Class 11 Commerce Economics - Theory Of Consumer Behaviour

State any two factors on which demand for a commodity depends.

Two factors on which demand of commodity depends are:-

1.Price of related goods:

a. Substitute Goods:

when the price of substitute goods increases the demand of the given commodity increases and vice versa. Example : tea and coffee , when price of tea increases demand for coffee increases and vice versa.

b.Complementary Goods:

when the price of complementary goods increases ,the demand of the given commodity decreases and vice versa. Example car and petrol, if the price of car increases demand for petrol decreases.

2. Income of the consumer:

As the income of the consumer increases ,his purchasing power increases and therefore the demand of the given commodity increases. Similarly, when the income of the consumer decreases,his purchasing power contradicts and hence the demand of the given commodity decreases.

Distinguish between price demand, income demand, and cross demand.

Price demand measures the ratio between proportionate change of quantity demanded of a good and proportionate change in price.

Income demand measures the ratio between proportionate change of income of the consumer and proportionate change in quantity demanded of a commodity.

Cross demand measures the ratio between proportionate change of quantity demanded of one good and proportionate change in price of another commodity.

Price and demand move in opposite directions. Give two reasons justifying this statement.

Price and demand move in opposite directions. This is because of :

1. Income Effect: When price of the commodity rises,real income of the people decreases,whereas money income remains the same. In other words, consumers can now buy less amount of goods with the same money they have. This is called income effect. For example, let the money income of consumer be Rs.100 , price of the commodity be Rs.10 so the quantity demanded is 10 units. Now if the price rises to Rs 20 per unit , quantity demanded will be 5 units. Hence as price increases demand decreases.

2. Substitution Effect: When commodity becomes cheaper ,it is substituted for other commodities which are expensive. This is known as substitution effect. For example , price of tea is Rs 50 and price of coffee is Rs 60 , now tea being cheaper than coffee will work as substitute for coffee and hence demand for tea will increase.

Explain what may cause rise in the price of a commodity.

Causes to rise the price of a commodity are:-

1) Increase in factors of production.

2) Increase in raw materials or inputs.

3) Use of outdated technology for the production purpose.

4) Increase in tax can cause the price of a commodity to rise.

What do you understand by 'desire', 'want' and 'demand'?

Desire refers to the wish a person has.

Want is a strong feeling of possessing some things.

Demand refers to the desire to have a commodity backed by willingness and ability to purchase that commodity at given price during a period of time.

Briefly explain a demand schedule and demand curve.

Price of orange per unit in Rs.	Quantity demanded in nos.
10	100
25	80
60	50

Demand schedule refers to the tabular presentation of different quantities of a commodity that will be demanded at different prices.

It expresses what quantities of goods a consumer is ready to buy at different prices. A demand schedule of oranges is shown above.

A demand curve is graphical representation that shows different quantities of given commodity that is demanded at various prices. Price of the commodity is measured along the Y axis and quantity demanded on X axis.

The points are plotted to obtain a downward sloping demand curve, indicating inverse relation between price and quantity demanded.

Discuss the causes and effects of increases in individual income.

Causes of increase of individual income: When the price of a commodity falls, the real income of the consumer rises.

Effects of increase of individual income: As the real income rises, the consumer can purchase more units of a commodity and thus, the demand rises.

Prepare your family's demand schedule for milk.

DEMAND SCHEDULE

PRICE(MILK)	QUANTITY DEMANDED(LITRE)
15	5
20	4
25	3
30	2
35	1

DEMAND means desire is the wish to have something or to enjoy a service. But demand implies more than mere desire. It means that the person is willing and able to pay for the object he desires.

As Law of Demand says that the price of commodity increases and the quantity demand decreases

When the price of milk increases the family use lesser amount of milk and if the milk price is low than quantity demand of milk will be increased

The diagram shows the demand for shoes.
Give one factor that would cause a move from point A to point B.

The demand curve DD in the diagram represents an inverse relationship between quantity demanded and price. The price, is thus, the determining variable for demand. Hence, a decrease in the price of shoes will shift the quantity demanded from A to B.

What is demand?

Demand is an economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service. Holding all other factors constant, an increase in the price of a good or service will decrease demand, and vice versa.

Mention any four factors affecting the elasticity of demand.

Four factors affecting the elasticity of demand are:

1) Nature of commodity: Necessaries have less than unitary elastic demand whereas, luxuries have more than unitary elastic demand.

2) Time period: Demand is inelastic in short period but elastic in long period.

3) Price level: elasticity of demand will be high at higher level of the price of the commodity and low at lower level of price.

4) Diversity of uses: Commodities that can be put to variety uses have elastic demand. On the other hand, if a commodity has only few uses, its demand is likely to be less elastic.

The diagram shows the demand for shoes. How is it related to an increase in population.

As population increases, demand for the commodity also increases. when population increases demand increases with increase in number of people. So, the demand is directly related to population.

Create a hypothetical table showing the various prices and quantity and draw the demand curve using that data.

price	quantity demanded
5	40
10	30
15	20
20	10

Take values for price at specific intervals, such as 5, 10, 15, 20 etc. and assign a value for the quantity demanded at that price level. Ensure it follows the law of demand.

The diagram shows the demand for shoes.
Give one factor that would cause a movement from B to A?

The demand curve DD in the diagram represents an inverse relationship between quantity demanded and price. The price, is thus, the determining variable for demand. Hence, increase in price of shoes will shift the quantity demanded from A to B.

Explain what effect the increase in the price of a complementary commodity will have on the original product.

When their is increase in the price of a complementary commodity, the demand of original product will decrease.

Complementary goods are goods which are consumed together example bat and ball , petrol and car. Thus increase in price of any of them decreases the price of given commodity.

The demand curve will shift parallely in the leftward direction showing decrease in demand.

Explain what effect the increase in the supply of a substitute commodity will have on the original product.

1. If the supply of a substitute commodity increase, the price of the substitute goods will increase and then the original product's supply will become less and hence the same quantity of substitute goods will be sold at a higher price.
2.A change in the price of a substitute-in-production causes a change in supply and a shift of the supply curve. An increase in the price of one substitute good causes a decrease in the supply of the other.
A decrease in the price of one substitute good causes an increase in the supply of the other.

Give a brief classification of demand.

1) Price demand measures the ratio between proportionate change of quantity demanded of a good and proportionate change in price.

2) Income demand measures the ratio between proportionate change of income of the consumer and proportionate change in quantity demanded of a commodity.

3) Cross demand measures the ratio between proportionate change of quantity demanded of one good and proportionate change in price of another commodity.

4) Joint demand is possessed by those goods which are demanded at the same time.

5) Composite demand is possessed by those goods which have more than one use. For example, milk is used for making several food items like, cheese, curd, ghee, etc.

6) Derived demand is possessed by those goods which is caused because of demand of another good. For example, for making a leather bag, leather is needed so demand for leather is an example of derived demand.

Explain any five factors affecting Price Elasticity of Demand.

Five factors affecting the elasticity of demand are:

1) Nature of commodity: Necessaries have less than unitary elastic demand whereas, luxuries have more than unitary elastic demand.

2) Time period: Demand is inelastic in short period but elastic in long period.

3) Price level: elasticity of demand will be high at higher level of the price of the commodity and low at lower level of price.

4) Diversity of uses: Commodities that can be put to variety uses have elastic demand. On the other hand, if a commodity has only few uses, its demand is likely to be less elastic.5) Habit of consumers: Goods to which consumers become habitual will have inelastic demand.

Discuss five determinants of elasticity of demand.

Five factors affecting the elasticity of demand are:

1) Nature of commodity: Necessaries have less than unitary elastic demand whereas, luxuries have more than unitary elastic demand.

2) Time period: Demand is inelastic in short period but elastic in long period.

3) Price level: elasticity of demand will be high at higher level of the price of the commodity and low at lower level of price.

Complete the following individual demand schedule.

Price in Rs Quantity of Sugar demanded in Kgs
5 20
6
7
8
9

Price in Rs	Quantity of sugar demanded in kgs
5	20
6	18
7	16
8	14
9	12

With the help of appropriate diagram, explain the meaning of contraction in demand and extension in demand.

In economics, the extension and contraction in demand are used when the quantity demanded rises or falls as a result of changes in price and we move along a given demand curve. When the quantity demanded of a good rises due to the fall in price, it is called extension of demand and when the quantity demanded falls due to the rise in price, it is called contraction of demand.

For instance, suppose the price of bananas in the market at any given time is Rs.12 per dozen and a consumer buys one dozen of them at that price. Now, if other things such as tastes of the consumer, his income, prices of other goods remain the same and price of bananas falls to Rs. 8 per dozen and the consumer now buys 2 dozen bananas, then extension in demand is said to have occurred. On the contrary, if the price of bananas rises to Rs. 15 per dozen and consequently the consumer now buys half a dozen of the bananas, then contraction in demand is said to have occurred.

1152721_729909_ans_c5a618c08e7a4f6fa4344abcb746f9f3.jpg

Briefly explain the percentage method of calculating elasticity of demand.

If the percentage change in demand is proportional to percentage change in price, the elasticity is said to be unity. If the percentage change in demand is more than the percentage change in price, the elasticity is more than one, and if the percentage change in demand is less than percentage change in price, the elasticity of demand is less than unity. Mathematically
Elasticity of demand $= \dfrac {\text {Percentage change in demand}}{\text {Percentage change in price}}$

Demand is inversely related to price. Explain.

The law of demand states that if all the other parameters are constant then, the demand for a good or service is inversely proportional to price.

State two factors affecting the market demand of a commodity.

Factors affecting market demand are as follows:
$(1)$ Price of the Product: As price rises, the demand falls and vice-versa.
$(2)$ Consumer's Taste and Preference: As tastes and preferences shift from one commodity to the other, demand for the first commodity reduces and that of the other commodity rises.

Define indifference curve.

An indifference curve is a curve that represents all the combinations of goods that give the same satisfaction to the consumer. Since all the combinations give the same amount of satisfaction, the consumer prefers them equally.

Define Utility.

Utility is the want-satisfying power of a commodity. It is the satisfaction, actual or expected, obtained from the consumption of a commodity. It differs from person-to-person, place-to-place and time-to-time. It is the ability of a good to satisfy a want.

Distinguish between :
Total Utility and Marginal Utility Diminishing Marginal Utility.

Total utility refers to the total satisfaction obtained from the commodity of all possible units of a commodity. It measures the total satisfaction obtained from the consumption of all the units of a commodity.

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.

Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.

Give Reasons or Explain.
Utility is a psychological term.

Utility is psychological. This means that the satisfaction obtained from consumption of something depends on the mental attitude of the person. Thus utility differs from person to person as not all people consuming the same commodity will get equal satisfaction. Psychologically, each person has his own judgment and likes and dislikes and he acts accordingly.

The Law of Diminishing Marginal Utility and The Law of Equi- Marginal Utility.

Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.
People spend their income on various goods because consuming more and more of anyone good reduces the marginal satisfaction obtained from further consumption of the same good.
The law of equi-marginal utility is an extension of the law of DMU. It states that with the limited that a person has, he aims to spend it on different commodities and earn maximum and equal satisfaction from them.
He should such a combination of goods so that the utility derived from the last unit of the goods are the same.

Give Reasons or Explain.
Utility is a psychological term.

The utility is psychological. This means that the satisfaction obtained from consumption of something depends on the mental attitude of the person. Thus utility differs from person to person as not all people consuming the same commodity will get equal satisfaction. Psychologically, each person has his own judgment and likes and dislikes and he acts accordingly.

Give Reason or explain the following:
Assumptions of the law of Diminishing Marginal Utility.

Assumptions of DMU:

Cardinal measurement of utility: it is assumed that utility can be measured and it can be expressed in numerical terms as 1, 2, 3, etc.
Monetary measurement of utility: it is assumed that utility can be measured in monetary terms.
Continuous consumption: it is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then second ice-cream may provide equal or higher satisfaction.
No change in quality: quality is assumed as uniform and constant.
Fixed income and prices: it is assumed that income of the consumer and prices of the goods are assumed to be constant.

Give Reason or explain the following:
Limitations of the law of DMU.

Limitations of the law of DMU are:

It is assumed that the tastes, habits, fashion, and income remains constant. But this is not true realistically.
Income of the consumer is assumed is constant which doesn’t happen and thus he shifts to another good but this is not taken into consideration.
It cannot be applied to goods like television and ACs, where there is no decrease in their marginal consumption.
It focuses on goods which are assumed to be exactly same and gives the same level of satisfaction. Again this is not possible realistically.

Answer the following questions.
Explain the Importance/Significance of the law of DMU.

The importance of the law of DMU:

It helps the finance minister and other ministers in the formulation of various economic policies. It also helps explain the tax difference in the income of the rich and poor.
It helps the producer to maintain an appropriate level of stock and vary his sales accordingly.
It helps in understanding consumers’ perceptions and their behavior and consumption habit.

Give Reason or explain the following:
Practical Significance of law of DMU.

The practical significance of the law of DMU:

It helps the finance minister and other ministers in the formulation of various economic policies. It also helps explain the tax difference in the income of the rich and poor.
It helps the producer to maintain an appropriate level of stock and vary his sales accordingly.
It helps in understanding consumers’ perceptions and their behavior and consumption habit.

State with reason whether you agree or disagree.
There are no criticisms to the law of DMU.

No, there are some limitations of the law of DMU which are:

It is assumed that the tastes, habits, fashion, and income remains constant. But this is not true realistically.
Income of the consumer is assumed is constant which doesn’t happen and thus he shifts to another good but this is not taken into consideration.
It cannot be applied to goods like television and ACs, where there is no decrease in their marginal consumption.
It focuses on goods which are assumed to be exactly same and gives the same level of satisfaction. Again this is not possible realistically.

Give Reason or explain the following:
Exception to the law of Diminishing Margnal Utility.

The exception of the law of DMU, where this law doesn’t apply:

This law is valid only for uniform units of a commodity, which are same in shape, size, length, etc.
The law applies only in cases when the consumer doesn’t change his taste and fashion of the commodity remains same, which hardly is the case.
This law is not applicable for habitual goods of consumption like drugs, alcohol, etc.

State with reason whether you agree or disagree.
The law of DMU depends upon assumption.

Yes, the law of DMU depends on assumptions.

Assumptions of DMU:

Cardinal measurement of utility: it is assumed that utility can be measured and it can be expressed in numerical terms as 1, 2, 3, etc.
Monetary measurement of utility: it is assumed that utility can be measured in monetary terms.
Continuous consumption: it is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then second ice-cream may provide equal or higher satisfaction.
No change in quality: quality is assumed as uniform and constant.
Fixed income and prices: it is assumed that income of the consumer and prices of the goods are assumed to be constant.

State with reason whether you agree or disagree.
There are no real exceptions to the law of DMU.

No, there are some of the exceptions to the law of DMU, where this law doesn’t apply:

This law is valid only for uniform units of a commodity, which are same in shape, size, length, etc.
The law applies only in cases when the consumer doesn’t change his taste and fashion of the commodity remains same, which hardly is the case.
This law is not applicable for habitual goods of consumption like drugs, alcohol, etc.

Answer the following questions.
Explain the law of diminishing marginal utility.

Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.
People spend their income on various goods because consuming more and more of any one good reduces the marginal satisfaction obtained from further consumption of the same good.
Law of DMU has universal applicability and applies to all goods and services.

Answer the following questions.
What are the limitations / Shortcomings of the law of DMU ?

Limitations of the law of DMU are:

It is assumed that the tastes, habits, fashion, and income remains constant. But this is not true realistically.
Income of the consumer is assumed is constant which doesn’t happen and thus he shifts to another good but this is not taken into consideration.
It cannot be applied to goods like television and ACs, where there is no decrease in their marginal consumption.
It focuses on goods which are assumed to be exactly same and gives the same level of satisfaction. Again this is not possible realistically.

State with reason whether you agree or disagree.
The law of DMU could be explained with example and diagram.

Units of commodity	Total utility	Marginal utility
1	10	10
2	18	8
3	24	6
4	28	4
5	30	2
6	30	0
7	28	-2

Yes, I do agree with this statement.

The Law Of Diminishing Marginal Utility states that all else equal as consumption increases the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed. Utility is an economic term used to represent satisfaction or happiness. Marginal utility is the incremental increase in utility that results from consumption of one additional unit.

Consumers handle the law of diminishing marginal utility by consuming numerous quantities of numerous goods.

In the above figure, the marginal utility of a good is measured on the y-axis and the units on X-axis. With the help of the schedule, the points A, B, C, D, E, F and G are derived by the different combinations of units of the commodity and the marginal utility gained by different units of commodity. By joining these points, we get the marginal utility curve. The marginal utility curve has the downward negative slope. It intersects the X-axis at the point of 6th unit of the commodity. At this point "F" the marginal utility becomes zero. When the MU curve goes beyond this point, the MU becomes negative. So there is an inverse functional relationship between the units of a commodity and the marginal utility of that commodity.

State with reason whether you agree or disagree.
Law of DMU is important in practice.

The practical significance of the law of DMU:

It helps the finance minister and other ministers in the formulation of various economic policies. It also helps explain the tax difference in the income of the rich and poor.
It helps the producer to maintain an appropriate level of stock and vary his sales accordingly.
It helps in understanding consumers’ perceptions and their behaviour and consumption habit.

Answer in details:
State and explain law of Diminishing Marginal Utility and explain its exceptions.

Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.
People spend their income on various goods because consuming more and more of anyone good reduces the marginal satisfaction obtained from further consumption of the same good.
Law of DMU has universal applicability and applies to all goods and services.

Exception to the law of DMU, where this law doesn’t apply:

This law is valid only for uniform units of a commodity, which are same in shape, size, length, etc.
The law applies only in cases when the consumer doesn’t change his taste and fashion of the commodity remains same, which hardly is the case.
This law is not applicable for habitual goods of consumption like drugs, alcohol, etc.

Answer in detail:
State and explain the law of DMU ? Explain its assumptions.

Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.
People spend their income on various goods because consuming more and more of any one good reduces the marginal satisfaction obtained from further consumption of the same good.
Law of DMU has universal applicability and applies to all goods and services.

Assumptions of DMU:

Cardinal measurement of utility: it is assumed that utility can be measured and it can be expressed in numerical terms as 1, 2, 3, etc.
Monetary measurement of utility: it is assumed that utility can be measured in monetary terms.
Continuous consumption: it is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then second ice-cream may provide equal or higher satisfaction.
No change in quality: quality is assumed as uniform and constant.
Fixed income and prices: it is assumed that income of the consumer and prices of the goods are assumed to be constant.

Answer in details:
Discuss the importance of the law of DMU.

The importance of the law of DMU:

It helps the finance minister and other ministers in the formulation of various economic policies. It also helps explain the tax difference in the income of the rich and poor.
It helps the producer to maintain an appropriate level of stock and vary his sales accordingly.
It helps in understanding consumers’ perceptions and their behavior and consumption habit.

State how the Law of Diminishing Marginal Utility is important in practice, to various stakeholders (such as consumer, producer, government etc.).

(1) To Consumer: For planning household expenditure. A consumer plans the expenditure according to the utility of a commodity to get maximum satisfaction.
(2) To the Government: It is useful to the Finance Minister in formulating an appropriate tax policy. He can justify progressive tax policy on the grounds that rich people will feel relatively less impact of tax burden as the MU of money is low to them.
(3) To Producer: It acts as a guide to promote sales by reducing prices. At a lower price consumer buys more to equate MU with its price and to maximise TU.
(4) To Monopolist: To practice price discrimination, he can charge higher price to the rich and lower price to poor consumer because MU of money is higher for poor than rich people.
(5) For Welfare Measure: The welfare measure like food, subsidy, free education, etc., for the poor are adopted to promote the welfare. This welfare measures are adopted on the ground that the transfer of money from rich to poor by war of tax will cause more gain to poor.

Explain the conditions of consumer's equilibrium using Indifference Curve Analysis.

Consumers equilibrium is the amount of goods the consumer can buy in the market given his/her current level of income.

There are two conditions for consumers equilibrium:

1) The first is that the budget line should tangent to the indifference curve or marginal rate of substitution of good X for Good Y (MRS

$_{xy}$ ) must be equal to the price ratio . i.e MRS

$_xy$ = P

$_x$ /P

$_y$

2) The indifference curve should be convex to the origin at the point of tangency.

Given the price of a good, how will a consumer decide as to how much quantity to buy of that good? Explain.

Quantitiy of good purchased wil depend on the following factors:

1) Normal good

2) Change in preference

3) Complimentary goods

4) Substitute goods

5) Market size

6) Price expectations

What is Indifference Curve? State three properties of indifference curves.

An indifference curve joins all points representing bundles which are considered indifferent by the consumer.

3 properties of indifference curve are-

1. The indifference curve slopes downward.

2. The indifference curve is convex towards the origin.

3. Higher indifference curve represents higher utility

Define demand.

Demand refers to the desire to have a commodity, backed by the willingness and ability to purchase that commodity at a given price during a period of time.

What is meant by quantity demanded?

Quantity demanded refers to a specific quantity to be purchased against a specific price of the commodity.

What is a demand schedule?

A demand schedule is a table that shows the quantity demanded of a good or service at different price levels.
A demand schedule can be graphed as a continuous demand curve on a chart where the Y-axis represents the price and the X-axis represents the quantity.

Name two determinants of consumer's demand for a commodity.

Two determinants of consumer's demand for a commodity are:
(i) Own price of the commodity, and
(ii) Income of the consumer.

How is the demand for a good affected by a change in tastes and preferences of the consumers in favour of the commodity?

Change in tastes and preferences of the consumers in favour of the commodity will shift the demand curve of the commodity to the right.

What happens to the demand for a complementary good of a commodity when the price of the commodity rises?

Demand for a complementary good decreases when the price of the commodity rises. Demand curve will shift to the left.

What is a demand curve?

Demand curve is a graphic presentation of demand schedule showing an inverse relationship between price and quantity demanded of a commodity.

MRS tends to diminish because of the law of diminishing marginal utility. Comment.

True.

Diminishing MRS suggests that the consumer sacrifices less and less quantity of Good-Y for every additional unit of Good-X. Why does he do it? It is because the rising consumption of Good-X leads to a fall in its MU, while the falling consumption of Good-Y leads to a rise in its MU. This is in accordance with the law of diminishing marginal utility.

Do you agree with the view that the law of demand need not necessarily fail in case of inferior goods?

Yes, it is true that the law of demand need not necessarily fail in case of inferior goods.

Inferior goods are those goods in case of which we find an inverse relationship between income and quantity demanded. Even when an inverse relationship between income and quantity demanded is established (implying a situation of negative income effect), the law of demand will not fail in case negative income effect is less than the substitution effect.

Law of demand fails only when the negative income effect is greater than the substitution effect.

Explain the Statement.
MRS (marginal rate of substitution) along an indifference curve tends to diminish.

True. As we move along the indifference curve, marginal rate of substitution (MRS) tends to diminish. Because when we have less of a commodity, intensity of its desire increases. Accordingly, less and less of it is sacrificed for every additional unit of the other commodity.

Explain this statement.
If IC is not convex at the point of equilibrium, the consumer cannot reach the point of stable equilibrium. Comment.

True.
If IC is not convex at the point of equilibrium (or

$MRS_{XY}$ is not diminishing), the consumer cannot reach the point of stable equilibrium. In case IC is concave, it implies that marginal utility tends to rise as more of a commodity is consumed. Why should a consumer stop the consumption of that commodity, at all? In such a situation any equilibrium (when two goods are consumed) will never be a stable equilibrium.

What is the relation between Good-X and Good-Y, if with a rise in the price of Good-X, demand for Good-Y rises? Give an example.

The goods mentioned are substitute goods. When the price of Good-X rises, consumers switch over from X to Y and therefore, demand for Good-Y rises. Thus, consumers substitute one good with a similar one when there are substitutes available in the market.

Example: If the price of Pepsi rises, consumers are prompted to shift to Coke. Accordingly, demand for Coke rises.

It is because of monotonic preferences of the consumer that IC slopes downward. Comment.

True.

An IC slopes downward because of monotonic preferences of the consumer. According to this, more of one commodity implies less of the other, so that total satisfaction remains the same. An IC, therefore, must slope downward.

When is demand elastic?

Relatively elastic demand is defined as the proportionate change produced in demand is greater than the proportionate change in the price of a product. The quantity demanded changes by a larger percentage than the change in price.

For example, if the price of a product increases by 10% and then the demand for the product decreases by 15%, then the demand would be relatively elastic.

Define indifference map.

A set of indifference curves placed together in a diagram is known as indifference map.

Define price line.

Price line is a line showing different combinations of two goods which a consumer can attain, given his income and market price of the goods.

What is meant by an indifference curve?

Indifference curve is a curve showing different combinations of a set of two goods, each combination offering the same level of satisfaction to the consumer.

What is meant by budget set?

Budget set refers to a set of attainable combinations of two goods, given market price of the goods and income of the consumer.

Define monotonic preferences of the consumer.

Monotonic preferences means the consumer preferences are such that greater consumption of a commodity always offers him a higher level of satisfaction.

A consumer's budget is RsHe is buying Good-1 and Good-Price of Good-1 is Rs 8 per unit, and of Good-2 is Rs 10 per unit. Draw a budget line on the basis of these figures.

Let

$X_1$ denotes quantity of Good-1 and

$X_2$ denotes quantity of Good-2.
Given,

Consumer's budget, i.e., consumer's income (Y) = Rs 40
Price of Good-1 (

$P_1$ ) = Rs 8 per unit
Price of Good-2 (

$P_2$ ) = Rs 10 per unit
We know equation of the budget line is:

$P_1 X_1 + P_2 X_2 = Y$

$8X_1 + 10X_2 = 40$
When

$X_2 = 0$

$8X_1 =40$

$\Rightarrow X_1 =5$
Thus, when the entire income of the consumer is spent on Good-1, he can buy 5 units of Good-1.
When

$X_1=0$

$10X_2 = 40$

$\Rightarrow X_2 = 4$
Thus, when the entire income of the consumer is spent on Good-2, he can buy 4 units of Good-2. Accordingly, the budget line touches 4 units on Y-axis and 5 units on X-axis, as in Figure. Since price ratio remains constant, budget line is a straight line.

Explain the equation of budget line with the help of a hypothetical numerical example.

$M = P_X . Q_X + P_Y . Q_Y$ .
Where, M = Money income of the consumer;

$P_X$ = Price of Good-X;

$P_Y$ = Price of Good-Y;

$Q_X$ = Quantity of Good-X;

$Q_Y$ = Quantity of Good-Y.
Supposing a consumer has an income of Rs 40 to be spent on apples and oranges. Price of an orange is Rs 5 and an apple is Rs 10. With his given income and given prices of apples and oranges, the different combinations that a consumer can get of these two goods are shown in the following table:

Combination	Income (M)	Oranges	Apples
A	40	8	0
B	40	6	1
C	40	4	2
D	40	2	3
E	40	0	4

A consumer can purchase any of the above combinations in accordance with the budget line equation.

What do you mean by substitutes? Give examples of two goods which are substitutes of each other.

These are those goods which can be used in place of each other to satisfy a consumer's want. Example: Tea and coffee, Pepsi and Coca Cola.

Thus, if one is not available in the market, or is highly priced, the customer will buy the other good.

Why should diamonds be priced so high and water be priced so low even when water is essential to sustain life while diamonds are not?

One should distinguish between 'value-in-use' and 'market value' of a commodity. Water has high 'value-in-use', of course. But its market value (price) is low (compared with diamonds) because it is available in plenty. In terms of its market supply, water is scarce, but not as scarce as diamonds. Therefore, the market price of water is much lower than of the diamonds.
Imagine a situation when you are in a desert and you are dying to quench your thirst. You are then ready to pay any amount for a glass of water. You might even be ready to forego a diamond in your possession just for a glass of water.

On what factors, does the position of the budget line depend?

Position of the budget line depends on two factors namely, income of the consumer and prices of the two goods. If prices of two goods remain unchanged, then with an increase in income, budget line of the consumer shifts to the right and vice versa. Similarly, if income of the consumer remains unchanged, the budget line will shift to the right when there is a proportionate fall in the prices of both goods X and Y and vice versa. Thus, if the prices of both goods X and Y are reduced to half, the budget line will shift to the right showing twice the possible purchase of X and Y than before.

Certain goods are demanded even when their price is zero. Does it mean that we are demanding even those goods which are not scarce?

Only scarce goods are demanded. Goods which are not scarce are available to us in plenty and they need not be demanded (though these may be needed, like sun and air). But, when goods are available to us at a zero price, we should not jump to the conclusion that these are not scarce.

Goods are not scarce when two conditions are satisfied:

(i) goods do not have a price, and

(ii) goods do not have an opportunity cost.

Thus, medicines available in government hospitals at zero price are demanded. And these are scarce because these do have an opportunity cost, even when these are available at zero price.

How do you account for a rise in demand for rice even when own price of rice was rising in the flood-ravaged Jammu & Kashmir state of India?

A rise in demand for rice (even when its price was rising) is to be ascribed to expectations of the people in flood-ravaged Jammu & Kashmir. They are crazy to buy more of rice even at a higher price fearing that rice may not be available in the near future as most stocks of it in the state had been washed away.

How does MRS impact the shape of IC?

Shape of IC directly depends on MRS. MRS tends to decline. As a result, IC is convex to the origin. Higher the MRS, greater is the convexity of IC and vice versa.

What do you mean by complements? Give examples of two goods which are complements of each other.

These are those goods which complete the demand for each other. Two together satisfy a consumer's want. Example: Fountain pen and ink, petrol and car.

Thus, if one good is not available or is highly priced, the demand for the other good is also affected.

A consumer wants to consume two goods. The prices of the goods are Rs 4 and Rs 5 respectively. The consumer's income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of Good-1 can the consumer consume if she spends her entire income on that good?
(iii) How much of Good-2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?

Let

$X_1$ denote Good-1 and

$X_2$ denote Good-2.

$P_1=Rs \,\,4, P_2 =Rs\,\, 5, Y= Rs \,\,20$
(i)

$P_1 X_1 + P_2 X_2 =Y$

$4X_1 + 5X_2 =20$
Thus, the equation of the budget line is

$4X_1 + 5X_2 = 20$ .
(ii) We know equation of the budget line is:

$P_1 X_1 + P_2 X_2 = Y$
If the consumer spends her entire income on Good-1, then

$X_2 = 0$

$P_1 X_1 = Y \,\, \Rightarrow \,\, 4X_1 = 20$

$X_1 = 5$
Thus, the consumer can buy 5 units of Good-1 if she spends her entire income on that good.
(iii) If the consumer spends her entire income on Good-2, then

$X_1 =0$

$P_2 X_2 = Y \,\, \Rightarrow \,\, 5X_2 = 20$

$X_2 = 4$
Thus, the consumer can buy 4 units of Good-2 if she spends her entire income on that good.
(iv) Slope of budget line =

$\dfrac{P_1}{P_2} = \dfrac{4}{5}$ .

How does the budget line change if the consumer's income increases to Rs 40 but the prices remain unchanged (ie $X_1$ costs Rs: 4 and $X_2$ costs Rs. 5 each) ?

If the consumer's income increases to Rs 40, the new budget line would be

$4X_1 + 5X_2 = 40$ .

What do you mean by 'monotonic preferences'?

It means that a rational consumer always prefers more of a commodity as it offers him a higher level of satisfaction.

Explain why the budget line is downward sloping.

Budget line is a downward sloping line because given the prices of goods X and Y, and income of the consumer, more of Good-X (on X-axis) can be purchased only when less of Good-Y (on Y-axis) is purchased.

Elasticity of demand is generally high during the long period compared to short period. Why?

Elasticity of demand is generally high during the long period. Because, during the short period, full adjustment in demand (to a change in price) may not be possible owing to rigid consumption habits of the consumers. For example, in response to a substantial increase in price of wine, the consumers may not immediately reduce the consumption of wine. However, they may plan to give up or reduce the consumption of wine gradually over a long period of time.

Suppose a consumer can afford to buy 6 units of Good-1 and 8 units of Good-2, if she spends her entire income. The prices of the two goods are Rs 6 and Rs 8 respectively. How much is the consumer's income?

Given, quantity of Good-1 = 6 units
Quantity of Good-2 = 8 units
Price of Good-1 = Rs 6
Price of Good-2 = Rs 8
We know that,

$P_1 X_1 + P_2 X_2 = Y \,\, \Rightarrow \,\, 6 \times 6 + 8 \times 8 = Y$

$36 + 64 = Y \,\, \Rightarrow \,\, 100= Y$
Thus, consumer's income is Rs 100.

Utility Analysis studies consumer's equilibrium on the assumption that utility can be expressed in terms of units like 2, 4,Indifference Curve Analysis, on the other hand, assumes that utility cannot be expressed in terms of units; it can at best be compared. Does it mean that consumer's equilibrium (in terms of the consumption of goods X and Y) should be different, using different assumptions?

'No' is the answer.
Utility analysis and IC analysis are simply the two techniques of analysing consumer's behaviour. A rational consumer always maximises his satisfaction, spending his given income across goods X and Y. The maximum level of satisfaction should be the same level of satisfaction, and it must mean the same level of consumption of goods X and Y, no matter by which technique we study his behaviour.

What is budget line?

It is a line showing different combinations of a set of two goods that the consumer can buy, given his income and price of the goods.

How is the equation indicating budget line different from the equation indicating budget set?

The budget line equation shows different combinations of Good-1 and Good-2 that the consumer can buy spending his entire income across the two goods. The budget set equation shows all attainable combinations of Good-1 and Good-2 when the consumer spends his entire income or a part of it on the purchase of two goods. It is indicated by the shaded area under the budget line in Figure.

What do you mean by budget set of a consumer?

It refers to attainable combinations of a set of two goods, given prices of the goods and Income of the consumer.

When price of a good rises from $Rs.20$ per unit to $Rs. 23$ per unit, its demand falls by $30$ per cent.Calculate price elasticity of demand.

Given,

$P= Rs. 20$ ;

$P_1=Rs. 23;$

$\triangle P= P_1-P= Rs. 23 - Rs. 20 = Rs. 3$
Percentage change in price =

$\dfrac{\triangle P}{P}\times 100 =\dfrac{3}{20}\times= 15$ per cent

Percentage change in quantity demanded

$=(-)30$ per cent
Price elasticity of demand

$(E_d) = (-)\dfrac{Percentage \,\,change\,\, in\,\ quantity\,\, demanded}{ Percentage \,\,change \,\,in \,\,price}$
=

$(-) \dfrac{-30\%}{15\%}$ =

$2$
Price elasticty of demand =

$2.$

Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?

No. These preferences are not monotonic. If a consumer has monotonic preferences, he would prefer the bundle (6, 6) to the bundle (5, 6) because the bundle (6, 6) has more of Good-1 as compared to the bundle (5, 6).

A consumer spends $Rs. 1,500$ on a good priced at $Rs. 10$ per unit. When price rises by $20$ per cent, the consumer continues to spend $Rs. 1,500$ on the good. Calculate price elasticity of demand by percentage-change method.

Initial price (P)

$= Rs. 10$
Rise in price by

$20$ per cent =

$10\times \dfrac{20}{100}$ =Rs. 2
New price (

$P_1$ )

$Rs. 10 + Rs. 2 = Rs. 12$
Given,

$P= Rs. 10$ ;

$P_1=Rs. 12;$

$\triangle P= P_1-P$ =

$Rs. 12- Rs. 10 = Rs. 2$

$Q=\dfrac{1,500}{10}= 150\,\, units; Q_1=\dfrac{1,500}{12}= 125\,\, units;$

$\triangle Q = Q_1-Q= (125-150)units = (-) 25 units$
Price elasticity of demand

$(E_d) =(-) \dfrac{P}{Q} \times \dfrac{\triangle Q}{\triangle P}$

$= (-) \dfrac{10}{150}\times \dfrac{-25}{2}=\dfrac{5}{6}=0.83$
Price elasticity of demand

$= 0.83$

For a commodity, $\dfrac{\triangle P}{P} =-0.2$ , and elasticity of demand $=-0.6$ . Find percentage change in quantity demanded.

Percentage change in price =

$\dfrac{ \triangle P}{P}\times 100 = -0.2\times100 =(-) 20$ per cent

Elasticity of demand

$(E_d)= \dfrac{Percentage \,\,change \,\,in \,\,quantity \,\,demanded}{Percentage \,\,change \,\,in \,\,price}$

$-0.6$ =

$\dfrac{Percentage\,\, change \,\,in\,\, quantity \,\,demanded}{-20\%}$

Percentage change in quantity demanded

$=(-) 0.6\times (-) 20$ per cent

$= 12$ per cent
Percentage change in quantity demanded

$= 12\%$

If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?

No. the consumer can't be indifferent between the two.

If the consumer's preferences are monotonic, she cannot be indifferent between the combinations (10, 8) and (8, 6). Because, the first combination (10, 8) allows more of both the goods as compared to the second combination (8, 6). Implying that first combination offers higher level of satisfaction, and the consumer must prefer it to the other.

Suppose a consumer's preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?

Monotonic preference refers to a situation where the consumer prefers a bundle which has more of every good. In this case, the consumer's preference ranking can be explained as-

The most preferred bundle would be (10, 10).
Consumer's second preferred bundle would be (10, 9)
The third preferred bundle would be (9, 9).

The first combination offers higher level of satisfaction, and the consumer must prefer it to the other.

What is meant by excess demand for a product?

Excess demand refers to the situation in which market demand is more than market supply of a commodity at a given price.

State the law of diminishing marginal utility.

Law of diminishing marginal utility states that as more and more units of a commodity are consumed, marginal utility derived from every additional unit must decline. It is known as fundamental law of satisfaction or fundamental psychological law.

From the following table, calculate price elasticity of demand by the percentage-change method.
Price of X (Rs. per unit) Total Expenditure (Rs.)
$4$
$5$ $600$
$525$

Price of X (Rs. per unit)	Total Expenditure (Rs.)	Demand (Units)
$4$ $5$	$600$ $525$	$\dfrac{600}{4}=150$ $\dfrac{525}{5}= 105$

Here,

$P= Rs. 4$ ;

$P_1= Rs. 5;$

$\triangle P=P_1-P$ =

$Rs. 5 - Rs. 4$ =

$Rs. 1$

$Q= 150$ units;

$Q_1= 105$ units; $$

$\triangle Q=Q_1- Q$ =

$(105 -150)$ units

$=(-)45$ units
Price elasticity of demand

$(E_d)= (-) \dfrac{P}{Q}\times \dfrac{\triangle Q}{\triangle P}$

$= (-) \dfrac{4}{150}\times \dfrac{-45}{1}=1.2$
Price elasticity of demand

$= 1.2$

Explain how change in price of the substitute commodity-Y (related to commodity-X) would affect market equilibrium with respect to commodity-X.

Increase in the price of the substitute commodity-Y would cause increase in the demand for X, implying a forward shift in demand curve for X. Conversely, decrease in the price of the substitute commodity-Y would cause backward shift in demand curve for X.

Define marginal utility. State the law of diminishing marginal utility.

Marginal utility refers to additional utility obtained from the consumption of an additional unit of a commodity. To illustrate, if 10th unit yields satisfaction of 100 utils, while 11th unit yields satisfaction of 105 utils, then marginal utility derived from the 11 th unit is 5 utils.

Law of diminishing marginal utility states that as consumption increases, marginal utility tends to decline. It is known as fundamental psychological law.

In India, retail price of petrol has significantly fallen during the past six months. But, demand for cars has not shown any significant rise. Comment.

Car and petrol are complementary goods. A significant fall in the price of petrol is expected to induce a rise in demand for cars. But it did not happen. The reason is as this:
Car is expensive consumer good.

Demand for cars is expected to rise only when:

(i) there is a significant rise in income of the buyers, or

(ii) there is a significant fall in the price of cars, or

(iii) there is a significant cut in the interest rate for car loans.

None of these factors has shown any positive change during the past six months. Accordingly, demand for cars has not shown any rise in response to fall in petrol price in India.

How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

Coffee and tea are substitute goods. Let us assume that the price of coffee increases. This will cause a shift in demand curve for tea to the right as shown in Fig,

$D$ is the initial demand curve and S is the initial supply curve related to tea.

$E$ is the initial equilibrium where supply and demand curves intersect each other.

$OP$ is the equilibrium price and

$OQ$ is the equilibrium quantity of tea. When the price of coffee increases, demand curve (for tea) shifts forward as indicated by

${ D }_{ 1 }$ . Consequently, equilibrium price (of tea) increases from

$OP$ to

${ OP }_{ 1 }$ and equilibrium quantity increases from

$OQ$ to

${ OQ }_{ 1 }$ .
In case price of coffee decreases, demand curve for tea would shift to the left. Consequently, new equilibrium would indicate a fall in equilibrium quantity as well as a fall in equilibrium price.
1276194_958777_ans_dea21fcef47e497fa86b23d049a8709f.png

1276194_958777_ans_dea21fcef47e497fa86b23d049a8709f.png

If elasticity of demand $=\infty$ , equilibrium price remain unchanged,no matter supply increases or decreases. Comment.

Yes, we agree with this. When demand is perfectly elastic (or elasticity of demand is infinity), equilibrium price remains unchanged with increase or decrease in supply. Because (being perfectly elastic) demand increases or decreases proportionate to the increase or decrease in supply.

Draw PPC for an economy, if production possibilities are as under. Also find marginal opportunity cost.
Shirt (Millions) $0$ $1$ $2$ $3$ $4$ $5$
Computer (Thousands) $15$ $14$ $12$ $9$ $5$ $10$

Shirt (Millions)	Computer (Thousands)	Marginal Opportunity Cost
$0$	$15$	-
$1$	$14$	$\dfrac {1}{1} = 1$
$2$	$12$	$\dfrac {2}{1} = 2$
$3$	$9$	$\dfrac {3}{1} = 3$
$4$	$5$	$\dfrac {4}{1} = 4$
$5$	$0$	$\dfrac {5}{1} = 5$

If the price of a substitute (Y) of Good-X increases, what impact does it have on the equilibrium price and quantity of Good-X?

With increase in the price of the substitute of Good-X, demand curve of Good-X will shift to the right. Accordingly equilibrium price and quantity of Good-X would tend to increase.

Marginal utility schedule for $Good-X$ and $Good-Y$ is given in the following table.Assuming price of $X$ is $Rs. 1$ , and price of $Y$ is $Rs. 1$ and money income of the consumer is $Rs. 13$ . Find the optimum combination of $Good-X$ and $Good-Y$ for maximising consumer's utility.
$Q$ $1$ $2$ $3$ $4$ $5$ $6$ $7$ $8$ $9$ $10$
$MU_{X} (Utils)$ $28$ $24$ $21$ $20$ $16$ $13$ $9$ $5$ $3$ $1$
$MU_{Y} (Utils)$ $32$ $29$ $27$ $23$ $20$ $18$ $17$ $16$ $12$ $9$

At equilibrium,

$\dfrac {MU_{X}}{MU_{Y}} = \dfrac {P_{X}}{P_{Y}} = MU_{M}$

$\dfrac {MU_{X}}{MU_{Y}} = 1 \Rightarrow MU_{X} = MU_{Y}$
The consumer gets maximum satisfaction when he purchases

$5$ units of

$X$ and

$8$ units of

$Y$ . Because at this combination,

$MU_{X} = MU_{Y} = 16$ .

State the types of demand.

Demand is generally classified on the basis of various factors, such as nature of a product, usage of a product, number of consumers of a product, and suppliers of a product.

The different types of demand are as follows:

i. Individual and Market Demand:

It refers to the classification of demand of a product based on the number of consumers in the market.

Individual demand can be defined as a quantity demanded by an individual for a product at a particular price and within the specific period of time.

Market demand is the aggregate of individual demands of all the consumers of a product over a period of time at a specific price, while other factors are constant.

ii. Organization and Industry Demand:

This refers to the classification of demand on the basis of market.

The demand for the products of an organization at given price over a point of time is known as organization demand.

The sum total of demand for products of all organizations in a particular industry is known as industry demand.

iii. Autonomous and Derived Demand:

This refers to the classification of demand on the basis of dependency on other products.

The demand for a product that is not associated with the demand of other products is known as autonomous or direct demand. The autonomous demand arises due to the natural desire of an individual to consume the product.

On the other hand, derived demand refers to the demand for a product that arises due to the demand for other products. Moreover, the demand for substitutes and complementary goods is also derived demand.

iv. Demand for Perishable and Durable Goods:

This refers to the classification of demand on the basis of usage of goods. The goods are divided into two categories, perishable goods and durable goods.

Perishable or non-durable goods refer to the goods that have a single use.

On the other hand, durable goods refer to goods that can be used repeatedly.

v. Short-term and Long-term Demand:

This refers to the classification of demand on the basis of time period.

Short-term demand refers to the demand for products that are used for a shorter duration of time or for current period. This demand depends on the current tastes and preferences of consumers.

On the other hand, long-term demand refers to the demand for products over a longer period of time.

Generally, durable goods have long-term demand.

Write short note on 'factors determining elasticity of demand'.

The elasticity of demand measures how sensitive the quantity demanded of a good or service is to changes in other variables.
Various factors which affect the elasticity of demand of a commodity are:

Nature of commodity:
Availability of substitutes:
Income Level:
Level of price:
Postponement of Consumption:
Number of Uses:
Share in Total Expenditure:
Time Period:

When the price of a good rises from $Rs. 10$ per unit to $Rs. 12$ per unit, its quantity demanded falls by $20$ per cent. Calculate its price elasticity of demand. How much would be the percentage change in its quantity demanded, if the price rises from $Rs. 10$ per unit to $Rs. 13$ per unit?

Given, percentage change in quantity demanded

$= (-) 20\%$

$P =Rs. 10; P_{1} = Rs. 12; \triangle P = P_{1} - P = Rs. 12 - Rs. 10 = Rs. 2$

$= \dfrac {2}{10}\times 100 = 20\%$
Price elasticity of demand

$(E_{d}) = (-) \dfrac {\text {Percentage change in quantity demanded}}{\text {Percentage change in price}}$

$= (-) \dfrac {-20\%}{20\%} = 1$
If the price rises from

$Rs. 10$ per unit to

$Rs. 13$ per unit.

$E_{d} = 1$

$P = Rs. 10; P_{1} = Rs. 13; \triangle P = P_{1} - P =Rs. 13 - Rs. 10 = Rs. 3$
Percentage change in price

$= \dfrac {\triangle P}{P} \times 100$

$= \dfrac {3}{10}\times 100$

$= 30\%$
Price elasticity of demand

$(E_{d}) = (-) \dfrac {\text {Percentage change in quantity demanded}}{\text {Percentage change in price}}$

$1 = (-) \dfrac {\text {Percentage change in quantity demanded}}{30\%}$
Percentage change in quantity demanded

$= (-) 30\%$
Price elasticity of demand

$= 1$ .
Percentage fall in quantity demanded

$= 30\%$ .

Define or explain elasticity of demand.

Elasticity of demand refers to the sensitivity of demand to the change in other economic variables such as price and income. It is measured as the percentage change in quantity demanded divided by the percentage change in price or income.

The price elasticity of demand is estimated to be $2$ . The price of the commodity happens to increase by $10\%$ . Find the change in quantity demanded when initially he was buying $120$ units of the commodity.

Percentage change in price

$= 10\%$ .

This implies that,

$\dfrac {\triangle P}{P} = 0.1; Q = 120; E_{d} = 2$

We know,
Price elasticity of demand,

$E_{d}= (-) \dfrac {\triangle Q}{Q} \times \dfrac {P}{\triangle P}$

$2 = (-) \dfrac {\triangle Q}{120}\times \dfrac {1}{0.1}$

$2 = (-) \dfrac {\triangle Q}{12}$

$\triangle Q = -24$

Hence, the change in quantity demanded is equal to

$-24$ here negative sign implies that there is a decrease in the quantity demanded.

Distinguish between 'Desire and Demand'.

Desire:
Desire is simply a wish to possess a commodity, irrespective of the fact whether one can buy it or not, for example, one may desire to own a Ferrari car without having the ability to pay.

Demand:
Demand for a good is a combination of desire, ability to pay and willingness to pay. Demand is an economic concept and is one of the major market forces.

Discuss the assumptions of the law of diminishing marginal utility.

Law of diminishing marginal utility states that as the consumption of a commodity rises, marginal utility tends to fall. It is known as the fundamental psychological law.

Assumptions:

1) It is assumed that the unit of the consumer good is a standard one.

2) It is assumed that utility is measurable and can be expressed in quantitative terms.

3) The consumer's tastes and preferences remain same during the period of consumption.

4)There must be continuity in the consumption.

5) Marginal utility of money remains constant.

6) Income and prices of the goods remain unchanged during the period of consumption.

A consumer consume only two goods $X$ and $Y$ and is in equilibrium. Show that when the price of good $X$ rises, the consumer buys less of good $X$ . Use utility analysis.

In case of two commodities, the consumer's equilibrium is attained at the point where the utility derived from each additional unit rupee spent on each of the goods is equal. That is, Marginal Utility of a Rupee spent on the good

$x(i.e,\frac{MU_x}{P_x})$ is equal to the Marginal Utility of a Rupee spent on good

$Y(i.e,\frac{MU_y}{P_y})$ , which, in turn, is equal to the Marginal Utility of Money(MUm).

That is,

$\frac {MU_x}{P_x}=MU_m$

Howevwe, when the price of commodity x rises, the ratio of marginal utility to price of

$(\frac{MU_z}{P_z})$ becomes lower than that of Y, that is

$\frac {MU_x}{P_x}$ <

$\frac {MU_y}{P_y}$

In such a case, the consumer rearranges his consumption combination such that the equality is again restored. He would decrease his consumption of commodity X. With this decreases, marginal utility of x rises, As a result, the ratio of marginal utility to the price of X rises. The consumer would continue decreasing the consumption of commodity X till the equality between the ratio of marginal utility to price in case of X and Y is again reached.

A consumer spends Rs. 400 on a good priced at Rs. 4 per unit. When the price rises by 25 percent, the consumer continues to spend Rs.Calculate the price elasticity of demand by percentage method.

Given:

Initial Total Expenditure

$(TE_0) = Rs. 400$

Final Total Expenditure

$(TE_1) = Rs. 400$

Initial Price

$(P_0) = Rs. 4$

Percentage change in price

$= +25$

Percentage change in price

$=\dfrac{P_1-P_0}{P_0} \times 100$

$25 = \dfrac{P_1-4}{4} \times 100$

$\dfrac{100}{100} = P_1 - 4$

$P_1 = 5$

Price $(P)$	Total Expenditure $(TE) =$ Price $(P)$ $\times$ Quantity $(Q)$	Quantity $(Q) =\dfrac{ TE}{P}$
$P_0 = Rs. 4$	$TE_0 = Rs. 400$	$Q_0 = 100$
$P_1 = Rs. 1$	$TE_1 = Rs. 400$	$Q_1 = 80$

Now,

$E_d = (-) \dfrac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$

$E_d = (-) \dfrac{\dfrac{Q_1-Q_0}{Q_0}\times 100}{25}$

$E_d = (-) \dfrac{\dfrac{80-100}{100}\times 100}{25}$

$E_d =(-) \dfrac{-20}{25}$

$E_d = 0.8$

$\therefore \boxed {E_d = 0.8}$

Thus, the price eleasicity of demand is

$0.8$ .

Give reasons or explain :
Demand for the commodity having multiple uses is elastic.

Demand for the commodity having multiple uses is elastic demand because the demand for a particular commodity that can be used in a variety of ways will be more affected by the changes in price. * A commodity is said to have elastic demand if it is sensitive to the changes in the price

Find the elasticity of demand of $x$ and $y$ on the basis of the demand schedule given below and specify which one is more elastic:
Good $x$ Good $y$
$Px$ (Rs.) $Dx$ (units) $Py$ (Rs.) $Dy$ (units)
8 10 8 10
4 12 6 25

Elasticity of demand of X= (2/4)*(8/10) = 2/5= 0.4

Elasticity of demand of Y= (15/2)*(8/10) = 6

Good Y is more elastic than good X.

What are monotonic perferences?

It means that the consumer prefers a particular bundle over the other bundle if the former consists of at least more of one good and no less of the other good.

Example:

If bundle

$A(3, 5)$ and bundle

$B(3, 2)$ are available to the consumer, then he/she will prefer bundle

$A$ over bundle

$B$ as bundle

$A$ consists of more units of good 2 than bundle

$B$ .

Define budget line.

A budget line represents the different combinations of two goods that are affordable and are available to a consumer; while being aware of his/her income-level and market prices of both the goods. The budget line is represented by the following equation.

$P_1 x_1 + P_2x_2 = M$ .

Why is minus sign attached to the measure of price elasticity of demand of a normal good in comoparison to the plus sign attached to the measure of price of elasticity of supply? Explain.

The measure of price elasticity of demand of a normal good carries minus sign as there exists an inverse relationship between demand and price of the good. That is, other things remaining constant, as the price of a good rises (or falls), the quantity demanded of the good falls (or rises). On the other hand, price elasticity of supply carries plus sign as there exists a positive relationship between the supply of a commodity and its price. To put in other words, when the price of a good rises (or falls), then the quantity supplied will increase (or decrease), other things remaining unchanged.

Explain the concept of 'Marginal Rate of Substitution' with the help of a numerical example. Also explain its behaviour along an indifference curve.

Bundles	Good $x_1$ (units)	Good $x_2$ (units)
A	5	1
B	2	2
C	1	3

Marginal rate of substitution refers to the rate at which a consumer is willing to substitute one good additional unit for the other. Algebraically, it is represented as follows.

$MRS=\frac {\Delta _{x2}}{\Delta _{x1}}$

This can be better understood with the help of the following numerical example:

Now,as we can see a movement from bundle A to bundle B, the consumer must sacrifice 3units of good

$x_1$ in order to get one more u unit of

$x_2$ i.e.,

$MRS\frac={-3}{1}=-3$

As we move down along the indifference curve to the right, Marginal Rate of Substitution decreases. This is because as the consumer consumes more and more of one good, the marginal utility of the good falls. On the other hand, the marginal utility of the good which is sacrificed rises. In other words, the consumer is willing to sacrifice less and less for each additional unit of the good consumed. Thus, as we move down the is, MRS diminishes. the suggests the convex shape of the indifference curve.

For instance, in the example given above, a movement further from bundle B to C suggests that with of increase in good 2, the consumer's willingness to sacrifice good 1 falls to 1 unit. Thus, MRS falls.

Price elasticity of demand of good $X$ is $-2$ and good $Y$ is $-3$ . Which of the two goods is more price elastic and why?

Demand of good

$Y$ is more elastic as compared to good

$X$ . Due to negative relationship between price and demand, elasticity of demand is a negative number. But in case of elasticity negative sign does not matter.
That is, Mathematically,

$-2 > -3$
But, in context of elasticity,

$-3 > -2$

Answer the following question in a sentence/word.
Expand MRS.

Marginal rate of substitution

In economics, the marginal rate of substitution (MRS) is the rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility.

Answer the following question in $4$ sentences.
Name the motives of demand for money according to J.M. Keynes.

Following are the motives of demand for money according to J.M. Keynes.

Transaction motive
Precautionary motive
Speculative motive

Answer the following question in $4$ sentences.
What is Monotonic preference?

Monotonic preference means that a rational consumer always prefers more of a commodity without sacrificing the other commodity as it offers him a higher level of satisfaction. A rational consumer always prefers more of a commodity as it offers him a higher level of satisfaction is called monotonic preference.

Answer the following Project and Assignemnt related question.
How much Mangoes can she consumes if she spend her entire income on that good?

We know that P1 = 4, P2 = 5 and M = 20, then the equation of the budget line will be

P1X1 + P2X2 = M

4X1 + 4X2 = 20

If Rs. 20 entirely spent on Good 2, then

4(0) + 5X2 = 20

5X2 = 20

X2 = 20/ 5 = 4

The consumer can consume 4 units of Good 2. (i.e. Mango)

Answer the following question in $12$ sentences.
Explain the indifference map with a diagram.

Indifference Map is a collection of indifference curves in which each curve represent different level of satisfaction. An Indifference Curve to the right shows higher utility because in Indifference Map, a higher Indifference Curve represents those combinations which yield higher level of satisfaction than the combination on the lower Indifference Curve. This implies higher level of utility in accordance with the monotonic preferences of the consumer.

1442486_1691511_ans_889e31140a8b413c807408b111ac0fce.png

Explain three properties of indifference curves.

Properties of indifference curves (ICs):

(a) Indifference curves slope downwards or negative slope: The indifference curves slope downwards, left to right, because an increase in the amount of Good X along the indifference curve is associated with a decrease in the amount of Good Y, as the preferences are monotonic.

(b) Slope of Indifference curves represents marginal rate of substitution: Marginal rate of substitution (MRS) is the rate at which a consumer is willing to substitute one commodity for another commodity.

Ref. image 1

Slope of indifference curve between A and B

$= \dfrac{\Delta Y}{\Delta X} = MRS$

MRS is the rate at which the output of Good Y is sacrificed for every additional unit of Good X.

iii. In an indifference map, higher IC represents higher level of satisfaction:

An indifference map refers to a set of indifference curves. An indifference curve which is to the right and above another shows a higher level of satisfaction to the consumer. Here,

$IC_3$ shows higher level of satisfaction than

$IC_2$ . Thus, the indifference curve relates to a higher level of income of the consumer.

Ref. image 2

1957602_1944501_ans_8656d6a8648147c9987d837be53d78e6.png

Answer the following Project and Assignment related question.
How much Bananas can she consumes if she spend her entire income on that good?

We know that P1 = 4, P2 = 5 and M = 20, then the equation of the budget line will be

P1X1 + P2X2 = M

4X1 + 4X2 = 20

(a) If Rs.20 entirely spent on good 1. Then,

4X1 + 5(0) = 20

4X1 = 20

X1 = 20 /4

= 5

The consumer can consume 5 units of Good 1.(i.e. Banana)

(i) Define the term demand.
(ii) explain any three factors that affect the demand for a commodity.
(iii) Why are articles of distinction or the Veblen effect an exception to the law of demand ?

(i) Desire for a good or service backed by the ability and willingness to pay for the good is demand. Demand is related to time and price.

(ii) The following are the factors that affect the demand for a commodity:

1. Price of the good;

2. Price of related goods;

3. Income of the consumer;

4. Taste and preference of the consumer;

5. Consumer credit.

(iii) According to Economist Thorstein Veblen, some consumers measure the utility of a commodity entirely by its price, i.e., for them, the greater the price of a commodity, the greater it’s utility. Diamonds are often given an example of this case. The diamonds are considered as prestige goods in the society and for the upper strata of the society the higher the price of diamonds, the higher the prestige value of them and, therefore, the greater utility or desirability of them.

What is double coincidence of wants ?(Economics class 10)

The coincidence of wants is an economic phenomenon where two parties each hold an item the other wants, so they exchange these items directly without any monetary medium. This type of exchange is the foundation of a bartering economy.

Elaborate the law of demand, with the help of a hypothetical schedule.

According to the law of demand, a consumers demand shares an inverse relationship with the price of a good and vice-versa, ceteris paribus (other things being constant). In other words, if the income, price of related goods and a consumers tastes and preferences remain unchanged, then the demand of a good move opposite to the movement in the price of those goods.

Law of demand can be explained with the help of the following demand schedule.

Price of commodity X(Rs.)	Quantity Demanded of X(units)
$5$	$100$
$10$	$75$
$15$	$50$
$20$	$25$

The schedule shows that as the price of the commodity X increases from

$Rs. 10$ to

$Rs. 15$ , the quantity demanded of X falls from

$75$ units to

$50$ units. Thus, there is a negative relationship between demand and price.

Explain the law of diminishing marginal utility, with the help of a hypothetical schedule.

Law of diminishing marginal utility states that the utility of each successive unit goes on diminishing as more and more units of a commodity is consumed, when units of other commodities remains constant.
Assumptions :
- Rational behaviour of consumer.
- Cardinal measurability of utility.
- Utility can be measured by money and marginal utility of money remains constant.
- Income and mental status of consumer are assumed to be remains constant during the act of consumption .
- Price of commodity, price of other commodities, income of consumer and other factors that can affect the utility are assumed to be remain constant.

Explanation of the law : Initially as the consumer increases the consumption marginal utility decreases but it is positive (as in our example from first to third unit of the commodity marginal utility decreases from 6 to 2) After certain units consumer reaches to a point where utility from additional unit becomes zero or marginal utility curve intersects the X axis (as in our example at fourth unit of the commodity marginal utility becomes 0). This represents the point of complete satisfaction. If consumer further increases the consumption of the commodity then utility derived from additional units will becomes negative means the consumer is deriving negative utility or disutility from the additional units of the commodity (as in our example at fifth unit of the commodity marginal utility further decreases and becomes negative 2).

1958107_1943914_ans_5a5bc643dbee4d35b74c3590c2272750.png

With help of an example explain the term complementary goods.

Complementary Goods are those goods which are used together to satisfy a particular want. They complete the demand for each other. For example: Car and Petrol. There exists an inverse relationship between price and quantity demanded of complementary goods

How does demand differ from desire?

Demand of a commodity refers to the desire to acquire a commodity which is backed by the willingness to pay and desire is accompanied by the willingness to purchase and the power to purchase. A person can desire anything at any point of time.

What are limitations of marginal utility?

Limitations of marginal utility are :
1. This law is based on rigorous assumptions like cardinal measurability of utility
2. Utility is not in fact independent, it may be affected by the presence or absence of articles that are substitute and compliment.
3. It is not universal.
4. It may not work in the case of habit and creative painting.

What are the assumption of marginal utility?

Assumptions of marginal utility are:
1. Consumer is rational and attains maximum satisfaction;
2. Money is measuring rod money;
3. Cardinal measurement of utility;
4. Commodites are homogeneous;
5. Consumer price and income are constant.

What do you mean by indifference map?

The indifference map shows the graphical representation of different levels of satisfaction of the consumer. It depicts the complete picture of consumer preferences.

What is the substitution effect?

The change in quantity demanded of a commodity resulting from a change in its relative price is known as the substitution effect. When the price of a good goes down, consumers will substitute the goods that are expensive with the goods that are cheaper.

Define complementary goods.

Complementary goods are those goods that are complementary to one another in the sense that they are used jointly or together, such as car and petrol, pen and ink, etc. There is an inverse relationship between the demand for the goods and the price of their complements.

What is the market demand curve?

Market demand curve shows graphical representation of various quantities of a commodity that would be purchased at different prices by all the buyers at different prices at a given period of time.

What is the geometric method of elasticity of demand?

Geometric method of elasticity of demand is the method where the elasticity of demand is measured by taking the ratio of the line segment below the point on the demand curve to the line segment above the point.

What are the assumptions of indifference curve?

Assumptions of indifference curve are:
1. Consumer is rational;
2. Price of goods is constant;
3. Higher IC curve gives the highest satisfaction and lowest curve gives lowest satisfaction;
4. Two IC curves never intersect each other;
5. Consumers spend a small part of their income.

What is the budget line?

A budget line is a line which shows all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.

What do you mean by consumer budget?

Consumer budget is the actual purchasing potential with which a consumer can purchase quantities of two goods at given prices.

A consumer has total income of Rs. 250 to be spent on two goods X and Y with price of Rs.25 and Rs.10 per unit respectively. On the basis of the information given, answer the following questions:
a. Give the equation of the budget line of the consumer.
b. What is the value of the budget line.
c. How many units can the consumer buy if he is to spend all his money income on good X?
d. How does the budget line change if there is a fall in price of good Y?

(a) Equation of Budget Line:
Px.Qx + Py.Qy = M, where Px = Price of good X, Py = Price of good Y, Qx = Quantity of good x, Qy = Quantity of good y. 25Qx + 10Qy = 250.
(b) Slop of Budget Line = - Px/Py = (-)25/10 = (-)2.5.
(c) If 25Qx + 10(0) = 250, 25Qx = 250, Qx = 250/25 = 10 units.
(d) If there is fall in price of good Y (Py), the budget line becomes flatter because a consumer can purchase more units of good Y and new budget line appears. It is shown in the given diagram.

2131514_2017294_ans_d98ecfbe2715407a8d3e7e9a6ac0f2e9.PNG

2131514_2017294_ans_d98ecfbe2715407a8d3e7e9a6ac0f2e9.PNG

What happens when MUx/Px < MUy/Py?

MUx/Px and MUy/Py are not equal and MUx/Px is less than MUy/Py, then the consumer will substitute good 'y' for good 'x'. As a result the marginal utility of good 'x' will rise. The consumer will continue substituting good 'y' for good 'x'
till MUx/Px = MUy/Py where the consumer will be in equilibrium. If the value of MUx/Px is less than MUy/Py, then the
consumer will increase the consumption of good y and reduce good y.

The quantity demanded of a commodity falls by 5 units, when price rises by Rs.1 per unit. Its price elasticity of demand is (-)1.Calculate the price before change, if at this price quantity demanded was 60 units.

Price elasticity of demand = (-)5.
Original quantity demanded = 60 units, Change (fall) in quantity demanded = 5 units, Change (rise) in price = Rs.1 per unit, Original price = Rs.x.

Using proportionate method,
Let Change (fall) in price = Rs.x
Elasticity of demand = (-) [Change in quantity/Change in price] x [Original price/Original quantity]
= (-) [5/1] x [x/60].
(-)1.5 = (-) x/12.
Original price (x) = Rs.18.

When does a consumer attain an equilibrium point?

Consumer attains the equilibrium position at a point when he maximizes his total utility given his income and price of commodities he consumes.

Define budget set.

(a) The demand for a commodity declines by 10% when its price rises from ₹4 to ₹5 per unit. What is the Price Elasticity of demand of the commodity?
(b) Explain the effect of Rise in the Price of Complementary good on demand of a given good?

(a) Original Price (P) = 4, New Price = 5, Change in Price = 5 - 4 = 1.
Percentage change (rise) in price = (Change in Price/Original Price) x 100%= (1/4) x 100% = 25%, Percentage change (fall) in demand = 10%.
Using percentage method,
Elasticity of demand (Ed) = (-) Percentage change in quantity demanded/Percentage change in price = (-) 10%/25% = (-)0.4.

(b) Complementary goods refer to those goods that are consumed together. The joint consumption of these goods is done to satisfy the wants of the consumer. For example. ink and ink pens. In case of complementary goods, if the price of one good increases then a consumer reduces his demand for the complementary good as well, i.e. a rise in the price of one good results in a fall in demand of the other this case, the demand curve shifts parallel inwards to the left. In the above diagram, as a result of rise in
price of ink pens, the demand for ink falls and the demand curve for ink shifts from D1D1 to D2D2.

2129587_2016444_ans_e846a3ec1a62459ca65e8dd34bd2ce54.PNG

2129587_2016444_ans_e846a3ec1a62459ca65e8dd34bd2ce54.PNG

What do you mean by the budget set of a consumer?

The budget set is the collection of all the bundles of goods that a consumer can buy with his income at the prevailing market prices.

The following news was printed in the Economic Times:
"Petrol and diesel prices were cut by Rs.2 per litre each as international oil prices slumped to a five year low." Use a diagram and economic theory to analyse the impact on the demand for cars in India.

Petrol and cars are complementary goods. Complementary goods are those goods which are used together to satisfy a particular want, like tea and sugar, car and petrol.

Economic theory analysis:

An increase in the price of complementary good leads to a decrease in the
demand for given commodity and vice versa.

In the news printed in Economic Times, "Petrol and diesel price were cut by Rs.2 per litre each as international oil prices slumped to a five year low", then demand for diesel/petrol operated vehicles will rises in the country as it will be relatively cheaper to use both the goods together.

Diagrammatic analysis:

With the decrease in prices of complementary goods (petrol/diesel), demand
curve of petrol/diesel operated vehicles will shift towards rightward.

2131850_2017566_ans_1b1205f875b54a4f825de0ba90737553.PNG

Explain law of Diminishing Marginal Utility with the help of a diagram.

It states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. It has universal applicability. It applies to all goods and services except in the field of education. It is also known as Gossens first law of consumption.

Assumptions of Law of Diminishing Marginal Utility (Law of DMU)

Cardinal measurement of utility.
Consumption of reasonable quantity.
Continuous consumption.
No change in quality.

In the given diagram, units of ice cream are shown along the X-axis and MU along the Y-axis. MU from each successive ice-cream is represented by the points A, B, C, D and E. MU curve slopes downwards showing that MU of successive units is falling.
2135951_2019586_ans_1c4c7ad2b8614365bf4f04763d9afc32.PNG

2135951_2019586_ans_1c4c7ad2b8614365bf4f04763d9afc32.PNG

Ratio method : Ed = QP%Q%P :: ______ : Ed = Lower segment/Upper segment.

According to Percentage method, elasticity is measured as the ratio of percentage change in the quantity demanded to percentage change in the price. Elasticity of Demand (Ed) = Percentage change in Quantity demanded/Percentage change in Price.
Whereas according to Geometric or Arc or Point method, Elasticity of demand at any particular point is measured by: lower portion of the curve from that point is divided by the upper portion of the curve from the same point.
Elasticity of Demand (Ed) = Lower segment of demand curve (LS)/Upper segment of demand curve (US).
Hence, Ratio method : Ed = %Q/%P :: Geometric Method : Ed = Lower segment/Upper segment.

Why is an indifference curve convex to origin?

An indifference curve is convex to the origin because of diminishing MRS. MRS declines continuously because of the law of diminishing marginal utility. As seen in Table, when the consumer consumes more and more of apples, his marginal utility from apples keeps on declining and he is willing to give up less and less of bananas for each apple. Therefore, indifference curves are convex to the origin (see figure). So, MRS indicate the slope of indifference curve.

Combination	Apples (A)	Bananas (B)	MRS
P	1	15	--
Q	2	10	5B:1A
R	3	6	4B:1A
S	4	3	3B:1A
T	5	1	2B:1A

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Why two indifference curves can never intersect each other?

As two indifference curves cannot represent the same level of satisfaction, they cannot intersect each other. It means only one indifference curve will pass through a given point on an indifference map. In figure, satisfaction from point A and from B on IC1 will be the same. Similarly, points A and C on IC2 also give the same level satisfaction. It means points B and C should also give the same level of satisfaction. However, this is not possible, as B and C lie on two different indifference curves, IC1 and IC2 respectively and represent different levels of satisfaction. Therefore, two indifference curves cannot intersect each other.
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2138265_2021081_ans_0d52b47fdbd64732aebd28870761cc49.jpeg

Explain consumer's equilibrium by indifference curve analysis. Use diagram.

A consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.

Equilibrium Condition :

MRSXY (Slope of Indifference Curve) = Ratio of prices or P/Py (Slope of Budget Line).
If MRSXY > Px/Py, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.
If MRSXY < Px/Py, it means that the consumer is willing to pay less for X than the price prevailing in the market. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.
2. Sufficient Condition:
MRS continuously falls.

As budget line can be tangent to one and only one indifference curve, consumer maximizes his satisfaction at point E, when both the conditions of consumers equilibrium are satisfied.

2135950_2019585_ans_2fc0af7e681f4b69a76a4e23b5d92510.PNG

Explain the law of diminishing marginal utility along with assumptions.

The Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. People spend their income on various goods because consuming more and more of anyone good reduces the marginal satisfaction obtained from further consumption of the same good. The Law of DMU has universal applicability and applies to all goods and services.

Assumptions of DMU:

Cardinal measurement of utility: It is assumed that utility can be measured and it can be expressed in numerical terms as 1, 2, 3, etc.
Monetary measurement of utility: It is assumed that utility can be measured in monetary terms.
Continuous consumption: It is assumed that consumption is a continuous process. For example, if one ice cream is consumed in the morning and another in the evening, then the second ice cream may provide equal or higher satisfaction.
No change in quality: Quality is assumed as uniform and constant.
Fixed income and prices: It is assumed that the income of the consumer and prices of the goods are assumed to be constant.

Consider the demand for a good at a price of Rs.4, the demand for the good is 25 units. Suppose the price of the good increases to Rs.5, what will be the change in quantity if the elasticity of demand is 0.8?

Price (Rs.)	Demand (unit)
4	25
5	--

Change in price = 5 - 4 = 1
Change in demand = ΔQ

Price elasticity of demand = (-)ΔQ/ΔP x P/Q = (-)ΔQ/1 x 4/25 = (-)4ΔQ/25.
(-)0.8 = (-)4ΔQ/25.
ΔQ = 5. Therefore, change (fall) in quantity = 5 units.

A consumer buys 80 units of goods at a price of Rs. 5 per unit Suppose the price elasticity of demand is -At what price will he buy 64 units?

2176621_2025157_ans_d9e3e9596d9f4332a733d839acb03691.png

The coefficient of price elasticity of demand for a commodity is 0.When the price was Rs. 20 per unit. The quantity demanded was 80 units. If the price falls to Rs. 10 per unit, how much will be its quantity demanded?

Solution is as follows:
2147952_2026632_ans_ce55df820769471ba7ae01cb88beace7.PNG

State and explain the law of diminishing marginal utility.

Law of Diminishing Marginal Utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. People spend their income on various goods because consuming more and more of any one good reduces the marginal satisfaction obtained from further consumption of the same good.

A consumer spends rs. 1000 on a good price at rs. 8 per unit. When the price rises by 25%, the consumer continues to spend rs. 1000 on the good. Calculate the price elasticity of demand by the percentage method.

ed = % Change in quanity demanded/ % Change in price.

ed= 0/25

ed=0.

The price elasticity is zero.

Write definition and equation of price line or budget line.

The budget line shows all the different combinations of the two commodities that a consumer can purchase, given his money income and the price of two commodities.
The equation of a budget line is given by: M = PX.QX + PY.QY.
Where, M = Money income of the consumer, PX = Price of Good-X, PY = Price of Good-Y QX = Quantity of Good-X, QY = Quantity of Good-Y.

Illustrate the Consumer's equilibrium using indifference curve analysis.

Conditions of Consumer’s Equilibrium:

The consumer’s equilibrium under the indifference curve theory must meet the following two conditions:

(i) MRSXY = Ratio of prices or PX/PY.

Let the two goods be X and Y. The first condition for consumer’s equilibrium is that MRSXY = PX/PY.

a. If MRSXY > PX/PY, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer buys more of X. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.

b. If MRSXY < PX/PY, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.

(ii) MRS continuously falls: The second condition for consumer’s equilibrium is that MRS must be diminishing at the point of equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium. Unless MRS continuously falls, the equilibrium cannot be established.

Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.

In Fig., IC1, IC2 and IC3 are the three indifference curves and AB is the budget line. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y.
All other points on the budget line to the left or right of point ‘E’ will lie on lower indifference curves and thus indicate a lower level of satisfaction. As budget line can be tangent to one and only one indifference curve, consumer maximizes his satisfaction at point E, when both the conditions of consumer’s equilibrium are satisfied.

2143165_2023905_ans_f7ef0db488ae4263972b33f6a71db196.jpeg

Describe the law of diminishing marginal utility, its limitations and importance.

According to the law, when a consumer increases the consumption of a good, there is a decline in MU derived from each successive unit of that good, while keeping the consumption of other goods constant. In other words, as more and more of goods are consumed, the process of consumption at some point yields smaller and smaller additions to the utility. For example, an individual feels very hungry and decides to have samosas. The first samosa consumed by him/her gave maximum satisfaction to him/her. In such a case, on a 10-point scale, he would give ten points. Thus, the utility derived from first unit of samosa would be ten. His/her rate of satisfaction is best till eight points. After that, utility starts declining as he/she eats more and more samosas, therefore, he may stop consuming samosa. If he/she keeps eating samosa, he/she may eventually reach a point at which eating samosas would provide dissatisfaction to him/her. This would make utility zero or negative, leading to disutility.

Following are the limitations of law of DMU:

(i) Unrealistic assumptions: Include homogeneity, continuity, and constancy conditions. All these assumptions are impossible to find at once.

(ii) Inapplicability to certain goods: Implies that the law of diminishing marginal utility cannot be applied to goods, such as television and refrigerator. This is because the consumption of these goods is not continuous in nature.

(iii) Constant marginal utility of money: Assumes that MU of money remains constant, which is unrealistic. There is also a gradual decline in the MU of money.

(iv) Change in other people’s stock: Implies that the utility of consumers is also dependent on what other people have in their stock. Thus, the utility depends on social needs.

(v} Other possessions: Assumes that utility of consumers also depends on possessions already owned by them. For example, a consumer is suffering from diabetes, thus, he is not allowed to consume sugar that he/she already possesses. In such a case, the utility of coffee derived by him/her would be less.

The importance of the law of diminishing marginal utility is as follows :

(i) Helps to utilize resources economically: When the consumer purchases more units of a commodity, his marginal utility decreases. Due to this behaviour, the consumer cuts his expenditure on that commodity.

(ii) It has practical application: This law has a practical application in the field of public finance, as the principle of taxation is based on this law.

(iii) Base to other economic laws: The law of diminishing marginal utility is the base for other economic laws like law of demand, elasticity of demand, consumer surplus, the law of substitution etc.

(iv) Theory of value is based on this law: The theory of value is based on the law of diminishing utility. The value of a commodity falls with an increase in the supply of that commodity. This forms the basis for determining prices.

The price elasticity of demand of a good is (-) 0.At a price of Rs 20 per unit, its demand is 300 units. At what price will its demand increase by 10%?

Solution is given as:
2147957_2026637_ans_4cbc5d1fa5cb4722836724c54c2dc652.PNG

Define with the help of diagram the effect of the following changes on the demand for a
commodity,
(A) Fall in the price of the substitute good.
(B) Fall in the price of complementary goods.

(A) Substitute goods are the goods that can be used in place of another goods and give the same satisfaction to a consumer. There would always exist a direct relationship between the price of substitute goods and demand for given commodity. With a decrease in price of substitute goods (coffee), demand for the given commodity (tea) also decreases from OQ to OQ1 at the same price of OP. It shifts the demand curve of the given commodity towards left from DD to D1D1.

(B) Complementary goods are those which are useless in the absence of another good and which are demanded jointly. There would always exist an inverse relationship between price of complementary goods and demand for given commodity. With a decrease in price of complementary goods (sugar), demand for the given commodity (tea) increases from OQ to OQ1 at the same price of OP. As a result, the demand curve of the given commodity shifts to the right from DD to D1D1.
2139513_2022091_ans_74f070164c984405becb8b7391665a01.jpeg

2139513_2022091_ans_74f070164c984405becb8b7391665a01.jpeg

A consumer spends Rs.1500 on a good priced at Rs.10 per unit. When price by 20%, the consumer continues to spend Rs.1500 on the good. Calculate price elasticity of demand by percentage method.

A household buys 30 units of a commodity when its price is Rs. 5 per unit. The quantity demanded falls to 25 units when the price rises to Rs. 6 per unit. How much is the price elasticity of demand?

Explain law of diminishing marginal utility and write its assumption.

Law of diminishing marginal utility (DMU) states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. Law of DMU has universal applicability and applies to all goods and services. This law was first given by a German economist H.H. Gossen. That is why, it is also known as ‘Gossen’s first law of consumption’.

Assumptions of Law of Diminishing Marginal Utility:

The law of DMU operates under certain specific conditions. Economists call them the ‘assumptions’ of this law.

These are as follows:

1. Cardinal measurement of utility: It is assumed that utility can be measured and a consumer can express his satisfaction in quantitative terms such as 1, 2, 3, etc.

2. Monetary measurement of utility: It is assumed that utility is measurable in monetary terms.

3. Consumption of reasonable quantity: It is assumed that a reasonable quantity of the commodity is consumed. For example, we should compare MU of glassfuls of water and not of spoonful’s. If a thirsty person is given water in a spoon, then every additional spoon will yield him more utility. So, to hold the law true, suitable and proper quantity of the commodity should be consumed.

4. Continuous consumption: It is assumed that consumption is a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then the second ice-cream may provide equal or higher satisfaction as compared to the first one.

5. No change in Quality: Quality of the commodity consumed is assumed to be uniform. A second cup of ice-cream with nuts and toppings may give more satisfaction than the first one, if the first ice-cream was without nuts or toppings.

6. Rational consumer: The consumer is assumed to be rational who measures, calculates and compares the utilities of different commodities and aims at maximising total satisfaction.

Identify and explain the following concepts: Lalita satisfied her want of writing on essay by using pen and notebook.

Identified Concept: Utility.
Explanation: The utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good. Pen and notebook have utility to satisfy Lalita's want an essay. Thus the concept is utility.

Identify and explain the concepts from the given illustration: Since the price of tomatoes rises from Rs.30 per kg to Rs.80 per kg, Kavita purchased 2 kgs instead of 5 kgs.

Concept identified: Law of demand

Explanation: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.

A consumer buys 10 units of a commodity at the price of Rs. 5 per unit. The price elasticity of demand for this good is -Price falls to Rs. 4 per unit. How much of this commodity will he buy now at this price?

Want satisfying power of any commodity is called __________. (utility/usefulness)

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. Utility is measured in utils. Hence want satisfying power of any commodity is called utility.

A consumer consumes only two goods. Why is the consumer said to be in equilibrium when he buys only the combinations of two goods which lie at that point of the indifference curve where the budget line is tangent to the indifference curve? Explain. Use diagram.

Consumer equilibrium refers to a situation, in which a consumer derives maximum satisfaction, with no intention to change it and subject to given prices and his given income. The point of maximum satisfaction is achieved by studying indifference map and budget line together.

Conditions of consumer equilibrium:

Consumer The consumer’s equilibrium under the indifference curve theory must meet the following two conditions:

(i) MRSxy = Ratio of prices or Px/Py:

Let the two goods be X and Y. The first condition for consumer’s equilibrium is that MRSxy = Px/Py.
a. If MRSxy > Px/Py, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, the consumer buys more of X. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.
b. If MRSxy < Px/Py, it means that the consumer is willing to pay less for X than the price prevailing in the market. It induces the consumer to buys less of X and more of Y. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.

Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.

Let us now understand this with the help of a diagram:
In figure, IC1, IC2 and IC3 are the three indifference curves and AB is the budget line. With the constraint of budget line, the highest indifference curve, which a consumer can reach, is IC2. The budget line is tangent to indifference curve IC2 at point ‘E’. This is the point of consumer equilibrium, where the consumer purchases OM quantity of commodity ‘X’ and ON quantity of commodity ‘Y.

An indifference curve is __________ to the point of origin. (convex/concave).

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.

Hence, an indifference curve is convex to the point of origin.

2158992_2032880_ans_47ed2781b53144129bb6269c15ab170d.png

Budget line is also known as __________. (concave line/price line)

Budget line is also called price line because the slope of Budget Line is the ratio of prices of goods taken on each X-axis and Y-axis. Algebraically, equation of a budget line is: PX + QY = M, where P is the price of good X and Q is the price for good Y. Hence, budget line is also known as price line.

Price elasticity of demand of a good is (-)When price per unit falls by one rupee, its demand rises from 16 to 18 units. Calculate the price before change.

Distinguish between the following: Extension and Increase in demand

Extension in demand:
(i) Other things being constant, when with a fall in price, demand for a commodity rises, it is called extension in demand.
(ii) It is caused due to fall in price of the commodity.
(iii) There is a downward movement along the same demand curve from left to right.
Increase in demand:
(i) When at a given price larger quantity is purchased due to change in factors, other than price of the same commodity, it is called increase in demand.
(ii) It is caused by change in other factors affecting demand price remaining the same.
(iii) Consumers demand curve shifts to the right.

State of 'law of demand'. Explain three exceptions to this law.

Law of Demand: The law of demand is based on the law of diminishing marginal utility. This law states the relationship between the quantity demanded and price.
According to Marshall: "The amount demanded increases with a fall in price and diminishes with a rise in price".
According to Samuelson: "Law of demand states that people will buy more at lower prices and buy less at higher prices, ceteris paribus."
Demand Schedule: According to Prof. Marshall, "Demand schedule is a list of prices and quantities." It is a tabular statement of price-quantity relationship between two variables. The demand schedule in the table represents the different quantities of commodities that are purchased at different prices during a certain specified period.

Price of Oranges (Rs per kg	Demand by Consumers (in per kg)
15	2
12	3
9	4
6	5
3	6

Demand curves: The demand curve is a graphic statement or presentation of quantities of a commodity, which will be demanded by the consumer at various possible prices at a given moment of time. Demand curve does not tell us the price. It only tells us how much quantity of good would be purchased by the consumer at various possible prices.
Exceptions to the law:
i. War or Emergency: During the period of war, if there is fear of shortage, people may start buying for hoarding and building stocks, even at high prices. On the other hand, if there is depression, they will buy less at low prices.
ii. Articles of Distinction: Articles of distinction command more demand when their prices are high. These articles include jewellery, diamonds, gems, costly carpets etc. The rich people demand more of such commodities even at high prices. In case their price goes down, they no longer remain the articles of distinction and so have less demand.

a. What is demand? Explain how quantity demanded of a commodity X will be affected by
i. An increase in the price of its substitutes
ii. Consumer credit facility
iii. Government policy.

a. Demand : Demand for any commodity refers to the quantity of that commodity which consumers are willing to purchase at different prices during a given time of period.
i. Quantity demanded of a commodity X will increase with an increase in the price of its substitutes because they will compete with each other for the same demand in the market.
ii. With consumer credit facility the demand for commodity X will increase because consumers would be tempted to purchase commodity X which they could not have purchased otherwise.
iii. Demand for commodity X will vary with government policy. If the government imposes taxes on commodity in the form of sales tax, excise duties, VAT etc. the price of this commodity will increase. As a result, demand for this commodity will fall. But, on the other hand, if the government incurs more expenditure on construction of roads, bridges, in setting up industries etc., the demand for cement, iron and goods needed for these purposes will increase and so of this commodity if it is in the list.

Draw a demand curve with the help of a hypothetical individual demand schedule.

According to Samuelson: "Law of demand states that people will buy more at lower prices and buy less at higher prices, (ceteris paribus) other things remaining constant."
Demand Schedule: According to Prof. Marshall, demand schedule is a list of prices and quantities. If is a tabular statement of price-quantity relationship between two variables.

Prices of Oranges (Rs. per kg.)	Demand by consumer (in kg)
$15$	$2$
$12$	$3$
$9$	$4$
$6$	$5$
$3$	$6$

Demand Curves: The demand curve is a graphic statement or presentation of quantities of a commodity, which will be demanded by the consumer at various possible prices at a given period of time. Demand curve does not tell us the price. It only tells us how much quantity of goods would be purchased by the consumer at various possible prices.

What is meant by cross demand? Explain any four factors which determine demand in the market.

Cross demand from the economic point of view measures the responsiveness of the change in quantity demand towards the change in price of another commodity.

Four factors which determine demand in the market are:-
1) Own price of the commodity: Other things remaining constant, with the rise in own price of the commodity, its demand contracts and with the fall in price, the demand expands.

2) Income of the consumer: The demand for normal goods increases with the rise in consumer's income and vice-versa. On the other hand, the demand for inferior goods decreases with the rise in income of the consumer and vice-versa.

3) Tastes and preferences: Other things being equal, demand for those goods increases fr which consumers develop a strong tastes and preferences. On the contrary, if tastes and preferences towards a product fading, its demand will decrease.

4) Price of related goods: For substitute goods, increase in the price of one good, increases the demand for the other commodity and vice-versa like, tea and coffee. For complementary goods, increase in the price of one good, decreases the demand for the other commodity and vice-versa, like petrol and car.

The bus fare between two cities is reduced. How will this affect the demand curve for bus travel between the two cities?

In the above graph, P is the initial price and Q is the initial quantity demanded.

P1- Required price

Q1- Increased quantity demanded.

If bus fare falls, then demand increases for between two cities. Along with the same demand curve, it shifts downward which represents extension of demand.

How does the nature of a good affect its elasticity of demand?

The elasticity of demand for a good depends upon the nature of the good, i.e., whether the good is a necessary or a luxury good. The elasticity of demand for a necessary good is relatively small. For example, if the price of such good rises, its buyers generally are not able to reduce their demand.

With the help of appropriate diagrams, write relevant points of distinction between movement along a demand curve and shift of the demand curve.

Movements along demand curve happens because of changes in quantity demanded. Extension of demand and contraction of demand take place due to the change in price of the commodity. Extension of demand caused by decrease in own price of the commodity and contraction of demand caused by increase in own price of the commodity.

Shifts in the demand curve happens due to changes in demand cased by change in factors other than own price of the commodity. Increase in demand and decrease in demand happen because of shifts in the demand curve. Image result for increase and decrease of demand

Image result for increase and decrease of demand

When the price of a good rises from Rs. 10 per unit to Rs. 12 per unit, its quantity demanded falls by 20 percent. Calculate its price elasticity of demand. How much be the percentage change in its quantity demanded, if the price rises from Rs.10 per unit to Rs. 13 pe unit?

We are given,
Percentage fall in demand

$= 20$
Initial Price

$= 10$
New Price

$= 12$

$\%$ Increase in Price

$=\dfrac{2}{10} \times 100 = 20\%$
We know,

$e_d = -\dfrac{\% \text{change in Demand}}{\% \text{change in price}} = -\dfrac{20}{20} = -1$
Now, if price rises from 10 to 13

$\%$ Change in price

$-\dfrac{3}{10}\times 100 = 30\%$
So,

$\%$ Change in Demand

$=\%$ change in Price

$\times e_d = 30\times -1=-30$
So, we can say that if the price rises from Rs. 10 to Rs. 13, i.e by 30%, then the demand will fall by 30%. This is because the good follows unitary elasticity.

Explain with the help of a numerical example, the meaning of diminishing marginal rate of substitution.

Diminishing marginal rate of substitution implies that the rate at which a consumer is willing to substitute one good for each additional unit of the other good tends to decline when the consumer consumes more of that good. For example,suppose we have the consumption bundles of a consumer as given in the following schedule.

Units of Good 1	Units of Good 2
1	10
2	6
3	3
4	1

We also know that MRS is calculated as,

$\dfrac{\text{Change in consumption of Good 1}}{\text{Change in consumption of Good 2}}=\dfrac{2 \Delta y}{1\Delta x}$
Now, in the given schedule,
To increase the consumption of Good 1 by 1 unit, the consumer has to sacrifice 4 units (10-6) of Good 2.
So, the Marginal Rate of Substitution when the consumer increases the consumption of Good 1 from 1 to 2 units is,

$\dfrac{10-6}{2-1}=\dfrac{4}{1} = 4$
Now, similarly, when the consumer increases the consumption of Good 1 by one more unit, the consumer has to sacrifice 3 units (6-3) of Good 2.
So, the Marginal Rate of Substitution when the consumer increases the consumption of Good 1 from 2 to 3 units is,

$\dfrac{6-3}{3-2}=\dfrac{3}{1}=3$
After this, when consumer increases the consumption of Good 1 by one more unit, the consumer has to sacrifice 2 units (3-1) of Good 2.
Thus, the Marginal Rate of Substitution when the consumer increases the consumption of Good 1 from 3 to 4 units is,

$\dfrac{3-1}{4-3}=\dfrac{2}{1}=2$
Hence, we can see that the Marginal Rate of Substitution (MRS) is declining as and when the consumer consumes additional unit of Good 1 and we can say that MRS is diminishing in nature.

Explain the meaning of 'Budget set' and 'Budget line'.

A budget set represents those combinations of consumption bundles that are available to the consumer given his/her income level and at the existing market prices. In other words, it represents those consumption bundles that the consumer can purchase using his/her money income (M).
A budget line represents the different combinations of two goods that are affordable and are available to a consumer given his/her level of income and the market prices of the goods. The equation of the budget line is represented as follows.

$P_1x_1+P_2x_2=M$
With the help of the budget line we can estimate the amount of income that is spent on different goods.

Complete the following table and also draw the market demand curve.
Price
(Rupees) Quantity Demanded by Mishra
(Units) Quantity Demanded by Mishra
(Units) Market Demand
(Units)
10 3 - 8
9 - 8 15
8 11 - 22
7 - 14 30
6 20 22 -

Price (Rupees)	Quantity Demanded by Mishra (Units)	Quantity Demanded by Mishra (Units)	Market Demand (Units)
10	3	5	8
9	7	8	15
8	11	11	22
7	16	14	30
6	20	22	42

1274454_957111_ans_25b5f341507f40168f734e4b2c8b6ccf.jpg

Explain with reasons whether you 'agree' or 'disagree' with the following statement:
Law of Diminishing Marginal Utility is important in practice.

Law of diminishing marginal utility states that as the consumption of a commodity rises, marginal utility tends to fall. It is known as the fundamental psychological law. It is important in practice since it is applied to the theory of value. It also helps to determine the law of demand and law of supply.

Explain with reasons whether you 'agree' or 'disagree' with the following statement:
The law of diminishing marginal utility can be explained with the help of schedule and diagram.

Law of diminishing marginal utility states that as the consumption of a commodity rises, marginal utility tends to fall. It is known as the fundamental psychological law.

Unit of Consumption	Marginal Utility	Total Utility
1	20	20
2	15	35
3	10	45
4	05	50
5	00	50
6	-05	45

The following news was printed in the Economic Times:
"Petrol and diesel prices were cut by Rupees 2 per litre each as international oil prices slumped to a five-year low."
Use a diagram and economic theory to analyse the impact on the demand for cars in India.

When the prices of petrol and diesel are cut, the demand for cars is expected to rise, because car and petrol are complementary goods. It implies that demand curve for cars will shift to the right. More cars are demanded at their existing price. The figure illustrates this situation. Initially, PK cars were purchased. As price of petrol and diesel decreases, PS cars are purchased even when price of cars is constant. Accordingly, the demand curve for cars shifts forward from

$D$ to

$D_1$ .

1274459_957155_ans_ece4e7faacba4b12847a0df5ee632512.jpg

Answer the following question in $15$ sentences.
Explain any five properties of indifference curves.

Properties of Indifferences Curves :-

(i) A higher indifference curve represents a higher level of satisfaction

(ii) An indifference curve can’t be a vertical line or a horizontal line.

(iii) An indifference curve can’t be a downward sloping straight line.

(iv) IC cannot be positively sloped.

(v) Must always be convex to the origin

"Petrol is becoming cheaper, yet the demand for cars is not rising."
Does it means that, the law of demand is not operative?

Price of petrol and its impact on the demand for cars has nothing to do with the law of demand. Law of demand studies how the quantity demanded of a commodity responds to changes in the price of the same commodity. Change in the price of petrol would lead to a shift in demand curve for the cars.

If the demand curve is found to be positively sloped, what it could be due to? Give your answer in terms of nature of the commodity, income effect and substitution effect.

Positively sloped demand curve violates the law of demand. It is found in the case of Giffen goods. These are those inferior goods in case of which income effect is negative and greater than substitution effect so that net effect (or price effect) points to a positive relation between price and quantity demanded of the commodity. It contradicts the Law of Demand such that after a point when Price is lowered, the Demand is also reduced.

Show diagrammatically consumer's equilibrium using indifference curve analysis. Also, analyse the conditions of consumer's equilibrium.

A consumer always tries to remain at the highest possible indifference curve, subject to his budget constraint.

1. Equilibrium Condition:

MRSxy (Slope of Indifference Curve) = Ratio of prices or Px/Py (Slope of Budget Line).

If MRSxy > Px/Py, it means that the consumer is willing to pay more for X than the price prevailing in the market. As a result, MRS falls till it becomes equal to the ratio of prices and the equilibrium is established.
If MRSxy < Px/Py, it means that the consumer is willing to pay less for X than the price prevailing in the market. As a result, MRS rises till it becomes equal to the ratio of prices and the equilibrium is established.

2. Sufficient Condition:

MRS continuously falls: The second condition is also satisfied at point E as MRS is diminishing at point E, i.e IC2 is convex to the origin at point E.
As budget line can be tangent to one and only one indifference curve, consumer maximizes his satisfaction at point E, when both the conditions of consumers equilibrium are satisfied.

2138266_2021082_ans_5377a71c8ed34e10a0258d7468494669.jpeg

Why does law of demand operate?

Following are the various reasons for law of demand are:

Law of Diminishing Marginal Utility: Law of diminishing marginal utility states that as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing. So, demand for a commodity depends on its utility. If the consumer gets more satisfaction, he will pay more. As a result, consumer will not be prepared to pay the same price for additional units of the commodity. The consumer will buy more units of the commodity only when the price falls.
Substitution effect refers to substituting one commodity in place of other when it becomes relatively cheaper. When price of the given commodity falls, it becomes relatively cheaper as compared to its substitute (assuming no change in price of substitute). As a result, demand for the given commodity rises. For example, if price of given commodity (say, Pepsi) falls, with no change in price of its substitute (say, Coke), then Pepsi will become relatively cheaper and will be substituted for coke, i.e. demand for Pepsi will rise.
Income Effect: Income effect refers to effect on demand when real income of the consumer changes due to change in price of the given commodity. When price of the given commodity falls, it increases the purchasing power (real income) of the consumer. As a result, he can purchase more of the given commodity with the same money income. For example, suppose Isha buys 4 chocolates @ Rs. 10 each with her pocket money of Rs. 40. If price of chocolate falls to Rs. 8 each, then with the same money income, Isha can buy 5 chocolates due to an increase in her real income. Price Effect is the combined effect of Income Effect and Substitution Effect. Symbolically: Price Effect = income Effect + Substitution Effect.
Additional Customers: When price of a commodity falls, many new consumers, who were not in a position to buy it earlier due to its high price, starts purchasing it. In addition to new customers, old consumers of the commodity start demanding more due to its reduced price. For example, if price of ice-cream family pack falls from Rs. 100 to Rs. 50 per pack, then many consumers who were not in a position to afford the ice-cream earlier can now buy it with decrease in its price. Moreover, the old customers of ice-cream can now consume more. As a result, its total demand increases.
Different Uses: Some commodities like milk, electricity, etc. have several uses, some of which are more important than the others. When price of such a good (say, milk) increases, its uses get restricted to the most important purpose (say, drinking) and demand for less important uses (like cheese, butter, etc.) gets reduced. However, when the price of such a commodity decreases, the commodity is put to all its uses, whether important or not.

Explain consumer's equilibrium with the help of IC approach.

Consumer's equilibrium is the amount of goods the consumer can buy in the market given his/her current level of income. There are two conditions for consumers equilibrium:

The first is that the budget line should tangent to the indifference curve or the marginal rate of substitution of good X for Good Y (MRSxy) must be equal to the price ratio. i.e MRSxy = Px/Py.
The indifference curve should be convex to the origin at the point of tangency.

2140003_2022450_ans_35c9d1f9e83b4fff87bc2c3ba7df138e.jpeg

Good $x$		Good $y$
$Px$ (Rs.)	$Dx$ (units)	$Py$ (Rs.)	$Dy$ (units)
8	10	8	10
4	12	6	25

$Q$	$1$	$2$	$3$	$4$	$5$	$6$	$7$	$8$	$9$	$10$
$MU_{X} (Utils)$	$28$	$24$	$21$	$20$	$16$	$13$	$9$	$5$	$3$	$1$
$MU_{Y} (Utils)$	$32$	$29$	$27$	$23$	$20$	$18$	$17$	$16$	$12$	$9$

Theory Of Consumer Behaviour - Class 11 Commerce Economics - Extra Questions

State any two factors on which demand for a commodity depends.

Distinguish between price demand, income demand, and cross demand.

Price and demand move in opposite directions. Give two reasons justifying this statement.

Explain what may cause rise in the price of a commodity.

What do you understand by 'desire', 'want' and 'demand'?

Briefly explain a demand schedule and demand curve.

Discuss the causes and effects of increases in individual income.

Prepare your family's demand schedule for milk.

The diagram shows the demand for shoes.Give one factor that would cause a move from point A to point B.

What is demand?

Mention any four factors affecting the elasticity of demand.

The diagram shows the demand for shoes. How is it related to an increase in population.

Create a hypothetical table showing the various prices and quantity and draw the demand curve using that data.

The diagram shows the demand for shoes.Give one factor that would cause a movement from B to A?

Explain what effect the increase in the price of a complementary commodity will have on the original product.

Explain what effect the increase in the supply of a substitute commodity will have on the original product.

Give a brief classification of demand.

Explain any five factors affecting Price Elasticity of Demand.

Discuss five determinants of elasticity of demand.

Complete the following individual demand schedule.Price in Rs Quantity of Sugar demanded in Kgs520 6789

With the help of appropriate diagram, explain the meaning of contraction in demand and extension in demand.

Briefly explain the percentage method of calculating elasticity of demand.

Demand is inversely related to price. Explain.

State two factors affecting the market demand of a commodity.

Define indifference curve.

Define Utility.

Distinguish between :Total Utility and Marginal Utility Diminishing Marginal Utility.

Give Reasons or Explain.Utility is a psychological term.

The Law of Diminishing Marginal Utility and The Law of Equi- Marginal Utility.

Give Reasons or Explain.Utility is a psychological term.

Give Reason or explain the following:Assumptions of the law of Diminishing Marginal Utility.

Give Reason or explain the following:Limitations of the law of DMU.

Answer the following questions.Explain the Importance/Significance of the law of DMU.

Give Reason or explain the following:Practical Significance of law of DMU.

State with reason whether you agree or disagree.There are no criticisms to the law of DMU.

Give Reason or explain the following:Exception to the law of Diminishing Margnal Utility.

State with reason whether you agree or disagree.The law of DMU depends upon assumption.

State with reason whether you agree or disagree.There are no real exceptions to the law of DMU.

Answer the following questions.Explain the law of diminishing marginal utility.

Answer the following questions.What are the limitations / Shortcomings of the law of DMU ?

State with reason whether you agree or disagree.The law of DMU could be explained with example and diagram.

State with reason whether you agree or disagree.Law of DMU is important in practice.

Answer in details:State and explain law of Diminishing Marginal Utility and explain its exceptions.

Answer in detail:State and explain the law of DMU ? Explain its assumptions.

Answer in details:Discuss the importance of the law of DMU.

State how the Law of Diminishing Marginal Utility is important in practice, to various stakeholders (such as consumer, producer, government etc.).

Explain the conditions of consumer's equilibrium using Indifference Curve Analysis.

Given the price of a good, how will a consumer decide as to how much quantity to buy of that good? Explain.

What is Indifference Curve? State three properties of indifference curves.

Define demand.

What is meant by quantity demanded?

What is a demand schedule?

Name two determinants of consumer's demand for a commodity.

How is the demand for a good affected by a change in tastes and preferences of the consumers in favour of the commodity?

What happens to the demand for a complementary good of a commodity when the price of the commodity rises?

What is a demand curve?

MRS tends to diminish because of the law of diminishing marginal utility. Comment.

Do you agree with the view that the law of demand need not necessarily fail in case of inferior goods?

Explain the Statement.MRS (marginal rate of substitution) along an indifference curve tends to diminish.

Explain this statement.If IC is not convex at the point of equilibrium, the consumer cannot reach the point of stable equilibrium. Comment.

What is the relation between Good-X and Good-Y, if with a rise in the price of Good-X, demand for Good-Y rises? Give an example.

It is because of monotonic preferences of the consumer that IC slopes downward. Comment.

When is demand elastic?

Define indifference map.

Define price line.

What is meant by an indifference curve?

What is meant by budget set?

Define monotonic preferences of the consumer.

A consumer's budget is RsHe is buying Good-1 and Good-Price of Good-1 is Rs 8 per unit, and of Good-2 is Rs 10 per unit. Draw a budget line on the basis of these figures.

Explain the equation of budget line with the help of a hypothetical numerical example.

What do you mean by substitutes? Give examples of two goods which are substitutes of each other.

Why should diamonds be priced so high and water be priced so low even when water is essential to sustain life while diamonds are not?

On what factors, does the position of the budget line depend?

Certain goods are demanded even when their price is zero. Does it mean that we are demanding even those goods which are not scarce?

How do you account for a rise in demand for rice even when own price of rice was rising in the flood-ravaged Jammu & Kashmir state of India?

How does MRS impact the shape of IC?

What do you mean by complements? Give examples of two goods which are complements of each other.

How does the budget line change if the consumer's income increases to Rs 40 but the prices remain unchanged (ie X1X_1 costs Rs: 4 and X2X_2 costs Rs. 5 each) ?

What do you mean by 'monotonic preferences'?

The diagram shows the demand for shoes.
Give one factor that would cause a move from point A to point B.

The diagram shows the demand for shoes.
Give one factor that would cause a movement from B to A?

Complete the following individual demand schedule.

Price in Rs Quantity of Sugar demanded in Kgs
5 20
6
7
8
9

Distinguish between :
Total Utility and Marginal Utility Diminishing Marginal Utility.

Give Reasons or Explain.
Utility is a psychological term.

Give Reasons or Explain.
Utility is a psychological term.

Give Reason or explain the following:
Assumptions of the law of Diminishing Marginal Utility.

Give Reason or explain the following:
Limitations of the law of DMU.

Answer the following questions.
Explain the Importance/Significance of the law of DMU.

Give Reason or explain the following:
Practical Significance of law of DMU.

State with reason whether you agree or disagree.
There are no criticisms to the law of DMU.

Give Reason or explain the following:
Exception to the law of Diminishing Margnal Utility.

State with reason whether you agree or disagree.
The law of DMU depends upon assumption.

State with reason whether you agree or disagree.
There are no real exceptions to the law of DMU.

Answer the following questions.
Explain the law of diminishing marginal utility.

Answer the following questions.
What are the limitations / Shortcomings of the law of DMU ?

State with reason whether you agree or disagree.
The law of DMU could be explained with example and diagram.

State with reason whether you agree or disagree.
Law of DMU is important in practice.

Answer in details:
State and explain law of Diminishing Marginal Utility and explain its exceptions.

Answer in detail:
State and explain the law of DMU ? Explain its assumptions.

Answer in details:
Discuss the importance of the law of DMU.

Explain the Statement.
MRS (marginal rate of substitution) along an indifference curve tends to diminish.

Explain this statement.
If IC is not convex at the point of equilibrium, the consumer cannot reach the point of stable equilibrium. Comment.

How does the budget line change if the consumer's income increases to Rs 40 but the prices remain unchanged (ie $X_1$ costs Rs: 4 and $X_2$ costs Rs. 5 each) ?

When price of a good rises from $Rs.20$ per unit to $Rs. 23$ per unit, its demand falls by $30$ per cent.Calculate price elasticity of demand.

A consumer spends $Rs. 1,500$ on a good priced at $Rs. 10$ per unit. When price rises by $20$ per cent, the consumer continues to spend $Rs. 1,500$ on the good. Calculate price elasticity of demand by percentage-change method.

For a commodity, $\dfrac{\triangle P}{P} =-0.2$ , and elasticity of demand $=-0.6$ . Find percentage change in quantity demanded.

From the following table, calculate price elasticity of demand by the percentage-change method.
Price of X (Rs. per unit) Total Expenditure (Rs.)
$4$
$5$ $600$
$525$

If elasticity of demand $=\infty$ , equilibrium price remain unchanged,no matter supply increases or decreases. Comment.

Draw PPC for an economy, if production possibilities are as under. Also find marginal opportunity cost.
Shirt (Millions) $0$ $1$ $2$ $3$ $4$ $5$
Computer (Thousands) $15$ $14$ $12$ $9$ $5$ $10$

The price elasticity of demand is estimated to be $2$ . The price of the commodity happens to increase by $10\%$ . Find the change in quantity demanded when initially he was buying $120$ units of the commodity.

A consumer consume only two goods $X$ and $Y$ and is in equilibrium. Show that when the price of good $X$ rises, the consumer buys less of good $X$ . Use utility analysis.

Give reasons or explain :
Demand for the commodity having multiple uses is elastic.

Find the elasticity of demand of $x$ and $y$ on the basis of the demand schedule given below and specify which one is more elastic:
Good $x$ Good $y$
$Px$ (Rs.) $Dx$ (units) $Py$ (Rs.) $Dy$ (units)
8 10 8 10
4 12 6 25

Price elasticity of demand of good $X$ is $-2$ and good $Y$ is $-3$ . Which of the two goods is more price elastic and why?

Answer the following question in a sentence/word.
Expand MRS.

Answer the following question in $4$ sentences.
Name the motives of demand for money according to J.M. Keynes.

Answer the following question in $4$ sentences.
What is Monotonic preference?

Answer the following Project and Assignemnt related question.
How much Mangoes can she consumes if she spend her entire income on that good?

Answer the following question in $12$ sentences.
Explain the indifference map with a diagram.

Answer the following Project and Assignment related question.
How much Bananas can she consumes if she spend her entire income on that good?

(i) Define the term demand.
(ii) explain any three factors that affect the demand for a commodity.
(iii) Why are articles of distinction or the Veblen effect an exception to the law of demand ?

(a) The demand for a commodity declines by 10% when its price rises from ₹4 to ₹5 per unit. What is the Price Elasticity of demand of the commodity?
(b) Explain the effect of Rise in the Price of Complementary good on demand of a given good?