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The document discusses various microeconomics concepts: 1) It distinguishes intended supply from actual supply, explaining that intended supply depends on production factors while actual supply depends on market price fluctuations. 2) It defines the Veblen effect as consumers believing higher priced goods have higher quality, using price as a quality signal. 3) It shows price elasticity is zero at the x-intercept and infinity at the y-intercept on a straight line demand curve. 4) It explains how a rise in the price of a substitute good reduces supply, as producers find the substitute more profitable to produce. 5) It differentiates between market supply, the total quantity producers will offer, and

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Vijay Kumar
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533 views

234

The document discusses various microeconomics concepts: 1) It distinguishes intended supply from actual supply, explaining that intended supply depends on production factors while actual supply depends on market price fluctuations. 2) It defines the Veblen effect as consumers believing higher priced goods have higher quality, using price as a quality signal. 3) It shows price elasticity is zero at the x-intercept and infinity at the y-intercept on a straight line demand curve. 4) It explains how a rise in the price of a substitute good reduces supply, as producers find the substitute more profitable to produce. 5) It differentiates between market supply, the total quantity producers will offer, and

Uploaded by

Vijay Kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Question 1

(a) Distinguish between intended supply and actual supply.


Intended supply(stock) Actual supply(supply)

Intended supply is the total amount of Actual supply is the amount of stock
stock which a producer holds that is offered for sale

Intended supply depends on storage, Actual supply depends on price


production, transportation, etc

Indented supply can be used to control Actual supply depends on the


the economic conditions fluctuations in the market.
(b) Define veblen effect.
Ans. Sometimes consumers believe that higher priced goods have higher quality compared
to lower priced goods. They use price as an index to measure the quality of a good. In such
cases a large quantity of a commodity can be demanded at a higher price and small quantity
of goods at a lower price. Example, consumers would prefer lux premium over lux due to its
higher price.

(c)How much is the price elasticity of demand in case of straight line demand curve in
the following situations: i. X intercept ii. Y intercept. Draw diagrams for the same.

Ans. i. At x intercept price elasticity would be equal to zero

Ii. at Y intercept price elasticity would be equal to infinity


(D)Explain using an example the impact of a rise in the price of the substitute good on its
supply.

● prices of substitute goods are an important factor for determining the quantity of
goods to be supplied in the market.
● Producers have the choice to shift from the production of one commodity to another
commodity.
● When the prices of of substitute goods increases the producers find profitability in the
production of the substitute goods and tend to manufacture these goods, as a result
the supply of the commodity in study reduces
● Example, when the prices of coffee increase while the price of tea remains the same,
a farmer growing tea and coffee finds profitability in the production of coffee and
hence grows more coffee and reduces the supply of tea.

(e)Differentiate between market supply and market supply schedule.

Ans.
Market supply Market supply schedule

Market supply of a commodity refers to the Market supply schedule is a table that
total quantity of a commodity which all the shows different quantities of a commodity
producer are willing to produce and offer for that all the firms are willing to sell at
sale for a particular price for a given time different market prices during a given time
period period, assuming that the the factors
determining the supply are given

It is not used represent the law of supply It is used to represent the law of supply in a
table format
It shows the price at which a quantity of It shows the different prices at which
commodity is offred for sale by all the firms different quantities of a commodity is sold
by all the firms

Question 2
(a) i.Solve: A consumer buys18 units of a good at a price of Rs 9 per unit.The price
elasticity of demand is (-) 1.How many units the consumer will buy at a price of Rs 10
per Unit.
Ii. Explain using a diagram and a table, e>1 with respect to Total outlay method.

Ans. i.
Ii.

(b)Give the following reasons for the negative slope of the demand curve:
i Law of diminishing marginal utility
● The law of marginal states that as the amount consumed of a commodity increases,
the utility derived by the consumer from the additional units, i.e., marginal utility, goes
on decreasing.
● A consumer will maximise his satisfaction when he equalises the marginal utility of
the commodity with its price.
● Due to this equilibrium condition a consumer will buy a larger quantity of a commodity
only when the price decreases because the marginal utility of additional units goes
down.

Ii Price effect
Price effect is the sum total of income effect and substitution effect.

Income effect:-the change in demand due to the change in the real income resulting from a
change in the price of a commodity is known as the income effect. when the price changes it
affects the consumers purchasing power and thus leads to a change in the quantity
demanded When the price of a commodity falls, the consumer can buy a larger amount of
the commodity with his given money income or he can buy the same amount of commodity
and at the same he would be able to save some money.

Substitution Effect:-
When the price of a commodity falls and prices of its substitutes remain unchanged, it
becomes relatively cheaper in comparison to its substitutes. Consumers will normally like to
substitute cheaper goods for costlier ones.
(c) Explain the difference between change in supply and change in quantity supplied. Use
appropriate diagrams.
Ans. when the quantity of a commodity rises due to a rise in own price, whle the other
factors remain the same it is called change in quantity supplied
When th amountpf commodity supplied supplied of a commodity changes due to other
factors other than the own price it is called change in supply

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