NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES (NMIMS)

GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION

(NGA-SCE)

INTERNAL ASSIGNMENT

COURSE: BUSINESS ECONOMICS

APPLICABLE FOR JUNE 2021 EXAMINATION
NMIMS GLOBAL ACCESS SCHOOL FOR CONTINUING EDUCATION (NGA-SCE)
COURSE: BUSINESS ECONOMICS
INTERNAL ASSIGNMENT APPLICABLE FOR JUNE 2021 EXAMINATION

QUES 1.) CALCULATION OF ELASTICITY OF PRICE, TOTAL REVENUE AND

MARGINAL REVENUE
Price elasticity refers to the estimation of the numerical value of change in demand with respect
to change in the given price for making various decisions during the course of business. The
numerical value of change in demand can be calculated with the help of Elasticity of price.
Generally there are 5 types of price elasticity which are as follows:
 PERFECTLY ELASTIC DEMAND
It refers to the market situation
Where, Ep = infinity.
In other words it refers to the situation when demand for product is exactly equal to the
supply of the product.
 PERFECTLY INELASTIC DEMAND
This is another type of market situation in which the demand for product and its supply
are not at all related to each other.
Ep=0.
In other words, change in demand do not affect change in supply at any cost.
 RELATIVELY ELASTIC DEMAND
When proportionate or percentage change (fall or rise) in price results in greater than the
proportionate change or percentage change (rise or fall in demand) or quantity demanded,
the demand is said to be relatively elastic, Ep>1.
The demand curve is gradually sloping downwards.
 RELATIVELY INELASTIC DEMAND
It refers to the situation when percentage fall or rise in the price results in less than the
percentage change in demand, therefore it is said to be relatively inelastic. In other words
when change in demand is comparatively less than the change in price, the demand is
said to be inelastic. Ep<1.
 UNITARY ELASTIC DEMAND
It is the last type of elasticity of price in which change (rise or fall) in price results in
equivalent change (rise or fall) in demand.
Ep=1.
It means that for every single unit of price increase an equal unit of demand is also
increased and vice versa.
 In the given question the data is given as follows:
PRICE QUANTITY TOTAL REVENUE MARGINAL
REVENUE
6 0 0 -
5 100 500 500
4 200 800 300
3 300 900 100
2 400 800 300
1 500 500 500
0 600 0 0
 Price elasticity can be computed by 4 methods which are as follows:

a. TOTAL OUTLAY METHOD

This method was introduced by Dr. Alfred Marshall. According to this method,
the elasticity of any product is measured on the basis of the amount spent on
purchasing the product or expenditure incurred on the product.
Under this method, the price elasticity is computed by comparing the price paid
for the product with the expenditure incurred on the same. There are 3 cases in the
total outlay method which are as follows:

I. If the total outlay method remains unchanged after there is a change in the
price of goods, the price elasticity equals to 1. (Ep=1).

II. When a fall in the price of goods results in the quantity demanded, the
elasticity of demand is equal to one (Ep<1).

III. When a fall in the price of goods brings large increase in the quantity
demanded, then elasticity of price is less than 1. (Ep>1).

Calculation of Elasticity of price (Ep) using total outlay method

PRICE QUANTITY TOTAL OUTLAY PRICE
(P) (Q) (P X Q) ELASTICIT
Y
(Ep)
ORIGINA NEW ORIGINAL NEW ORIGINA NE
L PRICE PRIC QUANTIT QUANTIT L W
E Y Y
6 5 100 200 600 1000 Here change
in outlay is
more than
original
 outlay, so
Ep>1.
4 3 300 400 1200 1200 Here outlay is
equal in both
cases,
therefore
Ep=1.
2 1 500 600 1000 600 Here, change
in outlay is
less than
change in
original
outlay, Ep<1.
b. POINT ELASTICITY METHOD
This is the second method of calculation of price elasticity also known as
geometric method or slope method of demand curve b. In this method, the point
elasticity is computed by using the same formula as used for calculating general
price elasticity.
Here price elasticity is computed using an equation to measure various degrees of
price elasticity.

Where, Q = a – bp
Price elasticity of demand (Ed) = Percentage change in quantity
Percentage change in price
= P x dq
Q x dp
Where slope of Q= dq = -b and Ed = -b X P
dp Q
In this question given above, quantity demanded is already given. So this
method will not be applicable.

c. ARC ELASTICITY METHOD

Under arc elasticity method, the elasticity of demand is calculated at midpoint of
an arc on the demand curve. In this method, the average price and quantities are
calculated for finding elasticity. It is assumed that elasticity would be same over a
range of values of variables considered.
Arc elasticity is calculated as follows:
Ep = Change in Quantity x P+P1
Change in Price x Q+Q1

Where,
Change in quantity is (Q1-Q)
Change in price (P1-P)
Original quantity demanded Q
New Quantity demanded Q1
Original price is P
New price is P1

In the given question, Ep is calculated as follows

Ep = 100-0 x 6+5
6-5 x 100+0
= 100 x 11
1 x 100
=1100 = 11-Ans.
100

Ep = 200-100 x 5+4
5-4 x 200+100
= 100 x 9
1 x 300
=900 = 3-Ans.
300

Ep = 300-200 x 4+3
4-3 x 300+200
= 100 x 7
1 x 500
=700 = 1.4-Ans.
500

Ep = 400-300 x 3+2
3-2 x 400+300
= 100 x 5
1 x 700
=500 = 0.714-Ans.
700
Ep = 500-400 x 2+1
2-1 x 500+400
= 100 x 3
1 x 900
=300 = 0.333-Ans.
900
RELATIONSHIP BETWEEN AVERAGE REVENUE AND MARGINAL REVENUE
Before explaining the meaning of average revenue and marginal revenue, it is necessary to
understand the meaning of these terms.
Average revenue: It refers to the measure of the revenue per unit of output generated. It is
computed as follows

Average revenue (AR) = Total revenue

Output (units)

Marginal revenue: It refers to the additional total revenue generated by producing one additional
unit of a product or service. It is computed as follows

Marginal revenue (MR) = Change in total revenue

Change in quantity sold

The relationship between average revenue and marginal revenue can occur in two situations
 When price of goods do not change
When the price remains constant, the firm can sell any units of output at the price fixed
by the market. Due to this reason, the MR curve and AR curve is a horizontal straight line
which is parallel to the X Axis.

 When price changes with change in output

In this situation, sales can be increased only by decrease in price, which can result to
decrease in Average Revenue.
As a result both average revenue and marginal revenue slopes downwards from left to
right.

PRICE QUANTITY TOTAL AVERAGE REVENUE MARGINAL

(P) (Q) REVENUE TOTAL REVENUE REVENUE
(P X Q) OUTPUT
6 100 600 600/100 =6 -
5 600 1100 1100/600 = 1.833 4.167
4 700 2800 2800/ 700 = 4 -2.167
3 900 2700 2700/ 900 = 3 1
7 235 1645 1645/ 235 = 7 -4
 General relationship between average revenue and marginal revenue is explained as
follows
I. AR increases as long as MR is higher than AR (or when MR > AR, AR increases)
II. AR is maximum and constant when MR is equal to AR (or when MR=AR, AR is
maximum).
III. AR falls when MR is less than AR (or when MR <AR, AR falls)
QUES .2) DEMAND FORECASTING ALONG WITH QUANTITATIVE AND
QUALITATIVE METHODS
 Meaning of demand forecasting
Demand forecasting refers to the process of predicting the future demand of products and
services in the market. There are various risks and uncertainties that affect the demand,
supply, tastes and preferences and sale of goods and services in the market. Out of such
losses, there are some unavoidable losses which cannot be mitigated. Therefore to reduce
such losses, various business decisions are undertaken with a view to plan the production
process, purchasing raw materials, managing funds, deciding prices of products, etc.

It is rightly said that demand forecasting is not a speculative exercise into the unknown. It
is essentially a reasonable judgement of the future probabilities of the market events
based on scientific background.
This fact can be elaborated by different qualitative and quantitative methods of demand
forecasting which are as follows

1. QUANTITATIVE TECHNIQUES OF DEMAND FORECASTING

It refers to making use of statistical tools for the purpose of collecting
statistical data. In this technique demand is forecasted based on the
historical data.
Statistical method is cost effective and reliable method of demand
forecasting. Various quantitative techniques are as follows
i. TIME SERIES ANALYSIS
It is the method used by the organization for the purpose of
prediction of demand in the long period of time. Using trends an
organization can predict the demand for its product or service for a
period of time.
There are various components of demand forecasting of products
and services which are as follows
a) SECULAR TREND
It refers to the condition due to which graph of time series
moves to a higher or lower value over particular period of
time due to some factors such as increase in population, new
technology, new methods, etc.
b) CYCLICAL VARIATIONS
There are some phases which every business faces during its
journey such as growth, recession, depression, recovery and
it generally lasts for more than 1 year. These are not regular
in nature and can lead to various business irregularities. For
example due to lower demand for a particular product, its
 sales also gets reduced which further leads to hike in prices
and ultimate reduction in the revenue being generated from
particular product.
c) SEASONAL VARIATIONS
These are the type of fluctuations which are continuous and
repeating in nature. It generally occur during the period of
one year and are it can occur in various forms such as
d) IRREGULAR VARIATIONS
These are non-recurring short term fluctuations that affect
the value of time series.
It has no regular patterns regarding their occurrence and it is
unpredictable in nature. For example communal riots,
lockouts, etc.

ii. SMOOTHING TECHNIQUES

In cases where time series lacks significant trends, smoothing
techniques can be used for the purpose of demand forecasting. It
eliminates random variables from historical demand. It helps in
eliminating demand levels and demand patterns that can be used to
estimate the future demand.

There are two methods of smoothing techniques

(1) Simple average moving method

(2) Weighted average moving method

iii. BAROMETRIC METHODS

It is also known as leading indicators approach to demand
forecasting. Under this method, future trends is speculated based on
current trends. There are various indicators used in this trend are as
follows
(1) LEADING INDICATORS
When an event that has occurred in past has resulted to
prediction of future events, then such event is called as leading
indicator.
For eg stock.
(2) COINCIDENT INDICATORS
These are the indicators which move simultaneously with
current event.
For eg. Level of unemployment, rate of inflation, etc.
(3) LAGGING INDICATORS
 It includes all the events that follow a change. Lagging
indicators are very important to analyse the structure of the
economy and the way it operates. Few examples of lagging
indicators are outstanding loans, rate of interest, etc.
iv. ECONOMETRIC METHODS
These are the methods which makes use of statistical analysis for
the purpose of assessing various economic variables such as change
in price, income levels, economic rate of interest etc.
It is of two types

(1) Linear regression equation

(2) Multiple regression equation

2. QUALITATIVE TECHNIQUES OF DEMAND FORECASTING

i. POININON POLLS
It refers to the technique which involves taking the opinion of
those has knowledge of the prevalent trends in the market such
as sales representative, marketing experts, consultants etc.
There are various methods of opinion polls which are as follows
1) DELPHI METHOD
Under this method, the experts uses the assumptions
made by the other experts. The experts can revise their
own estimates and assumptions made by other experts.
The final result of all experts constitutes the final
demand forecast.
2) SALES FORCE COMPOSITE
Under this method, sales representatives of various
organizations collect information from the consumers
located at different places in a country. This helps them
to understand the probable demand for an organizational
product.
3) TEST MARKETING.
It is done by the companies at the time of launch of new
product. It is conducted under real market conditions. If
after test marketing, a positive response is received from
the consumers, then company can launch the product at
large scale in the market.

ii. SURVEY METHOD

It is another method of demand forecasting under qualitative
method. In this method, the organization conducts survey with
consumers for the purpose of determining the demand for their
existing products and services and for the purpose of
anticipation of future demand.
There are two types of survey methods which are as follows

a) COMPLETE ENUMERATION
It is the type of survey method under which all the
consumers are interviewed and asked about their future
plans regarding the purchases. Based on such details of the,
demand forecast is done.

b) SAMPLE SURVEY
Under such method, only some consumers are selected from
the market from the group of all consumers and survey is
conducted on the basis of various market forces such as
demand of the product, price of competitor’s products, etc.
QUES 3 (a) DEFINING ELASTICITY OF SUPPLY AND FINDING PRICE FROM THE
GIVEN STATEMENT
ELASTICITY OF SUPPLY:
It refers to the measurement of the degree of the change in the quantity supplied of a product or
service in response to the change in the product or service. It is based on the law of supply which
stats that quantity supplied of a product in directly related to the price of same. Which means that
with an increase in price, there is a proportionate increase in quantity supplied.
Definition of elasticity of supply
“The price elasticity of supply is the measure of the responsiveness in quantity supplied to a
change in price of specific good.”
It is calculated as follows

Es = Percentage change in quantity supplied of a commodity X

Percentage change in price of commodity X

Es = Change in quantity
Original quantity supplied
= Change in S X P
Change in P X S
Where, Change in S= S1-S
Change in P= P1-P

There are various types of elasticity of supply

 PERFECTLY ELASTIC SUPPLY
It refers to the situation when the proportionate change in price of product results in an
change in quantity supplied. In this case,
Es=Infinity.
This situation is considered as an imaginary situation as there is no such product or
service whose supply is infinite.

 PERFECTLY INELASTIC SUPPLY

It refers to the market situation in which there is no change in the quantity supplied of a
product or service with change in price of the same. It remains constant throughout.
Therefore, Es=0.
  RELATIVELY ELASTIC SUPPLY
In this case, the percentage change in quantity supplied of a product or service is more
than the percentage change in the price. That is why it is known as relatively elastic
supply.
In this case Es>1.
 RELATIVELY INELASTIC SUPPLY
It refers to the type of elasticity of supply in which the percentage change in quantity
supplied of a product is less than the percentage change in the price of a product.
Therefore it is known as relatively inelastic supply.
It is denoted as Es<1.
 UNITARY ELASTIC SUPPLY
When the proportionate increase in the quantity supplied of goods is exactly equal to the
proportionate increase/ decrease in price of the same, such situation is known as unitary
elastic supply.
It is shown as Es=1.

In the given question, data provided to us is as follows

Elasticity of supply (Es) = 2
Quantity supplied (Qs) = 200 units
Price (P) = Rs. 8 per unit
New quantity supplied =250 units
New price =?

Es = Change in S X P
Change in P X S

Where, Change in S= S1-S

Change in P= P1-P
Let new price = x
Putting values in the formula we get,

Es =( 250-200)units X 8
( x-8) X 200
2 =50 units X 8
( x-8) X 200
2 = 400
 200x-1600
400x-3200 = 400
400x = 3600
X = 9-Ans.
Therefore, as per given calculation, the supply of the commodity is relatively elastic.

Ques 3.(b) Calculation of elasticity of supply as per data given below

Increase in the price of soya bean = 15 %
Original quantity supplied = 300 units
Increase in the quantity supplied = 350 units

As per the data given in the question,

The elasticity of supply can be calculated by point method. Under the point method, the
elasticity of supply is measured at a specific point of supply curve.
In this method, we apply derivative on the given supply equation to measure the responsiveness
of the quantity supplied with reference to change in price.
The formula to calculate price elasticity of supply is as follows

Es= Percentage change in quantity

Pecentage change in price

= P X dq
Q X dp
= 350-300 X 100
300
15%
= 16.66%
15%
= 1.1106- Ans.
Therefore, as per given calculation, the supply of the commodity is relatively elastic.