ECO CH-2

Chapter 2 – Theory of Demand and Supply

Important Points

  • Demand

Demand is a desire which, must be backed by the ability or the capacity to pay for the goods, and the willingness on the part of the consumer to spend for the goods.

Observing the definition you can make out the five elements of Demand-

  1. Desire (want)
  2. Purchasing Power
  3. Willingness to pay
  4. Certain price and quantity demanded
  5. Certain period of time

 

  • Determinant of Demand

It means factor on which demand for a commodity depends, which are

  • The price of the commodity – (Ceteris paribus) other things being equal, demand of a commodity is inversely related to its price.
  • The price of the related goods –Here we can study two variants :-

(a) Complementary goods: There is an inverse relation between change in price of one complement and demand of other complementary good. A fall in the price of one will cause the demand of other to rise and vice versa.

(b) Substitutes or Competing goods: There is positive relation between change in price of one substitute and demand of other substitute good i.e. a fall in the price of one leads to a fall in the quantity demanded of its substitute and vice-versa.

  • The income of the consumers –
  • In case of Normal / Luxury goods demand for goods increase with increase in household’s income and vice versa. So there is positive relation.
  • In case of Inferior goods- there is inverse relation.
  • In case of Necessaries- the demand for necessaries also increase in the beginning and becomes income inelastic (constant) thereafter.

 

  • The taste and preferences of the consumer – A positive change in the taste and preference shall lead to an inverse in demand and vice-versa.
  • Size of the population – Larger the size of population of a country, more will be the demand.

Please note that – ‘Quantity supplied’ and factor price’ do not determine demand.

Law of Demand

“When the price of good increases, its demand decreases and a fall in price will lead to rise in demand-other things remaining constant it is based on following assumptions

  1. Income of the people remain unchanged
  2. Taste, preference remain unchanged
  3. Price of related goods remain unchanged
  4. No expectation of change in price in future

 

Market demand curve is horizontal summation of individual demand curves. The law of demand is a qualitative statement because it explains trend but not exactness.

Downward Slope of Demand Curve

Demand curve slopes downward because

  1. Dimnishing Marginal Utility of a product – Once we have purchased a certain commodity, we will buy additional units in a short span of time or immediately only if the price offered is lesser than the previous price on which we bought the initial units of that commodity.
  2. Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. The quantity demanded of the commodity whose price has fallen, rises.
  3. Income effect: When the price of a commodity falls, consumer’s real income or purchasing power increase. Thus price Effect (PE) = Substitution Effect (SE) + Income Effect (IE)
  4. Number of consumer: When the price of a commodity falls, the number of its consumers increases and this also trends to raise the market demand for the commodity.

 

  • Exceptions of Downward Slopes Demand Curve

Conspicuous goods: Some consumers measure the utility of a commodity by its price i.e. if the commodity is expensive they think that it has got more utility. This concept of ‘Conspicuous Consumption’ is given by Prof. Thorstein Veblen and it is called Veblen effect or prestigious goods effect.

Giffen goods: ‘Giffen goods’ are those goods, which are considered inferior by consumers. Sir Robert Giffen, found that when price of bread increased, the British workers purchased more bread not less of it. Such goods which exhibit direct price- demand relationship are called Giffen goods. In case of a Giffen good, demand curve will upward sloping to the right.

Conspicuous necessities: The demand for certain goods is effected by the demonstration effect of the consumption pattern of a social group.

Future expectations about prices: when price are rising, households expecting that the prices in the future will be higher, tend to buy larger quantities of commodities.

Irrational and Impulsive purchases: At time consumers tend to make impulsive purchase the law of demand fails.

Demand for Necessaries: In case of necessaries, people have to consume the minimum quantity, whatever is the price. Nareshmalhotra.in

Speculative goods: The law of demand also does not apply in share market because when prices are rising, more will be demanded.

Ignorance effect: a household may demand larger quantity of a commodity even at a higher price because it may be ignorant of the ruling price of the commodity

  • Extension and Contraction in Demand

Extension of Demand When quantity demanded increases in response to a fall in own price of the commodity. It is also called Expansion of demand.

Price Quantity
4

1

10

14

(In extension of demand the movement of demand curve is from left to right)

 

 

 

 

 

 

 

 

 

Contraction of Demand When quantity demanded decreases in response to a rise in own price of the commodity.

 

Price Quantity
10

14

24

18

(In contraction of demand or movement of demand curve is from right to left)

In both the cases demand will be represented by a movement (moving down and ulp accordingly) along the same demand curve.

Shift in Demand Curve

The demand curve will shift to right in case of increased income (an inferior is exception), when substitute goods price increase, when price of complement goods goes down, population increase and consumers taste change in favour of this product. The opposite changes will shift the demand curve to the left.

  • Elasticity of Demand

Elasticity of demand is a technical term used by economists to explain the degree of responsiveness in the demand for a good to a change in any of its determinants.

Its divided into 3 Kinds 1. Price Elasticity 2. Income Elasticity 3. Cross Elasticity.

=>Price Elasticity when the percentage change in quantity demanded of a commodity happens due to the percentage change in price of that commodity. It is measured as percentage change in quantity demanded divided by the percentage change in price, other things remaining equal.

Ed =    or

Ep =

Where Ep = Price elasticity                                                                             Q = Quantity

P = Price                                                                                                            = Change

Degrees / Types / Coefficient of Price Elasticity of Demand:

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

Measurement of Price Elasticity of Demand :

  1. Total outlay method:

    Price elasticity can also be measured on the basis of changes in the total outlay (or expenditure) due to the change in the price. Under this method elasticity will be of three types:

(a) E = 1: When as a result of a change in price, the total expenditure remains the same, the commodity is said to have a unitary elastic demand. This curve is also called Rectangular Hyperbole (R.H.).

(b) E > 1: When as a result of a rise in price, the total expenditure on the commodity falls and as a result of a fall in price, the total expenditure rises, the commodity is said to have More than unit elastic demand.

(c) E < 1: when as a result of a rise in price, the total expenditure on the commodity rises and as a result of a fall in price the total expenditure falls, the commodity is said to have Less then unity elastic demand.

  1. Point elasticity method:

    This is also known as geometrical method. This method is used when we have to find out elasticity at a point on the demand curve.

EP =

 

  1. Arc elasticity method:

    When the price change is somewhat larger and we have to measure elasticity over an arc on the demand curve. We use the average of the two prices and quantities.

 

Factors Affecting / Determinants of Elasticity of Demand

Availability of Substitutes: If commodities have more close substitutes, have more elastic demand. And, if a commodity have less substitutes, have inelastic demand.

Position of a commodity in the consumer’s budget: Generally, greater the proportion of income spent on a commodity, the greater will be its elasticity of demand and vice-versa.

Nature of the commodity: In general, luxury goods are price elastic while necessities are price inelastic.

Number of uses: The more the possible uses of a commodity the greater will be its price elasticity and vice versa.

The Period: So demand will be Elastic in long period. But in the short period, demand will be inelastic.

Consumer habits: If a consumer is habitual consumer of a commodity the demand for the commodity will remain inelastic. Nareshmalhotra.in

Tied demand / Joint demand: The demand for those goods, which are tied / joint to others, is normally inelastic as against those whose demand is independent.

Price range: Goods, which are in very high price range or in very low price range have inelastic demand but those, which are in middle price range have elastic demand. Generally low price good keeps the price elasticity of demand for a good low.

 

=>Income Elasticity When the quantity demanded of a commodity changes due to the change in income of the consumers it is related with Income elasticity. So, Income elasticity of demand means the ratio of percentage change in quantity demanded due to percentage change in income of consumers.

Ey =   =

Ey =

Please see: There is no Arc method in Income Elasticity

Types of income elasticity: It may be of three types-

Positive Ey – In case of Normal / Luxury good, there will be positive relation between income and demand

(a) Ey = 1 (equal to one) (% Q = % Y)

(b) Ey > 1 (Greater than one) (%

(c) Ey < 1 (Less than one) – Sometimes it’s found in necessities. (%

Negative Ey (Ey < 0 – Less than zero):- In case of Inferior goods, the income elasticity of demand is negative.

ENGEL’S  CURVE

Zero Ey (Ey = 0)- In case of Necessaries goods whether income increases or decreases the quantity remains the same. So zero income elasticity is found here.

=>Cross Elasticity of Demand (Ex):

The cross elasticity of demand is proportional change in quantity of X demanded resulting from given relative change in the price of the related commodity Y.

Ex =   or

Ex =  ×

x and y may be substitute goods or complementary goods.

  1. Positive Ex – In case of substitute goods for eg. Tea and Coffee, there is positive relation so positive cross elasticity is found here. Positive lies between +0 to + . In perfect substitutes it will be infinity.
  2. Negative Ex – In case of complementary goods like Car and Petrol, there is inverse relation, so negative cross elasticity is found here. Negative lies between -0 to –
  3. Unrelated Goods – In this case the cross elasticity will be zero.

There may be another method in which average of the two prices and quantities are taken:

Arc Method of Ex =

Here do not ignore – or +sign because – indicate negative relation and + indicates positive relation.

 

 

 

Theory of Consumer Behavior

Human Wants

Base of economy is human wants. As need of everything generates due to wants of human which is also known as desire of consumers to satisfy their needs. Wants may classified in

  1. Necessaries Comforts                            3. Luxuries

Utility

It was defined by Jeremy Bentham. Wants satisfying power of a good is called utility. It can be measured in cardinal numbers or given ranks. The expected utility often differs from realized utility which may be called real satisfaction. Utility should also be seen differently from benefit or usefulness. Utility is also known as ‘Satiety’.

  • Marginal Utility Analysis – Alfred Marshall

Marginal Utility

Marginal utility is the addition (Marginal satiety) to total utility by the consumption of one additional unit of the commodity.

Total Utility

The sum of the utility (Full Satiety) derived from the consumption of all units of the commodity by a consumer.

Relation between TU and MU – Total utility is the sum of marginal utilities. In the above table MU always declines and when MU decreases TU increase, when MU is zero then TU is maximum. This is called ‘saturation point’ and after that when MU become negative, TU decreases. MU may be positive, zero or negative but TU never negative.

Assumptions of the MU Analysis:-

  1. The cardinal measurability of utility
  2. Constancy of the MU of money
  3. The hypothesis of independent utility
  4. Rationality

 

 

 

The law of Diminishing Marginal Utility

The marginal utility that any household derives from successive units of a particulars commodity will diminish, when total consumption of the commodity increase. Therefore it is also called the ‘fundamental law of satisfaction’.

 

 

 

 

Assumptions: This law is based on above four assumptions of the MU analysis and there are also three more assumptions:

  1. Taste, income of the consumer remains unchanged.
  2. The units of the commodity are identical in all aspects.
  3. There is no time-gap between consumption.
  4. The consumer is rational.

Limitations:

  1. Cardinal measurement of utility is not possible.
  2. Law is applicable if there are standard unit – sufficient unit – neither more nor less.
  3. Law is applicable if there is no time-gap or interval between the consumption.
  4. Law may not apply to some articles like gold, money, music and hobbies.

 

Consumer Surplus

Consumer’s Surplus is equal to the difference between amount which is consumer ready to pay

and what actually he pays. It derived from the law of Diminishing Marginal Utility given by Alfred Marshall

‘What a consumer ready to pay’ is taken in terms of ‘MU’ and ‘What he actually pays’ is taken in terms of ‘Price’.     So CS = MU – P

 

 

  • Indifference Curve Analysis – Allen & Hicks

It is said to be ordinal concept in economics. This approach is based on consumer preference. It is believed that human satisfaction is psychological. So it cannot be measured in monetary terms. In this approach consumer’s preference is ranked order-wise. Here it is assumed that consumer is rational and he has monotonic preferences. Nareshmalhotra.in

 

Indifference Curve

Indifference curve shows different combination of goods for which consumer is indifferent. In other words all combination gives same satisfaction to consumer. Combination are A, B and C.

Marginal rate of substitution in the rate at which the consumer is prepared to exchange goods X and  Y.

=Imperfect substitute MRSxy declines

=Perfect substitutes MRSxy straight line

=Perfect complementary MRSxy zero

 

Properties of Indifference Curve

  1. It is convex to its origin and slopes downward.
  2. Two indifference curve never intersect each other.
  3. Indifference curve will not touch X axis or Y axis.
  4. Higher IC curve represents higher satisfaction.

 

 

Budget Line or Price Line

Budget Line or Price Line shows the combination of good1 and good1 on which consumer spends his whole income either on good1 or on good2 or on both.

  • As seen in the figure, the segment joining X axis and Y axis is called budget line. If consumer spends all his money on books he will buy 20 books and alternatively he will be able to buy 40 movies if he spends entire money on it.
  • Any point beyond the budget line is not affordable as it is out of consumer’s reach.
  • Any point inside the budget line shows under-spending by consumer.

 

 

Consumer’s Equilibrium with IC analysis

It refers to the optimum choice of the consumer. In terms of indifference curve analysis, the consumer achieves his optimum choice when he strikes a balance between what he wishes to buy and what he buys. Equilibrium is struck at Q. IK is the price line.

At Equilibrium Point Q, MRSxy (Marginal rate of substitution)

MRSxy  =  =

Theory of Supply and Elastics of Supply

  • Supply
  • The term supply refers the amount of goods or services which producers are willing and able to offer to the market at various prices during a period of time.

Determinants of Supply

  • Price of goods – When price increase then supply increase and when price decreases then supply decreases.
  • Price of related goods – If prices of related commodities (substitutes or complements) rise, they will become relatively more attractive to produce and the supply of that commodity rises.
  • Price of factor of production(e.g., Land, rent, wage rate etc.) – A rise in prices of factors of production of a commodity will make the production of that commodity less profitable, so supply will decrease.
  • Technology( e.g. new machinery) – Technology advances reduce the cost of production and results in more and more supply of the commodity.
  • Government policy( e.g., free tax for certain periods) – If Govt. policies are favourable then supply will increase and if Govt. policies are unfavourable then supply will fall.
  • Future Expectations – If there is future expectation about rise in price then supplier will not increase the supply at present and if there is future expectation about fall in price then supplier will increase his supply.
  • Other factors – Natural factor, market structure goal of the firm.
  • Law of Supply

If the price of a good increases the supply by producers for that goods will also increase in the market and other things remaining constant.


Movement of Supply Curve

It is described as increase or decrease in quantity supplied caused by change in own price of the commodity.

     

 

  

 

Shifts in the Supply Curve

It is described as the increase or decrease in supply when price of Y the commodity remains constant and other factors change.

 

  • Elasticity of Supply

It is defined as the degree of responsiveness  of the quantity supplied of a commodity to a change in its price.

Es =

=

Other methods of measurement of elasticity of elasticity of supply:  Other methods are-

(1) Point elasticity:- Point elasticity measures elasticity at a point on the supply curve. The  elasticity at a point on the supply curve can be measured with the help of following formula.

Es =  Where  is the differentiation of the supply function with respect to Price.

(2) Arc elasticity: In measurement of arc elasticity, we use the average of the two price (original and subsequent) and average of the two quantity (original and subsequent).

Arc Elasticity =

 

Types of Elasticity of Supply-

  1. Perfectly elastic supply (Es = ):- It is situation in which supply of a commodity continuously change without any change in price. In perfectly elastic supply curve, the supply curve will be horizontal parallel to quantity axis.
  2. More than unitary elastic supply (Es>1):- It refers to a situation by which percentage of change in supply of a commodity is higher than percentage change in price of that commodity. For ex. Change in price is 10% but change in supply is 20%, then 20% / 10% = 2 (E=2).
  3. Unit elastic supply (Es = 1):- When percentage change in supply of a commodity is equal to percentage change in price. For ex. Change in price is 10% but change in supply is also 10%, then 10% / 10% = 1 (E = 1) Nareshmalhotra.in
  4. Less than unit elastic supply (Es < 1):– When percentage change in supply of a commodity is less than percentage change in price. For ex. Change in price is 10% but change in supply is 8%, then 8% / 10% = 0.8 (E<1) (Inelastic supply).
  5. Perfectly inelastic supply (Es = 0):– When price of commodity does not influence supply of that commodity that situation is called perfectly inelastic supply.

 

  1. Which of the following elasticity of demand measures the movement along the demand curve rather than shift in demand curve?
  • Income elasticity of demand
  • Price elasticity of demand
  • Cross elasticity of demand
  • None of these
  1. If 20 % fall in price of commodity brings 40 % increase in its demand, then the demand for commodity will be treated as
  • Inelastic
  • Elastic
  • Highly elastic
  • Perfectly elastic

 

  1. When price falls by 5 % demand increase by 6%, then elasticity of demand is
  • Elastic
  • Inelastic
  • Unitary elastic
  • Zero

 

  1. Cross elasticity of complementary goods is
  • Positive
  • Negative
  • Infinity
  • None of these

 

  1. Demand of i-pod increase from 950 to 980 and income increases, from Rs. 9,000 to Rs. 9,800. What is income elasticity?
  • 53
  • 35
  • 43
  • None of these

 

  1. Bricks for houses is an example of which kind of demand?
  • Composite
  • Competitive
  • Joint
  • Derived

 

  1. Demand for electricity power is elastic because
  • It is available at a very high place
  • It is essential for life
  • It has many uses
  • It has many substitutes

 

  1. If income of a person increase by 10% and his demand for goods increases by 30 %, income elasticity will be
  • Equal to one
  • Less than one
  • More than one
  • None of these

 

  1. In case of luxury goods, the income elasticity of demand will be
  • Zero
  • Negative but greater than one
  • Positive but greater than one
  • Positive but less than one

 

  1. In case of straight line demand curve meeting two axis, the price elasticity of demand at the point where the curve meets y-axis would be
  • Zero
  • Greater than one
  • Less than one
  • Infinity

 

  1. The commodity whose demand is associated with the name of sir Robert Giffen?
  • Necessary good
  • Luxury good
  • Inferior good
  • Ordinary good

 

  1. When price falls from Rs. 6 to Rs. 4, the demand rises from 10 to 15 units. Calculate price elasticity of demand.
  • 5
  • 5
  • 5
  • 2

 

  1. Cross elasticity of perfect substitutes is
  • Zero
  • Negative
  • One
  • Infinity

 

  1. A consumer spends Rs. 80 on purchasing a commodity when its price is Rs. 1 per unit and spends Rs. 96 when the price is Rs. 2 per unit. Calculate the price elasticity of demand.

(a) 0.2

(b) 0.3

(c) 0.4

(d) 0.5

 

  1. When the price of cylinder rises from Rs. 120 to Rs. 200, the demand falls from 300 to 200. Calculate price elasticity of demand.
  • 00
  • 50
  • 00
  • None of these

 

  1. If the price is decreased from Rs. 10 to Rs. 8 of a commodity but the quantity demanded remains the same price elasticity is
  • 1
  • 0
  • None of these

 

  1. Law of demand is a
  • Quantitative statement
  • Qualitative statement
  • Both (a) and (b)
  • Hypothetical

 

  1. Increase in price from Rs. 4 to Rs. 6 then decrease in demand from 15 units to 10 units. What is the price elasticity?
  • 66
  • 5
  • -1.5
  • 2

 

  1. What is income elasticity of demand, when income changes by 20 % and demand changes by 40 %?
  • ½
  • 2
  • 33
  • None of these

 

  1. What is the original price of a commodity when price elasticity is 0.71 and demand changes from 20 units to 15 units and the new price is Rs. 10?
  • 15.4
  • 18
  • 20
  • 8

 

  1. In case of a straight line demand curve meeting the two axis, the price elasticity of demand at the mid-point of the line would be
  • 0
  • 1
  • 5
  • 2

 

  1. An increase in demand can result from
  • A decline in the market price
  • An increase in income
  • A reduction in the price of substitutes
  • An increase in the price of complements

 

  1. Which factor generally keeps the price-elasticity of demand for a good low
  • Variety of uses for that good
  • Its low price
  • Close substitutes for that good
  • High proportion of the consumer’s income spent on it

 

  1. The price of hot-dogs increase by 22% and the quantity demanded falls by 25% this indicates that demand for hot-dogs is
  • Elastic
  • Inelastic
  • Unitary elastic
  • Perfectly elastic

 

  1. In case of inferior goods like bajra, a fall in its price tends to
  • Make the demand remain constant
  • Reduce the demand
  • Increase the demand
  • Change the demand in an abnormal way

 

  1. Suppose the price of movies seen at a theatre rises from Rs. 120 per person to Rs. 200 per person. The theatre manager observes that the rise in price leads to a fall in attendance at a given movie from 300 to 200 persons. Find elasticity of demand for movies
  • 5
  • 8
  • 0
  • 2

 

  1. In case of an inferior good, the income elasticity of demand is
  • Positive
  • Zero
  • Negative
  • Infinite

 

  1. Contraction of demand is the result of :
  • Decrease in the number of consumers.
  • Increase in the price of the good concerned.
  • Increase in the prices of other goods.
  • Decrease in the Income of purchaser.

 

  1. All but one of the following are assumed to remain the same while drawing an individual’s demand curve for a commodity. Which one is it?
  • The preference of the individual.
  • His monetary income.
  • Price of related goods.

 

  1. Potato chips and popcorns are substitutes. A rise in the price of potato chips will ____ the demand for popcorns and the quantity of popcorns will ______:
  • Increase, increase
  • Increase, decrease
  • Decrease, decrease
  • Decrease, increase

 

  1. The Law of Demand, assuming other things to remain constant, establishes the relationship between :
  • Income of the consumer and the quantity of a good demanded by him.
  • Price of a good and the quantity demanded.
  • Price of a good and the demand for its substitute.
  • Quantity demanded of a good and the relative prices of its complementary goods.

 

  1. An increase in the demand for computers and an increase in the number of sellers of computers will:
  • Increase the number of computers bought
  • Decrease the price but increase the number of computers bought
  • Increase the price of a computer
  • Increase the price and the number of computers bought

 

  1. Identify the coefficient of price-elasticity of demand when the percentage increase in the quantity of a good demanded is smaller than the percentage fall in its price :
  • Equal to one.
  • Greater than one.
  • Smaller than one.

 

  1. If good growing conditions increases the supply of strawberries and hot weather increases the demand for strawberries, the quantity of strawberries bought:
  • Increases and the price might rise, fall or not change
  • Doesn’t change but the price rises
  • Doesn’t change but the price falls
  • Increases and the price rises

 

  1. If the demand for a good is inelastic, an increase in its price will cause the total expenditure of the consumers of good to :
  • Remain the same
  • Any of these.

 

  1. The way in which rational consumers allocate their expenditure on goods and service is best described by_____:
  • The law of diminishing marginal utility
  • The law of demand
  • The theory of value
  • The marginal rate of substitution

 

  1. All of the following are determinants of demand except :
  • Tastes and preferences.
  • Quantity supplied.
  • Price of related goods.

 

  1. A movement along the demand curve for soft drinks is best described as :
  • An increase in demand.
  • A decrease in demand.
  • A change in quantity demanded.
  • A change in demand.

 

  1. If a good is a luxury, its income elasticity of demand is :
  • Positive and less than 1.
  • Negative but greater than -1
  • Positive and greater than 1
  • zero
  1. If the demand is more than supply, then the pressure on price will be:
  • Upward
  • Downward
  • Constant
  • None of the above

 

  1. if the quantity demanded of beef increase by 5% when the price of chicken increase by 20% ,the cross price elasticity of demanded between beef and chicken is
  • -0.25
  • 25
  • -4
  • 4

 

  1. Elasticity of supply is defined as responsiveness of quantity supplied of a good to change in
    1. Price of concerned good
    2. price of substitute good
    3. demand
    4. None of these

 

  1. When Supply Curve shifts to the right there is ……………… in Supply.
    1. An increase
    2. Expansion
    3. Contraction
    4. Decrease

 

  1. A horizontal supply curve parallel to the quantity axis implies that the elasticity of supply is
    1. Zero
    2. Infinite
    3. Equal to one
    4. Greater than zero but less than one

 

  1. Supply refers to quantity supplied at a particular price for particular period of time. True or False.
    1. True
    2. False
    3. Partly true
    4. None of these

 

  1. If the price of apples rises from Rs. 30 kg to Rs. 40 kg and the supply increases from 240 kg to 300 kg. Elasticity of supply is
    1. 75
    2. 67
    3. (-)0.67
    4. (-)0.75

 

  1. If the supply of a commodity is perfectly elastic, an increase in demand will result in
    1. Decrease in both price and quantity at equilibrium
    2. Increase in both price and quantity at equilibrium
    3. Increase in equilibrium quantity, equilibrium price remaining constant.
    4. Increase in equilibrium price, equilibrium quantity remaining constant

 

  1. When change in the quantity supplied is proportionate to the change in the price, the producer is said to have.
    1. Perfectly elastic supply
    2. Relatively elastic supply
    3. Unitary elastic supply
    4. Perfectly inelastic supply

 

  1. What is the elasticity of supply, when price changes from Rs. 15 to Rs.12 and supply changes from 6 units to 5 units?
    1. 77
    2. 87
    3. 833
    4. 58

 

  1. When supply price increase in the short run, the profit of the producer
    1. Increase
    2. Decreases
    3. Remains constant
    4. Decreases marginally
    5. Given the following four possibilities, which one result in an increase in total consumer expenditure ?
  • Demand in unitary elastic and price falls
  • Demand is elastic and price rises.
  • Demand is inelastic and price falls
  • Demand is inelastic and price rise

 

  1. The price elasticity of demand for chocolate is
  • The change in the quantity demanded of chocolate when price increase by 30 paise per rupee.
  • The percentage increase in the quantity demanded of chocolate when the price falls by 1 percent per rupee.
  • The increase in the demand for chocolate when the price falls by 10 percent per rupee
  • The decrease in the quantity demanded of chocolate when the price falls by 1 percent per rupee

 

  1. The supply function is given as Q=-100+10P. Find the elasticity using point method, when price is Rs. 15
  • 4
  • -3
  • -5
  • 3

 

  1. Suppose a department store has a sale on its silverware. If the price of a plate setting is reduced from Rs 300 to Rs 200 and the quantity demanded increase from 3,000 plate setting to 5000 plate settings, what is the price elasticity of demand for silverware ?
  • .8
  • 0
  • 25
  • 50
  1. A discount store has a special offer on CDs. It reduces their price from Rs 150 to Rs 100. Suppose, the store manager observe that the quantity demanded increases from 700 CDs to 1,300 CDs, what is the price elasticity of demand for CDs ?
  • .8
  • 0
  • 25
  • 50

 

56.If the local pizzeria raise the price of a medium pizza from Rs 60 to Rs 100 and quantity demanded falls  from 700 pizza to 100 pizza a night ,the price elasticity of demanded for pizza is :

  • .67
  • 5
  • 0
  • 0

 

  1. If electricity demanded is inelastic ,and electric rates increase ,which of the following is
    likely to occur ?
  • Quantity demanded  will fall by a relatively large amount.
  • Quantity demanded will fall   by a relatively small amount .
  • Quantity demanded will rise in the short run ,but fall in the long run.
  • Quantity demanded will fall in the short run ,but rise in the long run .

 

 

58.Point elasticity  is useful for which of the following situation ?

  • The book store is considering doubling the price of notebooks.
  • A Restaurant is considering lowering the price of its most expensive dishes by 50 percent.
  • An auto producer is interested in determining the response of consumer to the price of cars being lowered by Rs 100.
  • None of the above .

 

 

  1. An increase in price will result in an increase in total revenue if :

 

  • The percentage change in quantity demanded is less than the percentage change in price .
  • The percentage change in quantity demanded is greater then the percentage change in price.
  • Demand is elastic.
  • The consumer is operating along a liner demand curve at a point at which the price is very high and the quantity demanded is very low.

 

  1. Demand for a good will tend to be more elastic if it exhibit which of the  following  characteristic ?
  • It represent a small part of the consumer income.
  • The good has many substitutes available.
  • It is necessity (as opposed to a luxury).
  • There is little time for the consumer to adjust to the price change.

 

  1. Demand for a good will tend to be more inelastic if it exhibits which of the following characteristics ?

 

  • The good has many substitutes.
  • The good is a luxury (as opposed to a necessity )
  • The good is a small part of the consumer income .
  • There is a great deal of time for the consumer to adjust to the change in price.

 

  1. Suppose a consumer income increase from Rs 50000 to Rs 60000. As a result, the consumer increases his purchase of parker pens from 25 pens to 30 Pens. What is the consumer income elasticity?
  • 5
  • 0
  • 5
  • 0

 

  1. Which one is not an assumption of the theory of demand based on analysis of indifference curves?
  • Given scale of preferences as between different combinations of two goods .
  • Diminishing marginal rate of substitutions .
  • Constant marginal utility of money.
  • Consumer would always prefer more of a particulars good to less of it, other things remaining the same.

 

  1. An indifference curve slope down towards right since more of one commodity and less of another result in :
  • Same satisfaction
  • Greater satisfaction
  • Maximum satisfaction
  • Decreasing expenditure.
  1. The second bottle of Pepsi give lesser satisfaction to thirsty boys. This is a clear case of
  • Law of Demanded
  • Law of Diminishing
  • Law of Diminishing utility
  • Law of supply

66.Supply of a commodity is ……………. Concept.

  • Stock concept (b)flow concept          (c) Both (a) and (b)   (d) wholesale concept

 

 

 

 

 

 

 

 

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