Certain Products are Not Subject to Certain Products are Not Subject to Scarcity!Scarcity!

Incorrect:

Except for free goods that we obtain from nature all the economic goods, whether of industrial origin or agricultural origin, are subject to the law of scarcity, i.e., their availability falls short of requirements.

In a market economy, the government In a market economy, the government has nohas no role to play.role to play.

• Incorrect:: In a market economy most decisions are made in the market place. But the government plays an important role in modifying the functioning of the market; government sets laws and rules that regu late economic life, produces educational and police services, and regulates pollution and business.

In Command Economy Major Decisions In Command Economy Major Decisions are made by Individuals & Firmsare made by Individuals & Firms

• Incorrect:

A command economy is one in which the government makes all decisions about production and distribution; the government owns a considerable fraction of the means of production, it also owns and directs the operations of enterprises in most industries.

In a market economy the government In a market economy the government answers the major economic questionsanswers the major economic questions

Incorrect: A market economy is one in which individuals and private firms make the major decisions about production and distribution. A system of prices, of markets, of profits and losses, of incentives and rewards determines what, how, and for whom.

The curve that shows different combinations of two The curve that shows different combinations of two commodities that can be produced in an economy with commodities that can be produced in an economy with

the given inputs is indifference curve.the given inputs is indifference curve.

Incorrect: Such a curve is known as a production possibility curve. It shows the maximum amounts of production that can be obtained by an economy, given the tech nological knowledge and quantity of inputs.

The alternative foregone is called fixed The alternative foregone is called fixed cost.cost.

Incorrect: Making a choice in a world of scarcity requires us to give up something else, in effect costing us the opportunity to do something else. The alternative foregone is called the opportunity cost.

The law of diminishing returns concerns the The law of diminishing returns concerns the relationship between inputs and output.relationship between inputs and output.

Correct. This law concerns the relationship between inputs and output in the produc tive process. More specifically, the law holds that we will get less and less extra output when we add successive doses of an input while holding other inputs fixed.

Capital is a primary factor of Capital is a primary factor of production.production.

Incorrect. Land and labour are often called primary factors of production. A primary factor of production is one whose quantity is determined outside the economy (by so cial forces in the case of labour and geological history in the case of land).

Financial capital is an important input Financial capital is an important input in the productive process.in the productive process.

Incorrect. We must carefully distinguish physical capital form financial capital. Physical capital takes the form of factories, equipment, houses, and inventories, physi cal capital is an input or factor of produc tion. Financial capital is paper assets or claims, like bonds, common stocks, savings accounts, or home mortgages; financial capital is often the claim to physical capital, but it is never an input into the productive process.

Market is a mechanism by which buyers andMarket is a mechanism by which buyers andsellers meet to exchangesellers meet to exchange

Correct: The market may be centralised or decentralised, or may even be an electronic market. The crucial characteristic of a market is that it brings buyers and sellers together to set prices and quantities.

Prices play an important role in the Prices play an important role in the market system.market system.

Correct. Prices coordinate the decisions of produces and consumers in a market. Higher prices tend to reduce consumer purchases and encourage production. Lower prices encourage consumption and discourage production. Prices are the balance-wheel in the market system

A market equilibrium represents a balance A market equilibrium represents a balance among all the different buyers and sellers.among all the different buyers and sellers.

Correct. It represents a balance among all the different buyers and sellers. Households and firms all want to buy or sell certain quantities depending upon the price. The market finds the equilibrium price that just balances the desires of buyers and sellers.

By 'invisible /hand' Adam Smith meant the intervention of the By 'invisible /hand' Adam Smith meant the intervention of the

government in the market system.government in the market system.

Incorrect. The principle of invisible hand, as seen by Adam Smith, holds that, in selfishly pursuing only his or her personal good.. every individual is led, as if by an invisible hand, to achieve the best good for all. Smith saw harmony between private interest and public interest. In his view of the economic world, any government interference with free competition is almost certain to be injurious.

A market in which no firm or consumer is large A market in which no firm or consumer is large enough to affect the market price enough to affect the market price is is called called

monopoly.monopoly.

Incorrect. This type of market structure is known as perfect competition. The number of buyers and sellers is so large that no one, by his individual action, can affect the course of demand and supply of a commodity.

An economic transaction without an An economic transaction without an economic payment is called economic gain.economic payment is called economic gain.

Incorrect. Such an economic transaction is known as externality. Externalities occur when firms or people impose costs or benefits on others outside the market place.

A state transport undertaking bus is aA state transport undertaking bus is agood example of a public goodgood example of a public good..

Incorrect. We can distinguish public goods from private goods on the basis of two fea tures : (i) excludability, and (ii) divisibility. Ownership is not important. Private goods possess both these characteristics, whereas private goods lack them. But since the production of public goods cannot be left to private enterprise, these are produced by the state.

Demand for a good is what a consumer Demand for a good is what a consumer needs to satisfy a want.needs to satisfy a want.

• Incorrect. Demand is an effective desire

backed by adequate ability and willingness.

Law of demand establishes a direct positive Law of demand establishes a direct positive relation between the price and demand for a relation between the price and demand for a

commodity.commodity.

Incorrect: The law of demand establishes a negative relationship between the two variables; as the price of a commodity goes up, its demand contracts and vice -versa.

A typical demand curve slopes A typical demand curve slopes upwards, going from northwest to upwards, going from northwest to

South East.South East.

Incorrect: A demand curve is a graphical illustration of the law of demand, the law explains that more of a commodity is demanded at a lower price than at a higher price. Hence, the demand curve slopes downwards from northwest to southeast.

It has not been possible to explain the It has not been possible to explain the basis of the law of demandbasis of the law of demand

Incorrect: The law of demand operates on the basis of two forces, viz., income effect and substitution effect. Income effect comes into play when as price goes up, I find myself somewhat poorer than before. Similarly, when the price of a good rises, I will substitute other similar goods for it.

As the price of oranges falls and I begin to buy As the price of oranges falls and I begin to buy more of them, my demand for oranges would be more of them, my demand for oranges would be

said to have increased.said to have increased.

Incorrect: The correct expression in this situation is that my demand for oranges has expanded. An increase in demand is associated with a total shift in the demand schedule; it arises due to a change in any of the determinants of demand other than the price of the commodity.

Supply of a commodity is the total Supply of a commodity is the total stock of a commodity available with stock of a commodity available with

the producers.the producers.

• Incorrect.: Supply is that part of the stock of a commodity available with the producers that they want to sell at obtaining prices.

A typical supply curve slopes upwardsA typical supply curve slopes upwards

Correct. Producers would be willing to offer higher quantity for sale at a higher price, and conversely lower quantity at a lower price. The supply curve, consequently, depicts this direct positive relationship and slopes upwards.

Supply of a commodity is basically Supply of a commodity is basically determineddetermined

by the cost of production.by the cost of production.

Correct. When production costs for a good are low relative to the market price, it is profitable for producers to supply a great deal. When production costs are high rela tive to price, firms produce little or may simply go out of business.

When automobile prices change, this When automobile prices change, this would be represented with the help of a would be represented with the help of a

new supply curvenew supply curve

Incorrect. When automobile prices change, producers change their production and quantity supplied, but the supply and the supply curves do not change. By contrast, when other influences affecting supply change, supply changes and the supply curve shifts.

If the market price is less than the equilibrium If the market price is less than the equilibrium price there with be an excess of quantity price there with be an excess of quantity

supplied in the market.supplied in the market.Incorrect. Equilibrium price is the price at which

the demand and the supply of a commodity are equal. At a price other than the equilibrium price, there may be a shortage or surplus of a commodity in the market. If the market price is less than the equi librium 'price, all the buyers will not be in a position to find the commodity, and hence there will arise a shortage of the com modity that will push the market price towards the equilibrium price.

Equilibrium price of a commodity may rise if the Equilibrium price of a commodity may rise if the demand for this commodity decreases, ceteris demand for this commodity decreases, ceteris

paribus.paribus.

Incorrect: A decrease in demand will shift the demand curve to the left of the original curve, i.e., consumers would be willing to buy lesser quantity of a commodity at a given price. Consequently, the sellers will be forced to reduce the prices. The equilibrium price will fall.

Equilibrium price of a commodity may rise Equilibrium price of a commodity may rise if the supply of this commodity increases, if the supply of this commodity increases,

ceteris paribus.ceteris paribus.

Incorrect. An increase in the supply of a commodity implies that the sellers are will ing to sell larger quantity of the commodity at the given price. In order to attract more buyers to this commodity, its price will have to fall.

The equilibrium price of a commodity The equilibrium price of a commodity will rise if increase in demand equals the will rise if increase in demand equals the

increase in supply of the commodity.increase in supply of the commodity.

Incorrect. An increase in demand will pull the equilibrium price upwards, but the equilibrium price will be pushed downwards by an increase in supply. It the pulls and pushes neutralise each other, equilibrium price may not change at all.

The equilibrium price of a commodity will The equilibrium price of a commodity will rise if the increase in demand meets with a rise if the increase in demand meets with a

decrease in supply.decrease in supply.

Correct. In this situation, both demand and supply forces are working together to push the equilibrium price upwards.

If the decrease in demand matches the If the decrease in demand matches the decrease in supply, both equilibrium decrease in supply, both equilibrium price and equi librium quantity will price and equi librium quantity will

remain unchanged.remain unchanged.Incorrect. A decrease in demand will push the price

downwards, but this push will be neutralised by an upward pull of equilibrium price due to a decrease in supply. The equilibrium price will remain un changed. But at this equilibrium price, quantity demanded and supplied will be lesser than in the original equilibrium.

At a non-equilibrium price, quantity At a non-equilibrium price, quantity bought in the market is not equal to bought in the market is not equal to

the quantity sold.the quantity sold.• Incorrect. Quantity bought must always be equal to

the quantity sold. Apparently, that which has not been sold cannot be bought. But at a high price there is a surplus of goods, with producers eagerly trying to sell more goods than consumers will buy. This excess of desired supply over desired demand will put downward pressure on price until price finally reaches that equi librium level where the two curves inter sect.

For inelastic demand curve, any increase in For inelastic demand curve, any increase in supply will lead to an upward shift in supply will lead to an upward shift in

equilibrium price and quantity.equilibrium price and quantity.

Incorrect. Given an inelastic demand curve, an increase in supply will lead to a surplus of stocks with the producers. They will be compelled to offer their surpluses at lower prices in the market. The equilibrium price may fall without a corresponding increase in the quantity demanded and sold.

Cross elasticity of demand is the responsiveness Cross elasticity of demand is the responsiveness of demand to a change in the supply of a of demand to a change in the supply of a

commodity.commodity.

• Incorrect. Cross elasticity of demand for a

commodity is the responsiveness of demand for a commodity to a change in the price of either of its substitutes or comple ments.

When a When a 1 1 percent change in price evokes percent change in price evokes only 1 percent change in quantity only 1 percent change in quantity

demanded, this is price-inelastic demand.demanded, this is price-inelastic demand.

• Incorrect. Price elasticity coefficient is the percentage change in quantity demanded divided by the percentage change in price. If both the variables change in the same proportion, the value of co-efficient will equal one, which is described as unit elasticity.

Water is more useful than diamond & so its Water is more useful than diamond & so its price should be higher.price should be higher.

Incorrect. The price of a commodity is determined by its marginal utility; the utility of water as a whole does not deter mine its price or demand. Rather, water's price is determined by its marginal utility, by the usefulness of the last glass of water. Because there is so much water, the last glass sells for very little.

Indifference curve gives different Indifference curve gives different commodities that a consumer prefers commodities that a consumer prefers

to buy with the same money.to buy with the same money.

Incorrect An indifference curve represents those different combinations of two com modities that yield a consumer equal satis faction.

A supply function illustrates the A supply function illustrates the relationship between inputs & output.relationship between inputs & output.

Incorrect The relationship between input and output is known as the production function. Production functions describe how a firm can produce its bundle of out puts, and production function is behind a firm's cost curves.

Total production is maximum when Total production is maximum when marginal product is zero.marginal product is zero.

Incorrect. Total product designates the total amount of output produced in physi cal units. Marginal product is the extra out put added by one extra unit of that input while other inputs are held constant. Mar ginal products of all the units add up to total product. As long as marginal product is more than zero, total product goes on increasing, the moment marginal product becomes zero, total product becomes maximum and does not increase further.

Returns to scale refer to the response Returns to scale refer to the response of output to an increase in the units of of output to an increase in the units of

a single input.a single input.

Incorrect- When all other factors are held constant, the response of output to an increase in one input is known as returns to a factor. Returns to scale, on the other hand, reflect the responsiveness of total product when all the inputs are increased proportionately.

Average Fixed costs remain unchanged Average Fixed costs remain unchanged at varying levels of output.at varying levels of output.

Incorrect. Fixed cost is the amount that must be paid irrespective of the level of output. Hence, total fixed costs remain un changed at varying levels of output. Average fixed costs are obtained by dividing total fixed costs by the units of output. As the level of output rises, given that the numerator remains unchanged, average fixed costs go on falling.

Average fixed costs determine the Average fixed costs determine the behaviour of the marginal cost.behaviour of the marginal cost.

• Incorrect Marginal cost is the addition to the total cost resulting from a unit increase in output. As output increases, total fixed costs remain unchanged. These are only the variable costs that change. Thus, the marginal cost represents the addition to total variable costs resulting from a unit increase in output.

For a perfectly competitive Firm, price will For a perfectly competitive Firm, price will always be less than its marginal revenue.always be less than its marginal revenue.

• Incorrect. A, perfectly competitive firm is a price-taker firm. It accepts the price as given, the price which is determined by industry demand and industry supply. Thus, each of the units that the firm sells is sold at this given price. The MR of the firm equals the price.

When a perfectly competitive firm When a perfectly competitive firm breaks even it produces at the lowest breaks even it produces at the lowest

average cost.average cost.

Correct. Break-even level of out put for a firm is one where the firm's total revenue equals its total COST or where its average revenue equals its average costs. Average cost curve for a firm is a U-shaped curve, whereas the average revenue-curve is a horizontal straight line. Break-even point occurs where the average cost curve is tangent to the average revenue curve. Invariably it is the lowest average cost level of output.

Imperfect competition implies that firm Imperfect competition implies that firm has absolute control over the price of has absolute control over the price of

its product.its product. Incorrect. Imperfect competition prevails in an industry

whenever individual sellers have some measure of control over the price of output in that industry. Imperfect competition does not imply that a firm has absolute control over the price of its product. To call Pepsi an imperfect competitor means that it may be able to set the price of a cool drink bottle at Rs.5 or Rs.6 and still remain a viable firm. The firm could hardly set the price at Rs.100 or Re.1; it would go out of business. It has only some discretion in its price decisions, not absolute control.

For a monopolist, marginal revenue For a monopolist, marginal revenue always equals average revenue.always equals average revenue.

Incorrect. A monopolist always is faced with a downward sloping demand curve. Its demand curve is its average revenue curve that reveals that every additional unit of output can be sold only when the monopolist lowers the price of his product. Consequently, the marginal revenue curve also slopes downwards and lies below the AR curve.

Perfect competition breaks down in a Perfect competition breaks down in a situation of decreasing costs.situation of decreasing costs.

True:Under continuously decreasing costs, one or few firms will expand their out puts to the point where they become a significant part of the industry's total out put. The industry then becomes imperfectly competitive. Perhaps a single monopolist will dominate the industry, a more likely out come will be a few large sellers will control most of the industry’s output; or there might be a large number of firms, each with slightly different products.

Any factor in perfectly elastic supply Any factor in perfectly elastic supply can earn economic rent.can earn economic rent.

Incorrect. Economic rent is the difference between the actual earnings of a factor and its opportunity cost. The actual earnings of a factor that is perfectly elastic in supply tend to be determined in the market at the level at which they are equal to its opportunity cost. Hence, such a factor-input does not earn any economic rent.

All the firms break even in the long-runAll the firms break even in the long-run

Incorrect These are only the competitive firms that break-even in the long run, i.e., when their AR = AC. A monopolist firm can and does manage to keep its AR above the AC at the equilibrium level of output and hence earns monopoly gains.

All the competitive firms operate at All the competitive firms operate at their optimum level of output in the their optimum level of output in the

long run.long run.

Incorrect. Optimum level of output for a firm is the one where its average cost is the minimum, and is obtained when the U shaped average cost curve is tangent to the average revenue curve. This tangency obtains in the case of a perfectly competitive firm at the lowest point of the AC curve, because the AR is a horizontal straight line. For an imperfectly competitive firm AR curve slopes downwards, hence tangency cannot be at the lowest point of the AC curve.