The main
objectives of a firm in the private sector: Basically the main key objective of
the private sector is to get the highest profit as much as they can get. The
profit is the Earning before interest and tax. Taxes are government sanctioned
and the private sector tries to give a great cushion to EBIT against interest
and tax. To achieve this aim, the companies in the private business produce,
where their total revenues are far higher than total costs. This creates high
reserves for the stockholders.
This
indicates that the private sector has to accomplish the goals and desires of
the shareholders and it will always aim to fulfil their satisfaction. Another
objective of companies in the private sector is to raise their market shares to
get a sustainable competitive advantage. Companies involved in the private
sector also strive to improve their corporate image by showing social
responsibility. In addition, the private sector is highly involved in
sponsoring and participating in social and community events because they know
that such events can make their positioning and image better in the market.
Q12. What do you mean by price
Elasticity of demand? Distinguish between elastic and inelastic demand.
Price Elasticity of demand: A measure of the relationship
between changes in the quantity demanded of a particular good and a change in
its price. Price elasticity of demand is a term in economics often used when
discussing price sensitivity. The formula for calculating price elasticity of
demand is:
Price Elasticity
of Demand = % Change in Quantity Demanded / % Change in Price
If a small
change in price is accompanied by a large change in quantity demanded, the
product is said to be elastic (or responsive to price changes). Conversely, a
product is inelastic if a large change in price is accompanied by a small
amount of change in quantity demanded.
For example,
if the quantity demanded for a good increases 15% in response to a 10% increase
in price, the price elasticity of demand would be 15% / 10% = 1.5.
The main
differences between an elastic demand and an inelastic demand have been
explained in details as follows:
Elastic Demand:
- When a small change in price brings about more than proportionate change in demand, it is known as the elastic demand.
- The demand curve is flatter.
- Luxuries and comforts have elastic demand.
- Examples of elastic demand are Color T.V. sets, Prestige goods, etc.
- Perfectly elasticity of demand is not practical, while relative elasticity is seen in case of moderately priced goods.
- The coefficient of elasticity of demand is greater than 1, that it ed > 1.
Inelastic Demand:
- When a big change in price brings about less than proportionate change in demand, it is known as inelastic demand.
- The demand curve is steeper.
- Necessary items can be termed as inelastic demand.
- Examples of Inelastic demand are salt, rice, food grains, etc.
- Perfectly inelasticity of demand is seen in the demand of necessary goods, while relative inelasticity is seen in case of very expensive goods.
- The coefficient of elasticity of demand is less than 1, that is ed < 1.
Q13. What is an indifference curve
and what are its characteristics/properties? Use diagrams in your answer
(Nov’03, Nov’04, Nov’07, Nov’09, and Nov’10).
An indifference curve:
Definition: An indifference curve is a graph
showing combination of two goods that give the consumer equal satisfaction and
utility. Each point on an indifference curve indicates that a consumer is
indifferent between the two and all points give him the same utility.
Description: Graphically, the indifference curve
is drawn as a downward sloping convex to the origin. The graph shows a
combination of two goods that the consumer consumes.
The above
diagram shows the U indifference curve showing bundles of goods A and B. To the
consumer, bundle A and B are the same as both of them give him the equal
satisfaction. In other words, point A gives as much utility as point B to the
individual. The consumer will be satisfied at any point along the curve
assuming that other things are constant.
Characteristics/properties of an
indifference curve:
Following
are the indifference curve properties:
1. If two
commodities are perfect substitute the indifference curve is a straight line.
2. When two
commodities are not substitutable then the shape is represented by two vertical
and horizontal lines.
3. In more
typical cases, in which the two commodities can be substituted for each other
but are not perfect substitutes, the indifference curve will be curved as
4. The more
easily the two commodities can be substituted for each other the nearer will
the curve approach straight line.
5.
Indifference curves normally slope downward, the upward sloping portion of
curve shown here s impossible. Basket A has more goods than basket B and
therefore it could not be on the same indifference curve. The indifference curves have normally
negative slops – sloping downward.
6. The
absolute value of the slope of an indifference curve at any point represents
the ratio of the marginal utility of the good and on the horizontal axis to the
marginal utility of the good on the vertical axis. The rate at which one good
can be substituted for the other without gain or loss in satisfaction is called
marginal rate of substitution.
7.
Indifference curves are convex, that is, their slope decrease as one moves down
and to the right along them. The implies that the ratio of the marginal utility
of meat to the marginal utility of the ghee (cooking oil) also known as marginal
ratio of substitution of meat for ghee (cooking oil) diminishes as one moves
down and to the right along the curve.
8.
Indifference curves can be drawn through the point that represents the basket
of goods whatsoever.
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