Dhyeya Classes Economics PDF

**Dhyeya Classes** **Economics** 1. **Introduction to Micro-economics and Macro-economics** - **Microeconomics** - Microeconomics is the branch of modern economics.  - **The term 'Micro' Is derived from the Greek word, 'Mikros' which means small or Millionth par...

**Dhyeya Classes** **Economics** 1. **Introduction to Micro-economics and Macro-economics** - **Microeconomics** - Microeconomics is the branch of modern economics.  - **The term 'Micro' Is derived from the Greek word, 'Mikros' which means small or Millionth part (दशलक्षवा भाग). ** - **Historical Review.** - This term was used by Norwegian economist Ragnar Frisch (रॅगनर फ्रिश) of Oslo University in 1933. He was the first Nobel Prize winner for economics in 1969.  - Microeconomics, which focuses on individual markets and decision-making, originated with classical economists (शास्त्रीय अर्थशास्त्रज्ञ) like Adam Smith, David Ricardo, and J.S. Mill.  - It gained prominence (प्रमुखता) with Alfred Marshall's book *Principles of Economics* (1890), which popularised the subject.  - Later Neo-Classical Economists (नव-शास्त्रीय अर्थशास्त्रज्ञ) such as Prof. Pigou(पिगौ), J.R. Hicks (हिक्स), Paul Samuelson (पॉल सॅम्युएलसन), and Mrs. Joan Robinson also contributed significantly (लक्षणीय) to its development, refining and expanding the ideas that shape microeconomic theory today. - **Meaning & Definition** - **Micro means a small part of a thing. Micro economics thus deals with a small part of the national economy.** - **It studies the economic actions and behaviour of individual units such as an individual consumer, individual producer or a firm, the price of a particular commodity or a factor etc.** - **According to Maurice Dobb (मॉरिस डॉब), "Micro economics is in fact a microscopic study of the economy."** - The **Scope of Microeconomics** includes three main areas: 1. **Theory of Product Pricing**: Microeconomics examines how the price of a product is determined (निर्धारित) by demand (consumer behaviour) and supply (producer behaviour) in a market. 2. **Theory of Factor Pricing**: It looks at how the rewards for production factors---land, labour, capital, and entrepreneurship---are determined. These rewards are rent (for land), wages (for labour), interest (for capital), and profit (for entrepreneurs). 3. **Theory of Economic Welfare**: This focuses on resource allocation (वाटप) to maximise society\'s satisfaction. It includes: - **Production Efficiency**: Maximising output from available resources. - **Consumption Efficiency**: Distributing goods and services in a way that maximises total satisfaction. - **Overall Economic Efficiency**: Producing goods that people most desire. - **Features:** 1. **Study of Individual Unit:** - Microeconomics is the study of the behaviour of small individual economic units, like individual firms, individual price, individual household etc. 2. **Price Theory:**   - Microeconomics deals with determination of the prices of goods and services as well as factors of production. - Hence, it is known as price theory. 3. **Partial Equilibrium:** - Equilibrium is the balance between two factors. - Microeconomic analysis deals with partial equilibrium which analyses equilibrium position of an individual economic unit i.e. Individual consumer, individual firm, individual industry etc.  - It isolates an individual unit from other forces and studies its equilibrium independently. 4. **Based on Certain Assumptions (गृहीतके):** - Microeconomics begins with the fundamental assumption, "other things remaining constant" (Ceteris Paribus {सेटेरिस परिबस}) such as perfect competition, laissez-faire policy (लैसेज़), pure capitalism, full employment etc. - These assumptions make the analysis simple.  5. **Slicing Method:** - Microeconomics uses a slicing method. - It splits (फूट) or divides the whole economy into small individual units and then studies each unit separately in detail. - For example, the study of individual income out of national income. 6. **Use of Marginalism Principle:** - The concept of marginalism (सीमांतवाद) is the key tool of microeconomic analysis.  - The term marginal means change brought in total by an additional unit. - Marginal analysis helps to study a variable through the changes. 7. **Analysis of Market Structure:** - Microeconomic analysis of different market structures such as Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly etc. 8. **Limited Scope:** - The scope of microeconomics is limited to only individual units. - It doesn\'t deal with the nationwide economic problems such as inflation (महागाई), deflation (चलनवाढ), Balance of payments, population, economic growth etc. - **Importance:** 1. **Price Determination:** - Microeconomics explain how the prices of different products and various factors of production are determined. 2. **Free Market Economy:** - Microeconomics helps in understanding the working of a free market economy.  - A free-market economy is that economy where the economic decisions regarding production of goods are taken at individual levels.  - There is no intervention (हस्तक्षेप) by the government or any other agency. 3. **Foreign Trade:** - Microeconomics helps in explaining various aspects of foreign trade, like effects of tariff on a particular commodity, determination of currency exchange rate of any two countries, gains from international trade to a particular country etc. 4. **Economic Model Building:** - Microeconomics helps in understanding various Complex (जटिल) economic situations with the help of economic models.  - It has made a valuable contribution to economics by developing various terms, concepts, terminologies (शब्दावली), tools of economic analysis etc.  - Economic models are built using various economic variables. 5. **Business Decision:** - Microeconomic theories are helpful to businessmen for taking crucial (निर्णायक) business decisions.  - Decisions are related to the determination of cost of production, determination of price of goods etc. 6. **Useful to Government:** - It is useful to the government in framing economic policies such as taxation policy, public expenditure policy, price policy etc.  - These policies help the government to attain its goals of efficient allocation of resources and promoting economic Welfare of the society. 7. **Basis of Welfare Economics:** - Microeconomics explains how best results can be obtained (प्राप्त) through optimum utilisation of resources and its best allocation.  - It also studies how taxes affect social welfare.  - **Macroeconomics ** - Macroeconomics is the branch of modern economics.  - **The term 'Macro' Is derived from the Greek word, 'Makros' which means large.** - This term was used by Norwegian economist Ragnar Frisch (रॅगनर फ्रिश) of Oslo University in 1933. He was the first Nobel Prize winner for economics in 1969.  - **Historical Review.** - Macroeconomics, which looks at the economy as a whole, has roots going back to the 16th and 17th centuries with the Mercantilists, who advised governments using a broad, economy-wide approach.  - In the 18th century, the Physiocrats (French thinkers) studied national income and wealth. Even classical economists like Adam Smith, David Ricardo, and J.S. Mill discussed national income, but they combined macroeconomic ideas with microeconomic analysis. - Microeconomics dominated until the Great Depression of the 1930s. In response, John Maynard Keynes published his book *The General Theory of Employment, Interest and Money* in 1936, using a purely macroeconomic approach to address economic problems.  - Keynes is credited with establishing modern macroeconomics. Other important contributors to its development include economists like Malthus, Wicksell, Walras, and Irving Fisher. - **Meaning & Definition** - **Macroeconomics is the branch of economics which analyses the entire economy. ** - **It deals with total employment, national income, national output, total investment, total consumption, total savings, general price level, interest rates, inflation, trade cycles, business fluctuations etc.** - **Thus, Macroeconomics is the study of aggregates.** - **According to prof. Carl Shapiro, "Macro economics deals with the functioning of the economy as a whole."** - The **Scope of Macroeconomics** includes four key areas: 1. **Theory of Income and Employment**: Macroeconomics studies what determines the level of national income and employment, and what causes fluctuations (चढउतार) in them. This involves analysing factors like consumption (spending) and investment, as well as the business cycle, which refers to the ups and downs in economic activity over time. 2. **Theory of General Price Level and Inflation**: It examines how the overall price level in the economy is determined and why it fluctuates, focusing on issues like inflation (rising prices) and deflation (falling prices), both of which can cause economic problems. 3. **Theory of Growth and Development**: This area looks at the causes of underdevelopment and poverty and suggests strategies for promoting economic growth and development in a country. 4. **Macro Theory of Distribution**: It deals with how the total national income is divided among different factors of production---rent (for land), wages (for labour), interest (for capital), and profit (for entrepreneurs). - Features: 1. **Study of Aggregates:** - Macroeconomics deals with the study of the economy as a whole. - It is concerned with the aggregate(एकूण) concept such as national income, National output, National employment, general price labour, business cycles etc. 2. **Income Theory:  ** - Macroeconomics studies the concept of national income, its different elements (घटक), methods of measurement and social accounting. - Macroeconomics deals with aggregate demand and aggregate supply. 3. **General Equilibrium Analysis:** - Macroeconomics deals with the behaviour of large aggregates and their functional relationship. - General equilibrium deals with the behaviour of demand, supply and prices in the whole economy. 4. **Interdependence:** - Macro analysis takes into account interdependence (परस्परावलंबन) between aggregate economic variables, such as income, output, employment, investments, price level etc.  5. **Lumping Method:** - The lumping method is the study of the whole economics rather than its part. - According to Prof.  Boulding, "Forest is an aggregation of trees but it does not reveal the properties of an individual tree." - This reveal (प्रकट करते) the difference between microeconomics and macroeconomics. 6. **Growth Models:** - Macroeconomics studies various factors that contribute to economic growth and development. - It is useful in developing growth models. - These growth models are used for studying economic development. 7. **General Price Level:** - Determination and changes in general price level are studied in macroeconomics. - The general price level is the average of all prices of goods and services currently being produced in the economy. 8. **Policy Oriented:** - According to Keynes, "Macroeconomics is a policy oriented (देणारं) science." - It suggests suitable economic policies to promote economic growth, generate employment, control of inflation and depression etc.  - **Importance:** 1. **Functioning of an Economy:** - Macroeconomic analysis gives us an idea of the functioning of an economic system. - It helps us to understand the behaviour pattern of aggregative variables in a large and complex economics system. 2. **Economic Fluctuations:** - Microeconomics helps to analyse the causes of fluctuations in income, output and employment makes an attempt to control them or reduce their severity. 3. **National Income:** - Study of macroeconomics has brought forward the immense (अफाट) importance of the study of national income and social accounts. - Without a study of national income, it is not possible to formulate correct economic policies. 4. **Economic Development:** - Advanced studies in macroeconomics help to understand the problems of developing countries such as poverty, inequalities of income and wealth etc. - It suggests important steps to achieve economic development. 5. **Performance of an Economy:** - Macroeconomics helps us to analyse the performance of an economy. - National income estimates (अंदाज) are used to measure the performance of any economy overtime by comparing the production of goods and services in one period with that of the other period. 6. **Study of Microeconomic Variables:** - To understand the working of the economy, study of microeconomic variables is important. - Main economic problems are related to the economic variable such as behaviour of total income, output, employment and general price level in the economy. 7. **Level of Employment:** - Macroeconomics helps to analyse the general level of the employment and output in an economy. - **Economic Terms** 1. Average of all prices of goods and services currently being produced in an economy -- **General Price level.** 2. Branch of economics that deals with small part of national economy -- **Micro economics.** 3. Wear and tear of capital assets due to their use in the process of production -- **Depreciation.** 4. Number of firms producing identical product -- **Industry.** 5. The microeconomic theory which deals price of individual commodity -- **Theory of Product pricing.** 6. This macroeconomic theory is a part and parcel of the Theory of income and Employment -- **Theory of Business Cycles.** 7. A type of economy where economic decisions regarding production of goods are taken at individual level -- **Free market Economy.** 8. The two main branches of modern economics -- **Microeconomics and Macroeconomics.** 9. The Greek word which means small or a millionth part -- **Mikros.** 10. The book published by Prof. Alfred Marshall in 1890 -- **Principle of Economics.** 11. The book published by Lord Keynes in 1936 -- General Theory of Employment, Interest and Money. 12. This concept is the key tool of microeconomic analysis -- **Marginalism.** 13. This branch of economics explains determination of currency exchange rates of any two countries -- **Microeconomics.** 14. This macroeconomic theory explains the causes of underdevelopment and poverty. -- **Theory of Growth and Development.** 15. The theory which deals with the relative shares of rent, wages, interest and profit in the total national income -- **Macro** **Theory** **of** **Distribution.** 16. The method which engages in the study of whole economy rather than its part -- Lumping method. 17. The average of all prices of goods and services currently being produced in the economy -- **General Price Level.** - **Distinguish Between** 1. **Partial Equilibrium Analysis and General Equilibrium Analysis.** **Basis for Comparison** **Partial Equilibrium Analysis** **General Equilibrium Analysis** -------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Meaning** Under partial equilibrium analysis we assume other things are constant (Ceteris paribus). Under this assumption we try to establish a relationship between two variables. Under general equilibrium analysis we assume everything depends upon everything else. Under this assumption we study behaviour of aggregate and their interdependence.  **Use** Microeconomics makes the use of partial equilibrium analysis. Macroeconomics makes the use of general equilibrium analysis. **Example** Law of Demand is an example of partial equilibrium analysis. The Law of Demand states the other things (Income, preference etc.) remaining the same, the quantity demanded of a commodity is inversely related to its price. Economic growth is an example of general equilibrium analysis. For example, change in income leads to change in saving which in turn influences the investment. The increase in investment leads to increase in production output, which leads to increase in economic growth. 2. **Micro Economics and Macro Economics** **Basis for Comparison** **Micro Economics** **Macro Economics** -------------------------- --------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- **Meaning** Microeconomics studies the behaviour of individual unit of an economy Macroeconomics studies the behaviour of aggregates of the economy as a whole **Tools ** It uses tools like Individual Demand and Individual Supply It uses tools like Aggregate Demand and Aggregate Supply **Scope** The scope of the micro economics are demand, supply, product pricing, factor pricing, production, consumption, economic welfare, etc. The scope of the macroeconomics is national income, general price level, employment, money etc. **Importance ** Microeconomics helps in Price determination, Model building, Business decisions etc. Macroeconomic helps in Economic fluctuations, Study of national income, Economic development etc. **Theory** It is also known as Price Theory It is also known as Income and Employment Theory  **Examples ** Individual income, Individual output etc. National income, National output etc.  3. **Slicing Method and Lumping Method** **Basis for Comparison** **Slicing Method** **Lumping Method** -------------------------- -------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ **Meaning** In slicing method, the entire economy is cut into individual slices and each unit is studied in depth. In lumping method, we study the economy as a whole without slicing it. **Use** Micro-economics uses slicing method. Macro-economic uses lumping method. **Example** Study of individual income out of national income. Study of economy as whole. - **Illustrations (Concepts)** 1. Ramesh analysed the total investments, total employment, total consumption and total savings of the economy for the financial year 2019-20. Concept: **Macroeconomics** Explanation: a. Macroeconomics is the branch of economics which analysis the entire economy. It deals with total employment, national income, national output, total investment, total consumption, total savings, general price level, interest rates, inflation, trade cycles, etc. b. since Ramesh analysed some of these macro variables for the financial year 2019-20, this illustration is related to the concept of 'Macroeconomics'. 2. Mala collected information about the income and expenditure of twenty-five families from her locality. Concept: **Microeconomics** Explanation: a. Microeconomics deals with small part of the national economy. b. Since Mala collected information about income and expenditure of 25 families, which is a small part of the entire economy, this illustration is related to the concept of 'Microeconomics'. 3. Asha/Gauri collected information about the income of a particular firm. Concept: **Microeconomics** Explanation: a. Microeconomics examines how particular economic units such as consumers, producers, firms, and the price of a particular good or material, for example: behave. b. As a result, this example corresponds to the idea of "microeconomics," where Asha/Gauri has gathered data regarding the revenue of a certain firm. 4. Mrs. Sharma paid salaries to workers in her shop and rent to landlord. Concept: **Theory of Factor Pricing** Explanation: a. The theory of factor pricing explains how the rewards are determined for various factors of production like land, labour, capital and entrepreneur. b. Hence, this illustration relates to the concept of 'theory of factor pricing' as Mrs, Sharma paid salaries to workers (labour) in her shop and rent to landlord (land). 5. Preeti collected the information about the income of a company ABC. Concept: **Microeconomics** Explanation: a. Microeconomics studies the individual economic units such as an individual consumer, individual product, individual firm etc. b. Hence, this illustration relates to the concept of 'microeconomics' as Preeti collected the information about the income of a company ABC. 6. Ramesh decided to take all decisions related to production, such as what and how to produced? Concept: **Free market Economy** Explanation: a. A free-market economy is where economic decisions regarding the production of goods, such as 'what to produce? How much to produce? How to produce?' are taken at individual levels. b. There is no intervention by the government or any other agency while making decisions regarding production. 7. Shabana/Neelam paid wages to workers in her factory and interest on her bank loan. Concept: **Theory of Factor Pricing** Explanation: a. The theory of factor pricing explains how the rewards are determined for various factors of production like labour, land, capital and entrepreneurship. b. Hence, this illustration relates to the concept of 'theory of factor pricing' as Shabana/Neelam paid wages to workers (labour) in her factory and get interest on bank loan (capital). 8. Amit had to calculate repair cost for the renovation of entire complex. He calculated the cost building by building. Concept: **Slicing Method** Explanation: a. Microeconomics uses slicing method. b. It splits or divides the economy into small individual units and then studies each unit separately in detail. c. Hence, this illustration relates to the concept of 'slicing method' wherein Amit calculated the cost of renovation of entire complex building by building. 9. Lack of adequate supply of essential commodities will lead to inflation, implying rise in the overall prices. Concept: **General price level** Explanation: a. General price level is the average of all prices of goods and services currently being produced in the economy. b. Hence, this illustration relates to the concept of 'general price level' as the lack of adequate supply of essential commodities will lead to change in the general price level i.e. inflation. - **Agree or Disagree (Reasons)** 1. The scope of microeconomics is unlimited. Ans: I **disagree** with the above statement. Explanation: a. The scope of microeconomics is limited to individual units. b. It doesn't deal with nationwide problems such as inflation, deflation, population, etc. c. Microeconomics is mainly confined to price theory. d. This approach does not study national problems such as poverty, inequality in income, etc. e. It has scope in demand supply, product pricing, factor pricing, production, consumption, economic welfare, etc. f. The theory of growth, the theory of business cycles, monetary and fiscal policies, etc. are beyond the limits of microeconomics. 2. Macroeconomics deal with the study of individual behaviour. Ans: I **disagree** with the above statement Reason: a. It deals with total employment, national income, national output, total investment, total consumption, total savings, general price level, interest rates, inflation, trade cycles, etc. b. Macroeconomics studies the behaviour of aggregates of the economy as a whole. c. Macroeconomics does not deal with the study of individual behaviour. d. It deals with the whole economy. 3. Macroeconomics is different from microeconomics. **OR** Macroeconomics and microeconomics are different concepts. Ans: I **agree** with the above statement. Reason: a. Macroeconomics is the study of the entire economy, whereas, on the other hand, microeconomics is the study of a particular segment of an economy. b. Macroeconomics studies aggregate supply, national income, general price level, etc. c. On the other hand, microeconomics studies individual demand, individual supply, individual income, price determination of a particular product, etc. d. Macroeconomics follows general equilibrium analysis. On the other hand, micro economics follows partial equilibrium analysis. e. Macroeconomics uses the lumping method. f. On the other hand, micro economics uses slicing method. g. Therefore, macroeconomics is different from microeconomics. 4. Microeconomics uses slicing method. Ans: I **agree** with the above statement. Reason: a. Micro economics is a branch of modern economics. b. It deals with a small part of the national economy. c. It studies the individual economic units such as an individual consumer, individual producer, individual firm, etc. d. Microeconomics splits or divides the economy into small individual units and then studies each unit separately in detail. e. E.g. study of individual income out of national income. 5. Microeconomics is known as income theory. Ans: I **disagree** with the above statement. Reason: a. Macroeconomics is known as income theory. b. Macroeconomics is the branch of economics which analyses the entire economy. c. In simple terms, it is examination of the 'forest' and not the 'tree'. d. Macroeconomics studies the national income of the country. e. Hence, macroeconomics is known as income theory. f. On the other hand, microeconomics is known as the price theory. g. This is because it deals with determination of the factor as well as product prices. 6. The scope of macroeconomics is unlimited. Ans: I **agree** with the above statement. Reason: a. Macroeconomic analysis explains which factor determine the level of national income and employment in the country. b. It is also explaining the causes of fluctuations in income, output and employment, therefore it is also called as Theory of Income and Employment. c. Macroeconomic analysis shows how the general price level in the economy is determined. d. Macroeconomics consists of the theory of economic growth and development. e. The macro theory of distribution deals with the relative shares of rent, wages, interest and profits in the total national income. f. Thus, the scope of micro economics is unlimited. 7. Microeconomics is also known as price theory. Ans: I **agree** with the above statement. Reason: a. Microeconomics deals with the determination of prices of goods and services. b. It is also deals with the determination of prices of factors of production i.e. land, labour, capital and entrepreneur. c. Hence, microeconomics is also known as price theory. 2. **Utility Analysis** - **Utility** **Meaning:** - **Utility** is the ability of a commodity to satisfy a human want or need. For example, food satisfies hunger, so it has utility. **Features Of Utility:** 1. **Relative Concept:** - utility is related to time and place. It varies from time to time and place to place. - For example, woollen clothes have a greater utility in the winter and sand has greater utility at the construction site rather than at the seashore. 2. **Subjective Concept: ** - it is a psychological concept. Utility refers from person to person. This is due to differences in taste, habits, preferences, nature etc. - For example, status scope has utility to a doctor but not to a layman. 3.  **Ethically Neutral Concept: ** - the concept of utility has no ethical consideration.  - The commodity should satisfy any want of a person without consideration of what is good or bad, desirable or undesirable. - For example, a knife has utility to cut fruit as well as it can be used to harm someone. - Both wants are of different nature but are satisfied by the same commodity. - Thus, utility is ethically neutral. 4. **Utility Differs from Usefulness:** - Any goods or services are useful if they satisfy human wants and generate human welfare. - Usefulness indicates value in use of the commodity. - For example, milk has both utility as well as usefulness to a consumer. - While liquor has utility only to an addict, but has no usefulness.  5. **Utility Differs from Pleasure:** - Commodity may possess utility but it may not give any pleasure to the consumer. - For example, Injection for a patient has utility because it cures the ailment but it hardly gives any pleasure to him. 6. **Utility Differs from Satisfaction: ** - utility is a cause of consumption; satisfaction is the end result of consumption. - They are interrelated but still different concepts. - For example, a thirsty person drinks a glass of water since water has the capacity to satisfy thirst. - Utility of water is the cause of consumption and the satisfaction derived is the end result of consumption. 7. **Measurement Of Utility Is Hypothetical: ** - utility is an abstract concept. - Cardinal or numerical measurement of utility is not possible. - Utility can only be experienced and found either positive, zero   or negative.  - Negative utility is called disutility. 8. **Utility Is Multi-Purpose:  ** - a commodity can satisfy the wants of more than one person, it can also be put to several uses. - For example, electricity can be used to serve many purposes and for many people at some point of time. 9. ** Utility Depends on The Intensity of Want: ** - more intense the want, greater will be the utility.  - As and when the urgency of want declines, utility diminishes.  - For example, a hungry person finds more utility in food, than a person who is not hungry. 10.  **Utility is the Basis of Demand: ** - a person will demand a commodity only if it gives utility to him. - For example, a sick person has utility in medicines hence, he demands medicines. 1. **Relative Concept**: - Utility changes with time and place. - For example, woollen clothes are more useful in winter, and sand is more useful at a construction site than at the beach. 2. **Subjective Concept**: - Utility varies from person to person because people have different tastes, preferences, and needs. - For example, a stethoscope is useful to a doctor but not to a layman. 3. **Ethically Neutral**: - Utility doesn\'t consider whether something is morally good or bad. - A knife has utility for cutting fruit or for hurting someone, but utility doesn\'t judge if the use is right or wrong. 4. **Utility vs. Usefulness**: - Utility simply satisfies a want, but usefulness adds value to human welfare. - For example, milk has both utility and usefulness, while liquor has utility for an addict but isn't necessarily useful. 5. **Utility vs. Pleasure**: - A commodity can have utility without giving pleasure. - For example, an injection cures a patient (utility) but doesn't bring pleasure. 6. **Utility vs. Satisfaction**: - Utility is the reason for consuming something, while satisfaction is the result of consuming it. - For example, drinking water (utility) satisfies thirst (satisfaction). 7. **Measurement is Hypothetical**: - Utility is abstract and can't be exactly measured. It can be experienced as positive, zero, or negative (disutility). - For example, too much food can cause discomfort (disutility). 8. **Multi-Purpose Utility**: - Some commodities can satisfy multiple needs. - For example, electricity can power lights, appliances, and more, serving many purposes at once. 9. **Utility Depends on Intensity of Want**: - The more urgent the need, the higher the utility. - For example, food has more utility to a hungry person than to someone who isn't hungry. 10. **Utility is the Basis of Demand**: - People demand things that have utility to them. - For example, a sick person demands medicine because it has utility for curing illness. - **Economic Terms** 1. Unit at which MU becomes equal with market price -- **Marginal Unit (point of consumer's equilibrium).** 2. Swati purchased raincoat for her father in rainy season -- **Time Utility.** 3. Additional utility derived by consumer from an additional unit consumed -- **Marginal Utility.** 4. The capacity of a commodity to satisfy human wants -- **Utility.** 5. The term that denotes negative utility -- **Disutility**. 6. The utility that is created when a consumer acquires more information about the functioning of a particular product -- **Knowledge** **utility**. 7. The utility that is created when robber is converted into a type -- **Form Utility.** 8. Utility of a commodity increases with a change in its time of utilisation -- **Time utility.** 9. The utility that is created on buying mangoes from a mango seller -- **Possession utility.** 10. The utility that is created when a scientist prepares an antidote for a virus -- **Service** **utility.** 11. The point after which a rational consumer stops his consumption -- **Point of satiety.** 12. The law of DMU was explained in detail by this economist in his book 'Principle of Economics' -- **Prof. Alfred Marshall.** 13. The assumption to the law of DMU violate in case of a miser -- **Rationality.** 14. Example of commodities/things having more value in use but less value in exchange -- **Water/ Sunshine/ Air.** 15. Example of commodities/things having more value in exchange but less value in use -- **Gold, diamonds, rare paintings.** - **Distinguish Between** **1} Marginal Utility and Total Utility** +-----------------------+-----------------------+-----------------------+ | **Basis for | **Marginal Utility** | **Total Utility** | | Comparison** | | | +=======================+=======================+=======================+ | **Meaning** | Marginal utility is | Total utility is the | | | additional utility | sum total of | | | derived from | utilities derived | | | consumption of | from the consumption | | | additional units of a | of all units of a | | | commodity. | given stock of | | | | commodity. | +-----------------------+-----------------------+-----------------------+ | **Formula** | MU~n~ -- TU~n~ = | TU = SMU | | | TU~n-1~ | | +-----------------------+-----------------------+-----------------------+ | **Relationship** | 1. Marginal utility | 1. Whereas total | | | continuously | utilities | | | diminishing. | initially | | | | increase but at a | | | 2. When marginal | diminishing rate. | | | utility becomes | | | | zero | 2. Total utility is | | | | maximum. | | | 3. When marginal | | | | utility becomes | 3. Total utility | | | negative. | starts | | | | diminishing. | +-----------------------+-----------------------+-----------------------+ **2} Place Utility and Time Utility** **Basis for Comparison** **Place Utility** **Time Utility** -------------------------- ---------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------ **Meaning ** Place utility is created by transferring goods from the place of production to the place of consumption. Time utility is created by changing the time of utilisation. **Creates** Transport creates place utility. Warehouse creates time utility. **Example** Food grains from village farm are sold in city markets. Wheat stored during harvest time and released during off season. **3} Utility And Usefulness** **Basis for Comparison** **Utility** **Usefulness** -------------------------- -------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------- **Meaning ** Utility is the capacity of a commodity to satisfy human wants. Any goods or services are useful if they satisfy human wants and generate human welfare. **Nature of Commodity** A product may have utility irrespective of whether the commodity is useful or harmful. A product has usefulness only when it generates consumer welfare. **Example ** All commodities have utility such as car, clothes and harmful product like cigarettes, narcotics Products such as food items, medicines etc. are useful items. Also, services such as education, recreation etc. is useful to people. **Utility and Satisfaction** **Basis of Comparison** **Utility** **Satisfaction** ------------------------- ---------------------------------------------------------------- ------------------------------------------------------------------ **Meaning** Utility is the capacity of a commodity to satisfy human wants. Satisfaction is the happiness derived after consuming commodity. **Realization** Utility is assumed satisfaction. Satisfaction is actually realized. **Result** Utility is the causes of consumption. Satisfaction is ending result of consumption. - **Illustrations (Concepts)** 1. Rohan created a jewellery box out of pieces of wood. Concept: **Form Utility** Explanation: a. When utility is created due to the change in shape or form or structure of an existing material, it is called form utility. b. Since Rohan created a jewellery box out of wooden pieces, this illustration is related to the concept of 'form utility'. 2. Kavita consumed an additional unit of bread to satisfy her hunger. Concept: **Marginal Utility** Explanation: a. Marginal utility refers to the additional utility derived by a consumer from an additional unit of a commodity consumed. b. Since Kavita consumed an additional unit of bread, which must have given her additional utility and satisfied her hunger, this illustration is related to the concept of 'marginal utility'. 3. Lalita/Manish satisfied her/his want of writing an essay by using pen and notebook. Concept: **Utility** Explanation: a. Utility is the capacity of a commodity to satisfy human wants. b. Pen and notebook have utility to satisfy Lalita's/Manisha's want for an essay. Thus, the concept is utility. 4. Salma purchased a sweater for her father in the winter season. Concept: **Time Utility** Explanation: a. When the utility of a commodity increases with a change in its time of utilization, it is called time utility. b. Time utility is also created by storing goods and making them available during times of need or scarcity. 5. Kavita consumed five units of oranges one after the other. Concept: **Total Utility or Continuity** Explanation: - [Total Utility]: a. Total utility refers to the aggregate of utility derived by the consumer from all units of a commodity consumed. b. It is an aggregate of utilities from all successive commodity units consumed. - [Continuity]: All units of a commodity are consumed quickly without any lapse of time. 6. Nilesh purchased ornaments for his sister. Concept: **Value in exchange/Possession Utility** Explanation: a. The law of DMU explains the 'paradox of values' by showing the difference between the value in use and the value in exchange. Some commodities have high value in exchange. b. Possession utility arises when the ownership of goods is transferred from one person to another. 7. On their anniversary, Mahesh purchased ornaments for his wife. Concept: **Possession Utility/Paradox of Value** Explanation: a. Possession utility arises when the ownership of goods is transferred from one person to another. b. Hence, this illustration relates to the concept of possession utility' where ownership of ornaments is transferred from shop owner to Mahesh/his wife. c. The law of DMU explains 'paradox of values' by showing the difference between value in use and value in exchange. d. Some commodities have high value in use and some commodities have high value in exchange. e. Hence, this illustration relates to the concept of 'value in exchange'. f. In this illustration, Mahesh purchased ornaments for his wife which have high value in exchange. 8. Ria consumed 8 apples one after the other. Concept: **Continuity** Explanation: a. Continuity is an assumption to the law of DMU where it is assumed that units are consumed in quick succession without any lapse of time. b. Hence, this illustration relates to the concept of 'continuity' because Ria consumed 8 apples one after the other. 9. Bhushan Refused to eat fifth chapati after eating four chapatis. Concept: **Point of satiety** Explanation: a. After reaching the point of satiety, a rational consumer should stop his consumption since the maximum limit of satisfaction is reached. b. There is no addition to the total utility by any further increase in the stock of a commodity. 10. Vidit does not buy branded shoes worth ₹ 20,000 because he does not find them worth. Concept: **Extra marginal unit** Explanation: a. Units which a rational consumer is not willing to buy and consume because he has to pay more than the MU of a good are called 'extra marginal units'. b. Therefore, this concept relates to 'extra marginal units' because Vidit is not willing to buy the shoes as he has to pay more than his MU. 11. Venky purchased a pack of 3 shirts for ₹ 599 as he feels that it gives him maximum value for his money. Concept: **Marginal unit/ consumer equilibrium** Explanation: a. Unit at which MU becomes equal with market price is 'marginal unit'. b. A consumer attains equilibrium by equating price with marginal utility of a good. c. Therefore, this concept relates to 'marginal unit' as Venky's MU become equal with market price of ₹ 599 for 3 shirts. d. Venky gets maximum satisfaction by doing so. e. Any consumption beyond this point would mean he has to pay more than the MU. 12. Dilip purchased his dream house in his village. Concept: **Possession Utility** Explanation: a. Possession utility arises when the ownership of goods is transferred from one person to another. b. Hence, this illustration relates to the concept of possession utility' where ownership of the house has been transferred to Dilip after he purchased it. 13. Engineering students rush to xerox centre when exams are approaching to take photocopies of their friends notes but don't use the notes for the rest of the year. Concept: **Time utility** Explanation: a. When the utility of a commodity increases with a change in its time of utilisation, it is called time utility. b. Hence, this concept relates to 'time utility' because the utility of the friend's notes increases one day prior to exams as compared to other days of the year. - **Agree or Disagree (Reasons)** 1. The law of DMU is important in practice. Ans: I **agree** with the above statement. Reason: a. The law of Diminishing Marginal Utility (DMU) is a very popular due to its universal application. b. A consumer always tries to maximise his satisfaction. c. Therefore, the consumer diversifies his limited resources among various commodities in such a way that MU acquired from a commodity is at least equal to the price. d. The law is useful to the government in framing various policies such as trade policy, pricing policy, etc. e. The law explains 'paradox of values' by showing the difference between value in use and value in exchange f. The law helps the producers to fix the prices of products. g. Larger is the stock of the commodity, lower is the MU and hence, the producer may decide to fix a lower price. 2. There is no real exception to the law of DMU. Ans: I **agree** with the above statement. Reason: a. A person having hobby of collecting old coins, artefacts, etc. gets more pleasure when he/she collects more of it. Hence, Hobby is an exception to the law of supply. b. MU of money increases for a miser as his stock of money keeps on increasing. It violated assumption of rationality. c. MU of alcohol keeps increasing for a drunkard as he consumes more of it. This applies to all addictions. d. It cannot be considered to be real exception because its violets assumption of rationality. e. The MU of power keeps increasing as the person continues to get more power. f. The greed for power does not end. MU of money never becomes zero. g. In fact, the MU of money keeps on increasing as stock of money increases. However, money cannot be considering as real exception. Its violets the basic assumption of DMU. h. All the above point clearly tells us that There is real exception to the law of DMU. 3. Utility is ethically neutral. Ans: I **agree** with the above statement. a. The concept of utility does not consider whether the commodity satisfies morally good want or bad want.  b. A commodity can have utility even if it satisfies bad or unethical wants. c. Utility is normally a colourless concept. d. E.g.: a gun has utility for a soldier as well as a terrorist. Both wants are of different nature but are satisfied by the same commodity.  e. Since the concept of utility has no ethical consideration, it is said to be ethically neutral. 4. There are many features of utility. Ans: I **agree** with the above statement. a. Utility is the capacity of a commodity to satisfy Human wants. b. It has various features like below. c. Utility is related to time and place Under consideration. it changes from time to time and place to place. d. Utility is a psychological concept. the utility of a commodity differs from person to person on account of differences in testes, preferences, habits, surroundings, age, occupation etc. e. The concept of utility does not consider whether the commodity satisfice morally good want or bad want. f. Usefulness is the benefit that is derived by consuming a commodity. g.  Utility is a cause of consumption but satisfaction is the end result of consumption. 5. When MU is zero, TU is maximum. Ans: I **agree** with the above statement. a. Total utility is the sum total of the utilities derived by a consumer by consuming all units of a commodity at a given point of time.  b. In simple words, it is a sum of marginal utilities derived from successive consumption of units. c. Marginal utility is the additional utility derived by the consumer on consumption of an additional unit of commodity. d. In short, it is an additional utility derived from the last unit consumed. e. Marginal utility derived from various units of a commodity and its total utility are interrelated. f. Thus, when MU is zero, TU is maximum. 6. The Mu curves go upwards means It has a positive slope. Ans: I **disagree** with the above statement. a. There is an inverse relation between the stock of a commodity and its marginal utility. b. As the stock of a commodity goes on increasing, the mu decreases. c. Law of DMU states that "other things being equal, the additional benefit which a person derives from the increases in the stock of a thing diminishes with every increase in the stock that he already has". d. Thus, the mu curve slopes downward from left to right and has a negative slope. 7. The law of diminishing marginal utility is based on certain assumptions. Ans: I **agree** with the above statement. a. The law of Diminishing Marginal utility has various assumptions like the consumer is assume to be rational. It means that his behaviour is normal and he tries to maximise his satisfaction. b. It is assumed that utility can be measured cardinally. c. It is assumed that all units of a commodity are uniform in nature. It means they are identical in terms of shape size colour test smell etc. d. It is assumed that units of commodity are consume in quick succession without any time lapse. e. It is Assume that all the units of the commodity consume are neither very small nor very big. The size of the commodity is reasonable i.e. Standard size. f. The law assumes that the commodity consume by the consumer is divisible so that it can be acquired in small quantities. **3.A) Demand Analysis** - **Economic Terms** 1. More quantity is demanded due to changes in the factors determining demand other than price. -- **Increase in Demand.** 2. Price being constant, demand falls due to unfavourable changes in other factors -- **Decrease in Demand.** 3. A situation where more quantity is demanded at lower price -- **Expansion of Demand** 4. Graphical representation of demand schedule -- **Demand Curve** 5. A commodity which can be put to several uses -- **Composite Demand** 6. More quantity is demanded due to changes in the factors determining demand other than price -- **Increase in Demand** 7. A desire which is backed by willingness to purchase and ability to pay -- **Demand** 8. The demand for a commodity which can be put to several uses -- **Composite Demand** 9. Total demand for a commodity from all the consumers at a given price during a given period of time -- **Market Demand** 10. The basis of demand -- **utility.** 11. An urge to have something -- **desire.** 12. In case of normal goods, when the price of the commodity rises, the consumer purchases which enables him to buy more of that commodity -- **income effect.** 13. In case of substitute goods, when the price of the commodity Rises, the consumer purchases more of the substitute and Less of that commodity whose price has increased. - **Substitution effect.** 14. The demand for a kilo of rice - **direct demand.** 15.  The Economist who introduced law of demand - **Professor Alfred Marshall.** 16. The goods whose demand does not rise even if their price is false -   **Giffen goods or inferior goods.** 17. Expensive goods like diamonds, gold etc which are status symbols - **Prestige goods.** 18. Situation where less quantity is demanded at Higher price - **Contraction of demand.** 19.  The total amount of sale proceeds which an entrepreneur actually expects from the sale of output produce at a given level of employment during the year - **Aggregate demand.** - **Distinguish Between** 1. **Individual Demand and Market Demand** **Basis for Comparison** **Individual Demand** **Market Demand** -------------------------- -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- **Meaning** It refers to the quantity of a commodity demanded by an individual at a given time and place. It refers to the total quantity of a commodity demanded at a different price by all the consumers in the market at a given time and place. **Factors Influencing** Factors influencing individual demands are price, income of the individual, taste, preference, habits, intensity of want, etc. Factors influencing market demands are size and growth of population, consumption of the population, standard of living of people, etc.  **Scope** It is narrow in scope as it is part of market demand. It is broader in scope as it includes all individuals demands. 2. **Increase in Demand and Decrease in Demand** **Basis for Comparison** **Increase in Demand** **Decrease in Demand** --------------------------- --------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------- **Meaning ** Increase in Demand occurs when more quantity is demanded at the same price and the same quantity is demanded at a higher price. Decrease in Demand occurs when less quantity is demanded at a same price and same quantity is demanded at a lower price. **Resources ** It occurs due to change in other factors such as income, taste, preferences etc. in favour of the commodity. It occurs due to change in other factors such as income, taste, preferences etc. in against of the commodity. **Shift of Demand Curve** The demand curve shifts to the right-hand side.  The demand curve shifts left hand side. **Diagram**  3. **Joint Demand and Composite Demand** **Basis for Comparison** **Joint Demand** **Composite Demand** -------------------------- ----------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------- **Meaning ** When two or more commodities are demanded at the same time to satisfy a single want is called as a joint or complementary demand. When a single commodity is demanded to satisfy several wants it is called as a composite demand. **Example ** Joint demand can be for car and petrol, mobile and sim card. Electricity has composite demand as it is used for several uses like light, fan, etc. **Type of Demand** The demand for joint products is inelastic. The demand for composite commodities is elastic. 4. **Expansion of Demand and Contraction of Demand** **Basis for Comparison** **Expansion of Demand** **Contraction of Demand** -------------------------- ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- **Meaning** It takes place when quantity demand is more due to fall in price alone, "other's thing remain constant". It takes place when quantity demand is less due to rise in price alone, "other's thing remain constant." **Movement** The movement of demand is downward along the same demand curve. The movement of demand upward along with the same demand curve. **Graph**  5. **Direct Demand and Derived Demand** **Basis for Comparison** **Direct Demand** **Derived Demand** -------------------------- ----------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- **Meaning** When goods and services are demanded by consumers to satisfy their wants directly is called as a direct demand. When a commodity is demanded to produce another product is called as a derived or indirect demand. **Origin of Demand** Direct demand comes from the consumers for direct consumption. Derived demand or indirect demand comes from producers to carry out production. **Example** All consumer goods like TV, furniture, Tea etc. have direct demand. Factor such as land, labour, raw materials, machinery etc. have derived demand or indirect demand. 6. **Demand and Desire** **Basis for Comparison** **Demand** **Desire** -------------------------- ---------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- **Meaning** Demand is a desire backed by ability to pay and willingness to buy a particular commodity. Desire is a wish to have something. **Limitations** There are several limitations affecting demand like ability to pay and willingness to buy, taste etc. There are no limitations for desire. Anyone can desire anything at any point of time. **Price Relation** Demand has inverse relation with price. Desire does not have any relation with price. **Example** A desire to buy a BMW car by rich man can be transformed into demand as he has ability to pay and also willingness to buy. A middle-income person may also desire for BMW car but it cannot be transformed into demand as he does not have ability to pay. 7. **Contraction of Demand and Decrease in Demand** **Basis for Comparison** **Contraction of Demand** **Decrease in Demand** -------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------------------------------------------------------------------------------------------------------------------------------------------- **Meaning** Contraction of demand is a case of variation of demand. It takes place when less quantity is demanded due to rise in price alone, other factors remain constant. It is a case of change in demand. It takes place when less quantity is demanded at same price and same quantity is demanded at a lower price. **Reason** It is due to rise in price alone other things remain constant. It is due to change in income, taste, preferences, habits etc. **Movement of Curve** The movement of demand curve is upward along with the same demand curve. The movement of demand curve shifts left side. 8. **Necessary Goods and Prestigious Goods** **Basis for Comparison** **Necessary Goods** **Prestigious Goods** -------------------------- ------------------------------------------------------- ---------------------------------------------------------------- **Meaning** The necessary goods satisfy basic needs of consumers. The prestigious goods satisfy ego or status need of consumers. **Elasticity of Demand** The necessary goods have less elastic demand. Prestigious goods have more elastic demand. **Example** Necessary goods include food grains, clothes etc. Prestigious goods include car, air conditioners etc. - **Illustrations (Concepts)** 1. Manish purchased 100 meters of cotton textile to produced readymade shirts at his garment factory. Concept: **Indirect/Derived Demand** Explanation: f. Indirect demand refers to demand for goods which are needed for further production. It is the demand for producer's goods. g. Since cotton textile is purchased as a reward material to produced readymade shirts, this illustration is related to the concept of 'indirect/derived demand'. 2. Kaushik purchased 10 kgs of wheat for his monthly consumption at ₹ 40/- per kg Concept: **Individual Demand** Explanation: a. Individual demand is the quantity of a commodity demanded by an individual consumer at a given price during a given period of time. b. Since Kaushik purchased 10 kgs of wheat at ₹ 40/- per kg for his own monthly consumption, this illustration is related to the concept of 'individual demand'. 3. A poor person wants to buy a car. Concept: **Desire** Explanation: a. Desire means an urge to have something. b. Because he does not have ability and capacity to pay the price for a car. 4. Due to mandatory use of masks during corona epidemic the demand for mask producing labour has increased. Concept: **Indirect Demand** Explanation: a. This concept illustrates the direct relationship between product demand and labour demand. b. During COVID-19 epidemic the demand for masks increased, manufactures required more labour for boosting the production of masks. 5. Sunrise Cosmetic Company spends on advertisements, broadcasts on radio and television as well as distributes free sample of its shampoo product to in order to increase in demand. Concept: **Selling cost** Explanation: a. Selling cost refers to the cost incurred by the firm to create more demand for its product and thereby, increase the volume of sales. b. It includes expenditure on advertisement, radio and television broadcasts, hoardings, exhibitions, window display, free gifts, free sample etc. c. Since, Sunrise Cosmetic Company incurs various kinds of expenditure to increase demand for their shampoo, this illustration is related to the concept of 'selling cost'. 6. Kavita bought two jeans when there was a 60% discount in the shop. She could purchase two jeans at the price of one. Concept: **Income Effect** Explanation: a. In case of normal goods, when price falls, purchasing power of the consumer increases which enables him to buy more of that commodity. b. This is known as income effect. c. Hence, this illustration relates to the concept of 'income effect' as fall in price i.e. 60% discount enabled Kavita to buy two jeans at the price of one. 7. Raman's mother sent him to the shop to get sugar and milk to make kheer for guests in the evening. Concept: **Joint/Complementary Demand** Explanation: h. When two or more goods are demanded jointly to satisfy one single want, it is known as joint demand or complementary demand. i. Hence, this illustration relates to the concept of 'complementary demand' as Raman's mother sent him to get 'sugar and milk' both to make kheer for the guests in the evening. 8. A Rich person bought a car. Concept: **Demand** Explanation:  a. Demand means the Desire which is backed by willingness and ability to pay. b. Hence, this illustration relates to the concept of' demand\' as the rich person has the willingness and ability to pay for the car. 9. Anuja bought two trousers when there was a 50% discount in the shop. Concept: **Income effect** Explanation: a. In case of normal goods, when price Falls, purchasing power of the consumer increases which enables him to buy more of that commodity. This is known as the income effect.  b. Hence, this illustration relates to the concept of income effect as a fall in price i.e.  50% discount enabled Anuja to buy Two trousers at the price of one.   10. Vidyut bought a bottle Of Fanta for his evening house party as the price of Miranda had increased. Concept:  **Substitution effect** Explanation: a. In case of substitute goods, when the price of a commodity Rises, the consumer buys more of its substitute and Lays of that commodity whose price has increased. This is known as the substitution effect. b. Hence, this illustration relates to the concept of substitution effect as Vidyut bought a bottle of Fanta when the price of Mirinda had increased. 11. When the price of pav decreases, people started buying Britannia bread. Concept:  **Giffen's Paradox** Explanation:  a. The behaviour of people to prefer superior good when the prices of Imperial goods fall, is called as Giffen's Paradox. b. Hence, this illustration relates to the concept of Giffen's paradox as people started buying Britannia bread when the price of pav decreased. 12.  Virat Kohli bought a 7,000 sq. Ft House in Worli for ₹ 34 crores. Concept:  **Prestige goods** Explanation:  a. Expensive goods like diamond, gold, luxury cars, big houses etc.  Are status symbols. So rich people by more of it even their prices are high. b. Hence, this illustration relates to the concept of prestige goods as Virat Kohli bought a 7,000 sq. Ft house in Worli at a high rate of ₹ 34 crores. 13.  Vishranti took admission for her daughter in a Preschool which is 2 kms away and has high fees in spite of having a preschool just below her building. Concept:  **Price illusion** Explanation:  a. Consumers have an illusion that high price goods are of a better quality. This is termed as price illusion. b. Hence, this illustration relates to the concept of price illusion as Vishranti has an illusion That the preschool which has high fees will provide better education. 14.  The demand for commodities shot up during the lockdown in spite of prices remaining the same. Concept:  **Increase in demand/ future expectation of price rise** Explanation:  a. When more is demanded at the same price, it is called as increase in demand. b. Increase in demand takes place due to favourable changes in factors other than price like fashion, income, Taxation policy, advertisement, tastes and habits etc. c. Hence, this illustration relates to the concept of increase in demand as demand for commodities shot up i.e. Increased in Spite of prices remaining the same People expect the prices to increase in the future. d. Hence, they demanded more at present. 15. Subhash expects a sale of rupees 30 crores from his business this year. Concept:   **Aggregate demand** Explanation:  a. Aggregate demand refers to the total amount of sales proceeds which an entrepreneur actually expect from the sale of output produce at a given level of employment during the year. b. Hence, this Dis illustration relates to the concept of aggregate demand as Subhash expect the total sale proceeds from the sales of output to be rupees 30 crores. - **Agree or Disagree (Reasons)** 1. Demand curve slopes downward from left to right. Ans: I **agree** with the above statement. Reason: j. The demand curve is the graphical representation of the relationship between the demand for a good and its price, for a given income, price of related goods, tastes and preferences. k. This curve slopes downwards from left to right because of the negative relationship between the price of the commodity and its demand. 2. Price is the only determinant of demand. OR Price is the only factor that affects demand of a commodity. Ans: I **disagree** with the above statement. Reason: a. Price is one of the most basic factors influencing market demand. b. Income is an additional factor that affects market demand. c. Income and demand are directly connected. d. The prices of substitute goods influence market demand. e. When cheaper one is available, people desire it more than the original commodity. f. The costs of complementary items have an impact on market demand. g. If the price of a complementary good rises, the demand for the commodity in issue falls. 3. When price of Giffen goods fall, the demand for it increases. Ans: I **disagree** with the above statement. Reason: a. When the price of Giffen goods falls, the demand for them decreases. b. Inferior goods or low-quality goods, are those goods whose demand does not rose even if their price falls. c. At times, demand decreases when the price of such commodities falls. d. Sir Robert Giffen observed this behaviour in England in relation to bread declined; people did not buy more because of an increase in their real income or purchasing power. e. They preferred to buy superior goods, like meat. This is known as Giffen's paradox. 4. Manufacturers influence the demand for a commodity. a. Price determines the demand for a commodity to large extend. Generally, it is observed that when the price of a commodity rises, the demand for the commodity falls and vice versa. b. Apart from price, many other factors such as income price of substitute and complementary goods nature of product size of population expectations about future prices level of advertisement level of taxation also influence the demand for a commodity.  **3.B) Elasticity of Demand** - **Economic Terms** 1. Degree of responsiveness of quantity demanded to change in income only -- **Income Elasticity of demand.** 2. Degree of responsiveness of a change in quantity demanded of one commodity due to change in the price of another commodity -- **Cross Elasticity of Demand.** 3. Degree of responsiveness of a change of quantity demanded of a good to a change in its price -- **Price Elasticity of Demand.** 4. Elasticity resulting from infinite change in quantity demanded -- **Perfectly Elasticity Demand.** 5. Elasticity resulting from a proportionate change in quantity demanded due to a proportionate change in price -- **Unitary Elastic Demand.** 6. Proportionate change in quantity demanded of one commodity due to a proportionate change in the price of other commodity -- **Perfectly Elastic Demand.** 7. The Economist who explains the concept of elasticity of demand - **Professor Alfred Marshall.** 8. The type of goods which have negative income elasticity -**Inferior goods.** 9. The type of goods which have positive cross elasticity - **Substitute goods.** 10. The value of Ed in case of perfectly inelastic demand - **Ed = 0.** 11. The value of Ed \> 1 in this type of price elasticity of demand - **Relatively elastic demand.** 12. The type of commodities having relatively elastic demand - **Comforts and luxury goods.** 13. The ratio method of measuring price elasticity of demand is also called this - **Percentage method/ Arithmetic method.** 14. It is the type of price elasticity when total outlay does not change when price Falls or Rises - **Unitary elastic demand.** 15. It is the type of price elasticity when the total outlier decreases with a given change in price - **Relatively inelastic demand.** 16. Perishable commodities have this type of price elasticity of demand - **Relatively inelastic demand.** 17. A commodity which has multiple uses will have this type of elasticity of demand - **Relatively elastic demand.** 18. Period in which all factors of production are variable - **long run period.** - **Distinguish Between** 1. **Elastic Demand and Inelastic Demand** +-----------------------+-----------------------+-----------------------+ | **Basis for | **Elastic Demand** | **Inelastic Demand** | | Comparison** | | | +=======================+=======================+=======================+ | **Meaning** | If the percentage (%) | If the percentage (%) | | | change in quantity | change in quantity | | | demanded of a | demanded of a | | | commodity is infinite | commodity is zero or | | | or more than | less than | | | proportionate to any | proportionate to any | | | percentage (%) change | percentage (%) change | | | in its price, the | in its price, the | | | demand is said to be | demand is said to be | | | elastic. | inelastic. | +-----------------------+-----------------------+-----------------------+ | **Types** | There are two types | There are two types | | | | | | | 1\. Perfectly | 1\. perfectly | | | elastic demand | inelastic demand | | | | | | | 2\. Relatively | 2\. Relatively | | | elastic demand | inelastic demand | +-----------------------+-----------------------+-----------------------+ | **Numerical Value** | The numerical value | The numerical value | | | of perfectly elastic | of perfectly | | | demand is infinite | inelastic demand is | | | (∞) and the numerical | zero (0) and | | | value of relatively | numerical value of | | | elastic demand is ≥ | relatively inelastic | | | 1. | demand is ≤ 1 | +-----------------------+-----------------------+-----------------------+ | **Example** | Demand for comforts | Demand for salt, pins | | | and luxuries, car, | etc. | | | air conditioners. | | +-----------------------+-----------------------+-----------------------+ 2. **Relatively Elastic Demand and Relatively Inelastic Demand** **Basis for Comparison** **Relatively Elastic Demand** **Relatively Inelastic Demand** -------------------------- ------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------- **Meaning** If the % change in quantity demanded of a commodity is more than the % change in its price, the demand is relatively elastic. If the % change in quantity demanded of a commodity is less than % change in its price, the demand is relatively inelastic. **Numerical Value** The number value of relatively elastic demand is ≥ 1. The numerical value of relatively inelastic demand is ≤ 1. **Examples** Demand for comforts air conditioners, car etc. Demand for habituated goods like alcohol, cigarettes etc. 3. **Perfectly Elastic Demand and Perfectly Inelastic Demand** **Basis for Comparison** **Perfectly Elastic Demand** **Perfectly Inelastic Demand** -------------------------- ---------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------------- **Meaning** If the % change in the quantity demanded of a commodity is infinite (∞) to any % change in its price, the demand is perfectly elastic. If the % change in the quantity demanded of a commodity is zero (0) to any % change in its price the demand is perfectly inelastic. **Numerical Value** The numerical value of perfectly elastic demand is infinite (∞). The numerical value of perfectly inelastic demand is zero (0). **Examples** Demand for atmospheric air it is priced. Demand for absolute necessities such as food for survival. 4. **Percentage Method and Total Outlay Method.** **Basis for Comparison** **Percentage Method** **Total Outlay Method** -------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------------------------------------------------------------- **Meaning** This method measures price elasticity of demand when there is a small change in price. It is a small change in price. It is used to measure elasticity of demand from a demand schedule. This method measures the price elasticity of demand on the basis of expenditure incurred with a change in price of a commodity. **Variable** This method considers two variables i.e. price and quantity demanded. This method considers three variables i.e. price, quantity demanded and total outlay. 5. **Price Elasticity and Incomes Elasticity** ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- **Basis for Comparison** **Price Elasticity** **Incomes Elasticity** -------------------------- -------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------------------- **Meaning** It refers to proportionate change in quantity demanded of a commodity to a given change in price of a commodity. It refers to proportionate change in quantity demanded of a commodity to a given change in consumer's income. **Formula** \ \ [\$\$Ed = \\ \\frac{\\%\\ change\\ in\\ quantity\\ deamnded\\ }{\\%\\ change\\ in\\ price.}\$\$]{.math.display}\ [\$\$Ed = \\ \\frac{\\%\\ change\\ in\\ quantity\\ demanded}{\\%\\ change\\ in\\ consumer\^{\'}\\text{s\\ income.}}\$\$]{.math.display}\ **Responsiveness** It shows the degree of expansion of demand due to fall in price and contraction of demand due to rise in price of a commodity. Income elasticity of demand shows the degree of responsiveness of a quantity demanded of a commodity to a given change in consumer's income. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 6. **Income Elasticity of Demand and Cross Elasticity of Demand** +-----------------------+-----------------------+-----------------------+ | **Basis of | **Income Elasticity | **Cross Elasticity of | | Comparison** | of Demand** | Demand** | +=======================+=======================+=======================+ | **Meaning** | Income elasticity of | Cross elasticity of | | | demand is the | demand is the | | | proportionate change | proportionate change | | | in quantity demanded | in the quantity | | | of a commodity to a | demanded of commodity | | | given change in the | to a given change in | | | consumer's income. | the price of | | | | substitute or | | | | complementary goods. | +-----------------------+-----------------------+-----------------------+ | **Formula** | Income Elasticity | | | | (EY)= | | | | | | | | Percentage change in | | | | Quantity Demanded / | | | | Percentage change in | | | | Income | | | | | | | | EY = | | +-----------------------+-----------------------+-----------------------+ | **Types** | Income Elasticity of | Cross Elasticity of | | | Demand are of three | Demand are of three | | | types: | types: | | | | | | | 1. Positive Income | 1. Positive Cross | | | Elasticity is | Elasticity is | | | found in case of | found in case of | | | Normal Goods. | substitute goods | | | | like tea and | | | 2. Negative Income | coffee. | | | Elasticity for | | | | inferior goods | 2. Negative Cross | | | cheap bread, | Elasticity is | | | rice, etc | seen in case of | | | | Complementary | | | 3. Zero Income | Goods. | | | Elasticity. | | | | | 3. Zero Cross | | | | Elasticity in | | | | case of unrelated | | | | goods like cup | | | | and book. | +-----------------------+-----------------------+-----------------------+ - **Illustrations (Concepts)** 1. Kiran's demand for milk remained unchanged even when its price increased by 10%. Concept: **Perfectly Inelastic Demand** Explanation: a. When a percentage change in price has no effect on the quantity demanded of a commodity, it is called perfectly elastic demand. b. Since rise in the price of milk by 10% had no effect on Kiran's demand for milk, this illustration is related to the concept of 'perfectly inelastic demand'. 2. Ramesh's demand for salt remained unchanged in spite of a 10% rise in its price. Concept: **Perfectly Inelastic Demand** Explanation: a. Perfectly inelastic demanded (ED = 0) occurs when a percentage price adjustment has no impact on the quantity demanded of a good. b. A 10% price increase will therefore have no impact on the quantity needed. In reality, such an occurrence is uncommon. c. An illustration salt is in demanded. 3. Preeti started shopping for clothes frequently after she got a good salary increment last year. Concept: **Positive income elasticity** Explanation: a. Income elasticity of demand is a ratio of proportionate change in quantity demanded of a commodity to a proportionate change in income of an individual. Normal good have positive income elasticity. b. Hence, this illustration relates to the concept of 'positive income elasticity' as Preeti's demand for clothes increased when her income increased. 4. Flipkart sold more than 2 lakhs TV sets during Diwali when they offered a 30% discount. Concept: **Price elasticity of demand** Explanation: l. Price elasticity demand is a ratio of proportionate change in quantity demanded of a commodity to a given proportionate change in its price. In simple words, price elasticity is responsiveness of demand due to a change in price only. m. Hence, this illustration relates to the concept of 'positive elasticity of demand' as the demand for TV sets increased due to a change in its price. 5. Kalpana started shopping for clothes frequently after she got a good salary increment last year Concept: **Positive income elasticity** Explanation:  a. Income elasticity of demand is a ratio of proportionate change in quantity demanded of a commodity to a proportionate change in uniform of an individual. Normal goods have positive income elasticity. b. Hence, this illustration Relates to the concept of positive income elasticity as Kalpana demand for clothes increases when her income increases. 6. When prices of railway tickets increased, there was an increase in air travel. Concept:  **Positive cross elasticity**  Explanation:  a. Cross elasticity of demand is a ratio of proportionate change in quantity demanded of 1 commodity to a proportionate change in the price of another commodity. Substitute goods have positive cross elasticity. b. Hence, this illustration relates to the concept of positive cross elasticity as well travel increases when prices of railway tickets increase. Both are substitutes to each other. 7. Amazon experienced a surge in demand during Diwali when they offered huge discounts. Concept:  **Price elasticity of demand** Explanation: a. Price elasticity of demand is a ratio of proportionate change in quantity demanded of a commodity to a given proportionate change in its price. In simple words, price elasticity is a responsiveness of demand due to a change in price only. b. Hence, this illustration relates to the concept of price elasticity of demand as the demand for products increases due to a change in its price. 8. Call in the price of sugar by 50% resulting in a 50% rise in demand. Concept:  **Unitary elastic demand** Explanation: a. When the proportionate or percentage change in quantity demanded is exactly equal to the proportionate or percentage change in price of the commodity, it is called unitary elastic demand. b. Hence, this illustration relates to the concept of unitary elastic demand as a fall in the price of sugar by 50% results in a 50% rise in demand. 9. Reduce his smoking even though the price of cigarettes almost doubled. Concept: **Relatively inelastic demand** Explanation: a. When a change in the price of a commodity has proportionate at least effect on the demand for a commodity, the demand for such commodity is relatively inelastic. b. Hence, this illustration relates to the concept of relatively inelastic demand as Uday's demand for cigarettes did not reduce in spite of an increase in price of Cigarettes. 10. The government charges high GST on liquor. Concept:   **Importance of concept of elasticity to government/ Relatively inelastic demand** Explanation: a. The government charges higher taxes on commodities whose demand is relatively inelastic and which are harmful. This helps the government to increase tax revenue and also keep the consumption of such goods in control. b. Hence, this illustration relates to the concept of importance of the concept of elasticity to government as government Charges high GST on liquor which has inelastic demand to earn higher Tax revenue and control its consumption.  11. OPEC Have you increase the price of oil several times. Concept:  **Importance of concept of elasticity in foreign trade/ Relatively in elastic demand** Explanation: a. The concept of elasticity of demand is useful to determine terms and conditions in foreign trade. b. The countries exporting commodities having relatively in elastic demand can easily Raise their prices. c. Hence, this illustration relates to the concept of importance of concept of elasticity in foreign trade as OPEC Have increased the price of oil several time knowing that oil has in elastic demand in all countries all approach the world. - **Agree or Disagree (Reasons)** 1. Total outlay method is one of the methods for measuring elasticity of demand. Ans: I **agree** with the above statement. Reason: a. The term elasticity indicates responsiveness of one variable to change in the other variable. b. There are various methods for measuring elasticity of demand such as ratio or percentage method. c. Total outlay method was developed by Prof. Marshall, in this method; total amount of expenditure by the consumer at original price is compared with total expenditure at new price to calculate the elasticity of demand. d. Here, Total Outlay (Total Expenditure) = price × Quantity demanded. e. Elasticity is determined by change in total outlay after change in price. 2. Demand for necessary goods is inelastic. Ans: I **agree** with the above statement. Reason: a. When the proportionate or percentage change in quantity demanded is less than the proportionate or percentage change in price, it is called as relatively inelastic demand. b. Necessary goods like kerosene, rice, wheat, oil, etc. are required by every individual for existence. c. A change in price has very less effect on demand for such goods. d. E.g. if the price of such good increases, a person is unable to reduce his consumption much since it is essential for his survival. e. Hence, demand for necessary goods is inelastic. 3. Various factor influences the elasticity of demand. Ans:  I **agree** with the above statement. Reason: a. Where are factors influencing the elasticity of demand like below. b. Commodities which are necessity is have relatively in elastic demand. c. On the other hand, Comfort Goose and luxury goods have relatively elastic demand. d. The demand for a commodity will be relatively elastic if its Close substitute is easily available while the demand will be relatively in elastic if its close substitute is not available. e. The demand for commodities having single use will be late elastic or relatively in elastic while the demand for commodities having multiple Uses will be relatively more elastic. f. The demand for commodities which are consume as a habit is relatively in elastic. g. The demand for durable goes is relatively elastic while that of perishable goods is relatively in elastic. h. The goods Which are needed urgently will have a relatively in elastic while luxury goods Which are less urgent will have relatively elastic demand. 4. **Supply Analysis** - **Economic Terms** 1. Cost incurred on fixed factor -- **Total Fixed Cost.** 2. Cost incurred per unit of output -- **Average Cost.** 3. Net addition made to total cost of production -- **Marginal cost.** 4. Revenue per unit of output sold -- **Average Revenue**. 5. Rise in the quantity supplied of a commodity due to a rise in its price, other factors remaining constant -- **Expansion of Supply.** 6. The law which explains the functional relationship between price and quantity supplied -- **Law of Supply.** 7. The sum total of the quantity of the commodity produced at a given period of time in the economy - **Total output.** 8. The source of supply - **Stock. ** 9. The type of commodities in which stock may be equal to supply - **Perishable goods.** 10. The economist who defined supply as relation between market prices and quantity supplied - **Paul Samuelson.** 11. A tabular representation of the functional relationship between price and quantity supplied - **Supply** **scheduled.** 12. A graphical representation of the market supply scheduled - **Market supply curve.** 13. The law which explains the functional relationship between price and quantity supplied - **Law of supply.** 14. Symbolic representation of functional relationship between price and quantity supplied - **Sx = f (Px).** 15. Change in supply on account of unfavourable change in factors other than price - **Decrease in supply.** 16. The minimum amount of sale proceeds which entrepreneurs expect to receive from sale o