Introduction

1
There is a big problem in the Economy. i.e. Human wants are unlimited but
(i) Resources, to satisfy those wants are limited and
(ii) Resources have alternative uses.
These above two points are limitation of Resources.
Many Resources are non-renewable hence they can’t be produced at large.
and they have alternative uses. e.g. land can be put to alternative uses. You can
build factories on it or construct houses : you can grow crops on it or convert
into a play ground.
The main problem arise problem of choice which alternative of resources
should be selected.
 Scarcity is the main problem of an economy.
∴ Problem of choice is also a problem.
Difference between
Micro Economics Macro Economics
1. Micro means small. Macro means large.
2. It studies the behaviour of an It studies economy as whole or
individual or a product. aggregate.
3. Subject matter Subject matter
Study about demand, supply Study about agreegate demand.
determination of output and price aggregate supply, determination of
for an individual firm or industry. aggregate output and general price
level in an economy.
4. Price theory Income and employment theory.
5. e.g. Income of a consumer, pricing of e.g. National income, general price
a product, study about a single tree level, study about the whole forest
in a forest. and per capita income.

CENTRAL PROBLEMS OF AN ECONOMY

(i) What to Produce?
The 1st central problem in every economy is what goods and services are to be
produced in what quantity, because resources are limited i.e. greater production
of good X must imply lower production o good Y (if Y
a
resources are used in the production of goods X and Y).
As in fig. 1 we used the resources of society hence we
must produce those goods which have market demand
Wheat

in society and produce according to the availability of

resources, which goods should be produced consumer
goods or capital goods, durable goods or non-durable b
goods, etc. O X
Rice

(5)
6 PRINCIPLE OF MICROECONOMICS

(ii) How to Produce?

This is related to choose the technique of production probem arises because.
There are many way of producing goods. There are two technique of production
(1) labour intensive (2) capital intensive.
In labour intensive technique use of labour is more than capital. In capital
intensive technique use of capital (machinery) is more then labour. Labour
intensive technique is less expensive India use labour intensive but Rich country
USA use capital intensive but labour intensive helps to reduce unemployment
while capital intensive pushes the growth in economy.
The choice between labour and capital intensive technique becomes a
problem because producer need to minimise their costs, and at the same time,
maximise their productivity level or efficiency.
(iii) For Whom to Produce?
This is the 3rd problem of economy. Which relates to distribution of output
or income in the economy.
Here we have to decide who is the consumer of our produced goods. There
are two sector under which people are grouped: (i) Rich sector and (ii) Poor
and Middle sector. So decision related to which good should be produced for
which sector is so difficult. But a rational producer should produced quality
product’s at high price for rich sector people and producer should produce low
quality products at reasonable price for poor and middle sector. So that they can
purchase these goods out of their given income and given market price of goods.
Three types of Economy
(i) Market Economy: In this market producer’s are free to take decision
about what goods are produced. How to and for whom to produce with the
objective of Profit Maximisation.
(ii) Centrally Planning Economy: Here decsion relating to what to produce.
How to and for whom to produce are taken by govt. through policy commission.
All decisions are taken with a view to maximising social welfare not profit
maximisation.
(iii) Mixed Economy: Mixed economy has the features of market economy
and centrally planned economy. Decisions regarding what, how and for whom to
produce are taken on the basis of market forces as well as govt. Motive is both
profits and welfare.
 Consumer Equilibrium
2
UTILITY ANALYSIS (CARDINAL APPROACH)
Utility is the want satisfying capacity of a commodity.
(TU) → Total Utility: It is the sum total of utility derived from consumption
of all units of a commodity.
(MU) → Marginal Utility: It is the change in TU due to consume of an
additional units.
MUn = TUn – TUn – 1
Law of Diminishing Marginal Utility
As we consume more and more units of a commodity then the marginal
utility derivs from each an additional unit goes on diminishing.
MU always falls, zero and negative.
Assumption
(i) Consumer is rational.
(ii) Only standard units of the commodity are consumed like cut of tea, not
a spoon of tea.
(iii) Continuous consumption of Homogeneous commodity, not that one unit
of the commodity is consumed now
Y
an another on tomorrow.
Quantity TU MU
0 0 — U TU
1 8 8 T
I
2 14 6 L
3 18 4 I
4 20 2 T
Y
5 20 0
6 18 –2
* Relationship between TU & MU.
(i) As TU increases Mu is positive X
Units Consumed
(ii) As TU falls MU is negative MU
(iii) As TU is maximum MU is zero (saturation point)
Budget line: It is a line showing different combination of two goods which a
consumer can purchase with his given income and price of goods.
Budget line is also called price line.
 equation of budget line Y = x · Px + y · Py
— Px refers to price of x commodity.
— Py refers to price of y commodity.

(12)
CONSUMER EQUILIBRIUM 13

— x shows no. of x unit. Y

— y shows no. of y unit. A

Y shows income of a consumer. Budget line

Budget set: It refers to a set of attainable Good y

combination of two goods at given market price and
income of consumer. eg. let us assume the income of
a consumer is ` 60. And he want to spent it on two
goods say (x and y). Assume price of x is ` 2 per unit O
Good x B
X

and y is ` 1 per unit. Budget sets are

(0, 60), (10, 40), (20, 20), (30, 0), (15, 30), (25, 10), (5, 10) etc... (Attainable
combination)
Attainable or feasible combinations are those Y
combinations of two goods which can be purchased
by the consumer with his given income at given non-feasible
market price. As shown figure (1). Non feasible & non-attainable

or unattainable combinations which can not be Good y

purchased with his given income and given market
prices. eg. (20, 30) (15, 40) etc. feasible or
attainable
Consumer Equilibrium in Case of Utility Approach O
combinations
X
Good x
(a) In case of single commodity: In this case Figure (1)
consumer. Consumes only a single commodity.
The point where the consumer is getting the maximum satisfaction with his
given income.
In this case consumer is equlibrium at a point where the marginal utility of
X commodity is equal to price of X commodity Y
[MUx = Px]
No. of units MUx Px
Consumer
MU & Price

1 10 6 surplus

2 8 6 PX
3 6 6
4 4 6 MU
O X
Good x
In the given diagram, MU represent marginal utility
curve which is always be decline and Px represent the price of the commodity and
that is horizontal line. The point where MU and Px intersect each other is called
as equilibrium point which is denoted as e [equilibrium] at 3rd level.
14 PRINCIPLE OF MICROECONOMICS

(b) In Case of Double Commodity: In this case consumer, consumes two

commodity x and y.
In case of any one commodity, say X a consumer is in equilibrium when
= `1 ...(1)

Similarly in case of commodity Y consumer is in equilibrium when

MUy
= `1 ...(2)
Py
So relating equation (1) and (2).
We consider a situation when a consumer both commodities X and Y, we
can say
MUx Px  MUx MUy 
= or  =
MU y P y  P x Py 
Here marginal utility per rupee must be the same for both.
Consumer is in equilibrium when ratio of their marginal utilities is equal to
the ratio of their
Y Y
Units MUx MUy
U
1 7 8 T
I PX C
2 5 6 L
3 4 4 I MUY
T
4 2 3 Y MUX
5 1 2 O Units O
In the given diagram MUx represents the marginal utility of X commodity and
MUy represents the marginal utility of Y commodity and Px represents the price
of X commodity Py denoted price of Y commodity and consumer is in equilibrium
at 3rd unit where the MUx is equal to MUy at the given price in diagram it is
shown at point ‘e’.
MUx MUy
If > . In this case, the consumer is getting more marginal utility
Px Py

in case of goods of goods x as compared to Y. Therefore he will buy more of x

and less of Y. This will lead to fall in MUx and rise in MUy. The consumer will
MUx MUy
continue to buy more X till = .
Px Py

MUx MUy
If < , the consumer is getting more MU in case of goods Y. Therefore
Px Py
he will buy more of Y and less X. This will lead to fall in MUy and rise in MUx the
MUx MUy
consumer will continue to buy more of Y till = .
Px Py
 Theory of Demand
3
DEFINATION
When a consumer is willing to purchase a fixed quanity of a commodity at
various prices in market during a given period of time.
eg. A consumer demands 2 kg of wheat in a month ` 20 per kg.
→ Demand is a flow concept.
→ Demand always means effective Demand.
Individual Demand
When a Single individual is willing to purchase a fixed quantity of a commodity
at Various prices called individual Demand.
Market Demand
Sum of all individuals demand in the market is called Market Demand.
Schedule
C
Price A’Demand B’ Demand Market Demand (A+B+C )
Demand
2 4 5 6 15 i.e. (4 + 5 + 6)
4 3 4 5 12 i.e. (3 + 4 + 5)
6 2 3 4 9 i.e. (2 + 3 + 4)
8 1 2 3 6 i.e. (1 + 2 = 3)

Demand function
Demand function shows the Relationship between the Demand for a
commodity and Various factor Affecting it.
Dx = f (Px, Po, Y, T, D, E)
Factors Affecting Demand / Determinants of Demand.
1. Px = Own price of the commodity.
Law of Demand: It states that “Other things remaining Constant” when
price of the Commodity increases, then the quantity demanded of that
Commodity decreases and Vice, Versa. Y
→ Law of Demand is a Qualitative Statement.
Price X Demand X P Convex to origin
2 20 R or Downwardly Sloping
I towards Right
3 18 C
4 16 E

5 14
Dx
o X
Quantity demanded

(22)
THEORY OF DEMAND 23

2.Po = Price of Other Related Goods.

Other Related goods are of Two Types.
(i) Substitute/Competitive goods: Substitute goods are those goods which
can be used in place of other. eg. Tea, Coffee, pepsi, Coke.....
Explanation: If the price of one commodity increases then demand for
other commodity also increases and vice versa.
Price Tea ↑ Demand coffee ↑ (Direct
Price Tea  ↓ Demadn coffee ↓ Relationship)
Substitution effect is Positive
These goods are highly competitive goods.
(ii) Complementary goods: Compementary goods are those goods which
have jointly Demand eg. Pen, ink, Petrol, Car.
Explanation: If the of one commodity increases thendemand for other
commodity decreases and Vice-Versa.
Price petrol ↑ Demand cars ↓ (Inverse
price petrol ↓ Demand cars ↑ Relationship)
Effect on demand Curve when their is change in price of Substitute goods
Substitute goods are those goods which can be used in place of other
eg. Tea, Coffee.
Tea can be used in place of Coffee and Coffee can be used in place of Tea.
These are Competitive /Substitute goods. Hence if price of Tea increases The
Demand for Coffee also increases because of Law of demand According to Law
if price of Tea increases then Demand for Tea Decreases because Coffee is the
Substitute of Tea. Demand for Coffee increases.
Increase in price of Substitute goods
Y

Rightward Shift in Demand Curve:

Price Tea ↑ Demand coffee ↑
P
1 Price Tea  ↓ Demadn coffee ↓

D D (Coffee)
1 2
o X
Q Q
1 2
Initially the price of Coffee is OP1 and quantity is OQ1 Now Suppose the
price of coffe remains constant but the price of Tea increases the demand for
coffee is also increases. Hence Demand Curve of coffee shifts Rightward from
D1to D2 and Quantity demanded increases form OQ1 to OQ2.
Decrease in price of Substitute goods
If the price of Tea Decreases. The Demand for coffee also decreases because
of law of Demand According to law if the price of Tea decreases then Demand for
Tea increases.
24 PRINCIPLE OF MICROECONOMICS

Due to law many Consumer prefers Tea Hence demand for coffee Decreases.
Y

Leftward Shift in Demand Curve:

P
1 Price Tea  ↓ Demadn coffee ↓

D D (Coffee)
2 1

o X
Q Q
1 2
Initially the price of coffee is OP, and quantity OQ1 Now Suppose the price
of coffee remains constant but the price of (Substitute) Tea Decreases. Then
The demand for coffee is also decreases, Hence demand curve of coffee Shifts
leftward from D1 to D2 and quantity from OQ2 to OQ1.
Effect on demand curve when their is change in price of complementary goods.
Complementary goods are these goods which have jointly demand both
goods demand jointly eg. petrol and car.
Increase in price of Complementary goods
Hence if price of petrol increases then Demand for car Decreases because
both the goods have joint demand.
Y

P
Leftward Shift in Demand Curve:
1
Price petrol ↑ Demadn cars ↓

D D (Cars)
2 1

o X
Q Q
2 1
Initially the price of cars is OP1 then Demand of car is OQ1 Now Suppose the
price of petrol increases then demand for car decreases. Hence demand curve of
car shift leftwards form D1 to D2 and quantity decreases from OQ1 to OQ2.
Decrease in price of comlementary goods
If the price of petrol decreases then Demand for car increases. (because both
the good have joint demand)
Y

Rightward Shift in Demand Curve:

Price petrol ↓ Demadn cars ↑
P
1

D (Cars)
D 2
1
o X
Q Q
1 2
THEORY OF DEMAND 25

Initially the price of cars is OQ1 then Demand for car is OQ. Now suppose the
price of petrol decreases then the demand for car increases, Hence the demand
curve shifts rightward from D1 to D2 and quantity increases from OQ1 to OQ2.
3. Y - Income of Consumers
Effects Income (Y) Demand Nature of Commodity
(i) —NA— Y ↑ or Y ↓ Constant Necessary gooods (Medicine)
(ii) Income effect Y ↑ (Increase) D ↑ (Increase) Normal goods OR
is +ve. Y ↓ (Decrease) D ↓ (Decrease) Luxerious goods.
(iii) Income effect Y ↑ (Increase) D ↓ (Increase) Interior goods
is – ve Y ↓ (Decrease) D ↑ (Decrease) Second hand clothes, Bajra
Necessary goods
When the income of a consumer increases or decreases the Demand for
Necessary goods do not change (constant) eg. medicines, Testbooks, Matchbox,
Salts etc.
Normal goods
When the income of consumer increases the Demand for Normal goods also
increases and if the income of consumer decreases then the Demand for Normal
goods also Decreases.
Y Y

P P
Goods

D′ D
Goods

D D′
O X O X
rmal

rmal

Q Q
No

No

Income increases then, Income decreases then,

Demand Curve Shift's Rightward Demand Curve Shift's Leftward

Inferior goods
When the income of a consumer increases the demand for inferior goods
decreases and if the income of consumer decreases then demand for inferior
goods increases.
Y Y

P P
rior Goods

rior Goods

D D′
D′ D
O X O X
Q Q
Infe

Infe

Income increases then, Income decreases then,

Demand Curve Shift's Leftward Demand Curve Shift's Rightward
26 PRINCIPLE OF MICROECONOMICS

4. T - Taste or preference of consumer.

It means likings or Disliking of Consumer.
It is the Subjective Approach of consumer.
→ if Taste of consumer is favourable for any commodity then Demand for
that commodity increases
It causes Rightward shift in Demand curve.
→ If Taste of consumer is unfavourable for any commodity then Demand for
that commodity decreases.
It causes leftward shift in Demand curve.
5. D - Distribution of income

equal distribution unequal distribution

Demand ↑ Demand ↓
Demand curve shift Demand curve shifts
Rightward Leftward
6. E - Expectation of consumer.
→ If a consumer expects a price rice in near future then in present he
increases the Demand of commodity.
Here Demand curve shifts Rightward.
Expects
Present D ↑ future P ↑
→ if a consumer expects a price-fall in near future then in present be
Decreases the Demand of commodity.
Here Demand curve Shifts Leftward.
Expects
Present D ↓ future P ↓
Change in Quantity Demanded Change in Demand
1. It is due to own price of the commodity. It is due to other factors (Po, Y, T, D, E)
(Px)
2. Law of Demand Works. Law does not works.
3. Price ↑ Demand ↓ Due to does not works.
• Contraction in Demand (i) Fall in price of substitutes.
• Upward movement along with same (ii) Rise price of complementary gooods.
demand curve. (iii) Fall in income of consumers.
Y (iv) Unfavourable taste of consumers.
Decease in Demand
• Leftward Shift in Demand Curve
PRICE

P
PRICE

D R
O X I
QUANTITY C
E D
D1
O X
Quantity
THEORY OF DEMAND 27

4. Price ↑ Demand ↓ Due to ...

• Extension/Expansion in Demand.
• Downward movement along with
same demand curve.
Y
PRICE
(i) Rise in income of consumer.
(ii) Increase in price of substitutes.
(iii) fall in price of complementary goods.
(iv) Taste of consumer is favourable.
Increase in Demand
• Rightward Shift in Demand Curve
Y

PRICE
O X
QUANTITY
D1
D
O X
QUANTITY

REASON FOR LAW OF DEMAND

Why demand curve is downwardly sloping to right.
(i) Law of Diminishing Marginal Utility: It states that as consumer
consume more and more units of a commodity. The utility derived
from each additional unit goes on decreasing hence consumer gets less
satisfaction from additional unit so he pay’s less for additional unit.
(ii) Substitution Effect: Substitutes are those which can be used in place
of other. If price of given goods falls, it becomes cheaper as compared to
its substitutes. So demand of given goods rises.
(iii) Income effect: When price of a given commodity falls, it increases the
purchasing power (Real income) of the consumer. As a result, he can
purchase more of given commodity with same level of income.
EXCEPTIONS TO LAW OF DEMAND
(i) Giffen goods: These are special kind of inferior goods on which the
consumer spends a large. Part of his income and their demand rises with
an increase in price and demand falls with decrease in price. e.g. Course
cereals like jawar, bajra etc. This also called "Giffen Paradox".
(ii) Ignorance: It consumer is not aware about the prevailing prices then he
may buy more of a commodity at a higher price.
(iii) Status symbol (Prestigious goods): For status symbol goods consumer
can ready to pay more. i.e. Demand for prestigious goods rises even its
price rises.
(iv) Fashion related goods: Goods related to fashion do not follow the law of
demand and their demand rises even price rises. e.g. designer dresses.
(v) Necessities of life: Goods which are become necessities of life due to
their constant use. e.g. rise, wheat, salt, medicine etc.


28 PRINCIPLE OF MICROECONOMICS

IMPORTANT NOTES
 Elasticity of Demand
4
PRICE ELASTICITY OF DEMAND
It measures changes in demand due to change in price of the commodity.
It is Quantitative Statement.
Degree of Elasticity or Types or Coefficient of Elasticity
A B C D E

ed = 0 ed < 1 ed = 1 ed > 1 ed = ∞
Perfectly Less than Unitary Elastic More than Perfectly
Inelastic unitary Demand Unitary Elastic
OR OR
Relatively inelastic Relatively elastic

A. Perfectly Inelastic Demand (ed = 0)

If the percentage change in demand is nothing or zero even after the change
in price then the demand is said to be perfectly inelastic.
Y
Parallel to Y axis P 10% ↑ D-constant
P1 D
P 15% ↓ D-constant
P
P Q.D.
P2
10 20
O
Q X
11 20

B. Relatively Inelastic Demand (ed < 1)

If the percentage change in price is more than the percentage change in
demand then it is said to be less elastic.
Y
Price 10% ↑ Quantity demanded 5% ↓
P
Price 10% ↓ Quantity demanded 5% ↑
P1
P P Q.D.
D
10 20
11 19
O Q QQ1 X

C. Unitary elastic Demand (ed = 1)

If percentage change in price is equal to percentage change in demand then
it is said to be unitary elastic demand. (Rectangular hyperbola)
Y

Price 10% ↑ Quantity demanded 10% ↓

P′
Price 20% ↓ Quantity demanded 20% ↑
P P Q.D.
10 20
D
11 18
O Q′ Q X
(29)
30 PRINCIPLE OF MICROECONOMICS

D. Relatively elastic Demand (ed > 1)

If the percentage change in Demand is more than the percentage change in
price, then it is said to be more elastic.
Y
Price 10% ↑ Quantity demanded 15% ↓
P
Price 15% ↓ Quantity demanded 27% ↑
P1
D P Q.D.
10 20
O Q Q1
11 17
X

E. Perfectly elastic Demand (ed = ∞)

If there is change in demand even at the same prices the demand is said to
be perfecty elastic.
Y

P Q
P D Price is constant but 10 5
Parallel to Quantity changes 10 4
'X' axis
10 3
O Q X

FACTOR’S AFFECTING ELASTICITY OF DEMAND

(i) Availability of Closed Substitutes: Demand for goods which have close
substitutes (like tea and coffee) is Relatively More elastic. Because when
price of such good rises, the consumers have the option of shifting to its
substitutes. Goods without close substitutes like cigarettes and liquor
are generally found to be less elastic demand.
(ii) Income of Consumer: Elasticity of demand for a good also depends on
the income of consumer. A consumer with high level of income will not
be bothered by rise in its price. Hence they have less elastic demand, but
A consumer having low level of income having more elastic demand.
(iii) Luxirious vs Necessaries: The demand for necessary goods like salt,
kerosene oil, matchbox, textbooks, several vegetables etc. have less
elastic demand. Luxuries like AC, costly furniture, fashionable garments
have more elastic demand. It means demand can change for luxuries
with change in price but not in necessaries.
(iv) Postponement: The goods which consumption can be postponed like
cars, residential houses having. More elastic demand whereas the goods
which consumption can not be postponed like medicines, salt etc. having
less elastic demand.
(v) Number of uses of the commodity: Those commodities which have
multiple uses like electricity used for various purpose. So it have more
elastic demand whereas the commodity such as paper has only few uses
it demand is likely to be less elastic.
ELASTICITY OF DEMAND 31

(vi) Part/Proportion of Income Spent on Consumption: Goods on which

consumer’s spend a small proportion of their income like toothpaste,
boot-polish, needle, news paper, salt, match box etc. will have inelastic
demand. On the other hand goods on which the consumer spent a large
proportion of their income like clothes Bikes etc. have elastic demand.
Measurement of Price-elasticity of Demand

1. Percentage/ 2. Geometric/Point 3. Total Expenditure

Proportinoate Method or Total Outlay
Method Method
1. Percentage/Proportinate Method: It is the most popular method of
measuring price elasticity of demand.
Under this method, elasticity of demand is measured by the ratio of
percentage change in quantity demanded To percentage change in price.
Note: Since demand and price have got different units so percentage (%)
is taken.

% Change in Quantity Demanded
⇒ (− )
% Change in Price

Q2 − Q1
× 100
Q1
⇒ (− )
P2 − P1 DP = P2 – P1
× 100
P1 DQ = Q2 – Q1
DQ P1 = Initial price
Q P2 = New price
⇒ (–) 1 Q1 = Initial quantity
DP
P1 Q2 = New quantity
∆Q P1
⇒ (–)
×
∆P q1

Note: (i) Negative sign used in formula shows applicability of law of demand.
(ii) Ignore negative sign in formula if in question ed is given with negative sign.
(iii) Range of elasticity of demand is (0 to ∞).
2. Geometric/Point Method: In this method
elasticity of demand is measured on different Y A ed = ?∞
points on a straight line demand curve.
B ed > 1
Lower Segment
Ed =
Upper Segment C (ed = 1) Mid point
Price

→
As we move downwardly the value of ed D ed < 1
decreases. E ed = 0
O
→ As we move upwardly the value of ed increases.
Quantity X
32 PRINCIPLE OF MICROECONOMICS

Calculation of elasticity of demand at point

AE
A. ed = =∞
O
Any real number divided by zero is infinity.
A = Perfectly elastic
BE
B. ed = ed > 1 (BE > AB) B = Relatively elastic
AB

C. ed = CE ed = 1 (CE = AC) i.e. C is mid point of AE

AC
C = Unitary elastic
DE
D. ed = ed < 1 (DE < AD) D = Relatively inelastic
AD
O
E. ed = ed = 0 E = Perfectly inelastic
AE
Zero is divided by any real number is zero.
3. Total Expenditure/Total Outlay Method: In this method elasticity of
demand is calculated by comparing the price with total expenditure.
(i) Less than unitary or Relatively inelastic (ed < 1)
If there is increase in total expenditure due to increase in price or decrease
in total expenditure due to decrease in price. The direct relationship between
price and total expenditure.
Price ↑ Total Expenditure ↑
Price ↓ Total Expenditure ↓
(ii) Greater than unitry or Relatively elastic (ed > 1)
If there is increase in total expenditure due to decrease in price or decrease
in total expenditure due to increase in price. There is inverse relationship
between Price and Total Expenditure.
Price ↑ Total Expenditure ↓
Price ↓ Total Expenditure ↑
(iii) Unitary elastic (ed = 1)
If increase in price or decrease in price have no effect on total expenditure.
Total expenditure is constant.
* Total expenditure = Price × Quantity
Price ↑ Total Expenditure – Constant
Price ↓ Total Expenditure – Constant More than unitary
Y
Price Q Expenditure Nature of elasticity ed > 1

1 6 6 P ↑ TE ↑    TE < 1 P
R
2 5 10 P ↓ TE ↓ ; less than unitary I ed = 1
C
3 4 12 P ↑ TE is constant TE = 1 E
4 3 12 P↓ unitary elastic ed < 1
Less than unitary
5 2 10 P ↑ TE ↓     TE < 1 O
Total Expenditure X
6 1 6 P ↓ TE ↑ More than unitary
ELASTICITY OF DEMAND 33

Flatter the curve, Greater the Elasticity: Y

D2 is more elstic then demand curve D1 because P

price decrease from P to P1 for D1 quantity increase
from O to Q and for D2 quantity increase from Q to P1
d2
Q1. Their is greater change in quantity in D2. Hence
more elastic but small changes in quantity in D1 d1
there less elastic.
O Q Q1 X
PRACTICAL QUESTIONS (elasticity of demand)
Q1. When the rice of a goood is `12 per unit, the consumer buys 24 units of
that good when the price rise to `14 per unit the consumer buys 2 units.
Calculate ed?
Q2. Calculate ed when price rises from `15 to `20 per unit and when price
falls from `20 to `15.
Price (`) 15 16 17 20
Demand (in units) 100 80 50 40
Q3. Due to a 10% falls in the price of a commodity its quantity demanded
rises from 400 units to 450 units. Calculate its price elasticity.
Q4. A consumer buys a certain quantity of a good at a price of `10 per unit.
When price falls to `8 per unit. She buys 40% more quantity calculate
price elasticity of demand.
Q5. Determine price elasticity of demand using percentage method.
Quantity (in units) Total Outlay
20 ` 200
15 ` 300
Q6. Shyam spent ` 500 on a commodity and bought 25 units of it. When
its price changed. He spent ` 600 and bought 20 units. Find out the
elasticity of demand by total expenditure method.
Q7. A decline is the price of X by `2 causes an increase of 10 units in demand
which goes up to 60 units. The new price is `18. Calculate ed?
Q8. Price elsticity of demand of a good is (–) 1. At a given price the consumer
buys 60 units of the good. How many units will the consumer buy if the
price falls by 10%?
Q9. ed for a good is (–) 2. the consumer buys a certain quantity of this good
at a price of `8 per unit when the price falls he buys 50% more quantity.
What is new price?
Q10. ed of a good is (–) 3. If the price rises from `10 per units to `12 per unit,
what is the percentage change in demand?
Q11. The demand for a good doubles due to a 25% percent fall in its price.
Calculate its price elasticity of demand.
Q12. ed = (–) 1, the consumer buys 50 units of that goood when price is `2 per
unit. How many units will the consumer buy if the price rises to `4 per
unit? Answer this question with the help of total expenditure method.
Q13. ed = (–) 0.5, its quantity demand falls by 5 units when its price rises by `1
per unit. Calculate the quantity demanded if the price before the change
is `5 per unit.
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34 PRINCIPLE OF MICROECONOMICS

IMPORTANT NOTES