Principles of Economics Essay

5262 Words May 25th, 2015 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 allocation.

25 x 4=100 marks
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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

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