Wa0024.

INDEX
SR. NO. PARTICULARS PG. NO.
CHAPTER 1: NATURE & SCOPE OF BUSINESS ECONOMICS
UNIT 1: INTRODUCTION 1-8
UNIT II: BASIC PROBLEMS OF AN ECONOMY AND ROLE OF PRICE

MECHANISM 9-20
CHAPTER 2: THEORY OF DEMAND AND SUPPLY
UNIT 1: THEORY OF DEMAND 21-41
UNIT II ELASTICITY OF DEMAND 42-96
UNIT III: THEORY OF CONSUMER BEHAVIOUR 97-129
UNIT IV: THEORY OF SUPPLY 130-134
UNIT V ELASTICITY OF SUPPLY 135-141
CHAPTER 3: THEORY OF PRODUCTION AND COST
UNIT 1: THEORY OF PRODUCTION 142-169
UNIT II: THEORY OF COST 170-194
CHAPTER 4: PRICE DETERMINATION IN DIFFERENT MARKETS
UNIT 1: MEANING AND TYPES OF MARKETS 195-207
UNIT II: DETERMINATION OF PRICES 208-214
UNIT III: PRICE OUTPUT DETERMINATION UNDER DIFFERENT 215-257

MARKET FORMS
CHAPTER 5: BUSINESS CYCLES 258-273

Business Economics
Chapter -1
Unit-1
NATURE AND SCOPE OF BUSINESS ECONOMICS
INTRODUCTION
About Economics
 Economics is the study of the processes by
which the relatively scarce resources are
allocated to satisfy the competing unlimited
wants of human beings in a society. Economics came from
 Economics is, thus, the study of how we work Greek word “Oikonomia”
together to transform the scarce resources which means
into goods and services to satisfy the most “households”
pressing of our infinite wants and how we
distribute these goods and services among
ourselves.
 General Definition
Business Economics may be defined as the use of economic analysis to make business decisions
involving the best use of an organization’s scarce resources.
 Technical Definition :
 Joel Dean defined Business Economics in terms of the use of economic
analysis in the formulation of business policies. Defined by
“Joel Dean”
 Business Economics is essentially a component of Applied Economics
as it includes application of selected quantitative techniques such as
Linear programming
Regression analysis
Capital budgeting
Break even analysis
Cost analysis.
Nature & Scope of Business Economics 1

Business Economics
NATURE OF BUSINESS ECONOMICS
Micro Economics Macro Economics
Micro Economics
 Micro Economics is basically the study of the behaviour of different individuals and
organizations within an economic system.
 Microeconomics examines how the individual units (consumers or firms) make decisions as to
how to efficiently allocate their scarce resources.
 Here, the focus is on a small number of or group of units rather than all the units combined, and
therefore, it does not explain what is happening in the wider economic environment.
What we study in Micro Economics

(i) Product pricing
(ii) Consumer behaviour
(iii) Factor pricing
(iv) The economic conditions of a
section of people
(v) Behaviour of firms
(vi) Location of industry
Macro Economics
 In Macro-Economics, we study the behaviour of the large economic aggregates, such as,
Overall levels of output and employment
Total consumption
Total saving and total investment
Exports
Imports
Foreign investment
2 Nature & Scope of Business Economics

Business Economics
What we study in Macro Economics

(i) National Income and National Output
(ii) The general price level and interest rates
(iii) Balance of trade and balance of payments
(iv) External value of currency
(v) The overall level of savings and investment
(vi) The level of employment and rate of
economic growth.
Nature of Business Economics
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.
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.
Business Economics
 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
 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
Econometrics.
Normative in Nature
Economic theory has developed along two lines –
Positive Normative
Business Economics
POSITIVE ECONOMICS NORMATIVE ECONOMICS

 Positive Economics deal with  Normative Economics deal with
What are How are they What ought to How the economic
economic actually solved be economic problem should be
problems problem solved
 It does not give value judgments, it is
neutral between ends.  It gives value judgements
 It can be verified with Actual data.
 Example : India is overpopulated  It cannot be verified with Actual data.
 Example : India should not be overpopulated
 It is based upon facts , thus not  It is based on Individual opinion and
suggestive. therefore suggestive.
SCOPE OF BUSINESS ECONOMICS
Scope of Business Economics 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:
Internal issues or operational issues External issues or environmental issues
(this can be solved using Micro Economics) (this can be solved using Macro Economics)
I 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.

Business Economics
Demand Analysis and Forecasting
Production and Cost Analysis
Inventory Management
Market Structure and Pricing Policies
Resource Allocation
Theory of Capital and Investment Decisions
Profit Analysis
Risk and Uncertainty Analysis
I(a) 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
Preferences
 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.

Business Economics
I(b) 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.
I(c) 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.
I(d) 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.
I(e) 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.
I(f) 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.
Business Economics
I(g) 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.
I(h) 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.
II 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 Economics
Chapter - 1
Unit - II
BASIC PROBLEMS OF AN ECONOMY AND ROLE OF
PRICE MECHANISM
What to
Produce ?
What provisios
How to are to be made
Central
produce ? for economic
Economics
growth ?
Problems
For whom to
produce?
Basic Problems of An Economy and Role of Price Mechanism 9

Business Economics
WHAT TO PRODUCE
Selection of Goods and Service to be produced

 This problem involves
Quantity to be produced for each selected commodity.
 Problems of what to produce has two impacts
What possible commodities to produce How much to produce
An economy has to decide which goods It involves decisions

are to be produced regarding quantity to be produced
Consumer Capital of Consumer Goods

Goods Goods
Capital Goods
Rice, Wheat, Machinery
Clothes Equipment
HOW TO PRODUCE
 This problem refers to selection of technique to be used for production of goods and services.
“Technique”
Particularly means combination of inputs
to be used.
10 Basic Problems of An Economy and Role of Price Mechanism

Business Economics
Types Of Techniques
Capital Intensive Technique

Labour Intensive Technique
More Capital and Less labour is used.

More labour and less Capital is
used.
FOR WHOM TO PRODUCE
 This problem relates to distribution of produced goods and services among individual within the
country i.e.
Selection of category of people Whether the goods are produced for

who will ultimately consume the  More Poor less Rich
goods.  More Rich less Poor
 Capacity of people to pay for Goods depends upon there level of income it means problem is
concerned about distribution of income
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, it if 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 standard 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 process.

Business Economics
What is Economic System

 An economic system refers to the sum
total of arrangements for the production
and distribution of goods and services in
a society.
 It is defined as the sum of the total
devices which give effect to economic
choice.
 It includes various individuals and
economic institutions.
TYPES OF ECONOMIC SYSTEM
Capitalist Economy Socialist Economy Mixed Economy
Means Of Production Means Of Production Both Public and Private

sector allotted Respective
Owned Controlled Operated Owned Controlled Operated Roles for Solving economic
problems
By Government
By Private Sector
CAPITALIST ECONOMY
 It is an economic system in which all means of production are owned and controlled by private
individuals for profit.
Private property is the mainstay of capitalism
Profit motive is its driving force.
 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.
‘

Business Economics
CHARACTERSTIC OF CAPITALIST ECONOMY
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.
 Consumers have unbridled freedom to choose the goods and services Consumer sovereignty
which they would consume. means that buyers
 Therefore, producers have to produce goods and services which are ultimately determine
which goods and services
preferred by the consumers. In other words, based on the purchases will be produced and in
they make, consumers decide how the economy's limited resources what quantities
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.

Business Economics
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.
HOW CAPITALIST ECONOMY SOLVE CENTRAL PROBLEM ?
Central Problems are solved in following manner
What to produce How to produce For whom to produce
Produce only those goods that can be If labour If labour If labour not
Goods are distributed
sold profitability either in is cheap is costly on basis of needs but on
basis of income
use labour use capital
Domestic Foreign Intensive Intensive
Market Market Method Technique
MERITS OF CAPITALIST ECONOMY
 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.
 The existence of private property and the driving force of profit motive result in greater efficiency
and incentive to work.
 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.
 Resources are used in activities in which they are most productive.
 This results in optimum allocation of the available productive resources of the economy.
 There is usually high degree of operative efficiency under the capitalist system.
 Cost of production is minimized as every producer tries to maximize his profit by employing
methods of production which are cost-effective.
 Capitalist system offer incentives for efficient economic decisions and their implementation.
 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.
Business Economics
 This also results in higher standard of living.
 Capitalism offers incentives for innovation and technological progress.
 The country as a whole benefits through growth of business talents, development of research, etc.
 Capitalism preserves fundamental rights such as
right to freedom
right to private property.
 Therefore, the participants enjoy maximum amount of autonomy and freedom.

 Capitalism rewards men of initiative and enterprise and punishes the imprudent and inefficient.
 Capitalism usually functions in a democratic framework.
 The capitalist set up encourages enterprise and risk taking and emergence of an entrepreneurial
class willing to take risks.
DEMERITS OF CAPITALISM
 There is vast economic inequality and social injustice under capitalism.

 Inequalities Reduce the aggregate economic welfare of the society as a whole
Split the society into two classes namely the ‘haves’ and the ‘have-nots’,
Sowing the seeds of social unrest and class conflict.
 Under capitalism, there is precedence of property rights over human rights.

 Economic inequalities lead to wide differences in economic opportunities and perpetuate unfairness
in the society.
 The capitalist system ignores human welfare because, under a capitalist set up, the aim is profit
and not the welfare of the people.
 Due to income inequality, the pattern of demand does not represent the real needs of the society.
 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.
 Consumer sovereignty is a myth as consumers often become victims of exploitation. Excessive
competition and profit motive work against consumer welfare.
 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.
 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.
 Due to unplanned production, economic instability in terms of over production, economic depression,
unemployment etc., is very common under capitalism.

Business Economics
 These result in a lot of human misery.

 There is enormous waste of productive resources as firms spend huge amounts of money on
advertisement and sales promotion activities.
 Capitalism leads to the formation of monopolies as large firms may be able to drive out small ones
by fair or foul means.
 Excessive materialism as well as conspicuous and unethical consumption leads to environmental
degradation.
SOCIALIST ECONOMY
 In this economy, the material means of production

Propounded by Karl
Marx and Frederic
Factories are owned by the whole community represented Engels
Capital by the State.
Mines
 All members are entitled to get benefit from the fruits of such socialised planned production on the
basis of equal rights.
 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.
Also called as
 Command Economy
 Centrally Planned
Economy

Business Economics
Some important characteristics of this economy are:
(i) Collective Ownership:
 There is collective ownership of all means of production except Small farms which may
Workshops remain in
Trading firms private hands.
(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.

Business Economics
MERITS OF SOCIALISM
 Equitable distribution of wealth and income and provision of equal opportunities for all help to
maintain economic and social justice.
 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.
 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.
 In a planned economy, unemployment is minimised, business fluctuations are eliminated and
stability is brought about and maintained.
 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.
 Socialism ensures right to work and minimum standard of living to all people.
 Under socialism, the labourers and consumers are protected from exploitation by the employers and
monopolies respectively.
 There is provision of comprehensive social security under socialism and this makes citizens feel
secure.
DEMERITS OF SOCIALISM
 Socialism involves the predominance of bureaucracy and the resulting inefficiency and delays.
Moreover, there may also be corruption, red tapism, favouritism, etc.
 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.
 Socialism takes away the basic rights such as the right of private property.
 It will not provide necessary incentives to hard work in the form of profit.
 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.
 State monopolies created by socialism will sometimes become uncontrollable.
 This will become more difficult to regulate than the private monopolies under capitalism
 Under socialism, the consumers have limited freedom of choice.
 Therefore, what the state produces has to be accepted by the consumers.
 No importance is given to personal efficiency and productivity.
 Labourers are not rewarded according to their efficiency.
 This acts as a disincentive to work.
 The extreme form of socialism is not at all practicable.
Business Economics
THE MIXED ECONOMY
 The mixed economic system depends on both Markets for allocation of

Governments resources.
 In a mixed economy, the aim is to develop a system which tries to include the best features of both
the
Controlled Economy
Market economy
 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.
 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.
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:
Private Sector Public Sector Combined Sector
(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.
Business Economics
(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.
DEMERITS OF MIXED ECONOMY
 Mixed economy, sometimes, is characterised by excessive controls by the state resulting in
Reduced incentives
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
Poor performance of the public sector.

Business Economics
Chapter – 2
Unit – I
THEORY OF DEMAND
MEANING OF DEMAND
willing
The term ‘demand’ refers to the quantity of a good or service that buyers are
to purchase at various prices during a given period of time. able
Desire / Wish
There is a difference between
Demand
For Example : You have a desire/wish to buy cars one is Baleno and the other is AUDI
Q 7.
Price of the two Cars are Baleno = Rs 10,00,000
Audi Q 7=Rs 95,00,000
But you have purchasing power to buy only Baleno and not Q 7
So Baleno will become My demand and for Q 7 it will only be My wish / desire.
Name Of
Desire / Wish
Purchasing
Demand Desire
Car Power
+
Audi Q 7  - - Purchasing Power
Baleno    Demand
Theory of Demand 21
Business Economics
MEANING OF EFFECTIVE DEMAND
The effective demand for a thing

depends on
(i) Desire
+
(ii) Means to purchase
+
(iii) Willingness to use those means
for that purchase
The quantity demanded is a flow.
What is Flow ?
The quantity demanded is
always expressed at a given
price. At different prices To Measure something over a period of
different quantities of a time.
commodity are generally
Example: one thousand dozens of oranges
demanded.
per day, seven thousand dozens of
oranges per week and so on.
22 Theory of Demand
Business Economics
WHAT DETERMINES DEMAND?
(i) Price of the commodity:

When price of commodity increases its Quantity demand This happens
decreases. because of
When price of commodity decreases its Quantity demand income and
increases. substitution
effects
P Q.D.
P Q.D. Keeping other factor constant
(ii) Price of related commodities:
Substitute Goods Complimentary Goods
Substitute Goods are those which Complimentary goods are those goods
Are used in placed of each other for which jointly satisfy a particular want.
satisfaction of particular want.
Bottle Ink Pen
Pepsodent Colgate` Ink Bottle Ink Pen

P Q.D. P Q.D. P Q.D. P Q.D.
P Q.D. P Q.D. P Q.D. P Q.D.
If price of substitute goods (Colgate) If price of complimentary good (Ink

Increase the demand of substitute pen) increases then demand of
Good falls and hence our good in complimentary good falls, so demand
Question increases and vice versa for good in question also falls and vice versa
Theory of Demand 23
Business Economics
(iii) Disposable Income of the consumer:

1. The purchasing power of a buyer is determined by the level of his disposable income.
2. Other things being equal, the demand for a commodity depends upon the disposable income of
the potential purchasers.
Increase in disposable income tends to A decrease in disposable income generally

increase the demand for particular types lowers the quantity demanded at all possible
of goods and services at any given price. prices.
Income Demand
Income Demand
Normal Goods V/S Inferior Goods
Normal Goods Inferior Goods

 Normal goods are those that are demanded  There are some commodities for which
in increasing quantities as consumers’ the quantity demanded rises only up
income increases. to a certain level of income and
 Most goods and services fall under the decreases with an increase in money
category of normal goods. income beyond this level.
 Household furniture, clothing, automobiles,  These goods are called inferior goods.
consumer durables and semi durables etc.
fall in this category.
 When income is reduced (for example due
to recession), demand for normal goods Demand for luxury goods and
falls.
prestige goods arise beyond a
certain level of consumers’
income and keep rising as

income increases.
24 Theory of Demand
Business Economics
Essential consumer goods such as

food grains, fuel, cooking oil,
necessary clothing etc. satisfy the Business managers should be
basic necessities of life and are assessing the current as well as
consumed by all individuals in a future demand for their products
society. A change in consumers’ they should also recognize the
income, although will cause an movements in the macro economic
increase in demand for these variables that affect buyers’
necessities, but this increase will be incomes.
less than proportionate to the
increase in income.
(iv) Tastes and Preferences of Buyers:

 If taste and preference goes in favour of a good then its demand increases.
 If taste and preference goes against the favour of a good its demand decreases.
Example : If T & P goes in favour of sneakers then its demand increases.
If T & P goes against favour of sneakers then its demand decreases.
External Effects on Utility
Demonstration BandWagon Veblen Snob

Effect Effect Effect Effect
(a) Demonsteration Effect :

 Desire of people to emulate the consumption behaviour of
others.
 People buy or have things because they see that other people to “James
have them. Dusenberry”
 For example, an individual’s demand for cell phone may be
affected by his seeing a new model of cell phone in his
neighbour’s or friend’s house, either because he likes what he
sees or because he figures out that if his neighbour or friend can have it, he too can.
Theory of Demand 25
Business Economics
(b) BandWagon Effect :

 BandWagon Effect refers to extent to which demand for commodity is increased due to the
fact that others are also consuming the same commodity.
(c) Snob Effect :

 Snob effect refers to the Extent to which the demand of Consumer goods is decreasing owing
to fact that others are also consuming the same commodity.
 When one wants to Exclusive
Be different
Dissociate himself from command herd.
 For example, when a product becomes common among all, some people decrease or altogether
stop its consumption.
The distinction between the snob effect and the Veblen effect is that
Snob is a function of consumption Veblen is function of price Of others
(d) Veblen Effect :

 Highly priced goods are consumed by status
seeking rich people to satisfy there needs for
American Economist
conspicuous consumption.
 For Example : Car / Jewellery
“Throstein Veblen
(v) Consumers’ Expectations :

Consumers’ expectations regarding future prices, income, supply conditions etc. influence current
demand.
If the consumers expect If they expect a fall in price

 Increase in future prices fall in income
 Increase in income they will postpone their purchases of
 Shortages in supply nonessential commodities and therefore,
more quantities will be demanded. the current demand for them will fall.
26 Theory of Demand
Business Economics
(vi) Other Factors:
Size of Age The level of Consumer- Government

Population Distribution of National credit facility Policies and
Population Income and its and interest Regulations
Distribution rates
(a) Size of Population: Generally, larger the size of population of a country or a region, larger would be
the number of buyers and the quantity demanded in the market would be higher at every price.
The opposite is the case when population is less.
Size of Population No. of Buyer Quantity Demanded (At every Price)

Size of Population No. of Buyer Quantity Demanded (At every Price)
(b) Age Distribution of Population:
If a larger proportion of people

If the population consists of more
belong to older age groups relative to
of children, demand for toys, baby
younger age groups, there will be
foods, toffees, etc. will be more.
increased demand for spectacles,
walking sticks, etc and less demand
for children’s books.
Likewise, if there is migration from

rural areas to urban areas, there will
be decrease in demand for goods and
services in rural areas.
Theory of Demand 27
Business Economics
(c) The level of National Income and its Distribution:
National Income Demand for Normal Goods & Services
 The wealth of a country may be unevenly  If the distribution of income is

distributed so that there are a few very more equal, then the propensity
rich people while the majority is very poor. to consume of the country as a
 Under such conditions, the propensity to whole will be relatively high
consume of the country will be relatively less, indicating higher demand for
 Because the propensity to consume of the goods.
rich people is less than that of the poor
people.
 Consequently, the demand for consumer
goods will be comparatively less.
(d) Consumer-credit facility and interest rates:

 Availability of credit facilities induces people to purchase more than what their current
incomes permit them.
 Credit facilities mostly determine the demand for investment and for durable goods which are
expensive and require bulk payments at the time of purchase.
 Low rates of interest encourage people to borrow and therefore demand will be more.
Credit fascility Demand ROI Demand

Credit fascility Demand ROI Demand
(e) Government policies and regulations: The governments influence demand through its
Taxation
Purchases
Expenditure
Subsidy policies.
Taxes Price Q.D. Taxes Price Q.D.
28 Theory of Demand
Business Economics
Point To Be Noted
Apart from above, factors such as
 Total bans, restrictions and  Weather conditions

higher taxes may be used by  Business conditions
government to restrict the  Stage of business cycle
demand for socially undesirable  Wealth Also play
goods and services.  Levels of education
important
 Government’s policy on  Marital status
international trade also will roles in
 Socioeconomic class
affect the domestic demand for influencing
 Group membership
goods and services.
 Habits of the consumer demand.
 Social customs and
conventions
 Salesmanship
 Advertisements
THE DEMAND FUNCTION
1. The demand function states in equation form, the relationship between the
Demand for a product Its determinants

(the dependent variable) (the independent or explanatory variables).
2. Any other factors that are not explicitly listed in the demand function are assumed to be
irrelevant or held constant.
Qx = f (PX, Y, Pr,)
Where QX is the quantity demanded of product X
PX is the price of the commodity
Y is the money income of the consumer
Pr is the price of related goods
Theory of Demand 29
Business Economics
THE LAW OF DEMAND
 The law of demand is one of the most important laws

of economic theory.
 The law states the nature of relationship between the Prof. Alfred
quantity demanded of a product and its price. Marshall
 Law of demand states Inverse relationship between
price and Quantity demanded
 Law of demand states that
“When Price of commodity rises its Quantity demanded falls and

when Price of commodity falls its Quantity demanded rises”. Keeping
other factors constant (Ceteris Paribus)
Which Factors to be
Assumed Constant ??
All Factors Discussed

Above
DEMAND SCHEDULE
Demand Schedule is tabular statement showing various Quantity of commodity demanded at

various level of prices during given period of time.
Price Q.D.
1 50
2 40
3 30
4 20
30 Theory of Demand
Business Economics
THE DEMAND CURVE
1. A demand curve is a graphical presentation of the demand schedule.
The vertical axis of the graph measures The horizontal axis measures the quantity of
the price per unit of the good. the good, which is usually expressed in some
physical measure per time period.
2. By plotting each pair of values as a point on a graph and joining the resulting points, we get the
individual’s demand curve for a commodity.
3. It shows the relationship between the quantities of a good that buyers are willing to buy and the
price of the good.
Demand Curve for Ice Cream
4. The negative or downward slope indicates that the quantity demanded increases as the price falls.
5. Consumers are usually ready to buy more if the price is lower. Briefly put, more of a good will be
purchased at lower prices.
6. Thus, the downward sloping demand curve is in accordance with the law of demand which, as
stated above, describes an inverse price-demand relationship.
SLOPE OF A DEMAND CURVE
 The slope of a demand curve is - ∆P / ∆Q
(i.e the change along the vertical axis divided by the change
along the horizontal axis).
Theory of Demand 31
Business Economics
 The negative sign of this slope is consistent with the law of demand.
Point To Remember
 The demand curve for a good does not have to
be linear or a straight line;
 it can be curvilinear- meaning its slope may
vary along the curve.
 If the change in quantity demanded does not
follow a constant proportion, then the demand
curve will be non linear.
 However, linear demand curves provide a
convenient tool for analysis.
MARKET DEMAND SCHEDULE
 Tabular representation of price and quantity demanded by all consumers in the market.
 The market demand for a commodity thus depends on
All the factors that determine the individual’s demand

In addition, on the number of buyers of the commodity in the market.
 When we add up the various quantities demanded by different consumers in the market, we
can obtain the market demand schedule.
Market Demand Schedule of Apple (per day)
Quantity Demanded by
Price of Apple in (Rs) A B Total Market Demand
0 3 2 5
10 2 1 3
20 1 0 1
30 0 0 0
32 Theory of Demand
Business Economics
The Market Demand Curve for Good X
THE MARKET DEMAND CURVE
 It is Graphic Representation of Market Demand Schedule.

 The market demand curve is obtained by horizontal summation of all individual demand
curves.
 When there are more than two consumers in the market for some good, the same principle
continues to apply and the market demand curve would be the horizontal summation of all the
market participants' individual demand curves.
 The market demand curve, like the individual demand curve, slopes downwards to the right
because it is nothing but the lateral summation of individual demand curves.
Theory of Demand 33
Business Economics
WHY DOES DEMAND CURVE SLOPES DOWNWARD ??
(1) Price Effect of a fall in price: The price effect which indicates the way the consumer's purchases
of good X change, when its price changes, is the sum of its two components namely: substitution
effect and income effect.
(a) Substitution Effect: Hicks and Allen

 The substitution effect describes the change in demand for have explained
a product when its relative price changes. the law in terms
 When the price of a commodity falls, the price ratio of substitution
between items change and it becomes relatively cheaper effect and
than other commodities. income effect.
 Assuming that the prices of all other commodities remain constant, it induces consumers to
substitute the commodity whose price has fallen for other commodities which have now
become relatively expensive.
 When the price falls, the substitution effect is always positive; The result is that the
i.e it will always cause more to be demanded. The substitution total demand for the
effect will be stronger when: commodity whose price
 the goods are closer substitutes has fallen increases.
 there is lower cost of switching to the substitute good This is called
 there is lower inconvenience while switching to the substitution effect.
substitute good
(b) Income Effect: The increase in demand on account of an increase in real income is known as
income effect. When the price of a commodity falls, the consumer can buy the same quantity of
the commodity with lesser money or he can buy more of the same commodity with the same
amount of money.
A part or whole of the resulting

As a result of fall in the price of increase in real income can now be
the commodity, consumer’s real used to buy more of the commodity in
question, given that the good is
income or purchasing power
normal. Therefore, the demand for that
increases. commodity (whose price has fallen)
increases.
34 Theory of Demand
Business Economics
(2) Utility maximising behaviour of Consumers: A consumer is in equilibrium (i.e. maximises his
satisfaction) when
The marginal utility of the commodity = Its Price
[MUX = PX]
 According to Marshall, the consumer has diminishing utility for each additional unit of a
commodity and therefore, he will be willing to pay only less for each additional unit.
 A rational consumer will not pay more for lesser satisfaction. He is induced to buy additional
units only when the prices are lower.
Expectations
 In the case of inferior goods, the income effect
works in the opposite direction to the
substitution effect.
 In the case of inferior goods, the expansion in
demand due to a price fall will take place only
if the substitution effect outweighs the income
effect.
 The operation of diminishing marginal utility and the act of the consumer to equalize the
utility of the commodity with its price result in a downward sloping demand curve.
(3) Arrival of new consumers:

 When the price of a commodity falls, more consumers start buying it because some of those
who could not afford to buy it earlier may now be able to buy it.
 This raises the number of consumers of a commodity at a lower price and hence the demand
for the commodity in question increases.
(4) Different uses:

 Many commodities have multiple uses.
 Price of such commodities are high Put to limited uses only.
 The increase in the number of uses consequent to a fall in price make the buyer demand more
of such commodities making the demand curve slope downwards.
For example: Electricity
Theory of Demand 35
Business Economics
Exceptions to the Law of Demand
Incomplete
Conspicuous Conspicuous Speculative
Information
Goods Necessities Goods
and Irrational
behaviour:
Future Demand for
Giffen
Expectation Necessaries
Goods about Prices
(i) Conspicuous Goods:

 Articles of prestige value Are used by the rich people as status symbol for
 Snob appeal enhancing their social prestige or /and for
 Articles of conspicuous consumption displaying wealth.
 These articles will not conform to the Veblen effect

usual law of demand as they become Veblen effect takes place as some
more attractive only if their prices are consumers measure the utility of a
high or keep going up. commodity by its price
 This was found out by Veblen in his if the commodity
doctrine of “Conspicuous Consumption” is expensive they think that it has got
and hence this effect is called Veblen more utility.
effect or prestige goods effect.
36 Theory of Demand
Business Economics
(ii) Giffen Goods:
Given By
Sir Robert
Giffen
 Those goods which are inferior, with no close Such goods which exhibit direct
substitutes available and which occupy a price-demand relationship are
substantial place in consumers’ budget are called ‘Giffen goods’
called ‘Giffen goods’.
P Q.D.
 All Giffen goods are inferior goods; but all
inferior goods are not Giffen goods.
 Examples of Giffen goods are coarse grains
like bajra, low quality rice and wheat etc.
(iii) Conspicuous Necessities:

 The demand for certain goods is affected by the demonstration effect of the consumption
pattern of a social group to which an individual belongs.
 These goods, due to their constant usage, become necessities of life.
 For example, in spite of the fact that the prices of television sets, refrigerators, air-
conditioners etc. have been continuously rising, their demand does not show any tendency to
fall.
(iv) Future expectations about Prices:

 If price expected to Rise in near future then its demand will Increase now.
 If price expected to Fall in near future then its demand will Decrease now.
Theory of Demand 37
Business Economics
(v) Incomplete information and irrational behaviour:

 The law has been derived assuming consumers to be rational and knowledgeable about
market-conditions.
 However, at times, consumers have incomplete information and therefore make inconsistent
decisions regarding purchases.
 Similarly, in practice, a household may demand larger quantity of a commodity even at a
higher price because it may be ignorant of the ruling price of the commodity.
 Under such circumstances, the law will not remain valid.
 Sometimes, consumers tend to be irrational and make impulsive purchases without any
rational calculations about the price and usefulness of the product and in such contexts the
law of demand fails.
(vi) Demand for necessaries:

 The law of demand does not apply much in the case of necessaries of life.
 Irrespective of price changes, people have to consume the minimum quantities of necessary
commodities.
(vii) Speculative goods:

In the speculative market, particularly in the market for stocks and shares
More will be demanded when the prices Less will be demanded when prices
are rising decline
Changes In Quantity Demanded

OR
Movement Along the Demand Curve
Due to Change in price of Commodity
Expansion in Demand Contraction in Demand

P Q.D. P Q.D.
“Expansion in demand refers to rise “Contraction of demand refers to fall in
In Quantity demanded due to fall in price Quantity demanded due to Rise in price
(Keeping other factors constant)” (keeping other factor constant)”.
38 Theory of Demand
Business Economics
P Q.D. P Q.D.
20 100 15 150
15 150 20 100
y D y D1
20 20
15 15
D1 D1
O x O x
100 150 100 150
“Downward “Upward Movement

Movement along the along the Demand
Demand Curve” Curve”
Theory of Demand 39
Business Economics
Change in Demand
OR
Shift in Demand Curve
Due to Change in any factor other then Price
Increase in Demand Decrease in Demand
It means rise in demand due It means fall in demand due

to any factor other then price. to any factor other then price.
Price Income Q.D. Price Income Q.D.
Price Income Q.D. Price Income Q.D.
10 100 20 10 200 40
10 200 40 10 100 20
"Rightward shift “Leftward shift

in In
Demand Curve” Demand Curve”
Y Y
D1 D
D DI
10 10
D1 D
D D1
O X O X
20 40 20 40
40 Theory of Demand
Business Economics
Difference between Increase in Demand and Decrease in Demand
Increase in Demand Decrease in Demand

Changes in determinants other than price that Changes in determinants other than price that cause
cause increase in demand (Rightward shift of Decrease in Demand (Leftward shift of demand curve
demand curve when more is demanded at each price) when less is demanded at each price)
Rise in income in the case of normal goods A fall in income in case of normal goods, and a rise in
income in case of inferior goods
Increase in wealth in the case of normal goods Decrease in wealth in case of normal goods, and an
increase in wealth in case of inferior goods
Rise in the price of a substitute good Fall in the price of a substitute good
Fall in the price of a complement Rise in the price of a complement
An increase in the number of buyers A decrease in the number of buyers
A change in tastes in favour of the commodity A change in tastes against the commodity
A redistribution of income to groups of people who Redistribution of income away from groups of people who
favour the commodity favour the commodity.
An expectation that price will rise in the future An expectation that price will fall in the future
Government policies encouraging consumption of the Government regulations discouraging consumption e.g.
good . Eg. Grant of consumer subsidies ban on cigarette smoking / ban on consumption.
Movements along the Demand Curve vs. Shift of Demand Curve
Basis Movement along Demand Curve Shift in Demand Curve

Meaning When the quantity demanded changes When the demand changes due to
due to a change in the price, keeping change in any factor other than the
other factors constant, it leads to a own price of the commodity, it leads
movement along the same demand to a shift in the demand curve.
curve.
Effect on The movement along the same demand Shift in the demand curve is either
Demand curve is either upwards (known as rightwards (known as increase in
Curve contraction in demand) or downwards demand) or leftwards (known as
(known as Expansion in demand). decrease in demand).
Reason It occurs due to an increase or a It occurs due to change in other
decrease in the price of the given factors like change in price of
commodity. substitutes, change in price of
complementary good, change in
income etc.
Theory of Demand 41
Business Economics
Chapter - 2
Unit – II
Elasticity of Demand
 Elasticity of demand is defined as the responsiveness of the quantity demanded of a
good to changes in one of the variables on which demand depends.
 More precisely, elasticity of demand is the percentage change in quantity demanded
divided by the percentage change in one of the variables on which demand depends.
Price Elasticity of Demand
 The most important measure of elasticity of demand is the price elasticity of demand
which measures the sensitivity of quantity demanded to ‘own price’ .
 The concept of price elasticity of demand is important for a firm for two reasons.
Knowledge of the nature and degree of price elasticity allows firms to
predict the impact of price changes on its sales.
Price elasticity guides the firm’s profit-maximizing pricing decisions.
How to calculate Price Elasticity ?
Ep = % in Q.D. Ep = Change in Quantity X 100 Ep = P X Q

% in Price Original Quantity Q X P
Change in Price X 100
Original Price
42 Elasticity of Demand
Business Economics
Where Ep - stands for price elasticity
q - stands for original quantity
p -stands for original price
∆ - stands for a change.
A negative sign on the elasticity of demand illustrates the law of demand ie. less
quantity is demanded as the price rises
The value of price Since price and quantity

The greater the value of elasticity varies from are inversely related
minus infinity to (with a few exceptions)
elasticity, the more
approach zero. This is price elasticity is
sensitive quantity
because q
demanded is to price. negative.
P
has a negative sign.
QUESTION
The price of a commodity decreases from Rs 6 to Rs 4 and quantity demanded of the good
increases from 10 units to 15 units. Find the coefficient of price elasticity.
SOLUTION
Price elasticity = (-) q / p × p/q = 5/2 × 6/10 = ( -) 1.5
Elasticity of Demand 43
Business Economics
QUESTION
A 5% fall in the price of a good leads to a 15% rise in its demand. Determine the elasticity
and comment on its value.
SOLUTION Price Elasticity = Ep = % change in quantity demanded
% change in Price
= 15% / 5% = 3
Comment: The good in question has elastic demand
QUESTION
The price of a good decreases from ` 100 to ` 60 per unit. If the price elasticity of demand
for it is 1.5 and the original quantity demanded is 30 units, calculate the new quantity
demanded.
SOLUTION Ep = q ×p
p q
1.5 = q ×100 =18
40 30
Therefore new quantity demanded = 30+18 = 48 units
QUESTION
The quantity demanded by a consumer at price Rs 9 per unit is 800 units. Its price falls by
25% and quantity demanded rises by 160 units. Calculate its price elasticity of demand.
SOLUTION Change in quantity demanded = 160
Therefore, % change in quantity demanded = = 20%
% change in price = 25%
Ed = % change in q
% change in p
Ea = 20 = 0.8
25
Business Economics
QUESTION
A consumer buys 80 units of a good at a price of Rs 4 per unit. Suppose price elasticity of
demand is - 4. At what price will he buy 60 units?
SOLUTION Ed = q ×p
p q
Or 4= 20 × 4
x – 4 80
Or 4= 1
x– 4
x = 4.2 per unit
Point Elasticity
1. The point elasticity of demand is the price elasticity of demand at a particular point on
the demand curve.
2. The concept of point elasticity is used for measuring price elasticity where the change
in price is infinitesimal.
3. Price elasticity is a key element in applying marginal analysis to determine optimal
prices.
4. Since marginal analysis works by evaluating “small” changes taken with respect to an
initial decision, it is useful to measure elasticity with respect to an infinitesimally small
change in price.
Business Economics
Where dq
Ep = –dq × p is the derivative of quantity
dp q with respect to price at a point
on the demand curve, and p
and q are the price and
quantity at that point
Economists generally use

the word “elasticity” to
refer to point elasticity.
Point elasticity is, therefore, the product

of price quantity ratio at a particular
point on the demand curve and the
reciprocal of the slope of the demand
line.
Measurement of Elasticity on a Linear Demand Curve – Geometric Method
 The elasticity varies along the curve as price and quantity change. The slope of a
linear demand
curve is constant.
Business Economics
 However, the elasticity at different points on a linear demand curve would be different.
When price is high price The elasticity becomes

is high and quantity is smaller as we move
small, the elasticity is down the curve.
high.
Given a straight line demand curve tT, point elasticity at any point say R can be found by
using the formula
RT = lower segment
Rt upper segment
Using the above formula we can get elasticity at various points on the demand curve.
Fig .7: Elasticity at Different Points on the Demand Curve

Business Economics
Arc-Elasticity
When are Elasticity ?
 When required to calculate price elasticity over some portion

of the demand curve rather than at a single point.
 The elasticity may be calculated over a range of prices.
 When price and quantity changes are discrete and large we
have to measure elasticity over an arc of the demand curve.
 When price elasticity is to be found between two prices (or two

points on the demand curve the question arises as to which price
and quantity should be taken as base.
 This is because elasticities found by using original price and
quantity figures as base will be different from the one derived by
using new price and quantity figures.
 Therefore, in order to avoid confusion, rather than choose the initial
or the final price and quantity, the mid-point method is used i.e.
the averages of the two prices and quantities are taken as (i.e.
original and new) base. The midpoint formula is an approximation to
the actual percentage change in a variable, but it has the advantage
of consistent elasticity values when price moves in either directions.
Business Economics
The arc elasticity can be found out by
using the formula: We drop the minus
sign and use the absolute value.
Formulae
P1 = Original Price
Q 2-Q 1 Q1 = Original Quantity
Ep = (Q 2 + Q 1 )/ 2 P2 = New Price
Q2 = New Quantity
P2 – p 1
(P2+P1 )/ 2
Business Economics
Thus, if we have to find elasticity of demand for

headphones between: The arc elasticity
P1= Rs.500 Q1= 100 will always lie
P2 = Rs. 400 Q2= 150 somewhere (but not
We will use the formula Ep = Q2 –Q1 × P2+P1 necessarily in the
Q2 +Q1 P2 –P1 middle) between the
Or Ep = 50 x 900 point elasticity
250 100
calculated at the
or Ep = 1.8
lower and the higher
prices.
Interpretation of the Numerical Values of Elasticity of Demand
1. Perfect Elastic Demand : Ed = ∞
When there is an Infinite demand at a particular
price and demand becomes zero with a slight
rise in price , then demand for a commodity is
said to be perfectly elastic.
Ed =0
2. Perfectly Inelastic Demand :
=0
When there is no change in demand with change
In price, then demand for such a commodity is
Said to be perfectly inelastic demand.
Business Economics
3. Highly Elastic Demand : Ed >1
When percentage change in quantity demanded
Is more then percentage in price , then demand
Is said to be highly elastic demand.
4. Less Elastic Demand : Ed < 1
is less then percentage in price, then demand
is said to be less elastic demand or inelastic
demand.
5. Unitary Elastic Demand : Ed = 1
is equal to percentage in price , then demand
is said to be unitary elastic demand.
Quick Recap
Type Value
Perfectly Elastic Ed = ∞
Perfectly Inelastic Ed = 0
Highly Elastic Ed > 1
Less Elastic Ed < 1
Unitary Elastic Ed = 1
Business Economics
General Interpretation
 The numerical value of elasticity of demand can assume any value between zero and
infinity.
 Elasticity is zero, (Ep= 0) if there is no change at all in the quantity demanded when
price changes i.e. when the quantity demanded does not respond at all to a price
change. In other words, any change in price leaves the quantity demanded unchanged
and consumers will buy a fixed quantity of a good regardless of its price.
 Perfectly inelastic demand is as an extreme case of price insensitivity and is therefore
only a theoretical category with less practical significance. The vertical demand curve
in represents perfectly or completely inelastic demand,
 Elasticity is one, or unitary, (Ep= 1) if the percentage change in quantity demanded
is equal to the percentage change in price. Shows special case of unit-elastic demand,
where the demand curve is a rectangular hyperbola.
Numerical measure Verbal description Terminology

of elasticity
Zero Quantity demanded does not change as Perfectly (or completely)
price changes inelastic
Greater than zero, Quantity demanded changes by a Inelastic
but less than one smaller percentage than does price
One Quantity demanded changes by Unit elasticity
exactly the same percentage as does
price
Greater than one, but Quantity demanded changes by a larger Elastic
less than infinity percentage than does price
Infinity Purchasers are prepared to buy all Perfectly (or infinitely)
they can obtain at some price and elastic
none at all at an even slightly higher
price
Business Economics
Total Outlay Method of Calculating Price Elasticity
Total Expenditure Total Revenue

Price x Quantity Price x Quantity Sold
Purchased
 Price Elasticity of demand equals one or Unity:
When Fall in Price ( or) Rise in Price
Niether changes Total Expenditure Nor changes Total Rervenue
Price Quantity Total Expenditure Price Quantity Total Revenue
5 100 500 8 100 800
4 125 500 10 80 800
P TE
P TE
P TR
P TR
 This is because the total expenditure made on the good can remain the same only
if the proportional change in quantity demanded is equal to the proportional change
in price.
Business Economics
 Thus, if there is a given percentage increase (or decrease) in the price of a good
and if the price elasticity is unitary, total expenditure of the buyer on the good or
the total revenue received from it will remain unchanged.
 Price elasticity of demand is greater than unity: When, as a result of increase in the
price of a good, the total expenditure made on the good or the total revenue received
from that good falls or when as a result of decrease in price, the total expenditure
made on the good or total revenue received from that good increases, we say that price
elasticity of demand is greater than unity.
When fall in price results in When Rise in price results in
Increases in OR Increases in Decrease in OR Decrease in

Total Revenue Total Expenditure Total Revenue
Total Expenditure
P T.E. P T.E.
Arrows in Arrows in
P T.R. opposite P T.R. opposite
direction direction
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Price Quantity Total Price Quantity Total Expenditure

Expenditure
4 200 800
5 100 500
4 140 560 5 150 750
Price Quantity Total Price Quantity Total

Revenue Revenue
10 80 800 12 80 960
8 110 880 14 60 840
Price elasticity of demand is less than unity: When, as a result of increase in the
price of a good, the total expenditure made on the good or the total revenue received
from that good increases or when as a result of decrease in its price, the total
expenditure made on the good or the total revenue received from that good falls, we
say that the price elasticity of demand is less than unity
Price Elasticity of Demand is less than Unity
When Rise in price results in When Fall in price results in
Increases in OR Increases in Decreases in OR Decreases in

Total Revenue Total Expenditure Total Revenue
Total Expenditure
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Arrows P TE Arrows in
P TE in same
P TR same
P TR direction
direction

Expenditure Expenditure
5 100 500 10 100 1000
6 140 840 8 110 880

Revenue Revenue
10 80 800 10 100 1000
12 110 1320 8 102 816
Business Economics
Except in case of Perfectly Elastic (or) Perfectly Inelastic Demand
Total revenue (TR) = Price × Quantity sold
When a seller raises the price of a good, there are two effects which act in opposite
directions on revenue.
Price Effect Quantity Effect

After a price increase After a price increase
(decrease), each unit sold sells (decrease), fewer (more) units
at a higher (lower) price, are sold, which tends to lower
which tends to raise (lower) (increase) the revenue.
the revenue. P Fewer unit TR
P Quantity TR sold
sold at
Higher price P More unit TR
P Quantity TR sold
sold at
lower price
What will be the net effect on total revenue?
If the price effect which tends to If the quantity effect, which tends to
raise total revenue is the stronger of reduce total revenue, is the stronger,
the two effects, then total revenue then total revenue goes down.
goes up.
Business Economics
 The price elasticity of demand tells us what happens to the total revenue when price
changes: its size determines which effect, the price effect or the quantity effect, is
stronger.
 If demand for a good is unit-elastic , an increase in price or decrease in price does not
change total revenue. In this case, the quantity effect and the price effect exactly
balance each other.
 When price rises from P to P1, the gain in revenue (Area A ) is equal to loss in revenue
due to lost sales( Area B)
 If demand for a good is inelastic (the price elasticity of demand is less than one), a
higher price increases total revenue.
 In this case, the quantity effect is weaker than the price effect. On the contrary,
when demand is inelastic, a fall in price reduces total revenue because the quantity
effect is dominated by the price effect.
 If demand for a good is elastic (the price elasticity of demand is greater than one), an
increase in price reduces total revenue and a fall in price increases total revenue. In this
case, the quantity effect is stronger than the price effect.
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The Relationship between Price elasticity and Total Revenue (TR)
Demand
Elastic Unitary Elastic Inelastic
Price increase TR Decreases TR remains same TR Increases
Price decrease TR Increases TR remains same TR Decreases
Determinants of Price Elasticity of Demand
(1) Availability of Substitutes:
One of the most important determinants of elasticity
Is the degree of substitutability
The extent of availability of substitutes.
 Some commodities like butter, cabbage,  Commodities such as salt,
car, soft drink etc. have close substitutes. housing, and all vegetables taken
 A change in the price of these commodities, together, have few if any, satisfactory
the prices of the substitutes remaining constant, substitutes and a rise in their prices
can be expected to cause quite substantial may cause a smaller fall in their
substitution – a fall in price leading consumers quantity demanded.
to buy more of the commodity in question and  Thus, we can say that goods which
a rise in price leading consumers to buy more typically have close or perfect
of the substitutes. substitutes have highly elastic
demand curves.
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Point To Be Noted
 It should be noted that while as a group, a good or service may have
inelastic demand, but when we consider its various brands, we say that a
particular brand has elastic demand.
 Thus, while the demand for a generic good like petrol is inelastic, the
demand for Indian Oil’s petrol is elastic.
 Similarly, while there are no general substitutes for health care, there are
substitutes for one doctor or hospital.
 Likewise, the demand for common salt and sugar is inelastic because good
substitutes are not available for these.
(2) Position of a commodity in the Consumer’s Budget:
 The demand for goods like common salt, matches, buttons, etc. tend to be highly
inelastic because a household spends only a fraction of their income on each of them.
 On the other hand, demand for goods like rental apartments and clothing tends to be
elastic since households generally spend a good part of their income on them.
Greater the proportion of Income Smaller the proportion of Income

Spent on commodity spent on Commodity
Greater will be Demand Smaller will be Demand
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(3) Nature of the need that a commodity satisfies:
 Luxury goods are price elastic because one can easily live without a luxury. In contrast,
necessities are price inelastic.
 While the demand for a home theatre is relatively elastic, the demand for food and
housing, in general, is inelastic.
If it is possible to postpone the Consumption of necessary goods

consumption of a particular good, cannot be postponed and therefore,
such good will have elastic demand. their demand is inelastic.
(4) Number of uses to which a commodity can be put:
 The more the possible uses of a commodity, the greater will be its price elasticity and
vice versa.
 When the price of a commodity which has multiple uses decreases, people tend to
extend their consumption to its other uses.
 Example : Milk has several uses. If its price falls, it can be used for a variety of
purposes like preparation of curd, cream, ghee and sweets. But, if its price increases, its
use will be restricted only to essential purposes like feeding the children and sick
persons.
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(5) Time period:
 The longer the time-period one has, the more completely one can adjust.
 Time gives buyers the opportunity to find alternatives or substitutes, or change their
habits.
 A simple example of the effect can be seen in motoring habits. In response to a higher
petrol price, one can, in the short run, make fewer trips by car. In the longer run, not
only can one make fewer trips, but he can purchase a car with a smaller engine
capacity when the time comes for replacing the existing one.
 Hence one’s demand for petrol falls by more when one has made long term
adjustments to higher prices.
(6) Consumer Habits:
 If a person is a habitual consumer of a commodity, no matter how much its price
change the demand for the commodity will be inelastic.
 If buyers have rigid preferences demand will be less price elastic.
(7) Tied Demand:
 The demand for those goods which are tied to others is normally inelastic as against
those whose demand is of autonomous nature.
 For example printers and ink cartridges.
(8) Price Range:
 Goods which are in very high price range or in very low price range have inelastic
demand
 But those in the middle range have elastic demand.
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(9) Minor Complementary Items:
 The demand for cheap, complementary items to be used together with a costlier product
will tend to have an inelastic demand.
Point to be Noted
If the demand for a firm’s When the demand is elastic,

product is relatively elastic,
they have to be very cautious

the managers need to about increasing prices
recognize that lowering the because a price increase will
price would expand the volume lead to a
of sales
decline in total revenue as

result in an increase in total fall in sales would be more
revenue. than proportionate
If the firm finds that the demand for their product is

relatively inelastic,
the firm may safely increase the price and thereby increase
its total revenue as they can be assured of the fact that the
fall in sales on account of a price rise would be less than
proportionate.
Business Economics
 Knowledge of price elasticity of demand is important for governments while determining
the prices of goods and services provided by them, such as, transport and
telecommunication.
 It also helps the governments to understand the nature of responsiveness of demand
to increase in prices on account of
Additional taxes
The implications of such responses on the tax
revenues.
 Elasticity of demand explains why the governments are inclined to raise the indirect
taxes on those goods that have a relatively inelastic demand, such as alcohol and
tobacco products.
Income Elasticity of Demand
 The income elasticity of demand is a measure of how much the demand for a good is
affected by changes in consumers’ incomes.
 Estimates of income elasticity of demand are useful for businesses to predict the
possible growth in sales as the average incomes of consumers grow over time.
 Income elasticity of demand is the degree of responsiveness of the quantity demanded
of a good to changes in the income of consumers. In symbolic form,
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EI = Percentge change in demand
Percentge change in income
EI = Q ÷ Y
Q Y
= Q x Y
Q Y
EI = Q x Y
Y Q
EI = Income Elasticity of Demand

Q = Change in Demand
Q = Original Demand
Y = Original money Income
Y = Change in money Income
Relation between Income Elasticity And Proportion of Income
If the proportion of If the proportion of If the proportion of income

income spent on a good income spent on a good spent on a good decrease as
remains the same as increase as income income rises
income increases increases, then the then income elasticity for the
then income elasticity for income elasticity for good is positive but less than
that good is equal to one. that good is greater than one.
one. The demand for income-
inelastic goods rises, but
The demand for such substantially slowly compared
goods increase faster to the rate of increase in
than the rate of increase income. Necessities such as
in income food and medicines tend to
be income- inelastic
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If the proportion of income spent

on a good remains the same as  When income elasticity is
income increases greater than zero or positive,
then income elasticity then an increase in income
for that good is equal to one. leads to an increase in the
demand for the good.
 This happens in the case of
most of the goods and such
goods are called normal goods.
 When the income elasticity of

demand is negative, the good is
an inferior good.
 In this case, the quantity When income elasticity of demand
demanded at any given price is equal to one, the proportion of
decreases as income increases. income spent on goods remains the
 The reason is that when income same as consumer’s income
increases, consumers choose to increases.
consume superior substitutes.
For all Normal Goods , Income

Elasticity is Positive.
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 If the income elasticity for a good is greater

than one, it shows that the good bulks
larger in consumer’s expenditure as he
becomes richer. Such goods are called luxury
goods.
 On the other hand, if the income elasticity
is less than one, it shows that the good is
either relatively less important in the
consumer’s eye or, it is a good which is a
necessity.
Practical Examples
(a) The income of a household rises by 10%, the demand for wheat rises by 5%.
(b) The income of a household rises by 10%, the demand for T.V. rises by 20%.
(c) The incomes of a household rises by 5%, the demand for bajra falls by 2%.
(d) The income of a household rises by 7%, the demand for commodity X rises by 7%.
(e) The income of a household rises by 5%, the demand for buttons does not change at
all.
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Income-elasticity for
S. No. Commodity the household Remarks
5% Since 0 < .5 < 1, wheat is a
= 5(Ei < 1)
a Wheat
10% normal good and fulfils a
necessity.
20%
=2(Ei > 1) Since 2 > 1, T.V. is a
b T.V. 10%
luxurious commodity.
(-)2% Since –.4 < 0, Bajra is an

=(–).4(Ei < 0)
c Bajra 5% inferior commodity in the
eyes of the household.
7%
= 1(Ei =1) Since income elasticity is 1,
d X 7%
X has unitary income
elasticity.
0%
= 0(Ei = 0)
e Buttons 5% Buttons have zero income-
elasticity.
Relation between Elasticity and Sales
If EY= 1, sales move exactly in step with changes in income.
If EY >1 If EY < 0
If EY >1, sales are highly cyclical, that is, For an inferior good, sales are countercyclical,
sales are sensitive to changes in income. that is, sales move in the opposite direction
of income and EY < 0.
Business Economics
Question
Income Elasticity of Demand

A car dealer sells new as well as used cars. Sales during the previous year were as follows;
Car Type Price Quantity (Nos)

1
New 6.5 lakhs 400
.
Used 60,000 4000
7
During the previous year, other things remaining the same, the real incomes of the
.
customers rose on average by 10%. During the last year sales of new cars increased
to 500, but sales of used cars declined to 3,850.
C What is the income elasticity of demand for the new as well as used cars? What
inference do you draw from these measures of income elasticity?
R
Solution
O Income Elasticity of demand for new cars
S Percentage change in income = 10%, given

Percentage change in quantity of new cars demanded = (∆ Q/Q) X 100 = (100/400 )
S
X100 = 25%
Income elasticity of demand = 25%/ 10% = + 2.5
- New car is therefore income elastic. Since income elasticity is positive, new car is a
normal good.
Income Elasticity of demand for used cars
P
Percentage change in income = 10%, given
R % change in quantity of used cars demanded = (∆ Q/Q )X 100 =( -1 50/4000 )
x100 = - 3.75%Income elasticity of demand = – 3.75/ 10= –.375
I
Since income elasticity is negative, used car is an inferior good.
C
Business Economics
Cross-Price Elasticity Of Demand
What is Cross Demand ?
Cross demand refers to the quantities of a commodity or service

which will be purchased with reference to changes in price, not of
that particular commodity but of other inter-related commodities,
other things remaining the same.
Substitute Goods Complimentary Goods
(a) Substitute Products and Demand
 In the case of substitute commodities, the cross demand curve slopes upwards (i.e.
positively) showing that more quantities of a commodity, will be demanded whenever
there is a rise in the price of a substitute commodity.
 The quantity demanded of tea is given on the X axis. Y axis represents the price of
coffee which is a substitute for Tea . When the price of pepsodent increases, due to
the operation of the law of demand, the demand for pepsodent falls.
 The consumers will substitute Tea in the place of coffee. The price of Tea is
assumed to be constant.
 Therefore, whenever there is an increase in the price of one commodity, the demand
for the substitute commodity will increase.
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(b) Complementary Goods
 In the case of complementary goods, a change in the price of a good will have an
opposite reaction on the demand for the other commodity which is closely related or
complementary.
 For instance, an increase in demand for solar panels will necessarily increase the
demand for batteries.
 Whenever there is a fall in the demand for solar panels due to a rise in their prices,
the demand for batteries will fall, not because the price of batteries has gone up, but
because the price of solar panels has gone up.
 So, we find that there is an inverse relationship between price of a commodity and the
demand for its complementary good (other things remaining the same).
Business Economics
Ec = Percentage change in quantity demanded of good X

Percentage change in price of good Y
Symbolically, (mathematically)
Ec = ∆qx ÷ ∆py
qx py
Ec = ∆ q x ÷ py
∆py qx
Where Ec = stands for cross elasticity.
qx = stands for original quantity demanded of X.
∆qx = stands for change in quantity demanded of X
Py = stands for the original price of good Y.
∆py = stands for a small change in the price of Y.
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Point to be Remembered
 When two goods X and Y are substitutes, the cross-price elasticity of demand is
positive:
 a rise in the price of Y increases the demand for X and causes a rightward shift of
the demand curve.
 When the cross-price elasticity of demand is positive, its size is a measure of how
closely substitutable the two goods are. Greater the cross elasticity, the closer is the
substitute.
 Higher the value of cross elasticity, greater will be the substitutability.
If two goods are close substitutes,

If two goods are perfect substitutes
the cross-price elasticity will be
for each other, the cross elasticity
between them is infinite. positive and large.
If two goods are not close If two goods are totally unrelated,
substitutes, the cross-price the cross-price elasticity between
elasticity will be positive and them is zero.
small.
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 When two goods are complementary (tea and sugar) to each other, the cross elasticity
between them is negative so that a rise in the price of one leads to a fall in the
quantity demanded of the other causing a leftward shift of the demand curve.
 The size of the cross-price elasticity of demand between two complements tells us
how strongly complementary they are:
If the cross-price elasticity is only If it is negative and very high,

slightly below zero, they are weak they are strong complements
complements
Conclusion
While the goods The goods

between which between which
cross elasticity is cross elasticity
positive can be is negative are
called not always
substitutes. complementary.
If cross elasticity to change in

the price of substitutes is greater
than one, the firm may lose by
increasing the prices and gain by
reducing the prices of his
products.
Business Economics
QUESTION
A shopkeeper sells only two brands of note books Imperial and Royal. It is observed
that when the price of Imperial rises by 10% the demand for Royal increases by
15%.What is the cross price elasticity for Royal against the price of Imperial?
SOLUTION
Ec = Percentage change in quantity demanded of good X
Percentage change in price of good Y
Ec = 15% = + 1.5
10%
The two brands of note book Imperial and Royal are substitutes with significant
substitutability
QUESTION
The cross price elasticity between two goods X and Y is known to be - 0.8. If the
price of good Y rises by 20%, how will the demand for X change?
SOLUTION Inserting the values in the formula:
-0.8 = X/ 20%
% change in quantity demanded of X = 20% x - 0.8 = - 16%
Since cross elasticity is negative, X and Y are complementary goods
QUESTION
The price of 1kg of tea is ` 30. At this price 5kg of tea is demanded. If the price of
coffee rises from ` 25 to 35 per kg, the quantity demanded of tea rises from 5kg to
8kg. Find out the cross price elasticity of tea.
SOLUTION Cross elasticity = q x × py Here x = tea
py qx y = coffee
Ec = 8 – 5 x 25 = 3 x 25 = 1.55
10 5 10 5
The elasticity of demand of tea is +1.5 showing that the demand of tea is highly
elastic with respect to coffee. The positive sign shows that tea and coffee are
substitute goods.
Business Economics
QUESTION
The price of 1 kg of sugar is Rs 50. At this price 10 kg is demanded. If the price of

tea falls from Rs 30 to Rs 25 per kg, the consumption of sugar rises from 10 kg to
12 kg. Find out the cross price elasticity and comment on its value.
SOLUTION Cross elasticity = q x × py Here x = Sugar
Py qx y = Tea
= 2 x 30 = (–) 1.2
–5 10
Since the elasticity is -1.2, we can say that sugar and tea are complementary in nature.
ADVERTISEMENT ELASTICITY
 Advertisement elasticity of sales or promotional elasticity of demand is the
responsiveness of a good’s demand to changes in the firm’s spending on advertising.
 The advertising elasticity of demand measures the percentage change in demand that
occurs given a one percent change in advertising expenditure.
 Advertising elasticity measures the effectiveness of an advertisement campaign in
bringing about new sales.
 Advertising elasticity of demand is

typically positive.
 Higher the value of advertising
elasticity greater will be the
responsiveness of demand to change in
advertisement.
 Advertisement elasticity varies between
zero and infinity.
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It is measured by using the formula;
Ea = % Change in quantity demanded
% change in spending on advertising
Ea = ∆ Qd/Qd
∆ A/A
Where ∆ Qd denotes increase in demand
∆ A denotes additional expenditure on
advertisement
Qd denotes initial demand
A denotes initial expenditure on advertisement
Elasticity Interpretation
Ea = 0 Demand does not respond at all to increase in advertisement

expenditure
Ea >0 but < Increase in demand is less than proportionate to the increase in
1 advertisement expenditure
Ea = 1 Demand increase in the same proportion in which advertisement

expenditure increase
Ea> 1 Demand increase at a higher rate than increase in advertisement
expenditure
Business Economics
DEMAND FORECASTING
 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
 The prevailing trends at present.
 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 Of Demand Forecasting ?
Of
What is Demand Forecasting ? Advantages Of Good Forecasting
 Forecasting of demand plays a vital  A good forecast enables the firm to
role in the process of planning and perform efficient business planning.
decision-making, whether at the  Forecasts offer information for budgetary
national level or at the level of a planning and cost control in functional
firm. areas of finance and accounting.
 The effectiveness of the plans of  Good forecasts help in efficient
business managers depends upon the Production planning
level of accuracy with which future Process selection
events can be predicted. Capacity planning
 The importance of demand Facility layout
forecasting has increased all the Inventory management.
more on account of mass production  Demand forecasts also provide the
and production in response to necessary information for formulation of
demand. suitable pricing and advertisement
strategies.
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Level 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 Forecasting
Macro-level Forecasting Industry- level Forecasting Firm- level Forecasting
 Index of Industrial  It is concerned with the  It refers to forecasting
Production (IIP) demand for the the demand for a
 National income industry’s products as a particular firm’s product
 General level of employment whole. say, the demand for
 For example ,demand for ACC cement.
cement in India.
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Demand forecasts may be short term demand forecasting and long term demand
forecasting
Demand Distinctions
Short term demand Forecasting Long term Forecasts

covers a short span of time, depending are for longer periods of time, say two to
of the nature of industry. It is done five years and more. It provides
usually for six months or less than one information for major strategic decisions
of the firm such as expansion of plant
year and is generally useful in tactical
capacity.
decisions.
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:
Producer’s Durable goods Derived Industry Short-run

goods and demand demand demand
and Non-durable and and and
Consumer’s goods Autonomous Company Long-run
goods demand demand demand
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(a) Producer’s goods and Consumer’s goods
Producer Goods
Consumer Goods
 Producer’s goods are those which
 Consumer’s goods are those
are used for the production of
which are used for final
other goods- either
consumption.
Consumer goods
 Examples of consumer’s goods
Producer goods
are readymade clothes, prepared
themselves.
food, residential houses, etc.
 Examples of such goods are
machines, plant and equipments.
(b) Demand for Durable goods and Non-durable goods
Durable Goods
 Durable goods do not quickly wear out,
Non – Durable Goods
can be consumed more than once and
 Non durable goods are those which
yield utility over a period of time.
cannot be consumed more than
 Examples of durable consumer goods are:
once.
cars, refrigerators and mobile phones.
 Raw materials, fuel and power,
 Building, plant and machinery, office
packing items etc
 Beverages, bread, milk etc are furniture etc are durable producer goods.
examples of non-durable consumer The demand for durable goods is likely to

goods. These will meet only the be derived demand.
current demand.  Further, there are semi- durable goods
such as, clothes and umbrella.
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(c) Derived demand and Autonomous demand
Derived Demand Autonomous Demand

 The demand for a commodity that arises
 If the demand for a product is
because of the demand for some other
independent of the demand for other
commodity called ‘parent product’, ‘is
goods, then it is called autonomous
called derived demand.
demand.
 For example, the demand for cement is
 It arises on its own out of an innate
derived demand, being directly related to
desire of the consumer to consume or
building activity.
to possess the commodity.
 In general, the demand for producer goods
 But this distinction is purely arbitrary
or industrial inputs is derived demand.
and it is very difficult to find out
Also the demand for complementary goods
which product is entirely independent
is derived demand.
of other products.
(d) Demand for firm’s product and industry demand
Industry Demand
Demand For Firm’s Product
 The term industry demand is used to
 The demand for firm’s product denotes
denote the total demand for the
the demand for the products of a
products of a particular industry,
particular firm, i.e. the quantity that a
 e.g. the total demand for steel in the
firm can dispose off at a given price over
country.
a period of time.
 E.g. demand for steel produced by the
Tata Iron and Steel Company
Business Economics
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 is based on time Period
Long run Demand

Short run Demand  Long-run demand refers to demand
 Short run demand refers to demand which exists over a long period. Most
with its immediate reaction to changes generic goods have long term demand.
in product price and prices of related  Long term demand depends on long
commodities, income fluctuations, term income trends, availability of
ability of the consumer to adjust their substitutes, credit facilities etc.
consumption pattern, their  In short, long run demand is that which
susceptibility to advertisement of new will ultimately exist as a result of
products etc. changes in pricing, promotion or product
improvement, after enough time is
allowed to let the market adjust to the
Common example new situation.
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.
Business Economics
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.
Business Economics
Point to be Remembered
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
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.
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(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
1. Since producers’ goods or capital goods help in further production, the demand for them
is derived demand i.e.derived from the demand of consumer goods they produce.
2. The demand for them depends upon the Rate of profitability of user industry
Size of the market of the user industries.
3. 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.
4. 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.
5. Higher the profit making prospects, greater will be the inducement to demand capital
goods.
Business Economics
6. If firms are optimistic about selling a higher output in future, they will have greater
incentive to invest in producer goods.
7. 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.
8. 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
(I) Survey of (III) Expert (V) Controlled

Buyers’ Opinion Experiment
Intentions method
(II) Collective (IV) (VI)

opinion method Statistical Barometric
methods Method
IV(a) Trend Projection IV(a) Regression

Analysis
IV(a)(i) Graphical Method IV(a)(ii) Fitting Trend Equation
Business Economics
(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 Sample survey method End–use method,

method where nearly all under which only a especially used in
potential customers are scientifically chosen forecasting demand for
interviewed about their sample of potential inputs, involves
future purchase plans customers are interviewed  Identification of all
final users
 Fixing suitable
technical norms of
consumption of the
This method is useful when product
bulk of sale is made to  Application of the
industrial producers who norms to the desired
generally have definite future or targeted levels of
plans. output
(II) Collective opinion method:
 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.
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 The rationale of this method is that salesmen being

Also known as
closest to the customers are likely to have the most
 Sales Force Opinion
intimate feel of the reactions of customers to changes Method
 Grass Roots Approach
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
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.
This method can be used only

in short Run, for long Run
different method should be
used.
Business Economics
(III) Expert Opinion method:
 Information is elicited from them through appropriately structured unbiased tools of
data collection such as interview schedules and questionnaires.
 Under this method, instead of depending upon the opinions Also known as
Delphi
of buyers and salesmen, firms solicit the opinion of
Technique
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.
The Delphi Process
Business Economics
This method has

advantage 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
Free from subjectivity.
The important statistical methods of demand forecasting are:
Trend Projection IV (a) Regression Analysis IV (b)
Graphical Method Fitting Trend Equation
IV (a) (i) IV (a) (ii)
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(a) Trend Projection Method
 This method, also known classical method, is considered as a ‘naive’ 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.
IV (a) (i) Graphical Method:
 This method, also known as ‘free hand projection method’ 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

Also known as
possible. Free Hand
 The direction of the curve shows the trend. Projection Method.
 This curve is extended into the future for deriving
the forecasts.
 The direction of this free hand curve shows the trend.
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 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.
IV (a) (ii) Fitting trend equation:
 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

Also known as
estimates of future demand.
Least Square
 The least square method is based on the Method
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.
Business Economics
IV (b) Regression Analysis
Under this method, a relationship is established between the
Quantity demanded Independent variables
(dependent variable) (explanatory variables)
such as income, price of the
good, prices of related goods
 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

Also known as
of demand which can be manipulated, for example, price,
Market
advertising, etc., and conduct the experiments assuming Experiment
that the other factors would remain constant. Method.
Business Economics
 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.
Point to Remember
Market experiments can also be replaced by Controlled laboratory experiments
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.
(VI) Barometric method of forecasting:
 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.
Business Economics
 Therefore, in order to find out these turning points, it is necessary to find out the
general behaviour of the economy.
 The 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.
Coincidental Indicators Lagging Indicators
Move up and Down Follow a change after some
simultaneously at same time time log
where other changes occur Ex. – Order for Electricity
Ex. – Number of order for Heavy Meters, shows that
New Doors / Glasses, when Heavy Construction was
permitted for construction conducted in Past.
of new house.
Leading Indicators
It move up and down

ahead of time series.
Results CA Exam will

Improve
Business Economics
Chapter – 2
Unit - III
THEORY OF CONSUMER BEHAVIOUR
NATURE OF HUMAN WANTS
Important Points About Want

1. All wants of human beings exhibit some
Meaning Of Want
characteristic features.
 The term ‘want’ refers to a 2. Wants are unlimited in number. All wants
wish, desire or motive to own cannot be satisfied.
3. Wants differ in intensity. Some are urgent
or/and use goods and services
,others are less intensely felt
that give satisfaction.
4. Each want is satiable
 Wants may arise due to
5. Wants are competitive. They compete each
physical, psychological or social
other for satisfaction because resources are
factors.
scarce in relation to wants
 Since the resources are limited, 6. Wants are complementary. Some wants can
we need to make a choice be satisfied only by using more than one good
between the urgent wants and or group of goods
the not so urgent wants. 7. A particular want may be satisfied in
alternative ways
8. Wants are subjective and relative.
9. Wants vary with time, place, and person
10. Some wants recur again whereas others do
not occur again and again
11. Wants may become habits and customs
12. Wants are affected by income, taste, fashion,
advertisements and social norms and customs
13. Wants arise from multiple causes such as
Physical and psychological instincts,
Social obligations
Individual’s economic and social status
Theory of Consumer Behaviour 97

Business Economics
CLASSIFICATION OF WANTS / CATEGORIES OF WANTS
In Economics, wants are classified into three categories, viz
Necessaries Comforts Luxuries.
Necessaries
 Necessaries are those which are essential for living.
 Necessaries are further sub-divided into
Necessaries for life or existence
Necessaries for efficiency
Conventional necessaries.
 Necessaries for life are things necessary to meet the minimum physiological needs for
the maintenance of life such as minimum amount of food, clothing and shelter. Man
requires something more than the necessities of life to maintain longevity, energy and
efficiency of work, such as nourishing food, adequate clothing, clean water, comfortable
dwelling, education, recreation etc.
 These are necessaries for efficiency. Conventional necessaries arise either due to
pressure of habit or due to compelling social customs and conventions.
 They are not necessary either for existence or for efficiency.
Comforts
 Comforts make life comfortable and satisfying. Comforts are less urgent than
necessaries.
98 Theory of Consumer Behaviour

Business Economics
 Tasty and wholesome food, good house, clothes that suit different occasions, audio-
visual and labour saving equipments etc .make life more comfortable.
Luxuries
 Luxuries are those wants which are Superfluous
Expensive.
 They are not essential for living. Items such as expensive clothing, exclusive vintage
cars, classy furniture and goods used for vanity etc. fall under this category.
 A thing which is a comfort or luxury for one person or

at one point of time may become a necessity for
another person or at another point of time.
 As all of us are aware, the things which were
considered luxuries in the past have become comforts
and necessaries today.
WHAT IS UTILITY?
 Utility is thus the want satisfying power of a commodity.
 The utility of a consumer is a measure of the satisfaction that the consumer expects to
obtain from consumption of goods and services when he spends money on a stock of
commodity which has the capacity to satisfy his want.

Business Economics
 Utility is thus the anticipated satisfaction by the consumer, and satisfaction is the
tangible satisfaction derived.
 The concept of utility is used in neo classical Economics to explain the operation of the
law of demand.
Following Jeremy Bentham, John Stuart

Mill, and other nineteenth-century British
economist-philosophers, economists apply
the term utility to "that property in any
object, whereby it tends to produce benefit,
advantage, pleasure, good, or happiness”.
 A commodity has utility for a consumer even when it is not consumed.
 Utility is a subjective and relative entity and varies from person to person.
 A commodity has different levels of utility for the same person at different places or at
different points of time.
 It should be noted that utility is not the same thing as usefulness.
 From the economic standpoint, even harmful things like liquor may be said to have
utility because people want them.
 Thus, in Economics, the concept of utility is ethically neutral.

Business Economics
Two Important Theories
Marginal Utility Analysis Indifference Curve Analysis
by Alfred Marshall by J.R. Hicks and R.G.D.Allen.
THE MARGINAL UTILITY ANALYSIS
Formulated
 Marginal utility theory treats consumers as striving to maximize
by Alfred
utility which is a quantitative measure of the consumer’s well- Marshall
being or satisfaction.
 According to Marshall, utility is the numerical score in terms of utils representing the
satisfaction that a consumer obtains from the consumption of a particular good.
Utils refer to the

hypothetical
measuring unit of
utility
(a) Total Utility:
 Total utility may be defined as the sum of utility derived from different units of a
commodity consumed by a consumer.
 Total utility is the sum of marginal utilities derived from the consumption of different
units i.e.

Business Economics
Where MU 1 , MU 2,…….., MU n etc are marginal utilities of the successive units of a
commodity.
TU= MU1+MU2+………..+MU n (OR)
TU n = U 1 + U 2 + U 3…………………..U n
(b) Marginal Utility:
 The marginal utility of a good or service is the change in total utility generated by
consuming one additional unit of that good or service.
 It is the utility derived from the marginal or one additional unit consumed or possessed
by the individual.
 Marginal utility = the addition made to the total utility by the addition of consumption
of one more unit of a commodity.
MU n = TU n – TU n-1
Where, MU n is the marginal utility of the n th unit
TU n is the total utility of the n th unit,
TU n-1 is the total utility of the (n-1)th unit.
Assumptions of Marginal Utility Analysis
 The marginal utility analysis is stated with respect to certain conditions.
 It simply means that this law has certain assumptions and without these, the law may
not hold true.

Business Economics
(1) Rationality:
A consumer is rational and attempts to attain maximum satisfaction from his limited
money income.
(2) Cardinal Measurability of Utility:
It is assumed that
Utility can be measured Satisfaction can be expressed
In Quantitative terms (eg 1,2,3)
(3) Money Measurement :
 Money is the measuring rod of utility.
 The amount of money which a person is prepared to pay for a unit of a good, rather
than go without it, is a measure of the utility which he derives from the good.
(4) All Other Factor Constant :
 The theory also assumes all the other factors ‘constant’ such as price of the
commodity, tastes and preferences, income, habits, temperament and fashion.
 If any of these changes, the marginal utility may not decline and thus the law would
not hold true.

Business Economics
(5) Continuous Consumption :
 It is assumed that consumption is continuous process.
 For example : If one Ice cream is consumed in morning and another in evening then
satisfaction may be same or even higher.
(6) Consumption Of Reasonable Quantity / Standard Units :
 It is assumed that reasonable quantity is consumed of commodity
 For example : If thirsty person is given spon of water then every additional unit if
consumption increases MU.
(7) MU Of Money remains Constant :
 It is assumed that MU of Money remains constant.
(8) The hypothesis of independent utility implies that the total utility which a person gets
from the whole collection of goods purchased by him is simply the sum total of the
separate utilities of the goods. The theory ignores complementarily between goods.
The Law of Diminishing Marginal Utility
Law of Diminishing Marginal Utility states that as we consume more and more unit of
commodity
Utility deceived from successive unit goes on decreasing

Business Economics
Units TU MU
1 20 20
2 34 14
3 44 10
TU
4 50 6
5 50 0
6 44 -6
Units Of Commodity
MU
 This law describes a very fundamental
tendency of human nature. In other words, ‘as a consumer

increases the consumption of any
 In simple words, it says that as a
one commodity keeping constant
consumer consumes more units of a the consumption of all other
commodities, the marginal utility of
good, the extra satisfaction that he
the variable commodity must
derives from an extra unit of a good eventually decline”.
goes on falling.
 It is to be noted that it is the marginal utility and not the total utility which declines
with the increase in the consumption of a good.
Relation between Total Utility and Marginal Utility
Relation
a) When MU falls but remains positive, TU
increase
b) When MU is zero, TU is maximum
“When MU is zero, it is known as point of
satiety”
c) When MU becomes negative, TU starts
falling

Business Economics
MU can be
 Positive
 Zero
TU
 Negative
e
Units
MU is the
rate of
change of TU
Point of satiety
MU
TU
MU is the
slope of TU
Curve.
Units
Consumer Equilibrium in case of single commodity
 All assumption of law of DMV are taken as assumption of consumer equilibrium in case
of single commodity.
“Consumer purchasing a single commodity will be at equilibrium
When he is buying such quantity of that commodity which gives
maximum satisfaction.”

Business Economics
 To determine point of Equilibrium
Consumer compares price of commodity with its utility. [satisfaction or benefit]
Equilibirum Condition
Marginal Utility [MU x] = Price of commodity [P x]
MU x = Px
If MU x>Px If MU x < Px
 Consumer goes on buying more,  Consumer will have to reduce
because benefit is greater then consumption of commodity x to Raise
cost. his total satisfaction till MU becomes
 As he buys more MU falls because equal to zero.
of law of DMU.
 When MU becomes equal to prize
consumer get maximum benefit
and is in equilibrium
MU x = Px
E
P
Price Of X
P1
E1 D
Q Q1
Quantity of Commodity X

Business Economics
 The cosumer is in equilibrium at point E with OQ quantity of commodity .We find that
at point E, the marginal utility of the good for the consumer is equal to its price.ie
MUx= Px.
 Above illustrates this case. At price P the consumer is at equilibrium at E; MUX = P.
When price falls to P1, the consumer extend his consumption to reach E1 where his MUx
= Px
Consumer Equilibrium in case of two Commodities
According to “Law of Equi Marginal Utility”, a consumer get maximum satisfaction
when the following two condition are fulfilled.
Also known as
Condition 1 Condition 2  Law of Equi-

Marginal utility
When Ratio of MU falls as consumption increases
 Law of Substitution
MU of two commodity  Law of Maximum
Satisfaction
and there respective
 Gossens second law
prices are equal
Condition – 1
Ratio of Marginal utility to price is same in case of both the goods.
𝑴𝑼𝒙 𝑴𝑼𝒚
= = 𝑴𝑼𝑴
𝑷𝒙 𝑷𝒚

Business Economics
𝑴𝑼𝒙 𝑴𝑼𝒚 𝑴𝑼𝒙 𝑴𝑼𝒚

When > When <
𝑷𝒙 𝑷𝒚 𝑷𝒙 𝑷𝒚
 Consumer is getting more marginal  Consumer is getting more marginal utility

utility in case of good X Qs compared in case of good y as compared to Good x
to good y  Therefore he will buy more of y and less
 Therefore he will buy more of x and of x
less of y
This will lead to fall in Mu y and Rise in MU x
This will lead to fall in Mu x and Rise in
Mug.  Consumer will buy more of y till
 Consumer will buy more of x till 𝑴𝑼𝒙 𝑴𝑼𝒚

=
𝑷𝒙 𝑷𝒚
𝑴𝑼𝒙 𝑴𝑼𝒚
=
𝑷𝒙 𝑷𝒚
 MU x = MU y = MU m
Px Py
 MU x = MU y = 1
Px Py
 MU x = Px
MU y Py

Business Economics
CONSUMER SURPLUS
What Customer is ready to pay
(-) What he actually pays Propounded by

Alfred
Consumer Surplus
Marshall.
Marshall defined the concept of consumer surplus as the The concept of

“excess of the price which a consumer would be willing to pay consumer surplus
is derived from
rather than go without a thing over that which he actually the law of
does pay”, is called consumers surplus.” diminishing
marginal utility.
The consumer is in
equilibrium when the
marginal utility of a This extra utility
good is equal to its or extra surplus
price i.e., he purchases
for the consumer
that many number of
is called consumer
units of a good at
surplus.
which marginal utility
is equal to price

Business Economics
No. of units Marginal Utility Price Consumer Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
6 20 20 0
7 18 20 -
Marshall’s Measure of Consumer Surplus
 The total consumer surplus in a market which is the sum of all individual consumer
surpluses in a market, is equal to the area below the market demand curve but above
the price.
 The term consumer surplus is often used to refer to both individual and total consumer
surplus.

Business Economics
 Thus, the total area below the demand curve and above the price is the sum of the
consumer surplus of all buyers in the market.
 The total utility is equal to the area under the marginal utility curve up to point Q i.e.
ODRQ.
 But, given the price equal to OP, the consumer actually pays OPRQ.
 The consumer derives extra utility equal to DPR which is nothing but consumer surplus
 Graphically, it is the triangular area below the demand curve and above the price line.
The size of the consumer surplus triangle depends on the price of the good.
 A rise in the price of a good reduces consumer surplus; a fall in the price increases
consumer surplus.
 Thus, a higher price results in a smaller consumer surplus and a lower price generates a
larger consumer surplus.
 The change in consumer surplus on account of a fall in price can be illustrated with
the help of Graph.
Change in Consumer Surplus Due to a Fall In Price

Business Economics
A fall in price from P to P1 increases consumer surplus from APE to A P1F.The increase
in consumer surplus has two components.
(a) The increase in consumer surplus of existing buyers who were earlier paying price P
(the rectangle marked b).
(b) The consumer surplus now available to the new buyers who started buying the
commodity due to lower prices (the triangle c)
Applications Of Consumer Surplus
The concept of consumer surplus has important practical applications. Few such
applications are listed below:
1. Consumer surplus is a measure of the welfare that people gain from consuming goods
and services.
2. Understanding the nature and extent of surplus can help business managers make
better decisions about setting prices.
3. If a business can identify groups of consumers with different elasticity of demand
within their market and the market segments which are willing and able to pay higher
prices for the same products, then firms can profitably use price discrimination.
4. Large scale investment decisions involve cost benefit analysis which takes into account
the extent of consumer surplus which the projects may fetch.
5. Knowledge of consumer surplus is also important when a firm considers raising its
product prices Customers who enjoyed only a small amount of surplus may no longer be
willing to buy products at higher prices.
6. Firms making such decisions should expect to make fewer sales if they increase prices.

Business Economics
7. Consumer surplus usually acts as a guide to finance ministers when they decide on the
products on which taxes have to be imposed and the extent to which a commodity tax
has to be raised.
Limitations Of Consumer Surplus
(1) Consumer surplus cannot be measured precisely
because it is difficult to measure the
marginal utilities of different units of a
commodity consumed by a person.
(2) In the case of necessaries,
the marginal utilities of the earlier units are infinitely large. In
such case the consumer surplus is always infinite.
(3) The consumer surplus derived from a commodity is affected
by the availability of substitutes.
(4) There is no simple rule for deriving the utility scale of articles which are used for their
prestige value (e.g., diamonds).
(5) Consumer surplus cannot be measured in terms of money because the marginal utility
of money changes as purchases are made and the consumer’s stock of money
diminishes.
(6) The concept can be accepted only if it is assumed that utility can be measured in
terms of money or otherwise.

Business Economics
INDIFFERENCE CURVE ANALYSIS
Also called
Given by Hicks and ISO – Utility
Allen (OR)
Equal Utility Curve
Indifference Curve refers to graphical representation of various alternative combination
of bundle of two goods among which consumer is indifferent.
Assumptions Underlying Indifference Curve
Approach
 The consumer knows his own tastes and preferences and possesses full information
about all the relevant aspects of economic environment in which he lives.
 The consumer is rational and tends to take rational actions that result in a more
preferred consumption bundle over a less preferred bundle.
 The indifference curve analysis assumes that utility is only ordinally expressible.
 The consumer is capable of ranking all conceivable combinations of goods according to
the satisfaction they yield. Thus, if he is given various combinations say A, B, C, D and
E, he can rank them as first preference, second preference and so on.

Business Economics
 Consumer choices are assumed to be transitive. If the consumer prefers combination A
to B, and B to C, then he must prefer combination A to C. In other words, he has a
consistent consumption pattern.
 If combination A has more commodities than combination B, then A must be preferred
to B.
 This is sometimes referred to as the “more is better” assumption or the assumption of
non-satiation
Combination Food Clothing MRS
A 1 12 -
B 2 6 6
C 3 4 2
D 3 3 1
GRAPH OF INDIFFERENCE CURVE

Business Economics
Indifference Curve Map
 Indifference Map refers to family of indifference curves that represent consumer
preference over bundle of two goods.
 An indifference curve represent all combinations, which provide same level of
satisfaction
However every higher or level of satisfaction can be shown on indifference curve.
 It means infinite no. of indifference curve can be drawn.
 Moving Upward and to the right from one Indifference curve to the next Represents an
increase in utility and moving down and to left represents a Decrease.
 An Indifference Curve Curve Map Thus Depicts the Complete Picture of Consumer Taste
& Prefrences
 IC1 refers to lowest satisfaction

Commodity y
 IC3 Represent highest level of

satisfaction
 Higher indifference curve
IC3
represent higher level of
IC2
satisfaction IC1
Commodity x

Business Economics
Marginal Rate of Substitution
 The Marginal Rate of Substitution (MRS) is the rate at which a consumer is prepared
to exchange goods X and Y, holding the level of satisfaction constant (i.e., moving
along an indifference curve).
 The marginal rate of substitution along any segment of an indifference curve refers to
the maximum rate at which a consumer would willingly exchange units of Y for units
of X.
 The MRS at any point on the indifference curve is equal to the (absolute value of) the
slope of the curve at that point. When measured at a point, the MRS xy tells us the
maximum rate at which a consumer would willingly trade good Y for a infinitesimal bit
more of good X.
𝑴𝑼𝑿
𝑴𝑹𝑺𝒙𝒚 =
𝑴𝑼𝒀
Diminishing Marginal Rate of Substitution

Business Economics
Properties of Indifference Curves
The following are the main characteristics or properties of indifference curves:
(i) Indifference curves slope downward to the right:
 This property implies that the two commodities can be substituted for each other and
when the amount of one good in the combination is increased, the amount of the
other good is reduced.
 This is essential if the level of satisfaction is to remain the same on an indifference
curve.
(ii) Indifference curves are always convex to the origin :
 It has been observed that as more and more of one commodity (X) is substituted for
another (Y), the consumer is willing to part with less and less of the commodity being
substituted (i.e. Y).
 This is called diminishing marginal rate of substitution.

Business Economics
TWO EXTREME SITUATION
 When two goods are perfect  Goods are perfect complements when a
substitutes of each other, the consumer is interested in consuming
consumer is completely indifferent as these only in fixed proportions.
to which to consume and is willing to  When two goods are perfect
exchange one unit of X for one unit of complementary goods (e.g. left shoe
Y. and right shoe), the consumer
 His indifference curves for these two consumes only bundles like A and B in
goods are therefore straight, parallel figure 20(B) in which both X and Y
lines with a constant slope along the in equal proportions.
curve, or the indifference curve has a  Here two straight Line Intersect at 90
constant MRS. Degree( Right Angle).
 L Shaped Indifference Curve
 It is Convex to Origin
Indifference Curve of Perfect Substitutes and Perfect Complements

Business Economics
(iii) Indifference curves can never intersect each other:
 No two indifference curves will intersect each other although it is not necessary that
they are parallel to each other.
 In case of intersection the relationship becomes logically absurd because it would show
that higher and lower levels are equal, which is not possible.
Intersecting Indifference Curves
 IC1 and IC2 intersect at A. Since A and B lie on IC1, they give same satisfaction to
the consumer.
 Similarly since A and C lie on IC2, they give same satisfaction to the consumer.
 This implies that combination B and C are equal in terms of satisfaction.
 But a glance will show that this is an absurd conclusion because certainly combination
C is better than combination B because it contains more units of commodities X and
Y. Thus we see that no two indifference curves can touch or cut each other.

Business Economics
(iv) A higher indifference curve represents a higher level of satisfaction than the lower
indifference curve:
 This is because combinations lying on a higher indifference curve contain more of
either one or both goods and more goods are preferred to less of them.
(v) Indifference curve will not touch either axes :
 Another characteristic feature of indifference curve is that it will not touch the X axis
or Y axis.
 This is born out of our assumption that the consumer is considering different
combination of two commodities.
 If an indifference curve touches the Y axis at a point P as shown in the figure 22, it
means that the consumer is satisfied with OP units of Y commodity and zero units of
X commodity.
 This is contrary to our assumption that the consumer wants both commodities
although in smaller or larger quantities.
 Therefore an indifference curve will not touch either the X axis or Y axis.
Impossible Indifference Curve

Business Economics
BUDGET LINE AND BUDGET SET
 Budget line is graphical representation for all possible combination of two goods which
can be purchased with given Income & prices
Such that cost of each combination is money income of consumer.
Practical Case
Price of Coffee= Rs. 5 Income of consumer = Rs. 20
Price of Sandwitch= Rs. 10
What quantity will you purchase of above two goods if given level of income is Rs. 20
 When this is represented graphically then

Possible Combination
it is known as budget line.
2 Coffee + 1 Sandwitch
Also termed as Budget Set 4 Coffee + 0 Sandwitch
0 Coffee + 2 Sandwitch
BUDGET SET
Budget set is all possible combination of two goods which a consumer can afford given
his income and prices in market.
Income- Rs. 20 ; Apple Price= Rs. 4; Banana Price= Rs. 2

Business Economics
Combination Units Units Money

10 C of of Spent
8 Apple Banana
“Banana”
6 P 5 0 20
4 Q 4 2 20
R 3 4 20
2 D.
S 2 6 20
0
T 1 8 20
1 2 3 4 5 U 0 10 20
“Apple”
Attainable Combination Unattainable Combination
All the point On budget line Points outside the budget

and also point D
line point –C
ALGEBRIC EXPLANATION
𝑴 = 𝑷𝑨 × 𝑸 𝑨 + 𝑷𝑩 × 𝑸 𝑩
M= Money Income
PA= Price of Apple
QA= Quantity of Apple
PB= Price of Banana
QB= Quantity of Banana

Business Economics
SLOPE OF BUDGET LINE
∆ 𝒖𝒏𝒊𝒕𝒔 𝒔𝒂𝒄𝒓𝒊𝒇𝒊𝒄𝒆𝒅
Slope =
∆ 𝑼𝒏𝒊𝒕𝒔 𝑮𝒂𝒊𝒏𝒆𝒅
PROPERTIES OF BUDGET LINE
 Budget line is downward slopping  Budget line is straight line

 Budget line has negative slope is  Budget line is represented by price
slopping downward as more of one  As price is constant budget line
good can be bought by decreasing
some unit of other good.
is straight line
Ice Cream Chocolate
A 0 10
B 1 8
C 2 6
D 3 4
E 4 2
F 5 0
 The budget constraint can be explained by the budget line or price line.
 In simple words, a budget line shows all those combinations of two goods which the
consumer can buy spending his given money income on the two goods at their given
prices.

Business Economics
 All those combinations which are within the reach of the consumer (assuming that he
spends all his money income) will lie on the budget line. The consumer could, of course,
buy any bundle that cost less than Rs 100.(e.g. Point K )
Price Line Or The Budget Line
SHIFT IN BUDGET LINE
Effect of change in income Effect of change in prices.
of consumer.
Rightward Leftward Change in
Shift (a) Shift (b) Price of Commodity
On x-axis (d)
Change in price Change in price
of both the of commodity
Commodities (c) on y -axis

Business Economics
(a) Rightward Shift-
When there is increase in income of consumer keeping prices constant budget line will
shift to right.
(b) Leftward Shift-
When there is decrease in Income of consumer keeping prices constant budget line will
shift to left.
(c) Change in Price of both the commodities-
 When price of both the goods change, then budget line will shift.
 Fall in price of both the goods will lead to rightward shift in budget line to A,B.
 Rise in price of both the goods will lead to leftward shift in budget line to A2B2
A2
B2 B B1
(d) Change in price of commodity on x axis-
 When price of Apple falls, then new budget line is represented by shift in budget line to
right from AB to BC, as more of Apple can be purchased now.
 Similarly Rise in price of apples will shift in Budget line towards left from AB to BD.

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B R
Q
P
D A C
(e) Change in Price of Commodity on Y-axis-
 When fall in prices of Bananas, then new budget line will shift to right from PQ to PR
 Similarly Rise in prices of Bananas will shift budget line towards left from PQ to PS.
CONSUMER EQUILIBRIUM WITH INDIFFERENCE CURVE

AND BUDGET LINE
Assumptions
(i) The consumer has a given indifference map which shows his scale of preferences for
various combinations of two goods X and Y.
(ii) He has a fixed money income which he has to spend wholly on goods X and Y.
(iii) Prices of goods X and Y are given and are fixed.
(iv) All goods are homogeneous and divisible, and
(v) The consumer acts ‘rationally’ and maximizes his satisfaction.
Equilibrium
Indifference Map + Budget Line

Business Economics
Consumer’s Equilibrium
 In above figure IC1, IC2, IC3, IC4 and IC5 are shown together with budget line PL for
good X and good Y.
 Every combination on the budget line PL costs the same.
 Thus combinations R, S, Q, T and H cost the same to the consumer.
 The consumer’s aim is to maximise his satisfaction and for this, he will try to reach
the highest indifference curve.

Business Economics
Chapter – 2
Unit – IV
THEORY OF SUPPLY
MEANING OF SUPPLY
Supply refers to quantity of a commodity that a firm is willing and offer for sale at a given price
during given period of time.
TYPES OF SUPPLY
Individual Supply Market Supply

Refers to Quantity of a commodity that Refers to quantity of a commodity
individual firm is willing and able to offer that all firm is willing and able to
for sale at a given price over given period of offer for sale at a given price over
time. given period of time.
DETERMINANTS OF INDIVIDUAL SUPPLY
1) Price of Given Commodity :

Price increases so quantity supplied also increases Keeping other factor
Price decreases so quantity supplied also decreases Constant.
2) Price of other Goods :

 If price of other goods increase, so quantity supplied of other goods increases hence supply of our
good in question decreases
 If price of other goods decreases so quantity supplied of other goods decreases hence supply of
our good in question increases.
3) Price of Factor of Production :

Price of FOP Cost Chances of earning profit Supply
Price of FOP Cost Chances of Earning profit Supply
4) State of Technology :
Technology Improved COP Chances of Earning Profit Supply
Technology degraded COP Chances of Earning Profit Supply
130 Theory of Supply
Business Economics
5) Government Policy :
Taxes COP Chances of Earning Profits Supply
Taxes COP Chances of Earning Profits Supply
6) Goals / Objectives of firm :

 Generally supply of a commodity increases only at higher prices as it fulfils objective of profit
Maximization.
 However with change in Trend some firms are willing to supply more even at those prices, which
do not maximise profit.
7) Expectations :
 If sellers expect a Rise in price in near future then current market supply will Decrease.
 If sellers expect a Fall in price in near future then current market supply will Increase.
8) Number Of Sellers :
Firms Supply
Firms Supply
OTHER FACTORS
 Government’s industrial and foreign policies
 Goals of the firm, infrastructural facilities,
natural factors such as weather, floods,
earthquake
 Man- made factors such as war, labour
strikes, communal riots etc.
SUPPLY SCHEDULE
Supply Schedule is a (tabular statement) showing various quantities of commodities being supplied
at various level of price, during given period of time.
TYPES OF SUPPLY SCHEDULE
Individual Supply Schedule Market Supply Schedule

Tabular statement showing various Tabular statement showing various
quantities of commodity that a quantities of commodity that all
producer is willing to sell at various producer is willing to sell at various
level of price during given period of level of price during given period of
time time
Theory of Supply 131

Business Economics
Individual Supply
Price Quant. Supplied Quant.
Price Supplied
SA SB
1 5
2 10 1 5 10 5+10=15
2 10 20 10+20=30
3 15 3 15 25 40
4 20 4 20 35 55
5 25 40 65
5 25
SUPPLY CURVE
Supply Curve refers to graphical representation of supply schedule.
TYPES OF SUPPLY CURVE
Individual Supply Curve Market Supply Curve
Individual Supply Curve is Market supply Curve is graphical

graphical representation of representation of market supply
individual supply schedule schedule
y y
s s
Price
Price
e
Quantity supplied x Quantity supplied x

Business Economics
LAW OF SUPPLY
Price of supply states, the direct relationship between price and quantity supplied, keeping other
factor constant [Cateris Paribus]
ASSUMPTION OF LAW OF SUPPLY
 Price of the goods is constant

 No change in state of technology
 Prices of factors of production remain same
 No change in taxation policy
 Goals of producer remains same.
CHANGE IN QUANTITY SUPPLIED OR MOVEMENT ALONG THE SUPPLY CURVE
Due to  Change in price of commodity
Expansion of supply Contraction of supply

Refers to Rise in Quantity Refers to fall in quantity
supplied due to increase in supplier Due to decrease in
price price
Price Quantity Price Quantity

20 100 20 100
25 150 15 70
y y
s s
25 20
Price
Price
20 15
s s
x x
0 0 70 100
100 150
Quantity Supplied Quantity Supplied
Upward Movement along the same supply Downward movement along the same supply
curve curve
Theory of Supply 133

Business Economics
CHANGE IN SUPPLY / SHIFT IN SUPPLY CURVE
Due to  Change in any other Factor (other then price of commodity)
Increase in supply Decrease in Supply

Increase in supply refers to rise in Decrease in supply refers to fall in
supply of a commodity caused due to supply of a commodity caused due to
any factor other then own price of any factor other then own price of
commodity. commodity.
Price Supply Price Supply

20 100 20 100
20 150 20 70
y y
20 20
0 x O x
100 150 70 100
Right ward shift in supply curve. Leftward shift in supply curve

Business Economics
Chapter – 2
Unit - V
ELASTICITY OF SUPPLY
 Price elasticity of supply means the degree of responsiveness of supply for a commodity with
reference to change in price of such commodity.
 It establishes a quantitative relationship between quantity supplied of a commodity at its price,
while other factors constant.
 Higher the numerical value of elasticity, larger is affect of price change in Quantity supplied.
 Price Elasticity of supply also known as supply elasticity. Elasticity of Supply
MEASUREMENT OF ELASTICITY OF SUPPLY
Es = % change in Quantity Supplied

% change in Price
% Change in Qs = Q1 – Q x 100
Q
% Change in Price = P1 – P x 100
P
Es = P x Q
Q P
Where, P = Original Place
Q = Original Quantity
P1 = New Price
Q1 = New Quantity
Q = Q1 – Q
P = P1 - P
Elasticity of Supply 135

Business Economics
TYPES OF ELASTICITY
1- Perfectly Elastic Supply Here Es= ∞
When there is an infinite supply at a particular price

and supply becomes zero with a slight rise in price, s s
then the supply for a commodity is said to be perfectly Elastic.
Price
Quantity Supplied
Here Es= 0
2- Perfectly Inelastic Supply
When there is no change in supply with change in price,

then supply for such a commodity is said to be perfectly s
inelastic.
Price
Quantity Supplied
Here Es>1
3- Highly Elastic Supply
When percentage change in quantity supplied is more then

percentage in price, then supply is said to be highly elastic
s
Price
Quantity Supplied
136 Elasticity of Supply

Business Economics
4- Less Elastic Supply Here Es<1
s
When percentage change in quantity supplied is less then
percentage in price, then supply is said to be less elastic.
Price
Quantity Supplied
5- Unitary Elastic Supply Here E5=1
When percentage change in quantity demanded is

equal to percentage in price, then demand is said s
to unitary elastic demand Price
Quantity Supplied
QUICK RECAP
Type Value
Perfectly Elastic E5=∞

Perfectly Inelastic E5=0
Highly Elastic E5>1
Less Elastic E5>1
Unitary Elastic E5=1

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ARC ELASTICITY
E S = Q 2 – Q 1 x P 2 + P1
Q2 + Q1 P2 - P1
Where,
P1 = Original Price
Q1 = Original Quantity
P2 = New Price
Q2 = New Quantity
DETERMINANTS OF ELASTICITY OF SUPPLY
The price elasticity of supply depends on the flexibility sellers have, to change the amount of the
good they produce and sell. The more easily sellers can change the quantity they produce, the
greater the price elasticity of supply.
Following are the General determinants of elasticity of supply :
1. Period of time Longer :

Elasticity of supply more (as in Long Run ,firm can build new plants/new firms comes into
existence)
2. Number of Producer Higher Degree of Competition Supply
3. Barriers to Entry of firms Supply Elasticity
4. Spare Production Capacity Available Elasticity of Supply more Elastic
If key Raw Material easily and If key Raw Material NOT easily and
Cheapely Available Costly Available
COP Elasticity of Supply Elastic COP Elasticity of Supply less

Elastic

Business Economics
5. Adequate stock of Raw Material Elasticity of Supply

Components and finished good available
6. If Capital and Labour are mobile Elasticity if supply

For Example : A printing press can easily switch between printing magazines and greeting cards.
Similarly falling prices of a particular vegetable encourage farmers to switch to the production of
another. Products which are more continuously produced have greater supply
elasticity than those which are produced infrequently.
7. Price Expected to Rise in near future Elasticity of supply
EQUILIBRIUM PRICE
 The equilibrium price in a market is determined by the intersection between demand and supply.
It is also called the market equilibrium.
 At this price, the amount that the buyers want to buy is equal to the amount that sellers want to
sell.
 The competitive market equilibrium represents the ‘unique’ point at which both consumers and
suppliers are satisfied with price and quantity.
Hence, micro-economic
Equilibrium price is theory is also called
also called market price theory.
clearing price.
Supply and Demand Schedule

Price (Rs) Quantity Demanded Quantity Supplied Impact on price
5 6 31 Downward
4 12 25 Downward
3 19 19 Equilibrium
2 25 12 Upward
1 31 6 Upward

Business Economics
Equilibrium Price
 Demand and supply are in equilibrium at point E where the two curves intersect each other.
 It means that only at price Rs. 3 the quantity demanded is equal to the quantity supplied.
 The equilibrium quantity is 19 units and these are exchanged at price Rs 3.
 If the price is more than the equilibrium level, excess supply will push the price downwards as
there are few takers in the market at this price. For example, in Table 11, if price is say Rs5,
quantity demanded is 6 units which is quite less than the quantity supplied (31 units).
 There will be excess supply in the market which will force the sellers to reduce price if they want
to sell off their product.
 Hence the price will fall and continue falling till it reaches the level where the quantity
demanded becomes equal to the quantity supplied.
 Opposite will happen when quantity demanded is more than the quantity supplied at a
particular price.
Market Equilibrium and Social Efficiency
 Social efficiency represents the net gains to society from all exchanges that are made in a
particular market. Producer Surplus
 It consists of two components:
Consumer Surplus

Business Economics
Consumer surplus Producer surplus

 Consumer surplus is a measure  Producer surplus is the benefit derived by
of consumer welfare. producers from the sale of a unit above and
 There is welfare gain to beyond their cost of producing that unit.
producers as well when they  This occurs when the price they receive in the
participate in the market, market is more than the minimum price at

namely producer surplus. which they would be prepared to supply.
 It is represented by the area above the supply
curve and below the price line
Equilibrium Price and Social Efficiency
For all quantities below OQ, we find that there is a difference between the price that producers are
willing to accept for supplying the good and the price that prevails in the market (P).
 Producer surplus disappears when market price is at equilibrium i.e the price at which sellers are
willing to offer for sale is equal to the price that they receive.
 We find that at price P, when the market is in equilibrium, social efficiency is achieved with
both producers and consumers enjoying maximum possible surplus.

Business Economics
Chapter – 3
Unit – I
THEORY OF PRODUCTION
MEANING OF PRODUCTION
 Production is any economic activity which converts inputs into outputs which are capable of
satisfying human wants.
 Whether it is making of material goods or providing a service, it is included in production provided
it satisfies the wants of some people.
EXAMPLE
Making of cloth by an industrial worker, the services of the retailer who delivers it to consumers, the
work of doctors, lawyers, teachers, actors, dancers, etc. are production.
According to James Bates and J.R. Parkinson Production is the organized activity of
transforming resources into finished products in the form of goods and services; and the
objective of production is to satisfy the demand of such transformed resources”.
FACTORS OF PRODUCTION
Land Labour Capital Entrepreneur
I. LAND
We may discuss these factors of production briefly in the following paragraphs.
Meaning of Land
It does not mean soil or earth’s
surface alone, but refers to all free
gifts of nature which would include
 land in common parlance,
 natural resources,
 fertility of soil,
 water,
 air,
 light,
 heat
 natural vegetation
142 Theory of Production

Business Economics
CHARACTERISTICS OF LAND
(I) Land is a free gift of nature: No human effort is required for making land available for
production. It has no supply price in the sense that no payment has been made to mother
nature for obtaining land
(II) Supply of land is fixed:
 The total supply of land is perfectly inelastic from the point of view of the economy.
 However, it is relatively elastic from the point of view of a firm.
(III) Land is permanent and has indestructible powers: Land is permanent in nature and cannot be
destroyed. According to Ricardo, land has certain original and indestructible powers and these
properties of land cannot be destroyed.
(IV) Land is a passive factor: Land is not an active factor. Unless human effort is exercised on land,
it does not produce anything on its own.
(V) Land is immobile: in the geographical sense. Land cannot be shifted physically from one place
to another. The natural factors typical to a given place cannot be shifted to other places.
(VI) Land has multiple uses: and can be used for varied purposes, though its suitability in all the
uses is not the same.
(VII) Land is heterogeneous: No two pieces of land are alike. They differ in fertility and situation.
II. LABOUR
The term ‘labour’, means

any mental or physical
exertion directed to
produce goods or
services.
 it refers to various types of human efforts which require the use of physical exertion, skill
and intellect.
 Anything done out of love and affection, although very useful in increasing human well-being,
is not labour in the economic sense of the term.
 It is for this reason that the services of a house-wife are not treated as labour, while those
of a maid servant are treated as labour.
Theory of Production 143

Business Economics
Characteristics of labour:
(1) Human Effort:
 Labour is connected with human efforts whereas others are not directly connected with
human efforts.
 As a result, there are certain human and psychological considerations which may come up
unlike in the case of other factors.
Therefore,
leisure,
fair treatment, are essential for labourers.
favourable work environment
(2) Labour is perishable: Labour is highly ‘perishable’ in the sense that a day’s labour lost cannot be
completely recovered by extra work on any other day.
A labourer cannot
store
his labour.
(3) Labour is an active factor: Without the active participation of labour, land and capital may not
produce anything.
(4) Labour is inseparable from the labourer:

 A labourer is the source of his own labour power.
 When a labourer sells his service, he has to be physically present where they are delivered.
 The labourer sells his labour against wages, but retains the capacity to work.
(5) Labour power differs from labourer to labourer:

 Labour is heterogeneous in the sense that labour power differs from person to person.
 Labour power or efficiency of labour depends upon -
the labourers’ inherent and acquired qualities,
characteristics of work environment,
and incentive to work.
(6) All labour may not be productive: (i.e.) all efforts are not sure to produce resources.

Business Economics
(7) Labour has poor bargaining power:
 Labour has a weak bargaining power. Labour has no reserve price.
 Since labour cannot be stored, the labourer is compelled to work at the wages offered by the
employers.
 For this reason, when compared to employers, labourers have poor bargaining power and can
be exploited and forced to accept lower wages.
(8) Labour is mobile:

 Labour is a mobile factor.
 Apparently, workers can move from one job to another or from one place to another.
 However, in reality there are many obstacles in the way of free movement of labour from job
to job or from place to place.
(9) There is no rapid adjustment of supply of labour to the demand for it: The total supply of labour
cannot be increased or decreased instantly.
(10) Choice between hours of labour and hours of leisure:

 A labourer can make a choice between the hours of labour and the hours of leisure.
 The supply of labour and wage rate is directly relate.
However, beyond a desired level of income, the labourer reduces the

supply of labour and increases the hours of leisure in response to
further rise in the wage rate. That is, he prefers to have more of rest
and leisure than earning more money.
III. CAPITAL
Meaning of Capital
 that part of wealth of an individual or community
which is used for further production of wealth.
 Capital has been rightly defined as ‘produced means
of production’ or ‘man-made instruments of
production’,
 In other words, capital refers to all man made goods
that are used for further production of wealth.

Business Economics
Capital is a stock concept which yields

a periodical income which is a flow
concept.
Wealth V/s Capital

Wealth refers to all those goods and
human qualities which are useful in
production and which can be passed
on for value, only a part of these goods
and services can be characterised as
capital because if these resources are
lying idle they will constitute wealth
but not capital.
Types of Capital:
Fixed capital Circular Real capital Human Tangible Individual Social

capital capital capital capital capital
Fixed capital is that which exists in a durable shape and renders a series of services over a period of
time. For example tools, machines, etc.
Circulating capital is another form of capital which performs its function in production in a single
use and is not available for further use. For example, seeds, fuel, raw materials, etc.
Real capital refers to physical goods such as building, plant, machines, etc.
Human capital refers to human skill and ability. This is called human capital because a good deal of
investment goes into creation of these abilities in humans.

Business Economics
Tangible capital can be perceived by senses whereas intangible capital is in the form of certain
rights and benefits which cannot be perceived by senses. For example, copyrights, goodwill, patent
rights, etc.
Individual capital is personal property owned by an individual or a group of individuals.
Social Capital is what belongs to the society as a whole in the form of roads, bridges, etc.
CAPITAL FORMATION
 Capital formation means a sustained increase in the stock of real capital in a country.
 Capital formation involves production of more capital goods like, machines, tools, factories,
transport equipments, electricity etc. which are used for further production of goods. Capital
formation is also known as investment.
Stages of capital formation:
There are mainly three stages of capital formation which are as follows:
1. Savings:
 The basic factor on which formation of capital depends is the ability to save.
Stage – 1  The ability to save depends upon the income of an individual.
 Higher incomes are generally followed by higher savings.
Income Savings
[As APC is reduced and APS is increased]
2. Mobilisation of savings:
 It is not enough that people save money; the saved money should enter into circulation and
Stage – 2 facilitate the process of capital formation.
 Availability of appropriate financial products and institutions is a necessary precondition for
mobilisation of savings.
 There should be a wide spread network of banking and other financial institutions to collect
public savings and to take them to prospective investors.
 In this process, the state has a very important and positive role to play both in generating
savings through various fiscal and monetary incentives and in channelising the savings
towards priority needs of the community so that there is not only capital generation but also
socially beneficial type of capital formation.
3. Investment:
 The process of capital formation gets completed only when the real savings get converted into
Stage – 3
real capital assets.

Business Economics
 An economy should have an entrepreneurial class which is prepared to bear the risk of business
and invest savings in productive avenues so as to create new capital assets.
IV. ENTREPRENEUR
 The task of the entrepreneur is to initiate production work and to bear the risks involved in it.
Functions of an entrepreneur: In general, an entrepreneur performs the following functions:

(i) Initiating business enterprise and resource co-ordination:
An entrepreneur senses business opportunities
Conceives project ideas
Decides on scale of operation, products and processes and builds up,

owns and manages his own enterprise
(ii) Risk bearing or uncertainty bearing: Entrepreneur will bear all Risk of business.
(iii) Innovations:
What is Innovation
Innovation refers to commercial application of a
Given
new idea or invention to better fulfilment of
by
business requirements.
Schumpeter
Include the introduction of new or improved
products, devices and production processes,
utilisation of new or improved source of raw-
materials, adoption of new or improved
technology, novel business models, extending
sales to unexplored markets etc.
According to Schumpeter, the task of the

Business Economics
Enterprise’s objectives and constraints
The standard assumption about an

enterprise is that its business
activity is carried out with the sole
objective of earning profits.
Other objectives of an enterprise may be broadly categorised under the following heads:
1) Organic objectives
2) Economic objectives
3) Social objectives
4) Human objectives
5) National objectives
1. Organic objectives:
 The basic minimum objective of all kinds of enterprises is to survive or to stay alive.
 An enterprise can survive only if it is able to produce and distribute products or services at a
price which enables it to recover its costs.
 If an enterprise does not recover its costs of staying in business, it will not be in a position to
meet its obligations to its creditors, suppliers and employees with the result that it will be
forced into bankruptcy.
 Therefore, survival of an enterprise is essential for the continuance of its business activity.
 Once the enterprise is assured of its survival, it will aim at growth and expansion.
2. Economic objectives:
Profit, in the accounting sense, is the difference between total

revenue and total costs of the firm. Economic profit is the difference
between total revenue and total costs, but total costs here costs include both
explicit and implicit costs. Accounting profit considers only explicit costs while
economic profit reflects explicit and implicit costs i.e. the cost of self-owned factors
used by the entrepreneur in his own business. Since economic profit includes these opportunity
costs associated with self-owned factors, it is generally lower than the accounting profit. When
the economist speaks of profits, s/he means profits after taking into account the capital and
labour provided by the owners i.e. s/he differentiates between normal profits and super normal
profits. Normal profits include normal rate of return on capital invested by the entrepreneur,
remuneration for the labour and the reward for risk bearing function of the entrepreneur.

Business Economics
` Normal profit (zero economic profit) is a component of costs

and therefore what a business owner considers as the minimum
necessary to continue in the business. Supernormal profit, also called
economic profit or abnormal profit is over and above normal profits. It is
earned when total revenue is greater than the total costs. Total costs in this case
include a reward to all the factors, including normal profit.
OBJECTIVE OF UTILITY MAXIMIZATION"
First in case of firms owned and managed Second, in case of large joint stock
by the entrepreneur himself, companies
Utility maximisation implies that in choosing The utility function of managers or

an output level, the entrepreneur owner executives of these companies includes
considers not only the money profits which not only the profits which they earn for
he will make, but also the sacrifice of leisure the shareholders but also the promotion
which he would have to make in doing the of sales, maintaining lavish offices,
necessary activity for producing that level of seeking to have a larger member of staff
output. under their supervision etc.
Cyert and March suggests four possible

functional goals in addition to profit goal
namely, production goal, inventory goal, sales
goal and market share goal
3. Social objectives: Important social objectives of business are:

 To maintain a continuous and sufficient supply of
unadulterated goods
articles of standard quality.
 To avoid profiteering and anti-social practices.

 To create opportunities for gainful employment for the people in the society.
 To ensure that the enterprise’s output does not cause any type of pollution
Air
Water
Noise.

Business Economics
4. Human objectives: Some of the important human objectives are:
Human beings are the

most precious resources
of an organisation.
 To provide fair deal to the employees at different levels

 To develop new skills and abilities and provide a work climate in which they will grow as
mature and productive individuals.
 To provide the employees an opportunity to participate in decision-making in matters
affecting them.
 To make the job contents interesting and challenging.
5. National objectives: Some of the national objectives are:

 To remove inequality of opportunities and provide fair opportunity to all to work and to
progress.
 To produce according to national priorities.
 To help the country become self-reliant and avoid dependence on other nations.
 To train young men as apprentices and thus contribute in skill formation for economic growth
and development.

Business Economics
CONSTRAINT TO ENTERPRISE ACTION
1. Lack of knowledge and information: The enterprise functions in an uncertain world where
due to lack of accurate information, many variables that affect the performance of the
firm cannot be correctly predicted for the current month or the current year, let alone
for the future years. Similarly, the firms may not know about the prices of all inputs and
the characteristics of all relevant technologies. Under such circumstances, it is very
difficult to determine what the profit maximising price is.
2. There may be other constraints such as restrictions imposed in the public interest by the
state on the production, price and movement of factors. In practice, there are several
hindrances for free mobility of labour and capital. For example, trade unions may place
several restrictions on the mobility of labour or specialised training may be required to
enable workers to change occupation. These contingencies may make attainment of
maximum profits a difficult task.
3. There may be infrastructural inadequacies and consequent supply chain bottlenecks
resulting in shortages and unanticipated emergencies. For example, there could be
frequent power cuts, irregular supply of raw-materials or non-availability of proper
transport. This could put limitations on the power of enterprises to maximise profits.
4. Changes in business and economic conditions which become contagious due to the highly
connected nature of economies, place constraints by causing demand fluctuations and
instability in firms’ sales and revenues. Besides, external factors such as sudden change
in government policies with regard to location, prices, taxes, production, etc. or natural
calamities like fire, flood etc. may place additional burdens on the business firms and
defeat their plans. When firms are forced to implement policies in response to fiscal
limitations, legal, regulatory, or contractual requirements, these have adverse
consequences on the firms’ profitability and growth plans.
5. Events such as inflation, rising interest rates, unfavourable exchange rate fluctuations
cause increased raw material, capital and labour costs and affect the budgets and
financial plans of firms. Significant constraints are also imposed by the inability of firms
to find skilled workforce at competitive wages as well as due to the recurring need for
personnel training.

Business Economics
Enterprise’s Problems
An enterprise faces a number of problems from its inception, through its life time and till its closure.
We shall try to get a few insights about them from the following discussion.
Problems Problems Problems Problems Problems Problems Problems Problems

relating to relating to relating to relating to relating to relating to relating to relating to
objectives location and Selecting and Finance organization marketing Legal industrial
size of the organizing structure formalities relations
plant physical
facilities
Problems relating to objectives: The problem is that these objectives are multifarious and very often
conflict with one another.
For example, involves improving the quality, slashing the prices etc.
Problems relating to location and size of the plant:

 Cost of labour
 facilities and cost of transportation.
 An enterprise has to decide about the  It has to decide whether it is to be a

location of its plant. small scale unit or large scale unit.
 It has to decide whether the plant  Due consideration will have to be given
should be located near the source of to technical, managerial, marketing
raw material or near the market. and financial aspects of the proposed
business before deciding on the scale
of operations.
It goes without saying that the management must make a realistic evaluation of its strengths and
limitations while choosing a particular size for a new unit.

Business Economics
Problems relating to selecting and organising physical facilities:
 A firm has to make decision on the nature of production process to be employed and the type
of equipments to be installed.
 The choice of the process and equipments will depend upon the design chosen and the required
volume of production.
Problems relating to Finance:

Financial planning involves
(i) determination of the amount of funds required for the enterprise with reference to the physical
plans already prepared
(ii) assessment of demand and cost of its products
(iii) estimation of profits on investment and comparison with the profits of comparable existing
concerns to find out whether the proposed investment will be profitable enough and
(iv) determining capital structure and the appropriate time for financing the enterprise etc.
Problems relating to organisation structure:

 It has to divide the total work of the enterprise into major specialised functions and then
constitute proper departments for each of its specialized functions.
 Not only this, the functions of all the positions and levels would have to be clearly laid down
and their inter-relationship (in terms of span of control, authority, responsibility, etc) should
be properly defined. In the absence of clearly defined roles and relationships, the enterprise
may not be able to function efficiently.
Problems relating to marketing:

The enterprise has to make decision regarding 4 P’s namely,
4P’s
Product Promotion
variety, quality, design, Methods of communicating
features, brand name, with consumers through
packaging, associated services, personal selling, social
utility etc. contacts, advertising, publicity
etc.
Price Place
Policies regarding pricing, Policy regarding coverage,
discounts, allowance, credit outlets for sales, channels of
terms, concessions, etc. distribution, location and
layout of stores, inventory,
stores, inventory, logistics etc.

Business Economics
Problems relating to legal formalities:
A number of legal formalities have to be carried out during the time of launching of the enterprise
as well as during its life time and its closure.
 These formalities relate to assessing and paying different types of taxes (corporate tax, excise
duty, sales tax, custom duty, etc.),
 Maintenance of records, submission of various types of information to the relevant authorities
from to time,
 Adhering to various rules and laws formulated by government (for example, laws relating to
location, environmental protection and control of pollution, size, wages and bonus, corporate
management licensing, prices) etc.
Problems relating to industrial relations:

Various problems which an enterprise faces with regard to industrial relations are –
 The problem of winning workers’ cooperation,
 The problem of enforcing proper discipline among workers,
 The problem of dealing with organised labour.
 The problem of establishing a state of democracy in the industry by associating workers with
the management of industry.
PRODUCTION FUNCTION
 it states technological relationship between inputs and output.
 The production function can be algebraically expressed in the form of an equation in which
the output is the dependent variable and inputs are the independent variables.
 The equation can be expressed as:
Q = f (a, b, c, d …….n)
Where ‘Q’ stands for the rate of output

of given commodity and a, b, c, d…….n,
are the different factors (inputs) and
services used per unit of time.
Assumptions of Production Function:

First we assume that the relationship between inputs and outputs exists for a specific period of
time. In other words, Q is not a measure of accumulated output over time.
Second, it is assumed that there is a given “state-of-the-art” in the production technology. Any
innovation would cause change in the relationship between the given inputs and their output. For
example, use of robotics in manufacturing or a more efficient software package for financial
analysis would change the input-output relationship.
Third assumption is that whatever input combinations are included in a particular function, the
output resulting from their utilization is at the maximum level.

Business Economics
Meaning of Capital
 The relationship between the maximum amount of output
that can be produced and the input required to make that
output. It is defined for a given state of technology i.e., the
maximum amount of output that can be produced with
given quantities of inputs under a given state of technical
knowledge. (Samuelson)
 It can also be defined as the minimum quantities of various
inputs that are required to yield a given quantity of output.
Q = f (L, K). Where Q = Output

L = Labour
K = Capital
SHORT RUN LONG RUN
 A period will be considered short-run period if the  The long run is a period of time (or
amount of at least one of the inputs used remains planning horizon) in which all
unchanged during that period. factors of production are variable.
 Thus, short-run production function shows the  It is a time period when the firm
maximum amount of a good or service that can be will be able to install new machines
produced by a set of inputs, assuming that the and capital equipments apart from
amount of at least one of the inputs used remains increasing the variable factors of
fixed (or unchanged). production.
 Generally, it has been observed that during the short  A long-run production function
period or in the short run, a firm cannot install a shows the maximum quantity of a
new capital equipment to increase production. good or service that can be produced
 It implies that capital is a fixed factor in the short by a set of inputs, assuming that
run. the firm is free to vary the amount
 Thus, in the short-run, the production function is of all the inputs being used.
studied by holding the quantities of capital fixed,  The behaviour of production when
while varying the amount of other factors (labour, all factors are varied is the subject
raw material etc.) matter of the law of returns to
This is done when the law of variable proportion is scale.
studied.

Business Economics
Cobb-Douglas Production Function
 Paul H. Douglas and C.W. Cobb of the U.S.A. studied the production function of the American
manufacturing industries.
 This production function applies not to an individual firm but to the whole of manufacturing
in the United States.
 In this case, output is manufacturing production and inputs used are –
labour
capital.
Cobb-Douglas production function is

stated as:
a (1-a)
Q = KL C
where ‘Q’ is output, ‘L’ the quantity of

labour and ‘C’ the quantity of capital.
‘K’ and ‘a’ are positive constants.
 The conclusion drawn from this famous statistical study is that labour contributed about
3/4th and capital about 1/4th of the increase in the manufacturing production.
 Although, the Cobb-Douglas production function suffers from many shortcomings, it is
extensively used in Economics as an approximation.
MEANING OF TOTAL PRODUCT, AVERAGE PRODUCT, MARGINAL PRODUCT
TOTAL PRODUCT (TP)

Total Product refers to
Total Quantity of goods produced by a firm during a

given period of time with given number of inputs.
Example:- If 10 labours produce 60 kg of Rice then total product is 60 kg.

In short Run, a firm can expand TP by increasing only the variable factors. However in Long
Run TP can be Raised by increasing both fixed and variable factors.

Business Economics
AVERAGE PRODUCT
Average Product refers to output per unit of variable input.

Example:- If 10 labours produce 60 kg. of Rice then Average Product is 6 kg.
𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 (𝐴𝑃) =
𝑈𝑛𝑖𝑡 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑓𝑎𝑐𝑡𝑜𝑟𝑠
𝑇𝑃
𝐴𝑃 =
𝐿
MARGINAL PRODUCT
Marginal Product refers to Addition to total product, when
One more unit of variable factor is employed
𝑀𝑃 = 𝑇𝑃 − 𝑇𝑃
Where,
MPn= Marginal Product of nth unit of variable factor.
TPn= Total product of nth unit of variable factor
TPn-1= Total product of (n-1)th unit of variable factor
n= No. of unit of variable factor
For example:- if 10 Labours make 60 kg of Rice and 11 Labours make 67 kg of Rice

then MP of 11th laboure will be
HP11 = TP11 = TP10
= 67-60
= 7 kg.
One More way to calculate MP
∆𝑇𝑃 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑜𝑡𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

𝑀𝑃 = =
∆𝑄 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐹𝑎𝑐𝑡𝑜𝑟

Business Economics
This formulae is used

when difference
variable factor is of
more then 1
∆𝑇𝑃
𝑀𝑃 =
∆𝑄
Example- Suppose 2 Labours produce 60 kgs and 5 labours produce 90 kgs, then MP will be
∆𝑇𝑃 90 − 60 30
𝑀𝑃 = = = = 10 𝑘𝑔𝑠.
∆𝑛 5−2 3
Relation between AP and MP
1- As long as MP is more than AP; AP Rises

2- When AP=MP [AP is at its maximum]
3- When MP is less then AP, AP falls.
There after both MP and AP falls
AP/MP
but MP becomes negative
AP remains positive AP
MP

Business Economics
Law of Variable Proportion

Law of Variable Proportions [LVP] states that as we increase, quantity of only one input keeping
other input fixed, then
Total Product (TP) Initially increase at Increasing Rate

Then at decreasing Rate
Finally at a Negative Rate
Law of Variable Proportion is also known as
Law of Returns
Law of Returns to Factors
Returns to Variable Factors
Assumption of Law of Variable Proportion

 The state of technology is assumed to be given and unchanged. If there is any improvement in
technology, then marginal product and average product may rise instead of falling.
 There must be some inputs whose quantity is kept fixed. This law does not apply to cases when
all factors are proportionately varied. When all the factors are proportionately varied, laws of
returns to scale are applicable.
 The law does not apply to those cases where the factors must be used in fixed proportions to yield
output. When the various factors are required to be used in fixed proportions, an increase in one
factor would not lead to any increase in output i.e., marginal product of the variable factor will
then be zero and not diminishing.
 We consider only physical inputs and outputs and not economic profitability in monetary terms.
Fig.: Law of Variable Proportions

Business Economics
Stage – 1
Increasing Return to Factor
Also known as Stage of

Increasing Return
Stage 1: The Stage of Increasing Returns: The total product increases at an increasing rate upto a
point (in figure upto point F), marginal product also rises and is maximum
“Point Where TP stops rising at

Increasing Rate”
When MP falls but Remains Positive; TP Rises at Diminishing Rate

Stage 1 ends where AP Curve reaches its Highest Point.
In the first phase every additional variable factor adds more and more to total output.
It means, TP increases at Increasing Rate and MP of each variable factor Rises
It happens because, initially Quantity of variable input is too small as compared to fixed input
As production starts There is efficient use of fixed input, which raises productivity of variable input
due to division of labour.

Business Economics
Stage – 2
Diminishing Return to Factor
Also known as Stage of

Diminishing Return
 The total product continues to increase at a diminishing rate until it reaches its maximum at
point H, where the second stage ends.
 In this stage, both marginal product and average product of the variable factor are diminishing
but are positive.
 At the end of this stage i.e., at point M (corresponding to the highest point H of the total
product curve), the marginal product of the variable factor is zero.
 Stage 2, is known as the stage of diminishing returns because both the average and marginal
products of the variable factors continuously fall during this stage.
 This stage is very important because the firm will seek to produce within its range.
Explanation of law of increasing returns:

In the second phase every additional variable factor adds lesser and
lesser amount of output. It means TP increases at diminishing rate and MP
falls with increase in variable factor.
That is why This phase is known as diminishing returns to factor.
Stage 3: Stage of Negative Returns: Total product declines, MP is negative, average product is
diminishing. This stage is called the stage of negative returns since the marginal product of the
variable factor is negative during this stage.
Stage 1 and Stage (3) are

called as stages of
Economic absurdity (Or)
Economic Non Sense

Business Economics
 Employment of additional variable factor causes TP to decline. MP now becomes negative
 Therefore this phase is known as Negative Returns to a factor
 It happens because Amount of variable input becomes too large in comparison to the fixed input
which leads to decline in TP.
It is thus clear that a rational

producer will never produce in
stage 1 and stage 3.
Law of Return to Scale
Returns to scale refers to change in Output when all the factors Inputs
are changed Simultaneously, in same Proportion in long run
a) Constant Returns to Scale

When Proportionate increase in total output is equal to proportionate increase in inputs it is
known as constant returns to scale
Inputs (units) Output Percentage Percentage

[K=capital; L=labour] (units) increase in input increase in output
4k+8L 600 - -
8k+16L 1,200 100% 100%
16k+32L 2,400 100% 100%
Constant return to scale,

also called as “Linear
Homogeneous Production
Function”

Business Economics
b) Increasing Returns to scale
When proportionate increase in total output is more than proportionate increase in inputs it is
known as increasing return to scale.

(K=Capital;L=labour) (units) Increase in inputs Increase in output
1k+2L 100 - -
2k+4L 250 100% 150%
4k+8L 600 100% 140%
c) Diminishing Returns to Scale

When proportionate increase in total output is less to proportionate increase in inputs it is known
as diminishing returns to scale.
[K=Capital; (units) Increase in input Increase in output
L=Labour]
16k+32L 2,400 - -
32K+64L 4,200 100% 75%
64K+128L 7,350 100% 75%
The function was constructed in such a way that the exponents summed to a+1 – a=1.
However, later they relaxed the requirement

and rewrote the equation as follows
a b
Q=KL C
= k (K, L)
Where ‘Q’ is output, ‘L’ the quantity of

labour and ‘C’ the quantity of capital, ‘K’
and ‘a’ and ‘b’ are positive constant.

Business Economics
“COBB-DOUGLAS AND RETURN TO SCALE”
If a + b > 1 Increasing returns to scale result i.e. increase in output is more than the
proportionate increase in the use of factors (labour and capital).
a+b=1 Constant returns to scale result i.e. the output increases in the same proportion in
which factors are increased.
a+b<1 decreasing returns to scale result i.e. the output increases less than the
proportionate increase in the labour and capital.
PRODUCTION OPTIMISATION
 Normally, a profit maximising firm is interested to know what combination of factors of
production (or inputs) would minimise its cost of production for a given output.
 This can be known by combining the firm’s production and cost functions, namely isoquants
and iso-cost lines respectively.
ISOQUANTS:
 Isoquants are similar to indifference curves in the theory of consumer behaviour.
 An isoquant represents all those combinations of inputs which are capable of producing the
same level of output.
 Since an isoquant curve represents all those combination of inputs which yield an equal quantity
of output, the producer is indifferent as to which combination he chooses.
 Therefore,
Isoquants are also called
equal- production
product indifference
curves curves
iso-
product
curves.

Business Economics
 The concept of isoquant can be easily understood with the help of the following schedule.
Table 2 : Various combinations of X and Y to produce a given level of output
Factor combination Factor X Factor Y MRTS

A 1 12
B 2 08 4
C 3 05 3
D 4 03 2
E 5 02 1
When we plot the various combinations of factor X and factor Y, we get a curve IQ as shown in
Figure.
Fig.: Equal Product Curve or Isoquant
PROPERTIES OF INDIFFERENCE CURVES

 Isoquants have properties similar to indifference curves.
 Isoquants are
negatively sloped,
convex to the origin due to diminishing marginal rate of technical substitution (MRTS)
non-intersecting.
ISO COST OR EQUAL-COST LINES:

Iso cost line,
Iso cost line, also known

as budget line or the
budget constraint line

Business Economics
It shows the various alternative combinations of two factors which the firm can buy with given
outlay.
 Suppose a firm has Rs. 1,000 to spend on the two factors X and Y.
 If the price of factor X is Rs. 10 and that of Y is Rs. 20, the firm can spend its outlay on X
and Y in various ways.
 It can spend the entire amount on X and thus buy 100 units of X and zero units of Y or it can
spend the entire outlay on Y and buy 50 units of it with zero units of X factor.
 In between, it can have any combination of X and Y.
 Whatever be the combination of factors the firm chooses, the total cost to the firm remains
the same.
In other words, all

points on a budget line
would cost the firm the
same amount.
GRAPHICAL REPRESENTATION OF ISO-COST LINE

 The X-axis shows the units of factor X and Y-axis the units of factor Y.
 When the entire ` 1,000 is spent on factor X, we get OB of factor X and when the entire amount is
spent on factor Y we get OA of factor Y.
 The straight line AB which joins points A and B will pass through all combinations of factors X
and Y which the firm can buy with outlay of ` 1,000.
 The line AB is called iso-cost line.
Graphical Representation of Iso-Cost Line”
Fig. 3: Iso-cost lines

Business Economics
 Above graph shows various iso-cost lines representing different combinations of factors with
different outlays.
 Isoquants, which represent the technical conditions of production for a product and iso-cost lines
which represent various ‘levels of cost or outlay’ (given the prices of two factors) can help the
firm to optimize its production.
 It may try to minimise its cost for producing a given level of output or it may try to maximise
the output for a given cost or outlay.
LEAST COST COMBINATION OF FACTORS : PRODUCERS EQUILIBRIUM

The problem is with which factor combination the firm should try to produce the pre-decided level
of output.
The firm will try to use the least-cost combination of factors.
The least cost combination of factors can be found by super-imposing the isoquant that represents
the pre decided level of output on the iso-cost lines. This is shown in below graph.
Fig. 4 : Least-cost Combination of Factors: Producer’s Equilibrium

Business Economics
PRACTICAL EXAMPLES
 Suppose the firm has decided to produce 1,000 units (represented by iso-quant P).
 These units can be produced by any factor combination lying on P such as A, B, C, D, E, etc.
 The cost of producing 1,000 units would be minimum at the factor combination represented
by point C where the iso-cost line MM1 is tangent to the given isoquant P.
 At all other points such as A, B, D, E the cost is more as these points lie on higher iso- cost
lines Compared to MM1.
 Thus, the factor combination represented by point C is the optimum combination for the
producer. It represents the least-cost of producing 1,000 units of output.
 It is thus clear that the tangency point of the given isoquant with an iso-cost line represents
the least cost combination of factors for producing a given output.

Business Economics
Chapter – 3
Unit - II
THEORY OF COST
ACCOUNTING COST
 Accounting costs relate to those costs which involve cash payments by the entrepreneur of the
firm.
Also known
 Thus, accounting costs are explicit costs and includes all the payments
as Explicit
and charges made by the entrepreneur to the suppliers of various productive Cost.
factors.
ECONOMIC COST
Economic costs include:
The normal return on The wages or salary not paid

money capital invested by to the entrepreneur, but
the entrepreneur himself could have been earned if
in his own business the services had been sold
somewhere else.
Also known
as Implicit
Cost
Economic Cost = Normal Profit is part of
Accounting + Implicit Implicit Cost

Cost Cost
170 Theory of Cost

Business Economics
Opportunity Costs.
Outlay Costs
 Opportunity cost, on the other hand,
 Outlay costs involve actual expenditure of is concerned with the cost of the next best
funds on, say, wages, materials, rent, alternative opportunity which was foregone in
interest, etc
order to pursue a certain action.
 Outlay costs involve financial expenditure at
 It is the cost of the missed opportunity and
some point of time and hence are recorded
involves a comparison between the policy that
in the books of account
was chosen and the policy that was rejected.
 It relates to sacrificed alternatives; it is, in
general not recorded in the books of account.
.
Zero Economics Profit V/s Positive Economic Profit
Zero Economic Profit Positive Economic Profit
If Total Revenue just cover both If Total Revenue are Greater then Sum
explicit and implicit cost of Explicit Cost and Implicit Cost.
Then he has zero Economic Profit Then he has positive Economic Profit
Positive Economic Profit

also known as Abnormal
Profits.
Theory of Cost 171

Business Economics
Direct Costs Indirect Costs
 Direct costs are those which have direct  Indirect costs are those which are not easily
relationship with a component of operation and definitely identifiable in relation to a
like manufacturing a product, organizing a plant, product, process or department.
process or an activity.  Therefore, such costs are not visibly traceable
 Since such costs are directly related to a to specific goods, services, operations, etc.;
product, process or machine, they may vary but are nevertheless charged to different jobs
according to the changes occurring in these. or products in standard accounting practice.
 Direct costs are costs that are readily  Examples of such costs are electric power
identified and are traceable to a particular and common costs incurred for general
product, operation or plant. operation of business benefiting all products
 Even overhead costs can be direct as to a jointly.
department; manufacturing costs can be
Also known as
direct to a product line, sales territory,
Non-Traceable
customer class etc.
Also known Cost
as Traceable
Cost
Incremental Cost Sunk Cost
 Incremental cost refers to the additional cost  Sunk costs refer to those costs which are
incurred by a firm as result of a business already incurred once and for all and cannot
decision. be recovered.
 For example, incremental costs will have to  They are based on past commitments and
be incurred by a firm when it makes a cannot be revised or reversed if the firm
decision to change its product line, replace wishes to do so.
worn out machinery, buy a new production  Examples of sunk costs are expenses incurred
facility or acquire a new set of clients. on advertising, R& D, specialised equipments
and fixed facilities such as railway lines.
Sunk costs act as an important barrier to
entry of firms into business.

172 Theory of Cost
Business Economics
Historical Costs Replacement Costs
 Historical cost refers to the cost incurred  Replacement cost is the money expenditure
in the past on the acquisition of a that has to be incurred for replacing an old
productive asset such as machinery, asset.
building etc.
Private Costs Social Costs
 Private costs are costs actually incurred  Social cost refers to the total cost borne by
or provided for by firms and are either the society on account of a business activity
explicit or implicit. and includes private cost and external cost.
 They normally figure in business  It includes the cost of resources for which the
decisions as they form part of total firm is not required to pay price such as
cost and are internalised by the firm. atmosphere, rivers, roadways etc. and the cost
in terms of dis-utility created such as air,
water and environment pollution.
COST FUNCTION
 Cost function refers to the mathematical relation between cost of a product and the various
determinants of costs.
 In a cost function,
Independent Variable
Dependent Variable
The independent variables are the price
The dependent variable is unit of a factor, the size of the output or
cost or total cost any other relevant phenomenon which
has a bearing on cost.
Theory of Cost 173

Business Economics
 Such as technology, level of capacity utilization, efficiency and time period under consideration.
 Cost function is a function which is obtained from
Production function
Market supply of inputs.
 It expresses the relationship between costs and output.
 Cost functions are derived from actual cost data of the firms and are presented through cost
curves.
 Cost functions are of two kinds:
Short-run cost functions
Long-run cost functions.
Short Run V/S Long Run
Short Run
 Short run is a period of time in which
output can be increased or decreased by
changing only the amount of variable
factors such as, labour, raw materials, etc.
 In the short run, quantities of fixed
factors cannot be varied in accordance Long Run
with changes in output.  Long run is a period of time in which
 If the firm wants to increase output in the quantities of all factors may be
the short run, it can do so only by varied. In other words, all factors
increasing the variable factors, i.e., by become variable in the long run.
using more labour and/or by buying more

raw materials.
 Thus, short run is a period of time in
which only variable factors can be varied,
while the quantities of fixed factors
remain unaltered.
174 Theory of Cost

Business Economics
TOTAL FIXED COST
 Fixed cost refers to those cost which do not vary directly with the level of output.
 For Example:-
 Rent of Premises
 Interest on loans
 Salary of Permanent Staff
 Insurance premium etc.
Fixed Cost is also known as Supplementary Cost
Overhead Cost
General Cost
Indirect Cost
Unavoidable Cost
Shut down Cost.
 Fixed cost is incurred on fixed factor like Machinery, Land, Building etc.
Which Cannot be Changed in Short Run.
1. Fixed cost Remains the same whether output is Large
Small
Zero
y
Output TFC
0 12
Fixed Cost
12 TFC 1 12
2 12
3 12
O 4 12
x
Output 5 12
Theory of Cost 175

Business Economics
Shape of Graph
“Straight Line Parallel to x-

axis”
TOTAL VARIABLE COST
 Variable Cost Refers to those cost, which vary directly with level of output
 For Example- Payment of Raw Material, Salary of Casual Labour
 Variable Cost are Incurred on Variable Factors like Raw Material, Direct Labour, Power etc.
Which Changes with change in level of output.
Rise with Rise in output
It Means Variable Cost Fall with fall in output
Is Zero at zero level of output
y TUC Output TVC

0 0
1 6
2 10
TVC
3 15
4 24
5 35
O x
Output
Also Known as
Shape of Graph?
 Prime Cost
 Direct Cost
Inversely S-Shaped  Avoidable Cost
176 Theory of Cost

Business Economics
Whys is TVC Curve Inversely S-Shaped
Because Initially TVC Increases at decreasing Rate
Later it increases at increasing rate
1. Initially TVe Rises at decreasing rate because of better utilisation of fixed factor
and increase in efficiency of variable factor.
2. Thereafter TVe Rises at an increasing rate because of fall in efficiency of variable
factors
due to limitation of fixed factor.
Assumption y Complete Variable Cost

Variable Cost change
line early with
vc
changes in output.
Total
Variable
Cost
O x
Output
Theory of Cost 177

Business Economics
AVERAGE FIXED COST
Average fixed cost refers to Per unit fixed cost of production
𝑻𝑭𝑪
AFC= 𝑸
AFC= Avg Fixed Cost
TFC= Total Fixed Cost
Q= Quality of Output
y
TFC AFC
0 12 -
1 12 12
2 12 6
AFC
3 12 4
4 12 3
5 12 240
AFC
x Shape
O Quantity
Rectangular hypeubola
“AFC will fall as output

increases”
“AFC will not touch

x-axis and can never be
zero
178 Theory of Cost

Business Economics
AVERAGE VARIABLE COST .
Average variable cost refers to the per unit variable cost & production.
It is calculated by
𝑻𝑽𝑪
AVC= 𝑸
Ave= Avg. Variable Cost.
TVC= Total Variable Cost
Q= Qty of Output
Output TVC AVC
0 0 -
1 6 6
2 10 5
3 15 5
4 24 6
5 35 7
POINT TO BE NOTED
 Average variable cost normally

falls as output increases from
zero to normal capacity output
due to occurrence of increasing
returns to variable factors.
 But beyond the normal
capacity output, average
variable cost will rise steeply
because of the operation of
diminishing returns
Theory of Cost 179

Business Economics
AVERAGE COST
Average cost refers to Per unit total cost of production
𝑻𝑪
AC= 𝑸
AC= Avg. Cost.

TC= Total Cost Shape2
Q= Quality of Output ‘U-Shaped Curve’
AC is also defined as sum of average fixed cost and Average variable cost.
y
Phase-1 :- When both AFC and AVC falls;
AC
AC also falls
Phase-2:- AFC continue to fall but AVC Average Cost
remain constant so AC fall
(due to falling) AFC till it B
reaches minimum point B O

x
Phase -3 :- Rise in AVC is more then
Fall in AFC: So AC rises
Shape
“U- shaped curve”
180 Theory of Cost

Business Economics
MARGINAL COST
Marginal cost refers to addition to total cost when one more unit of output is produced
MCn= TCn-TCn-1
(OR)
MCn=TVCn-TVCn-1
n= Number of units produced

MCn= Marginal cost of nth unit.
TCn= Total cost of n units
TCn-1= Total cost of (n-1) units.
One more way to calculate MC
∆𝑻𝑪 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒕𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕

=
∆𝑸 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒖𝒏𝒊𝒕𝒔 𝒐𝒇 𝒐𝒖𝒕𝒑𝒖𝒕
Output TVC TFC TC MC Mc

TCn -TCn-1 TVCn -TVCn-1
This formula is
used when 0 0 12 12 - -
difference in two 1 6 12 18 18+2=6 6-0=6
2 10 12 22 22-18=4 10-6=4
units is of More
3 15 12 27 27-22=5 5
then 1
4 24 12 36 9 9
5 35 12 47 11 11
Theory of Cost 181

Business Economics
Relation between TC, TFC, TUC
 TFC Curve is horizontal straight line parallel to x-axis as it remains constant at all level of
output.
 TC and Tue Curves are invensely S-shaped
 At zero output TC= TFC because
There is no variable cost at zero level of output ,So TC and TFC
curves start from some point which is above origin
 Vertical distance between TFC and TC curve is equal to TVC
 TC and TVC curves are parallel to each other and vertical distance between them remains same
at all levels of output.
Because the gap between them represent TFC
RELATIONS
(A) Between AC and MC
y
 When MC is less then AC; AC falls
AC
MC
 MC cuts Ac, when AC is at its
minimum
Cost
 When MC is more than AC; Ac rises
O
Output [in Units] x
182 Theory of Cost

Business Economics
Can AC falls
Can AC Rise
When MC is Rising?
When MC is Falling?
Yes, Possible only when

No, because when
MC is less then AC
MC falls AC also falls
(B) Between AVC and MC
y  When MC is less then AVC; AVC falls
 MC cuts AVC, when AVC is at its minimum

AC
MC
 When MC is more than AVC; AVC Rises
Cost
O
x
Output [in Units]
(C) Relation between AC, AVC and MC
y  When MC is less then AC and AVC; AC and
AC AVC both falls

MC
AVC  MC cuts AC and AVC at there minimum
Cost
 When MC is more than AC and AVC; AC
and AVC both rises
O
x
Output [in Units]
Theory of Cost 183

Business Economics
(D) Relation between TC and MC
y  Marginal cost is addition to total cost

TC
when one more unit of output is
produced
Cost (in Rs)
 When MC declines; TC Rises at
diminshing rate.
 When MC is at its minimum ; TC Stops
Output [in Units] x

rising at diminishing rate
y
 When MC Rises; TC Rises at increasing
x Rate
MC
Cost (in Rs)
O
Output
184 Theory of Cost

Business Economics
LONG RUN AVERAGE COST CURVE
 In the long run the firm can build any size or scale of plant and therefore, can move from one
plant to another; it can acquire a big plant if it wants to increase its output and a small plant if
it wants to reduce its output.
 The long run being a planning horizon, the firm plans ahead to build the most appropriate scale
of plant to produce the future level of output.
 It should be kept in mind that once the firm has built a particular scale of plant, its production
takes place in the short run.
 The firm actually operates in the short run and plans for the long run.
Long run cost of production is the A long run cost curve

least possible cost of producing any depicts the functional
given level of output when all relationship between output
individual factors are variable. and the long run cost of

production.
SUPPOSE
 Suppose that there are the only three plants which are
technically possible.
 Given the size of the plant, the firm will be increasing or
decreasing its output by changing the amount of the variable
Short run average
inputs.
cost curves (SACs)
 But in the long run, the firm chooses among the three
are also called ‘plant
possible sizes of plants as depicted by short run average
curves’.
curves (SAC1, SAC2, and SAC3).
 In the long run, the firm will examine with which size of
plant or on which short run average cost curve it should
operate to produce a given level of output, so that the total
cost is minimum.
 It will be seen from the diagram that up to OB amount of
output, the firm will operate on the SAC1, though it could also
produce with SAC2.
Theory of Cost 185

Business Economics
 Up to OB amount of output, the production on SAC1 results in lower cost than on

SAC2.
 For example, if the level of output OA is produced with SAC1, it will cost AL per
unit and if it is produced with SAC2 it will cost AH and we can see that AH is
more than AL.
 Similarly, if the firm plans to produce an output which is larger than OB but less
than OD, then it will not be economical to produce on SAC1.
 For this, the firm will have to use SAC2.
 Similarly, the firm than OB but less than OD, then it will not be economical to
produce on SAC1.
 For this, the firm will have to use SAC2.
 Similarly, the firm x the employment of plant and it will employ that plant which
yields minimum possible unit cost for producing a given output.
Suppose, the firm has a choice so that a plant can be varied by infinitely small
gradations so that there are infinite number of plants corresponding to which there are
numerous average cost curves. In such a case the long run average cost curve will be a
smooth curve enveloping all these short run average cost curves.
186 Theory of Cost

Business Economics
EXPLANATION OF “U” SHAPE OF THE LONG RUN AVERAGE COST CURVE
U shaped LAC
aries due to
returns to scale
Result
Falling LAC
from Increasing Returns
and Internal to scale causes
Increasing Economics and Fall in Long Run

External Average Cost
of Scale
Economics
of scale
Rising LAC Result from
and Internal and Decreasing Returns to

External scale causes
Diminishing Returns
diseconomies
Results in Rise in LAC
to Scale of scale
Theory of Cost 187

Business Economics
When Firm Expands
Return to scale
Increases
On same line LAC

Curve first
Declines
then finally Rises
After a Range of
constant Returns to
scale
Return to scale finally

Decreases
LAC also called as
 Envelope Curve
ECONOMIES  Planning Curve
Internal External
Economies of Production which Benefits to other firm in the
Accrue when output Increases Industry because of Expansion of
owe Firm
So COP Reduces
188 Theory of Cost

Business Economics
 Beyond a certain point, a firm experiences net diseconomies of scale.
 This happens because when the firm has reached a size large enough to allow utilisation of
almost all the possibilities of division of labour and employment of more efficient machinery,
further increase in the size of the plant will bring about high long-run cost because of difficulties
of management.
 When the scale of operations becomes too large, it becomes difficult for the management to
exercise control and to bring about proper coordination.
(ii) Managerial economies and diseconomies:
 Managerial economies refer to reduction in managerial costs. When output increases, specialisation
and division of labour can be applied to management.
 It becomes possible to divide its management into specialised departments under specialised
personnel, such as production manager, sales manager, finance manager etc.
 If the scale of production increases further, each department can be further sub-divided; for e.g.
sales can be split into separate sections such as for advertising, exports and customer service.
 Since individual activities come under the supervision of specialists, management’s efficiency and
productivity will greatly improve.
 Decentralisation of decision making and mechanisation of managerial functions further enhance
the efficiency and productivity of managers.
 Thus, specialisation of management enables large firms to achieve reduction in managerial costs.
 However, as the scale of production increases beyond a certain limit, managerial diseconomies set
in.
 Communication at different levels such as between the managers and labourers and among the
managers become difficult resulting in delays in decision making and implementation of decisions
already made.
190 Theory of Cost

Business Economics
 Management finds it difficult to exercise control and to bring in coordination among its various
departments.
 The managerial structure becomes more complex and is affected by greater bureaucracy, red
tapism, lengthening of communication lines and so on.
 All these affect the efficiency and productivity of management and that of the firm itself.
(iii) Commercial economies and diseconomies:
 Production of large volumes of goods requires large amount of materials and components. A large
firm is able to place bulk orders for materials and components and enjoy lower prices for them.
 Economies can also be achieved in marketing of the product. If the sales staff is not being
worked to full capacity, additional output can be sold at little or no extra cost.
 Moreover, large firms can benefit from economies of advertising. As the scale of production
increases, advertising costs per unit of output fall.
 In addition, a large firm may also be able to sell its by-products or process it profitably;
something which might be unprofitable for a small firm.
 There are also economies associated with transport and storage.
 These economies become diseconomies after an optimum scale.
 For example, advertisement expenditure and other marketing overheads will increase more than
proportionately after the optimum scale.
(iv) Financial economies and diseconomies:
 A large firm has advantages over small firms in matters related to procurement of finance for its
business activities.
 It can, for instance, offer better security to bankers and avail of advances with greater ease.
 On account of the goodwill enjoyed by large firms, investors have greater confidence in them and
therefore would prefer their shares which can be readily sold on the stock exchange.
Theory of Cost 191
Business Economics
 A large firm can thus raise capital at lower cost.
 However, these costs of raising finance will rise more than proportionately after the optimum
scale of production.
 This may happen because of relatively greater dependence on external finances.
(v) Risk bearing economies and diseconomies:
 It is said that a large business with diverse and multi- production capability is in a better position
to withstand economic ups and downs, and therefore, enjoys economies of risk bearing.
 However, risk may increase if diversification, instead of giving a cover to economic disturbances,
increases these.
EXTERNAL ECONOMIES AND DISECONOMIES
 External economies and diseconomies are those economies and diseconomies which accrue to firms
as a result of expansion in the output of the whole industry and they are not dependent on the
output level of individual firms.
 They are external in the sense that they accrue to firms not out of their internal situation but
from outside i.e. due to expansion of the industry
EXTERNAL ECONOMIES
Cheaper raw materials Development of Better transportation

and capital equipment skilled labour and marketing
facilities
Technological external Growth of ancillary Economies of

economies industries Information
192 Theory of Cost

Business Economics
(i) Cheaper raw materials and capital equipment:
 The expansion of an industry may result in exploration of new and cheaper sources of raw
material, machinery and other types of capital equipments.
 Expansion of an industry results in greater demand for various kinds of materials and capital
equipments required by it.
 The firm can procure these on a large scale at competitive prices from other industries.
 This reduces their cost of production and consequently the prices of their output.
(ii) Technological external economies:
 When the whole industry expands, it may result in the discovery of new technical knowledge an d
in accordance with that, the use of improved and better machinery and processes than before.
 This will change the technical co-efficient of production and enhance productivity of firms in the
industry and reduce their cost of production.
(iii) Development of skilled labour:
 When an industry expands in an area, the labourers in that area are well accustomed with the
different productive processes and tend to learn a good deal from experience.
 As a result, with the growth of an industry in an area, a pool of trained labour is developed which
has a favourable effect on the level of productivity and cost of the firms in that industry.
(iv) Growth of ancillary industries:
 Expansion of industry encourages the growth of a number of ancillary industries which specialise
in the production and supply of raw materials, tools, machinery, components, repa ir services etc.
 Input prices go down in a competitive market and the benefits of it accrue to all firms in the
form of reduction in cost of production. Likewise, new units may come up for processing or
recycling of the waste products of the industry.

Theory of Cost 193
Business Economics
 This will tend to reduce the cost of production in general.
(v) Better transportation and marketing facilities:
 The expansion of an industry resulting from entry of new firms may make possible the
development of an (efficient transportation) and (marketing network).
 These will greatly reduce the cost of production of the firms by avoiding the need for establishing
and running these services by themselves.
 Similarly, communication systems may get modernised resulting in better and speedy information
dissemination.
(vi) Economies of Information:
 Necessary information regarding technology, labour, prices and products may be easily and cheaply
made available to the firms on account of publication of information booklets and bulletins by
industry associations or by governments in public interest.
EXTERNAL DISECONOMIES
 When an industry expands the requirement of various factors of production, such as raw materials,
capital goods, skilled labour etc.
 Increasing demand for inputs puts pressure on the input markets.
 This may result in an increase in the prices of factors of production, especially when they are
short in supply.
 Moreover, too many firms in an industry at one place may also result in higher transportation
cost, marketing cost and high pollution control cost.
 The government may also, through its location policy, prohibit or restrict the expansion of an
industry at a particular place.
194 Theory of Cost

Business Economics
Chapter – 4
Unit – I
MEANING AND TYPES OF MARKETS
MEANING OF MARKET
Market refers to the whole region where buyers and sellers of a commodity are in contact with each
other
to effect purchase and sell of goods and services
Value in Use Value in Exchange
Attribute which a thing may have to satisfy Amount of goods and services which may be
needs obtained in market in exchange of goods
and services.
Also knowns as usefulness/ utility Also known as economic value
Elements of a Market
(i) Buyers and sellers
(ii) A product or service
(iii) Bargaining for a price
(iv) Knowledge about market conditions
(v) One price for a product or service at a given
time.
Classification of Market
Product Market Factor Market
Market for Households Market for Firms
Consumer Goods to Consumer Producer Goods to Producer
Meaning and Types Of Markets 195

Business Economics
Price of Factor Market is

called
Factor Price.
On the basis of Geographical Area
Local Markets Regional Markets National Markets International

 Regional markets  When the markets
 When buyers and
cover a wider demand for a  A commodity is
sellers are
area such as a commodity or said to have
limited to a local
few adjacent service is limited international
area or region,
cities, parts of to the national market when it
the market is
states, or cluster boundaries of a is exchanged
called a local
of states. country, it is internationally.
market.
 The size of the called a national  Usually, high
 Generally, highly
market is market. value and small
perishable goods
and bulky generally large  The trade policy bulk
articles, the and the nature of the commodities are
of buyers may government may demanded and
transport of
vary in their restrict the traded
which over a
demand trading of a internationally.
long distance is
uneconomical’ characteristics. commodity to
command a local within the

country.
market.
196 Meaning and Types Of Markets

Business Economics
On the basis of Time
Very short period Short-period Market Long-period Market Very long-period or

market  secular period
In this period, the  In the long period,
 Very short period
supply of output all factors  is one when
may be increased become variable secular
refers to a period
by increasing the and the supply of movements are
of time in which
employment of commodities may recorded in
supply is fixed
variable factors be changed by certain factors
and cannot be
with the given altering the scale over a period of
increased or
fixed factors and of production. time.
decreased.
state of  As such, supply  The period is very
 Commodities like
technology. may be fully long. The factors
vegetables, flower,
fish, eggs, fruits,  Since supply can adjusted to include the size of
milk, etc., which be moderately changes in the population,
are perishable adjusted, the demand capital supply,
and the supply of changes in the conditions. supply of raw
which cannot be short period  The interaction materials etc.
changed in the prices on account between long run
very short period of changes in supply and
come under this demand are less demand
category. compared to determines long
market period. run equilibrium
Also called
price .
market
period.
Long run
equilibrium
price is called
Since supply is fixed, very Normal Price.
short period price is
dependent on demand. An
increase in demand will raise
the prices vice versa.

Business Economics
On the basis of Nature of Transactions
Spot Market Forward Market
 Spot transactions or spot markets refer  In this market, transactions involve

to those markets where goods are contracts with a promise to pay and
exchanged for money payable either deliver goods at some future date.
immediately or within a short span of  For example, purchase of foreign
time. currency contract at future rate from
 For example, grains sold in the Mandi bank.
at the current prices and cash is
payable immediately are thus part of Also called as
Spot Market. Future Market
Also called as
Cash Market
On the basis of Regulation
Regulated Market Unregulated Market

 In this market, transactions are  It is also called a free market as there
statutorily regulated so as to put an end are no stipulations on the transactions.
to unfair practices.
 For example. Weekly markets (Haat
 Such markets may be established for Bazaar).
specific products or for a group of
products.
 For example, stock exchange.

Business Economics
On the basis of volume of Business
Wholesale Market Retail Market

 The wholesale market is the market  When the commodities are sold in
where the commodities are bought and small quantities, it is called retail
sold in bulk or large quantities. market.
 Transactions generally take place  This is the market for ultimate
between traders. i.e. Business to consumers. i.e. Business to Consumer
Business (B2B). (B2C).
FORMS OF MARKET STRUCTURE
Perfect Competition Imperfect Competition
Monopoly Monopolistic Oligopoly
Monopolistic Competition
Perfect Competition
 It differs in only one respect,
Perfect competition is characterised by
namely, there are many sellers
many sellers selling identical products to
offering differentiated products to
many buyers.
many buyers.
 For example, shampoo
manufacturers.

Business Economics
Monopoly
 It is a situation where there is a single
Oligopoly
Oligopoly
seller producing for many buyers.
 There
There are
are a
a few
few sellers
sellers selling
selling competing
competing
 Its product is necessarily extremely
products to
products to many
many buyers.
buyers.
differentiated since there are no
 For
For example,
example, Telecom
Telecom Industry.
industry
competing sellers producing products
which are close substitutes.
 For example. Indian Railways
Market Types
Assumption Perfect Monopolistic
Oligopoly Monopoly
Competition Competition
Number of sellers Very large Large Small numbers One
None to
Product differentiation None Slight Extreme
substantial
Price elasticity of demand of a firm Infinite Large Small Small
Very
Degree of control over price None Some Some
considerable

Business Economics
TYPES OF REVENUE
Total Revenue Average Revenue Marginal Revenue
TOTAL REVENUE
Total Revenue
Total Revenue refers to total Receipt from the sale of given Quantity of =
commodity. Quantity x Price
AVERAGE REVENUE
Average Revenue refers to Revenue per unit of output sold.

For Example: If Total Revenue from sale of 10 chair is 1600 Rs. TR
Then AR 
Q
AR = TR/Q = 1600/10 = 160 Rs.
AR and Price are same AR Curve and Demand Curve

AR = Total Revenue are same
Quantity
 AR = Price x Quantity  It is because AR and Price
Quantity are 100% identical hence
 AR = Price  AR Curve = Demand Curve
MARGINAL REVENUE
Marginal Revenue is additional Revenue Generated from sale of an additional unit of output.
It is change in TR from sale of one more unit of commodity.
One more way to calculate MR

Formulae ∆𝑻𝑹 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑻𝒐𝒕𝒂𝒍 𝑹𝒆𝒗𝒆𝒏𝒖𝒆
𝑴𝑹𝒏 = 𝑻𝑹𝒏 − 𝑻𝑹𝒏 𝟏 𝑴𝑹 = =
∆𝑸 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚

Business Economics
TR is Summation of MR This formula is used
TR can also be calculated as sum When difference in two

of Marginal Revenues of all the units is of more than 1
units sold
𝑻𝑹 = 𝑴𝑹𝟏 + 𝑴𝑹𝟐 + − − +𝑴𝑹𝒏
𝑻𝑹 = ∑𝑴𝑹 Marginal Revenues of all the units so
𝑇𝑅 = 𝑀𝑅 + 𝑀𝑅 + − − +𝑀𝑅
TR = ∑MR
𝑇𝑅 =∈ 𝑀𝑅
RELATION BETWEEN REVENUE CONCEPTS
When price Remains Constant (1) When price falls with Rise in output
Happens Under Perfect Competition Happens Under Imperfect Competition
A) Relations between AR and MR C) Relations between AR and MR

B) Relations between TR and MR D) Relations between TR and MR
(A) Relation between AR and MR [When Price Remains Constant]
 When price remains same, a firm can sale more quantity of output at the same price It means
Revenue from every additional unit [MR] is equal to AR.
So both AR and MR curve coincide in a horizontal straight line parallel to x-axis.

Business Economics
Units sold Price/AR TR MR
1 5 5 5
2 5 10 5 P=AR=MR
3 5 15 5
4 5 20 5
5 5 25 5
Unit Sold
(B) Relation between TR and MR [when Price Remains Constant]
 When price remains constant, firm can sell any quantity of output at price fixed by Market.
 As a result MR Curve/ AR Curve, is a horizontal straight line parallel to x-axis
 Since MR Remains constant, TR also increases at constant rate.
Units sold Price/AR TR MR TR

TR and MR[in Rs.]
1 5 5 5
2 5 10 5
P=AR=MR
3 5 15 5
4 5 20 5
5 5 25 5
Units Sold
(C) Relation between AR and MR [When Price Falls]
When firms can increase their volume of sales by decrease in prices, than AR will fall with
increase in sale
That means Revenue from additional unit [i.e. MR] will be less then AR.
In below table both MR and AR fall with increase in output

However fall in MR is double that of AR
As a Result MR curve steeper then AR curve

Business Economics
Rate of
Units AR TR MR fall AR
AR / MR
(AR:MR)
1 5 5 5 -
2 4 8 3 1:2
3 3 9 1 1:2
4 2 8 -1 1:2 MR
5 1 5 -3 1:2
Unit Sold
(D) Relation between TR and MR [When Price Falls]
TR
Units AR TR MR
TR
1 5 5 5
2 4 8 3
3 3 9 1
4 2.25 9 0
5 1 5 -4
Unit Sold
Relationship between TR and MR

 When MR is positive, TR
increases
 When MR is Zero, TR is
MR
maximum
 When MR becomes Negative,
TR Starts falling
Unit Sold
MR

Business Economics
Relationship between AR, MR, TR and Price Elasticity of Demand
It is to be noted that marginal revenue, average revenue and price elasticity of demand are uniquely
related to one another through the formula:
Formula:
MR= AR x e – 1
e
Where e = price elasticity of demand
if e = 1, MR = 0
if e > 1, MR = Positive
if e < 1, MR = Negative
Principle 1- A firm should not produce at all if its total variable costs are not met.
 If a firm’s total revenues are not enough to make good even the total variable costs, it is better
for the firm to shut down.
 In other words, a competitive firm should shut down if the price is below AVC.
 In that case, it will minimise loss because then its total cost will be equal to its fixed costs and
it will have an operating loss equal to its fixed cost.

Business Economics
 This means that the minimum

average variable cost is equal to the
shut-down price, the price at which
The sunk fixed cost is irrelevant to the the firm ceases production in the
shutdown decision because fixed costs short run.
are already incurred.
 Shutting down is temporary and
does not necessarily mean going out
of business.
POINT TO BE REMEMBER
 If price (AR) is greater than minimum AVC, but less than minimum ATC, the firm
covers its variable cost and some but not all of fixed cost.
 If price is equal to minimum ATC, the firm covers both fixed and variable costs
and earns normal profit or zero economic profit.
 If price is greater than minimum ATC, the firm not only covers its full cost, but
also earns positive economic profit or super normal profit.
Principle 2 - The firm will be making maximum profits by expanding output to the level where
marginal revenue is equal to marginal cost.
 It will pay the firm to go on producing additional units of output so long as the marginal revenue
exceeds marginal cost i.e., additional units add more to revenues than to cost.
 At the point of equality between marginal revenue and marginal cost, it will earn maximum
profits.

Business Economics
 Graph shows a set of hypothetical marginal revenue and marginal cost curves.
 Marginal revenue curve slopes downwards and marginal cost curve slopes upwards.
 They intersect each other at point E (MC= MR) which corresponds to output Q.* Up to Q* level of
output, marginal revenue is greater than marginal cost and at output level *Q they are equal.
 The firm will be maximizing profits at E (or at Q* level of output). For all levels of output less
than Q*, additional units of output add more to revenue than to cost (as their MR is more than
MC) and thus it will be profitable for the firm to produce them.
 The firm will be foregoing profit equal to the area EFG if it stops at A.
 Similarly profits will fall, if a greater output than OQ is produced as they will add more to cost
than to revenues.
 On the units from Qth to Bth, the firm will be incurring a loss equal to the area EHI.
Conclusion
Firm will Maximize Profit at point where
MR = MC

Business Economics
Chapter – 4
Unit - II
DETERMINATION OF PRICES
INTRODUCTION
 A free market is one in which the forces of demand and supply are free to take their own course
and there is no intervention from outside by government or any other entity.
DETERMINATION OF PRICES - A GENERAL VIEW
 In an open competitive market, it is the interaction between demand and supply that tends to
determine equilibrium price and quantity.
 In the context of market analysis, the term equilibrium refers to a state of market in which the
quantity demanded of a commodity equals the quantity supplied of the commodity.
 Equilibrium price or market clearing price is the price at which the quantity demanded of a
commodity equals the quantity supplied of the commodity i.e. at this price there is no unsold
stock or no unsupplied demand.
Determination Of Price
Quantity Price Demand Units Supply (Units)

1 1 60 5
2 2 35 35
3 3 20 45
4 4 15 55
5 5 10 65
208 Determination of Prices

`
Business Economics
CHANGES IN DEMAND AND SUPPLY
The four possible changes in demand and supply are:
An increase (shift A decrease (shift

An increase (shift A decrease (shift to
to the right) in to the left) in
to the right) in the left) in supply.
demand demand supply
(i) An increase in demand
 The original demand curve of a normal good is DD
 Supply curve is SS.
 At equilibrium price OP, demand and supply are equal to OQ.
 We will see that on the new demand curve D1D1 at OP price, demand increases to OQ2 while
supply remains the same i.e. OQ and there is excess demand in the market equal to Q Q2.
 Since supply is short of demand, price will go up to OP1.
Determination of Prices 209

Business Economics
 With the higher price, supply will also shoot up generating an increase in the quantity supplied or
an upward movement along the supply curve.
 Ultimately, a new equilibrium between demand and supply will be reached. At this equilibrium
point, OP1 is the price and OQ1 is the quantity which is demanded and supplied.
Income Demand
Demand Curve shifts Right to D1D1 and Supply Curve remains same.
(ii) Decrease in Demand
 As the supply exceeds demand, price will come down and quantity demanded will go up.
 A new equilibrium price OP1 will be settled in the market where demand OQ1 will be equal to
supply OQ1.
Income Demand
Demand curve shifts Left to D1D1 and Supply Curve remains same.
210` Determination of Prices

Business Economics
Thus, with a decrease in demand, there is a decrease in the equilibrium price and quantity
demanded and supplied.
(iii) Increase in Supply
Technology Cost of Production Chances of earning Profit Supply
 The supply curve SS will shift to the right and become S1S1.

Business Economics
 At the original equilibrium price OP, OQ is demanded and OQ2 is supplied (with new supply
curve).
 At the original price, a surplus now exists; as a result, the equilibrium price falls and the quantity
demanded rises.
supply OQ1.
 Thus, as a result of an increase in supply with demand remaining the same, the equilibrium price
will go down and the quantity demanded will go up.
(iv) Decrease in Supply
 The supply curve SS will shift to the left and become S1S1.
 At the original equilibrium price OP, OQ is quantity demanded and OQ2 is quantity supplied (with
new supply curve).
 At the original price, a deficit now exists; as a result equilibrium price rises and the quantity
demanded decreases.
supply OQ1.
Technology Cost of Production Chances of earning Profit Supply

Business Economics
SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY
(a) (b)
 In panel (a) there is a simultaneous rightward shift of the demand curve and leftward shift of
the supply curve.
 Here, the increase in demand is more than the decrease in supply, therefore, the equilibrium price
and equilibrium quantity will rise.
 In panel (b) there is also a coincident rightward shift of the demand curve and leftward shift of
the supply curve.
 Here, the decrease in supply is more than the increase in demand, consequently, the equilibrium
price rises and the equilibrium quantity falls.
 In both cases, the equilibrium price rises from P to P1 as the equilibrium moves from E to E1.
What is the effect on quantity?
 In panel (a), the increase in demand is large relative to the decrease in supply and the
equilibrium quantity rises as a result.
 In panel (b), the decrease in supply is large relative to the increase in demand, and the
equilibrium quantity falls as a result.

Business Economics
 That is, when demand increases and supply decreases, the actual quantity bought and sold can go
either way, depending on how much the demand and supply curves have shifted.
 In general, when supply and demand shift in opposite directions, we cannot predict what the
ultimate effect will be on the quantity bought and sold. What we can say is that a curve that
shifts a disproportionately greater distance than the other curve will have a disproportionately
greater effect on the quantity bought and sold.
 We can summarise the two possible outcomes when the supply and demand curves shift in the
opposite directions as follows:
 When demand increases and supply decreases, the equilibrium price rises but nothing
certain can be said about the change in equilibrium quantity.
 When demand decreases and supply increases, the equilibrium price falls but nothing
certain can be said about the change in equilibrium quantity.

Business Economics
Chapter – 4
Unit - III
PRICE OUTPUT DETERMINATION UNDER
DIFFERENT MARKET FORMS
FORMS OF MARKET STRUCTURE
Perfect Competition Imperfect Competition
Monopoly Monopolistic Oligopoly
Perfect Competition
 Perfect competition refers to the market situation
where there are very large no. of buyers and sellers

In reality
Dealing in Homogenous product perfect
At a price fixed by market competition

does not exist.
Features of Perfect Competition
Very large Freedom of entry Perfect Mobility Absence of
No. of buyers and exit Of factors of selling costs.
and sellers Homogenous Perfect Production Absence of
Product Knowledge Transportation Cast

Price Output Determination 215
Business Economics
Features of Perfect Competition
1- Very large No. of Buyers and Sellers:-
In a perfectly competitive Market, there are very large no. of buyers and sellers.
As the no. of Sellers are so large As the no. of Buyers are so large
Share of individual Seller is Share of Individual Buyer is
insignificant and hence cannot insignificant and hence cannot
influence the Market Price. influence the market price.
2- Homogenous Product:-
Product offered for sale in the Market are homogenous i.e. Product sold is identical in all respects
which are Size
Shape
Quality
Colour etc.
3- Freedom of Entry and Exit:-
Every seller has the freedom to enter or exit the industry
 There are no Natural barrier for entry and exit.
Artificial
 It ensure absence of Abnormal Profit (or) in the long Run.
Abnormal Looses
216 Price Output Determination

Business Economics
4- Perfect Knowledge Among Buyers and Sellers:-
Perfect knowledge means that both buyers and sellers are fully informed about market price.
Its implications is that no firm is in a position to charge different price and no buyer will pay a
higher price
As a result a uniform price prevails in the market
5- Perfect Mobility of factors of production :-
Land
 Factors of production Labour are perfectly Mobile
Capital
Entrepreneurship
 There is no Geographical Restriction on there movement.
Occupational
6- Absence of Transportation Cost: -
It is assumed that transportation costs are zero in order to ensure uniform price in the Market.
7- Absence of Selling Costs:-
 Selling costs refers to cost of Advertisement of the product.
 In perfect competition there are no selling cost because of perfect knowledge among buyers and
sellers

Business Economics
Perfect Competition V/s Pure Competition
Pure competition exist where 3

fundamental condition are
satisfied
 Very long no. of Buyers & Perfect Competition exist when

Seller all 7 conditions are satisfied
 Homogeneous Product
 Freedom Of Entry & Exit
Price Maker V/s Price Taker
Industry-Price Maker Firm- Price Taker

D S
AR=MR
S D
Demand/Supply [in units] Demand/Supply [in units]
Price is determined at the point where Market demand curve intersect Market Supply Curve

Business Economics
Price Determination under Perfect Competition
Equilibrium of the Industry
 When the total output of the industry is equal to the total demand, we say that the industry is
in equilibrium; the price then prevailing is equilibrium price.
 A firm is said to be in equilibrium when it is maximising its profits and has no incentive to
expand or contract production.
 OP is the equilibrium price and OQ is the equilibrium quantity which will be sold at that price.
 The equilibrium price is the price at which both demand and supply are equal and therefore, no
buyer who wanted to buy at that price goes dissatisfied and none of the sellers is dissatisfied
that he could not sell his goods at that price.
Equilibrium of the Firm
 The firm is said to be in equilibrium when it maximizes its profit.
 The output which gives maximum profit to the firm is called equilibrium output.
 In the equilibrium state, the firm has no incentive either to increase or decrease its output.
 Firms in a competitive market are price-takers.
 This is because there are a large number of firms in the market who are producing identical or
homogeneous products.
Business Economics
 As such these firms cannot influence the price in their individual capacities.
 They have to accept the price determined through the interaction of total demand and total
supply of the commodity which they produce.
 The market price OP is fixed through the interaction of total demand and total supply of the
industry. Firms have to accept this price as given and as such they are price-takers rather than
price-makers.
 They cannot increase the price above OP individually because of the fear of losing its customers
to other firms.
 They do not try to sell the product below OP because they do not have any incentive for lowering
it.
 They will try to sell as much as they can at price OP.
 As such, P-line acts as demand curve for the firm.
 Because it is a price taker, the demand curve D facing an individual competitive firm is given by a
horizontal line at the level of market price set by the industry.
 The demand curve of each firm is perfectly (or infinitely) elastic.
 The firm can sell as much or as little output as it likes along the horizontal price line.
 Since price is given, a competitive firm has to adjust its output to the market price so that it
earns maximum profit.

Business Economics
Conditions for equilibrium of a firm
 As discussed earlier, a firm, in order to attain equilibrium position, has to satisfy two conditions
as below:
Condition 1 : The marginal revenue should be equal to the marginal cost. i.e. MR = MC.
Condition 2 : The MC curve should cut MR curve from below. In other words, MC should have a
positive slope.
If MR is greater than If MR is less than MC, the

MC, there is always an firm will have to reduce
incentive for the firm to output since an additional
expand its production unit adds more to cost than
further and gain by to revenue.
selling additional units.
PROFIT V/S SUPER NORMAL PROFIT V/S LOSSES
In the short run, a firm will attain equilibrium position and at the same time, it may earn
supernormal profits, normal profits or losses depending upon its cost conditions. Following are the
three possibilities:
Super Normal Profit Normal Profit Losses

Business Economics
SUPERNORMAL PROFIT
 When a firm earns supernormal profits, its average revenues are more than its average total cost.
 Thus, in addition to normal rate of profit, the firm earns some additional profits.
 Example :
o Suppose the cost of producing 1,000 units of a product by a firm is ` 15,000.
o The entrepreneur has invested 50,000 in the business and the normal rate of return in
the market is 10 per cent.
o That is, the cost of self owned factor (capital) used in the business or implicit cost is `
5000/-. The entrepreneur would have earned` 5,000 (10% of ` 50,000) if he had invested it
elsewhere.
o Thus, total cost of production is 20,000 (` 15,000+ 5,000).
o If the firm is selling the product at ` 20, it is earning normal profits because AR (` 20) is
equal to ATC (` 20).
o If the firm is selling the product at ` 22 per unit, its AR (` 22) is greater than its ATC (`
20) and it is earning supernormal profit at the rate of ` 2 per unit.
Short run equilibrium: Supernormal profits of a competitive firm

Business Economics
 Shows the revenue and cost curves of a firm which earns supernormal profits in the short run.
 MR (marginal revenue) curve is a horizontal line and MC (marginal cost) curve is a U -shaped
curve which cuts the MR curve at E.
 The firm is in equilibrium at point E where marginal revenue is equal to marginal cost. OQ is the
equilibrium output for the firm.
 At this level of output, the average revenue or price per unit is EQ and average total cost is BQ.
The firm’s profit per unit is EB (AR-ATC). Total profits are ABEP. (EB x OQ ; OQ =AB) .
 Applying the principle Total Profit = TR – TC, we find total profit by finding the difference
between OPEQ and OABQ which is equal to ABEP.
NORMAL PROFIT
 When Average Revenue of Firm is just equal to Average Total Cost
Firms earns normal profit Zero Economic Profit
 When a firm just meets its average total cost, it earns normal profits.
 Here AR = ATC
Normal % of Profit for
entrepreneur for his Managerial
services is already included in
Cost Of Production.
Short run equilibrium of a competitive firm: Normal profits

Business Economics
 The figure shows that MR = MC at E.
 The equilibrium output is OQ. At this level of output, price or AR covers full cost (ATC).
 Since AR = ATC or OP = EQ, the firm is just earning normal profits.
 Applying TR – TC, we find that TR – TC = zero or there is zero economic profit.
LOSSES
 The firm can be in an equilibrium position and still makes losses.
 This is the situation when the firm is minimising losses.
 For all prices above the minimum point on the AVC curve, the firm will stay open and will produce
the level of output at which MR = MC.
 When the firm is able to meet its variable cost and a part of fixed cost, it will try to continue
production in the short run.
 If it recovers a part of the fixed costs, it will be beneficial for it to continue production because
fixed costs (such as costs towards plant and machinery, building etc.) are already incurred and in
such case it will be able to recover a part of them.
 But, if a firm is unable to meet its average variable cost, it will be better for it to shutdown.
 This shutdown may be temporary. When the market price rises, the firm resumes production.
Short run equilibrium of a competitive firm: Losses

Business Economics
 E is the equilibrium point and at this point AR = EQ and ATC = BQ since BQ>EQ, the firm is
having per unit loss equal to BE and the total loss is ABEP.
LONG RUN EQULLIBRIUM OF A COMPETITIVE FIRM
 Firms are in equilibrium in the long run when they have adjusted their plant so as to produce at
the minimum point of their long run ATC curve, which is tangent to the demand curve defined by
the market price.
 In the long run, the firms will be earning just normal profits, which are included in the ATC.
 If they are making supernormal profits  If the firms make losses in the short
in the short run, new firms will be run, they will leave the industry in the
attracted into the industry; this will long run.
lead to a fall in price (a down ward  This will raise the price and costs may
shift in the individual demand curves) fall as the industry contracts, until the
and an upward shift of the cost curves remaining firms in the industry cover
due to increase in the prices of factors their total costs inclusive of normal rate
as the industry expands. of profit.
 These changes will continue until the
ATC is tangent to the demand curve.
 We show how firms adjust to their long run equilibrium position. As in the short run, the firm
faces a horizontal demand curve.
 If the price is OP, the firm is making super-normal profits working with the plant whose cost is
denoted by SAC1.
 If the firm believes that the market price will remain at OP, it will have incentive to build new
capacity and it will move along its LAC.
 At the same time, new firms will be entering the industry attracted by the excess profits.

Business Economics
 As the quantity supplied in the market increases, the supply curve in the market will shift to the
right and price will fall until it reaches the level of OP1 (in figure) at which the firms and the
industry are in long run equilibrium.
Long run equilibrium of the firm in a perfectly competitive market
The condition for the long run

equilibrium of the firm is that the
marginal cost should be equal to the
price and the long run average cost
i.e. LMC = LAC = P.
 At equilibrium, the short run

marginal cost is equal to the long
run marginal cost and the short
run average cost is equal to the The firm adjusts its plant size
long run average cost. so as to produce that level of
 Thus, in the long run we have, output at which the LAC is
SMC = LMC = SAC = LAC =P =MR the minimum possible.

Business Economics
LONG RUN EQULLIBRIUM OF THE INDUSTRY
A long-run competitive equilibrium of a perfectly competitive industry occurs when three
conditions hold:
Condition 1 : All firms in the industry are in equilibrium i.e. all firms are maximizing profit.
Condition 2 : No firm has an incentive either to enter or exit the industry because all firms are
earning zero economic profit or normal profit.
Condition 3 :The price of the product is such that the quantity supplied by the industry is equal
to the quantity demanded by consumers.
Long run equilibrium of a competitive industry and its firms
 Shows that in the long-run AR = MR = LAC = LMC at E1. In the long run, each firm attains the
plant size and output level at which its cost per unit is as low as possible.
 Since E1 is the minimum point of LAC curve, the firm produces equilibrium output OM at the
minimum (optimum) cost.
 A firm producing output at optimum cost is called an optimum firm. In the long run, all firms
under perfect competition are optimum firms having optimum size and these firms charge
minimum possible price which just covers their marginal cost.

Business Economics
Outcomes Associated With Long Run Equilibrium

 The output is produced at the minimum feasible cost.
 Consumers pay the minimum possible price which just covers the marginal cost i.e.
MC = AR. (P = MC)
 Plants are used to full capacity in the long run, so that there is no wastage of
resources i.e. MC = AC.
 Firms earn only normal profits i.e. AC = AR.
 Firms maximize profits (i.e. MC = MR), but the level of profits will be just normal.
 There is optimum number of firms in the industry.
 In other words, in the long run,
LAR = LMR = P = LMC = LAC and there will be optimum allocation of resources.
 It should be remembered that the perfectly competitive market system is a myth.

 This is because the assumptions on which this system is based are never found in the real
world market conditions
MONOPOLY
 Monopoly is a situation in which there is a single seller of a product which has no close
substitute.
 In public utilities such as transport, water and electricity, we generally find a monopoly form of
market.

Business Economics
Features of Monopoly Market
The following are the major features of the monopoly market:
 Single seller of the product:
o In a monopoly market, there is only one firm producing or supplying a product.
o This single firm constitutes the industry and as such there is no distinction between firm
and industry in a monopolistic market.
o Monopoly is characterized by an absence of competition.
 Barriers to Entry:
o In a monopolistic market, there are strong barriers to entry.
o The barriers to entry could be economic, institutional, legal or artificial.
 No close-substitutes:
o A monopoly firm has full control over the market supply of a product or service.
o A monopolist is a price maker and not a price taker.
o The monopolist generally sells a product which has no close substitutes.
 The price elasticity of demand

for monopolist’s product is also
less than one.
The cross elasticity of demand for
 The monopolist faces a steep
the monopolist’s product and any
downward sloping demand curve.
other product is zero or very small

Business Economics
 Market power:
o A monopoly firm has market power i.e. it has the ability to charge a price above marginal
cost and earn a positive profit.
How do Monopolies arise?
Reasons for occurrence and continuation of monopoly are:
 Strategic control over a Scarce resources
Inputs or technology
by a single firm limiting the access of other firms to these resources.
 Through developing or acquiring control over a unique product that is difficult or costly for other
companies to copy.
 Governments granting exclusive rights to produce and sell a good or a service.
 Patents and copyrights given by the government to protect intellectual property righ ts and to
encourage innovation.
 Business combinations or cartels (illegal in most countries) where former competitors cooperate
on pricing or market share.
 Extremely large start-up costs even to enter the market in a modest way and requirement of
extraordinarily costly and sophisticated technical know-how discourage firms from entering the
market.
 Natural monopoly arises when there are very large economies of scale.
 A single firm can produce the industry’s whole output at a lower unit cost than two or more
firms could. It is often wasteful (for consumers and the economy) to have more than one such
supplier in a region because of the high costs of duplicating the infrastructure.
 For e.g. telephone service, natural gas supply and electrical power distribution.

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 Enormous goodwill enjoyed by a firm for a considerably long period crea te difficult barriers to
entry.
 Stringent legal and regulatory requirements effectively discourage entry of new firms without
being specifically prohibited.
 Firms use various anti-competitive practices often referred to as predatory tactics, such as limit
pricing or predatory pricing intended to do away with existing or potential competition.
Monopolist’s Revenue Curves
 Since the monopolist firm is assumed to be the only producer of a particular product, its demand
curve is identical with the market demand curve for the product.
 The market demand curve, which exhibits the total quantity of a product that buyers will offer to
buy at each price, also shows the quantity that the monopolist will be able to sell at every price
that he sets.
 If we assume that the monopolist sets a single price and supplies all buyers who wish to purchase
at that price, we can easily find his average revenue and marginal revenue curves.
A monopolist’s demand curve and marginal revenue curve

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Quantity Average Revenue Total Revenue (TR) Marginal Revenue (MR)

sold (AR = P)
0 10.00 0
1 9.50 9.50 9.50
2 9.00 18.00 8.50
3 8.50 25.50 7.50
4 8.00 32.00 6.50
5 7.50 37.50 5.50
6 7.00 42.00 4.50
7 6.50 45.50 3.50
8 6.00 48.00 2.50
9 5.50 49.50 1.50
10 5.00 50.00 .50
11 4.50 49.50 (-).50
RELATIONSHIP BETWEEN AR AND MR
The relationship between AR and MR of a monopoly firm can be stated as follows:
1. AR and MR are both negatively by sloped (downward sloping) curves.
2. The slope of the MR curve is twice that of the AR curve.
3. MR curve lies half-way between the AR curve and the Y axis. i.e. it cuts the horizontal line
between Y axis and AR into two equal parts.
4. AR cannot be zero, but MR can be zero or even negative

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TYPES OF MONOPOLY
Discriminating Monopoly
Simple Monopoly
Discriminating monopoly where the
Simple monopoly where the monopolist
monopolist charges different prices
charges uniform price from all buyers
from different buyers of the same
For example, Indian Railways charging
good or service for eg. Dynamic fare
same fare from all AC 3Tier passengers
charged by Indian Railways in specific
trains
Equilibrium of the Monopoly Firm
POINT TO BE NOTED
 Since a monopolist faces a downward sloping demand curve, if he raises the price
of his product, his sales will go down.
 On the other hand, if he wants to increase his sales volume, he will have to be
content with lower price.
 A monopolist will try to reach the level of output at which profits are maximum
i.e. he will try to attain the equilibrium level of output.
 Since firm and industry are identical in a monopoly setting equilibrium of the
monopoly firm signifies equilibrium of the industry.

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SHORT RUN EQUILLIBIRIUM
Equilibrium is
attained when
MR = MC
Equilibrium of a monopolist (Short run)
 The figure shows that MC curve cuts MR curve at E.
 That means, at E, the equilibrium output is OQ.
 The ordinate EQ extended to the demand curve (AR curve) gives the profit maximising equilibrium
price OP.
 Thus the determination of output simultaneously determines the price which a monopolist can
charge.
HOW TO FIND PROFIT / LOSSES ??
Firm’s equilibrium under monopoly: Maximisation of profits

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 Shows that MC cuts MR at E to give equilibrium output as OQ. At OQ, the price charged
is OP.
 At output level OQ, the price per unit is QA (=OP) and the cost per unit is BQ.
 Therefore, the economic profit per unit given by AR – ATC is AB (AQ-BQ).
 The total profit is ABCP.
 It is to be noted that there is no certainty that a monopolist will always earn an economic or
supernormal profit.
 It all depends upon his demand and cost conditions.
 If a monopolist faces a very low demand for his product and the cost conditions are such that
ATC >AR, he will not be making profits, rather, he will incur losses. Figure 26 depicts this
position.
Equilibrium of the monopolist: Losses in the short run
 In the above figure, MC cuts MR at E. Here E is the point of loss minimisation. At E, the
equilibrium output is OQ and the equilibrium price is OP.
 The average total cost (SATC) corresponding to OQ is QA. Cost per unit of output i.e. QA is
greater than revenue per unit which is BQ.

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 Thus, the monopolist incurs losses to the extent of AB per unit or total loss is ABPC. Whether
the monopolist stays in business in the short run depends upon whether he meets his average
variable cost or not.
 If he covers his average variable cost and at least a part of fixed cost, he will not shut down
because he contributes something towards fixed costs which are already incurred. If he is unable
to meet even his average variable cost, he will shutdown.
LONG RUM EQUILIBRIUM
 Long run is a period long enough to allow the monopolist to adjust his plant size or to use his
existing plant at any level that maximizes his profit.
 In the absence of competition, the monopolist need not produce at the optimal level.
 He can produce at a sub-optimal scale also. In other words, he need not reach the minimum of
LAC curve; he can stop at any point on the LAC where his profits are maximum.

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PRICE DISCRIMINATION
 Price discrimination occurs when a producer sells a specific commodity or service to different
buyers at two or more different prices for reasons not associated with differences in cost.
 Price discrimination is a method of pricing adopted by a monopolist in order to earn abnormal
profits.
 It refers to the practices of charging different prices for different units of the same commodity.
 Examples of price discrimination are:
 Railways separate high-value or relatively small-bulk commodities which can bear higher
freight charges from other categories of goods.
 Some universities charge higher tuition fees from evening class students than from other
scholars.
 Price discrimination cannot

persist under perfect competition
because the seller has no
influence over the market
determined price.
 Price discrimination requires an
element of monopoly so that the
seller can influence the price of
his product.

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Conditions for Price Discrimination
Price discrimination is possible only under the following conditions:
CONDITION 1 : The seller should have some control over the supply of his product i.e. the firm
should have price- setting power. Monopoly power in some form is necessary (not sufficient) to
discriminate price.
CONDITION 2 : The seller should be able to divide his market into two or more sub-markets.
CONDITION 3 : The price-elasticity of the product should be different in different sub-markets.
The monopolist fixes a high price for his product for those buyers whose price elasticity of
demand for the product is less than one. This implies that, when the monopolist charges a higher
price from them, they do not significantly reduce their purchases in response to high price.
CONDITION 4 : It should not be possible for the buyers of low-priced market to resell the product
to the buyers of high- priced market i.e there must be no market arbitrage
Objectives of Price Discrimination

 To earn maximum profit
 To dispose off surplus stock
 To enjoy economies of scale
 To capture foreign markets and
 To secure equity through pricing.

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Degree Of Price Discrimination
FIRST DEGREE :
 Under the first degree price discrimination, the

Prof. Pigou classified
monopolist separates the market into each individual three degrees of
price discrimination
consumer and charges them the price they are willing
and able to pay and thereby extract the entire consumer
surplus.
 Doctors, lawyers, consultants etc., charging different
fees, prices decided under ‘bid and offer’ system, auctions, and through negotiations are examples
of first degree price discrimination.
SECOND DEGREE:
 Under the second degree price discrimination, different prices are charged for different quantities
of sold. The monopolist will take away only a part of the consumers’ surplus.
The two possibilities are:
(a) Different consumers pay different price (b) Each consumer pays different price for
if they buy different quantity. Larger consecutive purchases. For example, suppliers
quantities are available at lower unit price. of services such as telephone, electricity,
For example, a family pack of soaps or water, etc., sometimes charge higher prices
biscuits tends to cost less per kg than when consumption exceeds a particular limit.
smaller packs.

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THIRD DEGREE:
 Under the third degree price discrimination, price varies by attributes such as location or by
customer segment.
 Here the monopolist will divide the consumers into separate sub-markets and charge different
prices in different sub-markets.
 Examples: Dumping, charging different prices for domestic and commercial uses, lower prices in
railways for senior citizens, etc.
Equilibrium under Price Discrimination
 Under simple monopoly, a single price is charged for the whole output; but under price
discrimination the monopolist will charge different prices in different sub-markets.
 First of all, the monopolist has to divide his total market into various sub-markets on the basis of
differences in elasticity of demand.
 In order to reach the equilibrium position, the discriminating monopolist has to make three
decisions:
1) How much total output should he produce?
2) How the total output should be distributed between the two sub-markets? and
3) What prices he should charge in the two sub-markets?
 The discriminating monopolist will compare the marginal revenue with the marginal cost of the
output.
 But he has to find out first, the aggregate marginal revenue of the two sub-markets taken
together and compare this aggregate marginal revenue with marginal cost of the total output.

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 MRa is the marginal revenue

curve in sub-market A
Aggregate marginal revenue
corresponding to the demand
curve is obtained by summing curve Da.
up laterally the marginal  Similarly, MRb is the
revenue curves of the sub- marginal revenue in sub-
markets. market B corresponding to

the demand curve Db.
 Now, the aggregate marginal revenue curve AMR, which has been shown in Panel (iii) of figure
has been derived by adding up laterally MRa and MRb.
 The marginal cost curve of the monopolist is shown by the curve MC in Panel(iii) of figure
 The discriminating monopolist will maximize his profits by producing the level of output at which
marginal cost curve (MC) intersects the aggregate marginal revenue curve (AMR).
 It is manifest from the diagram (iii) that profit maximizing output is OM, for only at OM
aggregate marginal revenue is equal to the marginal cost of the whole output.
 Thus, the discriminating monopolist will decide to produce OM level of output.
Concept Of Sub Market
1. Once the total output to be produced has been determined, the next task for the discriminating
monopolist is to distribute the total output between the two sub-markets.
2. He will distribute the total output OM in such a way that the marginal revenues in the two sub-
markets are equal.
3. The marginal revenues in the two sub-markets must be equal if the profits are to be maximized.
If he is so allocating the output into two markets that the marginal revenues in the two are not
equal, then it will pay him to transfer some amount from the sub-market in which the marginal
revenue is less to the sub-market in which the marginal revenue is greater.

Business Economics
4. Only when the marginal revenues in the two markets are equal, it will be unprofitable for him to
shift any amount of the good from one market to the other.
5. For the discriminating monopolist to be in equilibrium it is essential not only that the marginal
revenues in the two sub-markets should be the same but that they should also be equal to the
marginal cost of the whole output.
6. Equality of marginal revenues in the two markets with marginal cost of the whole output ensures
that the amount sold in the two sub-markets will together be equal to the whole output OM
which has been fixed by equalizing aggregate marginal revenue with marginal cost.
7. It will be seen from figure (iii) that at equilibrium output OM, marginal cost is ME.
8. Now, the output OM has to be distributed in the two markets in such a way that the marginal
revenue from them should be equal to the marginal cost (ME) of the whole output.
9. It is clear form the diagram (i) that OM1 must be sold in the sub -market A, because marginal
revenue M1E1 at amount OM1 is equal to marginal cost ME.
10. Similarly, OM2 must be sold in sub-market B, since marginal revenue M2E2 of amount OM2 is
equal to the marginal cost ME of the whole output.
11. To conclude, demand and cost conditions being given, the discriminating monopolist will produce
total output OM and will sell amount OM1 in sub-market A and amount OM2 in sub- market B.
12. It should be noted that the total output OM will be equal to OM1 + OM2.
13. Another important thing which the discriminating monopolist has to discover is what prices will
be charged in the two sub-markets.
14. It is clear from the demand curve that amount OM1 of the good can be sold at price OP1 in sub-
market A.
15. Therefore, price OP1 will be set in sub-market A. Like wise, amount OM2 can be sold at price
OP2 in sub-market B. Therefore, price OP2 will be set in sub-market B.
16. Further, it should be noted that price will be higher in market A where the demand is less elastic
than in market B where the demand is more elastic.

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17. Thus, price OP1 is greater than the price OP2.
Fixation of total output and price in the two sub -markets by the discriminating monopolist
CONCLUSION
 Price discrimination is usually resorted to by a monopolist to secure higher
profit and to acquire and sustain monopoly power.
 There is loss of economic welfare as the price paid is higher than marginal
cost. Price discrimination also results in reduced consumer surplus.
ECONOMIC EFFECTS OF MONOPOLY
1. Monopoly is often criticized because it reduces aggregate economic welfare through loss of
productive and allocative efficiency.
2. Monopolists charge substantially higher prices and produce lower levels of output than would exist
if the product were produced by competitive firms.
3. Monopolists earn economic profits in the long run which are unjustifiable.

Business Economics
4. Monopoly prices exceed marginal costs and therefore reduces consumer surplus. There is a transfer
of income from the consumers to the monopolists. Not only that consumers pay higher prices, but
they would also not be able to substitute the good or service with a more reasonably priced
alternative.
5. Monopoly restricts consumer sovereignty and consumers’ opportunities to choose what they desire.
6. Monopolists may use unjust means for creating barriers to entry to sustain their monopoly power.
They often spend huge amount of money to maintain their monopoly position. This leads increases
average total cost of producing a product.
7. A monopolist having substantial financial resources is in a powerful position to influence the
political process in order to obtain favourable legislation.
8. Very often, monopolists do not have the necessary incentive to introduce efficient innovations that
improve product quality and reduce production costs.
9. Monopolies are able to use their monopoly power to pay lower prices to their suppliers.
10. The economy is also likely to suffer from ‘X’ inefficiency, which is the loss of management
efficiency associated with markets where competition is limited or absent.
MONOPOLISTIC COMPETITION
Features of Monopolistic Competition
 Large number of sellers:
In a monopolistically competitive market, there are large number of independent firms who
individually have a small share in the market.

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 Product differentiation:
 In a monopolistic competitive market, the products of different sellers are differentiated on the
basis of brands.
 Because competing products are close substitutes, demand is relatively elastic, but not perfectly
elastic as in perfect competition.
 Freedom of entry and exit:
 Barriers to entry are comparatively low and new firms are free to enter the market if they find
profit prospects and existing firms are free to quit.
 Non-price competition:
 In a monopolistically competitive market, firms are often in fierce competition with other firms
offering a similar product or service, and therefore try to compete on bases other than price
 for example: they indulge in aggressive advertising, product development, better distribution
arrangements, efficient after-sales service and so on.
Price-Output Determination under Monopolistic Competition
EQUILIBRIUM OF A FIRM [SHORT RUN]
Short run equilibrium of a firm under monopolistic competition: Supernormal profits

Business Economics
Conditions for the Equilibrium of an individual firm:
The conditions for price-output determination and equilibrium of an individual firm may be stated
as follows:
(i) MC = MR
(ii) MC curve must cut MR curve from below.
 Shows that MC cuts MR curve at E. At E, the equilibrium price is OP and the equilibrium
output is OM.
 Since per unit cost is SM, per unit supernormal profit (i.e. price - cost) is QS (or PR) and the
total supernormal profit is PQSR.
LOSSES FOR MONOPOLISTIC FIRM
 It is also possible that a monopolistically competitive firm may incur losses in the short run.
 The figure shows that per unit cost (HN) is higher than price OT (or KN) of the product of the
firm and the loss per unit is KH (HN-KN). The total loss is GHKT.

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LONG RUN EQULLIBIRUM MONOPOLISTIC FIRM
 If the firms in a monopolistically competitive industry earn supernormal profits in the short run,
there will be an incentive for new firms to enter the industry.
 As more firms enter, profits per firm will go on decreasing as the total demand for the product
will be shared among a larger number of firms.
 This will happen till all supernormal profits are wiped away and all firms earn only normal profits.
Thus, in the long run all firms under monopolistic competition will earn only normal profits.
 Figure shows the long run equilibrium of a firm in a monopolistically competitive market.
 The average revenue curve touches the average cost curve at point T correspondin g to quantity Q
and price P.
 At equilibrium (i.e. MC= MR) supernormal profits are zero, since average revenue equals average
costs. All firms are earning zero economic profits or just normal profits.
In Long Run
In case of persisting losses, in the
All Firms are earning Zero long run, the loss making firms
Economic Profit / Normal will exit from the market and this
Profit will go on till the remaining firms

make normal profits only.

Business Economics
CONCLUSION TABLE
Perfect Competition Monopoly Monopolistic Competition

Large number of buyers and large Single seller, no Large number of buyers and large number of
number of firms in the industry difference between firms in the industry
firm and industry
Homogenous products which No close substitutes Differentiated products which are close
are perfect substitutes substitutes, but not perfect substitutes
Insignificant market share Command over the whole Each firm is small relative to the market
market
Competition among firms Absence of competition Imperfect competition
is perfect
Complete absence of monopoly High degree of monopoly Some degree of monopoly power due to
power prevails product differentiation
Free entry and exit Strong barriers to entry Free entry and exit
Price-taker Price maker Some control over price
Price is equal to marginal cost Price is higher than marginal Price is higher than marginal cost
cost
Price less than other market High equilibrium price Price is high compared to perfect
forms competition
Demand curve is infinitely elastic Downward sloping and Downward sloping and more elastic
highly inelastic demand demand curve
curve
MR and AR represented by the MR starts at the same MR starts at the same point as AR, and
same curve point as AR, and is twice is twice steep when compared to AR
steep when compared to
AR
TR straight line positively TR inverted U shaped TR inverted U shaped
sloping through the origin
No price discrimination-same Can practice price Depends on the extent of monopoly
price for all units discrimination by selling a power the firm has
product at different prices

Business Economics
No supernormal profits in the Supernor mal profits both in No supernormal profits in the long run
long run the short run and long run
No selling costs Generally low selling Due to severe competition, selling costs are
costs, only for informing vital to persuade buyers
the consumers
Price being given, decides only Decides on both price and Decides on both price and output
quantity of output output
Product is produced at Produced at the declining Produced at the declining portion of

the minimum average portion of average cost average cost curve
cost curve
Equilibrium quantity is highest Equilibrium quantity less Equilibrium quantity less than optimal,
and produced at least cost than other market forms there is excess capacity
No consumer exploitation Consumers can be exploited Consumers are influenced through price
by charging high prices and non price competition
Efficient allocation of resources Inefficient allocation of Inefficient allocation of resource

resource
No wastage of resources Wastage of resource Huge w astage of resources for
advertisements
OLIGOPOLY
 Oligopoly is often described as ‘competition among the few’. Prof. Stigler defines oligopoly as that
“situation in which a firm bases its market policy, in part, on the expected behaviour of a few
close rivals”. In other words, when there are few (two to ten) sellers in a market selling
homogeneous or differentiated products, oligopoly is said to exist.
 Oligopolies mostly arise due to those factors which are responsible for the emergence of
monopolies.
 Example : Airlines, Telecom Industry

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TYPES OF OLIGOPOLY
Collusive and Syndicated and

Pure oligopoly or Open and closed Partial or full
Competitive organized
perfect oligopoly oligopoly oligopoly
oligopoly oligopoly
 Pure oligopoly or perfect oligopoly :
 It occurs when the product is homogeneous in nature,

Differentiated or imperfect
e.g. Aluminium industry. oligopoly occurs when goods
sold is based on product
 This type of oligopoly tends to process raw materials or
differentiation, e.g. Talcum
produce intermediate goods that are used as inputs by powder.
other industries.
 Notable examples are petroleum, steel, and aluminium.
 Open and closed oligopoly:
 In an open oligopoly market new firms can enter the market and compete with the existing firms.
But, in closed oligopoly entry is restricted.
 Collusive and Competitive oligopoly:
 When few firms of the oligopoly market come to a common understanding or act in collusion with
each other either in fixing price or output or both, it is collusive oligopoly.
 When there is absence of such an understanding among the firms and they compete with each
other, it is called competitive oligopoly.

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 Partial or full oligopoly:
 Oligopoly is partial when the industry is dominated by one large firm which is considered or looked
upon as the leader of the group.
 The dominating firm will be the price leader. In full oligopoly, the market will be conspicuous by
the absence of price leadership.
 Syndicated and organized oligopoly:
 Syndicated oligopoly refers to that situation where the firms sell their products through a
centralized syndicate.
 Organized oligopoly refers to the situation where the firms organize themselves into a central
association for fixing prices, output, quotas, etc.
Characteristics of Oligopoly Market
 Strategic Interdependence:
 The most important feature of oligopoly is interdependence in decision-making of the few firms
which comprise the industry.
 Since there are only few sellers, there will be intense competition among them.
 Under oligopoly, each seller is big enough to influence the market. A firm has to necessarily
respond to its rivals’ actions, and simultaneously the rivals also respond to the firm’s actions.
 This is because when the number of competitors is few, any change in price, output or product by
a firm will have direct effect on the fortunes of the rivals who will then retaliate by changing
their own prices, output or advertising technique as the case may be.

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 Importance of advertising and selling costs:
 A direct effect of interdependence of oligopolists is that the firms have to employ various
aggressive and defensive marketing weapons to gain greater share in the market or to maintain
their share.
 For this, firms have to incur a good deal of costs on advertising and other measures of sales
promotion.
 Group behaviour:
 The theory of oligopoly is a theory of group behaviour, not of mass or individual behaviour and to
assume profit maximising behaviour on the oligopolists’ part may not be very valid.
 There is no generally accepted theory of group behaviour.
 The firms may agree to pull together as a group in promotion of their common interest
 The group may or may not have a leader. If there is a firm which acts as a leader, it has to get
others to follow it.
 These are some of the concerns of the theory of group behaviour.
Price and Output Decisions in an Oligopolistic Market
 An oligopolistic firm has to behave strategically when it makes a decision about its price. It has
to consider whether rival firms will keep their prices and quantities constant, when it mak es
changes in its price and/or quantity.
 When an oligopolistic firm changes its price, its rival firms will retaliate or react and change their
prices which in turn would affect the demand of the former firm.
 Therefore, an oligopolistic firm cannot have sure and determinate demand curve, since the demand
curve keeps shifting as the rivals change their prices in reaction to the price changes made by it.
 Now when an oligopolist does not know his demand curve, what price and output he will fix
cannot be ascertained by economic analysis.

Business Economics
3 PRICE OUTPUT APPROCH
 Approach 1 :
 It is assumed by some economists that oligopolistic firms ignore their interdependence and make
their decisions independently.
 When interdependence is ignored, the demand curve becomes definite and the equilibrium output
is found out by equating marginal cost and marginal revenue.
 Approach 2 :
Some economists assume that an oligopolist is able to predict the reaction pattern of his
competitors and on the basis of his prediction; he makes decisions relating to price a nd quantity
Cournot model Stackelberg’s model, Bertrand model

In Cournot model, the In Stackelberg’s model, According to Bertrand
firms’ control variable is the leader commits to an model, price is the control
output before all other variable for firms and each
output in contrast to price.
firms. The rest of the firm independently sets its
They do not collude.
firms are followers and price in order to maximize
they choose their outputs profits.
so as to maximize
profits, given the leader’s
output.
 Approach 3 :
 The third approach is that oligopolists enter into agreement and try to pursue their common
interests.
 They jointly act as a monopoly organization and fix their prices in such a manner that their joint
profits are maximized.

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 They will then share the profits, market or output among them as agreed. Entering into collusion
or forming a cartel is generally considered illegal because it restricts trade and creates situations
which are close to monopoly.

PRICE LEADERSHIP
 Cartels are often formed in industries where there are a few firms, all of which are similar in
size.
 A group of firms that explicitly agree (collude) to coordinate their activities is called a cartel.
 Most cartels have only a subset of producers.
 If the participating producers stick to the cartel’s agreements, the cartel will have high market
power and earn monopoly profits especially when the demand for the product is inelastic.
TYPES OF PRICE LEADERSHIP
One strategy is to adopt a Another type of price There could be barometric

‘live and let live leadership is by a low price leadership under which
philosophy’. Specifically, cost firm. Here, the an old, experienced, largest or
the dominant firm accepts price leader sets the most respected firm acts as a
the presence of fringe price in such a manner leader and assesses the
firms and sets the price to that it allows some market conditions with regard
maximize its profit, taking profits to the followers to the demand, cost,
into account the fringe also. competition etc. and makes
firms’ behaviour. This is changes in price which are
called price-leadership by best from the view point of
Whatever price is
dominant firm. all the firms in the industry.
charged by the price
leader is generally
accepted by the
follower firms.

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KINKED DEMAND CURVE
 It has been observed that in many oligopolistic industries
prices remain sticky or inflexible for a long time. Given by an

 They tend to change infrequently, even in the face of American economist
Paul A. Sweezy.
declining costs. Hence this is called
 Many explanations have been given for this price rigidity Sweezy’s Model.
under oligopoly and the most popular explanation is the
kinked demand curve hypothesis .
 The demand curve facing an oligopolist, according to the kinked demand

Also called
curve hypothesis, has a ‘kink’ at the level of the prevailing price. as Sweezy’s
Model
 It is because the segment of the demand curve above the prevailing
price level is highly elastic and the segment of the demand curve below the prevailing price level
is inelastic.
 A kinked demand curve dD with a kink at point P
Kinked Demand Curve under Oligopoly
 The prevailing price level is MP and the firm produces and sells output OM.
 Now the upper segment dP of the demand curve dD is relatively elastic and the lower segment
PD is relatively inelastic.
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 This difference in elasticities is due to the particular competitive reaction pattern assumed by the
kinked demand curve hypothesis. This assumed pattern is :
 Each oligopolist believes that if it lowers the price below the prevailing level its competitors will
follow him and will accordingly lower prices, whereas if it raises the price above the prevailing
level, its competitors will not follow its increase in price.
ASSUMPTION
 This is because when an oligopolistic firm lowers the price of its product, its competitors will feel
that if they do not follow the price cut, their customers will run away and buy from the firm
which has lowered the price.
 Thus, in order to maintain their customers they will also lower their prices.
 The lower portion of the demand curve PD is price inelastic showing that very little increase in
sales can be obtained by a reduction in price by an oligopolist.
 On the other hand, if a firm increases the price of its product, there will a substantial reduction
in its sales because as a result of the rise in its price, its customers will withdraw from it and go
to its competitors which will welcome the new customers and will gain in sales.

Business Economics
OTHER IMPORTANT MARKET FORMS
Duopoly Monopsony Oligopsony Bilateral monopoly
Duopoly, a subset of Monopsony is a Oligopsony is a market Bilateral monopoly
oligopoly, is a market market characterized characterized by a is a market
situation in which by a single buyer of small number of large structure in which
there are only two a product. or service buyers and is mostly there is only a
firms in the market. and is mostly relevant to factor single buyer and a
applicable to factor markets single seller i.e. it is
markets in which a a combination of
single firm is the monopoly market
only buyer of a and a monopsony
factor. market.
CLASSIFICATION OF MARKET FORM
Form of Market Structure Number of Firms Nature of product Price Elasticity Degree of Control over
of Demand of a price
firm
(a) Perfect competition Large number of Homogeneous Infinite None

firms
(b) Monopoly One Unique product without Small Very Considerable

close substitute
(c) Imperfect Competition

i) Monopolistic Large number of Differentiated Large Some
Competition firms products
ii) Oligopoly Few Firms Homogeneous or Small Some

differentiated
product

Business Economics
Chapter - 5
BUSINESS CYCLE
PHASES OF BUSINESS CYCLE
I. Expansion (also II. Peak or boom or III. Contraction IV. Trough or

called Boom or Prosperity (also called Depression
Upswing) Downswing Or
Recession)
The broken line (marked

‘trend’) represents the
steady growth line or the
growth of the economy when
there are no business cycles.
PHASES OF BUSINESS CYCLE
Peak
Y Peak Peak Trend
Trend
Real GDP
Trough Trough
Trough
0 Trough
X
Time
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1. The figure starts with ‘trough’ when the overall economic activities i.e. production and
employment, are at the lowest level.
2. As production and employment expand, the economy revives, and it moves into the expansion
path.
3. However, since expansion cannot go on indefinitely, after reaching the ‘peak’, the economy starts
contracting.
4. The contraction or downturn continues till it reaches the lowest turning point i.e. ‘trough’.
However, after remaining for some time, the economy revives again and a new cycle starts
I. EXPANSION
 The expansion phase is characterised by increase in National output
Employment
Aggregate demand
Capital and consumer expenditure
Sales
Profits
Rising stock prices
Bank credit.
 This state continues till there is full employment of resources and production is at its maximum
possible level using the available productive resources.
 Involuntary unemployment is almost zero and whatever unemployment is there is either
Frictional Structural
(i.e. due to change of jobs, or suspended work (i.e. unemployment caused due to
due to strikes or due to imperfect mobility of structural changes in the economy).
labour)
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Business Economics
 Prices and costs also tend to rise faster.
 Good amounts of net investment occur, and demand for all types of goods and services rises.
 There is altogether increasing prosperity and people enjoy high standard of living due to high
levels of consumer spending, business confidence, production, factor incomes, profits and
investment.
 The growth rate eventually slows down and reaches its peak.
PEAK
II.
 The term peak refers to the top or the highest point of the business cycle.
 In the later stages of expansion, inputs are difficult to find as they are short of their demand
and therefore input prices increase.
 Output prices also rise rapidly leading to increased cost of living and greater strain on fixed
income earners.
 Consumers begin to review their consumption expenditure on housing, durable goods etc. Actual
demand stagnates.
 This is the end of expansion and it occurs when economic growth has reached a point where it
will stabilize for a short time and then move in the reverse direction.
CONTRACTION
III.
 As mentioned above, once peak is reached, increase in demand is halted and starts decreasing in
certain sectors.
 During contraction, there is fall in the levels of investment and employment.
 Producers do not instantaneously recognise the pulse of the economy and continue anticipating
higher levels of demand, and therefore, maintain their existing levels of investm ent and
production.
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Business Economics
 The consequence is a discrepancy or mismatch between demand and supply. Supply far exceeds
demand.
 Initially, this happens only in few sectors and at a slow pace, but rapidly spreads to all sectors.
 Producers being aware of the fact that they have indulged in excessive investment and over
production, respond by holding back future investment plans, cancellation and stoppage of orders
for equipments and all types of inputs including labour.
 This in turn generates a chain of reactions in the input markets and producers of capital goods
and raw materials in turn respond by cancelling and curtailing their orders.
 This is the turning point and the beginning of recession.
Decrease in input demand pulls input prices down;


Incomes of wage and interest earners gradually

Decline resulting in decreased demand for goods and
services
.
 Producers lower their prices in order to dispose off their inventories and for meeting their financial
obligations.
 Consumers, in their turn, expect further decreases in prices and postpone their purchases.
 With reduced consumer spending, aggregate demand falls, generally causing fall in prices.
 The discrepancy between demand and supply gets widened further.
 This process gathers speed and recession becomes severe. Investments start declining; production
and employment decline resulting in further decline in incomes, demand and consumption of both
capital goods and consumer goods.
 Business firms become pessimistic about the future state of the economy and there is a fall in
profit expectations which induces them to reduce investments.
 Bank credit shrinks as borrowings for investment declines, investor confidence is at its lowest,
stock prices fall and unemployment increases despite fall in wage rates.
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Business Economics
 The process of recession is complete and the severe contraction in the economic activities pushes
the economy into the phase of depression.
IV. TROUGH AND DEPRESSION
 Depression is the severe form of recession and is characterized by extremely sluggish economic
activities.
 During this phase of the business cycle, growth rate becomes negative and the level of national
income and expenditure declines rapidly.
 Demand for products and services decreases, prices are at their lowest and decline rapidly forcing
firms to shutdown several production facilities.
 Since companies are unable to sustain their work force, there is mounting unemployment which
leaves the consumers with very little disposable income.
 A typical feature of depression is the fall in the interest rate.
 With lower rate of interest, people’s demand for holding liquid money (i.e. in cash) increases.
 Despite lower interest rates, the demand for credit declines because investors' confidence has
fallen.
 Often, it also happens that the availability of credit also falls due to possible banking or financial
crisis.
 Industries, especially capital and consumer durable goods industry, suffer from excess capacity.
 Large number of bankruptcies and liquidation significantly reduce the magnitude of trade and
commerce.
 At the depth of depression, all economic activities touch the bottom and the phase of trough is
reached.
 It is a very agonizing period causing lots of distress for all. The great depression of 1929-33 is
still cited for the enormous misery and human sufferings it caused.
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RECOVERY
 The economy cannot continue to contract endlessly.
 It reaches the lowest level of economic activity called trough and then starts recovering.
 Trough generally lasts for some time and marks the end of pessimism and the beginning of
optimism.
 This reverses the process. The process of reversal is initially felt in the labour market.
 Pervasive unemployment forces the workers to accept wages lower than the prevailing rates.
 The producers anticipate lower costs and better business environment.
 A time comes when business confidence takes off and gets better, consequently they start to
invest again and to build stocks; the banking system starts expanding credit; technological
advancements require fresh investments into new types of machines and capital goods;
employment increases, aggregate demand picks up and prices gradually rise.
 Besides, price mechanism acts as a self-correcting process in a free enterprise economy. The
spurring of investment causes recovery of the economy.
 This acts as a turning point from depression to expansion.
 As investment rises, production increases, employment improves, income improves and consumers
begin to increase their expenditure. Increased spending causes increased aggregate demand and in
order to fulfil the demand more goods and services are produced.
 Employment of labour increases, unemployment falls and expansion takes place in the economic
activity.
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Business Economics
ECONOMIC INDICATORS
Leading Indicators Lagging Indicators Coincident or concurrent

Indicators
E.g. Changes in Stock Price, e.g. Unemployment,

E.g. GDP, Inflation
New .g. Changes in Stock Corporate profit labour cost
Industrial Production
Price, New per unit of output
: Leading Indicator
 A leading indicator is a measurable economic factor that changes before the economy starts to
follow a particular pattern or trend.
 Those variables that change before the real output changes are called ‘Leading indicators’.
 Leading indicators often change prior to large economic adjustments.
 For example, changes in stock prices, profit margins and profits, indices such as housing, interest
rates and prices are generally seen as precursors of upturns or downturns.
 Similarly, value of new orders for consumer goods, new orders for plant and eq uipment, building
permits for private houses, fraction of companies reporting slower deliveries, index of consumer
confidence and money growth rate are also used for tracking and forecasting changes in business
cycles.
 Leading indicators, though widely used to predict changes in the economy, are not always
accurate.
 Even experts disagree on the timing of these so-called leading indicators.
 It may be weeks or months after a stock market crash before the economy begins to show signs
of receding. Nevertheless, it may never happen.
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Business Economics
Lagging Indicator
 Lagging indicators reflect the economy’s historical performance and changes in these indicators
are observable only after an economic trend or pattern has already occurred.
 variables that change after the real output changes are called ‘Lagging indicators’.
 If leading indicators signal the onset of business cycles, lagging indicators confirm these trends.
 Lagging indicators consist of measures that change after an economy has en tered a period of
fluctuation.
 Some examples of lagging indicators are unemployment, corporate profits, labour cost per unit of
output, interest rates, the consumer price index and commercial lending activity.
Coincident or concurrent Indicators
 Coincident economic indicators, also called concurrent indicators, coincide or occur simultaneously
with the business-cycle movements.
 Since they coincide fairly closely with changes in the cycle of economic activity, they describe the
current state of the business cycle.
 In other words, these indicators give information about the rate of change of the expansion or
contraction of an economy more or less at the same point of time it happens.
 A few examples of coincident indicators are Gross Domestic Product, industrial production,
inflation, personal income, retail sales and financial market trends such as stock market prices.
FEATURES OF BUSINESS CYCLES
Feature 1
 Business cycles occur periodically although they do not exhibit the same regularity.
 The duration of these cycles vary.

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Business Economics
 The intensity of fluctuations also varies.
 The intensity of fluctuations also varies.
Feature 2
 Business cycles have distinct phases of Expansion
Peak
Contraction
Trough.
 These phases seldom display smoothness and regularity.
 The length of each phase is also not definite.
Feature 3
 Business cycles generally originate in free market economies.
 They are pervasive as well. Disturbances in one or more sectors get easily transmitted to all other
sectors.
Feature 4
 Although all sectors are adversely affected by business cycles, some sectors such as capital goods
industries, durable consumer goods industry etc, are disproportionately affected.
 Moreover, compared to agricultural sector, the industrials sector is more prone to the adverse
effects of trade cycles.
Feature 5
 Business cycles are exceedingly complex phenomena; they do not have uniform characteristics and
causes.
 They are caused by varying factors.

266 Business Cycle
Business Economics
 Therefore, it is difficult to make an accurate prediction of trade cycles before their occurrence.
Feature 6
 Repercussions of business cycles get simultaneously felt on nearly all economic variables viz.
output, employment, investment, consumption, interest, trade and price levels.
Feature 7
 Business cycles are contagious and are international in character.
 They begin in one country and mostly spread to other countries through trade relations.
 For example, the great depression of 1930s in the USA and Great Britain affected almost all the
countries, especially the capitalist countries of the world.
Feature 8
 Business cycles have serious consequences on the well-being of the society.
CAUSES OF BUSINESS CYCLE
EXTERNAL CAUSES BOTH

INTERNAL CAUSES
 War
 Fluctuations in
 Post War Reconstruction
Effective Demand
 Technology shock
 Fluctuations in
 Natural Factors
Investment
 Population growth
 Variations in
government spending
 Macroeconomic policies
 Money Supply
 Psychological factors
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Business Economics
INTERNAL CAUSES
The Internal causes or endogenous factors which may lead to boom or bust are:
I (a) Fluctuation in Effective Demand : (a)Fluctuations in Effective Demand: According to

Keynes
 Fluctuations in economic activities are due to fluctuations in aggregate
effective demand
 In a free market economy, where maximization of profits is the Meaning Of Effective

aim of businesses, a higher level of aggregate demand will Demand
induce businessmen to produce more. Effective demand refers to

the willingness and ability
 As a result, there will be more output, income and employment.
of consumers to purchase
 However, if aggregate demand outstrips aggregate supply, it goods at different prices).
causes inflation.
 As against this, if the aggregate demand is low, there will
be lesser output, income and employment.
 Investors sell stocks, and buy safe-haven investments that traditionally do not lose value, such as
bonds, gold and the U.S. dollar.
 As companies lay off workers, consumers lose their jobs and stop buying anything but necessities.
That causes a downward spiral.
 The bust cycle eventually stops on its own when prices are so low that those investors that still
have cash start buying again. However, this can take a long time, and even lead to a depression.
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Business Economics
The difference between exports

and imports is the net foreign
demand for goods and services.
Decrease in aggregate
Increase in aggregate
effective demand
effective demand
causes conditions of
causes conditions of
recession or
expansion or boom
depression.
I(b)) Fluctuations in investments : According to
 Fluctuations in investments are the prime cause of business cycles. some

economist
 Investment spending is considered to be the most volatile component of the
aggregate demand. Investments fluctuate quite often because of changes in the profit
expectations of entrepreneurs.
 New inventions may cause entrepreneurs to increase investments in projects which are cost-
efficient or more profit inducing.
 Investment may rise when the rate of interest is low in the economy. Increases in investment
shift the aggregate demand to the right, leading to an economic expansion.
 Decreases in investment have the opposite effect.
I (c) Variations in government spending : (c)
 Fluctuations in government spending with its impact on aggregate economic activity result in
business fluctuations.
 Government spending, especially during and after wars, has destabilizing effects on the economy.
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Business Economics
I(d) Macroeconomic Policies:
 Macroeconomic policies (monetary and fiscal policies) also cause business cycles.
 Expansionary policies, such as increased government spending and/or tax cuts, are the most
common method of boosting aggregate demand.
 This results in booms. Similarly, softening of interest rates, often motivated by political motives,
leads to inflationary effects and decline in unemployment rates.
 Anti-inflationary measures, such as reduction in government spending, increase in taxes and
interest rates cause a downward pressure on the aggregate demand and the economy slows down.
 At times, such slowdowns may be drastic, showing negative growth rates and may ultimately end
up in recession.
I(e) Money Supply :

According to
 Trade cycle is a purely monetary phenomenon. Hawtrey
 Unplanned changes in supply of money may cause business fluctuation in an economy.
 An increase in the supply of money causes expansion in aggregate demand and in economic
activities.
 However, excessive increase of credit and money also set off inflation in the economy.
 Capital is easily available, and therefore consumers and businesses alike can borrow at low rates.
 This stimulates more demand, creating a virtuous circle of prosperity. On the other hand, decrease
in the supply of money may reverse the process and initiate recession in the economy.
I(f) Psychological factors:
 Modern business activities are based on the anticipations According to Pigou
of business community and are affected by waves of optimism
or pessimism.
 Business fluctuations are the outcome of these psychological states of mind of businessmen.
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Business Economics
 If entrepreneurs are optimistic about future market conditions, they make investments, and as a
result, the expansionary phase may begin.
 The opposite happens when entrepreneurs are pessimistic about future market conditions.
 Investors tend to restrict their investments.
 With reduced investments, employment, income and consumption also take a downturn and the
economy faces contraction in economic activities.
Schumpeter Innovation Theory
 The cobweb theory propounded by Nicholas Kaldor holds that business cycles result from
the fact that present prices substantially influence the production at some uture date.
 The present fluctuations in prices may become responsible for fluctuations in output and
employment at some subsequent period.
EXTERNAL CAUSES
(a) Wars:
 During war times, production of war goods, like weapons and arms etc., increases and most of the
resources of the country are diverted for their production.
 This affects the production of other goods - capital and consumer goods.
 Fall in production causes fall in income, profits and employment.
 This creates contraction in economic activity and may trigger downturn in business cycle.
(b) Post War Reconstruction:
 After war, the country begins to reconstruct itself. Houses, roads, bridges etc. are built and
economic activity begins to pick up.
 All these activities push up effective demand due to which output, employment and income go up.
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Business Economics
(c) Technology shocks:
 Growing technology enables production of new and better products and services.
 These products generally require huge investments for new technology adoption. This leads to
expansion of employment, income and profits etc. and give a boost to the economy.
 For example, due to the advent of mobile phones, the telecom industry underwent a boom and
there was expansion of production, employment, income and profits.
(d) Natural Factors:
 Weather cycles cause fluctuations in agricultural output which in turn cause instability in the
economies, especially those economies which are mainly agrarian.
 In the years when there are draughts or excessive floods, agricultural output is badly affected.
 With reduced agricultural output,
incomes of farmers fall and therefore they reduce their demand for industrial goods.
Reduced production of food products also pushes up their prices and thus reduces the income
available for buying industrial goods.
Reduced demand for industrial products may cause industrial recession.
(e) Population growth:
If the growth rate of population is higher than the rate of economic growth,
There will be lesser savings in the economy.
Fewer saving will reduce investment and as a result, income and employment will also be less.
With lesser employment and income, the effective demand will be less, and overall, there will be
slowdown in economic activities.
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Business Economics
What are Cyclical Business ??
 Businesses whose fortunes are closely linked to the rate of economic growth are referred to as
"cyclical" businesses.
 These include fashion retailers, electrical goods, house-builders, restaurants, advertising, overseas
tour operators, construction and other infrastructure firms.
During a boom, such But during a slump, they

businesses see a strong usually suffer a sharp drop in
demand for their products demand
Business Cycle 273

CHAPTER 2 - Utility Analysis & Consumer Equilibrium
UTILITY Liquor, Cigarettes, etc.

(b) Only for socially desirable
1. When Economists speak of the Utility of a goods (food, etc.)
certain product, they are referring to - (c) Both (a) and (b)
(a) Usefulness of the product (d) Neither (a) nor (b)
in consumption 7. Utility is ethically neutral. This statement is -
(b) Demand for the product (a) True
(c) Satisfaction gained from (b) False
consuming the product
(c) Partially True
(d) Rate at which consumers are willing to
(d) Nothing can be said about Utility
exchange one good for another
8. Which of the following is not a consumption:
2. Utility may be defined as -
(a) Burning of gas when
(a) Power of Commodity to
cooking of food
satisfy wants
(b) Burning of furniture in an
(b) Usefulness of a Commodity
accident of fire
(c) Desire for a Commodity
(c) Burning of crackers on Diwali
(d) All of the above
(d) Eating of an Ice-Cream
3. Which of the following statements regarding
9. All wants of an individuals are not of:
Utility is not true?
(a) Equal importance
(a) Utility is the psychological
(b) Immediate importance
satisfaction that a
Consumer derives by using (c) Fixed importance
a particular product (d) All of the above
(b) Utility helps to understand how
consumers make choices CARDINAL APPROACH - BASICS
(c) Utility is always measureable
(d) Utility is a purely subjective issue. 10. Utility can be measured and quantified
4. Utility is a - under -
(a) Subjective concept (a) Cardinal Approach only
(b) Indeterminate concept (b) Ordinal Approach only
(c) Objective concept (c) Both (a) and (b)
(d) Irrelevant concept (d) Neither (a) nor (b)
5. Utility - 11. Which of the following Utility approaches
(a) Differs from time to time suggest that Utility can be measured and
quantified?
(b) Differs from person to person
(a) Cardinal
(c) Differs from product to product
(b) Ordinal
(c) Both (a) and (b)
6. Utility is applicable -
(d) Neither approach makes such
(a) Only for harmful goods like
13
suggestion (b) Hicks and Allen Approach
12. Under Marginal Utility analysis, Utility is (c) Cardinal Utility Analysis
assumed to be a - (d) None of the above
(a) Cardinal Concept 19. Cardinal Utility Approach is also called as -
(b) Ordinal Concept (a) Indifference Curve Analysis
(c) Infinite Concept (b) Hicks and Allen Approach
(d) Indeterminate Concept (c) Marginal Utility Analysis
13. Which of the following Utility measurement (d) All of the above
approaches is based on the Marshallian
20. Cardinal Measure of Utility is required in -
school of thought?
(a) Marginal Utility Theory
(a) Cardinal Utility Approach
(b) Indifference Curve Theory
(b) Ordinal Utility Approach
(c) Revealed Preference Theory
(c) Independent Variables Approach
(d) None of the above
(d) Both (a) and (b)
21. If we make the assumption that Utility can
14. Marshallian utility analysis is called ______
be expressed in numbers, we are adopting -
analysis
(a) Cardinal Approach
(a) cardinal
(b) Ordinal Approach
(b) ordinal
(c) classical
(d) Neither (a) nor (b)
(d) historical
22. Which of the approaches uses Money
15. Who is the main exponent of Marginal Utility
Measurement Concept for Utility?
Analysis?
(a) Keynes
(b) Hicks
(c) Paul Samuelson
(d) Marshall
23. Which of the theories is applicable under
16. Marginal Utility Approach to demand was
Cardinal Approach to Utility?
given by
(a) Law of Equi-Marginal Utility
(a) Robbins W
(b) Law of Diminishing Marginal
(b) Alfred Marshall
Utility
(c) J.R. Hicks
(c) Both (a) and (b) and consumer surplus
(d) A C Pigou theory
17. According to Marginal Utility analysis, Utility (d) Neither (a) nor (b)
can be measured in - .
24. Which one of the following assumptions is
(a) Ranks not necessary for the Cardinal
(b) Cardinal Numbers Utility Theory?
(c) Nominal Values (a) Rationality of the Consumer
(d) All of the above (b) Constant Marginal Utility of Money
18. Marginal Utility Approach is also (c) Perfectly Competitive Market
known as - (d) Additivity of Utility
(a) Ordinal Utility Analysis 25. Cardinal Approach to Utility analyses -
14
(a) One Commodity at a time (d) Decreasing Trend
(b) Two Commodities at a time TOTAL UTILITY AND MARGINAL UTILITY
(c) Many Commodities at a time
(d) None of the above 31. ……… is the sum total of the Utility derived
26. Under Cardinal Approach to Utility ,……… is from additional units of a commodity
the measuring rod of Utility. (a) Ordinal Utility
(a) Customer Satisfaction (b) Average Utility
(b) Relative Preference (c) Total Utility
(c) Money (d) Marginal Utility
(d) Both (a) and (c) 32. ……….. of a commodity is the additional
27. Which of the following is an assumption Utility derived by a consumer, by consuming
under Cardinal Approach to Utility Analysis? one more unit of that Commodity.
(a) Measurability of Utility (a) Total Utility
in monetary terms (b) Marginal Utility
(b) Change in Marginal Utility (c) Average Utility
of Money (d) Ordinal Utility
(c) Utility arises even at zero consumption 33. Marginal Utility can be stated by -
(d) All of the above (a) TUn- TUn-1
28. Which of the following is not an assumption (b) Additional Utility derived
under Cardinal Approach to Utility Analysis? from additional unit of
(a) Utility is comparable commodity
across goods (c) Change in Total Utility ÷ Change
(b) Utilities of goods are in Quantity
independent of one another (d) All of the above
(c) Marginal Utility of Money is constant 34. Marginal Utility = Additional Utility derived by
(d) Utility cannot be measured, but only consuming …….. additional unit of a
ranked commodity.
29. The Cardinal Approach to Utility Analysis (a) One
assumes that Utility is measurable and (b) Unit
quantifiable means -
(c) Single
(a) Utility can be expressed
in numbers
35. Marginal Utility -
(b) Utility can only be ranked
(a) Will always be positive
across products
(b) Can be positive or negative
(c) Utility Schedule is derived by the
but not zero
Consumer
(c) Will always be negative
(d) Can be positive or negative or zero
30. The Cardinal Approach to Utility assumes
Marginal Utility of Money is - 36. Total Utility -
(a) Zero (a) Will generally be positive
(b) Constant (b) Will generally be negative
(c) Increasing Trend (c) Can be positive or negative but
15
not zero (c) -1
(d) Can be positive or negative or zero (d) ±1
37. Total Utility is maximum when - 43. Total Utility derived by Ram by eating 10
(a) Marginal Utility is zero Cakes is 250. Marginal Utility of the 11th Cake
is -60. What will be the Total Utility for 11
(b) Marginal Utility is at its
Cakes?
highest point
(a) - 60
(c) Marginal Utility is equal to
Average Utility (b) 150
(d) None of the above (c) 190
38. When total utility is increases at a (d) 310
diminishing rate, then marginal 44. Total Utility derived by Ram by eating 6
utility is ______ Apples is 300. Marginal Utility of the 7th
(a) Diminishing Apple is 30. What will be the Total Utility for 7
Apples?
(b) Zero
(a) 330
(c) Maximum
(b) 270
(d) One
(c) 300
39. Marginal Utility will always show -
(d) 30
(a) Increasing trend
Use the following Table to answer the next 3
(b) Decreasing trend
Questions.
(d) Neither (a) nor (b) No. of Units Total Utility Marginal Utility
0 0
40. The Marginal Utility Curve is -
1 3600
(a) Horizontal to Y axis 2 6800
(b) Demand Curve of that Commodity 3 9600
(c) Vertical to X axis 4 12000
(d) Both (a) and (b) 5 14000
6 15600
41. The Total Utility derived by Ram by
7 16800
consuming 10 cups of Coffee is 99, whereas
8 17600
the total Utility on consumption of 11th Cup
9 18000
is 95. What is the Marginal Utility for 11th cup
of Coffee? 45. What is the Marginal Utility when
(a) -4 consumption increases from 4 units to 5
(b) 6 units?
(c) 10 (a) 3000
(d) -3.5 (b) 1200
42. The Total Utility that Shyam derives after (c) 2000
having 4 Mangoes is 10, and the Total Utility (d) 1500
on consuming 5 Mangoes is 9. What is the 46. What is the Marginal Utility when
Marginal Utility for 5th mango? consumption increases from 6 units to 7
(a) 1 units?
(b) 0 (a) 3100
16
(b) 1200 51. Find the value of "C" in the above Table.
(c) 1240 (a) 2400
(d) 1500 (b) 4800
47. What is the Marginal Utility when (c) 1400
consumption increases from 8 units to 9 (d) 0
units?
52. Find the value of “D” in the above Table.
(a) 3000
(a) 6000
(b) 400
(b) 4
(c) 200
(c) 1200
(d) 1500
(d) Cannot be determined
1. Use the following Table and answer the next
53. Find the value of “E” in the above Table.
13 Questions.
(a) 700
No. of Units Total Utility Marginal Utility (b) 500

0 0 ? (c) 1000
1 1800 A (d) Cannot be determined
2 B 1600 54. Find the value of “F” in the above Table.
3 4800 C
(a) 6
4 D 1200
5 7000 E (b) 7800
6 F 800 (c) 800
7 8400 G (d) Cannot be determined
8 8800 H 55. Find the value of “G” in the above Table.
9 I 200
(a) - 650
10 J 0
11 8800 K (b) 8400
12 L -600 (c) 600
48. Find the value of"?" in the above Table.
56. Find the value of “H” in the above Table.
(a) 0
(a) 8800
(b) 1
(b) 400
(c) 1800
(c) 8
49. Find the value of "A" in the above Table.
57. Find the value of “I” in the above Table.
(a) 800
(a) 9000
(b) 100
(b) 900
(c) 1800
(c) 90
50. Find the value of "B" in the above Table.
58. Find the value of “J” in the above Table.
(a) 2
(a) 9000
(b) 3400
(b) 0
(c) 1600
(c) 10
17
59. Find the value of “K” in the above Table. (c) No extra consumption
(a) 200 (d) Infinite consumption
(b) -200 65. After reaching a saturation point,
(c) 300 consumption of additional units
of the commodity cause -
(d) 100
(a) Total Utility to fall and
60. Find the value of "L" in the above Table.
Marginal utility to rises
(a) 600
(b) Total Utility & Marginal
(b) -600
Utility both to increase
(c) 8200
(c) Total Utility to fall and Marginal Utility
(d) -8200 to become negative.
(d) Total Utility to become negative and
LAW OF DIMINISHING MARGINAL UTILITY Marginal Utility to fall.
66. Marginal Utility of a commodity depends on
61. The Law of Diminishing Marginal Utility its quantity and is -
states that the more a consumer consumes (a) Inversely proportional to
a product, he derives ……… from additional its quantity
consumption. (b) Not proportional to its quantity
(a) Infinite Utility (c) Independent of its quantity
(b) Equal Utility (d) All of the above
(c) Lesser Utility 67. Which of the following is not an assumption
(d) Higher Utility of Law of Diminishing Marginal Utility?
62. Which of the following laws states that the (a) Units consumed should be
more a consumer consumes a product, the identical in all respects
lesser the Utility he derives from the (b) There is no time gap
additional consumption? between consumption
(a) Law of Equal - Marginal Utility (c) Units consumed should be of
(b) Law of Ordinal Utility a standard
(c) Law of Cardinal Utility (d) None of the above
(d) Law of Diminishing Marginal Utility 68. Which of the following is an assumption of
63. The 2nd glass of Lemon Juice gives lesser Law of the Law of Diminishing Marginal
satisfaction to a thirsty person. This is Utility?
a'case of (a) Ordinal Approach to Utility
(a) Law of Demand (b) Continuous Consumption
(b) Law of Supply (c) Perfect Competition
(c) Law of Diminishing Utility (d) Constant Demand
(d) Law of Diminishing Returns 69. Which of the following is an assumption of
64. The Law of Diminishing Marginal Utility Law of the Law of Diminishing Marginal
states that the more a consumer consumes Utility?
a product, he derives lower utility from ........ (a) Perfect Competition
(a) Additional consumption (b) Cardinal Approach to Utility
(b) Lower consumption (c) Constant Demand
18
(d) Constant Marginal Utility of Money still hold good. This statement is -
70. Which of the following is an assumption of (a) True
Law of the Law of Diminishing Marginal (b) False
Utility?
(c) Partially True
(a) Different Units consumed
(d) Can't Say
should be identical in all
76. One of the assumptions is that the Law of
respects
Diminishing Marginal Utility is not applicable
(b) No effect of Consumer's Personal
to -
Tastes and Preferences
(a) Money
(c) Cardinal Approach to Utility
(b) Gold
71. As per the Law of Diminishing Marginal
Utility, Continuous Consumption means
there should be ………. between the 77. As per the assumptions to the Law of
consumption of one unit and another unit. Diminishing Marginal Utility, in case of
money, gold, etc. a greater quantity may -
(a) Equal time gap or interval
(a) Increase the lust and utility
(b) No time gap or interval
thereof
(c) Long time gap or interval
(b) Decrease the lust and utility
thereof
72. The Law of Diminishing Marginal Utility does
(c) Not affect utility at all
not apply to ………., where personal
preferences are dominant.
78. Utility may be affected by the presence or
(a) Music
absence of
(b) Hobbies like Stamp and Coin Collection
(a) Substitute Goods
(b) Complementary Goods
73. The Law of Diminishing Marginal Utility will
not hold good if the Income of the Consumer
79. Utility obtained from tea may be affected if
(a) Decreases
no sugar is available. This statement is -
(b) Increases
(a) True
(c) Remains constant
(b) Partially True
(c) False
74. The Law of Diminishing Marginal Utility is
(d) None
based on the assumption that the habits and
tastes of the consumer - 80. Law of Diminishing Marginal Utility applies
only if ……….. to measurement of utility is
(a) Must remain unchanged
assumed.
(b) Changes in the short run
(d) Nothing can be said
75. If customers' taste or liking for an item
increases with additional consumption, then
the Law of Diminishing Marginal Utility will
19
LAW OF EQUI – MARGINAL UTILITY 86. If MU of money spent on Commodity A is
greater than the MU of money spent on
Commodity B, the Consumer will withdraw
81. Which of the following laws say "If a person
some money from the purchase of B, and will
has a product which can be put to several
spend it on A, till the MU of money in the two
uses lie will distribute it among these
cases becomes equal. Which theory says
uses in such a way that it has
so?
the same Marginal Utility'?
(a) Theory of Diminishing
(a) Law of Equi-Marginal Utility
Marginal Returns
(b) Law of Diminishing Marginal Returns
(b) Theory of Diminishing Marginal Utility
(c) Law of Diminishing Marginal Utility
(c) Theory of Equi-Marginal Utility
(d) Law of Utility
(d) Theory of Total Utility
82. The Consumer will attain maximum
87. The Law of Equi-Marginal Utility applies
satisfaction, and will be in equilibrium when
because -
MU of money spent on various goods that he
buys, are - (a) The Consumer will try to
maximize his satisfaction
(a) Zero
(b) There may be substitutes available in
(b) Decreasing
the market for every product
(c) Increasing
(c) Consumer will substitute one item for
(d) Equal
the other such that his MU > Price.
83. The Consumer will attain ………. satisfaction,
and will be in equilibrium when MU of money
spent on various goods that he buys, are
equal. ORDINAL APPROACH - BASICS
(a) Maximum
(b) Minimum 88. Ordinal Approach means -
(c) Infinite (a) Measurement of Utility is
not possible through money
(d) No
(b) Measurement of Utility is possible but
84. The Consumer will attain maximum
it cannot be ranked
satisfaction, and will be ……….. when MU of
money spent on various goods that he buys, (c) Measurement of Utility is not possible
are equal. in Cardinal Numbers but it can
be ranked
(a) Irrational
(d) Measurement and ranking of Utility
(b) In equilibrium
is possible
(c) Rational
89. If we make the assumption that Utility
(d) In happiness
cannot be expressed in numbers, we are
85. The Consumer will attain maximum adopting -
satisfaction, and will be in equilibrium when
……… that he buys, are equal.
(a) MU of different goods
(b) MU of money as such
(c) MU of money spent on various goods
90. In which approach is Utility ranked in order
of preferences but not measured and
20
quantified? (a) Many Commodity at a time
(a) Cardinal (b) Two Commodities at a time
(b) Ordinal (c) One Commodities at a time
(c) Independent Variables Approach (d) Does not analyse any Commodity at all
(d) Neither Cardinal and Ordinal 97. Which of the approaches dispenses with the
91. Which of the following statements regarding Money Measurement Concept for Utility?
Ordinal Utility is true? (a) Cardinal Approach
(a) Utility can be measured, but (b) Ordinal Approach
cannot be ranked in order of (c) Both (a) and (b)
preferences (d) Neither (a) nor (b)
(b) Utility can neither be measured nor be 98. Which of the approaches helps to explain
ranked in order of preferences the Law of Demand?
(c) Utility can be measured and also be (a) Cardinal Approach
ranked in order of preferences (b) Ordinal Approach
(d) Utility cannot be measured, but can be (c) Both (a) and (b)
ranked in order of preferences
92. Ordinal Utility Approach is also known as -
(a) Cardinal Utility Analysis CONSUMER EQUILIBRIUM & SURPLUS
(b) Hicks and Allen Approach
(c) Marshallian Approach 99. The economic analysis expects the
(d) None of the above Consumer to behave in a ……… manner.
93. Ordinal Utility Approach is also known as - (a) Rational
(a) Indifference Curve Approach (b) Indifferent
(b) Hicks and Allen Approach (c) Irrational
(c) Both (a) and (b) (d) Emotional
(d) Neither (a) nor (b) 100. A Rational Person does not act unless -
94. Which of the following Economists is not (a) The action is ethical.
concerned with Ordinal Utility Approach? (b) The action leads to
(a) Marshall Marginal Costs that
(b) Hicks exceed Marginal Benefits.
(c) Allen (c) The action produces Marginal Benefits

that exceed Marginal Costs.
(d) None the above
(d) The action makes money for the
95. Which approach suggests that Human
person
Satisfaction is a psychological phenomenon,
101. Rational decision-making requires that -
and cannot be measured quantitatively in
monetary terms? (a) One's choices be arrived at
logically and without errors.
(b) One's choices be consistent
with one's goals
(c) One's makes choices that do not
(d) Neither (a) nor (b) involve trade-offs
96. Ordinal Approach to Utility analyses - (d) One's choices never vary
21
102. A Buyer's willingness to pay - to pay for a good and its market price.
(a) Minimum amount he is (d) None of the above.
willing to pay for a product. 108. Consumer Surplus is the area -
(b) Producer Surplus. (a) Below the Demand Curve
(c) Consumer Surplus. and above the price
(d) Maximum Amount he is willing- to pay (b) Below the Supply Curve and above the
for a product. price
103. The Consumer will be willing to purchase an (c) Above the Demand Curve and below
item, so long as the Marginal Utility the price
(additional satisfaction) derived is equal to (d) Above the Supply Curve and below
the Price of the commodity. This principle the price
is called -
109. In economics, what a Consumer is ready to
(a) Consumer Equilibrium pay minus what he actually pays, is termed
(b) Consumer Surplus as -
(c) Consumer Advantage (a) Consumer's Equilibrium
(d) Consumer Exploitation (b) Consumer's Surplus
104. The Consumer is in equilibrium when (c) Consumer's Expenditure
Marginal Utility from a Commodity equals - (d) Any of the above
(a) Supply of that Commodity 110. Consumer Surplus can be represented as -
(b) Demand for that Commodity (a) What a Consumer is ready
(c) Price of the Commodity to pay Less What he
(d) None of the above actually not pays
105. If the Price paid is more than the additional (b) What a Consumer is
satisfaction derived from that item, the ready to pay willingly Less
Consumer will - What he is forced to pay
(a) Continue buying the item (c) What a Consumer is ready to pay
Less. What he actually pays
(b) Stop buying the item
(d) What a Producer actually produces
(c) Will start selling the item
Less What he actually pays
111. "The excess of Price which he would be
106. Consumer is in equilibrium and he keeps
willing to pay rather than go without the
purchasing till the point -
thing over that which he actually does pay
(a) Marginal Utility = Price in the economic measure of his surplus
(b) Marginal Utility = Infinite satisfaction" is given by
(c) Marginal Utility = Zero (a) Alfred Marshall
(d) Marginal Utility = Quantity (b) Lionel Robbins
107. Consumer Surplus means - (c) J.R. Hicks
(a) The area inside the Budget Line. (d) Edge Worth.
(b) The area between the Average 112. ______ is defined as the difference
Revenue and Marginal between what the consumer is willing to
Revenue curves. pay for a product and what he actually
(c) The difference between the pays.
maximum amount a person is willing (a) Consumer Surplus
22
(b) Price Gap (d) MU declines but Price increases
(c) Optimum Price 119. If MU, is the Marginal Utility of product X
(d) Consumer Burden and Px is the price of Product X, a Rational
Consumer will consume the Product Xuntil)
113. The difference between the price a
(a) MUx > Px
consumer is willing to pay and the price he
actually pays is called (b) MUx < Px
(a) Excess Price (c) MUx < Px
(b) Excess Demand (d) MUx = Px
(c) Consumer Surplus 120. At the point of Consumers' Equilibrium -
(d) Exploitation (a) Consumers' Surplus is positive
114. The law of Consumer Surplus is based on - (b) Consumers' Surplus is zero
(a) Law of Diminishing Marginal Utility (c) Consumers' Surplus is
negative
(b) Revealed Preference Theory
(d) None of these
(c) Law of Substitution
121. In the concept of Consumer's Equilibrium
and Consumer's Surplus, for
115. From which of the following concept of
the quantity purchased at the
consumer's surplus has been derived-
equilibrium level -
(a) Law of diminishing marginal utility
(a) Consumers' Surplus is positive
(b) Law of demand
(b) Consumers' Surplus is zero
(c) Law of supply
(c) Consumers' Surplus is negative
(d) Indifference curve analysis
(d) Both (b) and (c)
116. The Concept of Consumer Surplus arises
122. In the concept of Consumer's Equilibrium
since for all earlier units purchased (i.e.
and Consumer's Surplus, for the quantity
prior to equilibrium point) -
purchased at the equilibrium level,
(a) MU < Price Marginal Utility is -
(b) MU = Price (a) Positive
(c) MU > Price (b) Zero
(d) MU = Zero (c) Negative
117. The concept of Consumer Surplus (d) Equal to Price
arises due to the reason that -
123. For the quantity purchased at the
(a) MU is initially higher than Price Consumer's Equilibrium level, is -
(b) MU is initially lower than Price (a) Marginal Utility = Price
(c) MU is always equal to Zero (b) Consumers' Surplus is Zero
(d) MU is always equal to Price (c) Both (a) and (b)
118. The concept of Consumer Surplus arises (d) Neither (a) nor (b)
due to the reason that -
124. Consumers' Surplus arises in respect of -
(a) MU increases but Price
(a) All quantities purchased
remains constant
upto Consumers'
(b) MU increases but Price decreases Equilibrium level
(c) MU declines but Price remains (b) All quantities purchased beyond
constant Consumers' Equilibrium level
23
(c) Quantities purchased at equilibrium (d) Water
level only 130. Which of the following statements
(d) None of the above regarding Consumer Surplus is not true?
125. A Consumer consumed three units of a (a) Consumer Surplus is useful
product. Marginal Utilities derived from the for designing Government
three units are ₹ 400, ₹ 350 and ₹ 300, policies and implementing
respectively. If the price of the product is ₹ welfare programs.
300 per unit, the Consumer Surplus is - (b) Consumer Surplus can also be used to
(a) 0 measure the health of an economy
(b) 250 (c) On the basis of Consumer Surplus
(c) 100 only domestic trade can be
advocated and international trade
(d) 150
should be avoided
126. A Consumer consumed three units of a
(d) Consumer Surplus helps the
product. Marginal Utilities derived from the
monopolist in fixing the price of a
first two units are ₹ 500 and ₹ 400. If the
commodity
price of the product is ₹ 300 per unit and
the Consumer is in equilibrium at 3 units, 131. ______ Consumer Surplus indicates higher
the Marginal Utility of the 3rd unit should level of e ciency in the economy.
be - (a) Higher
(a) 100 (b) Lower
(b) 300 (c) Balanced
(c) 400 (d) Negative
(d) 200 132. ……….. is helpful in designing Government
127. A Consumer consumed 3 units of a policies and implementing welfare
product. Marginal Utilities derived from the programs.
first two units are ₹ 500 and ₹ 400. If the (a) Law of Diminishing Returns
price of the product is ₹ 300 per unit and (b) Law of Equi-Marginal Utility
the Consumer is in equilibrium at 3 units,
(c) Consumer Surplus
the Consumer Surplus will be -
(d) Income and Substitution Effects
(a) 300
133. While analyzing Marshall's measure of
(b) 400
Consumer's Surplus, we assume -
(c) 500
(a) Monopsony
(d) cannot be determined
(b) Perfect Competition
128. Consumer Surplus is highest in the case of -
(c) Monopoly
(a) Necessities
(d) Imperfect Competition
(b) Luxuries
Use the following diagram to answer the next 5
(c) Comforts questions. MM is the Marginal Utility Curve.
129. Which of the following goods give the
maximum amount of Consumer Surplus?
(a) Colour Television
(b) Ice cream
(c) Car
24
134. In the above diagram, Market Price at is ₹ 12,00,000, and she is able to actually
Consumer Equilibrium level is given by - buy it for ₹ 9,00,000, her Consumer Surplus
(a) OA is -
(b) MM (a) ₹ 11,00,000.
(c) OC (b) ₹ 3,00,000.
(d) OM (c) ₹ 9,00,000.
135. In the above diagram, the Consumer (d) ₹ 5,00,000
attains Equilibrium level by consuming 141. Suppose there are three identical vases
……. units. available to be purchased. Buyer 1 is willing
(a) OA to pay ₹ 30 for one, Buyer 2 is willing to pay
₹ 25 for one, and Buyer 3 is willing to pay ₹
(b) OC
20 for one. If the price is Rs 25, how many
(c) MM
vases will be sold and what is the value of j
(d) None of the above Consumer Surplus in this market? ;
136. In the above diagram, the Consumer's Total (a) Three vases will be sold and
Utility is given by - Consumer Surplus is ₹ 80.
(a) Area under OMBC (b) One vase will be sold and
(b) Area under OABC Consumer Surplus is ₹ 5.
(c) Area under OBM (c) One vase will be sold and Consumer
(d) Area under AMB Surplus is ₹ 30
137. In the above diagram, the total price paid (d) Two vases will be sold and Consumer
by the Consumer is given by - Surplus is ₹ 5
(a) Area under OMBC 142. Consumer stops purchasing the additional
units of the commodity when -
(b) Area under OABC
(a) Marginal Utility is equal to
(c) Area under AMB
Marginal Utility of Money
(b) Marginal Utility starts declining
138. In the above diagram, the Consumer's
(c) Marginal Utility become zero
Surplus is given by -
(d) Total Utility is increasing
(a) Area under OMBC
143. Consumer's Surplus left with the consumer
(b) Area under OABC
under Price Discrimination is - .
(c) Area under AMB
(a) Maximum
(b) Minimum
139. Suppose that the price of a new bicycle is
(c) Zero
₹ 3,000. Nathan values a new bicycle at
₹ 5,000. What is the value of Total (d) Not predictable
Consumer Surplus if he buys a new 144. Under which of the following market types
bi-cycle? ; will Consumer's Surplus be generally
(a) ₹ 5,000 minimum -
(b) ₹ 3,000 (a) Perfect Competition
(c) ₹ 2,000 (b) Monopoly
(d) Nil (c) Monopolistic Competition
140. If a buyer's willingness to pay for a new car (d) None of the above
25
145. A Monopolist will try to Consumer's Surplus (a) Infinite
to his advantage by adopting - (b) Zero
(a) Price Rigidity (c) There is no Marginal
(b) Price Exploitation Utility at all
(c) Price Discrimination (d) Nothing can be said
(d) Price Equilibrium 151. The Consumer's Surplus derived from a
146. In case of two or more products, a product is …….. by the availability of
Consumer reaches equilibrium when - substitutes.
(a) MUx/Px = MUy/Py (a) Not affected
(b) MUx/Py = MUy / Px (b) Affected
(c) MUx Px = MUy x Py (c) None
(d) MUx + PX = MUy + Py (d) Substitutes are not available at all
147. If the value of MUx/Px is more than MUy 152. The concept of Consumer's Surplus fails in
/Py, then the Consumer - case of articles which are used for their
prestige value, e.g. Diamonds, etc. This
(a) Will increase the
statement is -
Consumption of Product
X reduce Product Y (a) True
(b) Will reduce the consumption of (b) Partially True
Product X and increase Product Y (c) False
(c) Will consume more of Product X and Y (d) Nothing can be said
(d) Will consume less of Product X and Y 153. The concept of Consumer's Surplus is
148. If the prices of ice-cream and chocolate based on the assumption that Marginal
are ₹ 40 and ₹ 30 respectively, and the Utility of Money is
Marginal Utility of Chocolate is 150, what is (a) Zero
the Marginal Utility of ice-cream assuming (b) Negative
that consumer is at equilibrium?
(c) Constant
(a) 120
(b) 325
154. The concept of Consumer's Surplus adopts -
(c) 200
(a) Cardinal Approach only
(d) 225
(b) Ordinal Approach only
149. Which among the following is the
drawback of Consumer Surplus ?
(a) It is highly hypothetical
155. If we make the assumption that Utility
and imaginary
cannot be expressed in monetary terms,
(b) It ignores interdependence
the concept of Consumer's Surplus -
between goods
(a) Will still apply
(c) It cannot be measured in terms of
(b) Will not apply
money because Marginal Utility of
money changes (c) Only Producers' Surplus
will arise
(d) Any of the above
150. In case of necessaries, the Marginal
Utilities of the first few units are -
26
Ordinal Approach
INDIFFERENCE CURVE APPROACH products that give same amount of

satisfaction.
1. Indifference Curve Approach to Utility (a) Is cost Curve
Analysis was given by - (b) Indifference Curve
(a) Hicks and Allen (c) Marginal Utility Curve
(b) Lionel Robbins (d) Isoquant
(c) Adam Smith 8. An Indifference Curve represents all those
(d) Alfred Marshall combinations of goods which gives -
2. According to Indifference Curve analysis, (a) Higher satisfaction to the
Utility can be measured in - Consumer
(a) Ranks (b) Lower satisfaction to the
Consumer
(b) Cardinal Numbers
(c) No satisfaction to the Consumer
(c) Nominal Values
(d) Equal satisfaction to the Consumer
9. All points on the same Indifference Curve
3. Indifference Curve Approach is also known
represents
as -
(a) Same satisfaction
(a) Ordinal Utility Analysis
(b) Similar satisfaction
(b) Marshallian Approach
(c) Equal satisfaction
(c) Cardinal Utility Analysis
10. The Consumer is said to be ……… among
4. Ordinal Utility Approach is also called -
different points on an IC -
(a) Marginal Utility Analysis
(a) Indifferent
(b) Indifference Curve Analysis
(b) Intelligent
(c) Marshallian Approach
(c) Irrational
(d) Interesting
5. Ordinal Utility Approach is also known as -
11. Indifference Curve slopes -
(a) Indifference Curve Analysis
(a) Downward to the right
(b) Hicks and Allen Approach
(b) Upward to the right
(c) Downward to the left
(d) Upward to the left
6. In Indifference Curve Analysis, the
12. Indifference curve is convex slope, the
Customers' preferences are -
reason is _________
(a) Ranked / arranged in
(a) Increasing Marginal rate of
preference order
substitution
(b) Measured in terms of money
(b) Constant Marginal rate of
substitution
(c) Diminishing Marginal rate of
7. ……… shows various combinations of two
27
substitution (c) Two Indifference Curves intersect each
(d) All of above other at equilibrium
13. Indifference Curve is downward sloping - (d) Indifference Curve slopes downward to
the right
(a) Always
20. Which of the following is a feature
(b) Sometimes
of the Indifference Curve?
(c) Never
(a) It always slopes downward
(d) None of these to the right
14. Indifference Curve has - (b) Indifference Curves are always convex
(a) Positive slope to the origin
(b) Negative slope (c) A higher Indifference Curve represents
(c) No slope at all a higher level of satisfaction
(d) None of the above (d) All of the above
15. The reasons for downward sloping curve- 21. Which of the following is a property
(a) Diminishing MRS of an Indifference Curve?
(b) Constant MRS (a) It is convex to the origin
(c) Increasing MRS (b) The Marginal Rate of Substitution |
is constant as one moves along an
(d) None
Indifference Curve
16. ……..have a negative slope and cannot
(c) Marginal Utility is constant as one move
intersect each other.
along an Indifference Curve
(a) Demand and Supply Curves
(d) Total Utility is greatest where the 45
(b) Isoquants degree line cuts the Indifference Curve
(c) Indifference Curves 22. Which of the following is not a property of
(d) Both (b) and (c) the Indifference Curve?
17. An Indifference Curve slopes down towards (a) No two Indifference Curves
right, since more of one commodity and less can cut each other
of another result in- (b) Indifference Curves slope
(a) Same satisfaction downwards from left to right
(b) Decreasing expenditure (c) Indifference Curves are convex to the
(c) Greater satisfaction origin
(d) Maximum satisfaction (d) None of the above
18. An Indifference Curve is - 23. Which of the following statements is
(a) Concave to the Origin incorrect?
(b) Convex to the Origin (a) The total effect of a change
in the price of a good on its
(c) Parallel to X Axis
quantity demanded is called the Price
(d) Parallel to Y Axis Effect.
19. Which of the following statements regarding (b) Convexity of a Curve implies that the
Indifference Curve is not true? slope of the curve diminishes as one
(a) An Indifference Curve moves from left to right
always has a positive slope (c) The Elasticity of Substitution between
(b) Higher level of Indifference Curve two goods to a Consumer is zero
shows higher level of Utility
28
(d) An Indifference Curve must be each other, it means that the Indifference
downward- sloping to the right Curve relating to the two goods -
24. Which of the following is not an assumption (a) Will be curvilinear.
of the Theory of Demand based on analysis (b) Will be linear.
of Indifference Curves?
(c) Will be divided into two segments
(a) Given scale of preferences which meet at a right angle.
as between different
(d) Will be convex to the origin.
combinations of two goods
30. When two goods are perfect substitutes of
(b) Diminishing Marginal Rate
each other, the Indifference Curve is a -
of Substitution
(a) Straight Line on which
(c) Constant Marginal Utility of money
MRS is constant
(d) Consumers would always prefer more
(b) Concave on which MRS is
of particular good to less of it, other
diminishing
things remaining the same
(c) Convex on which MRS is constant
25. Indifference Curve approach assumes -
(d) Straight Line on which MRS is
(a) Transitivity
increasing
(b) Consistency
31. In the case of two perfect substitutes, the
(c) Rationality indifference curve will be :
(d) All of the above (a) Straight Line
26. Indifference Curve approach deals with - (b) L-shaped
(a) One Commodity only (c) U-shaped
(b) Two Commodities at a time (d) C-shaped
(c) Many Commodities at a time 32. When an Indifference Curve is L shaped,
(d) No Commodities at all then two goods will be -
27. Indifference Curve Approach assumes - (a) Perfect Substitute Goods L
(a) Prices of Commodities (b) Substitute Goods
remain the same throughout (c) Perfect Complementary goods
the analysis
(d) Complementary goods
(b) All Commodities are
33. ……………. depicts complete picture of
homogenous and divisible
consumer's tastes and preferences.
(c) Consumer has full knowledge of all
(a) Marginal Revenue Curve
relevant information
(b) Budget Line
(d) All of the above.
(c) Indifference Map
28. The Indifference Curve Approach does not
(d) Average Cost Curve
assume -
34. A set of ………. is called Indifference Map.
(a) Consistent consumption
pattern behaviour of (a) Demand Curves
consumers (b) Marginal Utility Curves
(b) Rationality on the parts of consumers (c) Cost Curves
(c) Ordinal Measurement of satisfaction (d) Indifference Curves
(d) Cardinal Measurement of Utility 35. Under Indifference Map, even though higher
29. If two goods were perfect substitutes of levels of satisfaction are identified, it cannot
29
be quantified as such. This statement is - Behaviour under Indifference Curve Analysis
(a) True is that more goods are preferred to less of
them. This statement is-
(b) False
(a) True
(c) Partially True
(b) Partially True
(c) False
36. The farther the Indifference Curve is from
the origin, then - (d) Nothing can be said
(a) The higher is the satisfaction 43. An Indifference Map can also be drawn such
level that two Indifference Curves cut each other.
This statement is -
(b) The lower is the satisfaction level
(a) True
(c) The same satisfaction level will be
obtained (b) False
(d) None of the above (c) Partially True
37. A higher Indifference Curve shows - (d) Nothing can be said
(a) A higher level of satisfaction 44. No two ICs will cut or intersect each other.
This statement is -
(b) A higher level of production
(a) True
(c) A higher level of income
(b) False
(c) Partially True
38. A higher Indifference Curve shows -
(a) Higher Level of satisfaction
45. ……….. indicates how much of one
(b) Lower Level of satisfaction
commodity is substituted for how much of
(c) Equal Level of satisfaction as before
another commodity.
(a) Marginal Income
39. A lower Indifference Curve shows -
(b) Marginal Utility
(a) A lower level of satisfaction
(c) Marginal Rate of Substitution
(b) A lower level of production
(d) Marginal Returns
(c) A lower level of income
46. In the context of Indifference Curve
(d) None of the above Analysis, MRS stands for -
40. A lower Indifference Curve shows - (a) Marginal Rate of
(a) Higher Level of satisfaction Substitution
(b) Lower Level of satisfaction (b) Marginal Rate of Satisfaction
(c) Equal Level of satisfaction as before (c) Marginal Return of Substitution
(d) Nothing can be said (d) Marginal Return of Satisfaction
41. Combinations lying on a higher Indifference 47. MRS is indicated by -
Curve contain more of - (a) Slope of an IC at a
(a) One commodity only particular point
(b) Both commodities (b) Angle between IC and X Axis
(c) Either (a) or (b) (c) Angle between IC and Y Axis
(d) Neither (a) nor (b) (d) Nothing can be said
42. The general assumption in Consumer 48. MRS indicates movement -
30
(a) From lower IC to higher IC 55. A ………. shows all those combinations of
(b) From higher IC to lower IC two goods which the consumer can buy
spending his given money income on the two
(c) Along an IC
goods at their given prices.
(a) Indifference Curve
49. Generally, MRS shows -
(b) Budget Line
(a) Increasing trend
(c) Demand Curve
(b) Decreasing trend
(d) Diminishing Utility Curve
(c) Constant trend
56. Budget Line is also called -
(d) No trend at all
(a) Price-Income Line
50. Decreasing Trend of MRS makes the
(b) Price Opportunity Line
Indifference Curve
(c) Price Line
(a) Concave to the Origin
(b) Convex to the Origin
57. Price Line is also called -
(c) Parallel to Y Axis
(a) Budget Line
(d) Parallel to X Axis
(b) Budget Constraint Line
51. If marginal rate of substitution is increasing
then shape of indifference curve is ______ (c) Both (a) and (b)
(a) Concave (d) Neither (a) nor (b)
(b) L-shape 58. The price line/Budget lint of a consumer is-
(c) Convex (a) Parallel to X-axis
(d) None of these (b) Parallel to Y-axis
52. Convexity of IC is due to - (c) Straight line joining two axis
(a) Increasing trend of MRS (d) All of the above
(b) Decreasing trend of MRS 59. If a combination is below the Price Line, it
indicates that there is -
(c) Constant trend of MRS
(a) Under Utilization of
(d) No trend of MRS at all
Resources
53. Why does the Indifference Curve Analysis
(b) Optimum utilization of Resources
approach operate?
(c) Over Utilization of Resources
(a) MRS decrease as we go
down the Curve (d) None of the above
(b) Consumer Surplus decreases 60. A Point below the Price Line represents -
(c) MRS remains constant (a) Over-spending by the
Consumer
(d) MRS increases
(b) Under-spending by the
54. In order to get maximum satisfaction, the
Consumer
consumer has to work under some
constraints. These constraints are (c) Full spending by the Consumer
explained by - (d) Any of the above
(a) Price Line 61. Every Point below the Price
(b) Budget Line Line represents -
(c) Both (a) and (b) (a) Over-spending by the
Consumer
31
(b) Under-spending by the Consumer (b) Total Utility Curve
(c) Full-spending by the Consumer (c) Marginal Utility Curve
(d) None of the above (d) Price Line
62. A Point above the Price Line will be …….. the 68. The Consumer is in Equilibrium at a point
reach of the Consumer, at his present levels where the Budget Line -
of income and spending. (a) Cuts an Indifference Curve
(a) Beyond (b) Is above an Indifference Curve
(b) Within (c) Is tangent to an Indifference Curve
(c) Either (a) or (b) (d) Is below an Indifference Curve
(d) Neither (a) nor (b) 69. A Consumer is at equilibrium when -
63. Budget Line shows all the combinations of (a) Slope of the Price Line is
…….. products. equal to Indifference Curve
(a) Two (b) He saves 30% of his Income
(b) Many (c) Borrows an amount equal to his
(c) Three income from the Bank
(d) None of the above (d) None of the above
64. As Consumers' Income and Spending 70. At the equilibrium point on Indifference
increases, the Price Line or Budget Line - Curve which of the following equation is
(a) Remains at the same level satisfied?
(b) Shifts outward away from (a) MRSxy = MUx ÷ MUy < Px ÷ Py
the origin (b) MRSxy < MU ÷ MUy = Px ÷ Py
(c) Shifts inward nearer to the origin (c) MRSxy = MUx ÷ MUy = Px ÷ Py
(d) Any of the above (d) Any of the above
65. If Consumers' Income and Spending 71. At the equilibrium point on Indifference
decreases, the Price Line or Budget Line - Curve which of the following equation is
(a) Shifts outward away from satisfied?
MUx Px
the origin (a) MRSxy = MUy Py
MUx MUy
(b) Remains at the same level (b)
Px Py
(c) Shifts inward nearer to the origin (c) Both (a) and (b)
(d) Any of the above (d) Neither (a) nor (b)
66. As per Indifference Curve Analysis, to 72. At the equilibrium point on Indifference
maximise his satisfaction, a Consumer will Curve which of the following is satisfied?
try to - (a) Slope of Price Line =
(a) Reach the Origin Point Slope of IC
(b) Reduce to a lower IC (b) Slope of Price Line <
(c) Reach the highest possible IC. Slope of IC
(d) Remain in the same IC (c) Slope of Price Line > Slope of IC
67. To Consumer's objective of maximising his (d) None of the above
satisfaction and reaching the highest 73. MUX of X is 40 and MUy of Y is 30. It the price
possible Indifference Curve is restricted by - of Y is ₹ 9 what will be the price of X at
(a) Marginal Rate of Substitution equilibrium?
(a) ₹9
32
(b) ₹ 30 Indifference Curve
(c) ₹ 15 (c) Always purchases higher quantities of
(d) ₹ 12 both the commodities
74. What will be the Marginal Utility of Product (d) Both (a) and (b)
A, if the prices of A and B are ₹ 10 and ₹ 20 77. Which of the following is not an assumption
respectively, and the Marginal Utility of in Consumer Equilibrium analysis under
Product B is 50, assuming that the Indifference Curve Approach?
Consumer is at equilibrium? (a) There is a given Indifference
(a) ₹ 100 Map with different levels of
(b) ₹ 25 satisfaction
(c) ₹ 150 (b) Income of the Consumer is fixed
(d) ₹ 40 (c) Prices of Commodities are constant
75. The Marginal Utilities of Product A and (d) Only one Commodity is considered for
Product B are 300 and 450 at equilibrium the purposes of analysis
respectively. If the price of the product B is ? 78. In Consumer Equilibrium analysis under
₹ 60, what is the price of Product A at Indifference Curve Approach, the Consumer
equilibrium level? is assumed to spend his income ……… on
(a) ₹ 45 two goods.
(b) ₹ 90 (a) Partly
(c) ₹ 40 (b) Wholly
(d) ₹ 50 (c) Either (a) or (b)
76. Under Income Effect, the Consumer - (d) None of the above
(a) Moves along the original
Indifference Curve
(b) Moves to higher or lower
33
CHAPTER 3 - Demand Analysis
DEMAND BASICS (d) All of these

6. For want to become an Effective Demand, it
1. ………. is the want satisfying power of the must be backed by the -
product. (a) Ability to buy the product
(a) Supply (b) Necessity to buy the product
(b) Utility (c) Desire to buy the product
(c) Demand (d) Utility of the product
(d) None of these 7. Which of the following is an important
2. ………. refers to the quantity of goods or aspect in Demand?
services, those Consumers are willing and (a) Availability of the product
able to purchase / buy in a given market, at in the market
various prices, in a given period of time. (b) Ability to buy the product
(a) Supply (c) Willingness to spend
(b) Demand (d) All of the above
(c) Utility 8. In the context of Demand, the availability of
(d) Surplus money with the Consumer, in order to
3. Demand refers to the quantity of goods or purchase the Commodity is called -
services, that ……… are willing and able to (a) Consumer Surplus
purchase / buy in a given market, at various (b) Purchasing Power
prices, in a given period of time.
(c) Cost of Living
(a) Government
(d) Standard of Living
(b) Producers
9. Purchasing Power refers to -
(c) Consumers
(a) Availability of money with
(d) Investors the Consumer to purchase
4. Demand for a commodity refers to - the Commodity
(a) Quantity demanded of that (b) Availability of goods in the market
commodity (c) Availability of substitute goods
(b) Desire for the commodity (d) Availability of money with the Producer
(c) Need for the commodity to produce the Commodity
(d) Quantity of the commodity demanded 10. Purchasing Power means -
at a certain price during any particular (a) Desire to buy the product
period of time
(b) Necessity to buy the product
5. On which of the following the Effective
(c) Ability to buy the product
Demand for a thing depends?
(d) Utility of the product
(a) Desire
11. Purchasing power of money fall when
(b) Means to purchase
(a) Price level increases
(Ability to Buy)
(b) Income level increases
(c) Willingness to use those means
(c) Money supply falls
34
(d) Price level decreases (a) Tangible Goods and
12. Unless Demand is backed by purchasing Commodities only
power or ability to pay, it does not constitute (b) Intangibles and Services only
Demand. This statement is - (c) Both (a) and (b)
(a) True (d) Neither (a) nor (b)
(b) Partially True 19. Demand for Final Consumption arises in -
(c) False (a) Household Sector only
(d) Nothing can be said (b) Government Sector only
13. In the context of Effective Demand, (c) Both Household and
Willingness to spend means - Government Sectors
(a) Readiness to use available (d) None of the above
money for purchasing a
20. Demand for Intermediate Consumption
Commodity
arises in -
(b) Availability of Money with Consumers
(a) Corporate Enterprises only
(b) Household Consumers
(c) Government Enterprises only
14. For Demand to be effective, the Commodity
(d) All Producing Sectors of the economy
should be available -
21. Demand for Resources and Factors of
(a) At a certain time
Production is -
(b) At a certain price
(a) Direct Demand
(c) At a certain place
(b) Derived Demand
(c) Irrelevant in Economics
15. Demand arises in respect of-
(d) Not a Demand at all
(a) Socially desirable goods,
22. The demand for factors of production is
e.g. food, clothing
demand
(b) Harmful goods, e.g. liquor,
(a) Market
cigarettes, etc.
(b) Derived
(c) Joint
(d) Fundamental
16. Demand arises in respect of -
(a) Consumer Goods only
INDIVIDUAL AND MARKET DEMAND
(b) Capital Goods only
23. Individual Demand is also called -
(a) Market Demand
(b) Industrial Demand
(a) Agricultural Commodities only
(c) Household Demand
(b) Industrial Goods only
24. Household Demand is also called -
(a) Producer Demand
(b) Individual Demand
35
(c) Industry Demand 31. If A = Household Demand and B = Market
(d) Market Demand Demand, then -
25. Individual Demand shows the (a) A > B
quantities of demand for a (b) A < B
commodity at various prices by - (c) A = B = 0
(a) A particular consumer (d) None of the above
(b) The entire market 32. If Household Demand and Market Demand
(c) Both (a) and (b) are equal in a situation, it means that -
(d) Neither (a) nor (b) (a) There is only one Producer
26. Industry Demand is also known as - (b) There is only one Consumer
(a) Individual Demand (c) Both (a) and (b)
(b) Market Demand (d) Neither (a) nor (b)
(c) Household Demand 33. The total demand for the product of an
(d) All of the above individual Firm at various prices is known
as -
27. Market Demand is called -
(a) Household Demand
(a) Household Demand
(b) Industrial Demand
(b) Producer Demand
(c) Market Demand
(c) Industry Demand
(d) Firm Demand
(d) Individual Demand
34. If Market Demand and Firm's Demand are
28. Market Demand shows the
equal in a situation, it means that -
quantities of demand for a
commodity at various prices by - (a) There is only one Producer
(a) a particular consumer (b) There is only one Consumer
(b) the entire market (c) Both (a) and (b)
(c) Both (a) and (b) (d) Neither (a) nor (b)
(d) Neither (a) nor (b) 35. If Individual Demand = Market Demand =
Firm's Demand, it means that -
29. Market Demand is the sum total of-
(a) There is only one Producer
(a) All quantities that Producers
can produce (b) There is only one Consumer
(b) All quantities actually sold in (c) Both (a) and (b)
the market (d) Neither (a) nor (b)
(c) All quantities demanded by 36. A relative price is ______
individual households and consumers (a) What you get paid for
(d) None of the above baby-sitting your cousin
30. ……… is the sum total demand of (b) Price expressed in terms of money
all individuals in the market. (c) The ratio of one money price to
(a) Individual Demand another
(b) Market Demand (d) Equal to a money price
(c) Household Demand
(d) Firm Demand DETERMINANTS OF DEMAND
36
37. Which of the following influence most the (b) Luxury and Quasi-Luxury Goods
price level in the very short-run period? (c) Both (a) and (b)
(a) Demand (d) Neither (a) nor (b)
(b) Production 44. Goods covered by Demonstration
(c) Supply Effect can be best described as -
(d) Cost (a) Necessities of Life
38. Which of the following is not a determinant (b) Conspicuous Necessities
of Demand? (c) Absolute Luxuries
(a) Level of Consumers' Income (d) Both (a) and (b)
(b) Price of the Commodity 45. In which of the following will the
(c) Price of Related Commodities Demonstration Effect be high?
(d) None of these (a) Water
39. All of the following are determinants of (b) Rice
demand except (c) Cell phone
(a) Tastes and Preferences (d) Plant and Machinery
(b) Quantity supplied 46. ………. are goods which are consumed
(c) Income together or simultaneously.
(d) Price of related goods (a) Substitute Goods
40. Which of the following is a determinant of (b) Inferior Goods
Individual Demand? (c) Complementary Goods
(a) Economic Policies of the (d) Normal Goods
Government
47. Complementary Goods are goods
(b) Nature of Product, i.e. socially which are consumed -
desirable vs. other goods
(a) Only at high income levels
(c) Tastes and Preferences of Consumers of Consumer
(d) Cost of Production (b) Together or simultaneously
41. When a Consumer prefers a commodity due (c) Only when the goods are distributed as
to prestige attached to it, it is known as - free compliment to the Consumer
(a) Substitution Effect (d) In place of one another
(b) Demonstration Effect 48. The demand for two-wheelers is likely to
(c) Income Effect decrease with an increase in petrol prices
(d) None of the above because two- wheelers and petrol are -
42. When a Consumer wants a product by seeing (a) Inferior Goods
another person use that product, it is called - (b) Normal Goods
(a) Disturbance Effect (c) Complementary Goods
(b) Comparison Effect (d) Substitute Goods
(c) Demonstration Effect 49. Which of these is not a Complementary
(d) Marshallian Effect Good for Pen?
43. Demonstration Effect is generally (a) Notebooks
found in respect of (b) Refills
(a) Necessary Goods (c) Paper
37
(d) Wheat (a) directly related
50. If an increase in the price of Black Jeans (b) inversely related
leads to an increase in the demand for Sport (c) proportionally related
Shoes, then Black Jeans and Sport Shoes
are -
55. If X and Y are Complementary Goods, if there
(a) Complements
is an increase in Price of X, then -
(b) Inferior Goods
(a) Demand of X and Y will
(c) Normal Goods increase
(d) Substitutes (b) Demand of X will decrease
51. If two goods are Complements, it means that and Demand of Y will increase
a rise in the price of one commodity will lead (c) Demand of X will increase and Demand
to - of Y will decrease
(a) No shift in the demand for (d) Demand of X and Y will decrease.
the other commodity
56. If X and Y are Complementary Goods, if there
(b) Upward Shift in demand for the other is an decrease in Price of X, then -
commodity
(a) Demand of Y will decrease
(c) Downward Shift in demand for the and Demand of X will
other commodity increase
(d) Rise in the price of the other (b) Demand of Y will increase
commodity and Demand of X will decrease
52. In case of Complementary Goods, increase (c) Demand of X and Y will increase
in price of a product will -
(d) Demand of X and Y will decrease
(a) Decrease the demand for
57. ……… are goods which are consumed in
the other product
place of one another.
(b) Increase the price of the
(a) Complementary Goods
other product
(b) Normal Goods
(c) Increase the demand for the other
(c) Inferior Goods
product
(d) Substitute Goods
(d) Not affect the demand for the other
product 58. Substitute Goods are goods which can be
used -
53. In case of Complementary Goods, decrease
in price of a product will - (a) Only when the goods are
used for a variety of purposes
(a) Decrease the demand for
the other product (b) Together or simultaneously
(b) Increase the price of the (c) In place of one another
other product (d) Only at high income levels of Consumer
(c) Increase the demand for the other 59. Which of the following pairs of goods is an
product example of Substitutes?
(d) Not affect the demand for the (a) Shirt and Trousers
other product (b) Tea and Coffee
54. If X and Y are Complementary Goods, the (c) Tea and Sugar
price of X and the Demand of Y are -
(d) Pen and Ink
38
60. Which of the following is an example of (d) None of the above
Substitutes? 66. If the Price of Product A increases relative to
(a) Coffee and Milk the Price of Substitute B & C, the demand for -
(b) Diamond and Cow (a) B will decrease
(c) Pen and Ink (b) C will increas
(d) Mustard Oil and Coconut Oil (c) B and C will increase
61. Which of the following pairs of goods in an (d) C and B will decrease
example of substitutes? 67. If the Price of Pepsi decreases relative to the
(a) Tea and Ball Pen Price of Coke and 7-Up, the demand for -
(b) Tea and Coffee (a) Coke and 7-Up will increase
(c) Tea and Sugar (b) 7-Up will decrease
(d) Tea and Shirt (c) Coke will decrease
62. In case of Substitute Goods, increase in (d) Coke and 7-Up will decrease
price of a product will - 68. If Tea and Coffee are Substitutes, a fall in the
(a) Decrease the demand for Prices of Tea leads to -
the other product (i) Rise in the demand for Tea
(b) Increase the price of the (ii) Fall in the supply of Coffee
other product
(iii) Fall in the demand for Coffee
(c) Increase the demand for the other
(iv) Rise in the supply of Tea
product
(a) Both (ii) and (iv) above
(d) Not affect the demand for the other
(b) Both (i) and (iii) above
product
(c) Both (i) and (ii) above
63. In case of Complementary Goods, decrease
in price of a product will - (d) Both (iii) and (iv) above
(a) Decrease the demand for 69. If X and Y are Substitute Goods, if there is an
the other product increase in Price of X, then -
(b) Increase the demand for (a) Demand of X will decrease
the other product and Demand of Y will increase.
(c) Increase the price of the other product (b) Demand of X will increase
and Demand of Y will decrease.
(c) Demand of X and Y will increase.
64. If X and Y are Substitute Goods, the price of
X and the Demand of Y are - (d) Demand of X and Y will decrease.
(a) Directly related 70. If X and Y are Substitute Goods, if there is an
decrease in Price of X, then -
(b) Inversely related
(a) Demand of X will decrease
(c) Proportionally related
and Demand of Y will increase
(b) Demand of X will increase
65. When the Price of a Substitute of X
and Demand of Y will decrease
Commodity falls, the Demand for X-
(c) Demand of X and Y will decrease
(a) Rises
(d) Demand of X and Y will increasee
(b) Falls
71. In which phase of the business cycle to
(c) Remains Unchanged
Producers try to sell out their inventories?
39
(a) Recession (a) Normal Goods
(b) Prosperity (b) Inferior Goods
(c) Boom (c) Luxury Goods
(d) Recovery (d) Both (a) and (b)
72. Which of the following Statements is not 77. Giffen Goods are -
true about Individual Demand? (a) Normal Goods
(a) Consumers measure (b) Inferior Goods
their Opportunity Cost in (c) Luxury Goods
terms of the price they pay (d) All of the above
for the products and services they
78. Inferior Goods are also called -
forego
(a) Giffen Goods
(b) The decision to purchase is always
influenced by the Income Constraint (b) Normal Goods
(c) Selection of products and services are (c) Marshallian Goods

based on the Opportunity Cost (d) Hicks and Allen Goods
(d) Decision to purchase is never 79. The Giffen Effect in respect of Inferior
influenced or concerned with the Goods was observed in the case of -
Income Constraint. (a) Rice and Wheat
73. What effect does an increase in the price of (b) Wheat and Meat
a product have on the Purchasing Power of (c) Bread and Meat
the Consumer? (d) Bread and Rice
(a) Increases 80. As income levels increase, the demand for
(b) Decreases goods satisfying Necessities of life, will be
(c) Decreases initially, but …….. to the increase in income.
increases over a period of time (a) Less than proportionate
(d) No effect (b) More than proportionate
74. The Demand for a commodity also depends (c) Proportionate
upon the money income of the household. (d) None of the above
This statement is - 81. If Income Levels rise, and the demand for
(a) True goods rises by less than proportionate
(b) False extent, such goods will be -
(c) Partially True (a) Inferior Goods
(d) Nothing can be said (b) Necessary Goods
75. The Demand for a commodity depends only (c) Luxury Goods
upon the money income of the household. (d) None of the above
This statement is- 82. If Income Levels increase, and the demand
(a) True; for goods increase by more than
(b) False proportionate extent, such goods will be -
(c) Partially True (a) Inferior Goods
(d) Nothing can be said (b) Necessary Goods
76. If demand falls with a rise in money income (c) Luxury Goods
of Consumers, such goods are called - (d) Nothing can be said
40
83. As Income Levels increase beyond a certain 89. Demand for Air Conditioners, Water Coolers,
extent, the propensity to consume - Refrigerators show an rise during-
(a) Falls (a) Winter
(b) Rise (b) Summer
(c) Remains constant (c) Spring
(d) Becomes zero (d) All Seasons
84. Generally, larger size of population of a
country or a region implies ……… for all
commodities as such.
(a) Higher demand
(b) Ineffective demand
(c) Lower demand
(d) No demand
85. In case of unequal distribution of income in
the country, the propensity to consume will
be ….., and demand for Consumer Goods will
be …….
(a) Higher, lower
(b) Lower, higher
(c) Higher, higher
(d) Lower, lower
86. If the Consumers expect an rise in prices of
the product in the future, its current demand
will be-
(a) Higher
(b) Lower
(c) Nil
87. If the Consumers expect a decrease in
prices of the product in the future, its
current demand will be -
(a) Nil
(b) lower
(c) higher
88. Demand is affected by weather conditions
and seasonal aspects also. This statement is -
(a) True
(b) False
(c) Partially True
41
Theory Of Demand
DEMAND CURVE (a) Supply of the product

(b) Quality of the product
1. Demand Schedule shows the (c) Price of the product
relation between - (d) Technology used in offering the
(a) Price and Quantity supplied product
(b) Price and Quantity demanded 7. Generally, the Demand Curve slopes -
(c) Income and Quantity demanded (a) Downward from left to right
(d) Income and Quantity supplied (b) Downward from right to left
2. In a typical Demand Schedule, (c) Upward from right to right
quantity demanded - (d) Upward from left to left
(a) varies directly with price. 8. Demand Curve in most cases slopes-
(b) varies proportionately with price. (a) Upward towards left
(c) varies inversely with price. (b) Vertical and parallel to Y-axis
(d) is independent of price. (c) Downward towards right
3. ……… indicates the changes in Consumers' (d) Horizontal and parallel to X-axis
purchasing habits, depending on the price
9. Demand Curve in most cases has a -
variation of a particular product.
(a) Infinity Slope
(a) Total Utility Curve
(b) Negative Slope
(b) Demand Schedule
(c) Positive Slope
(c) Purchasing Power Parity
(d) Zero Slope
(d) Production Possibility Curve
10. Demand Curve -
4. A Demand Curve shows -
(a) Will be a Straight Line
(a) Quantity demanded of
(b) Will be a Curve
a product at various levels
of income of the Consumer. (c) Either (a) or (b)
(b) Quantity demanded of a product, at (d) Neither (a) nor (b)
various levels of price of the product 11. All but one of the following are assumed to
(c) Quantity supplied of a product at remain the same while drawing an
various levels of price of the product individual's Demand Curve for a product.
Which one is it?
(d) Amount of money spent by a Consumer
on a product at various levels of price (a) Preference of the individual
5. A Demand Curve deals with - (b) Price of related goods
(a) One product at a time (c) Price
(b) Two products at a time (d) His monetary income
(c) Many products at a time 12. If regardless of changes in its price, the
quantity demand of a product
remain unchanged, then, Demand
6. While drawing the Demand Curve, the
Curve for that product will be -
change takes place in which of the following
(a) Horizontal
factors?
42
(b) Vertical (b) Concave
(c) Positively Sloped (c) Straight line
(d) Negatively Sloped (d) All of the above
13. If any quantity at the same price, then, the 19. In a Demand Curve, the Horizontal Axis will
Demand Curve for that product will be - be -
(a) Horizontal (a) Quantity Demanded
(b) Positively Sloped (b) Price of the Product
(c) Negatively Sloped (c) Income Levels of Consumer
(d) Vertical (d) None of the above
14. What is the other name given to the Demand 20. In a Demand Curve, the Vertical Axis will be -
Curve? (a) Quantity Demanded
(a) Profit Curve (b) Price of the Product
(b) Average Revenue Curve (c) Income Levels of Consumer
(c) Average Cost Curve M (d) Any of the above
(d) Indifference Curve 21. Which of these is not depicted in a typical
15. Average Revenue Curve is also called Demand Curve?
(a) Profit Curve (a) Quantity Demanded
(b) Demand Curve (b) Price of the Product
(c) Average Cost Curve (c) Income Levels of Consumer
(d) Indifference Curve (d) All of the above
16. Why is the Demand Curve otherwise known
as the Average Revenue Curve? LAW OF DEMAND
(a) Price paid for each unit
by the Consumer, is the
22. The Law of Demand is explained by -
Average Revenue per unit
for the Seller
(b) Price paid for each unit by the
Consumer, is the Total Revenue for the (c) Both (a) and (b)
Seller (d) Neither (a) nor (b)
(c) Price paid by Consumer is equal to the 23. Which of the following can be regarded as
Seller's willingness to sell the product. law of Demand?
(d) All of the above (a) Ceteris Paribus, if Price
17. The Total Area under the Demand Curve of a of a product rises, its
product measures - quantity demanded will fall
(a) Consumer's Surplus (b) Higher the Income, greater is the
expenditure
(b) Total Utility
(c) Taxes have no relation with the
(c) Marginal Utility
benefits which a person derives from
(d) Producers' Surplus
the State
18. If Marginal Utility of a product remains
constant, the Demand Curve will be -
24. The Law of Demand, assuming other things
(a) Convex
to remain constant, establishes the
43
relationship between - (c) Quality of the Product
(a) Income of the Consumer (d) Price of the Product
and the quantity of a good 31. The condition "other things being equal" in
demanded by him the Law of Demand denotes -
(b) Price of a good and the quantity (a) Tastes and Preferences
demanded remaining constant
(c) Price of a good and the demand for (b) Price of related goods remaining
its Substitute constant
(d) None of the above (c) Income Levels remaining constant
25. The Law of Demand refers to - (d) All of the above
(a) Price-Supply relationship 32. What type of relationship exists between
(b) Price- Cost relationship Price and Quantity Demanded?
(c) Price-Demand relationship (a) Direct
(d) Price-Income relationship. (b) Inverse
26. The Law of Demand is - (c) Positive
(a) A quantitative statement (d) Positional
(b) A qualitative statement 33. As per the Law of Demand, if the Price of a
(c) Both (a) and (b) commodity, its Demand
(d) Neither (a) nor (b) (a) Decreases, Increases
27. The Law of Demand is a - (b) Increases, Increases
(a) Positive Statement (c) Increases, Decreases
(b) Normative Statement (d) Both (a) & (c)
(c) Both (a) and (b) 34. Why does the Law of Demand operate?
(d) Neither (a) nor (b) (a) Income Effect
28. The Law of Demand is a principle relating to- (b) Substitution Effect
(a) Micro-Economics (c) Both (a) and (b)
(b) Macro-Economics (d) Neither (a) nor (b)
(c) Both (a) and (b) 35. The total effect of a price change of a
commodity is
(a) Substitution Effect +
29. The term "Ceteris Paribus" in the Law of
Demonstration Effect
Demand denotes -
(b) Substitution Effect + Income Effect
(a) All factors remaining constant
(c) Substitution Effect + Price Effect
(b) All factors except one
remaining constant (d) Substitution Effect minus
Income Effect
(c) All factors being variable
36. When we say that the Demand for a
commodity depends upon the money
30. Which of these is a variable factor in the Law
income of the Consumer, we are referring to -
of Demand?
(a) Income Effect
(a) Economic Conditions of
(b) Substitution Effect
Boom / Recession
(c) Utility Effect
(b) Consumers' Income Level
44
(d) Demonstration Effect because of a rise or fail in the real income
37. …….. refers to the effect of a change in the of the consumer
price of a product on the Consumer's 42. When the price of a Commodity
purchasing power. falls, the Consumer
(a) Consumer Surplus (a) Can buy more of the same
(b) Income Effect commodity with the same
money
(c) Substitution Effect
(b) Can buy the same quantity of the
(d) Law of Equi-Marginal Utility
commodity with lesser money
38. As a result of a fall in prices of the
commodity, the Consumer's increases.
(a) Real Income
43. When the price of a Reynolds pen falls,
(b) Purchasing Power
ceteris paribus, Buyers substitute Reynolds
Pen for other pens that are now relatively
(d) Neither (a) nor (b) more expensive. This is called -
39. If there is a decrease in the prices of a (a) Price Effect
product, the Consumer's Real Income -
(a) Increases
(c) Income Effect
(b) Remains constant
(d) Veblen Effect
(c) Decreases
44. The 'Substitution Effect' takes place due to
(d) None of the above change in
40. When increase in his Real Income induces a (a) Income of the Consumer
Consumer to buy more of a Commodity
(b) Prices of the Commodity
whose prices has fallen, it is called -
(c) Relative Prices of the commodities
(a) Inducement Effect
45. ……… refers to the Consumer's Reaction to a
(c) Income Effect
change in the relative prices of two
(d) Utility Effect products, keeping the Total Utility constant.
41. Which of the following statements best (a) Consumer Surplus
describes the Income Effect?
(b) Income Effect
(a) It is the change in quantity
(c) Substitution Effect
demanded as a result of the
(d) Law of Diminishing Marginal Utility
changes in the income,
keeping other things constant 46. When the price of a product increases,
Consumers tend to switch to purchasing the
(b) It is the change in quantity demanded
substitutes of the product. This describes
of substitute goods, as a result of
why the Demand Curve for the good -
change in the price of a product,
keeping the income constant (a) Slopes downward to the left
(c) It is the change in quantity demanded (b) Shift downward to the left
of a product, as a result of change in (c) Slopes downward to the right
the real income because of change the (d) Shift upward to the right
price of the product
47. Which of the following statement best
(d) It is the change in the price of a good describes the Substitution Effect?
45
(a) the price of a product rises, Utility, Consumers continue buying till Price
Consumers stop consuming equals Marginal Utility. Hence at lower prices -
the product. (a) Higher quantities will be
(b) When the price of a product demanded
rises, Consumers tend to substitute it (b) Lower quantities will be
with a relatively expensive product demanded
(c) When the price of a product rises, (c) No quantities will be demanded
Consumers tend to substitute it with a
relatively inexpensive product
53. Since Consumers continue buying till Price
(d) When the price of a product fails,
equals Marginal Utility, if the price of a
consumers tend to substitute in with a
product is lower, the Consumer will attain
more expensive product
equilibrium -
48. In normal circumstances, if the Government
(a) At zero quantity level
increases the tax on any product, the
(b) At a higher quantity level
demand for the product ……… in the short
run (c) At a lower quantity level
(a) Increases (d) Both (a) and (b)
(b) Decreases 54. Under the Indifference Curve approach, if
the price of a product is lower, the
(c) Remain unchanged
Consumer will attain equilibrium -
(a) At a higher Indifference Curve
49. The segregation between Income Effect and
(b) At a lower Indifference Curve
Substitution Effect is adequately explained
by - (c) At the origin point
(a) Cardinal Approach (d) At infinity
(c) Both (a) and (b) EXCEPTIONS TO THE LAW
50. When the price of a product falls, its 55. Conspicuous Goods are also called -
Demand increases because - (a) Basic Goods
(a) Existing Consumers buy (b) Prestige Goods
more quantities of the (c) Giffen Goods
product
(d) Necessary Goods
(b) New Consumers start buying
56. Conspicuous goods are also called as:
the product
(a) Veblen
(b) Snob
(c) Prestigious
51. The Law of Demand is explained by -
(a) Law of Diminishing Marginal
57. Conspicuous Goods -
Utility
(a) Are an exception the Law of Demand
(b) Law of Indifference Curves
(b) Follow the Law of Demand
(c) Either (a) or (b)
52. Under the Law of Diminishing Marginal
46
58. In case of Conspicuous Goods, as the Price (b) Which have a high income elasticity of
rises, the quantity demanded thereof - demand
(a) Rise (c) Which are in short supply
(b) Fall (d) Both (b) and (c)
(c) Remains constant 65. In case of Giffen Goods, Demand Curve will
(d) Becomes zero slope -
59. When Consumers feel that if the commodity (a) Upward
expensive, that it has got more utility, we are (b) Downward
referring to - (c) Horizontal
(a) Inferior Goods (d) Vertical
(b) Normal Goods 66. An Inferior Commodity is one which is
(c) Conspicuous Goods consumed in smaller quantities when the
(d) Giffen Goods income of consumer -
60. Which of the following is an (a) Falls
example of Conspicuous Goods? (b) Becomes nil
(a) Diamonds (c) Remains the same
(b) Petrol (d) Rises
(c) Rice 67. Giffen Goods are goods which
(d) Cooking Gas (a) Are considered inferior by
61. Which of the following is not an Consumers
exception to the Law of Demand? (b) Occupy a substantial place
(a) Conspicuous Goods in the Consumers budget
(b) Normal Goods (c) Both (a) and (b)
(c) Conspicuous Necessities (d) Neither (a) nor (b)
(d) Giffen Goods 68. Giffen Goods are -
62. If the demand for Petrol remains (a) Conspicuous Necessities
the same even after the increase in (b) Conspicuous Goods
petrol prices, it means Petrol is a - (c) Normal Goods
(a) Inferior Good (d) Inferior Goods
(b) Necessity 69. When people buy more of a product when its
(c) Normal Good price goes up, the product will be -
(d) Luxury Good (a) Conspicuous Goods
63. In the case of a Giffen Good, the (b) Normal Goods
Demand Curve be (c) Inferior Goods
(a) Upward-sloping to the right (d) Luxury Goods
(b) Downward-sloping to the right 70. When due to their constant usage, certain
(c) Backward falling to the left goods have become necessities of life, they
(d) Horizontal are referred to as -
64. Giffen Goods are those goods - (a) Conspicuous Goods
(a) For which Demand increases (b) Normal Goods
as Price increases (c) Conspicuous Necessities
47
(d) Giffen Goods (b) Contraction of Demand
71. Under which of the following situations the (c) Change in Demand
Law of Demand will not operate? (d) Expansion of Demand
(a) Absolute Necessities 77. Rise in quantity demanded of a product as a
(b) Conspicuous Goods result of reduction in price is known as -
(c) Giffen Goods (a) Change in Demand
(d) All of the above (b) Contraction of Demand
72. Under which of the following situations the (c) Expansion of Demand
Law of Demand will not operate? (d) Alteration of Demand
(a) Irrational purchasing 78. Contraction of Demand is the result of-
pattern by Consumer (a) Increase in Prices of
(b) Consumer's lack of knowledge other goods
about prices (b) Increase in Price of the
(c) Price Change expected by Consumer product concerned
(d) All of the above (c) Decrease in number of Consumers
73. Under which of the following situations the (d) Decrease in Incomes of Purchasers
Law of Demand will not operate? 79. Expansion of Demand is the result of -
(a) Increase in Consumers' (a) Increase in number of
Income Levels Consumers
(b) Change in Tastes and Preferences (b) Decrease in Price of the
(c) Both (a) and (b) product concerned
(d) Neither (a) nor (b) (c) Decrease in Prices of other goods
(d) Increase in Incomes of Purchasers
EXPANSION / CONTRACTION OF DEMAND 80. A movement along the Demand Curve for
soft drinks is best described as -
74. Expansion and Contraction of demand for a (a) Decrease in Demand
good occurs as a result of- (b) Change in Demand
(a) Change in Price of the (c) Change in quantity demanded
Commodity (d) Increase in Demand
(b) Increase in Consumer Income 81. In case of Expansion of Demand, there is a -
(c) Change in Quality of the Commodity (a) Outward shift of the
(d) Availability of Cheaper Substitutes Demand Curve
75. In case of Expansion and Contraction of (b) Inward shift of the
Demand, the Demand Curve - Demand Curve
(a) Shifts to the right (c) Upward movement on the same Curve
(b) Shifts to the left (d) Downward movement on the same
(c) Remains the same Curve
(d) All of the above 82. In case of Contraction of Demand, there is a -
76. Fall in quantity demanded of a product as a (a) Inward shift of the
result of rise in price is called - Demand Curve
(a) Alteration of Demand (b) Outward shift of the
Demand Curve
48
(c) Upward movement on the same Curve (c) Change in demand
(d) Downward movement on the same (d) No demand
Curve
83. In case of Expansion of Demand, INCREASE OR DECREASE IN DEMAND
the quantity demanded -
(a) Increases
89. Change in Demand as a result of the factors
(b) Becomes zero other than Price is called -
(c) Becomes constant (a) Change in Demand
(d) Decreases (b) Shift in Demand
84. In case of Contraction of Demand, (c) Increases and Decrease in demand
the quantity demanded - (d) All of these
(a) Increases 90. Increase in Demand leads to -
(b) Decreases (a) Inward shift of the Demand
(c) Becomes zero Curve
(d) Becomes constant (b) Outward shift of the Demand
85. Expansion of Demand is associated with - Curve
(a) Rise in Price, Fall in (c) Upward movement on the same Curve
quantity demanded (d) Downward movement on the same
(b) Fall in Price, Fail in quantity Curve
demanded 91. Decrease in Demand leads to -
(c) Fall in Price, Rise in quantity demanded (a) Inward shift of the Demand
(d) Rise in Price, Rise in quantity Curve
demanded (b) Downward movement on
86. Contraction of Demand is related with - the same Curve
(a) Fall in Price, Rise in (c) Outward shift of the Demand Curve
quantity demanded (d) Upward movement on the same Curve
(b) Fall in Price, Fall in 92. Which of the following results in
quantity demanded a shifting of the Demand Curve?
(c) Rise in Price, Rise in quantity (a) Rise in the electricity charges
demanded leading to lesser consumption
(d) Rise in Price, Fall in quantity demanded (b) Slashing of ad rates by a
87. Expansion and Contraction of demand for a television channel resulting
product occurs as a result of changes in - in a rise in the number of ads
(a) Price of the Commodity (c) Rise in the tax on cigarettes leading to
their fall in demand
(b) Factors other than Price
(d) All of these
93. In which of the following cases,
does a shift in demand take place?
88. Change in demand due to change in price is
(a) Fall in demand for cigarettes,
known as ________
as a result of increased taxes
(a) Income demand
(b) Rise in the demand for two
(b) Change in quantity demanded
wheelers due to decrease in the sales
49
tax description of the impact of this event on
(c) Decline in electric power consumption the market for apples?
due to rise in the power charges (a) There is an increase in the demand
(d) Decline in the sales of Diwali crackers for apples and a decrease
due to sudden rains and floods in supply of apples
94. Change in demand, as a result of the factors (b) There is an increase in the
other than price is also known as - demand and supply of apples
(a) Demand Fluctuation (c) There is an increase in quantity
demanded of apples and in supply
(b) Demand Shrinking
of apples
(c) Contraction / Expansion of Demand
(d) There is an increase in the demand
(d) Shift in Demand
for apples and an increase in the
95. Shift in demand does not take place due to - quantity supplied
(a) Change in the price of 100. In case of Shift in Demand, ………
the product remains constant.
(b) Change in consumer habits (a) Income of Consumers
(c) Change in population (b) Quality of the Product
(d) Change in the tastes and preferences (c) Price of the Product
96. An Increase in Demand can (d) Tastes and Preferences of
result from - Consumers
(a) Decline in Market Price 101. Rise in the price of Substitute
(b) Increase in Income Goods leads to -
(c) Reduction in the Price of Substitutes (a) Increase in Demand
(d) Increase in the Price of Complements (b) Decrease in Demand
97. A Decrease in Demand would (c) Expansion of Demand
result from - (d) Contraction of Demand
(a) Increase in Market Price 102. Fall in the price of Substitute
(b) Decrease.in Income Goods leads to -
(c) Increase in the Price of Substitutes (a) Increase in Demand
(d) Decrease in the Price of Complements (b) Decrease in Demand
98. A drought in India leads to unusually low (c) Contraction of Demand
level of wheat production. This would lead to (d) Expansion of Demand
a rise in the price of wheat and fall in the 103. Other things being equal, a fall in the price
quantity of wheat demanded due to - of complementary good will cause the
(a) Excess Demand at the ______ of the other to rise.
original price (a) Price
(b) Demand Curve shifting to (b) Utility
the left
(c) Demand
(c) Supply Curve shifting to the right
(d) Supply
(d) Excess Supply at the original price
104. A Decrease / Fall in the price of
99. Suppose consumer tastes shift toward the Complementary Goods leads to -
consumption of apples. Which of the
(a) Increase in Demand
following statements is an accurate
50
(b) Decrease in Demand (b) Fall in price of this product
(c) Expansion of Demand (c) Rise in population
(d) Contraction of Demand (d) Rise in the price of Substitute Goods
105. An Increase in the price of 109. Increase in Demand is caused by -
Complementary Goods leads to - (a) Increase in population
(a) Contraction of Demand (b) Re-distribution of income
(b) Decrease in Demand to Consumers who favour
(c) Increase in Demand this commodity
(d) Expansion of Demand (c) Change in Buyer Preferences and
Tastes in favour of this commodity
106. Increase in Income Levels of
Buyers leads to - (d) All the above
(a) Increase in Demand 110. Which of the factors does not
cause Decrease in Demand?
(b) Decrease in Demand
(a) Fall in the price of
(c) Expansion of Demand
Substitute Goods
(d) Contraction of Demand
(b) Rise in price of this product
107. Decrease in Income Levels of
(c) Decrease in Income Levels of Buyers
Buyers leads to -
(d) Decrease in population
(a) Expansion of Demand
111. Decrease in Demand is caused by-
(b) Decrease in Demand
(a) Decrease in population
(c) Increase in Demand
(b) Re-distribution of income
(d) Contraction of Demand
away from Consumers who
108. Which of the factors does
favour this commodity
not cause Increase in Demand?
(c) Change in Buyer Preferences and
(a) Rise in Income
Tastes against this commodity
Levels of Buyers
(d) All the above
51
Elasticity Of Demand
ELASTICITY BASICS (c) Changes in Price of the Commodity

1. The concept of Elasticity of 6. Which of the following statements regarding
Demand was developed by- Elasticity of Demand is correct?
(a) Alfred Marshall (a) Elasticity can be positive
(b) Paul Samuelson or negative
(c) Edwin Cannon (b) Elasticity always has a
negative value
(d) Fredric Bonham
(c) Elasticity always has a positive value
2. Two important factors which make
difference in the Elasticity of Demand (d) Elasticity can never be zero
for different commodities are 7. Which of the following statements is true
(a) Tax Rates and Level with regard to the elasticity of demand?
of Income (a) The elasticity of demand
(b) Income and Expenditure remains same, both in
short run and in long run
(c) Quantity and Price of the Commodity
(b) Demand is more elastic in
(d) Preferences and Income
the short run than in long run
3. Elasticity of Demand means -
(c) Demand is more inelastic in the long
(a) The responsiveness of
run than in short run
the quantity demanded
(d) Demand is more elastic in the long
of a commodity, to changes
run than in short run
in one of the variables on which
demand depends. 8. Price Elasticity of Demand is defined as -
(b) The percentage change in quantity (a) Change in quantity
demanded, divided by the demanded ÷Change in
percentage change in one of the price
factors on which demand depends. (b) Change in quantity demanded ÷
(c) Both (a) and (b) Proportionate change in Price
(d) Neither (a) nor (b) (c) Proportionate change in quantity
demanded ÷ Change in Price
4. Elasticity of Demand is attributed to -
(d) Proportionate change in quantity
(a) Changes in Prices
demanded ÷ Proportionate change
(b) Changes in Incomes
in price
9. Price Elasticity of Demand is defined as
(d) Neither (a) nor (b) the responsiveness of -
5. Elasticity of Demand is measured in (a) Price to a change in
case of - quantity demanded
(a) Changes in Prices of (b) Quantity demanded to
related commodities a Change in Price
(b) Changes in Incomes (c) Quantity demanded to a change in
of the Consumers income
52
(d) Price to a Change in Income paradox of plenty relates more to items in
10. Price Elasticity of Demand for a product is - the -
(a) Change in the quantity (a) Services Sector
demanded of the product (b) Agricultural Sector
when price increases by 30% (c) Mining Sector
(b) Percentage increase in the (d) Industrial Sector
quantity demanded of the
17. Goods which have more close or perfect
product when the price falls by 1%
substitutes are
(c) Increase in the demand for the
(a) Zero Elastic
product when its price falls by 10%
(b) Unit Elastic
(d) Decrease in the quantity demanded of
(c) More Elastic
the product when its price falls by 1%
(d) Less Elastic
11. Price Elasticity of Demand is given by -
18. Goods which have fewer substitutes are -
(a) Δq/Δp X q/p
(a) Less Elastic
(b) Δp/Δq X p/q
(b) Unit Elastic
(c) Δp/Δq X q/p
(c) More Elastic
(d) Δq/Δp X p/q
(d) Zero Elastic
12. Usually, the demand for Necessities is -
19. Goods having higher proportion of the
(a) Highly Elastic
Consumers' spending are -
(b) Highly Inelastic
(a) Less Elastic
(c) Slightly Elastic
(b) Unit Elastic
(d) Slightly Inelastic
(c) More Elastic
13. Demand for which of the following products
(d) Zero Elastic
is/are relatively inelastic?
20. Goods having lower share in the Consumers'
(a) Electricity
Budget are -
(b) Water
(a) Less Elastic
(c) Movie Tickets
(b) Zero Elastic
(c) More Elastic
14. Which of the following products has highly
(d) Unit Elastic
inelastic demand?
21. Luxury Goods are considered ………. than
(a) Jewellery
Necessity Goods.
(b) Imported sofa set
(a) Less Elastic
(c) Salt
(b) Unit Elastic
(d) Sports car
(c) More Elastic
15. Amongst the following which item has
(d) Zero Elastic
highest Price Elasticity?
22. Necessary Goods are considered ………. than
(a) Rice
Luxury Goods.
(b) Petrol
(a) Less Elastic
(c) Indian Oil's Petrol
(b) More Elastic
(d) Salt
(c) Zero Elastic
16. In the context of Elasticity of Demand, the
(d) Unit Elastic
53
23. Salt is ………. to price changes than Motor (b) Zero Elastic
Car. (c) More Elastic
(a) Less Elastic (d) Unit Elastic
(b) Unit Elastic 30. Goods in respect of which the use or
(c) More Elastic consumption can be postponed are -
(d) Zero Elastic (a) Less Elastic
24. Cellphone is ………. to price changes than (b) Unit Elastic
Bread. (c) More Elastic
(a) Zero Elastic (d) Zero Elastic
(b) Less Elastic 31. Goods which are required for immediate or
(c) More Elastic urgent consumption are -
(d) Unit Elastic (a) Less Elastic
25. Goods which can be put to multiple uses are - (b) Unit Elastic
(a) Less Elastic (c) More Elastic
(b) Unit Elastic (d) Zero Elastic
(c) More Elastic 32. Medicines have less elastic demand since -
(d) Zero Elastic (a) They have alternative uses
26. Goods which have a specified and particular (b) They have to be used
use are immediately, and their
(a) Less Elastic purchase and use cannot be delayed
(b) More Elastic (c) There are fewer substitutes available
(c) Zero Elastic (d) All of the above
(d) Unit Elastic 33. Goods which are subject to Consumer
Habits, e.g. Cigarette, Liquor, etc. are -
27. Demand for electricity is elastic because -
(a) Less Elastic
(a) It is very expensive.
(b) More Elastic
(b) It has a number of close
substitutes. (c) Unit Elastic
(c) It has alternative uses. (d) Zero Elastic
(d) None of the above.
28. Goods in respect of which the Consumers PERFECTLY INELASTIC
have more time to adjust or modify
their consumption pattern are - 34. What would be the value of elasticity of
(a) Zero Elastic demand, if the demand for the good is
(b) Unit Elastic perfectly inelastic?
(c) More Elastic (a) 0
(d) Less Elastic (b) Infinity
29. Goods in respect of which the (c) 1
Consumers do not have time to (d) Less than 0
adjust their consumption 35. If the demand for the good is perfectly
pattern are - inelastic, the Demand Curve will be -
(a) Less Elastic (a) Horizontal Line
54
(b) Vertical Line 42. If a product has perfectly inelastic demand,
(c) Rectangular Hyperbola and there is a change in its price, which of
(d) Downward Sloping to the following is correct?
the right (a) Percent Change in Quantity
36. A demand curve parallel to Y-axis refer to demanded will be equal to
Percent Change in Price
(a) Ep = 0
(b) Percent Change in Quantity
(b) Ep = 1
demanded will be lesser than
(c) Ep < 1
Percent Change in Price
(d) Ep > 1
(c) Percent Change in Quantity
37. Vertical Demand Curve will show that the demanded will be greater than
price elasticity of demand is - Percent Change in Price
(a) Perfectly inelastic (d) Quantity demanded will not change at
(b) Perfectly elastic all
(c) Inelastic
(d) Unitary LESS ELASTIC
38. If the demand for a commodity is ………,
entire burden of indirect tax will fall on the 43. Identify the factor which generally keeps the
consumer. Price- Elasticity of Demand for a product
(a) Relatively inelastic low.
(b) Perfectly inelastic (a) High proportion of the
(c) Perfectly elastic Consumer's Income spent
(d) Relatively elastic on it
39. For goods with perfectly inelastic demand (b) Its Low Price
(a) Δp = 0 (c) Variety of Uses for that product
(b) Δp = Δq (d) Close Substitutes for that product
(c) Δp = Δq 44. Identify the coe cient of price-elasticity of
(d) Δq = 0 demand when the percentage increase in
the quantity demanded of a product is
40. If the demand for the good is perfectly
smaller than the percentage fall in its price.
inelastic, which of the following is correct?
(a) Equal to one
(a) Quantity does not
change at all (b) Greater than one
(b) Quantity decreases (c) Smaller than one

and price falls (d) Zero
(c) Quantity increases and price 45. Price Elasticity of Demand for addictive
increases products like cigarettes and alcohol would
(d) Quantity increases and price falls be -
41. If the demand for the good is perfectly (a) One

inelastic, and E is the measure of Elasticity, (b) Less than 1
which of the following is true? (c) Greater than 1
(a) E = 0 (d) Infinity
(b) E = 1 46. If Electricity Demand is inelastic, and
(c) 0 < E < 1 electric rates increase, which of the
(d) E > 1 following is likely to occur?
55
(a) Quantity demanded will from Rs. 8 to Rs. 9 then the demand
fall by a relatively large decreases by 10%. The price Elasticity of
amount demand is _______
(b) Quantity demanded will fall (a) 0.8
by a relatively small amount (b) 1
(c) Quantity demanded will rise in the (c) 0.9
short run, but fall in the long run (d) 1.1
(d) Quantity demanded will fall in the
short run, but rise in the long run UNIT ELASTIC
47. For goods with less elastic demand -
(a) Δq > Δp 52. If the demand for a good is unit elastic, the
(b) Δq = Δp value of the elasticity of demand would be -
(c) Δq < Δp (a) Less than 0
(d) Δq = 1 (b) 1
48. If the demand for the good is less elastic, (c) 0
and E is the measure of Elasticity, (d) Infinity
which of the following is true?
53. If the price of 'X' rises by 10% and the
(a) E = 0 quantity demanded falls by 10%, 'X' has -
(b) 0 < E < 1 (a) Zero Elastic Demand
(c) E = 1 (b) Unit Elastic Demand
(d) E > 1 (c) Inelastic Demand
49. If the demand for the good is less (d) Elastic Demand
elastic, the Demand Curve
54. For goods with unit elastic demand -
would be- .
(a) Δq > Δp
(a) Horizontal Line
(b) Δq = Δp
(b) Vertical Line
(c) Δq < Δp
(c) Downward Sloping to the right, flatter
(d) Δq = 1
(d) Downward Sloping to the right,
55. If the demand for the good is unit elastic, and
steeper
E is the measure of Elasticity, which of the
50. If a product has less elastic demand,
following is true?
and there is a change in its price,
(a) E > 1
which of the following is correct?
(b) 0 < E < 1
(a) Quantity demanded will
not change at all (c) E = 1
(b) Percent Change in Quantity (d) E = 0
demanded will be lesser than Percent 56. If the demand for the good is unit elastic, the
Change in Price Demand Curve will be -
(c) Percent Change in Quantity (a) Horizontal Line
demanded will be greater than (b) Vertical Line
Percent Change in Price (c) Rectangular Hyperbola
(d) Percent Change in Quantity (d) Nothing can be said
demanded will be equal to Percent 57. If the demand for the good is unit elastic, the
Change in Price Demand Curve would be -
51. When the price of a commodity increases
56
(a) 45 degree Straight Line,
sloping downward to MORE ELASTIC
the right
(b) Rectangular Hyperbola 62. Identify the coe cient of price-elasticity of
(c) Either (a) or (b) demand when the percentage increase in
(d) Neither (a) nor (b) the quantity demanded of a product is more
58. Rectangular Hyperbola is also known as - than the percentage fall in its price.
(a) Equilateral Hyperbola (a) Smaller than one
(b) Vertical Line (b) Greater than one
(c) Square (c) Equal to one
(d) Horizontal Line (d) Zero
59. If the demand for the good is unit elastic, the 63. When quantity demanded changes by larger
Demand Curve will be - percentage than Price, Elasticity is termed
(a) 45 degree Straight Line, as -
sloping downward to (a) Perfectly inelastic
the right (b) Perfectly elastic
(b) Rectangular Hyperbola (c) Elastic
(c) Equilateral Hyperbola (d) Inelastic
(d) All of the above 64. Suppose the demand for meals at a medium-
60. If a product has unit elastic demand, and priced restaurant is elastic. If the
there is a change in its price, which of the management of the restaurant is
following is correct? considering raising prices, it can
(a) Percent Change in expect a relatively -
Quantity demanded will (a) Large fall in quantity demanded
be greater than Percent (b) Small fall in quantity demanded
Change in Price (c) Large fall in demand
(b) Percent Change in Quantity (d) Small fall in demand
demanded will be lesser than Percent 65. For goods with more elastic demand -
Change in Price
(a) Δq > Δp
(b) Δq = Δp
demanded will be equal to Percent
Change in Price (c) Δq < Δp
(d) Δq = 1
(d) Quantity demanded will not change
at all 66. If the demand for the good is more elastic,
and E is the measure of Elasticity, which of
61. In case of Straight Line demand curve
the following is true?
meeting two axes, the Price Elasticity of
demand at a point where the curve meets (a) E = 0
x-axis would be (b) 0 < E < 1
(a) 1 (c) E = 1
(b) ∞ (d) E > 1
(c) 0 67. If the demand for the good is more elastic,
(d) >1 the Demand Curve will be -
(a) Horizontal Line
57
(b) Downward Sloping to (a) Δp > Δq
the right, steeper (b) Δp = Δq
(c) Downward Sloping to the (c) Δp = 0
right, flatter (d) Δq = 0
(d) Vertical Line 73. If the demand for the good is perfectly
68. If a product has less elastic demand, and elastic, and E is the measure of Elasticity,
there is a change in its price, which of the which of the following is true?
following is correct? (a) E = 0
(a) Percent Change in Quantity (b) 0 < E < 1
demanded will be greater (c) E > 1
than Percent Change in
(d) E = Infinity
Price
74. What is the mean by price elasticity of
(b) Percent Change in Quantity
demand greater than 1-
demanded will be lesser than Percent
Change in Price (a) % change in quantity
demanded is less than %
change in price.
demanded will be equal to Percent
Change in Price (b) % change in quantity
(d) Quantity demanded will not change at demanded is more than

all %change in price.
(c) No change in quantity and price
PERFECTLY ELASTIC (d) None of these

75. Horizontal Demand curve, Parallel to X-axis
indicates, that the elasticity of Demand is
69. What would be the value of Elasticity of
________
Demand, if the demand for the good is
perfectly elastic? (a) >1
(a) 1 (b) Infinite
(b) 0 (c) Zero
(c) Infinity (d) <1
(d) Less than 0

70. If the demand for the good is perfectly DETERMINANTS OF PRICE ELASTICITY
elastic, the Demand Curve will be -
(a) Horizontal Line 76. Price Elasticity of Demand would be higher
(b) Vertical Line for those products which have -
(c) Rectangular Hyperbola (a) A larger number of
(d) Downward Sloping to the right Substitutes
71. Horizontal Demand Curve will show that the (b) Fewer Substitutes
price elasticity of demand is - (c) No Substitutes
(a) Perfectly inelastic (d) Fewer Complementary Goods
(b) Inelastic 77. Demand for a good will tend to be more
(c) Perfectly elastic elastic if it exhibits which of the following
features?
(d) Unitary
(a) It is a necessity (as opposed to a
72. For goods with perfectly elastic demand -
58
luxury) (c) It is immeasurable concept
(b) The good has many (d) It is due to direction of change in
substitutes available price
(c) It represents a small part
of the consumer's income PROPORTIONATE METHOD
(d) There is little time for the Consumer
to adjust to the price change 82. If the demand for a product reduces by 5%
78. If the Elasticity of Demand for a commodity as a result of an increase in the price by 25%.
is perfectly inelastic, then which of the What is the Price Elasticity of Demand?
following is incorrect? (a) -0.2
(a) The Elasticity of Demand for (b) -0.25
this Commodity must be (c) -0.5
equal to zero
(d) 0.2
(b) The Commodity must
83. If Price of Coffee decreases from 5 to
have many substitutes 4.50, and as a result the Consumer's Demand
(c) The Commodity must be essential to for Coffee increase from 60 grams to 75
those who purchase it grams, the absolute Price Elasticity of
(d) The Commodity will be purchased Demand of Coffee is -
regardless of increase in its price (a) 3.0
79. Demand for a product will tend to be more (b) 2.0
inelastic if it exhibits which of the following (c) 1.5
characteristics?
(d) 2.5
(a) The product has many
84. If the demand for a product reduces by 2%
substitutes as a result of an increase in the price by 10%,
(b) The product is a luxury what is the Price Elasticity of Demand for the
(as opposed to a necessity) product?
(c) The product is a small part of the (a) +0.20
Consumer's income (b) -0.40
(d) There is a great deal of time for the (c) -0.20
consumer to adjust to the change in (d) +0.40
prices
85. If the Demand for Cricket Balls increases
80. The Elasticity of Substitution between two from 50 to 55 because of fall in price from
Perfect Substitutes is- 25 to 24, what is the Price Elasticity of
(a) Less than infinity Demand for Cricket Balls?
(b) Greater than zero (a) (2)
(c) Zero (b) (2.5)
(d) Infinite (c) (5)
81. Which is correct about price (d) (1.0)
elasticity of demand? 86. What is the Price Elasticity of
(a) It is several degrees and Demand for a product, if an
natures increase in the price of the
(b) It is unaffected due to change in price good by 2% leads to fall in
of other goods demand by 3%?
59
(a) +1.5 91. If a shop raises the price of a product from
(b) -1.5 60 to 100 and quantity demanded falls
(c) 1 from 400 units to 300 units, the Price
Elasticity of Demand is -
(d) 0
(a) 0.667
87. Price of Mangoes increases by 22% and the
quantity of mangoes demanded falls by 25%. (b) 0.500
This indicates that demand for mangoes is - (c) 1.000
(a) Elastic (d) 0.375
(b) Unitarily elastic 92. A book seller estimates that if the price of a
(c) Perfectly elastic book is increased from 60 to 67, the
quantity of books demanded will decrease
(d) Inelastic
from 2,035 to 1,946. The Book's Price
88. Suppose the price of movies seen at a Elasticity of Demand is approximately -
Theatre rises from 120 to 200 per person.
(a) 0.4
The Theatre Manager observes that the rise
in price causes attendance at a given movie (b) 2.5
to fall from 300 persons to 200 persons. (c) 0.8
What is the Price Elasticity of Demand for (d) 1.0
Movies? 93. What is the new quantity demanded when
(a) 0.5 Price Elasticity is 1 and price changes from
(b) 0.8 15 to 10 and the original quantity
(c) 1.2 demanded was 10 units?
(d) 1.0 (a) 15 units
89. Suppose a Department Store has a sale on (b) 20 units

its silverware. If the Price of a plate-setting (c) 8 units
is reduced from 300 to 200 and the (d) 12 units
quantity demanded increases from 3,000 94. What will be the price elasticity if original
plate settings to 5,000 plate- settings, what price is 5, original quantity is 8 units and
is the Price Elasticity of Demand for that changed price is 6 changed quantity is 4
item? units?
(a) 0.8 (a) 2.5
(b) 2.0 (b) 1.0
(c) 1.25 (c) 2.0
(d) 1.5 (d) 1.5
90. A Store has a special offer on CDs. It reduces 95. The original price of commodity is 500 and
the price from 150 to 100. The Store quantity demanded is 20 kgs. If price rises to
Manager observes that the quantity 750 and quantity demanded reduce to 15
demanded increases from 700 CDs to 1,400 kgs, price elasticity of demand is _______
CDs. What is the Price Elasticity of Demand (a) 0.25
for CDs?
(b) 0.50
(a) 0.8
(c) 2.00
(b) 3.0
(d) 1.50
(c) 3.25
96. The price of a ti n box is 100 per unit and
(d) 2.50 the quantity demanded in a market is
60
25,000 units. Company increased the price interested in determining the
to 125 per unit due to this increase in response of consumers to the price
price quantity demanded decreases to of cars being lowered by ÷ 50,000
1,00,000 units. What will be price elasticity (d) All of the above
of demand 101. Which of the following statements
(a) 1.25 regarding Elasticity of Demand is true?
(b) 0.80 (a) Elasticity of demand
(c) 1.00 decreases as one goes
(d) 0.00 down a Straight Line
97. The price of a commodity decreases form Demand Curve
10 to 8 and the quantity demanded of it (b) Elasticity of Demand increases as
increases from 25 to 30 units. Then the one goes down a Straight Line
coe cient of price elasticity will be Demand Curve
_______ (c) Elasticity of Demand is constant
(a) 1.5 throughout the Straight Line
(b) -1 Demand Curve
(c) -1.5 (d) None of the above
(d) 1 102. If a point on a Demand Curve of any Product

lies on X Axis, then Price Elasticity of
Demand of that commodity at that point
POINT ELASTICITY will be -
(a) Less than zero
98. The Elasticity at a given point on a Demand (b) More than zero
Curve is known as -
(c) Infinite
(a) Point Elasticity
(d) Zero
(b) Income Elasticity
103. If a point on a Demand Curve of any Product
(c) Arc Elasticity lies on Y Axis, then Price Elasticity of
(d) Cross Elasticity Demand of that commodity at that point
99. Point Elasticity of Demand is calculated as will be -
(a) Upper Segment ÷ (a) Infinite
Lower Segment (b) More than zero
(b) Lower Segment ÷ (c) Zero
Upper Segment (d) Less than zero
(c) Either (a) or (b) 104. In the case of a Straight Line Demand Curve
(d) Neither (a) nor (b) meeting the two axes, the Price-Elasticity
100. Point Elasticity is useful for which of the of Demand at the mid-point of the line
following situations - would be
(a) The bookstore is (a) 0
considering doubling (b) 1
the price of notebooks (c) 1.5
(b) A restaurant is considering lowering (d) 2
the price of its most expensive
105. If R point bisects the Demand Curve in two
dishes by 50%
equal parts, then elasticity at R equals -
(c) An automobile producer is
61
(a) Two 190, the Price Elasticity of Demand for
(b) Five Blankets using Arc Method is -
(c) Zero (a) 0.69
(d) One (b) 2.67
106. Point Elasticity at the mid-point on the (c) 1.46
Straight Line Demand Curve is - (d) 1.0
(a) One 111. What is the Original Price of a Product
(b) Zero when Price Elasticity is 0.71 and Demand
(c) Less than one changes from 20 units to 15 units and the
new price is 10? (Use Arc Method for
(d) Less than zero
computation)
107. What is the elasticity between midpoint &
(a) ₹ 15
upper extreme point of a straight line
continuous demand curve? (b) ₹ 8
(a) Infinite (c) ₹ 18
(b) Zero (d) ₹ 20
(c) >1
(d) <1 TOTAL OUTLAY / REVENUE METHOD
ARC ELASTICITY 112. Under Total Outlay Method, if as a result of

the decrease in price of a product, the total
expenditure on the product rises, we say
108. At a price of 300 per month, there are that Price Elasticity of Demand is -
30,000 subscribers to Cable TV in a Small
(a) Equal to unity
Town. If the Cable Company raises its price
to 400 per month, the number of (b) Greater than unity
subscribers will fall to 20,000. Using the (c) Less than unity
mid-point method for calculating the (d) Zero
elasticity, what is the Price Elasticity of 113. Under Total Outlay Method, if Price and
Demand for Cable TV? Consumer's Total Expenditure on the
(a) 1.4 product move in opposite directions, then,
(b) 2.00 Price Elasticity of Demand is -
(c) 0.66 (a) Zero
(d) 0.75 (b) Greater than unity
109. What is the Price Elasticity of Demand (c) Equal to unity
when, price changes from 10 to 12 (d) Less than unity
and as a result, demand falls from 6 units to 114. If the demand for a product is elastic, an
4 units? increase in its price will cause the Total
(a) 0.833 Expenditure of the Consumers to -
(b) 1.6 (a) Remain the same
(c) 2.2 (b) Increase
(d) 1.833 (c) Decrease
110. If the quantity of blankets demanded (d) Any of these
increases from 4,600 to 5,700 in response 115. If the demand for a product is elastic, an
to a decrease in their price from 220 to decrease in its price will cause the Total
62
Expenditure of the Consumers to – (iv) Demand is inelastic and price falls
(a) Remain the same (a) Only (i)
(b) Increase (b) Only (iii)
(c) Decrease (c) Both (i) and (ii)
(d) None of these (d) Both (ii) and (iii)
116. Under Total Outlay Method, if as a result of 121. Given the following four possibilities, which
the decrease in price of a product, the total one results in an increase in Total
expenditure on the product decreases, we Consumer Expenditure?
say that Price Elasticity of Demand is - (a) Demand is inelastic and
(a) Equal to unity price falls
(b) Greater than unity (b) Demand is elastic and price rises
(c) Less than unity (c) Demand is unitary elastic and price
(d) Zero falls
117. Under Total Outlay Method, if Price and (d) Demand is inelastic and price rises
Consumer's Total Expenditure on the 122. Due to change in price of the commodity,
product move in the same direction, then, the Total Expenditure remains the same as
Price Elasticity of Demand is - before, then Elasticity under Total Outlay
(a) Greater than unity Method is -
(b) Equal to unity (a) Equal to unity
(c) Less than unity (b) Greater than unity
(d) Zero (c) Less than unity
118. If the demand for a product is inelastic, an (d) Zero
increase in its price will cause the Total 123. When Increase in prices is exactly balanced
Expenditure of the Consumers to - by a proportionate reduction in the
(a) Remain the same purchase quantity, then Elasticity
(b) Increase under Total Outlay Method is -
(c) Decrease (a) Equal to unity
(d) Any of these (b) Less than unity
119. If the demand for a product is inelastic, an (c) Greater than unity
decrease in its price will cause the Total (d) Zero
Expenditure of the Consumers to - 124. An increase in price will result in
(a) Remain the same an increase in Total Revenue if -
(b) Increase (a) Percentage Change in
(c) Decrease quantity demanded is
less than the Percentage Change
(d) All of these
in Price
120. Total Expenditure of a Consumer
(b) Percentage Change in quantity
increases if-
demanded is more than Percentage
(i) Demand is elastic and Change in price
price rises
(c) Consumer is operating along a
(ii) Demand is elastic and Linear Demand Curve at a point at
price falls which the price is very high and the
(iii) Demand is inelastic and price rises quantity demanded is very low
63
(d) Demand is elastic 128. Ceteris paribus, what would be the impact
125. Which of the following statements on foreign exchange earnings for a given
regarding Elasticity of Demand is true? falling export prices, if the demand for the
(a) If the demand for the country's exports is inelastic?
product is inelastic, an (a) Foreign Exchange
increase in price will Earnings decrease
have a positive effect on (b) Foreign Exchange
the total revenue of the Firm Earnings increase
(b) If the demand for the product is (c) No effect on Foreign Exchange
elastic, an increase in price will Earnings
have a positive effect on the total (d) Foreign Exchange Earnings
revenue of the Firm increase for a brief period and
(c) If the demand for the product is decrease drastically later on
inelastic, an increase in price will 129. If the Railways are making losses on
have a negative effect on the total passenger tra c, they should lower their
revenue of the Firm fares. The suggested remedy would only
(d) If the demand for the product is work if the demand for Rail Travel had a
inelastic, a decrease in price will price elasticity of -
have a positive effect on the total (a) Greater than one
revenue of the Firm (b) Greater than zero but
126. A decrease in price will result in less than one.
an increase in Total Revenue if - (c) One
(a) Percentage Change in (d) Zero
Quantity Demanded in less than
130. If Cinema Halls are making losses they
Percentage Change in Price
should lower the ticket fares. This
(b) Percentage Change in Quantity suggestion would only work if the
Demanded is greater than demand for watching movies in
Percentage Change in Price cinema halls had a Price
(c) Consumer is operating along a Elasticity of -
Linear Demand Curve at a point at (a) One
which the Price is very low and
(b) Greater than zero but less than one.
quantity demanded is very high
(c) Zero
(d) Demand is inelastic
(d) Greater than one
127. If a good has price elasticity
greater than one then - 131. Price Elasticity of demand for a product is
zero. If the Firm increases the price of the
(a) Demand is unit elastic
product by 10%, Total Revenue of the Firm
and a change in price
will -
does not affect sellers' revenue.
(a) Not change
(b) Demand is elastic and a change in
price causes Sellers' Revenue to (b) Increase to infinity
change in the opposite direction. (c) Fall to zero
(c) Demand is inelastic and a change in (d) Decrease by 10%
price causes Sellers' Revenue to
change in the same direction. INCOME ELASTICITY
(d) None of these
64
132. Income Elasticity of Demand is defined as (b) Falls
the responsiveness of - (c) Becomes zero
(a) Price to a change in (d) Rises
quantity demanded 139. Generally when income of a consumer
(b) Price to a Change in Income increases he goes for superior goods,
(c) Quantity demanded to a leading to fall in demand for inferior goods.
Change in Price It means income elasticity of demand is
(d) Quantity demanded to a ______.
change in income (a) Less than one
133. Income Elasticity of Demand is given by - (b) Negative
(a) ∆i/∆q X q/i (c) Zero
(b) ∆i/∆q X i/q (d) Unitary
(c) ∆q/∆i X q/i 140. What type of goods does a consumer
(d) ∆q/∆i X i/q eventually stop buying, when his income
134. Positive Income Elasticity implies that as rises?
income rises, demand for the commodity - (a) Goods with Zero Income
(a) Rises Elasticity
(b) Remains unchanged (b) Goods with Negative

Income Elasticity
(c) Becomes zero
(c) Goods with Positive Income
(d) Falls
Elasticity
135. If Income-Elasticity is greater than zero,
(d) No relationship exists between the
then the product is -
type of the goods bought and rise in
(a) Superior income
(b) Normal 141. Goods having negative Income Elasticity
(c) Inferior are known as -
(d) Both (a) & (b) (a) Normal
136. ……….. have a positive Income Elasticity of (b) Inferior
Demand. (c) Superior
(a) Complementary Goods (d) Necessities
(b) Inferior Goods 142. In case of Inferior Goods, Income Elasticity
(c) Normal Goods is -
(d) Substitute Goods (a) Zero
137. For what type of goods does demand fall (b) Positive
with rise in income levels of households? (c) Negative
(a) Inferior Goods (d) Infinity
(b) Substitutes 143. In Demand-Supply Analysis, if the income
(c) Luxuries of the Consumer increases, the Demand
(d) Necessities Curve for an inferior good -
138. Negative Income Elasticity implies (a) Shifts upward to
that as income rises, demand for the right
the commodity - (b) Shifts downward to the left
(a) Remains unchanged (c) Shifts upward to the left
65
(d) Shifts downward to the right (b) Above 1
144. …….. have a negative Income Elasticity of (c) Zero
Demand. (d) Between -1 and 0
(a) Necessities 151. Services like Air Travel and Movies have an
(b) Luxury Goods income elasticity of -
(c) Normal Goods (a) More than 1
(d) Inferior Goods (b) Between 0 and 1
145. If quantity demanded does not change as (c) Less than 1
Income changes, then Income Elasticity of (d) 0
Demand is - 152. What would be the value of Income
(a) Below 1 Elasticity of demand for the
(b) Between -1 and 0 meals in a costly restaurant?
(c) Zero (a) Lesser than one
(d) Above 1 (b) Between 0 and 1
146. Goods having Zero Income Elasticity are - (c) 1
(a) Inferior Goods (d) More than 1
(b) Normal Goods 153. If a good is a Luxury, its Income
(c) Luxury Goods Elasticity of demand is
(d) None of the above (a) Zero
147. If an increase in Consumer Incomes leads (b) Negative but greater than -1
to a increase in the demand for Product X, (c) Positive and greater than 1
then Product X is - (d) Positive and less than 1
(a) A Normal Good 154. Goods having Income Elasticity > 1 are
(b) A Substitute Good considered as -
(c) An Inferior Good (a) Luxury Goods
(d) All of the above (b) Necessities
148. For ………. goods increase in income leads (c) Normal Goods
to increase in demand. (d) Inferior Goods
(a) Abnormal 155. The Income of a Household rises by 20%,
(b) Normal the demand for Computer rises by 25%, this
(c) Superior means Computer (in Economics) is a/an
(d) Inferior (a) Inferior Good
149. If Income Elasticity > 1, it means that (b) Luxury Good
proportion of Income spent on goods …….., (c) Necessity
as income of the Consumers increases. (d) None of the above
(a) Increases 156. If Income Elasticity for the household for
(b) Decreases Product A is 2 then A is -
(c) Remains constant (a) Necessity Item
(d) None of the above (b) Inferior Goods
150. For a product to be called income elastic, (c) Luxurious Item
its Income Elasticity has to be - (d) Comfortable Item
(a) Below 1 157. If the Income Elasticity is greater than one,
66
the commodity is - than 1.
(a) Necessity 163. Goods having Income Elasticity < 1 are
(b) Luxury considered as-
(c) Inferior goods (a) Normal Goods
(d) None of these (b) Necessities
158. If Income Elasticity = 1, it means that (c) Luxury Goods
proportion of Income spent on goods (d) Inferior Goods
………, as income of the Consumers 164. Which of the following is not a determinant
increases. of the Advertising Elasticity of Demand?
(a) Increase (a) Effect of Time
(b) Decreases (b) Stages of Product
(c) Remains constant (c) Advertising by Competitors
(d) None of these (d) Income Level of the Consumers
159. If Consumers always spend 15% of their 165. If income increases by 10% and demand
income on food, then the Income Elasticity increases by 5%, then income elasticity of
of Demand for Food is demand is:
(a) 1.15 (a) +0.5
(b) 1.50 (b) -0.05
(c) 1.00 (c) + 0.05
(d) 0.15 (d) -0.5
160. If Income Elasticity < 1, it means that 166. Suppose a Consumer's income increases
proportion of Income spent on goods ……., from 30,000 to 36,000. As a result, the
as income of the Consumers increases. consumer increases her purchases of
(a) Increases compact discs (CDs) from 25 CDs to 30 CDs.
(b) Decreases What is the Income Elasticity of Demand for
(c) Remains constant CDs here?
(d) Nothing can be said (a) 1.5
161. Which of the following is not an (b) 1.0

income- elastic product/service? (c) 2.0
(a) Air Travel (d) 0.5
(b) Meals in a costly restaurant 167. If the quantity of CD demanded increases
(c) Life-saving Drugs from 260 to 290 in response to an increase
in income from 9,000 to 9,800, the
(d) Entertainment in an Amusement
Income Elasticity of Demand is
Park
approximately -
162. A Necessity is defined as a good having -
(a) 3.4
(a) Positive Income
(b) 0.01.
Elasticity of Demand
(c) 1.3
(b) Negative Income
Elasticity of Demand (d) 2.3.
(c) Income Elasticity of Demand 168. Concerned about the poor state of the
less than 1 economy, a Car Dealer estimates that if
income decreases by 4%, Car Sales will fall
(d) Price Elasticity of Demand less
from 352 to 335. Consequently, the Income
67
Elasticity of Demand for cars is (b) Price Elasticity
approximately - (c) Income Elasticity
(a) -1.2 (d) Supply Elasticity
(b) 0.01 174. Cross Elasticity measures the
(c) 0.4 responsiveness of quantity demanded of a
(d) 1.2 commodity to -
169. If an Increase In Consumer Incomes leads (a) Changes in Price of that
to a decrease in the demand for Product Z, Commodity
then Product Z is - (b) Changes in Price of other
(a) A Normal Good Commodities
(b) A Substitute Good (c) Changes in Income Levels of Buyers
(c) An Inferior Good (d) All of the above
(d) None of the above 175. In measuring Cross Elasticity, ……..is / are
170. Income of a household increases by 10%, considered.
and the demand for Wheat rises by 5%. This (a) No products
means that Wheat is an example of - (b) Two products
(a) Normal Goods (c) Many products
(b) Luxurious Goods (d) Only one product
(c) Inferior Goods 176. Which of the following statements
(d) Economic Goods regarding Cross Elasticity is true?
171. Income of a household increases by 10%, (a) It is always negative
and the demand for TV rises by 20%. This (b) It is always positive
means that TV is an example of - (c) It can be either positive or negative
(a) Inferior Goods (d) It always lies between 0 and 1
(b) Luxurious Goods 177. If Goods A and B are complementary, their
(c) Normal Goods Cross Elasticity is -
(d) Economic Goods (a) Infinity
172. Income of a household increases by 5%, (b) Greater than zero but less
and the demand for Bajra falls by 2%. In this than infinity
case, Bajra is an example of - (c) Zero
(a) Normal Goods (d) Negative
(b) Luxurious Goods 178. Complementary Goods like tea and sugar
(c) Inferior Goods have a ……… Cross Elasticity.
(d) Economic Goods (a) Negative
(b) Positive
CROSS ELASTICITY (c) Zero
(d) Infinite
173. In order to assess the effect of a change in 179. What will be the Slope of Demand Curve
price of one product on the demand for when it shows the Cross Elasticity between
other products, which type of elasticity is two Complementary Goods?
often used? (a) Negative
(a) Cross Elasticity (b) Positive
68
(c) Horizontal Cross Elasticity between the Colas and Tea
(d) All of the above / Coffee is -
180. Cross Elasticity between Tea and Sugar is - (a) Zero
(a) Less than 0 (b) Positive
(b) Greater than 1 (c) Negative
(c) Zero (d) Infinite
(d) Greater than 0, but less than 1 187. If two products are good substitutes, the
181. Goods having negative Cross Elasticity are - value of Cross Elasticity will be -
(a) Mostly complementary (a) Negative

goods (b) Positive
(b) Always substitute goods (c) Zero
(c) Always complementary goods (d) No Cross Elasticity exists between
(d) Mostly substitute goods two substitute products
182. Negative Cross Elasticity always implies 188. The cross elasticity of demand between
that the goods are complementary in two perfect substitutes will be –
nature. This statement is - (a) Very high
(a) True (b) Infinity
(b) False (c) Very low
(c) Partially True (d) Zero
(d) Nothing can be said 189. Goods having positive Cross Elasticity are -
183. Goods having zero Cross Elasticity are - (a) Mostly complementary
(a) Complementary goods goods
(b) Unrelated goods (b) Always complementar

goods
(c) Substitute goods
(c) Mostly substitute goods
(d) Always substitute goods
184. Cross Elasticity of Demand between Tea
and Coffee is - 190. Positive Cross Elasticity always implies that
the goods are substitute goods. This
(a) Positive
statement is -
(b) Negative
(a) True
(c) Zero
(b) Partially True
(d) Infinity
(c) False
185. If the co-e cient of Cross Elasticity of
Demand of A for B is 3, it means that A and
B are - 191. If Cross Elasticity of Demand is Infinity, it
means that the goods are -
(a) Inferior Goods
(a) Perfect Complementary Goods
(b) Substitute Goods
(b) Perfect Substitute Goods
(c) Normal Goods
(c) Inferior Goods
(d) Complementary Goods
(d) Normal Goods
186. When Cola Companies Coke and Pepsi,
introduced Colas in mini bottles at a low 192. If Cross Elasticity of Demand = Zero, it
price, the demand for Tea and Coffee is means that the goods are -
small tea stalls declined drastically. The (a) Perfect Complementary Goods
69
(b) Perfect Substitute Goods (b) 0.35 and Z and X are Substitutes
(c) Unrelated Goods (c) 0.35 and Z and X are Complements
(d) All the above (d) 2.5 and Z and X are Substitutes
193. If Cross Elasticity of Demand between A 198. Which of the following is not correct?
and B is Zero, it means that between A (a) Cross Elasticity of
and B - Demand for two
(a) There can be no substitutes is positive.
substitution at all (b) Income Elasticity of Demand is the
(b) A can be perfectly percentage change in quantity
substituted for B, and vice- versa. demanded of a good due to a
(c) A and B are Inferior Goods change in the price of a substitute.
(d) Nothing can be said (c) Cross Elasticity of Demand for two
194. If the quantity demanded of Tea increases complements is negative.
by 5% when the price of Coffee increases (d) Price Elasticity of Demand is always
by 20%, the Cross Elasticity of demand negative, except for Giffen Goods.
between Tea and Coffee is-
(a) -4 ALL ELASTICITY COMPUTATION
(b) 0.25
(c) 0.25 Use the following data for the next 8 questions.
(d) 4 A Grocery Shop used to sell fresh milk at 20
195. The Cross Elasticity of monthly demand for per litre, at which price 400 litres of milk were
ink pen, when the price of gel pen increases sold per month. After some time, the price was
by 25% and demand for ink pen increases raised to 30 per litre. Following are the
by 50% is equal to - consequences:
(a) + 2.00 • Only 200 litres of milk was sold every
(b) 2.9 month.
(c) -2.00 • The number of boxes of cereal
(d) + 2.09 customers bought went down from 200
to 140.
196. Cross Elasticity of Demand for Gel Pen
when the Price of Refills increases by 20% • The number of packets of powdered
and demand for Gel Pens falls by 30% is milk customers bought went up from 90
equal to - to 220 per month.
(a) + 0.25 199. The Price Elasticity of Demand when fresh

milk's price increases from `20
(b) 0.71
per litre to `30 per litre is equal to
(c) 0.18
(a) 2.5
(d) 1.5.
(b) 1.0
197. If the quantity demanded of Product Z
increases from 8 to 12 units in response to (c) 1.66
an increase in the price of Product Z from (d) 2.66
`23 to `27, the Cross Elasticity 200. What can be said about the
of Demand for Z with respect to Price Elasticity of Demand for
Price of Z is approximately - Fresh Milk?
(a) 2.5 and Z and X are Complements (a) It is perfectly elastic
70
(b) It is elastic (a) Luxury Goods
(c) It is inelastic (b) Inferior Goods
(d) It is perfectly inelastic (c) Normal Goods
201. The Cross Elasticity of Demand for Cereals (d) Nothing can be said.
when the price of Fresh Milk increases from Use the following data for the next 8 questions.
20 to 30 is equal to A Shopkeeper sells Gel Pen at 10 per pen. At
(a) -0.6 this price he can sell 120 units per month. After
(b) +0.6 some time, he raises the price to 15 per pen.
(c) -0.19 Following the price rise -
(d) +0.38 • Only 50 pens were sold every month.
202. What can be said about Fresh Milk & • The number of refills bought went down
Cereals? from 200 to 150.
(a) They are Complementary • The number of ink pen customers
Goods bought went up from 90 to 150 per
(b) They are Substitute Goods month.
(c) They are Unrelated Goods 207. Price Elasticity of demand when Gel Pen's
price increases from 10 to 15 per pen is -
(a) 2.5
203. The Cross Elasticity of Demand for
Powdered Milk, when the price of Fresh Milk (b) 2.16
increases from 20 to 30 per litre is (c) 1.16
equal to - (d) 1.00
(a) -1.05 208. What can be said about the Price Elasticity
(b) +1.05 of Demand for Gel Pens?
(c) -2.89 (a) It is perfectly elastic.
(d) +2.89 (b) It is elastic.
204. What can be said about Fresh Milk and (c) It is perfectly inelastic.
Powdered Milk? (d) It is inelastic.
(a) They are Complementary 209. The Cross Elasticity of Demand for Refills
Goods when the price of Gel Pen increases from
(b) They are Substitute Goods `10 to `15 is -
(c) They are Unrelated Goods (a) -0.50
(d) Nothing can be said (b) 0.25
205. If Income of the Consumers increases by (c) 0.38
50% and the quantity of Fresh Milk (d) -0.19
demanded increases by 30%. What is 210. What can be said about Gel Pen and Refills?
Income Elasticity of Demand for Fresh (a) They are Complementary Goods
Milk?
(b) They are Substitute Goods
(a) 1.25
(c) They are Unrelated Goods
(b) 0.6
(c) 0.5
211. Cross Elasticity of Demand for Ink Pen
(d) 1.5 when the price of Gel Pen increases from
206. We can say that Fresh Milk in economics 10 to 15 is equal to -
sense is an example of -
71
(a) +1.33 (b) 0.5
(b) -1.05 (c) 1.5
(c) +2.09 (d) 1.6
(d) -2.09 216. What can be said about the Price Elasticity
212. What can be said about Gel Pen and Ink of Demand for Commodity X?
Pens? (a) Demand is unit elastic
(a) They are Complementary (b) Demand is highly elastic
Goods (c) Demand is inelastic
(b) They are Substitute Goods (d) Demand is perfectly elastic
(c) They are Unrelated Goods 217. Cross Elasticity of Demand for Commodity
(d) Nothing can be said Y when the Price of X decreases from 20
213. If Income of the residents of locality per piece to 10 per piece will be -
increases by 50% and the quantity of Gel (a) +1
Pens demanded increases by 20%. What is (b) -1.5
income elasticity of demand for Gel Pen? (c) +1.5
(a) 0.4 (d) -1
(b) 1.50 218. Cross Elasticity of Demand for Commodity
(c) 0.60 Z when the price of X decreases from 20
(d) 1.25 per piece to 10 per piece will be -
214. We can say that Gel Pen in economics (a) -1.66
sense is an example of - (b) +0.66
(a) Luxury Goods (c) -0.66
(b) Inferior Goods (d) +1.66
(c) Normal Goods 219. If Income of the Consumers increases by
(d) Nothing can be said. 50% and the demand for X increases by
Use the following data for the next 6 questions. 20% what will be the Income Elasticity of
X, Y and Z are three commodities where X and Y Demand for X?
are complementary whereas X and Z are (a) 0.04
substitutes. (b) 0.4
A Shopkeeper sells Commodity X at 20 per (c) 4.00
piece. At this price, he is able to sell 100 pieces (d) -4.00
of X per month. After some time, he decreases 220. We can say that Commodity X in economic
the price of X to 10 per piece. Consequently - sense is an example of -
• He is able to sell 150 pieces of X per (a) Luxury Goods
month.
(b) Inferior foods
• Demand for Y increases from 25 to 50
(c) Normal Goods
units.
(d) Gi n Goods
• Demand for Z decreases from 75 to 50
units. 221. Advertisement Elasticity is also known as -
215. Price Elasticity of Demand (using Arc (a) Marketing Elasticity

Method) when Price of X decreases from (b) Promotional Elasticity
20 per piece to 10 per piece will be - (c) Commercial Elasticity
(a) 0.6 (d) All of the above
72
222. The responsiveness of a good's demand to Advertising Elasticity,
changes in the Firm's spending on greater will be the
advertising is known as - responsiveness of
(a) Supply elasticity demand to change in
(b) Demand elasticity advertisement.
(c) Advertisement elasticity (b) Lower the value of Advertising

Elasticity, greater will be the
responsiveness of demand to
223. Advertisement Elasticity is the percentage change in advertisement.
change in
(c) Higher the value of Advertising
(a) Supply that occurs for Elasticity, lesser will be
every 1% change in the responsiveness of demand to
Advertising Expenditure. change in advertisement.
(b) Demand that occurs for every 1% (d) None of the above
change in Advertising Expenditure.
(c) Advertisement expense that occurs
for every 1% change in Demand.
224. Advertising Elasticity is generally
(a) Positive
(b) Negative
(c) Zero
225. Which of the following statements is true?
(a) Higher the value of
73
Demand Forecasting
1. Scientific way of estimating demand is than once is called -

called - (a) Durable Goods
(a) Demand analysis (b) Producers Goods
(b) Demand Prediction (c) Consumer Goods
(c) Demand Forecasting (d) Non-Durable Goods
(d) Demand Testing 8. Smart Phone is an example of -
2. Demand Forecasting helps in - (a) Durable Producers' Goods
(a) Budgetary Planning (b) Durable Consumers' Goods
(b) Production Scheduling (c) Non-Durable Consumers' Goods
(c) Marketing (d) Non-Durable Producers' Goods
(d) All of the above 9. Cooking oil is an example of -
3. Based on area, Forecasting can be classified (a) Durable Producers' Goods
as -
(b) Durable Consumers' Goods
(a) International, National
(c) Non-Durable Producers' Goods
and Local Level
(d) Non-Durable Consumers' Goods
(b) International, National,
10. Tools and spare parts is an example of -
State and city Level
(a) Durable Producers' Goods
(c) International, National, Industry and
Firm Level (b) Non-Durable Producers' Goods
(d) Micro and Macro Level (c) Durable Consumers' Goods
4. Goods which are used for production of (d) Non-Durable Consumers' Goods
other goods 11. Increase in Farm Production leads to
(a) Capital Goods increase in demand of fertilizers. This is an
example of -
(b) Consumer Goods
(a) Autonomous Demand
(c) End user Goods
(b) Derived Demand
(d) None of the following
(c) Dependent Demand
5. Goods which are used for final consumption -
(d) Industry Demand
(a) Capital Goods
12. The demand for a product which is
(b) Consumer Goods
independent of the demand for other goods
(c) Durable Goods
is called -
(a) Independent Demand
6. Goods which can be consumed more than
(b) Company Demand
once is called -
(c) Autonomous Demand
(a) Consumer Goods
(d) Derived Demand
(b) Producers Goods
13. The Demand for a Firm's product when
(c) Durable Goods
expressed as a percentage of Industry
(d) Non-Durable Goods Demand signifies the ______ of the Firm.
7. Goods which cannot be consumed more (a) Performance
74
(b) Return (d) All of the above
(c) Yield 20. Which of the following methods cannot be
(d) Market Share used for short term forecasting -
14. Demand for the product of a particular Firm (a) Survey Method
is known as - (b) Collective Opinion Method
(a) Firm Demand (c) Least Square Method
(b) Industry Demand (d) All of the above
(c) Derived Demand 21. Concept of giving the Consumers a specific
(d) Product Demand sum of money and asking them to spend on
goods with varying price, packing, display
15. The Survey method where all potential
etc. is called
customers are interviewed about their
future purchase plans (a) Consumer Laboratory
(a) Complete Enumeration Method (b) Consumer Clinic
(b) Sample Survey Method (c) Consumer Workshop
(c) End-Use Method (d) Consumer Research Centre
(d) None of the above 22. The method in which future demand is
estimated by conducting market studies and
16. The Survey method where scientifically
experiments on consumer behaviour is
chosen sample of potential customers are
known as -
interviewed
(a) Market Research Method
(a) Complete Enumeration Method
(b) Market Experiment Method
(b) Sample Survey Method
(c) Market Response Analysis
(c) End-Use Method
(d) Consumer Behaviour Analysis
23. For demand forecasting which is the
17. The method in which the Salesmen are
Classical Method?
required to estimate expected sales in their
respective territories (a) Trend Projection Method
(a) Collective Opinion Method (b) Graphical Method
(b) Sales Force Opinion Method (c) Regression Analysis
(c) Grass Roots Approach (d) Last Square Method
(d) All of the above 24. Graphical Method is also known as -
18. Expert opinions for demand forecasting is (a) Classical Method
used in (b) Free-hand projection method
(a) Opinion Projection Method (c) Index Method
(b) Controlled Experiments (d) None of the above
(c) Delphi Technique 25. The superior method of forecasting is -
(d) All of the above (a) Barometric method
19. Tools used by Delphi Technique to forecast (b) Survey method
demand based on Expert Opinions - (c) Statistical method
(a) Questionnaire (d) Expert Opinion method
(b) Interview 26. Economic indicators in demand forecasting
(c) Feedback is called
75
(a) Trend Projection method 30. Indicators that move simultaneously with
(b) Barometric method the level of economic activities is -
(c) Least Square method (a) Coincidental Indicators
(d) Gauge method (b) Lagging Indicators
27. Barometric Method has a (c) Leading Indicators
(a) Wholistic approach (d) None of the above
(b) Product specific approach 31. Indicators that follow a change after some
time lag
(c) Vague approach
(a) Coincidental Indicators
(b) Leading Indicators
28. What type of indicator is used in Barometric
method of demand forecasting (c) Lagging Indicators
(a) Leading Indicators (d) All of the above
(b) Lagging Indicators
(c) Coincidental Indicators
29. Advance indications are given by -
(a) Coincidental Indicators
(b) Leading Indicators
(c) Lagging Indicators
76
CHAPTER 4 - Supply Analysis & Equilibrium Price
SUPPLY BASICS services, that ______ are willing and able to

offer to the market at various prices during a
period of time.
1. Supply refers to -
(a) Producers
(a) Those goods which Firms
offers for sale (b) Economists
(b) Amount of goods, Firms sells (c) Accountants
in the market (d) Consumers
(c) Amount of goods all people want 7. Supply Quantity is the same as Sales
(d) None of the above Quantity. This statement is -
2. The Supply of a product refers to - (a) True
(a) Actual production of the (b) False
product (c) Partially True
(b) Total existing stock of the (d) None of the above
product 8. Supply refers to what Firms offer for
(c) Stock available for sale sale, and not necessarily to what
(d) Amount of the product offered for sale they succeed in selling. This
at a particular price per unit of time statement is -
3. Supply of a Commodity is a - (a) True
(a) Stock Concept (b) Partially True
(b) Flow Concept (c) False
(c) Both Stock and Row Concept. (d) None of the above
(d) All of these 9. To constitute Supply, the
4. _______refers to the quantity of goods or Producing Firms must have
services that Producers are willing and able (a) Ability, i.e. productive
to offer to the market at various prices capacity
during a period of time. (b) Willingness, i.e. ready to supply
(a) Demand (c) Both (a) and (b)
(b) Supply (d) Neither (a) nor (b)
(c) Stock 10. Supply refers to the _____ by
(d) Sales Producing Firms.
5. Supply refers to ______ (a) Quantities offered for sale
(a) Stock of goods available (b) Profits earned
for sale (c) Sales achieved
(b) Actual production of the goods (d) Prices offered
(c) Quantity supplied at a various price 11. Period in which supply cannot be
during a period of time increased is called
(d) Stock of goods (a) Market Period
6. Supply refers to the quantity of goods or (b) Short Run
77
(c) Long Run (d) None of these
12. _______ is the total volume of the DETERMINANTS OF SUPPLY
commodity which can be brought into the
market for sale at a short notice.
18. Which of the following factors is
(a) Demand not a determinant of Supply?
(b) Supply (a) Price of the Commodity
(c) Stock (b) Prices of Factors of Production
(d) Sales (c) Prices of Water and Salt
13. ______ refers to the quantity which is (d) Prices of Related Commodities
actually brought in the market.
19. Which of the following factors is not a
(a) Demand determinant of Supply?
(b) Supply (a) Government's industrial
(c) Stock and foreign policies
(d) Sales (b) Market Structure
14. Supply is different from Stock. This (c) State of Technology
statement is (d) Income Levels of Consumers
(a) True 20. Generally, higher the prices of products,
(b) Partially True higher the _______
(c) False (a) Profits of Producing Firms
(d) None of the above (b) Satisfaction Level of
15. Stock is potential supply. Consumers
(a) True (c) Tax Rates
(b) False (d) All of the above
(c) Partially True 21. Producing Firms are guided by -
(d) None of the above (a) Service Motive
16. Stock refers to quantity _____ into the (b) Profit Motive
market, whereas Supply refers to (c) Both (a) and (b)
quantity_______ into the market. (d) Neither (a) nor (b)
(a) Can be brought, actually 22. Other things being equal, if the price of the
brought commodity is higher, ______ quantities
(b) Can be brought, actually brought thereof will be supplied to the market.
(c) Can be brought, can be brought (a) Zero
(d) Actually brought, actually brought (b) Lower
17. The meaning of time element in economics (c) Greater
is _______ (d) Equal
(a) Calendar time 23. Prices of Related Commodities are not a
(b) Clock time determinant of supply of a particular
(c) Operational time which supply adjusts commodity. This statement is-
with the market demand (a) True
78
(b) False (c) Increase
(c) Partially True (d) Become Zero
(d) None of the above 29. Other things being equal, if the Cost of
24. Generally, Supply of a Product X will ______ Production of a commodity is higher, ______
be if the prices of goods other than X quantities thereof will be supplied to the
increase. market.
(a) Zero (a) Equal
(b) Lower (b) Lower
(c) Equal (c) Greater
(d) Greater (d) Zero
25. Generally, Supply of a Product X will be 30. Other things being equal, if the Cost of
_______ if the prices of goods other than X Production of a commodity is lower, ______
decrease. quantities thereof will be supplied to the
market.
(a) Equal
(a) Zero
(b) Lower
(b) Lower
(c) Greater
(c) Greater
(d) Zero
(d) Equal
26. Supply of a Product decreases when the
prices of other related goods increase. This 31. Inventions and Innovations lead to -
is because (a) Lower Cost of Production
(a) Producing Firms' profit in existing products
motive changes (b) Production of more or better goods
(b) Those goods become relatively more (c) Both (a) and (b)
profitable to the Firm to produce and (d) Neither (a) nor (b)
sell
32. Other things being equal, if the State of
(c) Customers preferences and tastes will Technology in relation to a commodity
change increases, _______ quantities thereof will be
(d) Customers start demanding more of supplied to the market.
other goods (a) Lower
27. If there is an increase in the Prices of (b) Equal
Factors of Production, Cost of Production of
(c) Greater
that product will -
(d) Zero
(a) Increase
33. Inventions and Innovations lead to -
(b) Decrease
(a) Reduction in the supply
(c) Remain Constant
quantity of products that
(d) Become Zero are displaced
28. If there is an decrease in the Prices of (b) Increase in supply quantity of new
Factors of Production, Cost of Production of products
that product will -
(a) Remain Constant
(b) Decrease
34. Other things being equal, the supply quantity
79
of a product is ______ related to its price. irrigation, improved seeds, etc. the supply of
(a) Directly agricultural commodities will -
(b) Inversely M (a) Increase
(c) Proportionally (b) Become Zero
(d) None of these (c) Remain Constant
35. Other things being equal, the supply quantity (d) Decrease
of a product is ______ related to price of
related goods. LAW OF SUPPLY AND SUPPLY CURVE
(a) Directly
(b) Inversely 41. Which of the following is the determinant in
(c) Proportionally the Law of Supply?
(d) None of these (a) Technology
36. Other things being equal, the supply quantity (b) Price of related goods
of a product is _______ related to the Cost of (c) Price of the product
Production of that product.
(d) All of these
(a) Directly
42. Which of the following is the only
(b) Inversely determinant that the Law of Supply takes
(c) Proportionally into account?
(d) Not at all (a) Quality of the Product
37. Generally, if there is an increase in (b) Price of the Product
Commodity Taxes (Excise Duty, Customs (c) Purchasing Power of Buyers
Duty, VAT, etc.) leading to increase in their
(d) Purchasing Power of Sellers
cost of production, the supply quantity will -
43. As per Law of Supply, other things being
(a) Remain Constant
equal, if the Price of a Commodity increases,
(b) Decrease its Supply Quantity will
(c) Increase (a) Increase
(d) Become Zero (b) Become Zero
38. Generally, if there are incentives like (c) Decrease
Subsidies which reduce the cost of
(d) Remain Constant
production, the supply quantity will -
44. As per Law of Supply, other things being
(a) Increase
equal, if the Price of a Commodity
(b) Decrease decreases, its Supply Quantity will
(c) Remain Constant (a) Increase
(d) Become Zero (b) Decrease
39. In case of failure of rains, floods, fires, etc. (c) Become Zero
the supply of agricultural commodities will -
(d) Remain Constant
(a) Increase
45. The assumption "Ceteris Paribus" in the Law
(b) Decrease of Supply stands for -
(c) Remain Constant (a) Technology remaining
(d) Become Zero constant
40. In case of better rainfall, improvement in (b) Demand remaining constant
80
(c) Price remaining constant 52. The Market Supply Curve is a lateral
(d) All factors other than Price remaining (a) True
constant (b) False
46. As per Law of Supply, other things being (c) Partially True
equal, there is a ______ between Price and
Quantity Supplied.
53. What would be the shape of the Supply
(a) Direct relationship
Curve of the toys, if a Seller offers to sell any
(b) No relationship number of toys as ₹ 100?
(c) Inverse relationship (a) Upward sloping
(d) Proportional relationship (b) Downward sloping
47. _______ shows the quantity of products a (c) Horizontal
producer or seller wishes to sell at a given
(d) Vertical
price level.
(a) Average Product Curve
INCREASE / DECREASE IN
(b) Supply Curve
QUANTITY SUPPLIED
(c) Marginal Product Curve
(d) Total Product Curve
54. Increase or Decrease in the
48. Generally, the Supply Curve - quantity supplied occurs due to -
(a) Slopes downwards from (a) Changes in Price
left to right
(b) Changes in Factors other
(b) Slopes upwards from right than Price
to left
(c) Neither (a) nor (b)
(c) Slopes upwards from left to right
(d) Slopes downwards from right to left
55. While recognizing Increase or Decrease in
49. Generally, the Supply Curve - the quantity supplied, we assume _______
(a) Positively sloped remain constant.
(b) Negatively sloped (a) Price
(c) Zero-sloped (b) All Factors other than Price
(d) Nothing can be said (c) Both (a) and (b)
50. Typically, the Supply Curve - (d) Neither (a) nor (b)
(a) Slopes upward 56. When there is a movement on the Supply
(b) Is horizontally straight Curve, it refers to -
(c) Is vertically straight (a) Change in Supply
(d) Slopes downward (b) Change in Quantity Supplied
51. The Supply Curve - (c) Neither (a) nor (b)
(a) Is always a straight line (d) Both (a) and (b)
(b) Is always a curve 57. Change in Quantity Supplied causes -
(c) Sometimes a straight line, (a) a movement on the same
sometimes a curve Supply Curve
(d) None of the above (b) shift of the Supply Curve
81
(c) Both (a) and (b) (d) Decrease in the Outlay of Sellers
58. When there is a change in quantity supplied - INCREASE / DECREASE IN SUPPLY
(a) Supply Curve shifts inward
or outward 64. Increase or Decrease in Supply occurs
(b) There is a upward / due to -
downward movement on (a) Changes in Price
the same Supply Curve (b) Changes in Factors other
(c) Both (a) and (b) than Price
(d) Neither (a) nor (b) (c) Both (a) and (b)
59. In case of Increase / Decrease in quantity (d) Neither (a) nor (b)
supplied, the position of the Supply Curve 65. While recognizing Increase or Decrease in
remains the same. This statement is - the Supply, we assume ______ remain
(a) True constant.
(b) False (a) Price
(c) Partially True (b) All Factors other than Price
(d) None of the above (c) Both (a) and (b)
60. Increase in quantity supplied, due to (d) Neither (a) nor (b)
changes in price, may also known as - 66. When there is a movement of the Supply
(a) Contraction of Supply Curve, we are referring to -
(b) Expansion of Supply (a) Change in Supply
(c) Increase in Supply (b) Change in Quantity Supplied
(d) Decrease in Supply (c) Both (a) and (b)
61. Increase in quantity supplied, due to (d) Neither (a) nor (b)
changes in price, may also known as - 67. Change in Supply means -
(a) Contraction of Supply (a) A movement on the
(b) Decrease in Supply same Supply Curve
(c) Increase in Supply (b) Shift of the Supply Curve
(d) Expansion of Supply (c) Both (a) and (b)
62. When more units of the product are supplied (d) Neither (a) nor (b)
at a higher price, it is called - 68. When there is a change in supply -
(a) Contraction of Supply (a) Supply Curve shifts
(b) Increase in Supply inward or outward
(c) Change in Supply (b) There is a upward / downward
(d) Expansion of Supply movement on the same Supply Curve
63. Contraction of Supply is the result of - (c) Both (a) and (b)
(a) Increase in the prices of (d) Neither (a) nor (b)
other goods 69. When higher quantities are
(b) Decrease in the price of the supplied, due to changes in
product concerned factors other than price, it is called
(c) Decrease in the number of Producers (a) Decrease in Supply
82
(b) Expansion of Supply (c) Inventions and Innovations on
(c) Contraction of Supply this commodity
(d) Increase in Supply (d) All of the above
70. When lower quantities are supplied, due to 75. A Decrease in the Supply of a product is
changes in factors other than price, it is caused by -
called (a) Technology or fashion
(a) Contraction of Supply change, making the
commodity outdated
(b) Increase in Supply
(b) Increase in the price of Related
(c) Decrease in Supply
Commodities
(d) Expansion of Supply
(c) Increase in Cost of Production of this
71. Which of the following factors will not result
Commodity
in the shifting of Supply Curve for Software
(d) All of these
Packages?
Use the following diagram to answer the next 11
(a) Increase in the wages of
questions
computer professionals
(b) Government tariffs on software
exports and imports
(c) Fall in the prices of software packages
(d) All of the above result in the shifting of
the curve
72. An Increase in the Supply of a product is
caused by
(a) Fall in the Prices of 76. Movement from S0 to S1 is called -
Factors of Production
(a) Contraction of Supply
(b) Fall in the Prices of other goods
(b) Increase in Supply
(c) Improvements in Technology
(c) Decrease in Supply
(d) All of these
(d) Expansion of Supply
77. Movement from S0 to S1 is caused by -
caused by
(a) Changes in Price of
(a) Reduction in the price
the product
of Related Commodities
(b) Changes in Factors other
(b) Reduction in Cost of
than price
Production of this Commodity
(c) Subsidies by Government for
producing this commodity.
78. Movement from S0 to S2 is called -
(d) All of these
(a) Decrease in Supply
caused by (b) Expansion of Supply
(a) Reduction in the price (c) Contraction of Supply
of Related Commodities (d) Increase in Supply
(b) Reduction in Cost of 79. Movement from S0 to S1 is caused by -
Production of this Commodity
83
(a) Changes in Price of (a) Movement from S0 to Si
the product (b) Movement from S0 to S2
(b) Changes in Factors (c) Movement on S0 itself
other than price
(d) None of these
84. Inventions and Innovations on this
(d) Neither (a) nor (b) commodity will cause a movement from -
80. Reduction in the price of Related (a) Movement from S0 to S1
Commodities will cause a movement from -
(b) Movement from S0 to S2
(a) Movement on S0 itself
(c) Movement on S0 itself
(d) No change at all
(c) Movement from S0 to S1
85. Technology or fashion change, making the
(d) No change at all commodity outdated, will lead to -
81. Increase in the price of Related (a) Movement from S0 to Si
Commodities will cause a movement from -
(a) Movement from S0 to St
(c) Movement on S0 itself
(b) Movement on S0 itself
(c) Movement from S0 to S2
86. If any Subsidies are by Government for
(d) No change at all producing this commodity, there will be a
82. Reduction in Cost of Production of this movement from -
Commodity will cause a movement from - (a) Movement from S0 to S1
(a) Movement from S0 to S1 (b) Movement from S0 to S2
(b) Movement from S0 to S2 (c) Movement on S0 itself
(c) Movement on S0 itself (d) No change at all
83. Increase in Cost of Production of this
Commodity will cause a movement from -
84
Elasticity and Equilibrium Price
ELASTICITY OF SUPPLY (c) Arc Elasticity Method

(d) All the above
1. Elasticity of Supply refers to the degree of 7. Which of the following method is not used
responsiveness of supply of a good to for measuring elasticity of supply?
changes in its (a) Arc Method
(a) Demand (b) Percentage Method
(b) Price (c) Total outlay Method
(c) Cost of Production (d) Point Method
(d) State of Technology 8. If Quantity Supplied increases by 60% for a
2. Which of the following has the lowest Price 50% increase in Price, Elasticity of Supply is -
Elasticity of Supply? (a) -0.83
(a) Items that have the least (b) +1.2
budgetary allocation
(c) -1.2
(b) Necessities
(d) +0.83
(c) Perishable Goods
9. If Price is ₹ 15, quantity supplied is 150 units.
(d) Luxury Items If Price is ₹ 25, quantity supplied is 300
3. In which of the following type of product, is units. Compute Price Elasticity of Supply
the Elasticity of Supply lowest? using Arc Method.
(a) Necessities (a) -1.09
(b) Luxury Goods (b) +1.09
(c) Perishable Goods (c) -0.98
(d) Perfect Substitutes (d) +0.98
4. Given the Market Demand, the burden of 10. When Supply is perfectly inelastic, Elasticity
specific tax that will be borne by the of Supply is equal to -
Consumer (Buyer) depends on the - (a) -1
(a) Price Elasticity of Supply (b) 0
(b) Type of the Product (c) +1
(c) Consumer's Ability (d) Infinity
(d) Price Elasticity of Demand 11. If as a result of a change in price, the
5. Elasticity of Supply is given by the formula - quantity supplied of a product remains
(a) ∆p/∆q X ∆ q/p unchanged, we conclude that -
(b) ∆p/∆q X p/q (a) Elasticity of Supply is
perfectly inelastic
(c) ∆q/∆p X q/p
(b) Elasticity of Supply is relatively
(d) ∆q/∆p X p/q
greater elastic
6. Elasticity of Supply can be measured by
(c) Elasticity of Supply is inelastic
(a) Percentage Change or
(d) Elasticity of Supply is relatively
Proportional Method
less elastic
(b) Point Elasticity Method
85
12. A Vertical Supply Curve parallel to Y axis (d) Upward sloping to the right
implies that the Elasticity of Supply is - 18. When change in the quantity supplied is
(a) Zero proportionate to the change in the price, the
(b) Infinity product is said to have -
(c) Equal to One (a) Unitary Elastic Supply
(d) Greater than Zero but less than infinity (b) Perfectly Elastic Supply
13. Elasticity of Supply is greater than one when (c) Relatively Elastic Supply
(a) Proportionate change (d) Perfectly Inelastic Supply
in price is greater than 19. If the Elasticity of Supply is Infinity, then
proportionate change Supply Curve will be -
in supply (a) Horizontal
(b) Proportionate change in supply is (b) Downward Sloping
greater than proportionate change in
(c) 45 degrees Straight Line
price
(d) Vertical
(c) Proportionate change in supply is
20. If ∆ = Change in Quantity Supplied, ∆p =
equal to proportionate change in price.
Change in Price, when Supply is perfectly
(d) None of these
inelastic, it means
14. If the Elasticity of Supply is Zero, then
(a) ∆q = Zero
Supply Curve will be -
(b) ∆p = Zero
(a) Horizontal
(c) ∆q < ∆p
(b) Downward Sloping
(d) ∆q > ∆p
(c) Upward sloping to the right
21. If ∆q = Change in Quantity Supplied, ∆p =
(d) Vertical
Change in Price, when Supply is perfectly
15. When Supply is perfectly elastic, Elasticity elastic, it means -
of Supply is equal to -
(a) ∆q = Zero
(a) -1
(b) ∆q > ∆p
(b) 0
(c) ∆q < ∆p
(c) +1
(d) ∆p = Zero
(d) Infinity
16. A Horizontal Supply Curve parallel to the Change in Price, when Supply is relatively
quantity axis implies that the Elasticity of elastic, it means
Supply is -
(a) ∆q < ∆p
(a) Zero
(b) ∆q = ∆p
(b) Infinite
(c) ∆q = Zero
(c) Equal to one
(d) ∆p = Zero
(d) Greater than zero but less than one.
17. If the Elasticity of Supply is Infinity, then Change in Price, when Supply is relatively
Supply Curve will be - elastic, it means
(a) Horizontal (a) ∆q = Zero
(b) Vertical (b) ∆q > ∆p
(c) Downward Sloping (c) ∆q < ∆p
86
(d) ∆p = Zero (d) All of these
24. If ∆q = Change in Quantity Supplied, ∆p = 30. Generally, the Demand Curve -
Change in Price, when Supply is relatively (a) Is parallel to X Axis
elastic, it means -
(b) Is parallel to Y Axis
(a) ∆q < ∆p
(c) Slopes upward from left to right
(b) ∆q = ∆p
(d) Slopes downward from left to right
(c) ∆q = Zero
31. Generally, the Demand Curve -
(d) ∆p = Zero
(a) Does not have a slope at all
25. Price is fallen by 20% brings above 10% fall
(b) Is negatively sloped
in quantity supplied then elasticity of supply
(c) Is positively sloped
is ______
(d) Has both positive and negative slopes
(a) 2.0
32. Generally, the Supply Curve -
(b) 0.5
(a) Is parallel to X Axis
(c) 1.0
(d) 1.5
EQUILIBRIUM PRICE WITH DEMAND & SUPPLY
33. Generally, the Supply Curve -
(a) Is negatively sloped.
26. Market Forces refer to -
(b) Is positively sloped.
(a) Demand
(c) Does not have a slope at all
(b) Supply
(d) Has both positive and negative slopes
34. In the table below, what will be Equilibrium
Price?
27. Which of these refer to "Market Forces'?
Price (in ₹) Demand Qty Supply Qty
(a) Price and Output
1 1000 400
(b) Demand and Supply 2 900 500
(c) Cost and Revenue 3 800 600
(d) None of the above 4 700 700
5 600 800
28. Demand & Supply interact in determining-
6 500 900
(a) Price and Output
7 400 1000
(b) Cost and Revenue 8 300 1100
(a) ₹ 5
(b) ₹ 3
29. Equilibrium price is where _______
(c) ₹ 4
(a) Market supply and market
(d) ₹ 2
demand are equal
35. P Q.D. Q.S. 1 500 200 2 450 250 3 400 300 4
(b) Firm supply ad market
350 350 5 300 400 6 250 450 7 200 550 8 150
demand are equal
600 What is equilibrium price
(c) Firm demand and market supply
(a) 1
are equal
87
(b) 2 (a) Equilibrium Price increases
(c) 3 and Quantity decreases
(d) 4 (b) Equilibrium Price and
Quantity both decrease
36. Other things being equal, as Demand
increases, Equilibrium Price - (c) Equilibrium Price and Quantity both
increase
(a) does not change at all
(d) Equilibrium Price decreases and
(b) increases
Quantity increases
(c) decreases
42. With a given Supply Curve, a decrease in
(d) cannot be commented upon.
Demand causes-
37. Other things being equal, as Demand
(a) No change in overall price
increases, Quantity at the Equilibrium
but a reduction in equilibrium
Price level -
quantity
(a) increases
(b) An overall increase in price but a
(b) decreases decrease in equilibrium quantity
(c) does not change at all (c) An overall decrease in price and a
(d) cannot be commented upon. decrease in equilibrium quantity
38. Other things being equal, as Demand (d) An overall decrease in price but an
increases increase in equilibrium quantity
(a) Equilibrium Price and 43. Other things being equal, as Supply
Quantity both increase increases, Equilibrium Price -
(b) Equilibrium Price decreases (a) Decreases
and Quantity increases (b) Increases
(c) Equilibrium Price increases and (c) Does not change at all
Quantity decreases
(d) Cannot be commented upon.
(d) Equilibrium Price and Quantity both
44. Other things being equal, as Supply
decrease
increases, Quantity at the Equilibrium Price
39. Other things being equal, as Demand level -
decreases, Equilibrium Price -
(a) Increases
(a) decreases
(b) Decreases
(b) increases
(c) Does not change at all
(c) does not change at all
40. Other things being equal, as Demand increases -
decreases, Quantity at the Equilibrium Price
(a) Equilibrium Price increases
level -
and Quantity decreases
(a) increases
(b) Equilibrium Price and Quantity
(b) decreases both decrease
(c) does not change at all (c) Equilibrium Price and Quantity both
(d) cannot be commented upon. increase
41. Other things being equal, as Demand (d) Equilibrium Price decreases and
decreases - Quantity increases
88
46. Other things being equal, as Supply (b) Equilibrium Price decreases
decreases, Equilibrium Price - and Quantity increases
(a) Decreases (c) Equilibrium Price increases
(b) Increases and Quantity decreases
(c) Does not change at ail (d) Equilibrium Price and Quantity
both decrease
52. If decrease in demand is greater than the
decrease in supply, then the Equilibrium
decreases, Quantity at the Equilibrium Price
Price -
level -
(a) Decreases
(a) Decreases
(b) Increases
(b) Increases
(d) Nothing to Say
53. If decrease in demand is greater than
decrease in supply, then the Quantity at the
decreases Equilibrium Price and
Equilibrium Price level -
Quantity both increase.
(a) Increases
(a) Equilibrium Price and
Quantity both decrease. (b) Decreases
(b) Equilibrium Price increases and (c) Does not change at all
Quantity decreases. (d) Cannot be commented upon.
(c) Equilibrium Price decreases and 54. If decrease in demand is greater than the
Quantity increases. decrease in supply, then -
(d) All of the above (a) Equilibrium Price increases
49. If increase in demand is greater than the and Quantity decreases
increase in supply, then the Equilibrium (b) Equilibrium Price and Quantity both
Price - decrease
(a) Decreases (c) Equilibrium Price and Quantity
(b) Increases both increase
(c) Does not change at all (d) Equilibrium Price decreases and
Quantity increases.
55. If increase in demand is equal to the
50. If increase in demand is greater than
increase in supply, then the Equilibrium
the increase in supply, then Quantity
Price -
at the Equilibrium Price level -
(a) Increases
(a) Increases
(b) Decreases
(b) Decreases
(d) None of these
56. If increase in demand is equal to the
51. If increase in demand is greater than the
increase in supply, then the Quantity
increase in supply, then -
at the Equilibrium Price level -
(a) Equilibrium Price and Quantity
(a) Increases
both increase
(b) Decreases
89
(c) Does not change at all (d) Cannot be commented upon.
(d) Cannot be commented upon. 62. If increase in demand is less than the
57. If increase in demand is equal to the increase in supply, then the Quantity at the
increase in supply, then - Equilibrium Price level -
(a) Equilibrium Price and (a) Increases
Quantity both increase. (b) Decreases
(b) Equilibrium Price and (c) Does not change at all
Quantity both decrease. (d) Cannot be commented upon.
(c) Equilibrium Price remains the same but 63. If increase in demand is less than the
Quantity increases. increase in supply, then -
(d) Equilibrium Price remains the same (a) Equilibrium Price increases
but Quantity increases. and Quantity decreases
58. If decrease in demand is equal to the (b) Equilibrium Price and
decrease in supply, then the Equilibrium Quantity both decrease.
Price -
(c) Equilibrium Price and Quantity
(a) Decreases both increase
(b) Increases (d) Equilibrium Price decreases and
(c) Does not change at all Quantity increases.
(d) Nothing to Say 64. If decrease in demand is less than the
59. If decrease in demand is equal to the decrease in supply, then the Equilibrium
decrease in supply, then the Quantity at the Price -
Equilibrium Price level - (a) decreases
(a) increases (b) increases
(b) decreases (c) does not change at all
(c) does not change at all (d) cannot be commented upon.
(d) cannot be commented upon. 65. If decrease in demand is less than the
60. If decrease in demand is equal to the decrease in supply, then the Quantity at the
decrease in supply, then - Equilibrium Price level -
(a) Equilibrium Price and (a) Increases
Quantity both increase. (b) Decreases
(b) Equilibrium Price and (c) Does not change at all.
(a) Equilibrium Price remains the same but (d) Cannot be commented upon.
Quantity increases. 66. If decrease in demand is less than the
(b) Equilibrium Price remains the same but decrease in supply, then -
Quantity increases. (a) Equilibrium Price and
61. If increase in demand is less than the Quantity both increase.
increase in supply, then the Equilibrium (b) Equilibrium Price and
Price - Quantity both decrease.
(a) Decreases (c) Equilibrium Price increases and
(b) Increases Quantity decreases.
(c) Does not change at all (d) Equilibrium Price decreases and
Quantity increases.
90
67. Which of the following situation does not constant Quantity both decrease.
lead to an rise in Equilibrium Price? 71. If the Supply of a commodity is perfectly
(a) An increase in demand, inelastic, a decrease in Demand will result in -
without a change in supply. (a) Decrease in both Price and
(b) A decrease in supply Quantity at equilibrium
accompanied by an increase in (b) Decrease in Equilibrium
demand. Quantity, Equilibrium Price
(c) A decrease in supply without a change remaining constant
in demand. (c) Increase in both Price and Quantity at
(d) An increase in supply accompanied by equilibrium
a decrease in demand. (d) Decrease in Equilibrium Price,
68. If the Supply of a commodity is perfectly Equilibrium Quantity remaining constant
elastic, an increase in Demand will result in - 72. If the Demand of a commodity is perfectly
(a) Decrease in both Price and elastic, an increase in Supply will result in -
Quantity at equilibrium (a) Decrease in both Price
(b) Increase in both Price and and Quantity at equilibrium
Quantity at equilibrium (b) Increase in both Price
(c) Increase in Equilibrium Quantity, and Quantity at equilibrium
Equilibrium Price remaining constant (c) Increase in Equilibrium Quantity,
(d) Increase in Equilibrium Price, Equilibrium Price remaining constant
Equilibrium Quantity remaining (d) Increase in Equilibrium Price,
constant Equilibrium Quantity remaining
69. If the Supply of a commodity is perfectly constant
elastic, a decrease in Demand will result in - 73. If the Demand of a commodity is perfectly
(a) Decrease in both Price and elastic, a decrease in Supply will result in -
Quantity at equilibrium (a) Decrease in both Price
(b) Decrease in Equilibrium and Quantity at equilibrium
Price, Equilibrium Quantity (b) Decrease in Equilibrium
remaining constant Price, Equilibrium Quantity
(c) Decrease in Equilibrium Quantity, remaining constant
Equilibrium Price remaining constant (c) Decrease in Equilibrium
(d) Increase in both Price and Quantity at Quantity, Equilibrium Price remaining
equilibrium constant
70. If the Supply of a commodity is perfectly (d) Increase in both Price and Quantity at
inelastic, an increase in Demand will result in - equilibrium
(a) Decrease in both Price 74. If the Demand of a commodity is perfectly
and Quantity at equilibrium inelastic, an increase in Supply will result in -
(b) Increase in both Price and (a) Decrease in both Price
Quantity at equilibrium and Quantity at equilibrium
(c) Increase in Equilibrium Quantity, (b) Increase in both Price
Equilibrium Price remaining constant and Quantity at equilibrium
(d) Increase in Equilibrium Price, (c) Increase in Equilibrium Quantity,
Equilibrium Quantity remaining Equilibrium Price remaining constant
91
(d) Increase in Equilibrium Price,. income rises and the price of a factor of
Equilibrium Quantity remaining production also increases. What point in
constant Figure 1 is most likely to be the new
75. If the Demand of a commodity is perfectly equilibrium price and quantity?
inelastic, a decrease in Supply will result in - (a) Point 5
(a) Decrease in both Price (b) Point 3
and Quantity at equilibrium (c) Point 9
(b) Increase in both Price and (d) Point 2
Quantity at equilibrium
78. We are analyzing the market for good Z. The
(c) Decrease in Equilibrium Quantity, price of a complement good, good Y,
Equilibrium Price remaining constant declines. At the same time, there is a
(d) Decrease in Equilibrium Price, technological advance in the production of
Equilibrium Quantity remaining good Z. What point Figure 1 is most likely
constant to be the new equilibrium price and
76. If a fisherman must sell all of his daily catch quantity?
before it spoils for whatever price he is (a) Point 4.
offered once the fish are caught. The (b) Point 5
Fisherman's Price Elasticity of Supply for
(c) Point 8
fresh fish is -
(d) Point 7
(a) Zero
79. Heavy rains in Maharashatra during 2005 and
(b) Infinity
2006 caused havoc with the rice crop. What
(c) One point in Figure 1 is most likely to be the new
(d) Can't determine equilibrium price and quantity?
The Below 7 Questions are based on the demand (a) Point 8
and supply diagrams below. S1 and D1 are the (b) Point 3
original demand and supply curves. D2 D3, S2
(c) Point 6
and S3 are possible new demand and supply
(d) Point 7
curves. Starting from initial equilibrium point (1)
what point on the graph is most likely to result 80. Assume that consumers expect the prices
from each change? on new cars to significantly increase next
year. What point in Figure 1 is most likely to
be the new equilibrium price and quantity?
(a) Point 3
(b) Point 5
(c) Point 8
(d) Point 6
81. What combinations of changes would most
likely decrease the equilibrium quantity?
(a) When supply increases
and demand decreases.
(b) When demand increases
77. Assume X is a normal good. Holding and supply decreases
everything else constant, assume that (c) When supply increases and
92
demand increases.
(d) When demand decreases and supply
decreases.
82. When a market is in equilibrium:
(a) A price is established that
clears the market
(b) Quantity demanded equals quantity
supplied
(c) No shortages exist
83. The market of computers is not in
equilibrium, then which of the following
statements is definitely true?
(a) The prices of computer
will rise
(b) The prices of computer
will fall
(c) The prices of computers will change,
but not enough information is given to
determine the direction of the change.
93
CHAPTER 5 - Production Concepts
PRODUCTION BASICS (CODE – PA) (c) Economic

1. In Economics.……… refers to any economic (d) Successful
activity, which is directed towards 7. Production does not include of
satisfaction of human wants. which of the following activities?
(a) Production (a) Changing the form of natural
(b) Economics resources
(c) Distribution (b) Changing the place of the resources
(d) Consumption (c) Both of the above
2. In Economics, Production refers to any (d) None of the above
economic activity - 8. Production = Creation of Utility.
(a) Which results in a tangible This statement is
product or commodity (a) True
(b) Which is directed towards (b) Partially True
satisfaction
(c) False
of human wants.
9. Production = Satisfaction of Utility.
This statement is
3. Which of the following statement
(a) True
is True? Production refers to-
(b) False
(a) Creation or addition of utility
(c) Partially True
(b) Conversion of raw material into
finished goods
10. Production refers to -
(c) An activity of making something
immaterial (a) Creation of value
(d) All of these (b) Addition of value
4. In Economics, Production means - (c) Both (a) and (b)
(a) Creation of utility (d) Neither (a) nor (b)
(b) Satisfaction of utility 11. Production refers to -
(c) Both (a) and (b) (a) Tangible goods and products
(d) Neither (a) nor (b) (b) Intangible services
5. Production may be defined as an act of- (c) Both (a) and (b)
(a) Creating utility. (d) Neither (a) nor (b)
(b) Earning profit. 12. Production can be defined as
(c) Destroying utility. (a) Creation of matter
(d) Providing services. (b) Creation of utility in matter
6. Production is a / an ……… activity. (c) Creation of infrastructural facilities
(a) Charitable (d) None of these
(b) Beneficial 13. Which of the following statements
94
regarding Service Industry is Correct? 19. Hawking of Fruits and Vegetables by a
(a) Service Industry uses Street Vendor is an example of Production
less Capital Equipment Activity. This statement is -
(b) Service Industry uses (a) True
more Capital (b) False
(c) Service Industry uses no Capital (c) Partially True
Equipment (d) None of the above
(d) Service Industry uses less Variable 20. Work of a Professional (like Chartered
Factors Accountant) does not result in any tangible
14. Production means - output. Hence, it is not a Production
(a) Capital Goods only Activity in Economics. This statement is -
(b) Consumer Goods only (a) Partially True
(c) Both (a) and (b) (b) False
(d) Neither (a) nor (b) (c) True
15. Production includes - (d) None of the above
(a) Mining 21. Which of these is a Production Activity?
(b) Manufacturing (a) Sale of Apples and Mangoes
(c) Service providing (b) Sale of Crackers during
Festival Season
(d) All of above
(c) Distributing Water Packets
16. Which of the following can be called as
in a temple festival
Production in Economics?
(a) Tilling of soil
22. In Economics, Production Activity
(b) Singing a song before friends
should involve -
(c) Preventing a child from falling
(a) Creation of new matter
into manhole on the road
(b) Addition of value to existing matter
(d) Painting a picture for pleasure
(a) Services of a Doctor are
considered Production 23. Production Activity involves creation of
Utility. Such Utility can be created as -
(b) Services of a Housewife
are consider Production (a) Place Utility
(c) Man can create matter (b) Time Utility
(d) When a man creates a table, he (c) Form Utility
creates matter (d) All of the above
18. Production of Mobiles by a Manufacturing 24. Production Activity involves creation of
Company is an example of Production Utility. Such Utility can be created as -
Activity. This statement is - (a) Personal Utility
(a) True (b) Form Utility
(b) False (c) Time Utility
(c) Partially True (d) All of the above
(d) None of the above 25. In Production Activity, one of the ways of
95
creating Utility is - (b) Personal Utility
(a) Form Utility (c) Time Utility
(b) Marginal Utility (d) Place Utility
(c) Total Utility 32. When Bangles and Ear-Rings are made from
(d) All of the above Gold, we refer to creation of -
26. Which of these is not a method of creating (a) Form Utility
Utility in Production? (b) Place Utility
(b) Marginal Utility (d) Personal Utility
(c) Place Utility 33. Raw Material converted into Finished
(d) Personal Utility Product in the manufacturing process,
refers to creation of
27. ……..Utility means physically changing the
form of natural resources. (a) Form Utility
(a) Form Utility (b) Personal Utility
(b) Place Utility (c) Place Utility
(c) Time Utility (d) Time Utility
(d) Personal Utility 34. If Apples from Kashmir are available for Sale
in Chennai, it refers to creation of -
28. ………Utility refers to changing the place of
the resources, from place of lesser use to (a) Form Utility
place of greater use. (b) Place Utility
(a) Time Utility (c) Time Utility
(b) Place Utility (d) Personal Utility
(c) Form Utility 35. If Oranges from Nagpur are made available
(d) Personal Utility for Sale in a Department Store in Indore, it
refers to creation of-
29. ……..Utility is created by making goods and
services available at times when they are (a) Form Utility
not normally available. (b) Place Utility
(b) Place Utility (d) Personal Utility
(c) Time Utility 36. If Garments from Jaipur are available for
(d) Personal Utility Sale in a Store in USA, it refers to creation of-
30. ………Utility involves making use of personal (a) Form Utility
skills in the form of services. (b) Place Utility
(a) Place Utility (c) Time Utility
(b) Form Utility (d) Personal Utility
(c) Time Utility 37. Moving or distributing goods from places of
(d) Personal Utility production (Origin Centres) to Markets
(destination centres) refers to creation of -
31. Making Furniture from raw Wood
is an example of creation of - (a) Form Utility
(a) Form Utility (b) Place Utility
(c) Time Utility
96
(d) Personal Utility (c) Factors of Production
38. Extraction from coal, minerals, gold, etc. (d) Ideas of Production
from Earth, refers to creation of - 44. Factors of Production are -
(a) Time Utility (a) Man Made Resources
(b) Place Utility (b) Natural Resources
(c) Form Utility (c) Both (a) and (b)
(d) Personal Utility (d) Neither (a) nor (b)
39. Place Utility involves Changing the place of 45. Land is a ………. Factor of Production.
the resources, from the place where they
(a) Natural
are of ……. use, to another place where they
(b) Man Made
are of …….. use.
(a) Lesser, greater
(b) General, specific
46. Which of these is not a basic Factor of
(c) Specific, general
Production in Economics?
(d) Greater, lesser
(a) Capital
40. Storing harvested foodgrains for use till
(b) Enterprise
next harvest is an example of creation of -
(c) Land
(a) Form Utility
(d) Money
(b) Place Utility
47. Which of the following is a
(c) Time Utility
factor(s) of production?
(d) Personal Utility
(a) Entrepreneurship
41. Work of Professionals like Doctors, CA, CS,
(b) Capital
etc. can be considered under -
(c) Labour
(a) Form Utility
(d) All of these
(b) Place Utility
48. The demand for a Factor of Production is
(c) Time Utility
called as a Derived Demand because-
(d) Personal Utility
(a) It is a function of the
42. To complete production, all four types of
profitability of an enterprise
utilities, i.e. Form, Place, Time and Personal
Utility, should be created. This statement is - (b) It depends on the supply of
complementary factors
(a) True
(c) Its stems from the demand for the
(b) False
final product
(c) Partially True
(d) It arises out of means being scarce in
relation to wants.
49. The Incentive / Reward in respect of Land is
FACTORS OF PRODUCTION called -
(a) Rent
43. Productive Resources required to produce (b) Wages
goods and / or services are called -
(c) Interest
(a) Resources of Production
(d) Profit
(b) Concepts of Production
50. The Incentive / Reward in respect of Labour
97
is called (d) Entrepreneurial Skills
(a) Interest 57. Which of these is an example of Land as a
(b) Wages Factor of Production?
(c) Rent (a) Agricultural Lands
(d) Profit (b) Forests
51. The Incentive / Reward in respect of Capital (c) Diamond Mines
is called (d) All of the above
(a) Rent 58. Which of these is included in "Land" as a
(b) Wages Factor of Production?
(c) Interest (a) Air
(d) Profit (b) Water
52. The Incentive / Reward in respect of (c) Fertility of Soil
Entrepreneurial Ability is called - (d) All of the above
(a) Wages 59. Anything available above the earth's surface
(b) Rent is called "Land". This statement is -
(c) Interest (a) Partially True
(d) Profit (b) False
(c) True
LAND (d) None of the above
53. Land refers to - 60. As a Factor of Production, Land is -
(a) All free gifts of nature. (a) A free gift of nature.
(b) All man-made resources (b) Fixed in quantity
(c) Both (a) and (b) (c) Variable in terms of fertility and uses
(d) Neither (a) nor (b) (d) All of above are correct.
54. Land means - 61. As a Factor of Production, Land is -
(a) Soil and earth's surface (a) Permanent
(b) Fertility of soil (b) Original and indestructible
(c) Natural resources (c) Free gift of nature
(d) All of the above (d) All of above are correct.
55. Gold Mines is an example of ……., as a Factor 62. As a Factor of Production, Land is -
of Production. (a) Fixed in quantity
(a) Land (b) Not useful for production
(b) Entrepreneurial Skills (c) Not quantifiable at all
(c) Labour (d) Variable in quantity
(d) Capital 63. As a Factor of Production, "Land" is a ……..
56. Reserves of Crude Oil is an example of …….., means of Production.
as a Factor of Production. (a) Original
(a) Land (b) Produced
(b) Labour (c) Derived
(c) Capital (d) Monetary
98
64. As a Factor of Production, the Supply of (d) None of the above
Land is ………..from the point of view of the 70. As a Factor of Production, Land has certain
economy. inherent properties, e.g. Fertility. These
(a) Perfectly elastic properties are -
(b) More elastic (a) Original
(c) Less elastic (b) Indestructible
(d) Perfectly inelastic (c) Both (a) and (b)
65. As a Factor of Production, the Supply of (d) Neither (a) nor (b)
Land is perfectly inelastic from the 71. If Land is used as a productive purposes, its
view point of - fertility is reduced. Such fertility -
(a) The entire economy (a) Can be restored
(b) An Individual Firm (b) Cannot be restored at all
(c) Both (a) and (b) (c) Is lost forever
(d) Neither (a) nor (b) (d) Both (b) and (c)
66. As a Factor of Production, the Elasticity of 72. As a Factor of Production, Land
Supply of Land from the viewpoint of the lacks mobility, Which means -
entire economy is -
(a) Land cannot be used for
(a) Positive anything other production of Rice.
(b) Zero (b) Land cannot be shifted from one place
(c) Negative to another place
(d) Infinite (c) Both (a) and (b)
67. As a Factor of Production, the Supply of (d) Neither (a) nor (b)
Land is ……….from the viewpoint of the 73. As a Factor of Production, Land lacks
entire economy. mobility in the …….. sense.
(a) Perfectly elastic (a) Geographical
(b) Relatively elastic (b) Utility
(c) Relatively inelastic (c) Both (a) and (b)
(d) Perfectly inelastic (d) Neither (a) nor (b)
68. As a Factor of Production, the Supply of 74. As a Factor of Production, Land is mobile
Land is relatively elastic from the viewpoint across
of -
(a) Places
(a) The entire economy
(b) Uses
(b) An Individual Firm
75. No two pieces of land are exactly alike in all
69. As a Factor of Production, Land is respects. This statement is -
permanent. It means that Land -
(a) True
(a) Remains before and
(b) Partially True
after cultivation
(c) False
(b) Cannot be destroyed or lost
(c) Cannot be used for production at all
76. Land is a specific factor of production. Why?
99
(a) It is a free gift of nature satisfaction
(b) It does not yield any result (c) Both (a) and (b)
unless human efforts (d) Neither (a) nor (b)
are employed.
82. Which of these constitute "Labour"?
(c) It is fixed and permanent
(a) Singing while walking on the road
(d) It cannot be used at all
(b) Singing against payment of a fee.
77. Which of the following is not a
(c) Singing in the company
characteristic of Land?
of friends for the sake
(a) Its supply for the economy is limited of pleasure
(b) It is immobile (d) None of the above
(c) Its usefulness depends 83. Which of these constitute "Labour"?
on human efforts
(a) Singing in the company
(d) It is produced by our forefathers of friends for the sake
78. Which one of the following is not a feature of pleasure.
of land (b) Singing against payment of a fee.
(a) A Free gift of nature (c) Singing while walking on the road
(b) Its supply is fixed (d) None of the above
(c) An active factor of production 84. Services of a Maid Servant constitutes
(d) It has Different Uses Labour, while Services of a Housewife
does not. This statement is
LABOUR (a) True
79. ……..refers to mental or physical exertion (b) False
directed to produce goods or services, and (c) Partially True
with a view to gain some economic reward. (d) None of the above
(a) Land 85. As a Factor of Production, "Labour" is a ……..
(b) Enterprise means of Production.
(c) Capital (a) Original
(d) Labour (b) Derived
80. Activities done out of pleasure, love and (c) Monetary
affection, pastime, hobbies, etc. may be (d) Produced
very useful in increasing human well-being,
86. Which of these constitute a feature of
and hence constitute Labour. This
"Labour", as a Factor of Production?
statement is -
(a) Human Efforts
(a) Partially True
(b) Perishable Nature
(b) False
(c) Weak bargaining power
(c) True
87. "Labour", as a Factor of Production include -
81. For economic significance, Labour must be
(a) Economic Considerations only
done with -
(b) Human and Psychological
(a) The motive of some
Considerations
economic reward
(b) The motive of pleasure and
100
(d) Neither (a) nor (b) (c) False
88. "Labour", as a Factor of Production include - (d) None of the above
(a) Free Gift of Nature 95. As a Factor of Production, "Labour" is
(b) Human Efforts perishable. The consequence of this is -
(c) Both (a) and (b) (a) The Labourer has to accept
the wage offered to him.
(b) There is no Reserve Price
89. "Labour", as a Factor of Production involves
for Labour.
human efforts, with a view to gain -
(c) The Labour has weak bargaining
(a) Pleasure only
power.
(b) Mental satisfaction
(c) An economic reward
96. Since there is no Reserve Price, Labour has -
(d) Use of time
(a) Weak bargaining power
90. As a Factor of Production, "Labour" is -
(b) Strong bargaining power
(a) Perishable
(c) No bargaining power
(b) Permanent
(d) Infinite bargaining power
97. The purpose of Labour Laws is primarily to -
(a) Increase bargaining
91. Which is not a characteristic of labour?
power of Labour
(a) Labour is not separable from labourer
(b) Maintain Labour Welfare
(b) Labour is perishable
(c) Guarantee work for each individual
(c) Labour is not a mobile factor
(d) Labour is an active factor
98. Labour is inseparable from the Labourer
92. As a Factor of Production, "Labour" is himself. This statement is -
perishable. It means that -
(a) True
(a) day's labour lost cannot be
(b) False
completely recovered subsequently.
(c) Partially True
(b) Every human being is mortal and will
have to leave this world some day or
the other. 99. If a Worker terminates his employment with
Company Z, he -
(a) Can get employed in another Company
(b) Cannot get employed in
93. As a Factor of Production, a day's "Labour"
any Company at all
lost cannot be -
(c) Becomes the Owner of
(a) Recovered at all
Company Z
(b) Measured at all
(d) Will not get any Wages at all
(c) Completely recovered
100. Labour can be classified as -
(a) Skilled
94. A Labourer cannot store his Labour, for use
(b) Semi-Skilled
at a later time. This statement is -
(c) Unskilled
(a) True
(b) Partially True
101
101. Labour Power depends upon - supply of Labour. This paradox
(a) Physical strength is attributed to -
(b) Education and skills (a) Some more members of the
family, who were not working
(c) Motivation to work
before, may start working.
(b) Workers may prefer to work overtime
102. All Labour is not productive in the sense
to increase their earnings.
that all efforts are not sure to produce
want-satisfying goods and services. This
statement is - (d) Neither (a) nor (b)
(a) True 107. Supply of Labour and Wage Rates are
directly related. This statement is -
(b) False
(a) False
(c) Partially True
(b) True
(c) Partially True
103. Generally, Supply of Labour and Wage Rates
are ……… related. (d) None of the above
(a) Directly 108. Supply of Labour and Wage Rates are always
directly related. This statement is -
(b) Inversely
(a) True
(c) Equally
(b) False
(d) Related at all.
(c) Partially True
104. Direct relationship between Wage Rates
and Supply of Labour means that - (d) None of the above
(a) Increase in Wage Rates will decrease 109. Supply of Labour and Wage Rates may
the Supply of Labour become inversely related at -
(b) Decrease in Wage Rates (a) Very high wage rates
will decrease the Supply (b) Very low wage rates
of Labour (c) Both (a) and (b)
(c) Increase in Wage Rates will increase (d) Neither (a) nor (b)
the Supply of Labour
110. Which of the following statements is not
(d) Increase in Wage Rates will not affect true about Labour Economies?
the Supply of Labour at all
(a) Division of Labour results in
105. Generally, Supply of Labour and Wage Rates improving worker's skills
are directly related. However, at very high
(b) Division of Labour is not profitable at
wage rates, there is a paradox of reduction
small scale of production
in labour. This paradox is attributed to -
(c) Larger Scale of Production enables
(a) Preference to restrict Supply
the division of labour
(b) Preference to have more
(d) Division of Labour is impossible in
of rest and leisure
Firms with large scale production
(c) Preference to earn more money
CAPITAL
106. Generally, Supply of Labour and Wage Rates
111. ……… is that part of wealth of an individual
are directly related. However, at very low
or community, which is used for further
wage rates, there is a paradox of excess
production of wealth, or which produce an
102
income. constitute "Capital"?
(a) Land (a) Factory Building
(b) Enterprise (b) Plant and Machinery
(c) Capital (c) Forests
(d) Labour (d) Dams and Canals
112. As a Factor of Production, "Capital" can be 119. As a Factor of Production, "Tools and
used for- Accessories" constitute -
(a) Further production of wealth (a) Enterprise

(b) Land
(b) Yielding further income income
(c) Capital
(d) Labour
120. As a Factor of Production, "Capital" is a
113. All Capital is Wealth, but all Wealth
……… concept.
is not Capital, This statement is -
(a) Stock
(a) True
(b) Flow
(b) Partially True
(c) False
121. Income arising out of "Capital" is a ………
114. All Wealth is Capital, but all Capital is not concept
Wealth. This statement is -
(a) Stock
(a) Partially True
(b) Flow
(b) False
(c) True
122. As a Factor of Production, "Capital" is a
115. If a Resource is lying idle, it will constitute - ………. means of Production.
(a) Wealth (a) Primary
(b) Capital (b) Original
(c) Both (a) and (b) (c) Produced
(d) Neither (a) nor (b) (d) Monetary
116. If a Resource is being used for generating 123. "Capital" is considered as a "produced
further revenue, it will lead to means of production". This statement is -
(a) Wealth (a) True
(b) Capital (b) Partially True
(c) Both (a) and (b) (c) False
(d) Neither (a) nor (b) (d) None of the above
117. Which of these constitutes "Capital'? 124. Capital ≠ Wealth. This statement is -
(a) Land (a) True
(b) Water (b) False
(c) Air (c) Partially True
(d) Plant and Machinery (d) None of the above
118. Which of these constitutes does not 125. As a Factor of Production, "Capital" is -
103
(a) A free gift of nature which are used for further production
(b) Produced by man alone of goods.
(c) Produced by man (c) Investment
working with nature (d) All of the above
(d) Not relevant at all. 132. Capital Formation is required for-
126. As a Factor of Production, "Capital" is - (a) Replacement and renovation of
(a) Produced by man working with nature existing machinery and equipment's
(b) Produced means of production (b) Creating additional productive
capacity
(c) Mobile
127. As a Factor of Production, Capital
has relative mobility in the ……… sense. 133. Capital Formation is required for -
(a) Geographical (a) Ensuring growth of the economy
(b) Utility (b) Expansion of output of consumer
goods in the future
(c) Increasing the e ciency of
production efforts
128. As a Factor of Production, Capital is mobile
(d) All the above
across -
134. For the purpose of Capital Formation -
(a) Places / Countries
(a) Current consumption is to be
(b) Uses / Purposes
sacrificed to a certain extent
(b) Current income should be saved
129. As a Factor of Production, "Capital" is -
(a) Perishable
135. When whole of the current capacity
(b) Permanent
is used to produce only Consumer Goods -
(a) Production of Consumer
(d) Neither (a) nor (b) Goods in the
future will be affected
CAPITAL FORMATION (b) Economy cannot grow in future
(c) Production Possibility Curve
130. The process of increase in the stock of real (PPC) cannot shift outside
capital in a country is called - (d) All of the above
(a) Stock Increase 136. Larger production of …….. goods would lead
(b) Capital Formation to higher production in future.
(c) Decrease in GDP (a) Public Goods.
(d) Resource Allocation (b) Capital Goods.
131. Capital Formation refers to- (c) Consumer Goods.
(a) A sustained increase in the stock of (d) Agricultural Goods.
real capital in a country. 137. Lesser production of ………. would lead to
(b) Production of more capital goods, lesser production in future
104
(a) Consumer Goods (b) Business Enterprises
(b) Public Goods (c) Government
(c) Capital Goods (d) None of the above
(d) Agriculture Goods 144. Level of Savings depends upon -
138. A 100% Consumption Economy - (a) Ability to Save
(a) Cannot have any Capital Formation (b) Willingness to Save
(b) Will become static (c) Both (a) and (b)
and cannot grow (d) Neither (a) nor (b)
(c) Both (a) and (b) 145. Ability to Save depends upon -
(d) Neither (a) nor (b) (a) Average level of income
139. Capital Formation can be possible by - (b) Distribution of
(a) Using whole of the current capacity national income.
to produce only Consumer Goods (c) Both (a) and (b)
(b) Reducing present consumption to a (d) Neither (a) nor (b)
certain extent
146. If there is an increase in income levels, the
(c) Both (a) and (b) propensity to consume -
(d) Neither (a) nor (b) (a) Reduces
140. If current consumption is reduced for the (b) Becomes zero
purpose of Capital Formation, it represents
(a) Uneconomic activity
(d) Increases
(b) Current sacrifice for
future growth
……… reduces.
(c) Decrease in demand and supply
(a) Propensity to consume
(d) Decrease in resources
(b) Propensity to save
141. Capital Formation means -
(a) Creation of Savings
(b) Mobilisation of Savings
(c) Investment of Savings propensity to save -
into Real Capital
(a) Decreases
(b) Increases
142. For the purpose of Capital Formation, which
of the following create "Savings" in an
(d) Becomes zero
economy?
(a) Individuals or Households
………. increases.
(b) Business Enterprises
(a) Propensity to consume
(c) Government
(b) Propensity to save
143. Under Capital Formation, which of the
following create maximum "Savings" in an
economy? 150. Higher the level of income, Higher is the
level of Savings. This statement is -
(a) Individuals or Households
105
(a) True (d) None of the above
(b) Partially True 157. …………. save by way of Retained Earnings,
(c) False i.e. Undistributed Profits.
(d) None of the above (a) Individuals or Households
151. Higher the level of income, Higher is the (b) Business Enterprises
level of Savings. This statement is true in (c) Government
respect of (d) None of the above
(a) Individual Households only 158. Which of these is a source of savings for
(b) Overall Economy Government?
(c) Both (a) and (b) (a) Tax and Fees Collections
(d) Neither (a) nor (b) (b) Profits of PSUs
152. A …….. country has greater ability to save (c) Both (a) and (b)
than a ……… country (d) Neither (a) nor (b)
(a) Rich, Poor 159. Which of these play a role in mobilisation of
(b) Poor, Rich savings in an economy?
(c) Good, Bad (a) Banks
(d) None of the above (b) Capital Market
153. Willingness to Save depends upon - (c) Financial Institutions
(a) An individual's concern about his (d) All of the above
future 160. Real Capital Formation requires -
(b) Social setup in which (a) An entrepreneurial class
the individual lives. which is prepared to bear
(c) Both (a) and (b) the risk of business
(d) Neither (a) nor (b) (b) Economic and industrial policies in
154. If Willingness to Save is higher, the level of which Investment is given initiative
…….. will be higher. (c) An inducement to invest, e.g.
(a) Voluntary Savings prospective rate of profit
(b) Compulsory Savings (d) All of the above
(c) Forced Savings 161. Inducement to Invest is influenced by -
(d) All of the above (a) Prospective Rate of Profit
155. If Willingness to Save is less, the level of (b) Rate of Interest
……… will be higher. (c) Both (a) and (b)
(a) Government regulated Savings (d) Neither (a) nor (b)
(b) Compulsory Savings 162. Prospective Rate of Profit is also called -
(c) Forced Savings (a) Marginal Cost
(d) All of the above (b) Marginal E ciency
156. ………. save by reducing their present of Capital
consumption. (c) Marginal Utility of Capital Employed
(a) Individuals or Households (d) Rate of Interest on Bank Deposits
(b) Business Enterprises 163. Scheme of Subsidies for setting up
(c) Government industries in backward regions leads to -
106
(a) Balanced Regional Development 169. Entrepreneurship gets its reward (i.e.
(b) Socially-Beneficial Capital Formation Profit), only after all other factors of
production have been rewarded. This
statement is -
(a) True
(b) Partially True
ENTREPRENEUR
(c) False
164. ………. is the person who combines the
170. The reward / incentive / remuneration for
various factors of production in the right
Entrepreneurship is a ……… amount.
proportions, initiates the process of
(a) Irrelevant
production and bears the risk involved in it.
(b) Variable
(a) Government
(c) Fixed
(b) Capitalist
(d) Semi-Variable
(c) Socialist
171. Enterpreneur holds the final responsibility
(d) Entrepreneur
of the business. This statement is -
165. The most important function of an
(a) True
entrepreneur is to ______.
(b) Partially True
(a) Innovate
(c) False
(b) Earn Profit
(c) Finance
172. The functions of an Entrepreneur include -
(d) Bear the sense of responsibility
(a) Initiating a business enterprise and
166 Entrepreneur is also called as -
resource coordination.
(a) Risk-Taker
(b) Risk-bearing or uncertainty-bearing
(b) Manager
(c) Introducing Innovations
(c) Organiser
on a continuous basis
167. Entrepreneurship is a wider term than
173. Innovation theory of entrepreneur is
organization and management of a
propounded by-
business. This statement is -
(a) Prof knight .
(a) True
(b) Schumpeter
(b) False
(c) Max weber
(c) Partially True
(d) Peter Ducker
174. Which of the following constitute
168. Entrepreneur -
Innovation?
(a) Gives direction to the
(a) Utilisation of new or
usage of other factors
improved source of
of Production.
Raw Material
(b) Is the catalyst in the process of using
(b) Introduction of a new or improved
the factors of production.
product
(c) Introduction of new or improved
107
production methods / machinery (d) All of the above
(d) All of the above 180. The difference between Economist's Profit
175. Which of the following constitute and Accountant's Profit is
Innovation? (a) Consideration of
(a) Opening-up new or indirect Cost
improved markets (b) Consideration of
(b) Utilisation of new or depreciation
improved source (c) Consideration of Opportunity Cost
of Raw Material (d) There is no difference
(c) Introduction of a new or improved 181. To enable Employees enjoy a good standard
product of living and maintain work-life balance, is a
(d) All of the above (a) National Objective
176. Organic Objectives of Enterprises - (b) Human Objective
(a) Growth and Expansion (c) Social Objective
(b) Survival (d) Economic Objective
(c) Both (a) and (b) 182. Which of the following is a National
(d) Either (a) or (b) Objective of an enterprise
177. Profit Making is _____objective - (a) To remove inequality of
(a) Organic opportunities and provide
fair opportunity to all to
(b) Social
work and to progress
(c) Economic
(b) To make the job contents
interesting and challenging
178. Accounting Profits is also called -
(c) To avoid profiteering and anti-social
(a) Book Profit practices
(b) Super profit (d) To maximize profits
(c) Pure Profit 183. To ensure that the Enterprise's output does
(d) Super Annual Profit not cause any type of pollution - air, water
179. Economic Profit is also called - or noise, is a
(a) Pure Profits (a) Social Objective
(b) Super Normal Profits (b) National Objective
(c) Abnormal Profits (c) Economic Objective
(d) Human Objective
108
Production Function
Production Function (a) purely technical relationship between

input & output
1. ……….. is the functional relationship (b) Purely economic relationship between
between physical inputs (i.e. factors of input & output
production), and physical outputs (i.e. (c) Both (a) & (b)
quantity of goods / services produced). (d) None of the these
(a) Demand-Supply Function 7. In a Production Function, Input means -
(b) Input-Output Function (a) Goods and Services produced
(c) Production Function (b) Factors of Production required
(d) Cost Function (c) Both (a) and (b)
2. Production Function deals with - (d) Neither (a) nor (b)
(a) Quantitative Values of Input and 8. In a Production Function, Output means -
Output
(a) Goods and Services produced
(b) Monetary Values of Products
(b) Factors of Production
(c) Both (a) and (b) required
(d) Neither (a) nor (b) (c) Both (a) and (b)
3. ……….shows the output produced with a (d) Neither (a) nor (b)
given amount of inputs.
9. Production Function states the relationship
(a) Isoquants between inputs and output, keeping
(b) Production Function technology
(c) Cost Function (a) Increasing trend
(d) Demand Function (b) Decreasing trend
4. ………. shows the overall output generated at (c) Zero
a given level of input. (d) Constant
(a) Isocost and Isoquants 10. Production Function specifies the ………..
(b) Production Function output that can be produced with given
(c) Marginal Rate of Substitution quantities of inputs, in the existing state of
technology.
(d) Cost Function
(a) Zero
5. Production Function explains the
relationship between - (b) Maximum
(a) Maximum Output which (c) Average
can be produced from given (d) Minimum
units of different inputs 11. Production Function specifies the ……….
(b) Maximum Output which can be quantities of various inputs that are required
produced at various points of time to yield a given quantity of output.
(c) Price and Cost (a) Minimum
(d) Various Stages of Production (b) Average
6. Production function is _______ (c) Maximum
109
(d) Zero one-unit increase in one output
12. In a Cobb-Douglas production function, two (d) All levels of output that can be
inputs are generated by those inputs
(a) Capital and Entrepreneur 17. In general, Production Functions measure -
(b) Capital and Labour (a) Economies of Scale
(c) Land and Labour (b) Productivity of factors of production
(d) Entrepreneur and land (c) Relation between the
13. Linder Cobb- Douglas production function factors of production
contribution of capital and labour (d) Relations between change in
respectively- physical inputs and physical output.
(a) 3/4th, l/4th 18. A Firm's Production Function-
(b) 1/4th, 3/4th (a) Shows how much output
(c) 1/2th, 1/2th and the level of input
required for the firm to
maximize profits
14. Production Function specifies -
(b) Shows labour force which is employed
(a) Maximum amount of output
(c) Shows the maximum output that can
that can be produced with
be produced with a given amount of
given quantities of inputs
inputs with available technology.
(b) Minimum quantities of
(d) Establishes the minimum level of
various inputs that are required to
output that can be produced using the
yield a given quantity of output.
available resources
19. Which of the following is/are an outcome of
a technological change?
15. Which of the following is the best definition
(a) A downward shift in the
of the "Production Function'?
production function
(a) The relationship between
(b) Same output with fewer inputs
the quantity of inputs and
or more output with same inputs
the firm's marginal cost of production
(c) Invention of a product or production
(b) The relationship between the firm's
process
total revenue and the cost of
(d) Both (b) and (c) above
production
20. Which of the following statements
(c) The relationship between the
regarding Production Function is false?
quantities of inputs needed to
produce a given level of output (a) It just shows the relationship
between output and input
(d) The relationship between market price
and quantity supplied (b) It does not provide any information
on the least-cost Capital Labour
16. The Production Function is a relationship
combination
between a given combination of inputs and-
(c) In reveals the output that yields the
(a) Another combination that
maximum profit
yields the same output
(d) Both (a) and (c)
(b) The highest resulting output
(c) The increase in output generated by
110
Short Run vs. Long Run 27. In the short-run, ……… factors of
production changes.
21. The time period covered in Economics (a) Proportion between
Study is / are - (b) Quantity of
(a) short-run (c) Both (a) and (b)
(b) long-run (d) Neither (a) nor (b)
(c) Both (a) and (b) 28. In the short-run, the proportion between
(d) Neither (a) nor (b) factors of production -
22. ……… is the period of time in which all but (a) Is zero
one factor of production are variable. (b) Changes
(a) Short-run (c) Remains constant
(b) Long-run (d) Is infinity
(c) Medium-run 29. In the short-run, the proportion between
(d) Allof the above factors of production changes because -
23. In the short-run, ……….factor of production (a) One of the Factor is kept constant
is / are variable. (b) There is no explanation for
(a) All such behaviour
(b) None (c) It is not the long-run
(c) One (d) Every Factors is kept constant
(d) None of the above 30. Law of ……… is applicable in the short-run.
24. Variable Factors means those Factors of (a) Variable Proportions
Production - (b) Returns to Scale
(a) Which can be only changed (c) Both (a) and (b)
in the long run (d) Neither (a) nor (b)
(b) Which can be changed in 31. Law of Variable Proportions is applicable to -
the short run
(a) Medium-run
(c) Which can never be changed
(b) Short-run
(c) Long-run
25. There is only one Fixed Factor of
Production in the short-run planning
32. Which of the following activities cannot
horizon. This statement is -
take place in the short-run?
(a) True
(a) Changing the input combination
(b) Partially True
(b) Changing the quantity
(c) False
of labour employed
(c) Regular maintenance of the
26. The difference between Fixed and Variable Plant to ensure e cient production
Factors of Production is relevant in -
(d) Installation of an Additional Plant
(a) Medium-run to meet future requirements
(b) Short-run 33. In describing a given production technology,
(c) Long-run the short run is best described as lasting -
111
(a) As long as all inputs are fixed (a) Medium-run
(b) Up to six months from now (b) Short-run
(c) Up to five years from now (c) Long-run
(d) As long as at least one input is fixed (d) All of the above
34. The short run, as economists use the 40. In the long-run, …………factors of
phrase, is characterized by - production changes.
(a) At least one fixed factor of (a) Proportion between
production and firms neither (b) Quantity of
leaving nor entering the industry
(c) Need for
(b) All inputs being variable
(c) No variable inputs - that is all of the
41. In the long-run, the quantity of factors of
factors of production are fixed
production
(d) A period where the law of diminishing
(a) Remains constant
returns does not hold
(b) Changes
35. ………. is the period of time in which all the
(c) Is zero
factors of production are variable.
(d) Is infinity
(a) Short-run
42. In the long-run, the quantity of factors of
(b) Long-run
production changes because -
(c) Medium-run
(a) There is no explanation for
such behaviour
36. In the long-run, ……… factor(s) of
(b) Every Factor is kept constant
production is /are variable.
(c) Every Factor is considered variable
(a) All
(d) One of the Factor is kept constant
(b) Many
43. Law of …………. is applicable in the long-run.
(c) Two
(a) Variable Proportions
(d) None
(b) Returns to Scale
37. All Factors of Production become variable
in -
(a) Medium-run
44. Law of Returns to Scale is applicable to -
(b) Short-run
(a) Medium-run
(c) Long-run
(b) Short-run
(c) Long-run
38. There is no Fixed Factor of Production in
the long- run planning horizon. This (d) All of the above
statement is - 45. Which of the following statements
(a) True regarding short run and long run is true?
(b) False (a) Firms plan for the long run but
operate in the short run
(c) Partially True
(b) Firms operate and plan
as well in the short run
39. The difference between Fixed and Variable
(c) Firms operate and plan as well in the
Factors of Production arises only in -
long run
112
(d) Firms plan in the short run but in the long run
operate in the long run (a) Plant
46. Main difference between the short run and (b) Product
the long run is -
(c) Process
(a) In the short run all inputs are
(d) There is no relationship between
fixed, while in the long run
innovation processes and standard
all inputs are variable
of living
(b) In the short run the Firm varies
all of its inputs to find the least-cost
Total, Average and Marginal Product
combination of inputs
(c) In the short run, at least one of the
Firm's input levels is fixed 51. ………… is the total output resulting from the
efforts of all the factors of production,
(d) In the long run, the Firm is making a
combined together at any time.
constrained decision about how to
use existing Plant and equipment (a) Total Product
e ciently (b) Average Product
47. ……….is the improvement in the production (c) Marginal Product
techniques for existing production. . (d) None of the above
(a) Process Innovation 52. ………… is the Total Product per unit of the
(b) Production Function Variable Factor.
(c) Production Innovation (a) Total Product
(d) Plant Innovation (b) Average Product
48. The introduction of new product with added (c) Marginal Product
features in the market is known as - (d) All of the above
(a) Process Innovation 53. ………..= Total Product -f Quantity of the
(b) Product Innovation Variable Factor.
(c) Production Function (a) Total Product
(d) Plant Innovation (b) Average Product
49. Which of the following statements (c) Marginal Product
regarding Product and Process Innovation (d) None of the above
is true?
54. ………….is the change in Total Product, for
(a) It is di cult to quantify one unit change in the quantity of Variable
product innovation, as Factor.
compared to process innovation
(a) Total Product
(b) It is di cult to quantify process
(b) Average Product
innovation, as compared to product
(c) Marginal Product
innovation
(c) Neither of the innovation types can
quantified 55. is the addition made to Total Product, by an
additional unit of input of the Variable
(d) Quantifying both the innovation types
Factor.
is equally easy / di cult
(a) Average Product
50. ……….. Innovation is of more importance as
it helps in increasing the standard of living (b) Total Product
113
(c) Marginal Product
(d) None of the above (d) All of the above
56. Marginal Product is - 60. If the inputs of all but one factor are held
constant, then Total Factor will -
(a) The change in Total Product,
for one unit change in the quantity (a) Remain constant
of Variable Factor. (b) Become infinity
(b) The addition made to Total Product, (c) Vary with the quantity used of the
by an additional unit of input of the Variable Factor.
Variable Factor (d) Become zero
(c) Both (a) and (b) 61. When 50 hours of Labour are spent, total
(d) Neither (a) nor (b) output quantity is 2,000 units. When 55
57. The Marginal Product of an input is ………. hours of Labour are spent, total output
quantity is 2,250 units. Here, Marginal
(a) Extra product produced by one extra
Product will be -
unit of input while other inputs are
held constant (a) 2,250
(b) Extra product produced by reducing (b) 2,000

one unit of input while other inputs (c) 250
are held constant (d) 50
(c) Reduction in total product 62. Suppose the first four units of a variable
due to one extra unit of input input generate corresponding total outputs
while other inputs are held constant of 150, 200, 350 and 550. The marginal
(d) Reduction in total product by product of the third unit of input is:
reducing one unit of input while other (a) 200
inputs are changing. (b) 250
58. The Marginal Product of a variable (c) 150
input is best described as-
(d) 50
(a) Total product divided by the
Use the following information to answer next 3
number of units of variable input
questions
(b) The additional output resulting from a
one unit increase in the variable input
Hours of Total Marginal
(c) The additional output resulting from a Labour Output Product
one unit increase in both the variable 0 - -
and fixed inputs 1 100 100
(d) The ratio of the amount of the 2 - 80
variable input that is being used to 3 240 -
the amount of the fixed input that is
being used
63. What is the Total Output when 2 hours of
59. If the inputs of all but one factor are held Labour are employed?
constant, then …….. will vary with the
(a) 80
quantity used of the Variable Factor.
(b) 300
(a) Total Product
(c) 180
(b) Marginal Product
(d) 200
(c) Average Product
114
64. What is the Marginal Product of the third (c) 600
hour of Labour? (d) 400
(a) 60 70. Find the value of "E" in the above Table.
(b) 80 (a) 1,000
(c) 100 (b) 1,600
(d) 240 (c) 1,700
65. What is the Average Product of the first (d) 2,100
three hours of Labour?
71. Find the value of "F" in the above Table.
(a) 60
(a) 500
(b) 80
(b) 600
(c) 85
(c) 700
(d) 240
(d) 800
Let TP = Total Product, AP = Average Product
72. Find the value of "G" in the above Table.
and MP = Marginal Product. Use the following
(a) 535
table and answer the next 10 Questions
(b) 525
Quantity of TP AP MP
(c) 550
Variable Factor (in units) (in units) (in units)
1 1,000 A B (d) 575
2 C D 600 73. Find the value of "H" in the above Table.
3 E 700 F (a) Nil
4 2,100 G H (b) 1,000
5 I 400 J
(c) 2,000
(d) Cannot be calculated
66. Find the value of "A" in the above Table.
74. Find the value of "I" in the above Table.
(a) 1,000
(a) 1,100
(b) 2,000
(b) 1,000
(c) 3,000
(c) 2,000
(d) 0
(d) Cannot be calculated
67. Find the value of "B" in the above Table.
75. Find the value of "J" in the above Table.
(a) 1,000
(a) Nil
(b) 2,000
(b) -100
(c) 0
(c) + 100
(d) 3,000
(d) 110
68. Find the value of "C" in the above Table.
76. If Total Product = 1,00,000 units when
(a) 1,000
20,000 hours of Labour are used, then Total
(b) 1,300
Product =
(c) 1,600
(a) 1,00,000
(d) 1,900
(b) 20,000
69. Find the value of "D" in the above Table.
(c) 50
(a) 1,000
(d) 1,20,000
(b) 800
115
77. If Total Product = 1,00,000 units when 82. Output per worker is maximized at a Labour
20,000 hours of Labour are used, then Input of:
Average Product= (a) 2
(a) 1,00,000 (b) 4
(b) 20,000 (c) 6
(c) 5 (d) 8
(d) 1,20,000 83. The firm's output is at a short run maximum
Read the Table below & answer the following at a Labour Input of:
8questions (a) 2
(b) 3
Labour Marginal Total Average
(c) 4
Input Product Product Product
0 0 0 0 (d) 5
1 25 84. When Labour Input = 5, Marginal Product is-
2 90 (a) -1
3 120 (b) 120
4 140
(c) 0
5 28
6 20 (d) -120
85. At what level of Labour Input are MP and AP
78. If Labour Input = 1, Total Output is- equal?
(a) 25 (a) 1
(b) 30 (b) 2
(c) 50 (c) 3
(d) 75 (d) 4
79. If Labour Input = 2, Marginal Product is- 86. As quantity of the Variable Factor increases,
Total Product (TP) Curve -
(a) 25
(a) Always increases
(b) 90
(b) First decreases, reaches a
(c) 65
minimum, and then increases.
(d) 115
(c) First increases, reaches a maximum,
80. If Labour Input = 4, output per worker is:
and then decreases.
(a) 20
(d) Always decreases
(b) 35
87. If Total Product (TP) increases, Marginal
(c) 55 Product (MP) will be -
(d) 90 (a) Positive
81. If Labour Input = 6, the marginal product of (b) Negative
labour is:
(c) Zero
(a) 120
(d) Infinity
(b) -20 88. If Total Product (TP) increases at an
(c) 15 increasing rate, Marginal Product (MP) will be -
(d) -10 (a) Increasing
116
(b) Infinity 95. Marginal Product (MP) -
(c) Zero (a) Will have positive values only
(d) Decreasing (b) Will have negative values only
89. If Total Product (TP) increases at a (c) Can be positive or zero or even
decreasing rate Marginal Product (MP) will negative.
be - (d) Can be positive or zero, but not
(a) Increasing negative.
(b) Decreasing 96. If Marginal Product (MP) Curve is depicted on
(c) Zero a graph with Quantity on X axis -
(d) Infinity (a) MP will not go below the X axis.
90. If Total Product (TP) is maximum, Marginal (b) MP may go below the X axis.
Product (MP) will be - (c) MP cannot be depicted on
(a) Positive the graph at all.
(b) Infinity (d) None of the above
(c) Zero 97. Average Product (AP) -
(d) Negative (a) Can be positive or zero or
even negative.
91. What is the maximum point of TP?
(b) Will have negative values only
(a) When AP becomes zero
(c) Will have positive values only
(b) When MP becomes zero
(d) Can be positive or zero, but not
(c) At the intersecting point of AP & MP
negative.
(d) None of these
98. What Is the relationship between AP and MP?
92. If TP reduces, MP will be -
(a) AP and MP both rise first
(a) Zero
and there after fall
(b) Negative
(b) MP Curves always lies
(c) Positive half-way between AR Curve and Origin
(d) Infinity (c) AP and MP both can be zero or
93. Marginal Product (MP) Curve - negative
(a) Is parallel to X Axis (d) None of these
(b) Is parallel to Y Axis 99. If Average Product (AP) Curve is depicted on
(c) First decreases, reaches a minimum, a graph with Quantity on X axis -
and then increases (a) AP will not go below the X axis.
(d) First increases, reaches a maximum, (b) AP may go below the X axis.
and then decreases (c) AP cannot be depicted on
94. Average Product (AP) Curve - the graph at all.
(a) First decreases, reaches a minimum, (d) All of the above
and then increases 100. Which of the following is correct?
(b) Is parallel to Y Axis (a) If Marginal Product is
(c) Is parallel to X Axis positive and falling, Total
(d) First increases, reaches a maximum, Product will rise at a decreasing rate.
and then decreases (b) Total Product divided by Quantity of
Variable Factor equals Average
117
Product. input -
(c) Marginal Product and Average (a) MP < AP
Product can be calculated from Total (b) MP = AP
Product.
(c) MP > AP
(d) There is no relationship between MP
101. The point where MP is maximum is called - and AP
(a) Point of Shut-down 108. When Average Product (AP) decreases as a
(b) Point of Indifference result of an increase in the quantity of
(c) Point of Inflexion variable input -
(d) Point of Increase (a) MP is more than AP.
102. At what point is the Marginal Product (b) MP is less than AP.
maximum? (c) MP = AP
(a) Turning Point (d) There is no relationship between
(b) Equilibrium Point MP and AP
(c) Focal Point 109. When Average Product (AP) decreases as a
result of an increase in the quantity of
(d) Inflexion Point
variable input-
103. At the Point of Inflexion, the Marginal
(a) MP < AP
Product is -
(b) MP = AP
(a) Increasing
(c) MP > AP
(b) Negative
(d) There is no relationship between
(c) Maximum
MP and AP
(d) Decreasing
110. When Average Product (AP) decreases as a
104. At the Point of Inflexion -
result of an increase in the quantity of
(a) Total Product is maximum variable input -
(b) Average Product is maximum (a) MP < AP
(c) Marginal Product is maximum (b) MP > AP
(d) None of the above (c) MP = AP
105. At the Point of Inflexion, TP will generally - (d) There is no relationship between
(a) Show increasing trend MP and AP
(b) Show decreasing trend 111. If the Marginal Product of Labour is below
(c) Equal to zero the Average Product of Labour, it must be
true that
(d) Be negative
(a) The Marginal Product of
106. When AP rises as a result of an increase in
Labour is negative
the quantity of variable input -
(b) The Marginal Product of Labour is zero
(a) MP is more than AP.
(c) The Average Product of Labour is
(b) MP is less than AP
falling
(c) There is no relationship between MP
(d) The Average Product of Labour is
and AP
negative
(d) MP = AP
112. When Average Product (AP) is at its
107. When Average Product (AP) rises as a result
maximum
of an increase in the quantity of variable
118
(a) MP = 0 118. Marginal Product (MP) Curve cuts Average
(b) MP = AP Product (AP) Curve -
(c) MP < AP (a) From above
(d) MP > AP (b) From below
113. The Average Product of Labour is (c) MP does not cut AP at all
maximized when Marginal Product of (d) Nothing can be said
Labour - 119. Marginal Product (MP) rises steeply, and
(a) Equals the Average Product of Labour also declines slightly earlier than Average
(b) Equals zero Product (AP) Curve. This statement is -
(c) Is maximized (a) True
(d) None of the above (b) False
114. Marginal Product (MP) Curve cuts Average (c) Partially True
Product (AP), when - (d) None of the above
(a) MP = 0 120. The Marginal, Average, and Total Product
(b) MP = AP Curves encountered by the Firm producing in
the short run exhibit all of the following
(c) MP > AP
relationships except -
(d) MP < AP
(a) When Average Product is
115. When Marginal Product (MP) = Average
at a maximum, Marginal
Product (AP), it means that AP is -
Product equals Average Product,
(a) At its maximum and Total Product is rising
(b) At its minimum (b) When Marginal Product is negative,
(c) Zero Total Product and Average Product
(d) Infinity are falling
116. Marginal Product (MP) Curve cuts Average (c) When Total Product is rising, Average
Product (AP) Curve - and Marginal Product may be either
rising or falling
(a) MP = AP
(d) When Marginal Product is at a
(b) AP is maximum
maximum, Average Product equals
(c) MP is falling
Marginal Product, and Total Product
(d) All of the above is falling
117. When is Average Product at its maximum?
(a) When AP intersects MP
(b) When AP intersects TP
(c) At the Point of Inflexion
119
Law of variable proportions
LAW OF VARIABLE PROPORTIONS (a) Medium-run

(b) Short-run
1. The Law of ……….. analyses the production (c) Long-run
function with one factor as variable, keeping (d) All of the above
quantities of other factors fixed.
7. The Law of Variable Proportions is also
(a) Fixed Proportions called -
(b) Multiple Proportions (a) Law of Diminishing Marginal
(c) Variable Proportions Physical Productivity
(d) Returns to Scale (b) Law of Diminishing Returns
2. The Law of Variable Proportions analyses (c) Law of Proportionality
The ………. with one factor as variable, (d) All of the above
keeping quantities of other factors fixed.
8. The Law of Variable Proportions deals with
(a) Revenue Function
(a) Output Quantities
(b) Production Function
(b) Monetary Values
(c) Cost Function
(d) Demand and Supply Function
3. The Law of ……….deals with input-output
9. Which of the following is an assumption in
relationship, when the output is increased
the Law of Variable Proportions?
by varying the quantity of one input.
(a) The state of technology
(a) Variable Proportions
is constant and unchanged
(b) Returns to Scale
(b) Only physical quantities
(c) Demand of inputs and outputs are
(d) Supply considered
4. Which Law examines the production (c) Only one factor input is considered
function keeping one factor variable? variable, while all other factors are
(a) Law of Returns to Scale fixed
(b) Law of Increasing Returns (d) All of the above
to Scale 10. Which of the following is an assumption in
(c) Law of Variable Proportion the Law of Variable Proportions?
(d) Law of Diminishing Marginal Utility (a) Factors of Production can
be used in any proportion
5. The Law of Variable Proportions operates in -
(b) There are no perfect
(a) Medium-run
substitutes for the Fixed Factor
(b) Short -run
(c) The Fixed Factor of production
(c) Long-run
is scarce
6. In the ………., all factors of production
11. Assumption which are applicable under Law
cannot be increased or decreased
of Variable Proportion are-
simultaneously.
120
(a) State of technology is (c) Partially True
constant (d) None of the above
(b) Quantities of some inputs 16. The Law of Variable Proportions assumes
is kept fixed that factors of production -
(c) Economic profitability in monetary (a) Do not affect production
terms is not considered
(b) Can be used in any
(d) All of these proportion
12. Which of the following is not an assumption (c) Cannot be used at all
in the Law of Variable Proportions?
(d) Can be used only in a specified
(a) Only physical quantities proportion
of inputs and outputs are
17. In agriculture, the land area is taken as
considered
constant, while number of workers can be
(b) Factors of Production can increased. If we apply the Law of Variable
be used in any proportion Proportions in this situation, it means that
(c) There are no perfect substitutes for the Fixed Factor of Production is -
the Fixed Factor (a) Number of workers
(d) None of the above (b) Land
13. Which of the following is not an assumption (c) Units of Output produced
in the Law of Variable Proportions?
(d) All the above
(a) There are no perfect
18. In agriculture, the land area is taken as
substitutes for the Fixed
constant, while number of workers can be
Factor
increased. If we apply the Law of Variable
(b) Only one factor input is Proportions in this situation, it means that
considered variable, while all other the Variable Factor of Production is -
factors are fixed.
(a) Number of workers
(c) State of Technology is improved as
(b) Land
more output is produced
(d) Only physical quantities of inputs and
outputs are considered
19. In the production of wheat, all of the
14. Law of Variable Proportions is valid when -
following are variable factors that are used
(a) Only one input is varied
by the farmer except -
and all other inputs are
(a) The seed and fertilizer
kept constant
used when the crop is
(b) All Factors are kept constant
planted
(c) All inputs are varied in the same
(b) The field that has been
proportion
cleared of trees and in which the crop
(d) None of the above is planted
15. The Law of Variable Proportions analyses (c) The tractor used by the farmer in
the economic profitability of the Firm in planting and cultivating not only wheat
monetary terms also. This statement is - but also corn and barley
(a) True (d) The number of hours that the farmer
(b) False spends in cultivating the wheat fields
121
20. If all factors are required to be used in fixed Utility
proportions, then the Law of Variable (c) Law of Variable Proportions
Proportions -
(d) Law of Constant Returns
(a) Will apply
25. When a Factory is working at 70% capacity,
(b) Will not apply at all increasing of variable inputs, leads to-
(c) Neither (a) nor (b) is true (a) Decreasing of output up
(d) Both (a) and (b) are true to some extent to full capacity and later
21. As per Law of Variable Proportions, as the increasing of the output
quantity of one input which is combined with (b) Decreasing of output according to the
other fixed inputs is increased, the ……… of Law of Diminishing Returns
the Variable Input must eventually decline, (c) Increasing of output up to full capacity
(a) Total Productivity and later decreasing of the Marginal
(b) Average Productivity Product according to the Law of
Diminishing Returns
(c) Marginal Productivity
(d) Increasing of output
(d) All the above
26. The order of stages in the Law of Variable
22. The Law of Variable Proportions is drawn
Proportions are -
under all of the assumptions mentioned
below except the assumption that - (a) Increasing Returns,
Negative Marginal Returns,
(a) The Technology is
Diminishing Returns
changing
(b) Increasing Returns, Diminishing
(b) There must be some
Returns, Negative Marginal Returns
inputs whose quantity is
kept fixed (c) Negative Marginal Returns, Increasing
Returns, Diminishing Returns
(c) The technology is given and stable
(d) Diminishing Returns, Negative Marginal
(d) We consider only physical inputs and
Returns, Increasing Returns
not economically profitability in
monetary terms 27. Which of the following is not a stage in Law
of Variable Proportions?
23. The Law of Variable Proportions come into
being when- (a) Diminishing Returns
(a) There are only two (b) Constant Returns
variable factors. (c) Increasing Returns
(b) There is a fixed factor (d) Negative Returns
and a variable factor. 28. The stage of Increasing Returns applies
(c) All factors are variable. from ………. To ……….
(d) Variable factors yield less. (a) Origin to Point where AP
24. ……….. states that when Labour increases is maximum
with capital being the same, the Marginal (b) Point where AP is maximum
Productivity of Labour will rise at first but to Point when TP is maximum
start falling later. (c) Point when TP declines and and
(a) Law of Equi-Marginal MP becomes negative.
Returns (d) None the above
(b) Law of Diminishing Marginal 29. In the stage of Increasing Returns, Total
122
Product (TP)- (c) Marginal Cost must be falling at an
(a) Remains constant increasing rate
(b) Increases (d) Both (a) and (c)
(c) Decreases 35. Why does the Law of Increasing Returns
operate?
(d) Becomes negative
(a) Full Use of Fixed Indivisible
30. In the stage of Increasing Returns, Average
Factors
Product (AP)-
(b) E ciency of Variable Factors
(a) Decreases
(c) Need to reach the right combination
(b) Increases
36. Which of these is a reason for the operation
of Law of Increasing Returns?
31. In the stage of Increasing Returns, Marginal
(a) Effective use of Fixed
Product (MP)-
Factor of Production
(b) Division of Labour
(b) Increases
(c) Specialisation of functions
(c) Decreases
(d) First increases, reaches a maximum
37. Which of the following is the reason of the
and then decreases
working of law of increasing returns?
32. What result we get in the first stage of Law
(a) Fuller utilization of fixed
factor
(a) Total Product is increasing
(b) Indivisibility of factor
at an increasing rate
(c) Greater specialization of factor
(b) Average Product increases
only till Inflexion Point (d) All of the above
(c) (a) but not (b) 38. The stage of Diminishing Returns applies
from ……… to ……….
(d) Both (a) & (b)
(a) Origin to Point where
33. Which of the following is true?
AP is maximum
(a) MP does not decrease
(b) Point where AP is
during the First Stage
maximum to Point when
(b) TP remains positive
TP is maximum
during the First Stage
(c) Point when TP declines and MP
(c) AP starts declining after the Point
becomes negative.
of Inflexion
(d) None the above
(d) All of these
39. The Law of Diminishing Returns -
34. A Firm is operating at an output level, where
(a) States that beyond some
its Total Product is increasing at an
level of a variable input,
increasing rate. This implies that the Firm's
the Average Product of that
(a) Average Product is
variable input begins to increase
increasing
steadily.
(b) Marginal Product is
(b) Assumes that there is technological
increasing at a increasing rate
improvement over time.
123
(c) Informs a Firm whether or not to use a (b) MP decreases but AP increases
factor input (c) MP increases but AP decreases
(d) States that beyond some level of a (d) MP and AP show decreasing trend
variable input, the Marginal Product of
45. In the stage of Diminishing Returns -
that Variable input begins to decrease
(a) MP and AP remain
steadily
positive
40. In case of law of variable proportions,
(b) MP and AP become
diminishing returns occur.
negative
(a) When units of a variable
(c) MP is positive but AP becomes
input are added to a fixed
negative
input and total product falls
(d) MP becomes negative but AP remains
(b) When units of a variable input are
positive
added to a fixed input and marginal
product falls 46. Which of the following statements show the
Stage of Diminishing Returns under the Law
(c) When the size of the plant is increased
in the long run.
(a) Marginal Product is
(d) When the quantity of the fixed input is
negative
increased and returns to the variable
input falls. (b) Marginal Product is falling
and it is negative
41. In the stage of Diminishing Returns, Total
Product (TP)- (c) Marginal Product is falling but it is
positive
(b) Increases
47. Which of the following is a reason for the
(c) Becomes negative
operation of the Law of Diminishing
(d) Decreases
Returns?
42. In the stage of Diminishing Returns, Average
(a) Ine ciency of Fixed
Product (AP)-
Indivisible Factors
(b) Inadequacy of Fixed
(b) Increases Indivisible Factors
(c) Decreases (c) Indifference of Fixed Indivisible
(d) Becomes negative Factors
43. In the stage of Diminishing Returns, Marginal (d) Immobility of Fixed Indivisible Factors
Product (MP) - 48. As per the Law of Diminishing Returns, Fixed
(a) First increases, reaches Factor becomes inadequate because -
a maximum and then (a) It has no perfect
decreases substitutes
(b) Decreases (b) It is scarce
(c) Increases (c) Both (a) and (b)
(d) Remains constant (d) Neither (a) nor (b)
44. In the stage of Diminishing Returns- 49. The "Law of Diminishing Returns" applies to-
(a) MP and AP show (a) The short run, but not
increasing trend the long run
124
(b) The long run, but not (a) Marginal Cost falls at a
the short run decreasing rate
(c) Both the short run and (b) Marginal Cost increases
the long run (c) Marginal Cost falls at a
(d) Neither the short run nor the long run constant rate
50. Diminishing Returns occur- (d) Marginal Cost falls at an increasing rate
(a) When units of a variable 55 When the Law of Diminishing Returns sets
input are added to a fixed in, then-
input and Total Product falls. (a) Marginal Cost falls at a
(b) When units of a variable input are decreasing rate
added to a fixed input and Marginal (b) Marginal Cost falls at a
Product falls constant rate
(c) When the quantity of the fixed input is (c) Marginal Cost falls at an increasing rate
increased and returns to the Variable
(d) Marginal Cost increases
Input falls
56. Diminishing Marginal Returns implies -
(d) When the size of the Plant is increased
(a) Decreasing Average
in the long run
Variable Costs
51. Law of Diminishing Returns is not relevant
(b) Decreasing Marginal Costs
when-
(c) Increasing Marginal Costs
(a) All labourers are equally
e cient (d) Decreasing Average Fixed Costs
(b) The Time Period is short 57. The Third Stage of Law of Variable
Proportion is known as-
(c) All factory inputs are increased by the
same proportion (a) Law of Negative Returns
(d) Technology remains constant (b) Law of Decreasing Returns
52. In which stage of production are the Average (c) Law of Diminishing Returns
Product and Marginal Product decreasing (d) None of these
with the Marginal Product above zero 58. The stage of Negative Marginal Returns
(positive) ? applies from ………to ………
(a) In the stage of Constant (a) Origin to Point where
Returns AP is maximum
(b) In the stage of Decreasing (b) Point where AP is
Returns maximum to Point when TP is
(c) In the stage of Increasing Returns maximum
(d) Both (a) and (b) (c) Point when TP declines and and MP
53. During the stage of Decreasing Returns - becomes negative.
(a) AP is negative (d) None the above
(b) MP is decreasing 59. In the stage of Negative Marginal Returns,
Total Product (TP) -
(c) MP is negative
(b) Increases
54. When the Law of Diminishing Returns
operates (c) Decreases
125
(d) Remains at zero (b) Same level of technology
60. In the stage of Negative Marginal Returns, (c) Change in proportions
Average Product (AP) - in which Factors are used
(a) Remains constant (d) Short-Run
(b) Decreases 66. In which of the following situations, the Law
(c) Becomes negative of Variable Proportions will not apply?
(d) Increases (a) Scarcity of Fixed Factor
of Production
61. In the stage of Negative Marginal Returns,
Marginal Product (MP) - (b) Availability of Perfect
Substitutes for the Fixed Factor
(a) Decreases but does
not become negative (c) Change in proportions in which Factors
are used
(d) Same level of technology
(c) Increases
67. In case of ………, MP and AP may rise instead
of falling.
62. Which of the following stages of production
(a) Constant State of
is known as stage of Negative Returns?
Technology
(a) When AP is Negative
(b) Improvement in Technology
(b) When MP is decreasing
(c) Erosion / Reduction in Technology
(c) When MP is Negative
If Stage I = Increasing Returns, Stage II =
63. The Law of Negative Marginal Returns
Diminishing Returns, and Stage III = Negative
operates because the Variable Factor is
Marginal Returns, answer the next 6 questions.
……….. in relation to the Fixed Factor of
68. A Rational Producer will operate in -
Production.
(a) Stage I
(a) Irrelevant
(b) Stage II
(b) Adequate
(c) Stage III
(c) Excessive
(d) Optimal
69. A Rational Producer will not operate in -
64. In which of the following situations, the Law
of Variable Proportions will not apply? (a) Stages I and II
(a) Where the factors (b) Stages II and III
must be used in fixed (c) Stages III and I
proportions to yield the (d) Only Stage II
product
70. Stages I and III are called -
(b) When all factors are proportionately
(a) Economic Absurdity
varied
(b) Economic Stability
(c) Improvement in technology
(c) Economic Equilibrium
65. In which of the following situations, the Law
71. Stages I and III are called -
of Variable Proportions will not apply?
(a) Economic Optimality
(a) Long-Run
(b) Economic Nonsense
126
(c) Economic Rationality 74. A Rational Producer intends to work in-
(d) Economic Achievement (a) Stage of Negative Returns
72. A Rational Producer will not operate in Stage (b) Stage of Increasing Returns
I due to the reason that - (c) Stage of Diminishing Returns
(a) There is more scope for (d) Stage of Constant Returns
making the best use of
75. In which stage of production would a
the Fixed Factor
rational entrepreneur like to operate?
(b) Total Output still shows
(a) Stage 1 where MP
an increasing trend
is maximum
(c) Optimal Combination of Fixed and
(b) Stage 2 where both
Variable Factors is not yet achieved
MP and AP are decreasing,
(d) All of the above but both are positive
73. A Rational Producer will not operate in Stage (c) Stage 3 where MP is negative
III due to the reason that -
(d) Either Stage 2 or 3
(a) The Fixed Factor has
become over-used
and ine cient
(b) The MP of the Variable Factor is
negative
(c) There is a reduction in Total Output
127
Law of Returns To Scale
LAW OF RETURNS TO SCALE (d) Proportion between different Factors

of Production
1. The Law of Returns to Scale operates in - 7. Law of Returns to Scale indicates the
(a) Medium-run responsiveness of total product when all
inputs
(b) Short-run
(a) Remain same
(c) Long-run
(b) Are changed marginally
(c) Are changed drastically
2. The concept 'Returns to scale' is related with
______ (d) Are changed proportionately
(a) Very short period 8. Returns to Scale will be said to be in
operation when quantity of -
(b) Short period
(a) All inputs are changed
(c) Long period
(b) All inputs are not changed
(c) All inputs are changed in already
3. In the ………., the quantities of all factors of
established proportion
production can be increased or decreased
simultaneously. (d) One input is changed while quantity of
all other inputs remains the same
(a) Medium-run
9. Change in Scale means that all Factors of
(b) Short -run
Production are increased or decreased -
(c) Long-run
(a) In different proportions
(b) In the same proportion
4. Long-period production function is related
(c) To infinity
to _______
(a) Law of variable proportions
10. When there is an increase in all factors of
(b) Law of returns to scale
production together in the same ratio ,
(c) Law of diminishing marginal utility
………. - (a) increases at first, (b) becomes
(d) None of these constant thereafter, and (c) starts
5. The Law of Returns to Scale deals with - decreasing beyond a certain level.
(a) Output Quantities (a) Total Product
(b) Monetary Values (b) Average Product
(c) Neither (a) nor (b) (c) Marginal Product
(d) Both (a) and (b) (d) Both (a) and (b)
6. Under the Law of Returns to Scale, ……… is 11. In the initial stages, when there is an
constant. increase in scale, there is ……… increase in
(a) Output Quantities output.
(b) Quantities of Variable (a) Zero
Factors of Production (b) Proportionate
(c) Quantities of Variable and Fixed (c) Less than proportionate
Factors of Production
128
(d) More than proportionate (c) Pecuniary Economies of Scale
12. In the initial stages, there will be increasing (d) Technical Economies of Scale
returns to scale, due to - You are given the following data:
(a) Specialisation in Factors
(b) Indivisibility of Factors Factor Output
(c) Both (a) and (b) 0 0
(d) Neither (a) nor (b) 1 15
13. In the initial stages, there will be increasing 2 35

returns to scale, due to - 3 60
(a) Economies in operations 4 92
(b) Diseconomies in operations 5 140
17. The above data is an example of:
(a) Decreasing returns to scale.
14. In the very beginning of production,
(b) Constant returns to scale.
generally the Increasing Returns to scale is
(c) Increasing returns to scale.
found because-
(d) Positive fixed costs.
(a) Input is increased
18. If as a result of 50% increase in all inputs,
(b) Plant and Machinery
the output rises by 75%, this is a case of:
will be new
(a) Constant Returns to
(c) Production Problems are less
a Factor
(d) Economies of Scale
(b) Increasing Returns to Scale
15. In a small scale rubber plant, factors of
(c) Increasing Returns to a Factor
production like labour, material and capital
are increased by 10% and output increases. (d) Constant Returns to Scale
It implies that the Firm is experiencing 19. After the initial stages of increasing returns
………… to scale, the Firm will experience -
(a) Increasing as well (a) Still Increasing Returns
as decreasing to Scale
(b) Constant Returns (b) Constant Returns to Scale
to Scale (c) Diminishing Returns to Scale
(c) Increasing Returns to Scale (d) None of the above
(d) Decreasing Returns to Scale 20. In which of the following cases does output
16. Manufacturers can lower their costs by double with the doubling of all inputs?
producing a variety of different products on (a) Constant Returns to Scale
the same equipment. The added volume
(b) Increasing as well as
helps in lowering average total costs; it may
decreasing returns to Scale
also allow the Firm to employ different types
(c) Decreasing Returns to Scale
of equipment that have lower variable costs.
These factors lead to - (d) Increasing Returns to Scale
(a) Production Economies 21. If a change in scale inputs leads to a
of Scale proportional change in the output, it is a
case of-
(b) Economies of Scale
129
(a) Increasing Returns to Scale 26. With a view to increase his production Hari
(b) Constant Returns to Scale Haran a manufacturer of shoes, increases
all the factors of production in his unit by
(c) Diminishing Returns to Scale
100%. But at the end of year he finds that
(d) Variable Returns to Scale
instead of an increase of 100%, his
You are given the following data: production has increased by only 80%.
Which law of returns to scale is operating in
Factor Output
this case _______.
0 0
(a) Increasing returns to scale
1 15
(b) Decreasing returns to scale
2 30
(c) Constant returns to scale
3 45
22. The above data is an example of: 27. If all inputs are trebled and the resultant
output is doubled, this is a case of:
(a) Constant Returns to Scale.
(a) Constant returns to scale
(b) Decreasing Returns to Scale.
(b) Increasing returns to scale
(c) Increasing Returns to Scale.
(c) Diminishing returns to scale
(d) Globalization.
(d) Negative returns to scale
23. If one unit of labour and one unit of capital
give 200 units of output, two units of labour | 28. In electricity generation plants, when the
and two units of capital give 400 units of plant grows too large risks of plant failure
output and 5 units of labour and five units of with regard to output increase
capital give 1000 units of output then this is disproportionately. Hence we are talking
a case of: about which concept of returns to scale?
(a) Constant Returns to Scale. (a) Balanced Returns to Scale
(b) Increasing Returns to Scale. (b) Increasing Returns to Scale
(c) Decreasing Returns to Scale. (c) Decreasing Returns to Scale
(d) None of the above (d) Constant Returns to Scale
24. After the stages of constant returns to 29. Linear Homogeneous Production function is
scale, the Firm will start experiencing - based on _______
(a) Still Increasing Returns (a) Increasing Returns to Scale
to Scale (b) Decreasing Returns to Scale
(b) Constant Returns to Scale (c) Constant Returns to Scale
(c) Diminishing Returns to Scale (d) None.
(d) None of the above 30. Beyond a certain extent, the Firm will start
25. If Decreasing Returns to Scale are present, experiencing decreasing returns to scale,
then if all inputs are increased by 10% then due to
(a) Output will also decrease (a) Economies in operations
by 10% (b) Diseconomies in operations
(b) Output will increase by 10% (c) Neither (a) nor (b)
(c) Output will increase by (d) Both (a) and (b)
less than 10% 31. Problems like managerial di culties, low
(d) Output will increase by more than 10% employee morale, higher input prices, etc.
130
arising out of large scale operations lead to- (c) Both (a) and (b)
(a) Large Economies of Scale (d) Neither (a) nor (b)
(b) Pecuniary Economies of Scale 37. External Economies and Diseconomies arise
(c) Real Economies of Scale due to -
(d) Diseconomies of Scale (a) Overall industry-level changes
32. Diseconomies of Scale means - (b) Changes at the Firm level
(a) Forces which increase (c) Neither (a) nor (b)
the Average Cost of (d) Both (a) and (b)
producing a product as
38 External economies can be achieved
the Firm expands the Size of its Plant
through-
(b) Forces which reduce the Marginal Cost
(a) Foreign trade only
of producing a product as the Firm
(b) Extension of transport &
expands the Size of its Plant
transport credit facility
(c) Forces which reduce the Average Cost
(c) Superior managerial skills
of producing a product as the Firm
expands the Size of its Plant (d) External assistance
(d) Forces which increase the Marginal 39. External Diseconomies may lead to _______
Cost of producing a product as the (a) Decrease in cost of technology
Firm the Size of its Plant (b) External Assistance
33. Economies and Diseconomies in (c) Increase in the price of
operations can be - factors of production
(a) Internal (d) All of the above
(b) External 40. Inventory Economies are a part of which of
(c) Both (a) and (b) the following type of economies of scale?
(d) Neither (a) nor (b) (a) Production
34. Internal Economies and (b) Storage and Transport
Diseconomies are dependent on - (c) Labour
(a) Output level of individual Firms (d) Selling
(b) Output level of the entire industry 41. ………. economies result from the use of
(c) Neither (a) nor (b) specialized equipment and modern
(d) Both (a) and (b) techniques of production
35. Internal Economies and (a) Managerial
Diseconomies arise due to - (b) Marketing
(a) Overall industry-level changes (c) Selling
(b) Changes at the Firm level (d) Production
(c) Both (a) and (b) 42. Which of the following is an important
(d) Neither (a) nor (b) ingredient of Selling Economies?
36 External Economies and (a) Advertising Economies
Diseconomies are dependent on - (b) Inventory Economies
(a) Output level of individual Firms (c) Transportation Economies
(b) Output level of the entire industry (d) Storage Economies
131
43. ……….. economies are associated with the (d) External Diseconomies of Scale
distribution of the product of a Firm. 48. Discovery of new technical knowledge and
(a) Production improvements in technology leads to -
(b) Inventory (a) Internal Economies of Scale
(c) Manufacturing (b) Internal Diseconomies
(d) Selling of Scale
44. Which of the following is not a type of (c) External Economies of Scale
pecuniary Economies of Scale? (d) External Diseconomies of Scale
(a) Reduction in prices of 49. Management E ciency and Productivity due
raw materials, as a result to creation of different specialised
of discounts due to large functional departments is an example of-
volumes from the Suppliers (a) Internal Economies of Scale
(b) Lower costs of external finance as (b) External Diseconomies
banks often offer loans to large Firms of Scale
at a lower rate of interest
(c) External Economies of Scale
(c) Lower advertising rates for large Firms
(d) Internal Diseconomies of Scale
if they advertise at large scales
50. Growth of Ancillary Industries supplying
(d) Economies achieved by increasing the
related goods and services is an example of -
scale of output mainly due to division
(a) Internal Economies
of labour
of Scale
45. Di culties of management, co-ordination
(b) Internal Diseconomies
and control due to bigger Plant
of Scale
Size is an example of-
(a) Internal Economies of Scale
(d) External Diseconomies of Scale
(b) Internal Diseconomies of Scale
51. Delays in internal communication due to
(c) External Diseconomies of Scale
complex management structure is an
(d) External Economies of Scale
example of-
46. Availability of cheaper Raw Materials and
(a) External Economies
Capital Equipment in the long-run
of Scale
constitutes -
(c) Internal Economies of Scale
of Scale
(b) Internal Diseconomies
of Scale 52. A large Firm can offer better security to
Bankers and obtain credit easily. This
creates ……… for such Firm.
47. Increase in Prices of Factors of
of Scale
Production due to expansion
in industry creates -
(a) External Economies of Scale
53. When a large Firm makes bulk purchase and
(c) Internal Economies of Scale
132
obtains its Raw Materials at lower prices (b) Shifts inward
than a small size Firm, the large Firm is said (c) Shifts outward
to have achieved -
(d) Not affected at all
58. If the LAC curve falls as output expands, this
of Scale
is due to -
(b) External Diseconomies
(a) Law of Variable Proportions
of Scale
(b) Economies of Scale
(c) Diseconomies of Scale
(d) Internal Diseconomies of Scale
(d) Law of Diminishing Returns
54. Internal Economies of Scale can arise in
59. Identify the correct statement
………. aspects.
(a) Average Product is at
(a) Technological
its maximum when Marginal
(b) Managerial
Product is equal to Average
(c) Financial Product
(d) All of the above (b) Law of Increasing Returns to Scale
55. Internal and External Economies and relates to the effect of changes in
Diseconomies of Scale has its impact on - factor proportions
(a) Long Run Average Cost (c) Economies of Scale arise only because
(LAC) Curve of invisibilities of factor proportions
(b) Short Run Average Cost (d) Internal Economies of scale can accrue
(SAC) Curve only to the exporting sector
(c) Neither (a) nor (b) 60. The Economy achieves 'Productive
(d) Both (a) and (b) E ciency' when:
56. Due to External Economies of Scale, the (a) The best quality goods are
Long Run Average Cost (LAC) Curve - produced.
(a) Shifts inward (b) The highly skillful resources in the
country are fully employed.
(c) All resources are utilized and goods &
(c) Shifts outward
services are produced at least cost.
(d) Is not affected at all
57. Due to External Diseconomies of Scale, the
Long Run Average Cost (LAC) Curve -
133
CHAPTER 6 - Cost & Revenue Concepts
COST ANALYSIS AND COST FUNCTION (b) Physical aspects

(c) Either (a) or (b)
1. Cost Analysis is the study of behaviour of (d) Both (a) and (b)
……….., in relation to one or more production 7. Cost Function refers to the mathematical
criteria. relationship between cost of a product and
(a) Output Quantity the various determinants of Cost. This
(b) Prices and Revenue statement is
(c) Costs (a) True
(d) Profits (b) Partially True
2. Cost Analysis is the study of behaviour of (c) False
Cost, in relation to - (d) None of the above
(a) Selling Prices 8. A Cost Function deals with -
(b) Profits (a) Total Cost
(c) Total Revenue (b) Cost per unit
(d) One or more Production Criteri (c) Either (a) or (b)
3. For Cost Analysis purposes, the (d) Neither (a) nor (b)
Production Criteria may be - 9. In a Cost Function, the Total Cost or Cost per
(a) Prices of factors of production unit is a/an - .
(b) Scale of operations (a) Dependent Variable
(c) Quantity of output (b) Independent Variable
(d) All of the above (c) Either (a) or (b)
4. For Cost Analysis purposes, the (d) Both (a) and (b)
Production Criteria may be - 10. In a Cost Function, the Output Quantity is
(a) Prices of factors of production a/an-
(b) Quantity of output (a) Dependent Variable
(c) Either (a) or (b) (b) Independent Variable
(d) Neither (a) nor (b) (c) Either (a) or (b)
5. Cost Analysis is concerned with ……… of (d) Neither (a) nor (b)
production. 11. In a Cost Function, the Scale of Operations is
(a) Financial aspects a/an-
(b) Physical aspects (a) Dependent Variable
(c) Either (a) or (b) (b) Independent Variable
(d) Both (a) and (b) (c) Both (a) and (b)
6. Production Analysis is concerned with (d) Neither (a) nor (b)
……….of production. 12. In a Cost Function, the Price of Factors of
(a) Financial aspects Production is a/an-
134
(a) Dependent Variable (d) Fixed Cost
(b) Independent Variable 19. Which of the following is not a determinant
(c) Either (a) or (b) of the Firm's Cost Function?
(d) Neither (a) nor (b) (a) Production Function
13. Identify the Dependent Variable in (b) Price of Labour
a Cost Function from the following. (c) Rent paid for use of Building
(a) Quantity of Output (d) Price of the Firm's Output
(b) Price of Factors of Production 20. The Functional Relationship between Output
(c) Total Cost and the Long Run Cost of Production is
(d) Scale of Operations known as -
14. Identify the Dependent Variable in a Cost (a) Short Run Cost Function
Function from the following. (b) Long Run Cost Function
(a) E ciency (c) Cost Function
(b) Level of Capacity utilisation (d) Output Function
(c) Technology 21. The Functional Relationship between Output
(d) Cost per unit and the Short Run Cost of Production is
15. Identify the Independent Variable in a Cost known as -
Function from the following. (a) Cost Function
(a) Time Period under study (b) Long Run Cost Function
(b) Cost per unit (c) Short Run Cost Function
(c) Total Cost (d) Output Function
(d) All of the above 22. Which of the following statements regarding
16. Cost Functions are Derived Functions. They the Long Run Cost Function is not true?
are derived from - (a) Inputs are chosen for producing a
(a) Demand Function desired level of output
(b) Supply Function (b) Firms identify a combination
(c) Isoquant Function that gives maximum output
at the lowest Cost
(d) Production Function
(c) The Firm adjusts Factors of
17. A Cost Function determines the behaviour of
Production to meet the market
Costs with change in -
demand
(a) Output
(d) All the inputs in the long-run are fixed
(b) Technology
23. Expansion of Scale of operation forms a part
(c) Input
of ………. Cost Function.
(d) Wages
(a) Long run
18. The Cost Function indicates the functional
(b) Short run
relationship between Total Cost and -
(c) Fixed
(a) Total Input
(d) Both (a) and (c)
(b) Variable Cost
(c) Total Output
135
Short and Long Run Cost Functions is not (c) Variable Cost
true? (d) Implicit Cost
(a) A Variable Input varies 28. The Cost that a Firm incurs in hiring or
according to the quantity purchasing any Factor of Production is
of output to be produced
referred to as -
(b) In the Short Run, one or more of the
(a) Explicit Cost
inputs of the production process is
(b) Implicit Cost
fixed
(c) Variable Cost
(c) In the Long Run, all the inputs are
(d) Fixed Cost
fixed
29. ………. can be defined as the Cost that involve
(d) In the Long Run there are no
actual payment to other parties.
restrictions on the resource allocation
(a) Opportunity Costs
in the production process.
(b) Explicit Costs
25. Which theory proposes that a country could
(c) Hidden Costs
be better off by producing the product in
(d) Implicit Costs
which it has relatively lower Labour Cost and
30. Which of the following is an example of an
relatively higher Labour productivity?
"Explicit Cost"?
(a) Imitation Theory
(a) Wages a Proprietor could
(b) Relative Advantage Theory have made by working as
(c) Comparative Advantage Theory an employee of a large Firm
(d) Absolute Advantage Theory (b) Income that could have been earned
26. A Product can be produced using two input in alternative uses by the resources
combinations A and B. Combination A takes 2 owned by the Firm
units of Labour and 8 units of Capital. (c) Payment of Wages by the Firm
Combination B takes 3 units of Labour and 5 (d) Normal Profit earned by a Firm
units of Capital, what is the Marginal Rate of 31. Explicit Costs are also called-
Technical Substitution of Labour for Capital? (a) Out-of-Pocket Costs
(a) 5 (b) Outlay Costs
(b) 0 (c) Accounting Costs
(c) 3 (d) All of the above
(d) 2 32. Which of the following does not relate to
Explicit Costs?
EXPLICIT AND IMPLICIT COSTS (a) Outlay Costs
(b) Out-of-Pocket Costs
27. Costs which involve payment made by the (c) Opportunity Costs
Entrepreneur to providers of other factors of (d) Accounting Costs
production are called - 33. ………. are actually incurred and hence can be
(a) Explicit Cost easily and objectively measured.
(b) Fixed Cost (a) Implicit Costs
136
(b) Explicit Costs 39. Which of the following is an
(c) Hidden Costs example of an "Implicit Cost'?
(d) Opportunity Costs (a) Interest that could have been
34. Which of the following Costs is included and earned on retained earnings
used by the Firm to finance expansion
recorded in the books of accounts?
(b) Payment of Rent by the Firm for the
(a) Notional Costs
building in which it is housed
(b) Opportunity Costs
(c) Payment of Wages by the Firm
(c) Imputed Costs
(d) Interest Payment made by the Firm for
(d) Explicit Costs
funds borrowed from a Bank
35. Explicit Costs are used for ……… purposes.
40.Implicit Costs are also known as -
(a) Accounting and Reporting
(a) Notional Costs
(b) Cost Control
(b) Opportunity Costs
(c) Decision Making
(c) Imputed Costs
36. Costs which do not involve any cash payment
41. Which of the following does not relate to
to outsiders are called -
Implicit Costs?
(a) Explicit Cost
(a) Opportunity Costs
(b) Implicit Cost
(b) Out-of-Pocket Costs
(c) Variable Cost
(c) Imputed Costs
(d) Fixed Cost
(d) Notional Costs
37. ………. are the value of foregone
42. ……….. involve subjective estimation.
opportunities that do not involve any physical
(a) Implicit Costs
cash payment.
(b) Outlay Costs
(a) Implicit Costs
(c) Out-of-Pocket Costs
(b) Actual Costs
(d) Accounting Costs
(c) Hidden Costs
43. An entrepreneur who manages his Firm has
(d) Explicit Costs
to forego his salary, which he could have
38. An Implicit Cost can be defined as the-
earned if he had worked elsewhere. The
(a) Payment to the non-owners
of the Firm for the resources foregone Cost is known as -
they supply (a) Implicit Costs
(b) Money payment which the self (b) Explicit Costs
employed resources could have (c) Hidden Costs
earned in their best alternative (d) Actual Costs
employment 44.Implicit Costs includes -
(c) Costs which the Firm incurs but does (a) Salary to Entrepreneur he
not disclose would have earned in an
alternative employment
(d) Costs which do not change over a
(b) Rent of Entrepreneur's own premises
period of time
used in business
137
(c) Interest on own Capital invested by (b) Cost Control
Entrepreneur (c) Decision Making
(d) All of the above (d) None of the above
45. An Implicit Cost is 50. If Rent is paid to the Landlord separately, it is
(a) Wages paid to Workers / an -
Labourers (a) Implicit Cost
(b) Rent for Land and Building (b) Explicit Cost
used in business
(c) Hidden Cost
(c) Normal Rate of Profit in the business
(d) Undisclosed Cost
51. If Land is owned by the Entrepreneur, Rent is
46. Which of the following is an Implicit Cost?
an -
(a) Land owned by Entrepreneur
(a) Implicit Cost
and used for business
(b) Explicit Cost
purposes, on which no
Rent is paid. (c) Hidden Cost
(b) Wages or Salary not paid to the (d) Undisclosed Cost
Entrepreneur, but could have been 52. Salary / Wages paid to Employees / Workers
earned if his services had been sold is an -
somewhere else, i.e. if he were (a) Implicit Cost
employed in another Firm. (b) Explicit Cost
(c) Normal Return on Money Capital (c) Hidden Cost
invested by Entrepreneur himself in (d) Undisclosed Cost
his own business. 53. If own people (e.g. family members) are
(d) All of the above employed in the Firm, without paying them
47. Which of the following Costs is not included any reward for their work, Labour Cost is an -
in the books of accounts? (a) Implicit Cost
(a) Taxes (b) Explicit Cost
(b) Manufacturing Costs (c) Hidden Cost
(c) Explicit Costs (d) Undisclosed Cost
(d) Implicit Costs 54. If Capital is borrowed and used in the
48. Which of the following Costs does not business, Interest on Capital is -
include the contractual cash payments (a) Undisclosed Cost
which the firm makes to other Factor Owners (b) Explicit Cost
for purchasing or hiring various factors? (c) Hidden Cost
(a) Private Costs (d) Implicit Cost
(b) Variable Costs 55. If Entrepreneur employs his own funds as
(c) Accounting Costs Capital, then Interest is -
(d) Implicit Costs (a) Implicit Cost
49. Implicit Costs are used for ……….. purposes. (b) Explicit Cost
(a) Accounting and Reporting (c) Hidden Cost
138
(d) Undisclosed Cost (b) Implicit Cost
56. When Entrepreneur himself manages the (c) Marginal Cost
business, the reward for Entrepreneurial (d) Economic Cost
Ability (i.e. Profit) is an - 62. Which of the following is an example of an
(a) Implicit Cost Accounting Cost?
(b) Undisclosed Cost (a) Interest paid to Bank on
(c) Hidden Cost short-term loan taken
(d) Explicit Cost (b) Cost incurred on the purchase
57. Reward for Entrepreneurial Ability (i.e. of raw materials
Normal Profit in the business) is included in - (c) Wages paid to Labourers
(a) Implicit Cost (d) All the above
(b) Explicit Cost 63. Expenditure incurred on Wages, Rent,
(c) Hidden Cost Interest, etc. are included in-
(d) Undisclosed Cost (a) Accounting Cost
58. Direct costs are ______ (b) Opportunity Cost
(a) Traceable costs (c) Fixed Cost
(b) Implicit costs (d) Direct Cost
(c) Indirect costs 64. Economic Cost = ?
(d) Explicit costs (a) Implicit Cost
59. Suppose the total cost of production of a (b) Explicit Cost
commodity X is ₹ 1,25,000 out of which (c) Both (a) and (b)
implicit cost 35,000 and normal profit is (d) Neither (a) nor (b)
25,000. What would be the explicit cost of 65. Economic Cost =
commodity? (a) Accounting Cost + Non-
(a) 60,000 Accounting Cost
(b) 65,000 (b) Fixed Cost + Variable Cost
(c) 1,00,000 (c) Explicit Cost + Implicit Cost
(d) 90,000 (d) Short Run Cost + Long Run Cost
66. Economic Cost =
ACCOUNTING COSTS AND ECONOMIC COSTS (a) Accounting Cost +
Explicit Cost
(b) Accounting Cost + Implicit Cost
60. Accounting Cost equals -
(c) Fixed Cost + Variable Cost
(a) Explicit Cost
(d) Accounting Cost + Non-Accounting
(b) Implicit Cost
Cost
67. Economic Cost =
(a) Wages paid to Workers / Labourers
61. Cost incurred in purchasing the Factor of
(b) Rent for Land and Building
Production is known as -
used in business
(a) Accounting Cost
139
(c) Normal Rate of Profit in the business Cost = Implicit Cost
(d) All of the above (c) Economic Cost less
68. Which of the following are Accounting Cost =
considered as Economic Cost? Explicit Cost
(a) Interest on the Capital invested (d) Accounting Cost less Economic Cost =
(b) Wages or Salary of the Entrepreneur Implicit Cost
(c) Normal Return on money 74. When Total Revenue equals Accounting
Capital invested Costs, it means that the Firm -
(d) All of the above (a) Has No-Profit-No-Loss
69. ………. includes all payments paid to Factors (b) Earns Normal Profits
of Production and Opportunity Cost. (c) Earns more than Normal Profits (i.e.
(a) Implicit Costs Super- Normal Profits)
(b) Explicit Costs (d) Incurs Losses in the accounting sense
(c) Economic Costs 75. When Total Revenue is less than Accounting
(d) Accounting Costs Costs, it means that the Firm -
70. Reward for Entrepreneurial Ability (i.e. (a) Has No-Profit-No-Loss
Normal Profit in the business) is included in - (b) Earns Normal Profits
(a) Economic Cost (c) Earns more than Normal Profits
(b) Accounting Cost (d) Incurs Losses
(c) Undisclosed Cost 76. When Total Revenue is less than Accounting
(d) Explicit Cost Costs, it means that the Firm incurs Losses -
71. Which of the following is true regarding (a) In the accounting sense
Economic Cost and Accounting Cost? (b) In the economic sense
(a) Economic Cost = (c) Both (a) and (b)
Accounting Cost (d) Either (a) or (b)
(b) Economic Cost > 77. When Total Revenue equals Economic Costs,
Accounting Cost it means that the Firm -
(c) Economic Cost < Accounting Cost (a) Has No-Profit-No-Loss
(d) None of the above (b) Earns Normal Profits
72. The difference between Economic Cost and (c) Earns more than Normal Profits
Accounting Cost is equal to - (d) Incurs Losses in the accounting sense
(a) Explicit Cost 78. When Total Revenue exceeds Economic
(b) Implicit Cost Costs, it means that the Firm -
(c) Both (a) and (b) (a) Incurs Losses
(d) Neither (a) nor (b) (b) Earns Normal Profits
73. Which of the following is true regarding (c) Earns more than Normal Profits
Economic Cost and Accounting Cost? (d) Has No-Profit-No-Loss
(a) Accounting Cost less Economic 79. When Total Revenue is less than Economic
Cost = Explicit Cost
Costs, it means that the Firm -
(b) Economic Cost less Accounting
140
(a) Incurs Losses in the economic sense (a) Value of sacrifice made
(b) Earns Normal Profits (b) Benefit of opportunity
(c) Earns more than Normal foregone
Profits (i.e. Super- (c) Both (a) and (b)
Normal Profits) (d) Neither (a) nor (b)
(d) Incurs Losses in the accounting sense 84. Opportunity Cost means-
80. Economic Profits means- (a) Cost of opportunity foregone
(a) Difference between Total (b) Comparison between the
Revenue, and Total Implicit policy that was chosen and
and Explicit Costs the policy that was rejected
(b) Difference between Total Revenue (c) Costs relating to sacrificed
and Total Economic Costs alternatives
(c) Zero in a perfectly competitive (d) All of the above
industry in the long-run 85. The Cost of one thing in terms of the
(d) All the above alternative given up is known as -
81. If there are Implicit Costs of Production - (a) Real Cost
(a) Economic Profit will be (b) Physical Cost
equal to Accounting Profit
(c) Production Cost
(b) Economic Profit will be less
(d) Opportunity Cost
than Accounting Profit
86. Opportunity Costs are a result of -
(c) Economic Profit will be more than
(a) Technology obsolescence
Accounting Profit
(b) Overproduction
(d) Economic Profits will be zero
(c) Scarcity
82. Which of the following statements is false?
(d) Abundance of resources
(a) Economic Costs include the
87. Opportunity Costs arise only when resources
Opportunity Costs of the
are -
resources owned by the Firm
(a) Available only to a
(b) Accounting Costs include only Explicit limited extent
Costs (b) Restricted in availability
(c) Economic Profit will always be less (c) Scarce
than Accounting Profit if resources (d) All of the above
owned and used by the Firm have any 88. Opportunity Cost arises only when
Opportunity Costs alternatives are available. This statement is -
(d) Accounting Profit is equal to Total (a) True
Revenue less Implicit Costs (b) False
(c) Partially True
OPPORTUNITY COSTS (d) None of the above
89. If a resource can be put only to a particular
83. Opportunity Cost refers to ………. in use, then, Opportunity Costs -
accepting an alternative course of action. (a) Are applicable and
141
quantifiable good of service forgone
(b) Are applicable but not quantifiable (c) Economic Costs include only Out-of
(c) Are not applicable at all Pocket Costs
(d) All of the above (d) Both (a) and (c) above
90. Opportunity Costs - 96. A Manager needs a Stenographer and a Clerk
(a) Involve cash payment for the Accounts Department. But, due to
(b) Do not involve any cash payment financial constraints, he can able to recruit
(c) Both (a) and (b) only one i.e. either Stenographer or Clerk.
(d) Neither (a) nor (b) Finally he decides to recruit the
91. Outlay Costs - Stenographer and had to give up the idea of
(a) Involve cash payment having an Additional Clerk in the Accounts
(b) Do not involve any cash payment Department. Here, the Cost of not hiring an
(c) Both (a) and (b) accounts clerk is known as -
(d) Neither (a) nor (b) (a) Accounting Cost
92. Opportunity Cost is - (b) Cost Possibility Curve
(a) Recorded in books (c) Opportunity Cost
of accounts (d) Substitution Effect
(b) Not recorded in books of accounts 97. ………. Cost is the Total Additional Cost that a
(c) Sometimes (a) sometimes (b) Firm has to incur, as a result of implementing
(d) Neither (a) nor (b) a major managerial decision.
93. Opportunity Costs are used for …….. (a) Opportunity
purposes (b) Incremental
(a) Accounting and Reporting (c) Marginal
(b) Cost Control (d) Sunk
(c) Decision Making 98. Incremental Cost equals -
(d) None of the above (a) Additional Variable Costs only
94. Which of the following is not true (b) Additional Fixed Costs only
with reference to Opportunity Cost? (c) Both (a) and (b)
(a) It is useful in decision-making (d) Neither (a) nor (b)
(b) It is the value of a 99. Which of the following statement is correct?
sacrificed alternative
(a) Marginal Cost is a sub-
(c) It is the value of the next best use for
set of Incremental Cost
an economic good
(b) Incremental Cost is sub-
(d) It does not take into consideration,
set of Marginal Cost
the cost of time
(c) Marginal Cost is a sub-set of Sunk
95. Which of the following is/are true?
Cost
(a) Total Cost includes only
(d) Sunk Cost is a sub-set of Incremental
Variable Costs
Cost
(b) Opportunity Cost is the value of the
100. ………. Cost is not relevant for Decision
142
(c) Variable Costs (b) Time
(d) Semi-Variable Costs (c) Both (a) and (b)
121. Which of the following is not a Fixed Cost? (d) Either (a) or (b)
(a) Depreciation Charges on Equipment 127. ……… Cost must be incurred only when the
and Buildings Firm's produces output.
(b) Charges for Fuel and (a) Variable
Electricity
(b) Fixed
(c) Payment of Interest on Borrowed
Capital
(d) Contractual Rent for Equipment
128. Variable Costs are incurred only when
of Building
production takes place. So, they are in the
122. Of the following which one corresponds to
nature of-
Fixed Cost?
(a) Discretionary Costs
(a) Labour Costs
(b) Committed Costs
(b) Payments for Raw Material
(c) Semi-Variable Costs
(c) Transportation Charges
(d) Fixed Costs
(d) Insurance Premium on Property
129. All Variable Costs are avoidable or
123. The following are some Costs incurred by
discretionary in nature. This statement is -
a Clothing Manufacturer. State which
among them will be considered as Fixed (a) True
Cost. (b) False
(a) Cost of Cloth (c) Partially True
(b) Piece Wages paid to Workers (d) Nothing can be said
(c) Depreciation on Machines 130. As output increases, Total Variable Cost-
owing to time (a) Decreases
(d) Cost of Electricity for running (b) Increases
machines (c) Remains constant
124. ……… are costs that change, based on the (d) Becomes zero
level of output. 131. Which Cost increases continuously with the
(a) Variable increase in production?
(b) Fixed (a) Fixed Cost
(c) Neither (a) nor (b) (b) Marginal Cost
(d) Both (a) and (b) (c) Average Cost
125. Variable Costs are - (d) Variable Cost
(a) Period-related 132. Total Variable Costs always vary
(b) Product-related proportionately with output. This
(c) Both (a) and (b) statement is -
(d) Neither (a) nor (b) (a) True
126. Variable Costs are a function of- (b) False
(a) Output (c) Partially True
145
(d) Nothing can be said 138. Marginal Cost refers to -
133. Over certain ranges of production Variable (a) Change in Average Variable
Costs vary less or more than Cost divided by Change in
proportionately depending on the Total Output
utilisation of fixed facilities and resources (b) Change in Average Fixed Cost divided
during the production process.
by Change in Total Output
This statement is -
(c) Change in Total Fixed Cost divided by
(a) True
Change in Total Output
(b) False
(d) Change in Total Cost due to Change in
(c) Partially True
Total Output by one additional unit.
139. ..........Costs are important in short term
134. Variable Cost includes the Cost of -
decision making of the Firm, to determine
(a) Buying Land and Building
the output at which profits can be
(b) Hire Charges paid for the
maximized.
Machinery
(a) Opportunity
(c) Salary to Manager
(b) Sunk
(d) Material Bought
(c) Fixed
135. Which of the following is an example
(d) Marginal
of Variable Cost in the short run?
140. With which of the following is the concept
(a) Cost of Equipment
of Marginal Cost closely related?
(b) Interest Payment on
past borrowings (a) Variable Cost
(c) Payment of Rent on Building (b) Fixed Cost
(d) Cost of Raw Materials (c) Opportunity Cost
(d) Economic Cost
MARGINAL COSTS 141. Marginal Cost is independent of Fixed
Cost. This statement is -
(a) True
136. Marginal Cost changes due to
(b) Partially True
change in _____ Cost
(c) False
(a) Variable
(d) None of these
(b) Average
142. Marginal Cost is independent of Variable
(c) Total
Cost. This statement is -
(d) Fixed
(a) True
137. ………….. is the addition made to
the total cost by production of an (b) False
additional unit of output. (c) Partially True
(a) Fixed Cost (d) Nothing can be said
(b) Variable Costs 143. Which of the following will affect Marginal
(c) Total Costs Costs?
(d) Marginal Costs (a) Variable Costs
146
(b) Output Quantity (b) Reverse
(c) Both (a) and (b) (c) Either (a) or (b)
(d) Neither (a) nor (b) (d) Nothing can be said
144. Which of the following will not affect 150. Marginal Costs are applicable in -
Marginal Costs? (a) Short-Run
(a) Variable Costs (b) Long-Run
(b) Output Quantity (c) Both (a) and (b)
(c) Fixed Costs (d) Neither (a) nor (b)
(d) None of the above 151. Use the following data to answer following
145. TCn – TCn - 1 = which cost function? question
(a) Marginal Cost Output 0 1 2 3 4 5 6
(b) Average Cost (0)
(c) Total Cost Total 240 330 410 480 540 610 690
(d) None of the above Cost
146. Marginal Costs per unit = (TC)
(a) Change in Total Costs ÷ The marginal cost of the sixth unit of output
Change in Output Quantity is
(b) Change in Variable Costs ÷ Change in (a) 80
Output Quantity (b) 450
(c) Either (a) or (b) (c) 75
(d) Both (a) and (b) (d) 133
147. Which of the following describes the 152.
Units TFC TVC MC
behaviour of Marginal Cost Curve?
0 500 - -
(a) Declines first, reaches
1 500 400 400
its minimum and then rises
5 500 1600 -
(b) Rises first, reaches a maximum and
then declines What is MC of 5 units:
(c) Remains constant throughout all (a) 300
output levels (b) 500
(d) Nothing can be said (c) 700
148. Marginal Cost Curve of a Firm will be - (d) 400
(a) Inverted U Shaped 153. Diminishing Marginal Returns implies:
(b) J Shaped (a) Constant MC
(c) U Shaped (b) Increasing Marginal Cost
(d) L Shaped (c) Decreasing MC
149. Marginal Cost Curve of a Firm will show (d) All of the above
……… behaviour when compared to Marginal 154. What is the MC of 6th unit of output?
Product (MP) Curve. Q 0 1 2 3 4 5 6 7
(a) Same TC 48 73 94 114 130 148 168 189
147
(a) 16 (d) None of the above
(b) 21 160. Social Cost =
(c) 20 (a) Explicit Cost + Implicit Cost
(d) 24 (b) Private Cost + External Cost
155. Additional cost incurred by a Firm as a (c) Private Cost + Internal Cost
result of a business decision - (d) Total Cost + Internal Cost
(a) Extra Cost
(b) Replacement Cost
(c) Incremental Cost
(d) Sunk Cost
156. Costs which are already incurred once and
for all, and cannot be recovered.
(a) Historical cost
(b) Sunk Cost
(c) Private Cost
157. Which of the following statement is
correct?
(a) An increase in price will
make Replacement Costs
higher than Historical Cost.
(b) A decrease in price will make
Replacement Costs higher than
Historical Cost.
(c) An increase in price will make
Replacement Costs lower than
Historical Cost.
158. The cost incurred during the acquisition of
an asset
(a) Sunk Cost
(b) Replacement cost
(c) Historical cost
159. Cost of Production incurred by an
Individual firm is -
(a) Private Cost
(b) Production Cost
(c) Social Cost
148
Short-run & Long-run Cost Behaviour
TOTAL COST RELATIONSHIPS concerning the relationships among the

Firm's Costs?
1. Which of the following statements regarding (a) TC = TVC X TFC
Output is false? (b) TC = TFC - TVC
(a) Output is under the control (c) TC = TVC - TFC
of the Firm (d) TC = TFC + TVC
(b) Change in output level determines the 6. TFC Curve will be a -
rate of change in the Total Cost of (a) Curve
Production (b) Straight Line
(c) Magnitude of the Output determines (c) Rectangular Hyperbola
the Total Cost of Production (d) All of these
(d) Output has no role to play in 7. TFC Curve will be a straight line -
determining the Cost Function (a) Parallel to X-Axis
2. If Output increases in the short-run, Total (b) Parallel to Y-Axis
Cost will - (c) Increasing from left to right
(a) Decrease if the Firm is in the (d) Decreasing from left to right
region of Diminishing Returns 8. TFC Curve will commence from -
(b) Increase due to an increase (a) A certain point on the
in Variable Costs only Quantity Axis (X Axis)
(c) Increase due to an increase (b) A certain point on the Cost Axis
in both Fixed and Variable Costs (Y Axis)
(d) Increase due to an increase in Fixed (c) Origin
Costs only (d) None of the above
3. If the Firm's output level is below its short run 9. TVC Curve will be a -
capacity, it is …….. its Plant and Machinery. (a) Curve with a positive slope
(a) Under utilizing (b) Curve with a negative slope
(b) Fully utilizing (c) Both (a) and (b)
(c) Over utilizing (d) Neither (a) nor (b)
(d) Exploiting 10. TVC Curve will -
4. Which of the following statements is correct (a) Increase, i.e. slope upward
concerning the relationships among the from left to right
Firm's Costs? (b) Decrease, i.e. slope
(a) TC = TVC - TFC downward from left to right
(b) TC = TFC - TVC (c) Either (a) or (b)
(c) TFC = TC - TVC (d) Neither (a) nor (b)
(d) TVC = TFC - TC 11. TVC Curve will commence from -
5. Which of the following statements is correct
149
(a) A certain point on the (b) Lower than the TVC Curve
Quantity Axis (X Axis) (c) Parallel to X Axis
(b) A certain point on the (d) Parallel to Y Axis
Cost Axis (Y Axis) 18. The Vertical difference between TVC and TC
(c) Origin is equal to-
(d) All of the above (a) MC
12. TVC Curve will be - (b) AVC
(a) Higher than the TC Curve (c) TFC
(b) Lower than the TC Curve (d) All of these
(c) Parallel to Y Axis 19. "I am making a loss, but with the rent I have
(d) Parallel to X Axis to pay, I can't afford to shut down at this
13. If Variable Cost per unit (i.e. AVC) is constant point of time." If this entrepreneur is
at all levels of output, TVC Curve will be - attempting to maximize profits or minimize
(a) Curve with positive slope losses, his behaviour in the short run is:
(b) Straight Line with (a) rational, if the firm is
positive slope covering its variable cost
(c) Rectangular Hyperbola (b) irrational, since fixed costs
(d) None of these are eliminated if a firm shuts down
14. TC Curve will be a - (c) irrational, since plant closing is
(a) Curve with a positive slope necessary to eliminate losses
(b) Curve with a negative slope (d) rational, if the firm is covering its
(c) Neither (a) nor (b) fixed costs
(d) Either (a) or (b)
15. TC Curve will - AVERAGE COST
(a) Increase, i.e. slope upward 20. Average Cost is the same as -
from left to right (a) Average Fixed Cost
(b) Decrease, i.e. slope downward from (b) Average Total Cost
left to right (c) Average Variable Cost
(c) Either (a) or (b) (d) None of the above
(d) Neither (a) nor (b) 21. Which of the following is the Average Cost?
16. TC Curve will commence from - (a) Average Fixed Cost +
(a) A certain point on the Average Variable Cost
Quantity Axis (X Axis) (b) Average Total Cost
(b) A certain point on the Cost Axis (Y (c) Total Cost divided by the number of
Axis) units
(c) Origin (d) All of the above
(d) None of the above 22. Which of the following statements is true of
17. TVC Curve will be - the relationship among the Average Cost
(a) Higher than the TVC Curve Function?
150
(a) AFC = ATC + AVC 28. In the short run, when the output of a Firm
(b) AVC = AFC + ATC decreases, its Average Fixed Cost -
(c) ATC = AFC - AVC (a) Increases
(d) AFC = ATC - AVC (b) Decreases
23. If TVC = 1,000, TFC = 400, then calculate ATC (c) Remains constant
at 5 units. (d) First declines and then rises
(a) 280 29. Average Fixed Cost (AFC) of a Firm is ……….
(b) 150 related to its output.
(c) 300 (a) Directly
(d) 250 (b) Inversely
(c) Proportionately
AVERAGE FIXED COST (d) Not
24. Average Fixed Cost (AFC) equals - 30. Which of the following describes the
(a) ATC-AVC behaviour of Average Fixed Cost Curve?
(b) TFC divided by Output Quantity (a) Declines first, reaches its
(c) Both (a) and (b) minimum and then rises
(d) Neither (a) nor (b) (b) Rises first, reaches a
25. Which of the following describes the maximum and then declines
behaviour of Average Fixed Cost? (c) Remains constant throughout all
(a) Declines first, reaches its output levels
minimum and then rises (d) Declines throughout as output
(b) Declines throughout as output increases
increases 31. Which of the following is correctwith respect
(c) Remains constant throughout all to Average Fixed Cost?
output levels (a) It is a bell shaped Curve
(d) Rises first, reaches a maximum and (b) As the quantity increases it
then declines approaches zero
26. In the short run, when the output of a Firm (c) If quantity produced tends to zero,
Increases, Its Average Fixed Cost Average Fixed Cost approaches
(a) Increases infinity
(b) Decreases (d) Both (b) and (c) above
(c) Remains constant 32. The Average Fixed Cost Curve of a Firm -
(d) First declines and then rises (a) Is a 'U' Shaped Curve
27. The Average Fixed Cost - (b) Is parallel to the Vertical Axis
(a) Remains the same whatever (c) Is parallel to the Horizontal Axis
the level of output (d) Is a Downward Sloping Curve from left
(b) Increase as output increases to right
(c) Diminishes as output increases 33. AFC Curve will be a -
(d) None of the above (a) Curve with a positive slope
151
(b) Curve with a negative slope 40.AFC curve is always ______
(c) Straight Line (a) Intersected by M.C at its
(d) None of the above minimum point refer back
34. Which curve is downward sloping and does (b) U-shaped if there is increasing
not touch the X-axis? returns to scale
(a) ATC (c) Declining when output increases.
(b) AVC (d) U-shaped if there is decreasing
(c) MC returns to scale
(d) AFC 41. Average Cost of Producing 50 units of a
35. Which of the following Cost Curves is never Commodity is ₹ 250 and fixed cost is ₹ 1000.
'U' shaped? What will be the average fixed cost of
(a) Average Cost Curve producing 100 units of the Commodity?
(b) Marginal Cost Curve (a) 10
(c) Average Variable Cost Curve (b) 5
(d) Average Fixed Cost Curve (c) 30
36. All of the following are U-Shaped Curves (d) 20
except the- 42. A Firm's average fixed Cost id ₹ 20 at 6 units
(a) AC Curve of output. What will it be at 4 units of output?
(b) AFC Curve (a) ₹ 60
(c) AVC Curve (b) ₹ 30
(d) MC Curve (c) ₹ 40
37. AFC Curve- (d) ₹ 20
(a) Will touch the Quantity
Axis (X Axis) AVERAGE VARIABLE COST
(b) Will touch the Cost Axis (Y Axis) 43. Average Variable Cost (AVC) equals -
(c) Will touch both Axes (a) ATC-AFC
(d) Will not touch any Axis (b) TVC divided by Output
38. The AFC Curve passes through the Origin. Quantity
This statement is - (c) Both (a) and (b)
(a) True (d) Neither (a) nor (b)
(b) False 44. AVC decreases as output increases -
(c) Partially True (a) Upto normal capacity output
(d) Can't Say (b) Beyond normal capacity
39. Which statement among below is correct in output
reference to AFC? (c) At all levels of output
(a) Never becomes zero (d) None of the above
(b) Curve never touch X-axis 45. Upto Normal Capacity of output,
(c) Curve never touch Y-axis as output increases, AVC will -
(d) All of the these (a) Remain constant
152
(b) Decrease (d) All of the above
(c) Increase 52. Average Variable Cost Curve
(d) Nothing can be said has a negative slope -
46. AVC decreases as output increases, (a) Upto normal capacity output
upto normal capacity output, due to- (b) Beyond normal capacity output
(a) Law of negative returns (c) At all levels of output
(b) Law of diminishing returns (d) Nothing can be said
(c) Law of increasing returns 53. Average Variable Cost Curve
(d) Law of constant returns slopes upwards -
47. AVC increases as output increases - (a) Upto normal capacity output
(a) Upto normal capacity output (b) Beyond normal capacity output
(b) Beyond normal capacity output (c) At all levels of output
(c) At all levels of output (d) Nothing to Say
(d) Nothing can be said 54. Average Variable Cost Curve
48. Beyond Normal Capacity of output, has a positive slope -
as output increases, AVC will - (a) Upto normal capacity output
(a) Remain constant (b) Beyond normal capacity output
(b) Decrease (c) At all levels of output
(c) Increase (d) Nothing can be said
(d) Nothing can be said 55. Average Variable Cost Curve is -
49. AVC increases as output increases, beyond (a) Exactly a U Shaped Curve
normal capacity output, due to - (b) Not exactly a U Shaped Curve
(a) Law of Constant Returns (c) Not depicted in the Graph at all
(b) Law of Diminishing Returns (d) Straight line
(c) Law of Equi-Marginal Utility 56. The AVC Curve passes through
(d) Law of Increasing Returns the Origin. This statement is -
50. Average Variable Cost Curve - (a) True
(a) Slopes downwards at first (b) False
and then upwards (c) Partially True
(b) Slopes upwards, remains constant (d) Nothing can be said
and then falls 57. A firm produces 10 units of commodity at an
(c) Slopes downwards always average total cost of ₹ 200 and with a fixed
(d) Remains a straight line parallel to X cost of ₹ 500. Find out component of
Axis average variable cost in total cost.
51. Average Variable Cost Curve slopes (a) ₹ 200
downwards - (b) ₹ 100
(a) Upto normal capacity output (c) ₹ 150
(b) Beyond normal capacity output (d) ₹200
(c) At all levels of output
153
AVERAGE COST OR AVERAGE TOTAL COST (c) Slopes downwards always
(d) Remains a straight line parallel to X
58. Average Cost (AC) equals - Axis
(a) ATC + AFC 63. The AC Curve and AVC Curve start increasing
(b) Total Cost divided by Output Quantity at the same output level only. This statement
(c) Both (a) and (b) is
(d) Neither (a) nor (b) (a) True
59. Initially Average Cost declines (b) False
sharply due to the reason that - (c) Partially True
(a) AFC declines significantly (d) Can't Say
as output increases 64. The AC Curve passes through the Origin. This
(b) AVC declines significantly as output statement is-
increases (a) True
(c) AFC increases as output increases (b) False
(d) AVC increases as output increases (c) Partially True
60. Initially, even when there is an increase in (d) Nothing can be said
Average Variable Cost (AVC), Average Cost 65. Average Cost Curve is a -
(AC) may still decline due to the reason that - (a) U Shaped Curve
(a) Fall in AFC is less than the (b) J Shaped Curve
rise in AVC (c) L Shaped Curve
(b) Fall in AFC is greater than (d) Straight Line
the rise in AVC
66. Average total cost to firm is ₹ 600 when it
(c) Fall in AFC is equal to the rise in AVC
produces 10 units of output and ₹ 640 when
the output is 11 units. The MC of the 11th unit
61. Beyond certain output level, when there is an
is
increase in Average Variable Cost (AVC),
(a) 840
Average Cost (AC) also increases due to the
(b) 40
reason that -
(c) 540
(a) Fall in AFC is less than
(d) 1040
the sharp rise in AVC
(b) Fall in AFC is greater than the sharp
MARGINAL COST AND AVERAGE COST
rise in AVC RELATIONSHIPS
(c) Fall in AFC is equal to the rise in AVC 67. Marginal Cost Curve cuts the
(d) All of the above Average Cost Curve -
62. Average Cost Curve- (a) At the left to its lowest point
(a) Slopes downwards at first (b) At its lowest point
and then upwards (c) At the right to its lowest point
(b) Slopes upwards, remains constant (d) Any of the above
and then falls 68. When ………, we know that the Firms must be
154
producing at the minimum point of the (c) MC Curve intersects the AC Curve at
Average Cost Curve and so there will be minimum AC
productive e ciency. (d) If MC is less than AC, then AC is
(a) MC = MR increasing
(b) MC = AC 73. Marginal Cost is - .
(c) AR = MR (a) Never equal to Average Cost
(d) AC = AR (b) Always more than the Average Cost
69. The relationship between the (c) Equal to the Average Cost at its
AC and MC is that minimum point
(a) MC will always be less than the AC (d) Always less than the Average Cost
(b) MC will be more than 74. When shape of Average Cost Curve is
AC when MC is falling upward, Marginal Cost -
(c) AC may be more than (a) Must be decreasing
MC when MC is rising (b) Must be constant
(d) None of the above (c) Must be rising
70. Which of the following statements (d) Any of the above
is correct? 75. The MC Curve cuts the AVC and ATC Curves
(a) When Average Cost is rising, (a) At the falling part of each
Marginal Cost must also be rising (b) At the rising part of each
(b) When Average Cost is falling, Marginal (c) At their respective minimas
Cost must be rising (d) At different points
(c) When Average Cost is rising, Marginal 76. MC Curve cuts the AVC and ATC Curves -
Cost is above the Average Cost (a) From above
(d) When Average Cost is rising, Marginal (b) From below
Cost must be falling (c) Either (a) or (b)
71. If a Firm's Average Variable Cost Curve is (d) Neither (a) nor (b)
rising, its Marginal Cost Curve must be - 77. When AC falls as a result of an increase in
(a) Constant output -
(b) Above the Total Cost Curve (a) MC = AC
(c) Above the Average Variable (b) MC < AC
Cost Curve. (c) MC > AC
(d) None of the above (d) None of these
72. Which of the following is true of the 78. MC Curve is lower than AC, when -
relationship between Marginal Cost (a) AC decreases
andAverage Cost Functions? (b) AC increases
(a) If MC is greater than AC, then AC is (c) AC is at its minimum
falling (d) Nothing can be said
(b) AC Curve intersects the MC Curve at 79. When AC increases as a result of an increase
minimum MC in output
155
(a) MC < AC whether it produces or not. How much of the
(b) MC = AC Average Total Cost is made up of Variable
(c) MC > AC Costs?
(d) Nothing can be said (a) ₹ 300
80. When MC Curve intersects AC Curve, it (b) ₹ 200
means that (c) ₹ 50
(a) MC is minimum (d) ₹ 100
(b) AC is minimum 86. A Firm's Average Fixed Cost is ₹ 20 at 6 units
(c) Both MC and AC are minimum of output. What will it be at 4 units of output?
(d) Nothing can be said (a) ₹ 40
81. When MC Curve intersects AC Curve, it (b) ₹ 30
means that - (c) ₹ 60
(a) AC is minimum (d) ₹20
(b) AC = MC 87. For producing 100 units, Total Variable Cost
(c) Both (a) and (b) is ₹ 500 and Total Fixed Cost is
(d) Neither (a) nor (b) ₹1,000.Compute Average Cost.
(a) 10
COST COMPUTATIONS (b) 15
82. A Firm's Average Total Cost is ₹ 300 at 5 units (c) 5
of output and ₹ 320 at 6 units of output. The (d) 20
Marginal Cost of producing the 6th unit is - 88. The Average Total Cost of producing 50 units
(a) ₹320 is ₹250 and Total Fixed Cost is ₹ 1,000. What
(b) ₹20 is the Average Fixed Cost of producing 100
(c) ₹ 120 units?
(d) ₹ 420 (a) ₹ 10
83. A Firm has a Variable Cost of ₹ 1000 at 5 units (b) ₹ 20
of output. If Fixed Costs are ₹ 400, what will (c) ₹5
be the Average Total Cost at 5 units of (d) ₹ 30
output? Use the following data to answer the following 11
(a) ₹ 280 questions
(b) ₹ 60
Output (in units) Total Cost (TC) (in ₹)
(c) ₹ 120
(d) ₹ 1,400 0 240
84. What is the Average Total Cost in producing
1 330
20 units, if Fixed Cost is ₹ 5,000 and Variable
Cost is ₹ 200? 2 410
(a) ₹ 258 480
3
(b) ₹ 260
(c) ₹ 250 4 540
(d) ₹ 252 5 610
85. A Firm producing 7 units of output has an
6 690
Average Total Cost of ₹ 150 and has to pay ₹
350 to its Fixed Factors of Production 7 840
156
89. TFC at all levels of Output is - (d) 205
(a) 300 97. AC for 5 units of Output is -
(b) 240 (a) 205
(c) 690 (b) 160
(d) 330 (c) 135
90. AFC for 3 units of Output is - (d) 122
(a) 120 98. AC is minimum at …….. units of Output.
(b) 240 (a) 4
(c) 80 (b) 5
(d) 60 (c) 6
91. MC for 2nd unit of Output is - (d) 7
(a) Nil 99. MC Curve will cut AC Curve at …….. units of
(b) 90 Output.
(c) 80 (a) 7
(d) 70 (b) 4
92. MC for 3rd unit of Output is - (c) 6
(a) 80 (d) 5
(b) 0 100. A company produces 10 units of output
(c) 90 and incurs ₹30 per unit of variable cost and
₹ 5 per unit of fixed cost. In this case total
(d) 70
cost is:
93. MC for 5th unit of Output is -
(a) ₹ 300
(a) 90
(b) ₹ 35
(b) 80
(c) ₹ 305
(c) 70
(d) ₹ 350
(d) 60
94. MC is minimum at …….. units of Output.
LONG RUN COST BEHAVIOUR
(a) 6
(b) 4
101. The period of time in which the Plant
(c) 5
Capacity can be varied is known as -
(d) 3
(a) Short Period
95. AC for 3 units of Output is -
(b) Market Period
(a) 205
(c) Long Period
(b) 160
(c) 135
102. Which is the other name given to the Long
(d) 122
Run Average Cost Curve?
96. AC for 4 units of Output is -
(a) Indifference Curve
(a) 160
(b) Planning Curve
(b) 122
(c) Demand Curve
(c) 135
(d) Profit Curve
157
103. Which one of the following is SAC Curves, the LAC Curve will be -
also known as Planning Curve? (a) Perpendicular to each SAC Curve
(a) Long-Run Average Cost Curve (b) Connecting the lowest
(b) Short-Run Average Cost Curve points of each SAC Curve
(c) Average Variable Cost Curve (c) Smooth Curve, so as to be
(d) Average Total Cost Curve tangent to each of the SAC Curves
104. Which one of the following is (d) All of the above
also known as Plant Curve? 110. LAC Curve is tangent to each of the
(a) Average Variable Cost Curve infinite SAC Curves. This statement is -
(b) Short-Run Average Cost Curve (a) True
(c) Long-Run Average Cost Curve (b) False
(d) Average Total Cost Curve (c) Partially True
105. LAC = Least Cost combination for (d) Nothing can be said
an appropriate output level. This 111. LAC Curve is the connection of
statement is - all minimum points of SAC Curves.
(a) True This statement is -
(b) False (a) True
(c) Partially True (b) False
(d) Nothing can be said (c) Partially True
106. In the long-run, the Firm will operate at (d) Nothing can be said
the …….. for any output level, by choosing 112. When LAC Curve is declining,
the appropriate Plant Size. it will be tangent to the
(a) Optimum cost (a) Falling portions of the SAC Curves
(b) Minimum cost (b) Rising portions of the SAC Curves
(c) Maximum cost (c) Both (a) and (b)
(d) None of these (d) Neither (a) nor (b)
107. In the long-run, the Firm will decide on 113. When LAC Curve is ...........it will be
which SAC Curve it should operate to tangent to the falling portions of
produce a given output, so that its - the SAC Curves.
(a) AC is minimum (a) Decreasing
(b) MC is maximum (b) Increasing
(c) MC is minimum (c) Both (a) and (b)
(d) AC is maximum (d) Neither (a) nor (b)
108. In the long-run, the Firm will try to select - 114. When LAC Curve is rising, it will be
(a) Lowest point of every SAC tangent to the -
(b) SAC with the lowest cost for (a) Falling portions of the SAC Curves
a particular level of output (b) Rising portions of the SAC Curves
(c) Both (a) and (b) (c) Both (a) and (b)
(d) Neither (a) nor (b) (d) Neither (a) nor (b)
109. In the long-run, when there are infinite 115. When LAC Curve is ……….. it will be
158
tangent to the rising portions of the SAC 120. The LAC Curve -
Curves. (a) Falls when the LMC
(a) Decreasing Curve falls
(b) Increasing (b) Rises when the LMC Curve rises
(c) Both (a) and (b) (c) Goes through the lowest point of the
(d) Neither (a) nor (b) LMC Curve
116. Which of the following statements (d) Falls when LMC < LAC and rises when
concerning the Long-Run Average LMC > LAC
Cost Curve is false? 121. Positively sloped (i.e. rising) part of
long run Average Cost Curve is due
(a) It represents the least-cost input
to which of the following ________
combination for producing each level
(a) Constant Returns to Scale
of output
(b) Economics of Scale
(b) It is derived from a series of Short
Run Average Cost Curves
(d) Increasing Returns to Scale
(c) The Short-Run Cost Curve at the
122. Planning curve is related to which
minimum point of the LAC Curve
of the following
represents the least-cost Plant Size
(a) Short-run average cost curve
for all levels of output
(b) Long-run average cost curve
(d) As output increases, the amount of
(c) Average variable cost curve
capital employed by the Firm
(d) Fixed cost curve
increases along the Curve.
117. If the LAC Curve falls as output
expands, this falls is due to -
(a) Economies of Scale
(b) Law of Diminishing Returns
118. If the LAC Curve rises as output
expands, this falls is due to -
(a) Economies of Scale
(b) Law of Diminishing Returns
119. Long Run Average Cost Curves
are broadly-
(a) U - shaped
(b) Inverted U - shaped
(c) V-shaped
(d) L-shaped
159
Revenue Concepts
1. Total Revenue = below

(a) Money which a Firm realises (a) AC
by selling certain units of a (b) MR
commodity.
(c) AVC
(b) Revenue earned per unit of output
(d) AR
(c) Change in Total Revenue (TR) resulting
6. Price = ………
from the sale of an additional unit of
(a) Total Revenue
the commodity.
(b) Average Revenue
(c) Marginal Revenue
2. Average Revenue =
(d) Zero Revenue
(a) Money which a Firm realises
7. Price X Quantity = ………..
by selling certain units of a
(a) Total Revenue
commodity.
(b) Zero Revenue
(b) Revenue earned per unit of output
(c) Marginal Revenue
(c) Change in Total Revenue (TR) resulting
(d) Average Revenue
from the sale of an additional unit of
8. If P = Price, and Q = Quantity sold, which of
the commodity.
the following statements are correct?
(a) Total Revenue = P x Q
3. Marginal Revenue =
(b) Average Revenue= P x Q
(a) Money which a Firm realises
by selling certain units of a (c) Marginal Revenue= P x Q
commodity. (d) Zero Revenue = P x Q
(b) Revenue earned per unit of output 9. If TR = Total Revenue, and Q = Quantity sold,
(c) Change in Total Revenue (TR) resulting then TR ÷ Q refers to -
from the sale of an additional unit of (a) Total Revenue
the commodity. (b) Average Revenue
(d) All of the above (c) Marginal Revenue
4. Marginal Revenue is equal to - (d) Zero Revenue
(a) The change in price divided 10. If TR = Total Revenue, Q = Quantity sold, and ∆
by the change in output is the rate of change, then ∆TR
refers to -
∆Q
(b) The change in quantity divided by the (a) Zero Revenue
change in price (b) Average Revenue
(c) The change in P x Q due to a one unit (c) Marginal Revenue
change in output (d) Total Revenue
(d) Price, but only if the Firm is a price 11. If Price = ₹ 50 and Quantity is 1,200
searcher units, then Total Revenue =
5. The firm will attain equilibrium at a point (a) ₹ 1,250
where MC curve cuts ______ curve from
160
(b) ₹ 1,150 (a) ₹ 120
(c) ₹ 60,000 (b) ₹ 30
(d) ₹ 50,000. (c) ₹ 60
12. If Total Revenue = ₹ 1,00,000 when 20,000 (d) ₹ 20
units are sold, then Average Revenue = 18. When Price is ₹ 5, 40 units can be sold. When
(a) ₹ 1,0000 price is reduced to ₹ 4, 60 units can be sold.
(b) ₹ 20,00 Here, Marginal Revenue will be -
(c) ₹ 5 (a) ₹ 120
(d) ₹ 1,20,000 (b) ₹ 40
13. If Total Revenue = ₹ 2,00,000 when 20,000 (c) ₹ 60
units are sold, then Average Revenue = (d) ₹ 2
(a) ₹ 1,00,000 19. If a Seller gets ₹ 10,000 by selling
(b) ₹ 20,000 100 units and ₹14,000 by selling 120
units, his Marginal Revenue is
(c) ₹ 10
(a) ₹ 4,000
(d) ₹ 1,20,000
(b) ₹ 4,500
14. If a seller obtains ₹ 3,000 after selling 50
(c) ₹ 200
units and ₹ 3,100 after selling 52 units then
(d) ₹ 1,000
MR will be
20. When Price = ₹ 20, quantity demanded is 9
(a) 59.68
units, and when Price = ₹ 19, quantity
(b) 50.00
demanded is 10 units. What is the Marginal
(c) 60.00
Revenue resulting from an increase in output
(d) 55.80
from 9 units to 10 units?
15. When Price is ₹ 10, 5 units can be sold. When
(a) ₹ 20
price is reduced to ₹ 9, 6 units can be sold.
(b) ₹ 19
Here, Marginal Revenue will be -
(c) ₹ 10
(a) ₹ 11
(d) ₹ 1
(b) ₹ 9
21. When Price = ₹ 20, quantity demanded is 15
(c) ₹ 2
units, and when Price = ₹ 18, quantity
(d) ₹ 4
demanded is 16 units. What is the Marginal
16. When Price is ₹ 20, 5 units can be sold. When
Revenue resulting from an increase in output
from 15 units to 16 units?
(a) ₹ 12 negative
(a) ₹ 14
(b) ₹ 12 positive
(b) ₹ 27
(c) ₹ 12 negative
(c) ₹ 20
(d) ₹ 18 positive
(d) ₹ 19
22. As quantity increases, Total
17. When Price is ₹ 50,12 units can be sold. When
Revenue (TR) Curve -
(a) Always increases
(b) Always decreases
161
(c) First increases, reaches a maximum, (d) MR decreases but MR increases
and then decreases. 29. Generally, as quantity sold increases,
(d) First decreases, reaches a minimum, Marginal Revenue (MR) Curve -
and then increases. (a) Increases
23. If Total Revenue (TR) increases, (b) Decreases
Marginal Revenue (MR) will be - (c) Remains constant
(a) Positive (d) None of the these
(b) Zero 30. Generally, as quantity sold increases,
(c) Infinity Average Revenue (AR) Curve -
(d) Negative (a) Increases
24. If Total Revenue (TR) decreases, (b) Decreases
Marginal Revenue (MR) will be -
(a) Positive
(d) Cannot be ascertained
(b) Negative
31. Let, Marginal Revenue = MR and Average
(c) Zero
Revenue = AR. Generally, as
(d) Infinity quantity sold increases -
25. If Total Revenue (TR) is maximum, (a) MR falls quickly than AR
Marginal Revenue (MR) will be -
(b) MR and AR fall at the same rate
(a) Infinity
(c) MR falls slowly than AR
(b) Positive
(d) MR and AR do not change
(c) Zero
32. Let, Marginal Revenue = MR and Average
(d) Negative
Revenue = AR. Generally, as quantity sold
26. Generally, Marginal Revenu
increases -
(MR) Curve -
(a) AR falls quickly than MR
(a) Is parallel to X Axis
(b) AR falls slowly than MR
(c) AR and MR fall at the same rate
(d) AR and MR do not change
33. Marginal Revenue (MR) is-
27. Generally, Average Revenue (AR) Curve -
(a) Can be positive or zero,
(a) Slopes upward from
but not negative
left to right
(b) Will have negative values only
(c) Will have positive values only
(c) Is parallel to X Axis
(d) Can be positive or zero or even
negative.
28. Generally, as quantity sold increases,
34. If Marginal Revenue (MR) Curve is
Marginal Revenue (MR) and Average Revenue
depicted on a graph with Quantity
(AR) Curve -
on X axis -
(a) MR and AR increase
(a) MR will not go below the X axis.
(b) MR and AR decrease
(b) MR may go below the X axis.
(c) MR increases but AR decreases
(c) MR cannot be depicted on the graph at
162
all. 40.If Marginal Revenue = MR, Average Revenue =
(d) All of the above AR, and Price Elasticity of Demand = 'e' which
35. Average Revenue (AR) - of the following is correct?
e-1
(a) Will have positive values only (a) MR = AR × e
e-1
(b) Will have negative values only (b) AR = MR × e
e-1
(c) Can be positive or zero, but not (c) MR = AR × e
e-1
negative. (d) AR = MR × e
(d) Can be positive or zero or even 41. If Marginal Revenue = MR, Price Elasticity of
negative. Demand = 'e', and e < 1, then MR will be -
36. What is the relationship between AR and MR? (a) Zero
(a) AR and MR both are negatively sloped (b) Negative
(b) MR Curves always lies half (c) Positive
-way between AR Curve (d) Infinity
and Origin
42. Marginal Revenue will be negative if
(c) AR and MR both can be zero or
negative
(a) Less than one
(d) None of these
(b) Equal to zero
37. Average Revenue (AR) Curve denotes-
(c) Equal to one
(a) Demand
(d) More than one
(b) Supply
43. If Marginal Revenue = MR, Price Elasticity of
Demand = 'e', and e > 1, then MR will be -
(a) Positive
38. If Average Revenue (AR) Curve is depicted on
(b) Infinity
a graph with Quantity on X axis -
(c) Zero
(a) AR will not go below the
(d) Negative
X axis.
44.If Marginal Revenue = MR, Price Elasticity of
(b) AR may go below the X axis.
Demand = 'e', and e = 1, then MR will be -
(c) AR cannot be depicted on the graph at
(a) Positive
all.
(b) Negative
(d) Both (b) and (c)
(c) Zero
39. Which of the following is True?
(d) Infinity
(a) If Marginal Revenue is
45. If Marginal Revenue = MR, Price Elasticity of
positive and falling, Total
Revenue will rise at a decreasing rate. Demand = 'e', and MR is positive (i.e. MR > 0), e
(b) Total Revenue is equal to price times will be
the quantity sold. (a) e > 1
(c) Marginal Revenue and Average (b) e = zero
Revenue can be calculated from Total (c) e = 1
Revenue. (d) e < 1
(d) All of the above 46. If Marginal Revenue = MR, Price Elasticity of
163
Demand = 'e', and MR is negative (i.e. MR < 0), (a) ₹ 105
e will be (b) ₹ 225
(a) e > 1 (c) ₹ 300
(b) e < 1 (d) ₹ Nil
(c) e = 1 53. Given AR=5, Elasticity of demand =2 find MR-
(d) e = zero (a) 2.5
47. If Marginal Revenue = MR, Price Elasticity of (b) -2.5
Demand = 'e', and MR = 0, e will be (c) -1.5
(a) e < 1 (d) 2.0
(b) e > 1
(c) e = 1 PROFIT MAXIMISATION
(d) e = zero 54. Which is the first order condition for the
48. If Average Revenue (AR) = ₹ 30, Price profit of a Firm to be maximum?
Elasticity of Demand (e) = 1.5, then MR will be (a) AC = MR
(a) ₹ 10 (b) MC = MR
(b) ₹ 20 (c) MR = AR
(c) ₹ 30 (d) AC = AR
(d) ₹ Nil 55. In the short run, as the prices are fixed, Firms
49. If Average Revenue (AR) = ₹ 30, Price can maximize their profit when they operate
Elasticity of Demand (e) = 1, then MR will be - at
(a) Positive (a) MC = MR
(b) Negative (b) MC = AC
(c) Zero (c) MC > MR
(d) Infinity (d) MC < MR
50. If Average Revenue (AR) = ₹ 30, Price 56. If Marginal Cost = MC, and Marginal Revenue =
Elasticity of Demand (e) = 0.5, then MR will MR, then, for achieving equilibrium output,
be- the conditions are -
(a) ₹ 30 positive (a) MC = MR
(b) ₹ 30 negative (b) MC Curve should cut MR
(c) Infinity Curve fro below.
(d) Zero (c) Both (a) and (b)
51. If Average Revenue (AR) = ₹ 300, Price (d) Neither (a) nor (b)
Elasticity of Demand (e) = 2.5, then MR will be 57. If Marginal Cost = MC, and Marginal Revenue =
(a) ₹ 180 MR, then, for achieving equilibrium output -
(b) ₹ 160 (a) MC < MR
(c) ₹ 200 (b) MC > MR
(d) ₹ Nil (c) MC = MR
52. If Average Revenue (AR) = ₹ 300, Price (d) None of the above
Elasticity of Demand (e) = 4, then MR will be - 58. If Marginal Cost = MC, and Marginal Revenue =
164
MR, then, for achieving equilibrium output - (a) MC Curve should have
(a) MC Curve should not cut positive slope
MR Curve a all (b) MC Curve should be
(b) MC Curve should cut MR parallel to Y Axis
Curve fro below (c) MC Curve should be parallel to X Axis
(c) MC Curve should cut MR Curve from (d) MC Curve should have negative slope
above 64. Let Marginal Cost = MC, and
(d) MC Curve should be tangent to MR Marginal Revenue = MR. If MC
Curve cuts MR from below,it means-
Curve
(a) MC Curve has a negative slope
59. If Marginal Cost = MC, and Marginal
Revenue = MR, and MC < MR, the (b) MC Curve has a positive slope
Firm should - (c) MC Curve is parallel to Y Axis
(a) Increase its output. (d) MC Curve is parallel to X Axis
(b) Reduce its output 65. Let Marginal Cost = MC, and Marginal
(c) Operate at the present level itself. Revenue = MR. If MC Curve cuts
(d) Should shut down. MR from above, it means -
60. Suppose a Firm is producing a level (a) MC Curve is parallel to X Axis
of output such that MR>MC. What (b) MC Curve has a positive slope
should be Firm do to maximize its profits? (c) MC Curve has a negative slope
(a) The Firm should increase price (d) MC Curve is parallel to Y Axis
(b) The Firm should hire less labour 66. Let Marginal Cost = MC, and
(c) The Firm should do nothing Marginal Revenue = MR. If MC
(d) The Firm should increase output Curve cuts MR from above, it means -
61. What should Firm do when Marginal (a) Firm is at equilibrium output level.
Revenue is greater than Marginal (b) Firm is below equilibrium output level.
Cost? (c) Firm is above equilibrium output level.
(a) Firm should expand output (d) Firm does not operate at all.
(b) Efforts should be made to make then 67. Let Marginal Cost = MC, and Marginal
equal Revenue = MR. If MC Curve cuts
(c) Prices of the products should be MR from below, it means -
lowered down (a) Firm is at equilibrium output level.
(d) All of the above (b) Firm does not operate at all
62. If Marginal Cost = MC, and Marginal Revenue = (c) Firm is above equilibrium output level.
MR, and MC > MR, the Firm should - (d) Firm is below equilibrium output level
(a) Increase its output 68. If any unit of production adds more to
(b) Reduce its output revenue than to cost it will result into -
(c) Should shut down (a) Increase in Profit
(d) Operate at the present level itself (b) Decrease in Profit
63. If Marginal Cost = MC, and Marginal Revenue = (c) No change
MR, then, for achieving equilibrium output - (d) Loss
165
69. If any unit of production adds more to economic sense
cost than to revenue it will result into - (d) Is earning Super-Normal Profits
(a) No change 76. Let Average Cost = AC, and Average Revenue
(b) Decrease in Profit = AR. If AC < AR, it means that the Firm -
(c) Increase in Profit (a) Is earning Super-Normal Profits.
(d) Loss (b) Is earning Normal Profits.
70. When the Firm is said to be in (c) Is making Losses.
equilibrium? (d) Has to shut-down.
(a) When it maximizes its Profit 77. Let Average Cost = AC, and Average Revenue
(b) When it maximizes its Losses = AR. If AC = AR, it means that the Firm -
(c) When Revenue is equal to Cost (a) Is earning Super-Normal Profits
(d) None of these (b) Is earning Normal Profits
71. When a Market is in equilibrium - (c) Has to shut-down
(a) No shortages exist. (d) Is making Losses
(b) Quantity demanded equals 78. Let Average Cost = AC, and Average Revenue
quantit supplied.
= AR. If AC > AR, it means that the Firm -
(c) A price is established that clears the
(a) Is earning Super-Normal Profits
market.
(b) Is earning Normal Profits
(d) All of the above are correct.
(c) Is making Losses in the
72. Profits of the Firm will be more at -
economic sense
(a) MR = MC
(d) Has to shut-down
(b) AR > AC
79. When ………., the Firm will be earning just
(c) Both of the above
Normal Profits.
(d) None of these
(a) AC = AR
73. Let Average Cost = AC, and Average Revenue
(b) MC = AC
= AR. If AR > AC, it means that the Firm -
(c) AR = MR
(d) MC = MR
(b) Is making Losses
80. When does a Firm earn Normal Profits?
(c) Has to shut-down
(a) When MR = MC
(d) Is earning Normal Profits
(b) When AR = AC
(c) When MR = AR = AC = AC
= AR. If AR = AC, it means that the Firm -
(d) None of these
81. What are conditions when the Firm earns
(b) Is earning Normal Profits
Super- Normal Profit?
(c) Is making Losses
(a) Average Revenue is more
(d) Has to shut-down
than Average Cost
(b) MC Curve has negative slope
= AR. If AR < AC, it means that the Firm -
(c) MR Curve has positive slope
(a) Has to shut-down (d) Average Cost is more than Average
(b) Is earning Normal Profits Revenue
(c) Is making Losses in the 82. For earning super-normal profits, the
166
condition is ……… at the point when MC = MR (b) If Marginal Cost exceeds
(MC cutting from below) Marginal Revenue the Firm
(a) AR > AC should decrease output.
(b) AR = AC (c) Economic Profits are maximized when
(c) AR < AC Total Costs are equal to Total
(d) None of the above. Revenue.
83. For earning normal profits, the condition is (d) Profits are maximized when Marginal
……… at the point when MC = MR (MC cutting Revenue equals Marginal Cost.
from below) 89. Suppose that a Sole Proprietorship Firm is
(a) AR > AC earning Total Revenues of ₹ 120,000 and is
(b) AR = AC incurring Explicit Costs of ₹ 90,000. If the
(c) AR < AC Owner could work for another Company for ₹
(d) None of these 50,000 a year, we would conclude that
84. For having economic losses, the condition is (a) The Firm is incurring an
…….. at the point when MC = MR (MC cutting Economic Loss
from below) (b) The Individual is earning an
(a) AR > AC Economic Profit of ₹ 25,000
(b) AR = AC (c) The total Economic Costs are ₹
(c) AR < AC 100,000
(d) None of these (d) Implicit Costs are ₹ 90,000
85. When ………, we know that the Firms are 90. Suppose that a Sole Proprietorship is earning
earning just Normal Profits. Total Revenue of ₹ 1,50,000 and is incurring
(a) AC = AR Explicit Costs of ₹ 75,000. If the Owner could
(b) MC = MR work for another Company for ₹ 30,000 a
(c) MC = AC year, it can be concluded that
(d) AR = MR (a) Total Economic Costs are
86. The Average Profit is the difference ₹ 1,00,000
between- (b) Implicit Costs are ₹ 25,000
(a) AC and TR (c) The Firm is incurring an Economic
(b) AC and VC Loss
(c) AC and AR (d) The individual is earning an economic
(d) AC and TC profit of ₹ 45,000
87. When AR= ₹10 and AC= ₹ 8, the Firm makes- 91. Suppose the Total Cost of Production of
(a) Gross Profit Commodity X is ₹ 1,25,000. Out of this Cost,
(b) Normal Profit Implicit Cost is ₹ 35,000 and Normal Profit is
(c) Net Profit ₹ 25,000. What will be the Explicit Cost of
(d) Super-Normal Profit Commodity X?
88. Which of the following statements is (a) ₹ 90,000
incorrect? (b) ₹ 65,000
(a) If Marginal Revenue exceeds Marginal (c) ₹ 60,000
Cost, the Firm should increase output. (d) ₹ 1,00,000
167
92. If the Total Product Cost for manufacturing (d) Profits will increase
of a commodity is ₹ 1,50,000. Out of this, 98. If AR < AVC and the Firm stops
Implicit Cost is ₹ 55,000 and Normal Profit is production, then -
₹ 25,000, what will be Explicit Cost? (a) There is no profit no loss
(a) ₹ 85,000 (b) There is a Loss equivalent to Fixed
(b) ₹ 1,25,000 Costs
(c) ₹ 75,000 (c) There is a Profit
(d) ₹ 70,000 (d) All of the above
99. What should Firm do if Total Revenue from
SHUT DOWN POINT its product does not equal or
93. Let Average Variable Cost = AVC, exceeds its Total Variable Cost?
and Average Revenue = AR. If AR (a) Firm should carry production
< AVC, it means that the Firm (b) Firm should stop the production
(a) Is earning Super-Normal Profits (c) Firm should carry production and at
(b) Is earning Normal Profits least try to get revenues equal to fixed
(c) Is making Losses but need not shut cost
down (d) All of these
(d) Has to shut-down 100. In the short run, if the Firm can
94. Which of these is a condition for shut-down not cover its Total Variable Cost -
of a Firm? (a) It continues its operations
(a) AR < AC (b) It shuts down its operations
(b) AR > AC temporarily
(c) AR > AVC (c) It shuts down its operations forever
(d) AR < AVC (d) It makes more investments to make
95. A firm will close down in the short period, if the operations viable
AR is less than 101. A Firm encounters its "Shut-
(a) AVC Down Point” when-
(b) AC (a) Marginal Cost equals Price at the
(c) MC profit- maximizing level of output
(d) None (b) Average Variable Cost equals Price at
96. If AR < AVC then the Firm - the profit- maximizing level of output
(a) Will have losses but will (c) Average Total Cost equals price at the
not shut down profit- maximizing level of output
(b) Will shut-down (d) Average Fixed Cost equals price at the
(c) Will continue and make profits profit- maximizing level of output
(d) Will increase the output 102. At which of the following points, does the
97. If AR < AVC and the Firm continues Marginal Cost Curve meet the Average
production, then Variable Cost Curve?
(a) Losses will be reduced (a) Shut Down Point
(b) Profits will be reduced (b) Profit Maximization Point
(c) Losses will increase (c) Equilibrium Point
168
(d) Break Even Point 108. In the long-run, Firms will exit the market
103. "I am making a loss, but with the rent I the price of the good offered for sale is less
have to pay, I can't afford to shut down at than -
this point of time." If this Entrepreneur is (a) Marginal Revenue
attempting to maximize profits or minimize (b) Marginal Cost
losses, his behaviour in the short-run is (c) Average Total Cost
(a) Rational, if the Firm is (d) Average Revenue
covering its Variable Cost. 109. In the long run, there is enough time for
(b) Rational, if the Firm is the Firm to cover its Losses and earn
covering its Fixed Costs. Normal Profits. This is because in the long
(c) Irrational, since Plant Closure is run, all inputs are -
necessary to eliminate losses. (a) Homogenous
(d) Irrational, since Fixed Costs are (b) Fixed
eliminated if a Firm shuts down. (c) Variable
104. At Shut-Down Point - (d) Identical
(a) Price is equal to AVC
(b) Total Revenue is equal to TVC COMPREHENSIVE PROBLEMS
(c) Total Loss of the Firm is equal to TFC A Competitive Firm sells as much as of its
(d) None of the above product as it chooses at a Market Price of ₹ 100
per unit. Its Fixed Costs are ₹ 300 and its
105. Long-Run Normal Prices is that which is
Variable Costs for different levels of production
likely to prevail
are shown in the following table. Use the
(a) All the times following table and answer the next 14
(b) In market period questions.
(c) In short-run period 110. When Production is 10 units, AVC will be
(d) In long-run period (a) ₹ 49.00
106. In the long-run, if the Firm is unable to (b) ₹ 47.00
cover the Average Total Cost then it - (c) ₹ 46.67
(a) Decreases the Selling Price (d) ₹ 50.00
(b) Decreases the Labour to 111. When Production is 10 units, AC will be -
decrease production (a) ₹ 50.00
(c) Increases the Labour to increase (b) ₹ 97.00
production
Quantity TVC TFC TC AVC AFC AC MC
(d) Moves out of the business 0 0
107. In the long-run, any Firm will eventually 5 250
leave the industry if - 10 470
(a) Price does not at least 15 700
20 980
cover Average Total Cost
25 1350
(b) Price does not equal Marginal Cost 30 1850
(c) Economies of Scale are being reaped 35 2520
(d) Price is greater than Long Run 40 3400
45 4530
Average Cost
50 5950
169
(c) ₹ 77.00 (c) ₹ 110.00
(d) ₹ 110.00 (d) ₹ 125.00
112. When Production is 20 units, 120. AC is minimum when output is -
AVC will be - (a) 30 units
(a) ₹ 47.00 (b) 20 units
(b) ₹ 48.00 (c) 40 units
(c) ₹ 46.67 (d) 10 units
(d) ₹ 49.00 121. MC Curve will cut AC Curve when output is
113. When Production is 20 units, AC will be - (a) 10 units
(a) ₹ 50.00 (b) 20 units
(b) ₹ 64.00 (c) 30 units
(c) ₹ 77.00 (d) 40 units
(d) ₹ 88.00 122. To maximize Profit, the Firm should
114. When Production is 30 units, AVC will be - produce -
(a) ₹ 46.67 (a) 35 units
(b) ₹ 61.67 (b) 30 units
(c) ₹ 56.67 (c) 15 units
(d) ₹ 65.67 (d) 50 units
115. When Production is 30 units, AC will be - 123. If the Market Price drops from ₹ 100 to ₹
(a) ₹ 66.67 56, the Firm's short run response should be -
(b) ₹ 71.67 (a) Shutdown
(c) ₹ 56.67 (b) Produce 5 units
(d) ₹ 76.67 (c) Produce 20 units
116. When Production is 40 units, AVC will be - (d) Continue to produce the same number
(a) ₹ 85.00 of units as before the drop in
(b) ₹ 92.50 price.Use Table to answer the following 4
(c) ₹ 82.50 questions.
(d) ₹ 95.50 Bozzo's burgers is a small restaurant and a price
117. When Production is 40 units, AC will be - taker. The table below provides the data of
(a) ₹ 85.00 Bozzo's output and costs in Rupees.
Qty TC FC AVC AC MC
(b) ₹ 82.50
0 0 - - - -
(c) ₹ 92.50 10 210
(d) ₹ 95.00 20 300
30 400
118. When Production is 50 units, AVC will be - 40 540
(a) ₹ 110.00 50 790
60 1060
(b) ₹ 100.00
(c) ₹ 119.00 124. If burgers sell for Rs14 each, what is
(d) ₹ 125.00 Bozzo's profit maximizing level of output:
119. When Production is 50 units, AC will be - (a) 10 burgers
(a) ₹ 100.00 (b) 40 burgers
(b) ₹ 119.00 (c) 60 burgers
170
(d) 50 burgers (a) Fixed cost is 0 and its variable cost is
125. What is the total variable cost when 50 193
burgers are produced? (b) Fixed cost is 193 and its
(a) ₹ 690 variable cost is 0
(b) ₹ 960 (c) Fixed cost is 100 and its
(c) ₹ 110 variable cost is 93
(d) ₹ 440 (d) Fixed cost is 45 and its variable cost is
126. What is average fixed cost when 20 148.
burgers are produced? 129. When production equals 5 units, the firm's
(a) ₹ 5 Total Revenue is:
(b) ₹10 (a) ₹ 100
(c) ₹ 3.33 (b) ₹ 270
(d) ₹ 2.5 (c) ₹ 324
127. Between 10 to 20 burgers, what is the (d) ₹ 500
marginal cost (per burger)? 130. When production equals 6 units, the firm's
(a) ₹ 13 marginal revenue is:
(b) ₹ 11 (a) ₹94
(c) ₹ 14 (b) ₹ 384
(d) ₹ 9 (c) ₹ 64
(d) ₹ 20
Use Table to answer the following 5 questions. 131. When production equals 7 units, the firm's
The following table provides cost and price profit is:
information for an individual firm. The first two (a) ₹ 42.80
columns represent the demand curve that the (b) ₹ 41.57
firm faces. The firm has a fixed amount of
(c) ₹ 291
capital equipment, but can change the level of
(d) ₹ 300
other inputs such as labour and materials.
Calculate the missing values in the table, and 132. To maximize its profit, the firm should
use the table to answer the below questions. produce:
(Make sure you answer each question using the (a) 3 units
production level specified.) (b) 0 units
0 P TC TVC MC TR MR (c) 5 units
0 130 45 (d) 7 units
1 124 88
2 118 125
3 112 159 PRODUCTION OPTIMISATION
4 106 193
1. The term "Iso" means -
5 100 230
6 94 273 (a) Similar
7 88 325 (b) Single
8 82 389
(c) Equal
9 76 465
(d) Unequal
128. When production equals 4 units, the 2. Isoquant represents
firm's: (a) Constant quantity of input
171
(b) Variable quantity of input (d) All the above
(c) Variable quantity of output 9. The point of tangencybetween any Isoquant
(d) Constant quantity of output and an Isocost Line gives the
3. ______ represents all those combinations of (a) highest-cost combination of inputs
inputs which are capable of producing the and maximum level of output that can
same level of output. be produced
(a) Isoquant (b) lowest-cost combination of inputs
(b) Isocost and minimum level of output that can
(c) Isoprice be produced
(d) Both (b) and (c) (c) lowest-cost combination of inputs
4. Isoquants are also known as- and maximum level of output that can
(a) Equal-Product Curves be produced
(b) Production Indifference Curves (d) highest-cost combination of inputs
(c) Isoproduct Curves and minimum level of output that can
(d) All the above be produced
5. Isoquants 10. A line joining tangency points of Isoquants
(a) Touched both the axis and Isocostsis refer to
(b) Are concave to the origin (a) Expansion Path
(c) Are non-intersecting (b) Contraction Path
(d) Are positively sloped (c) Constant Path
6. Isocost Lines are also known as - (d) None of the above
(a) Equal cost Lines
(b) Budget Line
(c) Budget constraint Line
(d) All the above
7. ______ shows the various alternative
combinations of two Factor Inputs, which a
Firm can buy with given amount of money.
(a) Isocost Lines
(b) Isoproduct Lines
(c) Isoprice Lines
(d) Isoquant lines
(a) A change in the relative Input Price
will cause a change in the slope of the
Isocost Line
(b) Whatever the combination of Factor
Inputs the Firm chooses, the Total
Cost to the Firm remains the same
(c) All points on a Budget Line would cost
the Firm the same amount
172
CHAPTER 7 - Forms Of Market
MARKETS BASICS (c) A product or service

1. In Economics, a place where Buyers 6. The Market for ultimate consumers is known
and Sellers meet and bargain over as _______
a commodity for a price is called - (a) Whole Sale Market
(a) Exchange (b) Retail Market
(b) Den (c) Unregulated Market
(c) Market (d) Regulated Market
(d) Shop 7. Which of these is not a Market Structure in
2. Which of the following statements Economics?
best describe a "Market"? (a) Monopolistic Competition
(a) Place where transactions takes place (b) Perfect Competition
(b) Place where Shares and Securities are (c) Monopoly
bought and sold (d) Intense Competition
(c) Place where Buyers and Sellers meet 8. Which of these is a Market Structure in
and bargain over a commodity for a Economics?
price (a) Stock Exchange
(d) Place where Fruits and Vegetables are (b) Reserve Bank of India
bought and sold (c) Oligopoly
3. Which of these is not a feature of Market? (d) Government of India
(a) Buyers and Sellers. 9. Which of the following types of competition
(b) Commodity, Product or is just a theoretical economic concept, not a
Service. realistic case where actual competition and
(c) Bargaining for a Price trade take place?
(d) Government Regulation and Control (a) Monopolistic Competition
4. Which of these is a characteristic of Market? (b) Monopoly
(a) Perishable Nature of the (c) Perfect Competition
commodity (d) Oligopoly
(b) Government Regulation 10. Free Entry / Exit is a characteristic of-
and Control
(a) Monopolistic Competition
(c) One Price for a Product or
(b) Monopoly
Service at a given time
(c) Perfect Competition
(d) Scarcity of Resources
(d) (a) and (c)
5. Which of the following is an element of
11. Free Entry / Exit is a not feature of-
Market Structure?
(a) Perfect Competition
(a) Bargaining for a Price
(b) Monopoly
(b) Buyers & Sellers
(c) Monopolistic Competition
173
(d) None the above (b) Oligopoly
12. Free Entry / Exit is possible in - (c) Monopoly
(a) short-run (d) Monopolistic Competition
(b) long-run 20. Which of the following is an Oligopoly?
(c) Both (a) and (b) (a) Automobile
(d) Neither (a) nor (b) (b) Mobile Industry
13. Short run price is also called: (c) Cold Drink
(a) Market price (d) All of these
(b) Showroom price 21. Toothpaste Manufacturing Industry is an
(c) Maximum retail price example of
(d) Both (a) and (b) (a) Oligopoly
14. The market for Foodgrains, Cereals, (b) Monopoly
Vegetables, etc. closely resembles - (c) Monopolistic Competition
(a) Perfect Competition (d) Perfect Competition
(b) Monopolistic Competition 22. Automobile (Cars) Manufacturing Industry is
(c) Oligopoly an example of -
(d) Monopoly (a) Perfect Competition
15. Railways is an example of - (b) Monopoly
(a) Oligopoly (c) Monopolistic Competition
(b) Monopoly (d) Oligopoly.
(c) Monopolistic Competition 23. Toilet Soaps Industry is an example of -
(d) Perfect Competition (a) Oligopoly
16. Air Travel Service Industry is an example of- (b) Monopoly
(a) Perfect Competition (c) Monopolistic Competition
(b) Monopoly (d) Perfect Competition
(c) Monopolistic Competition 24. Mobile Phone Service Providers is an
(d) Oligopoly. example of
17. Electricity Supply Service is an example of - (a) Perfect Competition
(a) Oligopoly (b) Monopoly
(b) Monopoly (c) Monopolistic Competition
(c) Perfect Competition (d) Oligopoly.
(d) Monopolistic Competition 25. The structure of the Cold Drink Industry in
18. Bottled Cool Drinks Industry is an example of India is best described as
(a) Perfect Competition (a) Monopolistically Competitive
(b) Monopolistic Competition (b) Perfectly Competitive
(c) Monopoly (c) Monopolistic
(d) Oligopoly (d) Oligopolistic
19. Agricultural Goods markets depict 26. The conditions of Firm Equilibrium, i.e. MC =
characteristics close to - MR, and MC cuts MR from below, is applicable
(a) Perfect Competition for -
174
(a) Monopolistic Competition for -
(b) Perfect Competition (a) Monopolistic Competition
(c) Monopoly (b) Monopoly
(d) All of the above (c) Oligopoly
27. In which of the following market conditions, (d) Perfect Competition
does a Firm maximizes its profit when its 32. In which of the following market structures is
Marginal Revenue = Marginal Cost? the demand curve of the market is
(a) Perfect Competition represented by the demand curve of the
(b) Monopolistic Competition Firm?
(c) Monopoly (a) Monopolistic competition
(d) All of the above (b) Perfect Competition
28. What is the other name given for Average (c) Monopoly
Revenue Curve? (d) Oligopoly
(a) Profit Curve 33. The AR Curve and Industry Demand Curve are
(b) Demand Curve same in the case of -
(c) Average Cost Curve (a) Monopoly
(d) Indifference Curve (b) Oligopoly
29. Which of the following is not a characteristic (c) Perfect Competition
feature common to both Monopolistic (d) Both (a) and (b)
Competition and Perfect Competition? 34. Why is the Demand Curve of the Market in
(a) Firms take other Firms' Monopoly is represented by the Demand
prices as given Curve of the Firm?
(b) Identical Products (a) Because there are many
(c) Many Buyers and Sellers buyers in the market
(d) Easy entry and exit of Firms (b) Because there is only one Firm in the
30. UnderPerfect Competition, the Firms market
operating in a monopolistically competitive (c) Because there is only one buyer in the
industry can realize only Normal market
Profits in the long run because (d) Because there are many Firm in the
(a) The Firms tend to have market
diseconomies of scale in the long run 35. The relationship Industry = Large
(b) There are virtually no entry or exit Number of Firms, is applicable for -
barriers (a) Monopolistic Competition
(c) Consumers are more price sensitive in (b) Perfect Competition
the long ruin that in the short run (c) Monopoly
(d) Cartels agreements tend to be more (d) Both (a) and (b)
unstable with the increase of time as 36. The relationship Industry = a Few
member Firms try to increase their Firms, is applicable for -
profits by cheating on the agreement (a) Perfect Competition
31. The relationship Firm = Industry is applicable (b) Monopolistic Competition
175
(c) Monopoly (c) Oligopoly
(d) Oligopoly (d) Perfect Competition
37. Which among the following market 43. A market structure in which many Firms sell
structures has the highest product products that are similar but not identical is
differentiation? known as -
(a) Pure or Perfect Competition (a) Monopolistic Competition
(b) Monopolistic Competition (b) Perfect Competition
(c) Oligopoly (c) Monopoly
(d) Monopoly (d) Oligopoly
38. Which among the following market 44.Which of the following types of market
structures has the highest price elasticity? structure is the exact opposite of Perfect
(a) Pure or Perfect Competition Competition?
(b) Monopoly (a) Monopolistic competition
(c) Oligopoly (b) Monopoly
(d) Monopolistic Competition (c) Oligopoly
39. Which of the following market forms will (d) Duopoly
never suffer losses in the short run? 45. Which of the following statements about
(a) Monopoly Price and Marginal Cost (MC) in competitive
(b) Oligopoly and monopolized markets is true?
(c) Perfect Competition (a) In Competitive Markets,
(d) None of these Price = MC; in Monopolized
40.Under which of the following market Markets, Price > MC.
structures is the price lower and output (b) In Competitive Markets, Price > MC; in
larger? . Monopolized markets, Price = MC.
(a) Perfect Competition (c) In Competitive Markets, Price = MC; in
(b) Monopolistic Competition Monopolized Markets, Price = MC.
(c) Monopoly (d) In Competitive Markets, Price > MC; in
(d) Oligopoly Monopolized markets, Price > MC.
41. In which form of the market structure is the 46. In which of the following types of market
degree of control over the price of its structures can a Firm earn abnormal profits
product by a Firm very large in the long run?
(a) Monopoly (a) Perfect Competition
(b) Oligopoly (b) Monopolistic competition
(c) Perfect Competition (c) Monopoly
(d) Imperfect Competition (d) All of the above
42. Under which of the following forms of market 47. In which of the following types of market
structure does a Firm has no control structure, do Firms produce
over the price of its product homogeneous products?
(a) Monopoly (a) Differentiated Oligopoly
(b) Monopolistic competition (b) Monopoly
176
(c) Perfect Competition (a) Monoposony
(d) Monopolistic Competition (b) Bilateral Monopoly
48. Which of the following statements (c) Duopoly
is not correct? (d) Oligopoly
(a) Even Monopolist can earn losses 53. A market characterized by a Single Buyer of a
(b) Firms in a perfectly competitive product or service means
market are Price Takers. (a) Monoposony
(c) It is always beneficial for a Firm in a (b) Bilateral Monopoly
Perfectly Competitive Market to (c) Duopoly
discriminate prices. (d) Oligopoly
(d) Kinked demand curve is related to an 54. A market characterized by a small number of
Oligopolistic Market. large buyers.
49. Which of the following statements is not (a) Duopoly
true with respect to the long run? (b) Bilateral Monopoly
(a) A Firm in a monopolistically (c) Monoposony
competitive industry earns (d) Oligopsony
only normal profits in the long run 55. A market structure in which there is only a
(b) A Perfectly Competitive Firm earns Single Buyer and a Single Seller
only normal profits in the long run (a) Monoposony
(c) A Monopolist does not make losses (b) Bilateral Monopoly
(d) Monopolistically Competitive Firms (c) Duopoly
will be producing at minimum average (d) Oligopsony
cost 56. Duopoly is a market situation in which -
50. P = MR = MC = AC = is the condition of - (a) there are only two Firms in the market
(a) Long run equilibrium for a Firm (b) there is a Single Buyer of
under Perfect Competition a product or service
(b) Long run disequilibrium (c) there is only a Single Buyer
for a Firm and a Single Seller
(c) Long run equilibrium for a Firm under (d) All of the above
Monopoly 57. A person who charges different prices in
(d) Long run equilibrium for a Firm under different sub-markets is -
Monopolistic competition (a) Discriminating Monopolists
51. Which of the following features is not seen in (b) Simple Monopolists
Imperfect Competition? (c) Selective Monopolists
(a) Price wars (d) None of the above
(b) Few Sellers
(c) Product Differentiation
(d) All goods are Homogenous
52. Market situation in which there are only two
Firms in the market
177
Perfect Competition
PERFECT COMPETITION (b) Mobility of factors of production

(c) Free entry and exit
1. In India which of the following best describes (d) Presence of advertisement
a perfectly competitive market? 7. Under Perfect Competition, the product is -
(a) Sugarcane Cultivation (a) Influenced by Brand Name
(b) Electricity Distribution (b) Homogeneous
(c) Toilet Soap Industry (c) Differentiated
(d) Indian Railways (d) Always Intangible
2. Which industry best fits the description of a 8. Under Perfect Competition, each Firm is a
Perfectly Competitive market? _______
(a) Automobile (a) Price Maker
(b) PC (b) Price Taker
(c) Soft-drinks (c) Price Maker for its own product.
(d) Agriculture (d) All of the above.
3. Under Perfect Competition, there are _____ 9. Price under perfect competition is
Sellers. determined by -
(a) Many (a) Government
(b) A Few (b) Industry
(c) Only one (c) Firm
(d) No (d) Society
4. Under Pure Competition, there are ______ 10. In a perfect competition, who set the prices:
Sellers. (a) Buyers
(a) Many (b) Sellers
(b) Only one (c) Both buyers and sellers
(c) A Few (d) Government
(d) No 11. The assumptions of large number of Sellers
5. Which of the following is not an essential and product homogeneity in Perfect
condition of Pure Competition? Competition, implies that all individual Firms
(a) Freedom of entry in Perfect Competition are -
(b) Homogeneous Product (a) Price Takers
(c) Large number of Buyers and Sellers (b) Price Givers
(d) Absence of Transport Cost (c) Price Offerers
6. Which of the following is not true about (d) Price Movers
perfect competition? 12. In which competition, firm has no
(a) Purchase and sale of control over price?
homogeneous goods (a) Monopoly
178
(b) Perfect competition (a) Relatively elastic
(c) Monopolistic Competition (b) Relatively inelastic
(d) Oligopoly (c) Unitary elastic
13. In a Perfect Competitive Market - (d) Infinitely elastic
(a) Firm is the Price-Giver and 19. Under Perfect Competition, the Firm's
Industry is the Price Taker Demand Curve is
(b) Firm is the Price Taker and industry is (a) Horizontal Line, parallel to
the Price-Giver X Axis
(c) Both are Price Takers (b) Vertical Line, parallel to Y Axis
(d) Both (a) and (c) (c) Negatively Sloped
14. The distinction between a single firm & an (d) Kinked
Industry vanishes in which of the following 20. ________ shape of the Demand Curve faced
market condition by a Firm under Perfect Competition
(a) Monopoly (a) Horizontal
(b) Perfect competition (b) Vertical
(c) Imperfect competition (c) Positively sloped
(d) Monopolistic competition (d) Negatively sloped
15. How are prices determined under Perfect 21. In India, the Milk Market resembles a
Competition? perfectly competitive industry. If the
(a) At the equilibrium price industry is an increasing cost industry, the
of Firm long run supply curve of the industry
(b) At the equilibrium prices of Industry (a) Slopes upward to the right
(c) At the point where MR = MC (b) Slopes downward to the right
(d) Both (a) and (b) (c) Would be a vertical straight line
16. Under Perfect Competition, each Firm's (d) Would be horizontal straight line
control over price is - 22. Under Perfect Competition, a Firm can earn
(a) Nil ______ in the long-run.
(b) Full and Absolute (a) Normal Profits only
(c) Subject to Competing Firms’ (b) Super Normal Profits
Strategies (c) Losses
(d) All of the above (d) None of the above.
17. Under Perfect Competition, Price Elasticity 23. Under Perfect Competition, in the long-run, a
of Demand is Firm
(a) Nil (a) will not have excess capacity
(b) Less Elastic (b) will leave the industry
(c) More Elastic (c) may have excess capacity
(d) Infinity (d) has no capacity at all
18. In a Perfectly Competitive Market, the 24. Under Perfect Competition, in the long-run, a
Demand Curve is Firm -
179
(a) will always be a (d) Firms are free to enter and exit the
Optimal Firm. market
(b) will never be an 29. Which of the following statements
Optimal Firm.
regarding Perfect Competition
(c) may or may not be an Optimal Firm. is false?
(d) will leave the industry. (a) Supply and Demand forces
25. Which of these is not a feature determine the price of a commodity
of Perfect Competition? (b) All Buyers in the Market are always in
(a) Free Entry / Exit position to influence the market
(b) Large Number of Buyers & Sellers (c) In the short run, the Firm takes Market
(c) Homogeneous Products Price as given
(d) Preference of Consumers towards one (d) Considering the Market Price, Firm
Supplier adjusts the level of output to
26. Which of the following is a feature maximize profits
of Perfect Competition? 30. Which of these is not a feature
(a) Firms are free to produce any number of Perfect Competition?
of units of different commodities (a) Restriction in Entry of new Firms
(b) Firms are free to enter and exit from (b) E cient Transportation Facilities
the industry (c) Uniform Market Price
(c) Firms are free to produce any type of (d) Perfect Knowledge
a commodity 31. Which of the following is not a condition of
(d) All of the above Perfect Competition?
27. One of the essential conditions of (a) Perfect Mobility of Factors
Perfect Competition is - (b) Large Number of Firms
(a) Product Differentiation (c) Informative advertising to ensure that
(b) Multiplicity of prices for identical consumers have good information
product at any one time. (d) Freedom of entry and exit into and out
(c) Many Sellers and few Buyers of the market
(d) Only one price for identical goods at 32. Which of the following is not a characteristic
any one time of a Perfectly Competitive Market?
28. Which of the following is true about Perfect (a) Large number of Firms
Competition? in the industry
(a) Entry and exit in the market (b) Outputs of the Firms are perfect
is highly restricted substitutes for one another
(b) Firms can enter freely in the market (c) Firms face downward-sloping
but it is di cult to exit from the Demand Curves
market (d) Resources are very mobile
(c) Firms face di culty in entering the 33. Which of the following is not a feature of a
market, but Firms can freely exit from Perfectly Competitive Market?
the market (a) Large number of Buyers and Sellers
180
(b) Homogeneous Product be horizontal at each Firm's zero
(c) Free entry and exit of Firms profit price
(d) Presence of high (c) The long run equilibrium in a
transportation costs competitive industry will be one with
34. Which of these is not a characteristic of no economic profit
Perfect Competition? (d) With a constant increase in one input,
(a) Free Entry / Exit keeping other inputs constant, the
(b) Lack of Perfect Knowledge output could be increase
(c) Ine cient Transportation Facilities 39. Under Perfect Competition, Demand (D) =
(d) Mobility of Factors of Production (a) Price (P)
35. Which of the following is not a characteristic (b) Average Revenue (AR)
feature of Perfect Competition? (c) Marginal Revenue (MR)
(a) Customers have no bargain (d) All of the above
ng power
40.Which of the following curves resembles the
(b) All the products are homogenous
Demand Curve in a Perfect Competition?
(c) All the sellers sell at the same price
(a) Average Variable Cost Curve
(d) Customers have no purchasing power
(b) Marginal Utility Curve
(c) Average Cost Curve
Perfect Competition is false?
(d) Average Utility Curve
(a) The Marginal Revenue Curve
41. Which of the following statement is
is a straight line
incorrect about Perfect
(b) In the short run, Fixed Costs remain Competition?
constant and cannot be changed (a) The Demand Curve is also the
(c) The Firm becomes a Price-Taker and Firm's Average Revenue Curve
tries to achieve equilibrium (b) The Demand Curve is a horizontal line.
(d) Marginal Revenue is more than the (c) Demand increases as price increases
price (d) Supply increases as price decreases
37. Under Perfect Competition, all output can be 42. Under Perfect Competition price
sold - of the Product
(a) at different prices (a) can be controlled by
(b) at the same price only individual Firm
(c) only when Buyers are willing to buy (b) cannot be controlled by individual
(d) at zero price Firm
38. Which of the following statements is false in (c) can be controlled within certain limit
a Perfectly Competitive Market by individual Firm
with constan returns to scale? (d) All of the above
(a) The long run average cost 43. In Perfect Competition, since the
curve will be horizontal at each Firm is a price- taker, the _______
Firm's minimum average cost Curve is a Straight Line.
(b) The long run average cost curve will (a) Total Revenue
181
(b) Marginal Cost a Price Taker. This designation as a Price
(c) Total Cost Taker is based on the assumption that -
(d) Marginal Revenue (a) The Firm has some, but not
44.Price Taker Firms are who complete, control over its
(a) Advertise to increase the product price
demand for their products. (b) There are so many buyers and sellers
(b) Do not advertise because most in the market that any individual Firm
advertising is harmful for the society. cannot affect the market
(c) Do not advertise because they can sell (c) Each Firm produces a homogeneous
as much as they want at the current product
price. (d) There is easy entry into or exit from
(d) Who advertise will get more profits the market place
than those who do not. 49. A Perfectly Competitive Firm Producer has
45. Which of the following is not a featureof a control over -
"Price Taker"? (a) Control over production,
(a) TR = P x Q price and consumers
(b) AR = Price (b) Production as well as price
(c) Negatively - sloped Demand Curve (c) Price
(d) Marginal Revenue = Price (d) None of the above
46. Price-Taking Firms, i.e., Firms that operate in 50. Under Perfect Competition, Demand (D) = AR
a perfectly competitive market, are said to = MR = Price. This statement is -
be "small" relative to the market. Which of the (a) True
following best describes this smallness? (b) Partially True
(a) The individual Firm has (c) False
assets of less than ₹ 20 lakh (d) None of the above
(b) The individual Firm must 51. Under Perfect Competition, TR = MR x Q. This
have fewer than 10 employees statement is -
(c) The individual Firm faces a (a) True
downward-sloping demand curve (b) False
(d) The individual Firm is unable to affect (c) Partially True
market price through its output (d) None of the above
decisions 52. If a Competitive Firm doubles its output, its
47. For the price-taking Firm - Total Revenue -
(a) Marginal Revenue is (a) doubles

less than Price (b) more than doubles
(b) Marginal Revenue is equal to Price (c) less than doubles
(c) Marginal Revenue is greater than Price (d) cannot be determined because the
(d) The relationship between Marginal price of the good may rise or fall
Revenue and Price is indeterminate 53. In Perfect Competition, a Firm can maximize
48. The Firm in a Perfectly Competitive Market is its profit in short-run only when -
182
(a) Average Revenue is equal to Marginal (b) MC=MR=AR=P
Cost (c) MC<MR<AR<P
(b) Average Revenue is more (d) MC>MR>AR>P
than Marginal Revenue 59. Which is the first order condition for the
(c) Marginal Revenue is equal to Total profit of a firm to be maximum?
Cost (a) MR = AR
(d) Marginal Cost is equal to Marginal (b) MC = MR
Revenue (c) AC = AR
54. A Competitive Firm maximizes profit at the (d) AC = MR
output level where - 60. Under the Perfect Competition a Firm will be
(a) Marginal Revenue equals in Equilibrium when -
Marginal Cost (a) MC is rising when it cuts MR
(b) Slope of the Firm's profit function is (b) MC cuts MR from below
equal to zero (c) MC = MR
(c) Price equals Marginal Cost (d) All of the above
(d) All of the above 61. Under Perfect Competition, a Firm can earn
55. In Perfect Competition, when Marginal Cost = ______ in the short-run.
Marginal Revenue, Profit is ………. (a) Normal Profits only
(a) Maximum (b) Super Normal Profits
(b) Average (c) Losses
(c) Zero (d) All of the above
(d) Minimum 62. Under Perfect Competition, in the short-run,
56. In Perfect Competition, a Firm maximizing its the condition AR = MR = MC = AC, means that
profits will set its output at that level where - the Firm is earning -
(a) Average Variable Cost = Price (a) Normal Profits only
(b) Marginal Cost = Price (b) Super Normal Profits
(c) Average Fixed Cost = Price (c) Losses
(d) Fixed Cost = Price (d) None of the above
57. Which of the following market situations 63. Under Perfect Competition, in the short-run,
explains Marginal Cost equal to Price for if AR > AC at the point when MC = MR, it
attaining equilibrium? means that the Firm -
(a) Perfect Competition. (a) Normal Profits only
(b) Monopoly (b) Super Normal Profits
(c) Oligopoly. (c) Losses
(d) Monopolistic Competition. (d) All of the above.
58. In a Perfectly Competitive Market, if MC = 64. Under Perfect Competition, in the short-run,
Marginal Cost, MR = Marginal Revenue, AR = if AR < AC at the point when MC = MR, it
Average Cost and P = Price, the first order means that the Firm -
condition for profit maximization will be - (a) Normal Profits only
(a) MC=MR>AR=P (b) Super Normal Profits
183
(c) Losses (a) Average Cost, Average
(d) Both (b) and (c) Revenue
65. In the short run, If a Perfectly Competitive (b) Total Revenue, Total Fixed
Firm finds Itself operating at a loss, It will – Cost
(a) shutdown (c) Marginal Cost, Marginal Revenue
(b) reduce the size of Its plant (d) Average Revenue, Average Cost
to lower fixed costs 70. In a perfectly competitive markets, if MR is
(c) raise the price of Its product greater than MC then a firm should-
(d) continue to operate as long as It (a) Increase its production
covers Its variable cost. (b) Decrease its production
66. Under Perfect Competition, In the short-run, (c) Increase in sales
the condition for shut-down Is - (d) Decrease in sales
(a) AR < AC 71. In Perfect Competition, a Firm's
(b) AR > AC Profit diminishes when ___

exceeds______
(c) AR > AVC
(a) Total Revenue, Marginal Cost
(d) AR < AVC
(b) Marginal Cost, Marginal Revenue
67. Which of the following is correct with
(c) Average Revenue, Average Cost
reference to shut down point in a
(d) Marginal Revenue, Average Cost
Perfect Competition?
72. In a perfectly competitive market, in the long
(a) The profits of the Firm
run, competitive prices equal the minimum
equals Its total costs
possible ______ cost.
(b) At that output level the price covers
(a) Marginal
the average fixed costs of the Firm
(b) Variable
(c) At that output level the price covers
(c) Total
the average variable costs of the Firm
(d) Average
(d) At that output level the price covers
73. Under Perfect Competition, the burden of a
the average total costs of the Firm
specific tax would be borne by -
68. If the price falls below the Minimum Average
(a) Seller
Variable Cost, a Firm operating under Perfect
(b) Buyer
Competition should, In the short run,
(c) Seller and buyer equally
(a) Produce an output where
MR = MC (d) Nothing to say
(b) Reduce its output so as to 74. Under Perfect Competition, the condition for
increase the price and profits equilibrium Is AR = MR = MC = AC. This Is for
(c) Stop production (output) until price (a) short-run
increases (b) long-run
(d) Continue to produce in the short run, (c) Both (a) and (b)
but not in long run (d) Neither (a) nor (b)
69. In Perfect Competition, a Firm increases 75. Under Perfect Competition, In the long-run,
profit when ______ exceeds ______ the LAC Curve will be _____ to the AR Curve.
184
(a) tangent industry are in long run equilibrium then -
(b) coinciding (a) P=MR=Lowest point on the LAC curve
(c) parallel (b) P=MR=SAC=LAC
(d) perpendicular (c) D=MR=SMC=LMC
76. Under Perfect Competition, In the long-run, (d) All of the above
the _____ will be tangent to the AR Curve, 82. In the long run, the Pure Competition Firm
(a) LAC Curve can have
(b) LMC Curve (a) Super Normal Profit
(c) Demand (b) Normal Profits
(d) Supply (c) Losses
77. Under Perfect Competition, In the long-run, (d) All of these
the industry is said to be in equilibrium, if- 83. In Long run which of the following is true for
(a) All the Firms are earning a perfect competition
normal profits only. (a) Industry is operating at
(b) There is no further entry or minimum point of AC curve
exit of Firms to / from the market. (b) Price is less than AC
(c) Both (a) and (b) (c) AFC is less than AVC
(d) Neither (a) nor (b) (d) MC is greater than MR
78. Under Perfect Competition, in the long-run, if 84. In Perfect Competition, in the long run -
SMC = SAC = LAC = LMC = LMR = LAR = Price, (a) There are negligible profits
then the industry is said to be - . for the Firm
(a) in troubled times (b) There are large Losses for
(b) Growing the Firm
(c) in Equilibrium (c) There is no super-normal profit and no
(d) ine cient loss for the Firm
79. In the long-run, Industry Equilibrium is (d) There are large Profits for the Firm
achieved if SMC = SAC = LAC = LMC = LMR = 85. What are the conditions for long-run
LAR = Price. This condition is applicable for - equilibrium of the Competitive Firm?
(a) Perfect Competition (a) LMC = LAC = P
(b) Monopoly (b) SMC = SAC = LMC
(c) Monopolistic Competition (c) P = MR
(d) Oligopoly. (d) All of these
80. Under Perfect Competition, the condition for 86. Under Perfect Competition, in the long-run,
Industry Equilibrium, i.e. SMC = SAC = LAC = Output is produced at -
LMC = LMR = LAR = Price, Is applicable for - (a) minimum feasible cost
(a) short-run (b) maximum cost
(b) long-run (c) optimal cost
(c) Both (a) and (b) (d) zero cost
(d) Neither (a) nor (b) 87. Under Perfect Competition, in the long-run,
81. When the Perfectly Competitive Firm and LAC refers to -
185
(a) minimum feasible cost Curve will be the same as Marginal Cost (MC)
(b) optimal cost Curve for -
(c) zero cost (a) the portion above AVC
(d) maximum cost (b) the portion below AVC
88. Under Perfect Competition, in the long-run, (c) Neither (a) nor (b)
resources will be - (d) Both (a) and (b)
(a) fully used 95. Normally, in the short run, the supply curve
(b) not used at all of a perfectly competitive Firm slopes _____
(c) wasted (a) Downward from left to right
(d) partially used (b) Downward from right to left
89. Excess Capacity is not found under- (c) Upward from left to right
(a) Monopoly (d) Upward from right to left
(b) Monopolistic Competition 96. The short-run supply curve of the Perfectly
(c) Perfect Competition. Competitive Firm is given by -
(d) Oligopoly. (a) Rising Portion of its MC
90. Under Perfect Competition, the Firm's AR and Curve over and above the
MR Curve will be the same as - Shut-Down Point
(a) Supply Curve (b) Rising Portion of its MC Curve
(b) Demand Curve (c) Rising Portion of its MC Curve over
(c) Indifference Curve and above the Break-Even Point
(d) Production Possibility Curve (d) Rising Portion of its MC Curve over
91. Under Perfect Competition, the Firm's and above the AC Curve
Demand Curve will be the same as - 97. A Purely Competitive Firm's Supply Schedule
(a) Marginal Revenue (MR) Curve in the short run is determined by -
(b) Average Revenue (AR) Curve (a) Its Marginal Utility for
money curve
(b) Its Marginal Revenue
(c) Its Average Revenue
92. Under Perfect Competition, the Firm's MC
(d) Its Marginal Cost curve
Curve will be the same as - a
98. In Perfect Competition, in the long run, if a
(a) Supply Curve
new Firm enters the industry, the Supply
(b) Production Possibility Curve
Curve shifts to the right resulting in -
(c) Indifference Curve
(a) Fall in Price
(d) Demand Curve
(b) Rise in Price
93. Under Perfect Competition, the Firm's Supply
(c) Reduction in Supply
Curve will be the same as -
(d) No change in Price
(a) Marginal Revenue (MR) Curve
A Competitive Firm sells its product at Market
(b) Average Revenue (AR) Curve
Price of ₹ 51 per unit. The Fixed Cost is ' 300 and
(c) Marginal Cost (MC) Curve Variable Cost for different level of production
(d) Average Cost (AC) Curve are shown in the following table. Answer the
94. Under Perfect Competition, the Firm's Supply following questions -
186
Quantity Variable Fixed Total AVC ATC MC 101. To maximize profit, the Firm should produce
Cost Cost Cost
(a) 30 units
0 0
(b) 10 units
10 470
(c) 20 units
20 980 (d) 40 units
30 1850 102. If the Market Price drops from ₹ 51 to ₹ 47,
40 3400 the Firm should -
50 5950 (a) Produce 20 units
(b) Produce 10 units
99. When production is 30 units, the Average (c) Produce 30 units
Variable Cost is - (d) Close down
(a) 70.6
(b) 63.6
(c) 61.6
(d) 72.6
100. When Production is 50 units, Marginal
Cost is -
(a) 245
(b) 255
(c) 265
(d) 225
187
Monopoly
MONOPOLY considerable control over the price of its

product?
1. Under Monopoly, there is / are (a) Monopoly
______Seller(s). (b) Monopolistic competition
(a) No (c) Perfect competition
(b) Only one (d) Oligopoly
(c) Many 8. A Monopoly will not be a Perfect Monopoly, if
(d) A Few cross elasticity of demand of the related
2. Under Monopoly, the product is - goods is
(a) Differentiated (a) Zero
(b) Homogeneous (b) Low
(c) Necessity Goods (c) High
(d) Always Intangible (d) One
3. In Monopoly, entry of new Firms - 9. Which of the following best describes
(a) is restricted at all times Monopoly?
(b) is possible only in long-run (a) An indisputable market
(c) is possible only in short-run leader in an industry
(d) both (a) and (c) (b) A single seller with large control over
4. Under Monopoly, each Firm is a ____ the price in the industry
(a) Price Maker (c) Only a single buyer in the market
(b) Price Taker (d) Only a single seller with complete
(c) Price Maker for its own product. control over the industry
(d) None of the above 10. In India, Monopoly exists in the
5. Monopolist can control only _________ following industry-
(a) Price (a) Courier Services
(b) Utility (b) Internet Services providing industry
(c) Demand (c) Rail Transportation
(d) Both (b) & (c) (d) Toilet Soaps Industry
6. Which of the following is false regarding 11. A Market in which a Single Seller is required
Monopoly? for e cient production is known as-
(a) Firm is a price taker . (a) Regulated Industry
(b) Unique product (b) Natural Monopoly
(c) Single Seller (c) Legal Monopoly
(d) None of the above (d) Contestable Market
7. Under which of the followings forms of 12. If the Electricity Market is a Natural
market structure does a firm has very Monopoly, it is preferred to have a single
188
producer rather than several small (a) Vertical Line, parallel to Y Axis
producers because - (b) Horizontal Line, parallel to
(a) Profits are maximized Axis
(b) Marginal Revenue is maximized (c) Negatively Sloped
(c) Average Total Cost is minimized (d) Kinked
(d) Marginal Cost is maximized 18. The Demand Curve facing an industrial Firm
13. By Imperfect Monopoly, we mean - under Monopoly is a/an -
(a) It is possible to substitute (a) Horizontal Straight Line
the Monopolized product with (b) Indeterminate
another monopolized product (c) Downward Sloping
(b) Entry of new Firms is possible to (d) Upward Sloping
produce the same product 19. A Monopolist who faces a negatively sloped
(c) The amount of output produced is demand curve operates in the region where
very small the elasticity of demand is -
(d) None of the above (a) Less than one
14. Under Monopoly, each Firm's control over (b) Greater than one
price is - (c) Equal to one
(a) Nil (d) Between zero and one
(b) Full and Absolute 20. In Monopoly, the relationship
(c) Subject to Competing Firms’ between Average and Marginal
Strategies Revenue Curves is as follows:
(d) All of the above (a) AR Curve lies above the MR Curve.
15. In case of a profit maximizing Monopolist, (b) AR Curve coincides with the MR
what point determines the Selling Price? Curve.
(a) Point where average cost (c) AR Curve lies below the MR Curve.
equals average revenue (d) AR Curve is parallel to the MR Curve.
(b) Point where average cost 21. Under Monopoly, a Firm can earn …….. in the
equals marginal revenue long-run.
(c) Point where marginal cost equals (a) Normal Profits only
average revenue (b) Super Normal Profits
(d) Point where marginal cost equals (c) Either (a) or (b)
marginal revenue (d) Losses
16. Under Monopoly, Price Elasticity of Demand 22. In long-run a monopolist always earn profits
is (a) Zero profit
(a) More Elastic (b) Abnormal
(b) Less Elastic (c) Loss
(c) Infinity (d) Normal
(d) Nil 23. In the short run, the Monopolist -
17. Under Monopoly, the Firm's Demand Curve is (a) Earns Normal Profits
189
(b) Earns Super Normal Profits (c) Marginal Cost and Average Cost
(c) Incurs losses (d) Average Cost and Average Revenue
(d) Any of these 30. Which of these is not a feature of Monopoly?
24. A Monopoly Producer usually earns ………. (a) Many Sellers
even in the long run. (b) Many Buyers
(a) Super Normal Profits (c) No substitutes
(b) Only Normal Profits (d) Firm = Industry
(c) Losses 31. Which of these is not a feature of Monopoly?
(d) All of the above (a) Single Seller
25. Abnormal profits exists in the long run only (b) No substitutes
under _____ (c) Firm = Industry
(a) Monopoly (d) Elasticity of Demand = 0
(b) Perfect competition 32. Which of these does not apply to Monopoly?
(c) Monopolistic competition (a) Single Seller
(d) Oligopoly (b) No substitutes
26. Under Monopoly, in the long-run, a Firm - (c) Free Entry and Exit of Firms
(a) will not have excess capacity. (d) Firm = Industry
(b) may have excess capacity 33. Which of the following is not the
(c) has no capacity at all characteristic of Monopoly?
(d) will leave the industry (a) Many Buyers
27. Under Monopoly, in the long-run, (b) Heterogeneous Products
a Firm - (c) Free Entry of new Firms
(a) will leave the industry (d) Both b & c
(b) will never be an Optimal Firm 34. Which of the following features is
(c) may or may not be an Optimal Firm not associated with a Monopoly
(d) will always be a Optimal Firm market structure?
28. Monopolies are allocatively (a) There is only one seller in the market
ine cient because (b) There are no close substitutes for the
(a) they restrict the output to product
keep the price higher than under (c) There are barriers to entry
Perfec Competition.
(d) There are no close complements for
(b) they charge a price higher than the
the product
Marginal Cost.
35. All of the following are characteristics of a
(c) both (a) and (b) are correct.
Monopoly except -
(d) both (a) and (b) are incorrect
(a) The existence of some
29. The degree of Monopoly Power is advertising
measured in terms of difference
(b) The Firm is a Price Taker
between -
(c) There is a single Firm
(a) Marginal Cost and Price
(d) The Firm produces a unique product
(b) Marginal Revenue and Average Cost
190
36. In Monopoly Market, there is a — (c) MR can be zero or negative
(a) Single Seller (d) all of the above
(b) Single Buyer 43. Equilibrium Price of a Monopolist is -
(c) Both (a) and (b) (a) Equal to Marginal Revenue
(d) Neither(a) and (b) (b) Equal to Marginal Cost
37. Economics of Scale allows the Monopolist to (c) Less than Marginal Cost
set a _____ price than any new entrant. (d) More than Marginal Cost
(a) Higher 44.Under Monopoly, the Firm can earn _____ in
(b) Lower the short-run.
(c) At the existing market rate (a) Normal Profits only
(d) Economics of scale does not (b) Super Normal Profits
influence the price (c) Losses
38. In Monopoly Market, the product has - (d) All of the above
(a) Perfect Substitutes 45. A Monopolist is able to maximize his profits
(b) No Close Substitutes when -
(c) the same feature as Giffen Goods (a) His average cost is minimum
(d) None of the above (b) His output is maximum
39. Price Elasticity of Demand for Monopolist's (c) He charges a high price
Product is (d) His Marginal Cost is equal to Marginal
(a) More than one Revenue
(b) Infinity 46. If Marginal Revenue exceeds Marginal Cost, a
(c) Less than one Monopolist should -
(d) Zero (a) increase output
40.Under Monopoly, in the short-run, the Firm (b) decrease output
can never make Losses. This statement is - (c) raise the price
(a) True (d) keep output the same because profits
(b) False are maximized when Marginal
(c) Partially True Revenue exceeds Marginal Cost
(d) None of the above 47. Under Monopoly, in the short-run, the
41. In the case of Monopoly - condition AR = MR = MC = AC, means that the
(a) MR Curve cannot be defined Firm is earning -
(b) AR Curve cannot be defined (a) Normal Profits only
(c) Short Run Supply Curve cannot be (b) Super Normal Profits
defined (c) Losses
(d) All of the above (d) None of the above
42. Under monopoly which of the 48. Under Monopoly, in the short-run,
following are correct- if AR > AC at the point when MC =
(a) AR&MR both are downward sloping MR, it means that the Firm -
(b) MR lies half way between AR & Y axis (a) Normal Profits only
191
(b) Super Normal Profits which demand is not identical will be unable
(c) Losses to maximize his profits unless he -
(d) All of the above. (a) Sells below Costs of
49. Under Monopoly, in the short-run, if AR < AC Production in both markets.
at the point when MC = MR, it means that the (b) Practices Price Discrimination.
Firm - (c) Equates the volume of sales in both
(a) Normal Profits only markets.
(b) Super Normal Profits (d) Equates Marginal Costs with Marginal
(c) Losses Revenue in one market only.
(d) None of the above 55. Price Discrimination in a Monopoly
50. Under Monopoly, in the short-run, the Firm is described as -
will never shut-down. This statement is - (a) Different products having same price
(a) True though costs of production are same
(b) False (b) Same product selling at different
(c) Partially True prices though the costs of production
(d) None of the above are same
51. Under Monopoly, in the short-run, the (c) Same product selling at different
condition for shut-down is - prices since the costs of production
(a) AR > AVC are different
(b) AR < AC (d) Different products having different
(c) AR > AC prices since costs of production are
(d) AR < AVC different
52. If a Monopolist is operating at a production 56. Objectives of price discrimination in
level where Marginal Cost is Rs.10 and international market is-
Marginal Revenue is Rs.25, what action you (a) To earn maximum profit
would suggest to him? (b) To dispose of surplus stock
(a) To reduce the price to Rs.20 (c) To capture foreign markets
(b) To increase the costs by Rs.4 (d) All of the these
(c) To increase output till Marginal 57. Price discrimination will not be profitable if
Revenue would equal Marginal Cost elasticity of demand is ______ in different
(d) To stop production markets.
53. When different prices are charged by the (a) Uniform
Producer, from different customers, it is (b) Different
called (c) Less
(a) Optimum Price Search (d) Zero
(b) Price Discrimination 58. Discriminating Monopoly implies that the
(c) Demand Supply Equilibrium Monopolist charges different prices for his
(d) Profiteering commodity -
54. A Monopolist who is selling in two markets in (a) From different groups of consumers
192
(b) For different uses large
(c) At different places (d) Both a and b above
(d) All of the above 63. Barriers to entry like _____ allows the
59. Which of these is not a pre-requisite for Monopolist to charge a price much below
Price Discrimination? then the price of new entrant, thereby
(a) Market Segmentation driving the new entrant out of business.
(b) Seller's Control over the (a) Economics of Scale
supply of his product (b) High Quality Product
(c) Differing Elasticity in various market (c) Price Discrimination
segments (d) Product Differentiation
(d) Different versions of the same 64. Why is first degree price discrimination
product termed as the extreme form of price
60. The price discrimination under monopoly will discrimination -
be possible under which of the (a) All the Firms in the industry
following conditions? undertake price discrimination
(a) The seller has no control (b) Firms in the industry discriminate in
over the supply of his product price for almost all the products they
(b) The market has the same conditions are producing
all over (c) Firms earn the least profit in this type
(c) The price elasticity of demand is of discrimination; they are just able to
different in different markets cover the cost
(d) The price elasticity of demand is (d) In this type of discrimination Firms
uniform charge the consumers the maximum
61. Which of these is a pre-requisite for Price price
Discrimination? 65. Which of the following statements in not
(a) Differing Elasticity in various Correct about a discriminating Monopolist?
market segments (a) He operates in more than one market
(b) No scope of re-sale between (b) He makes more profit
segments because he discriminates
(c) Divisibility of Market into segments (c) He maximizes his profits in
(d) All of the above each market
62. Which of the following is a condition which (d) He charges different prices in each
makes Price Discrimination possible? market
(a) The market must be divided into sub 66. Under Price Discrimination, the Producer
markets with different price Firm can charge higher prices from a market,
elasticity's if Price Elasticity (e) -
(b) There has to be an effective (a) e = 1
separation of the submarkets (b) e < 1
(c) Size of the submarkets should be very (c) e = 0
193
(d) e > 1 (c) Different Elasticity's of Demand
67. Under Price Discrimination, the Producer (d) Equal Elasticity's of Demand
Firm may charge lower prices from a market, 73. Discriminating Monopolist divides the total
if Price Elasticity (e) production in two markets in a way that -
(a) e = 0 (a) MR earned in market with
(b) e < 1 higher elasticity of demand
is greater than the other
(c) e > 1
with lower elasticity of demand
(d) e = 1
(b) MR earned in market with lower
68. For price discrimination to be successful, the
elasticity of demand is greater than
elasticity of demand for the commodity in
the other
the two markets, should be:
(c) MR earned in each market is the same
(a) Same
(d) MR earned in each market is maximum
(b) different
(c) Constant
Questions 74 to 76 are based on the Figure
(d) Zero
69. Price Discrimination is not possible if the
market is an indivisible whole of Buyers. This
statement is -
(a) True
(b) Partially True
(c) False
70. For practicing Price Discrimination, the
Seller should be able to divide his market into
74. Figure represents a:
two or more sub- markets. The statement is -
(a) Perfectly competitive firm.
(a) True
(b) Perfectly competitive industry.
(b) False
(c) Monopolist
(c) Partially True
75. In figure, the firm's marginal revenue curve is
71. Price Discrimination is possible -
curve:
(a) Only under Monopoly
(a) A
situation
(b) B
(b) Only under Perfect Competition
(c) F
(c) Only under Oligopoly
(d) E
(d) Under any market form
76. In figure, curve E is the firm's:
72. Discriminating Monopoly is possible
(a) Marginal revenue curve
if two markets have
(b) Average cost curve
(a) Rising Cost Curves
(c) Demand curve
(b) Rising and declining Cost Curves
(d) Marginal cost curve
194
77. Which of the following is false with reference
to first- degree price discrimination?
(a) The Monopolist will be able
to extract entire Consumer's
Surplus
(b) The price of each unit will be different
(c) By following first degree price
discrimination, the Monopolist will
earn higher profits than he would have
earned by adopting a single price
The price of the first unit will be less
than that of the subsequent units
195
Monopolistic
MONOPOLISTIC COMPETITION 7. Under Monopolistic Competition, Price

1. Under Monopolistic Competition, there are (a) Nil
_____ Sellers. (b) Less Elastic
(a) Many (c) More Elastic
(b) No (d) Infinity
(c) A Few 8. Under Monopolistic Competition, the Firm's
(d) Only one Demand Curve is -
2. Under Monopolistic Competition, the product (a) Vertical Line, parallel to
is Y Axis
(a) Differentiated (b) Horizontal Line, parallel to X Axis
(b) Homogeneous (c) Negatively Sloped
(c) Necessity Goods (d) Kinked
(d) Always Intangible 9. Product Differentiation in a Monopolistic
3. A market structure in which many firms sell Competition could lead to -
product that are similar, but not identical. (a) Horizontal Demand Curve
(a) Monopolistic Competition (b) Downward Sloping
(b) Perfect Competition Demand Curve
(c) Monopoly (c) Vertical Demand Curve
(d) Oligopoly (d) Downward Sloping Supply Curve
4. Selling outlay is an essential part of which of 10. Under Monopolistic Competition, a Firm can
the following market situation earn _____ in the long-run.
(a) Monopolistic Competition (a) Normal Profits only
(b) Perfect Competition (b) Super Normal Profits
(c) Pure Competition (c) Losses
(d) Monopoly (d) Both (a) and (c)
5. Under Monopolistic Competition, each Firm 11. Under Monopolistic Competition, in the long
is a run, a Firm
(a) Price Maker (a) will not have excess capacity.
(b) Price Taker (b) may have excess capacity
(c) Price Maker for its own product (c) has no capacity at all
(d) None of the above (d) will leave the industry.
6. Under Monopolistic Competition, each Firm's 12. Which of the following markets has the
control over price is - concept of group equilibrium in long-run?
(a) Nil (a) Monopoly
(b) Full and Absolute (b) Oligopoly
(c) Reasonable (c) Monopolistic competition
(d) All of the above. (d) Perfect competition
196
13. Excess Capacity' is the essential (b) Identical Products
characteristic of the Firm in the market form (c) Easy entry and exit of Firms
of - (d) Firms take other Firms' prices as given
(a) Monopoly 20. Which of the following is not a characteristic
(b) Perfect Competition of Monopolistic Competition?
(c) Monopolistic Competition (a) Relatively large
(d) Oligopoly number of sellers
14. Under Monopolistic Competition, in the long (b) Ease of entry into the industry
run, a Firm - (c) Product Differentiation
(a) will always be a Optimal Firm (d) Homogenous products
(b) will never be an Optimal Firm 21. Which of these applies to Monopolistic
(c) may or may not be an Optimal Firm Competition?
(d) will leave the industry (a) Price Competition
15. Non-price competition in popular sense (b) Restrictions in entry /exit
known as- (c) Large Number of Sellers
(a) Monopoly market (d) Homogeneous Product
(b) Oligopoly market 22. Linder Monopolistic Competition, each Seller
(c) Monopolistic competition tries to develop Brand Loyalty for his
(d) Perfect competition product. This statement is -
16. Which of these does not apply to (a) True
Monopolistic Competition? (b) Partially True
(a) Product Differentiation (c) False
(b) Large Number of Buyers (d) None of the above
(c) Large Number of Sellers 23. The sale of branded articles is common in a
(d) Price Competition situation of
17. Which of these does not apply to (a) Excess Capacity.
Monopolistic Competition? (b) Monopolistic Competition.
(a) Product Differentiation (c) Pure Competition
(b) Free entry/exit (d) Monopoly
(c) Large Number of Buyers 24. A Firm under Monopolistic Competition
(d) Single Seller advertises -
18. Which of the following is not a feature of (a) because it cannot raise price
Monopolistic Competition? (b) to lower cost of production
(a) Non-Price competition (c) to increase sales and profit
(b) Large Number of Sellers (d) to compete successfully with the rival
(c) Product differentiation Firms
(d) None of these 25. Through more advertising, a monopolistically
19. Which of the following is not a competitive Firm has successfully created
characteristic feature of more demand for its product. It
Monopolistic Competition? would have resulted in shifting of -
(a) Many Buyers and Sellers (a) AC Curve upward
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(b) MR Curve to the left (a) earn super normal profits
(c) AC Curve upward and MR curve to the (b) earn normal profits
right (c) incur losses
(d) AC Curve upward and MR curve to the (d) may earn super normal profit, normal
right profit or in incur losses
26. Under Monopolistic Competition, Price 32. In the short run equilibrium of a Firm in
Discrimination is not possible at all. This Monopolistic Competition, which Curve is U
statement is - shaped?
(a) True (a) MR
(b) False (b) AC
(c) Partially True (c) MC
(d) Nothing to Say (d) AR
27. Which of these does not apply to 33. Under Monopolistic Competition, in the
Monopolistic Competition? short-run, the condition AR = MR = MC = AC,
(a) Aggressive Advertising and Publicity means that the Firm is earning -
(b) E cient after-sales service (a) Normal Profits only
(c) Price Competition (b) Super Normal Profits
(d) Product improvement and (c) Losses
Development (d) All of the above.
28. Under Monopolistic Competition, in the 34. Under Monopolistic Competition, in the
short-run, the Firm can never make Losses. short-run, if AR > AC at the point when MC =
This statement is - MR, it means that the Firm -
(a) True (a) Normal Profits only
(b) False (b) Super Normal Profits
(c) Partially True (c) Losses
(d) None of the above (d) All of the above.
29. Under Monopolistic Competition, the Firm 35. Under Monopolistic Competition, in the
can _____ earn in the short-run. short-run, if AR < AC at the point when MC =
(a) Losses MR, it means that the Firm -
(b) Normal Profits only (a) Normal Profits only
(c) Super Normal Profits (b) Super Normal Profits
(d) All of the above. (c) Losses
30. In short run, a Firm in Monopolistic (d) None of the above
Competition - 36. Under Monopolistic Competition, in the
(a) earns normal profit only short-run, the Firm will never shut-down.
(b) always earns profits This statement is -
(c) incurs losses (a) True
(d) may earn normal profit, super normal (b) False
profit or incur losses (c) Partially True
31. In long-run, all Firms in Monopolistic (d) None of the above
Competition - 37. Under' Monopolistic Competition, in the
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short-run, the condition for shut-down is - run equilibrium -
(a) AR >AVC (a) when price is equal to Marginal Cost
(b) AR < AC (b) in the declining segment
(c) AR > AC of the LAC Curve
(d) AR < AVC (c) at the minimum point of
38. In Monopolistic Competition, the long-run the LAC Curve
equilibrium price will be equal to - (d) In the rising segment of the LAC Curve
(a) Marginal Revenue 44.Under Monopolistic Competition, in the long
(b) Average Cost run, Output is produced at -
(c) Marginal Cost (a) minimum feasible cost
(d) Both (a) and (c) (b) maximum cost
39. Under Monopolistic Competition, in the long (c) optimal, and not necessarily minimum
run, if MC = MR and LAC = LAR, then the cost
industry is said to be - (d) zero cost
(a) ine cient 45. Under Monopolistic Competition, in the long
(b) growing run, resources -
(c) in Equilibrium (a) may not be used at all
(d) in troubled times (b) may be partially used
40.In the long-run, Industry Equilibrium is (c) will be fully used
achieved if MC = MR and LAC = LAR. (d) will not be required at all
This condition applies to - 46. Monopolistic Competition differs from
(a) Perfect Competition Perfect Competition primarily because -
(b) Monopoly (a) In Monopolistic Competition,
(c) Monopolistic Competition Firms can differentiate
(d) Oligopoly their products
41. In the long-run, Industry Equilibrium is (b) In Perfect Competition, Firms can
achieved in Monopolistic Competition only if differentiate their products
LAC = LMC. This statement is - (c) In Monopolistic Competition, entry
(a) True into the industry is blocked
(b) False (d) In Monopolistic Competition, there are
(c) Partially True relatively few barriers to entry
(d) None of the above 47. The long-run equilibrium outcomes in
42. In the long-run, Industry Equilibrium is Monopolistic competition and Perfect
achieved in Monopolistic Competition only at Competition are similar, because in both
the lowest point of LAC Curve. This market structures -
statement is (a) Firms will be producing at
(a) True minimum average cost
(b) False (b) Firms realize all economies of scale
(c) Partially True (c) Firms will only earn a normal profit
(d) None of the above (d) The e cient output level will be
43. In Monopolistic Competition, a Firm is in long produced in the long run
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Oligopoly
OLIGOPOLY Industry is
(a) Horizontal Demand Curve
1. Under Oligopoly, there are ______ Sellers. (b) Too much importance to
(a) Only one Non-Price Competition
(b) Many (c) Price Stickiness
(c) A Few (d) A small number of Firms in the
(d) No industry
2. ……… is a situation is which a firm bases its 6. Under Oligopoly, the product is -
market policy on part of the expected (a) Differentiated
behavior of a few close rivals- (b) Necessity Goods
(a) perfect competition (c) Always Intangible
(b) oligopoly (d) Homogeneous
(c) monopoly 7. Under Oligopoly, each Firm's control over
(d) monopolist price is -
3. Which one of the following is the best (a) Nil
example of agreement between Oligopolists? (b) Full and Absolute
(a) GATT (c) Subject to Competing Firms’
(b) OPEC Strategies
(c) WTO (d) All of the above
(d) UNIDO 8. Under Oligopoly, Price Elasticity of Demand
4. If Firms in the Toothpaste Industry have the is
following market shares, which market (a) Nil
structure would best describe the industry? (b) Less Elastic
Firm Market Share% (c) More Elastic
White Shine Ltd 29.8 (d) Infinity
White Teeth Ltd 18.7 9. Under Oligopoly, the Firm's Demand Curve is -
More White Teeth Ltd 14.3
(a) Vertical Line, parallel to
Sure Health Ltd 11.6
Y Axis
Bright Teeth Ltd 9.4
(b) Horizontal Line, parallel to
Dental Care Ltd 8.8
X Axis
Brighter than White Ltd 7.4
Total 100.0 (c) Negatively Sloped
(d) Kinked
(a) Monopolistic Competition
10. Oligopoly is the market from in
(b) Perfect Competition
which there are
(c) Oligopoly
(a) Many Sellers and many Buyers
(d) Monopoly
(b) One Seller and many Buyers
5. One featurenot typical of Oligopolistic
(c) Few Sellers and many Buyers
200
(d) None of the above industry is
11. Which of the following most closely (a) Too much importance to
approximates the definition of an Non-Price Competition
Oligopoly?
(b) Price Leadership
(a) Readymade Garments units in a city
(c) Horizontal Demand Curve
(b) Vehicle manufacturers in India
(d) A small number of Firms in the
(c) Rice Producers
industry
(d) Tobacco Industry
17. Which of these applies to Oligopoly?
12. Pure Oligopoly is one where -
(a) Group Behaviour between
(a) There are many sellers Sellers
producing homogeneous product (b) Non-Price Competition
(b) There are many sellers producing (c) A Few Sellers
differentiated product (d) All the above
(c) There are few sellers producing 18. Duopoly is a specific form where are -
homogeneous product (a) No Sellers at all
(d) There are few sellers producing (b) Only one Seller
differentiated product (c) Two Sellers
13. Oligopolistic Industries are characterized by (d) Large Number of Sellers
(a) A few dominant Firms and 19. The American Economist Sweezy
substantial barriers to entry developed the -
(b) A large number of small (a) Price Discrimination Theory
Firms and no entry barriers (b) Diminishing Marginal Utility Theory
(c) A few large Firms and no entry (c) Kinked Demand Curve Theory
barriers (d) Production Possibility Curve concept
(d) One dominant Firm and low entry 20. When an Oligopolistic Firm changes its price,
barriers its rival Firms -
14. In which of the following, a Kinked Demand (a) will retaliate or react and
Curve can be seen in a Firm? change their prices
(a) Monopolistic competition (b) will not react at all
(b) Monopoly (c) will exit the market
(c) Duopoly (d) will appeal to the Government
(d) Oligopoly 21. A Price War in an Oligopoly refers to -
15. Which of these does not apply to Oligopoly? (a) Successive and continued
(a) Group Behaviour between price cuts by the Firms to
Sellers increase sales and revenues
(b) Inter-dependence between (b) Increase in the price by one Firm and
Sellers other Firms following in a reverse way
(c) Only one Buyer by decreasing their prices
(d) A Few Sellers (c) Flooding the market with its goods by
16. One characteristic not typical of Oligopolistic one Firm leading to price reduction by
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others (c) Lower than Prevailing Price
(d) Free gift offers by all Firms on a (d) Origin
competitive basis 29. As per Kinked Demand Curve Theory of
22. A Firm under ______ cannot have sure and Oligopoly, the demand above the Kink is -
definite Demand Curve. (a) more elastic
(a) Perfect Competition (b) zero elastic
(b) Monopoly (c) unit elastic
(c) Monopolistic Competition (d) less elastic
(d) Oligopoly. 30. As per Kinked Demand Curve Theory of
23. Price Leadership is form of - Oligopoly, the demand below the Kink is -
(a) Monopolistic Competition (a) more elastic
(b) Perfect Competition (b) less elastic
(c) Non-Collusive Oligopoly (c) unit elastic
(d) Monopoly (d) zero elastic
24. Under Oligopoly, if one Firm reduces its 31. The upper part of kinked demand curve is -
prices, the other Firms will generally - . (a) Elastic
(a) reduce their prices (b) Inelastic
(b) increase their prices (c) Perfectly Elastic
(c) not react at all (d) Unitary Elastic
(d) exit the market. 32. What does the Kinked Demand Curve
25. Under Oligopoly, if one Firm reduces its explain?
prices, the other Firms will generally (a) Price Differentiation
(a) exit the market (b) Other than Price Competition
(b) reduce their prices (c) Rivalry reactions in an Oligopoly
(c) maintain their prices (d) All of the above
(d) increase their prices 33. A Firm having a Kinked Demand Curve
26. Kinked demand curve is related to- indicates that
(a) Oligopoly (a) If the Firm increases the
(b) Perfect price, competitive Firms
reduce the price
(c) Monopoly
(b) If the Firm increases the price,
(d) Monopolistic competition
competitive Firms also increase the
27. Kinked demand curve is found in:
price
(a) Perfectly Competitive firm
(c) If the Firm reduces the price,
(b) Monopolistic
competitive Firms do not reduce the
(c) Perfectly competitive industry
price
(d) If the Firm increases the price,
28. As per Kinked Demand Curve Theory of
competitive Firm do not increase the
Oligopoly, the Kink is formed at -
price
(a) Prevailing Price
34. The Kinked Demand Hypothesis is designed
(b) Higher than Prevailing Price
202
to explain in the context of Oligopoly - than the response to a price decrease
(a) Collusion among Rivals (d) Elasticity of demand is constant
(b) Price Rigidity regardless of whether price increases
(c) Price Leadership or decreases
(d) Price and Output Determination 40. In both the Chamberlin and Kinked Demand
35. The Kinked Demand Curve model assumes Curve models, the Oligopolists -
that price elasticity of demand is - (a) recognize their independence
(a) Higher for a price increase (b) do not collude
than for a price decrease (c) tend to keep prices constant
(b) Lower for a price increase than for a (d) all of the above
price increase 41. In Oligopoly, why it di cult to determine the
(c) Perfectly elastic for a price increase equilibrium price and output?
perfectly inelastic for a price (a) All the Firms take their
decrease independent decisions
(d) Perfectly inelastic for a price increase (b) Firms are interdependent making it
and perfectly elastic for a price di cult to specify the particular
increase reaction of the rivals
36. The demand curve of an oligopolist is (c) A large number of Firms exist in the
(a) Determinate market
(b) Indeterminate (d) Very few Firms exist in the market
(c) Circular 42. If the Demand Curve confronting an
(d) Vertical individual Firm is perfectly elastic then
37. Kinky demand curve model explains the (a) The Firm's Marginal Revenue
market situation known as ______ Curve coincides with Average
(a) Differentiated Oligopoly Revenue Curve
(b) Collusive oligopoly (b) The Firm cannot influence the Price
(c) Pure Oligopoly (c) The Firm is a Price Taker
(d) Price rigidity (d) All of the above
38. Kinked DD curve under oligopoly is designed 43. Kinked demand curve of the Oligopoly
to show _______ indicates
(a) Collusion among rivals I. If one firm decreases price
(b) Price rigidity other firms also decreases the price
(c) Price & Leadership ii. If one firm increases price other firms
(d) Price & output also increases the price
39. The Kinked Demand Curve model of Oligopoly iii. If one firm decreases the price other
assumes that - firms does not decrease the price.
(a) Response to a price increase iv. If one firm increases the price other
is less than the response to firms does not increase the price.
a price decrease (a) Only II
(b) Elasticity of demand is perfectly (b) II and IV
elastic if price increases and perfectly (c) I and IV
inelastic if price decreases
(d) II and III
(c) Response to a price increase is more
203
CHAPTER 8 - Business Cycle
1. Business cycle refers to (d) recovery

(a) the ups and downs in production of 7. Severe form of recession is
commodities (a) Peak
(b) the fluctuating levels of economic (b) Depression
activity over a period of time (c) Expansion
(c) increasing unemployment rate and (d) Contraction
diminishing rate of savings 8. The trough of a business cycle occurs when
(d) decline in economic activities over _____ hits its lowest point.
prolonged period of time (a) inflation in the economy
2. When does an economic expansion occur in (b) the unemployment rate
the business cycle? (c) aggregate economic activity
(a) Between the peak and trough (d) the money supply
(b) At the trough of the business cycle 9. The lowest point in the business cycle is
(c) At the peak of the business cycle referred to as the
(d) Between the trough and peak (a) Expansion.
3. Increasing Prosperity and High standards of (b) Boom.
living are the characteristics of (c) Peak.
(a) Contraction (d) Trough.
(b) Trough 10. Even with lower rate of interest, demand for
(c) Expansion credit declines in
(d) Peak (a) Contraction Phase
4. The end of expansion is termed as - (b) Expansion Phase
(a) Peak (c) Peak
(b) Contraction (d) Depression
(c) Trough 11. Which of the following statements is true?
(d) None of the above (a) It is easy to predict turning points of
5. The beginning of recession is Business Cycle
(a) Trough (b) An Economy grows endlessly
(b) Peak (c) An Economy Contracts endlessly
(c) Contraction (d) None of the above
(d) Expansion 12. Which of the following statement is not true?
6. A significant decline in general economic (a) Business Cycles are periodical
activity extending over a period of time is (b) Business Cycles are regular
(a) business cycle (c) Business Cycles vary in intensity
(b) contraction phase (d) Business Cycles vary in length
(c) recession 13. A leading indicator is
204
(a) a variable that tends to move along 19. A decrease in government spending would
with the level of economic activity cause
(b) a variable that tends to move in (a) the aggregate demand curve to shift
advance of aggregate economic to the right.
activity (b) the aggregate demand curve to shift
(c) a variable that tends to move to the left.
consequent on the level of aggregate (c) a movement down and to the right
economic activity along the aggregate demand curve.
(d) Both (a) and (c) (d) a movement up and to the left along
14. A variable that tends to move later than the aggregate demand curve.
aggregate economic activity is called 20. Which of the following does not occur during
(a) a cyclical variable an expansion?
(b) a leading variable (a) Business profits and business
(c) a lagging variable confidence tend to increase
(d) a coincident variable (b) Consumer purchases of all types of
15. Changes in housing interest rate is a goods tend to increase
(a) a leading indicator (c) Employment increases as demand for
(b) a coincident indicator labour rises
(c) a lagging indicator (d) None of the above
(d) a cyclical indicator 21. Which of the following best describes a
16. Unemployment is a typical business cycle?
(a) a cyclical indicator (a) Economic expansions are followed by
(b) a leading indicator economic contractions
(c) a lagging indicator (b) Economic expansions are followed by
(d) a coincident indicator economic growth and development
17. GDP is a (c) Inflation is followed by rising income
(a) a leading indicator and unemployment
(b) a coincident indicator (d) Stagflation is followed by inflationary
(c) a lagging indicator economic growth
(d) a cyclical indicator 22. During recession, the unemployment rate
18. Industries that are extremely sensitive to the ______ and output _______.
business cycle are the (a) Rises; falls
(a) Durable goods and service sectors (b) Falls; rises
(b) Non-durable goods and service (c) Falls; falls
sectors (d) Rises; rises
(c) Capital goods and durable goods 23. The four phases of the business cycle are
sectors (a) peak, depression, bust, and boom
(d) Capital goods and non-durable goods (b) peak, recession, trough, and boom
sectors (c) peak, recession, trough, and recovery
205
(d) peak, depression, trough, and boom consequences on the well-being of
24. Leading economic indicators the society.
(a) are used to forecast probable shifts in (b) Business cycles occur periodically,
economic policies although they do not exhibit the same
(b) are generally used to forecast regularity.
economic fluctuations (c) Business cycles have uniform
(c) are indicators of stock prices existing characteristics and causes.
in an economy (d) Business cycles are contagious and
(d) are indicators of probable recession unpredictable.
and depression 29. Economic recession shares all of these
25. When aggregate economic activity is characteristics except.
decline, the economy is said to be in (a) Incomes of wage and interest earners
(a) Contraction. gradually decline resulting in
(b) a turning point. decreased demand for goods and
(c) an expansion. services
(d) a trough. (b) Fall in the levels of investment,
26. Peaks and troughs of the business cycle are employment
collectively called as (c) Investor confidence is adversely
(a) Volatility. affected and new investments may
(b) Turning points. not be forthcoming
(c) Equilibrium points. (d) Increase in the price of inputs due to
(d) Real business cycle events. increased demand for inputs
27. The most probable outcome of an rise in the 30. The different phases of a business cycle
money supply is (a) Do not have the same length and
(a) interest rates to rise, investment severity
spending to rise, and aggregate (b) expansion phase always last more
demand to rise than ten years
(b) interest rates to rise, investment (c) last many years and are di cult to get
spending to fall, and aggregate over in short periods
demand to fall (d) All of the above
(c) interest rates to fall, investment 31. Which of the following is not an example of
spending to rise, and aggregate coincident indicator?
demand to rise (a) Industrial production
(d) interest rates to fall, investment (b) inflation
spending to fall, and aggregate (c) Retail sales
demand to fall (d) New orders for plant and equipment
28. Which of the following is not a featureof 32. According to _______ trade cycles occur due
business cycles to onset of innovations.
(a) Business cycles have serious (a) J M Keynes
206
(b) ADAM Smith 34. What is the cause for increasein
(c) Hawtrey investments?
(d) Schumpeter (a) Low interest rate in the economy
33. According to Keynes, Fluctuations in (b) Profit expectations
economic activity are due to fluctuations in (c) New inventions
(a) Supply of resources (d) All of the above
(b) Aggregate effective demand 35. Internal Cause for Business Cycle include
(c) Price (a) Money Supply
(d) None of the above (b) Weather Cycles
(c) Changing Technology
(d) Wars
207
Answers
CHAPTER 1 – INTRODUCTION TO MICRO ECONOMICS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b c a b b b c a a c d c a b c d b b b d
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
b c d d d b d c d c b b c a d b a b c b
41 42
d c
CENTRAL ECONOMIC PROBLEMS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
d d b b d d d b c c b d d c c b a a b c
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c a b d d d b a a a a a a d a a c a b d
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
a d c b b a b b a d d a c a b b a d b a
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
b c c c b c d a c d d b c c b c c d c d
81 82 83 84
c b c b
208
Chapter 2 – Utility Analysis & Consumer Equilibrium
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c a c a d c a b d c a a a a d b b c c a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
a a c c a c a d a b c b d d d a a b b b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
a c c a c b b a c b c a c b c b a a b c
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
c d c a c a d b d d b c d a b c a c a a
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
a d a b c c d c b b d b c a b b b c a c
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
b d a c b a c a b c a a c a a b a c d b
121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140
b d c a d b a a d c c c b a b a b c c b
141 142 143 144 145 146 147 148 149 150 151 152 153 154 155
d c c b c a a c d a b a c a b
ORDINAL APPROACH
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a a a b c a b d d a a c a b a c a b a d
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
a d c c d b d d b a a c c d a a a a a b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
c a b a c a a c b b a b a c b d c c a b
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78
c a a b c c d c a c c a d b c b d b
209
Chapter 3 – Demand Analysis
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b b c d d a d b a c a a b d c c c c c d
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
b b c b a b c b c b b b d a c c a d b c
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
b c b b c c b c d a c a c b d c d c b d
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
b c a a b c d b a b a d b a b b b a c a
81 82 83 84 85 86 87 88 89
b c a a d a b a b
THEORY OF DEMAND
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b c b b a c a c b c c b a b b a b c a b
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c c a b c b a a b d d b d c b a b c a c
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
c c b c c c c b b c c a b a b d a a c a
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
b b c a a d c d c c d d c a c b c b b c
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
d c a b c d a b d b a d d d a b b a d c
101 102 103 104 105 106 107 108 109 110 111
a b c a b a b b d b d
210
ELASTICITY OF DEMAND
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a c c c d a d d b b d b d c c b c a c a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c a a c c a c c a c a b a a b b b b d a
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
a d b c b b c b d b a b b b c c c a d c
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
c b c a a d c a c a a c d b b a b b c d
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
a a d c b b a a b b d a a a b c b a b c
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
a d a b d a c a c c a b b c b c c b c d
121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140
d a a a a b b a b b a d d a d c a b a b
141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160
b c b d c d a b a b a d c a b c b c c b
161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180
c c b d a b c d c a b c a b b c d a a a
181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200
a b b a b b b b d a b c a b a d d b b b
201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220
a a d b b c c b a a a b a c a c d b b c
221 222 223 224 225

b c b a a
211
DEMAND FORECASTING
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c d c a b c d b d a b c d a a b d c d c
21 22 23 24 25 26 27 28 29 30 31
b b a b c b a d b a c
CHAPTER 4 - Supply Analysis & Equilibrium
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a d b b c a b a c a a c b a a b c c d a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
b c b b c b a b b c c c c a b a b a b a
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
c b a b d a b c a a c a c a b b a b a b
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
a d b b a a b a d c c d d d d c b d b b
81 82 83 84 85 86
a d b b a a
ELASTICITY AND EQUILIBRIUM PRICE
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b c c a d d c b b b a a b d d b a a c a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
d b c b b c b a a d b c b c d b a a a b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
b c a a d b a b b a a a b b c a c c b d
212
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
a a d b b c d c c d d c c d d a d c b b
81 82 83
d d c
CHAPTER 5 - Prodcution Concepts
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a b a a a c d a b c c b a c d a a a a b
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
d b d d a b a b c d a a a b b b b b a c
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
d b c c a d d c a b c d a d a a d d b d
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
d a a d a b b b b c a b a b a b d b d b
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
a b b a a d c b c a c a c a d a b a a d
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
d a a c b c c b c d c c a b a c d c c a
121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140
b c a c c d c c a b d c d c d b c c b b
141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160
d d a c c a a b b a c a c a d a b c d d
161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180
c b c d a d a c a b a d b d d c c a d c
181 182 183

b a a
213
PRODUCTION FUNCTION
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c a b b a a b a d b a b b c c b d c d c
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c a c b a b a b a a b d d a b a c a b b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
b c b c a c a b a b a b b c c c a b a c
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
d c c a b a a c b d a b a c b a c a c b
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
b a c c a c a a b c b b d d c b d a a d
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
c d c c a a c b a a c b a b a d a a a d
LAW OF VARIABLE PROPORTIONS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c b a c b b d a d d d d c a b b b a b b
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c a b c c b b a b b d c b d d d d b c b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
b c b d a c b c a b c b b b d c a c c b
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75
d c c d a b b b c a b d d c b
214
PRODUCTION FUNCTION
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c c c b a d d a b c d c a d c b c b b a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
b a a c c b c c c b d c c a b b a b c a
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
d a d d b c d c a c b a a d a a c b a c
CHAPTER 6 - Cost & Revenue Concepts
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c d d c a b a c a b b b c d a d a c d b
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c d a c c c a a b c d c b d d b a b a d
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
b a a d c d d d c b a b a b a a a a b a
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
a d a c c b d d c a b b b a d c b c a d
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
b c c d d c d a c b a b c d b c b c a c
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
a b b a b c a b d d b a a b d c b c a b
121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140
b d c a b a a a a b d b a d d a d d d a
141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160
a b c c a c a c b c a a b c c b a c a b
215
SHORT-RUN & LONG-RUN COST BEHAVIOUR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
d b a c d b a b a a c b b a a b a c a b
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
d d a c b b c a b d d d b d d b d b d c
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
a b c a b c b c b a a a b b b b c c a b
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
a a b b a d b b c c c c c c c b b a c b
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
c d a b d b b a b c c d c b b c d c c d
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
c b a b a b a b c a b a a b b c a c a d
121 122
c b
REVENUE CONCEPTS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a b c c b b a a b c c c c b d a a b a c
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c c a b c d d b b b a b d b c a a a d a
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
b a a c a b c a c b a c a b a c c b a d
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
a b a b c b a a b a d c a b c a b c a b
216
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
a a b c a c d c a d b d d d b b c b b b
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
b a a b d d a c c b c d b b b a c c d b
121 122 123 124 125 126 127 128 129 130 131 132
b b c b a a d d d c c d
PRODUCTION OPTIMISATION
1 2 3 4 5 6 7 8 9 10
c d a d c d a d c a
CHAPTER 7 - Forms Of Market
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c c d c d b d c c d b b a a b d b d a d
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c d c d d d d b b b b c a b d d d a d a
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57
a d a b a c c c d a d c a d b a a
PERFECT COMPETITION
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a d a a d d b b b c a b b b b a d d a a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
a a a a d b d d b a c c d c d d b d d b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
c b d c c d b b d a a a d d a b a b b d
217
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
d a b c d d c c d a b d d b a a c c a b
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
d b a c d a a a c b c a c a c a d a c b
101 102
c b
MONOPOLY
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b a a a a d a b d c b c a b d b c c a a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c b d a a b c c a a d c c d b a a b c b
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
c d d d d a a b c b d c b b b d a d d c
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77
d d a d c b c a a a a c c c c c d
MONOPOLY
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
a a a a c c c c b a b c c c c d d d b d
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
c a b c d b c b d d b b a b c b d b c c
41 42 43 44 45 46 47
b b b c b a c
218
SHORT-RUN & LONG-RUN COST BEHAVIOUR
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
c b b c a a c b d c b c a d c c d c c a
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
a d c a c a d a a b a c d b a b d b a d
41 42 43
b d c
CHAPTER 8 - Business Cycle
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b d c a c c b c d d d b b c a c b b d d
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35
a a c b a b c c d a d d d d a
219
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INDEX

SR. NO. PARTICULARS PG. NO.

CHAPTER 1: NATURE & SCOPE OF BUSINESS ECONOMICS

UNIT 1: INTRODUCTION 1-8

UNIT II: BASIC PROBLEMS OF AN ECONOMY AND ROLE OF PRICE

CHAPTER 2: THEORY OF DEMAND AND SUPPLY

UNIT 1: THEORY OF DEMAND 21-41

UNIT II ELASTICITY OF DEMAND 42-96

UNIT III: THEORY OF CONSUMER BEHAVIOUR 97-129

UNIT IV: THEORY OF SUPPLY 130-134

UNIT V ELASTICITY OF SUPPLY 135-141

CHAPTER 3: THEORY OF PRODUCTION AND COST

UNIT 1: THEORY OF PRODUCTION 142-169

UNIT II: THEORY OF COST 170-194

CHAPTER 4: PRICE DETERMINATION IN DIFFERENT MARKETS

UNIT 1: MEANING AND TYPES OF MARKETS 195-207

UNIT II: DETERMINATION OF PRICES 208-214

UNIT III: PRICE OUTPUT DETERMINATION UNDER DIFFERENT 215-257

CHAPTER 5: BUSINESS CYCLES 258-273

Nature & Scope of Business Economics 1

NATURE OF BUSINESS ECONOMICS

Micro Economics Macro Economics

What we study in Micro Economics

2 Nature & Scope of Business Economics

What we study in Macro Economics

Nature of Business Economics

The following points will describe the nature of Business Economics:

Business Economics is a Science

Based on Micro Economics

 Business Economics is based largely on Micro-Economics.

Incorporates elements of Macro Analysis

Business Economics is also an Art

Use of Theory of Markets and Private Enterprises

 Business Economics is interdisciplinary in nature as it incorporates tools from other disciplines

Economic theory has developed along two lines –

POSITIVE ECONOMICS NORMATIVE ECONOMICS

SCOPE OF BUSINESS ECONOMICS

Internal issues or operational issues External issues or environmental issues

I Microeconomics applied to Internal or Operational Issues

Nature & Scope of Business Economics 5

Demand Analysis and Forecasting

Production and Cost Analysis

Market Structure and Pricing Policies

Theory of Capital and Investment Decisions

Risk and Uncertainty Analysis

I(a) Demand Analysis and Forecasting:

Price of the commodity

Prices of related commodities

6 Nature & Scope of Business Economics

I(b) Production and Cost Analysis:

I(c) Inventory Management:

I(d) Market Structure and Pricing Policies:

I(e) Resource Allocation:

I(f) Theory of Capital and Investment Decisions:

I(g) Profit Analysis:

I(h) Risk and Uncertainty Analysis:

II Macroeconomics applied to External or Environmental Issues

 Stage of business cycle