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iii. The above demand schedule shows that with the fall in price of the
commodity from Rs 5 to Rs 4 its quantity demanded has increased
from 20 units to 25 units and from 25 units to 32 units when the price
further falls from Rs 4 to Rs 3 per unit.
iv. The law of demand can also be shown by diagram. As the initial
price is OP and initial quantity is OQ respectively. When the Price
decreases to OP1 the quantity rises to OQ1.Thus there is inverse
relation between the price and the quantity demanded.
(ii) a. When the market price is below the equilibrium price, there will
be excess demand. Since quantity supplied will be less than the
quantity demanded, there will be competition among buyers.
b. Consequently, market price will keep on rising till it reaches the
equilibrium level.
3p = 300
P = 100
Qd = 400 + 2 p
New equilibrium is where
Qd=Qs
1000-p = 400 + 2p
3p = 600
P = 200
= 800 units
(c) When tax of Rs 3 per unit is imposed on sale of salt new supply
curve becomes:
Qs = 700 + 2 (p- 3)
QS = 700 + 2p-6
= 694 + 2p
3p = 306
P = 102
Complementary:
When the price of a complementary good falls (raises), its demand
rises (falls) and the demand for the given good will increase
(decrease), for example pen and ink.
Q.14.
Goods X and Y are substitutes. Explain the effect of fall in
price of Y on demand.
Ans. When price of Y falls, X becomes relatively dearer. This reduces
demand for X as Y will be substituted for X.
Q.15. What are the assumptions of law of diminishing
marginal utility?
Ans. The assumptions of law of diminishing marginal utility
are as under:
(i) Standard Units:
The law will not hold good if units consumed are too small or too
large. For example, if water is consumed in drops, the law may not
hold good.
ii. However, if significant part of income is spent upon the good, the
demand would be more elastic.
4. Habits:
If the consumer is habitual to the use of any particular commodity, the
demand for this commodity would be inelastic and vice versa e.g.
demand for alcohol and cigarette would be inelastic for drunkards &
smokers.
ii. This should be true with the basic assumption of equal satisfaction
on same IC-Curve. This is only possible when IC-Curve slopes
downward to right or negatively sloped.
iii. Any curve which is positively sloped, horizontally sloped or
vertically sloped will be against the basic assumption of equal
satisfaction on same IC-curve like.
All the above slopes are just opposite to the definition of IC-curve. So
ultimately, our statement is consistent with the basic assumption that
IC-curve must slope downwards.
MRSXy = ∆Y/∆X
Q.24. State three changes leading to the shift of demand
curve of a commodity to the right.
Ans. The three changes leading to the shift of demand curve
to the right are:
(i) Increase in income of the consumer (In case of normal good).
The 4th unit has a marginal utility of 6 and satisfies the equilibrium
condition MUx = Px. (MU of money). Thus consumer should purchase
4 units to get maximum satisfaction, i.e. at that level he will not have
the urge to consume any further.
Q.27. Distinguish between:
(a) Individual demand and market demand.
(a) Change in demand and change in quantity demanded.
(a) Individual Demand & Market Demand:
Ans. Demand of an individual means the quantity of a commodity
that an individual is willing to buy at a particular price in a given
period of time.
i. Suppose Mr. X buys 4 Kg of potatoes at a price of Rs 6 per Kg. per
week, it is his individual demand.
iii. The change in demand is of two types (i) increase in demand and
(ii) decrease in demand.
Decrease in demand:
i. When the demand for a commodity falls due to factors other than
price of the commodity, it is called decrease in demand. In case of
decrease in demand, the demand curve shifts to the left.
ii. In figure 2, DD was the original demand curve which has shifted
towards left to D’D’ because of decrease in demand. The quantity
demanded has reduced from OQ to OQ2 due to decrease in demand.
Q.29. State the causes of shift in a demand curve.
Ans. The causes of shift in a demand curve are:
(i) Change in the income of the consumers.
(ii) Change in the prices of substitute goods.
Example:
If the consumer demands more of good X after the rise in income,
then that good is a normal good for that consumer.
Example:
If the consumer demands less of good X after the rise in income, that
good X is an inferior good for that consumer.
ii. Their demand rises with the rise in income and falls with a fall in
the income of the consumer. They follow law of demand.
Inferior Goods:
When with increase (decrease) in income of the buyer, the demand for
the good increases (decreases), the good is called normal good.
i. Inferior goods on the other hand are those goods demand for which
falls with the rise in income of the consumer.
iii. With the rise in income of the consumer, he will prefer to buy
better milk so the demand for toned milk will decrease.
MUx/ Px=MUy/Py
(2) Marginal utility has a tendency to fall as more and more units are
consumed
Q.41. Explain any two factors that affect the price elasticity
of demand. Give suitable examples.
Ans. (i) Number of Substitutes:
Where the number of close substitutes of a good is more, the price
elasticity of that good, is higher. Because, in case of a price change a
consumer can easily shift from one substitute to another.
For example, rise in the price of Coke encourages buyers to buy Pepsi.
Q.42.
iii. The new budget line A’B’ will be parallel to the original
budget line AB as shown in the graph below:
Q.44. How does the budget line change if the price of good 2
decreases by a rupee but the price of good 1 and the
consumers income remain unchanged?
Ans. i. In case price of good 2 decreases, the consumer will obviously
be in a position to buy more of good 2.
ii. Point P of original budget line PQ will then move upward to P’ so
that P’Q will be the new budget line as shown in the figure.
Q = 25 unit
∆P =(Rs 5 -Rs 4) RS 1
Q= 10 – 3 x 5/3
Q= 5
∆Q/∆P = -3
Ed= (-) 1
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