Business Economics

price determination under perfect competition

How is the price and output of a firm and industry determined under perfect competition?

Ans:-

Meaning of perfect competition:- Perfect competition is that market where there are a large number of buyers and large numbers of sellers available to sell and purchase homogeneous products.

In other words:- It is a location where homogeneous products are dealt by many buyers and sellers. Individual sellers have no control over the price in perfect competition.

Features of Perfect Market

Large number of buyers and sellers
Homogeneous Products
Free entry and exit
Perfect knowledge
Same price
No advertise cost

Meaning of Firm:- It is an enterprise unit engaged in the production for sale with the objective of maximizing the profit.

Price determination under perfect competition by firm

As we know that in the perfect competition no one firm has control over the price in the market to sell its products. So every firm is bound to take price whatever is prevailing in the industry market. So in the perfect market price is determined through the demand and supply of products. price determination under perfect competition

In other words “Firm is price taker not a price maker”.

Every firm is a part of an industry so whatever price is determined in the industry, firms have to take the same price. Such price is determined with the force of supply and demand of goods in the market. Thus individual firms cannot determine the price in perfect competition.

Meaning of industry:- It involves many firms which produced homogeneous products in the market called industry.

So Industry is a price maker.

Price determination under perfect competition in industry

Price of a commodity is determined by industry and not by any one, a firm or seller. Aggregate of all firms is known as industry. price determination under perfect competition

Price of the commodity is determined by the industry at which point “where Market demand for the commodity is equal to aggregate supply by the industry”

In simple words, “Equilibrium of price is determined at that point where total demand is equal to total supply.

However we can understand the price determination under the perfect competition concept with the following example. price determination under perfect competition

Price per unit (₹)	Market Supply of good –X	Market Demand for good –X
5	50	10
4	40	20
3	30	30
2	20	40
1	10	50

Table indicate following data

Table tells us that at the highest price ₹5 per dozen, and supply is 50 dozen but demand is only 10 dozen.
As we know that suppliers will be more supplied at the highest price.
But demand will be less at the highest price.
This is due to the competition among the homogeneous products.
Thus supply is more than demand.
But when prices fall, supply also declines but demand will rise.
As when price falls upto ₹ 3 from ₹5. Then demand will rise and demand supply will be in equilibrium.
If more prices decline as ₹2 then demand will be increased. Due to the competition among buyers. price determination under perfect competition

Now we can understand through Figure

Good units are shown on the x axis and the price shown on the Y axis.
DD is the demand curve and it slopes downward from left to right.
In which DD shows us that when price rises, demand falls. As when price ₹5 then demand upto 10 units.
When price decreases from ₹5 to ₹1 then demand increases upto 50 units.
So relation of demand curve is negative with the Price.
SS is the supply curve.
It slopes upwards from left to right.
SS curve shows us that when price is high as ₹5 then supply also is high in the industry. When price declines upto ₹1 then supply also decreases upto 10 units.
In addition, supply curve relation with price is always positive.
DD and SS intersect each other at point E.
In other words supply and demand are equal at E point.
Thus at Point E will be equilibrium Price as ₹3.
So price under perfect competition is determined where Demand and Supply curves cut each other.

It is clear from the figure that Every Supplier would like to supply at the highest price for the purpose of maximizing profit. price determination under perfect competition

But Every customer would like to purchase more at a lower price. So these competitions remain in the perfect market. price determination under perfect competition

As we know in a perfect market there are many firms for homogeneous products which alone cannot determine the price of a product in a perfect market. But according to the industry in which supply and demand will adjust itself. And the price of a commodity will be determined by itself where equilibrium will be established through demand and supply. You can check the syllabus of business economics under BCom-ll on the official website of Gndu. price determination under perfect competition

Conclusion:- At last we can say that demand and supply intersects each other at that point where equilibrium will be established. No single firm can determine the price of a commodity. Thus, price will be determined as per the industry supply and demand in the perfect market. Now we are able to understand price determination under perfect competition. price determination under perfect competition.

Important questions of Business Economics

Price determination under perfect competition

Business Economics

Law of variable proportions

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Explain in detail the Law of Variable proportion / Return to a factor Proportion. Give its causes

Ans:- Meaning of law of variable:- Law of variable proportion Refers to “When one factor is increased while other factors of production are constant then total output will increase”.

Definition of law of variable proportion:-

According to leftwich “The law of variable proportion states that if the input of one resource is increased while the input of other resources are constant, total output will increase”.

In other words:- A single variable of inputs is increased in the production process while the other factor of inputs remains constant causing an increase in production. law of variable proportions.

On account of change in proportion of factors is called the law of variable proportions. Due to change in proportion of input factor causing change in production at first phase is increasing then after it becomes constant then beyond this it becomes diminishing in the production of process function. law of variable proportions

Law of variable proportion \| Return to a factors
A Single Variable Factor ( Other Factors Constant )
It ia a Short Run Analysis

The law of variable proportions has three different phases.

Increasing Return to a Factor
Constant Return to a Factor
Diminishing Return to a Factor

Increasing Return to a Factor:- It is a situation in which total output tends to increase at an increasing rate when more of the variable factor is combined with the fixed of production. In which marginal product is increasing and cost marginal product must be diminishing. law of variable proportions

Explanation

Table shows the operations of increasing return to a factor.

Units Of Labour	Units Of Capital	Total Product	Marginal Product
1	1	4	4
2	1	10	6
3	1	18	8
4	1	28	10
5	1	40	12

Figure shows

This table shows that more and more units of labour are combined with the fixed amount of capital.

Total marginal product is increasing at the increasing rate. While the total product increased in production. law of variable proportions

Note:- Increasing to a factor leads to Diminishing cost. As a law of increasing return, When the output is increased, average cost per unit goes on diminishing.

Causes of increasing Return to Scale

( I ) Fixed Factor:- Underutilization remains of fixed factor. Its full utilisation calls for greater application of the variable factor.

Example – A small plant manufacturing cloth. The size of the plant is fixed in a short period. Five workers are required to get maximum output out of this plant. If a firm hires only two workers then production would be inefficient. The plant would be more efficiently utilised if more workers are added. law of variable proportions

( II ) Increase in efficiency :- Due to increase in variable units of input leads to possibility of division of labour and specialisation. Division of labour increases efficiency and efficiency leads to more production.

( lll ) Better Coordination between factors :- Additional application of variable factor of input tends to improve the efficiency of constant factor of input. Due to which production will be increased. law of variable proportions

Constant Return to a Factor:- It is the stage when increasing application of the variable factor results in no increase in the marginal product of the factor. Rather, the marginal product of the factor tends to stabilise.

In other words:- Constant return to a factor occurs when additional application of the variable factor increases output also increases at the constant rate. law of variable proportions

Constant Cost :- Cost of production will remain constant at the constant Return of Law. gndupapers.online

Following Table shows proper Understanding

gndupapers.online

Units of Labour	Units of capital	Total Product	Marginal Product
1	1	5	5
2	1	10	5
3	1	15	5
4	1	20	5
5	1	25	5

Table shows that as more and more units of labour are combined with the fixed amount of capital, total output increases only at the constant rate. Marginal product of the variable factor remains constant. law of variable proportions

We can also understand the graph of constant return of factor

Figure A. As Total product increases at the constant rate indicated by an upward sloping straight line TO curve.

Figure B. Shows constant marginal product of the variable factor, indicated by horizontal straight line MP.

Causes of Constant Return to a Factor

( I ) Fixed Factor :- With the increasing of variable factor production is increased, however, a stage comes when the fixed factor gets optimally utilised. Here the marginal product of the variable factor is maximised and tends to remain constant.

( ll ) Factor Ratio :- It is an Ideal factor Ratio between fixed and variable factor. Hence, Marginal product of the factor stabilises at its maximum.

( lll ) Variable Factor :- A combination of fixed factor and variable factor a stage comes when there is best division of labour. Where variable factor is most efficiently Utilised. Here marginal product tends to be constant at its maximum. law of variable proportions

Diminishing Return to a Scale:- It refers to a situation in which total output tends to increase at the diminishing rate when more variable factor is combined with the fixed factor of production. In such a situation marginal products must be diminishing.

In other words :- As more and more units of labour are employed on a given piece of land, the marginal product of the additional units of labour will go on diminishing. law of variable proportions

Note Increased Cost:- The law of diminishing return gives the cost of production is increased.

Following Table shows proper understanding

Diminishing Return to a Factor

Units of Labour	Units of capital	Total Production	Marginal Production
1	1	5	5
2	1	8	3
3	1	10	2
4	1	11	1
5	1	11	0
6	1	10	– 1

Tables show that as more and more units of labour are combined with fixed capital, the total capital increases only at a decreasing rate. Or it may even stop increasing at all or further start diminishing. Marginal product of the variable factor is diminishing and beyond a point it becomes zero or Even Negative.

We can properly understand with the help of Following Figure.

Figure:- A Total Product is increasing at the decreasing rate as indicated by the slope of the TP curve. At point p It becomes maximum and beyond that, it starts reducing. law of variable proportions

Figure:- B Shows diminishing marginal product of the variable factor, indicated by downward sloping MP curve. Beyond a point it becomes zero or Even negative. law of variable proportions

Conclusion:- we can understand the concept law of variable proportion or Return to a factor. Which includes Increasing, constant and Diminishing law of return to a factor. Here some causes of these are discussed also for the proper understanding. You can check the syllabus of Business Economics for BCom-ll on the official website of GNDU.

law of variable proportions

Essential question of Business Economics

law of variable proportions

Business Economics

law of Returns to Scale

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Explain the law of Returns to Scale. Explain the reasons for returning to scale.

Ans:- Meaning of law of return to scale- Return to scale describes the changes in production due to the all input units are varied by the same proportion.

Definition of return to scale:- “The Return to scale refers to changes in total output as a result of changes in total input factor by the same proportion. Increasing returns to scale or diminishing cost refers to a situation when all factors of production are increased in the manufacturing, then output increases at a higher rate. It means if all inputs are doubled, The, output will also increase at a faster rate than double. Hence, it is said to be increasing returns to scale.

In other words:- Law of return to scale refers to increase in output as a result of increase in all factors of production in the same proportion. Such an increase in output is known as Return to scale. It is a long run concept. law of Returns to Scale

Production function

P= f ( L, K )

L= Labour K= capital

If both the factors of production i.e labour ( L) and capital (K) are increased in the same proportion (m) then production function will be written as:

P= f ( ml, mk )

There are three aspect of Return to scale

Increasing Return to Scale
Constant Return to Scale
Diminishing Return to Scale

1.Increasing Return to Scale:- When all factors of inputs are increased causes greater increase in output than input increase. Understand with the following figure.

Then increasing returns to scale occurred. The above Figure Shows that a 10% increase in all factor inputs causes a 15% increase in output. Again 15% increase in all factor increase causes 25% increase in output. Thus, any percentage increase in all input factors is causing a greater percentage increase in output. By gndupapers.online law of Returns to Scale

Causes of Increasing Return to Scale

There are two types of Causes

Internal causes
External Causes

Internal Causes

Internal Causes

Real Economies:- It deals with the reduction in the physical quantity of inputs due to labour skills, labour specialisation and labour division. law of Returns to Scale
Inventory Economies:- A big enterprise enjoys inventory economies. Because they purchase a large stock as a result of which they get a discount. When the raw material is scarce in the market and then they sell at the highest price. The firm has no need to worry at all. So they get an increasing return.
Managerial Economies:- A firm produces efficient and talented managers by using advanced machines. Thus all production will be increased due to decentralised work of the firm. law of Returns to Scale
Transport and Storage Economies:- A big firm has its own trucks which carry its raw material and finished production carrying to the market. Transport and storage help it to sell its products at favourable prices. law of Returns to Scale

External Economies.

Real Economies:- These firms are shared in by a number of firms and industry. These external economies include managerial techniques, Developed financial areas and roads. And some projects are shares and jointly operated by their experts employees.
Economies of information:- Developed system of communication of a country will be helpful in increasing return in production. law of Returns to Scale

2. Constant Return to Scale

Constant Return to Scale occurs when a percentage increase in all factors of input increase causes the same increase in output.

Above figure shows that a 10% increase in all factors of inputs causes a 10% increase in output. Again 20% increase in inputs causes 20% increase in output. Therefore, any percentage increase in inputs matched with an equal percentage increase in output is called constant return.

Causes of Constant Return to scale

( I ) Economies of scale give rise to increasing return to scale.

( II ) Diseconomies of scale lead to Decreasing Return to Scale.

( III ) This constant Return to Scale exists after the phase of increasing return to scale exhausts itself and before the phase of Decreasing return to scale sets in. Means when all skills and advancement of machines are exhausted. Due to which products return remains constant.

( IV ) Constant Return to Scale arises when economies are exactly balanced by Diseconomies. law of Returns to Scale

3. Diminishing Return to Scale:- Diminishing Return to Scale occurs when a percentage increase in all factors of inputs causes a lesser increase in output. As 15% increase in all factors of inputs causes only 10% increase in output.

Above figure shows that 15% increase in all factor inputs causes only 10% increase in output. Again 25% increase in factor inputs causes 16.50% increase in output. Thus, Return to scale is thus diminishing.

Causes of Diminishing Return to Scale

External Diseconomies
External Diseconomies

( 1 ) Unwieldy Management :- At the biggest firm management is difficult to carry out its managed functions. It becomes difficult to supervise the work spread all over the firm. Due to which proper control is not possible in the business and as a result of which return is decreased. law of Returns to Scale

( 2 ) Technical Difficulties:- At certain points technical improvement can be carried out. But after that it becomes difficult to improve on it. Which becomes in economies causes Diseconomies of scale. And returns also declined in the firm.

B. External Diseconomies

( I ) These Diseconomies are suffered by all firms. When the area of a firm expands beyond the limit then firms operating in that industry suffer external Diseconomies. Example:- Firms experience great difficulties in procuring raw material. Because of the large demand for raw materials, it has become scarce and expensive.

Cost of land for the new firms becomes prohibitive.

A Brief Of Law of Returns To Scale

Return To Scale Involves
Change In All factors of production in the same proportion
Law of Returns Always Long Run Analysis
Non-homogeneous production Function

Conclusion :- Now we can understand the scale of Return in the production. Which passes through three stages. As increasing, diminishing and constant phases of return. We can also understand its causes due to which they occurred in the business.

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Essential question of business economics which you must learn.

Business Economics

Consumer Equilibrium through Indifference Curve

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What is the indifference curve approach? And tell the Consumer equilibrium through the Indifference Curve Analysis.

Meaning of Indifference curve:- An indifference curve is that line of points which shows different combinations of two commodities which yield equal satisfaction to the consumer.

Definition

According to the leftwich:- “A single indifference curve shows the different combinations of X and Y two commodities that yield equal satisfaction for the consumer and he/she doesn’t want to change in his situation”.

In other words:- The combination Each of points on the price line of the indifference curve represents equal satisfaction to the consumer on the indifference curve for two commodities. Consumer Equilibrium through Indifference Curve

Consumer’s Equilibrium Through Indifference Curve Analysis

Every consumer would like to get maximum satisfaction out of his given expenditure. A consumer may find out his position with the help of indifference curve as to how much he should spend his limited income on the different goods so that he may get maximum satisfaction.

In other words:- Consumer’s equilibrium refers to that situation in which he is not willing to make any change on expenditure with his given income and given prices.

Assumption

Prices of the goods are constant.
Income of consumers is also constant.
Consumers know the price of all things.
Consumers can spend his income in small quantities.
Market contains perfect competition.
Goods are classify as divisible.

CONSUMER’S EQUILIBRIUM

The consumer’s equilibrium is found at the tangent of the price line and a convex on the indifference curve. Consumer Equilibrium through Indifference Curve

Two Main Conditions Of Consumer’s Equilibrium are

Price line should be tangent to indifference curve on price line
Indifference curve should be convex to the point of origin.

Price line should be tangent to indifference curve on price line.

AB is a price line.
IC1, IC2, IC3 are indifference curves.
A consumer can buy any of the combination, C, D and E apple and Oranges shown on the price line AB.
He can’t get any combination on IC3 as it is away from price line AB.
He can buy combinations of those goods which are only on the price line AB for getting maximum equal satisfaction.
Out of C, D and E combinations, the consumer will be in equilibrium at combination D ( 2 Apple + 4 Oranges ) because at this point the price line ( AB ) is tangent to the highest indifference curve IC2.
The consumer can also buy C or E combinations as well but these will not give him maximum satisfaction being situated on lower indifference curve IC1.
It means the consumer’s equilibrium is a point that tangent on the price line and of the indifference curve.

B) Indifference curve must be convex to the origin

It is the second condition of equilibrium that represents the indifference curve must be convex to the point of origin. It means that the marginal rate of substitution of good X for good Y should be diminishing. If there is a point of consumer equilibrium of consumer, the indifference curve will be concave and not convex to the origin, then it will not be a permanent position of equilibrium. Consumer Equilibrium through Indifference Curve

AB is a price line.
IC is an indifference curve.
At point ‘E’ the marginal rate of substitution and price ratio of apples and oranges are equal. But point E is not a permanent equilibrium point because at this point, the marginal rate of substitution increases instead of diminishing.
In other words, at point E, the indifference curve is concave to its point of origin ‘O’ so it is a violation of the second condition of equilibrium. Consumer Equilibrium through Indifference Curve
So permanent equilibrium will not be permanent at point E.
Thus, the consumer is in equilibrium at point E1 on IC1 indifference Curve.
At point E1, Price line AB is tangent to IC1 Curve. Which is convex to the points of origin on the indifference curve.

Conclusion:- Thus, as per the above analyst consumer can be in equilibrium in the two conditions, when price line should be tangent to the indifference curve and Indifference curve must be convex to the origin. Consumer Equilibrium through Indifference Curve. You can download the syllabus of Business Economics on the official website of Gndu.

In summary, indifference curve analysis provides a more realistic and refined approach to understanding consumer behavior Compared to utility cardinal measurement, emphasizing preferences, trade-offs, and rational decision-making. Consumer Equilibrium through Indifference Curve

Tell the Assumption and Exception of Marginal Utility.

Definition of utility:- Want Satisfying power of a good is called utility. It denotes a quality in a commodity or service by virtue of which our wants are satisfied.

According to Hibbdon, “Utility is the quality of a good that satisfies a want”.

Meaning of Marginal Utility

Meaning of Marginal Utility:- The change that takes place in the total utility by the consumption of an additional unit of a commodity is called marginal utility.

For Example:- By consumption of the first cup of tea you get 15 units of utility and by the consumption of the second cup of tea your total utility goes up to 25 units. It means, the consumption of a second cup of tea has added 10 units = 25-15 of utility to the total utility. So here the difference of 10 units of utility of consumption is called marginal utility.

Definition of Marginal Utility:- “Marginal utility is the addition made to the total utility in consumption by consuming one more unit of commodity and that difference lies in the previous and successive unit of a consumption.” is called marginal utility.

Assumptions of Marginal Utility Theory

The theory of marginal utility, particularly the Law of Diminishing Marginal Utility, is based on several key assumptions:

Rational Consumer: The consumer acts rationally and aims to maximize total utility within their budget.
Cardinal Measurement of Utility: Utility can be measured in numerical units (utils), making comparisons possible.
Constant Marginal Utility of Money: The purchasing power of money remains constant throughout the consumption process.
Independent Utility of Goods: The utility derived from one good does not affect the utility of another.
Homogeneous Units of Consumption: Each unit of the good consumed is identical in size, quality, and utility.
Continuous Consumption: Consumption occurs without long breaks to ensure consistency in utility measurement.
Reasonable Consumption Range: The law applies only within a normal range of consumption and does not hold for extreme cases like addiction or necessities.

These assumptions provide the foundation for marginal utility analysis, helping explain consumer behavior and decision-making in economics. Assumption of marginal utility analysis

Exceptions to the Law of Diminishing Marginal Utility

While the Law of Diminishing Marginal Utility states that additional consumption of a good reduces its extra satisfaction, there are several exceptions where this may not hold:

Hobbies and Collectibles: Items like stamps, rare coins, and art may provide increasing satisfaction as a collection grows.
Addictive Goods: Products like alcohol, drugs, or gambling may create increasing utility due to psychological dependence.
Knowledge and Education: Gaining more knowledge often leads to greater interest and satisfaction rather than diminishing utility.
Money: Many argue that utility from money does not diminish significantly, as higher income can offer more choices and security. Assumption of marginal utility analysis
Prestige or Status Goods (Veblen Goods): Luxury brands and designer items may increase in desirability as consumption rises, contradicting the law.
Rare or Unique Experiences: Traveling to exotic locations or experiencing new adventures may provide continuous or increasing satisfaction. Assumption of marginal utility analysis
Initial Lack of Appreciation: Sometimes, individuals need time to develop a taste for certain goods, such as classical music or fine wine, leading to increasing utility over time. Assumption of marginal utility analysis

These exceptions highlight cases where consumer behavior deviates from the traditional marginal utility theory, often influenced by psychological, social, or economic factors. Assumption of marginal utility analysis. You can check the syllabus of Business Economics on the official website of Gndu.

Conclusion of Marginal Utility

The concept of marginal utility explains how consumer satisfaction changes with each additional unit of a good or service consumed. It follows the Law of Diminishing Marginal Utility, which states that as consumption increases, the additional satisfaction (marginal utility) derived from each extra unit gradually decreases.

Most Important Question of Marginal Utility

Law of Diminishing Marginal Utility.

Assumption of marginal utility analysis

Business Economics

Measures of price elasticity of demand

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Meaning of Price Elasticity

Price elasticity of demand denotes the ratio at which the demand contracts with the rise in price and extends with a fall in price. So there is an inverse relationship between price and demand of a good. Price elasticity of demand is represented with the minus (–) Sign. It can be understand with the help of following formula.

Example :- Rise in price by 10 percent is followed by a decrease in demand by 20 percent. Measures of price elasticity of demand

Definition of Price Elasticity of Demand

By Dr. Marshall, “Elasticity of demand is defined as the percentage change in the quantity demanded divided by the percentage change in the price”. Measures of price elasticity of demand

Degrees of Price Elasticity of Demand

Price elasticity of demand is for all goods, at different prices are not always the same for always. It may be more or less. So in economics, the study of the concept of elasticity of demand is divided into five degrees. Which are the following.

(1). Perfectly Elastic

(2). Perfectly Inelastic

(3). Unit Elastic

(4). More than unit Elastic

(5). Less than unit Elastic

(1). Perfectly Elastic Demand:- A perfectly elastic demand is that due to which a little change in price will cause an infinite change in demand. As a little price rise causes demand to fall in demand to zero and a little fall in price causes an infinite demand for goods. So under Perfect Competition, the demand curve of firms is perfectly elastic. Measures of price elasticity of demand

DD Represents a perfectly elastic demand curve. As it is parallel to the OX- axis. As if prices rise a little from 4 to 5 then demand goes on zero. And at the same price 4 a consumer can buy 10 units or 30 units as many units as he desires.

(2). Perfectly Inelastic Demand:- A perfectly inelastic demand is one which a change in price causes no change in demand is called inelastic demand. Such a type of demand is concerned with the essential things of life such as salt, sugar, clothes and flour. Measures of price elasticity of demand

When price is 0 to 2, 0 to 4 and 0 to 6 but demand remains constant at all prices is called perfectly inelastic demand. Measures of price elasticity of demand

(3). Unitary Elastic Demand:- Unitary Elastic demand is that which shows an equal percentage change in demand with the same percent change in price of a good is called unitary Elastic Demand. Example- A 10% change in price rise of a good then the same 10% of the demand will decline of the same good whose demand rises. And Reverse this. Measures of price elasticity of demand

In the graph we can see that price goes up OT to OP then at the same time demand declines ON to OM at the same percentage 10%.

(4). Greater than Unitary Elastic:- It is a demand in which a greater change in demand caused a less price decline. Example if price falls 5% then demand increases by 20% and reverse this. In other words if the price rises a little but compared to it demand will decline more percentage as compared to rise price. Measures of price elasticity of demand

As we see in the graph that price goes down from OP to OT by 5%. But Demand goes up by 20% is called the Greater than Unitary elastic demand.

(5). Less than Unitary Elastic demand:- it is that demand of goods which percentage demand responses less than the price more is called Less than Unitary Elastic demand. Example:- When price falls by 5 percent accompanied by 3 percent extends a demand of a good. Measures of price elasticity of demand

When price falls more than a percentage than demand goes on it is called less than unitary demand. Measures of price elasticity of demand

Measurement of Price Elasticity of Demand

There are five methods of measurement of price elasticity of demand. Which are as.

Total Expenditure Method
Proportionate Method
Point Elasticity Method
Arc Elasticity Method
Revenue Method

(1). Total Expenditure Method:- This method was developed by Dr. Marshall. This method tells us how much and in what direction the total expenditure has changed as a result of a change in the price of a good. This method shows us three stages of expenditure due to the change in price as follows.

Unity Elasticity Demand:- When the total expenditure remains constant due to the fall or rise in the price of a good.
Greater than Unity Elastic Demand:- When total expenditure rises due to the price fall. And total expenditure goes down due to the price rise of a good.
Less than a Unity Elastic Demand:- When total expenditure goes down due to the fall in price of a good. And reverse Total expenditure goes up due to the rise in price of a good.

Now, we can understand this total expenditure with the change in price with the following example.

Elasticity of Demand

Price

Total Expenditure

Unity

Rise

Fall

Unchanged

Greater than Unity

Rise

Fall

Down

Less than Unity

Rise

Fall

Down

(2). Proportionate Method:- This is the second method of price elasticity method. Which shows proportionate change in demand is divided by the proportionate change in price. This can be understood with the following formula.

Ed= (-) Proportionate change in demand for good -x

Proportionate change in price of a good -x

(3). Point Elasticity Method:- This method can be measured with the help of demand curve. Which shows change in demand with the changes in price change. As at every point of price it shows different demand. So such changes of price denote different demands of the same good for which price has been changed. All these points are different prices as well as different demand due to the change in price level of the same good.

Example throughout the graph we can understand as at point A, price elasticity of demand where op is a price and oq is a quantity demanded. Another point C, where Op1 is the price for the same good and OQ1 is a quantity demanded for the same good. Measures of price elasticity of demand

(4). Arc Elasticity:- arc elasticity method can be used when a little change occurs in price as well as little change in demand. It can be understood with the following graph arc.

There are three as A, B and C demand points on the demand curve.
When we see points A and B where the price OP and Demand at OQ on the point A of Demand Curve.
But when price falls a little from OP to OP1 in results of which demand also rises a little by OQ to OQ1.
And the same occurred on the point C, where we can see when Price rises from the OP2 to OP1 then demand falls a little from OQ2 to OQ1.
So we find in the graph the Arc between the two points as A and C.

So, Price elasticity of demand of an arc is called arc Elasticity of Demand.

(5). Revenue Method

This is the fifth method of price elasticity of method. Revenue is earned by the firm by selling its products. Assume that a firm sells 10 products and the firm gets 50 rupee as a revenue. This is called total revenue of the firm as 50 rupees. When we divide total revenue by the number of total sold units we get the average revenue. When we divide 50 rupees by 10 units of products, we get the average here =5. Measures of price elasticity of demand

If firms sell 11 products and total revenue goes up with the firm as 55. Now we can find the marginal revenue is 55-50 = 5.

Marginal Revenue = 5

So the price of elasticity under the Revenue Method is measured with the help of Marginal revenue. Measures of price elasticity of demand

Revenue has been shown on OY -axis and quantity demanded on OX-axis. AB is average revenue and Demand Curve and AN is marginal Revenue Curve. At point P on (Average Revenue) demand Curve. You can check the syllabus of Business Economics on the official website Gndu.

Conclusion:-

Price elasticity of demand (PED) is a crucial concept in economics that measures how the quantity demanded of a good or service responds to changes in its price. Goods with elastic demand experience significant changes in quantity demanded when prices fluctuate, while inelastic goods show little responsiveness to price changes. Measures of price elasticity of demand

Understanding price elasticity helps businesses and policymakers make informed decisions regarding pricing strategies, taxation, and revenue generation. Firms can use this concept to maximize profits by adjusting prices based on consumer sensitivity, while governments can predict the impact of taxes on goods and services.

In conclusion, price elasticity of demand is an essential tool for analyzing market behavior. It provides insights into consumer purchasing patterns, assists in strategic decision-making, and helps in predicting the economic impact of price changes on different products and industries. Measures of price elasticity of demand

Important other questions of Business Economics

Law of Diminishing Utility

Assumption and Exception of Diminishing Utility

Equilibrium of consumer under Indifference Curve

Business Economics

How is the price and output of a firm and industry determined under perfect competition?

Features of Perfect Market

Price determination under perfect competition by firm

In other words “Firm is price taker not a price maker”.

Price determination under perfect competition in industry

Table indicate following data

Now we can understand through Figure

Important questions of Business Economics

Explain in detail the Law of Variable proportion / Return to a factor Proportion. Give its causes

Definition of law of variable proportion:-

Law of variable proportion | Return to a factors

A Single Variable Factor ( Other Factors Constant )

It ia a Short Run Analysis

Explanation

A Brief Of Law of Returns To Scale

What is the indifference curve approach? And tell the Consumer equilibrium through the Indifference Curve Analysis.

Definition

Consumer’s Equilibrium Through Indifference Curve Analysis

Assumption

CONSUMER’S EQUILIBRIUM

Price line should be tangent to indifference curve on price line.

B) Indifference curve must be convex to the origin

Important questions of Business Economics of BCom-lI sem

Consumer Equilibrium through Indifference Curve

Tell the Assumption and Exception of Marginal Utility.

Meaning of Marginal Utility

Assumptions of Marginal Utility Theory

Exceptions to the Law of Diminishing Marginal Utility

Conclusion of Marginal Utility

Assumption of marginal utility analysis

Meaning of Price Elasticity

Definition of Price Elasticity of Demand

Degrees of Price Elasticity of Demand

Measurement of Price Elasticity of Demand

Measures of price elasticity of demand

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