micro economics

Class 11

Microeconomics

Total marks =24

1 marks 5 marks 8 marks Total
questions questions questions

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This Chapter includes
2.1 Demand supply and equilibrium
2.2 Elasticity of Demand and Supply
2.3 Theory of Consumer ‘s Behavior
2.4 Theory of Production

Unit 2.1: demand supply and market equilibrium.

Demand:

Demand refers to the quantity of commodity that the consumer is willing and able to

purchase at various price in the given period of time .

Element of demand

 Desire to have goods or services .
 Ability to pay.
 Willing to pay .
 Per period of time.

What is the difference between the desire and demand?

Desire Demand

It is simple wish of people It is effective desire which is backup by
ability to pay and willing to pay per
It is not associate with price, quantity period of time
and time It is associate with price, quantity and
it does not create impact on economy time
It has no role on policy making it does create impact on economy
Eg: It has role on policy making
Eg:

Demand function: Mathematical or functional relationship between the

quantity of demand and its determinants is called Demand function
It is given by .

()

Note: demand equation is given by

Determinants of demands

Demand of goods and service is differ from place to place time to time person to
person . Responsible factors that bring variation on demand are called
determinant of demand

The major determinants are

1. Price of commodity: price is the main determinants of demand .There is positive
relationship between price and Giffen goods and inverse relationship with
normal goods.

2. Income of a consumer :Income of consumer is one of the major determinants of
demand. If income of consumer increase, it increase the demand of normal and
luxurious goods and decrease the demand of Giffen and inferior goods.

3. Price of related goods : If the price of substitutes goods increase, it increase the
demand of goods ie there is there is positive relationship . If the price of
complementary goods increase , it decrease the demand of goods i.e. there is
positive relationship between the complementary goods .so , price of related
goods in one of the major determinant of demand.

4. Taste and preference of consumers: if taste and preference of consumers are
change in favor of particular goods then the demand for that goods will be
higher and vice versa

5. Size and composition of population : demand for goods will be higher in cause of
large population and favorable composition of population.

6. Other determinants of demand are
i. Advertisement
ii. Price expectation
iii. Fear of shortage
iv. Custom and tradition
v. Technological progress
vi. distribution of income
vii. Government policy

What is law of demand? Explain with table and figure.

Law of demand is one of the well-known most applied theories and most important

issues in economics It was developed by Alfred marshal

According to Alfred marshal" other things remain same, quantity demanded increase

with falls in price and vice versa".

This law shows the inverse relation between the price and quantity demanded

Symbolically,

and if other things remaining same.

Mathematically ,

other things remining same

Assumptions of law

 No change in income of consumer

 No change in price of related goods

 No change in test and preference of consumers.
 No change in price expectation etc.

Explanation
The law of demand is explained with the help of following table

Combination price (RS/kg) Quantity (kg)
P 5 100
Q 10 80
R 15 60
S 20 40
T 25 20

Demand schedule
The first column of table shows five combination of price and quantity . Rest two
columns Represents the per kg price an quantity demand .This table shows the
indirect relationship between the price and quantity of demand .When the price
is Rs 5 per kg quantity of demand is 100 kg .As price increase from the Rs 5 to RS
10, quantity of demand decrease from 100 kg to 80 kg .In similar manner
increase in price cause decrease in quantity demand . It shows the inverse
relation between the price and quantity demand.

Quantity of Demand

In the given figure , price and quantity demand are measured along the Y-axis
and X-axis respectively. DD is the demand curve which is the downward slopping
from left to right . The downward slope shows the inverse relation between the
price and quantity demand

Thus from above table and figure we conclude that there is inverse relation
between the price and quantity demanded

what are the exception of law of demand ?

Expectation of law of demand
The law of demand does not hold true for all the goods , person , times, places
and environment . The situation in which the law of demand is not applicable are
termed as exception ( limitation ) to the law of demand
The major limitation are as follows
1. Giffen goods: Those inferior Goods whose quantity demanded increase with
increase in price and vice versa called Giffen goods .It is against the law of
demand.

2. Expectation of a future price : If a consumer expects that price of certain
commodity will rise in near future then the present demand of that commodity
will be high even if the price is same . it is against the law of demand.

3. Scarcity of goods : in the market if there is shortage of goods than whatever be
the price consumer demand more . It is against the law of demand.

4. Trade cycle: the upas and down in economic activities that consists of
prosperity recession, depression recovery known as trade cycle .At the time of
prosperity people demand more even if price is increase. But during the
depression demand falls even if price decrease

5. Necessity of life: law of demand is not applicable in the case of basic necessary
goods . People should buy goods at any cost for their survival . For example
water, food ,cloths. So the law of demand does not hold true in necessary goods.

6. Prestigious Goods: the goods like diamond gold rare painting etc. symbolized
the prestige of user or buyers. Demand of prestigious goods increase even the
price increase.

Others factors which also violate the law of demand are
i. Change in fashion ,habits income season

ii. Demonstration effect
iii. Change in population
iv. Cultural religious factor
v. War and emergency
vi. ignorance

Why does the demand curve slope downwards from left to right?

Reasons behand Downward sloping demand curve:
Generally the demand curve slopes downwards from left to right due to the
following reasons

i. Income effects: if the price of commodity falls then real income and purchasing
of consumers increase then consumers can buy more at the same level of
income . Sol when the price of commodity falls quantity falls

ii. substitution effect: substitute goods can be used in the absence of others
.When the price of a commodity falls , it became cheaper as compare to the
other commodity. As a result the consumer would like to substitute cheaper
commodity for similar commodity.

iii. Entry of new consumers : when the price of a commodity falls, it increase the
purchasing power of consumer . A a result , those consumes who are not able to
buy at the previous price can buy the quantity .As a result demand increase .

iv. Law of diminishing marginal utility: the law says that additional level of
satisfaction goes on diminishing with increase in units of consumption with in
same period of time . In general a rational consumer tire to remain in
equilibrium between price and marginal utility derived from that commodity.
So , consumers demand more goods only at a lower price and vice versa.

v. Several uses: some commodities have multiple uses fi price of such commodity
decrease consumer's demand more and more commodity for multiple purpose.
If the price such commodity increase, consumers use the commodity for only
important purpose and quantity in greater amount .As a result when price falls
the quantity demand rises.

Market demand

Market demand is the sum of all the demand of individual

Change in demand

Demand for goods and services do not remains constant all the time. It change with
change in price and other factors the change in demand can be explained in the
following two way

1. Movement along the demand curve.
2. Shift in demand curve

Movement along demand curve
Quantity demanded change due to change in only price is called movement
along the demand curve. It explains same theory as explained by the law of
demand. It explains mainly the two natures of change in demands

a. Extension of demand : when price falls demand rises then the equilibrium
points downward along the same demand curve . It refers to the extension in
demands due to fall in price when is known as extension in demand

b. Contraction of demand: when price rises demand falls then the equilibrium pint
moves upward along the same demand curve . It refers to contraction in demand
due to rise in price which is known as construction of demand
The concept of movement along demand curve is illustrated in following figure

Quantity of demand
Fig : Movement along the demand curve
In the given figure , quantity demanded and price are measured along the X-axis and
Y-axis respectively .DD is the Demand curve. P1 is the initial price ,Q1 is the
corresponding quantity and E1 is the equilibrium point. When price rise from P1 to
P2 the quantity decrease from Q1 to Q2 equilibrium point moves along the demand
curve from E1 to E2 . It shows the contraction on demand . If the price decrease from
P1 to P3 quantity increase from . Equilibrium point moves from E1 to E3 along the
demand curve which is expansion on demand .
Shift in demand curve
Change in demand due to change in various factors other than its price is called shift
in demand curve.
There are two types of shift in demand curve .
1. Rightward shift in demand curve.:- the original curve shift right ward when the
demand increase due to some favorable change in factors other than price .

2. Left ward shift in demand curve: the original demand curve shift leftward when
the demand decrease due to some unfavorable change in factors other than
price

The concept of shit in demand curve can be explained with the help of the
following figure

In the figure , price is shown on Y axis and quantity demanded is shown on X-axis
DD is th initial demand curve which shows the Q quantity demanded at price 'P'.
When the demand curve shift to D2D2 position to Rightwards due to change in
favorable non price factors the demand increase from Q to Q2. If the demand
curve shift to D1D1 position to leftward due to unfavorable change in no price
factor , then quantity of demanded decrease from Q to Q1 .It is the leftward
shit in demand .

Factors causing shit in demand curve
A normal demand curve shit towards left or right due to various factors other
than change in price.
Some major factor which causes shift in demand curve are given below
1. income of consumer
2. price of related goods
3. taste and preference of the consumer
4. price expectation
5. advertisement
6. Technological progress
7. Taxation policy
8. size of population
9. Change in money supply
10. seasonal factor
11.Shortage expectation
12. Custom and tradition
13.Change in fashion , habit

Difference between Movement along demand curve and shift in demand curve

Movement along demand curve shift in demand curve

1. Movement along demand curve is 1. Shift in demand curve is defined
defined as as
the change in price whereas all other the change in non-price
non-price factor remaining same whereas price remaining same

2. Price quantity combination move on 2. Price quantity combination
different points of same demand move on different points of
curve different demand curve

3) price change 3)price remain constant

4. Extension of demand curve represent 4)Rightward shift in demand curve
increase in quantity demanded and represent increase in quantity

contraction of demand curve demanded and leftward shift in
represent decrease in quantity demand curve represent decrease in
demand quantity demand

5. Demand changes according to law of 5)Demand does not change

demand according to law of demand

6. Fig 6 fig

What is law of supply ? Explain the law of supply with
the help of table and diagram .
Supply

the quantity of goods and services that the suppliers are willing and able to
sale in the market at various prices per period of time is called supply. So supply
is not stock of goods services . Supply accepts the current price .
Law of supply
one of the major objective of business people to earn more profit . So they
supply more goods and service at higher price and vice versa .The functional
relationship between t price and quantity of supply is called law of supply . Law
of supply states that " other things remaining same quantity supplied increase
with rise in price and vice versa"
mathematically

Assumption
 No change in number of firm
 No change in state of technology
 No change in government policy ( tax and subsidy)
 No change in price of factors of production
 No change in price expectation
 No change in objectives of the firm

Explanation
The law of supply is further explained with the help of the following table

combination price per kg Quantity
A 10 5
B 20 10
C 30 15

D 40 20
E 50 25
Table : supply schedule
In the schedule , when the per units price of commodity is RS 10 the quantity
supply is 5kg .As price increased to Rs 20 per kg the quantity of supply is
increased from 5 to 10 . As the price increase the quantity of supply also
increase .The table shows the positive relationship between the price and
supply
It can be further explained with the help of a diagram

Quantity supply
fig: law of supply

In the above figure , price and quantity supplied are measure along Y-axis and X-axis
respectively. This figure shows the direct relationship between price and quantity
supplied . SS is the supply curve which is upward slopping from left to right reflecting
law of supply
from above analysis , we can conclude that price of a product and its quantity
supplied are directly related ,other things remaining same.

Exception to the law of supply
The law of supply states that increase in price increase in the supply and vice versa.
But there are some condition under which this law does not hold true .These
condition are called exception or limitation of the law of supply
They are as follows

1. Auction sale :- An auction sale take place at the time when seller is in financial
crisis and needs money at any cost .the sellers becomes ready to sale his goods
at offered price . So it does not follows the law of supply .

2. Perishable goods : Those goods which have very short life time and become
useless after that are called perishable goods such goods must supply in the
market at its right time whatever its price. So, supply of perishable goods does
not follows the law of supply

3. Agricultural goods: supply of agricultural good are governed by the seasons
factors rather than price. So, law of supply does not apply in cause of
agricultural goods:

4. Supply of labor: A person should not wait for increase in price( wages) to
increase his labour supply . He supplies labour at market rate.

5. Others limitation
i. At the time of depression
ii. price expectation
iii. in order to finish old stock( clearance sale)
iv. Fear of fashion out
v. Need cash at present

Change in supply
Supply of goods and services do not remains constant all the time . It change
with change in price and other factors .
The change in supply can be explained in the following two ways.
1. Movement along the supply curve
2. shift in supply curve

movement along the supply curve : change in quantity supply due to change in
only price is called movement along the supply curve . It explain same theory as
law of supply . It explain two nature of change in supply.

a. Extension of supply: when the price increase supply also increase then
equilibrium point moves upward along the same supply curve , it is called
extension of supply.

b. Contraction of supply : when the price decrease supply also decrease then
equilibrium point moves downward along the same supply curve , it is called
contraction of supply.
Movement along the supply curve is shown in the following figure

Quantity of supply

In the given figure, quantity supplied and price are measure along the x-axis
and Y -axis respectively. SS is the supply curve .P1 is the initial price and Q1 is
the initial quantity. E1 is the equilibrium point. If the price rises from P1 to P2
then quantity increase from the Q1 to Q2 and equilibrium points moves from E1
to E2 along the same supply curve. It shows the extension on supply. If the price
decrease from P1 to P3 then the quantity supply decrease from Q1 to Q3 and
equilibrium point moves from E1 to E3 along the same supply curve .It shows the
construction on supply.

Shift in supply

change in supply due to change in factors other than price is called
shift in supply curve. There are two types of shift in supply

a. Rightward shift in supply curve: The original supply curve shift right wards itself
due to favorable change in non price factors( technology, price of related goods,
price of factors of production tax policy) remaining price constant. It is called
right shift in supply curve

b. Leftward shift in supply :The original supply curve shift leftward itself

due to unfavorable change in non-price factors remaining the price

of goods constant , It is called leftward shift in supply curve.

Quantity supply
Fig: Shift in supply curve

In the above figure price is measured along the y-axis. Quantity supplied is
measured along the X-axis . S1S1 Is the initial supply curve which shows Q1
quantity is supplied at the Price P1 .if there is favorable change in non-
price factors then quantity supply change from Q1 to Q3 and equilibrium
point shift from E1 to E3.It is called Right shift in supply curve.
if there is unfavorable change in non-price factors then quantity supply
change from Q1 to Q2 and equilibrium point shift from E1 to E2. It is called
left shift in supply curve.

Difference between Movement along supply curve and shift in supply curve

Movement along supply curve shift in supply curve

1. Movement along supply curve is defined 1. Shift in supply curve is
as defined as

the change in price whereas all other the change in price whereas
non-price factor remaining same all other non-price factor
remaining same
2. Price quantity combination move on
different points of same supply curve 2)Price quantity combination
move on different points of
3) price change different supply curve
4. Extension of supply curve represent
3. Price does not change
increase in quantity supply and
contraction of supply curve represent 4. Right shift of supply curve
decrease in quantity supply. represent increase in quantity
supply and left shit of supply
5. Supply changes according to law of curve represent decrease in
supply quantity supply.

6) fig 1. Supply does not change
according to law of supply

Factors causing shift in supply curve
there are various reasons behind increase and decrease in quantity of supply.
Some of the
Major factors are described below

1. Cost of production : if the cost of production of a particular goods is relatively
higher as compared to market price, the producer profit will be less . So
producer may not increase the supply

2. Numbers of forms in the industry: If there is increase in numbers of firms , it
help to increase in supply in the market

3. Price of related goods: The quantity supply is affected by the price of related
goods. Considering the price of related goods , producer decide the amount of
quantity of supply

4. Government policy : if the government imposes high tax on goods and service it
reduce the supply and supply curves shit to left. Low tax subsidy shift its supply
to the right

5. Change in technology: Modern , latest up to date and effective technology
increase the profit . So it increase the supply

6. Objective of firm: it the objectives of the firm is sales maximum . It increase in
supply.

size of population , infrastructure future expectation of firm are also factors that
cause shift in supply curve

Interaction between the demand and supply curve.( equilibrium
point)

The activities of market are guided by mostly by the demand and supply forces

.Demand of goods are inversely y proportional to price .Supply of goods and

services are directly propositional to the price , other things remaining same

In the free market economy the equilibrium price is determined by the help of
interaction between the demand and supply. Equilibrium is a situation in which
demand and supply are equal .

The concept of intersection between the demand and supply is explained
with the help of the following table

Price(Rs/unit) Quantity Quantity Result
demand supply
10 (units) (units) Excess supply
8 10 50 Excess supply
6 20 40 Quantity of demand=
30 30 quantity of supply
4 Excess demand
2 40 20 Excess demand
50 10

Table: Interaction between demand and supply
The above table shows the inverse relation between price and demand. It also
shows positive relation between price and supply. The equilibrium quantity is 30
units .The equilibrium price is the process of equilibrium price an output
determination is shown in the following figure

Quantity of Demand and supply
fig: interaction between demand and supply
In the above figure quantity of demand and supply are measured along the X-axis
and price is measured along the Y-axis. DD is the demand curve. SS is the supply
curve .E is the equilibrium point. Equilibrium price is 6 and equilibrium quantity is
30 units .

Units 2.2
Elasticity of demand

: elasticity of demand is defined as the proportionate(percentage) change in
quantity divided by the proportionate change in its determinates like price , income
, price of related goods etc.

There are various types of elasticity of demand as its determinants. However there
are three types of demand as they are main determinants of demand whose change
is visible and measurable . They are

1. Price elasticity of demand
2. income elasticity of demand
3. Cross elasticity of demand

What is price elasticity of demand ? Explain its types.
In general elasticity of demand means price elasticity of demand . It is defined as
percentage change in quantity demanded for a product divided by the
percentage change in its price other thing remaining same, it is denoted by
and written as

Where Q=Quantity demand
P= price

The terms other things refers to the income of consumer price of related
goods tase and preference of the consumes etc. . The value of price
elasticity of demand remain always negative because of the negatives slope
of demand curve.
Numerical example
Price quantity demand
20 4
25 2

It shows that 1% increase in price causes 2% decrease in quantity
Types of elasticity of demand

The price elasticity of demand can be classified into five different types on
the basis of their degree.