Opportunity Cost 1) What is opportunity cost? be st alternative good forgone for it. A) The opportunity cost of a good is the value of the next best Ex;-Suppose a given value of resources can be used to produce either a car or 60 computers. Then, the true value of a car is not its ! but 60 computers "hich are forgone to produce a car.
2) What is marginal opportunity cost? A) arginal opportunity cost of a good is the amount of the other good satisfied for the production of an additional unit of the former good, resources and technology remaining the same.
3) Why is production possibility curve concave to the origin? A) #t is the increase in the marginal opportunity cost that ma$es the production possibility curve concave to the origin.
Consumer Behavior and Demand 1) Distinguish between total and marginal utility? A) Total utility is the total amount of satisfaction "hich a consumer obtains from consuming a certain number of units of a good goo d consumed. %n the other hand, ha nd, marginal utility is the addition made to total utility by consuming an extra unit of a good. Suppose a person obtain &' units of satisfaction from the first unit of a good, say an orange, &0 units of extra satisfaction from the second unit and ( units of satisfaction from the third unit of good. The total utility of the three un its consumed by him is e)ual to &'*&0*(+0 & '*&0*(+0 units, "hereas the marginal utility of the first unit of the good is &', of the second unit is &0 and third unit is (. Thus, the total utility obtained by a consumer can be obtained by summing up the marginal utilities of the three units consumed by him. ence, T + Sum of
2) What is consumers e!uilibrium? goo ds in such A) / consumer is in e)uilibrium "hen he is spending his given income on various goods a "ay that he maximies his satisfaction.
3) "tate the condition o# consumers e!uilibrium$ A) 1or a consumer to be b e in e)uilibrium he must distribute his given income among various goods in such a "ay that marginal utility derived from the last rupee spent on each good is the same. Thus, in case of t"o goods 2 and 3 a consumer is in e)uilibrium "hen4 x + y + m !x !y
%) "tate the law o# diminishing marginal utility$ A) /s a consumer consumes more units of a commodity marginal utility obtained from an additional good of it goes on diminishing.
Consumer Behavior &nd Demand Demand 1) 'ive the meaning o# Demand$ A) 5emand refers to the desire to buy a commodity bac$ed by "illingness and ability to purchase that commodity. commodity.
2) What is a demand schedule? A) 5emand schedule is the tabular presentation of the different amount of a commodity demanded at different d ifferent possible price of that commodity.
3) What is individual demand schedule? A) #ndividual demand schedule states the relationship bet"een price and )uantity demanded of a commodity by an individual.
%) What is mar(et demand schedule? A) ar$et demand schedule is the sum of the individual demand schedule for a commodity in the mar$et.
) What is demand curve? / #t is a graphic presentation of the reverse relationship bet"een price and )uantity demanded of a commodity.
*) What is law o# demand? A) 7a" of demand states that, other things being constant, more of a commodity is purchased in response to its decrease price.
+) Di##erentiate between substitute and the complementary goods? A) Substitute goods are those goods "hich can be used in place of each other. #f the price of the commodity increases then the demand for its substitute also increases as it become relative cheaper. Similarly, if the price of a commodity decreases the demand of its substitute decreases. 1or e.g.4- Tea and 8offee, 9all- pen and #n$ pen. Complementary goods are the goods "hich are used together to satisfy a given "ant. #f the price of one good increase then the demand for its complementary decreases and vice versa. 1or e.g.4- 8ar : !etrol, 1ountain !en : #n$.
,) -.plain the law o# demand with he help o# a diagram$ 'ive its e.ceptions / importance$ A) The la" of demand states that other things being e)ual, the amount demanded of a commodity decreases "ith rise in the price and increases "ith fall in the price. So, there is a inverse relationship bet"een price and )uantity demanded. This is explain "ith the help of a diagram belo". 9oth demand schedule and demand curve are sho"ing an inverse relation ship bet"een price and )uantity demanded.
5emand schedule : 5emand 8urve sho"ing inverse relationship bet"een price : .5emand. Demand Schedule
Demand Curve
Price Per Unit
Quantity Demanded
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Exceptions to the la"4The la" "ill not hold good under follo"ing circumstances4@a Aoods of conspicuous consumption4- #n such cases, higher price means more consumption. @b Aiifen goods4- Bhen price of a Aiifen good falls its demand also fall. @c 8onsumerCs ignorance4- The la" of demand brea$ do"n "hen consumer Dudge )uality of a commodity by its price. #mportance4@a The la" of demand expresses general human behavior in the mar$et place. @b #t is based on this la" that the producer plans their price policy "ith a vie" to maximiing their profits or maximiing their sales.
0) Why does demand curve slope downwards? -.plain? A) The demand curve of normal goods slopes do"n"ard because of the follo"ing reasons4 i 7a" of diminishing marginal utility4- /ccording to the la"s, the utility derived from each successive unit of a commodity tends to diminish. Since !x + x diminishing x must mean diminishing !x corresponding to greater purchase of the commodity. ii #ncome effect4- / fall in price of a commodity causes increase in real income of the consumers. /ccordingly, )uantity demanded of the commodity increases. iii Substitute effect4- "hen price of a commodity decreases in relation to the price of its substitutes its )uantity demanded increases in place of the substitute good. iv Sie of consumer Aroup4- Bhen the price of a commodity falls, many consumers "ho "ere not buying it at its previous price begin to purchase it no".
1) What do you understand by assumptions o# law o# demand? A) The main assumptions of la" of demand are4& o change in income. ' o change in taste and preference of the consumer. !rice of the related commodity should remain constant. > o change in the sie of population. < o change in distribution of income and "ealth. 6 !erfect competition.
11) Di##erentiate between e.tension and contraction o# demand? A) The extension of demand occurs due to the reduction in price "hereas contraction in demand follo"s an increase in price. 1or instance, the demand for commodity 2 is &0 $g at a given price of Fs. &0. o", suppose the price of the very commodity falls to Fs. < and demand "ill increase to &' $g. This is called extension in demand. %n the other hand, if the price of the commodity increases to Fs.&', demand "ill decrease. such a situation "ill refer to the contraction of demand.
8ase #
Extension : 8ontraction of 5emand !rice Fs. uantity
5escription
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1all in price Fise in 5emand
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!) Di##erentiate between increase and decrease in demand? A) #ncrease in demand refers to the situation "hen there is more demand at the same price or the same demand at higher price. #n such case, there "ill be a shift in demand curve in the up"ard direction.
!rice
5emand
8ase #
&0 &0
'0 0
8ase ##
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'0 0
#ncrease in 5emand
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5ecrease in demand means that either less )uantity is demanded at the same price or same )uantity at lo"er price. C !rice
5emand
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13) Distinguish between movement along the demand curve and shi#t in the demand curve? A) "ovement along the demand#$ 5ue to change in price of a good, other factors influencing demand remaining the same, a consumer moves along a given demand curve. /s a result of rise in price of a commodity the )uantity demanded of the commodity falls and he therefore moves up on the demand curve. %n the other hand "hen price of the commodity falls, other factors remaining the same, he buys more of the commodity and therefore moves do"n on the demand curve.
Shi%t in Demand Curve# $ Bhen factors other than price changes, the entire demand curve shifts. #f a consumerCs income increases or he start preferring the commodity more the demand increases and as a result demand curve shifts to"ards the right. %n the other hand "hen a consumerCs income decline or price of its substitute good falls, the consumerCs demand for the commodity decreases and its demand curve shifts to the left. Thus, "hereas movement along the demand curve ta$es place due to the changes in price of the commodity alone, shift in the demand curve occurs due to the factor other than price.
rice -lasticity O# Demand 1) De#ine price elasticity o# demand$ A) !rice elasticity of demand measures the degree of responsiveness of )uantity demanded of a good to changes in its price, given the consumerCs income, his preference and prices of other goods. !recisely, price elasticity as defined as the ratio of proportionate change in price.
!rice Elasticity + !ercentage change in uantity 5emanded !ercentage change in !rice
2) -.plain the meaning o# elastic demand and inelastic demand as understood in economics$ A) Elastic 5emand4 - Bhen price elasticity of a commodity is greater than one, demand for that commodity is said to be elastic. #n case of demand percentage, increase in )uantity demanded is
greater than the percentage fall in the price so that the total expenditure on the commodity increases "hen the price falls and vice versa. #nelastic 5emand4- Bhen coefficient of price elasticity for a commodity s lee than one, demand percentage increases in )uantity demanded is less than the percentage fall in price so the total expenditure on the commodity decreases "hen the price falls and vice G versa. Thus, 5emand is elastic if e p H & 5emand is inelastic if e p I &
3) -.plain any three #actors on which price elasticity o# demand depends$ A) The price elasticity of demand is determined by the follo"ing factors4i /vailability of substitutes4- #f for a commodity close substitutes are available, its demand tends to be elastic. #f the price of the commodity goes up, the people "ill shift to the close substitute and as a result the demand for that commodity "ill greatly decline. The greater the possibility of substitution, the greater the price elasticity of demand for it. #f for a commodity substitutes are not available, people "ill have to buy it even "hen its price rises, and therefore its demand "ould tend to be inelastic. ii The number of uses of a commodity4- the greater the number of uses of a commodity the higher "ill be its price elasticity. iii The nature of a commodity4- /s "hether it is a necessity or a luxury goo d. 5emand for necessities is inelastic "hile for luxury is elastic. iv Time !eriod4- The duration of time also influence the elasticity of demand for a commodity. 5emand tends to become elastic if time involved is long. This is because consumer can substitute goods in the long run. #n the short run, substitution of the commodity by an other is not so easy.
%) -.plain degree or types o# price elasticity$ A) !erfect Elastic 5emand4- !erfectly elastic demand is said to be happen "hen a little change in price leads to an infinite change in )uantity demanded. / small rise in price on the part of the seller reduces the demand to ero. #n such a case the shape of the demand curve "ill be horiontal straight line.
3 e c i r !
2 !erfectly #nelastic demand4- !erfectly inelastic demand is opposite to perfectly elastic demand. nder perfectly elastic demand, irrespective of any rise or fall in price of a commodity, the )uantity demanded remains the same. The elasticity of demand in this case "ill be e)ual to ero.
nitary Elastic 5emand4- the demand is said to be unitary elastic "hen a given proportionate change in price level brings about an e)ual proportionate change in )uantity demanded. The numerical value of unitary elastic demand is exa ctly one i.e. Ed + &. arshall call it unit elastic.
Felatively elastic 5emand4- relatively elastic demand refers to a situation in "hich a small change in price leads to a big change in )uantity demanded. #n such a case elasticity of demand is said to be more than one.
Felatively #nelastic 5emand4- nder this relatively inelastic demand a given percentage change in price produces a relative less percentage change in )uantity demanded. #n such a case elasticity of demand is said to be less than &.
) What are the #actors determining -lasticity o# demand$ A) 1actors determining elasticity of demand are4i ecessaries of 7ife4- 1or necessaries of life the demand is elastic or inelastic because people buy re)uired amount of goods "hatever their price is. E.g. Fice, salt etc......... ii 8onventional ecessaries4- The demand for conventional necessaries is less elastic or inelastic. !eople "ho are accustomed to the use of goods li$e intoxicants "hich they purchase at any price. E.g. Bine, cigarette etc.. iii Substitutes4- demand is elastic for those goods having substitutes and inelastic for those good "hich have no substitutes. E.g. Tea and 8offee.. iv umber of uses4- Elasticity of 5emand for any commodity depends on its number of uses. 5emand is elastic if the commodity has more uses an d inelastic if it has only one use. E.g. 8oal has elastic demand. v Fa" material and finished goods4- The demand for ra" material is inelastic but the demand for finished goods is elastic. E.g. !etrol has inelastic demand "hile 8ar has elastic demand. vi abits4 - #f consumers are habituated of some commodities the demand for such commodities "ill be inelastic. This is because the 8onsumer consumes them even at high prices. E.g. / smo$er does not smo$e less "hen the price of the cigarette "ill goes up.
*) What are the mportance o# elasticity o# Demand? A & seful for 9usiness4- #t enables the business in general and the monopolistic in particular to fix the price. Studying the nature of demand the monopolist fixes higher price for those goods "hich have inelastic demand and lo"er prices for goods "hich have elastic demand. %n this "ay, they maximie profit. ' 1ixation of !rices4- #t is very useful to fix the price of Dointly supplied goods. #n the case of Doint product li$e paddy and sha", the cost of production is not $no"n. The price of each is then fixed by its elastic and inelastic demand. Bage 9argaining4- The same argument applies to the price of labour i.e. the "age rate. Trade union demand high "age rates if the elasticity of demand for labors are lo". > #ndirect Taxation4- The concept of elasticity is also important for the government, "hen it tries to fix the rate of indirect taxes because these taxes affect the price of the commodities. The government has to levy taxes on goods "hich have inelastic demand to get a high tax revenue "ithout changing the demand. < #nternational !rices4- Bhen t"o countries engage in trade, the term of trade are determined by the reciprocal elastic ties of demand of the t"o countries for each otherCs goods. 6 5evaluation policy4- Sometimes "hen a country suffers from an adverse balance of !ayment i.e. the value of imports exceed the value of exports, the government devalues the currency. The
government reduces the price of domestic currency in terms of foreign currency. This helps in solving the balance of payments problem by increasing the price of imported goods in the domestic mar$et and hence reducing the demand for imports.
