Economics

Economics | 369
ECONOMICS
Introduction: Definition, Microeconomics vs. macroeconomics, scope of economics, meaning of
economic theory, some basic concepts- product, commodity, want, utility, consumption, factors of
production.
Demand: Law of demand, factors determining demand, shifts in demand, demand functions,
deriving demand curves, substitution and income effects, deriving aggregate demands, various
concepts of demand elasticity and measurements, discussion on the method of estimating demand
functions and demand functions and demand forecasting.
Supply: Law of supply and supply function, determination of supply, shifts in supply, elasticity of
supply, market equilibrium.
Economic Theory of Consumer Behavior: reasons for consumption, Principle of diminishing
marginal utility, indifference Curves, Budget Constraint, Utility Maximization and Consumer
Equilibrium.
Consumer Demand: Change in Budget Constraints, Price Consumption Curve, Income
Consumption Curve, Consumer Demand, market Demand, Engel Curve.
Production: Production functions, total, average and marginal products, law of diminishing
marginal physical products, production isoquants, marginal rate of technical substitution (MRTS),
optimal combination of inputs, expansion path, returns to scale, estimation of production function
and estimation of cost function.
Cost: concepts of cost, short-run costs, relation between short-run costs and production, long run
costs, economies and diseconomies of scale, relation between short run and long run costs, cost
function and estimation of cost function.
Markets and Revenue: Meaning of market, different forms of market, concepts of total, average
and marginal revenue, relation between average revenue and marginal revenue curves, relation
between different revenues and elasticity’s of demand, equilibrium of the firm.
Price and Output: Price and output determination under perfect competition, monopoly,
monopolistic competition and oligopoly, profit maximization, price discrimination, plant shut
down decision, barriers to entry.
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CHAPTER 1 PAGE: 378
INTRODUCTION
1. What is Economics? [2020][2017] [2013] [2014] [2012]
 How do you differentiate between Micro Economics and Macro Economics? [2020]
 Describe the major branches of economics.
2. The scope of economics is very large- Is it true? Describe. [2020][2013]
3. Is Economics a science or an-arts? Explain. [2013][2012]
4. The central problem of economics is the allocation of scarce resources for the satisfaction of
unlimited wants’’-Discuss [2017/2013]
Or what do you mean by resource allocation and economic efficiency?
5. Show the differences between positive and normative economics.
Or what is the difference between Positive Economics and Normative Economics?
[2021][2014] [2013]
Or Is economics, positive or normative? [2014]
6. What is the Production Possibility Frontier (PPF) or Production Possibility Curve (PPC)?
[2014][2012][2010]
7. What are the fundamental economic problems? How these problems can be solved?
[2021][2016][2012][2010][2008][2014]
Or Explain the fundamental problems of economic organization? How these problems can be
solved
8. What are the factors of production? Describe. [2020]
9. What is production?
10. Define macroeconomics. What are the major objectives of macroeconomics?
CHAPTER 2 PAGE: 386

DEMAND
1) What is demand? [2017][2008]
2) Define law of demand. Why demand curve is downward sloped? Describe. [2013][2008]
Or State law of demand with diagram. [2013]
Or Draw an individual demand curve from the law of demand. [2017][2020]
3) What is the exception of law demand? Discuss about different exception demand curve.
[2013][2010]
4) Draw a demand curve from a demand schedule. [2013][2010]
5) What is demand function?
6) What is the demand curve? Discuss the factors that affect the demand curve.
7) Determinants / Factors of demand?
Or what are the determinants of demand? Explain. [2021][2017][2016][2014][2010]
8) What do you mean by shift in demand curve? [2014]
9) Shifting factors of demand.
10) What is the difference between shifts in Demand Vs Movement along Demand curve?
11) What is elasticity? What are the methods of demand elasticity? [2014][2010]
12) What are the types of elasticity? Describe. [2014][2010]
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Or describe different cases of elasticity with graphs. [2015]
13) what do you mean by elasticity of demand, explain the terms E= 1, E>1 and E<1 [2020]
14) Point out elasticity along the demand curve.
15) What are the differences between elastic and inelastic demand? [2016]
16) Explain the concept of elasticity of demand. Why does it matter for a businessman to measure
perfect elasticity and perfect inelasticity of demand of a product? [2013]
17) What do you mean by the price elasticity of demand, the income elasticity of demand and the
cross elasticity of demand in measure in general?
18) Explain the determinants of price elasticity of demand of a product? [2020/2017]
19) Describe different types of price elasticity. [2012]
20) What do mean by elasticity of demand? Distinguish between price elasticity, income elasticity
and cross elasticity of demand for a commodity.
21) Prove that the elasticity of demand will not be the same everywhere on a linear demand
curve.
22) What is the cross elasticity of demand? What will be the sign of the cross elasticity of demand
for chicken with respect to the price of beef?
Or Explain why the cross price elasticity of demand is positive for commodities that are
substitutes but negative when commodities are complementary.
23) Distinguish between a change in demand and a change in quantity demanded, mentioning the
cause of each.
24) What is the difference between Demand schedule and demand curve? [2015]
25) What do you mean by contraction and Extension of Demand? [2015]
26) What do you mean by movement and shift in demand? Explain graphically. [2021]
27) What do you mean by elasticity of demand? Graphically explain cross elasticity of demand.
[2021]
CHAPTER 3 PAGE: 412

SUPPLY
1) Describe law of supply. [2015][2010]
2) What is a supply function? What are the factors responsible to change in the quantity of
supply of a product? [2021]
Or what are the determinants of supply? [2015][2013]
3) Why does supply curve slope upward? [2016][2013][2010]
4) With the help of diagrams explain the elasticity of supply.
5) What do you mean by Supply and Exceptional Supply?
6) What are the causes of changes in supply?
7) Determine equilibrium price and quantity using demand supply model.
Or, what do you mean by market equilibrium? How would you determine equilibrium price?
Determine market equilibrium price and output using demand supply framework.
Or what do you mean by market equilibrium? Explain market equilibrium with the help of
demand and supply curve. [2021][2020/2017/2014]
8) The following are the demand and supply functions----
a. d - , s
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Determine equilibrium price and quantity in a perfectly competitive market with
mathematically and graphically.
Determine Ed and ES from above equation.
What will be the effect on the market equilibrium if the government imposes a tax of TK. 4 on
each unit of output?
9) The following are the demand and supply functions: [2020]
Qd=25-5P
Qs= 7+P
i. Determine equilibrium price and Quantity in perfectly competitive market with
ii. Determine Ed and Es from above equation.
iii. What will be the effect on the market equilibrium if the government imposes a tax of TK. 2 on
each unit of the output?
10) Suppose a market consist of three consumers A, B and C. Whose inverse demand functions are
given below:
1) :P= 35-0.5QA
2) :P= 50-0.25QB
3) :P= 40-200QC
(i) Find out the market demand function for the commodity.
If the market supply function is given by Qs = 40+3.5P, Determine the equilibrium price and
quantity.
11) There are 10,000 identical individuals in the market for commodity X, with a demand function
given by Qdx=12-2Px and 1000 identical producers of commodity X, each with a supply
function given by Qsx=20Px.
(a) Find the market demand function and market supply function for commodity X.
(b) Find the market demand schedule and market supply schedule of commodity X and then find
the equilibrium price and quantity.
(c) Plot on the set of axes the market demand curve and market supply curve for commodity X
and show the equilibrium point.
(d) Obtain the equilibrium price and show the mathematically.
12) The following are the demand and supply functions of a manufacturer. Determine equilibrium
price and output:-
Qd = 500 – 2P
Qs = - 200 + 1.5P
i) What will be the impact on the market equilibrium if government imposes a tax of tk 4 on each
unit of the output?
Determine Demand elasticity at Equilibrium price.
13) At the equilibrium point, Demand=Supply.-Explain. [2021]
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CHAPTER 4 PAGE: 422
ECONOMIC THEORY OF CONSUMER BEHAVIOR
Sl Question Year
1) What is utility? 2017
Or What do you mean by Utility?
2) Describe the two measures method of utility 2021/2012
3) Define total utility and Marginal utility. 2010/2008
4) Define Utility and Marginal Utility.
5) Basic assumption of MARSI-IALLIAN utility analysis.
6) Describe the relationship between Total Utility and Marginal Utility. 2016
7) Describe the Law of Diminishing Marginal Utility. 2020/2017
Or explain the Law of Diminishing Marginal Utility using necessary 2015/2012
diagrams. 2010
8) Difference between Total Utility and Marginal Utility
9) What is Indifference Curve (IC)? 2021
What are properties of IC?
Or Define indifference curve? Write down the properties of indifference
curve?
10) What is the Marginal Rate of Substitution (MRSxy) 2020
11) What is Budget Line? Draw a Budget Line from an imaginary equation. 2020
Draw a Budget Line from the equation 500 = 10X + 5Y 2021
12) Describe the Consumer’s Equilibrium.
Or, Show and describe the optimal combination of two goods so that
consumer can be able to optimize the utility.
Or Identify and describe the least cost combination of two factors.
13) Derive Demand Curve from PPC.
Or, With the help of indifference curve, derive demand curve for a normal
commodity.
14) Deriving Engel Curve From ICC. 2021
Or Define Engle Curve.
Or Draw an Engel curve from ICC.
15) What is the difference between cardinal and ordinal utility 2017/2015
16) Define indifference map.
17) Ex lain consumer’s behavior. 2008
18) What is meant by budget constraint? 2020
19) How does a consumer achieve maximum satisfaction by minimum expenditure? 2021
Illustrate with the help of indifference curve.
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CHAPTER 5 PAGE: 435
CONSUMER DEMAND
1. Explain the concept of consumer surplus. How did Marshall measure it? [2017/2015]
2. What do you mean by consumer sur lus? How can you measure consumer’s sur lus by using
indifference curve?
3. Ex lain the kuznet’s uzzle about consum tion. [2015]
4. Describe income consumption curve and income effect.
5. What is a consumption function? Derive a saving function from the consumption function,
C=a+bY
Or what do you mean by consumption function? Show the relationship between saving
function and consumption function. [2014/2015]
6. Show that the sum of APC and APS is equal to one.
7. Distinguish between autonomous investment and induced investment. Explain the factors that
determine the level of investment in the economy.
8. What is the difference between short-run and long-run consumption function?
Or Distinguish between short run consumption function & long run consumption function?
9. Explain and demonstrate the relationship between MPC & APC.
Or what do you mean by APC and MPC? [2015]
10.
 Prove that MPC + MPS = 1
 Prove that MPC + MPS = 1
 Explain why it must always be true that MPC+MPS=1
Explain and prove that MPC + MPS = 1
11. What are the differences between MPC and MPS?
12. What is marginal propensity to consume (MPC) [2012]
CHAPTER- 6 PAGE: 443

PRODUCTION
1. What is return of scale? Types of return of scale [2017/2016/2013]
2. Define total product average product and marginal product. [2013][2020]
3. Define production function with input output relationship.
[2008/2011/2012/2013/2014/2017]
4. What is opportunity cost? [2021]
5. How is the shape of production possibilities frontier connected with the law of increasing
opportunity cost? [2021]
6. Explain the law of returns to scale in the long- run production function. Why do we get
decreasing returns to scale? [2021][2016]
7. Explain the law of diminishing marginal returns. [2021][2016]
8. Or state the “law of diminishing returns” with exam le. [2014][2013]
9. What do you mean Iso-quant?
10. What are the Properties of Iso-quants?
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11. What is the difference between Marginal Rate of Substitution (MRSxy) and Marginal Rate of
Technical Substitution (MRTSLK)? Explain.
12. What is iso-cost lines? Draw aiso-cost line from the equation 100=2L+3K.
13. Show producers equilibrium using Iso-cost and Iso quants. [2018]
14. Show the optimal combination of input where producers maximizes their profit
15. Determine and describe the least cost combination of two s so that producer can be able to
minimize the cost.
16. What is marginal rate of Technical substitution (MRTS)?
17. Describe diminishing Marginal Rate of Technical Substitution.
18. What do you mean by Isoquant? Briefly write down the common characteristics of Isoquant.
Or Define isoquants and state its properties. [2020]
19. What is production possibility frontier (PPF)?
20. Define economic of scale.
21. What are the features of production function? [2014]
22. Explain the law of variable proportion. What is the optimum stage of production and why?
[2014]
23. Describe three stages of the law of variable proportion in production function. [2016]
24. Discuss the differences between fixed factors and variable factors of production. [2016]
25. How technology change can affect the production function? [2016][2010]
26. Or what will happen in production function if technology is developed in a significant manner?
[2013]
27. Define short run and long run production function? [2014]
28. What is cost least rules? In Which situation a producer will shut down its production under a
perfect competitive market? [2010]
CHAPTER 7 PAGE: 460

COST
1. “No cost is fixed in the long-run.” – Explain the statement. [2020]
Or, Explain why in long run all costs are variable. [2013]
2. What is the difference between Economics of Scale and Diseconomies of scale?
3. Describe the relationship between Total, Average and Marginal Cost. [2013]
Or, Describe about total cost, variable cost and marginal haziest. [2010]
4. What are the difference between Marginal cost and Average Cost
5. What is short run average cost? [2014]
6. Why is SAC (Short run average cost) curve U-shaped? [2017/2016/2014]
7. Explain why MC cuts AC and AVC at their minimum values?
8. Why does average curve and marginal revenue curve fall on the same line?
9. Differentiate between fixed cost and variable cost. [2021]
10. Why Ac curve and MC curve tend to be U shaped?
11. Explain profit maximum conditions with the help of MR and MC curve. [2014]
12. How is the shape of production possibilities frontier connected with the law of increasing
opportunity cost?
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13. Define opportunity cost. [2017/2016]
14. Describe implicit and opportunity cost. [2013]
15. What is Explicit and implicit cost? [2016]
16. Define fixed cost, variable cost and marginal cost.
17. Explain AFC, AVC and ATC with curve. [2016]
18. Why total cost falls as you increase the number of production. [2010]
19. Explain the relationship between TFC, TVC and TC. [2021]
CHAPTER 8 PAGE: 470

MARKETS AND REVENUE
1. What is meant by market? [2010/2011/2012/2014/2015/2020]
2. What are the different forms of market? [2020]
Or Describe the Classification of Market.
Or, what are the different forms of market? [2014]
Or discuss different types of market. [2013][2012][2010]
Or classify market in term of competition. [2015]
3. Compare among monopolistic competition, oligopoly, duopoly, monopoly and monophony
market.
4. Write down the characteristics of a Market [2011/2013/2015]
Or Properties or characteristics of perfectly competitive firm
Or what are the characteristics of a perfectly competitive market? [2015][2012]
Or Define market. What are the different features of a perfectly competitive market?
5. What do you mean by perfectly competitive market and Profit Maximization? [2009]
6. Define Monopoly Market with their characteristics.
7. Distinguish between perfect competition and monopoly market. [2010/2011/2014]
8. Why demand curve of a perfectly competitive firm is horizontal?
Or, A Competitive firm faces a completely horizontal demand curve.
Or, How the shape is different from that of monopolistic market?
9. What is equilibrium of the firm?
10. Explain the conditions for the equilibrium of a firm.
11. Using Total revenue and Total cost approach, explain how firm maximizes profit to attain
equilibrium.
12. In what levels of production, a perfectly competitive firms stop its production in the short-
run? Describe using diagram.
Or, A Com etitive firm’s shutdown oint where rice cover just variable cost.
13. Determine Price and output under a monopoly.
14. Differentiate between Monopoly and Perfect Competition.
Or what are differences between perfect competitive market and monopoly market
function? [2014][2010]
15. Determine Price and Quantity under Monopolistic Competition.
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17. Why demand curve of a perfect competitive firm is parallel to the horizontal axis? Discuss
your rational.
18. Define Average revenue product and marginal revenue cost.
19. Why is a perfectly competitive firm a price taker?
20. “Marginal revenue curve of a firm can`t be above its average revenue curve”--- Explain. [2021]
21. Is it possible to enjoy supernormal profit by a perfectly competitive firm in the long run.
22. How is the shape of the demand curve of a firm in perfectly competitive market situation?
How the shape is differ from monopolistic market?
23. Show the long run market equilibrium of a firm under monopolistic market condition.
24. Explain short run equilibrium of a firm in perfectly? [2015]
25. How does the firm reach in equilibrium position in competitive market in the short run?
[2010][2021]
26. What are differences between perfect competition and monopolistic competition?
27. Briefly explain the marginal productivity theory of wages with criticism.
28. What is market equilibrium? Explain market equilibrium with the help of demand and supply
curve. [2017]
29. Define market Equilibrium. Discuss the impact of change in demand on market Equilibrium.
[2015]
30. What is imperfect competition?
31. Describe source of market imperfection.
32. Describe Oligopoly and it`s characteristics.
33. Definition of Duopoly.
34. What do you mean by monopoly? And its characteristics. [2008]
CHAPTER 09 PAGE: 494

PRICE AND OUTPUT
1) Determine price and quantity under monopolistic competition.
2) Price and output determination under perfect competition.
3) Explain the process of price and output determination under a monopoly. [2008]
4) How you can maximize the profit in the competitive market.
5) Why is a perfectly competitive firm a price taker?
6) Define price discrimination. Explain the condition under which monopolistic price
discrimination is both possible and profitable.
Or Define price discrimination is both possible and profitable.
7) What Are Barriers to Entry?
8) Types of Barriers to Entry
9) Determining the Shutdown Point of a Business
10) What do you mean by factor pricing? [2021]
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CHAPTER 1
INTRODUCTION
1. What is Economics? [2013] [2017] [2014] [2012]
 How do you differentiate between Micro Economics and Macro Economics?
 Describe the major branches of economics.
Economics (অর্থনীতি)
Economics comes from the Greek word “Okonomia”. It means household management
Adam Smith is the father of economics. He says economics is the wealth of nations.
----An economist L.Robins says “Economics is a science which studies human behavior as a
relationship between ends and scare means which have a alternative uses.
One of the key word of economics is co-ordination. It refers how the three central problems facing
any economics are solved. The roblems are……
 What and how to produce (তি এবং তিভাবব উত্পাদন)
 How to produce (তিভাবব উত্পাদন)
 Whom to produce. (িার জনয উত্পাদন)
 There are two types of economics, they are microeconomics and macroeconomics.
Microeconomics:
Microeconomics is the study of the decisions of individual people and business and the
introduction of those inter action.
Macroeconomics:
Macroeconomics is the study of the national economy and the global economy.
There are several differences between microeconomics and macroeconomics, those are:
Subjects Microeconomics Macroeconomics
1. Nature Microeconomics focuses on the Macroeconomics is a vast field, which
market’s su ly and demand concentrates on two major areas,
factors and determines the increasing economic growth and
economic price levels. changes in the national income.
2. Focus It facilitates decision making for It focuses on unemployment rates,
smaller business sectors. GDP and price indices, of larger
industries and entire economics.
3.Strategies It has no strategies to maintain. It maintains two strategies: Fiscal
policy…Monetary policy.
4. Demand It deals with individual and market It discusses about the aggregate
and supply demand and supply and the Demand and Supply.
equilibrium price etc.
5. Founder Founder of microeconomics is Founder of Macroeconomics is John
Adam Smith. Maynard Keynes.
6. Meaning Micro means small. Macro means large.
7. Area Through it we get the picture of Through it we get the overall picture
smaller economic condition of the of the nation economy.
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country.
8.Examples If Zeeba is a consumer, she will If Zeeba is the minister of trade and
compare prices and choose the commerce, then she will compare the
cheapest product giving her the prices and choose the cheapest
maximum utility (satisfaction). It is
product with maximum quality to
microeconomics. control the economic situation of the
country. It is macroeconomics.
Indeed, both economics are important subject because of the fact of scarcity and the desire for the
efficiency.
2. The scope of economics is very large- Is it true? Describe. [2013]

The scope of economics means the area of the economics study. It includes:
1. The subject matter of economics: Economics studies man’s life and work, not the whole, but
only one aspect of it e.g it tells us how a man utilizes his limited resources (money & time,
labor, raw material) in order to fulfill his unlimited wants.
 Economic Activity: a farmer tilling his field, a worker is working in a factory, a doctor
attending the patients & so on, these activities are called Economic Activities.
2. Economics is a Social Science: In society, a man produces what he does not consume &
consumes what he does not produce. So he has to buy a product which is not produced by him
& sell his excess production. This process is called an Exchange.
Things produced in factories with the help of labor, land, capital, & entrepreneur. They all get a
reward in the form of income (e.g. wages, rent, interest, & profit). Economics studies how these
incomes are determined. This process is called Distribution:
 Macro Economics – When we study how the level of country’s income & em loyment is
determined, at an aggregated level.
 Micro-Economic – When economics is studied at individual level i.e. consumer’s behavior,
roducer’s behavior, & rice theory….
3. Economics, a Science or an Art? A science is a systematized body of knowledge. Economics
also many laws and principles have been discovered & hence it is treated as a science.
Economics also guides the people to achieve aims, e.g. Removal poverty, so it is an art.
4. Economics whether positive or normative science: A positive science explains why and
how of things and normative science explains the right or wrong of the things. Economics is
both, it not only tells us why certain things happen, it also says whether it is right or wrong.
3. Is Economics a science or an-arts? Explain. [2013][2012]

Under this, we generally discuss whether Economics is science or art or both and if it is a science
whether it is a positive science or a normative science or both. Often a question arises - whether
Economics is a science or an art or both.
(a) Economics is as science:
A subject is considered science if
 It is a systematized body of knowledge which studies the relationship between cause and
effect.
 It is capable of measurement.
 It has its own methodological apparatus.
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 It should have the ability to forecast.
If we analyze Economics as a science, we can find that it has all the features of science.
 Economics studies cause and effect relationship between economic phenomena. For
example; the law of demand which explains inverse relationship between price and
commodity demanded means if price falls, demand expands and vice versa. So here price is
the cause and demand for a commodity is the effect.
 Economics is capable of being measured in terms of money. It has its own methods of study
which are inductive and deductive.
 It forecasts the future market condition with the help of various statistical and non-statistical
data or tools. Therefore, there are concepts like demand forecasting in economics.
(b) Economics is as an art:
Art is nothing but practice of knowledge. Whereas science teaches us to know, art teaches us to
do. Unlike science which is theoretical, art is practical.
If we analyze Economics, we find that it has the features of an art too. Because it provides practical
solutions to various economic problems regarding consumption, production, distribution and
public finance etc. It helps in solving various economic problems which we face in our daily life.
Thus, Economics is both a science and an art. It is science in its methodology and art in its
application. Study of unemployment problem is science but framing suitable policies for reducing
the extent of unemployment is an art.
4. The central problem of economics is the allocation of scarce resources for the
satisfaction of unlimited wants’’-Discuss. [2017/2013]
Scarcity is the state of insufficiency where people are incompetent to achieve their needs
sufficiently. We can say scarcity arises when there are fewer resources in comparison to unlimited
human wants and needs. Some of these unlimited wants may be satisfied but soon new wants get
to your feet. This is not possible to produce goods and services which can satisfy all wants of
people. Thus scarcity is the term which elaborates on the connection between limited resources
and unlimited wants and the problems arising as a result.
Economic problems arise due to the scare goods which can be used to fulfill many needs of the
users.
For example: a piece of land has many uses like it can be used to construct a building or to make
a beautiful park or to raise agricultural crops. So, it is vital to realize the importance of how
limited resources can be used otherwise to fulfill some wants of people to get maximum
satisfaction as possible.
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So the two basic elements of economics are diversity of human wants and scarcity of resources.
The scarcity of resources creates the problems of allocation of resources and elimination of waste.
Resources are to be allocated in a way they are best used to attain maximum satisfaction. This can
happen only when we arrange a list of our wants on the basis of scale of preferences. In the scale
of preference necessaries are fulfilled first, then comforts and luxuries are at the end.
The second problem is the elimination of waste. In the countries where resources are not fully
utilized by the government and they are lying indolent, will mean the maximum satisfaction is not
being imitated from the limited available resources which are being wasted for nothing. The
resources are not only scared but can be used alternatively after deciding between the uses. We
all have to decide to make choices between alternative uses of the resources we have. Even the
government in the richest countries distribute their resources in such a way that they can be able
to cradle maximum satisfaction with minimum resources.
5. Show the differences between positive and normative economics.

Positive economics is entirely based on facts which means it provides explanation for topics
and such issues that are related to economy without even judging then while normative
economics is merely based on values and it is inherently subjective which means it does not
just provides explanation for issues and topics concerned with economics but judges them as
well.
Economics is both science and art. And it is not only limited to fact or fiction. It is a combination of
both.
 Positive economics talks about things that “are”. They are facts. They can be verifiable. You
can prove it or disprove it. You can test it. And you can find out whether these statements
mentioned under positive economics are true or untrue.
 But normative economics is fiction. They aren’t facts; rather they are opinions of economists
who tell us what they think. It can be true for some and false for some. And these statements
mentioned under normative economics aren’t verifiable. They can’t be tested either.
Or
Let’s have a look at the Com arison between Positive Economics vs Normative Economics:
The basis of Positive Economics Normative Economics
Comparison Between
Positive Economics vs
Normative Economics
Related to Positive economy relates to Normative economics generally
the causes and effects of an believes in the theory which
economy. It captures the prevails as per the morality or as
consumer or the mass sentiment per the things which need to do.
and the consequences.
Meaning It strongly deals with facts and The Normative Economy deals
data. Thus the facts lead to with the fictional part of the
various opinions and different thought process. It deals with what
judgments. is essential rather than what can be
done from the current scenario.
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Nature The nature of the positive economy The Normative economy deals
is based on data and facts. It is with perceptions and the morally
highly narrative regarding the relevant things which need to
demand and supply situation and happen in a certain situation.
the present trends across the
masses.
Argument The argument which could be The argument would base on
arising is objective as it is well subjective because there is no
backed up by data and relevant question of real data. All the facts
information. are morally fitted as per the
situations.
Testing The statements/ argument under The statement is not possible to
positive economy can be tested with test as the data are not available
the estimated figures and from because those are based on a
there the right or wrong or the different philosophy, moral values,
difference can be found. etc. There is no one who could
compare morality along with the
actual facts and figures.
Caused The facts are required for a reality The opinions are required so as to
by Need check within the economy. provide a moral value to the
Sometimes the desired results may system and the steps which need
move in a different direction and to to be done for better economic
control this we need to take the results.
help of a Positive economy.
Based on Real data, Facts, drivers of demand It is based on moral values,
and supply, the difference in theories of what needs to be done
expectations as well as practical and fictional concepts.
implementations, etc.
6. What is the Production Possibility Frontier (PPF) or Production Possibility Curve

(PPC উৎপাদন সম্ভাবনা বৃত্ত)?
Production possibility curve is a graphical presentation of alternative production possibilities
facing an economy. It is also known as production possibility frontier. As our resources are
limited we have to choose between various goods. A person has to select which product he
produces more and produce less.
Let us assume that there is a given amount of production resources and they remain fixed. We
have constructed the following table showing various production possibilities between wheat and
cloth. If all the given resources are employed for the production of wheat, it is supposed that 15
thousand guintais of wheat are produced. On the other hand, if all the resources are devoted to
the production of cloth, 5 thousand meter of cloth are made. But these are the two extreme
production possibilities. In between these two, there will be many other production possibilities
such as B,C,D and E.
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With production possibility B, the economy can produce 14 thousand quintals of wheat and meter
of cloth. With C, the economy can have 12 thousand and 2 thousand and so on. As we move from A
towards F, We draw away some resources from the production of wheat and devote them to the
production of cloth. In other words, we give up some units of wheat in order to have some more
units of cloth. As we move on from alternative A to B, we sacrifice one thousand motor of cloth.
Again our movement from alternative B to C, involves the sacrifice of two thousand quintal of
wheat for the sake of one thousand more motors of cloths.
Schedule of possible production:-
Production Possibility Cloth(in thousand meters) Wheat (in thousand meters)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
The table shows our sacrifice of wheat goes on increasing as we move from C, towards E. In a fully
employed economy more of one good can be obtained only by cutting down the production of
another good.
7. What are the fundamental economic problems? How these problems can be solved?
[2016][2012][2010][2008] [2014]
Or Explain the fundamental problems of economic organization? How these problems
can be solved.
The fundamental economic problem is related to the issue of scarcity, there are three types of
economic problem, and those are:
a) What to produce?
Everything in life is scarce. So, the basic economic problem is what we can produce using
limited resources with proper utilization.
b) How to produce?
Most goods can be produced in more than one ways using resources in different
combinations. Which resources and technical process will be employed to produce these goods
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and services? So the problem after determining what to produce is by what methods are these
commodities produce?
c) For whom to produce?
How is the society to allocate the goods and services produced when the supply is never
able to satisfy total demand? Who is to receive what share of the economic goods and services? So
the questions are for whom shall the goods and services be produced?
At last, we can say that, all fundamental problems are created because of limited resources and
infinite demands. If we can make proper combination of those, fundamental problems can be
solved.
Solution of fundamental problems: Limited resources and infinite demands create the main
economic problem. To solve the economic problem, human being takes four solution, those are:
a) Production:
Men create additional utility using natural resources by technical knowledge and
intelligence is called production. In human life want is limited but to fulfill want, resources are
scarce. By using scare resources essential product have to produce.
b) Distribution:
How or by which policy produced goods will be distributed among different people in
society? Some factors of production, such land, labor, capital and organization and how the
distributed parts of the factor of production like rent, wage, interest and profit will be give are
another problem.
c) Exchange:
Exchange means inter change of goods and services with in human society by money. How
goods and services will be distributed among different peoples? It also includes how the excessive
part of goods and services will distributed, whether in the country or import in other country?
d) Consumption:
The main purpose of human workforce is consumption. Creating utility means production,
consumption means the completion of utility by using. With limited resources how we can get
highest satisfaction, human have been trying always to do that.
The four solution of economic problem are interrelated and dependent to each other. Without
other single one has no importance.
8. What are the factors of production you know? Describe.

To produce a good or provide a service, resources must be used which is known as factors of
production. They are natural, human and capital resources used by entrepreneurs to make goods
and provide services.
Land
Capital
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Entrepreneurship is called fourth factor of production. So, there are four factors of production i.e,
land, labor, capital and entrepreneurship.
Land: - Land stands for natural resources or gifts of nature such as oil, iron ore, forests
and water. There is sometimes confusion here. When natural resources such as wheat are turned
into flour, the flour is a good not natural resource. It is used to bake bread, then it is intermediate
good and bread is final good.
Labor:- Labor refers to human resources. It reflects the abilities of people and includes
people health, strength, education, motivation and skills. The labor force is the number of people
in an economy willing and able to work.
Capital: - It refers to man made things used in production- money, building, tools,
machinery , road etc.
Entrepreneurship:- It is special kind of labor that represents the characteristics of
people who assume the risk of organizing productive resources to produce goods and provide
services. It refers to the management , organization and planning of the other three factor. It is the
ability to oversee entire production process and ability to take risks.
9. What is production?
The processes and methods used to transform tangible inputs (raw materials, semi-finished
goods, subassemblies) and intangible inputs (ideas, information, knowledge) into goods or
services. Resources are used in this process to create an output that is suitable for use or has
exchange value.
10. Define macroeconomics. What are the major objectives of macroeconomics?

Macroeconomics: Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. It focuses on the aggregate changes in the economy such
as unemployment, growth rate, gross domestic product and inflation.
According to Prof. Henderson & Quandt,
“Macroeconomics, which is the study of broad aggregates such as total employment and
national income”
Major objectives of macroeconomics:

1. Accelerates the economic growth rate
2. Unemployment at its natural rate
3. Steady growth in real GNP
4. Low and predictable inflation price level stability
5. Stable exchange rate
6. Balanced international trade
7. Interest rate stability
8. A balance of payment surplus.
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CHAPTER 2
DEMAND
1. What is demand? [2017][2008]
Generally, demand means desire or want of something. But in economics demand has three
characteristics. Those are:
a) Desire for commodities,
b) Enough money and
c) Willingness to purchase.
The combinations of those characteristics are called demand.
According to R. F. Benham-
“Demand for anything at a given rice, is the amount of it which will be bought per unit of time at
that rice.”
In the words of pagan Thomas-
“ uantity demanded is the amount of a good that consumers wish to buy at a articular rice.”
From the above definition we can say that demand is a term used in economics to describe the
desire of a consumer, or a group of consumers, to purchase a particular good or service at a
certain price.
2. Define law of demand. Why demand curve is downward sloped? Describe.

[2013][2008]
Or State law of demand with diagram. [2013]
Or Draw an individual demand curve from the law of demand. [2017]
The law of demand states quantity demanded for a good rises as the price falls. In other words,
the quantity demanded and price is inversely related.
In Marshall's words-
“The amount demanded increases with a fall in price and diminishes with a rise in prices."
According to Dominick Salvatore-
“Law of demand is the inverse relationshi between rice and quantity reflected in the negative
slope of a demand curve."
Demand is a function of price varies with price and can be expressed as D = F (P). Here D is
demand and P is price.
Finally, we can conclude that the law of demand states that other things remaining constant, price
increases quantity demand decreases, price decreases quantity demand increases.
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3. What is the exception of law demand? Discuss about different exception demand
curve. [2013][2010]
Normally the law of demand applies to a large number of goods. However, there are some
circumstances when the law of demand does not apply which are known as Exceptions to the law
of demand.
Some of the important exceptions to the law of demand are as follows:-
1. Expected change in the price of goods
Quantity demanded of a product increases if it is expected that there will be a rise in the price of
the product. Consumers postpone their purchases when fall in price is expected.
2. Type of Goods
Inferior Goods: Generally low-quality goods are consumed by the poorer sections of society.
Inferior goods are consumed by poor consumers for their survival. Consumers move to better
quality goods with an increase in income.
Also, if the income of consumers falls they might shift from good quality products to inferior
goods or may reduce the demand for such goods.
Giffen Goods: Giffen goods are cheaper varieties of inferior goods. This category covers cheaper
varieties like bajra, low priced rice, low priced bread, cheaper vegetable like potatoes. Due to the
lack of substitute consumers consume these goods even at a high price.
Ignorance: Good quality commodities are costly and expensive is a myth among consumer. It also
happens when consumers are unable to judge the quality of the products.
Conspicuous Consumption (Goods having Prestige value): Consumers are attracted by
distinct and costly goods. These are treated as a sign of prestige. The consumer buys more of such
product if the price of such product is high.
For example – Diamond. Only rich consumers can buy a diamond. The price of such product is
beyond the capacity of the normal consumer. If the diamond is very costly (expensive) it will be
considered as more prestigious.
3. Change in Fashion
Change in fashion and taste affects the demand for a commodity. When he considers that goods
are out of fashion, the law of demand becomes ineffective. Once the commodity goes out of
fashion, consumers resist buying more even if the price falls.
For example, Consumers do not buy old fashioned clothes even if they are available at low prices
or discounted price. Consumers prefer current fashionable clothes even if they are available at
high prices.
4. Complementary Goods
Complementary goods are another exception to the law of demand. For Example: – Demand of
DVD layer increases due to falling in its rices; demand for DVD’s will also increase irrespective
of its high price.
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4. Draw a demand curve from a demand schedule. [2013][2010]
The demand curve is based on the demand schedule. The demand schedule shows exactly how
many units of a good or service will be purchased at various price points.
For example, below is the demand schedule for high-quality organic bread:
It is important to note that as the price decreases, the quantity demanded increases. The
relationship follows the law of demand. Intuitively, if the price for a good or service is lower, there
is a higher demand for it.
From the demand schedule above, the graph can be created:
Through the demand curve, the relationship between price and quantity demanded is clearly
illustrated. As the price for notebooks decreases, the demand for notebooks increases.
5. What is demand function?

Demand function a behavioral relationship between quantity consumed and a person's maximum
willingness to pay for incremental increases in quantity. It is usually an inverse relationship
where at higher or lower prices, less or more quantity is consumed. Other factors which influence
willingness to pay are income, tastes and preferences, and price of substitutes.
Demand function is a relationship between a dependent variable and various independent
variables. Like as-
Qd = f (P, I, T, H, Ms, Pr, S......)
Here,
Qd = Quantity demand
P = Price
I = Income
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T = Taste
H = Habit
Ms = Market size
Pr = Price of related goods
S = Social factors
So, demand function shows the relationship between quantity demand and other factors that
affected quantity demand.
6. What is the demand curve? Discuss the factors that affect the demand curve.
In economics the demand curve is the graph depicting the relationship between the price of a
certain commodity and the amount of it that consumers are willing and able to purchase at that
given price. It is a graphic representation of a demand schedule. The demand curve for all
consumers’ together follows from the demand curve is very individual consumer: the individual
demand at each price are added together.
Demand curve are used to eliminate behaviors in competitive markets and are often combined
with supply curves to estimate the equilibrium price and the equilibrium quantity of the market.
In a monopolistic market, the demand curve facing a monopolist is simply the market demand
curve.
Factors that affect the demand curve

 Tastes and preference of consumer: Due to taste and preference the demand for a
commodity changes. For example—demand for cloths has come down for the trouser and
cloth.
 Income of the consumer: When the customers income increase more will be demanded.
 Price of substitutes: Some of the goods can be substituted for other goods. For example—tea
and coffee are substitutes while price of coffee increase, the price of tea remains the same. So
the demand for tea then increase and demand for coffee decreases. The demand for
substitutes moves in the opposite direction.
 Number of consumers: Size of population is an important determinant of demand. The
larger the population the more the demand when number for a consumer increase, there will
be a greater demand for goods.
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 Distribution of income: Distribution of income affects the consumption pattern for various
good. If the govt. attempts redistribution of income to make it equitable the demand for
luxuries will decline and the demand for necessity of life will increase.
 State of business: During boom, demand will expand and during depression demand will
contract.
 Consumer Innovativeness: When the price of wheat flour or price of elasticity falls, the
consumer identifies new uses for the product. It creates new demand for the product.
7. Determinants / Factors of demand?

Or what are the determinants of demand? Explain. [2017][2016][2014][2010]
 Price of considerable goods
 Individual income.
 The price of relative goods
 Price of substitute goods.
 Price of complementary goods
 Tests and preference
 Expectations
 Taxes on and subsidies to consumers
 Advertisement.
8. What do you mean by shift in demand curve? [2014]

A shift in the demand curve is when a determinant of demand other than price changes. It occurs
when demand for goods and services changes even though the price didn't.
Increases in demand are shown by a shift to the right in the demand curve. This could be caused
by a number of factors, including a rise in income, a rise in the price of a substitute or a fall in the
price of a complement.
Demand can decrease and cause a shift to the left of the demand curve for a number of reasons,
including a fall in income, assuming a good is a normal good, a fall in the price of a substitute and a
rise in the price of a complement.
Various Reasons for Shift in Demand Curve:

i. Change in price of substitute goods;
ii. Change in price of complementary goods;
iii. Change in income of consumers;
iv. Change in tastes and preferences;
v. Expectation of change in price in future;
vi. Change in population;
vii. Change in distribution of income;
viii. Change in season and weather.
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5. Shifting factors of demand.
 Individual income
 The prices of relative goods
 Price of substitute goods
 Price of complementary goods.
 Test and preference
 Expectations
 Taxes on and subsidies to consumers
 Advertisement.
9. What is the difference between shift in Demand Vs Movement along Demand curve?
2011
Movement alone demand curve
Movement alone demand curve refers changing quantity demand due to change in price but other
factors ore constant.
Shift in demand
Shift in demand means change in demand due to change in various factors but price are constant
The differences between change in quantity demand and change in demand is:
Subject Movement alone demand curve Shift in demand
Change in quantity means movement Change in demand curve
Means
alone demand curve. means shift in demand.
Change in quantity demand refers Change in demand refers
movement alone demand curve due to shift in demand due to
Change
changing price but other factors are change in factors but price
constant. ore constant.
Graphical
presentation a
b DD1 DD DD2
Types It has two parts- a) extension of demand b) It has two parts- a) increase
contraction of demand in demand b) decrease in
demand
Analysis In the above graph movement of demand In the above graph the shift
from b to a is called contraction and b to c is in demand from bb to bbl is
called extension of demand. called increase in demand
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and from bb to bb2 is called
decrease in demand.
Price In movement alone demand curve the price But in shift in demand the
changes. price remain same.
Other things Other things like income, taste and habit are Like In income, But in it the
remain unchanged. other things are remain
changing.
Finally, we can say both movement alone demand and shift in demand helps a business to
calculate the possible ways of production.
10. What is elasticity? What are the methods of demand elasticity? 2014, 2010
Elasticity
Elasticity is a measure of a variable's sensitivity to a change in another variable.
In business and economics, elasticity refers the degree to which individuals, consumers or
producers change their demand or the amount supplied in response to price or income changes. It
is predominantly used to assess the change in consumer demand as a result of a change in a good
or service's price.
Methods of demand elasticity

There are four methods of measuring elasticity of demand. They are the percentage method, point
method, arc method and expenditure method.
a) The Percentage Method:
The price elasticity of demand is measured by its coefficient E p. This coefficient Ep measures the
percentage change in the quantity of a commodity demanded resulting from a given percentage
change in its price: Thus
Where q refers to quantity demanded, to rice and ∆ to change. If Ep> 1, demand is elastic. If Ep <
1, demand is inelastic, it Ep = 1 demand is unitary elastic.
b) The Point Method:

Prof. Marshall devised a geometrical method for measuring elasticity at a point on the demand
curve. Let RS be a straight line demand curve in Figure 11.2. If the price falls from PB(=OA) to
MD(=OC). the quantity demanded increases from OB to OD. Elasticity at point P on the RS demand
curve according to the formula is: Ep ∆q/∆p x p/q
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Where ∆ q re resents changes in quantity demanded, ∆ changes in rice level while and q are
initial price and quantity levels.
From Figure 11.2
∆ q BD M
∆ P
p = PB
q = OB
c) The Arc Method:
We have studied the measurement of elasticity at a point on a demand curve. But when elasticity
is measured between two points on the same demand curve, it is known as arc elasticity. In the
words of Prof. Baumol, “Arc elasticity is a measure of the average res onsiveness to rice change
exhibited by a demand curve over some finite stretch of the curve.”
Any two points on a demand curve make an arc. The area between P and M on the DD curve in
Figure 11.4 is an arc which measures elasticity over a certain range of price and quantities. On any
two points of a demand curve the elasticity coefficients are likely to be different depending upon
the method of computation.
d) The Total Outlay Method:

Marshall evolved the total outlay, total revenue or total expenditure method as a measure of
elasticity. By comparing the total expenditure of a purchaser both before and after the change in
price, it can be known whether his demand for a good is elastic, unity or less elastic. Total outlay is
price multiplied by the quantity of a good purchased: Total Outlay = Price x Quantity Demanded.
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11. What are the types of elasticity? Describe. 2014, 2010
There are various types of elasticity. They are----
1) Price elasticity of demand:-
Measures the responsiveness of quantity demanded by changes in the price of good.
2) Income elasticity of demand:-
Measures the responsiveness of quantity demanded by changes in consumer incomes.
3) Cross elasticity of demand:-
Measures the responsiveness of quantity demanded by changes in price of another good.
12. What do you mean by elasticity of demand, explain the terms E= 1, E>1 and E<1.
(2016)
Price elasticity of demand is a measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price. Price elasticity of demand is a term in
economics often used when discussing price sensitivity. The formula for calculating price
elasticity of demand is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
E>1:
I this case, the quantity demanded is relatively elastic, meaning that a price change will cause an
even larger change in quantity demanded. the case of Ed= referred to as perfectly clastic. In this
theoretical case, the demand curve would be horizontal. for products having a high price elasticity
of demand, a price increase will result in a revenue decrease since the revenue lost from the
resulting decrease in quantity sold is more than the revenue gained from the price increase.
E<1:
In this case, the quantity demanded is relatively inelastic, meaning that a price change will cause
less of a change in quantity demanded. the case of Ed=0 is referred to as perfectly inelastic. in this
theoretical case, the demand curve would be vertical. for products whose quantity demanded is
inelastic , a price increase will result in a revenue gained from the higher price.
E=1:
In this case, the product is said to have unitary, small changes in price do tot affect the total
revenue.
13. Point out elasticity along the demand curve. 2014, 2012, 2009
The first law of demand states that as price increases, less quantity is demanded. This is why the
demand curve slopes down to the right. Because price and quantity move in opposite directions
on the demand curve, the price elasticity of demand is always negative.
The image below shows the price elasticity of demand at different points along a simple linear
demand curve, QD = 8 - P.
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Let's use the equation above, QD = 8 - P, to calculate the price elasticity of demand.
Imagine that the price is at 3, then moves up to 5. What is the elasticity?
At a price of 3, the quantity is 5 (Q = 8 - 3) and at a price of 5, the quantity is 3.
Ep = ((Q2 - Q1) / (Q1)) / ((P2 - P1) / (P1))
Ep = ((3 - 5) / (5)) / ((5 - 3) / 3)
Ep = -0.6
14. What are the differences between elastic and inelastic demand? [2016]
Elastic demand refers to the adverse change in the quantity of a product on account of the minute
changes in the price of that particular product and it denotes how demand and supply respond to
each other due to price, income levels, etc whereas inelastic demand signifies the demand for a
particular product or service that remains constant and remains unaffected with the changes in
price.
BASIS FOR ELASTIC DEMAND INELASTIC DEMAND
COMPARISON
Meaning When a little change in the price of a Inelastic demand refers to a
product results in a substantial change change in the price of a good result
in the quantity demanded, it is known in no or slight change in the
as elastic demand. quantity demanded.
Elasticity More than equal to 1 Less than 1
Quotient
Curve Shallow Steep
Price and Total Move in the opposite direction Move in the same direction
revenue
Goods Comfort and luxury Necessity
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15. Explain the concept of elasticity of demand. Why does it matter for a businessman to
measure perfect elasticity and perfect inelasticity of demand of a product? [2013]
Generally elasticity means the rate of change. In economics, elasticity is the measurement of how
changing one economic variable affects others. There are several factors related to elasticity. For
example, elasticity of demand, supply, income, expenditure, cross etc.
Elasticity of demand:
Elasticity of demand is a major of how changing quantity demand due to change in its price. That
is-
Ed =
According to Prof. A. Marshall-

“The degree of ra idity or slowness with which demand changes with every change in rice is
known as elasticity of demand."
In the words of Lipsey-
"Elasticity of demand is the measure of the responsiveness of the quantity demanded to change in
price."
In mathematical terms, elasticity of demand is-
Ed = = = = = ×
Ed= α, Infinite elasticity/ perfectly elastic demand:

If a little change or on change in price causes large change in quantity demand of a product that is
called infinite elasticity. Example- Gold market.
Imagine a demand schedule:
P Qd
10 100
10 200
From the schedule we get,

∆ d = 200-100 =100
∆P = 10-10 =0
Qd =100
P =10
Putting the value in price elasticity equation,

Ed ∆ d/ ∆P × P/ d
= 100/0 × 10/100
= 10/0
=0
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From the schedule we can draw a demand curve:
10 a b DD
100 200
When price is Tk. 10 demand is 100 unit and the point is a. But when price remains Tk. 10
demand increases to 200 unit and point is b. Adding those points we get DD which is horizontal.
Ed=0, Zero Elasticity/ Perfectly Inelastic Demand:
If price of the product may changes but change of the demand may be unchanged that is called
zero elasticity.
P Qd
10 100
20 100
∆ d = 100-100 =0
∆P = 20-10 =10
Qd =0
P =10
Ed ∆ d/ ∆P × P/ d
= 0/10 × 10/100
= 0/10
=0
DD
20 b
10 a
100
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When price is Tk. 10 demand is 100 unit and the point is a. But when price increases to Tk. 10
demand remains100 unit/same and point is b, adding those points we get DD which is vertical.
16. What do you mean by the price elasticity of demand, the income elasticity of demand
and the cross elasticity of demand in measure in general?
Price elasticity of demand:
Price elasticity of demand is a measure used in economics to show the elasticity of the quantity
demanded for a good or service to a change in its price. It gives the percentage change in quantity
demanded in response to a one percent change in price.
Income elasticity of demand:
In measures the responsiveness of the demand for a good to a change in the income of the people
demanding the good. It is calculated as the ratio of the percentage change in demand to the
percentage change in income. For example—if in response to a 10% increase in income , the
demand for a good increased by 20%, the income elasticity of demand would be 20% / 10% = 2.
Cross price elasticity of demand:
It measures the responsiveness of the demand for a good to a change in the price of another good.
It measures the percentage change in demand for the first good that occurs in response to a
percentage in price of the second good.
17. Explain the determinants of price elasticity of demand of a product? [2013]

The demand/ demand curve/ shift in demand shows the relationship between the demand of a
product and its price. There are certain factors affect the demand/ demand curve/ shift in
demand-
(i) Price of the commodity: Other things remaining constant, price of a certain commodity
increases quantity demand decreases and price decreases quantity demand increases.
(ii) Change in income: If the income of a person increases, the demand of that person will be also
increases and vice versa.
(iii) Change in taste and preference: If in the meantime consumers tastes have undergone a
change or if the commodity has gone out of fashion, more may not be demanded even if the
price falls.
(iv) Change in price of Complementary goods: Goods that are complement can affect the
demand/ demand curve/ shift in demand. For example, if the price of sugar increases, the
price of tea will also be increases.
(v) Change in price of substitute goods: Substitute goods like tea and coffee has positive
relationship like if the price of tea increases the price of coffee will increases.
(vi) Change in market size: The number of potential buyers of a good determines the size of
the market.
(vii) Change in savings: If the willingness of saving increases, the demand will decrease.
(viii) Advertisement: The advertisement of a product influences potential customers.
Finally we can say, demand/ demand curve/ shift in demand can be affected by various factors
which are important for determining the demand.
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18. Describe different types of price elasticity. [2012]
Price elasticity of demand is an economic measure of the change in the quantity demanded or
purchased of a product in relation to its price change.
Expressed mathematically, it is:
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
Types of Price Elasticity of Demand
 Perfectly elastic demand
 Perfectly inelastic demand
 Relatively elastic demand
 Relatively inelastic demand
 Unitary elastic demand
19. What do mean by elasticity of demand? Distinguish between price elasticity, income
elasticity and cross elasticity of demand for a commodity.
Elasticity means the degree of responsiveness of quantity affected by a change in anyone of the
forces behind the demand. There are three measures of demand elasticity.
They are:
a) Price elasticity of demand:
Price elasticity of demand defines the ratio of the percentage change in quantity demand of a
commodity due to a percentage change in price.
According to R. G. Lipsey-
"The price elasticity of demand is the percentage change in quantity demanded divided by the
percentage change in price that brought it about."
Ed =
= ×
Here, Δ Change in quantity demand
ΔP Change in rice
P = Initial price
Q = Initial quantity
Price Quantity demand
10 100
8 120
When the price of a particular commodity is Tk. 10, the demand is 100 units. But when price
decreases to 8, the demand increases Tk. 120.
From the above schedule, we get:
Δ ( 1 - Q) = 120 - 100 = 20
ΔP (P1 - P) = 8 - 10 = -2
P = 10
Q = 100
Putting the value in the equation of price elasticity of demand, we get:
Ed = 20/-2 X 10/100
= |-1| [using absolute value]
=1
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2. Income Elasticity of Demand:
Income elasticity of demand measures the percentage change in quantity demand caused by
percentage change in income.
According to R. G. Lipsey-
"The responsiveness of demand for a commodity to change in income is termed income elasticity
of demand."
Ed =
= ×
Here, Δ Change in quantity demand
ΔY Change in income
Y = Initial income
Q = Initial price
For normal goods income elasticity is positive, but for inferior goods income elasticity is negative.
Example:
(i) Normal goods: We know, if the income of people increases the demand of normal goods
increases. If income decreases the demand also decreases. Imagine a demand schedule:
Income (Y) Quantity Demand (Qd)
100 10
110 20
Here, the income of man increases 100 to 110, the demand of the man also increases 10 to 20
units. Now,
Δ d = (Q1-Q) = 20-10 =10
ΔY = (Y1-Y) = 110-100 =10
Qd = 10
Y = 100
Putting the value in income elasticity equation, we get:
Ey = 10/ 10 × 100/ 10
=10 (Positive)
(ii) Inferior goods:

For inferior goods, the income of buyer increases, the demand of goods decreases and income
decreases demand increases. Imagine a demand schedule:
Income (Y) Quantity Demand (Qd)
100 10
110 5
Here, the income of man increases 100 to 110, the demand of the man decreases 10 to 5 unit.
Now, from the above schedule, we get:
Δ d = (Q1-Q) = 5-10 = -5
ΔY = (Y1-Y) = 110-100 =10
Qd =5
Y = 110
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Ey = -5/ 10 X 110/ 5
= -11(Negative)
At last we can say, if the elasticity is positive the good in normal and if the elasticity is negative
then the good in inferior.
Cross elasticity of demand:
The cross elasticity of demand measures the percentage change in demand for a particular good
caused by a change in another good.
In the words of A. Koutsoyiannis-
“The cross elasticity of demand is defined as the proportionate change in the quantity demanded
of X resulting from a proportionate change in the price of Y."
Ec =
= ×
Implication of Cross Elasticity of Demand:
For substitute goods, cross elasticity is positive, for complementary goods cross elasticity is
negative. Both are discussed below:
(i) Substitute goods:
For substitute goods, if the price of one good increases, the demand of another good also
increases. Imagine a demand schedule of Tea and Coffee:
Px(Tea) Qy(Coffee)
40 20
60 40
ΔPx = (Px1-Px) = 60-40 =20
Δ y = (Qy1-Qy) = 40-20 =20
Qy = 20
Px = 40

Ec = 20/20 X 40/20
= 2 (Positive)
(ii) Complementary goods:
For complementary goods, if the price of one good increases, the demand of another good
decreases. Imagine a demand schedule of Tea and Sugar:
Px(Tea) Qy(Sugar)
40 100
60 50

ΔPx = (Px1-Px) = 60-40 =20
Δ y = (Qy1-Qy) = 50-100 =-50
Qy = 20
Px = 50
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Ec = -50/20 X 40/100
= -1 (Negative)
At last we can conclude that for substitute goods cross elasticity has positive relationship and for
complementary goods cross elasticity has negative relationship.
20. Prove that the elasticity of demand will not be the same everywhere on a linear
demand curve.
There are five types of elasticity of demand, those are:
a) Ed>1, Elastic demand:
If percentage changes in quantity demand changes greater than percentage change in price, then
it is called elastic demand. For example - luxgaries goods.
P Qd
10 100
8 300
Δ d = 300-100 =200
ΔP 8−1 −
Qd =100
P =10
Ed Δ d/ ΔP × P/ d
= 200/-2 X 10/100
= |-10|
= 10
Price
a
10
8 b
100 300 Quantity

When price is Tk. 10 demand is 100 unit and the point is a. But when price decreases to Tk. 8
demand increases to 300 unit and point is b. Adding those points we get DD which is flatter.
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b) Ed<1, Inelastic demand:
If percentage changes in quantity demand changes less than percentage change in price, then it is
called inelastic demand. For example- necessary goods.
P Qd
10 100
8 110
Δ d = 110-100 =10
ΔP = 8-10 =-2
Qd =100
P =10
Ed Δ d/ ΔP X P/ d
= 10/-2 X 10/100
= |-1/2|
= |-0.5|
= 0.5

Price
a
10
8 b
Quantity
100 110
demand increases to 110 unit and point is b. Adding those points we get DD which is stepper.
c) Ed=1, Unit Elasticity:

If percentage change in quantity changes equals to percentage change in price, it is called unit
elasticity. Imagine a demand schedule:
P Qd
10 100
8 120
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Δ d = 120-100 =20
ΔP = 8-10 =-2
Qd = 100
P =10
Ed Δ d/ ΔP X P/ d
= 20/-2 X 10/100
= |-1|
=1
Price
a
10
8
b
Quantity
100 120
demand increases to 120 unit and point is b. Adding those points we get DD which is straight line.
d) Ed= α, Infinite elasticity/ perfectly elastic demand:
If a little change or on change in price causes large change in quantity demand of a product that is
called infinite elasticity. Example - Gold market.
P Qd
10 100
10 200
∆ d = 200-100 =100
∆P = 10-10 =0
Qd =100
P =10
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Ed ∆ d/ ∆P × P/ d
= 100/0 × 10/100
= 10/0
=0
a b
DD
10
100 200
When price is Tk. 10 demand is 100 unit and the point is a. But when price remains Tk. 10
demand increases to 200 unit and point is b. Adding those points we get DD which is horizontal.
e) Ed=0, Zero Elasticity/ Perfectly Inelastic Demand:
If price of the product may changes but change of the demand may be unchanged that is called
zero elasticity.
P Qd
10 100
20 100
∆ d = 100-100 =0
∆P = 20-10 =10
Qd =0
P =10
Ed ∆ d/ ∆P × P/ d
= 0/10 × 10/100
= 0/10
=0
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DD
20 a
10 b
100
When price is Tk. 10 demand is 100 unit and the point is a. But when price increases to Tk. 10
demand remains100 unit/same and point is b, adding those points we get DD which is vertical.
21. What is the cross elasticity of demand? What will be the sign of the cross elasticity
of demand for chicken with respect to the price of beef?
Cross elasticity of demand: The cross elasticity of demand measures the percentage change in
demand for a particular good caused by a change in another good.
In the words of A. Koutsoyiannis –
“The cross elasticity of demand is defined as the ro ortionate change in the quantity demanded
of X resulting from a proportionate change in the rice of Y.”
Ec =
=
Implication of Cross Elasticity of demand:
For substitute goods, cross elasticity is positive, for complementary goods cross elasticity is
negative. Chicken and Beef are substitute goods, the relationship between chicken and beef is
discussed below:
For substitute goods, if the price of one good increases, the demand of another good also
increases. Imagine a demand schedule of Chicken and Beef:
Px (Chicken) Qy (Beef)
40 20
60 40
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Now we can draw a demand curve from the schedule:
Quantity of Beef
60
a
40
b
Price of Chicken
20 40
Here, we can see that when the price of Chicken is Tk. 40, the demand of Beef is 20 units. When
the price of Chicken increases to Tk. 60, the demand of Beef also increases 40 units. From the
above schedule, we get:
= 60 – 40 = 20
∆ = 40 – 20 = 20
= 20
= 40
Ec = = × = 2 (Positive)
22. Distinguish between a change in demand and a change in quantity demanded,

mentioning the cause of each. [2011]
Movement alone demand curve/ change in quantity demand:
Movement alone demand curve refers changing quantity demand due to change in price but other
factors ore constant.
Shift in demand/ change in demand:
Shift in demand means change in demand due to change in various factors but price are constant
Subject Change in quantity demand Change in demand
1. Means Change in quantity means movement Change in demand curve
alone demand curve. means shift in demand.
2. Change Change in quantity demand refers movement Change in demand refers shift
alone demand curve due to changing price in demand due to change in
but other factors are constant. factors but price ore constant.
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3.Graphical
presentation
a
DD1 DD DD2
4.Types It has two parts- a) extension of demand b) It has two parts- a) increase in
contraction of demand demand b) decrease in
demand
5.Analysis In the above graph movement of demand In the above graph the shift in
from b to a is called contraction and b to c is demand from bb to bbl is
called extension of demand. called increase in demand and
from bb to bb2 is called
decrease in demand.
6.Price In movement alone demand curve the price But in shift in demand the
changes. price remain same.
7.Other things Other things like income, taste and habit are Like In income, But in it the
remain unchanged. other things are remain
changing.
Finally, we can say both movement alone demand and shift in demand helps a business to
calculate the possible ways of production.
23. What is the difference between Demand schedule and demand curve? [2015]
A demand curve and a demand schedule are fundamental tools used by economists to describe
the relationship between the price of an item in the marketplace and the consumer demand for
that item. Distinguishing a demand curve from a demand schedule is generally a straightforward
matter.
 A demand curve presents data as a graph, and a demand schedule lists data in table format.
 A demand schedule includes pairs of data points that identify the price for an item and the
quantity of sales expected at that price. Price is often labeled "P" and quantity is labeled "Q,"
although other headings may be used as well.
 A demand curve usually presents a smooth curve or straight line relationship between the
price, shown on the Y axis (the vertical axis) and quantity on the X axis (horizontal).
Economics | 409
24. What do you mean by contraction and Extension of Demand? [2015]
The demand for a commodity changes due to a change in price. It is called extension and
contraction of demand. When there is decrease in price of commodity there is in increase in
demand of that commodity. This is called extension of demand. When there is increase in price of
a commodity there is decrease in the demand for that commodity. This called contraction of
demand.
Extension of demand
There is extension of demand for a commodity when there is decrease in the price of that
commodity. When price is 15 dollars the demand is 50 kilograms. When price comes down to 10
dollars there is extension in demand from 50 to 60 kilograms.
Price Demand
$15 50 kg
10 60
The diagram shows extension of demand. Quantity of demand is shown on OX axis. The price is
shown on OY axis. DD is demand curve. When price comes down the quantity demanded extends
and demand curve moves downward.
Contraction of demand
There is contraction of demand for a commodity when there is increase in the price of
commodity. When price is 10 dollars per kilogram the demand is 40 kilograms. When price
increases to 20 dollars there is contraction of demand from 40 to 30 kilograms.
Price Demand
$10 40 kg
20 30
The diagram shows contraction of demand. Quality of demand is shown on OX axis. The price is
shown on OY axis. DD is demand curve. When price increases the quantity demanded comes
down and demand curve moves upward.
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28) What do you mean by movement and shift in demand? Explain graphically. [2021]
Movement and shift in demand refer to changes in the quantity of a particular good or service that
consumers are willing and able to purchase at different prices.
A movement along the demand curve occurs when the price of a good changes, causing a change
in the quantity demanded. When the price of a good increases, the quantity demanded decreases,
and when the price of a good decreases, the quantity demanded increases. This can be shown
graphically as a movement along the same demand curve.
On the other hand, a shift in demand occurs when there is a change in any other factor affecting
demand apart from price. These factors can include changes in consumer preferences, income,
population, and the availability of substitutes or complementary goods. When there is a shift in
demand, the entire demand curve shifts either to the left or right.
For example, if the popularity of electric cars increases, this would lead to an increase in demand
for electric cars, causing the demand curve to shift to the right. Conversely, if a new regulation is
introduced that bans the use of diesel engines in urban areas, this could lead to a decrease in
demand for diesel vehicles, causing the demand curve to shift to the left.
Here is a graphical representation of a movement along a demand curve:
And here is a graphical representation of a shift in demand:

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29) What do you mean by elasticity of demand? Graphically explain cross elasticity of
demand. [2021]
Elasticity of demand is a measure of the responsiveness of quantity demanded to a change in
price or other related factors. It helps economists understand how sensitive consumers are to
price changes or changes in other variables.
Cross elasticity of demand specifically measures the responsiveness of the quantity demanded of
one good to a change in the price of another good. It shows the relationship between the changes
in the prices of two related goods and the resulting change in the quantity demanded of one of the
goods.
Graphically, cross elasticity of demand can be illustrated using a demand curve for one good (the
good whose quantity demanded is being measured) and the corresponding changes in the price of
another good.
Here is a graphical representation of cross elasticity of demand:
In the graph above, the demand curve represents the quantity demanded of Good A at different
prices of Good A. Now, let's consider the cross elasticity of demand between Good A and Good B.
 If the cross elasticity of demand is positive, it indicates that Good A and Good B are substitute
goods. This means that as the price of Good B increases, the quantity demanded of Good A also
increases. In the graph, this would be shown by a rightward shift of the demand curve for
Good A.
 If the cross elasticity of demand is negative, it indicates that Good A and Good B are
complementary goods. This means that as the price of Good B increases, the quantity
demanded of Good A decreases. In the graph, this would be shown by a leftward shift of the
demand curve for Good A.
 If the cross elasticity of demand is zero or close to zero, it indicates that Good A and Good B
are unrelated or independent goods. This means that changes in the price of Good B do not
have a significant impact on the quantity demanded of Good A. In the graph, this would be
shown by no shift or a very minimal shift of the demand curve for Good A.
By observing the shifts or lack thereof in the demand curve for Good A in response to changes in
the price of Good B, we can determine the cross elasticity of demand and understand the
relationship between the two goods.
412 | Economics
CHAPTER 3
SUPPLY
1. Describe law of supply. [2015][2010]
The law of supply is a fundamental principle of economic theory. It states that all else equal an
increase in price results in an increase in quantity supplied. In other words there is a direct
relationship between price and quantity. Quantities respond in the same direction as price
changes. This means that producers are willing to offer more products for sale on the market at
higher price by increasing production as a way of increasing profit.
In the figure OY is vertical axis OX is horizontal axis. Here b, o, d, a are four point show price
quantity combination. The supply curve / slopes upward from left to right indicating that less
quantity is offered for sale at lower price and more at higher prices by the sellers not supply curve
is usually positively sloped.
2. What is a supply function? What are the factors responsible to change in the
quantity of supply of a product? [2012]
Or what are the determinants of Supply? [2015][2013]
A supply function is a mathematical expression of the relationship between quantity demanded of
a product or service, its price and other associated factors such as input costs, prices of related
goods, etc.
Innumerable factors and circumstances could affect a seller's willingness or ability to produce
and sell a good. Some of the more common factors are:
The factors on which the supply of a commodity depends are known as the determinants of
demand. These are:
 Price of the Commodity
 Firm Goals
 Price of Inputs or Factors
 Technology
 Government Policy
 Expectations
 Prices of other Commodities
 Number of Firms
 Natural Factors
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3. Why does supply curve slope upward? [2016][2013][2010]
The supply curve slopes upward due to the value of the commodity and the inherent profit a
manufacturer or supplier would receive for supplying said product. The supply curve is bounded
by quantity supplied (x-axis) and price (y-axis). As the price increases for the product, so does the
potential for profit (assuming everything else about the product remains the same—cost of
production, demand, etc).
As a result of this increase in potential profit, it is more valuable for a supplier to produce or
supply this commodity, because they will receive more money per unit supplied. Because of this,
they will inherently create and furnish more of that good in order to profit off of it. In a
straightforward economy (perfectly competitive), all firms would react this way and would
produce more under these circumstances.
4. With the help of diagrams explain the elasticity of supply.
Meaning of Elasticity of Supply:
The law of supply says that the supply varies directly with the price. If the price rises, the quantity
offered will extend, and as it falls the quantity offered will contract. This attribute of supply, by
virtue of which it extends or contracts with a rise or fall in price, is known as the Elasticity of
Supply. It refers to the sensitiveness or responsiveness of the supply to changes in price.
Diagrammatic Representation:
Figure represents inelastic supply and Fig. 24.10 elastic supply. Price is measured along OY and
quantity offered along OX.
In Fig., when the rice rises from PM to P’ M ‘ (which is a considerable rise), the quantity offered
extends from OM to OM’ only, which is not much. Hence su ly is less elastic.
In Fig., the-rise from PM to P M is not so large, but the extension of supply from OM to OM 2 is
quite considerable. Hence the supply is elastic.
5. What do you mean by Supply and Exceptional Supply?
Supply means the quantities that a seller is willing and able to sell at different prices. It is obvious
that if the price goes up, he will offer more for sale. But if the price goes down, he will be reluctant
to sell and will offer to sell less. Supply thus varies with price. Just as we cannot speak of demand
without reference to price and time, similarly we cannot speak of supply without reference to
price and time.
414 | Economics
The normal law of supply is widely applicable to a large number of Products. There are certain
exceptions to law of supply, like a change in the price of a good does not lead to a change in
its quantity supplied in the positive direction.
Some exceptions to law of supply are given below:
 Change in business
 Monopoly
 Competition
 Perishable Goods
 Legislation Restricting Quantity
 Agricultural Products
 Artistic and Auction Goods
6. What are the causes of changes in supply?

The causes of changes in supply
1) A decrease in costs of production. This means business can supply more at each price.
Lower costs could be due to lower wages, lower raw material costs
2) More firms. An increase in the number of producers will cause an increase in supply.
3) Investment in capacity. Expansion in the capacity of existing firms, e.g. building a new
factory
4) Related supply. An increase in supply of a related good e.g. beef and leather
5) Weather. Climatic conditions are very important for agricultural products
6) Technological improvements. Improvements in technology, e.g. computers or automation,
reducing firms costs.
7) Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce the cost of goods.
8) Government subsidies. Increase in government subsidies will also reduce the cost of
goods, e.g. train subsidies reduce the price of train tickets.
7. Determine equilibrium price and quantity using demand supply model.

Or, what do you mean by market equilibrium? How would you determine equilibrium
price?
Or Determine market equilibrium price and output using demand supply framework.
Or what do you mean by market equilibrium? Explain market equilibrium with the
help of demand and supply curve. [2017/2014]
"The Determination of Equilibrium Price and Quantity" combines the demand and supply data
introduced A Demand Schedule and a Demand Curve" and "A Supply Schedule and a Supply
Curve" Notice that the two curves intersect at a price of $6 per pound—at this price the quantities
demanded and supplied are equal. Buyers want to purchase, and sellers are willing to offer for
sale, 25 million pounds of coffee per month. The market for coffee is in equilibrium. Unless the
demand or supply curve shifts, there will be no tendency for price to change. The equilibrium
price in any market is the price at which quantity demanded equals quantity supplied. The
equilibrium price in the market for coffee is thus $6 per pound. The equilibrium quantity is the
quantity demanded and supplied at the equilibrium price. At a price above the equilibrium, there
is a natural tendency for the price to fall. At a price below the equilibrium, there is a tendency for
the price to rise.
Economics | 415
Figure 3.7 the Determination of Equilibrium Price and Quantity
When we combine the demand and supply curves for a good in a single graph, the point at which
they intersect identifies the equilibrium price and equilibrium quantity. Here, the equilibrium
price is $6 per pound. Consumers demand, and suppliers supply, 25 million pounds of coffee per
month at this price.
With an upward-sloping supply curve and a downward-sloping demand curve, there is only a
single price at which the two curves intersect. This means there is only one price at which
equilibrium is achieved. It follows that at any price other than the equilibrium price, the market
will not be in equilibrium. We next examine what happens at prices other than the equilibrium
price.
8. The following are the demand and supply functions----

b. d - , s
Determine equilibrium price and quantity in a perfectly competitive market with
Determine Ed and ES from above equation.
What will be the effect on the market equilibrium if the government imposes a tax of TK. 4 on
each unit of output?
Solution:
a. Given that,
d …………(i)
s ………….(ii)
In equilibrium condition,
d s
 60 – 20 = p + 3p
 4p = 40
P = 10
416 | Economics
Put the value of p in equation (i)
Qd = 60 – 3p
= 60 - 3×10
= 60-30
= 30
Equilibrium price = TK. 10
Equilibrium quantity = 30 units.
d
Table 1
Qd 60-3p = 60-3.11 60-3p = 60-3.10 60-3p = 60-3.9
P 27 30 33
Table 2
Qd 20 + p = 20 + 11 20 + p = 20 + 10 20 + p = 20 + 9
P 31 30 29
Ere, DD, and SS, intersect at point E from this it is found that,
Equilibrium price = TK.3
Equilibrium quantity = 10unit.
ii. Determination of Ed and ES from equation:
Ed =
Ed =
Ed =
Ed =
Es =
=
=
Economics | 417
=
iii. there will be no effect on the market equilibrium if the govt. impose a tax TK.4 on each unit of
the output. So market equilibrium will remain same.
9. The following are the demand and supply functions:

Qdx=25-5P
Qsx= 7+P
(i) Determine equilibrium price and Quantity in perfectly competitive market with
(ii) Determine Ed and Es from above equation.
(iii) What will be the effect on the market equilibrium if the government imposes a tax of TK. 2
on each unit of the output? 2012, 2010
Solution:
Given that,
Qdx=25-5P………………….. 1
sx 7 P……………………..
d s
 25 – 7 = p + 5p
 6p = 18
P=3
Qd = 25 – 5p
= 25 - 5×3
= 25-15
= 10
Qdx=25-5P
Demand Schedule Supply schedule
P Q P Q
0 25 0 7
2 15 2 9
3 10 3 10
5 0 5 12
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Ere, DD, and SS, intersect at point E from this it is found that,
Equilibrium price = TK.3
Equilibrium quantity = 10unit.
Ed =
Ed =
Ed =
Ed =
Ed =
Es =
=
=
=
iii. if the govt. impose a tax TK.4 on each unit of the output. So market equilibrium will be
QSx=7 + ( P – 2)
QSx= 5 + p
So,
 - 5P – P = 5 - 25
 -6p = - 20
P = 3.33 Equilibrium price
And = 25 – 5 (3.33)
Or Q = 8.33 Equilibrium quantity
10. Suppose a market consist of three consumers A, B and C. Whose inverse demand
functions are given below:
1) P= 35-0.5QA
2) P= 50-0.25QB
3) P= 40-200QC
(i) Find out the market demand function for the commodity. 2011
If the market supply function is given by Qs = 40+3.5P, Determine the equilibrium price and
quantity.
Inverse market demand function of A, B , C are
QA = 70 – 2p
QB = 200 – 4P
QC = 0.2 – 0.005P
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The market Demand is Q = Qa + Qb + Qc
= 70 – 2P + 200 – 4P + 0.2 – 0.005P
= 270.2 – 6.00P
Market equilibrium will be exist where Qd = Qs

270.2 – 6.00P = 40+3.5P
- 9.505P = - 230
Equilibrium quantity Q = 40 + 3.5P = 40 + 3.5(24.19) = 124.69
11. There are 10,000 identical individuals in the market for commodity X, with a
demand function given by Qdx=12-2Px and 1000 identical producers of commodity
X, each with a supply function given by Qsx=20Px.
a) Find the market demand function and market supply function for commodity X.
b) Find the market demand schedule and market supply schedule of commodity X and then find
the equilibrium price and quantity.
c) Plot on the set of axes the market demand curve and market supply curve for commodity X
and show the equilibrium point.
d) Obtain the equilibrium price and show the mathematically.
a) According to question market demand function and market supply function :

Qdx = 10,000 (12-2px)
= 120,000 – 20,000px
Qsx = 1000 ( 20Px)
= 20,000px
b) From the above market demand function and market supply, we can prepare the schedule and
locate equilibrium price and output
Px QDx QSx
6 0 120,000
5 20,000 100,000
4 40,000 80,000
3 60,000 60,000
2 100,000 40,000
0 120,000 0
Equilibrium price is 3 , output is 60

420 | Economics
c) Now, we can draw a market demand and supply curve by plotting the above schedule of
information and point out the equilibrium point where demand is equal to supply:
Equilibrium point is found where market demand curve intersect market supply curve.
d) Equilibrium price and output can also be found mathematically:
Qdx = 120,000- 20,000Px
And Qsx = 20,000 Px
As per equilibrium condition Qdx = Qsx
So,
120,000- 20,000Px = 20,000 Px
Or , - 40, 000Px = - 120,000
Or, Px = 3
And Q = 20,000(3) = 60,000
12. The following are the demand and supply functions of a manufacturer.
Determine equilibrium price and output:-
Qd = 500 – 2P
Qs = - 200 + 1.5P
i) What will be the impact on the market equilibrium if government imposes a tax of tk 4 on
each unit of the output?
ii) Determine Demand elasticity at Equilibrium price.
Solution:
Given that,
Qd = 500 – P……………………….. 1
Qs = - 1.5P………………………
d s
 500 + 200 = 1.5p + 2p

 3.5p = 700
P = 200
Economics | 421
Qd = 500 – 2 P
= 500 – 2(200)
=500 – 400
= 100
ii. if the govt. impose a tax TK.4 on each unit of the output. So market equilibrium will be
QSx= - 200 + 1.5 ( P – 4) = - 200 + 1.5p – 6= -206 + 1.5p
So,
 500 + 206 = 1.5P + 2P

 3.5P = 706
And = Qd = 500 – 2 ( 201.71)
Or Q = 96.571 Equilibrium quantity

Ed =
Ed = Ed = Ed = - 4
13. At the equilibrium point, Demand=Supply.-Explain. [2021]

At the equilibrium point, demand is equal to supply. This means that at a given price level, the
quantity demanded by consumers is exactly equal to the quantity supplied by producers. The
equilibrium point represents a state of balance in the market, where there is no excess demand or
excess supply.
The equilibrium price and quantity are determined by the intersection of the demand and supply
curves. At the equilibrium price, the quantity demanded by consumers is exactly equal to the
quantity supplied by producers. Any other price level will result in either excess demand
(shortage) or excess supply (surplus).
When we add the concept of elasticity to the equation, we can modify the equilibrium condition to
take into account how changes in price affect demand and supply. Specifically, the relationship
between demand, supply, and price elasticity can be expressed as:
Demand = Supply +/- ( )
This equation states that at the equilibrium point, the quantity demanded is equal to the quantity
supplied plus or minus any adjustment due to changes in price and price elasticity. For instance, if
demand is relatively elastic, a small change in price will result in a large change in quantity
demanded, and vice versa for relatively inelastic demand. Similarly, supply elasticity affects the
degree of responsiveness of quantity supplied to changes in price.
422 | Economics
CHAPTER 4
ECONOMIC THEORY OF CONSUMER BEHAVIOR
1. What is utility?
Or what do you mean by Utility? [2017]
Utility has several meanings: In economics, it refers to the value for money that people derive
from consuming a product or service. In this sense, we also use the term when talking about being
somewhere. Value for money, in this context, means ‘pleasure and satisfaction.
The goods satisfy human wants. This want satisfying quality in a good is called Utility. Utility is
that quality in a commodity by virtue of which it is capable of satisfying a human want. Air, water
(free goods) and food, cloth etc. (economic goods) satisfies eo le’s wants and hence they ossess
utility.
Types of Utility:
1. From Utility: Due to change in form there is change in utility, e.g. Wood when transformed
into furniture, utility will increase.
2. Place utility: When goods transported from one place to another place utility can increase.
For example apple will fetch more prices in other part of country than in Kashmir and
Himachal Pradesh.
3. Time utility: By storing a commodity and selling it at a time of scarcity, utility can be realized
more.
2. Describe the two measurement method of utility [2012]

Measurement of a utility helps in analyzing the demand behavior of a customer. It is measured in
two ways
Cardinal Approach
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In this approach, one believes that it is measurable. One can express his or her satisfaction in
cardinal numbers i.e., the quantitative numbers such as 1, 2, 3, and so on. It tells the preference of
a customer in cardinal measurement. It is measured in utils.
Ordinal Approach
In this approach, one believes that it is comparable. One can express his or her satisfaction in
ranking. One can compare commodities and give them certain ranks like first, second, tenth, etc. It
shows the order of preference. An ordinal approach is a qualitative approach to measuring a
utility.
3. Define total utility and Marginal utility.

Total Utility:
Total utility is the total satisfaction gained from a given level of consumption of a good.
Marginal Utility:
Marginal Utility is the increases in total utility when consumption increases by 1 unit.
4. Define Utility and Marginal Utility. [2010]

Utility is the satisfaction a person derives from the consumption of a good or service.
Total utility is the total satisfaction received from consuming a given total quantity of a good or
service,
While marginal utility is the satisfaction gained from consuming an additional quantity of that
item.
Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or expected,
derived from the consumption of a commodity. Utility differs from person- to-person, place-to-
place and time-to-time.
In the words of Prof. Hobson, “Utility is the ability of a good to satisfy a want”.
Marginal Utility (MU):
Marginal utility is the additional utility derived from the consumption of one more unit of the
given commodity. It is the utility derived from the last unit of a commodity purchased. As per
given example, when 3rd ice-cream is consumed, TU increases from 36 utils to 46 utils. The
additional 10 utils from the 3rd ice-cream is the MU.
In the words of Cha man, “Marginal utility is addition made to total utility by consuming one
more unit of a commodity”.
5. Basic Assumption of Marsi-Iallian Utility Analysis.

The cardinal utility approach or what is called also as the Marshallian approach to consumer`s
equilibrium is based on the following assumption.
i. Rationality: It is assumed that the consumer is a rational being in the sense that he satisfies
he`s wants in order to their merit. It means that he buys a commodity which yields the
highest utility and he buys last a commodity which he gives the last utility.
ii. Limited money income: The consumer has a limited money income to spent on the goods to
services he chooses to consume.
iii. Maximization of satisfaction: Every rational consumer intends to maximize his satisfaction
from his given money income.
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iv. Utility is cardinally measurable: The cardinal assume that utility is cardinally measurable.
i.e, it can be measured in absolute term an cardinal numbers.
v. Diminishing marginal utility: The cardinal assumed that the utility gained from successive
units of a commodity consumed decreases as a consume more and more units of it.
vi. Constant utility of money: The marginal utility of money remains constant whatever the
level of consumer`s income and each unit of money has utility equal to 1.
6. Describe the relationship between Total Utility and Marginal Utility. 2016
The term “Utility” refers to the level of satisfaction that consumers receive after consuming the
given good or service at a given period of time.
Total Utility
Total Utility refers to the total level of satisfaction received after consuming total level of good and
service. In other words, the consumer will be satisfied after consuming 3 units of goods or
services, then 3 is total utility.
Marginal Utility
Marginal utility refers to the level of satisfaction that a consumer receives after consuming an
additional unit of good or service. Let total utility is 3 units and consumer consuming one more
unit of a good or service then marginal utility is 1.
Let understand the relationship between TU and MU with the help of a table:
7. Describe the Law of Diminishing Marginal Utility. [2017/2015/2012/2010]

Or explain the Law of Diminishing Marginal Utility using necessary diagrams.
The Law of Diminishing Marginal Utility states that the additional utility gained from an increase
in consumption decreases with each subsequent increase in the level of consumption. Marginal
Utility is the change in total utility due to a one-unit change in the level of consumption. The Law
of Diminishing Marginal Utility states the marginal utility gradually decreases with the level of
consumption.
We can explain this more clearly with the help of a schedule and diagram.
Schedule for Law of Diminishing Marginal Utility:
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In the above table, the total utility obtained from the first apple is 20 utils, which keep on
increasing until we reach our saturation point at 5th apple. On the other hand, marginal utility
keeps on diminishing with every additional apple consumed. When we consumed the 6th apple,
we have gone over the limit. Hence, the marginal utility is negative and the total utility falls.
With the help of the schedule, we have made the following diagram:
8. Difference between Total Utility and Marginal Utility.

The main difference between total and marginal utility is that total utility refers to the total
satisfaction received by the consumer from consuming different units of a commodity while
the marginal utility, connotes the additional utility derived from the consumption of the extra
unit of a commodity.
The significant points of difference between Total Utility and Marginal Utility.
BASIS FOR TOTAL UTILITY MARGINAL UTILITY
COMPARISON
Meaning Total Utility means total benefit Marginal Utility means the amount of
obtained by a person from utility a person gains from the
consumption of goods and consumption of each successive unit of a
services. commodity.
Result Suffers from diminishing returns. Declines for each additional unit
consumed.
Rate of Increase Total Utility rises as more Marginal utility diminishes with an
consumption are done increase in total utility
9. What is Indifference Curve (IC)? What are properties of IC?

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An indifference curve is a graph showing combination of two goods that give the consumer equal
satisfaction and utility. Each point on an indifference curve indicates that a consumer is
indifferent between the two and all points give him the same utility.
Graphically, the indifference curve is drawn as a downward sloping convex to the origin. The
graph shows a combination of two goods that the consumer consumes.
Combination of Apples and Bananas Apples (A) Bananas (B)
P 1 15
Q 2 10
R 3 6
S 4 3
T 5 1
From the above table we can draw the following indifference curve:
Apples Q
R
S
IC
Bananas
Fig: Indifference Curve
Properties of Indifference Curve:
Following are the features of indifference curve
(a) Indifference Curve  An indifference curve has a negative slope, i.e. it slopes downward
Always Slopes from left to right.
Downwards From Left To Reason: If a consumer decides to have one more unit of a
Right commodity (say apples), quantity of another good (say oranges)
must fall so that the total satisfaction (utility) remains same.
(a) Indifference Curve Is IC is strictly Convex to origin i.e. MRSxy is always diminishing
Always Convex To The  Reason: Due to the law of diminishing marginal utility a consumer
Origin is always willing to sacrifice lesser units of a commodity for every
additional unit of another good.
(c) higher indifference  Higher indifference curve represents larger bundles of goods i.e.
curve represents bundles which contain more of both or more of at least one.
Higher level of  It is assumed that consumer’s references are monotonic i.e. he
satisfaction always prefers larger bundle as it gives him higher satisfaction.
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In the diagram, IC1 and IC2 are the two indifference curves. IC2 is
the higher indifference curve than IC1.
 Combination ‘L’ contains more of both goods ‘X’ and Y than
combination ‘M’ on IC1. Hence IC curve gives more satisfaction
10. What is the Marginal Rate of Substitution (MRSxy)

The marginal rate of substitution is the rate of exchange between some units of goods X and Y
which are equally preferred. The marginal rate of substitution of X for Y (MRS)xy is the amount of
Y that will be given up for obtaining each additional unit of X.
This rate is explained below in the following indifference schedule of Table.
Marginal Rate of Substitution:

(1) Combination (2) X ( )У (4) MRS of X for Y
1 1 18 —
2 2 13 5:1
3 3 9 4:1
4 4 6 3:1
5 5 4 2:1
6 6 3 1:1
To have the second combination and yet to be at the same level of satisfaction, the consumer is
prepared to forgo 5 units of Y for obtaining an extra unit of X. The marginal rate of substitution of
X for Y is 5:1. The rate of substitution will then be the number of units of Y for which one unit of X
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is a substitute. As the consumer proceeds to have additional units of X, he is willing to give away
less and less units of Y so that the marginal rate of substitution falls from 5:1 to 1:1 in the sixth
combination (Col. 4).
11. What is Budget Line? Draw a Budget Line from an imaginary equation.
Or Draw a Budget Line from the equation 500 = 10X + 5Y
Budget Line
A graphical depiction of the various combinations of two selected products that a consumer can
afford at specified prices for the products given their particular income level. When a typical
business is analyzing a two product budget line, the amounts of the first product are plotted on
the horizontal X axis and the amounts of the second product are plotted on the vertical Y axis.
Budget line is a curve that shows the combinations of two goods that can be purchased by a
consumer using a certain amount of income and based on the market price of the good.
There is a combination of budget……
Combination X Y
A 10 0
B 8 1
C 6 2
D 4 3
E 2 4
F 0 5
If a person spend all the money to purchase Y, one will obtain 5 unit of Y and 10 unit of X
12. Describe the Consumer’s Equilibrium.

Or, Show and describe the optimal combination of two goods so that consumer can be
able to optimize the utility.
Or Identify and describe the least cost combination of two factors.
The state of balance obtained by an end-user of products that refers to the number of goods and
services they can buy given their existing level of income and the prevailing level of cost
prices. Consumer equilibrium permits a customer to get the most satisfaction possible from their
income.
Assumptions:
This analysis assumes that
a. The money to be spent by consumer is given and constant. It is Rs 10.
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b. The price of good X falls.
c. Prices of other related goods do not change.
d. Consumer’s tastes and preferences remain constant.
In order to display the combination of two goods X and Y, that the consumer buys to be in
equilibrium, let’s bring his indifference curves and budget line together.
We know that,
 Indifference Map – shows the consumer’s reference scale between various combinations
of two goods
 Budget Line – depicts various combinations that he can afford to buy with his
money income and prices of both the goods.
In the following figure, we depict an indifference map with 5 indifference curves – IC1, IC2, IC3, IC4,
and IC5 along with the budget line PL for good X and good Y.
From the figure, we can see that the combinations R, S, Q, T, and H cost the same to the consumer.
In order to maximize his level of satisfaction, the consumer will try to reach the highest
indifference curve. Since we have assumed a budget constraint, he will be forced to remain on the
budget line.
13. Derive Demand Curve from PPC.

Or, with the help of indifference curve, derive demand curve for a normal commodity.
We have already seen how the price consumption curve traces the effect of a change in price of a
good on its quantity demanded. However, it does not directly show the relationship between the
price of a good and its corresponding quantity demanded. It is the demand curve that shows
relationship between price of a good and its quantity demanded. In this section we are going to
derive the consumer's demand curve from the price consumption curve. The figure shows
derivation of the consumer's demand curve from the price consumption curve where good X is a
normal good.
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Fig: Derivation of the Demand Curve: Normal Goods

The upper panel of Figure shows price effect where good X is a normal good. AB is the initial price
line. Suppose the initial price of good X (Px) is OP. e is the initial optimal consumption
combination on indifference curve U. The consumer buys OX units of good X. When price of X (Px)
falls, to say OP1, the budget constraint shift to AB1. The optimal consumption combination is e1 on
indifference curve U1. The consumer now increases consumption of good X from OX to OX 1 units.
The Price Consumption Curve (PCC) is rising upwards.
14. Deriving Engel Curve from ICC.
We derive the Engel Curve (demand with respect to income) for X1 by varying M while holding
both prices P1 and P2 constant, and tracing out the utility-maximizing level of X1 consumed at
each level of M.
In this animation, as M is increased, the budget line shifts outward in parallel to new tangency
points on successively higher indifference curves, indicating successively higher optimal
consumption levels of X1.
In this example, X1 is a normal good: its income elasticity is greater than zero. In contrast, if X1
were an inferior good, consumption of it would decline as income increases: an inferior good's
income elasticity is less than zero.
Luxury goods are a subset of normal goods with income elasticities greater than +1.
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15. What is the difference between cardinal and ordinal utility

We have seen what is meant by the cardinal approach and the ordinal approach of utility. Let us
see how these two differ from each other.
Cardinal Approach of Utility Ordinal Approach of Utility
Cardinal approach is the one, which rests on Ordinal approach of utility does not give out any
the assumption that utility can be measured measurement unit which means that this
thereby implying that utility can be approach does not consider the quantification of
quantified. utility.
For the purpose of measurement of utility As per ordinal approach, utility is used for
the cardinal approach uses utils which help grading/ranking of the products depending on
in understanding how much utility is derived the preferences of the consumer.
from consumption of a product. Thus
cardinal numbers are used to show the
utility schedule.
The cardinal utility approach focuses on the Here comparisons can be made of the utility
independent utility derived from a product derived from two products, but the utility cannot
and hence any dependence is avoided. be computed quantitatively
Though this approach brings out the The ordinal approach will give a sense of
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preference of one product over other preferences, likes and dislikes but there is no
through utils but this does not imply any numerical measurement and this approach is
conclusion or relation between the choices used in grading the preferences of the consumer
depending upon the alternatives that are
available to him/her.
16. Define indifference map. [2010]

We can draw more than one indifference curve on the same diagram. This family of curves is
called indifference map. We know that right side curve yield higher utility and it goes on
increasing as we move righter, While the curve in the left yield lesser utility and it goes on
decreasing as we move towards left. ( the reason is right hand side point means more
consumption of either of 2 goods, hence higher satisfaction)
IC1, IC2 and IC3 are three indifference curves.

All the points on IC2 will yield higher satisfaction than the points on IC1 and
All the points on IC3 will yield lesser satisfaction than the points on IC1
17. Explain consumer’s behavior. 2008

Economics is not just statistics and graphs. It also deals with human behavior and human wants. The
theory of consumer behavior in particular deals with how consumers allocated and spend their
income among all the different goods and services.
Consumer behavior is a field of study in economics which tries to explain consumer choices and
their decisions in the context of limited income and the perceived benefit they derive from
various goods and services.
The perceived benefit obtained from a product or service is called utility in economics. Marginal
utility is the additional utility from each additional unit purchased.
18. What is meant by budget constraint? [2020]

A budget constraint is an economic term referring to the combined amount of items you can afford
within the amount of income available to you. For example, if you are a sales professional with a
$1,000 budget for promotional items, this sets the upper limit on items you can purchase. The cost of
each item and the minimum quantity you need would determine how many you can buy within your
budget.
In Short, A budget constraint occurs when a consumer is limited in consumption patterns by a
certain income.
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Diagram showing a budget constraint and indifference curves
 Income = £40
 Price of apples = £1
 Price of bananas = £2
The budget line is B1 – this shows maximum consumption with current income.
To maximise utility, the consumer can choose on IC1, 20 apples, 10 bananas.
An increase in income would shift the budget line to the right.
19. How does a consumer achieve maximum satisfaction by minimum 2021

expenditure? Illustrate with the help of indifference curve.
A consumer can achieve maximum satisfaction by minimum expenditure through a concept

known as consumer equilibrium. Consumer equilibrium is achieved when a consumer
allocates their limited income in a way that maximizes their total utility or satisfaction, given
the prices of goods and services in the market.
To illustrate this concept, we can use an indifference curve. An indifference curve represents
different combinations of two goods that provide the consumer with the same level of
satisfaction or utility. Higher indifference curves indicate higher levels of satisfaction.
Here is an example:
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In the graph above, we have an indifference curve map showing three indifference curves
(A, B, and C) representing different levels of satisfaction. The consumer's goal is to reach the
highest indifference curve possible, indicating the maximum satisfaction they can achieve.
To achieve consumer equilibrium, two conditions must be met:
1. The consumer must be on the highest indifference curve attainable, representing the
highest level of satisfaction. In the example, this would be point A on indifference curve
A.
2. The consumer must be on a budget line that represents their income and the prices of
the goods. The budget line is a straight line connecting the various combinations of
goods that can be purchased with the given income. The consumer aims to reach the
highest indifference curve while staying within their budget constraint.
The point of tangency between the budget line and the highest attainable indifference curve
represents consumer equilibrium. In the example, this would be point B where the budget
line is tangent to indifference curve A.
At consumer equilibrium, the consumer is maximizing their satisfaction because any other
combination of goods on the budget line would either have a lower level of satisfaction
(below the indifference curve) or be unaffordable (beyond the budget line).
To minimize expenditure while achieving maximum satisfaction, the consumer should
choose a combination of goods at the point of tangency between the budget line and the
highest indifference curve. This allocation allows the consumer to achieve the highest level
of satisfaction given their income and the prices of the goods.
By making optimal choices along the budget line and selecting the point of tangency with the
highest attainable indifference curve, the consumer achieves maximum satisfaction (utility)
by allocating their limited expenditure in the most efficient way.
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CHAPTER 5
CONSUMER DEMAND
1. Explain the concept of consumer surplus. How did Marshall measure it?
[2017] [2015]
Consumer surplus is an economic measurement of consumer benefits. Consumer surplus happens
when the price that consumers pay for a product or service is less than the price they're willing to
pay. It's a measure of the additional benefit that consumers receive because they're paying less
for something than what they were willing to pay.
In the words Prof. Marshall –
“The total utility of a good is the sum of the successive marginal utilities of each added unit.
Therefore, the price a peon pass for a good never exceeds, and seldom equals, that which he or
she would be i1ling to pay rather than go without the desired object. Only at the margin will price
generally match a erson’s willingness to ay. Thus, the total satisfaction a erson gets from
purchasing successive units of a good exceeds the sacrifices required to pay for the good is called
consumer’s sur lus.”
So, finally total social surplus is composed of consumer surplus and producer surplus. It is a
measure of consumer satisfaction in terms of utility.
Marshall Theory of Consumer Surplus:
Price (Tk.) Quantity
20 1
14 2
10 3
6 4
4 5
3 6
2 7
The rice and quantity data shown in above table is to illustrate consumer’s sur lus. From the
table that the person for whom these data apply would buy 1 goods if the price were Tk. 20. At Tk.
14 he would buy 2goods, at Tk. 10, 3 goods, and so on. Suppose, the market price was actually Tk.
2, this consumer would buy 7 goods annually, pay Tk. 2 for each good, and spend Tk. 14. Notice,
however, that the first good provides Tk. 20 worth of utility, the second Tk. 14 worth of utility,
and so forth. This erson’s total gain in utility from the urchase of the 7 good is thus Tk. 59 (
14 + 10 + 6 + 4 + 3 + 2).
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The consumer surplus is graphically shown below:
C Supply
Price Consumer
Surplus E
B
Demand
F Quantity
Fig: Consumer Surplus
Above figure shows Marshall’s Equilibrium Price and uantity “Haggling and bargaining” of
sellers and buyers result in an equilibrium price (here B) that equates quantity supplied and
quantity demanded (both F). Buyers collectively receive consumer surplus of BCE.
2. What do you mean by consumer surplus? How can you measure consumer’s surplus by
using indifference curve?
Consumer surplus is an economic measurement of consumer benefits. Consumer surplus happens
when the price that consumers pay for a product or service is less than the price they're willing to
pay. It's a measure of the additional benefit that consumers receive because they're paying less
for something than what they were willing to pay.
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Consumer’s surplus by using indifference curve
There is an inverse relationshi between market rice and consumer’s sur lus. An inverse
relationship means that a decline in market price increases consumer’s sur lus and vice-versa.
In figure, when the market price for the commodity under consideration is OP, the areas Q and R
are consumer’s sur lus. If there is an increase an increase in the market rice (OP 1), the area Q
will represent consumer’s sur lus. Note that there is a loss of consumer’s sur lus equivalent to
area R. When the price decreases (OP2), consumer’s sur lus increases (area area R area S).
3. Explain the kuznet’s puzzle about consumption. [2015]

One of the very first theory on consumption was given by Johnn Maynard Keynes. Keynes gave 3
conjectures about consumption function.
 First that Marginal propensity to consume is between 0 and 1.
 Second Keynes said that average propensity to consume i.e the ratio of consumption to
income falls as income rises and
 Third income was the rimary determinant of consum tion and interest rate doesn’t have
that an important role.
When studies were conducted on the basis of these 3 conjectures researchers found that Keynes
theory did hold but only for short run. In long run Keynes 2 conjectures that APC falls as income
rises and income was the rimary determinant for consum tion didn’t hold. When Simon Kuznets
assembled the data on consumption and income dating back to 1869, Kuznets analysis indicated
that the APC is fairly constant over long period of time. This fact presented a PUZZLE that
motivated much research in consumption.
Economists wanted to know why some studies su orted or confirmed Keynes’s conjectures and
other refuted them. To solve these puzzle two economists Franco Modigliani and Milton Friedman
have two Hy othesis “Life cycle Hy othesis” and “Permanent Income Hy othesis” res ectively to
solve consumption puzzle.
Franco Modigliani gave “Life Cycle Hy othesis” which says any individual with wealth w and
expect to earn an income Y till she retires R , the consumer will divide up her lifetime resources
among T remaining years of life and wish to achieve smooth consumption. On the basis of this
hypothesis Modigliani solved the puzzle by putting forward the argument that; because wealth
doesn’t vary ro ortionally with income from erson to erson or from year to year we should
find that high income corresponds to a low average propensity to consume, when looking at data
across individual over short periods of time. But over long periods of time , wealth and income
grow together which results W/Y ratio to be constant.
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According to Friedman, the solution to the consumption puzzle was that according to Permanent
Income Hypothesis (where consumption depends only on the permanent income of the
consumer). APC depends only on the ratio of permanent income to current income. When current
income temporarily rises above permanent income APC falls, when current income falls below
permanent income APC temporarily rises. Which says Keynes should have used Permanent
income variable to calculate APC instead current income.
4. Describe income consumption curve and income effect.

Income-Consumption Curve
In economics and particularly in consumer choice theory, the income-consumption curve is a
curve in a graph in which the quantities of two goods are plotted on the two axes; the curve is
the locus of points showing the consumption bundles chosen at each of various levels of income.
Income Effect
In microeconomics, the income effect is the change in demand for a good or service caused by a
change in a consumer's purchasing power resulting from a change in real income.
The income effect is the change in consumption of goods based on income. This means consumers
will generally spend more if they experience an increase in income, and they may spend less if
their income drops. But the effect doesn't dictate what kind of goods consumers will buy. In fact,
they may opt to purchase more expensive goods in lesser quantities or cheaper goods in higher
quantities, depending on their circumstances and preferences.
5. What is a consumption function? Derive a saving function from the consumption

function, C=a+bY
Or What do you mean by consumption function? Show the relationship between saving
function and consumption function.
Ans: Consumption Function: The consumption function is a mathematical formula laid out by
famed economist John Maynard Keynes. The formula was designed to show the relationship
between real disposable income and consumer spending, the latter variable being what Keynes
considered the most important determinant of short-term demand in an economy.
The consumption function can represented in a general form as:
C = f(Y)
where: C is consumption expenditures, Y is income (national or disposable), and f is the notation
for a generic, unspecified functional form.
Depending on the analysis, the actual functional form of the equation can be linear, with a
constant slope, or curvilinear, with a changing slope. The most common form is linear, such as the
one presented here:
C = a + bY
where: C is consumption expenditures, Y is income (national or disposable), a is the intercept, and
b is the slope.
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Derive a saving function from the consumption function, C=a+bY
Saving function can be derived from the consumption function.

S= f(y)
.’. y c S
.’. S y – c …………………. 1
Thus, Saving Is The Amount Of Income Which Is Not Spent On Consumption
‘.’ C a bY
‘.’ S Y – a – bY
.’. S - a + Y(1 – b) ……………….
So, saving function is S = - a + Y(1 – C)
6. Show that the sum of APC and APS is equal to one.

Ans: APC/ Average Propensity to Consume: Average propensity to consume (APC) is the
percentage of disposable income which households intend to spend on goods and services.
It is a statistic that tells what fraction of income households are willing to spend and what fraction
they intend to save.
APS/ Average Propensity To Save: The average propensity to save (APS) is an economic term
that refers to the proportion of income that is saved rather than spent on goods and services. Also
known as the savings ratio, it is usually expressed as a percentage of total household disposable
income (income minus taxes).
Here, C = a + bY
C = a + bY
‘.’ S Y – a – bY
.’. S - a + Y(1 – b)
APC = = = +b
APS = = = + (1 – b)
.’. APC APS +b+ + (1 – b) = 1
7. Distinguish between autonomous investment and induced investment. Explain the

factors that determine the level of investment in the economy.
Ans: Distinguish between autonomous investment and induced investment given below The first
step to determining the difference between autonomous and induced consumption is to look at
what each of these terms mean. The key difference between autonomous consumption and
induced consumption lies in the factor of income.
Autonomous Consumption
Autonomous consumption is defined as expenditures taking place when disposable income levels
are at zero. This consumption is typically used to fund consumer necessities, but causes
consumers to borrow money or withdraw from savings accounts.
Autonomous consumption occurs most often when people are in dire straits and have no income,
but still have expenses. Even if a person is broke, he still has basic needs such as food, rent,
utilities, health expenses and car payments. When a consumer is in this situation, he is forced to
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spend more money than he earns, which results in dissaving. Even though their incomes are not
necessarily at zero, these consumers are forced to spend all of their incomes as well as money
they don't have just for necessities. As a result, they have no disposable income.
Induced Consumption
Induced consumption, on the other hand, differs in that the amount of consumption varies based
on income. As disposable income rises, so does the rate of induced consumption. This process
applies to all normal goods and services. For induced consumption, disposable income is at zero
when induced consumption is at zero. As the value of disposable income rises, it induces a similar
rise in consumption. Induced consumption demonstrates how people begin to enjoy more lavish
lifestyles and spend more money as their wealth grows.
8. What is the difference between short-run and long-run consumption function?

Ans:
short-run consumption function long-run consumption function
1. the general form of consumption function is 1. The general form of long term consumption
C = C + cY function C c’Yd
2. in short term consumption function APC > 2. in long run consumption function APC = MPC
MPC
3. SR consumption function has a falling APC 3. LR consumption function has a constant APC.
4. APC is inversely changed with the change in 4. At any level of income APC remain constant
income
5. Graph 5. Graph
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9. Explain and demonstrate the relationship between MPC & APC.
Ans:
Basis APC MPC
Meaning It is the ratio of consumption It is the ratio of change in
expenditure (C) to the consum tion ex enditure (∆C)
corresponding level of income to change in income (∆Y) over
(Y) at a point of time. a period of time.
Value more than APC can be more than one as MPC cannot be more than one
one long as consumption is more as change in consumption
than national income, i.e. till cannot be more than change in
the break-even point. income.
Response to When income increases, APC When income increases, MPC
change in falls but at a rate less than that also falls but at a rate more
income of MPC. than that of APC.
Formula APC = C/Y MPC ∆C/∆Y
10. Prove that MPC + MPS = 1

Ans:
MPC: Proportion of a small change in disposable income that would be saved, instead of being
spent on consumption. It is computed by dividing the change in savings by the change in
disposable income that caused the change.
MPS: Proportion of a small change in the disposable income that would be spent
on consumption instead of being saved. It is computed by dividing the change in consumption by
the change in disposable income that caused it.
Here, C = a + bY
C = a + bY
‘.’ S Y – a – bY
.’. S - a + Y(1 – b)
MPC = = =b
MPS = = = 1-b
.’. MPC MPS b 1 – b = 1
11. What are the differences between MPC and MPS?

Ans:
MPS MPC
Definition Proportion of a small change in the Proportion of a small Change In
Disposable income that would be spent disposable income that would be saved,
on consumption instead of being saved. It instead of being spent on consumption.
is computed by dividing the change in It is computed by dividing the change
consumption by the change in disposable in savings by the change in disposable
income that caused it. income that caused the change.
Derivation 2. MPS = = = 1-b 2. MPC = = =b
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Formula 3. MPS = 3. MPC =
Slope 4. MPS is the slope of saving curve 4. MPC is indicated as the slope of
consumption curve.
12. What is marginal propensity to consume (MPC)

Ans: The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay
that a consumer spends on the consumption of goods and services, as opposed to saving it.
Marginal propensity to consume is a component of Keynesian macroeconomic theory and is
calculated as the change in consumption divided by the change in income. MPC is depicted by a
consumption line- a sloped line created by plotting change in consumption on the vertical y axis
and change in income on the horizontal x axis.
The marginal pro ensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in
consum tion, and ΔY is change in income. If consum tion increases by 8 cents for each
additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.
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CHAPTER 6
THEORY OF PRODUCTION
1. What is return of scale? Types of return of scale [2011/2013/2017]
The terms 'economies of scale' and 'returns to scale' are related, but they mean very different
things in economics. While economies of scale refers to the cost savings that are realized from an
increase in the volume of production, returns to scale is the variation or change in productivity
that is the outcome from a proportionate increase of all the input.
There are Three Types of Returns to Scale:
(a) Increasing Returns to Scale
(b) Decreasing Returns to Scale
(c) Constant Returns to Scale
(a) Increasing Returns to Scale:

An increasing return to scale occurs when the output increases by a larger proportion than the
increase in inputs during the production process. For example, if input is increased by 3 times, but
output increases by 3.75 times, then the firm or economy has experienced an increasing returns to
scale.
(b) Decreasing Returns to Scale:
A decreasing return to scale occurs when the proportion of output is less than the desired
increased input during the production process. For example, if input is increased by 3 times, but
output is reduced 2 times, the firm or economy has experienced decreasing returns to scale.
(c)Constant Returns to Scale:
When all inputs are increase by a given proportion and the output increases by the same
proportion, it is called constant returns to scale. For example, if all inputs are doubled and output
also gets doubled, then that kind of input- output relationship is referred to as constant returns to
scale.
2. Define total product average product and marginal product. [2013]

Theory of production, which allows firms to figure out how much of which resources they need
to acquire. To do this, we look at three different factors: the total product, the average product,
and the marginal product.
Total product is the total amount produced per a set of resources, average product is the
average cost per unit produced per set of resources, and marginal product is the cost for the very
next unit to be produced in resources.
Total Product
Obviously, it is beneficial for a firm to know the total amount of resources that it will need for a
coming period of time in order to manufacture a given amount of goods. Likewise, it is also useful
for a company to know how much it plans on selling.
Average Product
The average product, on the other hand, tells us exactly what goes into making each and every
item we produce. This is crucial in helping a firm determine a fair price point for its goods, as well
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as for helping a firm to realize if there are any efficiencies that could be applied in order to reduce
overall costs.
3. Marginal Product:
Marginal product of a factor is the addition to the total production by the employment of an extra
unit of a factor. Suppose when two workers are employed to produce wheat in an agricultural
farm and they produce 170 quintals of wheat per year.
Now, if instead of two workers, three workers are employed and as a result total product
increases to 270 quintals, then the third worker has added 100 quintals of wheat to the total
production. Thus 100 quintals is the marginal product of the third worker.
3. Define production function with input output relationship.

2008/2011/2012/ 2013/2014/2017
Meaning of Production Function:
In simple words, production function refers to the functional relationship between the quantity of
a good produced (output) and factors of production (inputs).
“The roduction function is urely a technical relation which connects factor in uts and out ut.”
Prof. Koutsoyiannis
In this way, production function reflects how much output we can expect if we have so much of
labour and so much of capital as well as of labour etc. In other words, we can say that production
function is an indicator of the physical relationship between the inputs and output of a firm.
Definitions:
“The roduction function is a technical or engineering relation between in ut and out ut. As long
as the natural laws of technology remain unchanged, the production function remains
unchanged.” Prof. L.R. Klein
“Production function is the relationshi between in uts of roductive services er unit of time
and out uts of roduct er unit of time.” Prof. George J. Stigler
“The relationshi between in uts and out uts is summarized in what is called the roduction
function. This is a technological relation showing for a given state of technological knowledge how
much can be roduced with given amounts of in uts.” Prof. Richard J. Li sey
Thus, from the above definitions, we can conclude that production function shows for a given
state of technological knowledge, the relation between physical quantities of inputs and outputs
achieved per period of time.
4. How is the shape of production possibilities frontier connected with the law of
increasing opportunity cost? 2013, 2012
Production Possibility Frontier shows the maximum amounts of production that can be obtained
by an economy given its technological knowledge and quantity of imputes available.
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an alternative action.
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Table of Production Possibility Frontier
A table for the possibilities where two product can be produced with the utilization of resources
available.
Possibilities Butter Guns
A 0 14
B 1 12
C 2 9
D 3 5
E 4 0
The graphical presentation of the above table is given below:
A . Unattainable Point
14
B
Guns
12
C
9
5 D
0 Butter
1 2 3 4
Fig: Production Possibility Frontier

From the above graph we see that, A, B, C and D are four separate point where a producer can
produce product with the utilization of available resources.
5. Explain the law of returns to scale in the long- run production function. Why do
we get decreasing returns to scale? 2012, 2009
Production function may be defined as the functional relationship between physical inputs (i.e.,
factor of production) and physical outputs (i.e., the quantity of good produced). Production
function shows technological or engineering relationship between output of a commodity and its
inputs. The act of production involves the transformation of input into output. The word
production in economics in not merely confined to effecting physical transformation in matter, it
also covers the rendering of services. The production function can be expressed symbolically as,
X=f (Ld, L, K, M, T)
Where X denotes commodity X, Ld land, L labor, K capital, M management and T technology. The
above function shows the general production function.
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There are two types of production function:
1. Short run production function.
2. Long run production function.
Long run production function:

Long run is the period where the fixed factor is changed. If the demand for the firm's product
increases, the firm can increase its output by enlarging the size of its plant or increasing the scale
of its operations. So in the long run there is enough time to effect changes in the scale operations
or to introduce other adjustment in the organization set- up of the firm. In fact the firm in the long
period, can build any desired scale of plant. All factors are variable none is fixed. In the long run,
then, there are number of decisions that a firm will have to make about the scale of its operations,
the location of its operations and the techniques of production it will use. In this concept it
explains the laws of return to scale.
6. Explain the law of diminishing marginal returns. 2011

The Law of Diminishing Returns, also referred to as the Law of Diminishing Marginal Returns,
states that in a production process, as one input variable is increased there will be a point at
which the marginal per unit output will start to decrease, holding all other factors constant. In
other words, keeping all other factors constant, the additional output gained by another one unit
increase of the input variable will eventually be smaller than the additional output gained by the
previous increase in input variable. At that point, the diminishing marginal returns take effect.
7. What do you mean Iso-quant? 2013, 2009

The iso quant curve is a graph, used in the study of microeconomics, that charts all inputs that
produce a specified level of output. This graph is used as a metric for the influence that the inputs
have on the level of output or production that can be obtained. The iso quant curve assists firms in
making adjustments to inputs in order to maximize outputs, and thus profits.
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“The Iso-product curves show the different combinations of two resources with which a firm
can roduce equal amount of roduct.”Bilas
“Iso- roduct curve shows the different in ut combinations that will roduce a given out ut.”
Samuelson
“An Iso-quant curve may be defined as a curve showing the possible combinations of two
variable factors that can be used to roduce the same total roduct.” Peterson
“An Iso-quant is a curve showing all possible combinations of inputs physically capable of
roducing a given level of out ut.” Ferguson
8. What are the Properties of Iso-quants? 2013, 2012, 2009

i. ISO-QUANT curve slope downwards: ---
An iso-quant curve slopes downwards from left to right. In other words it has a negative slopes. It
is because one factor is a substitute of the other. In order to produce a given amount of output of a
commodity , if we use more of one factor we use less of the other. If the amount is increased or
decreased total output remain the same.
ii. ISO-QUANT curves convex to the origin:---

An iso-quant curve is always convex to it`s point of origin O as it means the factors are not perfect
substitutes. Increasing quantity of the factor is substituted for every addition units of one factor
which is being saved. Table 1 shows that 30 units of capital are given up to use 10 additional units
of labor and only 20 units of capital are given up to use 10 additional units of labor and only 20
units of capital are given up to use yet another 10 units of labor. This characteristic of iso-quant
curve is in according to diminishing marginal rate of technical substitution.
At point B - 10 more units of labor 30 units of capital are given up. Accordingly, marginal rate of
technical substitution of labor for capital will be 3:1. At point C it will be 2:1. Hence the rate tends
to decline. Thus IQ curve is convex to origin.
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iii. Two IQ curves cannot insect each other:---
We know one iso-quant curve corresponds to a particular level of output, and at points on an iso-
quant curve indicate the same level of output. If the iso-quant happen to intersect each other.
We shall have a comment point corresponding to both the iso-quant. This common point would
indicate two different levels of output of output to only contradict our earlier assertion that each
point on an iso-quant curve indicates the same level of output. This is illustrated in the graph.
iv. The higher the iso-quant curve the higher the level of output it represents:--
Higher iso quant curve represents higher level of output. It is so because higher iso-quant curves
are based upon higher level of input of the factor TK.
v. Knowledge of the case of factor substitution:---

Curvature of the iso-quant curves reflects the ease with which factor are substituted for another.
If two factor are perfect substitutes one another the iso-quant curve will be a straight line. In fact,
they will be one and the same factor. As the process of substitution becomes difficult, the iso-
quant curves become convex to the point of origin. When two factor can`t be substituted that is
when they can be used in a fixed proportion only then the iso-quant curves assume the shape of
right angle.
9. What is the difference between Marginal Rate of Substitution (MRSxy) and

Marginal Rate of Technical Substitution (MRTSLK)? Explain.2014, 2012, 2009
Both describe the relationship between two goods in terms of how many units of one is equivalent
to one unit of the other. However, the marginal rate of transformation focuses on supply and the
marginal rate of substitution focuses on demand.
The marginal rate of transformation tells you how many more units of X you could produce if you
produce one less unit of Y, i.e. the opportunity cost of producing one in terms of the other. If
making one less Ferrari frees up enough resources to make five Toyota Prius, the rate of
transformation is five to one at the margin. The rate of transformation may change as the number
of units of X relative to Y changes, and the line plotting these values is called the transformation
curve.
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The marginal rate of substitution tells you how many units of X which a given consumer, or group
of consumers, would consider to be compensation for one less unit of Y. For instance, a consumer
who prefers Coca Cola may be equally happy if offered two cans of Pepsi instead. A line joining all
points on a chart showing those quantities of X and Y considered by the consumer to provide
equivalent utility is called an indifference curve.
The steepness of the line at any particular point on the two graphs above indicates the marginal
rate of transformation and the marginal rate of substitution respectively. Point AA on the
transformation curve indicates a different marginal rate of transformation than at point BB.
10. What is iso-cost lines? Draw also-cost line from the equation 100=2L+3K.
2014, 2009
The iso cost line is an im ortant com onent when analyzing roducer’s behaviour. The isocost
line illustrates all the possible combinations of two factors that can be used at given costs and for
a given roducer’s budget. In sim le words, an isocost line re resents a combination of inputs
which all cost the same amount.
Now suppose that a producer has a total budget of Rs 120 and and for producing a certain level of
output, he has to spend this amount on 2 factors A and B. Price of factors A and B are Rs 15 and Rs.
10 respectively.
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Combinations Units of Capital Units of Labour Total expenditure
Price = 150Rs Price = 100 Rs ( in Rupees)
A 8 0 120
B 6 3 120
C 4 6 120
D 2 9 120
E 0 12 120
The iso cost line shows all the possible combinations of two factors Labour and capital.
11. Show producers equilibrium using Iso-cost and Iso quants. [2018]
Producer’s Equilibrium
The graph below shows how we can use isoquant curve and isocost lines to determine optimum
roducer’s equilibrium.
In the figure shown above, the isoquant curve represents targeted output, i.e. 200 units. Icocost lines
EF, GH and KP show three different combinations in which we can utilize the total outlay of inputs, i.e.
capital and labour.
The isoquant curve crosses all three isocost lines on points R, M and T. These points show how much
costs we will incur in producing 200 units. All three combinations produce the same output of 200
units, but the least costly for the producer will be point M, where isocost line GH is tangent to the
isoquant curve.
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Points R and T also cross the isoquant curve and equally produce 200 units, but they will be more
expensive because they are on the higher isocost line of KP. At point R the producer will spend more
on capital, and labour will be more expensive on point T.
Thus, oint M is the roducer’s equilibrium. It will roduce the same out ut of units, but will a
more profitable combination as it will cost less. The producer must, therefore, spend OC amount on
capital and OL amount on labour.
12. Show the optimal combination of input where producers maximizes their profit
Equilibrium conditions of the firm are identical to the above situation which is, iso-cost line must
be tangent to the highest possible isoquant and isoquant should be convex. Though the present
problem is theoretically different. In this case firm has to maximise its output for a given cost. This
is elucidated in the figure:
Figure: Maximisation of Output

Firm's cost constraint is given by iso-cost line AB. The maximum level of output that firm can
produce is Q2since the point 'e' lies on the isoquant Q2. Point 'e' is the equilibrium point since at
this point the iso-cost line AB is tangent to the isoquant Q2. Other points on the isocost line which
is S and T, lie on a lower isoquant Q1. Points to the right of 'e' indicate higher levels of output that
are desirable, however aren't attainable because of the cost constraint. Therefore Q2 is the
maximum output possible for given cost. The optimal combination of factors is OK1 and OL1.
The above analysis illustrates that optimal combination of inputs required for a firm to minimise
the cost of producing a given level of output or to maximise the output for a given cost outlay is
given at tangency point of an isoquant and is cost line.
The above analysis is based on constant factor prices. If factor prices change, firm will choose
another factor combination which will minimise the cost of production for given output or
maximise the level of output for a given cost
13. Determine and describe the least cost combination of two s so that producer can
be able to minimize the cost.
Least-Cost Combination
The problem of least-cost combination of factors refers to a firm getting the largest volume of
output from a given cost outlay on factors when they are combined in an optimum manner.
In the theory of production, a producer will be in equilibrium when, given the cost-price function,
he maximizes his profits on the basis of the least-cost combination of factor. For this he will
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choose that combination of factors which maximizes his cost of production. This will be the
optimum combination for him.
Assumptions
The assumptions on which this analysis is based are:
1. There are two factors. Capital and labor.
2. All units of capital and labor are homogeneous.
3. The prices of factors of production are given and constant.
4. Money outlay at any time is also given.
5. Perfect competition is prevailing in the factor market.
On the basis of given prices of factors of production and given money outlay we draw a line A, B.
The firm cannot choose and neither combination beyond line AB nor will it chooses any
combination below this line. AB is known as the factor price line or cost outlay line or iso-cost line.
It is an iso-cost line because it represents various combinations of inputs that may be purchased
for the given amount of money allotted. The slope of AB shows the price ratio of capital and
labour, i.e., By combining the isoquants and the factor-price line, we can find out the optimum
combination of factors. Fig. illustrates this point.
In the Fig. equal product curves IQ1, IQ2 and IQ3 represent outputs of 1,000 units, 2,000 units and
3,000 units respectively. AB is the factor-price line. At point E the factor-price line is tangent to
iso-quant IQ2 representing 2,000 units of output. Iso-qunat IQ3 falls outside the factor-price line
AB and, therefore, cannot be chosen by the firm. On the other hand, iso-quant IQ, will not be
preferred by the firm even though between R and S it falls with in the factor-price line. Points R
and S are not suitable because output can be increased without increasing additional cost by the
selection of a more appropriate input combination. Point E, therefore, is the ideal combination
which maximizes output or minimizes cost per units: it is the point at which the firm is in
equilibrium.
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14. What is marginal rate of Technical substitution (MRTS)?
Marginal rate of technical substitution (MRTS) may be defined as the rate at which the producer
is willing to substitute one factor input for the other without changing the level of production.
In other words, MRTS can be understood as the indicator of rate at which one factor input (labor)
can be substituted for the other input (capital) in the production process while keeping the level
of output unchanged or constant.
Marginal rate of substitution will be thus----
It means the Marginal rate of technical substitution of factor labor for factor capital (K) (MRTS LK)
is the number of units of factor capital (K) which can be substituted by one unit of factor labor (L)
keeping the same level of output.
15. Describe diminishing Marginal Rate of Technical Substitution.

The marginal rate of technical substitution (MRTS) is an economic theory that illustrates the rate
at which one factor must decrease so that the same level of productivity can be maintained when
another factor is increased.
The MRTS reflects the give-and-take between factors, such as capital and labor, that allow a firm
to maintain a constant output. MRTS differs from the marginal rate of substitution (MRS) because
MRTS is focused on producer equilibrium and MRS is focused on consumer equilibrium.
The Formula for the MRTS Is
Δ
MRTS (L, K)= Δ
Where:
K=Capital
L=Labor
MP=Marginal products of each input
Δ
=Amount of capital that can be reduced
Δ
When labor is increased (typically by one unit)
16. What do you mean by Isoquant? Briefly write down the common characteristics of
Isoquant.
An Isoquant represents combination of two factors which are capable of producing the same level
of output.
Combination Factor x Factor y
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
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The above table shows the different combination of two factors x and y. The graphical
presentation of the above table is given below:
A . Unattainable Point
12
Factor y
8 B
C
5
3
D
0
Factor x
1 2 3 4
Fig: Isoquant Curve

The above curve shows the combination of factor x and factor y.
Characteristics of Isoquant Curve:
a) An isoquant lying above and to the right of another isoquant represents a higher level of
output:
b) Two isoquants cannot cut each other:
c) Isoquants are convex to the origin:
d) No isoquant can touch either axis:
e) Isoquants are negatively sloped:
f) Isoquants need not be parallel:
g) Each isoquant is oval-shaped:
17. What is production possibility frontier (PPF)?

Production possibility frontier is the graph which indicates the various production possibilities of
two commodities when resources are fixed. The production of one commodity can only be
increased by sacrificing the production of the other commodity. It is also called the production
possibility curve or product transformation curve.
The opportunity cost of such a decision is the value of the next best alternative use of scarce
resources. Opportunity cost can be illustrated by using production possibility frontiers (PPFs)
which provide a simple, yet powerful tool to illustrate the effects of making an economic choice.
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18. Define economic of scale.

Economies of scale are cost advantages reaped by companies when production becomes
efficient. Companies can achieve economies of scale by increasing production and lowering costs.
This happens because costs are spread over a larger number of goods. Costs can be both fixed and
variable.
Economies of scale can be both internal and external. Internal economies of scale are based on
management decisions, while external ones have to do with outside factors.
Diagram of economies of scale
19. What are the features of production function? [2010]

Production function presumes the following main features:
i. Production function expresses a functional relationship between quantities of inputs and
output.
ii. It represents technical relationship between inputs and output.
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iii. Output is the result of a joint use of factors of production, so, the physical productivity of one
factor can be measured only in context of this factor being used in conjunction with other
factors.
iv. It expresses a flow of inputs resulting in a flow of output in a specific period of time.
v. Production function is determined by the state of technology Any change in technology will
mean shift in production function.
vi. Advancement in technology will result in a larger output from a given combination of the
factors of production.
vii. Production function is not related with money price. It does not have any monetary
significance. In other words, it is related with physical quantity.
Thus production function describes the law of production, i.e the transformation of factor inputs
into outputs (products) at any particular period of time.
20. Explain the law of variable proportion. What is the optimum stage of production
and why? [2014]
The Law of Variable Proportions or Returns to a Factor plays an important role in the study of the
Theory of Production.
This law examines the production function with one factor variable, keeping the quantities of other
factors fixed. In other words, it refers to the input-output relation when output is increased by
varying the quantity of one input. Law of variable proportion is also known as ‘ Law of Returns’ or ‘
Returns to Variable factor ”
A major dilemma in the world of the law of diminishing returns is deciding the stage where a rational
roducer would look to o erate. Let’s examine each of these stages from his ers ective.
The stage of negative returns or stage III is robably not a stage of the roducer’s choice. This is
because the fixed factors here are over utilized. Thus a rational producer would know that he is not
having optimum production.
Further, production can be increased by decreasing the number of variable inputs. Effectively, even if
the inputs are free of cost, the producer would stop before the advent of stage III.
Stage I or the stage of increasing returns is a better stage, to start with. However, a rational producer
would again not operate in this stage. This is because he would know that he is not making efficient
utilization of the fixed inputs. In simpler words, the fixed inputs are underutilized.
21. Describe three stages of the law of variable proportion in production function.
[2016]
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Three Stages of the Law
The law has three stages as explained below:
1. Stage I – The Total Physical Product increases at an increasing rate and the MPP increases too.
The Marginal Physical Product increases with an increase in the units of the variable factor.
Therefore, it is also called the stage of increasing returns. In this example, the Stage I of the law
runs up to three units of labour (between the points O and L).
2. Stage II – The TPP continues to increase but at a diminishing rate. However, the increase is
positive. Further, the MPP decreases with an increase in the number of units of the variable
factor. Hence, it is called the stage of diminishing returns. In this example, Stage II runs between
four to six units of labour (between the points L and M). This stage reaches a point where TPP is
maximum (18 in the above example) and MPP becomes zero (point R).
3. Stage III – Now, the TPP starts declining, MPP decreases and becomes negative. Therefore, it is
called the stage of negative returns. In this example, Stage III runs between seven to eight units of
labour (from the point M onwards).
22. Discuss the differences between fixed factors and variable factors of production.
[2016]
Fixed factors Variable factors
1. Fixed factors exist only in the 1. Variable factors exist both in the short-run
short-run. and long-run.
2. It is independent of output in 2. It changes with the change of output in the
the short-run. short-run
3. Plant, machines etc. are the 3. Labour, raw materials etc. are the examples
examples of fixed. of variable factors.
4. It exists even in the zero level 4. When output is zero, quantities of variable
of output. factors are reduced to zero.
23. How technology change can affect the production function? [2016][2010]
Or what will happen in production function if technology is developed in a
significant manner? [2013]
Technological change alters the firm’s roduction function by either changing the relationshi
between inputs and output or introducing a new product and therefore a new production
function. An improvement in technology enables your firm to produce a given quantity of output
with fewer inputs shifting the production isoquant inward.
Technological change that introduces new products are difficult to view as a shift in the
production function. The new product simply has a new production function. When they were
first introduced, there weren’t any goods com arable to com uters, microwave ovens, and
cellular telephones. When introduced, these new goods had their own, new production function.
Technological change has three components — invention, innovation, and diffusion.
Invention refers to a new device, method, or process developed from study and experimentation.
According to the United States Patent and Trademark Office, an invention is “any art or rocess
(way of doing or making things), machine manufacture, design, or composition of matter, or any
new and useful improvement thereof, or any variety of plant, which is or may be patentable under
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the patent laws of the United States.”
An innovation is an invention that’s a lied for the first time. Although substantial evaluation
occurs during the research and development process, innovation still entails a substantial degree
of uncertainty regarding its profitability. This uncertainty can be removed only with the actual
implementation of the innovation. After the innovation has been applied, reevaluation occurs
based upon additional information obtained.
The two types of innovations are product innovations and process innovations.
 Product innovation
 Process innovation
Diffusion examines the speed at which an innovation is adopted. Diffusion seeks to explain how,
why, and at what rate innovations are adopted. As a result, diffusion introduces a time element in
your decision-making.
24. Define short run and long run production function? [2014]
A short-run production function refers to that period of time, in which the installation of new
plant and machinery to increase the production level is not possible. On the other hand, the Long-
run production function is one in which the firm has got sufficient time to install new machinery
or capital equipment, instead of increasing the labor units.
The short run production function is one in which at least is one factor of production is thought
to be fixed in supply, i.e. it cannot be increased or decreased, and the rest of the factors are
variable in nature.
Long run production function refers to that time period in which all the inputs of the firm are
variable. It can operate at various activity levels because the firm can change and adjust all the
factors of production and level of output produced according to the business environment. So, the
firm has the flexibility of switching between two scales.
25. What is cost least rules? In Which situation a producer will shut down its
production under a perfect competitive market? [2010]
The Least Cost Method is another method used to obtain the initial feasible solution for the
transportation problem. There are several methods available to obtain an initial basic feasible
solution of a transportation problem. We discuss here only the following three. For finding the initial
basic feasible solution total supply must be equal to total demand.
Method: Least Cost Method (LCM)
The least cost method is more economical than north-west corner rule, since it starts with a lower
beginning cost. Various steps involved in this method are summarized as under.
Step 1: Find the cell with the least (minimum) cost in the transportation table.
Step 2: Allocate the maximum feasible quantity to this cell.
Step:3: Eliminate the row or column where an allocation is made.
Step:4: Repeat the above steps for the reduced transportation table until all the allocations are made.
Shut down production
A firm will choose to implement a production shutdown when the revenue received from the sale of
the goods or services produced cannot cover the variable costs of production. In this situation, a firm
will lose more money when it produces goods than if it does not produce goods at all. Producing a
lower output would only add to the financial losses, so a complete shutdown is required. If a firm
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decreased production it would still acquire variable costs not covered by revenue as well as fixed
costs (costs inevitably incurred). By stopping production the firm only loses the fixed costs.
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CHAPTER 7
COST
1. “No cost is fixed in the long-run.” – Explain the statement.
Or, Explain why in long run all costs are variable. 2013
In the long run, when all inputs under the control of the firm are variable, there is no fixed cost. As
such, there is no need to distinguish between total cost, fixed cost, and variable cost. In the long
run, total cost is merely total cost.
With no fixed inputs in the long run, increasing and decreasing marginal returns, and especially
the law of diminishing marginal returns, are not relevant to long-run total cost. There are,
however, two similar influences, economies of scale (or increasing returns to scale) and
diseconomies of scale (or decreasing returns to scale).
a) The Short Run: In the short run, total cost increases at a decreasing rate due to increasing
marginal returns and increases at an increasing rate due to decreasing marginal returns and
the law of diminishing marginal returns. This also triggers changes in marginal cost.
b) The Long Run: In the long run, there are no fixed inputs. As such, marginal returns and
especially the law of diminishing marginal returns do not operate and thus do not guide
production and cost. Instead long-run total cost is affected by increasing and decreasing
returns to scale, which translates into economies of scale and diseconomies of scale.
2. What is the difference between Economics of Scale and Diseconomies of scale?

Economies of scale and diseconomies of scale are related concepts and are the exact opposites of
one another. Economies of scale arise when the cost per unit reduces as more units are produced,
and diseconomies of scale arise, when the cost per unit increases as more units are produced. A
firm constantly aims to obtain economies of scale, and must find the production level at which
economies of scale turns to diseconomies of scale.
3. Describe the relationship between Total, Average and Marginal Cost. 2013
Total Cost
Total cost is an economic measure that sums all expenses paid to produce a product, purchase an
investment. The Total Cost is the actual cost incurred in the production of a given level of output.
The total cost includes both the variable cost and the fixed cost.
Total Cost = Total Fixed Cost + Total Variable Cost + Opportunity Cost
Marginal Costs – Marginal cost is the cost of producing an extra unit. If the total cost of 3 units is
1550, and the total cost of 4 units is 1900. The marginal cost of the 4th unit is 350.
Marginal Cost = Total cost of nth unit - Total cost of (n-1)th unit.
Average Cost- The Average Cost is the per unit cost of production obtained by dividing the total
cost by the total output. By per unit cost of production, we mean that all the fixed and variable
cost is taken into the consideration for calculating the average cost. Thus, it is also called as Per
Unit Total Cost.
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AC = Average Variable cost (AVC) + Average Fixed cost (AFC)
4. What are the difference between Marginal cost and Average Cost?
Average Cost Marginal Cost
Cost per unit of output is called average Marginal cost is the change in total cost when an
cost. It is called unit cost. additional unit of output is produced.
Product of quality and AC is equal to If MC is added with the total cost of pricing units we
total cost. get total cost.
AC=AFC+AVC MC=AFC+MVC
AC=TC quantity MC=TC=TC=-1
AC is greater than MC MC is lower than AC
AC increases slower then MC. MC increases faster than AC.
5. What is short run average cost? 2014

While the total cost of production helps firms understand the overall expenses incurred, the
average costs help identify the expenditures involved in manufacturing a single unit.
As in the short run, costs in the long run de end on the firm’s level of out ut, the costs of factors,
and the quantities of factors needed for each level of output. The chief difference between long-
and short-run costs is there are no fixed factors in the long run. There are thus no fixed costs.
6. Why is SAC (short run average cost) curve U-shaped? 2017/2016/2014

The U-shapes of the average total cost, average variable cost, and marginal cost curves are
directly or indirectly the result of increasing marginal returns for small quantities of output
(production Stage I) followed by decreasing marginal returns for larger quantities of output
(production Stage II). The decreasing marginal returns in Stage II result from the law of
diminishing marginal returns.
The U-shaped cost curves form the foundation for the analysis of short-run, profit-maximizing
production by a firm. These three curves can provide all of the information needed about the cost
side of a firm's operation.
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Bring on the Curves
The diagram to the right displays the three U-shaped U-Shaped Cost Curves
cost curves--average total cost curve (ATC), average
variable cost curve (AVC), and marginal cost curve
(MC)--for the production.
All three curves presented in this diagram are U-
shaped. In particular, the production is guided by
increasing marginal returns for relatively small output
quantities, then decreasing marginal returns for larger
quantities.
Consider a few reference points:

a) The marginal cost curve reaches its minimum
value at 4 units.
b) The average variable cost curve reaches its
minimum at 6 units.
c) The average total cost curve reaches its minimum at 6.5 units.
The marginal cost curve is the only one of these three curves that is DIRECTLY affected by the law
of diminishing marginal returns. Up to a production of 4 units, increasing marginal returns is in
effect. From the 5th unit on, decreasing marginal returns (and the law of diminishing marginal
returns) takes over. The U-shaped pattern for the marginal cost curve that results from increasing
and decreasing marginal returns is then indirectly responsible for creating the U-shape of the
average variable cost and average total cost curves.
7. Explain why MC cuts AC and AVC at their minimum values?

Total Cost - The sum total of money expenses incurred by firm in production of a commodity is
called cost of production. TC = TVC + TFC
Fixed Costs - Which don't vary with the change in the level of output (These are also
called overhead costs) like rent of land, building, machines etc. Fixed Costs are also called Total
Fixed Costs (TFC). TFC = TC – TVC
Variable Costs - These costs vary directly with the change in the level of output like
labour cost, cost of raw material etc. Variable Costs are also called Total Variable Costs (TVC). TVC
= TC – TFC
Average Fixed Cost – It is the fixed cost per unit of output. AFC continuously decreases
with increase in output as TFC is remain constant. Its shape is rectangular hyperbola. AFC =
TFC/Q AFC = ATC – AVC
Average Variable Cost – It is the cost of variable per unit of output. AVC is u shaped
which shows it first fall then reaches its minimum and the rises. It is determine by the Law of
Variable Proportion. AVC = TVC/Q AVC = ATC – AFC
 Relation Ship Between Average Cost (AC), Average Variable Cost (AVC) and Marginal Cost
(MC)
 When AC and AVC declines, MC declines faster than AC and AVC. So that MC curve Remain
below AC curve and AVC curve.
 When AVC increases, MC increases faster than AVC. So that MC is above AVC curve.
 When AC increases, MC increases faster than AC. So that MC is above AC curve.
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 Since MC declines faster than AC and AVC its reaches its lowest point earlier than AC and AVC.
 So that MC starts rising even AC and AVC is falling.
 MC must cut AC and AVC from its lowest point.
Relationship between Average Cost (AC) and Marginal Cost (MC)

 Both are calculated from TC.
 When AC falls, MC is less than AC
 When MC = AC, AC is minimum.
 When AC increases, MC is greater than AC.
 MC curve cuts AC curve from below.
 Minimum point of MC comes before minimum point of AC
8. Why does average curve and marginal revenue curve fall on the same line?
The equality between average revenue and marginal revenue occurs for a firm selling an output
in a perfectly competitive market. This is illustrated by the exhibit to the right. This exhibit
contains the average revenue curve and marginal revenue curve for zucchini sold by Phil the
zucchini grower, a hypothetical firm in Shady Valley. Phil the zucchini grower is one of thousands
of zucchini growers in the market, selling identical products. As such, Phil receives the going price
for zucchini.
Fig: Perfect Competition

The primary observation from this exhibit is that (apparently) only one curve is displayed. This
single horizontal line, labeled MR = AR, is actually two curves, the marginal revenue curve and the
average revenue curve. They appear to be one curve because each overlays the other.
They coincide because marginal revenue is equal to average revenue at every output quantity.
The equality between marginal revenue and average revenue is the result of perfect competition.
Because Phil receives the same per unit price for every worker, incremental revenue is equal to
the per unit revenue.
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9. Differentiate between fixed cost and variable cost. 2015
 Fixed costs are costs we still have to pay for even if we're not producing.
 Variable cost are costs that simply vary with production.
Fixed cost includes expenses that remain constant for a period of time irrespective of the level of
outputs, like rent, salaries, and loan payments, while variable costs are expenses that change
directly and proportionally to the changes in business activity level or volume, like direct labor,
taxes, and operational expenses.
BASIS FOR COMPARISON FIXED COST VARIABLE COST
Meaning The cost which remains same, The cost which changes
regardless of the volume with the change in output is
produced, is known as fixed cost. considered as a variable
cost.
Nature Time Related Volume Related
Incurred when Fixed costs are definite, they are Variable costs are incurred
incurred whether the units are only when the units are
produced or not. produced.
Unit Cost Fixed cost changes in unit, i.e. as Variable cost remains same,
the units produced increases, per unit.
fixed cost per unit decreases and
vice versa, so the fixed cost per
unit is inversely proportional to
the number of output produced.
Behavior It remains constant for a given It changes with the change
period of time. in the output level.
Combination of Fixed Production Overhead, Fixed Direct Material, Direct
Administration Overhead and Labor, Direct Expenses,
Fixed Selling and Distribution Variable Production
Overhead. Overhead, Variable Selling
and Distribution Overhead.
Examples Depreciation, Rent, Salary, Material Consumed, Wages,
Insurance, Tax etc. Commission on Sales,
Packing Expenses, etc.
10. 10. Why ac curve and MC curve tend to be U shaped?

The average cost curve is u-shaped because of two things. The first is fixed costs and the second is
the law of diminishing returns.
Most sorts of production have some fixed costs. We can't have a bakery, for example, without
having a building and equipment like ovens. When we first start producing baked goods, the
average costs are high because we are making only a few goods and the fixed cost of the ovens is
high. (High costs/few goods = high average costs).
As you make more baked goods, the average costs drop because you are making more units of
product in the same ovens. (High costs/many goods = lower average costs)
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Marginal Cost is the increase in cost caused by producing one more unit of the good.
The Marginal Cost curve is U shaped because initially when a firm increases its output, total costs,
as well as variable costs, start to increase at a diminishing rate. At this stage, due to economies of
scale and the Law of Diminishing Returns, Marginal Cost falls till it becomes minimum. Then as
output rises, the marginal cost increases.
11. Explain profit maximum conditions with the help of MR and MC curve. 2014
The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that
level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal
Cost curve is rising. In other words, it must produce at a level where MC = MR.
The profit maximization rule formula is
MC = MR
Marginal Cost is the increase in cost by producing one more unit of the good.
Marginal Revenue is the change in total revenue as a result of changing the rate of sales by one unit.
Marginal Revenue is also the slope of Total Revenue.
Profit = Total Revenue – Total Costs
Therefore, profit maximization occurs at the most significant gap or the biggest difference between
the total revenue and the total cost.
12. How is the shape of production possibilities frontier connected with the law of
increasing opportunity cost?
To understand the law of increasing opportunity costs, let's first define opportunity
costs. Opportunity cost is the cost of what we are giving up to do what we are currently doing. If we
can either go to work or go to the beach, and we choose to work, the opportunity cost of working is
the value we would have gotten had we gone to the beach.
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The law of increasing opportunity costs states that as we increase production of one good, the
opportunity cost to produce an additional good will increase.
The Production Possibilities Curve (PPC) is a model that captures scarcity and the opportunity
costs of choices when faced with the possibility of producing two goods or services. Points on the
interior of the PPC are inefficient, points on the PPC are efficient, and points beyond the PPC are
unattainable. The opportunity cost of moving from one efficient combination of production to
another efficient combination of production is how much of one good is given up in order to get
more of the other good.
13. Define opportunity cost. 2017/2016

Opportunity cost is an economics term that refers to the value of what you have to give up in order
choosing something else.
Opportunity cost is the profit lost when one alternative is selected over another. The concept is useful
simply as a reminder to examine all reasonable alternatives before making a decision. For example,
you have $1,000,000 and choose to invest it in a product line that will generate a return of 5%. If you
could have spent the money on a different investment that would have generated a return of 7%,
then the 2% difference between the two alternatives is the foregone opportunity cost of this decision.
14. Describe implicit and opportunity cost. [2013]

Implicit costs (also called implied, imputed or notional costs) are the opportunity costs that
are not reflected in cash outflow but are implied by the choice of the firm not to allocate its
existing (owned) resources, or factors of production, to the best alternative use.
Opportunity cost is an economics term that refers to the value of what you have to give up in order
choosing something else.
Opportunity cost is the profit lost when one alternative is selected over another. The concept is useful
simply as a reminder to examine all reasonable alternatives before making a decision. For example,
you have $1,000,000 and choose to invest it in a product line that will generate a return of 5%. If you
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could have spent the money on a different investment that would have generated a return of 7%,
then the 2% difference between the two alternatives is the foregone opportunity cost of this decision.
15. What is Explicit and implicit cost? [2016]

Based on payment, costs are classified into two categories; they are Explicit Costs and Implicit
Costs. Explicit Cost is the cost which is actually incurred by the organization, during production.
On the other hand, Implicit Cost, are just opposite to the explicit cost, as the organization does
not directly incur them, but they are implied in nature which does not involve a cash payment.
Explicit costs are normal business costs that appear in the general ledger and directly affect a
company's profitability. Explicit costs have clearly defined dollar amounts, which flow through to
the income statement. Examples of explicit costs include wages, lease payments, utilities, raw
materials, and other direct costs.
An implicit cost is any cost that has already occurred but not necessarily shown or reported as a
separate expense. It represents an opportunity cost that arises when a company uses internal
resources toward a project without any explicit compensation for the utilization of resources.
This means when a company allocates its resources, it always forgoes the ability to earn money
off the use of the resources elsewhere, so there's no exchange of cash. Put simply, an implicit cost
comes from the use of an asset, rather than renting or buying it.
16. Define fixed cost, variable cost and marginal cost.

Fixed costs are expenses that do not change in proportion to the activity of a business, within the
relevant period or scale of production. For example, a retailer must pay rent and utility bills
irrespective of sales.
Variable costs by contrast change in relation to the activity of a business such as sales or
production volume. In the example of the retailer, variable costs may primarily be composed of
inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable.
Marginal cost is the change in total cost that arises when the quantity produced changes by one
unit. In general terms, marginal cost at each level of production includes any additional costs
required to produce the next unit. So, the marginal costs involved in making one more wooden
table are the additional materials and labour cost incurred.
17. Explain AFC, AVC and ATC with curve. [2016]

1. Average Fixed Cost (AFC)
The average fixed cost is the total fixed cost divided by the number of units produced. Hence, if
TFC is the total fixed cost and Q is the number of units produced, then
AFC =
2. Average Variable Cost (AVC)
The second aspect of short-run average costs is an average variable cost. Average variable cost is the
total variable cost divided by the number of units produced. Hence, if TVC is the total fixed cost and Q
is the number of units produced, then
AFC =
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3. Average Total Cost (ATC)
The average total cost is the sum of the average variable cost and the average fixed costs. That is,
ATC = AFC + AVC
In other words, it is the total cost divided by the number of units produced.
The diagram below shows the AFC, AVC, ATC, and Marginal Costs (MC) curves:
18. Why total cost falls as you increase the number of production. [2010]
The production cost involves two components as written below
Total Cost = Fixed Cost + Variable Cost
The total cost can be decreased by Economies of Scale i.e by increasing production . As the
number of components produced increases the Fixed cost gets divided over a large number of
components , while the variable cost remains the same thus decreasing the Total cost.
A simple example as follows :
Case 1) Company A produces toys with the following costs
Fixed Cost = Cost of purchasing Machine = Rs.100000
Variable Cost-= Cost of Producing one unit of product = Rs.10/Unit
(Labour , electricity etc.. which changes with production )
Quantity Produced = 100
Total Cost for production for 100 components = Fixed Cost +Variable Cost
=Fixed Cost + Variable Cost/Unit *No. of units
= 100000+(10*100)
=Rs101000
Therefore Cost / Unit = Total Cost / Number of Units
=101000/100
=Rs.1010
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Case 1) Company B produces toys with the following costs
Fixed Cost = Cost of purchasing Machine = Rs.100000
Variable Cost-= Cost of Producing one unit of product = Rs.10/Unit
(Labour , electricity etc.. which changes with production )
Quantity Produced = 1000
Total Cost for production for 100 components = Fixed Cost +Variable Cost
=Fixed Cost + Variable Cost/Unit *No. of units
= 100000+(10*1000)
=Rs110000
Therefore Cost / Unit = Total Cost / Number of Units
=110000/1000
=Rs.110
From the above example it is clear that Company B has a clear advantage due to economies of
scale where its per unit cost decreases drastically . This reduction in cost can be used to increase
profit margins or pass on the benefit to consumers to make the market more competitive.
19. Explain the relationship between TFC, TVC and TC. [2021]
In economics, Total Fixed Cost (TFC), Total Variable Cost (TVC), and Total Cost (TC) are important
concepts related to production and cost analysis. Let's understand the relationship between these
terms:
1. Total Fixed Cost (TFC): TFC refers to the cost incurred by a firm that does not change with the
level of production in the short run. It includes expenses such as rent, salaries of permanent
employees, insurance premiums, and other fixed expenses. TFC remains constant regardless of
the quantity of output produced.
2. Total Variable Cost (TVC): TVC represents the cost incurred by a firm that varies with the level
of production. It includes expenses directly related to the production of goods or services, such as
raw materials, direct labor wages, and variable overhead costs. As the level of production
increases, TVC also increases.
3. Total Cost (TC): TC is the sum of TFC and TVC. It represents the overall cost incurred by a firm to
produce a given quantity of output. Mathematically, TC = TFC + TVC.
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CHAPTER 8
MARKETS AND REVENUE
1. What is meant by market?

What are the different forms of market?
In Economics however, the term “Market” does not refer to a articular lace as such but it refers
to a market for a commodity or commodities. It refers to an arrangement whereby buyers and
sellers come in close contact with each other directly or indirectly to sell and buy goods.
According to Prof. R. Chapman, “The term market refers not necessarily to a lace but always to
a commodity and the buyers and sellers who are in direct com etition with one another.”
Forms of Market Structure:
On the basis of competition, a market can be classified in the following ways:
1) Perfect Competition
2) Monopoly
3) Duopoly
4) Oligopoly
5) Monopolistic Competition
1) Perfect Competition Market:
A perfectly competitive market is one in which the number of buyers and sellers is very large, all
engaged in buying and selling a homogeneous product without any artificial restrictions and
possessing perfect knowledge of market at a time.
2) Monopoly Market:
Monopoly is a market situation in which there is only one seller of a product with barriers to entry
of others. The product has no close substitutes. The cross elasticity of demand with every other
product is very low. This means that no other firms produce a similar product.
3) Duopoly:
Duopoly is a special case of the theory of oligopoly in which there are only two sellers. Both the
sellers are completely independent and no agreement exists between them. Even though they are
independent, a change in the price and output of one will affect the other, and may set a chain of
reactions.
4) Oligopoly:
Oligopoly is a market situation in which there are a few firms selling homogeneous or differenti-
ated roducts. It is difficult to in oint the number of firms in ‘com etition among the few.’ With
only a few firms in the market, the action of one firm is likely to affect the others. An oligopoly
industry produces either a homogeneous product or heterogeneous products.
5) Monopolistic Competition:
Monopolistic competition refers to a market situation where there are many firms selling a differ-
entiated product. “There is com etition which is keen, though not erfect, among many firms
making very similar roducts.” No firm can have any erce tible influence on the rice-output
policies of the other sellers nor can it be influenced much by their actions. Thus monopolistic
competition refers to competition among a large number of sellers producing close but not perfect
substitutes for each other.
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2. Compare among monopolistic competition, oligopoly, duopoly, monopoly and
monophony market.
OLIGOPOLY: A situation where there are only a few sellers in a particular economy who control a
particular commodity. They can, therefore, influence prices and affect the competition. In India,
an example of this would be mobile telephony - There are only a few operators, examples of which
are: Airtel, Idea, BSNL, Reliance
PERFECT COMPETITION: This is an economic situation that really doesn't exist, in which a bunch
of conditions are met, not the least of which are free entry and exit from a market, tons of sellers
selling the exact same product, and tons of buyers for that product who have perfect knowledge of
what it does and how it works. An Indian fish market might be an example of something close to
this (though real "perfect competition" doesn't really exist.) At the fist market, lots of sellers
gather together to try to sell the same wares, and lots of customers try to buy them with a good
knowledge of what they are buying. There is little to prevent someone from joining in on the
selling or quitting the market altogether.
DUOPOLY: A market in which two giant brands control most of the product being sold and
therefore have a great amount of influence over the factors involved in the selling. This is the one
I can't give you a great example of in relation to India...I just can't think of one that is specifically
"Indian." Some examples would be Visa &Mastercard and Reuters & Associated Press and
International news agencies.
MONOPOLY: A market dominated by one seller. The cable company is an example of this in India
(sort of like it is in America.) The cable company in India, facing no competition, is notorious for
poor quality and poor service.
MONOPOLISTIC COMPETITION: Here, there are lots of sellers selling similar products that don't
differ a whole lot in terms of characteristics or price. Think breakfast cereals. In India, an
example of this is the banking system. After financial sector reforms in 1992, the banking system
in India has become much more competitive with lots more banks offering similar products at
similar prices.
3. Write down the characteristics of a Market. [2011/2013/2015]

Perfect competitive Market
Perfect competition is a market structure in which the following five criteria are met: 1)
All firms sell an identical product; 2) All firms are price takers - they cannot control the market
price of their product; 3) All firms have a relatively small market share; 4) Buyers have complete
information about the product being sold and the prices charged by each firm; and 5) The
industry is characterized by freedom of entry and exit. Perfect competition is sometimes referred
to as "pure competition".
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Characteristics of Perfectly Competitive Market
A market is said to be [perfect competitive market where a sharp competition exist between large
number of buyers and sellers for homogeneous product at only one price in all over the market.
There are several characteristics of a perfect competitive market, those are:
a) A large number buyers and sellers – A large number of consumers with the willingness and
ability to buy the product at a certain price, and a large number of producers with the
willingness and ability to supply the product at a certain price.
b) No barriers of entry and exit – No entry and exit barriers makes it extremely easy to enter
or exit a perfectly competitive market.
c) Perfect factor mobility – In the long run factors of production are perfectly mobile, allowing
free long term adjustments to changing market conditions.
d) Perfect information - All consumers and producers are assumed to have perfect knowledge
of price, utility, and quality and production methods of products.
e) Zero transaction costs - Buyers and sellers do not incur costs in making an exchange of
goods in a perfectly competitive market.
f) Profit maximization - Firms are assumed to sell where marginal costs meet marginal
revenue, where the most profit is generated.
g) Homogeneous products - The products are perfect substitutes for each other;i.e-the
qualities and characteristics of a market good or service do not vary between different
suppliers.
h) Non-increasing returns to scale - The lack of increasing returns to scale (or economies of
scale) ensures that there will always be a sufficient number of firms in the industry.
i) Property rights - Well defined property rights determine what may be sold, as well as what
rights are conferred on the buyer.
j) Rational buyers - buyers capable of making rational purchases based on information given
k) No externalities - costs or benefits of an activity do not affect third parties
In the short run, perfectly competitive markets are not productively efficient as output will not
occur where marginal cost is equal to average cost (MC=AC).
4. What do you mean by perfectly competitive market and Profit Maximization? [2009]
Perfectly competitive market is a market where businesses offer an identical product and
where entry and exit in and out of the market is easy because there are no barriers. In the
example from earlier, when starting your own business in a perfectly competitive market, you
would need to sell a product that is identical to the products that other businesses are selling so
that you can enter the market more easily.
Profit Maximization: A process that companies undergo to determine the best output and price
levels in order to maximize its return. The company will usually adjust influential factors such as
production costs, sale prices, and output levels as a way of reaching its profit goal. There are
two main profit maximization methods used, and they are Marginal Cost-
Marginal Revenue Method and Total Cost-Total Revenue Method. Profit maximization is a good
thing for a company, but can be a bad thing for consumers if the company starts to use
cheaper products or decides to raise prices.
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5. Define Monopoly Market with their characteristics. [2008]
Definition: The Monopoly is a market structure characterized by a single seller, selling the
unique product with the restriction for a new firm to enter the market. Simply, monopoly is a form
of market where there is a single seller selling a particular commodity for which there are no close
substitutes.
Features of Monopoly Market
2. Under monopoly, the firm has full control over the supply of a product. The elasticity of
demand is zero for the products.
3. There is a single seller or a producer of a particular product, and there is no difference
between the firm and the industry. The firm is itself an industry.
4. The firms can influence the price of a product and hence, these are price makers, not the price
takers.
5. There are barriers for the new entrants.
6. The demand curve under monopoly market is downward sloping, which means the firm can
earn more profits only by increasing the sales which are possible by decreasing the price of a
product.
7. There are no close substitutes for a mono olist’s roduct.
Under a monopoly market, new firms cannot enter the market freely due to any of the reasons
such as Government license and regulations, huge capital requirement, complex technology and
economies of scale. These economic barriers restrict the entry of new firms.
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6. Distinguish between perfect competition and monopoly market.
A general comparison between monopoly and perfect competition for easy understanding
has been depicted as under:

Or, A Competitive firm faces a completely horizontal demand curve.
Or, How the shape is different from that of monopolistic market?
In a perfectly competitive market the market demand curve is a downward sloping line, reflecting
the fact that as the price of an ordinary good increases, the quantity demanded of that good
decreases. Price is determined by the intersection of market demand and market supply;
individual firms do not have any influence on the market price in perfect competition. Once the
market price has been determined by market supply and demand forces, individual firms become
price takers. Individual firms are forced to charge the equilibrium price of the market or
consumers will purchase the product from the numerous other firms in the market charging a
lower price (keep in mind the key conditions of perfect competition). The demand curve for an
individual firm is thus equal to the equilibrium price of the market .
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Demand Curve for a Firm in a Perfectly Competitive Market

The demand curve for an individual firm is equal to the equilibrium price of the market. The
market demand curve is downward-sloping.
The demand curve for a firm in a perfectly competitive market varies significantly from that of the
entire market. The market demand curve slopes downward, while the perfectly competitive firm's
demand curve is a horizontal line equal to the equilibrium price of the entire market. The
horizontal demand curve indicates that the elasticity of demand for the good is perfectly elastic.
This means that if any individual firm charged a price slightly above market price, it would not
sell any products.
A strategy often used to increase market share is to offer a firm's product at a lower price than the
competitors. In a perfectly competitive market, firms cannot decrease their product price without
making a negative profit. Instead, assuming that the firm is a profit-maximize, it will sell its goods
at the market price.
8. What is equilibrium of the firm?

Explain the conditions for the equilibrium of a firm.
Using Total revenue and Total cost approach, explain how firm maximizes profit to
attain equilibrium.
The firm is in equilibrium when it maximizes its profits (11), defined as the difference
between total cost and total revenue:
Π TR – TC
Given that the normal rate of rofit is included in the cost items of the firm, Π is the rofit above
the normal rate of return on capital and the remuneration for the risk- bearing function of the
entrepreneur.
The firm is in equilibrium when it produces the output that maximizes the difference between
total receipts and total costs.
The equilibrium of the firm may be shown graphically in two ways. Either by using the TR and TC
curves, or the MR and MC curves.
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In figure 5.2 we show the total revenue and total cost curves of a firm in a perfectly competitive
market. The total-revenue curve is a straight line through the origin, showing that the price is
constant at all levels of output. The firm is a price-taker and can sell any amount of output at the
going market price, with its TR increasing proportionately with its sales. The slope of the TR curve
is the marginal revenue. It is constant and equal to the prevailing market price, since all units are
sold at the same price. Thus in pure competition MR = AR = P.
The shape of the total-cost curve reflects the U shape of the average-cost curve, that is, the law of
variable proportions. The firm maximizes its profit at the output X e, where the distance between
the TR and TC curves is the greatest. At lower and higher levels of output total profit is not
maximized at levels smaller than XA and larger than XB the firm has losses.
The total-revenue-total-cost approach is awkward to use when firms are combined together in the
study of the industry. The alternative approach, which is based on marginal cost and marginal
revenue, uses price as an explicit variable, and shows clearly the behavioural rule that leads to
profit maximization.
In figure 5.3 we show the average- and marginal-cost curves of the firm together with its demand
curve. We said that the demand curve is also the average revenue curve and the marginal revenue
curve of the firm in a perfectly competitive market. The marginal cost cuts the SATC at its
minimum point. Both curves are U-shaped, reflecting the law of variable proportions which is
operative in the short run during which the plant is constant. The firm is in equilibrium
(maximizes its profit) at the level of output defined by the intersection of the MC and the MR
curves (point e in figure 5.3).
To the left of e profit has not reached its maximum level because each unit of output to the left of
Xe brings to the firm a revenue which is greater than its marginal cost. To the right of X e each
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additional unit of output costs more than the revenue earned by its sale, so that a loss is made and
total profit is reduced.
9. In what levels of production, a perfectly competitive firms stop its production in the
short-run? Describe using diagram.
Or, A Competitive firm’s shutdown point where price cover just variable cost.
Perfect competition is said to be exist when the following conditions are fulfilled:
Infinite buyers / Sellers: Infinite customers with the willingness and ability to buy the product at
the certain price, Infinite producers with the willingness and ability to supply the product at a
certain price. Neither buyer nor seller can influence upon the price of the product as individual
sellers have insignificant amount of market share and individual buyer can buy small amount of
goods.
10. Determine Price and output under a monopoly.

Price discrimination is the practice of charging a different price for the same good or service.
There are three types of price discrimination – first-degree, second-degree, and third-degree
price discrimination.
Discrimination, alternatively known as perfect price discrimination, occurs when a firm charges a
different price for every unit consumed.
The firm is able to charge the maximum possible price for each unit which enables the firm to
capture all available consumer surplus for itself. In practice, first-degree discrimination is rare.
A monopolist may be able to engage in a policy of price discrimination. This occurs when a firm
charges a different price to different groups of consumers for an identical good or service, for
reasons not associated with the costs of production. It is important to stress that charging
different prices for similar goods is not price discrimination. For example, price discrimination
does not does not occur when a rail company charges a higher price for a first class seat. This is
because the price premium over a second-class seat can be explained by differences in the cost of
providing the service.
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11. Differentiate between Monopoly and Perfect Competition.
Following points make clear difference between both the competitions:

i. Output and Price:
Under perfect competition price is equal to marginal cost at the equilibrium output. While under
monopoly, the price is greater than average cost.
ii. Equilibrium:
Under perfect competition equilibrium is possible only when MR = MC and MC cuts the MR curve
from below. But under simple monopoly, equilibrium can be realized whether marginal cost is
rising, constant or falling.
iii. Entry:
Under perfect competition, there exist no restrictions on the entry or exit of firms into the
industry. Under simple monopoly, there are strong barriers on the entry and exit of firms.
iv. Discrimination:
Under simple monopoly, a monopolist can charge different prices from the different groups of
buyers. But, in the perfectly competitive market, it is absent by definition.
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v. Profits:
The difference between price and marginal cost under monopoly results in super-normal profits
to the monopolist. Under perfect competition, a firm in the long run enjoys only normal profits.
vi. Supply Curve of Firm:
Under perfect competition, supply curve can be known. It is so because all firms can sell desired
quantity at the prevailing price. Moreover, there is no price discrimination. Under monopoly,
supply curve cannot be known. MC curve is not the supply curve of the monopolist.
vii. Slope of Demand Curve:
Under perfect competition, demand curve is perfectly elastic. It is due to the existence of large
number of firms. Price of the product is determined by the industry and each firm has to accept
that price. On the other hand, under monopoly, average revenue curve slopes downward. AR and
MR curves are separate from each other. Price is determined by the monopolist. It has been shown
in Figure 10.
viii. Goals of Firms:

Under perfect competition and monopoly the firm aims at to maximize its profits. The firm which
aims at to maximize its profits is known as rational firm.
ix. Comparison of Price:
Monopoly price is higher than perfect competition price. In long period, under perfect
competition, price is equal to average cost. In monopoly, price is higher as is shown in Fig. 11. The
perfect competition price is OP1, whereas monopoly price is OP. In equilibrium, monopoly sells ON
output at OP price but a perfectly competitive firm sells higher output ON1 at lower price OP1.
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x. Comparison of Output:
Perfect competition output is higher than monopoly price. Under perfect competition the firm is in
equilibrium at point M1 (As shown in Fig. 11 (a)), AR = MR = AC = MC are equal. The equilibrium
output is ON1. On the other hand monopoly firm is in equilibrium at point M where MC=MR. The
equilibrium output is ON. The monopoly output is lower than perfectly competitive firm output.
12. Determine Price and Quantity under Monopolistic Competition.
Monopolistic competition is form of imperfect competition where many competing producers sell
products that are differentiated from one another. In monopolistic in the short run including
using market power to generate profit. In the long run, other firms enter the market and the
benefits of differentiation decreases with competition; the market becomes more like perfect
competition where firms can not gain economic profit.
AR
MR
Short run equilibrium of the firm under monopolist competition. The firm maximizes it`s profit
and produces a quantity where the firm`s marginal revenue (MR) is equal to its marginal
cost(MC). The firm is able to collect a price based on the average revenue (AR) curve. The
difference between the firms average revenue and average cost gives it a profit.

Each perfectly competitive firm is a price taker, that is , it cannot affect the price of the good.
A single price must prevail under the assumption of competitive market and the demand curve or
average revenue curve is face by an competitive firm is perfectly elastic. It signifies that the firm
does not exercise any control over the price of the product can sell any amount of the product as
it takes at the ruling price. Once the price in the market is established a firm accepts as a given
datum and adjust its output at the level which gives it maximum profits.
The market demand curve slopes downward. But each firm faces a horizontal perfectly elastic—
demand curve at the going price.
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14. Why demand curve of a perfect competitive firm is parallel to the horizontal axis?
Discuss your rational.
The demand curve faced by the firm showing the relationship between price and quantity will be
parallel to X-axis because under perfect competition a firm has to sell its product at a given price
determined through the free market demand and supply.
Y
P D
In the given diagram DD is the demand curve under perfect competition , parallel to X-axis. Op is
the price given or determined through the market forces of demand and supply.
15. Define Average revenue product and marginal revenue cost.

AVERAGE REVENUE PRODUCT
Average revenue product is the unit revenue generated by the use or employment of different
quantities of a variable input. It is closely related to the concept of average product (or average
physical product). Average revenue product can be derived by dividing total revenue by the
quantity of variable input as specified by this equation----
Marginal Revenue Product:---

Marginal revenue product is the additional revenue generated by the use or employment of an
extra variable input. It is costly related to the concept of marginal product. Marginal physical
product indicates how much total production changes by employing another unit of variable
input. Marginal revenue product is also costly related to the concept of marginal revenue.
Marginal revenue is the change in total revenue that results from changing the quantity of output
produced.
Marginal revenue product can be derived as the change in total revenue due to a change in the
variable input as specified by this equation----
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Every firm in perfect competition is very small compared to the overall size of the market.
Consumers do not distinguish between the products of one firm one another, so consumer will
only purchase at the lowest price or the market price if there is only one price. With perfect
competition the competition means that all inefficient firms have been weeded out of the industry
; only those which can cover their costs can survive. The competition means that the market price
will allow for normal profile but no economic profiles. What this all means is that the individual
firm can`t lower it`s prices to attract more consumer`s, lower prices means that the firm can`t
continue to cover it`s costs, and it will lose it`s customers to the competition. With each firm
selling identical products, there is no customer loyalty. The customer will migrate to the firm with
lower prices.
17. “Marginal revenue curve of a firm can`t be above it`s average revenue curve”---
Explain.
The average revenue curve is the downward sloping industry demand curve and it`s
corresponding marginal revenue curve lies below it. The relation between the average revenue
and the marginal revenue under monopoly can be understood with the help of the table. The
marginal revenue is lower than the average revenue………
Q AR (= P) RS
1 20 20 20
2 18 36 16
3 16 48 12
4 14 56 8
5 12 60 4
6 10 60 0
7 8 56 -4
Given the demand for his product, the monopolist can increase his sales by lowering the price, the
marginal revenue also falls but the rate of fall in marginal revenue is greater than that in average
revenue. In the table AR falls by RS, 2 at a time whereas MR falls by RS.4. This is shown in which
the MR curve is below the AR curve and lies half way on the perpendicular drawn from AR to the
T-axis. The relation will always exist between straight line downward sloping AR and MR curves.
P
A C
D AR
MR
O M Output
In order to prove it, draw perpendiculars CA and CM to the y-axis and X-axis respectively from
point C on the AR curve; CA cuts MR at B and CM at D. We have to prove that AB = BC.
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18. Is it possible to enjoy supernormal profit by a perfectly competitive firm in the long
run? (2014)
The equilibrium market price and industry equilibrium level of output are determined by the
industry demand and supply curves. The number of firms in the industry and their size is fixed in
short run. In long run, the number of firms in the industry and their size can adjust.
Changes in the market demand affect the price and the firms profits. The presence of an economic
profit means all time passes new firms enter the industry the presence of economic loss means
that eventually some existing firms exit when firms earn a normal profit, there is no incentive to
enter or exit.
Economic profits bring entry by new firms. The industry supply curve shifts rightward and
reduces the market price. The fall in price reduces economic profit and decreases the incentive to
entry the industry. New firms enter unit it is no longer possible to earn an economic profit.
19. How is the shape of the demand curve of a firm in perfectly competitive market
situation? How the shape is differ from monopolistic market?
A market is said to be [perfect competitive market where a sharp competition exist between large
number of buyers and sellers for homogeneous product at only one price in all over the market.
Shape of the demand curve of a firm in perfectly competitive market
A perfect Competition firm has the goal to maximize economic profit, which equals total revenue
minus total cost. A table representing perfect competition market is shown below:
Quantity Price
1 10
2 8
3 6
4 4
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The above table shows the different price of different quantity of a perfect competitive firm. The
graphical presentation of the above table is given below:
5
4
Price
2 4 6 10 Quantity
Fig: Demand Curve of Perfect Competitive Firm
In a perfect competitive market, there remains several product with several price, every
consumer have to buy product at a bargaining rate as the perfect competitive firm is called a price
taker.
Shape of the demand curve of Monopolistic
A Monopolistic firm has the goal to continue a certain price in a market for economic
development. A table representing perfect competition market is shown below:
Quantity Price
1 4
2 4
3 4
4 4
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The above table shows the different price of different quantity of a monopolistic firm. The
graphical presentation of the above table is given below:
6
Price
4
3
2
1
0 1 2 3 4 Quantity
Fig: Demand Curve of Perfect Competitive Firm
In a monopolistic market, there remains a same price, every consumer have to buy product at a
fixed rate.
20. Show the long run market equilibrium of a firm under monopolistic market
condition.
For a firm to achieve long run equilibrium, the marginal cost must be equal to the price and the
long run average cost. That is, LMC = LAC = P. The firm adjusts the size of its plant to produce a
level of output at which the LAC is minimum. Now, we know that at equilibrium:
 Short-run marginal cost = Long-run marginal cost
 Short-run average cost = Long-run average cost
Therefore, in the long-run, we have: SMC = LMC = SAC = LAC = P = MR
Hence, at the minimum point of the LAC, the plant works at its optimal capacity and the minima of
the LAC and SAC coincide. Also, the LMC cuts the LAC at the minimum point and the SMC cuts the
SAC at the minimum point. Therefore, at the minimum point of the LAC, the equality mentioned
above is achieved.
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21. Explain short run equilibrium of a firm in perfectly? [2015]
A firm is in equilibrium in the short-run when it has no tendency to expand or contract its output
and wants to earn maximum profit or to incur minimum losses. The short-run is a period of time
in which the firm can vary its output by changing the variable factors of production. The number
of firms in the industry is fixed because neither the existing firms can leave nor new firms can
enter it.
In Fig. 5.15, the short run marginal cost curve, SMC, is equal to MR at point E. Thus E is the
equilibrium point. Corresponding to this equilibrium point, the firm produces OQ output and sells
it at a price OP. Thus, the firm earns pure profit to the extent of PARB since total revenue (OPAQ)
exceeds total cost of production (OBRQ).
A firm, in the short run, may earn only normal profit if MC = MR < AR = AC occurs. A loss may
result in the short run if MC = MR < AR < AC happens
22. How does the firm reach in equilibrium position in competitive market in the short
run?
Under perfect competition, the individual firm cannot influence the price. It must take the average
revenue (its demand) curve for granted and adjust its output according to its marginal cost curve.
The short-run equilibrium position of a firm under perfect competition is illustrated in Fig. 2,
where
OP = Price.
PR = Average Revenue Curve.
AC = Average Cost Curve.
MC = Marginal Cost Curve.
When output is OQ1 the marginal cost is the same as the price. Therefore, the firm will produce OQ
and sell it at price OP (=EQ).
In Fig. 1 the firm’s average cost ( Q1Z) is less than the price (=EQ1). Therefore, the firm is earning
excess profits (=EZ per unit). In the long run there will be new entry and the excess profits will be
competed away.
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23. What are differences between perfect competition and monopolistic competition?
[2011]
In a monopolistic market, there is only one firm that dictates the price and supply levels of goods
and services and has total market control. Contrary to a monopolistic market, a perfectly
competitive market is composed of many firms, where no one firm has market control.
BASIS FOR PERFECT COMPETITION MONOPOLISTIC COMPETITION
COMPARISON
Meaning A market structure, where there Monopolistic Competition is a market
are many sellers selling similar structure, where there are numerous
goods to the buyers, is perfect sellers, selling close substitute goods to
competition. the buyers.
Product Standardized Differentiated
Price Determined by demand and Every firm offer products to customers
supply forces, for the whole at its own price.
industry.
Entry and Exit No barrier Few barriers
Demand Curve Horizontal, perfectly elastic. Downward sloping, relatively elastic.
slope
Relation between AR = MR AR > MR
AR and MR
Situation Unrealistic Realistic
24. Briefly explain the marginal productivity theory of wages with criticism. [2011]
The marginal productivity theory of wage states that the price of labour, and wage rate is
determined according to the marginal product of labour.
Assumptions:
a. Perfect competition prevails in both product and factor market.
b. Law of diminishing marginal returns operates on the marginal productivity of labour.
c. Labor is homogeneous.
d. Full employment prevails.
e. The theory is based on long run.
f. Modes of production in constant.
Criticism:
a) The theory is based on the assumption of perfect competition. But perfect competition is
unreal and imaginary. Thus theory seems in practicable.
b) The theory puts too much on demand side. It ignores supply side.
c) Production is started with the combination of four factors of production. It is ridiculous to say
that production has increased by the additional employment of one worker. Employment of
an additional laborer amounts nothing in a big scale industry.
d) The theory is static. It applies only when no change occurs in the economy. Under depression
wage cut will not increase employment.
e) This, theory explains that wages will be equal to MRP and ARP.
f) It is difficult to measure MRP because any product is a joint product of both fixed and variable
factors.
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g) According to Watson the theory is cruel and harsh. This theory never takes into consideration
the marginal product of old, aged, blind etc.
25. What is market equilibrium? Explain market equilibrium with the help of demand
and supply curve. [2017]
Market equilibrium is a market state where the supply in the market is equal to the
demand in the market. The equilibrium price is the price of a good or service when the
supply of it is equal to the demand for it in the market. If a market is at equilibrium, the
price will not change unless an external factor changes the supply or demand, which
results in a disruption of the equilibrium.
Let us understand the concept of market equilibrium with the help of an example.
Table-10 shows the market demand and supply for talcum powder in Mumbai with their
varying prices of a week:
Determination of Market Price:

The equilibrium price of a product is determined when the forces of demand and supply
meet. For understanding the determination of market equilibrium price, let us take the
example of talcum Powder shown in Table-10. In Table-10 we have taken the initial price
of talcum powder as Rs. 100.
In this case, the quantity demanded is 80,000, while the supply is 10,000. This results in
the shortage of 70,000 of talcum powder in the market. Due to this shortage, the seller s get
a chance to earn more by increasing the price of the talcum powder and consumers are
ready to purchase at the price quoted by sellers due to shortage of talcum powder.
This increase in profit results in increase in the production of a product to earn more
profit, which, in turn, increases the supply of the product. The process of increase in prices
goes on till the price of talcum powder reaches to Rs. 300. At this price, the demand and
supply is equal to 40,000. Therefore, equilibrium is achieved and the equilibrium price is
Rs. 300.
Similarly, if the supply of talcum powder increases beyond Rs. 300, then the sellers need to
decrease their prices to sell their unsold stock. They would also stop production that
results in the decrease in supply. In such a case, consumers would buy more due to
reduction in price of talcum powder. This would continue till the stock would achieve
equilibrium and the equilibrium price come out to be Rs. 300.
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26. Define market Equilibrium. Discuss the impact of change in demand on market
Equilibrium. [2015]
Market equilibrium is a market state where the supply in the market is equal to the
demand in the market. The equilibrium price is the price of a good or service when the
supply of it is equal to the demand for it in the market. If a market is at equilibrium, the
price will not change unless an external factor changes the supply or demand, which
results in a disruption of the equilibrium.
A change in demand can be recorded as either an increase or a decrease.
Increase in Demand
When there is an increase in demand, with no change in supply, the demand curve tends to
shift rightwards. As the demand increases, a condition of excess demand occurs at the old
equilibrium price. This leads to an increase in competition among the buyer s, which in turn
pushes up the price.
Of course, as price increases, it serves as an incentive for suppliers to increase supply and
also leads to a fall in demand. It is important to realize that these processes continue to
operate until a new equilibrium is established. Effectively, there is an increase in both the
equilibrium price and quantity.
Decrease in Demand
Under conditions of a decrease in demand, with no change in supply, the demand curve
shifts towards left. When demand decreases, a condition of excess supply is built at the old
equilibrium level. This leads to an increase in competition among the sellers to sell their
produce, which obviously decreases the price.
Now as for price decreases, more consumers start demanding the good or service.
Observably, this decrease in price leads to a fall in supply and a rise in demand. This
counter mechanism continues until the conditions of excess supply are wiped out at the old
equilibrium level and a new equilibrium is established. Effectively, there is a decrease in
both the equilibrium price and quantity.
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27. What is imperfect competition?

Imperfect competition is a competitive market situation where there are many sellers, but they
are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market
scenario. As the name suggests, competitive markets that are imperfect in nature.
28. Describe source of market imperfection.

a) Economics of scale:-
 If economics of scale exists a firm can decrease it average cost by expanding it`s output.
 Bigger firms will have a cost advantage over smaller firms.
 One or few firms will produce most of the industries total output.
 If a single firm is producing for entire market the market is natural monopoly.
b) Barriers to entry :-
 Legal restrictions.
 High cost of entry.
 Advertising.
c) Network externalities:-
 Exist when an increase in network`s membership increases it`s value to current and
potential members.
 When network externalities are present joining a large network is more beneficial than
joining a small network.
 Avoiding switching costs.
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29. Describe Oligopoly and it`s characteristics.
In case the number of firms is small and the action taken by one firm is followed by rival firms in
the market, it is then to be studied within a separate framework of monopolistic competition
called Oligopoly.
A small number of firms
Homogenous of differentiated goods

Characteristics of Oligopoly
Barriers to entry
1) A small number of firms:--

Oligopoly is a market structure characterized by a few firms. This is different compared to the
perfectly competitive market and the monopolistic market that consist of large number of sellers
whereas there is only one sole seller in the monopoly market.
Due to the small number of firms, an oligopoly firm is perceived t have the power to determine
price but each firm must consider the action of competitors that is predicted to influence it`s
decision in determining price, output and carrying out advertising campaigns.
As a result, oligopoly firms are considered as mutually dependent since the profit of each firm not
only dependents on the strategies of price and sales, but also on the action of it`s competitors. The
characteristic of mutual interdependence that exists among these firms is an oligopoly industry
makes it hard to analyze the behavior of a certain firm.
2) Homogenous Goods and Goods that can be differentiated:--
In terms of goods oligopoly firms may produce wither homogenous goods or differentiated goods.
Most of the goods produced such as zine, aluminum, cement and steel are homogenous goods.
Meanwhile, consumer goods such as automobile, electronic equipments, cigarettes, breakfast
cereals and sports equipments are goods that can be differentiated. For goods that can be
differentiated, firms will usually conduct non-price competition such as advertising.
3) Barriers to Entry:--
Firms are an oligopoly market also face barriers as in the monopoly market. There are a few
important barriers that influence the number of firms in market. The small number of firms
enables each firm to make enough sales to achieve economies of scale. For new firms, they only
control a small portion of market share and definitely will not be able to achieve economies of
scale. This means they run production will a high average cost and eventually, they will not be
able to sustain in the industry.
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30. Definition of Duopoly.
Duo means two, poly means seller, so , Duopoly is two seller market. A situation in which two
companies own all or nearly all of the market for a given product or service is called Duopoly
market. A duopoly is the basic form of oligopoly market dominated by a small number of
companies. A duopoly can have the same impact on the market as a monopoly if the two players
collude on prices or output. Collusion results in consumers paying higher prices than they would
in a truly competitive market and is illegal under U.S. antitrust law.
A duopoly is a form of oligopoly occurring when two companies control all most of the market for
a product or service.
31. What do you mean by monopoly? And its characteristics. [2008]

Monopoly is from the Greek word meaning one seller. It is the polar opposite of perfect
competition. Monopoly is a market structure in which one firm makes up the entire market.
Monopoly and competition are at the two extremes.
It is define as----
Monopoly refers to a market where there is a single seller for a product and there is no close
substitute of the commodity that is offered by the sole supplier to the buyers. The firm constitutes
the entire industry.
Characteristics of a Monopoly
A monopoly can be recognized by certain characteristics that set it aside from the other market
structures:
 Profit maximizer: a monopoly maximizes profits. Due to the lack of competition a firm can
charge a set price above what would be charged in a competitive market, thereby maximizing
its revenue.
 Price maker: the monopoly decides the price of the good or product being sold. The price is
set by determining the quantity in order to demand the price desired by the firm (maximizes
revenue).
 High barriers to entry: other sellers are unable to enter the market of the monopoly.
 Single seller: in a monopoly one seller produces all of the output for a good or service. The
entire market is served by a single firm. For practical purposes the firm is the same as the
industry.
 Price discrimination: in a monopoly the firm can change the price and quantity of the good
or service. In an elastic market the firm will sell a high quantity of the good if the price is less.
If the price is high, the firm will sell a reduced quantity in an elastic market.
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CHAPTER 9
PRICE AND OUTPUT
1. Determine price and quantity under monopolistic competition.

In monopolistic competition, since the product is differentiated between firms, each firm does not
have a perfectly elastic demand for its products. In such a market, all firms determine the price of
their own products. Therefore, it faces a downward sloping demand curve. Overall, we can say
that the elasticity of demand increases as the differentiation between products decreases.
Fig. 1 above depicts a firm facing a downward sloping, but flat demand curve. It also has a U-
shaped short-run cost curve.
2. Price and output determination under perfect competition.

A firm is in equilibrium when it maximizes its profits. Hence, the output that offers maximum
profit to a firm is the equilibrium output. When a firm is in equilibrium, there is no reason to
increase or decrease the output.
In a competitive market, firms are price-takers. The reason being the presence of a large number
of firms who produce homogeneous products. Therefore, firms cannot influence the price in their
individual capacities. They have to follow the price determined by the industry.
The following figure shows a firm’s demand curve under erfect com etition:
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From Fig. 2 above, you can see that the industry price, OP, is fixed throughout the interaction of
demand and supply of the industry. Firms have to accept this price. Hence, they are price-takers
and not price-makers. Hence, they cannot increase or decrease the price OP.
Therefore, the line P acts as a demand curve for such firms. Hence, in perfect competition, the
demand curve of an individual firm is a horizontal line at the level of the industry-set market
price. Firms have to choose the level of output that yields maximum profit.
3. Explain the process of price and output determination under a monopoly. [2008]
A firm under monopoly faces a downward sloping demand curve or average revenue
curve. Further, in monopoly, since average revenue falls as more units of output are sold,
the marginal revenue is less than the average revenue. In other words, under monopoly the
MR curve lies below the AR curve.
The Equilibrium level in monopoly is that level of output in which marginal revenue equals
marginal cost. The producer will continue producer as long as marginal revenue exceeds
the marginal cost. At the point where MR is equal to MC the profit will be maximum and
beyond this point the producer will stop producing.
It can be seen from the diagram that up till OM output, marginal revenue is greater than
marginal cost, but beyond OM the marginal revenue is less than marginal cost. Therefore,
the monopolist will be in equilibrium at output OM where marginal revenue is equal to
marginal cost and the profits are the greatest. The corresponding price in the diagram is
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MP’ or OP. It can be seen from the diagram at out ut OM, while MP’ is the average revenue,
ML is the average cost, therefore, P’L is the rofit er unit. Now the total profit is equal to
P’L ( rofit er unit) multi ly by OM (total out ut).
In the short run, the monopolist has to keep an eye on the variable cost, otherwise he will
stop producing. In the long run, the monopolist can change the size of plant in response to
a change in demand. In the long run, he will make adjustment in the amount of the factors,
fixed and variable, so that MR equals not only to short run MC but also long run MC.
4. How you can maximize the profit in the competitive market.
Perfect competition arises when there are many firms selling a homogeneous good to many
buyers with perfect information. Under perfect competition, a firm is a price taker of its good
since none of the firms can individually influence the price of the good to be purchased or sold. As
the objective of each perfectly competitive firm, they choose each of their output levels to
maximize their profits. The key goal for a perfectly competitive firm in maximizing its profits is to
calculate the optimal level of output at which its Marginal Cost (MC) = Market Price (P). As shown
in the graph above, the profit maximization point is where MC intersects with MR or P. If the
above competitive firm produces a quantity exceeding qo, then MR and Po would be less than MC,
the firm would incur an economic loss on the marginal unit, so the firm could increase its profits
by decreasing its output until it reaches qo. If the above competitive firm produces a quantity
fewer than qo, then MR and Po would be greater than MC, the firm would incur profit, but not to
its maximum. Therefore, the firm could increase its profits by increasing its output until it reaches
qo.

Every firm in perfect competition is very small compared to the overall size of the market.
Consumers do not distinguish between the products of one firm one another, so consumer will
only purchase at the lowest price or the market price if there is only one price. With perfect
competition the competition means that all inefficient firms have been weeded out of the industry
; only those which can cover their costs can survive. The competition means that the market price
will allow for normal profile but no economic profiles. What this all means is that the individual
firm can`t lower its prices to attract more consumer`s, lower prices means that the firm can`t
continue to cover its costs, and it will lose its customers to the competition. With each firm selling
Economics | 497
identical products, there is no customer loyalty. The customer will migrate to the firm with lower
prices.
6. Define price discrimination. Explain the condition under which monopolistic price
discrimination is both possible and profitable.
Or Define price discrimination is both possible and profitable.
WHEN PRICE DISCRIMINATION IS POSSIBLE:
Price discrimination refers to charging of different consumers by the monopolist. It is possible
only when following conditions prevail in the market----
a. Existence of Monopoly---
Price discrimination is also called discriminating monopoly. It is evident that price discrimination
is possible only under conditions of monopoly.
b. Separate market----
Another condition necessary for discriminating monopoly is that there must between or more
markets which can be separated and can be kept separate. It can be possible only if a unit if the
commodity could not be transferred from low priced market to high priced market nor could the
buyer move from expensive market to cheap marketed. In other words unit of demand should not
move from one market to the other , otherwise goods will be purchased from the cheap market
and sold in the clear market. In the way that difference in price will disappear which the
monopolist wanted to maintain.
c. Difference in the elasticity of Demand:---
Price discrimination is possible when elasticity of demand will be different in different markets.
The monopolist will fix higher price per unit in the market where demand is in elastic and lower
price per unit in the market where demand is elastic. In this way alone he can increase his
revenue. There will be no fear or any change in demand. If elasticity of demand is the same
different markets, then price discrimination will either not be possible or will be detrimental.
d. Expenditure in dividing and sub-dividing market to be minimum---
The expenditure incurred by the monopolist in dividing and sub-dividing market should be the
least. If his expenditure neutralizes elasticity of demand, the objective of price discrimination
would not be fulfilled.
e. Commodity to order:---
If a consumer gets a commodity made to order then it is possible for the producer or the seller to
practice price discrimination. Let suppose that a furniture marker ordinarily sells a sofa-set made
by him at TK.5000 per set, but if a consumer wants a sofa set made to order, then the furniture
maker may charge TK 6000 per set.
f. Product differentiation :---
A monopolist by changing the packing, name, level etc of the good can charge different prices
although intrinsically the good is of the same quality.
7. What Are Barriers to Entry?
Barriers to entry are the obstacles or hindrances that make it difficult for new companies to enter
a given market. These may include technology challenges, government regulations, patents, start-
up costs, or education and licensing requirements.
498 | Economics
Another American economist, George J. Stigler, defined a barrier to entry as, “a cost of roducing
that must be borne by a firm which seeks to enter an industry but is not borne by firms already in
the industry.”
8. Types of Barriers to Entry
There are two types of barriers:
#1 Natural (Structural) Barriers to Entry
 Economies of scale:
 Network effect:
 High research and development costs:
 High set-up costs:
 Ownership of key resources or raw material:
#2 Artificial (Strategic) Barriers to Entry
 Predatory pricing, as well as an acquisition:
 Limit pricing:
 Advertising: Brand:
 Contracts, patents, and licenses:
 Loyalty schemes:
 Switching costs:
9. Determining the Shutdown Point of a Business
Three main factors help determine the shutdown point of a business:
1. How much variable cost goes into producing a good or service
2. The marginal revenue received from producing that good or service
3. The types of goods or services provided by the firm
For a one-product firm, the shutdown point occurs whenever the marginal revenue drops below
marginal variable costs. For a multi-product firm, shutdown occurs when average marginal
revenue drops below average variable costs.
A firm might reach its shutdown point for reasons that range from standard diminishing marginal
returns to declining market prices for its merchandise.
10. What do you mean by factor pricing? [2021]

Factor pricing refers to the process of determining the prices at which different factors of
production, such as labor, capital, land, and entrepreneurship, are bought and sold in a market
economy. In other words, it is the determination of the price that individuals and firms pay to rent
or purchase the services of these factors of production. Factors of production are inputs used in
the production process to create goods and services. Each factor of production has a price
associated with it, which reflects its relative scarcity and usefulness in producing goods and
services. The prices of factors of production are determined by the interaction of supply and
demand in factor markets.

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Economics | 369

CHAPTER 2 PAGE: 386

CHAPTER 3 PAGE: 412

CHAPTER- 6 PAGE: 443

CHAPTER 7 PAGE: 460

CHAPTER 8 PAGE: 470

CHAPTER 09 PAGE: 494

2. The scope of economics is very large- Is it true? Describe. [2013]

3. Is Economics a science or an-arts? Explain. [2013][2012]

5. Show the differences between positive and normative economics.

6. What is the Production Possibility Frontier (PPF) or Production Possibility Curve

8. What are the factors of production you know? Describe.

10. Define macroeconomics. What are the major objectives of macroeconomics?

Major objectives of macroeconomics:

2. Define law of demand. Why demand curve is downward sloped? Describe.

5. What is demand function?

Factors that affect the demand curve

7. Determinants / Factors of demand?

8. What do you mean by shift in demand curve? [2014]

Various Reasons for Shift in Demand Curve:

Methods of demand elasticity

b) The Point Method:

d) The Total Outlay Method:

According to Prof. A. Marshall-

Ed= α, Infinite elasticity/ perfectly elastic demand:

From the schedule we get,

Putting the value in price elasticity equation,

17. Explain the determinants of price elasticity of demand of a product? [2013]

(ii) Inferior goods:

Putting the value in income elasticity equation, we get:

From the above schedule, we get:

100 300 Quantity

From the schedule we can draw a demand curve:

c) Ed=1, Unit Elasticity:

22. Distinguish between a change in demand and a change in quantity demanded,

And here is a graphical representation of a shift in demand:

6. What are the causes of changes in supply?

7. Determine equilibrium price and quantity using demand supply model.

8. The following are the demand and supply functions----

9. The following are the demand and supply functions:

Market equilibrium will be exist where Qd = Qs

Equilibrium quantity Q = 40 + 3.5P = 40 + 3.5(24.19) = 124.69

a) According to question market demand function and market supply function :

Equilibrium price is 3 , output is 60

 500 + 200 = 1.5p + 2p

 500 + 206 = 1.5P + 2P

ii. Determination of Ed and ES from equation:

13. At the equilibrium point, Demand=Supply.-Explain. [2021]

2. Describe the two measurement method of utility [2012]

3. Define total utility and Marginal utility.

4. Define Utility and Marginal Utility. [2010]

5. Basic Assumption of Marsi-Iallian Utility Analysis.

7. Describe the Law of Diminishing Marginal Utility. [2017/2015/2012/2010]

8. Difference between Total Utility and Marginal Utility.

9. What is Indifference Curve (IC)? What are properties of IC?

10. What is the Marginal Rate of Substitution (MRSxy)

This rate is explained below in the following indifference schedule of Table.

Marginal Rate of Substitution:

12. Describe the Consumer’s Equilibrium.