Economic Part-A

Class 12th UNIT -1:-INTRODUCTION
UNIT-I
INTRODUCTION (4 Marks)
Q1:-What is meant by an economy?
Ans. An economy is a system that helps to produce goods and services and enables people to
earn living.
Q2:- What are the functions of an economy?
Ans. Production, consumption and investment are the main functions of an economy.
Q3:- What is meant by an economic problem?
Ans. An economic problem is the problem of choice.
Q4:- Why does problem of choice /economic problem arise?
Ans. An economic problem arises due to scarcity which is due to unlimited wants and
limited resources which have alternative uses.
Q5:-What is meant by scarcity of resources?
Ans. Scarcity means limited availability of resources in relation to demand for them.
Q6:- What leads to scarcity of resources?
Ans. The following factors leads to scarcity of resources :->
a) Unlimited human wants.
b) Limited resources.
C) Resources having alternative uses.
Q7:- Explain the reasons behind scarcity of resources?
Ans. Scarcity of resources is due to the following reasons:
a) Human wants are unlimited :-Multiplication of human wants is the basic fact of life.
There is no end to human wants. If one is satisfied, another may crop up & this goes on
endlessly.
b) Resources are limited :-Resources which are used for the production of goods & services
are limited as against wants which are unlimited . Thus scarcity of resources creates problem
of choice.
c) Resources have alternative uses :- Resources are not only limited but can be put to
alternative uses also. This makes resources all the more scare as these can be used
simultaneously for more than one purposes.
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Q7:- What is meant by economizing of resources ? Why there is a need to economise

resources ?
Ans. Economising of resources means making the best use of available resources. It is
needed because resources are scarce.
Q8 :- What do you mean by 'economics' ?
Ans. The word economics is derived from two Greek words 'Oikou' meaning 'household' and
'Nemin' meaning 'management'. Thus the word, economics means 'household management'.
In other words economics is that branch of knowledge which deals with economic activities
relating to earning & spending of wealth & income.
Q9 :- Discuss the subject matter of economics ?
Ans. The subject matter of economics is micro-economics and macro-economics.
Q10 :- What is micro-economics?
Ans. The term micro-economics was coined by Prof. Ragner Frisch in 1933. It is that branch
of economics which deals with the behavior of individual economics units of the economy
such as individual household, individual firm, industry, etc.
Q11:- Discuss the scope of micro-economics.
Ans. The scope of microeconomics includes:

a) Theory of Demand
b) Theory of Production
c) Theory of Distribution (factor pricing)
d) Economics Of Welfare
e) Theory of supply
Q12:- What do mean by the term 'individual' in economics ?
Ans. An individual in economics means an individual decision making unit like a household,
a firm a group or an organization.
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Q13 :- Distinguish between microeconomics & macro economics ?
Ans.
Sno. Basis Microeconomics Macroeconomics

1. Term It is derived from the It is derived from the
greek word Mikros' greek word Makros'
meaning small. meaning large.
2. Degree of Aggregation It deals with the It deals with the

individual unit of the aggregates.
economics
3. Objective Its objective is to study Its objective is to
principles, problems and study principles
policies relating to problems and
efficient allocation of policies relating to
resources. full employment of
resources.
4. Instruments Main instruments are Main instruments
demand and supply are aggregate
demand and
aggregate supply
5. Method of study It adopts partial It adopts general
equilibrium analysis equilibrium analysis
6. Alternate name It is known as price It is known as

theory income and
employment theory
7. Example An individual brand of a Various brand of a

commodity commodity
Q14:- Why microeconomics is important ?
Ans. Microeconomics is important because:
a) It helps in formulation of economic policies.

b) It solves the central problem of an economy.
c) It has both theoretical & practical importance.
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Q15:- What are the limitations of micro-economics?
Ans. The following are the limitations of micro economics:
a) It fails to explain the working of whole of the economy.

b) Conclusions drawn on the basis of individual variables may be misleading. These may be
true about an individual unit but not for the economy as a whole.
c) It fails to deal with the problems confronting Whole of the economy
Q16:- What are the central problems of an economy?
Ans. The central problems of an economy are common to all economies. These are related to
allocation of resources and are explained as follows:
a) What to produce & in what quantity? :-It is the problem of choosing which goods &
services should be produced and in what quantity. This has to be decided by every economy
as it has limited resources at its command. It refers to the choice among different types of
goods like consumer goods (e.g. cloth, shoes, sugar, wheat) and producer goods (e.g. tools,
machines) necessary goods & luxury goods. All goods cannot be produced in view of limited
resources so the economy has also to decide the quantities in which selected commodities are
to be produced.
b) How to produce? :- It is the problem of choosing the technique of production of goods &
services. In an economy, a commodity can be produced by more than one method. There are
two techniques of production:
i) Labour intensive technique:- In this , more labour and less capital is employed.
ii) Capital intensive Technique:- In this , more capital & less labour is employed.
Since resources are scare and efficient technique of production only can reduce cost, thus
every economy has to produce with the most efficient technique of production.
Example :- A given amount of wheat can be produced either by using more land & less
capital( manure , seeds , tube well etc. ) or less land and more capital.
c) For Whom to produce ? :-This problem means who gets how much of goods that are
produced in the economy. In other words how should output be distributed among those who
have helped to produce it. Output emerging from production is distributed in the form of
wages, rent, interest & profit, on the basis of contribution of each individual factor of
production. Thus the question for whom to produce deals with how the total output is
divided among various consumers. Who is paid how much is also a choice problem.
Q17:- Why do central problems arise ?
Ans :- When resources of an economy are scarce , choice has to be made about the use of
resources. Thus, broadly the central problem of an economy is allocation of resources or
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making choices among alternative use of resources. Clearly, it is scarcity of resources that
gives rise to the central problems.
A POSITIVE OR A NORMATIVE SCIENCE
1. Economics as a Positive Science
Positive economics deals with what is or how the economic problems facing a society
are actually solved.
In other words, in positive economics we study human decisions as facts which can be
verified with actual data. Examples of positive economics are:
a) India is an overpopulated country.

b) A fall in the price of a good leads to rise in its quantity demanded.
c) Prices have been rising in India.
2. Economics as a Normative Science
Normative economics deals with what ought to be or how the economic problems
should be solved.
In other words, in normative economics there is no reservation on passing value
judgment on moral rightness or wrongness of things. Normative economics gives
prescriptive statements. Examples of normative economics are:
a) Government should guarantee a minimum wage for every worker.
b) Government should stop Minimum Support Price to the farmers.
c) India should not take loans from foreign countries.
S.No. Positive Economics Normative Economics
1. It expresses what is. It expresses what should be
2. It is based on facts. It is based on ethics.
3. It deals with actual or realistic It deals with idealistic situation.
situation.
4. It can be verified with actual data. It cannot be verified with actual data.
5. In this value judgments are not In this value judgments are given.
given.
6. It deals with how an economic It deals with how an economic problem
problem is solved. should be solved.
7. Observe these examples: Compare these examples:
a) What determines the a) What is a fair price rise?
price rise? b) Unemployment is worse than
b) Government has adopted inflation.
policies to reduce c) The rate of inflation should
unemployment. not be more than 6 percent.
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c) The rate of inflation in
India is 6 percent
3. Interdependence of Positive and Normative Sciences
In reality, economics has developed along both positive and normative lines. Both
these aspects have grown inseparably. The role of an economist is not only to explain
and explore (i.e., positive aspect) but also to admire and condemn (i.e., negative
aspect). This role of an economist is essential for a health and rapid growth of an
economy. Examples of statements which contain both positive and normative
economics are:
i. A rise in the price of a good leads to a fall in its quantity demanded, therefore,
Government should check rise in prices.
ii. Rent Control Act provides accommodation to the needy people; therefore, the
Act should be honestly implemented.
iii. Indian economy is a developing economy, the Government should make it
developed through correct planning.
In the above three examples, the first part of the statement is positive giving facts and
the second part is normative based on value judgments.
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PRODUCTION POSSIBILITY CURVE
OR
PRODUÇTION POSSIBILITY FRONTIER
Q1:- Define Production Possibility Curve .
Ans. Production Possibility curve is a curve which depicts all possible combinations of two
goods which an economy can produce with available technology & full employment of given
resources. In other words it depicts the maximum possible combinations of two goods that
can be produced in an economy with available technology and of given resources.
Assumptions :-
a) Factors of production are given
b) No change in technology
c) Only two goods can be produced
d) Resources are non-specific.
e) Resources are not equally efficient in production of both the goods.
y
PRODUCTION POSSIBILITY SCHEDULE
Production Wheat Tanks A B
Possibilities (qtls.) 15
A 0 15 C H
12 D
B 1 14
Tanks
9
C 2 12 E
6
D 3 9
3 G
E 4 5
F 5 0 F
o x
1 2 3 4 5
Wheat
Production Possibility Curve
1. Every point on a PPC (A, B, C, D, E, F) in the figure
indicates full employment & most efficient use of
resources.
2. Any point inside the PPC (G) , indicates under utilization
& inefficient use.
3. Any point outside the PPC (H) is an unattainable combination.
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Q2:- What are the features of a PPC?
Ans. Features/Properties/Characteristics of a PPC :-
a) PPC slopes downwards:-A PPC always slope downwards from left to right. It is because
more of one good can be produced only when less of another good is produced. For e.g. in
the diagram, if we want to produce more of wheat, we have to reduce the quantity of tanks to
be produced. This is due to limited availability of resources.
b) PPC is always concave :- PPC looks concave to the origin because of increasing
marginal opportunity cost. Increasing marginal opportunity cost implies that for producing
additional unit of a good, sacrifice of units of other goods goes on increasing.
Q3. Why a PPC is also known as transformation curve?
Ans. A PPC shows that more of a commodity can be produced only by giving up some of the
other. So in a way one commodity can be transformed into the other. That is why, it is
termed as transformation curve.
Q4 :- What is opportunity cost?
Ans. The opportunity cost for a commodity is the amount of other commodity that has been
given up or sacrificed in order to produce the first. For e.g. on a piece of land equally fit for
production of wheat and rice , if wheat is grown than opportunity cost of producing wheat is
the quantity of rice given up. In other words, opportunity cost is opportunity lost.
Q5 :- What is Marginal opportunity cost (MOC) or Marginal Rate of Transformation
(MRT)?
Ans. Marginal opportunity cost of a particular good along a PPC is the amount of the other
good which is sacrificed to produce an additional unit of that particular good. Symbolically:
MOC= ∆𝑦/∆𝑥 [where ∆y = change in loss & ∆x = change in gain]
Rate of sacrifice technically termed is the marginal rate of transformation. It is the ratio of
units of one good sacrificed to produce one more unit of the other good. Symbolically:
MRT = ∆𝑦: ∆𝑥
Q6 :- Why does MOC increase?
Ans. Reasons for increasing MOC :-
a)Operation of law of diminishing marginal productivity:-> According to this law if more
& more units of a good are to be produced, the additional units will require more & more of
the factors as their productivity falls, i.e. cost of production of additional units of the goods
will increases.
b)Transferring resources from more productive to less productive use :-> When factors
which are specialized for production of a particular good (tanks) are transferred to the
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production of another good (wheat) for which they are less productive, some productivity is
lost. This implies increase in MOC making the PPC concave.
Shifts in PPC :-The PPC can shift if there is change in resources & technology. Shifts can
be of two types:-
a) Rightward Shift :- Rightward or outward shift takes place due to the following reasons:-
i) Increase in skilled labour
ii) Discovery of new resources
iii) Improvement in technology
iv) Inventions
Rightward shift of PPC indicates increase in economy's productive capacity as a result of
growth of resources & technological advancement.
Rightward shift
y
P
1
P
y- good
o 1 x
x- good P P
b) Leftward Shift :- Leftward or inward shift takes place due to the following reasons:-
i) Natural calamities leading to destruction of natural resources.
ii) War
iii) Reduction in labour force.
Leftward shift shows under utilization or inefficient utilization of resources causing fall in
productive capacity.
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Leftward shift
y
P
P1
y- good
x
o x- good P1 P
Rotation of PPC :->
Rotation of PPC is caused only when the change in factors of production effects only one
good leaving the other unaffected .This is shown in the following diagrams :->
y Good-x y
P
P1
P
y- good y- good
o x- good P1 P x x
o x- good P
y Leftward Shift y Rightward Shift
Good-y
y- good y- good
o x x
x- good o x- good
Leftward Shift Rightward Shift
Movement along a PPC :-

Movement along a PPC means moving from one point on PPC to another. It shows
production of more of one good and less of another.
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Q7:- Explain the central problem of an economy with help of a PPC.
Ans. a) What to produce & in what quantity :-> All the points on a PPC depict different
combinations of two goods offering different choices to the economy. It is from these
choices that the society has to select with the objective of achieving maximum production.
For e.g. if the economy decides to produce more of wheat & less of tanks it will produce on
E. On the other hand if it requires to produce more tanks & less wheat the economy will
produce on B or C. In short, PPC offers various options to economy in the form of different
combinations of goods to choose from according to its needs &thus solves the problem of
wheat to produce & in what quantity.
b) How to produce? :- The problem of how to produce is the problem of choice of
technique of production i.e. labour intensive technique or capital intensive technique. PPC
solves this problem too, for e.g. if the technique used in PPC is obsolete the economy will
operate at same point inside the PPC &not on it. This will inspire the economy to change the
technique so as to produce on PPC itself by making efficient use of its resources.
c) For Whom to Produce? :- PPC does not solve this problem .

y
A
P B
C
y-good D
(Tanks)
E
F
o x-good P x
(Wheat)
Q8 :- "Massive unemployment shifts the PPC to the left". Defend or refute.

Ans. This statement is wrong as unemployment does not have any impact on PPC. It only
represents under- utilization of resources. While PPC takes into account only of the work
force of an economy, thus unemployment is inconsistent with PPC.
Q9: - Does production take place only on PPC?
Ans. Production takes place only on PPC is not true. Production on PPC is only when given
resources are fully employed & efficiently used.
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Class 12th UNIT 4:- FORMS OF MARKET AND SIMPLE APPLICATION
UNIT-II
CHAPTER – 1
Consumer's Equilibrium
Marks (13)
Questions Expected
Important Terms: -
1. Utility :-Utility is the want satisfying power of a commodity.
2. Cardinal Utility :- Utility which can be measured in numbers is called cardinal utility.
3. Ordinal Utility :- Utility which cannot be measured is known as ordinal utility.
4. Utils :- Utils are the unit for measuring utility.
Concept of Utility
a.) Total Utility :- It is the increase in total utility which results from the consumption of an
additional unit of a commodity. Symbolically:
TU=MU1 + MU2 +….. + MUn or TU=∑MU
b.) Marginal Utility: - It means addition to the total utility by consumption of one more unit
of a commodity. Symbolically:
𝑴𝑼 = 𝑻𝑼𝒏 − 𝑻𝑼𝒏−𝟏
OR
∆𝑻𝑼
𝑴𝑼 = [∆TU is change in total utility & ∆Q is change in quantity]
∆𝑸
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Relationship b/w TU & MU
a) As long as MU is positive, TU goes on increasing.
b) When MU becomes zero, TU is maximum.
c) When MU becomes negative, TU starts declining.
d) MU curve is the slope of TU curve at each & every point.
e) MU can be zero or negative but TU can never be zero or negative.
y
'Relationship B/w TU &MU'
Unit of TU MU 12
apples
consumed 10
0 0 -- TU
1 6 6 TU/MU 8
2 10 4 6
3 12 2
4
4 12 0
5 10 -2 2
o x
Law of Diminishing Marginal Utility 1 2 3 4 5
Units of apple MU
Assumptions:-
1. A consumer is a rational being.
2. Consumption should be continuous.
3. Consumption of a commodity should be in standard units.
4. Utility is cardinal.
5. Mental and social conditions of the consumer is normal.
Explanation :- This law is also known as Gossen's first law as it was given by Gossen. This
law states that as more & more units of a commodity are consumed, marginal utility or
satisfaction derived from each successive unit goes on falling.
Example :- Suppose a hungry man wants to eat. The first chapati gives him maximum
satisfaction (100 utilis). Second chapati will also fetch him utility (80 utilis) but not as much
as the first one because a part of his hunger is satisfied by eating first chapati. Similar will be
the case with 3rd, 4th or 5th chapati. In short, as a consumer consumes more & more
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chapatis the intensity of his want goes on falling. This is shown in the following table &
diagram:-
Units Consumed MU
1 6
2 4
6
3 2
MU
4 0 4
5 -2
2
o x
1 2 3 4 5
Qty. MU
Consumer's Equilibrium
Meaning:-Consumer's Equilibrium refers to a situation under which he spends his given
income on purchase of a commodity in such a way that gives him maximum satisfaction &
he does not want to change his position. It is basically a position of rest.
There are two approaches to reach at consumer's equilibrium viz. Cardinal utility approach &
ordinal utility approach.
Difference b/w Cardinal utility & Ordinal utility
Cardinal Utility Ordinal Utility
a) The word cardinal means The word ordinal means

measureable in numbers. immeasurable in numbers.
b)This approach was given by This approach was given by Hicks &
Marshall. Allen.
c)Utils are used for measuring utility. Utils does not exist.
d)This approach is objective This approach is subjective.
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CARDINAL UTILITY APPROACH
Assumptions :-
a) A consumer is always rational.
b) Marginal utility(MUM) of money is constant.
c) Consumer's income is given.
Marginal utility of money: - It is the utility derived from spending one additional unit of
money on goods & services.
Consumer's Equilibrium in case of a single commodity :-
Condition of consumer's equilibrium :-Consumer's equilibrium is attained when marginal
utility of commodity in money terms is equal to its price. Symbolically: It is clear from the
dig. that the consumer is in equilibrium at point e where MUx = Px .
𝑴𝑼𝒙
𝑴𝑼𝒙 = 𝑷𝒙 𝒐𝒓 = 𝑷𝒙
𝑴𝑼𝒎
The above condition of a consumer's equilibrium can be explained with help of following
y
utility schedule & diagram :-
a) Suppose the price of an apple is ₹5:-
Units of MUx Px Gain
8 MUx> Px
MUx= Px
apple e MUx< Px
6
1 7 5 5 MUx Px
2 6 5 1 4
3 5 5 0 MUx
2
4 4 5 -1
5 2 5 -3 o 1 2 3 4 5 x
y
b) Suppose the price of an apple is Rs. 5 & MUm is 5 :-
10 MUX> Px
Units of MUx MUx / MUm Px Gain MUM MUX= Px
apple 8 MUM
1 50 10 5 5 MUX< Px
6 e MUM
2 30 6 5 1 MUX
3 25 5 5 0 MUM4
MUX
4 20 4 5 -1 2 MUM
5 10 2 5 -3
x
o 1 2 3 4 5
Units of Apple
It is clear from the schedule that if 𝑀𝑈𝑥 /𝑀𝑈𝑚 is greater than its price, the consumer can
increase his satisfaction by increasing consumption of apples. Similarly if 𝑀𝑈𝑥 /𝑀𝑈𝑚 is less
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than the price, the satisfaction can be increased by cutting down the consumption. The
𝑀𝑈𝑥
consumer is in equilibrium at point 'e' where = 𝑃𝑥 .
𝑀𝑈𝑚
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Law of Equi-Marginal Utility (Two - Commodity Case)
This law states that a consumer should incur his expenditure on two commodities in such a
manner that utility gained from the last rupee spent on each commodity is equal. There are
two ways in which consumer's equilibrium can be determined in case of two commodities :
a) When price of both commodities is same :-

Condition :-1. 𝑀𝑈𝑥 = 𝑀𝑈𝑦
2. 𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑌 [where Y = income of the consumer]
This can be shown with the help of the following utility schedule & diagram :
Suppose 𝑃𝑥 = 𝑃𝑦 = Rs. 10 & Y =Rs. 110
Units MUx MUy y y

1 80 66
2 72 58 80 80
3 64 54 70 70
4 56 48 60 60
5 48 (40) MUX50 e MUy 50 e
6 (40) 34 40 40
7 32 24 30 30
8 24 16 20 20
9 16 10 10 10
MUX MUy
10 8 6
o 1 2 3 4 5 6 7 8 9 10 x o 1 2 3 4 5 6 7 8 9 10 x
Qty. Qty.
In order to have maximum satisfaction the consumer will buy 6 units of good x of & 5 units
good y as at this combination
𝑀𝑈𝑥 (40)=𝑀𝑈𝑦 (40)
𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑌
10 x 6 + 10 x 5 = 110
60+50=110
110 = 110
In the diagram the consumer is in equilibrium at point e where he consumes 6 units of x & 5
units of y.
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b) When prices of two commodities are different :->
𝑀𝑈𝑥 𝑀𝑈𝑦
Conditions :-> a) =
𝑃𝑥 𝑃𝑦
b) 𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑌
Units MUx MUy MUx/Px MUy/ Py

1 60 80 20 20
2 54 76 18 19
3 48 72 16 18
4 42 68 (14) 17
5 36 64 12 16
6 30 60 10 15
7 24 56 8 (14)
8 18 52 6 13
9 12 48 4 12
10 6 44 2 11
Here 𝑃𝑥 = Rs 3, 𝑃𝑦 =Rs 4 & Y=Rs 40

In this case the consumer is in equilibrium when he consumes 4 units of good x & 7 units of
good y because it is only where both the condition are satisfied.
Indifference Curve Analysis (Ordinal Approach)
Assumptions :-
1. Utility is ordinal
2. A consumer is able to show his preferences.
3. Consistency (if A>B, then B is never preferred to A)
4. Transitivity (if A>B & B>C, then A>C)
5. Diminishing marginal rate of substitution(DMRS).
Marginal rate of Substitution :- Marginal rate of substitution of X for Y is defined as the
number of units of commodity Y that must be given up for an extra commodity of X so that
the consumer maintains the same level of satisfaction.
∆𝑦
Symbolically: 𝑀𝑅𝑆𝑥𝑦 = [∆y=∆loss, ∆x=∆gain]
∆𝑥
𝑀𝑅𝑆𝑥𝑦 is the slope of indifference curve. It always declines due to the law of diminishing
marginal utility. That is why the consumer will be willing to sacrifice lesser & lesser quantity
of Y.
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Important Concepts: -
1. Monotonic Preferences: - These are those preferences in which a consumer always
prefers the bundle having either more of both goods or more of at least one good & of
no less of other good compared to another bundle. For eg. Between 2 bundles (10,9)
and (9,9), consumer’s preference of bundle (10,9) to (9,9) will be called monotonic
preference.
2. Budget Set :- A budget set is the collection of all bundles of two goods that a
consumer can buy with his income and the prevailing market prices. He can buy any
bundle of good x & y that, satisfies the following conditions:
𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 ≤ 𝑀[M = money income]
3. Budget Constraint :- The consumer has a given income which sets limits to his
maximizing behavior. In case of 2 commodities, it may be written as
𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑀
4. Budget Line:- A budget line represents all bundles which a consumer can buy with
his entire income & prices of two goods.
e.g. Suppose there are two goods x and y and their prices are Rs 1 & Rs 2 respectively
.
The income of the consumer is Rs 10 . He can buy any combination which costs Rs 10
Symbolically
𝑃𝑥 𝑄𝑥 + 𝑃𝑦 𝑄𝑦 = 𝑀
5. Slope of Budget Line :- The slope of budget line is the rate at which the consumer is
able to substitute one commodity for the other in the market. It is negatively sloped
because to buy more of a good, the commodity must buy less units of other good as
his income is fixed. Symbolically:
𝑃𝑥
Slope of budget tine =
𝑃𝑦
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Suppose the price of x is ₹1 & price of y is ₹2 & Income (y) = ₹6 then the budget line
formed is BL.
Y
B Py
Good- y 3
1
Y
Px
o x
1 2 3 4 5 6L
Good- x
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6. Shifts in budget line :- Shifts in budget line may be caused due to change in income
or change in prices of the commodities.
i) Change in income :- An increase in income leads to a rightward shift in budget
line due to increased consumption of both the goods. While decrease in income
causes a left ward shift. y
y Change in Income
a) Increase B b) Decrease
B1
B B1
y-good y-good
x o x
o x-good L L1 x-good L1 L
ii) Change in price of good x :- An increase in price of good x results in a budget
rotation of line from BL to 𝐵𝐿1 making it steeper while a decrease in price of
good x causes BL to be flatter i.e. from BL to 𝐵𝐿1 .
y Changes in Price of good-x y
B a) Increase in Px B1 b) Decrease in Px
y-good y-good
x x
o x-good L1 L o x-good L L1
iii) Change in price of good y :- An increase in price of good y results in a rotation
of budget line from BL to 𝐵1 𝐿 making it flatter while a decrease in price of
good y causes BL to be steeper i.e. From BL to 𝐵1 𝐿1 .
y Changes in Price of good-y y
B a) Increase in Py b) Decrease in Py
B1
B1 B
y-good y-good
o x-good L x o x
x-good L
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INDIFFERENCE CURVE
Meaning: - An indifference curve is a curve that represents all those combinations of two
goods which give equal satisfaction to the consumer. The consumer is indifferent towards
various combinations of two goods giving same level of satisfaction. Therefore, such a curve
is called indifference curve. y
INDIFFERENCE CURVE
INDIFFERENCE SCHEDULE A
Combination Tea Biscuit MRSxy
∆𝑦
( )
∆𝑥
A 1 20 -
Biscuits B
B 2 12 8
C 3 8 4 C
D 4 6 2 D E
E 5 5 1 o x
Tea
Indifference Map :- An indifference y
map is a collection of indifference
curves corresponding to different levels
of satisfaction. In short, all the
indifference curves taken together y-good
constitute the indifference map of the
consumer. IC3
IC2
In the figure, every indifference curve IC1
o x
is numbered in ascending order. Each x-good
curve on the right hand side represents
a higher level of satisfaction as compared to the curve on left hand side.
PROPERTIES OF INDIFFERENCE CURVES
1. An IC always slopes downward to the right :- It has a negative slope which shows that
if quantity of one commodity increases the quantity of other must decrease if the consumer
has to stay on the same level of satisfaction.
2. Higher IC represents higher level of Satisfaction :- The farther the IC from the origin,
the higher level of satisfaction it denotes because the higher curve represents greater
quantities of both the goods. Thus increasing satisfaction of the consumer.
3. An IC is always convex to the origin:- This implies that the slope of an IC decreases as
we move along the curve from left downwards to the right which means that it follows
diminishing marginal rate of substitution.
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4. Indifference curves can’t intersect each other: - Two ICs can never intersect. If they do
the point of their intersection imply two different levels of satisfaction which is impossible.
5. An IC never touches the axis: - If an IC touches any of the axis, it means consumer is
consuming only one commodity. This can't happen in case of an IC as a Consumer has to
consume two goods.
CONSUMER”S EQUILIBRIUM THROUGH IC APPROACH
To derive consumer's equilibrium through indifference curve approach, two things are
required, an indifference map & his budget line. The consumer's equilibrium is defined by
the point of tangency of the budget line with the highest possible indifference curve. For this,
the budget line is superimposed on the indifference map.
Conditions :-
a) Budget line must be tangent to
the highest possible IC i.e. y
Slope of IC = Slope of budget line.

MRSxy= Px
Symbolically, B Py
𝑃𝑥
𝑀𝑅𝑆𝑥𝑦 = y-good K IC3
𝑃𝑦
IC2
b) IC must be convex to the origin IC1
i.e. MRS must be

diminishing.(DMRS) o x
Q x-good L
In the diagram budget line AB is
tangent to the 𝐼𝐶2 at point e.This is the highest attainable level given the budget constraint.
Thus at point e, the consumer maximizes his utility by consuming OK of good Y and OQ of
good X as at this point both the conditions are satisfied.
What happens if :-
𝑷𝒙
a)If 𝑴𝑹𝑺𝒙𝒚 > : - It shows that the consumers is willing to sacrifice more units of Y than
𝑷𝒚
the market requires in order to consumes one more unit of X. It means he values X more than
Y. In this case, the consumer will buy more of X to reach at equilibrium point as MRSxy
begins to fall with his increased consumption of X.
𝑷𝒙
b) 𝑴𝑹𝑺𝒙𝒚 < :-It shows that the consumer is willing to sacrifice lesser units of Y than the
𝑷𝒚
market requires in order to consumes more of X. This induces him to reduce consumption of
X & increase the consumption of Y to reach at equilibrium point as MRSxy begins to rise.
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Q1 :- Who is a consumer?
Ans. A consumer is an economic agent who consumes goods and services for the satisfaction
of his wants.
Q2 :- What do you mean by slope of budget line or price line?
Ans. The slope of budget line is the rate at which the consumer is able to substitute one good
for the other in the market. So slope of budget line is equal to the ratio of price of two goods.
𝑃𝑥
i.e. .
𝑃𝑦
Q3 :- What are the determinants of budget line?
Ans. a) Income of the consumer (y)

b) Prices of commodities purchased. (Px & Py)
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Theory of demand
Meaning of Demand: - Demand for a commodity refers to the quantity of a commodity
which a consumer is willing to buy at a particular price, during a point of time.
Example: - A household’s demand for milk is 2 liters at a price of Rs.40 per liter in a day.
Thus, demand involves three elements: (a) Price of the commodity (b) Quantity of the
commodity and (c) Time.
Factors/ Determinants of Demand:-
Following are the main factors which influence the demand for a commodity:-
(i)Price of the commodity itself (Px):- The demand for a commodity bears an inverse
relationship to its price i.e. with an increase in the price of the commodity, its quantity
demanded falls and vice-versa. For example, quantity demanded of tea will fall with a rise in
its price and rise with a fall in its price.
(ii) Price of related good (Pz) :- The demand for a commodity is affected by the price of
related good too. Goods are said to be related when price of one good (x) influences the
demand for the other good (y). Related goods are of two types:-
a) Substitute Good:- These are those goods which can be used in place of each other to
satisfy a given want for example, Vodafone card and Airtel card. The demand for Vodafone
card will rise if Airtel card becomes costlier. Conversely, if Airtel card becomes cheaper the
demand for Vodafone card will fall. Thus, there is a direct relationship between substitute
goods.
(b) Complementary goods:- These are those goods which are jointly used to satisfy a want.
e.g. Car and petrol. If price of petrol rises, the demand for cars will fall and vice-versa. Thus,
the demand for complementary goods bears an inverse relationship with the price of
complementary good.
(iii) Income of the consumer (Y) :- The effect of change in income on demand depends on
the nature of the commodity. On this basis, commodities can be classified into three
categories:-
(a) Necessities: - Demand for this type of good is not affected by the change in income.
(b) Normal Goods: - The quantity demanded for a normal good rises with a rise in income
and falls with a fall in income.
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(c) Inferior Goods:- The quantity demanded for an inferior good rises with a fall in income
and falls with a rise in income.
(iv) Taste, habit and preferences (T) :- The demand for a commodity is directly related to
taste, habit and preference of the consumer. Demand for those goods increase for which a
consumer is having a favorable taste. On the other hand, demand for those goods decrease
for which consumer is not having any taste.
(v) Expected change in future prices (E) :- If there is expectation of rise in future prices,
more quantity will be demanded in present. On the other hand, if there is an expectation of
fall in future prices, less qty. will be demanded in the present time.
Meaning of Demand function:-

A demand function is an algebraic expression of the relation between the demand for a
commodity and its various determinants.
Symbolically, Dx= f (Px, Pz, Y, T, E)

Difference Between:-
a) Normal Good and Inferior good.
(b) Substitute good and Complementary good
Normal Good Inferior Good
1. Normal goods are those goods 1. Inferior goods are those good whose
whose quantity demanded rise with quantity demanded falls with a rise in
a rise in income and vice-versa. income and vice-versa.
2. These goods have positive 2. These goods have negative
relationship with income of the relationship with income of the
consumer. consumer.
3. Eg. Milk, cloth etc. 3. Jawar, Bajra , Non-branded Stuff.
Substitute good Complementary Good

1. These are the goods which can be 1. These are the goods which are
used in place of each other to satisfy demanded jointly to satisfy the want
want of the consumer. of the consumer.
2. There is direct relationship between 3. There is an inverse relationship
the Substitutes. between complementary goods.
3. E.g. Tea and Coffee. 3. E.g. Car and Petrol.
Meaning of Individual Demand and Market Demand:-
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(a) Individual demand: - Individual demand for a commodity refers to the amount of it
bought by a person or a household at different prices.
(b) Market Demand: - Market demand for a commodity refers to the total demand for a
commodity bought by all consumers taken in the market together at different prices.
Market demand function:-
Dx = f (Px, Pz, Y, T, E, U)
U = other determinants like:-
i. Size of the Population: - More the population more will be the number of consumers
in the market and consequently more will be the market demand and vice-versa.
ii. Distribution of Income: - If distribution of income in the country is even, market
demand for commodities will be at higher level. But if the distribution of income is
uneven (favouring rich), market demand for the commodities will remain low.
iii. Composition of Population: -This also determines market demand. For instance, in a
market which has a large population of children, there will be a great demand for toys,
baby soaps, oils, etc. while if there are more youngsters, demand will be more of
clothes, accessories, gadgets etc.
Market Demand Schedule:-
Price Quantity demanded by A Quantity demanded by B Market Demand
1 4 5 (4+5) 9
2 3 4 (3+4) 7
3 2 3 (2+3) 5
4 1 2 (1+2) 3
y y y (Market)
(A) (B)
Price
D D1 D11
4
3
2
1 D1 D11
D
x o x o x
o 2 4 6 8 10 2 4 6 8 10 2 4 6 8 10
Qty. Qty. Qty.
Market Demand Curve:- Market demand curve is the horizontal summation of individual
demand curves. It is derived by horizontally adding the individual demand urves.
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Law of Demand
Assumptions:-
(a) No change in consumer’s income.
(b) No change in the price of the related good.
(c) No change in taste and fashion.
(d) No expectation of change in future prices.
Statement of the law:- The law of Demand states that, other things being constant (ceteris
paribus), the demand for a commodity rises with a fall in its price and falls with a rise in its
price .In short, there is an inverse relationship between price and quantity demanded of a
commodity.
Demand Schedule:- A demand schedule is a tabular presentation which shows different

quantities of a commodity demanded at different prices.
Demand Curve:- A demand curve
graphically reflects graphically the relation y Demand Curve
between the quantity demanded of a D
commodity and its price. 10
Demand Schedule 8
Price
Price QD (kg.) 6
10 1 4
8 2
6 3 2 D
4 4 x
o 1 2 3 4 5
2 5 QD
Q. Why does demand curve slope downwards? OR why there is an inverse relation between
price and quantity demanded?
Reasons For Downward Slope Of the Curve: - [Inverse relation between price and QD]
The negative slope of the demand curve is due to the following reasons:-
a) Law of diminishing marginal utility: - This law states that the marginal utility of
good falls with consumption of additional units of a commodity. Since additional units
give him lesser satisfaction, he will buy more at a lesser price. Thus, the demand curve
slopes downward as the consumer demands more only at a lesser price.
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b) Income effect:- When the price of the commodity falls, the consumer has to spend
less on the purchase of same amount of the commodity. Thus, it increases his
purchasing power or real income which enables him to buy more of that commodity.
Thus, with a fall in price, demand will rise due to positive income effect.
c) Substitution effect: - When the price of the commodity falls, it becomes cheaper in
comparison to other commodities. So the consumer starts substituting this commodity
in place of other commodity. Thus, demand for this commodity increases with the fall
in price and vice-versa. This is substitution effect.
d) New consumers creating demand: - As price of the commodity falls, new consumer
class appears, who can now afford the commodity. Thus, the total demand for the
commodity increases. i.e. with a fall in price, quantity demanded for a commodity
increases.
e) Number of uses:- with a fall in price of the commodity, consumers start putting it into
various uses this increasing its demand.
Exception to the Law of Demand or Where Law of Demand Does Not Operate :-
a) Veblen goods or Goods of Status :- These are the goods of conspicuous
consumption. These are purchased to emphasis status or prestige. These are bought
only by rich and wealthy sections as due to their high prices they are out of reach of
the common man. E.g. Fancy Diamonds, Luxury Cars, antiques etc.
b) Necessities of life :- There are some goods which are necessities of life like salt, life
saving drugs, etc. whose fixed amount has to be purchased by the consumer
irrespective of their price. In such cases, law of demand does not operate.
c) Giffen goods :- These are special types of inferior goods whose QD falls with a fall in
price and rises with a rise in price. E.g. Cheap cereals like bajra, maize etc. If price of
maize falls, the consumer cuts back his consumption of maize and divert his increased
real income to the consumption of rice and vice-versa.
d) Emergency :- In case of emergency like war, drought etc., people tend to buy more
even at higher prices due to abnormal conditions prevailing in the economy.
e) Demonstration effect :- These are the commodities with which prestige value is
attached due to some fashion or trends like fancy clothes, jewellery etc., They are
bought more at a higher price, failing the law of demand.
f) Ignorance :- Out of ignorance, that high priced commodity is better than a low priced
one, consumers buy more at a higher price.
g) Expectation of further rise in prices: - When buyer expects a further rise in price, he
purchases more quantity even a t a higher price and vice-versa. E.g. Shares, petrol etc.
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Movement and Shift in Demand

a) Movement in demand: - It is also known as change in quantity demanded. It refers to
the change in demand for a commodity caused by the change in its price. Graphically,
it is shown as a movement along a given demand curve.
i. Expansion in demand: - An expansion in demand occurs when the quantity
demanded of a commodity rises due to a fall in price.
ii. Contraction in demand: - It occurs when the quantity demanded for a commodity
falls due to a rise in its price.
b) Shift in demand: - It is also known as change in demand. It refers to the change in

demand caused by factors other than price. Graphically, change in demand is shown
with the help of a new demand curve.
i. Increase in demand: - An increase in demand takes place when the consumer
demands more of a commodity due to change in any of the other determinants of
demand.
ii. Decrease in demand: - It takes place when the consumer demands less of a
commodity due to change in other factors of demand.
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Differentiate Between:-
Movement in Demand Shift in demand
1.This is also known as change in QD. 1.This is also known as change in demand.
2. It includes expansion and contraction of 2.It includes increase and decrease in
demand. demand.
3.There are upward and downward movement 3.There is leftward or rightward shift in the
along the demand curve. demand curve.
4.It is due to change in price. 4.It is due to other factors like, change in
income, change in price of related good,
5.Other things being equal if QD increases or change in taste and preferences, change in
decreases due to fall or rise in the price of a future prices.
commodity, it is known as movement along
a demand curve. y 5.If more or less quantity of a commodity
is demanded at the same price due to
Price QD change in factors other than price of
A Expansion commodity, it is known as change in
10 15 10 y
demand.
Price
8 20 B Contraction
8 Increase
Price Q
Price
11
6 25 D1 D1 D Decrease
6 D
C 10 A B C D
10 5
x D 1 D11
o 15 20 25 Qty. D
10 10 x
o 5 10 15 Qty.
10 15
Expansion in Demand Increase in Demand
1.It refers to a rise in demand due to a 1.It refers to increase in demand due to change in
fall in price other factors like fall in price of complementary
2. It is included in movement in good, rise in income or favorable change in taste,
demand. expected rise in future prices, rise in price of
3. In this there is downward substitute goods.
movement along ythe same demand 2.It is included in shift in demand
curve. 3. In this there is rightward shift in the
demand curve. y
D
10 A
Price QD
Price
Price QD
Price
10 10 8 1 D2
B
D
10 10 D D
8 15 6 10 15 A B C D
C 10
6 20 o x 10 20 D D
1 D
2
10 15 20 Qty.
o x
10 15 20 Qty.
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Decrease in demand Contraction in demand
1.It refers to decrease in demand due 1.It refers to fall in QD due to rise in
tochange in factors other than price price.
like, fall in income, rise in price of 2.In this, there is an upward
complementary good, unfavorable movement along the same demand
change in taste etc. curve
3.It is included in movement of the
2.In this there is a leftward shift in the demand curve.
y
demand curve.
3. It is included in shift of the demand Price QD D
10 A
Price
curve. y 6 20
8 15 8 B
D
Price QD 10 10 6
Price
D 1 C
10 20 D D 1 x
1 o 10 15 20 Qty.
10 15 10
1
10 10 D D D
1
o
1 x
10 1 2 Qty
5 0 .
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Elasticity of demand
Price elasticity of demand:-

The concept of elasticity of demand was developed by Professor Alfred Marshall. It is
defined as the degree of responsiveness of quantity demanded of a commodity in response to
change in its price. In other words, it is the percentage change in quantity demanded due to
percentage change in its price.
Symbolically,
Ed= (-) %age change in Qd _or (-) proportionate change in QD or ∆Q x P
%age change in price proportionate change in price ∆P x Q
Where Q= original quantity, P= original price, ∆Q= Q1-Q, ∆P= P1-P
Factors affecting elasticity of demand:-

1. Availability of substitute :- More the substitutes, higher the elasticity, those commodities
which have substitutes they have higher elasticity like tea and coffee. While those
commodities which do not have substitutes are inelastic in demand like salt.
2. Nature of the commodity :- Goods may be necessity or inelastic. Demand for necessities
tends to be less elastic e.g. salt while demand for luxury goods like car, air conditioners are
more elastic. So nature of the commodity affects elasticity of demand a lot.
3. Habit, fashion and taste Once people form habit of consuming a particular product, the
demand for that commodity becomes inelastic like cigarette, alcohol etc. It is difficult for
them to change the demand making the demand inelastic.
4. Number of uses of the commodity :- Multiple use goods have more elasticity as when its
price is high, its use will restricted to a few important uses. If its price is low, it will be put to
many uses, for e.g. Electricity. Single are commodities have lesser elasticity.
5. Proportion of income spent on commodity :- If the amount of money spent on
commodity consist a small proportion of the total expenditure its demand is perfectly
inelastic, e.g., match box. On the other hand, if the amount of money spent on a commodity
constitute a large proportion of income, its demand will be elastic.
6. Price level :- High priced commodities have higher elasticity of demand while the goods
which have less price have less elastic demand. Hence, low priced commodities have
inelastic while high priced commodities have more elastic demand.
7. Time period :- The demand for a commodity is likely to be more elastic during long
period of time and less elastic during short period of time because in long period of time, a
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substitute can be found for almost any product making the demand for the commodity
elastic.
8. Possibility of postponement of the use of the commodity :- If the use of the commodity
can be postponed, its demand is likely to be inelastic than the commodity whose use cannot
be postponed.
Degrees or Types of Elasticity of Demand ;-
The price elasticity of demand is classified into following five categories :-
(a)Perfectly inelastic demand [Ed=0] :-
When QD does not change at all in response to a change in price, demand of the commodity
does not change, the demand for that good is said to be inelastic. For eg. Salt or life saving
medicine. y
The shape of the demand curve is Parallel to y-axis. D
Price QD
10
10 10
Price
8 10 8
6 10
6
o x
10 QD
(b) Inelastic demand [E<1] :-
When percentage in demand is less than the percentage change in its price. For eg.
Necessities like food. y
The shape of the demand curve is steeper.
Price QD D
10 10 10
2 12
Price
2
D
o x
10 12 QD
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(c) Unitary Elastic [Ed = 1] :-

When percentage change in quantity demanded is equal to the percentage change in price,
the demand is said to be unitary elastic. For eg. Clothes, shoes, bags, etc.
y
The shape of the curve is rectangular hyperbola.
Price QD
D
10 10 Price
10
5 15
5
D
(d) Elastic demand [ Ed>1} :- o x

10 QD 15
When percentage change in quantity demanded is more than percentage change in price, the
demand for the commodity is said to be elastic. For eg. Luxury goods.
y
The demand curve is flatter in shape.
Price QD
10 10
Price
D
8 30 10
8 D
(e) Perfectly Elastic [Ed=infinity] :- o x

10 30 QD
When the demand for the commodity rises without any change in price, the demand for that
commodity is said to be perfectly elastic. For eg. Goods consumed due to habit, fashion etc.
y
The shape of the demand curve is parallel to x-axis.
Price QD
Price
10 10
10 20 D
10
10 30
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10 20 30 QD
Methods Of Measuring Elasticity of Demand :-
1. Percentage or Proportionate Method :- According to the method, elasticity of demand is
the ratio of percentage change in quantity demanded to percentage change in price.
Ed= (-) %age change in QD or ∆Q x 100
%age change in price Q_____
∆P x 100
P
Proportionate Method :-
Ed= (-) ∆Q x P ∆Q = Q1-Q

∆P Q ∆P = P1-P
Q = Original quantity
P = Original Price
Q1 = New quantity
P1 = New price
Q. Why do we ignore minus sign in the calculation of price elasticity

coefficient?
Sol. We ignore minus sign due to the following reasons:-
(a) Price and demand have an inverse relationship, therefore it has a minus sign.
(b) (-) 1 is greater than (-) 3. But elasticity coefficient of (-) 1 makes demand more elastic
than elasticity of (-) 3. Therefore, minus sign is ignored.
Q. Why does elasticity of demand has a minus sign?

Sol. Elasticity of demand has a minus sign(-) to show the inverse relationship
b/w price and quantity demanded.
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Unit III:- Producer Behaviour and Supply
(Weightage: - 13Marks)
PRODUCTION
Meaning of Production: - Production means transformation of input into output.

Meaning of Production Function:-The term production function means functional
relationship between input used and resulting output under given technology.
Symbolically, Q = f (L, K, D)
Where Q = Production
L = Labour
K = Capital
D = Land
Types of production function:-
a) Short run production function: - It refers to production in the short run where
there are some fixed factors and some variable factors and production will increase
only when more units of variable factors are used with fixed factors. For eg. Labour,
raw material.
b) Long run production function: - It refers to production in long run in which all
factors of production can be changed and production will increase when all factors are
increased in the same proportion. For eg. Land and capital.
Concept of Total Physical Product, Average Physical Product and Marginal Physical
product :-
a) Total Product/ Total Physical Product: - It refers to total amount for a commodity
produced during a specified period of time.
y
Units of TP
Labour
0 0
1 20 160
Total Product
2 50 TP
140
3 90
120
4 120
100
5 140
80
6 150
7 150
60
8 140 40
20
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Units of labour
b) Average product/Average physical product: - It refers to the amount of output per

unit of variable factor employed. y
Symbolically, AP = TP
L
32
Units of TP AP
Labour 28
0 0 - 24
1 20 20 20
2 50 25 Avg. 16 AP
3 90 30 Product 12
4 120 30
8
5 140 28
6 150 25
4
7 150 21.4 x
o 1 2 3 4 5 6 7 8
8 140 17.5
Units of labour
c) Marginal Product/Marginal Physical Product: - It is the change or addition in the
product resulting from a unit increase in variable input. Symbolically,
y
MP = ∆TP or TPn – TPn-1
∆L
Where, ∆TP is change in total product
∆L is change in factor input
40
Units TP MP
of 35
Labour 30
0 0 _
1 20 20
Marginal 25
Product 20
2 50 30
3 90 40 15
4 120 30
10
5 140 20
6 150 10 5
7 150 0
8 140 -10 o x
1 2 3 4 5 6 7 8
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CONTACT NO.:- 09419231850 MP
Relationship B/W Total Product, Average Product and Marginal Product:-

a) Relationship b/w AP and MP:-
1. Initially both AP and MP increase.
2. As long as AP is rising, MP would be more than it.
3. When AP falls, MP would be less than it.
4. When AP is maximum, MP is equal to it.
5. MP can be zero or negative but AP can never be zero or negative.
b) Relationship b/w TP and MP:-

1. Initially both TP and MP increase.
2. When MP increases, TP increases at increasing rate.
3. When MP falls, TP increases at diminishing rate.
4. When MP is zero TP is maximum.
5. When MP is negative TP falls.
6. MP can be zero or negative while TP is always positive.
c) Relationship b/w TP, AP and MP:-

1. Both AP and MP are derived from TP.
2. Initially all TP, AP and MP increase.
3. When AP and MP falls, TP still increases.
4. When TP is maximum, MP is zero and AP is falling.
5. When MP is negative, both AP and TP fall.
6. MP can be zero and negative, but TP and AP are always positive.
Units TP AP MP y
of (TPP) (APP) (MPP)
labour
0 0 _ _ 18
1 2 2 2
16
2 6 3 4
TP/AP/MP
14
3 12 4 6
12
4 16 4 4
10
5 18 3.6 2
8 TP
6 18 3 0
6
7 14 2 -4
4
8 8 1 -6
2
AP
o 1 x
2 3 4 5 6 7 8
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MP
Law of Returns to factor
Q. Explain the law of TPP and MPP when only one output is increased?
Or
Q. Explain the law of variable proportions and the reasons behind it?
Sol. Law of Variable Proportions: - The law of variable factor was propounded by Mrs.
Joan Robinson. It is a short-run law which explains the relationship b/w inputs and the
resulting output.
Assumptions of the law of returns to factor:
1. One input is fixed so that the ratios at which factors are combined, varies.
2. State of technologies is given.
3. The marginal product of an input declines.
Statement of the law:-This law states that with an increase in variable factor, keeping other
factors constant, the marginal product of the variable factor will initially increase, then
decreases, becomes zero and ultimately becomes negative. In terms of total product, it is
stated that as more and more units of variable factors are applied to the given quantity of a
fixed factor, the total product initially increases at an increasing rate, then at diminishing rate
and ultimately declines.
Units of Total Average Marginal Stages of

Variable Product Product Product production
factor inputs
(labour)
0 0 - -
1 2 2 2
2 6 3 4 I
3 12 4 6
4 16 4 4
5 18 3.6 2 II
6 18 3 0
7 16 2.2 -2 III
8 12 1.5 -4
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y
18
TP/AP/MP 16
14
12
10
8
6 I TP
II III
4
2 AP
o x
1 2 3 4 5 6 7 8
Units of labour
Stages of law of variable proportions:- MP
(Stage 1) Increasing returns to factor: -The stage starts from the origin up to the point
where MP is maximum. In this stage, TP increases at increasing rate and AP also increases.
In the beginning, MP also increases and reaches maximum. A rational producer will not
operate in this stage because the producer can always expand from stage 1. In the diagram,
the first stage of law of returns to factor is up to 3rd unit of labour which is shown by point
‘b’.
Reasons:-
a) Optimum combination of factors: - Increasing returns are due to realization of
optimum combination of factors which gives maximum production with given
resources. Moreover, better coordination among factors results in increasing returns.
b) Specialization:-Specialization resulting from division of labour increases efficiency
which helps in getting increasing returns. i.e. MP goes on rising till it achieves
maximum production with given input.
c) Fuller utilization of fixed factors: - Increasing returns are due to better and fuller
utilization of fixed factors like machinery, buildings, etc. In other words with increase
in variable input, factor proportion becomes more suitable for production.
(Stage 2) Stage of diminishing returns to factor: - It is the most important stage out of the
three stages. In this stage, TP continues to increase but at a diminishing rate. This stage goes
up to the point where TP reaches the maximum and MP becomes zero, AP also goes on
diminishing. A rational producer will always operate in this stage. In the diagram, this is
shown up to 6th unit of labour and is shown by point ‘c’.
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Reasons:-
a) Use beyond optimum capacity: - After achieving optimum combination of variable

and fixed factors, efficiency starts declining when more units of a variable factor are
employed with fixed factors. As a result, MP starts falling.
b) Lack of perfect substitution b/w factors:- Up to a certain limit, factors of production
can be substituted for one another but beyond a certain stage, that is not possible. The
factors become imperfect substitutes leading to diminishing returns.
c) Over utilization of fixed factors: - When more units of variable factors are combined
with fixed factors, they become over utilized. Thus, MP falls leading to decreasing
return to factor.
(Stage 3) Stage of negative returns to factor: - This stage starts from the point where MP
is zero. In this stage, both TP and AP falls and MP becomes negative.
Reasons:-
a) Misuse of fixed factors: - Misuse of fixed factor is caused due to the overcrowding of
variable factor which disturbs the work relationship of the factors.
b) Inefficiency of variable factor.
Q. What is meant by returns to a factor?
Sol. When only one factor is increased keeping other factors constant, the resultant increase
in output is called returns to a factor.
Q. Explain the law of diminishing marginal product?
Sol. The law of diminishing marginal product states that, as the quantity of the variable
factor input is increased in a production process, every additional unit of the variable
input yields lesser and lesser output. That is with an increase in quantity of variable
input, marginal product keeps diminishing. y
Marginal Productivity
Fixed Factors Variable MP 20

(land in Acers) factor
(labour) 16
1 1 20 12 MP
1 2 18
8
1 3 15
4
1 4 12
o 1 x
2 3 4
Labour
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Q. Why this law is called the law of variable proportions?
Sol. The law of returns to factor is also known as the law of variable proportions because:-
a) The factor proportion varies as one input varies and others are held constant.
b) The returns also varies non-proportionally with the change in factor ratio. i.e. ratio
of fixed factor and variable factor.
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Cost
Meaning of cost :- Cost of production refers to the expenses incurred on the factor inputs
used in the production of the commodity.
Different types of cost :-
a) Money Cost: - It is the money expenditure incurred by a firm for hiring or buying of
inputs needed for producing a given output of the commodity. E.g. Wages, salaries
etc.
b) Real Cost: - It is the pain, sacrifice and discomfort faced by the labour during
producing a commodity.
c) Opportunity cost: - It is the cost of alternative opportunity given up or surrendered.
d) Explicit Cost: - It is the direct cost/actual expenditure incurred by a firm to purchase

the inputs it needs in the production process for E.g. rent, wages, insurance etc.
e) Implicit Cost: - It is the imputed cost of inputs owned by a firm and used by the firm
in its own production process. E.g. self invested capital, value of owner’s occupied
house.
f) Private Cost: - It is the money cost incurred by a firm in producing a commodity.
g) Social Cost: - It is the cost of producing a commodity to the society as a whole for
E.g. pollution caused while producing a commodity.
h) Short-run Cost: - These are the cost over a period during which some factors are
fixed in supply.
i) Long-run Cost: - These are the cost over a period of time long enough to permit
changes in all the factors of production.
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Differentiate b/w Fixed Cost and Variable Cost
Fixed Cost Variable Cost
1.These are the cost which are incurred 1.These are the expenses incurred on
on fixed factors of production. variable factors of production.
2. Fixed cost do not vary with the 2.These vary with the level of output
quantity of output.
3. Fixed cost never become zero. 3.These are zero when production is zero.
4. These cost remain same throughout. 4.These change with a change in level of output.
5. A firm can continue production even 5.Production is carried only when variable costs are
at the loss of fixed cost. met.
6. E.g. rent, interest insurance, salary 6.E.g. expenses on raw material, power fuel, wages
of permanent employees etc. of labour, etc.
Q. Explain total cost, variable cost and total fixed cost?

Sol. Total Fixed Cost: -The expenditure incurred on fixed inputs is called total fixed costs.
They are also known as overhead expenses. These cost do not depend on the level of output
and are constant. Symbolically, TFC= TC – TVC. It is a straight line parallel to x-axis.
y
Output TFC
0 100
TFC
1 100
2 100
3 100 100 TFC
4 100
o 1 x
2 3 4 Output
Total Variable Cost :- The expenditure incurred on variable inputs are called variable costs.
These are also called as prime costs. These cost vary directly with the level of output. E.g.
wages of labour, raw material, fuel etc. y
Total Variable Cost
Output TVC
0 0
10 100 400 TVC
20 150 300
30 220 200
100
40 310
50 450 x
o 10 20 30 40 Output
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TVC is an inverse-S shaped curve which starts from the origin and increases as the level of
output is raised. Initially, it rises at a diminishing rate and then at increasing rate.
Total Cost :- It is the total expenditure incurred on producing any given amount of output.
Symbolically, TC= TVC+TFC y
Output TFC TVC TC
TC/TVC/TFC
500 TC
0 100 0 100 400 TVC
10 100 100 200 300
20 100 150 250 200
30 100 220 320 100 TFC
40 100 310 410 x
o 10 20 30 40
Output
50 100 450 550
TC is an inverse-S shaped curve which initially increases at a decreasing rate and ultimately
at an increasing rate. The change in TC is entirely due to change in TVC. So the shapes of
TVC and TC are the same.
Relationship b/w TC, TVC and TFC :-
a) At zero level of output, TC=TFC.
b) The vertical difference b/w TC and TVC is TFC.
c) TC and TVC curves are parallel to each other because the difference b/w TC and TVC
is of TFC which remains same at all level of output.
d) TC and TFC are inverse-S shaped while TFC is a straight line parallel to x-axis.
Q. What are AFC, AVC and AC? How are they related?
Sol. Average fixed cost: - It is per unit fixed cost of producing a commodity. It can be
obtained by dividing TFC by the quantity of output.
Symbolically, TFC = AFC
Q
Graphically, AFC is rectangular hyperbola which never touches the x-axis. Since TFC remains same
at different levels of output, AFC falls as qty. increases but it never becomes zero at any level of
output. y
Output TFC AFC
0 100 - 10
10 100 10 8
AFC
20 100 5 6
30 100 3.33
4
40 100 2.5
2
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o 10 20 30 40 50
50 100 2
Average variable cost: - It is per unit variable cost of producing a commodity. It is obtained
by dividing TVC with the quantity of output.
Symbolically, AVC= TVC
Q
Graphically, AVC is a U-shaped curve which shows that initially it slopes downward and
ultimately it rises due to the law of variable proportions.
y
Output TVC AVC
0 0 - AVC
10
10 100 10
AVC 8
20 150 7.5 6
30 220 7.3 4
40 310 7.5 2
50 450 9 x
o 10 20 30 40 50
Average Total Cost/Average Cost: - Ac is per unit of producing the commodity. It is

obtained by dividing the total cost by quantity of output or by adding AFC and AVC.
Symbolically,
AC= TC or AC= AVC+AFC
Q
Graphically, the vertical summation of AFC and AVC gives AC which is a U-shaped curve.
y
Output TC AC
0 100 -
10 200 20
Average Cost
20
20 250 12.5
15
30 320 10.6 AC
10
40 410 10.25
5
50 550 11
x
Relation b/w AC and AVC:- o 10 20 30 40 50
Qty.
a) Both AC and AVC are U-shaped curves.
b) The minimum point of AVC (a) is always to the left of minimum point of AC (b).
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c) AC and AVC curve never intersect each other. This is due to AFC which is always
positive. When AFC is never equal to zero, AC and AVC can never be equal. Thus,
AC always remains above AVC.
Q. Why average curve is U-shaped curve?
Sol. AC curve is U-shaped due to the following reasons:-

a) Basis of AFC: - AC includes AFC and AVC and AFC falls continuously with
increase in output. Once AVC reaches its minimum and starts rising, its rise initially is
offset by the fall in AFC. The result is that AC continues to fall. Ultimately, the rise in
AVC becomes greater than the fall In AFC so that AC starts rising.
b) Basis of law of variable proportions: - the u-shape of AC curve is due to the law of
variable proportion in which increasing returns and diminishing returns are there. So
as output increases, AC first falls reaches it’s minimum and then rises.
Q. Explain the following:-
I. Marginal Cost: - It is the increase in total cost resulting from one unit increase in
output. It is also known as incremental cost. It can also be defined as increase in total
variable cost due to one unit increase in output. Symbolically,
MC = TCn-TCn-1 or ∆TC/ ∆Q
y
Or
700
MC = TVCn-TVCn-1 or ∆TVC/ ∆Q TC
600
Output TC MC 500
TC/MC
0 10 - 400
1 100 90 300
2 180 80 MC
200
3 280 100
4 420 140 100
5 620 200
x
Graphically, MC is u-shaped. o 1 2 3 4 5
Qty.
U-Shape of MC :- It is due to the law of returns to factor. Initially, production is subject to
increasing (decreasing cost) and then (constant cost) and diminishing returns (increasing
cost). Thus, MC falls in the beginning than ultimately rises.
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Relationship between MC & TC:
a) MC is the slope of TC at each & every point.

b) When TC rises at a diminishing rate, MC falls.
c) When TC rises at an increasing rate, MC rises.
d) When the rate of increase in TC starts diminishing, MC is at its minimum.
y
Relationship between MC, AVC & ATC: MC
AC
AC, AVC & MC

a) AC, AVC & MC are u-shaped curves. AVC
b) At point a, when AVC is minimum, MC b
Cuts it from below.
c) At point b, when AC is minimum, MC
a
Cuts it from below.
d) MC lies below both AVC & AC when
they are declining & it lies above them
when they are rising.
x
Relationship between AC & MC: o Output
y
a) When AC is falling, MC is below it.
b) When AC is rising, MC is above it. MC
c) Both MC & AC are u-shaped curves. AC
AC & MC
d) Both AC & MC can be derived form TC.

e) Rising MC cuts AC at its minimum point.
Q. What will happen to AC, when MC>AC?

A. When MC is more than AC, AC is rising.
x
o
Q. What will happen to ATC when MC=AC? Output
A. ATC will be minimum.
Q. Can AC be less than MC when AC is rising?

A. Yes, rising AC can be less than MC.
Q. Can AC be more than MC when MC is falling?

A. Yes, falling AC can be less than MC.
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Important Notes:-
Type of Cost Formula Shape of the curve

1. Total Cost (TC) TC= TFC+TVC Inverse – s shaped (due to law of
Or variable proportion)
=∑ MC
Or
AC x Q
2.Total variable cost TVC=TC-TFC Inverse- s- shaped

(TVC) Or = ∑ MC
= AVC x Q
(At 1st level TVC=MC)
3.Total Fixed cost (TFC) TFC= TC-TVC Parallel to x-axis

= AFC x Q
(at 0th level, TFC=TC)
4.Average cost AC= AFC+ AVC U-shaped curve

(AC/ATC) 𝑇𝐶
Or
𝑄
5.Average Fixed cost AFC=AC=AVC Rectangular Hyperbola

(AFC) 𝑇𝐹𝐶
Or
𝑄
6. Average variable cost AVC=AC-AFC U-shaped

(AVC) 𝑇𝑉𝐶
Or
𝑄
7.Marginal Cost (MC) MC=𝑇𝐶𝑛 -𝑇𝐶𝑛−1 U-shaped

∆𝑇𝐶
Or =
∆𝑄
Or= 𝑇𝑉𝐶𝑛 - 𝑇𝑉𝐶𝑛−1
∆𝑇𝑉𝐶
Or =
∆𝑄
(at 1st level, MC=TVC)
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Revenue
Meaning of Revenue: Revenue refers to the money received by a firm selling.

Concepts of Revenue
a) Total Revenue: It refers to the total amount of money received by the firm from
selling a given amount of its output.
TR=Price X Quantity
or
Average Revenue X Quantity
b) Average Revenue:- It refers to the revenue on per unit of the product it is calculated
as:
AR= TR/Q
In other words, AR is equal to the price of the commodity.
Proof of AR = Price: - AR=TR/Q [TR=P x Q]
AR=P x Q/Q
AR=P
c) Marginal Revenue:- It is the addition made to the total revenue from the sale of an
additional unit of the commodity.
MR =TRn-TRn-1
or
Change in TR / Change in Q
d) Demand curve of a consumer is sellers AR curve:-AR curve shows per unit of

output thus it always tells about the demand of a consumer at a particular price.
AR=demand curve.
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Relationship between TR, AR, MR:-

Perfect Competition: -In perfect competition since market price is fixed i.e., MR is constant
therefore TR increases at constant rate with the increase in numbers of units sold.
y
Unit Price TR AR MR
1 10 10 10 10
40 TR
2 10 20 10 10
TR/AR/MR 30
3 10 30 10 10
20
4 10 40 10 10 AR=MR=P
10
o 1 x
2 3 4
Units
Q. Why is TR facing a competitive firm and upward sloping straight line passing
through the origin?
Sol. Since in a competitive market price is fixed MR is constant therefore TR increases at a
constant rate forming an upward sloping straight line. As at zero output TR is zero therefore
TR curve passes through the origin.
Imperfect Competition:-
(a) Both AR and MR are derived from TR
(b) When MR is positive, TR increases.
(c) When MR is zero, TR is maximum.
(d) When MR is negative, TR starts declining
(e) MR can be zero or negative but TR and AR are never zero or negative.
This relationship is explained below with the help of a schedule and diagram:
y
Qty. Price TR AR MR
32
1 10 10 10 10
28
2 9 18 9 8 24 TR
3 8 24 8 6 20
TR/AR/MR 16
4 7 28 7 4 12
5 6 30 6 2 8
6 5 30 5 0 4 AR
7 4 28 4 -2
x
o 1 2 3 4 5 6 7
Qty. MR
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y
Relationship between AR and MR:-

(a) AR falls as quantity increases.
(b) MR falls and is below AR. Revenue
(c) AR and MR are both downward

sloping straight lines.
AR
(d) AR and MR have a common x
intercept on Y-axis. o Qty. MR
(e) MR bisects the distance between origin and Ari into two equal points.
Relationship between Price line and TR:-
Under perfect competition, TR is equal to the area under the price line. In perfect
competition, a firm is price taker and same price prevails in the market.TR is defined as PxQ.
Thus, we can say that under perfect competition, TR at any point is equal to the area under
the price line. y
Price
P A
o x
Qty. Q
In the diagram, the market price is OP and PA is a Hypothetical price line. A firm sells OQ
units of its output. Clearly TR=QP x OQ. This represents the shaded area of the rectangle
OQRP which is in fact area under the price line.
Q. Explain the relationship between price elasticity of demand and MR with the help of
y
a diagram?
A. The relationship between elasticity of demand
and MR is as follows: D
1. When MR is +ve, Ed>1. Ed>1
Price
2. When MR is 0, Ed=1. Ed=1
3. When MR is –ve, Ed<1. Ed<1
Dx
o Qty.
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Producer Equilibrium
Meaning of Producer Equilibrium:-
Producer equilibrium is defined as a situation under which a producer gets maximum
production from the given factors of production or it is that situation in which a producer
earns a maximum profit with minimum cost of production.
I) TR-TC Approach
According to this approach, a producer is in equilibrium where the difference between total
revenue and total cost is maximum.
Important concepts:-
a) Break even point:- It is that level of output where a firm’s total revenue is equal to its
total cost i.e. a point where a firm is earning normal profits (Point ’a’ in the diagram)
y
TC
TR
b shut down
point
TR/TC
a
Break-even
point
o x
Output
b) Normal Profit:- It is the maximum profit which a firm must get to remain in the
business. It is calculated as: 𝜋 = 𝑇𝑅 − 𝑇𝐶 where ℼ = profit, TR= total revenue and
TC= total cost.
c) Shut-down Point:- It is a point where the firm is unable to recover its variable costs
and the production is stopped. Thus, it is a point where market price is just equal to the
average variable cost. (Point ‘b’ in the diagram.
d) Super-normal Profit:- The profit over and above the normal profit is known as
supernormal profit
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MR=MC Approach
In case of a competitive firm, a producer is in equilibrium when;
a) MR=MC
b) MC must cut MR from below i.e. MC must be rising.

Graphical Presentation:- y
MC
a b
MC MR
MC/MR
o H Q
x
Output
In the diagram, point ‘b’ is the equilibrium point and OQ is the Equilibrium quantity as at
this point MC=MR and MC is rising. So both the conditions are satisfied at this point. At
point ‘a’ again MC=MR but this is not an Equilibrium point. If the firm stops production at
OH it will loose the profit at the level of output between H&Q which yields a surplus for the
firm (shaded portion). Between H&Q, at every point, firm’s MR is more than MC adding to
its profit. But this is not beyond OQ. Thus ’b’, is the equilibrium point and not ‘a’ as the
point ‘a’ fulfills only the first condition.
y
Proof:-
Revenue and Cost
R MC
In the diagram, AR=MR=OP and is assumed to be
constant as under perfect competition. Accordingly AR Q1 Q2
AR=MR
P
and MR line is drawn as a horizontal straight line parallel
to x-axis. MC curve is shown to be U-shaped, as usual.
MR is equal to MC under two situations
o x
L1 L2
i) At point Q1 when output is OL1 Output
ii) At point Q2 when output is OL2

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In situation I, MC is falling but in situation ii, MC is rising.
Therefore, TR = area under MR, this is equal to OL1Q1P.
Likewise TVC= are under MC, this is equal to OL1Q1R.
Evidently OL1Q1R>OL1Q1P [TVC=TR]

Thus the firm is not covering its variable costs.
In situation II, when MC is rising at Q2
TR=OL2Q2P
and TVC=OL2Q2R
Therefore, TR>TVC
Thus the producer will be in equilibrium only in situation II, where MR=MC and MC is
rising.
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Theory of Supply
Supply:- Supply refers to the quantity of a commodity offered for sale by a producer at
different prices during a given period of time.
Difference between Supply & Stock:-
Stock of a commodity refers to the total quantity of a commodity available with the seller at
any given point of time. On the other hand, Supply is that part of the stock that the seller is
ready to sell at a given price at a given point of time
For example: - A farmer has a large stock of crops. He has produced 500 quintals of wheat.
During a given period, he may offer 100 quintals for sale at a price of
Rs. 500/quintal, 150 quintals at a rate of Rs. 120/quintal and so on. So 500
quintals of wheat is the stock and various part of the stock offered for sale at
various prices is the supply.
Difference between Quantity Supplied and Supply
a) Quantity Supplied:- It refers to the quantity that a producer is willing to offer for sale
at a particular price in a given period of time.
b) Supply:- It refers to the various amount of quantity supplied at different prices in a

given period of time.
Factors Affecting Supply and Determinants of Supply:-
a) Price of the commodity (Px):- Supply of the commodity ha a direct relationship with
its price and an increase in price results in an increased quantity of the commodity
being offered for sale and vice-versa. It means higher the price, greater will be the
quantity supplied.
b) Price of related good (Pz):- Supply of the commodity is also affected by the price of
related good. An increase in price of substitute good decreases, the supply of the
commodity and vice-versa. While an increase in the price of the complementary good
increase the supply of this commodity and vice versa. In other words supply of a
commodity is inversely related to the price of substitute good and directly related to
the price of the complementary good.
c) Cost of Production (C):- Prices of factors of production constitute the cost of
production of a commodity. If the prices of factor inputs go up, the cost of production
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will go up. At the higher cost of production producer would like to produce a reduced
quantity. Hence the supply of a commodity will decrease. On the other hand, at lesser
cost of production, supply will increase.
d) State of technology (T):- If improved and advanced technology is used for production
of a commodity, it reduces the cost of production and increases the supply. On the
other hand, supply of goods will be less when production depends a inferior and
obsolete technology.
e) Goal of the firm (G):- Supply of a commodity is influenced by goals of producers. A
producer who wants to increase hi market share may be willing to sacrifice a part of
his profits by selling or supplying more at the same price. Similarly a producer may be
guided by social considerations. So he may offer more quantities for sale in the
market. Sometimes a firm may increase supply of a commodity not because of its
profitability but because its supply is a source of status/prestige in the market.
f) Government Policies (Gp):- Government policies like tax and subsidies also
influence the supply of a commodity. For example, Suppose tax is raised on the raw
material. This will increase cost of production and result in a decrease in the supply;
on the contrary, grant of subsidy lowers the cost f production and results in an
increased supply.
g) Expected change in Future Prices (E) :- If the prices of a commodity are expected to
rise in future, the producer will hold the supply new and increase it in future and vice-
versa. In this manner, expected change in price of a commodity influence supply of a
commodity.
Supply Function:-
A supply function is a set of determinants of supply. It shows the functional relationship
between quantity supplied and the factors affecting it.
Symbolically, QSx=f (Px, Pz, C, Gp, T, G, E)

Assumptions:-
1. Price of other goods are constant.
2. Cost of production remains unchanged.
3. No change in state of technology.
4. Government policies are unchanged.
5. No expected change in future prices.
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Law of Supply:-
The law of supply states that the quantity supplied of a commodity bears a direct relationship
too its price. This means that quantity supplied and the price of a commodity moves in the
same direction. Thus, other things remaining same, the quantity supplied rises with a rise in
price and falls with a fall in price.
Supply Schedule:- A supply schedule shows the tabular presentation of law of demand
showing the various amount of the commodity that a producer wants to sell at different
prices in the market.
Supply Curve:- It is the graphical presentation of the law of supply.
y
Supply Schedule
Price QS
1 3
5 S
2 6
4
3 9 Price
3
4 12
2
5 15
1 S
o 3 x
6 9 12 15
Marginal Supply Schedule:- QS
A market supply Schedule Shows the various amount of goods that all the producers/firms in
the market wish to sell at different prices. It is obtained by adding all individual supply
schedule.
Market Supply Curve:-
Market supply curve is the horizontal summation of all individual supply curves.
Price Supply (A) Supply (B) Supply (Market)
1 4 2 6
2 8 4 12
3 12 6 18
4 16 8 24
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y (A) y (B) y (Market)
S S1 S2
4
3
Price
2
S2
1
S S1
x o x o x
o 4 8 12 16 2 4 6 8 4 8 12 16 20 24
QS QS QS
Reasons behind direct relationship between Price and Quantity Supplied

or
Q. Why Quantity Supply rises with a rise in price?
Answer:-
a) Profit Motive:- A higher price of a product means higher profit for the supplier. That
is why to earn profit; he supplies more at a higher price and the supply curve moves
upward to the right.
b) Law of Diminishing Marginal Productivity: - With an increase in output, marginal
productivity of labour fell which means marginal cost rises. A firm will not find it
possible to produce more in such a situation. So in order to induce the supplier to
increase his supply, price must rise.
c) Incentives to other firms:- Rising prices work as an incentive to other firms and
induce them to enter the industry. With the entry of new firms quantity supply
increases.
Q. What is a market period?
Sol. A market period is a very short period in which a firm can not adjust its output to any
change in price.
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Movements and Shifts in Supply
(a) Movement along a Supply Curve:-

Other things being equal if quantity supplied increases or decreases due to change in price, it
is known as movement along a supply curve. In this, movement is along the same supply
curve. It consist of extension/expansion in supply and contraction in supply.
(i) Expansion in Supply: - Other things being equal, when more quantity is supplied at
higher price, it is termed as expansion in supply. In this there is an upward movement
along the same supply curve. i.e. movement from a to b & b to e in the diagram.
y
Price QS
10 100 S
30
20 200
Price
30 300 20
10
o x
100 200 300 Qty.
ii) Contraction in Supply:- Other things being equal, when less quantity is supplied at a
lower price of a commodity, it is termed as contraction in supply. In this there will be a
downward movement along the same supply curve. i.e. downward movement from c to b &
b to a shows contraction of supply. y
Price QS
S
30 300 30
Price
20 200
20
10 100
10
o x
100 200 300 Qty.
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(b) Shifts in Supply:
If more or less quantity of a commodity is supplied at the price due to change in factors other
than price, its known as shift in the supply curve or change in the supply curve.
(i) Increase in Supply:- When because of changes in factors other than price, more quantity
at the same price or same quantity at more price is supplied, its increase in supply. In
this there will be a rightward shift in the supply curve.
In the diagram, movement from a to b and b to c shows increase in supply.
Price QS y
10 100
10 200
10 300
S S1 S11
Price
Reasons for Increasing Returns:-

(i) Improvement in technology.
(ii) Fall in the price of related good.
10
(iii) Favourable government policy. S1

S S11
(iv) Fall in cost of production. o x
10 20 30 Qty.
(v) Expected fall in future prices of the commodity.
(ii) Decrease in supply:- When because of changes in factors other than price, less quantity
is supplied at the same price and same quantity is supplied at lesser price, its known as
decrease in supply of a commodity. In this, there is a leftward shift in the supply
curve. In the diagram, movement from c to b and b to a shows decrease in supply.
Price Qs y
10 300
10 200
S1
Price
10 100 S S11
1
0
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S S11 62
o x
100 20 30 Qty
0 0 .
Reasons for Decrease in Supply:-
(i) Obsolete technique of production.
(ii) Increase in price of related good.
(iii) Increase in the cost of production.
(iv) Expected rise in future prices.
(v) Un-favourable government policies.
Differentiate Between:-
Increase in Supply Expansion in Supply

1. It is a case of shift of supply. 1. It is movement in supply curve
2. In this, there is rightward shift of the 2. In this there is an upward movement along
supply curve. the supply curve.
3. Its due to favourable changes in factors 3.Its due to rise in the price of the
other than price commodity.
4. It is defined as rise in supply at same price 4.It is defined as the rise in supply at higher
of the good price of the good.
5. In this New supply curve emerges 5. In this movement is along the same supply
curve.
y y
Pric QS Pri QS
Price
S S1
Price
e ce S
5 10 5 10 10
5 5
5 20 10 20 S
S S1 x
o x o 10 20
10 20 Qty. Qty.
Decrease in Supply Contraction in Supply
1. It is a case of shift of supply. 1.It is movement in supply curve
2. In this there is leftward shift of the supply curve. 2.In this there is a downward movement
along the supply curve.
3. It is due to unfavourable changes in factors other 3. It is due to fall in the price of the
than price. commodity.
4. It is defined as the fall in supply at lower

4. It is defined as fall in supply at same price of the price of the good.
good.
5. In this new supply curve emerges. 5. In this movement is along the same supply
curve.
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y y
Price QS
Price
Price QS
Price
S S1 S
5 20 10 20 10
5
5 10 5 10 5
S S1
o x S
10 20Qty. x
o 10 20 Qty.
Movement in Supply Shift in Supply
1. It is known as change in Quantity Supplied. 1. It is known as change in supply.
2. It is along the same supply curve. 2. In this new supply curve emerges.
3. In this there is upward and downward movement. 3. In this there is a rightward and leftward shift.
4. In this, price changes while other factors change. 4. In this other factors change.
5. It includes expansion and contraction. 5. It includes increase and decrease.
y
Price
Price QS S Price QS y Increase Decrease

40 10 100
10 100 Contraction
30 S1 S S11 S111
20 200 10 200
20
Expansion 10
30 300 10 10 300
S S1 S
x S11 S111
40 400 o 100 200 300 400 10 400 x
Qty. o 100 200 300 400
Qty.
Elasticity of Supply
Price Elasticity of Supply:-It is the degree of responsiveness of change in quantity supplied

due to change in the price of the commodity. Thus, it is a measurement of change in quantity
supplied due to a change in the price of the commodity.
Symbolically, Es= Percentage change in quantity supplied

Percentage change in price
Or Es = Proportionate change in quantity supplied
Proportionate change in price
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= ∆Q/∆P x P/Q where Q= Original Quantity
P= Original Price
Q1= New Quantity
P1= New Price
∆Q= Q1-Q
∆P= P1-P y
Degrees of Elasticity of Supply S
Price
(a) Perfectly inelastic supply [Es=0]:-,
30
Price QS
20
10 10
20 10 10
30 10
o x
10 QS
When with a change in price, supply of the commodity does not change, the
supply is said to be perfectly in elastic. The shape of the supply curve is parallel to y-axis.
y
(b) Inelastic or relatively inelastic supply [Es<0]:- S

Price
Price QS
20
10 10
20 10
10
S
x
o 10 12 QS
When percentage in quantity supplied is less than the percentage change in price, the
elasticity is said to be less than one. In other words, supply is said to be inelastic. The shape
of the supply curve is steeper.
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y
th
Class 12 UNIT 4:- FORMS OF MARKET AND SIMPLE APPLICATION
(c) Unitary Elastic Supply [ES = 1]:- Pric
e S
Price QS
10 10 2
0
20 20 1
0 S
o x
10 20 QS
When percentage change in quantity supplied is equal to the percentage change in price, the
supply is said to be unitary elastic. The curve is a straight line going upwards at 45° from the
origin. y
(d) Elastic or Relatively Elastic Supply [ES>1}:-
Price
Price QS
S
10 10 15
15 30 10
S
o 10 x
QS 30
When percentage change in quantity supplied is more than percentage change in price, the
supply is said to be elastic. The supply curve is flatter in shape.
y
Price
(e) Perfectly Elastic Supply [ES=infinity]:-
Price QS
10 10
10 S
10 20
10 30
o x
10 20 30 QS
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When without any change in price, quantity supplied goes on increasing, supply is said to be
perfectly elastic. The shape of the supply curve is a straight line parallel to x-axis.
Methods of Measuring Elasticity of Supply:-
(a) Percentage Method:-
∆𝑄
%𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑆 𝑋100
𝑄
𝐸𝑠 = or ∆𝑃
% 𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑋 100
𝑝
(b) Proportionate Method:-

𝑃𝑟𝑜𝑝𝑟𝑜𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑆 ∆𝑄 𝑃
𝐸𝑠 = or ( 𝑋 )
𝑃𝑟𝑜𝑝𝑟𝑡𝑖𝑜𝑛𝑎𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 ∆𝑃 𝑄
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Forms of market
Weightage : 12 Marks
Meaning of market :
A market is a place or area where buyers and sellers come in close contact with each other to
buy or sell a commodity. It is not marked by any geographical territory but is an area where
buyers and sellers are brought in free competition with each other.
Features of Market :
Every market is composed of the following features:
a) Area
b) Buyers and Sellers
c) Commodity
d) Competition
Basis of classification of different markets:
Markets are classified on the following basis:-
a) Numbers of sellers or firms:- The level of competition is determined by the number of
firms in an industry. If there is large number of sellers, it is perfect competition or
monopolistic competition, single seller means monopoly and few sellers means oligopoly.
b) Nature pf the commodity:- It means whether the product is homogenous, differentiated
or unique. Homogenous product implies perfect competition, differentiated product implies
monopolistic competition and unique product is in monopoly.
c) Freedom of entry and exit:- It implies that in monopolistic competition and perfect
competition, a firm has freedom to enter and leave the industry but in monopoly and
oligopoly there is a restriction on other firms to enter the industry.
Forms of Market:-
Perfect Competition:-
Meaning:- Perfect competition is a market structure where there are a large number of
buyers and sellers selling homogeneous product. Here the producer is a price taker and no
individual seller is able to influence the price of the commodity. In this market structure
there is a freedom of entry as well as exit of a firm.
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Features:- The following are the features of perfect competition.

1. Large number of buyers and sellers:- In a perfectly competitive market there are a large
number of buyers and sellers in the market. So neither a single buyer nor a single seller is
able to influence the price in any way. Each buyer and seller buys or sells a very insignificant
proportion of total supply of the commodity in the market.
Implication:- The implication of this feature is that the share of each seller in total market
supply is so small that no single seller can influence the price. Hence the firm has to sell the
product at the price given by the industry. Due to this, each firm is a price taker in perfect
competition.
2. Homogeneous product:- Under perfect competition all sellers sell completely identical
goods. Identical or homogeneous product means similar in quality, shape, size, colour,
package etc. The products are perfect substitutes for each other. The products sold by
different firms in the market are equal in the eyes of the buyers. In other words, for the
buyers all sellers are equal.
Implication:- The implication of a product being homogeneous is that all forms have to
charge the same price for the product otherwise no one will buy from the firm which charges
a higher price for the same item and the firm will lose its customers.
3. A firm is a price-taker:- The firm under perfect competition is a price taker and not a
price maker. The price is decided by the market forces of demand and supply. This is
because the number of firms in perfect competition is large so no firm can influence the price
and all the firms produce homogeneous goods. Thus, in perfect competition a firm is a price
taker and an industry is price maker.
4.Free entry and exit of the firm:- Under perfect competition, there is no restriction on
entry of new firms in the industry or exit of old firms from the industry. Any or every firm is
free to enter or exit from the market making it a perfectly competitive market. New firms,
due to profits can enter the industry whereas losses make the inefficient firms to leave the
industry.
Implication:- Implication of free entry and exit is that no firm can earn above normal profit
in the long-run. i.e. a firm earns zero abnormal profits. In short, each firm earns just normal
profit. i.e. minimum profit necessary to stay in the business.
5. Perfect knowledge:- In a perfectly competitive market, both buyers and sellers have
perfect knowledge about the market for e.g. Sellers must be aware of the prices charged by
other sellers and buyers should know the prices charged by other sellers.
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6. Perfect mobility:- There must be perfect mobility in the perfectly competitive market
both for goods and factors of production. Their should be no restriction on their movement.
Goods can be sold at any place. Similarly factors of production can move freely from one
place to another.
7. Absence of transportation cost:- Another feature of perfect competitive market is that
the price of the product is not affected by its transportation cost. As under this type of market
structure, it is essential to maintain same price, as no transportation cost is included in the
price.
Q:- How is seller (firm) under perfect competition a price taker ?
Ans. Under perfect competition price of a commodity is determined by the equilibrium
between market demand and market supply of the whole industry. It is because of this reason
that firm is said to be price taker and industry, the price maker. This price is called
equilibrium price, because at this price quantity demanded is equal to quantity supplied. This
is shown with the help of a diagram :
INDUSTRY FIRM
y y
D S
Price
e
P Price
S D
x x
O Q Qty. O Qty.
y
Demand curve faced by a firm in perfect competition:-
The demand curve of a firm under perfect competition is
perfectly elastic as a firm can sell any amount of the Price
commodity at the same price. The shape of the demand D
curve is straight line parallel to x-axis.
Revenue curves under perfect competition:- x
The demand curve facing a perfectly competitive O Qty.
y
market’s firm constitutes its AR curve. In such a
market structure AR=MR=Price= demand curve. So
AR MR curves under this market structure are same
as the demand curve. AR/MR AR=MR=Price
x
O Qty.
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Q1:- Why there are only normal profits under perfect competition?
Ans. A perfectly competitive firm can earn only normal profits and it can’t get any abnormal
or extra profits in the long run. This is because if firms are earning extra profits i.e. TR>TC,
the new firms will enter the market thereby increasing the supply which will reduce the price
to the point of normal profit. Similarly if firms are incurring losses, then some of the firms
will leave the market and supply will decrease which will increase the price till the point of
normal profit.
MONOPOLY:-
Meaning:- The word monopoly has been derived from two Greek words ‘monos’ meaning
single and ‘poly’ meaning seller. Thus, the word monopoly means single seller. So it is a
market structure where there is a single firm or producer selling a commodity for which there
are no close substitutes. The market has to accept whatever the seller offers for sale.
Features:-
(a) Single seller:- This is the most important feature of a monopoly structure. There is only a
single firm producing the commodity in the market. Since there is a single seller, he has
complete control over the price as well as the quantity to be supplied of the commodity in the
market.
(b) No close substitutes:- There are no close substitutes of the products sold by the
monopolist in the market. As a result, the consumer have to buy the commodity only from
the monopolist. Thus, the cross elasticity of the products sold by the monopolist is zero. Eg.
There is no close substitutes of Indian railways in our country.
(c) Barriers to entry:- Unlike perfect competition, there are certain restrictions on the entry
of new firms in the market under monopoly market system. Here, new firms cannot enter the
industry as there are strong barriers that prevent entry of new firms in the market.
(d) A firm is a price maker:- A monopoly, firm is a price maker because it is a single seller
of the product in the market. There are no close substitutes of this product. So there is no fear
that the boys would shift from one product to the other. Such type of firm has full control
over the supply. Does the prize maker and not a price taker.
(e) Price-discrimination:- Price discrimination means charging different from different
consumers based on personal, situational and trade considerations. Under monopoly market,
price discrimination is possible. If a monopolist adopt a policy of price discrimination, the
situation is called discriminating monopoly.
(f) No selling cost:- In monopoly, there is no competition, hence there is no need to incur
advertisement cost or selling cost. Selling cost is the cost of promoting or advertising a
product in the market and in case of monopoly market structure, it is not required.
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(g) Independent price policy:- A monopolist firm can adopt independent price policy i.e. it
can increase or decrease price as it likes.
(h) Negatively sloped demand curve:- The demand curve of a monopolist firm slopes
downward from left to right and is relatively inelastic as a monopolist can sell more goods
only at a lower price.
Types of Monopoly:-
i) Discriminating Monopoly:- In this type of monopoly, the monopolist practices price
discrimination. By price discrimination, it means that different buyers are charged different
prices for the same good or service. For e.g. Indian Railways department charges different
prices from different customers depending upon their age.
ii) Non-discriminating monopoly:- A non-discriminating monopoly is a market structure
where goods are sold at a uniform price to all the buyers. It is also called pure monopoly.
Reasons or Sources of Emergence of monopoly market structure:-
1) Government Restrictions:- Sometimes, government may impose restrictions on the entry
of any enterprise in a particular field by providing license or exclusive franchise only to one
firm to work in a particular area or product.
2) Patent:- A patent is the exclusive right granted by the government to an inventor to
manufacture, use or sell his invention for a certain number of years. Thus, a patent grants a
monopoly by law as it prevents other firms from providing the same product.
3) Cartel:- In order to earn maximum profits, sometimes producers of a particular to form a
cartel which means a group of firms jointly selling output and price so as to exercise
monopoly power.
4) Ownership of scarce economic resources:- A firm may acquire monopoly by having a
control over a scarce raw material or technology.
5) Trademarks and Copyrights:- Like patents, trademarks and copyrights also grants
monopoly to a firm. A trademark is made of any distinctive work, name or symbol used by a
manufacturer to identify his goods and services. A copyright is the exclusive right granted by
law to its owner to reproduce the copyrighted work and distribute them to the public by sale,
rental, lease or lending.
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Demand curve of Monopoly firm:- y
D
A negatively sloped demand curve
Price
AR-MR curves under Monopoly market:- D

x
The demand curve facing the monopolist constitutes O Qty.
y
its revenue curve. Thus, the AR curve of a monopolist
slopes downward indicating that higher quantity of a
commodity is sold only at a lesser price.
AR/MR
Monopolist competition:-
MR AR
Meaning:- Monopolist competition is defined as a x
market situation in which many firms compete with O Qty.
each other to sell their closely related but
differentiated goods. It is known as monopolist competition as it is a situation with the
elements of perfect competition and monopoly. It is the most common form of market
structure.
Features:-
1) Large number of buyers and sellers:- There are large number of firms Producing
commodity in the market. Each firm controls a very small share of the total output of the
industry. The element of competition arises from the fact that an individual firm is among
innumerable firm selling the same product. Each of these firms is too small to affect the
others.
2) Differentiated product:- Under monopolist competition, products of different firms are
different from each other. They are not identical but are close substitutes of each other. Thus,
the product of the sellers are differentiated giving some degree of price making power to
them. Products can be differentiated in terms of brand, shape, size, packing, colour etc.
3) Free entry and exit of the firm:- Every firm is free to enter the industry and come out of
it as and when it wishes. Every firm is free to take its own In case of supernormal profit,
some new firms may join the industry and may exit out of the industry in case of losses.
4) Imperfect knowledge:- Buyers and sellers do not have perfect knowledge of market
conditions. Buyers preferences are guided by advertising and other selling activities
undertaken by the sellers.
5) Selling costs:- A firm under monopolistic competition incurs selling cost to increase the
demand for its product. This is the cost of modifying consumer’s behavior through
advertisements and salesmanship.
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6) Independent price policy:- A monopolistic market is characterized by differentiated
products. Thus each firm under this market situation can have an independent price policy to
attract more and more consumers price changes from time to time.
7) High transportation cost:- Cost of transporting he commodity from one place to another
is very high under monopolistic Competition.
Demand curve under monopolistic competition:- The y
demand curve is a relatively elastic demand curve due to the
D
availability of substitutes in the market. (Ed>l)
Price
Revenue curves:- AR curve under a monopolistic market is a D

downward sloping curve but is flatter than that of monopoly x
O Qty.
market. It is because the demand curve in the monopolistic
y
market is highly elastic.
Oligopoly:-
Meaning:- The word oligopoly is derived from the 'oligo' AR/MR
meaning 'few' and 'poly' meaning seller. Thus, it is defined

AR
as a market structure in which there are a few sellers of MR
homogeneous or differentiated products. The number of x
O Qty.
sellers depend on the size of the market.
Features:-
1. Few sellers:- There are a few seller or dominant firms each producing a significant portion
of output. The number of firms is so small that a single firm can influence the price by its
own actions.
2. Homogenous or differentiated goods:- The output in an oligopolistic market maybe
homogeneous (steel) or differentiated (cars).
3. Barriers to entry:- In this type of market, there are barriers to entry of new firms. As a
result, a firm continues to earn supernormal profits in the long run.
4. Interdependence:- Under oligopoly, a firm cannot take independent price and output
decisions. As the number of competing firms is limited, therefore each firm has to take into
account the reactions of the rival firm. Price and output decisions of the firm effect on the
price and output decisions of the rival firms.
5. Indeterminate demand curve:– An oligopoly firm can never predict sales correctly.
Any change in price and output by one firm leads to a series of reactions by the rival firms.
Thus, the demand curve of an oligopoly firm remains indeterminate.
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6. Selling cost:- Selling costs play an important role in oligopoly market. In this market
system, a firm employs various techniques of sales to attract large number of buyers and
maximize the profits. Selling cost has a direct bearing on the sales of an oligopoly firm.
7. Price rigidity:- An oligopoly firms generally sticks to price which is determined after a
great deal of planning and negotiations with the competing firms. The firm will not resort to
price cut as it could lead to retaliatory actions by the rival firms culminating price cut. He
will not raise the price because the rivals may not follow and as a result may loose many of
his consumers.
8. Group behaviour:- In an oligopolistic market, firms try to maximize their profits through
collusive action. Instead of independent price output strategy, oligopoly firms prefer group
decisions that will protect the interest of all the firms.
Reasons of oligopoly:-
1. Huge capital investment and specialised inputs required.
2. Patent rights to a fee firms.
3. Loyal following of customers.
4. Control over the entire supply of a raw material required.
5. Mergers.
6. Economies of sale.
Types of oligopoly:-
(a) Collusive Oligopoly:- It is a form of a market in which there are a few firms in the
market and all decide to avoid competition through a formal agreement. They collude to
form a cartel and fix for themselves output quotas and market price. Sometimes a leading
firm is accepted by the cartel as a price leader and other members of the cattle accept the
price as fixed by the price leader.
(b) Non- collusive Oligopoly:- It is a form of market in which there are a few firms in the
market and each firm pursues its price and output policy independent of the rival firms. Each
firm tries to maximise its market share through competition. Because there are only a few big
firms in the market, there is a cut throat competition.
(c) Perfect or pure oligopoly:- This type of oligopoly, the firms produce a homogeneous
product.
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(d) Imperfect or differentiated oligopoly:- In this type of oligopoly, the firm produce a
differentiated products.
No. Basis Perfect Monopoly Monopolistic Oligopoly
Competition Competition
1. No. of Large no. of Single seller Large no. of Few sellers
buyers and buyers and and large no. of buyers and and large no.
sellers. sellers. buyers. sellers. of buyers.
2. Nature of Homogeneous Unique Differentiated Homogeneous

the commodity. but closely or
goods.
commodity related goods. differentiated.
3. Condition Freedom. Restriction. Freedom. Restriction.
of entry
and exit
4. Selling No selling No selling cost. Selling costs are High selling
cost cost. incurred. cost.
5. Pricing A firm is a Price maker Freedom of Freedom of

decisions price taker. firm. fixing its price. fixing its
price.
6. Demand Perfectly Negatively Negatively Indeterminate.
curve elastic. sloped but sloped but
inelastic. elastic.
7. AR-MR Perfectly Negatively Negatively Indeterminate.

curves elastic. sloped but sloped but
inelastic. elastic.
8. Diagram y y Indeterminate.
y
D D
Price
Price
Price
D D D
x x x
O Qty. O Qty. O Qty.
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Chapter:- Price Determination Under Perfect Competition
1. Equilibrium:- It is a situation in a market where a demand for a commodity is equal
to its supply.
2. Equilibrium price:- It is a price at which market demand is equal to market supply
or where QD=QS.
3. Equilibrium Quantity:- It is the quantity at equilibrium price.
4. Determination or Equilibrium price:-
i.e. equilibrium price is determined with the help of the following things:-
a) Demand:- According to the law of demand there is an inverse relationship between
price and quantity demanded of a commodity. If price for a commodity falls, its
demand rises and vice-versa.
b) Supply:- The law of supply states that there is a direct relationship between price
and quantity supplied. It means more the price, more will be the supply and vice-versa.
c) Equilibrium between Demand and Supply:- The forces of demand and supply
determine the price of a commodity. Equilibrium price will be determined where
quantity demanded is equal to quantity supplied. This is called equilibrium price this is
shown in the following demand and supply schedule and diagram:-
y
Demand and Supply Schedule
Price QD QS D Excess S
5 Supply
5 10 50 Excess Supply
4 20 40
4
Price
e
3 equilibrium
3 30 30 Equilibrium point
point
2
2 40 20 Excess Demand Excess
1 S demand
1 50 10 D
x
1 O
2 3 4 5
Qty.
0 0 are
In the schedule QD and Qs at different prices are shown which
0 equal
0 to Rs.3.
0 Thus,
Rs.3 is the equilibrium price and 30 units is the equilibrium quantity.
In the diagram, both demand curve (DD) and supply curve (SS) intersect each other at
point ‘e’ implying that at price of Rs.3 both demand and supply are equal to each other
i.e. 30 units.
POOJA CHATURVEDI
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77
Market for a good is in equilibrium. Explain the
chain of reaction in the market if the price is:- y
a) Higher than the equilibrium price:-
D Excess S
At price more than the equilibrium price,
Supply
QD<QS. The excess supply will push the price
downwards. The sellers will be left with unsold P1
stock. To get rid of their stock they will reduce P e
the price. This would attract new buyers. The
market price will move towards equilibrium.
Ultimately equilibrium price will be determined,
where QD=QS. S D
b) Lower than the equilibrium price:- x
O Qty.
At a price less than equilibrium price,
OD>QS. Excess demand will push the price y
upwards. Those who need to consume the
commodity and cannot get it in the market D S
would buy it at a higher price. A higher price Price
would induce sellers to offer more quantity
for sale. Thus, the price would move towards e
P
the equilibrium.
P1
Excess
S demand D
x
O Qty.
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
78
Effects of changes in demand and supply on equilibrium point and quantity:-
Changes in demand:-
D1
Price
(a) Increase in demand:- When demand of a D S
commodity increases while supply remains constant,
equilibrium price will increase and quantity sold and P1 e
e 1
purchased will also increase. P
In the original situation, DD and SS curves intersect
point e to give equilibrium price as OP and output D1
S
OQ. Now if demand increases from DD to D`D` and D
Q Q1 x
supply remain constant a new equilibrium is O
y
established at point e`. the equilibrium price goes up
D S
Price
from OP to OP` and output from OQ to OQ`. 1
D
Therefore when demand curve shifts upwards,
equilibrium price and output increases.
P e
(b)Decrease in demand:- If the demand for a P1 e1
commodity decreases while supply remains constant,
the equilibrium price and quantity falls. D
S D1
x
In the diagram, DD and SS are the origin demand O Q1 Q
curve intersecting at point e. decrease in demand is y
shown by leftward shift in demand curve. The new S
D S1
Price
demand curve D`D` intersects supply curve at e`. Thus,

equilibrium price falls from OP to OP` and output falls
e
from OQ to OQ`. Therefore, when demand curve P
Shifts leftwards, equilibrium price and output falls. P1 e1
Changes in supply: S D
S1
x
(a) Increases in supply:- If supply of a commodity O Q Q1
increases while demand remains constant, equilibrium y
price will fall. S1
D S
Price
In the diagram, DD is the original demand curve and SS

is the original supply intersecting at point e. The new
e1
supply curves S`S` intersects the original demand curve P 1
at e`. Thus, if demand remains constant and supply P e
increases, the price falls and quantity increases.
S1
(b) Decrease in supply:- If supply of a commodity D
S
decreases while demand remains constant, equilibrium x
O Q1Q Qty.
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
79
price will increase. In the diagram, DD is the original demand curve and SS is the original
supply intersecting at point e. When supply decreases to S`S`, it cuts the demand curve at e`
which is the new equilibrium point.
The equilibrium price rises from OP to OP` and quantity in the market decreases from OQ to
OQ`. Thus, if demand remains constant and supply decreases, the price will rise and output
will fall.
Simultaneous Changes in both demand and supply:-
(a) If in Both Demand and Supply increases in same proportion:- When increase in
supply is equal to Increase in demand, the price will y
remain the same but equilibrium output will increases. S 1
D1 S
D
Price
In the diagram, DD is the original demand curve and SS is
the original supply curve which intersect at e. When e e1
demand curve D`D` and supply curve S`S` increase in P
same proportion and intersect at e` , the price will remain
same while quantity increases from OQ to OQ`. S D1
S1 D
x
(b) When increase in supply is less than Increases in O Q Q1
Qty.
demand:- When increase in demand is less than increase
in supply, both equilibrium price and quantity will increases.
In the diagram, DD is the original demand curve and SS is
the original supply curve which intersect at e which gives
equilibrium price and equilibrium quantity OQ. When both
demand and supply increases and increase in supply is less
than increase in demand, the new curves D`D` and S`S`
intersect at e` giving a higher equilibrium price OP` and
higher equilibrium quantity OQ`.
(c) When increase in supply is more than increase in
demand:- When increase in supply is more than increase in
demand, equilibrium price falls while equilibrium quantity
increases.
In the diagram, DD is the original demand curve and SS is the
original supply curve which intersect at e which gives
equilibrium price OP and equilibrium quantity OQ. When both
demand and supply shifts rightwards but shift in supply is more than of
demand, the new curves D`D` and S`S` intersect at e`.
This results in a new equilibrium price OP` and higher equilibrium quantity OQ`.
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
80
y
(d) If increase in demand is equal to decrease in supply:-
When increase in demand is equal to decrease in supply, the
equilibrium price rises while equilibrium quantity remains same.
DI SI
In the diagram, point e is the original equilibrium point where D
S
demand DD is equal to supply SS. When demand increases to
eI
D`D` and supply increases to S`S` giving a new equilibrium PI
point e`, price rises to OP` but equilibrium quantity remains same.
P e
Price
SI
DI
S D
x
O Q Qty
(e) When demand decrease is equal to supply increase:- If y .
the demand for a commodity decreases in same proportion

as its supply increases, equilibrium price will fall but equilibrium
D
quantity remains the same. DI S
In the diagram, equilibrium point is e where DD and SS intersect. SI
Demand decreases to D`D` and supply increases to S`S` e

intersecting each other at point e`, the equilibrium price falls to OP`P
but the quantity remains same. PI eI
Price
S
D
SI DI
x
O Q Qty.
(f) When decrease in demand is more than the decrease y
in supply:- If decrease in demand is more than the decrease in

supply, the equilibrium price will fall and the quantity will also
D
decline. DI S
In the diagram e is the equilibrium point where DD and SS
intersect. When demand decreases to D`D` and supply increases
eI e
to S`S`, a new equilibrium point e` is obtained showing fall in P
PI
equilibrium price to OP and equilibrium quantity to OQ`.
Price
S D
DI
QI Q
x
O Qty.
(g) When decrease in demand is equal to decrease in supply:- When decrease in demand
is equal to decrease in supply, equilibrium price will remain the same but equilibrium output
will decrease.
In the diagram, e is the original equilibrium point giving OP as equilibrium price and OQ as
equilibrium quantity. Due to a decrease in both demand and supply curves D`D` and S`S`
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
81
intersect at point e`. A same decrease in both demand and supply leaves the equilibrium price
unaffected as OP but equilibrium quantity falls to OQ`.
SI
S
D
DI
eI e
Price
SI
S D
I
D
x
O
Qty.
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
82
y
D1
Special Cases:- D
Price
(a) Supply is perfectly elastic and demand changes: e e1
P S
-(i) Increase in demand: - In this situation supply of a
commodity is perfectly elastic. If demand increases+ while the
D D1
supply is perfectly elastic, the equilibrium quantity x
O Q Q1 Qty.
increases while equilibrium price remains the same at OP. The
new demand curve intersects the supply curve at e' causing an y
increase in quantity to QQ'.
D
(ii) Decrease in Demand: - In this situation supply of Commodity D1
Price
is perfectly elastic and demand curve DD Intersects it at e. The
equilibrium price is OP while the equilibrium quantity is OQ. P
e1 e
S
When Demand increases a new demand curve D'D' emerges and
intersects supply curve at E'. It results a lesser quantity OQ` but D
D1
the remains the same. x
O Q1 Q Qty.
(b) Supply is perfectly inelastic: y

S
Price
(i) Demand increase:- In this situation supply of a commodity is D1
D
perfectly inelastic. If demand increases, then the demand will shift P e1
from DD to D`D`. It will give a new and higher equilibrium point
P1 e
e` due to which the prices rises to OP` but equilibrium quantity
remains the same at OQ. D1
D
x
O Q Qty.
y
(ii) Demand decreases:- In this situation, supply of a commodity S
Price
D1 D
is perfectly inelastic. If demand decreases, then the demand curve
will shift from DD to D`D`. It will give a new and higher P e
equilibrium point e` due to which the price rises to OP` but P1 e1
equilibrium quantity remains same at OQ.
D
D1
x
O Q Qty.
y
(c) Demand is perfectly elastic: -
S S1
(i) Supply Increases: -If demand is perfectly elastic supply Price
increases, the supply curve shifts from SS to S'S'. Now, the new e e1
P D
equilibrium point at e'. This will increase the quantity from OQ
to OQ' while the price remains same. S S1
x
O Qty.
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
83
(ii) Supply decreases:- When demand is perfectly elastic and y
supply deceases from SS to S`S`, the new equilibrium point will S1 S
Price
be e`. It will give a new equilibrium quantity OQ` but the price
will remain same at OP. e1 e
P D
S1 S
x
O Q1 Q Qty.
(d) Demand is perfectly inelastic:- y
D
Price
(i) Supply increases;- When demand curve is perfectly inelastic S
S1
and supply changes, a new supply curve emerges to the right of the
original supply curve SS. The new supply curve S`S` intersect P e
demand curve at e` causing a fall in price to OP` from OP while
P1 e1
the quantity remains the same at OQ. S
S1
(ii) Supply decreases:- When demand curve is perfectly inelastic and x
O
supply changes, a new supply curve emerges to the left of the Q Qty.
y
original supply curve SS. The new curve S`S` intersect demand D
Price
curve at point e` causing a rise in price to OP` from OP while the S1
S
quantity remains the same at OQ.
P1 e1
P e
S1
Reasons For Shifts In Demand Curve:- S
x
O Q Qty.
Increase in Demand (Rightward shift) Decrease in Demand (Leftward shift)
1. Rise in price of substitute good. 1. Fall in price of substitute good.
2. Fall in price of complementary goods. 2. Rise in price of complementary good.
3. Increase in income of the buyer of a 3. Decrease in income of the buyer of a
normal good. normal good.
4. Decrease in income of the buyer of an 4. Increase in income of the buyer of an
inferior good.
inferior good.
5. Favourable taste and preference. 5. Unfavourable taste and preferences.
6. Expected rise in future prices. 6. Expected fall in future prices.
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
84
Reasons for shifts in supply curve:-
Increase in Supply (Rightward shift) Decrease in Supply (Leftward shift)
1. Fall in price of substitute good. 1. Rise in price of substitute good.
2. Rise in price of complementary good. 2. Fall in price of complementary good.
3. Fall in cost of production. 3. Rise in cost of production.
4. Fall in taxes and increase in subsidy. 4. Rise in taxes and decrease in subsidy.
5. Advanced technology. 5. Obsolete technology.
6. Expected fall in future prices. 6. Expected rise in future prices.
Situations Effect on Effect on

equilibrium price equilibrium quantity
1. Change in demand:-
i) Increase Rises Rises
ii) Decrease Falls Falls
2. Changes in supply:-
i) Increase Falls Rises
ii) Decrease Rises Falls
3. Simultaneous Changes:-
i) Increase in QD=Increase in QS Same Rises
ii) Increase in QD>Increase in QS Rises Rises
iii) Increase in QD<Increase in QS Falls Rises
iv) Decrease in QD=Decrease in Same Falls
v) Increase in QD=Decrease in QS Rises Same
vi Decrease in QD=Increase in QS Falls Same
4. Supply is perfectly in elastic:
i) Demand increases Rises Same
ii) Demand decreases Falls Same
5. Supply is perfectly elastic:-
i) Demand increases Same Rises
ii) Demand decreases Same Falls
6. Demand is perfectly inelastic:-
i) Supply decrease Falls Same
ii) Supply increase Rises Same
7. Demand is perfectly elastic:-
i) Supply increases Same Rises
ii) Supply decrease Same Falls
POOJA CHATURVEDI
CONTACT NO.:- 09419231850
85
Chapter : –SIMPLE APPLICATION OF TOOLS OF DEMAND

AND SUPPLY
Government intervention to affect market equilibrium:-
Government has a major role to play to regulate the prices of goods and services when
prices are either too high or too low. Government can interfere in two ways:
a) Direct intervention :- Price Ceiling and Price
Flooring (Support Price) y
b) Indirect intervention :- Taxation policy or D S
Expenditure policy. Price
R
1.Price Ceiling P
Maximum price ceiling:- Price ceiling means that
a ceiling has imposed on the prices of essential L N Price
H
commodities like coal, petroleum products, ceiling
Shortage
agricultural products etc. Producers of such S D
commodities cannot charge prices higher than the x
O T Q W Qty.
ceiling price or maximum price fixed by the
government.
In the diagram, DD and SS are the original demand and supply curves for a
commodity. R is the equilibrium point, corresponding to which OQ quantity is
demanded at OP price. Suppose the government decide to fix the price at OH i.e. less
than the equilibrium price. Now the equilibrium price OP is no longer legally
obtainable. At the lower price, OH, quantity demanded is HN while at the reduced
price, suppliers will supply only HL quantity of goods. This will create shortage in the
market which is shown by the level LN.
Consequences or Effects of Price Ceiling:-
i) Shortages:- due to fall in price, the quantity supplied in market shrinks. As a result,
most of the consumer’s demand remains unsatisfied which leads to shortages.
ii) Problem of distribution of limited supplies among large number of consumers:-
Problem of distribution is solved by the government by leaving this job to the retailers,
to ration shops. In the first case, people are left to the mercy of retailers or the
producers may be distributed on first-come-first-served basis.
In case of ration shops, a consumer with less utility may choose not to purchase the
commodity.
iii) Black Marketing:- Black marketing implies a situation in which the controlled
commodity is sold unlawfully at a price higher than the lawfully enforced ceiling price.
This situation arises because the number of consumer is more than the supplier and
some consumers are willing to buy it at higher prices.
POOJA CHATURVEDI 86
CONTACT NO.:- 09419231850
2.Price Flooring
It includes:
a. Minimum support price:- Price flooring in price support means a floor is laid
on the price of such commodities as are covered under the price support
measures. The Government of India
y
maintains a variety of price support
programmes for a number of Price D
Surplus
S
agricultural products. Producers of
L N
these commodities need not sell at K Price Floor
prices lower than the floor price fixed P R
by the government.
In the diagram, R is the equilibrium point H Z
determined by the intersection of demand
and supply curves, OQ quantity is supplied S D
at OP price. If government fixes a floor O Q Qty.
x
price higher than the equilibrium price (OK
per unit). OP price is now legally non-attainable. At the higher price, OK, quantity
demanded will contract to KL but the suppliers are ready to supply KN quantity. This
will result in a surplus of LN quantity.
Consequences or Effects Of Price Flooring:-
a) Surpluses:- The quantity demanded will shrink as a consequence of price support
due to which a large portion of producer’s stock will remain unutilised.
b) Buffer Stock:- The Government has to maintain buffer stock. The government
purchases surplus stocks available with the producers for the benefit of the producers.
But the result is that the consumers have to pay higher prices to buy the goods.
c) Subsidies:- In order to minimize the loss of the consumers, the government
subsidises the product. The government purchases the product at support price and sells
the products to consumers below its cost of procurement. The ultimate cost is borne by
the government.
y
b. Minimum Wage Legislation:- This is
similar to price flooring but in case of factor Wage
Rate D Surplus S
markets. In this case, government fixes Labour
minimum wages to be paid by the T J
Z
employees to the labourers. Minimum
P R Wage
In the diagram, OQ quantity of labou is being

demanded and suppliesd at the equilibrium rate of
S D
OP. if the wage rate is fixed at OZ by the
x
government legislation, it will cause:- O W Q Labour
POOJA CHATURVEDI 87
CONTACT NO.:- 09419231850
a) Wages of labour rises from OP to OZ.

b) At the new and higher wage rate only ZT labour would be demanded where as OQ
labour is being supplied and demanded. Employment will fall by WQ.
c) Minimum wage will create a surplus labour TI.
d) Some of the unemployed worked may be forced to offer themselves for work at the
wage rate below the floor rate.
POOJA CHATURVEDI 88
CONTACT NO.:- 09419231850

Economic Part-A

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Class 12th UNIT -1:-INTRODUCTION

Q7:- What is meant by economizing of resources ? Why there is a need to economise

Q8 :- What do you mean by 'economics' ?

Q9 :- Discuss the subject matter of economics ?

Ans. The subject matter of economics is micro-economics and macro-economics.

Q10 :- What is micro-economics?

Q11:- Discuss the scope of micro-economics.

Ans. The scope of microeconomics includes:

Q12:- What do mean by the term 'individual' in economics ?

Q13 :- Distinguish between microeconomics & macro economics ?

Sno. Basis Microeconomics Macroeconomics

2. Degree of Aggregation It deals with the It deals with the

6. Alternate name It is known as price It is known as

7. Example An individual brand of a Various brand of a

Q14:- Why microeconomics is important ?

Ans. Microeconomics is important because:

a) It helps in formulation of economic policies.

Ans. The following are the limitations of micro economics:

a) It fails to explain the working of whole of the economy.

Q16:- What are the central problems of an economy?

a) India is an overpopulated country.

2. Economics as a Normative Science

3. Interdependence of Positive and Normative Sciences

Movement along a PPC :-

c) For Whom to Produce? :- PPC does not solve this problem .

Q8 :- "Massive unemployment shifts the PPC to the left". Defend or refute.

a) The word cardinal means The word ordinal means

d)This approach is objective This approach is subjective.

a) When price of both commodities is same :-

Units MUx MUy y y

Units MUx MUy MUx/Px MUy/ Py

Here 𝑃𝑥 = Rs 3, 𝑃𝑦 =Rs 4 & Y=Rs 40

Slope of IC = Slope of budget line.

i.e. MRS must be

Q3 :- What are the determinants of budget line?

Ans. a) Income of the consumer (y)

Meaning of Demand function:-

Symbolically, Dx= f (Px, Pz, Y, T, E)

Substitute good Complementary Good

Meaning of Individual Demand and Market Demand:-

Demand Schedule:- A demand schedule is a tabular presentation which shows different

Movement and Shift in Demand

b) Shift in demand: - It is also known as change in demand. It refers to the change in

Movement in Demand Shift in demand

Price elasticity of demand:-

Where Q= original quantity, P= original price, ∆Q= Q1-Q, ∆P= P1-P

Factors affecting elasticity of demand:-

(c) Unitary Elastic [Ed = 1] :-

(d) Elastic demand [ Ed>1} :- o x

(e) Perfectly Elastic [Ed=infinity] :- o x

Ed= (-) ∆Q x P ∆Q = Q1-Q

Q. Why do we ignore minus sign in the calculation of price elasticity

Q. Why does elasticity of demand has a minus sign?

Unit III:- Producer Behaviour and Supply

Meaning of Production: - Production means transformation of input into output.

b) Average product/Average physical product: - It refers to the amount of output per

Relationship B/W Total Product, Average Product and Marginal Product:-

b) Relationship b/w TP and MP:-

c) Relationship b/w TP, AP and MP:-

Law of Returns to factor

Units of Total Average Marginal Stages of

a) Use beyond optimum capacity: - After achieving optimum combination of variable

Q. What is meant by returns to a factor?