B.COM (H) Semester — 1st a OLIVE we 4 MICRO ECONOMICS |Q1. What do we mean by a ‘Competitive Market’? AN. The term competitive market describes a market in which there are so many buyers and so many sellers that each has a negligible impact on the market price. The market for ice-cream, like most markets in the economy, is highly competitive. Each seller of ice-cream has limited control over the price because other sellers are offering similar products. A seller has little reason to charge less than the going price, and if he or she charges more, buyers will make their purchases elsewhere. Similarly, no single buyer of ice-cream can influence the price of ice-cream because each buyer purchases only a small amount 4Q2. Explain the difference between a demand schedule and a demand curve. ANS. The quantity demanded of any good isthe amount of the good that buyers are willing and able to purchase. The given table shows how many ice-cream cones Karishma buys each month at different prices of ice-cream. If ice-cream is free, Karishma eats 12 cones per month. At 220 per cone, Karishma buys 10 cones each month. As the price rises further, she buys fewer and fewer cones. When the price reaches 2120, Karishma doesn't buy any ice-cream at all. This table is a demand schedule, a table that shows the relationship between the price of a good and the quantity demanded, all other factors remaining constant that influence how much of a good consumers want to buyThe demand schedule is a table that shows the quantity demanded at each price. The demand curve is a graphical representation of the demand schedule. Itillustrates how the quantity demanded of the good changes as its price varies. As quantity demanded increases with fall in price, the demand curve slopes downwards 100 120 The graph in figure uses the numbers from the table to illustrate the law of demand. By convention, the price of ice-cream is on the vertical axis and the quantity of ice-cream demanded is on the horizontal axis. The downward- sloping line relating price and quantity demanded is called the demand curveQ3. Show how market demand is derived from individual demand. (ela ind? Give an example to Ans. The quantity demanded ina market is the sum of the quantities demanded by all the buyers at each price. Thus, the market demand curve is found by adding horizontally the individual demand curve. At a price of 780,Karishma demands 4 ice-cream cones, and Ameesha demands 3 ice-cream cones. The quantity demanded in the market at this price is 7 cones Cheo4psase pasion trades resi 24 6 8 1012 141618 Quantity of ice-cream cones ‘Quantity ofice-cream cones Quenilyofeo-cream conos Price of ice- Karishma Market Demand cream cone 20 12 ia 19 cones 220 40 6 46 cones 240 8 5 43 cones 260 6 4 10 cones 280 4 3 7 cones =100 2 2 4 cones =120 0 1 4 conesQ4. List the determinants of Individual Demand AN. Determinants of Individual Demand: 2 1. Price of the commodity. Generally, itis expected that with a decrease in the price of a commodity, the demand for the commodity increases and witha rise in price of the commodity, its demand decreases 2. INCOME. the demand for goods depends upon the income of people. A lower income means that you have less to spend in total, so you would have to spend less on some and probably on most goods. With a rise and fall in income the demand curve shifts upwards and downwards respectively. If the demand for a good falls when income falls, the good is called a normal good. Not all goods are normal goods. If the demand for a good rises when income falls, the good is called an inferior good. An example of an inferior good might be bus rides. As your income falls, you are less likely to buy a car or take a cab and more likely to ride a bus3. Prices of Related Goods. the demand fora commodity is affected by the changes in price of related goods. In case of substitute goods, when the price of a substitute falls, the demand for that good declines and when the price of the substitute rises, the demand forthat good increases. For example, tea and coffee. Tn case of complementary goods, increase in price of one commodity leads to a decrease indemand for the other and vice versa. For example, printers and cartridges 4. Tastes and Preferences. the most obvious determinant of your demand is your tastes. Tastes include fashion, habit, customs etc. If you like ice-cream, you buy more of it. Economists normally do not try to explain people's tastes because tastes are based on historical and psychological forces that are beyond the realm of Economics 5. Future Expectations. your expectations about the future may affect your demand for goods or services today. If you expect to earn a higher incomenext month, you may choose to save less now and spend more of your current income on buying things. If you expect the price of a commodity to fall tomorrow, you may be less willing to buy that commodity at today's price6. Number of Buyers. inaddition to the above factors, which influence the behaviour of individual buyers, market demand depends on the number of these buyers. If Punit were to join Karan and Naman as another consumer of ice-cream, the quantity demanded in the market would be higher at every price, and market demand would increase ®Celoma iris oR Mi tn aia ata (Tura Rol ve List some factors that may cause the demand curve to shi Ans. The market demand curve holds other things constant, need not be stable over time. If something happens to alter the quantity demanded at any given price, the demand curve shifts. When the demand for a commodity changes due to other factors affecting its demand other than price, it is called a shift in the demand curve Any change that increases the quantity demanded at every price shifts the demand curve to the right and is called an increase in demand. Any change that reduces the quantity demanded at every price shifts the demand curve to the left and is called a decrease in demand. There are many factors that can shift the demand curve [ej | tnerease Decrease in the income of the consumer £4 th ase/Decrease in the price of substitute goods inges intastes and preferences in favour offagainst the modity Expectation of price rise/fall in future Increase! Decrease in the total number of consumersQ6. Explain the concepts of change demanded and change in demand. Ans. Change in quantity demanded refers to change in the quantity purchased due to increase or decrease in the price of a product keeping the other factors constant. Changes in quantity demanded can be measured by the movement of demand curve The term, change in quantity demanded refers to expansion or contraction of demand. Expansion of demand refers to the period when quantity demanded is more because of the fallin prices of a product. However, contraction of demand takes place when the quantity demanded is less due to rise in the price of a productChange in Demand refers to increase or decrease in demand of a good due to various determinants of demand, while keeping the price constant. Changes in demand are measured by shifts in demand curve. Change in demand refers to increase or decrease in demand. Increase in demand refers to the rise in demand of a product at a given price. On the other hand, decrease in demand refers to the fall in demand of a product at a given priceCOW MM PS Tare Te molt ad amovementalong the demand curve. mand curve and Ans. Movement along a demand curve occurs due to change in the price holding, all other factors remaining constant. A shift in the demand curve occurs due to a change in any other non-price factor affecting the demand for a particular good ay aay tt 1 \ [| (0) Ashift in the Demand Curve {0A movement slong the Demand Curve Price of ‘Change in the weather Price of ‘Atax thst raises the woollen shifts the demand of _ woollen Price of kurtis results kortis ‘woollen Kurtis to left. feurtis ina movement slong $409) the demana cue. £200 40 20 12=——=20 ‘Number of woollen kurtis bought Number of woollen kurtis boughtQ8. Explain the difference between a supply schedule and a supply curve. Ans. The table and the figure below show the quantity of ice-cream cones supplied each month by Sonu, an ice-cream seller, at various es of ice-cream. At a price below 210, Sonudoes not supply any ice-cream at all. As the price rises, he supplies a greater and greater quantity. The supply schedule is a table that shows the relationship between the price of a good and the quantity supplied, holding constant everything else that influences how much producers of the good want to sell. The graph in figure below uses the numbers from the table to illustrate the law of supply. The curve relating to price and quantity supplied is called the supply curve. The supply curve slopes upwards because, other things remaining equal, a higher price means a greater quantity suppliednce The supply schedule is a table that aE Supply curve shows the quantity supplied at z each price. The supply curve is a ane graphical representation of the supply schedule. It illustrates how the quantity supplied of the good changesas its price varies Lk i because a higher price increase rae STB e Ha the quantity supplied, the supply incase quaniy of conos suppies We-sTeameoes curve slopes upwards Price of ice-cream Quantity of cones cone (=) 0 5 10 15 20 25 alaAloly|siolo 30Q9. Show how market supply is derived from individual supply. Ans. The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of 220, Sonu supplies 3 ice cream cones and Sahil supplies 4 ice-cream cones. The quantity supplied in the market at this price is 7 cones Price of ice-creamcone | Sonu + Sahil = Market Supply 20 0 + 0 = Ocones 35 0 oF 0 Ocones #0 - + 0 = 1 cones H5 2) + 2 = 4Acones 320 3 ca 4 = 7 cones 220 4 + 6 = 10 cones =30 a + 8 = 13. cones bes tis ‘Sahi’s Supply & op Market Supty i Tresor eevme ‘Quanty of ice-cream cones Quanity of ice-cream cones Quaiilly of lce-ceai caries Oppeeseresiie ieseeeTeoTIZQ10. List the determinants of Individual Supply. Ans. Determinants of Individual Supply: 1. Price of Commodity. Price of a commodity and its supply are directly related. As price increases, quantity supplied of the commodity increases and as price decreases, quantity supplied also aa” a 2. Input Prices. To produce their output of ice-cream, sellers use various inputs such as cream, sugar, flavoring, ice-cream machines, the buildings in which the ice-cream is made, and the labour of workers to mix the ingredients and operate the machines. When the price of one or more of these inputs rises, producing ice-cream becomes less profitable, and firms supply less ice-cream. If input prices rise substantially, a firm might shut down and supply no ice- cream at all. Thus, the supply of a good is negatively related to the price of the inputs used to make the good3. Technology. The technology for turning inputs into ice- cream is another determinant of supply. The invention of the mechanized ice-cream machine, for example, reduced the amount of labour necessary to make cream. By reducing the firms’ costs, the advancement in technology raised the supply of ice-cream ar » 4. Expectations. The amount of ice-cream a firm supplies today may depend on its expectations about the future. For example, if a firm expects the price of ice-cream to rise in the future, it will put some of its current production into storage and supply less to the market today5. Number of Sellers. in addition to the preceding factors, which influence the behavior of individual sellers, market supply depends on the number of these sellers. If Sonu or Sahil were to retire from the ice-cream business, the supply in the market would fallQ11. What do we mean by a shift in the supply curve? List some factors that may cause the supply curve to shift. Ans. When there is a change in supply as a result of change in factors other than the price, shift in supply curve occurs. These factors include change in price of other goods, change in price of inputs, change in technology or change in government policies. For example, suppose the price of sugar falls. Sugar is an input for producing ice-cream, so the fall in the price of sugar makes selling ice-cream more profitable. This raises the supply of ice cream -At any given price, sellers are now willing to produce a larger quantity . The supply curve for ice cream shifts to the right from S, to S, in the diagram. Also, the reverse happens if the price of inputs increases. In that case the supply curve moves to the left at S, in supply crease in supply, Quantiy of Seneca