SHORT QUESTIONS ON MICRO/BUSINESS ECONOMICS FOR 2019

SHORT QUESTIONS ON MICRO ECONOMICS/BUSINESS ECONOMICS

DR. SHASHI AGAGRWAL

MEANING OF DEMAND

IN ORDINARY LANGUAGE THE TERM NEED,DESIRE,WANT AND DEMAND ARE USED IN THE SAME SENSE

BUT IN ECONOMICS ALL THESE TERMS HAVE DIFFERENT MEANING

DESIRE : A DESIRE FOR ANYTHING IS NOT THE DEMAND FOR IT. DEMAND MEANS A CONSCIOUS LONGING FOR A THING

LIKE A POOR MAN HAVE A DESIRE TO POSSESS A GRAND BUNGALOW

WANT IS THE DESIRE WHICH IS BACKED BY THE ABILITY AND WILLINGNESS TO SATISFY IT.

DEMAND : WANT OF A PERSON WILL BECOME DEMAND WHEN HE IS READY TO BUY A BUNGALOW AT A GIVEN PRICE AND A GIVEN PERIOD OF TIME.

DEMAND MAY BE DEFINED AS THE QUANTITY OF A COMMODITY WHICH A CONSUMER IS WILLING AND ABLE TO PURCHASE AT GIVEN PRICE,DURING SOME SPECIFIC POINT OF TIME.

VEERA ANSTEY,” THE DEMAND FOR A PARTICULAR GOOD IS THE AMOUNT THAT WILL BE PURCHASED AT GIVEN PRICE AND GIVEN TIME.

ELEMENTS OF DEMAND :

1.     DESIRE FOR A COMMODITY

2.     CAPACITY TO PAY FOR IT

3.     WILLINGNESS TO PAY FOR IT

4.     QUANTITY BOUGHT AND SOLD AT GIVEN TIME,GIVEN PRICE AND GIVEN PLACE

COMPOSITE DEMAND
REFERS TO DEMAND FOR  ONE COMMODITY IN ORDER TO SATISFY TWO OR MORE WANTS. FOR EXAMPLE DEMAND FOR ELECTRICITY IS A COMPOSITE DEMAND. DEMAND FOR  INDUSTRIES,AGRICULTURE AND HOUSEHOLD IS COMPOSITE DEMAND

DIRECT AND DERIVED DEMAND : WHEN THE DEMAND FOR A PRODUCTS IS TIED TO PURCHASE OF SOME PARENT PRODUCT,ITS DEMAND IS CALLED DERIVED DEMAND. FOR EXAMPLE THE DEMAND FOR CEMENT IS A DERIVED DEMAND. ALL DEMAND FOR PRODUER’S GOODS IS DERIVED. WHEN A COMMODITY OS DEMANDED FOR DIRECT CONSUMPTION, LIKE DEMAND FOR BREAD TO EAT,. DERIVED DEMAND FOR ONE COMMODITY AS RESULT OF DEMAND FOR ONE COMMODITY AS A RESULT OF DEMAND OF ANOTHER.

DEMAND FUNCTION

DEMAND FUNCTION IS A COMPREHENSIVE FORMULATION WHICH SPECIFIES THE FACTORS THAT INFLUENCE DEMAND FOR THE PRODUCT

D_X  =f( P_X, P_R, Y.T----ETC)

P_X,  = PRICE OF X GOOD

 P_R   = PRICE OF RELATED GOODS

 Y. = INCOME OF THE CONSUMER

T-= TASTE AND REFERENCES OF THE GOODS

DEMAND FUNCTION SHOWS THE DEMAND FOR A COMMODITY DEPENDS ON THE PRICE OF X,RELATED GOODS,INCOME AND TASTE AND EXPECTATION

LAW OF DEMAND

KNOWN AS THE FIRST LAW OF PURCHASE AND IT INDICATES THE FUNCTIONAL RELATIONSHIP BETWEEN THE PRICE OF COMMODITY AND QUANTITY DEMANDED

LAW OF DEMAND STATES OTHER THINGS BEING EQUAL THE DEMAND FOR GOODS EXTEND WITH A FALL IN THE PRICE AND CONTRACTS WITH RISE IN PRICE.

D_X  =f( P_X, P_R, Y.T----ETC)

LAW OF DEMAND EXPLAINS THE INVERSE RELATIONSHIP BETWEEN PRICE AND DEMAND OF A COMMODITY

DR MARSHALL,” THE LAW OF DEMAND STATES THAT AMOUNT DEMANDED INCREASES WITH  A FALL IN PRICE AND DIMINISHES WITH RISE IN PRICE

EXTENSION OF DEMAND AND INCREASE IN DEMAND

EXTENSION OF DEMAND : OTHER THINGS REMAINING THE SAME IF WITH FALL IN PRICE THE AMOUNT DEMANDED RISES. IT IS SAID TO BE AN EXTENSION OF DEMAND.

INCREASE IN DEMAND : WHEN IRRESPECTIVE OF PRICE DEMANDED OF A COMMODITY RISES DUE TO CHANGE IN INCOME,FASHION ,TASTE,POPULATION ETC. IT IS AN INSTANCE OF INCREASE IN DEMAND. THE INCREASE IN DEMAND MEANS :

1.     SAME PRICE MORE DEMAND

2.     SAME DEMAND MORE PRICE

DEMAND CURVE WILL SHIFT TO RIGHT

CONTRACTION OF DEMAND AND DECREASE IN DEMAND

CONTRACTION OF DEMAND : OTHER THINGS REMAINING THE SAME IF WITH RISE  IN PRICE THE AMOUNT DEMANDED FALL. IT IS SAID TO BE AN CONTRACTION OF DEMAND.

DECREASE IN DEMAND : WHEN IRRESPECTIVE OF PRICE DEMANDED OF A COMMODITY FALL DUE TO CHANGE IN INCOME,FASHION ,TASTE,POPULATION ETC. IT IS AN INSTANCE OF DECREASE OF  DEMAND. THE DECREASE  IN DEMAND MEANS :

1.     SAME PRICE LESS DEMAND

2.     SAME DEMAND LESS PRICE

DEMAND CURVE WILL SHIFT TO LEFT

MEANING OF ELASTICITY OF DEMAND

THE LAW OF DEMAND EXPLAINS DIRECTION OF CHANGE IN DEMAND FOR A COMMODITY AS RESULT OF CHANGE IN ITS PRICE. AND IT DOES NOT EXPLAIN THE DEGREE OF CHANGE.

PROF MARSHALL HAS DEVELOPED THE CONCEPT OF ELASTICITY OF DEMAND IN HIS FAMOUS BOOK PRINCIPLES OF ECONOMICS. YET THIS IDEA WAS EVOLVED MUCH EARLIER BY ECONOMISTS LIKE COURNOT AND J.S MILL

ELASTICITY OF DEMAND MEASURES THE DEGREE OF CHANGE IN DEMAND OF A COMMODITY IN RESPECT TO CHANGE IN THE PRICE OF THE COMMODITY OR CHANGE IN THE INCOME OF THE CONSUMER OR CHANGE IN THE PRICE OF RELATED GOODS

DOOLEY,” THE ELASTICITY OF DEMAND MEASURES THE RESPONSIVENESS OF THE QUANTITY DEMANDED OF GOOD TO CHANGE IN ITS PRICE,PRICE OF OTHER GOODS AND CHANGES IN CONSUMER’S INCOME.

ELASTICITY OF DEMAND :

1.     PRICE ELASTICITY OF DEMAND :-PRICE OF ELASTICITY OF DEMAND MAY BE DEFINED AS THE RATIO OF PERCENT CHANGE IN DEMAND TO THE PERCENT CHANGE IN PRICE

2.     INCOME ELASTICITY OF DEMAND :- INCOME ELASTICITY OF DEMAND MEANS THE RATIO OF PERCENT CHANGE IN THE QUANTITY DEMANDED TO PERCENT CHANGES IN INCOME

3.     CROSS ELASTICITY OF DEMAND :-CROSS ELASTICITY OF DEMAND IS THE RESPONSIVENESS OF DEMAND FOR  GOODS A TO CHANGES IN THE PRICES OF GOODS B

MEANING OF UTILITY,CARDINAL AND ORDINAL UTILITY

UTILITY IS THE WANT SATISFYING POWER OF THE COMMODITY. LOOKED FROM THE CONSUMER’ ANGLE,UTILITY IS THE PSYCHOLOGICAL FEELING OF SATISFACTION,PLEASURE AND HAPPINESS THAT DERIVED FROM A CONSUMER FROM THE USE OF A COMMODITY. THE CONCEPT OF UTILITY IS SUBJECTIVE THAT DIFFERS FROM PLACE TO PLACE,TIME TO TIME AND PERSON TO PERSON

CARDINAL UTILITY :- ACCORDING TO CLASSICAL AND NEO CLASSICAL ECONOMISTS SUCH AS BENHAM,MARSHALL UTILITY IS MEASURABLE IN CARDINAL NUMBERS I.E 1,2,3,ETC

ORDINAL UTILITY : ACCORDING TO MODERN ECONOMISTS LIKE J.R HICKS AND ALLEN. UTILITY IS NOT QUANTITATIVELY MEASURABLE IN ABSOLUTE TERMS RATHER IT IS EXPRESS ABLE IN TERMS OF PREFERENCE IE FIRST,SECOND  OR MORE OR LESS THAN

MARGINAL UTILITY

MARGINAL UTILITY MEANS THE ADDITION MADE TO TOTAL UTILITY BY THE MARGINAL UNITS.

IN THE WORDS OF CHAMPAN, MARGINAL  UTILITY IS THE ADDITION MADE TO TOTAL UTILITY BY CONSUMING ONE MORE UNIT OF THE COMMODITY

MU_n = TU_n   - TU_n-1

MU=∆TU/ ∆Q

POSITIVE MARGINAL UTILITY :- IF BY CONSUMING ADDITIONAL UNITS OF COMMODITY,TOTAL UTILITY GOES ON INCREASING THEN MARGINAL UTILITIES OF THESE UNITS WILL BE POSITIVE

ZERO MARGINAL UTILITY :-IF THE CONSUMPTION OF AN ADDITIONAL UNIT OF A COMMODITY CAUSES NO CHANGE IN THE TOTAL UTILITY,IT MEANS MARGINAL UTILITY OF THE ADDITIONAL UNIT IS ZERO.

NEGATIVE MARGINAL UTILITY :- IF THE CONSUMPTION OF AN ADDITIONAL UNIT OF DEMAND CAUSES FALL IN TOTAL UTILITY,IT MEANS THE MARGINAL UTILITY OF THAT UNIT IS NEGATIVE.

LAW OF DIMINISHING MARGINAL UTILITY

FUNDAMENTAL LAW OF UTILITY ANALYSIS

THE LAW OF DIMINISHING MARGINAL UTILITY EXPLAINS THE RELATION BETWEEN UTILITY AND QUANTITY OF A COMMODITY

IT IS PSYCHOLOGICAL FACT WHEN A CONSUMER GETS MORE AND MORE UNITS OF COMMODITY DURING A PARTICULAR TIME,THE UTILITY FROM THE SUCCESSIVE UNITS WILL DIMINISH

DR MARSHALL,” THE ADDITIONAL BENEFITS WHICH A PERSON DERIVES FROM A GIVEN INCREASE OF HIS STOCK OF A THING DIMINISHES WITH EVERY INCREASE IN THE STOCK THAT HE ALREADY HAS.

MORE WE HAVE OF THING THE LESS WE WANT TO HAVE MORE OF IT. EACH SUCCESSIVE UNIT OF A COMMODITY GIVES,OTHER THINGS REMAINING THE SAME LESS UTILITY TO THE CONSUMER THAN THE FOREGOING UNIT.

LAW OF EQUI MARGINAL UTILITY

IS THE SECOND MOTS IMPORTANT LAW OF THE UTILITY ANALYSIS

PROPOUNDED BY A FRENCH ENGINEER H.H GOSSEN

ALSO CALLED GOSSEN;S SECOND LAW

THE LAW POINTS OUT HOW A CONSUMER CAN GET MAXIMUM SATISFACTION OUT OF GIVEN EXPENDITURE ON DIFFERENT GOODS.

THE LAW STATES THAT IN ORDER TO GET MAXIMUM SATISFACTION A CONSUMER SHOULD SPEND HIS LIMITED INCOME ON DIFFERENT COMMODITIES IN SUCH A WAY THAT THE LAST RUPEE SPENT ON EACH COMMODITY YIELD HIM EQUAL MARGINAL UTILITY.

DR MARSHALL,” IF A PERSON HAS A THING WHICH HE CAN PUT TO SEVERAL USES,HE WILL DISTRIBUTE IT AMONG THESE USES IN SUCH A WAY THAT HE HAS THE SAME MARGINAL UTILITY IN ALL.

CONSUMER’S EQUILIBRIUM

REFERS TO SITUATION WHEREIN A CONSUMER GETS MAXIMUM SATISFACTION OF HIS LIMITED INCOME AND HE HAS NO TENDENCY TO MAKE ANY CHANGES IN HIS EXISTING EXPENDITURE PATTERN.

TIBER SCITOVOSKY,” A CONSUMER IS IN EQUILIBRIUM WHEN HE REGARDS HIS ACTUAL BEHAVIOUR AS THE BEST POSSIBLE UNDER THE CIRCUMSTANCES AND FEEL NO URGE TO CHANGE HIS BEHAVIOUR AS  LONG AS CIRCUMSTANCES REMAIN UNCHANGED

DEFINITION OF INDIFFERENCE CURVE

AN INDIFFERENCE CURVE IS A CURVE WHICH SHOWS DIFFERENT COMBINATIONS OF TWO COMMODITIES YIELDING EQUAL SATISFACTION TO THE CONSUMER. IT MEANS ALL THE POINTS LOCATED ON AN INDIFFERENCE CURVE REPRESENT SUCH COMBINATIONS OF TWO COMMODITIES GIVE EQUAL SATISFACTION TO THE CONSUMER. A CONSUMER BECOMES INDIFFERENT ABOUT CHOICE.

H.L.VARIAN” AN INDIFFERENCE CURVE REPRESENTS ALL COMBINATIONS OF TWO COMMODITIES THAT PROVIDED THE SAME LEVEL OF SATISFACTION TO A PERSON. THAT PERSON IS THEREFORE INDIFFERENT AMONG THE COMBINATION REPRESENTED BY THE POINTS ON CURVE.

DEFINE GIFFEN’S GOODS

ARE KIND OF INFERIOR GOODS. WERE EXPLAINED FOR THE FIRST TIME BY SIR ROBERT GIFFEN AND AFTER HIS NAME THESE ARE CALLED GIFFEN GOODS. GIFFEN GOODS ART THOSE INFERIOR GOODS:-

1.     THE DEMAND FOR WHICH DECREASES AS THE INCOME OF THE CONSUMER INCREASES AND INCREASES AS THE INCOME OF THE CONSUMER DECREASES

2.     THE DEMAND FOR WHICH INCREASES WITH INCREASES IN THEIR PRICES AND FALLS WITH A DECREASE IN THEIR PRICES

INCOME HAS ADVERSE EFFECT BUT PRICE HAS POSITIVE EFFECT

INDIFFERENCE MAP

 A SET OF FAMILY OF INDIFFERENCE CURVES IS AN INDIFFERENCE MAP

A LOWER INDIFFERENCE CURVE REPRESENTS LOWER LEVEL OF SATISFACTION AND A HIGHER INDIFFERENCE CURVE REPRESENTS HIGHER LEVEL OF SATISFACTION

DIMINISHING MARGINAL RATE OF SUBSTITUTION

BASIS OF INDIFFERENCE CURVE ANALYSIS

DISCUSSED BY LERNER,HICKS AND ALLEN

MARGINAL RATE OF SUBSTITUTION MAY BE DEFINED AS THE RATE AT WHICH A CONSUMER WILL EXCHANGE SUCCESSIVE UNITS OF ONE COMMODITY FOR ANOTHER

RATE AT WHICH THE CONSUMER IS PREPARED TO EXCHANGE GOODS X AND Y IS KNOWN AS MARGINAL RATE OF SUBSTITUTION

THE MARGINAL RATE OF SUBSTITUTION OF X FOR Y IS DEFINED AS THE AMOUNT OF Y THE CONSUMER IS JUST WILLING TO GIVE UP ONE MORE UNIT OF X AND MAINTAIN THE SAME LEVEL OF SATISFACTION

DEFINE PRODUCTION FUNCTION

PRODUCTION FUNCTION REFERS TO THE TECHNICAL RELATIONSHIP BETWEEN THE QUANTITY OF GOODS PRODUCED AND FACTORS OF PRODUCTION NECESSARY TO PRODUCE IT.

WATSON,” THE RELATION BETWEEN A FIRM’S PHYSICAL PRODUCTION ( OUTPUT) AND THE MATERIAL FACTORS OF PRODUCTION( INPUTS) IS REFEREED TO AS PRODUCTION FUNCTION”

Y =f ( L,K,)

BUDGET(PRICE ) LINE

PRICE LINE REPRESENTS ALL POSSIBLE COMBINATIONS OF TWO GOODS THAT A CONSUMER CAN PURCHASE WITH HIS GIVEN INCOME AND THE GIVEN PRICES OF TWO GOODS. ALSO KNOWN AS CONSUMPTION POSSIBILITY LINE OR LINE OF ATTAINABLE COMBINATIONS.

HIBBDON” THE BUDGET LINE IS THAT LINE WHICH SHOWS ALL THE DIFFERENT COMBINATIONS OF TWO COMMODITIES THAT A CONSUMER CAN PURCHASE GIVEN HIS MONEY INCOME AND THE PRICE OF TWO COMMODITIES.

SLOPE OF PRICE LINE = P_X  /P_Y