Model Solution - Assessment 1

Managerial Economics
Assessment-1
Model Solution
Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution
1. Companies often change colour, package, design, and advertisements for their products. Is it
because the companies wish to counter the impact of diminishing marginal utility. Explain
with suitable examples that you may have witnessed, heard, or read. Explain the law of
diminishing Marginal Utility.[6 MARKS]
THE LAW OF DIMINSHING MARGINAL UTILITY:

In economics, the law of diminishing marginal utility states that ‘the marginal utility of a
good or service declines as its available supply increases. Economic factors devote each
successive unit of the good or service towards less and less valued ends. The law of
diminishing marginal utility is used to explain other economic phenomena, such as time
preference.’
This law states that the satisfaction that is derived from consumption of additional units of a
product or service, keeps diminishing with the addition of the product.
This can make us understand the fact that, the more of the same thing, will end up
providing less and less satisfaction to a person, even though additional units of the product
is also of the same quality as the first one, which provided maximum satisfaction.
Thus, we can connect this to understand the reason why companies change the color,
package, design and advertisements for their products. It can be simply because people get
bored of frequent exposure when it is continuous and sometimes even when the exposure
to something is not continuous in nature.
NEW PERK OLD PERK
GONE MAD - BEFORE
GONE MAD AFTER CHANGING THE PACKAGE
DAIRY MILK 90’S AD
RECENT DAIRY MILK AD

WHY DOES SATISFACTION FROM ADDITIONAL UNITS DIMINSH?:
MONOTONOUS
MIND GETS USED
TO THE SAME
THING
Influencing
MIND SEEKS TO
factors
SHIFT TO THE
UPGRADED
ONE
STILL MIND IS IN
CONSTANT NEED
MIND ALWAYS OF CHANGE
WANTS NEW
THINGS OVER
ALREADY
EXISTING ONES
From the above diagram it can be understood that, it is psychologically proven that mind
keeps on wanting for changes and upgradation as it gets used to the same things over and
over again, so in case of a product where perfect competition exists, in order to sustain the
brand over a long period and keep up with profits, the manufacturer has to seek ways to
make improvements, changes, upgradation to keep up with the CHANGING TRENDS/
FASHION FACADS of the king-i.e. the consumers.
Let us see the case of the examples we have depicted above. Perk has been in market since
1995, which sums up to 25 years of its existence. Even though the quality and taste and
package of perk was really good and has always been successful in sustaining that standard,
the market started to fall as new products were launched for the same price namely-
munch, KitKat etc. as these products came into the market, they became the leaders or the
rulers of the market. So perk , in order to keep up with the changes in consumers’ needs
and wants, it launched the all new one, discontinuing the old one which was identified as
the yellow and purple wrapped one into a blue wrapped one with a new concept of added
glucose in the chocolate. So initially when this product was launched, it earned maximum
profit as, the presence of glucose in the chocolate made consumers to choose this over the
others, considering the health factors that it helps in boosting additional energy in the body.
In addition, the fact that it lowered the market price to Rs.5 (small one) and Rs.10 (relatively
big one) as against the old one, which was sold at MRP-Rs.25, people, found this one cost
effective.
Second example of Gone mad sticks- the initial old ones were packed in brown color
wrappers with the brand name ‘Gone mad’ written funnily on it. Even the product was a
great hit in the market in the initial stages- launched during 2011, as years passed by with
the arrival of competitors, it was not able to maximize its profits, so it launched additional
products such as almond flavored one and coffee flavored one, and it was observed to be
visible leaders in the market again after 7 years.
REVERSING LAW OF DMU BY PRODUCT CHANGES/
3.5
PRODUCT DIVERSIFICATION
2.5
1.5
0.5
0
Old Perk New Perk
2. Any change in product price done by the company will require the company to assess the
impact on its quantity demanded. Competitor price changes can also influence the demand
of the product of the respondent company. This is because of cross-price elasticity. A change
in our income tends to make us less price sensitive. Explain the concept of Elasticity - own
price elasticity, cross-price elasticity, and Income elasticity with help of suitable examples.
[6 MARKS]
A) CONCEPT OF ELASTICITY:
In simple words, the concept states that the demand for a product might change due to the
changes in price called elastic demand; or the demand can remain insensitive to the
changes in price popularly known as an inelastic demand.
 ELASTIC DEMAND OR SUPPLY – changes in demand/supply marked by changes in price
 INELASTIC DEMAND AND SUPPLY – demand/supply remains the same despite the changes
in price.
Example: we all use soap on daily basis, so naturally we have a tendency to accumulate the
brand we use even though we have enough, when there is a fall in price that is called elastic
demand
Some people are always inclined towards using apple products over other brands, in these
cases even though the price of an apple phone increases as new products are launched
people do buy it,i.e. changes in price does not affect the demand or supply – this is called
an inelastic demand.
B) OWN PRICE ELASTICITY:
A measure of responsiveness in quantity demanded or supplied of a good to a change in the

price of the good.
C) CROSS PRICE ELASTICITY:
It is the change in the quantity demanded of a product with the changes in price of another
product is called cross price elasticity.

D) INCOME ELASTICITY:
Change in the quantity demanded of a good with a change in your income is known as
income elasticity.
3. Let us assume you are planning to buy a new car. Explain the demand determinants. Which of
the demand determinant will have higher weightage and why?
DEMAND DETERMINANTS OF A CAR:
PRICE OF THE CAR Choices available-

colour, design
Brand
name/trade
mark DEMAND TASTE
DETERMINANTS
PREFERENCES
PERSONAL INCOME
Factors like
longevity,
endurance,
durability, length
of service
Price of complementary
products and services – price of
seat covers, price of tyre, price
of insurance, price involved in
subsequent maintenance of the
car
WEIGHTAGE OF DEMAND DETERMINANTS OF THE CAR
PIE CHART- REPRESENTATION:
From the above chart, it can be understood that personal income has the highest weightage
in comparison to the other determinants because, affordability is the main factor that
influences our purchase decision, i.e. a salaried employee can practically not afford a rolls
Royce with the money he/she earns, he/she has to look for other sources of earning money
such as loan, EMI options etc. Then follows the price, based on the ability to afford. We
would first look for the price of the product and then gauge it with the brand name because
we would not want to buy a car which is not socially respectable say, because we feel it
lowers our standard and we would rather use a public transport and say in an eco-friendly
person. So Brand name is the third most important factor, and if we would be able to afford
a rolls Royce we would definitely buy it without any second thought as we gain an amount
of respects with the car we own because it is a luxury good.
Then comes longevity of the car, as it is understood that branded cars last for longer
period/ has long life when compared to the normal ones. Price of the substitutes
also plays a major role because, if we will be able to get another car at same price
with higher features or another car for lower price with same features, we would go
for that because we can save money. In addition, price of complementary products
and services and cost of maintenance is an important factor to determine the car
we would want to buy.
STAGES OF PRODUCTION OF A CAR:
A) Supply Chain:
To understand process of manufacturing a car, we have to understand the

underlying supply chain that drives domestic vehicle assembly. These days’ cars are
primarily "sourced out" to produce various sub-assemblies in over 4,000 disparate
locations from all around the world. This means a car's "production" plant is an
active assembly point, where skilled workers and robotic systems bring together all
of the necessary loose components and tools to create a final product on a "just-in-
time" basis.
B) Chassis
The chassis of the car is nothing but the baseline component. All other parts are
integrated on, or within the chassis. This specially welded frame is initially attached
to a conveyor that moves along a production line. As the frame progresses, the car
is literally "built from the frame up" to create the final product with perfection.
Parts that are sequentially applied to the chassis include the engine, front and rear
suspension, wheel drums, gas tank, rear-end and half-shafts, transmission, drive
shaft, gear box, steering box and the brake system.
C) Body
Once the "running gear" is integrated and fitted within the frame, the body is
constructed as a secondary process. First, the floor pan is positioned properly with
the help of machines, and then the left and right quarter panels are positioned and
welded to the floor structure. This step is followed by adding the front/rear door
pillars, rear deck, the body side panels, hood and roof. The entire process is typically
executed by robotic machines without the use of manual laborer.
D) Paint
Before painting the vehicle, a quality control team inspects the body, only after
this is completed will painting be initiated. Skilled workers look for dents, abrasives
or other deformations that could create a finishing problem when undergoing the
painting process for ensuring perfection and enhance customer satisfaction. Once
this step is completed, the car is automatically "dipped" with primer, followed by a
layer of undercoat and dried in a heated paint bay all done by machines. Once the
primer/undercoat process is finished, the car is again "dipped" with the base coat
and again dried thoroughly before moving the assembly to the next stage.
E) Interior
After the structure is entirely painted and dried, the body is moved to the interior
department in the plant. There, all of the internal components are integrated with
the body with the help of machines. These components include instrumentation,
wiring systems, all weather stripping, dash panels, interior lights, seats, door/trim
panels, headliner, radio, speakers, glass, steering column, brake and gas pedals,
carpeting and front/rear facias.
F) Chassis/Body Mating
The two central major assemblies are next mated for final setup and rollout which
is the final process. Again, this process is executed via computer and control
machines to ensure speed and zero mistakes, and perfect the fit between the body
assembly and the chassis. Once the car is rolling on its own, it is driven to the final
quality control point, inspected and placed in a waiting line for transportation to its
final dealer destination in the desired mode of transport.
IMPACT OF COVID ON AUTOMOTIVE SECTOR
The COVID-19 pandemic has had a major swift and severe impact on the globally
integrated automotive industries. Symptoms include a disruption in Chinese parts
exports- china being the major exporter of assemble sets for countries throughout
the world, large scale manufacturing interruptions across Europe, and the closure
of assembly plants in the United States has had a major impact too. This is placing
intense pressure on an industry already coping with a downshift in global demand,
and likely leading to increased merger & acquisition activity, which might bring
down the number of suppliers and potentially lead to monopoly.
China being the main supplier of car parts, has currently stopped supplying due to
the rapid increases in the number of cases in China especially, so other states are
not only affected by the shortage of assemble set supplies but also due to the
spread of corona virus and its impact which is said to be long lasting in nature.
4. Assume food delivery firms like Swiggy are making huge profits. Higher profits may
attract the entry of new firms into the food delivery industry. Explain what could be
the impact of entry on the firms and the industry as a whole.
1. AVERAGE COST OF RENDERING THE DELIVERY SERVICE FOR THE EXISTING

PLAYERS:
AVERAGE COST = TOTAL COST
NO. OF UNITS OF GOODS PRODUCED
When new firms enter into the food delivery industry, the cost of delivering food for the
existing players would increase. This is because the new firms will want to take over the
current market share of the existing ones by providing better prices to the customers, so
that they would choose theirs over the existing one. Therefore, in order to sustain in the
existing market the already existing firms will have to provide the same services for a better
lower price, which in turn increases the cost. Thus, there will be an increase in the average
cost of rendering delivery service for the existing players.
AVERAGE COST OF RENDERING DELIVERY SERVICE BEFORE THE ARRIVAL OF NEW FIRMS:
The cost now will be lesser as the existing firms decides the prices to be charged to the
customers
AVERAGE COST OF RENDERING DELIVERY SERVICE AFTER THE ARRIVAL OF NEW FIRMS:
There will be an increase in the cost now, as there are more sellers of the service and people
might choose the cost effective one, and there are high possibilities for existing ones to lose
the market, so in order to sustain their market share they have to cut the prices they charge
to the customers which in turn increase the cost to delivering the services.
2. PRICE OR COMMISSIONS THAT THEY CHARGE FROM THEIR CUSTOMERS:
There will be a fall in this too, as the law states as more competitors enter into the market,
the prices in which the goods or services is provided must go down, then only the customers
will choose to get the cost affordable one, as price is the most important factor that
determines the demand for a product.
3. PROFTABILITY:
Chances of profitability will decrease, as there is an increase in the number of players in the
market as it would be difficult to sustain in perfect competition. However, delivery apps can
sustain the market by applying various strategies that helps holding the customers to a
particular app such as – trademark, reduced price, discounts, gifts, advertising etc.
4. BREAK EVEN POINT AFTER ENTRY OF NEW FIRMS:
It is designed to calculate how long it will take, how much money you need to earn and how
much you need to sell for the business to cover its costs and become profitable. Break- even
point in simple words is the sales volume where neither profit nor loss is made or where
contribution margin equals to fixed cost margin. Now when new firms enter, the break-even
point or the point where the sales volume earns neither profit nor loss increases, thus
making it hard for the firm to earn their profits.
Fixed cost denotes - set up cost or cost of setting up of business, which is usually fixed and
non-recurring in nature – cost of bikes, office building etc.
Variable cost – that which varies and recurring in nature- cost of labourers, cost of petrol for
the bike etc.
BREAK EVEN POINT AFTER ENTRY OF NEW FIRMS:
BREAK EVEN GRAPH AFTER ENTRY OF NEW FIRMS:
Therefore, it can be understood that break-even point raises with the entry of new firms making it hard
for the existing ones to earn profit.
NOTE:
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Proprietary content. ©Great Learning. All Rights Reserved. Unauthorized use or distribution prohibited.

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Managerial Economics

THE LAW OF DIMINSHING MARGINAL UTILITY:

NEW PERK OLD PERK

GONE MAD AFTER CHANGING THE PACKAGE

DAIRY MILK 90’S AD

RECENT DAIRY MILK AD

MIND GETS USED

REVERSING LAW OF DMU BY PRODUCT CHANGES/

 ELASTIC DEMAND OR SUPPLY – changes in demand/supply marked by changes in price

B) OWN PRICE ELASTICITY:

A measure of responsiveness in quantity demanded or supplied of a good to a change in the

product is called cross price elasticity.

DEMAND DETERMINANTS OF A CAR:

PRICE OF THE CAR Choices available-

PIE CHART- REPRESENTATION:

STAGES OF PRODUCTION OF A CAR:

To understand process of manufacturing a car, we have to understand the

IMPACT OF COVID ON AUTOMOTIVE SECTOR

1. AVERAGE COST OF RENDERING THE DELIVERY SERVICE FOR THE EXISTING

AVERAGE COST = TOTAL COST

NO. OF UNITS OF GOODS PRODUCED

2. PRICE OR COMMISSIONS THAT THEY CHARGE FROM THEIR CUSTOMERS:

the bike etc.

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