ECONOMICS by Rana Bhai (1)

8/13/2019 ECONOMICS by Rana Bhai (1)

1/36

1. What is law of demand? Explain.

If price increase then demand will decrease and if price decrease then demand will

increase, holding other economic variable constant. This is known as law of demand. So the

relationship between price and demand is the inverse relationship and their slope will benegative.

2. Which factor can shift the demand curve? Give a summar table and !"plain.

QD=F (PX, Py, Inome, !est, "#ye$s%

#rom the above five parameter there will be an upward or downward movement along the

demand curve due to change of own price. $ther four parameters can shift the demand curve

due to their change.

Own Price No shift

Cross Price Inward or Outward Shift

Income Shift

Test Always Outward Shift

Buyers Shift

%. Which factor can movement the demand curve?

If own price increase, then demand will decrease and there will be an upward movement

along the demand curve. $n the other hand if own price decrease then demand will increase and

there will be a downward movement along the demand curve. So movement is possible onl due

to change in own price.

&. Wh demand curve will shift in ward and outward?

1


2/36

'emand curve will shift inward if price of complementar goods increase, price of

substitute goods fall, income decrease, test decreases and number of buers decrease.

'emand curve will shift outward if price of substitute goods increase, price of

complementar goods falls, income increase, test increase and number of buers increase.

(. What is complementar goods and substitute goods? Give e"ample

If price increases and due to price increases demand will also increases this tpes of goods

are said to be substitute goods. Example&Sugar and sweet. So the relationship between price and

)uantit demanded is positive and therefore slope is also positive.

If price increase and due to increased price demand decrease this tpe of goods are

complementar goods. !"ample* +oke and epsi. So the relationship between price and )uantit

demanded is the inverse relationship and as a result slope is negative.

-. What is demand schedule? !"plain.

demand schedule is a table showing the )uantit that consumers are willing and able to

purchase over a given period of time at each price of the commodit holding all other economic

variable constant. !"ample*

Price

Quantity

Demanded

10 50

15 35

20 20

30 10

/. !"plain determinants of demand.


The determinants of demand are

a. $wn price

b. +ross price

c. Income

d. Test

2


3/36

e. 0umber of buers

'wn p$ie&If own price increase then demand will decrease and if own price decrease then demand

will increase. So the relationship between own price and demand is the inverse relationship and as a

result slope is negative.

$oss p$ie&If cross price increase then for complementar goods demand will decrease and if

cross price decrease then demand for complementar goods will increase. So for complementar

goods the relationship between cross price and demand is the inverse relationship and as a result

slope is negative.

$n the other hand if cross price increase then for substitute goods demand will increase and if

cross price decrease then demand for substitute goods will decrease. So for substitute goods the

relationship between cross price and demand is the positive relationship and as a result slope is

positive.

Inome&If income increase then demand will also increase and if income decrease then demand will

also decrease. So the relationship between income and price is the positive relationship and as a

result slope is positive.

!est&If test increase then demand will also increase and if test decrease then demand will also

decrease. So the relationship between test and price is the positive relationship and as a result slope

is positive.

"#ye$s&If buers increase then demand will also increase and if buers decrease then demand will

also decrease. So the relationship between buers and price is the positive relationship and as a


1. 'istinguish between substitute goods and complementar goods.

If price increases and due to price increases demand will also increases this tpes of

goods are said to be substitute goods. Example&Sugar and sweet. So the relationship between

price and )uantit demanded is positive and therefore slope is also positive.

If price increase and due to increased price demand decrease this tpe of goods are

complementar goods. !"ample* +oke and epsi. So the relationship between price and )uantit

demanded is the inverse relationship and as a result slope is negative.

. If demand curve is changed for cross price then what will happen?

3


4/36

If demand curve is changed for cross price then demand curve can be shifted inward or

outward. If cross price is lower than own price than it will shift inward. If cross price is higher than

own price than it will shift outward.

Price forApple

Quantity Demanded(Apple)

PriceforOrange

40 500 50

60 400 60

70 300 70

60 500 50

60 600 70

34. When cross price will be negative or positive?

#or substitute goods cross price will be positive. #or e"ample* if price of sugar rise then

demand for coffee will also rise. $n the other for complementar goods cross price will be

negative. #or e"ample* if price of milk rise then demand for custard falls.

33. Wh substitute goods relationship is positive?

#or substitute goods if price increases then demand will also increases. Therefore the

slope is positive and the relationship between price and )uantit demanded is positive.

32. Wh complementar goods relationship is negative?

#or complementar goods if price increases then demand will decreases. Therefore the

slope is negative and the relationship between price and )uantit demanded is also negative.

3%. Wh suppl curve is in ward shift? 5e specific.

decrease in suppl will cause the inward shift of the suppl curve.

3&. +alculate demand curve from the given table

Category P=40 P=30 P=50A 60 60 50

B 50 35 30

C 10 30 15

D 50 50 35

E 40 45 40

Sum !0 0 !"0

4


5/36

#rom the summari6ed data we can generate a table which is known as demand schedule.

3(. Wh suppl curve upward shift? 5e specific.

Q)=f (PX, Inp#t p$ie, !ehnolo*y, +#me$ of selle$s%

#rom the above four parameter input price, technolog and number of sellers can shift the

suppl curve. If input price decrease then producer will produce more and as a result suppl will

increases. s a result suppl curve will shift outwards. So the relationship between suppl and inputprice is the inverse relationship.

$n the other hand technolog improvement can produce more products and as a result

suppl increase and suppl curve will shift outward. So relationship between suppl and technolog

is the positive relationship.

If number of sellers increases the suppl will also increases. So the relationship between

suppl and number of seller is the positive relationship.

3-. What is slope and elasticit? !"plain and derive elasticit e)uation.

Slope is the change in )uantit divided b change in price. !lasticit is the percentage

change in )uantit divided b percentage change in price. To illustrate this let us assume that

)uantit is 7 and price is . So change in )uantit is 87 and change in price is 8. Therefore

Slope 9 P

Q

5

PriceQuantityDemanded

30 21040 220

50 170


6/36

Elasticity =

=

= x

3/. !"plain demand function in brief.


The determinants of demand are

a. $wn price

b. +ross price

c. Income

d. Test

e. 0umber of buers

'wn p$ie&If own price increase then demand will decrease and if own price decrease then demand

will increase. So the relationship between own price and demand is the inverse relationship and as a

result slope is negative.

$oss p$ie&If cross price increase then for complementar goods demand will decrease and if

cross price decrease then demand for complementar goods will increase. So for complementar

goods the relationship between cross price and demand is the inverse relationship and as a result

slope is negative.

$n the other hand if cross price increase then for substitute goods demand will increase and if

cross price decrease then demand for substitute goods will decrease. So for substitute goods the

relationship between cross price and demand is the positive relationship and as a result slope ispositive.

6


7/36

Inome&If income increase then demand will also increase and if income decrease then demand will

also decrease. So the relationship between income and price is the positive relationship and as a


!aste&If test increase then demand will also increase and if test decrease then demand will alsodecrease. So the relationship between test and price is the positive relationship and as a result slope

is positive.

"#ye$s&If buers increase then demand will also increase and if buers decrease then demand will

also decrease. So the relationship between buers and price is the positive relationship and as a


31. What is elastic, inelastic and unitar elastic. !"plain interpretation of elasticit.

#la$ticity #%planatione>1 Elastic

e


8/36

/. When apple and o$an*e will e s#stit#te *oods?

If price of apple increase and at the same time demand of orange will also increase then

apple and orange will be substitute goods. t the same wa if price of apple decrease and at the

same time demand of orange also decrease then apple and orange will be substitute goods.

23. !"plain and derive slope and elasticit of own price, substitute price, Income, Test, Supplier.

If own price9=, +ross price9, Income9I+, Taste9TS, 5uers95r then change in own

price98", +hange in +ross rice98, change in income98I+, change in taste98TS, change in

buers985r. Therefore

Slope of own price 9 >3

Slope of cross price 9 >3

Slope of Income 9 3

Slope of Taste 9 3

Slope of 5uers 9 3

On !rice elasticity = = = x

On cr"ss !rice elasticity = = = x

#


9/36

On Inc"$e elasticity = = = x

On taste elasticity = = = x

On cr"ss !rice elasticity = = = x

22. 'erive elasticit function and generate a common formula and e"plain.

On !rice elasticity = x

On cr"ss !rice elasticity = x

Inc"$e elasticity = x

%aste elasticity = x

Byr elasticity = x

Therefore the elastic can be written as percentage change in )uantit due to percentage

change in factors.

&


10/36

!lasticit9 x

2%. !"plain the given demand function

QD=0.2 PX3 .4 Py3 .55 !s366

If own price increase b 3 T@. then demand will decrease b ./1 T@. If own price

decrease b 3 T@ then demand will increase b ./1 T@.

If cross price change b 3 T@ then for substitute goods demand will change b ./1 T@. If

own price decrease b 3 T@ then for complementar goods demand will increase b ./1 T@ and

if own price increase b 3 T@ then for complementar goods demand will decrease b ./1 T@

If taste change b 3 T@ then demand will change b ./1 T@.

2&. !"plain the given demand function

7o* QxD=1.6 0.2 lo*PX3 1.4 lo*Py3 .52 In

If own price increase b 3A then demand will decrease b ./1A. If own price decrease b

3A then demand will increase b ./1A

If cross price change b 3A then for substitute goods demand will change b 3.2A. If

own price decrease b 3A then for complementar goods demand will increase b 3.2A and if

own price increase b 3A then for complementar goods demand will decrease b 3.2A

If income changes b 3Tk then demand will change b .%1A

2(. !"plain the given demand function

QxD=1.6 0.16lo*PX3 .52 lo* In (If PX=5/, Qx=12/, In=1////%

2-. !"plain the given demand function

7o* QxD=1.6 0.16PX3 /.16Py3 .52 In (If PX=5/, Qx=12/, In=1////%

2/. What is law of suppl? 'raw the suppl curve and e"plain.

If price increase, suppl will also increase. $n the other hand if price decreases then suppl will

also decrease holding other economic variable constant. This is known as law of suppl.

10


11/36

21. Wh suppl curve is upward slope?

If price increase then suppl will also increases and if price decreases then suppl will

also decreases. So there is a positive relationship between price and suppl and there slope is

also positive. That is wh suppl curve is upward slope.

2. What are the determinants of suppl?

Q)=f (PX, Inp#t p$ie, !ehnolo*y, +#me$ of selle$s%

%4. Wh suppl curve will shift?

Suppl curve will shift due to*

aB +hange in input price

bB Technolog

cB Sellers

%3. Wh suppl curve shift outward and inward?

Suppl curve will shift outward if input price decreases, improvement of technolog, and increase

the number of seller in the market. Suppl curve will shift inward if input price increasesC

decrease the number of seller in the market.

%2. !)uilibrium is a long run process. Wh?

11


12/36

!)uilibrium is a long run process because ever single buer has e)ual chances and it takes a

long time to reach the e)uilibrium point where demand and suppl is e)ual.

%%. Dow market price is determined?

We determine the market price b the intersection of the demand and suppl forces. In

the figure pE is the market determination price. In the market determination price there is no

e"cess suppl and demand and market clear.

%&. What is e)uilibrium price?

!)uilibrium price is that price where suppl and demand are e)ual and market clear. It is

a long run process and where '9S. in the figure pE is the e)uilibrium price and )E is the

e)uilibrium )uantit.

PRICE QUANTITY DEMANDED QUANTITY SUPPLIED

1.1 0 1000

1 100 00

0 !00 "00

"0 #00 $00

$0 %00 &00

60 500 500'0 &00 %00

12


13/36

%0 $00 #00

#0 "00 !00

%(. Wh in the short run there is no e)uilibrium?

In the short run demand can be greater than suppl which is known as !"cess demand

goods F!'GB. It is also possible that suppl can be greater than demand which is known as

!"cess suppl goods F!SGB. This process will continue until reached at e)uilibrium price. This

process is a long run process. That is wh in short run there is no e)uilibrium.

%-. Dow do we establish market e)uilibrium price?

!)uilibrium price is determined b the market demand and suppl forces. t price over

the e)uilibrium, there are e"cess suppl goods. s a result price will decrease and demand will

increase. So suppl will decrease and according to the law of suppl and demand there is a

13


14/36

downward movement along the demand and suppl curve. This process will continue until reach

at e)uilibrium price.

t price under the e)uilibrium, there are e"cess demand goods. s a result price will

increase and demand will decrease. So suppl will increase and according to the law of suppland demand there is an upward movement along the demand and suppl curve. This process

will continue until reach at e)uilibrium price.

%/. When surplus and shortage will happen in the market?

When price is overabove the e)uilibrium price, the )uantit suppl e"ceeds the )uantit

demanded. s a result there is a surplus of the commodit which drives the price down.

When price is below the e)uilibrium price, the )uantit demanded e"ceeds the )uantit

suppl. s a result there is a shortage of the commodit which drives the price up.

14


15/36

%1. 'erive the suppl function and e"plain. Wh suppl curve will shift?

Q)

=f (PX, Inp#t p$ie, !ehnolo*y, +#me$ of selle$s%

If own price increase producer will produce more and as a result suppl will also increase.

So relation between suppl and own price is positive relationship and slope will be positive.

If input price increase producer will produce less and as a result suppl will decrease. So

relation between suppl and input price is negative relationship and slope will be negative

#or technolog advancement the producer can produce more and as a result suppl will

increase. So relationship between technolog and suppl is the positive relationship and slope

will be positive.

If number of seller increase more products can be consumed and as a result the producer

will produce more. So relationship between seller and suppl is the positive relationship and

slope will be positive.

%. When price will reach at e)uilibrium?

When suppl and demand are e)ual then price will reach at e)uilibrium. There could not

be an e"cess or shortage of suppl and demand in the market.

&4. What are !'G and !SG?

When price is overabove the e)uilibrium price, the )uantit suppl e"ceeds the )uantit

demanded which is known as !"cess Suppl Goods F!SGB.

15


16/36

When price is below the e)uilibrium price, the )uantit demanded e"ceeds the )uantit

suppl which is known as !"cess demand goods F!'GB.

&3. Dow can e)uilibrium be restore?

In !SG suppl'emand. s a result price will decrease and demand will increase and

there will be a downward movement along the demand and suppl curve. This process will

continue as long as S' and will stop when S9' which is e)uilibrium price and demand.

In !'G 'emandSuppl. s a result price will increase and demand will decrease and

there will be an upward movement of demand and suppl curve. This process will continue as

long as 'S and will stop when S9' which is e)uilibrium price and demand.

This is a long run process and at the long e)uilibrium will be restore b demand and

suppl forces.

&2. What is corner solution?

16


17/36

In=PX8x3Py89=Expendit#$e. Het us assume that and 5 are two commodit and price of

commodit is and price of commodit 5 is 5. 'emand of commodit is 7and demand of

commodit 5 is 75. If consumer has the e"treme choice of 7then 75will be 6ero. Therefore

Inc9E7. $n the other hand if consumer has the e"treme choice of 75then 7will be 6ero and

Inc95E75. This is known as corner solution.

&%. What is budget line?

budget line is the various combinations of two goods that a consumer can purchase b

spending all of hisher income at the given price of the two goods. It reflects the purchasing

power.

S

&&. Wh budget line is constraint?

5udget line is constraint due to consumer:s limited income and the given price of goods.

&(. 'escribe a situation of budget line when consumer income changes.

If consumer:s income increase, his purchasing power will also increase but price ratio is

same. s a result there will be an outward shipment of the budget line. $n the other hand if

consumer:s income decreases, his purchasing power will also decrease but price ratio is same.

s a result there will be an inward shipment of the budget line.

17


18/36

&-. What is the difference between I+ and 5H?

S& ' udget &ine ndifference Cur*e

01

budget line is the variouscombinations of two goods that aconsumer can purchase b spendingall of hisher income at the given priceof the two goods

In'i((erence c)r*e s+"s t+e *ari")sc"$,inati"n "( t" -""'s t+at can -i*ec"ns)$ers sa$e le*el "( satis(acti"n

02B)'-et line re(lects t+e !)rc+asin-!"er

In'i((erence c)r*e re(lects satis(acti"nle*el.

03 %+e sl"!e "( ,)'-et line is !rice rati". %+e sl"!e "( In'i((erence C)r*e is /

&/. What is consumer behavior? !"plain the e)uation and derive the e)uation in brief.

+onsumers are individual firms and groups +onsumer test and preference varies from

person to person. +onsumer wants to ma"imi6e his satisfaction subect to income and price of

the commodit which is known as consumer behaviour. !ver consumer is a rational decision

maker.

In=PX8x3Py89=Expendit#$e. Dere " and are determinate point of Income and e"penditure. If

"E and JE is the level of satisfaction then =E

9=E" and JE

9EJ. Therefore level of satisfaction

F=E, JEB 9PX8X3Py89. Dere =E9 , JE9 .

&1. What is the optimum label of satisfaction?

1#


19/36

$ptimum level of satisfaction will be where Indifference curve is tangent to the budget

line. In the following figure = is the optimum label of satisfaction. t point = slope of budget line9K

"2"39L;S. So point " is the optimum bundle of goods.

&. What is I+? !"plain propert of I+. Wh I+ is downward slope?

n indifference curve shows the various combination of two goods that gives the

consumer same level of satisfaction. n point along this curve will generate same level of

satisfaction. Digher Indifference +urve indicates higher level of satisfaction and lower

Indifference curve indicates lower level of satisfaction.

P$ope$ties of Indiffe$ene #$:e&

aB Indifference curve is a downward slope curve.

bB Two Indifference curve will never intersect.

cB Indifference curve is conve" to the origin.

Indifference curve is downward slope because more is preferable than less and slope of

Indifference curve is the Larginal ;ate of substitution which is alwas negative.

1&


20/36

(4. !"plain law of diminishing marginal utilit.

The law of diminishing marginal utilit is a law of economics which is developed b Carl

/en-er stating that as a person increases consumption of one product K while keeping

consumption of other products constant K there is a decline in the marginal utilit that person

derives from consuming each additional unit of that product. Think about eating a chocolate bar.

!verone loves chocolate right? When ou eat one chocolate bar ou will immediatel feel

satisfied and happ to have curbed our chocolate craving. 5ut if ou eat a second bar, it ma

still taste good but not as umm and satisfing as before. If ou continue to eat more and more

chocolate bars the less satisfied ou feel and eventuall ou will become sick. In economics,

consumers deal with this problem b consuming and purchasing a variet of products.

(3. What is Larginal rate of Substitution?

Larginal ;ate of Substitution of = for J FL;S"B refers to the amount of J that a

consumer is willing to give up in order to gain one additional unit of = and still remain on the

same indifference curve. s the individual moves down an indifference curve the L;S"

diminishes.

(2. When budget line will shift?

5udget line will shift if

aB Income increase F$utward shiftB

bB Income decrease FInward shiftB

cB ;eal income increase F$utward ShiftB

dB ;eal Income decrease FInward shiftB

eB Increase of consumer preferenceF$utward ShiftB

20


21/36

fB 'ecrease of consumer preferenceFInward ShiftB

(%. !"plain income effect and substitution effects if price of " decrease.

Het us assume that Income and price of J is fi"ed. Sa budget line is M@. If price of " falls,

demand will increase and the budget line will shift outward. Het us assume that budget line shift

from M@ to M@:.M@ is the budget line where price of J is constant. is the optimum level of output

on I+3. If the price of " falls the consumer ma"imi6es utilit at point 5 on I+2. If we draw a

parallel line M@, it will be tangent to I+3 at point +. It is clear that consumer has now preference

at point +. we know change in consumption due to change in price ratio is the substitution effect.

Therefore substitution effect is +K. We also know that I! is due to the change in purchasing

power because real income increases due to price decrease FGiven the price ratioB. There

Income effect is 5K+. Total effect is 5K, resulting from the increase in the )uantit purchase.

.

(&. !"plain income effect and substitution effects if price of " increase.

((. What is production? !"plain factors of production.

roduction means creation of utilit. It the relationship between output and input and

output is the function of Habor and +apital which is known as factors of production.

79 , Dere 7 is the output, @ is the +apital, H is the Habor.

21


22/36

In short capital is fi"ed and in that case we can write @ as @:. So for the short run output is

79 which can be written as 79 . In the short run @ is constant. So we can write

production function for the short run as 79

(-. 'erive the production e)uation for the short run and long run.

In short capital is fi"ed and in that case we can write @ as @:. So for the short run output is

79 which can be written as 79 . In the short run @ is constant. So we can write

production function for the short run as 79 .

In the short run capital is constant. s a result +hange in capital is 6ero. Therefore

9N

4

>4

94

In the long run 79

(/. What is marginal product of capital, marginal product of labor, verage product of +apital,

verage product of Habor?

22


23/36

roduction 79

+apital 9@

Habor 9H

+hange in roduction 9O7

+hange in +apital 9O@

+hange in Habor 9OH

Larginal product of Habor is the change in roduct due to change in labor. Therefore

Larginal product of Habor is, . If labor change b one unit then output will change b

one unit

Larginal product of +apital is the change in roduct due to change in +apital. Therefore

Larginal product of +apital is, . If capital change b one unit then output will change b

one unit

verage product of Habor is the output roduction of per unit labor. Therefore verage

product of Habor is

verage product of +apital is the output roduction of per unit +apital. Therefore

verage product of +apital is

(1. Wh capital is variable in the long run?

In the long run there ma be some profit. It also ma be some loss. s a result capital is

not fi"ed. If there is some profit, it will reinvest and as a result it will increase the capital. If there

is some loss, it will decrease the capital. So capital is variable in the long run.

23


24/36

(. !"plain stages of production.

-4. 'raw the total product and marginal product graph.

-3. 'erive the cost function, slope of Isocost, Input price ratio.

24


25/36

-2. 'raw the increase in increasing rate, increase in decreasing rate, decrease is decreasing rate,

decrease in increasing rate? F#acts of average productivit of HaborB

Fi*& In$easin* at in$easin* $ate

Fi*& In$easin* at de$easin* $ate

25


26/36

Fi*& De$easin* at in$easin* $ate

Fi*& De$easin* at de$easin* $ate

-%. What is long run and short run in production?

The time period where at least one input is fi"ed is said to be short run. The time period

where all of the inputs are variable is said to be long run.

-&. !"plain the roperties of iso)uant.

aB +onve" to the origin

bB Two iso)uant will never intersect

cB Slope of iso)uant id downward slope and slope is called L;TS.

-(. What is the difference between Isocost line and budget line?

S&'

udget &ine SOCOS+ &ine

26


27/36

1

budget line is the variouscombinations of two goods that aconsumer can purchase bspending all of hisher income atthe given price of the two goods

IOCO% line s+"s t+e *ari")sc"$,inati"n "( t" in!)t t+at a(ir$ can +ire at a -i*en t"tal c"st

2%+e sl"!e "( ,)'-et line is !ricerati".

%+e sl"!e "( IOCO% is in!)t!rice rati".

66. Define I)'')!, I)'Q;


28/36

/4. +an IS$+$ST line shift parallel outward without an change in the investment?

Jes. When input price decrease at the same rate then IS$+$ST line shift parallel

outward without an change in the investment. #or e"ample* if the price of @ P H decrease Q

34A then IS$+$ST curve will shift outward parallel. Dere @H is the IS$+$ST curve and @:H: is

the outward shifted IS$+$ST curve.

/3. When IS$+$ST curve shift parallel?

IS$+$ST curve shift parallel due to change of input price. If input price increase at the

same proportion then IS$+$ST curve will shift inward parellal. If input price decrease at the

same proportion then IS$+$ST curve will shift outward parellal.

/2. What should be the optimum level of output?

The point where cost is minimum is the cost efficient level of output. $ptimum level of

output is that output where IS$7


29/36

/%. L;TS, L;S, labor elasticit of output.

Larginal ;ate of Substitution of = for J FL;S"B refers to the amount of J that a

consumer is willing to give up in order to gain one additional unit of = and still remain on the

same indifference curve. s the individual moves down an indifference curve the L;S"

diminishes.

Larginal ;ate of Technical Substitution of = for J FL;TS"B refers to the amount of J that

a firm is willing to give up b using one additional unit of = and still remain on the same

IS$7


30/36

If both capital and labor will change b 3 A then output will change b F.- R .4&B 94.-& A.

/(. 'erive regression function from production e"ponential function.

79@H

$r, Hog79Hog R Hog@ R HogH

$r dHog7dlog@9, dHog7dlogH9

+apital elasticit of output is . This means that if capital is changed b 3A then output

will change b A.

Habor elasticit of output is . This means that if Habor is changed b 3A then output will

change b A.

If capital and labor change b 3 A then output will change b FRB A

FRB can be 3 or less than 3 or greater than 3.

If FRB 93 then it is called constant returns to scale.

If FRB 3 then it is called increasing returns to scale.

If FRB >3 then it is called decreasing returns to scale.

/-. What is scale?

Scale refers to the long run situation where all inputs are changed in the same proportion.

There are three effects of output. These are listed below*

aB Increasing returns to scale

bB 'ecreasing returns to scale

cB +onstant returns to scale

If all input F+apital and HaborB change b 3A and output change b more than 3A then it

is called increasing returns to scale.

If all input F+apital and HaborB change b 3A and output change b less than 3A then it is

called decreasing returns to scale.

If all input F+apital and HaborB change b 3A and output change b also 3A then it is

called constant returns to scale.

30


31/36

//. +an average product of labor is 6ero? FJesB

. $utput can be 6ero. s a result H can be 6ero but it can never be less than 6ero.

/1. +an marginal product of labor be negative?

Jes. LHcan be 6ero, less than 6ero, greater than 6ero based on situation.

/. +an average product of capital be negative?

L@can be 6ero, greater than 6ero but never less than 6ero based on situation.

14. 'erive production cost function. What is the relationship between cost and output?

79f F@, HB, Dere @ is the +apital and H is the labor. If rate of labor is w and rate of +apital is r

then

+ost of +apital is rE@

+ost of Habor is wEH

Therefore total cost is 9 rE@RwEH

#or the short run, +ost9#i"ed +ost R Uariable +ost and it is represented b T+

T+9 rE@RwEH

#or the long run, +ost 9 Uariable +ost R Uariable +ost and it is represented b +

>elationship etween ost and '#tp#t&

31


32/36

+ost of producing 7 unit out is +

Therefore cost of producing 3 unit of output is +7 which is known as average cost.

Therefore, for the long run verage cost is , Larginal cost is , Larginal cost of +apital is ,

and Larginal cost of Habor is .

#or the short run +ost is represented b T+ and verage cost is , Larginal cost is

13. What average cost, total cost, marginal cost of Habor, Larginal cost of capital, marginal cost,

cost in the short run, +ost in the long run

12. Wh cost curve average is


33/36

1%. Wh in the short run average fi"ed cost is downward slope?

1&. rove +9wH

2. What is the $elationship etween in$easin* $et#$n to sale and expansion path?

1-. What is economies of scale and diseconom of scale?

1/. What is cost efficient label of output?

11. What is e"pansion path? !"plain in details.

!"pansion of cost efficient level of output is the e"pansion path. !"pansion path reflects

cost efficient level of scale operation. 'ue to increase in investment, IS$+$ST line shift

outwards parallel. !ach time IS$7


34/36

!"pansion path is linear because IS$+$ST shift parellal and slope of input price

ratio remains same at each point.

4. What is utilit? !"plain.

3. When production will stop?

2. What is market, competitive market?

%. D$W ;I+! IS '!T!;LI0!' I0 L$0$$HJ L;@!T?

&. Wh demand curve in monopolistic competition is flatter?

(. Lonopol e)uilibrium price and )uantit math.

-. Dow a monopolist set the price?

/. !"plain characteristics of monopol market.

1. What is the difference between monopol and monophon?

. Wh monopolists produce less than perfect in output?

344. Wh there is a dead weight loss in monopol market?

343. Wh demand curve is kinked in oligopol?

342. State the behavior assumption.

34%. Wh L;9.( of ;? rove it.

34&. Wh demand curve is downward slope in LL?

34


35/36

34(. !"plain characteristics of LL.

34-. Dow price is determined in +L?

34/. Dow e)uilibrium price is established in +L?

341. Wh demand curve of L; is hori6ontal?

34. What is the long run in e)uilibrium in +L?

334. Wh L;9L+ in imperfectl competitive FLonopol, Lonopolistic +ompetition, $ligopolB market

111. Why @> #$:e lie elow the ?

11. Why a:e$a*e $e:en#e ne*ati:ely sloped?

33%. Wh ; is demand curve?

33&. Wh L;9.('?

33(. What is consumer and producer surplus?

33-. What is optimum bundle of good?

33/. What is optimum label of output?

331. Dow e)uilibrium price will be establish if the firm incurs loss?

33. L+ curve is e)ual to Suppl +urve. Wh?

324. What are the characteristics of oligopol market?

323. !"plain kinked demand curve model.

322. What are the properties of monopolistic competition market?

32%. What are the sources of oligopol market?

32&. What is DI?

32(. Dow profit is ma"imi6ed?

32-. State the behavior assumption. FIf each of the firms tr to ma"imi6e profit assume that

other rival holds its output constant at the e"isting levelB

32/. +an ou imagine income effect is greater than substitution effect?

35


36/36

321.

Documents

ECONOMICS by Rana Bhai (1)