CLASS

XII
UNIT-3

CBSE-i

Teacher's Manual

Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

 CBSE-i

Teacher's Manual

CLASS

XII
UNIT-3

Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India

The CBSE-International is grateful for permission to reproduce
and/or translate copyright material used in this publication. The
acknowledgements have been included wherever appropriate and
sources from where the material may be taken are duly mentioned. In
case any thing has been missed out, the Board will be pleased to rectify
the error at the earliest possible opportunity.
All Rights of these documents are reserved. No part of this publication
may be reproduced, printed or transmitted in any form without the
prior permission of the CBSE-i. This material is meant for the use of
schools who are a part of the CBSE-International only.
 Preface
Education plays the most important role in acquiring professional and social skills and a positive attitude to face
the challenges of life. Curriculum is a comprehensive plan of any educational programme. It is also one of the
means of bringing about qualitative improvement in an educational system. The Curriculum initiated by Central
Board of Secondary Education-International (CBSE-i) is a progressive step in making the educational content
responsive to global needs. It signifies the emergence of a fresh thought process in imparting a curriculum which
would restore the independence of the learner to pursue the learning process in harmony with the existing
personal, social and cultural ethos.
The CBSE introduced the CBSE-i curriculum as a pilot project in few schools situated outside India in 2010 in
classes I and IX and extended the programme to classes II, VI and X in the session 2011-12. It is further extended in
classes III, VII and Senior Secondary with class XI in the session 2012-13.
The Senior Secondary stage of education decides the course of life of any student. At this stage it becomes
extremely important for students to develop the right attitude, a willingness to learn and an understanding of the
world around them to be able to take right decisions for their future. The senior secondary curriculum is expected
to provide necessary base for the growth of knowledge and skills and thereby enhance a student's potential to face
the challenges of global competitiveness. The CBSE-i Senior Secondary Curriculum aims at developing desired
professional, managerial and communication skills as per the requirement of the world of work. CBSE-i is for the
current session offering curriculum in ten subjects i.e. Physics, Chemistry, Biology, Accountancy, Business-
Studies, Economics, Geography, ICT, English, Mathematics I and Mathematics II. Mathematics at two levels
caters to the differing needs of students of pure sciences or commerce.
The Curriculum has been designed to nurture multiple intelligences like linguistic or verbal intelligence, logical
mathematical intelligence, spatial intelligence, sports intelligence, musical intelligence, inter-personal
intelligence and intra-personal intelligence.
The Core skills are the most significant aspects of a learner's holistic growth and learning curve. The objective of
this part of the core of curriculum is to scaffold the learning experiences and to relate tacit knowledge with formal
knowledge. This involves trans-disciplinary linkages that would form the core of the learning process.
Perspectives, SEWA (Social Empowerment through Work and Action), Life Skills and Research would be the
constituents of this 'Core'. The CBSE-i Curriculum evolves by building on learning experiences inside the
classroom over a period of time. The Board while addressing the issues of empowerment with the help of the
schools' administering this system strongly recommends that practicing teachers become skilful and lifelong
learners and also transfer their learning experiences to their peers through the interactive platforms provided by
the Board.
The success of this curriculum depends upon its effective implementation and it is expected that the teachers will
make efforts to create better facilities, develop linkages with the world of work and foster conducive environment
as per recommendations made in the curriculum document.
I appreciate the effort of Dr. Sadhana Parashar, Director (Academics, Research, Training and Innovation), CBSE
and her team involved in the development of this document. I specially appreciate the efforts of (Late)Dr.Srijata
Das for working tirelessly towards meeting deadlines.
The CBSE-i website enables all stakeholders to participate in this initiative through the discussion forums. Any
further suggestions on improving the portal are always welcome.
Vineet Joshi
Chairman, CBSE
 Acknowledgement
Advisory Conceptual Framework
Shri Vineet Joshi, Chairman, CBSE Shri G. Balasubramanian, Former Director (Acad), CBSE
Dr. Sadhana Parashar, Director (Academics, Research, Ms. Abha Adams, Consultant, Step-by-Step School, Noida
Training & Innovation), CBSE) Dr. Sadhana Parashar, Director (Academics, Research,
Training & Innovation), CBSE

Ideators: Classes XI and XII

Prof. A K Bakshi Ms. P Rajeshwary Dr. Niti Nandini Chatnani Ms. Deepa Shukla
Dr. N K Sehgal Ms Gayatri Khanna Dr. Preeti Tewari Dr. Anshu
Mr. L. V Sehgal Mr. Maneesh Jaryal Dr. Arun Maurya Dr. Om Vikas
Prof. Kapil Kapoor Mrs. Anita Makkar Dr. Deeksha Bajpai Dr Rajesh Hassija
Ms. Renu Anand Prof. Biswajit Nag Mr. S K Agarwala Mr. Mukesh Kumar
Dr. Barkatullah Khan Ms. Usha Sharma Dr. Vijay Sarda Ms. Neeta Rastogi
Ms. Avnita Bir Ms. Mandira Pal Dr. Indrakant K Singh Ms. Rajeshwari Garg
Dr. Archana Singh Ms. Lucy Jad Ms. Mridula Arora Ms. Monika Mehan

Material Production Groups: Classes XI and XII

English: Ms. Sucharita Basu Kasturi Geography: Mr. Sandeep Sethi
Ms Gayatri Khanna Mr. Vivek Dr. Preeti Tewari Ms. Sakshi Mehta
Ms Renu Anand Ms. Sonika Babbar Ms. Rupa Das
Business Studies:
Ms. P Rajeshwary Mr. S Fazal Daoud Firdausi
Biology: Dr. S K Bhatia
Ms. Sandhya Awasthi Ms. Neena Phogat
Dr. Arun Maurya Ms. Meenu Ranjan Arora
Ms. Manna Barua Ms. Sujata Sharma
Ms. Rajeshwari Garg Mrs. Shegorika
Ms. Veena Bhasin Ms. Deepa Kapoor
Dr. Indrakant K Singh Mr. Sandeep Sethi
Ms. Urmil Guliani Ms. Bharti Malhotra
Dr. Archana Singh Ms. Usha Sharma
Ms. Sudha Ravi Ms. Isha Kaushik
Ms. Lucy Jad Ms. Komal Bhatia
Mr. Anil Kumar Mr. Riyazuddin Khan
Ms. Mridula Arora Ms. Ravisha Aggarwal
Ms. Vijaylaxmi Raman Ms. Pooja Verma
Mr. Vinod Kumar Ms. Sakshi Mehta
Ms. Neerada Suresh Ms. Mamta Kanti Kumar
Ms. Mandira Pal
Ms. Richa Bhardwaj Economics:
Chemistry: Ms. Monika Mehan
Ms. Sunita Bajpai Mr. S K Agarwal
Dr. K. K Arora Ms. Deepa Shukla
Ms. Shweta Yadav Ms. Ambika Gulati
Dr. Sarita Passey
Mathematics: Mr. Gurvinder Singh Ms. Nidhi Singh
Dr. Adarsh Gulati
Dr. Sushil Kumar Mr. Rahul Singal Ms. Malti Modi
Dr. Neeti Misra
Mrs. Monica Talwar Ms. Sapna Das
Dr. A.C Handa Accountancy:
Mrs. Charu Dureja Ms. Ingur Agarwal
Mr. S. K Jain Mr. S S Sehrawat
Mrs. Seema Juneja Ms. Shankar Kulkarni
Dr. K Mohna
Physics: Dr. H L Bhatia Mr Sandeep Sethi
Dr. Balbir Singh
Mr. Vivek Kaushik Mrs Neeru Aggarwal Ms. Sakshi Mehta
Mr. Bhupendra Kriplani
Ms. Namrata Alwadhi Dr. Saroj Khanna
Dr. Shipra Vaidya
Mr. Dhirender Sharma Dr Sushma Bansal

Chief Co-ordinator: Ms. Kshipra Verma, Education Officer

(Late) Dr.Srijata Das, Ms. S. Radha Mahalakshmi, Ms. P. Rajeshwary, Mr. Sandeep Sethi,
Education Officer Education Officer Education Officer Education Officer
Ms. Neelima Sharma, Shri. R. P. Sharma, Ms. Deepa Shukla, Ms. Reema Arora,
Consultant (English) Consultant (Science) Consultant(Biology) Consultant (Chemistry)
Mr. Navin Maini, Mr. R.P Singh, Shri Al Hilal Ahmed, Mr. Sanjay Sachdeva,
R O (Technology) AEO AEO D. O.
 Content
Preface
Acknowledgment
1. Matrix 1
2. Scope 4
3. Teacher's Note 6
4. Teacher's Manual (Introduction) 9
5. Student's Worksheet - 2 29
6. Student's Worksheet - 3 37
7. Student's Worksheet - 4 49
 1. Matrix
Previous Knowledge of pupils:
Knowledge of theory of consumer behaviour.

S.No. Sub Units Teaching Specific Weblinks Connectivity-

points Objectives integration
with other
subjects

1. Production Concept of A student should http://www

function total product. be able to: .youtube.co
m/watch?v=
Average Explain the
aGv92TeU-
product. concept of total
hc.
product,
Marginal
average http://www
Product.
product and .youtube.co
Returns to a marginal m/watch?v=
Factor. product with JNS_rntqUc
relationship M.
between them.

Explain the law

of Returns to
Factor with
reasons for
operation of
the law.

2. Cost Analysis Meaning of A student should http://www

Cost. be able to: .youtube.co
m/watch?v=
Concept of Explain the
uBNoW5Jk9
Short run meaning of
u8.
and Long cost.
Run. http://www
Numerical
.youtube.co
Concept of expression of
m/watch?v=
Total cost, all the costs
ScEk47mXyc
total fixed with its
Y.
cost, total formulas.
variable cost,
Distinguish
Average cost,
between fixed
Average
cost and
variable cost
variable cost.
and marginal

1
 cost. Distinguish
between
Relationship
average cost
between
and marginal
various costs.
cost.

3. Revenue Meaning of A student should http://www Political

Analysis Revenue. be able to: .youtube.co Science to
m/watch?v= reflect on how
Concept of Explain the
3v4Qq5GI1L policies can
Total meaning of
k. lead to higher
revenue, Revenue.
HDIs
average
Concept of
revenue and
total revenue,
marginal
average
revenue.
revenue and
Relationship marginal
between total revenue.
revenue and
marginal
revenue.

4. Producers Meaning of A student should http://www.

equilibrium producers be able to: youtube.com
equilibrium. /watch?v=de
Explain the
vjsF8shrU&fe
Conditions of conditions for
ature=related.
producers producers
equilibrium equilibrium. http://www.
with the help youtube.com
Objective of a
of MR and /watch?v=hl
firm to
MC approach Rqh77yOIg&f
maximize
eature=relate
profit.
d.

5. Supply Concept of A student should http://www

analysis supply, be able to: .youtube.co
individual m/watch?v=
Explain the
supply and x4OKYQXfE
concept of
market XY.
supply.
supply.
Explain the
Determinants
determinants of
of supply.
individual and

2
Movement market supply.
and shifts in
Distinguish
supply.
between
Concept of movement and
elasticity of shifts in
supply and supply.
factors
Explain the
affecting it.
method of
Measurement calculation of
of price elasticity of
elasticity of supply by
supply by different
percentage methods.
and
geometric
method.

3
 2. Scope
Production process involves the transformation of inputs into output. The inputs
could be land, labour, capital, entrepreneurship etc. and the output could be goods
or services. In a production process managers take four types of decisions:
(a) Whether to produce or not,
(b) How much output to produce,
(c) What input combination to use, and
(d) What type of technology to use.
The analysis of this unit mainly focuses on the firms that produce a single
product. Analysis on decisions related to multiproduct firms is also given
briefly. The nature of production when there is only one variable input is
taken up

Short Run and Long Run

All inputs can be divided into two categories: i) fixed inputs and ii) variable inputs. A
fixed input is one whose quantity cannot be varied during the time
The time period will vary depending on the circumstances. Although any input may be
varied no matter how short the time interval, the cost involved in augmenting the
amount of certain inputs is enormous; so as to make quick variation impractical. Such
inputs are classified as fixed and include plant and equipment of the firm. On the other
hand, a variable input is one whose amount can be changed during the relevant period.

4
For example, in the construction business the number of workers can be increased or
decreased on short notice. Many builder firms employ workers on a daily wage basis
and frequent change in the number of workers is made depending upon the need. The
amount of milk that goes in the production of butter can be altered quickly and easily
and is thus classified as a variable input in the production process. Whether or not an
input is fixed or variable depends upon the time period involved. The longer the length
of the time period under consideration, the more likely it is that the input will be
variable and not fixed. Economists find it convenient to distinguish between the short
run and the long run. The short run is defined to be that period of time when some of
the firms inputs are fixed. Since it is most difficult to change plant and equipment
among all inputs, the short run is generally accepted as the time interval over which the
firms plant and equipment remain fixed. In contrast, the long run is that period over
which all the firms inputs are variable. In other words, the firm has the flexibility to
adjust or change its environment. Production processes of firms generally permit a
variation in the proportion in which inputs are used. In the long run, input proportions
can be varied considerably.
For example, at Maruti Udyog Limited, an automobile dye can be made on
conventional machine tools with more labour and less expensive equipment, or it can be
made on numerically controlled machine tools with less labour and more expensive
equipment i.e. the amount of labour and amount of equipment used can be varied.
Later in this unit, this aspect is considered in more detail. On the other hand, there are
very few production processes in which inputs have to be combined in fixed
proportions. Consider, Ranbaxy or Smith-Kline-Beecham or any other pharmaceutical
firm. In order to produce a drug, the firm may have to use a fixed amount of aspirin per
10 gm of the drug. Even in this case a certain (although small) amount of variation in
the proportion of aspirin may be permissible. If, on the other hand, no flexibility inthe
ratio of inputs is possible, the technology is described as fixed proportion type. We refer
to this extreme case later in this unit, but as should be apparent, it is extremely rare in
practice.

5
 3. Teachers Notes
3.1 Unit Introduction
It is suggested that the topic of Development Indicators be introduced by the
Teacher in one of the following ways:
1. Movie Clip
Show the students the first 5 minutes of the movie whose link is given below:
http://www.youtube.com/watch?v=y1wbRd2vqVc
This movie clip explains the concept of production function . From this movie
the teacher can engage the students in the rest of the unit.
NOTE: With the help of the movie teacher can raise the discussion on the
different stages of production Law of variable proportion.
2. Group work
Students can be divided into appropriate groups and asked to reflect on the
following:
Which stage will be opted by the rationale producer and why?
Why costs are different in the short period and long period?
How revenue gets affected when more units produced and sold?
What is the relationship between price and quantity supplied of a
commodity?
The answers given by students can be linked to the concept of production
and cost analysis. Students can also be engaged in discussions on how
they would consider the production process and its different stages before
the teacher starts explaining the concepts of the unit.
3. Picture Analysis
Show the students the following pictures. Ask them to describe what they see
with respect to production function and its law of variable proportion. How
would the rationale producer can take decision among the three different
phases of production? Initiate a discussion to introduce the topic.

6
Production process

7
Costs

Revenues

8
 Teachers Manual
Concept of production function.
The functional relationship between physical inputs and physical output or a firms is
called production function. It can be expressed as below presuming there are three
factor inputs : labour (L), capital (K) and Land (D).
Q= f (L, K, D)
It gives information regarding maximum amount of output that can be produced from
different quantities of factor inputs with the assumption that technology remains
constant. A production function is an expression of relationship between change in
inputs and the resultant change in output.
Concept of total product (TP), average product (AP) and marginal product (MP)
1. Total product (TP) TP refers to total volume of goods and services product by a
firm with the given inputs during a specified period of time.
2. Average Product (AP) AP is per unit product of a variable factor. AP is total
physical product per unit employment of a variable input.

Total Product (TP)

AP =
Unit of variable factor
3. Marginal Physical Product (MP) MP is an additional to the total production
(output) when an additional unit of a variable factor is employed. Factor rises in
the beginning and then ultimately falls as more of it is employed.

9
Hypothetical Schedule of TP, AP and MP

Land & Capital Unit of Labour TPP APP MPP

(Fixed factors) (variable factors)
1 0 0 0 0
1 1 2 2 2
1 2 6 3 4
1 3 12 4 6
1 4 20 5 8
1 5 25 5 5
1 6 29 4.8 4
1 7 31 4.4 2
1 8 31 3.9 0
1 9 29 3.2 -2

10
LAW OF RETURNS
Law of Returns. Production broadly means, transformation of input in to output.
Change in quantity of output may be referred to as return Law of Returns explains the
change in physical output as a result of change in inputs.
(i) Short period (in which some factors are fixed and some are variable)
(ii) Long period (in which all factors are variable).
Short period. A time period that is less than the minimum required to bring
about changes in factors of production. is known as short period. A short period
is the period of time in which a firm cannot change its fixed factors of production
like plant, machinery, building etc.
Long period. A long period is a time period during which a firm can change all
factors of production including machinery, building organization etc.
Fixed Factors and Variable Factors
Fixed factors generally mean those factors of production which cannot be changed
easily during short period, e.g., factory building, machines, plant and services of
management.
Variable factors on eh other hand, generally refer to those factors of production which
can be varied or changed during short period, e.g., raw material, ordinary labour,
power, fuel etc.
Law of Returns

Returns to a Factor Returns to Scale

(or Law of variable proportion) (Long period production function)
(Short period production function)

11
Return to a factor means. Change in total physical product when an additional unit of
a variable factor is employed with fixed factors. When only one factor is increased
keeping other factors constant, the resultant increase in output is called returns to a
factors.

Statement of law of variable proportion.

The law states if more and more units of a variable factor are employed with fixed
factors, total product (TP) increase at an increasing rate in the beginning, then increase
at a diminishing rate and finally starts falling. If quantities of a certain variable factor
are increased while quantities of other factors are fixed, MP first increases, then falls but
remains positive and finally becomes negative.
(b) There phases of production. The following three phases (stages) of production are
noticed as more and more units of a variable factors (labour)

Land (Acre) No. of labourers TP (quintal) AP (quintal) MP (quintal)

1 0 0 0 -

1 1 2 2 2

1 2 6 3 4 Phase - I

1 3 12 4 6

1 4 16 4 4

12
 1 5 18 3.6 2 Phase - II

1 6 18 3 8

1 7 14 2 -4

1 8 8 1 -6 Phase - III

Phase I. TP increase at an increasing rate. MP keeps rising between O to Q1 level of

output and reaches its maximum.
Phase II. TP increases at a diminishing rate till it reaches its maximum point. MP is
falling but remains positive.
Phase III. TP starts declining. MP comes negative (-)
Reasons for operation of the law.
Main reasons for increasing return are:
(i) Realization of optimum combination of factors. Among different combination of
factors of production, there is one optimum combination which gives maximum
production with given resources. Moreover better coordination among factors
result in increasing returns.
(ii) Specialization resulting from division of labour increases efficiency which helps in
getting increasing returns, i.e., MP goes on rising till it achieves maximum
production with given inputs.
(iii) Full utilization of fixed factor. When we go towards this optimum, we get
increasing returns because the under-utilized fixed factors (like machinery,
building) are better and more fully used. In other words with increase in variable
input, factor proportion becomes more suitable for production by a firm.
(B) Reasons for diminishing returns are:
(i) Use of a factor beyond optimum capacity. (This makes fixed factor proportion
unsuitable and inadequate for increased quantity of variable factor.)
(ii) Lack of perfect substitution between factors
(iii) Fall in quantity of fixed factors inputs per unit of variable factor input and
(iv) Scarcity of factors

13
 Student Worksheet- 1

A short-run production function assumes that

A) the usage of at least one input is fixed.

B) the level of output is fixed.

C) all inputs are fixed inputs.

D) both a and b

E) both b and c

If average product is decreasing, then marginal product

A) must be greater than average product.

B) must be less than average product.

C) must be increasing.

D) cannot be decreasing.

14
E) both a and c

Which of the following statements is TRUE?

A) A firm plans in the short run and operates in the long run.

B) In the long run a firm can change all but one input.

C) In the long run all inputs are variable.

D) In the short run all inputs are fixed.

Suppose you operate a sandwich shop and currently have two

employees. If you hire a third employee, your output of sandwiches per
day rises from 75 to 90. If you hire a fourth employee, output rises to 110
per day. A fifth and sixth employee would cause output to rise to 120 and
125 per day, respectively. Choose the correct statement:

A) Diminishing returns set have not yet set in because output is still
increases.

B) Diminishing returns set in with the hiring of the fourth worker.

C) Diminishing returns set in with the hiring of the fifth worker.

D) Diminishing returns set in with the hiring of the sixth worker.

The marginal product of labor

A) is less than the average product of labor when the average product
of labor is decreasing.

B) measures how output changes as the wage rate changes.

C) is negative when adding another unit of labor decreases output.

D) both a and c

E) both b and c

Diminishing marginal productivity

15
A) occurs when the marginal product curve begins to slope
downward.

B) occurs eventually because each additional unit of the variable

input has, on average, fewer units of the fixed input with which to
work.

C) occurs when adding one more unit of the variable input reduces
total product.

D) both a and b

E) both a and c

Diminishing returns refers to the decrease in

A) long-run average cost that results from increases in output.

B) average total cost that results from decreases in input prices.

C) profit that results from increases in output.

D) average product that results from increases in the variable input.

E) marginal product that results from increases in the variable input.

If a firm is producing a given level of output in a technically-efficient

manner, then it must be the case that

A) it is choosing the lowest-cost method of producing that output.

B) this output level is the most that can be produced with the given
levels of inputs.

C) each input is producing its maximum marginal product.

D) both a and b

E) both a and c

If a firm is producing a given level of output in an economically-efficient

16
 manner, then it must be the case that

A) it is choosing the lowest-cost method of producing that output.

B) this output level is the most that can be produced with the given
level of inputs.

C) each input is producing its maximum marginal product.

D) both a and b

E) both a and c

Q. 2 Explain the relationship between the marginal product and the total product of
an input.
Q.3 Examine the relationship between average product and marginal product in the
law of constant marginal returns.
Q.4 Explain the law of diminishing marginal returns. Why do diminishing marginal
returns to a variable factor occur?
Q.5 Explain the role of Point of inflexion in the law of variable proportions?
Q.6 State the reasons for operation of increasing returns.
Q.4 Calculate TP and AP

Units of labour 1 2 3 4 5 6
Marginal product 30 32 27 24 20 12

Q.5 On the basis of the following data, what can you say about the nature of returns
to the variable factor (labout) at various levels of its employment?

Units of variable factor 0 1 2 3 4 5 6

Total product 0 5 11 18 25 31 36

17
 COST AND REVENUE
CONCEPT OF COST
Meaning of cost:

The sum of explicit costs and implicit costs constitutes total cost of production of a
commodity. For producing a commodity, a firm requires factor inputs (services of land,
labour, capital etc.) and non-factor inputs is called money cost or explicit cost.

18
In economics money expenses alone do not constitute cost of production because it does
not include the imputed cost of self-owned factors supplied by the firm itself. This
hidden cost (or implicit cost) of self-supplied factors also forms a part of cost of
production. Sum of explicit cost and implicit cost constitutes total of production of a
commodity.
Cost Function The functional relationship between output and cost is called cost
function. Symbolically C = f(Q)
Distinction between short run costs and long run costs
Short run costs A short run (or period) is a period of time in which some factors of
production (like machinery, building, technical labour) cannot be changed (or
increased) due to insufficiency of time while others (like raw material, ordinary labour,
power etc.) can be changed (or increased) according to the output to be produced.
Long run cost A long run is a time period during which quantities of all the factor
inputs (like machinery, building, raw material etc.)
Fixed costs. Fixed costs are the costs which do not change with change in the level of
output. Fixed costs remand even if output is zero. TFC curve is a straight line parallels
to X-axis as shown below.
Y

Total Fixed Cost TFC Curve

150 FC
No. of units product TFC (Rs.)
0 150 100
1 150
2 150 50
3 150
4 150
O 1 2 3 4 X

OUTPUT

19
Variable Costs
These are the costs which very directly with the change in the level of output. That is
are called direct costs. The costs incurred on raw material, power, fuel, wages of
temporary labour, wear and tear of machines etc. are examples of variable costs.

Total Variable Cost

No. of units produced TVC (Rs.)

0 0
1 50
2 70
3 80
4 105
5 135
6 170

20
 Distinction between Fixed Costs and Variable Costs

Fixed Costs (FC) Variable Costs (VC)

1. FC do not increase or decrease with 1. VC change with changes in the level of
increase or Decrease in level of output. output.
2. FC are related to fixed factors which 2. VC are related to variable factors
cannot be Changed during short capable of be changed during short
period. period.
3. FC can never be zero even when 3. VC is zero (nil) when production is
production is stopped. stopped.
4. Production may continue even at the 4. A firm continues production only when
loss of FC during short period. VC are met.
5. FC curve is parallel to X-axis. 5. VC curve moves up from left to the
right.
6. FC are present only in short period.
6. In the long run, all costs are variable
costs.

Total Fixed Costs are the costs which remain the same at different levels of production
i.e., they do not change with change in output. Since TFC remains constant irrespective
of size of output, TFC curve is parallel to X-axis .

21
Total Variable Costs are sum of the costs which vary directly with the size of output
produced. Such costs change with change in the level of output. In other words, total
variable costs go up output is increased and fall as output is decreased. TVC is zero at
zero output.
Total cost of production. It is the cost of production of all the units of a commodity
produced by a firm. TC is the sum of TFC and TVC.

TC = TFC + TVC

Quantity of Output TFC TVC TC

(unit) (Rs.) (Rs.) (Rs.)

0 200 0 200

1 200 50 250

2 200 70 270

3 200 80 280

4 200 105 305

5 200 135 335

6 200 170 370

(i) TFC curve is horizontal and parallel to X-axis. The reason is that TFC is fixed or
constant and remains the same (Rs. 200) at all levels of output.
(ii) TVC curve and TC curve are upward sloping because TVC and TC increase with
increase in output.
(iii) Total cost curve is the vertical summation of total fixed cost curve and total
variable cost curve.
(i) Average Fixed Cost. It is the per unit fixed cost of producing a commodity. It
is calculated by dividing the total fixed cost by the number of units of
commodity produced. For example, if total fixed cost of manufacturing 200
fans is Rs. 15000, then

22
 Total Fixed Cost
AFC =
No. of units produced
(ii) Average Variable Cost. It is per unit variable cost of producing a commodity.
It is worked out by dividing the total variable cost by the number of units
produced. For instance if total variable cost of manufacturing 200 fans is Rs.
25000 then
Total Variable Cost
AVC =
No. of units produced

(iii) Average total cost. It is per unit cost of production of a commodity. It is

worked out by dividing the total cost (fixed cost + variable cost) by the
number of units produced. Continuing the above example if total cost of
manufacturing 200 fans is Rs. 40,000 (fixed cost 15000 + variable cost 25000),
then
Total Cost
ATC =
No. of units produced

Relationship between AFC, AVC and ATC Apparently there is relationship

between AFC, AVC and ATC is the sum of AFC and AVC. Algebraically ATC
= AFC + AVC.

23
(i) Relationship between MC and ATC.

Let it he reminded that AC is formally called ATC. Relationship between MC and

ATC is as under.
(i) When AC (i.e. ATC) falls, MC > AC.

24
 (ii) When AC is constant, MC = AC
(iii) When AC rises, MC > AC.

(ii) Relationship between MC and AVC

Remember rotation between MC and AVC is similar to MC and AC since MC is
not affected by FC. Relation between MC and AVC is as under.
(i) When AVC falls, MC < AVC (Diagrammatically MC curve line below AVC
curve till their intersection.
(ii) When AVC in minimum, MC = AVC (Diagrammatically the point where MC
curve intersects AVC curve is the minimum points of AVC).
(iii) When AVC rises, MC is more than AVC (Graphically MC curve lies above
AVC curve after point of intersection).
Why is AC curve U-shaped? AC curve in short period is a U-shaped curve
due to operation of law of returns (i.e. law of variable proportion) Remember,
increasing returns imply diminishing costs, constant returns mean constant
costs and diminishing returns imply increasing costs. As output is increased,
AC first falls, reaches is minimum and then rises. Hence, AC curved becomes
U-shaped. Minimum point of AC curve indicates lowest per unit cost or
production.
Marginal Cost (MC)
Marginal cost is the addition to the total variable cost when an additional
(extra) unit of a commodity is produced. MC is the additional cost of
producing an additional unit of a commodity.
Why is MC curve U-shaped?
It is due to operation of law of returns. MC curve is also U-shaped which
indicates that MC falls in the beginning, then remains constant and ultimately
it rises. The reason behind U-shaped of MC curve is operation of law o
returns. Initially production is subject to law of increasing return, the law of
constant return and ultimately of diminishing return.

25
 Y
MC
COST

O X
OUTPUT
Fig. 3.12
Relationship between AC and MC curves
(i) As long as MC is less than AC, AC curve falls and MC curve lies below AC curve
till their intersection at point B.
(ii) When MC curve comes to falling, it falls more rapidly and reaches its minimum
point E earlier that AC curve reaches its minimum point B. Thereafter MC curve
starts rising from E to B even when AC curve is still falling from D to B.
(iii) While rising. MC curve cuts AC curve at ACs minimum point B. Thereafter, AC
curve rise because MC curve lies above AC curve.

COST Schedule

Output TC AC MC
(Units) (Rs.) (Rs.) Rs.)
1 30 30 30
2 48 24 18
3 60 20 12
4 76 19 16
5 100 20 24
6 150 25 50

26
Time element and costs.
Production has its own time dimension. Therefore role of time element in
determining the costs of a firm is significant.
(i) Very Short Period (Market Period). It is the period which is so short that the
supply cannot be adjusted to change in demand (or price) During very short
period supply is price inelastic, i.e., supply does not respond to changes in price.
Since supply remains almost fixed, therefore, cost have title or no influence on
supply.
(ii) Short Period. It is the period during which supply can be increased only up to the
maximum capacity of existing plant by using more quantities of variable factors
(labour, raw material, power). In other words supply is inelastic beyond that point
Since supply can be increased by using the existing factors. Variable costs of the
firm must be met during short period.
(iii) Long period. It is the period which is long enough to change the supply by
changing the quantities of all types of factor inputs (fixed and variable factors).
New firms can enter and old can leave the industry. Thus supply is more or less
elastic. Therefore during long period all costs (fixed cost and variable cost) must be
met otherwise the firm will stop producing

27
28
 STUDENT WORKSHEET-2

A short-run cost function assumes that

A) the level of output is fixed.

B) all inputs are fixed.

C) at least one input is fixed.

D) both a and c

E) none of the above

Average total cost

A) Decreases as output increases.

B) Increases as output increases.

C) Increases if marginal cost is increasing.

D) Increases if marginal cost is greater than average total cost

E) both b and d

Average fixed cost

A) increases if marginal cost is increasing.

B) increases as output increases.

C) decreases as output increases.

D) increases if marginal cost is greater than average fixed cost.

Marginal cost

A) is less than average cost when average cost is decreasing.

B) measures how total cost changes when one more unit of output is
produced.

29
 C) measures how total cost changes when input prices change.

D) both a and b

E) both b and c

Q.2 Name the cost which is known as avoidable cost.

Q.3 A firms fixed cost is Rs. 2000. Compute TVC, AVC, TC and ATC form the
following table.

Output (unit) 1 2 3 4 5 6 7
MC (Rs.) 2000 1500 1200 1500 2000 2700 3500

Q.2 Suppose that a firms TFC is Rs. 100 and MC schedule of a firm is the following :

Output (units) 1 2 3 4 5 6 7
MC (Rs.) 10 20 30 40 50 60 71

(i) Is the MC curve U-shaped?

(ii) Derive AVC schedule. Will the AVC curve be U-shaped?
Discuss why or why not.
Q.4 Calculate TC and AVC of a firm at each give level of output from its cost
schedule.

Output (units) 1 2 3 4 5 6
AFC (Rs.) 60 30 20 15 12 10
MC (Rs.) 32 30 28 30 35 43

Q.5 Name the cost which always fall with rise in level of Output ?

30
Q.5 From the following information calculate TFC,TVC,AFC,AVC,AC and MC.

Output 0 1 2 3 4 5 6
Total Cost 10 30 45 55 70 90 120

Output 1 2 3 4 5 6
Total Cost 50 65 75 95 130 185

Q.6 Is it possible that when average cost fall Marginal cost curve rises, explain
through diagram?
Q.7 Does AC and AVC intersect at any point of time, justify your answer with
diagram?
Q.8 Explain any three differences between fixed cost and Marginal costs.
Q.9 Explain the reason why AC curve is U-shaped during short run.

31
Concept of Revenue
Define Total Revenue (TR).
Meaning of Revenue. Revenue of a firm is its money receipts form the sale of its
product. Revenue (or income) refers to the amount of money which a firm gets by
selling its product. Revenue is in fact sale revenue. In this connection it should be noted
that the demand curve of the consumers for a commodity is, in fact, the average
revenue curve of the firm because price paid by the consumers is the revenue of the
firm.
Total Revenue (TR.) TR may be defined as the total money receipts of the firm form the
sale of its total output in a given period of time.
TR = Price per unit x Number of units sold
Average Revenue (AR). It is the revenue per unit of commodity sold. AR is calculated
by dividing the total revenue by the number or units sold.

Total Revenue
AR =
No. of units sold

Marginal Revenue (MR). MR is the edition to the total revenue by selling an additional
unit of output. Marginal revenue is the addition to the total revenue which results
from the sale of one more unit of output.
Relationship between TR and MR.
A general relationship between total revenue (TR) and marginal revenue (MR) (as
happens in monopoly and monopolistic competition where MR changes) is given
below.
(i) When MR is positive and is declining, TR increasing at a diminishing rate.
(ii) When MR is zero, TR is maximum.
(iii) When MT becomes negative (i.e., below zero), TR decrease.

32
Unit Sold TR (Rs.) AR (Rs.) MR (Rs.)

1 12 12 12

2 20 10 8

3 28 8 8

4 24 6 4

5 25 5 1

6 30 5 0

7 28 4 -2

33
In perfect competition a firm is a price taker and industry the price maker. Firm has no
control over price of the product as its share in total market supply is very small. MR is
also constant because when an additional unit is sold, the addition made to total
revenue. Price = AR = MR.

34
Relationship between Average Revenue (AR) and Marginal Revenue (MR)
It is the MR which pulls AR up or down.
General Relationship between AR and MR.
(i) AR increases as long as MR is higher than AR. Alternatively when MR > AR, AR
increase.
(ii) AR is maximum and constant when MR is equal to AR. Alternatively when and
constant when MR = AR, AR is maximum.
(iii) AR falls when MR is less than AR. Alternatively when MR < AR, AR falls.
(MR can be negative but can never be negative)
Meaning of producers equilibrium.
A producer is said to reach equilibrium at that level of output which gives him
maximum profit and he has no incentive to increase or decrease output. It is an
equilibrium notion because the producer (firm) would like to stay or rest at that level of
output.

35
Producers Equilibrium through Revenue and Marginal Cost Approach. Profit
maximizing condition is MR = MC.
P = MC (in fact this condition is the same as MR = MC, because in perfect competition,
price = AR = MR)

A competitive firm attains equilibrium where price is equal to it marginal cost.

Graphically a competitive firms profit is maximized at the point where price line
intersects MC curve i.e., where Price = Marginal Cost.
It is proved that the total profit is maximized at OQ level of output where P = MC, i.e.
price is equal to marginal cost. To achieve equilibrium, a competitive firm choose its
level of output in the rising portion of MC curve. P = MC is that after equilibrium
marginal cost increase with increase in output making MC higher than MR.

36
 STUDENT WORKSHEET-3
State True and false supported by the reason.
1. Average revenue can be zero
2. Average revenue can be negative
3. Marginal revenue can be zero.
4. Marginal revenue can be negative.
5. Average revenue will always be equal to marginal revenue in all market
conditions.
Q.2 Why is the total revenue curve of a price-taking firm an upward-sloping straight
line? Why does the curve pass through the Origin
Q.3 What happens to AR when MR is greater than, equal to and less than AR?
Q.4 What change in TR will result in i) a decrease in MR and ii) An increase in MR.
Q.5 A producer will increase his profit by reducing production when his MC is
greater than his MR. Explain.
Q.6 Explain why MR=MC is the profit maximization principle of a firm in general ?

Meaning of Supply.
Supply of a commodity by a firm refers to the quantity of commodity which the firm is
willing to supply (sell) at a particular price and time.
Supply may mean the amount offered for sale per unit of time. Stock of a commodity
refers to total quantity of a commodity available with the sellers in the market at a given
time.
Factors Determining Supply (Determinants of Supply Curve)
The supply of a commodity by an individual firm depends upon many factors, some of
which are discussed below:
1. Price of the commodity itself.
A producer usually offers more quantity of commodity for sale at a higher price
and less quantity at a lower price. Supply of a commodity is directly related to the
price of the commodity.

37
2. Change in technology of production.
A change in technique of production which lessens cost of production, increases
supply of the commodity and shifts supply curve rightward.
3. Change in price of inputs.
Change in price of row material and remuneration of factors (rent, wages, interest
etc.) influences the cost of production of a commodity and thereby supply.
4. Change in excise duty (or tax rate).
Taxation by the government on output, sales or imports of raw material also
influences supply because it adds to the marginal cost of production.
5. Price of other related goods.
Supply of a good is also influenced by prices of other goods. am increase in the
price of a substitute goods in production shifts the supply curve of the given good
to the left.
6. Objectives of the firm.
Sometimes a firm may be induced to increase supply of a commodity not because
it is more profitable but because its supply is a sources of status and prestige in the
market.
7. Miscellaneous. Other determinants of supply are :
Future expectation of rise in price, time involved in production (short or long
period), agreements among producers etc.

Supply function. It explains functional relationship between supply of a

commodity and the determinant of supply. This can be expressed mathematically
as shown below.

Sn = f (Pn, Pr, T F O ..)

Where Sn = quantity supplied of commodity n
f = function of (or depends on)
Pn = Price of commodity n
Pr = Price of related good
T = technology of production
F = cost of factors of production (inputs)

38
O = objective or goal of the firm

State and explain the law of supply with the help of a supply schedule and supply
curve.
The law of supply states Other things being constant, quantity supplied of a
commodity is directly related to the price of commodity. When price of a
commodity rises, supply also rises and when price falls, supply also falls provided
other factors remain unchanged. Relationship between price and supply is direct
(positive), that between price and demand is inverse.

Supply Schedule. It is a tabular statement showing different quantities of a

commodity which a firm is ready to sell at different price during a given period of
time.
Supply Schedule

Price of sugar per kg. Quantity supplied

(Rs.) (kg)

20 50
16 40
12 30
8 20
4 10

39
3. Supply Curve. A supply curve reflects the relationship between the price and
quantity supplied graphically what the supply schedule shows arithmetically.

Assumption of Law of Supply (Other things being equal)

The phrase other things being constant used in the law of supply shows the
assumptions of the law.
(i) Price of other related goods should not change.
(ii) Technology of production should not change.

40
 (iii) Cost of factors of production should remain the same.
(iv) Goal (objectives) of the firm should not change
(v) Taxation policy of the government should not change.
Distinguish between change in supply and change in quantity supplied.
(a) Change in quantity supplied. (i) When quantity supplied of a commodity
changes (rises or falls) it its own price, it is called change in quantity
supplied.
(b) Changes in Supply. When change (increase) in supply in caused by
change in factors other than the price, it is merely called change in
supply.
Expansion and Contraction of Supply. When supply of a commodity rises
with rise it its price, other things remaining constant, it is called expansion
of supply. other things remaining constant, when supply of a commodity
falls with fall in its price, it is termed as contraction) not decrease of
supply).
Movement along a supply Curve. Rise and fall in supply of a commodity
due to change in its price (i.e., expansion and contraction of supply)
graphically means movement along a supply curve.
Distinguish between increase and decrease in supply.
Increase and Decrease in supply. When supply of a commodity rises due
to change in factors other than the price. It is called increase in supply.
when supply of a commodity falls as a result of change in factors other
than the price, termed as decrease in supply.
Causes of increase in Supply:
(i) Fall in the price of competing commodities,
(ii) Fall in prices of inputs or in the remuneration of factors of production,
(iii) Improvement in technology,
(iv) Change in goals (objectives) of producers form profit maximization to sale
maximization,
(v) Decrease in excise duty, and
(vi) increase in number of firms in the market.

41
Causes of decreases in Supply:
(i) Rise in prices of competing, commodities, making production of other
commodities more profitable,
(ii) Rise in prices of inputs or in remuneration of factors of production (resulting in an
increase in cost of production),
(iii) Technology becoming outdated causing increase in cost of production,
(iv) Change in objectives of producers from sale maximization to profit maximization
(v) Increase in excise duty, and
(vi) Fall in number of firms in the market.

Market Supply.
Simply put market supply of a commodity is the total (collective) supply of all the
individual firms (producers) in the market at a given price during a given period of
time.
Factors determining market supply and supply curve. Market supply of a good is
obtained by aggregating the supplies of individual sellers (firms) at alternative prices
in the market.
(i) Change in technology of production
(ii) Change in prices of inputs / factors
(iii) Change in excise duty rate
(iv) Change in prices of other related goods

42
(v) Number of firms (Sellers) in the market.
(vi) Objective of the firm.
(vii) Expected future price.
Market supply schedule reflects the total to various quantities offered for sale by
all the individual firms at different prices.
Price elasticity of supply is the degree of responsiveness of supply of a commodity
to a change in its price. It measures responsiveness of quantity supplied of a
commodity to change in its own price. Elasticity of supply is a measurement of
degree of responsiveness of quantity supplied to change in price. Percentage
change in quantity supplied divided by percentage change in price

% Change in quantity supplied

Es =
% Change in Price
Factors affecting magnitude of price elasticity of supply
(i) Change in cost of production. Elasticity of supply of a commodity depends on
how responds to change in output. If with an increase in output, cost of production
per unit also goes up, supply will be rather less elastic.
(ii) Nature of commodity. The nature of the commodity agricultural or industrial,
durable or perishable also affects the elasticity of supply. For example, elasticity
of supply of industrial goods is more than that of agricultural goods. Similarly
elasticity or supply of durable goods is more than that or perishable goods.
(iii) Behavior pattern of producers. Generally producers aim at maximizing their
profits and if they are rational, they differently. For instance farmers in rich
countries respond negatively to rise in price of their agricultural product because
then their need for fixed money income sis met by disposing of smaller quantity of
food grains.
(iv) Time Period. Generally elasticity of supply is more in the long period than in
shorter period of time. The reason is that in the long period, all adjustment to the
higher prices can be made easily and supply of commodity can be varied
accordingly. As against it, supply is inelastic in short period.

43
(v) Availability of facilities for expanding output. How an farmers raise their
agricultural output with rise in price of their products if facilities like seeds,
fertilizers or irrigation facilities for expansion are not available.
Describe different types (degree) of elasticity of supply.
Five types of elasticity of supply are taken into consideration.
(i) Perfectly inelastic supply (es = 0). When quantity supplied does not change
at all in response to change in price of the commodity, its supply is said to
be perfectly inelastic.

(ii) Less than unit elastic supply (es < 1). When percentage change in quantity
supplied is less than the percentage change in price, supply is said to be less
than unit elastic (or less elastic)

44
(iii) Unit elastic supply (es = 1). Supply of a commodity is said to be unit elastic
(or unitarily elastic) when percentage change in supply is equal to
percentage change in price as shown below.

Price per kg (Rs.) Supply (kg)

12 120
15 150
Alternatively is also means that es = 1, if supply curve starts form the origin
(point of axes).
(iv) More than unit elastic (es > 1). When percentage change in supply is more
than percentage change in price, supply is said to be more than unit elastic
(or highly elastic) but less than infinity as shown below.

45
 Price per kg (Rs.) Supply (kg)
10 100
15 200

Alternatively it also means that Es > 1, if supply curve starts from y-axis.
(v) Perfectly elastic supply (es = ). Supply of a commodity is said to be
perfectly elastic when its supply expands (rises) or contracts (falls) to any extent
without any change or very little change in price as shown below.

Price per kg (Rs.) Supply (kg)

20 100
20 200

46
 Degrees of Elasticity of Supply

Coefficients of es Nature of es Relationship between price and supply

es = 0 Perfectly inelastic Quantity supplied does not change with

with change in price.
es < 1 Less than unit elastic % change in supply is less than that
in price.
es = 1 Unit elastic % change in supply is equal to that
in price.
es > 1 More than unit elastic % change in supply is more than change
in price.
es = Perfectly elastic Supply change infinitely without change
in price.

47
Explain percentage method of measuring price elasticity of supply.
As the ratio or percentage change in quantity supplied of the commodity to percentage
change in its price.
Percentage change in quantity supplied
Elasticity of supply =
Percentage change in price
By simplifying, this can be converted into the following formula.
q p
es = x
p q
In which es stands for Elasticity of supply
q stands for change in quantity supplied
p stands for change in price
q stands for original quantity
p stands for original price
result of the above equation is 1, supply is elastic, if more than 1, supply is more
or highly elastic; if less than 1, supply is less elastic. This can be further clarified
with the help of following examples.
Explain the Geometric (Graphic) Method of measuring price elasticity of supply.
(i) Supply curve is extended to meet X-axis at point T. Now elasticity of supply
can be obtained by dividing the distance TQ by the distance OQ.
TQ
Symbolically es =
OQ

48
 (ii) Since supply curve when extended meets X-axis to the right of origin O,
therefore, IQ is smaller than
TQ
OQ. Hence es = is less than unity (es < 1).
OQ
(iii) Since supply curve when extended meets X-axis at the point of origin O,
therefore TQ is equal to
TQ
OQ. Hence es = is equal to unity (es = 1).
OQ

STUDENT WORKSHEET- 4
Q.1 The price of a commodity is Rs. 12 per unit and its quantity supplied is 500 units.
When its price rises to Rs. 15 per unit, its quantity supplied rises to 650 units.
Calculate its price elasticity of supply. IS supply elastic?
Q.2 The quantity supplied of a commodity at a price of Rs. 8 per unit is 400 units. Its
price elasticity is 2. Calculate the price at which its quantity supplied will be 600
units.
Q.3 Distinguish between expansion and increase in supply.
Q.4 Explain the relationship between state of technology and supply of a commodity.
Q.5 A new technique of production reduces marginal cost of producing stainless steel.
How will this affect supply curve of stainless steel utensils?
Q.6 What is increase in supply? Explain three causes of increases in supply.
Q.7 How is supply of a product affected by decrease in tax?
Q.8 What is meant by the assumption, other things remaining the same on which
law of supply is based?
Q.9 Explain all five degrees of measuring elasticity of demand.
Q.10 Explain the effect of following on supply of a product.
i) Change in prices of related goods.
ii) Subsidy on production of good
iii) rise in own price of good.

49
 iv) Change in price of input
v) Technological Changes
prepared to supply 15% more. This supply is best described as
a) inelastic
b) unit-elastic
c) elastic
d) unit-inelastic
e) none of the above
The law of supply states that an increase in the price of a good:
a) decreases the demand for that good
b) increases the supply of that good
c) decreases the quantity demanded for that good
d) increases the quantity supplied of that good
All of the following shift the supply curve of watches to the right except:
a) an advance in the technology used in manufacturing watches
b) a decrease in the wages/salaries of workers employed to manufacture
watches
c) an increase in the price of watches
d) manufacturers expectations of lower watch prices in the future
A decrease in the supply of a good will tend to cause:
a) an increase in the equilibrium price and quantity
b) a decrease in the equilibrium price and quantity
c) an increase in the equilibrium price and a decrease in the equilibrium
quantity
d) a decrease in the equilibrium price and an increase in the equilibrium
quantity
Q.2 If price of sugarcane rises from Rs. 16 per kg to Rs. 18 per kg, the quantity
supplied expands from 100 kg to 150 kg. What is Es of sugarcane?

50
Q.3 The quantity supplied of a commodity at a price of Rs. 8 per unit is 400 units. Its
price elasticity is 2. Calculate the price at which its quantity supplied will be 600
units.
Q.4 The price Es of commodity y is half the price Es of commodity x. 16% rise in price
of x results in a 40% rise in supply. If price of x falls by 8%, calculate % fall in its
supply.

51
CENTRAL BOARD OF SECONDARY EDUCATION
Shiksha Kendra, 2, Community Centre, Preet Vihar, Delhi-110 092 India