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Course: Business Economics

GDP measures the value of all goods and services produced within a country, while GNP measures production by citizens of that country wherever located. GDP equals consumption + investment + government expenditure + (exports - imports). GNP equals GDP + net income from abroad. The key difference is that GNP includes income from domestic assets owned by citizens abroad. At an equilibrium price of Rs 270, quantity demanded equals quantity supplied in the market. When the price rises above equilibrium, supply exceeds demand. When it falls below, demand exceeds supply. The price elasticity of demand for a good that saw demand rise from 25,000 to 35,000 units when the price dropped from Rs 450 to Rs 350 is 1.

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74 views

Course: Business Economics

GDP measures the value of all goods and services produced within a country, while GNP measures production by citizens of that country wherever located. GDP equals consumption + investment + government expenditure + (exports - imports). GNP equals GDP + net income from abroad. The key difference is that GNP includes income from domestic assets owned by citizens abroad. At an equilibrium price of Rs 270, quantity demanded equals quantity supplied in the market. When the price rises above equilibrium, supply exceeds demand. When it falls below, demand exceeds supply. The price elasticity of demand for a good that saw demand rise from 25,000 to 35,000 units when the price dropped from Rs 450 to Rs 350 is 1.

Uploaded by

jitendra.jgec8525
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Course: Business Economics

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

GDP is the sum of money value of all goods and services produced within the domestic territories of a
country during an accounting year.

GDP = Consumption + Investment + Government Expenditure + (Exports - Imports)

Consumption= Household final consumption expenditure-Durable goods, Non durable, Services-Food,


Medical expenses, rent

Investment= Purchase of machinery, construction of new mine

Government expenditure= Salaries of public servants, purchase of defence items

GNP measures the levels of production of all the citizens or corporations from a particular country working
or producing in any country.

For example, the American GNP measures and includes the production levels of any American or
American-owned entity,

regardless of where in the world the actual production process is taking place, and defines the economy in
terms of the citizens output.

GNP=GDP + Net factor income from abroad

GNP is an estimate of total value of all the final products and services turned

out in a given period by the means of production owned by a country's residents.

Net exports represent the difference between what a country exports minus any imports of goods and
services.

It measures country’s Economic performance

Components of GNP are consumption , investment, government Expenditure ,export and imports

GNP = GDP + net property income from abroad

Net factor income from abroad is the difference between the factor income earned from abroad by normal
residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the
domestic territory of that country (i.e., India).
2. for the year 2017 Qd= 1200-P and Qs= 120+3P. Find equilibrium price.

At equilibrium price, the quantity demanded is equals to the quantity supplied to the market.
This implies that Demand=Supply,
Qd=Qs

1200-P = 120+3P
Solving the above
4P = 1080
Hence Equilibrium price P = Rs 270

When price Rises to Rs 400

Qs=120 + (3×400)
Qs = 1320
and
Qd = 1200 - 400 = 800

From the above price Rd 400, we can say that there is more supply than Demand because the price is
high.

When Price rises to Rs 120

Qs = 120 + (3 × 120)
Qs = Rs 480
And
Qd = 1200 - 120 = Rs 1080

The above price change implies that there is more demand than supply as the price is low.

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

Answer:
Price elasticity of demand is a measure of a change in the quantity
demanded of a product due to change in the price of the product in the
market. In other words, it can be defined as the ratio of the percentage
change in quantity demanded to the percentage change in price. It can be
mathematically expressed as:

PercentageChange in theQuantity Demanded


Price elasticity of demand 
PercentageChange in Price
Thus, the formula for calculating the price elasticity of demand is as
follows:

=9/5

= 1.8

Thus, the absolute value of elasticity of demand is greater than 1.


b. “There is a high cross elasticity of demand between new and old cars”. Discuss the
statement by explaining the features of cross elasticity of demand. Also compare and
contrast cross elasticity with other types of elasticities of demand.
Answer:

The elasticity of demand is a degree of change in the quantity demanded of a product


in response to its determinants, such as the price of the product, price of substitutes,
and income of consumers. It can also be noted that the elasticity of demand is referred
to as a change in quantity demanded of a product with change in its price. However, in
a logical sense, the elasticity of demand measures the receptiveness of demand of a
product with a change in any of its determinants, such as the price, income of
consumers, and availability of substitutes. Therefore, economists have divided the
elasticity of demand in three main categories, which are:

 Price Elasticity of Demand


 Income Elasticity of Demand
 Cross Elasticity of Demand.

Cross Elasticity of Demand:-


The cross elasticity of demand can be defined as a measure of a proportionate change
in the demand for goods as a result of change in the price of related goods.
In the words of Ferguson, “The cross elasticity of demand is the proportional change in
the quantity demanded of good X divided by the proportional change in the price of
the related good Y.” The cross elasticity of demand can be measured as:

Cross Elasticity of Demand = Percentage change in quantity demanded of X


Percentage change in price of Y
Price Elasticity of Demand
Elasticity looks at the responsiveness of one variable to a change in another
Price elasticity:

 The responsiveness of demand to a change in price


 %change in quantity demanded / % change in price
 If PED > 1 it is elastic (flat demand curve)
 If PED < 1 it is inelastic (steep demand curve)

Price Elasticity of Demand, Revenue and Profit


If a product is elastic to increase revenue you reduce price
The reduction in price increases quantity demanded by a greater amount therefore increasing revenue
If a product is inelastic to increase revenue you increase price
The increase in price reduces quantity demanded by a smaller amount therefore increasing revenue
If costs stay the same then these actions will result in greater levels of profit for the firm

Income Elasticity of Demand


Measures the responsiveness of demand to changes in income

 % change in quantity demanded / % change in income


 YED > 0 (positive sign) = Normal goods – as income rises demand rises
 YED < 0 (negative sign) = Inferior goods – as income rises demand falls

Cross Elasticity of Demand


Measures the responsiveness of demand of one good to changes in the price of another good

 % change in quantity of good 1 / % change in price of good 2


 Cross elasticity < 0 (negative sign) The goods are compliments
 Cross elasticity < 0 (positive sign) The goods are substitutes

Factors that Influence Elasticity of Demand

 Number of substitutes – the greater the number of substitutes the more elastic a product is
 The % of income spent on the product – the smaller the % the more inelastic the good
 The time period – the longer this is the more elastic the good is
 Luxury or necessity – Luxuries tend to be more elastic and necessities more inelastic

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