University of Moratuwa

Faculty of Information Technology

Assignment 01
ITE 2003 - Business Studies
E151041035
a) Elasticity Demand is a key concept in economic systems. Describe how a
business organisation could use the knowledge of elasticity of demand of its
goods or services to improve profitability.

The law of demand, which expresses an inverse relationship between

quantity demanded and price, shows only the direction of demand. No
information is provided as to how much or to what extent will demand
change to a change in any of the variables affecting demand. This
information is, however, provided by the concept of elasticity of demand
which shows the exact magnitude by which demand will change if there is a
change in its variables.

percentage change in quantity demanded

Elasticity of demand =
𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐚𝐧𝐨𝐭𝐡𝐞𝐫 𝐞𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐯𝐚𝐫𝐢𝐚𝐛𝐥𝐞

The most prominent elasticity of demand are,

1. Price elasticity of demand.

2. Income elasticity of demand.
3. Cross elasticity of demand.

Price elasticity of demand.

Price elasticity of demand (PED) shows the relationship between price and
quantity demanded and provides a precise calculation of the effect of a
change in price on quantity demanded.
The following equations enable Price elasticity of demand to be calculated.

percentage change in quantity demanded

Price elasticity of demand =
𝐩𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞.

OR

change in quantity demanded Initial price

Price elasticity of demand = ×
𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞 𝐢𝐧𝐢𝐭𝐢𝐚𝐥 𝐪𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐝𝐞𝐦𝐚𝐧𝐝𝐞𝐝
Price elasticity of demand is always negative, indicating the inverse
relationship between quantity demanded and price. Demand for most goods
is either elastic, inelastic or unitary depending on whether its coefficient is
greater than, less than or equal to one. Demand is said to be elastic when a
percentage change in price brings about a more than proportionate change in
quantity demanded. Hence, an elastic demand occurs when the percentage
change in quantity demanded is greater than the percentage change in price,
and the coefficient of the elasticity is greater than 1 (PED > 1). An elastic
demand can be illustrated as follows,

PP
DD

P2
P2
25%
25%
P1
P1
50%
50% DD

Qd
Qd
00 Q1
Q1 Q2

On the other hand, demand is said to be inelastic when a percentage change

in price brings about a less than proportionate change in quantity demanded.
Hence, an inelastic demand occurs when the percentage change in quantity
demanded is less than the percentage change in price, and the coefficient of
the elasticity is less than 1 (PED < 1).

PP D
D

P2
P2
25%
25%
P1
P1
10%
50% D
D
Qd
Qd
00 Q2
Q1 Q1
 Besides, demand is said to be unitary when a percentage change in price
brings about an equal proportionate change in quantity demanded. The
coefficient of elasticity is equal to 1 (PED = 1).

P
D

P2
25%
P1
D
25%

Qd
0 Q2 Q1

The movement of goods and services are able to increase profits,

• To increase revenue by increasing the price of an item business.

The selected items should be an inelastic demand. Goods with inelastic

demand are when other factors stable, reviewed in price less than the
percentage change in the percentage change of the goods. That is the
essential goods.

Ex: Clothes / Sold / Rice etc.

• To increase revenue by decreasing the price of an item business.

The selected items should be an elastic demand. Goods with elastic demand
are when other factors stable, reviewed in price more than the percentage
change in the percentage change of the goods. That are luxury goods and not
essential items.

Ex: Washing machine / ACs

Accordingly, in this way, it will be important to increase profit in a

marketplace of goods and services.
b) Using demand and supply analysis, illustrate each of the following scenarios,
be sure to label all of the relevant components of the diagram and state the
directional effects on the equilibrium price and quantity

I. An increase in consumer income.

P
S When an increase in
consumer income,
P2 demand curve goes
1
P1 up and price and
D2 quantity will be
D1 increasing.
Qd
0 Q1 Q2

II. An increase in the price of a substitute for a consumer good.

P
S When an increase in
the price of a
P2 substitute for a
1
P1 consumer good,
D2 demand curve goes
D1 up and price and
Qd quantity will be
0 Q1 Q2
increasing.
 III. An expectation of a future price increase

P When an expectation
S of a future price
P2 increase,
1 demand curve goes
P1
up and price and
D2
quantity will be
D1
increasing.
Qd
0 Q1 Q2

c) “Business goals and objectives are part of the planning process. They
describe what a company expects to accomplish throughout the year.” Why
do business organisations need objectives? In what ways are the objectives
of the private sector and public sector organisations likely to differ?

The goal does not have to be overly complicated, but it does require
commitment and discipline to follow through and complete the required
action steps. Business goals need to be thought through and detailed
enough to achieve desired results. Many organisations use the SMART goal
model to do this.

S - specific, significant, stretching

M - measurable, meaningful, motivational

A - agreed upon, attainable, achievable, acceptable, action-oriented

R - realistic, relevant, reasonable, rewarding, results-oriented

T - time-based, time-bound, timely, tangible, trackable

SMART Goals
Specific
• Well defined
 • Clear to anyone that has a basic knowledge of the project
Measurable
• Know if the goal is obtainable and how far away completion is
• Find out when you have achieved your goal
Agreed Upon
• Agreement with all the stakeholders what the goals should be
Realistic
• Within the availability of resources, knowledge and time
Time-Based
• Enough time to achieve the goal
• Not too much time, which can affect project performance

Business objectives of an organisation depend on the preparation of the

mission. short or long term to achieve these objectives is expected. The
business objectives need,

• To explain the mission to everyone clearly.

- Identify any business could ever be in the future.
• To identify the business progress.
- To measure income, profit and productivity etc.
• Helping to implement the decisions.
• To guide to peoples and employees.
• To analyse the entire business process.

Major Differences between Public and Private Sector Organisations

Public Sector Organizations Private Sector Organisations

The section of a nation's
economy, which is under the
control of the government,
Meaning
whether it is central, state or
local, is known as the Public
Sector.
To serve the citizens of the
Basic objective
country.
The section of a nation's
economy, which owned and
controlled by private
individuals or companies is
known as Private Sector.
Earning Profit
Raises money Public Revenue like a tax, Issuing shares and
from duty, penalty etc. debentures or by taking loan
Police, Army, Mining, Health, Finance, Information
Manufacturing, Electricity, Technology, Mining,
Education, Transport, Transport, Education,
Areas Telecommunication, Telecommunication,
Agriculture, Banking, Manufacturing, Banking,
Insurance, etc. Construction,
Pharmaceuticals etc.
Job security, Retirement Good salary package,
Benefits of
Benefits, Allowances, Competitive environment,
working
Perquisites etc. Incentives etc.
Basis of Seniority Merit
Promotion
Job Stability Yes No