National Institute of Business Managing

Chennai -- 020

1ST SEMESTER EMBA/ MBA

Subject: Principles of Economics

Enroll in any 4 questions. Every question provides 25 marks

(Each solution should be of minimum a couple of pages as well as of 300 words)

1 . What are the vital features of an Economic system? Explain the price mechanism. 2 . Explain measurement of Value Elasticity of Demand.

Quite methods of computing price elasticity of require are the following

- Percentage method

- Point method

- Arc method

- Costs method

The proportion Method:

The price elasticity of demand is definitely measured by simply its coefficient Ep. This coefficient Ep measures the percentage change in the quantity of a commodity required resulting from the percentage change in its price: Thus

Where q refers to quantity required, p to price and ∆ to improve. If Ep> 1, demand is stretchy. If Ep < 1, demand is inelastic, it Ep = 1 require is unitary elastic. With this solution, we can calculate price elasticities of require on the basis of a requirement schedule. The actual Method:

Prof. Marshall devised a geometrical method for computing elasticity in a point on the demand competition. Let RS be a directly line demand curve in Figure eleven. 2 . If the price declines from PB(=OA) to MD(=OC). the quantity demanded increases via OB to OD. Suppleness at level P around the RS demand curve in line with the formula can be: Ep = ∆q/∆p x p/q

Where ∆ q signifies changes in variety demanded, ∆p changes in selling price level when p and q happen to be initial price and volume levels. Coming from Figure

∆ queen = BD = QM

∆p sama dengan PQ

l = PB

q sama dengan OB

Substituting these values in the elasticity formula:

With the aid of the point method, it is easy to speak about the suppleness at any point along a demand curve. Suppose that the perfect line demand curve DC in Physique 11. 3 is 6th centimetres. Five points D, M, In, P and Q happen to be taken oh yea this demand curve. We arrive at the conclusion that at the mid-point for the demand contour the suppleness of require is unanimity. Moving up the necessity curve through the mid-point, firmness becomes better. When the demand curve details the Y-axis, elasticity is infinity. Ipso facto, virtually any point under the mid-point towards X-axis displays elastic demand. Elasticity turns into zero if the demand shape touches the X-axis. The Arc Approach:

We have examined the measurement of suppleness at a place on a require curve. Nevertheless elasticity is definitely measured between two points on the same demand competition, it is generally known as arc elasticity. In the phrases of Prof. Baumol, " Arc elasticity is a measure of the average responsiveness to value change showed by a demand curve over some limited stretch in the curve. ” Any two points on a demand curve call and make an arc. The spot between S and M on the DD curve in Figure eleven. 4 is definitely an arc which procedures elasticity on the certain selection of price and quantities. On any two-points of a require curve the elasticity coefficients are likely to be several depending upon the process of calculation.

The whole Outlay Technique:

Marshall developed the total cost, total income or total expenditure technique as a way of measuring elasticity. By comparing the whole expenditure of the purchaser both before and after the change in value, it can be regarded whether his demand for a good is flexible, unity or perhaps less elastic. Total pay out is value multiplied by the quantity of a great purchased: Total Outlay = Price times Quantity Demanded. (i) Elastic Demand:

Demand is usually elastic, when ever with the along with price the total expenditure improves and with the rise in price the whole expenditure lessens. Table eleven. 3 shows that when the selling price falls via Rs. being unfaithful to Rs. 8, the whole expenditure raises from Rs. 180 to Rs. 240 and when cost rises by Rs. several to Rs. 8, the total expenditure is catagorized from Rs. 280 to Rs. 240. Demand is definitely elastic (Ep > 1) in cases like this.

(ii) Unitary Supple Demand:

The moment with the show up or rise in price, the total expenditure remains unchanged; the elasticity of demand is usually unity. This is shown in the...