Updated-EME-Unit-1 Economics managementsubject

Economics subject

1. Dynamics of Business and Economics Muthuraja.M Assistant Professor Department of CSE Kongu Engineering College Perundurai ‹#›

2. Nature of Business A business tries to earn a profit by providing products that satisfy people’s need. What is a product ? Goods or service with tangible an d intangible characteristics that provide satisfaction and benefits. Sometimes product can also be an idea. Tangible Goods Automobile Computer Loaf of bread Television Services Dry cleaning Photo processing Checkup at doctor’s Movie star performance ‹#›

3. GOAL OF BUSINESS organizations: Profit Earn a Profit - The reward for the risks that businesses take in providing products. Non-Profit Organizations- provide goods and services but do not have the fundamental purpose of earning profits. ‹#›

4. Maintaining Profitability Quality products Efficient operations Social responsibility Business ethics Profitability ‹#› Management skills Planning Organizing Controlling Leading Marketing Expertise Products Price Promotion Distribution Finance Skills to maintain fund Expanding its operations Maintaining day to day operations

5. People and activities of Business ‹#›

6. The Economic Foundations of Business Distribution of resources for the production of goods and services within a social system. Resources Natural resources (land, forests, minerals, water) Human resources (labor) Financial resources (capital) ‹#›

7. Economic Systems Three Important questions : What types and quantities of goods/services will satisfy consumer needs? How will goods/services be produced? By whom? With what resources? How are goods/services distributed to consumers? to produce goods society distributes its and How a resources services. ‹#›

8. Economic Systems…. A society in which the people without regard to class, own all the nation’s resources. China North Korea Cuba Communism ‹#›

9. Economic Systems….. System in which the government owns and operates basic industries but individuals own most businesses. Sweden India Israel Socialism ‹#›

10. Economic Systems….. Free Enterprise – individuals own and operate majority of businesses providing goods and services United States Japan Australia Canada Capitalism ‹#›

11. Economic Systems Free Market -- All economic decisions made without government intervention (pure capitalism) Government intervenes and regulates business to some extent (modified capitalism) Pure Capitalism Modified Capitalism ‹#›

12. Economic Systems No country practices pure capitalism or pure socialism/ communism. Economic systems contain various elements of government intervention. Mixed Economies ‹#›

13. ‹#› FREE ENTERPRISE SYSTEM Rights Individuals – have the right to own property and to pass this property on to their heirs. Individuals- right to choose what career to pursue, where to live, what goods and services to purchase and more Individuals & businesses – right to earn profits and to use the profits as they wish, within the constraints of their society’s law and values. Individuals & businesses – right to make decisions that determine the way the business operates.

14. Comparison of Communism, Socialism, and Capitalism ‹#›

15. Supply & Demand Demand : number of goods/services consumers buy at given price at a specific time Supply : number of products businesses will sell at different prices at a specific time Distribution of resources and products determined by supply and demand ‹#›

16. Forces of Supply & Demand Price at which number of products supplied equal amount of products consumers are willing to buy at a specific time = equilibrium price ‹#›

17. Nature of Competition Pure competition – many small businesses in same product market (Agri goods). Price is determined solely by supply & demand. Monopolistic competition – small number of businesses little difference in products (Soft drinks). Businesses have some power over pricing. Oligopoly – very few businesses selling a product (Airlines industry). Businesses have full control over pricing. Monopoly - only one business providing a product (electricity, nature gas suppliers, business based on patents obtained) Rivalry among businesses for consumers’ dollars. ‹#›

18. Economic Cycles and Productivity Economic Expansion – economy is growing and consumers are spending money Economic Contraction – spending declines, layoffs, economy slows down Expansion and Contraction ‹#›

19. ‹#› Economic Cycles terms Inflation– condition characterized by continuing rise in prices Recession– decline in production, employment, and income Unemployment– % population wants to work but unable to find jobs Depression– unemployment very high; consumer spending low; business output sharply reduced

20. Overall Unemployment Rate U.S. Civilian Labor Force 1920 - 2007 ‹#›

21. Measuring the Economy Gross Domestic Product (GDP) – Monetary value of all goods and services produced in a country during a year ‹#›

22. Evaluating Our Nation’s Economy ‹#›

23. Trade balance of India CPI of India ‹#›

24. ‹#›

25. COMMON INDICATORS ‹#›

26. Entrepreneurship Bill Gates Michael Dell Steve Jobs Frederick Smith Risk, innovation, creativity, reward Entrepreneur- An individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something ‹#›

27. Ethics & Social Responsibility Volkswagen crisis – CO 2 emission norms violation Satyam computers - a corporate scandal that worked in India in 2009 where chairman Ramalinga Raju confessed that the company's accounts had been falsified Emission Standards Global Warming Going “Green” Business reputation depends on profit AND ethical conduct and responsibility ‹#›

28. ‹#› BASIC CONCEPTS AND PRINCIPLES

29. Economics - Definitions Derived from Greek work oikos (house) and nomos (custom or law) Adam smith (1723-1790) - Father of economics- “…an enquiry into the nature and causes of the wealth of nations” Alfred Marshall (1842-1924)- “…the study of mankind in the everyday business of life” Lionel Robbins (1898-1984) – “ the science which studies human behaviour as a relationship between ends and scare means which have alternative uses” 29

30. ‹#› Economics Defined…. “ as a body of knowledge or study that discusses how a society tries to solve the human problems of unlimited wants and scarce resources ” “ is a Social science since it deals with the society as a whole and human behaviour in particular, and studies the production, distribution, and consumption of goods and services”. (Study of how individuals and societies deal with scarcity)

31. ‹#› Basic Assumptions Ceteris Paribus Latin phrase “With other things (being) the same” or “all other things being equal”. Rationality Consumers and producers measure and compare the costs and benefits of a decision before going ahead. Involves making a choice that gives the greatest benefit relative to cost. Firms aim at maximizing profit and minimizing the cost while consumers aim at maximizing utility and minimizing sacrifice.

32. ‹#› Types of Economic Analysis Micro and Macro Microeconomics ( “micro” meaning small ): study of the behaviour of small economic units An individual consumer, a seller/ a producer/ a firm, or a product. Focus on basic theories of supply and demand in individual markets Macroeconomics ( “macro” meaning large ): study of aggregates. Industry as a unit, and not the firm . Focus on aggregate demand and aggregate supply, national income, employment, inflation, etc.

33. ‹#› Types of Economic Analysis..... Positive and Normative Positive economics: “ what is ” in economic matters Establishes a cause and effect relationship between variables. Analyzes problems on the basis of facts. Normative economics: “ what ought to be ” in economic matters. Concerned judgments. Incorporates with questions involving value value judgments about what the economy should be like.

34. ‹#› Types of Economic Analysis.... Short Run and Long Run Short run: Time period not enough for consumers and producers to adjust completely to any new situation. Some inputs are fixed and others are variable Long run: Time period long enough for consumers and producers to adjust to any new situation. All inputs are variable Decisions to adjust capacity, to introduce a larger plant or continue with the existing one, to change product lines. In terms of accounting or finance: short run- any time period less than a year Long run- 5 to 6 years or even as high as 20 years

35. Differences Short Run Some i/p is fixed No entry and exit Economic profit can be positive, negative and also zero. Long Run Nothing is fixed entry and exit is possible Economic profit is always zero.

36. ‹#› Types of Economic Analysis.... Partial and General Equilibrium – Partial equilibrium analysis: Related to analysis micro Studies the outcome of any policy action in a single market only. Equilibrium of one firm or few firms and not necessarily the industry or economy. General equilibrium: explains economic phenomena in an economy as a whole . State in which all the industries in an economy are in equilibrium. State of full employment

37. ‹#› Economic Decisions/Questions The fundamental problem faced by economy : WHAT to produce? (make) - Choice HOW to Produce?(manufacture) - efficiency FOR WHOM to Produce? (who gets distribution Are Resources used economically? – scarcity Are resources fully employed? Is the economy growing? what) - The way these questions are answered, determines the economic system

38. Economic Principles Relevant to Managerial Decisions Concept of scarcity Unlimited human wants Limited resources available to satisfy such wants Best possible use of resources to get: maximum satisfaction (from the point of view of consumers) or maximum output (from the point of view of producers or firms) Concept of opportunity cost Opportunity cost is the benefit forgone from the alternative that is not selected. Highlights the capacity of one resource to satisfy multitude of wants Helps in making rational choices in all aspects of business, since resources are scarce and wants are unlimited 37

39. ‹#› Economic Principles Relevant to Managerial Decisions …. Concept of margin or increment Marginality: a unit increase in cost or revenue or utility. Marginal cost : change in Total Cost due to a unit change in output. MC = TCn – TCn-1 Marginal cost = (Change on total cost)/change in total output = dTC/ dQ Marginal revenue : change in Total Revenue due to a unit change in sales. Marginal utility : change in Total Utility due to a unit change in consumption. Incremental: applied when the changes are in bulk, say 10% increase in sales.

40. Economic Principles Relevant to Managerial Decisions… Discounting Principle Time value of money : Value of money depreciates with time A rupee in hand today is worth more than a rupee received tomorrow. Outflow and inflow of money and resources at different points of time FV PV = (1 + r ) n where PV = Present Value of Fund, n = period (year, etc.) R = rate of discount ‹#›

41. ‹#› Production Possibilities Curve Shows the different combinations of the quantities of two goods that can be produced (or consumed) in an economy at any point of time. Depicts the trade off between any two items produced (or consumed). Highlights the concepts of scarcity and opportunity cost Indicates the opportunity cost of increasing one item's production (or consumption) in terms of the units of the other forgone Slope of the curve in absolute terms Assumptions The economy is operating at full employment. Factors of production are fixed in supply; they can however be reallocated among different uses. Technology remains the same.

42. Food Clothing F Q C P C Q Figure 1.3: PPC for the Society Q F P P O Production Possibilities Curve…. Productively Inefficient Area Technically Infeasible Area ‹#›

43. ‹#› All points on the PPC (like P and Q) are points of maximum productive efficiency. In the figure, OFp of food and OCp of clothing can be produced at Point P and OF Q of food and OC Q respectively at point Q, when production is run efficiently. All points inside the frontier are feasible but productively inefficient. All points to the right of (or above) the curve are technically impossible (or cannot be sustained for long). A move from P to Q indicates an increase in the units of clothing produced and vice versa. It also implies a decrease in the units of food produced. This decrease in the units of food is the opportunity cost of producing more clothing. Production Possibilities Curve….

44. ‹#› Demand and supply analysis

45. ‹#› Demand “If you can’t pay for a thing, don’t buy it. If you can’t get paid for it, don’t sell it” (Benjamin Franklin) The process to satisfy human wants/ needs/desires – Demand Desire: an aspiration to acquire something Want: having a strong desire for something Demand: effective desire Demand is that desire which is backed by willingness and ability to buy a particular commodity, at a given point of time. Quantity of the commodity which consumers are willing to buy at a given price for a particular unit of time. Things necessary for demand: Time Price of the commodity Amount (or quantity) of the commodity consumers are willing to purchase at the price

46. ‹#› Demand Definition: Demand is defined as that want, need or desire which is backed by willingness and ability to buy a particular commodity, at a given point of time ( a day, a week, a month, six months and so on ). Demand is an effective desire, as it is backed by willingness to pay and ability to pay.

47. ‹#› Types of Demand Based on the nature of commodity demanded (consumer goods and capital goods), time unit for which it is demanded (short run and long run), relation between two goods the demand may be classified as follows: Direct and Derived Demand Recurring and Replacement Demand Complementary and Competing Demand Individual & Market Demand Demand for Consumer Goods and Capital Goods Demand for Perishable Goods and Durable Goods

48. Types of Demand Direct and Derived Demand Direct demand is for the goods as they are such as Consumer goods Derived demand is for the goods which are demanded to produce some other commodities; e.g. Capital goods Recurring and Replacement Demand Recurring demand is for goods which are consumed at frequent intervals such as food items, clothes. Durables are purchased to be used for a long period of time (cars, watches, bikes, mobile phones) Wear and tear over time needs replacement 45

49. Types of Demand…. Complementary and Competing Demand Some goods are jointly demanded hence are complementary in nature, e.g. software and hardware, car and petrol. Some goods compete with each other for demand because they are substitutes to each other, e.g. soft drinks and juices. Individual & Market Demand Demand for an individual consumer is Individual demand. Eg. Your demand for Swift car. Demand by all the consumers for the product know as Market demand. Eg. Demand for swift in 2015. Industry demand is the demand for the product by all firms in the industry. Eg. Demand for car in year 2015 in India 46

50. Determinants of Demand Price of the product Single most important determinant Negative effect on demand Higher the price-lower the demand Income of the consumer Normal goods: demand increases with increase in consumer’s income Inferior goods : demand falls as income rises Price of related goods Substitutes If the price of a commodity increases, demand for its substitute rises. Complements If the price of a commodity increases, quantity demanded of its complement falls. 47

51. ‹#› Determinants of Demand…. Tastes and preferences Very significant in case of consumer goods Expectation of future price changes Gives rise to tendency of hoarding of durable goods Population Size, composition and distribution of population will influence demand Advertising Very important in case of competitive markets Growth of Economy If economy is growing, demand for goods of better quality will be high. Consumer credit Easy access to loans for purchasing consumer goods

52. ‹#› Demand Function Interdependence between demand for a product and its determinants can be shown in a mathematical functional form Dx = f(Px, Y, Py, T, A, Ef, N) Independent variables: Px, Y, Py, T, A, N Dependent variable: Dx Px: Price of x Y: Income of consumer Py: Price of other commodity T: Taste and preference of consumer A: Advertisement Ef: Future expectations N: Macro variable like inflation, population growth, economic growth

53. Law of Demand A special case of demand function which shows relation between price and demand of the commodity Dx = f(Px) Other things remaining constant, when the price of a commodity rises, the demand for that commodity falls or when the price of a commodity falls, the demand for that commodity rises. Price bears a negative relationship with demand Reasons Substitution Effect : When the price of a commodity falls (rises), its substitutes become more (less) expensive assuming their price has not changed. Income Effect : When the price of a particular commodity falls, the consumer’s real income rises, hence the purchasing power of the individual rises. Law of Diminishing Marginal Utility : as a person consumes successive units of a commodity, the utility derived from every next unit (marginal unit) falls. 50

54. Demand Schedule and Individual Demand Curve Point on Demand Curve Price (Rs per cup) Demand (‘000 cups) a 15 50 b 20 40 c 25 30 d 30 20 e 35 10 50 10 20 30 40 Quantity of coffee e 35 d 30 c 25 b 20 a 15 O ‹#›

55. Change in Demand Price D 2 D D 1 Quantity ‹#› Shift in demand curve from D to D 1 More is demanded at same price. Increase in demand caused by: A rise in the price of a substitute A fall in the price of a complement A rise in income A redistribution of income towards those who favour the commodity A change in tastes that favours the commodity Shift in demand curve from D to D 2 Less is demanded at each price.

56. Movements Along and Shifts of The Demand Curve D 2 D 1 Quantity Price Entire demand curve shifts rightward when: income or wealth ↑ price of substitute ↑ price of complement ↓ population ↑ expected price ↑ tastes shift toward ↑ ‹#›

57. Movements Along and Shifts of The Demand Curve D 1 D 2 Quantity Price Entire demand curve shifts leftward when: income or wealth ↓ price of substitute ↓ price of complement ↑ population ↓ expected price ↓ tastes shift toward ↓ ‹#›

58. ‹#› Exceptions to the Law of Demand Law of demand may not operate due to the following reasons: Giffen Goods –low income, non-luxury product Ex: meat & bread, Rice Snob Appeal – the qualities or attributes of a product that might appeal to a consumer  Ex: Diamond Demonstration Effect - items of luxury, fashion Future Expectation of Prices (Panic buying) Goods with No Substitutes Life saving drugs, petrol and diesel Insignificant proportion of income spent Match box, Salt

59. ‹#› Market Demand Market: interaction between sellers and buyers of a good (or service) at a mutually agreed upon price. Market demand Aggregate of individual demands for a commodity at a particular price per unit of time. Sum of the quantities of a commodity that all buyers in the market are willing to buy at a given price and at a particular point of time (ceteris paribus) Market demand curve: horizontal summation of individual demand curves

60. ‹#› Supply Indicates the quantities of a good or service that the seller is willing and able to provide at a price, at a given point of time, other things remaining the same. Supply of a product X (S x ) depends upon: Price of the product (P x ) Cost of production (C) State of technology (T) Government policy regarding taxes and subsidies (G) Other factors like number of firms (N) Hence the supply function is given as: S x = (P x , C, T, G, N)

61. Law of Supply Law of Supply states that other things remaining the same, the higher the price of a commodity the greater is the quantity supplied. Price of the product is revenue to the supplier; therefore higher price means greater revenue to the supplier and hence greater is the incentive to supply. Supply bears a positive relation to the price of the commodity. Point on Supply Curve Price (Rs. Per cup) Supply (‘000 cups per month) a 15 10 b 20 20 c 25 30 d 30 45 e 35 60 Supply Schedule 10 20 30 15 20 30 35 25 b a c e d Quantity of Coffee Supply Curve 40 50 60 58

62. Change in Supply S 2 S S 1 Price Quantity O Shift in the supply curve from S to S 1 More is supplied at each price. the Increase in supply caused by: Improvements in technology Fall in the price of inputs Shift in the supply curve from S to S 2 Less is supplied at each price. Decrease in supply caused by: A rise in the price of inputs Change in government policy (VAT) 59

63. Changes in Supply and in Quantity Supplied Price S 2 S 1 Entire supply curve shifts rightward when: price of input ↓ price of alternate good ↓ number of firms ↑ expected price ↑ technological advance favorable weather Quantity ‹#›

64. Changes in Supply and in Quantity Supplied Price S 1 S 2 Entire supply curve shifts rightward when: price of input ↑ price of alternate good ↑ number of firms ↓ expected price ↑ unfavorable weather Quantity ‹#›

65. Market Equilibrium Equilibrium occurs at the price where the quantity demanded and the quantity supplied are equal to each other. For prices below the equilibrium, quantity demanded exceeds quantity supplied (D>S). Pulling price upward. For prices above the equilibrium, quantity demanded is less than quantity supplied (D<S). Pushing price downward. S Price E 25 D Quantity O 30 Price (Rs) Supply (‘000 cups / month) Demand (‘000 cups / month) 15 10 50 20 15 40 25 30 30 30 45 15 35 70 10 62

66. Changes in Market Equilibrium (Shifts in Supply Curve) The original point of equilibrium is at E, the point of intersection of curves D 1 and S 1 , at price P and quantity Q An increase in supply shifts the supply curve to S 2 . Price falls to P 2 and quantity rises to Q , taking the new equilibrium 2 to E 2 . A decrease in supply shifts the supply curve to S . Price rises to P and quantity falls to Q taking the new equilibrium to E Thus an increase in supply raises quantity but lowers price, while a decrease in supply lowers quantity but raises price; demand being unchanged. 2 Price E S 1 S 2 Quantity E 2 D 1 D 1 S 2 S 1 E P P P 2 Q Q Q O S S 63

67. The original point of equilibrium is at E, the point of intersection of curves D 1 and S 1 , at price P and quantity Q An increase in demand shifts the demand curve to D 2 . Price rises to P 1 and quantity rises to Q 1 taking the new equilibrium to E 1 A decrease in demand shifts the demand curve to D . Price falls to P* and quantity falls to Q* taking the new equilibrium to E 2 . Thus, an increase in demand raises both price and quantity, while a decrease in demand lowers both price and quantity; when supply remains same. Q* Q 1 P* Price D 2 D 1 Quantity E 1 D 1 D 2 S 1 S 1 E 2 D P 1 P E ‹#› D O Changes in Market Equilibrium (Shifts in Demand Curve)

68. Change in Both Demand and Supply D 1 Q 1 Q 2 P 1 P 2 D 1 Quantity S 1 S 2 Price O E 2 ‹#› S 2 D 2 D 2 S 1 E 1 Whether price will rise, or remain at the same level, or will fall, will depend on: the magnitude of shift and the shapes of the demand and supply curves. Therefore, an increase in both supply and demand will cause the sales to rise, but the effect on price can be: Positive than S) (D increases more Negative than D) (S increases more ▪ No change (increase in D=increase in S)

69. ‹#› CIRCULAR FLOW OF ECONOMIC ACTIVITIES AND INCOME The simple model of the circular flow assumes two players: Firms (Producer) Produce and supply the goods and services by considering the various factors of production Households (Consumer) Who is an individual who purchase goods and services Households Provide services in terms of factor inputs to the firms and get paid for these services by firms which households spend on consumption. Thus Money and economic activities flowing between firms and households create a circular flow It is a circular flow of money or income

70. Circular Flow of Income Firms Households Financial Market Investment (I) Savings (S) Goods and Services (O ) Consumption expenditure (C) (Two Sector Economy) (Wages, Rent, Interest and Profits) Factor Payments / Income (Y) Factor Inputs In the equilibrium Y=E=O 68

71. ‹#› Circular Flow of Economic Activities and Income Value of output produced (Y) = value of output sold (O) Value of output sold = Sum of consumption expenditure (C) and investment expenditure (I). E = O = C+I Income is either consumed or saved (S). Y = C+S = C+I Savings are withdrawal of money from the circular flow Investment is injection of money into the circular flow For equilibrium savings should be equal to investments Hence Y=O=E

72. ‹#› Circular Flow of Income (Four Sector Economy) The third sector is Government (G) Government Spending On provision of public utility goods and services. Provides salaries to the households Pays to firms for purchases of goods and services - public ltd companies Government Revenue Households and firms pay various taxes and other payments and provide factor inputs to the government. Government borrows from the financial market to fill revenue gap. The fourth sector is the external sector Imports (M): Outflow of income occurs when the domestic firms buy goods and services from foreign ones. Exports (X): Inflow of income takes place when foreign firms buy goods and services from domestic ones

73. Circular Flow of Income (Four Sector Economy) Salaries Remittances for purchases Taxes (T) Taxes (T) Exports (X) Exports (X) Imports (M) Imports (M) Consumption Expenditure (C ) Government (G) Financial Market Investment (I) Savings (S) Foreign Nations (X-M) Factor Payments Firms Households Factor Inputs Goods (G) ‹#›

74. ‹#› Circular Flow of Income (Four Sector Economy) Total expenditure (E) is the sum of consumption expenditure, investment expenditure and government expenditure. E=C+I+G Total Income (Y) is equal to consumption, savings and tax. Y=C+S+T Equilibrium Expenditure is C+I+G=C+S+T

75. ‹#› Circular Flow of Income (Four Sector Economy) National income includes expenditures on investment, government and net of exports (X-M) National Income=C+I+G+(X-M) consumption, Since national income can either be consumed, or saved, or paid as tax to the government: C+I+G+(X-M)=C+S+T At equilibrium, total injections are equal to total withdrawals. This circular flow of income and expenditure forms the basis of measurement of national income.

76. Macro Economic Variables Aggregate Demand and Aggregate Supply – Aggregate Demand is the sum of demand for all goods and services by all the consumers for a given period of time. aggregate demand (AD) for consumer goods i.e. consumption demand (C) aggregate demand for capital goods i.e. (I). Thus AD = C+I Aggregate supply is the total national output produced and supplied by all the factors of production in an economy. It refers to the supply of all goods and services in the economy for a given period of time. Aggregate supply (AS) consists of – supply of consumer goods (C) and – Supply capital goods (where capital comes from savings (S), Hence AS=C+S 73

77. Macro E conomic Variables…. Stock and Flow Stock may be defined as any economic variable which has been accumulated at a specific point of time like money, assets and wealth. Flow includes the variables which increase (inflows) and decrease (outflows) the stock, over a period of time . like income, consumption, saving and investment Stock=Inflows-Outflows Intermediate and Final Goods Intermediate goods (and services) are items purchased by firms for using them in production of some other goods or utility. (Partly finished goods or raw materials) Also known as producer goods because they are used as inputs in the production of other goods. Final goods are those which are demanded by the final consumer for using these goods as they are. 74

78. Macro Economic Variables…. Capital formation The process of savings being converted into investment is known as capital formation Gross Capital Formation refers to the aggregate of additions to fixed assets (Fixed Capital Formation) and increase in stocks of inventories during a period of time . Employment An employed person is willing and capable to work in a productive activity and is engaged for certain number of hours per week, whether working for self or someone else. The population of any country is divided into working population (age group of 16 to 65 ) and dependents. Government Expenditure and Revenue Government Expenditure is which is made from public exchequer. Government Revenue is income received by government in various forms, e.g. Taxes 75

79. ‹#› Problems in Demand and Supply

80. ‹#› 1. Assume that there is a fruit seller who has 20 kg of Apples. It is to be sold so that he want to fix the price. There are three customers in the market and their individual demand are as follows. D1=25-1.0P D2=20-0.5P D3=15-0.5P Determine the market demand equation for the fruit seller and find out the price at which he can sell apples. Note : Demand is a negative function of price and it can be expressed as D=a-bP Where a is a constant represents level of demand when price is zero and b is another constant measures change in demand per unit change in price.

81. ‹#› Solution: Market demand is the sum of individual demand D=(25-1.0P)+(20-0.5P)+(15-0.5P) D=60-2.0P As he wants to sell 20kg of apple, price must be set to market demand for 20kg. 20=60-2.0P Solving the above equation, we get P=20 Respective demand for three buyers are D1=5 D2=10 D3=5

82. ‹#› 2. Suppose the demand equation for wrist watch by Beyond Time Inc. for the year 2006 is given by Q d = 1000-P and the supply equation is given by Q s = 100+4P a) What is equilibrium price? b) What is excess demand or supply if the price is 500 and 100 Solution: a) Equilibrium Price At equilibrium, quantity demand Q d = quantity supplied Q s so, 1000-P=100+4p 5P=900 P=180 b) When price is 500 Q d = 1000-P = 1000-500 Q d =500

83. ‹#› Similarly, Q s = 100+4P = 100+4(500) Q s =2100 Here supply exceeds demand and excess supply is given by Excess supply=2100-500 =1600 b) When price is 100 Q d = 1000-100 =900 Q s = 100+4(100) =500 Here demand exceeds supply and excess demand is given by Excess demand=900-500 =400

84. ‹#› 3. The quantity demand of good X depends upon the price of X (P x ) , monthly income of consumer (Y) , and the price related good Y(P y ). Demand for the good X(D x ) is given by the equation D x =1500-10 P x +4Y-15P y . Find the demand equation for good X in terms of price for X (P x ), when Y is 500 and P y is 60 . The supply function of the good X(S x ) is given by the equation S x =800+ 2P x . Find the equilibrium price and quantity. Solution: Given demand equation is D x =1500-10 P x +4Y-15P y Substitute given Y and P y D x =1500-10 P x +4(500)-15(60) =2600-10 P x

85. ‹#› Given supply equation is S x =800+ 2P x At equilibrium both demand and supply are equal D x =S x 2600-10 P x =800+ 2P x 12 P x =1800 P x =150 The equilibrium Quantity is D x =2600-10 P x D x =2600-10(150) =1100 Equilibrium price= 150 Equilibrium quantity= 1100

86. ‹#› Book back: pbm No:7 4. If the market demand curve is given by Q d = 15-8P and the market supply curve is given by Q s = 2P . Find the equilibrium price and quantity?

87. ‹#› Solution: At equilibrium both demand and supply are equal. Q d = Q s 15-8P = 2P 10P=15 P= 1.5 Equilibrium price is 1.5 Equilibrium quantity is Q s = 2P =2 (1.5) =3

88. ‹#› Book back: pbm No:15 5. If the market demand curve is given by Q d = 100-P and the market supply curve is given by P=10+2Q s . Find the equilibrium price and quantity?

89. ‹#› Solution: Q d = 100-P P=10+2Q s Q s = (P-10)/2 At equilibrium both demand and supply are equal. Q d = Q s 100-P = (P-10)/2 P-10=200-2P 3P= 210 P=70 Equilibrium price is 70 Equilibrium quantity is Q d = 100-P =100-70 =30

90. ‹#› Book back: pbm No:17 6. If the market demand curve is given by Q d = 6-P and the market supply curve is given by Q s =3P-2 . Find the equilibrium price and quantity?

91. ‹#› Book back: pbm No:18 7. There are 1000 identical individuals in the market for commodity X given by Q d = 12000-2000P and 100 identical producers of commodity X, each with a function given by Q s = 2000P a) Find equilibrium price and quantity b) If there is increase in consumer’s income Q d = 14000-2000P . State the new equilibrium price and quantity. c) Suppose there is an increase in technology of producing commodity and the new supply function is Q s = 4000+ 2000P . State the new equilibrium price and quantity.

92. ‹#› Solution: Q d = 12000-2000P Q s = 2000P a.Equilibrium price Q d = Q s 12000-2000P=2000P 4000P=12000 P=3 Equilibrium quantity Q s = 2000(3) =6000

93. ‹#› Solution: b. If Q d = 14000-2000P then what is Equilibrium price and quantity Q s = 2000P a.Equilibrium price Q d = Q s 14000-2000P=2000P 4000P=14000 P=3.5 Equilibrium quantity Q s = 2000(3.5) =7000