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CLASS XII : TOPICS
• PRODUCTION POSSIBILITY CURVE.
• CONCEPT OF DEMAND.
• SHIFT IN DEMAND CURVE AND MOVEMENT ALONG
THE DEMAND CURVE.
• CONCEPT OF SUPPLY.
• SHIFT IN SUPPLY CURVE AND MOVEMENT ALONG
THE SUPPLY CURVE.
• EQUILIBRIUM PRICE.
(PPC)
COTENTS
• DEFINITION OF PRODUCTION
POSSIBILITY CURVE.
• PRODUCTION POSSIBILITY SCHUDLE.
• PRODUCTION POSSIBILITY CURVE.
• SHIFT IN PRODUCTION POSSIBILITY
CURVE.
• CURVE SHOWING UNDER
UTILIZATION OF RESOURCES AND
FULL UTILIZATION OF RESOURCES.
Objectives





To understand meaning of PPC.
To understand PPC schedule.
To understand PPC.
To understand why it is concave to the origin.
To understand that any point inside it shows under
utilization of resources , point on it shows full
utilization of resources.
 To understand central problems.
PRODUCTION POSSIBILITY
CURVE

Production possibility curve is that curve
which represents the maximum amount of
a pair of goods or services that can both
be produced with an economy’s given
resources and technique, assuming that
all resources are fully employed.
• Assumptions of PPC
(a) Fixed quantity of factor of production of
production.
(b) Resources are fully and efficiently
utilized.
(c) Technology of production remains
constant.
(d) Assumption of two goods.
PRODUCTION POSSIBILITY
SCHUDLE
A GOOD
B GOOD
0
100
1
90
2
70
3
40
4
0
PRODUCTION POSSIBILITY CURVE
A GOOD
A1
A2
A3
A4
A5
O
B1 B2 B3 B4
B5
B GOOD
Two Basic Properties of PPC
• (1)Production Possibility Curve Slopes Downwards:
Production possibility curve slopes downwards from left
to right. It is because in a situation of fuller utilization of
the given resources, production of both the goods can
not be increased. More of good-Can be produced only
with less of good-Y.
• (2) 1)Production Possibility Curve is concave to the
point of origin; It is because to produce each
additional unit of good-X, more and more unit of
good-Y will have to be sacrificed than before.
Opportunity cost of producing every additional unit
of good –X tends to increase in terms of loss of
production of good-Y.In other words, production will
obey the Law of Increasing opportunity cost
P1
GROWTH OF RESOURCES
A GOOD
P
Initial
Resources
o
P
P1
B GOOD
Full Utilization
of resources
Unattainable
combination of
output
.
P
W
.
A GOOD
.
.
Z
Under
utilization of
resources
O
.
S
.
Y
E
.
P
B GOOD
OPPORTUNITY COST
• Opportunity Cost:- Opportunity Cost refers to value of a
factor in its next best (or second best) alternative use.
Possible
uses of land
Use-1Production of wheat
Use-2 Production of Rice
Use -3 Production of maize
Market value
of production
Use-1 Rs. 6000
Use-2 Rs. 5000
Use-3 Rs. 4000
Assumption
Technique of production is
constant and resources are
fully utilized
Y
A
Use-1 value of output
One hectare of land and a
given package of other
inputs
Rs.6000
Available
Resources
O
B
X
Use-2 value of output
Rs. 5000
Opportunity cost of employing resources in use -1=loss of
out put in next best alternative use of the given resources
which is Rs. 5000 in use -2
Evaluation
• Define P.P.C. ?
• What does slope of P.P.C show ?
• What does the point inside the P.P.C. show
?
• What does the shifting of P.P.C show ?
• Can you show the central problems
through the P.P.C ?
DEMAND
Meaning –the quantity of a
commodity or service that a
consumer would buy at a given
price and at a given time .
Contents of demand
• Desire for a
commodity.
• Ability to pay.
• Readiness to
spend.
• Specific time.
• Specific place.
• Specific price.
FACTORS AFFECTING DEMAND
1. Price of the
commodity.
2. Income of the
consumer.
3. Price of related
goods.
4. Tastes and
preferences.
5. Future expectations.
LAW OF DEMAND
If other things remaining the
same, when the price of a
commodity
increases,
its
demand falls and when the
price
falls,
its
demand
increases.
Assumptions of law of Demand
(1)Income
of the consumer remains constant.
(2)There is no change in the taste and preference of the
consumer.
(3)No change in price of the related good.
(4)The commodities are normal.
(5)There is no expectations of change in price in near future.
(6)No new substitute of the commodity are available.
(7)No change in the distribution of income and wealth.
(8)Other relevant factors like size and composition of
population, seasonal and climate factors, economic
condition of the country etc. remain unchanged.
RELATION OF PRICE WITH
DEMAND
PRICES (Rs.)
1
2
3
4
5
DEMAND (Qt.)
5
4
3
2
1
Y
D
5
Price
1
O
D
1
Quantity
5
X
DIFFERENCE
Sr.no
1
2
Base of
difference
Definition
Alternative
Name
Change in Quantity Demand
Change in Quantity demanded
refers to increase or decrease
In quantity purchased of a
commodity in response to
decrease or increase in its
price other than its
determinants.
Movements along the
Demand curve
Change in Demand
Change in Quantity
demanded refers to
increase or decrease In
quantity purchased of a
commodity in response
to change in other
determinants of demand,
other than price of the
same commodity.
Shifting of the Demand
curve
(1)Extension of Demand
(1)Increase in Demand
(2)Contraction of Demand
(2)Decrease in Demand
Difference between Contraction and Decrease in Demand
• This is caused only by
change in the price of
concerned commodity
• Increase in price of
the commodity is the
only cause
• This is caused by change in
determinants, other than
price of the concerned
commodity
• Several causes: Decrease
in income, decrease in price
of substitute good, increase
in price of complementary
good,
Price(Rs.) Quantity (Units) Description
1
5
D
p Q.D.
•
Price (x)
10
10
Quantity (Units)
30
20
Contraction of demand
Price
D
P1
P
O
N
M
Q1 Q
Quantity
D
Decrease in demand
Price
Y D1 D
P
E1
E
D1
O
Q1
Q
Quantity
D
x
Extension of demand
Price
Y
P
P1
O
D
K
L
Q Q1
Quantity
D
Increase in demand
PRICE
Y
p
D
D1
E
E1
D1
D
O
X
Q1 QUANTITY
Questions
• VERY SHORT ANSWER TYPE
Q .1 Define demand ?
Q .2 Define supply ?
Q .3 Define demand function ?
Q .4 Define
supply function ?
Q. 5 what do you understand by demand schedule ?
Q.6 what do you understand by supply schedule ?
Q 7 Explain the law of demand ?
Q 8 what are the factors affecting demand ?
Q 9 what are the assumptions of law of
demand ?
Q 10 what are the exceptions to the law of
demand ?
SUPPLY OF GOODS
•
The supply of goods is the
quantity offered for sale in a
given market at a given time
at various prices.
• The law of supply states that other things remaining constant,
the higher the price the greater the quantity supplied or the
lower the price the smaller the quantity supplied.
FACTORS AFFECTING SUPPLY
Price Of Commodity.
*Price Of Factors Of Production.
*Productivity Of Factors.
*Technology.
*Numbers Of Firms.
*Policy Of Govt.
*Aim Of Firms.
TYPES OF SUPPLY SCHEDULE
•
(1)
• (2)
Individual Supply
Schedule.
Market Supply
Schedule.
The table relating to price and
quantity Supplied is called the
supply schedule.
• Other things being are equal, when
quantity supplied of a commodity
increases due to rise in its price it is
called extension.
DIFFERENCE BETWEEN
CHANGE IN QUANTITY SUPPLIED AND
CHANGE IN SUPPLY.
Change in quantity
Supplied
Change in supply
1. Due to change in
price.
2. Movement along
the supply curve.
1. Due to change in
other factors.
2. Shift in supply
curve.
EXTENSION OF SUPPLY
EXTENSION OF SUPPLY
• Other things being equal, when quantity
supplied of a commodity decreases due to
fall in its price, it is called contraction of
supply.
INCREASE IN SUPPLY
INCREASE IN
SUPPLY
• More supply at same price
or same supply at less price
is called increase in supply.
Increase in Supply
DECREASE IN
SUPPLY
• Less supply at same price and same
supply at more price is called decrease
supply.
DECREASE IN SUPPLY
Evaluation
• What do you mean by supply ?
• Define the law of supply ?
• Name any four factors effecting the supply
of a commodity.
• Define the expansion of supply.
• What do you mean by contraction of
supply ?
• Equilibrium Price Will be Shown by the Diagram
• Effect of Change in demand on Equilibrium
Price- When supply is Constant ,Perfectly Elastic
and Perfectly Inelastic
• Effect of Change in Supply on Equilibrium PriceWhen Demand is Constant ,Perfectly Elastic and
Perfectly Inelastic
• Effect of Simultaneous Change in Demand and
Supply
• All the Effects Mentioned Above Will be Shown
by the Diagrams
HERE ARE SOME PICTURES OF
HOUSEHOLD COMMODITIES
Rs. 8,000/Rs. 20,000/-
Rs. 5/-
THESE COMMODITIES HAVE
DIFFERENT PRICES.
•
LETS KNOW HOW
THESE PRICES
DETERMINED IN THE
MARKET.
• THE PRICE ON WHICH A COMMODITY
IS SOLD AND PURCHASED IN MARKET
IS CALLED EQUILIBIRIUM PRICE.
• EQUILIBIRIUM PRICE IS THAT PRICE
ON WHICH THE DEMAND AND SUPPLY
OF A COMMODITY IS EQUAL TO EACH
OTHER.
SCHEDULE OF EQUILIBIRIUM
PRICE
PRICE(RS.)
1
2
3
4
5
QT.SUPPLIED QT.DEMANDED
1
2
3
4
5
5
4
3
2
1
EQUILIBIRIUM PRICE
Y
• Equilibrium
Price is that
price at which
its two
determinantsP
demand and
supply are in Price
balance, or
equal.
O
S
D
E
D
S
Q
Quantity
X
PRICE
S
D
EXCESS SUPPLY
P1
p
E
EXCESS DEMAND
P2
O
D
S
X
Q
QUANTITY
• When
supply
is
constant
Price
D1
Y
S
D
E1
P1
E
P
D1
S
D
O
Q
Q1
Quantity
X
Y
When supply is Perfectly Elastic and
increase in demand
D1
D
Price
P
S
E
E1
D
O
Q
Q1
Quantity
S
D1
X
When Supply is Perfectly Inelastic and demand
increases.
Y
D
D1
S
Price
E1
P1
E
P
D1
D
S
O
Q
X
Quantity
Effect of Decrease In Demand
And no change in supply
D
Y
S
D1
E
P
E1
Price
P1
D
S
O
D1
Q1 Q
Quantity X
When Supply is Perfectly Elastic
Price
Y
P
D1
S
D
E1
E
S
D1
O
Q1
Q
D
Quantity
X
Y
When Supply is Perfectly
Inelastic
D
D1
S
E
P
Price
E1
P1
O
D1
S
Q
D
Quantity
X
Effect of increase in supply and no
change in demand
S
D
Price
Y
S1
E
P
E1
P1
S
D
S1
O
Q Q1
Quantity
X
When Supply is Perfectly Inelastic
Y
D
D1
S
Price
E
P
E1
P1
D1
S
O
Q
D
Quantity
X
When Demand is Perfectly Elastic
S
Y
S1
Price
P
D
S
O
E
D
E1
S1
Q
Q1
Quantity
X
When Demand is Perfectly Inelastic
D
Y
S
S1
Price
E
P
P1
E1
S
S1
O
D
Q
Quantity
X
Effect of Decrease in Supply and
no change in Demand
S1
D
Y
S
Price
E1
P1
E
P
S1
S
O
D
Q1
Q
Quantity DEMANDED AND SUPPLIED
X
When Demand is Perfectly Inelastic
Price
Y
S1
D
S
E1
P1
E
P
S1
S
O
D
Q
Quantity DEMANDED AND SUPPLIED
X
When Demand is Perfectly Elastic
S1
Y
S
Price
D
E1
E
P
D
S1
S
O
Q1
Q
Quantity DEMANDED AND SUPPLIED
X
Simultaneous Change in Demand
and Supply
D1
Y
• When
Changes
in
Price
Demand
and
P
Supply
are Equal
S
D
S1
E
E1
D1
S
D
S1
O
Q
Quantity
Q1
X
Evaluation
• Define the equilibrium price ?
• How does increase in demand effects
equilibrium price when supply is constant?
• What will be the change in equilibrium
price, when demand is perfectly elastic
and supply increases ?
• What will be the change in equilibrium
price, when supply is perfectly inelastic
and demand decreases ?
OBJECTIVES
• To know the meaning and components of
AD and AS.
• To understand the concepts of inflationary
and deflationary gap through the diagrams
• To understand the determination of income
and employment through AD /AS and
saving and investment.
• Aggregate demand refers to the sum total
of demand for all the goods and services
in the economy as a whole. It is measured
in terms of total expenditure on the goods
and services in an economy.
COMPONENTS OF AGGREGATE
DEMAND
AD= C+I+G+(X-M).
 C= Household consumption expenditure.
 I=Investment expenditure.
 G=Govt. Expenditure.
 (X-M)=Net export (Export- import).
AGGREGATE SUPPLY
• Aggregate supply refers to the flow of
goods and services in an economy.
• Aggregate supply is the minimum sale
proceeds which the producer must get so
as to continue production at any given
level of employment



AS=C+S.
C=CONSUMPTION.
S=SAVING.
DETERMINATION OF OUTPUT,
INCOME AND EMPLOYMENT.
• : AS/ AD approach Equilibrium level of output, income and
employment id determined at the point where aggregate
demand and aggregate supply are equal to each other.
• Equilibrium : AD -=AS
• Since , AD = C + I and AS = C + S
• Equality between (C + I) and (C + S) simply implies the equality
between saving and investment . so that equilibrium occurs
where,
• AS = AD or S = I
• Accordingly determination of output, income and employment
can be explained in two ways :
• 1.On the basis of equilibrium between aggregate demand and
aggregate supply
• 2.On the basis of equilibrium saving and investment
AS
.AD
AD
AND
AS
E
O
Y
SAV.
AND
INV.
S
E
I
INCOME
AND EMPLOYMENT
I
O
S
Y
INCOME
AND EMPLOYMENT
AS
AD
AND
AS
AD
E
FULL EMPLOYMENT LEVEL
o
Y
INCOME
AND EMPLOYMENT
EQUILIBRIUM AT
UNDEREMPLOYMENT
UNDEREMPLOYMENT EQ..
AD
AND
AS
E
AS
AD
AD1
E1
FULL EMPLOYMENT LEVEL
o
Y1
Y
INCOME
AND EMPLOYMENT
EQUILIBRIUM AT
UNDEREMPLOYMENT
UNDEREMPLOYMENT EQ..
AD
AND
AS
E
AS
AD
AD1
E1
FULL EMPLOYMENT LEVEL
o
Y1
Y
INCOME
AND EMPLOYMENT
INCOME
AND EMPLOYMENT
AS
OVER EMPLOYMENT EQ.
E1
AD
AND
AS
AD1
AD
E
FULL EMPLOYMENT LEVEL
O
Y
INCOME
AND EMPLOYMENT
• FULLEMPLOYMENT LEVEL SHOWS
ABSENCE OF UNVOULENTRY
UNEMPLOYMENT.
• UNDER EMPLOYMENT LEVEL SHOWS
DEFICIENT DEMAND ,ALSO CALLED
DEFLATIONARY GAP.
• OVER EMPLOYMENT LEVEL SHOWS
EXCESS DEMAND, ALSO CALLED
INFLATIONARY GAP .
Evaluation
• Define aggregate demand ?
• What do you mean by aggregate supply ?
• What are the components of aggregate
demand?
• Explain the full employment level equilibrium of
out put, income and employment.
• Explain the equilibrium of out put, income and
employment through the help of AD/AS and
Saving and investment.