Ail.comUnit III PRODUCERS BEHAVIOUR (18 marks)
PRODUCTION FUNCTION
1. production function-It is a technological relationship that tells the maximum
output that can be produced from various combinations of factor inputs.
2. total physical product (TPP)- It is the total quantity of good producedby
particular firm with given inputs. With one input variable & all other inputs remain
constant.
3. marginal product or marginal physical product (MPP)- it is defined as
the change in total physical product per unit change in one variable input when all
other inputs remain constant.
MPPn = TPPn – TPPn-1
4.
fixed factor inputs.
variable factors inputs.
Fixed factors refer to those factors those factors which can be changed in
which can’t be changed in short run, short run.in long run all factors inputs
are variable
they remain fixed
For eg. land ,machines, factory building For eg. labour
5. If TPP is falling, what can you say about MPP?
Ans. MPP is diminishing &negative.
6. If TPP is increasing at a decreasing rate, what can you say about MPP?
Ans. MPP is falling but is positive.
7. If TPP is increasing at an increasing rate, what can you say about MPP?
Ans. MPP is rising.
8. If APP is falling, what can you say about MPP?
Ans. If APP is falling, MPP is less than AP
9.explain is law of variable proportion with the help schedule and diagram.
AnsThe Law Of Diminishing Marginal Product Or
The Law Of Variable Proportions Or The Law Of Diminishing Returns To
Variable Factors Input
The law of variable proportions statesthat: When one variable input is increased
keeping other factor inputs constant, marginal product of variable factor(i.ethe
increase in total production) increases thendecreases becomes zero & then negative.. It
can be explained with the help of a following schedule.
Figure showing behaviour of total product, average product and marginal
product
Land fixed Labour
factor
(in variable factor
acres)
(in units)
2
1
2
2
2
3
2
4
2
5
2
6
Total
Product
Marginal
Product
5
12
20
27
32
34
5
7
8
7
5
2
2
2
34
32
0
-2
7
8
Increasing
returns
to
variable factor
Diminishing
positive returns
to
variable
factor
Diminishing
Negative
returns
to
variable factor
FIRST phase: At this stage TP increases at an increasing rate and MP also
increases& reaches maximum. AP increases. This stage is also known as the stage of
increasing returns.
This phase ends when MP reaches maximum
SECOND phase:: At this stage TP continues to increase but at a diminishing
rate. This stage goes to the point when TP reaches the maximum and MP decreases &
becomes zero. MP decline but remain positive. AP increases & reaches maximum then
declines. when AP is maximum MP=AP.This is known as stage of diminishing
returns.
This phase ends when TP reaches maximum & MP becomes zero
THIRD phase:: At this stage TP starts declining and MP keeps diminishing
&becomes negative. AP decline but remains positive .This stage is also known as
stage of diminishing negative returns.
10.Explain Relation between Marginal physical product and Total physical product
When marginal product increases, total product increases at increasing rate.
When marginal product decreases, total product increases at diminishing rate.
When marginal product is zero total product is maximum
When marginal product is negative, total product starts declining
11.Explain Relation between APP and MPP
When MPP is greater than average product, APP increases
When APP is at its maximum and constant both the MPP and APP are equal.
When MPP is less than APP, APP falls
When MPP falls & is negative, APP falls but remains positive
12.Calculate APPs and MPPs of a factor from the following table.
Level of factor 0 1 2
3
4 5
6
7
Employment:
TPP:
0 5 12 20 28 35 40 42
Ans.
Level of Factor
TPP
APP
MPP
0
1
2
3
4
5
6
7
0
5
12
20
28
35
40
42
-5
6
6.6
7
7
6.6
6
13.The following table gives the MPPs
TPP at zero level of employment is
Schedules.
Level of factor 1 2
Employment:
MPP:
20 22
Ans.
Level of Factor TPP
0
0
1
20
2
42
3
60
4
76
5
90
6
96
-5
7
8
8
7
5
2
of a factor. It is also known that the
zero. Determine its TPP and APP
3
4
5
6
18 16 14 6
APP
-20
21
20
19
18
16
MPP
-20
22
18
16
14
6
COST
1.
fixed costs
Fixed costs are those which do not change
when output is increased or decrease
These are cost of fixed factor inputs
For example Rent of Land, Insurance
charges
variable costs
Variable costs are those costs which vary
with output
These are cost of variable factors inputs.
For example. Cost of raw material used in
production, wages paid to labou
2. Classify the following fixed costs and variable costs.
a) Rent for a shed.
b) Minimum Telephone Bill
c) Cost of raw materials
d) Daily wages
e) Payment for transportation of goods.
f) Interest on Capital
g) Telephone charges beyond minimum
h) Wages to permanent staff
Fixed cost.
a) Rent for a shed
b) Minimum Telephone Bill
f) Interest on Capital
h) Wages to permanent staff
Variable cost
c) Cost of raw materials
d) Daily wages
e) Payment for transportation of goods
g) Telephone charges beyond minimum
3.Cost :- amount paid to hired factor inputs used in production process & imputed
value of self-owned factors inputs of producer
4.Causes of increasing returns to variable factor
1. Indivisibility of the factors: -Increase in units of variable factor leads to better and
fuller utilization of fixed factor. This causes the production to increase at a rapid rate.
2. Division of labour and specialisation: - With more use of labour, process based
division of labour and specialization becomes possible which increases efficiency &
productivity
3. Realisation of optimum/ideal ratio betweenvariable & fixed factor :- Increase in
units of variable factors leads to optimum combination of resources maximizing
production, as resources are better utilised.
Causes of diminishing returns to variable factor
1. Use of fixed factor beyond the optimum level-It leads to overcrowdingof variable
factor over fixed factor resulting in inefficiency ,irresponsibility among
workers&mismanagement . Fixed factor becomes insufficient in comparison to
variable factor.
5.Total cost(TC) -Total cost of production is the sum of all expenditure incurred in
producing a given volume of output.” In short period, the total cost comprises of two
types of costs total fixed cost and total variable cost
TC = TFC + TVC
Total Fixed Cost (TFC) refers to total expenses/cost incurred on fixedfactors of
production which. TFC is never zero, It exists even when there is no production as it
is the payment to fixed factors like rent of land, salaries of permanent employees. TFC
remains constant at all levels of output as fixed factors remain same at all levels of
output. TFC curve is a straight line parallel to horizontal (X) axis.
Total Variable Cost (TVC) Refers to sum total of expenses on each unit of variable
factor. As variable factor inputs change with change inoutput .with increase in
output first TVC increases at a decreasing rate and then increases at an increasing
rate.
TVC curve is inverse S shaped due to the law of variable proportion.
6. Relationship between TC, TVC and TFC curve.
Total
Costs,
TC
TVC
TC
Quantity of output produced
*(a) Total cost -Total cost of production is the sum of all expenditure incurred in
producing a given volume of output.” In short period, the total cost comprises of two
types of costs total fixed cost and total variable cost
TC = TFC + TVC
*(b) When there is no production, variable factor inputs are not used so Total Variable
Cost is zero, but Total fixed Cost exists as payment to fixed factors production like
rent of land, salaries of permanent employees has to be made even if there is no
production.
When Q= 0,
TVC=0,
TC=TFC
*(c)TVCcurve starts from origin (zero)
(d) TCcurve starts from point on vertical axis above origin equal to TFC
*(e)TFC remains same at all levels of output as fixed factors remain constant at all
levels of output. TFC curve is a straight line parallel to horizontal (X) axis.
*(f)So any change in Total cost (TC) curve is due to total variable cost (TVC) only,
Hence TC and TVC are same in shape&
(g)TC and TVC remain parallel to each otherat all levels of output as difference
betweenTC and TVCis TFCwhich remains constant at all levels of output .
7. AVERAGE COSTS
AC
AVC
AVERAGE COSTS
AFC
O
Quantity of output produced (Q)
Average Total Cost & Average Cost (ATC & AC ) both mean the same
(a) Average cost-It is Total cost per unit of output. It is the sum of Average Fixed
Cost & Average Variable Cost. It curve is U shaped
AC=TC/Q
AC=AFC+AVC
(b) Average Fixed Cost- It refers to fixed cost per unit of output.
TFC is never zero; it exists even when there is no production as it is the payment to
fixed factors like rent of land, salaries of permanent employees. So AFC never
touches X or Y axis.
Since TFC remains constant at all levels of output AFC continuously decreases
with increase in output. So AFC curve keeps on decreasing infinitely and is a
rectangular hyperbola.
( c) Average Variable Cost- It is the Total variable cost per unit of output. AVC
curve is U shaped, due to law of variable proportions.. It means that at first this
curve falls and after reaching the minimum point it begins to rise.
8.Relationship between AVC and ATC curve
(a) AC-AVC=AFC
* The difference between AC & AVC is AFC ,So Average total cost curve lies above
the AVC curve at a distance equal to AFC at that particular unit if output.
* The distance between ATC and AVC curve decreases with increase in outputas
AFC decreases with increase in output.
* ButATC and AVCnever intersectasAFC is never zero
* The of AVC curve reaches minimum point Nat a lower level of outputQ1than
AC, which reaches minimum M at Q2
ATC and AVCboth curves are U shaped
costs
AC
M
N
O
Q1
Q2
Quantity of output produced
AVC
9. Explain the Relation between MC & AVC curve? OR
Why is AVC curve U shaped?
costs
AC
AVC
MC
E
O
Quantity of output produced
Short-run average variable cost curve is U-shaped. It means that at first this curve
falls and after Reaching the minimum point it begins to rise .
Firstly,AVC is U shaped due to Law of Variable Proportion.
i.e.When there are increasing returns it implies diminishing cost so AVC falls&
when there are decreasing returns it implies increasing costs so AVC rises.
Secondly, Relation between MC & AVC curve
*(i)Initially when output increases MC decreases reaches its minimum point &then
increases
throughout these output levels MC is less than AVC,
so MC pulls AVC downwards &AVC decreases
When MC<AVC, AVC FALLS
*(ii) When MC is equal to AVC, AVC is at its minimum point
MC=AVC, AVC =Minimum
Minimum of MC curve is at a lower level of output than Minimum level of AC
*(iii) on further increasing output MC keeps on increasing & When MC is more than
AVC, it pulls AVC upwards &AVC increases
When MC>AVC, AVC rises.
Hence AVC becomes U shaped
Note: The relationship between MC & AC curve is same as that between MC
and AVC.
10. Explain the Relation between MC & AC curve? OR
Why is the Short-run Average Cost Curve U-Shaped?
MC and ACBoth curves are U shaped
costs
MC
O
AC
Quantity of output produced
Short-run average cost curve is U-shaped. It means that at first this curve falls and
after Reaching the minimum point it begins to rise .
Firstly,AC is U shaped due to Law of Variable Proportion.
i.e.When there are increasing returns it implies diminishing cost so AC falls&
when there are decreasing returns it implies increasing costs so AC rises.
Secondly, Relation between MC & AC curve
*(i)Initially when output increases MC decreases reaches its minimum point &then
increases
throughout these output levels MC is less than AC,
so MC pulls AC downwards &AC decreases
When MC<AC, AC FALLS
*(ii) When MC is equal to AC, AC is at its minimum point
MC=AC, AC =Minimum
Minimum of MC curve is at a lower level of output than Minimum level of AC
*(iii) on further increasing output MC keeps on increasing & When MC is more than
AC, it pulls AC upwards &AC increases
When MC>AC, AC rises.
Hence AC becomes U shaped
11.Relationship between ATC, AVC and AFC curve
costs
AC
AVC
AFC
O
Q1 Q2
Quantity of output produced
ATC and AVCBoth curves are U shaped they decrease then increase
* ThefAVC curve reaches minimum point at a lower level of outputthan AC
AFC curve is a rectangular hyperbola.
AFC decreases with increase in output & it is is never zero
AFC+AVC= AC
(i) with increase in output from O toOQ1
AFC and AVC decreases , so AC decreases
(ii) As output increase from OQ1 to OQ2
Decreases in AFC ismore than increases in AVC ,so AC decreases
(iii) As output increase beyond OQ2
increases in AVC is more than Decreases in AFC ,so AC increases
* The difference between AC & AVC is AFC ,So Average total cost curve lies above
the AVC curve at a distance equal to AFC at that particular unit if output.
* The distance between ATC and AVC curve decreases with increase in outputas
AFC decreases with increase in output.
* ButATC and AVCnever intersectasAFC is never zero
12.What is the reason behind the U – shape of the MC curve?
Ans. The reason behind the U shape of the MC curve is the law of diminishing returns
to variable factors inputs.
13. Is there any change in the TFC when output changes in the short period?
Ans. Total Fixed Cost remains constant at all levels of output.
14.Can AC be less than MC when AC is rising?
Ans. Yes.AC will rise only when MC is more than AC.
15.At what point of AC curve, MC curve cuts it?
Ans. At Minimum point of AC.
16.How is TVC derived from MC?
Ans. TVCof producing a particular level of output is the sum of MCsuptil that level of
output.
17.How is MC derived from TVC?
Ans. MC is the addition to TVC when an additional unit is produced.
18. A firm is producing 20 units. At this level of output, the ATC and AVC are
respectively equal to Rs. 40 and Rs. 37. Find out total fixed cost of the Firm?
Ans. Units of Output Produced ATC AVC AFC TFC
20
40 37
3
60
19. Can TFC be Zero, when output is Zero?
Ans.No,it is expense on fixed factors like rent on lend, which are done even when
there is no production .
20.. Suppose TFC is Rs. 120, find out TC, TVC and MC from the following data.
Output (in Units): 1
2
3
4
5
ATC:
240 160 140 160 180
Ans.
Output (in Units) TFC TVC AFC AVC ATC TC MC
1
120 120 120 120 240 240 120
2
120 200 60
100 160 320 80
3
120 300 40
100 140 420 100
4
120 520 30
130 160 640 220
5
120 780 24
156 180 900 260
21.From the data given below, calculate AFC, AVC and MC.
Output (in Units): 0 1
2
3
4
5
TC (in Rs.):
40 100 120 130 150 190
Ans.
TC TFC TVC AFC AVC MC
Output (in Units)
0
1
2
3
4
5
40
100
120
130
150
190
40
40
40
40
40
40
0
60
80
90
110
150
-40
20
13.3
10
8
0
60
40
30
27.5
30
-60
20
10
20
40
22. Firm’s total cost schedule is given in the following table. Find output AFC,
ATC and MC schedules.
Output (in Units): 0 1
2
3
4
5
6
7
8
TC (in Rs.):
40 120 170 180 210 260 340 440 550
Ans.
Output
(in units)
0
1
2
3
4
5
6
7
8
TC
(in Rs)
40
120
170
180
210
260
340
440
550
TFC
(in Rs)
40
40
40
40
40
40
40
40
40
TVC
(in Rs)
0
80
130
140
170
220
300
400
510
AFC
AVC
(in Rs) (in Rs)
0
40
80
20
65
13.3
46.6
10
42.5
8
44
6.6
50
5.7
57.1
5
63.75
ATC
MC
(in Rs) (in Rs)
-120
80
85
50
60
10
52.5
30
52
50
56.6
80
62.8
100
68.75 110
FORMULAE
TC = TFC + TVC
TVC = AVC *Q Units of Output
AC = AFC + AVC
AC = TC/Q
AFC = TFC/Q, AVC = TVC/Q, TFC = AFC*Q Units of Output
TC = AC * Q
Note: (1) When Q=0, TVC=0,TC=TFC
(2) When Q=1, TVC=AVC=MC
REVENUE
1.What is meant by revenue?
Ans, Revenue is the money receipts of a firm from the sale of its output.
2. Define total revenue.
Ans Total revenue is the sum of money receipts of a firm from the sale of its total
output.
TR = P X Q
3. What is average revenue?
Ans. Average revenue is the revenue per unit sold. AR = TR/Q
4. Define marginal revenue.
Ans. Marginal revenue is the net addition to the total revenue by selling one more
unit of output.
MRn = TRn – TRn-1
5. What is the relationship between TR ,AR and MR under perfect
competition?
Ans.Relationship between AR & MR in perfect competition: As the price of the
good remain same, therefore the AR curve takes the form of a straight horizontal line
& MR curve is equal to AR. AR = MRas all units of output are sold at same price by
the firms
Units
sold
1
TR
(Rs.)
10
AR
(Rs.)
10
MR
(Rs.)
10
2
3
4
20
30
40
10
10
10
10
10
10
5
50
10
10
TR
AR=MR
6.What is the relationship between AR and MR in imperfect competition?
Ans- AR & MR in an imperfect market condition:
In such a market situation, every unit of good is sold at different price &
as the price of the good decreases more goods are sold ,so demand curve is downward
sloping hence AR curve is downward sloping ,the MR curve is also downward
sloping.MR=1/2 AR
Y
AR
&
MR
AR
M
R
UNITS SOLD
X
Producer’sequilibrium
1.What is meant by producer’s equilibrium?
Ans. Producer’s equilibrium occurs at that level of output at which producer
maximizes profit.
2.What is the general profit maximizing condition of a firm?
Ans. (i) profit is maximumat a output level where,MR = MC.
(ii) on producing outputbeyond this output maximumprofit falls, i.e MR<MC
3. Explain producer’s Equilibrium ?
A. MR and MC approach.
PRODUCER EQUILIBRIUM/ EQUILIBRIUM OF A FIRM: It refers to such a situation or
that level of output with an enterprise when it maximize its profits or minimize its loss
out of its given scale of production & has no motive to expand or contract the level of
output without changing the existing scale of production i.e. when the firm produces
positive output.
Condition for producer’s equilibrium:1. The Marginal Cost (MC) of the firm must be equal to its Marginal Revenue (MR).
The firm attains equilibrium at point E & output OQ3 earns maximum
profit(maximum profit = area E1 TE) when its MC is equal to MR.
It is an essential condition b’cozwhen MC<MR belowOQ1 level of output, the firm still
expects to get moreprofits;
& when MC>MRbeforeOQ1 & after OQ3 level of output , the firm gets loss as it spends
more than what it earns from the extra unit.
2. The Marginal Cost (MC) must be greater than MR after the equilibrium point,
i.ebeyond equilibriumlevel of output maximum profits decline.
MC must intersect MR from below but not from above. If the MC intersects from
above of the MC curve i.e. MC>MR, then it implies that the firm was already facing
loss & further production will accrue profits to the firm. Moreover, the question of
maximizing profits does not arise as the firm was getting losses on the production of
previous units of the good.
MC &MR
MC
Loss
E1
E
E2
G
AR=MR
T
O
Q1
Q2
Q3
Quantity of output
B. TR and TC approach.
(i)In a competitive market situation
Condition for producer’s equilibrium:-
1. the firm attains equilibrium at the point where the gap between the Total Revenue (TR) &
Cost (TC) is the largest or maximum; and TR>TC
i.e. the firm must be earning maximum profits.(i.e TR is parallel to tangent drawn on T
particular level of output.
2.beyond equilibriumlevel of outputmaximum profits decline
TR curve is upward sloping straight line passing through origin,
TC curve begins at OY axis, first it increasesat diminishing rate;
andthen it increases at increasing rate.
Initially, the TC>TR, losses occur so there isdisequilibrium,
At levels of output where, TR>TC the firm is earning profits ,
but equilibrium occurs ,
only at that output level where& the gap between TR & TC is maximum .
&profit ismaximised .
TC-TR Approach: (Perfect Market)
q
1
2
3
4
5
6
7
8
9
10
11
P TR TC ∏ MC MR
10 10 20 -10 10 10
10 20 26 -6
6
10
10 30 30 0
4
10
10 40 32 8
2
10
10 50 36 14 4
10
10 60 42 18 6
10
10 70 50 20 8
10
10 80 60 20 10 10
10 90 78 12 18 10
10 100 100 0 22 10
10 110 124 -14 24 10
Break Even
Point
Producer
Equilibrium
Break Even
Point
TC-TR Approach: (Imperfect Market)
Condition for producer’s equilibrium:1.the firm attains equilibrium at the point where the gap
between the Total Revenue (TR) & Total Cost (TC) is the largest or maximum;
and TR>TC i.e. the firm must be earning maximum profits.
(i.etangent drawn on TR is parallel to tangent drawn on TC at that
particular level of output.
2.beyond equilibriumlevel of outputmaximum profits decline
TR curve starts from origin, first it increases atincreasing rate;
andthen it increases at diminishing rate.
TC curve begins at OY axis, first it increases at diminishing rate;
andthen it increases at increasing rate.
Initially, the TC>TR, losses occur so there isdisequilibrium,
At levels of output where, TR>TC the firm is earning profits ,
but equilibrium occurs ,
only at that output level where& the gap between TR & TC is maximum .
&profit ismaximised .
q TR TC ∏ MC MR
1
8
20 -12 10
8
2 18 26 -8
6
10
3 30 30
0
4
12
4 46 32 14
2
16
5 60 36 24
4
14
6 72 42 30
6
12
7 82 52 30 10
10
8 88 64 24 12
6
9 92 78 14 14
4
10 94 94
0
16
2
11 95 102 -7 18
1
TC-TR Approach: (Imperfect Market)
Break Even
Point
Producer
Equilibrium
Break Even
Point
This table shows the producer equilibrium of a firm in the perfect market situation.
The first two units lead to loss for the firm. While the firm is in break even point on
3rd & 10th unit b’coz its TR is equal to TC. Here the firm is getting normal or
economic profits or zero abnormal profits. On the 8th unit, the firm maximize its
profits and will produce positive output, b’coz the gap between TR & TC is maximum
(MC=MR), and the profit is at its maximum.
This table shows the producer equilibrium of a firm in the imperfect market structure.
The first two units lead to loss for the firm. While the firm is in break even point on
3rd & 10th unit b’coz its TR is equal to TC. Here the firm is getting normal or
economic profits or zero abnormal profits. On the 7th unit, the firm maximize its
profits and will produce positive output, b’coz the gap between TR & TC is maximum
(MC=MR), and the profit is at its maximum
CHAPTER-THEORY OF SUPPLY
The flow of goods and commodities from the firms into the market is
called supply.
Q) Explain change in quantity supplied and change in supply. ( 6 )
OR
Differientiate between increase in supply and extension in supply.
OR
Explain decrease in supply and contraction of supply.
Ans- When supply of goods changes due to change in price, it is known as change in
supply. It may be either extension of supply or contraction of supply. When supply of
a commodity increases due to increase in price, it is extension of supply but when
supply of a commodity decreases due to decrease in price, it is called as contraction of
supply.
The term quantity supplied refers to specific amount of a commodity offered by the
producer for sale at a specific price.
TABLE FOR CONTRACTION OF SUPPLY
PRICE
20
10
QUANTITY
200
100
DIAGRAM FOR CONTRACTION OF SUPPLY
TABLE FOR DECREASE IN SUPPLY
DIAGRAM
LY
FOR
PRICE
10
10
QUANTITY
200
100
DECREASE IN SUPP
Q) Distinguish between movement along the supply curve and shift in supply
curve. ( 6 )
Ans- Movement along the supply curve represents expansion and contraction of
supply due to change in price of the concerned commodity. When price
increases there is an upward movement along the supply curve and when price
decreases there is a downward movement along the supply curve.
Shift in supply curve occurs due to factors other than price of the commodity
when other factors change in positive direction, supply curve shifts to the right,
showing increase in supply and when changes occur in negative direction,
supply curve shifts to the left showing a decrease in supply as following:-
SS1 indicates increase in supply
SS2 indicates decrease in supply
Q) Explain law of supply. ( 6 )
OR
Why supply curve slopes slopesupward ?
OR
Why does a producer supply more at a higher price?
Ans- The law of supply states that other things remaining the same, higher the price,
greater is the quantity supplied and lower the price, the smaller is the quantity
supplied.
In the other words, supply of a commodity increases with increase in price and
decreases with decrease in price of a commodity.SS is the supply curve. Sloping
upward, it shows a positive relationship between price and quantity supplied of a
commodity. The following table and diagram explain law of supply clearly:PRICE
QUANTITY
SUPPLIED
10
100
20
200
30
300
40
400
50
500
From the above table we observe that at higher price, the producer is supplying more
of his commodity to the market. But we observe also that very less of the commodity
is being supplied by the producer at a lower price because higher price fetches more
profit and lower price fetches less profit for the producer. The producer is always
interested
for
more
profit.
In
the above diagram, SS is the supply curve, OX axis indicates the quantity of supply,
OY axis indicates price of the commodity. Initially, OP is the price and OQ is the
quantity of supply. Price increases from OP to OP`, quantity supplied increases from
OQ to OQ’. So, it is clear that more of a commodity is supplied by the producer at a
higher price and less is supplied at the lower price.
Q) How does technological progress affect the supply curve of a firm? ( 4 )
Ans- Technological progress will reduce the cost of production. When cost of
production will be less , the firm will produce more and more of the goods. Due to
increase in production, there will be more supply of the commodity in the market. This
means that supply curve will shifts forward indicating an increase in supply. Thus
technological progress leads to increase in supply. More production due to
technological progress increases the profit level of the producer. Further the society
will be benefitted by getting sufficient amount of the commodity produced with the
help of new technology. Traditional method is outdated now a days as it is associated
with low level of production which cannot meet the demand of the commodity
concerned by the consumers of the society.
Q) Priceelasticity of supply of a goods is 5. A producer sells 500 units of his goods
at Rs 5 per unit. How much will he be willing to sell at the price Rs 6 per unit?( 3)
Ans- Suppose the producer will be willing to sell X units of his goods at price Rs 6 per
unit
Es = P/Q *∆Q/∆P
Here Es =5 , P= 5 rupees, P'= 6 rupees, ∆P = 6 rupees – 5 rupees = 1 rupees,
Q=500 , Q'= X , ∆Q= X- 500
5= 5/100 * X - 500/ 1 = 1/100 * X-500/ 1 = X- 500/ 100
5= X-500/ 100 or 500= X – 500
X= 500 + 500 = 1000
So the producer will be willing to sell 1000 units (Ans)
Q) If the supply curve passes through the origin/ X-axis/ Y-axis – What
will be the kind of elasticity of supply or Es.( 3 )
Ans- Origin- Es is 1
Y- axis - Es is >1
X- axis- Es is<1
PRICE ELASTICITY OF SUPPLY
Q)
What
is
meant
by
price
elasticity
of
supply?
(1)
Ans- Price elasticity of supply is a percentage change in quantity supplied in response
to a percentage change in price of the commodity.
Q) When does supply become more elastic? ( 1 )
OR
When is the supply of a commodity called ‘ elastic’?
Ans- When percentage change in quantity supplied is greater than the percentage
change in price.
Q) When does supply become less elastic? ( 1 )
OR
When is the supply of a commodity called ‘ inelastic’?
Ans- When the percentage change in quantity supplied is less than the percentage
change in price.
Q) What is meant by zero elastic supply? ( 1 )
Ans- When quantity supplied does not respond to any change in price, it is called zero
elastic supply.
Q) Using diagrams explain various degrees of price elasticity of supply. ( 6 )
Ans- 1) Perfectly Elastic Supply:- When a slight change in price causes infinite
change in quantity supplied. In this case, the supply curve is parallel to X-axis.
2) Perfectly Inelastic Supply:- When the quantity supplied remains unchanged
whatever the price may be. Here, the supply curve is parallel to Y-axis.
3) Unitary Elastic Supply:- When the percentage change in quantity supplied is
exactly equal to percentage change in price. Here, the supply curve is a straight line
passing through the origin and sloping upward.
4) More than Unitary Elastic Supply:- When percentage change in quantity supplied
is greater than percentage change in price. In this case, an upward sloping straight line
supply curve shoots from Y-axis.
5) Less than Unitary Elastic Supply:- When percentage change in quantity supplied
is less than percentage change in price. An upward sloping straight line supply curve
shooting from X-axis.
Q) The price of a commodity is 10 per unit and its quantity supplied is 500 units.
If its price falls by 10 per cent and quantity supplied falls to 400 units. Calculate
price elasticity of supply. ( 3 )
Ans- P= 10 rupees
Price falls by 10%.
New price ( P1 ) = 10 - 10* 10/100 = 10 rupees – 1 rupee = 9 rupees
Change in price = P1 – P = 9 rupees – 10 rupees = ( - ) 1 rupee
Q = 500; Q1 = 400 ; ∆Q = 400 – 500 = - 100
Es = P/Q * ∆Q/∆P = 10/500 * -100/-1
Price elasticity of supply = 2 (Ans )
Q) Price elasticity of supply of a good is 5. A producer sells 500 units of this good
at Rs 5 per unit . How much will he be willing to sell at the price of Rs 6 per
unit ?( 3 )
Ans- Suppose the producer will be willing to sell X units of good at Rs 6 per unit.
Es = P/Q * ∆Q/∆P
Here Es = 5; P = 5 rupees; P1 = 6 rupees;
∆P = 6 rupees – 5 rupees = 1 rupee
Q = 500 ; Q1 = X ; ∆Q = X – 500
5 = 5/500 * (X-500) /1 = 1/ 100 * (X-500) /1 = (X- 500) /100
5 = (X – 500) /100 or 500 = X – 500
X = 500 + 500 = 1000
The producer will be willing to sell 1000 units. ( Ans )
Q.Brieflyexplain determinants of a supply of a commodity?
1.Price of the commodity-There is a direct and positive relationship
between supply and price.Generally,higher the price,larger would be
the supply and lower price results into lesser supply.
2.Prices of factors of production-with the rise in prices of factors of
production,cost of production may also rise.It lowers producer’s
profits,which results into a decrease in its supply.
3.Goals of the firms –Supply of a commodity is also guided by the
firm’s goal of profit maximisation or sales maximisation.If the firm has
the goal of profit maximization,it will supply more goods at a higher
price.
4.Change in technology-If producers make use of new technology that
helps in reducing its cost of production and higher profits,it ensures a
higher level of production and its supply.
5.Price of related goods-supply of substitutes vary inversely with the
prices of its substitutes(tea & coffee) whereas supply of jointly
produced goods and their prices vary in the same direction(car &
petrol).
Some other factors that determine market supply are:number of
producing firms,taxation and subsidies,natural factors etc.
Q.From the following schedule find out the level of output at which the
producer is in equilibrium.Give reason for your answer.
Output
1
2
3
4
5
6
7
Price(AR) 24
24
24
24
24
24
24
TC
26
50
72
92
115
139
165
Sol.TR-TC Approach
Output
1
2
3
4
5
6
7
Price(AR) 24
24
24
24
24
24
24
TR
24
48
72
96
120
144
168
TC
26
50
72
92
115
139
165
Profit
-2
-2
0
4
5
5
3
The producer achieves equilibrium at 6 units of output.It is because
this level of output satisfies both the conditions of producer’s
equilibrium.
1.The difference between TR and TC is positive and maximum.
2.Total profits fall i.e.(5 to 3) after 6 units of output.
MR-MC Approach
Output
1
2
3
4
5
6
7
Price(AR)
TR
TC
MR
MC
24
24
26
24
26
24
48
50
24
24
24
72
72
24
22
24
96
92
24
20
24
120
115
24
23
24
144
139
24
24
24
168
165
24
26
The producer achieves equilibrium at 6 units of output.It is because
this level of output satisfies both the conditions of producer’s
equilibrium.
1.MR=MC ,i.e.24=24
2.MC becomes greater i.e.(24 to26)than MR after 6th(equilibrium)this
level of output.
Q.From the following schedule find out the level of output at which the
producer is in equilibrium.Give reason for your answer.
TR-TC Approach
Output
1
2
3
4
5
TR(Rs.)
10
19
27
34
40
TC(Rs.)
4
9
15
22
30
Profit
6
10
12
12
10
The producer achieves equilibrium at 4 units of output.It is because
this level of output satisfies both the conditions of producer’s
equilibrium.
1.The difference between TR and TC is positive and maximum.
2.Total profits fall i.e.(12 to 10) after 4 units of output.
MR-MC Approach
Output
1
TR(Rs.)
10
TC(Rs.)
4
MR(Rs.) 10
MC(Rs.) -
2
19
9
9
5
3
27
15
8
6
4
34
22
7
7
5
40
30
6
8
The producer achieves equilibrium at 4 units of output.It is because
this level of output satisfies both the conditions of producer’s
equilibrium.
1.MR=MC ,i.e.7=7
2.MC becomes greater i.e.(7 to 8)than MR after 4th(equilibrium) level
of output.
Q.Define price elasticity of supply.Explain various types of price
elasticity of supply.
Price elasticity of supply may be defined as degree of responsiveness of
quantity supplied of a commodity to change in its price.
Types of price elasticity of supply
1.Perfectly inelastic supply:It implies that quantity supplied does not
respond to change in price.
Y
s
p
o
Es=0
qty
x
2.Less than unit elastic supply:It implies that percentage change in
uantity supplied is less than percentage change in price.
y
s
pEs<1
oqty
x
3.Unit elastic supply:It implies that percentage change in quantity
supplied is equal to percentage change in price.
Y
s
p
o
Es=1
qty
x
4.More than unit supply:It implies that percentage change in quantity
supplied is more than percentage change in price.
y
pEs>1
oqty
x
5.Perfectly elastic supply:It implies that quantity supplied changes
irrespective of change in price.
y
pEs=infinite
s
oqty
x
Unit 1 Introduction
Causes of economic problem or why
does economic problem arise?
1.Scarcity of resources – Availability of resources is limited in
relation to need for demand.
2.Unlimited human wants-Human wants are recurring in nature.This
is based on psychological behavior that as soon as one want is
satisfied,another new want would take place.
3.Alternative uses-means have alternative uses.choice is to be made
between different uses.When we opt for one want,we have to forgo the
other.
4.Wants differ in intensity-Human wants also differ in
intensity(urgency).All wants are not equal intensity.That is
why,resources can be allocated according to the priority of wants.
.