REVISION - AT A GLANCE
CHAPTER - INTRODUCTION
PGT Economics
Kendriya Vidyalaya Sangathan
09451927636
Facebook Page - @madeeconomicseasy
You Tube Channel – Dr. Asad Ahmad
Blog – drahmadasad.blogspot.com
Saturday, 21 January 2017
ELASTICITY OF DEMAND
Price Elasticity
of Demand
1. Price elasticity of demand:- It is a measure of the degree of responsiveness of
the demand for a commodity to a change in its price.
- Importance of Elasticity of Demand:-
1) To a
producer: - Every producer, especially a monopolist has to decide its
output and price at which he has to sell it. If demand for his product is
elastic, he will keep the price low to earn maximum profit.
2) To a finance minister - Before
charging taxes, finance minister takes into consideration, elasticity of those
commodities, which are to be taxed. He often charges high taxes on those
commodity which have inelastic demand.
3) Useful in factor pricing - The factor
having inelastic demand can obtain a higher price than those with elastic
demand.
4) Useful in international trade - If a
country knows that the commodity produced in a country have inelastic demand in
international market, then high prices can be charged for exporting goods.
- Factors Affecting Elasticity of Demand
|
S.No.
|
Basis
|
Elastic
|
Inelastic
|
|
1
|
Availability of
substitute goods
|
If substitutes are
available
|
If substitutes are
not available
|
|
2
|
uses of the
commodity
|
If the commodity
have different uses, its
demand will be
elastic
|
Single use
Commodity
|
|
3
|
Taste &
preferences
|
Different type of
brand
|
If only on brand
is available
|
|
4
|
Level of Income
|
Low level of
income
|
High level of
Income
|
|
5
|
Habit
|
Non Habituated
|
Habituated
|
|
6
|
Postponement of
Consumption
|
Postponement
Possible
|
Postponement not
Possible
|
|
7
|
Proportion of
total exp. on the product
|
Major
|
Minor
|
|
8
|
Time Period
|
Long time
|
Short Time
|
|
9
|
Price of Goods
|
Highly Priced
|
Low Priced
|
Very Short Answer Type Question-
Q1. How is
percentage change in quantity demanded calculated?
Ans. %age change in quantity demanded =Change in Quantity / Old Quantity X 100.
Q2. Define
Price Elasticity of demand?
Ans.
It refers to the degree of responsiveness of quantity demanded to change in its
price.
Q3. Draw a
demand curve with unitary elasticity.
Q4. When is demand for a commodity said to be
perfectly in elastic?
Ans.
When demand does not change with change in its price.
Q5. What makes the demand for a good more or less
elastic ? State one factor.
Ans.
Availability of substitutes.
Short Answer Questions (3/4 Marks)
Q1. Draw demand
curves showing price elasticity equals to
(a) 0, (b)
, (c) 1.
Ans.
Q2. What is
meant by elasticity of demand .State any three factors that affect it?
Ans.
It refers to the degree of responsiveness of the quantity demanded of a good to
a change in its price.
Factors affecting it:-
a)
Availability of
close substitutes.
b)
Price level.
c)
Uses of Commodity
Q3. What will
be the price elasticity of demand be in the following cases?
a) Rise in
price of the Commodity, increases total household expenditure on it.
b) A rise in
the price of the commodity reduces the total expenditure on it.
c) A change in
the price of a commodity does not change the total expenditure on it.
Ans.
a) Price rises, total expenditure also rise then ED < 1.
b) Price rises, total expenditure
decreases, then ED > 1.
c) A change in price, total expenditure
does not change, then ED = 1
Dr. Asad Ahmad
PGT Economics
Kendriya Vidyalaya Sangathan
09451927636
Facebook Page - @madeeconomicseasy
You Tube Channel – Dr. Asad Ahmad
Blog – drahmadasad.blogspot.com
Thursday, 19 January 2017
UNIT – II THEORY OF DEMAND
UNIT – II Theory
of Demand
Basic Concepts:-
- Demand:- It is defined as the quantity of a good a person is willing to buy
at a given price at a given point of time
- Law of demand:- Other things remains constant, demand of a
quantity falls with rise in price, and vice versa.
- Normal goods :- Normal goods are those goods which are
positively. That means their demand increases with increase in income.
- Inferior goods :- Are those goods with are negatively related with
increase in income i.e. their demand falls with rise in income.
- Substitute goods :- Substitute goods are those goods which are
substitute each other ex. Tea and coffee.
- Complementary goods :- Are those goods which are used together eg. Car
& petrol.
- Demand function :- It explains relationship between demand of a
commodity and its determinants.
Dx = f(Px,Pa,Pb
………….Pn,income, taste, fashion etc.)
- Demand Schedule :- It is a tabular presentation which shows the
different quantities of a commodity bought at various price levels.
- Changes in quantity demanded:- It is a movement along the same demand curve.
- Change in demand:- It shows the shift to the demand curve.
- Elasticity of demand :- It is the responsiveness of quantity demanded of a good to the change in its
price.
- Increase in demand :- The demand increases due to the change in other
factors like increases in the income of the consumer. In this case the
demand curve shift to the right.
- Decrease
in demand :- Same price-less demand due to change in other
factors which affecting demand.
Very Short Answers( 1 mark)
Q1. Give the
meaning of demand.
Ans. It refers to
the quantity of a commodity which a consumer is willing to buy at a given price
at is given point of time.
Q2. Give the
factors that affect demand.
Ans. Price of commodity, income , price of related
goods, taste etc.
Q3. What is law
of demand?
Ans. It states that
at a higher price, consumer will buy less of commodity and vice versa, other
factors remaining constant.
Q4. What is a
demand schedule?
Ans. It is a tabular
presentation which shows different quantities of a commodity demanded at
different prices in a given period of time.
Q5. What is
demand Curve?
Ans. It is a
graphical representation of change in demand due to change in price of a
commodity.
Q6. What
happens to the demand for a good when the price of the substitute good falls?
Ans. The demand of
the good will fall.
Q7. When does a
consumers buy less of a commodity at a given price?
Ans. A consumer buys
less of a commodity when income decreases or consumer develops unfavourable
taste.
Q8. Define
market demand?
Ans. It refers to
the sum total of the quantities demanded by all the individuals households in
the market at a given price and at a given point of time.
Q9. What is changes in demand?
Ans. Changes in
demand is when demand changes due to other factors than price.
Q10. Give two
examples of substitute goods.
Ans. eg.1) Tea &
Coffee 2) Colgate tooth paste & Pepsodent Tooth paste.
Short Answer Questions (3/4 Marks)
Q1. What are
the determinants of demand?
Ans. (a) Price of a commodity (b) Income of a consumer.
(c) Price of related goods (d) Tastes & preferences
of a consumer
Q2. Give three
reasons of a rightward shift of demand curve.
Ans. It refers to
that at the same price quantity demands is increase because:-
(a)
Increase in income of the consumer.
(b)
Rise in the price of substitute goods.
(c)
Fall in the price of complementary goods.
(d) Favorable Change in Taste &
Preference.
(e) Favorable change in Weather.
(f) Expectation of rise in price in
future.
(g) Favorable change in Population
Composition.
(h)
Q3. What is
market demand? How is market demand curve derived from the individual demand
curve?
Ans. Market demand
refers to the sum total of the quantities demanded by all the individual
households in the market at given price and time.
Market demand curve:- It is a
horizontal summation of individual
demand curves.
Q4. Explain
briefly any three factors which lead to decrease in demand.
Ans. It refers to
that at the same price quantity demands is less because:-
(a)
Decrease in income of the consumer.
(b)
Fall in the price of substitute goods.
(c)
Rise in the price of complementary goods.
(d) Unfavorable Change in Taste
& Preference.
(e) Unfavorable change in Weather.
(f) Expectation of fall in price in
future.
(g) Unfavorable change in Population
Composition.
(h)
Q5. What are
the exceptions to the law of demand?
Ans. Law of demand
is not applicable in the following case
(1)
Geffen goods
(2)
Ignorance
(3)
Luxury goods( goods having demonstration effect)
Very long Answer( 6 Marks )
Q1. Explain
with the help of diagrams, the effect of the following Changes on the demand of
a commodity.
a) A fall in
the price of substitute goods. / A rise in the price of substitute goods.
b) A rise in
Price of Comp. Goods / A fall in Price of Comp. Goods.
c) An
unfavorable change in other factors / A favorable change in other factors.
Ans. a) A fall
in the price of substitute goods:- The demand of a commodity and the
price of its substitute goods are directly related to each other. When the
price of one substitute good falls, the demand for the goods falls and vice-
versa. As a result the demand curve of the commodity shifts to the left (d”).
A
rise in the price of substitute goods:- The demand of a commodity
and the price of its substitute goods are directly related to each other. When
the price of substitute goods rises then demand for given commodity rises. As a
result demand curve of commodity will shift to the right (d’).
(b) A fall in
the price of Complementary goods:-
The demand of a commodity and the price of its complementary goods are
inversely related to each other. When the price of one complementary good
falls, the demand for the given goods rises. As a result the demand curve of
the commodity shifts to the right (d’).
A rise in the
price of Complementary goods:-
The demand of a commodity and the
price of its complementary goods are inversely related to each other. When the
price of one complementary good rises, the demand for the given goods falls. As
a result the demand curve of the commodity shifts to the Left (d”).
b) A fall in
the income of its buyer:- The demand of a commodity and the income of the buyer
are directly related to each other. A fall in the income of buyer will lead to
decrease in the demand for the given commodity as buyers purchasing capacity
will reduce. In this case the demand curve of the commodity will shift to left
side (d”).
A rise in the income of its buyer:-The demand
of a commodity and the income of the buyer are directly related to each other.
A rise in the income of buyer will lead to increase in the demand for the given
commodity as buyers purchasing capacity will increase. In this case the demand
curve of the commodity will shift to right side (d’).
(c) An
unfavourable change in other factors:- The demand of a commodity
and the Unfavorable change in other factors are directly related to each other.
An unfavorable change in the other factors will lead to decrease in the demand
for the given commodity. In this case the demand curve of the commodity will
shift to left side (d”).
A favorable change in other factors :- The
demand of a commodity and the favorable change in other factors are directly
related to each other. A favorable change in the other factors will lead to
increase in the demand for the given commodity. In this case the demand curve
of the commodity will shift to right side (d’).
Ans.
A demand curve shows in curse relationship between price and quantity demanded
because of following causes.
(a) Law of diminishing marginal utility:- Marginal utility of a commodity goes on declining
from its successive units, whenever, a consumer consumes its units
continuously. This simply means that demand shall be more when price is less
and vice-versa.
(b)
Price
Effect - If the price of the
product falls the real income of the consumer increases, so consumer will buy
more.
(c)
Substitution
effect:- If the price of the
product falls, it becomes cheaper in comparison to its substitutes, so the
consumer will buy more.
(d)
Uses of the
commodities :- If the commodity
has many uses, consumer will more with the fall in price.
Q3. Distinguish between change in demand and change in
quantity demand. And show the diagrams.
Ans.
|
Basis
|
Expantion
in Demand
|
Increase
in Demand
|
|
|
When
there is change in Quantity demanded due to fall in Price of its own.
|
When
change in demand due to rise in income, fall in price of comp. Goods, rise in
price of substitute goods etc.
|
|
|
In
this situation consumer move downward on the same demand curve.
|
In
this situation demand curve shift rightward.
|
|
|
It
is known as “Change in Quantity Demanded”
|
It
is known as “Change in Demand”
|
|
Basis
|
Contraction
in Demand
|
Decrease
in Demand
|
|
|
When
there is change in Quantity demanded due to rise in Price of its own.
|
When
change in demand due to fall in income, rise in price of comp. Goods, fall in
price of substitute goods etc.
|
|
|
In
this situation consumer move upward on the same demand curve.
|
In
this situation demand curve shift leftward.
|
|
|
It
is known as “Change in Quantity Demanded”
|
It
is known as “Change in Demand”
|
(a) Change in quantity demand :- When change in demand for a commodity is caused by
change in its own price, it is called change in quantity demanded. It is
expressed in the form of either expansion or contraction of demand. A change in
quantity demand graphically means movement along a given demand curve.
(b)Change
in demand :- When change in
demand is caused by Factors other than the price , it is called change in
demand. It is expressed in the firm of either ‘increase’ or ‘decrease’ in
demand .In fact change in demand refers to a shift of a demand curve.
Happy Learning,
Thank you
Dr. Asad Ahmad
PGT Economics
Kendriya Vidyalaya Sangathan
09451927636
Facebook Page - @madeeconomicseasy
You tube Channel - Dr. Asad Ahmad
Blog - drahmadasad.blogspot.com
Tuesday, 17 January 2017
UNIT I - Introduction to Economics
UNIT
I
Introduction to Economics
The problem of choice arises
because of scarcity. And this is the main focal point of study in
economics.
Economic
Problem refers to the problem of choice arising from the use of limited
means to the satisfaction of various ends.
Why
does an economic problem arise?
An economic
problem arises primarily due to scarcity of resources.
The main
causes of economic problems are as follows :-
1. Human wants are
unlimited.
2. Limited means.
3. Alternative uses
Whereas means
are limited they have alternative uses as well
Central or Basic Problems of An Economy Which Arise Due to
Scarcity
1. What to Produce
If refers to
which goods and services will be produced and in what quantities with the
limited resources i.e. consumption goods or capital goods.
2.
How to Produce
It refers to
the choice of methods of production of goods & services i.e. whether labour
intensive or capital intensive technique is to be adopted taking into
consideration the proportion of capital and labour in an economy.
3.
For whom to Produce
It concerns
with the distribution of income & wealth which refers to who earns how much
or who has more assets than others.
How are fundamental problems solved in the capitalistic economy.
In a
market-oriented or capitalist economy, these fundamental problems are solved by
the market. There is a price, which is influenced by the market forces of
demand and supply. These forces guide which goods and how much is to be
produced and consumed
Production Possibility Curve And Opportunity Cost
It refers to
a curve which shows the various production possibilities that can be produced
with given resources and technology.
Production Commodity Commodity Marginal opportunity
A 0 15 -
B 1 14 15-14= 1
C 2 12 14-12=2
D 3 9 12-9=3
E 4 5 9-5=4
F 5 0 5-0=5
If the economy devotes all its resources to the production of
commodity B, it can produce 15 units but then the production of commodity A
will be zero. There can be a number of production possibilities of commodity A
& B. If we want to produce more commodity B, we have to reduce the output
of commodity A & vise versa.
Shape of PP
curve and marginal opportunity cost
1) A Production Possibility Curve is a
downward sloping curve.
In a full employment economy, more of one goods can be obtained
only by giving up the production of another goods. It is not possible to
increase the production of both of them with the given resources.
2) The shape of the production
possibility curve is concave to the origin.
The opportunity cost for a commodity is the amount of other
commodity that has been forgone in order to produce the first.
The marginal opportunity cost of a particular good along the PPC
is defined as the amount sacrificed of the other good per unit increase in the
production of the good in question. Increasing marginal opportunity cost
implies that PPC is concave.
Very
Short Answer Questions (marks each)
Q1. What
is economising resources ?
Ans. Efficient use of a
available scarce resources
Q2. Define
economic activity.
Ans. It is an activity performed with the
expectation of some remuneration either in the form of cash or in kind.
Q3. What
is micro economics?
Ans. It is the study of the behaviour of
individual economic units like determination of price, wages, income of
individuals and firms.
Q4. What
is macro economics?
Ans. It is a study of
aggregates of the economy as a whole. Eg. Level of income and output.
Q5. Why
does economic problem arise?
Ans. Economic problem
arises primarily due to scarcity of resources.
Q6. What
are the central basic problems of an economy?
Ans. a) What to produce?
b) How to produce?
c) For whom to produce?
Q7. Define
production possibility Curve?
Ans. It is a curve which shows all possible
combination of two which can be produced with the given resources and
technology.
Q8. What
is marginal opportunity cost?
Ans. Marginal opportunity cost of a good is the
amount of the other goods scarified for the production of an additional unit of
the former good.
Q9. What
is the problem of scarcity?
Ans. Scarcity refers to
the limited resources in relation to demand.
Q10. What
is an economic problem?
Ans. Economic problem is
the problem of making choice.
Short
Answer Questions ( 3&4 Marks)
Q1.
Explain the central problems of an
economy
Ans. a) What to produce?
It refers to
that what goods and services are produced and in what quantities.
b)
How to produce?
It refers to
the choice of methods of production of goods and Services.
c) For whom to
produce?
It refers to
the distribution of income and wealth .
Q2. Draw
a PPC curve and show the following:-
a) Growth of
resources. (b) Under utilization of
resources. (c) Fuller utilization of resources.
Ans.
Q3. Explain
opportunity cost with an example.
Ans. It refers to the value of the next best
activity Eg. Suppose a doctor braving private clinic in Delhi is earning Rs. 5
lakhs annually. There are two other alternatives for him.
One:- Joining a Govt. hospital in Bangalore earning
Rs. 4 lakhs annually .
Two:- Opening a clinic in his home town in
Mysore and earning 3 lakhs annually.
The opportunity cost will be joining Govt.
hospital in Bangalore.
Q4. Distinguish
between Micro Macro Economics.
Ans.
Microeconomics
|
Macroeconomics
|
1. It is the study of individual units of an economy
2. It deals with allocation of resources
3. It is also called price theory
|
1. It is the study of the whole economy
2. It deals with growth and development of resources
3. It is also called income theory
|
Q5. What
is opportunity cost? Calculate the marginal opportunity cost.
X :
|
0
|
1
|
2
|
3
|
4
|
5
|
Y :
|
90
|
85
|
75
|
60
|
40
|
10
|
Ans. The rate of sacrifice of one good to produce
another good is called Marginal opportunity cost.
X
|
0
|
1
|
2
|
3
|
4
|
5
|
Y
|
90
|
85
|
75
|
60
|
40
|
10
|
MOC
|
--
|
05
|
10
|
15
|
20
|
30
|
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