Ans. When demand increases at given price then it is called ‘increase in demand’. On the other hand, when demand increases by decrease in the price of a commodity then it is called increase in quantity demand.
Ans. Consumer purchases upto the point where marginal utility is equal to the price (MU=P). So long as marginal utility is greater than price, he keeps on purchasing. As he makes purchases MU falls and at a particular quantity of the good MU becomes equal to price. Consumer purchases upto this point.
Ans. There are two conditions of consumer equilibrium :
Explanation :
If, the consumer is not in equilibrium because he
Similarly if MUX/PX MUY/PY the consumer is not in equilibrium as he can raise his total utility by buying less of X and more of Y.
(ii) MU falls as consumption increases : If MU does not fall as consumption increases the consumer will end up buying only good which is unrealistic or consumer will never reach the equilibrium position.
Q.4 Explain how the demand for a good is affected by the price of its related goods. Give examples.
Ans. Related goods are either substitutes or complementary
Substitutes Goods : When price of a substitude falls, it becomes cheaper than the given good. So the consumer substitutes it for given good will decrease. Similarly, a rise in the price of substitute will result in increase in the demand for given good. For example Tea and Coffee.
Complementary Goods : When the price of a complementary good falls its demand rises and the demand for the given good will increase.
Similarly when price of complementary good increases, then demand for given good decreases. For example : – Car & Petrol.
Q.5 Distinguish between normal goods and inferior goods. Give example also.
Ans. Normal Goods : These are the goods the demand for which increases as income of the buyer rises. There is a positive relationship between income and demand or income effect is positive. Example ; Rice, Wheat
Inferior Goods : These are the goods the demand for which decreases as income of buyer rises. Thus, there is negative relationship between income and demand or income effect is negative.Example : coarse grain, coarse cloth.
Q.6 Explain any four factors that affect price elasticity of demand.
Ans. 1. Nature of Commodity : Necessories like Salt, Kerosene oil etc. have inelastic demand and luxuries have elastic demand.
2. Availability of substitutes : Demand for goods which have close substitudes is relatively more elastic and goods without close substitutes have less elastic demand.
3. Different uses : Commodities that can be put to different uses have elastic demand for instance electricity has different uses.
4. Habit of the consumer : Goods to which consumers become habitual will have inelastic demand. Examples – Liquor and Cigarette.
Q.7 Explain relationship between total utility and marginal utility with the help of a schedule.
Ans.
(1) As long as 18 MU is positive, TU increases. – 2
(2)When marginal utility is equal to zero then total utility is maximum. (3) When marginal util[ity is negative; Total utility starts diminishing.
Q.8 Define marginal utility. State the law of diminishing merginal utility.
Ans. Marginal Utility : It is addition more to the total utility as consumption is increased by one more unit of the commodity.
Law of Diminishing Merginal utility : It states that as consumer consumes more and more units of a commodity, the utility derived from each successive unit goes on decreasing. According to this law TU increases at decreasing rate and MU decreases.
6 MARKS QUESTIONS
Q.1 Explain the three properties of indifference curves.
Ans. Three properties of indifference curves are as follow.
1. Slopes downward from left to right : To consume more of one good the consumer must give up some quantity of the other good so that total utility remains the same.
2. Convex towards the origin : MRS declines continuously due to the operation of the law of diminishing marginal utility.
3. Higher indifference curves represents higher utility : Higher indifference curve represent large bundle of goods. Which means more utility because of monotoric preference.
Q.2 Explain the conditions of consumer’s equilibrium using indifference curve analysis. Use diagram.
Ans. There are two conditions for consumer’s equilibrium.
(i) MRS =PX/PY
(ii) MRS is continuously falling.
Explanation
Suppose there are two goods X and Y. the first condition of consumer’s equilibrium is MRS =
If MRS . It means consumer values X more than what market values & willing to give more price than market price he will purchase more of X this cause fall in MRS and it will continue upto that when MRS = PX/PY
If MRS . It means consumer values X less than what market values. Consumer is willing to give less price as market price & he will purchase less of X, by this MRS will increase and it will continue till MRS = PX/PY
(ii) Unless the MRS is continuously falling the equality between the MRS and will not be achieved.
