Assignment Cover Sheet

Name of Learner LUCKHINARAIN Nishma

OU Learner ID Number 202401234
Full Programme Title Human Resource Management and Development
Year 2024
Semester 1
Name of Lecturer Mr Hevin Ramsarakha
Module Title Business Economics
Assignment Number 1
Assignment Due Date 06 April 2024
Date of Assignment is Submitted 05 April 2024
No of Words 2200 Words

Note: I certify that during the completion of this project, I did not engage in any unauthorized
collaboration or plagiarize the work of others.

Table to be filled in by Lecturer

Basis of Assessment Weighting Marks Marker’s Comment
(%) Awarded
Presentation and Style 10
Evidence of Reading/ Application of 20
Theory
Logical development/ Discussion of the 30
Topic
Development of Insight 30
Conclusion 10
TOTAL MARKS AWARDED
Question 1 [22 marks]
In the local market for e-books, the aggregate demand is given by the equation
Qd = 6,360 - 400 Pd

and the aggregate supply by the equation

Qs = − 1,116+ 300Ps

With reference to the data above,

(a) Identify 2 factors that may lead to a rightward shift in the demand curve for e-
books. (2 marks)

1. Increased popularity of e-books: If there is a widespread trend toward digital media

consumption, or if e-books become more fashionable, demand for e-books may rise.

2. An rise in the quantity of e-readers: If the price of e-readers decreases or if technology

advances, more people would be inclined to purchase e-books, which would raise demand.

(b) To sketch the market, we can set the demand and supply equations equal to each
other to find the equilibrium price and quantity:

6,360 - 400Pd = -1,116 + 300Ps

7,476 = 700Ps
Ps = 10.68
Substitute Ps back into either equation to find the equilibrium quantity:
Qs = -1,116 + 300(10.68)
Qs = -1,116 + 3,204
Qs = 2,088

Therefore, the equilibrium price is approximately €10.68 and the equilibrium quantity is
approximately 2,088 e-books.
Market demand curve (D):

A market demand curve represents the quantity of a good or service that customers in a
market are willing and able to buy at various price levels, assuming all other conditions
remain unchanged. It illustrates the correlation between the pricing of a product and the level
of demand from customers.

The market demand curve exhibits a typical negative slope, indicating that as the price of a
product decreases, the quantity demanded increases, and vice versa. This is derived from the
law of demand, which states that there is a negative correlation between price and quantity
demanded, providing all other factors stay same.

The variation in question can be attributed to changes in consumer preferences, incomes, the
cost of linked commodities, and forecasts for the demand curve.

Market supply curve (S):

A market demand curve represents the aggregate quantity of a product or service that all
consumers in a market are willing and capable of purchasing at different price levels,
assuming all other factors remain same. This illustrates the correlation between the pricing of
a product and the level of demand from customers.

A typical market demand curve slopes downward, showing that as the price of a product falls,
the quantity desired rises, and vice versa. This statement is derived from the law of demand,
which states that there is a negative correlation between the price of a product and the amount
of that product consumers are willing to purchase., assuming all other conditions remain
constant.

Customer preferences, income levels, prices of related products, and expectations regarding
the demand curve can all contribute to its volatility.

Equilibrium price and quantity:

Equilibrium refers to the specific price and quantity in a market when the quantity sought by
customers is exactly equal to the quantity supplied by producers.As a result, there is no
propensity for the price to fluctuate, creating a state of equilibrium.
Equilibrium is reached in a graphical depiction at the point where the supply and demand
curves (S and D) cross. The intersection of these two curves determines the price and quantity
at this point, when the market is in balance.

The price at which the amount being sold and the amount being bought are equal is called the
balance price.
The point where the supply and demand levels meet is what decides it.
The equilibrium quantity is the total amount bought and sold at the equilibrium price.
It is also influenced by the point where the supply and demand curves cross.

Alterations in supply or demand can lead to shifts in the supply and demand curves, hence
modifying the equilibrium price and quantity. An increase in demand would result in a
rightward shift of the demand curve, leading to an increase in both the equilibrium quantity
and price. In line with the preceding illustration, a decrease in supply would result in a shift
of the supply curve to the left, which would raise the equilibrium price and decrease the
equilibrium quantity.
All things considered, equilibrium price and quantity are crucial ideas in economics since
they clarify how markets function and how prices are established in a market that is
competitive.

(c) Determine the amount of excess demand or supply if price is €12. [2 marks]

Qd = 6,360 - 400(12)
Qd = 6,360 - 4,800
Qd = 1,56
 Qs = -1,116 + 300(12)
Qs = -1,116 + 3,600
Qs = 2,484
Excess demand = Qd - Qs
Excess demand = 1,560 - 2,484
Excess demand = -92
Therefore, at a price of €12, there is an excess supply of 924 e-books

(d) Discuss whether the demand for e-books is likely to be price elastic or
price inelastic. [5 marks]

Price elasticity is expected to characterize the demand for e-books. This is due to the fact that
most customers are likely to view e-books as a discretionary purchase, which means that if
the cost of e-books rises, they may simply be replaced with alternative leisure or reading
materials. Because of this, a small increase in price will likely result in a correspondingly
larger drop in the quantity demanded.

In economics, the word "price elastic" typically pertains to the concept of price elasticity of
demand. This concept quantifies the degree to which the demand for a particular commodity
or service reacts to changes in its price. The formula for price elasticity of demand is
calculated by dividing the percentage change in quantity demanded by the percentage change
in price.
- Demand is deemed elastic when its price elasticity exceeds 1. Hence, even a slight alteration
in price will lead to a significantly larger alteration in the quantity needed, suggesting that
customers are generally highly receptive to changes in pricing.
- Demand is classified as inelastic when its price elasticity is below one. This suggests that
customers have a negative response to price modifications and a shift in demand.

(e) Two types of elasticity commonly used in business are price elasticity of
demand (PED) and income elasticity of demand (YED).

When the quantity of an item or service is extremely responsive to price fluctuations, it is

referred to as price elastic demand (PED). Put another way, there is a noticeable shift in the
quantity demanded as a product's price changes.

Price elasticity of demand can be computed mathematically as follows:

PED = % change in quantity demanded

% change in price

Demand is deemed elastic if the PED is higher than 1. This indicates that price changes are
felt by consumers, and that a slight variation in price causes a correspondingly larger
variation in the quantity demanded.

For instance, the PED would be computed as follows if the price of e-books rises by 10% and
the quantity demanded falls by 15% as a result:

PED = -15% = -1.5

10%
Given that the % change in quantity sought is more than the percentage change in price, this
suggests that the demand for this particular brand of coffee is price elastic.

Price elastic demand is typical for products or services that be easily postponed, have many
of alternatives, or are regarded as luxury commodities.

(e) Distinguish between the types of elasticity that are commonly used in
business and usefulness to the online books owner (e-books owner). (8
marks)

Different forms of elasticity are frequently employed in business to examine how shifts in
different factors impact supply or demand. Price elasticity of supply (PES), income elasticity
of demand (YED), cross-price elasticity of demand (XED), and price elasticity of demand
(PED) are a few examples. Online book owners, or e-book owners, can benefit greatly from
the distinct insights that each type of elasticity offers into customer behavior and market
dynamics as they pertain to understanding and operating their businesses. The following is a
quick summary of each kind of elasticity and how it relates to owners of e-books:

1.Price Elasticity of Demand (PED) is a concept that quantifies how responsively amount
sought is to price fluctuations. It aids in e-book owners' comprehension of how susceptible
their clientele is to pricing fluctuations. For instance, if an e-book's PED is -2, a 10% price
rise would result in a 20% drop in the amount desired. Pricing plans and advertising
initiatives can be guided by this information.

2. The quantity required is responsive to variations in income levels, and this is measured by
the Income Elasticity of Demand (YED). Knowing YED can assist owners of e-books in
determining if their possessions are inferior goods (YED < 0) or regular products (YED > 0).
If e-books were regular items, then rising consumer income would drive up demand and
falling consumer income would do the opposite.
3. The concept known as "cross-price elasticity of demand," or "XED," describes how the
quantity of a commodity that is demanded reacts to changes in the price of another.
XED can assist owners of e-books in finding complements and substitutes. An increase in
the price of printed books would result in a rise in demand for e-books if the XED between
them and printed books is positive, indicating that they are equivalents.

4. PES stands for price elasticity of supply, which quantifies how sensitive the quantity
supplied is to price fluctuations. Even while traditional retailers may have more influence
over supply than e-book owners, knowing PES can help you anticipate changes in the market
and modify your pricing and production methods accordingly.

To summarise, by comprehending and utilising these diverse forms of elasticity, owners of

electronic books can enhance their competitiveness and profitability in the online books
market by making well-informed decisions regarding pricing, marketing, and inventory
management.

Question 2 (8 marks)
A firm is operating with 10 machine-hours, which it cannot change before 3
months. The following schedule describes its production function:

 Labour (man-hours)
 Output (units)

Using the formula:

MP = Change in output

Change in Labour

AP = Output
Labour

We can calculate the Marginal Product and Average Products values:

Labour (man- Output (units) Marginal Products Average Products

hours)
1 8
2 18
3 26
4 32
5 37
6 41
7 44
8 46
9 47
- 8
10 9
8 8.67
6 8
5 7.4
4 6.83
3 6.29
2 5.75
1 5.22
 10 47 0 4.7

Let's now plot these numbers to generate the curves for the average and marginal products:

Following an initial ascent to a maximum, the MP curve will then decline.

The AP curve will rise, peak, and subsequently fall.

When the MP begins to decline, diminishing marginal returns begin to apply. In this instance,
it happens when MP decreases from 10 to 8 at the point where the second unit of labour is
applied. This indicates that compared to the preceding unit, each additional unit of labour
adds less to the overall output.

When the AP hits its maximum value, which in this case is two units of labour, diminishing
average returns begin. This is true because the AP is a reflection of the MP, and the AP
decreases in tandem with a reduction in the MP.

In general, the point of diminishing average returns denotes the point at which the average
contribution of each unit of input begins to decline, whereas the point of diminishing
marginal returns denotes the point at which each additional unit of input adds less to the
overall output.
Derive the marginal product and average product curves. At what point do
diminishing marginal returns set in? How does this relate to the point of
diminishing average returns? Explain. (8 marks)

When the MP begins to decline, diminishing marginal returns begin to apply. In this instance,
it happens as MP decreases from 10 to 8 at the point where the third unit of labour is applied.
sThis indicates that compared to the preceding unit, each additional unit of labour adds less to
the overall output.
When the AP hits its maximum value, which in this case is two units of labour, diminishing
average returns begin. This is true because the Average Product is a reflection of the
Marginal Product, and the Average Product decreases in tandem with a reduction in the MP.
In general, the point of diminishing average returns denotes the point at which the average
contribution of each unit of input begins to decline, whereas the point of diminishing
marginal returns denotes the point at which each additional unit of input adds less to the
overall output.

When additional units of labourur are engaged, the average product of labour (AP) begins to
decline even though the marginal product of labour (MP) may still be positive. This
phenomenon is known as diminishing average returns.

Initially, in a production process, the average product of labour rises when more labour units
are added to a constant amount of capital, resulting in an increase in total output. But
eventually, adding more labour units becomes less productive, and as a result, the average
product of labour decreases and the overall production grows at a diminishing rate.
Diminished marginal returns is a concept that is connected to this occurrence. When more
units of labour are added, the marginal product of labour falls while the average output of
labour rises, a phenomenon known as diminishing marginal returns occurs. The average
product of work gradually declines as diminishing marginal returns take hold and the overall
production grows at a slower rate.

In conclusion, even though the overall production is growing, falling average returns happen
when the average productivity of each unit of input (labour) begins to decline. This is a
typical occurrence in production processes and a crucial idea to comprehend when attempting
to understand how efficiently resources are used in production.

References

Jason Fernando 31 December 2023. Investopedia. [Online]

Available at: https://www.investopedia.com/terms/l/law-of-supply-demand.asp

James Chen 19 December 2023. Investopedia [Online]

Available at: https://www.investopedia.com/terms/e/equilibrium.asp

WIKIPEDIA The Free Encyclopedia [Online]

Available at: Law of demand - Wikipedia