CBSE Class 12 Economics Consumer Equilibrium and Demand Assignment

Important Questions for NCERT Class 12 Economics Consumer Equilibrium and Demand

POINTS TO REMEMBER

❑ Consumer : is an economic agent who consumes final goods and services.
❑ Total utility : It is the sum of satisfaction from consumption of all the units of a commodity at a given time.
❑ Marginal Utility : It is a net increase in total utility by consuming an additional unit of a commodity.
❑ Law of Diminishing Marginal Utility : As consumer consumes more and more units of commodity. The Marginal utility derived from the last each successive units goes on declining.
❑ Consumer’s Bundle : It is a quantitative combination of two goods which can be purchased by a consumer from his given income.
❑ Budget set : It is a quantitative combination of those bundles which a consumer can purchase from his given income at prevailing market prices.
❑ Consumer Budget : It states the real income or purchasing power of the consumer from which he can purchase the certain quantitative bundles of two goods at given price.
❑ Budget Line : Shows those combinations of two goods which a consumer can buy from limited income on same curve.
❑ Monotonic Preferences : Consumer’s preferences are called monotonic when between any two bundles, one bundle has more of one good and no less of other good.
❑ Change in Budget Line : There can be parallel shift (leftwards or rightwards) due to change in income of the consumer.
❑ Marginal Rate of Substitution (MRS) : It is the rate at which a consumer is willing to substitute good X for good y.
MRS = Good x/Good y

❑ Indifference Curve : is a curve showing different combination of two goods, each combinations offering the same level of satisfaction to the consumer.
❑ Properties of Indifference curve :
1. Indifference curves are negatively sloped.
2. Indifference curves are convex to the point of origin.
3. Indifference curves never touch or interesect each other.
4. Higher Indifference curve represents higher level of satisfaction.

❑ Consumer’s Equilibrium : Consumer is in equilibrium when he gets maximum satisfaction from his limited income.

Condition of Consumer’s Equilibrium

(iii) Budget line should be tangent to indifference curve.

❑ Demand : It is that quantity which a consumer purchases or is willing to buy at given price.
❑ Market Demand : It is the sum of total quantity purchased by all the consumers at given price in the market.
❑ Demand Function : It is the functional relationship between the demand of a good and factors affecting demand.
❑ Change in Demand : When demand changes due to change in any one of its determinants other than the price.
❑ Change in Quantity Demanded : When demand changes due to change in its own price.

❑ Total Expenditure Method : It measures price elasticity of demand on the basis of change in total expenditure incurred on the commodity by a household as a result of change in its price.

❑ There are three conditions :
1. If the Total Expenditure on the commodity changes inversely with the price change, the demand is relatively elastic (ed > 1) 2. If the total expenditure on the commodity remains the same as before and after change in price, then demand is said to be unitary elastic (ed = 1)
3. It the total expenditure on the commodity increases with an increase in its price and decreases with a decrease in the price, then demand is relatively inelastic (ed < 1)
❑ Geometric Method : Elasticity of demand at any point is measured by dividing the length of lower segment of the demand curve with the length of upper segment of demand curve at that point.
Ed = Lower segment of the demand curve/Upper segment of the demand curve

Factors affecting Price elasticity of Demand
(a) Behaviour of the consumer
(b) Nature of the commodity
(c) Possibility of postponement of consumption.
(d) Proportion of income to be spent on the commodity
(e) Number of close substitutes
(f) Alternative uses of commodity
(g) Income of the consumer

VERY SHORT ANSWER TYPE QUESTIONS

Question. What do you mean by utility?
Answer: Utility is the want satisfying power of a commodity.

Question. How is total utility derived from marginal utility?
Answer: Total utility is the sum total of marginal utilities of various units of a commodity.
TUn= MU1+MU2+MU3------ +MUn

Question. State the law of equi-marginal utility.
Answer: It states that a consumer gets maximum satisfaction when the ratio of the marginal utilities of two goods and their prices is equal i.e., MUx / Px = MUy / Py

Question. What will you say about MU when TU is maximum?
Answer: MU is zero when TU is maximum

Question. Give the reason behind a convex indifference curve.
Answer: Diminishing marginal rate of substitution.

Question. Give the formula for calculating the slope of the budget line.
Answer: It is equal to the ratio of the prices of the two commodities , i.e., Px / Py

Question. Suppose a consumer’s preferences are monotonic. What can you say about hi preference ranking over the bundles (10,10),(10,9) and (9,9)?
Answer: Consumer will monotonically prefer bundle (10,10) to (10,9) and (9,9) and also prefer bundle (10,9) to (9,9)

Question. A rise in the income of the consumer leads to a fall in the demand for commodity ‘x’. What type of good is commodity ‘x’?
Answer: Inferior good

Question. What do you mean by substitute and complementary goods? Give two examples each.
Answer: Substitute goods are those goods which can be used in place of each other. Ex. Tea and Coffee. Complementary goods are those goods which are used together to satisfy a given want. Ex : Car and petrol.

Question. Mention one factor that causes a leftward shift of the demand curve.
Answer: Fall in income of a consumer.

Question. What causes a movement along the demand curve of a commodity?
Answer: When the price of a commodity changes and other factors remain constant, there will be movement along the demand curve.

Question. What is meant by utility?
Answer: Utility is the power of goods to satisfy human wants.

Question. How is Total utility derived from marginal utilities?
Answer: Total utility is derived by summing up the marginal utilities TU = SMU.

Question. What is Law of Diminishing Marginal Utility?
Answer: 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.

Question. What will be the behaviour of total utility when marginal utility is zero?
Answer: Total utility will be maximum.

Question. State condition of consumer's equilibrium in respect of one good.
Answer: MUX = Px

Question. Define consumers equilibrium.
Answer: Consumers equilibrium refers to a situations in which a consumer gets maximum satisfaction from his given income and market price.

Question. What is meant by Marginal Rate of Substitution (MRS).
Answer: MRS is the rate of sacrifice of one good to get an additional unit of other good.

Question. What is meant by budget set.
Answer: The set of bundles available to the consumer with his given income at prevailing market price is called the budget set.

Question. Define Indifference curve Map.
Answer: A family of indifference curve indicating different levels of satisfaction called indifference map.

Question. How is budget line defined?
Answer: 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.

Question. Why does higher indifference curve give more satisfaction?
Answer: Higher difference curve shows a higher level of satisfactions. It shows the various combinations of excess quantity of both goods than lower indifference curve.

Question. What is the impact of diminishing marginal rate of substitution on the slope of indifference curve?
Answer: Indifference curve become convex towards the origin.

Question. Define monotonic preference.
Answer: Consumer’s preferences are called monotonic when between any two bundles, one bundle has more of one good and no less of other good.

Question. How is market demand schedule derived with the help of individual demand schedules?
Answer: By summations of individual schedules.

Question. Define normal good.
Answer: 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.

Question. How does availability of substitute good affect the elasticity of demand?
Answer: The demand of a good becomes elastic if its substitute good is available in the market/

Question. Demand of good ‘X’ falls due to increase in the income of the consumer what type of good ‘X’ is?
Answer: Good ‘X’ is an inferior good.

Question. What will be the impact on demand of the good due to increase in price of the substitute good?
Answer: The demand of the good will increase.

Question. A rise in price of a good results in a decrease in expenditure of it. Is its demand elastic or inelastic?
Answer: Elastic.

Question. What is meant by market demand?
Answer: Market demand is the sum of total demand of all the consumers in the market at a particular time and at a given price.

Question. Define demand schedule.
Answer: Demand schedule is a tabular representation which represent different quantities of the commodity demanded at different prices.

Question. What cause an upward movement along a demand curve?
Answer: Increase in price while other factors are constant.

Question. If the number of consumers increase, in which direction will the demand curve shift?
Answer: Rightward.

Question. A straight line demand curve is given. What will be elasticity of demand on the mid point of this curve.
Answer: Equal to unit.

Question. If the slope of a demand curve is parallel to X-axis, what will be the elasticity of demand?
Answer: Perfectly elastic.

Question. Why is demand of water inelastic?
Answer: Because water is a necessity good.

Question. Define price elasticity of demand. 
Answer: The price elasticity of demand is the degree of responsiveness of quantity demanded of a commodity to the change in its price.

H.O.T.S.

Question. Why does total utility increases at diminishing rate due to continuous increase in consumption?
Answer: 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.

Question. Due to decrease in price of pen why does the demand of ink increase?
Answer: These are complementary goods.

Question. What will be the behaviour of total utility when marginal utility curve lies below X-axis?
Answer: Total utility start to decline.

Question. When is demand inelastic?
Answer: When percentage change in quantity demanded is less than percentage change in price, the demand is said to be inelastic.

Question. Give two examples of normal goods & inferior goods.
Answer: Normal goods – Rice, Wheat
Inferior goods – coarse grain, coarse cloth.

Key Points for Class 12 Economics Chapter 2 Theory of Consumer Behaviour

Meaning of Demand: Demand of commodity refers to the quantity of a commodity which a consumer is willing to buy at a given price, and time.
Market Demand: Market Demand refers to the sum total of the quantities demanded by all the individual households in the market at various prices in given time.
Demand Function: Demand Function is the functional relationship between demand and factors affecting demand.
Dx = f (Px, Po, Y, T, E)

Factors affecting Demand:- Following are the factors which affect the Demand.
1. Price of Commodity: When the price of commodity rises demand of commodity will decrease and vice-versa.
2. Price of other related commodity: Price of other commodity affect the demand of commodity in two ways:

a) Substitute Goods:- In the case of substitute goods, the demand for a commodity X rises with a rise in the Price of commodity Y and vice versa.
Example- Tea and coffee

b) Complementary Goods:- In case of complementary goods, the demand for a commodity X rises with the fall in the Price of commodity Y and vice versa.
Example: Car and Petrol, Ink and Pen,

3. Income of Consumer: - When the Income of Consumer rises the demand of normal goods increases and if the income decreases the demand of normal good decreases.
In case of Inferior good the demand will decrease with rise in income and increase with decrease in income.

4. Taste and Preference: - If the taste and preference of consumer develop for a commodity the demand will rise.

5. Expectation: - If the consumer expects that price in future will rise the demand will rise and vice-versa

6. Population: - More population, more demand, less population less demand.

7. Climate: - The demand of commodity changes according to the climate.
Law of Demand: - Other things being equal, the demand for a good rises with a decrease in price and decreases with increase in price. 

The table shows when price decreases the demand increases. Demand curve DD shows more quantity (OQ1) and lower Price (OP1)

Inferior Goods: - These are the goods for which demand rises with decreases in income of consumer. In other words income effect is negative.

Giffen Goods: - Those inferior goods whose income effect is negative but price effect is positive.

Change in Quantity demanded: - It is also called movement along a demand curve.
Due to change in its own price, quantity of commodity changes. There are two type of change in quantity of Demand (a) Extension in Demand (b) Contraction in Demand.

Change in Demand: - It is also called shift in demand curve. When quantity of commodity change due to change in factor other than price. It has two typesa) Increase in Demand b) Decrease in Demand

Change in Quantity Demanded Change in Demand
Diagram 

Elasticity of Demand: - The elasticity of demand measures the responsiveness of the quantity demanded due to change in price of the commodity.

Measurement of elasticity of demand:-
Total Expenditure Method/Total outlay method
(i) If no change in total expenditure as change in price than Ed=1
(ii) If total expenditure and price changes in opposite direction Ed>1
(iii) If total expenditure and price changes in same direction Ed<1
Proportionate or Percentage Method: - Under this method elasticity of demand is measured by the ratio of the percentage change in quantity demanded to the percentage in price.
E_d = Percentage change in Quantity Demanded/Percentage change in Price
Ed = ΔQ/ΔP X P/Q P=initial price Q=initial quantity
ΔQ = Change in Quantity ΔP = Change in price
Ex. P Q
   10 100
    15 80   Ed = 20X/5 10/100 =0.4

Geometric Method/ Point Elasticity Method
If elasticity of demand is to be measured on the point of demand curve following formula is to be used
ed = Lowe segment from the point/Upper segment from the point
ed= cb/ca 

Factors effecting elasticity of Demand:-

1. Nature of Goods: - The elasticity of demand is of necessary goods is less than one Ed<1. The elasticity of demand of luxury good is greater than one ed>1. The elasticity of demand of comfort goods is equals to one ed=1

2. Availability of Substitutes:- If the substitutes of goods are available than elasticity of demand is high or elastic demand ed>1 and if the substitutes are not available than demand is in elastic ed<1

3. Postponement of Consumption:- If the consumption of goods cannot be postponement, than elasticity of demand is less than one ed<1 like medicines. If the consumption of goods can be postponed the demand of good is elastic ed>1.

4. Number of Uses:- If the commodity has several uses, than its demand will be elastic ed>1 like milk and if the number of uses of commodity is less than demand of commodity is in elastic ed<1

5. Time period: - Demand is generally inelastic in the short period and more elastic in long run.

6. Habit of consumer:- If consumer is habitual for the consumption of commodity, than the demand will be inelastic ed<1

Degrees of elasticity of Demand: - There is the different degree of elasticity of demand.

1. Perfectly elastic Demand: - When the demand for a commodity rises or falls to any extent, without any change in its price, the demand is said to be perfectly elastic.
Ed=∞ % change in price = 0 Demand curve is parallel to OX axis. 

2. Perfectly Inelastic Demand: - When the demand of a commodity does not change as a result of change in price, it is called perfectly inelastic demand.
ed=0 % change in demand = 0
Demand curve is parallel to OY axis 

3. Unitary Elastic Demand: - When the percentage change in quantity is equal to percentage change in price it is called elastic demand. Ed=1
% change in quantity = % change in price 

4. Inelastic Demand: - When the percentage change in quantity is less then % change in price, it is called inelastic demand.
% change in quantity< % change in price 

5. Elastic Demand: - When the percentage change in quantity is greater than percentage change in price it is called elastic demand.
% Change in quantity > % change in price 

HOTS

Question. Is the demand for the following elastic, moderate elastic, highly elastic? Give reasons.
(i) Demand for petrol
(ii) Demand for text books
(iii) Demand for cars
(iv) Demand for milk
Answer: i) Demand for petrol is moderately elastic , because when the price of the petrol goes up , the consumer will reduce the use of it.
ii) Demand for text books is completely inelastic. In case of text books, even a substantial change in price leaves the demand unaffected.
iii) Demand for cars is elastic. It is a luxury good, when the price of the car rises, the demand for the car comes down.
iv) Demand for milk is elastic, because price of the milk increases then the consumer purchase less quantity milk.

Question. Explain the various degrees of price elasticity of demand with the help of diagrams.
Answer: There are five degrees of price elasticity of demand. They are,
a) Perfectly elastic demand (Ed=∞):- a slight or no change in the price leads to infinite changes in the quantity demanded.
b) Perfectly Inelastic demand (Ed=0) :- Demand of a commodity does not change at all irrespective of any change in its price.
c) Unitary elastic demand (Ed=1):- When the percentage change in demand (%) of a commodity is equal to the percentage change in price.
d) Greater than unitary elastic demand (Ed>1):- When percentage change in demand of a commodity is more than the percentage change in its price.
e) Less than unitary elastic demand (Ed<1) :- When percentage change in demand of a commodity is less than the percentage change in its price.

Numerical for practice

Question. Derive the total utility schedule from the marginal utility.
Answer:
Units consumed   Marginal utility
 1                          12
 2                          11
 3                           8
 4                           6
 5                           3
 6                           0

Question. A consumer buys 50 units of a good at Rs. 4/- per unit. When its price falls by 25 percent its demand rises to 100 units. Find out the price elasticity of demand.
Answer: Ed=4

Question. Price elasticity of demand for wheat is equal to unity and a household demands 40 Kg of wheat when the price is Rs.1 per kg. At what price will the household demand 36 kg of wheat?
Answer: The price of wheat rises to Rs.1.10 per kg.

Question. The quantity demanded of a commodity at a price of Rs.10 per unit is 40 units.
Its price elasticity of demand is -2. Its price falls by Rs.2/- per unit. Calculate its quantity demanded at the new price.
Answer: 56 units.

Production Function

Production Function: - It is defined as the functional relationship between input and output for a given state of technique.
Q= f (L, K….)

Total Product:- The total quantity of goods produced by a firm during a given period of time with given inputs. TP=ΣMP

Average Product:- The output per unit variable input. AP=TP/Q

Marginal Product:- The change in total output by using one more unit of variable factor .
MP_n = TP_n – TP_n-1 MP =

Return to a factor: - It is operated in short run period. If some factors are constant and by increasing the quantity of variable factor resulting output is affected. The effect on
output is called returns to factor.

Law of variable proportion: this law state that as we increase the quantity of only one input keeping other input constant initially MP increases than decreases and ultimately become negative.

In stage I TP increases between O to M at an increasing rate and M P increase
In stage II, TP continues to increases at a diminishing rate and reaches the maximum at T, MP continues to decreases and become zero In stage III, TP begins to fall, MP is negative, Causes of Application of the Law of Variable Proportions.
1. Indivisibility of factors.
2. Division of Labour and specialization.
3. More than optimum use of the fixed factors.
4. Imperfect substitutes.

Relationship between TP and MP Curves:
1. MP curve is the slope of TP curve at each point.
2. When TP increases at an increasing rate, MP increases.
3. When TP increases at a diminishing rate, MP decreases.
4. When TP is maximum MP is zero.
5. When TP decrease, MP is negative.

Relationship between AP and MP
1. When MP>AP, AP increases
2. When MP = AP, AP is maximum
3. When MP<AP, AP decreases
4. MP can be zero or negative but AP is never zero
5. MP reaches its maximum point earlier than AP reaches its own.

HOTS

Question. When there are diminishing returns to a factor, total product always decreases.
Answer: False, as TPP increases at a decreasing rate when there is diminishing returns to a factor.

Question. TPP increases only when MPP increases.
Answer: False, TPP also increases when MPP decreases but remains positive.

Question. Increase in TPP always indicates that there are increasing returns to a factor.
Answer: False . TPP increases even when there are diminishing returns to a factor.

Question. When there are diminishing returns to a factor marginal and total products always fall.
Answer: False, only MPP falls, not TPP. In case of diminishing returns to a factor TPP increase at diminishing rate.

Question. Calculate MP for the following.

Answer: MP: 0 5 8 10 5 0 -4

Cost concept

Cost:- The expenditure incurred on various inputs is known as the cost of production.

Types of Cost
1. Money Cost:- Total money expenses by a firm for producing a commodity.
2. Explicit Cost and Implicit Cost:- Actual payment made to outsiders is Explicit Cost.
Cost of self-supplied factors in implicit cost.
3. Real Cost:- All the pain, sacrifices, discomforts involved in producing factor services to produce commodity.
4. Opportunity Cost: - It is the cost of next best alternative foregone.
5. Short Run Cost:-
I. Fixed Cost: - Cost of fixed factors.
II. Variable Cost: - Cost of variable factors

Diagram 

Relationship between AC, MC & AVC 

1. When MC is less than AC than AC tends to fall.
2. When MC is equal to AC than AC is minimum.
3. When MC is more than AC than AC tends to increase

HOTS

Question. Why AFC curve never touches „x‟ axis though lies very close to x axis?
Answer: Because TFC can never be zero.

Question. Why AVC and AFC always lie below AC?
Answer: AC is the summation of AVC & AFC so AC always lies above AVC & AFC.

Question. Why TVC curve start from origin?
Answer: TVC is zero at zero level of output.

Question. When TVC is zero at zero level of output, what happens to TFC or Why TFC is not zero at zero level of output?
Answer: Fixed cost are to be incurred even at zero level of output.

HOTS

Question. Marginal cost includes both fixed cost and variable cost. Comment. 
Answer: No, marginal cost is only variable cost; it does not include fixed cost. Because, marginal cost is additional cost and additional cost cannot be fixed cost.

Question. ATC must fall simply because AFC always falls. Comment.
Answer: No, it is not correct. ATC = AFC +AVC. Being a component of ATC, falling AFC implies falling ATC. But this is true only in the initial stages of production when average fixed cost is a significant component of AC. In the later stages of production, average fixed cost (because it is continuously falling) reduces to an insignificant component of AC. Accordingly AC tends to rise in assonance with rising AVC, even when AFC tends to fall.

Question. TC is not the sum total of marginal cost (TC ≠ ∑MC) Why?
Answer: MC is additional cost. Additional cost can only be variable cost. Accordingly sum total of marginal cost will be total variable cost, not total cost (which includes both variable cost and fixed cost). 

Question. Complete the following table when fixed cost is Rs 100. 
Answer: 

Question. Explain the relation between AC and MC with the help of a diagram. 
Answer: The relation between AC and MC is explained with the help of a diagram as under: 

Observations:
(i) When AC declines, MC declines faster than AC. So that MC curve remains below AC curve. Implying that AC > MC. In the figure, AC curve is falling till point E and MC continues to be lower than AC. 
(ii) When AC increases, MC increases faster than AC. So that MC curve is above the AC
curve. Implying that AC < MC. In the figure, AC start rising from point E and beyond E, MC is higher than AC.
(iii) MC curve cuts AC curve from its lowest point. When average curve is minimum then MC = AC. In the figure, MC curve is intersecting AC curve at its lowest or minimum point E.

Very Short Answer Type Questions

 

Question. Explain relationship between total utility and marginal utility with the help of a schedule.

Answer

.

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.

 

Question. 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?
Answer. 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.There will be no shifts in the demand curve.
c. 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.

 

Question. If a good can be used for many purposes, the demand for it will be elastic. Why?
Answer. 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.