PirMehr Ali Shah

Arid Agriculture University, Rawalpindi

Office of the controller of Examinations
Final Exam / FALL 2020-21 (Paper Duration 24 hours)
To be filled by Teacher

Course No.: AEC-301 Course Title: principles of Agricultural Economics

Total Marks: 36 Date of Exam: 08-02-2021
Degree: Semester: First Section:……A,B ,D………………………………
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Name of the teacher: Bashir Ahmad Khan
Who taught the course: Signature of teacher / Examiner:

To be filled by Student
20-ARID-3079 MUQADAS NOOR
Registration No.: ………………………………………….……… Name:……………………………………………………..

Answer the following questions. Marks: - 6

Question no 1:- Where should a rational firm produce? In your answer discuss why the rational
firm should produce or not in stage 1, 2 and 3? OR

Supply and demand conditions can also be expressed in quadratic form. Find the equilibrium
price and quantity, given the demand function
P+ Q2+3Q- 20 = 0
and the supply function
P- 3Q2+10Q = 5 also make a graph.
Question no 2:- Explain at least six determinants of price elasticity of demand?

OR Give your understanding about market equilibrium, supply and demand analysis, .law of
demand ,law of supply . Marks: - 6

Determinants of price elasticity of

demand.
There are many factors that effect the price elasticity of demand ;

1) Availability of substitute;
A commodity with more and close substitutes tend to have an elastic demand and
one with a few and weak substitute has an inelastic demand.

For example, if the price of coffee rises in the market , people will switch over to
the consumption of the tea , which is its close cheaper substitute. So the demand
of coffee is elastic.
 2) Degree of necessity;
The demand for necessities is inelastic and demand for luxuries and comfort is
elastic.

In the developing countries of world, per capital income of the people is generally
low. They spend a greater amount of their income on the purchase of necessaries
of life such as wheat , milk, course cloth etc. They have to purchase these
commodities whatever be their price.

The demand for luxury goods, on the other hand is greatly elastic whose
consumption can be postponed. For example, furniture e.t.c

3) Habits of consumer;
If a consumers are habitual of consuming some commodities like cigarette , coffee
etc, they will continue to consume these even at higher prices.

4) Income of consumer;
Normally rich consumer have inelastic demand and it is so because rise and fall in
price will not much affect their pocket. On the other hand , the demand of middle
income and poor people is generally elastic as a change in price of a commodity
will much affect their budget.

5) Number of uses of a commodity;

The greater the number of income spent on a commodity , the smaller will be the
elasticity of demand, vice versa.

For example , if the price of coal falls, its quantity demanded will rise,
considerably , because demand will be coming from household, industries,
railways etc.

6) Time
The period of time plays an important role in shaping the demand curve. Price
elasticity is generally low for the short period as compared to the long period.

In the short run, when the consumption of a good cannot be postponed, its
demand will be less elastic. In the long run if the rise price persists, people will
find out methods to reduce the consumption of goods. For example ; if the price
of electricity goes up, it is very difficult to cut back its consumption in the short
run than in the long run by adoption of available alternatives.

7) Price range;
Demand for a commodity tends to be inelastic at very high and very low prices,
and elastic within the moderate range of prices.

Question no 3:-

Marks: - 6

1- Question: What can you conclude about the price elasticity of demand in each of the
following statements?
2- “The pizza delivery business in this town is very competitive. I’d lose half my customers
if I raised the price by as little as 10%.”
3- My economics professor has chosen to use the Krugman/Wells textbook for this class. I
have no choice but to buy this book.”
4- “I always spend a total of exactly $10 per week on coffee.”
5- If the cross elasticity of demand between tea and sugar is -1.61, then are tea and sugar
substitutes or complements? Be able to explain your answer
OR
Give conceptual discussion about the factors affecting wheat supply in the market.
Answer ,
Wheat is an agricultural product used for the production of bread and many
baked products and also used for feeding livestocks.

Factors affecting the supply of wheat:

There are many factors that affect the supply of wheat in market some of them
are;
 1. Weather conditions.
Different weather conditions are the main factor that affect the production and
supply of many agricultural products .

Favorable weather conditions and timely rain increase the production of wheat
and the supply of wheat in increases in market.

2. Fertilizers .
With the use of the fertilizers in the soil, the fertility of soil increases due to which
its productivity increases and it result in the better quality of wheat and more
production of wheat. Due to better quality of wheat and more production of
wheat its price increases and supply also increases.

3. Technology
Supply of wheat may rise due to use of new technology. Tractor in agriculture has
helped many farmers for increased production of crops , similarly many other
technologies liked thresher has helped in fast threshing of wheat and different
technologies used in industries in industries help for the production of by-
products of wheat. So by use of different technologies supply of wheat and wheat
product increases.

4. Cost of inputs like raw material.

Fall in supply occur when there is increase in the cost of inputs. Rise in price of
fertilizer can compel farmer to produce and supply small amount of wheat due to
which supply reduces.

5. Expectations about future prices.

If producer expect some change in in the price in future , they will try to manage
their production plans accordingly. Supply may change if farmers expect the price
of wheat to be fall in coming season, they will produce and sale less wheat.

Similarly, expectations for increase in price will compel them to produce more
wheat.
 6. Numbers of producers,
With the increase in the number of producers of wheat , the supply of wheat can
increase in market.

7. Wars and natural hazards.

Due to wars and natural hazards factories may close down and production and
supply reduces.

8. Price of wheat,
With the rise in price of wheat its supply increases, and vice versa.

Price is the main factor affecting supply .

9. Means of transport,
Supply may rise due to improved transport and communication facilities e.g.
introduction of cargo and fax services.

10. Taxation,
Increase in taxes of wheat( such as sales tax) may cause fall in supply of wheat.

Question no 4:-

Marks: - 6

Define Marginal utility and write its formula? What is law of diminishing
marginal utility? Explain the law with the help of graph.
ANSWER

Marginal utility,
Marginal utility refers to the additional utility derived from the consumption of an
additional unit of a commodity.

It is an addition made to the total utility by consuming one more unit of a

commodity.
Formula ,
Change in utility/change in no. of units consumed

LAW OF DIMINISHING MARGINAL UTILITY.

H.H GOSSEN was the first to formulate this law in 1854.

The law states that as the amount consumed of a commodity increases, other
things being equal , the utility derived by the consumer from the additional units ,
i.e, marginal utility goes on decreasing.

It is also known as;

. Fundamental law of satisfaction

. Fundamental psychological law

ASSUMPTIONS.
1) All the units of commodity must be identical.
2) The units of the good must be standard
3) There should be no change in the taste during the process of consumption.
4) There must be a continuity in consumption
5) Marginal utility of money is assumed to be constant.

Diagrammatic representation
Units of ice-cream Total utility (in utils) Marginal utility
1 20 20
2 36 16
3 46 10
4 50 4
5 50 0 (point of satiety)
6 44 -6
After every consumption total utility increases while that marginal utility
decreases. Table shows that when total utility is maximum marginal utility
decreases. If the consumption is continued after point of satiety the utility derived
will become negative.

Graph
Importance of the law
1) Variety in production and consumption:
Consumer stops consumption of a commodity after a limit and shifts to
some other commodity.
Producer produces different varieties of goods.
2) Price determination.
Price of commodity depends of supply and demand
More price =less units
3) Basis of progressive taxation
Progressive taxation refers to that system of taxation, under which rate of
taxation increases as the income of a person increases.
4) Advantage to the consumers

Marginal utility=price

5) Basis of redistribution of wealth and income

If wealth is redistributed in favor of poor, total welfare of society would
increase
6) The famous diamond water paradox of smith can be explained with the
help of this law.

Question no 5:- Marks: - 6

a- If Neil’s elasticity of demand for hot dog is constant 0.9 and he buys 4 hotdogs when the
price is $1.5 per hotdog, how many will he buy when the price is $1.00 per hot dog?

Katherine advertises to sell cookies for $4per dozen. She sells 50 dozen and decides that she can charge
more. She raises the price to $6 per dozen and sells 40 dozen. What is the elasticity of demand?
Assuming that the elasticity of demand is constant. How many would she sell if the price were $10 per
dozen?

OR
Give your understanding about different types of economic systems prevailing in the
world.
Question no 6:- Marks: - 6
a- Explain in detail with the help of examples factors of production?
Factors of production:
Inputs used in production of goods are known as factors of production.

 Land
 Labor
 Capital
 Entrepreneur

These production factors are also interpreted as management, machines, materials,

and labor, technology and knowledge.

Land
As a result the reward of land is rent. All the natural resources used in production
are known as land.

According to Marshall, the material and the forces which nature gives freely for
mans aid, in land and water, in air and light and heat.

These resources can be renewable, such as forests, or non-renewable such as oil

or natural gas.

CHARACTERISTICS,
 Land is a nature’s gift to man.
 Land is a primary factor of production.
 Land is fixed in quantity.
 Land is permanent.
 Geographically land has lack of mobility
 Supply of land is inelastic.
 Land has many uses.
 It is an essential component of production.

Labor ,
The reward of labor is its wage.

Labor is the effort that people contribute to the production of goods and services.
Labor is an active factor of production. The quality of labor is dependent on work
force, skill, education, motivation.

Characteristics
1) Labor is perishable in nature.
2) Labor is inseparable from laborer.
3) Labor has less mobility (as compared to capital)
4) Human efforts (direct relation)
5) Difference in labor power
6) Labor has weak bargaining power.

Efficiency of labor:
By efficiency of labor we mean, the amount of work which a laborer can do with a
given time.

It is the ability of labor by virtue of which it is productive.

Three aspects that help determine the efficiency of labor;

 Amount of goods a worker can produce

 Quality of the goods produced
 Time spent on producing the goods.
Factors influencing labor efficiency
1) Personal qualities of worker
2) Health and physique
3) Motivation
4) Education and training
5) Experience

Division of labor:
It is way to satisfy the largest possible number of wants, we have to organize
them by division of labor in a way that yield greatest volume of output.

1) Simple division of labor

2) Complex division of labor
 3) Territorial division of labor

Simple division of labor

Division of society into major occupations.

Example, carpenters, weavers, blacksmiths

This may also called functional division of labor.

Complex division of labor

No groups of workers makes a complete article. Instead, making of an article to
split up into a number of processes and sub- processes and each of one is carried
out by a separate division of labor.

This is a proper division of labor.

Territorial division of labor.

This division refers to certain localities, cities or towns specializing in the
production of some commodity.

This is called localization of industries.

Advantages of labor
 Increase in productivity
 Increase in dexterity and skill
 Invention are facilitated
 Diversity of employment
 Large scale production
 Right man in right place

Disadvantages of labor
 Loss of skills
 Risk of unemployment
 Retards human development
 Disrupts family life
  Division of labor is limited by extent of the market
 Market depends upon division of labor

3 Capital
Reward of the capital is interest.

Capital are the goods that has been produced for further production.

According to J.R hicks,

“Capital consist of all those goods, existing at present time which can be used in
anyway. So as to satisfy wants during the subsequent years”

Capital goods are the products of the past labor used for further production.

1) Economic capital (machinery)

2) Financial capital(earnings)

Characteristics
 Capital is man made
 Capital is a passive factor
 Capital has high mobility
 Capital is variable(depends on requirement of markets)
 Capital depriciates with time(value decreases)
 Capital is stored up labor
 Capital is temporary in nature

4 ENTREPRENEURS
Entrepreneur is generally known as engines of economic growth

Reward of entrepreneur is profit.

Someone who takes on risk and bring all factors to earn profit.

An entrepreneur is a person who controls the policy of the firm.

Entrepreneur can act as innovation( introduce new products)

Characteristics
 Entrepreneur initiates the business
 Entrepreneur have strong networking abilities
 Drive rewards in the form of money , fame and reputation
 Self-motivated
 Mobilize the resources
 These are risk bearings and innovators

>THE END<