Business Economics

NMIMS Global Access

School for Continuing Education (NGA-SCE)
Course : Business Economics
Internal Assignment Applicable for April 2023 Examination

1. “The technique of indifference curves has been used not only to explain consumer’s
behaviour and demand but also to analyse and explain several other economic problems”. In
view to the above statement elaborate about indifference curve and its properties.

Answer:
Defination:
“Indifference curve is a graphical representation of the various combination of of two goods
with which a consumer is equally satisfied.”

What is an Indifference Curve? :

An indifference curve is a chart showing various combinations of two goods
or commodities that leave the consumer equally satisfied as in neither a yes or no more like
maybe and hence indifferent. It is used in economics to describe the point where individuals
have no particular preference for either one good or another based on their relative
quantities. Along the indifference curve, a consumer has an equal preference for various
combinations of goods. Also, indifference curves are shown in convex to the origin and no
two indifferent curves ever meet.

Formula for indifference curve:

The formula used in economics for constructing an indifference curve is: U(t,y)=c
where:
c stands for the utility level achieved on the curve and is constant.
t and y are the quantities of two different goods, t and y.
Different values of ’c’ correspond to different indifference curves, so if we increase our
expected utility, we obtain a new indifference curve that is plotted above and to the right of
the previous one.

Properties of Indifference Curves:

The four properties of indifference curves are:
(1) Indifference curves can never cross, cause if they do it will create ambiguity as to what
the true utility is.
(2) The farther out an indifference curve lies, the higher the utility it indicates.
(3) Indifference curves always slope downwards
(4) indifference curves are convex.

Example:
The below is an example of indifference curve for food and clothing.

P.S : (Graph taken from web)

1
 Business Economics
2. Find below hypothetical data for total production costs of a manufacturing firm at various
levels of output. Complete the following:

Quantity Total FixedCost Variable Average Average Average

Cost Cost Fixed Variable Cost
Cost Cost
0 1000 1000

20 1200 1000

40 1300 1000

60 1380 1000

100 1600 1000

Answer:
Considering the above hypothetical data for total production costs of a manufacturing firm
at various levels of output.The solution are:
Quantity Total Fixed Variable Average Average Average
(Q) Cost Cost (FC) Cost (VC) Fixed Variable Cost (AC)
(TC) Cost Cost
(AFC) (AVC)
0 1000 1000 0 _ _ _

20 1200 1000 200 50 10 60

40 1300 1000 300 25 705 32.5

60 1380 1000 380 16.667 6.3 23

100 1600 1000 600 10 6 16

Fixed cost always remain constant.

Fixed cost is Total cost at 0 unit(quantity).
Variable Cost = Total Cost - Fixed Cost [VC = TC - FC]
Average Fixed Cost = Fixed Cost / Quantity [AFC = FC / Q]
Average Variable Cost = Variable Cost / Quantity [AVC = VC / Q]
Average Cost = Total Cost / Quantity [AC = TC / Q]

3. a. Large scale production is considered to be economical in the sense of per unit cost.
Explain the statement by describing different types of economies of scale. Give examples to
substantiate your answer.

Answer:
Large scale production is considered to be economical in the sense of per unit cost - when
more units of a good or service can be produced on a larger scale, yet with fewer input
costs, economies of scale are said to be achieved as well. Also, this means that as a company
grows and production units increase, a company will have a better chance to decrease its
costs.

2
 Business Economics
There are two types of economies of scale:

i) Internal economies of scale -

firm specific or caused internally;
measure a firm’s efficiency of production and occur because of factors controlled by its
management team;
offer greater competitive advantages.

ii?? External economies of scale -

occur based on larger changes outside;
occur because of larger changes within the industry, so when the industry grows, the
average costs of business drop;
lesser competitive advantage as it is shared among competitors.

Both result in declining marginal costs of production, yet the net effect is the same.

3.b. Elaborate Cross Demand, Composite Demand and Derived Demand and cite an example
to enumerate these types of demand.

Answer:
Cross Demand:
Cross demand refers to change in the quantity demanded of a good when the price of a
related good changes,I.e, the demand for good A will increase as the price of good B goes
up. This means that goods A and B are good substitutes, so that if B gets more expensive,
people are happy to switch to A. An example would be the price of milk, If whole milk goes
up in price, people may switch to 2% milk. Likewise, if 2% milk rises in price instead, whole
milk becomes more in demand.

Composite Demand:
Composite demand refers to when goods or services have more than one use so that an
increase in the demand for one product leads to a fall in supply of the other. For example
milk which can be used for cheese, yogurts, cream, butter and other products, If more milk is
used for manufacturing cheese, yogurt there is less available for butter.

Derived Demand:
Derived demand refers to the demand for a good or service that arises from the demand for
a different, or related, good or service. Derived demand is related solely to the demand
placed on a product or service for its ability to acquire or produce another good or service.
For example, if the demand for a good such as wheat increases, then this leads to an
increase in the demand for labour, as well as demand for other factors of production such as
fertilizer.