Microeconomics Important Questions - Part - 1

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MICROECONOMICS: IMPORTANT QUESTIONS

PART – I
UNIT I: INTRODUCTION
UNIT II: THEORY OF DEMAND AND SUPPLY
UNIT III: THEORY OF CONSUMER BEHAVIOUR
UNIT I: INTRODUCTION
1. Discuss the nature and scope of Economics.
Ans: Economics is a subject matter that focuses on the rational management of scarce resources
in a manner such that our economic gains are maximized at the micro as well as the macro level.
Nature:
Economics is divided into two fields with respect to nature – Science and Arts.
Economics as an Art: Like any art form, economics requires a great deal of imagination;
however, the imagination must be in the context of reality and cannot be a random idea.
Economics is goal oriented. It states the means to achieve an end; similar is the case with arts. For
instance, Arts tells us the ‘how to’ part of anything. Economics also states theories that discuss the
‘how to’ part of an end goal. Therefore, arts and economics both bring life to the theories.
Economics as a Science: Science determines the cause-and-effect relationship. It is based on
experimentation. Economics has all these qualities; it establishes a strong cause and effect
relationship for the consumption of goods and services between demand and supply.
Economics is a science and can be of two types:
Positive: It is based on cause-and-effect relationship between variables and lays down the facts.
Normative: It is based on value judgements and is to do with ‘how’ things should be.
Hence, economics as a science deal with the theory and the principles; economics as an art deal
with the application and execution.
2. Distinguish between
a. microeconomics and macroeconomics.
Ans:
(i) Microeconomics is the study of individual economic units of an economy whereas
macroeconomics is the study of economy as a whole and it aggregates.
(ii) Central problems of microeconomics is price determination and allocation of resources
but that of macroeconomics is determination of level of income and employment.
(iii) Main tools of microeconomics are 'demand and supply of the commodity but that of
macroeconomics are aggregate demand and aggregate supply of the whole economy.
(iv) Microeconomics analyses how equilibrium of a consumer, a producer or an industry is
attained but macroeconomics is concerned with determination of economy's equilibrium
level of income, employment and output.
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(v) Microeconomics deals with prices of individual goods and individual factors of
production but macroeconomics deals with prices and incomes in general.
b. Positive and normative economics.

Ans:
(i) One of the primary differences between positive economics and normative economics is
the matter of truth. Positive economics deals with the relevant data, facts, and figures
required to analyse and the respective arguments. Whereas on the other hand, Normative
Economics deals with the fictions and what was required to do and does not include any
data interpretations or checking of data.
(ii) The current demand-supply situation, the preferences of the masses, the change in the real
course of action by the government and the actual results of the actions which were taken
were captured under positive economics. On the other hand, the moral values of a
particular scenario, the fictional thought process what as actually projected to carry on
include Normative Economy.
(iii) Positive Economics is always backed up by data, information, and the facts whereas
normative economics does not require these as it only captures the values.
3. Write a short note on Scarcity and Choice.

Ans: Scarcity: Scarcity means limited in supply. There are three categories of economic
resources: Land, labour and capital. Each of these resources exists in a finite, limited quantity.
People have unlimited wants and since we have a limited number of resources it means we can
only produce a limited amount of goods and services, that is, the limited resources cannot produce
enough to satisfy everyone’s unlimited wants. This gives rise to the study of economics for better
allocation of scare resources among competing and insatiable needs to maximize welfare.
Choice: A choice is a comparison of alternatives. The problem of scarcity leaves us in a situation
in which we must constantly choose which of our wants we will seek to satisfy. For instance, an
individual consumer must choose among the types of goods and services to consume because of
his limited income. He must also choose between spending on present consumption and saving
for future consumption.
4. Discuss the basic problems of an economy.
Ans: The limited resources have led to the problem of how to assign the scare resources to achieve
maximum satisfaction. These problems are called central economic problems because other problems
revolve around them. They are:
What to produce: This has to do with the problem of allocation of resources among different goods
and services. It involves selection of what should be produced and in what quantity to satisfy
consumer wants as best as possible using the available resources. The society must choose among
different kinds of goods and decide on how to allocate resources among them.
How to Produce: This problem refers to selection of appropriate technique of production, that is, how
to combine resources in other to produce goods and service in a more efficient way and at a minimum
cost. A combination of resources (factors) implies a technique of production. The technique of using a
combination which involves less capital, and more labour is known as labour-intensive mode of
production while a combination of more capital and less labour is capital-intensive mode of
production.
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For whom to produce: This economic problem focuses on how the national product is to be
distributed among the members of the society, that is, how the consumer goods and capital goods will
be distributed. The society must decide who receives the output produced in the economy because
human wants are unlimited. The money income of the people determines the distribution of output in
the society. The greater the money income, the greater the quantity of goods the person will purchase
from the market.
5. What is opportunity cost and marginal opportunity cost?

Ans: Opportunity cost in economics refers to the value of the next best alternative forgone when a
decision is made to allocate resources to a particular option.
Marginal opportunity cost in economics refers to the additional opportunity cost incurred by
producing one more unit of a good or service. It focuses on the change in opportunity cost
because of producing or consuming an additional unit. In short, Marginal Opportunity Cost is
described as a rate at which output of Good-Y is to be sacrificed for every additional unit of
Good-X.
MOC = Change in loss of output/Change in gain of output
6. Discuss Production Possibility Curve.
Ans: DEFINITION: Production possibility set refers to different possible combinations of two
goods that can be produced from a given amount of resources and a given level of technology.
Production possibility curve or frontier (PPF) shows the various alternative combinations of
goods and services that an economy can produce when the resources are all fully and efficiently
employed.
PPC SCHEDULE & CURVE:
PP schedule refers to tabular presentation of different possible combinations of two goods that an
economy can produce with given resources and available technology. The table given below gives
a production possibility schedule.
The schedule shows the various possible combinations that might be made with the available
resources.
The diagram below illustrates a production possibility curve.
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Good X is shown on the X-axis and good Y is shown on the y-axis. PP’ is the required production
possibility curve. It shows, the maximum amount of good X produced, given the amount of the
other good and various combinations that can be made.
CHARACTERISTICS:
a. PPC is a downward sloping curve as production of one good must be decreased to gain
another.
b. PPC is concave to the origin due to Increasing marginal opportunity cost.
c. Exceptions:
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ATTAINABLE AND UNATTAINABLE PPC
The economy can either produce OP of good Y or OP’ of good X or any other combination shown
by points A, B, C, D or E. All points on the curve are attainable. The problem is that of choice,
i.e., to choose among the attainable points on the curve. Any point inside the curve, such as point
F, indicates unemployment of resources or inefficient use of resources. Any point outside the
curve, such as point G, is unattainable given the scarcity of resources. An economy always
produces on PPC and thus points on the curve are said to be attainable.
SHIFT OF THE PPC CURVE
a. Rightward shift
PPC will shift to the right when:

a. New stock of resources is
discovered.
b. There is an advancement in
technology.
b. Leftward shift
PPC will shift to the left when:

a. Resources are destroyed because
of national calamity like
earthquake, fire, war, etc.
b. There is use of outdated
technology.
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7. Calculate Marginal Opportunity Cost.
GOOD X GOOD Y
1 20
2 18
3 15
4 11
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UNIT II: THEORY OF DEMAND AND SUPPLY
CHAPTER 1: THEORY OF DEMAND
1. Write a short note on demand, individual demand and market demand.

Ans: Demand for a commodity is the desire to buy a commodity backed with sufficient purchasing
power and the willingness to spend.
Individual demand shows different quantities of a commodity that one buyer is ready to
buy at different possible prices of the commodity at a point of a time.
Market demand is the summation of the individual demand . It shows various quantities of a
commodity that all the buyers in the market are ready to buy at different possible prices of the
commodity at a point of time.
2. What is derived demand?

Ans: The demand for a commodity that arises because of the demand for some other commodity
is called derived demand. For instance, demand for steel, bricks, cement, stones, wood, etc. is a
derived demand that is derived from the demand for houses and other buildings. The demand for
these goods arises because of the demand for houses and other buildings.
3. What are the determinants of demand?

OR
What is demand function?
Ans: Demand function shows the relationship between demand for a commodity and its various
determinants. It shows how demand for a commodity is related to say, own price of the commodity or
income of the consumer or other determinants.
We have two types of demand function:
A. Individual Demand Function
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B. Market Demand Function
A. Individual Demand Function: Individual demand function shows how demand for a
commodity, by an individual consumer in the market, is related to its various determinants. It
is expressed as under:
Dx = f (Px, Pr, Y, T, E)
(Here, Dx = Quantity demanded of commodity-X; Px =own price of commodity-X; Pr =Price
of related goods; Y= Consumer’s income; T= Consumer’s taste and preferences; E=
Consumer’s expectation.)
a. Own Price of Commodity: other things being equal, with a rise in own price of thecommodity,
its demand contact, and with a fall in price, its demand extends.
b. Price of Related Goods: Demand for a commodity is also influenced by change in price of
related goods. These are of two types:
(i) Substitute Goods: These are the goods which can be substitute for each other, such as
tea and coffee, or ball-pen and ink-pen. In case of such goods, increase in the price of
one cause increase in demand for the other and decrease in the price of one cause
decrease in the demand for the other.
(ii) Complementary Goods: Complementary goods are those goods which complete the
demand for each other, and are, therefore, demanded together. Pen and ink or bread
and butter may be cited as examples. In case of complementary goods, a fall in the
price of one cause increase in the demand of the other and a rise in the price of one
cause decrease in the demand for the other.
c. Income of the Consumer: Change in the income of the consumer also influences his demand
for different goods. The demand for normal goods tends to increase with increase in income,
and vice versa. On the other hand, the demand for inferior goods like coarse grain tends to
decrease with increase in income, and vice versa. Lastly, for necessary goods, demand
remains constant irrespective of increase in income.
d. Taste and Preferences: The demand for goods and services also depends on individual’s
taste and preferences. Tastes and preferences of the consumers are influenced by
advertisement, change in fashion, climate, invention, etc. Other things being equal, demand
for those goods increase for which consumers develop strong taste and preferences. Contrary
to it, if taste or preference for a product is fading (decreasing), its demand will decrease.
e. Expectations: If the consumer expects a significant change in the availability of the
concerned commodity in the near future, he may decide to change his present demand for the
commodity. Particularly, if the consumer fears acute shortage of the commodity in the near
future, he may raise his present demand for the commodity at its existing price.
B. Market Demand Function

Mkt. Dx = f (Px, Pr, Y, T, E, N, Yd)
Here, Mkt. Dx= Market demand for commodity X

Px = Own price of commodity X
Pr = Price of related goods
Y = Income of the consumers
T = Tastes and preference of consumers
E = Expectation of consumers
N = Population size/ Number of buyers
Yd = Distribution of income
Population Size: Demand increase with increase in the number of buyers for a commodity.
Distribution of income: If redistribution of income increase inequality (rich becoming richer, and
poor becoming poorer), the demand for luxury goods (like big cars) is expected
to rise. Also, a fall in the income of the poor people may compel them to shift from normal to inferior
goods. Implying a rise in the demand for inferior goods, like coarse grain.
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4. State the law of demand and its assumptions.

Ans: Statement of the Law
The law of demand states that, other things remaining equal, the quantity demanded of a
commodity increases when its price falls and decreases when its price rises. Thus, the law of
demand indicates an inverse relationship between the price and the quantity demanded of a
commodity. That is, with a rise in price demand will fall and with a fall in price demand will rise.
Assumptions
The law of demand assumes that 'other things remain unchanged', i.e., assumption of ceteris
paribus order.) As stated above, demand for a commodity depends not only on its price, but also
on many other factors like consumer's income, price of the related goods, consumer's tastes and
preferences, etc. These other factors influencing the demand are assumed to be constant or
unchanged. Thus,
1. There should be no change in income of the consumer.
2. There should be no change in the tastes and preferences of the consumers.
3. Prices of the related commodities should remain unchanged.
4. Size of population should not change.
5. The distribution of income should not change.
5. State the exceptions to the law of demand.

Ans: The exceptions to the law of demand or for an upward sloping demand curve are as follows:
Giffen Goods: Giffen goods are those inferior goods on which the consumer spends a large part
of his income and the demand for which falls with a fall in their price. For example, maize and
jowar are inferior food items for an average Indian consumer. They are consumed largely by poor
people. As the price of 'maize' falls, real income of the consumer rises. With an increase in real
income, a consumer may afford to purchase superior foo like rice or wheat.
Articles of Snob Appeal: The law of demand does not apply to the commodities which serve as
'status symbol', increase social prestige or are a source of display of wealth and richness. Diamond
is often given as an example of this case. The higher price makes the possession of diamond more
prestigious. Therefore, at higher price the quantity demanded of diamond by consumers may
increase.
Expectations Regarding Future Prices: If price of a commodity is rising today and it is likely to
rise more in the future, people will buy more even at the existing higher price and store it up.
They will do this to avoid the pinch of higher price in future.
Emergencies: Law of demand may not hold good during emergencies like war, famines, etc. At
such times, consumers behave in an abnormal way. If they expect shortage of goods, they will buy
and hoard goods even at high prices during such periods. On the other hand, during depression
they will buy less even at low prices.
Quality-Price Relationship: Sometimes consumers assume that high priced goods are of higher
quality than the low-priced goods. They take price as an index of quality. In such cases, more of
the goods may be demanded at a higher price. For example, some people buy more of 'Lux
Supreme' having a higher price than the ordinary 'Lux' having a lower price even though the two
soap brands are almost of the same quality.
Change in Fashion: When a commodity goes out of fashion, consumers will not purchase a
larger quantity of this commodity even when its price is reduced.
6. Discuss movement along the demand curve and shift of the supply curve.
Ans: When the amount demanded of a commodity changes (rises or falls) because of change in its
own price, while other determinants of demand (like income, tastes and prices of related goods)
remain constant, it is known as change in the quantity demanded.
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MOVEMENT ALONG THE DEMAND CURVE

Change in the quantity demanded may be of two types: (ii) extension of demand, (ii) contraction
of demand.'
Extension of Demand: When the quantity demanded of a commodity rises due to fall in its price,
other things remaining the same, it is called 'rise in quantity demanded' or 'extension of demand.’
A movement down a demand curve is called a 'rise in the quantity demanded' or 'extension of
demand'.
Contraction of Demand: ‘Contraction of demand' or ‘fall in the quantity demanded' refers to a
decrease in the quantity demanded of a commodity because of rise in its price, other things
remaining the same.
A movement up the demand curve is called a fall in the ‘quantity demanded', or 'contraction of
demand'.
SHIFT OF THE DEMAND CURVE

When the amount purchased of a commodity rises or falls because of change in factors other than the
own price of the commodity, it is called change in demand.
Changes in demand may be of two types: 1. Increase in demand, 2. Decrease in demand.
1. Increase in Demand: Increase in demand refers to a situation when the consumers buy larger
amount of a commodity at the same price because of change in factors other than the own
price of the commodity.
2. Decrease in Demand: Decrease in demand refers to a situation when the consumers buy a
smaller quantity of the commodity at the same price. Decrease in demand takes place because
of change in factors other than the own price of the commodity.
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CHAPTER 2: ELASTICITY OF DEMAND
1. Explain price elasticity of demand.

Ans: Price elasticity of demand is defined as a measurement of percentage change in quality
demanded in response to a given percentage change in own price of the commodity.
Numerically, price elasticity of demand, Ed is calculated as:
Ed = Percentage change in quantity demanded / percentage change in price
Ed = (change in quantity demanded/original quantity demanded)/(change in price/original price)
Ed = ΔQ/ΔP x P/Q
ΔQ= Change in quantity demanded
Q=Original quantity demanded
ΔP=Change in price
P=Original price
Ed = Coefficient of elasticity of demand.
Ed is negative. The ratio is a negative number because price and quantity demanded are inversely
related.
2. State the degrees of price elasticity of demand.

Ans: The five degrees of price elasticity of demand are:
Perfectly Inelastic Demand (Ed = 0): When the quantity demanded of a commodity does not
respond to a change in its price, then the elasticity of demand is zero.
Perfectly Elastic Demand (Ed =∞): When consumers are prepared to purchase all that they can
get at a particular price but nothing at all at a slightly higher price, then the price elasticity of
demand for a commodity is said to be infinite.
Unitary Elastic Demand (Ed = 1): When a given percentage change in the price of a commodity
causes an equivalent percentage change in the quantity demanded, then the elasticity of demand is
said to be unitary (or one).
Elastic Demand (Ed > 1): When the percentage change in the quantity demanded of a commodity
exceeds the percentage change in its price, the elasticity of demand is greater than unitary.
Inelastic Demand (Ed < 1): Demand is inelastic when the percentage change. in the quantity
demanded of a commodity is less than the percentage change in its price. The elasticity of demand
here is less than unity.
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3. State the determinants or factors affecting price elasticity of demand.

Ans: The determinants of price elasticity of demand are:
A. Availability of Substitutes: If a commodity has many close substitutes, its demand is likely
to be elastic. Even a small fall in price will induce more people to buy this commodity rather
than its substitutes.
B. Nature of the Commodity: One of the important determinants of price elasticity of demand
is the nature of the commodity, i.e., whether it is a necessity' or a luxury' or a commodity of
'comfort'. Demand for necessities such as food items is generally inelastic. These goods are
essential for existence. On the other hand, commodities of luxuries and comfort are not
essential for existence and is therefore elastic.
C. Proportion of the Income Spent: The smaller is the proportion of income spent on a
commodity, the smaller will be the elasticity of demand and vice versa. The demand for soap,
salt, matches, etc., is highly inelastic since the consumer spends a very small proportion of his
income on them. On the other hand, the demand for clothes, furniture, etc., is likely to be
elastic since the consumer spends a large fraction of his/her income on these goods.
D. The Number of Uses of a Commodity: Elasticity of demand depends also upon the number
of uses a commodity can be put to. The greater is the number of uses to which a commodity
can be put to, the greater will be its price elasticity of demand.
E. Time Factor: Price is generally low for the short period compared to long period. This is for
two reasons. Firstly, it takes time for consumers to adjust their tastes, preferences and habits.
In the long period consumers may adjust their preferences and consumption pattern.
Secondly, new substitutes may be developed in the long run.
F. Price Range: Price elasticity of demand depends upon the range of prices. Demand for a
commodity tends to be inelastic at very high and very low prices, and elastic within the
moderate range of prices.
G. Habits of the Consumers: If consumers are habitual of consuming some commodities, they
will continue to consume these even at higher prices. For instance, a smoker does not reduce
much the number of cigarettes Smoked as the price of cigarette goes up. The demand for such
commodities will be usually inelastic.
4. Discuss the percentage or proportionate method of calculating price elasticity of

demand.
Ans: The Percentage Method:
The price elasticity of demand is measured by its coefficient (Ep). This coefficient (Ep) measures
the percentage change in the quantity of a commodity demanded resulting from a given
percentage change in its price. Thus,
Ep = % change in Q/% change in P
Ed = (ΔQ/Q) x (ΔP/P)
EP = ΔQ/ΔP x P/Q
where Q refers to quantity demanded, P to price and Δ to change.
5. Discuss income elasticity of demand and cross price elasticity of demand.

Ans: Income Elasticity of Demand
Apart from the own price of the product, an important determinant of demand is income (Y).
Income elasticity of demand is a measure of the degree of responsiveness of the quantity
demanded of a product to changes in income, prices remaining constant. The numerical value of
the co-efficient of income elasticity can be calculated by the given formula:
EY = Percentage change in quantity demanded/Percentage change in income
EY = (ΔQ/Q)/(ΔY/Y)
EY = (ΔQ/ΔY) x (Y/Q)
where Y is income and EY is the co-efficient of income elasticity of demand.
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Price Cross-elasticity of Demand

The price cross-elasticity of demand is given by the percentage change in quantity demanded of a
good divided by the percentage change in price of related goods, some other factors that affect
demand remain unchanged.
The formula for cross elasticity:
EC = % change in quantity demanded of good 1/% change in price of related good 2
EC = (ΔQ1/Q1) x100/(ΔP2/P2) x100
EC = (ΔQ1/ ΔP2) x (P2/Q1)
PRACTICAL PROBLEMS
1. The price of a commodity decreases from Rs.6 to Rs. 4. This results in an increase in the
quantity demanded from 10 units to 15 units. Find the price elasticity.
2. If the price of a commodity rises by 40% and accordingly, its demand falls by 80%. What is
the price elasticity of demand?
3. If price of a commodity rises from Rs 8 to Rs 10 per unit and its demand falls by 50%. What
is the price elasticity of demand?
4. Due to a 10% fall in the price of a commodity, the demand rises from 100 units to 120 units.
How much percentage will its demand fall, due to a 10% rise in its price.
5. A commodity shows Ed = 2, Quantity demanded reduces from 300 units to 150 units. In
response to an increase in price. Find the increased price when initially it was Rs. 20 per
unit.
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CHAPTER 3: THEORY OF SUPPLY
1. State a note on the concept of supply.

Ans: Supply of a commodity refers to the quantity of a commodity which producers are willing to
produce and offer for sale at a particular price during a particular period of time) There are three
important aspects of supply which need to be noted in this definition of supply.
1. Supply is a desired quantity, i.e., how much producers are willing to sell and not how much they
actually sell.
2. Supply is that supply is always expressed with reference to some price.
3. Supply is a flow variable.
INDIVIDUAL AND MARKET SUPPLY
Quantity of a commodity which one producer is willing to produce and offer for sale is known as
individual supply. Therefore, individual supply refers to the quantity of a commodity which a firm is
willing to produce and offer for sale at a particular price during a specified period.
The quantity that the producers are willing to produce and offer for sale of a single line of
commodities at a particular price during a specified period is known as market supply or industry' s
supply.
2. Explain the determinants of supply.
Ans: The important determinants of supply can be expressed in the form of a 'supply function'. The
supply function is a statement which states the relationship between the quantity supplied of a
commodity and its determinants.
Sn =f (Pn, P1, …..Pn-1, Gf, Fi…..Fm, T, E, Gt, N, Mt…) where
Sn = Quantity supplied of a commodity ‘n’
f = Shows the relationship between supply of a commodity ‘n’ and all of its determinants
Pn = Price of the Commodity ‘n’
P1, …..Pn-1 = Price of commodities other than ‘n’
Gf = Goal of the firms
Fi…..Fm = Price of different factors of production
T = Technique of production
E = Expectation of future prices
Gt = Taxation policy of the government
N = Natural factors
Mt = Means of transportation
DETERMINANTS OF SUPPLY
1. Price of the Commodity: Given other things, larger quantity of a commodity will be supplied at a
higher price and smaller quantity will be supplied at a lower price. This will be so because the higher
the price, given the per unit cost of production, the higher is the per unit profit. The higher profit
would motivate the firms to supply more in order to earn higher profits.
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2. Goals of the Produces: The goals or objectives of the firms also determine the Supply of a
commodity. The goals of the firms may be profit maximisation', 'sales maximisation' or 'risk
minimisation'. Ordinarily, most of the firms try to earn maximum profits. That is why it is assumed in
economic theory that the objective of the firm is to earn maximum profits. The higher is the profit
from the sale of a commodity, the higher will be the amount supplied by the firms, and vice versa.
Firms could, however, pursue other objectives sometimes. At times, the firms may aim to maximise
the sales or revenue rather than profits. They may like to maximise the sales to acquire status and
prestige in the business world or to dominate the market. If the firms aim at maximising the sales,
they may produce and sell more than the profit maximising output. Similarly, if the firms aim at
minimising the risk, they will play safe and produce and supply a smaller quantity of the commodity.
3. Input Prices: Another factor influencing the level of supply of a commodity is the prices of inputs
or factors used in production such as raw materials, labour, machines, etc. If the producers have to pay
higher prices to secure the factors of production needed for producing the commodity, its cost of
production will be higher. Given the price of the commodity, a higher cost of production reduces the
profit margin. This will lead to a lower amount of output that firms will produce and offer for sale at a
given price level. A fall in the input prices and, therefore, a fall in the cost of production will have the
opposite effect on supply. In general, supply will change in the opposite direction of change in input
prices.
4. Prices of Related Commodities: Supply of a commodity also depends upon the prices of the
related goods, especially the substitute goods. Producers have always the possibility of shifting from
the production of one commodity to the production of another commodity. If prices of other
commodities are rising, while the price of the commodity under question remains constant, producers
will find it more profitable to produce and sell other commodities. Therefore, the supply of the
commodity under question will fall.
5. Techniques of Production: Techniques of production also exert a significant influence on the
supply of a commodity. An improvement in the technique of production, the invention of new
machines and advanced techniques reduce the cost of production and increase the profit margin
thereby. Increased profitability induces the producers to produce more and increase supply thereby.
6. Nature of the Industry: The supply of a commodity also depends on whether the industry is
monopolised or competitive. In case of monopoly, one firm produces the entire commodity. A
monopolist firm will like to restrict the output so as to raise the market price. But if there is
competition among firms, there will be no tendency to restrict the output. Thus, the competitive firms
are likely to produce and sell more as compared to monopolised industry.
7. Policy of Taxation and Subsidies: The taxation policy of the government also influences the
supply of a commodity. Taxes imposed are likely to increase the prices of the commodities. The
imposition of heavy taxes on a commodity leads to an increase in its cost of production and, therefore,
it will generally lead to a decrease in supply. A reduced taxation will have the opposite effect in their
supply. Subsidies also affect the supply and will motivate the producers to increase supply of a
commodity. The government pays subsidies to firms to encourage them to produce certain goods.
Subsidies will reduce the costs and induce producers to increase supply.
8. Expectations of Future Prices: Producers’ expectations of future market prices affect the supply
of any good. If the producers expect an increase in the price of a commodity in future, they will
supply less today and hoard it to offer large quantity of the commodity in future at higher prices.
Conversely, expectations of fall in future prices tend to increase supply in the present period.
9. Natural Factors: Natural factors are particularly important for the supply of agricultural products.
Natural factors like drought, flood, unfavourable climatic conditions, etc., adversely affect the supply
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of some commodities. Heavy rains, flood and drought conditions will lead to decrease in the supply of
agricultural commodities. Adequate rain and favourable climatic conditions may help in increasing the
supply of agricultural commodities.
10. Agreement among Producers: Sometimes producers may form a pool and enter into some
agreement to restrict the supply of a commodity to earn large profits. They will Create artificial
scarcity of the commodities and, as a consequence, supply will decrease.
11. Availability of Transport and Communication Facilities: The supply of a commodity depends
upon the types of transport and communication facilities available in an economy. An improvement in
the transport and communication facilities will expand the size of the market. This will motivate the
producers to produce and supply more.
3. Explain Law of Supply.
Ans: A higher price would mean more profits. The producer will supply more at a higher price.
Similarly, a producer will supply smaller quantity at a lower price. This is a direct relationship
between the price and the quantity supplied of a commodity and is called the 'Law of Supply'.
THE SUPPLY SCHEDULE
A supply schedule shows quantities of a commodity that a seller is willing to supply, per unit of time,
at each price, assuming other factors remaining constant. A supply schedule of a product based on
imaginary data is given in the table illustrating the relationship between price and quantity supplied as
given by the law of supply.
The schedule presented in the table shows that at Rs. 2 per pen, the producer is willing to supply 25
thousand pens per month. At a higher price of Rs. 3 per pen, he is willing to supply 40 thousand pens
per month and so on. This schedule depicts direct relationship between price per pen and quantity
supplied of pens per month.
THE SUPPLY CURVE
Look at the figure where the data from the table has been plotted. Here the price is plotted on the Y-
axis and quantity supplied on X-axis.
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The figure shows that point labelled a, for example, gives the same information given on the first row
of the table: when the price of pens is Rs. 2 pen, 25,000 pens per month are offered for sale. Similarly,
points b, c, d, and e. On the graph correspond to row 3rd, 4th, 5th and 6th of the table respectively.
The supply curve S is a smooth curve drawn through the five points a, b, c. a and e. This curve shows
the quantity of pens offered for sale at each price.
The supply curve (just like a demand curve) can be linear straight line, or in the shape of an upward
slopping curve convex downwards. The upward slope of the supply curve indicates that higher the
price, the greater the quantity will be supplied.
EXCEPTIONS TO THE LAW OF SUPPLY
The law of supply indicates a direct relation between the price and the quantity supplied. But there
can be some exceptions to the law of supply such as:
Non-maximisation of profits: In some cases, the enterprise may not be pursuing the goal of
maximisation of profits. In that case, the quantity supplied may increase even when price does not
rise. For example, if the firm wants to maximise sales, it may sell larger quantities even when the
price remains unchanged. So, the law of supply may not apply for each product.
Factors other than price not remaining constant: We may notice that factors other than the price of
the product may not remain constant. For example, the change in technology can also bring about a
change in the quantity supplied of a commodity even if the price of that commodity does not undergo
a change.
4. Discuss movement along the supply curve and shift of the supply curve.
Ans:
MOVEMENT ALONG THE SUPPLY CURVE
When quantity supplied changes as a result of change in price alone, other factors remaining
the same, it is known as change in quantity supplied. When the quantity supplied of a
commodity rises due to a rise in the own price, other factors affecting supply remaining the
same, it is called 'extension of supply' (or increase in quantity supplied). On the other hand,
when the quantity supplied of a commodity falls due to a fall in its own price, other factors
remaining the same, it is called 'contraction of supply (or fall in quantity supplied). Thus,
extension or contraction or change in quantity supplied is due to change in the own price of
the commodity.
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SHIFT OF THE CUPPLY CURVE

The amount supplied or a commodity may change not because of any change in the own price of the
commodity, but due to change in other factors like change in input prices, change of related
commodities, change in technology, etc. When the amount supplied of a commodity increases or
decreases because of change in factors other than the own price of the commodity, it is called change
in supply.
An increase in supply refers to a situation when the producers are willing to supply a larger quantity
of the commodity at the same price.
A decrease in supply, on the other hand, refers to a situation when the producers are willing to supply
a smaller quantity of the commodity at the same price.
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CHAPTER 4: ELASTICITY OF SUPPLY

1. Define Elasticity of supply.
Ans: Elasticity of supply measures the degree of responsiveness of quantity supplied to a change in
own price of the commodity. It is also defined as the percentage change in quantity supplied divided
by percentage change in price. It can be calculated by using the following formula:
Es = % change in quantity supplied/% change in price
Es = (ΔQ/Q) x 100 / (ΔP/P) x 100
= ΔQ/ΔP x P/Q
2. State the five degrees of elasticity of supply.

Ans: Elastic Supply (Es>1): Supply is said to be elastic when a given percentage change in price
leads to a larger change in quantity supplied. Under this situation, the numerical value of Es will he
greater than one but less than infinity. SS1 curve of Fig. exhibits elastic supply. Here quantity supplied
changes by a larger magnitude than does price.
Inelastic Supply (Es< 1): Supply is said to be inelastic when a given percentage change in price
causes a smaller change in quantity supplied. Here the numerical value of elasticity of supply is
greater than zero but less than one. The figure depicts inelastic supply curve where quantity supplied
changes by a smaller percentage than does price.
Unit Elasticity of Supply (Es = 1): If price and quantity supplied change by the same magnitude,
then we have unit elasticity of supply. Any straight-line supply curve passing through the origin, such
as the one shown in the figure, has an elasticity of supply equal to 1.
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Perfectly Elastic Supply (Es= ∞): The numerical value of elasticity of supply, in exceptional cases,
may reach up to infinity. The supply curve PS1 drawn in the figure has an elasticity of supply equal to
infinity. Here the supply curve has been drawn parallel to the horizontal axis.
Perfectly Inelastic Supply (Es= 0): Another extreme is the completely or perfectly inelastic supply
or zero elasticity. SS1 curve drawn in Figure illustrates the case of zero elasticity. This curve describes
that whatever the price of the commodity, it may even be zero, quantity supplied remains unchanged
at OQ. This sort of supply curve is conceived when we consider the supply curve of land from the
viewpoint of a country, or the world.
3. State the determinants of elasticity of supply.

Ans:
1. Behaviour of Cost of Production: Elasticity of supply depends upon change in the cost of
producing additional quantity of output. If an increase in output by the firms in an industry
causes only a slight increase in their cost per unit or leads to decrease in cost per unit, we
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would expect supply to be elastic. If, on the other hand, increase in supply leads to a large
increase in cost of production, the supply would be relatively inelastic.
2. Time Element: Time period is an important determinant of elasticity of supply. Supply of a

commodity, in the ultimate analysis, depends upon its production. A price change due to
change in demand for a commodity may have a smaller response in the quantity supplied in
the short run since the production capacity may be limited. Therefore, in the short-run Supply
tends to be relatively inelastic. However, in the long-run, new plants can set up and
production capacity can be expanded. Therefore, in the long-run supply tends to be elastic. In
general, supply elasticity is likely to be higher in the long-run than the short-run.
3. Nature of the Commodity: Nature of the commodity is also an important determinant of the
elasticity of supply. For instance, the supply of durable products is relatively more elastic.
Durable goods can be stored and hence producers can meet the market demand by running
down their stocks. Therefore, supply of such goods can be increased or decreased quickly in
response to a change in price. On the other hand, supply of perishable goods like milk
vegetables is relatively less elastic. These products cannot be stored. Change in their supply
must be largely through change in production only.
4. Availability of Facilities for Expanding Output: The response of producers to change in

price depends on the availability of production facilities. If producers have sufficient
production facilities such as availability of raw materials, power, etc., they would be able to
increase their supply in response to rise in the prices of the commodities. The supply,
therefore, will be elastic. But, on the other hand, if there is shortage of power, fuel and
essential raw materials, the output would be expanding slowly in response to increase in
prices of the commodities.
5. Nature of Inputs: Elasticity of supply depends on the nature of inputs used to produce a
commodity. If the production of a product requires inputs that are easily available, its supply
would be more elastic. On the other hand, if it uses specialised inputs, its supply will be
relatively inelastic.
6. Risk-taking: The elasticity of supply is determined by the willingness of the entrepreneurs to

take risk. If entrepreneurs are willing to take risk, the supply will be more elastic. On the
other hand, if entrepreneurs hesitate to take risk the supply will be inelastic.
7. Expectation of Future Prices: If the producers expect a rise in the price of a commodity in
future, producers would like to hoard the commodity to take advantage of a rise in the future
price. The supply will, therefore, be less elastic. On the other hand, if they expect a fall in the
future price, they will release the goods from their stocks. The supply will be more elastic.
4. Discuss the percentage or proportionate method of calculating price elasticity of supply.

Ans: Percentage Method: The percentage method of measuring the price elasticity of supply is
based on the definition of elasticity, i.e., the ratio of proportionate change in quantity supplied of a
commodity to a given proportionate change in its price.) Thus, (the formula for measuring price
elasticity of supply is:
Es = % change in quantity supplied / % change in price

Es = (ΔQ/Q) x 100 / (ΔP/P) x 100
= ΔQ/ΔP x P/Q
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Es stands for elasticity of supply,

Q stands for initial quantity,
ΔQ stands for change in supplied quantity.
P stands for initial price,
ΔP stands for change in price.
PRACTICAL PROBLEMS
Problem 1: If an increase in the price of a ball point pen from Rs 40 to Rs 50 results in an
increase in quantity supplied of pens from 1,000 to 1,500. What is the elasticity of supply?
Problem 2: The price of a commodity is 10 per unit and its quantity supplied at this price is
500 units. If its price falls by 10% and quantity supplied falls to 400 units, calculate its price
elasticity of supply.
Problem 3: A producer supplies 200 units of a good at Rs 10 per unit. Price elasticity of
supply is 2. How many units will the producer supply at Rs 11 per unit.
Problem 4: The quantity supplied of a commodity at a price of Rs 8 per unit is 400 units. Its
price elasticity is 2. Calculate the price at which its quantity supplied will be 600 units.
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CHAPTER 5: MARKET EQUILIBRIUM & PRICE DETERMINATION
1. Write short notes on:

a. Equilibrium
b. Disequilibrium
c. Equilibrium price and quantity
Ans:
a. Equilibrium: Equilibrium refers to a situation in which the quantity demanded of a
commodity equals the quantity supplied of the commodity.
b. Disequilibrium: When the quantity demanded is not equal to the quantity supplied, we say
that the market is in disequilibrium.
c. Equilibrium price and quantity: The price at which the quantity demanded of commodity
equals the quantity supplied, it is known as 'equilibrium price'.
The equilibrium price, therefore, is the price at which the consumers are willing to purchase
the same quantity of a commodity which producers are willing to sell. The amount that is
bought and sold at equilibrium price is called the 'equilibrium quantity'.
2. Determine equilibrium price and quantity in a competitive market.

Ans: Equilibrium price determination in a competitive market can be illustrated diagrammatically
with the help of the market demand curve and the market supply curve. The figure given shows
combination the market demand curve and the market supply curve in the same diagram.
X-axis expresses the quantity demanded and supplied and Y-axis represents the price. DD is demand
curve and SS is the supply curve. The downward-sloping demand curve intersects the upward-sloping
supply curve at a single point. Equilibrium at point is E where the demand curve intersects the supply
curve. At this point of intersection, the quantity demanded equals the quantity supplied. OP is the
equilibrium price and OQ is the equilibrium quantity.
If the price rises to OP1, the quantity demanded decreases from PE to P1A. Many consumers who
could afford to purchase this commodity at OP price would not be able to purchase it at the higher
price OP1. On the other hand, supply will increase to P1B as the sellers would like to produce more at
a higher price to earn more profits. This increase in quantity supplied and decrease in quantity
demanded will create a situation of excess supply. It is clear from the diagram that at the OP1 price,
there is excess supply equal to AB. This excess supply will force the sellers to reduce the price to
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attract more buyers to dispose of their surplus stock. The price will move towards OP. Thus, because
of competition among sellers, the price eventually becomes equal to equilibrium price.
Conversely, if the price falls to OP2, the quantity demanded will increase to P2L. Many consumers,
who were not able to afford this commodity at the higher price, would start purchasing this
commodity at the lower price. The amount supplied, on the other hand, would fall from PE to P2K.
Demand being more than supply, there emerges excess demand equal to KL. This excess demand will
push the price towards the equilibrium price OP. The excess demand means that many consumers will
not be able to get the commodity at OP2 price. In an attempt to get this commodity, they are to offer a
higher price. Therefore, as a prepared result of competition among buyers, price starts rising and
eventually it becomes equal to equilibrium price. Thus, ultimately, the equilibrium price OP prevails
in the market. This denotes the situation of stable equilibrium.
3. Determine the effect of changes in demand and supply on equilibrium price and
quantity with supply being constant.
Ans: If supply remains constant, increase in demand raises and decrease in demand lowers the
price. In other words, price changes directly with change in demand.
DD is demand curve and SS is supply curve, OP is equilibrium price and OQ is equilibrium quantity.
Increase in Demand: The figure shows that (while supply. remains unchanged) due to an increase in
demand, the demand curve shifts to the right form DD to D1D1. The new demand curve D1D1
intersects supply curve SS at point E1. The new equilibrium point is E1. The equilibrium price
increases from OP to OP1 and equilibrium quantity increases from OQ to OQ1. Thus, a shift in
demand curve to the right takes the market to a new equilibrium with a higher price and higher
quantity than before.
Decrease in Demand: The figure shows that (while supply remains unchanged) due to decrease in
demand curve shifts to the left from DD to D2D2. The new demand curve D2D2 intersects supply curve
SS at point E2, the point of new equilibrium. At E2, the equilibrium price, falls from OP to OP2 and
equilibrium quantity falls from OQ to OQ2.
quantity with demand being constant.
Ans: Demand remaining constant, increase in supply causes a fall in equilibrium price and decrease in
supply causes a rise in equilibrium price. Thus, price changes inversely with supply.
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In the figure. DD is initial demand curve and SS is initial supply curve. OP is equilibrium price and
OQ the equilibrium quantity.
Increase in Supply: The above figure shows that while demand remains unchanged, due to increase
in supply, the supply curve shifts downwards from SS to S2S2. The new supply curve S2S2 intersects
the demand curve at point E2. The new equilibrium point E2, the equilibrium price decreases from OP
to OP2 and equilibrium quantity increases from OQ to OQ2. Thus, increase in supply causes shift in
equilibrium where price is lower and quantity is higher than before.
Decrease in Supply: The above figure shows that while demand remains unchanged, due to decrease
in supply, the curve shifts upwards (to the left) from SS to S1S1. The new supply curve S1S1
intersects the demand curve at point E1 the new equilibrium point. At point E1, the equilibrium price
rises from OP to OP1 and equilibrium quantity decreases from OQ to OQ1. Thus, a decrease in supply
causes a shift in equilibrium where quantity is lower, and price is higher than before.
quantity.
Ans: There may be situations when supply and demand happen to change simultaneously.
Figure (a) relates to a situation when increase in demand proportionately greater than the increase in
supply. Figure (b) relates to a situation when increase in demand and supply is proportionately equal.
And figure (c) relates to a situation when increase in supply is proportionately greater than the
increase in demand.
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In Figure (a), D1D1 is the initial demand curve and S1S1 is the initial supply curve. OP1 is
equilibrium price and OQ1 the equilibrium quantity. Due to increase in demand, demand curve shifts
to D2D2 and due to increase in supply, supply curve shifts to S2S2. However, it is a situation when
increase in demand is proportionately greater than the increase in supply. Consequently, price
increases to OP2 and quantity to OQ2. Implying that, when demand increases more than supply, price
tends to rise along with a rise in equilibrium quantity.
Figure (b) shows that increase in demand and supply is proportionate to each other. Consequently,
price remains unchanged at OP1 even when equilibrium quantity increases from OQ1 to OQ2.
In Figure (c) increase in supply is proportionately greater than the increase in demand. It causes a fall
in price from OP1 to OP2 even when the equilibrium quantity increases from OQ1 to OQ2.
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UNIT III: THEORY OF CONSUMER BEHAVIOUR
CHAPTER 1: CONSUMER’S EQUILIBRIUM UTILITY ANALYSIS
1. Define utility, total utility and marginal utility. State the relationship between total utility and
marginal utility.
Ans: The want-satisfying power of a commodity is called utility.
Total Utility (TU) is the sum total of utility derived from the consumption of all the units of a
commodity.
TU = ∑ 𝑴𝑼
Marginal Utility (MU) refers to additional utility on account of the consumption of an additional unit
of a commodity.
MUn= TUn – TUn-1
1. At the first stage, TU increases at

a decreasing rate and MU
decreases but is positive.
2. When TU is at maximum, MU is
zero. The point at which MU is
zero is known as the point of
saturation or the point of satiety.
3. When TU falls, MU is negative.
3. Write a short note on Law of Diminishing Marginal Utility.

Ans: Law of diminishing marginal utility states that as more and more units of a commodity are
consumed, marginal utility derived from every additional unit must decline.
ASSUMPTIONS:
A. All the units of a commodity must be identical, i.e., same in all respects -in size, colour, design,
quality, etc.
B. The unit of the good must be standard. The units of the commodity should not be too small or too
large. Otherwise, the law will not hold.
C. There should be no change in taste during the process of consumption.
D. There must be continuity in consumption and if a break in the continuity is necessary, the time
interval between the consumption of two units must be short.
E. The consumer is rational while taking consumption decisions.
4. Show the conditions for equilibrium in one-commodity case.

Ans: Consumer’s Equilibrium in the case of a single commodity is explained with the help of the Law
of Diminishing Marginal Utility. Being a rational consumer, a consumer will be at an equilibrium
level when the price paid for the commodity is equal to marginal utility.
Purchase of a commodity by a consumer depends on three factors:
a. Price of the commodity.
b. Marginal (and total) utility of the commodity.
c. Marginal utility of money.
A consumer is in equilibrium when he satisfies the following condition: i.e.,
MU of the good = Price of the product
or MUx= Px
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5. Explain two-commodity case.

Ans: It is assumed that a consumer consumes only two commodities X and Y and their prices are Px
and Py respectively. In such a case, the law of DMU is extended to two goods which the consumer
buys with his income. The condition required by a consumer to maximise his utility for two
commodities X and Y is:
MUx= Px
MUy= Py
Mux/Px = Muy/Py
This is called the law of equi-marginal utility.
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CHAPTER 2: CONSUMER’S EQUILIBRIUM INDIFFERENCE CURVE

ANALYSIS
1. Define Indifference curve and indifference map. State the properties of indifference curve.
Ans: Indifference Curve is a locus of all such points which show different combinations of two
commodities yielding the same level of satisfaction to the consumer.
Indifference Map shows a set of indifferences curves one above the other. A set of ICs drawn in a
graph is called Indifference Map.
PROPERTIES/CHARACTERISITCS OF INDIFFERENCE CURVE

1. Indifference curves are also downward sloping as to gain one good, another good has to be
sacrificed.
2. Indifference curve is convex to the origin due to decreasing Marginal Rate of Substitution (MRS).
3. Higher indifference curve gives higher level of satisfaction.
4. Indifference curve never intersects with each other otherwise higher indifference curve will not
reflect higher utility.
2. Explain budget line with necessary diagrams.
Ans: A consumer’s budget constraint identifies the combinations of goods and services the
consumer can afford with a given income and given prices.
Let M0 be the consumer's money income, X1 and X2 are the two goods consumed, P1 and P2 are
the prices of X1 and X2. Then the budget equation is,
M0 = P1X1+P2X2
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SHIFT OF THE BUDGET LINE

An increase in income will shift the budget line to the right and with a decrease in income it will shift
to the left, its slope remaining unchanged.
ROTATION OF THE BUDGET LINE

If income of the consumer and price of one commodity remain unchanged but the price of other
commodity changes, then the slope of budget line will also change. One end of the budget line will
remain at its place, but the other end touching the axis of that commodity whose price has changed,
will rotate to the right from its original place if the price has fallen or will rotate to the left from its
original place if the price has risen.
SITUATION 1: Money income and Price of Good Y i.e., oranges is constant:
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SITUATION 2: Money income and Price of Good X i.e., apples is constant:
3. Explain consumer’s equilibrium in the ordinal utility approach.

Ans: A consumer attains equilibrium under two conditions:
a. When marginal rate of substitution is equal to ratio of prices of two goods, i.e., MRSXY =
PX/PY
b. MRSXY is continuously falling, i.e., indifference curve should be convex to the origin.
4. Explain Income Consumption curve:

a. In case of both goods being normal goods.
Ans: Shape of income-consumption curve depends on the nature of the commodities consumed.
Income-consumption curve is upward rising, since both X1 and X2 are normal goods. In other
words, if both the goods are normal goods, as money income increases, consumption of both the
goods increases and therefore, income-consumption curve is upward rising.
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b. In case of one good being normal goods and the other being inferior.
Ans:
SITUATION 1 SITUATION 2
This shows good X to be an inferior good, This signifies that good X2 is an inferior
income effect is negative for good X and as a good, income effect is negative for good Y
result its quantity demanded falls as income and as a result its quantity demanded falls as
increases. Thus, the income consumption income increases. Thus, the income
curve (ICC) slopes backward to the left consumption curve (ICC) slopes to the right
towards the Y-axis. towards the X-axis.
5. Explain Price consumption curve and derive demand curve from the same.
Ans: Price-consumption curve is the locus of all such combination of two commodities where the
consumer gets maximum utility at different prices of a commodity when all other factors remain
the same. For each level of price of any commodity, slope of the budget line changes, and we get a
new budget line. For each new budget line, there is a new equilibrium point where the consumer
gets maximum level of utility. Joining all these equilibrium points we get the price-consumption
curve.
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DERIVATION OF DEMAND CURVE FROM PRICE CONSUMPTION

CURVE
In the upper portion, we have the price-consumption curve (PCC) when the price of commodity X1
changes, price of commodity X2 and money income M remaining constant. We get three equilibrium
points E, F and G from the price-consumption curve (PCC) and three equilibrium quantities X10,
X11, and X12. In the lower portion, we plot the combinations (P10, X10), (P11, X11), and (P12,
X12). As the price level decreases from P10 to P11 and further to P12, quantity demanded increases
from X10 to X11 and further to X12. Joining all these combinations we get the downward sloping
demand curve DD.

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Guiding You Today For a Better Tomorrow Aaditya Gupta Classes

MICROECONOMICS: IMPORTANT QUESTIONS

b. Positive and normative economics.

3. Write a short note on Scarcity and Choice.

5. What is opportunity cost and marginal opportunity cost?

ATTAINABLE AND UNATTAINABLE PPC

PPC will shift to the right when:

PPC will shift to the left when:

7. Calculate Marginal Opportunity Cost.

UNIT II: THEORY OF DEMAND AND SUPPLY

CHAPTER 1: THEORY OF DEMAND

1. Write a short note on demand, individual demand and market demand.

2. What is derived demand?

3. What are the determinants of demand?

B. Market Demand Function

B. Market Demand Function

Here, Mkt. Dx= Market demand for commodity X

4. State the law of demand and its assumptions.

5. State the exceptions to the law of demand.

MOVEMENT ALONG THE DEMAND CURVE

SHIFT OF THE DEMAND CURVE

CHAPTER 2: ELASTICITY OF DEMAND

1. Explain price elasticity of demand.

2. State the degrees of price elasticity of demand.

3. State the determinants or factors affecting price elasticity of demand.

4. Discuss the percentage or proportionate method of calculating price elasticity of

5. Discuss income elasticity of demand and cross price elasticity of demand.

Price Cross-elasticity of Demand

CHAPTER 3: THEORY OF SUPPLY

1. State a note on the concept of supply.

SHIFT OF THE CUPPLY CURVE

CHAPTER 4: ELASTICITY OF SUPPLY

2. State the five degrees of elasticity of supply.

3. State the determinants of elasticity of supply.

2. Time Element: Time period is an important determinant of elasticity of supply. Supply of a

4. Availability of Facilities for Expanding Output: The response of producers to change in

6. Risk-taking: The elasticity of supply is determined by the willingness of the entrepreneurs to

4. Discuss the percentage or proportionate method of calculating price elasticity of supply.

Es = % change in quantity supplied / % change in price

Es stands for elasticity of supply,

CHAPTER 5: MARKET EQUILIBRIUM & PRICE DETERMINATION

1. Write short notes on:

2. Determine equilibrium price and quantity in a competitive market.

UNIT III: THEORY OF CONSUMER BEHAVIOUR

CHAPTER 1: CONSUMER’S EQUILIBRIUM UTILITY ANALYSIS

1. At the first stage, TU increases at

3. Write a short note on Law of Diminishing Marginal Utility.

4. Show the conditions for equilibrium in one-commodity case.

5. Explain two-commodity case.

CHAPTER 2: CONSUMER’S EQUILIBRIUM INDIFFERENCE CURVE

PROPERTIES/CHARACTERISITCS OF INDIFFERENCE CURVE

SHIFT OF THE BUDGET LINE

ROTATION OF THE BUDGET LINE

SITUATION 2: Money income and Price of Good X i.e., apples is constant:

3. Explain consumer’s equilibrium in the ordinal utility approach.

4. Explain Income Consumption curve:

DERIVATION OF DEMAND CURVE FROM PRICE CONSUMPTION