QUESTION BANK

ECONOMICS - I
SHORT ANSWERS

1. Distinguish between microeconomics and macroeconomics. Give Examples.

2. Explain the relationship between Total Product (TP) and Marginal Product (MP) with
diagram.
3. Why is the demand curve facing a firm is perfectly elastic under perfect competition but
less than elastic under monopolistic competition?

5. Explain the Law of Demand with the help of diagram.

6. Define market supply. What is the effect on the supply of goods when government
Imposes a tax on the production of goods? Explain.
7. A consumer buys 5 units of a good at a price of Rs 4 per unit. When price falls to Rs 3 per
unit he buys 10 units. Calculate price elasticity of demand also explain the degree of
elasticity so obtained with reason.

8. What is perfect competition? State its main features.

9. Describe the three motives of liquid demand of money according to Liquidity Preference
Theory of Interest?
10. ‘Economics is Science as well as an Art’. Elucidate
11. Differentiate between expansion of demand and increase in demand by using diagrams.
12. What is price elasticity of demand for a commodity? State its importance.
13. Explain the Law of Supply with the help of supply schedule and supply curve.
14. State the principal features of Oligopoly.
15. Define marginal revenue. What is its relationship with average revenue under perfect -
competition and monopoly?
16. Explain various degrees of price elasticity of supply using diagrams.
17. The quantity demanded of a commodity at a price of Rs 8 per unit is 600 units. Its price
falls by 25 percent and quantity demanded rises by 120 units. Calculate its price elasticity of
demand.
18. The average revenue curve of a firm under perfect competition is parallel to X axis and
negatively sloped under monopoly. Give reasons
20. Distinguish between perfect competition and monopoly.
21. Explain the Law of Diminishing Marginal Utility.

LONG ANSWERS

1. Discuss the effect of following on the market demand of a commodity:

A. Change in price of related goods
B. Change in the number of its buyers.
2. Give reasons why the average revenue curve of a firm under perfect competition is parallel
to X axis and negatively sloped under monopoly?
3. What is the law of variable proportion? Also explain the reasons behind the law.
4. Define oligopoly. Explain four features of oligopoly.
5. Explain Liquidity Preference Theory of interest in detail.
6. Critically evaluate the Modern Theory of rent.
7. Explain the difference between monopoly and monopolistic form of market. Also explain
the shape of their demand curve.

8. Define market demand. State the factors that affect market demand of a commodity.

10. What is price discrimination? When is price discrimination possible under monopoly?
11. Discuss the types of changes that take place in total product and marginal product when
there are:
A. Increasing returns to a factor
B. Diminishing returns to a factor
12. What is price elasticity of demand? Explain various degrees of price elasticity using
diagram.
13. Describe imperfect competition? What are different types of imperfect forms of market?
14. Give a detail note on the Innovations Theory of profit.
15. Explain the following using diagram, the effect of the following changes on the demand
of the commodity
a) A fall in the price of complementary goods
b) A rise in the price of the substitute goods
16. What do you understand by price elasticity of demand? How is it measured?
17. Explain using schedule and diagram the Law of Diminishing Marginal Utility.
ANSWERS

ANS1.

Total product is simply the output that is produced by all of the employed workers. Marginal
product is the additional output that is generated by an additional worker

The relationship between TP and MP is explained through the law of variable proportion. As
long as TP increases with increasing rate, the MP also increases. This goes on till MP reaches
maximum. When TP increases at diminishing rate, MP declines. This continues till point
where TP is at its highest. When TP reaches its maximum point, MP becomes zero. This
concept can be better understood with the help of the following schedule and diagram.
As you can see in the graph, TP increases at an increasing rate till point P, the point of
inflextion and till that point (i.e. the 2nd unit of variable factor), MP increases. Then as the TP
start increasing at a diminishing rate till point M when tp is maximum, the mp keeps
declining and reaches zero at point N. This happens at the 6th unit of variable factor. after this
point, the tp start decreasing and MP becomes negative, which can be seen when 7th unit of
variable factor is employed.

ANS. 2
Under perfect competition, a demand curve of the firm is perfectly elastic because the firm
can sell any amount of goods at the prevailing price. So even a small increase in price will
lead to zero demand. This indicates that the firm has no control over price.
Perfect competition in an industry structure is when, there are many firms, none large enough
to influence the industry, producing homogeneous products. Firms are price takers. There are
no barriers to entry.
Perfect competition leads to the Pareto-efficient allocation of economic resources. Because of
this, it serves as a natural benchmark against which to contrast other market structures.
However, in practice, very few industries can be described as perfectly competitive.

On the other hand, large firms under monopolistic competition deals with differentiated

products on the basis of brand. Thus, demand curve slopes downwards and enjoys the
monopoly power. It can sell more goods only by reducing the price of the product and by
selling close substitutes. Hence, the demand curve facing a firm perfectly elastic under
perfect competition but less than perfectly elastic under monopolistic competition.

The process by which a monopolistic competitor chooses its profit-maximizing quantity and
price resembles closely how a monopoly makes these decisions process. First, the firm selects
the profit-maximizing quantity to produce. Then the firm decides what price to charge for
that quantity.

Step 1. The monopolistic competitor determines its profit-maximizing level of output. In this
case, the Authentic Chinese Pizza company will determine the profit-maximizing quantity to
produce by considering its marginal revenues and marginal costs.
Two scenarios are possible:
 1. If the firm is producing at a quantity of output where marginal revenue exceeds
marginal cost, then the firm should keep expanding production, because each
marginal unit is adding to profit by bringing in more revenue than its cost. In this way,
the firm will produce up to the quantity where MR = MC.
2. If the firm is producing at a quantity where marginal costs exceed marginal revenue,
then each marginal unit is costing more than the revenue it brings in, and the firm will
increase its profits by reducing the quantity of output until MR = MC.

ANS 3
The law of demand expresses a relationship between the quantity demanded and its price. It
may be defined in Marshall's words as “the amount demanded increases with a fall in price,
and diminishes with a rise in price”. Thus it expresses an inverse relation between price and
demand.

.
The 'Law Of Demand' states that, all other factors being equal, as the price of a good or
service increases, consumer demand for the good or service will decrease, and vice versa.

Many factors affect demand. When drawing a demand curve, economists assume all factors
are held constant except one – the price of the product itself. Ceteris paribus allows us to
isolate the effect of one variable on another variable

A demand curve shows the relationship between the price of an item and the quantity
demanded over a period of time. There are two reasons why more is demanded as price falls:
1. The Income Effect: There is an income effect when the price of a good falls because the
consumer can maintain the same consumption for less expenditure. Provided that the good is
normal, some of the resulting increase in real income is used to buy more of this product.

2. The Substitution Effect: There is a substitution effect when the price of a good falls
because the product is now relatively cheaper than an alternative item and some consumers
switch their spending from the alternative good or service.

 ●  As price falls, a person switches away from rival products towards the product
  ●  As price falls, a person's willingness and ability to buy the product increases

 ●  As price falls, a person's opportunity cost of purchasing the product falls

ANS 4.

The market supply is the total quantity of a good or service that all producers are willing to
supply at the prevailing set of relative prices during a defined period of time. It is understood
that "Supply" means Market Supply, unless it refers to one producer.
For Example, In most communities, there are many teenagers who offer their babysitting
services to earn extra money. Each babysitter is in a unique position. One may need the
flexible hours babysitting offers to pursue other activities. Others may be limited because
they have another job that consistently restricts babysitting availability. Another babysitter
may not have access to a car and must depend on someone to drive her. These restrictions
affect their individual supply curves. Businesses also have restrictions and differ in their
manufacturing expertise and cost structure. Just like the babysitters, each business will have
its own supply curve or schedule. The sum of each individual producer's supply equals the
market supply, or what is more commonly referred to as the supply of a particular good or
service. A market supply curve (or supply curve) is the amount all producers are willing to
offer of a good or service at a range of prices over a defined period of time.
When the government imposes heavy taxes on the production of a particular commodity, the
cost of production of that good increases and the price will remain constant. This results in
reduction in profits. In such a situation, the producer will use the resources to produce those
commodities on which the government has levied less tax. Therefore, the supply of that
particular commodity decreases. A small increase in price leads to a large drop in the quantity
demanded. The imposition of the tax causes the market price to increase and the quantity
demanded to decrease. Because consumption is elastic, the price consumers pay doesn’t
change very much. Because production is inelastic, the amount sold changes significantly.
The producer is unable to pass the tax onto the consumer and the tax incidence falls on the
producer.

ANS. 7
“Elasticity of demand may be defined as the percentage change in quantity demanded to the
percentage change in-price.”
Different commodities have different price elasticity’s. Some commodities have more elastic
demand while others have relative elastic demand. Basically, the price elasticity of demand
ranges from zero to infinity. It can be equal to zero, less than one, greater than one and equal
to unity.

1. Perfectly elastic demand is said to happen when a little change in price leads to an
infinite change in quantity demanded. A small rise in price on the part of the seller
reduces the demand to zero.
Perfectly inelastic demand is opposite to perfectly elastic demand. Under the perfectly
inelastic demand, irrespective of any rise or fall in price of a commodity, the quantity
demanded remains the same.

The demand is said to be unitary elastic when a given proportionate change in the price level
brings about an equal proportionate change in quantity demanded. 

Relatively elastic demand refers to a situation in which a small change in price leads to a
big change in quantity demanded. In such a case elasticity of demand is said to be more than
one
Under the relatively inelastic demand, a given percentage change in price produces a
relatively less percentage change in quantity demanded. In such a case elasticity of demand is
said to be less than one.

ANS. 8
Perfect competition is a unique form of the marketplace that allows multiple companies to
sell the same product or service. Many consumers are looking to purchase those products.
None of these firms can set a price for the product or service they are selling without losing
business to other competitors. There are no barriers to any firm that is looking to enter or exit
the market. The final output from all sellers is so similar that consumers cannot differentiate
the product or service of one company from its competitors.

Features-
Many Buyers and Sellers – There will always be a huge number of buyers and sellers in this
form of marketplace. The advantage of having a large number of small-sized producers is that
they cannot combine to influence the market price. If the quantity offered by an individual
seller is very small compared to the total market produce, they cannot influence the market
price independently.
Similarly, if there are many buyers, then an individual will not have the power to dictate
conditions to the market or influence the price by altering demand for a product. The
individual demand will not be large enough to change the price.

Homogeneity – The product or service produced by the buyers in a perfectly competitive

market should be homogenous in all respects. There should be no differentiation between
them in terms of quantity, size, taste, etc., so that the products are perfect substitutes for each
other. If a seller tries to charge a higher price for products that are so similar, they will lose
their customers immediately.

Free Entry and Exit – Another condition of a perfectly competitive market is that no artificial
restrictions prevent a firm’s entry, or compel an existing firm to stay put when they want to
leave. Their decision to enter, stay or leave the market depends purely on economic factors.
Perfect Knowledge – The buyers and sellers have perfect knowledge about the market
conditions. The buyers are aware of the details of the product sold as well as its price. At the
same time, the sellers know about the potential sales of their products at different price
points. Since the buyers are already informed about the product, there is no need for
advertising or sales promotion. So firms don’t have to invest a single penny in these
activities. It also helps sellers save on advertising or other marketing activities, which keeps
the price of their products low.

Mobility of Factors of Production – The factors of production like labour, raw materials and
capital should have total mobility under perfect competition. The labour should have the
freedom to move from one place (industry, market or production unit) to another depending
on their remuneration. Even the raw materials and capital should not have any restrictions in
movement.

Transport Cost – In the perfectly competitive market, the costs for transporting goods,
services or factors of production from one place to another is either zero or constant for all
sellers. The assumption is that all sellers are equally near or farther away from the market.
Thus, the transport cost is uniform for all of them.
Absence of Artificial Restrictions – There is no interference from the government or any
other regulatory body to hinder the smooth functioning of the perfect competition. 

Uniform Price – There is a single uniform price for all products and services in a perfectly
competitive market. The forces of demand and supply determine it.

ANS. 9

Demand for money: Liquidity preference means the desire of the public to hold cash.
According to Keynes, there are three motives behind the desire of the public to hold liquid
cash: (1) the transaction motive, (2) the precautionary motive, and (3) the speculative motive.

Transactions Motive: The transactions motive relates to the demand for money or the need of
cash for the current transactions of individual and business exchanges. Individuals hold cash
in order to bridge the gap between the receipt of income and its expenditure. This is called the
income motive.
The businessmen also need to hold ready cash in order to meet their current needs like
payments for raw materials, transport, wages etc. This is called the business motive.
Precautionary motive: Precautionary motive for holding money refers to the desire to hold
cash balances for unforeseen contingencies. Individuals hold some cash to provide for illness,
accidents, unemployment and other unforeseen contingencies. Similarly, businessmen keep
cash in reserve to tide over unfavourable conditions or to gain from unexpected deals.
Keynes holds that the transaction and precautionary motives are relatively interest inelastic,
but are highly income elastic. The amount of money held under these two motives (M1) is a
function (L1) of the level of income (Y) and is expressed as M1 = L1 (Y)

Speculative Motive: The speculative motive relates to the desire to hold one’s resources in
liquid form to take advantage of future changes in the rate of interest or bond prices. Bond
prices and the rate of interest are inversely related to each other. If bond prices are expected
to rise, i.e., the rate of interest is expected to fall, people will buy bonds to sell when the price
later actually rises. If, however, bond prices are expected to fall, i.e., the rate of interest is
expected to rise, people will sell bonds to avoid losses.
According to Keynes, the higher the rate of interest, the lower the speculative demand for
money, and lower the rate of interest, the higher the speculative demand for money.
Algebraically, Keynes expressed the speculative demand for money as
M2 = L2 (r)
Where, L2 is the speculative demand for money, and
r is the rate of interest.
Geometrically, it is a smooth curve which slopes downward from left to right.
Now, if the total liquid money is denoted by M, the transactions plus precautionary motives
by M1 and the speculative motive by M2, then
M = M1 + M2. Since M1 = L1 (Y) and M2 = L2 (r), the total liquidity preference function is
expressed as M = L (Y, r).

ANS 10.
https://www.shaalaa.com/question-bank-solutions/differentiate-between-the-extension-of-
demand-and-an-increase-in-demand-using-diagrams-movement-along-and-shifts-in-the-
demand-curve_98099)

ANS 11
https://www.economicsdiscussion.net/elasticity-of-demand/what-is-the-importance-of-
elasticity-of-demand/21813
ANS 13.
The law of supply is the microeconomic law that states that, all other factors being equal, as
the price of a good or service increases, the quantity of goods or services that suppliers offer
will increase, and vice versa. The law of supply says that as the price of an item goes up,
suppliers will attempt to maximize their profits by increasing the number of items for sale.
Supply in a market can be depicted as an upward-sloping supply curve that shows how the
quantity supplied will respond to various prices over a period of time.

How supply curve work?

The supply curve will move upward from left to right, which expresses the law of supply: As
the price of a given commodity increases, the quantity supplied increases (all else being
equal).
Note that this formulation implies that price is the independent variable, and quantity the
dependent variable. In most disciplines, the independent variable appears on the horizontal or
x-axis, but economics is an exception to this rule.
If a factor besides price or quantity changes, a new supply curve needs to be drawn. For
example, say that some new soybean farmers enter the market, clearing forests and increasing
the amount of land devoted to soybean cultivation. In this scenario, more soybeans will be
produced even if the price remains the same, meaning that the supply curve itself shifts to the
right (S2) in the graph below. In other words, supply will increase.
Other factors can shift the supply curve as well, such as a change in the price of production. If
a drought causes water prices to spike, the curve will shift to the left (S3). If the price of
a substitute—from the supplier's perspective—such as corn increases, farmers will shift to
growing that instead, and the supply of soybeans will decrease (S3).
Supply schedule
Supply schedule is a chart that shows how much product a supplier will have to produce to
meet consumer demand at a specified price based on the supply curve. In other words, it’s
basically a supply graph in spreadsheet form listing the quantity that needs to be produced at
each product price level.
There can be two types of supply schedules and those are explained below

Individual supply schedule: This schedule represents the quantities of a product supplied by

an individual firm or supplier at different prices during a specific period of time, assuming
other factors remain unchanged.
Market supply schedule: This schedule represents the quantities of a product supplied by all
firms or suppliers in the market at different prices during a specific period of time, while
other factors are constant.

ANS 14.
Oligopoly is a market where there are few sellers in the market who produces homogenous
goods or differentiate goods.
Characteristics of the oligopoly
The foremost characteristic of oligopoly is interdependence of the various firms in the
decision making.

This fact is recognized by all the firms in an oligopolistic industry. If a small number of
sizeable firms constitute an industry and one of these firms starts advertising campaign on a
big scale or designs a new model of the product which immediately captures the market, it
will surely provoke countermoves on the part of rival firms in the industry.
Thus different firms are closely inter dependent on each other.
 
1. Advertising:

The firm under oligopoly can start an aggressive advertising campaign with the intention of
capturing a large part of the market. Other firms in the industry will obviously resist its
defensive advertising.  Therefore, the rival firms remain all the time vigilant about the moves
of the firm which takes initiative and makes policy changes. 

2. Group Behaviour:

In oligopoly, the most relevant aspect is the behaviour of the group. There can be two firms
in the group, or three or five or even fifteen, but not a few hundred. Whatever the number, it
is quite small so that each firm knows that its actions will have some effect on other firms in
the group.

3. Competition:
This leads to another feature of the oligopolistic market, the presence of competition. Since
under oligopoly, there are a few sellers, a move by one seller immediately affects the rivals.
So each seller is always on the alert and keeps a close watch over the moves of its rivals in
order to have a counter-move. This is true competition, “True competition consists of the life
of constant struggle, rival against rival, whom one can only find under oligopoly
4. Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry, there are no barriers to entry into or
exit from it. However, in the long-run, there are some types of barriers to entry which tend to
restrain new firms from entering the industry.
5. Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms. Firms differ
considerably in size. Some may be small, others very large. Such a situation is
asymmetrical. A symmetrical situation with firms of a uniform size is rare.

6. Existence of Price Rigidity:

In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its price,
the rival firms will retaliate by a higher reduction in their prices. This will lead to a situation
of price war which benefits none. On the other hand, if any firm increases its price with a
view to increase its profits; the other rival firms will not follow the same. Hence, no firm
would like to reduce the price or to increase the price. The price rigidity will take place.
7. `No Unique Pattern of Pricing Behaviour
The rivalry arising from interdependence among the oligopolists leads to two conflicting
motives. Each wants to remain independent and to get the maxmium possible profit. Towards
this end, they act and react on the price-output movements of one another which are a
continuous element of uncertainty.
On the other hand, again motivated by profit maximisation each seller wishes to cooperate
with his rivals to reduce or eliminate the element of uncertainty. All rivals enter into tacit or
formal agreement with regard to price-output changes.

8. Indeterminateness of Demand Curve:

The interdependence of the oligopolists, however, makes it impossible to draw a demand
curve for such sellers except for the situations where the form of interdependence is well
defined. In real business operations, the demand curve remains indeterminate. 
ANS 15
Marginal Revenue
Marginal revenue (MR) is the increase in revenue that results from the sale of one additional
unit of output. While marginal revenue can remain constant over a certain level of output, it
follows from the law of diminishing returns and will eventually slow down as the output level
increases.

Under pure (or perfect) competition, a very large number of firms are assumed to be present.
The supply by each seller is just like a drop of water in a mighty ocean so that any increase or
decrease in production by any one firm exerts no perceptible influence on the total supply and
on the price in the market. The collective forces of demand and supply determine the price in
the market so that only one price tends to prevail for the whole industry. Each firm has to
take the market price as given and sell its quantity at the ruling market price. In simple terms,
the firm is a ‘price-taker’ and the firm’s demand curve is infinitely elastic. As the firm sells
more and more at the given price, its total revenue will increase but the rate of increase in the
total revenue will be constant, since AR = MR.

Under Imperfect Competition (Monopoly)

Unlike under perfect competition, a firm under imperfect competition such as under
monopoly can sell more only by lowering its price. Therefore, the average revenue curve is
downward sloping and its corresponding marginal revenue curve lies below it.

ANS 18.
Under perfect competition, the demand curve of firm is a horizontal straight line parallel to
X-axis. It implies the firm will sell the product at the prevailing price which is determined by
the industry. The individual firm cannot influence the price.
Under perfect competition, the average revenue curve of a firm is parallel to the X-axis,
whereas under monopoly it is negatively sloped. A perfectly competitive firm is a price taker
and can sell as much as it wishes to at the prevailing price. Therefore, AR is equal to price
and remains constant. AR curve is therefore parallel to the X-axis. A monopolistic firm is a
price maker and can increase its sales only when the price of the good falls. Therefore, when
price or AR falls, the firm can increase the quantity sold. Thus, under monopoly AR curves
slopes downward.

ANS 20
Perfect Competition
1. It refers to the market in which there are many firms selling a certain homogenous
product.
2. Price is equal to the marginal cost at the equilibrium output.
3. It is possible only when MR=MC and MC cut the MR curve from below.
4. There is no price discrimination by sellers as the prices are determined by supply and
demand forces.
5. Here, the supply curve can be identified as all firms sell the desired quantity at the
prevailing price.
6. Here, the sellers don’t have any control over the price.
7. In this market, the sellers are known as price takers.
8. This market has strong competition in the market.
9. In this market, close substitutes are available. 
10. There are a large number of sellers with a large number of Buyers offering
homogenous products.

Monopoly competition
 1. A monopoly market is a market structure in which a single firm is a sole producer of a
product for which there are no close substitutes available in the market
2. Price is greater than the average cost at equilibrium output.
3. Equilibrium can be realized whether the MC is rising, constant, or falling.
4. It has strong restrictions for the entry of new firms into the market.
5. The monopolist can charge different prices from different groups of buyers.
6. In a monopoly, the supply curve cannot be known because of price discrimination.
7. In this market, the seller has full control over the price.
8. There is no competition in the market.
9. here are no close substitutes for the products in this market.
10. There is only one single seller of a commodity with a large number of buyers.

ANS 21.
https://www.investopedia.com/terms/l/lawofdiminishingutility.asp - :~:text=The law of
diminishing marginal utility says that the marginal,another unit of any product.

The law of diminishing marginal utility states that all else equal, as consumption increases,
the marginal utility derived from each additional unit declines. Marginal utility is the
incremental increase in utility that results from the consumption of one additional unit.
"Utility" is an economic term used to represent satisfaction or happiness.
The marginal utility may decrease into negative utility, as it may become entirely unfavorable
to consume another unit of any product. Therefore, the first unit of consumption for any
product is typically highest, with every unit of consumption to follow holding less and less
utility. Consumers handle the law of diminishing marginal utility by consuming numerous
quantities of numerous goods.

The law of diminishing marginal utility directly relates to the concept of diminishing prices.
As the utility of a product decreases as its consumption increases, consumers are willing to
pay smaller dollar amounts for more of the product. For example, assume an individual pays
$100 for a vacuum cleaner. Because he has little value for a second vacuum cleaner, the same
individual is willing to pay only $20 for a second vacuum cleaner.

Example of Diminishing Utility

An individual can purchase a slice of pizza for $2, and is quite hungry, so they decide to buy
five slices of pizza. After doing so, the individual consumes the first slice of pizza and gains a
certain positive utility from eating the food. Because the individual was hungry and this is the
first food consumed, the first slice of pizza has a high benefit.
Upon consuming the second slice of pizza, the individual’s appetite is becoming satisfied.
They are not as hungry as before, so the second slice of pizza had a smaller benefit and
enjoyment than the first. The third slice, as before, holds even less utility as the individual is
now not hungry anymore.
The fourth slice of pizza has experienced a diminished marginal utility as well, as it is
difficult to be consumed because the individual experiences discomfort upon being full from
food. Finally, the fifth slice of pizza cannot even be consumed. The individual is so full from
the first four slices that consuming the last slice of pizza results in negative utility.
The five slices of pizza demonstrate the decreasing utility that is experienced upon the
consumption of any good. In a business application, a company may benefit from having
three accountants on its staff. However, if there is no need for another accountant, hiring
another accountant results in a diminished utility, as there is a minimum benefit gained from
the new hire.

This law is based upon two important facts. Firstly, while the total wants of a man are
virtually unlimited, each single want is satiable. Therefore, as an individual consumes more
and more units of goods, intensity of his want for the goods goes on falling and a point is
reached where the individual no longer wants any more units of the goods. That is, when
saturation point is reached, marginal utility of goods becomes zero. Zero marginal utility of
goods implies that the individual has all that he wants of the goods in question.
The second fact on which the law of diminishing marginal utility is based is that the different
goods are not perfect substitutes for each other in the satisfaction of various particular wants.
When an individual consumes more and more units of a goods, the intensity of particular
want for the goods diminishes but if the units of that goods could be devoted to the
satisfaction of other wants and yield as much satisfaction as they did initially in the
satisfaction of the first want, marginal utility of the good would not have diminished.
LONG ANSWERS

Ans 1. A) There are two types of related goods that affect the demand for a commodity
assuming that the price for the commodity remains constant. These two goods are:
1. Complementary goods- These goods are the paired goods which are consumed together
and if it is consumed separately then its utility is decreased. So if the demand for one of the
two goods is increased, the demand for the other commodity will also increase even if the
price of this commodity remains the same and vice versa. Example: Ink and pen, car and
petrol etc. 
2. Substitute goods- These goods are the opposite goods which are substitutes of each other.
So if the demand for one of the two goods is increased, the demand for the other commodity
will decrease even if the price of this commodity remains the same and vice versa. Example:
coffee and tea, soft drink and fruit juice etc. 

B) Change in the number of its buyers - If the number of buyers of a good decreases in a

market, then there will be less quantity demanded at every price, which means the demand
for the good has decreased and vice versa.
ANS. 2
As same as answer 18.

ANS 3.
when the number of one factor is increased or decreased, while other factors are constant, the
proportion between the factors is altered. For instance, there are two factors of production
viz., land and labour.

Land is a fixed factor whereas labour is a variable factor. Now, suppose we have a land
measuring 5 hectares. We grow wheat on it with the help of variable factor i.e., labour.
Accordingly, the proportion between land and labour will be 1: 5. If the number of laborers is
increased to 2, the new proportion between labour and land will be 2: 5. Due to change in the
proportion of factors there will also emerge a change in total output at different rates. This
tendency in the theory of production the Law of Variable Proportion.

led
From the table 1 it is clear that there are three stages of the law of variable proportion. In the
first stage average production increases as there are more and more doses of labour and
capital employed with fixed factors (land). We see that total product, average product, and
marginal product increases but average product and marginal product increases up to 40
units. Later on, both start decreasing because proportion of workers to land was sufficient and
land is not properly used. This is the end of the first stage.

The second stage starts from where the first stage ends or where AP=MP. In this stage,
average product and marginal product start falling. We should note that marginal product
falls at a faster rate than the average product. Here, total product increases at a diminishing
rate. It is also maximum at 70 units of labour where marginal product becomes zero while
average product is never zero or negative.
The third stage begins where second stage ends. This starts from 8th unit. Here, marginal
product is negative and total product falls but average product is still positive. At this stage,
any additional dose leads to positive nuisance because additional dose leads to negative
marginal product.

Graphic Presentation:
In fig. 1, on OX axis, we have measured number of labourers while quantity of product is
shown on OY axis. TP is total product curve. Up to point ‘E’, total product is increasing at
increasing rate. Between points E and G it is increasing at the decreasing rate. Here marginal
product has started falling. At point ‘G’ i.e., when 7 units of labourers are employed, total
product is maximum while, marginal product is zero. Thereafter, it begins to diminish
corresponding to negative marginal product. In th
Up to point ‘H’ marginal product increases. At point ‘H’, i.e., when 3 units of labourers are
employed, it is maximum. After that, marginal product begins to decrease. Before point ‘I’
marginal product becomes zero at point C and it turns negative. AP curve represents average
product. Before point ‘I’, average product is less than marginal product. At point ‘I’ average
product is maximum. Up to point T, average product increases but after that it starts to
diminish.