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SCALE OF PREFERENCE:-
The concept of scale of preference is the base of indifference curve
analysis. Now, we see what is meant by Scale of preference.
Suppose, a consumer is in a position to arrange the different
combination of two goods say X & Y, in order to buy or consume it, then he
have to arrange the combination in ascending or descending order of
preference. He could tell us that the satisfaction derived from the first
combination is more than, equal to or less than from the second
combination but not the exact difference (in number) in satisfaction derived
from any two combinations.
Thus, every consumer arranges these combinations in order of
preference.
“This conceptual arrangement of combination of goods set in order
of level of preference or importance is called the scale of preference.”

INDIFFERENCE CURVE:-
An Indifference curve is the locus of all those combination of any two goods
which give the same level of satisfaction to the consumer. (i.e.) He will be
indifference between that combination and he does not matter if any combination
he gets.

Indifference Schedule:-
Combinations Goods (X) Goods (Y) Level of
satisfactions
A 1 18 S
B 2 13 S
C 3 9 S
D 4 6 S
e 5 4 S
S = Same level of Satisfaction.
In the above schedule there are 5 combinations of 2 goods (X) and (Y)
But all are achieved combinations of (X)and (Y).
The consumer is indifferent between them. It can be explained in
further detail as _
To get one more units of X the consumer prefer to give up 5 units or
Y. The gain in utility of one additional unit of X will exactly compensated
the consumer by the loss of 5 units of Y. Thus the total level of satisfaction
from (1X + 18Y) is equal to (2X + 13Y).
Similarly, the total utility or the level of satisfaction from (2X + 13Y)
is equal to (3X + 9Y) and so on. Since all these combinations gives the same
level of satisfaction they are also known as Iso-utility combination.

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Indifference schedule in Indifference curve as shown below:


y
P
r
o 20 A
d
u
15 B
c 10 C
t
Y
05 D
0 E IC1
1 2 3 4 5 x
ProductX

In the above figure, X-axis represents product X and Y –axis


represents product Y. IC1 is the Indifference curve. All
combinations of the goods X & Y represented by points A,B,C,D & E
on the Indifferent curve will be equally preferable to the consumer.
As these goods gives him the same level of satisfactions.

INDIFFERENCE MAP:
An indifference map is consists of a set of indifference curve drawn
together. It shows the scale of preference of consumer for different
combinations of any two goods.

y
P
r
20 o
d
15 u IC3
10 c
t
05 Y IC2
0 IC1
1 2 3 4 5 x
ProductX

In the indifferent Map given above, all the combination of


two goods represented by the curve IC1 will give the consumer the
same level of satisfaction. But the level of satisfaction will be less
than those given by IC2 and IC3 etc.
Higher and higher indifference curve represents higher &
higher level of satisfaction as compared to lower one.
Therefore Indifference curve in a indifference map are
labeled in an ascending order such as IC0, IC1, IC2, IC3, IC10,
IC100 ……… ICn. Without actual measurement of utility.

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ASSUMPTION OF INDIFFERENCE CURVE
ANALYSIS.
1. A consumer is assumed to buy any two goods in combinations.
2. A consumer can rank the alternative combinations and compare
their level of satisfaction, and he prefers a combination providing
a higher level of satisfaction.
3. It is assumed that utility can be measured in ordinal numbers but
not in cardinal measurements.
4. Consumer is rational and his choices are transitive.
5. The consumer behaviour is assumed to be constant, throughout
the analysis.
6. Indifference curve analysis assumes diminishing marginal rate of
substitution.

Properties of Indifference Curve


The indifference curves possess certain characteristics which are
also called as properties. The important properties are:
1. Indifference curve must slopes downwards from left to right.
2. Indifference curve must be convex to the origin.
3. No two Indifference curves should intersect.
Let us see in detail one by one.
Indifference curve must slopes downwards from left to
right
y
P
r
A
o y1
d
u B
c
t y2 IC1
Y

0 x1 x2 x
ProductX

Indifference curves slopes downwards from left to right indicating


that as the quantity of commodity X increases, the amount of commodity
Y should fall in order that the level of satisfaction from every
combination should remain the same.
In the above figure, where the Indifference curve (IC1) slopes
downwards from left to right, shows that as the consumer moves from
point A to B on (IC1), consuming more of commodity X [(i.e.) from o-x1
to o-x2] and less of commodity Y [(i.e.) from o-y1 to o-y2], level of
satisfaction remains the same.

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Let us see weather, the indifference curve can slope
upwards
from left to right or that it is horizontal or vertical
as shown in the following figure.
Upward sloping IC1

Y
P
r
o y2 B
d
u
c y1 A
t
Y

0 x1 x2
ProductX

In the upward sloping Indifference curve_


When the consumer prefers (0 – x1) quantity of commodity X he prefers
(0 – y1) quandity of commodity Y at the point A. When the consumer
tends to prefer (0 – x2) quandity of commodity X he prefers (0 – y2)
quandity of commodity Y at the point B.
From the diagram it is very clear that,

(0 – x1) (0 – x2) &

(0 – y1) (0 – y2)

Therefore, the satisfaction derived from the combination of goods X and


Y at point B is greater than the satisfaction derived from the combination
of goods X and Y at point A.
This is happening, because the consumer moves from A to B on IC1
consuming more of commodity X [ (i.e.) 0 – x1 to 0 – x2 ] and more of
commodity Y [ (i.e.) from 0 – y1 to 0 – y2 ]

Horizontal
y

4
P
r A B IC1
o
d
u
c
t
Y
x1 x2 x
ProductX

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In the horizontal slopping of Indifference


curve_
When the consumer prefers (0 – x1) quandity of commodity X as well as
(0 – x2) quandity of commodity X he prefers the same quandity of Y (i.e.)
(0 – y1).
From the diagram, it is very clear that,

(0 – x1) ( 0 – x2) &

(0 – y1) = (0 – y1)

Therefore, the satisfaction derived from the combination of goods


X and Y at point B is greater than the satisfaction derived from the
combination of goods X and Y at point A.
This is because the consumer moves from A and B on (IC1)
Consuming more of commodity X (i.e. 0 – x1 to 0 – x2) and same level of
commodity Y (i.e.) from 0 – y1 to 0 – y1.
Vertical IC1
P y
r
o
d y2
u
c
t y1
Y

x1 x
ProductX

In the vertical sloping Indifference curve_


When the consumer prefers (0 – y1) quandity of commodity
Y as well as (0 – y2) quandity of commodity Y he prefers the same
quandity of commodity X (i.e.) (0 – x1)
From the diagram, it is very clear that,
(0 – x1) = (0 – x1) &

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(0 – y1) (0 – y2)

Therefore, the satisfaction derived from the combination of


goods X and Y at point B is greater than the satisfaction derived
from the combination of goods X and Y at point A.
This is because the consumer move from A to B on (IC1)
Consuming same level of commodity X {(i.e.) from 0 – x1 to 0 – x1}
and more of commodity Y {(i.e.) from 0 – y1 to 0 – y2}.

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Indifference curve must be convex to the


origin
The convexity of an Indifference curve is explained by the law
of diminishing marginal rate of substitution.
Marginal rate of substitution between X and Y is the quantity
of good Y which the consumer is willing to give up for every
additional unity of X, so that the level of satisfaction remains the
same, from all the successive combinations.

Combinations Goods (X) Goods (Y) MRSxy Level of


satisfactions
A 1 18 — S
B 2 13 5:1 S
C 3 9 4:1 S
D 4 6 3:1 S
e 5 4 2:1 S

P Y A
r
o y1
d y2 B
u
c y3 C
t D IC1
Y
y4
x1 x2 x3 x4 X

ProductX

Convexity implies that the consumer is willing to give up less


of good Y to obtain a little more of good X. This means, a
diminishing slope ( y/ x) of the indifference curve.
A rational consumer gives less significance to an extra unit of
a commodity with a large stock and more significance to an unit of
a commodity with a smaller stock. As the consumer moves down
the indifference curve, quantity or X becomes larger and that of Y
becomes smaller. In order to be at the same level of satisfaction,
the consumer will sacrifice less and less of Y in exchange of X. So
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MRS of X for Y will diminish as the consumer gets more and more
of X. Only then the subsequent combinations will give the
consumer an equal level of satisfaction. Hence indifference curves
are convex to the origin.

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No two Indifference curve intercept with


each other.

In order to prove that two indifference curve do not intercept


with each other. Let us draw two Indifference curve (IC1 &IC2)
intercepting with each other at point A, As shown in the diagram.

R
R1
R2 A
IC2
IC1

Q Q1
Each indifferent curve represents a particular level of
satisfaction to the consumer, which is different from other
Indifference Curve representing different level of satisfaction. If
two indifference curve intercepts (as shown in the above diagram)
it will corresponding to B and C, managed to equal at some other
point A. But is logically meaning less and unacceptable proportion.

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Features of Perfect Competition.
Perfect Competition:- A type of market where there are large
number of buyers and sellers and no buyer or seller influences the
market individually.
Features of Perfect Competition are_
1. Large number of buyers and sellers:- Perfect competition is a
market where there are large number of buyers and sellers. This
feature indicates that both the buyers and sellers do n0t have any
major control over the market and they cannot individually
influence the market. Thus, it means that quantity supplied by a
single seller is so small that it does not affect the market supply
and the price of the commodity produced by hid. Similarly,
quantity demanded by a single buyer does not influence the total
demand and the price of the commodity.

2. Homogeneous products. A commodity produced by different


producers is exactly identical in respect of quality, size, price, etc.
So a seller has no excuse to charge a higher price for his
commodity. The buyer also need not discriminate between the
sellers.

3. Complete Market information:- According to this feature both the


buyers and sellers must have the complete knowledge of market,
regarding price, demand and supply situations in the market.

4. Free entry and exist:- Perfect competition allows free entry and
exist for the sellers of the commodity under consideration. The
sellers are free to enter the market at any time as per their wish
and they also can quit the market whenever they want. There are
no legal restrictions on the closing down of the firm.

5. Perfect mobility of factors of production:-It is an important feature


of the perfectly competitive markets that all the factors of
production like labor and capital are perfectly mobile, both
geographically and occupationally. If labor and capital are move
from one place to another as per the requirement of the market

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they are mobile geographically. If labor and capital move from one
type of job or occupation to other type of job easily which means
they are mobile occupationally.

6. No transport Cost:- Perfect competition assumes that there is a


absence of transport cost. This is mainly because the seller will
have no excuse of transport cost to charge a different price.
Features of Pure Competition.
1. Large number of buyers and sellers.
2. Homogeneous products
3. Free entry and Exist.

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Features of Monopoly market.
Monopoly:- Monopoly is a type of market in which there is
only one seller producing a commodity having no close substitute.
1. Single Seller:- In this type of market, there is only one seller
producing a particular commodity.
2. No substitutes:-Monopoly not only implies a single seller but
it also means a single seller producing a commodity having
no close substitutes. If the substitutes are available, there will
be a competition among the firms. Monopoly means a
complete absence of competition. So under monopoly, the
commodity has no close substitutes.
3. No distinction between a firm and industry:- Since there is
only one seller of a commodity, there is only one firm
producing that commodity in the market. So there is no
distinction between the concepts of industry and firm under
monopoly.
4. No free entry and exist:- In the monopoly market, there are
strong barriers to the entry of a new firm in the market. This
prevents new firms from entering the market and so there is
only one firm producing that commodity.
5. Large number of buyers:- Under monopoly there are large
number of buyers in the market who compete with one
another.
6. Downward sloping demand curve:- The demand curve of the
monopoly firm slopes downward indicating that the
monopolist can maximize sales only by reducing the price.

Features of Monopolistic Competition.


Monopolistic competition:- Monopolistic
competition refers to a market where many sellers sell similar but
differentiated product to a large number of buyers. In a
monopolistic competition market, many monopolistic firms

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compete with each other by producing same but differentiated
products.
For example, companies selling toothpaste products like
Colgate, Pepsodent, Close-up, etc. fall under Monopolistic
competition.
1. Large number of Sellers:- In a monopolistic competition
market, there are large number of sellers. Hence no single
seller can control the market supply. Each seller follows his
own course of action. In other words each seller is
independent.
2. Product differentiation:- Product differentiation is the most
important feature of monopolistic competition. Since all

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sellers sell the product which are perfect substitutes for each
other, they go for product differentiation. Every seller makes
efforts to show that his product is superior to other product.
This differentiation is done through Advertisement, brands,
trademarks, designs, packaging, color etc. Thus the products
are not homogeneous under monopolistic competition.
3. Selling costs:- One of the unique features of monopolistic
competition is its selling cost. Selling cost is the cost
incurred by the seller on sales promotion activities like
advertisement, salesman’s service etc. Selling cost enables
the seller to persuade buyers to buy their products than
products from other sellers.
4. Large number of buyers:- There are large number of buyers
in a monopolistic competition market. Thus the buyers
purchase goods by choice and not by chance.
5. Free exist and entry:- There is free entry and exist of firms
under monopolistic competition. There are no barriers for
the firm to enter. Since each firm produces a product which
is little different from others, there is no possibility of more
firms entering the market.
6. Competition :- Competition under monopolistic market is
more as all the firms sell close substitutes. But the
competition is in two dimensional:
1. Price Competition under which the firms were compete
with each other by reducing their products price.
2. Non-price competition under which they compete through
advertisement, and sales promotion activities, etc.

Features of Oligopoly.
Oligopoly :- Oligopoly is an important form of imperfect
competition. In the word Oligopoly ‘Oligo’ means few and ‘poly’
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means seller. Oligopoly therefore refers to the market structure
representing few sellers or firms.
1. Few Firms:- Oligopoly is the market in which few firms
compete with each other. The simplest model of oligopoly is
duopoly. Duopoly is the market structure when only two
firms produce and supply the product. For e.g. Coke and
Pepsi.
2. Nature of the product: In an oligopoly market, all the few
firms produce an identical product. Such an oligopoly market
is called Pure Oligopoly. On the other hand, firms with
product differentiation constitute imperfect oligopoly.
3. Interdependence of Firms: In an oligopoly market, there is

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Interdependence among firms. Thus the move made by one


firm to reduce price attracts reaction from other firms.
4. Complex market structure:- The oligopolistic market
structure is quite complex. Cartel is an example of collusive
oligopoly. The non-collusive oligopoly is the other form of
complex market structure.
5. Selling cost:- Advertisement is an important method used by
oligopolists to gain larger share in the market. The costs
incurred on advertisement are selling costs.

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Scope and Meaning of Economics:-
The subject of economics is concerned with the satisfaction of
human materialistic wants. It also deals with economic problems
that arise out of making a choice. These are choice of goods and
choice of technique. The problem of choice of goods arises because
of _ 1. multiplicity of wants. 2. Wants can be arranged in the order
of their importance. 2. Resources are scarce.
Economic problems relating to choice of technique arise
because factor of production have alternative uses. The root cause
of an economic problem is the scarcity of resources and the study
of economics is concerned with economizing resources. How to
make best uses of resources. Thus according to Somuelson. The
subject of economics is concerned with a following fundamental
problem:-
1. What to produce:- This is the major problem in front of the
nation. A country has to decide the type of product and the
amount of the product to be produced by utilizing the limited
resources as its disposal. Here the firm need to decide
between_
a. Choice between Consumption goods and Capital Goods.
b. Choice between Civil goods and War goods.
c. Choice between Mass goods and Luxury goods.
d. Choice between Private goods and Public goods.
2. How to produce:- How to produce is essentially a problem of
choice of technique. If the country is advanced in its
technological knowledge then it may produce more
production with less fact0r of production and vice versa.
3. For whom to produce:- This is a problem related to
distribution of national income among different factors. In
other words it is the problem of how much share each factor
should be provided in return of their services in the process
of production.
According to ‘Hipsey’ besides the above mentioned
fundamental problems other important problems are_
1. How to achieve full employment
2. How to achieve faster growth.
3. How to achieve efficiency.
4. Productive efficiency.
5. Distributive efficiency.

Conclusion: Thus, Scarcity of resources is the root cause


of all economic problems. The subject economics is
concerned with economizing resources.
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Meaning of Production Possibility Curve
“A production possibility curve may be defined as a curve which
shows the maximum amount of any two products that can be produced
with the given resources and technology. It is also known as Production
possibility frontier and Transformation Curve.”
It is based on the basis of three assumptions:
1. The economy operates under full employment and achieves full
production.
2. The available supply of factors of production is fixed. Such
resources can be used for different purposes.
3. The state of technology remains unchanged during the time of
analysis.
Let us illustrate the concept of PPC with the help of the following
schedule and diagram.
PPC Schedule:-
Production possibility Commodity Commodity
combinations
X Y
A 0 40
B 1 36
C 2 30
D 3 22
E 4 12
F 5 0
In the above schedule only a combination of two goods (X&Y) is produced
in the economy with the given resources and technology.
When the economy(country) diverts its entire resources to the
production of Y, it results in the production of 40 units of Y while X
remains Zero. Now, if the society prefers to produce 1 units of X, it has to
sacrifice the production of Y by 4. Likewise there can be a number of
production possibilities of X and Y in which an increase in the production
of one commodity leads to reduction in the production of another
commodity.
PPC Diagram:
y

P 40A
r
o
B
d 30 C
u
c
t 20 D
Y
E
10

13
ProductX F
0 1 2 3 4 5 X

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In the diagram, the point A indicates the extreme possibility in
which only the commodity Y is produced. The point F indicates
other extreme possibility where only the commodity X is produced.
Between both extremes we have point B,C,D&E showing different
combinations of two goods X and Y. When all the points are joined,
we get the curve called production possibility curve(PPC).

Production Possibility curve and the most efficient use of resources


Or Explain the term Economic Efficiency with the help of PPC.
Y

P 40A
r B H
o
d 30 C
u
c
t 20 D
Y G E
10
F
0 1 2 3 4 5 X
ProductX

Production possibility curve of a society guides how the resources


can be most efficiently utilized. A production Possibility curve
represents those combinations of two goods (A&B) which can be
produced when its resources are most efficiently used.
In the above diagram, X-axis represent Commodity X and Y-
axis represents Commodity Y. The combinations A,B,C,D,E&F are
the attainable combinations while doing most efficient use of
resources. But if the economy(country) chooses to Produce
combination ‘G’, it leads to inefficient utilization of resources.
Since the combination ‘G’ lies below the PPC. It would mean under
utilization of resources. If the economy chooses to produce a
combination like ‘H’, it would be unattainable under the given
resources and technology. Since, the combination ‘H’ lies outside
the curve, it would be impossible to attain as the resources are
limited.

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Features of Free Market Economy/Capitalism.
Free market Economy:- It a system of market mechanism refers to an
economic system in which all the means of production are privately
owned. All economic activities like production, distribution,
consumption are very much influenced by the decision taken by the
Private entrepreneurs.
1. Free enterprise: A market economy is a free enterprise economy
where an individual enjoys maximum freedom in economic
matters.
2. Economic freedom: The consumers are allowed free to spend their
income in whatever manner they decide. The producer is also
allowed free to choose the products they produce and invest their
capital whatever way they like. But it should not be used opposed
to public policy.
3. The role of Government: As the economy is based on free
enterprise, the government does not interfere in economic
activities.
4. Profit motive: Profit motive is the central feature of capitalism. It
acts as an incentive and motivate the entrepreneurs to come
forward and bear risks and uncertainties.
5. Price mechanism: Since government interference is almost not
there, the entrepreneurs had to take decision of
➢ What to produce
➢ How to produce
➢ For whom to produce
6. Competition:- A market economy is characterized by competition.
Competition among entrepreneurs improves the efficiency in the
production of goods and services.
Features of Command economy/Socialism/
Planned economy
There is no specific definition of Command economy. However it can be
explained as “ A planned economy is one which is run by a single central
planning authority China is an example of a planned economy.”
1. Means of production: Means of production will be owned by the
society as a whole. They are managed by the state for the benefit of
the society. Under socialism, all labourers are employed by the
state. So there is no scope for exploitation of labour.
2. No private property: Means of production cannot be owned by
private individuals or associations or individuals.
3. Planning:-The state will decide what to produce where to produce
and how to produce. All the production like agriculture, industry,
irrigation and transport will be developed systematically according
to a well prepared plan.

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4. Service motive: Since the production activities are practiced by the
state on behalf of the people. So the main aim is to provide service
to the people.
5. No Competition: Since all the production activities are taken down
by the State there is no competition among the industries.
6. The role of Government: It is fully controlled by the Government.

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Features of Mixed Economy:
Mixed Economy: It is a system in which both capitalist economy and
command economy exist. It means both private and public sectors co –
exist and co – ordinate. It covers the features of both Capitalism and
Socialism.
1. Co-existence of Private and public sectors: Both public and private
sectors exist in a mixed economy. Generally, the public sectors
enter the areas of infrastructure and capital goods industries
which require huge capital and long waiting. The private sectors
enters those areas which are left free by the public sector and
particularly the consumer goods industries. There is also joint
sector in which the state joins hands with the private sectors.
2. Operation of Market Mechanism
3. Operation of Government control.
4. Economic freedom
5. Government regulations
6. Planned economy

Distinguish between Market economy and command


economy.
Market economy (Capitalism) Planned economy (Socialism)
1. Definition 1. Definition
2. The means of production are 2. The means of production are
owned by the private owned by the state. All the
enterprises. The decisions of decisions regarding production,
production, distribution, distribution and exchange are
exchange are controlled by the taken by the state.
private entrepreneurs. 3. All activities are undertaken
3. All economic activities are with a view to improve social
guided by self interest and profit welfare and to deliver social
motive. justice.
4. The decisions of what to 4. The decisions of what to
produce, how to produce & produce, how to produce &
where to produce were mainly in where to produce were mainly in
the hands of Private enterprises. the hands of States.
5. Consumer is the king in a 5. Here neither the consumer
market economy. He can choose nor the producer is the king.
whatever he likes and rejects They have no choice but to
what he doesn’t like. The accept the decisions taken by the
producers are free to invest planners.
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wherever they desire.
6. Profit motive and private 6. The major objective of
property are the essential planned economy is to provide
features. It leads to growth of social justice and reduce in
monopolies and high degree of equality. It makes all possible
inequality. attempts to eliminate monopoly.

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Market economy (Capitalism) Mixed economy(Capital + Social)
1. Definition 1. Definition
2. The means of production are 2. The means of production are
owned by the private owned by the private as well as
enterprises. The decisions of Public enterprises. The decisions
production, distribution, of production, distribution,
exchange are controlled by the exchange are controlled by both
private entrepreneurs. the Private as well as Public
entrepreneurs.
3. All economic activities are 3. All economic activities are
guided by self interest and profit guided by not only self interest
motive. and profit motive but also
service oriented.
4. The decisions of what to 4. The decisions of what to
produce, how to produce & produce, how to produce &
where to produce were mainly in where to produce were mainly
the hands of Private enterprises. there in the hands of
government, which guides both
Public enterprises as well as
Private enterprises.
5. Consumer is the king in a 5. Here both the consumer and
market economy. He can choose the producer is the king. But,
whatever he likes and rejects they have to follow the decisions
what he doesn’t like. The (law) laid down by the
producers are free to invest government bodies from time to
wherever they desire. time.
6. Profit motive and private 6.Profit motive and private
property are the essential property also Service motive and
features. It leads to growth of Public property are the essential
monopolies and high degree of features.
inequality.
Short Note on Micro economics.
“Micro economics is the study of particular firms, particular
households, individual prices, wages, income, individual industries,
particular commodities.
The above definition gives an idea that, Micro economics is
concerned with the study of the behaviour of the individual units. The

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word ‘Micro’ is derived from the Greek word ‘Mikros’ meaning small.
Hence Micro economics means the study of minute or small parts of the
economy.
Short Note on Macro economics.
“ Macro economics deals not with individual income but with the
national income, not with individual prices but with the price levels, not
with individual prices but with the price levels, not with individual output
but with the national output”
Macro economics deals with the economic system as a whole. It

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can be defined as that branch of economic analysis which studies the
behaviour of not one individual unit but all the units combined together.
(i.e.) the study of Aggregates.
The word ‘Macro’ is derived from the Greek word ‘Macros’
meaning large. Hence macro economic is concerned with study of the
entire economy. It makes a telescopic approach to study the function of
an economy. It deals with aggregates like total output, total employment,
total savings, total investment, general price level etc. Since Macro
economics studies the economy in aggregates(large units), it is also
known as lumping method.
Macro economics does not deal with the individual parts of the
economy but with the economy as a whole. It studies the forest as a whole
and not the trees in it.
Micro economics Macro economics
1. The concept of Micro 1. Macro economics is concerned
economics deals with the study with the study of aggregates like
of individual units like national income, employment
consumers, firms etc. etc.
2. It is the traditional economic 2. It is the modern economic
approach followed by the neo- approach followed by modern
classical economists. economists like Keynes.
3. Micro economics analysis the 3. Macro economics analyses the
behaviour of micro variables behaviour of macro variables
such as individual demand, such as national income,
individual supply, price of a aggregate supply, aggregate
particular product, wages for a demand, aggregate savings etc.
particular worker etc.
4. Micro economics is also 4. Macro economics is also
called as Price theory. called as Income theory.
5. The scope of micro 5. Macro economics enjoys
economics is limited. It deals extensive scope. It is concerned
with theory of price and theory with monetary theory, income
of welfare. and employment theory, public
finance, international trade,
trade cycle, economic growth
etc.

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Consumer’s equilibrium :- “A consumer is said to be
equilibrium when he gets maximum level of satisfaction by spending his
limited income on purchase of any two goods”. A rational consumer will
therefore attempt to reach the highest possible indifferent curve and try
to obtain maximum level of satisfaction by spending his limited income.

The conditions or assumption of Consumer Equilibrium are _


Consumer equilibrium can be explained by making the following
assumption”:-
1. A consumer has a scale or preference for different combination of
any two goods and it remain constant throughout the analysis.

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2. A consumer has a fixed amount of income to be spend on any two
goods and he is spent his entire income on the purchase of the two
goods and does not save any part of his income.
3. Prices per unit of two goods X and Y are given and remain constant
throughout the analysis.
4. The two goods are perfectly divisible and substitutable to some
extent.
5. All the units of goods are homogeneous.
6. Consumer is a rational person & attempts to get maximum level of
satisfaction.

Budget line/Price line: Price line represents different


combination of any two goods X and Y which the consumer can actually
purchase. Assuming the fixed income of the consumer and price per unit
of X and Y is given.

Explain how the consumer is reaches his equilibrium combination on his


indifference map. OR explain consumer equilibrium under Indifference
curve analysis.
In order to explain consumer equilibrium under Indifference
curve analysis, we have to draw the Indifference Map and the
Budget/price line together as shown in the figure below.
Y

P A
r Q
o
d R
u IC3
c
t E
Y IC2
T IC1
s IC0

B X
ProductX

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A rational consumer will try to reach the highest possible
Indifference curve given his income and price per unit of the two goods X
and y.
The consumer will not be equilibrium below the Price line because
he will not be spending his entire income and he will not get maximum
level of satisfaction. On the other hand all the combination of X and Y
represented by the IC2 and IC3 are ruled out because his income is not
sufficient to reach any point on the IC2 and IC3.
The consumer equilibrium should be some where n the Budget line
neither below nor above. ‘E’ is the equilibrium point. The consumer will
not be equilibrium at any point on the Budget line above the point E
because MRSxy is greater. Similarly, he will not be equilibrium at any

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point below Equilibrium point E on the Budget line Because MRSxy is
lesser.

Price Elasticity Demand or concepts of Elasticity of Demand


The concept of Price elasticity of demand is introduced by Alfred
Marshall. According to Marshall, “Price elasticity of demand is the ratio
of percentage change in quantity demanded to the percentage change in
price.” This is stated in the form of a formula as,

Ep = Percentage change in quantity demand


Percentage change in price.

= Q
P

= Q X P
P Q
Where: Ep = Price elasticity of demand.
Q = Original demand.

P = Change in price.
Income Elasticity of Demand.
Income Elasticity of Demand refers to the Degree of
responsiveness of demand for a commodity due to a change in
consumer’s income. The formula for measuring income elasticity of
demand is as follows.
Ey = Percentage change in the quantity demanded
Percentage change in income.

Ey = Q X Y
Y Q

Where:- Ey = Income elasticity of demand.


Q = original demand
Y = original income
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Q = Change in Demand
Y = Change in Income

Practical uses of concept of elasticity of


Demand.
1. Useful to Businessman:- It guides the businessman in fixing the
price of his goods. He can raise the price of those goods having
inelastic demand and earn more profit. It is very helpful to
monopolists to maximize their profit.
2. Government Taxation Policy: While imposing taxes on
commodities, the Finance Minister has to keep in mind the
elasticity of demand for a commodity. If he levies taxes on goods
which have elastic demand, it is not profitable for Government.

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3. Price determination of joint products: In case of joint products like
cotton and cotton seeds, wool and mutton, etc. it is not possible to
calculate the cost of production separately as they are supplied
together. Therefore, the price of each product depends on the
elasticity of demand.
4. Determination of wages: Industrial workers get higher wages, if
the product produced by them has inelastic demand. Because the
producer is able to pay higher wages by fixing higher price for the
product which ha inelastic demand. If the demand is elastic, trade
unions cannot get their wages raised.
5. Pricing under monopoly:-Under discriminating monopoly the
monopolist charges different prices in different markets on the
basis of elasticity of demand.

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