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PREFACE
Hello Friends,
Team Ednovate at the very outset extends its warm Welcome to You ALL in the
Magical world of Chartered Accountancy.
This Enriching journey will be sometimes Tiring, sometimes Lengthy, sometimes

Complex but it’s our promise to you that it will Certainly be Enjoyable and Worthy
of your time and efforts.
Through this book and lectures we intend to provide you with:

1. Exam oriented Exhaustive, Amended and Easy to understand Content.
2. Questions are selected from ICAI material and past examination.
3. Seamless Conceptual Understanding of the subject with Real Life Practical
examples.
Examples.
As per a Famous Saying,
“A journey of a Thousand miles begins with a Single Step”
So let’s take our First step towards unwinding CA INTER and come out of it as a PRO.
Wish you all the Best

Team Ednovate
INDEX
SR.
TOPICS PAGE NO.
NO.
1. INTRODUCTION TO MICRO ECONOMICS 1.1 to 1.58
2. THEORY OF DEMAND AND SUPPLY 2.1 to 2.114
3. THEORY OF PRODUCTION AND COST 3.1 to 3.138
4. PRICE DETERMINATION IN DIFFERENT MARKTER 4.1 to 4.116
5. BUSINESS CYCLE 5.1 to 5.35

INTRODUCTION TO
1. MICRO ECONOMICS
Introduction
Economics is an important branch of social science, which deals with the behaviour of human
beings in relation to economic activities. Economics is derived from two Greek words viz.
“Oiko” (means household) and “Nomia” (means management). Therefore, economics was
understood as a “Science of Household Management” - managing a household with the
limited resources available, in an economical manner. But later, the scope of economics has
expanded from mere household management to the nation’s management. In fact, out of
social sciences, it is economics which has more practical applicability, hence regarded as
‘Queen of Social Sciences’.
The science of economics was born with the publication of Adam Smith’s classical work
“An Inquiry into Nature and Causes of Wealth of Nations” in the year 1776. Before Adam
Smith, there were many people who expressed ideas on economics. In the 17th century,
Adam Smith was the first person who put all the economic ideas in a systematic way. Hence,
he is considered to be the “father of economics”.
Basic premise of economics

• Humans wants are unlimited
• Means of satisfying these wants are relatively scarce
Example: Coal can be used for producing electricity, heating, running locomotives, in
industries, etc. Co being limited resource, an economy has to decide between the different
choices that are available for its use. Hence, economics is the study of how the society uses
its limited resources to satisfy its infinite wants and how these resources are distributed
among different sections of the society.
Definition of economics
Economics has been defined by several groups of economists. The following are the
classification of various definitions:
• Wealth definition by Adam Smith or Classical Economists
• Welfare definition by Alfred Marshall or Neo-classical Economists
• Scarcity definition by Lionel Robbins
• Growth-oriented/Modern definition by Paul A. Samuelson
1.1 INTRODUCTION TO MICRO ECONOMICS

Wealth/Classical definition
“An inquiry into the nature and causes of the wealth of the nations”
“Adam Smith”
Adam Smith defined economics as the ‘Science of Wealth Adam Smith, the father of economics,
published his master piece in 1776 and according to him, the main objective of any human
activity is the acquisition and attainment of wealth and economics deals with the acquisition,
accumulation and expenditure of wealth. Economists like J.B. Say, J.S. Mill, Malthus, Ricardo
and many others advocated the same Hence they are called as classical economists or those
belonging to the Classical school of thought.
According to J. B. Say, “economics is a science which deals with wealth”. J. S. Mill, defines
economics as - “The practical science of production and distribution of wealth”. From 1776
to 1890, this was a well-accepted definition of economics.
Main points of wealth definition:

• Economics is a “Science of Wealth”
• The main objective of human life is acquisition and attainment of Wealth
• Economics is a science which finds the causes for the wealth of nations
• Material things lead to the prosperity of the nation
Welfare/Material well-being/Neo-classical definition

“A study of mankind in the ordinary business of life. It examines that part of individual and
social action which is most closely connected with the attainment and with the use of the
material requisites of well-being. Thus, on one side, it is a study of wealth and on the other
and more important side, a part of the study of man.”
“Alfred Marshall”
This definition was propounded by Prof. Alfred Marshall in his book “Principles of Economics”,
published in 1890. This definition lays emphasis on welfare as compared to wealth.
Prof. Marshall clearly points that economics is first, a study of human welfare and only then
is the emphasis given on wealth. According to Prof. Alfred Marshall, wealth is a “mean” and
welfare is an “end”. From 1890 to 1930, for almost four decades, welfare definition was
considered the best definition. He divided human activity into two parts i.e.
• Economic activities: which result in material things. Example Production of goods
• Non-economic activities: which does not result in material things. All kinds of services
like teachers, lawyers, doctors are included in this category
INTRODUCTION TO MICRO ECONOMICS 1.2

Scarcity definition/Science of Choice Making
“Economics is a science which studies the human behaviour as a relationship between
unlimited ‘ends’ and scarce ‘means’, which have alternative uses.”
“Prof. Lionel Robbins”
Prof. Lionel Robbins, professor of London School of Economics gave this new definition to
economics in his famous book “An Essay on the Nature and Significance of Economic Science”,
written in 1931. He said, “Economics is a study of problems arising out of scarcity of resources
and choice making.” Whenever ends, means and alternative uses do not meet, it creates
economic problems. This definition has got universal applicability. Robbins says an economic
problem can be solved by choice making by arranging unlimited wants in the order of priority.
He says economics must be neutral between ends. The term “ends” mean “wants”.
Growth-oriented/Modern definition
“Economics is a study of how men and society choose, with or without the use of money, to
employ scarce productive resources which could have alternative uses, to produce various
commodities over time and distribute them for consumption, now and in the future, amongst
various people and groups of society”.
“Prof. Samuelson”
Samuelson’s definition is known as a modern definition of economics. It is a combination of
wealth, well fare and scarcity definitions. This talks about sustainable development and “inter-
generational equality”. It includes choice making in the present and in the future. Although
the fundamental economic problem of scarcity remains undisputed, Samuelson goes a step
further and discusses how a society uses limited. The term “n resources for producing goods
and services for present and future consumption of various people or lumping me groups.
This definition takes into account, production, consumption, exchange, and distribution of
goods. Hence, this definition is most satisfactory and acceptable. It has a universal appeal.
Jacob Viner has given a rational definition of economies. According to him, “Economics is
what economists do”.
Prof. Henry Smith also gave an all-inclusive definition of economics. According to him,
“Economics is the study of how in a civilized society one obtains the share of what others
people have produced and of how the total product of society changes and is determined”.
Methodology of studying economics

The subject matter of economics has been divided into two parts: Micro Economics and Macro
Economics. Though both are different, they are inter-dependent

Micro economics
The term “micro” is derived from the Greek word “mikros” which means small. In micro
economics, we study the economic behaviour of an individual, firm or industry in the national
economy. It is also called as the slicing method. As it divides the economy into small units
and analyses each and every unit in detail, it is a microscopic study of the working of the
economy. It is also known as “price theory” as it deals with the determination of prices of
commodities and factors. It solves three of the basic economic problems of what, how and
for whom to produce. It is unrealistic as it is based on assumptions.
Under micro-economics, we study
• Product pricing
• Consumer behaviour
• Factor pricing
• Economic conditions of a section of the people
• Study of firms Location of an industry
Macro economics
The term “macro” is derived from the Greek word “macros” which means large. It is also
called the lumping method or telescopic method. Under macroeconomics, we study the
working and performance of the economy as a whole. It is also called as “income theory”,
as it deals with the determination income and unemployment. Here, a detailed study is not
possible and no assumption is made because deal with it in one stretch, hence it is realistic.
It gives a bird’s eye view about the subject. In - we study about total consumption, savings
and investment etc.
Under macroeconomics, we study:
• National income and output
• General price level
• Balance of trade and payments
• External value of money Savings and investment
• Employment and economic growth
Example: Study of per capita income of India, under-employment in the agriculture sector,
savings of India causes of inflation, etc.

Differences between Micro economics and Macro economics
Micro approach Macro approach
1. Studies a particular part or a component Studies the economy as a whole
of the economy
2. It is known as “Price Theory” It is known as ‘Income Theory”
3. Makes assumptions while studying an Doesn’t make any assumptions
economy
4. It gives a worm’s eye view of an economy It gives a bird’s eye view of an economy
5. It is unrealistic study It is more realistic study
6. Has limited scope Has wider scope
7. It is known as Microscopic study It is known as Telescopic study
8. Studies bit by bit Studies whole economy at one stretch
Nature of Business Economics

The economic world is extremely complex as there is a lot of interdependence among the
decisions and activities of economic entities. Economic theories are hypothetical and simplistic
in character as they are based on economic models built on simplifying assumptions. Therefore,
usually, there is a gap between the propositions of economic theory and happenings in the
real economic world in which the managers make decisions. Business Economics enables
application of economic logic and analytical tools to bridge the gap between theory and
practice.
The following points will describe the nature of Business Economics:
• Business Economics is a Science: Science is a systematized body of knowledge which
establishes cause and effect relationships. Business Economics integrates the tools of
decision sciences such as Mathematics, Statistics and Econometrics with Economic Theory
to arrive at appropriate strategies for achieving the goals of the business enterprises. It
follows scientific methods and empirically tests the validity of the results.
• Based on Micro Economics: Business Economics is based largely on Micro-Economics.
A business manager is usually concerned about achievement of the predetermined
objectives of his organisation so as to ensure the long-term survival and profitable
functioning of the organization. Since Business Economics is concerned more with the
decision making problems of individual establishments, it relies heavily on the techniques
of Microeconomics.
• Incorporates elements of Macro Analysis: A business unit does not operate in a
vacuum. It is affected by the external environment of the economy in which it operates
such as, the general price level, income and employment levels in the economy and
government policies with respect to taxation, interest rates, exchange rates, industries,

prices, distribution, wages and regulation of monopolies. All these are components
of Macroeconomics. A business manager must be acquainted with these and other
macroeconomic variables, present as well as future, which may influence his/ her
business environment.
• Business Economics is also an Art as it involves practical application of rules and
principles for the attainment of set objectives.
• Use of Theory of Markets and Private Enterprises: Business Economics largely uses the
theory of markets and private enterprise. It uses the theory of the firm and resource
allocation in the backdrop of a private enterprise economy.
• Pragmatic in Approach: Micro-Economics is abstract and purely theoretical and analyses
economic phenomena under unrealistic assumptions. In contrast, Business Economics is
pragmatic in its approach as it tackles practical problems which the firms face in the
real world.
• Interdisciplinary in Nature: Business Economics is interdisciplinary in nature as it
incorporates tools from other disciplines such as Mathematics, Operations Research,
Management Theory, Accounting, marketing, Finance, Statistics and Econometrics.
• Normative in Nature: Economic theory has developed along two lines “positive and
normative. A positive or pure science analyses cause and effect relationship between
variables in an objective and scientific manner, but it does not involve any value
judgement. In other words, it states “what is” of the state of affairs and not what
“ought to be”. In other words, it is descriptive in nature in the sense that it describes the
economic behaviour of individuals or society without prescriptions about the desirability
or otherwise of such behaviour. As against this, a normative science involves value
judgements. It is prescriptive in nature and suggests “˜what should be” a particular
course of action under given circumstances. Welfare considerations are embedded in
normative science.
Business Economics is generally normative or prescriptive in nature. It suggests the

application of economic principles with regard to policy formulation, decision-making
and future planning. However, if the firms are to establish valid decision rules, they
must thoroughly understand their environment. This requires the study of positive
or descriptive economic theory. Thus, Business Economics combines the essentials of
normative and positive economic theory, the emphasis being more on the former than
the latter.

SCOPE OF BUSINESS ECONOMICS
The scope of Business Economics is quite wide. It covers most of the practical problems a
manager or a firm faces. There are two categories of business issues to which economic
theories can be directly applied, namely:
1. Internal issues or operational issues (this can be solved using Micro Economics)
2. External issues or environmental issues (this can be solved using Macro Economics)
Now we will see both of them one by one –

1. Microeconomics applied to Internal or Operational Issues
Operational issues include all those issues that arise within the organization and fall within the
purview and control of the management. These issues are internal in nature. Issues related
to choice of business and its size, product decisions, technology and factor combinations,
pricing and sales promotion, financing and management of investments and inventory are a
few examples of operational issues. The following Microeconomic theories deal with most of
these issues.
• Demand Analysis and Forecasting: Demand analysis pertains to the behaviour of
consumers in the market. It studies the nature of consumer preferences and the effect
of changes in the determinants of demand such as, price of the commodity, consumers’
income, prices of related commodities, consumer tastes and preferences etc.
Demand forecasting is the technique of predicting future demand for goods and services
on the basis of the past behaviour of factors which affect demand. Accurate forecasting
is essential for a firm to enable it to produce the required quantities at the right time
and to arrange, well in advance, for the various factors of production viz., raw materials,
labour, machines, equipment, buildings etc. Business Economics provides the manager
with the scientific tools which assist him in forecasting demand.
• Production and Cost Analysis: Production theory explains the relationship between
inputs and output. A business economist has to decide on the optimum size of output,
given the objectives of the firm. He has also to ensure that the firm is not incurring
undue costs. Production analysis enables the firm to decide on the choice of appropriate
technology and selection of least - cost input-mix to achieve technically efficient way
of producing output, given the inputs. Cost analysis enables the firm to recognise the
behaviour of costs when variables such as output, time period and size of plant change.
The firm will be able to identify ways to maximize profits by producing the desired level
of output at the minimum possible cost.
• Inventory Management: Inventory management theories pertain to rules that firms
can use to minimise the costs associated with maintaining inventory in the form of

“work-in-process”, “raw materials”, and “finished goods”. Inventory policies affect the
profitability of the firm. Business economists use methods such as ABC analysis, simple
simulation exercises and mathematical models to help the firm maintain optimum stock
of inventories.
• Market Structure and Pricing Policies: Analysis of the structure of the market provides
information about the nature and extent of competition which the firms have to face.
This helps in determining the degree of market power (ability to determine prices)
which the firm commands and the strategies to be followed in market management
under the given competitive conditions such as, product design and marketing. Price
theory explains how prices are determined under different kinds of market conditions
and assists the firm in framing suitable price policies.
• Resource Allocation: Business Economics, with the help of advanced tools such as
linear programming, enables the firm to arrive at the best course of action for optimum
utilisation of available resources.
• Theory of Capital and Investment Decisions: For maximizing its profits, the firm has
to carefully evaluate its investment decisions and carry out a sensible policy of capital
allocation. Theories related to capital and investment provides scientific criteria for
choice of investment projects and in assessment of the efficiency of capital. Business
Economics supports decision making on allocation of scarce capital among competing
uses of funds.
• Profit Analysis: Profits are, most often, uncertain due to changing prices and market
conditions. Profit theory guides the firm in the measurement and management of profits
under conditions of uncertainty. Profit analysis is also immensely useful in future profit
planning.
• Risk and Uncertainty Analysis: Business firms generally operate under conditions of risk
and uncertainty. Analysis of risks and uncertainties helps the business firm in arriving at
efficient decisions and in formulating plans on the basis of past data, current information
and future prediction.
2. Macroeconomics applied to External or Environmental Issues

Environmental factors have significant influence upon the functioning and performance of
business. The major macro-economic factors relate to:
• The type of economic system
• Stage of business cycle
• The general trends in national income, employment, prices, saving and investment.
• Government’s economic policies like industrial policy, competition policy, and fiscal

policy, foreign trade policy and globalization policies.
• Working of central banks and financial sector and capital market and their regulation.
• Socio-economic organisations like trade unions, producer and consumer unions and
cooperatives.
• Social and political environment.
Business decisions cannot be taken without considering these present and future environmental
factors. As the management of the firm has no control over these factors, it should fine-tune
its policies to minimise their adverse effects.
BASIC PROBLEMS OF AN ECONOMY

As mentioned in the last unit, all countries, without exceptions, face the problem of scarcity.
Their resources (natural productive resources, man-made capital goods, consumer goods,
money and time etc.) are limited and these resources have alternative uses. For example,
coal can be used as a fuel for the production of industrial goods; it can be used for producing
electricity, for domestic cooking purposes and for many other purposes. Similarly, financial
resources can be used for many purposes. If the resources were unlimited, people would be
able to satisfy all their wants and there would be no economic problem. Alternatively, if a
resource has only a single use, then also the economic problem would not arise.
Every economic system, be it capitalist, socialist or mixed, has to deal with this central
problem of scarcity of resources relative to the wants for them. This is generally called “the
central economic problem”. The central economic problem is further divided into four basic
economic problems. These are:
• What to produce?
• How to produce?
• For whom to produce?
• What provisions (if any) are to be made for economic growth?

(i) What to produce? : Since the resources are limited, every society has to decide
which goods and services should be produced and how many units of each good (or
service) should be produced. An economy has to decide whether more guns should
be produced or more butter should be produced; or whether more capital goods like
machines, equipment’s, dams etc., will be produced or more consumer goods such as,
cell phones will be produced. Not only the society has to decide about what goods are
to be produced, it has also to decide in what quantities each of these goods would be
produced. In a nutshell, a society must decide how much wheat, how many hospitals,
how many schools, how many machines, how many meters of cloths etc. have to be
produced.
(ii) How to produce? : There are various alternative techniques of producing a commodity.
For example, cotton cloth can be produced using handlooms, power looms or automatic
looms. Production with handlooms involves use of more labour and production with
automatic loom involves use of more machines and capital. A society has to decide
whether it will produce cotton cloth using labour- intensive techniques or capital-
intensive techniques. Likewise, for all goods and services, it has to decide whether to
use labour- intensive techniques or capital - intensive techniques. Obviously, the choice
would depend on the availability of different factors of production (i.e. labour and
capital) and their relative prices. It is in the society’s interest to use those techniques
of production that make the best use of the available resources.
(iii) For whom to produce? : Another important decision which a society has to take is
‘for whom’ it should produce. A society cannot satisfy each and every want of all the
people. Therefore, it has to decide on who should get how much of the total output of
goods and services, i.e. How the goods (and services) should be distributed among the
members of the society. In other words, it has to decide about the shares of different
people in the national cake of goods and services.
(iv) What provision should be made for economic growth? : A society would not like to use
all its scarce resources for current consumption only. This is because, if it uses all the
resources for current consumption and no provision is made for future production, the
society’s production capacity would not increase. This implies that incomes or standards
of living of the people would remain stagnant, and in future, the levels of living may
actually decline. Therefore, a society has to decide how much saving and investment
(i.e. how much sacrifice of current consumption) should be made for future progress.

We shall now examine the term ‘economic system’. An economic system refers to the sum
total of arrangements for the production and distribution of goods and services in a society.
In short, it is defined as the sum of the total devices which give effect to economic choice. It
includes various individuals and economic institutions.
You must be wondering how different economies of the world would be solving their
central problems. In order to understand this, we divide all the economies into three broad
classifications based on their mode of production, exchange, distribution and the role which
their governments plays in economic activity. These are:
- Capitalist economy
- Socialist economy
- Mixed economy
2.1 CAPITALIST ECONOMY

Capitalism, the predominant economic system in the modern global economy, is an economic
system in which all means of production are owned and controlled by private individuals for
profit. In short, private property is the mainstay of capitalism and profit motive is its driving
force. Decisions of consumers and businesses determine economic activity. Ideally, the
government has a limited role in the management of the economic affairs under this system.
Some examples of a capitalist economy may include United States and United Kingdom, Hong
Kong, South Korea etc. However, many of them are not pure form of capitalism but show
some features of being a capitalist economy. An economy is called capitalist or a free market
economy or laissez- faire economy if it has the following characteristics:
1) Right to private property: The right to private property means that productive factors
such as land, factories, machinery, mines etc. can be under private ownership. The
owners of these factors are free to use them in any manner in which they like and
bequeath it as they desire. The government may, however, put some restrictions for the
benefit of the society in general.
2) Freedom of enterprise: Each individual, whether consumer, producer or resource
owner, is free to engage in any type of economic activity. For example, a producer is
free to set up any type of firm and produce goods and services of his choice.
3) Freedom of economic choice: All individuals are free to make their economic choices
regarding consumption, work, production, exchange etc.
4) Profit motive: Profit motive is the driving force in a free enterprise economy and directs
all economic activities. Desire for profits induces entrepreneurs to organize production
so as to earn maximum profits.

5) Consumer Sovereignty: Consumer is supposed to be the king under capitalism. Consumer
sovereignty means that buyers ultimately determine which goods and services will be
produced and in what quantities. Consumers have unbridled freedom to choose the
goods and services which they would consume. Therefore, producers have to produce
goods and services which are preferred by the consumers. In other words, based on
the purchases they make, consumers decide how the economy’s limited resources are
allocated.
6) Competition: Competition is the most important feature of the capitalist economy.
Competition brings out the best among buyers and sellers and results in efficient use of
resources.
7) Absence of Government Interference: A purely capitalist economy is not centrally
planned, controlled or regulated by the government. In this system, all economic
decisions and activities are guided by self-interest and price mechanism which operates
automatically without any direction and control by the governmental authorities.
2.1.0 How do capitalist economies solve their central problems?

A capitalist economy has no central planning authority to decide what, how and for whom
to produce. In the absence of any central authority, it looks like a miracle as to how such
an economy functions. If the consumers want cars and producers choose to make cloth and
workers choose to work for the furniture industry, there will be total confusion and chaos in
the country. However, this does not happen in a capitalist economy. Such an economy uses
the impersonal forces of market demand and supply or the price mechanism to solve its
central problems.
Deciding ‘what to produce’ The aim of an entrepreneur is to earn as much profits as possible.
This causes businessmen to compete with one another to produce those goods which
consumers wish to buy. Thus, if consumers want more cars, there will be an increase in the
demand for cars and as a result their prices will increase. A rise in the price of cars, costs
remaining the same, will lead to more profits. This will induce producers to produce more
cars. On the other hand, if the consumers’ demand for cloth decreases, its price would fall
and profits would go down. Therefore, business firms have less incentive to produce cloth
and less of cloth will be produced. Thus, more of cars and less cloth will be produced in such
an economy. In a capitalist economy (like the USA, UK and Germany) the question regarding
what to produce is ultimately decided by consumers who show their preferences by spending
on the goods which they want.

Deciding ‘how to produce’: An entrepreneur will produce goods and services choosing that
technique of production which renders his cost of production minimum. If labour is relatively
cheap, he will use labour- intensive method and if labour is relatively costlier he will use
capital-intensive method. Thus, the relative prices of factors of production help in deciding
how to produce.
Deciding ‘for whom to produce’: Goods and services in a capitalist economy will be produced
for those who have buying capacity. The buying capacity of an individual depends upon his
income. How much income he will be able to make depends not only on the amount of work
he does and the prices of the factors he owns, but also on how much property he owns.
Higher the income, higher will be his buying capacity and higher will be his demand for goods
in general.
Deciding about consumption, saving and investment: Consumption and savings are done
by consumers and investments are done by entrepreneurs. Consumers’ savings, among other
factors, are governed by the rate of interest prevailing in the market. Higher the level of
income and interest rates, higher will be the savings. Investment decisions depend upon the
rate of return on capital. The greater the profit expectation (i.e. the return on capital), the
greater will be the investment in a capitalist economy. The rate of interest on savings and
the rate of return on capital are nothing but the prices of capital.
Thus, we see above that what goods are produced, by which methods they are produced,
for whom they are produced and what provisions should be made for economic growth are
decided by price mechanism or market mechanism.
2.1.1 Merits of Capitalist Economy

1. Capitalism is self-regulating and works automatically through price mechanism. There
is no need of incurring costs for collecting and processing of information and for
formulating, implementing and monitoring policies.
2. The existence of private property and the driving force of profit motive result in greater
efficiency and incentive to work.
3. The process of economic growth is likely to be faster under capitalism. This is because
the investors try to invest in only those projects which are economically feasible.
4. Resources are used in activities in which they are most productive. This results in
optimum allocation of the available productive resources of the economy.
5. There is usually high degree of operative efficiency under the capitalist system.

6. Cost of production is minimized as every producer tries to maximize his profit by
employing methods of production which are cost-effective.
7. Capitalist system offer incentives for efficient economic decisions and their
implementation.
8. Consumers are benefitted as competition forces producers to bring in a large variety of
good quality products at reasonable prices. This, along with freedom of choice, ensures
maximum satisfaction to consumers. This also results in higher standard of living.
9. Capitalism offers incentives for innovation and technological progress. The country as a
whole benefits through growth of business talents, development of research, etc.
10. Capitalism preserves fundamental rights such as right to freedom and right to private
property. Therefore, the participants enjoy maximum amount of autonomy and freedom.
11. Capitalism rewards men of initiative and enterprise and punishes the imprudent and
inefficient.
12. Capitalism usually functions in a democratic framework.
13. The capitalist set up encourages enterprise and risk taking and emergence of an
entrepreneurial class willing to take risks.
2.1.2 Demerits of Capitalism

1. There is vast economic inequality and social injustice under capitalism. Inequalities
reduce the aggregate economic welfare of the society as a whole and split the society
into two classes namely the ‘haves’ and the ‘have-nots’, sowing the seeds of social
unrest and class conflict.
2. Under capitalism, there is precedence of property rights over human rights.
3. Economic inequalities lead to wide differences in economic opportunities and perpetuate
unfairness in the society.
4. The capitalist system ignores human welfare because, under a capitalist set up, the aim
is profit and not the welfare of the people.
5. Due to income inequality, the pattern of demand does not represent the real needs of
the society.
6. Exploitation of labour is common under capitalism. Very often this leads to strikes and
lock outs. Moreover, there is no security of employment. This makes workers more
vulnerable.
7. Consumer sovereignty is a myth as consumers often become victims of exploitation.
Excessive competition and profit motive work against consumer welfare.
8. There is misallocation of resources as resources will move into the production of luxury
goods. Less wage goods will be produced on account of their lower profitability.

9. Less of merit goods like education and health care will be produced. On the other hand,
a number of goods and services which are positively harmful to the society will be
produced as they are more profitable.
10. Due to unplanned production, economic instability in terms of over production, economic
depression, unemployment etc., is very common under capitalism. These result in a lot
of human misery.
11. There is enormous waste of productive resources as firms spend huge amounts of money
on advertisement and sales promotion activities.
12. Capitalism leads to the formation of monopolies as large firms may be able to drive out
small ones by fair or foul means.
13. Excessive materialism as well as conspicuous and unethical consumption leads to
environmental degradation.
2.2 SOCIALIST ECONOMY

The concept of socialist economy was propounded by Karl Marx and Frederic Engels in their
work ‘The Communist Manifesto’ published in 1848. In this economy, the material means of
production i.e. factories, capital, mines etc. are owned by the whole community represented
by the State. All members are entitled to get benefit from the fruits of such socialised planned
production on the basis of equal rights. A socialist economy is also called as “Command
Economy” or a “Centrally Planned Economy”. Here, the resources are allocated according to
the commands of a central planning authority and therefore, market forces have no role in
the allocation of resources. Under a socialist economy, production and distribution of goods
are aimed at maximizing the welfare of the community as a whole.
Some important characteristics of this economy are:
(i) Collective Ownership: There is collective ownership of all means of production except
small farms, workshops and trading firms which may remain in private hands. As a
result of social ownership, profit- motive and self- interest are not the driving forces of
economic activity as it is in the case of a market economy. The resources are used to
achieve certain socio-economic objectives.
(ii) Economic planning: There is a Central Planning Authority to set and accomplish socio-
economic goals; that is why it is called a centrally planned economy. The major economic
decisions, such as what to produce, when and how much to produce, etc., are taken by
the central planning authority.

(iii) Absence of Consumer Choice: Freedom from hunger is guaranteed, but consumers’
sovereignty gets restricted by selective production of goods. The range of choice is
limited by planned production. However, within that range, an individual is free to
choose what he likes most.
The right to work is guaranteed, but the choice of occupation gets restricted because
these are determined by the central planning authority on the basis of certain socio-
economic goals before the nation.
(iv) Relatively Equal Income Distribution: A relative equality of income is an important

feature of Socialism. Among other things, differences in income and wealth are narrowed
down by lack of opportunities to accumulate private capital. Educational and other
facilities are enjoyed more or less equally; thus the basic causes of inequalities are
removed.
(v) Minimum role of Price Mechanism or Market forces: Price mechanism exists in a socialist
economy; but it has only a secondary role, e.g., to secure the disposal of accumulated
stocks. Since allocation of productive resources is done according to a predetermined
plan, the price mechanism as such does not influence these decisions. In the absence
of the profit motive, price mechanism loses its predominant role in economic decisions.
The prices prevailing under socialism are ‘administered prices’ which are set by the
central planning authority on the basis of socio-economic objectives.
(vi) Absence of Competition: Since the state is the sole entrepreneur, there is absence of
competition under socialism.
The erstwhile U.S.S.R. was an example of socialist economy from 1917 to 1990. In
today’s world there is no country which is purely socialist. Other examples include
Vietnam, China and Cuba. North Korea, the world’s most totalitarian state, is another
example of a socialist economy.
2.2.0 Merits of Socialism

1. Equitable distribution of wealth and income and provision of equal opportunities for all
help to maintain economic and social justice.
2. Rapid and balanced economic development is possible in a socialist economy as the

central planning authority coordinates all resources in an efficient manner according to
set priorities.

3. Socialist economy is a planned economy. In a socialistic economy, there will be better
utilization of resources and it ensures maximum production. Wastes of all kinds are
avoided through strict economic planning. Since competition is absent, there is no
wastage of resources on advertisement and sales promotion.
4. In a planned economy, unemployment is minimised, business fluctuations are eliminated

and stability is brought about and maintained.
5. The absence of profit motive helps the community to develop a co-operative mentality
and avoids class war. This, along with equality, ensures better welfare of the society.
6. Socialism ensures right to work and minimum standard of living to all people.
7. Under socialism, the labourers and consumers are protected from exploitation by the
employers and monopolies respectively.
8. There is provision of comprehensive social security under socialism and this makes
citizens feel secure.
2.2.1 Demerits of Socialism

1. Socialism involves the predominance of bureaucracy and the resulting inefficiency and
delays. Moreover, there may also be corruption, red tapism, favouritism, etc.
2. It restricts the freedom of individuals as there is state ownership of the material means
of production and state direction and control of nearly all economic activity.
3. Socialism takes away the basic rights such as the right of private property.
4. It will not provide necessary incentives to hard work in the form of profit.
5. Administered prices are not determined by the forces of the market on the basis of
negotiations between the buyers and the sellers. There is no proper basis for cost
calculation. In the absence of such practice, the most economic and scientific allocation
of resources and the efficient functioning of the economic system are impossible.
6. State monopolies created by socialism will sometimes become uncontrollable. This will
become more difficult to regulate than the private monopolies under capitalism.
7. Under socialism, the consumers have limited freedom of choice. Therefore, what the
state produces has to be accepted by the consumers.
8. No importance is given to personal efficiency and productivity. Labourers are not
rewarded according to their efficiency. This acts as a disincentive to work.
9. The extreme form of socialism is not at all practicable.

2.3 THE MIXED ECONOMY
The mixed economic system depends on both markets and governments for allocation
of resources. In fact, every economy in the real world makes use of both markets and
governments and therefore is mixed economy in its nature. In a mixed economy, the aim is
to develop a system which tries to include the best features of both the controlled economy
and the market economy while excluding the demerits of both. It appreciates the advantages
of private enterprise and private property with their emphasis on self-interest and profit
motive. Vast economic development of England, the USA etc. is due to private enterprise.
At the same time, it is noticed that private property, profit motive and self-interest of the
market economy may not promote the interests of the community as a whole and as such,
the Government should remove these defects of private enterprise. For this purpose, the
Government itself must run important and selected industries and eliminate the free play of
profit motive and self-interest. Private enterprise which has its own significance is also allowed
to play a positive role in a mixed economy. However, the state imposes necessary measures
to control and to regulate the private sector to ensure that they function in accordance with
the welfare objectives of the nation.
2.3.0 Features of Mixed Economy

Co-existence of private and public sector: The first important feature of a mixed economy is
the co-existence of both private and public enterprise.
In fact, in a mixed economy, there are three sectors of industries:

(a) Private sector: Production and distribution in this sector are managed and controlled
by private individuals and groups. Industries in this sector are based on self-interest and
profit motive. The system of private property exists and personal initiative is given full
scope. However, private enterprise may be regulated by the government directly and/
or indirectly by a number of policy instruments.
(b) Public sector: Industries in this sector are not primarily profit-oriented, but are set up
by the State for the welfare of the community.
(c) Combined sector: A sector in which both the government and the private enterprises
have equal access, and join hands to produce commodities and services, leading to the
establishment of joint sectors.

Mixed economy has the following merits available to capitalist economies and socialist
economies.
1. Economic freedom and existence of private property which ensures incentive to work.
2. Price mechanism and competition forces the private sector to promote efficient decision-
making and better resource allocation.
3. Consumers are benefitted through consumers’ sovereignty and freedom of choice.
4. Appropriate incentives for innovation and technological progress.
5. Encourages enterprise and risk taking.
6. Advantages of economic planning and rapid economic development on the basis of plan
priorities.
7. Comparatively greater economic and social equality and freedom from exploitation due
to greater state participation and direction of economic activities.
8. Disadvantages of cut-throat competition averted through government’s legislative
measures such as environment and labour regulations.
However, mixed economy is not always a ‘golden path’ between capitalism and socialism. It
could also suffer from substantial uncertainties. Mixed economy, sometimes, is characterised
by excessive controls by the state resulting in reduced incentives and constrained growth
of the private sector, poor implementation of planning, higher rates of taxation, lack of
efficiency, corruption, wastage of resources, undue delays in economic decisions and poor
performance of the public sector. Moreover, it is very difficult to maintain a proper balance
between the public and private sectors. In the absence of strong governmental initiatives,
the private sector is likely to grow disproportionately. The system would then resemble
capitalism with all its disadvantages.

MULTIPLE CHOICE QUESTIONS
Question 1.
‘Economics is the study of mankind in the ordinary business of life’ was given by: (1 Mark)
(a) Adam Smith (b) Lord Robbins (c) Alfred Marshall (d) Samuelson
Question 2.
The branch of economic theory that deals with the problem of allocation of resources is:
(1 Mark)
(a) Micro Economics (b) Macro Economics (c) Econometrics (d) None of these
Question 3.
A study of how increase in the corporate income tax rate will affect the natural unemployment
rate is an example of : (1 Mark)
(a) Macro Economics (b) Descriptive Economics
(c) Micro Economics (d) Normative Economics
Question 4.
In which type of economy do consumers and producers make their choices based on the
market forces of demand and supply? (1 Mark)
(a) Open Economy (b) Controlled Economy
(c) Command Economy (d) Market Economy
Question 5.
Under a free economy, prices are: (1 Mark)
(a) Regulated (b) Determined through free interplay of demand and supply
(c) Partly regulated (d) None of these
Question 6.
Which of the following falls under micro economics? (1 Mark)
(a) National income (b) General price level
(c) Factor pricing (d) National saving and investment

Question 7.
In a free market economy, when consumers increase their purchase of a goods and the level
of ________ exceeds ________ then prices tend to rise: (1 Mark)
(a) demand, supply (b) supply, demand
(c) prices, demand (d) profits, supply
Question 8.
Under Inductive method, the logic proceeds from : (1 Mark)
(a) General to particulars (b) Particular to general
(c) Both (a) and (b) (d) None
Question 9.
According to Robbins, ‘means’ are: (1 Mark)
(a) Scarce (b) Unlimited (c) Undefined (d) All of these
Question 10.
Economics is the study of : (1 Mark)
(a) How society manages its unlimited resources
(b) How to reduce our wants until we are satisfied
(c) How society manages its scarce resources
(d) How to fully satisfy our unlimited wants.
Question 11.
Who defines Economics in terms of Dynamic Growth and Development? (1 Mark)
(a) Robbins (b) Paul A Samuelson (c) Adam Smith (d) None
Question 12.
A Free Market economy solves its Central Problems through _________. (1 Mark)
(a) planning authority (b) market mechanism (c) both (d) none
Question 13.
Normative aspect of Economics is given by: (1 Mark)
(a) Marshall (b) Robbins (c) Adam Smith (d) Samuelson

Question 14.
Mixed economy means (1 Mark)
(a) All economic decisions are taken by Central Authority
(b) All economic decisions are taken by private entrepreneurs
(c) Economic decisions are partly taken by the state and partly by private entrepreneurs
(d) None of these
Question 15.
Capitalistic Economy uses _________ as principal means of allocating resources. (1 Mark)
(a) demand (b) supply (c) price (d) all of the above
Question 16.
Economic Problem arises when: (1 Mark)
(a) Wants are unlimited (b) Resources are limited
(c) Alternative uses of resources (d) All of the above
Question 17.
Micro economics is also know as _________. (1 Mark)
(a) public economics. (b) price theory. (c) income theory. (d) demand theory.
Question 18.
A developed economy uses _________ technique in production. (1 Mark)
(a) labour intensive. (b) capital intensive. (c) home-based. (d) traditional.
Question 19.
Which one is the feature of Marshall’s definition? (1 Mark)
(a) Limited ends. (b) Scarce means.
(c) Study of wealth as well as study of man. (d) Study of allocation of resources.
Question 20.
Which one in the following is not correct: (1 Mark)
(a) There are limited wants (b) Means are scarce
(c) Resources have alternative uses (d) Economics is science.

Question 21.
Micro Economics is concerned with: (1 Mark)
(a) Consumer Behaviour (b) Product pricing
(c) Factor Pricing (d) All of the above.
Question 22.
Who gave the positive aspect of science? (1 Mark)
(a) Alfred Marshall (b) A.C. Pigou (c) Adam Smith (d) Robbins.
Question 23.
Which of these is a part of micro economics? (1 Mark)
(a) Factor pricing (b) National Income (c) Balance of payment (d) None.
Question 24.
Which of these is an example of macro economics: (1 Mark)
(a) Problem of unemployment in India (b) Rising price level in the country
(c) Increase in disparities of income (d) All of above.
Question 25.
In a capitalist economy the allocation of resources is performed by: (1 Mark)
(a) Producers (b) Government (c) Planners (d) Price mechanism
Question 26.
Which of the following statements is incorrect? (1 Mark)
(a) Alfred marshall propagated the wealth definition of Economics.
(b) L. Robbins introduced the “Scarcity” definition of Economics
(c) Samuelson emphasized upon the “growth” aspect of Economics
(d) A.C Pigou believed in “welfare” aspect of Economics
Question 27.
Inequalities of income do not perpetuate in _________. (1 Mark)
(a) socialism (b) mixed economy (c) capitalism (d) none
Question 28.
Normative Economics is based on: (1 Mark)
(a) Ethical Considerations (b) Facts and Generalisation
(c) What is? (d) All of the above.

Question 29.
Dual system of pricing exist in: (1 Mark)
(a) Free market economy (b) Socialistic economy
(c) Mixed economy (d) None of the above
Question 30.
In Inductive method, logic proceeds from: (1 Mark)
(a) General to Particular (b) Particular to General
(c) Both (a) and (b) (d) None of these.
Question 31.
In a capitalist economy, allocation of resources id done by: (1 Mark)
(a) Producers (b) Government (c) Planners (d) Price mechanism
Question 32.
‘Economics is the science of choice making’ it implies:- (1 Mark)
(a) No choice is to be made
(b) Choice to be made between alternative uses
(c) Choice to be made between means and ends (d) None of the above.
Question 33.
Which of the following is a part of the subject matter of macro economics?
(a) Study of firms (b) Aggregate profits of a firm
(c) Market demand for a product (d) Net national product. (1 mark)
Question 34.
A free market economy’s driving force is:
(a) Profit motive (b) Welfare of the people
(c) Rising income and levels of living (d) None of the above. (1 mark)
Question 35.
“Economics is neutral between ends”. The statement is given by:
(a) L. Robbins (b) Mrs. Joan (c) Alfred Marshall (d) A.C. Pigon. (1 mark)

Question 36.
Where does price mechanism exists?
(a) Capitalist Economy (b) Socialist Economy
(c) Both type of economies (d) None of the above. (1 mark)
Question 37.
Economics which is concerned with welfare propositions is called
(a) Socialistic economics (b) Capitalistic economics
(c) Positive economics (d) Normative economics (1 mark)
Question 38.
Positive science only explains
(a) What is? (b) What ought to be?
(c) What is right or wrong (d) None of the above. (1 mark)
Question 39.
Who has defined economics as “Science which deals with wealth” ? (1 mark)
(a) Adam Smith (b) Canon (c) J.B. Say (d) A.C. Pigou
Question 40.
The most important function of an entrepreneur is to __________.
(a) innovate (b) bear the sense of responsibility
(c) finance (d) earn profit (1 mark)
Question 41.
Under Inductive method logic proceeds from:
(a) General to particular (b) Positive to normative
(c) Normative to positive (d) Particular to general (1 mark)
Question 42.
The meaning of time element in Economics is:
(a) Calendar time
(b) Clock time
(c) Operational time in which supply adjusts with the market demand
(d) None of the above. (1 mark)

Question 43.
All wants of an individual are not of:
(a) Equal importance (b) Immediate importance
(c) Fixed importance (d) All of the above. (1 mark)
Question 44.
_______ is another name of production possibility curve.
(a) Indifference Curve (b) ISO-Product Curve
(c) Transformation Curve (d) Diminishing Utility Curve (1 mark)
Question 45.
Who is the author of “The Nature and causes of wealth of Nation”? (1 mark)
(a) Karl Marx (b) Adam Smith (c) J B Say (d) A C Pigou.
Question 46.
Micro economics does not study
(a) Consumer behavior (b) Factor pricing
(c) General price level (d) Firms equilibrium. (1 mark)
Question 47.
Find cut the correct statement
(a) Higher the prices, lower the quality demanded of a product are a normative statement
(b) Micro and macro-economics are interdependent
(c) In a capitalist economy, the economic problems are solved by planning commission
(d) In deductive method logic proceeds from particular to the general. (1 mark)
Question 48.
Which of the following illustrate a decrease in unemployment using the PPF?
(a) A movement down along the PPF
(b) A rightward shift of the PPF
(c) A movement from a point on the PPF to a point inside the PPF
(d) A movement from a point inside the PPF to a point on the PPF. (1 mark)
Question 49.
Micro Economies is the study of:
(a) Individual parts of the economy (b) The economy as a whole
(c) Choice making (d) Development of the economy. (1 mark)

Question 50.
According to _______ Economics is a Science which deals with wealth”.
(a) Walker (b) Fairchild (c) Adam Smith (d) J.B. Say (1 mark)
Question 51.
Definition of economics given by Robbins does not deal with one of the following aspect.
Indicate that aspect.
(a) Scarce means (b) Limited ends
(c) Alternative uses (d) Economics is a science (1 mark)
Question 52.
An economic system in which all means of production are owned and controlled by private
individuals for profit is called:
(a) Mixed Economy (b) Socialist Economy
(c) Capitalist Economy (d) Developed Economy (1 mark)
Question 53.
In which of the following methods conclusions are drawn on the basis of collection and
analysis of facts?
(a) Deductive method (b) Scientific method
(c) Inductive method (d) Experimental method. (1 mark)
Question 54.
Production Possibility Curve (PPC) is also known as:
(a) Indifference Curve (b) Supply Curve
(c) Transformation Curve (d) Demand Curve. (1 mark)
Question 55.
The Central problem in every economic society is:
(a) To ensure a minimum level of income for every individual.
(b) To allocate scarce resources in such a manner that societies unlimited wants are satisfied
in the best possible manner.
(c) To ensure that production occurs in the most efficient manner.
(d) To provide job to every job seeker. (1 mark)

Question 56.
Concept of Business Economics was given by:
(a) Joel Dean (b) Alfred Marshall
(c) Adam Smith (d) L Robbins (1 mark)
Question 57.
“Features of the book wealth of nations”
(a) It was the first book user on economics (b) It was created in 1776
(c) It was also known as ‘wealth of nations’ (d) All of the above. (1 mark)
Question 58.
In India Mixed Economy exists due to:
(a) coexistence of public sector and private sector
(b) individual forces of. demand and supply
(c) orders by government
(d) None of these. (1 mark)
Question 59.
Which economic system is described by Schumpeter as capitalism in the oxygen text?
(a) Laissez-faire Economy (b) Command Economy
(c) Mixed Economy (d) Agrarian Economy (1 mark)
Question 60.
Capitalistic Economy user _______ as principal means of allocating resources:
(a) demand (b) supply
(c) price (d) all of the above. (1 mark)
Question 61.
Under inductive method logic proceeds from:
(a) General to particular (b) Positive to narrative
(c) Normative to positive (d) Particular to general (1 mark)
Question 62.
Human wants are _________ In response to satisfy their wants?
(a) Unlimited (b) Limited (c) Scarce (d) Multiple. (1 mark)

Question 63.
Business Economics is also known as?
(a) Applied Economics (b) Managerial Economics
(c) Micro Economics (d) All of the above (1 mark)
Question 64.
Business economy involves theory of Business economics with ________.
(a) Normative Economics (b) Business practices
(c) Micro Economics (d) Macro Economics (1 mark)
Question 65.
Which is not included in Economics?
(a) Family Structure (b) Managerial Economics
(c) Micro Economics (d) Macro Economics
(1 mark)
Question 66.
Business Economics involves the elements of.
(a) Micro Environment (b) Macro Environment
(c) Both (a) and (b) (d) None of the above (1 mark)
Question 67.
Which factor is included in business Economics?
(a) Business Economics is an art (b) Interdisciplinary in nature
(c) Normative in nature (d) All of the above (1 mark)
Question 68.
Which out of these are the feature of capitalism?
(i) Profit motive (ii) Human welfare (iii) Work through price mechanism (1 mark)
(a) (i) and (ii) (b) (ii) and (iii) (c) (i) and (iii) (d) All of these.
Question 69.
Macroeconomics include
(a) Product pricing (b) Consumer behavior
(c) External value of money (d) Location of industry (1 mark)

Question 70.
Which of the following is correct ?
(a) 49% FDI is allowed is defence production
(b) 49% FDI is allowed in private sector banking
(c) 74% FDI is now allowed in multi brand retails
(d) 100% FDI is allowed in insurance (1 mark)
Question 71.
As per the World Bank’s International Debt Statistics 2017, India continues to be amongst the
_______ countries.
(a) more debt (b) less debt
(c) more vulnerable (d) less vulnerable (1 mark)
Question 72.
Economic goods are considered as scarce resources because ________
(a) Inadequate quantity to satisfy the needs of the society
(b) Not possible to increase in quantity
(c) Limited hands to make goods
(d) Primary importance in satisfying social requirements (1 mark)
Question 73.
Due to recession, employment role and output _________ (1 mark)
(a) Rises; rises (b) Falls; falls (c) Rises; falls (d) Falls; rises
Question 74.
Freedom of choice is the advantage of _________.
(a) Socialism (b) Capitalist
(c) Mixed economy (d) None of the above (1 mark)
Question 75.
________ refers to the work area where surplus manpower is employed out of which some
individuals have zero or almost zero marginal productivity, such that if they are removed the
total level of output remains unchanged. (1 mark)
(a) Voluntary (b) Disguised (c) Structural (d) Technological

Answer Key
Question Answer
No.
1. (c) ‘Economics is a study of mankind in the ordinary business of life’ is the
welfare definition given by Alfred Marshal.
2. (a) The study of micro economics deals with how a producer allocates his
resources and fixes a price of his product for the optimum utilization of
resources.
3. (a) Macro economics studies the economy as a whole. Therefore, increase in
corporate income tax rate and its effect on unemployment is at macro level.
4. (d) In a capitalistic economy, producers make their choices based on market
forces of demand and supply. Capitalist economy works under price
mechanism i.e. prices are determined by free interplay of demand and
supply forces. A capitalist economy is also known as “Market Economy”.
5. (b) Under free economy (capitalist economy) prices are determined by price or
market mechanism i.e. there is no authority to determine prices but they
are decided by forces of demand and supply
6. (c) Micro economics studies economic behavior of individual economic units.
Pricing of every factor is micro concept.
7. (a) In a market (capitalist) economy prices are determined by market forces of
demand and supply. When demand of goods increases, the supply remaining
the same, the prices of goods rises.
8. (b) Under inductive method, conclusions are drawn of the basis of collection and
analysis of facts relevant to the inquiry. The logic proceeds from particular to
general. The generalizations are based on observation of individual examples.
9. (a) Robbins in his scarcity definition explains that there are unlimited ends
(wants) and limited means (resources). Resources are limited in nature and
have alternative uses.
10. (c) Society has scarce resources and unlimited wants. Economics is the study of
how to manage the scarce resources to fulfill the unlimited ends. Economics
deals with how to make optimum utilization of scarce resources.
11. (b) Economics in terms of Dynamic Growth and Development was given by
Paul A. Samuelson. Who states that “Economics is the study of how men
and society choose, with or without the use of money to enjoy scarce
productive resources which could have alternative uses, to produce various
commodities over time and to distribute them for consumption now and in
the future of amongst various people and groups of society.

12. (b) A free market economy also known as a capitalist economy has no central
planning authority to decide what, how and for whom to produce. Such an
economy uses the impersonal force of the market demand and supply or the
price mechanism to solve its central problems.
13. (a) Normative aspect is concerned with welfare propositions. Such aspect
of economics is prescriptive in nature and describes ‘what should be the
thing’. Example, the question like what should be the level of national
income, how the fruits of national product be distributed among people. In
such an aspect of economics as given by ‘Alfred Marshall’.
14. (c) Mixed economy is characterized by presence of both private and public
enterprise. In this economy, the government as well as private enterprises
exist and hence economic decisions are taken both by government and
private enterprises.
15. Same as Answer 3
16. (d) Economic problem arises when wants are unlimited, resources are limited
and resources have alternative uses. These reasons give rise to basic
economic problems of “what to produce”, “How to produce” and “For
whom to produce”.
17. (b) Micro Economics is also known as Price Theory. (Self Explanatory).
18. (b) Developed Economies have more of technology so they use capital intensive
techniques in production to have minimum cost of production.
19. (c) Alfred Marshall gave the definition of science of material well-being. It is
on one side study of wealth and on other and more important side study of
man.
20. (a) According to two fundamental facts, human beings have unlimited wants
and the means of satisfying the wants are scarce.
21. (d) Micro-economics is concerned with:
(i) Product pricing (ii) Consumer behavior
(iii) Factor pricing (iv) Economic conditions of a section of the people
(v) Study of firms (vi) Location of an industry
22. (d) A positive or pure science analyses cause and effect relationship between
variables but it does not pass value judgments. This positive aspect of
science was emphasized by Professor Robbins.
23. (a) Micro economics is the study of economic behavior of an individual, firm or
industry in the national economy. It is the study of a particular unit. Factor
pricing relates to pricing of individual factor and hence is a subject of micro
economics.

24. (d) In macro economics we study the economic behavior of large aggregates
such as overall conditions of economy, total production etc. Therefore, all
these are a subject of macro economics.
25. (d) A capitalistic economy has no central planning authority to decide what, how
and for whom to produce. Thus, the allocation of resources is performed by
the market forces of demand and supply known as price mechanism.
26. (a) The ‘wealth’ definition of Economics was given by Adam Smith and JB Say:
“An inquiry into the nature and causes of the wealth of the nations” – Adam
Smith.
“Science which deals with wealth” – JB Say.
27. (a) A relative equality of income is n important feature of socialistic economy.
Educational and other facilities are enjoyed more or less equally, thus the
basic causes of inequalities are removed.
28. (a) Normative economics is concerned with welfare propositions. It states
“what should be the things.” It does not deal with facts but involves value
judgments. The ethical aspect of economics is normative economics. For
e.g. – What should be the wage rate level? This is a normative statement.
29. (c) Mixed economy is a type of economy which combines the features of both
capitalistic and socialistic economy. In this economy, dual system of pricing
exist i.e. prices of essential commodities are determined by the government
while of others is fixed by price mechanism (by interaction of demand and
supply)
30. (b) Under inductive method, conclusions are drawn on the basis of collection
and analysis of facts relevant to the enquiry. Hence the logic proceeds from
particular to general. This means generalizations are made based on facts
collected.
31. (d) In a capitalist economy there is no government intervention. In this economy
the resources are allocated based on the demand of the consumers. Producers
will produce those goods which are in demand without thinking about the
public welfare. Hence, this economy is guided by price mechanism.
32. (b) Robbins gave the following definition of economics –
“Economics is the science which studies human behavior as a relationship
between ends and scarce means which have alternative uses”.
Thus, economics is a science of choice which is to be made between
alternative uses.

33. (d) In macro economics, we study the economic behaviour of large aggregates
such as overall conditions of economy, total production etc. Out of the
options given, only NNP studies the national income which is related with
the entire economy.
34. (a) Free market economy or capitalist economy is in which all the means of
production are owned and controlled by private individuals for profit. Thus,
profit motive is the driving force’ of a free market economy.
35. (a) According to Prof. Lionel Robbins “economics is neutral between ends.”
Ends refer to wants. Human wants are unlimited. When one want is satisfied,
other wants crop up.
36. (a) A capitalistic economy has no central planning authority to decide what,
how and for whom to produce. This economy uses the impersonal forces
of the market demand and supply or price mechanism to solve its central
problems.
37. (d) Normative aspects is concerned with welfare propositions. It involves value
judgments. It is prescriptive in nature and describes ‘what should be the
things’. For e.g. what should be the level of national income, what should
be the wage rate.
Thus Normative economics is the correct option.
38. (a) A positive or pure science analyses causes and effect relationship between
variables but it does not pass value judgement. It states what is and not
what ought to be
Thus, option (A) is correct.
39. (c) Many classical economists defined economics in terms of wealth. JB Say is
one of them. He said Economics is a “Science which deals with wealth.”
40. (a) Entrepreneur is one of the factor of production. He is the one who co-
ordinate with other factors like land, labour, capital etc. Various functions
of entrepreneur are decision-making, managerial function, organizational
functions etc. while the most important function of an entrepreneur is to
innovate.
41. (d) Under Inductive Method Conclusions are drawn on the basis of collection
and analysis of facts relevant to the enquiry. The logic in this case proceeds
from the particular to general.
42. (c) Operational time in which supply adjusts with the market demand.
43. (a) All wants of individuals are not of equal importance as all cannot be fulfilled.
44. (c) PPC also known as Production Possibility Curve, Production Possibility
Boundary, Transformation Line/Curve.

45. (b) Science of wealth:
Although the activity of acquiring and increasing material wealth is as
old as civilization, a disciplined study of the wealth producing activities
commenced about 235 years back (in 1776) when Adam Smith, the father of
Economics, published “The Nature and Causes of wealth of Nations”.
46. (c) Micro Economics is the study of particular firms, particular households,
individual price, wage income, individual industries and particular
commodities.
We mainly study the following:
(i) Product Pricing (ii) Consumer Behaviour
(iii) Factor Pricing (iv) Economic conditions of a section of the people
(v) Study of firms (vi) Location of industry
47. (b) Micro and Macro Economics are interdependent on each other because they
both play a vital and in most cases they play a complementary role Ex.
National income cannot grow unless the production in individual firms and
factories rises.
48. (d) A movement of point inside PPF to on the PPF indicates the actual growth in an
economy and wherever there is a decrease in. unemployment it shows that an
economy is making progress towards growth by optimizing its full resources.
49. (a) The term micro economics is derived from the Greek word micros, meaning
“small”. In micro economics we study the economic behavior of an individual,
firm of industry. In the national economy. It is thus a study of a particular
unit rather than all the units combined.
50. (d) According to J. B. Say “Economics is a science which deals with wealth”.
51. (b) Definition of economics given by Rabbins does not deal with limited ends as
in the definition. He deals with unlimited ends.
52. (c) Capitalist economy is a system of economy in which all means of production
are owned and controlled by private individuals for profit.
53. (c) Inductive Method: Under this method conclusions are drawn on the basis of
collection and analysis of facts relevant to the inquiry. The logic in this case
proceeds from the particular to general. The generalizations are based on
observation of individual examples.
Thus, option (c) is correct.
54. (c) Production-possibility curve is also known as transformation curve. It is a
graph that shows the different rates of production of two goods that an
individual or group can efficiently produce with limited productive resources.

55. (b) Every economic system, be it capitalist, socialist or mixed, has to deal with
this central problem of scarcity of resources relative to wants for them.
The central economic problem is further divided into four basic economic
problems.
These are:
(i) What to produce (ii) How to produce
(iii) For whom to produce
What provisions (if any) are to be made for economic growth?
56. (a) Concept of Business economics was given by Joel Dean.
57. (d) Adam Smith was the father of Economics. He wrote the book ‘the Nature
and causes of Wealth of Nations’ in 1776. This book was also known as
‘Wealth of Nations’. He defined economics at ‘An inquiry cuts the nature
and causes of wealth of nations’
58. (a) There are three types of economy. These are:
(a) Capitalist economy (private enterprises)
(b) Socialist economy (governed by government)
(c) Mixed economy (public and private enterprises)
Mixed economy means where a co-relation or co-existence of public and private
sector.
59. (c) Mixed Economy is described by Schumpeter as ‘capitalism in oxygen text’.
According to him it is only a trick of capitalism to cheat the working class by
offering them some temporary advantages like social security, upliftment of
depressed classes etc.
60. (c) Price is principal means of allocating resources in capitalist while it is
not in socialist economy. Price Mechanism is a characterise is of capitalist
economy.
61. (d) Inductive Method is a method which is based on facts and in this method
logic proceeds from particular to general. While deductive method based
on assumptions and in this logic proceeds from general to particular.
62. (a) ‘Human beings have unlimited wants arid to means to satisfy these unlimited
wants are relatively scarce’ form the subject matter of Economics.
63. (b) Business economics also referred to as managerial economics, generally
refers to the Integration of economic theory with business practice.
64. (b) Business economy Involves theory of business with business practices,
(application of theory)
65. (a) Family structure in no sense effects economics therefore it is not included
in economics.

66. (c) Business economics involves economy as a whole arid therefore elements of
macro economics and micro ‘economics’ are included in it
67. (d) Factor of business economics are
1. It is science 2. It is normative in nature
3. It is Inter disciplinary in nature 4. It is pragmatic in approach.
Therefore answer will be all of the above.
68. (c) Feature of capitalist economy
1. Profit motive
2. Work through price mechanism
3. High degree of operative efficiency
Therefore, human welfare is not a feature of capitalist economy.
69. (c) Macro economics is the study of the overall phenomena or the economy as
a whole, rather than its individual parts. It includes:
(i) National income and national output
(ii) General price level and interest rates
(iii) Balance of trade and balance of payment
(iv) The overall level of savings and investment
(v) The level of employment and rate of economic growth
(vi) External value of currency.
70. (a) In 2016, the government related FDI norms in several sectors including
defence. As per the policy, foreign investment upto 49% has been permitted
in defence sector through automatic route.
71. (d) As per country comparison based on “International Debt Statistics 2017” of
the World Bank India continues to be among the less vulnerable countries
with other indebted developing countries.
72. (a) A economy exists because of two facts i.e. human wants are unlimited and
the resources are scarce, i.e. there is an inadequate quantity to satisfy the
needs of entire society.
73. (b) During the contraction or recession phase of business cycle, there is a fall
in levels of investment and employment. Decrease in demand pulls down
prices”, investor confidence is at lowest. Employment rate falls and so is
the output.
74. (b) In Capitalist economy consumers are benefited due to competitive forces,
variety of good quality products affordable prices. This, not only ensures
freedom of choice but also the maximum satisfaction to the consumers.

75. (b) Disguised unemployment: A kind of unemployment where more people are
engaged in a work than required. Disguised refers to the work area where
surplus manpower is employed out of which some individuals have zero or
almost zero marginal productivity, such that if they are removed the total
level of output remains unchanged.

CLASSWORK
1. Which of the following is not a feature of a capitalist economy?
(a) Right to private property (b) Restrictions on consumers right to choose
(c) Profit motive (d) Freedom of enterprise
2. The term “Mixed Economy denotes

(a) Co-existence of both consumers and producers goods industries in the economy.
(b) Co-existence of both private and public sectors in the economy.
(c) Co-existence of both rural and urban sectors in the economy
(d) Co-existence of both large and small industries in the economy
3. The most important function of an entrepreneur

(a) Innovate (b) Bear the sense of responsibility
(c) Finance (d) Earn profit
4. Under Inductive method logic proceeds from:

(a) General to particular (b) Positive to normative
(c) Normative to positive (d) Particular to general
5. The meaning of time element in economics is:

(a) Calendar time (b) Clock time
(c) Operational time which supply adjusts with the market demand
(d) None of the above
6. All wants of an individual are not of:

(a) Equal importance (b) Immediate importance.
(c) Fixed importance (d) All of the above
7. __________ is another name of production possibility curve.

(a) Indifference Curve (b) ISO-Product Curve
(c) Transformation Curve (d) Diminishing Utility Curve
8. Who is the author of “The Nature and Causes of Wealth of Nations?

(a) Karl Marx (b) Adam Smith
(c) JB Say (d) AC Pigou

9. Microeconomics does not study
(a) Consumer behavior (b) Factor pricing
(c) General price level (d) Firms equilibrium
10. Find out the correct statement

(a) Higher the prices, lower the quality demanded of a product is a normative statement
(b) Micro and macro-economics are interdependent
(c) In a capitalist economy, the economic problems are solved by planning commission
(d) In deductive method logic proceeds from particular to the general
11. Which of the following illustrate a decrease in unemployment using the PPF?
(a) A movement down along the PPF
(b) A rightward shift of the PPF
(c) A movement from a point on the PPF to a point inside the PPF
(d) A movement from point inside the PPF to a point on the PPF
12. Microeconomics is the study of:

(a) Individual parts of the economy (b) The economy as a whole
(c) Choice making (d) Development of the economy
13. According to _________ “Economics is a science which deals with wealth”.

(a) Walker (b) Fairchild
(c) Adam Smith (d) J.B. Say
14. Freedom of choice is the advantage of

(a) Socialism (b) Capitalism
(c) Mixed Economy (d) Communism
15. The definition of economics given by Robbins does not deal with one of the following
aspects. Indicate that aspect.
(a) Scarce means (b) Limited ends
(c) Alternative uses (d) Economics is a science

16. An economic system in which all means of production owned and controlled by private
individuals for profit is called:
(a) Mixed Economy (b) Socialist Economy
(c) Capitalist Economy (d) Developed Economy
17. In which of the following methods conclusions are drawn on the basis of collection and
analysis of facts?
(a) Deductive method (b) Scientific method
(c) Inductive method (d) Experimental method.
18. Which Economic System is described by Schumpeter as ‘capitalism in the oxygen tent’?
(a) Laissez-Faire Economy (b) Command Economy
(c) Mixed Economy (d) Agrarian Economy.
19. The production Possibility Curve (PPC) is also known

(a) Indifference Curve (b) Supply Curve
(c) Transformation Curve (d) Demand Curve.
20. The Central problem in every economic society is:

(a) To ensure a minimum level of income for every individual.
(b) To allocate scarce resources in such a manner that society’s unlimited wants are
satisfied in the best possible manner.
(c) To ensure that production occurs in the most efficient manner.
(d) To provide job to every job seeker.
21. Socialist Economy was propounded by:

(a) Karl Marx (b) Samuelson
(c) A.C. Pigou (d) Adam Smith
22. Concept of Business Economics was given by:

(a) Joel Dean (b) Alfred Marshall
(c) Adam Smith (d) L. Robbins

23. Features of the book wealth of nations:
(a) It was the first book written on economics
(b) It was created in 1776
(c) It was also known as wealth of nations
(d) All of the above.
24. In India, Mixed Economy exists due to:

(a) Coexistence of public sector and private sector
(b) Individual forces of demand and supply
(c) Orders by government
(d) None of these.
25. Which economic system is described by Schumpeter as capitalism in oxygen tent?

(a) Laissez-faire Economy (b) Command Economy
(c) Mixed Economy (d) Agrarian Economy
26. Capitalistic Economy uses ________ as principal means of allocating resources:

(a) Demand (b) Supply
(c) Price (d) all of the above.
27. Under inductive method

(a) General to particular (b) Positive to narrative
(c) Normative to positive (d) Particular to general
28. Human wants are ______ in response to satisfy their wants?

(a) Unlimited (b) Limited
(c) Scarce (d) Multiple
29. Price Mechanism is the main feature of which economy?

(a) Capitalistic Economy (b) Mixed Economy
(c) Socialist Economy (d) All of the above
30. Business Economics is also known as?

(a) Applied Economics (b) Managerial Economics
(c) Micro Economics (d) All of the above

31. A business economy involves the theory of Business economics with
(a) Normative Economics (b) Business practices
32. Which is not included in Economics?

(a) Family Structure (b) Managerial Economics
33. Business Economics involves the elements of:

(a) Micro Environment (b) Macro Environment
(c) Both (a) and (b) (d) None of the above
34. In which economy market and government both play an important role?
(a) Mixed economy (b) Socialistic economy
(c) Capitalistic economy (d) Business economy
35. Which factor is included in business Economics?

(a) Business Economics is an art (b) Interdisciplinary in nature
(c) Normative in nature (d) All of the above
36. Which out of these are the features of capitalism?

(i) Profit motive (ii.) Human welfare
(iii.) Work through price mechanism
(a) (i) and (ii) (b) (ii) and (iii)
(c) (i) and (iii) (d) All of these.
37. Business Economics is

(a) Normative in nature (b) Interdisciplinary in nature
(c) Both (d) None
38. Socialism ensures

(a) Rapid growth and balanced development
(b) Right to work
(c) Incentives for efficient economic decisions
(d) Both (a) and (b)

39. Macroeconomics includes
(c) External value of money (d) Location of industry
40. Exploitation and inequality will be more int

(a) Socialism (b) Capitalism
(c) Mixed (d) All of the above
41. Shyam: This year due to heavy rainfall my onion crop was damaged Krishna: Climates
affect crop yields. Some years are bad, others are good
Hari: Don’t worry-Price increase will compensate for the fall in quantity supplied
Radhe: The Government ought to guarantee that our income will not fall. In this
conversation, the normative statement is made by
(a) Shyam (b) Krishna
(c) Hari (d) Radhe
42. Which of the following is correct?

(a) 49% FDI is allowed in defense production
(b) 49% FDI is allowed in private sector banking
(c) 74% FDI is now allowed in multiband retails
(d) 100% FDI is allowed in insurance
43. A capitalist economy consists of

(a) Central planning authority
(b) A mechanism to decide as to what, how and for whom to produce
(c) Both (a) and (b)
44. As per the World Bank’s International Debt Statistics 2017, India continues to be amongst
the countries.
(a) More debt (b) Less debt
(c) More vulnerable (d) Less vulnerable

45. Applied economics includes
(a) Regression analysis and mathematical linear programming
(b) Capital budgeting (c) Both (a) and (b) (d) None
46. Economic goods are considered as scarce resources because

(a) Inadequate quantity to satisfy the needs of the society
(b) Not possible to increase the quantity
(c) Limited hands to make goods
(d) Primary importance in satisfying social requirements
47. Due to recession, employment rate and output

(a) Rises; rises (b) Falls; falls
(c) Rises; falls (d) Falls; rises
48. Freedom of choice is the advantage of

(a) Socialism (b) Capitalist
(b) Mixed economy (c) None of the above
49. ________ refers to the work area where surplus manpow employed out of which some
individuals have zero or almost marginal productivity, such that if they are removed the
total le output remains unchanged
(a) Voluntary (b) Disguised
(c) Structural (d) Technological
50. Socialist economy is

(a) Self-regulation (b) Profit Oriented
(c) Command economy
(d) Allocation of resources as per market requirements

HOME WORK
1. Economics is the study of mankind in the ordinary business of life’ was given by:
(a) Adam Smith (b) Lord Robbins
(c) Alfred Marshall (d) Samuelson
2. The branch of economic theory that deals with the problem of allocation of resources
is:
(a) Microeconomics (b) Macroeconomics
(c) Econometrics (d) None of these
3. Capitalistic Economy uses __________ as principal means of allocating resources.

(c) price (d) all of the above
4. A study of how an increase in the corporate income tax rate will affect the natural
unemployment rate is an example of:
(a) Macroeconomics (b) Descriptive Economics
(c) Microeconomics (d) Normative Economics
5. In which type of economy do consumers and producers make their choices based on the
market forces of demand and supply?
(a) Open Economy (b) Controlled Economy
(c) Command Economy (d) Market Economy
6. Under a free economy, prices are:

(a) Regulated
(b) Determined through a free interplay of demand and supply
(c) Partly regulated (d) None of these
7. Which of the following falls under microeconomics?

(a) National income (b) General price level
(c) Factor pricing (d) National saving and investment
8. In a free-market economy, when consumers increase their purchase of a goods and the
level of ________ exceeds _______ then prices tend to rise:
a) Demand, supply (b) Supply, demand
(c) Prices, demand (d) Profits, supply

9. Under the Inductive method, the logic proceeds from:
(a) General to particulars (b) Particular to general
10. According to Robbins, means are:

(a) Scarce (b) Unlimited
(c) Undefined (d) All of these
11. Economics is the study of:

(a) How society manages its unlimited resources
(b) How to reduce our wants until we are satisfied
(c) How society manages its scarce resources
(d) How to fully satisfy our unlimited wants.
12. A mixed economy means:

(a) Co-existence of small and large industries
(b) Promoting both agriculture and industries in the economy
(c) Co-existence of rich and poor
(d) Co-existence of public and private sectors
13. Who defines Economics in terms of Dynamic Growth and Development?

(a) Robbins (b) Paul A Samuelson
(c) Adam Smith (d) None
14. A Free Market- economy, solves its Central Problems through________.

(a) Planning authority (b) Market mechanism
(c) Both (d) None
15. Normative aspect of Economics is given by

(a) Marshall (b) Robbins
(c) Adam Smith Answer: (d) Samuelson
16. Which one is not the characteristic of capitalistic economy?

(a) Profit motive (b) Income inequality
(c) Free employment (d) Collective ownership

17. Mixed economy means
(a) All economic decisions are taken by the central Authority
(b) All economic decisions are taken by private entrepreneurs
(c) Economic decisions are partly taken by the state and partly by private entrepreneurs
(d) None of these
18. Capitalistic Economy uses resources

(c) Price (d) all of the above
19. Economic Problem arises when:

(a) Wants are unlimited (b) Resources are limited
(c) Alternative uses of resources (d) All of the above
20. Micro economics is also known as ____________

(a) Public economics (b) Price theory
(c) Income theory (d) Demand theory
21. A developed economy uses ________ technique in production.

(a) Labor intensive (b) Capital intensive
(c) home-based (d) Traditional
22. Which one is the feature of Marshal’s definition?

(a) Linted ands (b) Scarce means
(c) Study of wealth as well as study of man
(d) Study of allocation of resources
23. Which one in the following is not correct :

(a) There are limited wants (b) Means are scarce
(c) Resources have alternative uses (d) Economics is science
24. Micro Economics is concerned with

(a) Consumer Behavior (b) Product pricing
(c) Factor Pricing (d) All of the above

25. Who gave the positive aspect of science?
(a) Alfred Marshall (b) A.C. Pigou
(c) Adam Smith (d) Robbins
26. A mixed economy means :

(a) Coexistence of both private and public sector
(b) Coexistence poor and rich people
(c) Roth (a) and (b)
(d) None
27. Which of these is a part of microeconomics?

(a) Factor pricing (b) National Income
(c) Balance of payment (d) None
28. Which of these is an example of macroeconomics :

(a) The problem of unemployment in India
(b) The rising prices level in the country
(c) Increases in disparities of income
(d) All of the above
29. In a capitalistic economy the allocation of resources is performed by

(a) Producers (b) Government
(c) Planners (d) Price mechanism
30. Which the following statements is incorrect?

(a) Alfred Marshall propagated the wealth definition Economics
(b) L Robbins introduced the “Scarcity” definition of economics
(c) Samuelson emphasized upon the “growth” aspect of economics
(d) A.C. Pigou believed in the “welfare” aspect of Economics
31. Inequalices of income do not perpetuate in _________

(a) Socialism (b) Mixed economy
(c) Capitalism (d) None

32. Which of the following are the features of a mixed economy?
(a) Planned economy (b) Dual system of pricing exists
(c) Balanced regional development (d) All of the above.
33. Normative Economics is based on:

(a) Ethical Considerations (b) Facts and Generalization
(c) What is? (d) All of the above.
34. The dual system of pricing exists in :

(a) Free market economy (b) Socialistic economy
(c) Mixed economy (d) None of the above
35. In the Inductive method, logic proceeds from:

(a) General to Particular (b) Particular to General
(c) Both (a) and (b) (d) None of these.
36. In a capitalist economy, allocation of resources is done by :

(a) Producers (b) Government
(c) Planners (d) Price mechanism
37. A Capitalist Economy follows the policy of :

(a) Laissez-faire (b) Regulated markets
(c) Promoting public sector (d) None of the above.
38. Economics is the science of choice-making implies :-

(a) No choice is to be made
(b) The choice to be made between alternative uses
(c) The choice to be made between means and ends
39. Which of the following is a part of the subject matter of macroeconomics?

(a) Study of firms (b) Aggregate profits of a firm
(c) Market demand for a product (d) Net national product

40. A capitalist economy is by and large
(a) a closed economy
(b) a free market economy
(c) a centrally controlled economy
(d) an economy in which a government neither collects any taxes nor incurs any
expenditure
41. Deductive and Inductive methods are complementary to each other. It in:
(a) Absolutely correct (b) Absolutely incorrect
(c) Partially incorrect (d) None of the above
42. A free-market economy’s driving force is:

(a) Profit motive (b) Welfare of the people
(c) Rising income and levels of living (d) None of the above
43. Economics is neutral between onds. The statement is given by

(a) L. Robbins (b) Mrs. Joan
(c) Alfred Marshall (d) A.C. Pigou
44. A system of economy in which all the means of production are owned and controlled by
the private individuals for the purpose of profit is called:
(a) Socialist Economy (b) Capitalist Economy
(c) Mixed Economy (d) All of the above
45. Where does the price mechanism exist?

(a) Capitalist Economy (b) Socialist
(c) Both types of economies (d) None of the above
46. Economics which is concerned with welfare propositions is called

(a) Socialistic economics (b) Capitalistic economics
(c) Positive economics (d) Normative economics
47. In which among the following systems the right to property exists
(a) Mixed economy (b) Capitalist economy
(c) Socialist economy (d) Traditional economy

48. Positive science only explains
(a) What is? (b) What ought to be?
(c) What is right or wrong (d) None of the above
49. Socialist Economy is also known as

(a) Mixed Economy (b) Centrally Planned Economy
(c) Capitalist Economy (d) None of the above
50. Who has defined economics as “Science which deals with wealth”?
(a) Adam Smith (b) Canon
(c) J.B. Say (d) A.C. Pigou

TEST PAPER
1. A study of have increase in the corporate tax rate will affect national unemployment
rate is
(a) Macroeconomics (b) Descriptive economics
(c) Microeconomics (d) Normative economics
2. A capitalist economy uses ________ as a principal means of allocating resources.

(c) Efficiency (d) Price
3. In a market economy all assets are held by:

(a) Investors (b) Privately
(c) Government (d) Jointly by government
4. The branch of economic theory that deals with problem of allocating resources,
(a) Microeconomics (b) Macroeconomics
(c) Econometrics (d) None
5. Larger production of ________ goods would lead to higher production in future.

(a) Consumer goods (b) Capital goods
(c) Agricultural goods (d) Public goods
6. Which of the following is not within the scope of business economics?

(a) Capital budgeting (b) Risk analysis
(c) Business cycle (d) Accounting Standards
7. Which is the first book of Economics named as

(a) The Wealth of Nations (b) Economics
(c) Nations of Wealth (d) Political Economy
8. Which type of scarcity is referred to in economics

(a) Relative scarcity (b) Absolute scarcity

9. Consumer sovereignty is which of the following characteristics?
(a) Capitalist economy (b) Mixed economy
(c) Socialist economy (d) Democracy
10. Who defines Economics in terms of Dynamic growth and development?

(a) Robbins (b) Paul A Samuelson
(c) Adam Smith (d) None
11. ______ economics explain economic phenomenon according to their cause and effects.
(a) Normative (b) Empirical
(c) Positive (d) Applied
12. The study of behavior of different individuals organizations within an economic system
is known as:
(a) Micro Economics (b) Macro Economics
(c) Welfare Economics (d) None
13. The nature of Business economics is:

(a) Positive in nature (b) Pragmatic
(c) Pure science (d) Independent
14. Economics is term of Dynamic Growth and development defined by:

(a) Alfred Marshall (b) Adam Smith
(c) Robbins (d) Paul A Samuelson
15. A socialistic economy is also called as:

(a) Profit oriented economy (b) Self-regulatory economy
(c) Centrally planned economy (d) Unorganized economy
16. In capitalistic economy _______ and _________ will be more.

(a) Inequalities, exploitation (b) Exploitation, equalities
(c) Equalities, Non exploitation (d) Non exploitation, inequalities

17. In which economy, cost benefit analysis is used to answer the fundamental questions of
economy?
(a) Mixed economy (b) Socialistic economy
(c) Capitalistic economy (d) Regulatory economy
18. A system of economy in which all the means of production are owned controlled by the
private individuals for the purpose of profits is called:
(a) Socialist economy (b) Capitalist economy
(c) Mixed economy (d) All of these
19. In which economic system production and distribution of goods and services aim at
maximizing the welfare of community as a whole?
(a) Capitalistic economy (b) Normative
(c) Mixed (d) Socialist economy
20. _______ are responsible for all economic problems.

(a) Unlimited wants (b) Alternative resource
(c) Scarcity of resource (d) Others
21. Capitalist system offer incentives for:

(a) Efficient business decisions
(b) Efficient government decisions
(c) Efficient non-government decisions
(d) Efficient economic decisions
22. Macro-economic is also called _______ economics.

(a) Applied (b) Aggregate
(c) Micro (d) Experimental
23. The book “Wealth of Nations was written by

(a) Alfred Marshall (b) Join Robinson
(c) Adam Smith (d) Robert Malthus

24. Rama: My corn harvest this year is poor. Manoj: Don’t worry. Price increase will
compensate for the fall in quantity supplied.
Meera: Climate affects crop yield. Some years are bad, others are good.
Bharti: The Government ought to guarantee that our income will not fall. In this
conversation, the normative statement is made by:
(a) Rama (b) Manoj
(c) Meera (d) Bharti
25. In a mixed economy, the _______ are sectors of industries.

(a) Two (b) Three
(c) Four (d) Five
26. An economy exists because of two basic facts. i.e. _______

(a) Human wants are limited and re sources are unlimited
(b) Human wants are unlimited and resources are unlimited
(c) Human wants are unlimited and resources are scare
(d) Human wants are limited and resources are abundant
27. An economy is called capitalist economy, when is given.

(a) Right to private property (b) Freedom of government interference
(c) Freedom of business choices (d) Discrimination
28. Coexistence of public and private sector is feature of mixed economy.

(a) Capitalist Economy (b) Mixed Economy
(c) Socialist Economy (d) Federal Economy
29. Which one of the area comes under macro-economic?

(c) The general price level and interest rates
(d) Economics conditions of a Section of people
30. Laissez-Faire economy is also known as:

(a) Capitalist economy (b) Socialist economy
(c) Mixed economy (d) Communist economy

31. In economics, we use the term scarcity to mean:
(a) Absolute scarcity and lack of resources in less developed countries.
(b) Relative scarcity i.e. scarcity in relation to the wants of the society.
(c) Scarcity during times of business failure and natural calamities.
(d) Scarcity caused on account of excessive consumption by the rich
32. Micro economics is also known as:

(a) Public economics (b) Price theory
(c) Income theory (d) Demand theory
33. The Famous book abbreviated as “The Wealth of Nations”, which also considered as the
first modem work of Economics, was written by:
(a) Frederic Engels (b) Karl Marx
(c) David Ricardo (d) Adam Smith
34. The economic system in which production and distribution of are aimed at maximizing
the welfare of the community as whole known as:
(a) Capitalism (b) Socialism
(c) Mixed economy (d) Communist economy
35. The Central Economics Problem does not deal with which of the following economic
problems?
(a) What to produce? (b) How to produce?
(c) For whom to produce? (d) Where to produce?
36. Study of behavior of different individual and organizations within an economic system
is called:
(a) Industrial Economics (b) Macro Economics
(c) Micro Economics (d) Welfare Economics
37. The concept of socialist economy was propounded by

(a) Karl Marx and Adam Smith (b) Frederic Engels and Adam Smith
(c) Frederic Engels (d) Karl Marx and Frederic Engels

38. Which of the following is not a study of Macroeconomics?
(a) Consumer behavior (b) National Income
(c) General Price Level (d) Level of Employment
39. Which one of the following is not the scope of business economics?
(a) Cost Standard (b) Cost analysis
(c) Demand Analysis (d) Inventory management
40. Which of the following statement is correct?

(a) Mixed economy is not always a golden path between capitalism and socialism.
(b) Socialistic economy is not always a golden path between mixed and capitalism.
(c) Capitalism economy is not always a golden path between mixed and socialism.
(d) Mixed economy is always a golden path between capitalism and socialism.
41. The central economic problem of an economy arises due to:

(a) Scarcity of resources relatives to their wants
(b) Co-existences of private and public sector
(c) Govt. interference in economic activities
(d) Federal structure of constitution
42. Business Economics is essentially a component of Applied Economics as it includes

application of selected quantitative techniques which technique is not included in it?
(a) Regression analysis (b) Economic analysis
(c) Capital budgeting (d) Linear programming
43. Business economics is pragmatic in its approach because?

(a) It tackles practical problem which the firm faces in real world.
(b) It tackles practical problem which the firm faces due to WTO policies
(c) It tackles practical problem which the firms faces due to lack directors.
(d) Business-economics is abstracts and purely theoretical.

THEORY OF DEMAND
2. AND SUPPLY
UNIT 1
1. MEANING OF DEMAND
• In ordinary speech, the term demand is many times confused with ‘desire or want
• Desire is only a wish to have anything.
• In economics demand means more than mere desire.
• Demand in economics means an effective desire for a commodity i.e. desire backed by
the ability to pay and willingness to pay for it.
• Thus, demand refers to the quantity of a good or service that consumers purchase at
different prices during a period of time.
• Thus, defined, the term demand shows the following features:
(i) Demand is always with reference to a PRICE
(ii) Demand is to be referred to IN A GIVEN PERIOD OF TIME.
(iii) Consumer must have the necessary purchasing power to back his desire for the
commodity.
(iv) Consumer must also be ready to exchange his money for the commodity he desires.
• Eg. Mr. A’s demand for sugar at Rs. 15 per kg. Is 4 kgs, per week.
1.1 Determinants of Demand

(i) Price of the commodity:
• Other things being equal, the demand for a commodity is inversely related with its
price
• It means that a rise in price of a commodity brings about fall in its demand and
vice versa.
• This happens because of income and substitution.
(ii) Price of the related commodities:

• The demand for a commodity also depends on the prices of related commodities
• Related commodities are of two types namely
(a) Substitutes or competitive goods, and
(b) Complementary goods.
• Substitute goods are those goods which can be used with equal case in place of
another.
2.1 THEORY OF DEMAND AND SUPPLY

• Eg. Essar Speed Card and Airtel Magic Card, Coke and Pepsi ball pen and ink pen;
tea and coffee; etc.
• Demand for a particular commodity is affected if the price of its substitute fails or
rises
• Eg. if the price of Airtel Magic card falls, its demand will increase and demand for
Essar Speed Card would fall and vice versa.
• Thus, there is a POSITIVE RELATIONSHIP between price of a commodity and demand
for its substitutes
• Complementary good are those goods whose utility depends upon the availability
of both the goods as both are to be used together.
• Eg A camera and film roll, a ball pen and refill; car and petrol a hand set and phone
connection; a Tonga and horse, etc.
• The demand for complementary goods have an INVERSE RELATIONSHIP with the
price of related goods.
• Eg. If the price of camera falls, its demand will increase leading to increase in
demand for film rolls.
(iii) Income of the consumers:

• Other things being equal generally the quantity demanded of a commodity should
bear a DIRECT RELATIONSHIP to the income of the consumer Le with an increase in
income, the demand for a commodity rises.
• However, this may not always hold true. It depends upon the class to which
commodity belongs Le necessaries or comforts and luxuries or inferior goods.
(a) Necessaries (E.g. Food, clothing and shelter). Initially, with an increase in the
income, the demand for necessaries also rises upto some limit. Beyond that
limit, an increase in income will leave the demand unaffected.
(b) Comforts and Luxurious. (E.g. Car; Air-condoners; etc.) Quantity demanded
of these group of commodities have DIRECT RELATIONSHIP with the income
of the consumers. As the income increases, the demand for comforts and
luxuries also increases
(c) Inferior goods. (E.g. Coarse grain; rough clothe skimmed milk etc.). Inferior
goods are those goods for which superior substitutes are available Quantity
demanded of this group of commodities have an INVERSE RELATIONSHIP with
the income of the consumer. E.g. A consumer starts consuming full cream
milk (normal good) in place of toned milk (inferior good) with an increase in
income.
THEORY OF DEMAND AND SUPPLY 2.2

(iv) Tastes and Preferences of the consumers.
• Tastes and preferences of consumers generally change over time due to fashion
advertise ments , habits, age, family composition, etc.
• Demand for a commodity bears a direct relationship to those determinants
• A positive change in tastes shall lead to an increase in demand and vice versa.
(v) Other Factors. Other things being equal demand for a commodity is also determined by
the following factors:-
(a) Size of Population:
• Generally, larger the size of population of a country, more will be the demand
of the commodities.
• The composition of the population also determines the demand for various
commode-ties.
• E.g. If the number of teenagers is large, the demand for trendy clothes,
shoes, movies, etc. will be high
(b) Distribution of income:

• If income is more evenly distributed, the demand for necessaries and comforts
is more.
• If income is unevenly distributed, the demand for luxuries is high.
(c) Sociological factors:

• The household’s demand for goods also depends upon sociological factors like
class, family background, education, marital status, age, etc.
(d) Weather conditions:

• Changes in weather conditions also influence household’s demand.
• E.g. Extraordinary hot summer push up the demand for ice-creams, cold
drinks coolers etc.
(e) Advertisement:
• A clever and continuous campaign and advertisement create a new type of
demand
• E.g. Toilet products like soaps, tooth pastes, creams etc.

(f) Government Policy:
• The government’s taxation policy also affects the demand for commodities
• High tax on a commodity will lead to fall in the demand of the commodity.
(g) Expectation about future prices:

• Consumers expect rise in the price of a commodity in near future, the demand
for the commodity at present will increase and vice-versa.
1.2 The Law of Demand

• The Law of Demand expresses the nature of functional relationship between the price
of a commodity and its quantity demanded.
• It simply states that demand varies inversely to the changes in price. i.e demand for a
commodity expands when price falls and contracts when price rises.
• “Law of Demand states that people will buy more at lower prices and buy less at higher
prices, other things remaining the same.
• It is assumed that other determinants of demand are constant and ONLY PRICE IS THE
VARIABLE AND INFLUENCING FACTOR.
• Thus, the law of demand is based on the following main assumptions:-
(i) Consumers income remain unchanged.
(ii) Tastes and preferences of consumers remain unchanged.
(ii) Price of substitute goods and complement goods remain unchanged.
(iv) There are no expectations of future changes in the price of the commodity.
(v) There is no change in the fashion of the commodity etc.
• The law can be explained with the help of a demand schedule and a corresponding
demand curve.
• Demand schedule is a table or a chart which shows the different quantities of commodity
demanded at different prices in a given period of time.
• Demand schedule can be Individual Demand Schedule or Market Demand Schedule.
TABLE 1 : DEMAND SCHEDULE OF INDIVIDUAL BUYER

Price of sugar Rs. Per kg. Quantity Demand per week kgs.
5 500
4 400
3 300
2 200
1 100

• Reasons for the law of demand and downwards slope of a demand curve are as follows:-
(a) The Law of Diminishing Marginal Utility:
• According to this law, other things being equal as we consume a commodity,
the marginal utility derived from its successive units go on falling.
• A consumer goes on purchasing a commodity till the marginal utility of the
commodity is greater than its market price and stops when MU = Price i.e
when consumer is at equilibrium
• It therefore, follows that the diminishing marginal utility implies downward
sloping demand curve and the law of demand operates.
(b) Change in the number of consumers:

• Many consumers who were unable to buy a commodity at higher when the
price also start buying when the price of the commodity falls.
• Old customers starts buying more when price falls.
(c) Various uses of a commodity:

• Commodity may have many uses. The number of uses to which the commodity
put will increase at a lower price and vice-versa.
(d) Income effect:

• When price of a commodity falls, the purchasing power the the real income)
of the consumer increases.
• Thus he can purchase the same quantity with lesser money or he can get
more quantity for the same money.
• This is called income effect of the change in price of the commodity

(e) Substitution effect:
• When price of a commodity falls it becomes relatively cheaper than other
commodities.
• As a result the consumer would like to substitute it for other commodities
which have now become more expensive.
• E.g. With the fall in price of tea, coffee’s price remaining the same, tea will
be substituted for coffee.
• This is called substitution effect of the change in price of the commodity
• Thus PRICE EFFECT= INCOME EFFECT + SUBSTITUTION EFFECT
1.3 Exceptions to the Law of Demand

• These are known as exceptions to the law of demand and are as follow:-
(a) Giffen Goods:
• In some cases, demand for a commodity falls when its price fall and vice
versa.
• In case of inferior goods like jawar, bajra, cheap bread, etc also called
“Giffen Goods” (known after its discoverer Sir Robert Giffens) demand is of
this nature.
• When the price of such inferior goods fall, less quantity is purchased due
consumer’s increased preference for superior commodity with the rise in
their “real Income” (purchasing power)
• Hence, other things being equal, if price of a Giffen good fall its demand also
falls.
• There is positive price effect in this case.
(b) Conspicuous goods:

• Some consumers measure utility of a commodity by its price ie if the
commodity is expensive they think it has got more utility and vice versa.
• Therefore they buy less at lower price and more of it at higher price.
• E.g. Diamonds fancy cars, dining at 5 stars, high priced shoes, ties, etc.
• Higher prices are indicators of higher utilities
• A higher price means higher prestige value and higher appeal and vice versa.
• Thus a fall in their price would lead to fall in their quantities demanded. This
is against the law of demand.

(c) Conspicuous necessities:
• The demand for some goods is guided by the demonstration effect of the
consumption pattern of a social group to the person belongs.
• E.g. Television sets, refrigerators, music systems, cars, fancy clothes, washing
machines etc.
• Such goods are used just to demonstrate that the person is not inferior to
others in group.
• Hence in spite of the fact that prices have been continuously rising, their
demand does not show tendency to fall.
(d) Future changes in prices:

• When the prices are rising, households tend to purchase larger quantities
commodity, out of fear that prices may go up further and vice versa.
• Eg. Shares of a good company, etc.
(f) Ignorance effect:

• Many times households may demand larger quantity of a commodity even at
a higher price because of ignorance about the ruling price of the commodity
in the market.
(g) Consumer’s Illusion:

• Many consumers have a wrong illusion that the quality of the commodity also
changes with the price change.
• A consumer may contract his demand with a fall in price and vice-versa.
DEMAND CURVE FOR ABOVE EXCEPTIONS IS POSITIVELY SLOPED

1.4 Expansion and Contraction of Demand (changes in quantity demanded. OR V movement
along a demand curve)
• The law of demand, the demand schedule and the demand curve all show that
o when the price of a commodity falls its quantity demanded rises or expansion
takes place, and
o when the price of a commodity rises its quantity demanded fall or contraction
takes place
• Thus, expansion and contraction of demand means changes in quantity demanded
due to change in the price of the commodity other determinants like income,
tastes, etc. remaining constant or unchanged.
• When price of a commodity falls, its quantity demanded rises. This is called
expansion of demand.
• When price of a commodity rises, its quantity demanded falls. This is called
contraction of demand
• As other determinants of price like income, tastes, price of related goods etc are
constant, the position of the demand curve remains the same. The consumer will
move upwards or downwards on the same demand curve.
Expansion in demand
In the figure 2

Contraction in demand
Variation in demand
1.5 Increase and Decrease in demand (changes in demand OR shift in demand curve)
• When there is change in demand due to change in factors other than price of the
commodity, it is called Increase or decrease in demand.
• It is the result of change in consumer’s income, tastes and preferences, changes in
population, changes in the distribution of income, etc
• Thus price remaining the same when demand rises due to change in factors other than
price, it is called Increase in demand. Here, more quantity is purchased at same price
or same quantity is purchased at higher price.
• Likewise price remaining the same when demand falls due to change in factors other
than price, i is called decrease in demand. Here, less quantity is purchased at same
price or same quantity is purchased at lower price.

• In above cases demand curve shifts from its original position to rightward when demand
increases and to leftward when demand decreases. Thus, change in demand curve as a
result of increase or decrease in demand, is technically called shift in demand curve.
Increase in demand
In the figure 2
Decrease in demand

Change in demand
1.6 Elasticity of Demand

• Elasticity of demand is defined as the responsiveness or sensitiveness of the quantity
demanded of a commodity to the changes in any one of the variables on which demand
depends.
• These variables are price of the commodity prices of the related commodities, income
of the consumers and many other factors on which demand depends.
• According we have price elasticity, cross elasticity, elasticity of substitution and income
elasticity.
• Unless mentioned otherwise, it is price elasticity of demand which is generally referred.
Price Elasticity:
• Price elasticity measures the degree of responsiveness of quantity demanded of a
commodity to a change in its price given the consumers income, his tastes and prices of
all other goods.
• It reflects how sensitive buyers are to change in price.
• Price elasticity of demand can be defined “as a ratio of the percentage change in the
quantity demanded of a commodity to the percentage change in its own price”.
• It may be expressed as follows:

• Rearranging the above expression we get:
• Since price and quantity demanded are inversely related the value of price elasticity
co-efficient will always be negative. But for the value of elasticity co-efficient we ignore
the negative sign and consider the numerical value only
• The value of elasticity coefficients will vary from zero to infinity.
o The value of elasticity coefficients will vary from zero to infinity.
o When the co-efficient is zero, demand is said to be perfectly inelastic.
o When the co-efficient lies between zero and unity, demand is said to be inelastic.
o When co-efficient is equal to unity, demand has unit elasticity.
o When co-efficient is greater than one, demand is said to elastic.
o In extreme cases co-efficient could be infinite.
The degrees (types) of price elasticity of demand.

• Price elasticity measures the degree of responsiveness of quantity demanded of a
commodity to a change in its price. Depending upon the degree of responsiveness of
the quantity demanded to the price changes, we can have the following kinds of price
elasticity of demand.
(a) Perfectly Inelastic Demand: (Ep = 0):
When change in price has no effect on quantity demanded, then demand is perfectly
inelastic, Eg. If price falls by 20% and the quantity demanded remains unchanged
then,
In this case, the demand curve is a vertical straight line curve parallel
to y-axis as shown in the figure.

(b) Perfectly Elastic Demand: (Ep = ∞):
When with no change in price or with very little change in price, the demand for a
commodity expands or contracts to any extent, the demand is said to be perfectly
elastic. In this case, the demand curve is a horizontal and parallel to X-axis.
(c) Unitary Elastic Demand: (Ep = 1):

When the percentage or proportionate change in price is equal to the percentage
or proportionate change in quantity demanded, them the demand is said to be unit
elastic. E.g. If price falls by 10% and the demand rises by 10% then,
Demand curve DD is a rectangular hyperbola curve suggesting unitary elastic demand.

(d) Relatively Elastic Demand: (Ep> 1): (Ep > 1):
When a small change in price leads to more than proportionate change in quantity
demanded then the demand is said to be relatively elastic Eg. If price falls by 10%
and demand rises by 30% then, >. The co-efficient of price elasticity
would be somewhere between ONE and INFINITY. The elastic demand curve is
flatter as shown below.
(e) Relatively Inelastic Demand: (Ep(1)):

When a big change in price leads to less than proportionate change in quantity
demanded then the demand is said to be relatively inelastic Eg. If price falls by
20% and demand rises by 5% then,
The demand curve in this case has steeper slope as shown below:

Measurement of price elasticity of demand.
• The Different methods of measuring price elasticity of demand are:
(a) The Percentage or Ratio or Proportional Method,
(b) The Total Outlay method,
(c) The point or Geometrical Method, and
(d) The Arc Method.
(a) The Percentage Method:

This method is based on the definition of elasticity of demand. The coefficient of price
elasticity of demand is measured by taking ratio of percentage change in demand to
the percentage change in price. Thus, we measure the price elasticity by using the
following formula-
Where –
∆q = Original in quantity demanded
q = Change quantity demanded
∆p = Change in price
P = Original price
(b) The Total Outlay or Expenditure Method:

(Seller Total Revenue Method)
The total outlay refers to the total expenditure done by a consumer on the purchase of
a commodity. Its obtained by multiplying the price with the quantity demanded. Thus,
Total Outlay (TO) = Price (P) x Quantity (Q)
TO = P x Q
In this method, we measure price elasticity by examining the change in total outlay due
to change in price.

Dr. Alfred Marshall laid the following propositions:
(i) When with the change in price, the TO remains unchanged, Ep = 1.
(ii) When with a rise in price, the TO falls or with a fall in price, the TO rises, Ep>1.
(iii) When with a rise in price, the TO also rises and with a fall in price, the TO also
falls, Ep<1.

(c) The Point Method or Geometric Method:
• The point elasticity method, we measure elasticity at a given point on a demand
curve.
• This method is useful when changes in price and quantity demanded are very small
so that they can be considered one and the same point only.
• Eg. If price of X commodity was Rs. 5.000 per unit and now it changes to Rs. 5002
per unit which is very small change. In such a situation we measure elasticity at a
point on demand curve by using
Formula
• Diagrammatically also we can find elasticity at a point by using the formula –
• The figure shows that even though the shape of the demand curve is constant, the
elasticity is different at different points on the curve.
• If the demand curve is not a straight line curve, then in order to measure elasticity
at a point on demand curve we have to draw tangent at the given point and then
measure elasticity using the above formula
• We can also find out numerical elasticity’s on different points.

(d) The Arc Elasticity Method:
• In point elasticity the change in price and the change quantity demanded are very
small. Hence, it does not matter whether we take original or new figures as the
basis of measurement.
• But when there is large change in the price or we have to measure elasticity over
an arc of the demand curve, we use the “arc method to measure price elasticity
of demand.
• The arc elasticity is a measure of the “average elasticity i.e. elasticity at MID-
POINT that connects the two points on the demand curve.
• Thus, an arc is a portion of a curved line, hence a portion of a demand curve. Here
instead of using original or new data as the basis of measurement, we use average
of the two.
• The formula used is –
Determinants of price elasticity of demand.

• Price elasticity of demand which measures the degree of responsiveness of quantity
demanded of a commodity to a change in price (other things remaining unchanged)
depends on the following factors:-
(a) Nature of commodity:
• The demand for necessities of life like food, clothing housing etc. is less
classic or inelastic because people have to buy them whatever be the price.
• Whereas, demand for luxury goods like cars, air conditioners, cellular phone,
etc. is elastic.

(b) Availability of Substitutes:
• If for a commodity wide range of close substitutes are available Le if a
commodity is easily replaceable by others, its demand is relatively elastic
Eg. Demand for cold drinks like Thumbs up Coca-Cola, Limca , etc.
• Conversely a commodity having no close substitute has inelastic demand. Eg
salt (but demand for TATA BRAND SALT is elastic.)
(c) Number of uses of a commodity:

• A commodity which has many uses will have relatively elastic demand.
• Eg. Electricity can be put to many uses like lighting, cooking, motive power,
etc. If the price of electricity falls, its consumption for various purposes will
rise and vice versa.
• On the other hand if a commodity has limited uses will have inelastic demand.
(d) Price range:

• If price of a commodity is either too high or too low its demand is inelastic
but those which are in middle price range have elastic demand
(e) Position of a commodity in the budget of consumer:

• If a consumer spends a small proportion of his income to purchase a commodity,
the demand is inelastic E.g. Newspaper, match box, salt, buttons, needles.
• But if consumer spends a large proportion of his income to purchase a
commodity, the demand is elastic E.g. Clothes, milk, etc.
(f) Time period:

• The longer any price change remains the greater is the price elasticity of
demand. On the other hand, shorter any price change remains, the lesser is
the price elasticity of demand.
(g) Habit:
• Habits makes the demand for a commodity relatively inelastic. E.g. A smoker’s
demand for cigarettes tend to be relatively inelastic even at higher price.
(h) Joint Demand

• Some goals are demanded because they are used jointly with other goods
Such goods normally have inelastic demand
• E.g. It price of machine oil rises, demand for machines will not fall. In this
case demand is inelastic because for such goods consumer spends a very
small proportion.
(i) Consumer’s Income:

• A consumer having high income have relatively inelastic demand for many
goods. While a consumer with low income has elastic demand for the goods
in general.
(j) Durability of the commodity:

• Durable goods like TV sets, furniture, etc. have relatively inelastic demand
in short run.
• On the other hand perishable goods like fruits, milk, vegetables, etc have
relatively elastic demand.
(k) Possibility postponement:

• When we can postpone buying of a commodity its demand is elastic.
• Urgently required commodity have inelastic demand.
1.7 Income elasticity of demand

• The income elasticity of demand measures the degree of responsiveness of quantity
demanded to changes in income of the consumers.
• The income elasticity is defined as a ratio of percentage change in the quantity demanded
to the percentage change in income.
• Income Elasticity (EY) =
Symbolically-EY =
Where - ∆Q & ∆Y denote new quantity & income.
Q & Y denote original quantity & income.
The Income effect is POSITIVE for all normal or luxury goods and the Income effect
is NEGATIVE for Inferior goods. Income elasticity can be classified under five heads:-
(a) Zero Income Elasticity:
• It means that a given increase in income does not at all lead to any increase
in quantity demanded of the commodity.
• In other words, demand for the commodity is completely income inelastic or
Ey=0.

• Commodities having zero income elasticity are called NEUTRAL GOODS.
• E.g. Demand in case of SALT, MATCH BOX, KEROSENE OIL, POST CARDS, etc.
(b) Negative Income Elasticity:

• It means that an increase in income results in fall in the quantity demanded
of the commodity or Ey <0.
• Commodities having negative income elasticity are called INFERIOR GOODS in
economics
• E.g.- Jawar, Bajra, etc.

(c) Unitary Income Elasticity:
• It means that the proportion of consumer’s income spent on the commodity
remains unchanged before and after the increase in income or Ey=1.
(d) Income Elasticity Greater Than Unity:

• It refers to a situation where the consumers spends GREATER proportion of
his income on a commodity when he becomes richer. Ey>1.
• E.g. In the case of LUXURIES like cars, TV sets, music system, etc.
(e) Income elasticity Less than unity:

• It refers to a situation where the consumer spends a SMALLER proportion of
his income commodity when he becomes richer Ey<1,
• E.g. In the case of NECESSITIES like rice, wheat, etc.

1:8 Cross elasticity of demand
• Many times demand for two goods are related to each other.
• Therefore, when the price of a particular commodity changes, the demand for other
commodities changes, even though their own prices have not changed.
• We measures this change under cross elasticity.
• The cross elasticity of demand can be defined “as the degree of responsiveness of
demand for a commodity to a given change in the price of some RELATED commodity”
OR “as the ratio of percentage change in quantity demanded of commodity X to a given
percentage change in the price of the related commodity Y”, Symbolically:
Where = cross elasticity

qx = Original quantity of X which is demanded
Py = Original price of Y
∆ = Original price of Y
Cross elasticity demand can be used to classify goods as follows:-
Types of cross elasticity of demand

1. Positive cross elasticity of demand
2. Negative cross elasticity of demand
3. Zero cross elasticity of demand
4. Infinite cross elasticity of demaned
(a) Positive cross elasticity of demand: E.g.: Tea and Coffee. The cross elasticity between
two substitutes is always POSITIVE. If cross elasticity is infinite, the two goods are
perfect substitute and if it is greater than zero but less than infinity, the goods are
substitutes.
(b) Zero cross elasticity of demand : E.g.: Pastry and Scooter. The two commodities are not
related. The cross elasticity in such cases is ZERO.
(c) Negative cross elasticity of demand : E.g.: Petrol and Car. If the price of petrol fall, its
demand rises and along with it demand for cars also rises. The cross elasticity in such
cases is NEGATIVE.

Infinite cross elasticity of demaned
DEMAND FORECASTING
Meaning
Forecasting, in general, refers to knowing or measuring the status or nature of an
event or variable before it occurs. Forecasting of demand is the art and science of predicting
the probable demand for a product or a service at some future date on the basis of certain
past behaviour patterns of some related events and the prevailing trends at present. It should
be kept in mind that demand forecasting is not simple guessing, but it refers to estimating
demand scientifically and objectively on the basis of certain facts and events relevant to
forecasting.
Usefulness
The significance of demand or sales forecasting in the context of business policy decisions
can hardly be over emphasized. Forecasting of demand plays a vital role in the process of
planning and decision-making, whether at the national level or at the level of a firm. The
effectiveness of the plans of business managers depends upon the level of accuracy with
which future events can be predicted. The importance of demand forecasting has increased
all the more on account of mass production and production in response to demand.
A good forecast enables the firm to perform efficient business planning. Forecasts offer
information for budgetary planning and cost control in functional areas of finance and
accounting. Good forecasts help in efficient production planning, process selection, capacity
planning, facility layout and inventory management. A firm can plan production scheduling
well in advance and obtain all necessary resources for production such as inputs and finances.
Capital investments can be aligned to demand expectations and this will check the possibility
of overproduction and underproduction, excess of unused capacity and idle resources.

Marketing personnel often rely on sales forecasting in making key decisions. Demand forecasts
also provide the necessary information for formulation of suitable pricing and advertisement
strategies.
It is said that no forecast is completely fool-proof and correct. However, the very process of
forecasting helps in evaluating various forces which affect demand and is in itself a rewarding
activity because it enables the forecasting authority to know about various forces relevant to
the study of demand behaviour.
Scope of Forecasting
Demand forecasting can be at the national or international level depending upon the area
of operation of the given economic institution. It can also be confined to a given product
or service supplied by a small firm in a local area. The scope of the forecasting task will
depend upon the area of operation of the firm in the present as well as what is proposed in
future. Much would depend upon the cost and time involved in relation to the benefit of the
information acquired through the study of demand. The necessary trade-off has to be struck
between the cost of forecasting and the benefits flowing from such forecasting.
Types of Forecasts
(i) Macro-level forecasting deals with the general economic environment prevailing in the
economy as measured by the Index of Industrial Production (IIP), national income and
general level of employment etc.
(ii) Industry- level forecasting is concerned with the demand for the industry’s products as
a whole. For example, demand for cement in India.
(iii) Firm- level forecasting refers to forecasting the demand for a particular firm’s product,
say, the demand for ACC cement.
Based on time period, demand forecasts may be short term demand forecasting and long
term demand forecasting.
(i) Short term demand forecasting covers a short span of time, depending of the nature of
industry. It is done usually for six months or less than one year and is generally useful in
tactical decisions.
(ii) Long term forecasts are for longer periods of time, say two to five years and more. It
provides information for major strategic decisions of the firm such as expansion of plant
capacity.

Demand Distinctions
Business managers should have a clear understanding of the kind of demand which their
products have. Before we analyse the different methods of forecasting demand, it is important
for us to understand the demand distinctions which are as follows:
(a) Producer’s goods and Consumer’s goods
(b) Durable goods and Non-durable goods
(c) Derived demand and Autonomous demand
(d) Industry demand and Company demand
(e) Short-run demand and Long-run demand
(a) Producer’s goods and Consumer’s goods

Producer’s goods are those which are used for the production of other goods- either
consumer goods or producer goods themselves. Examples of such goods are machines,
plant and equipment’s. Consumer’s goods are those which are used for final consumption.
Examples of consumer’s goods are readymade clothes, prepared food, residential houses,
etc.
(b) Demand for Durable goods and Non-durable goods

Goods may be further sub-divided into durable and non-durable goods. Non-durable
goods are those which cannot be consumed more than once. Raw materials, fuel and
power, packing items etc. are examples of non-durable producer goods. Beverages,
bread, milk etc. are examples of non-durable consumer goods. These will meet only
the current demand. On the other hand, durable goods do not quickly wear out, can
be consumed more than once and yield utility over a period of time. Examples of
durable consumer goods are: cars, refrigerators and mobile phones. Building, plant and
machinery, office furniture etc. are durable producer goods. The demand for durable
goods is likely to be derived demand. Further, there are semi-durable goods such as,
clothes and umbrella.
(c) Derived demand and Autonomous demand

The demand for a commodity that arises because of the demand for some other
commodity called parent product, is called derived demand. For example, the demand
for cement is derived demand, being directly related to building activity. In general,
the demand for producer goods or industrial inputs is derived demand. Also the demand
for complementary goods is derived demand. If the demand for a product is independent
of the demand for other goods, then it is called autonomous demand. It arises on its
own out of an innate desire of the consumer to consume or to possess the commodity.
But this distinction is purely arbitrary and it is very difficult to find out which product is
entirely independent of other products.
(d) Demand for firm’s product and industry demand

The term industry demand is used to denote the total demand for the products of a
particular industry, e.g. the total demand for steel in the country. On the other hand,
the demand for firm’s product denotes the demand for the products of a particular firm,
i.e. the quantity that a firm can dispose off at a given price over a period of time. E.g.
demand for steel produced by the Tata Iron and Steel Company. The demand for a firm’s
product when expressed as a percentage of industry demand signifies the market share
of the firm.
(e) Short - run demand and Long-run demand

This distinction is based on time period. Short run demand refers to demand with its
immediate reaction to changes in product price and prices of related commodities,
income fluctuations, ability of the consumer to adjust their consumption pattern, their
susceptibility to advertisement of new products etc.
Long-run demand refers to demand which exists over a long period. Most generic goods
have long term demand. Long term demand depends on long term income trends,
availability of substitutes, credit facilities etc. In short, long run demand is that which
will ultimately exist as a result of changes in pricing, promotion or product improvement,
after enough time is allowed to let the market adjust to the new situation. For example,
if electricity rates are reduced, in the short run, the existing users will make greater
use of electric appliances. In the long run, more and more people will be induced to
buy and use electric appliances. The above distinction is important because each of
these goods exhibit distinctive characteristics which should be taken into account while
analysing demand for them.
Factors Affecting Demand for Non-Durable Consumer Goods

There are three basic factors which influence the demand for these goods:
(i) Disposable income: Other things being equal, the demand for a commodity depends
upon the disposable income of the household. Disposable income is found out by
deducting personal taxes from personal income.
(ii) Price: Other things being equal, the demand for a commodity depends upon its own
price and the prices of related goods (its substitutes and complements). While the

demand for a good is inversely related to its own price and the price of its complements,
it is positively related to the price of its substitutes.
(iii) Demography: This involves the characteristics of the population, human as well as
non-human, using the product concerned. For example, it may pertain to the number
and characteristics of children in a study of demand for toys and characteristics of
automobiles in a study of the demand for tyres or petrol.
Non-durables are purchased for current consumption only. From a business firm’s point
of view, demand for non-durable goods gets repeated depending on the nature of the
non-durable goods. Usually, non-durable goods come in wide varieties and there is
competition among the sellers to acquire and retain customer loyalty.
Factors Affecting the Demand for Durable-Consumer Goods

Demand for durable goods has certain special characteristics. Following are the important
factors that affect the demand for durable goods.
(i) A consumer can postpone the replacement of durable goods. Whether a consumer will
go on using the good for a long time or will replace it depends upon factors like his
social status, prestige, level of money income, rate of obsolescence etc.
(ii) These goods require special facilities for their use e.g. roads for automobiles, and
electricity for refrigerators and radios. The existence and growth of such factors is an
important variable that determines the demand for durable goods
(iii) As consumer durables are used by more than one person, the decision to purchase may
be influenced by family characteristics like income of the family, size, age distribution
and sex composition. Likely changes in the number of households should be considered
while determining the market size of durable goods.
(iv) Replacement demand is an important component of the total demand for durables.
Greater the current holdings of durable goods, greater will be the replacement demand.
Therefore, all factors that determine replacement demand should be considered as a
determinant of the demand for durable goods.
(v) Demand for consumer durables is very much influenced by their prices and credit
facilities available to buy them.
Factors Affecting the Demand for Producer Goods

Since producers’ goods or capital goods help in further production, the demand for them is
derived demand, derived from the demand of consumer goods they produce. The demand
for them depends upon the rate of profitability of user industry and the size of the market of
the user industries. Hence data required for estimating demand for producer goods (capital
goods) are:

(i) Growth prospects of the user industries;
(ii) Norms of consumption of capital goods per unit of installed capacity.
An increase in the price of a substitutable factor of production, say labour, is likely to increase
the demand for capital goods. On the contrary, an increase in the price of a factor which is
complementary may cause a decrease in the demand for capital.
Higher the profit making prospects, greater will be the inducement to demand capital goods.
If firms are optimistic about selling a higher output in future, they will have greater incentive
to invest in producer goods. Advances in technology enabling higher efficiency at reduced
cost on account of higher productivity of capital will have a positive impact on investment
in capital goods. Investments in producer goods will be greater when lower interest rates
prevail as firms will have lower opportunity cost of investments and lower cost of borrowing.
Methods of Demand Forecasting

There is no easy method or simple formula which enables an individual or a business to
predict the future with certainty or to escape the hard process of thinking. The firm has
to apply a proper mix of judgment and scientific formulae in order to correctly predict
the future demand for a product. The following are the commonly available techniques of
demand forecasting:
(i) Survey of Buyers’ Intentions: The most direct method of estimating demand in the
short run is to ask customers what they are planning to buy during the forthcoming time
period, usually a year. This method involves direct interview of potential customers.
Depending on the purpose, time available and costs to be incurred, the survey may be
conducted by any of the following methods:
• Complete enumeration method where nearly all potential customers are interviewed
about their future purchase plans
• Sample survey method under which only a scientifically chosen sample of potential
customers are interviewed
• End-use method, especially used in forecasting demand for inputs, involves identification
of all final users, fixing suitable technical norms of consumption of the product
under study, application of the norms to the desired or targeted levels of output and
aggregation.
Thus, under this method the burden of forecasting is put on the customers. However, it would
not be wise to depend wholly on the buyer’s estimates and they should be used cautiously in
the light of the seller’s own judgement. A number of biases may creep into the surveys. The
customers may themselves misjudge their requirements, may mislead the surveyors or their
plans may alter due to various factors which are not identified or visualised at the time of
the survey.

This method is useful when bulk of sale is made to industrial producers who generally have
definite future plans. In the case of household customers, this method may not prove very
helpful for several reasons viz. irregularity in customer’s buying intentions, their inability
to foresee their choice when faced with multiple alternatives, and the possibility that the
buyer’s plans may not be real, but only wishful thinking.
(ii) Collective opinion method: This method is also known as sales force opinion method
or grass roots approach. Firms having a wide network of sales personnel can use the
knowledge, experience and skills of the sales force to forecast future demand. Under
this method, salesmen are required to estimate expected sales in their respective
territories. The rationale of this method is that salesmen being closest to the customers
are likely to have the most intimate feel of the reactions of customers to changes in the
market.
These estimates of salesmen are consolidated to find out the total estimated sales.
These estimates are reviewed to eliminate the bias of optimism on the part of some
salesmen and pessimism on the part of others. These revised estimates are further
examined in the light of factors like proposed changes in selling prices, product designs
and advertisement programmes, expected changes in competition and changes in secular
forces like purchasing power, income distribution, employment, population, etc. The
final sales forecast would emerge after these factors have been taken into account.
Although this method is simple and based on first-hand information of those who are
directly connected with sales, it is subjective as personal opinions can possibly influence
the forecast. Moreover salesmen may be unaware of the broader economic changes
which may have profound impact on future demand. Therefore, forecasting could be
useful in the short run, for long run analysis however, a better technique is to be applied.
(iii) Expert Opinion method: In general, professional market experts and consultants
have specialised knowledge about the numerous variables that affect demand. This,
coupled with their varied experience, enables them to provide reasonably reliable
estimates of probable demand in future. Information is elicited from them through
appropriately structured unbiased tools of data collection such as interview schedules
and questionnaires.
The Delphi technique, developed by Olaf Helmer at the Rand Corporation of the USA,
provides a useful way to obtain informed judgments from diverse experts by avoiding the
disadvantages of conventional panel meetings. Under this method, instead of depending
upon the opinions of buyers and salesmen, firms solicit the opinion of specialists or
experts through a series of carefully designed questionnaires. Experts are asked to
provide forecasts and reasons for their forecasts. Experts are provided with information
and opinion feedbacks of others at different rounds without revealing the identity of
the opinion provider. These opinions are then exchanged among the various experts
and the process goes on until convergence of opinions is arrived at. The following chart
shows the Delphi process.
Initial Anonumous Coordinator

Questionnaire sent Responses of Performs
by Coordinator Experts submitted Analysis
Coordinator Coordinator
No Consensus Yes
sends Updated summarizes
Reached?
Questionnair forecast
Fig: 12 The Delphi process
The Delphi method is best suited in circumstances where intractable changes are
occurring and the relevant knowledge is distributed among experts spread over different
geographical locations. For example, the method may be used for forecasting national
energy demand 50 years from now, long term transportation needs, environmental issues
and long term human resource forecasting to mention a few. Delphi technique is widely
accepted due to its broader applicability, absence of group pressure, capability to tap
collective human expertise and intelligence and ability to address complex questions.
It also has the advantages of speed and cheapness.
(iv) Statistical methods: statistical methods have proved to be very useful in forecasting
demand. Forecasts using statistical methods are considered as superior methods because
they are more scientific, reliable and free from subjectivity. The important statistical
methods of demand forecasting are:
(a) Trend Projection method: This method, also known classical method, is considered
as a ‘naïve’ approach to demand forecasting. A firm which has been in existence
for a reasonably long time would have accumulated considerable data on sales
pertaining to different time periods. Such data, when arranged chronologically,
yield a ‘time series’. The time series relating to sales represent the past pattern
of effective demand for a particular product. Such data can be used to project the
trend of the time series.
The trend projection method assumes that factors responsible for the past trend

in demand will continue to operate in the same manner and to the same extent
as they did in the past in determining the magnitude and direction of demand in
future. The popular techniques of trend projection based on time series data are;
graphical method and fitting trend equation or least square method.
(i) Graphical Method: This method, also known as â€˜free hand projection
methodâ€™ is the simplest and least expensive. This involves plotting of the
time series data on a graph paper and fitting a free-hand curve to it passing
through as many points as possible. The direction of the curve shows the
trend. This curve is extended into the future for deriving the forecasts. The
direction of this free hand curve shows the trend. The main draw-back of this
method is that it may show the trend but the projections made through this
method are not very reliable.
(ii) Fitting trend equation: Least Square Method: It is a mathematical procedure

for fitting a line to a set of observed data points in such a manner that the
sum of the squared differences between the calculated and observed value
is minimised. This technique is used to find a trend line which best fit the
available data. This trend is then used to project the dependant variable in
the future. This method is very popular because it is simple and in-expensive.
Moreover, the trend method provides fairly reliable estimates of future
demand.
The least square method is based on the assumption that the past rate of
change of the variable under study will continue in the future. The forecast
based on this method may be considered reliable only for the period during
which this assumption holds. The major limitation of this method is that it
cannot be used where trend is cyclical with sharp turning points of troughs
and peaks. Also, this method cannot be used for short term forecasts.
(b) Regression analysis: This is the most popular method of forecasting demand.
Under this method, a relationship is established between the quantity demanded
(dependent variable) and the independent variables (explanatory variables) such
as income, price of the good, prices of related goods etc. Once the relationship
is established, we derive regression equation assuming the relationship to
be linear. The equation will be of the form Y = a + bX. There could also be a
curvilinear relationship between the dependent and independent variables. Once
the regression equation is derived, the value of Y i.e. quantity demanded can be
estimated for any given value of X.

(v) Controlled Experiments: Under this method, future demand is estimated by conducting
market studies and experiments on consumer behaviour under actual, though controlled,
market conditions. This method is also known as market experiment method. An effort is
made to vary separately certain determinants of demand which can be manipulated, for
example, price, advertising, etc., and conduct the experiments assuming that the other
factors would remain constant. Thus, the effect of demand determinants like price,
advertisement, packaging, etc., on sales can be assessed by either varying them over
different markets or by varying them over different time periods in the same market.
The responses of demand to such changes over a period of time are recorded and are
used for assessing the future demand for the product. For example, different prices
would be associated with different sales and on that basis the price-quantity relationship
is estimated in the form of regression equation and used for forecasting purposes. It
should be noted however, that the market divisions here must be homogeneous with
regard to income, tastes, etc. The method of controlled experiments is used relatively
less because this method of demand forecasting is expensive as well as time consuming.
Moreover, controlled experiments are risky too because they may lead to unfavourable
reactions from dealers, consumers and competitors. It is also difficult to determine what
conditions should be taken as constant and what factors should be regarded as variable
so as to segregate and measure their influence on demand. Besides, it is practically
difficult to satisfy the condition of homogeneity of markets.
Market experiments can also be replaced by â€˜controlled laboratory experiment’s or
‘consumer clinics’ under which consumers are given a specified sum of money and asked
to spend in a store on goods with varying prices , packages, displays etc. The responses
of the consumers are studied and used for demand forecasting.
(vi) Barometric method of forecasting: The various methods suggested till now are related
with the product concerned. These methods are based on past experience and try
to project the past into the future. Such projection is not effective where there are
economic ups and downs. As mentioned above, the projection of trend cannot indicate
the turning point from slump to recovery or from boom to recession. Therefore, in order
to find out these turning points, it is necessary to find out the general behaviour of the
economy. Just as meteorologists use the barometer to forecast weather, the economists
use economic indicators to forecast trends in business activities. This information is
then used to forecast demand prospects of a product, though not the actual quantity
demanded. For this purpose, an index of relevant economic indicators is constructed.
Movements in these indicators are used as basis for forecasting the likely economic
environment in the near future.

There are leading indicators, coincidental indicators and lagging indicators. The leading
indicators move up or down ahead of some other series. For example, the heavy advance
orders for capital goods give an advance indication of economic prosperity. Increase in
the number of construction permits for new houses will be reflected in corresponding
increase in the number of sheets of glass ordered several months later. The coincidental
indicators, however, move up and down simultaneously and are witnessed at around the
same time the changes they signal occur. Since these happen almost in real time, they
do not offer much predictive insight, but provide a fair reading of the current scenario.
For example, Figures on retail sales, rate of unemployment and Index of Industrial
Production (IIP).
The lagging indicators follow a change after some time lag. The heavy household
electrical connections confirm the fact that heavy construction work was undertaken
during the past with a lag of some time.
Unit 2
2.1 THEORY OF CONSUMER BEHAVIOUR
• The demand of a commodity depends on the utility of that commodity to a consumer.
• The want satisfying capacity or power of a commodity is called utility.
• It is a subjective and relative term and varies from person to person, place to place and
time to time.
• Utility does not mean the same things as usefulness. Eg. Liquor, Cigarettes, etc. have
utility as people are ready to buy them but they are harmful for the health.
• Therefore, utility has no moral or ethical significance.
• To study the consumer behaviour, the two important theories are –
o Marginal utility analysis, given by Dr. Alfred Marshall, and
o Indifference curve analysis given by Hicks and Allen.
2.2 The Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility is based on two important facts, namely:
(i) Human Wants are unlimited
(ii) Each separate human want is limited. The amount of any commodity which a man can
consume in a given period of time is limited and hence each single want is satiable.
The law describes that, as the consumer has more and more of a commodity, the additional
utility which he derives from an additional unit of commodity goes on falling. Marshall stated
the law as follows-

“The additional benefit which a person derives from a given increase in stock of a thing
diminishes with every increase in the stock that he already has. The law can be explained
with the help of following table:
TABLE: UTILITY SCHEDULE

Units of Rosegulla’s Total Utility Marginal Utility
Consumed
1 10 10
2 8 18
3 6 24
4 4 28
5 2 30
6 0 30
7 -2 28
• We can show the information given in the table on a graph as follows:-
The Law of Diminishing Marginal Utility is based on the following assumptions:-

(a) Homogeneous Units:
• It is assumed that all the units of the commodity are homogeneous i.e identical in
every respect like size, taste, colour, quality, blend, etc.
• Eg-If a consumer is consuming CADBURY DAIRY MILK CHOCOLATE (40 gms), then all
bars of chocolate must be of Dairy Milk Chocolates and not of any other type
(b) Continuous Consumption:

• There should not be any time gapor interval between the consumption of one unit
and another unit.

(c) Rationality:
• The consumer is assumed to be rational
(d) Cardinal Measurement:

• The utility is measurable and quantifiable.
(e) Constancy of Marginal Utility of Money:

• The marginal utility of money remain unchanged throughout when the consumer is
spending on a commodity.
(f) The tastes of consumers should remain constant.
Exceptions to and limitations of the Law of Diminishing Marginal Utility

• In some cases a consumer gets increasing marginal utility with the increase in
consumption. Such cases are called as exception which are as follows-
(a) Hobbles and Rare Collections: The law does not hold good in case of hobbies and
rare collections like reading, collection of stamps, coins, etc. Every additional unit
gives more satisfaction i.e. the marginal utility tends to increase.
(b) Abnormal Persons: The law does not apply to abnormal persons like misers,
drunkards, musicians, drug addicts, etc. who want more and more of the commodity
they are in love with.
(c) Indivisible Goods: The law cannot be applied in case of indivisible bulky goods
like T.V. set house, scooter, etc. No one purchases more than one unit of such
goods at a time.

• The limitations of the Law of Diminishing Marginal Utility are as follows-
(a) Cardinal Measurement Unrealistic: The law assumes cardinal measurement
of utility. This unrealistic, because, utility being a subjective or psychological
phenomenon, cannot measured numerically. The feeling experienced by a consumer
cannot be quantified.
(b) Unrealistic Conditions: The law is based on unrealistic assumptions. It is not
possible to meet all conditions like homogeneous goods, continuous consumption,
rationality, etc. at the same time.
(c) Constant Marginal Utility of Money: The law assumes that marginal utility of
money remains constant. Therefore, the utility of the commodity depends on its
quantity alone. But, the marginal utility of money never remains constant.
(d) Inapplicable to Indivisible Goods: The assumptions of the Law of DMU cannot
be made applicable to indivisible bulky goods like TV Sets, scooter, house, etc
because no one purchases more than one unit of such goods at a time.
(e) Single Commodity Model: The Law of DMU is a single commodity model Marginal
utility of each commodity is measured independently. But, a consumer may
purchase more than one commodity Also, utilities of goods such as complementary
or substitutes are interdependent.
LAW OF EQUI MARGINAL UTILITY
2.3 Consumer’s Surplus

• Consumers Surplus is one of the important concept in economic theory and in economic
policy making. It was given by Dr. Alfred Marshall Marshall’s concept of consumer surplus
is following assumptions:
1. Utility can be cardinally measured in monetary units.
2. Marginal utility of money remains constant.
3. Income, fashion and taste of consumer remains constant.
4. Independent marginal utility of each unit of the commodity
5. The law of diminishing marginal utility holds good.
EXPLANATION
• In our daily expenditure we often find that the price we pay for a commodity is less than
the satisfaction derived from its consumption.
• Therefore, we are ready to pay much higher price for a commodity than we actually
have to pay.
• E.g. Commodities like salt, newspaper, match box, etc. are very useful, but they are
also very cheap.

• From the purchase of such commodities we derive a good deal of extra satisfaction or
surplus over and above the price that we pay for them. This is consumer’s surplus.
• Marshall defined consumer surplus “as the excess of the price which a person would be
willing to pay rather than go without the thing over that which he actually does pay”
• Thus, it is the difference between what a consumer is ready to pay and what he actually
pays,
Consumer Surplus what a consumer is ready to pay what he actually pays
=Sum of Marginal Utilities (Price x Units Purchased)
=Total Utility Total amount spent.
We can illustrate the concept of consumer’s surplus with the help of following table-
TABLE MEASUREMENT OF CONSUMER’S SURPLUS

No. of units Marginal utility (Rs) Price (Rs) Consumer Surplus
1 25 10 15
2 20 10 10
3 15 10 05
4 10 10 00
Total units purchased Total utility = 70 Total Amt. Spent = 40 30
When the consumer buy first unit of commodity he is ready to pay Rs. 25 for it as he expects
satisfaction worth Rs. 25 from it and thus gets a surplus worth R<=15, For second unit he is
ready to pay only Rs. 20 for it as he expects lesser satisfaction from it and thus gets surplus
worth Rs. 10 only. The consumer will go on buying the commodity till Marginal Utility Price &
consumer surplus is Zero Le up to 4th unit.
Here, Consumer Surplus = Total Utility - Total Amt. Spent = Rs70 – Rs40 = Rs30
We can represent consumer’s surplus with the following diagram.

2.4 Indifference Curve Analysis
• An indifference curve is a curve which represents combinations of two commodities that
gives same level of satisfaction to the consumer.
• As all the combinations give same level of satisfaction, the consumer becomes indifferent
(ie neutral) as to which combination he gets.
• In other words, all the combinations lying on indifference curve are equally desirable
and equally preferred by the consumer.
• To understand consider the following indifference schedule.
TABLE: INDIFFRENCE SCHEDULE

Combinations BURGER SANDWICHES LEVEL OF MRS
SATISFACTION
A 1 10 1000 -
B 2 6 1000 4
C 3 3 1000 2
D 4 4 1000 1
By plotting the above combination on a graph, we can devise an indifference curve as shown
in the following figure.
In the diagram, quantity of burger is measured on X-axis and quantity of sandwiches on Y-axis
The various combinations A, B ,C, D are plotted and on joining them, we get a curve known
as indifference curve All combinations lying on the indifference curve. All combinations lying
on the indifference give the same level of satisfaction to the consumer. Hence, the consumer
is indifferent among them.

Assumptions of indifference curve
(a) Non-satiety: This assumption means that the consumer has not reached the point of
full satisfaction in the consumption of any commodity. Therefore, a larger quantity of
both commodities are preferred consumer. Larger the quantities of commodities, higher
would be the total utility.
(b) Rationality: Consumer is assumed to be rational. He aims at the maximisation of his
total utility, given the market prices and money income. He is also assumed to have all
relevant information like prices of goods, the markets where they are available, etc.
(c) Consistency: The consumer is consistent in his choice ie the preferences of consumers
are consistent. If he prefers combination ‘A’ over combination ‘B’ in one period of time
he will NOT prefer ‘B’ over ‘A’ in another period of time.
(d) Transitivity: If combination A is preferred to B and ‘B’ is preferred to C, then, A is
preferred to C Symbolically, if A>B, and B>C, then ADC.
(e) Ordinal Utility: It is assumed that consumer cannot measure precisely utility or
satisfaction in absolute unit’s i.e. Cardinally, but he can express utility ordinally. In
other words consumer is capable of comparing and ranking satisfaction derived from
various goods and their combinations.
(f) Diminishing Marginal Rate of Substitution: It means that as more and more units of
‘A’ are substituted for ‘B’ consumer will sacrifice lesser and lesser units of ‘B’ for each
additional unit of ‘A.
Marginal rate of substitution

• The concept of marginal rate of substitution is the basis of Indifference Curves in the
Theory of Consumer’s Behaviour.

• IT MAY BE DEFINED AS THE RATE AT WHICH A CONSUMER WILL EXCHANGE SUCCESSIVE
UNITS OF ONE GOOD (COMMODITY) FOR ANOTHER.
• Consider the following Schedule-
TABLE: INDIFFRENCE SCHEDULE

Combination Good X Good Y Marginal rate of
substitution =
A 1 10 -
B 2 6 4Y : 1X
C 3 4 2Y : 1X
D 4 3 1Y : 1X
• The above schedule shows the combinations of two goods X and Y. Suppose the consumer
wants more of X. To do so he must sacrifice some units of Y. in order to maintain same
level of satisfaction.
• Initially, the consumer sacrifices 4Y to get IX, to obtain second unit of X’ he sacrifices
2Y and so on.
• This rate of sacrifice is technically called Marginal Rate of Substitution (MRS).
• Thus, for any goods X and Y, the MRS is the loss of Y which can just be compensated by
a gain of X MRS XY goes on diminishing.
• We can also measure MRS on an indifference curve. Consider the following diagram-

Properties of Indifference Curves.
1. Indifference curves always slope downwards from left to right:
• This means that an indifference curve as a negative slope.
• REASON –In order to maintain same level of satisfaction, as the quantity of burgers
is increased in the combination, the quantity of sandwiches is reduced.
• Thus this property follows from the definitions of an IC and non-entity assumption.
i.e. more is preferred to less
• Indifference curve cannot be horizontal straight line or vertical straight line or
positively sloped
2. Indifference Curves are convex to the origin:
3. Higher Indifference Curves Represents Higher Level of Satisfaction:
• In an indifference map, combinations lying on a higher IC gives higher level of satisfaction

than the combinations lying on a lower IC. But how much higher cannot be indicated.

• REASON this is because combinations on higher IC contains more quantity of either
sandwiches or burger without having less of other as shown in the following diagram.
4. Indifference curves cannot intersect each other:
• It means that only one IC will pass through a point in the indifference map.
• In other words, ONE combination can lie only on one IC.
• Higher IC represents higher level of satisfaction and lower IC represents lower level of
satisfaction. If they intersect each other, it would lead to illogical result
• It can be proved with the help of following diagram
2.5 Budget Line or Price Line (Or Price Opportunity Line Or Expenditure Line Or Budget
Constraint)
• A higher indifference curve shows a higher level of satisfaction than lower one.
• Therefore, to maximize satisfaction consumer will try to reach the highest possible
indifference curve.
• He will try to buy more and more goods to get more and more satisfaction. But,
what and how much a consumer can actually buy depends on -
(a) The money income of consumer, and
(b) Prices of goods he wants to buy. They are the two objective factors which
form the budgetary constraint of the consumer.
The budgetary position of the consumer can be graphically shown by

BUDGET LINE. A budget line or price line shows maximum quantity of the
different combinations of TWO GOODS that the consumer can purchase
with his given money income and given market prices of goods.

Example:
The consumer’s money income is Rs 100/- to spend on Apples and Bananas
Price of Apples is Rs. 5/- per unit
Price of Bananas is Rs. 2/- per unit
Therefore, the consumer can get either 20 units of Apples and no Bananas
OR
50 units of Bananas and no Apples.
OR
Combination of Apples and Bananas
Hence, 20 Apples and 50 Bananas form the two extreme limits of his expenditure.
But the consumer can buy any ONE of the many combinations of apples and bananas
within these limits. Graphically it can be shown as follows-
• The slope of budget line is equal to the ratio of the prices of two goods i.e. ratio of the
prices of Apples
(P apples) to the price of Bananas (P bananas). Thus, the slope of the budget line PL
is
2.6 Consumer’s equilibrium

• The consumer is said to be in equilibrium when he maximizes his satisfaction (Le. utility).
• To explain the consumer’s equilibrium under ordinal approach, we have to make use of
TWO TOOLS of indifference curve analysis namely-
1) The consumer’s INDIFFERENCE MAP, and
2) his PRICE/BUDGET LINE.

Assumptions:
1. The consumer has a fixed amount of money income to spend.
2. The consumer intends to buy TWO GOODS.
3. The Consumer is RATIONAL, and tries to maximise his satisfaction.
4. The prices of two goods are GIVEN and are CONSTANT. Therefore, budget line has
constant slope.
5. Goods are HOMOGENEOUS and DIVISIBLE.
6. The scale of preference of consumer Le his taste & preferences remains unchanged.
Scale of preference is expressed through indifference map.
• The CONSUMERS INDIFFERENCE MAP shows all indifference curves which rank the
consumer’s preferences between various possible combinations of TWO commodities.
• To maximise his satisfaction consumer would like to reach highest possible indifference
curve.
• The slope of IC at any one point shows the MAGINAL RATE OF SUBSTITUTION (which
diminishes).
• THUS, MRSxy =
• To maximise satisfaction consumer will try to reach the highest possible IC and so will
try to buy more and more of the two commodities.
• But there are limits to which he can go on and on.
• These limits are imposed (1) his money income, & (2) prices of the commodities. These
limits are described by PRICE/BUDGET LINE which shows the various combinations of
two commodities the consumer can afford to buy.
• All the combinations lying on the budget line are affordable by the consumer. Any,
combination lying beyond budget line is unaffordable.
• The slope of budget/price line shows the ratio of the prices of two commodities
i.e.
• Now we can show how a consumer reaches equilibrium i.e, how he allocates his money
expenditure between commodities X and Y and gets maximum satisfaction.

• For showing this, we will have to superimpose the price line on the indifference map as
follows-
FIGURE: CONSUMER’S EQUILIBRIUM
• At the point of tangency, Slope of Indifference Curve = Slope of Budget Line=

MRSXY =
• Thus, the consumer is at equilibrium when-
(a) MRSXY = and
(b) Indifference curve is CONVEX to origin.
UNIT 3
3. SUPPLY
Supply of a commodity refers to the quantity of commodity offered for sale at a particular
price during period of time. Thus, the supply of a commodity may be defined as the amount of
commodity which the sellers or producers are able and willing to offer for sale at a particular
price, during a given period of time.
Thus, defined, the term supply shows the following features:
(1) Supply of a commodity is always with reference to a PRICE
(2) Supply of a commodity is to be referred to IN A GIVEN PERIOD OF TIME.
(3) Supply of a commodity depends on the ABILITY OF SELLER TO SUPPLY A COMMODITY
However, ability of a seller to supply a commodity depends ON THE STOCK available
with him.
(4) Supply of a commodity abo depends on the WILLINGNESS OF SELLER TO SUPPLY A
COMMODITY A seller’s willingness to supply a commodity depends ON THE DIFFERENCE
BETWEEN THE

RESERVATION PRICE and the PREVAILING MARKET PRICE.
E.g. A dairy farm’s daily supply of milk at the price of Rs.12 per litre is 600 litres
Determinants of Supply
(a) Price of the commodity:
• Other things being equal the supply of a commodity is DIRECTLY related with its
price.
• It means that, larger quantity of a commodity is offered for sale at higher price
and vice versa.
• This is because the profits of the firm increases if the price of its product increases.
(b) Price of the related commodities:

• The supply of a commodity also depends on the prices of related commodities i.e.
substitute goods and complementary goods.
• Other things being equal, if the price of a substitute goes up, the firms will be
tempted to produce that substitute to get higher profits. E.g. If the price of coffee
rises, the firm would reduce the quantity supplied of tea.
• On the other hand, other things being equal, if price of a complementary good
goes up, the supply of the product in question also rises. E.g.-If the prices of
fountain pens rise, it may cause an increase in the supply of ink.
(c) Prices of factors of production.

• Supply of a commodity depends on the cost of production. The cost of production
itself depends upon the prices of various factors of production.
• So, if the price of any factor of production rises, the production costs would be
higher for the same
Level of output (and vice versa), Hence the supply will tend to decrease
• Conversely, a fall in the cost of production tends to increase the supply.
(d) State of technology:

• A change in technology affects the supply of commodity productivity.
• A technological progress and improvement in the methods of production increases
reduce the cost of production and increases the profits. As a result more is produced
and supplied
• Also discoveries and innovations bring new variety of goods.

(f) Government Policy:
• The supply of a commodity is also affected by the economic policies followed by
the Government.
• The Government may Impose taxes on commodities in the form of excise duty,
sales tax and import duties or may give subsidies
• Any Increase in such taxes will raise the cost of production and so the quantity
supplied will fall Under such conditions supply will increase only when its price in
the market rises
• Subsidies reduce the cost of production and thus encourages firms to produce and
sell more.
(I) Future price expectations:

• If the seller expects a rise in the prices in future, supply may be withheld by him
at present.
(j) Other factors:

• Supply of a commodity also depends upon Natural conditions like rainfall,
temperature, etc.
Industrial and foreign policies, infrastructural facilities; War; market structure;
etc.
Law of Supply
• The Law of Supply express the nature of functional relationship between the price of a
commodity and its quantity supplied
• It simply states that supply varies DIRECTLY to the changes in price te. supply of a
commodity expands when price rises and contracts when price falls
• The Law of Supply states that the higher the price, the greater the quantity supplied
or the lower the price the smaller the quantity supplied, other things remaining the
same.” (Dooley)
• Thus, there is DIRECT RELATIONSHIP between supply and price.
• It is assumed that other determinants of supply are constant and ONLY PRICE IS THE
VARIABLE AND INFLUENCING FACTOR Thus, the law of supply is based on the following
main assumptions:-
1) Cost of production remains unchanged even though the price of the commodity
changes.
2) The technique of production remains unchanged.
3) Government policies like taxation policy, trade policy, etc. remains unchanged.
4) The prices of related goods remains unchanged.
5) The scale of production remains unchanged etc.
• The law can be explained with the help of supply schedule and a corresponding supply
curve.
TABLE : SUPPLY SCHEDULE

Price Rs. Per unit Supply per week in units
10 20
20 30
30 40
40 50
50 60
FIGURE: SUPPLY CURVE
• The law of supply states that, supply of a commodity varies directly with its price.
• But, in some cases, this may not hold true. Hence, the law of supply has the following
EXCEPTIONS –
• LABOUR SUPPLY
(i) When the seller expects a further rise in the prices in future, he may hoard stock
of commodity. So the supply at present will fall and vice versa.
(ii) At higher wage rates, there is tendency among labourers to prefer more leisure
than work. As a result when wages rise, labour supply falls.
(iii) In the case of rare commodities like paintings, coins, etc. the supply is fixed.
Whatever the price, it cannot change.

Changes in Quantity Supplied OR Expansion Changes in supply OR increase and decrease
& Contraction of supply OR Movement along in supply OR shift in supply curve
a supply curve
(a) - When Supply of a commodity changes (a) –When there is change in supply due
only due to change in the price to change in factors other price of
of commodity other determinants the commodity , it is called change in
remaining unchanged, it is called supply
changes in quantity supplied. -It is the result of change in technology,
-Changes in quantity supplied thus govt. policies price of related goods
means expansion of supply & contraction etc.
of supply -Change in supply means- increase in
-When price of a commodity rises, supply & decreases in supply.
quantity supplied also rises. This called -Price remaining the same when supply
expansion of supply. rises due to change in factors other
price, it is called increase in supply.
-Likewise, price reaming the same when
supply falls due to in factors other than
price, it is called decrease in supply.
(b) -As other determinants of supply the (b) -In this case the supply curve shifts
price of related commodities, prices from its original position to rightward
of factors of pro diction state of when supply increases and to leftward
technology, etc. are assumed to be when supply decreases.
constant, the position of the supply -Thus change in supply curve as a result
curve remains the same. of increase and decrease in supply, is
-The seller will move upwards or technically called shift in supply curve.
downwards un the same supply curve
Quantity Quantity

Elasticity of supply.
• Price elasticity of supply measures the degree of responsiveness of quantity supplied of
a commodity to a change in its own price.
• In other words, the last of supply as the degree of change to the quantity ad in repose
to change is the price of the commodity.
• Elasticity of supply can be defined “ as a ratio of the percentage change in the quantity
supplied of a commodity tot the percentage change in its own price.
Where –
Es = elasticity of supply
Q = Original quantity supplied
P = Original price
D = indicates change
Rearranging the above expression we get -
• Since the law of supply establishes positive relationship between price and quantity
supplied the elasticity of supply would be positive.
• However, in case of decreasing cost industry elasticity of supply is negative.
• The value of elasticity co-efficient will vary from zero to infinity.
• The elasticity of supply, according to its degree, may be of following types :-
(a) Perfectly Inelastic Supply:

When a change in the price of a commodity has no effect on its quantity supplied,
perfectly inelastic. Eg. If price rises by 20% and the quantity supplied remain unchanged
then . In this case, the supply curve is a vertical straight line curve parallel
to Y-axis as shown in the figure.
The figure shows that, whatever the price quantity supplied of the commodity remains
unchanged at OQ.

(b) Perfectly Elastic Supply: (Es = ∞) :
When with no change in price or with very little change in price, the supply of a
commodity expands or contracts to any extent, the supply is said to be perfectly elastic.
In this case, the supply in a horizontal straight line and parallel to X-axis.
FIGURE PERFECTLY ELASTIC SUPPLY

(c) Unitary Elastic Supply: (Es = 1) :
When the percentage change in price is equal to percentage change in quantity supplied
them the supply is said to be unit elastic Eg. – If price rises by 10% and the supply also
rises by 10% than,
FIGURE UNIT ELASTIC SUPPLY
(d) Relatively/More Elastic Supply: (Es>1) :

When a small change in price leads to big change in quantity supplied, then the supply
or more elastic. Eg If price rises by 10% and supply rises by 30% then.
FIGURE MORE ELASTIC SUPPLY
The coefficient of elasticity would be somewhere between ONE and INFINITY. The elastic
supply curve is flatter as shown be low
Supply curve SS is flat suggesting that the supply is more elastic. In this case the supply
curve SS when extended will pass through Y-axis.

(e) Relatively Inelastic Or Less Elastic Supply::
When a more change in price leads to small change in quantity supplied, then supply is
said to relatively inelastic or less elastic. Eg. - If price rises by 30% and supply rises by
10% then, Coefficient of elasticity would be somewhere between ZERO
and ONE. The supply curve in this case has steep slope as shown below-
Supply curve SS is steeply sloped suggesting that supply is less elastic. In this case the
supply curve SS when extended will pass through X-axis.

MULTIPLE CHOICE QUESTIONS
Question 1.
“High priced goods consumed by status seeking rich people to satisfy their need for
conspicuous goods” is:
(a) Veblen effect (b) Ban wagon effect
(c) Snob effect (d) Demonstration effect (1 mark)
Question 2.
Y
A
P B
R
I C
C D
E
E
O
QUANTITY x
(a) elasticity at point A = ∝, at B = > 1, at C = 1, at D = < 1 and at E = 0

(b) elasticity at A = 0, at B = < 1, at C = 1, at D = > 1 and at E = ∞
(c) elasticity at A = 0, at B > 1, at C = 1, at D = < 1 and at E = 0
Question 3.
Cardinal approach is related to:
(a) Indifference curve (b) Equi marginal utility
(c) Law of diminishing returns (d) None of these. (1 mark)
Question 4.
An Increase in demand can result from: (1 mark)
(a) A decline in the market price (b) An increase in income
(c) A reduction in the price of substitutes (d) An increase in the price of complements.

Question 5.
Cross elasticity of perfect substitutes is
(a) Zero (b) Negative (c) One (d) Infinity (1 mark)
Question 6.
Supply is a ________ concept. (1 mark)
(a) flow (b) stock (c) flow and stock, both (d) Qualitative
Question 7.
For what type of goods does demand fall with a rise in income levels of households?
(a) Inferior goods (b) Substitutes (c) Luxeeries (d) Necesities (1 mark)
Question 8.
Which economist said that money is the measuring rod of utility?
(a) A.C Pigou (b) Marshall (c) Adam Smith (d) Robbins (1 mark)
Question 9.
Elasticity between two points:
(a) point elasticity (b) Arc elasticity
(c) Cross elasticity (d) None. (1 mark)
Question 10.
Indifference curve is L shaped then two goods will be:
(a) Perfect substitute goods (b) Substitute goods
(c) Perfect complementary goods (d) Complementary goods (1 mark)
Question 11.
The concept of consumer’s surplus is derived from:
(a) The law of diminishing marginal utility. (b) The law of equal-marginal utility
(c) The law of diminishing returns (d) Engel’s law (1 mark)
Question 12.
When supply curve shifts to the right there is:
(a) an increase (b) expansion (c) contraction (d) decrease (1 mark)

Question 13.
Short run price is also called by the name of:
(a) Market price (b) Showroom price
(c) Maximum retail price (d) None of these. (1 mark)
Question 14.
When supply price increase in the short run, the profit of the producer ________.
(a) increases (b) decreases
(c) remains constant (d) decreases marginally (1 mark)
Question 15.
When Price of a commodity increases what will be the affect on Quantity demanded?
(1 mark)
(a) Increases (b) Decreases (c) No change (d) None of these
Question 16.
According to law of supply, change in supply is related to?
(a) Price of goods (b) Price of related goods
(c) Factors of production (d) None of the above (1 mark)
Question 17.
In case of inferior goods, with rise of income of consumes, demand of goodwill? (1 mark)
(a) Increases (b) Decreases (c) No change (d) None of the above
Question 18.
In case of necessaries, consumes surplus is? (1 mark)
(a) Infinite (b) Zero (c) Equals to one (d) More than one
Question 19.
When price of a commodity Rises from 200 to Rs. 300 and Quantity supply increases from
2000 to 5000 units find elasticity of supply?
(a) 3:0 (b) 2.5 (c) 0.3 (d) 3.5 (1 mark)

Question 20.
From the following data given below answer question 18 and 19-
Units TU MU
1 200
2 - 180
3 480 -
Total utility derived from 2nd unit?

(a) 380 (b) 20 (c) 100 (d) 280 (1 mark)
Question 21.
Marginal utility of 3rd unit is?
(a) 200 (b) 280 (c) 100 (d) 50 (1 mark)
Question 22
Which Equation is correct-
MUx Px MUx Px
(a) = (b) >
MUy Py MUy Py
MUx Px MUx Px
(c) < (d) ≠ (1 mark)
MUy Py MUy Py
Question 23.
The scope of fie indifference curve shows consumer equilibrium at point where MRS(xy) _______
Px
(Price line) (1 mark)
Py
(a) Less than (b) More than (c) Equal to (d)None of the above
Question 24.
Which of the following is not the property of indifference curve ?
(a) IC is convex to the origin (b) IC scopes downwards from left to right
(c) Two IC can touch each other (d) IC cannot touch either of the axis (1 mark)
Question 25.
In case of Normal goods, Rise in price leads to ________?
(a) Fall in demand (b) Rise in demand
(c) No change (d) Initially rise then ultimately fall (1 mark)

Question 26.
Method of demand forecasting does not include?
(a) Mathematical method (b) Barometric method
(c) Expert opinion method (d) Statistical method (1 mark)
Question 27.
If price of the commodity increases, what will be the effect on Quantity demanded?
(a) Decreases (b) Increases (c) No change (d) Cant say (1 mark)
Question 28.
An IC shows ________ MRS between the commodity?
(a) Increasing (b) Decreasing (c) Constant (d) Zero (1 mark)
Question 29.
Forecasting .of demand is the Art and Science of predicting?
(a) Actual demand of a product at same future date
(b) Probable demand in future
(c) Total demand in future
Question 30.
Addition made to total utility refers to? (1 mark)
(a) Total utility (b) Average utility (c) Marginal, utility (d) All of the above.
Question 31.
Elasticity of supply is zero means?
(a) Perfectly inelastic (b) Perfectly elastic
(c) Imperfectly elastic (d) All of the above. (1 mark)
Question 32.
The Consumer is in equilibrium when the following condition is satisfied:
MUx MUy MUz

(a) Budget line is tangent to the Ic curve (b) = =
Px Py Pz
(c) Both (a) and (b) (d) None of the above (1 mark)

Question 33.
Which of the following statement is correct?
(a) Supply is inversely related to its cost of production
(b) Price and quantity demand of a good have direct relationship
(c) Taxes and subsidy has no impact on the supply of the product
(d) Seasonal changes have no impact on the supply of the commodity (1 mark)
Question 34.
When the supply of a product is perfectly inelastic then the curve will be
(a) Parallel to Y – axis (b) Parallel to X - axis
(c) At the angle of 45° (d) Sloping upwards (1 mark)
Question 35.
In case of _________, there is an inverse relationship between income and demand for a
product.
(a) Substitute goods (b) Complementary goods
(c) Giffen Goods (d) None of the above (1 mark)
Question 36.
If maize has - 0.30 as income elasticity of demand, then maize will be considered as
__________.
(a) Necessity (b) Inferior good (c) Superior good (d) None (1 mark)
Question 37.
If price decreases from Rs. 80 to Rs. 60 and elasticity of demand is 1.25 then _________.
(1 mark)
(a) demand increase by 25% (b) demand decrease by 25%
(c) remains constant (d) None of the above
Question 38.
Which of the following are the condition’s of theory of consumer surplus if price is same for
all the units he purchased ?
(a) Consumer gains extra utility or surplus
(b) Consumer surplus for the last commodity is zero
(c) Both (d) None (1 mark)

Question 39.
Which of the following is not the property of indifference curve?
(a) Slopes down words to the right (b) Always convex to the origin
(c) Intersects each other (d) Will not touch either of the axes (1 mark)
Question 40.
Which of the following is correct ?
(a) Elasticity on lower segment of demand curve is greater than unity
(b) Elasticity on upper segment of demand curve is lesser than unity
(c) Elasticity at the middle of demand curve is equal to unity
(d) Elasticity decreases as one move from lower part of demand curve to upper part
(1 Mark)
Question 41.
Which of the following will affect the demand for non-durable goods? (1 mark)
(a) Disposable Income (b) Price
(c) Demography (d) All of the above
Question 42.
When the price of tea decreases, people reduces the consumption of coffee. Then the goods
are
(a) Complementaries (b) Substitutes
(c) Inferior goods (d) Normal goods (1 mark)
Question 43.
Which of the following relation is true with MU? ^
(a) When MU is positive, Total utility rises at a diminishing rate
(b) When marginal utility is zero, total utility is” maximum
(c) When marginal utility is negative, total utility is diminishing
(d) All of the above (1 mark)
Question 44.
The price elasticity of demand at the midpoint of the straight line demand curve under point
method is _________.
(a) 0 (b) 1 (c) >1 (d) <1 (1 mark)

Question 45.
Contraction of supply implies. ________. (1 mark)
(a) Decrease in cost of production (b) Decrease in price of the good concerned
(c) Decrease in price of related good (d) Increase in price of the good concerned
Question 46.
Perishable commodities will have _________.
(a) Perfectly elastic curve (b) Perfectly inelastic curve
(c) Elastic (d) Inelastic (1 mark)
Answer Key
Question Answer
No.
1. (a) Veblen effect was given by veblen. Hence, this is called veblen effect, also
known as prestige goods effect. Related to conspicuous consumption. Veblen
effect takes place as some consumers measure the utility by its price i.e. if
price rises they think it has got more utility so, it is used by rich people to
satiety their need.
2. (a) Y
A
B
P
R C
I
C D
E E
QUANTITY x
(a) When change of demand is greater than price change then e > 1
(b) When change of demand is less than price change than e < 1
(c) When change of demand is same as change of price then it is e =1
(d) When these is no change in demand as change in price then e = 0
(e) When price is change slightly but demand change at high then it is e =
∞
Here, C shows e = 1 by which we can prove that
C ⇒ e = 1, A ⇒ e = ∞, B ⇒ e > 1
D ⇒ e < 1, E ⇒ e = 0

3. (b) Marginal utility theory is given by Alfred Marshall and he assume the Marginal
utility theory is related cardinal approach which means we can measure
utility in terms of money and “Money is measuring rod of utility said by
Marshall.
4. (b) Price and Demand are inversely related as price rises. Demand falls and
vice-versa but income and demand are directly related. As rise in income
increase the quantity demanded and fall in income decrease the quantity
demanded.
5. (d) When there are perfectly substitutes available the cross elasticity of these
perfectly substitutes leads to infinity as rise in price of one good will cause
rise in demand of its substitutes Ex: If tea’s price rise the coffee’s demand rise
as these both are perfectly substitutes. Cross elasticity of complementary
goods leads to zero.
6. (a) Supply refers to quantity of a good or service that consumers are willing and
able to purchase during a given period of time. Supply is a flow concept as
quantity supplied is so much per unit of time per day, per week or per year.
It is regularly going on supply means not only those goods which are sold but
also those which are in stock.
7. (a) Inferior goods are type of goods which are not of goods quality and no one
want to consume them but circumstances force to one to consume them.
If income rises of households then demand for inferior goods go down or
elasticity for these goods becomes negative.
8. (b) Marginal utility theory is given by Alfred Marshall and he assume the Marginal
utility theory is related cardinal approach which means we can measure
utility in terms of money and Money is measuring rod of utility’ said by
Marshall.
9. (b) When price elasticity is to be found between two prices or two points on the
demand curve then it is not possible to know that what price and quantity
should be taken as base; So, we use Arc elasticity method to know base
price and quantity.
10. (c) When two goods are perfect complementary goods (e.g. printer and
cartridge), the indifference curve will consist of two straight lines with a
right angle between them which is convex to the origin, or in other words,
it will be L shaped.

11. (a) Consumer surplus is a surplus which a consumer would be willing to pay rather
then go without a thing over that which he actually does pay. Consumer
surplus is given by Marshall and it is derived from = what a consumer is
willing to pay - what he actually pays.
12. (a) When the supply curve shift to the right due to change in one or more
factors other than commodity own’s price. We say that there is increase in
supply and when supply curve shift to left we say that there is decrease in
supply.
13. (a) Short run price is also known market price and it is determine by central
them of micro economic analysis, hence, micro economic theory is also
called price theory.
14. (a) Supply and price are directly related as supply increase, price increase and
price decrease, supply decrease. So, increase in supply-price will increase
the profits of producer.
15. (b) As per the law of demand, other things being equal, if the price of a
commodity falls, the quantity demanded of it will rise and if the price of a
commodity rises, its quantity demanded will decline.
16. (a) The law of supply can be started as Other things remaining constant, the
quantity of a good produced and offered for sale will Increase as the price
rises.
17. (b) In General cases, as consumer Income rises they will prefer high - quality
goods and therefore, demand for Giffen goods will decrease.
18. (a) In case of necessaries, the managerial utilities of the earlier limits are
Infinitely large. In such case the consumer’s surplus is always Infinite.
19. ∆q p 3,000 200
(a) x = x = 3.0
q ∆p 2,000 100
20. (a) TU = ∑ MU
therefore, 380
21. (b) MU = TUn – TUn-1,

Therefore, = 280.
22. MUx Px
The law of utility states, that consumer will be in equilibrium when x
MUy Py
23. Px
(c) Consumer will be in equilibrium only when MRS(xy) is equal to (price
Py
line).

24. (c) Properties of Indifference curve are:
1. Indifference curves slope downward to thing
2. Indifference curve are always convex to orgin.
3. Indifference curve can never intersect each other
4. A higher Indifference Gurve represent higher level satisfaction
5. Indifference curve will not touch either axes.
25. (a) In general cases when price of commodities rise, purchasing power of
customer will fall and therefore demand will fall.
26. (a) Method of demand forecasting are:
1. Survey of buyer’s, intentions
2. Collection opinion method
3. Expert opinion method
4. Statistical method
5. Controlled experiments
6. Barometric method.
Therefore, Mathematical method is not a method of forecasting.
27. (a) As per the law of demand, other things remaining constant when price of
commodity increases quantity demanded decreases and vice versa.
28. (b) MRS is falling because as the consumer has more and more units of food, he
is prepared to give up less and less units of commodity.
29. (b) Forecasting in general, refers to knowing or measuring the status or nature
of an event or variable before it occurs. Forecasting of demand is the art
and science of predicting the probable demand for a product or a services.
30. (c) Marginal utility is the addition made to total utility by the consumption of
an additional unit of a commodity.
31. (a) Elasticity of supply:
e > 1 ⇒ elastic supply
e < 1 ⇒ inelastic supply
e = 0 ⇒ Perfectly inelastic supply
e = ∞ ⇒ Perfectly elastic supply
e =1 ⇒ Unit elastic
Therefore, elasticity of supply is zero means, it is perfectly inelastic supply.
32. (c) Condition for consumer attaining equilibrium is the point where the budget
MUx MUy
line is tangent to the indifference curve and x
Px Py
Hence, option (c) is correct.

33. (a) In economics, supply refers to quantity of product available in market for
sale at a specified price at a given point of time.
Supply of a product has inverse relation with cost of production.
Example A seller would supply less quantity of product in market when the
cost of production exceeds the market-price of the product. In such case
the seller would wait for rise in price of the product.
34. (a) If due to change in price, the quantity supplied of goods remain unchanged,
such goods are said to have inelastic supply i.e. there supply cannot be
changes. This is shown by vertical supply curve i.e. curve parallel to Y-Axis.
Y S
Price
P1
P0
O Q x
Quantity
35. (c) Giffen goods are the products for which demand increases as the price
increases and falls when price decreases. These are a special case of an
“inferior good” of which people buy less when their income rises hence,
an inverse relationship is established between income and demand of the
product.
36. (b) Since, the income elasticity of maize is — .30 < 0, it is an inferior commodity
in the eyes of the house held. The demand of inferior goods falls as income
rises. Also as the elasticity is less than one is shows that the goods is either
relatively less important in the consumer’s eye or it is a necessity.
37. Percentage change in quantity demanded
(d) Price Elasticity =
Percentage change in price
given, ⇒ Elasticity = 1.25
60 - 80
% change in price = 25%
80
% change in Quantity
1 25 =
25%
Increase in Demand = - 31.25%

Hence, option (d) is correct.

38. (c) The concept of consumer surplus is based on law of diminishing marginal
utility. If a consumer gets extra of anything, its marginal unity starts
decreasing. Keeping price same for all the commodities, a consumer gets
extra utility for the units consumed by him except the one at the margin i.e.
the last unit. The extra utility obtained-by consumer is known as consumer
surplus.
39. (c) The following are the properties of indifference curves:
1. It slope downwards to the right
2. It is convex to the origin
3. two IC never intersect each other
4. Higher IC represents higher level of satisfaction.
5. IC never touches either axis.
Thus option (c) is not the property of indifference curve.
40. (c) Point elasticity at any point can be measured by the following formula
RT lower segment
x
Rt upper segment
• Elasticity on lower segment of demand curve is less than 1

• Elasticity at the middle of demand curve is equal to unity
• Elasticity on upper segment of demand curve is more than 1
• Elasticity increases on one moves from lower part of demand curve to
upper part.
41. (d) Factors affecting the demand for non-durable consumer goods are
1. Disposable income 2. Price 3. Demography
Thus, option (d) is the correct answer.
42. (b) Substitute goods are those goods which can be interchangeably used.
Example, tea and coffee, ink pen and ball pen. If the price of a product falls
the people will try it and thus, the demand of the other product will fall.
Y
D
P1
Price coffee
X
O Q
Tea Demand

43. (d) The relationship between marginal utility (MU) and Total Utility (TU) is as
follows:
1. When MU decreases TU increases at a decreasing rate.
2. When MU is zero, TU is maximum
3. When MU becomes negative, TU declines.
Y
TU
Unity
X
Consumption
MU
44. (b) Given a straight line demand curve, point elasticity can be calculated
through.
RT lower segment
x
Rt upper segment
Elasticity at various points:
Thus, price elasticity of demand at mid point under point method is 1.

45. (b) Contraction in supply is the result of decrease in price of the goods
concerned.
Y
S
P1
X
O Q1 Q
46. (b) The supply curve of perishables goods-is perfectly inelastic. Perishable
goods cannot be stored for long time, if stored the same will be wasted,
thus, its supply is limited and cannot be changed in short run.

PRACTICE QUESTIONS OF MCQ
Question 1.
Demand for a commodity refers to :
(a) Desire for the commodity
(b) Need for the commodity
(c) Quantity demanded of that commodity
(d) Quantity of the commodity demanded at a certain price during any particular period of
time.
Question 2.
Suppose the price of movies seen at a theatre rises from Rs. 120 per person to Rs. 200 per
person. The theatre manager observed that the rise in prices has lead to a fall in attendance
at a given movie from 300 persons to 200 persons. What is the price elasticity of demand for
the movie? (Arc elasticity)
(a) 0.5 (b) 0.8 (c) 1.00 (d) None of these.
Question 3.
In case of an inferior good, the income elasticity of demand is :
(a) Positive (b) Zero (e) Negative (d) Infinite
Question 4.
For what type of goods does demand fall with a rise in income levels of households?
(a) Inferior goods (b) Substitutes (c) Luxuries (d) Necessities
Question 5.
In case of Inferior goods like bajra, a fall in its price tends to :
(a) Make the demand remain constant (b) Reduce the demand
(c) Increase the demand (d) Change the demand in an abnormal way
Question 6.
Movement along the same demand curve shows:
(a) Expansion of demand (b) Expansion of supply
(c) Expansion and contraction of demand (d) Increase and decrease of demand

Question 7.
The price of hot-dogs increases by 22% and the quantity demanded falls by 25% this indicates
that demand for hot dogs is :
(a) Elastic (b) Inelastic (c) Unitary elastic (d) Perfectly elastic
Question 8.
The quantity demanded does not respond to price change and so the elasticity is:
(a) Zero (b) One (c) Infinite (d) None
Question 10.
Which factor generally keeps the price-elasticity of demand for a goods low:
(a) Variety of uses for that goods
(b) Its low price
(c) Close substitutes for that goods
(d) High proportion of the consumer’s income spent on it
Question 11.
In case of a straight line demand curve meeting the two axes, the price elasticity of demand
at the mid-point of the line would be :
(a) 0 (b) 1 (c) 1.5 (d) 2
Question 12.
An increase in demand can result from:
(c) A reduction in the price of substitutes (d) An increase in the price of complements
Question 13.
Compute income elasticity if demand increases by 5% and income by 1 %.
(a) 5 (b) 1/5 (c) 0 (d) None
Question 14.
For a commodity with a unitary elastic demand curve if the price of the commodity rises,
then the consumer’s total expenditure on this commodity would :
(a) Increase (b) Decrease
(c) Remains constant (d) Either increase or decrease

Question 15.
What is the value of elasticity of demand if the demand for the goods is perfectly elastic?
(a) 0 (b) 1 (c) Infinity (d) Less than 0
Question 16.
What is the original price of a commodity when price elasticity is 0.71 and demand changes
form 20 units to 15 units and the new price is Rs. 10? [Point elasticity]
(a) Rs. 15.4 (b) Rs. 18 (c) Rs. 20 (d) Rs. 8
Question 17.
If the price of any complement goods rises :
(a) Demand curve shifts to left (b) Demand curve shifts to right
(c) Demand curve moves downwards (d) Demand curve moves upward
Question 18.
Cross elasticity of demand in Monopoly market is :
(a) Elastic (b) Zero (c) Infinite (d) One
Question 19.
What is income elasticity of demand, when income changes by 20% and demand changes by
40%
(a) 1/2 (b) 2 (c) 0.33 (d) None
Question 20.
If demand is parallel to x axis, what will be the nature of elasticity?
(a) Perfectly elastic. (b) Inelastic (c) Elastic (d) Highly elastic
Question 21
Giffen Paradox is an exception of
(a) Demand (b) Supply (c) Production (d) Utility
Question 22.
Law of demand is a ________.
(a) quantitative statement (b) qualitative statement
(c) Both (a) & (b) (d) Hypothetical

Question 23.
The demand of which type of goods do not decrease with increase in its price
(a) Comforts (b) Luxury (c) Necessities (d) Capital goods
Question 24.
Increase in Price from Rs. 4 to Rs. 6 then decrease in demand from 15 units to 10 units. What
is the price elasticity. (Point elasticity)
(a) 0.66 (b) 5 (c) –1.5 (d) 2
Question 25.
Expansion &, contraction of Demand curve occurs due to:
(a) Change in the price of commodity
(b) Change in price of substitute or complementary goods
(c) Change in income
(d) None
Question 26.
Elasticity between two points:
(a) Point elasticity (b) Arc elasticity (c) Cross elasticity (d) None
Question 27.
When price remains’ constant and quantity demanded changes, then the elasticity of demand
will be:
(a) Vertical to X axis (b) Horizontal to X axis
(c) Either (a) or (b) (d) None
Question 28.
Demand of a commodity depends upon:
(a) Price (b) Income (c) Price of related good (d) All of the above
Question 29.
In case of substitute goods, cross elasticity is ________.
(a) negative (b) zero (c) positive (d) none of these

Question 30.
The prices of a commodity were increased from Rs. 4 to Rs. 6. As a result demand decreased
from 15 units to 10 units. What is the price elasticity? (Point elasticity)]
(a) 0.66 (b) 0.33 (c) 1.00 (d) 1.5
Question 31.
Other things remaining constant, if the price of the inferior goods decreases then what will
be the effect?
(a) Demand increases (b) Demand decreases
(c) Quantity demanded increases (d) Quantity demand decreases.
Question 32.
When price falls from Rs. 6 to Rs. 4, the demand rises from 10 to 15 units.
Calculate price elasticity of demand, (Point elasticity)
(a) 1.5 (b) 3.5 (c) 0.5 (d) 2
Question 33.
Cross elasticity of perfect substitutes is:
(a) Zero (b) Negative (c) One (d) infinity
Question 35.
A consumer spends Rs. 80 on purchasing a commodity when its price is Rs. 1 per unit and
spends Rs. 96 when the price is Rs. 2 per unit. Calculate the price elasticity of demand.
(a) 0.2 (b) 0.3 (c) 0.4 (d) 0.5
Question 36.
When the price of cylinder rises from Rs. 120 to Rs. 200, the demand falls from 300 to 200.
Calculate price elasticity of demand.
(a) 1.00 (b) 0.50 (c) 5.00 (d) None
Question 37.
If the price is decreased from Rs. 10 to Rs. 8 of a commodity but the quantity demanded
remains the same price- elasticity is __________.
(a) 1 (b) 0 (c) 8 (d) none

Question 38.
Demand for electricity power is elastic because __________.
(a) it is available at a very high price. (b) it is essential for life.
(c) it has many uses. (d) it has many substitutes.
Question 39.
If income of a person increases by 10% and his demand for goods increases by 30%, income
elasticity will be ________.
(a) equal to one. (b) less than one. (c) more than one. (d) none of these.
Question 40
In case of luxury goods, the income elasticity of demand will be _________.
(a) zero. (b) negative but greater than one.
(c) positive but greater than one. (d) positive but less than-one.
Question 41.
In case of straight line demand curve meeting two axis, the price elasticity of demand at the
point where the curve meets y- axis would be __________.
(a) zero. (b) greater than one. (c) less than one. (d) infinity.
Question 42.
Calculate income elasticity for the household when the income of the household increases by
10% and the demand for cars rises by 20%.
(a) +2. (b) -2. (c) +5. (d) -5.
Question 43.
The commodity whose demand is associated with the name of Sir Robert Giffen?
(a) Necessary good. (b) Luxury good. (c) Inferior good. (d) Ordinary good.
Question 44.
In expansion and contraction of demand ___________.
(a) demand curve remains unchanged. (b) demand curve changes.
(c) slope of the demand curve changes. (d) both (a) & (c) above.

Question 45.
Certain goods for which Quantity demanded decreases when Income Increases are called.
(a) superior goods (b) inferior goods (c) prestige goods (d) conspicuous goods
Question 46.
When price falls by 5% and demand increases by 6%, then elasticity of demand is ________.
(a) elastic (b) inelastic (c) unitary elastic (d) zero.
Question 47.
Gross elasticity of complementary goods is :
(a) Positive (b) Negative (c) Infinity (d) None of these.
Question 48.
Demand of i-pod increases from 950 to 980 and income increases from 9,000 to 9,800. What
is income elasticity?
(a) 0.53 (b) 0.35 (c) 0.43 (d) None.
Question 49.
Contraction of demand results due to __________.
(a) increase in price of goods (b) decrease in no. of producers
(c) decrease in output of sellers (d) decrease in price of goods.
Question 50.
Bricks for houses is an example of which kind of demand?
(a) Composite (b) Competitive (c) Joint (d) Derived.
Question 51.
Normal goods have _________.
(a) zero income elasticity (b) negative income elasticity
(c) positive income elasticity (d) infinite income elasticity
Question 52.
In which of the following cases the demand for goods tends to be less elastic?
(a) Good is necessary (b) Time period is shorter
(c) Number of close substitutes is less (d) All of the above

Question 53.
Which of the following elasticity of demand measures a movement along the demand curve
rather than a shift in the curve?
(a) Income elasticity of demand (b) Price elasticity of demand
(c) Substitution elasticity of demand (d) None of these.
Question 54.
If the price elasticity of demand is zero, the shape of the curve will be:
(a) Horizontal (b) Vertical
(c) Sloping downwards (d) None of these.
Question 55.
If a 20% fall in price of a commodity brings about a 40% increase in its demand, then the
demand for the commodity will be termed as:
(a) Inelastic (b) Elastic (c) Highly elastic (d) Perfectly elastic.
Question 56.
Expansion and contraction in demand are caused by:
(a) Change in income of buyer (b) Change in taste and preference of buyer
(c) Change in price of the commodity (d) Change in price of related goods.
Question 57.
A fall in price of normal goods leads to:
(a) Shift in demand curve (b) Fall in demand
(c) A rise in consumer’s real income (d) A fall in consumer’s real income.
Question 58.
A 10% increase in the price of tea results is an 8% increase in the demand for coffee. Cross
elasticity of demand will be :
(a) 0.80 (b) 1.25 (c) 1.50 (d) 1.80.
Question 59.
When the total expenditure incurred by the consumers oh a commodity due to a change is its
price remains the same, then the elasticity of demand for that commodity will be:-
(a) Zero (b) One (c) More than one (d) Less than one

Question 60.
What will be the price elasticity if original price is Rs. 5, original quantity is 8 units and
changed price is Rs. 6, changed quantity is 4 units:
(a) 2.5 (b) 2.0 (c) 1.5 (d) 1.0
Question 61.
Original price of a commodity is Rs. 500 and quantity demanded of that is 20 kgs. If the price
rises to Rs. 750 and the quantity demanded reduces to 15 kgs. The price elasticity of demand
will be:
(a) 0.25 (b) 0.50 (c) 1.00 (d) 1.50
Question 62.
The demand for factors of production is _________.
(a) fundamental demand (b) derived demand
(c) market demand (d) joint demand.
Question 63.
Cross elasticity of demand between two perfect substitutes will be
(a) Very high (b) Very low (c) Infinity (d) Zero
Question 64.
What is the elasticity between mid point and upper extreme point of a straight line continuous
demand curve ?
(a) Infinite (b) Zero (c) Greater than one (d) Less than one
Question 65.
Price of Tiffin Box is Rs. 100 per unit and the quantity demanded in market is 1,25,000 units.
Company increased the price to Rs. 125. Due to this increase in price, quantity demanded
decreases to 1,00,000 units. What will be the price elasticity of demand ?
(a) 1.25 (b) 0.80 (c) 1.00 (d) None of the above.
Question 66.
The price of a commodity decreases from 10 to 8 and the quantity demanded of it increases
from 25 to 30 units, then the coefficient of price elasticity will be ___________.
(a) 100 (b) -1.00 (c) 1.5 (d) -1.5

Question 67.
Which statement is true about the law of demand ?
(a) Income rises, demand rises (b) Price rises, demand rises
(c) Price falls, demand falls (d) Price falls, demand rises
Question 68.
Which of the following is not a determinant of demand ?
(a) Consumer’s tastes and preferences (b) Quality supplied of a commodity
(c) Income of the consumers (d) Price of related goods
Question 69.
A demand curve parallel to the Y-axis implies:
(a) Ep = 0 (b) Ep = 1 (c) Ep < 1 (d) Ep > 1
Question 70
Generally/when income of consumer increases, he goes in for superior goods, leading to a
fall in demand for inferior goods. It means, income elasticity of demand of superior goods
__________.
(a) less than 1 (b) unitary (c) zero (d) negative
Question 71.
If the quantity demanded of X commodity increases by 5% when the price of Y commodity
increases by 20%, the cross-price elasticity of demand between X and Y commodity will be:
(a) -0.25 (b) 0.25 (c) -4.00 (d) 4.00
Question 72.
Which amongst the following is the right formula for calculating price elasticity of demand
using ratio method?
(a) (∆Q/∆P) x (P/Q) (b) (∆P/∆Q) x (Q/P)
(c) (∆Q/∆P) x (Q/P) (d) (∆P/∆Q) x (1/P)
Question 73.
Straight line demand curve at the point of meeting the x-axis will indicate elasticity coefficient
Equal to _________.
(a) one (b) Infinity (c) zero (d) more than one

Question 74.
Changes in the quantity demanded in response to changes in the price of same commodity is
called:
(a) change in demand (b) change in quantity demanded
(c) income demand (d) cross demand
Question 75.
Other things being equal, a fall in the price of the complementary goodwill cause the ______
of the other to rise.
(a) price (b) supply (c) demand (d) utility
Question 76.
A horizontal demand curve parallel to X-axis shows that the elasticity of demand is:
(a) zero (b) equal to unity (c) greater than unity (d) infinite.
Question 77.
When the price of a commodity increases from Rs. 8 to Rs. 9, its demand decreases by 10%.
The price elasticity of demand for the commodity is:
(a) 0.8 (b) 0.9 (c) 1.0 (d) 1.1
Question 78.
Which one of the following is correct about the price elasticity of demand of a commodity?
(a) It remains same under all situations (b) It has several degrees/nature
(c) It remains unaffected by the price of any other commodity
(d) It is an immeasurable concept.
Question 79.
The supply of a good refers to :
(a) Actual production of goods
(b) Total stock of goods
(c) Stock available for sale
(d) Amount of goods offered for sale at a particular price per unit of time

Question 80.
Increase or Decrease in-Supply means:
(a) Shift in Supply curve (b) Movement along same supply curve
(c) Both (a) and (b) (d) Neither (a) or (b)
Question 81.
If supply curve is Perfectly Inelastic, the supply curve is:
(a) Vertical (b) Horizontal
(c) Upward sloping (d) Downward sloping
Question 82.
When supply price increase in the short run, the profit of the producer ________:
(c) remains constant (d) decreases marginally
Question 83.
A change in the supply of a commodity along with same supply curve may occur due to:
(a) Change in the price of the commodity
(b) Change in the prices of related goods
(c) Change in the future expectations about the price of the goods.
(d) Change in the cost of inputs
Question 84.
What is the elasticity of supply, when price changes from Rs. 15 to Rs. 12 and supply change
from 6 units to 5 units?
(a) 0.77 (b) 0.87 (c) 0.833 (d) 0.58
Question 85.
A perfectly inelastic supply curve will be:
(a) Parallel to X axis (b) Parallel to Y axis
(c) Downward sloping (d) None of these

Question 86.
If the supply of a commodity is perfectly elastic, an increase in demand will result in:
(a) Decrease in both price and quantity at equilibrium
(b) Increase in both price and quantity at equilibrium
(c) Increase in equilibrium quantity, equilibrium price remaining constant
(d) Increase in equilibrium price, equilibrium quantity remaining constant
Question 87.
When change in the quantity supplied is proportionate to the change in the price, the producer
is said to have ____________:
(a) perfectly elastic supply (b) relatively elastic supply
(c) unitary elastic supply (d) perfectly inelastic supply
Question 88.
Expansion in supply refers to a situation when the producers are willing to supply a:
(a) Larger quantity of the commodity at an increased price
(b) Larger quantity of the commodity due to increased taxation on that commodity
(c) Larger quantity of the commodity at the same price
(d) Larger quantity of the commodity at the decreased price
Question 89.
When supply is perfectly inelastic, elasticity of supply is equal to :
(a) +1 (b) 0 (c) .1 (d) Infinity
Question 90
If there is an improvement in the technology, _________:
(a) the supply curve shifts to the left (b) the supply curve shifts to the right
(c) quantity supplied increase (d) Both (b) and (c)
Question 91
If the price of apples rises from Rs. 30 per Kg to Rs. 40 per Kg and the supply increases from
240 Kg to 300 Kg/Elasticity of supply is :
(a) 0.75 (b) 0.67 (c) 00.67 (d) 00.77

Question 92
A horizontal supply curve parallel to the quantity axis implies that the elasticity of supply is :
(a) Zero (b) Infinite
(c) Equal to one (d) Greater than zero but less than one
Question 93
Supply refers to quantity supplied at a particular price for a particular period of time:
(a) True (b) False (c) Partly true (d) None
Question 94
Increase or decrease in supply means:
(a) Change in supply due to change in its own price
(b) Change in supply due to change in factors other than its own price
(c) Both of above
(d) None of above
Question 95
When Supply Curve shifts to the right there is _________ in Supply.
(a) an increase (b) expansion (c) contraction (d) decrease.
Question 96
Elasticity of supply is defined as responsiveness of quantity supplied of a good to change in
________.
(a) price of concerned good (b) price of substitute, good
(c) demand (d) none.
Question 97
The supply of the commodity implies?
(a) Total Output during a specified period
(b) Its total stock (c) Its stock available for sale
(d) Its Quantity Offered for sale at a particular price per unit of time
Question 98.
Supply of a commodity is a _________.
(a) stock concept (b) flow concept
(c) both stock and flow concept (d) whole sale concept

Question 99.
The price of mangoes increases from, Rs. 30 per kilogram to Rs. 40 per kilogram and the
supply increases from 240 kilograms the 300 kilograms. What will be the elasticity of supply
for mangoes?
(a) -0.67 (b) +0.67 (c) -0.77 (d) +0.77
Question 100.
If a 20% fall in price brings about a 10% fall in quantity supplied, in such a case elasticity of
supply will be equal to:
(a) 2.0 (b) 0.5 (c) 1.0 (d) 1.5
Question 101.
At a price of Rs. 25 per kg, the supply of a commodity is 10,000 kg per week. An increase in
its price to Rs. 30 per kg, increases the supply of the commodity to 12,000 kg per week. The
elasticity of supply will be:
(a) 0.75 (b) 1.00 (c) 1.50 (d) 1.75
Question 102.
Short run price is also called by the name of ___________.
(a) market price (b) showroom price
(c) maximum retail price (d) none of these.
Question 103.
If a 20% fall in the price brings about a 10% fall in the quantity supplied, then the elasticity
of supply will be equal to:
(a) 2.0 (b) 0.5 (c) 1.0 (d) 1.5
Question 104.
Elasticity of supply is greater than one when:
(a) Proportionate change in price is more than the proportionate change in quantity supplied
(b) Proportionate change in quantity supplied is more than the proportionate change in
price
(c) Change in price and quantity supplied are equal

Question 105.
Supply refers to which of the following?
(a) Total stock of the goods
(b) Stock of the goods available for sale
(c) Quantity of a good offered for sale at a particular price
(d) Quantity of a good actually sold.
Question 106
After reaching saturation point consumption of additional units of commodity causes
(a) Total utility to fall and marginal utility to increase
(b) Total and marginal utility both to increase
(c) otal utility to fall and marginal utility to become negative
(d) Total utility to become negative and marginal utility to fall.
Question 107
Elasticity of supply is greater than one when
(a) Proportionate change in price is greater than the proportionate change in quantity supplied
(b) Proportionate change in quantity supplied is more than the proportionate change in price
(c) Change In price and quantity supplied are equal
(d) All of the above.
Question 108
As the price of a commodity increases, normally, its supply:
(a) Decreases (b) Remains unchanged
(c) Increases (d) Cannot be determined.
Question 109
If equilibrium is present in\a market then it can be said that:
(a) The price of the product will tend to rise
(b) Quantity demanded equals quantity supplied
(c) Quantity demanded exceeds quantity supplied
(d) Quantity supplied exceeds quantity demanded.

Question 110
Supply is a _________ concept.
(a) flow (b) stock
(c) flow and stock, both (d) qualitative
Question 111.
Elasticity of supply is measured by dividing the percentage change in quantity supplied of a
good by:
(a) Percentage change in income
(b) Percentage change in price
(c) Percentage change in quantity demanded of goods
(d) Percentage change in taste preferences.
Question 112.
Increase in supply denotes a shift in the supply curve to the right. If there is an increase in
supply without change in demand, equilibrium price will _______ and the quantity demanded
will go up.
(a) fall (b) remain constant (c) increase (d) becomes zero.
Question 113.
Which among the following is not a determinant of supply?
(a) Price of the commodity concerned
(b) Prices of the factors of production
(c) tate of technology used in the production process
(d) Customs and the traditions in the society.
Question 114.
When the price of the commodity increases from Rs. 200 per unit to Rs. 250 per unit and
consequently the quantity supplied rises from 1000 units to 1100 units. What will be the
coefficient of elasticity of supply?
(a) 4.0 (b) 0.4 (c) 5.0 (d) 0.5
Question 115.
The Supply Curve shifts to the right because of:
(a) Improved technology (b) Increased price of factors of production
(c) Increased excise duty (d) All of the above.

Question 116
The supply of a good refers to
(a) Stock available for sale
(b) Total stock in the warehouse
(c) Actual production of the goods
(d) Quantity of the good offered for sale at a particular price per unit of time.
Answer
1 (d) 2 (b) 3 (c) 4 (a) 5 (b) 6 (c)
7 (a) 8 (a) 9 (b) 10 (b) 11 (b) 12 (b)
13 (a) 14 (c) 15 (c) 16 (a) 17 (a) 18 (b)
19 (b) 20 (a) 21 (a) 22 (b) 23 (c) 24 (a)
25 (a) 26 (b) 27 (b) 28 (d) 29 (c) 30 (a)
31 (d) 32 (a) 33 (d) 34 (c) 35 (c) 36 (b)
37 (b) 38 (c) 39 (c) 40 (c) 41 (d) 42 (a)
43 (c) 44 (d) 45 (b) 46 (a) 47 (b) 48 (b)
49 (a) 50 (d) 51 (c) 52 (d) 53 (b) 54 (b)
55 (b) 56 (c) 57 (c) 58 (a) 59 (b) 60 (a)
61 (b) 62 (b) 63 (a) 64 (c) 65 (b) 66 (b)
67 (d) 68 (b) 69 (a) 70 (a) 71 (b) 72 (a)
73 (c) 74 (b) 75 (c) 76 77 (a) 78 (c)
79 (d) 80 (a) 81 (a) 82 (a) 83 (a) 84 (c)
85 (b) 86 (c) 87 (c) 88 (a) 89 (b) 90 (b)
91 (a) 92 (b) 93 (a) 94 (b) 95 (a) 96 (a)
97 (d) 98 (b) 99 (d) 100 (b) 101 (b) 102 (a)
103 (b) 104 (b) 105 (c) 106 (c) 107 (b) 108 (c)
109 (b) 110 (a) 111 (b) 112 (a) 113 (d) 114 (b)
115 (a) 116 (d)

CLASSWORK
1. Supply is _______ concept.
a) Flow b) Stock
c) Flow and Stock d) None of the above.
2. When supply curves moves to right, it means:

a) Supply increases b) Supply decreases
c) Supply remains constant d) Supply expands
3. 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.
4. The quantity demanded of coffee increases by 2% when the price of tea Increases by 8%,
the cross elasticity of demand between two product are:
(a) -0.30 (b) +0.30
(c) +0.25 (d) -0.25
5. Goods which are inferior, with no close substitutes easily available and which occupy a
substantial place in consumer’s budget are called _______ goods.
a) Geffen b) Conspicuous
c) Speculative d) Prestige
6. Suppose the demand for automobile decreases due to increase in price of petrol both
the goods are:
a) Normal b) Substitute
c) Perishable d) Complementary
7. Marshall defined the concept of consumer surplus as the ________

a) Area covered in between the average revenue and marginal revenue curve
b) Difference between maximum amounts a person is willing to pay for a goods and
the amount he actually pays
c) Area inside the budget line
d) Difference between the minimum amounts a person is willing to pay for a good and
its market price

8. Of the following who developed the Delphi technique of Demand Forecasting?
a) Olaf Helmer b) David Richardson
c) Michael Porter d) J.M. Keynes
9. Indifference curve analysis is based on which approach?

a) Nominal b) Cardinal
c) Marginal d) Ordinal
10. Following table and answer question no

Quantity consumed Total utility
0 0
1 300
2 500
3 650
4 750
5 830
6 890
7 930
8 960
11. What is Marginal utility when consumption increases from 4 unit to 5 units?
a) 130 b) 80
c) 160 d) 100
12. What is Marginal utility when consumption increases from 7 units to 8 units?
a) 60 b) 100
c) 40 d) 30
13. He price of a commodity decreases from 200 to 120 per unit. If the price elasticity of
Demand for this commodity is 2 and the original quantity demanded is 60 units calculate
the new quantity demanded.
a) 48 units b) 100 units
c) 120 units d) 108 units

14. A group of people decreases or altogether stop consumption common product due to
which of the following effect?
a) Veblen effect b) Demonstration effect
c) Bandwagon effect d) Snob effect.
15. Highly price goods are consumed by Status seeking rich people to satisfy their need for
conspicuous consumption. This is called
a) Veblen effect (b) Demonstration effect
b) Snob effect c) Bandwagon effect
16. For which of the following product elasticity of demand is highly elastic?
a) Salt b) Jewelry
c) Lifesaving medicines d) Water.
17. The indifferences curve for two perfect complementary goods is

a) Z shaped b) L shaped
c) U shaped d) Straight line
18. Assume that wheat have (-) 0.4 as income elasticity by this we can say:
a) Wheat is normal good b) Wheat is an inferior good
c) Wheat is a superior good d) Wheat is a luxurious good
19. Demand for a commodity refers to:

a) Desire for the commodity
b) Need for the commodity
c) Quantity demanded of that commodity
d) Quantity of the commodity demanded at a certain price during any particular
period of time.
20. Suppose the price of movies seen at a theatre rises from 120 per person to 200 per
person. The theatre manager observed that the rise in prices has lead to a fall in
attendance at a given movie from 300 person to persons. What is the price elasticity of
demand movie?
a) 0.5 b) 0.8
c) 1.00 d) None of theses

21. In case of an interior good, the income elasticity of demand is
a) Positive b) Zero
c) Negative d) Infinite
22. For what type of goods does demand fall with a rise in income levels of households?
a) Inferior goods b) Substitutes
c) Luxuries d) Necessities
23. In case of Interior goods like bajra, a fall in its price tends to:
a) Make the demand remain constant
b) Reduce the demand
c) Increase the demand
d) Change the demand in an abnormal way
24. Movement along the same demand curve shows:

a) Expansion of demand
b) Expansion of supply
c) Expansion and contraction of demand
d) Increase and decrease of demand
25. The price of hot-dogs increases by 22% and the quantity demandect by 25% this indicates
that demand for hot dogs is:
a) Elastic b) Unitary elastic
c) Inelastic d) Perfectly elastic
26. The quantity demanded does not respond to price change and so the elasticity is:
a) Zero b) Infinite
c) One d) None
27. What is an Engels curve?

a) Another name of the demand
b) A curve showing both demand & supply curves
c) Curve named after Lord Engels
d) All

28. Which factor generally keeps the price-elasticity of demand for a good low:
a) Variety of uses for that goods
b) Its low price
c) Close substitutes for that goods
d) A high proportion of the consumer’s income spent on it
29. In case of a straight-line demand curve meeting the two axes, the price elasticity of
demand at the mid-point of the line would be:
a) 0 b) 1.5
c) 1 d) 2
30. An increase in demand can result from:

a) A decline in the market price
b) An increase in income
c) A reduction in the price of substitutes
d) An increase in the price of complements
31. Compute income elasticity if demand increases by 5% and income by 1%.

a) 5 b) 1/5
c) 0 d) None
32. For a commodity with a unitary elastic demand curve if the price of the commodity
rises, then the consumer’s total expenditure on this commodity would:
Increase For a commodity with a unitary elastic demand curve if the price of the
commodity rises, then the consumer’s total expenditure on this commodity would:
(a) Increase (b) Decrease
(c) Remains constant (d) Either increase or decrease
33. What is the value of elasticity of demand if the demand for the goods is perfectly
elastic?
a) 0 b) 1
c) Infinity d) Less than 0

34. What is the original price of a commodity when price elasticity is 0.71 and demand
changes form 20 units to 15 units and the new price is 10?
a) 15.4 b) 18
c) 20 d) 8
35. If the price of a complementary good rises:

a) Demand curve shifts to the left b) Demand curve shifts to the right
c) Demand curve moves downwards d) Demand curve moves upwards
36. Cross elasticity of demand in Monopoly market is:

a) Elastic b) Infinite
c) Zero d) One
37. What is income elasticity of demand, when income changes by 20% and demand changes
by 40%
a) 1/2 b) 2
c) 0.33 d) None
38. If demand is parallel to the X-axis, what will be the nature of elasticity?
a) Perfectly elastic b) Inelastic
c) Elastic d) Highly elastic
39. Law of demand is a ________

a) Quantitative statement b) Qualitative statement
c) Both (a) & (b) d) Hypothetical
40. The demand for which type of goods do not decrease with the increase in its price
a) Comforts b) Luxury
c) Necessities d) Capital goods
41. Increase in Price from 4 to 6 then decrease in demand from 15 units to 10 units. What
is the price elasticity? (Point elasticity)
(a) 0.66 (b) 5
(c) -1.5 (d) 2

42. Expansion & contraction of the demand curve occurs duo to:
a) Change in the price of commodity
b) Change in price of substitute or complementary goods
c) Change in income
d) None
43. The elasticity between two points:

a) Point elasticity b) Arc elasticity
c) Cross elasticity d) None
44. When price remains constant and quantity demanded changes, then the elasticity
demand will be:
a) Vertical to X-axis b) Horizontal to X-axis
c) Either (a) or (b) d) None
45. Demand of a commodity depends upon:

a) Price b) Income
c) Price of related good d) All of above
46. In case of substitute goods, cross elasticity is ______-

a) Negative b) Zero
c) Positive d) None of these
47. The prices of a commodity were increased from t 4 to 6. As a result, demand decreased
from 15 units to 10 units. What is the price elasticity?
a) 0.66 b) 0.33
c) 1.00 d) 1.5
48. Other things remaining constant, if decreases then what will be the effect?
a) Demand increases b) Demand decreases
c) Quantity demanded increases d) Quantity demand decreases.
49. When the price falls from t 6 to 4, the demand rises from 10 to 15 units. Calculate price
elasticity of demand.
a) 1.5 b) 3.5
c) 0.5 d) 2

50. Cross elasticity of perfect substitute is:
a) Zero b) Negative
c) Both (a) and (b) d) None
51. What is Engel’s Curve?

a) Curve showing three demand curve b) Named after Emst Engel
c) Both (a) and (b) d) None
52. A consumer spends Rs.80 on purchasing a commodity when its price is Rs 1 per unit and
spends Rs. 96 when the price is 2 per unit. Calculate the price elasticity of demand.
a) 0.2 b) 0.3
c) 0.4 d) 0.5
53. When the price of cylinder rises from 120 to 200, the de from 300 to 200. Calculate the
price elasticity of demand.
a) 1.00 b) 0.50
c) 5.00 d) None
54. If the price is decreased from 10 to 8 of a commodity but the quantity demanded
remains the same price elasticity is _______
a) 1 b) 0
c) 8 d) none
55. Demand for electricity power is elastic because

a) It is available at a very high price b) it is essential for life
c) It has many uses d) it has many substitutes
56. If the income of a person increases by 10% and his demanda increases by 30%, income
elasticity will be
a) Equal to one b) Less than one
c) More than one d) None of those
57. In the case of luxury goods, the income elasticity of demand will be ______
a) Zero b) Negative but greater than one
c) Positive but greater than one d) Positive but less than one

58. In the case of a straight line demand curve meeting two axes the price elasticity of
demand at the point where the curve meets y-axis would be _______
a) zero b) greater than one
c) less than one d) infinity
59. Calculate income elasticity for the household when the income of the household
increases by 10% and the demand for cars rises by 20%.
a) +2 (b) -2
(c) +5 (e) -5
60. 134. The commodity whose demand is associated with the name of Sir Robert Geffen?
a) Necessary good b) Luxury good
c) Inferior good d) Ordinary good
61. In expansion and contraction of demand.

a) demand curve remains unchanged b) demand curve changes
c) The slope of the demand d) both (a) & (c) above
62. Certain goods for which Quantity demanded decreases when Income Increases are called
a) superior goods b) inferior goods
c) prestige goods d) conspicuous goods
63. When the price falls by 5% and the demand in rises by 6%, then elasticity of demand is
a) elastic b) inelastic
c) unitary elastic d) zero
64. Cross elasticity of complementary goods is :

a) Positive b) Negative
c) Infinity d) None of those.
65. Demand of I-pod increases from 950 to 900 and income from 0,000 to 9,800. What is
income elasticity?
a) 0.53 b) 0.35
c) 0.43 d) None

66. Contraction of demand results due to
a) increase in the price of the goods
b) decrease in the no. of the producers
c) decrease in the output of the sellers
d) decrease in the price of the goods.
67. Bricks for houses is an example of which kind of demand?

a) Composite b) Competitive
c) Joint d) Derived
68. Normal goods have _______

a) zero income elasticity b) negative income elasticity
c) positive income elasticity d) infinite income elasticity
69. In which of the following cases demand for goods tends to be less elastic?
a) Good is necessary b) The time-period is shorter
c) Number of close substitutes is less d) All of the above
70. Which of the following elasticity of demand measures a movement along the demand
curve rather than a shift in the curve?
a) Income elasticity of demand b) Price elasticity of demand
c) Substitution elasticity of demand d) None of these.
71. If the price elasticity of demand is zero, the shape of the curve will be:
a) Horizontal b) Sloping downwards
c) Vertical d) None of these.
72. If a 20% fall in the price of a commodity brings about a 40% increase in its demand, then
the demand for the commodity will be termed as:
a) Inelastic b) Elastic
c) Highly elasticity d) Perfectly elastic
73. Expansion and contraction in demand are caused by:

a) Change in the income of the buyer
b) Change in the taste and preference of the buyer
c) Change in the price of commodity
d) Change in the price of the related goods.

74. A fall in the price of normal goods leads to:
a) A shift in the demand curve b) Fall in demand
c) A rise in consumer’s real income d) A fall in consumers real income.
75. A 10% increase in the price of tea results is an 8% increase in the demand for coffee.
Cross elasticity of demand will be:
a) 0.80 b) 1.25
c) 1.50 d) 1.80
76. When the total expenditure incurred by the consumers on a commodity due to a change
is its price remains the same, thon the elasticity of demand for that commodity will be:
a) Zero b) One
c) More than one d) Less than one

HOME WORK
1. “High priced goods consumed by status seeking rich people to satisfy their need for
conspicuous goods” is:
(a) Veblen effect (b) Bandwagon effect
(c) Snob effect (d) Demonstration effect
2. Cardinal approach is related to:

(a) Indifference curve (b) Equi marginal utility
(c) Law of diminishing returns (d) None of these.
3. An Increase in demand can result from:

(c) A reduction in the price of substitutes
(d) An increase in the price of complements.
4. Cross elasticity of perfect substitutes is

(a) Zero (b) Negative
(c) One (d) Infinity
5. Supply is a ________ concept.

(a) Flow (b) Stock
(c) Flow and stock, both (d) Qualitative
6. For what type of goods does demand fall with a rise in income levels households?
(a) Inferior goods (b) Substitutes
(c) Luxuries (d) Necessities
7. Which economist said that money is the measuring rod of utility?

(a) A.C Pigou (b) Marshall
(c) Adam Smith (d) Robbins
8. Elasticity between two points:

(a) Point elasticity (b) Arc elasticity
(c) Cross elasticity (d) None.

9. An indifference curve is L shaped, then two goods will be:
(a) Perfect substitute, goods (b) Substitute goods
(c) Perfect complementary goods (d) Complementary goods
10. The concept of consumer’s surplus is derived from:

(a) The law of diminishing marginal utility.
(b) The law of equal-marginal utility
(c) The law of diminishing returns
(d) Engel’s law
11. When supply curve shifts to the right there is:

(a) An increase (b) Expansion
(c) Contraction (d) Decrease
12. Short-run price is also called by the name of:

(a) Market price (b) Showroom price
(c) Maximum retail price (d) None of these.
13. When supply price increase in the short run, the profit of the producer ______-
(a) Increases (b) Decreases
(c) remains constant (d) Decreases marginally
14. When Price of a commodity increases what will be the effect on quantity Demanded?
(c) No change (d) None of these
15. According to the law of supply, change in supply is related to ?

(a) Price of goods (b) Price of related goods
(c) Factors of production (d) None of the above
16. In case of inferior goods, with a rise in the income of consumers price demand for
Geffen goods will?
(c) No change (d) None of the above

17. In case of necessaries, consumer surplus is?
(a) Infinite (b) Zero
(c) Equals to one (d) More than one
18. When the price of a commodity rises from 200 to 300 and Quan supply increases from
2000 to 5000 units, find the elasticity of supply.
(a) 3.0 (b) 2.5
(c) 0.3 (d) 3.5
19. From the following data below answer question 20 and 21-
Units TU MU
1 200
2 - 180
3 480 -
20. Total utility derived from 2nd unit?

(a) 380 (b) 20
(c) 100 (d) 280
21. Marginal utility of 3 unit is?

(a) 200 (b) 280
(c) 100 (d) 50
22. Which Equation is correct?
23. The scope of the indifference curve shows consumer equilibrium at the point where
_________
(a) Less than (b) More than
(c) Equal to (d) None of the above.

24. Which of the following is not the property of the indifference curve?
(a) IC is convex to the origin (b) IC scopes downwards from left to
(c) Two IC can touch each other (d) IC cannot touch either of the axes
25. In case of Normal goods, rise in price leads to ________?

(a) Fail in demand (b) Rise in demand
(c) No change (d) Initially rise then ultimately fall
26. Method of demand forecasting does not include?

(a) Mathematical method (b) Barometric method
(c) Expert opinion method (d) Statistical method
27. If the price of the commodity increases, what will be the effect on the Quantity
demanded?
(a) Decreases (b) Increases
(c) No change (d) Can’t say
28. An IC IC shows _______ MRS between the commodity?

(a) Increasing (b) Decreasing
(c) Constant (d) Zero
29. Forecasting of demand is the Art and Science of predicting?

(a) Actual demand for a product at the same future date
(b) Probable demand in future
(c) Total demand in future
(d) None of these.
30. Addition made to total utility refers to?

(a) Total utility (b) Average utility
(c) Marginal utility (d) All of the above.
31. The elasticity of supply is zero means?

(a) Perfectly inelastic (b) Perfectly elastic
(c) Imperfectly elastic (d) All of the above.

32. The Consumer is in equilibrium when the following condition is satisfied:
(a) Budget line is tangent to the lo curve
(b)
(c) Both (a) and
33. Which of the following statement is correct?

(a) Supply is inversely related to its cost of production
(b) Price and quantity demand of a good have a direct relationship
(c) Taxes and subsidy has no impact on the supply of the product
(d) Seasonal changes have no impact on the supply of the commodity
34. When the supply of a product is perfectly inelastic then the curve will be
(a) Parallel to Y-axis (b) Parallel to X-axis
(c) At the angle of 45° (d) Sloping upwards
35. In the case of there is an Inverse relationship between income and demand for a product.
(a) Substitute goods (b) Complementary goods
(c) Geffen Goods (d) None of the above
36. If maize has-0.30 as income elasticity of demand, then maize will be considered as
(a) Necessity (b) Inferior good
(c) Superior good (d) None
37. If price decreases from Rs.80 to Rs.60 and elasticity of demand is 1.25 then _______
(a) Demand increase by 25% (b) Demand decrease by 25%
(c) remains constant (d) None of the above
38. Which of the following is / are the conditions of theory of consumer surplus if the price
is same for all the units he purchased?
(a) The consumer gains extra utility or surplus
(b) Consumer surplus for the last commodity is zero
(c) Both (d) None

39. Which of the following is not the property of an indifference curves?
(a) Slopes downwards to the right (b) Always convex to the origin
(c) Intersects each other (d) Will not touch either of the axes
40. Which of the following is correct? ?

(a) Elasticity on the lower segment of demand curve is greater unity
(b) Elasticity on the upper segment of demand curve is lesser than
(c) Elasticity at the middle of the demand curve is equal to unity
(d) Elasticity decreases as one moves from the lower part d demand curve to upper
part
41. Which of the following will affect the demand for non-durable good
(a) Disposable Income (b) Price
(c) Demography (d) All of the above
42. When the price of tea decreases, people reduce the consumption of coffee. Then the
goods are
(a) Complementary (b) Substitutes
(c) Inferior goods (d) Normal goods
43. Which of the following relation is true with MU?

(a) When MU is positive, Total utility rises at a diminishing rate
(b) When marginal utility is zero, total utility is maximum
(c) When marginal utility is negative, total utility is diminishing
44. The price elasticity of demand at the midpoint of the straight line demand curvo under
point method is _______
(a) 0 (b) 1
(c) >1 (d) <1
45. Contraction of supply implies

(a) Decrease in cost of production (b) Decrease in price of the good concerned
(c) Decrease in price of related good (d) Increase in price of the good concerned

46. Perishable commodities will have
(a) Perfectly elastic curve (b) Perfectly inelastic curve
(c) Elastic (d) Inelastic
47. Supply is a concept.

(a) Flow (b) Stock
(c) Both (a) and (b) (d) None of the above
48. Total utility is also known as

(a) Total satiety (b) Aggregate satiety
(c) Full satiety (d) Half satiety
49. A vertical supply curve parallel to y axis implies the elasticity of supply is
(a) Zero (b) Infinity
(c) Equal to one (d) Greater than zero but less than infinity
50. Budget line is also called

(a) Price line (b) Iso cost line
(c) Iso-quant (d) None
51. The Quantity supplied of a goods or services is the amount that

(a) As actually bought during a given time period at given price.
(b) Producers wish, they could sell at higher price
(c) Producers plan to sell during a given time period at given price.
(d) People are willing to buy during a green their period at a given price.
52. Luxury goods have income elasticity

(a) Negative and less than 1 (b) Positive and greater than 1
(c) Zero (d) None
53. Percentage change quantity supplied is divided by _______ to obtain elasticity of supply
(a) Percentage decrease in price (b) Percentage change in price

54. If the price of the product is 20 per unit and if the price decreases by 5% as a result of
which quantity demanded increases by 10% find MR f old quantity is 10 units)
(a) 9 (b) 19
(c) 10 (d) 12
55. Law of demand relates to:

(a) Price only (b) Price and quantity demanded of
(c) Quantity demanded only (d) Supply
56. An in difference curve slopes down towards right since more of one commodity and of
another commodity result in
(a) Same level of satisfaction (b) Maximum satisfaction
(c) Greater satisfaction (d) Less satisfaction
57. Basicity for habitual goods is

(a) Perfectly elastic (b) Elastic
(c) Perfectly inelastic (d) Inelastic
58. Diminishing marginal returns for the first four units of variable inputs is oxhibited by the
total product sequences.
(a) 50,100,150,200 (b) 50,50,50,50
(c) 50,110,150,260 (d) 50,00,120,140
59. Demand forecasting by means of asking customer what they are going to buy comes
under:
(a) Survey of buyers intentions (b) Statistical method
(c) Grass roots method (d) Expert opinion method
60. When the price of petrol decreases, people reduce the consumption of diesel then the
goods are:
(a) Mixed (b) Complementary
(c) Superior (d) Substitutes

61. When price of apple is 120 per kg. Ram buys one kg. of apples at that price. Now if other
things remains the same but the price of apples falls to 90 per kg. Now Ram buys 2 kg
of apples. It is called as:
(a) Contraction of demand (b) Expansion of demand
(c) Market demand (d) Demand schedule
62. To know the base price and quantity, which method of elasticity is used?
(a) Arc Elasticity (b) Cross Elasticity
(c) Point Elasticity (d) Zero Elasticity
63. The price elasticity of demand for X is 1 and the average quantity demand of X is 90
units. If the price of X decreases from 300 to 180 per unit, calculate the now quantity
demand of X is:
(a) 126 units (b) 36 units
(c) 144 units (d) 120 units
64. If the quantity supply changes substantially changes in price of the good then it is:
(a) Relatively greater elastic supply (b) Relatively less elastic supply
(c) Unitary elastic (d) Perfect elastic
65. If Indifference curve is L shaped, means two goods will be

(a) Perfect complementary goods (b) Perfect substitute goods
(c) Perfect inferior goods (d) Perfect superior goods
66. Let us assume that in OY axis we have good A and on OX axis good B. If the price of good
B increases by t 1 but the price of good A remains constant and income also Romains
unchanged, the budget line will shift:
(a) Right on OY axis (b) Right on OX axis
(c) Left on OY axis (d) Left on OX axis
67. Purushotham wanted to buy laptop by paying ? 60,000 but the actual price is 55,000
then the consumer surplus is:
(a) 60,000 (b) 55,000
(c) 5,000 (d) 6,500

68. Effective demand depends on.
(a) Price (b) Cost
(c) Desire (d) Product.
69. Why does demand curve slopes downwards?

(a) Law of diminishing marginal cost (b) Arrival of old consumers
(c) Cost effect (d) Different users.
70. What is not a determinant of demand?

(a) Consumer’s expectations (b) Consumer’s tastes and preferences
(c) Income of the consumers d) Prices of unrelated goods.
71. What are exceptions to Law of Demand?

(a) Law of Diminishing Marginal Utility (b) Substitution effect
(c) Conspicuous goods (d) Different uses.
72. Identify the factor which generally keeps the price elasticity of a good law:
(a) Variety of uses for that 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.
73. In the case of inferior goods, the income elasticity of demand is:
(a) Positive (b) Zero
(c) Negative (d) Infinite
74. What is numerical measure of elasticity for “Perfectly Elastic?

(a) Zero (b) Infinity
(c) Greater than one and less than infinity (d) Less than one
75. The price of 1 kg. of tea is 30 demand at this price is 5 kg 1 coffee rises from 25 to 35
per kg. the quantity demanded of from 5kg. to 8 kg. Find out cross elasticity of tea?
(a) -1.5 (b) 1.5 (c) 3 (d) 1

TEST PAPER
1. What will be the price elasticity if the original price is 5, the original quantity is 8 units
and the changed price is 6, and the changed quantity is 4 units:
(a) 2.5 (b) 2.0
(c) 1.5 (d) 1.0
2. The original price of a commodity is 500 and quantity demanded of that is 20 kgs. If
the price rises to 750 and the quantity demanded falls to 15 kgs. The price elasticity of
demand will be:
(a) 0.25 (b) 0.50
(c) 1.00 (d) 1.50
3. The demand for factors of production is ________

(a) Fundamental demand (b) Derived demand
(c) Market demand (d) Joint demand.
4. Cross elasticity of demand between two perfect

(a) Very high (b) Very low
(c) Infinity (d) Zero
5. What is the elasticity between the midpoint and the upper point of a straight line
continuous demand curve?
(a) Infinite (b) Zero
(c) Greater than one (d) Less than one
6. The price of a Tiffin Box is 100 per unit and the quantity demanded in the market is
1,25,000 units. Company increased the price Due to this increase in price, the quantity
demanded decrease to 1,00,000 units. What will be the price elasticity of demand?
(a) 1.25 (b) 0.80
(c) 1.00 (d) None of the above.
7. The price of a commodity decreases from 10 to 8 and the quantity demanded of it

increases from 25 to 30 units, then the coefficient of price elasticity will be
(a) 1.00 (b) -1.00
(c) 1.5 (d) -1.5

8. Which statement is true about the law of demand?
(a) Income rises, demand rises (b) Price rises, demand rises
(c) Price falls, demand falls (d) Price falls, demand rises
9. Which of the following is not a determinant of demand?

(a) Consumer’s tastes and preferences (a) Ep=0 (c) Ep < 1
(b) Quality supplied of a commodity
(c) Income of the consumers
(d) Price of related goods
10. A demand curve parallel to the Y-axis implies:

(a) Ep=0 (b) Ep = 1
(c) Ep < 1 (d) Ep>1
11. Generally, when the income of a consumer increases, he goes in for superior goods,
leading to a fall in the demand for interior goods. It means, income elasticity of demand
for superior goods.
(a) Less than 1 (b) unitary
(c) zero (d) negative
12. If the quantity demanded of X commodity increases by 5% when the price of Y commodity
increases by 20%, the cross-price elasticity of demand between X and Y commodity will
be:
(a) -0.25 (b) 0.25
(c) -4.00 (d) 4.00
13. Which amongst the following is the right formula price elasticity of demand using ratio
method?
(a) (AQ/AP) × (P/O) (b) (AP/AO) x (Q/P)
(c) (AQ/AP) x (Q/P) (d) (AP/AO) x (1/P)
14. Straight line demand curve at the point of meeting the x-axis will indicate elasticity
coefficient Equal to
(a) one (b) infinity
(c) zero (d) more than one

15. Changes in the quantity demanded in response to changes of the same commodity is
called:
(a) change in demand (b) change in quantity demanded
(c) income demand (d) cross demand
16. Other things being equal, a fall in the price of complementary goods will cause the
______ the other to rise.
(a) price (b) supply
(c) demand (d) utility
17. A horizontal demand curve parallel to X-axis shows that the elasticity of demand is:
(a) zero (b) equal to unity
(c) greater than unity (d) infinite.
18. When the price of a commodity increases from t 8 to 9, its demand decreases by 10%.
The price elasticity of demand for the commodity is
(a) 0.8 (b) 0.9
(c) 1.0 (d) 1.1
19. Which one of the following is correct about the price elasticity of demand for a
commodity?
(a) It remains the same under all situations
(b) It has several degrees/nature
(c) It remains unaffected by the price of any other commodity
(d) It is an immeasurable concept
20. The supply of a good refers to:

(a) Actual production of goods (b) Total stock of goods
(c) Stock available for sale
(d) Amount of goods offered for sale at a particular price per unit of time
21. Increase or Decrease in Supply means:

(a) A shift in Supply curve (b) Movement along the same supply
(c) Both (a) and (b) (d) Neither (a) or (b)

22. If the supply curve is Perfectly Inelastic, the supply curve
(a) Vertical (b) Horizontal
(c) Upward sloping (d) Downward sloping
23. When supply price increase in the short run, the profit of the producer
(c) remains constant (d) decreases marginally
24. A change in the supply of a commodity along with the same supply curve may occur due
to:
(a) Change in the price of the commodity
(b) Change in the prices of related goods
(c) Change in future expectations about the price of the goods
(d) Change in the cost of inputs
25. What is the elasticity of supply, when price changes from t 15 to 12 and supply change
from 6 units to 5 units?
(a) 0.77 (b) 0.87
(c) 0.833 (d) 0.58
26. A perfectly inelastic supply curve will be:

(a) Parallel to X-axis (b) Parallel to Y-axis
(c) Downward sloping (d) None of these
27. If the supply of a commodity is perfectly elastic, an increase in demand will result in
(a) Decrease in both the price and quantity at equilibrium
(b) Increase in both the price and quantity at equilibrium
(c) Increase in equilibrium quantity, equilibrium price remaining constant
(d) Increase in equilibrium price, equilibrium quantity remaining constant
28. When the change in the quantity supplied is proportionate to the change in the price,
the producer is said to have ______
(a) perfectly elastic supply (b) relatively elastic supply
(c) unitary elastic supply (d) perfectly inelastic supply

29. Expansion in supply refers to a situation when the producers are willing to supply a:
(a) Larger quantity of the commodity at an increased price
(b) Larger quantity of the commodity due to increased taxation on that commodity
(c) Larger quantity of the commodity at the same price
(d) Larger quantity of the commodity at the decreased price
30. When supply is perfectly inelastic, elasticity of supply is equal to:

(a) +1 (b) 0
(c) .1 (d) Infinity

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CAFC | CA Inter | CA Final

Ednovate For subject

This Enriching journey will be sometimes Tiring, sometimes Lengthy, sometimes

Through this book and lectures we intend to provide you with:

Wish you all the Best

4. PRICE DETERMINATION IN DIFFERENT MARKTER 4.1 to 4.116

5. BUSINESS CYCLE 5.1 to 5.35

Basic premise of economics

1.1 INTRODUCTION TO MICRO ECONOMICS

Main points of wealth definition:

Welfare/Material well-being/Neo-classical definition

INTRODUCTION TO MICRO ECONOMICS 1.2

Methodology of studying economics

1.3 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.4

Nature of Business Economics

1.5 INTRODUCTION TO MICRO ECONOMICS

Business Economics is generally normative or prescriptive in nature. It suggests the

INTRODUCTION TO MICRO ECONOMICS 1.6

Now we will see both of them one by one –

1.7 INTRODUCTION TO MICRO ECONOMICS

2. Macroeconomics applied to External or Environmental Issues

INTRODUCTION TO MICRO ECONOMICS 1.8

BASIC PROBLEMS OF AN ECONOMY

1.9 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.10

2.1 CAPITALIST ECONOMY

1.11 INTRODUCTION TO MICRO ECONOMICS

2.1.0 How do capitalist economies solve their central problems?

INTRODUCTION TO MICRO ECONOMICS 1.12

2.1.1 Merits of Capitalist Economy

1.13 INTRODUCTION TO MICRO ECONOMICS

2.1.2 Demerits of Capitalism

INTRODUCTION TO MICRO ECONOMICS 1.14

2.2 SOCIALIST ECONOMY

1.15 INTRODUCTION TO MICRO ECONOMICS

(iv) Relatively Equal Income Distribution: A relative equality of income is an important

2.2.0 Merits of Socialism

2. Rapid and balanced economic development is possible in a socialist economy as the

INTRODUCTION TO MICRO ECONOMICS 1.16

4. In a planned economy, unemployment is minimised, business fluctuations are eliminated

2.2.1 Demerits of Socialism

1.17 INTRODUCTION TO MICRO ECONOMICS

2.3.0 Features of Mixed Economy

In fact, in a mixed economy, there are three sectors of industries:

INTRODUCTION TO MICRO ECONOMICS 1.18

1.19 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.20

1.21 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.22

1.23 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.24

1.25 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.26

1.27 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.28

1.29 INTRODUCTION TO MICRO ECONOMICS

INTRODUCTION TO MICRO ECONOMICS 1.30