ECONOMICS ASSIGNMENT_1

SUBMITTED TO: SUBMITTED BY:

Dr. Yogesh Gupta Sourav Thakur
Roll no. 16428
ECE 4yrs

DEPARTMENT OF

ELECTRONICS & COMMUNICATION ENGINEERING

NATIONAL INSTITUTE OF TECHNOLOGY

HAMIRPUR-177005, HP (INDIA)
1. Write the difference between the Price, Income and Cross Elasticity of Demand.
Discuss the practical applications of Elasticity of Demand.
1. Price Elasticity of Demand:
The price elasticity is a measure of the responsiveness of demand to changes in the commodity’s
own price. If the changes in price are very small we use as a measure of the responsiveness of
demand the point elasticity of demand. If the changes in price are not small we use the arc elasticity
of demand as the relevant measure. The point elasticity of demand is defined as the proportionate
change in the quantity demanded resulting from a very small proportionate change in price.

2. The income elasticity of demand:

Income elasticity of demand is defined as the responsiveness of demand to a change in income,
while all other things remain unchanged. It is measured as a ratio of proportionate change in
quantity demanded to a proportionate change in income while other things remain unchanged.

3. Cross-elasticity of demand:
Cross (price) elasticity of demand is defined as the degree of responsiveness of the quantity
demanded of a commodity such as x1 to a certain percentage change in the price of another
commodity such as x2. We use the concept to study cross-price-quantity relationships, i.e., how the
quantity demanded of a commodity is affected by a change in the market price of another
commodity, its own price and income of the buyer(s) remaining the same.
Cross elasticity is positive if x1 and x2 are substitutes of each other and is negative if they are
complements. It is zero in case of unrelated goods, i.e., if x1 and x2 are neither substitutes nor
complements.

Practical applications of elasticity of demand:

Taxation: The tax will no doubt raises the prices but the demand being in elastic, people must
continue to buy the same quantity o f the commodity. Thus the demand will not decrease.
Increasing returns: When an industry is subject to increasing returns the manufacturer lowers the
price to develop the market so that he may be able to produce more and take full advantage of the
economies of large scale production.
Output: Elasticity of demand affects industrial output reduction in price will certainly increases the
sale in the market as a whole.
Monopoly prices: In the same manner, the businessman, especially if he is a monopolist, will have
to consider the nature of demand while fixing his price. In case I is in elastic, it will pay him to him to
change a higher price and sell a smaller quantity. If, on the other hand, the demand is elastic he will
lower the prices, stimulate demand and thus maximize his monopoly net revenue.
Wages: Elasticity of demand also exerts its influence on wages. If demand for a particular type of
labour is relatively inelastic, it is easy to raise wages, but not otherwise.
Poverty in plenty: The concept of elasticity explains the paradox of poverty in the midst of plenty.
This is specially so if production is perishable. A rich harvest may actually fetch less money than a
poor one.
Effect on the economy: The working of the economy in general is affected by the nature
of consumer demand. It affects the total volume of goods and services produced in the country.

2. What are the economies and dis-economies of scale of production?

The term scale of production refers to the size of a firm. A small-sized firm yields lower output
compared to a large-sized firm. This is because in the small-sized firm smaller amount of resources
are combined while in a large-sized firm’s larger amount of resources, huge finance and modern
technologies are employed to obtain larger output.

Economies of Scale of Production—Internal and External:

The concept of returns to scale is linked to those of economies of scale. A firm may experience
economies of scale if costs per unit of output fall as the scale of production increases. Thus, by
economies of scale we mean advantages in large scale production. Internal economies of
production arise when the benefits or advantages of a firm’s expansion are enjoyed by the firm
itself. External economies arise when an increase in a firm’s expansion produces favourable effects
on other firms.
Types of Internal Economies:
Technological Economies:
1) Increased Specialization: One of the most important sources of internal economies is technology.
Large firms can use specialized and highly efficient machinery along with specialized labour.
(2) Factor Indivisibility: Factor indivisibility is another source of technological economies enjoyed
internally by a firm. Some factors are indivisible or lumpy in character. These cannot be installed in
fraction or in smaller units.
(3) Economies of Increased Dimensions: Large firms often reap economies of increased dimensions
than small firms. This results in lower costs. If the dimension of a container increases, the cubic
capacity increases more than proportionately.
(4) Principle of Multiples: In other words, efficient as well as optimum utilization of machines is
possible since large firms can afford to make use of multiple machines. Further, production may be
multistage.
(5) Use of By-Products: A large firm can utilize its by-product or save the waste materials. A big
factory like that of Tata’s can use its smoke emanating from its factory site to produce articles like
tar, naptha, etc. A small firm is always at a disadvantageous position.
(6) Research and Development: It is only the large firms that can conduct its own research and
development (R & D) programme so that newer and improved techniques of production are
developed.
Marketing (Trading) Economies: A large firm can reap substantial economies in the purchase and
sale of goods and raw materials. As large firms purchase raw materials in bulk quantities, they can
obtain the same at a wholesale cheaper price or at favourable discounts. As far as sale or
distribution of a product of a large firm is concerned, it appoints expert or specialist sellers as well
as expensive but more cost- effective advertising.
Financial Economies: A large firm can secure business finance easier as it has huge assets or
collateral security. Because of its reputation, the shares of large firms are sold easily. Again,
investors enjoy greater confidence in buying shares, debentures and other securities of a large firm.
Managerial or Administrative Economies: It is the size of large firms that enable them to use more
advanced and specialized management techniques. Different departments may enjoy specialist
management personnel. Managerial economies can now be secured by the delegation of functions
to each specialist.
Risk-Distribution Economies: A business always involves uncertainty and, hence, risk. Through
diversification of output, markets, and sources of supply, a large firm can withstand any adverse
conditions emanating from a particular product or market.
Types of External Economies:
(i) Economies of Concentration: It may happen that a particular area(s) often specialize in the
production of particular products due to the availability of various inputs required for production. If
a particular area is endowed with a variety of resources including infrastructure facilities, industries
tend to flock in such areas.
(ii) Economies of Information: All the firms, particularly the bigger ones, in a geographical area may
cooperate in the realm of research and development. The R&D wing of a modern large firm
provides valuable information relating to a business through its trade and technical journals.
(iii) Economies of Disintegration: When an industry develops, many specialized firms get
established specializing in particular stages of the production process. This is called disintegration
which results in increased efficiency.

Diseconomies of Scale of Production:

Economies of scale can never be unlimited. As a result, expansion beyond a certain point will not
cause average costs to decline. Instead, it will rise as the firm expands. In other words, when the
size of a firm becomes large, possibilities for economies get exhausted and diseconomies set in.

There are four important internal causes of diseconomies of scale:

(a) Technical Diseconomies: The size of the firm may hurt itself. Technologically, it is not wise always
to use more and more complex machinery which itself is expensive.
(b) Marketing Diseconomies: We know that division of labour or specialization is limited by the
extent of the market. If the market is narrow, continual expansion in size may not be cost effective.
(c) Financial Diseconomies: Growth of large firms is often hampered due to financial constraint.
Sometimes, it may fail to secure necessary amount of finance from the market, particularly if the
firm’s financial credibility is lost or damaged.
(d) Managerial Diseconomies: As the size of a firm increases, administrative problems as well as
coordinating problems may emerge due to the growth of bureaucracy or a minute division of
managerial labour.

2. Plot the following graphs on graph paper.

(a) Total Production and Marginal Production
(b) Total Utility and Marginal Utility
(c) Average Cost and Marginal Cost