Principles Of Economics Essay

5294 words - 22 pages

National Institute of Business Management
Chennai - 020
FIRST SEMESTER EMBA/ MBA
Subject : Principles of Economics

Attend any 4 questions. Each question carries 25 marks
(Each answer should be of minimum 2 pages / of 300 words)



1. What are the vital functions of an Economy? Explain the price mechanism.
2. Explain measurement of Price Elasticity of Demand.
3. Describe the kinds of Economic Systems.
4. Price mechanism also known as the market mechanism, that helps to solve the central problems in Capitalist Economy. Explain.
5. What are the factors governing Price Elasticity of Demand? Explain.
6. Explain economic systems and resource ...view middle of the document...

Negative signs are usually disregarded.
The following formula is used for the measurement of price elasticity of demand:
Ey = Δq/Δp × p/q
Elasticity less than unity:
A consumer buys 5 kg of commodity at $10. If the price falls to $6 the consumer buys 6 kilograms. Elasticity in this case is less than 1.
Ey = Δq/Δp × p/q = 1/4 × 10/5 = 1/2 < 1 (less elastic)
Elasticity is unity:
A consumer buys 5 kg of commodity at $10. If the price rises to $12 the consumers buys 4 kilograms. Elasticity in this case is1.
Ey = Δq/Δp × p/q = 1/2 × 10/5 = 1 (unity)
Elasticity is more than unity:
A consumer buys 5 kg of commodity at $10. if the price rises to $11 the consumers buys 4 kilograms. Elasticity in this case is more than 1. Thus
Ey = Δ q /Δ p × p/q = 1/1 × 10/5 = 2 > 1 (elastic)
2. Total expenditure method
Marshal evolved total expenditure (outlay) of consumer or total revenue of seller as measure of elasticity. Total expenditure of a producer is compared before and after change in price. Total outlay is equal to price multiplied by quantity demanded. This method of the measurement of price elasticity of demand tells us whether demand for a commodity is elastic or greater than unity. When fall in its price leads to increase in total expenditure in it and a rise the price causes decrease in total expenditure. Demand is equal to unity when total expenditure remains the same whether there is increase in price or decrease in price of goods. Demand is said to be inelastic or less than unity when total expenditure decrease with decrease in price and increase with increase in price.

Schedule for expenditure elastic demand
Price | Quantity demanded | outlay |
12 | 2 | 24 |
6 | 4 | 24 |
3 | 8 | 24 |

The total expenditure remains unchanged at $24 in unitary elastic demand. There is fall in price from $12 to $6 and $3, the total expenditure remains unchanged at $24. When there is rise in price from $3 to $6 and $12, the total expenditure remains unchanged at $24. The elasticity of price is = 1 or unitary elastic demand whether there is increase in price or decrease in price.
Schedule of expenditure elastic demand
Price | Quantity demanded | Outlay |
12 | 2 | 24 |
6 | 6 | 36 |
3 | 16 | 48 |

The total expenditure rises from $24 to $36 and $48 respectively with the fall in price from $12 to $6 and $3. The total expenditure falls from $48 to $36 and $24 respectively with the rise in price from $3 to $6 and $12. The elasticity of price is > 1 in this case.
Schedule of expenditure inelastic demand
Price | Quantity demanded | Outlay |
12 | 2 | 24 |
6 | 3 | 18 |
3 | 4 | 12 |

The total expenditure falls from $24 to $18 and $12 respectively with fall in price from $12 to $6 and $3. The total expenditure rises from $12 to $18 and $24 respectively with the rise in price from $3 to $6 and $12. The elasticity price is < 1. There is inelastic demand in such case.
This method is simple as it classifies the elasticity...

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