Unit Marks
1. Introduction 4
2. Consumer Behaviour and Demand 13
3. Producer Behaviour and Supply 23
4. Forms of Market and Price determination 10
5. National income and related aggregates 15
6. Determination of income and employment 12
7. Money and Banking 8
8. Government Budget and the economy 8
9. Balance of Payments 7
CBSE SAMPLE PAPERS 2008
SAMPLE PAPER 1
SAMPLE PAPER 2

Chapter 1: INTRODUCTION
Que. What is economics about?
Ans. Economics is about making choices in the presence of scarcity.

Que. What is meant by "economic problem”?
Ans. Economic problem is the problem of choice of the manner in which scarce resources with alternative uses are disposed off.

Que. What is the main cause of economic problem? Or
Mention the main cause which gives rise to economic problems. Or
Why do economic problems arise?
Ans. Scarcity of resources in relation to unlimited wants is the main cause which gives rise to economic problems.

Que. What is meant by scarcity in economics?
Ans. In economics, scarcity means lesser availability of resources in relation to unlimited wants of society.

Que. Discuss the subject matter of economics.
Ans. The subject matter of economics is divided under two broad branches i.e. (1) Micro-economics (2) Macro-economics.
(1) Microeconomics is the study of particular firm, particular household. Individual price, wages, income, industry and particular commodity. Thus, It is a study of a particular unit rather than all the units combined. Micro economic theory deals with the problem of allocation of resources
(2) Macro economics theory is that part of economics which studies the overall average and aggregates of the system, such as total production., total consumption, total saving, and total investment. Thus macro economics is the study of overall phenomena as a whole rather than its individual parts.

Que. What do you mean by economizing the use of resources?
Ans. Economizing the resources means making best use of available resources because they are limited in relation to our requirements.

Que. What are the central problems of an economy and why do they arise?
Ans. Following are the central problems of an economy:
(i) What to produce
(ii) How to produce
(iii) For whom to produce
Central problems of an economy arise due to scarcity of resources in relation to unlimited wants.

Que. Discuss the central problems of an economy.
Or Explain briefly three central problems of an economy.
Ans. Following are the central problems of an economy:
(1) What to produce - Human wants are unlimited and resources are limited to satisfy human wants. The question arises which commodities should be produced and in what quantity.
(2) How to produce - This problem is related to the choice of technique for producing a commodity. An economy has to choose between labour intensive technique and capital-intensive technique. Every method has its own advantages and disadvantages. The economy has to decide about technique of production on the basis of cost labour and capital.
(3) For whom to produce - Problem of "for whom to produce" means how the national product i.e., national income is to be distributed among the factors of production that helped to produce it. It is rent, wages, interest and profits, which determine the distribution of goods among the various individuals in the society. The important view has been that each individual should get income equal to the contribution he makes to the national production.

Que. What do you mean by the production possibilities of an economy?
Ans. The collection of all possible combinations of the goods and services that can be
produced from a given amount of resources and a given stock of technological knowledge is called the production possibility set of the economy.

Que. What is Production Possibility Curve? Or
What is a production possibility frontier?
ANS. PRODUCTION POSSIBILITY CURVE (PPC)
Production Possibility Curve may be defined as a curve which shows the various combinations of two goods that can be produced in any economy with a given amount of resources and technology. PPC also known as Production Possibility Frontier (PPF) and Transformation curve.
Assumptions- While drawing PPC we assume-
1. Only Two types of goods – cloth and wheat produced
2. Productive resources remain fixed
3. Full employment of productive resources –No unemployment of resources
4. No change in technology

Que. Draw a Production Possibility Curve with the help of imaginary schedule.
Ans. It is assumed that there are only two types of goods – cloth and wheat. The resources of economy can be alternatively used in both the commodities. If the production of a commodity is increased then the production of the other commodity will be decreased. Following table shows the production possibilities of production.

Production
Possibilities Cloth Wheat
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

From the above table and figure it is clear that when production of cloth increases then production of food decreases and it will give concave shape of PPC because opportunity cost are increasing.

PPC and Productivity Efficiency
ALL points on PPC curve like A,B,C,D,E, and F show that goods and services produced at least cost and no resource is wasted and the economy is ‘Productively Efficient’.

Que. Define opportunity cost in relation to PPC.
Ans. Opportunity cost may be defined as the value of the next best alternative. It is also called ‘foregone cost’ and ‘Trade off ‘. In the context of PPC since there are only two goods, therefore opportunity cost of producing one good is in terms of sacrifice made of the other good. PPC is downward sloping because more production of one good is associated with less of the other good.





Que. Why PPC is Concave to the origin?
PPC - Concave to the origin- due to Increasing opportunity cost-
PPC looks concave to the origin because of increasing marginal opportunity cost. The increasing marginal opportunity cost means that for additional unit of a good, the sacrifice of unit of other good goes on increasing. Principle of increasing opportunity cost that makes the PPC concave to the origin or makes bowed-out shape. PPC may be straight line if opportunity cost is constant. PPC is negative sloped not due to increasing opportunity cost but due to ‘scarcity’ because at any point of time we have limited resources.

Que. Show on a PPC
(i) Under utilization of resources
(ii) Growth of resources
Ans. When an economy produces on PPC, it means that there is no unemployment and all the resources are being used efficiently. But if an economy operates inside the PPC then there is unemployment or underemployment and/or inefficient use of resources.

In the figure given below point ‘U’ inside the PPC indicate under utilization of resources. In other words economy would not be utilizing its resources fully. Point ‘S’ indicate that an economy could not produce with the given resources and technology. If economy moving from ‘U’ to ‘A’ and ‘B’ points, its indicates resources which were lying unutilized are now being utilized fully.

Economic Growth and shift in PPC
When an economy produced at PPC curve it is ‘productively efficient’. But there is also scope of progress and one PPC can shift to another PPC on the right, It indicates Economic Growth. PPC can shift to the right or economic growth are possible in the following circumstances-
1. Improvement in overall technology
2. Greater capital formation
3. Increase in population growth / labour force

In the above figure PPC curve shift from ‘PP’ to ‘P1P1’it indicates economic growth. Sometimes PPC may shift inward when earthquake destroying resources of the country.


Que. What does a rightward shift in production possibility curve indicate?
Ans. A rightward shift in production possibility curve indicates the situation of growth of resources under which an economy can produce more of both the goods.


Que. An economy always produces on, but not inside, a PPC." Defend or refute.
Ans. An economy does not always produce on a PPC. PPC shows the possibilities of producing rent combinations of two goods. When an economy produces on PPC, it means that there is no unemployment and all the resources are being used efficiently. But in practical life, these two conditions not apply. If there is unemployment and/or inefficient use of resources, an economy will operate inside PPC. Hence, the given statement is refuted.

Que. Define a Centrally planned economy. State its features.
Ans. In a Centrally planned economy, all material means of production i.e. land, capital and mines etc. are owned by the whole community represented by the STATE. All the members being entitled to the benefits from the fruits of such socialised planned production on the basis of equal rights. State decides the size and direction of the investment. The state works for the welfare of the society and profit motive is not important for it.
Characteristics: -The following are its main characteristics
(a) Collective ownership of means of production
(b) Economic equalities
(c) Social welfare.
(d) Lack of competition
(e) Elimination of exploitation.

Que. Define a Capitalist or Market economy. State its features.
Ans. Market economy is one in which the factors of production are privately owned and managed and in which production takes place on the initiative for private profits. It is a free economy in which government interference is not found.
Characteristics: -The following are its main characteristics
(i) Right of Private Property
(ii) Freedom of Enterprise
(iii) Freedom of choice by consumers
(iv) Profit Motive
(v) Competition
(vi) Price mechanism
(vii) Inequalities of Income

Que. Define a Mixed economy. State its features.
Ans. An economic system which contains element of both private and public sectors is called mixed economy. It permits coexistence of controlled and market economy.
Features: -
(i) Coexistence of both private and public sectors.
(ii) Planned Economy
(iii) Balanced regional development
(iv) Dual system of pricing


Que. Distinguish between a centrally planned economy and a market economy.
Ans.
Basis of difference Centrally Planned Economy
Market Economy

Definition In a Socialist economy, all material means of production are owned by the whole community represented by the STATE. Market economy is one in which the factors of production are privately owned and managed and in which production takes place on the initiative for private profits.
Owner ship of factors of production State (Govt.) owns all the factors of production/ Factors of production are privately owned.
Objective Social Welfare Private Profit

Price Determination By the Govt. By Market Mechanism.

Examples China U.S.A., U.K. GERMANY Etc



Que. Define Micro Economics. State its variables.
Ans. Microeconomics is the study of particular firm, particular household. Individual price, wages, income, industry and particular commodity. Thus, It is a study of a particular unit rather than all the units combined. Micro economic theory deals with the problem of allocation of resources. Under micro economics we study-
(i) Theory of product pricing
(ii) Theory of Consumer behavior
(iii) Theory of Factor pricing
(iv) Study of a firm
(v) Location of an industry
Example of Micro economics
(a) Lock out in TELCO
(b) Finding the causes of failure of X and co.

Que. Define Macro Economics. State its variables.
Ans. Macro economics theory is that part of economics which studies the overall average and aggregates of the system, such as total production., total consumption, total saving, and total investment. Thus macro economics is the study of overall phenomena as a whole rather than its individual parts. Macro economics deals with growth and development of resources. Under macro economics we study: -
(i) Theory of National Income and output
(ii) Theory of Employment
(iii) Theory of Money
(iv) Theory of General Price Level
(v) Theory of Economic Growth and Development
(vi) Theory of International Trade.
Example of Macro economics
(a) Per capita income of India.
(b) Under employment in agricultural sector.
(c) Total savings in India.
(d) Determining the GNP of India.
(e) Identifying the causes of inflation in India.
(f) Analyse the causes of failure of industry in providing large-scale employment.
(g) The national economy's annual rate of growth
(h) Increase in the corporate income tax rate will affect the national unemployment.
Note: - It should be noted that micro and macro economics are interdependent

Que. Distinguish between microeconomics and macroeconomics.
Ans.
Micro - economics Macro- economics
1. It studies economic relationship or economic problems at the level of an individual- an individual firm ,an
individual household or an individual consumer.
1. It studies economic relationship or
economic problems at the level of the
economy as a whole.

2It is basically concerned with
determination of output and price for an individual firm or industry.

2.It is basically concerned with determination
of aggregate output and general price level in the economy as a whole.

3. Study of microeconomics assumes
that macro variable remain constraint.

3. Study of macroeconomics assumes that
macro variables remain constraint.
4. Market mechanism plays a significant role in the context of microeconomics
problems, like the problem of product pricing or facture pricing. 4. Government plays a significant role in the context of macroeconomic problems like the problems of unemployment, poverty and inflation.

Que. What do you understand by positive economic analysis?
Ans. Positive economic analysis states ‘what is’ and not ‘what ought to be’. or it makes a real description of an economy. It does not pass value judgments. Any one with the limited amount of money may use it for buying liquor and not milk.
Example of positive economic analysis
(a) Planned economies allocate resources via government departments.
(b) Most transitional economies have experienced problems of falling output and rising prices.
(c) There is a greater degree of consumer sovereignty in the market.

Que. What do you understand by normative economic analysis?
Ans. Normative economic analysis refers to “What ought to be” or it makes an assessment of an activity and offers advice.
Example of normative economic analysis
(a) Reducing inequality should be major priority for mixed economy
(b) Changing the level of interest rates is a better way of managing the economy than using taxation and government expenditure.
(c) Govt. ought to guarantee that farmer’s income will not fall if harvest is poor.

Note: The positive and the normative issues involved in the study of the central economic problems are very closely related to each other and a proper understanding of one is not possible in isolation to the other.
.


CHAPTER II: Theory of Consumer Behaviour

Que. What do you mean by the budget set of a consumer? (NCERT)
Ans. The budget set is the collection of all bundles of goods that a consumer can buy with his or her income at the prevailing market prices.

Que. What do you mean by the budget constraint of a consumer?
Ans. A consumer can buy any bundle of goods which costs less than or equal to the income he has. It is called the consumer’s budget constraint.

Que. What is budget line?
Ans. The budget line represents all bundles which cost the consumer his or her entire income. The budget line is negatively sloping.

Que. Explain why the budget line is downward sloping.
Ans. As the income of the consumer is limited so if the consumer wants to have one more unit of good 1, he can do it only if he gives up some amount of the other good. The budget line measures the rate at which the consumer is able to substitute good 1 for good 2 when he spends his entire budget.


Que. A consumer wants to consume two goods. The prices of the two 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?

Ans. (i) The equation of the budget line is p1x1 +p2x2 ≤M. Where p1 = price of good 1, x1 =quantity of good 1, p2 = Price of good 2 , x2 = quantity of good 2 and M = Income of the consumer.
(ii) If she spends her entire income on the good 1 the consumer can consume 5 units of that good. ( Rs. 20/4)
(iii) If she spends her entire income on the good 2 the consumer can consume 4 units of that good. ( Rs. 20/5)
(iv) The budget line is downward sloping.

Que.. How does the budget line change if the consumer’s income increases but the prices remain unchanged?
Ans. If there is an increase in the income, the vertical intercept increases, and hence, there is a parallel outward shift of the budget line.


Que. How does the budget line change if the consumer’s income decreases but the prices remain unchanged?
Ans. If there is a decrease in the income, the vertical intercept decreases, and hence, there is a parallel inward shift of the budget line.

Que. How does the budget line change if the price of good 1 decreases by a rupee but the price of good 2 and the consumer’s income remain unchanged?
Ans. If the price of good 1 decreases, the consumer can now purchase more of good 1 due to increase in purchasing power hence, the absolute value of the slope of the budget line decreases and hence, the budget line becomes flatter.


Que. How does the budget line change if the price of good 1 increases by a rupee but the price of good 2 and the consumer’s income remain unchanged?
Ans. If the price of good 1 increases, the consumer can now purchase less of good 1 due to decrease in purchasing power hence, the absolute value of the slope of the budget line increases hence, the budget line becomes steeper.

Que. What happens to the budget set if both the prices as well as the income double?
Ans. If both the prices as well as the income double the budget set will remain unchanged.

Que 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?
Ans. M = p1x1 +p2x2
= 6x6 + 8x8 = Rs. 100
Consumer’s income= Rs. 100

Que. Suppose a consumer wants to consume two goods which are available only in integer units. The two goods are equally priced at Rs 10 and the consumer’s income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to the consumer, identify those which
cost her exactly Rs 40.
Ans. (i) The bundles that this consumer can afford to buy are: (0, 0), (0, 1), (0, 2), (0, 3), (0, 4), (1, 0), (1, 1), (1, 2), (1, 3), (2, 0), (2, 1), (2, 2), (3, 0), (3, 1) and (4, 0).
(ii) Among the bundles, (0, 4), (1,3), (2, 2), (3, 1) and (4, 0) cost exactly Rs 40 and all the other bundles cost less than Rs 40.

Que. What does point below the Budget Line represent?
Ans. Any point below the budget line represents a bundle which costs less than the consumer’s income.


Que. What are the assumptions of preferences of the consumer?
Ans. Followings are are the assumptions of preferences of the consumer
1. Well-defined preferences: - It is generally assumed that the consumer has well-defined preferences to the set of all possible bundles. She can compare any two bundles. In other words, between any two bundles, she either prefers one to the other or she is indifferent to the two.
2. Ranking of Preferences:-It is assumed that the consumer can rank the bundles in order of her preferences over them.
3. Taste and preference: - It is assumed that the consumer chooses his consumption bundle on the basis of his tastes and preferences over the bundles in the budget set.
4. Monotonic Preferences: - A consumer’s preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.
5. Substitution between Goods: - Consider two bundles such that one bundle has more of the first good as compared to the other bundle. If the consumer’s preferences are monotonic, these two bundles can be indifferent only if the bundle having more of the first good has less of good 2 as compared to the other bundle.
6. Diminishing Rate of Substitution: - The consumer’s preferences are assumed to be such that she has more of good 1 and less of good 2, the amount of good 2 that she would be willing to give up for an additional unit of good 1 would go down. The amount of good 1 increases, the rate of substitution between good 2 and good 1 diminishes. Preferences of this kind are called convex preferences.

Que. Explain the concept of indifference curve with the help of an example and diagram.
Ans. INDIFFERENCE CURVE (IC): - An IC is the curve, which represents all those combinations of two goods, which give same satisfaction to the consumer. Following table and diagram shows different combination of X and Y which give same satisfaction to the consumer.
Combination Good X Good Y
A 1 12
B 2 6
C 3 4
D 4 3

Que. What is shape of the Indifference Curve? Why it is so?
Ans. Indifference curves are always convex to the origin. The rate of substitution between good 2 and good 1 is called the marginal rate of substitution (MRS). If the preferences are monotonic, then if more and more of one commodity (X) is substituted for another (Y), the consumer is willing to part with less and less of the commodity being substituted (i.e.Y). This is called law of diminishing rate of substitution. Thus, monotonicity of preferences implies that the indifference curves are downward sloping and convex to the origin.



Que. What is Indifference Map?
Ans. The consumer’s preferences over all the bundles can be represented by a family of indifference curves as shown in Figure . This is called an indifference map of the consumer. Monotonicity of preferences imply that between any two indifference curves, the bundles on the one which lies above are preferred to the bundles on the one which lies below thus A higher indifference curve represents a higher level of satisfaction than lower IC.


Que. Explain Utility function.
Ans. Utility function assigns a number to each and every available bundle in a way such that between any two bundles if one is preferred to the other, the preferred bundle gets assigned a higher utility number, and if the two bundles are indifferent, they are assigned the same utility number.

Que. Explain consumer equilibrium under IC analysis. Or Explain the concept of optimal choice of the consumer.
Ans. It is generally assumed that the consumer is a rational individual. From the bundles, which are available to her, a rational consumer always chooses the one, which she prefers, the most.

Her preferences over the available bundles can usually be represented by an indifference map. The rational consumer’s problem is to move to a point on the highest possible indifference curve given her budget set.

The optimum (most preferred) bundle of the consumer would be on the budget line.

Consumer’s equilibrium can be understood with the help of IC MAP and BUDGET LINE.

To show which combination of two goods X and Y the consumer will buy to be in equilibrium we bring his indifference map and budget line together.

Consider the figure given below in which consumer’s indifference map together with the price line ‘PL’ is depicted.



Good X is measured on the X-axis and good Y is measured on the Y-axis. With given money to be spent and given prices of the two goods, the consumer can buy any combination of the goods which lies on the price line PL. In order to maximize his satisfaction the consumer will try to reach the highest possible indifference curve.

The highest indifferences curve to which the consumer can reach is the indifference curve to which the price line is tangent. Any other possible combination would either lie on a lower indifference curve or would be unattainable.

Que. Define the term demand.
Ans. Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a period of time.

Que. What is consumer demand function?
Ans. The consumer’s demand function for a good gives the amount of the good that the consumer chooses at different levels of its price when the other things remain unchanged. The consumer’s demand for a good as a function of its price can be written as
q = d(p)
Where q denotes the quantity and p denotes the price of the good.

Que. What is demand schedule?
Ans. Demand Schedule: Demand schedule is a numerical tabulation showing quantity that is demanded at given prices. Demand schedule and curve may be two types:
(a) Individual demand schedule: It shows the quantity of the commodities that one consumer will buy at selected prices.

Price of ‘X’ (Rs.) Quantity of ‘X’
1 50
2 40
3 30
4 20
5 10

This above table and curve below shows an inverse relationship between price and quantity demanded, if other things being equal.


(b) Market demand schedule: When we add the individual demands for various schedules we get market demand schedule.

Price of ‘X’ (Rs.) A B C Total Market Demand
1 50 40 10 100
2 40 35 5 80
3 30 30 3 63
4 20 25 2 47
5 10 20 1 31

It indicates that market demand have also inverse relationship between price and quantity demanded.






Que. What is Demand Curve?
Ans. The graphical representation of the demand function is called the demand curve.



Que. Explain the determinants of demand.
Or
Explain the factors that can affect demand for a commodity.
Ans. Following factors demand of a commodity.
1. Price of the commodity (P): Other things being equal, demand of a commodity is inversely related to its price because when price increases then demand decreases and when price decreases then demand increases.
2. Price of related commodities (Pr): Related commodities are of two types:
(a) Complementary goods: Complementary goods are those goods, which are consumed together, or simultaneously e.g. tea and sugar, automobiles and petrol, pen and ink. There is an inverse relation between change in price of one complement and demand of other complementary good. Other things being equal, a fall in the price of one will cause the demand of other to rise and vice versa.
(b) Substitutes or competing goods: Substitutes are those goods which can be used in place of one another e.g. tea and coffee, ink pen and ball pen. There is positive relation between change in price of one substitute and demand of other substitutes good i.e. a fall in the price of one leads to a fall in the quantity demanded of its substitute and vice-versa.
3. Income of the household (Y):
(a) Other things being equal, in case of Normal / Luxury goods demand for goods increases with increase in household’s income and vice versa. So there is positive relation.
(b) In case of Inferior Goods increase in income decrease the quantity demanded. So there is inverse relation
(c)In case of Necessaries as the income of household increases, the demand for necessaries also increases in the beginning and becomes income inelastic (constant) thereafter.
4. Tastes and preference of consumers (T): A positive change in the tastes and preference shall lead to an increase in demand and vice-versa. Fashion can also affect demand and Goods, which are more in fashion command higher demand than goods which are out of fashion. ‘Demonstration effect’ plays also an important role in affecting demand for a product.
5. Future Expectations about price (E): If there is future expectation about rise in price then at present demand rises and if there is future expectation about fall in price then at present demand falls. For example in share market it happens.
6. Other factors (O):
(a) Size of population: Generally larger the size of population of a country, more will be the demand for commodities and vice versa
(b) Composition of population: If the number of children is large, demand for toys and biscuits will be high, similarly, if there are more old people, goods such as sticks and artificial teeth etc. will be in more demand.
(c) Distribution of income: While equitable distribution of the income in the community leads to increase in consumption so APC (Average Propensity to Consume) will rise, an unequal distribution of income brings a fall in the quantity demanded so consumption decreases so APC will fall.
Que. Explain the Law of demand with the help of a demand schedule and demand curve.
Ans. Law of Demand states “other things being equal, there is an inverse relationship between price and quantity demanded of a commodity i.e. if the price of a commodity falls, the quantity demanded of it will rise and if the price of the commodity rises, its quantity demanded will decline. The Law is based upon certain assumptions, which are:
1. No change in Price of related goods.
2. No change in consumer’s income.
3. People’s taste and preference remains unchanged.
4. There are no expectations of future changes in the price.
5. The law may not apply in the goods, which has the prestige value.
The Law of Demand can be illustrated with the help of the demand schedule and the demand curve.

(c) Demand Curve: Graphical presentation of demand schedule is known as demand curve. The Law of Demand can also be explained through the demand curve.


(Individual demand curves) (Market demand curve)

Both individual and market demand curves slopes downward from left to right indicating an inverse relationship between price and quantity demanded. Market demand curve is horizontal summation of individual demand curves.

Que Explain the concept of Adding up Two Linear Demand Curves.
Ans. Consider, for example, a market where there are two consumers and the demand
curves of the two consumers are given as
d1(p) = 10 – p
and d2(p) = 15 – p
Furthermore, at any price greater than 10, the consumer 1 demands 0 unit of the good, and similarly, at any price greater than 15, the consumer 2 demands 0 unit of the good. The market demand can be derived by adding equations. At any price less than or equal to 10, the market demand is given by 25 – 2p, for any price greater than 10, and less than or equal to 15, market demand is 15 – p, and at any price greater than 15, the market demand is 0.

Que. Suppose there are two consumers in the market for a good and their demand functions are as follows:
d1(p) = 15 – p for any price less than or equal to 15, and d1(p) = 0 at any price greater than 15.
d2(p) = 30 – 2p for any price less than or equal to 15 and d1(p) = 0 at any price greater than 15.
Find out the market demand function.
Ans. To get market demand function we have to add the two equations
d1(p) = 15 – p
d2(p) = 30 – 2p

d2(p) = 45 – 3p


At any price less than or equal to 15, the market demand is given by 45 – 3p, for any price greater than 15, and less than or equal to 30, market demand is 30 – 2p, and at any price greater than 30, the market demand is 0.


Que. Explain the rational for the law of demand. Or why does demand curve slope downwards?
Ans. The demand curve slopes downwards due to the following reasons
(1) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. This induces the consumer to substitute the commodity whose price has fallen for other commodities, which have now become relatively expensive. As a result of this substitution effect, the quantity demanded of the commodity, whose price has fallen, rises.
(2) Income effect: When the price of a commodity falls, the consumer can buy more quantity of the commodity with his given income, as a result of a fall in the price of the commodity, consumer’s real income or purchasing power increases. This increase induces the consumer to buy more of that commodity. This is called income effect.
(3) Number of consumers: When price of a commodity is relatively high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it because some of those who previously could not afford to buy may now afford to buy it, Thus, when the price of a commodity falls, the number of its consumers increases and this also tends to raise the market demand for the commodity.

Que. Write the equation for Linear demand curve.
Ans. A linear demand curve can be written as
d(p) = a – bp; 0 ≤p ≤ a/b
= 0; p > a/b
where a is the vertical intercept, –b is the slope of the demand curve. At price 0, the demand is a, and at price equal to a/b , the demand is 0.



Que. What does the slope of demand curve measure?
Ans. The slope of the demand curve measures the rate at which demand changes with respect to its price. In the following demand curve for a unit increase in the price of the good, the demand falls by b units.


Que.State the exceptions to Law of Demand.
Ans. Following are the important exceptions to Law ofpemand :

(i) Giffen goods - Law of Demand does not apply to "giffen" goods which have direct price-demand relationship. Examples of such goods are dalda ghee and coarse grain.
(ii) Conspicuous goods - Some consumers measure the utility of a commodity by its price, For example, diamonds are demanded more at high price. Higher the price of diamonds, higher is the prestige attached to them and hence higher is the demand for them.
(iii) Conspicuous necessities - Law of Demand does not apply to the goods which have become necessities of life due to constant use. For examples, television sets, coolers, cooking gas etc.
(iv) Future expectations about prices: It has been observed that when price are rising, households expecting that the prices in the future will be still higher, tend to buy larger quantities of commodities. For example, when there is a expectation that prices of share would rise in future, then demand for the same rises at present.
(v) Ignorance effect: Generally, it is assumed that household has perfect knowledge about price and quality of goods. However, in practice, a household may demand larger quantity of a commodity even at a higher price because it may be ignorant of the ruling price of the commodity.

Que. Explain the concept of expansion and contraction of demand.
Ans. When due to change in price alone demand for a commodity changes, it is called movement along the demand curve. Movements of two types-

(a) Expansion in Demand / Increase in Qty. demand / Downward movement on the same demand curve: Rise in demand due to fall in price is called Expansion of demand.
(b) Contraction of Demand / Decrease in Qty. demand / Upward movement along the same demand curve: - Fall in demand due to rise in its price is called Contraction of demand. In other words contraction of demand is the result of increase in the price of good concerned.



(CONTRACTION OF DEMAND) (EXPANSION OF DEMAND)
Que. Explain the concept of increase and decrease of demand.
Ans. When due to change in factors other than price, demand for a commodity changes. It is called shifting. Shifting is of two types.
(a) Increase in Demand / Rightward shift in the demand curve: When there is increase in demand due to change in factors other than price; it is called increase in demand.

Causes of increase in demand
1. Rise in price of substitutes.
2. Fall in price of a complement good.
3. Rise in income.
4. Taste and preference favour of commodity.
5. Increase in population.
6. Same price and increase in demand or same demand and increase in price.


(b) Decrease in Demand / Leftward shift in demand curve: - When decrease in demand is due to change in factors other than price it is called decrease in demand.

Causes of Decrease in demand:
1. Fall in price of substitutes.
2. Rise in price of a complement
3. Fall in income
4. Taste and preference against the commodity
5. Decrease in population
6. Same price and decrease in quantity demanded or same demand and decrease in price.


Que. Differentiate between movement along the demand curve and shifting of demand curve.
Ans. Difference between Movement and Shifting:
1. Movement along the demand curve indicates change in quantity demanded due to change in price and a shifting indicates that there is change in demand due to change in factors other than price.
2. Movement is also called ‘change in quantity demanded’ and which includes expansion and contraction of demand. Shifting is also called ‘change in demand’ which includes increase and decrease in demand.
3. Change in Qty. demanded represents movement upwards or downwards on the same demand curve and ‘change in demand’ represents shifts of demand curve to the right or left.


Que. Explain the concept of Elasticity of demand.
Ans. Elasticity of demand (Ed) is the percentage change in quantity demanded divided by the percentage change in one of the variables on which demand depends, these variables are P, Pr, Y, T, E, O. Price elasticity of demand usually referred to as elasticity of demand.

Que. What is Price elasticity of demand?
Ans. Price elasticity of demand is measured as percentage change in quantity demanded divided by the percentage change in price, other things remaining equal.

Percentage Change in Quantity demanded %∆Q
Ed= --------------------------------------------- or -------------
Percentage Change in Price %∆P

EP = ∆Q ÷ ∆P
Q P

EP = ∆Q x P
∆P Q
Where EP= Price elasticity Q = Quantity
P = Price ∆ = Change
For example

1. As the price of ‘X’ increases by 5%, and demand falls by 8%. What is the elasticity of demand for ‘X’ commodity?

Elasticity of demand for X = Percentage change in quantity demanded of X
Percentage change in price of X
8%
Ep = -------- = 1.6 or say Ep > 1
5%
2. Originally, a product was selling for Rs. 10 and the quantity demanded was 1000 units. The product price changes to Rs. 14 and as a result the quantity demanded changes to 600 units. Calculate the price elasticity.
EP = ∆Q x P
∆P Q

∆Q = 400 ∆P = 4
P = 10 Q = 1000

400 10
Ep = ---- X ---- = 1 or say E = 1
4 1000

Que. Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

Ans. EP = ∆Q x P
∆P Q

∆Q = 5(25-20) ∆P = 1(5-4)
P = 4 Q = 25


5 4
Ep = ---- X ---- = 0.8 or say E < 1
1 25

Que. Suppose the price elasticity of demand for a good is – 0.2. If there is a 5 % increase in the price of the good, by what percentage will the demand for the good go down?

Ans. Percentage Change in Quantity demanded
Ed= ---------------------------------------------
Percentage Change in Price

Percentage Change in Quantity demanded
-0.2 = ---------------------------------------------
5%
%∆Q = 0.1%

Que. Explain Elasticity along a Linear Demand Curve.
Ans. Let us consider a linear demand curve q = a – bp.
EP = ∆Q x P
∆P Q
Note that at any point on the demand curve, the change in demand per unit change in the price ∆q/∆p = –b. Substituting the value of ∆q/∆p in ed formula we obtain
eD = – b. p/q = – bp/a–bp

it is clear that the elasticity of demand is different at different points on a linear demand
curve. At p = 0, the elasticity is 0, at q = 0, elasticity is ∞. At p = a/2b , the elasticity is 1, at any price greater than 0 and less than a/2b , elasticity is less than 1, and at any price greater than a/2b , elasticity is greater than 1. The price elasticities of demand along the linear demand curve given by equation are depicted in Figure .



Que.. Consider the demand curve D (p) = 10 – 3p. What is the elasticity at price 5/3 ?
Ans. The linear equation is p/q = – bp/a–bp
Here, a = 10, b = 3 and P= 5/3
eD = – bp/a–bp
= -3x5/3
10 -3x5/3
= -1


Que. What are different types of price elasticites of demand.
Ans. Degrees / Types / Coefficient of Price elasticity of Demand are as follows
1. Perfectly elastic demand (Ed=): It is a situation in which demand of a commodity continuously change without any change in price. It means demand of commodity is perfectly flexible in case of perfectly elastic demand. In perfectly elastic demand, the demand curve will be horizontal.
2. More than unitary elastic demand (Ed>1) :-It refers to a situation by which percentage change in demand of a commodity is higher than percentage change in price of that commodity. It is also called elastic demand. For ex. change in price is 10% but change in demand is 20%, then 20% / 10% = 2 (E>1)
3. Unit elastic demand (Ed=1): - When percentage change in demand of a commodity is equal to percentage change in price. For ex. change in price is 10% but change in demand is 10%, then 10% / 10% = 1 (E = 1)
4. Less than unit elastic demand (Ed<1): - When percentage change in demand of a commodity is less than percentage change in price. For ex. change in price is 10% but change in demand is 7%, then 7 % / 10% = .70 (E<1)
5.Perfectly inelastic demand (Ed=0):- When price of commodity does not influence demand of that commodity that situation is called perfectly inelastic demand. In perfectly inelastic demand curve, the demand curve will be vertical. In other words if regardless of change in its price, the quantity demanded of a good remain unchanged, then the demand curve for the good will be vertical.

Que. Explain the relationship between Elasticity of demand and Expenditure.
Ans. The expenditure on a good is equal to the demand for the good multiplied by its price. The price of a good and the demand for the good are inversely related to each other. Whether the expenditure on the good goes up or down as a result of an increase in its price depends on how responsive the demand for the good is to the price change.
Case 1.Increase in the price of a good.
1. If the percentage decline in quantity is greater than the percentage increase in the price, the expenditure on the good will go down.
2. If the percentage decline in quantity is less than the percentage increase in the price, the expenditure on the good will go up.
3. If the percentage decline in quantity is equal to the percentage increase in the price, the expenditure on the good will remain unchanged.
Case 2.Decline in the price of the good.
1. If the percentage increase in quantity is greater than the percentage decline in the price, the expenditure on the good will go up.
2. On the other hand, if the percentage increase in quantity is less than the percentage decline in the price, the expenditure on the good will go down.
3. If the percentage increase in quantity is equal to the percentage decline in the price, the expenditure on the good will remain unchanged.
Summary
1. The expenditure on the good would change in the opposite direction as the price change if and only if the percentage change in quantity is greater than the percentage change in price, i.e. if the good is price-elastic.
2. The expenditure on the good would change in the same direction as the price change if and only if the percentage change in quantity is less than the percentage change in price, i.e., if the good is price inelastic.

Que. Suppose the price elasticity of demand for a good is – 0.2. How will the expenditure on the good be affected if there is a 10 % increase in the price of the good?
Ans. Since the good is price inelastic The expenditure on the good would change in the same direction as the price change.

Que.Suppose there was a 4 % decrease in the price of a good, and as a result, the expenditure on the good increased by 2 %. What can you say about the elasticity of demand?
Ans. The expenditure on the good would change in the opposite direction as the price change if and only if the percentage change in quantity is greater than the percentage change in price, i.e. if the good is price-elastic.

Que Explain the factors which affect elasticity of demand.
Ans. FACTORS AFFECTING / DETERMINANTS OF ELASTICITY OF DEMAND-
(1) Availability of substitutes: If a commodity have more close substitutes, have more elastic demand. And, if a commodity have less substitutes, have inelastic demand. For example Coca cola, Pepsi have close substitutes so demand tends to be elastic. Other commodities such as salt have inelastic demand.
(2) Position of a commodity in the consumer’s budget: Generally, greater the proportion of income spent on a commodity, the greater will be its elasticity of demand and vice-versa. The demand for goods like salt, matches, buttons, etc. tends to be highly inelastic because consumer spend small part of his income. On the other hand, demand for goods like clothing tends to be elastic since consumer spends high part of his income.
(3) Nature of the commodity: In general, luxury goods are price elastic while necessities are price inelastic. Thus while the demand for televisions is relatively elastic the demand for necessity e.g. food and housing, is inelastic.
(4) Number of uses: The more the possible uses of a commodity the greater will be its price elasticity and vice versa. To illustrate, milk has several uses. If its price falls, it can be used for a variety of purposes like preparation of curd, cream, ghee and sweets. But if its price increases, its use will be restricted only to essential purposes.
(5) Consumer habits: If a consumer is habitual consumer of a commodity no matter how much its price change, the demand for the commodity will remain inelastic.