Download Study material for Less Achievers Micro Economics XII

STUDY MATERIAL FOR SLOW LEARNERS STUDENTS
SUB.-ECONOMICS
MICRO ECONOMIC THOERY
UNIT I &II
Q1. What do you mean by economizing of resources?
Ans. Efficient use of available scarce resources
Q2. What is micro economics?
Ans. It is the study of the behavior of individual economic units like
Determination of price, wages, income of individuals and firms.
Q3. What is macro economics?
Ans. It is a study of aggregates of the economy as a whole. Eg. Level of
Income and output.
Q4. Why does economic problem arise?
Ans. Economic problem arises primarily due to scarcity and alternative uses of resources.
Q5. Define production possibility Curve?
Ans. It is a curve which shows all possible combination of two goods Which can be produced with the given
resources and technology.
Q6. What is an opportunity cost?
Ans. Opportunity cost of a factor is the value in its next best alternative use.
Q7. What is the problem of scarcity?
Ans. Scarcity refers to the limited resources in relation to demand.
Q8. What is an economic problem?
Ans. Economic problem is the problem of making of choice since resources are limited.
Short Answer Questions ( 3&4 Marks)
Q1. Explain the central problems of an economy
Ans. a) What to produce: It refers to the problem of what goods and services are to be producedConsumer or producer
b) How to produce’s refers to the choice of techniques or methods of production of goods
And Services i.e ,labour-intensive or capital intensive.
c) For whom to produce?
It refers to the distribution of income and wealth among the factors of production.
Q2. Draw a PPC curve and show the following:-
a) Growth of resources.
b) Under utilization of resources.
c) Fuller utilization of resources.
Ans.
y goods
a
Growth of resources
c
Fuller utilization of resources
b Under utilization of resources
Q3. Explain opportunity cost with an example.
Ans. It refers to the value of the next best alternative use.
Eg. Suppose a doctor braving private clinic in Delhi is earning Rs. 5
lakhs annually. There are two other alternatives for him.
One:- Joining a Govt. hospital in Bangalore earning Rs. 4 lakhs
annually .
Two:- Opening a clinic in his home town in Mysore and earning 3
lakhs annually.
The opportunity cost will be joining Govt. hospital in Bangalore.
Q4. Distinguish between Micro and Macro Economics.
Ans.
Microeconomics
1. It is the study of individual units of an
economy
2.It deals with allocation of resources
3.It is also called price theory
Macroeconomics
1.It is the study of the whole economy
2.It deals with growth and development of
resources
3.It is also called income and employment
theory theory.
Q5. What is opportunity cost? Calculate the marginal opportunity cost.
X: 0
1
2
3
4
5
Y : 90
85
75
60
40
10
Ans. The rate of sacrifice of one good to produce another good is called
Marginal opportunity cost.
X
Y
MOC
0
1
90
85
-05
2
3
4
5
75
60
40
10
Very Short Answer Questions ( 1 mark each)
Q1. Define total utility?
Ans. It signifies the total satisfaction which a consumer gets by
Consuming all the units of a commodity.
Q2. How is marginal utility derived from total utility?
Ans. It is defined as an addition made to the total utility by consuming
an additional unit of a commodity.
MUn = TUn – TUn-1
Q3. What happens to TU when MU is Zero?
Ans. TU is maximum when MU is Zero.
Short Answer Questions 3 or 4 Marks
Q1. Distinguish between TU and MU with the help of a diagram.
Ans.
1. TU increases at diminishing rate when MU is declining and
Positive.
2. TU is maximum, MU is ‘0’ (Zero)
3. When MU becomes Negative, TU declines.
10
15
20
30
Very Short Answers (1 mark)
Q1. Give the meaning of demand.
Ans. It refers to the quantity of a commodity which a consumer is willing to buy at a given price at is given
time.
Q2. Mention any two factors that affect demand of a commodity.
Ans. 1- Price of the commodity
2- Income of the consumer
Q3. What is law of demand?
Ans. It states that at a higher price, consumer will buy less of commodity and vice versa, other factors
remaining constant.
Q4. What is a demand schedule?
Ans. It is a tabular presentation which shows different quantities of aCommodity demanded at different prices
in a given period of time.
Q5. What is demand Curve?
Ans. It is a graphical representation of change in demand due to change in price of a commodity.
Q6. What happens to the demand for a good when the price of the substitute good falls?
Ans. The demand of the good will fall.
Q7. When does a consumer buy less of a commodity at a given price?
Ans. A consumer buys less of a commodity when income decreases or consumer develops unfavorable taste.
Q8. Define market demand?
Ans. It refers to the sum total of the quantities demanded by all the consumers in the market at a given price
and at a given point of time.
Q9. What cause changes in demand?
Ans. It is a situation when demand changes due to other factors other than the price.
Q10. Give two examples of substitute goods.
Ans. eg.1) Tea & Coffee 2) Colgate tooth paste & Pepsodent, Tooth paste/ toothpowder.
Q11. How is percentage change in quantity demanded calculated?
Ans. Percentage change in quantity demanded = Q x 100
Short Answer Questions (3/4 Marks)
Q1. Draw demand curves showing price elasticity equals to a) Zero,
b)Infinity .
Q2. What are the determinants of demand?
Ans. Determinants: a) Price of a commodity
b) Income of a consumer.
c) Price of related goods
d) Tastes & preferences of a consumer
e) Future expectation
Q3. Give three reasons of a rightward shift of demand curve.
Ans. Reasons a) Increase in the income of consumer
b) Rise in the price of substitute goods.
c) Increase in the number of consumers.
Q4. What is market demand? How is market demand curve derived from the individual demand curve?
Ans. Market demand refers to the sum total of the quantities demanded by all the individual households in the
market at given price and time.
Market demand curve:- It is a horizontal summation of individual demand curve
Y
Price
price
(Rs.)
Q5. Explain briefly any three factors which lead to decrease in demand.
Ans. It refers to that situation wherein the price remaining constant, the quantity demanded decreases because
of the following reasonsa) Decrease in income of the consumer
b) Fall in the price of substitute goods.
c) Decrease in the number of consumers.
Very long Answer( 6 Marks )
Q1. Explain with the help of diagrams, the effect of the following Changes on the demand of a
commodity.
a) A fall in the price of substitute goods.
b) A fall in the income of its buyer.
Ans. a) A fall in the price of substitute goods:The demand of commodity and the price of its substitute goods are directly related to each other. When the
price of a substitute good falls, the demand for the good falls and vice- versa. As a result the demand curve of
the commodity shifts to the left
(A fall in the price of substitute goods)
b) A fall in the income of its buyer:- The demand of a commodity
and the income of the buyer are directly related to each other. A fall in the income of buyer will lead
to decrease in the demand for the commodity as buyer’s purchasing capacity will reduce. The
demand curve of the commodity will shift to left side.
(A Fall in the income of its buyers)
a)
Q2. Distinguish between change in demand and change in quantity
demand. And show it in the diagrams.
Ans. a) Change in quantity demanded :- When demand for a commodity changes because of change in its
own price (other things remaining constant), it is called change in quantity demanded. It is expressed in the
form of expansion or contraction of demand. A change in demand graphically means movement along a given
demand curve.
Change in demand :- When demand for acommodity changes because of factors other than price , it is called
change in demand. It is expressed in the form of either ‘increase’ or ‘decrease’ in demand .In fact change in
demand refers to a shift of a demand curve.
.
Change in Quantity demanded
Change in demand
Y
y
D
D1
D2
P2
D
C
Price
A
Price
p
C
A
B
B
Price Elasticity of demand
Very Short Answer( 1 Mark)
Q1. Define Price Elasticity of demand?
Ans. It refers to the degree of responsiveness of quantity demanded to change in its price.
Q2. Draw a demand curve with unitary elasticity.
Ans.
y
Price
ED=1
AP
AQ
Q3. When is demand for a commodity said to be perfectly in elastic?
Ans. When demand does not change with change in its price.
Q4. What makes the demand for a good more or less elastic ? State one factor.
Ans. Availability of substitutes.
Short Answer Question ( ¾ Marks)
Q1. What is meant by elasticity of demand .State any three factors that affect it?
Ans. It refers to the degree of responsiveness of the quantity demanded of a good to a change in its price.
Factors affecting it:a) Availability of close substitutes.
b) Price level.
c) Different uses of Commodity
Q2. At price of Rs. 20 Unit the quantity demanded is 300 units. Its price falls by 10% its quantity
demanded rises by 60 units. Calculate price elasticity.
Ans. Rise in Price = 10% (Given)
 rise in Quantity = Q x 100
= 60 x 100= 20%
300
 ED =
Percentage change in Quantity demanded
Percentage change in price
= 20/10
=2
 Elasticity is greater than unity  ED > 1
Q3. The market demand for a good at Rs. 4 is 100 Units. The price rises and demand falls to 75 units.
Find out the new price if elasticity of demand is ( - ) 1.
Ans. ED = ( - ) Q x P
Q
P
-1 = - 25/100 x 4/X = 1/x
-1 = - 1/x
1x = 1
= x = 1/1 = 1
Initial price = 4
New price (Q7) = 4+1=5 Rs.
Q1. Define supply ? Draw a supply curve with unitary elasticity of supply.
ans. it refers to the quantity of a commodity that a seller is ready to sell at a given price in the given period of
time. Supply curve which shows the es is unitary is as follows-
y
es=1
s
supply
x
price
o
Q2. Define marginal cost?
ans. it is the change in total cost which result from the production of one more unit of a commodity
MC= change in TC/ change in output
Q3. What is break even point?
ans. where TC is equal to TR
Q4. what is producers equilibrium ? Explain any two factors that cause shift of supply curve.
ans. a producer is said to be in equilibrium when he produces the level of output at which his profits
is maximum . The factors that cause shift of supply curve are [ other than price]i) no. of firms (ii) technology (iii) govt policy etc
Q5 Draw the supply curve of the followingi) es=1
(ii) es>1
(iii) es<1
ES>1
Y
ES=1
S
Y
Y
S
ES<1
S
PRICE
O
O
X
O
SUPPLY
X
X
Q6. what is price elasticity of supply?
ans. price elasticity of supply is the responsiveness of quantity supplied of a commodity to change in
its own price. es= % change in supply/ % change in price
Q7. Explain in short the law of variable proportions?
ans. This law is also known as law of production. Which take place in the short run. In short run
production can be increased by increasing the variable factor only because in short run many
factors lies constant. but the marginal production by every additional unit goes diminishing.
Q8. Discuss the main determinates of supply.
ans. the main determinants of supply are as followsi) Price of the commodity
[ with explanation]
ii) Price of related goods
iii) State of technology
iv) Cost of production
v) govt. policy
vi) Numbers of the firms
vii) Price of the factors of production.
Q9. What is supply? Why does supply curve slope upward?
ans. supply- it refers to the quantity of a commodity that a seller is ready to sell at a given price in a given
period of time. The reason behind upward of supply curve is the law of supply which says that there is direct
relation between change in price and change in supply.
supply schedulePrice in rupees
Supply in units
1
10
2
20
3
30
4
40
5
50
Y
S
PRICE
S
O
SUPPLY
X
Q.1. Define Market.
Ans. In economics market does not mean a particular area or a region rather it refers to the whole region where buyers
and sellers can contact with each other either physically or through any other means of communication.
Q.2. What is meant by Perfect Competitive market?
Ans. It refers to that market situation where there are large numbers of buyers and sellers, selling homogeneous
product at a uniform price and the price is determined by the industry.
Q.3. Define monopoly.
Ans: It refers to that market situation in which there is only one seller of the product who has complete control over the
supply of the product.
Q.4. Define monopolistic competition.
Ans:-It refers to that market situation where there is large number of small firms selling differentiated products but
close substitutes of each other.
Q.5.What is meant by differentiated product or product differentiation?
Ans it refers to the differences among the product on the basis of brands name, Shape, packing, colour , Quality, type
of services and advertisements.
Q.6 In Which forms of market a firm is a price- taker?
Ans .Under perfect competitive market the firm is price taker.
Q.7. In Which forms of market a firm is a price- maker?
Ans .Under monopoly market the firm is price maker.
Q. 8 . In Which forms of market there is product differentiation?
Ans:-Under monopolistic Competition.
Q.9.What is the nature of AR curve under monopolistic competition?
Ans:- under monopolistic competition AR curve is more elastic.
Q.10.In which forms of market AR curve is perfectly elastic?
Ans: Perfect Competitive market.
Q.11. In which market entry of new firms is restricted?
Ans: Monopoly
Q.12.Comparision among Perfect competition, monopoly, monopolistic competition, oligopoly.
Basis
Perfect
Monopoly
Competition
Buyers and sellers Large
One seller but large
number of buyers
Nature of product HomogeneousHomogeneous or
differentiated
Monopolistic
Large
Oligopoly
Few sellers
but large
number of
buyers
Product differentiation Homogeneou
s or
differentiated
Price
Uniform
Not uniform because of
price discrimination
Not uniform because of In determined
Entry and exit of Free
Restricted
Product differentiation
Free
Restricted
firms
Knowledge about Perfect
Imperfect
Imperfect
Imperfect
Elastic (Ed>1)
Undefined
market
Shape of Demand Perfectly elastic
Inelastic (Ed<1)
curve
Q1. Show the determination of market equilibrium with the help of demand and supply schedules .
Ans. Equilibrium price is the price at which quantity demanded is equal to quantity supplied. We can explain it
with the help of table and diagram.
PRICE(Rs)
1
2
3
4
5
DEMAND(Kg)
50
40
30
20
10
SUPPLY(Kg)
10
20
30
40
50
Q2. How does an increase in the income of a consumer impact
equilibrium quantity and price of normal
X
goods?
Ans. a) With increase in income the demand curve would shift to the right for normal goods .The equilibrium
price would increase from OP to OP.
Q3. “Equilibrium price may or may not change with shifts in both demand & supply curves”. Comment.
Ans.When Demand and Supply both changes in same ratio than equilibrium price remain same constant. It
may be in two cases.Case 1:- Equilibrium price does not change if both supply & demand increase by the same proportion.
Equilibrium price remains OP even though both supply & demand are increasing.
Case 2:- Equilibrium price does not change when both supply & demand decrease by the same proportion.
S1
D
S
D1
Equilibrium price remains the same at OP even though both supply a demand are decreasing.
When Equilibrium Price Changes
Case 3:- When increase in supply is by a higher proportion as compared to the increase in demand the
equilibrium price falls from OP to OP1
Y
S
S
D
D’
S’
X
Gist of lessons of economics
Micro economics
Chapter 1 Introduction:1. Difference of Micro and Macro economicsMicro economics is a study of individual units.
Macro economics is a study of whole economy, (at the level of economy)
2. Economic problem- problem of scarcity.
It arises due to 1.unlimited wants2. Limited resources 3. Alternate use of resources.
3. Central problems of economy:1. What to produce?- Which goods and services will be produced in an economy.
2. How to produce?- problem related to choice of technique (i.e. labour intensive, capital
intensive)
3. For whom to produce- it related to distribution of produced goods and services.
4.
Concepts of PPC and opportunity cost.
PPC shows the different combination of two commodities that an economy can produce
with the help of available resources.
Generally the slope of PPC downwards and is concave to the point of origin because of
increasing marginal opportunity cost.
Why MRT increases.
Opportunity cost is a cost of next best alternative goods forgone for it.
Chapter 2 consumer’s Equilibrium
1. Meaning of utility: want satisfying power of a commodity
Concepts of utility-mu: utility derived from the consumption of additional unit of the commodity
TU:-sum of all marginal utility derived from the consumption of various units of the commodity
Relation of TUand MU(a).MU decreases TU increases at decreasing rate
(b)MU becomes 0 TU becomes maximum (c)MU becomes negative TUstarts decreasing
Ordinal
2.Consumer’s Equilibrium :it is a condition in which consumer gets maximum satisfaction and he
does not want to change his present consumption pattern.
cardinal and ordinal utility approach
Cardinal approach:measures utility on the scale of money
One commodity case: MU=PX or MUx/MUm=Px
Two commodity case:MUx/Px =MUy/Py
Ordinal approach: utility can only be ranked
Meaning of indifference curve –it shows various combinations of two goods which give same level of
satisfaction to consumer and he remains indifferent among these combinations
Properties of indifference curve(a)slopes downward-Due to MRS(b)convex to the origin-due to
decreasing MRS(c)higher indifference curve shows high level of satisfaction-due to monotonic
preference(D)two ICs never intersect each other
Indifference map: set of indifference curves
Budget line-shows various combinations of two goods which a consumer can purchase with his
income and prices of two goods and which cost exactly equal to the income of the consumer.
Causes of shift in budget line: change in income and change in prices of two goods
Budget set shows various combinations of two goods which are available to the consumer
Consumers equilibrium under IC (a)IC should be tangent to the budget line
(b)Ic should be convex to the origin.
MRSxy=Px/Py
DEMAND
1. Meaning of demand it refers to desire for a commodity backed with purchasing power
willingness to spend the money at various possible prices during a given period of time.
Types of demand: individual demand-that an individual buyer is ready to buy at each possible
price during given period of time.
Market demand: that all buyer are ready to buy at each possible price during given period of
time.
2. Demand function shows functional relationship between demand of a commodity and its
various determinants(a) Market demand function Dx=f(Px,Pr,Y,T,E,N,Yd)
Individual demand function Dx=f(Px,Pr,Y,T,E)
3. LAW OF DEMAND :other things being the same ,demand for a commodity increases with
decrease in price and it decreases with increase in price
4. Reasons for the application of law of demand
(a)law of diminishing marginal utility (b)substitution effect(c)income effect(d)many uses
(e) increase in no. of consumers
5.
Exceptions of the law of demand(a) Giffin goods(b)status symbol goods(c)necessary goods
(d )ignorance
6. Difference between change in demand and change in quantity demanded
Meaning of change in demand –due to change in factors other than price (causes shift in
demand curve)
Meaning of change in quantity demanded –due to change in price of the commodity itself
(causes movement along demand curve)
Elasticity of demand
Meaning of price elasticity demand: degree of responsiveness of demand due to change in
price of a commodity.
Methods of measuring price elasticity of demand-percentage method-%change in quantity
demanded/change in price (∆Q/∆P*P/Q)
Geometric method -Lower segment/upper segment
Expenditure method Total Expenditure=price*Quantity
(a) If TE increases with increase in price and decreases with decrease in price Ed<1
(b) If TE increases with decrease in price and decreases with increase in price ED>1
(c) If TE does not change with change in price Ed=1
Factors affecting elasticity of demand
(a)Nature of the commodity
(b)Availability of substitutes
(c)Income level
(d)Level of price
(e)Postponement of consumption
(f)Number of uses
(g) Share in total expenditure
(H) Time period
Chapter 3- Producer equilibrium and supply.
Production function is a relationship between physical input and physical output.
Q=f(L,K)
L-labour K –capital
Three concepts of production.
1.TPP- Total output of commodity at particular level of employment.
2.MPP- Addition made in TPP by employing one additional unit.
MPP= TPPn-TPPn-1
or ∆TPP/∆L
3.APP- Per unit average production.
APP= TPP/L
Law of variables proportions state that if we are using more and more unit of variables factors are
combined with fixed factors initially TPP of the variable factors increase at increasing rate than
decreasing rate and finally it falls.
Three phases of LOWP.
1.
2.
3.
Cost;
TPP increase at increasing rate. MPP rises. (1st phase)
TPP increase at decreasing rate.MPP falls. (2nd phase)
TPP starts falling MPP becomes negative (3rd phase)
Expenditure incurred on the production of goods and services.
Fixed cost are those costs that do not vary with the level of output it formally called TFC (Total fixed
cost? Example 1. Minimum electricity bill 2.wage to permanent staff.
Variable costs are those that change with the level of output it formally called TVC (Total variable
cost) example 1.labour cost 2.cost of raw material
Total cost is a sum of TFC and TVC (TC= TFC+TVC)
TC= TFC+TVC
TFC= TC-TVC
TVC=TC-TFC
Average cost is cost of per unit of output.
AFC= TFC/Q or AC-AVC
AVC=TVC/Q or AC- AFC
ATC=TC/Q
or ATC= AFC +AVC
Marginal cost is addition made to the total cost when output change by one unit.
MC= TCn-TCn-1 or ∆TC/∆Q
Relationship between AC and MC (same for AVC and MC)
1. When AC is falling, MC lies Below the AC i.e. MC<AC
2. When AC is minimum and constant AC=MC
3. When AC is rising ,MC lies above AC curve i.e. MC>AC
Revenue:Revenue is the money receipts from the sale of product.
There are three concepts relating to revenue 1. TR 2.MR 3.AR
Total revenue is obtained by multiplying the quantity sold by its price.
TR= Price X Quantity
Average revenue is per unit revenue of output.
AR=TR/Q
AR=TR/Q
AR is always equal to Price AR= P
TR=PxQ
So AR= PxQ/Q
Thus AR=P
Marginal revenue is an addition made to total revenue by selling an additional unit.
MR=TRn-TRn-1
or ∆TR/∆Q
Producer equilibriumMeaning of producer equilibrium-It is a condition of where producers gets maximum profit or
minimum losses. And he does not want to change the condition.
TR ,TC approach= TR-TC equal to profit.
MR,MC approach- 1.MR=MC
2.MC must be rising or MC must cut MR from below
Breakeven point –TR=TC or AR=AC (normal Profit condition)
Shut down point-AVC=AR
Supply :Supply is a quantity of commodity that a seller is willing to sale at a given price in a given period of
time.
Supply schedule is a table showing the quantity supplied of commodity by a seller at different price.
Law of supply state that other things remaining the same, there is a direct relationship between price
of commodity and quantity supplied
Individual supply is a supply of one producer
Market supply is sum of the supply of all the sellers in market.
Factors determined the supply of commodity.
1.Tecnological changes.
2.Prices of input
3.Price of other goods
4. Change in excise duty.
Reasons of rightward shifting of supply curve.
1.Improvement in production technology.
2.a fall in the price of input
3. a fall in the price of other goods.
Change in supply due to change in other factors when price remain constant. increase in supply
and decrease in supply ( shift a supply curve)
Change in quantity supplied when change in price when other factors remaining same.(
movement along supply curve)
Elasticity of supply.
Price elasticity of supply measures the responsiveness of quantity supplied to change in its own price.
Methods of measuring elasticity of supply
1. Percentage method- % change in quantity supplied/ % change in price (∆Q/∆P*P/Q)
2. Geometric method- segment of x axis intersected by supply curve/quantity supply
segment.
Factors effecting price elasticity of supply.
1.nature of commodity.
2.Cost of production.
3.Time period
4.Tecnique of production
5.nature of input.
6.natural factors.