MICRO

ECONMICS

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INTRODUCTION OF
MICRO-ECONOMICS
S. NO. QUESTIONS
1.) What is an economy?
Ans. An economy is a system which provides people, the means to work and earn a
living.
It is an organization which provides living to the people. In this task, it makes use of the
available resources to produce those goods and services that people want.
For example, Indian economy consists of all sources of production in agriculture, industry,
transport and communication, banking etc.
2.) Define scarcity.
Ans. Scarcity refers to the limitations of supply in relation to demand for a
commodity.
It refers to the situation, when wants exceed the available resources. As a result, goods are
not readily available and society does not have enough resources to satisfy all the wants of
its people.
3.) What do you understand by Economic problem?
Ans. Economic problem is the problem is the problem of choice involving satisfaction
wants out of limited resources having alternative uses.
Reasons for the economic problem –

1.) Scarcity of resources

Resources (land, labour, capital etc) are limited in relations to their demand and economy
cannot produce all what people want. It is the basic reason for existence of economic
problems in all economies. Scarcity is universal and applies to all individuals, organizations
and countries.

2.) Unlimited human wants

Human wants are never ending, they can never be fully satisfied. As soon as one want is
satisfied, another new want emerges. Wants of the people are unlimited and keep on
multiplying and cannot be satisfied due to the limited resources.

3.) Alternate uses

Resources are not only scarce, but they can also be put to various uses. It makes choice
among resources more important. For example- petrol is used not only in vehicles, but also
for running machines, generators, etc. As a result, economy has to make choice b/w the
alternative uses of the given resources.
4.) What is economics?
Ans. Economics is a social science which studies the way a studies the way to choose to use
its limited resources, which have alternate uses, to produce goods and services and to
distribute them among different groups of people.
5.) Difference b/w Micro-Economics and Macro-Economics?
Basis Micro-economics Macro-Economics
Meaning Microeconomics is that part of Macroeconomics is that part of the
economic theory which studies economic theory which studies the
the behavior of individual behavior of aggregates of the economy
units of an economy. as a whole.

Tools Demand and supply. Aggregate demand and Aggregate

supply.

Objective It aims to determine price of a It aims to determine income and

commodity or factors of employment level of the economy.
production.

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 Other name It is also known as price It is also known as ‘income and
theory. employment theory’.

Degree It involves limited degree of It involves the highest degree of

involved aggregation. For example – aggregations. For example – aggregate
market demand is derived by demand is derived for the entire
aggregating individual economy.
demands of all buyers in the
particular market.

Assumptions It assumes all the macro It assumes that the all the micro
variables to be constant variables like decisions of households
therefore it assumes that and firms, prices of individual
national income, consumption, products etc. are constant.
savings etc are constant.

Example Individual income, individual National income, national output.

output.

6.) Difference b/w positive and normative economics.

Or what do you understand by normative economic analysis?
Or what do you understand by positive economic analysis?

Basis POSITIVE ECONOMICS NORMATIVE ECONOMICS

Meaning It deals with what is or how It deals with what ought to be or how
the economic problems are the economic problems should be
actually solved. solved.
Verifications It can be verified with actual It cannot be verified with actual data.
data.
Purpose It aims to make real It aims to determine the deals.
description of an economic
activity.
Suggestive It is based upon facts, and It is based upon individual opinion
thus, not suggestive. and therefore, it is suggestive in
nature.
Value of It does not give any value It gives value judgments.
judgment judgments, it is neutral b/w
ends.
Example: i.) Prices in Indian India should take steps to control
economy are rising prices.
constantly rising. Income inequalities should be
ii.) There are reduced.
inequalities of
income in our
economy.

7.) What are the central problems of an economy?

Ans. There are three central problems of an economy –

a.) What to produce

This problem involves selections of goods and services to be produced and the
quantity to be produced of each selected commodity.
Every economy has limited resources and thus, cannot produce all the goods. More of one
good or service usually means less of other.

For example – production of more sugar is possible only by reducing the production
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 of other goods. Production of more war goods is possible only by reducing the
production of civil goods. So, on the basis of the importance of various goods, an
economy has to decide which goods should be produced and in what quantities.

This is the problem of allocation of resources among different goods.

The problem of what to produce has two aspects-

 What possible commodities to produce
 How much to produce

b.) How to produce

This problem refers to selection of technique to be used for production of goods and
services. A good can be produced using different techniques of production. By
technique we mean which particular combination of inputs to be used.
Generally techniques are classified as –
i.) Labour intensive technique
In labour intensive technique, more labour and less capital is used.

ii.) Capital intensive technique

In capital intensive technique, more capital and less labour is used.

For example – textiles can be produced either with a lot of labour and little capital or less
labour and more capital. Availability of factors and their relative price helps in determining
the technique to be used.

The selection of technique is made with a view to achieve the objective of raising the
standard of living of people and to provide employment to everyone. For example – In
India, Labour intensive technique is preferred due to abundance of labour whereas the
countries like U.S.A , England etc. prefer Capital intensive technique due to shortage of
labour and abundance of capital.

c.) For whom to produce

This problem refers to the selection of the category of people who will ultimately
consume the goods, whether to produce goods for more poor and less rich or more
rich and less poor.

Since resources are scarce in every economy, no society can satisfy all the wants of its
people. Thus, a problem of choice arises. Goods are produced for those people who have the
paying capacity.
The capacity of people to pay for goods depends upon their level of income. It means, this
problem is concerned with distribution of income among the factors of production (land,
labour, capital and enterprises) who contribute in the production process.

The problem can be categorized under two main heads –

i.) Personal distribution
It means how national income of an economy is distributed among different groups of
people.

ii.) Functional distribution

It involves deciding the share of different factors of production in the total national product
of the country.

8.) Define opportunity cost with example.

Ans. Opportunity cost is the cost of next best alternative forgone.

For example – If we use a certain amount of land, labour and capital to build a factory
then the economic cost of the factory might be the houses which these resources
could have produced.
Suppose you are working in a bank at the salary of 40000 per month. Further suppose, you

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 receive two more job offers –

1.) To work as an executive at 30000 per month.

2.) To become a journalist at 35000 per month.

In this given case, the opportunity cost of working in the bank is the cost of next best
alternative forgone 35000. The amount of other goods and services, that must be sacrificed
to obtain more of any one good, is called opportunity cost of that good.
9.) Explain the concept of opportunity cost with the help of PPC.
Ans. The opportunity cost of the product is the alternative that must be given up to produce
that product. PPF illustrates the concept of opportunity cost. The opportunity cost of

10.) Explain Production Possibilities Frontier (PPF).

Ans. Production Possibilities Frontier refers to the graphical representation of possible
combinations of two goods that can be produced with given resources and technology.
The PPF can also known as –
i.) Production possibility curve
ii.) Production possibility boundary
iii.) Transformation boundary
iv.) Transformation curve
v.) Transformation frontier

Assumptions –
1.) The amount of resources in an economy is fixed, but these resources can transfer
from one use to another.
2.) With the help of given resources, only two goods can be produced.
3.) The resources are fully and efficient utilized.
4.) Resources are not equally efficient in production of all products. So, when resources
are transferred from production of one goods to another, the productivity
decreases.
5.) The level of technology is assumed to be constant.

PPC SCHEDULE:

Possibilities Guns (in units) Butter (in MOC MRT = change

units) in guns/
change in
butter
A 21 0 - -
B 20 1 1 1G: 1B
C 18 2 2 2G: 1B
D 15 3 3 3G: 1B
E 11 4 4 4G: 1B
F 6 5 5 5G: 1 B
G 0 6 6 6G: 1 B

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 1.) If the economy uses all its resources to produce only guns, then maximum of 21
units of guns and no butter can be produced.
2.) On the other hand, if all the resources are used for butter, then maximum 6 units of
butter and no guns can be produced.
3.) In b/w, there are various possibilities with different combinations of guns and
butter.
4.) When points A, B, C, D, E, F and G are joined, we get a curve AG, known as
production possibility frontier.
AG curve shows the maximum limit of production of guns and butter.

Characteristics of PPF
1.) PPF slopes downward
PPF shows all the maximum possible combination of two goods, which can be produced
with available resources and technology.

In such a case, more of one commodity can be produced only by taking the resources from
the production of another goods. As there exists an inverse relationship b/w change in
quantity of one commodity and change in the quantity of the other commodity, PPF slopes
downwards from left to right.

2.) PPF is concave shaped

PPF is concave shaped because of increasing marginal opportunity costs more and more
units of one commodity are sacrificed to gain of additional unit of another commodity.

In the given example, units of guns sacrificed keep on increasing each time to increasing
production of one unit of butter. Due to increasing marginal opportunity cost, PPF becomes
more and more steep as we move from point A to G.
Technically, a curve with an outward bend described as concave to the origin.
11.) Can an economy always operates on PPF?
Ans.

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 It must be remembered that PPF does not show the point at which the economy will
actually operate. It only shows the maximum available possibilities, which an economy can
produce. The exact point of operation depends on how well the resources of the economy
are used.

1.) Economy will operate on PPF only when resources are fully and efficiently utilized.

2.) Economy will operate at any point inside PPF if resources are not fully and
efficiently utilized.

3.) Economy cannot operate at any point outside PPF as it is unattainable with the
available productive capacity.

It means,
1.) Economy can either operate on PPF or inside PPF known as ‘Attainable
combinations’.
2.) But, economy cannot operate outside PPF, known as ‘Unattainable combinations’.
12.) Define Marginal Opportunity cost.
Ans. MOC refers to the number of units of commodity sacrificed to gain one
additional unit of another commodity.

In case of PPF, MOC is always increasing, more and more units of the commodity have to be
sacrificed to gain an additional unit of another commodity.

13.) Define Marginal Rate of Transformation (MRT).

Or explain the concepts of opportunity cost and marginal rate of transformation
using PPC schedule based on the assumption that no resources is equally efficient in
production of all goods.
Or what is MRT? Explain
Ans. MRT is the ratio of number of units of a commodity sacrificed to gain an additional unit
of another commodity.
Possibilities Guns (in units) Butter (in MOC MRT = change
units) in guns/
change in
butter
A 21 0 - -
B 20 1 1 1G: 1B
C 18 2 2 2G: 1B
D 15 3 3 3G: 1B
E 11 4 4 4G: 1B
F 6 5 5 5G: 1 B
G 0 6 6 6G: 1 B

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14.) Can PPF be a straight line?

Ans. PPF can be a straight line if we assume that MRT is constant, same amount of a
commodity is sacrificed to gain an additional unit of another commodity. It is possible only
when we assume that all the resources are equally efficient in production of all goods. In
such cases, PPF will be a straight line.

15.) Can PPF be convex to the origin?

Ans. PPF can be convex to the origin if MRT decreasing, less and less units of the commodity
are sacrificed to gain and additional unit of another commodity. In such case, PPF will be
convex to the origin.
16.) Explain shift in PPF.
Ans. There are two types of shift happen in PPF curve –
1.) Rightward shift

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 When there is advancement of technology or increase in resources in respect to both the
goods, then PPF will shift to the right.
For example – if there is increase in resources for production of butter and guns, we can
produce more of both the goods. In such cases, existing PPF will shift to the right,
represented by PP to P1P1 in the below figure.

2.) Leftward shift

PPF will shift towards left, when there is a technological degradation or decrease in
resources with respect to both the goods.
For example – destruction of resources in an earthquake will reduce the productive
capacity and as a result, PPF curve will shift to the left from PP to P1P1.
17.) Explain Rotation in PPF.
Ans. It happens when there is change in productive capacity (resources or technology with
respect to change in one good.
The rotation either for the commodity on the x-axis or the commodity on the Y-axis.

i.) Rotation for commodity on the x-axis

When there is technological improvement or increase in resources for production of the
commodity on the x- axis (say butter) then PPF will rotate from AB to AC.
However in case of technological degradation or decrease in resources for production of
butter, then PPF will rotate to the left from AB to AD.

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 ii.) Rotation for commodity on Y-axis
A technological improvement or an increase in resources for the production of commodity
on Y-axis (say guns), will rotate the PPF from AB to CB.
However, in case of degradation in technology or a decrease in resources for production of
guns, will rotate the PPF to the left from AB to DB as shown in this diagram.

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DEMAND
S.NO QUESTIONS
1.) What is the meaning of demand?
Ans. Demand is that quantity of a commodity that a consumer is willing and able to buy, at
each possible price during a given period of time.

The definition of demand highlights four essential elements of demands –

i.) Quantity of the commodity
ii.) Price of the commodity
iii.) Willingness to buy
iv.) Period of time
2.) Compare Individual Demand curve and Market Demand?

Ans. Individual demand refers to the quantity of a commodity that a consumer is willing and
able to buy, at each possible price during a given period of time.

Market demand refers to the quantity of a commodity that all consumers are willing and able
to buy, at each possible price during a given period of time.

3.) What are the determinants of Demand (Individual Demand)?

Ans. The various factors affecting demand are following –

1.) Price of the given commodity

It is the most important factor affecting demand for the given commodity. Generally, there
exists an inverse relationship b/w price and quantity demanded. It means, as price increases,
quantity demanded falls due to decrease in the satisfaction level of consumer.

2.) Price of the related goods

Demand for the given commodity is also affected by change in prices of the related goods.
Related goods are of two types:

i.) Substitute goods – Substitute goods are those goods which can be used in place
of one another for satisfaction of a particular want, like tea and coffee.
An increase in the price of substitute leads to an increase in the demand for given
commodity and vice-versa.

ii.) Complementary goods – Complementary goods are those which are used
together to satisfy a particular want, like tea and sugar.
An increase in the price of complementary goods leads to a decrease in the
demand for a given commodity and vice-versa.

3.) Income of the consumer

Demand for a commodity is also affected by income of the consumer. However, the effect of
change in income on demand depends on depends on the nature of the commodity under
consideration.
- If the given commodity is normal goods, then an increase in income leads to rise in
its demand, while decrease in income reduces the demand.

- If the given commodity is an inferior good, then an increase in income reduces the
demand, while a decrease in income leads to rise in demand.

4.) Tastes and preferences

Tastes and preferences of the consumer directly influence the demand for the commodity.
They include changes in fashion, customs, habits, etc. If a commodity is in fashion or is
preferred by the consumers, then demand for such a commodity rises. On the other hand,
demand for a commodity falls, if the consumers have no taste for that commodity.

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 5.) Expectation of change in the price in future
If the price of a certain commodity is expected to increase in near future, then people will buy
more of that commodity than what they normally buy more of that commodity than what
they normal buy. There exists a direct relationship b/w expectation of change in the price in
future and change in demand in the current period.

4.) What are the determinants of Market Demand?

Ans. Market demand is influenced by all the factors affecting individual demand for a
commodity. In addition, it is also affected by the following factors:

1.) Size and composition of population

Market demand for a commodity is affected by size of population in the country. Increase in
population raises the market demand, while decrease in population raises the market
demand, while decrease in population reduces the market demand.
2.) Season and weather
The seasonal and weather conditions also effect the market demand of the commodity. For
example, during winters, demand for woolen clothes and jackets increases, whereas, market
demand for raincoat and umbrellas increases during the rainy season.
3.) Distribution of income
If the income in the country is equitable distributed, then market demand for commodities
will be more. However, if income distribution is uneven, i.e. people are either very rich or
very poor, and then market demand will remain at lower level.

5.) How “Change in Demand” is differs from “Change in Quantity demanded”?

Ans. Change in Demand –
Whenever demand for the given commodity changes due to factors other than price, then
such change in demand is known as “change in Demand”.
For example – If demand for Pepsi changes due to change in price of Coke or due to change in
income or due to a change in taste, then such change in demand for Pepsi is known as “change
in demand”.

Change in Quantity Demanded –

Whenever demand for the given commodity changes due to change in its own price, then
such change in demand is known as “change in Quantity demand”.

For example – If demand for Pepsi changes due to changes due to change in its own price,
then such change in demand for Pepsi is known as “change in Quantity Demanded”.

6.) What is Demand function?

Ans. Demand function shows the relationship b/w quantity demanded for a particular a
commodity and the factors influencing it.
It can either with respect to one consumer (individual demand function) or to all the
consumers in the market (market demand function).

7.) How “Individual Demand Function” is differs from “Market Demand Functions”?
Ans. Individual demand function refers to the functional relationship b/w individual demand
and the factors affecting individual demand.
D x = f (P x, Pr, Y, T, F)

Market demand function refers to the functional relationship b/w market demand and the
factors affecting market demand.
D x = f (P x, Pr, Y, T, F, Po, S, D)

8.) What is Demand Schedule?

Ans. Demand schedule is a tabular statement showing various quantities of a commodity
being demanded at various levels of price, during a given period of time.
It shows the relationship between price of the commodity and its quantity demanded.

9.) Q.9 How “Individual Demand Schedule” is differs from “Market Demand Schedule”?
Ans. Individual demand Schedule

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 Individual demand schedule refers to a tabular statement showing various quantities of a
commodity that a consumer is willing to buy at various levels of price, during a given period
of time.
Price Quantity demanded
of commodity X
5 1
4 2
3 3
2 4
1 5
Market Demand Schedule
Market demand schedule refers to a tabular statement showing various quantities of a
commodity that all the consumers are willing to buy at various levels of price, during a given
period of time.
It is the sum of all individual demand schedules at each and every price.

PRICE INDIVIDUAL DEMAND MARKET DEMAND

Household A Household B DA + DB
5 1 2 3
4 2 3 5
3 3 4 7
2 4 5 9
1 5 6 11
10.) How “Demand” is differs from “Quantity Demanded”?
Ans.
Demand
Demand is not a particular quantity. It describes the behavior of buyers at every possible
price.
For example – There is a demand of 5 units at Rs 1 per unit, demand is 4 units at Rs 2 per unit
and so on.
demand is not a fixed quantity, rather it changes with change in price of Rs 50 per ticket than
at Rs 150 per ticket.

Quantity Demanded
Quantity demanded refers to specific quantity of the demand schedule that is demanded
against a specific price, i.e. it makes sense only in relation to a particular price.
For example – 2 units are demanded at Rs 4 per unit.
It not the actual quantity purchases. Rather, it is the desired quantity which the consumers
wish to purchase and not necessarily how much they actually succeed in purchasing.

11.) What is Demand curve?

Ans. Demand curve is a graphical representation of demand schedule.

It is the locus of the points showing various quantities of a commodity that a consumer is
willing to buy at various levels of price, during a given period of time, assuming no change in
other factors.

12.) How “Individual Demand Curve” is differs from “Market Demand curve”?

Individual Demand curve –

Individual demand curve refers to a graphical representation of individual demand schedule.
The demand curve ‘DD’ downwards due to inverse relationship b/w price and quantity
demanded.

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 Market Demand curve –
Market demand curve refers to a graphical representation of market demand schedule.
It is obtained by horizontal summation of individual demand curves.
Market demand curve ‘Dm’ also slope downwards due to inverse relationship b/w price and
quantity demanded.

13.) Explain the Law of Demand?

Ans. law of demand states the inverse relationship b/w price and quantity demanded,
keeping other factors constant. This law is also known as the ‘First Law of Purchase’.

Assumptions of the Law of Demand –

1.) Prices of substitute goods do not change.

2.) Prices of complementary goods remain constant.
3.) Income of the consumer remains same.
4.) There is no expectation of change in price in the future.
5.) Tastes and preference of the consumer remain same.

Price Quantity
demanded
5 1
4 2
3 3
2 4
1 5

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 Important facts about Law of demand –
1.) Inverse relationship – It states the inverse relationship b/w price and quantity
demanded. It simply affirms that an increase in price will tend to reduce the quantity
demanded and fall in price will lead to increase in the quantity demanded.

2.) Qualitative, not quantitative – It makes a qualitative statement only, it indicates the
direction of change in the amount demanded and does not indicate the magnitude of
change.

3.) No proportional relationship – it does not establish any proportional relationship

b/w change in price and the resultant change in demand. If the price rises by 10%,
quantity demanded may fall by any proportion.

4.) One sided – law of demand is one sided as it only explains the effects of change in
price on the quantity demanded. It states nothing about the effect of change in
quantity demanded on the price of the commodity.

14.) How can you derivate this “Law of Demand”?

Ans. Law of Demand can be derived by –

i.) Marginal utility = Price (Single commodity equilibrium condition) –

According to single commodity equilibrium conditions, consumer purchases that much
quantity of a good at which marginal utility (MU) is equal to price.
- When MU is more than Price = If price of the good falls, it makes MU greater than
price. It encourages the consumer to buy more. It shows that when price of a good fall,
its demand rises. The consumer will continue to buy more until MU falls enough to be
equal to price again. It shows that when price falls demand rises.

- When MU is less than price = If price of the good rises, it makes MU less than price.
Now consumer will reduce the demand until MU rises till it again becomes equal to
price. It means that when price rises demand falls.

ii.) Law of Equi - Marginal Utility –

According to this law, a consumer will be at equilibrium when he spends his limited income
in such a way that the ratios of marginal utilities and their respective prices are equal and MU
falls as consumption increases.

In case of two goods equilibrium conditions will be –

MUx = MUy
Px Py
- In this equilibrium conditions, if the price of commodity X falls, then
MUx> Muy
Px Py
In this case, the consumer is getting more marginal utility per rupee in case of good X as
compared to good Y. This shows that when price of a good falls, more of it is demanded. The
consumer will continue to buy more of X till MUx = MUy
Px Py

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 - Similarly, if the price of commodity X (Px) rises, then MUx <MUy
Px Py
Now, consumer is getting more marginal utility per rupee in case of good Y as compared to X.
So, he will buy less of X and more of Y. It means, demand of a commodity varies inversely
with its price.

15.) What are the reasons for the Law of Demand?

Ans. The various reasons for operation of Law of Demand are–

1.) Law of diminishing Marginal utility

Demand for a commodity depends upon on its utility. If the consumer gets more satisfaction,
he will pay more. As a result, consumer will not be prepared to pay the same price for
additional units of the commodity. The consumer will buy more units of commodity only
when the price falls.

2.) Substitution effect

When price of the given commodity falls, it becomes relatively cheaper as compared to its
substitute (assuming no change in price of substitute). As a result, demand for the given
commodity rises.

3.) Income effect

When price of the given commodity falls, it increases the purchasing power (real income) of
the consumer. As a result, he can purchase more of the given commodity with same money.

4.) Additional customer

When price of a commodity falls, may new consumers, who were not in a position to buy it
earlier due to high price, starts purchasing it. In addition to new customer, old customer of
the commodity start demanding more due to its reduced price.

5.) Different uses

Some commodities like milk, electricity etc have several uses, some of which are more
important than the others. When price of such a good (say, milk) increases, its uses get
restricted to the most important purpose (say, drinking) and demand for less important uses
(like cheese, butter, etc) gets reduced.

16.) What are the exceptions of Law of Demand?

Ans. Some of the important exceptions are –

1.) Giffen goods

These are special kind of inferior goods on which the consumer spends a large part of his
income and their demand rises with an increase in price and demand falls with decrease in
price.

2.) Status symbol goods or Goods of Ostentation

The exception relates to certain prestige of goods which are used as status symbols.
For example – diamonds, gold, antique paintings etc. are bought due to prestige they confer
upon the processor. These are wanted by the rich persons for prestige and distinction. The
higher the price, the higher will be the demand for such goods.

3.) Fear to shortage

If the consumer expects a shortage or scarcity of a particular commodity in the near future,
then they would start buying more and more of that commodity in the current period even if
their prices are rising. The consumers demand more due to fear of further rise in price.
For example – during emergencies like war, famines etc consumers demand goods even
higher prices due to fear of shortage and general insecurity.

4.) Ignorance
Consumer may buy more of commodity at a higher price when they are ignorant of the

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 prevailing prices of the commodity in the market.

5.) Fashion related goods

Goods related to fashion do not follow the law of demand and their demand increases even
with a rise in their prices.
For example – If any particular type of dress is in fashion, then demand for such dress will
increase even if its price is rising.

6.) Necessities of life

Another exception occurs in the use of such commodities, which become necessities of life
due to their constant use.
For example – Commodities like rice, wheat, salt, medicines etc are purchased even if their
prices increase.

7.) Change in weather

With change in season/weather, demand for certain commodities also changes, irrespective
of any change in their prices.
For example – Demand for umbrellas increase in rainy season even with an increase in their
prices.

17.) What do you understand by the Movement along Demand curve (Change in Quantity
Demanded)?
Ans. When quantity demanded of a commodity changes due to change due to a change in its
price, keeping other factors, it is known as change in a Quantity Demanded.
It is graphically expressed as a movement along the same demand curve.

- Expansion in Demand is shown by downward movement from A to B. Quantity

demanded rises from OQ to OQ1 due to fall in price from OP to OP1.

- Contraction in Demand is shown by an upward movement from A to C. Quantity

demanded falls from OQ to OQ2 due to rise in price from OP to OP2.

18.) What do you understand by the Shift in Demand Curve (Change in Demand)?
Ans. When the demand of a commodity change due to change in any factor other the own
price of the commodity, it is known as change in demand.

For example – Suppose income of the consumer increases. Now, the consumer may increase
the demand for the product, even though the price has not changed. Such increase in demand
of any product, whose price has not changed, cannot be represented by the original demand
curve. It will shift the demand curve.

Reasons for shift in Demand curve –

1.) Change in the price of substitute goods

2.) Change in price of complementary goods.
3.) Change in income of the consumer.
4.) Change in taste and preferences.
5.) Expectation of change in price in future.
6.) Change in population.
7.) Change in distribution of income.
8.) Change in season and weather.
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 - Increase in demand shown by rightward shift in Demand curve from DD to D1D1.
Demand rises from OQ to OQ1 due to favourable change in other factors at the same
price OP.

- Decrease in Demand is shown by leftward shift in demand curve from DD to D2D2.

Demand falls from OQ to OQ2 due to unfavourable change in other factors at the same
price OP.

19.) Differentiate b/w Movement along demand curve and Shift in Demand Curve?

Basis Change in Quantity Change in

Demanded demand
1.) Meaning When the quantity When the demand changes
demanded changes due to due to change in any factor
a change in the price, other than the own price of
keeping other factors the commodity, it is termed
constant, it is known as as change in demand.
change in quantity
demanded.

2.) Effect on It leads to a movement It leads to a shift in the

Demand along the same demand demand curve either
curve curve, either upwards rightwards (known as
(known as contraction in increase in demand) or
demand) or downwards leftwards (known as
(known as Expansion in decrease in demand).
demand).

It occurs due to an It occurs due to change in

3.) Reason increase or a decrease in other factors, like change in
the price of the given price of substitutes, change
commodity. in prices of complementary
goods, change in income etc.

20.) Differentiate b/w Expansion in Demand and Increase in Demand?

Basis Expansion in Demand Increase in Demand curve
1.) Meaning When the quantity Increase in demand refers to
demanded rise due to a a rise in the demand of a
decrease in the price, commodity caused due to
keeping other factors any factor other than the
constant, it is known as commodity.

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 expansion in demand.

2.) Effect on There is a downward There is a rightward shift in

demand movement along the same demand curve.
curve demand curve.

3.) Reason It occurs due to a It occurs due to favorable

decrease in the price of Change in the other factors
the given commodity. like increase in the prices of
substitute, decrease in the
prices of complementary
goods, increase in income in
case of normal goods, etc.

21.) Differentiate b/w Contraction in Demand and Decrease in Demand?

Basis Contraction in Demand Decrease in Demand curve
1.) Meaning When the quantity Decrease in demand refers to
demanded falls due to an fall in the demand of a
increase in the price, commodity due to any factor
keeping other factors other than the own price of
constant, it is known as the commodity.
contraction in demand.

2.) Effect on There is an upward There is a leftward shift in the

demand movement along the same demand curve.
curve demand curve.

3.) Reasons It occurs due to an increase It occurs due to an

in the price of the given unfavorable change in the
commodity. other factors like decrease in
the prices of substitutes,
increase in the prices of
complementary goods,
decrease in income in case of
normal goods etc.

22.) What are Substitute goods?

Ans. Substitute goods
Substitute goods are those goods which can be used in place of one another for satisfaction of
a particular want, like tea and coffee.
Demand for a given commodity varies directly with price of a substitute good. For example –
If price of a substitute good (say, coffee) increases, than demand for a given commodity (say,
tea) will tea rise as tea will become relatively cheaper in comparison to coffee.

23.) What are Complementary goods?

Ans. Complementary goods
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 Complementary goods are those goods which are used together to satisfy a particular want.
Demand for a given commodity varies inversely with the price of a complementary good.

For example – if price of a complementary good (say, sugar) increases, then demand for
given commodity (say, tea) will fall as it will be relatively increases, then demand for given
commodity (say, tea) will fall as it will be relatively costlier to use both the goods together.

24.) How “Substitute goods” is differs from “Complementary goods”?

Basis Substitute goods Complementary goods

Meaning Substitute goods refer to those Complementary goods refer
goods which can be used in place to those goods which are
of one another to satisfy a used together to satisfy a
particular want. particular want.

Nature of Substitute goods have Complementary goods have

demand competitive demand. joint demand.

Relation Price of one substitute good has Complementary good has

positive relationship with negative relationship with
quantity demanded of another quantity demanded of
substitute good. another complementary
good.
Examples Tea and coffee Tea and substitute
Coke and Pepsi Car and petrol

25.) How “Normal goods” are differs from “Inferior goods”?

Basis Normal goods Inferior goods
Meaning Normal goods refer to those Inferior good refer to those
goods whose demand increases goods whose demand
with an increase in income. decreases with an increase in
income.

Income effect Income effect is positive in case Income effect is negative in

of normal goods. case of inferior goods.

Relation There is a direct relation b/w There is an inverse relation

income and demand for normal b/w income and demand for
goods. inferior goods.

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 Example ‘Full cream milk’ is a normal ‘Toned Milk’ is an inferior
good if its demand increases good if its demand decreases
with an increase in income. with an increase in income.

Diagram

26.) What do you understand by “Cross Price Effect”?

Ans. Cross Price Effect refers to effect on the demand for a given commodity due to a
change in the price of related commodity.
It means, cross price effect originates from substitute goods and complementary goods.
Let us understand the effect on the demand curve of a given commodity when there is change
in the prices of substitute and complementary goods.
Change in Prices of substitute goods –
i.) Increase in price of substitute goods

ii.) Decrease in price of substitute goods

Change in price of complementary goods –

i.) Increase in price of complementary goods

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 ii.) Decrease in price of complementary goods

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27.) How “Change in Income” effect the demand curve?
Ans. A change in income causes a positive change in demand for normal goods, whereas, a
negative change occurs in the case of inferior goods.
So, the demand curve of a given commodity is affected by change in income in case of normal
goods and inferior goods.
It must be noted that there is no change in demand for the necessity goods with increase or
decrease in income.

Change in Income (Normal goods)

i.) Increase in income

ii.) Decrease in income

Change in Income (Inferior goods)

i.) Increase in Income

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 ii.) Decrease in Income

28.) What is “Substitution Effect”?

Ans. Substitution effect refers to substituting one commodity in place of other when it
becomes relatively cheaper.
When price of the given commodity falls, it becomes relatively cheaper as compared to its
substitute (assuming no change in price of substitute). As a result, demand for the given
commodity rises.
For example – If price of the given commodity (say, Pepsi) falls, with no change in price of
the substitute (say, Coke), then Pepsi will become relatively cheaper and will be substituted
for Coke, demand for Pepsi will rise.

29.) What is “Income Effect”?

Ans. Income effect refers to effect on demand when real income of the consumer changes due
to change in price of the given commodity.
When price of the given commodity falls, it increases the purchasing power (real income) of
the consumer. As a result, he can purchase more of the given commodity with the same
money income.
For example – Fall in price of given commodity (say Pepsi) will raise the purchasing power
of the consumer and he can buy more Pepsi with the same money income.
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30.) Write a short note on Giffen goods.
Ans. Giffen goods are special kind of inferior goods in which negative income effect is
stronger than positive substitution effect.

Substitution effect – Even in case of Giffen goods, substitution effect is positive as fall in
their prices increases their demand as they become relatively less expensive as compared to
their substitutes whose price have not fallen.

Income effect – A fall in price of Giffen goods increase the real income, which reduces the
demand for Giffen goods as consumer prefer to shift to superior commodities.

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 ELASTICITY OF DEMAND
S.NO. QUESTIONS
1.) What is the concept of Elasticity of Demand?
Ans. Elasticity of demand refers to the percentage change in demand for a commodity
with respect to percentage change in any of the factors affecting demand for that
commodity.
Elasticity of demand = Percentage change in demand for X
Percentage change in a factor affecting the demand for X

2.) What do you understand by “Price Elasticity of Demand”?

Ans. Price elasticity of Demand means the degree of responsiveness of demand for a
commodity with reference to change in the price of such commodity.
 It establishes a quantitative relationship b/w quantity demanded of a commodity
and its price, while other factors remain constant.
 Higher the numerical value of elasticity, larger is the effect of a price change on the
quantity demanded.
 For certain goods, a change in price leads to a greater change in the demand,
whereas, in some cases, there is a small change in demand due to change in price.

For example – If prices of two commodities ‘X’ and ‘Y’ rise by 10% and their demands fall
by 20% and 5% respectively, then commodity ‘X’ is said to be more elastic as compared to
commodity ‘Y’.

3.) What are the methods for measuring “Price Elasticity of Demand”?
Ans. The main methods for measuring price elasticity of demand are –
1.) Percentage method
2.) Geometric method

4.) Explain “Percentage Method”?

Ans. It is the most common method for measuring price elasticity of demand (Ed). This
method is also known as ‘Flux Method’ or ‘Proportionate Method’ or ‘Mathematical
Method’.
According to this method, elasticity is measured as the ratio of percentage change in
the quantity demanded to percentage change in the price.

Elasticity of Demand (Ed) = Percentage change in quantity demanded

Percentage change in price

Proportionate method –
The percentage method can also be converted into the proportionate method. Putting the
values 1, 2, 3 and 4 in the formula of percentage method.

Ed = ∆Q X P
∆P Q
Where,
Q = Initial quantity demanded
∆Q = change in quantity demanded
P = Initial price
∆P = change in price

5.) Explain “Geometric Method”?

Ans. This method is used to measure the elasticity at a point on the demand curve. When
there are infinitely small changes in price and demand curve. When there are infinitely
small changes in price and demand, then ‘Geometric method’ is used.
This method is also known as ‘Graphic Method’ or ‘Point Method’ or ‘Arc Method’.

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 In order to measure Ed at any particular point, lower portion of the curve from that point
is divided by the upper portion of the curve from the same point.

Elasticity of demand (Ed) = lower segment of demand curve (LS)

Upper segment of demand curve (US)
Diagram.

Elasticity of demand on different points of a straight line demand curve –

1.) Unitary Elasticity Demand

2.) Highly Elastic Demand
3.) Less Elastic Demand
4.) Perfectly elastic Demand
5.) Perfectly inelastic Demand

6.) Explain “Total Expenditure Method”?

Ans. The price elasticity of demand for a good and the total expenditure made on the good
are greatly related to each other. At times, it becomes important to determine the effect on
the expenditure on a good due to change in price of the good.
We know that the price of a good and the demand for the good are inversely related to
each other.

So responsiveness of demand in relation to change in price (price elasticity of

demand) determines the change in expenditure.

Diag.

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 1.) Elasticity is more than one (Ed >1)
When demand is elastic, a fall in the price of a commodity results in increase in total
expenditure on it. On the other hand, when price increases, total expenditure decreases. It
means, in case of highly elastic demand, price and total expenditure move in the opposite
directions.
Price Quantity Total expenditure
(Price X Quantity)
5 100 500
4 140 560

2.) Elasticity is less than one (Ed <1)

When demand is inelastic, a fall in the price of a commodity leads to fall in total
expenditure also increases. It means, in case of less elastic demand, price and total
expenditure move in the same directions.
Price Quantity Total expenditure
(Price X Quantity)
5 100 500
4 120 480

3.) Elasticity is equal to one (Ed = 1)

When demand is unitary elastic, a fall or rise in the price of the commodity does not
change the total expenditure. It means total expenditure will remain unchanged in case of
unitary elastic demand.
Price Quantity Total expenditure
(Price X Quantity)
5 100 500
4 125 500

7.) What are the degrees of Price Elasticities of Demand?

Ans. The various kinds of price elasticities of demand –
1.) Perfectly Elastic Demand
When there is an infinite demand at a particular price and demand becomes zero with a
slight rise in the price, then demand for such a commodity is said to
be perfectly elastic.

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 Perfectly elastic demand is an imaginary situation.

Price Demand
30 100
30 200
30 300

2.) Perfectly Inelastic Demand

When there is no change in demand with change in price, then demand for such
commodity is said to be perfectly inelastic.
Perfectly inelastic demand is also an imaginary situation.

Price Demand
20 100
30 100
40 100

3.) Highly Elastic Demand

When percentage change in the quantity demanded is more than percentage change in
price, then demand for such a commodity is said to be highly elastic.
Commodities like AC, DVD player etc generally have highly elastic demand.
Price Demand
20 100
10 200

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 4.) Less Elastic Demand
When percentage change in the quantity demanded is less than percentage change in
price, then demand for such a commodity is said to be less elastic or inelastic.
Commodities like salt, vegetables etc generally have less elastic demand.
Price Demand
20 100
10 120

5.) Unitary Elastic Demand

When percentage change in quantity demanded is equal to percentage change in price,
then demand for such commodity is said to be unitary elastic.
In this case the demand curve is rectangular hyperbola.
Commodities like scooter, refrigerator etc. generally have unitary elastic demand.

8.) What are the Factors affecting price elasticity of Demand?

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 Ans. Various factors affect the elasticity of demand of a commodity are–
1.) Nature of commodity
Elasticity of demand of a commodity is influenced by its nature. A commodity for a person
may be a necessity, a comfort or a luxury.
 When commodity is a necessity like food grains, vegetables, medicines etc its
demand is generally inelastic as it is required for human survival and its demand
does not fluctuate much with change in price.
 When a commodity is a comfort like fan, refrigerator, etc its demand is generally
elastic as consumer can postpone its consumption.
 When a commodity is a luxury like AC, DVD player etc. its demand is generally
more elastic as compared to demand for comforts.

2.) Availability of substitute

Demand for a commodity with large number of substitutes will be more elastic. The
reason is that even a small rise in its prices will induce the buyers to go for its substitutes.
For example – A rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.
Thus, availability of close substitutes makes the demand sensitive to change in the price.
On the other hand, commodities with few or no substitutes like wheat and salt have less
price elasticity of demand.

3.) Income level

Elasticity of demand for any commodity is generally less for higher income level groups in
comparison to people with low income. It happens because rich people are not influenced
much by changes in the price of goods.
But, poor people are highly affected by increase or decrease in the price of goods. As a
result, demand for lower income group is highly elastic.

4.) Level of price

Level of price also affects the price elasticity of demand. Costly goods like laptop, Plasma
TV etc have highly elastic demand as their demand is very sensitive to change in their
prices.
However, demand for inexpensive goods like needle, match box, etc is inelastic as change
in prices of such goods do not change their demand by a considerable amount.

5.) Postponement of consumption

Commodities like biscuits, soft-drinks etc whose demand is not urgent have highly elastic
demand as their consumption can be postponed in case of an increase in their prices.
However, commodities with urgent demand like life saving drugs, have inelastic demand
because of their immediate requirement.

6.) Number of uses

If the commodity under consideration has several uses, then its demand will be elastic.
When price of the commodity increases, then it is generally put to only more urgent uses
and, as a result, its demand falls. When the prices fall, then it is used for satisfying, even
less urgent needs and demand rises.

For example –Electricity is multiple-use commodity. Fall in its price will result in
substantial increase in demand, particularly in those uses (like AC, Heat convector etc)
where it was not employed formerly due to its high price.
On the other hand, a commodity with no or few alternative uses has less elastic demand.

7.) Share in Total Expenditure

Proportion of consumer’s income that is spent on a particular commodity also influences
the elasticity of demand for it. Greater the proportion of income spent on the commodity,
more is the elasticity of demand for it and vice-versa.
Demand for goods like salt, needle, soap, match box etc. tends to inelastic as consumer
spend a small proportion of their income on such goods. When prices of such goods
change, consumer continues to purchase almost the same quantity of these goods.
However, if the proportion of income spent on a commodity is large, then demand for such
a commodity will be elastic.

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 8.) Time period
Price elasticity of demand is always related to a period of time. It can be a day, a week, a
month, a year or a period of several years. Elasticity of demand varies directly with the
time period. Demand is generally inelastic in the short period. It happens because
consumers find it difficult to change their habits, in the short period, in order to respond
to a change in the price of the given commodity.

9.) Habits
Commodities, which have become habitual necessities for the consumers, have less elastic
demand. It happens because such commodities become a necessity for the consumer and
he continues to purchase it even if price rises. Alcohol, tobacco, cigarettes etc. are some
examples of habit forming commodities.

9.) What is the importance of Elasticity of Demand?

Ans. Price elasticity of demand is a very important concept. Its important can be realized
from the following points –

1.) International trade

In order to fix prices of the goods to be exported, it is important to have knowledge about
the elasticities of demand for such goods. A country may fix higher price for the products
with inelastic demand. However, if demand for such goods in the importing country is
elastic, then the exporting country will have come to fix lower prices.

2.) Formulation of government policies

The concept of price elasticity of demand is important for formulating government
policies, especially the taxation policy. Government can impose higher taxes on goods with
inelastic demand, whereas, low rates of taxes are imposed on commodities with elastic
demand.

3.) Factor pricing

Price elasticity of demand helps in determining price to be paid to the factors of
production. Share of each factor in the national product in determined in proportion to its
demand in the productive activity. If demand for a particular factor is inelastic as
compared to the other factors, then it will attract more rewards.

4.) Decisions of monopolist

A monopolist considers the nature of demand while fixing price of his product. If
demand for the product is elastic, then he will fix low price. However, if demand is
inelastic, then he is in position to fix a high price.

5.) Paradox of poverty amidst plenty

A bumper crop, instead of bringing prosperity to farmers, brings poverty. This is called the
paradox of poverty amidst plenty. It happens due to inelastic demand for most of the
agriculture products. When supply of crops increases as a result of rich harvest, their
prices drastically fall due to inelastic demand. As a result, their total income goes down.

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CONSUMER’S EQUILIBRIUM
S.NO. QUESTIONS
1.) What is Consumer’s Equilibrium?
Ans. the term ‘equilibrium’ is frequently used in economic basis analysis. Equilibrium
means a state of rest or a position of no change. It refers to a position of rest, which
provides the maximum benefit or gain under a given situation.
Consumer’s equilibrium refers to the situation when a consumer is having
maximum satisfaction with limited income and has no tendency to change his way
of existing expenditure.

2.) Name the main approaches to study human consumer’s behavior and consumer
equilibrium?

Ans. Utility approach & Indifference curve approach

3.) What do you understand by Cardinal Utility Approach/Marshall’s Utility Analysis/
Marginal Utility Analysis?
Ans. People consume different goods and services in order to maximize the satisfaction
level. However, to do this, it is necessary to determine quantum of satisfaction obtained
from a particular commodity.
Under the Cardinal Utility Approach, the concept of “Utility” is used to attain the
consumer’s equilibrium.

4.) What is the meaning of Utility?

Ans. “Utility refers to want satisfying power of the commodity”.
When a commodity is capable of satisfying human wants, we can conclude that the
commodity has utility.
It is the satisfaction, actual or expected, derived from the consumption of a commodity.
Utility differs from person to person, place to place and time to time.
In the words of Prof Hobson, “utility is the ability of a good to satisfy a want.”

5.) How we can measure Utility?

Ans. There are two different ways to measure utility-
According to classical economists, utility can be measured, in the same way, as weight or
height is measured. For this, economists assumed that utility can be measured in
Cardinal (Numerical) terms.

1. By using Cardinal Measure of utility, it is possible to numerically estimate

utility, which a person derives from consumption of goods and services. But there
is no standard unit for measuring utility. So, the economists derived an imaginary
measure, known as ‘Util’.

For example- suppose you have eaten an ice-cream and a chocolate. You agree to
assign 20 utils as utility derived from the ice-cream. Now the question is: how
many utils be assigned to the chocolate?

If you liked the chocolate less, then you assign utils less than 20. Suppose, you assign 10
utils to the chocolate, then it can be concluded that you liked the ice-cream twice as much
as you liked the chocolate.

2. According to Marshall and several economists, units cannot be taken as

standard unit for measurement as it will vary from individual to individual.
Hence, several economists including Marshall suggested the measurement of
utility in monetary terms.
It means utility can be measured in terms of money or price, which the consumer is
willing to pay.
For example- suppose 1 util is assumed to be equal to Rs 1. Now, an ice-cream will yield
utility worth Rs 20 (as 1 util = Rs 1) and chocolate will give utility of Rs 10. This utility of

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 Rs 20 from the ice-cream or Rs 10 from the chocolate is termed as value of utility in terms
of money.

6.) Define the terms Utils.

Ans. “Utils are imaginary and psychological units are used to measure satisfaction (Utility)
obtain from consumption of a certain quantity of a commodity.”

7.) Define the terms-

1.) Total Utility (T.U.) –
Total utility refers to the total satisfaction obtain from the consumption of all possible
units of a commodity.
It measure the total satisfaction obtained from the consumption of all the units of that
good.
TU= U1 + U2 + U3 +………. + Un

2.) Marginal Utility (M.U.) –

Marginal utility is the additional utility derived from the consumption of one more unit of
the given commodity.
It is the utility derived from the last unit of a commodity purchased.
MU= TUn – TUn-1
Or
MU= Change in Total Utility
Change in no. of units
8.) Explain the relationship b/w TU and MU?

Ice-creams Marginal utility Total utility

Consumed (MU) (TU)
1 20 20
2 16 36
3 10 46
4 4 50
5 0 50
6 -6 44

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 Relationship b/w TU and MU –
1. TU increase with an increase in consumption of a commodity as long as MU is
positive.
In this phase, TU increases, but a diminishing rate as MU from each successive
unit tends to diminish.

2. When TU reaches its maximum, MU becomes zero. This is known as Point of

Satiety. TU curve stops rising at this stage.

3. When consumption is increased beyond the point of satiety, TU starts falling as

MU become negative.

9.) How can you consumer equilibrium in case of single commodity?

Ans. A consumer purchasing a single commodity will be at equilibrium, when he is
buying such a quantity of that commodity, which gives his maximum satisfaction. The
number of units to be consumed of the given commodity by a consumer depends on two
factors –

1.) Price of given commodity

2.) Expected utility (marginal utility) is equal from each successive unit.

To determine the equilibrium point, consumer compares the price (or cost) of the given
commodity with its utility (satisfaction or benefit). Being a rational consumer, he will be
at equilibrium when marginal utility is equal to price paid for the commodity.
Marginal utility in terms of money =
Marginal utility in utils
Marginal utility of one rupee (MUM)

Equilibrium conditions–
Consumer in consumption of single commodity (say X) will be at equilibrium when
Marginal utility (MUX) is equal to price (PX) paid for the commodity,
MU = Price

1.) If MU x > Px, then consumer is not at equilibrium and he goes on buying because
benefit is greater than cost. As he buys more, MU falls because of operation of the
law of diminishing marginal utility.
When MU becomes equal to price, consumer gets the maximum benefits and is in
equilibrium.

2.) Similarly, when MU x < Px, then also consumer is not at equilibrium as he
will have to reduce consumption of commodity X to raise his total
satisfaction till MU becomes equal to Price.

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 Units Price (Px) Marginal Marginal Difference Remarks
of utility utility in Rs MU x and Px
X (Utils) 1 util = Rs 1

1 10 20 20/1 =20 20 – 10 =10 MU x > Px, so

2 10 16 16/1 =16 16 – 10 =6 consumer will
increase the
consumption
3 10 10 10/1 =10 10 -10 =0 Consumer
equilibrium
(MU x = Px)
4 10 4 4/1 = 4 4 – 10 = -6 MU x < Px, so
5 10 0 0/1 =0 0 – 10 =-10 consumer will
6 10 -6 -6/1 =-6 -6 – 10=-16 decrease the
consumption

10.) How can you describe consumer equilibrium in case of two commodities/law of
Equi-marginal utility/ law of Substitution/ Law of maximum satisfaction/ Gossen’s
second law?

Ans. The law of DMU applies in case of either one commodity or one use of a commodity.
However, in real life, a consumer normally consumes more than one commodity. In such a
situation, ‘Law of equi-marginal utility’ helps in optimum allocation of income.
According to the law of Equi-marginal utility, a consumer gets maximum satisfaction,
when ratios of MU of two commodities and their respective prices are equal and MU falls
as consumption increases.

It means, there are two necessary conditions to attain consumer’s equilibrium in

case of two commodities:
1.) Marginal Utility (MU) of last rupee spent on each commodity is same –

- We know, a consumer in consumption of single commodity (say X) is at

equilibrium when MUx = MUM ………………………………. (1.)
Px

- Similarly, consumer consuming another commodity (say Y) will be at

equilibrium when MUY = MUM ……………………………………… (2.)
PY

Equating 1 and 2 we get:

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 2.) MU falls as consumption increases-

The second condition needed to attain consumer’s equilibrium is that MU of a commodity

must fall as more of it is consumed. If MU does not fall as consumption increases, the
consumer will end up buying only one good which is unrealistic and consumer will never
reach the equilibrium position.
Finally it can be concluded that a consumer in consumption of two commodities will be at
equilibrium when he spends his limited income in such a way that the ratios of marginal
utilities of two commodities and their respective prices equal and MU falls as
consumption increases.

EXAMPLE:

Let us now discuss the law of equi-marginal utility with the help of a numerical example.
Suppose, total money income of the consumer is Rs 5, which he wishes to spend on two
commodities: X & Y.
Both these commodities are priced at Rs 1 per unit. So, consumer can buy
maximum 5 units of X or 5 units of Y. In the given table, we have shown the MU
which consumer derives from various units of X & Y.

Units MU of commodity MU of commodity ‘Y’

‘X’ ( in utils)
( in utils)
1 20 16
2 14 12
3 12 8
4 7 5
5 5 3

From the above table it is obvious the consumer will spend the first rupee on commodity
X, which will provide him utility of 20 utils. The second rupee will be spent on commodity
Y to get utility of 16 utils. To reach the equilibrium, consumer should purchase that
combination of both the goods, when:
a.) MU of last rupee spent on each commodity must be same; and
b.) MU falls as consumption increases.

It happens when consumer buys 3 units of X and 2 units of Y because:

 MU from last rupee (5th rupee) spent on commodity Y gives the same level of
satisfaction of 12 utils as given by last rupee (4th rupee) spent on commodity X
and
 MU of each commodity falls as consumption increases.
The total satisfaction of 74 utils will be obtained when consumer buys 3 units of X and 2
units of Y. It reflects the state of consumer’s equilibrium. If the consumer spends his
income in any other order, total satisfaction will be less than 74 utils.

11.) What happens when MUX/PX is not equal to MUY/PY?

Ans. Suppose, MUX/PX>MUY/PY
In this case, the consumer is getting more marginal utility in case of good X as compared
to Y. Therefore, he will buy more of X and less of Y.
This will lead to fall in MUx and rise in MUy. The consumer will continue to buy more of X
till MUX/PX=MUY/PY.

When MUX/PX<MUY/PY, the consumer is getting more MU per rupee in case of good Y as
compared to X. Therefore, he will buy more of Y and less of X. this will lead to fall in MUy
and rise in MUx. The consumer will continue to buy more of Y till MUX/PX=MUY/PY.

It brings us to conclusion that MUX/PX=MUY/PY is a necessary condition to attain

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 consumer’s equilibrium.

12.) What is Law of diminishing Marginal Utility? What are its assumptions?
Ans. Law of Diminishing Marginal Utility (DMU) states that as we consume more and
more units of a commodity, the utility derived from each successive unit goes decreasing.
In making choices, most people spread their incomes over different kinds of goods.
People prefer a variety of goods because consuming more and more of any one good
reduces the marginal satisfaction derived from further consumption of the same good.
This law expresses an important relationship b/w utility and the quantity consumed of a
commodity.

Diagrammatic explanation of Law of Diminishing Marginal utility –

Units of ice-cream Total utility (in utils) Marginal utility (in utils)
1 20 20
2 36 16
3 46 10
4 50 4
5 50 0 ( point of satiety)
6 44 -6

In the diagram, units of ice-cream are shown along the X-axis and MU along the Y-axis.
MU from each successive ice-cream is represented by points A, B, C, D and E. As seen, the
rectangles (showing each level of satisfaction) become smaller and smaller with increase
in consumption of ice-creams. MU falls from 20 to 16 and then to 10 utils, when
consumption is increased from 1st to 2nd and then to 3rd ice-cream. 5th ice-cream has no
utility (MU = 0) and this is known as the “Point of satiety”. When 6th ice-cream is
consumed, MU becomes negative. MU curve slopes downwards showing that MU of
successive units is falling.

Assumptions of law of Diminishing Marginal utility

A.) Cardinal measurement of utility
B.) Monetary measurement of utility
C.) Consumption of reasonable quantity
D.) Continuous consumption
E.) No change in quality
F.) Rational consumer
G.) Independent utilities
H.) MU of money remains constant
I.) Fixed income and prices

13.) What do you understand Ordinal utility approach (Indifference curve analysis)?
Ans. Modern economists disregarded the concept of ‘cardinal measure of utility’. They
were of the opinion that utility is psychological phenomenon and it is next to impossible

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 to measure the utility in absolute terms.

According to them, a consumer can rank various combinations of goods and

services in order of his preference.

For example – if a consumer consumes two goods, Apples and Bananas, then he can
indicate:

1.) Whether he prefers apple over banana, or

2.) Whether he prefers banana over apple, or
3.) Whether he is indifferent b/w apples and bananas, both are equally preferable
and both of them give his same level of satisfaction.

14.) What is the meaning of Indifference curve?

Ans. Indifference curve refers to the geographical representation of various alternative
combinations of bundles of two goods among which the consumer is different.
When a consumer consumes various goods and services, then there are some
combinations, which give exactly the same total satisfaction. The graphical representation
of such combinations is termed as indifference curve.
Alternatively, indifference curve is a locus of points that show combinations of two
commodities which give the consumer same satisfaction.
Combinations of Apples Apples Bananas
and Bananas
P 1 15
Q 2 10
R 3 6
S 4 3
T 5 1

In the diagram, apples are measured along the X-axis and bananas on the Y-axis. All
points (P,Q, R, S and T) on the curve show different combinations of apples and bananas.
These points are joined with the help of a smooth curve, known as indifference curve.

15.) What is Indifference Curve set?

Ans. the combinations give equal satisfaction to the consumer and therefore he is
indifferent among them. These combinations together known as ‘Indifference set’.

16.) What are Monotonic preferences?

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

In simple words, a monotonic preference implies that as consumption increases total

utility also increases.
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 For example – a consumer’s preferences are monotonic only when b/w any two bundles,
he prefers the bundle which has more of at least one of the goods and no less of the other
good as compared to the other bundle.
17.) What is Indifference Map? What are the properties of Indifference curve?
Ans. Indifference Map refers to the family of indifference curves that represent consumer
preferences over all the bundles of the two goods.

Properties of Indifference curve –

1.) Indifference curves are always convex to the origin.
An indifference curve always is convex to the origin because of diminishing MRS. MRS
Declines continuously because of the law of diminishing marginal utility.
MRS declines continuously because of law of diminishing marginal utility. When the
consumer consumes more and more of apples, his marginal utility from apples keeps on
declining and he is willing to give up less and less of bananas for each apples.
Therefore the IC curve is convex to the origin to the origin.

2.) Indifference curve slope downwards.

It implies that as a consumer consumes more of one good, he must consume less of the
other good. It happens because if the consumer decides to have more units of one good,
he will have to reduce the number of units of another good, so that total utility remains
same.

3.) Higher indifference represents higher levels of satisfaction.

Higher indifference represents large bundle of goods, which means more utility because
of monotonic preference.

4.) Indifference curve never intersect each other.

As two indifference curves cannot represent the same level of satisfaction, they cannot
intersect each other. It means, only one indifference curve will pass through a given point
on an indifference map.

18.) What are the assumptions of Indifference curve?

Ans. The various assumptions of indifference curve are –
1.) Two commodities
It assumed that the consumer has a fixed amount of money, whole of which is to be spent
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 on the two goods, given constant prices of both the goods.

2.) Non Satiety

It is assumed that the consumer has not reached the point of saturation. Consumer
always prefer more of both commodities, i.e. he always tries to move to a higher
indifference curve to get higher and higher satisfaction.

3.) Ordinal utility

Consumer can rank his preferences on the basis of the satisfaction from each bundle of
goods.

4.) Diminishing marginal rate of substitution

Indifference curve analysis assumes diminishing marginal rate of substitution. Due to this
assumption, an indifference curve is convex to the origin.
5.) Rational consumer
The consumer is assumed to behave in a rational manner, i.e. he aims to maximize his
total satisfactions.

19.) What is Marginal Rate of Substitution (MRS)?

Ans. MRS refers to the rate at which the commodities can be substituted with each other,
so that total satisfaction of the consumer remains the same.

For example – MRS of ‘A’ and ‘B’ will be number of units of ‘B’, that the consumer is
willing to sacrifice for additional unit of ‘A’, so as to maintain the same level of
satisfaction.
MRS = Units of bananas (B) willing to sacrifice
Units of Apples (A) willing to gain

Combination Apple (A) Banana (B) MRSAB

P 1 15 -
Q 2 10 5B:1A
R 3 6 4B:1A
S 4 3 3B:1A
T 5 1 2B:1A

20.) What is Budget line? Explain with diagram and schedule.

Ans. Budget line is a graphical representation of all possible combinations of two goods
which can be purchased with given income and price, such that the cost of each of these
combinations is equal to the money income of the consumer.

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21.) Write the slope and algebraic expression of budget line. What are its properties?
Ans. the slope of a curve is calculated as a change in variable on the vertical or Y-axis
divided by change in variable on the horizontal or X-axis.

Slope of Budget line = Units of bananas (B) willing to Sacrifice

Units of apple (A) willing to Gain

Combinations of Apples Bananas Money spent =

Apples and (Rs 4/- each) (Rs 2/- each) income
Bananas
E 5 0 20
F 4 2 20
G 3 4 20
H 2 6 20
I 1 8 20
J 0 10 20

PROPERTIES OF BUDGET LINE

i.) Budget line is downward sloping
Budget line has a negative slopes, it slopes downwards as more of one good can be
bought by decreasing some units of the other good.

ii.) Budget line is straight line

The slope of the budget line is represented by the price ratio. As price ratio is constant
throughout, the budget line is straight line.

22.) What is Budget Set?

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 Ans. Budget set is the set of all possible combinations of the two goods which a consumer
can afford, given his income and price of the market.

23.) What is the Price Ratio?

Ans. Price ratio is the price of the good on the horizontal or X-axis divided by the price of
the good on the vertical or Y-axis.
For example – If good X is plotted on the horizontal axis and good Y on the vertical axis,
then:
Price ratio = Price of X (Px)
Price of Y (Py)

24.) Why shift occurs in Budget line?

Ans. There are several reasons mentioned below due to shift happen in budget line –

1.) Effect of a change in the income of consumer

If there is any change in the income, assuming no change in prices of apples and bananas,
then the budget line will shift. When income increase, the consumer will be able buy more
bundles of goods, which were previously not possible.

2.) Effect of change in the relative prices

If there is any change in prices of the two commodities, assuming no change in the money
income of the consumer, then budget line will change. It will change the slope of budget
line, as price ratio will change in prices.

i.) Change in the price of commodity on X-axis (Apples) :

When the price of apples falls, then new budget line is represented by a shift in budget
line to the right from ‘AB’ to ‘A1B’.

ii.) Change in the price of commodity on Y-axis (Bananas) :

With a fall in the price of bananas, the new budget line will shift to the right from ‘AB’ to
‘AB1’.

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25.) Explain Consumer’s equilibrium Indifference Curve Analysis?
Ans. Consumer equilibrium refers to the situation, in which a consumer derives maximum
satisfaction, with no intention to change it and subject to given prices and his given
income.
The point of maximum satisfaction is achieved by studying indifference map and budget
line together. On indifference map, higher indifference curve represents a higher level of
satisfaction than any lower level of satisfaction than any lower indifference curve. So, a
consumer always tries to remain at the highest possible indifference curve, subject to his
budget constraint.

i.) Price line should be tangent to the indifference curve, i.e., the marginal
rate of substitution of X for Y is equal to ratio of their prices.
MRSXY = Px/Py
ii.) Indifference curve should be strictly convex to the point of origin.

i.) Budget Line or Price Line

should be Tangent to
Indifference curve
In figure, AB is the budget or price
line. IC1, IC2 and IC3 are indifference
curves.
A consumer can buy any of the
combinations A, B, C, D and E of
apples and oranges shown on the
price line AB. He cannot get any
combination on IC3 as it is away
from price-line AB. He can buy
those which are not only on price
line AB but also coincide with the
highest indifference curve which is
IC2 in this case. Out of A, B, C, D and combinations, the consumer will be in
equilibrium at combination D, because at this point price line is tangent to
the highest indifference curve IC2. No doubt, the consumer can buy C or E
combinations as well but these will not give him maximum satisfaction
being situated on lower indifference IC1. It means consumer's equilibrium
point is the point of tangency of price line and indifference curve.
At equilibrium point D, slope of indifference curve and price line coincide. Slope of
indifference curve is indicative of marginal rate of substitution of good X for good
Y (MRS) and slope of price line is indicative of the ratio of price of good x (Px) and
price of good Y (PY).

Slope of Indifference Curve Slope of B or Price Line or MRSXY = Px/Py

In short, the first condition of consumer's equilibrium is that budget or price line
should be tangent to indifference curve which means that price-rat of good X and
good Y should be equal to the marginal rate of substitution of good X for good Y.

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 (ii) Indifference curve must be Convex to the Origin

The other condition of equilibrium is that at the point of equilibrium; indifference

curve should be convex to the point of origin. It means that marginal rate of
substitution of good X for good Y should be diminishing. If at the point of equilibrium,
indifference curve is concave and not convex to the origin, then it will not be a
position of equilibrium. This fact has been clarified by Prof. Hicks with the help of
following figure.

In fact, the point of tangency E would yield the lowest attainable indifference
curve, whereas the highest indifference curve would lie at one of the end points of
the budget line. A consumer will therefore attain stable equilibrium only when
indifference curve is not only tangent to the budget line but is also convex.

26.) Compare Cardinal utility with Ordinal Compare Cardinal utility with Ordinal
utility?

a.) Under cardinal utility approach, it is assumed that utility can be measured in
cardinal terms, such as 1, 2, 3 etc. However, according to ordinal utility approach,
utility is a subjective concept, which cannot be measured and we can just rank the
scale of preferences.

b.) Under cardinal approach, the term “util” was developed as a unit to measure
utility, whereas, no such unit of measurement was developed under ordinal
approach.

c.) Example: Suppose a person consumes apple and banana.

- According to cardinal approach, the consumer can assign utils to both
commodities, say, 20 utils to apple and 15 utils to banana. It signifies that
apple offers 5 more utils than banana.

- According to ordinal approach, the consumer cannot express the satisfaction

in exact terms. It means, if the consumer likes apple more than banana, then
he will give 1st rank to apple and 2nd rank to banana.

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COST
S.NO. QUESTIONS
1.) What is the meaning of cost?
Ans. Cost is the total expenditure incurred in producing a commodity.

2.) How “Explicit Cost” is differs from “Implicit Cost”?

Ans. Explicit cost –
It is the actual money expenditure on inputs or payment made to outsiders for hiring
their factor services.
For example – Wages paid to the employees, Rent paid for hired premises, Payment for
raw materials etc.

Implicit cost –
It is the estimated value of the inputs supplied by the owners including normal profit.
For example – Interest on own capital, Rent of own land, Salary for the services of
entrepreneur etc.

3.) What is Cost Function?

Ans. The relation b/w cost and output is known as ‘Cost function’.
‘Cost function’ refers to the functional relationship b/w cost and output.
It is expressed as:
C = f (q)

4.) Explain what is the meaning of Opportunity Cost with examples.

Ans. “Opportunity cost is cost of the next best alternative forgone”
For example –
Suppose a farmer can produce either 50 quintals of rice or 40 quintals of wheat on his
land with given resources. If he chooses to produce rice, then he will have forgo the
opportunity of producing 40 quintals of wheat.

5.) What are Short run costs? Explain.

Ans. In the short run there are some factors which are fixed, while others are variable.
Similarly, short run costs are also divided into two kinds of costs –
i.) Fixed costs
ii.) Variable costs

6.) Explain –
i.) Total fixed cost (TFC) or Fixed Cost (FC) or Supplementary cost or Overhead cost
or Indirect cost or General Cost or Unavoidable cost

Fixed costs refer to those costs which do not vary directly with the level of output.
Fixed cost is incurred on fixed factors like machinery, land, building etc which cannot be
changed in the short run. The payment to these factors remains fixed irrespective of the
level of output, i.e. fixed cost remains the same, whether output is large, small or even
zero.

For example – Rent on premises, Interest on loan, Salary of permanent staff, Insurance
premium etc.
Output TFC
0 12
1 12
2 12
3 12
4 12
5 12

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 ii.) Total Variable Cost (TVC) or Variable cost (VC) or Prime Cost or
Direct cost or Avoidable cost –

Variable cost refers to the costs which vary directly with level of output.
Variable cost incurred on variable factors like raw material, direct labour, power etc.
which changes with change in level of output. It means, variable costs rise with increase
in the output. Such costs are incurred till there is production and become zero and zero
level of output.

For example – Payment of Raw material, Power, Fuel, Wages of Casual labour etc.
Output TVC
0 0
1 6
2 10
3 15
4 24
5 35

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 ii.) Total cost (TC) –
Total cost (TC) is the total expenditure incurred by a firm on the factors of
production required for the production of a commodity.

TC is the sum of Total fixed cost (TFC) and Total variable cost (TVC) at various levels of
output.
TC = TVC + TFC

Output Total fixed cost Total variable Total cost or TC =

or TFC cost or TVC TFC +TVC
0 12 0 12+0 = 12
1 12 6 12+6 =18
2 12 10 12+10 =22
3 12 15 12+15 =27
4 12 24 12+24 =36
5 12 35 12+35 =47

7.) Explain the relationship b/w TC, TFC, and TVC?

Ans. The various points relationship b/w TC, TFC and TVC can better explained with the
help of above table –
Output Total fixed cost Total variable Total cost or TC =
or TFC cost or TVC TFC +TVC
0 12 0 12+0 = 12
1 12 6 12+6 =18
2 12 10 12+10 =22
3 12 15 12+15 =27
4 12 24 12+24 =36
5 12 35 12+35 =47

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 1.) TFC curve is a horizontal straight line parallel to x- axis as it remains constant at
all levels of output.
2.) TC and TVC curves are inversely S-shaped because they rise initially at a
decreasing rate, then at a constant rate and finally, at an increasing rate. The
reason behind their shape is the Law of variable proportion.
3.) At zero output, TC is equal to TFC because there is no variable cost at zero level of
output. So, TC and TFC curves start from the same point, which is above the
origin.
4.) The vertical distance b/w TFC curve and TC curve is equal to TVC. As TVC rises
with increase in the output, the distance b/w TFC and TC curves also goes on
increasing.
5.) TC and TVC curves are parallel to each other and the vertical distance b/w them
remains the same at all the levels of output because the gap b/w them represents
TFC, which remains constant at all levels of output.

8.) Explain –
i.) Average Fixed Cost (AFC)
Average fixed cost refers to the per unit fixed cost of production. It is calculated by
dividing TFC by total output.
AFC = TFC
Q

Output Total variable cost or Average fixed cost or

TVC AFC = TFC/Output
0 12 ∞
1 12 12
2 12 6
3 12 4
4 12 3
5 12 2.40

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 ii.) Average Variable Cost (AVC)
Average variable cost refers to the per unit cost of production. It is calculated by dividing
TVC by total output.
AVC = TVC
Q
Output Total variable cost or AVC
TVC TVC/output = AVC
0 0 -
1 6 6
2 10 5
3 15 5
4 24 6
5 35 7

iii.) Average Total Cost (ATC) or Average Cost (AC)

Average cost refers to the per unit total cost of production. It is calculated by dividing TC
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 by total output.
AC = TC
Q
Average cost is also defined as the sum of average fixed cost (AFC) and average variable
cost (AVC).
Output AFC AVC AC =
AFC+AVC
0 ∞ - -
1 12 6 18
2 6 5 11
3 4 5 9
4 3 6 9
5 2.40 7 9.40

9.) What is Marginal Cost?

Ans. Marginal cost refers to additions to total cost when one more unit of output is
produced.
For example – If TC of producing 2 units is Rs 200 and TC of producing 3 units is Rs 240,
then MC = 240 – 200 = 40.
MCn = TCn – TCn-1

10.) Explain the Relationship b/w AC and MC.

Ans. There exists a close relationship b/w AC and MC.

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 1.) Both AC and MC are derived from total cost (TC). AC refers to TC per unit of
output and MC refers to addition to TC when one more unit of output is produced.
2.) Both AC and MC curves are U-shaped due to law of Variable proportions.

Output TC AC MC Phase
0 12 - -
1 18 18 6 I (MC < AC)
2 22 11 4
3 27 9 5

4 36 9 9 ii (MC=AC)
5 47 9.40 11 iii (MC > AC)

1.) When MC is less than AC, AC falls with increase in the output, i.e. till 3 units of
output.
2.) When MC is equal to AC, when MC and AC curves intersect each other at point
A, AC is constant and at its minimum point.
3.) When MC is more than AC, AC rises with increase in output, from 5 units of
output.
4.) Thereafter, both AC and MC increase at a faster rate as compared to AC. As a
result, MC curve is steeper as compared to AC curve.

11.) Q.11 Explain the Relationship b/w AVC and MC.

Ans. The relationship AVC and MC curves is similar to that of AC and MC.
 Both AVC and MC are derived from total variable cost (TVC). AVC refers to TVC
per unit and MC is the addition to TVC, when one more unit of output is produced.
 Both AVC and MC curves are U-shaped due to the Law of the variable proportions.
Output TVC AVC MC Phase
0 0 - -
1 6 6 6 I (MC<AVC)
2 10 5 4

3 15 5 5 ii (MC = AVC)

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 4 24 6 9 iii (MC > AVC)
5 35 7 11

1.) When MC is less than AVC, AVC falls with increase in the output, till 2 units of
output.
2.) When MC is equal to AVC, when MC and AVC curve intersect each other at point B,
AVC is constant and at its minimum point (3rd unit of output).
3.) When MC is more than AVC, AVC rises with increases in output, from 4 units of
output.
4.) Thereafter, both AVC and MC rise, but MC increases at a faster rate as compared
to AVC. As a result, MC curve is steeper as compared to AVC curve.

12.) Explain the Relationship b/w AVC, AC and MC.

Ans. The relationship AC, AVC and MC can be better illustrates with the help of following
schedule and diagram –
Output TVC AC AVC MC
0 0 - - -
1 6 18 6 6
2 10 11 5 4
3 15 9 5 5
4 24 9 6 9
5 35 9.40 7 11

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 1.) When MC is less than AC and AVC, both of them fall with increase in the
output.
2.) When MC becomes equal to AC and AVC, they become constant, MC curve cuts
AC cuts (at A)and AVC curve (at B) at their minimum points.
3.) When MC is more than AC and AVC, both rises with increase in output.

13.) Explain the Relationship b/w AVC and AC.

Ans.
1.) AC is greater than AVC by the amount of AFC.
2.) The vertical distance b/w AC and AVC curves continue to fall with increase in
output because the gap b/w them is AFC, which continues to decline with rise
in output.
3.) AC and AVC curves never intersect each other as AFC can never be zero.
4.) Both AC and AVC curves are U-shaped due to the law of the variable
proportions.
5.) MC curve cuts AVC and AC curves at their minimum points.
6.) The minimum point of AC curve (point A) lies always to the right of the
minimum point of AVC curve (point B).

14.) Q.14 Explain the Relationship b/w TC and MC.

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 1.) Marginal cost is the addition to total cost, when one more unit of output is
produced.
2.) When TC rises at a diminishing rate, MC declines.
3.) When the rate of increase in TC stops diminishing, MC is at its minimum point,
point E.
4.) When the rate of increase in total cost starts rising, the marginal cost is
increasing.

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PRODUCER EQUILIBRIUM
S.NO. QUESTIONS
1.) What is the meaning of Profit?
Ans. profit refers to the excess of receipts from the sale of goods over the expenditure
incurred on producing them.

2.) What is Producer Equilibrium?

Ans. Equilibrium refers to a state of rest when no change is required.
A firm is in equilibrium when it has no inclination to expand or to contract its output. This
state either reflects maximum profits or minimum losses.

Producer can attain the equilibrium level under two situations –

1.) When price remain constant
In this situation, firm has to accept the same price as determined by the industry. It
means, any quantity of a commodity can be sold at that particular price.

2.) When price falls with rise in output (It happens under imperfect
competition)
In this situation, firm follows its own pricing policy. However, it can increase sales only by
reducing the price.

3.) Explain TR-TC approach.

Ans. According to TR-TC approach producer equilibrium refers to the stage of that
output level at which the difference b/w TR and TC is positively maximized and total
profits fall as more units of output are produced.

The two essential conditions for producer equilibrium are –

1.) The difference b/w TR and TC is positively maximized.
2.) Total profit fall after that level of output.

Output Price TR TC Profit = Remarks

TR – TC
0 10 0 5 -5 Profits rises
1 10 10 8 2 with
2 10 20 15 5 increase in
3 10 30 21 9 output
4 10 40 31 9 Producer’s
equilibrium
5 10 50 42 8 Profits falls
6 10 60 54 6 with
increase in
output

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 Producer’s equilibrium will be determined at OQ level of output at which the vertical
distance b/w TR and TC curves (at point G) is parallel to TR curve and difference b/w
both the curves (represented by GH) is maximum.

At quantities smaller or larger than OQ such as OQ1 or OQ2 units, the tangents to TC
curve would not be parallel to the TR curve. So, the producer is at equilibrium at OQ units
of output.

4.) Explain TR and TC approach (When price fall with rise in output).
Ans. When price falls with rise in output (like in case of imperfect competition), each
producer aims to produce that level of output at which he can earn maximum profits,
when difference b/w TR and TC is the maximum.
Output Price TR TC Price = Remarks
TR – TC
0 10 0 2 -2 Profits rises
1 9 9 5 4 with
2 8 16 9 7 increase in
3 7 21 11 10 output

4 6 24 14 10 Producer
equilibriu
m
5 5 25 20 5 Profits fall
6 4 24 27 -3 with
increase in
output

Producer will be at equilibrium at 4 units of output because at this level, both the
conditions of producer’s equilibrium are satisfied.
1.) Producer is earning maximum profit of Rs10.
2.) Total profits fall to Rs 5 after 4 units of output.

Producer’s equilibrium will be determined at OQ level of output at which the vertical

distance b/w TR and TC curves is the greatest.
At this level of output, tangents to TR curve are parallel to the tangents to TC curve and
difference b/w both the curves are maximum.

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5.) Explain producer equilibrium with MR-MC approach
(When price remains constant).
Ans. According to MR = MC approach, producer’s equilibrium refers to stage of that
output level at which –

1.) MC = MR
As long as MC is less than MR, it is profitable for the producer to go on producing more
because it adds to its profits. He stops producing more only when MC becomes equal to
MR.

2.) MC is greater than MR after MC = MR output level –

When MC is greater than MR after equilibrium, it means producing more will decline in
profits.

Producer equilibrium

When price remain constant, firms can sell any quantity of output at the price level by the
market. Price or AR remains same at all levels of output. Also, the revenue from every
additional unit (MR) is equal to AR. It means, AR is same as MR curve. Producer aims to
produce that level of output at which MC is equal to MR and MC is greater than MR after
MR = MC output level.

Output Price TR TC MR MC Profit =

TR – TC
1 12 12 13 12 13 -1
2 12 24 25 12 12 -1
3 12 36 34 12 9 2
4 12 48 42 12 8 6
5 12 60 54 12 12 6
6 12 72 68 12 14 4
According to this table, MC=MR conditions is satisfied at both the output levels of 2 units
and 5 units. But the second condition, MC becomes greater than MR is satisfied only at 5
units of output.
Therefore, producer equilibrium will be achieved at 5 units of output.
6.) Explain producer equilibrium with MR-MC approach
(When price falls with rise in output).
Ans. Ans. When there is no fixed price and price falls with rise in output, MR curve slope
downwards. Produce aims to producer that level of output at which MC is equal to MR
and MC curve cuts the MR curve from below.

Output Price TR TC MR MC Profit=

TR - TC
1 8 8 6 8 6 2
2 7 14 11 6 5 3
3 6 18 15 4 4 3
4 5 20 20 2 5 0
5 4 20 26 0 6 -6

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 According to this table both conditions of equilibrium are satisfied at 3 units of output.
MC is equal to MR and MC is greater than MR then more output is produced after 3 units
of outputs.
So producer’s equilibrium will be achieved at 3 units of output.

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PRODUCTION FUNCTION
S.NO. QUESTIONS
1.) What is “Production Function”?
Ans. There exists a relationship b/w inputs and output of a firm. In economics such
relationship is known as production function.

Production function is an expression of the technological relation b/w physical

inputs and outputs of a good.

For example – suppose a firm is manufacturing chairs with the help of two inputs, say
labour (L) and Capital (K). Then, production function can be written as –

Important points about production function –

1.) The production function specifies either the maximum output that can be
produced with the given inputs or the minimum quantity of inputs needed to
produce a given level of output.
2.) Production function establishes a relation b/w inputs and output, which is
technical in nature.
3.) Production function is always defined with respect to a given technology. If there is
improvement in the technique of production, then increased output can be
obtained with the same physical inputs.
4.) The production function includes only the technically efficient methods of
production as no rational entrepreneur will use inefficient methods.

2.) How “Short Run” is differs from “Long Run”? or

Difference b/w short run and long run?
Basis Short-run Long-run
Meaning Short run refers to a period Long run refers to a period in which
in which output can be output can be changed by changing all
changed by changing only factors of production.
variable factors.

Classification Factors are classified as All factors are variable in the long
variable and fixed factor in run.
the short run.

Price In the short run, demand is In the long run, both demand and
determination more active in price supply play equal role in price
determination as supply determination as both can be
cannot be increased increased.
immediately with
increased in output.

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3.) How “Variable factors” is differs from “Fixed Factors”?
or
Difference b/w variable factors and fixed factors.

Basis Variable factors Fixed factors

Meaning Variable factors refer to Fixed factors refer to those factors
those factors which can be which cannot be changed in the
changed in the short run. short run.

Relation with They vary directly with They do not vary directly with
output output. output.

Raw material, casual labour, Building, plant and machinery,

Example power, fuel, etc. permanent staff etc.

4.) What are the types of production function?

Ans. The distinct b/w fixed and variable factors help us to study the two types of
production function –

1.) Short run production function [Variable proportion type]

It studies the effect on output, due to change in variable input, assuming no change in
other factors. As there is change in variable input only, the ratio b/w different inputs levels
to change at different level of output. This relationship is explained by the law of variable
proportion.

2.) Long run production function [Constant proportion type]

It studies the effect on output, due to change in all the factors inputs. As all inputs are
variable in the long run, the ratio b/w different inputs tends to remain the same at
different levels of output. This relationship is explained by the “law of returns to Scale”.

5.) What is “Product”? What are its types?

Ans. Product or output refers to the volume of goods produced by a firm or an industry
during a specified period of time.

The concept of product can be looked at from three different angles –

i.) Total product
ii.) Marginal product
iii.) Average product
6.) Define –
i.) Total product
ii.) Marginal Product
iii.) Average Product
i.) Total product
Total product refers to total quantity of goods produced by a firm during a given period of
time with given quantity number of inputs.

For example – if 10 labours produce 60 kg of rice, then total product is 60 kg.

In short run, a firm can expand TP by increasing only the variable factors. However, in long
run, TP can be raised by increasing both fixed and variable factors.

ii.) Marginal product

Marginal product refers to addition made to total product, when one more unit of variable
factor is employed.
iii.) Average product
Average product refers to output per unit of variable input.

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 For example – if total product (TP) is 60 kg of rice, produced by 10 labours
(variable input), then average product will 60/10 = 6 kg.

7.) Explain Law of variable proportions?

Ans. law of variable proportion states that as we increase quantity of only one input
keeping fixed, total product (TP) initially increasing at an increasing rate, then at
diminishing rate and finally at the negative rate.

Law of variable proportion is also known as ‘law of returns’ or ‘law of return to

factor’ or ‘Return to variable factor’.

Assumptions of law of variable proportions –

1.) It operates in short run, as factors are classified as variable and fixed factors.
2.) The law applies to all fixed factors including land.

3.) Under law of variable proportions, different units of variable factor can be
combined with fixed factors.
4.) This law applies to the field of production only.
5.) The effect of change in output due to change in variable factor can be easily
determined.
6.) It is assumed that, factors of production become imperfect substitutes of each
other beyond a certain limit.
7.) The state of technology is assumed to be constant during the operation of this law.
8.) It is assumed that all variable factors are equally efficient.
For example
Suppose a farmer has 1 acre of land (fixed factor) on which he wants to increase the
production of wheat with the help of labour (variable factor). When he employed more
and more units of labour, initially output increased at an increasing rate, then at a
decreasing rate and finally, at a negative rate.
Fixed factor Variable TP MP Phase
(land in acre) factor (units) (units)
(labour)
1 1 10 10 1st (increasing
1 2 30 20 returns to a
factory)
1 3 45 15 2nd
1 4 52 7 (diminishing
1 5 52 0 returns to
factors)
1 6 48 -4 3rd (negative
returns to a
factor)

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 Phase.1
Increasing return to a factor – In the first phase, every additional variable factors adds
more and more to the total output. It means, TP increases at an increasing rate and MP of
each variable factor rises. As seen in the given schedule and diagram, one labour produces
10 units, while two labours produce 30 units. It implies, TP increases at increasing rate
(till point ‘Q’) and
MP rises till it reaches its maximum point ‘P’, which marks the end of first phase.

Phase.2
Diminishing return to a factor –
In the second phase, every additional variable factor adds lesser and lesser amount of
output. It means TP increases at a diminishing rate and MP falls with increase in variable
factor. That is why; this phase is known as diminishing return to a factor. The second
phase ends at point ‘S’, when MP is zero and TP is maximum (point ‘M’) at 52 units.

Phase.3
Negative return to a factor –
In third phase (starting from 6 units of labour), the employment of additional variable
factor cause TP to decline. MP now becomes negative. Therefore, this phase is known as
negative return to a factor. In fig. the third phase starts after point ‘S’ on MP curve and
point ‘M’ on TP curve. MP of each variable factor is negative in the 3rd phase. So, no firm
would deliberately choose to operate in this phase.

8.) Explain “Increasing Returns to factor”. What are its reasons.

Ans. Every additional variable factors adds more and more to the total output. It means, TP
increases at an increasing rate and MP of each variable factor rises.

Reasons for increasing return to a factor

1.) Better utilization of the fixed factor

in the first phase, the supply of the fixed factor (say, land) is too large, whereas variable
factors are too few. So, the fixed factor is not fully utilized. When variable factors are
increased and combined with fixed factors, then fixed factors is better utilized and output
increases at an increasing rate.

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 2.) Increased efficiency of variable factor
When variable factors are increased and combined with the fixed factors, then former is
utilized in a more efficient manner. At the same time, there is greater cooperation and high
degree of specialization b/w different units of the variable factor.

3.) Indivisibility of fixed factor

Generally, the fixed factors which are combined with variable factors are indivisible. Such
factors cannot be divided into smaller units. Once investment is made in an indivisible
factor, improve the utilization of fixed factors. The increasing return apply as long as
optimum level of combination b/w variable and fixed factor is achieved.

9.) Explain “Decreasing Returns to factor”. What are the reasons of diminishing law of
return?
Ans. Every additional variable factor adds lesser and lesser amount of output. It means TP
increases at a diminishing rate and MP falls with increase in variable factor. That is why;
this phase is known as diminishing return to a factor.

10.) Explain “Negative Returns to factor”.

Ans. The employment of additional variable factor causes TP to decline. MP now becomes
negative. Therefore, this phase is known as negative return to a factor.

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11.) What is the Law of Diminishing Returns?

12.) Explain the Relationship b/w TP and MP?

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13.) Explain the Relationship b/w AP and MP?

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REVENUE
S.NO. QUESTIONS
1.) What is the meaning of Revenue?
Ans. Revenue refers to the amount received by a firm from the sale of the given quantity
of a commodity in the market.
For example – if a firm gets Rs 16000 from the sale of 100 chairs, then the amount of Rs
16000 is known as revenue.

2.) Explain the concept of –

i.) Total Revenue
Total revenue refers to total receipts from the sale of a given quantity of a commodity. It
is the total income of the firm.
For example- if a firm sells 10 chairs at a price of Rs 160 per chair, then the total revenue
will be 10 chairs Rs 1600.

ii.) Average Revenue

Average revenue refers to receive per unit of output sold. It is obtained by dividing the
total revenue by the number of units sold.
For example – if total revenue from the sale of 10 chairs at the rate of Rs 160 per chair is
Rs 1600, then

iii.) Marginal Revenue

Marginal revenue is the additional revenue generated from the sale of an additional unit
of output. It is the change in TR sale of one more unit of a commodity.

3.) Explain the relationship b/w revenue concepts?

Ans. The relationship b/w different revenue concepts can be discussed under two
situations –
i.) When price remains constant (It happens under Perfect competition) –
In this situation, firm has to accept the same price as determined by the industry. It
means, any quantity of commodity can be sold a that particular price.

ii.) When price falls with rise in output (It happens in Imperfect
competition) –
In this situation, firm follows its own pricing policy. However, it can increase sales only
by reducing the price.

4.) Explain the relationship b/w AR and MR (when price remain constant)?
Ans. When price remains same at all output levels (like in case of perfect competition), no
firm is in a position to influence the market price of the product. A firm can sell more
quantity of output at the same price. It means, the revenue from every additional unit MR
is equal to AR.
As a result, both AR and MR curve coincide in a horizontal straight line parallel to the X-
axis.

Units sold Price/ AR TR MR

1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5

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 Always remember that when a firm is able to sell more output at the same price,
then AR = MR at all levels of output.

5.) Explain the relationship b/w TR and MR (when price remains constant)?
Ans. when price remains constant, firm can sell any quantity of output at the price fixed
by the market. As a result, MR curve (and AR curve) is a horizontal straight line parallel to
the X-axis. Since MR remains constant, TR also increases at a constant rate. Due to this
reason, the TR is positively slope straight line. As TR is zero at zero level of output, the TR
curve starts from the origin.
Units sold Price/ AR TR MR
1 5 5 5
2 5 10 5
3 5 15 5
4 5 20 5
5 5 25 5

6.) Explain the relationship b/w TR and Price Line?

Ans. When price remains constant at the levels of output, then price = AR = MR.
Therefore, price line is the same as MR curve. Also, TR = ∑ MR. So, the area under MR
curve or price line will be equal to TR.

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7.) Explain the relationship b/w AR and MR (when price falls with rise in output)?
Ans. When firms can increase their volume of sales only by decreasing the price, then AR
fall with increase in sale. It means, revenue from every additional unit will be less than
AR. As a result, both AR and MR slope downwards from left to right.
Units sold AR TR MR Ratio of Fall
(AR : MR)
1 5 5 5 -
2 4 8 3 1:2
3 3 9 1 1:2
4 2 8 -1 1:2
5 1 5 -3 1:2

Both MR and AR fall with increase in output. However, fall in MR is double than that in
AR, MR falls at a rate which is twice the rate of fall in AR. As a result, MR curve is steeper

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 than the AR curve because MR is limited to one unit, whereas, AR is derived by all the
units. It leads to comparatively lesser fall in AR than fall in MR.

It must be noted that MR can fall to zero and can even become negative. However,
AR can be neither zero nor negative as TR it is always positive.

8.) Explain the general relationship AR and MR?

The relationship b/w AR and MR depends on whether the price remains same or falls
with rise in output. However, if nothing is mentioned about the nature of price with rise
in output, then the following general relation exists b/w AR and MR.
1.) AR increases as long as MR is higher than AR (or when MR > AR, AR increases).
2.) AR is maximum and constant when MR is equal to AR (or when MR = AR, AR is
maximum).
3.) AR falls when MR is less than AR (or when MR < AR, AR falls).

It must be noted that specific relationship b/w AR and MR depends upon the relation of
price with output whether price remains same or varies inversely with output.

9.) Explain the relationship b/w TR and MR (when price falls with rise in output)?
Ans. When more of output can be sold only by lowering the price, then revenue from
every additional unit (MR) will fall. MR is the addition to TR when one more unit of
output is sold. So, TR will increase when MR is positive, TR will fall when MR is negative
and TR will be maximum when MR is zero. The relationship can be better understood
with the help of table.

Units sold AR TR MR
1 5 5 5
2 4 8 3
3 3 9 1
4 2.25 9 0
5 1 5 -4

The TR curve rises as long as MR is positive. It reaches the highest point (point A) when
MR is zero (point B) and it starts declining when MR becomes negative.

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 The relationship can be summed up as under –
1.) As long as MR is positive, TR increases (or when TR rises, MR is positive).
2.) When MR is zero, TR is at its maximum point (or when TR is maximum, MR is
zero).
3.) When MR becomes negative, TR starts falling (or when TR falls, MR is negative).
10.) What is Break Even Point?
Ans. Break even point refers to the point where the total revenue is equal to the total cost.
At break-cost point, firm is able to meet all its cost.

1.) As seen in the diag. E is the break-even point as this point, TR = TC.
2.) Point E is the situation of normal points (also known as no profit no loss
situation).
3.) Any point below E indicates abnormal losses, whereas, any point above E shows

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 abnormal profits.

11.) What is Shut Down Point?

Ans. shut down point refers to a situation when a firm is able to cover its variable costs
only. In other words, it is a situation when total revenue (TR) received from the sale of
goods is just equal to total variable costs (TVC) of production.

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SUPPLY
S.NO. QUESTIONS
1.) Define Supply.
Ans. Supply refers to quantity of a commodity that a firm is willing and able to offer for
sale at a given price during a given period of time.

The definition of supply highlights four essential elements –

1.) Quantity of a commodity
2.) Willingness to sell
3.) Price of the commodity
4.) Period of time

2.) How “Individual Supply” is differ from “Market Supply”?

Ans. Individual supply refers to quantity of a commodity that an individual firm is willing
and able to offer for sale at a given price during a given period of time.

Market supply refers to quantity of a commodity that all the figure are willing and able to
offer for sale at a given price during a given period of time.

3.) How “Supply” is differs from “Stock”?

Ans. supply refer to the quantity offered for sale which changes with change in price,
whereas, stock indicates a fixed quantity.
Supply relates to a period of time, whereas, stock relates to a particular point of time.

4.) What are the determinants of Individual supply?

Or what are the factors affecting supply?
Ans. The important factors affecting supply are –
1.) Price of the given commodity
The most important factors determining the supply of a commodity is its price. As general
price rule, price of the commodity and its supply are directly related. It means, as price
increases, the quantity supplied of the given commodity also rises and vice-versa.
It happens because at higher prices, there are greater chances of making profit. It induces
the firm to offer more for sale in the market.

2.) Prices of the other goods

As resources have alternative uses, the quantity supplied of a commodity depends not
only on its price, but also on the prices of other commodities. Increase in the prices of
other goods makes them more profitable in comparison to the given commodity.
As a result, the firm shifts its limited resources from production of the given commodity
to production of other goods.
For example – increase in the price of other good (say wheat) will induce the farmer to
use land for cultivation of wheat in place of the given commodity (say rice).

3.) Prices of factors of production (inputs)

When the amount payable to factors of production and cost of inputs increases, the cost
of production also increases, the cost of production also increases. This decreases the
profitability. As a result, seller reduces the supply of the commodity. On the other hand,
decrease in prices of factors of production or inputs; increase the supply due to fall in cost
of production and subsequent rise in profit margin.

4.) State of the technology

Technology change influences the supply of a commodity. Advanced and improved
technology reduces the cost of the production, which raises the profit margin. It induces
the seller to increase the supply. However, technology degradation or complex and

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 outdated technology will increase the cost of production and it will lead to decrease in
supply.

5.) Government policy (taxation policy)

Increase in taxes raises the cost of production and, thus reduces the supply, due to lower
profit margin. On the other hand, tax concessions and subsidies increase the supply as
they make it more profitable for the firm to supply goods.

6.) Goals/objectives of the firm

Generally, supply of a commodity increases only at higher prices as it fulfills the objective
of profit maximization. However, with change in trend, some firms are willing to supply
more even at those prices, which do not maximize their profits. The objective of such
firms is to capture extensive markets and to enhance their status and prestige.

5.) What are the determinants of Market supply?

Ans. Market supply is affected by all the factors affecting individual supply. In addition, it
is also affected by the following factors –

1.) Number of firms in the market –

When the number of firms in the industry increases, market supply also increases due to
large number of producers producing that commodity. However, market supply will
decrease, if some of the firms start leaving the industry due to loss.

2.) Future expectation regarding price –

If sellers expect a rise in price in near future, then current market supply will decrease in
order to raise the supply in future at higher prices. However, if the sellers fear that the
prices will fall in the future, then they will increase the present supply to avoid losses in
future.

3.) Means of transformation and communication –

Proper infrastructural development, like improvement in the means of transportation
and communication, help in maintaining adequate supply of the commodity.

6.) What is Supply function?

Ans. supply function shows the functional relationship b/w quantity supplied for a
particular commodity and the factors influencing it.
It can be either with respect to one producer (individual supply function) or to all the
producers in the market.

7.) How “Individual demand function” is differ from “Market demand function”?
Ans. Individual supply function refers to the functional relationship b/w supply
and factors affecting the supply of a commodity.

SX = F (PX, PO, PT, ST, T, G)

Where,
Sx = supply of the given commodity
Po = price of the other goods
St = state of the technology
G = goals of the firm
Px= price of the given commodity x
Pt = prices of factors of production
T = taxation policy

Market supply function

Market supply function refers to the functional relationship b/w market supply
and factors affecting the market supply of a commodity.
SX = F (PX, PO, PT, ST, T, G, N, F, M)
Where,

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 N= number of firms
F= future expectation regarding Px.
M= means of transporting and communication.

8.) What is Supply Schedule?

Ans. supply schedule is a tabular statement showing various quantities of a
commodity being supplied at various levels of price, during a given period of time.

9.) How “Individual Supply Schedule” is differ from “Market Supply Schedule”?
Ans. Individual supply schedule refers to a tabular statement showing various quantities
of a commodity that a produce is willing to sell at various levels of price, during a given
period of time.
Price Quantity supplied
1 5
2 10
3 15
4 20
5 25

Market supply schedule refers to a tabular statement showing various quantities of a

commodity that all the producers are willing to sell at various levels of price, during a
given period of time.

Individual supply Market supply (units)

Price (units) (SA + SB)
Px SA SB

1 5 10 15
2 10 20 30
3 15 25 40
4 20 35 55
5 25 40 65

-
10.) What is Supply Curve?
Ans. Supply curve refers to a graphical representation of supply schedule.

It is the locus of all the points showing various quantity of a commodity that a producer is
willing to sell at various quantities of a commodity that a producer is willing to sell to
various level of price, during a given period of time, assuming no change in other factors.
- It shows the direct relationship b/w price and quantity supplied, keeping other
factor constant.
- It can be drawn for any commodity by plotting each combination of the supply
schedule on a graph.

11.) How “individual supply curve” is differ from “market supply curve”?
Ans. “Individual supply curve refers to the graphical representation of individual supply
schedule.”
Supply curve SS slope upwards due to the positive relationship b/w price and quantity
supplied.

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 “Market supply curve refers to the graphical representation of market supply schedule”.
It is obtained by the horizontal summation of individual supply curves.
Market supply curve is also positively slope due to the positive relationship b/w price
and quantity supplied.

12.) How “supply” is differs from “Quantity supplied”?

Supply –
Supply refers to different quantities of a commodity that the producer is ready to sell at
different levels of prices.
For example – there is a supply of 5 units at Rs 1, supply is 10 units at Rs 2 and so on. It
means, supply describes the behavior of the firm at every possible price.

Quantity supplied –
Quantity supplied refers to a specific quantity, in the supply schedule, supplied against a
specific price.
For example – 5 units are supplied at price of Rs 1. The term ‘quantity supplied’ makes
sense only in relation to a particular price.

13.) Explain Law of Supply.

Ans. law of supply states the direct relationship b/w price and quantity supplied, keeping
other factors constant.
- It is a qualitative statement, as it indicates the direction of change in the quantity
supplied, but it does not indicate the magnitude of change.
- It does not establish any proportional relationship b/w change in price and the
resultant change in quantity supplied.
- Law is one sided as it explain only the effect of change in price on the supply, and
not the effect of change in supply on the price.

Assumptions of law of supply –

1.) Price of the other are constant
2.) There is no change in the state of the technology
3.) Prices of factors of production remain the same
4.) There is no change in the taxation policy
5.) Goals of the producer remains the same

Price Quantity (in units)

1 10
2 20
3 30
4 40
5 50

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 Law of supply can be better understood with the help of table that more and more units
of the commodity are being offered for sale as the price of the commodity is increased.
Supply curves direct relationship b/w price and quantity supplied.

14.) What are the reasons for the Law of supply?

Ans. The main reasons for operation of law of supply are –

1.) Profit motive

The basic aim of producer, while supplying a commodity, is to secure maximum profit.
When price of a commodity increases, without any change in costs, it raises their profits.
So, producer increase the supply of the commodity by increasing the production. On the
other, with fall in prices, supply also decreases as profit margin decreases at low prices.

2.) Change in the number of firms

A rise in price induces the prospective producers to enter into the market to produce the
given commodity so as to earn higher profits. Increase of firms raises the market supply.
However, as the price starts falling, some firms which do not expect to earn any profits at
a low price either stop the production or reduce it. It reduces the supply of the given
commodity as the number of firms in the market decreases.

3.) Change in the stock

When the price of a good increases, the sellers are ready to supply more goods from their
stocks. However, at relatively lower price, the producers do not release big quantities
from their stocks. They start increasing their inventories with a view that price may rise
in near future.

15.) What are the exceptions of law of supply?

Ans. The various exceptions to the law of supply are –

1.) Future expectations

If sellers expect a fall in the price in the future, then the law of the supply many not hold
true. In this situation, the sellers will be willing to sell more even at a lower price.
However, if they expect the price to rise in the future, they would reduce the supply of the
commodities, in order to supply the commodity later a high price.

2.) Agriculture goods

The law of supply does not apply to agriculture goods as their productions depend on
climatic conditions. If, due to unforeseen changes in weather, the production of
agriculture products is low, then their supply cannot be increased even at higher prices.

3.) Perishable goods

In case of perishable goods, like vegetables, fruits etc. sellers will be ready to sell more
even if the prices are falling. It happens because sellers cannot hold such goods for long.

4.) Rare articles

Rare, artistic and precious articles are also outside the scope of law of the supply. For
example, supply of raw articles like painting of MONA LISA cannot be increased, even if

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 their prices are increased.

5.) Backward countries

In economically backward countries, production and supply cannot be increased with rise
in price due to the shortage of resources.

16.) Explain the concept of Movement along the supply curve (Change in Quantity
supplied)?
Ans. When quantity supplied of a commodity changes due to change in its own
price, keeping other factors constant, it is known as ‘change in quantity supplied’.
It is graphically expressed as a movement along the same supply curve.
There can be either a downward movement (contraction in supply) or an upward
movement (expansion in supply) along the same curve.

OQ quantity is supplied at the price of OP. change in price leads to an upward or

downward movement along the same supply curve.
- Expansion in supply (Upward movement)

Expansion in supply refers to a rise in the quantity supplied due to increase in price
of the commodity, other factors remaining constant.

When price rises to OP1, quantity supplied also rises to OQ1 (expansion in supply),
leading to an upward movement from A to B along the same supply curve SS.
Price Quantity
20 100
25 150

- Contraction in supply (Downward movement)

Contraction in supply refers to a fall in the quantity supplied due to decrease in

price of the commodity, other factors remaining constant.

On the other hand, fall in the price OP to OP2 leads to decrease in the quantity supplied
from OQ to OQ2 (known as contraction in supply), resulting in a downward movement
from A to C along the same supply curve SS.
Price Quantity
20 100
15 70

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17.) Explain the concept of Shift along the supply curve (Change in supply)?
Ans. When supply of a commodity changes due to change in any factor other than
the own price of the commodity, it is known as ‘change in supply’.

For example – An increases in the excise duty on a commodity will raise its cost of
production with fall in profit margin, producers may decrease its supply, even though its
market price has not changed. Such decrease in supply, whose price has not changed, can
be represented by the original supply curve. It will lead to a shift in supply.

Various reasons due to shift in supply curve –

1.) Change in the price of other goods.

2.) Change in the price of factors of production.
3.) Change in the state of technology.
4.) Change in the taxation policy.
5.) Change in the objective of the firm.
6.) Change in the number of firms.
7.) Future expectation of change in price.

Increase in supply
Increase in supply refers to a rise in the supply of a commodity caused due to any factors
other than own price of the commodity.

In this case, supply rises at the same price or supply remains same even at lower price.
Price Quantity
20 100
20 150

Decrease in supply
Decrease in supply refers to a fall in the supply of a commodity cause due to any factor
other than the own price of the commodity.

In this case, supply falls at the same price or supply remains same even at higher price.
Price Supply
20 100
20 70

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18.) Differentiate b/w movement along supply curve and shift along supply curve.
Basis Movement along supply Shift in supply curve
curve
Meaning When the quantity supplied When the supply changes due to
changes due to change in change in any factor other than the
price, keeping other factors own price of the commodity, it
constant, it leads to a leads to a shift in supply curve.
movement along the supply
curve.
Effect on The movement is along the The shift in the supply curve either
supply same supply curve either rightward or leftward.
curve upward or downward.

It occurs due to an increase or It occurs due to a change in other

Reason decrease in the price of the factors, like change in price of
given commodity. inputs, change in taxes, change in
technology etc.

19.) Differentiate b/w Expansion supply and Increase in supply.

Basis Expansion in supply Increase in supply
Meaning When the quantity supplied Increase in supply refers to a rise
rise due to an increase in the in the supply of a commodity
price, keeping other factors caused due to any factor other
constant, it is known as than the own price of the
expansion in supply. commodity.

Effect on There is upward movement There is a rightward shift in the

supply along the supply curve. supply curve.
curve
It occurs due to increase in It occurs due to other factors like
Reason price of the given commodity. decrease in the price of inputs,
decrease in taxes, technology
upgradation etc.

20.) Difference b/w change in quantity supplied and change in supply.

Basis Change in quantity supplied Change in supply

Meaning When the quantity supplied When the supply changes due to
changes due to change in the change in any factors other than
price, keeping other factors own price of the commodity, it is
constant, it is known as known as change in supply.
change in quantity demanded.

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 Effect on It leads to a movement along It leads to the shift in the supply
supply the same supply curve upward curve either rightward or leftward.
curve or downward.
It occurs due to a change in other
It occurs due to an increase or factors, like change in the price of
Reason decrease in the price of the inputs, change in taxes, change in
given commodity. technology etc.

21.) Difference b/w contraction of supply and decrease in supply.

Basis Contraction in supply Decrease in supply
Meaning When the quantity supplied Decrease in supply refers to a fall in
falls due to a decrease in the the supply of the commodity caused
price, keeping other factors due to any factor other than own
constant, it is known as price of the commodity.
contraction in supply.

Effect on There is a downward There is leftward shift in the supply

supply movement along the same curve.
curve supply curve.

It occurs due to decrease in It occurs due to a change in other

Reason price of the given commodity factors, like increase in the price of
inputs, increase in taxes,
degradation in technology etc.

22.) What happens with the supply curve due to change in the price of other goods?
Ans. The quantity supplied of the given commodity depends not only on its price, but also
on the price of other goods. ‘Increase’ and ‘decrease’ in prices of other goods shifts the
original supply curve of given commodity.

i.) Increase in price of other goods

When prices of other goods rises, then production of such other goods become more
profitable in comparison to the given commodity. As a result, supply falls from OQ to OQ1
at the same price OP. It leads to leftward shift in the supply curve from SS to S1S1.

ii.) Decrease in price of other goods

Fall in prices of other goods make production of the given commodity more profitable
and it increases its supply from OQ to OQ1 at the same price OP. It leads to a rightward
shift in the supply curve from SS to S1S1.

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23.) What happens with the supply curve due to change in the price of factors of
production?
Ans. price of the factors of production forms a major part of the cost of producing a
commodity. With a change (increase or decrease) in the amount payable to factor input,
supply curve of the commodity also changes.

i.) Increase in price of factors of production

Rise in the price of factors of production increase in the cost of production and reduces
the profit margin. As a result, supply falls from OQ to OQ1 at the same price OP. It leads to
a leftward shift in the supply curve from SS to S1S1.

ii.) Decrease in price of factors of production

When price of factors of production falls, cost of production falls and profit margin rises.
It increases the supply from OQ to OQ1 at the same price OP. It leads to a rightward shift
in the supply curve SS to S1S1.

24.) What happens with the supply curve due to change in the state of technology?
Ans. technological changes affect the cost of production, which directly influence the
supply of the commodity. Supply increases with technological advancement, whereas, any
degradation of technology reduces the supply.

i.) Upgradation of technology

Advancement and improved technology reduces the cost of production and raises the
profit margin. Supply rises from OQ to OQ1 at the same price OP. It leads a rightward shift
in the supply curve from SS to S1S1.

ii.) Degradation of technology

Technological degradation or complex and outdated technology leads to rise in cost of
production and fall in the profit margin. It decrease the supply from OQ to OQ1 at the
same price OP. As a result, supply curve shift towards left from SS to S1S1.

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25.) What happens with the supply curve due to change in the taxation policy?
Ans. taxes directly affect the cost of producing a commodity. With a change (increase or
decrease) in taxes, supply curve of the given commodity changes.

i.) Increase in taxes

Rise in taxes increases the cost of production and reduces the profit margin. As a result,
supply falls from OQ to OQ1 at the same price OP. It leads to a leftward shift in the supply
curve from SS to S1S1.

ii.) Decrease in taxes

When taxes falls, cost of production falls and profit margin rises. It increases the supply
from OQ to OQ1 at the same price OP. It leads to a rightward shift in the supply curve
from SS to S1S1.

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ELASTICITY OF SUPPLY
S.NO. QUESTIONS
1.) What do you understand by price elasticity of supply?
Ans. Price elasticity of supply refers to degree of responsiveness of supply of the
commodity with reference to change in the price of such commodity.

This concept is parallel of price elasticity of demand. It points out the reaction of the
sellers to a particular change in the price of the commodity. It explain of the quantitative
change in supply of a commodity, due to a given change in the price of the commodity.

2.) What are the methods for measuring price elasticity of supply?
Ans. Price elasticity of supply can be measured by the following methods –

1.) Percentage method

According to this method, elasticity is measured as the ratio of percentage change in the
quantity supplied to percentage change in the price.

2.) Geometric method

According to this method, elasticity is measured at a given point on the supply curve. This
method is also known as ‘Arc method’ or ‘Point Method’.

3.) What are the kinds of price Elasticities of Supply?

Ans. There are five kinds of price elasticities of supply –

1.) Perfectly elastic supply –

When there is infinite supply of the particular price and the supply becomes zero with
slight fall in price, then the supply of such commodity is said to be perfectly elastic.
Price Supply
30 100
30 200
30 300

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 2.) Perfectly inelastic supply –
When the supply does not change with change in price, then supply for such a commodity
is said to be perfectly inelastic.

Price Supply
20 20
30 20
40 20

3.) Highly elastic supply -

When percentage change in quantity supplied is more than the percentage change in
price, then supply for such a commodity is said to be highly elastic.
Price Supply
10 100
15 200

4.) Less elastic supply –

When percentage change in quantity supplied is less than the percentage change in price,
then supply for such a commodity is said to be less elastic.

Price Supply
10 100
15 120

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 5.) Unitary elastic –
When percentage change in quantity supplied is equal to percentage change in price,
then supply for such a commodity is said to be unitary elastic.
Price Supply
10 100
15 150

4.) What are the factors affecting elasticity of supply?

Ans. Elasticity of supply depends upon a number of factors, some of which are as follows
–

1.) Nature of the commodity

On the basis of the nature commodities may be classified at perishable goods and durable
goods.
- Durable goods like furniture, tv etc have elastic supply, as they can be stored and
their supply can be changed according to change in their prices.
- On the other hand, perishable commodities like vegetables, fruits etc have
inelastic supply, because they cannot be stored and have to be disposed off within
a very short period.

2.) Cost of production

If cost of production rises rapidly with increase in output, then there is less incentive to
raise the supply with increase in price. In such cases, supply will be inelastic. However, if
the cost of production increases slowly with rise in output, then supply will increase with
rise in prices. In this case, supply will be more elastic.

3.) Time period

In the market period, supply of a commodity is perfectly inelastic as supply cannot be
changed immediately with change in price. In the short period, supply is relatively less
elastic as firm can change the supply by changing the variable factors. In the long period,
supply is more elastic as all factors can be changed and supply can easily adjusted as per
changes in price.

4.) Technique of production

Supply is generally elastic for commodities, which involve simple techniques of
production. However, supply is inelastic for commodities, which involve complex
techniques of production. Output of such goods cannot be easily increased with increase
in price.

5.) Nature of the inputs used

Elasticity of supply depends on the nature of inputs used in the process of production. If
raw materials and factors of production are of general nature and are easily available, the
supply will be elastic as supply can be easily changed with change in price. However, if
the inputs used are of specific or specialized nature, then supply is generally inelastic.

6.) Natural factors

The commodities, whose production depends on natural factors, such as weather, rain
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 etc. have inelastic supply (like in case of wheat, rice etc).
On the other hand, if production does not depends on natural factors (like in case of
manufactured goods), then supply is elastic.

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MARKET
S.NO. QUESTIONS
1.) What is the meaning of Market?
Ans. Market refers to the whole region where buyers and sellers of a commodity are in contact
with each other to effect purchase and sale of the commodity.
The essential constituents of a market can be summarized as –

i.) Area – Market is not related to any particular place. It spreads over an area. The
area becomes the point of contact b/w buyers and sellers.

ii.) Buyers and sellers – buyers and sellers should be in contact with each other.
However, contact does not necessarily mean physical presence.

iii.) Commodity – For the existence of market, there must be a commodity which will
be sold and purchased among buyers and sellers.

iv.) Competition – The existence of competition among buyers and sellers is also an
essential condition for the existence of a market, otherwise different prices may be
charged for the same commodity.

2.) Explain Perfect Competition with features.

Ans. Perfect competition refers to a market situation where there are very large no. of
buyers and sellers during in a homogenous product at a price fixed by the market.

Example of perfect competition –

In reality, perfect competition has never existed. The closest example we may have for such
kind of market can market for agriculture good (like wheat and rice). In case of wheat, there
are numerous buyers and sellers (farmers). As a result, no single buyers and seller can
significantly affect the market price of market.
Features of perfect competition –

1.) Very large number of buyers and sellers

In a perfectly competitive market, there are very large number of buyers and sellers.
Implication of ‘very large no. of buyers and sellers’ is that the no. of sellers is so large that the
share of each seller is insignificant in the total supply. Hence, an individual seller cannot
influence the market price. Similarly, a single buyer’s share in total purchase is so insignificant
because of their large no. that an individual buyer cannot influence the market price.

Under such conditions, price of a commodity is determined by the market forces of demand
and supply and each buyer and seller has to accept the same price. As a result, uniform
prevails in the market.

2.) Homogenous product

The products offered for sale in the market are homogenous, the product sold is identical in all
respects like size, shape, quality, colour etc. since each firm produces 100% identical products,
their products can be readily substituted for each other. So, the buyer has no specific
preference to buy from a particular seller only.

3.) Freedom of entry and exit

Perfect knowledge means that both buyers and sellers are fully informed about the market
price. Implication is that no firm is in a position to charge different price and no buyer will pay
higher price. As a result uniform price prevails in the market.

4.) Perfect knowledge among buyers and sellers

Perfect knowledge means that both buyers and sellers are fully informed about the market
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 price. Its implication is that no firm is in position to charge a different price and no buyer will
pay a higher price. As result a uniform price prevails in the market.

5.) Perfect mobility of factors of production

The factors of production (land, labour, capital and entrepreneurship) are perfectly
mobile. There is no geographical or occupational restriction on their movement. The
factors are free to move to the industry in which they get the best price.

6.) Absence of transport costs

In order to ensure uniform price in the market, it is assumed that transport costs is zero. A
producer can sell his product at any place and a buyer can buy it from the place he likes.

7.) Absence of selling costs

Selling cost refers to cost of advertisement of the product. In perfect competition, there are no
selling costs because of perfect knowledge amongst buyers and sellers.

3.) How “perfect competition” is differs from “pure competition”.

Ans. perfect competition is used in wider sense as compared to Pure competition. The
competition is said to be pure competition when the following 3 fundamentals conditions exist
–
1.) Very large no. of buyers and sellers
2.) Homogenous product
3.) Freedom of entry and exit

Perfect competition is a wider concept. For the market to be perfectly competitive, in addition
to three fundamental conditions, four additional conditions must satisfied –
1.) Perfectly knowledge among buyers and sellers
2.) Perfectly mobility of factors of productions
3.) Absence of transportation cost
4.) Absence of selling cost

4.) Firm is a price taker. Comment

Ans. price taker means that an individual firm has no option but to sell at a price determined
by the industry. Under perfect competition, an individual firm cannot influence the price on its
own as its share in total market supply is negligible.
Therefore, a firm plays no role in price determination. It can affect neither the supply, nor the
demand in the market. So, firm a price taker and industry is a price maker.
Each firm has to accept that price which is set by the market forces of the demand and supply.
Price is determined at the point where the market demand curve intersects market supply
curve.

5.) What is the shape of demand curve in perfect competition?

Ans. In case of perfect competition, there are very large no. of buyers and sellers selling
homogenous product at a price fixed by the market. Therefore, each firm is price taker and
faces a perfectly elastic demand curve.

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 In figure, output is represented on X-axis and price and revenue along the Y-axis. Firm’s
demand curve is indicated by the horizontal straight line parallel to the X-axis. As each
firm has to accept the price fixed by the industry, the price is determined at OP. At OP
price, a seller can sell OQ1, OQ2 or any other quantity. However, a firm is not in a
position to change the price.

6.) Explain Monopoly with features.

Ans. Monopoly is the market situation where there is a single a product which has no
close substitute. For example Railway in India

Features
1.) Single seller
Under monopoly, there is single seller selling the product. As a result, the monopoly firm and
industry are one and the same thing and monopolist has full control over the supply and price
of the product. However, there are large no. of buyers of monopoly product and no buyer can
influence the marker price.

2.) No close substitute

The product produce by the monopolist has no close substitutes. So, the monopoly firm has no
fear of competition from new or existing products. For example – there is no close substitute
of electricity services provided by NDPL. However, the product may have distant substitutes
like inverter and generator.

3.) Restriction on entry and exit

There exist strong barrier to entry of new firms and exit of existing firms. As a result, a
monopoly firm can earn abnormal profits and losses in the long run. These barriers may be
due to legal restrictions like licensing or patent rights or due to the restrictions created by the
firms in the form of cartel.

4.) Price discrimination

A monopolist may charge different price for his product from different sets of consumers at
the same time. It is known as price discrimination.

5.) Price maker

In case of monopoly, firm and industry is one and the same thing. So, firm has complete
control over the industry output. As a result, monopolist is a price-maker and fixes its own
price. It can influence the market price by changing the supply of the product.

7.) What are the Reasons for Emergence of Monopoly?

Ans. the various reasons for emergence of the monopoly are –
1.) Government licensing
It means that before a firm can enter an industry, it needs to take permission from the
government. Licensing is used to ensure minimum standards of competency. By not granting
licenses to new firm, government aims to assure that only one firm operates in the market.

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 2.) Patent right
Certain big private companies are engaged in research and development activities. At times,
they come up with new products or new technologies. As a reward for their risk and
investment in research, government grants them patent right. The period for which patent
right are granted is known as patent life.

3.) Cartel
Under cartel, some firms retain their industrial identities but coordinate their output and
pricing policies in order to act monopoly. The firms agree among themselves to restrict their
total output to the level the maximizes their joint profits.

4.) Control of raw material

Monopoly also rises due to solve ownership or control of certain essential raw materials
needed in a particular industry. For example – De beers co. of South Africa controls about 80
percent, still it is large enough to exert substantial influence over the market.

8.) What is the shape of demand under monopoly?

Ans. A monopoly firm is like an industry as the single seller constitutes the entire market for
the seller constitutes the entire market for the product, which has no close substitutes. So, a
monopolist has full freedom and power to fix price for the product.

However, demand of the product is not in the control of monopoly firm. In order to increase
the output to be sold, monopolist will have to reduce the price. Therefore, monopoly firms face
a downward sloping demand curve.

In figure, output is measured along the x-axis and price and revenue along Y-axis. At price OP,
a seller can sell OQ quantity. Demand rises to OQ1 if the price is reduced to OP1. So, demand
curve under monopoly is negatively sloped as more quantity can be sold only at a lower price.

9.) Explain Monopolistic competition with features.

Ans. Monopolistic competition refers to a market situation in which there are large no.
of firms which sell closely related but differential products. Markets of products like
soap, toothpaste etc. are the examples of monopolistic competition.
Monopoly + competition = monopolistic competition

Features
1.) Large number of seller

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 There are large number of firms selling closely related, but not homogenous products. Each
firm acts independently and has a limited share of the market. So, an individual firm has
limited control over the market price. Large number of firms leads to competition in the
market.

2.) Product differentiation

Each firm is in a position to exercise some degree of monopoly through product
differentiation. Product differentiation refers to differentiating the products on the basis of
brand, size, colour, shape etc. The product of a firm is close, but not perfect substitute of other
firm.

3.) Selling costs

Under monopolistic competition, production are differentiated and these differences are made
known to the buyers through selling costs refer to the expenses incurred on marketing, sales
promotion and advertisement of the product. Such cost are incurred to persuade the buyers to
buy a particular brand of the product in preference to competitor’s brand. Due to this reason,
selling costs constitute a substantial part of the total cost under monopolistic competition.

4.) Freedom of entry and exit

Under monopolistic competition, firms are free to enter into or exit from the industry at any
time they wish. It ensures that there of the consumers and it becomes very difficult for a
consumer to evaluate different products available in the market. As a result, a particular
product is preferred by the consumers even if other less priced products are of same quantity.

5.) Lack of perfect knowledge

Buyers and sellers do not have perfect knowledge about the market conditions. Selling costs
create artificial superiority in the minds of the consumers and it becomes very difficult for a
consumer to evaluate different product available in the market. As a result, a particular
product is preferred by the consumers even if other less priced products are of same quantity.

6.) Pricing decision

A firm under monopolistic competition is neither a price taker nor a price maker. However, by
producing a unique product or establishing a particular reputation, each firm has a partial
control over price. The extent of power to control price depends upon how strongly the buyers
are attached to his brand.

7.) Non-price competition

In addition to price competition, non-price competition also exists under monopolistic
competition. Non-price competition refers to competing with other firms by offering free gifts,
making favourable credit terms, etc without changing prices of their own prouducts.

10.) Differentiate perfect competition and monopoly

Basis Perfect competition Monopoly
No. of There are very large no of sellers There is a single seller and the
sellers and no individual seller has monopolist has full control over the
control over activities of other supply.
time.

Nature of The product is homogenous it is There are no close substitutes of

product identical in all respect. the product.

Entry and There is freedom of entry and There is restriction on entry and
exit exit. It leads to absence of exit. So, firm can earn abnormal
abnormal profits and losses in profits and losses in the long-run.
the long run.

Price Firm is a price taker as price is Monopolist is a price-maker as firm

determined by the industry. and industry are one and the same
thing.

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 Level of Buyers and sellers have perfect Buyers and sellers do not have
knowledge knowledge about the market perfect knowledge.
conditions.

Demand Demand curve is perfectly Demand curve slopes downwards

curve elastic as price remains same at as
all levels of output. more output can only at less price.

Selling cost No selling costs are incurred as Selling costs are incurred for
buyers and sellers have perfect informative purposes due to lack of
knowledge about the market perfect knowledge.
conditions.

11.) Differentiate perfect competition and monopolistic competition.

Basis Perfect competition Monopolistic competition

Nature of The product is homogenous it is The product is differentiated on the
the product identical in all respects like size, basis of brand, size, colour, shape
shape, quality etc. etc.

Selling cost No selling cost are incurred as

buyers and sellers have perfect Heavy selling costs are incurred on
knowledge about the market sales promotion due to lack of
conditions. perfect knowledge among buyers
and sellers.

Price Firm is a price-taker as price is

determined by the industry. Firm has partial control over price
due to product differentiation.

Level of Buyers and sellers have perfect Buyers and sellers do not have
knowledge knowledge about the market perfect knowledge due to product
conditions. differentiation and selling costs
incurred by sellers.

Demand Demand curve is perfectly elastic Demand curve slope downwards as

curve as price remains the same at all more output can be sold only at less
levels of output. price.

12.) Differentiate monopolistic competition and monopoly.

Basis Monopoly Monopolistic competition

Number of There is a single seller. So, a There are large no. of sellers. So,
sellers monopolist has full control firm does not have much impact
over the market. on activities of other firms.

Nature of There are no close substitutes Products are differentiated on

product of the product. the basis of brand, size, colour,
shape etc.
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 Entry and There is restriction on entry There is freedom of entry and
exit and exit. So, a firm can earn exit. However, only a competitive
abnormal profits in the long firm can enter or leave the
run. industry.

Price Firm has the partial control over

Monopolist is a price-maker as price due to product
firm and industry are one and differentiation.
the same thing.
The downward sloping demand
Demand The downward sloping curve is more elastic due to
curve demand curve is less elastic presence of close substitutes.
due to absence of close
substitutes.
Heavy selling costs are incurred
Selling cost Low selling costs are incurred. on sales promotion.

13.) Explain Oligopoly with features.

Ans. oligopoly refers to a market situation in which there are a few firms selling
homogeneous or differentiated product.

Oligopoly is the market structure in which there are few seller in the market (but more
than two) of the homogenous or differentiated products.

Features
1.) Few firms
Under oligopoly, there are few large firms. The exact number of firms is not defined. Each firm
produces a significant portion of the total output. There exists severe competition among
different firms and each firm try to manipulate both price and volume of production to
outsmart each other.

For example – the market for automobiles in India is an oligopolist structure as there are only
few producers of automobiles.

2.) Interdependence
Firms under oligopoly are interdependent. Interdependent means that actions of one firms
affect the actions of other firms. A firm considers the action and reaction of the rival firms
while determining its price and output levels. A change in output or price by one firm evokes
reaction from other firms operating in the market.

For example market for cars in India is dominated by few firms (Maruti, TATA, Hyndai, Ford,
Honda etc). A change by one firm say TATA in any of its vehicle say Indica will induce other
firms (say Maruti, Hyndai) to make changes in their respective items.

3.) Non-price competition

Under oligopoly, firms are in a positions to influence the prices. However, they try to avoid
price competition for the fear of price war. They follow the policy of price rigidity.
Price rigidity refers to a situation in which price tends to stay fixed irrespective of changes in
demand and supply conditions. Firms use other method like advertising, better services to
customer, etc to compete with each other.

4.) Barrier to entry of firms

The main reason for few firms under oligopoly is the barrier, which prevent entry of new firms
into the industry. Patents, requirement of large capital, control over crucial raw materials etc.
are some of the reasons, which prevent new firms from entering into the industry. Only those
firms enter into the industry which are able to cross these barriers. As a result, firms can earn

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 abnormal profits in the long run.

5.) Role of selling costs

Due to severe competition and interdependence of the firms, various sales promotion
techniques are used to promote sales of the product. Advertisement is in full swing under
oligopoly, and many times advertisement can become a matter of life and death. A firm under
oligopoly relies more on non-price competition.

6.) Group behavior

Under oligopoly, there is complete interdependence among different firms. So, price and
output decisions of a particular firm directly influence firms prefer group decisions that will
protect the interest of all the firms. Group behavior means that firms tend to behave as if they
were a single firm even though individually they retain their independence.

7.) Nature of the product

The firms under oligopoly may produce homogenous or differentiated product.
 If the firm produces a homogenous product, like cement or steel, the industry is called
a pure or perfect oligopoly.
 If the firms produce a differentiated product, like automobiles, the industry is called
differentiated or imperfect oligopoly.

8.) Indeterminate demand curve

Under oligopoly, the exact behavior pattern of a producer cannot be determined with
certainty. So, demand curve faced by an oligopolist is indeterminate (uncertain). As firms are
inter-dependents, a firm cannot ignore the reaction of the rival firms. Any change in price by
one firm may lead to change in prices by the competing firms. So, demand curve keeps o
shifting and it is not definite, rather it is indeterminate.

14.) 15.) Difference b/w collusive and non-collusive oligopoly.

Or Difference b/w perfect oligopoly and imperfect oligopoly.
Or Difference b/w pure and differentiated oligopoly.
Collusive oligopoly Non-collusive oligopoly
If the firms cooperate with each other in If firms in an oligopoly market compete
determining price or output or both, it is with each other, it is called a non-
called collusive oligopoly or cooperative collusive or non-cooperative oligopoly.
oligopoly.

Pure or perfect oligopoly Imperfect or differentiated

oligopoly
If the firms produce differentiated If the firms produce differentiated
products, then it is called pure or perfect products, then it is called differentiated or
oligopoly. Though, it is rare to find pure imperfect oligopoly.
oligopoly situation, yet, cement, steel, For example: passenger cars, cigarettes or
aluminum and chemicals producing soft drinks. The goods produced by
industries approach pure oligopoly. different firms have their own distinguish
characteristics, yet all of them are close
substitutes of each other.

16.) Compare all the market on the basis of their feature.

Basis Perfect Monopoly Monopolisti Oligopoly
competition c
competition
1. No. of Very large no. Single seller. Large Few big
sellers of sellers. number of sellers.
sellers.

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 2. Nature of Homogenous No close Closely Products are
product product. substitute. related but homogenous
differentiated under pure
. oligopoly and
differentiated
under
differentiated
oligopoly.
3. Entry and Freedom of Entry of new Freedom of Restriction
exit of the entry and firms and exit entry and on entry of
firms exit. of old firms is exit. new firms.
restricted.
4. Demand Perfectly Downward Downward Indeterminat
curve elastic sloping sloping e demand
demand demand demand curve.
curve curve. (less curve but
elastic). more elastic.
5. Price Uniform Firm is price Firm has Price rigidity
price as each maker. So, partial due to fear of
firm is a price price control over price war.
taker. discriminatio price due to
n is possible. product
differentiatio
n.
6. Selling No selling Only High selling Huge selling
Costs/ costs are informative costs. costs are
advertise incurred. selling costs incurred.
ment cost are incurred.

7. Level of Perfect Imperfect Imperfect Imperfect

knowledge knowledge. knowledge. knowledge knowledge.

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PRICE DETERMINATION
S.NO. QUESTIONS
1.) How we determine market equilibrium under perfect competition?
Ans. Perfect competition is market structure where each firm is a price-taker and price is
determined by the market forces of demand and supply. We know, equilibrium refers to
the state of balance.
It means under perfect competition when market demand is equal to market supply.
Both market demand and market supply act as the counteracting forces, which move in
the opposite directions. Market equilibrium is determined when the quantity demanded
of commodity becomes equal to the quantity supplied.
The price determined corresponding quantity is known as equilibrium quantity.

Price of Market Market supply Shortage or Remarks

chocolate demand of of chocolate surplus
chocolate
2 100 20 (-)80 Excess demand
4 80 40 (-)40
6 60 60 0 Equilibrium
level
8 40 80 (+)40 Excess supply
10 20 100 (+)80

As seen in the above table, both buyers and sellers are negotiating to buy and sell
chocolates. Both have different prices to offer. Buyers will like to pay as low as possible
and sellers will like to change as high as possible. But market equilibrium will be
determined only when both agree to a common price and a common quantity at that
price.

2.) Why any other price is not the equilibrium price?

Ans. 1.) Any other price above 6 is not the equilibrium price as the resulting surplus,
therefore excess supply would cause competition among sellers. In order to sell the
excess stock, price would come down to the equilibrium price of Rs 6.
2.) Any other price below Rs 6 is also not the equilibrium price as due to excess demand,
buyers would be ready to pay higher price to meet their demand. As a result, price would
rise upto the equilibrium price of Rs 6.

3.) Differentiate b/w Viable Industry and Non-Viable Industry.

Ans. Viable Industry
It refers to an Industry for which supply curve and demand curve intersect each other in
Positive axes.
In the viable industry, supply and demand curve must intersect at some positive point. As

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 seen in the diagram, both demand and supply curves intersect each other in the positive
range of X-axis and Y-axis.

Non-Viable Industry
It refers to an industry for which supply curve and demand curve never intersect each
other in the positive axes.
In non-viable industry, supply curve lies above the demand curve as price is too high for
the consumers. It happens when the price, at which producers are ready to produce is so
high that consumers are not willing to buy even a single unit. As a result, the product is
not produced.
Demand and supply curve never intersect each other in the positive range of both axes.

4.) What are the effects of changes in Demand and supply on Market equilibrium?
Ans. There is any change, which leads to shift in demand curve and supply curve or both,
then equilibrium price and equilibrium are bound to change.

Demand curve shifts due to the following reasons –

a.) Change in price of complementary goods.

b.) Change in price of substitute goods.
c.) Change in income.
d.) Change in taste and preference.
e.) Change in future expectation.
f.) Change in population

Supply curve shifts due to the following reasons –

a.) Change in the price of the factors of production.

b.) Change in the state of technology.
c.) Change in the no. of firms.
d.) Change in the price of other goods.
e.) Change in the taxation policy.
f.) Change in the goals of firms.

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 Change in demand

Change in demand or shift in the demand curve occurs due to the change in any of the
factors that were assumed constant under the law of demand. The change may be either
an ‘Increase in Demand’ or ‘Decrease in Demand’. Original market equilibrium is
determined at point E. When original demand curve DD and supply curve SS intersect
each other. OQ is the quantity and OP is the equilibrium price.

i.) Increase in demand

An increase in demand leads to rightward shift in demand curve DD to D1D1.

When demand increase from DD to D1D1, it creates an excess demand at the old
equilibrium price of OP. This leads to competition among buyers, which raises the price.
Increase in price leads to rise in supply and fall in demand. These changes continue till
the new equilibrium is established at point E1. As there is an increase in demand only,
equilibrium price rises from OP to OP1 and equilibrium quantity rises from OQ to OQ1.

ii.) Decrease in demand

In case of decrease in demand, demand curve shifts to the left from DD to D2D2.

When demand decrease to D2D2, it creates an excess supply at the old equilibrium price
of OP. This leads to competition among sellers, which reduces the price. Decrease in price
leads to rise in demand and fall in supply. These changes continue till the new
equilibrium is established at point E2.
Equilibrium price falls from OP to OP2 and equilibrium quantity falls from OQ to OQ2.

Change in supply
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 Change in supply or shift in the supply curve occurs due to change in any of the factors
that were assumed constant under the law of supply. The change may be either an
‘Increase in supply’ or ‘decrease in supply’. Original Equilibrium is determined at point E,
when demand curve DD and the original supply SS intersect each other. OQ is the
equilibrium quantity and OP is the equilibrium price.

i.) Increase in supply

When there is an increase in supply, demand remaining unchanged, the supply curve shift
towards right from SS to S1S1.

When supply increases to S1S1, it creates an excess supply at the old equilibrium price of
OP. This leads to competition among sellers, which reduces the prices. Decreases in price
leads to rise in demand and fall in supply. These changes continue till the new
equilibrium is established at point E1. Equilibrium price falls from OP to OP1 and
equilibrium quantity rises from OQ to OQ1.

ii.) Decrease in supply

When the supply decreases, demand remaining unchanged, the supply curve shift
towards left from SS to S2S2.

When supply decreases to S2S2, it creates an excess supply at the old equilibrium price
of OP. This leads to competition among buyers, which raises the prices. Increase in price
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 leads to fall in demand and rise in supply. These changes continue till the new
equilibrium is established at point E2. Equilibrium price rises from OP to OP2 and
equilibrium quantity falls from OQ to OQ2.

Change in both Demand and supply

The following 4 cases of simultaneous shift in demand and supply curves –

i.) Both demand and supply decrease

Original equilibrium is determined at point E, when the original demand curve DD and
the original supply curve SS intersect each other. OQ is the equilibrium quantity and OP is
the equilibrium price. The effect of decrease in both demand and supply on equilibrium
price and equilibrium quantity can be better analyzed under three different cases –

CASE – 1 Decrease in Demand = decrease in supply

When decrease in demand is proportionally equal to decrease in supply, then leftward

shift in demand curve from DD to D1D1 is proportionally equal leftward shift in supply
curve from SS to S1S1. The new equilibrium is determined at E1. As demand and supply
curve in the same proportion, equilibrium price remains same at OP, but equilibrium
quantity falls from OQ to OQ1.

CASE – 2 Decrease in demand > Decrease in supply

When decrease in demand is proportionally more than decrease in supply, then leftward
shift in demand curve from DD to D1D1 is proportionally more than leftward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium price
falls from OP to OP1 and equilibrium quantity falls from OQ to OQ1.

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 CASE – 3 Decrease in Demand < Decrease in supply
When decrease in demand is proportionally less than decrease in supply, then leftward
shift in demand curve from DD to D1D1 is proportionally less than leftward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium price
rises from OP to OP1 and equilibrium quantity falls from OQ to OQ1.

ii.) Both demand and supply increase

Original equilibrium is determined at point E, when the original demand curve DD
and the original supply curve SS intersect each other. OQ is the equilibrium quantity
and OP is the equilibrium price. The effect of increase in both demand and supply on
equilibrium price and equilibrium quantity can be better analyzed under three
different cases –

Case 1 Increase in demand = Increase in supply

When increase in demand is proportionally equal to increase in supply, then rightward

shift in demand curve from DD to D1D1 is proportionally equal rightward shift in supply
curve from SS to S1S1. The new equilibrium is determined at E1. As demand and supply
curve in the same proportion, equilibrium price remains same at OP, but equilibrium
quantity rises from OQ to OQ1.

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 Case 2 increase in demand > increase in supply
When increase in demand is proportionally more than decrease in supply, then rightward
shift in demand curve from DD to D1D1 is proportionally more than rightward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium price
rises from OP to OP1 and equilibrium quantity rises from OQ to OQ1.

Case-3 increase in demand < increase in supply

When increase in demand is proportionally less than decrease in supply, then rightward
shift in demand curve from DD to D1D1 is proportionally less than rightward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium price
falls from OP to OP1 and equilibrium quantity rises from OQ to OQ1.

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 iii.) Demand decrease and supply increase
The effect of simultaneous decrease in demand and increase in supply on equilibrium
price and equilibrium quantity is analyzed in the following three cases–

Case.1 Decrease in demand = Increase in supply

When decrease in demand is proportionally equal to increase in supply, then leftward
shift in demand curve from DD to D1D1 is proportionally equal to rightward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium
quantity remains the same at OQ, but equilibrium price falls from OP to OP1.

Case.2 Decrease in demand > Increase in supply

When decrease in demand is proportionally more than increase in supply, then leftward
shift in demand curve from DD to D1D1 is proportionally less than rightward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium
quantity falls from OQ to OQ1, equilibrium price falls from OP to OP1.

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 Case.3 Decrease in demand < Increase in supply
When decrease in demand is proportionally less than increase in supply, then leftward
shift in demand curve from DD to D1D1 is proportionally less than rightward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium
quantity rises from OQ to OQ1, equilibrium price falls from OP to OP1.

iv.) Demand Increase and supply decreases

The effect of increase in demand and decrease in supply on equilibrium price and
equilibrium quantity is discussed in the following three causes –

Case.1 Increase in demand = Decrease in supply

When increase in demand is proportionally equal to decrease in supply, then rightward
shift in demand curve from DD to D1D1 is proportionally equal to leftward shift in supply
curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium quantity
remains the same at OQ, but equilibrium price rises from OP to OP1.

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 Case.2 Increase in Demand > Decrease in supply
When increase in demand is proportionally more than decrease in supply, then rightward
shift in demand curve from DD to D1D1 is proportionally more than leftward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium
quantity rises from OQ to OQ1, equilibrium price rises from OP to OP1.

Case.3 Increase in Demand < Decrease in supply

When increase in demand is proportionally less than decrease in supply, then rightward
shift in demand curve from DD to D1D1 is proportionally less than leftward shift in
supply curve from SS to S1S1. The new equilibrium is determined at E1, equilibrium
quantity rises from OQ to OQ1, equilibrium price falls from OP to OP1.

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 Special cases

i.) Change in demand when supply is perfectly elastic

ii.) Change in supply when demand is perfectly elastic
iii.) Change in demand when supply is perfectly inelastic
iv.) Change in supply when supply is perfectly inelastic

Change in demand when supply is perfectly elastic –

When supply is perfectly elastic, then change is demand does not affect the equilibrium
price of the commodity. It only changes the equilibrium quantity. Original equilibrium is
determined at point E, when the original demand curve DD and the perfectly elastic
supply curve SS intersect each other. OQ is the equilibrium quantity and OP is the
equilibrium price.

The change may be either an ‘increase in demand’ or ‘decrease in demand’.

a.) Increase in demand –

When demand increases, the demand curve shifts to the right from DD to D1D1. Supply
curve SS is horizontal straight line parallel to the X-axis. Due to increase in demand for
the product, the new equilibrium is established at E1. Equilibrium quantity rises from OQ
to OQ1 but equilibrium price remains same at OP as supply is perfectly elastic.

b.) Decrease in demand –

When demand decrease, the demand curve shifts to the right from DD to D1D1. Supply
curve SS is horizontal straight line parallel to the X-axis. Due to decrease in demand for
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 the product, the new equilibrium is established at E2. Equilibrium quantity falls from OQ
to OQ1 but equilibrium price remains same at OP as supply is perfectly elastic.

Change in Supply when Demand is perfectly Elastic

When demand is perfectly elastic, then change is supply does not affect the equilibrium
price of the commodity. It only changes the equilibrium quantity. Original equilibrium is
determined at point E, when the original supply curveSS and the perfectly elastic demand
curve DD intersect each other. OQ is the equilibrium quantity and OP is the equilibrium
price.

The change may be either an ‘increase in supply’ or ‘decrease in supply’.

a.) Increase in supply –
When supply increases, the supply curve shifts to the right from SS to S1S1. Demand
curve DD is horizontal straight line parallel to the X-axis. Due to increase in supply for
the product, the new equilibrium is established at E1. Equilibrium quantity rises from
OQ to OQ1 but equilibrium price remains same at OP as demand is perfectly elastic.

b.) Decrease in supply –

When supply decreases, the supply curve shifts to the left from SS to S2S2. Demand
curve DD is horizontal straight line parallel to the X-axis. Due to decrease in supply
for the product, the new equilibrium is established at E2. Equilibrium quantity falls
from OQ to OQ1 but equilibrium price remains same at OP as demand is perfectly
elastic.

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 Change in Demand when supply is perfectly Inelastic –

a.) Increase in demand

When demand increases, the demand curve shifts to the right from DD to D1D1.
Supply curve SS is vertical straight line parallel to the Y-axis. Due to increase in
demand for the product, the new equilibrium is established at E1. Equilibrium price
rises from OQ to OP1 but equilibrium quantity remains same at OQ as supply is
perfectly inelastic.

b.) Decrease in demand

When demand decrease, the demand curve shifts to the left from DD to D2D2. Supply
curve SS is vertical straight line parallel to the Y-axis. Due to decrease in demand for
the product, the new equilibrium is established at E2. Equilibrium price falls from OP
to OP2 but equilibrium quantity remains same at OQ as supply is perfectly inelastic.

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 Change in supply when demand is perfectly inelastic –
When demand is perfectly inelastic, then change is supply does not affect the equilibrium
price of the commodity. It only changes the equilibrium price.

The change may be either an ‘increase in supply’ or ‘decrease in supply’.

a.) Increase in supply –

When supply increases, the supply curve shifts to the right from SS to S1S1. Demand
curve DD is vertical straight line parallel to the X-axis. Due to increase in supply for
the product, the new equilibrium is established at E1. Equilibrium price falls from OP
to OP1 but equilibrium price remains same at OP as demand is perfectly inelastic.

b.) Decrease in supply –

When supply decreases, the supply curve shifts to the left from SS to S1S1. Demand
curve DD is vertical straight line parallel to the X-axis. Due to decrease in supply for
the product, the new equilibrium is established at E2. Equilibrium price rises from OP
to OP2 but equilibrium quantity remains same at OQ as demand is perfectly inelastic.

5.) What do you understand by the term Price ceiling?

Or
Explain the term price ceiling with the help of diagram. Explain black marketing as
its direct consequence.
Or
Discuss the concept of price ceiling with the help of diagram.
OR
What are the effects of maximum price ceiling on the market of a good? Use
diagram.
Or
Explain the meaning and need for maximum price ceiling.

Ans. Price ceiling refers to fixing the maximum price of a commodity at a level
lower than the equilibrium price.

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 Government plays an important role in controlling the prices of essential commodities
(wheat, sugar, kerosene etc) if the equilibrium price so determined, by free play of
demand and supply, is too high for the poor people.

Let us consider this point by considering the commodity wheat and its price
determination. In the diagram, demand curve DD and supply curve SS of wheat intersect
each other at point E and as a result, equilibrium price of OP is determined.

Suppose the equilibrium price of OP is very high and many poor people are unable to
afford wheat at this price. As wheat is an essential commodity, government interferes and
fixes the maximum price (known as price ceiling) at OP1 which is less than the
equilibrium price OP. At this controlled price OP1, the quantity demanded OQd exceeds
the quantity supplied OQs by Qs Qd. It creates shortage of MN and some consumers of
wheat go unsatisfied. To meet this excess demand, government may enforce the rationing
system.

6.) What is rationing?

Rationing is a technique adopted by the government to sell minimum quota of essential
commodities at a price less than equilibrium price to supply goods to the poor
community to buy cheaper price. Under this system, consumer are given ration
cards/coupons to buy commodities at a cheaper price from ration shops.

7.) What are the drawbacks of price ceiling?

Or
Explain black marketing as a direct consequence of price ceiling.

But price ceiling, through system has certain drawbacks –

1.) Black markets
A black market is any market in which the commodities are sold at a price higher than the
maximum price fixed by the government. Black market exists because consumers are
ready to pay a price more than the price fixed by the Government to get more of the
limited amount of commodity available.

2.) Difficulty in obtaining goods from ration shops

Consumers have to stand in long queues to buy goods from ration shops. Sometimes,
commodities are not available in the ration shops or goods are inferior quality.

8.) What do you understand by price floor/ minimum price/ support price?
Or
Briefly explain the meaning of floor price.
Or
What are the effects of price floor (minimum price ceiling) on the market of a good?
Use diagram.

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 Ans. Price floor to the minimum price (above the equilibrium price), fixed by the
government, which the producers must be paid for the produce.
Government also intervenes in the process of price determination through price floor.

When govt. feels that the price fixed by the demand and supply is not remunerative from
the producer’s point of view, then it fixes a price (known as price floor) which is more
than the equilibrium price.

Most well-known examples of imposition of price floor are agricultural price support
program and minimum wage legislation. Indian government maintains a variety of price
support programs for various agriculture products like wheat, sugarcane etc. and
The floor is normally set at a level higher than the market determined price for these
goods. The effect of floor price can be better understood with the help of figure. As seen in
the diagram, equilibrium is determined at point E when demand curve DD and supply
curve SS of wheat intersect each other. The equilibrium price of OP is determined.
Suppose, to protect the producer’s interest and to provide incentive for further
production, government declares OP2 as the minimum price (known as Price floor) which
is more than the equilibrium price of OP. At this support price OP2, the quantity supplied
OQs exceed the quantity demanded by Qs Qd. This creates a situation of surplus in the
market which is equivalent to MN in the diagram. The excess supply may be purchased by
the government either to increase its buffer stocks or for exports.

9.) Explain the concept of buffer stock as a tool of price floor.

Ans. Buffer stock is an important tool in the hands of government to ensure price floor.
When market price is lower than what the government feels should be given to the
farmers/ produces so as to maintain stock of the commodity with itself, to be realized in
case of shortage of the commodity in future.

10.) Explain the concept of minimum wage legislation.

Ans. Under minimum wage legislation, the government aims to ensure that wage rate of
labour does not fall below a particular level and minimum wages are set above the
equilibrium wage level.

11.) “Demand and supply are like two blades of a pair of scissors”. Comment.
Ans. The given statement is correct. Both the blades of a pair of scissors are equally
important to cut a piece of cloth. Similarly, both the demand and supply are needed for
determining price of a market. There is no use for demand for a product if there is no
supply for the product and supply is not needed if there is no demand of the product. One
of the two may play more active role in price determination in the short run. But, both are
needed to determine the price in the long run.

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12.) Explain the effect of increase in income of buyers of a normal commodity on its
equilibrium price and quantity.
Or
Explain the effect of increase in the price of substitute good on its
equilibrium price and quantity.
Or
Explain the effect of decrease in the price of complementary good on its
equilibrium price and quantity.

Or
Explain the effect of increase in the future price of good on its equilibrium
price and quantity.
Or
Explain the effect of favorable change in the taste of good on its equilibrium
price and quantity.
Or
Explain the effect of increase in the population good on its equilibrium price
and quantity.
Ans. Effect of increase in demand on equilibrium price and quantity is discussed
with reference to the below described figure

Explanation
i.) DD is the initial demand curve and SS is the supply curve. Both are
intersecting at point E where we get equilibrium price (OP) and quantity
(OQ).
ii.) Due to increase in demand, demand curve shift to the right from DD to D1D1.
iii.) As an immediate impact on increase in demand, there is excess demand equal
to EF (at the existing price).
iv.) Due to pressure of demand, price of the commodity tends to be higher the
equilibrium price.
v.) The rise in price leads to extension of supply (upward movement from E to
E1) and contraction in demand (upward movement from F to E1) till new
demand DD1 equals to initial supply curve SS.
vi.) At that point we get new equilibrium price (OP1) and quantity (OQ1).
vii.) Due to increase in demand equilibrium price and quantity will rise.
13.) Explain the effect of decrease in income of buyers of a normal commodity on its
equilibrium price and quantity.
Or
Explain the effect of decrease in the price of substitute good on its
equilibrium price and quantity.
Or
Explain the effect of increase in the price of complementary good on its
equilibrium price and quantity.
Or
Explain the effect of decrease in the future price of good on its equilibrium
price and quantity.
Or
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 Explain the effect of unfavorable change in the taste of good on its
equilibrium price and quantity.
Or
Explain the effect of decrease in the population good on its equilibrium
price and quantity.
Ans. Effect of decrease in demand on equilibrium price and quantity is discussed
with reference to the below described figure

Explanation
i.) DD is the initial demand curve and SS is the supply curve. Both are
intersecting at point E where we get equilibrium price (OP) and quantity
(OQ).
ii.) Due to decrease in demand, demand curve shift to the right from DD to D1D1.
iii.) As an immediate impact on decrease in demand, there is surplus equals to EF
(at the existing price).
iv.) Due to surplus, there is competition in the market for clearing this surplus.
This leads to fall in the price of the commodity.
v.) The fall in price leads to contraction in supply (downward movement from E
to E1) and expansion in demand (downward movement from F to E1) till new
demand DD1 equals to initial supply curve SS.
vi.) At that point we get new equilibrium price (OP1) and quantity (OQ1).
vii.) Due to decrease in demand equilibrium price and quantity will fall.

14.) Explain the effect of decrease in the price of factor of productions/inputs on

its equilibrium price and quantity.
Or
Explain the effect of increase in the price of other good on its equilibrium
price and quantity.
Or
Explain the effect of up gradation of technology on its equilibrium price and
quantity.
Or
Explain the effect of decrease in the tax rate on its equilibrium price and
quantity.
Or
Explain the effect of decrease in the price of good in near future on its
equilibrium price and quantity.
Or

Explain the effect of high goals of firms on its equilibrium price and
quantity.
Or
Explain the effect of increase in the number of firms on its equilibrium price
and quantity.
Ans. Effect of increase in supply on equilibrium price and quantity is discussed
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 with reference to the below described figure

Explanation
i.) DD is the initial demand curve and SS is the supply curve. Both are
intersecting at point E where we get equilibrium price (OP) and quantity
(OQ).
ii.) Due to increase in supply, supply curve shift to the right from SS to SS1.
iii.) As an immediate impact on increase in supply, there is surplus equals to EF
(at the existing price).
iv.) Due to surplus, there is competition in the market for clearing this surplus.
This leads to fall in the price of the commodity.
v.) The fall in price leads to contraction in supply (downward movement from F
to E1) and expansion in demand (downward movement from E to E1) till new
demand DD1 equals to initial supply curve SS.
vi.) At that point we get new equilibrium price (OP1) and quantity (OQ1).
vii.) Due to increase in supply equilibrium price will fall and quantity will
rise.

15.) Explain the effect of increase in the price of factor of productions/inputs on

its equilibrium price and quantity.
Or
Explain the effect of decrease in the price of other good on its equilibrium
price and quantity.
Or
Explain the effect of de gradation of technology on its equilibrium price and
quantity. Or
Explain the effect of increase in the tax rate on its equilibrium price and
quantity. Or
Explain the effect of increase in the price of good in near future on its
equilibrium price and quantity. Or
Explain the effect of low goals of firms on its equilibrium price and quantity.
Or
Explain the effect of decrease in the number of firms on its equilibrium price
and quantity.
Ans. Effect of decrease in supply on equilibrium price and quantity is discussed
with reference to the below described figure

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 Explanation
i.) DD is the initial demand curve and SS is the supply curve. Both are
intersecting at point E where we get equilibrium price (OP) and quantity
(OQ).
ii.) Due to decrease in supply, supply curve shift to the right from SS to SS1.
iii.) As an immediate impact on Decrease in supply, there is deficit equals to EF (at
the existing price).
iv.) Due to shortage, the equilibrium price tends to increase.
v.) The rise in price leads to expansion in supply (upward movement from F to
E1) and contraction in demand (upward movement from E to E1) till new
demand DD1 equals to initial supply curve SS.
vi.) At that point we get new equilibrium price (OP1) and quantity (OQ1).
vii.) Due to increase in supply equilibrium price will rise and quantity will fall.

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 STATISTICS

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INTRODUCTION OF STATISTICS
S.NO. QUESTIONS
1.) What is the meaning of economics?
Ans. Economics is a social science which studies the way a society chooses to use its
limited, which has alternate uses, to produce goods and services and to distribute
them among groups of people.

2.) Define –
i.) Wealth definition
According to Adam smith, “Economics is an enquiry into the factors that determine
the wealth of a country and its growth”.

According to J.B Say, “Economics is the science which deals with wealth”.

ii.) Material definition

According to Alfred Marshall, “Economics is the study of mankind in the ordinary
business of life, it examines that part of individual and social action which is most
intimately connected with attainment and use of material requisites of well being”.

iii.) Scarcity definition

According to Prof. Lionel Robbins, “Economics is a science that studies human
behavior as relationship b/w unlimited wants and scarce resources”.

iv.) Growth definition

According to Paul A. Samuelson, “Economics is the study of how man and society
choose, with or without the use of money, to employ scarce productive resources,
which could have alternative uses, to produce various commodities over time and
distribute them for consumption now and in the future among various people and
groups of society”.

3.) What are the two types of activities? How they are different from each other?
Ans. there are two different activities –

1.) Economic activities

The activity which is related to the use of scarce resources is called an economic
activity. Doctors, teachers, lawyers, businessmen, industrials etc are engaged in this
types of activities.

Economics activities are classified as under –

i.) Production
Production is the process in which raw material convert into finished goods.

For example –
Manufacturing shirt with the help of cloth and tailoring etc is an act of production. In
this example cloth is raw material and shirt is an act of production.

ii.) Consumption
Consumption is the process of using up utility value of goods and services for the
direct satisfaction of our wants.

For example –
Eating bread, drinking water, drinking milk, wearing clothes etc. all are consumption
activities.

iii.) Investment
Investment is that economic activity which is concerned with production of capacity

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 goods for further production of goods and services. Investment indirectly satisfies
human wants.
For example –
The production of production of print books, magazines, newspaper etc.

iv.) Exchange
Exchange is a process which is concerned with sale and purchase of commodities.
This activity is done in terms of money.

v.) Distribution
Distribution is that activity which deals with determination of price of factors of
production, as land, labour, capital and enterprise.

2.) Non-Economic activities

Non-economic activities are those activities which are not concerned with money.
i.) Social activities
ii.) Religious activities
iii.) Charitable activities
iv.) Parental activities

4.) Define –
i.) Consumer
A person who consumes goods and services for satisfaction of his wants is known as
consumer.
ii.) Producer
A person who produces and or sells goods and services for the generation of income
is known as a producer.
iii.) Service holder
A person who is in a job to earn either wages or salary to buy goods is known as a
service holder.
iv.) Service provider
A person who provides services to society to earn money that is doctors, lawyers,
teachers, bankers etc is known as service provider.

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MEANING, SCOPE AND IMPORTANCE OF
STATISTICS

S.NO. QUESTIONS
1.) What is the meaning of Statistics?
Ans.
• In Plural sense, it means a collection of numerical facts.
• In singular sense, statistics deal with the collection, presentation, analysis and
interpretation of the quantitative information
2.) Define Statistics as Numerical Set of Data.
Ans. In the plural sense, statistics refers to aggregates of facts, affected to a market
by multiplicity of causes, numerically expressed, enumerated or estimated
according to reasonable standards of accuracy, collected in a systematic manner for
predetermined purpose and placed in relation to each other.

Statistics as used in plural sense, must possess the following characteristics:

1.) Aggregates of Facts: Statistics are a number of facts. Single and isolated
figures are not statistics as such figures cannot be compared. For example, a
single age of 30 years is not a statistics, but a series relating to the ages of a
group of persons will be called statistics.

2.) Affected by multiplicity of causes: Numerical figures (data) are influenced

by variety of factors. It is not an easy job to study the effects of any one factor
separately by ignoring other factors.

3.) Statistics are numerically expressed: The statistical approach to a subject

is numerical. So, any facts, to be called statistics, must be numerically or
quantitatively expressed.

Qualitative characteristics like intelligence, beauty, honesty, etc, cannot be

included in statistics unless they are quantified by assigning certain score as
a quantitative measure of assessment.

4.) Statistics should be collected with reasonable standard of accuracy: In

statistics, data is collected with reasonable standard of accuracy.
• A high degree of accuracy, as observed in accountancy or mathematics, is
not insisted upon in statistics, because mass of data is involved.
• The process of generalization can be achieved with a reasonable standard
of accuracy only.

5.) Statistics are collected for a pre-determined purpose: The purpose of

collecting the statistical data must be decided in advance, otherwise
usefulness manner of the data collected would be negligible. Data collected
in an unsystematic manner and without complete awareness for the purpose
will be confusing and cannot be made on the basis of valid conclusions.

6.) Statistics are collected in a systematic Manner: For accuracy or reliability

of the data, the figures should be collected in a systematic manner. If the
figures are collected in a haphazard manner, the reliability of such data will
data deteriorate.
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 7.) Statistics should be placed in relation to each other: Collection of
statistical is generally done with the motive to compare.

• If the figures collected are not comparable, then they lose a large part of
their significance.

• For the purpose of comparison, it is necessary that data must be

homogeneous.

• For example, it would be meaningless to compare the heights of men with

heights of trees because these figures are of a heterogeneous character.

3.) Define Statistics as Method.

Ans. Statistics in singular sense may be defined as collection, presentation, analysis
and interpretation of numerical data.

1.) Collection of Data: It is the main and the first step in a statistical enquiry.
The technique of collection of data depends upon the objective of the study.

2.) Organization of Data: After collection, the data is organized in a proper

form which involves editing and classification.

3.) Presentation of data: After classification, the data is presented in some

suitable manner, in the form of text, table, diagram or graph.

4.) Analysis of Data: After presentation of data, analysis is done with the help
of simple mathematical techniques. These include measures of central
tendency measures of dispersion, correlation and regression, etc.

5.) Interpretation of Data: It is the last step in the statistical methodology.

• It involves statistical thinking, skill and experience, to derive meaning from
analyzed data

• The interpretation provides the final conclusions drawn from the analyzed
data.

4.) What are the Functions of Statistics?

Ans. Statistics performs many functions useful to human beings. The broad
functions performed by statistics are discussed as under:
1.) To simplify complex facts: It is very difficult for an individual to
understand and conclude from huge numerical data. Statistical methods try
to present the great mass of complex data into simple and understandable
form.

2.) To present facts in definite form: Quantitative facts can easily be believed
and trusted in comparison to abstract and qualitative facts. Statistics
summarize the generalized facts and present the in a definite form.

3.) To make comparison of facts: Comparison is one of the main functions

data as the absolute figures convey a less concrete meaning. For comparison
of data, various statistical methods like average, rate, percentages, ratio, etc.
are used.
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 4.) To facilitate planning and policy formulation: On the basis of numerical
data and their analysis, businessmen and administrators can plan future
activities and shape their policies.

5.) To help in forecasting: As business is full of risks and uncertainties, correct

forecasting is essential to reduce the uncertainties of business. Statistical
tools (like interpolation, time series analysis, etc.) help in making projections
for future.

6.) Formulation and Testing of Hypothesis: Statistics methods are extremely

useful in formulating and testing hypothesis.

7.) To enlarge individual knowledge and experience: Statistics enable

people to enlarge their horizon. It sharpens the faculty of rational thinking
and reasoning, and is helpful in propounding new theories and concepts.

5.) What is the Importance of Statistics?

Ans. Statistics is widely used in modern times. Initially, it was employed by the
Government to collect information on public affairs. But, gradually, its use was
extended to all fields. We shall discuss briefly, the importance statistics in the
following major of areas:

(a) Importance to the Government

(b) Importance in Economics
(c) Importance in Economic Planning
(d) Importance in Business

a.) Importance of Statistics to Government

The subject of statistics was initially used by the ancient rulers in
assessment of their military and economic strength. Gradually, its scope was
enlarged to tackle other problems relating to political activities of the
economy.

• In the present, Government collects the largest amount of statistics for

various purposes.

• The role of government has increased and requires much greater

information in the form of numeric figures, to fulfill the welfare objectives in
addition to the efficient running of their administration.

• Popular statistical methods such as time-series analysis, index numbers,

forecasting and demand analysis are extensively used in formulating
economic policies.

• In a democratic country like India, various political groups are also guided
by the statistical analysis regarding their popularity in the masses.

b.) Importance of Statistics in Economics

Statistics is an indispensable tool for a proper understanding of various

economic problems.
• Every branch of economics takes support from statistics in order to prove
various economic theories in it.

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 • Statistics provides important guidelines for the formulation of various
economic.
• Most of the problems are capable of being expressed in numerical figures.

We can say that the study of various economic problems is essentially the one of a
statistical nature. Some of the uses of statistics in economics are as follows:

1.) Formulation of Economic Laws: The “Law of Demand” and the concept
famous “Law of Elasticity of Demand” have been developed by the Inductive
method of generalization, which is also based on statistical principles.

2.) Helps in understanding and solving an economic problem: Statistical

data and statistical methods play a vital role in understanding and solving
economic problems such as poverty, unemployment, disparities in the
distribution of income and wealth, etc.

3.) Studies of market structure: Study of perfect competition, oligopoly,

monopoly etc. requires statistical comparison of market prices, cost and
profits of individual.

4.) Helps in establishing mathematical relation: Statistical methods can also

be used to estimate mathematical relation between various economic
variables. For example, data on prices and corresponding quantities
demanded of a commodity, can be used to estimate mathematical form of
demand relationship between the two variables.

5.) Useful to study behavior of different economic concepts: Trend-series

analysis is used to study the behavior of prices, production and
consumption of the commodities, money in circulation, and bank deposits
and clearings.

6.) Price Analysis: Statistical surveys of prices helps in studying the theories of
prices, pricing policy and price trends as well as their relationship to the
general problem of inflation.

c.) Importance of Statistics in Economic Planning

Economic Planning is indispensable for achieving faster rate of growth
through the best of nation's resources.
• At every stage of economic planning, there is a need for figures and
statistical methods.
• Using statistical techniques, it is possible to assess the amounts of various
resources available in the economy and accordingly determine whether the
specified rate of growth is sustainable or not.
• Statistical analysis of data regarding an economy may reveal certain crucial
areas, like increasing rate of inflation, which may require immediate
attention.

d.) Importance of Statistics in Business

Statistics is important in the business due to following reasons:
1.) For Establishing a Business unit: Before starting a business, it is necessary
to know its feasibility. It involves detailed information about location, size of
output, availability of input taxes, size of market share, turnover, etc.
Statistics provide guidelines, which may prove to be helpful in making
business, the next key decisions.
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 2.) For Estimating the demand product: After launching of the business, the
next step is to estimate the present as well as future demand of the product.
Statistical methods are extremely helpful in preparing trend lines leading to
reliable forecasting.

3.) For Production Planning: The businessman has to plan its production so
that he is able to meet the demand of its product under production and
incurs minimum losses on account of over or under production. Careful
production planning is essential for maintaining a balance between demand
and supply.

4.) For Making Quality Control: Statistical techniques (like preparation of

control charts) can also be used to control the quality of the product
manufactured by a firm.

5.) For Making Marketing Strategy: Before a product is launched, market

research team makes use of various statistical techniques (like pilot survey),
to analyze data on population, purchasing power, habits of the consumers,
competitors, pricing, etc. Such studies reveal the possible market potential
for the product.

6.) Accounts writing and audit: Every business firm keeps accounts of its
revenue and expenditure.
• For taking certain decisions in a business, these accounts are required to be
summarized in a statistical way.

• This may consist of the calculation of typical measures like average

production per unit of labour, average production per hour, average rate of
return on investment, etc.

• Statistical methods may also be helpful in generalizing relationships

between two or more of such variables.

6.) What are the Limitations of Statistics?

Ans.

a.) Statistics does not study qualitative phenomena: Statistics can be applied
in studying only those problems which can be stated and expressed
quantitatively.
• Qualitative characteristics such as honesty, poverty, welfare, beauty, health etc.
cannot directly be measured quantitatively.
• As a result, qualitative characteristics are not suitable for statistical analysis.

b.) Statistics does not deal with individuals: Statistics deals only with
aggregates of facts and no importance is attached to individual items. For
example, marks of one student of a class do not constitute statistics, but the
average marks have statistical relevance.

c.) Statistics can be Mis-used: Statistics can be misused by ignorant or

wrongly motivated persons. Any person can misuse statistics and draw any
type of conclusion he likes.

d.) Statistical results are true only on average: Statistics, as a science, is not
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 as accurate as many other sciences are. Natural sciences are exact as their
results are universally true. However, statistical laws are not exact.

e.) Statistical laws are not exact: As statistical laws are probabilistic in
nature, inferences based on them are only approximate and not exact like
inferences based on mathematical or scientific laws.

f.) Only Experts can make the Best Possible use of Statistics: The
techniques of Statistics are not so simple to be used by any layman. These
techniques can only be used by the experts as they are complicated in
nature.

g.) Statistical data should be uniform and homogeneous: It is essential that

data must be uniform and homogeneous. Heterogeneous data are not
comparable. For example, it would be of no use
to compare the heights of trees with the heights of men because these data
are of heterogeneous nature.

7.) Why there is Distrust of Statistics?

Ans. Distrust of statistics means lack of confidence in statistical methods and
statements. • In spite of the services provided by statistics, considerable
distrust exists in the minds of people with regard to its reliability and usefulness.
• The reason for this distrust is improper use of statistical tools by unscrupulous,
irresponsible, inexperienced and dishonest persons.

8.) Differentiate between Quantitative variables and Qualitative

variables?

Ans. The variables which can be expressed in numerical terms are known as
Quantitative variables. For example, marks of students, number of rates in
country, heights of people, etc.
Variables which cannot be expressed in numerical variables terms are known as
Qualitative variables. For example, honesty, beauty, intelligence, etc. Qualitative
variables cannot be measured in figures as they are vague terms and we cannot
make statistical analysis out of them.
Qualitative expressions are not statistics unless they are assigned numerical
equivalents. So, they can be ranked according to the quality of their attributes. For
example, we may assign Rank No. 1 to the most intelligent, Rank 2 to the second
best, and so on. The ranks may be used as numerical measurements for purposes of
statistical analysis.

9.) Differentiate between Plural Sense and Singular Sense?

Ans.

1.) Statistics in plural sense deals with numerical information, whereas in

singular sense, statistics is a body of various methods and tools.

2.) Statistics in plural sense is descriptive in nature, but in singular sense, it is

basically a tool of analysis.

3.) Statistics in plural sense is often in the raw state, whereas in singular sense,
it helps in processing the raw data.

4.) Statistics in plural sense is quantitative, but in singular sense, it is an

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 operational technique.

10.) Differentiate between Empirical Analysis and Quantitative

Analysis?

Ans. Empirical Analysis refers to a method in which a subject is studied on the

basis of observations or experiments. In empirical analysis, knowledge is acquired
as a result of actual experience. Under natural sciences such as physics, chemistry
and biology this method is commonly used and relevant laws and statements can be
tested and experimented in laboratories.
As against this, economics is a social science, wherein human behavior is the subject
of study and empirical analysis cannot be used to study economics and other social
sciences. The problems of social sciences can be effectively studied through the
technique of quantitative analysis.
Quantitative Analysis is an attempt to level “precision” to the facts, so that they
can be easily compared. Under it, first of all, facts are expressed in the form of
quantities (like 25, 30, and 35) and then such numerical data is classified, tabulated
and analyzed to draw reasonable conclusions.

Statistical methods are no substitute for common

sense!
There is an interesting story which will justify this viewpoint:
Once a family of four persons (husband, wife and two children)
set out to cross a The father knew the average depth of the river.
So, he calculated the average height of his family members.
Since the average height of his family members was greater
than the average depth of the river, he thought they could cross
Consequently some members of the family (children) drowned
while crossing the river.
In the given case, the fault is not with the statistical method of
calculating averages, but with the misuse of average. The
Statistics has been be misused by the father as he has drawn
wrong conclusions. So, it is rightly said "Statistical methods are
no substitute for common sense"

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COLLECTION OF DATA
S.NO. QUESTIONS
1.) What do you understand by collection of data?
Ans. Collection of data is the important step. A careful study of the technique of collection of
data and their presentation in proper form is absolutely necessary as the data are
fundamental statistics.

2.) What are the sources of Data?

Ans. There are two sources of data,
1.) Internal sources - In an organization, when the data is collected from its reports and
records, it is known as internal sources of data.
Example - A Company publishes its annual report on profit and loss, total sales etc.

2.) External sources - External sources refer to the data collected from outside the
organization.
Example - If a Tour and Travels Company obtains information on UP Tourism from
Uttar Pradesh Transport Corporation, it would be known as external sources.
3.) What do you understand by Primary and Secondary data?
Ans.
1.) Primary data - Primary data is the data which is originally collected by an
investigator or agency for the first time for some specific purpose.
Example - Population census conducted by Government of India.

2.) Secondary data - Secondary data is the data which is not directly collected but rather
obtained from the published or unpublished sources. It is also known as Second hand
data.
Example - National accounts statistics published by the CSO, economic survey
published by government of India.

4.) Differentiate between Primary and Secondary data?

Ans.
Basis Primary Data Secondary Data
Originality It is original because it is They are not original since
collected by the investigator investigator makes use of the data
himself. collected by other agencies.

Source They are collected by some They are already collected and
agency or person by using processed by some person or
the method of data agency and are ready for use.
collection.

Time Factor It requires longer time for It requires less time.

data collection.
Cost Factor It requires a considerable It is cheaper as it is taken from
amount of money. published or unpublished material.

Reliability It is more reliable. It is less reliable.

5.) What are the different methods for collecting Primary Data?
Ans. The different methods of collecting primary data are:-
1.) Direct Personal Investigation - In this method of collection primary data, the
investigator collects the information personally from the sources concerned. He
presents himself on the spot and conducts the enquiry himself.
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 Suitability-
a.) When detailed information has to be collected.
b.) When area of investigation is limited.
c.) When nature of enquiry is confidential.
d.) When maximum degree of accuracy is needed.
e.) When importance is given to originality.
Merits-
a.) It ensures high degree of accuracy
b.) Collected data are uniform because they are collected by one person
c.) Original data are collected by this method
d.) When in direct contact with the informants, the investigator may obtain other related
information as well
e.) Comparative study is possible.

Demerits-
a.) In this method there is more use of power.
b.) This method consumes more time.
c.) This method requires a long time and involves enormous cost
d.) This method is not suitable for extensive inquiries where the scope of investigation is
wide.
e.) Indirect oral investigation

2.) Indirect Oral Investigation - Under this method, the investigator approach third
parties, who are in the possession of information about the subject of enquiry.
Suitability-
a.) When the area of inquiry is wide.
b.) When it is not possible to have direct contact with the concerned informants.
c.) When investigation is so complex in nature that only experts can give information.
d.) When direct sources do not exist or cannot be relied upon to give information.
e.) When the direct personal investigation is not suitable.

Merits-
a.) It is less time consuming
b.) This method is not costly
c.) This method provides information quickly.
d.) This method of investigation can be applied even when the field of investigation is
very wide.

Demerits-
a.) The data collected by this information are relatively less accurate
b.) There is a lack of uniformly of data.
c.) Results can be enormous because information is obtained from other persons.
d.) Person providing the information may be prejudiced or biased.

3.) Information through Correspondents - Under this method, local agents or

correspondents are appointed and trained to collect the information from the
respondents.
Suitability-

a.) When regular and continuous information is required

b.) When the area of investigation is very large
c.) When Hugh degree of accuracy is not required.

Merits-
a.) This method is economical.
b.) This method doesn't involve more efforts
c.) It is very useful for collecting regular information.

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 Demerits-
a.) Data collected by this method is not reliable
b.) A lot of time is consumed to collect the information.

4.) Telephonic interviews - Under this method, data collected through an interview
over the telephone with the interviewer.

Suitability-
a.) When the respondents have a telephone connection.
b.) When the data is to be collected in shorter duration.

Merits-
a.) It is useful for conducting enquiry over a large area.
b.) This method is cheaper as it requires less time and money.
c.) It is possible to assist the respondent by clarifying the questions.

Demerits-
a.) This method is not possible for people who do not own telephones.
b.) It obstructs visual reactions of the respondents, which becomes helpful in obtaining
information insensitive issues.

5.) Mailed Questionnaire Method - Under this method, the investigators makes a
questionnaire pertaining to the field of investigation and sends it to the respondent.

Suitability-
a.) Where the informants are educated.
b.) Where the field of inquiry is large.
c.) Where information is regularly supplied.

Merits-
a.) It saves time
b.) Less efforts are involved in this method
c.) This method is less expensive
d.) Result can be obtained quickly.

Demerits-
a.) The conclusion based on this investigation has only limited accuracy.
b.) The data received by thus method is not reliable.
c.) There is lack of originality.

6.) Questionnaire filled by enumerators - Under this method, the enumerator

personally visits informants along with a questionnaire, ask questions and write
down their replies in the questionnaire in his own language.

Suitability-
a.) When field of investigation is wide.
b.) When investigation needs specialized skilled investigators.
c.) When the investigators are well versed in the local language and cultural norms of
informants.

Merits-
a.) This method saves time
b.) This method is very economical.
c.) There is a quality of originality of the data.
d.) This method is capable of a wide coverage in terms of the area involved.

Demerits-
a.) If the enumerators are not educated, the information received will be misleading

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 b.) If the enumerators are biased, then the result will not be accurate.

6.) How a good questionnaire should be made? What are its qualities?
Ans. The following general principles should be followed while designing or drafting the
questionnaire.
1.) Covering letter - A very polite covering letter should be sent to the respondents
along with the questionnaire.

2.) Decision regarding questions - The selection of questions depends upon the
purpose if the enquiry

3.) Number of questions - Number of questions should be small as possible.

4.) Simple and short questions - The questions should be brief, clear and unambiguous.

5.) Avoid questions requiring calculation - Questions relating to mathematical

computations should not be asked.

6.) No personal questions - The questions affecting the pride and sentiments of the
respondents should be avoided.

7.) Avoid leading questions - The questions should not be a leading question, which
gives a clue about how the respondent should answer.

8.) Questions should be logically arranged - The question should follow a logical
sequence. 9.)

9.) Proper division and sub division of questions - Questions should be divided and
sub divided for the convenience of the informant and the investigator.

10.) Instructions to the informants - The questionnaire should provide

necessary instructions about the terms and units in it.

11.) Cross examination - The questionnaire should be set in a way so that there
may be cross examination if the information supplied by the informants

12.) Questionnaire should look attractive - A questionnaire should be made to

look as attractive as possible.

7.) Differentiate between Direct Personal Investigation and Indirect Oral Investigation?
Ans.
Basis Direct Personal Indirect Oral Investigation
Investigation
Coverage This method is suitable for This method can be used to
limited area. cover a wide area of
investigation.

Originality The data collected is original This methods lacks originality

in character. as data is collected from the
witnesses.

Reliability & Accuracy Information collected by the There is a possibility of

investigator is more reliable unreliable & inaccurate data.
& accurate.

Cost This method is more It is an economical method.

expensive.

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8.) What are the methods of collecting data?
Ans.
1.) Census method
When a statistical investigation is conducted wherein, the data is collected from
each and every element of the population, us known as census method.

 This method is generally adopted when area of investigation is minted and an

intensive study if the population is required.
 Highly trained investigators are needed to maintain a high degree of accuracy.
 Demographic data on birth and death rates, literacy, workforce, life expectancy, size
and composition of population, etc. are collected and published by the registrar
general of India.

Census method is also known as Complete Enumeration or 100% Enumeration or

Complete survey.

Example - Census of India conducted after every 10 years.

Merits-

a.) Intensive study if population

b.) High degree of accuracy and reliability.
c.) Suitability of the method.

Demerits-
a.) It is expensive method.
b.) It needs more time and manpower
c.) It is a method of inapplicability.

2.) Sampling method

When only some representative items of a population are selected and data
collected from these items are used for the analysis, this method is known as
sampling method.

 A sample is part of universe.

 The first task in selecting a sample is to identify the population. Once the population is
identified, the researchers select a representative sample as it is difficult to study the
entire population.
 A good sample is generally smaller than the population and is capable of providing
reasonably accurate information about the population at a much lower cost and
shorter time.

Example - an investigator is interested in conducting an enquiry into monthly

expenditure in a school comprising of total 5,000 students. The investigator may take a
sample to record evidence of while population of 5,000 students.
Merits-

a.) This method is very simple.

b.) It is more economical than census method.
c.) It is more feasible in situations of large investigations.
d.) In case of an extensive investigation, this method is more appropriate.

Demerits-
a.) Accuracy cannot be ensured.
b.) This method cannot adopt, if the units are heterogeneous.
c.) If the investigator has personal prejudice, the result obtained may be inaccurate.

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9.) Differentiate between Census method and Sampling method?

Ans.
Basis Census Method Sampling Method
Nature of Enquiry Extensive enquiry is conducted Limited enquiry is conducted
as each and every unit of the as only few units of the
population is studied. population are studied.

Economy It requires large amount of Relatively less money, time

money, time and labour. and labour is required.
Suitability It is more suitable if population It is more suitable is
is heterogeneous in nature. population is homogeneous in
nature.

Reliability & Results are quite reliable and Results are less reliable and
Accuracy accurate. accurate.

10.) What are the methods of Sampling?

Ans. There are two methods of Sampling, Random Sampling and Non-Random Sampling.

1.) Random Sampling

It refers to a method in which every item in the universe has a known chance of
being chosen for the sample.

 The selection of sample items is independent of the person making the study.
It is also known as ‘Probability Sampling’
 There is no room for discrimination in random sampling. Random sampling is a
replica of measurements of the population
 There are two methods under Random Sampling, Simple Random Sampling and
Restricted Random Sampling.

Simple Random Sampling

A simple random sample is one in which every item of the population has an
equal chance of being selected.

 This method is known as ‘Unrestricted Random Sampling’.

 Under this method, the sample is selected by the following two methods:

a.) Lottery method – Under this method, all the item f the universe are given
separate number on separate slip. Now these slips are mixed up in a container.
Then selection is made blindly on the number of slips that are required for the
sample.
This method is very popular in lottery draws conducted by DDA for allotment of
houses.

b.) Use of Random Number Table – The lottery method becomes very inconvenient
and time consuming in case of large size of population. In such situations, random
selection of the sample can be made by the use of Random Number Table.

Restricted Random Sampling

The selection of a simple random sample is appropriate when different items of the
population are homogeneous.

 However, in case of heterogeneous population, simple random sample may not be a

true representative of the population.
 In such cases, it becomes necessary to select a random sample under certain

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 restrictions. Such samples are known as ‘Restricted Random Sampling’.
 Methods of Restricted Random Sampling:

a.) Stratified Random Sampling

In this method, the universe or the entire population is divided into a number of
groups then certain numbers of items are taken from each group at random.

 Its basic purpose is to ensure that all the characteristics of a heterogeneous

population are adequately represented in the sample.
 It also helps in increasing the accuracy of the results of investigations.

b.) Systemic Sampling

Under this method, out of the complete list of available population, the sample is
selected by taking every nth item from the list.

 This method is based on assumptions that a complete list of the population under
study is available
 In order to obtain reliable and accurate results, it is necessary that the list is arranged
wholly at random.
 This method is also known as ‘Quasi-random Sampling’.

Example – If a population contains 20,000 items and a sample of 40 items is to be taken,

the selection of every 50th item will give the required sample.
c.) Cluster Sampling
Under this method, total population is divided into some recognizable sub-
divisions, known as clusters and then out of all the clusters, a given number of
clusters are chosen at random and all the items covered by the selection clusters
are included in the sample.

Example – Suppose we are interested in obtaining the income status of households of

rural areas. If there are about 100 villages, then obtaining a list of all the households
may be a difficult task. Under cluster sampling, it is possible to divide these 100
villages into different clusters such that they are homogenous b/w themselves. If 15
clusters are formed, then out of these clusters, we can select some clusters at random.

d.) Multistage Sampling

This is an extension of cluster sample, which is carried out in multiple stages.

 In first stage – The universe is added into some clusters from which certain
clusters are selected at random as the first stage.
 In second stage – The selected first stage samples are again sub-divided into
some clusters from which again, certain clusters are selected at random as
second stage samples
 In third stage - The selected second stage samples are again sub-divided into
some clusters from which again, certain clusters are selected at random as
third stage samples.

In this way, process of division and sub-division of clusters and selection of

multistage samples are carried out till the sample size is reduced to a reasonable
extent.

2.) Non-Random Sampling

Under Non-Random Sampling, the selection of a sample depends on the judgment
of the investigator rather than on chance.

 This method does not provide every item in the universe with a known chance
of being included in the sample
 If the investigator is unbiased and intelligent, the selected sample may be
more representative of the population than a random sample
 Non-Random Sampling method is not scientific. So various laws of statistics
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 cannot be used to analyze it.
 There are three methods of Non-Random Sampling:

a.) Judgment Method

Under this method, the choice of sample items depends exclusively on the judgment of
investigator.

 The selection is deliberate and is based on own idea of the investigator about
the sample units. He draws the sample such that it becomes a representative
of the population.

 The chance of inclusion of some items in the sample is very high while that of
others is very low

 This method is also known as ‘Purposive Sampling’ or ‘Deliberate Sampling’.

Example – An investigator is conducting an opinion poll, to ascertain the view of students in

regard to introduction of casual dress in schools. The investigator may select 50 students
who, in his opinion are true representative of 1,500 students.

b.) Quota Sampling

Under this method, the items of the population are sub-divided into various groups and
then a quota is fixed. But within, the given quota, the selection of sample units depends
upon the personal judgment of the investigator.

 Quota Sampling is a special form of stratifies Sampling. It is very popular in

the market surveys and opinion polls

 Since quota sampling is a combination of stratified sampling and deliberate

sampling, it enjoys the merits of both.

Example – Ina survey of TV viewers, the interviews may be told to interview 500 people
living in a certain area, and that 55% of the interviewed are to be housewives, 30% should be
schools students, 10% should be employees and 5% should be children. Within these quotas
the interviewer is free to select the people to be interviewed.

c.) Convenience Sampling

Under this method, while selecting the sample units, the investigator gives special
attention to his convenience.
This method is also known as ‘Chunk’.

Example – To estimate the average height of an Indian, the investigator can take a
convenience sample from Delhi state only and estimate the average height of the Indian.

11.) What is the Law of Statistical Regularity?

Ans. The Law of Statistical Regularity is based on the theory of probability. It enunciates that
a number of items selected at random from a large group tens to posses the characteristics of
the entire universe. This is called Law of Statistical Regularity. The Law of Statistical
Regularity is only a tendency. This means same as a result given by the population.

12.) What is the Law of Inertia of Large numbers?

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 Ans. This law is corollary of the Law of Statistical Regularity. This law states that eh other
things to be. This is because large numbers have an inertia or great stability to small ones.

13.) What do you understand by Sampling and Non-Sampling errors?

Ans.
1.) Sampling Errors
In a sample survey, only the small part of the population is studied. Hence while
drawing conclusions about the universe, these would result in certain amount of
errors. But, in a census study, such errors disappear altogether. Thus, difference
between sample result and census result is known as Sampling errors. Sampling
errors are of two types:

a.) Biased Errors – These are the errors which arise as a result of any bias or
prejudice of the selector. Such errors are also called ‘Cumulative Errors’ or ‘Non-
compensating errors’

b.) Unbiased Errors – These are errors which are without any bias or prejudice.
These errors arise not because of any bias on the part of the investigator but
because of the chance difference between the units of the population included in
the sample and those not included. It is called ‘Random Sampling Error’.

2.) Non-sampling Errors

These errors can occur in any type of survey whether it will be census or sampling
survey. These errors are also known as ‘Measurement Errors’. These errors are
committed intentionally or unintentionally in the investigation. These include all
biases and mistakes. They also arise because of the negligence, lack of knowledge or
forgetfulness on the part of the informants. It is difficult to minimize them even by
taking a large sample.

14.) What are the sources of collecting Secondary data?

Ans. There are two main sources of collecting secondary data, Published and Unpublished
sources.
Published Sources
1.) Government Publications – Different departments of Central government and state
government collect and publish at different times. Government publications are as
follows:

a.) Reserve Bank of India (RBI)

b.) Statistical abstract of
c.) Estimates National
d.) Census Reports
e.) Indian Trade Journal

2.) International Publications – There are number of international organizations which

publish data at different times. Some international publications are:

a.) International Labour Organization (ILO)

b.) World Health Organization (WHO)
c.) World Bank
d.) International Monetary Fund (IMF)

3.) Reports of Commission and Committees - Reports of Commission and Committees

provide complete and reliable data.

a.) Reports of Finance Commission b

b.) Reports of Hazari Commission

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 4.) Publications of Research Institutes – Different research institutes publish results of
research works at different times. These institutes are:

a.) University Research Bureaus

b.) Central Statistical
c.) Statistical Research Bureaus

5.) Magazines – A number of magazines collect and publish data relating to different
subjects. These magazines are:

a.) Commerce
b.) Capital
c.) Economic
d.) Economic
e.) Financial Times

6.) Report of Trade Association – A large number of trade associations publish data at
different times. These associations are:
a.) Trade Unions
b.) Trade
c.) Produce and Stock Exchange

7.) Publication of Personal Investigation – The persons who do research work first
collects and then publish the data.

Unpublished Sources
There are some unpublished secondary data as well. These data are collected by the
government organization and other generally for their self-use or office record. These data
are published. These unpublished numerical information may however, be used as secondary
data.

15.) What are the precautions taken while collecting Secondary Data?
Ans. Some of the notable questions to be borne in the mind while dealing with the secondary
data are:

a.) Whether the data is reliable?

b.) Whether they are suitable for the purpose of enquiry?
c.) Whether the data is adequate?

In order to assess the reliability, suitability and adequacy of data, the following points must be
kept in mind:

1.) Ability of the collecting organization – The data should only be used if it is
collected by able, experience and impartial investigator.
2.) Objective and Scope – One should note the objective of collecting data as well as the
scope.
3.) Method of collection – The method of collection of data by the original investigator
should also be noticed. The method adopted must match the nature of investigation.
4.) Time and conditions of collection – One should also make sure about the period of
investigation as well as the conditions of investigations.
5.) Definition of the unit – One should also make sure that the units of measurements
used in the initial collection of data are the same as adopted in present study.
6.) Accuracy – Accuracy of the data should also be checked. If the available data do not
conform to the required degree of accuracy, these should be discarded.
16.) Write a short note on NSSO. Ans.
The National Sample Survey Organization (NSSO), initiated in the year 1950, is nation-

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 wide, large scale, continuous survey operation conducted in the form of successive
rounds, under the overall direction of Governing Council f NSS data. The
NSSO has four divisions namely:- 1.)
Survey Design and Research division (SDRD)
2.) Field Operations Divisions (FOD)
3.)Data Processing Division (DPD)
4.) Co-ordination and Publication (CPD)
The NSSO is headed by the Director General and Chief Executive Officer who is
responsible for CPD, which is headed by the Deputy Director General of SDRD.
Functions of NSSO:-
1.) Collection of data relating to industries and crop estimation.
2.) Collection of data on different socio-economic conditions such as literacy, birth and
death, etc.
3.) Co-ordinate surveys to collect data from agriculture sector, land, livestock etc.
4.) Release collected data on different socio-economic subjects through reports.

Specimen Questionnaire – Consumer Eating Preference

1. Name:
2. Age:
3. Address:
4. Sex: □ Male □ Female
5. Mobile:
6. Monthly Family Income:
□ Less than 10,000 □ 10,000 to 15,000
□ 15,000 to 20,000 □ More than 20,000
7. What kind of food do you normally eat at home?
□ North Indian □ South Indian □ Mughlai □ Chinese
□ Continental □ Italian □ Fast Food □ Others
8. How frequently do you eat out?
In a week □ Once □ Twice □ Thrice □ More than thrice
In a fortnight □ Once □ Twice □ Thrice □ More than thrice
In month □ Once □ Twice □ Thrice □ More than thrice
9. You usually go out with:
□ Family □ Friends □ Colleagues □ Others
10. Any specific days when you go out:
□ Weekdays □ Weekends □ Holidays □ Special Occasions □No specific days
11. You generally go out for:
□ Lunch □ Snacks □ Dinner □ Party/Picnics □ Others
12. Where do you usually go:
□ Restaurant □ Chinese Joint □ Fast Food Joint □ Others
13. How much do you spend on eating (out time):
□ Below 200 □ 200-500 □ 500-1,000 □ More than 1,000
14. Which is your favorite eating point:
□ Nirula’s □ Haldiram’s □ McDonalds □ Burger King
□ Pizza Hut □ Dominos □ Others
15. What are the disgusting factors you look for, while eating out (Rank 1 to 8, 8 –
highest score):
□ Quality □ Service □ Location □ Wide Menu Range
□ Price □ Taste □ Home Delivery □ Others

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 ORGANIZATION OF DATA
S.NO. QUESTIONS
1.) What do you understand by organization of data?

Organization of data means the arrangements of figures in such a form that comparison of the mass
of similar data may be facilitated and further analysis may be possible. An important method of
organization of data is to distribute these into different classes on the basis of their characteristics.

2.) What are the requisites of a good classification?

Essential of ideal classification-
1.) Homogeneity. The data are included in a particular class should be homogenous.
Heterogeneous data should not be taken in that very particular class.
2.) Clarity. The classification should be very clear, simple and undoubtful. If there is any
ambiguity in the classification, it will lose its usefulness.
3.) Stability. Stability is also an essential characteristic of an ideal classification. The
classification of data should not be subjected to change. If the stability of classification is
lost, the purpose for which it has been done is defeated.
4.) Flexibility. The classification should be flexible but not rigid one. By flexible we mean that
with the change in circumstances the classification should be changed.
5.) Diversification. An ideal classification should also process the characteristics of
diversification. By diversification we mean that each unit must be included in any class. If
there is any unit which is not related to any class, it is included in miscellaneous.
6.) Investigation. An ideal classification should be according to the purpose of investigation.

3.) What is the meaning of Classification? What are its characteristics?

“The technique of arranging the data in different homogenous groups is known as

classification”.
According to Spur and Smith, “classification is the grouping of related facts into classes.”

Characteristics of Classification-
1. Under classification, collected data are divided into different groups.
2. Homogenous data are kept or kept or classified in one group.
3. Data are classified on the basis of their features.
4. The Data become comparable.

4.) What are the objectives of classification?

1. To make the data simple and brief. The main objective of classification is to condense the
mass of data to make them easily understand.
Marks obtained No. of students
(out of 200)
100 – 110 40
110 – 120 30
120 – 130 12
130 – 140 10
140 – 150 8
Total 100

2. To bring out points of similarities and dissimilarities. Classification reveals clearly

points of similarities and dissimilarities in the statistical data.
3. To facilitate comparison. It facilitates comparison. Unorganized and shapeless data
cannot be compared. It can be done with help of classification.
Weights in KGS Class A Class B
20 – 30 5 6
30 – 40 10 12
40 – 50 20 21

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 50 – 60 18 15
60 – 70 7 6
Total 60 60

4. Scientific and critical arrangement. With the help of classification, data can be presented
scientifically. For example, the number of students can classify on the basis of their age and
class.
5. To reveal the basis of tabulation. Classification provides basis for tabulation. No
tabulation is possible with classification.

5.) What are the methods of classification?

Types or Methods or Basis of Classification-
1. Geographical classification. When the data is classified according to certain geographical
locations, then such a classification is called geographical classification. The example of
geographical classification may be presented in the following manner.
Name of the States Production
(In crores M.T.)
Uttar Pradesh 15.2
Punjab 11.2
Madhya Pradesh 6.0
Bihar 5.0
Haryana 4.8
Other states 10.8
Total 53.0

2. Chronological classification. When data are classified with respect to different periods of
time the type of classification is known as chronological classification.
Year Population (in crores)
1901 23.83
1911 25.20
1921 25.12
1931 27.88
1941 31.85
1951 36.09
1961 43.90
1971 54.81
1981 63.38
1991 84.60
2001 102.70

1. Conditional classification. When data are classified with respect to condition the type of
classification is classification. For example, the number of students in different faculties
may be presented in the following manner.
Faculties No. of Students (in students)
Commerce 15.2
Economics 12.1
Science 10.3
Arts 8.2
Total 45.8
2. Qualitative classification. In qualitative classification data are classified on the basis of
some qualitative phenomenon. When people are grouped as employed and unemployed,
with respect to a single attribute ‘employment’, then this type of classification is known as
simple classification.

3. Quantitative classification. When a statistical enquiry is conducted and one of the

variables is recorded one after the other then we get a group of numbers. Such an
assembling of numbers is called Raw Data or Ungrouped Data. It is possible to arrange
the data in the ascending or descending order such as height, weight, age, income, etc. But
this does not reduce the volume of the data.
The quantitative classification of number of student of the different age groups in a
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 school may be presented in the following manner.
Age Group No. of Students
0–5 50
5 – 10 80
10 – 15 70
15 – 20 60

Total 260

6.) Define Variable. Explain its concept

Variable – A characteristics which is capable of being measured and change its value over
time is called a variable.

In other words, a variable refers to that quantity which is subject to change and which can be
measured by some unit as weight, age, income, etc. The variable can be divided into the
following two groups:

i.) Discrete Variable. Discrete variables refer to that variable which are exact or finite
and are not expressed in fractions. For example, number of students in a class, number
of members in a family, numbers of rooms in a house, etc. A discrete variable is based
on certain limits.
No. of Children No. of Families
0 5
1 30
2 40
3 80
4 60
5 55
6 50

ii.) Continuous Variable. A continuous variable, also known as continuous random

variable is capable of manifesting every conceivable frictional value within the range of
possibilities.
Weight (in Kgs.) No. of students
50 – 52 35
52 – 54 40
54 – 56 45
56 – 58 50
58 – 60 30

Total 200
7.) What is the meaning of attribute?

Attributes. The beauty of people, their intelligence and aptitude for art and music also change from
one to the other. They can not be measured numerically in the same way as heights and weights.
Therefore, they are not called variables in the statistical sense. They are called attributes.

In brief, it can be said that variable implies the quantitative character of an item, while
attribute signifies the qualitative character of an item.

8.) What is Raw Data?

Data which are collected by the investigator. They are in their original form. They are highly
disorganized. The investigator has to organize them in a classified form. For example, the marks of
20 students in a class in the paper of statistics out of 50 are given in the following table –

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 15 25 56 87 56
20 28 60 98 25
25 40 25 56 63
10 25 63 23 45

9.) Define statistical series.

Statistical series refers to those data which are presented in some order and sequences.
Statistical series can be classified in the following heads:-

1. Individual series or Individual Observation

2. Discrete Series
3. Continuous Series or Class Interval Series.

Individual series or Individual Observation. A series of individual observations is a series in

which items are listed individually.
S. No. Daily Wages (in Rs.)
1 25
2 30
3 33
4 35
5 40
6 45

10.) Define Array.

Array. The presentation of individual series either in ascending order or in descending order is
known as Array.
The data of daily wages given in the above example can be put in the form of array in the following
ways:-
Ascending order Descending order
25 45
30 40
33 35
35 33
40 30
45 25

By presenting the data in the form of Array can easily understood.

11.) Define Discrete Series.

When items are arranged in groups showing definite breaks from one point to another and when
they are exactly measurable, they form a discrete series. There is no class in such series.

The following is an example of discrete series:

Marks (out of 50) No. of Students (frequency)
20 30
25 20
30 15
35 17
40 10
45 8
Total 100
It is clear from the above example that 30 students are those who obtained 20 marks, 17
students are those who obtained 35 marks, etc.
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12.) Define Frequency.
Formation of discrete frequency distribution is very simple. The number of times an item repeats
itself corresponding to range of value is called Frequency.

13.) What is continuous series?

Continuous Series or Class Interval series –
When items are arranged in groups or classes but they are not exactly measurable, they form a
continuous series. In the continuous series, frequency of various classes is shown against them. The
following is an example of continuous series.
Marks obtained No. of students (frequency)
0 – 10 5
10 – 20 7
20 – 30 13
30 – 40 20
40 – 50 11
50 – 60 8
60 – 70 6
Total 70

14.) What is mid-point?

The centre of the limits of a class is called mid points or value of a class. It is the value lying half-
way b/w the lower and upper limits of a class interval. Mid point of a class is found as follows:
Mid value = lower limit + upper limit
2

15.) What are the types of frequency distribution? Explain.

Types of Frequency Distribution-
There are 5 types of frequency distribution series:
1. Exclusive series
2. Inclusive series
3. Open end series
4. Cumulative frequency series
5. Mid value frequency series

Exclusive series- When the class-intervals are so fixed that the upper limit of one class-
interval is the lower limit of the next class-interval, it is called exclusive series. For example,
in the class interval, 10-15, only such items would be included, the value of which is b/w 10 and 14.
Any item of the value of 15 would be included in the next class interval.
Marks Frequency
10-15 4
15-20 5
20-25 8
25-30 5
30-35 4

Total 26

Inclusive series – In inclusive series, both the lower limit and the upper limit of a class-
interval are included in that class interval. In other words, the upper limit of one class interval
is not equal to the lower limit of its next class interval. Following is the example of an inclusive
series:
Weekly wages (in Rs) No. of workers

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 40-49 7
50-59 17
60-69 25
70-79 10

In the first class-interval 40 to 49 all the values are included; in the second class interval 50-59 all
the values are included, etc.
Open End Series – Open end series is that series in which lower limit of the first class
interval and the upper limit of last class interval is missing. In some series, the lower class
limit of the first class interval and the upper limit of the last class interval are missing. Instead, ‘less
than’ or below is specified in place of the lower class limit of the first class interval and ‘more than’
or above is specified in place of the upper class limit of the last class interval. Such series are called
‘Open end’ series.

Marks Frequency
Below 5 1
5-10 3
10-15 4
15-20 6
20 and above 1

Cumulative Frequency Series – Cumulative frequency is that series in which the frequencies
are continuously added corresponding to each class interval in the series.
Simple Frequency Series
Marks Frequency
5-10 3
10-15 8
15-20 9
20-25 4
25-35 4

16.) How we can converting frequency into cumulative frequency?

There are two ways of converting this series into cumulative frequency series. These are:
i.) Cumulative frequencies may be expressed on the basis of upper limits of the class
intervals e.g. less than 10, less than 15, less than 20, when the class intervals are 5-10,
10-15 and 15-20.
ii.) Cumulative frequencies may be expressed on the basis of lower class limits of the class
intervals, e.g. more than 5, more than 10, more than 15, when the class intervals are 5-
10, 10-15 and 15-20.

Cumulative frequency series

Method.1 Method.2
Marks No. of students Marks No. of students
Less than 10 0+3 = 3 More than 5 =28
Less than 15 3+8 = 11 More than 10 28-3 = 25
Less than 20 11+9 = 20 More than 15 25-8 = 17
Less than 25 20+4 = 24 More than 20 17-9 = 8
Less than 30 24+4 = 28 More than 25 8-4 = 4

17.) Define Range.

Ans. the range of a frequency distribution can be defined as the difference b/w the lower the
limit of first class interval and the upper limit of the last class interval.
For example, if the classes are 0-10, 10-20 till 70-80, then range 80 – 0 = 80.

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18.) Difference b/w Exclusive and Inclusive method.
Exclusive method Inclusive method
1.) The upper limit of class interval is Both the limits of a class interval are
counted in the next immediate class. counted in the same class.

2.) The upper limit of a class interval The upper limit of a class interval and lower
and the lower limit of next class limit of next class are different. The
interval are the same. difference is generally of one.

3.) There is no need of converting it to For simplicity in calculation, it is necessary

inclusive method prior to to change it into exclusive method.
calculation.

19.) Difference b/w Univariate frequency and Bivariate Frequency distribution?

Basis Univariate Frequency Bivariate Frequency

distribution distribution
Meaning When data is classified on the basis When the data is classified on the
of single variable, the distribution is basis of two variables, the
known as univariate frequency distribution is known as bivariate
distribution. frequency distribution.

Purpose It aims to make description about It aims to determine the empirical

the particular variable. relationship b/w the two
variables.

Alternate It is also known as one-way It is also known as Two-way

name frequency distribution. frequency distribution.

Examples Height of students in the class. Height and weight of students in a

class.

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