This assignment delves into economic concepts such as supply and demand shifts, price elasticity, sales maximization, and profit maximization strategies. Through detailed graphs and explanations, it explores the impact of various economic factors on market equilibrium and business profitability.
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BEO1105 Assignment 1
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Question 1: a) The below diagram clearly presents the picture of the first option of efficient cars. Since, with the lack of petrol, there is decrease in supply (of petrol), S (supply curve) shifted leftwards to S2, the shift in supply curve lead to change in equilibrium point from E to E2 because there is fall in quantity available in the market (from Q to Q2) and resulted in increase in price (Chand, 2017). Figure1: describing decrease in supply of petrol and effect over quantity and price of petrol Source: Chand, 2017 b) 3
Figure 2: depicting the equilibrium process of substitute good (liquid gas) due to decrease in supply of petrol (main product) Source: Chand, 2017 The above graph depicts the shift of demand curve of liquid gas towards right due to a decrease in the supply of the main product (petrol). Though there is no increase in the price of petrol there is a shortage of supply of petrol and people will prefer to purchase liquid gas for their cars. Thus, the demand will move from D to D1 and the quantity supplied will increase from Q to Q1 and eventually the price will also increase from P to P1 of liquid gas (substitute good) (Chand, 2017). 4
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Question 2: a) Figure: describing effect of increase in income on normal good Source: Prasanna, 2016 The normal good (which is beef) will get affected by the rise in average income and therefore, as presented in above graph, the D curve will shift D to D1, and to fulfil the excess demand, there is will increase in quantity available (from Q to Q1) and increase in price (from P to P1). Thus, there will be a shift in equilibrium (E to E1) (Chand, 2017). b) 5
Figure: effect of increase in supply Source: Pal, 2017. With the farmer access for cattle feed and increased rate of cattle in the market, the supply of beef will increase. Thus, the above graph presents the shift of supply from supply to supply1 (rightwards shift) and thus, quantity available has also increased from Q to Q1 and price also decreases in price from P to P1 (Pal, 2017). c) Possibility 1st: with the government notification against mass slaughter of cows due to increasing in cow diseases, suppliers will get affected and reduce supply in the market. The below diagram presents the left shift wards of supply from S to S2 and this will lead to a downfall in quantity from Q to Q2 and increase in price (due to limited supply) and hence, a new equilibrium will be attained (Chand, 2017). 6
Figure: describing decrease in supply Source: Chand, 2017 Possibility 2nd: With the increase in awareness among consumers, there will decrease in demand for Beef and thus, the demand curve will shift leftwards as shown below. Also, the quantity supplied will decrease from Q to Q2 and Price will fall from P to P2. (Assumption: here is that there is no change in supply) (Chand, 2017). Figure: describing decrease in demand Source: Chand, 2017 7
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Question 3: Figure: describing increase in supply Source: Chand, 2017 The above graph presents one of the possibilities of impact over price and quantity. With the increase in the supply of commercial apartments (supply curve shifts rightwards from S to S1) and decrease in demand (demand curve will shift leftwards), the equilibrium point will come downwards from E to E1. The quantity supplied will remain same but the price will fall down an equilibrium will be achieved. Until the equilibrium will not achieve, there would be excess supply in the market (Chand, 2017). 8
Figure: describing excess supply Source: Sastry, 2015 The above graph shows the second probability of demand and supply curve. With the provision of a supply of commercial apartments on S curve, there is a decrease in demand (leftward shift of demand curve from D to D1), this would eventually reduce the quantity available from Q to Q1 and decrease in prices from P to P1 (Sastry, 2015). 9
Question 4: a)Price elasticity of demand: It measures the response in quantity demanded due to change in value or price of a product (Thimmapuram, & Kim, 2013). ParticularsOldNew Price$3.50$4.25 Quantity demanded25 units15 units 14161820222426 0 1 2 3 4 5 Demand Curve Demand Curve Quantity demanded P r i c e Change in quantity demanded: = (15-25)/ 25 *100 = -40% Change in price: (4.25-3.5)/ 3.5*100 = 21.42% =-40%/ 21.42% 10
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=-1.86 In the above scenario, it can be understood that the product is elastic as 21.42% change in prices brought 40% change in the quantity demanded. b) Elasticity is a phenomenon which describes the sensitivity of a product’s demand in consideration to other economic factors such as price, income, substitute etc. For a business, it is important to learn the elasticity value as it presents the effect which a businessman products can occur due to other factors (Thimmapuram, & Kim, 2013). For instance: In terms of price factor, a product is said to be highly elastic, if minor changes in price lead to great change in the quantity demanded and oppositely, it is inelastic when a major large change in price leads to a minor change in quantity demanded. Thus, with the change in external economic variables, a businessman can forecast regarding the futuristic effect over its product and can also vary its production and manufacturing policies and can sustain its profits and organization (Thimmapuram, & Kim, 2013). 11
Question 5: Sales maximizing strategy is one where a businessman is selling maximum products which it can be produced and that too without incurring any losses. Numerically, it can be presented as below: Total Cost= Total Revenue or Average Cost= Average Revenue For instance: No of output TCACTRAR 110101313 21892512.5 3258.33333 3 3010 4297.25338.25 5377.4418.2 6477.8346.987.83 In the above example, it is demonstrated that at the sixth unit, an organization has AC=AR, which means this is the sales maximisation point at which without making losses an organization is able to sales maximum unit and also earning the same amount which it cost to manufacture. Thus, it is the sales maximisation point (A2 Economics & RS with Komilla, 2010). The following graph represents the curve: Figure: describing sales maximisation 12
Source: A2 Economics & RS with Komilla, 2010 Profit maximising strategy: This strategy is attained where Marginal revenue is equal to the marginal cost (Tutor2u, 2015). Example: In the following example, marginal cost is equal to marginal revenue at output number 5. Here, the total cost is $37 and total revenue is 41 which means TC<TR, and provides maximum profitability to the organization (i.e. 5*41= $205) but if the organization manufactures output 6 the situation will be TR<TC. Thus, the maximum profitability is at output number 5. No of outputTCMCACTRMRAR 110101313 21889251212.5 3257 8.33333 330510 42947.253338.25 53787.44188.2 647127.8346.985.987.83 Figure: describing profit maximisation Source: Tutor2u, 2015 13
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Analysis: Considering the example, and both the methods, it can be assessed that at point 6th the MC (cost for producing one more unit) is quite high than MR (revenue generated from one extra unit). Therefore, the organization has to put in more funds. Hence, it can be ascertained that an organization must produce till output number 5 which provides the highest profitability and also does not involve much involvement of funds for manufacturing. 14
References: A2Economics&RSwithKomilla,2010.Salesmaximisation.[Online] http://www.learncbse.in. Available at: http://a2withkomilla.blogspot.in/2010/11/sales- maximisation.html/. (Accessed as on: 20thJanuary, 2018). Deepalipal,2017.DemandandSupplyofaCommodity.[Online] http://www.economicsdiscussion.net/.Availableat: http://www.economicsdiscussion.net/demand/demand-and-supply-of-a-commodity- faqs/14235. (Accessed as on: 20thJanuary, 2018). Prasanna, 2016. Explain the effect of increase in income of buyers of normal commodityonitsequilibriumprice.[Online]ask.learncbse.in.Availableat: http://ask.learncbse.in/t/explain-the-effect-of-increase-in-income-of-buyers-of- normal-commodity-on-its-equilibrium-price/8986.(Accessedason:20thJanuary, 2018). Sastry, 2015. Important questions. [Online] http://www.learncbse.in. Available at: http://www.learncbse.in/important-questions-for-class-12-economics-market- equilibrium/. (Accessed as on: 20thJanuary, 2018). Smriti Chand, 2017. 4 Cases of Simultaneous Shifts in Demand and Supply Curves | Economics.[Online]youarticlelibrary.com.Availableat: http://www.yourarticlelibrary.com/economics/4-cases-of-simultaneous-shifts-in- demand-and-supply-curves-economics/9221. (Accessed as on: 20thJanuary, 2018). SmritiChand,2017.EffectofDemandCurveonSubstituteGoodsand Complementary Goods | Micro Economics. [Online] youarticlelibrary.com. Available at:http://www.yourarticlelibrary.com/economics/effect-of-demand-curve-on- substitute-goods-and-complementary-goods-micro-economics/8914. (Accessed as on: 20thJanuary, 2018). Smriti Chand, 2017. The Change in Demand: Increase in Demand and Decrease in Demand|MicroEconomics.[Online]youarticlelibrary.com.Availableat: http://www.yourarticlelibrary.com/economics/the-change-in-demand-increase-in- demand-and-decrease-in-demand-micro-economics/9196.(Accessedason:20th January, 2018). Smriti Chand, 2017. The Change in Supply: Increase in Supply and Decrease in Supply|Economics.[Online]youarticlelibrary.com.Availableat: 15
http://www.yourarticlelibrary.com/education/the-change-in-supply-increase-in- supply-and-decrease-in-supply-economics/9198.(Accessedason:20thJanuary, 2018). Smriti Chand, 2017. The Change in Supply: Increase in Supply and Decrease in Supply|Economics.[Online]youarticlelibrary.com.Availableat: http://www.yourarticlelibrary.com/education/the-change-in-supply-increase-in- supply-and-decrease-in-supply-economics/9198.(Accessedason:20thJanuary, 2018). Thimmapuram, P. R., & Kim, J. (2013). Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), 390-397. Tutor2u, 2015. Factors that Affect Business Profitability. [Online] www.tutor2u.net/. Availableat: https://www.tutor2u.net/economics/reference/strategies-for-improving- business-profitability. (Accessed as on: 20thJanuary, 2018). 16