Study Material for Slow Learners Students

STUDY MATERIAL FOR SLOW LEARNERS STUDENTS

SUB.-ECONOMICS MICRO ECONOMIC THOERY

UNIT I &II

Q1. What do you mean by economizing of resources?

Ans. Efficient use of available scarce resources

Q2. What is micro economics?

Ans. It is the study of the behavior of individual economic units like

Determination of price, wages, income of individuals and firms.

Q3. What is macro economics?

Ans. It is a study of aggregates of the economy as a whole. Eg. Level of

Income and output.

Q4. Why does economic problem arise?

Ans. Economic problem arises primarily due to scarcity and alternative uses of resources.

Q5. Define production possibility Curve?

Ans. It is a curve which shows all possible combination of two goods Which can be produced with the given resources and technology.

Q6. What is an opportunity cost?

Ans. Opportunity cost of a factor is the value in its next best alternative use.

Q7. What is the problem of scarcity?

Ans. Scarcity refers to the limited resources in relation to demand.

Q8. What is an economic problem?

Ans. Economic problem is the problem of making of choice since resources are limited.

Short Answer Questions ( 3&4 Marks)

Q1. Explain the central problems of an economy

Ans. a) What to produce: It refers to the problem of what goods and services are to be produced-

Consumer or producer

b) How to produce’s refers to the choice of techniques or methods of production of goods

And Services i.e ,labour-intensive or capital intensive.

c) For whom to produce?

It refers to the distribution of income and wealth among the factors of production.

Q2. Draw a PPC curve and show the following:-

a) Growth of resources.

b) Under utilization of resources.

c) Fuller utilization of resources.

Ans.

y goods

a Growth of resources

c Fuller utilization of resources

b Under utilization of resources

Q3. Explain opportunity cost with an example.

Ans. It refers to the value of the next best alternative use.

Eg. Suppose a doctor braving private clinic in Delhi is earning Rs. 5

lakhs annually. There are two other alternatives for him.

One:- Joining a Govt. hospital in Bangalore earning Rs. 4 lakhs

annually .

Two:- Opening a clinic in his home town in Mysore and earning 3

lakhs annually.

The opportunity cost will be joining Govt. hospital in Bangalore.

Q4. Distinguish between Micro and Macro Economics.

Ans.

Microeconomics / Macroeconomics
1. It is the study of individual units of an economy
2.It deals with allocation of resources
3.It is also called price theory / 1.It is the study of the whole economy
2.It deals with growth and development of resources
3.It is also called income and employment theory theory.

Q5. What is opportunity cost? Calculate the marginal opportunity cost.

X : 0 1 2 3 4 5

Y : 90 85 75 60 40 10

Ans. The rate of sacrifice of one good to produce another good is called

Marginal opportunity cost.

X / Y / MOC
0 / 90 / --
1 / 85 / 05
2 / 75 / 10
3 / 60 / 15
4 / 40 / 20
5 / 10 / 30

Very Short Answer Questions ( 1 mark each)

Q1. Define total utility?

Ans. It signifies the total satisfaction which a consumer gets by

Consuming all the units of a commodity.

Q2. How is marginal utility derived from total utility?

Ans. It is defined as an addition made to the total utility by consuming

an additional unit of a commodity.

MUn = TUn – TUn-1

Q3. What happens to TU when MU is Zero?

Ans. TU is maximum when MU is Zero.

Short Answer Questions 3 or 4 Marks

Q1. Distinguish between TU and MU with the help of a diagram.

Ans.

1. TU increases at diminishing rate when MU is declining and

Positive.

2. TU is maximum, MU is ‘0’ (Zero)

3. When MU becomes Negative, TU declines.

Very Short Answers (1 mark)

Q1. Give the meaning of demand.

Ans. It refers to the quantity of a commodity which a consumer is willing to buy at a given price at is given time.

Q2. Mention any two factors that affect demand of a commodity.

Ans. 1- Price of the commodity

2- Income of the consumer

Q3. What is law of demand?

Ans. It states that at a higher price, consumer will buy less of commodity and vice versa, other factors remaining constant.

Q4. What is a demand schedule?

Ans. It is a tabular presentation which shows different quantities of aCommodity demanded at different prices in a given period of time.

Q5. What is demand Curve?

Ans. It is a graphical representation of change in demand due to change in price of a commodity.

Q6. What happens to the demand for a good when the price of the substitute good falls?

Ans. The demand of the good will fall.

Q7. When does a consumer buy less of a commodity at a given price?

Ans. A consumer buys less of a commodity when income decreases or consumer develops unfavorable taste.

Q8. Define market demand?

Ans. It refers to the sum total of the quantities demanded by all the consumers in the market at a given price and at a given point of time.

Q9. What cause changes in demand?

Ans. It is a situation when demand changes due to other factors other than the price.

Q10. Give two examples of substitute goods.

Ans. eg.1) Tea & Coffee 2) Colgate tooth paste & Pepsodent, Tooth paste/ toothpowder.

Q11. How is percentage change in quantity demanded calculated?

Ans. Percentage change in quantity demanded = Q x 100

Short Answer Questions (3/4 Marks)

Q1. Draw demand curves showing price elasticity equals to a) Zero,

b)Infinity .

Q2. What are the determinants of demand?

Ans. Determinants: a) Price of a commodity

b) Income of a consumer.

c) Price of related goods

d) Tastes & preferences of a consumer

e) Future expectation

Q3. Give three reasons of a rightward shift of demand curve.

Ans. Reasons a) Increase in the income of consumer

b) Rise in the price of substitute goods.

c) Increase in the number of consumers.

Q4. What is market demand? How is market demand curve derived from the individual demand curve?

Ans. Market demand refers to the sum total of the quantities demanded by all the individual households in the market at given price and time.

Market demand curve:- It is a horizontal summation of individual demand curve

Y

Price price

(Rs.)

Q5. Explain briefly any three factors which lead to decrease in demand.

Ans. It refers to that situation wherein the price remaining constant, the quantity demanded decreases because of the following reasons-

a) Decrease in income of the consumer

b) Fall in the price of substitute goods.

c) Decrease in the number of consumers.

Very long Answer( 6 Marks )

Q1. Explain with the help of diagrams, the effect of the following Changes on the demand of a commodity.

a) A fall in the price of substitute goods.

b) A fall in the income of its buyer.

Ans. a) A fall in the price of substitute goods:-

The demand of commodity and the price of its substitute goods are directly related to each other. When the price of a substitute good falls, the demand for the good falls and vice- versa. As a result the demand curve of the commodity shifts to the left

(A fall in the price of substitute goods)

b) A fall in the income of its buyer:- The demand of a commodity

and the income of the buyer are directly related to each other. A fall in the income of buyer will lead to decrease in the demand for the commodity as buyer’s purchasing capacity will reduce. The demand curve of the commodity will shift to left side.

(A Fall in the income of its buyers)

a)

Q2. Distinguish between change in demand and change in quantity

demand. And show it in the diagrams.

Ans. a) Change in quantity demanded :- When demand for a commodity changes because of change in its own price (other things remaining constant), it is called change in quantity demanded. It is expressed in the form of expansion or contraction of demand. A change in demand graphically means movement along a given demand curve.

Change in demand :- When demand for acommodity changes because of factors other than price , it is called change in demand. It is expressed in the form of either ‘increase’ or ‘decrease’ in demand .In fact change in demand refers to a shift of a demand curve.

.

Change in Quantity demanded Change in demand

Y y

D D1

D2 D

P2 C

Price A Price

p C A B

B

Price Elasticity of demand

Very Short Answer( 1 Mark)

Q1. Define Price Elasticity of demand?

Ans. It refers to the degree of responsiveness of quantity demanded to change in its price.

Q2. Draw a demand curve with unitary elasticity.

Ans. y

Price ED=1

AP

AQ

Q3. When is demand for a commodity said to be perfectly in elastic?

Ans. When demand does not change with change in its price.

Q4. What makes the demand for a good more or less elastic ? State one factor.

Ans. Availability of substitutes.

Short Answer Question ( ¾ Marks)

Q1. What is meant by elasticity of demand .State any three factors that affect it?

Ans. It refers to the degree of responsiveness of the quantity demanded of a good to a change in its price.

Factors affecting it:-

a) Availability of close substitutes.

b) Price level.

c) Different uses of Commodity

Q2. At price of Rs. 20 Unit the quantity demanded is 300 units. Its price falls by 10% its quantity demanded rises by 60 units. Calculate price elasticity.

Ans. Rise in Price = 10% (Given)

 rise in Quantity = Q x 100

= 60 x 100= 20%

300

 ED = Percentage change in Quantity demanded

Percentage change in price

= 20/10

= 2

 Elasticity is greater than unity  ED > 1

Q3. The market demand for a good at Rs. 4 is 100 Units. The price rises and demand falls to 75 units. Find out the new price if elasticity of demand is ( - ) 1.

Ans. ED = ( - ) Q x P

Q P

-1 = - 25/100 x 4/X = 1/x

-1 = - 1/x

1x = 1

= x = 1/1 = 1

Initial price = 4

New price (Q7) = 4+1=5 Rs.

Q1. Define supply ? Draw a supply curve with unitary elasticity of supply. ans. it refers to the quantity of a commodity that a seller is ready to sell at a given price in the given period of time. Supply curve which shows the es is unitary is as follows-

Q2. Define marginal cost?

ans. it is the change in total cost which result from the production of one more unit of a commodity

MC= change in TC/ change in output

Q3. What is break even point?

ans. where TC is equal to TR

Q4. what is producers equilibrium ? Explain any two factors that cause shift of supply curve.

ans. a producer is said to be in equilibrium when he produces the level of output at which his profits

is maximum . The factors that cause shift of supply curve are [ other than price]-

i) no. of firms (ii) technology (iii) govt policy etc

Q5 Draw the supply curve of the following-

i) es=1 (ii) es>1 (iii) es<1

Q6. what is price elasticity of supply?

ans. price elasticity of supply is the responsiveness of quantity supplied of a commodity to change in

its own price. es= % change in supply/ % change in price

Q7. Explain in short the law of variable proportions?

ans. This law is also known as law of production. Which take place in the short run. In short run

production can be increased by increasing the variable factor only because in short run many

factors lies constant. but the marginal production by every additional unit goes diminishing.

Q8. Discuss the main determinates of supply.

ans. the main determinants of supply are as follows-

i) Price of the commodity [ with explanation]

ii) Price of related goods

iii) State of technology

iv) Cost of production

v) govt. policy

vi) Numbers of the firms

vii) Price of the factors of production.

Q9. What is supply? Why does supply curve slope upward?

ans. supply- it refers to the quantity of a commodity that a seller is ready to sell at a given price in a given period of time. The reason behind upward of supply curve is the law of supply which says that there is direct relation between change in price and change in supply.

supply schedule-

Price in rupees / Supply in units
1 / 10
2 / 20
3 / 30
4 / 40
5 / 50

Q.1. Define Market.

Ans. In economics market does not mean a particular area or a region rather it refers to the whole region where buyers and sellers can contact with each other either physically or through any other means of communication.

Q.2. What is meant by Perfect Competitive market?

Ans. It refers to that market situation where there are large numbers of buyers and sellers, selling homogeneous product at a uniform price and the price is determined by the industry.

Q.3. Define monopoly.

Ans: It refers to that market situation in which there is only one seller of the product who has complete control over the supply of the product.

Q.4. Define monopolistic competition.

Ans:-It refers to that market situation where there is large number of small firms selling differentiated products but close substitutes of each other.

Q.5.What is meant by differentiated product or product differentiation?

Ans it refers to the differences among the product on the basis of brands name, Shape, packing, colour , Quality, type of services and advertisements.

Q.6 In Which forms of market a firm is a price- taker?

Ans .Under perfect competitive market the firm is price taker.

Q.7. In Which forms of market a firm is a price- maker?

Ans .Under monopoly market the firm is price maker.

Q. 8 . In Which forms of market there is product differentiation?

Ans:-Under monopolistic Competition.

Q.9.What is the nature of AR curve under monopolistic competition?

Ans:- under monopolistic competition AR curve is more elastic.

Q.10.In which forms of market AR curve is perfectly elastic?

Ans: Perfect Competitive market.

Q.11. In which market entry of new firms is restricted?

Ans: Monopoly

Q.12.Comparision among Perfect competition, monopoly, monopolistic competition, oligopoly.

Basis / Perfect Competition / Monopoly / Monopolistic / Oligopoly
Buyers and sellers / Large / One seller but large number of buyers / Large / Few sellers but large number of buyers
Nature of product / Homogeneous / Homogeneous or differentiated / Product differentiation / Homogeneous or differentiated
Price / Uniform / Not uniform because of price discrimination / Not uniform because of
Product differentiation / In determined
Entry and exit of
firms / Free / Restricted / Free / Restricted
Knowledge about
market / Perfect / Imperfect / Imperfect / Imperfect
Shape of Demand
curve / Perfectly elastic / Inelastic (Ed<1) / Elastic (Ed>1) / Undefined

Q1. Show the determination of market equilibrium with the help of demand and supply schedules .

Ans. Equilibrium price is the price at which quantity demanded is equal to quantity supplied. We can explain it with the help of table and diagram.

PRICE(Rs) / DEMAND(Kg) / SUPPLY(Kg)
1 / 50 / 10
2 / 40 / 20
3 / 30 / 30
4 / 20 / 40
5 / 10 / 50

Q2. How does an increase in the income of a consumer impact equilibrium quantity and price of normal goods?

Ans. a) With increase in income the demand curve would shift to the right for normal goods .The equilibrium price would increase from OP to OP.

Q3. “Equilibrium price may or may not change with shifts in both demand & supply curves”. Comment.

Ans.When Demand and Supply both changes in same ratio than equilibrium price remain same constant. It may be in two cases-

.Case 1:- Equilibrium price does not change if both supply & demand increase by the same proportion. Equilibrium price remains OP even though both supply & demand are increasing.

Case 2:- Equilibrium price does not change when both supply & demand decrease by the same proportion.

S1

D S

D1

Equilibrium price remains the same at OP even though both supply a demand are decreasing.

When Equilibrium Price Changes

Case 3:- When increase in supply is by a higher proportion as compared to the increase in demand the equilibrium price falls from OP to OP1

Y

S S

D D’S’

X

Gist of lessons of economics Micro economics

Chapter 1 Introduction:-

1. Difference of Micro and Macro economics-

Micro economics is a study of individual units.

Macro economics is a study of whole economy, (at the level of economy)

1. Economic problem- problem of scarcity.

It arises due to 1.unlimited wants2. Limited resources 3. Alternate use of resources.

1. Central problems of economy:-

1. What to produce?- Which goods and services will be produced in an economy.

2. How to produce?- problem related to choice of technique (i.e. labour intensive, capital intensive)

3. For whom to produce- it related to distribution of produced goods and services.

4. Concepts of PPC and opportunity cost.

PPC shows the different combination of two commodities that an economy can produce with the help of available resources.

Generally the slope of PPC downwards and is concave to the point of origin because of increasing marginal opportunity cost.

Why MRT increases.

Opportunity cost is a cost of next best alternative goods forgone for it.

Chapter 2 consumer’s Equilibrium

1. Meaning of utility: want satisfying power of a commodity

Concepts of utility-mu: utility derived from the consumption of additional unit of the commodity

TU:-sum of all marginal utility derived from the consumption of various units of the commodity

Relation of TUand MU(a).MU decreases TU increases at decreasing rate

(b)MU becomes 0 TU becomes maximum (c)MU becomes negative TUstarts decreasing

Ordinal

2.Consumer’s Equilibrium :it is a condition in which consumer gets maximum satisfaction and he does not want to change his present consumption pattern.

cardinal and ordinal utility approach

Cardinal approach:measures utility on the scale of money

One commodity case: MU=PX or MUx/MUm=Px

Two commodity case:MUx/Px =MUy/Py

Ordinal approach: utility can only be ranked

Meaning of indifference curve –it shows various combinations of two goods which give same level of satisfaction to consumer and he remains indifferent among these combinations

Properties of indifference curve(a)slopes downward-Due to MRS(b)convex to the origin-due to decreasing MRS(c)higher indifference curve shows high level of satisfaction-due to monotonic preference(D)two ICs never intersect each other

Indifference map: set of indifference curves

Budget line-shows various combinations of two goods which a consumer can purchase with his income and prices of two goods and which cost exactly equal to the income of the consumer.

Causes of shift in budget line: change in income and change in prices of two goods

Budget set shows various combinations of two goods which are available to the consumer

Consumers equilibrium under IC (a)IC should be tangent to the budget line

(b)Ic should be convex to the origin. MRSxy=Px/Py

DEMAND

1. Meaning of demand it refers to desire for a commodity backed with purchasing power willingness to spend the money at various possible prices during a given period of time.

Types of demand: individual demand-that an individual buyer is ready to buy at each possible price during given period of time.

Market demand: that all buyer are ready to buy at each possible price during given period of time.