BHALOTIA CLASSES (9883034569/9330960172) Microeconomics [1*t Sem] [New syllabus] [Subjective] T Chapter |: Tntroduction o1-18 s 14-34 3. Chapter 2B: Elasticity of[ Demand and Supply 35-48 4. Chapter 3: Theory of consumer behaviour 49-68, 5 Chapter 4A: Theory of Production 69-84 6. Chapter 4B: Theory of cost 85-93 7 Chapter 5A: Revenue & Market 94-96 8. Chapter SB: Perfect Competition 97-101 o. Chapter SC: Monopoly 102—107 10, ___ Mock Test Paper [Set A] 108 — 108 QUESTION PATTERN: 10 Questions of 2 Marks Each (out of 15): 20 Marks 4 Questions of 5 Marks Each (out of 6): 20 Marks 1 Questions of 10 Marks Each (out of 2): 10 Marks 15t Semester Crash Course Per Subject: % 750; All Subjects: = 2,500. Almost Daily Classes till last Day of Exam. Book Price: = 150Microeconomics: New Syllabus Unit-I Introduction Definition of Microeconomics, Macroeconomics-positive_and_normative economics--Basic concepts--seareity_and_choice-Production Possibility Curve-Central Problem of _the Economy--concept of slope Unit-Il: Theory of Demand and Supply (A) Demand and Supply—Concepts of Demand-derived demand--Demand — funetion~ Determinants of demand —_Law of Demand & its expectations--Movement along the Demand curve and shift of the Demand curve-- Concepts of Supply and Supply funtion Law of Supply --Movement along the supply curve and shift of the supply curve--Market equilibrium and Determination of price--Effect of change in the Demand and Supply on. Equilibrium price (B) Elasticity of Demand and Supply- Price elasticity of demand --Determinants and Measurement of price elasticity--Relationship between slope and price elasticity of demand- Income elasticity of demand--Cross price Elasticity of Demand --Elasticity of Supply Unit IJ: Theory of Consumer Behaviour- Concept of Utility and Marginal utility--Dhe Law of Diminishing marginal Utility--Cardinal Utility theory-Concept and significance of Consumer Surplus~Consumer’s Equilibrium in case of single and two commodities--Concept of Ordinal utility theory- properties- Marginal Rate of Substitution—Budget Line and Budget equation--Consumer’s Equilibrium Unit IV: Theory of Production and Cost- Concept of Production Funetion--Fixed and Variable inputs--Short run and Long run--Relation among Total, Average and Marginal Product--Law of Variable Proportion--Return to Scale— Isoquants, Isocosts and Producer’s equilibrium (Graphical Explanation)--Concepts of Economic Cost and Opportunity Cost--Short Run and Long run Cost Functions~-Relation among Average Cost, Average Variable Cost and Marginal Cost—Long run Average Cost Curve from Short Run Average Cost curves Unit V_:Revenue and Market— Definition and different forms of Market-Revenue under Different Market Stucture--Relation among Total Revenue, Average revenue _and Marginal Revenue--Perfect Competition and Monopoly--Features, Equilibrium of the firm ( Short Run and Long Run)--Short run supply curve of a firm under perfect competition-Price discrimination under monopoly--concepts and sonditions indifference_curve_and_itsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Chapter 1: Introduction positive and normative economics-Basic concepts-- scarcity and choice~-Production Possibility Curve--Central Problem of the Economy--concept of slope 1.Definition of Economics (Very Important)**** Economics is sum of OKIO + Nomus = Household + Resources. The science of economies was born with the publication of Adam Smith’s book an inquiry in to the Nature and Causes of Nations in the year 1776, Adain Smith is known as the father of Economies. 1, Wealth definition: Adam Smith Adam Smith: “Economics inquires into the factors that determine wealth of the country and its growth” The definition emphasizes production and expansion of wealth,” IB, SAY : “Economics is the science which deals with wealth,” red Marshal 2 Welfare Definitior ‘Marshall: “Economies is on one side the study of wealth, and on the other and more important side the study of —” He defines economies as “a study of mankind in the ordinary business of life: it examines that patt of individual and social action which is more closely connected with the attainment and use of material requires of well-being.” A.C, Pigon :“The range of our enquiry becomes restricted to that part of social welfare that ean be brought directly or with the measuring rod of money.” a ized Marshal (@ The definition includes only material things and ignores material things used in promotion of human welfare. (ii) Marshall defines economies in its normative or negative aspect. (iii) According to Robbins, the concept of welfare is not fixed. welfare dofit 3. Scarcity Definition: Lionel Robbins Prof. Lionel Robbins in his book Nature and significance of Economic Science (1932) defined. economics as the science of scarcity = 1 - Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Lionel Robbins: “Economies is the science which studies lmman behavior as a relationship b/w ends and scarce means which have alternative uses. “The important features of Robbins definition are @ Economies is a science of choice (ii) Multiplicity of ends (iid) Scarcity of means (iv) Alternative uses of scarce means (%) —_Beonomies is natural between ends (vi) Economics is a human science (vii) The definition makes economics a human science instead of social science. (viii) The definition is narrow and restricted in scope. This is because the definition discusses, economies as a theory of product and factor pricing. 4. Growth Definition: Paul A. Samuelson “Paul A. Samnelson’s definition of economies includes dynamic changes taking place both in the means as well as the ends with the lapse of time.” ‘The definition has an element of time in it which gives it dynamic Dimensions. It is clear form phrases like “...now and in future ‘The definition touches upon economic growth and welfare aspect also 2. Is economics a science or an art? (BHALOTIA) There is a great controversy among the economists regarding the nature of economics, whether the subject “economies” is considered as science or an art Prof, Robbins, Prof Jordon, Prof. Robertson etc, claimed economies as one of the subject of science like physics, chemistry ete, According to all these economists, ‘economics’ has also several characteristics similar to other science subjects According to Pigou, Marshall ete., economies is also considered as an art. In other way, art is the practical application of knowledge for achieving particular goals Therefore, fiom all the above discussions we can conclude that economies is neither a science nor an art only, However, it is a golden combination of both. According to Cossa, science and art are complementary to each other. Hence, economies is considered as both a science as well as an art. -2- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 3.Micro economics & Macro Economics Origi Microeconomues and Macroecononmes are the two mam branches of modem economics. The term ‘micro’ is derived from the Greek word, ‘Mikros’ which means small or a millionth part. ‘The term ‘macro’ is derived from the Greek word, ‘Makros’ which means large. These terms were coined by Norwegian Economist “Ragnar Frisch” of Oslo University in 1933. Micro Economic analysis was developed first. It is a traditional approach. The origin of this approach can be traced back to the era of Classical Economists- Adam Smith, David Ricardo, J. S, Mill, ete. It was popularized by Neo-Classical Economist, Prof Alfied Marshall in his book, ‘Principles of Economics, published in 1890, Other economists like Prof. Pigou, J. R. Hicks, Prof. Samuelson, Mrs. Joan Robinson, ete. have also contributed to the development of Micro Economies. 4. What is Micro economics [2 Marks](VVI) [90%] [9883034569]******* Wha Micro means a small part of a thing, Microeconomics thus deals with a sinall part of the national economy. It studies the economic actions and behavior of individual units such as an individual consumer, individual producer, or a firm, the price of a particular commodity or a factor, ete roecono 2 Microeconomics is the branch of economies that considers the behaviour of decision takers within the economy, such as individuals, households and firms. The word ‘firm’ is used generically to refer to all types of business. Microeconomics contrasts with the study of macroeconomics, which considers the economy as a whole. Microeconomics is the study of individuals, households and firms’ behavior in decision making and allocation of resources. It generally applies to markets of goods and services and deals with individual and economic issues. Microeconomic study deals with what choices people make, what factors influence their choices and how their decisions affect the goods markets by afleeting the price, the supply and demand, ‘The key role of microeconomics is to examine how a company could maximise its production and capacity, so that it could lower the prices and compete in its industry. A lot of microeconomics information can be obtained from the financial statements, -3 - Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 5.What do you mean by Macro Economics [2 Marks] Macroeconomics is the branch of economies that studies the behavior and performance of an economy asa whole, It focuses on the aggregate changes in the economy such as unemployment, growth rate, 21085 domestic product and inflation. Macroeconomics analyzes all aggregate indicators and the microeconomic factors that influence the economy. Goverment and corporations use macroeconomic models to help in formulating of economic policies and strategies Macroeconomics is a branch of economies that deals with the performance, structure, behavior, and decision-making of an economy as a whole—for example, using interest rates, taxes, and government spending to regulate an economy's growth and stability, This includes regional, national, and global economies ‘Macroeconomists study topics such as GDP (Gross Domestic Product), tnemployment (including wmemployment, rates), national income, price indices, output, consumption, inflation, saving, investment, energy, international trade, and intemational finance 6. Difference between micro & macroeconomics. [2 Marks] [Very Important] [99%] ‘Microeconomics Macroeconomics 1. Itis that branch of economics which | 1. Itis that branch of economics which deals with deals with the economic decision| aggregates and averages of the economy, eg. making of individual economic | aggregate output, national income, aggregate agents such as the producer, the| savings andinvestment, ete consumer, etc 2. In microeconomics, the economic Tn macroeconomics, the decision-making units (or decision-making units (or the the player) are the Central Planning Authority, the economics agents) are individual | Central Bank (e.g. the Reserve Bank of India) ete. consumers, individual producers ete 3.It takes info account small] 3. It takes info consideration the economy of any components of the whole economic county as a whole ‘ot deals with the process of price | 4 It deals with the general price level in any determination in case of individual | economy. products and factors of production. = 4 - Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 7. What do you mean by Positive Economics? (BHALOTIA) Positive economics deals with what is or how an economic problem facing a society is actually solved Prof, Robbins held that economies was purely a positive science Positive Economics is a branch of economics that has an objective approach, based on faets. It analyses, and explains the casual relationship between variables. It explains people about how the economy of the country operates, Positive economies is alternatively known as pure economies ot descriptive economics, When the scientific methods are applied to economic phenomena and scarcity related issues, it is positive economies. Statements based on positive economies considers what’s actually occurring in the economy. It helps the policy makers to decide whether the proposed action, will be able to fulfill our objectives or not. In this way, they accept or reject the statements. |. Definition of Normative Economics (BHALOTIA) ‘Nommative economics deals with what ought to be or how economics problems should solve. Alfied Marshall and Pigow have considered the normative aspect of economics. ‘The economics that uses valne judgments, opinions, beliefs is called normative economics, This branch of economics considers values and results in statements that state, “what should be the things’. It incorporates subjective analyses and focuses on theoretical situations. Normative Economics suggests how the economy ought to operate. It is also known as policy ‘economies, as it takes into account individual opinions and preferences. Hence, the statements can neither be proven right nor wrong. 9. Key Differences Between Positive and Normative Economics [2 Marks] [90%] (Very important)********* The important differences between positive and normative economics are explained in the pomts given below (a) Positive Economics refers to_a science which is based on data and facts, Normative economics is described as a science based on opinions, values, and judgment. () Positive economics is descriptive, but normative economics is prescriptive, (© Positive economies explains cause and effect relationship between variables, On the other hand, normative economics pass value judgments. = 5 - Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) BASIS FOR POSITIVE ECONOMICS NORMATIVE ECONOMICS COMPARISON Meaning, [A branch of economics based on data _ [A branch of economics based on values, land facts is positive economics. lopinions and judgement is normative Jeconomics. ature [Descriptive [Presesiptive What it does? [Analyses cause and effect relationship. [Passes value judgement. [Perspective [Objective [Subjective [study of \What actually is |What ought to be [resting [Statements can be tested using scientific Statements cannot be tested methods. [Economic issues [it clearly describes economic issue. __|[t provides solution for the economic sue, based on value. 10. Ba: Concepts of Economics (BHALOTIA) ‘We have five fundamental economic concepts in general. They are as follows- (a) Supply and Demand: - It is one of the basic economic concepts and theories, Supply and demand can be seen everywhere in our daily life. (b) Scarcity & choice- This is also the basie concept of economies, which also acts as a factor of demand and supply. Because the supply doesn't meet the demand, then the condition is termed as a scarcity of that particular utility, whether it is food or product or money or any other (©) Qpportunity Cost: - It is one of the basic concepts of economics. It is like a trade-off market, It is also termed as an exchange policy like if we want something we need to give others in the form of cash or product ot whatever it is. We are creating an opportunity to sell our goods in return for getting our requirements. (dW) Value for Money: -It is one of the important concepts in economies beemuse the value of money may vary from time to time based on different factors. It refers to utility that is derived. fiom every money a consumer spends, (©) Purchasing Power: - Another fundamental economic concept is the purchasing power of consumers, = 6 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 11. Economics is the social science. Comment (RKB) Economies is the sooial science that studies how people use scarce resources fo satisfy unlimited needs and wants. Economies is a social science that examines how people choose among the altematives available to them. Itis social because it involves people and their behavior. It is a science because it uses, as much as possible, a scientific approach in its investigation of choices. Economics is regarded as a social science because it uses scientific methods to build theories that can help explain the behaviour of individuals, groups and organisations. Economics attempts to explain economic behaviour, which arises when scarce resources are exchanged. 42. What is Scarcity? [2 Marks] [60%] (BHALOTIA) Scarcity is a central concept in economics. Scarcity is the situation in which available resources, or factors of production, are finite, whereas wants are infinite. There are not enough resources to produce everything that we need and want. 13. Economics is the study of Choice comment. [60%] Economics is the study of choice because resomees are scarce and many needs and wants cannot be satisfied. As such, choices must be made, and whenever a choice is made, an opportunity arises 14. Discuss the Scarcity and choice concept in Economics [80%] (Very important)*** (BHALOTIA) Scarcity is the situation in which available resources, or factors of production, are finite, whereas wants are infinite. There are not enough resources to produce everything that we need and want. The bas economic problem that arises because people have unlimited wants but resources are limited, Because of scarcity, various economic decisions must be made to allocate resources efficiently. Economics is essentially abont scarcity and choice. The fundamental problem of economics is that there is scarcity and that choices must be made. We cannot have everything we want as a result of scarcity, every choice that must be made between two or more options has an opportunity cost. Scarcity is one of the key concepts of economies. It means that the demand for a good or service is greater than the availability of the good or service. Therefore, scarcity can limit the choices available to the consumers who ultimately make up the economy. Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 15. How Can a Society Deal With Scarcity? (70%) (2M) Societies can deal with scarcity by increasing supply. The more goods and services available fo all, the less scarcity there will be, Of course, incteasing supply comes with limitations, such as production capacity, land available for use, time, and so on. Another way to deal with scarcity is by reducing demand. Rising prices may play that role inmarket economies, while command economies might use quotas or rationing, In practice, mixed economies also frequently use quotas and price caps 46. What do you mean by Free goods? (BHALOTIA) There are not many fiee goods. A fiee goodis one for which the choice of one use does not require that we give up another. One example of a free good is gravity. The fact that gravity is holding you to the earth does not mean that your neighbor is forced to drift up into space! One person’s use of gravity is not an alternative to another person’s use. 17. Scarcity and the Fundamental Economic Questions The choices we confiont as a result of scarcity raise three sets of issues, Every economy naust answer the following questions: (a) What should be produced? Using the economy’s scarce resomrees to produce one thing. requires giving up another. Every society must decide what it will produce with its searee resources, (b) How should goods and services be produced? There are all sorts of choices to be made in determining how goods and services should be produced. (© For whom should goods and services be produced? If a good or service is produced, a decision must be made about who will get it Every economy must determine what should be produced, how it should be produced, and for whom it should be produced. 18. What do you mean by Opportunity Cost (BHALOTIA) The concepts of scarcity, choice, and opportunity cost are at the heart of economics. A good is scarce if the choice of one alternative requires that another be given up. The existence of altemative uses forces us to make choices, The opportunity cost of any choice is the value of the best altemative forgone in making it Every choice has an opportmnity cost and opportunity costs affect the choices people make, The opportunity cost of any choice is the value of the best alternative that had to be forgone in making that choice. -8-— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 19. What do you mean by Production Possibility Curve (PPC) [99%] [2 Marks] (Very important)**** ‘A production possibilities eurve in economics measures the maximum output of two goods using a fixed amount of input, The input is any combination of the four factors of production: natural resources Cinchiding land), labor, capital goods, and entrepreneurship, Production Possibility Curve (PPC) (also called a prodnetion possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures, scarcity of resources and opportunity costs. In economies, the production possibilities curve is a visualization that demonstrates the most efficient production of a pair of goods. Each point on the curve shows how much of each good will be produced when resources shift to making more of one good and less of another 20. Draw a PPC Diagram (Very imp) [90%] [2 Marks] *** ‘The production possibi shows the choice of society between two different pre cts, PPC is coneave-shaped because more and more units of one commodity are sacrificed to gain an additional unit of another commodity. However, if there is unemployment or inefficiency in resource utilisation, then we can produce at any point inside the PPC. It is downward sloping because of the few units we sacrifice for the others, as there exists an inverse relationship between the change in quantity of one commodity and the change in quantity of the other commodities. Good X Units) 0 1 Good ¥ (Units) 3027 = 9 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Itis concave in accordance with the Patter in the table, It shows that Marginal Opportunity Cost tends to rise, With every increase in the quantity of X, we have to sacrifice more of Y, and Marginal Opportunity Cost tends to rise because of the Law of Diminishing Returns. 21. What causes shift in PPC? (BHALOTIA) ‘The Production Possibility Curve is also known as the Production Possibility Frontier (PPF) or ‘Transformation Curve. Shifts in the production possibilities eurve are caused by things that change the output of an economy, including advances in technology, changes in resources, more education or training (that’s what we call human capital) and changes in the labour force Product A Product B- When the curve shifts outward, of to the right, that means output is increasing, When the curve shifts inward, or to the left, that means output is decreasing. When the PPF shifts outwards, it implies growth in an economy. When it shifts inwards, the economy is shrinking due to a failure to allocate resources and optimal production capability. = 10— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 22. What are the Central Problem of the Economy (VVI) [99%] [2 Marks] [very Imp]***** The three basic economic activities performed in an economy are Production, Distribution, and Disposition, While performing these activities, every economy has to face the issue of scarcity of resourees, as the resources available are limited and human wants are unlimited Therefore, it becomes essential to decide on how to allocate the available scarce resources, leading to the three Central Problems of an Economy: (a) What to Produce (0) How to Produce (© For Whom to Produce These three basic problems of an economy are known as the central problems. Every other economic problem revolves around the three central problems. 23. What is the slope in economics? (Imp) [80%] [2 Marks]****** ‘The concept of slope is very useful in economies, because it measures the relationship between two variables, A positive slope means that two variables are positively related—that is, when x increases, so does y, and when x decreases, y decteases also. Graphically, a positive slope means that as a line on the line graph moves fiom left to right, the line rises. We will leam in other sections that “price”_and “quantity supplied” have a positive relationship; that is, firms will supply more when the price is # of Students potas Figure |: Positive Slope = 11- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Negative slope ‘A negative slope means that two variables are negatively related; that is, when x inereases, y decreases, and when x decreases, y increases. Graphically, a negative slope means that as the line on the line graph moves from left to right, the line falls. We will leam that “price” and “quantity demanded” have a negative relationship; that is, consumers will purchase less when the price is higher. # of Students Hof Fs Figure 2: Negative Slope Slope of zero A dope of zero means that there is a constant relationship between x and y. Graphically, the line is flat; the rise over mun is zero, +f Students in my cass of dogs Figure 3: Zero Slope = 12— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Showing all slope in one diagram The unemployment-rate graph in Figure 4, below, illustrates a common pattern of many line graphs some segments where the slope is positive, other segments where the slope is negative, and still other segments where the slope is close to zero, 12> 4 Unemployment Rate (%) 2 0 - - 1870 1875 1980 1885 1960 1895 2000 2005 2010 2015 Year Figure 4. U.S. Unemployment Rate, 1975-2014 Calculating Slope The slope of a straight line between two points can be calculated in numerical terms. To calculate slope, begin by designating one point as the “starting point” and the other point as the “end point” and then calculating the rise over min between these two points. A 104 oe 2 2 206 Zo ne Sy, Mount Everest a ~ 48,828 m, 0.023 kgim3) 3 —— 4,000 2.00 3090 4.00 000 6.000 7,000 &.900 9.000 40,000 ‘Addo (nd The slope of straight line between these two points would be the following: from the altitude of 4,000 meters up to 6,000 meters, the density of the air decreases by approximately 0.1 kilograms/eubie meter for each of the next 1,000 meters -13— Admission Going on For B.com/CA/M.com/BBA/X) |-XIT. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Chapter 2A: Demand & Supply Concepts of Demand-derived demand-- Demand finction--Determinants of demand -- Law of Demand & its expectations-~-Movement along the Demand eurve and shift of the Demand curve-- Concepts of Supply and Supply funetion--Law of Supply ~Movement along the supply enrve and shift of the supply curve Market equilibrium and Determination of price~Effeet of change in the Demand and Supply on. Equilibrium price 1. Concept of demand (Imp) [90%] [2 Marks] (BHALOTIA) Demand Demand is defined as the ability of a consumer to buy goods and services in the market, In economies, this term is associated with varions elements and aspects of the business, These include prodnct prices, customer preference, produet supply, competition, production, and sales Demand is an economic concept that relates to a consumer's desite to purchase goods and services and willingness to pay a specific price for them, An increase in the price of a good or service tends to decrease the quantity demanded, Likewise, a decrease in the price of a good or service will increase the quantity demanded. Definition of Demand **********]Very Important] [90%] Demand refers to the consumer’s desire and wi gness to buy a product or service at a given eriod or over time. Consumers must also have the ability to pay for something they want or need as determined by their disposable income budget. Therefore, demand is a force that affects economic growth and market expansion. Factors on which demand depends: Dx =F (Px, Po, ¥,T, U) Dx = Demand for goods X. F= Function Px = Price of X. Po = Price of related commodities (@ Price of sub-goods (0) Price of complimentary goods Y = Income of consumers T=Taste and reference U= Other factors e.g. population, climate, fashion = 14- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Demand Schedule ***|Jmportant] [80%] Demand schedule refers to_a table showing the relationship between pricing and the quantity of jemand, It shows different market prices and the quantities demanded at each price. The law of demand serves as the guide for the table or ceteris paribus, which means all other things remain unchanged. Demand Curve ******]Very Important] [90%] Demand curve is simply a graphic representation of demand schedule expressing the relationship between different quantities demanded at different possible prices of a commodity demand. It is based on the demand schedule data and represented as a curve on a graph, ‘The Y-axis represents the prices while the X-axis represents the quantity demanded, It also shows the application of the law of demand — where higher prices lead to lower demand, 2. Types of Demand (BHALOTIA) (9883034569) Few important different types of demand are as follows: (@) Price demand: It refers to various types of quantities of goods or services that a customer will Duy at a quoted price and given time, considering the other things remain constant. (b) Income demand: It refers to various types of quantities of goods or services that a customer will buy at different stages of income, considering the other things remain constant. (©) Cross demand: This means that the product's demand does not depend on its own cost but depends on the cost of the other related commodities. (@) Direet demand: When goods or services satisfy an individual’s wants directly, it is known as direct demand. © Derived demand or Indirect demand: The goods or services demanded or needed for manufacturing the goods and satisfying the consumer indirectly is known as derived demand. @® Joint demand: To produce a product there are many things that are related to each other, for example, to produce bread, we need services like an oven, fuel, flour mill, and more. So, the demand for other additional things to produce a product is known as joint demand, (g) Composite demand: A composite demand can be described when goods and services are utilised for more than one cause, Example: Coal = 15 - Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 3. What Is Derived Demand? [2 Marks] [VVI] [90%]***** demand for an intermediate good or service. Example — mobile phones and lithium batteries. The rise in demand for mobile phones and other mobile devices has led to a strong rise in demand for lithium. Market for mobile phones Demand for lithium Price Wwase = derived from demand for phone batterie wa D2 I” 1 a a Q wwweconomichelporg ——? Higher demand for mobile phones has caused greater demand for lithium batteries. Derived demanc direct and indirect Increase in demand for mobile phones Direct Lithium Glass screens Microchips derived-demand batteries Indirect Retail premises Energy/oil Food services derived-demand swineaconomieshelp org =16- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) The inerease in demand for mobile phones will also cause derived demand for other components such as glass sereens and micro-chips. Indirectly, a rise in demand for mobile phones may cause a rise in demand for retail premises (to sell them). There will also be derived demand for energy/ransport and even food services in the location where phones are produced sold. 4. What is Demand function? [2 Marks] [80%] [Imp]*** ‘A demand finetion is a mathematical function deseribing the relationship between a varlable, like the demand of quantity, and various factors determining the demand. The purpose of this funetion is to analyze the behavior of consumers in a market and to help firms make pricing decisions. The demand fimetion, or the demand curve, describes the relationship between the quantity demanded by customers and the product price. Thus, the price of goods becomes vital in determining the number of goods consumers buy in a market. The most common form of this function is the linear demand function, However, economists often use different functional forms apart from the linear process, stich as logarithmic and polynomial funetions, to capture different consumer behavior patterns Moreover, the process of demand describes the relationship between the need for a produet with that of other factors: (a) Commodity demand: the demand for a conmodity affects the item’s price either positively or negatively. (b) Commodity function: the quality of a commodity affects demand. (© Goods or service prices: ifthe costs inerease, demand decreases. (@) The expected price of the commodity in the future: if the customers expect any change in their income or price change of a product, the demand changes. (©) Related products and services price: if the substitute produet’s price changes, then if the demand for the original produet changes, one can say the product is related to each other as complement and substitute. (© Consumer's pattern of taste: The company makes significant investments in advertising to change the taste and preference of consumers to like the advertised product -17- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 5. What are the Determinants of demand [5 Marks] [Important] [80%] ***********(BHALOTIA) There are many determinants of demand, but the top five determinants of demand are as follows (@ Produet Price: Demand of the product changes as per the change in the price of the commodity. People deciding to buy a product remain constant only if all the factors related to it remain unchanged. (b) The income of the consumers: When the income increases, the number of goods demanded also increases. Likewise, ifthe income decreases, the demand also decreases. (c) Costs of related goods and services: For a complimentary product, an increase in the cost of one commodity will decrease the demand for a complimentary product. (d) Consumer expectation: High expectation of income or expectation in the increase in price of a 00d also leads to an inerease in demand. Similarly, low expectation of income or low pricing of goods will decrease the demand. (©) Buyers in the market: If the number of buyers for a commodity are more or less, then there will be a shift in demand. 6. What is ‘law of demand’? State its assumptions. [5 Marks] [Very Important] [90%] *#" "= ‘Law of Demand This law explains the functional relationship between price of a commodity and the quantity demanded of the same. [tis observed that the price and the demand are inversely related which means that the two move in the opposite direction. An increase in the price leads to a fall in the demand and vice versa, This relationship can be stated as SOther things being equal, the demand for a commodity varies inversely as the price” Assumptions: Itis based on following assumptions: (a) There is no change in taste, preference and habit of the consumer (b) Income of the consumer should remain constant, (©) Price of other related goods should not change (a) There should be no close substitute of the commodity, (e) The commodity should not conform any distinction. (‘The demand for the commodity should be continuous, (@ People should not expect any change in the price of the commodity demanded. = 18 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Explanation Law of demand may be explained with the help of demand schedule: Demand Schedule Ps) Q@&) 10 100 9 150 8 200 The schedule shows extension of demand in response to decrease in price of the commodity. Thus, demand stretches from 100 to 150 units when price reduces from Rs 10 to Rs 9 per unit, It may be further illustrated with the help of @ demand eurve nee (RS. Lk uertty In the above diagram, demand curve DD shown that demand for commodity-X extends from OL to OL; when price falls from OP to OP), In fact, downward slope of demand curve is an expression of the law of demand, 7. Why does a demand curve have negative slope? [5 Marks] [Very Important] [90%]**** Downward slope of demand curve indicates that more is purchased in response to Tall in price. Thus, there is inverse relationship between price of a commodity and its quantity demanded. This may be explained in terms of the following factors: (a) Law of Diminishing Marginal Utility: According to this Law, as constmption of a commodity increases, the utility from each successive unit goes on diminishing to a consumer. Accordingly, for every additional unit to be purchased, the consumer is willing to pay less and less price. Thus, more is purchased only when price of the commodity falls. -19- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) (b) Income Effects: Income effect refers to change in quantity demanded when real income of the buyers changes as a result of change in price of the commodity. Change in the price of a commodity causes a change in real income of the consumer. With a fall in price, real income increase, Accordingly, demand for the commodity expands (c) Substitution Effect: Substitution effect to substitution of one commodity for the other when it becomes relatively cheaper. Thus, when price of commodity-X falls, it becomes cheaper in relation to commodity-Y. Accordingly, X is substituted for Y. Tea and Coffee are substitutes. With a fall in the price of tea, itis substituted for coffee. It is called substitution effect (@ Size of Consumer Group: When price of a commodity falls, if attracts new buyers who now can. afford to buy it. (©) Alternative uses: Many goods have alternative uses. Milk, for example, is reduces its uses will expand. Accordingly, demand for milk expands. (© Change in number of buyers: Lower the price, will attract new buyers and raising of price will reduce the number of buyers. ‘These buyers are known as marginal buyers. Owing to such reason the demand falls when price rises and so the demand curve is downward sloping. 8. What are the exceptions to the law of demand? [5 Marks] [Very important] [99%]**********##* Exceptions of the "Law of Demand’ Law of demand has some exceptions as well. There are some commodities whose demand increases, when their price rises and decrease when their price falls. In this case, the demands curve DD slopes upwards from left to right as shown in following diagram. It means a positive slope. First of al, this fact was analyzed by Sir Robert Giffen. So, itis also called Giffen’s Paradox. . f° m Price (RS \ ° a4 ‘Quanity Demanded (unts}) -20- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) ‘The main causes of the demand curve being exceptional are as under: ‘When both price and demand of the commodity move in the same direction, itis called exception to the Jaw of demand. It means when price increases demand also increases and when price falls demand falls, ‘We may illustrate following exceptions to the law of demand: (a) Expected change in the price of a good: Continuous changes in the price lead to the exceptional behavior. If the price shows a rising trend a buyer is likely to buy more at a high price for protecting himself against a further rise. As against it when the price starts falling continuously, a consumer buys less at a low price and awaits a further in price (b) Giffen Goods: Giffen goods may be defined as those goods whose price effect is positive and income effect is negative. Positive price effet means that demand falls with a fall in price and rises with a rise in price. The positive relationship between price and demand (in case of Giffen goods) occurs because of @ very high negative income effect. ‘The Giffen goods are highly inferior goods, showing a very high negative income effect. As a result, when price of such commodities falls, their demand also falls. (© Articles of distinction: Conspicuons Consumption refers to the consumption of those commodities which are bought as a matter of prestige, Naturally with a fall in the price of such goods, there is no distinction in buying the same, As a result the demand declines with a fall in the price of such prestige goods (@) Ignorance: Ignorance effect implies a situation in which a consumer buys more of a commodity at a higher price only due to ignorance (©) Demonstration Effect: Consumers are influenced in their decisions by what is known as a cemonstration effet. Demand for certain goods goes up when people want to buy them because their neighbours have them, Due to growing popularity, the demand for such goods goes up even when their prices increase. © Complementary Good: Law of demand may be violated in the case of complementary goods also. If price of one of these goods falls sufficiently, the consumers would buy more it, And this, will necessitate that the consumer should have more of the other good as well. As a result, its, demand goes up without a fall in its price. Actually, in some cases its demand may increase even with some increase in its price. -21- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 9. Draw & explain separately an ind jual demand curve & the market demand curve for normal goods. [RKB] Individual Demand Curve Individual Demand Curve is a curve showing different quantities of a commodity that one particular buyer is ready to buy at different possible prices of the commodity at a point of time, In the following diagram quantity of the commodity is shown on OX-axis price on OY-axis. DD is the demand eurve. Y a) \ PB é zP ‘ & \ \o 6 x a 9, ‘Quantity (units) Market Demand Curve Market Demand Curve is the horizontal summation of the individual demand curves. It various quantities of a commodity that all the buyers in the market are ready to buy at different possible prices of the commodity at a point of time. ve v4 ve AsDemand Cune mand Curve Merket Demand Curve 5 ayy D 4 4 4 ea éa és g, i. g, 1 1 > 1 ° D Casa se? CT se ser” OC TESTS TT Ee Quanity (us) CGuantity uns ‘Quant arts) ty iy ft) A and B are two buyers in the market. Fig. (i) Is A’s demand curve. Fig. (ii) Is B’s demand curve. Fig. (ii) Is the market demand curve. When price is Re 1 per ice cream cup, A’s demand is 4 cup and B’s demand is for 5 cups. Accordingly, market demand is 4+5-9 cups when the price is Re 1 per cup. Likewise, when price is Rs 4 per cup, market demand is 1+2=3 cups. Market demand curve also slopes downward, Slope indicating inverse relationship between price of the commodity and its quantity demanded. = 22- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 10. What are the determinants of demand? [80%] [5 Marks] [Very Important]**** (BHALOTIA) Quantity of a commodity bought at a given price in a given period of time is called demand According to Benham, “The demand for anything at a given price is the amount of it which will be bought per unit of time at that price.” (@) Price of the Product: Under usual situation, demand is influenced by the price of the product. Generally, buyers like to purchase more when price falls and less when price increases. But in case of certain commodities demand increases with the increase in price and falls, with the fall in price. These goods are known as Giffen Goods Gi) Income: The relationship between income and the demand is a direct one, It means the demand changes in the same direction as the income. An inerease in ineome leads to rise in demand and viee versa. Population: The size of population also affects the demand. The relationship is a direct one. The higher the size of population, the higher is the demand and vice versa. (iv) Tastes and Habits The tastes, habits, likes, dislikes, prejudices and preference ete. of the consuner have a profound effect on the demand for a commodity. (9) Price of other related goods: This is another important determinant of demand for a commodity ‘The effect depends upon the relationship between the commodities in question. (vi) Advertisement_This factor has gained tremendous importance in the modern days. When a produet is aggressively advertised through all the possible media, the consumers buy the advertised commodity even at a high price and many times even if they don’t need it. (vil) Fashions: Hardly anyone has the courage and the desire to go against the prevailing fashions as well as social customs and the traditions. This factor has a great impact on the demand, (vil) Imitation This tendency is commonly experienced everywhere, This is known as the demonstration effects, due to which the low income groups imitate the consumption pattems of the rich ones. (ix) Price of the commodity: demand of a commodity is inversely proportional to the price of commodity. Price of the commodity increase, then the demand decreases and vice-versa (s) Distribution of Income: Market demand is also influenced by change in the distribution of income in the society. If income is equally distributed, there will be more demand -23-— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 11. Difference between a movement along the Demand Curve and a Shift in the Demand Curve [2 Marks] Every business has a demand curve for the commodities it sells. Many things influence demand, and these influences may be recognised by looking at variations in the demand curve, They are divided into two categories (a) Change in demand (b) Change in the quantity demanded Movement along the demand curve is cansed by a change in the commodity’s price, whereas the shift is caused by a change in one or more factors other than the price. 12.What do you mean by Movement along the Demand Curve. (BHALOTIA) [9883034569] The change in both factors, namely the price and quantity demanded, fom one point fo the next is depicted by movement along the demand curve. There are two forms of movement in a demand curve extension and contraction. (a) When the demand for a commodity rises due toa decrease in price, the demand curve extends, (b) A contraction in the demand curve occurs when the demand for a commodity diminishes due to a price increase. If the quantity changes due to the fluctuation in the price of the produet or service, the demand eurve moves. Any of the two directions of movement along the curve are possible: (@) Upward Movement indicates a decrease in demand, i.e. a decrease in demand due to a price increase, (b) Downsward Movement indicates an increase in demand, i.e., demand for the product or service rises as prices decrease As a result, when prices are low, more of a good is demanded, whereas when prices are high, less quantity is demanded, 13. What do you mean by Shift in the Demand Curve (BHALOTIA) [9883034569] ‘A shiftin the demand curve shows changes in demand at each potential price due to changes in one or more non-price factors like the price of comparable commodities, income, taste and preferences, and consumer expectations. If there is a shift in the demand curve, the equilibrium point also shifts. Any of the two sides of the demand onrve shifts: (a) Rightward Shift: Rightward Shift denotes a rise in demand at the same price due to a favourable shift in non-price variables. (b) Leftward Shift: When the price remains constant, but other factors move unfavourably, this indicates a drop in demand. -24— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 14. Explain diagrammatically the difference between the change in demand & change in quantity demanded? [5 Marks] [30%] (BHALOTIA) [9883034569] Tie law of demand explains the effect of only-one factor viz., price, on the demand for a commodity, under the assumption of constancy of other determinants. In practice, other factors such as, income, population etc. cause the rise or fall in demand without any change in the price. These effects are different from the law of demand. They are termed as changes in demand in contrast to variations in demand which ocou due to changes in the price of a commodity. In economic theory a distinction is made between (a) Variations i, extension and contraction in demand due to price and (b) Changes ie increase and deerease in demand due to other factors. Variations it mand refer to those which occur due to changes in the price of a commodit (change in quantity demanded): 1. Extension of Demand: This refers to rise in demand due to a fall in price of the commodity, Itis shown by a downwards movement on a given demand curve 2. Contraction of Demand: This means fall in demand due to inerease in price and can be shown, by an upwards movement on a given demand curve Ys D ° a, a a, x QUANTITY 2.3 (A) Extension/Contraction of Demand ‘Changes in demand imply the rise a due to factors other than price. (Change in Demand) It means they occur without any change in price. They are of two types. 1. Increase in Demand: This refers to higher demand at the same price and results from rise in income, population ete., this is shown on a new demand curve lying above the original one. Decrease in demand: It means less quantity demanded at the same price. This is the result of factors like fall in income, poptlation etc. this is shown on a new demand lying below the original one. = 25-— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Si z 1" Sem Micro-eco (New) ¥ al fi D ° a, a a, x QUANTITY Fig. 2.3 (B)| INCREASE / DECREASE IN DEMAND. In above figure , the original price is OP and the Quantity demanded is OQ. With a rise in price from OP to OPI the demand contracts from OQ to OQI and as a result of fall in price from OP to OP2, the demand extends from OQ to 0Q2. In figure, B an inerease in demand is shown by a new demand curve, D1 while the decrease in demand is expressed by the new demand curve D2, lying above and below the original demand curve D respectively. On D1 more is demand (OQI) at the same price while on D2 less is demanded (OQ2) at the same price OP. Difference between Change in Demand and Change in Demanded ‘Change In demand Change in Quantity Demand 1, Here consumer's demand schedule will change. | 1, Here consumer’s demand schedule remains the Demand schedule is a chart showing different same. Only consumers will move from one quantities at different price levels. quantity to another due to a change in price. 2 Here consumer will shiftfiom one demandcuve [2, Here consumer will move fom one point of to another demand euve to another point of the same curve. 3° Change in one or more of the following factor [3. Only change in curent price of the product will cause a change in demand, Income; | will cause the change in quantity demanded. Distribution; price of related product; taste; | Other factors affecting demand will remain population and expectation about future price | unchanged change = 26- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Si z 1" Sem Micro-eco (New) 15. Factors causing a Shift in the Demand Curve [RKB] The curve will shift to the right if consumers” desire to buy increases. It will shift to the left if consumer willingness to buy declines. The following are the most prominent causes of demand curve shifts (a) Price of Related Goods: (b) Income: (©) Numbers of Buyers (@) Expectations 16.What do you mean by Supply (BHALOTIA) In economies, supply refers fo the quantity of a product available in the market for sale at a specified price and time. In other words, supply can be defined as the willingness of a seller to sell the specified quantity of a product within a particular price and time period, Here, it should be noted that demand is the willingness of a buyer, while supply is the willingness of a supplier Supply has three important aspects, which are as follow: 1. Supply is always referred in terms of price The price at which quantities are supplied differs from one location to the other For example, fast moving consumer goods (FMCG) are usually supplied at different prices in different prices, 2. Suy is referred in terms of time This means that supply is the amount that suppliers are willing to offer during a specific period of time (per day, per week, per month, bi-annually, etc.) 3. Supply considers the stock and market price of the product Both stock and market price of a product affect its supply to a greater extent. If the market price of a product is more than its cost price, the seller would inerease the supply of the produet in the market. However, a decrease in the market price as compared to the cost price would reduce the supply of product in the market. 17. Classification of supply (BHALOTIA) [9883034569] Supply can be classified into two categories, which are individual supply and market supply. (a) Individual supply is the quantity of goods a single producer is willing to supply at a particular ptice and time in the market. In economies, a single producer is known as a firm, (b) Market supply is the quantity of goods supplied by all firms in the market during a specific time period and at a particular price. Market supply is also known as industry supply as_ firms collectively constitute an industry -27— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 18. Determinants of Supply (BHALOTIA) [9883034569] 9 Determinants of supply are (a) Price of a product (b) Cost of production (©) Natural conditions (@) Transportation conditions (©) Taxation policies (© Production techniques (g) Factor prices and their availability (h) Price of related goods (i) Industry structure Price of a product The major determinants of the supply of a product is its price. An increase in the price of a product increases its supply and vice versa while other factors remain the same Cost of production It is the cost incurred on the inanufacturing of goods that are to be offered to consumers. Cost of production and supply ate inversely propoxtional to each other Natural conditions The supply of certain produets is directly influenced by climatic conditions. For instance, the supply of agricultural products inereases when the monsoon comes well on time ‘Transportation conditions Better transport facilities result in an inerease in the supply of goods. Transport is always a constraint to the supply of goods. This is because goods are not available on time due to poor transport facilities, ‘Taxation policies Government’s tax policies also act as a regulating force in supply. If the rates of taxes levied on goods are high, the supply will decrease. This is because high tax rates increase overall productions costs, which will make it difficult for suppliers to offer produets in the market r : . The supply of goods also depends on the type of techniques used for production, Obsolete techniques result in low production, which further decreases the supply of goods, Factor prices and their availability The production of goods is dependent on the factors of production, such as raw material, machines and equipment, and labour Price of related good The prices of substitutes and complementary goods also influence the supply of a product to a large extent, = 28 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Industry structure The supply of goods is also dependent on the structure of the industry in which a finn is operating, If there is monopoly in the industry, the manufacturer may restrict the supply of his/her goods with an aim to raise the prices of goods and inerease profit 19. What do you mean by Supply Function? (BHALOTIA) Supply fimetion is the mathematical expression of law of supply. In other words, supply fimetion quantifies the relationship between quantity supplied and price of a product, while keeping the other factors at constant. The law of supply expresses the nature of the relationship between quantity supplied and price of a product, while the supply fimetion measures that relationship The supply fimction can be expressed as Os =f (Po, Pb, Pe, T, Tp) Where, Qe= Supply P= Price of the good supplied Po Price of other goods Pe= Price of factor input T Technology Tp =Time Period According to the supply function, the quantity supplied of a good (Q) varies with the price of that good (P2), the price of other goods (P,), the price of factor input (P.), the technology used for production (T), and time period (Tp) 20. What is Law of Supply? [2 Marks] [70%] (BHALOTIA) wots : ‘The law of supply predicts a positive relationship between pricing and supply. As prices of goods or services rise, suppliers inerease the amount they produce — as long as the revenue generated by each additional unit, they produce is greater than the cost of producing it, Seeing a greater potential for profits, new suppliers may also enter the market. For example, prices of lithium and other metals used in batteries have soared as sales of electric vehicles have increased. That has encouraged mining companies to explore new sources of lithium and expand production at existing mines in order to inerease the supply and generate higher profits. -29- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 21. What is Supply Curve? (BHALOTIA) [9883034569] ‘A supply curve shows the relationship between price (vertical axis) and supply (horizontal axis). It indicates how much output suppliers are willing to produce at different prices. When a supplier sees more profit potential from higher prices, it often will allocate more of its resources toward those more profitable items — usually at the expense of lower-priced items, At the same time, newcomers may enter the market, futher inereasing the available supply — because with the promise of higher revenne, more companies may be prepared to invest the startup costs required to enter that market. 22. What is Movement along the supply curve and shift of the supply curve? (BHALOTIA) [9883034569] Movement along the supply curve or change in quantity supplied zefars to extension and contraction of supply of a commodity caused by change in own price of the commodity. When price increases, there is ‘an upward movement (a+b) along the supply curve, called extension of supply; and when price decreases, there is a downward movement (ba) along the supply curve, called contraction of supply See Fig. (a) (a) Extension : a— b Contraction : b > a ° QQ Quantity -30- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Shift of supply curve or change in supply refers to increase or decrease in supply of a commodity caused by change in factors other than own price of the commodity. When other factors change in the favourable direction, the supply curve shifts to the right showing increase in supply; and when other factors change in an unfavourable manner, the supply curve shifts to the left showing a decrease in supply. See Fig. (b) Y (b) S,— Increase in Supply S,— Decrease in Supply Q, Q Q, Quantity 23. What do you mean by Equilibrium & Disequilibrium? Equilibrium Equilibrium is achieved at the price at which quantities demanded and supplied are equal, We can represent a market in equilibrium in a graph by showing the combined price and quantity at which the supply and demand curves intersect Disequilibrium Whenever markets experience imbalances—creating disequilibrium prices, surpluses, and shortages— market forces drive prices toward equilibrium, A surplus exists when the price is above equilibrium, which encourages sellers to lower their prices to liminate the surplus. A shortage will exist at any price below equilibrium, which leads to the price of the good increasing. Changes in equilibrium Changes in the determinants of supply and/or demand result in a new equilibrium price and quantity ‘When there is a change in supply or demand, the old price will no longer be an equilibrium. Instead, there will be a shortage or surplus, and price will subsequently adjust until there is a new equilibrium. = 31 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 24. What do you mean by Market Equilibrium [2 Marks] [imp] [60%] (BHALOTIA [9883034569] ‘The situation of market equilibrium occurs when the seller's production and the buyer's demand for a product are equal. ‘Market equilibrium is a situation that occurs when the seller’s production and the buyer’s demand for a particular product are equal. If the amount demanded equals the quantity provided at the market price, the market is in balance. The market equilibrium cost or market-clearing price is the price at which the amount requested equals the quantity supplied, and the corresponding amount is the rate constant. Market Assumpt ‘The following are the six most important market assumptions: (a) A market is distinguished by a single type of product or service (b) Ina market, all commodities or services bought and sold are identical (©) The items or services sold ina single market have a single price (d) All customers are well-informed about the product, (© Buyers and sellers have solid working relationships. ( Only buyers and sellers are aware of the transaction’s costs and rewards 25. Equilibrium price [imp] [70%]**** (BHALOTIA) The situation of market equilibrinm ocours when the seller's production and the buyer's demand for that product are equal. By setting the demand equal to the supply, we can calculate the equilibrium price The price at which the quantity demanded equals the quantity providedis the equilibrium price The supply curve represents the quantity supplied at any price. In contrast, the demand curve depicts the quantity desired at any price. So, they share one price in common on the graph, which is at the intersection of the two curves. Example of market equilibrium Price ‘A business produces 10,000 shirts and sells them for $12 each. However, no one is willing to pay so much for them. The store lowers its pricing to $10 to increase demand. At that price bracket, there are 250 buyers, As a result, the store further lowers the retail price to $7 and attracts a total of 500 customers. One thousand people buy the shirts when the price is reduced futher to $5, So, we can say that the supply and demand are equal at this price. Hence, $5 is the shirt’s equilibrium price. -32- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 26. What are the types of demand curve? [BHALOTIA] Individual demand curv. ‘A graphical representation of quantity demanded of a single consumer at a different price is called individual demand curve Market demand curve A graphical representation of quantity demand of goods and services by all the consumer at different prices called market demand curve 27. Distinguish between Changes in Demand and Changes in Quantity Demanded? [2 Marks] [80%]***** ‘Change in quantity demanded refers fo change in the quantity demanded due fo change in the price of a product where other factor remaining constant. On the other hand, change in demand refers to increase or decrease in demand of a product due to change in various determinants or other factors of demand, while keeping price at constant. Changes in quantity demanded can be measured by the movement of demand curve, while changes in demand are measured by shifts in demand curve. The terms, change in quantity demanded refers to expansion or contraction of demand, while change in demand means increase or decrease in demand, 28.Di guish between Expansion and Contraction of Demand. [BHALOTIA] [9883034569] Expansion of demand refers to the period when quantity demanded is inereases because of the fall in ptices of a product, However, contraction of demand takes place when the quantity demanded is decreases due to rise in the price of a product. 0 arq_at ‘Quanity Demanded Figure-11: Expansion and Contraction of Demand = 33 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 29. Distinguish between Increase and Decrease Demand. [BHALOTIA] [9883034569] Tnerease and decrease in demand are referred to change in demand due to changes in various other factors such as change in income, distribution of ineome, change in consumer’s tastes and preferences, change in the price of related goods, while Price factor is kept constant. Increase in demand refers to the rise in demand of a product at a given price, On the other hand, decrease in demand refers to the fall in demand of a product at a given price. Increase and decrease in demand is represented as the shift in demand curve Figure-12 shows the increase in demand: po Oo Pree FP ° Figure-12: Increase in Demand Figure-13 shows the decrease in demand: fos oO ‘Qusnty Figure-13: Decrease in Demand 30. Differences Between Giffen Goods and Inferior Goods [2 Marks] [Important] [70%] (BHALOTIA) The difference between Giffen goods and Inferior goods can be drawn cleaily on the following grounds: (@) Goods whose demand rises with the increase in their prices are called Giffen goods. Those goods whose demand decreases with the inerease in the consumer’s income over a specified level are known as inferior goods. (b) Giffen goods violate the law of demand, whereas inferior goods is a part of consumer goods and services, a determinant of demand, (© Giffen goods have no close substitutes. On the other hand, inferior goods have altematives of better quality. (@__ Incase of Giffen goods price effect is positive, while in case of inferior goods Income effect is, negative -34— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Chapter 2B: Elasticity of demand & Supply Price elasticity of demand --Determinants and Measurement of price elasticity--Relationship between slope and price elasticity of demand—-Income elasticity of demand--Cross price Elasticity of Demand -Elasticity of Supply 1.What is Elasticity of Demand? [2 Marks]*** [60%] Elasticity of demand is the responsiveness of the quantity demanded of a commodity to changes in one of the variables on which demand depends, In other words, it is the percentage change in quantity demanded divided by the percentage in one of the variables on which demand depends,” ‘The variables on which demand can depend on are (a) Price of the commodity (b) Prices of related commodities (© Consumer's income, ete. 2.What is Price elasticity of demand? [2 Marks] [Very important] [99 %] **************[BHALOTIA] Price Elasticity of Demand ‘The price elasticity of demand is defined as the percentage change in quantity demanded due to certain percentage change in price where as other factor remaining constant. Mathematically, it can be expressedast Price elasticity of demand = Séchange in quantity demanded ‘Séchange in price symbolically, t'can be expressedas: £,=282 apa Where, Ex= Price elasticity of demand Original quantity demanded Aq = Change in quantity demanded p= Original price ‘Ap = Change in price -35- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsz 1" Sem Micro-eco (New) Ravi Bhalotia & Abhishek Pandey Si 3.What are the different types of price elasticity of demand. [2 Marks] [Any 1 may ask] [90%] [Very Imp] Different types of Price elasticity of demand are as follows 1, Perfectly Elastic Demand (Ep = ) The demand is said to be perfectly elastic if the quantity demanded increases infinitely (or by unlimited quantity) with a small fall in price or quantity demanded falls to zero with a small tise in price, Thus, it is also known as infinite elasticity. It does not have practical importance as it is rarely found in real life Price s ‘Quantity demanded 2. Perfectly Inelastic Demand The demand is said to be perfectly inelastic if the demand remains constant whatever may be the price (ie, price may rise or fall). Thus it is also called zero elasticity, It also does not have practical importance as it is rarely found in real life, But we can say in case of life saving drugs which have no close substitutes. -36- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) elatively Elastic Demand (Ep> 1 The demand is said to be relatively elastic if the percentage change in demand is greater than the percentage change in price i. if there is a greater change in demand there is a small change in price. It is also called highly elastic demand or simply elastic demand, For example If the price falls by 5% and the demand rises by more than 5% (say 1026), then it is a case of elastic demand. The demand for mauious goods such as car, television, furniture, ete. is considered to be elastic. The demand is said to be relatively inelastic if the percentage change in quantity demanded is less than the percentage change in price ie. if there is a small change in demand with a greater change in price. It is also called less elastic or simply inelastic demand, For example: when the price falls by 10% and the demand rises by less than 10% (say 5%), then it is the case of inelastic demand. The demand for goods of daily consumption such as rice, salt, kerosene, etc. is said to be inelastic. anny demandes - 37 - Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) $.Ur ry Elastic Demand (E, ) The demand is said fo be unitary elastic if the percentage change in quantity demanded is equal to the percentage change in price. It is also called unitary elasticity. In such type of demand, 1% change in price leads to exactly 1% change in quantity demanded. This type of demand is an imaginary one as it is rarely applicable in our practical life ¥ ap=a0 ie oN 40 I~ ° uM, (Quantity demanded 4.What are the different Methods of Measurement of price Elasticity of demand? [5 Marks] [VVI] [95%]*** Measurement of Price Flas! of Demand: (a) Are elasticity This is the average measwe of the elasticity on the are of the demand eure, Here within the entire demand eurve, two points A & B are considered. Joining them, we get an are, and on average, the elasticity is measured. P a ie. initial pice = f2e P, 7 initial quantity B oi P| Price elasticity = 55g dQ ®4P)/2 “F Bie > O a a % Figne: Arc Elasticity of Demand -38— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) (b)Point clastic method: This is also known as geometrical method. This method is used when we have to find out elasticity ata point on the demand curve. x pq Loner Segmention the demand curve(LS) Upper Segment on the demand curve US) Ent ‘quant Using the above formula we can get elasticity at various point on the demand eurve. As we move fiom E s infinity and at E it is towards A elasticity goes on increasing at the mid point it is equal to one, at A i Zero Elasticity lies. (a) If lower sector = Upper sector, then Ed = (b) IfLS > US, then Ed > 1 (© IfLS< US, then Ed <1 @ IfLS =, then Ed will be 0 (©) IFUS = 0, then Ed will be (© Total Outlay Method: The elasticity of demand can be measured by considering the changes in price and the consequent changes in demand causing changes in the total amount spent on the goods. The change in price changes the demand for a commodity which in tum changes the total expenditure of the consumer or total revenue of the seller TQ=PxQ Where TQ=Total Expenditure; P = price: Q = Quantity purchased 5.Example on Measurement of price elasticity******** Price Elasticity of Demand (PED or Ep) = % change in quantity demanded / % change in price o Ep=Aq/Apxp/q % change in qantity demanded = new quantity (Q2) ~ initial quantity (QU) / initial quantity (QU) « 100 % change in price = new price (P2)-initial price / (P1) initial price ( PL) = 100 -39- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Solved example: ‘The market demand for a commodity priced at % 50 per unit was ten units per day, Demand rose to 60 units after which the product’s price was reduced to & 8. Determine the price elasticity of demand, Solution: ‘The price elasticity of demand may be calculated as follows: ~ Ep~=% change in quantity demanded / % change in price ‘After applying this formula, you get, Ep=20/-20=-1 6. What are the determinants of price Elasticity of Demand? OR What are the factors affecting the elasticity of demand of a commodity? [5 Marks] [90%] [Very Important]*****#*** ‘Various factors which affect the elasticity of damand of commodity are 1. Nature of commodity: Elasticity of demand of a commodity is influenced by its nature. A commodity for a person may be a necessity, a comfort or a luxury. (a) When a commodity is a necessity like food grains, vegetables, medicines, etc., its demand is generally inelastic as it is required for human survivel and its demand does not fluctuate much, with change in price. (b) When a commodity is a comfort like fan, refrigerator, ete, its demand is generally elastic as ‘consumer can postpone its consumption. (© When a commodity is a hixury like AC, DVD player, ete., its demand is generally more elastic as compared to demand for comforts. 2. Availability of substitute: Demand for a commiodity with large number of substitutes will be more elastic. The reason is that even a small sise in its prices will induce the buyers to go for its substitutes, For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa, On the other hand, commodities with few or no substitutes like wheat and salt have less price elasticity of demand. 3. Income Level: Elasticity of demand for any commodity is generally less for higher income level groups in comparison to people with low incomes. It happens because rich people are not influenced mueh by changes in the price of goods, But, poor people are highly affected by inerease or decrease in the price of goods, As a result, demand for lower income group is highly elastic. -40— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) evel of p Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma TV, ete. have highly elastic demand as their demand is very sensitive to changes in their prices, However, demand for inexpensive goods like needle, match box, ete. is inelastic as change in prices of such goods do not change their demand by a considerable amount, 5, Postponement of Consumption: Commodities like biscnits, soft drinks, ete. whose demand is not urgent, have highly elastic demand as, their consumption can be postponed in case of an increase in their prices. However, commodities with urgent demand like life saving drugs, have inelastic demand becanse of their immediate requirement 6. Number of Uses: If the commodity under consideration has several uses, then its demand will be elastic. When price of such a commodity increases, then it is generally put fo only more gent uses and, as a result, its demand falls, When the prices fall, then if is used for satisfying even less urgent needs and demand rises For example, electricity is a multiple-use commodity, Fall in its price will result in substantial increase in its demand, particularly in those uses (like AC, Heat convector, ete.), where it was not employed formerly due to its high price. On the other hand, a commodity with no or few alternative uses has less elastic demand, hare in Total Expenditu Proportion of consumer’s income that is spent on a particular commodity also influences the elasticity of demand for it, Greater the proportion of income spent on the commodity, more is the elasticity of demand for it and vice-versa, Demand for goods like salt, needle, soap, match box, ete. tends to be inelastic as consumers spend a small proportion of their income on such goods. When prices of such goods change, consumers continue to purchase almost the same quantity of these goods. However, if the proportion of income spent on a commodity is large, then demand for such a commodity will be elastic, 8. Time Period: Price elasticity of demand is always related to a period of time. It ean be a day, a week, a month, a year or a period of several years. Elasticity of demand varies directly with the time period. Demand is generally inelastic in the short period. It happens because consumers find it difficult to change their habits, in the short period, in order to respond to a change in the price of the given commodity, However, demand is more elastic in long rim as it is comparatively easier to shift to other substitutes, ifthe price of the given commodity rises 9. Habits: Commodities, which have become habitual necessities for the consumers, have less elastic demand. It happens because such a commodity becomes a necessity for the consumer and he continues to purchase it even if its price rises. Alcohol, tobacco, cigarettes, etc. are some examples of habit forming commodities. = 41- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 7. Relationship between slope and price elasticity of demand (BHALOTIA) (BHALOTIA) [9883034569] Price elasticity of demand and slope of the demand curve are two important concepts in economies Elasticity considers relative, or percent, changes. Slopes consider absolute unit changes. Despite their differences, slope and elasticity are not entirely unrelated concepts, and it is possible to figure out how they relate to each other mathematically. The Slope of the Demand Curve The slope of the demand curve represents the change in price divided by change in quantity, and it can be thought of as answering the question "by how much does an item's price need to change for customers to demand one more unit of it?” Responsiveness of Elasticity The price elasticity of demand answers the question "by how much does the quantity demanded of an item change in response to a change in price?" The calculation for this requires % changes in quantity to be divided by % changes in price rather than the other way around. Price Elasticity of Supply and the Slope of the Supply Curve The price elasticity of supply is equal to the reciprocal of the slope of the supply curve times the ratio of price to quantity supplied. In this case, however, there is no complication regarding arithmetic sign, since both the slope of the supply curve and the price elasticity of supply are greater than or equal to zer0, 8.What is Income elasticity of demand [2 Marks] [90%]** The income elasticity of demand explains the extent of change in demand as a result of change in income, In other words, income elasticity of demand means the responsiveness of demand to changes in income, Thus, ineome elasticity of demand can be expressed as Ey ~ [Percentage change in demand / Percentage change in income] In Other Words Income elasticity of demand means the ratio of percentage change in quantity demanded due to percentage change in income of consumers. pop —2oChangeis quantity demanded ~ %Changein Income Ey eG For example if income increase from € 100 & 110 and Quantity demanded also inereases from $0 to 55 then income elasticity of demand will be AQ=5 AY =10 ¥=10 Q=50 408 or say By=1 = 42— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 9.What are the types of Income Elasticity of Demand? (BHALOTIA) [9883034569] On the basis of numerical value, income elasticity of demandis classified info tee groups, which are as follows: i Positive Income Elasticity of Demand: Refers to a situation when the demand for a product increases with increase in consumer’s income and decreases with decrease in consumer’s income. The income elasticity of demand is positive for normal goods. Itis explained with the help of Figure-12: x he oF x ‘Quantty Figure-12: Posttive Elasticity of Demand The positive income elasticity of demand can be of three types, which are discussed as follows: a. Unitary Income Elasticity of Demand: Implies that positive income elasticity of demand would be unitary when the proportionate change in the quantity demanded is equal to proportionate change in ine 50% and demand also rises by 50%, then the demand wor . For example, if income increases by ¢ called as unitary income elasticity of Dd. demand, In such a case, the numerical value of income elasticity of demand is equal to one (e b. More than Unitary Income Elasticity of Demand: Implies that positive incom: of demand would be more than uiitary when the proportionate he quantity demanded is more than proportionate change in income. For example, if the elas change in income increases by 30% and demand rises by 100%. In such a case, the numerical value of income elasticity of demand would be more than one (>!) ¢. Less than Unitary Income Elasticity of Demand: Inmplies that positive income elasticity of demand would be less than unitary when the proportionate change in, the quantity demanded is less than proportionate change in income. For example, if the income increases by 50% and demand increases only by 25%. In such a case, the numerical value of income elasticity of demand would be less than one (ey<1) -43-— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Negative Income Elasticity of Demand: Refers to a kind of income clasticity of demand in which the demand for a product decreases with increase in consumer's income. The income elasticity of demand is negative for inferior goods, also known as Giffen goods. For example, if the income of a consumer increases, he would prefer to purchase wheat instead of millet, In sucha case, the millet would be inferior to wheat for the customer Negative income elasticity of demand is shown with the help of Figure-13: iii_ Zero Income Elasticity of Demans Refers to the income elasticity of demand whose numerical value is zero, This is because there is no effet of increase in consumer's income on the demand of product. The income elasticity of demand is zero (ey= 0) in case of essential goods. For example, salt is demanded in same quantity by a high income and a low income individual. Figure-14 shows the zero income elasticity of demand: y oy | 15) 19 4 ovzaee™ Quantty Figure-14: Zero Income Eloatlelty of Demand -44— Admission Going on For B.com/CA/M.com/BBA/X) |-XIT. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Si z 1" Sem Micro-eco (New) 10. What is Cross price Elasticity of Demand? [2 Marks] [90%] [Very important] ******** (BHALOTIA) Cross Price Elasticity of Demand is the responsiveness of demand for one good to the ange in the ptice of another good. It is the ratio of the percentage change in quantity demanded of Good X to the percentage change in the price of Good Y ‘The concept of cross elasticity explains the degree of change in demand for X as a result of change in price of Y. This can be expressed as, Ec = [Percentage Change in demand for X / Percentage change in price of Y] In other words The cross elasticity of demand is proportional change in quantity of X demanded resulting from given relative change in the price of the related commodity Y. %Change inquantity of 'X'_ %AOx —_—_—oc or %Change in price of %APy Examples: If the quantity demanded of X inereases by 5 % when the price of Y increases by 20%, the cross price elasticity of demand between X and Y will be oAQx Ec of XY commodity ++0.25 indicates that X and Y are complementary goods. ‘There may be another method in which average of the two prices and quantity are taken. Types: C cite wall . (a) Negative cross elasticity - Complementary commodities (Mobile & lithium batteries) (b) Positive cross elasticity — Substitutes. (Example: Tea & Coffee) (©) Zero cross elasticity — Unrelated goods. (Example: Tea & Mobile) In nutshell, it can be concluded that the concept of elasticity of demand has great significance in economic analysis. Its usefulness in branches of economic such as production, distribution, public finance, international trade etc, has been widely accepted. -45— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 411. What are the different types of Cross Elast Demand? (BHALOTIA) [9883034569] ity of 1. Posi t When goods are substitute of each other then cross elasticity of demand is positive. In other words, when an increase in the price of ¥ leads to an inetease in the demand of X. For instance, with the increase in price of tea, demand of coffee will increase 2. Negative: In case of complementary goods, cross elasticity of demand is negative. A proportionate increase in price of one commodity leads to a proportionate fall in the demand of another commodity because both are demanded jointly. 3. Zero: Cross elasticity of demand is zero when two goods are not related to each other. For instance, increase in price of car does not effect the demand of cloth. Thus, cross elasticity of demand is zero, 12. What do you mean by Arc elasticity? (BHALOTIA) ‘When elasticity is measured between two points on the same demand curve, itis known as are elasticity In the words of Prof. Baumol, “Arc elasticity is a measure of the average responsiveness to price change exhibited by a demand curve over some finite stretch of the curve.” Some important pi (@) Elasticity is measured over the arc of the demand curve on a graph. (b) Are elasticity calculations give the elasticity using the midpoint between two points. (©) The are elasticity is more usefill for Jarger price changes and gives the same elasticity outcome whether price falls or rises 13. What do you mean by point elasticity? (BHALOTIA) Point elasticity Point elasticity is the price elasticity of demand at a specific point on the demand curve instead of over a range of it. In other words, point elasticity of demand is the elasticity measured at any point on the demand curve, Itis the limiting value of ate elasticity. Point Elasticity of Demand = (% change in Quantity)/(% change in Price) = (AQ/Q)/(AP/P) = (PIQUAQUAP) = 46- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Si z 1" Sem Micro-eco (New) 14. What is Price Elasticity of Supply ? (BHALOTIA) Price Elasticity of Supply ‘The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price, Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly inelastic, inelastic, and unitary. Price Elasticity of Supply Formula Percentage method or proportionate mé “+ (5)= % Change in Quantity Supplied % Change in Price > ES=a0/aP+r/a {+ BQ change in quantity supplied, + AP=change in price “+ Op Initial quantity supplied. Be initial price of the good Determinants of Price Elasticity of Supply (a) Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of output produetion will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity supplied changes less than the change in price. However, if Marginal Cost nses slowly, then Supply will be elastic. (b) Time. As the price elasticity of supply increases over time, producers would inerease the quantity supplied by a greater percentage than the price increases. (©) Number of Firms: It is more likely that the supply will be elastic when there are a large number of firms. This oceurs because other firms can step in to fll the supply gap. (@ Mobility of Factors of Production- When the factors of produotion are mobile, then the price clasticities of supply are higher. This means that labor and other mamufacturing inputs may be imported from other regions to quiokly inctease production. 15. What do you mean by consumer Surplus? Consumer sumplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay (ie, the market price), Consumer surplus willing to pay ~ actual payment. -47— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 16. Some Practical Questions on Elasticity of demand I, When price of the good increases from © 10 to © 15 per unit, total expenditure on the commodity increases from & 1,000 to & 1,500. Find elasticity of demand, Porr####+* (Ans: The elasticity of demand is less than one or commodity has inelastic demand.) 2. There is 50% fall in price of the commodity. But quantity demanded remains to be 150 units. Find elasticity of demand. (Ans: Here, elasticity of demand is zero.) 3. A certain quantity of the commodity is purchased when its price is € 10 per unit, Quantity demanded increases by 50% in response to a fall in price by € 2 per unit. Find elasticity of demand (Ans: Elasticity of Demand = 2.5.) 4. Ata certain price of the commodity quantity purchased is 150 units. When price falls by 25%, quantity purchased increases by 75 units. Find elasticity of demand. (Ans: E = 2) 5, Price elasticity of demand is found to be 2. Price falls from % 10 per unit to © 8 per unit, Find the percentage change in quantity demanded. (Ans: % change in quantity demanded = 40.) 6. For a commodity, AP/P = -0,2, and elasticity of demand = 0.3. Find percentage change in quantity demanded, (Ans: Percentage change in quantity demanded = 6) For a commodity, AP/P =-0.2, and elasticity of demand is 0.5. Find quantity demanded after @ fall in price when initially it was 60 units. (Ans: Quantity demanded = 66 units) 8. A commodity shows Ed = ()2, Quantity demanded reduces from 300 units to 150 units. In response to increase in price. Find the increased price when initially it was & 20 per unit. (Ams: Price = 25) 9. Given Ed=-0.2 and percentage increase in quantity demanded = 20%, find the percentage change in expenditure, (Ans: Total expenditure reduces by 40%) 10. When price of a good rises from % 5 per unit to 2 6 per unit, its demand falls from 20 units to 10 units, Compare expenditures on the good to determine whether demand is elastic or inelastic (Answer: Here, total expenditure decreases with rise in price; hence elasticity of demand is more than unity. It is a situation of elastic demand) * ** ***** 11. Price elasticity of demand of a good is 1. At a given price the consumer buys 60 units of the good How many units will the consnmer buy if the price falls by 10 per cent? (Ans: The consumer will purchase 66 units of the good when price falls by 10 percent.) = 48 — Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Chapter 3: Theory of Consumer Behaviour— Concept of Utility and Marginal uility~The Law of Diminishing marginal Utility--Cardinal Utility theory- Concept and significance of Consumer Surplus~Consumer’s Equilibriuun in case of single and two commiodities--Concept of Ordinal utility theory--Indifference curve and its propetties-- Marginal Rate of SubstitutionBudget Line and Budget equation—Consumer’s Equilibrium 4.What is Utility? [2 Marks] (BHALOTIA) (9883034569) Utility Dei Itis a measure of satisfaction an individnal gets from the consumption of the commodities. In other words, itis a measurement of usefiiness that a consumer obtains from any good. A utility is a measure ‘of how much one enjoys a movie, favourite food, or other goods. It varies with the amount of desire. if you eat your favourite ice-cream, yon will be happy. What will happen in the second round? Happy, Right? Will you be satisfied one after the other rounds? No! Utility function The satisfaction of a consumer is the basis of the utility function. It measures how mmich one enjoys when he or she buys something. A utility is a measure of how much one enjoys a movie, favourite food, or other goods. It varies with the amount of desire. One can conclude the following conclusions (a) A Utility of a good differs from one consumer to another (b) It keeps on changing for the same consnmer due to change in the amount of desires, (0) It shonld not be equated with its usefulness Characteristic of Utility (a) It is dependent upon human wants. (b) Itis immeasurable. (© Anntility is subjective (@) It depends on knowledge (©) Utility depends upon use (D Itis subjective (g) It depends on ownership. Assumption of utility analysi (a) Rationality (b) The cardinal meastement of utility. (© Constaney of the marginal utility of money -49- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 2. How do you Measure Utility (2 Marks) [Imp] (90%)*** ‘Measurement of @ utility helps in analyzing the demand behaviour of a customer. It is measured in two ways (a) Cardinal Utility (b) Ordinal Utility —S— cardinal ‘Ordinal Approach, Approach rdinal Approach [Very important] [90 In this approach, one believes that it is measurable, One can express his or her satisfaction in cardinal numbers i.e, the quantitative numbers such as 1, 2, 3, and so on. It tells the preference of a customer in cardinal measurement. It is measured in utils. Limitation of Cardinal Approach (a) In the real world, one cannot always measure wility. (b) One cannot add different types of satisfaction fiom different goods. (©) For measwring it, itis assumed that utility of consumption of one good is independent of that of another (@) It does not analyze the effect of a change in the price Ordinal Approach [Ve ortant] [90%]**** In this approach, one believes that it is utility can’t be measured in numbers, it is comparable, One can express his or her satisfaction in ranking. One can compare commodities and give them certain ranks like first, second, tenth, ete. It shows the order of preference. An ordinal approach is a qualitative approach to measuring @ utility. Limitation of Ordinal Approach (a) It assumes that there are only two goods or two baskets of goods. It is not always true. (b) Assigning a numerical value to a concept of utility is not easy. (©) The consumer’s choice is expected to be either transitive or consistent. Itis always not possible -50- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 3. Types of Utility [Very Important] [90%]*** (BHALOTIA) Ttis basically of three types Total utility: ‘The sum of the total satisfaction fiom the consumption of specific goods or services. It increases as more goods are consumed. Total Utility (T.U.) =U: + Us +... + Ua Marginal Utility [Very imp] 91 It is the additional satisfaction gained fiom each extra unit of consumption, It decreases with each additional inctease in the consumption of a good ‘Marginal Utiity (M.U.) ~Change in TU. / Change in Total Quantity = A TU/ AQ Average utility: One can obtain it by dividing the total unit of consumption by the number of total units. Suppose there are total n units, then Average Utility (AU.)=T.U, /Number of units =T.U./ What Marginal utility? [2 Marks] [99%] (BHALOTIA) (9883034569)tt tt HHH setter eens Marginal ulility is the added satisfaction that a consumer gets fiom having one more unit of a good or service. The concept of marginal utility is used by economists to determine how much of an item consumers are willing to purchase. Positive marginal utility occurs when the consumption of an additional item increases the total utility On the other hand, negative marginal utility occurs when the consumption of one more unit decreases the overall utility. Economists use the idea of marginal utility to gauge how satisfaction levels affect consumer decisions. Economists have also identified a concept known as the law of diminishing marginal utility. It desoribes how the first unit of consumption of a good or setvice carries more utility than Jater units. -51- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 5. Exp[lain the Law of dimi hing marginal utility (Marshallian utility approach) [99%]******** (Very Important)**** (BHALOTIA) The law of d ing marginal utility. The law of diminishing marginal utility states that the amount of satisfaction provided by the consumption of every additional unit of good decreases as we increase that good’s consumption. ‘Marginal utility is the change in the utility derived from consuming another unit of a good. ‘The law of diminishing marginal utility is comprehensively explained by Alfied Marshall. According to his definition of the law of diminishing marginal utility, the following happens: “During the course of consumption, as more and more units of a commodity are used, every successive unit gives uility with a iminishing rate, provided other things remaining the same; although, the total utility increases.” Assumptions: (a) Constmption should be in adequate quality. (b) All the units of the commodity must be equal in size and quality (©) The consumption should be continous, (@) There should be no change in the assets in the tastes habits fashion preference and income of consumer (©) There should be no change in the mental condition of the consumer (® Cardinal measurement of utility is possible. (g) Marginal utility of money is assumed to be constant, Exceptions to the Law of Dimi ¢ Marginal Ut There are certain conditions in which the law does not apply. These conditions are known as its exceptions. Important exceptions to this law are as follows (a) Very Small Unit of Consumption: The law does not apply when the unit of consumption is very small. For e.g., if only one spoonful water is provided to a person who is very thirsty, he will not feel satisfied and the marginal utility of next spoon of water will be more. (b) Money and wealth Accumulation: This law does not apply on the accumulation of money and ‘wealth. With every successive increase in his accumulation, he gets more satisfaction. (© A Drunker: The law does not hold good on the consumption of liquor, Every additional does of liquor will inerease its marginal utility to a drunker (a) Music, Recital or Beautiful Scenic View: The law does not apply on listening to the music, recital of a song or poem or witnessing beautiful scenery. -52— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 6. Explanation of Law of dimi hing marginal ui [99%] (Very Important)**** (BHALOTIA) ‘We can explain this Taw with the help of following example or a table Utility schedule for Mangoes Unit of Mangoes Consumed Tu Mu 1 16 16 2 28 12 3 36 4 40 4 5 40 0 6 36 “4 40 os Tu 2 15 The above schedule and curve show that MU tends to diminish as consumption increases. It is important to note that when MU diminishes, TU tends to increase only at diminishing rate, Sth unit of mango does not provide any marginal utility to the consumer and this is the point of maximum satisfaction. If consumers continue consumption on 6th unit than his marginal utility will be negative. and marginal utility (a) When the total utility rises the marginal utility diminishes, (b) When the total utility is maximum then the marginal utility is zero, (© When the total utility is diminishing then the marginal utility is negative -53-— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) Limitations of the Law The law of diminishing marginal utility is applicable only under certain assumptions. (@) The different units consumed should be identical in all respects. The habit, taste, treatment and income of the consumer also remain unchanged. (b) The different units consumed should consist of standard units. If a thirsty man is given water by successive spoonful, the utility of second spoonful may conceivably be greater than the ulility of the first. (©) There should be no time gap or interval between the consumption of one unit and another unit ie. there should be continous consumption (@) The law may not apply to articles like gold, cash where greater quantity may increase the lust for it (©) The shape of the ulility curve may be aflected by the presence or absence of articles which are substitutes or complements. Criticism of the MU theory (a) Cardinal measurability of utility is unrealistic. (b) Hypothesis of independent utility is wrong (©) Assumption of constant MU of money is not valid (@ Law of demand generally can not be derived except in a one-commodity case (© This theory explains law of demand through substitution effect alone not explains the income effect 7.What is Cardinal Utility theory [2 Marks] (Very Important) [90%] [(BHALOTIA)***** Cardinal Uility approach was given by neo-classical economists, who said that satisfaction gained after using a certain commodity can be termed as Utility. Also, they assumed that cardinal utility can be measured in quantitative terms (or money), like 1,2,3,4 and so on. There are certain assumptions that need to be kept in mind in cardinal utility analysis apart fiom the ‘quantifiable nature of cardinal utility, which is as follows (a) A single unit of a certain commodity will provide the same level (utils) of satisfaction to all individuals. eg: If the first chocolate provides 50 utils of satisfaction to Ram then the same commodity will provide the same satisfaction to Shyam as well. (b) Transitivity: IF a good X is preferred over ¥ (X>Y) by a customer and good Y is preferred over Z (¥>Z) then he must prefer X over Z(X>Z).. (© Completeness of commodity: -54- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 8. What is Consumer Surplus? [2 Marks] [99%] (Very Importanty****##*#+## ‘Consumer surplus is based on the economic theory of marginal utility, which is the additional satisfaction a consumer gains from one more unit of a good or service, The utility a good or service provides varies fiom individual to individual based on their personal preference A consumer surplus happens when the price that consumers pay for a product or service is less than the price, theyre willing to pay. I's a measure of the additional benefit that consumers receive because they/re paying less for something than what they were willing to pay Consumer or social surplus = The maximum prices that consumers are ready to pay for an item - The actual market price of the item OR Consumer’ s Surplus = Total Utility — Total Amount Spent. 9. Assumptions of Consumer Surplus (Bhalotia) Following are the assumptions of the consumer surplus theory: (@) The utility is a measured type entity: The consumer surplus theory explains that the value of utility is to be measured. Under Marshallian economics, utility is expressed as a mumber. (b) No substitutes are available in the explanation: While understanding the Consumers Surplus there are no available substitutes taken into consideration. (© Ceteris Paribus: This connotes that the customers” tastes, preferences, and income will not change in any circumstances. (@) Marginal utili utility that is being derived from the income of a consumer remains constant. (©) Law of diminishing marginal utility: The law of DMU or Diminishing Marginal Utility is also used here, which states that the more a product or service is consumed, the lower be the marginal utility which is derived from consuming each and extra of that same unit. () Independent marginal utility: The marginal utility which is being derived from the product that is consumed does not get affected by the marginal utility that is actually derived from consuming similar types of goods or services. of money remains constant: This is another assumption which states that the -55- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 10. Discuss the Significance of Consumer Surplus. [5 M] [50%] [Imp]**** (Bhalotia) The idea of consumers surplus is not merely bookish. It has great practical importance and is useful in a number of ways In Public Finan It is useful fo a Finance Minister in imposing taxes and fixing their rates. He will tax those commodities in which the consumers enjoy much surplus. In such eases, the people would be willing to pay more than they actually pay at present. Such taxes will bring in more revenue to the State To the Businessman and Monopolist: To the businessman also the concept is very useful, He ean raise prices of those articles in which there is a lange consumer's surplus. In such eases, the consumers are willing to pay more than the prevailing price Comparing Advantages of Different Places: Our knowledge of consumer's surplus proves useful when we compare the advantage of living in two different places. A place where there are greater amenities available at cheaper rates will be better to live in, In these places, the consumers enjoy large surplus of satisfaction Distinction between Value-in-Use and Value-in-Exchange: Consumer's susplus draws a clear distinction between value-in-use and value-in-exchange, Commodities like salt and match-box have a great value-in-use but mnch less value-in-exchange Measuring Benefits from International Trade: Consumer's surplus measures benefits from intemational trade, We can import things cheaply from abroad. Before importing them, we were paying more for similar home- produced goods. 411. What Is Producer Surplus? (Bhalotia) Similar to consumer suplus, producer surplus is the economic benelit to produceis of goods measured by the difference in market price and where the producer would be willing to sell. A producer surplus thus exists if the market price of a good is higher than the price the producer is willing to sell 12. What Is Total Economic Surplus? (Bhalotia) Total economic surplus is equal to the producer surplus plus the consumer surplus. It describes the total net benefit to society from free markets in goods or services. -56- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 13. Explain Marshall's theory of consumer surplus. (Bhalotia) [9883034569/9330960172] ‘The concept of consumer's surplus was developed by Prof Marshall. It is closed related to the law of 1 2 3 4 5 6 79, <—_ units of commodity ‘y’ -59- Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 16. What do you mean by Ordinal utility theory? [70%] [2 Marks] [Imp]*** (Bhalotia) [9883034569] The Ordinal Utility approach is based on the fact that the ulility of a commodity cannot be measured in absolute quantity, but however, it will be possible for a consumer to tell subjectively whether the commodity derives more or less or equal satisfaction when compared to another ‘The modem economists have discarded the concept of cardinal utility and instead applied ordinal utility approach to study the behavior of the consumers. While the neo-classical economists believed that the utility can be measured and expressed in cardinal numbers, bnt the modem economists maintain that the utility being the psychological phenomena cannot be measured theoretically, quantitatively and even cardinally The modern economist, Hicks, in particular, have applied the ordinal utility concept to study the consumer behavior, He introduced a tool of analysis called “Indifference Curve” to analyze the consumer behavior. An indifference curve refers to the locus of points each showing different conibinations of two substitutes which yield the same level of satisfaction and utility to the consume 17. Assumptions of Ordinal Utility Approach(BHALOTIA) Assumptions of Ordinal Utility Approach (@ Rationality: It is assumed that the consumer is rational who aims at maximizing his level of satisfaction for given income and prices of goods and services, which he wish to consume. He is, expected to take decisions consistent with this objective. (b) Ordinal Utility: The indifference curve assumes that the utility can only be expressed ordinally. This means the consumer can only tell his order of preference for the given goods and services. (0) Transitivity and Consistency of Choice: The consumer's choice is expected to be either transitive or consistent (@ No saturation point: It is assumed that the consumer has not reached the saturation point of any commodity and hence, he prefers larger quantities of all commodities (©) Diminishing Marginal Rate of Substitution (MRS): The marginal rate of substitution refers to the rate at which the consumer is ready to substitute one commodity (A) for another commodity (B) in such a way that his total satisfaction remains unchanged. The MRS is denoted as DB/DA. The ordinal approach assumes that DB/DA goes on diminishing if the consumer continues to substitute A for B. -60— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 18. What difference curve [2 Marks] [Very Imp]***** What are Indifference Curves? ‘The Indifference Curve shows the different combinations of two goods that give equal satisfaction and utility to the consumers. In other words, the indifference curve is the graphical representation of different combinations of goods (generally two), for which the consumers are indifferent, in terms of the overall satisfaction and the utility Indifference Map: ‘An Indifference map represents a collection of many indifference curves where each curve represents a certain level of satisfaction. In short, set of indifference curves is called indifference map. Assumptions Underlying Indifference Curve Approach (a) Two goods: Only two goods ate taken into the consideration, It is assumed that the customer has to make a choice between two goods, provided their prices remains constant. (b) Customer is not saturated: It is assumed that the customer is not saturated with both the commodities and look for more benefits fiom these two, to have a higher curve to have more satisfaction. (©) Satisfaction level cannot be measured: The satisfaction level cannot be measured, thus, the customer ranks his preferences (@) Marginal rate of substitution diminishes: It is assumed that the marginal rate of substitution, diminishes, as more units of one good have to be set off by the reduction in the units of the other commodity, Thus, the indifference curve is convex to the origin. (© Consumer is rational : It is assumed that the consumer is rational and will make his choice objectively to have an increased ulility and the satisfaction. Explanation: The concept of Indifference curve can be further comprehended through an illustration below: Combination Product-A (in number) Product-B (in number) L 1 10 M 2 9 N 3 8 oO 4 7 P 3 6 ‘The consumer is indifferent between the Product-A and product-B, shown by 5 different combinations ‘Viz. L, M, N, O, P. This means that combination L (10A+1B) gives an equal level of satisfaction and utility as (9A+ 2B), (7A+4B) and so on. The IC curve shown in the figure below is generated by joining these combinations = 61— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) SN ue aayoos M Product B 123465 Product-A of 19. What are the properties of Indifference Curves? [5 Marks] [99%] (Very Imp)******* Properties of Indifference Curve (a) Downward Slop n indifference curve slope downward, which means, that with the more consumption of one good the consumption of the other is to be reduced to maintain the utility. Here, the principle of the marginal rate of substitution (MRS) applies, which means the increased consumption of one commodity is to be set off by the reduced consumption of another commodity, so as to have the same level of satisfaction or utility. Thus, the indifference eurve is negatively stoped, M Product B 423458 67 _ Product-A = 62— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for details |Ravi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) (b) Convex to the Origin: The indifference curves are convex to the origin because of the diminishing marginal rate of substitution, The MRS diminishes because of the decline in the marginal utility, which means with more and more consumption of one commodity, the customer’s utility starts declining and he is not willing to consume it more at the cost of the other commodity, For example, let's say there are two chocolates, dairy milk, and Nestle, with more and more consumption of dairy milk chocolates the utility continnes to decline, and the eustomer will no more give up the Nestle chocolates to buy the dairy milk. Here, MRS shows the slope of the indifference curve. Product -B Product -A (c) Higher the indifference curve, the higher is the lev. of satisfaction: The consumer derives maore satisfaction from the combination of two goods on a higher indifference cmve because more units of both the commodities are used that will surely be more satisfying than the lower quantity combinations. Product-B ret Product-A. -— 63— Admission Going on For B.com/CA/M.com/BBA/X) |-XIT. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) (d) Cannot Intersect or be tangent to each other: The indifference curves can not intersect with each other, because if it does so, then the combinations of two commodities lying on two ifferent curves will yield the same level of satisfaction which is not coneet. Product-B 102 Ie Product-A ‘Thus, it is clear from the properties of the indifference curve that the customer realizes an equal satisfaction and the utility from the use of different combinations of two commodities. 20. What is Marginal Rate of Substitution? [2 Marks] [99%] (Very Imp)******* What is the Marginal Rate of Substitution (MRS)? The marginal rate of substitution (MRS) is the quantity of one good that a consumer can forego for additional units of another good at the same utility level. MRS is one of the central tenets in the modern theory of consumer behavior as it measures the relative marginal utility. Marginal rates of substitutions are similar at equilibrium consumption levels and are calculated between commodity bundles at indifference curves. Combinations of two different goods that give consumers equal utility and satisfaction can be plotted on a graph using an indifference curve. The MRS is based on the idea that changes in two substitute goods do not alter utility whatsoever. dy | Muy ~ dx MUx’ |MRS,,, Where X and Y represent two different goods dy / dx = derivative of y with respect to x ‘MU ~ marginal utility of two goods, ie., good Y and good X -64— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 21. Substitutes and Complements in Indifference Curve Analysis. The indifference euve slope shows the marginal rate of substitution (MRS), which is the additional unit of a good a consumer will take on over another substitute or complement good, An indifference curve is downward sloping, usually with substitute goods being straight lines and complementary goods being right angles. In case of imperfect substitutes ifference curve a are negatively sloping shape: The shape of an indifference curve is convex to the origin and this is based on the principle of diminishing marginal rate of substitution. Thus when two goods X and Y are imperfect substitutes, the indifference curve has its usual negatively sloping shape. In case of perfect substitutes Iftwo goods X and ¥ are perfect substitutes, the indifference curve is a straight line with negative slope In case of perfect complements If the two goods are perfect complements the indifference curve is right-angled or L shaped, Figure 3.5: Perfect Substitutes and Complementary Goods Complementary goods Perfect substitutes saciid -65— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 22. What is Budget Line? [2 Marks] (90%)***(BHALOTIA) The term budget line refers to a graphical representation of all the potential combinations of two commodities that can be bought within a certain income and price, and all of these combinations provide the same satisfaction level. It comes with the condition that the cost of each combination must be less than or equal to the consumer's money income, Simply put, a budget line is the locus of varions combinations of two goods a consumer consumes and whose cost is equal to his ineome, Other names for Budget Line are Price Line, Price Opportunity Line, Budget Constraint Line, or Price Income Line. Budget line in economics is based on two essential components ~ (a) purchasing power or the income of the consumer, and (©) market price of the two commodities that have been considered. 3. What is Budget Line Equation? (BHALOTIA) Budget line is also termed as a budget constraint due to the fact that even though @ consumer will strive to achieve maximum utility across the indifference curve, he or she faces two very robust constraints ~ market price of commodities and limited income Income acts as a major constraint because there is only a particular height which may be reached in the indifference curve, given the income. It is this budgetary constraint that is exhibited in the budget line equation below P.X Q.+P.X QS Here, Px =Price of commodity X Py =Price of commodity Y Qc = Quantity of commodity X Qs = Quantity of conunodity Y S$ = Consumer income The equation indicated above shows that the expenditze incured by a consumer for purchasing commodity X and Y can never exceed his or her income (S) 24, What are the assumptions of Budget Line? [RKB] The budget line is primarily based on assumptions rather than facts. However, to achieve clear and exact results and a summary, the economist considers the following criteria in terms of budget line The consumer's income is given, limited and remains consistent. Commodity prices are provided and remain constant. ‘The customer is aware of the price of each commodity. Itis expected that the customer spends and consumes the entire income. Two commodities -66— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for detailsRavi Bhalotia & Abhishek Pandey Sir: 1** Sem Micro-eco (New) 25. What do mean by Consumer's Equilibrium? (Imp)**** [2 Marks] [very imp] [95%] (BHALOTIA) Consumers Equilibrium means a state of maximum satisfaction, A situation where a consumer spends his given income purchasing one or more commodities so that he gets maximum satisfaction and has no urge to change this level of consumption, given the prices of commodities, is known as the consumer's equilibrium The term equilibrium defines a state of rest fiom where there is no tendency to change anything. A consumer is observed to be in the state of equilibrium when he/she does not aspire to change his/her level of consumption i.e. when he/she attains maximum satisfaction. Therefore, consumer equilibrium refers fo the situation when the consumer has attained maximum possible satisfaction from the number of commodities purchased given his/her income and price of the commodity in the market. 26. What is Giffen goods? [2 Marks] [very imp] [90%]*** Giffen goods are low-priced products, the demand for which rises along with the price. These products are necessary to fulfill the need for food, and they have only a few substitutes. Bread, wheat, and rice are examples of Giffen goods. The thought of Giffen goods undermines the fimdamental law of demand. Giffen goods are those whose demand curve does not conform to “the first rule of demand,” ie., price and quantity demanded of Giffen goods are inversely related to each other, unlike other goods, where price and quantity appealed are positively correlated, Therefore, they are inferior goods without a substitute, These are named after the Scottish statistician, Sir Robert Giffen The lassie example of Giffen goods is the example of bread, which the poor consumed more as its price rose. They are inferior goods, but these are not normal cheap goods whose demand falls as soon as the income increases 27. What is Inferior Goods? [2 Marks] [Imp] [80%]*** ‘Goods whose quantity demanded decreases when the income of the consumer increases beyond a certain level and vice versa, are called inferior goods. In simple terms, the quantity demanded by consumers for such goods are indirectly related to the consumer's income, and so the income elasticity of demand is negative. Inferior goods refer to those goods whose demand decreases with an increase in income. For example, if the demand for "jaggery” decreases with an inerease in income, then "jaggery" is an inferior good. -67— Admission Going on For B.com/CA/M.com/BBA/XI-XII. Call/SMS for details