Micro Economics

Micro-Economics
MICRO-ECONOMICS
Shubham Verma (6375475167)

Micro-Economics
UNIT - 1
INTRODUCTION
1. ECONOMY - It is a system which provides people the means to work and earn a
living.
Two Types of Economies:
a. Open Economy: Which has economic relations with other economies
b. Closed Economy: Which has no economic relation with other economies
2. SCARCITY – When there is higher demand of resources relative to its supply.

3. ECONOMIC PROBLEM - It is the problem of choice which arises due to-
a. Unlimited wants
b. Limited Resources
c. Alternative Uses of Resources
4. ECONOMISING OF RESOURCES - It means allocating the limited resources in such a

way that economy produces maximum goods and services to satisfy human wants
i.e. effective and efficient use of resources.
REASONS / CAUSES OF ECONOMIC PROBLEM

1. Limited Resources: Problem of Choice arises because resources are not enough to satisfy each and
every want of individual.
2. Resources Have Alternative Uses: Resources have alternative uses, when an individual chooses one
option then, that resource will not be available for other uses. Eg. Land, power
These two are the features of resources: resources have alternative uses and resources are limited.
3. Unlimited Human Wants: human wants are unlimited and it is a never ending cycle after satisfaction
of one want another want emerges.

Micro-Economics
MICRO – ECONOMICS MACRO - ECONOMICS

1. Micro economics deals with individual 1. It deals with the economy as a
economic units. whole.
2. The main tools are individual demand 2. The main tools are aggregate
and individual supply. demand and aggregate supply.
3. Micro economics is also known as 3. It is also known as Income and
Employment Theory
Price Theory.
4. Micro economics is concerned with 4. It is concerned with determination
price determination by a firm. of prices for the economy as a
whole.
5. E.g. Price of a product. 5. E.g. General price level.

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CAPITALIST ECONOMY SOCIALIST ECONOMY

1. In this economy all the means of 1. In this economy, all the means of
production are owned by Private production are owned by
Sector. Public Sector/Government.
2. In this economy, central problems are 2. In this economy all the central
solved by price mechanism i.e. problem are solved by the central
market forces of demand and supply planning authority.
3. Free market economy. 3. Centrally Planned economy.
CENTRAL PROBLEM OF AN ECONOMY (Problem of Allocation of Resources)

1. What to Produce: The problem of what to produce is essentially a problem of choice
regarding which goods should be produced and in what quantities by an economy.
The economy has to decide which goods will be produced, eg. Consumer goods or
capital goods. The economy has to choose the commodities keeping the needs of the
people in mind and allocate the resources in such a way that gives: MAXIMUM
SATISFACTION.
2. How to Produce: The problem of how to produce is essentially a problem of choice
regarding technique of production.
There are two types of techniques:
a. Capital Intensive technique (Machinery)
b. Labor Intensive technique (Labor)
The most efficient technique is selected which uses latest amount of resources
and MINIMISE COST.
OR
Labor surplus economy uses labor intensive techniques

Capital Surplus economy uses Capital Intensive Techniques.

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The Problem of Distribution of Income (Output)

3. For Whom to Produce: This problem refers to the selection of a category of people who
will ultimately consume the goods i.e. whether to produce for the rich/poor consumer.
We know that output in an economy is the result of combined effort of various factors of
production. Hence the output shall be distributed among such factors according to
CONTRIBUTION.
OR
PRODUCTION POSSIBILITY CURVE (PPC) OR PRODUCTION POSSIBILITY FRONTIER

TRANSFORMATION CURVE OR OPPORTUNITY COST CURVE
It is a curve which depicts all the possible combination of two goods which an economy can
produce with given resources and technology.
Assumptions:
a. Resources are fixed
b. Technology can’t be changed
c. Resources are fully used
d. Resources are not equally efficient in production of both goods.
MARGINAL OPPORTUNITY COST (MOC): It is the amount of one goods (say rice) sacrificed
to produce one more unit of another good (say wheat).
MARGINAL RATE OF TRANSFORMATION (MRT): It is defined as ratio of one good sacrificed

for production of one additional unit of other good.
MRT is the Slope of PPC
MRT = ∆ goods sacrificed

∆ goods produced

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PROPERTIES OF PPC:
- PPC is a downward sloping curve from left to right.
- It is concave to the origin because of increasing MOC.
- PPC can shift to the right or to the left.
SHIFT IN PPC
1. Rightward Shift: PPC shift rightward due to

- Discovery of new natural resources i.e. increase in natural resources.
- Advancement in technology.
- Increase in labour through population growth.
- Introduction of foreign capital in the economy (trade and investment)
- Training and development of employees. etc.
- Any factor which increases the resources of an economy.
2. Leftward Shift: PPC shifts leftwards due to
- Natural calamities (earthquake, flood etc.)

- Decrease in population
- Use of Obsolete technology
- Breakdown of machinery
ROTATION OF PPC
1. When technology is efficient for good x, keeping the technology constant for good y,
then PPC rotates from aq to aq1 as this will increase productivity of x.
2. When technology is efficient for commodity y, keeping the technology constant for
good x, then PPC rotates from aq to a1q as this will raise the productivity of y.

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OPPORTUNITY COST is the cost of next best alternative foregone.

eg. A given piece of land is equally fit for production of rice, wheat and gram.
It yields 10,000, 9,000 and 8,000 respectively.
A farmer has 3 opportunities with same cost of production. Therefore, he decides to produce rice.
In this case, the opportunity cost of producing rice is 9000, that is cost of next best option/alternative
foregone.
Very Short Answer Type Questions(1 Mark)

1. With the help of an example, define micro economics.
Ans. Micro Economics is that branch of economics in which economic problems are
studied at individual level e.g. the behaviour of consumer, firms, etc.

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2. Define macro economics with the help of an example.

Ans. Macro economics is that branch of economics which studies the economy as a
whole and its aggregates e.g. National income, the level of employment.
3. Define opportunity cost.
Ans. For the selection of an opportunity, the sacrifice of next best alternative use is
called opportunity cost.
4. Why does an economic problem arise?
Ans. An economic problem arises due to scarcity of resources having alternative uses
in relation to unlimited wants.
5. Write two characteristics of resources.
Ans. Resources are scarce (limited) and they have alternative uses.
6. What do you mean by scarcity?
Ans. Scarcity refers to a situation in which demand is more than supply
7. What do you mean by marginal opportunity cost?
Ans. Marginal rate of transformation (MRT) is the ratio of one good sacrificed to
increase one more unit of the other good.
8. What do you mean by an economy?
Ans. An economy is an economic organisation which provides sources to earn
livelihood.
9. Why is there a need for economizing of resources?
Ans. Because resources are limited.
10. Why does economic problem arise?
Ans. It arises mainly because of scarcity of resources.
11. Why is PPC downward sloping from left to right?
Ans. Because in situation of full employment of resources, production of one good
can be increased only with less of other good.
12. What does a rightward shift of PPC indicate?
Ans. The rightward shift of PPC indicates growth of resources or technological
progress.
13. Why does the problem of choice arise?
Ans. Relative scarcity of resources having alternative uses in relation to unlimited
wants, gives rise to an economic problem.
14. Why does PPC look concave to the origin?
Ans. PPC is concave to the origin because of increasing marginal rate of
transformation (or increasing marginal opportunity cost).
15. Which factor lead to a shift of PPC towards right hand side?
Ans. Growth of resources or technological progress leads to a shift of PPC towards
right-hand side.
16. What does a point below PPC indicate?

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Ans. It shows inefficient/under utilization of resources.

17. What does slope of PPC show?
Ans. Negative slope of PPC shows that in order to produce more units of one good,
some units of the other good must be sacrificed.
18. When allocation of resources is considered as inefficient?
Ans. Allocation of resources is considered as inefficient when economy performs
below the PPC curve.
Short Answer Type Questions(3-4 Marks)

1. Draw PPC and show the followings:-
a. Full employment of resources,
b. Underutilisation of resources, and
c. Growth of resources.
Ans.
d. Full employment of resources - A point anywhere on the PPC, shows the
efficient use or full employment of resources.
e. Underutilisation of resources - A point anywhere inside of the curve, shows
inefficient/under utilisation of resources.
f. Growth of resources – It refers to the shift in PPC. If more resources are
generated, the level of production will increase. In the figure it is represented
by a shift in PPC from PP to P’P’.

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2. Why does PPC look concave to the origin? Explain.

Ans. PPC looks concave to the origin because of increasing marginal rate of
transformation/substitution (or increasing marginal opportunity cost). It means that
more and more units of commodity ‘y’ are to be sacrificed, to get each additional
unit of commodity ‘x’.
3. What does a PPC show? When will it shift to the right?
Ans. Production Possibility Curve shows the different combinations of two goods
which an economy can produce with available technology and resources.
It would shift towards right-hand side in case of growth of resources or technological
progress.
4. Does production take place only on the PP curve?
Ans. Yes and no, both. Yes, if the given resources are fully and efficiently utilized. No,
if the resources are underutilized or inefficiently utilized or both.
Refer to the above figure; on a point anywhere on the PPC the resources are fully
and efficiently employed. On point U, below the PPC or any other point but below
the PPC, the resources are either underutilized or inefficiently utilised or both. Any
point below the PP curve thus highlights the problem of unemployment and
inefficiency in the economy.
5. Why does an economic problem arise? Explain.

Ans. Reasons-
a. Unlimited wants - Human wants go on multiplying with the expansion of
education, knowledge, scientific advancement and economic growth. A man
can not satisfy all of his wants and therefore he has to make a choice in order
of urgency.
b. Limited resources - The resources are limited in relation to need for them. It
is the main cause of economic problem.
c. Alternative use of resources - A resource can be utilized in a different way
and for different purposes. Therefore choice has to be made among different
uses of resources.
6. Calculate MRTXY at different production possibilities from the following
hypothetical data. Draw a PPC on the basis of the schedule.
Production possibilities Commodity X Commodity Y
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 O
Ans.
Production possibility Schedule
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Marginal Rate of Transformation

Production possibilities Commodity X Commodity Y
(MRT) =ΔY/ΔX
A 0 15 -------------
B 1 14 1X:1Y
C 2 12 2X:1Y
D 3 9 3X:1Y
E 4 5 4X:1Y
F 5 0 5X:1Y

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7. Why is a production possibilities curve concave? Explain.

Ans. The production possibility curve being concave means that MRT increases as we
move downward along the curve. MRT increases because it is assumed that no
resource is equally efficient in production of all goods. As resources are transferred
from one good to another, less & less efficient resources have to be employed. This
raises cost and raises MRT.
8. Explain properties of a production possibilities curve.

Ans. There are two properties of a production possibilities curve.
a) Downward sloping : It is because as more quantity of one good is produced
some quantity of the other good must be sacrificed.
b) Concave to the origin : It is because the marginal rate of transformation
increases as more of one good is produced.
9. Explain the problem of ‘what to produce’.

Ans. An economy can produce different possible combinations of goods & services
with given resources. The problem is that, out of these different combinations,
which combination is produced. If production of one good increases then less
resources will be available for other goods.
10. What is ‘Marginal Rate of transformation’? Explain with the help of an example.
Ans. MRT is the rate at which the units of one good have to be sacrificed to produce one
more unit of the other good in a two goods economy Suppose an economy produces only
two goods X and Y. Further suppose that by employing these resources fully and efficiently,
the economy produces 1X + 10Y. If the economy decides to produce 2X, it has to cut down
production of Y by 2 units. Then 2Y is the opportunity cost of producing 1X. Then 2Y:1X is the
MRT.
11. Explain the problem ‘How to produce’.
Ans. Broadly, there are two techniques of production.
a) Labour intensive Technique : Under this technique, production depends
more on the use of labour.
b) Capital Intensive Technique : Under this technique, production depends
more on the use of machines (called capital) efficient technique of
production is that which uses minimum possible inputs for a given amount of
output. So that, cost per unit of output is minimised.

Micro-Economics
UNIT 2
CONSUMER’S EQUILIBRIUM AND DEMAND
1. UTILITY- It is the power or capacity of a commodity to satisfy human wants. It is measured in Utils
2. MARGINAL UTILITY- It is the additional utility derived from consumption of one additional unit of a
commodity.
3. TOTAL UTILITY- It is the sum of all the utilities derived from consumption of certain
number of units of a particular commodity.
CARDINAL UTILITY ORDINAL UTILITY

1. Utility is measurable and 1. Utility is a psychological concept.
Quantifiable concept. 2. Expressed in terms of Rank i.e.
2. Utility is expressed numerically in consumer gives his preference.
utils 3. Given by prof. J R Hicks.
3. Given by prof. Alfred marshal
LAW OF DIMINISHING MARGINAL UTILITY (DMU) OR FUNDAMENTAL LAW OF

SATISFACTION OR FUNDAMENTAL PSYCHOLOGICAL LAW
Law: This law states that as more and

more units of a commodity is consumed,
than the marginal utility keeps on
decreasing.

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Assumptions:
- Utility can be measured in quantitative terms i.e. utils

- It is assumed that consumption is a continuous process
- No change in quality.
- Rational consumer i.e. consumer is rational and aims at maximizing total
satisfaction.
CONSUMER’S EQUILIBRIUM
It is a situation under which the consumer spends his given income in such a wat that he gets MAXIMUM
SATISFACTION.
Two approaches:
- Utility Approach (cardinal) (By Alfred Marshall)
(i) Single commodity
(ii) Two commodity
- Indifference curve approach (ordinal) ( by J.R. Hicks)
UTILITY APPROACH
Assumption
- Utility can be measured

- Consumer is rational
- Price of the commodity is given (constant)
- Income of the consumer is given (constant)
SINGLE COMMODITY:
Equilibrium Condition
MU in terms of money (MUm) = Price of commodity (Px)
I.e.

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WHY MUM = PX IS THE EQUILIBRIUM CONDITION?
1. Before point E, MUM > PX which signifies that consumer is willing to pay more
than what he actually pays. So he will consume more of good X.
2. After point E, MUM < PX, signifies that consumer is willing to pay less than what
he actually pays, so he will reduce the consumption of good X.
3. Conclusion – From the above two points we infer equilibrium is struck at point E
when the price consumer is willing to pay is exactly equal to the price he actually
pays.
UTILITY APPROACH (TWO COMMODITIES)
1. Consumer equilibrium definition – SAME
2. Assumption – SAME
3. Consumer’s equilibrium conditions
MUX = MUY = MU of last rupee spent on each good.

Px Py
Law of Diminishing Marginal Utility must prevail
1. If MUX/PX > MUY/PY , Then it implies that additional utility derived from spending last
rupee on Good X is more than the additional utility derived by spending it on good Y.
Due to this, the consumer will increase the consumption of good X (or decrease the
consumption of good Y), this will continue till MUX/PX = MUY/PY
2. If MUX/PX < MUY/PY , then it implies that additional utility derived from spending last rupee on good x is less
than the additional utility derived by spending it on Good Y. Due to this, the consumer will increase the
consumption of good Y (or decrease the consumption of Good X), this will continue till MUX/PX=Muy/Py
Law Of Equi Marginal Utitlity (Law Of Substitution) or Law Of Maximum Satisfaction

In order to maximize the satisfaction, the consumer should spend his money income on two good in such a manner that the
ratio of MU of commodity to its price becomes equal to the ratio of MU of other commodity to its price, i.e. MUX = MUY
Px Py
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INDIFFERENCE CURVE ANALYSIS (ORDINAL APPROACH) (J R Hicks)
1. Bundle: It is a set of two commodities that a consumer can buy with his given income at prevailing
market prices.
2. Budget set: It is a set of all the bundles that a consumer can buy with his given income at prevailing
market prices.
3. Budget constraint: It shows what a consumer can afford to spend with his given
income. It is given by
Bundle Good X Good Y Total Expenditure

A 0 10 20 Let Income = 20 (M)
B 1 8 20 Price of apple (Good X) 4
C 2 6 20 Proce of Orange (Good Y) 2
D 3 4 20
E 4 2 20
F 5 0 20
P1.X1 + P2.X2 <=M
Here, P1 = Price of good 1

X1 = Quantity of good 1
P2 = Price of good 2
X2 = Quantity of good 2
M = Money Income
4. Budget Line: It represents the different bundles that a consumer can buy spending
his entire income.
5. Budget Line: is a downward sloping because money income is fixed and if we want
to increase the quantity of one good, then we have to sacrifice some quantity of
other good. (Slope of Budget line is Straight)
Budget line equation-
P1.X1 + P2+X2 = M
6. Slope of budget line

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P1/P2 = Ratio of Prices of 2 Goods = market rate of exchange (MRE)
WHEN DOES A BUDGET LINE SHIFT
1. RIGHTWARD SHIFT – Budget line shifts to the right only because of two reasons-
(a) When the income of the consumer increases.
(b) When the prices of both the goods decreases.
2. LEFTWARD SHIFT – Budget line shift to the left when the following situations occur-
(a) When the income of the consumer decreases.
(b) When the Prices of Both the goods Increases.

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INDIFFERENCE CURVE
1. It is a curve which shows all the combination of two goods that give equal
satisfaction to the consumer.
2. Indifference map: It is the collection of ICs that represent different level of
satisfaction.
3. Monotonic preferences: A consumer prefers a bundle where at least one
commodity is more if not both. For example- A consumer will prefer (10, 9) over
(9, 9).
MARGINAL RATE OF SUBSTITUTION

It is the rate at which the consumer is willing to give up good Y in order to get additional unit
of good X.
MRSXY = ∆ goods sacrificed (Y)

∆ goods gained (X)
CONSUMER’S EQUILIBRIUM (IC Approach or Ordinal Approach)

Assumptions-
1. Consumer is rational
2. Utility is ordinal
3. Consumer has monotonic preference
4. Price of goods and income of consumer is fixed or given.
5. Consumption of at least two goods must be there.
EQUILIBRIUM CONDITION
 =
=
Or where budget line is tangent to IC curve
 MRSXY is diminishing i.e. IC should be convex to the origin.
- At Point A (MRSXY > PX/PY) – It implies that the consumer is willing to sacrifice
MORE units of Y as compared to what is required in the market to obtain one
more unit of X, due to which he will increase the consumption of good X, which
lead to fall in the utility of good X and finally MRSXY starts falling till the time
MRSXY = PX/PY
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- At Point B (MRSXY < PX/PY) –

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- At Point H – Point H is desirable since it has on IC 3, but it is unattainable as it is

beyond the budget line.
- The consumer will attain the equilibrium at point E where the budget line is
tangent to the IC. It is the only combination which the consumer is willing to buy
and is able to buy.
PROPERTIES OF INDIFFERENCE CURVE
1. Two indifference curves never intersect each other.
2. Higher the IC, higher the satisfaction.
3. IC is downward sloping and convex to the origin.

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DEMAND
Quantity of a commodity which a consumer is willing to buy at a given price during a

particular period of time. It is also known as desire backed by purchasing power.
Factors Affecting Demand / Determinants of Demand
1. Price of commodity (PX): Price of the commodity has an inverse relationship with the
quantity demanded of the commodity i.e. if price of good X increases, then quantity
demanded for good X falls.
2. Price of related goods (PR):
- Substitute goods –
- Complimentary goods –

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3. Income of the consumer (Y): As the income of the consumer changes, the quantity
demanded of various goods increase, decrease or remains constant.
- Normal goods-
- Inferior goods-
- Necessity goods-
4. Taste and Preference (T): Taste and preference of the consumer also affects the
quantity demanded of the good. In case of favorable taste, demand for the good will
be higher. In case of unfavorable taste demand for good will generally lower.
5. Other Factor (O): Example Demand for goods in fashion is generally higher.
DEMAND FUNCTION
It depicts the relationship between quantity demanded and determinants of demand.
DX = f (PX, PR, Y, T, O).
Here, DX = Quantity demanded of good X
PX = Price of good X
PR = Price of related good
Y = Income of consumer
T = taste and preference
O = other factors
Demand Schedule – It is a showing different quantity of

commodity demanded at different prices during a given period of time.
Price of Good X (PX) Quantity demanded of Good X

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Law of Demand – It states that being other things constant ( ), quantity

demanded for a commodity is inversely related to its price.
Assumption of law of demand –

1. Price of related good remains constant.
2. Income of the consumer remains constant.
3. No change in Taste and Preference of the consumer.
4. Other factors also remain constant.
Demand Curve – It is also a graphical representation showing different quantity of

commodity demanded at different prices during the given period of curve.
Exception of Law of demand
1. Giffen goods (Sir Robert Giffen) –
2. Conspicuous goods-
3. Necessity goods –

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4. Emergency goods –
5. Future expectations –
WHY DOES THE LAW OF DEMAND OPERATE?

OR
WHY IS THERE AN INVERSE RELATION BETWEEN PRICE AND QUANTITY DDEMANDED?
OR
WHY IS DEMAND CURVE DOWNWARD SLOPING?
OR
WHY DOES THE CONSUMER BUY MORE OF A COMMODITY WHEN ITS PRICE FALLS?
1. Law of diminishing marginal utility – As more and more unit of a commodity is

consumed, the utility derived from it goes on decreasing. So the price has to be
decreased to sell more units of a commodity.
2. Income effect - When the price of a commodity falls, the real income i.e. purchasing
power of the consumer increases which leads to increase in the quantity.
3. Substitution effect – Substituting a cheaper commodity for a relatively expensive

commodity is known as substitution effect. Therefore, demand of a commodity falls
when its price rises.
4. Number of consumers – When price of a commodity falls, new consumers enter the
market and start buying more of that good. Therefore its demand increases when
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the price falls.

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CHANGE IN QUNATITY DEMANDED CHANGE IN DEMAND
EXPANSION IN DEMAND
Reason – Fall in price of a commodity.
Explanation –
Schedule –
PRICE OF GOOD X (PX) QUANTITY OF DEMANDED (QX)

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CONTRACTION IN DEMAND
Reason – Rise in price of a commodity.
Explanation –
Schedule –
PRICE OF GOOD X (PX) QUANTITY DEMANDED OF GOOD X (QX)
INCREASE IN DEMAND
Reason –
1.
2.
3.
4.
5.
Explanation –
Schedule -
PRICE OF GOOD X QUANTITY OF GOOD X

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DECREASE IN DEMAND
Reason –
1.
2.
3.
4.
5.
Explanation –
Schedule –
PRICE OF GOOD X QUANTITY OF GOOD X
“RISE IN INCOME OF THE CONSUMER WILL ALWAYS INCREASE THE DEMAND OF A

COMMODITY.” DEFEND OR REFUTE.
I refute the given statement. The above statement holds true only in case of normal good
but in case of inferior good the demand falls with rise in income and in case of necessity
goods the demand does not change with rise in income.
Conclusion – We can conclude that a rise in income will not always increase the demand of
commodity.
MARKET DEMAND
It is the aggregate of quantities demanded by all the consumers in the market at different
prices during a given period.
For example:
PX QD(A) QD(B) QD(C) MARKET
DEMAND

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Factors affecting Market Demand:
1. Price of the commodity

2. Price of related goods
3. Income of the consumer
4. Taste and Preference
5. Other factors
6. No. of consumer/population: If the no. of consumers in the market increases then
market demand also increases and vice versa and therefore there is a direct relation
between no. of consumers.
7. Distribution of income: If the distribution of income increases inequally i.e. the rich
becoming richer and the poor becoming poorer the demand for luxury goods is
expected to rise and also poor people will increase the demand for inferior good.
ELASTICITY OF DEMAND
1. Price Elasticity of demand –
2. Income elasticity of demand –
3. Cross elasticity of demand –
Degree of Elasticity of Demand
1. Perfectly Inelastic (Ed = 0): It means that quantity demanded does not change
at all with the change in price. In this case, demand curve is parallel to Y-axis.
2. Perfectly elastic (Ed = ∞): It means that the demand changes without any
change in price. In this case, demand curve is parallel to X-axis.
3. Less than elastic (inelastic) (Ed < 1): It means that % change in demand is less
than % change in its price. In this case the demand curve is Steeper.
4. More than elastic (elastic) (Ed > 1): It means that % change in demand is more
than the % change in price. In this case demand curve is Flatter.

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5. Unitary elastic (unit elastic) (Ed = 1): It means that % change in demand is
equal to % change in price.

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METHODS OF CALCULATING ELASTICITY - Proportionate Method (% age method)
Ed = % change in quantity demanded

% change in price
% change in Q =
OR
% change in P =
Ed is always NEGATIVE because price and demand has inverse relation
FACTORS AFFECTING ELASTICITY OF DEMAND
1. No. of close substitutes: If a good has a large number of substitutes then its demand
is likely to be highly elastic because a very small increase in price would result in
consumer’s shifting to other products. Example- pens, soaps, etc. On the other hand
if a commodity does not have close substitutes, then its demand is likely to be
inelastic. Example- Textbooks.
2. Nature of commodity: The demand for luxury goods like perfume, expensive cars are
generally elastic because in response to any price change, the quantity demanded
changes by large percentage. On the other hand, demand for necessity goods.
Example- food, salt are generally inelastic.
3. Time period: If the time period available to the consumer is short, then generally
demand is inelastic. On the other hand, if the time period available to the consumer
is long, then demand is generally elastic.
4. Proportion of Total expenditure on commodity : If the amount spent on the product

constitutes a big proportion of TE, then demand for the product is elastic. On the
other hand, if very small proportion of TE is spent on a product then demand is likely
to be inelastic. Example- Matchbox.
5. Number of uses: If a commodity can be put to many uses then its demand is likely to
be elastic. Example- Milk, elastic etc.

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6. Habits of consumer: Commodities in habits generally have low elasticity. Example-

Cigarettes, alcohol.

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(Demand Elasticity Numericals)
Q1 :- When the price of a good falls by 10% then its demand increases by 15%. Find
elasticity of demand.
Q2 :- At a price of Rs. 20 per unit, the quantity demanded of a commodity is 300 units.
When its price falls by Rs. 4, its quantity demanded rises to 450 units. Calculate its price
elasticity.
Q3 :- The quantity demanded of commodity at price of Rs. 8 is 600 units. Its price falls by
25% and quantity demanded rises by 120 units. Calculate elasticity of demand.
Q4 :- At a price of Rs.50 per unit, the quantity demanded of a commodity is 1000 units.
When its price falls by 10%, its quantity demanded rises to 1080 units. Calculate its price
elasticity.
Q5:- Price elasticity of demand 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%?
Q6 :- A consumer buys 100 units of a good at a price of Rs.5 per unit. When price changes
he buys 140 units. Calculate the new price if elasticity of demand is 2.
Q7 :- Price of the commodity increases from 50 to 60. Quantity demanded initially was
200 units. What should be the new quantity so that elasticity of demand is established to be
unitary ?
Q8 :- The market price of a good changes from Rs.5 to Rs.4. As a result, the quantity
demanded rises by 12 units. The price elasticity is 1.5. Find initial and final quantity.
Q9 :- When the price of a commodity rises from Rs. 10 to Rs. 11, its quantity falls by 100
units. Its price elasticity is 2. Calculate its quantity at increased price.
Q10 :- A consumer buys 14 units of a good at a price of Rs. 8 per unit. At a price Rs. 7 per
unit he spends Rs. 98 on the good. Calculate price elasticity by percentage method.
Q11 :- Commodities X and Y have equal price elasticity of demand. The demand of X rises
from 400 units to 500 units due to a 20% fall in its price. Calculate percentage fall in
demand of Y if its price rises by 8%.
Q12 :- The price elasticity of demand of Good X is half the price elasticity of demand of Good
Y. A 10% rise in the price of Good Y results in fall in demand from 400 units to 280 units.
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Calculate the percentage change in quantity demanded of Good X when its price falls from
Rs. 20 to Rs. 18 per unit ?

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Q13 :- Consider the demand curve D(p) = 12 - 5p. What is the elasticity at price 7/5 ?
Q14 :- Consider the demand curve D(p) = 14 - 3p. What is the elasticity at price 5/3 ?
Very Short Answer Type Questions(1 Mark)

1. What is meant by utility?
Ans. Utility is the power of goods to satisfy human wants.
2. How is Total utility derived from marginal utilities?
Ans. Total utility is derived by summing up the marginal utilities TU = Sum of MU.
3. What is Law of Diminishing Marginal Utility?
Ans. Law of diminishing marginal utility states that as more and more units of a
commodity are consumed marginal utility derived from every additional unit must
decline.
4. What will be the behaviour of total utility when marginal utility is zero?
Ans. Total utility will be maximum.
5. State condition of consumer’s equilibrium in respect of one good.
Ans. MUX = Px
6. Define consumers equilibrium.
Ans. Consumers equilibrium refers to a situations in which a consumer gets
maximum satisfaction from his given income and market price.
7. What is meant by Marginal Rate of Substitution (MRS).
Ans. MRS is the rate of sacrifice of one good to get an additional unit of other good.
8. What is meant by budget set.
Ans. The set of bundles available to the consumer with his given income at
prevailing market price is called the budget set.
9. Define Indifference curve Map.
Ans. A family of indifference curve indicating different levels of satisfaction called
indifference map.
10. How is budget line defined?
Ans. Budget line is a line showing all different possible combinations of two goods
which a consumer can buy with his given income and the price of both goods.
11. Why does higher indifference curve give more satisfaction?
Ans. Higher difference curve shows a higher level of satisfactions. It shows the
various combinations of excess quantity of both goods than lower indifference curve.
12. What is the impact of diminishing marginal rate of substitution on the slope of
indifference curve?
Ans. Indifference curve become convex towards the origin.
13. Define monotonic preference.
Ans. Consumer’s preferences are called monotonic when between any two bundles,

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one bundle has more of one good and no less of other good.
14. How is market demand schedule derived with the help of individual
demand schedules?
Ans. By summations of individual schedules.
15. Define normal good.
Ans. Normal goods are those goods, the demand for which increases as income of
the buyer rise. There in positive relation between income and demand of these
goods.

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16. How does availability of substitute good affect the elasticity of demand?
Ans. The demand of a good becomes elastic if its substitute good is available in the
market.
17. Demand of good ‘X’ falls due to increase in the income of the consumer what type
of good ‘X’ is?
Ans. Good ‘X’ is an inferior good.
18. What will be the impact on demand of the good due to increase in price of the
substitute good?
Ans. The demand of the good will increase.
19. A rise in price of a good results in a decrease in expenditure of it. Is its demand
elastic or inelastic?
Ans. Elastic.
20. What is meant by market demand?
Ans. Market demand is the sum of total demand of all the consumers in the market
at a particular time and at a given price.
21. Define demand schedule.
Ans. Demand schedule is a tabular representation which represent different
quantities of the commodity demanded at different prices.
22. What cause an upward movement along a demand
curve? Ans. Increase in price while other factors are
constant.
23. If the number of consumers increase, in which direction will the demand curve
shift?
Ans. Rightward.
24. A straight line demand curve is given. What will be elasticity of demand on the mid
point of this curve.
Ans. Equal to unit.
25. If the slope of a demand curve is parallel to X-axis, what will be the elasticity of
demand?
Ans. Perfectly elastic.
26. Why is demand of water inelastic?
Ans. Because water is a necessity good.
27. Define price elasticity of demand.
Ans. The price elasticity of demand is the degree of responsiveness of quantity
demanded of a commodity to the change in its price.

1. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’ of a
commodity.

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Ans. When demand increases at given price then it is called ‘increase in demand’. On
the other hand, when demand increases by decrease in the price of a commodity
then it is called increase in quantity demand.
2. Given price of a good, how does a consumer decide as to how much of that good to
buy?
Ans. Consumer purchases up to the point where marginal utility is equal to the price
(MU=P). So long as marginal utility is greater than price, he keeps on purchasing. As
he makes purchases MU falls and at a particular quantity of the good MU becomes
equal to price. Consumer purchases up to this point.

Micro-Economics
3. Explain how the demand for a good is affected by the price of its related goods.
Give examples.
Ans. Related goods are either substitutes or complementary
Substitutes Goods : When price of a substitute falls, it becomes cheaper than the
given good. So the consumer substitutes it for given good will decrease. Similarly, a
rise in the price of substitute will result in increase in the demand for given good.
For example Tea and Coffee.
Complementary Goods : When the price of a complementary good falls its demand
rises and the demand for the given good will increase. Similarly when price of
complementary good increases, then demand for given good decreases.
For example : – Car & Petrol.
4. Distinguish between normal goods and inferior goods. Give example also.
Ans. Normal Goods : These are the goods the demand for which increases as income
of the buyer rises. There is a positive relationship between income and demand or
income effect is positive.
Example ; Rice, Wheat
Inferior Goods : These are the goods the demand for which decreases as income of
buyer rises. Thus, there is negative relationship between income and demand or
income effect is negative.
Example : coarse grain, coarse cloth.
5. Explain any four factors that affect price elasticity of demand.
Ans.
1. Nature of Commodity : Necessaries like Salt, Kerosene oil etc. have inelastic
demand and luxuries have elastic demand.
2. Availability of substitutes : Demand for goods which have close substitutes is
relatively more elastic and goods without close substitutes have less elastic
demand.
3. Different uses : Commodities that can be put to different use have elastic
demand for instance electricity has different uses.
4. Habit of the consumer : Goods to which consumers become habitual will
have inelastic demand.
Examples – Liquor and Cigarette.
6. Explain relationship between total utility and marginal utility with the help of a
schedule.
Ans.
Quantity (Units) Total utility Marginal utility
0 0 –
1 8 8
2 14 6
3 18 4

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4 20 2
5 20 0
6 18 –2
1. As long as MU is positive, TU increases at diminishing rate.
2. When marginal utility is equal to zero then total utility is maximum.
3. When marginal utility is negative; Total utility starts diminishing.

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7. Define marginal utility. State the law of diminishing marginal utility.

Ans. Marginal Utility : It is addition more to the total utility as consumption is
increased by one more unit of the commodity.
Law of Diminishing Marginal utility : It states that as consumer consumes more and
more units of a commodity, the utility derived from each successive unit goes on
decreasing. According to this law TU increases at decreasing rate and MU decreases.
Higher Order Thinking Skills

1. Why does total utility increases at diminishing rate due to continuous increase in
consumption?
Ans. As more and more units of commodity are consumed, marginal utility derived
from each successive unit tends to diminish so total utility increases at diminishing
rate up.
2. Due to decrease in price of pen why does the demand of ink increase?
Ans. These are complementary goods.
3. What will be the behaviour of total utility when marginal utility curve lies below X-
axis?
Ans. Total utility start to decline.
4. When is demand inelastic?
Ans. When percentage change in quantity demanded is less than percentage change
in price, the demand is said to be inelastic.
5. Give two examples of normal goods & inferior goods.
Ans. Normal goods – Rice, Wheat
Inferior goods – coarse grain, coarse cloth.
6. Determine how the following changes (or shifts) will affect market demand curve
for a product.
a. A new steel plant comes up in Jharkhand people who were previously
unemployed in the area are now employed. How will this affect the
demand for colour T.V. and Black and White T.V. in the region?
b. In order to encourage tourism in Goa. The Government of India suggests
Indian Airlines to reduce air fare to Goa from the four major cities of
Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces
the fare to Goa, How will this affect the market demand curve for air travel
to Goa?
c. There are train and bus services between New Delhi and Jaipur. Suppose
that the train fare between the two cities comes down. How will this affect
demand curve for bus travel between the two cities?
Ans:
d. There will be rightward shift in market demand curve for colour and Black
and White T.V. This is because of increase of income of the people due to
employment in the new steel plant.
e. The demand for travel to Goa will expand in response to reduction in the air
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f ent along the demand curve. There will be no shifts in the demand curve.
a f. As train fare comes down the demand for bus travel will reduce. Demand
r curve for the bus travel will shift to the left showing less demand at the same
e price.
.
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7. If a good can be used for many purposes, the demand for it will be elastic. Why?
Ans: If a good can be used for many purposes , the demand for it will be more elastic
because with a decrease in its price it is put to several uses and with a rise in its price
it is withdrawn from its many existing uses. So that, there is a considerable change in
demand in response to some change in price.

Micro-Economics
UNIT – 3
PRODUCER’S BEHAVIOUR AND SUPPLY
SUPPLY – It is defined as quantity of a commodity that a producer is willing and able to sell
at a given price during a given period of time.
Determinants of supply (or factors affecting supply)
1. Price of the commodity (Px):
2. Price of other related good/competitive good (Pr):
3. Cost of factors of production example inputs, raw material, labour etc. (F):
4. Technology (T): Advanced technology reduces the cost of production, leading to

more profits and as a result supply increases.
5. Other factors (O):

(a) Excise duty –

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(b) Subsidies –

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SUPPLY FUNCTION
It is a technical function which gives the relationship between supply of a commodity and its
determinants.
SX = f (PX , Pr , F, T, O)
LAW OF SUPPLY (QUALITATIVE STATEMENT): It states that being other things constant
(CETERIS PABIBUS), there is a direct relationship between price of the commodity and its
quantity supplied.
Assumptions of law of supply

1. Price of other related goods remains constant.
2. Costs of factors of production do not change.
3. Technology remains constant.
4. Other factors example – Excise duty, subsidy etc. do not change.
SUPPLY SCHEDULE
It is a tabular presentation showing a direct relationship between quantity supplied and
price of the good.
PRICE OF GOOD X (PX) SUPPLY OF GOOD X (SX)
SUPPLY CURVE
It is a graphical representation showing a direct relationship between price of a commodity
and quantity supplied.

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CHANGE IN QUANTITY SUPPLIED CHANGE IN SUPPLY

1. Due to change in Price of the 1. Due to change in factors other than
commodity. price.
2. Movement along supply curve. 2. Shift in supply curve.
3. Types (a) Expansion in supply. (b) 3. Types (a) Increase in supply. (b)
Contraction in supply. Decrease in supply.
EXPANSION IN SUPPLY
Reason – Increase in price of the commodity.
Explanation –
Schedule –
PRICE OF GOOD (PX) QUANTITY OF SUPPLIED (SX)
CONTRACTION IN SUPPLY
Reason – Decrease in price of the commodity.
Explanation –
Schedule –
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PRICE OF GOOD (PX) QUANTITY SUPPLIED (SX)

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INCREASE IN SUPPLY
Reasons –
1. Decrease in price of other related good.
2. Advancement in technology.
3. Decrease in cost of factors of production (i.e. inputs, raw material etc.)
4. Fall in excise duty.
5. Rise in subsidies.
6. Increase in number of firms in the market.
7. Change in goal of producer from profit maximization to sales maximization,
8. Improvement in business expectation promoting higher investment.
Explanation –
Schedule –
DECREASE IN SUPPLY
Reasons –
1. Increase in price of other related good
2. Rise of obsolete technology.
3. Increase in cost of factors of production.
4. Rise in excise duty.
5. Fall in subsidy.
6. Decrease in number of firms in the market.

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7. Change in goal of producer from sales maximization to profit maximization.

8. Erosion of business expectation promoting a cut in investment.

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Explanation –
Schedule –
MARKET SUPPLY
Quantities of a commodity that all the firms in a market are willing to sell at different prices
during a given period of time are called market supply.
Market supply schedule – It is a tabular presentation showing the quantities of a commodity

that all the firms in a market are willing to sell at different prices at a given period of time.
PRICE QS (A) QS (B) QS (C) MARKET SUPPLY
10 100 80 60 240
9 90 70 50 210
8 80 60 40 180
7 70 50 30 150
6 60 40 20 120
A, B, C are individual producers (firm)
Market supply curve – It is a graphical representation showing the quantities of a

commodity that all the firms in a market are willing to sell at different prices at a given
period of time. Graphically, it is the “horizontal summation” of all individual supply curve.

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PRICE ELASTICITY OF SUPPLY (DEGREES)
1. Perfectly Inelastic (Es = 0): It means that quantity supplied does not change at
all with the change in price. In this case, supply curve is parallel to .
2. Perfectly elastic (Es = ∞): It means that the supply changes without any
change in price. In this case, supply curve is parallel to .
3. Less than elastic (inelastic) (Es < 1): It means that % change in supply is less
than % change in its price. In this case the supply curve is .
4. More than elastic (elastic) (Es > 1): It means that % change in supply is more
than the % change in price. In this case supply curve is .
5. Unitary elastic (unit elastic) (Es = 1): It means that % change in supply is equal
METHODS OF CALCULATING ELASTICITY

1. Proportionate Method (% age method)
ES = % change in quantity supplied

% change in price
OR % change in Q = Q1 – Q0 x 100
Q0
ES = ∆Q X P0
∆P Q0 % change in P = P1 – P0 x 100
P0
= Q 1 – Q 0 X P0
P1 – P0
Q0
ES is always POSITIVE because price and supply has direct relation

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FACTORS AFFECTING ELASTICITY OF SUPPLY
1. Cost of Production – If the expected cost of production increases with increase in

production then supply will be inelastic.
2. Nature of commodity – In case of durable goods, elasticity of supply is generally

greater than 1, whereas in case of non-durable goods (perishable goods) generally
elasticity is less than one.
3. Time Period – Longer the time period, higher will be the elasticity because over a
long period of time, factors are easily available.
4. Risk Taking – If the entrepreneur is willing to take the risk of higher output, than
supply will be more elastic.
5. Nature of Input used – If easily available inputs are used, then supply will be elastic
and in case of scarcely available resources, supply will be inelastic.
ELASTICITY OF SUPPLY:
1. If price elasticity of supply of a commodity is 5. A producer supplies 500 units of

this product at a price of Rs. 5 per unit. How much quantity of this product will
be supplied, at the price of Rs. 6 per unit?
2. Due to a 10 per cent rise in the price of a commodity, its quantity supplied rises
from 400 units to 450 units. Calculate its price elasticity of supply. Is the supply
elastic?
3. The quantity supplied of a commodity at a price of Rs. 8 per unit is 400 units. Its
price elasticity of supply is 2. Calculate the new price at which its quantity supplied
will be 600 units?
4. When the price of a commodity rises from Rs.10 to Rs.12 per unit, its quantity
supplied rises by 100 units. If es = 2, Calculate its quantity supplied at increased
price.
5. If es = 3, A seller supplies 20 units of the commodity at a price of Rs.8 per unit.

How much quantity of the commodity will the seller supply when price rises by
Rs.2 per unit?

Micro-Economics
PRODUCTION
1. Production is a process of transformation of inputs into outputs.
2. Production Function – It is a technical relationship between inputs and outputs

i.e.
Q = f (I1, I2, I3……. In) Here, Q = Output and I1, I2, I3… are Inputs.
3. Inputs/Factors of Production –
Fixed Input Variable Input
4. Types of Production function –
(a) Very short run production function: It refers to a production function in

which producer is unable to change any factor of production i.e all factors
are fixed. As a result, the output cannot be changed.
(b) Short run production function: It refers to the production function in which
one factor is variable (which can be changed). In short run, production can
only be increased when more units of variable factors are employed.

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(c) Long run production function: It refers to the production function which all
the factors are variable and there are no fixed factors.

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5. Production Concepts –
(a) Total product (TP)/ Total physical product (TPP): It is defined by the firm
within the given inputs during a specified period of time.
(b) Average product (AP)/ Average physical product (APP): It is defined as

amount of output produced per unit of variable input.
AP = TP
N
Here, N = No. of variable input.
(c) Marginal product (MP)/ Marginal physical product (MPP): It is defined as

change in total product resulting from change in variable input.
MP = ∆TP
∆N OR, MPn = TPn – TPn-1
Stages of Production:
1. STAGE 1 –
2. STAGE 2 –
3. STAGE 3 –
Relationship between TP and MP

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Relationship between AP and MP

1.
2.
3.

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LAW OF RETURNS TO FACTORS OR LAW OF VARIABLE PROPORTIONS
Assumptions of this law –

1. Only one input is variable i.e. labour.
2. All other factors are fixed.
3. All the units of variable factors are equally efficient.
4. Technique of production does not change.
5. It is possible to combine more and more units of variable factors with the given units
of fixed factors.
 In terms of TP - This law states that
 In terms of MP – This law states that
STAGE 1 – INCREASING RETURNS TO FACTOR
In this stage, TP increases at increasing rate, MP also increases and reaches its maximum.
Reason for operation of this law-
(a) Optimum combination of inputs along with full utilization of fixed inputs.
(b) Division of labour through specialization.
(c) Volume (Bulk) discount
STAGE 2 – DIMINISHING RETURNS TO FACTOR
In this stage TP increases at diminishing rate, reaches its maximum. Every producer tries to
operate in this stage. Also, in this stage, MP falls but remains positive.
Reason for operation of this law-
(a) Efficiency starts declining when more variable inputs are employed beyond the
optimum capacity.
(b) Lack of perfect substitution between fixed inputs and variable inputs.
STAGE 3 – NEGATIVE RETURNS TO FACTOR

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In this stage, TP starts falling and MP becomes negative.

Reasons for operation of this law-
(a) Poor coordination between fixed and variable factors
(b) Decrease in efficiency of variable factor.

Micro-Economics
LONG RUN
In long run, since all the factors of production are variable, therefore a firm can employ
larger quantities of both inputs (Capital and Labour) to increase the production.
In long run, the relationship between inputs and outputs is explained under law of returns
to scale.
RETURNS TO SCALE
It means the manner of change in physical output caused by the increase in all inputs
simultaneously and in same proportion.
Three phases –
(1) Increasing returns to scale :
(2) Constant returns to scale :
(3) Decreasing returns to scale :

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COST
Cost is the function of output i.e. C = f (Q)
Cost in Economics ( Economic Cost) =
1. Explicit cost :
2. Implicit cost:
COST CONCEPTS
1. Total Fixed cost (TFC): These costs do not change with the level of output i.e. they
remain constant.
For example – Rent, depreciation, interest, salaries of permanent staff, telephone bill
(minimum), electricity bill (minimum), insurance premium.
2. Total variable cost (TVC): It refers to the cost which changes with the level of output.
These costs are not incurred at 0 level of output. Example – Raw material,
transportation, wages of casual labour, telephone bill beyond minimum.

Micro-Economics

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3. Total cost (TC): It is the summation of fixed cost and variable cost.
TC = TFC + TVC
Relationship between TVC, TFC and TC
 At zero level of output TVC = 0 and TC = TFC.
 As the output increases TC also increases due to increase in TVC.
 TC and TVC never intersect each other i.e. they are parallel to each other because
the difference between TC and TVC is TFC which is always constant.
4. Average fixed cost (AFC): It is the per unit fixed cost of production
AFC = TFC
Output

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5. Average variable cost (AVC) – It is the per unit variable cost of production.
AVC = TVC
Output
6. Average cost (AC) / Average Total cost (ATC) : It is per unit of total cost of production
I.e. AC = TC
Output
Therefore AC =
7. Marginal cost (MC) – It is the addition to the total variable cost or total cost when
one more unit of output is produced.
1.
MC = ∆TVC OR ∆ TC 2.
Shubham Verma (6375475167) 3.
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∆Output ∆Output
MCN = TVCN – TVCN-1 OR TCN – TCN-1

Micro-Economics
Relationship between AC & MC
1. At all level of output when MC < AC, then .
2. When MC = AC, then AC is .
3. At all levels of output when MC > AC, then .
Relationship between MC and TC
1. When MC is falling, TC increases at diminishing rate.
2. When MC is minimum, TC stops increasing at diminishing rate (i.e. point of inflexion).
3. When MC is rising, TC increases at increasing rate.
Mathematically, MC = ∆TC
∆Output
OR
MCn = TCn – TCn-1
Relationship between MC and TVC
1. When MC is falling, TVC increases at diminishing rate.
2. When MC is minimum, TVC stops increasing at diminishing rate (i.e. point of

inflexion).

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3. When MC is rising, TVC increases at increasing rate.

Mathematically, MC = ∆TVC
∆Output OR MCn = TVCn – TVCn-1

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RELATIONSHIP BETWEEN AC , AVC and AFC
Explain why minimum of AVC is left to the minimum of AC ?
SUMMARY (FORMULAE)

Micro-Economics
Cost Numericals
Q1 :- Draw short run Marginal cost, Average variable cost and Average cost curves on
single diagram.
Q2 :- Answer the following :

1. What is the total cost of production of 20units if fixed cost is Rs. 500 and variable
cost is Rs. 2.
2. A firm producing 7 units of output has an average total cost of Rs. 150 and has to
pay Rs. 350 to its fixed factors of productions. How much of the average total
cost is made up of variable cost.
3. Units TC MC
2 80 40
4 30
4. A firm's AFC is Rs. 200 at 10 units of output. What will be it at 20 units of output.
Q3 :- State true or false :

1. As the output is increased, the difference between average total cost and average
variable cost falls and ultimately becomes zero.
2. Average cost falls only when marginal cost falls.
3. Average variable cost can fall even when marginal cost is rising.
4. The difference between average total cost and average variable cost is constant.
5. As soon as marginal cost starts rising, average variable cost also starts rising.
Q4 :- A firm's marginal cost schedule is given with total fixed cost is Rs. 100. Find TVC, TC,
AVC, and SAC
Output 0 1 2 3 4 5 6
SMC - 500 300 200 300 500 800
Q5 :- Given the average fixed cost at 4 units of output is Rs. 5. Find TVC, TFC, AVC, AFC,
SAC and SMC
Output 1 2 3 4 5 6
TC 50 65 75 95 130 185
Q6 :- Complete the following table :

Output TVC AVC MC
1 - 12 -
20
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2 - - -
3 40 10 10
4 - -
Q7 :- The average fixed cost of a firm is Rs. 20 when it produces 3 units. Find SMC and ATC
Output 1 2 3
AVC 30 28 32

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Output AVC TC MC
1 - 60 20
2 18 - -
3 - - 18
20 120 -
4
22 - -
5

Output TVC AVC MC
1 10 - -
2 - 8 6
3 27 - -
4 - 10 13
Q10 :- Calculate TC and AVC from given schedule
Output 1 2 3 4 5 6
AFC 15
MC 32 30 28 30 35 43

Micro-Economics
REVENUE
1. Total Revenue (TR) : It is the total money receipt from sale of total output.
TR = P X Q
P = price per unit
Q = quantity of output
2. Average Revenue (AR) : It is the revenue per unit of output
AR = TR
AR curve is also
Q
3. Marginal Revenue (MR) : It is the addition to total revenue from sale of one
additional unit of output.
MRn = TRn – TRn-1 OR MR = ∆TR

∆Output
Relationship between TR & MR
CASE I: Perfect Market (Competitive market) - PRICE IS CONSTANT
PRICE OUTPUT TR MR
10 1
10 2
10 3
10 4
1. In this market

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2. In this market firm is price taker.
3. In this market TR

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CASE II: Imperfect market (Non-competitive market) - PRICE IS NOT CONSTANT
PRICE OUTPUT TR MR
10 1
9 2
8 3
7 4
6 5
5 6
4 7
3 8
1.
2.
3.
General Relationship between AR & MR
1. It is the MR curve which pulls AR upward or downward.

2. When MR > AR, then AR rises.
3. When MR = AR, then AR is maximum.
4. When MR < AR, then AR falls.
Relationship between AR & MR
CASE I: Perfect Competition (Competitive market) : PRICE IS CONSTANT
PRICE OUTPUT TR AR MR
10 1
10 2
10 3
10 4
10 5

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1.
2.
3.

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CASE II: Imperfect Competition (Non-competitive market) : PRICE IS NOT CONSTANT
PRICE OUTPUT TR AR MR
10 1
9 2
8 3
7 4
1.
2.
3.
4.
BREAK EVEN POINT ( )
1. It refers to the point when TC = TR i.e. point where firm is able to meet ALL its
cost.
2. It is also known as point of Normal Profit.
SHUTDOWN POINT
Point where TR = TVC
Or AR = AVC
i.e. point where firm is able to cover its VARIABLE COST ONLY.

Micro-Economics
PRODUCERS EQUILIBRIUM (Profit Maximization)
1. Producer’s equilibrium – It is that level of output at which producer’s profit is

maximum and there is no tendency for him to change the output. It is also known as
profit maximization level of output.
2. Profit – It is defined as excess of revenue over cost i.e. Profit = TR – TC
Gross Profit = TR – TVC
MR – MC Approach (Equilibrium conditions)

1. MR = MC
2. MC should cut MR from below (i.e. MC should be rising after intersection) or
MC > MR after intersecting MR.
At point A,
Condition (1) is satisfied but condition (2) is not satisfied.
But at point B, both the condition are satisfied i.e.

(a) MR = MC
(b) MC rises after intersection.
Therefore, Q2 is the producer’s equilibrium level of output.
OUTPUT TC MR MC

Micro-Economics
Point B is producer’s equilibrium point. Explain why?

OR
MC should be rising (MC > MR) after the point of intersection. Comment.
1. In the above diagram point A is not equilibrium point because producer can add
more to his revenue by producing beyond Q 1, i.e. the producer is able to add to his
profit by increasing the production beyond Q1.
2. Point B is the profit maximum level of output or producer’s equilibrium point

because if he increases the production beyond Q 2, it will add more to his cost
resulting in losses.
3. Thus point B is the producers equilibrium point, thus MC should be rising after the
point of producer’s equilibrium.
If MC > MR at particular level of output than how will the producer react?
The producer will decrease the production to maximize his profit and eliminate the losses.
Reduction in production will be done till he reaches the equilibrium where MC = MR.
If MC < MR at particular level of output then how will the producer react?
The producer will increase the production to maximize his profit. Increase in production will
done till he reached the equilibrium point where MC = MR.
Explain producer’s equilibrium under imperfect market?

Micro-Economics
Very Short Answer Type Questions (1 Mark)

1. Define production function.
Ans. Diminishing return to a factor
2. Define marginal product.
Ans. Marginal product is net addition to total product when one additional unit of
variable factor is used.
3. What will be the behavior of total product when marginal product of variable input
is falling but is positive?
Ans. Total product increases at diminishing rate.
4. What is the relation between average and marginal product when average product
is falling?
Ans. MP falls but it falls at faster rate than AP
5. Define average production.
Ans. AP is a per unit output of a variable factor.
6. What do you mean by fixed factors of production? Give example.
Ans. These factors of production which cannot be varied in short period e.g.
machine, land.
7. By which behaviour of marginal product will total product be maximum
Ans. When marginal product of a factor is zero, then total product will be maximum.
8. How does fall in total product affects marginal product?
Ans. When total product falls, marginal product becomes negative.
9. What do you mean by cost?
Ans. Cost is the sum of explicit and implicit cost.
10. Define explicit costs.
Ans. Those monetary payments by producer on factor and non factor payments is
called explicit cost. Which are not owned by himself.
11. Which cost curve is parallel to ox-axis? Why?
Ans. Total fixed cost because TFC remain constant at all level of output.
12. What do you mean by implicit costs?
Ans. Implicit cost is the cost of self owned resources of producer.
13. Define marginal cost.
Ans. Marginal cost is the net addition to total cost when one additional unit of
output is produced.
14. Why does the difference between average total cost and average variable cost falls
with increase in output?
Ans. It is because average fixed cost goes on falling with increase in output.
15. Define Revenue.
Ans. Revenue is the amount received from sale of output.

Micro-Economics
16. At what rate average and marginal revenue falls, with fall in per unit price of a
good?
Ans. Marginal revenue falls twice the rate of average revenue.
17. What will be the behaviour of Average revenue when total revenue increases at
constant rate?
Ans. Average revenue remains constant.
18. What do you mean by marginal revenue?
Ans. Marginal revenue is net additions to total revenue by sale of one additional unit
of output.

Micro-Economics
19. What will be the behaviour of total revenue when marginal revenue is zero?
Ans. Total revenue will be maximum.
20. Why does average cost curve and averages variable cost curve never intersect each
other?
Ans. Because AFC can never be zero at any level of output.
21. What do you mean by producer’s equilibrium?
Ans. Producer’s equilibrium is a situation where he gets maximum profit.
22. State any two conditions of producers equilibrium according to marginal revenue
and marginal cost approach.
Ans. 1. MR = MC
2. Rising portion of Marginal cost curve intersects marginal revenue curve.
23. Define supply.
Ans. Supply refers to the amount of the commodity that a firm or seller is willing to
offer for sale in a given period of time at various prices.
24. What do you mean by individual supply schedule?
Ans. Individual supply schedule is a tabular representation showing various
quantities of a commodity which a firm is ready to sell at different prices during a
given period of time.
25. Define Market Supply
Ans. It refers the sum of total quantity supplied by all the firms in a market.
26. Name two determinants of
supply. Ans. 1. Number of firms
2. Change in technology
27. What is meant by change in supply?
Ans. Change in supply refers to increase or decrease in supply of a commodity due to
change in factors other than price like technology, price of inputs, Goal of producer,
Number of firms etc.
28. What type of change in price is the cause of upward movement along a supply
curve?
Ans. Due to increase in price.
29. What effect does an increase is tax rates have on supply of a commodity?
Ans. As a result of increase in tax rates production cost increase, so the profit margin
of producer will fall and producer will decrease the supply.
30. What causes a downward movement along a supply
curve? Ans. Decrease in price.
31. What is meant by leftward shift of supply curve?
Ans. Due to change in other factors the supply of a commodity falls at same price
than supply curve shifted to leftward.
32. How does a decrease in price of input effect supply curve of the commodity?
Ans. As a result of decrease in price of input production cost falls then producers
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profit margin will increase so producer will increase the supply of commodity.
33. Why does a supply curve have a positive slope?
Ans. Because of positive relation between price and supply.
34. What is meant by elasticity of supply?
Ans. Price Elasticity of Supply (Es) is a measure of degree of response of supply for a
good to change in its price.

Micro-Economics
35. What is the price elasticity of supply, if supply curve is parallel to y-axis.
Ans. Perfectly elastic.
36. When does the elasticity of supply of commodity called equal to unity?
Ans. When percentage change in price is equal to percentage change in supply.
37. When does the producer increase the supply of a good at given price, give two
reasons.
Ans. Due to change in other factor like improvement in technology, decrease in price
of inputs.
38. What causes an extension in supply?
Ans. Increase in price of a commodity.
39. If the price of a commodity falls by 10% and, consequently, the quantity supplied
decreases by 20%. What will be its price elasticity of supply?
Ans.
40. What happens to TP when MP is zero?
Ans. TP is maximum.
41. What happens to MPP when TPP increases at decreasing rate?
Ans. MPP falls but remains positive.
42. As the variable input is increased by one unit, total output falls. What would
you say about of marginal productivity labour?
Ans. Marginal productivity of labour is negative.
43. Why MC curve is in short run U-shaped?
Ans. MC Curve in short run is U-shaped due to operation of the law of returns to a
factor.
44. Why does fixed cost not influence marginal cost?
Ans. Because marginal cost does not include fixed cost.
45. When a seller sells his entire output at a fixed price, what will be the shape of AR &
MR curves?
Ans. Both AR & MR are equal and coincide with each other on a horizontal line.
46. Show that average revenue equals price.
Ans.
47. What effect does a cost saving technical progress have on the supply curve?
Ans. Supply curve will shift to the right.
48. What effect does an increase in excise tax have on the supply curve?
Ans. Supply curve will shift to the left.
49. What happens to TPP when marginal productivity of variable input is negative?
Ans. TPP falls.
50. When is TPP maximum in relation to MPP?
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Ans. When MPP is zero.

51. What happens to MPP when TPP is declining?
Ans. MPP declines and remains negative.
52. How does fall in MPP affect TPP?
Ans. TPP increases at decreasing rate.

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53. What effect does an increase in input price have on the supply curve?
Ans. The supply curve will shift towards left-hand side.
54. Why does average cost fall as output rises?
Ans. AC falls due to operation of the law of increasing returns to a factor as output
rises.
55. Does fixed cost affect marginal cost? Give the answer with reason.
Ans. No, because fixed cost is not subject to change and it is not considered while
calculating MC.
56. What would be the effect of increase in the output on the TFC?
Ans. There would not be any effect of increase in the output on the TFC, It will be
constant at different levels of production.
57. If marginal revenue falls, will total revenue fall?
Ans. It may fall when MR falls and becomes negative. If MR falls but remains positive
then TR may increase with diminishing rate.
58. What is the price elasticity of supply of a commodity whose straight line
supply curve passes through the origin forming an angle of 75º?
Ans. Price elasticity of supply will be equal to one when a straight line supply curve
passes through the origin; angle does not matter anything.

1. Explain the likely behaviour of total product under the stage of increasing return to
a factor with the help of numerical example.
Ans. Increasing return to a factor is the first phase of the Law of return to a factor.
When more and more units of a variable factor is combined with fixed factor up to a
certain level total physical product increases with increasing rate.
Machine Unit of labour Total physical product
1 1 10
1 2 24
1 3 42
2. With the help of example distinguish between total fixed cost and total variable
cost.
Ans.
Total fixed cost Total variable cost
1. Fixed cost remains constant at each level of 1. variable cost changes with the change in
output ie it do not change with change in quantity. It increase or decrease as the output
quantity. change.
2. It can not be zero when output is zero. 2. it is zero when output is zero
3. Its curve is parallel to X-aixs 3. Its curve is parallel to the curve of total cost.
4. Example :- cost of raw material, wages of
4. Example :- Rent, wages of permanent staff.
casual labour.
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3. Draw average cost, average variable cost and marginal cost curves on a single
diagram and explain their relations.
Ans.

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Relation of AC, AVC and MC

1. MC intersects to AC and AVC at their minimum level
2. AC and AVC decreases before the intersection by MC, but remain greater
than MC.
3. AC and AVC starts to increase after the intersection by MC, and becomes less
than MC.
4. As output increases, AC and AVC tends to be closer but the difference
between AC and AVC can never be zero.
4. Draw average cost, average variable cost and average fixed cost
curves on a single diagram and explain their relation.
Ans.
1. AC is the vertical summation of AVC and AFC

2. The difference between AC and AVC falls as output increases but the
difference of AC and AFC increases.
3. As output increases AC and AVC tends to be closer but their curves do not
interect each other because AFC always remains more than zero.
5. Explain the relation between average revenue and marginal revenue when a firm
can sell an additional unit or a good by lowering the price.
Ans.
1. AR and MR both decreases.
2. MR decrease at the rate of twice than AR.
3. MR become zero and negative but AR can never be zero.
6. Distingush between change in quantity supplied and change in supply.
Ans.
Change in quantity supplied change in supply
1. It refer’s the change in supply due to the
1. It refers the change in supply due to
change in the determinents of supply other than
change in price of the good.
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price.
2. Determinents of supply other than price
2. Price of the good remains unchanged.
remains unchanged.
3. Law of supply apply. 3. Law of supply does not apply.
4. There is upward and downward
4. supply curve shifted to leftward or rightward
movement along with supply curve in this
under this condition.
situation.
7. Explain how does change in price of input affect the supply of a good.
Ans.
A. Increase in price of input : increase in price of input is cause of a decrease in
the supply of a good because the production cost of a good will increase due
to increase in price of input. It will reduced the profit. So producer will
decrease the supply of the good.
B. Decrease in price of Input : Decrease in price of input is a cause of increase in
supply because when the price of input decrease the production cost of a
good also also decreases. Decrease in cost increases the profit margin. It
motivate to producer to increase the supply of the good.
8. Explain how changes in prices of other products influence the supply of a given
product.
Ans. The supply of a good is inversly influenced with the change in price of other
product which can explain as fallows.
A. Rise in price of other product :– When there is rise in the price of other
product the production of these product become more profitable due to
unchanged cost in comparison of the production of given produce. As a result
the producer will produce more quantity of other product so the supply of
given good will decrease.
B. Fall in the price of other product :– When there is fall in the price of other
product the production of these product become less profitable due to
unchanged cost in comparison of the production of given product. As a result
producer will produce less quantity of other product so the factors of
production shifted for the production of given good. It cause an increase in
supply of given good.
9. Explain how technological advancement influence the supply of a given product.
Ans. Technological advancement brings a positive impact in the supply of a given
product. It reduces per unit cost and increase the productivity of given factors of
production. Due to these reasons production of given product becomes more
profitable.
10. Explain the law of variable proportion with the help of diagram schedule.
OR
What is the likely behaviour of total product/marginal product when only
one input is increased for increasing production? Use diagram/ schedule.
Ans. Law of variable proportion state the impact of change in unit of a variable factor

Micro-Economics
on the physical output. When more and more unit of a variable factor combined with
fixed factor physical product passes though following phases.
Behaviour of TP
(i) TP increases at an increasing rate
(ii) TP increases at diminishing rate
(iii) TP falls
Behaviour of MP
(i) MP increases and becomes maximum.

Micro-Economics
(ii) MP decreases and becomes zero.

(iii) MP becomes negative.
Unit of
Machine TPP MPP
labour
1 1 3 3
1 2 7 4
1 3 12 5
1 4 16 4
1 5 19 3
1 6 21 2
1 7 22 1
1 8 22 0
1 9 21 -1
First Phase :– TPP increases with increasing rate upto A point. MPP also increase and
becomes maximum of point C.
Second Phase :– TPP increases with diminishing rate and it is maximum on point B. MPP
start to decline and becomes zero at D point.
Third Phase :– TPP starts to decline and MPP becomes negative.
11. What is producer’s equilibrium? Explain the conditions of produce’s equilibrium

through the ‘marginal cast and marginal revenue’ approach. use
diagram/schedule.
Ans. Producer’s equilibrium refer’s the stage under which with the help of given
factor’s of production producer attain that level of production of which he is getting
maximum profit. The conditions of producer’s equilibrium through the marginal cost
and marginal revenue approach are as follows.
1. Marginal cost should be equal to marginal revenue.
2. With the increase in output after equilibrium marginal cost should be greater than
marginal revenue.
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Output MR MC
1 4 5
2 4 4
3 4 3
4 4 4
5 4 5
OR
Output MR MC
1 10 5
2 8 4
3 6 3
4 4 4
5 2 5
Explanation of conditions :–
A. So long as MC is less than MR, it is profitable for the producer to go on
producing more because it adds to its profits. He stops producing more when
MC becomes equal to MR.
B. When MC is greater than MR after equilibrium it means the profit will decline
if producer will produce more units of the good.
12. What are the factors which give rise to increasing returns to variable factors?
Ans.
1. Fuller utilization of the fixed factors- Generally fixed factors are indivisible
and underutilized. With greater application of variable factor these factors
are better utilized its MPP tends to rise.
Micro-Economics
2. Increased efficiency of variable factor- Application of specialization and

division of labour among the units of variable factors leads to greater
efficiency and increase in MPP.
13. Explain the relationship between AC & MC with diagram.
Ans. (i) When MC < AC, AC falls.
(ii) When MC = AC, AC is minimum.
(iii) When MC > AC, AC rises.
(iv) MC falls & rises faster than AC.
(v) Both can be obtained from TC.

Micro-Economics
14. Why is AC curve in the short run U-shaped?

Ans. AC curve is U-shaped in short run due to operation of law of returns to factors
(i.e., law of variable proportion). Initially production is subject to law of increasing
returns (i.e. decreasing cost), then law of constant return (i.e. constant cost) and
ultimately to law of diminishing return (i.e. increasing cost). As output is increased,
AC first falls, reaches its minimum and then rises. Hence, AC curves become U-
shaped.
15. How do changes in MR affect TR?
Ans.
1. If MR increases, TR increases at increasing rate.
2. If MR is constant, TR increases at constant rate.
3. If MR falls, TR increases at diminishing rate.
16. What is MR? How is it related to AR?
Ans. MR refers to the change in TR due to sale of an additional unit.
Relation –
1. If AR (Price) is constant, MR = AR
2. If AR (Price) falls, MR < AR.
3. If AR (Price) rises, MR > AR.
17. What will be the price elasticity of supply if the supply curve is a positively sloped
straight line?
Ans. Es = 1 if the curve starts from the origin point.
Es>1 if the curve starts from the y-axis and
E<1 if the curve starts from the x-axis.
18. Define marginal revenue. State the relation between marginal revenue and
Micro-Economics
average revenue when a firm:

(i) is able to sell more quantity of output at the same price.
(ii) is able to sell more quantity of output only by lowering the price.

Micro-Economics
Ans. Marginal revenue is the addition to total revenue from producing one more unit
of output.
1. MR = AR at all levels of the output. (In case of perfect competitive market)
2. MR will be less than AR at all levels of the output. (In case of monopoly and
monopolistic market)
19. Explain how do the following determine price elasticity of supply:
(i) Nature of the good (ii) Time period.
Ans.
1. Nature of Commodity - Elasticity of industrial goods is more than that of
agricultural goods. Similarly supply of durable goods e.g. table is more elastic
than that of perishable goods e.g. vegetables.
2. Time Period- Generally elasticity of supply is more in the long period than in
shorter period of time. The reason is that in the long period, all adjustments
to the changed price can be made easily and supply of commodity can be
varied accordingly.
Higher Order Thinking Skills

1. Why is total variable cost curve parallel to total cost curve?
Ans. Total cost is the sum of total fixed cost and total variable cost. TFC remains
constant at all levels of output.
2. Why does average fixed cost fall with increase in output?
Ans. AFC can be calculated from TFC. Which remains constant at all level of output.
3. Why is total fixed cost curve parallel to ox-axis.
Ans. TFC remains constant at all levels of output.
4. Under which situation will MR fall when an additional quantity of a good is sold?
Ans. When per unit price falls by selling an additional unit of a good.
5. What behaviour of per unit price will cause the equality of average and marginal
revenue.
Ans. Per unit price remains constant.
6. Give one differences between law of supply and price elasticity of supply.
Ans. Law of supply reflects the direction of change in supply where as price elasticity
of supply measures the magnitude of change in supply.
7. What is the price elasticity of supply associated when the supply curve passing
through to intersect to x-axis?
Ans. Inelastic.
8. Why does a producer moves downward along a supply curve due to decrease in
price of commodity?
Ans. Because profit margin of firm (producer) decreases.
9. What is the price elasticity of supply associated with when a supply curve passes
through the origin at 40° angle?
Ans. Equal to unity elastic.
Micro-Economics
10. When does the supply curve shift rightward while price remains constant.
Ans. When the supply of commodity increases due to change in other factors.
11. What effect does an increase in price of competitive good have on the supply of a
commodity?
Ans. Supply of the commodity will fall.

Micro-Economics
UNIT 4
FORMS OF MARKET
Market is a place where buying and selling of goods take place.
Determinants of market
1.
2.
3.
4.
FORMS OF MARKET
PERFECT (Competitive market) IMPERFECT (non-competitive)
PERFECT MARKET (Example: vegetable market)

1. Definition – It is a market in which there are very large number of buyer and seller.
There is a homogeneous product which is selling at a uniform price.
1. Very large number of buyers and sellers

Micro-Economics
2. Homogeneous product
3. Free entry and exit of firms
4. Perfect Knowledge of Market
5. Perfect mobility of factors of production
6. No advertisement cost/selling cost/additional transportation cost is involved.
7. AR, MR and TR curve
8. Industry is price maker and firm is price taker.

Micro-Economics
MONOPOLY (Example: Indian Railways)

It is a market in which there is a single firm selling the commodity and there is no close
substitute.
1. Single seller
2. Number close substitutes
3. Independent Price Policy
4. Price Discrimination

Micro-Economics
5. Shape of AR, MR and TR
6. A monopolist can earn abnormal profits i.e. AR > AC
7. Restricted or very difficult entry of new firms
MONOPOLISTIC COMPETITION (Example: Soap, Clothes)

It is a market in which large no of sellers sell differentiated products.
1. Large number of sellers
2. Product differentiation
Micro-Economics
3. High selling cost is involved
4. Free entry and exit of firm
5. AR, MR and TR curve
OLOGOPOLY
It is a market in which few large firms producing homogeneous or heterogeneous products
compete against each other and recognize interdependence in their decision making.
1. Few Firms
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2. Nature of Product
3. Interdependence of decisions
4. Price Rigidity
5. Barriers in entry of new firms
6. Heavy selling costs are involved
7. Non-Price competition

Micro-Economics
BASIS PERFECT MONOPOLY

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BASIS PERFECT MONOPOLISTIC

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BASIS PERFECT OLIGOPOLY

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BASIS MONOPOLISTIC MONOPOLY

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BASIS MONOPOLISTIC OLIGOPOLY

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BASIS MONOPOLY OLIGOPOLY

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MARKET EQUILIBRIUM
It is a situation where market demand is equal to the market supply
EQUILIBRIUM PRICE
It is the price where market demand is equal to the market supply
EQUILIBRIUM QUANTITY
It is the quantity of a commodity which is demanded as well as supplied at the equilibrium
price
EXCESS DEMAND AND EXCESS SUPPLY
Excess demand means that consumer wants more but producers are willing to supply less.
Excess supply means that consumer wants less but producers are willing to supply more.
Price D S
Ep E
S D
O Quantity
Demanded & supplied
When the given price of a commodity is lower than the equilibrium price, then it is a case of

Micro-Economics
When the given price of a commodity is more than the equilibrium price, then it is a case of
.

Micro-Economics
If Price of a commodity is more than Equilibrium price then how will the market react?
OR
What happens when there is excess supply?
If a price of a commodity is more than equilibrium price then there is excess supply. The
following changes in the market take place:
If given price of a commodity is less than the equilibrium price, how will the market react?
OR
What happens when there is excess demand?
If a price of a commodity is less than equilibrium price then there is
. The following changes in the market take place:
1.
2.
3.
4.

Micro-Economics
EFFECT OF CHANGE IN DEMAND AND SUPPLY
1. Change in Demand
(A) Increase in demand (Rightwards shift)
Price D S
Ep E
S D
O Quantity
Eq Demanded & supplied
(B) Decrease in demand (Leftwards shift)
Price D S
Ep E

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S D
O Quantity

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2. Change in Supply
1. Increase in supply (Rightwards shift)
Price D S
Ep E
S D
O Quantity
2. Decrease in supply (Leftwards shift)
Price D S
Ep E

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S D
O Quantity

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SIMULTANEOUS INCREASE IN DEMAND AND SUPPLY
Simultaneous increase in demand and supply will result in increase in equilibrium quantity
but equilibrium price may rise, do not change or falls and it depends upon whether demand
increases proportionately more than, equal or less than supply.
Accordingly three cases are as follows :
1. Increase in demand > Increase in supply
Price D S
Ep E
S D
O Quantity

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2. Increase in demand < Increase in supply
Price D S
Ep E
S D
O Quantity
3. Increase in demand = Increase in supply
Price D S
Ep E

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S D
O Quantity

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SIMULTANEOUS DECREASE IN DEMAND AND SUPPLY
Simultaneous decrease in demand and supply will result in decrease in equilibrium quantity
but equilibrium price may rise, do not change or falls and it depends upon whether demand
decreases proportionately more than, equal or less than supply.
Accordingly three cases are as follows :
1. Decrease in demand > Decrease in supply
Price D S
Ep E
S D
O Quantity

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2. Decrease in demand < Decrease in supply
Price D S
Ep E
S D
O Quantity
3. Decrease in demand = Decrease in supply
Price D S
Ep E

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S D
O Quantity

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PRICE CEILING
Price ceiling refers to fixing the maximum price of a commodity by the government at a level
lower than equilibrium price.
Price D S
Ep E
S D
O Quantity
Demanded & supplied
 In the diagram, demand curve DD and supply curve SS intersect each other at point E
and as a result equilibrium price Ep is determined.
 Now suppose the government interferes and fixes the maximum price at OP which is
less than equilibrium price. At this price, quantity demanded exceeds the quantity
supplied and it creates .
 Drawbacks
1.
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2.
3.

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PRICE FLOOR
Price floor refers to the minimum price fixed by the government above the equilibrium price
which the producer must be paid for their goods and services.
Price D S
Ep E
S D
O Quantity
Demanded & supplied
 In the diagram, demand curve DD and supply curve SS intersect each other at point E
and as a result equilibrium price Ep is determined.
 Now suppose the government interferes and fixes the minimum price at OP which is
above the equilibrium price. At this price quantity supplied exceeds quantity
demanded and creates .

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Very Short Answer Type Questions (1 Mark)

1. Define market.
Ans. Market is a system with the help of it the buyers and seller of a commodity or
service come to contact with each other.
2. What do you mean by homogenous product?
Ans. It means product produced by different firms is identical in all respect like
quality, colour, size, weight etc. such products are perfect substitutes.
3. How is price determined under perfect competition?
Ans. Price is determined by an industry by the forces of demand and supply.
4. What is the common feature shared by perfect and monopolistic competition?
Ans. (i) Free entry and exit of firms
(ii) Perfect mobility of factors.
5. If the firms are earning abnormal profits, how will the number of firms in
the industry change?
Ans. The number of firms in the industry will increase.
6. Define the monopoly market.
Ans. It is a form of market under which there is a single seller, selling a product
which does not have close substitutes.
7. Under which market there is no difference between firm and industry?
Ans. Monopoly.
8. What is normal profit?
Ans. It is the minimum profit which a firm must get to stay in business.
9. Under which form of market the firm is price taker.
Ans. Perfect competition.
10. What is cartel?
Ans. A cartel is a group of firms which jointly set ‘output and price’ policy of its
product in such a way so as to reap benefits of monopoly.
11. What is the relationship between AR curve and demand curve in a
monopoly market?
Ans. Both AR curve and demand curve are the same in a monopoly market.
12. What do you mean by price discrimination?
Ans. Price discrimination is a policy under which a seller sells a similar product at
different prices to different buyers.
13. Define oligopoly.
Ans. Oligopoly is a market structure where there are few firms competing for their
homogenous or differentiated products.
14. Define equilibrium price.
Ans. It is the price at which demand = supply.
15. When does the situation of excess supply arise?
Micro-Economics
Ans. When market price is more than equilibrium price and market supply is more
than market demand.
16. What will be the effect on equilibrium price when increase in demand is than
increase in supply?
Ans. When increase in demand is more than increase in supply, equilibrium price will
increase.
17. Under what situation does the equilibrium price remains unaffected when there is
simultaneous increase in demand and supply.

Micro-Economics
Ans. When increase demand is equal to increase in supply the equilibrium price will
remain same.
Higher Order Thinking Skill
1. What is the relation between average revenue curve and demand curve under
monopolistic competition?
Ans. Both AR and MR curves have negative slope
Short Answer Type Questions (3-4 Marks)
1. Why is firm under perfect competition a price taker and under monopolistic
competition is price maker. Explain?
2. How is the demand curve under monopolistic competition different from demand
curve of a firm under perfect competition?
3. Why is a firm under perfect competition a price taker? Explain.
4. Explain three features of perfect competition.
5. Explain the implication of large number of seller feature of perfect competition.
6. What will happen if the price prevailing in the market is above the equilibrium price.
7. Distinguish between monopoly and oligopoly.
8. Explain the concept of excess demand with the help of diagram.
9. Differentiate between ‘Collusive and non-collusive oligopoly.
10. Explain the determination of equilibrium price under perfect competition with the
help of schedule.
11. Explain why is the equilibrium price determined only at the output level at which
market demand and market supply are equal.
Higher Order Thinking Skill
1. MR = AR in perfect competition but MR < AR in monopoly and monopolistic
competition why?
2. In which condition decrease in demand can not change the price of commodity?
3. Explain how firms are interdependent in an oligopoly market.
4. In which competition the availability of close substitutes is present? How does it
effect the price?
5. Explain the implication of ‘freedom of entry and exit to the firms’ under perfect
competition.
Long Answer Type Questions (6 Marks)
1. Explain the characteristics of monopolistic competition.
2. Market for a good is in equilibrium. There is simultaneous increase both in demand
and supply of the good. Explain its effect on market price.
3. Explain the term market equilibrium. Explain the series of changes that will take
place if market price is higher than the equilibrium price.
4. How will a fall in the price of tea affect the equilibrium price of coffee. Explain the
chain of effects.

Micro-Economics
5. Explain the following features of perfect competition.

i. Large number of firms or Sellers and Buyers
ii. Homogeneous Product.
6. Explain features of Oligopoly.
7. Explain how change in price of a substitute commodity would affect market
equilibrium of the commodity X.
8. With the help of a diagram explain the effect of “decrease” in demand of a
commodity on its equilibrium price and quantity.

Micro-Economics
9. There is simultaneous decrease in demand and supply of a commodity, when it

result in
i. no change in equilibrium price
ii. a fall in equilibrium price.

Micro Economics

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Micro-Economics

Shubham Verma (6375475167)

Two Types of Economies:

a. Open Economy: Which has economic relations with other economies

b. Closed Economy: Which has no economic relation with other economies

2. SCARCITY – When there is higher demand of resources relative to its supply.

c. Alternative Uses of Resources

4. ECONOMISING OF RESOURCES - It means allocating the limited resources in such a

REASONS / CAUSES OF ECONOMIC PROBLEM

Shubham Verma (6375475167)

MICRO – ECONOMICS MACRO - ECONOMICS

Shubham Verma (6375475167)

CAPITALIST ECONOMY SOCIALIST ECONOMY

CENTRAL PROBLEM OF AN ECONOMY (Problem of Allocation of Resources)

Labor surplus economy uses labor intensive techniques

Shubham Verma (6375475167)

The Problem of Distribution of Income (Output)

PRODUCTION POSSIBILITY CURVE (PPC) OR PRODUCTION POSSIBILITY FRONTIER

MARGINAL RATE OF TRANSFORMATION (MRT): It is defined as ratio of one good sacrificed

MRT is the Slope of PPC

MRT = ∆ goods sacrificed

Shubham Verma (6375475167)

1. Rightward Shift: PPC shift rightward due to

2. Leftward Shift: PPC shifts leftwards due to

- Natural calamities (earthquake, flood etc.)

Shubham Verma (6375475167)

OPPORTUNITY COST is the cost of next best alternative foregone.

Very Short Answer Type Questions(1 Mark)

Shubham Verma (6375475167)

2. Define macro economics with the help of an example.

Shubham Verma (6375475167)

Ans. It shows inefficient/under utilization of resources.

Short Answer Type Questions(3-4 Marks)

Shubham Verma (6375475167)

2. Why does PPC look concave to the origin? Explain.

5. Why does an economic problem arise? Explain.

Marginal Rate of Transformation

Shubham Verma (6375475167)

7. Why is a production possibilities curve concave? Explain.

8. Explain properties of a production possibilities curve.

9. Explain the problem of ‘what to produce’.

Shubham Verma (6375475167)

CARDINAL UTILITY ORDINAL UTILITY

LAW OF DIMINISHING MARGINAL UTILITY (DMU) OR FUNDAMENTAL LAW OF

Law: This law states that as more and

Shubham Verma (6375475167)

- Utility can be measured in quantitative terms i.e. utils

- Utility can be measured

MU in terms of money (MUm) = Price of commodity (Px)

Shubham Verma (6375475167)

WHY MUM = PX IS THE EQUILIBRIUM CONDITION?

UTILITY APPROACH (TWO COMMODITIES)

1. Consumer equilibrium definition – SAME

3. Consumer’s equilibrium conditions

MUX = MUY = MU of last rupee spent on each good.

Law of Diminishing Marginal Utility must prevail

Law Of Equi Marginal Utitlity (Law Of Substitution) or Law Of Maximum Satisfaction

INDIFFERENCE CURVE ANALYSIS (ORDINAL APPROACH) (J R Hicks)

Bundle Good X Good Y Total Expenditure