SEM 1
Business Economics
Q.1.Ans:
To calculate the various cost metrics based on the given table, we'll need to use the following
formulas:
1. Variable Cost (VC): This is the cost that varies with the level of output.
VC = Total Cost - Fixed Cost
2. Average Fixed Cost (AFC): This is the fixed cost per unit of output.
AFC = Fixed Cost / Output
3. Average Variable Cost (AVC): This is the variable cost per unit of output.
AVC = Variable Cost / Output
4. Average Total Cost (ATC or AC): This is the total cost per unit of output.
ATC = Total Cost / Output
Given the data from the table:
Output
Total Cost
Fixed Cost
Variable Cost
100
1600
1000
600
200
2300
1000
1300
300
3200
1000
2200
400
4300
1000
3300
500
5650
1000
4650
1000
13650
1000
12650
Let's calculate each of the requested metrics:
Variable Cost (VC):
For each row, VC = Total Cost - Fixed Cost.
Example: For Output 100,
VC = 1600 - 1000 = 600
Average Fixed Cost (AFC):
For each row, AFC = Fixed Cost / Output.
Example: For Output 100,
AFC = 1000 / 100 = 10
Average Variable Cost (AVC):
For each row, AVC = Variable Cost / Output.
Example: For Output 100,
AVC = 600 / 100 = 6
Average Total Cost (ATC or AC):
For each row, ATC = Total Cost / Output.
Example: For Output 100,
ATC = 1600 / 100 = 16
Here's the calculated data for each metric:
Output
VC
AFC
AVC
ATC
100
600
10
6
16
200
1300
5
6.5
11.5
300
2200
3.33
7.33
10.67
400
3300
2.5
8.25
10.75
500
4650
2
9.3
11.3
1000
12650
1
12.65
13.65
These are the calculated values for Variable Cost, Average Fixed Cost, Average Variable Cost,
and Average Total Cost based on the given data and formulas.
Q.2 Ans.
The ordinal utility approach and the cardinal utility approach are two different perspectives in
understanding consumer behavior and preferences. They differ in their treatment of utility, which
is a measure of satisfaction or happiness a consumer derives from consuming goods and services.
Ordinal Utility Approach:
In the ordinal utility approach, the focus is on ranking or ordering different consumption bundles
based on the consumer's preferences. It doesn't assign numerical values to utility levels, meaning
it doesn't quantify the level of satisfaction. Instead, it only establishes whether a consumer
prefers one bundle over another, or whether two bundles provide the same level of satisfaction
(indifference). The concept of indifference curves is central to this approach. These curves
represent combinations of goods that provide the consumer with the same level of satisfaction.
Cardinal Utility Approach (Marshallian Approach):
The cardinal utility approach assigns numerical values to utility, allowing for the comparison of
satisfaction levels across different consumption bundles. Alfred Marshall introduced this
approach, where utility is treated as a measurable and quantifiable entity. It involves assigning a
numerical "utility value" to each bundle of goods, allowing for direct comparison between the
utility levels derived from different bundles. This approach enables concepts like total utility,
marginal utility, and consumer surplus to be calculated.
Now let's address the statements about indifference curves using the ordinal utility approach:
"IC slopes downwards": This statement is true in the context of the ordinal utility approach. An
indifference curve slopes downward because it represents combinations of two goods that
provide the same level of satisfaction to the consumer. As the consumer moves along the curve,
they give up some units of one good in exchange for more units of the other while remaining
indifferent (equally satisfied). The downward slope indicates the trade-off or substitution
relationship between the two goods.
"Slope of indifference curve indicates the rate at which individuals are ready to substitute one
commodity for the other": This statement is also true in the context of the ordinal utility
approach. The slope of an indifference curve represents the marginal rate of substitution (MRS),
which indicates how much of one good a consumer is willing to give up to obtain an additional
unit of the other good while keeping their satisfaction constant. A steeper slope indicates a higher
willingness to substitute between the goods, while a shallower slope indicates a lower
willingness to substitute.
In summary, the ordinal utility approach focuses on the ranking and ordering of preferences
without assigning specific numerical values to utility. Indifference curves represent bundles that
provide the same satisfaction level. The downward slope of an indifference curve signifies
substitution, and the slope's magnitude indicates the rate at which the consumer is willing to
trade one good for another while remaining indifferent. This approach doesn't involve
quantifying utility levels.
Q.3
a) Ans.
The business cycle refers to the alternating periods of expansion and contraction in
economic activity that occur in an economy over time. It is dynamic in nature, meaning it
is characterized by continuous fluctuations in economic indicators such as output,
employment, income, and other key variables. The business cycle consists of several
distinct phases, each with its own characteristics and implications for the economy. These
phases are:
Expansion (Boom):
In this phase, economic activity is on the rise. Output, employment, and income levels are
increasing. Consumer and business confidence is high, leading to increased spending,
investment, and borrowing. The expansion phase is characterized by strong economic
growth, rising demand for goods and services, and often, low unemployment rates.
Peak:
The peak marks the highest point of the business cycle. Economic indicators have
reached their maximum levels. However, at this point, the rate of growth starts to slow
down. The economy may experience some capacity constraints, leading to potential
bottlenecks in production. Inflationary pressures might begin to emerge.
Contraction (Recession):
Following the peak, the economy enters a contraction phase. Economic activity starts to
decline, and output, employment, and income levels decrease. Consumer and business
confidence weakens, leading to reduced spending and investment. Unemployment tends
to rise during this phase. The recession phase is characterized by negative economic
growth and reduced demand for goods and services.
Trough:
The trough is the lowest point of the business cycle. At this stage, economic indicators
have hit their lowest levels. However, this is also the point where the rate of decline starts
to slow down. The trough represents the end of the recession and the beginning of the
recovery phase.
Recovery (Expansion):
After hitting the trough, the economy enters a recovery phase. Economic activity starts to
pick up, and there is an increase in output, employment, and income levels. Consumer
and business confidence begin to improve, leading to increased spending and investment.
The recovery phase is marked by positive economic growth, decreasing unemployment,
and a return to more favorable economic conditions.
b) Ans:
Price Demand:
Price demand, also known as own-price demand, refers to the relationship between the
quantity of a good or service demanded by consumers and its price, while other factors
remain constant. It examines how changes in the price of a product affect the quantity
consumers are willing to purchase. The law of demand states that when the price of a
product decreases, the quantity demanded increases, and vice versa, assuming all other
factors remain constant.
Example of Price Demand:
Consider the demand for smartphones. If the price of a popular smartphone model
decreases, consumers might be more willing to purchase it, leading to an increase in the
quantity demanded. Conversely, if the price of the smartphone increases, consumers may
decide to buy fewer units due to the higher cost.
Income Demand:
Income demand, also known as income elasticity of demand, measures how changes in
consumers' income levels impact the quantity of a good or service they demand. It helps
classify goods as normal goods, inferior goods, or luxury goods based on their income
elasticity.
Normal Goods: These are goods for which demand increases as income increases.
Examples include restaurant meals, vacations, and higher-quality clothing.
Inferior Goods: These are goods for which demand decreases as income increases.
Examples include generic store-brand products or used clothing.
Luxury Goods: These are goods with an income elasticity greater than 1, meaning their
demand increases disproportionately more than income growth. Examples include luxury
cars, designer clothing, and high-end electronics.
Example of Income Demand:
Consider luxury cars. If consumers' incomes rise significantly, they might be more
willing to purchase luxury cars, leading to a greater increase in the quantity demanded
compared to the increase in income.
Cross Demand (Joint Demand):
Cross demand, also known as cross-price elasticity of demand, focuses on how changes
in the price of one good affect the quantity demanded of another related good, assuming
other factors remain constant. This concept is particularly relevant for complementary
goods and substitute goods.
Complementary Goods: These are goods that are typically consumed together. An
increase in the price of one complementary good leads to a decrease in the demand for
the other. Examples include cars and gasoline, or computers and software.
Substitute Goods: These are goods that can be used in place of one another. An increase
in the price of one substitute good leads to an increase in the demand for the other.
Examples include coffee and tea, or different brands of smartphones.
Example of Cross Demand (Joint Demand):
Consider the demand for coffee and tea. If the price of coffee increases, consumers might
choose to buy more tea as a substitute, leading to an increase in the quantity demanded of
tea.
Understanding these types of demand helps businesses and policymakers make informed
decisions about pricing, marketing strategies, and economic policies based on how
consumers' behavior responds to various factors such as prices and income changes.