Class XII Economics Study Material

SYLLABUS
ECONOMICS(030)
Class XII (2014-15)
3 Hours
UNITS
100 Marks
Marks
Part A: Introductory Microeconomics
1. Introduction 06
2. Consumer Equilibrium and Demand 16
3. Producer behaviour and Supply 16
4. Forms of market and price determination under perfect 12
competition with simple applications.
Part B: Introductory Macroeconomics
Total: 50
5. National Income and Related Aggregates. 15
6. Money and Banking 08
7. Determination of Income and Employment 12
8. Government budget and the Economy. 08
9. Balance of Payments. 07
Total: 50
Note: The question paper will include value based question to the extent of 5 Marks

STUDY MATERIAL
(MICRO ECONOMICS)
UNIT-1 (MARKS-6)
INTRODUCTION
GIST OF THE LESSON
Meaning of economics: Economics is the science which studies human behavior
as a relationship between ends and scarce means which have alternative uses.
Meaning of an economy:-Economy is the system which provides people the means
to work and earn a living. Or it is a frame work within which economic activities like
production, consumption, and capital formation are undertaken.
Meaning of scarcity:-It is defined as excess of demand over available supply, i.e,
demand of resourses>supply of resources.
Economic problem:-The problem of making a choice is called economic problem.
Causes of economic problem:- It arises due to
1) Scarcity of resources
2) Unlimited human wants
3) Resources can be put to alternative uses
Scarcity and Choice go together:-Scarcity and choice are not separable because
resources are limited or scarce and the problem of choice arises due to it.
Economising of resources:-Our wants are unlimited and resources are limited, so
we have to use the resources fully and efficiently. It means that resources should be
best utilized. This is called economizing of resources.
Central Problems of an Economy:-Central problem of an economy is Allocation of
resources.The three central problems relating to allocation of resources are:-
1) What to produce:-The problem of what to produce and in what quantity is the
first basic or central problem. It is related to the selection of goods. Our
resources are limited. So first problem that we have to face is which goods
and services are to be produced e.g consumer goods or capital goods, war
time or peace time goods. After the decision has been taken the quantities of
these goods should also be decided.
2) How to produce:- The second important problem is the problem of choice of
technique of production. That means we have to decide whether to use labour
intensive technique(it uses more of labour than capital) or capital intensive
technique(it uses more of capital than labour).How ever the choice of
technique depends on the objective of the producer.The producer can use

labour intensive ,capital intensive or both technique of production.The main
aim is to use the efficient technique of production.
3) For whom to produce:-This is also called the problem of distribution of
National Income among the factor of production. For whom to produce is
actually the problem of determining wage rate for the use of labour ,rent for
the use of land, interest for the use of capital and profits for the producer to
ensure equitable distribution of income and welfare in the society.
Production possibility curve or frontier
A production possibility curve/ frontier shows different combinations of two
commodities that can be produced by an economy with the full use of given
resources and technology.
(i)Normally, the production possibility curve is concave to the origin. It is
because of increasing marginal opportunity cost.
(ii)A production possibility curve shifts out due to technological progress or
increase in thesupply of resources available to an economy or both.
Assumptions of PPC-1)Resources are constant.
2)Technology is given.
3)Resources are fully and efficiently used.
4)Production of only two goods can be shown in a PPC.
Features of PPC-1) It is downward sloping.
2) It is concave to the origin.
PPC can be explained with the help of a schedule

Shifting/Rotation of PPC
a) Change of Resources

(ii) Change in technology
• Efficient technology for the production of Commodity – X: Efficient technology
for the production of Commodity – X would mean more production of
commodity – X with the same resources. Accordingly, PPC would rotate (NOT
SHIFT) as shown in Fig
Efficient technology for the production of Commodity – Y : Efficient technology for the
production of commodity – Y would mean more production of Y with the same
resources. Accordingly, PPC would rotate (NOT SHIFT) as shown in Fig

Efficient technology for the production of both X and Y:
Efficient technology for the production of both X and Y would mean much greater
production of both X and Y with the same resources. Accordingly, PPC would shift to
the right as shown in Fig.

Opportunity Cost (Transformation cost)-
The opportunity cost of a factor is equal to the value of a factor in its next best
alternative use. Eg-A plot of land can be used for wheat and rice
production.Production of wheat provides earning of Rs. 1 lakh and Production of rice
provides earning of Rs. 90000.If we produce wheat then its opportunity cost is Rs.
90000,which is the value of rice sacrificed.
Marginal opportunity cost(or Marginal Rate of Transformation)-
The marginal opportunity cost of good X is the rate of sacrifice of the other good,
say, Y, per unit increase in the production of good X.
Or

The marginal opportunity cost of good X is defined as the amount / quantity
sacrificed of good Y per unit increase in production of good X.
Marginal opportunity cost along a PPC.
Production
of Good X
Production of
Good Y
Marginal Opportunity Cost of Good X in terms
of Good Y or amount sacrificed of good Y per
unit increase in good X
0 18 -
1 17 1
2 15 2
3 12 3
4 8 4
5 3 5
Note: The above table shows the case of increasing marginal opportunity cost. To
produce one more unit of Good X, increasing units of Good Y have to be sacrificed.
For example, to produce the first, second, third, fourth and fifth unit of Good X, 1,
2,3,4 and 5 units of Good Y have been sacrificed respectively.
The shape of PPC depends on MOC :
1. If MOC is increasing PPC is concave.
2. If MOC is decreasing, PPC is convex.
3.If MOC is constant, PPC is a straight line.

The Fig Illustrates the concept of marginal opportunity cost. It is assumed that
initially resources are employed such that, output in Use-1 = OK and output in Use-
2=OL
M.O.C = Loss of Output of Good Y/Gain of Output of Good X
= KK1 / LL1
= ab / bc= Slope of production possibility curve

Micro and Macro Economics:
Micro economics studies the behaviour of individual economic units of an economy
like a consumer, a producer for different goods and services.
Macroeconomics studies aggregates at the level of the economy as a whole like
aggregate demand, aggregate supply, problem of full employment, total saving, total
investment, aggregate price level, etc.
DIFFERENCE
MICROECONOMICS MACROECO0NOMICS
1. It studies individual economic units. 1. It studies aggregate economic units.
2. It deals with determination of price and 2. It deals with determination of general
output in individual markets. price level and national output in the
country.
3. It aims at optimal allocation of
3. It aims at determination of aggregate
resources. output, national income, price level and
employment level in the economy.
4. Example-Theory of demand, theory of 4. Example- Aggregate demand,
supply, theory of price determination,etc. aggregate supply, national income,etc.
QUESTIONS FOR BRIGHT LEARNERS
VERY SHORT ANSWER TYPE QUESTIONS: - (1 Mark Each)
Q.1. Why is there a need for economizing of resources?
Ans. Because resources are limited.
Q.2. Why does economic problem arise?
Ans. It arises mainly because of scarcity of resources.
Q.3. 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.
Q.4. What does a rightward shift of PPC indicate?
Ans. The rightward shift of PPC indicates growth of resources or technological
progress.
Q.5. 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.
Q.6. 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).
Q.7. 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.
Q.8. What does a point below PPC indicate?
Ans. It shows inefficient/underutilization of resources.
Q.9. What is the slope of PPC? What does it show?
Ans. Slope of PPC refers to MRT (marginal rate of transformation).It shows that in
order to produce more units of one good, say X, some units of the other good, say Y
must be sacrificed. So slope of PPC= ∆Y/∆X
Q.10. When allocation of resources is considered as inefficient?
Ans. Allocation of resources is considered as inefficient when economy performs
below the PPC curve.
Q.11.When can PPC be a straight line?
Ans. When MOC is constant.
Q.12 What is the opportunity cost of opting for higher studies rather than a job?
Ans.It is the amount of wage/salary the person would have earned in a job.
SHORT ANSWER TYPE QUESTIONS: (3/4 Marks Each)
Q.1.
(a)
(b)
(c)
Draw PPC and show the following:-
Full employment of resources,
Underutilisation of resources, and
Growth of resources.

Y (a) Full employment of
P’
(c) Growth of
Resources
Commod
ity Y
.
(b) Underutilisation
of Resources
X
O Commodity X P P’
Ans. (a) Full employment of resources - A point anywhere on the PPC, shows the
efficient use or full employment of resources.
(b) Underutilisation of resources - A point anywhere inside of the curve, shows
inefficient/under utilisation of resources.
(c) 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’.
Q.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’.
Q.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.

Q.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.
Y
A
B PPC
Cloth
C
.U
D
X
O Wheat
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.
Q.5. Why does an economic problem arise? Explain.
Ans. Reasons-
1. 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.
2. Limited resources - The resources are limited in relation to need for them. It is the
main cause of economic problem.
3. 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.
Q.6. Calculate MRTXY at different production possibilities from the following
hypothetical data. Draw a PPC on the basis of the schedule

Production
Possibilities
A
B
C
D
E
F
Commodity X
0
1
2
3
4
5
Commodity Y
15
14
12
9
5
0
Ans. Production Possibility Schedule:
Production
Possibilities Commodity X Commodity Y
Marginal Rate of
Transformation
(MRT) =ΔY/ΔX
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
---------
1 Y : 1X
2 Y : 1X
3 Y : 1X
4 Y : 1X
5 Y : 1X

Y
15
PPC
14
Comm1
o2
d ity Y
X
0 1 2 3 4 5
Commodity X
Value based question:-
Q1 A basic economic problem is that there is oil shortage in INDIA. What
measures do you suggest to mee t the growing demand of oil?
Ans:-Measures taken are : 1) oil is limited so it should be efficiently and
fully(optimum use)used.
2)Massive awareness on shortage of oil and people should be encouraged
to use public transport system.
Q2. The state govt. has sanctioned acertain amount to increase production in rural
areas. Which technique of production will you suggest to the state govt. for this
project?
Ans.:-Labour intensive technique of production.
Q3. Why is it that on one hand coal is found in plenty, yet it is scarce , while a rotten
fruit is rare but not scarce?
Ans:- Coal is scarce because its demand is greater than its supply.A rotten fruit is
not scarce because there is no demand for rotten fruits.
Q4. For a devolepmental project, logs of wood another building material have to be
carried to the upper floor of building under renovation by the labour .Alternatively
elevators and lifts can do the job ,which one will you choose and buy?
Ans:- I will choose the second alternative as it is efficient and time and money saving
method.

Q5. If more and more resources are constantly explored and new and new technique
of production are constantly discovered,don’t you think a day will come when our
central problems will be solved once for all?
Ans:-When new resources are explored and new technology is discovered,PPC
wouldexpand,indicating larger and larger flow of goods &services in the
economy.But our wants are limlted, so scarcity of resources in relation to human
wants will always exist.And,so long as limited resources are to colliding with
unlimited wants,central problems can never be solved once for all.
QUESTION FOR LATE BLOOMERS FOR THE SESSION 2013
Q1.What is microeconomics?
Ans:Microecomics is the study of an individual economic unit like a firm, a consumer.
Q2.What is PPC?
Ans:Production possibility curve shows different combinations of two goods which
can be produced with given resources and technology.
Q3.What is Opportunity Cost?
Ans:It is the value of a factor in its next best alternative use.
Q4.What is marginal opportunity cost?
Ans:It is the rate at which output of good Y is to be sacrificed for every additional
unit of good X.
Q5.Write two properties of PPC.
Ans:PPC slopes downward from left to right.
And PPC is concave to the origin.
Q6.Why does an economic problem arise?
Ans:An economic problem arises because resources are limited,our wants are
unlimited and resources have alternative uses.
Q7.What are the 3 basic economic problems of an economy?
Ans.The 3 basic economic problems are:
1.What to produce and in what quantity?
2.How to produce?
3.For whom to produce?

Q8.Explain the meaning of what to produce?
Ans: For answer see gist of the chapter.
Q9.Explain the meaning of how to produce?
Ans.For answer see gist of the chapter.
Q10.Explain the meaning of For whom to produce?
Ans:see gist of the chapter for this answer.
Q11.Draw PPC and show the following:
1.Overutilisation of resources.
2.Fullutilisation of resources.
3.Underutilisation of resources.
Q12.Write differences between microeconomics and macroeconomics.
Ans.See gist of the lesson.
TEST PAPER:-CLASS XII
CHAPTER :- 1 ( INTRODUCTION)
Q.1 What is an economy?( 1)
Q.2 What is scarcity .{1}
Q.3 Name the central problems of an economy.{1}
Q.4 Why do economic problems arise?.{1}
Q.5 What is the problem of what to produce? {1}
OR
Q.6 What is the problem of How to produce? {1}
Q.7 What is the problem of ‘for whom to produce’? {1}
Q.8 Define a PPC? {1}
Q.9 Define opportunity cost.{1}
OR
Q.10 What is marginal opportunity cost or marginal rate of transformation? {1}
Q.11 Define:) Micro economics.{1}

OR
Q.12 Define M acro economics.{1}
Q.13 What does a point on PPC indicate?{1}
Q.14 FILL IN THE BLANKS.
1. The PPC would shift to right when there is _------------- of resources.
2) The basic economic problem is the problem of _-----------------------.
3)Cotton textile industry is the subject matter of _----------economics. 3x1
Q.15 What is Rotation of PPC? Explain with diagram. {3}
OR
Q 16 What is shift in PPC? Explain with diagram {3}
Q.17 Why is PPC concave? Explain.{3}
Q18. Does production take place only on thePPC? Explain with diagram. {3}
Q.19A lot people died and many factories were destroyed in an earthquake{ natural
calamity}. How will it affect the PPC? {3}
Q20 Draw a ppc to represent the following on it .
a)Underemployment of resources.
b)Growth of resources
c)Fuller utilization of resources. {4}
Q21. Draw the shape of PPC when MOC is (a)Decreasing (b)Constant (c)
Increasing. {4}
Q22. Plot the PPC by taking Rice consumption on the X axis. Comment on the
shape of the curve. {4}
RICE CONSUMPTION FUEL CONSUMPTION
100 0
90 1
70 2
40 3
0 4

UNIT – 2 (16 Marks)
CONSUMER BEHAVIOUR AND THE THEORY OF DEMAND
STUDY MATERIAL FOR BRIGHT STUDENTS
Sr. No
1
Chapters
Utility Analysis
Concepts
Cardinal and Ordinal Utility
Consumer’s Equilibrium
- One Commodity
- Two Commodity
- Indifference Curve and Budget line
Demand-Individual and Market Demand
2 Demand and Law of
Demand
3 Elasticity of Demand
Law of Demand
Change in Demand and Change in quantity
demanded
Concept of elasticity of demand
Factors affecting elasticity of demand
Methods of measuring price elasticity of demand
-Point Method
-Total Expenditure Method
- Geometric Method
Utility Analysis
Utility - Want satisfying Power of a good.
Cardinal Utility – It says that utility can be measured in number. (Quantitative
Concept)
Ordinal Utility – It says that utility being a mental concept can’t be measured in
number. (Qualitative Concept)
Total Utility – It is the sum total of Utility derived from the consumption all units of
consumption.TU= Sum of MU
Marginal Utility – It refers to the additional utility on account of consumption of an
additional unit of commodity. MU=TUn-TUn-1
Consumption of x TU MU
1 20 20
2 36 16
3 46 10
4 50 4
5 50 0
6 44 -6
7 42 -2
8 38 -4
Law of Marginal Utility – The law says that when a consumer consumes more and
more amount of one commodity, the utility derived from successive units of
commodity will go on declining.

Consumer Equilibrium- Consumer’s equilibrium is a situation where the consumer
maximises his satisfaction out of his limited income.
Indifference Curve - It refers to the locus of all possible combinations of two
commodity which gives equal level of satisfaction to the consumer.
Budget line – It is the locus of all possible combinations of two commodities which
can be purchased at a given level of income.
Question and Answer
1. What do you mean by monotonic preference?
Ans . it mean that a rational consumer always prefer more of a commodity as
it offers him a higher level of satisfaction.
2. What price the consumer is ready to pay for a commodity in a state of
his equilibrium?
Ans:- in a state of equilibrium the price that the consumer is ready to pay is
exactly equal to the price prevailing in the market . Because, in a state of
equilibrium , money worth of marginal utility that the consumer gets is exactly
equal to market price he has to pay.
3. What happen when Mux/Px is greater than MUy/Py ?
Ans. This situation implies that by spending a rupee on Good –X the
consumer gets grater marginal utility that in case of Good-Y. Accordingly, he
will spend more on X than Y .As consumption of X rises, Mux will fall .On
other hand ,as consumption of Y falls ,MUy will rise. The consumer will stop
buying more of X in place of Y only when Mux/Px=MUy/Py. It is here only that
the equilibrium is struck.
4. How is equilibrium of the consumer affected when Mum happens to rise
,and Px is constant.
Ans . Equilibrium is struck when Mux/Px=Mum.
If MUm rises and price is constant ,the consumer will be off the point of
equilibrium .Because Mux/Px would then be less than Mum . the consumer
will reach back his equilibrium only if Mux rises ,as Px is given to be constant .
This will happen only when consumption of commodity –X is decreased.
5. How will the consumer move along his IC in a situation when MRSxy>
Px/Py
Ans. The consumer should move downward to the right along the IC .
Convexity of the IC ensure that as the consumer moves downward to the right
along his IC, MRSxy tends to fall. Implying that the consumer should start
consuming more of X in place of Y.
6. How will a consumer adjust his consumption of Good-X and Y in
asitution when MRSxy=Px/Py
Ans. The consumer should start consuming more of Y in place of X . That is,
he should move upward to the left along the IC . Convexity of the Ic ensure
that as the consumer moves upward to the left along his IC , MRSxy tends to
rise . He should stop at a point when MRSxy=Px/Py

7. Why should a consumer buy more of a commodity even when MU of
every successive units tends to decrease
Ans. Even when MU is decreasing ,its money worthy still be greater than the
price he has to pay. We know ,the consumer stops buying a good only when
its money worth of MU is equal to its price.
8. State the condition of consumer’s equilibrium.
Ans. Hint: A consumer strikes his equilibrium when rupee worth of marginal
utility actually received by the consumer is equal to marginal utility on money
Mux/Px=Mum
Demand and Law of Demand
Demand – Demand for a commodity is defined as the amount of commodity which a
consumer purchase at a given price and at a given time.
Individual Demand – It shows the amount of commodity purchased by an individual
consumer at a given price and at given time.
Market Demand – It shows the amount of commodity purchased by all consumers
present in the market at a given price and at a given time.
Demand function – It is the functional relationship between the quantity demanded
and the factors affecting it. Symbolically it is written as Q = f( P R I N T), where
P-Price of the commodity, R- Price of the related commodity, I – Income of the
consumer
N – Number of consumer, T – Taste and Habits and Preference of the
consumer
Law of Demand- Law of demand says that other thing remaining same more is
demanded at a less price and less is demanded at a high price. Hence there exist an
inverse relationship between the price and quantity demanded.
Change in demand – When quantity demanded of a commodity changes due to
change in the other factors, price of the commodity remaining constant, it is called
change in demand. It is also called movement of the demand curve. It is of two
types such as a) Increase in Demand
b) Decrease in demand and Increase in Demand – When quantity demanded
of a commodity increases due to positive changes in the other factors, price
remaining constant, it is called increase in demand.
Decrease in Demand – When quantity demanded of a commodity decreases due to
negative changes in the other factors, price remaining constant, it is called decrease
in demand.
Change in quantity demanded – When quantity demanded of a commodity
changes due to change in its price, other factors remaining constant, it is called
change in quantity demanded. It is also called movement along the demand curve. It
is of two types such as:-
a) Expansion in demand
b) Contraction in demand.
Expansion in demand – when quantity demanded of a commodity increases due to
fall in the price of the commodity, it is called expansion in demand.

Contraction in demand – When quantity demanded of a commodity decreases due
to rise in the price of the commodity, it is called contraction in demand.
Elasticity of demand
Price elasticity of demand- It is defined as the degree of responsiveness in the
quantity demanded of a commodity due to change in its price, other factors
remaining constant.
Factors affecting price elasticity of demand:
1. Nature of commodity
2. Availability of Substitutes
3. Diversity of uses
4. Income level of the buyer
5. Habit of the consumer
6. Proportion of income spent on a commodity
7. Time Period
8. Postponement of use
Methods of measuring price elasticity of demand - There are three methods of
measuring price elasticity of demand. These are 1. Percentage Method
2. Total expenditure method
3. Geometric Method
Percentage Method: By percentage method the price elasticity of demand is
measured by taking the ratio between the percentage change in quantity demand
and the percentage change in price.
Ed= (-) % Change in quantity Demanded/
% Change in price.
Ed = q1-q/q*100
P1-p/p*100
= Δq/q
Δp/p
= Δq/q *p/Δp
Ed = p/q * Δq/ Δp
Question and Answer
1. If the quantity demanded of a commodity ‘X’
decreases as the household income increases,
what type of good is ‘X’?
Ans. Inferior good.
2. Write down one factor responsible for increase in demand.
Ans. Rise of income or favourable taste for a good.
3. At the given price when will be the demand of a commodity be less?
Ans. Fall in the income.
or
Ans. Fall in the price of a substitute good.

4. When two demand curves intersect with each other which will be more
elastic.
Ans. The demand curve which is more flattered will be more elastic.
5. If the demands for good ‘Y’ increases as price of another good ‘X’
rises
how the two goods are related?
Ans. These are substitute goods.
6. Answer in one sentence the assumption on which a demand curve is
constructed
Ans. That all the determinates are constant.
7. What is cross price effect?
Ans. Cross price effect refers to the effect of change in the price of
commodity-X on the demand for commodity Y when X and Y are related
goods.
8. What types of goods find a rise in their demand even income of the
buyer reduces?
Ans. Inferior goods
9. Why is demand for water inelastic ?
Ans. Demand for water is inelastic ,as water is an essential of life.
3/4 Mark Questions :
1.Give difference between change in demand and change in quantity
demanded.
Change in quantity demanded
1. More or less quantity is
demanded due to change of
price
2. Movement on same demand
curve downwards or upwards
3. Extension & contraction are
two stages.
Change in demand
1. More or less quantity is
demanded due to factors
other then price.
2. Shifting of demand curve
towards left and right
3. Increase and decrease
are two stages
2. Why more is purchased when price falls?
Or
Why does demand curve slope downwards?
Ans. (a)Income effect: - change in real income due to change in price is
income effect. When price falls real income increases that why a person purchases
more.
(b)Size of consumer groups: - when price falls the demand extends
because the persons who were not purchasing earlier. They also start purchasing.
(c)Substitution effect: - when the price of a substitute good increases the
demand of the given god increases as it is relatively cheaper.

(d)Law of diminishing marginal utility:- by using more and more units of a
commodity the marginal utility from each successive unit goes on decreasing. This is
why the consumer buys more commodities at low price.
3.Explain with the help of diagram, the effect of the following changes on
the demand of a commodity.
10. Fall in the price of a substitute good .
11. Fall in the income of its buyers.
Ans. (a) Fall in the price of a substitute good will cause fall in the demand of
the given commodity from 0q to 0q1. the demand curve will shift
towards left to d1d1
(b) Fall in the income of its buyer will cause fall in the demand of normal
goods from 0q to 0q1. the demand curve will shift towards left from dd
to d1d1
4.Price of a commodity falls from Rs. 4 to Rs. 3 per unit. As a result total
expenditure on it rises from Rs. 200 to Rs. 300. Find out price elasticity of
demand by percentage method.
Ans. PriceTotal Exp.Quantity
Rs. 4Rs. 200200/4=50
Rs. 3Rs. 300300/3=100
Ed:- P / q x ∆q / ∆p
Ed:- (-) 4 / 50 x 100 – 50 / 3-4
Ed:- (-) 4 / 50 x 50 / -1Ed:- 4

5. Given the fact that the slope of a straight line demand curve =∆P/∆Q,
how do you relate it to own price elasticity of demand ?
Ans. We know ,Ed = P/Q x ∆Q/∆P .
Given the fact that slope of demand curve = =∆P/∆Q ,
We can write that Ed = 1/slope of demand curve X P/Q
Diagrams +
1. Law of demand with demand curve
2. Market Demand Curve
A B Market
3. Change in quantity demanded and change in demand

Due to change in price
No shifting of demand curve
Price constant
Shifting of demand curve
4 Degrees of price elasticity of demand
Ed >1 Ed <1
Ed =0
Ed=infinity
STUDY MATERIAL FOR SLOW LEARNERS (UNIT II)
CONSUMER’S BEHAVIOUR AND
DEMAND
SOME BASIC CONCEPTS OF THE RELATED UNIT
Utility:-Wants satisfying quality of a commodity.
Total utility:-Total psychological satisfaction obtained from the consumption of all
the commodities.
Marginal utility:-The rate of change in total utility is known as marginal utility.
Normal good:-whose demand increases with increase in income & vice-versa.
Inferior good:- Whose demand decreases with increase in income & vice-versa.

Giffen good:-whose demand increases with increase in price & vice-versa.
Substitute good:-Goods which can be demanded in place of other good.
Complementary good:- Goods which are jointly demanded.
Demand:-It is an effective desire which can be demanded at a certain price, place &
time.
Law of demand:- other things remaining the same, higher the price lower the
demand & vice-versa.
Indifference curve:-Locus of various points where a consumer attains equal level of
satisfaction at all points.
Indifference map:- Set of indifference curve which shows different level of
satisfaction.
Budget set:-The bundle of goods a consumer can buy from his/her entire income.
Budget line :-It shows the budgetary constraints or the money income of the
consumer.
Consumer’s equilibrium:- when a consumer attains maximum level of
satisfaction from the
given income.
Law of diminishing marginal utility:- It declines with the consumption of
successive units of the commodity.
Change in demand:- Affected by the factor other than price.
Change in quantity demand:- Affected by price only.
Elasticity of demand:-Responsive change in quantity demand which is due to
responsive change in price.
Factors affecting demand:- price of the goods,income of consumer, change in
future price, taste0 and preference of consumer etc.
(Very Short answer Questions Carrying 1 marks each)
Q1.Define marginal utility?
Ans:- The rate of change in total utility during consumption process is known as
marginal utility.
Q2. What is demand?
Ans:- It is an effective desire which can be demanded at a certain price, place and
time.

Q3. What is law of demand?
Ans:- other things remaining the same higher the price lower the demand and vice-
versa.
Q4. What is normal good?
Ans:-Goods whose demand increases with the increase in income and vice-versa.
Q5. What is inferior good?
Ans:- Goods whose demand decreases with the decrease in income is known as
inferior good.
Q6. Give two examples of giffen good.
Ans:- Diamond, Precious stone, Merchandise car etc.
Q7. Define the term elasticity of demand.
Ans:- Percentage change in quantity demand which is due to percentage change in
price is known as elasticity of demand.
Q8. Write the situation when a consumer’s attain equilibrium in case of one good.
Ans:- Mux/Px=Mum
Q9. What do you mean by increase in demand?
Ans:-It is a situation when demand increases irrespective of without change in price.
Q10. What is inelastic demand?
Ans:- When demand does not change irrespective of change in price.
(Short Answer Questions carrying 3 Marks each )
Q1. List three factors which affects demand.
Ans:- a)Price of the commodity
b) Income of the consumer
c) Change in taste, behaviour and preference of the consumer
Q2. Distinguish between Normal good and Inferior good.
Ans:-

Normal good Inferior good
# Goods whose demand increase with # Goods whose demand decreases with
increase in income .increase in income.
# It has positive slope .# It has negatively slope.
Q3. Differentiate between increase in demand and extension in demand.
Ans:-
Increase in demand Extension in demand
# Demand increases without change in # Demand extends due to change in
Price price
# Rightward shifting of demand curve .# Movement along demand curve.
Q4. Write the properties of indifference curve.(any three)
Ans:-1)Higher indifference curve gives higher level of satisfaction.
2) Two indifference curve never intersect each other at any point.
3) Indifference curves are convex to origin.
Q5.Mention any three factors which effects elasticity of demand.
Ans:- a)Nature of the commodity-necessary and luxurious good
b)Time period-short and long
c) Proportion of expenditure-larger and smaller part(students will explain the points in
brief)
Q6.Calculate price elasticity of demand by total expenditure method:-
Price(Rs)
8
10
Ans:-
Quantity demand(units)
100
90
Price
8
10
Quantity demand
100
90
Total
expenditure
800
900
Type of
elasticity
Ed=<1

Q7.Explain the concept of law of demand with suitable schedule.
Ans:-Law of demand states that other things remaining the same higher the price
lower the demand and vice-versa.
Price (Rs)
10
5
(pupil will explain the schedule in brief)
Quantity Demand
20
40
Q8. Show the relationship between total and marginal utility with the help of curve.
Ans:- y
TU
utility
o units of commodity MU x
i)When TU increases MU falls.
ii) When TU is maximum MU becomes Zero.
iii) When TU declines MU becomes negative.
(Short Answers Questions having 4 marks )
Q1. Distinguish between substitute and complementary good. Give example in each
case.
Ans:- Substitute good:- Goods which are demanded in place of one another is known
as substitute goods. For example-tea and coffee, wheat and rice, bike and scooter
etc.
Complementary good:- Goods which are jointly demanded is known as
complementary good. For example-car and petrol, bread and butter, pen and ink etc.
Q2. Explain the effect of change in income of the buyers of a good on its demand.
Ans:- As we know that the income of the consumer either increase or decrease and
a rational Consumer behaves accordingly. Incase if consumer income raises then
ultimately the demand will also increase and if consumer’s income decline then
consequently he will demand less due to fall in income.(student may take an
example to explain the concept by taking the case of normal and inferior good).

Q3. Distinguish between individual demand and market demand.
Ans:- Individual demand:-Demand of a particular commodity by an individual
consumer in the market is known as individual demand. For ex- Ram’s demand for
milk.
Market demand:- Demand of a commodity by all the consumers in the market is
termed as market demand. For ex- Ram,Sohan and mohan’s demand for milk will be
combined known as market demand.
(Long Answer type questions carrying 6 Marks only)
Q1. Explain briefly any three factors which lead to increase in demand.
Ans:- (1)Increase in income of the consumer
(2) Expected increase in future price
(3) Increase in size of population
(Pupil will explain the mentioned points along with suitable schedule and
diagram)
Q2. Define consumer’s equilibrium. Write its condition in case of two commodities
with the help of suitable diagram.
Ans:-It is a situation when a consumer spends his entire income on two goods in
such a manner which gives him maximum satisfaction.
Condition of consumer’s equilibrium:-
i)Slope of IC =Slope of budget line
i.e MRSxy=Px/Py
ii) At equilibrium point IC is tangent to budget line.
iii) IC is convex to the point of origin & we obtain decreasing MRS.
Y IC
o
good x(Need diagram and its suitable explanation)

Test Paper for Bright Students
Unit -2
(Consumer’s
Behaviour)
1. What does ‘the law of diminishing marginal utility’ say? 1
2. Mention the conditions of consumer’s equilibrium in single commodity case.1
3. Given the market price of a good, how does a consumer decide as to how
many units of that good to buy? Explain.3
4. Why does the demand curve downward slope? OR Give the reasons due to
which the law of demand holds.4
5. State the ‘law of demand’. What is meant by the assumption “other things”
remaining the same, on which the law is based.4
6. Price elasticity of demand for a good is (-) 1. At a given price the consumer
buys 60 units of the good. How many units will the consumer buy if the price
falls by 10%?4
7. Suppose there are 30 consumers for a good, having identical demand
function: d(p) =10-3P for any price less than or equal to 10/3 and d(p)=0 for
any price greater than 10/3. Write the market demand function.
6
8. Determine how the following changes (or shifts) will affect market demand
curve of a product.
2×3=6
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?
Test Paper for Bright Students
Unit -2
(Consumer’s Behaviour)
1. What is MRSxy.1
2. What happens to the demand curve of an inferior good when the income of
the buyer rises? 1
3. What happens to demand of a commodity if there is an increase in price of the
complementary good?1

4. Define consumer equilibrium. Why does a consumer maximize her
satisfaction only when the slope of both Indifference curve and Budget line
are equal to each other?3
OR
How much quantity of a good will be purchased by a consumer at a given
market price to maximize her satisfaction? Explain with the help of a utility
schedule.
5. Explain the difference between:- 4
A: Utility analysis and Indifference curve analysis.
B: Normal goods and Giffen’s goods
6 : Given Ed = - 0.02, and percentage increase in price = 20%, find change in
expenditure onthe commodity.
4
7 :Price of a commodity falls from Rs. 4 to Rs. 3 per unit. As a result total
expenditure on it rises from Rs. 200 to Rs. 300. find out price elasticity of
demand by percentage method. 4
8 Identify the effect on demand of the following–6
(a)Govt enhanced the pay of the government employees. How will this affect
the demand curve of government employees?
(b)A new car factory comes up in Assam; many people who previously
unemployed, in the area are now employed .How will this affect demand curve
of television.
(c) There are train and bus service between Lucknow and Agra. Suppose the
train fare between two cities comes down, how will this affect the demand
curve for bus travel between two cities?
9 : “If a product price increases, a family’s spending on the product has to
increase.” Defend or refute.6
TEST PAPER-2 (CONSUMER BEHAVIOUR AND DEMAND)
(FOR UNDER ACHIEVERS)
Q.1.State whether the following statements are true or false: 1x4=4
i. If other things remaining constant, there is positive relationship between quantity
demanded and own price of a commodity.
ii. The demand for inferior goods increases with decrease in income of consumer.
iii.When elasticity of demand is equal to zero ,the demand curve will be vertical
straight line parallel to Y-axis.
iv. Income of consumer affect the demand for an individual.
Q.2.Fill in the blanks: 1x4=4

a.Indifference curve is ----------------------- to the origin.
b.In case of --------------------goods demand rises with increase in income.
c.When a change in price causes no change in total expenditure then elasticity of
demand is--------------.
d.If good X and good Y are used together to fulfill a want then good X and good Y
are ------------------------goods.
Q.3.Categorise the following changes as expansion, contraction, increase or
decrease in demand (assuming given commodity is a normal good) 1x6=6
i. When price of substitute rises.
ii. When price of given commodity increases.
iii. When income of consumer decreases.
iv. When price of given commodity falls.
v. When the given commodity becomes a fashion good.
vi. When price of complimentary good increases.
Q.4.Draw demand curves having following elasticity:
1x4=4
i.Ed=0 ii.Ed=1 iii.Ed<1 iv.Ed=∞
Work-Sheet
Q1 What is the another name of indifference curve approach?
(a) Ordinal approach
Q2 What is the formula of TU ?
(b) Cardinal Approach (c) Both a and b
(a) ∑ MP (b) ∑ MC (c) ∑ MU
Q3 What is the normal shape of IC ?
(a) Concave (b) Straight Line (c) Convex
Q4 What is meant by change in demand ?
(a) Increase or decrease in demand
demand
(c ) Both a and b
Q5 What is meant by change in quantity demanded?
(b) Extension or contraction in
(a) Increase or decrease in demand(b) Extension or contraction in demand
(c) Both a and b

Q6 The % change in quantity demanded will be equal to % change in price if –
(a) Ed = 2 (b) Ed = 3 (c) Ed = 1
Q7 What is the slope of demand curve in case of normal goods?
(a) Negative (b) Positive (c) Parallel to X axis
Q8 What is the shape of demand curve in case of giffen goods?
(a) Negative (b) Positive (c) Parallel to Y axis
Q9 What is the another name of total expenditure method of measuring price
elasticity of demand?
(a) Total outlay method
Method
(b) Total cost method (c) MC and MR
Q10 What is the formula to measure the price elasticity of demand through
point method?
(a) Upper portion / lower portion
( c) None of the two.
Ans. 1.a 2.c 3.c 4.a 5.b
(b) Lower portion / Upper portion
6.c 7.a 8.b 9.a 10.b
UNIT – III
PRODUCER BEHAVIOUR AND SUPPLY (16 Marks)
A. PRODUCTION FUNCTION: TOTAL PRODUCT, AVERAGE PRODUCT,
MARGINAL PRODUCT, RETURNS TO A FACTOR &
PRODUCER’S EQUILIBRIUM
BASIC CONCEPTS:
1. Production function: refers to the technological relation between physical inputs
and physical output. It is the technological knowledge that determines the maximum
level of output that can be produced by employing different levels of inputs. It is
expressed in terms of a function as follows:
q = f (x1, x2),
where x1 is the amount of factor1, x2 is the amount of factor2, and ‘q’ is quantity of
output to be produced.
2. Total Product: refers to total quantity of goods produced by a firm during a given
period of time by varying the units of a variable input like factor 1.
3. Average product is defined the output per unit of a variable input, say, factor1.
That is, AP1 = TP/x1.

4. Marginal product refers to addition to total product, when one more unit of
variable factor is employed, that is, MP1 = = TPn –TPn-1
5. Short Run and Long Run: Short run is a period in which some factors are
variable (variable input) and other factors remain fixed (fixed input). On the other
hand, in the long run, all factors of production are variable, nil is the fixed factor.
6. Returns to a factor refers to change in total product due change in only the
variable input in the short run, while fixed inputs remain constant.
7. Law of Variable Proportion: states that if we go on increasing more and more
units of a variable factor with fixed factor remain constant, total product increases at
an increasing rate, but beyond a certain level of employment total product increases
at a decreasing rate and finally TP falls.
8. Law of Diminishing Marginal Product states that if we keep on increasing the
employment of a variable input with other inputs fixed, finally a point will be reached
after which the marginal product will start falling.
9. Relation between: (i) TP and MP, and (ii) MP and AP in terms of a schedule:
Factor1 TP1 MP1 AP1
O 0 - -
1 10 10 10
2 24 14 12
3 40 16 13.3
4 50 10 12.5
5 56 6 11.2
6 57 1 9.5
7 57 0 8.1
8 56 -1 7
(i) From the above schedule, the relation between TP and MP is derived as
follows:
Stages
I:IncreasingReturnto
factor1(uptofactor
employment level 3 units )
II: Diminishing Return to
factor 1 (from 4units to 0
unit)
III: Negative Return to
factor1 (after 7 units)
TP1
Increases at
increasing rate
Increasesat
diminishing rate
Starts falling
MP1
an Increasing
a Diminishing
Negative

* When TP is maximum, MP is zero.
(ii) From the above schedule, the relation between MP and AP is derived as
follows:
(a) When AP rises, MP is higher than AP,
(b)When AP falls, MP is less than AP, and
(c) When AP is maximum, MP =AP,
(d) MP may be positive, zero or negative but AP is always positive.
10. Reasons for the operation of increasing returns to a factor:
(i) better utilization of the fixed input with increase in variable input,
(ii) benefits of division and specialization of the variable input used, say, labour,
(iii) indivisibility of fixed input.
11. Reasons for the operation of diminishing return to a variable input, say,
labour:
(i) optimum combination between fixed and variable inputs is disturbed with
increasing use of the variable input,
(ii) After a certain level of employment of the variable input, the benefits from the
division of labour will diminish leading to diminishing return.
(iii) imperfect substitutes between fixed input and variable input.
QUESTIONS:
A. Very short answer questions:
1. Define production function.
2. Define average product.
3. Define marginal product.
4. Define law of variable proportions.
5. What is the law diminishing marginal product?
6. How is TP derived from MP?
7. Define Producer’s equilibrium.
8. What are the conditions of producer’s equilibrium?
9. Give the meaning returns to a factor?

10. What is the general shape of MP curve?
11. What happens to MP when TP increases at an increasing rate?
B. Short Answer Questions:
1. Explain the relation between TP and MP in terms of TP and MP curves.
2. Explain the relation between MP and AP in terms of MP and AP curve.
3. What are the conditions of producer’s equilibrium under MC-MR approach?
4. What are the reasons of the operation of increasing returns to a variable input?
C. Long Answer questions:
1. Explain the law of variable proportions in terms of (i) TP and MP curves, and (ii) a
schedule of TP and MP.
2. What is producer’s equilibrium? Explain the producer’s equilibrium under MC-MR
approach. Use diagram.
3. To increase the production of a good only one input is increasing while other
inputs are held constant. Explain its effect on total physical product. Give reasons.
D. NUMERICAL QUESTIONS WITH SOLUTIONS:
Q.1. Find out APP and MPP.
(i) Labour 1 2 3 4 5 6 7
TPP 40 80 110 130 140 140 130
Ans. APP 40 40 36.67 32.5 28 23.33 18.57
MPP 40 40 30 20 10 0 -10
(ii) Find out the TPP and APP.
Labour 1 2 3 4 5 6 7
MPP 24 20 16 12 8 0 -8
Ans. TPP 24 44 60 72 80 80 72
APP 24 22 20 18 16 13.33 10.28

(iii) Calculate the APP and MPP.
Labour 0 1 2 3 4 5 6 7
TPP 0 5 12 20 30 35 40 42
Ans. APP 0 5 6 6.66 7.5 7 6.66 6
MPP - 5 7 8 10 5 5 2
(iv) The following table gives APP of a factor. It is also known
that (TPP) total product at O level of employment is O.
Determine its total product and marginal product.
Labour 1 2 3 4 5 6
APP 50 48 45 42 39 35
Ans. TPP 0 50 96 135 168 195 210
MPP - 50 46 39 33 27 15
7. Complete the following table:
Units of
Labour
TP AP MP
1
---
3
--
5
20
--
66
---
--
-- --
21 22
-- ---
22 22
21 ---
9. Find out the maximum profit position of a producer by comparing MC &
MR on the basis of the following data:

Output (in units)
1
2
3
4
5
MR
(Rs)
10
9
8
7
6
MC
(Rs)
4
5
6
7
8
E. HOT Questions:
1. What happens to TP when MP is zero?
2. What happens to MPP when TPP increases at decreasing rate?
3. As the variable input is increased by one unit, total output falls. What would
you say about of marginal productivity labour?
4.What happens to MPP when TPP falls?
5.Why MP curve lies above AP curve in the phase of increasing returns to a factor?
6.Why AP keeps raising even when MP declines?
7.When will the producer will be in equilibrium. Explain with the help of a
schedule.
8. Explain the conditions of producer’s equilibrium in case of MR & MC approach
(with the help of diagram).
9.When does a producer earn maximum profit?
10.Prove that for profit maximization:-
1)The market price (P) = MC.
2)MC curve is non-decreasing
F: True or False Questions:
1. State whether the following statements are true or false. Give reasons for your
answer.
(i) When there are diminishing returns to a factor TP first increases then start falling.
(ii) Average product will increase only when marginal product increases.
(iii) Under diminishing returns to a factor, total product continues to increase till
marginal product reaches zero.
G. MCQ Questions:
1. Some factors variable and some factors fixed are referred to the period as:
(a) medium run, (b) long run, (c) short run, (d) None of the above.
2. Output per unit of a variable input is called:
(a) MP (b) TP (c) AP (d) AC
3. The technological relation between inputs and output is referred to as:
(i) cost function, (ii) supply function (iii) utility function (iv) production function.

4. If we keep on increasing units a variable input, fixed inputs remain constant, the
marginal product is initially increasing. But after a certain level of employment
marginal product starts falling. What is the law?
(i) law of diminishing marginal product, (ii) law of variable proportions, (iii) law of
diminishing marginal utility, (iii) law of demand
5. What happens to MP when TP continues to increase at a diminishing rate?
(a) increasing, (b) diminishing (c) remain constant (d) negative
6. What is the value of TP if the AP is 12 at 4 unit of variable input?
(i) 6 (ii) 16 (iii) 48 (iv) 8
7. A producer is in equilibrium when:
(i) MC>MR, (ii) MC= MR, (iii) MC is increasing, (iv) both (ii) and (iii)
STUDY MATERIALS FOR UNDER-ACHIEVERS (QUESTIONS WITH
SOLUTIONS):
1. Define marginal product.
Ans: Marginal product is an addition to the total production by using an extra unit of a
variable factor.
2. Define average product.
Ans: Average product is the product per unit of a variable factor used.
3. Define production function.
Ans: Production function is defined as technological relation between inputs and
output.
4. What is the relation between TP and MP?
Ans: (i) When TP rises at an increasing rate, MP is increasing.
(ii) When TP rises at a diminishing rate MP is diminishing.
(iii) When TP starts falling, MP is negative.
(iv) When TP is maximum, MP is zero.
5. What is producer’s equilibrium?
Ans: Producer’s equilibrium refers to a position at which the producer gets maximum
profit with minimum cost.
6. State the conditions of producer’s equilibrium.
Ans: (i) MC = MR and
(ii) MC should be rising at the point of equilibrium.
7. From the following table, find out the level of output at which the producer will be
in equilibrium. Give reasons for your answer.

Ans:
Output (in
units)
1
2
3
4
5
Output (in
units)
1
2
3
4
5
Marginal Revenue (Rs.)
8
8
8
8
8
Marginal Revenue
(Rs.)
8
8
8
8
8
Marginal Cost
(Rs.)
10
8
7
8
9
Marginal Cost
(Rs.)
10
8
7
8
9
From the above schedule it is concluded that the producer attains equilibrium when
he produces 04 unit of the output because at this level of output both conditions of
producer’s equilibrium are satisfied, i.e., (i) MC = MR, and (ii) MC is increasing at
point of equilibrium.
STUDY MATERIALS FOR BRIGHT LEARNERS (QUESTIONS WITH
SOLUTIONS):
1. What type of changes take place in TP and MP when there are:
(a) increasing return to a factor (b)
diminishing return to a factor Why
do these changes take place?
Ans: (a) TP increases an increasing rate and MP is increasing.
Causes: (i) better utilization of the fixed input with increase in variable input,
(ii) benefits of division and specialization of the variable input used, say, labour,
(iii) indivisibility of fixed input.
(b) TP increases at a diminishing rate and MP is diminishing.
Causes:(i) optimum combination between fixed and variable inputs is disturbed with
increasing use of the variable input,

(ii) After a certain level of employment of the variable input, the benefits from the
division of labour will diminish leading to diminishing return.
(iii) imperfect substitutes between fixed input and variable input
2. Identify the different phases of the law of variable proportions from the following
schedule. Give reasons for your answer.
Ans:
Variable input
(units)
1
2
3
4
5
TP (Units)
4
9
13
15
12
Variable
Input
1
2
3
4
5
TP MP
4 4
9 5
13 4
15 2
12 -3
Phases
I: Increasing return to a
factor
II: Diminishing return to a
factor
Negative return to a factor
Reasons: (i) In the 1st phase, TP increases at an increasing rate and MP is
increasing.
(ii) In the 2nd stage, TP increases at a diminishing rate and MP is diminishing.
(iii) In the 3rd stage, TP starts falling, and MP is negative.
B.COST & REVENUE:
Meaning-Cost means the total expenditure incurred in the Production of a
commodity. Broadly Costs are of two types:- Short-run costs & Long-run costs.
Short run costs-Short-run is a period of time when some factors are fixed and some
factors are Variable. Expenditure incurred in the Production of a commodity in the
short-run is known as short-run cost.
Long-run costs-Long-run is a time period when all the factors are variable.
Expenditure incurred in the production of a commodity in the long-run is known as
Long-run cost.
Types of Short-run costs:
1. Total Fixed Cost (TFC)-Expenditure incurred on the fixed factors of production
are known as Total fixed costs. Fixed costs do not vary with change in output.

TFC
40
TVC
--
TC
40
AFC
--
AVC
--
AC
--
MC
--
40 20 60 40.00 20.00 60.00 20
40 38 78 20.00 19.00 39.00 18
40 53 93 13.33 17.67 31.00 15
40 63 103 10.00 15.75 25.75 10
40 69 109 8.00 13.80 21.80 6
40 77 117 6.67 12.83 19.50 8
40 89 129 5.71 12.71 18.43 12
40 107 147 5.00 13.38 18.38 18
40 132 172 4.44 14.67 19.11 25
40 162 202 4.00 16.20 20.20 30
TFC=TC-TVC
2. Total Variable cost (TVC)- Expenditure incurred on the variable factors of
production are known as Total Variable Cost. Variable costs vary with change
in output.
TVC=TC-TFC
Total Cost (TC)-Total Cost is the total expenditure incurred on the production
3.
of a commodity. It is the sum total of Total Fixed Cost and Total Variable Cost.
TC=TVC+TFC
Average Fixed Cost (AFC)-AFC is obtained by dividing the Total Fixed Cost
By the total number of units produced.
4. AFC=TFC/Q
Average Variable Cost (AVC)-AVC is obtained by dividing the Total Variable
Cost by the number of units produced.
AVC=TVC/Q
5. Average Total Cost (ATC)-ATC is obtained by dividing the Total Cost by the
number of units produced.
ATC=TC/Q
Marginal Cost (MC)-Marginal cost is the addition made to the total cost by
6. producing an additional unit of Output.
MC = ∆TC/∆Q,
MCn = TCn-TCn-1
7.
Cost Schedule:
Out
Put
0
1
2
3
4
5
6
7
8
9
10

Diagrams:
MARGINAL AND AVERAGE COSTS:
Marginal cost curve is U-Shaped because:
MC falls in the beginning because of increasing return to a factor(decreasing cost )
and then increases due to diminishing return to a factor(increasing costs).
Relationship:
1. Between Total Cost and Marginal cost.
MCn =TCn-TCn-1
When Total Cost increases at a diminishing rate Marginal Cost decreases.
When Total Cost increases at an increasing rate Marginal Cost increases.
2. Between Total Variable Cost and Marginal Cost.
MCn =TCn-TCn-1
When Total Variable Cost increases at a diminishing rate Marginal Cost
decreases.
When Total Variable Cost increases at an increasing rate Marginal Cost
increases.
3. Between Average Variable Cost and Marginal Cost.
When MC ‹ AVC, then AVC falls.
When MC =AVC, then AC is Minimum.
When MC› AVC, then AVC rises.
MC curve always intersect AVC at its minimum point.
4. Between Average Total Cost and Marginal Cost.

When MC ‹AC, then AC falls.
When MC =AC, then AC is Minimum.
When MC ›AC, then AC rises.
MC curve always intersect AC curve at its minimum point.
REVENUE
Revenue is the total money receipt of the firm from sale of its product.Three
main concepts of revenue are total revenue, marginal revenue, and average
revenue.
Total Revenue refers to the total money receipt of the firm from the sale of its total
output
TR = Number of units sold (Q) x price per unit (p)
TR = P X Q
Average Revenue: AR is revenue per unit of output sold.
MARGINAL REVENUE: It is the addition to total revenue when an extra unit of
output is sold.
MR = TRn – TR n - 1
Relationship between AR & MR
i) If AR is constant MR is equal to AR
ii) If MR is above AR, AR increases.
iii) If MR is below AR, AR decreases.
AR and MR in Perfectly competitive market:
AR, MR
Output
AR = MR
In this market price or AR is constant. So MR isequal to AR. Both are
represented by the same horizontal line parallel to OX-axis.
AR & MR in non-competitive markets
1) The average revenue curve and marginal revenue curve slope downward from left
to right.
2) Since AR falls MR curve lies below the AR curve.
3) MR falls twice the rate of fall in MR.
Relationship between TR & MR:
1) As long as MR is positive TR increases.
2) When MR increases TR increases at increasing rate.

3) When MR decreases, but positive TR increases at decreasing rate.
4) When MR is zero TR is maximum.
5) When MR is negative TR diminishes.
QUESTIONS:
Very Short Answer Questions:
1. What is meant by Variable Cost?
Ans- Expenditure incurred on the variable factors of production are known as Total
Variable Cost
2. What is meant by Fixed Cost?
Ans- Expenditure incurred on the fixed factors of production are known as Total fixed
costs
3. Define marginal cost.
Ans- Marginal cost is the addition made to the total cost by producing an additional
unit of Output.
4. Define Average Variable Cost.
Ans- AVC is obtained by dividing the Total Variable Cost by the number of units
produced.
5. Express Total Variable Cost in terms of Total Fixed Cost and Total Cost.
Ans- TVC=TC-TFC
6. Explain marginal cost in terms of total cost.
Ans. MCn = TCn-TCn-1
7. Why is Average Total Cost greater than Average Variable Cost?
Ans- ATC=AVC+AFC
8. Give two examples of variable cost.
Ans- Expenditure on raw materials and expenditure on labor.
9. How does Average Fixed cost behave as out-put decreases?
Ans-AFC decreases.
10. How is MC derived from TVC?
Ans. MCn = TVCn-TVCn-1

Short Answer Questions (3/4 Marks)
1. Draw TFC, TVC and TC curves in a single diagram.
2. Distinguish between Fixed Costs and Variable Costs. Give two examples of each.
3. Why is the MC curve in the short-run U-shaped?
4. Explain the relationship between the Marginal Cost and Average Cost with the
help of a cost schedule and diagram.
Ans- When MC ‹AC, then AC falls.
5. What changes will take place in Total Cost if Marginal Cost is rising? Show
with the help of a diagram.
6. Complete the following table.
Out Put
1
--
3
--
TVC
10
--
27
--
AVC MC
-- --
8 6
-- --
10 13
7. Complete the following table.
Out Put
1
--
3
--
5
AFC MC TC
-- -- --
-- 10 82
20 8 --
-- -- 99
12 10 --
REVENUE:
8. Find AR and MR.
(i) Output 1 2 3 4 5 6 7
TR 10 24 33 40 40 36 28
Ans. AR 10 12 11 10 8 6 4
MR 10 14 9 7 0 -4 -8

9.
(i)
Ans.
Find out TR and MR.
Output 10
AR 6
TR 60
MR -
9 8
7 8
63 64
3 1
10.
(i)
Complete the following table:
Output1 2 3 4
Price- 9 - -
MR10 - - 4
TR- - 24 -
Ans. Output 1 2 3 4
Price 10 9 8 7
MR 10 8 6 4
TR 10 18 24 28
Q11.
(i) Output123
MR1080
Calculate TR and AR
4
-2
Ans.TR101818 16
AR1096 4
12.How do changes in MR affect TR?
Ans. i)If MR increases, TR increases at increasing rate.
ii)If MR is constant, TR increases at constant rate.
ii)IF MR falls, TR increases at diminishing rate.
13.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 –
(i)If AR (Price) is constant, MR = AR
(ii)If AR (Price) falls, MR < AR.
(iii)If AR (Price) rises, MR > AR.
HOTs:
1.At what point does the MC curve cut the AVC curve?
Ans- Minimum point of AVC.
2.What happens to ATC when MC is less than ATC?
Ans-ATC falls
3.When AC is rising What is the relation between AC and MC?
Ans-MC is greater than AC.

4.The Average Cost of producing 5 units of a good is Rs 6 /- and that of producing 6
units is Rs 5/- What is the MC of producing 6 units?
Ans-MC of producing 6 units is 0.
Study Material For Under Achievers:
1. Define cost.
Ans- Cost means the total expenditure incurred in the Production of a commodity
2. What is Marginal cost?
Ans- 1.Marginal cost is the addition made to the total cost by producing an additional
unit of Output.
3. What do you mean by variable cost?
Ans-Expenditure incurred on the variable factors of production are known as Total
Variable Cost
4. Write the formulas for calculating AFC, AVC and MC.
Ans-AFC=TFC/Q
AVC=TVC/Q
MCn=TCn-TCn-1
5. State the relationship between AC and MC.
Ans- When MC ‹AC, then AC falls.
6. What is the relationship between TC and TVC?
Ans-TC=TVC+TFC
7. Calculate TVC,AVC,AFC,AC and MC from the following data.
TFC 60 60 60 60 60 60 60 60
TC 90 105 115 120 135 160 200 260
Ans-TVC=TC-TFC
AVC=TVC/Q, AFC=TFC/Q, AC=TC/Q, MCn=TCn-TCn-1

Study Material for Bright Students:
1. 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 :
(i)
(ii)
(iii)
If AR (Price) is constant, MR = AR
If AR (Price) falls, MR < AR.
If AR (Price) rises, MR > AR.
2. What happens to ATC when MC is less than ATC?
Ans-ATC falls
3.When AC is rising What is the relation between AC and MC?
Ans-MC is greater than AC.
4. Explain the relationship between the Marginal Cost and Average Cost with the
help of a cost schedule and diagram.
Ans- When MC ‹AC ,then AC falls.
When MC =AC ,then AC is Minimum.
When MC ›AC ,then AC rises.
TEST PAPER -1
1. Fill in the blanks: 1x5=5
a. _cost increases and decreases with the volume of out-put.
b. ------------------ cannot be changed in the short period.
c. Wages is cost of the production.
d. ATC= +AVC.
e. =AFC x Q
2. Choose the correct answer. 1x5=5
a. Expenditure incurred on the fixed factors of production is known as-
i)Total Cost. ii)Total fixed cost. iii)Total Variable Cost. iv)Marginal Cost.
b. Average Variable Cost is obtained using which of the following formulas?
i) TC/Q ii)TVC/Q iii)TFC/Q iv) AFC/Q

c.When Total Cost rises at a diminishing rate the Marginal Cost _.
i)Rises. ii) declines iii)Constant. iv) increases
d. Marginal Cost is calculated from .
i)AVC ii)TC iii)TFC iv)AFC
e. Cost of raw materials is an example of .
i)fixed cost ii)variable cost iii)opportunity cost iv)marginal cost
3.Say whether true or false.
a) MC is calculated from TVC.
b) When MC is greater than AC, then AC falls.
c) Average cost is always positive.
1x10=10
d) Average cost is always equal to the price of the commodity.
e) Total cost is equal to the total fixed cost less total variable cost.
f) AFC is equal to TFC divided by total out-put.
g) Average cost is equal to AFC plus AVC.
h) MC=TCn+1-TCn-1
i) TFC=AFC/Q
J) TC=AFC+AVC.
C. THEORY OF SUPPLY:
1. Supply:
It is that quantity of a commodity which a seller or producer is ready to sell in the
market at a certain price within a given time period.
Factors Affecting Supply of the commodity:
1) Own price of commodity
2) State of technology
3) Prices of factors of production
4) Taxation policy
5) Price of related goods
6) Other factors like natural calamities.

Law of Supply: Other things being constant, there is a direct relation between price
of a commodity and its quantity supplied i.e. higher the price more the supply and
vice-versa.
Supply Schedule: It is a schedule / table showing different quantities supplied of a
commodity by a seller at different prices.
Price Quantity
Supplied
5 20
4 15
3 12
2 10
Supply Curve -If supply schedule is shown on a graph, we get a curve which is
called supply curve.
Market Supply: It is the horizontal summation of the supply of a product by all the
producers in the market at a given price and at a point of time.
Tabular presentation:
Price per Unit (in Quantity
Rs) supplied
(Units)
Quantity
by A supplied
(Units)
Market
by B (Units)
Supply
5 4 6 10
4 3 5 8
3 2 4 6
2 1 3 4

Diagrammatic Presentation:
Change in Quantity Supplied: When there is change in supply of a commodity due
to change in price (This is movement along the supply curve)
This Change is of two types.
1) Expansion in supply -Supply increases due to increase in price
(Figure 3.10)
2) Contraction in supply -Supply decreases due to decrease in price.
Change in Supply -(Shift in supply curve) When supply of a commodity changes
due to factors other than price, like technique, taxation policy, prices of factors of
production etc. This is called change in supply.
This change is of two types:
a) Increase in supply -when supply of a commodity rises due to factor other than
price it is increase in supply. In this case the supply curve shifts rightward.
b) Decrease in supply -when supply of a commodity falls due to factors other than
price it is decrease in supply. In this case the entire supply curve shifts to the left
(upward).

(Figure 3.11)
Price Elasticity of Supply:
It is the measurement of degree of change in supply of a commodity to change in its
price.
Es = % change in quantity supplied / % change in price
Es = ∋Σ x P
∋Π S
Factors Affecting Elasticity of Supply:
1. Nature of commodity
Durable goods -Elastic
Non-durable -Inelastic
2. Change in cost of production -
3. Technique of production
4. Time period.
Methods of Measuring Elasticity:
1. Percentage method or Proportionate method.
Es = % Change in QS or
% change in price
2. Geometric method
a) Es > 1
Proportionate change in Supply = ∋S x P
Proportionate change in PriceS x ∋Π
(Figure 3.12)
b) Es = 1 Supply curve passes through origin.

c) Es < 1
(Figure 3.13)
VERY SHORT ANSWER QUESTIONS:
1. What causes a downward movement along a supply curve of a commodity?
Ans : Increase in cost of production
2. What causes an upward movement along the supply curve of a commodity?
Ans: Decrease in excise duties.
3. What causes a movement along the supply curve of a commodity?
An : change in price of goods.
3. State the law of supply.
Ans : The law states that as price of a good rises, quantity rises, while other
things remain constant.
5. Define supply.
6. When is the supply of a commodity called ‘elastic’?

7. Price elasticity of supply of a good is 0.8. Is the supply ‘elastic’ or ‘inelastic’ and
why?
8. Price elasticity of supply is 1.2. Is its supply elastic or inelastic and why?
9. Define market supply.
10. What is the price elasticity of a straight line supply curve touching the OY-axis?
11. What is the price elasticity of straight line supply curve touching the OX-axis?
SHORT ANSWER QUESTION:
1. At a price of Rs. 8 per unit, the quantity supplied of a commodity is 200 units.
Its price elasticity of supply is 1.5. If its price rises to Rs. 10 per unit, calculate
its quantity supplied at new price 3.
2. The price elasticity of supply of a commodity is 2.5. At a price of Rs. 5 per
unit, its quantity supplied is 300 units. Calculate its quantity supplied at a price
of Rs. 4 unit.
3. The price of a commodity is Rs. 12 per unit and its quantity supplied is 500
units. When its price rises to Rs 15 per unit, its quantity supplied rises to 650
units. Calculate its price elasticity of supply. Is supply elastic?
4. List any three determiners of supply of a commodity.
5. Give three reasons for a rightward shift of supply curve of a commodity?
6. Give three reasons for ‘increase ‘in supply of a commodity?
7. State any three causes of leftwards shift of supply curve?
8. Explain the effect of ‘technological changes ‘on the supply of a product?
9. Define market supply of good. Give three causes of a rightward shift of supply
curve?
10. What is meant by ‘change in supply’? State three factors that can cause’
‘change in supply’?
11. When the price of a commodity falls from Rs. 10 per unit to Rs. 9 per unit, its
quantity supplied falls by 20 percent. Calculate its price elasticity of supply?
12. The price of a commodity is rs.5 per unit and its quantity supplied is 600 units.
If its price rises to Rs. 6 per unit, its quantity supplied rises by 25 per cent.
Calculate its price elasticity of supply.
13. 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 its
supply elastic?
14. A 5 per cent fall in the price of a commodity results in a fall in its quantity
supplied from 400 units to 370 units. Calculate its price elasticity of supply. Is
its supply elastic?
15. The price elasticity of supply of a commodity is 2. When its price falls from Rs.
10 to Rs. 8 per unit, its quality supplied falls by 500 units. Calculate the
quantity supplied at the reduced price.

16. When the price of a commodity rises from Rs. 10 to Rs. 11 per unit, its
quantity supplied rises by 100 units. Its price elasticity of supply in 2.
Calculate its quantity supplied at the increased price.
17.The elasticity of supply of a commodity is 3. An increase in its price from Rs.
20 to Rs. 21 per unitresults in a rise in its quantity supplied by 150 units.
Calculate its quantity supplied at the increased price.
LONG ANSWER QUESTION INCLUDING HOTS
1. Define price elasticity of supply. How is it measured by geometric method? (In
case of a straight line supply curve).
2. Distinguish between ‘change in supply’ and ‘change in quantity supplied’ of a
commodity.
3. Explain briefly the following determinants of supply:
i.
ii.
iii.
Increase in the prices of inputs.
Decrease in tax on total product.
Technological change.
MCQ of Supply and Producer’s Equilibrium:
Fill in the blanks:
1. A supply curve reflect the positive relationship between and quantity
supplied.
2. An increase in the inputs prices shift the supply curve too the _.
3. Elasticity of supply = % change in quantity supplied
?
4. MR=MC and other condition is
5. Breakeven point is the point where is equal to TC.
6. A/An in supply will rise the supply curve, at the same price, .
(Increase, Decrease, Constant)
7. Market supply is of individual supply.
(Addition, Subtraction, Division)
8. Unitary elastic supply equal to .
(2,>1, <1, 1)
9. If MC is more than MR at particular level of output, then Producer
will the production to maximize the profits.

(Increase, reduce, constant)
10. Profit refers to .
(Cost=Revenue, Cost>revenue, Revenue>cost)
Find True and False and Give reasons:
1. Contraction of supply occurs due to change in factors other than price of the given
commodity.
2. Supply is always Unitary elastic for all supply curves starting from the origin.
3. In case of zero elastic supply, supply curve is a horizontal straight line.
4. Law of supply does not indicate the magnitude of change in quantity supplied of a
commodity due to change in its price.
5. At the state of Producer’s Equilibrium, marginal cost of the firm should rising.
6. To maximize the profits of a firm, the only condition needed is equality between
marginal cost and marginal revenue.
VALUE BASED QUESTIONS:
Production Function: Returns to a Factor:
1. A producer produced 35 units by employing 4 laborers, but it produces 42 units by
employing 5 laborers. What is the amount as marginal production?
(1)
Ans. MP = 42 - 35 = 7 units.
2. In Indian agriculture, we obtain 120 Million tons of food grains by employing 20mns
of laborers if it employs 1 more millions of labor, production rises by 6 million tons
which type of return it is?(1)
Ans. Constant returns.
3. A firm employs form laborers and it had following value-additions. Comment on it.
(2)
Units of labor 1 2 3 4
Total product 4 10 18 28
Ans. We can calculate marginal product from it, to decide about the law of return
applying upon this firm, shown through following table:
Labor Total product Marginal products
1 4 4
2 10 6
3 18 8
4 28 10

Labor (millions) 1 2 3 4
Total production 25 54 55 5
(million tons)
Since marginal product is increasing with additional laborer, therefore law of
increasing returns is applicable on firm’s productions.
4. A country’s electronic industry is passing through diminishing returns to scale. It
wants to raise product defeating the effect of diminishing stage. Suggest two ways.
(2)
Ans. In diminishing return to scale, firm’s cost of production rises which can lower
firm’s profits. It can improve its profit ability through following measure:
(i)By introducing new technology that helps in reducing its cost of production.
(ii)By improving managerial skills so that labor cost as well as marketing costs
are reduced.
5. Determine various stages of law of variable of proportions for a firm which has
following total productivity table:(3)
Labor 1 2 3 4 5 6
Total product 20 55 75 90 90 80
Ans. various stages of law of variable of proportion are determined on the basis of
marginal product. Therefore, we rewrite the table in following manner:
LaborTotal product
120
255
375
490
590
680
Ist Stage: till MP is highest at second laborer.
IInd stage: Till MP was zero at 5th laborer.
IIIrd stage: when MP becomes negative at 6th laborer.
Marginal product
20
35 (Ist stage)
20
15
0 (2nd stage)
-10 3rd stage
6. Production function of a firm is given as Y= 5L+2K
A firm employs zero units of labor and to units of capital, what would be its total
output?
Ans. Y= 5L+2K(where L=0 & K=10)
Y =5(0) + 2(10) =20units
7. Total production in an economy is given as such:
Fixed factor10mn hectares of land
(1)
(2)
Determine the stage of law of returns to a factor.
Ans. Law of returns to a factor can be determined on the basis of marginal
production which is given as such.

Fixed factors Labor Total product Marginal product
(Millions) (Million tons) (million tons)
10 million hectares 10 25 ---
of land 20 35 10
30 45 10
40 55 10
Law of diminishing constant returns to a factor is being applied.
Supply and Elasticity of
Supply:
8. A firm raises its supply without any incentive of rise in price, mention three reasons.
Ans.
(i)Improvement in technique in production.
(ii)Fall in factor pricing.
(iii)Subsidies provided by the state.
(3)
9. An electronic company has enough period to raise the supply of A.C’s. what type of
elasticity of supply it will have (1)
Ans. Elastic
10. Demand for a good is elastic whereas its supply is inelastic. What impact it will have,
when demand for good increases? Explain.
Ans. When supply is inelastic, it means supply for such a product cannot be
increased. Now when demand for it increases, it will raise price for such a good.
11. “Supply of agricultural goods is inelastic”. Explain.
Ans. Yes, it is true that supply of agricultural goods is inelastic because it is not
inspired by price-rise rather it depends upon natural, climatic and biological factors.
Such goods take lot of time in its production, therefore no price-frame can guide
there production.
12. Imports of production with less elastic supply can fetch higher revenue. Explain.
Ans. True, those imported goods which are inelastic or less elastic like petrol and
diesel and can fetch higher revenue. It is because of the reason that such goods will
be sold at high price because of limited supply. Therefore, the yield from such import
will be higher.
13. Which of the following is an example of increase in supply? Explain with reason.
X- commodity Y- commodity
Price Rs.Supply Price Rs .Supply
10100 50 1000
1212 50 1200
(1)
(2)
(2)
(2)

Output (unit 0 1 2 3 4 5 6
Total cost 60 160 240 300 400 560 780
Ans. Supply of Y-commodity is an example of increase in supply because in this case
supply increases even when price per unit remains to be Rs. 50. In case of X-
commodity, there is extension in supply because here supply rises with every
increase in price. In case of Y-Commodity, supply increases due to factors other than
price rise.
Concepts of
Costs:
14. Rent paid for hiring a building and depreciation of machine is a fixed on variable
cost?(1)
Ans. Fixed costs
15. When cost of producing one commodity is expressed in terms of alternative
commodity, it is known as which costs?(1)
Ans. Opportunity Cost
16. Total cost for 6 units of a good is given through the following table. Determine total
variable cost and marginal cost from it.
(3)
Ans. Rs. 60 is total fixed cost as it is cost of producing zero units. Here TVC=TC-
TFC and MC=TVCn-TVCn-1. It is calculated as follows:
Output (units) T.C.(Rs) TFC (Rs.) TVC (Rs.) M.C. (Rs.)
0 60 60 0 ---
1 160 60 100 100
2 240 60 180 80
3 300 60 240 60
4 400 60 340 100
5 560 60 500 160
6 780 60 720 220
17. Supply curve of a firm is represented through which type of costs?
(2)
Ans. Supply curve of a firm is represented through an average cost curve (AC) and
Marginal cost cure (MC).
Concepts of
Revenue:
18. Total revenue earned from 20 units was Rs.800, what was average revenue? What
is its alternative name?(1)
Ans. AR=TR/Q = 800/20 =Rs.40. It is also known as price.
19. In case of perfect competition, what shape of AR curve?
(1)
Ans. It is parallel to x-axis.

20. Average revenue for 4 units was Rs.10 each; determine the value of total revenue
and marginal revenue. Use table
(3)
Ans. TR=AR x Q and MR=TRN-TRN-1.
Units sold
1
2
3
4
AR (Rs.)
10
10
10
10
TR(Rs.)
10
20
30
40
MR(Rs.)
10
10
10
10
21. In your opinion, which market can yield more revenue – perfect competition or
monopoly?(3)
Ans. Under perfect competition, price is kept as competitive which results into higher
sale and higher revenue. On the other hand under monopoly, monopolist wants to
change a higher price and sales lower amount of good. It therefore, under perfect
competition, there is larger revenue earned with lesser amount of profits.
22. Suggest a suitable price policy that helps a firm to make value addition.
(3)
Ans. A firm should adopt following of price policy for promoting its sale and overall
revenue of the firm.
(i)Keep a competitive price that helps a firm to raise its sale.
(ii)Spend some amount on advertisement of the good show as to attract new
buyers.
(iii)Provide cash discounts, guarantee of qualitative product, and home delivery
of goods and warranty of durable goods.
23. Why equilibrium is essential for a producer? (1)
Ans. Because it will help him in maximizing profits.
24. Given below is AC and price of different units produced by a firm. Determine
producer’s equilibrium level where it (1)can earn maximum possible profit. Use
total approach.

Output (units) 50 60 70 80
Output Price (Rs.) Average cost Total revenue (Rs Total cost (Rs Total profit
(units)(Rs.)(Rs.)
50 20 15 1000 750 250
60 20 15 1200 900 300
70 20 18 1400 1260 140
80 20 20 1600 1600 0
Ans. Producer will be in equilibrium, when he produces 60 units [he earns
maximum amount of profit in this situation.
25. Under perfect competition, when a producer would gain higher profits, during short
period or long period.(3)
Ans. During short period, a producer has risk of earning losses as well as super
normal profits. But during long period, he will earn normal profits by which his
aggregate amount of profits will be higher. It is therefore long period yields higher
amount of profits to the producers.
26. Demand and Supply equation for a product are given below:
(3)
Yd =100-P
Ys =70+2P
Determine equilibrium price and quantity.
Ans. Under equilibrium:
Yd = Ys
100-P = 70+2P
30 = 3P
P = Rs. 10
Putting the value of P in the equation
Yd =100-10 = 90 units
Ys =70+2(10) = 90 units
Therefore, equilibrium quantity = 90units
UNIT IV
FORMS OF MARKET AND PRICE DETERMINATION UNDER
PERFECT COMPETITION WITH SIMPLE APPLICATIONS
(12 MARKS)
Market: It refers to a region in which buyers & sellers interact with each other – may
be directly or indirectly – in order to exchange the commodities at certain price.
Types of Market: Market can be categorised on the basis of time, location and
competition. On the basis of competition, the market is classified into two categories
i.e. perfect and imperfect markets.

Perfect market / competitive market- It refers to such a market structure where the
firms are price takers and the price of the good remains same.
Imperfect market/ non-competitive market- It refers to the market structure where
the prices of the goods differ and firms are not only price taker but also price maker.
Perfect Competition Market: It refers to such a market structure where there are
large numbers of buyers and sellers and firm sell a homogenous product at uniform
price.
Characteristics / Features/ Conditions of the perfect competitive market
1. Large number of buyers and sellers – There are large number of buyers and
sellers in perfect competitive market it means no single buyer or seller can
influence the market It is because each seller sells a very small portion of
the market supply, similarly the demand of each buyer is also very small in the
market.
2. Homogeneous product - The product sold in the market is homogeneous or
identical in all respect i.e. shape, size, colour, composition, etc.
3. Free entry and exit of firms - Under perfect competition there are no barrier
to entry and exit of firms in industry. But entry and exit may take time so it
happens only in long runs. This freedom ensures that firms earn just the
normal profits in the long run.
4. Perfect knowledge of market- In this market all the sellers as well as buyers
have the complete information about the market situation. It means they are
well aware about the product and its price. Thus the price remain same.
5. Perfect mobility– The factors of production i.e. land, labour, capital and
entrepreneur are perfectly mobile. There is no geographical and occupational
restriction on their movement. It means factors of production are free to move
from one place to another place and one job to another job in which they get
better price.
6. No selling and transportation cost- It assumes that there is no selling and
transportation cost. Thus the price remains same everywhere.
Monopoly – It’s a market situation where there is a single seller of a commodity
which has no close substitutes.
Main features of a monopoly market are-
1. Single seller- Under monopoly there is an only seller of commodity in the
industry, so the difference between firm and industry get vanished. It means
the monopolist has full control over the supply and price of commodity.
2. No close substitute- The monopolist produces a distinct product which has
no close substitute in the market. Therefore the monopoly firm has no fear of
competition from any other commodity.
3. Barriers on entry- There are strong or significant barrier to the entry of new
firms. These barriers may be legal barriers like patent right or licensing etc.;
as a result monopolist firm can earn abnormal profit in the long run.
4. Price discrimination- When a monopolist charge different prices from
different buyers for the same product is called price discrimination. It’s a
distinct feature of monopoly market. E.g. railways charge different fare for
senior citizens, children and others for same journey.

5. Independent price policy - In monopoly, firm and industry are same so the
firm has complete control over the output and it fixes its price by itself. Thus
firm is price marker in monopoly.
Monopolistic Competition- It refers to such a market structure where there are
large number of buyers and sellers and the firms produce & sell differentiated
product which has many close substitute available.
Characteristics /feature/conditions-
1. In this kind of market situation, there exist a fairly large number of firms which
have a greater competition among themselves. Due to this, the firms do not
have total control over the market supply of the product.
2. The firms produce & sell heterogeneous (differentiated) products, in this kind
of markets, which enable the firms to have control on their own output, & thus
the firms are price makers.
3. There is a freedom of entry & exit of firms in the market, to a considerable
extent, due to which the number of firms always remain fairly large. As a
result, the firms can earn only the normal profits in the long run.
4. The unique feature of this type of market situation is prevalence of selling
cost, i.e. the expenditure made by the firms to promote the sales of their
products viz. sale exhibition, discount offer, showroom demonstration,
advertisement & wide campaigning cost etc.
5. The firms, in this type of markets, are price makers, as all these firms have
distinct consumers of their product. As the firms produce & sell differentiated
product, the price of products of each firm is different, irrespective of their
similarity. Because of this, the AR (demand) curve slopes negatively at
gradual rate.
Oligopoly is a market structure in which there are few large sellers of a commodity,
which sell homogenous and differentiated product.
If in an oligopoly market, the firms produce homogeneous products, it is called
perfect oligopoly.
If the firms produce differentiated products, it is called imperfect oligopoly.
Collusive oligopoly is one in which the firms cooperate with each other in deciding
price and output.
Non collusive oligopoly is one in which firms compete with each other.
Features of oligopoly
1. Few firms - Few firms mean either only a few firms in number or a few big
firms producing most of the output of the industry. The exact number of firms is
not defined. The word ‘few’ signifies that the number of firms is manageable
enough to make a guess of the likely reactions of rival by a firm.
2. Firms are interdependent in taking price and output decisions -When there
are only a limited number of firms, it is likely that rivals have some knowledge as
to how these firms operate. It one firm does something about the price and
quantity of the product it produces, the rivals are likely to take quick note of it and

react by changing their own price and output plAns- It makes each firm
dependent on other firms in the industry.
3. Barriers to the entry of firms- The main reason why the number of firms is
small is that there are barriers which prevent entry of firms into industry. Patents,
large capital, control over the crucial raw materials etc. prevent new firms from
entering into industry. Only those who are able to cross these barriers are able to
enter.
4. Non-price competition- Firms try to avoid price competition for the fear of price
war. They use other methods like advertising, better services to customers, etc
to compete with each other.
Difference between Perfect Competition Market & Monopoly market
Perfect Competition Market Monopoly Market
1. In this kind of market, there is an 1. In this kind of market, a single firm exist
existence of large numbers of firms which which has no close competitor, & thus, the
have perfect competition among each question of competition does not arise.
other.
2. The product been produced and sold in 2. The product, produced & sold in this
the market is homogenous, i.e. the product market is unique which have no close
have close substitute available. substitute available.
3. The firms, in this market, are price taker 3. The firm itself is an industry, & thus it is a
i.e. the firms have to accept the price which price maker i.e. the firm has the capacity to
is determined in the market. Make its own price.
4. In this market situation, the firms have 4. The entry or exit of the firm is not very
the freedom of making entry or exit from possible due to various constraints & patent
the market. right.
5. The elasticity of demand for the product 5. The product been sold in this market is
been sold in this market, is perfect; and relatively inelastic in demand, and therefore,
therefore, the DD or AR curve is straight the DD or AR curve has rapid negative slope.
line parallel to OX axis.
Y
Y
AR
AR=MR
6. The firms, in this market, earn normal 6. The monopoly firm enjoy an abnormal
profits in the long run, because the profits in the long run, because there is no
freedom of entry & exit of the firms is existence of close competetors & substitutes.
possible.

Perfect Competition Vs Monopolistic Competition Market
Perfect Competition Market
Market
Monopolistic Competition
1. In this kind of markets, the firms produce &
sell homogenous product which have no close
substitute, i.e. the cross elasticity of demand for
the products is equal to zero.
1. In this market situation, the firms
produce & sell heterogeneous product,
which are similar but not identical, &
therefore the price of the good differs.
2. The firms, in this market, are price takers, 2. The firms are price makers, in this
since the number of firms is large, & the firms kind of markets, because the firms
produce & sell homogenous product. produce & sell heterogeneous product,
although the number of firms is large.
3. The demand for the product, in this market, is
perfectly elastic i.e ep= α, & thus the demand
curve (AR Curve) is a straight horizontal line
parallel to X axis.
3. The demand for the product, in this
kind of market situation, is relatively
more elastic i.e. ep>1, & thus the DD
(ARC) has a gradual negative slope.
Y
AR=MR
MR
4. In this market situation, The price is equal to 4. In this case, the Price(AR) is greater
MR (as we can see from the above figure). than MR.
5. There is no prevalence of selling cost in this 5. Prevalence of selling cost is the
kinds of market. unique feature of this kind of market
situation.

Monopoly Market Vs. Monopolistic Competition Market
Monopoly Market
1. In this case, there is existence of single
firm which has no close competitor, & the
firm produces & sell unique product which
has no close substitute in the market.
Monopolistic Competition Market
1. In this case, a large number of firms exist in the
market which produce & sell heterogeneous
product, & thus, there is availability of close
substitute of the product.
2. There is no prevalence of selling cost, 2. Prevalence of selling cost is the most prominent
as it is not required. feature of this market as there is a cut- throat
competition among the firms.
4. The entry & exit of the firms in this 4. There is a freedom of entry & exit of the firms in
market is not possible due to various the market.
constraints & patent right.
5. The demand for the product is less 5. The demand for the product has more elasticity,
elastic, i.e ep<1 & therefore the DD has i.e ep >1, & therefore the DD has gradual negative
rapid negative slope .slope.
Y
6. The monopoly firm has total control over 6. The firms do not have control over the total
the market output of the product in the output of the product, since large number of firms
market. produce similar kind of product.
Short answer question(For Low Achievers) ( 1 Marks)
1. Define Market
Ans- Market may be defined as the entire area in which buyers and sellers are
in contact with each other for the purchase and sale of the commodity.
2. Define perfect competition?
Ans- Perfect competition is a form of the Market in which large number of buyers
and sellers, selling homogeneous products at a uniform price
3. Define Monopoly
Ans- Monopoly refers to a Market situation in which there is a single seller and
there are no close substitutes of the commodity

4. Under which Market form, a firm is a price Maker?
Ans -Under Monopoly
5. In which Market form a firm faces a perfectly elastic demand curve?
Ans- Under perfect competition Market, a firm faces perfectly elastic demand
curve as shown below.
Y
AR=MR
AR/MR
Output X
6. What is the shape of average revenue curve in Monopoly ?
Ans- AR curve under Monopoly is downward sloping.
7. What is price discrimination?
Ans- Selling the same goods at different prices to different buyers is known as
price discrimination
8. In which market form is there product differentiation ?
Ans- Under Monopolistic competition
9. In which market Form the goods are sold at uniform price ?
Ans- Under perfect competition.
10. Give an example of Monopoly ?
Ans- Railways
11. State the various ways in which a monopoly market structure may rise?
Ans- I) Grant of patent rightsII) Licensing by GovernmentIII)
Forming a Cartel
12. The firms are earning abnormal profits. Will the number of firms in the
industry change?
Ans- If firms are getting abnormal profit new firms will enter in the industry.
13. If firms are making abnormal losses will the number of firms in the industry
change?
Ans- When firms are suffering losses, the number of firms in the industry will
decrease as some firms may exit from the industry.
Short Answer Questions (3&4) Marks
1. Write three features of perfect competition.
Ans- A) Large number of buyers and sellers
B) Freedom Entry and exit of Firms
C) Homogeneous products

2. Explain any three features of Monopoly.
Ans- A) A Single seller.
B) No close substitutes of the product.
C) No freedom of entry of new firm.
3. Which features of monopolistic competition are monopolistic in nature?
Ans- i) Product differentiation ii) Control over price iii) Downward sloping
demand curve
Short answer question(For High Achievers) ( 3&4 Marks)
4. Explain briefly why a firm under perfect competition is a price taker not a
price maker?
Ans - A firm under perfect competition is a price taker not a price maker because
the price is determined by the market forces of demand of supply. This price is
known as equilibrium price. All the firms in the industry have to sell their outputs
at this equilibrium price. The reason is that, number of firms under perfect
competition is so large. So no firm can influence the price by its supply. All firms
produce homogeneous product.
5. What are the reasons which give emergence to the monopoly market?
Ans- The main reasons are as under-
i) Patent Rights- Patent rights are the authority given by the government to a
particular firm to produce a particular product for a specific time period.
ii) Formation of Cartel- Cartel refers to a collective decision taken by a group of
firms to avoid outside competition and securing monopoly right.
iii) Government licensing- Government provides the license to a particular firm
to produce a particular commodity exclusively
6. Why is demand curve facing a monopolistic competition firm likely to be
more elastic?
Ans- In monopolistic competition market the demand curve of a firm is likely to
be more elastic, the reason behind this is that all the firm in the industry produce
close substitute of each other. If close substitute of any good is available in the
market then elasticity of demand is very high because whenever there is a hike
in price the consumer will shift to its substitutes. That is why a firm‘s demand
curve under monopolistic competition is more elastic.
7. Explain how the efficiency may increase if two firms merge.
Ans- When two firms merge then there combined efforts and efficiency brings
more output to the firm. Increase in the sale of output and economies of scale
can be availed. It leads to division of labour and can get advantage of the
specialization. Use of better and advanced technology saves the cost of
production.
8. Explain the implication of the feature product differentiation under
Monopolistic competition.
Ans- Product differentiation is a distinct feature of monopolistic market. It
means that buyers differentiate between the products produced by different
firms. Therefore, they are willing to pay different prices for the products of

different firms. Different groups of buyers prefer products of different firms. This
gives an individual firm some monopoly power, i.e. power to influence the
demand for its product by changing price.
9. Explain the implication of the feature freedom of entry & exit of firms under
perfect competition.
Ans- Free entry and exit of firms: It means that there is no barrier for entry and
exit of firms in the industry. This freedom ensures that firms earn just the normal
profits in the long run. If the existing firms earn above-normal profits, new firms
enter in the industry, raise supply, which brings down the price. The profits fall till
each firm is once again earning only the normal profits.
If the existing firms are having losses, the firms start leaving, supply falls and
price goes up. The price continues to rise till the losses are wiped out and firms
are just earning normal profits.
Price determination under perfect competition
Under perfect completion price of commodity is determined by demand and supply of
a commodity in an industry.
Equilibrium price is the price at which demand and supply of commodity are equal.
The market equilibrium is determined by equality between quantity demanded and
quantity supply. It means at equilibrium point - Quantity demanded = Quantity
supplied
The price determined at equilibrium point is called equilibrium price.
The price has a tendency to persist. If at a price , market demand is not equal to
market supply there will be either excess demand or excess supply and the price will
have tendency to change until it reach a point where demand and supply are equal.
Explanation – We can show it with the help of demand-supply schedule and curve
Price
( )₹
1
2
3
4
5
Y
Price 5
4
3
2
Market demand
(Units)
1000
800
600
400
200
D
Excess supply
E
Market supply
(Units)
200
400
600
800
1000
S
Remark
Excess demand
Market
Equilibrium
Excess supply
1
S
O
200
Excess demand
D
400 600 800 1000
X

Class XII Economics Study Material

Class XII Economics Study Material

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Class XII Economics Study Material