of supply, companies can do a number of things.

These include improving the technology used, such as upgrading equipment and software to
improve efficiency. Improved capacity and capacity also boost Price elasticity of supply,
including boosting the stock and expanding storage space and systems. Beyond that, improving
how products are shipped and distributed can help. Making sure products can last long while
stored also increases Price elasticity of supply.

Elasticity refers to the responsiveness of demand or delivery concerning the price of the
own commodity. Inelasticity of delivery, the quantity provided of commodity changes with
a percentage change in the rate of the commodity.