BUSINESS ECONOMICS

Calculate Marginal rate of Substitution and explain the answer.

Commodities Unites of X Units of Y

A 25 3
B 20 5
C 16 10
D 13 18
E 11 28

Answer-

MARGINAL RATE OF SUBSTITUTION- Marginal rate of substitution is (MRS) is the rate

at which the consumer can substitute one commodity with another maintaining the same level of
satisfaction. It indicates the slope of indifference curve. The MRS of two substitute goods X and
Y may be defined as the quantity of X required replacing one unit of Y such that the utility
derived from the either commodity remains the same.

In the above table, let’s find out the Marginal rate of substitution

Commodities Unites Unites Change in X Change in Y MRS=

of X of Y (Change in X) / (Change in
Y)
A 25 3 - - -
B 20 5 5 2 2.5
C 16 10 4 5 .8
D 13 18 3 8 .375
E 11 28 2 10 .2
In the above table, change in X represents the units that a consumer is willing to sacrifice in
order to buy an additional amount of Y and change in Y represents the number of units bought
by consumer by sacrificing the delta X units. Hence, MRS is calculated as the ration of change in
X to the ratio of change in Y.

MRS= Change in X/Change in Y

In the above case, the MRS is diminishing because of the fact that the consumer in first is willing
to sacrifice more units of X in order to get an additional unit of Y but later on, the utility of the Y
decreases with the increase in the units of Y. Hence in later stage, the consumer is willing to
sacrifice less amount of X in order to get an additional unit of Y till the time the utility of both
the commodities become equal.

2- Elaborate the term Total Revenue and Marginal revenue also calculate TR and MR in
the given table

Price Output (in units) Total revenue Marginal revenue

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

Answer-
TOTAL REVENUE- In economics, total revenue represents the total income from the sale of
a certain amount of a good or service. This is the total revenue of the business and is calculated
by multiplying the number of products sold by the price of the products.

Total revenue= price of per unit* number of units sold

Without tracking total revenue, there is no way to know if your business is growing or not. In
order to make financial forecasts, or analyzing current income streams, the total revenue is very
important.

MARGINAL REVENUE- Marginal revenue is defined as the revenue that

an organization can earn by selling additional units of a product or service. Marginal revenue is
calculated by dividing the change in total revenue by the change in units sold.

Marginal revenue= Change in the total revenue/change in the quantity

Marginal revenue remains constant until the firm reaches a certain level of
output. Management uses this concept to understand consumer demand for a
product, set prices, and schedule production accordingly. It is also a very important economic
concept that helps businesses analyze whether producing an additional unit of a product or
service leads to an increase or decrease in its earnings. It is the basis of the concept of
diminishing marginal utility.

Now let’s look at the table and calculate Total revenue and Marginal revenue.

Price Output Total revenue= Marginal revenue=

(in units) Price of per unit*total units sold Change in the total revenue/change in
the quantity
20 1 20*1= 20 -
18 2 18*2= 36 (36-20)/(2-1)= 16
16 3 16*3= 48 (48-36)/(3-2)= 12
14 4 14*4= 56 (56-48)/(4-3)= 8
12 5 12*5= 60 (60-56)/(5-4)= 4

3.a. From the given Demand Schedule for air tickets, calculate elasticity of demand.

Price of air ticket (per ticket) Quantity demanded (tickets per month)
1,00,000 5000
1,20,000 3500

Answer-

ELASTICITY OF DEMAND- The term "elasticity of demand" refers to the response of a

product or quantity of demand for a commodity to a change in one of the variables that can affect
demand for that product. You can calculate this change in demand by simply calculating the rate
of change in the quantity demanded divided by the percentage of one of the variables that
determine the demand for the product.
The common variables that determine the demand for a product or commodity are the price of
the commodity, the price of the product involved, consumer income, and many others.

Elasticity of demand= percent change in quantity/percent change in price

= (5000-3500)/(120000-100000)

= 1500/20000

= .75

ELASTICITY OF SUPPLY-The elasticity of supply is a measure of the degree to which the

quantity supplied responds to changes in the factors such as price, of a given good. This is an
important parameter that determines how the supply of a particular product is affected by
market price fluctuations. It also gives you an idea of ​ ​ the profit you could get by
selling this product at a price difference.

Factors that affect the elasticity of supply include:

a) Easy maintenance: The Company can expand its supply chain by assembling parts or
final product so that it can respond to inflation effectively. However, this flexibility does
not favor companies that produce perishable items.
b) Input availability: The Company whose inputs are easily accessible is more flexible
than the company that has to wait or look for inputs. For example, a hospital may need
months to locate and consult an experienced surgeon. On the other hand, the welding
services company will hire more workers in the short term as only a few skills are
required. Therefore, the supply of hospitals is elastic rather than a welding service
company.
c) Time: Time provides flexibility to respond to market changes; therefore, the long-term
supply curve provides more flexibility than the short-term supply.