Economics important questions

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in price.

$$ \begin{aligned} E_p &= \frac{%\ \text{change in quantity demanded}}{%\ \text{change in price}} \ &= \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \end{aligned} $$

Since demand and price move in opposite directions, the value is negative, but only the numerical value is considered.

Types of price elasticity of demand:

• Perfectly elastic ($E_p = \infty$): demand changes infinitely at a given price; the demand curve is a horizontal straight line.
• Perfectly inelastic ($E_p = 0$): quantity demanded does not change at all when price changes; the demand curve is a vertical straight line.
• Unitary elastic ($E_p = 1$): the percentage change in quantity equals the percentage change in price; the curve is a rectangular hyperbola.
• Relatively elastic ($E_p > 1$): quantity demanded changes more than proportionately to price; the curve is flatter.
• Relatively inelastic ($E_p < 1$): quantity demanded changes less than proportionately to price; the curve is steeper.

The law of diminishing marginal utility states that as a consumer goes on consuming more and more units of a commodity, the marginal utility (the additional satisfaction from each successive unit) derived from every additional unit goes on falling, other things remaining the same. It reflects the fact that wants are satiable.

If a thirsty person drinks glasses of water, the following schedule shows the behaviour of utility.

Marginal utility falls with each extra unit, becomes zero at the point of maximum total utility (the point of satiety), and turns negative thereafter. The MU curve therefore slopes downward from left to right.

Assumptions and exceptions (limitations): the law holds only when the units are homogeneous and of suitable size, consumed continuously, tastes and income remain constant, and price is unchanged. It does not apply to hobbies such as collecting rare coins or stamps, to misers who value money, to intoxicants like alcohol where the desire may rise for a while, or where the consumer is irrational. These are treated as exceptions to the law.

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in ...

The law of diminishing marginal utility states that as a consumer goes on consuming more and more units of a commodity, the marginal utility (the additional satisfaction from each successive unit) derived from every additional unit goes on falling, other things remaining the same. It reflects the fact that wants are satiable.

If a thirsty person drinks glasses of water, the following schedule shows the behaviour of utility.

Marginal utility falls with each extra unit, becomes zero at the point of maximum total utility (the point of satiety), and turns negative thereafter. The MU curve therefore slopes downward from left to right.

Assumptions and exceptions (limitations): the law holds only when the units are homogeneous and of suitable size, consumed continuously, tastes and income remain constant, and price is unchanged. It does not apply to hobbies such as collecting rare coins or stamps, to misers who value money, to intoxicants like alcohol where the desire may rise for a while, or where the consumer is irrational. These are treated as exceptions to the law.

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in ...

The law of demand states that other things remaining the same, the quantity demanded of a commodity varies inversely with its price. When price falls demand rises, and when price rises demand falls. The demand curve therefore slopes down...

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in ...

The law of diminishing marginal utility states that as a consumer goes on consuming more and more units of a commodity, the marginal utility (the additional satisfaction from each successive unit) derived from every additional unit goes on falling, other things remaining the same. It reflects the fact that wants are satiable.

If a thirsty person drinks glasses of water, the following schedule shows the behaviour of utility.

Marginal utility falls with each extra unit, becomes zero at the point of maximum total utility (the point of satiety), and turns negative thereafter. The MU curve therefore slopes downward from left to right.

Assumptions and exceptions (limitations): the law holds only when the units are homogeneous and of suitable size, consumed continuously, tastes and income remain constant, and price is unchanged. It does not apply to hobbies such as collecting rare coins or stamps, to misers who value money, to intoxicants like alcohol where the desire may rise for a while, or where the consumer is irrational. These are treated as exceptions to the law.

A shift in the demand curve occurs when the whole demand curve moves to a new position because of a change in factors other than the price of the commodity itself, such as income, tastes, the prices of related goods, population and expec...

Completing the table: here price equals average revenue, $TR = P \times Q$ and $MR = \dfrac{\Delta TR}{\Delta Q}$.

Drawing the curves: total revenue rises, reaches a maximum of Rs 42 (where MR = 0, at the 6th-7th unit) and then falls. The AR curve slopes downward, and the MR curve also slopes downward, lies below AR, falls twice as fast, becomes zero when TR is maximum and turns negative thereafter.

Identification of market: because average revenue (price) falls as more is sold and MR lies below AR, the firm faces a downward sloping demand curve. Hence the market is one of imperfect competition (a monopoly-type market), not perfect competition.

Completing the table: here average revenue equals price, total revenue is $TR = P \times Q$, and marginal revenue is $MR = \dfrac{\Delta TR}{\Delta Q}$. Units sold (Q) Price = AR (Rs) TR = P×Q (Rs) MR (Rs) ------------ 1 35 35 35 2 30 60...

Under perfect competition a firm is a price taker, so the price remains constant however much it sells. Total revenue is price multiplied by quantity, and it rises in a straight line from the origin. Q Price (AR) TR MR ------------ 1 5 5...

The law of diminishing marginal utility states that as a consumer goes on consuming more and more units of a commodity, the marginal utility (the additional satisfaction from each successive unit) derived from every additional unit goes ...

Consumer's surplus is the difference between the maximum price a consumer is willing to pay for a commodity and the price he actually pays. It measures the extra satisfaction a consumer enjoys because the market price is lower than what ...

Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in ...

Under monopoly (and other imperfect markets) the firm faces a downward sloping demand curve, so it can sell more only by lowering the price. As a result the average revenue (AR) curve slopes downward from left to right, and the marginal ...

A shift in the demand curve occurs when the whole demand curve moves to a new position because of a change in factors other than the price of the commodity itself, such as income, tastes, the prices of related goods, population and expec...

Consumer's surplus is the difference between the maximum price a consumer is willing to pay for a commodity and the price he actually pays. It measures the extra satisfaction a consumer enjoys because the market price is lower than what ...

The law of supply states that, other things remaining the same, the quantity supplied of a commodity varies directly with its price; when price rises supply rises, and when price falls supply falls. Hence the supply curve slopes upward f...

The main determinants of the price elasticity of demand are: - Nature of the commodity: demand for necessities is inelastic, while demand for luxuries and comforts is elastic. - Availability of substitutes: goods with many close substitu...

The law of diminishing marginal utility is subject to the following limitations (exceptions):

• Suitable and homogeneous units: if the units are too small or of different quality, marginal utility may not fall regularly.
• Continuous consumption: the consumption must be continuous; with a long gap between units the law may not hold.
• Constant tastes, income and price: if tastes, income or the price change during consumption, the law may not operate.
• Rare collections and hobbies: for hobbies such as collecting rare coins or stamps, additional units may give more satisfaction.
• Misers and money: for a miser the marginal utility of money seems to rise as he collects more.
• Intoxicants: for drunkards, additional units of liquor may seem to give increasing satisfaction for a while.
• Rational consumer: the law assumes a rational consumer; it fails when the consumer is careless or irrational.

Under monopoly (and other imperfect markets) the firm faces a downward sloping demand curve, so it can sell more only by lowering the price. As a result the average revenue (AR) curve slopes downward from left to right, and the marginal ...

Income elasticity of demand measures the responsiveness of the quantity demanded of a commodity to a change in the income of the consumer, and is measured as the percentage change in quantity demanded divided by the percentage change in income. It is positive for normal goods and negative for inferior goods.

Consumer's surplus is the difference between the maximum price a consumer is willing to pay for a commodity and the price he actually pays. It measures the extra satisfaction a consumer enjoys because the market price is lower than what he was prepared to pay.

$$\text{Consumer's surplus} = \text{Total utility (what a buyer is willing to pay)} - \text{Total amount actually paid}$$

For example, if a person is willing to pay Rs 50 for a book but buys it for Rs 30, the consumer's surplus is Rs 20.

Elasticity of supply measures the degree of responsiveness of the quantity supplied of a commodity to a change in its price, and is measured as the percentage change in quantity supplied divided by the percentage change in price. $E_s = \dfrac{%\ \text{change in quantity supplied}}{%\ \text{change in price}}$. It is positive because price and supply move in the same direction.