1. Price elasiticity of demand depends on various factors .Explain each factor with the help of an example.

Ans: A behavioral relationship between quantity consumed and a person's maximum willingness to pay for incremental increases in quantity. It is usually an inverse relationship where at higher (lower) prices, less (more) quantity is consumed. Other factors which influence willingness-to-pay are income, tastes and preferences, and price of substitutes. Demand function specifies what the consumer would buy in each price and wealth situation, assuming it perfectly solves the utility maximization problem. The quantity demanded of a good usually is a storng function of its price. Suppose an experiment is run to determine the quantity demanded of a particular product at different price levels, holding everything else constant. Presenting the data in tabular form would result in a demand schedule. Elasticity of demand is the economists way of talking about how responsive consumers are to price changes. For some goods, like salt, even a big increase in price will not cause consumers to cut back very much on consumption. For other goods, like vanilla ice cream cones, even a modest price increase will cause consumers to cut back a lot on consumption. Elasticity of demand is an elasticity used to show the responsiveness of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in demand one might expect after a one percent change in price. Elasticity is almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive elasticity demand. Goods with a small elasticity demand (less than one) are said to be inelastic: changes in price do not significantly affect demand e.g. drinking water. Goods with large elasticity demands (greater than one) are said to be elastic: even a slight change in price may cause a dramatic change in demand. Revenue is maximised when price is set so as to create a ED of exactly one; elasticity demands can also be used to predict the incidence of tax. Various research methods are used to calculate price elasticity, including test markets, analysis of historical sales data and conjoint analysis. There is a neat way of classifying values of elasticity. When the numerical value of elasticity is less than one, demand is said to be inelastic. When the numerical value of elasticity is greater than one, demand is elastic. So elastic demand means that people are relatively responsive to price changes (remember the vanilla ice cream cone). Inelastic demand means that people are relatively unresponsive to price changes (remember salt). An important relationship exists between the elasticity of demand for a good and the amount of money consumers want to spend on it at different prices. Spending is price times quantity, p times Q. In general, a decrease in price leads to an increase in quantity, so if price falls spending may either increase or decrease, depending on how much quantity increases. If demand is elastic, then a drop in price will increase spending, because the percent increase in quantity is larger than the percent decrease in price. On the other hand, if demand is inelastic a drop in price will decrease spending because the percent increase in quantity is smaller than the percent decrease in price. The price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. The value illustrates if the good is relatively elastic (PED is greater than 1) or relatively inelastic (PED is less than 1).

A good's PED is determined by numerous factors, these include; Number of substitutes: the larger the number of close substitutes for the good then the easier the household can shift to alternative goods if the price increases. Generally, the larger the number of close substitutes, the more elastic the price elasticity of demand. Degree of necessity: If the good is a necessity item then the demand is unlikely to change for a given change in price. This implies that necessity goods have inelastic price elasticities of demand. Price of the good as a proportion of income: It can be argued that goods that account for a large proportion of disposable income tend to be elastic. This is due to consumers being more aware of small changes in price of expensive goods compared to small changes in the price of inexpensive goods. The following example illustrates how to determine the price elasticity of demand for a good. The price elasticity of demand for supermarket own produced strawberry jam is likely to be elastic. This is because there are a very large number of close substitutes (both in jams and other preserves), and the good is not a necessity item. Therefore, consumers can and will easily respond to a change in price. 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? Ans: Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market. Often forecasting demand is confused with forecasting sales. But, failing to forecast demand ignores two important phenomena[1]. There is a lot of debate in demand-planning literature about how to measure and represent historical demand, since the historical demand forms the basis of forecasting. The main question is whether we should use the history of outbound shipments or customer orders or a combination of the two as proxy for the demand. Stock effects The effects that inventory levels have on sales. In the extreme case of stock-outs, demand coming into your store is not converted to sales due to a lack of availability. Demand is also untapped when sales for an item are decreased due to a poor display location, or because the desired sizes are no longer available. For example, when a consumer electronics retailer does not display a particular flat-screen TV, sales for that model are typically lower than the sales for models on display. And in fashion retailing, once the stock level of a particular sweater falls to the point where standard sizes are no longer available, sales of that item are diminished. Market response effect The effect of market events that are within and beyond a retailers control. Demand for an item will likely rise if a competitor increases the price or if you promote the item in your weekly circular. The resulting sales increase reflects a change in demand as a

result of consumers responding to stimuli that potentially drive additional sales. Regardless of the stimuli, these forces need to be factored into planning and managed within the demand forecast. In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling considers the size of the market and the dynamics of market share versus competitors and its effect on firm demand over a period of time. In the manufacturer to retailer model, promotional events are an important causal factor in influencing demand. These promotions can be modeled with intervention models or use a consensus to aggregate intelligence using internal collaboration with the Sales and Marketing functions.
3.The supply of a product depends o the price .What are the factors that will affect the supply of a product. Ans: Supply is the amount of some product producers are willing and able to sell at a given price all other factors being held constant. Usually, supply is plotted as a supply curve showing the relationship of price to the amount of product businesses are willing to sell. Factors affecting supply

Innumerable factors and circumstances could affect a seller's willingness or ability to produce and sell a good. Some of the more common factors are:
1.Goods own price: The basic supply relationship is between the price of a good and the quantity supplied. Although there is no "Law of Supply", generally, the relationship is positive or direct meaning that an increase in price will induce and increase in the quantity supplied. 2.Price of related goods: For purposes of supply analysis related goods refer to goods from which inputs are derived to be used in the production of the primary good. For example, Spam is made from pork shoulders and ham. Both are derived from Pigs. Therefore pigs would be considered a related good to Spam. In this case the relationship would be negative or inverse. If the price of pigs goes up the supply of Spam would decrease (supply curve shifts up or in) because the cost of production would have increased. A related good may also be a good that can be produced with the firm's existing factors of production. For example, a firm produces leather belts. The firm's managers learn that leather pouches for smartphones are more profitable than belts. The firm might reduce its production of belts and begin production of cell phone pouches based on this information. Finally, a change in the price of a joint product will affect supply. For example beef products and leather are joint products. If a company runs both a beef processing operation and a tannery an increase in the price of steaks would mean that more cattle are processed which would increase the supply of leather.

3.Conditions of Production. The most significant factor here is the state of technology. If there is a technological advancement in one's good's production, the supply increases. Other variables may also affect production conditions. For instance, for agricultural goods, weather is crucial for it may affect the production outputs. 4.Expectations: Sellers expectations concerning future market condition can directly affect supply. If the seller believes that the demand for his product will sharply increase in the foreseeable future the firm owner may immediately increase production in anticipation of future price increases. The supply curve would shift out. Note that the outward shift of the supply curve may create the exact condition the seller anticipated, excess demand. 5.Price of inputs: Inputs include land, labor, energy and raw materials. If the price of inputs increases the supply curve will shift in as sellers are less willing or able to sell goods at existing prices. For example, if the price of electricity increased a seller may reduce his supply because of the increased costs of production. The seller is likely to raise the price the seller charges for each unit of output. 6.Number of suppliers - the market supply curve is the horizontal summation of the individual supply curves. As more firms enter the industry the market supply curve will shift out driving down prices. 7.Government policies and regulations:Government intervention can have a significant effect on supply. Government intervention can take many forms including environmental and health regulations, hour and wage laws, taxes, electrical and natural gas rates and zoning and land use regulations.

This list is not exhaustive. All facts and circumstances that are relevant to a seller's willingness or ability to produce and sell goods can affect supply. For example, if the forecast is for snow retail sellers will respond by increasing their stocks of snow sleds or skis or winter clothing or bread and milk.

5.Discuss the full cost pricing and marginal cost pricing method.Explain how the two methods differ from each other. Ans: In economics, profit maximization is the ((Short Run) process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenuetotal cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue-marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost

Total revenue - total cost method

Profit Maximization - The Totals Approach To obtain the profit maximising output quantity, we start by recognizing that profit is equal to total revenue (TR) minus total cost (TC). Given a table of costs and revenues at each quantity, we can either compute equations or plot the data directly on a graph. Finding the profitmaximizing output is as simple as finding the output at which profit reaches its maximum. That is represented by output Q in the diagram. There are two graphical ways of determining that Q is optimal. First, the profit curve is at its maximum at this point (A). Secondly, at the point (B) the tangent on the total cost curve (TC) is parallel to the total revenue curve (TR), meaning that the surplus of revenue net of costs (B,C) is at its greatest. Because total revenue minus total costs is equal to profit, the line segment C,B is equal in length to the line segment A,Q. Computing the price at which to sell the product requires knowledge of the firm's demand curve. The price at which quantity demanded equals profit-maximizing output is the optimum price to sell the product.

Marginal revenue-marginal cost method

Profit maximization using the marginal approach

An alternative argument says that for each unit sold, marginal profit (M) equals marginal revenue (MR) minus marginal cost (MC). Then, if marginal revenue is greater than marginal cost, marginal profit is positive, and if marginal revenue is less than marginal cost, marginal profit is negative. When marginal revenue equals marginal cost, marginal profit is zero. Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue. If there are two points where this occurs, maximum profit is achieved where the producer has collected positive profit up until the intersection of MR and MC (where zero profit is collected), but would not continue to after, as opposed to vice versa, which represents a profit minimum. In calculus terms, the correct intersection of MC and MR will occur when:

The intersection of MR and MC is shown in the next diagram as point A. If the industry is perfectly competitive (as is assumed in the diagram), the firm faces a demand curve (D) that is identical to its Marginal revenue curve (MR), and this is a horizontal line at a price determined by industry supply and demand. Average Total Cost are represented by curve ATC. Total economic profit are represented by area P,A,B,C. The optimum quantity (Q) is the same as the optimum quantity (Q) in the first diagram. If the firm is operating in a non-competitive market, minor changes would have to be made to the diagrams. For example, the Marginal Revenue would have a negative gradient, due to the overall market demand curve. 5.Discuss the ful cost pricing and marginal cost
6.Discuss the price output determination using profit maximization under perfect competition in the short run. Ans:

Perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets.