MB0042 – Managerial Economics - 4 Credits
(Book ID: B0908)
Assignment Set- 1 ( 60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.
Q.1 Price elasticity of demand depends on various factors. Explain each factor with the help of an example. Q.2 A company is selling a particular brand of tea and wishes to introduce a new flavor. How will the company forecast demand for it ?
Q.3The supply of a product depends on the price. What are the other factors that will affect the supply of a product. Q.4Show how producers equilibrium is achieved with isoquants and isocost curves. Q.5 Discuss the full cost pricing and marginal cost pricing method. Explain how the two methods differ from each other. Q.6 Discuss the price output determination using profit maximization under perfect competition in the short run.
Q.1 Price elasticity of demand depends on various factors. Explain each factor with the help of an example.
Consumers in a market economy are influenced by various factors in deciding what to buy. One of these factors is price, and the law of demand that defines the typical relationship between price and quantity demanded states that consumers will demand more of a particular product at a lower price, and less at a higher price. However, the price elasticity of demand extends this and examines the extent of such changes in demand in relation to price. How much demand contracts or expands in response to a price change is of importance to businesses and governments, and hence methods such as the total outlay method have been developed to test the price elasticity of demand at various price levels.
The price elasticity of demand measures the responsiveness or sensitivity of the quantity demanded of a particular product to changes in its price. As a figure, the price elasticity of demand shows the percentage change in the quantity of a good demanded resulting from a 1% increase in its price. Demand can hence be said to be relatively elastic, relatively inelastic or unitary elastic. As for most goods, a fall in price will cause an expansion in demand, but if that expansion in demand were proportionately greater than the fall in price, then we would say that quantity demanded is very responsive to a price change; thus demand is said to be relatively elastic.
The opposite situation, relatively inelastic demand, indicates that there has been a less than proportionate change in quantity demanded – a weak response to price change. When the total amount spent remains unchanged, the proportionate change in quantity demanded is the same as the proportionate change in price, and demand is said to be unitary elastic.
There are other methods of determining the price elasticity of demand, such as the arc method and the point method, but the total outlay method is a simple way of measuring price elasticity. It looks at the effect of changes in price on the total revenue earner by the producer. Total outlay (or revenue) is found by multiplying price by the quantity that would be demanded at that price. In effect, the total outlay (or total expenditure) by consumers on a certain product is equivalent to the total revenue that sellers of the product would receive at that price.
If total outlay moves in the same direction as the price change, demand in that price range would be relatively inelastic. Consumers demand 50 units at a price of $5, so total outlay is $250. When the price rises to $6, demand falls to 45 units, but the total outlay increases to $270. Total outlay has moved in the same direction as the price change – the price increase would lead to an increase in total revenue for firms, therefore demand is said to be relatively inelastic over this price range.
If total outlay moves in the opposite direction to the price change, demand in that price range would be relatively elastic. At a price...