MICRO-ECONOMICS

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 Unit – 1

Introduction

Very Short Answer Type Questions(1 Mark)

1. With the help of an example, define micro economics.
Ans. Micro Economics is that branch of economics in which economic problems are
studied at individual level e.g. the behaviour of consumer, firms, etc.
2. Define macro economics with the help of an example.
Ans. Macro economics is that branch of economics which studies the economy as a
whole and its aggregates e.g. National income, the level of employment.
3. Define opportunity cost.
Ans. For the selection of an opportunity, the sacrifice of next best alternative use is
called opportunity cost.
4. Why does an economic problem arise?
Ans. An economic problem arises due to scarcity of resources having alternative uses
in relation to unlimited wants.
5. Write two characteristics of resources.
Ans. Resources are scarce (limited) and they have alternative uses.
6. What do you mean by scarcity?
Ans. Scarcity refers to a situation in which demand is more than supply
7. What do you mean by marginal opportunity cost?
Ans. Marginal rate of transformation (MRT) is the ratio of one good sacrificed to
increase one more unit of the other good.
8. What do you mean by an economy?
Ans. An economy is an economic organisation which provides sources to earn
livelihood.
9. Why is there a need for economizing of resources?
Ans. Because resources are limited.
10. Why does economic problem arise?
Ans. It arises mainly because of scarcity of resources.
11. Why is PPC downward sloping from left to right?
Ans. Because in situation of full employment of resources, production of one good
can be increased only with less of other good.
12. What does a rightward shift of PPC indicate?
Ans. The rightward shift of PPC indicates growth of resources or technological
progress.
13. Why does the problem of choice arise?
Ans. Relative scarcity of resources having alternative uses in relation to unlimited
wants, gives rise to an economic problem.
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 14. Why does PPC look concave to the origin?
Ans. PPC is concave to the origin because of increasing marginal rate of
transformation (or increasing marginal opportunity cost).
15. Which factor lead to a shift of PPC towards right hand side?
Ans. Growth of resources or technological progress leads to a shift of PPC towards
right-hand side.
16. What does a point below PPC indicate?
Ans. It shows inefficient/under utilization of resources.
17. What does slope of PPC show?
Ans. Negative slope of PPC shows that in order to produce more units of one good,
some units of the other good must be sacrificed.
18. When allocation of resources is considered as inefficient?
Ans. Allocation of resources is considered as inefficient when economy performs
below the PPC curve.

Short Answer Type Questions(3-4 Marks)

1. Draw PPC and show the followings:-
a. Full employment of resources,
b. Underutilisation of resources, and
c. Growth of resources.

Ans.
a. Full employment of resources - A point anywhere on the PPC, shows the efficient use or full
employment of resources.
b. Underutilisation of resources - A point anywhere inside of the curve, shows inefficient/under
utilisation of resources.
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 c. Growth of resources – It refers to the shift in PPC. If more resources are generated, the level of
production will increase. In the figure it is represented by a shift in PPC from PP to P’P’.
2. Why does PPC look concave to the origin? Explain.
Ans. PPC looks concave to the origin because of increasing marginal rate of
transformation/substitution (or increasing marginal opportunity cost). It means that
more and more units of commodity ‘y’ are to be sacrificed, to get each additional
unit of commodity ‘x’.
3. What does a PPC show? When will it shift to the right?
Ans. Production Possibility Curve shows the different combinations of two goods
which an economy can produce with available technology and resources.
It would shift towards right-hand side in case of growth of resources or technological
progress.
4. Does production take place only on the PP curve?
Ans. Yes and no, both. Yes, if the given resources are fully and efficiently utilized. No,
if the resources are underutilized or inefficiently utilized or both.
Refer to the above figure; on a point anywhere on the PPC the resources are fully
and efficiently employed. On point U, below the PPC or any other point but below
the PPC, the resources are either underutilized or inefficiently utilised or both. Any
point below the PP curve thus highlights the problem of unemployment and
inefficiency in the economy.

5. Why does an economic problem arise? Explain.

Ans. Reasons-
a. Unlimited wants - Human wants go on multiplying with the expansion of
education, knowledge, scientific advancement and economic growth. A man
can not satisfy all of his wants and therefore he has to make a choice in order
of urgency.
b. Limited resources - The resources are limited in relation to need for them. It
is the main cause of economic problem.
c. Alternative use of resources - A resource can be utilized in a different way
and for different purposes. Therefore choice has to be made among different
uses of resources.
6. Calculate MRTXY at different production possibilities from the following
hypothetical data. Draw a PPC on the basis of the schedule.
Production possibilities Commodity X Commodity Y
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 O

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 Ans.
Production possibility Schedule

Marginal Rate of Transformation

Production possibilities Commodity X Commodity Y
(MRT) =ΔY/ΔX
A 0 15 -------------
B 1 14 1X:1Y
C 2 12 2X:1Y
D 3 9 3X:1Y
E 4 5 4X:1Y
F 5 0 5X:1Y

7. Why is a production possibilities curve concave? Explain.

Ans. The production possibility curve being concave means that MRT increases as we
move downward along the curve. MRT increases because it is assumed that no
resource is equally efficient in production of all goods. As resources are transferred
from one good to another, less & less efficient resources have to be employed. This
raises cost and raises MRT.

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 8. Explain properties of a production possibilities curve.
Ans. There are two properties of a production possibilities curve.
a) Downward sloping : It is because as more quantity of one good is produced
some quantity of the other good must be sacrificed.
b) Concave to the origin : It is because the marginal rate of transformation
increases as more of one good is produced.

9. Explain the problem of ‘what to produce’.

Ans. An economy can produce different possible combinations of goods & services
with given resources. The problem is that, out of these different combinations,
which combination is produced. If production of one good increases then less
resources will be available for other goods.
10. What is ‘Marginal Rate of transformation’? Explain with the help of an example.
Ans. MRT is the rate at which the units of one good have to be sacrificed to produce
one more unit of the other good in a two goods economy Suppose an economy
produces only two goods X and Y. Further suppose that by employing these
resources fully and efficiently, the economy produces 1X + 10Y. If the economy
decides to produce 2X, it has to cut down production of Y by 2 units. Then 2Y is the
opportunity cost of producing 1X. Then 2Y:1X is the MRT.
11. Explain the problem ‘How to produce’.
Ans. Broadly, there are two techniques of production.
a) Labour intensive Technique : Under this technique, production depends
more on the use of labour.
b) Capital Intensive Technique : Under this technique, production depends
more on the use of machines (called capital) efficient technique of
production is that which uses minimum possible inputs for a given amount of
output. So that, cost per unit of output is minimised.

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 Unit – 2

Theory of Consumer Behaviour

Very Short Answer Type Questions(1 Mark)

1. What is meant by utility?
Ans. Utility is the power of goods to satisfy human wants.
2. How is Total utility derived from marginal utilities?
Ans. Total utility is derived by summing up the marginal utilities TU = Sum of MU.
3. What is Law of Diminishing Marginal Utility?
Ans. Law of diminishing marginal utility states that as more and more units of a
commodity are consumed marginal utility derived from every additional unit must
decline.
4. What will be the behaviour of total utility when marginal utility is zero?
Ans. Total utility will be maximum.
5. State condition of consumer’s equilibrium in respect of one good.
Ans. MUX = Px
6. Define consumers equilibrium.
Ans. Consumers equilibrium refers to a situations in which a consumer gets
maximum satisfaction from his given income and market price.
7. What is meant by Marginal Rate of Substitution (MRS).
Ans. MRS is the rate of sacrifice of one good to get an additional unit of other good.
8. What is meant by budget set.
Ans. The set of bundles available to the consumer with his given income at
prevailing market price is called the budget set.
9. Define Indifference curve Map.
Ans. A family of indifference curve indicating different levels of satisfaction called
indifference map.
10. How is budget line defined?
Ans. Budget line is a line showing all different possible combinations of two goods
which a consumer can buy with his given income and the price of both goods.
11. Why does higher indifference curve give more satisfaction?
Ans. Higher difference curve shows a higher level of satisfactions. It shows the
various combinations of excess quantity of both goods than lower indifference curve.
12. What is the impact of diminishing marginal rate of substitution on the slope of
indifference curve?
Ans. Indifference curve become convex towards the origin.
13. Define monotonic preference.
Ans. Consumer’s preferences are called monotonic when between any two bundles,
one bundle has more of one good and no less of other good.
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 14. How is market demand schedule derived with the help of individual
demand schedules?
Ans. By summations of individual schedules.
15. Define normal good.
Ans. Normal goods are those goods, the demand for which increases as income of
the buyer rise. There in positive relation between income and demand of these
goods.
16. How does availability of substitute good affect the elasticity of demand?
Ans. The demand of a good becomes elastic if its substitute good is available in the
market.
17. Demand of good ‘X’ falls due to increase in the income of the consumer what type
of good ‘X’ is?
Ans. Good ‘X’ is an inferior good.
18. What will be the impact on demand of the good due to increase in price of the
substitute good?
Ans. The demand of the good will increase.
19. A rise in price of a good results in a decrease in expenditure of it. Is its demand
elastic or inelastic?
Ans. Elastic.
20. What is meant by market demand?
Ans. Market demand is the sum of total demand of all the consumers in the market
at a particular time and at a given price.
21. Define demand schedule.
Ans. Demand schedule is a tabular representation which represent different
quantities of the commodity demanded at different prices.
22. What cause an upward movement along a demand
curve? Ans. Increase in price while other factors are
constant.
23. If the number of consumers increase, in which direction will the demand curve
shift?
Ans. Rightward.
24. A straight line demand curve is given. What will be elasticity of demand on the mid
point of this curve.
Ans. Equal to unit.
25. If the slope of a demand curve is parallel to X-axis, what will be the elasticity of
demand?
Ans. Perfectly elastic.
26. Why is demand of water inelastic?
Ans. Because water is a necessity good.

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 27. Define price elasticity of demand.
Ans. The price elasticity of demand is the degree of responsiveness of quantity
demanded of a commodity to the change in its price.

Short Answer Type Questions(3-4 Marks)

1. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’ of a
commodity.
Ans. When demand increases at given price then it is called ‘increase in demand’. On
the other hand, when demand increases by decrease in the price of a commodity
then it is called increase in quantity demand.
2. Given price of a good, how does a consumer decide as to how much of that good to
buy?
Ans. Consumer purchases up to the point where marginal utility is equal to the price
(MU=P). So long as marginal utility is greater than price, he keeps on purchasing. As
he makes purchases MU falls and at a particular quantity of the good MU becomes
equal to price. Consumer purchases up to this point.
3. Explain how the demand for a good is affected by the price of its related goods.
Give examples.
Ans. Related goods are either substitutes or complementary
Substitutes Goods : When price of a substitute falls, it becomes cheaper than the
given good. So the consumer substitutes it for given good will decrease. Similarly, a
rise in the price of substitute will result in increase in the demand for given good.
For example Tea and Coffee.
Complementary Goods : When the price of a complementary good falls its demand
rises and the demand for the given good will increase. Similarly when price of
complementary good increases, then demand for given good decreases.
For example : – Car & Petrol.
4. Distinguish between normal goods and inferior goods. Give example also.
Ans. Normal Goods : These are the goods the demand for which increases as income
of the buyer rises. There is a positive relationship between income and demand or
income effect is positive.
Example ; Rice, Wheat
Inferior Goods : These are the goods the demand for which decreases as income of
buyer rises. Thus, there is negative relationship between income and demand or
income effect is negative.
Example : coarse grain, coarse cloth.
5. Explain any four factors that affect price elasticity of demand.
Ans.
1. Nature of Commodity : Necessaries like Salt, Kerosene oil etc. have inelastic
demand and luxuries have elastic demand.
2. Availability of substitutes : Demand for goods which have close substitutes is
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 relatively more elastic and goods without close substitutes have less elastic
demand.
3. Different uses : Commodities that can be put to different use have elastic
demand for instance electricity has different uses.
4. Habit of the consumer : Goods to which consumers become habitual will
have inelastic demand.
Examples – Liquor and Cigarette.
6. Explain relationship between total utility and marginal utility with the help of a
schedule.
Ans.
Quantity (Units) Total utility Marginal utility
0 0 –
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 –2
1. As long as MU is positive, TU increases at diminishing rate.
2. When marginal utility is equal to zero then total utility is maximum.
3. When marginal utility is negative; Total utility starts diminishing.
7. Define marginal utility. State the law of diminishing marginal utility.
Ans. Marginal Utility : It is addition more to the total utility as consumption is
increased by one more unit of the commodity.
Law of Diminishing Marginal utility : It states that as consumer consumes more and
more units of a commodity, the utility derived from each successive unit goes on
decreasing. According to this law TU increases at decreasing rate and MU decreases.

Higher Order Thinking Skills

1. Why does total utility increases at diminishing rate due to continuous increase in
consumption?
Ans. As more and more units of commodity are consumed, marginal utility derived
from each successive unit tends to diminish so total utility increases at diminishing
rate up.
2. Due to decrease in price of pen why does the demand of ink increase?
Ans. These are complementary goods.
3. What will be the behaviour of total utility when marginal utility curve lies below X-
axis?
Ans. Total utility start to decline.
4. When is demand inelastic?
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 Ans. When percentage change in quantity demanded is less than percentage change
in price, the demand is said to be inelastic.
5. Give two examples of normal goods & inferior goods.
Ans. Normal goods – Rice, Wheat
Inferior goods – coarse grain, coarse cloth.
6. Determine how the following changes (or shifts) will affect market demand curve
for a product.
a. A new steel plant comes up in Jharkhand people who were previously
unemployed in the area are now employed. How will this affect the
demand for colour T.V. and Black and White T.V. in the region?
b. In order to encourage tourism in Goa. The Government of India suggests
Indian Airlines to reduce air fare to Goa from the four major cities of
Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces
the fare to Goa, How will this affect the market demand curve for air travel
to Goa?
c. There are train and bus services between New Delhi and Jaipur. Suppose
that the train fare between the two cities comes down. How will this affect
demand curve for bus travel between the two cities?

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 Ans:
a. There will be rightward shift in market demand curve for colour and Black and White T.V.
This is because of increase of income of the people due to employment in the new steel
plant.
b. The demand for travel to Goa will expand in response to reduction in the air fare. However,
this will be reflected by a movement along the demand curve.
c. There will be no shifts in the demand curve as train fare comes down the demand for bus
travel will reduce. Demand curve for the bus travel will shift to the left showing less demand
at the same price.
7. If a good can be used for many purposes, the demand for it will be elastic. Why?
Ans: If a good can be used for many purposes , the demand for it will be more elastic
because with a decrease in its price it is put to several uses and with a rise in its price
it is withdrawn from its many existing uses. So that, there is a considerable change in
demand in response to some change in price.

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 Unit – 3

Theory of Producer’s Behaviour and Supply

Very Short Answer Type Questions (1 Mark)

1. Define production function.
Ans. Diminishing return to a factor
2. Define marginal product.
Ans. Marginal product is net addition to total product when one additional unit of
variable factor is used.
3. What will be the behavior of total product when marginal product of variable input
is falling but is positive?
Ans. Total product increases at diminishing rate.
4. What is the relation between average and marginal product when average product
is falling?
Ans. MP falls but it falls at faster rate than AP
5. Define average production.
Ans. AP is a per unit output of a variable factor.
6. What do you mean by fixed factors of production? Give example.
Ans. These factors of production which cannot be varied in short period e.g.
machine, land.
7. By which behaviour of marginal product will total product be maximum
Ans. When marginal product of a factor is zero, then total product will be maximum.
8. How does fall in total product affects marginal product?
Ans. When total product falls, marginal product becomes negative.
9. What do you mean by cost?
Ans. Cost is the sum of explicit and implicit cost.
10. Define explicit costs.
Ans. Those monetary payments by producer on factor and non factor payments is
called explicit cost. Which are not owned by himself.
11. Which cost curve is parallel to ox-axis? Why?
Ans. Total fixed cost because TFC remain constant at all level of output.
12. What do you mean by implicit costs?
Ans. Implicit cost is the cost of self owned resources of producer.
13. Define marginal cost.
Ans. Marginal cost is the net addition to total cost when one additional unit of
output is produced.
14. Why does the difference between average total cost and average variable cost falls
with increase in output?
Ans. It is because average fixed cost goes on falling with increase in output.
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 15. Define Revenue.
Ans. Revenue is the amount received from sale of output.
16. At what rate average and marginal revenue falls, with fall in per unit price of a
good?
Ans. Marginal revenue falls twice the rate of average revenue.
17. What will be the behaviour of Average revenue when total revenue increases at
constant rate?
Ans. Average revenue remains constant.
18. What do you mean by marginal revenue?
Ans. Marginal revenue is net additions to total revenue by sale of one additional unit
of output.
19. What will be the behaviour of total revenue when marginal revenue is zero?
Ans. Total revenue will be maximum.
20. Why does average cost curve and averages variable cost curve never intersect each
other?
Ans. Because AFC can never be zero at any level of output.
21. What do you mean by producer’s equilibrium?
Ans. Producer’s equilibrium is a situation where he gets maximum profit.
22. State any two conditions of producers equilibrium according to marginal revenue
and marginal cost approach.
Ans. 1. MR = MC
2. Rising portion of Marginal cost curve intersects marginal revenue curve.
23. Define supply.
Ans. Supply refers to the amount of the commodity that a firm or seller is willing to
offer for sale in a given period of time at various prices.
24. What do you mean by individual supply schedule?
Ans. Individual supply schedule is a tabular representation showing various
quantities of a commodity which a firm is ready to sell at different prices during a
given period of time.
25. Define Market Supply
Ans. It refers the sum of total quantity supplied by all the firms in a market.
26. Name two determinants of
supply. Ans. 1. Number of firms
2. Change in technology
27. What is meant by change in supply?
Ans. Change in supply refers to increase or decrease in supply of a commodity due to
change in factors other than price like technology, price of inputs, Goal of producer,
Number of firms etc.
28. What type of change in price is the cause of upward movement along a supply

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 curve?
Ans. Due to increase in price.
29. What effect does an increase is tax rates have on supply of a commodity?
Ans. As a result of increase in tax rates production cost increase, so the profit margin
of producer will fall and producer will decrease the supply.
30. What causes a downward movement along a supply
curve? Ans. Decrease in price.
31. What is meant by leftward shift of supply curve?
Ans. Due to change in other factors the supply of a commodity falls at same price
than supply curve shifted to leftward.
32. How does a decrease in price of input effect supply curve of the commodity?
Ans. As a result of decrease in price of input production cost falls then producers
profit margin will increase so producer will increase the supply of commodity.
33. Why does a supply curve have a positive slope?
Ans. Because of positive relation between price and supply.
34. What is meant by elasticity of supply?
Ans. Price Elasticity of Supply (Es) is a measure of degree of response of supply for a good to
change in its price.
35. What is the price elasticity of supply, if supply curve is parallel to y-axis.
Ans. Perfectly elastic.
36. When does the elasticity of supply of commodity called equal to unity?
Ans. When percentage change in price is equal to percentage change in supply.
37. When does the producer increase the supply of a good at given price, give two
reasons.
Ans. Due to change in other factor like improvement in technology, decrease in price
of inputs.
38. What causes an extension in supply?
Ans. Increase in price of a commodity.
39. If the price of a commodity falls by 10% and, consequently, the quantity supplied
decreases by 20%. What will be its price elasticity of supply?

Ans.
40. What happens to TP when MP is zero?
Ans. TP is maximum.
41. What happens to MPP when TPP increases at decreasing rate?
Ans. MPP falls but remains positive.
42. As the variable input is increased by one unit, total output falls. What would
you say about of marginal productivity labour?
Ans. Marginal productivity of labour is negative.
43. Why MC curve is in short run U-shaped?
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 Ans. MC Curve in short run is U-shaped due to operation of the law of returns to a
factor.
44. Why does fixed cost not influence marginal cost?
Ans. Because marginal cost does not include fixed cost.
45. When a seller sells his entire output at a fixed price, what will be the shape of AR &
MR curves?
Ans. Both AR & MR are equal and coincide with each other on a horizontal line.
46. Show that average revenue equals price.
Ans.

47. What effect does a cost saving technical progress have on the supply curve?
Ans. Supply curve will shift to the right.
48. What effect does an increase in excise tax have on the supply curve?
Ans. Supply curve will shift to the left.
49. What happens to TPP when marginal productivity of variable input is negative?
Ans. TPP falls.
50. When is TPP maximum in relation to MPP?
Ans. When MPP is zero.
51. What happens to MPP when TPP is declining?
Ans. MPP declines and remains negative.
52. How does fall in MPP affect TPP?
Ans. TPP increases at decreasing rate.
53. What effect does an increase in input price have on the supply curve?
Ans. The supply curve will shift towards left-hand side.
54. Why does average cost fall as output rises?
Ans. AC falls due to operation of the law of increasing returns to a factor as output
rises.
55. Does fixed cost affect marginal cost? Give the answer with reason.
Ans. No, because fixed cost is not subject to change and it is not considered while
calculating MC.
56. What would be the effect of increase in the output on the TFC?
Ans. There would not be any effect of increase in the output on the TFC, It will be
constant at different levels of production.
57. If marginal revenue falls, will total revenue fall?
Ans. It may fall when MR falls and becomes negative. If MR falls but remains positive
then TR may increase with diminishing rate.
58. What is the price elasticity of supply of a commodity whose straight line
supply curve passes through the origin forming an angle of 75º?
Ans. Price elasticity of supply will be equal to one when a straight line supply curve

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 passes through the origin; angle does not matter anything.
59.

Short Answer Type Questions(3-4 Marks)

1. Explain the likely behaviour of total product under the stage of increasing return to
a factor with the help of numerical example.
Ans. Increasing return to a factor is the first phase of the Law of return to a factor.
When more and more units of a variable factor is combined with fixed factor up to a
certain level total physical product increases with increasing rate.
Machine Unit of labour Total physical product
1 1 10
1 2 24
1 3 42
2. With the help of example distinguish between total fixed cost and total variable
cost.
Ans.
Total fixed cost Total variable cost
1. Fixed cost remains constant at each level of 1. variable cost changes with the change in
output ie it do not change with change in quantity. It increase or decrease as the output
quantity. change.
2. It can not be zero when output is zero. 2. it is zero when output is zero
3. Its curve is parallel to X-aixs 3. Its curve is parallel to the curve of total cost.
4. Example :- cost of raw material, wages of
4. Example :- Rent, wages of permanent staff.
casual labour.
3. Draw average cost, average variable cost and marginal cost curves on a single
diagram and explain their relations.

Ans.
Relation of AC, AVC and MC
1. MC intersects to AC and AVC at their minimum level
2. AC and AVC decreases before the intersection by MC, but remain greater
than MC.
3. AC and AVC starts to increase after the intersection by MC, and becomes less
than MC.
4. As output increases, AC and AVC tends to be closer but the difference
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 between AC and AVC can never be zero.
4. Draw average cost, average variable cost and average fixed cost
curves on a single diagram and explain their relation.

Ans.
1. AC is the vertical summation of AVC and AFC
2. The difference between AC and AVC falls as output increases but the
difference of AC and AFC increases.
3. As output increases AC and AVC tends to be closer but their curves do not
interect each other because AFC always remains more than zero.
5. Explain the relation between average revenue and marginal revenue when a firm
can sell an additional unit or a good by lowering the price.
Ans.
1. AR and MR both decreases.
2. MR decrease at the rate of twice than AR.
3. MR become zero and negative but AR can never be zero.
6. Distingush between change in quantity supplied and change in supply.
Ans.
Change in quantity supplied change in supply
1. It refer’s the change in supply due to the
1. It refers the change in supply due to
change in the determinents of supply other than
change in price of the good.
price.
2. Determinents of supply other than price
2. Price of the good remains unchanged.
remains unchanged.
3. Law of supply apply. 3. Law of supply does not apply.

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 4. There is upward and downward
4. supply curve shifted to leftward or rightward
movement along with supply curve in this
under this condition.
situation.
7. Explain how does change in price of input affect the
supply of a good. Ans.
A. Increase in price of input : increase in price of input is
cause of a decrease in the supply of a good because the
production cost of a good will increase due to increase in
price of input. It will reduced the profit. So producer will
decrease the supply of the good.
B. Decrease in price of Input : Decrease in price of input is a
cause of increase in supply because when the price of input
decrease the production cost of a good also also decreases.
Decrease in cost increases the profit margin. It motivate to
producer to increase the supply of the good.
8. Explain how changes in prices of other products influence the
supply of a given product.
Ans. The supply of a good is inversly influenced with the change in
price of other product which can explain as fallows.
A. Rise in price of other product :– When there is rise in the
price of other product the production of these product
become more profitable due to unchanged cost in
comparison of the production of given produce. As a result
the producer will produce more quantity of other product so
the supply of given good will decrease.
B. Fall in the price of other product :– When there is fall in the
price of other product the production of these product
become less profitable due to unchanged cost in
comparison of the production of given product. As a result
producer will produce less quantity of other product so the
factors of production shifted for the production of given
good. It cause an increase in supply of given good.
9. Explain how technological advancement influence the supply of
a given product. Ans. Technological advancement brings a
positive impact in the supply of a given product. It reduces per
unit cost and increase the productivity of given factors of
production. Due to these reasons production of given product
becomes more profitable.
10. Explain the law of variable proportion with the help of diagram schedule.

OR
What is the likely behaviour of total product/marginal
product when only one input is increased for increasing
production? Use diagram/ schedule.

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 Ans. Law of variable proportion state the impact of change in unit of
a variable factor on the physical output. When more and more unit
of a variable factor combined with fixed factor physical product
passes though following phases.
Behaviour of TP
(i) TP increases at an increasing rate
(ii) TP increases at diminishing rate
(iii) TP falls
Behaviour of MP
(i) MP increases and becomes maximum.
(ii) MP decreases and becomes zero.
(iii) MP becomes negative.
Unit
Machine TPP MPP
of
labo
ur
1 1 3 3
1 2 7 4
1 3 12 5
1 4 16 4
1 5 19 3
1 6 21 2
1 7 22 1
1 8 22 0
1 9 21 -1
First Phase :– TPP increases with increasing rate upto A point. MPP also
increase and becomes maximum of point C.
Second Phase :– TPP increases with diminishing rate and it is maximum
on point B. MPP start to decline and becomes zero at D point.
Third Phase :– TPP starts to decline and MPP becomes negative.

1. What is producer’s equilibrium? Explain the conditions of

produce’s equilibrium through the ‘marginal cast and marginal
revenue’ approach. use diagram/schedule.
Ans. Producer’s equilibrium refer’s the stage under which with the
help of given factor’s of production producer attain that level of
production of which he is getting maximum profit. The conditions of
producer’s equilibrium through the marginal cost and marginal
revenue approach are as follows.
1. Marginal cost should be equal to marginal revenue.

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 With the increase in output after equilibrium marginal cost should
be greater than marginal revenue.

Output MR MC
1 4 5
2 4 4
3 4 3
4 4 4
5 4 5
OR
Output MR MC
1 10 5
2 8 4
3 6 3
4 4 4
5 2 5
4 4 4
5 4 5

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 Explanation of conditions :–
A. So 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 when MC becomes equal
to MR.
B. When MC is greater than MR after equilibrium it means the
profit will decline if producer will produce more units of the
good.

11. What are the factors which give rise to increasing returns to
variable factors? Ans.
1. Fuller utilization of the fixed factors- Generally fixed
factors are indivisible and underutilized. With greater
application of variable factor these factors are better
utilized its MPP tends to rise.
2. Increased efficiency of variable factor- Application of
specialization and division of labour among the units
of variable factors leads to greater efficiency and
increase in MPP.
12. Explain the relationship between AC &
MC with diagram. Ans. (i) When MC <
AC, AC falls.
(ii) When MC = AC, AC is minimum.
(iii) When MC > AC, AC rises.
(iv) MC falls & rises faster than AC.
(v) Both can be obtained from TC.

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 13. Why is AC curve in the short run U-shaped?
Ans. AC curve is U-shaped in short run due to operation of law of
returns to factors (i.e., law of variable proportion). Initially
production is subject to law of increasing returns (i.e. decreasing
cost), then law of constant return (i.e. constant cost) and ultimately
to law of diminishing return (i.e. increasing cost). As output is
increased, AC first falls, reaches its minimum and then rises. Hence,
AC curves become U- shaped.
14. How do changes
in MR affect TR?
Ans.
1. If MR increases, TR increases at increasing rate.
2. If MR is constant, TR increases at constant rate.
3. If MR falls, TR increases at diminishing rate.
15. What is MR? How is it related to AR?
Ans. MR refers to the change in TR due to sale of an
additional unit. Relation –
1. If AR (Price) is constant, MR = AR
2. If AR (Price) falls, MR < AR.
3. If AR (Price) rises, MR > AR.
16. What will be the price elasticity of supply if the supply curve is a
positively sloped straight line?
Ans. Es = 1 if the curve starts from
the origin point. Es>1 if the curve
starts from the y-axis and

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 E<1 if the curve starts from the x-axis.
17. Define marginal revenue. State the relation between
marginal revenue and average revenue when a firm:
(i) is able to sell more quantity of output at the same price.
(ii) is able to sell more quantity of output only by lowering the price.
Ans. Marginal revenue is the addition to total revenue from
producing one more unit of output.
1. MR = AR at all levels of the output. (In case of perfect competitive market)
2. MR will be less than AR at all levels of the output. (In case
of monopoly and monopolistic market)
18. Explain how do the following determine price elasticity of supply:
(i) Nature of the good (ii)
Time period. Ans.
1. Nature of Commodity - Elasticity of industrial goods is more
than that of agricultural goods. Similarly supply of durable
goods e.g. table is more elastic than that of perishable
goods e.g. vegetables.
2. Time Period- Generally elasticity of supply is more in the
long period than in shorter period of time. The reason is
that in the long period, all adjustments to the changed
price can be made easily and supply of commodity can be
varied accordingly.

Higher Order Thinking Skills

1. Why is total variable cost curve parallel to total cost curve?
Ans. Total cost is the sum of total fixed cost and total variable cost.
TFC remains constant at all levels of output.
2. Why does average fixed cost fall with increase in output?
Ans. AFC can be calculated from TFC. Which remains constant at all level of
output.
3. Why is total fixed cost curve
parallel to ox-axis. Ans. TFC
remains constant at all levels of
output.
4. Under which situation will MR fall when an additional quantity
of a good is sold? Ans. When per unit price falls by selling an
additional unit of a good.
5. What behaviour of per unit price will cause the equality of
average and marginal revenue.
Ans. Per unit price remains constant.
6. Give one differences between law of supply and price elasticity of supply.

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 Ans. Law of supply reflects the direction of change in supply where
as price elasticity of supply measures the magnitude of change in
supply.
7. What is the price elasticity of supply associated when the
supply curve passing through to intersect to x-axis?
Ans. Inelastic.
8. Why does a producer moves downward along a supply curve
due to decrease in price of commodity?
Ans. Because profit margin of firm (producer) decreases.
9. What is the price elasticity of supply associated with when a
supply curve passes through the origin at 40° angle?
Ans. Equal to unity elastic.
10. When does the supply curve shift rightward while price
remains constant. Ans. When the supply of commodity
increases due to change in other factors.
11. What effect does an increase in price of competitive good have
on the supply of a commodity?
Ans. Supply of the commodity will fall.

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 Unit 4
Forms of Market
Very Short Answer Type Questions (1 Mark)
1. Define market.
Ans. Market is a system with the help of it the buyers and seller of a
commodity or service come to contact with each other.
2. What do you mean by homogenous product?
Ans. It means product produced by different firms is identical in all
respect like quality, colour, size, weight etc. such products are
perfect substitutes.
3. How is price determined under perfect competition?
Ans. Price is determined by an industry by the forces of demand and supply.
4. What is the common feature shared by perfect and monopolistic competition?
Ans. (i) Free entry and exit of firms
(ii) Perfect mobility of factors.
5. If the firms are earning abnormal profits, how will the
number of firms in the industry change?
Ans. The number of firms in the industry will increase.
6. Define the monopoly market.
Ans. It is a form of market under which there is a single seller,
selling a product which does not have close substitutes.
7. Under which market there is no difference between
firm and industry? Ans. Monopoly.
8. What is normal profit?
Ans. It is the minimum profit which a firm must get to stay in business.
9. Under which form of market the
firm is price taker. Ans. Perfect
competition.
10. What is cartel?
Ans. A cartel is a group of firms which jointly set ‘output and price’ policy of its
product in such a way so as to reap benefits of monopoly.
11. What is the relationship between AR curve and
demand curve in a monopoly market?
Ans. Both AR curve and demand curve are the same in a monopoly market.
12. What do you mean by price discrimination?
Ans. Price discrimination is a policy under which a seller sells a
similar product at different prices to different buyers.
13. Define oligopoly.
Ans. Oligopoly is a market structure where there are few firms

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 competing for their homogenous or differentiated products.
14. Define equilibrium price.
Ans. It is the price at which demand = supply.
15. When does the situation of excess supply arise?
Ans. When market price is more than equilibrium price and market
supply is more than market demand.
16. What will be the effect on equilibrium price when increase
in demand is than increase in supply?
Ans. When increase in demand is more than increase in supply,
equilibrium price will increase.
17. Under what situation does the equilibrium price remains
unaffected when there is simultaneous increase in demand and
supply.
Ans. When increase demand is equal to increase in supply the
equilibrium price will remain same.
Higher Order Thinking Skill
1. What is the relation between average revenue curve and
demand curve under monopolistic

competition?
Ans. Both AR and MR curves have negative slope
Short Answer Type Questions (3-4 Marks)
1. Why is firm under perfect competition a price taker and
under monopolistic competition is price maker. Explain?
2. How is the demand curve under monopolistic competition
different from demand curve of a firm under perfect competition?
3. Why is a firm under perfect competition a price taker? Explain.
4. Explain three features of perfect competition.
5. Explain the implication of large number of seller feature of perfect competition.
6. What will happen if the price prevailing in the market is above the equilibrium
price.
7. Distinguish between monopoly and oligopoly.
8. Explain the concept of excess demand with the help of diagram.
9. Differentiate between ‘Collusive and non-collusive oligopoly.
10. Explain the determination of equilibrium price under perfect
competition with the help of schedule.
11. Explain why is the equilibrium price determined only at the
output level at which market demand and market supply are equal.
Higher Order Thinking Skill
1. MR = AR in perfect competition but MR < AR in monopoly

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 and monopolistic competition why?
2. In which condition decrease in demand can not change the price of commodity?
3. Explain how firms are interdependent in an oligopoly market.
4. In which competition the availability of close substitutes is
present? How does it effect the price?
5. Explain the implication of ‘freedom of entry and exit to the firms’ under
perfect
competition.
Long Answer Type Questions (6 Marks)
1. Explain the characteristics of monopolistic competition.
2. Market for a good is in equilibrium. There is simultaneous increase
both in demand and supply of the good. Explain its effect on market
price.
3. Explain the term market equilibrium. Explain the series of
changes that will take place if market price is higher than the
equilibrium price.
4. How will a fall in the price of tea affect the equilibrium price of
coffee. Explain the chain of effects.
5. Explain the following features of perfect competition.
i. Large number of firms or Sellers and Buyers
ii. Homogeneous Product.
6. Explain features of Oligopoly.
7. Explain how change in price of a substitute commodity
would affect market equilibrium of the commodity X.
8. With the help of a diagram explain the effect of “decrease” in demand of
a
commodity on its equilibrium price and quantity.
9. There is simultaneous decrease in demand and supply of a
commodity, when it result in
i. no change in equilibrium price
ii. a fall in equilibrium price.

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