Business Economics

December 2020 Examination

1. Rohan is appointed as an economics’ professor in a reputed university. In his first lecture,

students asked him to elaborate on the Gross Domestic Product (GDP) and Gross National
Product(GNP). Help Rohan to prepare his first lecture on the given topic with a relevant
example and highlight the differences between the two concepts. (10 Marks)

Answer:

INTRODUCTION:

Gross Domestic Product (GDP): The overall market and monetary value of every finished service
and goods manufactured in a country's border during a specified period is known as Gross
Domestic Product (GDP). The Gross Domestic Product of a country is used to analyze and
calculate the economy's growth rate and size. And to get a more profound knowledge about a
country's position and aspects, the company can adjust Gross Domestic Product (GDP) for
inflation. We can calculate the Gross Domestic Product (GDP) of a nation with the help of three
different ways viz. with the help of incomes, production, or expenditure. 

Gross National Product (GNP): The overall value of the country's residents' finished goods and
services during a given period is known as Gross National Product (GNP). Usually, companies
include private domestic investment, government expenditure, net exports, and personal
consumption expenditures while calculating Gross National Product (GNP). To avoid double-
counting, intermediary goods and services and not included while calculating GNP. 

CONCEPT AND APPLICATION:

First of all, let us understand the concept of Gross Domestic Product (GDP) and Gross National
Product (GNP) with an example.

ABC Ltd. is a Japanese company, but all the manufacturing process happens in the United States.
Now, the company will consider the output of the product in the US in the Gross Domestic
Product, not in Gross National Product. It happens because the sales revenue of the product goes to
Japan. When the company manufactures a product in the United States, different job opportunities
open for the US residents, they, in return, use their salary or wages for purchasing local goods and
services. Therefore, the company will consider it under the Gross Domestic Product (GDP), not
GNP.
This example shows us why companies use Gross Domestic Product (GDP) more than the Gross
National Product (GNP).
Now, let us discuss the difference between Gross Domestic Product (GDP) and Gross National
Product (GNP).
Meaning: GDP: It is the overall value of a country's production of goods and services within the
country's boundary. Either nationals or foreigners of the country does the production work. And it
is calculated for one year.
GNP: It is the overall value of a country's production of goods and services. The citizens of the
nation do the production on the country's land or foreign land. And it is also calculated for one
year. 
● Formula:
GDP: Gross Domestic Product is calculated as, 
GDP = C + G + I + NX. 
C is consumption, G is government spending; I is an investment, and NX is net exports.
GNP: We can calculate the Gross National Product as, 
GNP = C + I + G + NX + Z
In the given formula, C is consumption, G is government spending; I is an investment, NX is net
exports. Z is net income earned by the domestic residents from the investment made overseas
minus the net income achieved by the foreign residents from the investments made domestically. 
OR
GNP = GDP + NR – NP
NR is the net income inflow from assets abroad/ net income receipts, and NP is the net payment
outflow to foreign investments.
● Application:
GDP: Gross Domestic Product is used to calculate the strength of the local economy of a country.
GNP: Gross National Product is used to check the work of the nationals of a country
economically. 
● Focus: 
GDP: The main focus of the Gross Domestic Product is to calculate the production that happens on
the domestic land of the country. 
GNP: The main focus of the Gross National Product is to calculate the production done by the
citizens of a country without considering the boundary.
● Measuring Productivity:
GDP: A company calculates the production on a domestic scale.
GNP: Whereas, in Gross National Product (GNP), the production is calculated on an international
scale.
● Exclusion: 
GDP: While calculating Gross Domestic Product, an estimator excludes all the goods and services
produced outside the country's domestic economy.
GNP: While calculating the Gross National Product, an estimator excludes all the goods and
services manufactured by the foreigners living in the country.
CONCLUSION:
With the help of the above-discussed difference and example, Rohan can easily teach students at
the university that Gross Domestic Product is used to evaluate the production of a country by the
residents and foreigners within the boundary. Gross National product helps in assessing the
production by a country's citizens on their land or a foreign land.
He can also tell the difference between Gross National Product and Gross Domestic Product with
the help of the given an example and the formula, which shows that Gross National Product (GNP)
is Gross Domestic Product (GDP) plus net receipts (abroad) minus net payments (abroad).
Besides these differences, there is one similarity between Gross Domestic Product and Gross
National Product. Both of the figures helps in Businesses and Economic Forecasting of a country. 

2. Suppose the demand equation for computers by Teetan Ltd for the year 2017 is given by
Qd= 1200-P and the supply equation is given by Qs= 120+3P. Find the equilibrium price and
analyze what would be the excess demand or supply if the price changes to Rs 400 and Rs
120. (10 Marks)

Answer:

INTRODUCTION:

Demand curve equation: It is an equation that shows different units of quantity demanded by a
consumer at different market prices. The formula of the linear demand curve is,
Where,

a = factors affecting price other than price like income, taste, and preferences, etc.
b = slope of the demand curve
P = price of the good
The supply curve equation: It is an equation that shows the consumer's quantity at different
prices. It is the horizontal total of each supply curve. A supply curve is generally upward sloping
because a higher price encourages a firm to manufacture more as the higher the good's cost, the
more profitable the good is for the firm to produce. The formula of the linear supply curve is,

Where, 

a = starting point of supply curve on Y-axis intercept

b = slope of the supply curve
CONCEPT AND APPLICATION:

Equilibrium price: The price at which the demand and supply of a product or service are the
same. At this point, both the customers and manufacturers are satisfied. If the good or service price
is more than the equilibrium price, then the demand for the commodity or service will decrease,
and the supply will increase. Similarly, if the commodity's price is less than the equilibrium price,
then the demand for the commodity will increase, and the supply of the commodity will decrease.
Sometimes, a company lowers the equilibrium of the commodity or service without any price
change. It can happen when there is low production cost or if the production undergoes some
technological changes.
The demand curve equation and supply curve equation in the question is,

First of all, we will put the demand curve equation equal to the supply curve equation to calculate
the equilibrium price.
1200 – P = 120 + 3P
1200 – 120 = 3P + P
1080 = 4P
P = 270
The price equilibrium of the given product is Rs. 270. It means that, at Rs. 270, the quantity
demanded, and the quantity supplied of the product will be the same.
The quantity demanded and supplied at the equilibrium price is,

= 1200 – 270
= 930 units

= 120 + 3(270)
= 930 units
We can see that 270 rupees, the quantity demanded and supplied will be 930 units.
To calculate the excess demand and supply at a price = Rs 400, let us put P = 400 in the quantity
equation and supply equation.

= 1200 – 400
= 800 units

= 120 + 3(400)
= 120 + 1200
= 1320
We can see that when the price is increased by rupees 130, the quantity demanded will decrease by
130 units, and the quantity supplied will increase by 390 units, i.e., thrice the excess quantity
demanded.
To calculate the excess demand and supply at a price = Rs 120, let us put P = 120 in the quantity
equation and supply equation.

= 1200 – 120
= 1080 units
= 120 + 3(120)
= 120 + 360
= 480
By decreasing the price at equilibrium by 150 rupees, the quantity demanded will increase. The
equilibrium quantity demanded by 150 units and the quantity supplied will decrease than the
equilibrium quantity supplied by 450 units, i.e., thrice the excess quantity demanded.
In short, the following figures comes out after calculation:
Equilibrium price = Rs. 270
Equilibrium quantity demanded = 930 units
Equilibrium quantity supplied = 930 units.
At Price = 400 rupees
Quantity demanded = 800 units
Quantity supplied = 1320 units
At Price = 120 rupees
Quantity demanded = 1080 units
Quantity supplied = 480 units

CONCLUSION:

We can conclude that the equilibrium price of the given commodity is rupees 270, and at this price,
the quantity demanded. The quantity supplied of the given commodity will be 930 units.

If the price is increased by 130 than the equilibrium price, then the new quantity demanded will
decrease by the same difference, i.e., 130, but the quantity supplied will increase by thrice the
difference in new and old price, i.e., 390.

Similarly, if the price is reduced by 150 than the equilibrium price, then the new quantity
demanded will increase by the same difference, i.e., 150, but the quantity supplied will reduce by
thrice the difference in new and old price, i.e., 450.

In the first case, where supply is more than the commodity or service demand, the producer will
not be satisfied as the producer has to lower the commodity or service price so that the company
can avoid excess inventory, and there is less or no loss.
In the second case, where supply is less than the commodity or service's demand due to a decrease
in the price of the commodity or service, the customer is not satisfied because they are not getting
enough demanded quantity of the commodity or service.

3. a. A business firm sells a good at the price of Rs 450.The firm has decided to reduce the
price of a good to Rs 350.Consequently, the quantity demanded for the goods rose from
25,000 units to 35,000 units. Calculate the price elasticity of demand. (5 Marks)

Answer:

INTRODUCTION:

Elasticity of demand: It is the percentage change in demand for a commodity because of the
percentage change in other factors affecting the commodity's demand. We can calculate the
elasticity of demand with the help of the following formula:

Various factors influence the demand for the commodity. These factors are the consumer's income,
the price of the commodity, and the price of related goods such as substitute goods and
complementary goods. If the changing factor is income, then income elasticity of demand is
calculated. If the price of the commodity is changing, then the price elasticity of demand is
estimated. If the price of related goods is changing, then cross elasticity of demand is estimated.

Price elasticity of demand: It is the consumer's response in respect of the demand of a commodity
because of change in the price of the service or commodity. In other words, we can say that the
price elasticity of demand is the change in the percentage of demand for a commodity due to the
difference in the portion of the price of the given commodity.

CONCEPT AND APPLICATION:

For getting an accurate picture of the commodity, the reader neglects the negative sign of the
elasticity of demand and uses the absolute value. The reader looks for the absolute value of demand
elasticity and interprets the degree of elasticity as highly elastic, moderately elastic, and highly
inelastic. The value of elasticity of demand lies between 0 and infinity.
The following information is present in the above question:
Original Price (P) = Rs 450 per unit
Original Quantity (Q) = 25000 units
New Price = Rs 350 per unit
New Quantity = 35000 units
And the price elasticity of demand is calculated as:

Where,

∆Q = 

∆P = 
CALCULATION:

                                                                             = 40%

                                                  = -22.22%

                                                           = -1.8 or 1.8
CONCLUSION:
In the above case, the price elasticity of demand for the given commodity is 1.8. When calculating
the price elasticity of demand a firm or user will ignore the negative sign. The negative sign gives
us information regarding the degree of elasticity. 

The price elasticity of demand is greater than 1, which means that the commodity is elastic. In
other words, we can say that the commodity is very sensitive to the change in the price of the
commodity. A slight change in the percentage price of the commodity will lead to a massive shift
in the percentage quantity of the commodity.

3.b. “There is high cross elasticity of demand between new and old cars”. Discuss the
statement by explaining the features of the cross elasticity of demand. Also, compare and
contrast cross elasticity with other types of elasticities of demand. (5 Marks)

Answer:

INTRODUCTION:

Cross elasticity of demand: The change in quantity demanded of one commodity when the price of
another commodity changes is known as cross elasticity of demand. In other words, it is the change
in the percentage of the quantity demanded of a commodity because of the difference in the rate of
the price of another commodity. There are two kinds of goods in cross elasticity of demand. These
are substitute goods and complementary goods. The cross elasticity of demand for a substitute
good is positive, and for a complementary good, it is negative. We can calculate cross elasticity of
demand as

CONCEPT AND APPLICATION:

Now, for understanding the statement, "There is high cross elasticity of demand between new and
old cars," first of all, we have to understand the meaning of substitute goods and complementary
goods. 
Substitute goods are goods that are used by the consumer in place of other goods. It means that
these goods satisfy the basic needs of the consumer with some extra features.
Complementary goods are the goods that are used by the consumers jointly. 
Now, new and old cars are substitute goods as they fulfil the basic needs of the consumer with
different and unique extra features. If the used/old vehicle of the same model is not cheap as the
new car of the same make. Then it is evident that the consumer will choose the new vehicle.
Therefore, there is a highly elastic demand between old and new cars.
Now, let us compare the demand's cross elasticity with the price elasticity of demand and income
elasticity.
● Cross elasticity of demand measures the change in demand for a commodity due to change
in other related commodities' prices.
Whereas, price elasticity of demand measures the change in demand for a commodity due to the
difference in the commodity price.
Income elasticity of demand measures the change in demand for a commodity due to a change in
the consumer's income.
● Numerical values calculated by users are:
Cross elasticity of demand: unrelated, complementary, and substitute goods.
Price elasticity of demand: unitary elastic, perfectly elastic, and inelastic and relatively elastic and
inelastic.
Income elasticity of demand: luxury, inferior and normal goods (relatively elastic and inelastic).
● In cross elasticity of the demand curve, there is no shift or movement in turn.
Whereas, in price elasticity of demand, there is movement along the demand curve.
And in the income elasticity of demand, there is a horizontal shift in the demand curve.

CONCLUSION:

From the above discussion, we can conclude that price elasticity of demand means a change in
demand due to the price of the commodity. Income elasticity of demand means a shift in demand
due to change in income of the consumer. And cross elasticity of demand represents a shift in
demand of a commodity because of difference in another related commodity's price, keeping the
given commodity's price constant.