Paper VIII Economics for Management

1) Explain how do you measure elasticity of demand. Illustrate. How do you interpret the different
types of elasticity.

Answer:
The term elasticity is defined as the rate of responsiveness in the demand of a commodity for a given change in price
or any other determinants of demand. In other words, it explains the extent of change in quantity demanded because
of a given change in the other determining factors, may be price or any other factors.
There are 4 types of elasticity of demand
1. Price elasticity of demand.
2. Income elasticity of demand.
3. Cross elasticity of demand.
4. Advertising elasticity of demand.

1. Price elasticity of demand:-
Elasticity of demand in general refers to the price elasticity of demand. In other words, it refers to the quantity
demanded of a commodity in response to a given change in price. Price elasticity is always negative which indicates
that the customer tends to buy more with every fall in the price. The relationship between the price & the demand in
inverse.
It is measured as follows..
Price elasticity of demand = Proportional change in the quantity demanded for product X
Proportional change in the price of X.
Edp= (Q2-Q1)/Q1/ (P2-P1)/P1.
Q1= quantity demanded before price change.
Q2= quantity demanded after price change.
P1= price before change.
P2= price after change.
The price is said to be elastic, when the proportionate change in quantity demanded is more than the proportionate
change in price.
Ex: 5% fall in the price results in an increase of 20% in the quantity demanded, the price is said to be elastic, which
implies that the elasticity is more than one (e>1).
On the other hand, if the price is said to be inelastic then it means that the quantity demanded is less than the
proportional change in the price. A 10% increase in price resulting in a 2% drop in the quantity demanded of the profit
implies a product where the demand is said to be price inelastic, which means the elasticity is less than one(e<1).
Significance of price elasticity of demand
It is necessary that the trader should be aware of the impact of changes in the quantity demanded for a given change
in price. He can take a decision as to how much he can supply if he is aware of the likely change in quantity
demanded as a result of change in price.

2. Income elasticity of demand:-
Income elasticity of demand refers to the quantity demanded of a commodity in response to a given change in
income of the consumer.
Income elasticity is normally positive, which indicates that the consumer tends to buy more and more with every
increase in income.
Income elasticity of demand= Proportional change in quantity demanded for product X
Proportional change in income.
Edi= (Q2-Q1)/Q1/ (I2-I1)/I1
Q1= quantity demanded before change,
Q2= quantity demanded after change.
I1= income before change.
I2= income after change.
Positive income elasticity indicates that the demand for the product rises more quickly them the rise in disposable
income. In other words, the demand is more responsive to a change in income.
Significance of income elasticity of demand:-
In determining the effects of changes in business activity it is necessary for the trader to be aware of the income
elasticity of demand for given commodities. With the help pf income elasticity of demand, he can estimate the likely
changes in the demand for his product as a result of changes in the national income. Income elasticity will help us in
knowing whether a commodity is a superior good, normal good or an inferior good.
If the income elasticity is positive and greater than one, it is a superior good. The superior goods such as automobiles
and refrigerators can be located where high income group customers find it convenient to shop. If the income
elasticity is positive and less than or equal to one, it is a normal good. If the income elasticity is negative, it is an
inferior good. Knowledge of the nature of goods help in allocating advertising budget.
3. Cross elasticity of demand:-
Cross elasticity of demand refers to the quantity demanded of a commodity in response to a change in the price of a
related good, which may be substitute or compliment.
Cross elasticity of demand= proportional change in quantity demand for product X
Proportional changes in price of product X.
Edc= (Q2-Q1)/Q1/ (P2y-P1y)/P1y.
Q1= quantity demanded before change.
Q2= quantity demanded after change.
P1y= price before change
P2y= price after change.
Significance of cross elasticity of demand:-
Knowledge of cross elasticity of demand helps a firm to estimate the likely effect of pricing decision of its traders
dealing in related products on sales. It also helps in defining industry.
4. Advertising elasticity:-
It refers to increase in the sales revenue because of change in the advertising expenditures. In other words, there is a
direct relationship between the amount of money spent on advertising and its impact on sales. Advertising elasticity is
always positive.
Advertising elasticity= Proportionate change in quantity demanded for product X
Proportionate change in advertisement costs.
Eda= (Q2-Q1)/Q1/ (A2-A1)/A1
Q1= quantity demanded before change.
Q2= quantity demanded after change.
A1= amount spent on advertisement before change.
A2= amount spent on advertisement after change
Significance of advertising elasticity:-
The advertising agencies richly depend on this concept to provide consultancy for their clients about the
advertisement budgets for a given level of sales activity

Q3: Monopoly is disappearing from markets. Do you agree with this statement? Do you advocate for
monopoly to continue in market situations?
(Source: http://ece-b.blogspot.in/2009/10/mefa-unit-6.html)
Answer:
Arguments against monopoly
1. when a monopolist restricts the output of his products the prices increases, and due to this, his profits
will be maximized.
2. A monopolist may exploit the consumer by charging higher prices for his products.
3. The choice of the consumer is restricted.
4. As there is no competition, there will be no pressure on the monopolist firms to charge particular
price as long as the superior authority (government) does not interfere.
5. A firm enjoying monopoly position in a strategic sector may provide a big risk for the economy.
Example : Keeping all the power of engineering facilities in one company is full of risks, as any natural or
man-made causes of slowdown or stoppage of production would give a severe setback to the economy.
Arguments in favour of monopoly
Despite various disadvantages, monopoly has certain advantages. They are,
1. A monopoly firm possesses large financial resources. These resources can be
Utilized sufficiently on innovation and technological progress, so as to introduce new inventions and
better techniques.
2. Monopoly firms can save expenditure on advertisement, publicity and transportation.
3. Monopoly can face foreign competition more easily than a competitive firm.
4. Monopoly is an essential increase of public utility services as a large investment is needed for such
services. Example : Railways.
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Q4: WHAT IS linear programming ? discuss the scope and role of linear programming solving
management problems?
Answer:
Linear programming (LP) is a mathematical method for determining a way to achieve the best outcome
(such as maximum profit or lowest cost) in a given mathematical model for some list of requirements
represented as linear relationships.
More formally, linear programming is a technique for the optimization of a linear objective function ,
subject to linerar equality linear equality and linear inequality constraints. Given a polytope and a real-
valued affine function defined on this polytope, a linear programming method will find a point on the
polytope where this function has the smallest (or largest) value if such point exists, by searching through
the polytope vertices.
Linear programming can be applied to various fields of study. It is used most extensively in business and
economics, but can also be utilized for some engineering problems. Industries that use linear
programming models include transportation, energy, telecommunications, and manufacturing. It has
proved useful in modeling diverse types of problems in planning, routing, scheduling, assignment, and
design.
The word "Programming" is used here in the sense of "planning"; the necessary relationship to
computer programming was incidental to the choice of name. Hence the phrase "LP program" to refer
to a piece of software is not a redundancy, although I tend to use the term "code" instead of "program"
to avoid the possible ambiguity.
There are many benefits of linear programming for business
1. Solve the business problems
With linear programming we can easily solve business problem. It is very benefited for increase the
profit or decrease the cost of business.
2. Easy work of manager under limitations and condition :-
Linear programming solve problem under different limitions and conditions , so It is easy for manager to
work under limitations and conditions . It helps manager to decide in different limitations.
3. Use in solving staffing problems:-
With linear programming , we can calculate the number of staff needed in hospitals ,mines , hotels and
other type of business.
4. Helpful in profit planning :-
Today linear programming is using for good profit planning.
5. Select best advertising media
With linear programming we can select best advertising media among a numbers of media.
6. solve the diet problems :-
With linear programming you can solve the diet problems with minimum cost. It is very useful for
hospitals .There are different elements like vitamins, proteins, carbohydrates etc. You can select best
quantity of them with minimum cost.

Although all linear programs can be put into the Standard Form, in practice it may not be necessary to
do so. For example, although the Standard Form requires all variables to be non-negative, most good LP
software allows general bounds l <= x <= u, where l and u are vectors of known lower and upper bounds.
Individual elements of these bounds vectors can even be infinity and/or minus-infinity. This allows a
variable to be without an explicit upper or lower bound, although of course the constraints in the A-
matrix will need to put implied limits on the variable or else the problem may have no finite solution.
Similarly, good software allows b1 <= Ax <= b2 for arbitrary b1, b2; the user need not hide inequality
constraints by the inclusion of explicit "slack" variables, nor write Ax >= b1 and Ax <= b2 as two separate
constraints. Also, LP software can handle maximization problems just as easily as minimization (in effect,
the vector c is just multiplied by -1).
The importance of linear programming derives in part from its many applications and in part from the
existence of good general-purpose techniques for finding optimal solutions. These techniques take as
input only an LP in the above Standard Form, and determine a solution without reference to any
information concerning the LP's origins or special structure. They are fast and reliable over a substantial
range of problem sizes and applications.
Two families of solution techniques are in wide use today. Both visit a progressively improving series of
trial solutions, until a solution is reached that satisfies the conditions for an optimum. Simplex methods,
"basic" solutions computed by fixing enough of the variables at their bounds to reduce the constraints
Ax = b to a square system, which can be solved for unique values of the remaining variables. Basic
olutions represent extreme boundary points of the feasible region defined by Ax = b, x >= 0, and the
simplex method can be viewed as moving from one such point to another along the edges of the
boundary. Barrier or interior-point methods, by contrast, visit points within the interior of the feasible
region. These methods derive from techniques for nonlinear programming that were developed and
popularized but their application to linear programming .
The related problem of integer programming (or integer linear programming, strictly speaking) requires
some or all of the variables to take integer (whole number) values. Integer programs (IPs) often have the
advantage of being more realistic than LPs, but the disadvantage of being much harder to solve. The
most widely used general-purpose techniques for solving IPs use the solutions to a series of LPs to
manage the search for integer solutions and to prove optimality. Thus most IP software is built upon LP
software, and this FAQ applies to problems of both kinds.
Linear and integer programming have proved valuable for modeling many and diverse types of problems
in planning, routing, scheduling, assignment, and design. Industries that make use of LP and its
extensions include transportation, energy, telecommunications, and manufacturing of many kinds.
If you have several objectives, then you may find that they cannot all be optimized by any one solution.
Instead, you will need to look for a solution or solutions that achieve an acceptable tradeoff between
objectives. Deciding what tradeoffs are "acceptable" is a topic of investigation in its own right.
There are packages specifically for multiple objective linear programming, including:
* ADBASE computes all efficient (i.e., nondominated) extreme points of a multiple objective linear
program. It is available without charge for research and instructional purposes. If someone has a
genuine need for such a code, they should send a request to: Ralph E. Steuer, Faculty of
* PROTASS is also available.
* NIMBUS is an interactive multiobjective optimization system that has a Web interface.
Other approaches that have worked are:
* Goal Programming (treat the objectives as constraints with costed slacks), or, almost equivalently,
form a composite function from the given objective functions;
* Pareto preference analysis (essentially brute force examination of all vertices);
* Put your objective functions in priority order, optimize on one objective, then change it to a
constraint fixed at the optimal value (perhaps subject to a small tolerance), and repeat with the next
function.
Linear programming is very important in various fields of life especially in managerial decision making.
The reason is that it helps the company in minimizing the costs and maximizing the profits. Through
linear programming managers can calculate the prices and the sales units which can maximize the
profits of the company. Therefore, there are various issues which the company incurs regarding their
costs and prices therefore, tools like linear programming can help the managers in decision making
progress.