ECONOMICS

1) Importance of Statistics in Economics?

Statistics play an important role in Economics.

i. National income accounts are multipurpose indicators for the
economists and administrators.
ii. In Economics research statistical methods are used for collecting and
analysis the data and testing hypothesis.
iii. The relationship between supply and demand is studied by statistical
methods, the imports and exports, the inflation rate, the per capita income
are the problems which require a good knowledge of Statistics.
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2) Drawbacks of Statistics?

(i) Statistics does not study about individuals : Statistics are expressed in
facts. It does not study individuals.

(ii) It does not study the qualitative aspect of problem : The most
important condition of statistical study is that subject of investigation and
inquiry should be capable of being qualitatively measured. For example,
honesty, poverty, etc.
(iii) Statistics can be misused: The result obtained can be manipulated
accordingly to one’s own interest and such manipulated results can
mislead the community.
(iv) Statistical results lack mathematical accuracy: The results drawn
from statistical analysis are normally in approximates. As the satistical
analysis is based on observation of mass data, number of inaccuracies
may be present and it is difficult to rectify them.
(v) Uniformity and homogeneity of data : It is essential that data must
have the quality of uniformity and homogeneity. Heterogeneous data are
not comparable.
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3) Functions of Statistics?
Functions or Uses of Statistics

(1) Statistics helps in providing a better understanding and exact

description of a phenomenon of nature.

(2) Statistics helps in the proper and efficient planning of a statistical

inquiry in any field of study.

(3) Statistics helps in collecting appropriate quantitative data.

(4) Statistics helps in presenting complex data in a suitable tabular,

diagrammatic and graphic form for easy and clear comprehension of the
data.

(5) Statistics helps in understanding the nature and pattern of variability

of a phenomenon through quantitative obersevations.

(6) Statistics helps in drawing valid inferences, along with a measure of

their reliability about the population parameters from the sample data.

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4) Define Statistics?

Statistics is a branch that deals with every aspect of the data. Statistical
knowledge helps to choose the proper method of collecting the data and
employ those samples in the correct analysis process in order to
effectively produce the results. In short, statistics is a crucial process
which helps to make the decision based on the data.
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5)Distinguish between Primary and Secondary data?

S.NO Primary Data Secondary Data

Primary data is the first data Whereas secondary data is a

1. collected by a researcher for the data that is already collected
first time. by someone earlier.

Primary data is called real-time While this is not real-time

2.
data. data, it is related to the past.

While collecting secondary

The process is very much
data it does not involve much
3. involved in collecting primary
process but rather quickly and
data.
easily.

4. Primary data is expensive. While it is economical.

While secondary data takes

The primary data takes long
5. shorter time than primary data
time for collection.
for collection.

Primary data is available in While it is available in

6.
crude form. processed or refined form.

Primary data is more accurate While it is less accurate than

7.
than secondary data. primary data.

Primary data is more reliable While secondary data is less

8.
than secondary data. reliable than primary data.

There is also difficulty in While there is no difficulty in

9.
collecting data. collecting data.

10. The sources from which The sources from which

primary data is collected are secondary data is collected
S.NO Primary Data Secondary Data

through surveys, experiments, are websites, government

observations, personal publications, journals, articles
interviews etc. etc.

The data collected may or

The data is always specific to
11. may not be specific to the
the researcher’s need.
researcher’s need.
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6) Distinguish between census and sample?
Census Sampling
Involves collecting data from Involves collecting data from a
every single member of a subset or a selected group of the
population population
Requires a large amount of Requires fewer resources and is
resources and time to conduct the quicker to conduct as it only
survey and gather data involves a specific group of the
population
Provides a complete and accurate Provides an estimate or a
representation of the population general idea of the population
as it covers all the members based on the sample selected
Can be more expensive than Is generally less expensive than
sampling as it involves collecting a census as it only involves a
data from every member of the specific group of the population
population
Can be useful for small Can be useful for large
populations or when detailed populations or when a general
information is needed about the overview is needed about the
whole population population
The margin of error is typically The margin of error is typically
very small as it covers the whole larger than a census as the
population sample size is smaller than the
population size
7) Merits and Demerits of Direct Personal and Indirect Oral
Investigations?

Direct Personal Investigations

In direct personal invertigation, the investigator obtains the first-hand

information from the respondents themselves. He personally visits the
respondents to collect the data.

Merits:

Reliable and accurate data collected

Flexibility for questions
Additional informations can also be collected

Demerits:

It is a time consuming process

Cannot be done for wide area location
It cost more

Indirect Oral Investigation

Indirect Oral investigation is the method in which the data is collected by

the investigator by interviewing orally the persons close to the original
incidence. It is used when the original persons are not available to give
information or when they are reluctant to give information. The below
are the merits and demerits of indirect oral investigation.

Merits:
(i) A wide area can be covered by interviewing several people.

(ii) The cost and energy for the investigation is less. It even takes less
time

(iii) Its simple and convenient

Demerits:

(i) The degree of accuracy of information is less.

(ii) This method leads to doubtful, conclusion due to ignorance and

carelessness of the witness.
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8) Procedure in preparation of questionnaire?

Steps in Making a Questionnaire

Identify a theme- With a theme, you can specify what data needs to be
gathered and how these may be acquired in the form of a question.

Ask simple questions - Be as specific as possible. Your respondents need

to be able to answer each question without much deliberation.

Ask the same question in different ways - There’s always a chance that
your respondent may be answering the questionnaire absentmindedly. To
assess the reliability of such response, ask the same question several
times but in different ways.

Choose a delivery method - If you want to reach a wider audience, you

can distribute your questionnaires through various social networks.
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9)Rules in the construction of table and graphs?

Rule for the construction of a good table:

(i) Heading - Headings should generally be written in the singular form.

(ii) Abbreviations - Use of abbreviations should be avoided in the
heading or sub-headings of the table.
(iii) Footnote - This should be given, only if needed.

(iv) Total - In the table, sub-totals of the items must be given at the end
of each row.

Rules for Graphical Representation of Data:

There are certain rules to effectively represent the information in

graphical form. Certain rules are discussed below:

a)Title: One has to make sure that a suitable title is given to the graph
which indicates the presentation subject.

b) Scale: It should be used efficiently to represent data in an accurate

manner.
c) Measurement unit: It is used to calculate the distance between the box

d) Index: Differentiate appropriate colors, shades, and design I graph for

a better understanding of the information conveyed.

e)Data sources: Include the source of information at the bottom graph

wherever necessary. It adds to the authenticity of the information.

f) Keep it simple: Construct the graph in an easy to understand manner

and keep it simple for the reader to understand. Looking at the graph the
information portrayed is easily understandable.
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10) Difference between discrete and continuous distribution?

Discrete Distribution Vs Continuous Distribution

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11)Draw Graph Ogive, Histogram and Pie diagram?

Ogive

Draw 'less than' and 'more than' ogive curves from the following data:
0− 5−1 10−1 15−2 20−2 25−3 30−3 35−4
Marks
5 0 5 0 5 0 5 0
Number
of
7 10 20 13 12 19 14 9
Student
s
Solution

(i) For constructing a less than ogive, first the given frequency
distribution must be converted into a less than cumulative frequency
distribution as follows.
Cumulative
Marks
Frequency
Less than 5 7
Less than 10 7 + 10 = 17
Less than 15 17 + 20 = 37
Less than 20 37 + 13 = 50
Less than 25 50 + 12 = 62
Less than 30 62 + 19 = 81
Less than 35 81 + 14 = 95
Less than 40 95 + 9 = 104
We now plot the cumulative frequencies against the upper limit of the
class intervals. The curve obtained on joining the points so plotted is
known as the less than ogive.
(ii) For constructing a less than ogive, first the given frequency
distribution is converted into a more than cumulative frequency
distribution as follows.
Cumulative
Marks
Frequency
More than 0 104
More than 5 104 − 7 = 97
More than 10 97 − 10 = 87
More than 15 87 − 20 = 67
More than 20 67 − 13 = 54
More than 25 54 − 12 = 42
More than 30 42 − 19 = 23
More than 35 23 − 14 = 9
More than 40 9−9=0

We now plot the cumulative frequencies against the lower limit of the
class intervals. The curve obtained on joining the points so plotted is
known as the more than ogive.
Pie Diagram

The following table shows the expenditure in percentage incurred on the

construction of a house in a city:
BRIC CEMEN STEE LABOU
ITEM MISCELLANEOS
K T L R
Expenditure (in
18% 30% 10% 12% 30%
percentage)
Draw a pie chart for the above data.

Solution:
Total percentage = 100
Central angle for a component = (Value of the component / Sum of the
values of all components) * 360°

Calculation of central angles:

EXPENDITURE (IN
ITEM CENTRAL ANGLE
PERCENTAGE)
((18 / 100) * 360°) =
Brick 18%
64.8°
((30 / 100) * 360°) =
Cement 30%
108°
((10 / 100) * 360°) =
Steel 10%
36°
((12 / 100) * 360° =
Labour 12%
43.2°
((30 / 100) * 360°) =
Miscellaneous 30%
108°
Thus, we obtain the required pie chart, shown in the above figure.

Histogram

Number
Daily
of wage
Earnings
earners
0−20 37
20−40 50
40−60 70
60−80 25
80−100 10
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12 )Mean and Median – Individual, Discrete and Continuous?

Individual Series – Mean

Calculate Arithmetic Mean for the following individual data −

Items 14 36 45 70 105

Solution −
Based on the above mentioned formula, Arithmetic Mean x¯will be –

x¯=(14+36+45+70+105)/5

=270/5
=54
The Arithmetic Mean of the given numbers is 54.
Continuous Series- Mean

Let's calculate Arithmetic Mean for the following continuous data −

Items 0-10 10-20 20-30 30-40
Frequency 2 5 1 3

Solution −
Based on the given data, we have –

Mid-pt Frequency
Items Fm
m f
0-10 5 2 10
10-20 15 5 75
20-30 25 1 25
30-40 35 3 105
N=11 ∑fm=215
Based on the above mentioned formula, Arithmetic Mean x¯will be –

x¯=215/11=19.54
The Arithmetic Mean of the given numbers is 19.54.
Discrete Series -Mean

Calculate Arithmetic Mean for the following discrete data −

Items 14 36 45 70
Frequency 2 5 1 3

Solution −

Based on the given data, we have −

Frequency
Items Fx
f
14 2 28
36 5 180
45 1 45
70 3 210
N=11 ∑fx=463
Based on the above mentioned formula, Arithmetic Mean x¯ will be −
x¯=463/11=42.09
The Arithmetic Mean of the given numbers is 42.09.

Individual Series -Median

Let's calculate Arithmetic Median for the following individual data −

Items 14 36 45 70 105 145
Solution −

Based on the above mentioned formula, Arithmetic Median M will be −

M=Value of ((N+1)/2)th item.

=Value of ((6+1)/2)th item.
=Value of 3.5th item.
=Value of ((3rd item + 4th item)/2)=((45 + 70)/2)=57.5
The Arithmetic Median of the given numbers is 57.5.

Continuous Series of Median

Solution:

Hence, the median lies in the class 15-20.

l1 = 15, f = 8, i = 5, c.f. = 12
Now apply the following formula:

Median= 16.875
Discrete Series of Median

Calculate the median of the following data:

Solution:

= Size of 25th item

Since the 25th item falls under the cumulative frequency 27 and the size
of the distribution against this cf value is 2500.

Median = 2,500

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13) Mode – Individual and Continuous?

Individual Observations:

Calculate the mode from the data given below showing the marks
obtained by 10 students.
75, 80, 82, 76, 82, 74, 75, 79, 82, 70

Solution:
The mode here is 82 as it appears with the highest frequency.

Continuous Series:

Mode for a data in the form of a continuous series is calculated using

the formula

Calculate the mode from the data given below pertaining to the marks
obtained by the students in a test.
Solution:
By observation, it is known that the modal class is 40 – 50 as this class
has the highest frequency.

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14 )Merits and Demerits of Mean, Median and Mode – 3 points
each?

MEAN

The arithmetic mean (or simply "mean") of a sample is the sum of the
sampled values divided by the number of items in the sample.

MERITS OF ARITHEMETIC MEAN

a) ARITHEMETIC MEAN RIGIDLY DEFINED BY ALGEBRIC
FORMULA
b) It is easy to calculate and simple to understand
c) IT BASED ON ALL OBSERVATIONS AND IT CAN BE
REGARDED AS REPRESENTATIVE OF THE GIVEN DATA

DEMERITS OF ARITHMETIC MEAN

a) It can neither be determined by inspection or by graphical location
b) Arithmetic mean cannot be computed for qualitative data like data on
intelligence honesty and smoking habit etc
c) It is too much affected by extreme observations and hence it is not
adequately represent data consisting of some extreme point

Median:

The median is that value of the series which divides the group into two
equal parts, one part comprising all values greater than the median value
and the other part comprising all the values smaller than the median
value.

Merits of median

(1) Simplicity:- It is very simple measure of the central tendency of the

series. I the case of simple statistical series, just a glance at the data is
enough to locate the median value.

(2) Free from the effect of extreme values: - Unlike arithmetic mean,
median value is not destroyed by the extreme values of the series.

(3) Certainty: - Certainty is another merits is the median. Median values

are always a certain specific value in the series.

Demerits of median:

Following are the various demerits of median:

(1) Lack of representative character: - Median fails to be a representative

measure in case of such series the different values of which are wide
apart from each other. Also, median is of limited representative character
as it is not based on all the items in the series.

(2) Unrealistic:- When the median is located somewhere between the two
middle values, it remains only an approximate measure, not a precise
value.

(3) Lack of algebraic treatment: - Arithmetic mean is capable of further

algebraic treatment, but median is not. For example, multiplying the
median with the number of items in the series will not give us the sum
total of the values of the series.

Mode:

The value of the variable which occurs most frequently in a distribution

is called the mode.

Merits of mode:

Following are the various merits of mode:

(1) Simple and popular: - Mode is very simple measure of central

tendency. Sometimes, just at the series is enough to locate the model
value. Because of its simplicity, it s a very popular measure of the central
tendency.

(2) Less effect of marginal values: - Compared top mean, mode is less
affected by marginal values in the series. Mode is determined only by the
value with highest frequencies.

(3) Graphic presentation:- Mode can be located graphically, with the help
of histogram.

Demerits of mode:

Following are the various demerits of mode:

(1) Uncertain and vague: - Mode is an uncertain and vague measure of

the central tendency.

(2) Not capable of algebraic treatment: - Unlike mean, mode is not

capable of further algebraic treatment.

(3) Difficult: - With frequencies of all items are identical, it is difficult to

identify the modal value.
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15) Scatter diagram – Merits and Demerits?

Merits of Scatter Diagram

1. Simplicity: It is a simple and non-mathematical method of studying the

correlation between the two variables.
2. Easily understandable: It can be easily understood and interpreted. It
enables us to know the presence or absence of correlation at a single
glance of the diagram.
3. Not affected by extreme items: It is not influenced by the size of
extreme values, whereas most of the mathematical methods lack this
quality.
4. First Step: It is a step in investigating the relationship between two
variables.
Demerits of Scatter Diagram
1. Non-mathematical method: This method does not indicate the exact
numerical value of correlation which is possible by other mathematical
methods of correlation.
2. Rough Measure: It gives only a broad and rough idea of the degree and
nature of the correlation between two variables. Thus, it is only a
qualitative expression rather than a quantitative expression.
3. Unsuitable for large observations: It is not possible to draw a scatter
diagram on a graph paper in case of more than two variables.

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16) Karl Pearson and Rank Correlation? (Ranks given and not
given)?
Rank Coefficient of Correlation is the method of determination of
coefficient of correlation. It is also named Spearman’s Coefficient of
Correlation. It measures the linear association between ranks assigned to
individual items according to their attributes. Attributes are those
variables that cannot be numerically measured such as intelligence of
people, physical appearance, honesty, etc.

It is developed by British psychologist Charles Edward Spearman. It is

used when the variables cannot be measured meaningfully as in the case
of quantitative variables such as price, income, weight, etc. Basically, it
is used when values are expressed qualitatively.

Karl Pearson’s Coefficient of Correlation:

Karl Pearson’s Coefficient of Correlation (or Product moment
correlation or simple correlation coefficient or covariance method ) is
based upon the arithmetic mean and the standard deviation.
According to Karl Pearson, the correlation coefficient of two variables
is obtained by dividing the sum of the products of the corresponding
deviations of the various items of two series from the respective means
by the product of their standard deviations and the number of pairs of
observation. Basically, it is based on the covariance of the concerned
variables.
17 )Explain Consumer Price Index (CPI)?

The index reflecting the average increase in the cost of the commodities
consumed by a class of people and helping them maintain the same
standard of living in the current year as in the base year is known
as Consumer Price Index (CPI). The main aim behind their design is the
measurement of the effects of change in the prices of a basket of goods
and services on the purchasing power of a specific section of society
during the current period with respect to the base period. Other names
for Consumer Price Index are Cost of Living Index Numbers, Price of
Living Index Numbers, and Retail Price Index Numbers.
Why is Consumer Price Index needed?

One needs to measure the Consumer Price Index because other general
index numbers do not show the effect of the change in prices of
different commodities on the cost of living of different classes of people
consuming these items. Besides, different classes of people consume a
different variety of commodities. Also, it is not necessary that the same
commodity is consumed in the same proportion by different classes of
people. Therefore, to study the effect of change in prices of different
types of commodities, Consumer Price Index Numbers are constructed
separately for different classes of people.
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18 ) What is Index Number in Statistics and its uses?

In the study of statistics, index numbers are the utmost requisite.

Imagine how it would be without these numbers while you change the
variable in the estimation of any particular statistics! The procedure itself
will turn out to be completely ineffective. Thus, index numbers are the
measurement of any change in a variable or variables across a determined
period. These numbers show a general relative change and not a direct
measurable figure. An index number is expressed in the percentage form.
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Uses of Index Number in Statistics

Index numbers are useful in many basic to complicated studies. Like it is
used in the basic study of human population in a country and also it is
used to determine the extinction rate of the rare animals in a particular
region. There are many more usages of Index Numbers, let us find out:
It helps in measuring changes in the standard of living as well as the price
level.
Wage rate regulation is consistent with the changes in the price level.
With the determination of price levels, wage rates may be revised.
Government policies are framed following the index number of prices.
This price stability inherent to fiscal and economic policies is based on
index numbers.
It gives a pointer for international comparison concerning different
economic variables—for instance, living standards between two
countries.
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19 )Explain Simple Aggregative Method with calculation in Index
Number?

Under this method, the price index for a given period is obtained by
dividing the aggregate of different prices of the current year by the
aggregate of different prices of the base year, and multiplying the
quotient by 100. As such, the price index, under this method, is computed
by the formula,
P01 = ( ∑P1/∑P0 ) X 100
Where, P01 = Price index of the current year with reference to the base
year
∑P1 = total of the prices of the current year
∑P0 = total of the prices of the base year.

The merits and demerits of this method can be outlined as under:

Merits

It is very to understand.
It is very simple calculate.
Demerits

It is affected by the magnitude of the prices of the different commodities.

It is influenced by the units of the articles through which the prices are
quoted.
It is based on the assumption that the various items and their prices are
expressed in the same unit.
It ignores the relative importance of the different commodities included
in the index number.
It is not capable of being calculated through other averages viz.
geometric mean, median etc. than the arithmetic mean only.

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20) Difficulties in Construction of Index Numbers?

The production of index numbers is fraught with challenges. Following
are the difficulties faced in the Construction of Index Numbers –

1. Difficulties in Choosing a Base Period:

The first challenge is determining which year to use as the starting point.
The foundation year must be standard. However, determining a causal
year is tough. Furthermore, a typical year now becomes abnormal after a
certain amount of time. As a result, having the same base period for
several years is not recommended.

2. Problem in Commodity Selection:

Another challenge is selecting the index number’s representative
commodities. The selection is not a simple task. They must be chosen
from a diverse range of things that are consumed. Consumer
consumption patterns may change, rendering the number of indexes
obsolete. As a result, selecting representative commodities involves
significant challenges.

3. Problems in Price Compendium:

Another challenge is obtaining enough and correct value. It’s not always
possible to obtain from the same location. Furthermore, the issue of
deciding middle prices arises. The retail cost differs greatly. As a result,
wholesale prices are calculated using index numbers.

4. Difficulty in Choosing a Statistical Approach:

Another challenge is deciding on a suitable approach for calculating
averages. However, each strategy produces a unique set of findings. As a
result, deciding which strategy to use is challenging.

5. Difficulties Resulting from Changes Over Time:

In today’s world, changes in commodities occur on a continuous basis
because of technological advancements. So, consumers begin to consume
them, and instead of the old, new commodities are introduced.
Furthermore, commodity prices may fluctuate because of technological
advancements. They might fall. However, when calculating the index
numbers, new commodities are not added to the list of commodities. As a
result, the index figures based on ancient commodities are unreal.

6. It is not possible to make a comparison:

Index numbers do not allow for international pricing comparisons. The
goods consumed and included in the calculation of an index number vary
by country. Meat, eggs, automobiles, and electrical appliances, for
example, are included in advanced countries’ price indices but not in
backward countries. Similarly, the weights allocated to goods differ. As a
result, international comparisons of index numbers are impossible.

7. It is not possible to make comparisons between different locations:

Even if various locations within a country are chosen, the same index
number cannot be assigned to them. This is due to variances in people’s
consumption habits. Individuals in the northern part of India consume
different commodities than people in the southern portion of India. As a
result, applying the same index number to both is incorrect.

8. Not Appropriate to Individuals:

An index number is not applicable to a single person who is a member of
the group it was created. A person may not be affected if there is a rise in
the price level index number shows. This is since an index number
reflects averages.
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21) Economic Problem and Central Problem?

Central problems of an economy are. What to produce, How to produce, and

For whom to produce.
'What to produce' relates to the problem of choice of goods and services to be
produced.
'How to produce' relates to the choice of technique of production. It involves a
choice between labor-intensive technique and capital - intensive technique.
'For whom to produce' relates to the distribution of goods and services across
different sections of society. It focuses on the issue of Economic Equality.

Economic problem – The problem of choice that arises due to

multiplicity of wants and scarcity of resources is called economic
problem.

The main reasons for arising economic problems are as follows -i.
Unlimited wants - Human wants are many in numbers and recurring in
nature. A man can not satisfy all of his wants and therefore it has to make
a choice in order of priority/urgency.
ii. Limited resources - The resources are limited in relation to need for
them. Therefore it has to make a choice that how to use the resources.

iii. Alternative use of resources - A resource can be utilised in a different

way and for different purposes. Therefore choice has to be made among
different uses of resources.
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22) Right side and Left side shift of PPC?

Rightward Shift in PPC:

A rightward shift in the Production Possibility Curve (PPC) occurs when

there is an increase in the production capacity of an economy. This
means that the economy is able to produce more goods and services than
before. The shift indicates an improvement in the economy's efficiency
and productivity.

Here are some possible reasons for a rightward shift in PPC: -

-Technological Advancements: A significant improvement in technology

can lead to a higher level of production efficiency, which can increase the
capacity of an economy to produce more goods and services.

- Increase in Capital Investment: When an economy invests in capital

goods such as machinery, equipment, and infrastructure, it can enhance
its production capacity. This can lead to a rightward shift in the PPC.

- Increase in Labor Force: If an economy experiences an increase in its

working-age population or a decrease in the unemployment rate, it can
lead to an increase in the labor force, which can boost the economy's
production capacity.

Leftward Shift in PPC:

A leftward shift in the Production Possibility Curve (PPC) occurs when

there is a decrease in the production capacity of an economy. This means
that the economy is able to produce fewer goods and services than
before. The shift indicates a decline in the economy's efficiency and
productivity.

Here are some possible reasons for a leftward shift in PPC:

- Natural Disasters: If an economy experiences a natural disaster such as

a hurricane, earthquake, or flood, it can cause damage to the
infrastructure, disrupt supply chains, and lead to a decrease in production
capacity.

- War or Conflict: If an economy is affected by war or conflict, it can

lead to destruction of infrastructure, disruption of trade, and loss of
human capital, whch can decrease the production capacity.
- Economic Recession: When an economy experiences a recession, it can
lead to a decrease in demand for goods and services, which can cause a
decrease in production capacity. This can result in a leftward shift in the
PPC.

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23)Given the market price of a commodity? how does the consumer decide
how much to buy?( Single Commodity Approach)

A consumer is in a state of equilibrium when he maximizes his satisfaction by

spending his given income on different goods and services. Any deviation or
change in the allocation of income under the given circumstance will lead to a
fall in total satisfaction.

For one-commodity case: Rupee worth of satisfaction actually received by the

consumer is equal to the marginal utility of money as specified by the
consumer himself.

Condition 1 : MU(of good X) = MU(of money) OR , PRICE(of good X) =

MU(of money)

Reason: Price paid by the consumers should be exactly equal to the money
value of MU that he derives. In case P(of X) is lesser than the MU(of money),
he should be prompted to buy more of good X. Higher consumption will lead
to a fall in MU. The consumption of good X would stop only when P(of good
X) will be equal to MU(in terms of money). Likewise, if P(of X) is greater
than MU(in terms of money), the consumer will be prompted to buy less of
good X, leading to a fall in MU.
Condition 2: Marginal utility of money remains constant.

Condition 3: Law of marginal utility holds good.

For two-commodity case: Rupee worth of marginal utility of money should be
same across good X and good Y, and equal to marginal utility of money.
Reason: In case rupee worth of satisfaction (MU of good X/ price of good X)
is greater for good X than good Y, the consumer will be prompted to buy
more of good X and less of good Y. This would lead to a fall in marginal
utility of good X and a rise in marginal utility of good Y. This process would
continue till MU(of good X)/ Price of good X = MU(OF GOOD Y)/ Price of
good Y = MU(of money) . In case rupee worth of satisfaction (MU of good y/
price of good Y) is greater for good Y than good X, the consumer will be
prompted to buy more of good Y and less of good X. This would lead to a fall
in marginal utility of good Y and a rise in marginal utility of good X.
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24) Explain the Conditions of Equilibrium if a)MRS> Px/Py b) Px/Py
> MRS

The consumer’s equilibrium under the indifference curve theory must

meet the following two conditions:
(i) MRSXY = Ratio of prices or PX/PY
Let the two goods be X and Y. The first condition for consumer’s
equilibrium is that
MRSXY = PX/PY

a. If MRSXY > PX/PY, it means that the consumer is willing to pay more
for X than the price prevailing in the market. As a result, the consumer
buys more of X. As a result, MRS falls till it becomes equal to the ratio
of prices and the equilibrium is established.

b. If MRSXY < PX/PY, it means that the consumer is willing to pay less
for X than the price prevailing in the market. It induces the consumer to
buys less of X and more of Y. As a result, MRS rises till it becomes equal
to the ratio of prices and the equilibrium is established.
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25) Equilibrium IC with Budget Line?

A consumer will be at equilibrium, according to the indifference curve

approach, when:

The budget line crosses the indifference curve. i.e. budget line slope =
indifference curve slope Alternatively, MRSXY = Px/PY.
Assume that X and Y are the two goods consumed. Let’s say the
consumer wants to increase their consumption of good X rather than
good Y. MRS is the rate at which a customer is willing to give up a
certain amount of Y in exchange for an additional unit of X. The market
rate of exchange (MRE) is the rate a consumer must give up a certain
amount of Y to obtain an extra unit of X.

When MRS>MRE, the consumer is willing to sacrifice more units of Y

than the market allows obtaining one unit of X. This will result in an
increase in X consumption but a decrease in Y consumption. MRS begins
to drop. They continue to eat more X until their MRS equals their MRE.

When MRS < MRE is used, it means that the consumer is willing to
sacrifice fewer units of Y than the market requires obtaining one more
unit of X. They will decrease X consumption while increasing Y
consumption. MRS begins to rise. They continue to reduce their X
consumption until MRS equals MRE.
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26) Properties of IC?

Properties of Indifference Curves

If a good satisfies all four properties of indifference curves, the goods are
referred to as ordinary goods. They can be summarized as the consumer
requires more of one good to compensate for less consumption of another
good, and the consumer experiences a diminishing marginal rate of
substitution when deciding between two goods.

1.Indifference curves never cross. If they could cross, it would create

large amounts of ambiguity as to what the true utility is.

2.The farther out an indifference curve lies, the farther it is from the
origin, and the higher the level of utility it indicates. As illustrated above
on the indifference curve map, the farther out from the origin, the more
utility the individual generates while consuming.
3.Indifference curves slope downwards. The only way an individual can
increase consumption in one good without gaining utility is to consume
another good and generate the same amount of utility. Therefore, the
slope is downwards sloping.

4.Indifference curves assume a convex shape. As illustrated above in the

indifference curve map, the curve gets flatter as you move down the
curve to the right. It illustrates that all individuals experience diminishing
marginal utility, where additional consumption of another good will
generate a lesser amount of utility than the prior.
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27) What are Factors affecting Elasticity of Demand?

Factors That Affect the Price Elasticity of Demand

1. Availability of close substitutes

If consumers can substitute the good for other readily available goods
that consumers regard as similar, then the price elasticity of demand
would be considered to be elastic. If consumers are unable to substitute a
good, the good would experience inelastic demand.

2. If the good is a necessity or a luxury

The price elasticity of demand is lower if the good is something the
consumer needs, such as Insulin. The price elasticity of demand tends to
be higher if it is a luxury good.

3. The proportion of income spent on the good

The price elasticity of demand tends to be low when spending on a good
is a small proportion of their available income. Therefore, a change in the
price of a good exerts a very little impact on the consumer’s propensity to
consume the good. Whereas, when a good represents a large chunk of the
consumer’s income, the consumer is said to possess a more elastic
demand.

4. Time elapsed since a change in price

In the long term, consumers are more elastic over longer periods, as over
the long term after a price increase of a good, they will find acceptable
and less costly substitutes.

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28 )Explain Percentage Method of measuring price elasticity of

Demand?

If the percentage change in demand is proportional to percentage change in

price, the elasticity is said to be unity. If the percentage change in demand is
more than the percentage change in price, the elasticity is more than one, and
if the percentage change in demand is less than percentage change in price, the
elasticity of demand is less than unity. Mathematically
Elasticity of demand =Percentage change in demandPercentage change in
price
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29) Explain Determinants of Demand?

Determinants of Demand

There are many determinants of demand, but the top five determinants of
demand are as follows:

Product cost: Demand of the product changes as per the change in the
price of the commodity. People deciding to buy a product remain
constant only if all the factors related to it remain unchanged.

The income of the consumers: When the income increases, the number of
goods demanded also increases. Likewise, if the income decreases, the
demand also decreases.

Costs of related goods and services: For a complimentary product, an

increase in the cost of one commodity will decrease the demand for a
complimentary product. Example: An increase in the rate of bread will
decrease the demand for butter. Similarly, an increase in the rate of one
commodity will generate the demand for a substitute product to increase.
Example: Increase in the cost of tea will raise the demand for coffee and
therefore, decrease the demand for tea.

Consumer expectation: High expectation of income or expectation in the

increase in price of a good also leads to an increase in demand. Similarly,
low expectation of income or low pricing of goods will decrease the
demand.

Buyers in the market: If the number of buyers for a commodity are more
or less, then there will be a shift in demand.

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30 )What is change in demand and change in quantity demanded?

A change in demand refers to a shift in the entire demand curve, which

is caused by a variety of factors (preferences, income, prices of
substitutes and complements, expectations, population, etc.). In this case,
the entire demand curve moves left or right.

A change in quantity demanded refers to a movement along the demand

curve, which is caused only by a chance in price. In this case, the demand
curve doesn’t move; rather, we move along the existing demand curve.

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31) Explain and Calculation of Price Elasticity of Supply?

Calculating the Price Elasticity of Supply

The price elasticity of supply measures how much quantity supplied changes
in response to a change in the price. The calculations and interpretations
are analogous to those we explained above for the price elasticity of
demand. The only difference is we are looking at how producers respond
to a change in the price instead of how consumers respond.
 Price elasticity of supply is the percentage change in the quantity of a
good or service supplied divided by the percentage change in the price.
Since this elasticity is measured along the supply curve, the law of supply
holds, and thus price elasticities of supply are always positive
numbers. We describe supply elasticities as elastic, unitary elastic and
inelastic, depending on whether the measured elasticity is greater than,
equal to, or less than one.
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32) Explain the total Expenditure Method of Measuring Elasticity of

Demand?

Total Expenditure Method:

Under this method, we measure elasticity of demand by examining the change

in the total expenditure due to a change in price.
Prof. Alfred Marshall evolved the total outlay, or total revenue or total ex-
penditure method as a measure of elasticity. By comparing the total
expenditure of a purchaser both before and after the change in price, it can be
known whether his demand for a good is elastic, unity or less elastic.
Total outlay is price multiplied by the quantity of a good purchased: Total
Outlay = Price x Quantity Demanded.
This is explained with the help of the demand schedule above.

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33) What are the factors affecting Supply?

Supply of a commodity is affected by following factors:
(a) Price of factor Inputs: When price of factor inputs increases, the cost
of production also increases. This decreases the profitability. As a result,
seller reduces the supply of the commodity. On the other hand, decrease
in prices of factor inputs, increases the supply due to fall in cost of
production and subsequent rise in profit margin.
(b) State of Technolgy: Advanced and improved technology reduces the
cost of production, which raises the profit margin. It induces the seller to
increase the supply. However, technological degradation or complex and
outdated technology will increase the cost of production and it will lead
to decrease in supply.
(c) Government Taxation Policy: If government increases taxes, it will
affect the cost of production adversely and hence supply decreases. But if
Government decreases the tax, the cost of production will fall and the
producer will be induced to increase the supply of the commodity.

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34) What is change in supply and change in quantity supplied?

Change in supply :
When the supply of a commodity changes due to any factor (taxation
policy, technology etc ) other than price, then such a change is known as
change in supply. This results in shift in the supply curve.

Change in quantity supplied:

When the supply of a commodity changes due to change in its price
keeping other factors constant, then such a change is known as Change in
Quantity supplied. This results in movement along the supply curve.
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35) What are the 3 stages of returns to factor?

Returns to a factor relates to the behaviour of total output as one variable
input, say labour, is varied. It is a short-run concept. There are three
aspects of returns to a factor:
(i) Increasing Returns to a Factor
(ii) Constant Returns to a Factor, and
(iii) Diminishing Returns to a Factor.
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36) What is Price determination in perfect competition?

i)Perfect competition is a market where there are a large number of buyers and
sellers dealing in homogeneous products.
ii) Under this, individual buyers and sellers cannot influence the market price
by increasing or decreasing their purchases or output, respectively.
iii)The market price of products in perfect competition is determined by the
industry as a whole.
iv)This implies that in perfect competition, the market price of products is
determined by taking into account two market forces, that is, demand and
supply.
v) In perfect competition, the price of a product is determined at a point at
which the demand and supply curve intersect each other. This point is known
as equilibrium point as well as the price is known as equilibrium price.
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37) Feature of perfect competition ?

Perfect competition describes a market structure where competition is

at its greatest possible level. To make it more clear, a market which
exhibits the following characteristics in its structure is said to show
perfect competition:

1. Large number of buyers and sellers

2. Homogenous product is produced by every firm

3. Free entry and exit of firms

4. Zero advertising cost

5. Consumers have perfect knowledge about the market and are well
aware of any changes in the market. Consumers indulge in rational
decision making.

6. All the factors of production, viz. labour, capital, etc, have perfect
mobility in the market and are not hindered by any market factors or
market forces.

7. No government intervention

8. No transportation costs

9. Each firm earns normal profits and no firms can earn super-normal
profits.

10. Every firm is a price taker. It takes the price as decided by the forces
of demand and supply. No firm can influence the price of the product.

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38) Explain the relationship between AC and MC?

(i) When MC is less than AC, AC falls with an increase in output. i.e.
till 3 units of output.
(ii) When MC ¡s equal to AC, i.e., when MC and AC curves intersect
each other at point A, AC is constant and it’s a minimum point.
(iii) When MC is more than AC, AC rises with an increase in output, i.e.,
from 5 units of output.
(iv) Thereafter, both AC and MC rise, but MC increases at a faster rate as
compared to AC. As a result, the MC curve is curved.

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39)Explain the relationship between a) AR=MR b)AR>MR

Marginal revenue is the change in total revenue when one more unit of a
commodity is sold.
MR= change in TR/change in quantity sold
Average revenue refers to revenue per unit of output.
AR=TR/Q
Relationship between AR and MR:
If AR is constant, MR is equal to AR. Both are indicated by the same
horizontal straight line(a situation of perfect competition)

When AR is decreasing, MR should be decreasing faster than AR. Thus,

downward sloping MR curve is below the downward sloping AR curve(a
situation of monopoly and monopolistic competition)