Chapter-02 Consumer Equilibrium

UNIT 2: Consumer's Equilibrium and Demand 45
Unit 2
13 Marks
Consumer's Equilibrium and
Demand
CBSE Syllabus 2020-21 Content
 Consumer’s equilibrium– meaning of utility, marginal 2.1 Consumer's Equilibrium -Cardinal Utility Approach
utility, law of diminishing marginal utility, conditions
2.2 Consumer's Equilibrium - Ordinal Utility Approach
of consumer’s equilibrium using marginal utility
analysis 2.3 Demand and Price Elasticity of Demand
 Indifference curve analysis of consumer’s equilibrium–
the consumer’s budget (budget set and budget line),
preferences of the consumer (indifference curve,
indifference map) and conditions of consumer’s
equilibrium
 Demand, market demand, determinants of demand,
demand schedule, demand curve and its slope,
movement along and shifts in the demand curve
 Price elasticity of demand– factors affecting;
measurement: percentage change method
 “The identity of an individual is essentially a function of her choices, rather than the discovery of an immutable
attribute.” —Amartya Sen
 “Every man lives by exchanging.” —Adam Smith
 “Consumption is the sole end and purpose of all production” —Adam
46 Microeconomics XI – by Subhash Dey
Introduction Consumer's Equilibrium and Demand
In this Unit, we will study the behaviour of an individual consumer1. A rational2 consumer has to decide
how to spend his income on different goods3. Economists call this the problem of choice. Most naturally, any
consumer will want to get a combination of goods that gives him maximum satisfaction. What will be this ‘best’
combination? This depends on the likes of the consumer and what the consumer can afford to buy. The ‘likes’
of the consumer are also called ‘preferences’. And what the consumer can afford to buy, depends on prices of
the goods and the income of the consumer. This Unit presents two different approaches that explain consumer
behaviour: (i) Cardinal Utility Analysis and (ii) Ordinal Utility Analysis.
The term ‘utility’ refers to the want satisfying power of a commodity. In other words, amount of satisfaction,
actual or expected, obtained from consuming goods and services is called utility.
(i) Cardinal Utility Analysis: When utility is expressed in exact units, like 1, 2, 3, ... etc., it is called cardinal
utility. Suppose a consumer says that he gets 2 units of utility from consumption of a good, then it is
cardinal utility.
(ii) Ordinal Utility Analysis: When utility is expressed in ranks, like more utility or less utility, etc., it is called
ordinal utility. Suppose a consumer says that he gets less satisfaction from 2nd unit of the chocolate as
compared to the 1st unit, it is ordinal utility. Ordinal utility approach does not use cardinal values like
1, 2, 3, ... etc. Rather, it makes use of ordinal numbers like 1st, 2nd, 3rd, ... etc. which can be used only
for ranking. It means, if the consumer likes Chocolate more than Icecream, then he will give 1st rank
to Chocolate and 2nd rank to Icecream. Such a method of ranking the preferences is known as ‘ordinal
utility approach’.
Preliminary Notations and Assumptions
A consumer, in general, consumes many goods; but for simplicity, we shall consider the consumer’s choice
problem in a situation of a single good or where there are only two goods4: Good X and Good Y. Any
combination of the amount of the two goods will be called a consumption bundle or, in short, a bundle. In
general, we shall use the variable Qx to denote the quantity of Good X and Qy to denote the quantity of
Good Y. Qx and Qy can be positive or zero. (Qx, Qy) would mean the bundle consisting of Qx quantity of
Good X and Qy quantity of Good Y. For particular values of Qx and Qy, (Qx, Qy), would give us a particular
bundle. For example, the bundle (5,10) means 5X + 10Y; the bundle (10, 5) means 10X + 5Y, whose market
prices are Px and Py respectively.
On what basis does he choose his consumption bundle from the ones that are available to him? In economics,
it is assumed that the consumer chooses his consumption bundle on the basis of his taste and preferences over
the bundles in the budget set. It is generally assumed that the consumer is a rational individual and he has
well defined preferences over the set of all possible bundles. A rational individual clearly knows what is good or
what is bad for him, and in any given situation, he always tries to achieve the best for himself. He can compare
any two bundles. From the bundles which are available to him, a rational consumer always chooses the one
which gives him maximum satisfaction.
1 A consumer is one who buys goods and services for satisfaction of wants.
2 A consumer is said to be ‘rational’ when he aims at maximising his satisfaction from the consumption of the given commodity, within his
money income.
3 We shall use the term 'goods' to mean goods as well as services.
4 The assumption that there are only two goods simplifies the analysis considerably and allows us to understand some important concepts
by using simple diagrams.
Consumer’s Equilibrium – Cardinal Utility Approach/

2.1
Marginal Utility Analysis
A consumer usually decides his demand for a commodity on the basis of utility that he derives from it. Utility
refers to satisfaction from the consumption of goods.
What is Utility?
Utility of a commodity is its want-satisfying capacity.
The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from
the commodity.
 Utility is subjective. It differs from person to person. Different individuals can get different levels of
utility from the same commodity. For example, someone who likes chocolates will get much higher utility
from a chocolate than someone who is not so fond of chocolates.
 Utility differs from place to place and time to time. In other words, utility that one individual gets from
the commodity can change with change in place and time. For example, utility from the use of a room
heater will depend upon whether the individual is in Ladakh or Chennai (place) or whether it is summer
or winter (time).
Cardinal Utility
Cardinal utility analysis assumes that level of utility can be expressed in numbers.
For example, if we can measure the utility derived from consumption of one unit of a commodity X and say, it
gives 12 units of utility (satisfaction), then it is cardinal utility.
Measures of Utility
TABLE 2.1: Values of MU and TU derived from consumption of various amounts of a commodity X.
Units Total Utility (TU) Marginal Utility (MU)
1 12 12
2 18 6
3 22 4
4 24 2
5 24 0
6 22 –2
Two important measures of utility are:
1. Total utility (TU)
Total utility (TU) means the total satisfaction derived from consuming a given quantity of a commodity X.
More of commodity X provides more total utility (TU) to the consumer. Thus, TU depends on the quantity of
the commodity X consumed. TU is the sum of the utilities from all the units consumed.
For example, if the 1st unit of commodity X gives the consumer a satisfaction of 12 units and 2nd one gives
6 units, then TU from 2 units of commodity X is 12 + 6 = 18 units. If the 3rd unit of commodity X gives
satisfaction of 4 units, then TU from 3 units of commodity X will be 12 + 6 + 4 = 22 units.
2. Marginal utility (MU)
Marginal utility (MU) can be defined as the addition to the total utility (TU) by consuming one extra unit
of the commodity.
Or, MU is the utility derived from the last unit of a commodity consumed.
In our example, when 3rd unit of commodity X is consumed, TU increases from 18 units to 22 units. Therefore,
MU of the 3rd unit of commodity X = TU3 – TU2 = 22 – 18 = 4 units.
MUn = TUn – TUn–1 (MUn = Marginal utility from nth unit; TUn = Total utility from n units;
TUn–1 = Total utility from n – 1 units.)
When change in units consumed is more than one, then Marginal utility (MU) is calculated as follows:
change in total utility DTU
=MU =
change in number of units consumed Dn
In our example, 2 units of commodity X gives the consumer 18 units of total utility and 4 units give him 24
units of total utility. So, MU = 6/2 = 3 units.
Total utility and marginal utility can also be related in the following way:
TUn = MU1 + MU2 + … + MUn–1 + MUn
This simply means that TU derived from consuming n units of commodity X is the sum total of marginal utility
of first unit (Mu1), marginal utility of second unit (MU2), and so on, till the marginal utility of the nth unit.
Numerical 1
Complete the table: (3 marks)

Quantity Total Utility Marginal Utility
1 20 –
2 – 15
3 – 10
4 53 –
5 – 5
6 58 –
7 – (–) 10
Solution:
1 20 20
2 35 15
3 45 10
4 53 8
5 58 5
6 58 0
7 48 (–)10
Do it yourself 1
Complete the table: (3 marks)
Units consumed Total Utility Marginal Utility
1 7 –
2 – 10
3 – 8
4 31 –
5 – 3
6 34 –
7 – (–)4
Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility states that: "As a consumer consumes more and more units of a
specific commodity, without a time lag, the additional utility (satisfaction), he expects to derive from
each successive unit will go on diminishing." This happens because having obtained some amount of the
commodity, the desire of the consumer to have still more of it becomes weaker.
TABLE 2.2: Law of diminishing marginal utility
1 12 12
2 18 6
3 22 4
4 24 2
5 24 0
6 22 –2
As per the schedule, marginal utility at first unit
of consumption is 12 utils and it goes on falling as
consumption increases. As the consumer consumes more
and more units of a commodity one after the other,
the marginal utility falls to zero(at 5th unit) and even
becomes negative (at 6th unit).
Relationship between TU and MU
1. Marginal utility falls but remains positive as long
as total utility increases (from 1st unit to 4th
unit of consumption).
2. When marginal utility is zero, total utility is
maximum (i.e. at 5th unit of consumption).
3. When marginal utility becomes negative, total
utility starts falling but remains positive (i.e. at
6th unit of consumption and beyond).
Top Tip
The consumption level of commodity where MU = 0 (or TU maximum) is known as the ‘Point of satiety’ or the stage of
maximum satisfaction.
Conditions of Consumer’s Equilibrium – in case of one commodity

Consumer’s equilibrium means maximum satisfaction level of the consumer, given his money income and
prices of the two goods in the market.
The two conditions for maximisation of satisfaction if only one commodity is purchased are:
1. Marginal utility (in rupees) is equal to the price of the commodity (MU = Price).
2. MU of the good falls as more of it is consumed.
Explanation
1. Given the market price of a commodity X how many units of it to buy, the consumer decides this by
comparing MU with price (P). The consumer buys so long as MU is greater than, or at least equal to price,
i.e., MU > P. As the consumer buys more units, MU falls due to the operation of the Law of Diminishing
Marginal Utility. The consumer stops buying when MU = P. If the consumer buys more units after MU = P,
then MU will become less than price. It makes buying more units disadvantageous to the consumer.
2. Unless MU falls as more of a good is consumed the consumer will not reach equilibrium.
Numerical example
Suppose that price of the commodity X is `2 per unit. When the consumer buys the first unit, the utility that he
gets is worth `12 but he has to pay only `2 for it. So, he buys more quantity of the commodity X. As he buys
more units, marginal utility diminishes because of the Law of Diminishing Marginal Utility. He stops buying
when he buys 4 units because at the 4th unit, MU = Price.
Buying more than 4 units will be disadvantageous to the consumer since MU < Price. Thus, the consumer will
maximise his satisfaction by buying 4 units of the commodity X.
TABLE 2.3: Given the price of commodity X (`2), a consumer buys up to 4 units where MU = Price
Units of Commodity X Price (P) (`) Marginal Utility (MU) (`)
1 2 < 12
2 2 < 6
3 2 < 4
4 2 = 2
5 2 > 0
Top Tip
Diagrammatic Presentation of Consumer’s Equilibrium (one commodity case)
The consumer is in equilibrium when he buys ‘Oq’ units of the good because at this quantity,
MU = Price
• The area under the marginal utility curve (i.e. total shaded area OacbO) depicts total
utility. It represents the total amount of money the consumer can pay.
• The area in blue (OpcbO) represents the total amount of money the consumer has to
pay.
• Therefore, the area in red (pacp) represents the consumer’s surplus/gain.
Numerical 2
Price of good X is `6. How many units should the consumer buy to attain equilibrium? (Assume that utility is
expressed in rupees). Give reasons for your answer. (3 marks)
Consumption (units) Total Utility (`)
1 10
2 18
3 25
4 31
5 34
6 34
Solution:
Units consumed Total utility (`) Marginal utility (`) Price (`)
1 10 10 > 6
2 18 8 > 6
3 25 7 > 6
4 31 6 = 6
5 34 3 < 6
6 34 0 < 6
The consumer will buy 4 units to attain equilibrium, i.e., to maximise his satisfaction since at this consumption
level, MU = Price = `6.
At consumption level of less than 4 units, MU > Price. Therefore, there is scope of increasing gain by purchasing more.
If he buys more than 4 units, MU < Price. Therefore, buying more than 4 units will be disadvantageous to the
consumer. Thus, the consumer will maximise his satisfaction by buying 4 units of the commodity X.
Do it yourself 2
Suppose the price of commodity of X is given as `8 and the MU (in rupees) for 4 units is given as: (3 marks)
Consumption (units) Marginal Utility (`)

1 12
2 10
3 8
4 6
How many units of the commodity X should the consumer buy? Explain.
Consumer’s equilibrium in case of two commodities

(Law of Equi-Marginal Utility)
The Law of Equi-marginal utility is an extension of the Law of Diminishing Marginal Utility. The consumer
may expect to get maximum utility by allocating the income among various goods in such a way that last rupee
spent on each good yields the same Marginal Utility.
In other words, the law states that the consumer will get maximum satisfaction if the marginal utility of the last
rupee of expenditure on each good is the same.
Suppose a consumer consumes only two goods. Let these goods be X and Y. The consumer is in equilibrium
when he allocates his income in two goods X and Y in such a manner that he derives maximum satisfaction.
Given the consumer’s income and prices of the two goods (Px and Py):
1. The necessary condition for the consumer to be in equilibrium in case of equi-marginal utility will be:
MUx = MUy = MU of last rupee spent on each good
Px Py
2. The second condition is: 'MU falls as more units of a good are consumed.'
Explanation:
MUx MUy
1. • If > , the consumer will not be in equilibrium because marginal utility derived by
Px Py
spending one rupee on consumption of commodity X is greater than the marginal utility derived
by spending one rupee on consumption of commodity Y. The satisfaction derived by consuming
Commodity X is greater than the satisfaction derived by consuming Commodity Y. The consumer
will reallocate his income by spending more on commodity X.
MUx
— Buying more of X reduces MUx. Px remaining unchanged, is also reduced.
Px
MUy
— Buying less of Y raises MUy. Py remaining unchanged, it raises .
Py
The change continues till the consumer is in equilibrium.
• If MUx < MUy , the consumer will not be in equilibrium because the satisfaction derived from
Px Py
spending a rupee on consumption of Good X is less than the satisfaction derived from spending a
rupee on consumption of Good Y. So he will reallocate his income by substituting Good Y for Good
X. In other words, he will buy more of Y by reducing expenditure on X.
MUy
— Buying more of Y reduces MUy. Py remaining unchanged, is also reduced.
Py
MUx
— Buying less of X raises MUx. Px remaining unchanged, it raises .
Px
MUx MUy
The change continues till = and the consumer is in equilibrium.
Px Py
MUx MUy
2. When > , the consumer buys more of X. As a result MUx falls.
Px Py
This happens due to the operation of the Law of Diminishing Marginal Utility. Unless MU falls as more
of a good is consumed, the consumer will not reach the equilibrium.
Numerical 3
The marginal utility schedule for goods X and Y are given. Price of both the goods is `1 each and the consumer’s
income is `8. Determine, how many units of both the goods should he purchase to maximise his total utility.
Also, calculate the total utility at equilibrium. (3 marks)
Units consumed MUx (utils) MUy (utils)
1 26 11
2 21 9
3 17 8
4 13 6
5 8 4
6 3 2
Solution:
Units consumed MUx / Px (utils) MUy / Py (utils)

1 26 11
2 21 9
3 17 8
4 13 6
5 8 4
6 3 2
Given the consumer’s income `8 and prices of the two goods (Px = `1, Py = `1), he will be in equilibrium when
the following two conditions are satisfied:
MUx MUy
(i) Per rupee MU from consumption of each good is the same, i.e., = .
Px Py
(ii) MU falls as more units of a good are consumed.
The consumer will buy 5 units of good X and 3 units of good Y to attain equilibrium, i.e., to maximise his
satisfaction since at this consumption level both the conditions are satisfied.
Total money spent on this combination = 5 × 1 + 3 × 1 = `8.
Total utility at equilibrium = (26 + 21 + 17 + 13 + 8) + (11 + 9 + 8) = 113 utils.
Do it yourself 3
Suppose the price of commodity of X is given as `8 and the MU (in rupees) for 6 units is given as: (3 marks)
Good X Good Y
Qx TUx MUx Qy TUy MUy
1 25 – 1 10 –
2 40 – 2 – 6
3 50 – 3 21 –
4 – – 4 24 –
5 59 3 5 – –
6 – 1 6 27 1
Key Terms
Utility—The want-satisfying capacity of a commodity.
Cardinal utility analysis—It assumes that level of utility can be expressed in numbers, e.g. 12 units, 6 units, etc.
Total utility (TU)—Total satisfaction derived from consuming a given quantity of a commodity.
Marginal utility (MU)—Change in total utility due to consumption of one additional unit of a commodity.
Law of diminishing marginal utility—It states that marginal utility from consuming each additional unit of a commodity
declines as its consumption increases.
Consumer’s equilibrium—Maximum satisfaction level of the consumer, given his money income and prices of the two
goods in the market.
Law of Equi-Marginal Utility—Per rupee MU from consumption of each good is the same, i.e. MUx/Px = MUy/Py.
RECAP
Utility refers to satisfaction from the consumption of goods. Utility is the want-satisfying capacity of a commodity.
Cardinal utility analysis assumes that level of utility can be expressed in numbers. For example, 12 units of utility (satisfaction)
from consuming 1 unit of a commodity X.
Two Measures of Utility
1. Total utility (TU): TU means the total satisfaction derived from consuming a given quantity of the commodity X. More of
commodity X provides more total utility (TU) to the consumer.
2. Marginal utility (MU): MU is the change in total utility due to consumption of one additional unit of the commodity X. Or,
MU is the utility derived from the last unit of a commodity consumed.
MUn = TUn – TUn–1
Total utility and marginal utility can also be related in the following way:
TUn = MU1 + MU2 +  + MUn–1 + MUn
Law of diminishing marginal utility
Law of Diminishing Marginal Utility states that marginal utility from consuming each additional unit of a commodity declines as
its consumption increases, while keeping consumption of other commodities constant. This happens because having obtained
some amount of the commodity, the desire of the consumer to have still more of it becomes weaker.
Relationship between TU and MU
1. TU increases (at a decreasing rate) as long as MU is positive (up to 4 units of commodity X in Table 2.1).
2. MU becomes zero at a level when TU remains constant. (TU does not change at 5th unit of consumption and therefore
MU5 = 0.)
3. Thereafter, TU starts falling and MU becomes negative (after 5 units of commodity X).
Conditions of Consumer’s Equilibrium

Consumer’s equilibrium means maximum satisfaction level of the consumer, given his money income and prices of the two
goods in the market.
Consumer’s equilibrium in case of one commodity
The two conditions of consumer's equilibrium if only a single good X is purchased are:
1. Marginal utility (in rupees) is equal to the price of the good (MU = Price).
2. MU of the good falls as more of it is consumed.
Explanation:
1. Given the market price of good X how many units of it to buy, the consumer decides this by comparing (MU) with price
(P). The consumer buys so long as MU ≥ P. As the consumer buys more units, MU falls due to the operation of the Law of
Diminishing Marginal Utility. The consumer stops buying when MU = P. If the consumer buys more units after MU = P, then
MU < P, and it makes buying more units disadvantageous to the consumer.
2. Unless MU falls as more of good X is consumed the consumer will not reach equilibrium.
Consumer’s equilibrium in case of two commodities

Given his money income, suppose a consumer consumes only two goods X and Y, whose prices are Px and Py respectively. The
two conditions of consumer's equilibrium are:
1. Per rupee MU from consumption of each good is the same, i.e. MUx/Px = MUy/Py. (Law of Equi-Marginal Utility)
2. MU falls as more units of a good are consumed.
Explanation:
1. If MUx/Px > MUy/Py, the consumer will not be in equilibrium because the satisfaction derived by consuming good X is
greater than the satisfaction derived by consuming good Y. The consumer will reallocate his income by spending more on
good X. As he will consume more units of good X, marginal utility derived from consumption of good X diminishes and
alternate proposition occurs for good Y. This process will continue till MUx/Px becomes equal to MUy/Py and the consumer
is in equilibrium.
2. Unless MU falls as more of a good is consumed, the consumer will not reach the equilibrium.
Objective Type Questions 2.1
1. The formula for calculating marginal utility is _________ . (Choose the correct alternative)
(a) TUn – TUn – 1 (b) TUn + TUn – 1
(c) MU0 = MU2 = MU3 (d) MU1 + MU2 + MU3 + ... + MUn
2. Which of the shaded area in the diagrams below represents total utility? (Choose the correct alternative)
3. A consumer is consuming two goods X and Y and is in equilibrium. The prices of X and Y are `10 and `20 respectively and
the marginal utility of good Y is 50 units. What will be marginal utility of good X? (Choose the correct alternative)
(a) 100 units (b) 25 units
(c) 250 units (d) 4 units
4. After reaching the point of satiety, consumption of additional units of the commodity causes:
(Choose the correct alternative)
(a) TU falls and MU increases (b) Both TU and MU increase
(c) TU falls and MU falls and becomes negative (d) TU becomes negative and MU falls
5. A consumer consumes only two goods X and Y whose prices are `3 and `4 per unit respectively. If the consumer chooses
a combination of the two goods with marginal utility of X equal to 4 and that of Y equal of 3, then the consumer will
________. (Choose the correct alternative)
(a) Buy more units of both, X and Y (b) Buy more units of Y and less of X
(c) Buy more units of X and less of Y (d) Buy less units of both, X and Y
6. The area under the marginal utility curve of a good represents _________ . (Fill up the blank with correct answer)
7. When marginal utility is zero, total utility is (Choose the correct alternative)
(a) zero (b) minimum
(c) maximum (d) negative
HOTS 2.1
Analysing, Evaluating & Creating Type Questions
Q.1 State giving reasons whether the following statements are true or false: (4 marks)
(a) Marginal utility can never be negative.
(b) When the marginal utility falls, total utility also decreases.
Ans. (a) False: Marginal utility of a good falls and becomes negative when total utility falls as consumption of
additional units of a commodity.
(b) False: When marginal utility (MU) falls, total utility (TU) may increase (at decreasing rate) so long as MU
is positive.
Q.2 A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of the good
X rises, the consumer buys less of good X. Explain using the law of Equi-Marginal Utility. (3 marks)
Ans. According to the law of Equi-Marginal Utility, the consumer is in equilibrium when MUx/Px = MUy/Py.
Now, given that Px rises, then MUx/Px < MUy/Py. Since per rupee MUx is lower than per rupee MUy, it means that
satisfaction derived from consumption of good X is less than the satisfaction derived from consumption of good Y.
Therefore, the consumer will buy less of X. It shows that when Px rises, demand for X falls.
Q.3 A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain the reaction
of consumer through the marginal utility analysis. (3 marks)
Ans. According to the marginal utility analysis, the consumer is in equilibrium when MUx/Px = MUy/Py.
Now, given that Px falls, then MUx/Px > MUy/Py. Since per rupee MUx is greater than per rupee MUy, it means
that satisfaction derived from consumption of good X is greater than the satisfaction derived from consumption
of good Y.
This will induce the consumer to buy more of X by reducing expenditure on Y.
— Buying more of X reduces MUx. Px remaining unchanged, MUx/Px is also reduced.
— Buying less of Y raises MUy. Py remaining unchanged, it raises MUy/Py.
The change continues till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium.
Q.4 A consumer consumes only two goods X and Y whose prices are `4 and `5 per unit respectively. If
the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that
of Y equal to 4, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this
situation? Use utility analysis. (4 marks)
Ans. The consumer is in equilibrium when MUx/Px = MUy/Py (Law of Equi-Marginal Utility).
Since Px = 4, Py = 5, MUx = 5 and MUy= 4, therefore, MUx/Px = 5/4 = 1.25 and MUy/Py = 4/5 = 0.8.
Since MUx/Px ≠ MUy/Py, therefore, the consumer is not in equilibrium.
Here, MUx/Px > MUy/Py. It means that the satisfaction a consumer derives from spending a rupee on Good X is
greater than the satisfaction derived from spending a rupee on Good Y. The consumer will reallocate his income
– substitute Good X for Good Y. As the consumption of Good X increases its marginal utility will fall. As the
consumption of Good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal
utility. This process will continue till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium.
Q.5 If a rational consumer is consuming only two Goods X and Y, state her likely behaviour to attain
consumer’s equilibrium if she faces a situation where MUx/Px <MUy/Py. (3 marks)
Ans. When MUx/Px < MUy/Py, the consumer is obtaining greater marginal utility per rupee in case of good Y as
compared to good X. Therefore, he would prefer to buy more units of good Y and lesser units of good X. This
will lead to a decline in MUy and rise in MUX. The consumer will continue to buy more of Y till he attains
equilibrium at a point where MUx/Px = MUy/Py.
Q.6 A consumer consumes only two goods A and B and is in equilibrium. If the price of good B rises, explain
the likely reaction of the consumer under utility analysis. (4 marks)
Ans. In case of two goods A and B, a consumer will at equilibrium when:
• MU of good A/Price of good A = MU of good B/Price of good B
• MU falls as consumption increases
If the price of Good B rises the per rupee Marginal Utility derived from the consumption of
Good A will be more than the consumption of Good B. This will create a situation where:
MU of good A/Price of good A > MU of good B/Price of good B
This will induce the consumer to reallocate his expenditure from Good B (less satisfying) to Good A (more
satisfying). Therefore, consumer will buy more of Good A and less of Good B.
As a result, MU derived from consumption of Good A decreases gradually while the MU derived from
consumption of Good B increases. Eventually, this process will continue till MU of good A/Price of good A =
MU of good B/Price of good B
Q.7 A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and
Py. Explain what will happen if: (6 marks)
(a) MUx/Px is greater than MUy/Py.
(b) Py falls
Ans. (a) If MUx/Px > MUy/Py, then it means that satisfaction of Mr. Aman, derived from spending a rupee on
Good X is greater than the satisfaction derived from spending a rupee on Good Y.
Mr. Aman, will reallocate his income by substituting Good X for Good Y. As the consumption of Good
X increases its marginal utility will fall. As the consumption of Good Y decreases, its marginal utility will
increase. This is due to the law of diminishing marginal utility. This process will continue till MUx/Px
becomes equal to MUy/Py and the consumer is in equilibrium.
(b) If Py falls, MUx/Px < MUy/Py, then it means that satisfaction derived from spending a rupee on Good X
is lesser than the satisfaction derived from spending a rupee on Good Y.
Mr. Aman will reallocate his income by substituting Good Y for Good X. As the consumption of Good Y
increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good
X, this process will continue till MUx/Px becomes equal to MUy/Py.
Q.8 Discuss briefly, using a hypothetical schedule, the relation between marginal utility and total utility. (4 marks)
Ans.
Quantity (in units) MU (Utils) TU (Utils)
1 8 8
2 5 13
3 3 16
4 1 17
5 0 17
6 –1 16
Relationship between total utility and Marginal Utility

(i) Marginal utility falls but remains positive as long as total utility increases from 1st unit to 4th unit of
consumption.
(ii) When marginal utility is Zero, total utility is maximum i.e. at 5th unit of consumption.
(iii) When marginal utility becomes negative, total utility starts falling but remains positive i.e. at 6th unit of
consumption and beyond.
Q.9 Explain the law of diminishing marginal utility, using a hypothetical schedule. (4 marks)
Ans. The law of diminishing marginal utility states as follows:
"As a consumer consumes more and more units of a specific commodity, without a time lag, the additional
utility (satisfaction), he expects to derive from each successive unit will go on diminishing."
Representation of the law of diminishing marginal utility

1 12 12
2 18 6
3 22 4
4 24 2
5 24 0
6 22 –2
As per the schedule, marginal utility at first unit of consumption is 12 utils and it goes on falling as consumption
increases. As the consumer consumes more and more units of a commodity one after the other, the marginal
utility falls to zero(at 5th unit) and even becomes negative (at 6th unit).
Source-based Integrated Question As per CBSE New Question Paper Design 2020-21
Question:
The following table shows the total utility gained from the consumption of Fanta Lemon in a week.
Quantity 1 2 3 4 5 6 7
Total utility 20 35 45 53 58 58 48
(i) Calculate the marginal utility. What do you observe?
(ii) Sketch the total utility and marginal utility curves.
(iii) If the price of Fanta Lemon increases from `8 to `10, how will it affect its consumption?
Explain your answer using the data above. (6 marks)
Answer:
(i) Utility Schedule
1 20 20
2 35 15
3 45 10
4 53 8
5 58 5
6 58 0
7 48 (–)10
In the above schedule, we observe that as more units are consumed marginal utility declines. This is termed as the
law of diminishing marginal utility. As we consume more units of a commodity, each successive unit consumed
gives lesser and lesser satisfaction, that is marginal utility diminishes.
(ii)
(iii) Given the price of a good, a consumer purchases up to the point where marginal utility and price are equal, i.e.,
MU = Price. So long as MU > Price, he keeps on purchasing. As he makes purchases MU falls and at a particular
quantity of the good MU becomes equal to price. The consumer purchases up to this point.
When price of Fanta Lemon is `8, MU = Price condition is satisfied when 4 units of Fanta Lemon are consumed.
When price of Fanta Lemon is `10, MU = Price condition is satisfied when 3 units of Fanta Lemon are consumed.
Thus, as price of Fanta Lemon increases from `8 to `10, its demand decreases from 4 units to 3 units.
Consumer’s Equilibrium – Ordinal Utility Approach

2.2
(Indifference Curve Analysis)
A Cardinal utility analysis is simple to understand, but suffers from a major drawback in the form of quantification
of utility in numbers. In real life, we never express utility in the form of numbers. At the most, we can rank various
alternative combinations in terms of having more or less utility.
Ordinal Utility Analysis
Under ordinal utility analysis, the consumer does not measure
utility in numbers, but he ranks various consumption bundles,
e.g. utility derived from the consumption bundle (15, 2) is
more than that from the bundle (11, 2).
Indifference Curve
A consumer’s preferences over the set of available bundles can often
be represented diagrammatically. The bundles available to the
consumer can be plotted as points in a two-dimensional diagram.
A curve joining all points representing such bundles among
which the consumer is indifferent is called an indifference
curve.
The consumer is said to be indifferent on the different bundles
because each bundle gives the consumer same level of utility.
Indifference curve is the locus of all the combinations of
the two goods, each combination providing the same level
of satisfaction.
Marginal rate of substitution (MRS)

When a consumer gets one more unit of good X, he has to forego some units of good Y, so that his total utility
level remains the same and he remains on the same indifference curve.
Marginal Rate of Substitution (MRS) is the ratio of units of good Y that the consumer is willing to sacrifice
to get an additional unit of good X, so that his total utility remains the same.
In other words, MRS is simply the rate at which the consumer is willing to trade-off or substitute good X for
good Y, so that his total utility remains the same.
number of units of good Y willing to sacrifice DY

MRS =
number of units of good X willing to gain DX
Thus, MRS measures the slope of indifference curve.
TABLE 2.4: Representation of Law of Diminishing Marginal Rate of Substitution
Bundle Good X Good Y MRS = DY/DX
A 1 20 —
B 2 15 5Y : 1X
C 3 11 4Y : 1X
D 4 8 3Y : 1X
Top Tip
MRS = – DY/DX. The minus sign represents the sacrifice of units of good Y. However, here we ignore the minus sign for
simplicity and consider only the absolute value or magnitude of the expression, i.e. DY/DX. So, if DY/DX = – 5/1 it means
MRS = 5Y : 1X.
In the Table 2.4, as we increase the quantity of good X, the quantity of good Y sacrificed for each additional
unit of good X declines. In other words, MRS diminishes with increase in the number of units of good
X. This is because as the consumption of good X increases, the marginal utility (MU) derived from each
additional unit of good X falls (due to the Law of Diminishing Marginal Utility). So, the consumer will
feel the inclination to sacrifice small and smaller amounts of good Y. Thus, MRS has the tendency to
diminish with increase in quantity of good X. This is known as Law of Diminishing Marginal Rate of
Substitution.
Law of Diminishing Marginal Rate of Substitution states that the consumer will be willing to sacrifice
lesser units of good Y, so as to gain each additional unit of the good X. This is an extension of law of
diminishing marginal utility.
Shape of an Indifference Curve
A typical indifference curve is convex to the origin because of the law of Diminishing Marginal Rate of
Substitution (MRS). MRS is nothing but slope of the indifference curve. Slope falls because of the law of
diminishing marginal utility.
Shape of an Indifference Curve in case of goods being perfect substitutes
Perfect Substitutes are the goods which can be used in place of each other, and provide exactly the same level of
utility to the consumer.
TABLE 2.5: Constant Marginal Rate of Substitution

Combination Quantity of Quantity of MRS
Five-Rupee Five-Rupee (DY/DX)
notes (Qx) coins (Qy)
A 1 4 –
B 2 3 1Y:1X
C 3 2 1Y:1X
D 4 1 1Y:1X
In case of goods being perfect substitutes, the marginal rate

of substitution(MRS) does not diminish. It remains the
same, i.e. constant.
Therefore, the indifference curve will be a straight line.
Top Tip
In case the marginal rate of substitution(MRS) increases, the
indifference curve will be a downward sloping concave to
the origin.
Indifference Map and Monotonic Preferences

Indifference Map is the set (or family) of indifference
curves representing different levels of satisfaction for the
consumer. (Refer to Figure 2.4)
A consumer’s preferences are monotonic if and only
if between any two bundles, the consumer prefers the
bundle which has more of at least one of the goods and no
less of the other good as compared to the other bundle.
For example, a consumer’s preferences are monotonic if
between any two bundles (3, 10) and (2, 10), the consumer
prefers (3, 10) to (2, 10) because the first bundle(3, 10)
has more units of good X and no less of good Y,and thus
the consumer gets more total utility. Monotonicity of
preferences imply that between any two indifference curves,
the bundles on the indifference curve which lies above are
preferred to the bundles on the indifference curve which
lies below.
TABLE 2.6: Representation of different level of utilities
from different combinations of goods
Combination Quantity of Quantity of Good
Good X Y
A 1 10
B 2 10
C 3 10
Numerical 4
(i) Suppose a consumer is indifferent of the bundles (5, 6) and (6, 6). Are his preferences monotonic?
(ii) Suppose a consumer’s preferences are monotonic. What can you say about his preference ranking over the
bundles (10, 10), (10, 9) and (9, 9)? (3 marks)
Solution:
(i) No, the consumer’s preferences are not monotonic since the bundle (6, 6) should give him more utility than
the bundle (5, 6) while he is indifferent towards these consumption bundles.
(ii) Monotonic preferences implies that consumption of more goods increases total utility. So, the consumer’s
ranking of preferences (10, 10) > (10, 9) > (9, 9) are monotonic.
Do it yourself 4
Suppose a consumer’s preferences are monotonic. Can he be indifferent between the bundles (10,8) and (8, 6)?
Give reason in support of your answer. (1 mark)
Properties or characteristics of indifference curve

1. Indifference curve slopes downwards from left to right (i.e., negatively sloped)
An indifference curve slopes downwards from left to right, which means that in order to have more of good X,
the consumer has to forego some units of good Y, so that his total utility level remains the same and he remains
on the same indifference curve.
If the consumer does not forego some units of good Y with an increase in quantity of good X, it will mean
consumer having more of good X with same quantity of good Y, taking him to a higher indifference curve. This
is based on the assumption of monotonic preferences. Thus, as long as the consumer is on the same indifference
curve, an increase in quantity of good X must be compensated by a fall in quantity of good Y.
2. Higher indifference curve gives greater level of utility
An indifference curve to the right gives higher level of satisfaction. It is because a higher indifference curve
consists of combinations with more of good X, or more of good Y, or more of both. As long as marginal utility
of a commodity is positive, an individual will always prefer more of that commodity as this will increase the level
of satisfaction. The underlying assumption here is the assumption of monotonic preference which represents that
a consumer will prefer a combination which contains more of at least one of the goods and no less of the other.
(Refer to Figure 2.4)
3. Two indifference curves never intersect each other.
Two indifference curves intersecting each other will lead
to conflicting results. To explain this, we assume that two
indifference curves intersect each other as shown in the
Figure 2.5. As points A and B lie on the same indifference
curve IC1, utilities derived from combination A and
combination B will give the same level of satisfaction.
Similarly, as points A and C lie on the same indifference
curve IC2, utility derived from combination A and
combination C will give the same level of satisfaction.
From this, it follows that utility from point B and from
point C will also be the same. But this is clearly an absurd
result, as on point B, the consumer gets more units of good
Y with the same quantity of good X. So consumer is better
off at point B than at point C.
Thus, it is clear that intersecting indifference curves will lead to conflicting results. Hence, two indifference
curves cannot intersect each other.
4. A typical indifference curve is strictly convex to the origin.
It is strictly convex because when a consumer moves downwards along the indifference curve, Marginal Rate of
Substitution (MRS) between the two goods continuously falls due to the operation of the law of diminishing
marginal utility. Marginal Rate of Substitution (MRS) is the rate at which the consumer is willing to sacrifice the
quantity of one good to obtain one more unit of the other good. Let the two goods consumed be X and Y. As
the consumer goes on obtaining more and more units of X, marginal utility of X goes on declining. Therefore,
the consumer is willing to sacrifice less and less of Y each time he obtains one extra unit of X. In other words,
MRSxy continuously falls. Hence, the indifference curve is convex to the origin.
Top Tip
• If MRSxy is constant, the indifference curve will be downward sloping straight line.
• If MRSxy is increasing, the indifference curve will be downward sloping concave curve.
Consumer’s Budget Set

Suppose a consumer has only a fixed amount of money income (M) to spend on two goods X and Y. The
prices of the goods are given in the market, Px and Py respectively. The consumer cannot buy any and every
combination of the two goods that he may want to consume. The consumption bundles that are available to
the consumer depend on the prices of the two goods and the income of the consumer. Given his fixed money
income and the prices of the two goods, the consumer can afford to buy only those bundles which cost him less
than or equal to his income.
Budget set
The set of bundles available to the consumer is called the budget set.
The budget set is the collection of all bundles that the consumer can buy with his income at the prevailing
market prices.
If the consumer wants to buy Qx quantity of good X, he will have to spend Px.Qx amount of money. Similarly, if
the consumer wants to buy Qy quantity of good Y, he will have to spend Py.Qy amount of money. Therefore, if the
consumer wants to buy the bundle consisting of Qx quantity of good X and Qy quantity of good Y, he will have to
spend Px.Qx + Py.Qy amount of money. He can buy this bundle only if he has at least Px.Qx + Py.Qy amount of
money. Given the prices of the goods and the income of a consumer, he can choose any bundle as long as it costs
less than or equal to his income (M). In other words, the consumer can buy any bundle (Qx, Qy) such that:
Px.Qx + Py.Qy ≤ M
Budget set is represented by this inequality.
The above inequality is called the consumer’s budget constraint. This inequality says that the total
expenditure on the two goods must be less than or equal to the consumer’s income.
Example: Suppose the consumer’s income is `20 and the prices of the two goods X and Y are `4 and `2
respectively. The budget set of the consumer will include the consumption bundles 5X + 0Y, 3X + 4Y, 2X + 3Y,
0X + 10Y, etc. or (5,0),(3,4), (2,3), (0,10), etc. Expenditure on each of these bundles is calculated as follows.
(i) 5 × 4 + 0 = `20
(ii) 3 × 4 + 4 × 2 = `20
(iii) 2 × 4 + 3 × 2 = `14
(iv) 0 + 10 × 2 = `20
Thus, all these bundles cost the consumer less than or equal to his income `20. The consumer cannot afford to
buy any bundle like 3X + 10Y because it costs 3 × 4 + 10 × 2 = `32, which is more than his income `20.
Changes in the budget set

A budget set is dependent on income of the consumer
and the prices of the two goods in the market and is
based on the assumption that these remain unchanged.
Thus, a change in income of the consumer or change in
price of one good or both the goods can lead to a change
in budget set.
Suppose in the above example, consumer’s income
increases to `28, but the prices of the two goods X and Y
remain unchanged. Now, the budget set of the consumer
will include the consumption bundles 7X + 0Y, 6X + 2Y,
5X + 4Y, 4X + 3Y, 6X + 1Y, 0X + 14Y, etc. because all
these bundles cost less than or equal to the consumer’s
new income `28.
Budget line
From the budget set if only such bundles are taken on
which total expenditure equals the consumer’s income and
plotted on a graph, we get a line called the budget line. In
other words, budget line consists of all bundles which cost
exactly equal to the consumer’s money income (M).
A budget line is the locus of points that represent
such combinations of the two goods on which total
expenditure equals the consumer’s income.
The equation of the budget line is: Px.Qx + Py.Qy = M
Figure 2.6 shows that the budget line AB is a straight line with horizontal intercept M/Px and vertical intercept
M/Py. The horizontal intercept M/Px represents the quantity of good X that the consumer can buy if he spends
his entire income on good X. Similarly, the vertical intercept M/Py represents the quantity of good Y that the
consumer can buy if he spends his entire income on good Y.
Example: If Px = `4, Py = `2 and income M = `20, then equation of the budget line will be:
Px.Qx + Py.Qy = M
Substituting Px = 4, Py = 2 and M = 20, we get 4Qx + 2Qy = 20, which is the equation of the budget line.
Consumption bundles on the budget line can be (5, 0), (4, 2), (3, 4), (2, 6), (1, 8) and (0, 10), i.e., 5X + 0Y, 4X
+ 2Y, 3X + 4Y, 2X + 6Y, 1X + 8Y and 0X + 10Y.
TABLE 2.7: Budget line schedule
Bundle Good X (units) Good Y (units) Money spent = Income (`)
A 5 0 5 × 4 + 0 = 20
B 4 2 4 × 4 + 2 × 2 = 20
C 3 4 3 × 4 + 4 × 2 = 20
D 2 6 2 × 4 + 6 × 2 = 20
E 1 8 1 × 4 + 8 × 2 = 20
F 0 10 0 + 10 × 2 = 20
The consumption bundle A (5X + 0Y) is the combination of the goods X and Y that the consumer can buy if
he spends his entire income on good X. He can buy maximum 5 units of good X. Similarly, the consumption
bundle F (0X + 10Y) is the combination of the goods X and Y that the consumer can buy if he spends his entire
income on good Y. He can buy maximum 10 units of good Y.
In Figure 2.7, FA is the budget line of the consumer. The

quantity of good X is shown on the X-axis and quantity of good
Y on the Y-axis. The horizontal intercept M/Px represents the
consumption bundle that the consumer can buy if he spends his
entire income on good X. Similarly, the vertical intercept M/Py
represents the consumption bundle that the consumer can buy if
he spends his entire income on good Y.
Top Tip
What does a point below the budget line represent?
Any point below the budget line (say, point G in Figure 2.2)
represents a consumption bundle which costs less than the
consumer’s income. Thus, if the consumer buys such a bundle, he
will have some money left over. The consumer could spend this
extra money on either of the two goods, and thus, buy a bundle
which consists of more of, at least, one of the goods, and no less of
the other as compared to the bundle lying below the budget line.
 Bundles which costs exactly equal to consumer’s money income (A, B, C, D, E and F) lie budget line while the bundles of
budget set lie either on or below the budget line.
 Bundles which cost less than consumer’s money income (like G) shows under spending. They lie inside the budget line.
 Bundles which cost more than consumer’s money income (like H) are not affordable to the consumer. They lie outside the
budget line.
Price Ratio and the Slope of the Budget Line

The slope of the budget line is (–) Px/Py.
Top Tip
Coefficient of x A
We know that slope of a straight line Ax + By = C is: (−) = (−)
Coefficient of y B
Px
Since budget line is also a straight line, therefore, slope of Budget Line QxPx + QyPy = M is (–) .
Py
The Price Ratio (Px/Py) measures the rate at which the consumer is able to substitute/exchange good X for
good Y when he spends his entire income.
Any point on the budget line represents a bundle which costs the consumer his entire budget (income).
Now suppose the consumer wants to have one more unit of good X. He can do it only if he gives up some
amount of the other good Y. How many units of good Y does he have to give up if he wants to have an extra
quantity of good X would depend on the prices of the two goods. One unit of good X costs Px. Therefore, he
will have to reduce his expenditure on good Y by Px amount. With Px, he could buy Px/Py quantity of good Y.
Therefore, he will have to give up Px/Py quantity of good Y.
In other words, in the given market conditions, the consumer can exchange good X for good Y at the rate Px/Py.
So, the price ratio (Px/Py) is also called the market rate of exchange between the two goods X and Y.
Example: In our example, Px = `4 and Py = `2. Since one unit of good X costs `4, therefore, in order to gain
one additional unit of good X the consumer will have to reduce expenditure on good Y by `4. With `4, he
could buy 4/2 = 2 units of good Y, which is equal to Px/Py. Therefore, 2 units of good Y must be sacrificed to
gain an additional unit of good X.
Px/Py gives the number of units of good Y the consumer has to sacrifice to obtain an additional unit of good X.
In our example, Px = `4, Py = `2 and consumer’s income = `20. Therefore, equation of the budget line is
4Qx + 2Qy = 20; and the slope of this budget line = –4/2
Top Tip
The slope is negative as it shows the number of units of good Y sacrificed to obtain one additional unit of good X. However,
for analysis, absolute value of the slope of budget line is always considered.
Properties of budget line

1. Budget line is negatively sloped (downward sloping)
The budget line is downward sloping because to buy more quantity of one good the consumer must give up
some quantity of the other good. It is because the consumer's income is fixed.
2. Budget line is a straight line
Budget line is a straight line because the prices of the two goods are constant. Therefore, the market rate of
exchange (i.e. Px/Py) between the two goods remains constant. Market rate of exchange measures the slope of
budget line, which is constant.
Causes of change in budget line
1. Change in income of the consumer
Change in income shifts the budget line parallel because consumer can now buy more or less of both the goods
in the same proportion.
Case I: Suppose the consumer’s income increases but the prices of the two goods remain unchanged.
The consumer can now buy more of both the goods at the prevailing market prices. Since prices of the two goods(Px and Py)
remain unchanged, therefore the slope of the new budget line is the same as the slope of the budget line prior to the change
in the consumer’s income. So, there is a parallel outward shift of the budget line (from AB to CD in panel (a) of figure 2.7).
Case II: If the consumer’s income decreases but the prices of the two goods remain unchanged.
The consumer can now buy less of both the goods at the prevailing market prices. Since prices of the two goods
(Px and Py) remain unchanged, therefore the slope of the new budget line is the same as the slope of the budget line
prior to the change in the consumer’s income. So, there is a parallel inward shift of the budget line (from AB to EF in
panel (b) of figure 2.8).
2. Change in price of one or both the goods

Change in price of one or both the goods changes the maximum quantity that the consumer can buy of one or
both the goods, changing one or both the intercepts (ends) of the budget line.
Case I: Suppose the price of good X falls but the price of good Y and the consumer’s income remain unchanged.
Suppose the price of good X falls but the price of good Y and consumer’s income remain unchanged. Now, the
consumer will be able to buy more of good X in same money income pushing the X-intercept of the budget line
away from origin, keeping the Y-intercept constant. The budget line rotates outwards and becomes flatter (from
AB to AC in panel (a) of figure 2.9).
Case II: Suppose the price of good X rises but the price of good Y and the consumer’s income remain unchanged.
If the price of good X rises but the price of good Y and consumer’s income remain unchanged, the consumer
will be able to buy less of good X in same money income pushing the X-intercept of the budget line towards the
origin, keeping the Y-intercept constant. The budget line rotates inwards and becomes steeper (from AB to AD
in panel (b) of figure 2.9).
Case III: Suppose the price of good Y falls but the price of good X and the consumer’s income remain unchanged.
Since price of good Y falls, the consumer will be able to buy more of good Y in same money income pushing
the Y-intercept of the budget line away from origin, keeping the X-intercept constant. The budget line rotates
outwards (from AB to BC in panel (a) of figure 2.10).
Case IV: Suppose the price of good Y rises but the price of good X and the consumer’s income remain unchanged.
Since price of good Y rises, the consumer will be able to buy less of good Y in same money income pushing the
Y-intercept of the budget line towards origin, keeping the X-intercept constant. The budget line rotates inwards
(from AB to BC in panel (b) of figure 2.10).
Conditions of consumer’s equilibrium –Indifference curve analysis/Ordinal

utility approach/Hicksian analysis of demand
Consumer’s equilibrium means maximum satisfaction level of the consumer, given his money income and
prices of the two goods in the market.
Let the two goods be X and Y, whose prices are Px and Py respectively. The two conditions of consumer’s
equilibrium under Indifference Curve Analysis (Ordinal Utility Analysis) are:
Px
1. Marginal Rate of Substitution (MRS) and Price Ratio must be equal, i.e. MRS =
Py
2. MRS must be diminishing as consumption of good X increases.
Explanation
• MRS is the rate at which the consumer is willing
to substitute good X for good Y and Px/Py is the
rate at which the consumer is able to exchange
good X for good Y in the market. At equilibrium,
the two rates must be the same, i.e. MRS = Px/Py.
If MRS > Px/Py, it means that the consumer is
willing to sacrifice more of Good Y than he needs
to give up actually in the market for an extra unit
of Good X. The consumer will buy more and
more of X. As consumption of Good X increases,
its marginal utility diminishes due to the Law of
Diminishing Marginal Utility. Thus, MRS will
fall. This will continue till MRS = Px/Py and
consumer is in equilibrium.
• MRS must be diminishing as consumption of
good X increases, symbolises fall in marginal
utility due to which the consumer will not further
increase its consumption. If it does not fall, he
will keep on increasing the consumption of good
X and will not reach equilibrium.
Diagrammatical Presentation
Diagrammatically, the two conditions of consumer’s
equilibrium under indifference curve analysis are:
1. Budget line is tangential to a particular indifference
curve at a unique combination of the two goods. It is
because if the budget line is tangent to an indifference
curve at a point, the slope of the indifference curve and the
slope of budget line are equal (i.e., MRS = Px/Py) at that
point.
2. The indifference curve is strictly convex to the origin at equilibrium. This is because MRS diminishes as
consumption of good X increases.
Key Terms
Ordinal utility analysis—It assumes that the consumer does not measure utility in numbers, but he ranks various
consumption bundles.
Indifference curve—The locus of all the combinations of the two goods, each combination providing the same level of
satisfaction.
Marginal Rate of Substitution (MRS)—The ratio of units of good Y that the consumer is willing to sacrifice to get an
additional unit of good X, so that his total utility remains constant.
Law of Diminishing Marginal Rate of Substitution—It states that the consumer will be willing to sacrifice lesser units of
good Y, so as to gain each additional unit of the good X.
Indifference Map—The set (or family) of indifference curves representing different levels of satisfaction for the
consumer.
Monotonic Preferences—A consumer’s preferences are monotonic if between any two bundles, the consumer prefers
the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.
Budget set—It includes those bundles which cost less than or equal to his income. Budget set is represented by the
inequality:
Px.Qx + Py.Qy ≤ M.
Budget line—Budget line consists of all bundles which cost exactly equal to the consumer’s money income. The equation
of the budget line is Px.Qx + Py.Qy = M.
Slope of the Budget Line—The slope of the budget line is (–) Px/Py.
Numerical 5
A consumer consumes only two goods X and Y. His money income is `200 and the prices of Goods X and Y are
`40 and `20 respectively.
(i) Write two such combinations of X and Y which lie on the budget line.
(ii) Write two such combinations of X and Y which are part of his budget set but do not lie on his budget line.
(iii) What is the equation of budget line and its slope?
(iv) Can the consumer afford a bundle 4X and 5Y? Explain.
(v) What will be the MRS when the consumer is in equilibrium? Explain. (6 marks)
Solution: (i) 1X + 8 Y, 2X + 6Y
(ii) 1X + 2Y, 2X + 2Y
(iii) Equation of the budget line is PxQx + PyQy= M
Substituting Px = 40, Py = 20 and M=200, we get the equation of budget line
40Qx + 20Qy = 200
Slope of budget line = (–) Px/Py = – 40/20 = – 2
(iv) Total expenditure on the bundle 4X + 5Y = 4×40 + 5×20 = 160 + 100 = `260
Since the income is only `200, the consumer cannot afford the bundle 4X + 5Y.
(v) When the consumer is in equilibrium, MRS = Px/Py
Substituting Px = 4, Py = 2, we have MRS = 4/2 = 2 : 1
Do it yourself 5
Suppose a consumer can afford to buy 6 units of good X and 8 units of good Y if she spends her entire income.
The prices of two goods are `6 and `8 respectively. How much is the consumer’s income? (3 marks)
[Ans. `100]
Numerical 6
The table shows bundles along an indifference curve for two goods X and Y:
X 0 1 2 3 4 5 6 7 8 9 10
Y 30 23 17 12 8 5 3 2 1.2 0.5 0
(i) Calculate Marginal Rate of Substitution (MRS) at each point along this indifference curve.
(ii) If the price of X is `3 and the price of Y is `1, what is the utility maximising bundle? Explain.
(iii) Determine the income of the consumer. (6 marks)
Solution: (i) Marginal Rate of substitution (MRS) means the ratio of units of good Y the consumer is willing to
sacrifice in order to obtain one more unit of good X, i.e., MRS = DY/DX.
X 0 1 2 3 4 5 6 7 8 9 10
Y 30 23 17 12 8 5 3 2 1.2 0.5 0
MRS – 7Y : 1X 6Y : 1X 5Y : 1X 4Y : 1X 3Y : 1X 2Y : 1X 1Y : 1X 0.8Y : 1X 0.7Y : 1X 0.5Y : 1X
(ii) Px = 3, Py = 1
The consumer is in equilibrium when MRS = Px/Py = 3 : 1
Therefore, utility maximising bundle is 5X + 5Y.
(iii) Consumer’s Income = 5 × 3 + 5 × 1 = `20
Do it yourself 6
A consumer consumes only two goods X and Y. His money income is `20 and the prices of Goods X and Y are `4
and `5 respectively.
(i) What will be the MRSxy when the consumer is in equilibrium? Explain.
(ii) What is the equation of budget line and its slope?
(iii) How much of the good X can the consumer have by spending his entire income on that good? How much
of the good Y can the consumer have by spending his entire income on that good?
(iv) How does the budget line change if consumer’s income increases to `40 but the prices remain unchanged?
(v) How does the budget line change if price of good Y falls by `1 but the price of good X and income remain
unchanged?
(vi) What happens to the budget set and budget line if both the prices as well as the income double? (6 marks)
Numerical 7
A consumer consumes only two goods X and Y. His money income is `24 and the prices of Goods X and Y are `4
and `2 respectively. Answer the following questions:
(i) What is the equation of budget line and its slope?
(ii) How much of the good X can the consumer have by spending his entire income on that good?
(iii) How much of the good Y can the consumer have by spending his entire income on that good?
(iv) How does the budget line change if consumer’s income increases to `48 but the prices remain unchanged?
(v) How does the budget line change if price of good X falls by `1 but the price of good Y and income remain
unchanged? (6 marks)
Solution: (i) Equation of the budget line is PxQx + PyQy = M
Substituting Px = 4, Py = 2 and M = 24, we get the equation of budget line
4Qx + 2Qy = 24
Slope of budget line = (–) Px/Py = – 4/2 = – 2
(ii) Qx = M/Px = 24/4 = 6, i.e. if the consumer spends his entire income on good X he can have 6 units of it.
(iii) Qy = M/Py = 24/2 = 12, i.e. if the consumer spends his entire income on good Y he can have maximum
12 units of it.
(iv) Px =4, Py = 2, M′ = 48
Equation of new budget line: 4Qx + 2Qy = 48.
If there is an increase in the money income of the consumer, prices of the two goods X and Y remaining
unchanged, the consumer can buy more of both the goods at prevailing market prices. Therefore,
the new budget line shifts outward to the initial budget line. Since prices of the two goods remain
unchanged the slope of the new budget line is the same as the slope of the initial budget line and
hence, the new budget line will shift parallel to the initial budget line.
(v) P′x = 3, Py = 2, M = 24
Equation of new budget line: 3Qx + 2Qy = 24.
Since price of good X falls, the consumer will be able to buy more of good X in same money income
pushing the X-intercept of the budget line away from origin, keeping the Y-intercept constant. The
budget line rotates outwards and becomes flatter.
Do it yourself 7
A consumer has total money income of `500 to be spent on two goods X and Y with prices of `50 and `10 per
unit respectively. On the basis of the given information, answer the following questions: (4 marks)
(a) Give the equation of the budget line for the consumer.
(b) What is the value of slope of the budget line?
(c) How many units can the consumer buy if he is to spend all his money income on good X?
(d) How does the budget line change if there is a 50% fall in price of good Y?
RECAP
Ordinal Utility
Under ordinal utility analysis, the consumer does not measure utility in numbers, but he ranks various consumption bundles,
e.g. utility derived from the consumption bundle 10X + 8Y is more than that from the bundle 8X + 8Y.
Indifference curve
Indifference curve is the locus of all the combinations of the two goods, each combination providing the same level of
satisfaction.
Marginal Rate of Substitution (MRS)
MRS is the ratio of units of good Y that the consumer is willing to sacrifice to get an additional unit of good X, so that his total
utility remains constant. In other words, MRS is the rate at which the consumer is willing to trade-off or substitute good X for
good Y, so that his total utility remains constant. MRS measures the slope of indifference curve.
Law of Diminishing Marginal Rate of Substitution
It states that the consumer will be willing to sacrifice lesser units of good Y, so as to gain each additional unit of the good X.
This is an extension of law of diminishing marginal utility. This is because as the consumption of good X increases, the marginal
utility (MU) derived from each additional unit of good X falls (due to the Law of Diminishing Marginal Utility). So, with increase
in the quantity of good X, the consumer will feel the inclination to sacrifice lesser units of good Y.
Shape of an Indifference Curve
A typical indifference curve is convex to the origin because of the law of Diminishing Marginal Rate of Substitution (MRS).
Shape of an Indifference Curve in case of goods being perfect substitutes
In case of goods being perfect substitutes, the marginal rate of substitution(MRS) does not diminish. It remains constant.
Therefore, the indifference curve will be a straight line.
Indifference Map
Indifference Map is the set (or family) of indifference curves representing different levels of satisfaction for the consumer.
Monotonic Preferences
A consumer’s preferences are monotonic if between any two bundles, the consumer prefers the bundle which has more of at
least one of the goods and no less of the other good as compared to the other bundle.
For example, a consumer’s preferences are monotonic if between any two bundles (3, 10) and (2,10), the consumer prefers
(3,10) to (2,10) because the first bundle (3,10) has more units of good X and no less of good Y, and thus the consumer gets
more total utility.
Properties or characteristics of indifference curve
1. Indifference curve slopes downwards from left to right (i.e. negatively sloped) because in order to have more of good X,
the consumer has to forego some units of good Y, so that his total utility level remains the same and he remains on the
same indifference curve. If the consumer does not forego some units of good Y with an increase in quantity of good X, it
will mean consumer having more of good X with same quantity of good Y, taking him to a higher indifference curve. (This
is based in the assumption of monotonic preferences.)
2. Higher indifference curve (an indifference curve to the right) gives greater level of utility (satisfaction) because a higher
indifference curve consists of combinations with more of good X, or more of good Y, or more of both. As long as marginal
utility of a commodity is positive, more goods will increase the level of total utility. The underlying assumption here is the
assumption of monotonic preference which represents that a consumer will prefer a combination which contains more of
at least one good and no less of the other.
3. Two indifference curves never intersect each other because two indifference curves intersecting each other (as shown in
the figure 2.5) will lead to conflicting results. As points A and B lie on the same indifference curve IC1, combination A and
combination B will give the same level of satisfaction. Similarly, as points A and C lie on the same indifference curve IC2,
combination A and combination C will give the same level of satisfaction. From this, it follows that utility from point B and
from point C will also be the same. But this is clearly an absurd result, as on point B, the consumer gets more units of good
Y with the same quantity of good X. So consumer is better off at point B than at point C. Thus, it is clear that intersecting
indifference curves will lead to conflicting results. Hence, two indifference curves cannot intersect each other.
Budget set
Budget set is the collection of all bundles that the consumer can buy with his income at the prevailing market prices. Budget
set includes those bundles which cost less than or equal to his income (M). Budget set is represented by the inequality:
Px.Qx + Py.Qy ≤ M
(i.e. budget constraint). This inequality says that the total expenditure on the two goods must be less than or equal to the
consumer’s income.
Budget line
Budget line from the budget set if only such bundles are taken on which total expenditure equals the consumer’s income and
plotted on a graph, we get a line called the budget line. In other words, budget line consists of all bundles which cost exactly
equal to the consumer’s money income. The equation of the budget line is
Px.Qx + Py.Qy = M.
The horizontal intercept (M/Px) represents the quantity of good X that the consumer can buy if he spends his entire income
on good X. Similarly, the vertical intercept (M/Py) represents the quantity of good Y that the consumer can buy if he spends
his entire income on good Y.
Price Ratio and the Slope of the Budget Line
The slope of the budget line is (–) Px/Py. The Price Ratio (Px/Py) measures the rate at which the consumer is able to substitute
good X for good Y when he spends his entire income. So, Px/Py is called the market rate of exchange.
1. Budget line is negatively sloped (downward sloping) because to buy more quantity of one good the consumer must give
up some quantity of the other good. It is because the consumer's income is fixed.
2. Budget line is a straight line because the prices of the two goods are constant. It makes the market rate of exchange (Px/
Py) between the two goods constant. Market rate of exchange measures the slope of budget line, which is constant.
Changes in the Budget Set
A budget set is dependent on income of the consumer and the prices of the two goods in the market. Thus, a change in income
of the consumer or change in price of one good or both the goods can lead to a change in budget set.
Causes of change in budget line
1. Change in income of the consumer: Increase (decrease) in income shifts the budget line parallel outward (inward) because
consumer can now buy more or less of both the goods X and Y in the same proportion.
Since prices of the two goods (Px and Py) remain unchanged, therefore the slope of the new budget line remains the same.
So, there is a parallel shift of the budget line.
2. Change in prices of one or both the goods: Change in prices of one or both the goods changes the maximum quantity of
one or both the goods which the consumer can buy, and thus changing one or both the ends of the budget line.
If the price of good X falls but the price of good Y and consumer’s income remain unchanged, the consumer will be able to buy
more of good X in same money income pushing the X-intercept of the budget line away from origin, keeping the Y-intercept
constant. The budget line rotates outwards and becomes flatter. (Panel (a) in Figure 2.9)
Similarly, if price of good X rises, the consumer will be able to buy less of good X in same money income pushing the X-intercept
of the budget line towards the origin, keeping the Y-intercept constant. The budget line rotates inwards and becomes steeper.
Conditions of consumer’s equilibrium
Let the two goods be X and Y, whose prices are Px and Py respectively. The two conditions of consumer’s equilibrium under
Indifference Curve Analysis (Ordinal Utility Analysis) are:
1. Marginal Rate of Substitution (MRS) and Price Ratio must be equal, i.e. MRS = Px/Py
2. MRS must be diminishing as consumption of good X increases.
Explanation:
1. If MRS > Px/Py, it means that the consumer is willing to sacrifice more of Good Y than he is actually required to sacrifice in
the market for an extra unit of Good X. The consumer will buy more and more of X. As consumption of Good X increases,
its marginal utility diminishes due to the Law of Diminishing Marginal Utility. Thus, MRS will fall. This will continue till MRS
= Px/Py and consumer is in equilibrium.
2. MRS must be diminishing as consumption of good X increases, symbolises fall in marginal utility due to which the consumer
will not further increase its consumption. If it does not fall, he will keep on increasing the consumption of good X and will
not reach equilibrium.
Diagrammatical Presentation
Diagrammatically, the two conditions for consumer’s equilibrium are :
1. Budget line is tangential to a particular indifference curve at a point, where the slope of the indifference curve and the
slope of budget line are equal (i.e., MRS = Px/Py).
2. The indifference curve is strictly convex to the origin at equilibrium (i.e., MRS diminishes as consumption of good X
increases).
Figure 2.11 illustrates the consumer’s equilibrium. The budget line AB is tangent to IC2 at point E. This is the point of consumer’s
equilibrium. The equilibrium consumption bundle is (Qx, Qy).
The consumer cannot get satisfaction level higher than IC2 because his income does not permit him to move above the budget
line AB on the higher indifference curve IC3.
The consumer will not like to purchase any other bundle on the budget line AB, for example the bundle at C and D, because
they all lie on the lower indifference curve, and give him lower satisfaction.
1. A point below the budget line represents ___________ . (Fill up the blank with correct answer)
2. If Marginal Rate of Substitution is constant throughout, the Indifference curve will be: (Choose the correct alternative)
(a) Parallel to the X-axis.
(b) Downward sloping concave.
(c) Downward sloping convex.
(d) Downward sloping straight line.
3. If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be: (Choose the correct alternative)
(a) Downward sloping convex
(b) Downward sloping concave
(c) Downward sloping straight line
(d) Upward sloping convex
4. _________ measures the slope of indifference curve. (Choose the correct alternative)
(a) Budget Line
(b) Marginal Rate of Substitution
(c) Marginal Rate of Transformation
(d) Price Ratio

HOTS 2.2
Q.1 Explain the meaning of budget line. What can cause a change in it ? Explain. (4 marks)
Ans. A budget line is the locus of points that represent such combinations of two goods on which total expenditure
equals total income.
Causes of change in budget line are –
(i) Change in income of the consumer.
(ii) Change in prices of one or both the commodities.
Explanation
(i) Change in income shifts the budget line parallel because consumer can now buy more or less of either of
the goods in the same proportion.
(ii) Change in price changes the maximum quantity consumer can buy of one or both the goods, changing
one or both the ends of budget line.
Q.2 Why should marginal rate of substitution diminish for a stable consumer's equilibrium? (3 marks)
Ans. Marginal rate of substitution (MRS) is the rate at which consumer is willing to trade-off one good for the
other. It depends on the quantity of the two goods s/he is consuming. A rational consumer will sacrifice lesser
units of Good Y so as to acquire additional units of Good X, due to the application of law of diminishing
marginal utility. MRS should be diminishing as additional consumption of Commodity X, symbolises fall in
marginal utility due to which the consumer will not further increase its consumption. If it does not fall, s/he
will keep on increasing the consumption of Commodity-X and will not reach a stable equilibrium.
Q.3 A consumer consumes only two goods X and Y both priced at `3 per unit. If the consumer chooses
a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in
equilibrium? Give reasons. What will a rational consumer do in this situation? Explain. (4 marks)
Ans. The consumer is in equilibrium when Marginal Rate of Substitution is equal to the ratio of prices of the two
goods X and Y, i.e., MRS = Px/Py.
Since Px = 3 and Py = 3, therefore, Px/Py = 3/3 = 1. MRS = 3
Since MRS < Px/Py, therefore, the consumer is not in equilibrium.
Here, MRS > Px/Py. It means that to obtain one extra unit of good X the consumer is willing to sacrifice
more units of good Y than what he is required to sacrifice in the market. The consumer gains and buys
more quantity of good X. As he goes on obtaining more and more units of good X, marginal utility of
good X goes on declining due to the operation of the law of diminishing marginal utility. Therefore, the
consumer is willing to sacrifice less and less of good Y each time he obtains one extra unit of good X. In
other words, MRS continuously falls. The process continues till MRS becomes equal to Px/Py and the
consumer is in equilibrium.
(a) A budget set is the collection of all bundles of goods that a consumer wants to buy.
(b) An indifference curve is convex to the origin because of the operation of the law of diminishing
marginal utility.
Ans. (a) False: A budget set is the collection of all bundles of goods that a consumer can afford to buy with his
given income and the prices of the goods in the market.
(b) True: The indifference curve is convex to the origin because when a consumer moves downwards along the
indifference curve, Marginal Rate of Substitution (MRS) between the two goods continuously falls due to
the operation of the law of diminishing marginal utility.
(a) Marginal rate of substitution (MRS) is the term used to denote the rate at which the consumer is
required to sacrifice units of one good to obtain one more unit of the other good.
(b) At the point of consumer’s equilibrium marginal rate of substitution should be diminishing.
Ans. (a) False: Marginal rate of substitution (MRS) is the term used to denote the rate at which the consumer is
willing to sacrifice units of one good to obtain one more unit of the other good.
(b) True: At the point of consumer’s equilibrium, MRS falls because of the law of Diminishing Marginal Rate
of Substitution. So, the indifference curve is convex to the origin.
(a) Lower indifference curve represents higher level of satisfaction.
(b) Marginal rate of substitution is a measure of the slope of a budget line.
(c) A budget set is a collection of such bundles of goods that give same satisfaction.
Ans. (a) False: Lower indifference curve represents lower level of satisfaction because a point on a lower indifference
curve represents a consumption bundle which contains less good(s).
(b) False: Marginal rate of substitution (MRS) is a measure of the slope of indifference curve.
(c) False: Budget set is a collection such bundles of goods which cost less than or equal to the consumer’s
money income at the given prices.
Q.8 What is a budget line ? Why the budget line is left to right downward sloping? (3 marks)
Ans. Budget line is a graphical presentation of all those combinations of two goods which costs the consumer exactly
his income.
It is downward sloping because to buy more of one good, the consumer must reduce the purchase of the other
goods as income remains same.
Q.9 Discuss briefly, using a hypothetical schedule the concept of diminishing marginal rate of substitution.
(4 marks)
Ans.
Combination Good X (in units) Good Y (in units) MRSxy (ΔY/ΔX)
A 1 8 -
B 2 4 4Y:1X
C 3 2 2Y:1X
D 4 1 1Y:1X
Diminishing Marginal Rate of Substitution implies that a consumer is willing to sacrifice lesser unitsof Good Y
for every additional unit of Good X. As given in the schedule, moving from combination B to C the consumer
is willing to give up 2 units of Good Y so as to gain an additional unit of Good X(2Y : 1X), which diminishes
to 1Y : 1X in combination D.
Q.10 What is the slope of an Indifference curve? (1 mark)
Ans. Slope of the indifference curve = Marginal rate of substitution(DY/DX )
Q.11 Discuss briefly the following properties of an indifference curve, using diagram: 4 marks
(a) Convexity to origin
(b) Downward sloping from left to right
Ans. (a) An Indifference curve is convex to the origin due to Diminishing Marginal Rate of Substitution (DY/DX).
In the above diagram, the consumer is willing to sacrifice lesser and lesser units of good Y to gain one
additional units of good X.
(b) An Indifference curve is downward sloping – means that the indifference curve is negatively sloped.
This property signifies that to remain on the same level of satisfaction the consumer must forego units of
one good if he wishes to consume more units of the other good.
Q.12 Explain the following conditions: (4 marks)

(a) Movement along the same indifference curve.
(b) Shift from a lower to a higher indifference curve.
Ans. (a) Movement along the same indifference curve shows various bundles of two goods that provide equal
satisfaction to the consumer. In order to increase the consumption of one commodity, the consumer has to
sacrifice the consumption of the other and he moves up or down on the same indifference curve.
(b) A consumer will shift from a lower indifference curve to a higher indifference curve when he wants to have
a new bundle of two goods, which has more quantity of at least one good and no less of the other good
(monotonic preference). Alternatively, the new bundle may offer more quantity of both the goods, thereby
providing the consumer greater level of satisfaction.
Q.13 ‘‘For a consumer to be in equilibrium position, marginal rate of substitution between the two goods must
be equal to ratio of prices of the two goods.’’ Do you agree with the given statement? Justify your answer.
(6 marks)
Ans. The given partially statement is true.
As the consumer will get stable equilibrium only when the following two conditions are satisfied:
(i) Slope of Indifference Curve is equal to the price ratio or MRSxy = Px/Py
(ii) MRSxy must be diminishing.
There may be following two situations that may arise:
• If MRSxy > Px/Py consumer is willing to pay more for commodity X than the price preventing in the
market It will induce him to purchase more of X less of Good Y, which leads to decline of MRS. This will
continue until MRSxy = Px/Py.
• It must be supported by the second condition i.e. MRS must diminish.
Thus, the consumer will get stable equilibrium only when MRSxy = Px/Py and Indifference curve is convex to
the origin.
Q.14 Suppose a consumer whose budget is `500, wants to consume only two goods, Good X and Good Y. The
goods are respectively priced at `50 and `25.
Answer the following questions on the basis of the given information :
(a) State the budget equation of the consumer.
(b) What is the slope of the budget line ?
(c) How many units can she purchase if she spends the entire `500 on Good X ?
(d) How many units can she purchase if she spends the entire `500 on Good Y, given that the price of
good Y has doubled ? (6 marks)
Ans. (a) PxQx + PyQy = M

50.Qx + 25.Qy = 500
(b) Slope = –Px/Py = –50/25 = –2
(c) Qx = M/Px = 500/10 = 10 units of Good X.
(d) Qy = M/Py = 500/50 = 10 units of Good Y. (since price of commodity Y has doubled)
Q.15 A rational consumer is consuming only two goods, Good X and Good Y. The prices of the goods are `20
and `10 respectively.
Her total money income is `200. Answer the following questions, using the given information :
(i) State her Budget line equation.
(ii) State the slope of the Budget line of the consumer.
(iii) If she decides to spend her entire income on Good Y, how many units of Good Y can she buy ? (3 marks)
Ans. (i) Px.Qx + Py.Qy = M
20.Qx + 10.Qy = 200
(ii) Slope of Budget line = (ignoring minus sign) = 2
(iii) If the entire income is spent on Good Y Qx is zero;
Px.Qx + Py.Qy = M
20 × 0 + 10 × Qy = 200
Qy = 20 units.
2.3 Demand and Price Elasticity of Demand

In the previous section, we studied the consumer’s
equilibrium given the prices of the goods, the consumer’s
income and his preferences. It was observed that the amount
of a good that the consumer purchases optimally, depends
on the price of the good itself, the price of other goods, the
consumer’s income and his tastes and preferences. Whenever
one or more of these factors change, the quantity of the
good demanded by the consumer is also likely to change. In
this section, we shall change one of these factors at a time
and study how the demand of the good by the consumer is
related to that factor.
Demand, Demand Curve and its Slope
Demand for a commodity refers to the quantity of the
commodity that a consumer is willing to buy and is able
to afford at a given price during a period of time, other
factors remaining unchanged.
If the prices of other goods, the consumer’s income and
his tastes and preferences remain unchanged, the quantity
demanded of a good that the consumer is willing to buy,
becomes entirely dependent on its price.
Demand curve is a graphical presentation of various
quantities of a commodity that a consumer is willing and
able to buy at different prices during a period of time,
other factors remaining the same.
Slope of demand curve

A linear demand curve can be written as q = a – bp, where ‘–b’ is the slope of the demand curve.
The slope of the demand curve measures the rate at which demand changes due to change in its price, i.e. Dq/Dp.
When price of the good rises by `1, the quantity demanded falls by b units.
Slope of demand curve

A linear demand curve can be written as: q = a – bp
where: (i) ‘a’ is the intercept (at price 0, the quantity demanded is ‘a’).
(ii) ‘–b’ is the slope of the demand curve.
Slope of any function measures the change in dependent variable due to change in independent variable.
In the demand function, quantity demanded depends on price of the good.
Therefore, slope of a demand curve measures the rate at which quantity demanded changes due to change in price of the good,
i.e., Dq/Dp.
Thus, slope of demand curve q = a – bp is given by Dq/Dp.
Law of demand with the help of a Demand Schedule

Law of Demand states that other things remaining unchanged, there is a negative (or inverse) relation between
demand for a commodity and its price. In other words, when price of the commodity increases, demand for it falls
and when price of the commodity decreases, demand for it rises, other factors remaining the same.
The law of demand is based on the assumption of ceteris paribus, which literally means ‘other things remaining
unchanged’. That is:
• Prices of other goods remain unchanged,
• Consumer’s income remain constant, and
• Tastes and preferences of the consumer remain unchanged.
Law of demand can be understood with the help of a demand schedule.
Demand schedule is a tabular presentation showing the different quantities of a good that a consumer is
willing and able to buy at different prices during a period of time.
TABLE 2.8: Demand Schedule of Good X
Price ( `per unit) Demand(units)
50 5
45 10
40 15
Demand schedule given in Table 2.8 illustrates that as price falls from `50 per unit to `40 per unit, demand
for the good rises from 5 units to 15 units. Thus, more quantity of a good are demanded when its price falls,
ceteris paribus.
Reasons behind Law of Demand– Derivation of law of demand from the law of
diminishing marginal utility
Why is there an inverse relationship between price of a good and its quantity demanded, other things remaining
the same? Let us understand this using utility analysis.
(a) Using the principle MU = Price
As we consume more and more units of a commodity, marginal utility (MU) of each successive unit consumed
goes on diminishing due to the operation of law of diminishing marginal utility. Therefore, we will be willing to
pay less for each successive unit. Thus, we will buy more units of a commodity only when its price falls.
A consumer buys a good only up to the point where marginal utility and price are equal, i.e., MU = Price.
Now, suppose price falls. The situation now changes to: MU > Price. Since marginal utility is greater than price,
this induces the consumer to buy more of the good. This shows that when price of a good falls, the consumer
demands more of that good.
Conversely, if price rises, then MU < Price. Therefore, the consumer will buy less quantity of the good.
This establishes the inverse relationship between price of a good and its quantity demanded.
(b) Using the law of equi-marginal utility
Suppose a consumer consumes only two goods X and Y. Let their respective prices be Px and Py. Other things
remaining unchanged, the consumer will be in equilibrium when: MUx/Px = MUy/Py
Now, suppose price of good X (Px) falls. The situation changes. The consumer is no longer in equilibrium.
The above equality turns into an inequality: MUx/Px > MUy/Py. It means that per rupee marginal utility from
consumption of X is greater than from consumption of Y. This induces the consumer to buy more of X and less
of Y. The consumer transfers expenditure from Y to X. The consumer now demands more of X.
This shows that when price of a good falls, the consumer demands more of that good.
Extra Shots
Derivation of Demand Curve from Indifference Curves and Budget Constraints
Suppose a consumer consumes two goods X and Y whose market prices are Px and Py respectively, and his income is M. Panel (a)
in Figure 2.13 depicts his consumption equilibrium at point E, where budget line AB is tangent to the indifference curve IC1. The
consumer buys Qx and Qy quantities of good X and Y respectively. In panel (b), we plot price Px against Qx which is the first point
on the demand curve for good X.
Suppose the price of good X falls to Px1 with Py and M remaining constant. The budget set in panel (a), expands and new consumption
equilibrium is on a higher indifference curve (IC2) at point E, where he buys more of good X (Qx1 > Qx). Thus, demand for good X
rises as its price falls. So, the demand curve for good X is negatively sloped. This establishes the inverse relation between price of a
good and its quantity demanded.
The negative slope of the demand curve can also be explained in terms of the two effects namely, substitution effect and income effect
that come into play when price of a commodity changes.
1. Income effect: When price of a good falls, the purchasing power (real income) of the consumer increases as he will be able to
purchase more quantity of the good with the same money income. This phenomenon is called as income effect and is one of the
main reasons for negative slope of demand curve.
In the above example, when price of good X falls to Px1 with Py and M remaining constant, the consumer’s purchasing power
increases. So, with the same money income he is able to buy more quantity of good X (Qx1 > Qx).
2. Substitution effect: When price of good X falls, it becomes relatively cheaper than good Y. So, the consumer maximises his utility
by substituting good X for good Y. Thus, demand for good X rises ( Qx1 > Qx but Qy1 < Qy). This phenomenon is called as
substitution effect, and is one of the main reasons for negative slope of demand curve.
Movements along the Demand Curve

(Change in Quantity Demanded)
Other things remaining the same, any change in the price of the
good leads to a movement along its demand curve. A fall (rise) in
the price of the good leads to downward (upward) movement along
the demand curve. This is also called change in quantity demanded.
It refers to rise or fall in demand due to change in own price of
the good, other things remaining unchanged. Here, rise in demand
is called ‘expansion of demand’ while the fall in demand is called
‘contraction of demand’.
Expansion of demand (or increase in quantity
demanded)
It refers to rise in demand due to fall in own price of the good, other
things remaining unchanged. It leads to downward movement along
the demand curve.
TABLE 2.9: Expansion of Demand
Price (`) Demand (units)
10 50
9 70
Table 2.9 illustrates that when price of the good falls from `10 per unit
to `9 per unit, its quantity demanded rises from 50 units to 70 units.
Contraction of demand (or decrease in quantity

demanded)
It refers to fall in demand due to rise in own price of the good, other
things remaining unchanged. It leads to upward movement along
the demand curve.
TABLE 2.10: Contraction of Demand
10 50
11 30
Table 2.10 illustrates that if the price rises from `10 per unit to
` 11 per unit, its quantity demanded falls from 50 units to 30 units.
Shifts in the Demand Curve

(Change in Demand)
Price of the good remaining constant, change in any other factor
(e.g., income of the consumers, prices of related goods, etc.) leads to
a shift in the demand curve.
This is also called change in demand. It refers to rise or fall in
demand due to change in any factor, other than the own price of the
good. Here, rise in demand is called ‘increase in demand’ while the
fall in demand is called ‘decrease in demand’.
Increase in demand
It refers to more quantity demanded of a good at the same price, due to change in any factor other than the own
price of the good. It leads to a rightward shift of the demand curve.
TABLE 2.11: Increase in Demand
10 50
10 70
Table 2.11 illustrates that price of the good remaining constant at `10 per unit, due to any other factor, say, if
the income of a consumer rises, then he buys more quantity of it at the same price from 50 units to 70 units.
Decrease in demand
It refers to less quantity demanded of a good at the same price, due to change in any factor other than the own
price of the good. It leads to a leftward shift of the demand curve.
TABLE 2.12: Decrease in Demand
10 50
10 30
Table 2.12 illustrates that price of the good remaining constant at `10 per unit, due to any other factor, say
unfavourable change in taste and preference for it, a consumer buys less quantity of it at the same price, i.e.,
from 50 units to 30 units.
Determinants of Demand (Shift factors)

1. Change in income of the consumer
The demand function is a relation between the consumer’s demand for a good and its price when other things are
given. Instead of studying the relation between the demand for a good and its price, we can also study the relation
between the consumer’s demand for the good and the income of the consumer. The quantity of a good that the
consumer demands can increase or decrease with the rise in income depending on the nature of the good.
The effect of change in income on demand for a good depends on whether it is a normal good or an inferior good.
Normal good is any good whose demand increases as the consumer’s income increases, and decreases as the
consumer’s income decreases.
Thus, a consumer’s demand for a normal good moves in the same direction as the income of the consumer.
Examples of normal goods include good quality food items like full cream milk, Basmati rice, etc.
Effect of increase in consumer’s income on demand for a normal good: Suppose with rise in income a consumer
buys more of X, then X is a normal good for that consumer. An increase in income of the consumer increases
the disposable income, and the consumer is in a better position of spending more on the good X. Therefore, the
consumer may buy more quantity of the good at the same price. So the price-demand curve of the normal good
shifts to the right at the same price.
Figure 2.16 shows that as income increases, the demand for a normal good X increases from OQ to OQ1 at the
same price OP. It leads to a rightward shift in the demand curve of normal good X from DD to D1D1.
Effect of decrease in consumer’s income on demand for a normal good: Suppose with fall in income a consumer
buys less of X, then X is a normal good for that consumer. A decrease in income of the consumer decreases the
disposable income and thus, he can buy less quantity of the good X at the same price. So the price-demand
curve of the normal good shifts to the left at the same price.
Figure 2.17 shows that as income decreases, the demand for a normal good X decreases from OQ to OQ2 at the
same price OP. It leads to a leftward shift in the demand curve of normal good X from DD to D2D2.

Inferior good is any good whose demand falls as the consumer’s income increases, and as the consumer’s
income decreases, the demand for it rises.
Thus, a consumer’s demand for an inferior good moves in the opposite direction of the income of the consumer.
Examples of inferior goods include low quality food items like toned milk, coarse cereals, etc.
Effect of increase in consumer’s income on demand for an inferior good: Suppose with rise in income a
consumer buys less of Y, then good Y is inferior for that consumer. As the consumer’s income rises, his ability to
buy normal goods increases. So he prefers to buy less quantity of the inferior good. Therefore, the price-demand
curve of the inferior good shifts to the left at the same price.
Figure 2.18 shows that as income increases, the demand for an inferior good Y decreases from OQ to OQ1 at
the same price OP. It leads to a leftward shift in the demand curve of inferior good Y from DD to D1D1.
Effect of decrease in consumer’s income on demand for an inferior good: Suppose with fall in income a
consumer buys more of Y, then good Y is inferior for that consumer. As the consumer’s income decreases, his
ability to buy normal goods decreases. So he buys more quantity of the inferior good. Therefore, the price-
demand curve of the inferior good shifts to the right at the same price.
Figure 2.19 shows that as income decreases, the demand for an inferior good Y increases from OQ to OQ2 at
the same price OP. It leads to a rightward shift in the demand curve of inferior good Y from DD to D2D2.

The same good can be inferior for one person and normal for another. Whether a good is normal or inferior is determined by
the income level of the consumer. A good which is a normal good for a consumer with a lower income, may become an inferior
good for a consumer with higher income. For example, coarse cloth may be a normal good for a low income consumer, but for
a high income consumer it may be an inferior good as he can afford a better quality cloth. Also, when a consumer moves to a
higher income level, he may consider coarse cloth as being below their income status, and has the ability to buy more expensive
fine cloth, thus considering coarse cloth as being inferior.
Top Tip
Law of demand holds true in case of Inferior goods also. That is, when price of an inferior good falls its demand rises and
vice-versa.
Law of demand is not applicable in case of Giffen goods (the most inferior goods). It is not in the CBSE Economics XII syllabus.
2. Change in prices of related goods

Related goods are either substitutes or complements.
Substitute goods are those goods which can be used in place of one another, for satisfaction of a particular
want, e.g., (i) Pepsi and Coca-Cola (ii) Tea and Coffee.
There is a direct relation between change in price of a substitute good and change in demand for the given good.
Effect of increase in price of a substitute good: An increase in price of a substitute good makes the given good
relatively cheaper. As a result, demand for the given good increases at the same price, and hence demand curve shifts
rightwards. For example, Pepsi and Coca-Cola are close substitutes for each other. Suppose the given good is Pepsi and
price of its substitute good Coca-Cola rises. So the consumer can shift to Pepsi because it has become relatively cheaper.
Therefore, it leads to increase in demand for Pepsi at the same price. Demand curve of Pepsi shifts to the right.
Figure 2.20 shows that as price of Coco-Cola rises, the demand for Pepsi increases from OQ to OQ1 at the same
price OP. It leads to a rightward shift in the demand curve of Pepsi from DD to D1D1.
Effect of decrease in price of a substitute good: A decrease in price of a substitute good makes the given good
relatively costlier. As a result, demand for the given good decreases at the same price, and hence demand curve
shifts leftwards. For example, Pepsi and Coca-Cola are substitutes for each other. Suppose the given good is Pepsi
and price of its substitute good Coca-Cola falls. So the consumer will substitute Coco-Cola for Pepsi. Therefore,
it leads to decrease in demand for Pepsi at the same price. Demand curve of Pepsi shifts to the left.
Figure 2.21 shows that as price of Coco-Cola falls, the demand for Pepsi decreases from OQ to OQ2 at the same
price OP. It leads to a leftward shift in the demand curve of Pepsi from DD to D2D2.

Complementary goods are those goods which are consumed (or used) jointly/together to satisfy a given
want, e.g., (i) Tea and Sugar (ii) Scooter and Petrol.
There is an inverse relation between price of the complementary good and demand for the given good.
Effect of increase in price of the complementary good: An increase in price of the complementary good reduces
its demand, which in turn decreases the demand for the given good at the same price. As a result, demand curve
of the given good shifts leftwards. For example, suppose tea is the given good and sugar is the complementary
good. An increase in the price of sugar reduces its demand, which in turn decreases demand for tea at the same
price since tea and sugar are used jointly. The demand curve of tea shifts to the left.
Figure 2.22 shows that as price of sugar rises, the demand for tea decreases from OQ to OQ1 at the same price
OP. It leads to a leftward shift in the demand curve of tea from DD to D1D1.
Effect of decrease in price of a complementary good: A decrease in price of a complementary good raises its
demand, which in turn increases the demand for the given good at the same price. As a result, demand curve
of the given good shifts rightwards. For example, suppose tea is the given good and sugar is the complementary
good. A decrease in the price of sugar raises its demand, which in turn increases demand for tea at the same price
since tea and sugar are used jointly. The demand curve of tea shifts to the right.
Figure 2.23 shows that as price of sugar falls, the demand for tea increases from OQ to OQ2 at the same price
OP. It leads to a rightward shift in the demand curve of tea from DD to D2D2.

Top Tip
Demand for a good is not affected by change in price of unrelated goods
Demand for a good is affected by change in price of only related goods (substitute goods and complementary goods). Any
change in the price of unrelated goods does not affect the demand for the given good. Unrelated goods refer to those
goods which are not linked with the demand for the given good. For example, there will be no change in the demand for
pepsi or tea with a change in the price of shoes.
3. Change in tastes and preferences for the good

Favourable change in taste and preference for the good will result in more demand of it at the same price.
Existing buyers may buy more of it. Therefore, the demand curve will shift to the right at the same price. For
example, demand curve for cold-drinks is likely to shift rightward in the summer because the preference for
cold-drinks goes up in the summer.
Unfavourable change in taste, fashion, etc. will result in decrease in demand for the good while there is no
change in its price. This will cause a leftward shift in demand curve at the same price. For example, if news reports
claim that consumption of cold drinks has harmful effect on human health, then demand for cold drinks may decrease
as people may be inclined to consume less. As a result, demand curve may shift towards left at the same price.

Market Demand
Market demand is the sum of quantity demanded which all the consumers are willing to buy at a given
price during a period of time.
The market demand for a good at each price can be derived by adding up the demands of all the consumers at
that price. Suppose there are only two consumers in the market for a good. Suppose at price ` per unit, the
demand by consumer A is 10 units and that by consumer B is 15 units. Then, the market demand for the good
at price `3 per unit is 10 + 15 = 25 units. Similarly, at price `4 per unit, if the demand by consumer A is
8 units and that by consumer B is 12 units, the market demand of the good at `4 is 8 + 12 = 20 units.
TABLE 2.13: Market Demand Schedule
Price Individual Demands Market Demand
A B (A + B)
3 10 15 25 (= 10 + 15)
4 8 12 20 (= 8 + 12)
Market demand curve is derived by the horizontal summation of individual demand curves in the market.
Factors affecting market demand

1. Price of the commodity: When price of the commodity increases, market demand for it falls and when
price of the commodity decreases, market demand for it rises, other factors remaining the same.
2. Number of consumers or buyers: If the number of consumers in the market increases, it leads to increase
in market demand for the good at the same price. On the other hand, if the number of consumers in the
market decreases, it leads to decrease in market demand for the good at the same price.
3. Income of its buyers: With rise in income consumers may buy more of a normal good because rise in
income increases their ability to buy more quantity at the same price. So, the market demand curve shifts
to the right. Conversely, with fall in income consumers buy less of a normal good leading to leftward
shift of market demand curve at the same price.
With rise in income consumers buy less of an inferior good. So the market demand curve shifts to the
left. Conversely, with fall in income consumers buy more of an inferior good leading to a rightward shift
of market demand curve.
4. Prices of the substitute goods: Rise in the price of a substitute good (Coke) makes the given good
(Pepsi) relatively cheaper. So there is increase in market demand for Pepsi at the same price. The market
demand curve shifts to the right at the same price. Conversely, fall in the price of a substitute good makes
the given good relatively costlier. So there is decrease in market demand of the given good at the same
price. The market demand curve shifts to the left at the same price.
5. Price of the complementary good: Rise in price of a complementary good (Petrol) reduces market
demand for the given good (scooter). The market demand curve of scooter shifts to the left. Conversely,
fall in price of a complementary good increases market demand for the given good leading to a rightward
shift of the market demand curve at the same price.
6. Tastes and preferences of the consumers: Favourable change in tastes and preferences for the good will
result in increase in market demand of it at the same price. So the market demand curve will shift to the
right at the same price.
On the other hand, unfavourable change in taste, fashion, etc. will result in decrease in market demand.
This will cause a leftward shift in market demand curve at the same price.
7. Distribution of income: If income is equally distributed among the people, then market demand for a
commodity will be more. However, if income distribution is uneven, i.e., people are either very rich or
very poor, then market demand will be low.
Causes of rightward shift of demand curve Causes of leftward shift of demand curve
• Rise in the price of substitute goods • Fall in the price of substitute goods
• Fall in the price of complementary goods • Rise in the price of complementary goods
• Rise in income of its buyers (in case of a normal good) • Fall in income of its buyers (in case of a normal good).
• Fall in income of its buyers (in case of an inferior good) • Rise in income of its buyers (in case of an inferior good)
• Favourable change in taste etc. for the good • Unfavourable change in taste etc. for the good
• Increase in the number of its buyers • Decrease in the number of its buyers
Numerical 8
Consider a market where there are two consumers A and B and the demand curves of the two consumers are
given as:
d1(p) = 10 – p
and d2(p) = 15 – p
Furthermore, at any price greater than 10, the consumer A demands 0 unit of the good, and similarly, at any
price greater than 15, the consumer B demands 0 unit of the good.
Derive the market demand function. (NCERT) (3 marks)
Solution:
When p ≤ 10, market demand = (10 – p) + (15 – p) = 25 – 2p
When 10 < p ≤ 15, market demand = 15 – p
When p > 15, market demand = 0
25 − 2p ; when p ≤ 10

Therefore, Market demand function: d (p) =  15 − p ; when 10 < p ≤ 15
 0; when p > 15

Do it yourself 8
Suppose there are two consumers in the market for a good and their demand functions are as follows:
d1(p) = 20 – p for any price less than or equal to 15, and d1(p) = 0 at any price greater than 15.
d2(p) = 30 – 2p for any price less than or equal to 15 and d2(p) = 0 at any price greater than 15.
Derive the market demand function. (NCERT) (1 mark)
Numerical 9
Suppose there are 20 consumers for a good and they have identical demand functions:
d(p) = 10 – 3p for any price less than or equal to 10/3
d(p) = 0 at any price greater than 10/3
 10
20(10 − 3p) ; when p ≤ 3
Solution: Market demand function: 
 10
0; when p >
 3
Do it yourself 9
Suppose there are 10 consumers for a good and they have identical demand functions:
d(p) = 10 – 2p for any price less than or equal to 5
d(p) = 0 at any price greater than 5
Price Elasticity of Demand

The demand for a good moves in the opposite direction of its price. But the impact of the price change is always
not the same. Sometimes, the demand for a good changes considerably even for small price changes, e.g., milk,
electricity, mobile phones, expensive clothes, etc. On the other hand, there are some goods for which the demand
is not much affected by price changes, e.g., medicines, salt, textbooks, newspapers, toothpaste, match-box, etc.
Price elasticity of demand is a measure of the degree of responsiveness of demand for a good to change in
its price.
Price elasticity of demand for a good is defined as the percentage change in demand for the good due to one
percentage change in its price. Price elasticity of demand for a good is calculated as follows.
percentage change in quantity demanded
eD =
percentage change in price
Consider the demand schedule of a good (Table 2.14). Suppose at price p, the demand for the good is q and at
price p1, the demand for the good is q1. Thus, when price changes from p to p1, demand for the good changes
from q to q1.
TABLE 2.14: Demand Schedule
Original = p Original = q
New = p1 New = q1
Here, the change in price is, Dp = p1 – p and change in the quantity demanded is, Dq = q1 – q.
Dp
The percentage change in price = × 100
p
Dq
The percentage change in quantity demanded = × 100
q
Dq
× 100
q Dq p
Thus, price elasticity of demand, eD = = ×
Dp Dp q
× 100
p
Example: If the price of a commodity falls from `28 per unit to `23 per unit and its quantity demanded rises
from 50 units to 100 units, then price elasticity of demand will be calculated as follows:

Original = 28 Original = 50
New = 23 New = 100
change in quantity demanded ( Dq) original price (p) 50 28

eD × =× =
− 5.6
change in price ( Dp) original quantity (q) −5 50
(minus sign is ignored as it only represents the inverse relation between price and quantity demanded.)
eD = 5.6 (eD > 1, Elastic demand)
Top Tip
The measure of price elasticity of demand has a minus sign because there is inverse relation between price and quantity
demanded of a good, other factors remaining the same. However, for simplicity, we will ignore the minus sign.
Degrees/Kinds of Price Elasticity of Demand

The more responsive the demand for a good is to its price, the
higher is the price elasticity of demand for the good.
1. Inelastic demand
When the percentage change in demand for a good is less than
the percentage change in price, then eD < 1 and the demand for
the good is said to be inelastic. Therefore, demand curve is steeper.
Example: The demand for a consumer for a good declines by 10%
when price increases from `5 to `6 per unit. Here, percentage
change in demand for the good = –10%, and percentage change
6 −5
in price = × 100 = 20%
5
Therefore, price elasticity of demand

percentage change in quantity demanded −10%
eD = = = − 0.5
percentage change in price 20%
eD = 0.5 (eD < 1). Therefore, demand for the good is relatively less price-elastic as 1% change in price leads to
only 0.5% change in quantity demanded.
2. Elastic demand
When the percentage change in demand for a good is greater
than the percentage change in price, then eD > 1 and the
demand for the good is said to be elastic.
Therefore, demand curve is flatter.
Example:
Demand Schedule of a Good
Price (`) Demand (kg)
40 3
35 5
Original price, p = 40 and change in price, Dp = 35 – 40 = –5
Original quantity demanded, q = 3 and change in quantity
demanded, Dq = 5 – 3 = 2
Therefore, price elasticity of demand,
Dq p
e=
D ×
D p q
= 2 40
× = − 5.33
−5 3
eD = 5.33 (eD > 1). Therefore, demand for the good is relatively more price-elastic as 1% change in price causes
5.33% change in quantity demanded of Apples.
3. Unitary elastic demand
When the percentage change in demand for a good is equal to the percentage change in price, then the
demand for the good is said to be unitary elastic.
Example: As a result of 10% fall in price of a good, its demand
rises from 200 units to 220 units.
Here, percentage change in price = –10%
Percentage change in quantity demanded
220 − 200 20
= × 100
= =× 10%
200 200
Therefore, eD =
10%
= = −1
−10%
(minus sign is ignored as it only represents the inverse relation
between price and quantity demanded
Therefore, eD = 1 (Unitary elastic demand).
Top Tip
Unitary elastic demand curve has the shape of a rectangular hyperbola
In class XI, for the sake of simplicity, we consider straight line demand curve.
However, in real life situations, demand curve of a commodity takes the shape of
a curve, as the name itself suggests.
Unitary elastic demand curve has the shape of a rectangular hyperbola. The figure
shows a rectangular hyperbola demand curve. It is called rectangular hyperbola
demand curve because for any point on this demand curve, the area under the
demand curve, i.e. total expenditure on the good remains unchanged. In other
words, with rectangular hyperbola demand curve, no matter at what point,
the consumer consumes, his expenditures are always the same and equal to
price (p) × quantity (q).
For example, for any two points e and e1, areas under the demand curve (i.e.,
expenditures on the good) represented by areas of rectangles oqep and oq1e1p1
are equal.
4. Perfectly inelastic demand

When with the change in price there is no change in demand
for the good, it is called perfectly inelastic demand, eD = 0.
A vertical demand curve (i.e., parallel to Y-axis) is perfectly
inelastic. Demand remains constant at all prices.
Example:
10 18
9 18
Original price, p = 10 and change in price, Dp = 9 – 10 = –1;

demanded, Dq = 18 – 18 = 0
Dq p 0 10
Therefore, price elasticity of demand, e=
D × = × =0
Dp q 1 18
5. Perfectly elastic demand
When the buyers of a good are willing to buy any quantity of it
at the given market price, it is called perfectly elastic demand,
eD = ∞ (infinity).
Demand curve is horizontal (i.e., parallel to X-axis).
Example:
9 100
9 150
Original price, p = 9 and change in price, Dp = 9 – 9 = 0
demanded, Dq = 150 – 100 = 50
Dq p 50 9 450
Therefore, e=D × =× == ∞ (infinity)
Dp q 0 100 0
Factors affecting Price Elasticity of Demand of a Good

1. Nature of the good/ Necessity of the good
• If the good is a necessity like food, its demand is not likely to be affected much by change in its price. So,
demand for necessities is price-inelastic (eD < 1).
More necessary the good is for the consumer, lower is its price elasticity of demand because in case
of price change, it becomes difficult to reduce the consumption of the good.
• On the other hand, demand for luxuries (e.g., luxury car or mobile phone) is price-elastic (eD > 1),
because with rise in price, consumers may reduce demand for luxuries.
Inelastic Demand for Luxuries

2. Number of substitutes of the good/Availability of close substitutes of the good
• If close substitutes are easily available, e.g. pulses; if the price of a variety of pulses rises, consumers can
shift to some other variety of pulses which is a close substitute. So, demand for such a good is price-
elastic.
Larger the number of substitutes available, more is the choice before the consumer and so more
elastic is the demand.
• On the other hand, if close substitutes are not available, e.g. salt, water etc., the demand is price-inelastic.
3. Proportion of income spent on the good/Own price of the good
Higher the proportion of income spent on a good, higher is its price elasticity of demand.
It is because a change in price of a high priced good has substantial effect on the budget of the consumer.
Thus, level of price of the good affects elasticity of demand.
• Demand for a high priced good (e.g. expensive clothes, mobile phones, etc.) is price-elastic, eD > 1,
because a change in price of a high priced good has substantial effect on the budget of the consumer.
• Demand for a low priced good (e.g. salt, toothpaste, match box, newspapers, etc.) is price-inelastic,
eD < 1 because a very small proportion of a consumer’s income is spent on it.
Inelastic Demand for low priced goods

4. Time period of response

Longer the time period of response, more elastic the demand.
• Habits change but normally over longer periods. When a consumer is habituated to consuming a good
and its price rises, it is very difficult for the consumer to reduce or to give up the consumption of the
good immediately. Thus, demand is price-inelastic, eD < 1 in the short period.
• However, over a longer time period, the consumer may be able to modify or change habits. Thus,
demand is relatively more price-elastic, eD > 1 in the long run as it is comparatively easier to shift to other
substitutes, if price of the given good rises.
5. Income level of consumers
• Price elasticity of demand for any commodity is generally low (eD < 1) for higher income level consumers
because rich people are not influenced much by change in the price of goods.
• On the other hand, price elasticity of demand for most goods in case of lower income group of consumers
is high (eD > 1) because poor people are highly affected by change in the price of goods.
6. Number of uses of a commodity
If a commodity has multiple alternate uses (e.g., electricity, milk, etc.), then its demand will be highly price-
elastic. For example, milk can be for preparing curd, cream, ghee and sweets. But if its prices increases, its
use will be restricted only to essential purposes like feeding the children and making tea.
Key Terms
Demand—Quantity of the commodity that a consumer is willing to buy and is able to afford at a given price during a
period of time, other factors remaining unchanged.
Market demand—The sum of quantity demanded which all the consumers are willing to buy at a given price during a
period of time.
Demand schedule—A tabular presentation showing the different quantities of a good that a consumer is willing and
able to buy at different prices during a period of time.
Demand curve—A graphical presentation of various quantities of a commodity that a consumer is willing and able to
buy at different prices during a period of time, other factors remaining unchanged.
Slope of the demand curve—It measures the rate at which demand changes due to change in its price, i.e. Dq/Dp.
Law of Demand—It states that other things remaining unchanged, there is a negative (or inverse) relation between
price of a commodity and its quantity demanded.
Income effect—When price of a good falls, the purchasing power (real income) of the consumer increases as he will be
able to purchase more quantity of the good with the same money income. This phenomenon is called income effect.
Substitution effect—When price of good falls, it becomes relatively cheaper than its substitutes. As a result, demand
for the given good rises. This phenomenon is called substitution effect.
Change in quantity demanded—Increase (decrease) in quantity demanded due to fall (rise) in own price of the good,
other things remaining unchanged.
Expansion of demand—Increase in quantity demanded due to a fall in own price of the good, other things remaining
unchanged.
Contraction of demand—Decrease in quantity demanded due to a rise in own price of the good, other things remaining
unchanged.
Change in demand—Rise/fall in quantity demanded due to change in any factor, other than the own price of the good.
increase in demand—Rise in quantity demanded due to change in any factor, other than the own price of the good.
Decrease in demand—Fall in quantity demanded due to change in any factor, other than the own price of the good.
Movement along the demand curve—Diagrammatically, a change in quantity demanded implies a movement along the
demand curve. A fall (rise) in the price of the good leads to downward (upward) movement along the demand curve.
Shift in the demand curve—Diagrammatically, a change in demand implies a shift in the demand curve. Increase
(decrease) in demand leads to a rightward (leftward) shift in the demand curve.
Normal good—Any good whose demand increases as the consumer’s income increases, and vice-versa.
RECAP
Demand for a commodity

Demand for a commodity refers to the quantity of the commodity that a consumer is willing to buy and is able to afford at a
given price during a period of time, other factors remaining unchanged.
Demand schedule
Demand schedule is a tabular presentation showing the different quantities of a good that a consumer is willing and able to
buy at different prices during a period of time.
Demand curve
Demand curve is a graphical presentation of various quantities of a commodity that a consumer is willing and able to buy at
different prices during a period of time, other factors remaining the same. A linear demand curve can be written as qD = a – bp,
where ‘–b’ is the slope of the demand curve. It measures the rate at which demand changes due to its price, i.e. Dq/Dp.
Law of Demand
Law of Demand states that other things remaining unchanged, there is a negative (or inverse) relation between price of a
commodity and its quantity demanded. In other words, when price of the commodity increases, demand for it falls and when
price of the commodity decreases, demand for it rises, other factors remaining the same.
Derivation of law of demand from the law of diminishing marginal utility
A consumer buys a good only up to the point where MU = Price. Now, suppose price falls. The situation now changes to: MU >
Price. This induces the consumer to buy more of the good. This shows that when price of a good falls, the consumer demands
more of that good. This establishes the inverse relationship between price of a good and its quantity demanded.
Using the law of equi-marginal utility: Suppose a consumer consumes only two goods X and Y. Let their respective prices be
Px and Py. Other things remaining unchanged, the consumer will be in equilibrium when MUx/Px = MUy/Py. Now, suppose
price of good X (Px) falls. Then, MUx/Px > MUy/Py. It means that per rupee marginal utility from consumption of X is greater
than from consumption of Y. This induces the consumer to buy more of X and less of Y. The consumer now demands more of
X. This shows that when price of a good falls, the consumer demands more of that good. So, the demand curve for good X is
negatively sloped.
Change in Quantity Demanded (Movements along the Demand Curve)
Change in quantity demanded refers to a increase (decrease) in quantity demanded due to fall (rise) in own price of the good,
other things remaining unchanged. Here, increase in quantity demanded is called expansion of demand whereas decrease in
quantity demanded is called contraction of demand.
Diagrammatically, a change in quantity demanded implies a movement along the demand curve. A fall (rise) in the price of the
good leads to downward (upward) movement along the demand curve.
Change in Demand (Shifts in the Demand Curve)
Change in demand refers to rise/fall in quantity demanded due to change in any factor, other than the own price of the good.
Here, rise in quantity demanded is called increase in demand whereas the fall in quantity demanded is called decrease in
demand.
Diagrammatically, a change in demand implies a shift in the demand curve. Increase (decrease) in demand leads to a rightward
(leftward) shift in the demand curve.
Determinants of Demand (Shift factors)
1. Change in income of the consumer: The effect of change in income on demand for a good depends on whether it is a
normal good or an inferior good. Normal good is any good whose demand increases as the consumer’s income increases,
and decreases as the consumer’s income decreases. Inferior good is any good whose demand falls as the consumer’s
income increases, and as the consumer’s income decreases, the demand for it rises. Examples of inferior goods include
low quality food items like toned milk, coarse cereals, etc.
Thus, increase in consumer's income results in increase in demand for a normal good and decease in demand for an
inferior good. Explanation: A rise in income increases the consumer's disposable income. So, he is able to spend more on
the normal good X. Therefore, the price-demand curve of the normal good X shifts to the right at the same price.
On the other hand, rise in income increases the consumer's ability to buy normal goods. So he prefers to buy less quantity
of the inferior good Y. Therefore, the price-demand curve of the inferior good Y shifts to the left at the same price.
Note: The same good can be inferior for one person and normal for another. Whether a good is normal or inferior is
determined by the income level of the consumer. A good which is a normal good for a consumer with a lower income, may
become an inferior good for a consumer with higher income. For example, coarse cloth may be a normal good for a low
income consumer, but for a high income consumer it may be an inferior good as he can afford a better quality cloth.
Also, when a consumer moves to a higher income level, he may consider coarse cloth as being below their income status,
and has the ability to buy more expensive fine cloth, thus considering coarse cloth as being inferior.
2. Change in prices of related goods: Related goods are either substitutes or complements. Substitute goods are those goods
which can be used in place of one another, for satisfaction of a given want, e.g., (i) Pepsi and Coca-Cola (ii) Tea and Coffee.
Complementary goods are those goods which are consumed (or used) jointly/together to satisfy a given want, e.g., (i) Tea
and Sugar (ii) Scooter and Petrol.
• There is a direct relation between change in price of a substitute good and change in demand for the given good. For
example, an increase in price of a substitute good makes the given good relatively cheaper. As a result, demand for the
given good increases at the same price, and hence demand curve shifts rightwards.
• There is an inverse relation between price of the complementary good and demand for the given good. For example,
an increase in price of the complementary good reduces its demand, which in turn decreases the demand for the given
good at the same price. As a result, demand curve of the given good shifts leftwards.
3. Change in tastes and preferences for the good: Due to favourable (unfavourable) change in taste and preference for the
good X, the consumer demands more (less) quantity demanded of it at the same price. So, the demand curve of good X
will shift to the right (left).
Market Demand
Market demand is the sum of quantity demanded which all the consumers are willing to buy at a given price during a period
of time.
Factor affecting market demand of a commodity:
(i) Number of consumers or buyers (ii) Price of the commodity
(iii) Income of its buyers (iv) Prices of the substitute goods
(v) Price of the complementary good (vi) Tastes and preferences of the consumers.
The market demand for a good at each price can be derived by adding up the demands of all the consumers at that price.
Market demand curve is derived by the horizontal summation of individual demand curves in the market.
Price Elasticity of Demand
Price elasticity of demand measures the degree of responsiveness of quantity demanded of good to change in its price.
Price elasticity of demand for a good is defined as the percentage change in quantity demanded for the good divided by the
percentage change in its price. Price elasticity of demand has a minus sign because there is negative (inverse) relation between
price and quantity demanded of a good, other factors remaining the same.
Degrees/Kinds of Price Elasticity of Demand
1. Inelastic demand: When the percentage change in demand for a good is less than the percentage change in price, then
eD < 1 and the demand for the good is said to be inelastic.
2. Elastic demand: When the percentage change in demand for a good is greater than the percentage change in price, then
eD > 1 and the demand for the good is said to be elastic.
3. Unitary elastic demand: When the percentage change in demand for a good is equal to the percentage change in price,
then eD = 1 and the demand for the good is said to be unitary elastic. Unitary elastic demand curve has the shape of a
rectangular hyperbola. It is called rectangular hyperbola demand curve because for any point on this demand curve, the
area under the demand curve, i.e., total expenditure on the good remains unchanged.
4. Perfectly inelastic demand: When with the change in price there is no change in demand for the good, it is called perfectly
inelastic demand, eD = 0. A vertical demand curve (i.e., parallel to Y-axis) is perfectly inelastic. Demand remains constant at
all prices.
5. Perfectly elastic demand: When the buyers of a good are willing to buy any quantity of it at the given market price, it is
called perfectly elastic demand, eD = ∞ (infinity). Demand curve is a horizontal line.
Factors affecting Price Elasticity of Demand
1. Nature of the good: If the good is a necessity like food, its demand is not likely to be affected much by change in its price.
So, demand for necessities is price-inelastic (eD < 1). On the other hand, demand for luxuries, e.g. a luxury car is price-
elastic (eD > 1), because with rise in price, consumers may reduce demand for luxuries.
2. Availability of close substitutes of the good: If close substitutes are easily available, e.g. pulses; if the price of a variety of
pulses rises, consumers can shift to some other variety of pulses which is a close substitute. So, demand for such a good is
price-elastic. On the other hand, if close substitutes are not available, e.g. salt, water etc., the demand is price-inelastic.
3. Proportion of income spent on the good/Own price of the good: Higher the proportion of income spent on a good, higher is its
price elasticity of demand. It is because a change in price of a high priced good (e.g. expensive clothes, mobile phones, etc.) has
substantial effect on the budget of the consumer. So, demand is price-elastic, eD > 1. On the other hand, demand for a low priced
good (e.g. salt, match box, etc.) is price-inelastic, eD < 1 because a very small proportion of a consumer’s income is spent on it.
4. Time period of response: Longer the time period of response, more elastic the demand because habits change but normally
over longer periods. When a consumer is habituated to consuming a good and its price rises, it is very difficult for the consumer
to reduce the consumption of the good immediately. Thus, demand is price-inelastic, eD < 1 in the short period. However, over
a longer time period, the consumer may change habits. Thus, demand is relatively more price-elastic, eD > 1 in the long run.
Numerical 10
Arrange the following coefficients of price elasticity of demand in ascending order: (1 mark)
–0.87, –0.53, –3.1, –0.80
Solution: –0.53, –0.80, –0.87, –3.1 (minus sign only represents the inverse relation between price and quantity
demanded).
Do it yourself 10
Arrange the following coefficients of price elasticity of demand in ascending order: (1 mark)
(–) 3·1, (–) 0·2, (–) 1·1
Numerical 11
omment upon the degree of elasticity of demand for commodity X, if the price of the commodity falls from
C
`28 per unit to `23 per unit and its quantity demanded rises from 50 units to 100 units. (3 marks)
Solution:
Original = 28 Original = 50
New = 23 New = 100
change in quantity demanded( Dq) original price (p) 50 28

eD = × =× = −5.6
change in price ( Dp) original quantity (q) –5 50

(minus sign only represents the inverse relation between price and quantity demanded).
eD > 1, relatively more elastic demand.
Do it yourself 11
When price of a commodity falls from `8 per unit to `7 per unit, the expenditure on it by a consumer increases
from `200 to `210. Calculate price elasticity of demand. [Ans. 1.6] (3 marks)
Numerical 12
hen price of a commodity falls from `8 per unit to `7 per unit, the expenditure on it by a consumer increases
W
from `200 to `210. Calculate price elasticity of demand. (3 marks)
Solution:
Price (`) Expenditure (`) Demand (units)
8 200 200 ÷ 8 = 25
7 210 210 ÷ 7 = 30
Dq p 5 8 40
Price elasticity of demand, eD = × = × = = −1.6
Dp q −1 25 −25
eD = 1.6 (eD > 1, relatively more elastic demand.)
Do it yourself 12
Price of a good rises from `7 per unit to `9 per unit but its demand remains unchanged. Calculate price elasticity
of demand of the good. What will be the shape of demand curve of the good? [Ans. 0] (3 marks)
Numerical 13
The price elasticity of demand for a good is (–)0.4. If its price increases by 5%, by what percentage will its
demand fall? Calculate. (3 marks)
Solution: Price elasticity of demand, eD = –0.4
eD =
−0.4 =
5
Percentage change in demand = –2%, i.e., demand for the good will fall by 2%.
Do it yourself 13
The demand for a good rises by 20% as a result of fall in its price. Its price elasticity of demand is (–)0.8. Calculate
the percentage fall in price. [Ans. 25%] (3 marks)
Numerical 14
Demand for a good is unitary elastic. The quantity demanded of this good at a price of `10 is 80 units. How
much quantity will be demanded when the price rises by 20%? Calculate. (3 marks)
Solution:
10 80
10 + 20% = 12 ?
Price elasticity of demand, eD = –1
Dq p Dq 10
Price elasticity of demand, eD= × − 1= ×
Dp q 2 80
⇒ Dq = –16
Therefore, new quantity demanded = 80 – 16 = 64 units.
Top Tip
In Numerical 14, new quantity demanded can also be calculated as follows:
Suppose new quantity demanded be x units.
Dq p x − 80 10
eD= × ⇒ − 1= ×
Dp q 2 80

or, x – 80 = –16 ⇒ x = –16 + 80 = 64
\ New quantity demanded = 64 units
Do it yourself 14
Market demand for a good at `4 per unit is 1000 units. The price rises. As a result, the market demand falls by
25%. Find the new price if demand is unitary elastic. [Ans. `5] (3 marks)
Numerical 15
Calculate price elasticity of demand of good X if a consumer does not buy its any quantity at price `10 per unit.
But when price falls by 10%, expenditure on it is `90. Use percentage change method. (3 marks)
Solution:
Price (`) Expenditure (`) Demand (units)
10 0 0
10 – 10% = 9 90 90 ÷ 9 = 10
Dq p 10 10 100
Price elasticity of demand, eD = × = × = = ∞ (infinity)
Dp q −1 0 0
Therefore, demand for the good is perfectly elastic.
Do it yourself 15
A consumer buys 20 units of a good at a price of `5 per unit. He incurs an expenditure of `120 when he buys
24 units. Calculate price elasticity of demand using the percentage method. Comment on the likely shape of the
demand curve based on this information. [Ans. ∞] (3 marks)
Numerical 16
CA 5% rise in price of good X leads to 10% fall in its demand. A consumer buys 100 units of good Y when its
price is `5 per unit. At what price will the consumer buy 120 units of good Y if the ratio of price elasticity of
demand for good X and Y is 2 : 1? (4 marks)
Solution: Good X
percentage change in quantity demanded −10
Price elasticity of demand, eD = = = −2
percentage change in price 5
ood Y
G
Since the ratio of price elasticity of demand for good X and Y is 2 : 1, therefore, elasticity of demand for good Y = –1
5 100
? 120
Dq p 20 5
e D= × − 1= ×
Dp q Dp 100
−100
Dp = =−1
100
\ New price of good Y = 5 – 1 = `4 per unit
Top Tip
In Q. 9, new price of good Y can also be calculated as follows:
Suppose new price be `x.
Dq p 20 5
eD= × ⇒ − 1= ×
Dp q x − 5 100
⇒ x = 4, i.e., New price = `4 per unit

Do it yourself 16
When price of commodity X falls by 10 per cent, its demand rises from 150 units to 180 units. Calculate its price
elasticity of demand. How much should be the percentage fall in its price so that its demand rises from 150 to 210
units? [Ans. 20%] (6 marks)
Numerical 17
The demand for a good doubles due to a 25% fall in its price. Calculate its price elasticity of demand. (3 marks)
Solution: Percentage change in price = –25%
Suppose original demand be ‘q’. Therefore, new demand at the reduced price = 2q
2q − q q
∴ Percentage change in demand = × 100 = × 100 =100%
q q
percentage change in quantity demanded 100%
eD = = = −4
percentage change in price −25%
eD = 4 (eD > 1, relatively more elastic demand.)
Do it yourself 17
When price of a good gets halved, its demand rises from 120 units to 150 units. Calculate its price elasticity of
demand. [Ans. 0.5] (3 marks)
Numerical 18
When price of good decreases to one-fourth of the original price, its demand increases three times more. What is
its price elasticity of demand? Calculate. (3 marks)
Solution: Let original price be `‘p’ per unit. Therefore, new price = p
4
Let original demand be ‘q’ units. Therefore, new demand = q + 3q = 4q
p −3p
−p
Percentage change in price = 4 × 100 = 4 × 100 = −75
p p
4q − q 3q
Percentage change in demand = × 100 = × 100 =300
q q
percentage change in demand 300
Price elasticity of demand, eD = percentage change in price
=
−75
= −4
Since eD = 4 > 1, therefore, demand for the good is elastic.
Do it yourself 18
A consumer buys 8 kg of potatoes at a price of `7 per kg. Price elasticity of demand is (–)1. How much quantity
of it will be demanded if the price rises to `8 per kg? [Ans. 6.85 kg appx.] (3 marks)
Numerical 19
When price of a commodity falls by `2 per unit, its quantity demanded increases by 10 units. Calculate the
original and new demand if the price before change was `10 per unit and the shape of the demand curve of this
good is rectangular hyperbola. (3 marks)
Solution: Demand curve of the good is rectangular hyperbola, i.e., price elasticity of demand, eD = –1
10 q
10 – 2 = 8
Dp = –2, Dq = 10, p = 10

Dq p
Price elasticity of demand, e=
D ×
Dp q
10 10
−1= ×
−2 q
⇒
2q = 100
⇒ q = 100 = 50
2
Therefore, original demand was 50 units and the new demand is 50 + 10 = 60 units
Do it yourself 19
Price elasticity of demand of a commodity is (–)1.5. When its price falls by `1 per unit, its quantity demanded rises by
3 units. If the quantity demanded before the price change was 30 units, what was the price at this demand? (3 marks)
[Ans. `15]
Numerical 20
rice of a good rises by 25% but there is no effect on demand of the good due to this price rise. Calculate price
P
elasticity of demand. (3 marks)
Solution: Suppose demand for the good remains unchanged at ‘q’ units.
q−q 0
Percentage change in demand = × 100 = × 100 =0
q q
percentage change in demand 0

e=
D = = 0
percentage change in price 25
Therefore, demand for the good is perfectly inelastic.
Do it yourself 20
Calculate price elasticity of demand for a commodity when its price rises by 25% and quantity demanded falls
from 150 units to 120 units. (3 marks)
[Ans. 0.8]
Numerical 21
Calculate and comment on nature of Price elasticity of demand, if, with a rise in price of Good X from
10 to 12, the quantity demanded falls by 40%. (4 marks)
Solution: Price elasticity of demand (eD) =
12 − 10 2
Percentage change in price = × 100 = × 100 =20%
10 10
Percentage change in quantity demanded = (–) 40%
− 40%
Price elasticity of demand (eD) = = −2
20%
eD = 2 (eD > 1, Elastic demand)
Do it yourself 21
5% fall in the price of Good X, leads to a 10% rise in its quantity demanded. A 20% rise in price of Good Y, leads
to a 10% fall in its quantity demanded. Calculate the price elasticities of demand of the two goods. Out of the two
Goods which one is more elastic ? (4 marks)
[Ans. 2 and 0.5]
Numerical 22
Consider the demand curve D(p) = 10 – 3p. What is the elasticity of demand at price 5/3? Is the demand curve
likely to be a rectangular hyperbola? Give reason. (NCERT) (4 marks)
Solution: Demand curve D(p) = q = 10 – 3p
Dq p
Price elasticity of demand, e=
D ×
Dp q
Dq
Slope of the demand curve, Dp = − 5 (Since for a demand curve q = a – bp, slope is –b, which measures
Dq
the rate of change in demand due to change in price, i.e., .
Dp
5 5
At p = 3 , q = 10 − 3 × 3 = 10 − 5 = 5
Substituting these values, we get e D = – 3 × (5/3)/5 = – 1

No, the demand curve is not likely to be a rectangular hyperbola but a straight line downward sloping
demand curve since the demand curve equation is a linear demand curve equation.
Do it yourself 22
Consider the demand curve D(p) = 10 – 5p. What is the elasticity of demand at price 3/5? (3 marks)
[Ans. 3/7]
1. If price of good X rises and it leads to rise in demand for good Y, then goods X and Y are ____________ (substitutes/
complements) (Fill up the blank with correct option)
2. Demand for water inelastic because __________ . (Fill up the blank with correct answer)
3. Price elasticity of demand is a negative number because ____________ . (Fill up the blank with correct answer)
4. The shape of a perfectly elastic demand curve is _________ . (Fill up the blank with correct answer)
5. If two demand curves intersect, at their point of intersection, _________ demand curve will be more elastic. (flatter/
steeper) (Fill up the blank with correct option)
6. If two commodities are complements, this means that a rise in the price of one commodity will result in _______.
(a) a rightward shift of demand curve of the other commodity
(b) a rise in the price of the other commodity
(c) no shift in demand curve of the other commodity
(d) a leftward shift in demand curve of the other commodity
7. Change is demand implies _____________ . (Choose the correct alternative)
(a) Increase or decrease in demand of a good due to change in its price
(b) Increase or decrease in demand of a good due to change in the price of its substitute goods
(c) Increase or decrease in demand of a good due to change in the price of its complementary goods
(d) Shifting of demand curve
8. When demand for a commodity is perfectly inelastic, an increase in price by 2%, leads to increase in quantity demanded
by ______________. (Choose the correct alternative)
(a) 10% (b) 0%
(c) 3% (d) 2%
9. Which one of the following commodities will not have inelastic demand? (Choose the correct alternative)
(a) Salt (b) Medicine
(c) Mobile phone (d) School uniform
10. If with the rise in price of good Y, demand for good X rises, the two goods are: (Choose the correct alternative)
(a) Substitutes (b) Complements
(c) Not related (d) Jointly demanded
11. If the demand curve is vertical, value of price elasticity of demand is ____________. (Choose the correct alternative)
(a) zero (b) less than one
(c) more than one (d) infinity
12. If the demand curve is a rectangular hyperbola, value of price elasticity of demand is _____________.
(a) 1 (b) 0
(c) infinity (d) less than one
13. When income of the consumer falls the impact on price-demand curve of an inferior good is: (Choose the correct alternative)
(a) Shifts to the right.
(b) Shifts to the left.
(c) There is upward movement along the curve.
(d) There is downward movement along the curve.
14. If due to fall in the price of good X, demand for good Y rises, the two goods are: (Choose the correct alternative)
(c) Not related (d) Competitive
15. The demand for cooking gas is not falling inspite of regular hike in the price of cooking gas. What will be the elasticity of
demand for cooking gas? Give reason in support of your answer.
16. What policy initiatives can the government undertake to increase the demand of milk in the country? Mention any one.
17. Ceteris Paribus, if the government provides subsidies on electricity bills, what would be the likely change in the market
demand of desert coolers?
18. Suggest any one economic measure by which the government can promote consumption of ‘Khadi’.
19. What economic measure can the Government take to reduce demand for commodity X which is harmful for health?
HOTS 2.3
Q.1 Give any three factors that can cause a rightward shift of demand curve. (3 marks)
Ans. Rightwards shift of demand curve can be caused by:
(i) Fall in price of complementary goods
(ii) Rise in price of substitute good
(iii) Change in preference in favour of the good
Q.2 State any three factors causing “increase” in market demand. (3 marks)
Ans. Factors of increase in market demand:
(i) Rise in income of consumers (in case of a normal goods)
(ii) Favourable change in taste & preferences
(iii) Increase in number of consumers
(iv) Fall in price of complementary goods
(v) Rise in price of substitute goods (any three)
Q.3 Explain the effect of the following on the demand for a good: (3 marks)
(i) Increase in income of its consumer
(ii) Rise in price of its substitute good
Ans. (i) When the good is normal, increase in income of its consumer raises his purchasing power, so he buys more
of it.
When the good is inferior, then with an increase in income the demand for such good will fall.
(ii) Rise in the price of substitute goods makes the given good relatively cheaper. So its demand increases and
demand for substitute good falls.
Q.4 (a) What will be the effect of increase in number of buyers on demand curve for a good?
(b) Goods X and Y are substitutes. Explain the effect of fall in price of Y on demand for X. (3 marks)
Ans. (a) If the number of buyers of a good in the market increases, it leads to increase in market demand for the
good at the same price. As a result, market demand curve shifts to the right.
(b) Goods X and Y are substitutes for each other. Fall in price of Y makes it relatively cheaper. Good X becomes
relatively expensive as compared to Y. The consumers will shift to Y. It leads to decrease in demand for X
at the same price.
Q.5 Giving reason, state the impact of each of the following on demand curve of normal good 'X' if
(i) Price of its complementary good falls.
(ii) News reports claims that consumption of product X has harmful effect on human health.
(iii) Income of consumer increases. (3 marks)
Ans. (i) Demand of the good X will increase, hence demand curve of good X shifts towards right.
(ii) Demand of Good X may decrease as people may be inclined to consume less due to media reports of
harmful effect of the good X. As a result, demand curve may shift towards left.
(iii) When income of consumer increases the disposable income increases and consumer is in a better position
of spending more on the good X. Hence, consumer may consume more of the commodity due to which
the demand for the goods increases and demand curve shifts away from origin.
Q.6 State any six causes of rightward shift of demand curve. (3 marks)
Ans. Causes of rightward shift of demand curve:
(i) Rise in prices of substitute goods
(ii) Fall in price of the complementary good
(iii) Favourable change in taste etc. for the good
(iv) Rise in income of its buyers (in case of a normal good)
(v) Fall in income of its buyers (in case of an inferior good)
(vi) Increase in the number of its buyers
Q.7 When does a consumer buy more quantity of a commodity at a given price? Give three points. (3 marks)
Ans. (i) When income of the consumer increases, if it is a normal good.
(ii) When there is a fall in the price of the complementary good.
(iii) When there is a rise in prices of substitute goods.
Q.8 How is the price elasticity of demand of a commodity affected by the number of its substitutes? Explain.
(3 marks)
Ans. More the number of substitutes available of a good, higher is its price elasticity of demand because in case of
price change, the consumers can conveniently shift from one substitute to another. For example, Pepsi has
many close substitutes, e.g., Coca-Cola, Limca, etc. If its price goes up, people can shift to other brands of
cold drinks. Therefore, demand for Pepsi is elastic. If close substitutes of a good are not available easily in the
market, the demand for the good is likely to be inelastic. For example, demand for salt is inelastic.
Q.9 What is the elasticity of demand associated with necessities and luxuries? Give reasons. (3 marks)
Ans. Demand for necessities (e.g. food, textbooks, etc.) is inelastic (eD < 1) because in case of price change, it
becomes difficult to reduce its consumption significantly.
Demand for luxuries (e.g. air conditioners, costly furniture, etc.) is very elastic (eD > 1) because luxurious
goods generally have many substitutes. If price of a brand rises, the consumer will switch over to other brands.
Therefore, a slight change in price affects demand for luxurious goods to a large extent.
Q.10 Name four goods having inelastic demand. Give reasons why demand for salt or water bottle is inelastic?
(3 marks)
Ans. Goods having inelastic demand: Food, newspapers, toothpaste, match-box
Demand for salt or water bottle is inelastic because:
(i) It has no close substitute.
(ii) It is a necessity.
(iii) A very small proportion of a consumer’s income is spent on its purchase.
(a) The demand for a good always increases with increase in the prices of other goods.
(b) Demand for a good always increases with the increase in income of its buyers.
Ans. (a) False: With increase in the price of a substitute good, the demand for a good increases. But with increase
in the price of the complementary good, the demand for the given good decreases.
(b) False: With the increase in income, demand for a normal good increases but demand for an inferior good
decreases.
(a) If goods X and Y are substitutes, a rise in price of X will result in a rightward shift in demand curve of Y.
(b) If a fall in price of good X leads to a rise in demand for good Y, then X and Y are substitute goods.
Ans. (a) True: If goods X and Y are substitutes, a rise in price of X makes Y relatively cheaper. Therefore, it leads to
increase in demand for good Y at the same price. As a result, demand curve of Y shifts to the right.
(b) False: X and Y are complementary goods and not substitute goods.
Q.13 A good is an 'inferior' good for one and at the same time 'normal 'good for another consumer. Do you
agree? Explain with the help of an example. (4 marks)
Ans. Yes, the same good can be inferior for one person and normal for another. Whether a good is normal or inferior
is determined by the income level of the consumer. A good which is a normal good for a consumer with a
lower income, may become an inferior good for a consumer with higher income.
For example, coarse cloth may be a normal good for a low income consumer, but for a high income consumer
it may be an inferior good as she can afford a better quality cloth.
Thus, when a consumer moves to a higher income level, she may consider coarse cloth as being below their
income status, and has the ability to buy more expensive fine cloth, thus considering coarse cloth as being
inferior.
Q.14 'As the price of a good falls, the resulting increased purchasing power may be a reason for increase in
quantity demanded'. Do you agree with the given statement? Give reason for your answer. (3 marks)
Ans. When price of a good falls the purchasing power (real income) of the consumer increases as he will able to
purchase more units of the given good with the same money income. This phenomenon is called as income
effect and is one of the main reasons for negative slope of demand curve.
Q.15 Distinguish between normal goods and inferior goods, with examples. (4 marks)
Ans. Normal Goods are those Goods whose demand tends to increase with an increase in the income of a consumer.
The demand for the normal goods is directly related to the income of a consumer.
Inferior Goods are those goods whose demand decreases with an increase in the income of a consumer. The
demand for the inferior goods is inversely related to the income of a consumer.
For example – with an increase in income, more generally, a consumer would like to shift to a smart phone
from a simple mobile phone he is using at present. Now, the simple mobile phone is an inferior good for him
whereas, the smart phone is a normal good.
Q.16 State any one valid reason for leftward shift in demand curve. (1 mark)
Ans. Leftward Shift in demand curve:
(i) Fall in the price of substitute goods
(ii) Rise in the price of Complementary goods
(iii) Decrease in the size of population
(iv) Unfavourable Change in taste
(v) Fall in income of the consumer (in case of normal goods) (any one valid reason)
Q.17 Good X and Good Y are substitute goods. If price of Good X increases, discuss briefly its likely impact on
the demand for Good Y. (3 marks)
Ans. Good X and Good Y are substitute goods, if the price of Good X rises, it makes the Good X costlier and Good
Y relatively cheaper. As a result demand for Good Y will increase and consumer will substitute Good Y over
Good X.
Q.18 If the income of a consumer increases, discuss briefly its likely impact on the demand for an inferior
good, Good X. (3 marks)
Ans. Increase in income of consumer leads to an increase in his purchasing power so the demand for inferior goods
falls as consumer will tend to shift from an inferior product to a better quality product.
Q.19 Good X and Good Y are complementary goods. If price of Good X increases, discuss briefly its likely
impact on the demand for Good Y. (3 marks)
Ans. Good X and Good Y are complementary goods which are jointly demanded therefore if the price of Good X
increases the demand for Good Y will decrease. This is due to the inverse relationship between the price of
given good and demand for its complementary good.
Q.20 If the income of a consumer increases, discuss briefly its likely impact on the demand for a normal good,
Good X. (3 marks)
Ans. Increase in income of consumer leads to an increase in purchasing power of consumer so the demand for
normal good X increases, as the demand for normal good is directly related to the income of consumer.
Q.21 How would the demand for a commodity be affected by a change in ‘‘tastes and preferences’’ of the consumers
in favour of the commodity ? Explain using a diagram. (3 marks)
Ans. If there is a favourable change in taste and preferences of the consumer for
a good at the same price OP the quantity demanded would increase from
OQ to OQ1.
Demand curve (DD) will shift to the right (D1D1).
This rightward shift shows increase in demand for the good at the same
price, keeping other factors constant.
Q.22 Explain the effect of the increase in the level of air pollution, on the market demand for ‘‘Air Purifiers’’.
(Use diagram) (3 marks)
Ans.
With increase in level of air pollution market demand for air purifiers will increase. DD is the market demand
curve of air purifier at a given level of air pollution. It will shift rightwards to D1D1 due to change in preference
for air purifiers, as the pollution level rises.
Q.23 State whether the following statements are true or false. Give valid reasons in support of your answer.
(a) The coefficient of price elasticity of demand for the commodity is inversely related to the number of
alternative uses of the commodity.
(b) Luxury goods often have lower price elasticity of demand. (4 marks)
Ans. (a) The given statement is false: A commodity with a number of alternative uses carries positive relation with
the coefficient of price elasticity of demand. With the fall in the price of such a commodity the quantity
demanded increases as people can put it for different uses.
(b) The given statement is false: If the price of luxury goods increases, people may postpone its consumption.
Hence the demand is elastic in nature.
Q.24 Giving valid reasons, state whether the following statements are true or false:
(a) An increase in the income of a consumer would lead to an increase in demand for all types of goods
demanded by him.
(b) If percentage change in quantity demanded is equal to percentage change in price, the demand curve
will be a straight line parallel to y-axis. (4 marks)
Ans. (a) The given statement is false: The quantity of a good that a consumer demands can increase or decrease with
rise in income. This depends upon the nature of the good i.e. normal good or an inferior good. With increase
in income of an individual, the demand for normal good rises whereas demand for inferior good falls.
(b) The given statement is false: The demand curve in this situation will be downward sloping from left to
right due to inverse relationship between price and its quantity demanded. Since percentage change in
quantity demanded is equal to percentage change in price, therefore Ed = 1 (ignoring minus sign). Hence
the demand curve will be a rectangular hyperbola.
Q.25 Price elasticity of demand of two goods A and B is (–) 3 and (–) 4 respectively. Which of the two goods
has higher elasticity and why? (3 marks)
Ans. Good B has higher elasticity as compared to A. It is because with change in price by one per cent, percentage
change in demand for B is 4% while in case of good A it is only 3%.
Q.26 Consider a market where there are just two consumers and suppose their demands for the good at
different prices are given below. Calculate the market demand for the good at each price. (3 marks)
p d1 d2
1 9 24
2 8 20
3 7 18
4 6 16
5 5 14
6 4 12
Ans. Market demand is the total quantity demanded of a good by all the consumers at a given price during a given
period of time.
p d1 d2 Market demand (d1 + d2)
1 9 24 33 (= 9 + 24)
2 8 20 28 (= 8 +20)
3 7 18 25 (= 7 + 18)
4 6 16 22 (= 6 + 16)
5 5 14 19 (= 5 + 14)
6 4 12 16 (= 4 + 12)
Case-based Integrated Question As per CBSE New Question Paper Design 2020-21
Question:

Given below is the market demand schedule of Acer PCs showing the quantity of PCs that people are
willing and able to buy at various prices during a given period of time, other things being equal.
Demand Schedule of Acer PCs
Price (`) Quantity Demanded (units)
50000 1000
45000 2000
40000 3000
35000 4000
30000 5000
25000 6000
(i) From market demand schedule of Acer PCs, draw its demand curve. Also explain, using diagram, how the
area under the demand curve could be used to illustrate consumer expenditure on PCs.
(ii) How many PCs per week are people willing and able to buy if the price is `30000? What assumptions are
you making when you answer this question?
(iii) What would you expect to happen to the demand for Acer PCs if Dell cut its prices?
(iv) What would you expect happen to the demand for Acer PCs if the price of CPU and keyboards come down
sharply?
(v) Calculate price elasticity of demand for Acer PCs when price falls from `40000 to `35000.
Answer:
(i) The area under the market demand curve shows price multiplied by quantity, i.e., total expenditure on the good
by all the consumers in the market. If, for example, the price of a PC is `40000 and 3000 units are purchased
it means that consumers have spent `12 crore on Acer PCs.
Y
D
50
45
Price (` in ’000)
40
35
30
25
D
O
1 2 3 4 5 6 X
Demand (in ’000 units)
(ii) If the price is `30000, the quantity demanded will be 5000 Acer PCs.
Assumption: ‘ceteris paribus’, that is all other factors such as income, the price of related goods and tastes and
preferences of the consumers towards Acer PCs, etc. remain the same.
(iii) Dell PCs are substitutes of Acer PCs. When Dell cut its prices, Dell PCs become relatively cheaper than Acer PCs.
Therefore, consumers shift to buying Dell PCs from Acer PCs. As a result, demand for Acer PCs decrease at the
same price.
(iv) CPU and keyboards are complementary products of PCs. If the price of CPU and keyboards come down sharply,
demand for them will rise which in turn will increase the demand for Acer PCs at the same price.
(v) When price falls from `40000 to `35000 demand for Acer PCs rises from 3000 units to 4000 units.
Dq p
Therefore, price elasticity of demand, e=
D ×
Dp q
1000 40000
= ×
−5000 3000
40
= = ( − )2.67
−15
Over to you
Very Short Answer Type Questions (1 mark each)
1. Give meaning of consumer’s equilibrium.
2. Define utility.
3. What is ‘Total Utility’.
4. Define marginal utility.
5. State the law of diminishing marginal utility.
6. State the two conditions of consumer’s equilibrium in case of a single commodity.
7. What is ordinal utility?
8. Define budget set.
9. What can lead to change in budget set of a consumer?
10. Define a budget line.
11. What does a point below the budget line represent?
12. Define an indifference curve.
13. What are monotonic preferences?
14. Define an indifference map.
15. Define marginal rate of substitution.
16. Define demand.
17. What is a demand schedule?
18. Define market demand.
19. How is market demand curve derived?
20. What is meant by normal good in economics?
21. What is meant by inferior good in economics?
22. What causes an upward movement along a demand curve?
23. What does a rightward shift of demand curve indicate?
24. If price of good X rises and it leads to rise in demand for good Y, how are the two goods related?
25. Define substitute goods.
26. Define complementary goods.
27. State the law of demand.
28. What is the assumption of law of demand?
29. What will be the effect of increase in number of buyers on demand for a good?
30. Give the meaning of increase in quantity demanded.
31. What is decrease in demand?
32. Define price elasticity of demand.
33. When is the demand for a good said to be inelastic?
34. When is the demand for a good said to be perfectly inelastic?
35. When is the demand for a good said to be price-elastic?
36. Why is demand for water inelastic?
37. Name four goods having inelastic demand.
38. Why is price elasticity of demand a negative number?
39. Which demand curve is always unitary elastic?
40. What is the shape of a perfectly elastic demand curve?
41. State any two factors affecting price elasticity of demand.

42. What can be the price elasticity of demand if the demand curve is a negatively sloped straight line?
43. What can be elasticity of a constant elasticity demand curve?
44. If two demand curves intersect, at their point of intersection, which demand curve will be more elastic?
45. What does the area under the demand curve of a good represent?
46. What does the area under the marginal utility curve of a good represent?

True/False? Give valid reason in support of your answer.
1. Marginal utility can never be negative.
2. A budget set is the collection of all bundles of goods that a consumer wants to buy.
3. Lower indifference curve represents higher level of satisfaction.
4. An indifference curve is convex to the origin because of the operation of the law of diminishing marginal utility.
5. Marginal rate of substitution (MRS) is the term used to denote the rate at which the consumer is required to
sacrifice units of one good to obtain one more unit of the other good.
6. At the point of consumer’s equilibrium marginal rate of substitution should be diminishing.
7. The demand for a good always increases with increase in the prices of other goods.
8. Demand for a good always increases with the increase in income of its buyers.
9. If goods X and Y are substitutes, a rise in price of X will result in a rightward shift in demand curve of Y.
10. Demand for all food items is inelastic.
11. Marginal rate of substitution is a measure of the slope of a budget line.
12. Marginal rate of substitution remains same along the indifference curve.
13. Only one indifference curve will pass through a given point on an indifference map.
14. When the marginal utility falls, total utility also decreases.
15. A budget set is a collection of such bundles of goods that give same satisfaction.
16. If a fall in price of good X leads to a rise in demand for good Y, then X and Y are substitute goods.
17. Increase in price of tea will shift its demand curve towards left.
18. Price elasticity of demand can never be equal at two different points on a demand curve.
19. When a change in price of good does not result in any change in the expenditure on the good, its demand is
perfectly inelastic.
20. Indifference curves are drawn under the ordinal approach to consumer’s equilibrium.
Objective Type Questions, MCQs

1. Total Utility is constant when Marginal Utility is .................... .
(a) maximum (b) zero
(c) negative (d) none of these
2. The formula for calculating marginal utility is .................... .
(a) TUn – TUn – 1 (b) TUn + TUn – 1
(c) MU1 = MU2 = MU3 (d) MU1 + MU2 + MU3 + ......... + MUn
3. If two commodities are complements, this means that a rise in the price of one commodity will result in ........... .
(a) a rightward shift of demand curve of the other commodity
(b) a rise in the price of the other commodity
(c) no shift in demand curve of the other commodity
(d) a leftward shift in demand curve of the other commodity
4. Change is demand implies .................... .

(a) Increase or decrease in demand of a good due to change in its price
(b) Increase or decrease in demand of a good due to change in the price of its substitute goods
(c) Increase or decrease in demand of a good due to change in the price of its complementary goods
(d) Shifting of demand curve
5. When demand for a commodity is perfectly inelastic, an increase in price by 2%, leads to increase in quantity
demanded by .................... .
(a) 10% (b) 0%
(c) 3% (d) 2%
6. Which one of the following commodities will not have inelastic demand?
(a) Salt (b) Medicine
(c) Mobile phone (d) School uniform
7. If with the rise in price of good Y, demand for good X rises, the two goods are:
(c) Not related (d) Jointly demanded
8. If the demand curve is vertical, absolute value of price elasticity of demand is .................... .
(a) zero (a) less than one
(c) more than one (d) infinity
9. If the demand curve is a rectangular hyperbola, absolute value of price elasticity of demand is .................... .
(a) 1 (b) 0
(c) infinity (d) less than one
10. Elasticity at the midpoint of a straight line demand curve is .................... .
(a) infinity (b) less than one
(c) one (d) zero
11. Which of the shaded area in the diagrams below represents total utility?

12. Which of the can be referred to as ‘point of satiety’?
(a) Marginal Utility is negative (b) Total Utility is rising
(c) Marginal utility is zero (d) Total Utility is falling
13. When income of the consumer falls the impact on price-demand curve of an inferior good is:
(a) Shifts to the right
(b) Shifts to the left
(c) There is upward movement along the curve
(d) There is downward movement along the curve
14. If Marginal Rate of Substitution is constant throughout, the Indifference curve will be:
(a) Parallel to the X-axis. (b) Downward sloping concave.
(c) Downward sloping convex. (d) Downward sloping straight line.
15. If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be:
(a) Downward sloping convex (b) Downward sloping concave
(c) Downward sloping straight line (d) Upward sloping convex
16. If due to fall in the price of good X, demand for good Y rises, the two goods are:
(c) Not related (d) Competitive
17. Total Utility is _________ at the point of satiety.
(a) Minimum (b) Maximum
(c) Zero (d) None of these
18. _________ measures the slope of indifference curve.
(a) Budget Line (b) Marginal Rate of Substitution
(c) Marginal Rate of Transformation (d) Price Ratio
19. A consumer is consuming two goods X and Y and is in equilibrium. The prices of X and Y are `10 and `20
respectively and the marginal utility of good Y is 50 utils. What will be marginal utility of good X?
(a) 100 utils (b) 25 utils
(c) 250 utils (d) 4 utils
20. After reaching the point of satiety, consumption of additional units of the commodity cause:
(a) TU falls and MU increases
(b) Both TU and MU increase
(c) TU falls and MU falls and becomes negative
(d) TU becomes negative and MU falls
21. A consumer consumes only two goods X and Y whose prices are `3 and `4 per unit respectively. If the consumer
chooses a combination of the two goods with marginal utility of X equal to 4 and that of Y equal of 3, then the
consumer will________ .
(a) Buy more units of both, X and Y (b) Buy more units of Y and less of X
(c) Buy more units of X and less of Y (d) Buy less units of both, X and Y
22. Total Utility of a commodity is maximum when:
(a) Consumption of goods is maximum.
(b) Marginal utility is maximum.
(c) Average utility is maximum.
(d) Marginal utility is zero.
23. Marginal Utility of a commodity
(a) Always decreases with increase in quantity
(b) Decreases only when total utility decreases
(c) Decrease but always remain positive
(d) First increase and start decreasing after reaching maximum point
24. A consumer gets maximum satisfaction, when?
(a) The price of commodity is minimum
(b) Total Utility is maximum
(c) Total utility he gets is equal to total utility he give up in terms of money.
(d) Utility he gets from last unit is equal to utility he give up in terms of money.
25. A consumer consumes two goods. Consumer is said to be in equilibrium, when:
(a) Marginal utility of two goods is equal. (b) Total utility of two goods is equal.
(c) Price of two goods is equal. (d) Per rupee marginal utility is equal.
26. When marginal utility is negative, ______________.

(a) Total utility increase at decreasing rate (b) Total utility starts diminishing
(c) Average utility becomes zero (d) Total utility becomes negative
27. If price of commodity is zero. The consumer will consume ______________.
(a) Unlimited units of commodity (b) Till Marginal utility reaches maximum
(c) Till Marginal utility becomes zero (d) till total utility becomes zero
28. Which of the following condition is necessary for consumer equilibrium in case of one commodity?
(a) MUm/MUx = Px (b) MUx = MUm × Px
(c) Px/MUx = MUm (d) MUm/Px = MUx
29. As per consumer's equilibrium theory, to reach consumer's equilibrium a consumer can ______________.
(a) Decrease the price of the commodity (b) Increase the Income of the consumer.
(c) Change the quantity of the commodity (d) Increase the consumption of both goods.
30. The situation of consumer's disequilibrium MUx/Px > MUy/Py arise ___________ .
(a) due to increase in consumption of good X
(b) due to decrease in the price of good Y
(c) due to increase in the price of good X
(d) due to increase in the price of good Y
31. In case of two commodities a consumer strikes equilibrium when:
(a) Px/MUx = Py/MUy = MUm (b) MUx/Px = MUy/Py = MUm
(c) MUx/Px = MUy/Py = MRSxy (d) MUm = MUx/Px
32. Number of Budget sets of a consumer are ______________.
(a) Unlimited, but within budget line
(b) Limited, depends upon the Income of consumer
(c) Limited, depends upon price of commodities
(d) Limited, depends upon price and income of consumer.
33. Which of the following is not a characteristic of an indifference curve?
(a) Indifference Curve is convex to the origin.
(b) Higher Indifference Curve indicates higher level of satisfaction.
(c) Indifference Curve do not intersect each other.
(d) Indifference Curve is concave to the origin.
34. Which of the following is not a determinant of individual demand function?
(a) Distribution of Income
(b) Price
(c) Income of Consumer
(d) Taste and preferences of the consumer
35. A consumer demands more quantity of a commodity when price decreases because ______________.
(a) Total utility increases and become more than the price
(b) Marginal utility becomes more than price
(c) Marginal utility of money increases with decrease in the price
(d) Marginal utility decreases with decrease in price
36. Demand curve shifts rightward in case of ______________.
(a) Decrease in price of the commodity
(b) Decrease in the price of substitute good
(c) Increase in the price of complementary good
(d) Increase in the number of buyers
37. Price elasticity of demand of a commodity is –2.5. Price of commodity increased by 20 percent. What will be the
change in quantity demanded?
(a) Decrease by 50 units (b) Increase by 50 units
(c) Decrease by 8 percent (d) Decrease by 50 percent
38. A consumer has monotonic preferences. The most preferred bundle by him is ______________.
(a) 4 units of X good and 6 units of Y good (b) 6 units of X good and 5 units of Y good
(c) 6 units of X good and 6 units of Y good (d) 4 units of X good and 5 units of Y good
39. What can be the maximum number of Indifference curves of a consumer?
(a) Unlimited numbers of Indifference curves
(b) Up to his maximum satisfaction level
(c) Depends upon his Budget line
(d) Equal to various bundles of budget sets.
40. Slope of the demand curve is zero, its elasticity of demand is ______________.
(a) Zero (b) One
(c) Infinity (d) Less than one
41. Which of these is not a factor affecting elasticity of demand?
(a) Nature of goods (b) Number of uses of the commodity
(c) Availability of substitute goods (d) Quantity of the commodity demanded
42. What is the value of total utility at the point of satiety?
(a) Maximum (b) Minimum
(c) Zero (d) Negative
43. When the value of total utility is maximum, what is the value of marginal utility?
44. What is the value of marginal utility at the point of satiety?
45. When total utility increases at diminishing rate, what happens to marginal utility?
(a) It increases. (b) It decreases.
(c) It becomes zero. (d) It becomes negative.
46. When total utility decreases , what happens to marginal utility?
(a) It increases. (b) It decreases.
(c) It becomes zero. (d) It becomes negative.
47. If the consumption of an additional unit of a commodity causes no change in total utility, then the resultant
marginal utility is :
(a) Zero (b) Constant
(c) Positive (d) Negative
48. According to law of diminishing marginal utility , satisfaction obtained from consumption of each successive
unit ______________.
(a) Increases (b) Decreases
(c) Remains same (d) Either increases or decreases
49. In case of single commodity, consumer’s equilibrium condition under utility approach is :
(a) MUx>Px (b) MUx<Px
(c) MUx=Px (d) MUx × Px
50. In case of two commodities, consumer’s equilibrium condition under utility approach is:
(a) MRSxy = Px/Py (b) MUx = Px
(c) MUx/Px = MUy/Py (d) MUx ≠ Px
51. Which of the following is a condition of consumer’s equilibrium under indifference curve analysis?
(a) MRSxy = Px/Py (b) MUx = Px
(c) MUx /Px=MUy /Py (d) MUx =MUy
52. If MUx /Px > MUy/Py, then to reach at the equilibrium position ,what should the consumer do ?
(a) Stop buying both commodities (b) Buy both the commodities in equal quantity
(c) Buy more of X and less of Y (d) Buy more of Y and less of X
53. If MUx/Px < MUy/Py, then to reach at the equilibrium position ,what should the consumer do ?
(a) Stop buying both commodities (b) Buy both the commodities in equal quantity
(c) Buy more of X and less of Y (d) Buy more of Y and less of X
54. Which of the following is not a property of a indifference curve?
(a) Indifference curve slopes downwards.
(b) Indifference curve is concave to the point of origin.
(c) Higher indifference curve represents higher level of satisfaction.
(d) Two indifference curves cannot intersect each other.
55. Which of the following is a property of a indifference curve?
(a) Indifference curve slopes upwards.
(b) Indifference curve is concave to the point of origin.
(c) Higher indifference curve represents higher level of satisfaction.
(d) Two indifference curves can intersect each other.
56. Indifference curves are convex to the point of origin due to ______________.
(a) Increasing MRS (b) Increasing MRT
(c) Decreasing MRT (d) Decreasing MRS
57. If Marginal Rate of Substitution is constant throughout, the indifference curve will be ______________.
(a) Downward sloping concave (b) Downward sloping convex
(c) Downward sloping straight line (d) Parallel to X-axis
58. Marginal utility is ______________.
(a) the utility from the last unit consumed
(b) the utility from first unit of a commodity consumed
(c) total utility divided by number of units consumed
(d) always positive
59. Total utility is ______________.
(a) the sum of marginal utilities
(b) utility from first unit X number of units consumed
(c) always increasing
(d) utility from last unit X number of units consumed
60. Which of the following can be referred to as ‘point of satiety’ ?
(a) Marginal utility is negative. (b) Marginal utility is zero.
(c) Total utility is rising. (d) Total utility is falling.
61. A consumer consumes only two goods. If price of one of the goods falls, the indifference curve ______________.
(a) Can shift both leftward and rightward (b) Shifts rightward
(c) Does not shift (d) Shifts leftward
62. When total utility is maximum ,marginal utility is _____________. (minimum/zero)

63. _____________ refers to want satisfying capacity of goods and services. (Marginal utility/Utility)
64. As consumer consumes more and more commodity ,the marginal utility derived from each successive unit goes
on _____________ (increasing/decreasing)
65. _____________ is the additional utility obtained from the consumption of one more unit of the given
commodity.(Utility/Marginal utility)
66. When total utility diminishes ,marginal utility is _____________. (zero/ negative)
67. ________ is an economic agent who consumes final goods and services to fulfill his basic needs. (producer/consumer)
68. A change in tastes in favour of a product will lead to _____________in demand.
69. A consumer spends his income on goods X and Y with prices `4 and `6 per unit respectively and has income
of `60. Consider bundles (i) [10,1] (ii) [12, 2] (iii) [15, 5]. Which of the following is true?
(a) (i) and (ii) are in his budget set. (b) (i) and (iii) are in his budget set.
(c) (ii) is in his budget set. (d) None of these
70. The bundles which the consumer can afford given her income and the prices of the goods constitutes
______________.
(a) Goods bundles (b) Budget line bundles
(c) Budget sets (d) Desired bundles
71. When Marginal Utility is negative, Total Utility is ______________.
(a) Increasing (b) Equal to zero.
(c) Decreasing. (d) At a maximum.
72. Price of the good on Y axis decreases, what happens to the budget line?
(a) Swings out on the Y axis (b) Swings out on the X axis
(c) Swings in on the X axis (d) Swings in on Y axis
73. Any bundle above the budget line is known as ______________.
(a) Preferred bundle (b) Non-affordable bundle
(c) Affordable bundle (d) Budget set
74. When demand is elastic, and there is increase in price of a commodity, quantity demanded falls more than
proportionately. (True or False)
75. If Price of the good on the X axis rises, the slope of the Budget line ______________.
(a) increases (b) decreases
(c) remains the same (d) Can’t say
76. A consumer will continue to consume the commodity till its Marginal Utility is zero, if the commodity is
available free. (True or False)
77. A 40% increase in the price of particular good results in 30% decrease in its quantity demanded. Price elasticity
of demand is ______________.
(a) – 0.25 (b) – 0.75
(c) – 1.33 (d) – 0.33
78. In which of the following case, demand is likely to be more elastic?
(a) Matchbox for household consumption (b) Textbooks for a student
(c) Medicine for a patient (d) Electricity consumption
79. Ceteris paribus, an increase in price of good on X axis, would lead to ______________.
(a) Shift of budget line towards origin
(b) Shift of budget line towards right
(c) Reduction in X intercept of the Budget line
(d) An increase in the Y intercept of the budget line
80. If demand curve of a commodity is depicted by Q = a – bp; due to change in a factor determining demand; new
demand curve is depicted by Q = 5a – bp; which of the following holds true?
(a) Demand curve will not change. (b) Demand curve will shift towards right.
(c) Demand curve will shift towards left. (d) Demand curve will rotate.
81. In which of the following situations, demand curve shifts towards left?
(a) Fall in price of the commodity
(b) Increase in price of substitute good
(c) Decrease in price of complementary good
(d) Increase in real income of consumer for normal goods
82. Which of the following bundle a consumer should prefer, if his preferences are monotonic?
(a) 5 Burgers and 2 Juices
(b) 5 Burgers and 3 Juices
(c) 4 Burgers and 3 Juices
(d) 4 Burgers and 2 Juices
83. An Indifference Curve is convex to the origin due to ___________ .
84. Slope of the Budget Line ______________.
(a) Increases with the increase in the income of consumer
(b) Increases with the decrease in the price of good shown on X axis
(c) Increases with the increase in the price of good shown on Y axis
(d) Is the ratio of the price of good shown on X axis and price of good shown on Y axis
85. Consider the Budget line of a consumer with income `400 and the two goods under consideration priced at
` 20 and `40 respectively. If the following three bundles are said to be on the budget line, find the missing
values (i) (_, 0) (ii) (16, _) and (iii) ( _,5)
(a) 20, 4,10 (b) 10, 3, 10
(c) 20, 2, 10 (d) 12,2,20
86. How much a consumer can buy depends upon ______________.
(a) The prices of available goods in the market
(b) The Income of the consumer
(c) The Quality of the good offered by seller
(d) The prices of goods and the income of consumer
87. What does an increase in the slope of a Budget Line indicate?
(a) Increase in Income of the consumer
(b) Increase in the price of good shown on X axis
(c) Increase in the price of good shown on Y axis
(d) Decrease in the price of good shown on X axis
88. Y intercept of the Budget line is determined by ______________.
(a) Ratio of price of good shown on Y axis and price of good shown on X axis
(b) Ratio of price of good shown on Y axis and the income of consumer.
(c) Ratio of the income of consumer and price of good shown on Y axis
(d) Ratio of price of good shown on X axis and price of good shown on Y axis
89. If Total Utility for consuming 5 Units and 7 Units for a consumer are 24 Utils and 34 Utils respectively. Calculate
Marginal Utility for consumption of 6th unit.
(a) 4 Utils (b) 8 Utils
(c) 10 Utils (d) 5 Utils
90. Indifference curve is the locus of all the possible combinations of two goods which gives maximum satisfaction
to the consumer. (True/ False)
91. If Coefficient of Elasticity of demand is (–) 1.5. Which of the following is true?
(a) Demand is price inelastic, 10% increase in price will decrease quantity demanded by 15%
(b) Demand is price elastic, 10% increase in price will increase quantity demanded by 15%
(c) Demand is price elastic, 10% increase in price will decrease quantity demanded by 15%
(d) Demand is price inelastic, 20% increase in price will decrease quantity demanded by 15%
92. Demand for a commodity refers to:
(a) desire backed by ability to pay for the commodity.
(b) need for the commodity and willingness to pay for it.
(c) the quantity demanded of that commodity at a certain price.
(d) the quantity of the commodity demanded at a certain price during any particular period of time.
93. Contraction of demand is the result of:
(a) decrease in the number of consumers. (b) increase in the price of the good concerned.
(c) increase in the prices of other goods. (d) decrease in the income of purchasers.
94. All except one of the following are assumed to remain the same while drawing an individual’s demand curve for
a commodity. Which one is it?
(a) The preference of the individual. (b) His monetary income.
(c) Price of the commodity. (d) Price of related goods.
95. Which of the following pairs of goods is an example of substitutes?
(a) Tea and sugar. (b) Tea and coffee.
(c) Pen and ink. (d) Shirt and trousers.
96. The Law of Demand, assuming other things to remain constant, establishes the relationship between:
(a) income of the consumer and the quantity of a good demanded by him.
(b) price of a good and the quantity demanded
(c) price of a good and the demand for its substitute.
(d) quantity demanded of a good and the relative prices of its complementary goods.
97. Identify the factor which generally keeps the city of demand for a good low:
(a) Nature of the good as a luxury good (b) Very low price of a commodity
(c) Close substitutes for that good (d) High proportion of the consumer’s income spent on it
98. Identify the coefficient of price-elasticity of demand when the percentage increase in the quantity of a good
demanded is smaller than the percentage fall in its price:
(a) Equal to one (b) Greater than one
(c) Smaller than one (d) Zero
99. If regardless of changes in its price, the quantity demanded of a good remains unchanged, then the demand
curve for the good will be:
(a) horizontal. (b) vertical.
(c) positively sloped. (d) negatively sloped.
100. Suppose the price of Pepsi increases, we will expect the demand curve of Coca Cola to:
(a) shift towards left since these are substitutes.
(b) shift towards right since these are substitutes.
(c) remain at the same level.
(d) None of the above
101. All of the following are determinants of demand except:
(a) Tastes and preferences (b) Quantity supplied
(c) Income of the consumer (d) Price of related goods

102. A movement along the demand curve for soft drinks is best described as :
(a) An increase in demand. (b) A decrease in demand.
(c) A change in quantity demanded. (d) A change in demand.
103. If the price of Pepsi decreases relative to the price of Coke and 7-up, the demand for :
(a) Coke will decrease. (b) 7-up will decrease.
(c) Coke and 7-up will increase. (d) Coke and 7-up will decrease.
104. The price of hot dogs increases by 22% and the quantity of hot dogs demanded falls by 25%. This indicates
that demand for hot dogs is:
(a) elastic. (b) inelastic.
(c) unitarily elastic. (d) perfectly elastic.
105. Which of the following statements about price elasticity of supply is correct?
(a) Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in
the price of that good.
(b) Price elasticity of supply is computed as the percentage change in quantity supplied divided by the percentage
change in price.
(c) Both (a) and (b)
(d) Neither (a) nor (b)
106. Which of the following is an incorrect statement?
(a) When goods are substitutes, a fall in the price of one (ceteris paribus) leads to a fall in the quantity demanded
of its substitutes.
(b) When commodities are complements, a fall in the price of one (other things being equal) will cause the
demand of the other to rise.
(c) As the income of the consumer increases, the demand for the commodity increases always and vice versa.
(d) When a commodity becomes fashionable people prefer to buy it and therefore its demand increases.
107. Suppose the price of movies seen at a theatre rises from `120 per person to `200 per person. The theatre
manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200
persons. What is the price elasticity of demand for movies? (Ignore minus sign)
(a) 0.5 (b) 0.8
(c) 1.0 (d) 1.2
108. Suppose a department store has a sale on its silverware. If the price of a plate-setting is reduced from `300 to
`200 and the quantity demanded increases from 3,000 plate-settings to 5,000 plate-settings, what is the price
elasticity of demand for silverware? (Ignore minus sign)
(a) 0.8 (b) 2
(c) 1.25 (d) 1.50
109. If the local pizzeria raises the price of a medium pizza from `60 to `100 and quantity demanded falls from 700
pizzas a night to 100 pizzas a night, the price elasticity of demand for pizzas is: (Ignore minus sign)
(a) 0.67 (b) 1.28
(c) 2.0 (d) 3.0
110. If electricity demand is inelastic, and electricity charges increase, which of the following is likely to occur?
(a) Quantity demanded will fall by a relatively large amount.
(b) Quantity demanded will fall by a relatively small amount.
(c) Quantity demanded will rise in the short run, but fall in the long run.
(d) Quantity demanded will fall in the short run, but rise in the long run.
111. Suppose the demand for meals at a medium-priced restaurant is elastic. If the management of the restaurant is
considering raising prices, it can expect a relatively:
(a) large fall in quantity demanded. (b) large fall in demand.
(c) small fall in quantity demanded. (d) small fall in demand.
112. Demand for a good will tend to be more elastic if it exhibits which of the following characteristics?
(a) It represents a small part of the consumer’s income.
(b) The good has many substitutes available.
(c) It is a necessity (as opposed to a luxury).
(d) There is little time for the consumer to adjust to the price change.
113. Demand for a good will tend to be more inelastic if it exhibits which of the following characteristics?
(a) The good has many substitutes.
(b) The good is a luxury (as opposed to a necessity).
(c) The good is a small part of the consumer’s income.
(d) There is a great deal of time for the consumer to adjust to the change in prices.
114. Total utility is maximum when:
(a) marginal utility is zero. (b) marginal utility is at its highest point.
(c) marginal utility is negative. (d) None of these
115. The consumer is in equilibrium at a point where the budget line:
(a) is above an indifference curve.
(b) is below an indifference curve.
(c) is tangent to an indifference curve.
(d) cuts an indifference curve.
116. An indifference curve slopes down towards right since more of one commodity and less of another result in:
(a) same level of satisfaction. (b) greater satisfaction.
(c) maximum satisfaction. (d) All of these
117. Which of the following statements is incorrect?
(a) An indifference curve is downward-sloping to the right.
(b) Convexity of a curve implies that the slope of the curve diminishes as one moves from left to right.
(c) The price effect in case of inferior goods is negative.
(d) None of the above
118. The second glass of lemonade gives lesser satisfaction to a thirsty boy. This is a clear case of:
(a) Law of demand. (b) Law of diminishing returns.
(c) Law of diminishing marginal utility. (d) Law of supply.
119. Which of the following is a property of an indifference curve?
(a) It is convex to the origin.
(b) The marginal rate of substitution is constant as you move along an indifference curve.
(c) Marginal utility is constant as you move along an indifference curve.
(d) Total utility is greatest where the 45 degree line cuts the indifference curve.
120. When economists speak of the utility of a certain good, they are referring to:
(a) the demand for the good.
(b) the usefulness of the good in consumption.
(c) the expected satisfaction derived from consuming the good.
(d) the rate at which consumers are willing to exchange one good for another.
121. A point below the budget line of a consumer:
(a) Represents a combination of goods which costs the whole of consumer’s income.
(b) Represents a combination of goods which costs less than the consumer’s income.
(c) Represents a combination of goods which is unattainable to the consumer given his/her money income.
(d) Represents a combination of goods which costs more than the consumers’ income.
122. Demand function is the
(a) the desire for a commodity given its price and those of related commodities.
(b) the relationship between the quantity demanded and the price of a good other things remaining the same.
(c) willingness to pay for a good if income is larger enough.
(d) ability to pay for a good.
123. If, as consumer’s income increases, the quantity demanded of a good decreases, the good is called
(a) a substitute. (b) a normal good.
(c) an inferior good. (d) a complement.
124. The price of tomatoes increases and people buy more tomato puree. You infer that tomato puree and tomatoes
are:
(a) normal goods. (b) complements.
(c) substitutes. (d) inferior goods.
125. Potato chips and popcorn are substitutes. A rise in the price of potato chips will ___________ the demand for
popcorn and the quantity of popcorn will ___________ .
(a) increase; increase (b) increase; decrease
(c) decrease; decrease (d) decrease; increase
126. If the price of Orange Juice increases, the demand for Apple Juice will _____________.
(a) increase (b) decrease
(c) remain the same (d) become negative
127. With a fall in the price of a commodity
(a) consumer’s real income increases. (b) consumer’s real income decreases
(c) there is no change in the real income (d) None of the above
128. An example of a good that exhibit direct price-demand relationship is
(a) Giffen goods. (b) Complementary goods.
(c) Substitute goods. (d) None of the above
129. In Economics, when demand for a commodity increases with a fall in its price it is known as:
(a) contraction of demand. (b) expansion of demand.
(c) no change in demand. (d) None of the above
130. The aim of the consumer in allocating his income is to ____________________.
(a) maximize his total utility.
(b) maximize his marginal utility.
(c) to buy the goods he wants most whatever the price.
(d) to buy the goods which he expects to be short in supply.
131. Demand for electricity is elastic because _________.
(a) it is a necessity (b) it has a number of close substitutes
(c) it has alternative uses (d) None of these
132. ________ and ________ do not directly affect the demand curve.
(a) The price of related goods, consumer incomes
(b) Consumer incomes, tastes
(c) The costs of production, bank opening hours
(d) The price of related goods, preferences
133. The Slope of Indifference Curve indicates:
(a) Marginal Rate of Substitution of x for y (b) Price of x and y
(c) Slope of the budget line (d) Change in prices of x and y
134. An indifference curve slopes down towards right since more of one commodity and less of another result in:
(a) same satisfaction (b) greater satisfaction
(c) maximum satisfaction (d) decreasing expenditure
135. The consumer is in equilibrium when the following condition is satisfied:
(a) MUx/MUy > Px/ Py (b) MUx/ MUy < Px/Py
(c) MUx/MUy = Px/ Py (d) None of these
136. The marginal rate of substitution between two perfect substitutes is:
(a) zero (b) one
(c) greater than one (d) infinity
137. Which of the following is a property of the indifference curve ?
(a) Indifference curves are convex to the origin
(b) Indifference curves slope downwards from left to right
(c) No two indifference curves can cut each other
(d) All of the above
138. In economics, what a consumer is ready to pay minus what he actually pays, is termed as:
(a) Consumer’s equilibrium (b) Consumer’s surplus
(c) Consumer’s expenditure (d) None of these
139. If the price of Pepsi decreases relative to the price of Coke and Slice, the demand for:
(a) Coke will rise (b) Slice will decrease
(c) Coke and Slice will increase (d) Coke and Slice will decrease
140. Consumer stops purchasing the additional units of the commodity when
(a) marginal utility starts declining (b) marginal utility become zero
(c) marginal utility is equal to price (d) total utility is increasing
141. In the case of two perfect substitutes, the indifference curve will be :
(a) Straight line (b) L-shaped
(c) U-shaped (d) S-shaped

Revision Questions
1. Explain the concept of ‘marginal utility’ with the help of a numerical example. (3 marks)
2. Explain the relationship between total utility and marginal utility with help of an example. (3 marks)
3. Explain the law of diminishing marginal utility with the help of a total utility schedule. (3 marks)
4. Explain the conditions of consumer’s equilibrium in case of a single good. Use a marginal utility schedule.
(4 marks)
5. A consumer consumes only two goods. What are the conditions of consumer’s equilibrium in the Utility Approach?
Explain the changes that will take place when the consumer is not in equilibrium. (6 marks)
6. Distinguish between Budget set and Budget line. What can lead to change in budget set? (3 marks)
7. What is a budget line? Explain why it is a straight line. Why is it negatively sloped? When can it shift to the
right? (4 marks)
8. What are monotonic preferences? Explain why is an indifference curve (i) Downward sloping from left to right
and (ii) Convex. (4 marks)
9. Explain why an indifference curve to the right shows higher utility level. (3 marks)
10. State and explain three characteristics/properties of indifference curves. (6 marks)
11. What are the conditions of consumer’s equilibrium under the indifference curve approach? What changes will
take place if the conditions are not fulfilled to reach equilibrium? Use diagram. (6 marks)
12. Explain, by giving an example, how is demand for a good affected when price of its substitute rises. (3 marks)
13. Explain how do the following influence demand for a good:
(i) Rise in income of the consumer
(ii) Fall in prices of the related goods (6 marks)
14. Explain the relationship between
(i) Prices of other goods and demand for the given good
(ii) Income of the buyers and demand for a good (6 marks)
15. Explain, giving reason, the law of demand with the help of a demand schedule and demand curve. State the
assumptions of law of demand. (6 marks)
16. Distinguish between ‘decrease in demand’ and ‘decrease in quantity demanded’ with examples. (3 marks)
17. Explain any three factors other than the price of a commodity that affect its demand. (6 marks)
18. State three different causes each for rightward and leftward shift of demand curve of a commodity. (3 marks)
19. A consumer consumes only two goods X and Y and is in equilibrium. If price of good Y rises, what will be the
reaction of the consumer? Explain. (3 marks)
20. Explain the term ‘change in demand’ and represent the same graphically. Also state three factors responsible for
‘change in demand’. (6 marks)
21. Explain the effect of the following on demand for a good:
(i) Rise in income
(ii) Rise in prices of related goods (6 marks)
22. Distinguish between demand by an individual and market demand with the help of a schedule. (3 marks)
23. Distinguish between a normal good and an inferior good. Give example in each case. (3 marks)
24. Explain how the demand for a good is affected by the prices of its related goods. Give examples. (6 marks)
25. Explain how rise in income of a consumer affects the demand of a good. Give examples. (4 marks)
26. Explain with diagrams, the effect of the following on demand for good X: (6 marks)
(i) Rise in price of complementary good Y. (ii) Favourable taste for the good.
27. Explain any two factors that affect the price elasticity of demand. Give suitable examples. (4 marks)
28. Give the meaning of price elasticity of demand. Explain the kinds of price elasticity of demand. (6 marks)
29. What changes will take place in total utility when: (3 marks)
(a) Marginal utility curve remains above X-axis?
(b) Marginal utility curve touches X-axis?
(c) Marginal utility curve lies below X-axis?
30. Under what situations there will be parallel shift in budget line? (3 marks)
31. Explain the effect of a rise in the prices of 'related goods' on the demand for good X. (4 marks)
32. Why does demand of a normal good increases due to increase in consumer's income? (3 marks)
33. What will be the effect of following on elasticity of demand? (4 marks)
(a) Income level of buyers (b) Habit of the consumer
34. What will be the slope of demand curve under following situations? (3 marks)
(a) Perfectly elastic demand (b) Perfectly inelastic demand
(c) Unit elastic demand
35. State the factors of rightward shift of demand curve. Explain any one. (4 marks)
36. State the factors of leftward shift of demand curve. Explain any one. (4 marks)
37. How does 'a proportion of income spent on the good' affect elasticity of demand? (3 marks)
38. Fill in the gaps in the following equations : (4 marks)
(i) MRS = ? (ii) ? = SMU
(iii) MUn = TUn – ? (iv) Ed = DQ/? × P/Q
39. Differentiate between: (4 marks)

(i) Normal goods and Inferior goods
(ii) Complementary goods and substitute goods.
40. Why should the budget line be tangent to the indifference curve at the point of consumer's equilibrium? (4 marks)
41. Why does consumer stop consumption in case where marginal utility is less than price of a good? (3 marks)
42. Explain the conditions determining how many units of a good the consumer will buy at a given price. (4 marks)
43. Define marginal rate of substitution. Explain why is an indifference curve convex? (4 marks)
44. With the help of diagrams, explain the effect of following changes on the demand of a commodity. (6 marks)
(a) A fall in the income of its buyer.
(b) A rise in price of complementary good.
45. What are the conditions of consumer's equilibrium under the indifference curve approach? What changes will take
place if the conditions are not fulfilled to reach equilibrium? (6 marks)
46. State giving reasons whether the following statements are true or false: (4 marks)
(i) Income effect of inferior good is positive.
(ii) Change in quantity demanded is the explanations of law of demand.
47. Explain the concept of marginal rate of substitution (MRS) by giving an example. What happens to MRS when
consumer moves downwards along the indifference curve? Give reasons for you answer. (4 marks)
48. State giving reasons whether the following statements are true or false: (4 marks)
(i) Increase in number of consumers shifts the demand curve rightward.
(ii) The demand of a commodity becomes elastic if its substitute good is available in the market.
49. A consumer consumes only two goods X and Y both priced at `3 per unit. If the consumer chooses a combination
of these two goods with Marginal Rate of Substitution equal to 3, is he consumer in equilibrium? Give reason.
What will a rational consumer do in this situation? Explain. (4 marks)
50. A consumer consumes only two good X and Y whose prices are `4 and `5 per unit respectively. If the consumer
chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the
consumer in equilibrium? Give reason. What will a rational consumer do in this situation? Use utility analysis.
(4 marks)

Numerical Questions
1. Given the utility schedule of good X, whose price is `3 per unit. Assuming that 1 util = `1, state how many units
should a consumer buy to maximise his satisfaction. Give reasons.
Quantity 1 2 3 4 5
Total Utility (utils) 8 15 20 23 25
2. The marginal utility schedule for good X and Y are given below. Both the goods are priced at `1 each and income
of Gauri is assumed to be `5. Determine, how many units of both commodities should be purchased by Gauri to
maximise her total utility?
Units consumed MUx (utils) MUy (utils)
1 11 8
2 10 7
3 9 6
4 8 4
5 7 3
6 6 2
3. A consumer consumes only two goods X and Y. His money income is `50 and the prices of goods X and Y are `10
and `5 respectively. Answer the following questions:
(i) What will be the MRSxy when the consumer is in equilibrium? Why?
(ii) Can 3X + 4Y be a utility maximising bundle? Why?
(iii) Can the consumer afford a bundle 4X + 3Y? Why?
4. Price elasticity of demand of a good is (–)1. At a given price the consumer buys 60 units of the good. How many
units will the consumer buy if the price falls by 10%?
5. Price elasticity of demand is (–)2. The consumer buys a certain quantity of this good at a price of `8 per unit.
When the price falls he buys 50% more quantity. What is the new price?
6. Price elasticity of demand of a good is (–)3. If the price rises from `10 per unit to `12 per unit, what is the
percentage change in demand?
7. At a given market price of a good, a consumer buys 120 units. When price falls by 50%, he buys 150 units.
Calculate price elasticity of demand.
8. Due to 10% fall in price of a commodity, its quantity demanded rises from 400 units of 450 units. Calculate its
price elasticity of demand.
9. A consumer buys a certain quantity of a good at a price of `10 per unit. When price falls to `8 per unit, she buys
40% more quantity. Calculate price elasticity of demand.
10. A 5% fall in price of a good leads to 10% rise in its demand. A consumer buys 40 units of the goods at a price of
`10 per unit. How many units will the consumer buy at a price of `12 per unit? Calculate.
11. A 5% rise in price of a good leads to 5% fall in demand. A consumer buys 100 units of the good when price is ` 5
per unit. At what price will the consumer buy 120 units? Calculate.
12. When the price of a commodity falls by `1 per unit, its quantity demanded increases by 10 units. Its price
elasticity of demand is (–)1. Calculate its quantity demanded at the price before change which was `10 per unit.
13. The price elasticity of demand of a commodity is (–)1.5. When its price falls by `1 per unit its quantity demanded rises
by 3 units. If the quantity demanded before the price change was 30 units, what was the price at this demand? Calculate.
14. Quantity demanded of a commodity rises by 6 units when its price falls by `1 per unit. Its elasticity of demand is
(–)1. If the price before the change was `20 per unit, calculate quantity demanded at this price.
15. Calculate price elasticity of demand by the percentage method:
10 0
9 10
16. Calculate price elasticity of demand by the percentage method:
0 10
1 5
17. When price of good is `13 per unit, the consumer buys 11 units of that good. When price rises to `15 per unit,
the consumer continues to buy 11 units. Calculate price elasticity of demand.
18. When price of a good is `12 per unit, the consumer buys 24 units of that good. When price rises to `14 per unit,
the consumer buys 20 units. Calculate price elasticity of demand.
19. The price of a commodity is `20 per unit and total expenditure on it is `1000. When its price falls to `18 per
unit, total expenditure increases by 8%. Calculate its price elasticity of demand by percentage method.
20. When the price of a commodity falls from `8 per unit to `7 per unit, total expenditure on it increases from `200
to `210. Calculate its price elasticity of demand by percentage method.
21. When price of a good is `7 per unit a consumer buys 12 units. When price falls to `6 per unit he spends `72 on
the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of
demand curve based on this measure of elasticity.
22. A consumer buys 14 units of a good at a price of `8 per unit. At price `7 per unit he spends `98 on the good.
Calculate price elasticity of demand by the percentage method. Comment upon the shape of demand curve based
on this information.
23. A consumer buys 10 units of a commodity at a price of `10 per unit. He incurs an expenditure of `200 on
buying 20 units. Calculate price elasticity of demand by the percentage method. Comment upon the shape of
demand curve based on this information.
24. A consumer buys 11 units of a good at a price of `10 per unit. He can buy 13 units of the same by incurring an
expenditure of `130. Calculate price elasticity of demand by the percentage method. Also comment on the shape
of demand curve based on this information.
25. A consumer buys 10 units of a good at a price of `11 per unit. When the price falls to `9 per unit, he spends
`90 on the good. Calculate price elasticity of demand using the percentage method. Also comment upon the
shape of demand curve based on this information.
26. The price elasticity of demand of X is (–)1.25. Its price falls from `10 to `8 per unit. Calculate the percentage
change in its demand.
27. The price elasticity of demand for a goods is –0.4. If its price increases by 5%, by what percentage will its demand
fall? Calculate.
28. The demand for a good rises by 20% as a result of fall in its price. Its price elasticity of demand is (–)0.8. Calculate
the percentage fall in price.
29. A 5% fall in the price of a good raises its demand from 300 units to 318 units. Calculate its price elasticity of
demand.
30. When the price of a commodity falls by 20%, its demand rises from 400 units to 500 units. Calculate its price
elasticity of demand.
31. Price elasticity of demand of a good is –0.75. Calculate the percentage fall in its price that will result in 15% rise
in its demand.
32. Price of a good rises from `7 per unit to `9 per unit but its demand remains unchanged. Calculate price elasticity
of demand of the good.
33. Price of a good rises from `5 to `6 per unit but it has no effect on demand for that good. Calculate price
elasticity of demand of the good.
34. Price of a good rises by 25% but there is no effect on demand for the good due to this price rise. Calculate price
elasticity of demand.
35. Price elasticity of demand of a good is (–)4. When price of the good falls, its demand rises by 24%. Calculate
percentage change in price.
36. Price elasticity of demand of a good is (–)3. What is the percentage change in demand if the price of the product
rises by 3%? Calculate.
37. The quantity demanded of a commodity at a price of `10 per unit is 80 units. How much quantity will be
demanded when the price rises by 20%, if eD = (–)1.5?
38. The market demand for a good at `4 per unit is 1000 units. The price rises and as a result, its market demand
falls by 25%. Find the new price, if demand is unitary elastic.
39. At a price of `50 per unit, the quantity demanded of a good is 1000 units. When its price falls by 10%, its
quantity demanded rises to 1080 units. Calculate price elasticity of demand.
40. Calculate price elasticity of demand by percentage method.
Price (`) Expenditure (`)
4 600
5 525
41. Price elasticity of demand for a good is (–)1. The consumer spends `190 to buy the good at the current price.
How many units will the consumer buy when the price changes to `2 per unit?

42. When price of a good falls from `5 to `3 per unit, its demand rises by 40%. Calculate its price elasticity of demand.
43. The demand for a good doubles due to a 50% fall in its price. Calculate its price elasticity of demand.
44. At a price of `5 per unit, 25 units of a commodity are demanded. Price elasticity of demand is (–)2. How many
units will be demanded when price falls by `1? What is your answer if demand for the commodity would be
perfectly inelastic?
45. Price of a good X rises by 10%. As a result, its quantity demand falls by 15%. State whether total expenditure on it
will rise or fall.
46. When the price of a good falls by 10%, its demand rises from 200 units to 220 units. Calculate its price elasticity of
demand.
47. When price of a commodity falls by `1 per unit, its quantity demanded rises by 3 units. Its price elasticity of
demand is (–)2. Calculate its quantity demanded if the price before the change was `10 per unit.
48. A consumer buys 20 units of a good at a price of `5 per unit. He incurs an expenditure of `120 when he buys
24 units. Calculate price elasticity of demand using the percentage method. Comment upon the likely shape of
49. Calculate the price elasticity of demand for a commodity when its price increases by 25% and quantity demanded
falls from 150 units to 120 units.
50. Price elasticity of demand of a good is (–)2. The consumer buys a certain quantity of this good at a price of `8 per
unit. When price falls, he buys 50% more quantity. What is the new price?
51. Calculate the percentage fall in demand for a good whose price rises from `10 per unit to `11 per unit. Its price
elasticity of demand is (–)0.25.
52. The price elasticity of demand of a good is (–)0.5. At a price of `20 per unit its demand is 300 units. At what
price will its demand increase by 10 per cent?
53. The price of a commodity increases from `10 to `14. Calculate percentage fall in quantity demanded of the
commodity if coefficient of price elasticity of demand is (–) 1·25.
54. At a price of `5 per unit, a consumer buys 40 units of a commodity. The coefficient of price elasticity of demand is
given as (–)2. How many units of the commodity will she buy if the price is reduced by 20% ?
55. The coefficient of price elasticity of demand is given as unity (1). At a price of `10, a consumer buys 120 units of
the commodity. How many units of the commodity will she buy if the price increases by 20% ?
56. The coefficient of price elasticity of demand is given as (–) 3. At a price of `10, a consumer buys 100 units of the
commodity. How many units of the commodity will she buy if the price falls by 50% ?
57. The price of a commodity X increases by 20%, as a result the quantity demanded falls to zero. Calculate coefficient
of price elasticity of demand. Comment upon the likely shape of the demand curve.
58. The price of a commodity X decreases by 10%, as a result the quantity demanded doubles. Calculate coefficient of
price elasticity of demand. Comment upon the likely shape of the demand curve.
59. When price of a good is `7 per unit a consumer buys 12 units. When price falls to `6 per unit he spends `72 on
the goods. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of
demand curve based on this measure of elasticity.
60. A consumer buys 20 units of a good at a price of `5 per unit. He incurs an expenditure of `120 when he buys
24 units. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of
Self Assessment Test 1
UNIT 2: Consumer's Equilibrium and Demand

Time allowed : 1 hour Maximum Marks : 25
Q.1 Which of the following can be referred to as ‘point of satiety’? (Choose the correct alternative) (1 mark)
(a) Marginal Utility is negative (b) Total Utility is rising
(c) Marginal utility is zero (d) Total Utility is falling
Q.2 _________ measures the slope of indifference curve. (Choose the correct alternative) (1 mark)
(a) Budget Line (b) Marginal Rate of Substitution
(c) Marginal Rate of Transformation (d) Price Ratio
Q.3 ___________ demand curve is always unitary elastic. (Fill up the blank with correct answer) (1 mark)
Q.4 Define utility. (1 mark)
Q.5 What is ordinal utility? (1 mark)
Q.6 What is budget set? Explain what can lead to change in budget set. (3 marks)
Q.7 If the price of a commodity rises by 40% and its quantity demanded falls from 150 units to 120 units, calculate
coefficient of price elasticity of demand for the commodity. (3 marks)
Q.8 Given the price of a good, how will a consumer decide as to how much quantity to buy of that good ? Explain
with the help of a numerical example. (4 marks)
Q.9 (a) State the equation of budget line. (1 mark)
(b) A rational consumer is consuming only two goods, Good X and Good Y with `4 and `5 as their respective
prices. Her total money income is `40. Answer the following questions, based on the given information :
(i) State the consumer’s budget line equation.
(ii) What would be the slope of the budget line ? (3 marks)
Q.10 A consumer consumes only two goods. For the consumer to be in equilibrium why must marginal rate of
substitution be equal to the ratio of prices of the two goods? Explain. (6 marks)

Time allowed : 1 hour Maximum Marks : 25
Q.1 Total Utility is constant when Marginal Utility is ______________ . (Choose the correct alternative) (1 mark)
(a) maximum (b) zero
(c) negative (d) none of these
Q.2 If Marginal Rate of Substitution is constant throughout, the Indifference curve will be:
(Choose the correct alternative) (1 mark)
(a) Parallel to the X-axis. (b) Downward sloping concave.
(c) Downward sloping convex. (d) Downward sloping straight line.
Q.3 What can be elasticity of a constant elasticity demand curve? (Choose the correct alternative) (1 mark)
(a) Ed = 0 (b) Ed = 1
(c) Both (a) and (b) (d) Ed = ∞
Q.4 What is total utility? (1 mark)
Q.5 What are monotonic preferences? (1 mark)
Q.6 Define a budget line. When can it shift to the right? (3 marks)
Q.7 The coefficient of price elasticity of demand for Good X is (–) 0·2. If there is a 5% increase in the price of the
good, by what percentage will the quantity demanded for the good fall ? (3 marks)
Q.8 Explain the conditions consumer’s equilibrium in case of a single good. Use a marginal utility schedule. (4 marks)
Q.9 Suppose a consumer whose budget is `500, wants to consume only two goods, Good X and Good Y. The goods
are respectively priced at `50 and `25.
Answer the following questions on the basis of the given information:
(a) State the budget equation of the consumer.
(b) What is the slope of the budget line?
(c) How many units can she purchase if she spends the entire `500 on Good X?
(d) How many units can she purchase if she spends the entire `500 on Good Y, given that the price of good Y
has doubled ? (4 marks)
Q.10 A consumer consumes only two goods. Why is the consumer in equilibrium when he buys only that combination
of the two goods that is shown at the point of tangency of the budget line with an indifference curve? Explain
with the help of a diagram. (6 marks)
UNIT 1: Introduction
Time allowed : 1 hour 30 minutes Maximum Marks : 40
Q.1 If Marginal Rate of Substitution is increasing throughout, the Indifference Curve will be:
(a) Downward sloping convex (b) Downward sloping concave
(c) Downward sloping straight line (d) Upward sloping convex
Q.2 According to cardinal approach, utility is measured in terms of _________ .
(a) Rupees (b) Ranks
(c) Utils (d) Units
Q.3 A production possibility curve (PPC) would be concave to the origin if marginal opportunity cost is :
(a) Increasing (b) Decreasing
(c) Constant (d) Negative
Q.5 Define marginal rate of transformation. (1 mark)
Q.5 Define marginal utility. (1 mark)
Q.6 Define an indifference map. (1 mark)
Q.7 Do rich countries also face central problems ? Give reasons for your answer. (1 mark)
Q.8 Explain the distinction between the equations of budget line and budget constraint. (3 marks)
Q.9 Discuss briefly the meaning of positive economics and normative economics, with suitable examples.
(3 marks)
Q.10 If the price of a commodity rises by 10% and its quantity demanded falls from 40 units to 30 units, calculate
coefficient of price elasticity of demand. Comment on the nature of price elasticity of demand. (3 marks)
Q.11 Distinguish between demand by an individual consumer and market demand of that good. Also state the factors
leading to fall in demand by an individual consumer. (4 marks)
Q.12 (a) Why is a production possibilities curve concave?
(b) What does a point lying below the PPC highlight? (4 marks)
Q.13 A rational consumer is consuming only two goods, Good X and Good Y. The prices of the goods are `20 and
`10 respectively. Her total money income is `200. Answer the following questions, using the given information :
(i) State her Budget line equation.
(ii) State the slope of the Budget line of the consumer.
(iii) If she decides to spend her entire income on Good Y, how many units of Good Y can she buy ? (4 marks)
Q.14 Explain the conditions of consumer's equilibrium using Indifference Curve Analysis. (6 marks)
Q.15 Elaborate the law of demand, with the help of a hypothetical schedule and a suitable diagram. (3 marks)
Check List to Objective Type Questions
Objective Type Questions 2.1 12. 100 units

1. (a) TUn – TUn – 1 13. `15
2. (c) 14. 120 units
3. (b) 25 units 15. Infinity
4. (c) TU falls and MU falls and becomes negative 16. 0
5. (c) Buy more units of X and less of Y 17. 0
6. Total utility. 18. –1
7. (c) Maximum 19. –2
20. –1.6
Objective Type Questions 2.2 21. 0 (Vertical demand curve)
1. a bundle which costs less than the consumer’s income, i.e., 22. 0 (Vertical demand curve)
some income is left over. 23. Infinity (Horizontal demand curve)
2. (d) Downward sloping straight line. 24. Infinity (Horizontal demand curve)
3. (b) Downward sloping concave 25. 0 (Vertical demand curve)
4. (b) Marginal Rate of Substitution 26. 25%
Objective Type Questions 2.3 27. 2%
1. substitutes 28. 25%
2. water is a necessity of life and it has no substitutes. 29. –1.2
3. the demand for a good is negatively (or inversely) related 30. –1.25
to the price of a good. 31. 20%
4. a horizontal straight line (i.e., parallel to X-axis). 32. 0
5. flatter 33. 0
6. (d) a leftward shift in demand curve of the other 34. 0
commodity 35. Falls by 6%
7. (d) Shifting of demand curve 36. Falls by 9 %
8. (b) 2% 37. 56 units
9. (c) Mobile phone 38. `5
10. (a) Substitutes 39. –0.8
11. (a) zero 40. –1.2
12. (a) 1 41. 95 units
13. (a) Shifts to the right. 42. –1
14. (b) Complements 43. –2
15. Demand will be inelastic because cooking gas is a necessity. 44. 35; 25 units
16. Give subsidies to reduce price/Undertake health campaigns 45. Decrease
to promote the positive effects of milk consumption. 46. –1
17. Demand for desert coolers will increase. 47. 18 units
18. Reduce price by giving subsidy. 48. Infinity
19. Put a tax on it so that its price rises. 49. –0.8
50. `6
Answer to Numerical Questions 51. 2.5%
1. 4 units 52. `16
2. 4 units of X and 1 unit of Y. 53. 50%
3. (i) 2 : 1 54. 56 units
(ii) Yes; Expenditure = `50 = Income 55. 96 units
(iii) No; Expenditure = `55 > Income 56. 250 units
4. 66 units 57. Ed = 5
5. `6 Shape of demand curve is downward sloping from left to
6. Falls by 6% right (flatter demand curve away from origin)
7. –0.5 58. Ed = 10
8. –1.25 Shape of demand curve is downward sloping from left to
9. –2 right (flatter demand curve away from origin)
10. 24 units 59. Ed = 0; vertical demand curve
11. `4 60. Ed = ∞ ; horizontal demand curve
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UNIT 2: Consumer's Equilibrium and Demand 45

Introduction Consumer's Equilibrium and Demand

Consumer’s Equilibrium – Cardinal Utility Approach/

Complete the table: (3 marks)

Law of Diminishing Marginal Utility

Conditions of Consumer’s Equilibrium – in case of one commodity

Consumption (units) Marginal Utility (`)

Consumer’s equilibrium in case of two commodities

Units consumed MUx / Px (utils) MUy / Py (utils)

Conditions of Consumer’s Equilibrium

Consumer’s equilibrium in case of two commodities

Objective Type Questions 2.1

Relationship between total utility and Marginal Utility

Representation of the law of diminishing marginal utility

Consumer’s Equilibrium – Ordinal Utility Approach

Marginal rate of substitution (MRS)

number of units of good Y willing to sacrifice DY

TABLE 2.5: Constant Marginal Rate of Substitution

In case of goods being perfect substitutes, the marginal rate

Indifference Map and Monotonic Preferences

Properties or characteristics of indifference curve

Consumer’s Budget Set

Changes in the budget set

In Figure 2.7, FA is the budget line of the consumer. The

Price Ratio and the Slope of the Budget Line

Properties of budget line

2. Change in price of one or both the goods

Conditions of consumer’s equilibrium –Indifference curve analysis/Ordinal

Objective Type Questions 2.2

Q.12 Explain the following conditions: (4 marks)

Ans. (a) PxQx + PyQy = M

2.3 Demand and Price Elasticity of Demand

Slope of demand curve

Slope of demand curve

Law of demand with the help of a Demand Schedule

Movements along the Demand Curve

Contraction of demand (or decrease in quantity

Shifts in the Demand Curve

Determinants of Demand (Shift factors)

2. Change in prices of related goods

3. Change in tastes and preferences for the good

Factors affecting market demand

Price Elasticity of Demand

Price (`) Demand (units)

change in quantity demanded ( Dq) original price (p) 50 28

Degrees/Kinds of Price Elasticity of Demand

Therefore, price elasticity of demand

4. Perfectly inelastic demand

Original price, p = 10 and change in price, Dp = 9 – 10 = –1;

Factors affecting Price Elasticity of Demand of a Good

Inelastic Demand for Luxuries

Inelastic Demand for low priced goods

4. Time period of response

Demand for a commodity

change in quantity demanded( Dq) original price (p) 50 28

⇒ x = 4, i.e., New price = `4 per unit

Since eD = 4 > 1, therefore, demand for the good is elastic.

percentage change in demand 0