Chapterwise Imp Qus of Micro Eco...

B.COM 1ST YR (Economics)SATNAM CLASSES PH- 9166848499

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SATNAM CLASSES PREMIUM INSTITUTE FOR YOUR FUTURE IN CS FOUNDATION, EXECUTIVE, PROFESSIONAL AND B.COM COURSE. NOTES AVAILABLE FOR ALL THE SUBJECTS IN HINDI ALSO.

MICRO ECONOMICS


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Unit 1 Nature & Scope of Chapter 1 EconomicsNature of economicsMicro Economics Macro Economics Meanin g Macro economics deals not with individual Microeconomics is a study of particular incomes but with national incomes not with firm, particular household, Individual prices, individual prices but with price levels, not with wages, income, individual Industries, individual outputs but with the national particular commodities. output. Approac h The approach of Microeconomics is The approach of Macroeconomics is Microscopic because it analyse the Macroscopic because it deals with behaviour of Individuals. Aggregates. Metho ds The Method adopted in Microeconomics The Method adopted in Macroeconomics is called Slicing method is called Lumping method Scope of Micro economics is said to be limited as compared to Macro economics Sco pe Scope of Macro economics is wider as it deals with entire economy.

Nature of assumptions Microeconomics is based on Ceteris Macroeconomics is based on very Paribus assumptions, i.e. others things few assumptions, hence it is more being equal, hence it is less realistic. realistic. Equilibrium analysis It deals with Partial equilibrium analysis It deals with General equilibrium analysis

Q.1. Distinguish between.


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Q.2. Distinguish between:1 . 2 . 3 . 4 . 5 . Economic Growth It means increase in Real Per Capita Income It is a narrow concept as it is concerned only with rise in Income It is a concept associated with Developed countries Growth is independent to structural changes It is not concerned with distribution of Income & Wealth 1 . 2 . 3 . 4 . 5 . Economic Development It means Economic Growth plus Economic welfare It is a broader concept as it focuses on economic welfare along with increase in income. It is a concept generally associated with Developing countries Development & Structural changes go together. Equality in distribution of income & Wealth is one of the prime concerns of economic development.

Q.3. Explain Economics is a Science or an Art. Depending on who uses and for what purpose. Discuss. {1999 -Jun. - 10 Marks} A] 1. a) b) c) Economics is a Science: A subject is considered Science if: It is a Systematised body of knowledge which studies the relationship between cause & effect. It is capable of measurement It is should have ability to forecast.

2.a) b) c) 3.

If we analyse Economics, we find it has all the features of Science. i.e.Like Science economics studies the relationship between cause & effect for e.g.: Law of demand (Cause & effect relationship between price & demand) It measures Law of demand in terms of money It has ability to forecasts the future market conditions. But Economics is not a perfect Science. This is because it deals with the Human behavior which


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is highly unpredictable and it is not possible to make correct predictions about behaviors of variables. B] 1. 2. Economics is an Art: Art tells us How to do a thing, to achieve an end (objectives). In other words Art is practical. We find that Economics has a feature of art also: i.e. its various branches like Consumption, Production and Public finance etc. provide practical solution to various economic problems. Thus, Economics is both a Science and an Art.

Conclusion:

Q.4. Working of an Economic System I] A Capitalist Economic System Or Capitalism is a Price- Directed economic system? Explain? {1999 -Dec. - 5 Marks} An economy is called capitalist or a free market economy if it has following characteristics: 1) 2) Right of Private property: It means the productive factors like Land, factories, machinery, mines etc are under private ownership. Freedom to choice by the consumer: It means producer produce only those goods which consumer wish to buy.


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3) 4) 5) 6)

Profit Motive: Capitalist economy is the profit motive which forces or induces people to work and produce. Competition: Competition prevails among sellers to sell their goods & among buyers to obtain goods to satisfy their wants. Market forces: All economic activities are guided by free market forces (Demand & Supply) or the price mechanism. Inequalities of Income: There is generally a wide gap between the rich and the poor in the income. Which mainly arise due to unequal distribution of property.

Working of Capitalist Economy: 1. 2. 3. 4. Deciding what to produce: In capitalist economy the question regarding what to produce is ultimately decided by consumers who show their preferences by spending on goods. Deciding How to produce: In capitalist economy, entrepreneur will produce his goods with that technique of production which renders his cost of production minimum. Thus, the relative price of factors of production help in deciding how to produce. Deciding for whom to produce: Goods and services in a capitalist economy will be produced for those who have the buying capacity. Decisions Regarding, Saving and Investment: Saving is governed by high interest & Investments are governed by high rate of returns.

Advantage of Capitalist Economy: 1) 2) 3) 4) Capitalist economy in order to reduce cost always try to use resources at an optimum level. The process of economic growth is faster under capitalist economy. Capitalist economy helps to producers for selecting long term projects by giving credit facilities. Capitalist economy has a tendency to register a high growth rate in both Nation Income and per capital income.

Demerits:


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1) 2) 3) 4)

Capitalism generates inequalities of Income and Wealth Inequalities of income and wealth together leads to difference in Education, training and employment Production under capitalist economy does not represent real needs of the society. Only those goods are produced which are in demand Capitalist system may be producing a number as goods and services which are positively harmful for the society.


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II] 1) 2) 3) 4) 5)

Socialist Economy: An economy is called socialist economy if it has following character tics: Social Ownership: In a socialist economy the institutions of private property are abolished except in case of consumption goods and personal belongings. All resources are owned by government authorities and co-operatives. Limited choice by the consumers: It means consumer gets restricted by selective production of goods. In other words, within available range an individual is free to choose what he likes most. Service Motive: In socialist economy profit motive and self interest are not the driving force of economic activity. Centrally planned Economy: There is a central authority (Government) to set and accomplish socio-economic goods. In other words, allocation of productive resources in done according to a predetermined plan. Distributive Justice (Equility): In socialist economy the gap between rich and poor in terms of distribution of Income and property is less.

Working of Socialist Economy:The major decisions like what to produce, how to produce, for whom to produce and decision regarding saving and Investment are taken by central authority(Government). These decisions are taken in a very planned manner so that all the members of society should get benefit from the fruits of such socialized planned production on the basis of equal rights. Merits: 1) In socialist economy, Educational and other facilities are enjoyed more or less equally, thus the basic causes of inequalities are removed. 2) The income is divided on the basis of relative needs of the members of the society; every one is assured of his share of the national income. Irrespective whether he has contributed to its creation or not. 3) The main aim of socialist economy is to serve the major part of the society and not to earn the profit. Demerits: 1) Consumers get a very limited choice which hampers the standard of living of society. 2) The lack of competition results in slow growth rate, poor productivity of labour, law national income and per capita income. 3) The right to work is guaranteed but choice of occupation gets restricted.


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General Question Q.1. Capitalism economy is a price directed economy system. Therefore, all major economic decisions of the economy can left to it. {1993 -Jun. - 3 Marks} Hint: No, Refer Q.3. [ I ] (Merits & Demerits)


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Q.2. Micro economics & Macroeconomics are complementary to each other.{2000-Dec-5 Marks} Hint: Yes, Both Micro & Macro economics are dependent on each other because the principle of microeconomics are derived from Macroeconomics & Macroeconomics is nothing but it is a sum of Micro units. (and also refer Q.1. Meaning & Scope ). Q.3. Economic development is a wider concept than Economic growth {2007 Jun. 5 Marks} Hint Refer Q.2.(modify the distinguish between in to answer)


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Chapter 2 Scope of EconomicsQ.1. Explain Economics as a science of wealth. Ans : Adam is regarded as :father of economics According to him The great object of political economy of every country is to be increase the riches & power of that country In other words Adam smith states that, the objective of the country should be both (a)To grow rich & (b) Acquire political & military strength Merits / Advantages i) It highlighted an important problem faced by each & every nations i.e. creation of wealth ii) This definition also highlights that, every economy need to acquire capacity to produce more iii) Since, the problems of poverty, unemployment etc. can be solved greater extent , when wealth is produced & distributed equitably, this credit goes to Adam smith. Disadvantages / Demerits i) They totally ignored creation of immaterial wealth like service of doctors, charted accounts etc. & focused only on Material wealth ii) iii) iv) Q.2. Ans They concentrated to much on the production of wealth & ignored social welfare Adam smith ignored the problem of income distribution They ignored the higher values of life & reducing it to a dismal science Explain the theory given by RICARDO Ricardo focused on the Distribution of wealth He states that all the production derived on the earth by jointly efforts of labour, machinery & Capital id divided among three class of the community i.e. a) The proprietor of land b) Owner of the stock of capital & c) Laborers He also states that framing the law which regulate this distribution is the principal problem In political economy Explain the Welfare Definition given by Alfred Marshall. Or Economics is neither study of only wealth nor only of man & his activity. {2007

Q.3.


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Dec. 5 Marks}

Ans:

Marshall states that Economic is a study of Mankind in ordinary business of life. It examines that part of individual & social actions which is most closely connected with the attainment & with use of material requisites of well being. According to Marshalls opinion / Explanation: a) Economics is a study of both wealth & man, but out of two study of man is important.


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b)

Economics should also focus on well being of members of society along with creation & consumption of goods & services. Criticism of Definition a) Marshall ignored the immaterial things like service of teacher, actors, C.A etc. b) Robbins criticized the welfare definition on the ground that it is very difficult to state which things would lead to welfare & which will not.

Q.4. Ans:

Explain the welfare definition given by A.C. Pigou? A.C. pigou states that The range of our inquiry become restricted to that part of social welfare that can be brought direct or indirectly into relation with can be brought direct or indirectly into relation with the measuring rod of money. Pigou emphasizes social welfare but only that of it which can be related with the measuring rod of money. Criticism a) Mr. Pigou also ignored the immaterial things like service of teacher, actors, C.A etc. b) A society cannot achieve everything it wants, because resources are always scare as compared to wants.

Q.5.

Explain science of choice making? Or Explain scarcity definition given by Lionel Robbins Or Economy is a science which studies Human behaviour as a relationship between ends & scarce means which have alternative uses comment. {1998 Dec. 10 Marks}{2002 Jun. 10 Marks} Or

Ans:

What are the elements of robbins definition of economics {2003 Jun. 5 Marks}. According to Lionel Robbins Economics is the science that studies human behaviour as a relationship between ends & scarce means which have alternative uses Robbins tried to explain that : a) Resource in economy is always scarce as compare to unlimited wants b) It is possible to select between several alternative resources for satisfying given want c) Similarly, it is also possible to use a given resources for the satisfaction of several alternative wants. Criticism a) Robbins emphasis only on scarcity, he forgetting that economic problem arise not only under scarcity condition but even economic problem can arise under abundance condition. b) Robbins ignores other aspects of economics such as national income,


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c)

economic growth & development etc. Robbins gave more importance to scarcity in his definition but not to growth thus it is said that his definition is scarcity oriented & not growth oriented.

Q.6. Ans:

Explain the science of dynamic growth & development? Or Explain the definition given by Samuelsons Mr. P.A. Samuelson states that Economic is the study of how people & society


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a) b) c)

choose, With or without the use of money, to employ scarce productive resources which could have alternative uses, to produce various commodities over time & distribute them for consumption now & in the future amongst various people & groups of society Explanation The above definition is very comprehensive The definition does not restrict to material well-being or money measure as limiting factor but it consider economic growth over time. The definition has universal appeal & is applicable to all economics.General question

Q.1. Q.2. Q.3. Q.4.

Economics has been defined as a science of material well-being. How does it differ from Robbins definition of economics? {2000 Jun. 10 Marks} Compare Welfare view of economics as a defined and propounded by Marshall with scarcity view of economics as enunciated by Robbins {2001 Dec. 10 Marks} Economics is a science of choice-making Discuss Theoretically, it is ideal to have a mixed economy. However, it suffers from several drawbacks. Critically evaluate this statement {2005 Dec.6 Marks}


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Unit 2 Utility, Demand & supply AnalysisChapter 1 Utility AnalysisUtility: Utility is the Quality in products that makes individual wants to buy them. Utility refers to the capacity of a commodity or service to satisfy a human wants. Hence, It is considered as want satisfying power of a commodity.

Q.1.

Features of Utility: [S2UPARI-MO] 1) Subjective Concept: Utility is Subjective as well as psychological concept. It deals with personal likes, dislikes etc, hence it differs from person to person. For eg:- A smoker finds utility in cigarette but a non-smoker does not.

2) Different from Satisfaction: Utility is a power of commodity to satisfy human wants. It means satisfaction is a result of utility. For eg:- A smoker Identifies utility from a cigarette by seeing them but he can get satisfaction only when he will consume cigarette.

3) Different from Usefulness: Utility is a quality which is their in the product may not necessarily be useful. For eg:- Many drug addicts enjoy satisfaction from opium but opium is harmful for health. Hence, utility is different from usefulness.

4) Different from Pleasure: A commodity having utility does not necessarily give pleasure. For eg:- A medicine relieves the child from fever,it has utility but does not give pleasure due to bitter taste. Hence, utility & pleasure are different. 5) Abstract Concept: Utility does not have physical existence; hence it cannot be seen, nor touched. It is a psychological concept, it is a feeling.

6) Relative Concept: Utility differs from person to person, place to place, time to time. For e.g.:- Woolen Clothes possess more utility in winter than in summer. Hence utility is a relative concept.

7) Intensity determines utility: A great intensity keeps the utility very high or vice versa. Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 1717

For eg:- A child has a greater intensity to consume chocolate, he finds more utility in chocolate after consumption if he satisfied his utility in chocolate will be come low.

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Hence utility is determined by the degree of intensity.

8) Utility is Multipurpose: Some commodities have specific use & some commodities used for different purpose. For eg:- Electricity satisfies several purposes hence utility derived from such commodity is also multipurpose.

9) Objectively Immeasurable: As utility is a psychological concept. It is a feeling & feeling cannot be measured numerically. Hence it is immeasurable. Distinguish between:

Q.2.

Total Utility Total Utility refers to the total psychological satisfaction which a consumer obtains from consumption of all units of a particular commodity.

Marginal Utility MEANIN G Marginal Utility refers to the addition made to the total Utility by consuming one more unit.

INTERRELATION When the total utility is maximum, the Marginal When the Marginal Utility is maximum, the total Utility is zero. Utility is the minimum. SLOPE S Marginal Utility curve slopes downward at a diminishing rate from left to right. FORMUL A MU =TU -TU n n n-1 NUMERICAL VALUE The numerical value of marginal utility can be positive, zero or even negative.

Total Utility slopes upward at a diminishing rate from left to right.

TUn=MU1+MU2++MUn

In a normal case, the numerical value of total utility is always positive.

Cardinal Cardinal utility can beUtility measured quantitatively. Cardinal utility is measurable, addable & comparable. Marshall assumes utility is cardinally measurable in the form of utils. for e.g.: It is expressed numerically 1, 2, 3, 4

Ordinal Ordinal utility cannotUtility be measured quantitatively but can be measured in terms of preferences. Ordinal utility cannot be addable but comparable only in terms of preference (Ranks) Utility cannot be measures ordinailly for e.g.:- It is expressed like 1st, 2nd, 3rd, 4th, etc

Q.3.

Distinguish between: {2006 Jun. 5 Marks}{2006 Dec. 5 Marks}

Q.4.

Explain the Relationship of TU & MU

Ans: 1) Introduction : This theory has been propounded by Mr. Alferd Marshall. 2) He tried to explain that, how MU of a particular commodity changes in stock of a commodity.

Meaning: Total utility: Total utility may be defined as the total psychological satisfaction which a consumer obtains from consumption of all units of a particular commodity. In other words it is the sum of all marginal utilities of a particular commodity. Marginal utility: Marginal utility refers to the addition made to the total utility by consuming one more unit. In other words it is the additional utility obtained from last unit consumed.

3)

Explanation with the help of the following schedule & diagram Units Consumed (Mangoes) 1 2 Utility schedule: Tot Margin al al util Utili ty ity 1 1 0 0 1 5 5

Praveen Balduass Smart NotesCS Foundation (Economics)3 4 5 6 1 8 2 0 2 0 1 8 3 2 0 2

Praveen Balduass Smart NotesCS Foundation (Economics)

Explanation: From the above schedule it appears that: As the consumption of number of successive mangoes increases, the total utility increases at a diminishing rate & the marginal utility decreases at a diminishing rate.st

The consumption of 1 unit of mango provides the highest amountth of satisfaction i.e.10 units. As the consumer goes on consuming more mangoes i.e. .up to 4 unit, the TU increases & the MU diminishes. But, at the 5th unit of consumption, the marginal utility is zero, it means the consumer wants is totally satisfied and TU ends to remain at maximum. This point is called as Point of Safety.th

After safety point, if consumer further mangoes i.e., 6 Unit, the MU become negative & also TU will also start falling. Utility Diagram:25 20 15 10 TU MU

5 0 1 5 2 5 3 6 4

Explanation: From the above diagram it appears that: The MU curve slopes downward(negative slope) from left to right it indicates the diminishing marginal utility & TU curve slopes upward from left to right.st

At the consumption of 1 th unit both the MU & TU was same i.e. 10units. At the consumption of 5 unit, TU was become maximum & MU becomes zero i.e. the MU touched to X-axis which called Point of Safety. Beyond the satiety point MU curve became negative & TU starts falling.

Q.5.1) 2)

Law of Diminishing marginal utility: Introduction : (same as relationship between TU & MU)Statement of law of DMU: The additional benefit which a person derives from a given increases of his stock of a thing diminishes with every increase in the stock that he already has"

Praveen Balduass Smart NotesCS Foundation (Economics)3) Explanation with the help of the following schedule & Diagram: (same as relationship between TU & MU)

Q.6.1)

Assumption of Law: [CU-MRRIS] Continuity: The law assumes that commodity which is consumed should be contious. It means there should not be long time interval between the consumption of one unit & another. If there is a long gap the utility may not diminish.Uniformity or Homogeneity: The law assumes that all the units of a commodity should be identical in respect of size, shape, colour, quality etc. If the goods are not homogenous the MU may not diminish. Measurability: Utility is a psychological & abstract concept which cannot be measured in numbers. But, Law assume that utility can be measured cardinally i.e. in numbers. Rationality: It is assumed that the behaviour of the consumer should be normal & rational at the time of analyzing the law. He should aim at maximum satisfaction

2)

3)

4)

5)

Reasonability: It is assumed that the unit consumed should be of normal standard size.i.e. the unit should not be too big nor too small. Income, Taste & Habit: It is assumed that the income, taste & habit of consumer should remain constant throughout the analysis. If any of the above factor changed the utility of consumer may start increasing hence assumed to be constant. Single Use: The Law assumes that the commodity used for consumption should not be of multiple use. Due to multiple use the consumers. Utility may increase for that product for other use. Hence it is assumed that commodity should be of single use. Conclusion: Apart from the above assumption the other factor like: No change in the price of other products, Real consumption etc. also assumed to be constant.

6)

7)

Q.7.1)

Exceptions to the Law: [RMMM-HD]Reading: It is said that a scholar derives more & more utility by reading more & more books. It is noted that scholar refers different books from different fields by different authors for (knowledge) satisfaction. Hence it violates the assumption of homogeneity hence it may not be an exception to Law.


2)

Money: It is said that with every additional rupee, the purchasing power increases & the individual gets more & more MU. But it is not true because the poor people get greater utility of money as the rich people enjoy less utility. Hence it proves that MU of money diminishes but it can never be zero or negative. Misers: It is said that miser enjoy more utility when he acquires more wealth. It is noted miser only accumulating money & not spending it. Hence it violates the assumption of rationality & real consumption hence it may not be any exception. Music & Poetry: It is said that repeated listening of music & poetry may give more & more utility. But if an individual is given the same song to listen then beyond certain stage, the marginal utility will diminish. Hence it may not be considered as exception because it violates the rule of homogeneity.

3)

4)

5)

Hobbies: It is said that certain hobbies like collecting stamps, old coins etc gives more utility as more units are collected. It is noted that, the stamps & coins collected are not (homogenous) same. Hence it violates the assumption of homogeneity, hence it may not be considered as exception. Drunkards: It is said that a drunkards gets more utility when he drinks more. It is noted that, the behaviour of drunkards is irrational or abnormal. Hence it violates the assumption of rationality hence it may not be considered as exception. Conclusion: From the above cases it is clear that may be they are considered as exception but they are not real exceptions as they violets the assumptions of Law.

6)

Q.8.1.

Limitations of Law:Cardinal Measurement: As utility is a psychological concept. It is a feeling & feeling cannot be measured cardinally. Hence it is immeasurable. Comparison of MU: Law assumes that MU of every successive units is comparable. But, practically it is not possible. Indivisible / Bulky goods: Law cannot be applied to bulky or indivisible goods like TV sets, Motor car etc. Because practically No people purchase 10 TV sets or cars at a time.

2.

3.

Praveen Balduass Smart NotesCS Foundation (Economics)4. Unrealistic assumption: The law is based on various assumption like homogeneity, continuity, rationally etc. are unrealistic. One commodity theory: This law is restricted to one commodity only. But, practically a consumer buys more than one commodity at a time. Importance or Usefulness of Law:Useful for formulation of various laws :Various law like Law of demand, Law of equi -marginal utility, consumer surplus etc. derived on the basis of this law only. Diamond water paradox of Adam smith :DMU helped to explain this riddle. It states that, as the supply of water is unlimited, it has less utility & the price is low. Whereas the supply of Diamond is limited. It has high level of utility & there price are very high. Consumer equilibrium : 4) This law helps the consumer to attain maximum satisfaction (i.e. consumer equilibrium) when MU is equal to price.

5.

Q.9.1) 2) 3)

Helps producers to fix prices :Law of DMU helps the producers to fix the prices for their goods according to the level of supply. i.e. If the supply of commodity of goods is large, tax marginal utility will be low & thus producer will charge low price or vice versa. Helps to maintain the proper level of Demand & Supply :Law of DMU helps to maintain balance between demand & Supply. For e.g. If the supply of goods will fall short, the MU will increase & thus price will increase, Thus the increase in price will encourage the supplier to increase the supply of goods (Law of Supply)

5)

6. Help to Discriminate the price of a Goods : Monopolist change high price for goods to the rich people who have less marginal utility for money. And he change low price for goods to the poor people, who has high marginal utility for money.

Q.10.

Principal Of Equi-Marginal utility Or Define Consumer equilibrium determine the concept using the Equi-marginal utility {2004 Jun. 5 Marks} The Law of equi-marginal utility explains how a consumer with a given income gains maximum satisfaction. 1. Explanation of Law:

Praveen Balduass Smart NotesCS Foundation (Economics)The law states that the consumer will distribute his money income between different goods in such a way that the utility derived from the last unit is the same. 2) Symbolically, consumer equilibrium as per the principal can be expressed as follows:MuA = MUB = MUC = = MUN = MU per unit of income PA

P

B

P

C

P

N

The above symbol states that the consumer can be in equilibrium, the ratio of marginal utility of a good A to its price should be equal to the ratio of MU of good B to its price & so on. 3) The consumer has to spend 24 Rs. on two goods A & B & their price are Rs 2 & Rs 3 respectively. Units 1 2 3 4 5 6 MU of A 3 0 2 0 1 6 8 MUA / Price A 15 10 8 4 3 2 MU of B 2 4 1 5 9 6 3 MUB / Price B 8 5 3 2 1 0. 33

The schedule explains that : The consumer will get maximum satisfaction where the ratio of MU to price will be equal for all the commodities. When consumer consumes 6 units of commodity A & 4 units of commodity B where total expenditure is 12Rs.on A & 12 Rs. on B. In to the total utility which consumer will device will be maximum i.e.(A=84 + B=56) =140.

4) Assumptions of Laws: Utility is cardinally measurable. Price of goods remains constant. Incomes of consumer remain constant. The consumer behaves rationally. Etc.


Chapter 2(1) Demand AnalysisMeaning of Demand: Q.1. Demand refers to the quantity of goods & services which consumers are willing & able to purchase at various price during a period of time. Symbolically, Demand = Desire to buy + Purchasing power + willingness to pay. Demand is always expressed with reference to price, time & Quantity hence it is called as relative concept. For E.g. Today when the price of chocolate is Rs. 8 per chocolate, Ram has demanded 10 chocolates. Determinants of Demand: [P3H2C2-FS] Or The law of demand establishes an inverse relationship between a products price & its quantity demanded. What are other variables significantly influence the demand of the product. {2001 Jun. 10 Marks} Price: Price is one of the most important factor which affect the Quantity demanded. Price has inverse relationship with Quantity demanded. 2) Therefore, when the price rises quantity demanded contracts or when the price falls, Quantity demanded Expands.

Q.2.

1)

Price of complementary goods: Complementary goods are those goods which are consumed together or simultaneously. Therefore, when the price of one goods rises the demand for its complement goods decreases. (OR) When the price of one goods falls the demand for its complement goods increases. For E.g. Car & petrol, Ink & Ink pen etc. Price of substitute goods: Substitute goods are those goods which can be easily used in place of one another. Therefore, when the price of one goods increases the demand for its Substitute goods also increases. (OR) When the price of one goods decreases the demand for its Substitute goods decreases. For E.g. Tea & Coffee, Coca-cola & Pepsi etc. Household Income: There is a direct relationship between the income & a quantity demanded. Therefore, when the income increases the demand for Goods also increases or vice versa. In case of necessary goods the change in income brings less change in demand for necessaries as compares to Luxury goods. Habit, Taste & Preferences: Change in habit, tastes & preference also determines demand. The people who are habituated will not give up such goods easily. For eg. Demand for cigarettes, liquor, etc. In case of taste & preference the goods which are more in fashion command higher demand then goods which are out of fashion.

3)

4)

5)

6)

Size of population: When the size of population is large in a country the demand for goods are huge or vice versa. Composition of population: If there are more old people in a region the demand for spectacles, walking sticks etc. will be high. If the population consists of more children, demand for toys, baby foods, & chocolates will be high. Climate: A change in climate can influence the extent of the market. For E.g. in Rainy season, demand for umbrellas & Rain coats, are high were as demand for woolen cloths remains high during winter season. 9) Future price expectations: If the consumers expects that price of a commodity will raise in future the demand for a commodity at present will be high even though the price are high. Similarly, if consumers expect that price will fall in future the demand for goods at present will be low even though the prices are low. Conclusion: Apart from the above factors the other factors like class, groups, weather conditions,

7)

8)

advertisement etc also affect the demand.

Q.3.

Law of Demand: Or The quantity demanded of a commodity increases with a fall in price and diminishes with a rise in price Discuss {2005 Dec. 6 Marks}

Law of demand is a propounded by Mr. Alfred Marshall. It shows inverse relationship between price & demand. Statement Of Law :Other things being equal, the demand for commodity tends to rise as its price falls, conversely, as the price rises, its demands tends to fall. Explanation: The Law of demand can be explained with the help of following Demand schedule & Demand curve.Quantity Demand ed (units) 5 4 3 2 1

PRICE (RS)

1 2 3 4 5

INDIVIDUAL DEMAND SCHEDULE:

From the above schedule it can be observed that: When the price is less (Rs.1), the demand is more (5 Units), & when the price rises (Rs. 5), the demand falls (1 Unit). Thus it indicates inverse relationship between the price& quantity demanded. INDIVIDUAL DEMAND CURVE: From the diagram it can be seen that: The demand curve slopes downward from left to right. The demand curve has negative slope which indicates inverse relationship between price & demand. This shows that more the price, less quantity demanded & vice versa.

Q.4. Assumptions of Law of Demand:1) Price of Complementary Goods Remains the Same: In case of complementary goods when the price of one goods change, the demand for its complementary goods changes without change in its price. For eg. Car & petrol, Ink & Inkpen, Tea & sugar, etc. This is in violation of Law of demand, hence the price of complementary goods remain constant. 2) No change in price of Substitute Goods: In case of substitute goods when the price of one goods changes, the demand for its substitute goods changes without changes in its price. For e.g. Bus Transport, Railway Transport, Tea & Coffee etc.. Hence it is assumed to be constant. 3) No change in household income: There is a direct relationship between the income & demand. Therefore, as the income increases the demand for goods also increases or vice versa, without change in its price. Hence income is assumed to remain constant. 4) No change in taste & preference: In this case, a change in consumers taste & preference may lead to a change in demand irrespective of the position of the price. Hence, the taste & preference are assumed to be constant. 5) No future expectation of price change:Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 2929

If consumer expects a fall or rise in price in the near future, he acts against the law of demand. For e.g. If he expects a further fall in price after two months, he may prefer to purchase less though the price is low at present. Hence it is assumed to be constant.

6) No change in population: If population increase, the demand for food, cloth & other essential goods increases even though price remain constant. This is against the law of demand hence assumed to remain constant. 7) No introduction of new goods: Introduction of new goods due to innovation may influence the consumer & change their preference. Hence there should be no introduction of new goods. 8) No change in climate: Due to change in climate & weather conditions, the demand for goods like umbrellas, Ice creams, etc. may change, irrespective to change in price. Hence change in climate is assumed to be constant.

Conclusion: Apart from the above assumption the other things like change in govt. policy, advertisements etc. are also assumed to remain constant. Q.5. EXCEPTIONS TO THE LAW (GNPD-F2) Or Briefly state the exception to the law of Demand {2007 Jun. 3 Marks} According to the Law of demand, there is an inverse relationship between price & demand. But incase of some products it does not work, that exceptions are as follows:1) Giffen Goods: Sir Robert Giffen noted that when the price of inferior goods falls the demand of such goods also falls. Robert Giffen found out those inferior quality products such as maize, Jowar, Bajra, etc. exception to the Law of demand. Therefore, inferior goods are named after Giffen & they are called Giffen Goods. 2) Necessary Goods: Incase of necessary goods, if prices are increasing the demand for the goods remains same/ constant. For e.g. Salt, Medicines & other necessity products. 3) Prestige Goods: There are certain goods which represent exclusive status. Demand for prestige & price have direct relationship. For eg. Rich people buy diamonds in higher quantities, if their prices are more.Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 3030

4) Demonstration effect:-


It refers to tendency on the part of Low- income groups to imitate standard of living of high income groups. In such cases, even though the prices of some commodities are high, low income group people demand more.

5) Fashion: If a commodity is out of fashion, people demand less of it, even though its price are less & vice versa. 6) Future Expectations:- (same explanation as in Q II point 9) When the consumer expects a rise in price in future he will demand more goods even though the current price are high & vice versa. 7) Illusion: When the price of a goods falls, the consumer feel that its quality must have declined. Therefore, they demand less though the prices are less. 8) Ignorance: When the consumer is unaware at a higher price. This is called Ignorance effect. of the price of the commodity, consumer buys more

Conclusion :Apart from the above exceptions the other points like speculation, emergencies, Depression, etc. does not follow Law of Demand.

Q.6. VARIATION IN DEMAND: a) When the demand for a commodity falls or rises due to change in price alone & other things remain same, it is called Variation in demand. b) Variations are shown by movement along the same demand curve from left to right or vice versa. c) Variation can be either extension or contraction. Extension in demand: (Refer Distinguish Between) Contraction in demand: (Refer Distinguish Between) Q.7. CHANGES IN DEMAND: a) When the demand for a commodity Increase or Decreases due to changes in factors other than price, it is called changes in demand. b) Changes are shown when the Demand Curve shifts from left to right or right to left, & new Demand Curve is formed. c) Changes can be either Increase or Decrease. Increase in Demand: (Refer Distinguish Between) Decrease in Demand: (Refer Distinguish Between)Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 3232

Q.8.

Distinguish Between {2004 Jun. 4 Marks} Or Show diagrammatically the distinction between {1999 Dec. 6 Marks}


Extension in Demand A rise in demand caused by a fall in price alone is called expansion of demand. Expansion of Demand is caused by a fall in the price.

Contraction in Demand A fall in demand caused by rise in price alone is called as Contraction of Demand. Contraction of Demand is caused by a rise in the price.

From the above diagram, it can be seen that as the price falls from OP to OP1, the demand rise from OQ to OQ1. Equilibrium point moves downward on the same demand curve from left to right.

From the above diagram it can be seen that as the price rises from OP to OP1, the demand falls from OQ to OQ1.Equilibrium point moves upward on the same demand curve from right to left.

INCREASE IN DEMAND A rise in demand caused by favourable changes in other factors than price is called increase in demand. Increase in demand is caused by: 1) Rise in income 2) Increase in liking etc.

DECREASE IN DEMAND A fall in demand caused by unfavorable changes in other factor than price is called decrease in demand. Decrease in demand is caused by: 1) Fall in income 2) Decrease in liking etc.


From the given diagram, it can be seen that the demand rises from OQ

From the given diagram, it can be seen that the demand falls from OQ

Q.9.

Distinguish between


to OQ1, at the same price OP. In this the equilibrium point shifts on new demand curve to the right of the original demand curve.

to OQ1, at the same price OP. In this the equilibrium point shifts on new demand curve to the left of the original demand curve.

Chapter 2(2) Elasticity of DemandPRICE ELASTICITY OF DEMAND:Meaning: Price elasticity is the percentage change in quantity demanded divided by percentage change in price. -Samuelson. TYPES OF PRICE ELASTICITY OF DEMAND:The following are the different types of price elasticity of demand:1) Perfectly Inelastic: The demand is said to be perfectly inelastic, when a proportionate change in price brings no (zero) change in quantity demand. The numerical value of perfectly inelastic demand is zero i.e. Ed=0 The demand curve is parallel to Y-axis.

2) Relatively inelastic demand: The demand is said to be relatively inelastic , when a proportionate change in price brings less than proportionate change in Quantity demanded. The Numerical value of relatively inelastic demand is less than one i.e. Ed1 The demand curve DD is flatter to X-axis. Conclusion:The above are the five types of price elasticity which can be calculated by the Percentage method or Total expenditure method or Point method. Q.10. Methods of measuring Price Elasticity of Demand:1) Percentage Method or Ratio Method Or Proportionate Method: The price elasticity of demand according to this method can be measured by dividing the percentage change in the quantity demanded by percentage change in price. This method is also called as Percentage or Ratio or Proportionate Method. The formula used for measurement of elasticity is as follows:Price Elasticity of demand= Proportionate change in demand / proportionate change in price. Symbolically, Ep= Q/Q* 100P/P*100 = Q/Q*P/P =Q/P*P/Q Where 1) Q = change in Quantity demanded, 2) P = Change in Price, 3) P = Original price 4) Q = Original Quantity Calculation Pric e 5 0 6 0 Deman d 1 0 5

Original NewStudy LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 3737

Ep =Q/P*P/Q = 5/10 * 50/10 = 25/10 =2.5 As the numerical value of elasticity is greater than one i.e. 2.5 hence it is Relatively elastic or more elastic demand.

2) Total Outlay Method or Total Expenditure Method Or Explain briefly the total expenditure method of measuring price elasticity of Demand {2002 Dec. 5 Marks} Under this method one can find the elasticity of demand by observing the changes in Total Outlay with reference to the change in price. This method can be explained with the help of following examples(Demand Schedule). SRNO. Price 1 2 a) 3 4 b) 5 6 c) 7 8 Quanti ty Demand 8 7 6 5 4 3 2 1 Total Outlay 8 1 4 1 8 2 0 2 0 1 8 1 4 8 Ed1

a) Inelastic Demand:The demand is said inelastic when the price of goods increases & the total expenditure on goods also increases. OR When the price of goods decreases & the total expenditure on goods also falls. b) Unitary Elastic Demand:The demand is said unitary when the total expenditure remains same even though the price increases or decreases. c) Elastic Demand:The demand is said elastic when the price increases & the total expenditure on goods decrease. OR When the price of goods decrease & the total expenditure on goods increases.

3) Point Method or Geometric Method Or A Linear demand curve will have different price elasticities of demand on its different points ranging from zero to Infinity Explain & illustrate with the help of diagram. {2004Dec. 4 Marks}

Under this method the elasticity of demand can be find out at a point on the Demand curve which can be explained with the following diagram:Linear demand Curve: Under LDC a straight line is drawn to meet X & Y axis at point B & A respectively. The straight line is divided in to equal parts as shown in the diagram viz.AC: & BC The upper segment is AC & Lower segment is BC The elasticity Demand curve of demand can be calculated by using this formula: ED =Upper segment of demand curve

Lower segment of

It indicates that the elasticity of demand is different at different points. If the point falls under upper segment then the demand will be more than 1 & it is elastic. i.e. Ed>1 or Ed=.

Q.11.

INCOME ELASTICITY OF DEMAND. Or Define Income elasticity of demand & how will the income elasticity of demand for an inferior goods be different from that of normal goods. {2005 Jun. 5 Marks} Meaning: The elasticity of demand measured the response of the demand for the commodity to change in income of consumer. Income Elasticity= % Change in quantity demanded / % Change in Income Symbolically, Ey= Q/y*y/Q Where, ey= elasticity of income, Q= change in Quantity demanded. Q= Original Quantity Y= Change in income Y= Original income Types of Income Elasticity of demand. 1) Negative Income Elasticity: The inferior goods has a negative income elasticity of demand. When the income increases the demand decreases & when the income decrease the demand for inferior goods increases. 2) Zero Income elasticity of demand:-

If a change in income of the consumer does not change the demand for a commodity then the income is said to be zero. For e.g. News paper, salt, etc. have zero income elasticity of demand.

3) Positive income elasticity of demand: if a change in income have a direct relationship with the change in demand then it is called positive income elasticity of demand. There are three types of positive income elasticity which are as follows:a) When a proportionate change in income brings equal proportionate change in demand is called Unitary income elasticity or ey=1. b) When a proportionate change in income brings a lesser proportionate change in demand is called Inelastic demand or ey1 Conclusion:When the demand for Quantity get affected only by income of consumer it is called Income Elasticity without change in price of commodity. Q.12. CROSS ELASTICITY OF DEMAND:-

Meaning:-

Cross elasticity refers to degree of responsiveness shown quantity demanded of one commodity in response to a given change in price of another commodity. Income Elasticity= % Change in quantity demanded of X / % Change in Price of Y Formula:- Symbolically, Ec= Q/Q* 100P/P*100 = QX/QX*PY/PY =Q /P *P /Q Where, Ec= Cross elasticity of demand. Qx= Change in Quantity demanded of X Qx= Original Quantity of demand X Py= Change in price of Y Py= Original price of Y. Types of Cross Elasticity:1. Cross Elasticity for Substitutes is positive: In case of substitutes, there is a direct relationship between the price of one commodity & the Quantity of another commodity. For e.g. When the price of tea increases the demand for coffee increases or When the price of tea decreases the demand for coffee decreases. Diagram:X Y Y X

From the above diagram, when the price of Tea increases OP to OP1, the demand for coffee has also increased from OQ to PQ1 In Cross elasticity, the elasticity is high when the substitutes are perfect. (AND) If the substitutes are poor the elasticity is low. 2. Cross elasticity for complementary goods are negative: In case of Complementary goods, there is as inverse relationship between price of one commodity & the demand of another commodity. For E.g. When the price of car falls the demand for the petrol rises. When the price of car rises the demand for the petrol falls. Diagram: From the above diagram, when the price of car increased from OP-OP1 the demand of petrol has been decreased from OQ TO OQ1. 3. Cross elasticity for Unrelated goods is zero: In case of unrelated goods, the price of one commodity does not have any effect on the demand of another commodity hence the effect is zero. For e.g. Car & Chair, Coldrinks & Fruits etc. Diagram:From the above diagram: - Even though the price of car is continuously increasing the demand of chair is same. Conclusion:In case of complementary elasticity the relationship is explained between the two products. Q.13. FACTORS INFLUENCING THE ELASTICITY OF DEMAND [N2AI-PIU-R]

1. Nature of Commodity: This is one of the important factor which influence the elasticity of demand. In case of Luxurious goods, like cars, perfumes, etc. have elastic demand. Incase of Necessities like salt, medicines, etc. have inelastic demand. 1. Number of Uses: The Commodity having many uses has a relatively an elastic demand. For e.g. milk, electricity, etc. The commodity having specific use has a relatively inelastic demand. 3) Availability of substitutes:-

The commodity which have many substitute in the market having Elastic Demand. For E.g. Soaps, Shampoo, Biscuits, etc. The commodity which has no substitute in the market having Inelastic demand. For e.g. Salt. 4) Income of Consumers: The people who have a high level of income, does not get affected by change in price, hence they have relatively inelastic demand. The people who are poor their demand get changes as the price change, thus they have relatively elastic demand. 5) Proportion of Income: If people spends a small proportion of his income on a commodity, it has relatively inelastic demand. For e.g. Match box, pins, etc. if people spends a high proportion of his income on a commodity, it has relatively, elastic demand. For e.g. Perfumes etc. 6) Influence of Habits: If an individual becomes habituated to use commodity then for them it has inelastic demand. For e.g. Smokers demand for cigarettes.

7) Urgency & Postponement: If the use of a commodity is urgent then the demand will be relatively inelastic. For e.g. Medicines. If the use of a commodity is not urgent & can be postponed to a future date, the demand will be relatively elastic.

8) Range of Price: Hire price goods like Diamonds & low Price goods like Match-box have an inelastic demand. In Hire price goods & low price goods when the price changes the demand remains almost same. Were as, Average price goods like Tshirts, perfumes etc. have an elastic demand. CONCLUSION:- Apart from the above factor other factors like Tied demand, Time Period, etc. also influence Elasticity of demand.


1) 2) 3) 4) 5) 6) 7) 8) 9)

Cross elasticity of demand between commodity X & commodity Y is -0.5. is X a complementary commodity or a competitive commodity of Y Income elasticity of demand for good X for a household is +1. id the income of a household rises, will the share of income spent on goods X rise or fall. Income elasticity of demand for commodity X is negative. Is X a superior commodity or an inferior commodity. When the price of commodity Y is increased from Rs 20 to 30. the demand fro commodity X declined from 100 units to 70 units .What type of commodity are X & Y. With an increase in the price of a petrol, the total expenditure on the purchase of petrol also increases. What is the nature of demand for petrol. When the income of a consumer is Rs 40, his demand for a particular commodity is 8 unis. When his income goes upto Rs.50, his demand for that commodity becomes 10 units. Calculate his income elasticity of demand for a commodity. A consumer buys 30 units of a commodity of Rs 4 P.U. When its price falls by 25% , its demand rises to 100 units . Find out price elasticity of demand. When the price of a commodity X is Rs 20 P.U. , its quantity demanded is 50 units, & when the price goes upto 40 P.U, its quantity demanded falls to 25 units . Find price elasticity demand & give interpretation. Consumer X buys 100 units of commodity at Rs 8 P.U. . When its price falls by 50%, the demand rises to 200 units. Find out the price elasticity of demand for this product.

Important points & Tips


Chapter 3(1) Supply Q.1. Supply: Supply refers to the quantity of a Goods & Services, which the producers or traders are willing & able to offer for actual sale at a given price at a point of time. Supply is always expressed with reference to price, time & quantity hence it is called as relative concept. Supply is that part of stock which is actually brought out in market for sale. For eg. The sellers daily supply is 100 oranges at Rs10 per unit. Q.2. SUPPLY SCHEDULE & SUPPLY CURVE Supply Schedule :a) A supply schedule is a tabular statement which shows different quantities of a commodity offered for a sale at different prices. b) A supply schedule is a list of possible alternatives of price quantity combinations. c) Individual Supply Schedule: It is a tabular Statement, which shows different quantities of a commodity offered for a sale by an individual firms at a different prices. INDIVIDUAL SUPPLY SCHEDULEPrice (Rs) Per Unit Quantity Supplied (Unit 1 2 3 4 5

1 2 3 4 5

It indicates when the price rises the supply also increases & when the price fall Quantity supplied too falls.

d) Market Supply Schedule: It is a tabular statement, which shows different quantities of a commodities are offered by all the individual firms at a different prices. The market supply schedule can be derived by summing up the supply of all individuals firms, explained as follows


Market Supply SchedulePRICE INDIVIDUAL SUPPLY SCHEDULE A 1 1 B 2 C 4 7 MSS

2 3 4 5

2 3 4 5

3 4 5 6

5 6 7 8

1 0 1 3 1 6 1 9

e) Both the supply schedules shows direct relationship between price & Quantity supplie Supply Curve a) The supply curve is a graphical representation of supply schedule which shows different quantities of goods are offered for sale at different prices. b) Individual Supply Curve: It is a graphical representation of individual supply schedule showing the relationship between price & Quantity supplied. The supply curve ss slopes upward from left to right indicating the direct relationship between price & Quantity supplied.

c) Market Supply Curve: It shows a graphical representation of MSS showing the relationship between price & Quantity supplied. The MSC is a summation of the Individual firms supply curves.


Here S1, S2, S3 are the Individual supply curve & MS is a market supply curve.


Q.3. FACTORS AFFECTING SUPPLY [P2WAET2F2N] 1] PRICE: Price is one of the most important factors which affect Quantity supply. Price has direct relationship with Quantity Supplied. Therefore, when the price increases, Quantity supplied increases or when the price decreases, Quantity supplied decreases. 2] Price of Other Goods: When the price of the other goods increases, the firm start producing the other goods which leads to reduction in supply of the goods whose price remains unchanged. For Eg.:- If the price of A increases faster then B the supplier increase the supply of A as compared to B whose price is less. 3] Weather condition: The supply of the agricultural products depends upon the weather condition. When Climate, Rainfall, Temperature, etc. are favourable, the supply of agricultural products increases or where as drought, floods, etc. reduce the supply of products. 4] Availability of Inputs: If Inputs like Raw Material, Labour, Equipments, etc. are scarcely available, it will hamper the production of goods, which results in reduction of supply.

5] Exports & Imports: Exports of goods results in a reduced supply of goods in the Domestic Market. An import of goods leads to increase the supply of goods in the Domestic Market. 6] Technology: The supply of goods also depends on the methods or techniques of production. Advanced & Sophisticated technology increase the production & thus increase the supply. Traditional & Outdated technology decrease the production & thus decrease the supply. 7] Transport & communication Facilities : Modern & speedy transport facilities increase the supply of the goods in the different markets. Slower transport, Breakdown, Strikes, etc. decrease the supply of goods. 8] Future Price Expectation: If the seller expects that the price of the goods will rise in future the supply of the goods at present will be reduced even though the price are high.Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 4747

Similarly, if the seller expects that the price of the goods will fall in future the supply of goods at present price will be high even though the price are low. 9] Number of sellers: If a large number of firms sells a particular product, the market supply will be high.


If the number of the firms are less, the Supply of a product will be less.

Conclusion: Apart from the above factors the other factors like goals of producer, self consumption, etc. also affect Quantity supplied. Q.4. Law of Supply: Law of supply is propounded by Mr. Alfred Marshall. It shows Direct relationship between price & supply. Statement Of Law: Other things being equal, the supply of Commodity expands with a rise in price & contract with a fall in price. Explanation:The Law of Supply can be explained with the help of following Supply Schedule & supply Curve. Individual Supply SchedulePrice (Rs) (per unit) Quant ity Suppli ed 1 2 3 4 5 1 2 3 4 5

. From the above schedule it can be observed that: When the price is less (Rs 1), the supply is also less (1 Unit), & when the price rises (Rs 5), the supply also rise (5 Units). Thus it indicates direct relationship between price & quantity supplied. INDIVIDUAL SUPPLY CURVE: From the above diagram it can be seen that : The Supply curve slopes upward from left to right . The Supply curve has positive slope which indicates the direct relationship between Price & Supply. This shows that, more the price, more Quantity is supplied & vice versa.


Q.5.

Assumptions to the Law of Supply:1) No change in price of other goods: In case of other goods, when the price of other goods rises the supply of other goods also rises, it leads to reduction in supply of the goods whose price remains unchanged. This is in violation of law of supply, hence it is assumed to be constant. 2) No change in Weather Conditions: The Supply of agricultural products gets affected by weather conditions. When the weather conditions are favourable, the supply of agricultural product increases or vice versa without change in its price Hence it is assumed to be constant. 3) No change in Availability of inputs: When the inputs like Raw Material, Labour, Equipments, etc. are scarcely available, it reduces the supply of goods without change in its price. Hence availability of inputs assumed to be constant. 4) No change in Exports & Imports: Exports of goods results in a decrease in supply of goods in a Domestic market without change in price. Imports of goods results in a increase in supply of goods in a Domestic market without change in price Hence Imports & Exports are assumed top be constant. 5) No change in Technology: Advanced & sophisticated technology increases the production & thus increase the supply without change in price. Traditional & outdated technology decreases the production & thus decreases the supply without change in price. Hence technology are assumed to be constant. 6) No change in Transport & communication facilities: Modern & speedy transport facilities increase the supply of goods without change in price. Slower transport, breakdown, strikes etc. decreases the supply of goods without change in price Hence Transport & communication facilities are assumed to be constant. 7) No Future expectation of price change:-. If seller expects a fall or rise in price in the near future, he acts against the Law of Supply. For E.g.: If supplier expects a further fall in price after two months, he may prefer to supply more though the price is low at present. Hence it is assumed to be constant.


8) No change in Number of sellers: Changes in the number of sellers brings a change in the supply of goods without change in the price. Hence the number of sellers are assumed to be constant. 9) No change in Infrastructural Facilities: Infrastructural Facilities like transport, communication, banking, etc. hampers the supply of goods without change in its price. Hence changes in Infrastructural Facilities are assumed to be constant. Conclusion:Apart from the above assumptions the other things like Producers goal, Speculations, etc. are also assumed to be constant.

Q.6.

Exception to the Law of Supply:-

[PHNCAFL]

1) Perishable Goods: Perishable Goods have a very short life, it cannot be stocked for a longer period of time. For Eg. Vegetables, Fruits, Eggs, etc. Some time sellers are forced to increase the supply of perishable goods, when the price are low due to a risk of loss. 2) Handicraft Goods: The Supply of handicraft goods cannot be increased suddenly even though the prices are high. Therefore items like rare paintings & sculptures, etc. are exceptions to law of supply. 3) Need for cash : When a seller is in urgent need for money, he deliberately tries to sell more products even though the price are low to get more liquidity. 4) Cost if Storing: When the cost of storing increases it leads to reduces the profit margin. In such case, the seller sells more even at a lower price. 5) Agricultural Products: Agricultural products are exception because their supply cannot be increased overnight though their prices are high. This is because Agricultural Products require sufficient period of time for growth.Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 5151

6) Future Expectations:


When the supplier expects a rise in price in future, he will supply less at present even though the price are high.

7) Labour Supply: In the initial stages, as the wage rate increases, the labour supply also increases. But at the later stage, the Labour prefers to earn the same amount of income by working for less hours. Thus the labour supply has backward sloping supply curve. Conclusion: The above points are the major exceptions to the Law of Supply. Chapter 3(2) Elasticity of Supply

Elasticity of Supply:Meaning: The elasticity of supply measures the response of the supply for the commodity of the supply for the commodity to change in price. Q.7. Types of Elasticity of Supply:1) Perfectly Inelastic Supply: The supply is said to be perfectly inelastic, when a proportionate change in price brings no(zero) change in Quantity Supply. The numerical value of perfectly inelastic supply is zero i.e. Es=0. The supply curve is Parallel to Y-Axis. 2) Relatively Inelastic Supply: The Supply is said to be relatively inelastic, when a proportionate change in Quantity supply. The numerical value of relatively inelastic supply is less than one i.e. Es1.

Q.8.

Distinguish between: {2006 Dec. 5 Marks}

Inferior Goods consumed Inferior goods are generally by weaker section of the society If income increases the demand for Such goods reduces (inverse relationship) These goods are also called as giffen goods Consumer consume these goods needs satisfy their basic needs for e.g. Jowar, Bajra, Jaggery Bidi etc

Status Related Goods Status related goods are consumed by rich section of the society If income increased demand for such goods also increases (direct relationship) These goods are also called as prestigious goods Consumer consume these goods for show off purpose for e.g. Demand, car ,Jewellery etc

( 1 )

( ( It is the part of the stock and cannot 2 2 exceed stock. ) ) ( ( In case of perishable goods like fruits, milk, 3 3 Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 5555

Sto Def: Stock refers ck to the total quantity of a commodity produced by the supplier for sale or it refers to potential supply. It is the total quantity produced and it can exceed supply. In case of durable goods stock may

( 1 )

Supp Def: Supply refers to ly the actual quantity of a commodity offered for sale at a given price in a given time.

Q.9.

Distinguish between:


(4) (5) (6)

1) 2) 3) 4) 5) 6) 7)

( 4 ) ( Supply can be elastic in a given time if 5 the stock exists. ) Stock depends upon production. ( Supply depends upon stock. 6 General question Generally , a demand curve slopes downwards to the right If a given change in price does not cause any changes in the total amount of money spent on the commodity, the elasticity of demand is said to be equal to unity. Define elasticity of demand. Discuss the various methods to measure price elasticity of demand. {2000 Jun. 7 Marks} According to ordinal utility concept, it is possible to measure and compare the utilities of two commodities Cross elasticity of demand under monopoly market is very high Decrease in demand and contraction of demand have the same meaning Elasticity of demand for salt is almost zero. 8) Expansion of demand does not mean the same thing as an increase in demand. {2007 Jun. 5 Marks}

exceed supply because the entire stock may not be brought to the market when the price is low. is like a reservoir. Or source Stock of supply. Stock is inelastic in a given time.

etc., supply is same as stock because the entire stock is brought to the market for sale. Supply is flow concept.


Unit 3 Cost, Production & Revenue Analysis Chapter 1Cost AnalysisCost Concepts Short run TC = TVC + TFC long run TC = TVC (No Fixed Cost)

SHORT RUN COSTS: The short run is a period of time in which at least one factors is fixed. It means in short run period both the variable cost & fixed cost are present. Hence Total cost (TC) = Total Variable Cost (TVC) + Total Fixed Cost (TFC). All the costs are explained with the help of diagram:-

Explanation:TOTAL COSTS CURVES:Q.1. With the help of suitable schedule & Diagram show the relationship between TC, FC & VC in short run. {2003 Dec. 7 Marks} 1. Total Fixed Cost (TFC): Fixed cost is a cost which does not vary with output. As showing in the diagram the TFC curve is constant as the output increases. Hence the TFC curve is a horizontal straight line parallel to X axis. For e.g. Land, Machinery, Building etc. Total Variable Cost (TVC): Variable Cost is a cost which increases as the output increases. Variable cost has a positive relationship with output. Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 5858 2.

3.

As shown in the diagram, when the output is zero the TVC curve also zero. The TVC curve rises but at a decreasing rate from left to right. For e.g. Material, Labor etc.

Total Cost (TC): Total Cost is a summation of both the Total Variable Cost & Total Fixed Cost. The starting point of Total Cost Curve coincides with Total Fixed Cost Curve. The slope behavior of TC curve is same as TVC curve because Total cost increase due to Variable cost only.

AVERAGE & MARGINAL COSTS CURVES:Q.2. Explain Average FC, VC & MC. {2003 Jun. 4 Marks} 1. Average Fixed Cost Curves: AFC is the total fixed cost divided by the number of units of output I.e. AFC = TFC Q Average fixed cost will steadily fall as output increases. The AFC curve slopes downwards but never touch to X axis it means AFC cannot be zero. 2. Average Variable Cost: AVC is the Total Variable Cost divided by the number of units of output I.e. AVC = TVC Q The AVC curve normally falls as output increases form zero to normal capacity due to increasing returns. But Beyond the normal capacity of output, Average variable cost increase steeply due to Diminishing returns. The Average variable cost curve is in U shape. Average Total Cost: Average total cost is a sum of Average variable cost & Average fixed cost i.e. ATC = AVC + AFC. In the beginning both AVC & AFC curve falls. There for ATC curve also falls sharply. But When AVC begins to rise the AFC & ATC continuous to falls this is because the fall in AFC Further When rise in AVC is more than fall in AFC the ATC starts rising. ATC is also in U shape. 4. Marginal Cost: Marginal cost is the addition made to the total cost by production of on additional units of output. It is calculated as TC n TC n -1 Marginal cost is dependent only on Variable cost . Hence like Average Variable cost it also has a U shape as MC also fall initially as the output increase but after normal capacity it also start increasing. is greater than fall in AVC.

3.

Q.3.

RELATIONSHIP BETWEEN AVERAGE COST & MARGINAL COST.


1. 2. 3.

When AVC falls as a result of increase in output, MC is less than AVC. When AVC rises as a result of increase in output, MC is more than AVC. When AVC is minimum, MC starts rising & become equal to AVC It means, MC curve cuts AVC curve at minimum point.

Explain the relationship between short run average cost curves & long run average cost curves. {2004 Jun. 3 Marks} Or Short Period/Short Long Period/ Long Run Run Cost Cost Curves Curves Short run is a period of time in which 1) Long run is a period where all the at least one factor is fixed. factors are variable i.e. there is no fixed cost. In short, producer can change the 2) In long run, producer can change output only by changing variable the output by changing all the factor. of Total Cost Curves factor. Diagram 3) Diagram

Q.4.

Diagram of Average Variable Cost

4)

Diagram

In the above both the diagrams the TC & VC curves are two different curves due to fixed cost (FC).

5)

In the above both the diagrams the TC & VC curve are one and the same because of absence of fixed cost (FC).

Distinguish between {2001 Dec. 8 Marks}



Q.5.

Distinguish between {2000 Dec. 5 Marks} Average Cost (Total) Marginal Cost Marginal cost is the addition made to the total cost by producing additional units. Marginal cost is derive by the following formula. TCn TCn-1 Or UTC UQ Marginal Cost depends on Average variable cost.

Average cost is the cost per unit of both fixed & variable factors of production. Average cost is derived by the following formula. TC Q The average Total Cost includes Average variable cost.

1.

2.

3.

Practical Questions1) From the following data, calculate the average variable cost for all levels of output. Total output (units) 0 1 2 3 0 0 Total cost (Rs) 100 20 29 30 0 0 9 No of ts fact 1 2 3 4 5 uni (variable Margin products or) 3 20 10 0 al 0 1 3) Fill in blanks the TO AO M Labour O 1 8 8 2 2 -10 23 3 12 64 12 127 5 5-5 6 6 -5 0 7 -0 General Question 2) From the following data, calculate the total product (TP) & average product (AP) fro all the

levels of variable factor :

Q.1. Distinguish between FC & VC{2001 Dec. 8 Marks} {2008 Dec. 3 Marks} Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 6262

Hint: Q.2. Hint: Q.3. Hint: Q.4.

Refer Q.1. (Point 1 & 2) in the same order. What are the important determinants of cost? {2002 Dec. 4 Marks} Explain Land, Labor, Capital & Entrepreneur. All costs are fixed in Long run. {2001 Jun. 5 Marks} No, Refer Q.4. Long run cost curves (All points). Can the average cost be falling while marginal cost rises? Illustrate with the help of a diagram. {1999 Jun. 4 Marks} Hint: Refer Q.3. Q.5. All Capital is wealth but all wealth is not capital. {2007 Jun. 5 Marks} Hint: Yes, because capital is that part of wealth which is used for production activity & capital can be equal to wealth but it can never be more than wealth.


Chapter 2 Production AnalysisProduction Function

Short runQ.1.

long run

Explain Law of Variable Proportions Or Explain Short run production function Or Explain Law of Diminishing returns Or State & Explain clearly the law of variable proportions. Out of which the three stages in its operation which do you think is the most relevant for the producer with suitable diagram & Example. {2000 Dec. 7 Marks} {2005 Jun. 7 Marks} {2008 Jun. 5 Marks}. Or

As equal increments of one input are added, the inputs of other productive services being held constant, beyond a certain point, the resulting increments of product will decrease, i.e. the marginal product will diminish. Explain the above law and give cause of increasing returns during its first stage. {2004 Dec. 8 Marks}The Law of variable proportions examines the production function with one variable factor & keeping other factors fixed. Statement of Law:As more & more one input factor is employed, keeping all other input quantities

constant, after a point, additional quantities of variable input will yield diminishing marginal contribution to total product. Explanation with the help of table & diagram:Production schedule with one variable input (Labour) No. of Labour 1 2 3 4 5 6 7 8 9 TP 8 20 36 48 55 60 60 56 51 AP 8 10 12 12 11 10 8.6 7 5.7 MP 8 12 16 12 7 5 0 -4 -5 Removes State I

State II Stage III

Explanation:The above production schedule explains that: When one unit of Labour is employed, the total product is 8 units. When two unit of Labour are employed, the total product rise to 20 units, the total product goes or rising as more & more Labours are employed.th th

With 6 th unit of Labour the TP rises to 60 units & remained constant for 7 unit also. When 8 unit of Labour employed the total product falls to 56 units. Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 6464

(i) (ii) (iii)

Thus, we can observe that: If MP > 0, TP will increase as the number of Labour employed increases If MP = 0, TP will be constant even the number of Labour employed increases If MP < 0, TP will be falling, even the number of Labour employed increases.

Diagram

1st stage:The Law of Increasing returns : In this stage the Total product curve first increases at an increasing rate & then at a decreasing rate up to 4th unit of worker i.e. Point T on TP curve Uptil 3rd unit of Labour, Average product & Marginal product curves both increases & MP curve lies above the AP curve. Further, MP curve falls & Cuts the AP curve from above but MP curve remains positive at this stage. 2nd stage:The Law of Diminishing returns: In this stage the TP curve increases at a diminishing rate & reaches its maximum point & become constant at point M. Uptil point M AP curve & MP curve both started falling & MP curve become zero I.e. it touched to X axis. At this stage AP curve lies above the MP curve. 3rd stage:-The Law of Negative returns: In this stage all the curve i.e. TP curve, MP curve & AP curve falls. MP become negative & AP curve continous to fall Hence this stage is called negative returns. Assumptions:1. Only one input is variable while other inputs are fixed. 2. Homogenous units of variable input. 3. No change in technique of production. 4. The production is measured in physical units. 5. Input prices remain unchanged. Criticisms:Economies have criticized the law on rationality of assumptions:

In real life situation it is difficult to have homogenous units of variable inputs. No change in prices of inputs or Techniques of production.

Conclusion:Stage1:- At this Stage the resources are under utilised thus, producer will not operate at this stage. State2:- This stage is most relevant stage, because all the resource is optimum utilised. Hence a rational producer would like to operate in this stage. Stage3:- At this stage the Total production (TP) start falling, thus, producer will not operate at this stage. Q.2. Short note on Production function {2007 Dec. 3 Marks} The term production function means physical relationship between inputs used & the resulting output. Production function is a process of getting maximum output from given quantity of inputs in a particulars time period. The general production function is expressed as : X = F (L,K,R,E,U,S) Were, X= L= K= R= E= U= S= Level of output Labour Capital Raw material Efficiency Returns to scale Land.

Type of production function:There are two types of production function a) Short run production function: It refers to production in the short run where there are some fixed factors & some variable factors In short run, production will increase when more units of variable factors are used with fixed factors. Long run production functions: It refers to production in the long run where all factors are in variable supply. In long run, production will increase when all factors are increased in the same proportion.

b)

Q.3. Returns to Scale: The concept of returns to scale is a term one, because it explains that all the factor can be varied & scale of plant can be increased or reduced to change the level of output for better returns. In other words, it explains the behaviour of output in response to a change in scale. Returns to scale may be constant, increasing or decreasing which is explained in details as follows: 1. Constant Returns to Scale:

When a certain proportion change in scale brings equal proportionate change in output is called constant Returns to scale. In other words the returns of the firm remain constant due to no change in Average Cost. It can be explained with the help of following diagram.

Explanation: From the above diagram we can observe that: We have several plant curve with their respective ranges & scales of output. The line AB indicates as Long run Average cost curve which is tangent to each plant curve at a minimum point, with the Average cost is minimum. Thus, as we change the scale of output by moving from are plant curve to the other, there is no shift in the least possible average cost & we enjoy constant returns to scale. Increasing returns to Scale: When a certain proportionate change in scale leads to more than proportionate change in output is called increasing returns to scale. In other words the returns of the firm increases due to decrease in Average cost

2.

3.

Decreasing returns to Scale: When a certain proportionate change in scale leads to less than proportionate change in output is called decreasing returns to scale. In other words the returns of the firm decreases due to increase in Average cost Both Increasing & Decreasing returns to scale can be explained with the help of followin diagram:

Explanation: From the above diagram we can observe that: We have several plant curves with their respective ranges & scales of output. a) The line AB indicates as long run average cost curve which is declining & is tangent to the falling part of short run average cost curve. Thus, as we change the scale of output by moving from one plant to the other, there is a fall in average cost & we enjoy increasing returns to scale. b) The line CD indicates as long run average cost curve which is increasing & is tangent to the increasing part of short run average cost curves. Thus, as we change the scale of output by moving from one plant to the other, there is a increasing in average cost & we enjoy decreasing returns to scale. Conclusion Increasing return is due to Economics of Scale. Decreasing returns is due to Diseconomics of scale. Q.4. Distinguish between. {1998 Dec. 7 Marks}{2005 Dec. 5 Marks}{2007 Dec. 4 Marks}{2009 Jun. 3 Marks} Returns to Scale

Returns to Variable Factors/Law of Retur Returns to variable is also known as short run production function. In this, some factors are fixed & some are variable

1.

Returns to scale is also known as long run production function. In this, all factors are variables

2.

It relates to short period. Scale of production does not change. Only variable factors like Labour, Raw material etc. are changeable.

3. 4. 5.

It relates to long period. Scale of production changes. Fixed as well as variable like Land, Machines, Labour, Raw-material etc. are variable.

General Questions Q.1. What do you mean by Returns to scale? How these affect to Total cost curves of a firm? {2007 Jun. 6 Marks} Hint: Refer Q.3. (Introduction & only Point 1 & 2 of Constant, Increasing & Decreasing returns to scale) Q.2. Constant returns to scale implies that an increase in the scale of same proportion results into an increase in the output in the same proportion. {2003 Dec. 3 Marks}. Hint: Refer Q.3. (Full Constant returns to scale including diagram) Q.3. U-shaped average and marginal cost curves suggest only economies of scale, comment on it. {2007 Dec. 5 Marks}

Hint: No, Refer Q.3. (only first two Points of Increasing & Decreasing returns to scale along with diagram{without explanation} & conclusion) Q.4. Returns to scale is another name of the law of variable proportion. {1999 Jun. 5Marks}

Hint: Refer Q.4.

Chapter 3 Revenue AnalysisQ.1. Revenue (meaning): It means receipt from the sale of goods. In other words, sale proceeds of the seller are revenue and price of commodity. Revenue is classified in to three types: are explained in details as follows:1. Total Revenue (TR): The aggregate income received by seller by selling output is called total revenue. Total revenue is calculated as quantity sold X price i.e. TR=Q*P. 2. Average Revenue (AR): Avg. revenue is revenue earned by each unit sold by seller. It is calculated as total revenue divide by total output sold i.e. AR=TR/Q. 3. Marginal Revenue: Marginal Revenue is the addition made to the total revenue by selling additional unit of output. It is calculated as TRn-TRn-1.

Q.2.

TR, AR & MR in Perfect Competition Revenue Schedule:Pri T ce R (Per (R 1 5 5 2 5 1 0 3 5 1 5 4 5 2 0

Output (Units)

A R (R 5 5 5 5

M R (R 5 5 5 5

Explanation:1) Under perfect competition price is decided by the Industry (for e.g. 5Rs). 2) Thus individual seller can sell any amount of goods at a given price i.e. Rs.5. Study LessScore More i.e. Smart Study www.prav insir.com/www.freecsnotes.com Page 7070

3) Hence, from the above schedule & diagram it is clear that price, AR & MR is one and the same i.e. 5Rs. 4) The demand is perfectly elastic & AR, MR, MP & DD curve are parallel to x-axis.


Q.3.

TR, AR, MR & price of Imperfect Competition (monopoly or monopolistic). Or AR & MR curve of a firm under monopolistic competition merge with each other. {2003 Jun. 3 Marks} Revenue Schedule:Pri ce (Per 6 5 4 3 2 T R (R 6 10 12 12 10 A R (R 6 5 4 3 2 M R (R 6 4 2 0 2

Output (Units) 1 2 3 4 5 Explanation:-

1) Under imperfect competition, price is decided by individual seller for there own products. 2) Thus, to sell more quantity of goods they have to reduce the price thus revenue also falls. 3) Hence, from the above schedule & diagram it is clear that as to no. of output sold increases the AR & MR falls & MR remains less than AR. 4) The demand curve is relatively elastic &AR, MR, P& DD slopes downward from left to right.

Chapter 4 Economics & Dimensions of ScaleQ.1. Economics of Scale Or What do you mean by economics of scale? What are it different types? {2008 Dec. 5 Marks} It means increasing the scale of production leads to lower cast per unit. It has been classified into:-1) Internal Economics, 2) External Economics

1) Internal Economics: a) Labour Economics: Division of labour or specialization is always more productive. This will reduce cost per unit in any large firms & increases the productivity in an efficient manner. b) Managerial Economics: Managerial Economics also reduces the per unit cast because of two types of specialization: i) Delegation of Authorities to subordinates (Decentralisation) ii) Functional Specialization iii) Routine work can be delegate to subordinate. c) Financial Economics:

A large firm has better growing due to its reputation, thus they can raise easily large funds at a low cost due to less risky from the markets.

d) Risk bearing Economics: A big firm is in a better position than a small firm in reducing its risk. A big firm is able to spread its risk into number of operation such as: i) Large scale operations. ii) Diversification of markets. Etc 2) External Economics:a) Economics of information: A large firms and growing industry can derive

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