Q1) Explain the law of supply through the hypothetical example of a supply schedule and a

supply curve. Why does a supply curve slope upward to the right? What factors cause a
rightward shift in the supply curve?
Ans. Law of Supply- It states that “the supply of a product increases with the increase in its
price and decreases with decrease in its price, other thing remaining constant. It implies
that the supply of a commodity and its price are positively related.
Example: At price ₹100, only 10 thousand jeans are supplied per week. When price rises to
₹300, supply increased to 50 thousand jeans and so on.

Price (in ₹) Supply (Jeans in ‘000)

100 10
200 35
300 50
400 60
600 75

Supply Curve
700
600
600
500
400
Price (in ₹)

400
300
300
200
200
100
100
0
0 10 20 30 40 50 60 70 80
No. of Jeans ('000)

A supply curve slope upward to the right (a positive slope), indicating that the greater the
price buyers are willing to pay for the product, the greater the quantity firms will supply.
The producer lowers the price until the quantity demanded equals the quantity he has to
supply.

The factor that cause a rightward shift in the supply curve are as follows:

i. Decrease in price of other goods.

ii. Advanced and improved technology.
iii. Favourable taxation policy.
 iv. Decrease in price of factors of production.
v. Goal of sales maximization.
vi. Increase in number of firms.
vii. Expectation of fall in prices in future.
viii. Improvement in means of transport and communication.

Q2) With the help of a suitable and logical example explain the concept of marginal rate of
substitution. What is the law behind diminishing marginal rate of substitution?

Ans. Marginal Rate of Substitution- Marginal rate of substitution refers to the rate at which the
commodities can be substituted with each other, so that total satisfaction of the consumer
remains the same.

Example- In the example of apples (A) and bananas (B), MRS of ‘A’ for ‘B’, will be number of
units of ‘B’, that the consumer is willing to sacrifice for an additional unit of ‘A’, so as to
maintain the same level of satisfaction.

MRSAB = Units of Bananas (B) willing to sacrifice

Units of Apples (A) willing to gain
MRSAB is the rate at which a consumer is willing to give up bananas for one more unit of
apple. It means MRS measures the slope of indifference curve.
The concept of MRSAB is explained through:

Combination Apples (A) Banana (B) MRSAB

P 1 15 ----
Q 2 10 5B:1A
R 3 6 4B:1A
S 4 3 3B:1A
T 5 1 2B:1A
 MRS Between Apples And Banana
16

14

12

10
Bananas

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
Apples

The law behind marginal rate of distribution is law of diminishing marginal utility as it
states that as we consume more and more units of a commodity, the utility derives from
each successive unit goes on decreasing.

Q3) Consider yourself as a General Manager of a FMCG company in India. Elaborate the
product lines your company is into. With the help of a Hypothetical scenario explain the
effect of the ongoing Pandemic (COVID-19) and its subsequent lockdown on various areas
of your business organization. Also explain your organization plan to emerge victorious
from such situations.

Ans.
ITC Limited, which manufactures personal hygiene products like hand wash, soaps and
sanitisers under Savlon brand and food items under brands such as Aashirvad, is “operational
with bare minimum people” as these these are essential products, said the Kolkata-
headquartered company.

Fig. PRODUCT LINE OF ITC LIMITED

According to ITC, it is “extremely critical” to ensure adoption of precautionary measures during

this period, but it is important, that during such challenging times, “essential products are made
available to consumers in a safe and sustainable manner across the length and breadth of the
country through continuity of supply.

“As various state government issue notifications, we are in in discussions with them to ensure
that manufacture and distribution of essential products are streamlined.

As a part of commitment, ITC is also expanding the company’s global manufacturing capacity,
including through the establishment of new US vaccine manufacturing capabilities in other
countries.

The additional capacity will assist in the rapid production of a vaccine and will enable the supply
of more than one billion doses of a safe and effective vaccine globally.
The world is facing an urgent public health crisis and we are committed to doing our part to
make a COVID-19 vaccine available and affordable globally as quick as possible.

Q4) Illustrate with the help of a suitable example the various sources of monopoly of a firm.
Also explain how the demand curve for a monopoly is firm different from that of a firm
under perfect competition. Illustrate the difference graphically.

Ans. Monopoly- Monopoly refers to a market situation where there is a single seller selling a
product which has no close substitutes.

Example: Railways, Microsoft, Facebook.

Sources of Monopoly:

I. Exclusive control over important inputs – Complete or large control over necessary
inputs for production causes some companies to be the sole power in an industry, as
competitors cannot form due to the lack of inputs.
II. Economies of scale – If the LAC is downward sloping, it is essentially wise to have only a
single producer in the market. This is called natural monopoly, as every additional
competitor makes production more costly and wasteful.
III. Patents – A patent typically confers the right to exclusive benefit from all exchanges
involving the invention to which it applies. Patents can be harmful and beneficial for a
market, as they give rise to monopolistic powers, but without them some inventions
would simply not occur at all.
IV. Network Economics – Once the fraction of consumers owing a certain product passes a
critical threshold, network economies can occur which are economies of scale which
occur because of a monopoly or natural monopoly power.
V. Government licenses of franchises – Government or local authorities can give out
licenses for firms in certain areas, so they gain exclusive rights of operation for example.
These licenses are for industries or areas in which more than one firm would be harmful,
however they come with regulations and restrictions.

Demand Curve under Perfect Competition:

In case of Perfect Competition, there are very large number of buyers and sellers selling a
homogenous product at a price fixed by the market. Therefore, each firm is a price-taker
and faces a perfectly elastic demand curve. It is due to the existence of large number of
firms. Price of the product is determined by the industry and each firm must accept that
price.
Demand Curve under Monopoly:

A monopoly firm is like an industry as the single seller constitutes the entire market for the
product, which has no close substitutes. So, a monopolist has full freedom and power to fix
price of the product. Under monopoly, average revenue curve slopes downward. AR and
MR curves are separate from each other. Price is determined by the monopolists.
Q4)
A. Can a monopoly firm charge any price for its product?
Ans. Yes, a monopoly firm can charge any price for its product because monopoly firm is a
‘price-maker’ or ‘price-setter’. It is the sole producer of a product. It can exercise
considerable influence on the market supply of the commodity and thereby its price.
Monopoly represents a situation of a high market power. A firm with high market
power is called a price maker. This contrasts with a competitive firm, which is a price-
taker with zero market power.
B. Can a monopoly firm always earn an abnormal profit?
Ans. Yes, a monopoly firm can always earn an abnormal profit because a monopoly market
is characterized by closed entry to the prospective producers. Monopoly is
characterized by very high barriers to entry, which exist when entrepreneurs face
obstacles while joining a profitable industry. There are some barriers or restriction on
the entry of new firms into the monopoly industry. The close entry may result from
natural, legal or man- made restrictions. These restrictions may take several forms
such as parent rights, copy rights, government rights and economies of scale, etc. In
view of this, there is no competitor for a monopoly firm as barriers to entry provides
market power to the monopolists. As a result, the monopolists can earn abnormal
profit even in a long run.

Q6) “A moderate degree of inflation is the logical concomitant of efficient mobilization.”

Explain and examine the validity of the statement. Give logical examples for your answer.
Ans. Inflation- Inflation is a quantitative measure of the rate at which the average price level of
a basket of selected goods and services in an economy increases over some period of time.
It is the general level of prices where a unit of currency effectively buys less than it did in
prior periods.
This will however be an erroneous conclusion because a price rise on account of the
following factors is not inflationary:

I. Price rise due to change in composition of GDP in which high price industrial goods
replace the low-price firm products.
II. Price rise due to qualitative change in the products across the world.

As there are three type of Inflation and as moderate inflation is the logical concomitant of
efficient mobilization because it is good for debtors and also good for an economy as a
whole, when an overhang of debt is holding back growth and job creation. It encourages
people to spend rather than sit on cash again.
Moderate Inflation – When the general level of price rises at a moderate rate over a long
period of time, it is called moderate inflation. It is a type of inflation that can be
anticipated; therefore, individuals hold money as a store of value.

Example- Harry G Johnson says, ‘… some of degree of inflation but a moderate degree only-
is the logical concomitant of efficient economic mobilization. He argues that apart from
helping through redistribution of income, a moderate rate of inflation breaks the
characteristic ‘rigidities’ and ‘immobility’s’ of the underdeveloped economics and can
‘draw labor and resources out of traditional or subsistence sector into the developing
sectors of the economy’ and can help efficient re-allocation of resources. Johnson puts
forward two arguments in support of his view. First, during the period of inflation, output
prices rise first, and input prices follow. This is called time-lag between the rise in output
prices and rise in input prices, especially the wage rate. In fact, output prices increase first
and wages increase after a time-lag. This time-lag between the output price rise and the
wage rise called wage-lag. If wage-lag persists over time, it enhances the profit margin
which provides incentive for investment and investible funds to the firm. This results in
increase in investment, production capacity and a higher level of output. Second, inflation
redistributes incomes in favor of high-income groups who have higher propensity to save.
Inflation induced redistribution of incomes increase total savings because upper income
classes have a higher propensity to save. As a result, the level of savings increases which
lowers the rate of interest. Lower interest rate induces new investment. Increase in
investment enhances production capacity of the economy leading to increase in the total
output that means economic growth.
 REFERENCES

BOOK NAME-
I. Managerial Economics – D N Dwivedi
II. Introductory Microeconomics – Sandeep Gard

SITES-
I. https://en.wikipedia.org/wiki/Marginal_rate_of_substitution
II. https://economictimes.indiatimes.com/