Managerial Economics

Topics: Supply and demand, Marginal cost, Costs Pages: 13 (4575 words) Published: May 25, 2011
MB0042 - Managerial Economics
ASSIGNMENT SET I: Ans.1. The price elasticity of demand is not the same for all commodities. It may be or low depending upon number of factors. The factors which influence price elasticity of demand, in brief, are as under:         

(i) Nature  of Commodities. In developing countries of the world, the per capital income of the people is generally low. They spend a greater amount of their income on the purchase of necessaries of life such as wheat, milk, course cloth etc. They have to purchase these commodities whatever be their price. The demand for goods of necessities is, therefore, less elastic or inelastic. The demand for luxury goods, on the other hand is greatly elastic. For example, if the price of gold falls, its demand in the cities will go up.  

(ii) Availability of substitutes. If a good has greater number of close substitutes available in the market, the demand for the good will be greatly elastic. For examples, if the price of Tropicana Orange Juice rises in the market, people will switch over to the consumption of Rasna Juice which is its close substitute. So the demand for Tropicana is elastic.  

(iii) Proportion of the income spent on the good. If the proportion of income spent on the purchase of a good is very small, the demand for such a good will be inelastic. For example, if the price of a box of matches or salt rises by 50%, it will not affect the consumers demand for these goods. The demand for salt, match box therefore will be inelastic. On the other hand, if the price of a car rises from Rs6 lakh to Rs9 lakh and it takes a greater portion of the income of the consumers, its demand would fall. The demand for car is, therefore, elastic.  

(iv) Time. The period of time plays an important role in shaping the demand curve. In the short run, when the consumption of a good cannot be postponed, its demand will be less elastic. In the long run if the rise price persists, people will find out methods to reduce the consumption of goods. So the demand for a good in the, long run is elastic, other things remaining constant. For example if the price of electricity goes up, it is very difficult to cut back its consumption in the short run. However, if the rise in price persists, people will plan substitution gas heater, fluorescent bulbs etc. so that they use less^electricity. So the electricity of demand will be greater (Ep = > 1) in the long run than in the short run.  

(5) Number of uses of a good. If a good can be put to a number of uses, its demand is greater elastic (Ep > 1). For example, if the price of coal falls, its quantity demanded will rise considerably because demand will be coming from households, industries railways etc.  

(6) Addition. If a product is habit forming say for example, cigarette, the rise in its price would not induce much change in demand. The demand for habit forming- good is, therefore, less elastic.  

(7) Joint demand. If two goods are Jointly demand, then the elasticity of demand depends upon the elasticity of demand of the other Jointly demanded good. For example, with the rise in price of cars, its demand is slightly affected, then the demand for petrol will also be less elastic.

Ans. 2. The following are some of the ways by which the company can forecast the demand for the new flavour for its particular brand of Tea: The Company will identify the current sales of the tea in the market where it plans to introduce the new flavour with respect to understanding its size and taste with purchase pattern. The Company will then introduce sample packs of the New Flavour in the market for generating its response from consumers with regards to the taste of the product. The Company will simulataneously identify other brands of Tea available in the Market with similar flavours if any with regards to their pricing and distribution pattern, whether it is on a higher side/lower side with respect to...
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