Theory Of Demand And Supply – CS Foundation Economics Notes

Theory Of Demand And Supply – CS Foundation Economics Notes

Supply and demand are perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of certain goods producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

1. The Law of Demand
The most famous law in economics and the one economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics. Demand means the quantity a consumer wants to purchase Features of Law of demand are

• As per this law fall in the price of a product is inversely proportional to the demand of that product. Thus when the price falls demand increases
• The Law of demand is ceteris Paribus which means the quantity purchased depends upon all other things being equal at that time. Thus if all the other things incidental to the product remain the same then purchase quantity is dependent on price.
• If the price falls then purchase quantity increases at that time. Thus if the price of potatoes falls in a week and the desire for potatoes remains the same for that week then purchase quantity increases.
• This law summarizes the effect price changes have on consumer behavior A demand for a good can be expressed in 3 ways
• Demand function – The demand function relates to price and quantity. It tells how many units of goodwill be purchased at different prices.

In general, at higher prices, less will be purchased. Thus, the graphical representation of the demand function (often referred to as the demand curve) has a negative slope. The market demand function is calculated by adding up all of the individual consumers’ demand functions.
It is an algebraic way of showing the demand of an individual. A generalized expression for a commodity X can be
Dx = Px, Y, T
Where Dx = quantity demanded for X product
Px = price of X product
Y = income level of consumer
T= his tastes
Thus quantity demanded by an individual is dependent on Px, Y, T

• Demand schedule
In economics, a market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price. A market demand schedule for a product indicates that there is an inverse relationship between price and quantity demanded. The graphical representation of a demanding schedule is called a demand curve. A demand schedule is a simple means of summarizing information about demand price and quantity demanded of a particular good. It is used to highlight the law of demand. It can also be used to derive a demand curve. It can be an individual demand schedule or a market demand schedule which is a summation of the individual demand schedule.

• Demand Curve
In economics, a graphic representation of the relationship between product price and the quantity of the product demanded is the demand curve. It is drawn with a price on the vertical axis of the graph and quantity demanded on the horizontal axis. With few exceptions, the demand curve is delineated as sloping downward from left to right because price and quantity demanded are inversely related (i.e., the lower the price of a product, the higher the demand or number of sales). This relationship is contingent on certain ceteris paribus (other things equal) conditions remaining constant.

Utility approach – Utility is a term used by economists to describe the measurement of “useful-ness” that a consumer obtains from any good. A consumer’s utility is hard to measure. However, we can determine it indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility.

2. Measurement of utility
The utility may measure how much one enjoys a movie, or the sense of security one gets from buying a deadbolt. Utility measurement provides a basis for discussing the satisfaction of wants and needs derived from consumption, which then enables an understanding of the role utility plays in market demand. The utility approach for determining demand is very much based on individual taste and desire. The desire may not always be for the welfare of consumers. But over here determining the demand is not concerned with the normative approach. There are two approaches that are used for measuring the utility.

• Cardinal Approach
• Ordinal Approach

Cardinal Approach

Cardinal approach suggests that utility can be measured in imaginary cardinal numbers 1,3,10 etc. It argues that a consumer has the capacity to measure the level of satisfaction that person derives from the consumption of a given quantity of a commodity.

As we know the resources are scarce and wants are unlimited so choices are to be made in regard to maximum utilization. Let us understand by an example. A man has is hungry he has the choice either to purchase it from the market or cook at home. Now it is on the consumer to decide which choice satisfies him the most and gives the maximum utility. As per this approach this utility can be measured.

The concept of Cardinal Utility was used by Marshal to define Consumer’s Equilibrium. Cardinal Utility means consumers could measure the satisfaction derived by the consumption of any goods or services in terms of number and . unit of that measurement is Utils. Cardinal utility was popular with utilitarian economists in the 18th century. Their belief was that utility could be measured.

As we know resources are scarce and want unlimited so the choices are to be made by consumers. For making choices you need a comparison parameter. As per this approach, a consumer can measure the utility of a good with other goods in cardinal numbers, and accordingly, it can make a choice which good gives him maximum utilization 1 Cardinal utility theory has two drawbacks First, the very first assumption of the cardinal utility approach is that utility is cardinally (or objectively) measurable is untenable. The utility is a subjective concept that cannot be measured objectively or quantifiably.

Secondly, the cardinal utility approach assumes that the MU of cardinal numbers remains constant and serves as a measure I of utility. This assumption is unrealistic because the MU of cardinal numbers, like that of all other goods, is subject to change. And, therefore, it cannot serve as a measure of utility derived from goods and services.

Ordinal approach
The concept was first introduced by Pareto. He said that utility can not be measured in numbers instead it can be depicted in a comparable manner. As per this approach, the utility can not be measured in units but it can be determined by preferences so whenever demand for a product is being accessed then it can be determined on the basis of preferences made by consumers. This is more realistic and better than the cardinal utility. This is totally based on Introspection.

This theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative bundles (combinations) of goods can be ordered such that one is considered by an individual to be worse than, equal to, or better than the other. This contrasts with cardinal utility theory, which generally treats utility as something whose numerical value is meaningful in its own right. The ordinal utility is also commonly known as indifference curve theory because its analysis is based on the indifference curve.
Concept of utility – a good after being purchased gets its utility divided into
Total utility (TU)
Average utility(AU)
Marginal utility (MU)
Total utility – is the summation of utilities derived from all of the n units
Average utility – when we divide total utility by the number of units we get average utility
Marginal utility – additional satisfaction a consumer gets when he consumes one more unit of a good is marginal utility.
Marginal utility is an important economic concept because economists use it to determine how much of an item a
consumer will buy. Positive marginal utility is when the consumption of an additional item increases the total utility. Negative marginal utility is when the consumption of an additional item decreases the total utility.
The time when marginal utility becomes zero total utility is maximum.

3. Law of Diminishing Marginal Utility
A law of economics stating that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product. The concept looks psychological but can be calculated in rational numbers like 2,3, etc. Law has a direct bearing on the market demand, the demand price, and the law of demand. If satisfaction is obtained from a good decline, then buyers are willing to pay a lower price, hence demand price is inversely related to quantity demanded, which is the law of demand.

This law can not be used for all the utility items cause there are certain things whose utility increases as they are added like reading. In such cases the more you get more you want thus here utility demand is not diminishing but instead increasing. The law of diminishing marginal utility is directly linked to determining the price of the commodity. Not only this it is very useful for social welfare programs where you can find out whether the goods and services wants are the same for all people or it is different. Then on basis of finding goods and services can be distributed among society members.

4. Observations for the law of DMU

• When TU rises, MU diminishes
• When TU is maximum, MU is zero
• When TU decreases, MU becomes negative

5. Assumptions of the law of DMU

• The marginal decision rule states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost.
• Constant marginal utility of money
• Consumption to be continuous
• Utility is cardinally measurable
• Hypothesis of independent utilities
• Taste and income of the consumer does not change
• The units of the commodity are identical
• There is no time gap between the consumptions
• Standard unit of consumption Exceptions to the law of DMU is
• Hobbies of consumers like Reading of more books give more satisfaction
• For a miser, a person’s greed increases with the acquisition of one additional unit and he wants more.
• Drunkards enjoy every additional drink so the rule does not apply to them

6. Uses of the law of DMU

• This law of DMU forms the basis of the law of demand, the law of Equi-marginal utility, the elasticity of demand, etc.
• A producer can increase the sale of his product by fixing a lower price. Since consumers tend to buy more to equate MU with price, a producer can expect a rise in sales.
• The Govt can impose and justify progressive income tax on the ground of this law, as the income increases, the MU of income diminishes.

7. Law of Equi Marginal Utility
The law of equity-marginal utility is an extension of the law of diminishing marginal utility. This law states a consumer spends money on the basis of marginal utility it derives from the purchase of that good. Thus when a consumer has to choose from different goods which have fixed price and which obeys the law of diminishing utility than a consumer will purchase that product whose marginal utility is not less than the price paid for it.
Symbolically MUa/Pa = 1
Here MUa is the marginal utility of product ‘a’
Pa is price of product ‘a’
If MUa/Pa > MUb/Pb then we can see that marginal utility of product ‘a’ is more than product ‘b’ thus consumer will shift its purchase from ‘b’ to ‘a’.
Assumptions of the Law of Equi -Marginal Utility

• There is no change in the prices of the goods.
• The income of consumers is fixed.
• The marginal utility of money is constant.
• The consumer has perfect knowledge of utility obtained from goods.
• The consumer is a normal person so he tries to seek maximum satisfaction.
• The utility is cardinally measurable.

8. Limitations to the law of Equi -marginal utility

• The law of equity-marginal utility may become inoperative if people forced by fashions and customs
• If the unit of expenditure is not divisible, then again the law may become inoperative.
• If there is no perfect freedom between various alternatives, the operation of law may be impeded.
• It assumes that customers are able to calculate the correct marginal utility of all goods
• Sometimes people are ignorant of the price so they are not able to get maximum benefit by equating the marginal utility.
• Sometimes the goods are substitutes or complement to each other. In such a case utility of a product is dependent on the quantity of its own product and other product.
• All goods can not be divided into units like a car can not be purchased in units but bread can be purchased in units.

9. Importance of law of Equi -marginal utility

• The law of equity-marginal utility is of great practical importance
• Every consumer consciously trying to get the maximum satisfaction from his limited resources acts upon this principle of substitution
• It applies equally to the theory of production and the theory of distribution.
• Government can also use this analysis for evaluation of its different economic prices.

10. Law of demand and its analysis
In economics, the law states that all else being equal, as the price of a product increases, a lower quantity will be demanded; likewise, as the price of a product decreases, a higher quantity will be demanded. Characteristic features of the law of demand

• When the price of a commodity rises, people buy less of that commodity, and when the price falls, people buy more of it ceteris paribus (other things remaining the same).
• The Law of demand has a negative slope which means as the price falls the demand for the product increases and as the price rises the demand decreases, thus quantity demanded is inversely proportional to the price of a good.
• When the price of a product increases the quantity purchased by a buyer decreases. This is called contraction of demand
• If the price falls consumer moves downward on the demand curve and purchases more which is called expansion
• If there is no change in the price of the good but still the quantity being purchased by the consumer changes then we draw another demand curve.
• The demand curve slopes downward from left to right. It has a negative slope showing that the two variables price and quantity work in the opposite directions.

11. Assumptions of the Law of demand

• There should not be any change in the tastes of the consumers for goods.
• The purchasing power of the typical consumer must remain constant (M).
• The price of all other commodities should not vary

12. Exceptions to the law of demand

• Prestige goods or conspicuous goods There are certain commodities like diamonds, sports cars, etc., which are purchased as a mark of distinction in society. If the price of these goods rises, the demand for them may increase instead of falling.
• Inferior goods – in such a case when the income of the consumer increases the shift his purchase from inferior goods to superior goods even if inferior goods price falls.
• Price expectations: If people expect a further rise in the price particular commodity, they may buy more in spite of rising in price. The violation of the law, in this case, is only temporary.
• Ignorance of the consumer: If the consumer is ignorant about the rise in the price of goods, he may buy more at a higher price.
• Giffen goods: these are the goods which people keep on buying in spite of the increase in price because they have no other substitute for them eg. basic goods, (potatoes, sugar, etc). This is known as the Giffen paradox. There is a positive price effect in the case of Giffen goods.
• Some goods are so complementary to each other that they can not be segregated thus even if there is a fall in the price of one product the increase in the price of other is immaterial
• Fashion dependent goods

13. Importance of law of Demand

• The study of the law of demand is helpful for a trader to fix the price of a commodity.
• The study of this law is of great advantage to the Government for deciding about taxation.

14. Supply
Supply refers to the quantities of a product that producers are willing and able to offer at a given price during some period of time. In other words, it is the total quantity of a particular good that can be given in the market at a certain price. Stock and supply are two different words. Stock means the total quantity of good ‘A’ available that is physically present in the market at a particular time while supply is the total quantity of ‘A’ offered to the market for sale. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. The Law of supply is opposite to the law of demand

15. Features of the law of Supply

• A shift in supply refers to an increase (rightward change) or a decrease (leftward change) in the quantity supplied at each possible price. These shifts are influenced by non-price determinants
• As the price increase producers are ready to supply more Thus Ceteris Paribus (when all conditions remain the same) price rise shows supply rise
• Supply curve is upward sloping
• Conditions that affect production are the number of firms, prices of input, technology, cost of production, etc.
• If the quantity supplied changes without change in price then a new supply curve is made towards the outer side and is called the increase in supply and if the supply curve moves inside it is called reduction
• The supply curve is positively sloped upward and to right
• A reduction in quantity supply on account of an increase in price is called ‘contraction’
• If the price of goods falls the supply of goods increases this is called ‘expansion’

16. Various ways of expressing Supply

• Supply Curve – It is a graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph and quantity of product supplied on the horizontal axis.
• Supply Function – It is the mathematical function that relates the price and quantity supplied for goods or services.
  The supply function tells how many units of a good that producers are willing to produce and sell at a given price.
• Supply Schedule – A table that contains values for the price of a good and the quantity that would be supplied at that price.

17. Reasons supply curve to be positively sloped are

• a change in price will push the quantity supplied in the same direction, supply curves will have a positive slope.
• as the selling price of the product increases, the willingness of producers to create that product increases as well.
• With the greater incentive (profit) to make that product, production will rise in direct proportion to how much price increases.

18. Exceptions to law of supply

• Competition may compel the supplier to supply goods even at lower prices
• Sometimes a seller may know that there will be an increase in price in the future so he may stop supplying and may wait for the price to rise
• Certain goods production can not be increased even if prices are high like agricultural products – On the contrary when agricultural products are on the verge of being spoilt then the supplier may be forced to sell at a low price
• Sometimes government puts restrictions like subsidies etc. Where whatever may be the demand of the good the seller has to supply at the subsidized price only.
• Artistic or auction goods supply can not be increased even if their price increases.
• If the seller’s number is small then even if the price increases supply can not be increased

19. Equilibrium
An equilibrium price (also known as a “market-clearing” price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands.
When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity. Thus a seller has to supply goods at a price that is acceptable to consumers. When there is an increase in the income of consumers then there is an increase in demand which in turn pressurizes the supplier to increase supply and that leads to an increase in price to reach equilibrium.

20. Characteristic features of the law of demand and law of supply

• On a supply and demand curve, the equilibrium price is represented by the point where the demand and supply
  curves intersect.
• It is the single price at which the quantity demanded and the quantity supplied is the same.
• if the market for a good is already in equilibrium and producers raise prices, consumers will buy fewer units.
  then they did in equilibrium, and fewer units than producers have available for sale. In that case, producers have two choices. They can reduce the price until supply and demand return to the old equilibrium, or they can cut production until the quantity supplied falls to the lower number of units demanded at the higher price.
• If the market price is above the equilibrium price, the quantity supplied is greater than the quantity demanded, creating a surplus. The market price will fall.
• Policymakers set ceiling prices below the market equilibrium price which they believed is too high.
• An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity.
• An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity.
• An increase in supply moves the supply curve to the right
• An increase in demand moves the demand curve to left

21. Elasticity of demand
Price elasticity of demand (PED) shows the relationship between price and quantity demanded and provides a precise calculation of the effect of a change in price on quantity demanded. The following equation enables PED to be calculated.

PED= change in quantity demanded/change in price
Elasticity describes the responsiveness (in percentage terms) of the quantity demanded to changes in price. Knowing how sensitive a product is to a change in price is important in pricing goods and services. Elasticity is a tool that an owner of a business can use to understand how consumers will change their behavior when you, as a business owner, change the price of a product. There are five categories of price elasticity. The categories of perfectly elastic and perfectly inelastic lean towards being more theoretical. There are few real-world examples for those two categories. Different types of elasticity of demand are

1. Perfectly elastic demand would occur when the quantity demanded skyrockets to infinity when the price dropped any amount. It means that a significant change in price leads to an infinite change in quantity demanded. This, of course, could not happen in real life.

• However, it illustrates the concept that elastic demand has a ratio of anything more than one.
• The demand curve is parallel to X-axis

2. Perfectly inelastic demand is when there is no change in the demand of the product with the change in price.

• thus elasticity is zero.
• The demand curve is parallel to Y-axis.

3. Unitary elastic demand is when the increase in price is proportionate to the increase in demand.

• Thus a given % change in price results in an equal % change in quantity demanded. Thus 10% reduction in price leads to a 10% increase in demand.
• The demand curve is a rectangular hyperbola.
• The elasticity coefficient always equals 1.

4. Relatively elastic demand is a concept where a change in the price results in more than proportionate change in the quantity demanded.

• For eg., a Fall in the price of 3% leads to an increase in demand of 10%.
• elasticity coefficient is always greater than 1.
• The demand curve is flatter in shape.

5. Relatively inelastic demand is a concept where a great change in price leads to a small change in quantity.

• The elasticity coefficient is less than 1.
• The demand curve is relatively steeper.

22. Methods of measuring price elasticity of demand
The price elasticity of demand measures the sensitivity of the quantity demanded to changes in the price. Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes. Price elasticity of demand can be measured in three ways

1. Arithmetic method or percentage method
2. Total expenditure method
3. Graphic method or point method

Arithmetic method – According to this method price elasticity is calculated by arithmetic calculation formula instead of the slope because the slope is sensitive to the units of measurement of price and quantity.

Price elasticity of demand = Percentage change in quantity demanded/percentage change in price Total expenditure Method – Some of the factors on which elasticity is dependent is the total expenditure made by the consumer on that particular product. If the expenditure is more than elasticity of demand is higher. Moreover, the demand is inelastic when the goods that are being purchased are too expensive or too moderate whose demand will not be affected as demand is very low.

Graphic Method – demand is measured on different points on a straight-line demand curve and then elasticity is calculated as per the formula written below Point Elasticity = Lower segment of the demand curve below the given point/Upper segment of the demand curve above the given point

23. Determinants of Price elasticity of Demand

• A number of substitutes: the larger the number of close substitutes for the good then the easier the household can shift to alternative goods if the price increases.
• Degree of necessity: If the good is a necessity item then the demand is unlikely to change for a given change in price.
• Price of the good as a proportion of income: elasticity depends on the proportion of consumer’s budget spent on it
• Habit: some products may be a habit of consumers and in such cases, prices do not matter like for smokers
• Time lag: The longer the time after the price change, the more elastic will be the demand

24. Cross price elasticity of demand
The measure of the responsiveness of the demand for a good towards the change in the price of a related good is called cross-price elasticity of demand. It is always measured in percentage terms. Thus when there is a change in the price of a product ‘A’ demand of quantity of product ‘b’ changes if they are related to each other. The cross-price elasticity of demand is useful for economists because it tells you whether two goods (A and B) are substitutes, complements, or even unrelated.

Cross price elasticity is positive – when a change in the price of good ‘b’ causes the change in demand of good ‘a’ in the same direction, eg. tea and coffee is a substitute to each other Cross price elasticity is negative – when a change in the price of good ’b’ causes the change in demand of good in the opposite direction, e.g. pen and ink which are complementary to each other. Cross price elasticity is zero – change in the price of good ‘b’ does not affect the quantity demanded of good ‘a’, such goods are unrelated Cross price elasticity is infinite – the slightest change in the price of good ‘b’ causes a great change in the demand of good ‘a’

25. Income elasticity of demand
The income elasticity of demand measures the responsiveness of demand for a good or service to changes in income. E= percentage change in the quantity of good ‘A ’/percentage change in real income of consumer Above formulae shows how the demand for good changes as the income of consumer changes. This theory was given by Stonier and Hague. Three situations explain the relation of demand of goods with the real income.

In case of inferior goods – as income increases consumer moves towards better goods instead of increasing the number of inferior goods.
In the case of normal goods – as income increases demand also increases but it rises less in the proportion of rising in income. In the case of luxuries – as income increase, it shows a great increase in demand. Demand and income increase are not in proportion.

26. Price elasticity of supply
The elasticity of supply tells us how sensitive the quantity supplied is to the good’s own price at a given point on a supply curve. Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes.

The elasticity of supply = Percentage change in quantity supplied/percentage change in price.
Unlike elasticity of demand elasticity of supply has a positive sign. The positive sign reflects the fact that higher prices will act as an incentive to supply more. Because the coefficient is greater than one, PES is elastic and the firm is responsive to changes in price. This will give it a competitive advantage over its rivals. The elasticity of supply responds in five ways

• Perfect elastic supply – Supply is perfectly priced elastic if for any percentage increase in price, no matter how small, the percentage change in quantity supplied is also infinitely large. In such conditions, suppliers supply all that they can. Here elasticity’ is equal to infinity, the producer accepts only one price

• Perfect inelastic supply – The other extreme case occurs when the percentage change in quantity supplied is always equal to 0, regardless of the percentage change in price. In this case, supply is said to perfectly price inelastic, or completely nonresponsive to change in prices. Here elasticity is equal to zero, the amount supplied does not depend at all on price

• Relative elastic supply – For a given rise in price, the rise in supply will be proportionately larger. Here elasticity is greater than 1.

• Relative inelastic supply -The quantity supplied increases only a small amount with a rise in price. Here elasticity is less than 1.

• Unitary elastic supply – here elasticity coefficient is equal to 1. Here the percentage of fall and percentage of quantity supply fall are the same. Thus if the price falls by 10% supply also falls by 10%. the supply curve is a straight line through the origin.

27. Determinants of price elasticity of supply

• If the availability of time is enough so that a seller can organize and adjusts the supply to demand, then supply is more elastic.
• Supply is more elastic when a product can be sold in another market. This is because when the price of goods falls in one market, it does not fall in other markets, and will make good.
• If there is excess capacity, and producers can increase output easily with the increase in price then elasticity will be high.
• If production is more complex then the elasticity of supply is low.
• If the factors of production can be easily moved and transportation cost is not much then the elasticity of supply is more.

28. Theory of consumer behavior
Besides the theory of demand and supply, it is consumer behavior towards the product which decides the demand of that particular product. The Theory of Consumer Behaviour studies how a consumer spends his income so as to attain the highest satisfaction or utility. Consumer behavior theories are used by businesses in order to optimize their selling and marketing strategies. These theories tend to concentrate on how consumers spend money, what causes them to spend more money, and how the spending of consumer money should impact the planning and strategies practiced by businesses. Different types of consumer behavior theories may focus on the choices consumers make based on their budgets, how consumers make decisions to reach the highest level of satisfaction, how consumers consider the utilities and features of different products, or what and how much consumers know about particular products. There are two theories on how the consumer will behave.

29. Marshallian approach
This approach was given by Alfred Marshall. As per this approach, a consumer tries to derive maximum utilization from the product on which he spends money. Thus consumer’s net utility = units of utility from consumption – utility of money given.

30. Assumptions of this theory

• Assumes that utility is measurable and additive.
• The Marshallian assumption of the constant utility of money is also unrealistic
• Marshallian demand theory is based on a single commodity model.
• According to Marshall theory, MU of money remains constant
• The Law of diminishing marginal utility stands true.

31. Limitations of Marshallian Approach

• It has been asserted that Marshallian utility analysis assumes ‘too much while it explains ‘too little’.
• Utility of money can not be constant all the time
• It is not acceptable that there is no substitute for the product
• The Law of diminishing marginal utility also does not stand true all the time.
• Also cardinal measurement is not realistic
• Marshall theory does not break up the ‘price effect’ into ‘income effect’ and ‘substitution effect’ and thereby it does not show the negative price effect in the case of Giffen goods.
• Marshallian demand theory is based on a single commodity model. Marshall avoids the discussion of substitutes and complementary goods
• Marshall’s theory does not measure how real income can be measured

32. Indifference curve approach
This approach was developed to remove the drawbacks of Marshallian approach. This approach can be called the ordinal concept. The indifference curve theory of ordinal utility theory is an important concept in Economics, as it suggests a more realistic way to analyze consumer behavior. An indifference curve shows all the various combinations of two goods that, give an equal amount of satisfaction to a consumer.

33. Assumptions of this theory

• Consumer is rational and he is interested to maximize his total utility.
• Utility can not be measured
• Consumer can rank his various combination of goods according to the satisfaction or utility
• The principle of diminishing marginal rate of substitution is assumed.
• The consumer, it is assumed, is consistent in his behavior during a period of time.
• The goods consumed by the consumer are substitutable.
• There are many combinations of the, two commodities that are equally preferred by a consumer and he is indifferent as to which of the two he receives.
• Consumers have full information about the relevant aspects of the economic environment
• A combination of having more commodities is more satisfying than a combination of having fewer commodities

Features of approach

• The indifference curves must slope down from left to right.
• A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.
• The curve is moving from up to down between two commodities
• Between X and Y axis which represents two commodities, it shows various combinations which can be purchased by a consumer.
• When budget line and indifference curves are drawn together then the budget line will be tangent to only one curve.
• When the amount of one good is increased the number of other goods decreases so the curves are downward to the right
• the relative nature of various goods is explained e.g. Inferior and superior.

Theory Of Demand And Supply MCQ Questions

Question 1.
The more elastic the demand curve for a product is
a. The greater the proportion of income spent on the commodity
b. The longer the period of time considered
c. The greater the number of close substituted available
d. a, b and c
Answer:
d. a, b and c

Question 2.
Substitution effect for a fall in the price of a commodity is given by
a. an upward shift in indifference curve
b. a movement up of a given indifference curve
c. a downward shift in indifference curve
d. a movement down a given indifference curve.
Answer:
d. a movement down a given indifference curve.

Question 3.
The marginal utility (MU) of the last unit of x consumed is twice the MU of the last unit of Y consumed, the consumer is in equilibrium only if
a. the income of the consumer id doubled
b. the price of x is equal to the price of Y
c. the expenditure of X is equal to twice on Y
d. the Price of X is one half of the price of Y
Answer:
d. the Price of X is one half of the price of Y

Question 4.
The demand curve for a human resource will be more elastic under the following conditions
a. More difficult to substitute other resources for it.
b. More and better substitutes are available for it.
c. Shorter the time period under consideration.
d. All of the above.
Answer:
d. All of the above.

Question 5.
If skilled labour is three times the cost of unskilled labour, a profit-maximizing firm will vary the quantity of each type of labor until the
a. marginal product of each is the same.
b. amount of unskilled labour used is three times the quantity of skilled labour used.
c. amount of unskilled labor used is one-third the quantity of skilled labour.
d. marginal product of unskilled labour is one-third that of skilled labour.
Answer:
d. marginal product of unskilled labour is one-third that of skilled labour.

Question 6.
The demand for inputs depends on the demand for outputs it is termed
a. inverse demand.
b. derived demand.
c. proportional demand.
d. notational demand.
Answer:
b. derived demand.

Question 7.
What concept implies that a firm’s marginal revenue product curve for labour will slope downward in the short run?
a. diminishing marginal returns
b. the law of supply
c. the law of decreasing cost.
d. The price equalization principle
Answer:
a. diminishing marginal returns

Question 8.
Which one of the following labour resources will likely have the most inelastic supply schedule in the short run?
a. filling station attendants
b. sales clerks
c. construction labourers
d. dentist
Answer:
d. dentist

Question 9.
Suppose the United Auto Worker Union succeeded in obtaining a 10 percent increase in the wages of its workers and that the wage increase caused automobile prices to rise. Employment in the auto industry would most likely fall if
a. the demand for Indian-made automobiles was highly elastic.
b. the supply of foreign-produced automobiles was highly inelastic.
c. Indian consumers considered foreign automobiles a poor substitute for Indian automobiles.
d. the demand for Indian automobiles was relatively constant and highly inelastic.
Answer:
a. the demand for Indian-made automobiles was highly elastic.

Question 10.
If the demand for a consumer good increases, the demand for resources required to make the goodwill
a. increase.
b. remains the same, but the quantity demanded will increase.
c. decrease due to economies of scale.
d. increase or decrease depending on whether the firm is intensive or capital intensive.
Answer:
a. increase.

Question 11.
The marginal productivity theory most closely relates to the
a. demand for resources.
b. supply of resources.
c. concept of scarcity.
d. noncompetitively aspects of the resource market
Answer:
a. demand for resources.

Question 12.
A decrease in demand for a product will cause the output of the product to
a. decline and the demand for and prices of productive resources used.to produce the product to fall.
b. decrease and both the demand for and prices of productive resources used to produce the product to increase.
c. decrease but the demand for resources used to produce the product will remain constant.
d. increase and the resource price to rise
Answer:
a. decline and the demand for and prices of productive resources used.to produce the product to fall.

Question 13.
If the demand for workers with Ph. Ds. in economics increases, we would expect
a. the wages of economists to increase in the short run and the number of economics employed to expend in the long run.
b. the supply of economists to increase in the short run and their wages to fall in the long run.
c. a rapid increase in the supply of economists, causing wages to remain constant.
d. the wages of economists to decline in the short run the number of economists employed to increase in the long run.
Answer:
a. the wages of economists to increase in the short run and the number of economics employed to expend in the long run.

Question 14.
According to __________ when prices decreases, demand rises, and when price increases, demand falls.
a. the Law of Diminishing Marginal Utility
b. Adam Smith
c. the law of demand
d. the elasticity of demand
Answer:
b. Adam Smith

Question 15.
The law of demand states that:
a. as the quantity demand rises, the price rises
b. as the price rises, the quantity demand rises
c. as supply rises, the demand rises
d. none of the above
Answer:
b. as the price rises, the quantity demand rises

Question 16.
The price elasticity of demand is the:
a. percentage change in price divided by the percentage change in quantity
b. percentage change in price divided by the percentage change in quantity demanded
c. dollar change in quantity demanded divided by the percentage change in quantity supplied.
d. A percentage change in quantity demanded divided by the percentage change in price
Answer:
d. A percentage change in quantity demanded divided by the percentage change in price

Question 17.
The demand for a product would be more inelastic
a. the greater is the time under consideration
b. the greater is the number of substitutes available to buyers
c. the less expensive is the product in relation to income
d. None of the above
Answer:
b. the greater is the number of substitutes available to buyers

Question 18.
If there is a price ceiling, which of the following is not likely to occur?
a. rationing by first-come-first-served basis
b. black markets
c. Grey markets
d. all sellers providing goods for free that were formerly not free
Answer:
d. all sellers providing goods for free that were formerly not free

Question 19.
The quantity demanded of a soft drink brand A has decreased. This could be because:
a. A’s consumers have has an increase in income
b. the price of A has increased.
c. A’s advertising is not as effective as in past.
d. The price of rival brand B has increased.
Answer:
b. the price of A has increased.

Question 20.
Suppose the demand for goods Z goes up when the price of goods Y goes down We can say that goods Z and Y are
a. perfect substitutes.
b. unrelated goods
c. complements
d. substitutes
Answer:
c. complements

Question 21.
Which of the following will NOT cause a shift in the demand curve for compact discs?
a. a change in the price of pre-recorded cassette tapes.
b. a change in wealth.
c. a change in income.
d. a change in the price of compact discs.
Answer:
d. a change in the price of compact discs.

Question 22.
Modern-day economy is based on the study of
a. Capital formation
b. Study of production
c. Employment
d. All of the above
Answer:
d. All of the above

Question 23.
“Determination of wage rate, distribution of national income “was the theory given by
a. Adam Smith
b. A. Marshall
c. Ricardo
d. Pigon
Answer:
b. A. Marshall

Question 24.
One s friends and relatives could be considered as ________ in regard to consumer behavior
a. impersonal influence
b. reference group influence
c. perceptual influence
d. institutional influences
Answer:
b. reference group influence

Question 25.
An imbalance between a consumer’s actual and desired state in which recognize that a gap or problem needs resolving is called
a. motive development
b. an attitude.
c. a self-concept
d. Product Evaluation
Answer:
a. motive development

Question 26.
As per Maslow’s Hierarchy of needs theory, the need for fulfillment, for realizing one’s own potential, and for fully one’s talents capabilities are examples of ______ needs.
a. self-actualization.
b. psychological
c. social
d. environmental
Answer:
a. self-actualization.

Question 27.
The buying behaviors of consumers, which require the least effort is
a. Low involvement in buying.
b. New buying situation.
c. Routine buying
d. Impulsive buying
Answer:
c. Routine buying

Question 28.
When there is a production process the marginal product of labor equals:
a. total output divided by total labour inputs.
b. total output minus the total labour inputs.
c. total output multiplied by total labour input.
d. total change produced by labour inputs.
Answer:
a. total output divided by total labor inputs.

Question 29.
The change to a new indifference curve following a rise in aggregate consumption caused by a price cut is:
a. a consumption effect.
b. a price effect.
c. an income effect.
d. a substitution effect.
Answer:
c. an income effect.

Question 30.
A combination study of economics, which dealt with wealth creation, as well as the study of man was an economics theory given by
a. Adam Smith
b. Ricardo
c. A. Marshall
d. Pigon
Answer:
c. A. Marshall

Question 31.
A utility function is a descriptive statement that relates total utility to
a. price
b. income
c. the production of goods and services.
d. the consumption of goods and services
Answer:
d. the consumption of goods and services

Question 32.
Marginal utility
a. is the extra output a firm obtains when it adds another unit of labor.
b. explains why product supply curves slope upward.
c. typically rises as successive units of a good are consumed.
d. is the extra satisfaction from the consumption of 1 more unit of some good or service.
Answer:
d. is the extra satisfaction from the consumption of 1 more unit of some good or service.

Question 33.
If profit is to rise as output expands, then marginal profit must be:
a. rising
b. falling
c. constant.
d. positive
Answer:
d. positive

Question 34.
According to the law of diminishing marginal utility:
a. as the price of a given product rises, the added benefit eventually diminishes
b. as the consumption of a given product rises, the added benefit eventually diminishes.
c. as the production cost for a given product rises, the added benefit eventually diminishes.
d. the demand curve for some product is upward-sloping
Answer:
b. as the consumption of a given product rises, the added benefit eventually diminishes.

Question 35.
Which of the following is consistent to the law of supply?
a. As the price of the product rises, centers paribus, suppliers will offer more for sale
b. As the price of a product falls, centers parbibus, suppliers will offer less for sale
c. As the price of a product rises, centers paribus the supply will remain steady
d. As the price of a product falls, centers paribus, the supply will remain steady
Answer
a. As the price of the product rises, centers paribus, suppliers will offer more for sale

Question 36.
A shift in the demand curve drawn in the traditional Price-Quantity space be caused by
a. a decrease in supply.
b. a fall in income.
c. a fall in price of a complementary good.
d. a fall in the number of substitute goods.
Answer:
b. a fall in income.

Question 37.
Price elasticity at a given price is not affected by
a. the price of complements.
b. the price of substitutes.
c. the consumer’s income
d. a change in tastes.
Answer:
c. the consumer’s income

Question 38.
The price elasticity of demand is the same thing as the negative of the
a. slope
b. reciprocal of slope.
c. the first derivative of the demand function.
d. reciprocal of slope times the ratio of price to quantity.
Answer:
c. the first derivative of the demand function.

Question 39.
The movement along an indifference curve reflecting the substitution of cheaper products for more expensive ones is:
a. supply effect
b. utility effect.
c. a substitution effect.
d. an income
Answer:
c. a substitution effect.

Question 40.
Supply is directly dependent on
a. Future market scenario
b. Technology changes
c. Goals of the firm .
d. All of the above
Answer:
d. All of the above

Question 41.
The demand curve of TV sales showed a movement towards left
a. It should decrease in demand
b. Prices will fall
c. Decrease the quantity of TV bought and sold
d. All of the above
Answer:
d. All of the above

Question 42.
When a consumer buys a good which of the following is the concept that is Not generated when taking care of utility
a. Average utility
b. Sum utility
c. Marginal utility
d. Total utility
Answer:
a. Average utility

Question 43.
Change in the quantity supplied is caused by a change in
a. price
b. income.
c. Weather.
d. energy costs.
Answer:
a. price

Question 44.
The shortage is a condition of:
a. Excess demand.
b. excess supply
c. a deficiency in demand.
d. market equilibrium.
Answer:
a. Excess demand.

Question 45.
The utility is measured by:
a. income.
b. wealth.
c. price.
d. value or worth.
Answer:
d. value or worth.

Question 46.
Net Benefit is maximized when:
a. marginal benefit equal marginal costs.
b. the slopes of the total benefits curve and total cost curve are equal.
c. All the above.
d. None of the above.
Answer:
c. All the above.

Question 47.
Marginal Analysis:
a. Is the optimal managerial decision involving comparing the marginal benefit with the marginal costs of a decision.
b. Refers to the change in total benefit arising from the managerial control variable.
c. Refers to the change in total costs arising from a change in the managerial control variable.
d. The additional revenues that stem from a yes-or-no decision.
Answer:
a. Is the optimal managerial decision involving comparing the marginal benefit with the marginal costs of a decision.

Question 48.
Marginal analysis can be used to
a. Determine how long to study for a test.
b. Determine how to get to your spring break destination^.e. plane = faster but more expensive, car= slower but less expensive).
c. Determine how much more to write on a workspaces page.
d. All the above.
Answer:
d. All the above.

Question 49.
A Marginal curve shows
a. the integral of the corresponding Total curve up to the quantity at which the marginal is being calculated.
b. The inverse of the corresponding of the Total curve to which it corresponds
c. the slope of the corresponding Total curve, computed at the same consumption quantity.
d. amount of utility derived from the consumption of each number of units
Answer:
c. the slope of the corresponding Total curve computed at the same consumption quantity.

Question 50.
Welfare definition of economics was given by
a. Adam smith
b. Ricardo
c. A. Marshall
d. Both b & c
Answer:
d. Both b & c

Question 51.
As per Robbins economics is the study
a. Which takes care of the wants of man
b. Ways to satisfy the wants of man
c. Collection of wealth to take care of wants of man
d. Both a & b
Answer:
d. Both a & b

Question 52.
When a relationship between DMU of a product and its prices is decided than it helps in determining
a. Total marginal value of a product
b. Average utility of product
c. Price of product in market
d. Total utility value of product
Answer:
c. Price of product in market

Question 53.
The laws of DMU are not helpful for
a. Social welfare program
b. Rationing of products
c. Determining the pricing of product
d. None of the above
Answer:
d. None of the above

Question 54.
As per the law of equal Marginal utility, consumer considers
a. Prices
b. Marginal utility
c. Availability of goods
d. Both a & b
Answer:
d. Both a & b

Question 55.
________ law is unrealistic in nature
a. Law of DMU
b. Law of Equi marginal utility
c. Both a & b
d. None of the above
Answer:
b. Law of equimarginal utility

Question 56.
If the price elasticity of demand is unit then a fall in price will
a. Reduce revenue
b. Leaves revenue unchanged
c. Increase revenue
d. None of the above
Answer:
b. Leaves revenue unchanged

Question 57.
If the cross elasticity of demand is -2:
a. The products are substitutes and demand is cross-price elastic
b. The products are substitutes and demand is cross-price inelastic.
c. The products are complements and demand is cross-price elastic
d. The products are complements and demand is cross-price inelastic
Answer:
c. The products are complements and demand is cross-price elastic

Question 58.
If the price elasticity of demand is negative number this means:
a. Demand is price elastic
b. Demand is price inelastic
c. The demand curve is downward sloping
d. An increase income will reduce the quantity demanded
Answer:
c. The demand curve is downward sloping

Question 59.
Demand is price inelastic, which means
a. An increase in price must raise profits
b. An increase in price decrease revenue
c An increase in price increase revenue
d. A decrease in price reduces sales
Answer:
c An increase in price increase revenue

Question 60.
Which best describe a supply curve?
a. The quantity consumers would like to buy in a market
b. The quantity producers are willing and able to sell at each and every price all other things unchanged
c. The quantity producers are willing and able to sell at each and every income all other things unchanged
d. The quantity producers are willing and able to sell at every point of time and all other things unchanged
Answer:
b. The quantity producers are willing and able to sell at each and every price all other things unchanged

Question 61.
Supply is likely to be more price elastic
a. In the short run rather than the long run
b. If factors of production are relatively immobile between industries
c. If there are very few producers
d. If it is easy to expand output
Answer:
d. If it is easy to expand output

Question 62.
The supply curve which is beginning at the origin has
a. A price elasticity of supply less than one
b. Price elasticity of supply equal to one
c. Price elasticity of supply less than one
d. Positive price elasticity of supply
Answer:
b. A price elasticity of supply equal to one

Question 63.
In the contraction of demand
a. The consumer moves upwards
b. The consumer moves downwards
c. Increase in price
d. Both a& c
Answer:
d. Both a& c

Question 64.
Giffin goods are
a. Goods that are not dependent on price increase
b. Have to be purchased cause there is no substitute for them
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 65.
Goods that represent social prestige are
a. Complimentary goods
b. Conspicuous consumption
c. Ignorance
d. Inferior goods
Answer:
b. Conspicuous consumption

Question 66.
The supply curve is
a. Positively stopped
b. Negatively stopped
c. Can stop either positive or negative
d. None of the above
Answer:
a. Positively stopped

Question 67.
What will the supplier do if cashew nuts production is good at this point in time?
Select the most appropriate
a. Decrease the supply and wait for the season when there is no production of cashew nut so that the prices can be increased
b. Offer to sell more quantities at a lower price
c. Can make no changes in the selling price of produce
d. None of the above
Answer:
a. Decrease the supply and wait for the season when there is no production of cashew nut so that the prices can be increased

Question 68.
A politician proposes reducing business taxes, a move she says will encourage risk-taking entrepreneurship. This proposed cut in business taxes is intended to stimulate the economy mainly through
a. an increase in aggregate supply
b. a decrease in aggregate demand
c. a decrease in aggregate demand
d. an increase in aggregate demand
Answer:
a. an increase in aggregate supply

Question 69.
On the basis of the use of utility dependent on the consumption of its quantity, the utility can be divided into ________ concepts
a. 5
b. 4
c. 3
d. None of the above
Answer:
c. 3

Question 70.
MU1/P1<Mu2/P2 means that
a. For consumer MU2/P2buying is more beneficial
b. It is the theory given by law of Equi-Marginal utility
c. It is law of demand curve
d. Both a & b
Answer:
d. Both a & b

Question 71.
When marginal utility falls than average utility
a. Marginally increases
b. Marginally falls
c. Increases
d. Decreases
Answer:
b. Marginally falls

Question 72.
DMU is
a. Diminishing marginal utility
b. Distributive marginal utility
c. Direct marginal utility
d. Display marginal utility
Answer:
a. Diminishing marginal utility

Question 73.
As more labor is added to a fixed amount of input, the rate at which output goes up begins to decrease. This is called
a. diminishing marginal utility
b. diminishing marginal productivity.
c. diminishing marginal costs.
d. diminishing marginal profit.
Answer:
b. diminishing marginal productivity.

Question 74.
If the cost of sugar rises and sugar is a major ingredient in jelly beans, then the jelly bean
a. demand curve shifts to the left.
b. supply curve shifts to the left.
c. supply curve shifts to the right.
d. demand and supply curves both shift to the right.
Answer:
c. supply curve shifts to the right.

Question 75.
A movement along the demand curve (drawn in Quantity-Price space) to the left may because by
a. an increase in supply.
b. a rise in income
c. a rise in the price of a complementary good.
d. a fall in the number of substitute goods.
Answer:
a. an increase in supply.

Question 76.
The output where diminishing returns to production begin is also the output where
a. marginal cost is at a minimum.
b. average total cost is a minimum.
c. average variable cots is at a minimum.
d. marginal and average cost interest.
Answer:
a. marginal cost is at a minimum.

Question 77.
Which of the following statements about marginal cost is incorrect?
a. A U-shappd marginal cost curve implies the existence of diminishing returns over all ranges of output.
b. When marginal cost equal average cost, average cost is at minimum.
c. In the short run, the shape of the marginal cost curve is due to the law of diminishing marginal returns.
d. When marginal1 cost is faffing fotaf cost fs rising
Answer:
a. A U-shappd marginal cost curve implies the existence of diminishing returns over all ranges of output.

Question 78.
In the short run, diminishing marginal returns are implied by
a. rising marginal cost.
b. rising average cost
c. rising average variable cost.
d. all of the above
Answer:
a. rising marginal cost.

Question 79.
In Dx=f(Px,T,Y) Y is
a. Income level of consumer
b. Tastes of consumer
c. Quantity of demand of goods
d. None of the above
Answer:
a. Income level of consumer

Question 80.
Individual demand schedule collectively make
a. Market demand schedule
b. Economic demand schedule
c. Production demand schedule
d. All of the above
Answer:
a. Market demand schedule

Question 81.
A graphical representation of demand is
a. Demand function
b. Demand schedule
c. Demand curve
d. None of the above
Answer:
c. Demand curve

Question 82.
In cardinal utility approach
a. The utility is measured in its absolute value
b. The utility can not be measured in its absolute value
c. Utility is calculated with the concept of evaluation with other utility
d. None of the above
Answer:
a. The utility is measured in its absolute value

Question 83.
What is true in a situation of Diminishing marginal returns to Labour?
a. Diminishing product of labour must be falling
b. Marginal product of labour must be rising
c. Marginal product of labour must be falling
d. None of the above
Answer:
b. Marginal product of labour must be rising

Question 84.
As more labour is added to a fixed amount of input, the rate at which output goes up, decreases. This is called
a. diminishing marginal utility.
b. diminishing marginal productivity.
c. diminishing marginal costs.
d. diminishing marginal profit.
Answer:
b. diminishing marginal productivity.

Question 85.
The main factors that influence supply is/are
a. Input prices
b. Technology.
c. Expectations.
d. All of the above.
Answer:
c. Expectations.

Question 86.
When the liquidity trap occurs the demand for money:
a. Is perfectly interest elastic
b. Is perfectly interest inelastic
c. Means that an increase in money supply leads to a fall in the interest rate
d. Means that an increase in the money supply leads to an increase in the interest rate
Answer:
a. Is perfectly interest elastic

Question 87.
When economists say the demand for a product has increased, they mean that the
a. demand curve for the product has shifted to the left.
b. price of the product has fallen, and consequently consumers are buying more of the product.
c. cost of producing the product has consequently consumers are buying more of the product.
d. amount of the product that consumers are willing to purchase at various prices has increased.
Answer:
d. amount of the product that consumers are willing to purchase at various prices has increased.

Question 88.
The law of supply:
a. reflects the amount, which want to offer at each price in a series of prices.
b. is reflected in an up sloping supply curve.
c. show that the relationship between price and quantity supplied is positive.
d. Is reflected in all of the above
Answer:
d. Is reflected in all of the above

Question 89.
Prices rate is determined on the basis of demand and supply, such kind of an economy is
a. Market driven economy
b. Production driven economy
c. Seller driven economy
d. None of the above
Answer:
a. Market driven economy

Question 90.
To make sports car a demand, a company should check
a. If people will be able to pay for it
b. If it can be produced in large scale
c. If people have a desire for sports car
d. Both a & c
Answer:
d. Both a & c

Question 91.
The law of “leteris paribus “says that
a. Purchase is directly dependent on price
b. Demand of quantity is dependent on time
c. Demand of quality is dependent on time
d. Both a & b
Answer:
d. Both a & b

Question 1.
With a fall in the price of a commodity –
a. Demand for the commodity increases
b. Demand for the commodity decreases
c. Quantity demanded for the commodity contracts
d. Quantity demanded of the commodity expands.
Answer:
a. Demand for the commodity increases
Hint
As per the Law of Demand fall in price of a product is inversely proportion to the demand of that product. Thus when the price falls demand increases.

Question 2.
A consumer changes, his purchase of a
commodity from point T on AB curve to point R on the A, B, curve. This represents –

a. A contraction in demand
b. An expansion in demand
c. An increase in demand
d. A decrease in demand.
Answer:
c. An increase in demand
Hint
The characteristic feature of Law of Demand is when the price of a commodity rises, people buy less of that commodity and when the price falls, people buy more of it ceteris paribus (provided other things remaining the same). If there is a change in influencing factor other then price then the demand curve may shift either to right or left. When demand curve shifts to right it shows that the quantity demanded has increased for a particular price. The factors responsible for such change could be taste of the consumer has changed, purchasing power of the consumer has changed etc.

Question 3.
A consumer would be in equilibrium if he does not has to pay any price for the commodity consumed at the level of consumption where –
a. Total utility in maxim
b. Marginal utility is zero
c. He has reached at the point of full satisfaction
d. All of the above
Answer:
d. All of the above
Hint
As per the ordinal approach of Utility
The consumer gets full satisfaction = The time when marginal utility becomes zero total utility is maximum.

Question 4.
In figure below, new price line AB, reflects-

a. A fall in income of the consumer
b. A fall in the price of commodity-Y
c. A fall in the price of commodity-X
d. A rise in income of consumers and a simultaneous rise in the prices of both commodities X and Y.
Answer:
c. A fall in the price of commodity-X
Hint
The Law of demand has a negative slope which means as the price falls the demand for the product increases and as the price rises the demand decreases, thus quantity demanded is inversely proportional to the price of a good.

Question 5.
Which of the following statements is wrong?
a. With the increase in the level of income, demand for all types of com moderates increases
b. With the increase in the level of income, demand for luxuries and comforts increases
c. With the increase in the level of income demand for inferior goods falls
d. With the increase in the level of income, demand for necessities almost remains unchanged.
Answer:
a. With the increase in the level of income, demand for all types of com moderates increases
Hint
Exceptions to the law of demand eg.
Inferior goods – in such case when the income of the consumer increases he shifts his purchase from inferior goods to superior goods even if inferior goods price falls.

Question 6.
On a straight-line demand curve intercepting both horizontal and vertical axes, the elasticity of demand would be equal to the unit at the-
a. Middle point on the curve
b. Point where the curve forms an intercept with the x-axis
c. Point where the curve forms an intercept with y-axis
d. None of the above.
Answer:
a. Middle point on the curve
Hint
Price elasticity of demand can be measured in three ways

• Arithmetic method or percentage method
• Total expenditure method
• Graphic method or point method

Graphic Method – demand is measured on different points on a straight-line demand curve and then elasticity is calculated as per the formula written below
Point Elasticity = Lower segment of the demand curve below the given point/Upper segment of the demand curve above the given point

Let us take B as the midpoint of the straight-line demand curve
Thus at middle point (suppose B) point elasticity = lower segment of the demand curve at midpoint (BC)/Upper segment of the demand curve above the given point(AB)
Point elasticity = BC/AC = 1

Question 7.
With an increase in the supply of the commodity, equilibrium price will not fall if
a. Demand also decreases
b. Demand also increases
c. Demand increases in the same proportion in which supply has increased.
d. Demand falls in the same proportion in which supply has increased.
Answer:
c. Demand increases in the same proportion in which supply has increased.
Hint
An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity. But if an equilibrium is to be managed then demand has to increase in the same proportion. Thus equilibrium price will not fall if demand increases in the same proportion in which supply has increased.

Question 8.
Any change in demand will leave the equilibrium quantity unaffected if:
a. Supply increases
b. Supply decreases
c. The supply curve is perfectly elastic
d. The supply curve is perfectly inelastic
Answer:
d. Supply curve is perfectly inelastic
Hint
Perfectly inelastic means that quantity demanded or supplied is unaffected by any change in price. In such a case supply is completely nonresponsive to change in prices Here elasticity is equal to zero. Any change in demand will leave the equilibrium unaffected in the case of a perfectly inelastic supply curve.

Question 9.
If with an increase in the price of a commodity, quantity demanded of the commodity rises, it must be a-
a. Normal good
b. Abnormal good
c. Giffen good
d. Necessity
Answer:
c. Giffen good
Hint
Giffen goods: these are the goods which people keep on buying in spite of an increase in price because they have no other substitute for them eg. basic goods, (potatoes, sugar, etc). this is known as the Giffen paradox. There is a positive price .effect in the case of Giffen goods.

Question 10.
An indifference curve slopes downward because more of one commodity and less of another results in in-
a. Same satisfaction
b. Greater satisfaction
c. Maximum satisfaction
d. Decreasing expenditure
Answer:
a. Same satisfaction
Hint
An indifference curve slopes downward because more of one commodity and less of another results in the same satisfaction. An indifference curve shows all the various combinations of two goods that, give an equal amount of satisfaction to a consumer.

Question 11.

New advances in technology result in more output of commodity Y from given outputs. Which one of the above figures is best describing the situation? The correct option is
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4
Answer:
11. c
Figure 3

Question 12.
The concept of the indifference curve to explain consumer’s equilibrium was propounded among others by
a. Alfred Marshall
b. John R Hicks
c. Paul A Samuelson
d. Amartya Sen
Answer:
b. John R Hicks
Hint
An indifference curve was given by John R Hicks. This approach was developed to remove the drawbacks of Marshallian approach. This approach can be called the ordinal concept.

Question 13.
Total utility derived from the consumption of a commodity will begin to fall —
a. with every additional unit consumed
b. when total utility curve becomes flat
c. when marginal utility starts falling
d. when marginal utility becomes negative
Answer:
d. when marginal utility becomes negative
Hint
The law of diminishing marginal utility is directly linked for determining the price of the commodity. Observations for law df DMU

• When TU rises at decreasing rate, MU diminishes
• When TU is maximum, MU is zero
• When TU decreases, MU becomes negative
• TU increases so long as MU is positive

Question 14.
Match the following

Table

The correct option is —
a. X(iv); Y(iii); Z(ii); W(i)
b. X(iii); Y(ii); Z(i); W(iv)
c. X(ii); Y(i); Z(iii); W(iv)
d. None of the above.
Answer:
a. X(iv); Y(iii); Z(ii); W(i)
Hint
Expansion – If the price falls consumer moves downward on the demand curve and purchases more which is called expansion Inferior goods – in such a case when the income of the consumer increases he shifted his purchase from inferior goods to superior goods even if inferior goods price falls. Complimentary goods – Some goods are so complementary to each other that they can not be segregated thus even if there is a fall in the price of one product the increase in the price of the other is immaterial Decrease in demand – when there is a fall in the quantity demanded due to falling in the price of substitute goods.

Question 15.
With a fall in the price of a commodity-X demand for commodity-Y also falls. This best represents—
a. An exception to the law of demand
b. Universal application of the law of supply
c. Relationship between two goods that are substitutes for each other
d. A market economy where pricing decisions are difficult to make.
Answer:
c. Relationship between two goods that are substitutes for each other
Hint
When a change in the price of good ‘b’ causes the change in demand of good ‘a’ in the same direction.eg. tea and coffee is a substitute to each other. In the present case With a fall in the price of a commodity-X demand for commodity-Y also falls shows 1 that changes are in the same direction thus they are substitutes for each other.

Question 16.
A functional relationship is given as follows:
QN = f(PN)
Where QN stands for quantity demanded-of commodity-N and PN stands for the price of commodity-No The law of demand states that other variables remain constant, there is an inverse relationship between the price of a commodity and its quantity demanded. It means that if –
a. The price of a commodity goes up, quantity demanded of its substitute will fall.
b. The demand for a commodity1 goes up, its price will also go up
c. The price of a commodity falls, the quantity demanded will rise
d. None of the above.
Answer:
c. The price of a commodity falls, its quantity demanded will rise
Hint
The given statement is related to the Law of Demand. The law states that all else being equal, as the price of a product increases, a lower quantity will be demanded; likewise, as the price of a product decreases, a higher quantity will be demanded.

Question 17.
If consumption of each additional unit of a commodity is expected to give an increasing marginal utility, the total utility derived by the consumer will
a. Initially rise, but eventually, fall
b. Rise at an increasing rate as long as marginal utility keeps rising
c. Rise at an increasing rate as long as marginal utility is more than zero
d. Not reflect an increasing trend.
Answer:
b. Rise at an increasing rate as long as marginal utility keeps rising
hint
The law of diminishing marginal utility is directly linked to determining the price of the commodity. Observations for the law of DMU

• When TU rises at a decreasing rate, MU diminishes
• When TU is maximum, MU is zero
• When TU decreases, MU becomes negative
• TU increases so long as MU is positive

Question 18.
In the case of a commodity for which no price is to be paid, a consumer will reach equilibrium –
a. At any point on the vertical axis
b. At the point where the falling marginal utility curve cuts the horizontal axis
c. Only when the consumer is taken away from the table
d. Only when the marginal utility begins to fall.
Answer:
b. At the point where the falling marginal utility curve cuts the horizontal axis
Hint
In case of a commodity for which no price is to be paid, a consumer will reach equilibrium at the point where the falling marginal utility curve cuts the horizontal axis.

Question 19.
Which of the following is not correct? Normally, an indifference curve
a. Slopes downwards from left to right
b. Does not have a concave shape
c. Can touch any other indifference curve
d. Can cut through a budget line.
Answer:
c. Can touch any other indifference curve
Hint
No two indifference curve intersects each other.
Features of indifference curve

• The indifference curves must slope down from left to right.
• A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.
• Curve is moving from up to down between two commodities
• Between X and Y axis which represents two commodities, it shows various combinations which can be purchased by a consumer.
• When budget line and indifference curves are drawn together then the budget line will be tangent to only one curve.
• When the amount of one good is increased the quantity of other good decreases so the curves are downward to the right

Question 20.

In the figure above, the highest desired level of satisfaction is being represented by –
a. Point A
b. Point B
c. Point C
d. Point D.
Answer:
c. Point C
Hint
This figure is related to the indifference curve. A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.

Question 21.
If the income elasticity coefficient for the demand of a Commodity-X is +0.5; with an increase in the consumer’s income; the share of income spent on this commodity will-
a. Rise
b. Remain the same
c. Fall
d. Not be determined.
Answer:
a. Rise
Hint
The income elasticity cl demand measures the responsiveness of demand for a good or service to changes in income. Thus If Income increases the spending on goods increases Thus In the case of positive elasticity with an increase in income spending on commodities will rise.

Question 22.
Cross elasticity of demand for Commodity-X and Commodity-Y is (-) 0.5.lt means that –
a. Commodity-X and Commodity-Yare, not related
b. An increase in the price of Commodity-Y results in a fall in the price of Commodity-X
c. Commodity-X and Commodity-Yare substitute goods
d. None of the above.
Answer:
d. None of the above.
Hint
Cross price elasticity is negative — when a change in the price of good ‘b ‘ causes the change in demand of good opposite direction e.g pen and Ink which are complementary to each other.

Question 23.
Which of these is not a property of the Indifference Curve (IC):
a. I.C. slopes downward to right.
b. I.C. is never convex to the origin
c. I.C. never intersects each other
d. I.C. represents a higher level of satisfaction.
Answer:
b. I.C. is never convex to the origin
Hint
Properties of the Indifference curve are

• The indifference curves must slope down from left to right
• A higher indifference curve that is above and to the right of another indifference curve represents e higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.
• The cove is moving from up to down between two commodities
• Between X and Y axis which represents two commodities, it shows various combinations which can be purchased by a consumer.
  When budget line and indifference curves are drawn together then the budget line will be tangent to only one curve.
• When the amount of one good is increased the number of other goods decreases so the curves are downward to the right
• IC never intersects each other
• The relative nature of various goods is explained e.g. Inferior and superior

Question 24.
When ed > 1, it means: –
a. Perfectly inelastic demand
b. Perfectly elastic demand
c. Relatively elastic demand
d. Relatively inelastic demand
Answer:
c. Relatively elastic demand
Hint
Relatively elastic demand is a concept where a change in the price results in more than proportionate change in the quantity demanded

• For CG Fall n the price of 3% leads to an increase in demand of 10%,
• elasticity coefficient is always eater than 1.
• Demand curve s flatter in shape

Question 25.
When ed < 1, it means: –
a. Perfectly inelastic demand
b. Perfectly elastic demand
c. Relatively elastic demand
d. Relatively inelastic demand
Answer:
d. Relatively inelastic demand
Hint
Relatively inelastic demand is a concept where a great change in price leads to a small change in quantity

• Elasticity coefficient is less than 1
• The demand curve is relatively steeper

Question 26.
If the price falls by 5%, the quantity supplied falls by the same 5%. Which type of elasticity is this?
a. Unitary Elasticity of Supply
b. Unitary Elasticity of Demand
c. Relatively Elasticity of Supply
d. Relatively Inelasticity of Supply
Answer:
a. Unitary Elasticity of Supply
Hint
Unitary elastic supply — here elasticity coefficient is equal to 1. Here the percentage of fall arid percentage of quantity supply fall are same. thus if the price falls by 10% supply also falls by 10%. A supply curve is a straight line through the origin.

Question 27.
In which type of approach, the utility is immeasurable?
a. Cardinal utility
b. Ordinal utility
c. Both (a) and (b)
d. None of these
Answer:
b. Ordinal utility
Hint
Ordinal approach The concept was first introduced by Hicks He said that utility can not be measured in numbers instead it can be depicted in a comparable manner. As per this approach, the utility can not be measured in units but it can be determined by preferences so whenever demand for a product Is being accessed then it can be determined on the basis of preferences macle by consumers. This is more realistic and better than cardinal utility

Question 28.
Which type of goods are related to the exceptions to the law of demand?
a. Giffen Goods
b. Substitute Goods
c. Complimentary Goods
d. Both (a) and (c)
Answer:
d. Both (a) and (c)
Hint
Exceptions to the law of demand

• Prestige goods or conspicuous goods
• Inferior goods.
• Price expectations:
• Ignorance of the consumer:
• Giffen goods
• Complimentary goods
• Fashion dependent goods

Question 29.
When a consumer’s real income increases, the price of which type of good falls down?
a. Luxurious Goods
b. Giffen Goods
c. Normal Goods
d. Inferior Goods
Answer:
d. Inferior Goods
Hint
Inferior goods – in such a case when the income of the consumer increases he shifted his purchase from inferior goods to superior goods even if inferior goods price falls.

Question 30.
Inelasticity of demand, what does elasticity means?
a. Eagerness
b. Willingness
c. Responsiveness
d. Both (a) and (b)
Answer:
c. Responsiveness
Hint
Elasticity describes the responsiveness (in percentage terms) of the quantity demanded to changes in price.

Question 31.
The raw of diminishing marginal utility applies in:
a. Long Run
b. Short Run
c. Very Long Run
d. Very short Run
Answer:
b. Short Run
Hint
The Law of diminishing marginal utility states that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product. This is possible only in the short run.

Question 32.
“Indifference curve never cuts each other”- This statement is
a. True
b. False
c. Partly True
d. Partly false
Answer:
a. True
Hint
The indifference curve never intersects each other because a higher curve will never show the same satisfaction level as the lower curve at any point.

Question 33.
What is the relationship between Demand and supply
a. Direct Relation
b. Inverse Relation
c. No relation
d. None of these
Answer:
c. No relation
Hint
Law of Demand and Law of supply are two different laws. There is no relation between the two.

Question 34.
The consumer is at equilibrium when the indifference curve is to the Budget line
a. Horizontal
b. Vertical
c. Tangent.
d. None
Answer:
c. Tangent.
Hint
When budget line and indifference curves are drawn together then the budget line will be tangent to curve at equilibrium.

Question 35.
When elasticity of demand is Zero, i.e. ed=0, it is ____________?
a. Perfectly Inelastic Demand
b. Unitary elastic Demand
c. Perfectly elastic Demand
d. Inelastic Demand
Answer:
a. Perfectly Inelastic Demand
Hint
Perfectly inelastic demand is when there is no change in the demand of the product with the change in price.

• thus elasticity is zero.
• Demand curve is parallel to Y-axis

Question 36.
If there is a utility of many combinations of A & B, then it is the case of-
a. Indifference curve
b. PPC
c. Budget line
d. None of these
Answer:
a. Indifference curve
Hint
The indifference curve theory of ordinal utility theory is an important concept in Economics, as it suggests a more realistic way to analyze consumer behavior. An indifference curve shows all the various combinations of two goods that, give an equal amount of satisfaction to a consumer. There is a utility of many combinations of A & B on the indifference curve.

Question 37.
If the demand for blankets increases from 4600 to 5700 and the price decreases ‘from 220 to 190. Find elasticity of demand
a. 2.25
b. 1.50
c. 1.75
d. 1.85
Answer:
c. 1.75
Hint
The income elasticity of demand measures the responsiveness of demand for a good or service to changes in income.
E= percentage change in the quantity of good ‘A’/percentage change in price
The above formulae show how the demand for goods changes as the income of consumers changes
Percentage change in the quantity of good = 5700-4600/4600 × 100
= 23.91%
Percentage change in price = 220-190/220 × 100
=13.64%
E = 23.91/13.64 = 1.75

Question 38.
The curve which neither touches X-axis nor is parallel to X-axis?
a. Indifference Curve
b. PPC
c. Both (a) & (c)
d. None of the above
Answer:
a. Indifference Curve
Hint
The indifference curve is convex to origin so it neither touches X-axis nor is parallel to Y-axis.

Question 39.
If the real income of the person rises, then demand of which type of goods increases-
a. Normal
b. Inferior
c. Conspicuous
d. none of the above
Answer:
a. Normal
Hint
As the price falls the demand for the product increases and as the price rises the demand decreases, x thus quantity demanded is inversely proportional to the price of a good. This happens in the case of normal goods.

Question 40.
On subsequent consumption of a product the utility increase at _________ rate.
a. Increasing
b. Decreasing
c. Variable
d. None of the above
Answer:
b. Decreasing
Hint
The Law of diminishing marginal utility states that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product. Thus on subsequent consumption of a product, the utility increases at decreasing rate.

Question 41.
In the case of MNC. which goods are not beneficial
a. Demerit goods
b. Poor Goods
c. Normal Goods
d. None of the above
Answer:
b. Poor Goods
Hint
MNC will produce only normal goods.

Question 42.
____________ goods are the products which the people continue to buy even at high prices due to lack of substitute products-
a. Inferior goods
b. Normal goods
c. Giffen goods
d. Luxury goods
Answer:
c. Giffen goods
Hint
Giffen goods: these are the goods which people keep on buying in spite of an increase in price because they have no other substitute for them eg. basic goods, (potatoes, sugar, etc). this is known as the Giffen paradox. There is a positive price effect in the case of Giffen goods.

Question 43.
Which amongst the following is incorrect in relation to the assumption of DMU.
a. All the units are homogeneous
b. The units are of reasonable size
c. More than one commodity is used at a time
d. Consumption is continuous.
Answer:
c. More than one commodity is used at a time
Hint
Assumptions of Law of DMU

• The marginal decision rule states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost.
• Constant marginal utility of money
• Consumption to be continuous
• The utility is cardinally measurable
• The hypothesis of independent utilities
• The taste and income of the consumer does not change
• The units of the commodity are identical
• There is no time gap between the consumptions
• The standard unit of consumption

Question 44.
When the price of coffee falls, the demand for Tea will?
a. Rise
b. Fall
c. Remains unchanged
d. Any of the above
Answer:
b. Fall
Hint
In the case of substitution, the change in the price of good ‘b’ causes the change in demand of good ‘a’ in the same direction.eg. tea and coffee is a substitute to each other.
In the present case With a fall in the price of a commodity coffee demand for commodity tea also falls shows that changes are in the same direction

Question 45.
Inferior goods have ……………………… and luxury goods have ………………………..
a. Negative income elasticity, Income elasticity greater than 1
b. Income elasticity greater than income elasticity
c. Positive income elasticity, negative income elasticity
d. Can’t say.
Answer:
a. Negative income elasticity, Income elasticity greater than 1
Hint
Inferior goods have negative elasticity of demand. Luxury goods have income elasticity greater than 1.

Question 46.
Which of the following pair of goods is an example of substitutes?
a. Pen and Ink
b. Gas and Kerosene
c. Shirt and Trousers
d. Tea and Sugar
Answer:
b. Gas and Kerosene
Hint
Substitute or substitute good is a product or service that a consumer sees as the same or similar to another product.

Question 47.
Total utility is maximum when:
a. Marginal utility is equal to average utility
b. Marginal utility is zero
c. Marginal utility is at its highest point
d. The average utility is maximum
Answer:
b. Marginal utility is zero
Hint
Observations for the law of DMU

• When TU rises at a decreasing rate, MU diminishes
• When TU is maximum, MU is zero
• When TU decreases, MU becomes negative
• TU increases so long as MU is positive

Question 48.
On which of the following Law, Law of Demand is based?
a. Total utility
b. Diminishing marginal utility
c. Equi-marginal utility
d. Cardinal utility
Answer:
b. Diminishing marginal utility
Hint
This law of DMU forms the basis of the law of demand, the law of Equi-marginal utility, the elasticity of demand, etc.

Question 49.
The indifference curve approach does not assume:
a. Ordinal measurement of satisfaction
b. Consistent consumption pattern behavior of consumers
c. Rationality on the parts of consumers
d. Cardinal measurement of utility
Answer:
d. Cardinal measurement of utility
Hint
Assumptions of indifference curve approach

• The consumer is rational and he is interested to maximize his total utility.
• The utility can not be measured
• The consumer can rank his various combination of goods according to the satisfaction or utility
• The principle of diminishing marginal rate of substitution is assumed.
• The consumer, it is assumed, is consistent in his behavior during a period of time.
• The goods consumed by the consumer are substitutable.
• There are many combinations of the, two commodities that are equally preferred by a consumer and he is indifferent as to which of the two he receives.
• Consumers have full information about the relevant aspects of the economic environment
• A combination of having more commodities is more satisfying than a combination of having fewer commodities

Question 50.
In which type of price elasticity of supply, a very insignificant change in price leads to an infinite change in quantity.
a. Relatively elastic
b. Perfectly inelastic
c. Relatively inelastic
d. Perfectly elastic
Answer:
a. Relatively elastic
Hint
Relative elastic supply – For a given rise in price, the rise in supply will be proportionately larger. Here elasticity is greater than 1.

Question 51.
How does the demand curve move in case of exception to Law of demand?
a. Upward
b. Downward
c. Positive
d. Negative
Answer:
c. Positive
Hint
The demand curve slopes downward from left to right. It has a negative slope showing that the two variables price and quantity work in opposite directions. In case of exception, the two variables don’t work in the opposite directions so the demand curve moves in a positive direction. For example, certain commodities like diamonds, sports cars, etc., are purchased as a mark of distinction in society, If the price of these goods rises, the demand for them may increase instead of falling.

Question 52.
In the Case, Good X and Good Yare substitute, what will be the impact on Good X for an increase in the price of Good Y?
a. Demand for good X will decrease
b. Demand for good X will increase
c. The market price of good X will decrease
b. Quantity demanded of goods X will increase.
Answer:
b. Demand for good X will increase
Hint
In the case of substitution, the change in the price of good ‘b’ causes the change in the demand of good ‘a’ in the same direction. eg. tea and coffee is a substitute to each other. In the present case With an increase, in the price of a commodity Y demand for commodity X also increases shows that changes are in the same direction

Question 53.
According to Marshall, the utility can be measured by which of the following approaches?
a. Both Cardinal and Ordinal Approach
b. Ordinal Approach
c. Cardinal Approach
d. Nominal Approach
Answer:
c. Cardinal Approach
Hint
Cardinal approach suggests that utility can be measured in imaginary cardinal numbers 1„3,10, etc. It argues that a consumer has the capacity to measure the level of satisfaction that person derives from the consumption of a given quantity of a commodity.

Question 54.
Which of the following is not an assumption of the difference curve approach of determining consumers?
a. Satisfaction is measured ordinarily
b. Consumer consumption behaviors is consistent
c. The utility is measured cardinally
d. Consumers are rational.
Answer:
c. Utility is measured cardinally
Hint
Assumptions of indifference curve approach

• The consumer is rational and he is interested to maximize his total utility.
• The utility can not be measured
• The consumer can rank his various combination of goods according to the satisfaction or utility
• The principle of diminishing marginal rate of substitution is assumed.
• The consumer, it is assumed, is consistent in his behavior during a period of time.
• The goods consumed by the consumer are substitutable.
• There are many combinations of the, two commodities that are equally preferred by a consumer and he is indifferent as to which of the two he receives.
• Consumers have full information about the relevant aspects of the economic environment
• A combination of having more commodities is more satisfying than a combination of having fewer commodities

Question 55.
In the case of two complementary goods a rise in the price of one commodity will induce:
a. An upward shift in demand for the other commodity
b. A rise in the price of the other commodity
c. No shift in the demand for the other commodity
d. A downward shift in demand for the other commodity.
Answer:
d. A downward shift in demand for the other commodity.
Hint
Some goods are so complementary to each other that they can not be segregated thus even if there is a fall in the price of one product the increase in the price of another is immaterial. If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in; less of each goodwill be demanded. When two goods are complements, they experience joint demand. For example, the demand for razor blades may depend upon the number of razors in use

Question 56.
A manufacturer supplies goods in such a way that if the price rises by 10%, he is prepared to supply 10% more. This supply is best described as:
a. Inelastic
b. Unit-inelastic
c. Unit-elastic
d. Relatively elastic.
Answer:
c. Unit-elastic
Hint
Unitary elastic supply – here elasticity coefficient is equal to 1. A percentage in price will produce the exact same percentage change in quantity. Thus if the price rise by 10% supply also rises by 10%. The supply curve is a straight line through the origin.

Question 57.
If a 20% change in the price of a commodity does not result in any change in the quantity demanded, which type of price elasticity of demand will be in this case?
a. Unitary elastic
b. Relatively elastic
c. Perfectly elastic
d. Perfectly inelastic.
Answer:
d. Perfectly inelastic.
Hint
Perfectly inelastic demand is when there is no change in the demand of the product with the change in price.

• thus elasticity is zero.
• The demand curve is parallel to Y-axis.

Question 58.
Which of the following does not lead to an increase in an equilibrium price for a consumer?
a. An ‘increase in supply accompanied by a decrease in demand
b. A decrease in supply accompanied by an increase in demand
c. A decrease in supply without a change in demand
d. An increase in demand without a change in supply.
Answer:
d. An increase in demand without a change in supply.
Hint
An equilibrium price (also known as a “market-clearing” price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands. When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market clearing price, the quantity is the equilibrium quantity. Thus a seller has to supply goods at a price that is acceptable to consumers. When there is an increase in the income of consumers then there is an increase in demand which in turn pressurizes the supplier to increase supply and that leads to an increase in price to reach equilibrium. An increase in demand without a change in supply does not lead to an increase in equilibrium price.

CS Foundation Business Economics Notes