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1.

Quantity Total Fixed Total Variable Total Average Marginal


Cost Cost Cost Cost Cost

25 10 18 28 1.12 -

26 10 20 30 1.15 2

27 10 21 31 1.14 1

 Total fixed cost – It refers to the cost occurred in the production process does
not change with change in quantity in short run it is a part of total cost. As above
the fixed remain the same even after the change in quantity.
 Total variable cost – Variable cost refers to it increases with increased
production, as above when quantity is 25 variable cost is 18 when quantity
increased to 26 the variable cost is 20 and so on.
 Total Cost - It is defined as the cost incurred in the production of the commodity
or a service. Total cost is the sum of total fixed cost and the total variable
cost.

Formula - Total Cost = TFC+TVC (Total Fixed Cost + Total variable cost)

Example - In Nestle India the fixed cost includes insurance premium paid, rent and
lease rent and compensation to employees and variable cost includes raw material,
stores and spares, power, fuel and water charges, advertisement expense, marketing
expense, travelling expense, distribution expense, communication expense and
deprecation after adding both fixed and variable cost they get the total cost.

Calculation-
(i) TC = 10 + 18 = 28
(ii) TC = 10 + 20 = 30
(iii) TC = 10 + 21 = 31

 Average Cost - It is defined as the cost per unit incurred in production of the
commodity. It is obtained by dividing total cost by total quantity or output. It is a
U-shaped curve due to law of variable proportion.
Formula - TC / Quantity

Example - In manufacturing business after the production of items or goods they buy
raw material in bulk and then produce the finished good after that the total cost incurred
in the raw material and other expenses they divide with the number of units produced
by that raw material and get the cost per unit incurred in the production process.

Calculation -
(i) AC = 28 / 25 = 1.12
(ii) AC = 30 / 26 = 1.153
(iii) AC = 31 / 27 = 1.148

 Marginal Cost - It is defined as the additional cost made to the total cost for the
production of additional unit of output. It is obtained by the change in total cost
by change in quantity.

Formula - Marginal Cost = TCn-TCn-1


Where:
n = Number of units produced.
TCn = Total cost of number units.
TCn-1 = Total cost of (n-1) units.

Example – As per new TRAI’s Channel rules they prescribed 100 channels for Rs.130
now for adding one extra channel they have to pay extra money according to the
channel price like for adding Star Gold SD you have to pay Rs.8 and for Star Gold HD
you have pay Rs.10. It is the additional cost made for additional channel.

Calculation -
(i) Not Defined
(ii) MC = 20 – 18 = 2
(iii) MC = 21 – 20 = 1

Formulae Used:

(i) TC = TFC + TVC


(ii) AC = TC / Quantity
(iii) MC = TCn-TCn-1
Q.2

Demand may be defined as willingness as well as capability of a person to buy goods


and services at a particular price at a particular period of time. The price and demand
are “ inversely proportional”. As the price of the commodity increases the demand of
the product start declining and vice versa.

The five determinants of individual demand are as follows :-

Normal Goods

Income of the Consumer Inferior Goods

Price of the given Complementary


Commodity Goods
Determinants
of individual Taste and Preference
demand

Consumer’s Expectations

Luxury Goods
Price of Related Good
Substitute Goods
1) Income of the Consumer – It plays an important role the income affects the
demand of a commodity as if the income is low the consumer can’t prefer that
goods or commodity to buy. However, the effect of change in income on
demand it also depends on the nature of the commodity.

Three different types of commodity :

Normal Goods
- These are goods whose demand

rise with the increase in the level of income of the consumer, while a decrease in
income results in decline the demand. Example- If income increases, the consumer
will prefer to select HD channels in place of SD channels, if the income decreases
then if consumer chooses the HD pack then he shifts to SD pack and if on SD pack
then he reduces some channels according to the income. The curves are as follows:

Decrease in Demand Increase in Demand

Inferior Goods
- These are goods whose
demand decrease when the income rises and demand increases when the income
fall. Example – The consumer do some business tour for expansion of business or for
payment collection, etc. if the income decreases they prefer to stay at cheap hotels
the demand for cheap hotels increases, if the income increases the consumer will
prefer to stay in expensive hotel with more services, comfortable beds, Wi-Fi facility
etc. the demand for cheap hotel decreases with rise in income of consumer. There is
direct relationship between the income and demand of the consumer. The curves are
as follows:
Luxury Goods
- These are the goods whose
demand rises with the rise in the income of the consumer. Example – The income
rises the consumer will prefer the better clothes, food, jewellery, automobile etc.

2) Price of the Commodity – When the price of the service or a commodity


increase the demand for that service or product will decline, and vice versa both
are inversely proportional to the price and quantity it is also called as “ law of
demand”.
Example – The price of air tickets are high if you choose the nearest date slot due to
this the demand for recent tickets are low if there is no emergency but if you choose
two three months later tickets the prices are low compared to current and the demand
are also high, consumers book tickets before two three months less prices increases
the demand.

3) Taste and Preference – It may be defined as the consumer’s taste and


preference change it affect the demand of a good. The price is not the only
factor due to which the consumer switch to another product the other reasons
of consumer taste and preference are changes because of change in habits,
fashion, etc.

Example – Reliance Jio launched wired broadband Jio-Fiber across 1600 cities in
India, it provides speed up to 100 mbps, free voice calling, landline connection at a
cost of RS. 699 in bronze plan with no installation charges they have to pay RS. 2500
a security deposit which is refundable, now he prefer to choose this plan rather than
other because of affordable price and they don’t have to pay different bill for Wi-Fi,
Mobile Connection, DTH they got all in one place.
4) Consumer’s Expectations - It refer to if the consumer have an indication of
increase in the price of the product in future then he purchases that product in
large quantity. The price and the demand have direct relation between the
expectation of rise in price in future and the current increase in demand.

Example – Like, IndiaMART when the IPO of this company launches it opens on RS.
973 and after listing the price of the shares goes RS. 1338 in high and after some time
the company shows their previous balance sheet and profits then the consumer
expectations were high and they know the price will rise and bought shares and today
it’s approx. RS. 1888 and RS. 1904 in high.

5) Price of Related Good – It is defined as there are two products in the market as
a substitute to each other if the price of one product is increased the demand
for the other good increase and the demand for that product start declining, and
vice versa. Related goods are categorised as follows:

Complementary goods
- It may be defined as if the price
of one good is increased the demand for its complimentary good will reduce it has an
inverse relation between the price and the demand of the product. Example – If the
price of play station reduced the demand for licenced game will increase, and this
increase in income by licenced game will settle the fall in revenue from reducing the
price.
Substitute goods
- It is defined as the goods which
can be used in place of another these goods have direct relation between price and
demand of the product . If the price of good is increased the consumer will shift to its
substitute goods. Example – The yearly plan price of the Netflix is increased then the
consumer will shift to its substitute Amazon Prime it decreases the demand for Netflix
due to rise in price.

Conclusion

In the above question it concludes that the price of the commodities will affect the
demand in some cases the demand increases when there is rise price and, in some
cases, demand decreases when fall in price. As well as there is situation where
demand increases when there is fall in price and the other cases the demand
decreases when rise in price it depends on cases to cases and according to the types
of product.

Q.3

Income elasticity of demand may be defined as the responsiveness of quantity


demanded to a change in income the increase in income of the consumer will increase
the demand for the product if the price remain the same this responsiveness is called
the income elasticity of demand.

There are 3 types of income elasticity of demand:


1) Positive income elastic - When the increase in the income of consumer
increases in the demand of the product and vice versa it happened in case of
normal good it is called positive income elasticity of demand.
2) Negative income elastic - When the increase in the income of consumer fall in
the demand of the other product and vice versa it happened in case of inferior
good it is called negative income elasticity of demand.
3) Zero income elastic - When the increase in the income of consumer does not
change in the demand of the product it is said to be zero it is called zero income
elasticity of demand.

To calculate the income elasticity of demand the formula to be used is :-

ey = Percentage change in quantity demanded


Percentage change in income
Where,
Percentage change in quantity demanded =

New quantity demanded - Original quantity demanded (ΔQ)


Original quantity demanded (Q)

and for percentage change in income =

New income – Original income (ΔY)


Original income (Y)

Now, the formula for calculating the price elastic of demand is as follows :

ey = ΔQ Y
ΔY Q

Where,

Y is the original income

Y1 is the new income

ΔY = Y1 – Y

Q is the original demand


Q1 is the new quantity demanded

ΔQ = Q1 – Q

Solution

In given question, Q = 20 units

Q1 = 25 units

ΔQ = Q1 – Q

ΔQ = 25 – 20 = 5 units

Y = RS. 10000

Y1 = RS. 15000

ΔY = Y1 – Y

ΔY = 15000 - 10000 = 5000

Now calculation of price elastic of demand ,

ey = ΔQ Y
ΔY Q

Substituting the values,

ey = 5 10000
5000 20

Ey = 0.5 (< 1)
Interpretation – In case of normal goods, the income elasticity of demand found
mostly positive which is shown in figure.

(B)
Cross elasticity of demand may be defined as the quantity demand changed due to
change in the price of the other good. The cross elasticity of demand is the percentage
change in quantity demanded of good divided by percentage change in price of the
other good. It is categorised in three parts –

1) Positive cross elasticity of demand – When the increase in the price of the
substitute product increase the demand of the other product and vice versa it
happened in case of substitute good it is called positive cross elasticity of
demand.
2) Negative cross elasticity of demand – When the increase in the price of the
substitute product decrease the demand of the other product and vice versa it
happened in case of complementary good it is called negative cross elasticity
of demand.
3) Zero elasticity of demand - When the increase in the price of the substitute
product does not change the demand of the other product and vice versa it is
called zero cross elasticity of demand.

It can be measured as :-

ec = Percentage change in output demanded of X

Percentage change in price of Y


The cross elasticity of demand is stated as :

ec = ΔQX PY
ΔPY QX

Here,

Ec is cross elasticity of demand


Qx = original quantity demanded of product X
ΔQx = Change in quantity demanded of product X
Px = Original price of product Y
ΔPx = Change in price of product Y

Solution

In given question, Qx = 100


Qx1 =160
ΔQX = Qx1 – Qx
ΔQX = 160 – 100 = 60
PY = 40
PY1 = 50
ΔPY = PY1 – PY
ΔPY = 50 – 40 = 10

Now calculation of price elastic of demand ,

eC = ΔQX PY
ΔPY QX

Substituting the values,

ec = 60 40
10 100

Ec = 2.4 (> 1)

The relationship between those goods are they are substitute goods in this good both
can be used for in place for another if the price of one good increased the demand for
that product start declining and their substitutes demand start rising. These goods
have direct relation between price and demand of the product . If the price of one
good is increased the consumer will shift to its substitute goods and vice versa.
Here the price of the coffee powder is increased then the demand of its substitute tea’s
demand start increasing.