Discuss the factors that determine elasticity of demand.? what are the different phases of trade cycle?

re the different phases of trade cycle? discuss the monetary theory of trade
cycle ?
Ans-Phases of Trade Cycle:
The elasticity of demand measures how sensitive the quantity demanded of a good or (1) Recovery:
service is to changes in its price. Several factors influence the elasticity of demand: In the early period of recovery, entrepreneurs increase the level of investment which
in turn increases employment and income. Employment increases purchasing power
and this leads to an increase in demand for consumer goods.
Availability of Substitutes: Elasticity of demand increases with the availability of close As a result, demand for goods will press upon their supply and it shall, thereby, lead
substitutes. Consumers can easily switch to alternatives if prices change, making to a rise in prices. The demand for consumer’s goods shall encourage the demand
demand more elastic. for producer’s goods.
The rise in prices shall depend upon the gestation period of investment. The longer
the period of investment, the higher shall be the price rise. The rise of prices shall
Necessity vs. Luxury: Necessities have inelastic demand because consumers need bring about a change in the distribution of income. Rent, wages, interest do not rise
them regardless of price changes. Luxuries have elastic demand as consumers can in the same proportion as prices.
delay or forego purchases when prices rise. (2) Boom:
The rate of investment increases still further. Owing to the spread of a wave of
optimism in business, the level of production increases and the boom gathers
Proportion of Income: Goods that consume a larger proportion of income tend to momentum. More investment is possible only through credit creation. During a
have more elastic demand. Price changes have a bigger impact on consumer budgets period of boom, the economy surpasses the level of full employment and enters a
for these goods. stage of over full employment.
(3) Recession:
The orders for raw materials are reduced on the onset of a recession. The rate of
Time Horizon: Demand is more elastic over longer time periods as consumers have investment in producers’ goods industries and housing construction declines.
more time to adjust their behavior, find alternatives, or change consumption patterns. Liquidity preference rises in society and owing to a contraction of money supply, the
prices falls. A wave of pessimism spreads in business and those markets which were
sometime before sellers markets become buyer’s markets now.
Market Definition: Narrowly defined markets (specific brands or niche products) often (4) Depression:
have more elastic demand due to greater availability of substitutes. Broadly defined The main feature of a depression is a general fall in economic activity. Production,
markets (entire product categories) may have less elastic demand because substitutes employment and income decline. The prices fall and the main factor responsible for
are fewer or less readily available. it is, a fall in the purchasing power
Purely Monetary Theory of Trade Cycle: by R.G. Hawtrey!
R.G. Hawtrey describes the trade cycle as a purely monetary phenomenon, in this
Brand Loyalty: The degree of brand loyalty affects elasticity of demand. Strong brand sense that all changes in the level of economic activity are nothing but reflections of
loyalty tends to make demand less elastic because consumers are less likely to switch changes in the flow of money.
to alternatives even if prices change. Thus, he holds firmly to the view that the causes of cyclical fluctuations were to be
found only in those factors that produce expansions and contractions in the flow of
money — money supply. Hence, the ultimate cause of economic fluctuations lies in
Perceived Necessity: Goods that are perceived as essential or necessary for daily life, the monetary system.
health, safety, or work often have less elastic demand. Consumers prioritize these According to Hawtrey, the main factor affecting the flow of money — money supply
goods and are less sensitive to price changes. — is the credit creation by the banking system. To him, changes in income and
spending are caused by changes in the volume of bank credit. The real causes of the
trade cycle can be traced to variations in effective demand which occur due to
What are the main factors that affect the supply of the product changes in bank credit. Therefore, “the trade cycle is a monetary phenomenon,
because general demand is itself a monetary phenomenon.”
He points out that it is the rate of progress of credit development that determines
1. Price of the Product: The most fundamental factor affecting supply is
the price of the product itself. As the price of a product rises, the extent and duration of the cycle, thus, “when credit movements are accelerated,
producers are generally willing to supply more of it to the market, the period of the cycle is shortened.” This implies that if credit facilities do not exist,
because higher prices mean higher revenues and potentially higher fluctuation does not occur. So, by controlling credit, one can control fluctuations in
profits. the economic activity.
2. Cost of Production: The costs involved in producing the product,
including raw materials, labor, machinery, and overhead costs, play a
significant role in determining supply. Higher production costs differences between monopoly and monopolistic competition?
reduce profitability and can limit the quantity of goods a producer is
willing to supply at a given price.
3. Technology and Productivity: Advances in technology can lower Aspect Monopoly Monopolistic Competition
production costs and increase productivity, allowing producers to Number of Firms One Many
supply more goods at each price level. Conversely, outdated Nature of Unique, no close Differentiated, slight
technology or inefficient production methods can constrain supply.
4. Prices of Related Goods: The supply of a product can also be Product substitutes substitutes
influenced by the prices of related goods. For example, if the price of Control over Price maker Limited, price taker due to
a substitute product increases, producers may switch resources to
produce that product instead, reducing the supply of the original Price competition
product. Entry Barriers High Low
5. Expectations of Future Prices: Producers' expectations about future
prices can impact their current supply decisions. If producers Market Power High Limited due to competition
anticipate that prices will rise in the future, they may withhold Product Unique product Slightly differentiated
supply from the market now to sell at higher prices later.
6. Number of Sellers in the Market: The number of producers or firms Differentiation products
supplying the product in the market affects overall supply. More Demand Curve Firm's own demand Downward sloping but more
sellers generally mean a higher total quantity supplied, as each curve (market demand elastic than in monopoly
producer competes to sell their goods.
7. Government Policies and Regulations: Government policies such as is firm's)
taxes, subsidies, trade restrictions, and regulations can affect Pricing Strategy Sets price above Sets price considering
production costs and therefore influence supply decisions. For
example, subsidies can lower production costs and increase supply, marginal cost to competitors, market
while taxes can have the opposite effect. maximize profit conditions
8. Natural and Environmental Factors: Natural factors such as weather
conditions, natural disasters, and seasonal changes can impact the Economic Often less efficient Less efficient than perfect
supply of agricultural and natural resource-based products. Efficiency (higher prices, lower competition but more than
Environmental regulations may also affect production processes and output) monopoly
supply.
9. Producer Expectations and Business Conditions: Economic conditions, Consumer Lower due to higher Higher due to product variety
business confidence, and expectations about the overall economy Welfare prices and restricted and competition
can influence supply decisions. During economic downturns, for
example, producers may reduce supply due to lower demand output
forecasts or financial constraints. Examples Utilities (local Restaurants, clothing stores
10. Supplier's Goals and Objectives: Finally, the goals and objectives of
individual producers or firms, including profit maximization, growth electricity provider)
strategies, market share objectives, and social responsibility, can all
affect their supply decisions.
Explain, the Pure Monetary theory. Differences between capitalism and socialism:

Pure Monetary Theory, also known as the Quantity Theory of Money, posits that the Aspect Capitalism Socialism
amount of money in circulation is the primary determinant of the overall price levels in Core Principles
an economy. The core idea is encapsulated in the equation of exchange:
Ownership Private ownership of the Public or collective ownership
means of production of the means of production
MV=PQMV = PQMV=PQ Where: Economic System Market economy Planned economy regulated by
–– governed by supply and the government
demand
 MMM is the money supply. Profit Motive Driven by profit and Focused on meeting collective
 VVV is the velocity of money (the rate at which money is spent). individual gain needs and reducing inequality
 PPP is the price level. Competition Competition drives Emphasis on cooperation over
 QQQ is the real output (quantity of goods and services produced). innovation and competition
efficiency
Government Minimal government Significant government
Key Points: Intervention intervention intervention in the economy
Economic
1. Direct Relationship: An increase in the money supply (MMM) leads to a Structures
proportional increase in the price level (PPP) if the velocity of money (VVV) Price Determined by market Often controlled by the
and the output (QQQ) remain constant. Conversely, a decrease in the Determination forces government
money supply leads to lower prices.
2. Velocity of Money: Assumes the velocity of money is stable, meaning Business Owned and operated by Major industries and services
changes in the money supply have predictable effects on prices. Ownership individuals or often state-owned––
3. Long-Run Neutrality: In the long run, changes in the money supply only corporations
affect nominal variables (like price levels) and not real variables (like
output or employment). Income Based on market forces Aims to reduce disparities
Distribution through redistribution
Social
Historical Context: Implications
Economic Believed to lead to Aims for economic stability
Efficiency efficient resource and security through planning
 Developed by classical economists like David Hume and John Stuart Mill. allocation
 Formalized by Irving Fisher. Income Inequality Can lead to significant Strives for greater social equity
 Prominent in monetarist economics, especially through Milton Friedman. wealth disparities
Consumer Choice Wide range due to Potentially limited due to
competition reduced competition
Criticisms:
Examples and
Variations
 Keynesian economists argue that the velocity of money can fluctuate and Pure Examples
Mixed Systems
United States, Singapore
Germany (social market
Cuba
Nordic countries (social
isn't always stable.
 Other factors, like demand-pull and cost-push inflation, can affect price economy) democracy), China (socialist
levels. market economy)

Explain the key features of mixed economic system What is disequilibrium? Briefly explain the reasons of disequilibrium
A mixed economic system combines elements of both capitalism and socialism.
Here are its key features: Disequilibrium in economics refers to a state where there is an imbalance
between the quantity demanded and the quantity supplied in a market,
1. **Coexistence of Public and Private Sectors**: Both private businesses and
government enterprises operate within the economy. resulting in market inefficiencies. It occurs when the market price does not
equal the equilibrium price—the price where quantity demanded equals
2. **Economic Planning and Market Mechanisms**: The economy is driven by quantity supplied. Disequilibrium can manifest as either a surplus (excess
market forces with government planning and intervention where necessary.
supply) or a shortage (excess demand), triggering adjustments in prices,
3. **Regulation and Deregulation**: The government enforces regulations to production levels, or consumer behavior to restore equilibrium.
protect consumers and ensure fair competition, but may also reduce restrictions
in certain areas to encourage innovation.
Reasons of Disequilibrium
4. **Social Welfare Programs**: The government provides social safety nets,
including healthcare, unemployment benefits, and housing assistance.
1. Fixity of prices for some certain period of time: when a supplier sets a fixed
5. **Fiscal and Monetary Policies**: The government uses taxation and spending price for a good or service for a certain time period. During this period of
to influence the economy, and the central bank controls the money supply and
interest rates. sticky prices, if the quantity demanded increases in the market for the good or
service, there will be a shortage of supply.
6. **Mixed Ownership**: Some enterprises are jointly owned by the
government and private entities.
2. Government intervention: If the government sets a floor or ceiling for a
7. **Income Redistribution**: Progressive taxation and welfare programs aim to good or service, the market may become inefficient if the quantity supplied is
reduce income inequality.
disproportionate to the quantity demanded. For example, if the government
8. **Public Goods and Services**: The government provides essential services sets a price ceiling on rent, landlords may be reluctant to rent out their extra
and public goods like national defense and infrastructure. property to tenants, and there will be excess demand for housing due to the
9. **Consumer Protection**: Laws are enforced to protect consumers from shortage of rental property.
unfair practices and harmful products.
10. **Balancing Economic Goals**: The system aims to balance efficiency, 3. Fixing minimum wage :A labor market disequilibrium can occur when the
equity, growth, and stability. government sets a minimum wage, that is, a price floor on the wage that an
employer can pay its employees. If the stipulated price floor is higher than the
labor equilibrium price, there will be an excess supply of labor in the economy
This approach seeks to leverage the strengths of both systems while mitigating
their weaknesses, creating a balanced and flexible economy.
Explain the relationship between cost and productivity in the long run How microeconomics is different from macroeconomics?

In the long run, the relationship between cost and productivity is crucial for understanding Microeconomics and macroeconomics are two branches of economics that focus on
how firms can optimize their operations and achieve efficiency. Here's a detailed explanation
of this relationship: different aspects of the economy at different levels of aggregation. Here's how they differ:

1. Cost and Productivity Defined: 1. Scope of Analysis:

 Cost: Cost refers to the expenses incurred by a firm in producing goods or

Microeconomics: Microeconomics examines the behavior of individual
economic units such as households, firms, industries, or specific markets. It
services. These expenses include both fixed costs (such as rent, depreciation of
equipment) and variable costs (such as labor, raw materials). looks at how these entities make decisions regarding the allocation of
resources, production, consumption, and pricing of goods and services.
 Productivity: Productivity measures the efficiency of production, usually defined Examples of microeconomic topics include supply and demand, consumer
as output per unit of input. It can be labor productivity (output per worker), behavior, production costs, market structures (like perfect competition or
capital productivity (output per unit of capital), or total factor productivity
(output per unit of all inputs). monopoly), and factors affecting individual markets.
Macroeconomics: Macroeconomics, on the other hand, studies the economy
as a whole. It focuses on aggregate measures such as national income,
2. Long-Run Perspective: In the long run, firms have the flexibility to adjust all inputs (both unemployment rates, inflation, economic growth, and overall price levels.
variable and fixed) to optimize their production processes. This contrasts with the short run, Macroeconomics deals with the broader issues that affect the entire
where some inputs are fixed (like capital equipment or plant size). economy, such as fiscal policy, monetary policy, international trade, and the
behavior of key economic aggregates like GDP (Gross Domestic Product),
aggregate demand and supply, and the overall level of savings and investment.
3. Relationship Between Cost and Productivity:

2. Units of Analysis:
 Economies of Scale: Increasing productivity often leads to lower average costs
per unit of output due to economies of scale. As productivity increases, a firm
can produce more output with the same amount of inputs, thereby spreading Microeconomics: Microeconomics analyzes the behavior and decisions of
fixed costs over more units. This results in lower average costs. individual economic agents within the economy. It looks at how individual
 Technological Advancements: Improvements in productivity, often driven by consumers allocate their income among different goods and services, how
technological advancements, can reduce costs by allowing firms to produce firms decide on production levels and pricing strategies, and how markets
more efficiently. For example, automation and better production techniques can achieve equilibrium under different conditions.
increase output per unit of labor input, reducing labor costs per unit of output. Macroeconomics: Macroeconomics focuses on aggregate economic variables
 Optimal Input Mix: Higher productivity can also lead to better utilization of that summarize the entire economy. It deals with issues that affect the
inputs. Firms can optimize their input mix (e.g., using more skilled labor, better- economy at large, such as overall employment levels, national output,
quality materials) to achieve higher output levels at lower costs. inflation rates, and the performance of the economy over time.
 Diseconomies of Scale: On the other hand, if productivity increases without
corresponding adjustments in other factors, it could lead to diseconomies of
scale in the long run. This might occur due to inefficiencies arising from overly 3. Approach to Analysis:
complex operations or difficulties in managing larger scale production.
Microeconomics: Microeconomics typically uses a bottom-up approach,
4. Strategic Implications: starting with individual units (like households and firms) and examining their
interactions and decisions. It often employs models such as supply and
demand analysis, cost-benefit analysis, and theories of consumer and
 Cost Leadership: Firms aiming for cost leadership focus on improving producer behavior to understand how individual choices impact markets.
productivity to lower costs and offer competitive pricing in the market. Macroeconomics: Macroeconomics takes a top-down approach, focusing on
 Quality Considerations: Higher productivity doesn't always mean lower costs if aggregate trends and relationships across the entire economy. It uses
quality suffers. Balancing productivity improvements with maintaining or macroeconomic models and theories to explain and predict phenomena such
enhancing product quality is crucial for long-term competitiveness as business cycles, economic growth, inflationary trends, and the impact of
government policies on the economy.
Discuss the economic factors that affect business environment
Explain the expenditure method of measuring national income.
.

Several economic factors significantly impact the business environment, influencing firms'
Components of the Expenditure Method:
operations, strategies, and performance:

1. Consumption (C):
1. Economic Growth: The overall growth rate of the economy affects business
opportunities and consumer spending. Higher growth rates typically lead to o Consumption expenditure represents spending by households
increased demand for goods and services, while recessions can constrain on goods and services for personal consumption. This includes
consumer confidence and spending. durable goods (like cars and appliances), nondurable goods (like
2. Interest Rates: Interest rates set by central banks influence borrowing costs for food and clothing), and services (like healthcare and education).
businesses. Lower rates stimulate investment and borrowing, fostering business 2. Investment (I):
expansion, while higher rates can constrain investment and consumer spending. o Investment includes spending by businesses (on capital goods
3. Inflation Rates: Inflation measures the rate at which prices for goods and such as machinery and equipment), spending on residential
services rise. Moderate inflation can indicate a healthy economy, but high construction (by households), and changes in business
inflation erodes purchasing power and can disrupt business planning and pricing inventories (goods produced but not yet sold).
strategies. 3. Government Spending (G):
4. Exchange Rates: Exchange rates impact international trade and competitiveness. o Government spending refers to expenditures by all levels of
Fluctuations in exchange rates affect the cost of imported goods, export government (federal, state, and local) on goods and services.
competitiveness, and the value of foreign earnings for multinational This includes spending on salaries of government employees,
corporations. infrastructure projects, and purchases of goods and services.
5. Labor Market Conditions: Factors such as unemployment rates, wage levels, and 4. Net Exports (NX):
skill availability influence labor costs and productivity. Tight labor markets can o Net exports represent the difference between exports (goods
lead to wage pressures, affecting profitability and workforce planning. and services produced domestically and sold abroad) and
6. Government Policies: Fiscal policies (taxation, government spending) and imports (goods and services produced abroad and sold
monetary policies (interest rates, money supply) directly impact business domestically). It can be calculated as: NX=Exports−ImportsNX =
operations and investment decisions. Regulatory changes also affect industry Exports - ImportsNX=Exports−Imports.
practices and compliance costs.
7. Global Economic Environment: Global economic trends, trade policies, and
geopolitical factors influence international markets, supply chains, and export Formula for GDP using the Expenditure Method:
opportunities for businesses operating globally.
8. Business Cycle Phases: The stage of the business cycle—expansion, peak,
recession, or recovery—affects consumer confidence, spending patterns, and GDP=C+I+G+NX
overall economic stability, impacting business planning and risk management.
 Define the consumption function and explain its components
Define inflation and describe different types of inflation that can occur in an
economy
The consumption function is a fundamental concept in economics that describes the
relationship between disposable income and consumption expenditure by households. It is
Inflation is the rate at which the general level of prices for goods and services rises,
a key component of Keynesian economics and helps explain how changes in income affect
resulting in a decrease in the purchasing power of a currency. It is typically measured as
consumer spending behavior.
an annual percentage change in a price index, such as the Consumer Price Index (CPI) or
the Producer Price Index (PPI).
Definition of the Consumption Function:
 Open Inflation: In a free market economy, prices go up freely due to supply-
demand imbalance leading to open inflation.
The consumption function is expressed as: C=C(Yd)
 Suppressed Inflation: Suppressed inflation occurs in a controlled economy where the
Where upward pressure on prices is not allowed to influence the quoted or managed prices. But
inflation reveals itself in other forms. Example: Government may introduce rationing of
: C represents consumption expenditure. goods leading to long queues in font of ration shops. There is very likely to be a black
Yd denotes disposable income (income after taxes and transfers). market for such goods whose prices are above the quoted prices. In India, suppressed
inflation manifests itself in the prices of essential goods sold through PDS. The ration
prices are deliberately maintained at a certain level while open market prices are above
The consumption function shows how much households are willing to spend on this level.
consumption goods and services at different levels of disposable income.
 Creeping Inflation, Galloping Inflation and Hyper Inflation: These three categories of
Components of the Consumption Function: inflation are recognised on the basis of severity of inflation, as measured in terms of rate
of rise in prices. There is moderate rise in prices of 2-3 per cent per annum in creeping
inflation. It is generally considered good for a growing economy. Mildly rising prices
1. Autonomous Consumption ( C0 ): result in faster growth of output in that they raise the profit margins of firms and
o Autonomous consumption refers to the level of consumption encourage them to produce more. Creeping inflation does not severely distort relative
expenditure that occurs even when disposable income is zero. It prices nor does it destabilise price expectations .A single digit inflation is also considered
represents the minimum amount of consumption necessary to
as moderate inflation which most countries have come to put up with. In galloping
sustain households' basic needs, financed through borrowing or
inflation prices rise at double- or treble-digit rates per annum (20-100%). It tends
savings.
todistort relative prices and results in disquieting changes in distribution of purchasing
2. Marginal Propensity to Consume (MPC):
power of different groups of income earners. There is often a flight of capital from the
o The MPC is the proportion of an additional unit of disposable country since people tend to send their investment funds abroad and domestic
income that households spend on consumption. It indicates the
responsiveness of consumption to changes in income. investment withers away. Hyperinflation or run-away inflation is of a severe type in
Mathematically, MPC is represented as: MPC=ΔCΔ/Yd Where ΔC is which prices rise a thousand or a million or even a billion per cent per year. It seriously
the change in consumption and ΔYd is the change in disposable cripples the economy. Prices and money supply rise alarmingly.
income.
3. Income ( Yd):
o Disposable income is the primary determinant of consumption Explain the types of unemployment, with examples
expenditure according to the consumption function. As disposable
income increases, households tend to spend more on
consumption goods and services, assuming other factors remain Unemployment refers to the situation where individuals who are capable of working, and
are actively seeking work, are unable to find a job. Different types of unemployment arise
constant. from various economic conditions and factors. Here are the main types of unemployment:

1. Frictional Unemployment
Differentiating between demand-pull inflation and cost-push inflation:
Definition: Temporary unemployment that occurs when people are between jobs or are
Aspect Demand-Pull Inflation Cost-Push Inflation entering the labor market for the first time.
Definition Occurs when aggregate Occurs when the costs of
demand in an economy production increase, leading to Causes: Job transitions, voluntary resignations, or new graduates seeking their first job.
outpaces aggregate supply. a decrease in aggregate supply.
Causes - Increased consumer - Higher wages Example: A software developer resigns from their job to find a better position and spends
two months searching for a new one.
spending
- Government expenditure - Increased prices of raw
2. Structural Unemployment
materials
- Investment spending - Higher taxes or tariffs on
production inputs Definition: Long-term unemployment that arises when there is a mismatch between the
skills of the labor force and the needs of employers.
- Export growth - Supply chain disruptions
Indicators - High consumer confidence - Rising costs for businesses Causes: Technological advancements, changes in consumer demand, globalization, and
- Low unemployment rates - Increased commodity prices shifts in the economy.
(e.g., oil)
- Increased money supply - Supply shortages Example: A factory worker becomes unemployed because their skills are no longer needed
Effects on - General rise in prices due to - Specific price rises in goods due to automation and they lack the necessary skills for available high-tech jobs.
Prices increased demand and services that have higher
production costs 3. Cyclical Unemployment
Monetary - Central bank may increase - Central bank may face a
Policy interest rates to curb dilemma as raising interest rates Definition: Unemployment resulting from economic recessions and downturns in the
Response spending can further reduce supply business cycle, where there is insufficient demand for goods and services.
Example - Booming economy leading - Oil price shock causing
to higher spending and increased transportation and Causes: Reduced consumer spending, decreased business investment, economic
recessions.
investment production costs
Economic - Keynesian economics - Cost-push inflation is often
Example: During the 2008 financial crisis, many construction workers lost their jobs due to
Theories emphasizes the role of associated with supply-side the collapse of the housing market and the subsequent economic downturn.
aggregate demand economic theories
Distinguish between direct demand and derived demand with the help of
Q- Elucidate the features of a perfect market structure.
suitable example Solution :
Perfect competition, can be defined as a market structure characterized by complete
Direct Demand: Direct demand refers to the demand for goods and services absence of rivalry among the individual firms i.e., perfect competition is a market
structure where there is a perfect degree of competition and single price prevails.
that are directly consumed by individuals or households for personal
Perfect competition is a market structure characterized by the following.
satisfaction and use. These are the end products or services that fulfill the 1. Homogeneous product – In a perfect competition, it is not possible to distinguish
immediate needs or wants of the consumer. between the products of individual firms. There are no distinctive features of the
product associated with any specific firm. The product, in that sense, is homogeneous
and undifferentiated. To the buyer,product supplied by one firm is a perfect substitute
Example of Direct Demand: A classic example of direct demand is the demand of that supplied by another.
for food. People buy groceries and meals to satisfy their hunger and nutritional 2. Large number of sellers – Perfect competition is characterized by a large number of
needs. For instance, when a person purchases a loaf of bread, this represents firms. Here, the term large denotes the fact that no individual firm is in a position to
direct demand. The bread is consumed directly by the individual, fulfilling their significantly influence the total supply of the industry and thereby affects the price of
immediate need for food. the product. Every firm in the industry is thus, a price taker. It can sell any quantity of its
own product at the going price.
3. Large number of buyer – Perfect competition is characterized by a large number of
Derived Demand: Derived demand, on the other hand, refers to the demand buyers who are in competition with each other for supply. Their number is so large that
for goods and services that are not desired for their own sake but for their any single buyer may change the quantity purchased without significantly affecting the
ability to produce other goods or services. It arises because of the demand for total demand in the market and affecting the price of the product.
another good or service. 4. Full knowledge of market – It is assumed that in perfect competition, every buyer and
seller has full knowledge of the prevailing price of the product, as also the prices being
asked by the sellers and being offered by the buyers. This ‘perfect knowledge’ enables
Example of Derived Demand: An example of derived demand is the demand for every buyer and seller to make use of any opportunity that may exist to strike a better
flour by a bakery. The bakery does not purchase flour to consume it directly bargain.
5. Economic rationality – Economic rationality is another feature of perfect competition.
but to use it as an ingredient to produce bread, cakes, and other baked goods.
It means that every buyer and seller is motivated by his own economic interest in his
The demand for flour is derived from the demand for these baked products. decisions to buy or sell. This, coupled with the assumption of perfect knowledge,
Another example is the demand for tires by automobile manufacturers. Tires ensures that a uniform price prevails in the market.
are not purchased for their own sake but because cars need tires to function.
Therefore, the demand for tires is derived from the demand for automobiles.
What does production function mean? What are the differences between short run
and long run production functions?

Distinguish between monology and perfect competition? how price determination differ A production function is a mathematical representation that describes the relationship between
between two markets? inputs used in production and the resulting output. It shows how different quantities of factors
Ans- Differences between Monopoly and Perfect Competition of production (such as labor, capital, and raw materials) are combined to produce a certain
In perfect competition, at equilibrium, the price of the product is equal to the marginal cost (the cost level of output. The production function is typically expressed as: Q=f(L,K
per unit production of the product), while in monopoly, it is higher than the average cost (the ratio of
the total cost of production and the total number of products produced).
In perfect competition, it is very easy for both entries as well as the exit of firms since there are no Where:
external factors involved. But in a monopoly, due to the barriers of entry, it is not easy for a firm to
both enter as well as exit from the market.
In a monopoly, the sellers can charge any amount of money from the consumers since there are no  Q is the quantity of output.
other firms selling the same product. In case of perfect competition, there can be no discrimination in
prices being made- there are homogeneous products, all the sellers sell the same products, and in  L is the quantity of labor.
case a seller is trying to discriminate, the buyers can buy from other sellers.  K is the quantity of capital.
In perfect competition, a firm gets normal profits, and that is in the long-run only. While monopolists
get super-normal profits and this is because there is a huge difference between the marginal cost and
 F represents the functional relationship between inputs and output.
the price of the products.
In a monopoly, equilibrium can be attained irrespective of whether the Marginal Cost is rising, falling, The production function helps firms understand how changes in input levels affect
or constant. In the case of perfect competition, for the market to achieve equilibrium, Marginal Cost output, which is crucial for optimizing production processes and achieving cost
must be equal to Marginal Revenue while on the graph, the curve representing Marginal Cost cuts efficiency.
that are representing Marginal Revenue from below.
In perfect competition, since there is no scope for price discrimination and since all firms sell the
required quantity of the product at a single price which cannot easily be changed, the supply curve Differences Between Short Run and Long Run Production Functions
can
be determined. But for a monopoly, the Marginal Cost curve doesn’t represent the supply curve, and
supply cannot be determined. Short Run Production Function:
The price in a monopoly is greater than that in perfect competition. In the case of perfect
competition,
price equals the average cost in the long run. But in a monopoly, it is higher than the average cost. 1. Period Definition: At least one input is fixed (typically capital), while other inputs
A market is a place where the buyers and the sellers interact, and it should always benefit the
(like labor) are variable.
2. Input Flexibility: Limited to adjusting variable inputs; fixed inputs cannot be
consumers since they are, ultimately, the users of the products. In the case of those industries where
changed.
monopoly is prevalent, the government must step in and ensure there is a benefit for the consumers, 3. Fixed and Variable Inputs: Involves both fixed inputs (e.g., machinery) and variable
and this is justifiable on its part. inputs (e.g., labor).
4. Law of Diminishing Returns: Applies; additional units of variable input lead to
decreasing marginal output after a certain point.
5. Example: A factory with a fixed number of machines hires more workers. Initially,
output increases, but additional workers eventually result in smaller increases in
output due to overcrowding and limited machinery.

Long Run Production Function:

1. Period Definition: All inputs are variable; no fixed inputs.

2. Input Flexibility: Full flexibility to adjust all production factors (labor, capital).
3. Returns to Scale: Describes how output changes with proportional changes in all
inputs (increasing, constant, or decreasing returns to scale).
4. Example: A company builds a new factory, invests in new machinery, and hires
more workers, allowing significant expansion of production capacity and potential
economies of scale.
 differentiating between Average Propensity to Consume (APC) and Marginal
Propensity to Consume (MPC):
Explain relationship between cost and productivity in the long run?
Aspect Average Propensity to Marginal Propensity to
Consume (APC) Consume (MPC)
Aspect Increase in Productivity Impact on Cost
Definition The fraction of total The fraction of additional
Economies of More efficient use of Decrease in average cost
income that is spent on income that is spent on
Scale inputs as production per unit due to spreading
consumption. consumption.
scales up fixed costs and bulk
Formula APC = Total MPC = Change in
purchasing
Consumption / Total Consumption / Change in
Technological Adoption of advanced Reduction in long-run
Income Income
Advancements technology and average costs through
Range Between 0 and 1 Typically between 0 and 1,
automation improved efficiency and
but can exceed 1 in some
faster production
cases
Learning by Increased efficiency Lower cost per unit as
Interpretation Indicates overall Indicates how much
Doing from experience and firms become more
consumption behavior consumption changes in
process improvements proficient in production
relative to total income. response to changes in
processes
income.
Investment in Enhanced skills and Decrease in costs due to
Usage Used to understand the Used to analyze the
Human Capital productivity of workers more efficient and higher
proportion of income responsiveness of
through training quality output from
allocated to consumption to income
skilled workforce
consumption. changes.
Innovation and Development of new Reduced costs through
Economic Higher APC implies a Higher MPC implies that
R&D methods and products innovative processes and
Implications greater portion of increases in income will
increasing output products that enhance
income is spent rather significantly boost
efficiency productivity
than saved. consumption.
Infrastructure Better infrastructure Lower costs associated
Graphical Slope of the line from Slope of the consumption
Improvements leading to more efficient with improved logistics
Representation the origin to a point on function (the tangent to
production and logistics and reduced downtime
the consumption the curve at any point).
Optimal Efficient allocation of Reduced costs due to
function.
Resource resources and inputs minimized waste and
Short-term vs Often considered in Primarily used in short-
Allocation optimal use of resources
Long-term both short-term and term economic analysis.
Scale of Increased output Decrease in per-unit cost
long-term analyses.
Production volume improving due to higher volume and
Example If total income is If income increases by
production efficiency better utilization of
Calculation $50,000 and total $1,000 and consumption
production capacity
consumption is $40,000, increases by $750, MPC =
Supply Chain Efficient supply chain Lower costs through
APC = 0.8. 0.75.
Management and inventory reduced inventory
Relevance in Helps in understanding Crucial for Keynesian
management increasing holding costs and
Economic Policy overall spending multiplier effect and fiscal
productivity efficient supply chain
patterns in an economy. policy decisions.
operations

differences between a demand schedule and a demand curve:

Aspect Demand Schedule Demand Curve

Definition A table showing the A graphical representation
quantity demanded of a of the relationship between b) Examine the circular flow in a two sector economy.
good at different price price and quantity Solution :
levels. demanded. In a two sector economy, only two sectors are considered viz., households
Format Tabular form Graphical form and firms. There is no government sector and no foreign sector. There exists a
Representation Lists quantities demanded Plots quantities demanded flow of services from the households to the firms and a corresponding of factor
at various prices at various prices on a graph incomes from the firms to the households. Firm produces goods and
Axes (in case of Not applicable Price on the vertical axis (Y- services with the help of factor services from households and pay rewards to
demand curve) axis) and quantity household sectors for their factor services in the form of rent, wage,
demanded on the interest, etc. After this first round, firms have goods and services and household
horizontal axis (X-axis) sectors have income which they want to spend for satisfying their wants.
Data Points Specific price-quantity pairs Continuous line or curve Household sector spends its earned money to buy goods and services from firm
connecting price-quantity and thus, firm, in return gets money in this exchange. This two-way circulation
points (one clockwise and the other anti-clockwise) goes on moving and re-cycling of
Usage Helps to understand the Visualizes the relationship economic activities in both the sectors takes place. Briefly, circular flow model
relationship between price and shows how quantity shows that production during the year is converted into factor income (implying
and quantity in numerical demanded changes with income of the owners of factors of production in terms of rent, interest,
form price profit and wages) during the year, and factor income during the year is
Example converted into expenditure (on goods and services) during the year. Thus, factor
payments = income of households = consumption expenditure of households.
- Price (P) - Quantity Demanded (Q) - A point on the curve at
price P1 corresponds to
quantity Q1
- $10 - 100 units - The curve shows the
inverse relationship
between price and quantity
demanded
- $8 - 150 units
- $6 - 200 units
Application Used in microeconomic Used to analyze consumer
analysis to derive the behavior and market
demand curve dynamics visually