# BUSINESS ECONOMICS

NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Business Economics

SEM – I

1. Calculate Elasticity in the following cases:

a) Assume that a business firm sells a product at the price of Rs 500. The firm has decided to reduce the price of the product to Rs 400. Consequently, the demand for the product is raised from 20,000 units to 25,000 units. Calculate the price elasticity of demand. ANSWER A:

PRICE ELASTICITY OF DEMAND:

MEANING: Price elasticity of demand is a measure of a change in the quantity demanded of a product due to Change in the price of a product in the market. Price elasticity of demand = Proportionate change in the quantity demanded Proportionate change in price A percentage change in demand and price is denoted with a symbol Thus, the formula for calculating the price elasticity of demand is as follows, ep = ^ Q P

^ P Q

Where,

ep = Price elasticity demand

P = Initial Price

P = Change in price

Q = Initial Quantity Demanded

Q = Changes in quantity demanded

Here,

P = Rs.500

P = Rs.100 (a fall in price; Rs.500 – Rs.400 = Rs.100)

Q = 20,000 units

Q = 5,000 units (25,000 – 20,000)

By substituting these values in above formula we get:

ep = 5,000 500

100 20,000

ep = 25,00,000

20,00,000

ep = 5

4

ep = 1.25

Thus elasticity of demand is greater than 1.

Numerical value of elasticity of demand is >1 it means, It is the type of relative elastic demand b) Suppose the monthly income of an individual increases from Rs 15,000 to Rs20,000. Now, his demand for clothes increases from 35 units to 40 units. Calculate the income elasticity of demand.

ANSWER B:

INCOME ELASTICTY OF DEMAND:

MEANING: An increase in the income of consumers increases the demand for the product even if the price Remains constant. The responsiveness of quantity demanded with respect to the income of Consumers is called the income elasticity of demand. Mathematically, the income elasticity of demand can be stated as: ey = Percentage change in quantity demanded

Percentage change in income

Where,

Percentage changes in quantity demanded =

New quantity demanded – Original quantity demanded (Q)

Original Quantity Demanded (Q)

Percentage changes in income =

New income – Original income (Y)

Original income (Y)

Thus the formula for calculating the price elasticity of demand is as follows, ey = ^ Q Y

^ Y Q

Where,

ey is income elasticity of demand

Q is original quantity demanded

Q1 is new quantity demanded

Q = Q1 - Q

Y is original income

Y1 is new income

Y = Y1 – Y2

Here,

Y = Rs.15,000

Y1 = Rs.20,000

Y = 20,000 – 15,000 = 5,000

Q = 35 units

Q1 = 40 units

Q = 40 – 35 = 5

The formula for calculating the income elasticity of demand is: ey = ^ Q Y

Y Q

Substituting the values,

ey = 5 15,000

5,000 35

ey = 0.4 ( as a result of change in the price of related goods The cross elasticity demand can be measured as:

ee = Percentage change in quantity demanded of X

Percentage change in...

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