CBSE Class 12 Economics HOTs All Chapters Set E

UNIT- 1
Introduction

What is microeconomics?

Central problems of an economy, production possibility curve and opportunity cost.

An economy is a system that provides people with the means to work and earn a living in the process of production.

MICROECONOMICS_ It is that branch of economics theory which studies the behavior of individual economics units of the economy i.e. household, individual firms etc.

MACROECONOMICS_ It is that branch of economics theory which studies economy as a whole and behavior of aggregates such as total output, employment level, and aggregates price level.

ECONOMICS PROBLEM_ it is basically the problem of choice which arises because of
(1) Recourses are scarce.
(2) Recourses have alternative uses.

CENTRAL PROBLEM_ It is allocation of resources or making choices among alternative uses of scarce resources. All central problem of an economy arise due to scarcity of resources having alternative uses. Three fundamental central problems are
(1) What to produce
(2) How to produce
(3) For whom to produce

These problems are solved through price mechanism in a capitalist economy and through central planning in a socialist economy.

PRODUCTION POSSIBILITY CURVE- It is a curve which depicts all possible

combinations of two goods which an economy can produce with available technology and full and efficient use of recourses.

OPPORTUNITY COST – It is equal to the value of next best alternative forgone.

MARGINAL OPPORTUNITY COST – MOC of particular good is the amount of other good which is scarf iced to produce an additional unit of that particular good. MOC is also called MARGINAL RATE TRANSFORMATION.

Part A-Introductory Microeconomics

Unit 1: Introduction

Q1 Why the problem of choice arises in an economy?

Q2 What are the two factors which define scarcity?

Q3 Why there is a need for economising of resources?

Q4 What do you mean by a production possibility curve?

Q5 What role PPC has in solving central problems of an economy?

Q6 Give a table showing the production of two commodities with the help of given resources?

Q7 Draw a production possibility curve.

Q8 What does a PPC show?

Q9 If we move from one point to another on PPC, what does it mean?

Q10 Why the production at a point towards left hand side from PPC is not desirable?

Q11 What do you mean by a point below PPC?

Q12 How is it possible to increase the production of one commodity without sacrificing the production of other commodity when all the resources are utilised fully?

Q13 Why do growth of resources and technological advances shift PPC to the right?

Q14 PPC shows the fuller utilisation of resources , then how is it possible to produce more with the help of same resources?

Q15 What is the meaning of growth of resources?

Q16 What is the role of improved technology on a production possibility curve?

Q17 What do you mean by under utilisation of resources?

Q18 If all the resources are not used fully to produce commodities , what is it called?

Q19 Explain the meaning of shift of PPC towards right hand side.

Q20 On which side PPC will shift due to growth of resources?

Q21 How an economy decides that what all should be produced with the help of given resources ?

Q22 In which direction PPC will shift due to a massive unemployment in the country ?

Q23 If some producing units are destroyed because of earthquake in the country, how will it affect the PPC ?

Q24 If number of skilled labour increases in the country, how will it affect PPC ?

UNIT II

CONSUMER’S EQUILIBRIUM WITH UTILITY APPROACH

1. Utility. It is ‘want – satisfying capacity’ of a commodity.

2. Total Utility. It is the sum total of utility derived from the consumption of all units of a commodity. TU = ΣMU

3. Marginal Utility. It is additional utility when one more unit of a commodity is consumed.

MUn = TUn - TUn-1 or MU = ΔTU

ΔQx

4. Law of Diminishing Marginal Utility. It states that marginal utility tends to diminish as more and more units of a commodity are consumed by a consumer.

5. Consumer’s Equilibrium. It is defined as a situation when a consumer maximizes his satisfaction given income and prices.

Equilibrium in case of one commodity X occurs where:

MUx = MUM

Px

Equilibrium in case of two commodities X and Y occurs where :

MUx / Px = MUY /  PY = MUM

Or

MUx / MUY = Px /  PY= MUY 

subject to PX.X + PY . Y = M

6. Price Effect. Price effect (PE) is split into two effects Substitution Effect (SE) and Income Effect (IE). In case of inferior goods, SE is stronger than IE, thus demand curve is downward sloping. In case of giffen goods, IE is stronger than SE, thus demand curve is upward sloping.

CONCEPT OF DEMAND

1. The demand for a commodity is the quantity of the commodity which the consumer is willing to buy at a certain price during any particular period of tme.

2. In economics, demand means effective demand which means there should be desire to own the good, sufficient money to buy it and willingness to spend the money.

3. The determinants of an individual household demand are:

(i)price of the good (PX), (ii) price of related goods (PZ), (iii) income of the consumer (Y), and (iv) tastes and preferences of the consumer (T).

DEMAND AND PRICE

1. The law of demand states that there is an inverse relationship between price and quantity bought of a commodity, ceteris paribus.

2. The consumptions of the law of demand are that PZ, Y and T are constant.

3. The demand schedule gives the data on changes in quantity bought at different prices in a particular time period.

4. Data is plotted on a price – quantity demanded axis to derive the demand curve.

The demand curve slopes downward because of:

i. law of diminishing marginal utility (as given by Marshall),

ii. income effect,

iii. substitution effect, and

iv. new consumers creating demand.

DEMAND AND PRICE OF OTHER GOODS

i. An increase in the price of substitute will increase the demand of the other good or shift the demand curve rightward and the vice versa.

ii. An increase in price of a complementary good will lead to decrease in demand of the other good or shift the demand curve leftward and vice versa.

DEMAND AND INCOME OF THE CONSUMER

i. If the good is a normal good, than an increase in income will increase its demand and vice versa.

ii. If the good is inferior, an increase in income will decrease its demand and vice versa.

CHANGE IN QUANTITY DEMANDED (MOVEMENT) VS. CHANGE IN DEMAND (SHIFT) OF DEMAND CURVE

1. Movement along a demand curve occurs due to changes in the price of the good (Px) itself. Shift of the demand curve occurs due to changes in

i. price of other good (PZ),

ii. income of the consumers (Y)

iii. Tastes of the consumers (T).

2. Movement can be expansion or contraction of demand whereas shift can be increases or decrease in demand.

PRICE ELASTICITY OF DEMAND

Price elasticity of demand (eD) measures percentage change in the quantity demanded of a good due to a percentage change in its price. Therefore, (eD) can be calculated as:

(ed) = Percentage change in demand

Percentage change in price

Or (ed)= ΔQ / ΔP . P /  Q

FACTORS AFFECTINGE ELASTICITY OF DEMAND- the major determinants of price elasticity of demand are:

i. Availability of substitutes

ii. Income of the consumers

iii. Luxuries versus necessities

iv. Proportion of total expenditure spent on the product

v. Number of uses of the commodity

vi. Time period.

MEASUREMENT OF PRICE ELASTICITY OF DEMAND

The three methods of measuring (ed) are:

i. Outlay or expenditure method

ii. Percentage or proportionate method

iii. Geometric or point method.

a. In the outlay method, the (ed) is measured on the basis of change in total expenditure (i.e. P x Q) due to change in the price (i.e. P) of the good. If the price of a good falls and, as a result, total outlay increases then (Ed)>1; if total outlay remains unchanged, then ed = 1; and if total outlay falls, then ed < 1.

b. In the percentage method, Ed is calculated by the formula:

ed = ΔQ / ΔP . P /  Q

c. In the geometric method, eD at a point on a linear (straight) demand curve is calculated as:

ELASTICITY OF DEMAND------

Lower segment of the demand curve / Upper side segment of the demand curve

Or

Ed= Right hand side segment / Left hand side segment

There are five degrees of Ed

i. Perfectly inelastic demand (Ed= 0)

ii. Inelastic demand (0 < Ed< 1)

iii. Unitary elastic demand (Ed= 1)

iv. Elastic demand (1 < Ed< ∞)

v. Perfectly elastic demand (Ed= ∞).