Class 11 Microeconomics Economy  An economy is a system in which people get a living

to satisfy their wants through the process of

production, exchange and distribution.
 For example : The Indian Economy consists of all
sources of production in agriculture, industry,
transport and communication, banking etc.

 Economics is a social science which studies the way a Economics

society chooses to use its limited resources, which
have alternative uses, to produce goods and services
and to distribute them among different groups of
people.
 Economics is all about making choices in the
presence of scarcity and studies human behaviour as
a relationship between means (resources) and ends
(human wants).

Scarcity  It refers to the limitation of Economic

supply about the demand for a
Problem
commodity. Economic Problem is a
 Scarcity is universal, i.e. every
individual, organisation and
problem of choice
economy faces scarcity of involving the
resources.
satisfaction of unlimited
 Scarcity of resources calls for
economizing of resources. wants out of limited
Economizing of resources refers to resources having
making optimum use of available
resources. alternative uses.
 Reasons for Economic Problem Branches of Economics
1) Scarcity of Resources :
 Resources are limited to people‟s demand and production due to which economic problems exist in all
economies.
 Scarcity is universal and applies to all individuals, organizations, and countries.
 If resources were not scarce, there would be no economic problem.
Economics can be classified
2) Unlimited Human Wants :
 Human wants are never-ending, they have two basic features. into two main branches
a) Human wants are unlimited and recurring :
 Human wants to keep on increasing with the expansion of education, knowledge and economic growth.
 As soon as one want is satisfied, another want arises and wants to keep on multiplying and cannot be satisfied
due to limited resources.
b) Human wants to have different priorities :
 Every individual want is more important and urgent as compared to others, due to which people allocate
resources to satisfy some of their wants.
 If all human wants were of equal importance, it would have become impossible to make choices.
Microeconomics Macroeconomics
3) Alternate Uses :
(Price (Income
 An alternative use implies that resources can be applied and used for alternative purposes.
 For example : Petrol is used not only in vehicles but also for running machines, generators etc.
Theory) Theory)
 An economy has to choose between the alternative uses of the given resources.

Microeconomics  Microeconomics is that part of economic

Macroeconomics  Macroeconomics is that part of economic theory
that studies the behaviour of aggregates of the
theory, that studies the behaviour of
economy as a whole and its main tools are
individual units of an economy and its main
„Aggregate demand‟ and „Aggregate supply‟.
tools are „Demand‟ and „Supply‟.
 For example : National Income, aggregate
 For example : Individual income, individual output, aggregate consumption, etc.
output, price of a commodity, etc.
 It is derived from the Greek word „Macros‟ which
 It is derived from the Greek word „mikros‟ means „large‟.
which means „small.
 Aggregative economics examines the
 Adam Smith is considered to be the founder of interrelations among various aggregates, their
the field of Microeconomics. determination and the causes of fluctuations in
 Microeconomics deals with the analysis of them.
behaviour and economic actions of small and  Macroeconomics deals with the overall
individual units of the economy, like a performance of the economy. It is concerned with
particular consumer, a firm or a small group of the study of problems in the economy like
individual units. inflation, unemployment, poverty, etc.
Differences Between Microeconomics and Macroeconomics
Basis Positive Economics Normative Economics
Positive and Normative Economics
Microeconomics is that part of economics Macroeconomics is that part of economics  Positive Economics deals with what are economic problems and how are they
Meaning which studies the behaviour of individual which studies the behaviour of aggregates
Positive solved.
units of an economy. of the economy as a whole.  For example : India is an overpopulated country and prices are constantly
Demand and Supply are the main tools of Aggregate Demand and Aggregate Supply
Economics rising.
Tools  Positive economics statements should not be confused as statements of truth
Microeconomics. are the main tools of Macroeconomics.
as they may be true or false.
Basic It aims to determine the price of a It aims to determine the income and
 Positive statements describe what was, what is or what will be under the
Objective commodity or factors of production. employment level of the country.
given state of circumstances. These statements do not pass any value
It involves a limited degree of aggregation. judgement.
It involves the highest degree of
Degree of For example: Market supply is derived by
aggregation. For example: Aggregate
Aggregation aggregation of individual supply of all  Normative Economics deals with what ought to be or how the economic
supply is derived for the entire economy.
producers in a particular market. problems should be solved. Normative
 For example : India should not be an overpopulated country and prices
Basic
It assumes all the macro variables are
It assumes that all micro variables are should not rise. Economics
constant like national income,
Assumptions
consumption, savings etc.
constant like prices of individual products.  Normative economics given by Prof. Marshall Deals with how the world ought
to be.
It is also known as the „Income and  Normative economics discusses what are desirable things and should be
Other Name It is also known as „Price Theory‟.
Employment Theory‟. realized and what are undesirable things and should be avoided. It gives
Examples Individual Income, Individual Output. National Income, National Output. decisions regarding value judgement.

Differences Between Positive Economics and Normative Economics Central Problems of an Economy
Basis Positive Economics Normative Economics
Production, distribution and disposition of goods and services are the basic economic
It deals with what is or how the It deals with what ought to be or how activities of life. In the course of these activities, every society has to face a scarcity
Meaning
economic problems are solved. the economic problems should be solved.
of resources. Because of this scarcity, every society has to decide how to allocate
It aims to make a real description scarce resources. It leads to the following central problems, that are faced by every
Purpose It aims to determine the ideals.
of economic activity. economy :
Verification It can be verified with actual data. It cannot be verified with actual data. 1) What to Produce :
It does not give any value  This problem involves the selection of goods and services to be produced and the quantity to be produced
Value by each selected community.
judgments, i.e. it is neutral It gives value judgments.
Judgments  In every economy, the resources are limited and hence an economy cannot produce all the goods.
between ends.
 More of one good usually means less of the other. The problem of what to produce has two aspects :
It is based upon facts, and thus, not It is based upon individual opinion and a) What Possible Commodities to Produce :
Suggestive  Every economy has to decide which consumer goods and which capital
suggestive. therefore, it is suggestive in nature.
goods are to be produced.
 Prices in the Indian Economy are  India should take steps to control  Similarly, the economy has to choose between civil goods and war goods.
constantly rising. rising prices. b) How Much to Produce :
Examples  It involves a decision regarding the quantity to be produced of consumer
 There are inequalities of income  Income inequalities should be
and capital goods, civil and war goods etc.
in an economy. reduced.
 Therefore, we can say that it is a problem of allocation of resources among different goods.
2) How to Produce :
 This problem refers to the selection of techniques to be used for the production of goods and
services. Opportunity  It is the cost of the next best alternative
 A good can be produced using different techniques of production;
Cost foregone.
generally, two techniques are used :
a) Labour Intensive Technique (LIT) : In this technique more Labour  For example : Mr. X is working in a
and less capital are used. bank at a salary of Rs 40,000 per
b) Capital Intensive Technique (CIT) : In this technique more
capital and less Labour are used.
month and he receives two more job
 The selection of technique is made to achieve the objective of raising the standard of living of offers :
people to employ everyone.
 For example : In India, LIT is preferred due to the abundance of labour; whereas, countries
a) To work as an executive at Rs
like the USA prefer CIT due to the shortage of labour and abundance of capital. 30,000 per month.
3) For Whom To Produce : b) To become a journalist at Rs 35,000
 This problem involves the selection of a category of people who will ultimately consume the per month.
goods i.e., whether to produce goods for poorer and less rich or richer and less poor.
 Goods are produced for those who have the paying capacity and the paying  The opportunity cost of working in the
capacity depends upon the level of income. bank is the cost of the next best
 It means this problem is concerned with the distribution of income among
the factors of production. alternative foregone i.e., Rs 35,000.

Production Possibility Curve Assumptions for PPC

 PPC refers to a graphical representation of possible combinations of two goods that can be produced with  The resources are fully and efficiently utilized.
given resources and technology.
 It is also known as Production Possibility Frontier, Transformation Curve, Transformation Boundary and  With the help of the given resources, only two goods
Transformation Frontier.
Guns Butter ∆ 𝐺𝑢𝑛𝑠 Y
can be produced.
Possibilities MOC MRT = A
PPF of Guns and Butter
(in units) (in units) ∆ 𝐵𝑢𝑡𝑡𝑒𝑟 B
●
21 -- ●
●
C
 The amount of resources in the given economy is
Guns (in units)

A 21 0 --- - 18 --
15 -- ●D
B
C
20
18
1
2
1
2
1G : 1B
2G : 1B
12 --
9 --
●
E
fixed but these resources can be transferred from one
F
●
D 15 3 3 3G : 1B 6 --
3 -- G
use to another.
E 11 4 4 4G : 1B | | | | | ●| X

 Level of technology is assumed to be constant.

O
F 6 5 5 5G : 1B 1 2 3 4 5 6
G 0 6 6 6G : 1B Butter (in units)

Explanation of Curve :  When resources are transferred from the production

 If the economy uses all its resources to produce only guns, then a maximum of 21 units of guns and no butter can be
produced. (point A). of one good to another, productivity decreases,
 If all resources are used for butter, then a maximum of 6 units of butter and no guns can be produced. (Produced G).
 There are various possibilities with different combinations of guns and butter in between. therefore resources are not equally efficient in the
 When A, B, C, D, E, F and G points are joined, we get a curve AG, known as the „Production Possibility Frontier‟.
 AG curve shows the maximum limit of production of guns and butter. production of all products.
 Characteristics or Properties of PPC
Marginal
 PPC is downward sloping from left to right
Rate of
because there exists an inverse relationship
between the change in the quantity of one commodity Transformation MRT is the ratio of the
PPC Slopes
Downwards
and the change in the quantity of another commodity.
 In other words, more of one good can be produced only by number of units of a
taking resources away from the production of another
good. commodity sacrificed to
 PPC is concave shaped because of increasing MOC gain an additional unit
PPC is Concave (Marginal Opportunity Cost) i.e. more and more units of
Shaped one commodity are sacrificed to gain an additional unit of of another commodity.
another commodity.
∆ 𝐔𝐧𝐢𝐭𝐬 𝐒𝐚𝐜𝐫𝐢𝐟𝐢𝐜𝐞𝐝
Shift Either Rightward or  If the resources are increasing then the curve MRT =
Leftward Depending on the shifts rightward and if the resources are ∆ 𝐔𝐧𝐢𝐭𝐬 𝐆𝐚𝐢𝐧𝐞𝐝
Availability of Resources
decreased then the curve shifts leftward.

Whether the economy will always operate on PPF?

Marginal
The exact point of operation depends on how well the resources of the economy are used.
Opportunity  MOC refers to the number of
units of a commodity sacrificed  Economy will operate on PPF only when
Cost resources are fully and efficiently utilized.
to gain one additional unit of
 Economy will operate at any point inside
another commodity. PPF if resources are not fully and
 In the case of PPF, MOC is efficiently utilized.
always increasing, i.e. more  Economy cannot operate at any point
and more units of a commodity inside PPF as it is unattainable with the
have to be sacrificed to gain an available productive capacity.
additional unit of another  Economy can either operate on PPF or inside PPF, known as „Attainable
Combinations‟.
commodity.  Economy cannot operate outside PPF, known as „Unattainable Combinations‟.
 Attainable and Unattainable Combinations
Attainable Combinations
Can PPF be a Straight Line?
Y • Any point on PPF
 It refers to those combinations at which the
economy can operate. 21 -
A
•
F•
(Points A to D) or
any point inside
PPC (Point E)
PPF can be a straight line PPF will be a straight line
as shown in figure :
 There can be two attainable options : 18 -- •
B are attainable
if we assume that MRT is

Guns (in units)

combinations.
a) Optimum utilization of resources; • Any point outside
15 --

constant, i.e. the same

C
b) Inefficient utilization of resources. •
PPF (point F) is
12 --
an unattainable
combination.

amount of a commodity is
D
9 --
Unattainable Combinations •
6 -- E•
 With the given amount of available resources it is
impossible for the economy to produce any
3 -- sacrificed to gain an
| | | | | | X
combination more than the given possible
combination.
O 1 2 3 4 5 6
additional unit of another
Butter (in units)
 An economy can never operate at any point outside
the PPF.
commodity.

Can PPF be convex to the origin? Relationship between PPF and MRT
Y  We can measure MRT on the
PPF can be convex to the origin if MRT is decreasing, 21 --
A
B
PPF and MRT PPF and PPF is a concave-
i.e. fewer units of a commodity are sacrificed to gain an 18 --
C shaped curve.
additional unit of another commodity. D  The slope of PPF is a measure of
Guns (in units)
15 --

12 --
the MRT.
PPF will be a convex-shaped curve as shown below Fig : H
E

9 --  The slope of a concave curve

It must be noted that both the 6 -- I F increases as we move
downwards along with the
above situations would not arise, 3 --
G
| | | | | | X curve.
as MRT always increases, so, PPF O 1 2 3 4 5 6

 The MRT also rises as we move

Butter (in units)
is always concave shaped. downwards along the curve.
 Relationship Between PPF And Opportunity Cost
PPF as
 The opportunity cost of a product is the alternative that must be given up to produce that
product.
Transformation  Slope of PPF indicates the ease or
 The opportunity cost of producing more butter is fewer guns. Curve difficulty in transforming one good
 As we move the point from point „E‟ to „F‟, the production of butter rises from 4 units to 5 units,
but the number of guns decreases from 11 units to 6 units.
into another.
 Opportunity cost of the 5th unit of butter is the sacrifice of 5 units of guns.  In the PPC curve when we move
Possibilities
Guns Butter
MOC
Y
PPF of Opportunity Cost
down the curve, we transform guns
(in units) (in units) A

A 21 0 ---
21 --●
18 --
B
●
●
C into butter.
D
●
B 20 1 1 15 --
 When we move up, we transform

Guns (in units)

12 -- E
C 18 2 2 ●

D 15 3 3
9 --
6 --
5 Guns

●F
butter into guns.
E 11 4 4
 Due to this, PPF is known as the

1 Butter
3 --
G
F 6 5 5 | | | | | ●| X

G 0 6 6
O
1 2 3 4
Butter (in units)
5 6
„Transformation Curve‟.

Shift in PPF
Change In PPF Rotation of PPF
The change in PPF indicates either an increase or a 1) Rightward Shift in PPF : Y
Rightward shift in PPF
decrease in the economy‟s productive capacity.  When there is “Advancement or Upgradation of P1
PPF shifts to the right from PP
P to P1P1 when there is growth of
Technology” or “Growth of Resources” concerning both

Guns (in units)

resources or/and technological

the goods, then PPF will shift to the right. degradation of both guns and

The change in PPF can be of two types  For Example: If there is an increase in resources for the
butter.

production of butter and guns, we came to produce

X
more of both goods and as a result, PPF will shift to O P P1
Butter (in units)
the right by P1P1.
Shift in PPF Rotation in PPF Y
2) Leftward Shift in PPF : P
 PPF will shift towards the left when there is a P1
PPF shifts to the left from PP
to P1P1 when there is decrease

Guns (in units)

technological degradation or decrease in resources in resources or/and
technological degradation of
concerning both goods.
PPF will shift when there is a PPF will rotate when there is a both guns and butter.

change in productive capacity change in productive capacity  For Example: The destruction of resources in an
concerning both goods. concerning only one good. earthquake will reduce the production capacity and as O P1 P
X
a result, PPF will shift to the left from PP to P1P1. Butter (in units)
 Rotation of PPF  PPF is concave-shaped due to increasing MRT.
Overview  PPF shows the maximum available possibilities and
1) Rotation for Commodity on the X-axis : operations depending on how well the resources of the
of PPF
Y Rotation for Commodity
on the X-axis

 When there is a technological improvement or an A

economy are used.
increase in resources for the production of the commodity

Guns (in units)

 If the economy operates at any point inside PPF, it means
on the X-axis, then PPF will rotate from AB to AC. resources are not fully and efficiently utilized.
 In case of technological degradation or a decrease in Rightward
 An outward shift in PPF, means that the economy can
Leftward rotation rotation
resources for the production of butter, PPF will rotate to O D B C
X produce more of both commodities.
the left from AB to AD. Butter (in units)
 PPF slopes downwards, as an increase in the production of
one good requires a decrease in the production of the other.
2) Rotation for Commodity on the Y-axis : Y Rotation for Commodity
on the Y-axis
 Technological improvement or an increase in resources
A
 PPF shows transformation, not physically, but by diverting
P
for the production of the commodity on the Y-axis will resources from one use to the other.

Good Y
B

rotate the PPF from PP to PA.  If the economy operates on PPF, it means resources are fully
 In case of degradation in technology or a decrease in and efficiently utilized.
resources for the production of guns, PPF will rotate to O P
X
 An outward shift in PPF means, that the economy can
the left from PP to PB. Good X
produce more of both commodities.

Class 11 Microeconomics Consumer

 A consumer is one who buys
goods and services for the
satisfaction of wants.
 He takes decisions with regard
to the kind of goods to be
purchased in order to satisfy his
wants.
 The main objective is to get
maximum satisfaction from
spending his income on various
goods and services.
 Approaches which are Used to Study Consumer‟s Behaviour Cardinal
Utility People consume different goods
There are two main approaches to Approach and services in order to maximize
studying consumer‟s behaviour and their satisfaction level. However,
consumer‟s equilibrium are : to do this, it is necessary to
determine quantum of
satisfaction obtained from a
Cardinal Utility Approach Ordinal Utility Approach particular commodity. Under the
(or Marshall‟s Utility (or Indifference Curve Cardinal Utility Approach, the
Analysis or Marginal Analysis or Hicksian concept of “Utility” is used to
Utility Analysis). Analysis).
attain the consumer‟s equilibrium.

Total Utility :
Utility  Total utility refers to the total satisfaction obtained from the consumption of all
possible units of a commodity.
 Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or expected, derived from the
 It measures the total satisfaction obtained from the consumption of all the units of that good.
consumption of a commodity. Utility differs from person to person, place to place and time to time. In the words of
Prof. Hobson, “Utility is the ability of a good to satisfy a want.”
 Total utility is zero at zero level of consumption.
 TU = ∑ MU
 There was no standard unit for measuring utility. So, economists derived an imaginary measure known as „Util‟.  If the 1st ice-cream gives you a satisfaction of 20 utils and 2nd one gives 16 utils, then TU from 2 ice-creams is
Example : Measurement of satisfaction in utils. 20 + 16 = 36 utils. If the 3rd ice-cream generates satisfaction of 10 utils, then TU from 3 ice-creams will be 20 +
Suppose you have just eaten an ice-cream and a chocolate. You agree to assign 20 utils as utility 16 + 10 = 46 utils.
derived from the ice-cream. Now the question is : how many utils be assigned to the chocolate? TU can be calculated as : TUn = U1 + U2 + U3 +..… + Un
If you liked the chocolate less, then you may assign utils less than 20. However, if you liked it
more, you would give it a number greater than 20. Suppose, you assign 10 utils to the chocolate, Marginal Utility :
then it can be concluded that you liked the ice-cream twice as much as you liked the chocolate.  MU is the additional utility derived from the consumption of one more unit of the given commodity.
 Utility can also be measured in terms of money or price, which the consumer is willing to pay.  It is the utility derived from the last unit of a commodity purchased.
∆𝑇𝑈
 The advantage of using monetary values instead of utils is that it allows easy comparison between utility and price  MU = OR MU = TUn – TUn-1
∆𝑄
paid, since both are in the same units.  As per given example, when 3rd ice-cream is consumed, TU increases from 36 utils to
Example : In the above example, suppose 1 util is assumed to be equal to ₹ 1. Now, an ice-cream will yield utility 46 utils. The additional 10 utils from the 3rd ice-cream is the MU.
worth ₹ 20 (as 1 util = ₹ 1) and chocolate will give utility of ₹ 10. This utility of ₹ 20 from the ice-cream of ₹ 10 from MU of 3rd ice-cream will be : MU3 = TU3 – TU2 = 46 – 36 = 10 utils
the chocolate is termed as value of utility in terms of money.
Average Utility :
It is impossible to measure the satisfaction of a person as it is inherent to the individual and differs greatly from  AU refers to the per unit satisfaction obtained from the consumption of the particular commodity.
person to person. Still, the concept of utility is very useful in explaining and understanding the behaviour of 𝑇𝑈
AU = 𝑄
consumer.
 Relationship Between TU And MU Law of
Units Marginal Utility (MU) Total Utility (TU) Y
Maximum TU „Diminishing  Law of DMU states that as we consume more and more
units of a commodity, the utility derived from each

Total Utility from Ice cream

1 20 20 50 TU
Marginal Utility‟ successive unit goes on decreasing.
2 16 36 40
 For example : Suppose your father has just come from
3 10 46 30
work and you offer him a glass of juice. The first glass of
4 4 50 20
juice will give him great satisfaction. The satisfaction with
10
5 0 50 the second glass of juice will be relatively lesser. With
X
6 -6 44 O 1 2 3 4 5 6
further consumption, a stage will come, when he would
Units of Ice cream
Y
not need any more glass of juice, i.e. when the marginal
Explanation :

Marginal Utility from Ice cream

50
utility drops to zero. After that point, if he is forced to
 TU increases with an increase in consumption of a 40
consume even one more glass of juice, it will lead to
commodity as long as MU is positive. 30 disutility. Such a decrease in satisfaction with
 When TU reaches its maximum, MU becomes zero. This 20 consumption of successive units occurs due to 'law of
is known as the ‟Point of Satiety‟. TU curve stops rising 10 Zero MU diminishing marginal utility'.
O
X  Law of DMU has universal applicability and applies to all
at this stage. 1 2 3 4 5 6
-ve MU
-4 Units of Ice cream goods and services.
 When consumption is increased beyond the point of MU
-8
 It is also known as Gossen‟s first law of consumption as it is
satiety, TU starts falling as MU becomes negative. given by a German H.H. Gossen.
Y‟

 The consumer is assumed to be rational who measures, calculates

Assumptions of the Law of DMU Rational Consumer and compares the utilities of different commodities and aims at
maximizing total satisfaction.

 It is assumed that all the commodities consumed by a consumer are

Cardinal  It is assumed that utility can be measured independent i.e. MU of one commodity has no relation with the MU of another
Measurement of and a consumer can express his satisfaction Independent
commodity.
Utilities Further, It is also assumed that one person‟s utility is not affected by the
Utility in quantitative terms such as 1, 2, 3 etc. 
utility of any other person.
Monetary Measurement  It is assumed that utility is measurable
 As a consumer spends money on the commodity, he is left with lesser money to
of Utility in monetary terms. spend on other commodities. In this process, the remaining money becomes
MU of Money dearer to the consumer and it increases MU of money for the consumer.
 It is assumed that a reasonable quantity of the Remains Constant  But, such an increase in MU of money is ignored. As MU of a commodity has to
Consumption of
commodity is consumed. be measured in monetary terms, it is assumed that MU of money remains
Reasonable constant.
 To hold the law true, a suitable and proper quantity of
Quantity
the commodity should be consumed. Fixed Income and Prices
 It is assumed that income of the consumer and prices of goods remain
constant.
Continuous Consumption  It is assumed that consumption is a continuous process.
 It is assumed that the consumer knows the different goods on which his income
 It is assumed that the quality of the Perfect Knowledge
can be spent and the utility that he is likely to get out of such consumption.
No Change in Quality  It means, that the consumer has perfect knowledge of the various choices
commodity is uniform. available to him.
 Law of DMU More about the Law of DMU
Units of Ice-Cream Total Utility (in units) Marginal Utility (MU)
1 20 20 MU may Increase Initially
2 36 16
3 46 10 Law of Diminishing
 In certain situations, MU may increase but it all
4 50 4 Y Marginal Utility depends on the circumstances.
5 50 0 (Point of Satiety) A
 Economists normally assume that MU continuously falls.

Marginal utility of Ice cream

20
6 44 -6 B
16

Explanation : 12 C Zero MU
No Indication about the Rate of Fall in MU
 In the above diagram, units of ice cream are shown along X-axis and 8
D
(Point of Satiety)
MU along the Y-axis. 4
E  It just states that MU falls with an increase in the
 The rectangles (showing each level of satisfaction) become smaller and X
smaller with an increase in the consumption of ice creams.
O
-4
1 2 3 4 5 6  Negative MU
consumption of a given commodity.
 MU falls from 20 to 16 and then to 10 utils when consumption is -8
MU
increased from 1st to 2nd and then to 3rd ice-cream.
 When 5th is consumed MU = 0 and this point is known as the „Point of
Units of Ice Cream
Synonyms of the Law of DMU
Y‟
Satiety‟.
 When 6th ice cream is consumed, MU becomes negative.  It is also known as the „Fundamental Law of Satisfaction‟
 MU curve slopes downwards showing that the MU of successive units is
falling.
or „Fundamental Psychological Law‟.

Consumer‟s Equilibrium Single Commodity Approach

 Equilibrium means a state of rest or a position of no change.
 A consumer is said to be in equilibrium, when he does not intend to change his level of consumption, i.e., when All the assumptions of the Law of DMU are taken as
he derives maximum satisfaction.
 Consumer Equilibrium refers to the situation when a consumer is having maximum satisfaction with limited assumptions of the consumer‟s equilibrium in the case of a
income and has no tendency to change his way of existing expenditure. single commodity.
 The consumer has to pay a price for each unit of the commodity. So, he cannot buy or consume unlimited
quantity. As per the Law of DMU, utility derived from each successive unit goes on decreasing. At the same The number of units to be consumed of the given
time, his income also decreases with purchase of more and more units of a commodity.
commodity by a consumer depends on two factors :
 A rational consumer aims to balance his expenditure in such a manner, so that he gets maximum satisfaction
with minimum expenditure.
Price of the Given Commodity.
Consumer Equilibrium can be discussed under two different situations :

If the consumer spends his entire income on a single

Expected Utility (Marginal Utility)
commodity (single commodity approach). from each successive unit.
If a consumer spends his entire income on two A consumer in consumptions of single commodity will be at equilibrium when
commodities (two commodity approach). marginal utility (MUX) is equal to the price paid (Px) for the commodity i.e. MUx=PX.
 Consumer‟s Equilibrium in Case of Single Commodity
Case 1  If MUx > Px then the consumer is not at
equilibrium and he goes on buying because the
Units
x
Price
Px
MU
(utils)
MUx = 1 util = ₹ 1
Difference MUx &
Px
Remarks

1 10 20 20 ÷ 1 = 20 20 – 10 = 10 MUx > Px
benefit is greater than the cost. 2 10 16 16 ÷ 1 = 16 16 – 10 = 6
MUx > Px
So, Consumer will increase the consumption
 As he buys more, MU falls because of the 3 10 10 10 ÷ 1 = 10 10 – 10 = 0
Consumer‟s Equilibrium
Y Consumer’s Equilibrium in case
(MUx = Px)
operation of the law of diminishing marginal 4 10 4 4÷1=4 4 – 10 = - 6 MUx < Px
of Single Commodity (x)

MU and Price of commodity X

MUx < Px 20
utility. When MU becomes equal to the price, 5 10 0 0÷1=0 0 – 10 = -10 MUx < Px 16
Consumer‟s Equilibrium (MUx = Px)

6 10 -6 -6 ÷ 1 = - 6 -6 – 10 = - 16 So, Consumer will decrease the consumption

consumer gets the maximum benefits and is in 12 E

Explanation : 8
equilibrium.  From the above schedule and diagram, it is clear that the consumer will be at 4
Zero MU (Point of Satiety)

equilibrium at point „E‟ when he consumes 3 units, because at point „E‟, MUx = X

 If MUx < Px then also consumer is not at

O 1 2 3 4 5 6
P X.
-4
-

equilibrium as he will have to reduce

consumption of commodity x to raise his
Case 2  A consumer will not consume 4 units as MU of Rs. 4 is less than the price paid
of Rs. 10
 Similarly, he will not consume 2 units as MU of Rs. 16 is more than the price
-8 MUx

Units of commodity X
Y‟
paid.
total satisfaction till MU becomes equal to  So, it can be concluded that a consumer in consumption of single commodity
price. (say, x) will be at equilibrium when marginal utility from the commodity
(MUx) is equal to price (Px) paid for the commodity.

2) MU falls as Consumption Increases :

Two Commodity Approach  The second condition needed to attain consumer‟s equilibrium is that MU of a commodity must fall as
more of it is consumed.
 The Law of DMU applies in case of either one commodity or one use of a commodity. However, in  If MU does not fall, as consumption increases, the consumer will end up buying only one good which is
real life, a consumer normally consumes more than one commodity. In such a situation, 'Law of unrealistic and consumer will never reach the equilibrium position.
Equi-Marginal Utility' helps in optimum allocation of his income. 𝐌𝐔𝐱 𝐌𝐔𝐲
 If > then the consumer is getting more MU in the case of good X as compared to
 It is also known as Gossen‟s Second Law and the Law of maximum satisfaction. Case
Case 1: 1 good Y.
𝐏𝐱 𝐏𝐲

 According to this approach, a consumer gets maximum satisfaction when ratios of MU of two
 Therefore, he will buy more of X and less of Y.
commodities and their representative prices are equal and MU falls as consumption increases i.e.
 This will lead to fall in MUx and a rise in MUY.
𝐌𝐔𝐱 𝐌𝐔𝐲
MUx MUy  The consumer will continue to buy more of X till 𝐏𝐱 becomes equal to 𝐏𝐲
=
Px Py  If
𝑀𝑈𝑥
<
𝑀𝑈𝑦
then the consumer is getting more MU per rupee in case of good Y as
𝑃𝑥
compared to good X.
𝑃𝑦
Case 2
There are two necessary conditions to attain consumer‟s  Therefore, he will buy more of Y and less of X.
equilibrium in the case of two commodities :  This will lead to falling in MUY and a rise in MUx.
𝑀𝑈𝑥 𝑀𝑈𝑦
 The consumer will continue to buy more of Y till becomes equal to 𝑃𝑦 .
𝑃𝑥
1) The ratio of Marginal Utility to Price is the same in the case of both
Conclusion :
the goods. A consumer in consumption of two commodities will be at equilibrium when he spends his limited income in such
MUx MUy
= a way that the ratios of marginal utilities of two commodities and their respective prices are equal and MU falls
Px Py as consumption increases.
 Diagrammatic Explanation with the help of an Example Explanation :
 From Table, it is obvious that the consumer will spend the first rupee on
Lest us now discuss the law of equi-marginal utility with the help of a numerical commodity 'x', which will provide him utility of 20 utils. The second rupee will be
example. Suppose, total money income of the consumer is ₹ 5, which he wishes to spent on commodity 'y' to get utility of 16 utils. To reach the equilibrium,
spend on two commodities: „x‟ and „y‟. Both these commodities are priced at ₹ 1 per consumer should purchase that combination of both the goods, when :
unit. So, consumer can buy maximum 5 units of „x‟ or 5 units of „y‟. In Table, we a) MU of last rupee spent on each commodity is same; and
have shown the marginal utility which the consumer derives from various units of b) MU falls as consumption increases.
„x‟ and „y‟.  It happens at point E when consumer buys 3 units of 'x'
and 2 units of 'y' because :
Consumer’s Equilibrium in case of Two Commodities a) MU from last rupee (i.e. 5th rupee) spent on commodity y
gives the same satisfaction of 12 utils as given by last rupee
Units MU of commodity „x‟ (in utils) MU of commodity „y‟ (in utils)
(i.e. 4th rupee) spent on commodity x; and
1 20 16 b) MU of each commodity falls as consumption increases.
2 14 12  The total satisfaction of 74 utils will be obtained when consumer buys 3 units of
3 12 8 'x' and 2 units of 'y'. It reflects the state of consumer's equilibrium. If the
4 7 5 consumer spends his income in any other order, total satisfaction will be less
5 5 3 than 74 utils.

Indifference Curve
Ordinal Utility
 Indifference Curves was made by J.R. Hicks and  Indifference Curve refers to the graphical representation of various alternative combinations of bundles of two
Approach R.G.D. Allen, popularly known as Hicks and Allen. In goods among which the consumer is indifferent.
1934, they wrote an article, „A reconstruction of the  It is a locus of points that show such combinations of two commodities which give the consumer the same
satisfaction.
theory of value‟, presenting the Indifference Curve
Analysis. Combination of Apples and Bananas Apples (A) Bananas (B)
P 1 15
 Modern economists disregarded the concept of the Q 2 10 Y
Indifference Curve
„cardinal measure of utility‟. They were of the R 3 6
opinion that utility is a psychological phenomenon S 4 3
and it is next to impossible to measure utility in T 5 1 15 P (1A + 15B)

absolute terms. Explanation : 12

Q (2A + 10B)
 As seen in the schedule, consumer is indifferent between five

Bananas (B)
 According to them, a consumer can rank various 9
combinations of apple and banana.
combinations of goods and services in order of his  Combination „P‟ (1A + 15B) gives the same utility as (2A + 10B), (3 6
R (3A + 6B)

preference. A + 6 B) and so on.

S (4A + 3B)
3 T (5A +1)
 A method of ranking the preferences is known as the  By joining these points, we get an indifference curve IC1 IC1
 MRS is the slope of the Indifference Curve. X
„ordinal utility approach‟. Ordinal utility is the  Every point on IC1 represents an equal amount of satisfaction to
O 1 2 3 4 5
Apples (A)
utility expressed in ranks. the consumer.
 Monotonic  It means that a rational consumer always Indifference Map
Preferences prefers more of a commodity as it offers him a  It refers to the family of indifference curves that represents consumer preferences
higher level of satisfaction. over all the bundles of two goods.
 It implies that as consumption increases total  It represents all the combinations which provide the same level of satisfaction.
utility also increases.  Every higher or lower level of satisfaction can be shown on different indifference
curves.
For Example : Consider 2 Goods : Apples (A) and Bananas (B). Y Explanation :
Indifference Map

a) Suppose two different bundles are: (10 A, 10 B) and 1st :

(7 A, 7 B). 2nd:  IC1 represents the lowest satisfaction, IC2 shows
satisfaction more than that IC1 and the highest level of
Consumer‟s preference of 1st bundle as compared to the 2nd bundle will be called satisfaction is depicted by indifference curve IC3.
monotonic preference as 1st bundle contain more of both Apples and Bananas.

Commodity Y
P
A B  However, each indifference curve shows the same level of
IC3
b) If 2 bundles are: 1st : (10 A, 7 B) and 2nd: (9 A, 7 B). IC2 satisfaction individually.
IC1
Consumer‟s preference of 1st bundle as compared to the 2nd bundle will be called  Higher Indifference Curves represent higher levels of
monotonic preference as 1st bundle contains more of apples, although bananas X
satisfaction as higher indifference curve represents larger
O R S bundles of goods, which means more utility because of
are same. Commodity X
monotonic preference.

„Marginal Rate of Substitution‟ Assumptions and Properties of the Indifference Curve

It refers to the rate at which the commodities can be Y
MRS between Apple and Banana Two Commodities
substituted with each other so that the total satisfaction IC1 is convex shaped due to
 It is assumed that the consumer has a fixed amount of money, whole of which
of the consumer remains the same. 15 P (1A + 15B) diminishing MRS
is to be spent on the two goods, given constant prices of both the goods.
5B {
Bananas (B)

12
Q (2A + 10B)
Combination Apple (A) Banana (B) MRSAB 9 Non-Satiety
P 1 15 ----
4B { R (3A + 6B)
6
Q 2 10 5B : 1A 3B { S (4A + 3B)  It is assumed that the consumer has not reached the point of saturation.
R 3 6 4B : 1A
3
2B { 1B{ T (5A +1)
IC1 Consumer always prefer more of both commodities.
X
S 4 3 3B : 1A O 1 2 3 4 5
T 5 1 2B : 1A Apples (A) Ordinal Utility
Explanation :  Consumers can rank their preferences based on the satisfaction from each bundle of goods.
 As seen in the above schedule and diagram, as the consumer moves from P to Q, he sacrifices 5 bananas for 1 apple and MRS comes
out to be 5:1. Similarly, from Q to R, MRSAB is 4: 1. Diminishing Marginal Rate of Substitution
 The MRS of apples for bananas is diminishing.
 MRS measures the slope of the indifference curve.  Indifference curve analysis assumes diminishing marginal rate of substitution, due to this
𝐔𝐧𝐢𝐭𝐬 𝐨𝐟 𝐁𝐚𝐧𝐚𝐧𝐚𝐬 𝐁 𝐰𝐢𝐥𝐥𝐢𝐧𝐠 𝐭𝐨 𝐬𝐚𝐜𝐫𝐢𝐟𝐢𝐜𝐞 ∆𝐁
 MRSAB =
𝐔𝐧𝐢𝐭𝐬 𝐨𝐟 𝐀𝐩𝐩𝐥𝐞𝐬 𝐀 𝐰𝐢𝐥𝐥𝐢𝐧𝐠 𝐭𝐨 𝐠𝐚𝐢𝐧
OR MRS =
∆𝐀
assumption, an indifference curve is convex to the origin.
 MRS diminishes because of the Law of DMU.
 In the given example of apples and bananas, Combination „P‟ has only 1 apple and, therefore, apple is relatively more important Rational Consumer
than bananas. Due to this, the consumer is willing to give up more bananas for an additional apple. But as he consumes more and
more of apples, his marginal utility from apples keeps on declining. As a result, he is willing to give up less and less of bananas for
 The consumer is assumed to behave in a rational manner, i.e. he aims to maximize his total
each additional apple. satisfaction.
 Properties of Indifference Curve Indifference Curves IC1 An Indifference Curve Can never
1) Indifference Curves are Always Convex to the Origin :
Y
and IC2 can never touch X-axis or Y-axis :
 An indifference curve is convex to the origin because of diminishing MRS. intersect each other
 MRS declines continuously because of the law of diminishing marginal utility.  If the indifference curve touches
 MRS indicates the slope of indifference curve. Y-axis, it would mean that the
2) Indifference Curve Slopes Downwards : A
consumption of commodities on
 It implies that as a consumer consumes more of one good, he must consume less of the other
the X-axis is zero.

Bananas
good. It happens because if the consumer decides to have more units of apple, he will have to
reduce the consumption of bananas, so that total satisfaction remains the same.
C  If the indifference curve touches
3) Higher Indifference Curves Represent Higher Levels of Satisfaction : X-axis, it would mean that the
 Higher indifference curve represents large bundle of goods which means
more utility because of monotonic preference.
B IC2
IC1 consumption of commodities on
4) Indifference Curves can Never Intersect Each Other : the Y-axis is zero.
X
 As two indifference curves cannot represent the same level of satisfaction, O Apples So, an Indifference curve can
they cannot intersect each other.
 It means only one indifference curve will pass through a given point on an indifference map. never touch any of these axes.

Schedule of Budget Line

Budget Line Suppose, a consumer has a budget of ₹ 20 to be spent on two commodities : Apples (A) and Bananas
(B). If apple is priced at ₹ 4 each and banana at ₹ 2 each, then the consumer can determine the
 We have discussed different combinations of two goods that various combinations (bundles), which form the budget line. The possible options of spending income
provide same level of satisfaction. But, which combination, of ₹ 20 are given in Table.
will a consumer actually purchase, depends upon his
income („consumer budget‟) and prices of the two Combination
Apples Bananas
Income (Y) = 20
Y Budget Line
(Rs.4 each) (Rs.2 each) C
commodities. 10 J
Unattainable
E 5 0 5 × 4 + 0 × 2 = 20 I
 Consumer Budget states the real income or purchasing
Combination

Bananas (B)
8
H
F 4 2 4 × 4 + 2 × 2 = 20
power of the consumer from which he can purchase certain 6
G
G 3 4 3 × 4 + 4 × 2 = 20
quantitative bundles of two goods at given price. 4 D
F
H 2 6 2 × 4 + 6 × 2 = 20 2 Point D indicates that
 It means, a consumer can purchase only those combinations I 1 8 1 × 4 + 8 × 2 = 20
income is underspent E
X
(bundles) of goods, which cost less than or equal to his J 0 10 0 × 4 + 10 × 2 = 20
O 1 2 3 4
Apples (A)
5

income.
 Budget line is a graphical representation of all possible Explanation :
 The number of apples are taken on X-axis and bananas on the Y-axis.
combinations of two goods which can be purchased with  At Point „E‟, the consumer can buy 5 apples by spending his entire income of Rs. 20 only on apples.
given income and prices, such that the cost of each of these  At Point „J‟, the entire income is spent only on bananas.
combinations is equal to the monetary income of the  By joining other combinations like F, G, H and I, we get a straight line „AB‟ known as Budget Line or Price Line.
consumer.  Every point on this budget line indicates those bundles of apples and bananas, which the consumer can purchase by spending
his entire income of ₹ 20 at the given prices of goods.
 Budget Set  It is the set of all possible combinations of
More about two goods which a consumer can afford with
Budget Line his given income and prices in the market.
 Budget line AB slopes downwards.  It is a quantitative combination of two
goods which can be purchased by a
 Bundles which cost exactly to consumer‟s
consumer from his given income.
money income lie on the budget line.
 Bundles which cost less than the Equation of a Budget Line
consumer‟s money income shows under- M = (PA x QA) + (PB x QB);
spending and lie inside the budget line. Where : M = Money Income;
 Bundles which cost more than the QA = Quantity of Apples (A);
consumer‟s money income are not QB = Quantity of Bananas (B);
available to the consumer and lie outside PA = Price of each apple;
the budget line. PB = Price of each Banana.

Slope of a Properties of Budget Line

Budget Line Budget Line is Downward Sloping Budget Line is a Straight Line
 Budget line slopes downwards as more of
one good can be bought by decreasing Budget Line has a Slope of a budget line
some units of the other good. negative slope, i.e. it
 Slope of Budget Line = is represented by the
slopes downwards as
Units of Bananas B willing to sacrifice
=
∆B
price ratio which is
Units of Apples A willing to gain ∆A more of one good can be
 Price Ratio indicates the slope of the bought by decreasing constant throughout,
Budget Line therefore it is equal to the
some units of the other therefore the budget
„Price Ratio‟ of two goods.
 Price Ratio =
Price of X (Px)
=
Px good. line is a straight line.
Price of Y (Py) Py
 Case 1. If the income of consumer changes :
Shift in Budget Line Explanation : Y
Effect of Change in
 With the increase in income, the consumer B1 Income on Budget Line

will be able to buy more bundles of goods. It B

Bananas (B)
Budget Line can be shifted will shift the budget line to the right from AB
B2

to A1B1.
only because of two factors :  Similarly, a decrease in income will lead to a O A2 A A1
X

leftward shift in the budget line to A2B2. Apples (A)

Case 2. If the price of a commodity change :

If the income of a If the price of the Change in prices of both commodities :
 When price of both the goods change, then the budget line will shift. Fall in
consumer commodity prices of both the goods will lead to a rightward shift in Budget Line to A1B1.
changes changes  On the other hand, rise in prices of both the goods will result in leftward shift in
budget line to A2B2.

Change in price of the commodity on the X-axis (Apples) : Y

Change in Price of
Indifference
Explanation : Apples Curve Analysis
 When price of apples falls, then new budget B
 Consumer‟s equilibrium refers to a situation,
Bananas (B)

Approach
line is represented by a shift in the budget line in which a consumer derives maximum
to the right from „AB‟ to „A1B‟. satisfaction with no intention to change it
and subject to given prices and his given
 Similarly, A rise in the price of apples will shift O A2 A A1
X
income.
the budget line towards left from „AB‟ to „A2B‟. Apples (A)

 The point of maximum satisfaction is

Change in price of the commodity on the Y-axis (Bananas) : Y achieved by taking the Indifference map and
Change in Price of
Explanation : B1 Budget Line together.
Bananas
Bananas (B)

B
 If the price of banana increases then Budget  On an indifference map, a higher indifference
B2
Line shifts leftward from AB to AB2. curve represents a higher level of satisfaction.
 If the price of bananas decreases then Budget  Therefore, a consumer always tries to remain
X
O A
at the highest possible indifference curve,
Line shifts rightward from AB to AB1. Apples (A)

subject to his budget constraint.

Consumer‟s Equilibrium under indifference curve theory must meet
the following two conditions :
Case 2. MRS Continuously Falls
 The second condition for consumer‟s equilibrium is that MRS must be diminishing at the point of
𝑃𝑥 equilibrium, i.e. the indifference curve must be convex to the origin at the point of equilibrium.
Case 1. MRSXY = Ratio of prices or  Thus, both the conditions need to be fulfilled for a consumer to be in equilibrium.
𝑃𝑦
𝑃𝑥 Explanation :
a) If there are two gods X and Y then the first condition to be fulfilled is MRSXY =  IC1, IC2 and IC3 are three indifference curves and AB is the
𝑃𝑦
budget line.
𝑃𝑥
b) If MRSXY > , it means that to obtain one more unit of good X, the consumer is willing to  With the constraint of the budget line, the highest indifference Y
𝑃𝑦 Consumer’s Equilibrium by
curve, which a consumer can reach, is IC2. Indifference Curve Approach
sacrifice more units of good Y as compared to what is required in the market.
 The Budget Line is tangent to the indifference curve IC2 at point B F
 As consumption increases the satisfaction of good X falls because of the Law of DMU. E.
 This is the point of consumer equilibrium where the consumer

Commodity Y
H
𝑃𝑥
 As a result, MRS falls and continues to fall till MRSXY = purchases OM quantity of commodity „X‟ and ON quantity of N
E
𝑃𝑦 IC3
commodity „Y‟.
IC2
𝑃𝑥  As Budget Line can be tangent to one and only one indifference
c) If MRSXY < , it means that to obtain one more unit of good X, the consumer is willing to sacrifice G
IC1
𝑃𝑦 curve, the consumer maximizes his satisfaction at point E, where X
less unit of good Y as compared to what is required in the market. both the conditions of the Consumer‟s Equilibrium satisfy i.e. O M A
𝑃𝑥 Commodity X
 It induces the consumer to buy less of X and more of Y. As a result, MRS rises till it becomes a) MRSXY = Ratio of prices or
𝑃𝑦
equal to the ratio of prices and the equilibrium is established. b) MRS continuously falls.

Class 11 Microeconomics Demand Demand is the quantity of a commodity

that a consumer is willing and able to buy
at each possible price during a given
period of time.

It can be of two types :

Individual Demand : It is the Market Demand : It is the quantity

quantity of a commodity that a of a commodity which all the
consumer is willing and able to consumers are willing and able to
buy, at each possible price during buy at each possible price during a
a given period of time. given period of time.
 Factors Affecting Individual Demand are : 3) Income of the Consumer :
• Demand for a commodity is also affected by the income of the consumer.
1) Price of the Given Commodity :
• The most important factor affecting demand is the price of the given commodity. • However, the effect of change in income on demand depends on the nature of the commodity.
• Generally, there exists an inverse relationship between price and quantity demanded. a) If the given good is a normal good, then an increase in income leads to a rise in its demand
• It implies as price increases quantity demanded falls and vice-versa. whereas a decrease in income reduces its demand.
• For example : If the price of tea increases, its quantity demanded will fall as satisfaction with b) If the given commodity is an inferior good then an increase in income reduces the demand while
the tea will fall due to the rise in its price
a decrease in income leads to a rise in demand
2) Price of the Related Goods :
• Demand for a commodity is also affected by changes in the price of related goods. 4) Tastes and Preferences :
• Related goods are of two types:
i. Substitute goods
• Tastes and preferences of the consumer directly influence the demand for a commodity.
• These are those goods which can be used in place of each other for the satisfaction of a particular want. • They include changes in fashion, customs, habits etc.
• An increase in the price of substitute goods leads to an increase in the demand for a given commodity and vice- • If a commodity is in fashion or is preferred by the consumers, then demand for such a commodity
versa. rises whereas demand for a commodity falls if the consumers have no taste for that commodity.
• For example : If the price of a substitute good (coke) increases then demand the given good (Pepsi) will rise as it
becomes relatively cheaper in comparison to Coke.
• Therefore, demand for a given commodity is directly affected by changes in the price of substitute goods 5) Expectation of Change in Price in Future :
ii. Complementary goods • If the price of a certain commodity is expected to increase in near future then
• These are those goods which are used together to satisfy a particular want like cars and petrol.
people will buy more of that commodity than what they normally buy.
• An increase in the price of complementary goods leads to a decrease in demand for the given good and vice versa.
• For Example : If the price of petrol increases then the demand for cars falls as it becomes relatively costlier to use • There exists a direct relationship between the expectation of change in prices in
both goods together. future and change in demand in the current period.
• Therefore, demand for a given commodity is inversely affected by the changes in the price of the complementary • For example : If the price of petrol is expected to rise in future, its present demand will increase.
goods

Factors Affecting Market Demand are Determinants of Market Demand :

1) Size and composition of population : Price of the given commodity

• Market demand for a commodity is affected by the size of the population in the country.
• Increase in population raises the market demand and vice versa. Price of related goods
• For example : If a market has a larger population of women, then there will be more
demand for articles of their use such as lipstick, sarees etc. Income of the consumers

2) Season and Weather : Tastes and preferences

• Seasonal and weather conditions also affect the market demand for a commodity.
• For example : During winter, demand for woolen clothes and jackets increases. Expectation of change in price in future

3) Distribution of Income : Size and composition of population

• If income in the country is equitably distributed, then market demand
for commodities will be more. Season and weather
• However, if income distribution is uneven, i.e. people are either very
rich or very poor, then market demand will remain at a lower level. Distribution of income
The difference between Substitute Goods & The difference between Normal Goods &
Complementary Goods are : Inferior Goods are :
Basis Substitute Goods Complementary Goods Basis Normal Goods Inferior Goods
Substitute Goods refer to those Complementary Goods refer to It refers to those goods whose It refers to those goods whose
goods which can be used in place of those goods which are used Meaning demand increases with an increase demand decreases with an
Meaning
one another to satisfy a particular together to satisfy a particular in income. increase in income.
want. want.
Income The income effect is positive in the The income effect is negative in
Nature of Substitute Goods have competitive Complementary Goods have Effect case of normal goods. the case of inferior goods.
demand demand. joint demand.
There is a direct relation between There is an inverse relation
The price of one substitute good has The price of a complementary Relation income and demand for normal between income and demand for
a positive relationship with the good has a negative relationship goods. inferior goods.
Relation
quantity demanded of another with the quantity demanded of
„Full cream milk‟ is a normal good if „Toned milk‟ is an inferior good if
substitute good. another complementary good.
Example its demand increases with an its demand decreases with an
• Tea and Coffee • Tea and Sugar
Example increase in income. increase in income.
• Coke and Pepsi • Car and Petrol

Demand Individual Demand Function Market Demand Function

It shows the relationship between the
Function quantity demanded for a particular It refers to the functional relationship
commodity and the factors influencing it. It refers to the functional relationship between market demand and the
between individual demand and the factors affecting market demand.
factors affecting individual demand. It is expressed as :
It is expressed as : DX = f(PX, Pr, Y, T, F, PO, S, D)
It can be of two types : DX = (PX, Pr, Y, T, F) Where,
Where, DX = Market Demand of Commodity x;
DX = Demand for Commodity x; Px = Price of the given Commodity x;
Px = Price of the given Commodity x; Pr = Price of Related Goods;
Pr = Price of Related Goods; Y = Income of the Consumers;
Individual Market Y = Income of the Consumer; T = Tastes and Preferences;
T = Tastes and Preferences; F = Expectation of Change in Price in future;
Demand Demand F = Expectation of Change in Price in PO = Size and Composition of Population;
Function Function future S = Season and Weather;
D = Distribution of Income
 Types of Demand Schedule
Demand It is a tabular statement showing various
quantities of a commodity being
Schedule demanded at various levels of price,
Individual Demand Schedule Market Demand Schedule
It refers to a tabular statement showing It refers to a tabular statement showing various
during a given period of time. various quantities of a commodity that a quantities of a commodity that all the consumers
consumer is willing to buy at various levels of are willing to buy at various levels of price, during
a given period of time
price, during a given period of time.
It can be of two types : Price Quantity Demanded of
Price
(in Rs.)
Household
A (DA)
Household B
(DB)
Market Demand
(in units) (DA + DB)
(In Rs.) commodity X (in units)
5 1 2 3
5 1
4 2 3 5
4 2 3 3 4 7
3 3 2 4 5 9
2 4 1 5 6 11
1 5
Individual Demand Market Demand As seen in the schedule, the quantity
As seen in the schedule when the price falls to Rs. 4,
market demand rises to 5 units.
Schedule Schedule demanded of „X‟ increases with a decrease in
So, the market demand schedule also shows the
its price when the price falls to Rs. 4, and inverse relationship between price and quantity
demand rises to 2 units. demanded.

 Demand Curve is a graphical Types of Demand Curve

Demand representation of the demand schedule.
Curve  It shows the inverse relationship between Individual Demand Curve Market Demand Curve
price and quantity demanded, keeping It refers to a graphical It refers to a graphical
other factors constant. representation of individual representation of market demand
demand schedules. schedules.
It can be of two types :

Individual Market Demand As seen in the diagram, the demand curve As seen in the diagram, the market demand
Demand Curve Curve “DD” is a downward-sloping straight line curve “DM” is a downward-sloping curve
because of the inverse relationship between because of the inverse relationship between
price and quantity demanded. price and quantity demanded.
 Market demand Slope of a Demand Curve
curve is a flatter  Slope of the demand curve equals the change in price divided by the change in quantity.
curve  Due to the inverse relationship between price and demand, the demand curve slopes
downwards and therefore the slope is negative.
Market demand curve is  Slope of the demand curve measures the flatness or steepness of the demand curve therefore it
is based on the absolute change in price and quantity.
always flatter than the
individual demand curve Curve
because a proportionate Slope of Demand Curve
change in market demand is 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞 ∆𝐏
more than a proportionate
= =
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 ∆𝐐
change in individual demand.

Law of Demand Important Facts About the Law of Demand are :

 Law of Demand states the inverse relationship between price and quantity demanded, 1) Inverse relationship :
keeping other factors constant (ceteris paribus). • It states the inverse relationship between price and quantity demanded.
• It affirms that an increase in price will tend to reduce the quantity
Assumptions of  Price of substitute goods does not change. demanded and vice versa.
Law of Demand  Price of complementary goods does not change.
 Income of the consumer remains the same. 2) Qualitative, not quantitative :
 Taste and preferences of the consumer remains the same. • It makes a qualitative statement only as it indicates the direction of change
 There is no expectation of a change in price in future. in the amount demanded. It does not indicate the magnitude of change.

Price (in Rs.) Quantity Demanded (in 3) No proportional relationship :

Demand units) Curve • It does not establish any proportional relationship between change in price
Schedule 5 1 and change in demand.
4 2
• If the price rises by 10%, the quantity demanded may fall by any
3 3
2 4
proportion.
1 5
4) One-sided :
Demand curve DD slopes downwards from left to right, indicating an inverse relationship • Law of Demand is one-sided as it only explains the effect of change in price
between price and quantity demanded. on the quantity demanded.
 Reasons for Operation of Law of Demand are : Exceptions of the Law of Demand are :
1) Law of Diminishing Marginal Utility :
• Law of DMU states that as we consume more and more units of a commodity the utility derived from each successive unit goes on 1) Giffen goods :
diminishing.
• Demand for a commodity depends on utility and if the consumer is getting the same satisfaction, he will not be ready to pay • These are special kinds of inferior goods on which a consumer spends a large
more.
• The consumer will buy more units only when the price falls.
part of his income and their demand rises with an increase in price whereas
2) Substitution Effect : demand falls with the decrease in price.
• It refers to substituting one commodity in place of other when it becomes relatively cheaper.
• When the price of a given commodity falls (coke) it becomes relatively cheaper as compared to its substitute (thumbs up). 2) Status symbol goods :
• As a result, demand for a given commodity rises
3) Income Effect :
• These are certain prestige goods which are used as status
• It refers to the effect on demand when the real income of the consumer changes due to a change in the price of the given symbols, for example: diamonds, gold, antique articles etc.
• These goods are wanted by rich persons for prestige and distinction.
commodity.
• When the price of the given commodity falls, it increases the real income of the consumer.
• As a result, the consumer can purchase more of the given commodity with the same money income.
4) Additional Customers :
• Higher the price, the higher will be the demand for such goods.
• When the price of a commodity falls many new customers, who were not in a position to buy it earlier start purchasing it as it 3) Fear of shortage :
comes into the budget of the customer.
• In addition to new customer old customers of the commodity starts demanding more due to its reduced price. • If a consumer expects a shortage of any commodity in the near future then
• As a result, the total demand increases.
5) Different Uses : they would start buying more and more commodities even if the prices are
• Some commodities like milk, electricity etc. have different uses. rising.
• When the price of a such commodity increases its use gets restricted to the most important uses.
• However, when the price of such a commodity decreases, the commodity is put to all its uses. • The consumer demands the goods due to fear of a further rise in prices.

4) Fashion Related Goods : The difference between Individual Demand &

• Goods related to fashion do not follow the Law of Demand
and their demand increases even with a rise in their prices. Market Demand are :
• For example : If a particular dress is in fashion, then demand
for a such dress will increase even if its price is rising.
Basis Individual Demand Market Demand
5) Necessities of life : It is the quantity of a commodity that a It is the quantity of a commodity
• The necessities are the exception to the Law of Demand due to their consumer is willing and able to buy, at which all the consumers are willing
constant use. Meaning
each possible price during a given and able to buy at each possible price
• For example : Commodities like wheat, rice, salt etc. are purchased even
period of time. during a given period of time.
if the prices increased.
Schedule It is shown by Individual Demand It is shown by Market Demand
6) Change in Weather : and Curve Schedule and Individual Demand Curve. Schedule and Market Demand Curve.
• With weather changes, demand for certain commodities also changes,
Inter-
irrespective of any change in their prices. It is the aggregation of individual
Relation- It is a component of market demand
• For example : Demand for umbrellas increases in the rainy season even demands.
ships
with an increase in their prices.
Scope It has a narrower scope. It has a broader scope.
7) Ignorance :
• Customers may buy more of a commodity at a higher price when they are Factors It is not affected by all the factors It is affected by all the factors
ignorant of the prevailing prices of the commodity in the market. Affecting affecting market demand. affecting individual demand.
 The difference between Change in Demand & Change in Quantity Demanded are :
Change in Demand
Basis Change in Demand Change in Quantity Demand
When the demand changes due to a change in any factor other than the price of When the quantity demanded changes due to a When the demand changes due to a change in any
the commodity, it is termed as a change in demand. change in the price, keeping other factors factor other than the price of the commodity, it is
Meaning
constant, then it is known as change in quantity termed as a change in demand.
For Example : If demand for Pepsi changes due to a change in the price of Coke demanded.
or due to a change in income, then such change in demand for Pepsi is known as
a change in demand. It leads to a movement along the same demand
Effect on It leads to a shift in the demand curve, either
curve, either upwards (known as contraction in
Demand rightwards (known as increase in demand) or
demand) or downwards (known as expansion in
Curve leftwards (known as a decrease in demand).
Change in Quantity Demand demand).
It occurs due to an increase or a decrease in the It occurs due to change in other factors like changes
Constituents
price of the given commodity. in the prices of substitutes, changes in income, etc.
Whenever demands for the given commodity change due to a change in price, It is also known as movement along the demand
keeping other factors constant, then it is known as a change in quantity Reason It is also known as shift in the demand curve.
curve.
demanded.
When the quantity demanded changes due to a When the demand changes due to a change in any
For Example : If demand for Pepsi changes due to a change in its own price, then Alternative change in the price, keeping other factors factor other than the price of the commodity, it is
such change in demand for Pepsi is known as a change in quantity demanded. Name constant, then it is known as change in quantity termed as a change in demand.
demanded.

Movement along
Downward Movement (Expansion)
 When quantity demanded of a commodity changes due
the Demand to a change in its price, keeping other factors constant, it  Expansion in demand refers to a rise in quantity demanded due to a fall in the
Curve is known as a change in quantity demanded. price of the commodity, with other factors remaining constant.
 It is graphically expressed as a movement along the
same demand curve.
 It leads to a downward movement along the same demand curve.
 It is also known as „Extension in Demand‟ or „Increase in Quantity demanded‟.

There can be either : Demand

Curve
Schedule
Price (in Rs.) Demanded (Units)
20 100
15 150
Downward
Upward Movement As seen in the above schedule and diagram, the quantity demanded rises from
Movement
(Contraction) 100 units to 150 units with a fall in the price from Rs.20 to Rs.15, which results in a
(Expansion) downward movement from A to B.
 Upward Movement (Contraction) • When the demand of a commodity changes due
Shift in
to a change in any factor other than the own
 Contraction in demand refers to a fall in the quantity demanded due to a rise Demand Curve price of the commodity, it is known as change in
in the price of the commodity, with other factors remaining constant.
demand.
 It leads to an upward movement along the same demand curve.
• It is expressed as a shift in the demand curve.
 It is also known as a „Decrease in Quantity demanded‟.

Demand
Curve
It can be of two types :
Schedule
Price (in Rs.) Demanded (Units)
20 100
15 70

As seen in the above schedule and diagram, the quantity demanded falls from Rightward Shift Leftward Shift
100 units to 70 units with a rise in the price from Rs.20 to Rs.25, resulting in an (increase in Demand) (Decrease in Demand)
upward movement from A to B along the same demand curve.

Rightward shift (Increase in Demand) Leftward Shift (Decrease in Demand)

• It refers to a rise in the demand of a commodity caused due to any factor other than
• It refers to a fall in the demand of a commodity caused due to any factor other than the own
the own price of the commodity.
price of the commodity.
• In this case, demand rises at the same price or demand remains same even at higher
price. • In this case, demand falls at the same price or demand remains same even at lower price.
• Increase in demand leads to a rightward shift in the demand curve. • Decrease in demand leads to a leftward shift in the demand curve

Y Increase in Demand Y Decrease in Demand

Demand D1 Demand D
Curve D Curve D1

Price (in ₹)
Price (in ₹)

Schedule A B Schedule B A
20 20
Price (in Rs.) Demanded (Units) Price (in Rs.) Demanded (Units)
D
20 100 D1 20 100 D1
D X
X O
20 150 O 100 150 20 70 70 100
Quantity demanded (in units) Quantity demanded (in units)

As seen in the above schedule and diagram, demand rises from 100 units to 150 As seen in the above diagram and schedule, demand falls from 100 units to 70
units at the same price of Rs.20, resulting in a rightward shift in the demand units at the same price of Rs20, which results in a leftward shift in the demand
curve from DD to D1D1. curve from DD to D1D1.
The difference between Movement along the Demand Curve & Shift in the Demand Curve are : The difference between Expansion in Demand and Increase in Demand are :
Basis Movement along Demand Curve Shift in Demand Curve Basis Expansion in Demand Increase in Demand
When the quantity demanded of a Expansion in demand refers to the rise in It refers to a rise in the demand of a
When the demand for a commodity
commodity changes due to a change in its quantity demanded due to a fall in the commodity caused due to any factor other
changes due to change in any factor other Meaning
Meaning price, keeping other factors constant, it price of the commodity, with others than the own price of the commodity, it is
than the own price, it leads to a shift in
leads to a movement along the same factors remaining constant. known as an increase in demand.
the demand curve.
demand curve.
Price (Rs.) Demand (units) Price (Rs.) Demand (Units)
The movement along the same demand Shift in the demand curve is either Tabular
Effect on 12 100 12 100
curve is either upwards (known as a rightwards (known as Increase in Statement
Demand 10 150 12 150
contraction in demand) or downwards demand) or leftwards (known as decrease
Curve Effect on
(known as an expansion in demand). in demand). There is a downward movement along the There is a rightward shift in the demand
Demand
Alternative It is also known as a change in quantity same demand curve. curve.
It is also known as a change in demand. Curve
Name demanded.
It occurs due to favourable change in the
It occurs due to change in other factors, It occurs due to a decrease in the price of other factors like increase in the price of
It occurs due to an increase or a decrease Reason
Reason like change in the prices of substitutes, the given commodity. substitutes, an increase in income in the
in the price of the given commodity.
change in income, etc. case of normal goods etc.

The difference between Contraction in Demand and Decrease in Demand are :

Basis Contraction in Demand Decrease in Demand Substitute Goods
Contraction in demand refers to a fall in  These are those goods which can be used in place of one another for satisfaction of a particular
It refers to a fall in the demand of a
the quantity demanded due to an want, like tea and coffee.
Meaning commodity caused due to any factor other
increase in the price, keeping other factors  Demand for a given commodity varies directly with the price of a substitute good.
than the own price of the commodity.
constant.  For Example : If price of a substitute good (say, coffee) increases, then demand for given
commodity (say, tea) will rise as tea will become relatively cheaper in comparison to coffee.
Price (Rs.) Demand (units) Price (Rs.) Demand (Units)
Tabular
10 150 10 150
Statement  In the above diagram, the price of coffee
12 100 10 100 Curve (substitute good) is shown on Y-axis and
Effect on the demand for tea (given commodity)
There is an upward movement along the There is a leftward shift in the demand
Demand on X-axis.
same demand curve. curve.
Curve
 From the above diagram, we have
It occurs due to unfavourable change in
observed that when the price of coffee
It occurs due to a increase in the price of the other factors like decrease in the price
Reason rises from OP to OP1, demand for tea also
the given commodity. of substitutes, decrease in income in the
case of normal goods etc.
rises from OQ to OQ1.
 Complementary Goods Cross Demand
It refers to the relationship between the demand of a given commodity and the price of related
• Complementary goods refer to those goods which are used together to satisfy a particular commodities, other things remaining the same.
want. It indicates how much quantity of a given commodity will be demanded at different prices of a
• Demand for a given commodity varies inversely with the price of a complementary good. related commodity.
• For Example : If price of a complementary good 9say, sugar) increases, then demand for given
commodity (say, tea) will fall as it will be relatively costlier to use both the goods together Cross Demand can be either positive or negative :
 Cross demand is positive in the case of substitute goods as demand for the given commodity
varies directly with the prices of substitute goods.
Curve  In the above diagram, the price of  Cross demand is negative in the case of complementary goods as demand for the given
sugar (complementary good) is shown commodity varies inversely with the prices of complementary goods.
on Y-axis and the demand for tea
(given commodity) is on the X-axis. Cross Price Effect
 We have observed that when the price
It refers to effect on the demand for a given commodity due to a change in
of sugar rises from OP to OP1, demand the price of a related commodity. It means, cross price effect originates from
for tea falls from OQ to OQ1. substitute goods and complementary goods.

Change in the Price of Substitute Goods on the Demand Curve Change in the Price of Complementary Goods

Increase in Price of Substitute Goods Increase in Price of Complementary Goods

• When the price of substitute goods (like, • When the price of complementary goods (like,
coffee) rises, demand for the given commodity sugar) rises, demand for the given commodity
(like tea) also rises from OQ to OQ1 at its same (like tea) falls from OQ to OQ1 at the same price
price of OP. of OP.
• It leads to a rightward shift in the demand • Demand curve of the given commodity shifts to
curve of the given commodity from DD to D1D1. the left from DD to D1D1.

Decrease in Price of Substitute Goods Decrease in Price of Complementary Goods

• With the decrease in price of substitute goods • When the price of complementary goods (like,
(coffee), demand for the given commodity sugar) decreases, demand for the given
(tea) also decreases from OQ to OQ1 at the commodity (tea) increases from OQ to OQ1 at the
same price of OP. same price OP.
• It shifts the demand curve of the given • As a result, the demand curve of the given
commodity towards the left from DD to D1D1. commodity shifts to the right from DD to D1D1.
  It refer to those goods for which Effect on demand curve for normal goods when income changes
Necessity there is no change in demand Increase in Income
Goods with a change in the income of
• As income rises, the demand for normal
consumer goods (like TV) also rises from OQ to OQ1 at
the same price as OP.
 For example: Salt, medicines, • It leads to a rightward shift in the demand
wheat flour etc. curve of normal goods from DD to D1D1.

 These goods are essential for Decrease in Income

human existence and, therefore, • When income falls, demand for normal
goods (TV) falls from OQ to OQ1 at the same
they occupy a higher place in price as OP.
the consumer‟s order of • Demand curve of normal goods shifts
towards the left from DD to D1D1.
preference.

Effect on demand curve for inferior goods when income changes Kinds of Demand
Increase in Income • It refers to the relationship between the price and demand
Price Demand of a commodity assuming other factors are constant.
• As income increases, the demand for inferior
goods (like, black-and-white TV) falls from
OQ to OQ1 at the same price of OP. Income • It refers to a relationship between the income of consumer
and the quantity demanded of a commodity, assuming
• It leads to a leftward shift in the demand Demand other factors are constant.
curve of inferior goods from DD to D1D1.
• It refers to a relationship between the demand of a given
Decrease in Income Cross Demand commodity and the prices of related commodities,
assuming other things remaining the same.
• As income decreases, the demand for
inferior goods (black-white TV) rises from • When two or more goods are demanded simultaneously to satisfy a
OQ to OQ1 at the same price of OP. particular want, then such a demand is called joint demand.
• It leads to a rightward shift in the demand Joint Demand • For example : Demand for sugar, milk and tea leaves is a joint
curve of inferior goods from DD to D1D1. demand, as they are demanded together to prepare tea.
 • When a commodity can be put to several uses, its demand is
Composite
•
known as composite demand. Demand Curve shifts towards the Right because of :
Demand For example : Demand for electricity as it can be used for
various purposes like TV, AC, lighting rooms etc.

• Demand for a commodity, which depends on the demand for other goods, is known as
Increase in the price of substitute goods
Y
Derived derived demand.
Increase in Demand

Demand • For example : Demand for labour producing cloth is a derived demand as it depends on Decrease in price of complementary goods D1
the demand for cloth.
D

• When a commodity satisfies the want directly, its demand is termed as direct demand. Increase in income (normal good)
Direct Demand • For example : Demand for clothes, books, food is a direct demand as these items satisfies
20
A B
the wants directly.

Price (in ₹)
Decrease in income (inferior good)
• When demand can be satisfied by different alternatives, then its
Alternative demand is known as alternative demand. D1
•
Increase in population
Demand For example : There are number of options (alternatives) to satisfy the
demand for food like chapatti, rice, burger etc.
D

Taste in favour of commodity O 100 150

X
• When two goods are close substitutes of each other and increase in demand for one of
Competitive them will decrease the demand for the other, then the demand for any one of them is Quantity demanded (in units)

Demand known as competitive demand. Expectation of future increase in price

• For example : An increase in demand for coffee might reduce the demand for tea.

Demand Curve shifts towards the Left because of : The differences between normal goods and inferior goods are :
Basis Normal Goods Inferior Goods
Decrease in the price of substitute goods Normal Goods refer to those Inferior goods refer to
Y Decrease in Demand
goods whose demand those goods whose
Increase in price of complementary goods D Meaning
D1
increases with an increase in demand decreases
income. with an increase in income.
Decrease in income (normal good)
B A Income Income effect is positive in Income effect is negative in
20
Increase in income (inferior good) Effect case of normal goods. case of inferior goods.
Price (in ₹)

There is a direct relation There is an inverse relation

D
Decrease in population Relation between income and demand between income and demand
D1
for normal goods. for inferior goods.
Taste not in favour of commodity O 70 100
X
„Full Cream Milk‟ is a normal „Toned Milk‟ is an inferior
Quantity demanded (in units)
Example good if its demand increases good if its demand decreases
Expectation of future decrease in price
with an increase in income. with an increase in income.
Class 11 Microeconomics Elasticity
of Demand Elasticity of demand refers to the percentage
change in demand for a commodity with
respect to percentage change in any of the
factors affecting demand for that
commodity.

The concept of elasticity was developed by

Prof. Marshall in his book ‘Principles of
Economics’.

Elasticity of Demand =
% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐃𝐞𝐦𝐚𝐧𝐝 𝒇𝒐𝒓 𝑿
% 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐚 𝐟𝐚𝐜𝐭𝐨𝐫 𝐚𝐟𝐟𝐞𝐜𝐭𝐢𝐧𝐠 𝐝𝐞𝐦𝐚𝐧𝐝 𝐟𝐨𝐫 𝐗

Dimensions of Elasticity of Demand Price Elasticity of Demand

1) Price Elasticity of 2) Cross Elasticity of 3) Income Elasticity It means the degree of responsiveness of demand for a commodity with
reference to change in the price of such commodity.
Demand : Demand : of Demand :
It establishes a quantitative relationship between the quantity demanded
of a commodity and its price, while other factors remain constant.
It refers to the
percentage change in It refers to the
It refers to the Higher the numerical value of elasticity, the larger is the effect of a price
demand for a percentage change in change on the quantity demanded.
percentage change in
commodity with respect demand for a
demand for a
commodity with For certain goods, a change in price leads to a greater change in the
commodity with respect to the percentage respect to the demand, whereas, in some cases, there is a small change in demand due to
to percentage change change in the price of a change in price.
percentage change in
in the price of the given related good the income of the
commodity. (substitute good or It is also known as ‘Elasticity of Demand’, ‘Demand Elasticity’ or
consumer. ‘Elasticity’.
complementary good).
 Methods for Measuring Price Elasticity of Demand
Percentage Method Proportionate Method Negative sign may be ignored :
According to this method, elasticity is  The coefficient of price elasticity of demand is always a
Percentage method can also be
measured as the ratio of the percentage negative number because of inverse relationship between
change in the quantity demanded to the converted into proportionate method :
price and quantity demanded.
percentage change in the price. ∆𝐐 ∆𝐐
𝐗 𝟏𝟎𝟎
𝐐 𝐐
Elasticity of Demand (Ed) =
𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐃𝐞𝐦𝐚𝐧𝐝𝐞𝐝
Ed = ∆𝐏 = ∆𝐏 OR Elasticity is a ‘Unit free’ measure :
𝐗 𝟏𝟎𝟎
𝐏𝐞𝐫𝐜𝐞𝐧𝐭𝐚𝐠𝐞 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐩𝐫𝐢𝐜𝐞 𝐏 𝐏
∆𝐐 𝐏  Elasticity is not affected whether the quantity demanded is
Where,
ED = X measured in kg or tonnes and whether the price is measured
 Percentage change in Quantity ∆𝐏 𝐐
Demanded =
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 (∆𝐐)
X 100 Where, in rupees or dollars.
𝐈𝐧𝐢𝐭𝐢𝐚𝐥 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 (𝐐)
 Q = Initial Quantity Demanded  It happens because elasticity considers percentage change in
 Change in Quantity = ∆Q = Q1 –Q  Q1 = New Quantity Demanded price and quantity demanded.
 Percentage change in price =  ∆Q = Change in Quantity Demanded  So, we can easily compare price sensitivity of inexpensive
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞 (∆𝐏)  P1 = New Price
𝐎𝐫𝐢𝐠𝐢𝐧𝐚𝐥 𝐏𝐫𝐢𝐜𝐞 (𝐏)  P = Initial Price goods like needle and that of expensive good like gold.
 Change in Price (∆P) = P1 - P1  ∆P = Change in Price

Various Degrees of Elasticity of Demand Perfectly Elastic Demand : (Ed = 0)

When there is an infinite demand at a particular price and demand becomes zero with a slight
When prices of different commodities change, the quantity demanded of each rise in the price, then demand for such a commodity is said to be perfectly elastic.
commodity reacts in a different manner. For example, demand of medicines or needle
responds very less to a change in price as compared to AC or DVD Player. So, degree of Price Demand
responsiveness of quantity demanded to a change in price may differ and hence,
elasticity of demand could also differ. Various kinds of price elasticities of demand are :
Schedule (in Rs.) (in units) Curve
30 100
30 200
Perfectly Elastic Demand 30 300

Perfectly Inelastic Demand

 As in the above schedule and diagram, the quantity demanded
Highly elastic Demand can be 100, 200 and 300 units and so on at the same price of Rs.30
 Ed = ∞ and demand curve is a horizontal straight line parallel to X-
Less Elastic Demand
axis.
Unitary Elastic Demand  Perfectly elastic demand is an imaginary situation.
 Perfectly Inelastic Demand : (Ed = 0) Highly Elastic Demand : (Ed > 1)
When percentage change in the quantity demanded is more than the percentage change in price,
When there is no change in demand with change in price, then then demand for such a commodity is said to be highly elastic.
demand for such a commodity is said to be perfectly inelastic.
Price Demand
Price Demand
Schedule Curve
(in Rs.) (in units)
Schedule (in Rs.) (in units) Curve
20 100
20 100
30 100 10 200
40 100
 As seen in the above schedule and diagram, the quantity demanded rises by
100% due to a 50% fall in price.
 As in the above schedule and diagram, the quantity demanded remains  As QQ1 is proportionately more than PP1, the elasticity of demand is more than 1.
constant at 100 units, whether the price is Rs 20, Rs 30 or Rs 40.  Commodities like AC, DVD player, etc. generally have highly elastic demand.
 Ed = 0 and the demand curve is a vertical straight line parallel to Y-axis.  Ed > 1, the highly elastic demand curve is flatter and its slope is inclined more
 Perfectly inelastic demand is an imaginary situation. towards X-axis.

Less Elastic Demand : (Ed < 1) Unitary Elastic Demand : (Ed = 1)

When percentage change in the quantity demanded is less than percentage change in price, then When percentage change in the quantity demanded is equal to percentage change in price, then
demand for such a commodity is said to be less elastic or inelastic. demand for such a commodity is said to be unitary elastic.

Price Demand Price Demand

Schedule Curve Schedule Curve
(in Rs.) (in units) (in Rs.) (in units)
20 100 20 100
10 120 10 150
 As seen in the above schedule and diagram, the quantity demanded rises by  As seen in the above diagram and schedule, quantity rises by 50% with a 50% fall in
just 20% due to 50% fall in the price. the price.
 Elasticity of demand is less than 1 as QQ1 is proportionately less than PP1.  The elasticity of demand is equal to one, as OQ1 is proportionately equal to PP1.
 Ed < 1, the less elastic demand curve is steeper and its slope is inclined more  Ed = 1, demand curve is a rectangular hyperbola. Rectangular hyperbola is a curve
towards Y-axis. under which the total area at all points will be the same.
 Commodities like salt, vegetables, etc. generally have less elastic demand.  Commodities like scooter, refrigerator, etc. generally have unitary elastic demand.
Quick Recap – Coefficients of Ed When the Flatter Curve
is more Elastic :
Type Value Description  When two demand curves intersect each other, then
the flatter curve is more elastic at the point of
Perfectly Infinite demand at intersection
Ed = ∞
Elastic same price
 In the below figure, demand curve DD (flatter curve)
Perfectly Same demand at and D1D1 (steeper curve) intersect each other at point
Ed = 0 E. At this point, OQ quantity is demanded at the
Inelastic all prices price of OP. When price rises from OP to OP1 , the
quantity demanded falls from OQ to OQ₂ for
Highly % ∆ in Demand > % demand curve DD and from OQ to OQ1 for demand
Ed > 1
Elastic ∆ in Price curve D₁D₁.

% ∆ in Demand < %  With the same change in price (PP₁), change in

Less Elastic Ed < 1 demand (QQ2) in case of demand curve DD is more
∆ in Price than change in demand (QQ₁) in case of demand
Unitary % ∆ in Demand = % curve D₁D₁. It means, Demand is more elastic in case
of DD (flatter curve) as compare to D1D1 (steeper
Ed = 1
Elastic ∆ in Price curve).

3) Income Level :
 Elasticity of demand for any commodity is generally less for higher income level groups in
Factors Affecting Price Elasticity of Demand comparison to people with low incomes.
 It happens because rich people are not influenced much by changes in the price of goods.
 As a result, demand for lower income group is highly elastic.
 A change in price does not always lead to the same proportionate change in demand.
4) Level of Price :
 For example : A small change in price of AC may affect its demand to a considerable extent,  Level of price also affects the price elasticity of demand as costly goods like laptop; AC, etc. have highly elastic
whereas, large change in price of salt may not affect its demand. So, Elasticity of Demand is demand as their demand is very sensitive to changes in the prices.
different for different goods.  However, demand for inexpensive goods like a match box, etc., is inelastic as change in the prices of
 Factors affecting Price Elasticity of Demand are : such goods do not change their demand by a considerable amount.

5) Number of Uses :
1) Nature of Commodity : Elasticity of demand of a commodity is influenced by its nature.
 If the commodity under consideration has several uses, then its demand will be elastic.
A commodity for a person a commodity may be a necessity, a comfort or a luxury.
 When a commodity is a necessity like food grains, vegetables etc., its demand is generally inelastic as it is required for human survival
 When price of such a commodity increases, then it is generally put to only more urgent uses and demand falls. When
and its demand does not fluctuate much with change in price. prices fall, then it is used for satisfying even less urgent needs and demand rises.
 When a commodity is a comfort like fan, refrigerator, etc., its demand is generally elastic as consumer can postpone its consumption.  For example: Electricity is a multiple-use commodity. Fall in its price will result in substantial increase in its demand,
 When a commodity is a luxury like AC, DVD player, etc., its demand is generally more elastic as compared to demand for comforts. particularly in those uses (like AC, Heat convector, etc.), where it was not employed formerly due to its high price.

2) Availability of Substitutes : 6) Time Period :

 With large number of substitutes, demand for a commodity will be more elastic.  Price elasticity is always related to the time period as it can be a day, a week, a month, a year or
 The reason is that even a small rise in its prices will induce the buyers to go for its substitutes. a period of several years.
 For example: A rise in the price of Pepsi encourages buyers to buy Coke and vice-versa. Thus,  It varies directly with the time period.
availability of close substitutes makes the demand sensitive to change in the prices.  Demand is generally inelastic because consumers find it difficult to change their habits in short period.
 Therefore, commodities with few or no substitutes like wheat and salt have less price elasticity of demand.  In long run, demand is more elastic because it is comparatively easier to shift to other substitutes, if the price of the
given commodity rises.
7) Postponement of Consumption :
 Commodities like biscuits, soft drinks etc. whose demand is not urgent, have highly elastic
demand as their consumption can be postponed in case of an increase in their prices.
Class 11 Microeconomics
 Commodities like life saving drugs have inelastic demand because of their immediate
requirement.

8) Share in Total Expenditure :

 Proportion of consumer’s income spent on a particular commodity
also influences the elasticity of demand for it.
 Greater the proportion of income spent on the commodity, more is the elasticity of demand
for it and vice-versa.
 For example: Demand for goods like salt, needle, soap, matchbox, etc. tends to be elastic as
consumers spend a small proportion of their income on such goods. When prices of such goods
change, consumers continue to purchase almost the same quantity of these goods

9) Habits :
 Commodities like alcohol, tobacco etc., which have become habitual
necessities for the consumers, have less elastic demand.
 It happens because such a commodity becomes a necessity for the consumer
and he continues to purchase it even if its price rises.

Production
 Production refers to transformation of
inputs into output.
Short Run Long Run
 For example : To manufacture shoes  It refers to a period in which  It refers to a period in which
(output), we need various inputs like output can be changed by output can be changed by
leather, nails, land, labour, capital, changing only variable changing all factors of
services of entrepreneur etc.
factors. production.
 In short run, fixed inputs like  It is long enough for the firm to
• Production Function is an expression of the
technological relation between physical input
Production plant, machinery, building, adjust all its inputs according
and output of a good. Function etc. cannot be changed. to change in the conditions in
• Symbolically : Ox = f(i1, i2, i3 ……………….. in)  In short run, some factors are the long run.
Where, fixed and some are variable  In long run, firm can change its
Ox = output of commodity x; and fixed factors cannot be factory size, switch to new
f = Functional relationship; changed during techniques of production,
i1, i2, i3 ……………….. in = Inputs needed for Ox
a short span of time. purchase new machinery, etc.
The differences between Short Run and Long Run are : Variable Factors Fixed Factors
Basis Short Run Long Run
 It refers to those factors,  It refers to those factors,
Short Run refers to a period Long Run refers to a period
in which output can be in which output can be which can be changed in which cannot be
Meaning
changed by changing only changed by changing all the short run. changed in the short run.
variable factors. factors of production.  It varies directly with the
 They do not vary
Factors are classified as
All the factors are variable level of output and is not
Classification variable and fixed factor in directly with the
the short run.
in the long run. required in case of zero
output. level of output.
In short run, demand is more In the long run, both
 For Example : Raw  For Example : Plant and
Price active in price determination demand and supply play
as supply cannot be equal role in price material, casual labour, machinery, building,
Determination
increased immediately with determination as both can
power, fuel, etc. land, etc.
increase in demand. be increased.

The differences between Variable Factors and Fixed Factors are :

Types of Production Function
Basis Short Run Long Run
Variable Factors refer Fixed Factors refer to Short Run Production Function (Variable Proportion Type) :
to those factors which those factors which cannot
Meaning  Short run production function refers to a situation when output is increased
can be changed in the be changed in the short
by changing only one input while keeping other inputs unchanged.
short run. run.  As there is change in variable input only, the ratio between
Relation different inputs tends to change at different levels of output.
They vary directly They do not vary directly
with
with output. with the level of output. Long Run Production Function (Constant Proportion Type) :
Output
 Long Run Production Function refers to a situation when output is increased
Raw material, casual Building, Plant and by increasing all the inputs simultaneously and in the same proportion.
Example labour, power, fuel, machinery, permanent  As all inputs are variable in the long run, the ratio between different
etc. staff, etc. inputs tends to remain the same at different levels of output.
 1) Total Product (TP) :
Product or output refers to the volume  It refers to total quantity of goods produced by a firm during a given period of time with
Product given number of inputs.
of goods produced by a firm or an  For Example: If 10 labours produce 60 kg of rice, then total product is 60 kg.
 It is also known as ‘Total Physical Product (TPP)’ or ‘Total Return’ or ‘Total Output’.
industry during a specified period of
time. 2) Average Product (AP) :
 It refers to output per unit of variable input.
 For Example: If TP is 60kg of rice, produced by 10 labours, then average
product will be 60/10 = 6 kg.
Product can be of three types :  It is also known as ‘Average Physical Product (APP)’ or ‘Average Return’.
𝐓𝐨𝐭𝐚𝐥 𝐏𝐫𝐨𝐝𝐮𝐜𝐭 (𝐓𝐏)
 Average Product =
𝐔𝐧𝐢𝐭𝐬 𝐨𝐟 𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐅𝐚𝐜𝐭𝐨𝐫 (𝐧)

3) Marginal Product (AP) :

 It refers to addition to total product, when one more unit of variable factor is employed.
Total Product Average Product  For Example: If 10 labours make 60 kg of rice and 11 labours make 67 kg of rice, then MP of
11th labour will be 7 kg.
 It is also known as ‘Marginal Physical Product’ or ‘Marginal Return’.
Marginal Product  Marginal Product =
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐓𝐨𝐭𝐚𝐥 𝐏𝐫𝐨𝐝𝐮𝐜𝐭
=
∆ 𝐓𝐏
= TPn – TPn – 1
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐔𝐧𝐢𝐭𝐬 𝐨𝐟 𝐕𝐚𝐫𝐢𝐚𝐛𝐥𝐞 𝐅𝐚𝐜𝐭𝐨𝐫 ∆𝐧

Law of Variable Proportion (LVP) Schedule Curve

 Law of Variable Proportions states that as we increase quantity of only one input
keeping other inputs fixed, total product (TP) initially increases at an increasing rate, Fixed Factor Variable
TP MP
then at a decreasing rate and finally at a negative rate. (Land in Factor
(units) (units)
Phase
acres) (Labour)
 It is also known as ‘Law of Returns’ or ‘Law of Returns to Factor’
or ‘Returns to Variable Factor’ 1 1 10 10 Phase I :
Increasing rate
Assumptions : 1 2 30 20 of return
1 3 45 15 Phase II :
a) Law of Variable Proportions always operate in short run. Diminishing
b) This law applies to field of production only. 1 4 52 7
Returns to a
c) The effect of change in output due to change in variable factor can be easily 1 5 52 0 factor
determined. Phase III :
d) It is assumed that all variable factors are equally efficient. Negative
1 6 48 -4
e) The state of technology is assumed to be constant during the operation of this Returns to a
law. factor
 Different Phases of Law of Variable Proportion  In Phase I, employment of every additional unit of
variable factor gives more and more output i.e.
Phase of marginal product increases.
 In phase III, marginal product of each variable
Phase I : Increasing Returns
to a Factor (TP increases at
Phase II : Diminishing Returns
to a Factor (TP increase at
Phase III : Negative
Returns to a Factor :
Operation factor is negative. So, this phase is ruled out on the
an increasing rate) : diminishing rate) : ground of technical inefficiency and a rational
producer will never produce in this phase.
 In the third phase,
 In the first phase, every  In the second phase,
the employment of
additional variable factor every additional variable
additional variable A producer will aim to Conclusion
adds more and more to factor adds lesser and
the total output. lesser amount of output.
factor causes TP to
decline and MP becomes
produce in Phase II, as TP is
 It means TP increases at  It means TP increases at
an increasing rate and MP a diminishing rate and
negative.
 This phase is known as
maximum and MP of each
of each variable factor MP falls with increase in
also rises. variable factor.
negative returns to a
factor.
variable factor is positive.

Reasons for Law of Variable Proportion Reasons for Diminishing Returns to a Factor (Phase II) :
1) Imperfect Substitutes :
Reasons for Increasing Returns to a Factor (Phase I) :  Diminishing returns to a factor occurs because fixed and variable
factors are imperfect substitutes of one another.
1) Better Utilization of the Fixed Factor :
 In the first phase, supply of the fixed factor is too large, whereas variable factors
 There is a limit to the extent of which one factor of production can
are too few. be substituted for another.
 So, the factor is not fully utilized, but when variable factors are increased and 2) Optimum Combination of Factors :
combined with fixed factor, then fixed factor is better utilized and output increases
at an increasing rate.  Among the different combinations between variable and fixed
2) Increased Efficiency of Variable Factor :
factor, there is one optimum combination at which TP is
 When variable factors are increased and combined with the fixed factor, then maximum.
former is utilized in a more efficient manner.  After making the optimum use of fixed factor, the marginal
 At the same time, there is greater cooperation and high degree of specialization return of variable factor begins to diminish.
between different units of the variable factor.
3) Indivisibility of Fixed Factor :
3) Over-utilization of Fixed Factors :
 The fixed factors which are combined with variable factors are indivisible.  As we keep on increasing the variable factor, eventually a
 Once an investment is made in an indivisible fixed factor, then addition of more position comes when the fixed factor has its limits and starts
and more units, improves the utilization of fixed factor. yielding diminishing returns.
Reasons for Negative Returns to a Factor (Phase III) : Law of Diminishing Returns
1) Limitation of Fixed Factor :  It states that when more and more units of a variable factor are employed with a fixed factor, then
 The negative returns to a factor apply because some factors of marginal product of the variable factor must fall.
production are of fixed nature, which cannot be increased with  This law is also known as Law of Diminishing Marginal Product.
increase in variable factor in the short run.
Fixed Factor Variable Factor TP (in MP (in
2) Poor Coordination between Variable and Fixed Factor : Schedule (Land) (Labour) Units) Units) Curve
 When variable factor becomes too excessive in relation to fixed 1 1 12 12
factor, then they obstruct each other which lead to poor 1 2 22 10
coordination. 1 3 30 8
 As a result, total output falls instead of rising and marginal 1 4 36 6
product becomes negative. 1 5 40 4

3) Decrease in Efficiency of Variable Factor :

 As seen in the above diagram and schedule, MP falls when more and more units of variable
 With continuous increase in variable factor, the advantages of factor are employed with the fixed factor.
specialization and division of labour start diminishing.  This law considers only the falling phases of MP and ignores the phase of increasing MP.
 It results in inefficiencies of variable factor, which is another  LVP is an extension to law of diminishing returns as it considers the phase of rising MP in
reason for the negative returns to eventually set in. addition to falling MP.

Relationship between TP and MP Relationship between AP and MP

Fixed Factor Variable Factor
TP MP Fixed Factor Variable Factor
Schedule (Land) (in
Acres)
(Labour) (in
Units)
(Units) (Units) Curve Schedule (Land) (in (Labour) (in
AP MP
Curve
(Units) (Units)
Acres) Units)
1 0 0 ---
1 0 0 ---
1 1 10 10
1 1 10 10
1 2 30 20
1 2 15 20
1 3 45 15
1 4 52 7 1 3 15 15

1 5 52 0 1 4 13 7
1 6 48 -4 1 5 10.40 0
1 6 8 -4

Explanation :
• As long as TP increases at increasing rate, MP also increases. Explanation :
• When TP increases at diminishing rate, MP decreases.  When MP is equal to AP, AP is at its maximum.
• When TP reaches it minimum point (P), MP becomes zero.  When MP is less than AP, AP falls.
• When TP starts decreasing, MP becomes negative.  Both AP and MP fall, but MP becomes negative, whereas AP remains positive.
Class 11 Microeconomics COST
Cost means the sum total of actual
expenditure on inputs (explicit cost) and
the imputed value of the inputs supplied by
the owners (implicit cost).

 It includes :
Explicit Cost Implicit Cost
It is the actual money expenditure on
it is the estimated value of the inputs
inputs or payment made to outsiders
supplied by the owners including
for hiring their factor services. For
normal profit. For example : Interest on
example : Payment for raw materials,
own capital, rent of own land, salary
wages paid to the employees, rent
for the services of entrepreneur, etc.
paid for hired premises, etc.

The differences between Explicit Cost and Implicit Cost :

Basis Explicit Cost Implicit Cost
Cost
It is the payment made
Function It refers to the functional relationship
It is the cost of self-
Meaning to outsiders for hiring between cost and output.
supplied factors.
factor services.
It involves actual There is no money The relation between cost and output
Money money payment on payment involved as it is known as ‘Cost Function’.
Payment buying and hiring involves imputed value of
inputs. factors owned by the firm. It is expressed as : C= f(q) where, C =
Payment of wages, Cost of production; q = Quantity of
Rent of own land, interest
Example rent, insurance output; f = Functional relationship.
on capital, etc.
premium, etc.
 Opportunity Types of Short Run Costs
Cost Opportunity Cost is the cost of next
best alternative foregone.
Short Run Costs are divided
For Example : A farmer can
produce 50 quintals of rice or 40
into two kinds of costs :
quintals of wheat on his land with
the given resources, if he chooses to
produce rice, then he will have to
forgo the opportunity of producing Fixed Cost Variable Cost
40 quintals of wheat.

Fixed Cost (FC) or Total Fixed Cost (TFC) Variable Cost (VC) or Total Variable Cost (TVC)
 It refers to those costs which do not vary directly with the level of output.  It refers to those costs which vary directly with the level of output.
 For example : Interest on loan, rent on premises, insurance premium, etc.  For example : Payment for raw material, fuel, power, wages of casual labour, etc.
 It is also known as ‘Supplementary Cost’; ‘Overhead Cost’; ‘Indirect Cost’; ‘General Cost’ and  Such costs are incurred till there is production and become zero at zero level of output.
‘Unavoidable Cost’.  It is also known as ‘Prime Cost’; ‘Direct Cost’; ‘Avoidable Cost’.
 Fixed cost remains the same, whether the output is large, small or even zero.

Y Output (in Units) TVC (Rs.)

Output (in Units) TFC (Rs.)
Schedule Curve 36 -
Total Fixed Cost Curve Schedule Curve
0 12 TFC curve is a horizontal 0 0
Fixed Cost (in ₹)

30 - straight line parallel to X-

1 12 24 - axis showing that total fixed 1 6
costs remain same (₹ 12) at
2 12 18 - all levels of output. 2 10
12 - TFC
3 12 6-
3 15
4 12 O
X 4 24
1 2 3 4 5
5 12 Output (in units) 5 35

Explanation : Explanation :
 Units of output are measured along the X-axis and fixed costs along the Y-axis.  Units of output are measured on X-axis and variable cost along Y-axis.
 TFC curve is a horizontal straight line parallel to X-axis because TFC remains same at all levels  TVC is an inversely S-shaped curve due to the Law of Variable Proportions.
of output, even if the output is zero.  It starts from origin indicating that when output is zero, variable cost is also zero.
 Total Cost (TC)
 It is the total expenditure incurred by a firm on the factors of production required for the production of a
TVC is inversely S-shaped curve
commodity.
 It is the sum of total fixed cost and total variable cost at various levels of output. because :
Total Total Total Cost
Schedule Output Curve
Fixed Cost Variable (TC) = TFC
(Units)
(TFC) Cost (TVC) + TVC
Initially TVC rises at decreasing rate because
0 12 0 12 of better utilization of fixed factor and
1 12 6 18 increase in efficiency of variable factors.
2 12 10 22
3 12 15 27
4 12 24 36
5 12 35 47
TVC rises at an increasing rate because of fall
in efficiency of variable factors due to
Explanation :
 Units of output are measured on X-axis and TVC, TFC, and TC are measured on Y-axis.
limitation of fixed factor.
 The vertical distance between TC and TVC always remains same due to constant TFC.
 Like TVC curve, TC curve is also inversely S-shaped, due to law of variable proportions.

The differences between Total Variable Cost & Total Fixed Cost :
Relationship between TC, TFC and TVC
Basis Total Variable Cost Total Fixed Cost
Total Total Total Cost Curve
Total Variable Cost refers to those costs Total Fixed Cost refers to those costs which Schedule Output
Fixed Cost Variable (TC) = TFC +
Meaning which vary directly with the level of do not vary directly with the level of (Units)
(TFC) Cost (TVC) TVC
output. output.
0 12 0 12
Time Period It can be changed in the short run. It cannot be changed in the short run. 1 12 6 18
Cost at Zero It can never be zero even if there is no 2 12 10 22
It is zero when there is no production.
Output production. 3 12 15 27
Factors of It is incurred on variable factors like It is incurred on fixed factors like land, 4 12 24 36
Production labour, raw material, etc. building, etc. 5 12 35 47

TVC is inversely S-shaped as variable Explanation :

Shape of the TFC is a horizontal straight line  Units of output are measured on X-axis and TVC, TFC, and TC are measured on Y-axis.
cost increases initially at a decreasing
parallel to X-axis as fixed cost  TFC curve is a horizontal straight line parallel to X-axis as it remains constant at all levels of output.
Curve rate, then at constant rate and, finally,
remains the same at all levels of output.  TC and TVC curves are inversely S-shaped because of law of variable proportions.
at an increasing rate.  At zero output, TC is equal to TFC because there is no variable cost at zero level of output.
Wages of casual labour, payment of raw Salary of permanent staff, insurance  TC and TVC curves are parallel to each other and the vertical distance between them remains the same at all
Example levels of output because the gap between them represents TFC, which remains constant at all levels of output.
material, etc. premium, building rent, etc.
 Average Average Fixed Cost
The per unit costs explain the
Costs relationship between cost and output  It refers to the per unit fixed cost of production.
 APC falls with increase in output as TFC remain same at all levels of output.
𝐓𝐅𝐂
in a more realistic manner.  AFC = 𝐐

Output Total Average

Schedule (in Fixed Cost Fixed Cost
Curve
Units) (TFC) (AFC)
The three units of per unit costs are : 0 12 ∞
1 12 12
2 12 6
3 12 4
Average Total Cost (ATC) or 4 12 3
Average Fixed Cost (AFC) 5 12 2.40
Average Cost (AC)
Explanation :
Average Variable Cost  From the above diagram and schedule, AFC diminishes by the same proportion as that of the proportion
(AVC) of increase of the number of units and the product will always be same and equal to TFC.
 AFC curve is a rectangular hyperbola, i.e. area under AFC curve remains same at different points.

Average Variable Cost (AVC)

AFC curve is a rectangular hyperbola.
 It refers to the per unit variable cost of production.
It gets nearer to both the axis but  AVC = 𝑸
𝑻𝑽𝑪

 AVC initially falls with increase in output, once the output rises till optimum level, AVC starts rising.
never touches any one of them. Total Average
Output Curve
Schedule Variable Cost Variable Cost
(in Units)
(TVC) (AVC)
AFC can never touch the X-axis as TFC can never 0 0 ---
be zero. 1 6 6
2 10 5
3 15 5
4 24 6
AFC curve can never touch the Y-axis because at 5 35 7
zero level of output, TFC is a positive value and Explanation :
any positive value divided by zero will be infinite  From the above diagram and schedule, AVC initially falls with increase in output and after reaching its
minimum level, it starts rising.
value.  AVC curve is a U-shaped curve as it initially falls and then remains constant for a while and finally, it
starts increasing.
 Average Total Cost Three Phases of AC are :
 It refers to the per unit total cost of production.
 AC =
𝑻𝑪
𝑸
1st1stPhase:
Phase:
 It is the sum of average fixed cost and average variable cost.
 When both AFC and AVC fall, AC also falls i.e. till point A.
Output AC (AFC +
Schedule
(Units)
AFC AVC
AVC)
Curve 22ndndPhase:
Phase:
∞
0
1 12
---
6
---
18
 AFC continues to fall, but AVC remains constant.
2 6 5 11  So, AC falls till it reaches its minimum point ’B’
3 4 5 9
 Fall in AFC is equal to rise in AVC, AC remains constant.
4 3 6 9
5 2.40 7 9.40
3rd
3rd Phase:
Explanation :
 In the above diagram and schedule, AC curve is a U-shaped curve.
 Rise in AVC is more than fall in AFC.
 AC initially falls, and after reaching its minimum point, it starts rising.  AC starts rising.

The relationship between AC, AVC and AFC

Marginal
Explanation Curve Cost
 It refers to addition to total cost when one more
 AC and AVC are U-shaped because of law of unit of output is produced.
variable proportions.  For Example : If TC of producing 2 units is ₹ 200
 AFC is a rectangular hyperbola which means and TC of producing 3 units is ₹ 240, then MC =
area under the curve remains same at all points.
40.
 AC curve will always lies above AVC because AC
includes both AVC and AFC.  MCn =TCn - TCn-1
 AVC reaches its minimum points lower than that Where, n = Number of units produced
of AC because when AVC is at its point AC is still MCN = Marginal Cost of the nth unit.
falling because of falling AFC. TCN = Total Cost of n units
 As output increases the gap between AC and
TCn-1 = Total Cost of (n - 1) units.
AVC decreases but they never intersect each
other because the gap between AC and AVC
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒕𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕 ∆𝑻𝑪
represents AFC which keeps on falling but never  MC = =
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒖𝒏𝒊𝒕𝒔 𝒐𝒇 𝒐𝒖𝒕𝒑𝒖𝒕 ∆𝑸
becomes zero.
 The relationship between AC and MC
Schedule Curve

Total
Schedule Output Curve
Output Total Fixed Cost TC AC MC Phase
Variable TC MC (units)
(units) (TFC)
(TVC) 0 12 --- --- I (MC < AC)
0 0 12 12 ---
1 18 18 6 I (MC < AC)
1 6 12 18 6
2 22 11 4 I (MC < AC)
2 10 12 22 4
3 27 9 5 I (MC < AC)
3 15 12 27 5
4 36 9 9 II (MC = AC)
4 24 12 36 9
5 47 9.40 11 III (MC > AC)
5 35 12 47 11

Explanation :
Explanation :  When MC is less than AC, AC falls with increase in the output.
 In the above schedule and diagram, we observed MC is a U-shaped  When MC is equal to AC, i.e. when MC and AC curves intersect each other at point A,
curve because it initially falls till it reaches its minimum point and AC is constant and at its minimum point.
 When MC is more than AC, AC rises with increase in output.
then start increasing because of law of variable proportion.  MC curve is steeper as compared to AC curve.

Both AVC and MC are U-shaped due to law of variable proportions

1) AC depends on the nature of MC
 When MC curve lies below the AC curve, it Schedule Output
Curve
TVC AVC MC Phase
pulls the latter downwards. (units)
0 0 --- --- I (MC < AVC)
 When MC curve lies above AC curve, it 1 6 6 6 I (MC < AVC)
pulls the latter upwards. 2 10 5 4 I (MC < AVC)

 MC and AC are equal where MC intersects 3

4
15
24
5
6
5
9
II (MC = AVC)
III (MC > AVC)
AC curve. 5 35 7 11 III (MC > AVC)

2) AC can fall, when MC is rising only when MC Explanation :

is less than AC.  When MC is less than AVC, AVC falls with increase in output.
 When MC is equal to AVC, i.e. when MC and AVC curves intersect each other at point B, AVC is
3) AC cannot rise when MC is falling because constant and at its minimum point.
when MC falls, AC will also fall.  When MC is more than AVC, AVC rises with increase in output.
 MC curve is steeper as compared to AVC curve because MC increases at a faster rate as
compared to AVC.
 The relationship between AC, AVC and MC Relationship between AC and AVC
Output  AC is greater than AVC by the amount of AFC.
Schedule (units)
TVC AC AVC MC Curve Explanation  The vertical difference between AC and AVC curves
0 0 --- --- --- continues to fall with increase in output because the gap
1 6 18 6 6 between them is AFC, which continues to decline with
2 10 11 5 4 rise in output.
3 15 9 5 5  AC and AVC curves never intersect each other as AFC
4 24 9 6 9 can never be zero.
5 35 9.40 7 11
 Both AC and AVC curves are U-shaped due to the law of
variable proportion.
Explanation :
 MC curve cuts AVC and AC curves at their minimum
 When MC is less than AC and AVC, both of them fall with increase in output.
points.
 When MC becomes equal to AC and AVC, they become constant and MC curve cuts AC
and AVC curve at their minimum points.  The minimum point of AC curve (point A) lie always to
 When MC is more than AC and AVC, both rise with increase in output. the right of the minimum point of AVC curve (point B).

The relationship between TC and MC The relationship between TVC and MC

Explanation Curve Explanation Curve

 When TC rises at a diminishing  MC is addition to TVC when one

rate, MC declines. more unit of output is
produced. So, TVC can be
 When the rate of increase in TC obtained as summation of MC
stops diminishing, MC is at its of all the units produced.
minimum point, i.e. point E.
 If output is assumed to be
 When the rate of increase in perfectly divisible, then total
total cost starts rising, area under the MC curve will
marginal cost is increasing. be equal to TVC.
Class 11 Microeconomics Revenue
 Revenue refers to the amount received by a firm from the sale of a given
quantity of a commodity in the market.
 It is directly influenced by sales level, i.e., as sales increase, revenue also
increases.

Revenue consists of three important terms

Total Revenue Marginal Revenue

(TR) (MR)
Average Revenue
(AR)

Three Important Terms of Revenue AR & Price are the Same

1) Total Revenue (TR) :
 Total Revenue refers to total receipts from the sale of a given AR is equal to per unit sale receipts and price is always per unit. Since sellers
quantity of a commodity. receive revenue according to price, price and AR are one and the same thing.
 Total Revenue = Quantity × Price OR TR = ∑MR.
TR = Quantity * Price ------ (1)
2) Average Revenue (AR) :
 Average Revenue refers to revenue per unit of output sold. AR = TR / Quantity ------ (2)
 Average Revenue =
𝐓𝐨𝐭𝐚𝐥 𝐑𝐞𝐯𝐞𝐧𝐮𝐞
𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲
Putting the value of TR from
3) Marginal Revenue (MR) :
equation (1) in equation (2),
 Marginal revenue is the additional revenue generated from
𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 × 𝐏𝐫𝐢𝐜𝐞
AR =
the sale of an additional unit of output. 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲
 MRN = TRN – TRN-1 OR MR =
∆𝐓𝐑
∆𝐐
AR = Price
 AR Curve and Relationship Between Revenue Concepts
Demand Curve
 A buyer’s demand curve graphically The relationship between revenue concepts can be discussed under two situations :
are the Same
represents the quantities demanded When Price Remains Constant :
by a buyer at various prices. In other  It happens under perfect competition.
words, it shows the various levels of  It means, any quantity of a commodity can
average revenue at which different be sold at that particular price.
quantities of the good are sold by the
seller. When Price Falls with Rise in Output :
 Therefore, in economics, it is  It happens under imperfect competition.
customary to refer AR curve as the  Under this situation, firm follow its own pricing policy and it can
increase sales only by reducing the price.
Demand curve of a firm.

Relationship between AR & MR, When the Price Remains Constant Relationship between TR and MR, When Price Remains Constant
Schedule Curve Schedule Curve Y
Relationship between TR and MR
(When price remains constant)
Units Sold Price / AR TR MR Y Relationship between AR and MR (When
Units Sold Price / AR TR MR 25 TR
price remains constant)
1 5 5 5 1 5 5 5
AR and MR (Rs.)

TR and MR (Rs.)
20 20

2 5 10 5 15 2 5 10 5 15

10 10
3 5 15 5 3 5 15 5
Price = AR = MR
5 5
4 5 20 5 X 4 5 20 5 X
O 1 2 3 4 5 O 1 2 3 4 5

5 5 25 5 Units sold 5 5 25 5 Units sold

Explanation : Explanation :
 In the above diagram and schedule, price remains same at all levels of output and is equal to MR.
 Under perfect competition, no firm is in a position to influence the market price.
 Under perfect competition, no firm is in a position to influence the market price.
 A firm can sell any quantity of output only at the same price.  A firm can sell any quantity of output only at the same price.
 As a result, revenue from every additional unit (MR) is equal to AR.  As a result, MR curve is a horizontal straight line parallel to X-axis.
 Therefore, both AR and MR curve coincides in a horizontal straight line parallel to x-axis.  Since MR remains constant, TR curve also rises at a constant rate.
 Above demand curve is perfectly elastic.  As a result, TR curve is a positively sloped straight line and starts from the origin.
 Relationship between AR and MR, when Price Falls with Rise in Output
Relationship between TR & Price Line as :
Schedule Curve Y
Relationship between AR and MR

Curve  When price remains constant Units Sold AR TR MR (When price falls with rise in output)

AR and MR (Rs.)
1 5 5 5
Y
Relationship between
at all the levels of output, 2 4 8 3
TR and Price Line 3 3 9 1
then price = AR = MR. 4 2.25 9 0
AR

X
O Units sold

 Price line is as same as MR 5 1 5 -4 MR

TR, AR and MR (Rs.)

Price Line R Price = AR = MR

P
Explanation :
curve.  When firms can increase their volume of sales by decreasing the price then AR falls with increase in sale.
 Also, revenue from every additional unit (MR) will be less than AR.
 TR = ∑MR, therefore area 

As a result, both AR and MR curve slope downwards from left to right.
However, MR falls at a rate which is twice the rate of fall in AR.

X
under MR curve or price line  As a result, MR curve is steeper than the AR curve because MR is limited to one unit, whereas, AR is derived by all the
units.
O Q
Units sold
will be equal to TR. MR can fall to zero and can even become negative. However, AR can be neither zero nor negative as TR is
always positive.

Relationship between AR and MR with Rise in Output Relationship between TR and MR, When Price Falls with Rise in Output
Schedule Curve
Curve Explanation : Units Sold AR TR MR
Y
Relationship between TR and MR
(When price falls with rise in output)
A

 AR increases as long as MR is

Total revenue (Rs.)

Y 1 5 5 5 TR

2 4 8 3
higher than AR. (or when MR >
3 3 9 1
AR, AR increases).
AR and MR (Rs.)

4 2.25 9 0 X

 AR is maximum and constant 5 1 5 -4

O
Y
Units sold

when MR is equal to AR. (when

Marginal revenue (Rs.)

AR = MR, AR is maximum). Relationship can be summed up as :
 As long as MR is positive, TR increases.
MR
AR
 AR falls when MR is less than
X  When MR is zero, TR is at its maximum point.
O Units sold
AR. (when MR < AR, AR falls).  When MR becomes negative, TR starts falling. O Units sold
B

MR
X
 MR can be zero and even negative,
When price falls with rise in output
TR = ∑MR, but TC ≠ ∑MC
Why TR can be calculated by adding up
revenue realised from sale of every
MR can be negative MR can be zero when
additional unit i.e.,
when TR falls with TR remains same
rise in output. with rise in output. TR = MR1 + MR2 + …..+ MRn = ∑MR.
But, TC is the sum of TFC and TVC.
However, MR cannot be zero or negative Since MC is not affected by TFC, TC
when price remains constant at all levels cannot be calculated as the
of output. summation of MC.

Class 11 Microeconomics Profits

Profit refers to the excess of receipts from
the sale of goods over the expenditure
incurred on producing them.

The difference between revenue and cost

is called ‘Profit’.

For example : If a firm sells goods for Rs

10 crores after incurring an expenditure
of Rs 7 crores, then profit will be Rs 3
crores.
 Producer’s Equilibrium When a Producer can Attain the Equilibrium Level
A producer can attain the equilibrium level under two different conditions :
It refers to that price and output combination which brings maximum
profit to the producer and profit declines as more is produced. When Price Remains Constant : When Price Falls with Rise in Output :

 It happens under  It happens under

There are Two Methods of perfect competition. imperfect
Producer’s Equilibrium : competition.
 It means, any quantity
of a commodity can be  It can increase sales
Total Revenue and Total Cost
Approach
Marginal Revenue and Marginal
Cost Approach
sold at that particular only by reducing the
(TR–TC Approach) (MR–MC Approach) price. price.

MR–MC Approach Necessary Conditions for Producer’s Equilibrium

MC = MR :
 Equilibrium is not achieved when MC < MR as it is possible to add to
According to MR–MC Approach, profits by producing more.

producer’s equilibrium refers to stage of  Producer is also not in equilibrium when MC > MR because benefit is less than cost.
 Therefore, the firm will be at equilibrium when MC = MR.
that output level at which :
MC is Greater than MR after MC = MR Output Level :

 If MC > MR, then producing beyond MC = MR output will reduce profits.

MC is greater than
 If MC < MR beyond MC = MR output, it is possible to add to
MC = MR MR after MC = MR profits by producing more.
output level
 Schedule : Curve :
MR – MC Approach Under Perfect Competition
 Under perfect competition firm can sell any quantity of Output Price
TR TC MR MC
Profit Producer’s Equilibrium (MR - MC)
(units) (Rs.) (TR – TC)
Y (When price remains constant)
output at the price fixed by the market.
 The price remains same at all levels of output.
MC
1 12 12 13 12 13 -1

According to this approach, producer’s 2 12 24 25 12 12 -1

Revenue and Cost (Rs.)

R K
equilibrium refers to stage of that output P AR = MR

level where : 3 12 36 34 12 9 2

4 12 48 42 12 8 6

MC > MR, after 5 12 60 54 12 12

6 (Producer’s

MC = MR MC = MR 6 12 72 68 12 14
Equilibrium)

4
O Q1

Output (Units)
Q
X

Explanation Producer’s Equilibrium Under Imperfect Competition

 When price remains, constant firms can sell any
quantity of output at a price fixed by the market. Under imperfect competition price falls with rise in
 Price remains same at all the level of output, also
MR = AR.
output because MC curve slope downwards.
 Hence, AR curve is similar to MR curve.
 Producer’s equilibrium will be determined at OQ Under imperfect competition producer will be at
equilibrium when the following 2 conditions are
level of output corresponding to point ‘K’ because at
satisfied i.e.,
this point both the conditions are satisfied i.e.
a) MC = MR
b) MC > MR, after MC = MR
 Also, MC = MR is also satisfied at point R but it is not MC > MR, after
the point of equilibrium because at that point only MC = MR MC = MR
the first situation is satisfied (MC = MR).
Schedule :
Output Price
TR TC MR MC
Profit
Curve :
Y
Producer’s Equilibrium (MR -MC) (When
price falls with rise in output)
Class 11 Microeconomics
(units) (Rs.) (TR – TC)
P F

Revenue and Cost (Rs.)

1 8 8 6 8 6 2
E
2 7 14 11 6 5 3
MR
3 6 18 15 4 4 3

4 5 20 20 2 5 0
X
5 4 20 26 0 6 -6 O Output (Units) M

Explanation :
 Output is shown on X-axis and revenue and costs are on the Y- axis.
 Producer equilibrium will be determined at OM level of output corresponding to point ‘E’.
 At this point both the conditions required at equilibrium are satisfied i.e. :
1) MC = MR;
2) MC > MR, after MC = MR.

Supply Stock  It refers to the total quantity of a

Supply refers to quantity of a commodity that a firm is willing and particular commodity that is available
able to offer for sale at a given price during a given period of time. with the firm at a particular point of
time.
It can be of two types :  Stock can never be less than the supply.
 It relates to a particular point of time.
 It indicates a fixed quantity.
Individual Supply Market Supply
It refers to quantity of a It refers to quantity of a
commodity that an individual commodity that all the firms are
 It is that part of stock which a producer
Supply
firm is willing and able to offer willing and able to offer for sale at
for sale at a given price during a a given price during a given is willing to bring in the market for sale.
given period of time. period of time.  It relates to a time period.
 4) State of Technology :
Determinants of Individual Supply  Technology changes influence the supply of a commodity.
1) Price of the Given Commodity :
 Advanced and improved technology reduces the cost of production, which raises the
 The most important factor determining the supply of a commodity is its price. profit margin and induces the seller to increase the supply.
 Price of a commodity and its supply are directly related.  Outdated technology increase the cost of production and it will lead to decrease in
 This signifies, as price increases, the quantity supplied of the given supply.
commodity also rises and vice versa.
5) Government Policy (Taxes and Subsidies) :
2) Prices of Other Goods :
 Increase in taxes raises the cost of production and
 Quantity supplied of a commodity depends not only on its price,
but also on the prices of other commodities. reduces the supply, due to lower profit margin.
 Increase in the prices of other goods makes them more profitable in  Tax concessions and subsidies increase the supply as
comparison to the given commodity. the make it more profitable for the firms to supply goods.
 Firm shifts its limited resources from production of the given commodity to other goods.
6) Goals / Objectives of the Firm :
3) Prices of Factors of Production or Inputs :  Generally, supply of a commodity increases only at higher prices as it fulfills the
 Price of factor of production (like, labour, capital, raw material, etc.) used in the process of
objective of profit maximization.
production constitute the cost of production of the commodity. If the prices of all or any of these
factors increases, the cost of production also increases. This decreases the profitability.  With change in trend, some firms are willing to supply more even at those prices,
 As a result, the seller reduces the supply of the commodity. which do not maximize their profits.
 Decrease in prices or inputs, increases the supply due to fall in cost of production and subsequent rise  The objective of these firms is to capture extensive markets and to enhance their
in profit margin. status and prestige.

Determinants of Market Supply are :

Determinants of Market Supply
Price of the Given Commodity
Number of Firms in the Market :
Prices of Factors of Production
 When the number of firms in the industry increases, market supply also increases due to
large number of producers producing that commodity. Government Policy
 Market supply will decrease, if some of the firms start leaving the industry due to losses.
Number of Firms
Future Expectation Regarding Price :
 If sellers expect a rises in price in future, then market supply will Means of Transportation and Communication
decrease in order to raise the supply in future at higher prices.
Prices of Other Goods
 If sellers fear that the prices will fall in future, then they will
increase the current supply to avoid losses in future. State of Technology
Means of Transportation and Communication :
Goals / Objectives of the Firm
 Proper infrastructural development, like improvement in the means of transportation
and communication, help in maintaining adequate supply of the commodity. Future Expectation Regarding Price
 Supply Function Individual Supply Function
It shows the functional relationship between It refers to the functional relationship between supply
quantity supplied for a particular commodity and and factors affecting the supply of a commodity.
the factors influencing it. It is expressed as : SX = f (PX, PO, PF, ST, T, G)
Where, SX = Supply of given commodity x;
PO = Price of Other Goods;
It can be of two types PX = Price of Given Commodity x;
St = State of Technology;
Pf = Price of Factors of Production;
Individual Market Supply G = Goals of Firm;
T = Taxation Policy.
Supply Function Function

Market Supply Function Supply Schedule

It refers to the functional relationship between market supply
and the factors affecting the market supply of a commodity. It is a tabular statement showing various quantities
It is expressed as : SX = f (Px, P0, PF, St, T, G, N, F, M) of a commodity being supplied at various levels of
Where, SX =Market Supply of given commodity x; price, during a given period of time.
PO = Price of other goods;
PX = Price of given commodity x;
St = State of technology;
Pf = Price of factors of production;
It can be of two types
G = Goals of the market;
T = Taxation policy;
F = Future expectation regarding PX; Individual Market Supply
N = Number of firms; Supply Schedule Schedule
M = Means of transportation and communication.
Individual Supply Schedule : Schedule : Supply Curve
Price (Rs.) Quantity Supplied of goods x (units)
It refers to a tabular statement showing 1 5
various quantities of a commodity that It refers to a graphical It is of two types :
2 10
a producer is willing to sell at various 3 15 representation of
levels of price, during a given period of 4 20 Individual Supply Market Supply
time. 5 25
supply schedule. Curve Curve
Y Individual Supply Curve
Market Supply Schedule : Schedule : Individual Supply Curve : 5
E
SS

Price SA SB Market Supply (SA + SB)

It refers to a tabular statement showing  It refers to a graphical representation of 4

Price (in ₹)
1 5 10 15 D
various quantities of a commodity that 2 10 20 30 individual supply schedule. 3 C
all the producers are willing to sell at 3 15 25 40  The supply curve slopes upwards because
2 B
1 A
various levels of price, during a given 4 20 35 55 of positive relationship between price and
5 X
10 15 20 25
period of time. 5 25 40 65
quantity supplied. O
Quantity Supplied (in units)

Market Supply Curve : 5

Y
Market Supply Curve

SA
SB
Slope of a Supply Curve
 It refers to a graphical representation of
SM
4
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞 (∆𝐏)
market supply schedule. Slope of a Supply Curve =
Price (Rs.)

 It is also positively sloped due to positive 2

SM is flatter than
𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 (∆𝐐)
SA and SB
1
relationship between price and quantity
supplied. O 10 20 30 40 50 60
X
 Due to direct relationship between Y S
Quantity Supplied (units)
price and supply, supply curve 10
Market supply curve is flatter than all individual supply slopes upwards. So, slope is positive. 8

Price (in ₹)

∆P = 4
curves  Slope of supply curve measures the
6
4
It happens because with a change in price, the proportionate flatness or steepness of the supply 2 ∆Q = 2
S
change in market supply is more than the proportionate curve. So, it is based on the absolute X
O 1 2 3 4 5
change in individual supplies. change in price and quantity. Quantity Supplied (in units)
 Supply  It refers to different quantities of a Law of Supply
commodity that the producer is Law of Supply states the direct relationship between Schedule
Price (Rs.) Quantity (units)
price and quantity supplied, keeping other factors
ready to sell at different levels of constant (ceteris paribus).
1 10
2 20
prices. Assumptions of Law of Supply : 3 30

 It describes the behaviour of the  Price of other goods is constant.

 There is no change in the state of technology.
4
5
40
50
 Prices of factors of production remain the same.
firm at every possible price.  There is no change in the taxation policy. Y SS
 Goals of the producer remain the same.
5
Important Points about Law of Supply :
Quantity 4

Price (in ₹)
 It states the positive relationship between price and quantity
3
 It refers to a specific quantity, in Supplied supplied, assuming no changes in other factors.
 It is a qualitative statement, as it indicates the direction of change 2
in quantity supplied, but it does not indicate the magnitude of
the supply schedule, supplied change.
1
X
 Law is one sided as it explains only the effect of change in price on O 10 20 30 40 50
against a specific price. the supply, and not the effect of change in supply on the price. Quantity Supplied (in units)

Reasons for Law of Supply Exceptions of Law of Supply

1) Future Expectations :
 The basic aim of producers is to secure maximum profits.  If sellers expect a fall in price in the future, then the law of supply may not hold true.
Profit  When price of a commodity increases, without change in costs, it raises their profits, so  The sellers will be willing to sell more even at a lower price.
producers increase the supply of the commodity by increasing the production.  If they expect the rise in price, they would reduce the supply, in order to supply later at a high price.
Motive :  With fall in prices, supply also decreases as profit margin decreases at low prices. 2) Agricultural Goods :
 Law of supply does not apply to agricultural goods as their production depends on climatic
conditions.
 A rise in price induces the producers to enter into the market,  Due to unforeseen changes in weather, production of agricultural goods is low, then their supply
so as to earn higher profits.
Change in  Increase in number of firms raises the market supply.
cannot be increased even at higher prices.
3) Perishable goods :
Number of  As the price starts falling, some firms which do not expect to earn
 In case of perishable goods, like fruits, vegetables, etc. sellers will be
any profits at a low price, either stop the production or reduce it.
Firms :  It reduces the supply of a given commodity as the number of firms
ready to sell more even if the prices are falling.
 It happens because sellers cannot hold such goods for long.
in the market decreases.
4) Rare Articles :
 Rare, artistic and precious articles are outside the scope of law of supply.
 When the price of a good increases, the sellers are ready to supply more goods from  For example : Supply of rare articles like supply of painting like Mona Lisa
Change in their stocks.
cannot be increased, even if their prices are increased.
 At a relatively lower price, producers do not release big quantities from their stocks
Stock : and start increasing their inventories with a view that price may rise in near future.
5) Backward Countries :
 Production and supply cannot be increased with rise in price due to shortage of resources.
 Expansion in Supply
Movement
along the  It refers to a rise in the quantity supplied due to increase in Expansion in Supply
 When quantity supplied of a price of the commodity, other factors remaining constant. Y S
Supply Curve : commodity due to change in its own  It leads to an upward movement along the same supply
25
curve. B
price, keeping other factors constant,  It is known as ‘Extension in Supply’ or ‘Increase in Quantity

Price (in ₹)
A
it is known as ‘Change in Quantity Supplied’. 20
Supplied’. Price (Rs.) Quantity (units)
S
 It is graphically expressed as a Schedule 20 100 X
O 100 150
movement along the same supply 25 150 Quantity Supplied (in units)
curve.
 There can be either contraction As seen in the above diagram and schedule, quantity supplied
(downward) or expansion (upward) rises with an increase in price, resulting in upward movement
along the supply curve. from A to B.

Contraction in Supply
Shift in Supply
 It refers to a fall in the quantity supplied due to
decrease in price of the commodity, other factors Y
Contraction in Supply
S
Curve :  When supply of a commodity
remaining constant. 20 changes due to change in any
 It leads to a downward movement along the same A
factor other than the own price of
Price (in ₹)

supply curve. B
 It is also known as ‘Decrease in Quantity Supplied’. 15 the commodity, it is known as
‘Change in Supply’.
Price (Rs.) Quantity (units)
Schedule S
 It is graphically expressed as shift in
20 100 X
O 70 100 supply curve.
15 70 Quantity Supplied (in units)
 There can be either increase
As seen in the above diagram and schedule, quantity supplied (rightward shift) or decrease
falls with decrease in price, resulting in downward movement (leftward shift) in supply along the
from A to B. same supply curve.
 Increase in Supply Decrease in Supply
 It refers to a rise in supply of a commodity Y
Increase in Supply
S
 It refers to a fall in the supply of a Y
Decrease in Supply
S1
caused due to any factor other than the own S1
commodity caused due to any factor other S
price of the commodity. than the own price of the commodity.
20 20
 It leads to a rightward shift in the supply  It leads to a leftward shift in the supply

Price (in ₹)
Price (in ₹)
curve. curve.
S S1
Price (Rs.) Supply (units) Price (Rs.) Supply (units)
Schedule S1 Schedule S
20 100 X 20 100 X
O 100 150 O 70 100
20 150 Quantity Supplied (in units) 20 70 Quantity Supplied (in units)

As seen in the above schedule and diagram, supply As seen in the above diagram and schedule, supply
rises at the same price, resulting in a rightward shift of falls at the same price, resulting in a leftward shift of
the supply curve. the supply curve.

Difference between Movement along Supply Curve & Shift in Supply Curve Difference between Change in Quantity Supplied and Change in Supply
Basis Movement along Supply Curve Shift in Supply Curve Basis Change in Quantity Supplied Change in Supply
When the quantity supplied When the supply of a commodity When the quantity supplied When the supply changes due
changes due to change in price, changes due to a change in any changes due to change in price, to change in any factor other
Meaning keeping other factors constant, it factor other than the own price of Meaning keeping other factors constant, it than the own price of the
leads to a movement along the the commodity, it leads is known as change in quantity commodity, it is known as
supply curve. to a shift in supply curve. supplied. change in supply.
It leads to a movement along the
The movement is along the same The shift in the supply curve is It leads to shift in the supply
Effect on Effect on same supply curve, either
supply curve either upward either rightward (increase in curve either rightward
Supply Supply upward (expansion in supply) or
(expansion in supply) or supply) or leftward (decrease in (increase in supply) or leftward
Curve Curve downward (contraction in
downward (contraction in supply). supply). (decrease in supply).
supply).
It occurs due to an increase or It occurs due to change in other It occurs due to an increase or It occurs due to change in other
Reason decrease in the price of the given factors, like change in price of Reason decrease in the price of the given factors, like change in price of
commodity. inputs, change in taxes, etc. commodity. inputs, change in taxes, etc.
Differences Between Expansion In Supply And Increase In Supply Differences between Contraction in Supply and Decrease in Supply
Basis Expansion in Supply Increase in Supply Basis Contraction in Supply Decrease in Supply
When the quantity supplied Increase in supply refers to a rise in When the quantity supplied Decrease in supply refers to a fall
rises due to an increase in price, the supply of a commodity caused falls due to a decrease in price, in the supply of a commodity
Meaning Meaning keeping other factors constant, caused due to any factor other
keeping other factors constant, due to any factor other than the
known as expansion in supply. own price of the commodity. it is known as contraction in than the own price of the
supply. commodity.
Price (Rs.) Supply (Units) Price (Rs.) Supply (Units) Price (Rs.) Supply (Units)
Tabular Price (Rs.) Supply (Units)
10 100 10 100 Tabular
Presentation 12 150 12 150
12 150 10 150 Presentation
10 100 12 100

Effect on There is an upward movement There is a rightward shift in the

Effect on There is a downward movement There is a leftward shift in the
Supply Curve along the same supply curve. supply curve.
Supply Curve along the same supply curve. supply curve.
It occurs due to other factors like
It occurs due to increase in price It occurs due to other factors like
Reason decrease in price of inputs, It occurs due to decrease in price
of the given commodity. Reason increase in price of inputs, increase
decrease in taxes, etc. of the given commodity.
in taxes, etc.

Effects on Supply Curve Due to Change in Price of Other Goods Effect on Supply Curve Due to Change in Price of Factors of Production
Effect on Supply Curve due to increase in price of other goods Effect on Supply Curve due to increase in price of factors of production
Increase in Price of Other Goods : Y S1 Increase in Price of Factors of Y S1
S S
 When prices of other goods rises, then Production : Supply curve of
Supply curve of given commodity
production of such other goods become P
Price (in ₹)

Price (in ₹)
given commodity  Rise in price of factors of production P shift towards left
from SS to S1 S1 due
more profitable in comparison to the shift towards left
from SS to S1 S1 due to increases the cost of production and to increase in price
given commodity. S1 S1 of factors of
S
increase in price of
other goods
reduces the profit margin. S production
 As a result, supply falls and leads to a X  As a result, supply falls and leads to a X
leftward shift in the supply curve. O Q1 Q O Q1 Q
Supply (in units) leftward shift in the supply curve. Supply (in units)

Decrease in Price of Other Goods : Y

Effect on Supply Curve due to decrease in price of other goods
S Decrease in Price of Factors of Effect on Supply Curve due to decrease in price of factors of production
Y S
 Fall in prices of other goods make S1 S1
Supply curve of
Production : Supply curve of
given commodity
production of the given commodity

Price (in ₹)
Price (in ₹)

P given commodity  Fall in price of factors of production, P shift towards right

from SS to S1 S1 due
more profitable. shift towards right
from SS to S1 S1 due to decreases the cost of production and to decrease in price
 As a result, supply increases and S S of factors of
decrease in price of increases the profit margin. S1 production
S1 other goods
leads to rightward shift in the supply X  As a result, supply increases, and leads X
O Q Q1 O Q Q1
curve. Supply (in units)
to a rightward shift in the supply curve. Supply (in units)
 Effects on Supply Curve Due to Change in State of Technology Effects on Supply Curve Due to Change in Taxation Policy
Effect on Supply Curve due to Upgradation of technology Effect on Supply Curve due to increase in taxes
S Y S1
Upgradation of Technology : Y
S1 Increase in Taxes : S
 Advanced and improved technology Supply curve of  Rise in taxes increase the cost of

Price (in ₹)

Price (in ₹)
P given commodity P Supply curve of
reduces the cost of production and shift towards right production and reduces the profit given commodity
from SS to S1 S1 due to shift towards left
raises the profit margin. S Upgradation of margin. S1 from SS to S1 S1 due to
 As a result, supply rises and leads to a S1 technology
 As a result, supply falls and leads to S increase in taxes

X X
rightward shift in the supply curve. O Q Q1 a leftward shift in the supply curve. O Q1 Q
Supply (in units) Supply (in units)

Effect on Supply Curve due to degradation of technology Effect on Supply Curve due to decrease in taxes
Degradation of Technology : Y S1
S Decrease in Taxes : Y S
S1
 Technological degradation or complex Supply curve of  When taxes falls, cost of production Supply curve of

Price (in ₹)

Price (in ₹)
and outdated technology lead to rise in P given commodity P
shift towards left falls and profit margin rises. given commodity
cost of production and fall in profit from SS to S1 S1 due to
shift towards right

margin. S1 degradation of  As a result, supply increases and S

from SS to S1 S1 due to
decrease in taxes
S technology
leads to a rightward shift in the S1
 As a result, supply decreases and it leads X
Q1 X
to a leftward shift in the supply curve. O Q supply curve. O Q Q1
Supply (in units) Supply (in units)

Supply Curve shifts towards right due to : Y

Effect on supply curve due to decrease Supply Curve shifts towards left due to : Y
in price of factors of production

Decrease in Price of Other Goods S Increase in Price of Other Goods S1

S
Decrease in Price of Factors of Production S1 Increase in Price of Factors of Production

Advanced and Improved Technology Complex and Outdated Technology

Price (in ₹)
Price (in ₹)

Favorable Taxation Policy P Unfavorable Taxation Policy P

Goals of Sales Maximization Goals of Profit Maximization

S S1

Increase in Number of Firms

S1
Decrease in Number of Firms S

Expectation of Fall in Prices in Future X Expectation of Rise in Prices in Future X

O Q Q1 O Q1 Q
Supply (in units) Supply (in units)
Improvement in Means of Transport and Communication Poor Means of Transport and Communication
 Price Elasticity of Supply Percentage Method
It refers to degree of responsiveness of supply of a commodity According to this method, elasticity is measured as
the ratio of percentage in the quantity supplied to
with reference to change in price of such commodity. percentage change in the price.

There are Two Methods Price Elasticity

of Supply (ES) = % 𝐜𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐐𝐮𝐚𝐧𝐭𝐢𝐭𝐲 𝐒𝐮𝐩𝐩𝐥𝐢𝐞𝐝
for Calculating Elasticity % 𝐂𝐡𝐚𝐧𝐠𝐞 𝐢𝐧 𝐏𝐫𝐢𝐜𝐞

Where,
∆𝑄
 % change in Quantity Supplied = X 100
Percentage Proportionate 𝑄
 Change in Quantity (∆Q) = New Quantity (Q1) – Initial Quantity (Q)
Method Method ∆𝑃
 Percentage Change in Price = X 100
𝑃
 Change in Price (∆P) = New Price (P1) – Initial Price (P)

Proportionate Method
Perfectly Elastic Supply
∆𝐐
𝐗 𝟏𝟎𝟎 Elasticity ∆𝐐 𝐏
ES = 𝐐
∆𝐏
𝐏
𝐗 𝟏𝟎𝟎 of Supply = X
∆𝐏 𝐐
Different Perfectly Inelastic Supply
Kinds of
Where 

Q = Initial Quantity Supplied
∆Q = Change in Quantity Supplied Elasticities Highly Elastic Supply
 P = Initial Price
 ∆P = Change in Price of Supply Less Elastic Supply
Notes :
 Price Elasticity of Supply will always have a positive sign as
are :
against the negative sign of elasticity of demand. Unitary Elastic Supply
 It happens because of direct relationship between price and
quantity supplied.
 Perfectly Elastic Supply Perfectly Inelastic Supply
Perfectly Elastic Supply
When there is an infinite supply at a particular (ES = ∞) Perfectly Inelastic Supply
price and the supply becomes zero with a slight
Y When the supply does not change with the Y (ES = 0)

fall in price, then the supply of such a P SS change in price, then supply for such a SS
commodity is said to be perfectly inelastic.

Price (in ₹)

Price (in ₹)
commodity is said to be perfectly elastic. P1

Price (Rs.) Supply (units) P

Price (Rs.) Supply (units) Schedule
Schedule 20 20 P2
30 100
30 200 Q1 Q Q2 X 30 20 X
O O Q
30 300 Quantity Supplied (in units) 40 20 Quantity Supplied (in units)

 From the above diagram and schedule, quantity supplied can be  From the above diagram and schedule, quantity supplied remains
100, 200 or 300 units at the same price. same whether the price is Rs.20, Rs.30 or Rs.40.
 ES = ∞ and the supply curve is a horizontal straight line parallel to X-  ES = 0 and the supply curve is a vertical straight line parallel to Y-
axis. axis.
 Perfectly elastic supply is an imaginary situation.  Perfectly inelastic supply is an imaginary situation.

Highly Elastic Supply Less Elastic Supply

When percentage change in quantity supplied Highly Elastic Supply When percentage change in quantity supplied Less Elastic Supply
Y (ES > 1)
is more than the percentage change in price, SS is less than the percentage change in price, then Y (ES < 1) SS
then supply for such a commodity is said to be P1 supply for such a commodity is said to be less P1
Price (in ₹)

Price (in ₹)
highly elastic. elastic.
P P
Schedule Price (Rs.) Supply (units) Schedule Price (Rs.) Supply (units)
10 100 10 100 X
X O Q Q1
O Q Q1
15 200 Quantity Supplied (in units)
15 120 Quantity Supplied (in units)

 From the above diagram and schedule, quantity supplied rises by  From the above diagram and schedule, quantity supplied by
100% due to a 50% rise in price. 20% due to 50% rise in price.
 ES >1 and the supply curve has an intercept on the Y-axis.  ES < 1 and the supply curve has an intercept on the X-axis.
 QQ1 is proportionately more than PP1, elasticity of supply is more  QQ1 is proportionately less than PP1, elasticity of supply is less
than 1. than 1.
 Unitary Elastic Supply
When percentage change in quantity supplied Y
Unitary Elastic Supply
(ES = 1)
Time Period & Supply
equal to percentage change in price, then SS
P1 From the view point of supply, time has been broadly divided into three periods :
supply for such a commodity is said to be

Price (in ₹)
P
unitary elastic. Market Period (Very short period) Y
S
Schedule Price (Rs.) Supply (units)  Market period refers to a very
10 100 X short period in which the supply
O Q Q1 Supply is perfectly

Price (in ₹)
Inelastic in very short
15 150 Quantity Supplied (in units)
cannot be changed in response to period

 From the above diagram and schedule, quantity supplied rises the change in demand.
by 50% due to 50% rise in price.  The supply curve is a straight line
 ES = 1, and supply curve is a straight line passing through the parallel to Y-axis (perfectly O S
X

origin. inelastic). Quantity Supplied (in units)

 QQ1 is proportionately equal to PP1, ES = 1.

Important Observations
Y Supply is less elastic in short period
Short Period : Y Unitary Elastic Supply

S All the supply curves, which pass through Curves (ES = 1)

 Short period refers to a period in the origin are unitary elastic :
A
Price (in ₹)

which output (supply) can be B

Price (in ₹)
 Any straight-line supply curve, which C
changed by changing only variable passes through the origin, has unitary
X
factors. elastic supply, irrespective of the angle it
O S
Quantity Supplied (in units)
 The supply curve is less elastic. makes with the origin. O Quantity Supplied (in units)
X

Y Supply is highly elastic in long period Y Flatter Curve SS is more elastic as

Long Period : Flatter the curve, more is the
compared to steeper curve S1 S1
S1 (Steeper Curve)
 Long period refers to a period in S
elasticity at the point of S (Flatter Curve)
Price (in ₹)

Price (in ₹)
which output (supply) can be P
P1
changed by changing all factors of intersection : S

production. S  Supply is more elastic in case of SS S1

X X
 The supply curve is highly elastic. O Quantity Supplied (in units)
(flatter curve) as compared to S1S1. O Q2 Q1 Q
Quantity Supplied (in units)
 Quick
Curve Class 11 Microeconomics
Recap
Type Value Description Y
S1S1 (ES = 0)
S2S2 (ES > 1)
Perfectly Infinite supply at same
ES = ∞ S4S4 (ES = 1)
Elastic price
Perfectly S3S3 (ES < 1)
ES = 0 Same supply at all prices

Price (in ₹)
Inelastic
Highly % ∆ in Supply > % ∆ in SS (ES = ∞)
ES > 1
Elastic Price
% ∆ in Supply < % ∆ in
Less Elastic ES < 1
Price
Unitary % ∆ in Supply = % ∆ in X
ES = 1 O Quantity Supplied (in units)
Elastic Price

Market refers to the whole region Market Structure

where buyers and sellers of a Market  Market structure refers to number and type of firms operating in the industry.
 The main factors, which determine the market structure, are :
commodity are in contact with 1) Number of Buyers and Sellers :
 Number of buyers and sellers in the market indicates the influence exercised by
each other to effect the purchase them on the price of the commodity.
 An individual buyer or seller is not in a position to influence the price, in case of a
and sale of the commodity. large number of buyers and sellers.
 A seller can exercise great control over the price if there is a single seller of a commodity.
2) Nature of the Commodity :
 If the commodity is of homogeneous nature, i.e., identical in all respects, then it is sold at a uniform price.
Essential Constituents of a Market are :  If the commodity is of differentiated nature, then it may be sold at different prices.
 If the commodity has no close substitutes, then the seller can charge higher price from the buyers.
Area 3) Freedom of Movement of Firms :
 If there is freedom of entry and exit of firms, then price will be stable in the market.
 If there are restrictions on entry of new firms and exit of old firms, then a firm can influence the price as it has no
Competition fear of competition from other or new firms.
4) Knowledge of Market Conditions :
 Uniform price prevails in the market, if buyers and sellers have perfect knowledge about the market conditions.
Buyers & Sellers  Sellers are in a position to charge different prices, in case of imperfect knowledge.
5) Mobility of Goods and Factors of Production :
 A uniform price prevails in the market, if factors of production can move freely from one place to another.
Commodity  Different prices may prevail in the market, in case of immobility of goods and factors.
 Perfect
Forms of Market Structure are : Competition
It refers to a market situation where
there are very large number of buyers
and sellers dealing in a homogeneous
Perfect Imperfect product at a price fixed by the market.
Competition Competition
In reality, perfect competition has
never existed.
Monopolistic Closest example for such kind of
Monopoly Oligopoly market can be market for agricultural
Competition
goods.

Features of Perfect Competition 4) Perfect Knowledge Among Buyers and Sellers :

 Perfect knowledge means that both buyers and sellers are fully informed about the market price.
1) Very Large Number of Buyers and Sellers : Implication :
 There are a very large number of buyers and sellers of the commodity in the market.  No firm is in a position to charge a different price and no buyer will pay a higher price.
Implication :  As a result, uniform price prevails in the market.
 The number of sellers is so large that each seller supplies a very small portion of the total quantity offered in the market.  Also the costs are uniform therefore the firms earn uniform profits.
 Any increase or decrease in supply by an individual seller has negligible effect on the total supply and therefore, a single seller is 5) Perfect Mobility of Factors of Production :
not in a position to influence the price of the product.  The factors of production are perfectly mobile.
 Number of buyers is so large that the demand of each buyer is a very small portion of the total demand of the market and  There is no geographical or occupational restriction on their movement.
therefore, no single buyer shall be able to influence the market price of the commodity.  Factors are free to move to the industry in which they get the best price.
2) Homogeneous Product : 6) Absence of Transportation Costs :
 The products offered for sale in the market are homogeneous i.e., identical in all respects like size, shape, quality, colour, etc.  In order to ensure uniform price in the market, it is assumed that the transportation costs are zero.
 Products of various firms are perfect substitutes for one another and there is zero degree of product differentiation.  A producer can sell his product at any place and a buyer can buy it from the place he likes.
Implication : 7) Absence of Selling Costs :
 As a result of homogeneous products, the buyer cannot distinguish between the product of one firm and that of another.  Selling costs refers to cost of advertisement of the product.
 The buyers are willing to pay only the same price for the products of all the firms in the industry.  In perfect competition, there are no selling costs because products are homogeneous in nature and there is perfect knowledge
 It also implies that no individual firm is in a position to charge a higher price for its product, amongst buyers and sellers.
which ensures a uniform price in the market.
3) Freedom of Entry and Exit :
1) Normal Profits :
 Every seller has the freedom to enter or exit the industry.
 There are no artificial or natural barriers for entry of new firms and exit of existing firms.  It refers to minimum profits, which are needed to carry out the business.
 It ensures absence of abnormal profits and abnormal losses in the long run.  The total production costs of a firm include the normal profits.
Implication :
 When the existing firms are earning abnormal profits, new firms get attracted and enter the
2) Abnormal Losses :
industry which raises the market supply, as a result of which market supply and profits falls.  It refers to the excess of earnings over the total production costs.
 When the firms are facing losses the firms will start leaving the industry because of freedom to exit, as a result market supply 3) Abnormal Profits :
falls which leads to rise in market price and profits. Also, the losses are wiped out and every firm will start earning normal
 It refers to excess of earnings over the total production costs.
profits.
Perfect Competition & Pure Competition Perfect Competition is a Price Taker :
 Perfect competition is used in a wider sense as compared to Pure  Under perfect competition an individual firm
Industry – Price Maker Firm – Price Taker
cannot influence the price on its own as its
Competition. The competition is said to be ‘Pure Competition’ share in the total market supply is negligible.
Y

D S
Y

when the following three fundamental conditions exist :  Price taker means that an individual firm
a) Very large number of buyers and sellers;

Price (Rs.)
E
has no option but to sell at a price P
AR = MR

b) Homogeneous product; determined by the industry.

c) Freedom of entry and exit.  Price is determined at the point where
S D

 Perfect competition is a wider concept. For the market to be market demand curve intersects market O Demand / Supply (units)
X
O Q Q1
X

perfectly competitive, in addition to three fundamental supply curve. Demand / Supply (units)

conditions, four additional conditions must be satisfied :  Firm has no other option but to sell at a price
determined by the industry as the price is
a) Perfect knowledge among buyers and sellers; determined by market forces of demand and In the above diagram, the price OP
b) Perfect mobility of factors of production; supply. is adopted by the price- taker firm
c) Absence of transportation costs;  Hence, firm is a price taker and industry is and firm are free to sell any
d) Absence of selling costs. the price maker. quantity at this price.

Demand Curve under Perfect Competition MR = AR under Perfect Competition

 In case of perfect competition, there Y  Under perfect competition, each
Firm under Perfect Competition
are very large number of buyers
faces Perfectly Elastic Demand firm is a price-taker.
and sellers selling a homogeneous Curve
product at a price fixed by the  All the firms have to accept the
Price/Revenue (Rs.)

market. Ed = ∞ Demand curve same price as determined by

(AR curve)
 Each firm is a price-taker and faces P
market forces of demand and
a perfectly elastic demand curve. supply.
 In the below diagram, at OP price,  Uniform price prevails in the
seller can sell OQ1, OQ2 or any other market, which signifies revenue
X
quantity and therefore a firm is not O Q1 Q2
from every additional unit is equal
in a position to change the price. Output (units)
to price of the product. So, MR = AR.
 Monopoly Features of Monopoly
1) Single Seller :
It refers to a market situation where  Under monopoly, there is a single seller, selling the product.
 As a result, the monopoly firm and industry are one and the same thing
there is a single seller selling a and monopolist has full control over the supply and price of the product.
product which has no close  As a result, price may fluctuate according to the will of the seller.
2) No Close Substitutes :
substitutes.  The product produced by a monopolist has no close substitutes.
 So, the monopoly firm has no fear of competition from new or existing products.
For Example : Railways in India. 3) Restrictions on Entry and Exit :
 There exist strong barriers to entry of new firms and exit of existing firms.
Monopoly is derived from two Greek  As a result, a monopoly firm can earn abnormal profits and
words : ‘Monos’ means single and losses in the long run.
 These barriers may be due to legal restrictions like licensing
‘polus’ means a seller. on patent rights or due to restrictions created by firms in the form of cartel.

4) Price Discrimination : Reasons for Emergence of Monopoly

 A monopolist may charge different prices for his product from
different sets of consumers at the same time.  It means that before a firm can enter an industry, it needs to
take permission from the government.
 And is known as price discrimination. Government
 Licensing is used to ensure minimum standards of competency.
 It is of 3 types : Licensing  By not granting license to new firms, government aims to assure
a) Personal Price Determination : The same product is sold at that only one firm operates in the market.
different prices to different kinds of buyers.
 Certain big private companies are engaged in research and development
b) Place Price Discrimination : Same product is sold at activities and come up with new technologies or new products.
different prices at different places. Patents Rights  As a reward for their risk and investment in research, government grants them
c) Used Price Discrimination : Same product is sold at different patent right.
 The period for which patents rights are granted known as patent life.
prices on the bases of different uses.
5) Price Maker :  Under cartel, some firms retain their individual identities but coordinate their
 Under monopoly, firm and industry are one and the same output and pricing policies in order to act as a monopoly.
Cartel  The firms agree among themselves to restrict their total
thing. So, firm has complete control over the industrial output.
output to the level that maximizes their joint profits.
 As a result, monopolist is a price- maker and fixes its own price.
 The firm can influence market price by charging the supply of Control on Raw  Monopoly arises due to sole ownership or control of
the product. Materials certain essential raw materials needed in a particular industry.
 MR and AR Relationship under Monopoly
Demand Curve Under Monopoly
 A monopolist has full Y MR < AR under
Monopolist faces a downward
freedom and power to fix sloping demand curve
Monopoly :  A monopoly firm faces a downward

Price/Revenue (Rs.)
sloping demand curve as more
price for the product. P
output can be sold only by reducing
 In order to increase the P1
Demand curve (AR curve)
the price.
output to be sold, monopolist  Revenue generated from every
will have to reduce the price O Q Q1 Output (units)
X
additional unit is less than price.
and therefore, monopoly From the above diagram, demand  In short, MR < AR under monopoly
faces a downward sloping curve under monopoly is negatively
because to increase the sale, seller
sloped as more quantity can be sold
demand curve. only at a lower price. have to reduce the price.

Features of Monopolistic Competition

Monopolistic
1) Large Number of Sellers :
Competition  There are large numbers of firms selling closely related, but not homogeneous products.
It refers to a market situation in which there  Each firm acts independently and has a limited share of the market.
 So, an individual firm has limited control over the market price, whereas
are large number of firms which sell closely large number of firms leads to competition in the market.
related but differentiated products. For 2) Product Differentiation :
Example : Markets of products like soap,  Each firm is in a position to exercise some degree of monopoly through product differentiation.
 Product differentiation refers to differentiating the products on the basis of brand, size, colour, etc.
toothpaste, etc. Implication :
 Buyers of a product, differentiate between the same products produced by different firms.
 Producers are willing to pay different prices for the same product produced by different firms.
Monopolistic competition is a market structure,  Therefore, to influence the market price of its product, product differentiation gives some
where there is a competition among a large monopoly power to an individual firm.
number of monopolists. 3) Selling Costs :
 Selling costs refer to the expenses incurred on marketing, sales promotion
and advertisement of the product.
Monopoly position is influenced due to stiff  Selling costs are incurred to persuade the buyers to buy a particular
competition from other firms. brand of the product in preference to competitor’s brand.
 Selling costs constitute a substantial part of the total cost under monopolistic competition.
4) Freedom of Entry and Exit :
 Free entry and exit of firms means that there are no barriers before the firm for entering into
the industry and leaving the industry. Demand Curve
 Demand curve under monopolistic
 With the entry of new firms, output of the industry increases which leads to fall in price of the under Monopolistic competition is negatively sloped as more
product and continues till each firm is earning normal profit.
 When the existing firms face losses, they leave and the output of the industry
Competition : quantity can be sold only at a lower price.
goes down and raises the price of the product till the losses are wiped out.
 It ensures that there are neither abnormal profits nor any
 In the below diagram, demand rises when
abnormal losses to a firm in the long run. the price is reduced.
Y Firm under Monopolistic
5) Lack of Perfect Knowledge : Competition faces a downward  Demand curve under monopolistic
 Buyers and sellers do not have perfect knowledge about the market conditions. sloping demand curve
competition is more elastic as compared
 Selling costs create artificial superiority in the minds of the consumers.
to demand curve under monopoly

Price/Revenue (Rs.)
 As a result, a particular product (although highly priced) is preferred by the consumers even
P because differentiated products under
if other less priced products are of same quality.
6) Pricing Decision : Demand curve (AR curve)
monopolistic competition have close
 A firm under monopolistic competition is neither a price-taker nor a price-maker. P1 substitutes.
 By producing a unique product, each firm has partial control over the price.
 Like monopoly, MR < AR under
7) Non-Price Competition :
 Non-price Competition refers to competing with other firms by offering free gifts, making X monopolistic competition, due to
O Q Q1 Output (units) negatively sloped demand curve.
Favourable credit terms, etc., without changing the prices of their own products.

The Difference Between Perfect Competition and Monopoly The Difference Between Perfect Competition and Monopolistic Competition
Basis Perfect Competition Monopoly Basis Perfect Competition Monopolistic Competition
There are very large numbers of sellers
Number of There is a single seller and the monopolist The product is homogeneous, i.e. it is
and no individual seller has control over Nature of The product is differentiated on the
Sellers has full control over the supply. identical in all respects like size,
the activities of other firms.
Product basis of brand, size, colour, shape, etc.
Nature of The product is homogeneous, i.e. it is shape, quality, etc.
There are no close substitutes of the product.
Product identical in all respects.
No selling costs are incurred as Heavy selling costs are incurred on
There is freedom of entry and exit. It There is restriction on entry and exit. So, a Selling Cost buyers and sellers have perfect sales promotion due to lack of perfect
Entry and
leads to absence of abnormal profits and firm can earn abnormal profit and losses in
Exit knowledge about market conditions. knowledge among buyers and sellers.
losses in the long run. the long run.
Firm is a price-taker as price is Monopolist is a price-maker as firm and Firm is a price-taker as price is Firm has partial control over price due
Price Price
determined by the industry. industry are one and the same thing. determined by the industry. to product differentiation.
Level of Buyers and sellers have perfect Buyers and sellers do not have perfect Buyers and sellers do not have perfect
Knowledge knowledge about market conditions. knowledge. Level of Buyers and sellers have perfect knowledge due to product
Demand Demand curve is perfectly elastic as price Demand curve slopes downwards as more
Knowledge knowledge about market conditions. differentiation and selling costs are
Curve remains same at all levels of output. output can be sold only at less price. incurred by sellers.

No selling cost is incurred as buyers and Demand curve is perfectly elastic as Demand curve slopes downwards as
Selling costs are incurred for informative Demand
Selling Cost sellers have perfect knowledge about price remains the same at all levels more output can be sold only at fewer
purposes due to lack of perfect knowledge. Curve
market conditions. of output. prices.
 The Difference Between Monopoly and Monopolistic Competition
Basis
Number of
Monopoly
There is a single seller. So, a
Monopolistic Competition
There are large number of sellers. So, a
Oligopoly
monopolist has full control over firm does not have much impact on
Sellers
the market. activities of other firms. The term oligopoly is derived from two
Nature of There are no close substitutes of Products are differentiated on the basis Greek words : ‘Oligi’ means few and ‘Polein’
Product the product. of brand, size, colour, shape etc.
means to sell.
There is restriction on entry and There is freedom of entry and exit.
Entry and
exit. So, a firm can earn However, only a competitive firm can
Exit
abnormal profits in the long run. enter or leave the industry. It refers to a market situation in which there
Monopolist is a price-maker as
are few firms selling homogeneous or
Firm has partial control over price due to
Price firm and industry are one and
product differentiation.
differentiated products.
the same thing.
The downward sloping demand The downward sloping demand curve is Markets for automobiles, cement, steel,
Demand curve is less elastic due to more elastic due to presence of close
absence of close substitutes. substitutes.
aluminium, etc., are the examples of
Heavy selling costs are incurred on sales oligopolistic market in India.
Selling Cost Low Selling costs are incurred.
promotion.

Types of Oligopoly Features of Oligopoly

Pure or Perfect Oligopoly : 1) Few Firms :
 If the firms produce homogeneous products, then it is called pure or perfect oligopoly.  Under oligopoly, there are few large firms and each firm produces a significant portion of the total output.
 Although, cement, steel, aluminium and chemical producing industries approach pure oligopoly but it is very rare to  There exists severe competition among different firms and each firm try to outsmart the other firm.
find pure or perfect oligopoly situation.  For example, the market for automobiles in India is an oligopolist structure as there are only few
producers of automobiles.
Imperfect or Differentiated Oligopoly :
 If the firms produce differentiated products, then it is called differentiated or imperfect 2) Interdependence :
oligopoly like, passenger cars, cigarettes or soft drinks.  Firms under oligopoly are interdependent. Interdependent means that
 The goods produced by different firms have their own distinguishing characteristics, actions of one firm affect the actions of other firms.
yet all of them are close substitutes of each other.  A change in output or price by one firm evokes reaction from other firms operating in the market.
 For Example, market for cars in India is dominated by few firms (Maruti, Tata, etc.)
Collusive Oligopoly :
 If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or 3) Non-Price Competition :
cooperative oligopoly.  Under oligopoly, firms are in a position to influence the prices, but they try to avoid price competition as
they follow the policy of price rigidity.
Non – collusive Oligopoly :  Firms use other methods like advertising, better services to customers etc. to compete with each other.
 If firms in an oligopoly market compete with each other, it is called a non-collusive or non-cooperative oligopoly.
4) Barriers to Entry of Firms :
Duopoly :  The main reason for few firms under oligopoly is the barriers which prevent entry of new firms into the
 It is a special case of oligopoly, in which there are exactly two sellers. industry, barriers may be : Patents, requirement of large capital, control over raw materials, etc.
 Under duopoly, it is assumed that the product sold by two firms is homogeneous and there is no substitute for it.  These are some of the reasons which prevent new firms to enter the industry.
 For example, Pepsi and Coca-Cola in the soft drink market.  As a result, firms can earn abnormal profits in the long run.
5) Role of Selling Cost :
 Due to severe competition and interdependence of firms various sales Comparison Between Different Market Structures
promotion techniques are used to promote sales of the product.
 Advertisement is in full swing under oligopoly and it is the main tool for sales promotion. Degree of Price Control -
6) Group Behaviour : 1) Perfect Competition : A firm under perfect competition is a Price-taker i.e.,
 Under oligopoly, price and output decision of a particular firm directly influence the competing
firms. an individual firm has no control over the price and has to accept the
 Instead of interdependent price an output strategy, oligopoly firms prefer group decisions that price as determined by the market forces of demand and supply.
will protect the interest of all the firms.
2) Monopoly : A monopolist is a Price-maker i.e., a firm has
7) Nature of the Product : complete control over the price and fixes its own price.
 Firms under oligopoly may produce homogeneous or differentiated product.
 If firms produce a homogeneous product then the industry is called pure or perfect oligopoly 3) Monopolistic Competition : A firm under monopolistic competition has
like cement or steel industry. partial control over the price i.e., each firm is neither a price-taker nor a
 If firms produce a differentiated product then the industry is called differentiated or imperfect price-maker. An individual firm is able to influence the price by creating a
oligopoly like automobiles.
differentiated image of its product through heavy selling costs.
8) Indeterminate Demand Curve :
 Under oligopoly, the exact behaviour pattern of a producer
4) Oligopoly : A firm under oligopoly follows the policy of price rigidity.
cannot be determined with certainty. Although, the firm can influence the prices, but it prefers to stick to its
 Therefore, the demand curve faced by an oligopolist is indeterminant. prices so as to avoid a price war.

Overall Comparison Between Different Market Structures

Nature of Demand Curve - Basis Perfect Competition Monopoly Monopolistic Competition Oligopoly
1) Perfect Competition : The demand curve for a perfectly competitive firm is perfectly elastic as it has to accept
Number of Very large number of
the price fixed by the market forces of demand and supply. Single seller Large number of sellers Few big sellers
Sellers sellers.
2) Monopoly : The monopoly firm faces a downward sloping demand curve as more quantity can be sold only at
a lower price. Products are
homogeneous under
3) Monopolistic Competition : The firm under monopolistic competition also faces a downward sloping demand Nature of Closely related but
Homogeneous products. No close substitutes pure oligopoly and
curve as more quantity can be sold only at a lower price. However, the demand curve is more elastic in Product differentiated products
differentiated under
comparison to demand curve under monopoly because of the presence of close substitutes. differentiated oligopoly.
4) Oligopoly : The demand curve for an oligopoly firm is determinate i.e., it cannot be drawn accurately as exact
behaviour pattern of a producer cannot be ascertained with certainty. Entry and Exit Entry of new firms and exit of Restrictions on entry of
Freedom of entry and exit. Freedom of entry and exit
of Firms old firms is restricted new firms.

Influence on Activities of Other Firms - Demand Curve

Perfectly elastic demand Downward sloping demand Downward sloping demand Indeterminate demand
curve. curve (less elastic) curve (but more elastic) curve.
1) Perfect Competition : Each firm is so small that its behaviour has no influence
Firm is a price- maker. So, Firm has partial control over
on the decisions of other firms operating in the market. Uniform price as each firm Price rigidity due to fear
Price price discrimination is price due to product
2) Monopoly : There is only one firm in the industry. Therefore, the question of reaction is a price-taker. of price war.
possible. differentiation.
from other firms does not arise i.e., monopolist has full control over the industry.
No selling costs are Only informative selling costs Huge selling costs are
3) Monopolistic Competition : There are large numbers of firms and behaviour of each Selling Costs High selling costs are spent
incurred. are incurred. incurred.
firm has less impact on activities of other firms.
Level of
4) Oligopoly : There are few firms and behaviour of each firm has significant impact on activities of other firms. Knowledge
Perfect knowledge Imperfect knowledge Imperfect knowledge Imperfect knowledge
Class 11 Microeconomics Market Consists of
Three Elements

 Demand, describing the

behaviour of consumers in the
market.
 Supply, describing the behaviour
of firms in the market.
 Market Equilibrium, connecting
demand and supply, describing
how consumers and producers
interact in the market.

Market Equilibrium Explanation

 It is determined when the quantity demanded of a commodity becomes equal to the quantity  From the above diagram and
supplied.
 The price determined corresponding to market equilibrium is known as equilibrium price.
schedule, market demand curve
 The quantity determined corresponding to market equilibrium is known as equilibrium quantity. DD and market supply curve SS
Price of Market Demand Market Supply Shortage (-) intersects each other at point E,
Chocolate of Chocolate of Chocolate or Surplus Remarks Y

(Rs) (units) (units) (+) D S

which is the market
Price of chocolates (Rs.)

10
2 100 20 (-) 80 Excess Demand 8
Excess Supply
equilibrium.
(as Market Demand >
4 80 40 (-) 40 6
 At this point, Rs 6 is determined
E
Market Supply)
4
Equilibrium Level (as Excess Demand
6 60 60 0 Market demand = 2
S D
X
as the equilibrium price and 60
Market supply)
8 40 80 (+) 40 Excess Supply (as
O 20 40 60 80
Quantity demanded and
100
chocolates as the equilibrium
supplied of chocolates (units)

10 20 100 (+) 80
Market > Market
Demand)
quantity.
 Excess Demand Excess Supply
 It refers to a situation, when quantity demanded is more than Y

quantity supplied at the prevailing market price. D S

 It refers to a market situation, when the quantity supplied is more Y

 Under this situation, market price is less than the equilibrium price. than the quantity demanded at the prevailing market price. D Excess Supply S
 Under this situation, market price is more than equilibrium price.

Price (Rs.)
Explanation :

Price (Rs.)
P E P1

 Market equilibrium is determined at point E. P2

Explanation : P E

 OP is the equilibrium price and OQ is the equilibrium quantity. S

Excess Demand
D
 Market equilibrium is determined at point E.
 If market price is OP2, then market demand of OQ1 is more than X  OP is the equilibrium price and OQ is the equilibrium quantity. S D
O Q2 Q Q1
the market supply of OQ2. Quantity demanded and  If market price OP, then market supply OQ2 is more than market O Q2 Q Q1
X

 This situation is termed as excess demand.

supplied of chocolates (units)
demand OQ1. Quantity demanded and

 This situation is termed as excess supply. supplied of chocolates (units)

Implications :
 Excess demand of Q1Q2 will leads to competition amongst the buyers as each buyer wants to have that Implications :
commodity.  Excess supply of O1Q2 will lead to composition among the sellers as each seller wants to sell his product.
 Buyers would be ready to pay higher price to meet their demand, which will lead to rise in price.  Sellers would ready to charge lower price to sell the excess stock, which will lead to fall in price.
 With increase in price, market demand will fall because of law of demand and market supply will rise  When price falls, market demand starts rising because of law of demand and market supply will
because of law of supply. decrease because of law of supply.
 The price will continue to rise till excess demand is wiped out. This is shown by arrows in the diagram.  The price will continue to fall till excess supply is wiped out, which is shown by arrows in the diagram.

Viable Industry : Y
Viable Industry
Change in Demand
 It refers to an industry for which supply curve and D S
on Equilibrium Price
Price (Rs.)

demand curve intersect each other in positive

axes. and Quantity
 From the below diagram, we conclude that both S
D

X
demand and supply curves intersect each other in O

positive range of X-axis and Y-axis.

Quantity demanded and supplied of
chocolates (units) Original market equilibrium
is determined at point ‘E’,
Non-viable Industry : Y Non-Viable
Industry
S
when the original demand
 It refers to an industry for which supply curve and
curve DD and supply SS
Price (Rs.)

demand curve never intersect each other in the S

positive axes. D
intersect each other. OQ is
 Under this industry, supply curve lies above the
demand curve as price is too high for the O
D
X the equilibrium quantity and
consumers. Quantity demanded and supplied (units)
OP is the equilibrium price.
Increase in Demand : Y
Increase in Demand

 An increase in demand (assuming no change in supply) D

D1
S
Change in Supply on
leads to a rightward shift in demand curve from DD to Equilibrium Price

Price (Rs.)
D1D1. P1 E1

 When demand increases to D1D1, it creates an excess P E and Quantity

demand at the old equilibrium price of OP.
 As there is an increase in demand only, equilibrium price S D
D1
Original Equilibrium is
determined at point ‘E’, when
X
rises from OP to OP1 and equilibrium quantity rises from O Q Q1
Quantity demanded and supplied (units)
OQ to OQ1.

Decrease in Demand
demand curve DD and the
Decrease in Demand : Y
D
original supply curve SS
S
 Decrease in demand (assuming supply unchanged) D2

demand curve shifts to the left from DD to D2D2. intersect each other, and OQ

Price (Rs.)
P E
 When demand decreases to D2D2, it creates an excess
supply at the old equilibrium price of OP.
P2 E2
is the equilibrium quantity
 As there is a decrease in demand only, equilibrium price
falls from OP to OP2 and equilibrium quantity falls from
S
D2
X
and OP is the equilibrium
O Q2 Q
OQ to OQ2. Quantity demanded and supplied (units)
price.

Increase in Supply :
Change in Equilibrium Price and Quantity
Increase in Supply
Y
D
 When there is an increase in supply, demand S
S1
remaining unchanged, the supply curve shifts When Both Demand and Supply Decrease
Price (Rs.)

P E
towards right from SS to S1S1. P1 E1
 As there is increase in supply only, it creates an
excess supply at the old equilibrium price of OP. S S1
D Both Demand and Supply Decreases
 Equilibrium price falls from OP to OP1 and O Q Q1
Quantity demanded and supplied (units)
X
 Original equilibrium is determined at point E, when the original demand curve DD and the
equilibrium quantity rises from OQ to OQ1. original supply curve SS intersect each other.
 OQ is the equilibrium quantity and OP is he equilibrium price.
Decrease in Supply : Decrease in Supply
Decrease in Demand = Decrease in Supply
Y
 When the supply decreases, demand remaining D
S2 Case I. Decrease in Demand = Decrease in Supply : Y
D1
D S1
S
S
unchanged, then supply curve shifts to the left  The new equilibrium is determined at E1, as
Price (Rs.)

Price (Rs.)
E1
from SS to S2S2. P2 E2
demand and supply decrease in the same P E
P E
 As the supply curves decreases from S2S2, it creates proportion.
S2 S1
an excess demand at old equilibrium price to OP. D
S
 Equilibrium price remains same at OP but S D1
D

 Thus, equilibrium price rises from OP to OP2 and Q2 Q

X
X

equilibrium quantity falls from OQ to OQ2.

O
Quantity demanded and supplied (units) equilibrium quantity falls from OQ to OQ1. O Q1 Q
Quantity demanded and supplied (units)
 Decrease in Demand > Decrease in Supply

Case II. Decrease in Demand > Decrease in Supply :

Y
D
S1
S
Change in Equilibrium Price and Quantity
 The new equilibrium is determined
D1

P E When Both Demand and Supply Increase

at E1, equilibrium price falls from OP P1
E1

to OP1 and equilibrium quantity falls S1

S
D
Both Demand and Supply Increases

Price
(Rs.)
D1

from OQ to OQ1. O Q1 Q X  Original equilibrium is determined at point E, when the original demand curve DD and the
Quantity demanded and supplied (Units) original supply curve SS intersect each other.
 OQ is the equilibrium quantity and OP is the equilibrium price.
Decrease in Demand < Decrease in Supply
Case III. Decrease in Demand < Decrease in Supply : Y S1 Increase in Demand = Increase in Supply
Case I. Increase in Demand = Increase in Supply :
 The new equilibrium is determined D Y D1
S
D1 S S1
D
 The new equilibrium is determined at E1.
at point E1.
P1 E1

Price (Rs.)
E E
P
 As both demand and supply increase in P E1

 Equilibrium price rises from OP to

S1
D
the same proportion, equilibrium price

Price (Rs.)
D1 S

OP1 whereas, equilibrium quantity S

remains same at OP, but equilibrium S1
D
D1

falls from OQ to OQ1. O Q1 Q

X
quantity rises from OQ to OQ1. O Q Q1
Quantity demanded and supplied (units)

Increase in Demand > Increase in Supply

Case II. Increase in Demand > Increase in Supply :
Change in Equilibrium Price and Quantity
Y S
D1 S1

 The new equilibrium is determined D

at E1. P1
E
E1 When Demand Decreases and Supply Increases
P

 Equilibrium price rises from OP to D1

S
S1
Demand Decreases and Supply Increases
Price
(Rs.)

OP1 and equilibrium quantity rises D

X
from OQ to OQ1. O Q Q1
Quantity demanded and supplied (Units)
Decrease in Demand = Increase in Supply
Case I. Decrease in Demand = Increase in Supply : Y
D
Increase in Demand < Increase in Supply S
Case III. Increase in Demand < Increase in Supply : Y S
 The new equilibrium is D1 S1

 The new equilibrium is determined

D1
D S1

P1 E
determined at E1. P E

at E1.  Equilibrium quantity remains the

Price (Rs.)
P E1
P1 E1
S

 Equilibrium price falls from OP to S D

Price (Rs.)

D1
D
same at OQ, but equilibrium S1
D1
OP1 whereas equilibrium rises from S1

price falls from OP to OP1. O Q

X

Quantity demanded and supplied (Units)

OQ to OQ1. O Q1 Q
Quantity demanded and supplied (Units)
X
 Y Decrease in Demand > Increase in Supply
Case II. Decrease in Demand > Increase in Supply : D
S Change in Equilibrium Price and Quantity
 The new equilibrium is determined at D1 S1

E1. P E When Demand Increases and Supply Decreases

Price (Rs.)
 Equilibrium quantity falls from OQ to P1 E1

OQ1 and equilibrium price falls from

S
S1
D1
D
Demand Increases and Supply Decreases
X
OP to OP1. O Q1 Q
Quantity demanded and supplied (Units)
Case I. Increase in Demand = Decrease in Supply : Y Increase in Demand = Decrease in Supply

Y Decrease in Demand < Increase in Supply

 The new equilibrium is determined at E1. S1

Case III. Decrease in Demand < Increase in Supply : D S

 As the increase in demand is D
D1 S

 The new equilibrium is determined at D1

S1
proportionately equal to the decrease in P1
E1

E1. P E
supply.

Price (Rs.)
P E

Price (Rs.)
 Equilibrium quantity rises from OQ to P1 E1
D
 Equilibrium quantity remains the same S1 D1
S S D
OQ1 whereas, equilibrium price falls S1
D1
at OQ but equilibrium price rises from X
X O Q
from OP to OP1. O Q Q1
Quantity demanded and supplied (Units)
OP to OP1. Quantity demanded and supplied (Units)

Y Increase in Demand > Decrease in Supply

Case II. Increase in Demand > Decrease in Supply : D1 S1

S
Effect on Equilibrium Price and Quantity When
 The new equilibrium is determined at E1. D

 As the increase in demand is proportionately

P1 E1
Supply is Perfectly Elastic and Demand Changes
Price (Rs.)

E
more than the decrease in supply. P
D1

 Equilibrium quantity rises from OQ to OQ1 and S1

S
D
Change in Demand
when Supply is
equilibrium price rises from OP to OP1. X

 Original Equilibrium is
O Q Q1
Quantity demanded and supplied (Units) Perfectly Elastic

Y
Increase in Demand < Decrease in Supply determined at point E, when
Case III. Increase in Demand < Decrease in Supply : D1
S1

 The new equilibrium is determined at E1. D

E1
S the original demand curve DD
 As the increase in demand is proportionately
P1
and the perfectly elastic supply
Price (Rs.)

less than the decrease in supply. P E

curve SS intersect each other.
 Equilibrium quantity falls from OQ to OQ1 S1 D1

whereas; equilibrium price rises from OP to S D

 OQ is the equilibrium quantity
X
OP1. O Q1
Quantity demanded and supplied (Units)
Q
and Op is equilibrium price.
Case I. Increase in Demand : Y Increase in Demand when
supply is perfectly elastic
Effect on Equilibrium Price and Quantity When
 When demand increases, demand curve shifts to
D1
D

the right from DD to D1D1 and the new E1

Demand is Perfectly Elastic and Supply Changes

Price (Rs.)
E
P SS (Es = ∞)
equilibrium is established at E1.
 Equilibrium quantity rises from OQ to OQ1 but D1 Change in Supply
 Original equilibrium is
D
equilibrium price remains same at OP as supply O
X
when Demand is
Q Q1
is perfectly elastic. Perfectly Elastic
determined at point E, when
Quantity demanded and supplied (Units)

the perfectly elastic demand

Case II. Decrease in Demand : Y Decrease in Demand when

 When demand decreases, demand curve shifts to D2

supply is perfectly elastic
D curve DD and the original
the left from DD to D2D2 and new equilibrium is supply curve SS intersect each

Price (Rs.)
E2 E
P SS (Es = ∞)
established at E2.
 Equilibrium quantity falls from OQ to OQ2 but
other.
D

equilibrium price remains the same at OP as

O Q2 Q
X
D2
 OQ is the equilibrium quantity
supply is perfectly elastic. Quantity demanded and supplied (Units)
and OP is the equilibrium price.

Y Increase in Supply when

Case I. Increase in Supply : demand is perfectly elastic

S Effect on Equilibrium Price and Quantity When
 When supply increases, the supply curve shifts to S1

the right from SS to S1S1 and new equilibrium is Supply is Perfectly Inelastic and Demand Changes
Price (Rs.)

E E1
P DD (ED =

established at E1. ∞)

 Equilibrium quantity rises from OQ to OQ1 but

S
S1
Change in Demand
equilibrium price remains same at OP as demand O Q Q1
X
when Supply is
is perfectly elastic. Quantity demanded and supplied (Units)
Perfectly Inelastic  Change in demand does
Case II. Decrease in Supply : Y
Decrease in Supply when
demand is perfectly elastic
not affect the equilibrium
 When supply decreases, the supply curve shifts to
S2
S quantity when supply is
the left from SS to S2S2 and new equilibrium is
perfectly inelastic.
Price (Rs.)

E2 E
P DD (ED = ∞)
determined at E2.
 Equilibrium, quantity falls from OQ to OQ2 but S2
S  It only changes
equilibrium price remains same at OP due to
perfectly elastic demand.
O Q2 Q
Quantity demanded and supplied (Units)
X
equilibrium price.
Case I. Increase in Demand : Y
Increase in demand when supply is
perfectly inelastic
Effect on Equilibrium Price and Quantity When Demand is
 When demand increases, the demand curve shifts D
D1
SS (Es = 0)
Perfectly Inelastic and Supply Changes
to the right from DD to D1D1 and new equilibrium P1
E1

Price (Rs.)
is established at E1. P
E

 Equilibrium price rises from OP to OP1 but Change in Supply

D1
equilibrium quantity remains the same at OQ as D when Demand is
When demand is
X

supply is perfectly inelastic.

O Q
Quantity demanded and supplied (Units) Perfectly Inelastic

Case II. Decrease in Demand : Y

Decrease in demand when supply is
perfectly inelastic perfectly inelastic,
 When demand decreases, the demand curve SS (Es = 0)

then change in supply

D
D2
shifts to the left from DD to D2D2 and new P
E

equilibrium is established at E2.

does not affect the

Price (Rs.)
P2 E2

 Equilibrium price falls from OP to OP2 but

D
equilibrium quantity remains the same at OQ as
equilibrium quantity.
D2
X
the supply is perfectly inelastic. O Q
Quantity demanded and supplied (Units)

Increase in Supply when demand is

Case I. Increase in Supply : Y

perfectly inelastic
DD (Ed = 0) S
 When supply increases, supply curve shifts to the S1

right from SS to S1S1 and new equilibrium point is P E Two Types of Government
Price (Rs.)

established at point E1.

Interventions are
P1
E1
 Equilibrium price falls from OP to OP1 but S
S1
equilibrium quantity remains the same at OQ as X
O Q
demand is perfectly inelastic. Quantity demanded and supplied (Units)

Decrease in supply when demand

Case II. Decrease in Supply : Y is perfectly inelastic
DD (Ed = 0)
 When supply decreases, the supply curve shifts to
S2

the left from SS to S2S2 and new equilibrium is P2 E2

S

Price Price
Price (Rs.)

established at point E2. P E

 Equilibrium price rises from OP to OP2 but
equilibrium quantity remains the same at OQ as
demand is perfectly inelastic.
O
S2
S

Q
Quantity demanded and supplied (Units)
X Ceiling Floor
 Price Ceiling Black Marketing’ as a Direct Consequence of Price Ceiling
Y
 Price Ceiling refers to fixing the maximum price of a
commodity at a level lower than the equilibrium price. D S
 Black Market is any market in which the
 The reason for price ceiling is that equilibrium price is too commodities are sold at a price higher
high for the common people to afford. P1

Price (Rs.)
E (Equilibrium Point)
than the maximum price fixed by the
 In other words, it is the maximum price which a seller can A
charge from a consumer.
P
S
B
D
PRICE CEILING
government.
Shortage
 It is done by the government with a view to protect the
 It implies a situation where the commodity
X
O Q1 Q2
interest of the consumer. Quantity demanded and supplied (Units)

under government’s control policy is

 OP1 is the price ceiling whereas OP is the equilibrium price. illegally sold at a price higher than the one
 At OP1, the producers are willing to supply OQ2 whereas consumer are demanded OQ1. fixed by the government.
 The effect of this ceiling is shortage equal to AB.
 It arises due to the presence of consumers
 The consequence of this shortage are : who may be willing to pay higher price for
the commodity than to go without it.
Black Marketing Hoarding Rationing Corruption

Rationing
Price Floor
 Price Floor refers to minimum price (above the
System  Rationing is a technique adopted by the equilibrium price), fixed by the government, which the
Y

D S
government to sell a minimum quota of essential producers must be paid for their produce. P1 A B
PRICE FLOOR
commodities at a price less than equilibrium  The need for price floor arises when government finds that Surplus

price to supply goods to the poor community at

Price (Rs.)
P E (Equilibrium Point)
the equilibrium price is too low for the producers.
a cheaper price.
 This price generally set above the equilibrium price for
 Under this, consumers are given ration cards/
S
various agricultural products like wheat, sugarcane etc. X
Q2
coupons to buy commodities at a cheaper price and the reason being protecting the interest of the O Q1
Quantity demanded and supplied (Units)
from ration shops. producers.

 Difficulty in obtaining goods from ration shops  OP1 is the price floor whereas OP is the equilibrium price.
as consumers have to stand in long queues to  At OP1, the producers are willing to supply OQ2, whereas the consumers are demanding only
buy goods from ration shops. OQ1.
 Sometimes, commodities are not available in the  It creates a situation of surplus equivalent to AB.
ration shops or goods are of inferior quality.  Price floor leads to excess supply in the market.
 Implication and Tool of Price Floor
Implications of Price Floor :
 Since, producers are not able to sell all they want to sell, they
illegally sell the good or service below the minimum price.
 Price floor is normally set at a level higher than the
equilibrium price, which leads to excess supply.
Buffer Stock as a Tool of Price Floor :
 When market price is lower than what government feels
should be given to the farmers, it purchases the commodity
at higher price from the farmers.
 Producers so as to maintain stock of the commodity with
itself, to be released in case of shortage of the commodity in
future.

Minimum Wage Legislation :

 Under this, government aims to ensure that wage rate of labour does not fall below a particular level.
 Minimum wages are also set above the equilibrium wage level (as in case of Price Floor).