1) The ordinal approach to measurement of utility is based on the assumption that utilities are comparable

but not measurable, unlike the cardinal approach, in which utilities are measurable. A consumer may
compare any two commodities and make a choice between them without measuring the respective
utilities. The indifference curve analysis is based on this measurement of utility. An indifference curve
may be defined as a curve which shows various combinations of any two commodities which give the
consumer same level of satisfaction. No one single combination is inferior or superior to the other
combinations. Thus, he/she is indifferent to the combination. For example, Meena is asked what
combinations of cake and coffee she prefers. Let us consider the following table,

Combinations Cake Coffee Marginal Rate of

Substitution
A 1 15 -
B 2 11 4
C 3 8 3
D 4 6 2
E 5 5 1

The above table shows the various combinations of cake and coffee that give Meena equal satisfaction. She
explains that she is indifferent to all of these combinations, as they all yield her equal satisfaction. In
combination A, Meena consumes 1 unit of cake and 15 units of coffee. However, if she wants second unit
of cake, Meena has to sacrifice certain units of coffee to get one extra unit of cake. In this case, she had to
let go 4 units of coffee to get 2 units of cake. In combination C, Meena acquires 3 units of cake by
sacrificing 3 units of coffee. The way in which Meena is substituting coffee for cake is called Marginal
Rate of Substitution, that is the rate at which the consumer substitutes one commodity for another. This
can be plotted on the following graph,

Meena's indiff erence curve

16 A

14
12 B

10
C
COFFEE

8
D
6 E

4
2
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5
CAKE

In the above graph, the X axis depicts cake and Y axis depicts coffee. The points A,B,C,D and E are
different combinations of cake and coffee and Meena is indifferent to all the combinations as they are all
same in terms of satisfaction level.

Initially, this theory was developed by Pareto, an Italian Economist. However, it was later designed more
scientifically by two British Economists, J.R. Hicks and R.J.D. Allen. This theory has certain assumptions.
They are as follows,
1. The consumer is rational
2. The aim of the consumer is maximization of total satisfaction.
3. It assumes non-satiety of the consumer.
4. It assumes the condition of transitivity, which implies that if A=B=C, it implies A=C.
5. It assumes that the tastes and preferences of the consumer remain constant.
6. The consumer’s income and price of commodities remain constant.

There were many criticisms against the indifference curve analysis. They are as follows,

1. Indifference curves are non-transitive: According to Professor W.E. Armstrong, the consumer is
indifferent to the various combinations of goods only due to their inability to recognize the difference
between the alternative combinations. However, as the differences among the various combinations
increase, the difference in the satisfaction of the various combinations become evident. Thus, the
different combinations do not yield equal satisfaction.

2. Unrealistic assumptions: The indifference curve analysis is based on the assumptions of perfect
competition, divisibility of goods, rationality, and perfect knowledge of the consumer on his/her
prefernces. However, this is far from the truth as they are unrealistic. It is unrealistic because it is
practically impossible for a consumer to have perfect knowledge about his/her prefernces. Perfect
competition in reality is just a myth. A consumer is not always rational. When it comes to the assumption
of divisibility of goods, not all goods are divisible. It is impossible to divide them. For example, goods
like mobile phones, furniture, cars etc., are indivisible.

3. Old wine in a new bottle: According to Professor Robertson, indifference curve analysis has no
originality, claiming it is very similar to the utility analysis. He mentioned it quite merely as “An old
wine in a new bottle.” This analysis replaced the concept of utility with scale of preference, cardinal
number system was replaced with ordinal number system and marginal utility was replaced with marginal
rate of substitution.

4. Two-goods model: The indifference curve analysis is based on the two goods model wherein the
consumer consumes only two goods. However, this is the biggest drawback as in reality, a consumer
consumes large quantities of goods to satisfy his/her wants. In this case, economists might have to depend
on complex mathematical solutions which makes it difficult to predict consumer behavior.

5. Based on weak ordering: The indifference curve analysis is based on weak ordering hypothesis. The
analysis states that the consumer can be indifferent between certain combinations of two goods.
However, according to critics, this analysis is deemed quite unrealistic.

6. Constancy of taste: Another assumption of the preference hypothesis is that the tastes and preferences of
consumers remain constant and unchanged. However, this is not the case in reality.

7. Predominantly introspective: The indifference curve analysis is predominantly introspective. Professor

Samuelson has criticized this analysis as it studies consumer behavior on the basis of imaginary drawn
difference curves. Due to this defect, he has chosen a behavioral method for constructing the demand
theory.

8. Fails to explain risk and uncertainty: The indifference curve analysis has been criticized on the
grounds of being unable to explain consumer behavior when the consumer is involved with choices
involving risks and uncertainty. For example, if there are three situations, A, B and C, and the consumer
prefers A to B and C to A wherein A is certain and the chances of B or C occurring are 50-50. In such a
case, the consumer’s preference for C over A can only be measured quantitatively.

9. Ignorance towards demonstration effect: The concept of demonstration effect explains the level of
consumption of others affects the level of an individual’s consumption. The indifference curve analysis,
however, ignores this and in turn refuses to understand consumer behavior.

Even though the indifference curve analysis was highly criticized, it still is regarded superior when
compared to Marshall’s utility analysis as it does not believe in measurement of utility and does not assume
anything about the marginal utility of money. It also explains Marshall’s law of demand in a more realistic
manner. In conclusion, though it is heavily criticized, it still remains superior to utility analysis.

Sources:

 https://www.academia.edu/18421132/Criticisms_of_Indifference_Curve_Analysis
 http://ecoworldquiz.com/2018/06/02/criticism-of-the-indifference-curve-analysis/
 https://www.yourarticlelibrary.com/economics/14-major-criticisms-regarding-indifference-
curve-analysis-economics/10791
 https://learneconomicsbydrswatigupta.blogspot.com/2020/10/indifference-curve-analysis.html

2) As known from the law of supply, the quantity supplied and the price of a commodity have direct
relationship. Implying that, when there is an increase in price, then the quantity supplied also increases and
vice versa. But to understand by how much percentage it would increase or how it will increase is
determined by elasticity of supply. The concept of elastic was introduced by Marshall in his book,
“Principles of Economics”. The term elasticity displays the responsiveness of one variable to a change in
other dependent variables. Elasticity of supply may be defined as the measurement of how responsive
quantity supplied is to a change in price, with other factors being constant. An example of elasticity of
supply would be glass water bottles since glass is made from molten rock and sand, it has a very high price
elasticity of supply as sand is a very abundant resource. However, on the other hand, highly demanding jobs
that require a lot of experience, both knowledge and work are an example of inelastic supply. This could
include work such as a chemist working on nuclear energy.

The following is the formula of elasticity of supply,

percentage change ∈quantity supplied

e s= However, there are certain factors that exert influence on the
percentage change ∈price
elasticity of supply. The following are the determinants of elasticity of supply,

1. Time factor: Time factor exerts great influence on the elasticity of supply. In short run, the producer
is unable to produce more as the time period is less, meaning the supply for a product here will be
inelastic. Thus, changes in prices don’t affect the supply of a product much. On the other hand, in the
long run, supply for a product will be elastic as the producer has more time period to produce goods.
An example for supply of products in the short run could be agricultural commodities and an
example for supply of products in long run could be manufacturing industries.

2. Production capacity: Production capacity is a factor determining elasticity of supply. When the
production capacity of a product can be increased, then the supply of that product will be elastic.
However, when the production capacity of a product cannot be increased or is narrow, then the
supply of that product will be inelastic. An example for this could be the following situation, increase
in storage capacity of a company helped in procuring raw materials which lead to an increase in
production. Here, the supply is elastic.

3. Method of production: Method of production is a factor determining the elasticity of supply. The
various production techniques taken by a company affect the supply of their products. If their
production methods are efficient and latest, then the products are supplied faster with respect to the
change in prices of their products. Thus, being elastic. However, if the production techniques of the
company are obsolete and intricate, then the products are supplied slower with respect to the change
in prices of their products. Thus, being inelastic.

4. Future price expectation: Future price expectations by the producers of a product is a determinant
of elasticity of supply. The supply of the product becomes inelastic when the producer feels like
there will be a rise in the price of the commodity in the future. Thus, there will be a fall in the supply.
 On the other hand, the supply will be elastic if the producer expects the price of the commodity to
fall in the future. Thus, there is a rise in the supply.

5. Product’s nature: The nature of the product is another factor determining elasticity of supply. In the
case of perishable goods like vegetables or fruits, the supply of these goods cannot be increased or
decreased in a small amount of time. Hence, the supply is inelastic. For example, the supply of
strawberries cannot be increased in a short span of time as they are produced during a particular
season. However, in the case of products like wines or antiques, the supply is elastic as there is
constant supply. An example of this could be vintage cars or vintage paintings that cannot be
reproduced.

6. Number of products: The number of products being produced also influence the elasticity of
supply. When a company produces multiple goods, the supply of those goods will be elastic.
However, the supply will be inelastic when a company only produces a single good.

Thus, elasticity of supply is influenced by certain factors like time factor, production capacity, method of
production, future price expectation, product’s nature and the number of products being produced.

Sources:

 https://www.economicsdiscussion.net/elasticity-of-supply/elasticity-of-supply-meaning-types-
measurement-and-determinants/17023
 https://www.economicsdiscussion.net/price-elasticity-of-supply/9-factors-affecting-price-elasticity-
of-supply/12455
 https://www.investopedia.com/ask/answers/040315/what-factors-influence-change-supply-
elasticity.asp

3)

a) As known from the law of demand, there is an inverse relationship between price and quantity demanded
of a commodity. This means that when there is an increase in the price of a commodity, there will be a
decrease in quantity demanded and vice versa. But to know or measure by how much percentage it has
increased or decreased is known by elasticity of demand. The concept of elasticity was introduced by
Marshall in his book “Principles of Economics”. Elasticity is a unit-free measure. Elasticity of demand
refers to the ability of the quantity demanded for a commodity to change whenever there is a change
in any of the determinants of demand like the price of the commodity, prices of other commodities
and income of the consumer. The change in demand due to the change in the price of the commodity is
called price elasticity of demand (e p ¿. The change in the demand for a commodity due to change in the price
of another commodity is called cross elasticity of demand (e c ). Similarly, the change in the demand for a
commodity due to a change in the income of the consumer is called income elasticity of demand (e y ¿ . Here,
y is denoted as income of the consumer.

The following are the types of price elasticity of demand,

1. Perfectly elastic demand: When there is a large change in quantity demanded of a commodity but there
is no change in price, then it is known as perfectly elastic demand. The elasticity of demand here is
infinity. Thus, e p=∞. In the diagram below, it is observed that as the quantity demanded of a commodity
increases from OQ1 to OQ2, the price is fixed at P1. Here, the price is stable. The demand curve in
perfectly elastic demand is horizontal and flat. For example, during the COVID-19 crisis, the demand for
cars has increased due to the lack of sanitation in public transportation or for safety reasons. Because of
this rise in demand for cars, there was a rise in demand for petrol as well.
2. Perfectly inelastic demand: When there is a change in price of a commodity but no change in the
quantity demanded, then it is known as perfectly inelastic demand. The elasticity of demand here is zero.
Thus, e p=0. In the diagram below, it is observed that as the price of a commodity increases from OP1
to OP2 and to OP3, there is no change in quantity demanded at OQ and thus remains same. Even though,
the law of demand states that quantity demanded is affected by a change in price, this is not true in the
case of perfectly inelastic demand as the quantity demanded is zero regardless of change in price. Here,
the demand curve is vertical. For example, a vaccine during COVID-19 crisis will have a perfectly
inelastic demand as people will purchase it regardless of its price.

3. Relatively elastic demand: When there is a greater change in quantity demanded of commodity than the
change in price, it is known as relatively elastic demand. The elasticity of demand here is greater than 1.
Thus, e p >1. In the diagram below, it is observed that the quantity demanded is greater than price as
quantity demanded has increased from OQ1 to OQ2 and price has decreased from OP1 to OP2. Here, the
demand curve is gradually sloping. For example, if there is a rise in the price of flight tickets, then
tourists or people going for vacations will choose alternatives or substitutes instead. Thus, the demand
for flight tickets here is reduced drastically.
4. Relatively inelastic demand: When the change in price of a commodity is greater than the change in the
quantity demanded of a commodity, it is known as relatively inelastic demand. The elasticity of demand
here is less than 1. Thus, e p <1. In the diagram below, price of the commodity increases from OP1 to
OP2 and quantity demanded falls from OQ1 to OQ2. Here, the change in price is more than the change
in quantity demanded. The demand curve is rapidly sloping. An example of relatively inelastic demand
is gasoline, as no matter how much the price increase, it is still demanded and there are no substitutes for
gasoline.

5. Unitary elastic demand: When there is an equivalent change in price and quantity demanded of a
commodity, then it is known as unitary elastic demand. The elasticity of demand here is 1. Thus,
e p=1. In the diagram below, it is observed that the price of the commodity increases from OP1 to
OP2 and the quantity demanded witnesses a fall from OQ1 to OQ2. Here, the change in price of
commodity is equal to change in quantity demanded. For example, an increase in the price of mobile
phones is 20% and the fall in its demand is 20%, then the elasticity of demand is 1.
To calculate the required elasticity of demand, the following formula is used,

∆Q
Percentage change∈quantity demanded Q
e p= =
Percentage change ∈ price ∆P
P

Where,

e p is the price elasticity of demand

P is the initial price of apple

∆ P is the change in price of apple

Q is initial quantity demanded apple

∆ Q is the change in quantity demanded of apple

From the given problem,

P = 20

∆P =1

Q = 100

∆Q = 4

4
100
e p= =0.8 Sources:
1
20
  For images & information- https://www.economicsdefinition.com

b) Perfect competition can be defined as a hypothetical market structure wherein large number of buyers
and sellers exist. In perfect competition, homogeneous products are produced by all firms and there no
advertisement costs as advertisement is no meaning in a market which has product homogeneity. Under this,
there is no competition whatsoever because firms sell individually any number of units as long as they can
sell at market price. Firms are price taker but not price makers. The demand and supply forced determine the
market price. Here, all firms face the same costs and sell the same product. There is free entry and exit of
firms. Thus, there are no barriers for entry. An example for perfect competition is agricultural markets as
there is homogeneity in products that the farmers sell like vegetables, fruits, grains etc. Another example of
perfect competition is online shopping (sites like Amazon and eBay) wherein there are many buyers and
sellers selling a similar product and the consumers can compare prices and get accurate information.

On the other hand, monopolistic competition can be defined as a market structure wherein the market has
many sellers and there are no barriers to entry. Each product sold by every seller is distinguishable and the
products are differentiated. Under this, the firms are price-makers as they sell the commodities at their own
price. The products are differentiated through packaging or advertising techniques. There is another feature
under monopolistic competition wherein employee skills are mattered. An example of monopolistic
competition is fast-food giants like McDonalds and Burger King wherein they sell similar commodities but
not substitutes. Though they sell burgers, fried and soft drinks, their recipes and taste differ thus making a
better example of monopolistic competition. Some other examples are restaurants, hotels, hairdressers etc.

The following are the differences between perfect competition and monopolistic competition.

BASIS OF PERFECT COMPETITION MONOPOLISTIC

COMPARISON
Meaning Perfect competition is a market
structure wherein large number
of buyers and sellers exist and
all firms sell homogeneous
products. Under this, consumers
have perfect knowledge of the
market and market price and
there is zero advertisement cost.
COMPETITION
Monopolistic competition is a
market structure wherein there is
keen competition among many
sellers producing products that
are differentiated from one
another through packaging or
advertisements.

Situation Perfect competition is theoretical Monopolistic competition is

and ideal situation on how realistic
markets should operate.
However, it is unrealistic.

Demand curve Under perfect competition, the Under monopolistic competition,

slope demand curve is perfectly elastic the demand curve is relatively
and horizontal. inelastic and sloping
downwards.

Relation AR = MR AR > MR
between AR and
MR
Price In perfect competition, firms are In monopolistic competition,
price takers. Thus, market every firm offers commodities at
 prices are determined by the its own price. Thus, they are
demand and supply forces. price makers.

Product In perfect competition, there is In monopolistic competition,

differentiation product homogeneity i.e., all there is product differentiation
firms in the industry produce i.e., products look highly
identical or similar products. different.

Examples Agricultural markets and online Restaurants, hotels, hairdressers

shopping sites like Amazon and etc.
eBay.

Sources:

 https://boycewire.com/perfect-competition-definition/
 https://keydifferences.com/difference-between-perfect-competition-and-monopolistic-competition.html
 https://www.investopedia.com/terms/p/perfectcompetition.asp
 https://www.educba.com/monopolistic-competition-examples/
 https://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html
 https://www.economicshelp.org/microessays/markets/perfect-competition/