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(NGA-SCE) Course: Business
Economics
Internal Assignment Applicable for June 2022
Assignment Marks: 30 Examination

Instructions:

 All Questions carry equal marks.

 All Questions are compulsory.
 All answers to be explained in not more than 1000 words for question 1 and 2 and for
question 3 in not more than 500 words for each subsection. Use relevant examples,
illustrations as far as possible.
 All answers to be written individually. Discussion and group work is not advisable.
 Students are free to refer to any books/reference material/website/internet for
attempting their assignments, but are not allowed to copy the matter as it is from the
source of reference.

 Students should write the assignment in their own words. Copying of assignments from
other students is not allowed.

 Students should follow the following parameter for answering the assignment questions.

For Theoretical Answer For Numerical Answer

Assessment Parameter Weightage Assessment Parameter Weightage
Introduction 20% Formula 20%
Concepts and Application 60% Procedure / Steps 50%
related to the question
Conclusion 20% Correct Answer & 30%
Interpretation

1. Assume that a consumer consumes two commodities X and Y and makes five combinations
for the two commodities:

TABLE BELOW
 NMIMS Global Access
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Economics
Internal Assignment Applicable for June 2022
Combination Units of X Units of Y
Examination
A 25 3
B 20 5
C 16 10
D 13 18
E 11 28

Calculate Marginal rate of Substitution and explain the answer. (10 Marks)

Marginal Rate of Substitution (MRS) is the amount of a good that a consumer is willing to
consume compared to another good, as long as the new good is equally satisfying.
The marginal rate of substitution is the slope of the indifference curve at given point along
the curve and displays a utility for each combination of good x and good y. The slope of the
indifference curve plays a vital role in the MRS analysis. If the MRS is increasing the
indifference
curve will be concave to the origin where else a decrease in the MRS will be seen as a convex
to the
origin.
For example, a consumer chooses between Misal Pav and Vada Pav, to determine the
marginal rate of
Substitution, it is thus asked that what combination of Misal Pav and Vada Pav provided the
same
level of satisfaction.
MRS can only be calculated between two commodities knowing the fact that at today’s time
there are
Various other commodities which together can provide a great level of satisfaction to the
consumers.
In the above example we can see two commodities which one can get at cheapest price and
a higher
price too. Also the two commodities chosen for the MRS analysis are not to examine the
marginal
utility as it treats both the commodities equally satisfying , though in reality it may vary.
 The marginal rate of substitution (MRS) formula is:

𝑑𝑥 𝑀𝑈𝑥 NMIMS Global Access

|𝑀𝑅𝑆| = = 𝑀𝑈𝑦
𝑑𝑦
School for Continuing Education
(NGA-SCE) Course: Business
where: Economics
x,y = two different goods
Internal Assignment Applicable for June 2022
𝑑𝑦 Examination
=derivative of y with respect to x
𝑑𝑥

MU=marginal utility of good x, y

COMBINATION UNIT UNIT COMBINATION CHANGE CHANGE MRS

OF X OF Y OF X+Y IN X IN Y dY/dX
A 25 3 28 - - -

B 20 5 25 -5 2 -2.50

C 16 10 26 -4 5 -0.8

D 13 18 31 -3 8 0.375

E 11 28 39 -2 10 -0.2

In the above given table, it represents that 2 additional units of commodity Y fully compensates
the consumer with 5 units of loss of commodity X. Therefore, at this stage consumers Marginal
rate of Substitution is -2.50.
Thus, we may define the marginal rate of substitution of X for Y as the amount of X whose loss can
just compensate the consumer with 2-unit gain of commodity Y. In other words, MRS of Y for X
can be seen as the amount of X sacrificed with the gain of Y so that the consumers level of
satisfaction remains intact.
We can see a diminishing MRS which is one of the basic during the indifference curve analysis of
the consumer behavior in case of substitute goods.

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2. Elaborate the term Total Revenue and
School forMarginal revenue
Continuing also calculate TR and MR in the
Education

given table (NGA-SCE) Course: Business (10 Marks)

Economics
Internal Assignment Applicable for June 2022
Price Output (In UnitsExamination
Total Marginal
) Revenue
Revenue
20 1
18 2
16 3
14 4
12 5

The amount of money that a producer receives in exchange for the sale proceeds is known as
revenue. For example, if a firm gets Rs. 16,000 from sale of 100 chairs, then the amount of Rs.
16,000 is known as revenue. Revenue refers to the amount received by a firm from the sale of a
given quantity of a commodity in the market. Revenue is a very important concept in economic
analysis. It is directly influenced by sales level, i.e., as sales increases, revenue also increases.
Concept of Revenue:
The concept of revenue consists of three important terms; Total Revenue, Average Revenue and
Marginal Revenue.

Total Revenue (TR):

Total Revenue refers to total receipts from the sale of a given quantity of a commodity. It is the
total income of a firm. Total revenue is obtained by multiplying the quantity of the commodity
sold with the price of the commodity.
Total Revenue = Quantity × Price

A company's revenue is what it earns from selling commodities, and services to consumers, which are its normal business
pursuits. It is also called turnover or sales. Royalties, fees, or interests may also be a source of revenue.
By setting a cost price less than or equivalent to the market cost price, an enterprise believes it can sell as many
quantities of its product as it needs. The rationale for lowering the cost price of a product is lost in such a scenario. As
a result, the enterprise should set a cost price that matches the market price of the commodity to the greatest extent
possible. The total revenue is the total amount a vendor can collect from the sale of commodities or services to the
customer. The price of the commodities can be expressed as P × Q, which means the cost price of the commodities
multiplied by the amount sold. Therefore, total
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revenue (TR) is defined as the market cost price of the commodity (p) multiplied by the enterprise's output (q).
(NGA-SCE) Course: Business
Thus,
Economics
TR = p × q
Internal Assignment Applicable for June 2022
Where Examination

TR-Total Revenue,

P-Price,

Q-Quantity.

For Example, if the price of a commodity is 100 and the quantity sold is 69 then the
TOTAL REVENUE will be 100x69 = 6900.00

 Marginal revenue: It is defined as the revenue earned from the sale of a new product or unit. In other
words, it is the revenue that a company generates when it sells an extra unit. Management uses it to
analyse customer demands, plan the production schedules, and set the prices of products.
In accordance with the law of diminishing returns, the margin of revenue remains constant to a
certain

output level, and slows down as output increases.

MR = Change in total revenue/Change in quantity

Were,

MR-Marginal Revenue,

TR-Total Revenue,

Q-Quantity.

With the help of the table and the graph we can derive the total revenue and the marginal revenue.

PRICE OUTPUT(IN TOTAL MARGINAL

UNITS) REVENUE REVENNUE

20 1 20 0

18 2 36 16
16 3 48 12

14 4 56 8
12 5 60 4
 GRAPH OF TR AND MR
70

60
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50
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40
(NGA-SCE) Course: Business
30
Economics
20
Internal Assignment Applicable for June 2022
10 Examination
0
20 18 16 14 12

OUTPUT TOTAL REVENUE MARGINAL REVENUE

From the above table and graph we can conclude that when Marginal Revenue is
greater than 0, the sale of an additional unit increases the TR.

With decrease in Price of the commodity and increase in the quantity of the
product we can see that there is increase in the Total Revenue of the commodity.
As we see with the increase in

By studying the graph of the following we can conclude that with the increase in
total revenue there is a growth in marginal revenue. But as the total revenue’s
margin decreases, we can see that the marginal revenue decreases considering the
output and the price.

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

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(NGA-SCE) Course: Business
Economics
Internal Assignment Applicable for June 2022
Examination

Price of Air Quantity Demanded (Tickets per

Ticket month)
(Per Ticket)
1,00,000 5,000
1,20,000 3,500

The elasticity of demand, or demand elasticity, refers to how sensitive 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 common economic factor used to measure it.

The elasticity of demand helps companies predict changes in demand based on a

number of different factors, including changes in price and the market entry of
competitive goods.

An elastic good is defined as one where a change in price leads to a significant shift in
demand. In general, the more substitutes there are for an item, the more elastic
demand for it will be.

The elasticity of demand for a given good or service is calculated by dividing the
percentage change in quantity demanded by the percentage change in price. If the
elasticity quotient is greater than or equal to one, the demand is considered to be
elastic. While the price of a good or service is the most common economic factor used
to measure the elasticity of demand, there are other measures of the elasticity of
demand, including income elasticity of demand and substitute elasticity of demand.

Demand is sometimes plotted on a graph: A demand curve shows how the quantity
demanded responds to price changes. The flatter the curve, the more elastic demand
is.
Price Elasticity of Demand
The elasticity of demand is commonly referred to as price elasticity of demand because
the price of a good or service is the most common economic factor used to measure it.
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For example, a change in the price of a luxury car can cause a change in the quantity
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demanded. If a luxury car producer has a surplus of cars, they may reduce their price in
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an attempt to increase demand. The extent of the price change will determine whether
or not the demand for the good changes and if so, by how much.
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Internal Assignment Applicable for June 2022
Examination
Price elasticity of demand is calculated by taking the proportional change of the
amount purchased (in response to a small change in price), divided by the proportional
change of price.

Income Elasticity of Demand

The income elasticity of demand is also known as the income effect. The income level
of a given population can influence the demand elasticity of goods and services.

For example, suppose that an economic event leads to many workers being laid off.
During this time period, people may decide to save their money rather than upgrading
their smartphones or buying designer purses. This would lead to luxury items
becoming more elastic. In other words, a slight change in income level would lead to a
significant change in the consumption of luxury goods.

Substitute Elasticity of Demand

If there is an easy substitute for a good or service, the substitute makes the demand
for the good more elastic. The presence of an alternative good or service makes the
original good or service more sensitive overall to price changes.

For example, if the price of Android phones increases by 10%, this could cause
consumers to demand less Android phones. As a result, an increase in demand for
iPhones leads to more demand for iPhones. Because iPhone smartphones are a close
substitute in quality and price, consumer demand for them will rise.

Examples of Elastic Products

Common examples of elastic products are consumer items, such as a brand of cereal.
Certain food products are not a necessity. For instance, it’s reasonable to argue that
people would stop buying a particular brand of cereal if its price shot up dramatically,
particularly if other comparable products didn’t follow suit and kept their prices the
same.

Conversely, if this same brand of cereals experienced a steep price cut, we’d expect
more people to buy it, assuming its level of quality is similar to peers and we aren't in a
deep recession.
Another example of an elastic product is a Porsche sports car. Because a Porsche is
typically such a large portion of someone's income, if the price of a Porsche increases
in price, demand will likely be elastic. There are also alternatives, such as Jaguar or
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Similarly, if the price of a Perks chocolate bar increases, people will buy a different type
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of candy bar like Munch.
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Inelasticity of DemandInternal Assignment Applicable for June 2022
Examination
An inelastic product, on the other hand, is defined as one where a change in price does
not significantly impact demand for that product.

Should demand for a good or service be static when its price or other factor changes, it
is said to be inelastic. In other words, when the price changes or consumer's incomes
change, they will not change their buying habits.

Inelastic products are necessities and, usually, do not have substitutes they can easily
be replaced with. Since the quantity demanded is the same regardless of the price,
the demand curve for a perfectly inelastic good is graphed out as a vertical line.

For businesses, there are many advantages to price inelasticity. For example, they have
greater flexibility with prices because demand remains basically the same, even if prices
increase or decrease. If the business raises its prices up or down, consumers' buying
habits will remain mostly unchanged. This can impact demand and total revenue for a
business in a couple of different ways.

First, a business may have less overall revenue. If the price for an inelastic good is
decreased and the demand for that good does not increase, this would result in a
decrease in revenue. For this firm, there is no beneficial outcome in reducing the price
of its goods.

Second, a business may experience more overall revenue. If the price for an inelastic
good is increased and the demand for those good stays the same, the total revenue
will increase because the quantity demanded has not changed.

Normally, a price increase does, in fact, lead to a decrease in quantity demanded (even
if it is small). So, businesses that deal with inelastic goods are generally able to increase
their prices, sell a little less, and still make higher revenues. They tend to be protected
against economic downturns and better able to maximize profits.

Examples of Inelastic Products

The most common goods with inelastic demand are utilities, prescription drugs, and
tobacco products. In general, necessities and medical treatments tend to be inelastic,
while luxury goods tend to be the most elastic.
Another typical example is salt. The human body requires a specific amount of salt per
pound of body weight. Too much or too little salt could cause illness or even death, so
the demand for it changes very little when price changes—salt has an elasticity
quotient that is close to zero and aNMIMS
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on a graph.
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While there are no perfectly inelastic goods, there are some goods that come pretty
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close. For example, people need gas to drive their cars. Even if gas prices get higher,
people may not be able to stop commuting to work, taking their kids to school, and
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driving to the store. Thus, people will still purchase gas

Internal Assignment Applicable even2022
for June at a higher price.
Examination

Elasticity of demand is a measure of a change in the quantity demanded of a

product due to the change in the price of the product in the market.
Price elasticity of the demand =
𝑝𝑒𝑟𝑐𝑎𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

Thus, the formula,

ΔQ 𝑃
Ep= X
ΔP 𝑄

Where, Ep = Price elasticity of demand

P = Initial price
ΔP= Change in Price
Q = Price
ΔQ = Change in the quantity demanded

Here, the change in price is 1,20,000-1,00,000= 20,000,

And the change in the quantity demanded is 5000-3500 = 1500

Thus, the price elasticity of demand is 20,000/1500 = 1,8500
We can see that with the increase of the price of the product there has been a
decline in the quantity demanded.
Therefore we can see that the Air Tickets are elastic in nature.

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Economics
3.b. Elaborate the termInternal
Elasticity of Supply and
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Applicable anyJune
three factors that
2022
Examination
determines elasticity of supply

(5
Marks)
The price elasticity of supply is a measure of the degree of responsiveness of the quantity
supplied to the change in the price of a given commodity. It is an important parameter in
determining how the supply of a particular product is affected by fluctuations in its market price.
It also gives an idea about the profit that could be made by selling that product at its price
difference which is affected by various factors relating to the product.

The important factors that determine the elasticity of supply are as follows –

 NATURE OF THE GOODS/SERVICES – The nature of the product is a major factor

determining the elasticity of supply. It depends on the permanence of the product one is
planning to supply as goods/services with short life span are inelastic in nature were as
product having longer life span have better elasticity.
It also depends on the substitution of the product available in the market.

 PRODUCTION TECHNIQUES – The product techniques of the goods or the services plays
ana impactful role in the elasticity of supply. The latest and updated technology to
produce the product can make it more elastic rather than products using out dated
technology.

 TIME - Time also exerts considerable influence on the elasticity of supply. Supply is more
elastic in the long run than in the short run. The reason is easy to find out. The longer the
time period the easier it is to shift resources among products, following a change in their
relative prices. As Paul Samuelson has commented, “A given change in price tends to
have a larger effect on amount supplied” as suppliers get more time to respond to price
changes. Business firms may find it difficult to increase their usage of labour and output
immediately after price rise. So, supply is likely to be less elastic.

**********