KNOWLEDGE ACADEMY CA FOUNDATION BUSINESS ECONOMICS

INDEX
PART- A
CHAPTER CHAPTER NAME PAGE
NO. NO.
1. Business Economics- Basic Concept 3-49
2. Utility Analysis and Consumer Behaviour 50-110
3. Demand Analysis 111-234
4. Supply Analysis and Equilibrium Price 235-280

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BUSINESS ECONOMICS- BASIC

CHAPTER CONCEPTS
1

Para No. A. BUSINESS ECONOMICS - BASICS

A.1 Basic Facts of Economics
A.2 Role of Decision Making in Economics
A.3 Business Economics
A.4 Nature of Business Economics
A.5 Micro-Economics vs Macro-Economics
A.6 Scope of Business Economics
Para No. B. CENTRAL ECONOMIC PROBLEMS
B.1 Central Economic Problems - Concept
B.2 The 4 Central Economic Problems
B.3 The Capitalist Economy
B.4 The Socialist Economy
B.5 The Mixed Economy

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A. BUSINESS ECONOMICS - BASICS

A. 1 Basic Facts of Economics

1. Human Beings have unlimited wants, and
2. The means of satisfying these wants are relatively scarce.
These two fundamental facts form the subject-matter of Economics.
Thus -
• Economics is concerned with the study of how effectively an individual and society uses limited
(i.e., scarce) resources, to satisfy infinite wants.
• Economics is the study of how individuals and society, work together to transform scarce
resources into goods and services to satisfy the most important of infinite human wants, and
how these goods and services are distributed among different sections of the society.
• Economics deals with -
a) how a nation allocates its scarce productive resources to various uses,
b) the process by which the productive capacity of these resources is increased, and
c) the factors which have led to sharp fluctuations in the rate of utilisation of resources.

A.2 Role of Decision Making in Economics

Point Description
1. Decision-Making is the process of selecting the
appropriate alternative, that will provide the most
efficient means of attaining specified objectives,
from two or more alternative courses of action
available.
Meaning of 2. Decision-Making involves evaluation of feasible
Decision Making alternatives, rational judgment on the basis of
information and choice of the most suitable
alternative.
3. Decision-Making arises only if there is choice
available, i.e. there are alternative courses of action
to choose from.
1. In Economics, the Productive Resources (called
Factors of Production) viz. Land, Labour, Capital and
Role in Economics
Management/ Entrepreneurship, are limited, and can
be employed in alternative uses.

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2. There is always a need for choosing the most

efficient alteratives, and rejecting the less efficient
ones.
3. A Business Firm has to make both - (a) Strategic, (b)
Tactical or Operational, decisions.
Some examples of decision-making for a Business Firm, in
the context of Economic Theory are -
1. Shut Down or Continue: Should the Firm continue to
be in business or close down?
2. New Product: Should the Firm launch the new
product, in the highly competitive market
environment? If yes, when, at what price, what
output level, etc.
3. Optimum Output: What should be the price at which
the product is to be sold? What is the optimum
output level?
4. Production Method: What available technique or
method of Production should be used? Whether to go
for Labour Intensive Method or Capital Intensive
Method?
5. Procurement: From where should the Firm purchase
Types of Decisions
its Materials, Services and other inputs required for
production? What prices to pay for such
procurement?
6. Make or Buy: Should the Firm make the
components, or buy them from other Firms? Will
such decision remain the same both in the short run
and in the long run?
7. Marketing: What Distribution and Marketing
Channels should be used? What Marketing Strategy
should be applied? Which Customer Segment should
be focused upon? What should be the Advertising
Budget?
8. Finance: What mix of Debt and Equity should the
Firm use? Is it advisable to go for Own Funds only?
9. Risks: How to handle the Risks and Uncertainties of
running the business?

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1. Decision-Making on the above matters is complex,

since the economic environment in which the Firm
operates is highly complex and dynamic.
Nature of 2. In many situations, decisions are to be taken under
Decisions conditions of imperfect knowledge and uncertainty.
3. Hence, Decision-Making requires that the
management be equipped with proper methodology
appropriate analytical tools and techniques.

A.3 Business Economics

1. Business Economics is the use of economic analysis in the formulation of business policies, and
to make key business decisions involving the best use of an organization's scarce resources, [as
per Joel Dean]
2. Business Economics is a component of Applied Economics as it includes application of selected
quantitative techniques such as Linear Programming, Regression Analysis, Capital Budgeting,
Break Even Analysis and Cost Analysis.
3. Business Economics, also referred to as Managerial Economics, refers to the integration of
economic theory with business practice. Theories of Economics provide the tools which explain
concepts like Demand, Supply, Costs, Price, Competition, etc. Business Economics applies these
tools in the process of business decision making.
4. Business Economics comprises of that part of economic knowledge, logic, theories and analytical
tools that are used for rational business decision making, i.e., Applied Economics that
integrates economic theory and business practice.

A.4 Nature of Business Economics

The nature of Business Economics is described as under -
1. Blending Theory and Practice:
a) Economic Theories are hypothetical and simplistic in character as they are based on economic
models built on simplifying assumptions.
b) So, usually, there is a gap between the propositions of economic theory and happenings in the
real economic world in which the Managers make decisions.
c) Business Economics enables application of economic logic and analytical tools to bridge the gap
between theory and practice.

2. Pragmatic Approach:
a) Micro-Economics is abstract and purely theoretical and analyses economic phenomena under
certain specified (even unrealistic) assumptions.
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b) However, Business Economics is pragmatic in its approach as it tackles practical problems which
the Firms face in the real world.

3. Inter-Disciplinary:
Business Economics is inter-disciplinary in nature as it incorporates tools from other Disciplines
like Mathematics, Operations Research, Management Theory, Accounting, Marketing, Finance,
Statistics & Econometrics.

4. Science and Art:

Business Economics is a Science Business Economics is an Art

(a) Science is a systematized body of knowledge Business Economics is an art also,
which establishes cause and effect relationships. as it involves practical application
(b) Business Economics integrates the tools of of rules and principles for the
decision sciences such as Mathematics, Statistics attainment of set objectives.
and Econometrics with Economic Theory to arrive
at appropriate strategies for achieving the goals
of the business enterprises.
(c) Business Economics follows scientific methods
and empirically tests the validity of the results.

5. Use of Micro & Macro Economic Principles:

[Note: Refer distinction between Micro & Macro Economics, below.]
1 Use of Micro Economic Theory Base Macro-Economic Impact Analysis
(a) A Business Manager is usually (a) A Business Firm is affected by its
concerned about achievement external environment comprising
of the specified objectives; various factors, e.g., general price
of his Firm, so as to ensure level, Income and Employment
the long-term survival and levels in the economy and
profitable functioning of the Government Policies on taxation,
Firm. interest rates, exchange rates,
(b) Business Economics is industries, prices, wages and
concerned more with the regulation of monopolies. All these
decision-making problems of are components of Macro-
individual establishments, and Economics.
it relies heavily on the (b) A Business Manager must be
techniques of Micro- acquainted with these and other
Economics. So, Business Macro-Economic Variables, which
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Economics is based largely on may influence his business

Micro-Economics. environment.

6. Analysis from Private Enterprise Economy viewpoint:

a) Business Economics uses the Theory of Markets and Private Enterprise.
b) It uses the theory of the Firm and Resource Allocation in the backdrop of a Private Enterprise
Economy.

[Note: There are three types of Economy-(a) Capitalist Economy, (b) Socialist Economy, and (c)
Mixed Economy.]

7. Positive vs Normative:
[Note: Refer distinction between Positive Science and Normative Science given below.]

a) Business Economics is generally normative or prescriptive in nature. It suggests the application

of economic principles with regard to policy formulation, decision-making and future planning.
b) However, if the Firms are to establish valid decision rules, they must thoroughly understand
their environment. This requires the study of Positive or Descriptive Economic Theory.
c) Thus, Business Economics combines the essentials of normative and positive economic theory,
the emphasis being more on the former (Normative) than the latter (Positive).

Note: Positive Science vs Normative Science

Positive or Pure Science Normative Science
1. Positive Science only explains "what is". Normative Science specifies "what ought to be".
Normative Science evaluates, i.e. right or wrong
2. Positive Science describes things. of a thing.
Positive Science is descriptive in
3. nature. Normative Science is prescriptive in nature.
Positive or Pure Science analyses cause Normative Science involves making value
and effect relationship between judgments. So, scarce resources are to be
4.
variables, but it does not pass value allocated to objectives which can be considered
judgments. good and reasonable.

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A.5 Micro-Economics vs Macro-Economics

The subject-matter of Economics is divided into - (a) Micro-Economics, and (b)
Macro-Economics.
Micro-Economics Macro-Economics

1. The term is derived from the Greek The term is derived from the Greek Word
Word 'Mikros' meaning "Small". 'Makros' meaning "Large".

2. [Link]: "Micro Economics is [Link]: "Macro Economics

the study of particular firms, examines the Forest and not the
particular households, individual Trees. Thus, it analyses and
price, wages, income, individual establishes the functional relationship
industries, particular between large aggregates".
commodities"

3. Micro-Economics studies the Macro-Economics deals with the overall

behaviour of individual decision- conditions, aggregates and averages
making units, such as Consumers, of the entire economy, i.e. all the
Resource Owners and Business decision-making units combined in the
Firms. economy as a whole.

4. It is the study the economic It is the study of overall economic

behaviour of an Individual Firm phenomena as a whole, rather than its
or Industry in the national individual parts.
economy.

5. It is also called Price Theory. It It is also called Income Theory. It

explains the composition or explains the level of total production,
allocation of total production, total consumption, total saving and
why more of some things is total investment, and why these levels
produced than that of others. rise and fall.

6. It analyses the behaviour of It gives a bird's eye-view of the entire

Individual Firms, and proceeds economic system. It helps in devising
explain such behaviour through

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economic theories and economic policies for the nation as a

principles. whole.

7. It deals with issues such as - It deals with issues such as -

(a) Product Pricing, (a) National Income and Output,

(b) Consumer Behaviour, (b) General Price Level,

(c) Factor Pricing, (c) Balance of Trade and Payments,

(d) Economic conditions of a section (d) External Value of Money,

of the society, (e) Saving and Investment, and
(e) Study of Firms, and (f) Employment and Economic Growth
(f) (f) Location of an Industry, etc.

8. Examples: (a) Price Fixation by a Examples: (a) Value of Rupee vis-a-vis

Producer Firm, (b)Location of an Dollar, (b)Balance of Payments Deficits, (c)
industry at a particular place, etc. are Reasons for saving rates being high or low,
micro-economic issues. etc. are macro-economic issues.

A.6 Scope of Business Economics

Category of Issues or Areas to which Business Economics can be applied

Operational or Internal Issues- Environmental or External Issues

applying Micro-Economics - applying Macro-Economics

Operational
1. or Internal Issues 1. Environmental Factors have significant
include all those issues that influence on the functioning and
arise within the Business Rrm performance of business.
and fall within the purview and
control of the management.

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Examples:
2. Issues related to 2. The major macro-economic factors
choice of business and its size, relate to -
product decisions, technology (a) the type of economic
and factor combinations, system -
pricing and sales promotion, Capitalist/Socialist/Mixed,
financing and management of (b) stage of business cycle -
investments and inventory, etc. Boom/Depression, etc.
(c) the general trends in
national income,
employment, prices, saving
and investment,
(d) Government's Economic
Policies - Industrial Policy,
Competition Policy,
Monetary and Fiscal Policy,
Price Policy, Foreign Trade
Policy and Globalization
Policies,
(e) working of Financial
Sector and Capital Market,
(f) socio-economic
organisations like Trade
Unions, Producer and
Consumer Unions and Co-
Operatives.
(g) Social and Political
Environment.

Tools:
3. The following Micro- 3. Business decisions can be taken only by
Economic Theory deal with considering these factors.
Operational Issues -
(a) Demand Analysis
and Forecasting,
(b) Production
Analysis,
(c) Cost Analysis,
(d) Market Forms and
Pricing Policies,

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(e) Resource
Allocation, etc.
[Note: See explanation below.]
4. The management of the Rrm has no
control over these factors. Hence, it
should align and manage its policies to
minimize their adverse effects.

Operational or Internal Issues:

Some examples of Micro-Economics Principles applied to Operational or Internal Issues are as
under -
1. Demand Analysis: Demand Analysis pertains to the behaviour of consumers in the market. It
studies the nature of consumer preferences and the effect of changes in the determinants of
demand e.g. price of the commodity, consumers' income, prices of related commodities,
consumer tastes and preferences, etc.

2. Demand Forecasting:
a) Demand Forecasting is the technique of predicting future demand for goods and services on
the basis of the past behaviour of factors which affect demand.
b) Proper Forecasting enables a firm to produce the required quantities at the right time and to
plan for the various factors of production viz. Materials, Labour, Machines, Facilities, etc.
c) Business Economics provides the Manager with the scientific tools which assist him in
forecasting demand.

3. Production Analysis:
a) Production Theory explains the relationship between Inputs and Output.
b) Production Analysis enables the firm to decide on the choice of appropriate technology and
selection of least-cost input-mix to achieve technically efficient way of producing output, given
the inputs.
c) A Business Economist has to decide on the optimum size of output, based on Production
Theories.

4. Cost Analysis:
a) Cost Analysis enables the firm to recognise the behaviour of costs when variables such as
output, time period and size of plant change.
b) The firm will be able to identify ways to maximize profits by producing the desired level of
output at the minimum possible cost

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c) Using Cost Theories and Cost Analysis, a Manager can ensure that the firm is not incurring
undue costs.

5. Inventory Management:
a) Inventory Management Theories pertain to rules that Firms can use to minimize the costs
associated with maintaining inventory in the form of 'Raw Materials', 'Work-inProcess/ and
'Finished Goods'
b) Inventory Policies affect the profitability of the Firm.
c) Business Economists use methods like ABC Analysis, Simulation and other Mathematical Models
to help the Firm maintain optimum stock of Inventories.

6. Market Structure and Pricing Policies:

a) Analysis of the Market Structure and extent of competition, helps a Firm in determining its
degree of market power (i.e., its ability to determine prices) and the marketing strategies to
be adopted e.g., product design and marketing channels.
b) Price Theory explains how prices are determined under different kinds of market conditions
and assists the Firm in framing suitable price policies, for both short run and long run.

7. Resource Allocation:
Using advanced tools like Linear Programming, Business Economics enables the Firm to arrive at
the best course of action for optimum utilisation of available resources.

8. Theory of Capital and Investment Decisions:

a) Every Business Firm has to carefully evaluate its investment decisions and capital allocation
decisions.
b) Theories related to Capital and Investment provide scientific criteria for choice of investment
projects and in assessment of the efficiency of capital.
c) Business Economics supports decision making on allocation of scarce capital among competing
uses of funds.

9. Profit Analysis:
Profit Theory guides the firm in the measurement and management of profits under conditions
of uncertainty. Profit Analysis is also immensely useful in future profit planning.

10. Risk and Uncertainty Analysis:

Analysis of Risks and Uncertainties helps the Business Firm in arriving at efficient decisions
and in formulating plans on the basis of past data, current information and future prediction.
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B. CENTRAL ECONOMIC PROBLEMS

B.1 Central Economic Problems - Concept

1. Basis of Economic Problem:
a) Since human wants are unlimited and productive resources to satisfy those wants are scarce,
there is a need to make the best possible use of the resources so as to get maximum
satisfaction / output / profit / welfare.
b) The problem of scarcity of resources applies to individuals and also the society as a whole.

2. Economic Problem:
a) The Economic Problem consists in making decisions regarding the ends to be pursued (i.e. goods
to be produced), and the means to be used (i.e. resources to be applied therefor.)
b) Every economy (whether Capitalist, Socialist or Mixed), has to deal with this central problem
of scarcity of resources relative to wants for them.

3. Classification:
The Central Economic Problem is divided into 4 basic economic problems –
a) What to produce?
b) How to produce?
c) For whom to produce?
d) What provisions are to be made for economic growth?

B.2 The 4 Central Economic Problems

Problem Explanation
1. What to (a) The society has to decide about - (i) what goods
produce? are to be produced, and (ii) in what quantities
these goods would be produced.
(a) Decisions should relate to allocation of resources
between various types of goods (e.g. consumer
goods, capital goods, etc.) and the quantities
thereof.
2. How to (a) The society has to decide on the method of
produce? production, i.e. using - (i) labour intensive
techniques, or (ii) capital intensive techniques.

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(b) (b) Choice would depend on the availability of

different factors of production (i.e. Labour and
Capital) and their relative prices.
3. For whom (a) The society has to decide for whom to produce, i.e.
to how to distribute and share the national product.
produce? (b) (b) The society has to decide shares of different
people in the total output of goods & services.
4. What (a) A society should not spend all its scarce resources
provision for current consumption only.
should be (b) If it uses all the resources for current
made for consumption, without making any provision for
growth? future production, it will become static, and lead to
decline in standards of living.
(c) The society has to decide and make sure that it
keeps on expanding and developing, by increasing
its production capacity.
(b) (d) So, the society has to decide how much saving
and investment (i.e. how much sacrifice of current
consumption) should be made for future progress.

B.3 The Capitalist Economy

The characteristics of a Capitalist Economy or Free Market Economy are -
Aspect Explanation
1. Right of (a) Right of Private Property means that
Private productive factors (e.g. Land, Factories,
Property Machinery, etc.) are under Private
Ownership.
(b) The Owners of these factors are free to
use them in the manner in which they like.
(c) (c) The Government may put some
restrictions for the benefit of the society
in general. However, a Capitalist Economy is
generally related to absence of Government
Interference.
2. Freedom of (a) Each person is free to engage in any economic
Enterprise activity that he likes.
(b) He is free to set up any Firm to produce goods.

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3. Freedom to (a) People (Consumers) are free to spend their income

choose by as they like. This concept is known as Consumer
the Sovereignty.
Consumers (b) This means that Producers produce only those
goods which consumers wish to buy.
4. Profit Profit Motive forces or induces people to work and
Motive produce. ~
5. Competition (a) There is a competition - (i) among Sellers to
sell their goods, and (ii) among Buyers to
obtain goods to satisfy their wants.
(b) Advertisement, Price-Cutting, Discounts,
etc. are common methods of handling
competition in a Capitalist Economy.
6. Inequalities There is generally a wide gap of income between the rich
of Incomes and the poor. This arises mainly arises due to unequal
distribution of property in Capitalist Economies.
Note: Capitalism usually functions effectively in a
democratic framework.

B.3;1 The Capitalist Economy - Merits

1. High degree of Operative Efficiency.
2. Self-regulating and automatic working through Price Mechanism.
3. Incentives for efficient economic decisions and their implementation.
4. No Costs for collecting and processing of information and for formulating, implementing and
monitoring policies.
5. Greater efficiency and incentive to work, due to existence of private property and profit
motive.
6. Scope for fast economic growth, since Investors try to invest in only those projects which are
economically feasible.
7. Optimum Allocation of Productive Resources, i.e. putting resources to best possible use.
8. Lower Costs of Production, as every Producer tries to maximize his profit by employing
methods of production which are cost-effective.
9. Better Standard of Living for Consumers - Competition forces Producers to bring in a large
variety of good quality products at reasonable prices, leading to maximum satisfaction to
Consumers.
10. Incentives for Innovation and Technological Progress - growth of business talents, development
of research, etc.

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11. Preservation of Fundamental Rights like right to freedom & right to private property - more
autonomy and freedom.
12. Encourages enterprise and risk taking and emergence of an Entrepreneurial Class willing to take
risks.
13. Rewards for men of initiative and enterprise and punishment for the imprudent and inefficient.

B.3.2 The Capitalist Economy - Demerits

1. There is precedence of property rights over human rights.
2. Capitalist System ignores human welfare. Under Capitalism, the aim is profit and not the
welfare of the people.
3. There is vast economic inequality and social injustice under capitalism. Inequalities reduce the
aggregate economic welfare of the society as a whole and split the society into two classes
namely the 'haves' and the 'have-nots', sowing the seeds of social unrest and class conflict.
4. Due to Income Inequality, the pattern of demand does not represent the real needs of the
society.
5. Exploitation of Labour is very common under capitalism. There is no security of employment.
This makes workers more vulnerable, and also leads to strikes and lock outs.
6. Consumer Sovereignty is a myth as consumers often become victims of exploitation. Excessive
competition and profit motive work against Consumer Welfare.
7. There is misallocation of resources as resources will move into the production of luxury goods.
Less Wage Goods will be produced on account of their lower profitability.
8. Less of Merit Goods like education and health care will be produced. Goods and Services which
are positively harmful to the society may be produced in larger quantities, as they are more
profitable.
9. Due to unplanned production, economic instability in terms of over production, economic
depression, unemployment etc. is very common under capitalism.
10. There is enormous waste of productive resources as Firms spend huge amounts of money on
advertisement and sales promotion activities.
11. Capitalism leads to formation of monopolies as large Firms may be able to drive out small ones
by fair or foul means.
12. Excessive Materialism, along with conspicuous and unethical consumption leads to environmental
degradation.
13. Economic Inequalities lead to wide differences in economic opportunities and perpetuate
unfairness in the society.

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B.3.3 The Capitalist Economy - Solutions to Central Economic Problems

A Capitalist Economy uses the impersonal forces of the market demand and supply, or the Price
Mechanism, to solve its central problems, i.e. to decide what, how and for whom to produce.

Problem Solution in a Capitalist Economy

1. What to (a) The question regarding what to produce is decided by
produce? consumers, who show their preferences by spending on
the goods which they want.
(b) (b) Since profit motive guides business decisions,
producing Firms compete with each other to produce
those goods which consumers wish to buy.
2. How to (a) The Business Firm will produce his goods with a
produce? technique of production, that will lead to minimum cost
of production.
(b) So, the relative / comparative prices of factors of
production (Labour vs Capital), help in deciding how to
produce.
3. For whom to (a) Goods and Services in a Capitalist Economy will be produced
produce? for those who have the buying capacity.
(b) Buying Capacity of an individual depends upon his income.
Higher the income, higher will be his buying capacity and
higher generally will be his demand for goods in general.
4. What provision (a) Consumption and Savings are done by Consumers, and
should be Investments are done by Entrepreneurs / Business
made for Firms.
growth? (b) Consumers' Savings, among other factors, are governed
by the rate of interest prevailing in the market. So,
higher the interest rate, higher is the savings.
(c) Investment decisions depend upon the rate of return
on capital (i.e. profit expectations).

Thus, in a Capitalist Economy, the basic economic problems are resolved by the Price
Mechanism or Market Mechanism.

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B.4 The Socialist Economy

The characteristics of a Socialist Economy or (also known as Command Economy, or Regulated
Economy or Controlled Economy) are -

Aspect Explanation
1. Collective (a) Here, the major factors of production (i.e. Factories, Capital,
ownership of etc.) are owned by the whole community represented by the
all means of State.
production (b) However, small farms, workshops and trading firms may remain
in private hands.
2. Socio- (a) Due to social ownership, profit-motive and self-interest are
Economic not the driving forces of economic activity. Resources are
Objectives used to achieve socio-economic objectives.
(b) (b) All members are entitled to get benefit from the fruits of
such socialized planned production on the basis of equal rights.
3. Centrally (a) There is a central authority to set and accomplish socio-
Planned economic goals. So, a Socialist Economy is also called a
Economy Centrally Planned Economy.
(b) (b) Basic economic problems, i.e. what to produce, when and
how much to produce, etc. are solved based on decisions taken
by the Central Authority.
4. Selective (a) Consumers' Sovereignty is restricted by selective production
production of of goods.
goods (b) The range of choice is limited by planned production. However,
within that range, an individual is free to choose what he likes
most.
(c) Right to work is guaranteed, but the choice of occupation gets
restricted, since these are determined by the Central
Authority on the basis of certain socio-economic goals before
the nation.
5. Relative (a) There is a relative equality of income in a Socialist Economy.
equality of (b) Differences in income and wealth levels are reduced by lack of
income opportunities to accumulate private capital.
(c) (c) Educational and other facilities are enjoyed more or less
equally, thus the basic causes of inequalities are removed.

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6. Existence of (a) Price Mechanism exists in a Socialist Economy but plays only a
Price secondary role, e.g. to secure disposal of accumulated stocks.
Mechanism (b) Allocation of productive resources is done as per pre-
determined plan. So, the Price Mechanism does not influence
these decisions.
(c) (c) In the absence of profit motive, Price Mechanism loses its
predominant role in economic decisions.

B.4.1 The Socialist Economy - Merits

1. Equitable Distribution of Wealth and Income and provision of equal opportunities for all help to
maintain economic and social justice.
2. Socialism ensures right to work and minimum standard of living to all people.
3. Labourers and Consumers are protected from exploitation by the Employers and Monopolies
respectively.
4. Unemployment is minimised, business fluctuations are eliminated and stability is brought about
and maintained.
5. Rapid and balanced economic development is possible in a Socialist Economy. The Central
Planning Authority coordinates all resources in an efficient manner according to set priorities.
6. Socialist Economy is a planned economy. So, there will be better utilization of resources and it
ensures maximum production.
7. Wastes of all kinds are avoided through strict economic planning. Since competition is absent,
there is no wastage of resources on advertisement and sales promotion
8. Absence of profit motive helps the community to develop a co-operative mentality and avoids
class war. This, along with equality, ensures welfare of the society.
9. There is provision of comprehensive social security under Socialism, and this makes citizens
feel secure.

B.4.2 The Socialist Economy - Demerits

1. Due to pre-dominance of bureaucracy, there may be inefficiency, delays, corruption, red-
tapism, favouritism, etc.
2. State Ownership of the material means of production and state direction and control of nearly
all economic activity - leads to restriction of the freedom of individuals.
3. Socialism takes away the basic rights such as the right of private property.
4. There is no incentives for hard work in the form of Profit, Private Ownership of Property, etc.
5. No importance is given to personal efficiency and productivity. Labourers are not rewarded
according to their efficiency. This acts as a disincentive to work.
6. Administered Prices are not based on market forces or proper cost computations.

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The most economic and scientific allocation of resources and the efficient functioning of the
economic system are impossible.
7. State Monopolies become uncontrollable, and more dangerous than the Private Monopolies
under Capitalism.
8. Consumers have no freedom of choice. They have to accept what the Planning Authority
decides to produce.
9. The extreme form of Socialism is not at all practicable since it curbs personal freedom
sometimes.

B.5 The Mixed Economy

The characteristics of a Mixed Economy are –
Aspect Explanation
1. Co-existence of There is co-existence of both Private and Public Enterprise. Thus, in
Private and Public a Mixed Economy, there are three sectors of industries - (a) Private
Enterprise Sector, (b) Public Sector, (c) Combined or Joint Sector.
[Refer Table below] --1
2. Planned Economy (a) A Mixed Economy is a planned economy, i.e. the Government
has a dear and definite economic plan.
(b) Public Sector Enterprises have to work according to a plan and
to achieve the objectives laid down.
(c) The Government has creates the necessary business
environment for both Private and Public Sector Enterprises.
3. Resource Allocation of Resources in a Mixed Economy is better, since it
Allocation attempts to combine the productive efficiency of capitalism and
distributive justice of socialism.
4. Balanced Regional (a) Public Sector Enterprises may be located in backward regions,
Development so as to ensure its development.
(b) The Government may provide subsidies and other incentives, to
make the Private Sector establish and develop industries in
back ward regions.
(c) Thus, Balanced Regional Development can be expected.
5. Dual System of (a) In Private Sector, prices of goods and factors of production
Pricing are determined through the free play of market forces of
demand and supply.
(b) In Public Sector, the State determines the prices of various
products. The State also reserves to itself, the right to keep
different prices for Public Sector Units and Private Sector
Units.
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(c) The State may also fix the prices of certain essential
commodities which are used by the common man. (e.g. petrol,
LPG prices in India)
(d) Thus, there is a system of Dual Pricing in a Mixed Economy.

Thus, the Mixed Economy seeks to include the best features of both the Market Economy
(Capitalist) and Controlled Economy (Socialist), while excluding the demerits of both.
Note: India has a Mixed Economy.

Three Sectors in a Mixed Economy

Private Sector Public Sector Joint Sector
• Production and Distribution are Industries in this In this Sector, both
managed and controlled by private Sector are not the Government and
individuals and groups. primarily profit- Private Enterprises
• Here, Industries are based on seif- oriented but are set have equal access,
interest & profit motive. up by the State for and join hands to
• Right to private property exists and the welfare of the produce a commodity,
personal initiative is given full scope. community. leading to the
• However private enterprise may be establishment of
regulated by the Government directly Joint Sector.
and or indirectly by a number of policy
instruments.

B.5.1 The Mixed Economy - Merits

Mixed Economy combines the merits available to Capitalist Economies and Socialist Economies.
Some of these are -
1. Economic Freedom and existence of right to Private Property which ensures incentive to work
and capital formation.
2. Consumers are benefitted through Consumers' Sovereignty and freedom of choice.
3. There are appropriate incentives for innovation and technological progress.
4. The system encourages enterprise and risk taking.
5. Price Mechanism and Competition forces operating in the Private Sector promoting efficient
decisions and better resource allocation.
6. There are advantages of Economic Planning and rapid economic development on the basis of plan
priorities.
7. There is comparatively greater economic and social equality and freedom from exploitation due
to greater State Participation and direction of economic activities.
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8. The disadvantages of cut-throat competition are averted through Government's Legislative

Measures.

B.5.2 The Mixed Economy - Demerits

Some demerits associated with Mixed Economy are -
1. Excessive controls by the State, leading to constraints on the Private Sector,
2. Poor implementation of Plans by the State Authority,
3. Poor performance of Public Sector, and general tendency of the society to prefer Private
Sector for "quality" product and services,
4. Undue delays in economic decisions,
5. Wastage of Resources due to same product and services being produced/ served in both
Private and Public Sectors
6. Higher Rates of Taxation,
7. Lack of Efficiency, Corruption, Favouritism, etc. in the State Authorities and Public Sector,
8. Disproportionate Growth of Private Sector in case Government initiatives are not properly
directed.

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BASICS OF BUSINESS ECONOMICS - MCQs

BASICS OF ECONOMICS
1. The meaning of the word ’Economic1 is most closely connected with the word –
(a) Extravagant
(b) Scarce
(c) Unlimited
(d) Restricted

2. Human Wants are –

(a) Extravagant
(b) Scarce
(c) Unlimited
(d) Restricted

3. "Ends" refer to –
(a) Human Wants
(b) Resources
(c) Both (a) and (b)
(d) Neither (a) nor (b)

4. "Means" refer to –
(a) Human Wants
(b) Resources
(c) Both (a) and (b)
(d) Neither (a) nor (b)

5. "Resources" refer to –
(a) Unproductive Resources
(b) Productive Resources
(c) Money only
(d) None of the above

6. The Means for satisfying Wants are –

(a) Not available at all
(b) Scarce

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(c) Unlimited
(d) Not usable

7. Which of the following is an economic activity?

(a) Listening to music on the radio
(b) Teaching one’s own son at home
(c) Medical Facilities rendered by a Charitable Dispensary
(d) A Housewife doing household duties

8. Which of the following is not an economic activity?

(a) A Son looking after his ailing mother
(b) A Chartered Accountant doing his own practice
(c) A Soldier serving at the border
(d) A Farmer growing Millets

9. Which of the following is an economic activity?

(a) Sale of Goods to Consumers
(b) Teaching one's own nephew at home
(c) A Housewife doing household duties
(d) Watching Television

10. Which of the following is an economic activity?

(a) Playing friendly cricket match
(b) Teaching one’s own daughter at home
(c) Manufacturing Chairs at subsidised rate
(d) A Housewife doing household duties

SCARCITY
11. The Law of Scarcity –
(a) Does not apply to rich, developed countries
(b) Applies only to the less developed countries
(c) Implies that consumers' wants will be satisfied in a socialistic system
(d) Implies that consumers wants will never be completely satisfied

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12. Which of the following is the best general definition of the study of Economics?
(a) Inflation and Unemployment in a growing economy
(b) Business decision-making under foreign competition
(c) Individual and Social Choice in the face of scarcity
(d) The best way to invest in the stock market

13. What implication(s) does resource scarcity have for the satisfaction of wants?
(a) Not all wants can be satisfied
(b) We will never be faced with the need to make choices
(c) We must develop ways to decrease our individual wants
(d) The discovery of new natural resources is necessary to increase our ability to satisfy wants

14. Rational decision-making requires that –

(a) One's choices be arrived at logically and without error
(b) One's choices be consistent with one's goals
(c) One's choices never vary
(d) One makes choices that do not involve trade-off

15. What is the "Fundamental Premise" of Economics?

(a) Natural Resources will always be scarce.
(b) Individuals are capable of establishing goals and acting in a manner consistent with
achievement of those goals
(c) Individuals choose the alternative for which they believe the net gains to be the greatest
(d) No matter what the circumstances, individual choice always involves a trade-off

16. Consider the following and decide which, economy if any is without scarcity –
(a) The pre-independent Indian economy, where most people were farmers
(b) A mythical economy where everybody is a rich person
(c) Any economy where income is distributed equally among its people
(d) None of the above

17. A system of economy in which all means of production are owned and controlled by private
individuals for the purpose of profit is called ______
(a) Socialistic economy
(b) Capitalistic economy
(c) Mixed economy
(d) All of the above

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18. Economics is the study of –

(a) How society manages its unlimited resources.
(b) How to reduce our wants until we are satisfied.
(c) How society manages its scarce resources.
(d) How to fully satisfy our unlimited wants

19. Scarcity in Economics is an –

(a) Absolute Concept
(b) Relative Concept
(c) Irrelevant Concept
(d) Not a Concept at all.

20. Resources are scarce in relation to –

(a) Human Wants
(b) Firm's Profit Motive
(c) Country's Social Goals
(d) All of the above

21. In Economics, we use "scarcity" the term to mean:

(a) Absolute scarcity and lack of resources in less developed countries.
(b) Relative scarcity i.e. scarcity in relation to the wants of the society.
(c) Scarcity during times of business failure and natural calamities.
(d) Scarcity caused on account of excessive consumption by the rich.

BUSINESS ECONOMICS
22. The process of selecting the appropriate alternative, that will provide the most efficient
means of attaining specified objectives, from two or more alternative courses of action
available is called
a. Problem solving
b. Decision making
c. Economic analysis
d. Managerial Expertise

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23. Which of the following statements is true?

a. The Economy has unlimited resources and there is a need for choosing the most efficient
alterative.
b. Decisions are always taken under conditions of imperfect knowledge and uncertainty
c. Decision making arises only if there is choice available
d. All of the above

24. Business Decision making involves –

a. Whether the Firm has to make the component or buy the components?
b. Whether the Firm has to shut down or continue in the business?
c. What mix of debt and equity should the Finn use?
d. All of the above

25. Which of the following is not a tool/component of Business Economics?

a. Capital Budgeting
b. Demand Analysis
c. Break Even Point
d. None of the above

26. Integration of Economic theory with business practice is called –

a. Managerial Economics
b. Business Economics
c. Applied Economics
d. All of the above

27. Economic Theories are –

a. Accurate
b. Hypothetical
c. Real
d. Factual

28. Micro Economics is –

a. Unrealistic
b. Theoretical
c. Abstract
d. All of the above

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29. Business Economics has a Pragmatic Approach which means it is not –

a. Practical
b. Realistic
c. Abstract
d. All of the above

30. Business economics is a science because –

a. It establishes a cause and effect relationship
b. Integrates the tools of decision sciences
c. Follows scientific methods and empirically tests the validity of the results.
d. All of the above

31. The emphasis of Business Economics is more on

a. Normative theory only
b. Positive theory only
c. More Normative than Positive theory
d. More Positive than Normative theory

32. Positive Science explains –

a. "What was"
b. "What is"
c. "What ought to be"
d. "What will"

33. Normative Science is –

a. Descriptive
b. Prescriptive
c. Explanatory
d. None of the above

34. Normative Science explains –

a. "What was"
b. "What is"
c. "What ought to be"
d. "What will"

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35. The study of the economic behaviour of an Individual Firm or Industry in the national economy
is called –
a. Micro Economics
b. Business Economics
c. Macro Economics
d. Behavioral Economics

36. Micro Economics deals with –

a. External Value of Money
b. Employment
c. Savings and Investment
d. Consumer Behaviour

37. Macro Economics deals with –

a. Study of Firms
b. General Price Level
c. Consumer Behaviour
d. Factor Pricing

38. The study of the nature of consumer preferences and the effect of changes in the
determinants of demand is called –
a. Demand Analysis
b. Production Analysis
c. Demand Forecasting
d. Market Analysis

39. Demand analysis means –

a. Technique of predicting future demand for goods and services
b. Study of behavior of consumers in the market
c. Analysis of the Market Structure and extent of competition
d. Measurement and management of profits under conditions of uncertainty

40. The technique of predicting future demand for goods and services on the basis of the past
behaviour of factors is –
a. Demand Analysis
b. Demand optimization
c. Demand Forecasting
d. None of the above
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41. Relationship between Input and Output is explained by-

a. Cost theory
b. Production theory
c. Demand theory
d. All the above

42. Inventory includes –

a. Raw material
b. Work in process
c. Finished Goods
d. All of the above

43. The degree of Market Power is determined by –

a. Demand Analysis
b. Production Analysis
c. Market Structure Analysis
d. Cost Analysis

44. A study of how increases in the corporate income tax rate will affect the national
unemployment rate an example of
(a) Macro-Economics
(b) Descriptive Economics
(c) Micro - economics
(d) Normative Economics

45. Which of the following statement does not apply to a market economy?
(a) Firms decide whom to hire and what to product
(b) Firms at maximizing profits
(c) Households decide which firms to work for and what to buy with their incomes
(d) Government policies are the primary forces that guide the decisions of firms and
households.

46. Human wants are ------------ in companion to means to satisfy them.

(a) Finite
(b) partial
(c) Unlimited
(d) limited

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47. The economy which makes use of both markets and government:
(a) Mixed Economy
(b) Socialist Economy
(c) Capitalistic Economy
(d) None of the above

48. The practical application of economic theory in business decisions is called ------
(a) Macro Economics
(b) Micro Economics
(c) Business Economics
(d) Normative Economics

49. Price mechanism is a feature of ----------------------------------------

(a) Capitalism
(b) Socialism
(c) Mixed Economy
(d) All of the above

50. Micro economic theory deals with the issues ------------------------------------------------

(a) Product pricing
(b) Consumer behavior
(c) Factor pricing
(d) All of the above

51. Nature of business economics is:

(a) Theory of markets and private enterprises
(b) Normative in nature
(c) Incorporate elements of macro analysis
(d) All of the above

52. Business economics is also called

(a) Micro Economics
(b) Macro Economics
(c) Welfare Economics
(d) Managerial Economics

53. Issues requiring decision making in the context business are:

(a) How much should be the optimum output what price should the firm sell?
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(b) How will the product be placed in the market?

(c) How to combat the risks and uncertaint involved?
(d) All of the above

54. Consider the following statement about capitalism:

(i) It works through price mechanism
(ii) It increase human welfare
(iii) It operates on profit motive
(a) (i) & (ii)
(b) (i)&(iii)
(c) (ii) & (iii)
(d) None of the above

55. Business economics uses elements of:

(a) Micro Economics
(b) Macro Economics
(c) Both micro & macro economics
(d) None of the above

ANSWERS to MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
b c a b b b c a a c d c a b c d b b b d

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
b c d d d b d c d c b b c a d B a b c
42 43 44 45 46 47 48 49 50 51 52 53 54 55
d c a d c a c a d d d d b c

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CENTRAL ECONOMIC PROBLEMS

–
CENTRAL PROBLEMS
1. Which of the following is a cause of economic problem?
(a) Scarcity of Resources
(b) Unlimited Wants
(c) Alternative Uses
(d) All of the above

2. The central problem in economics is that of

(a) Comparing the success of command versus market economies
(b) Guaranteering that production occurs in the most efficient manner
(c) Guaranteering a minimum level of income for every citizen
(d) Allocating scarce resources in such a manner that society's unlimited needs or wants are
satisfied as well as possible

3. Which of the following is not a central problem of economy?

(a) How to Produce
(b) When to Produce
(c) What to Produce
(d) None of these

4. Which of the following is not one of the four central questions that the study of economics is
supposed to answer?
(a) Who produces what
(b) When are goods produced
(c) Who consumes what
(d) How are goods produced

5. The Central Problems arise in case of –

(a) Capitalist Economies
(b) Socialist Economies
(c) Mixed Economies
(d) All of the above

6. The Central Problems arise in case of –

(a) Developed Economies
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(b) Developing Economies

(c) Undeveloped Economies
(d) All of the above

7. The Central Problems of an economy are –

(a) What to produce?
(b) How to produce?
(c) For whom to produce?
(d) All of the above

8. If there are adequate resources in an economy, then there is no economic problem at all. This
statement is –
(a) True
(b) False
(c) Partially True
(d) Cannot be commented at all

9. The problem of "What to produce" covers the issue relating to –

(a) what goods are to be produced
(b) what quantities of goods are to be produced
(c) Both (a) and (b)
(d) Neither (a) nor (b)

10. In deciding "What to produce", the economy should focus on the production of –
(a) Capital Goods only
(b) Consumer Goods only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

11. An economy which uses all its resources on production of …….. Goods only, cannot provide for
future growth prospects.
(a) Capital Goods only
(b) Consumer Goods only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

12. An economy achieves "Productive Efficiency" only when –

(a) Resources are employed in their most highly valued uses
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(b) Best resources are employed

(c) Total number of goods produced is greatest
(d) Goods and services are produced at least cost and not resources are wasted

13. In deciding "How to produce", the economy should decide on –

(a) types of goods to be produced
(b) quantity of goods to be produced
(c) consumer goods and capital goods
(d) methods of production

14. In deciding "How to produce", the economy should consider –

(a) Labour Intensive Techniques
(b) Capital Intensive Techniques
(c) Both (a) and (b)
(d) Neither (a) nor (b)

15. In deciding "How to produce", the choice of appropriate production method depends on –
(a) availability of different factors of production
(b) prices of different factors of production
(c) Both (a) and (b)
(d) Neither (a) nor (b)

16. Capital Intensive Technique would get chosen in

(a) Labour Surplus Economy
(b) Capital Surplus Economy
(c) Developed Economy
(d) Developing Economy

17. labour Intensive Technique would get chosen in

(a) Labour Surplus Economy
(b) Capital Surplus Economy
(c) Developed Economy
(d) Developing Economy

18. Production of Capital Goods vs Consumer Goods relates to the problem of –

(a) What to Produce
(b) How to Produce
(c) For whom to Produce
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(d) How to provide for growth

19. Use of Labour or Capital intensive techniques of production relates to the problem of –
(a) What to Produce
(b) How to Produce
(c) For whom to Produce
(d) How to provide for growth

20. Distribution and Sharing of National Product relates to the problem of –

(a) What to Produce
(b) How to Produce
(c) For whom to Produce
(d) How to provide for growth

21. The issue of "for whom to produce" deals with

(a) how to distribute and share the national product
(b) shares of different people in the total output of goods & services.
(c) Both (a) and (b)
(d) Neither (a) nor (b)

22. Savings and Investment is compulsory for economic growth and development. This statement is
–
(a) True
(b) False
(c) Partially True
(d) Cannot be commented at all.

23. An economy can spend all its present resources on current consumption only.
(a) True
(b) False
(c) Partially True
(d) Cannot be commented at all.

CAPITALIST, SOCIALIST, MIXED ECONOMY

24. For analyzing ownership and utilization of resources, Economies are classified into - ,
(a) Capitalist Economies
(b) Socialist Economies
(c) Mixed Economies
(d) All of the above
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25. Capitalist Economy is characterized by-

(a) Private Ownership of Resources
(b) Freedom of Enterprise
(c) Consumer Sovereignty
(d) All of the above

26. Capitalist Economy is characterized by –

(a) Profit Motive
(b) Competition among Sellers 8i Buyers
(c) Inequalities of Incomes
(d) All of the above

27. A system of economy in which all means of production are owned and controlled by private
individuals for the purpose profit is of called ______
(a) Socialistic economy
(b) Capitalistic economy
(c) Mixed economy
(d) All of the above

28. Which of the following applies to a Capitalist Economy?

(a) Profit Motive
(b) Government Regulation
(c) Equal distribution of Incomes
(d) Absence of Competition among various producing Firms

29. Which of the following is not feature of capitalistic economy?

(a) Right to private property
(b) Restriction on consumer's right to choose
(c) Profit motive
(d) Freedom of enterprise

30. A Capitalist Economy is also called as –

(a) Free Market Economy
(b) Command Market Economy
(c) Controlled Market Economy
(d) Regulated Market Economy

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31. Capitalist Economy uses __________as principal means of allocating resources

(a) Demand
(b) Supply
(c) Price
(d) All of the above

32. Free market economy driving force is _______

(a) Profit motive
(b) Welfare of the people
(c) Rising incomes and level of living
(d) None of the above

33. In which type of economic system has the Government no control over price fluctuations?
(a) Market Economy
(b) Command Economy
(c) Mixed Economy
(d) Regulated Economy

34. Which type of economy gives rise to the most efficient allocation of resources and capital in
the standard Micro-Economics framework?
(a) Free Market Economy
(b) Command Market Economy
(c) Controlled Market Economy
(d) Regulated Market Economy

35. In which type of economy do consumers and producers make their choices based on the market
forces of demand and supply?
(a) Open Economy
(b) Controlled Economy
(c) Command Economy
(d) Market Economy

36. In Capitalist Economies, the answer the fundamental questions - what, how, and for whom to
produce, are obtained by –
(a) Market Forces of Demand and Supply
(b) Government Regulations
(c) Cost Benefit Analysis
(d) All of the above
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37. In which type of economy can each producer allocate his resources based on the demand?
(a) Market Economy
(b) Command Economy
(c) Mixed Economy
(d) Regulated Economy

38. In a Free-Market Economy the allocation of resources is determined by

(a) Votes taken by consumers
(b) A Central Planning Authority
(c) Consumer Preference
(d) All of the above

39. In a Free Market Economy, when consumers increase their purchase of a good and the level of
______ exceeds ______, then the prices of those goods tend to rise.
(a) Demand, Supply
(b) Supply, Demand
(c) Prices, Demand
(d) Profits, Supply

40. In an economy, people have the freedom to buy or not to buy the goods offered in the market
place, and this freedom to choose what they buy dictates what producers will ultimately
produce. This condition is called –
(a) Economic Power of Choice
(b) Consumer Sovereignty
(c) Positive Economy
(d) Producer Sovereignty

41. "Consumer Sovereignty" refers to –

(a) Consumer participation in Production
(b) Consumer is the Ruler of the State
(c) Producers produce any type of goods and dump them in the market.
(d) Producers produce only those goods which Consumers prefer to buy.

42. Freedom of choice is an advantage of:

(a) Capitalist Economy
(b) Mixed Economy
(c) Socialist Economy
(d) Communist Economy
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43. A Capitalist Economy uses ............. means of allocating resources –

(a) Demand
(b) Supply
(c) Efficiency
(d) Prices

44. The concept of "Competition" in a Capitalist Economy refers to –

(a) Competition among Sellers to sell their goods
(b) Competition among Buyers to obtain goods to satisfy their wants.
(c) Both (a) and (b)
(d) Neither (a) nor (b)

45. Advertisement, Price-Cutting, Discounts, etc. in a Capitalist Economy are –

(a) attributed to Government Regulations
(b) methods of handling competition
(c) effects of Producer Sovereignty
(d) all of the above

46. Which of the following statements regarding Market Economy is not true?
(a) Price plays a major role in Market Economy
(b) The Government controls production and distribution of goods
(c) Consumers choose the goods they want
(d) Efficiency is achieved through Profit Motive

47. "Inequalities of Income" refers to –

(a) Gap between Rich and Poor
(b) All Workers do not equal wages.
(c) All Companies do not earn same profit.
(d) All of the above

48. In which among the following systems the "Right to property" exists-
(a) Mixed
(b) Capitalist
(c) Socialist
(d) Traditional

49. Command Economy refers to –

(a) Capitalist Economy
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(b) Socialist Economy

(c) Mixed Economy
(d) All of the above

50. Where does "Price mechanism" exists.

(a) Capitalist economy
(b) Socialist economy
(c) Both type of economies
(d) None of the above

51. Socialist Economy is characterized by –

(a) Collective ownership of means of production
(b) Socio-Economic Objectives
(c) Central Planning Authority
(d) All of the above

52. Socialist Economy is characterized by –

(a) Selective production of goods
(b) Relative Equality of Incomes
(c) Secondary Role of Price Mechanism
(d) All of the above

53. Which of the following applies to a Socialist Economy?

(a) Socio-Economic Objectives
(b) Market Mechanism
(c) Wide Inequalities of Incomes
(d) Competition among producing Firms

54. Which of the following applies to a Socialist Economy?

(a) Private Ownership of all resources and factors of production
(b) Total absence of Government Regulation
(c) Balancing between Social Objectives and Economic Objectives of the society
(d) Market Mechanism to solve all Central Problems of the Economy

55. In a Command Economy, all decisions from the allocation of resources to the distribution of end
products, is taken care of by –
(a) Government
(b) Producers
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(c) Cartels formed by the Producers

(d) Consumer Forums

56. Compared to other economic systems, National Income is more often evenly distributed in - (a)
Market Economy
(b) Command Economy
(c) Mixed Economy
(d) All of the above

57. In Socialist Economies, the answer the fundamental questions - what, how, and for whom to
produce, are obtained by –
(a) Market Forces of Demand and Supply
(b) Government Regulations
(c) Cost Benefit Analysis
(d) All of the above

58. In a Socialist Economy, the concept of consumer Sovereignty is –

(a) Restricted
(b) Unrestricted
(c) Recognised
(d) none of the above

59. Socialist Economy is also called –

(a) Command Economy
(b) Centrally Planned Economy
(c) Controlled Economy
(d) All of the above

60. Socialist economy is also known as ……….. economy

(a) Mixed
(b) Planned
(c) Capitalist
(d) None of the above

61. In the present-day world, no economy is absolutely socialist in nature. This statement is
(a) True
(b) False
(c) Partially True
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(d) Cannot be commented at all.

62. Identify the correct statement:

(a) In Capitalist Economy, people are not free to spend their income as they like
(b) In Socialist Economy, the right to work is guaranteed but the choice of occupation gets
restricted
(c) In Socialist Economy, a relative inequality in income is an important feature.
(d) In today's world, USA is a purely Socialist Country.

63. In which type of economic system is cost-benefit analysis used to answer the fundamental
questions- what, how, and for whom to produce?
(a) Market Economy
(b) Command Economy
(c) Mixed Economy
(d) Regulated Economy

64. In Mixed Economies, the answer the fundamental questions - what, how, and for whom to
produce, are obtained by –
(a) Market Forces of Demand and Supply
(b) Government Regulations
(c) Cost Benefit Analysis
(d) All of the above

65. Mixed Economy contains the positive aspects of

(a) Capitalist Economies
(b) Socialist Economies
(c) Both (a) and (b)
(d) Neither (a) nor (b)

66. The term mixed economy denotes

(a) Co-existence of consumer and producer's goods industries in the economy
(b) Co existence of private 8i public sectors in the economy
(c) Co existence of urban & rural sectors in the economy
(d) Co existence of large & small industries sectors in the economy

67. In a Mixed Economy, there are ………. Sectors of industries.

(a) One
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(b) Two
(c) Three
(d) None

68. In a Mixed Economy, industries are found in-

(a) Private Sector
(b) Private Sector
(c) Joint Sector
(d) All of the above

69. In a Mixed Economy, Industries in Private Sector have ....... as their objective and driving
force.
(a) profit motive only
(b) community welfare only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

70. In a Mixed Economy, Industries in Public Sector have …….as their objective and driving force.
(a) profit motive only
(b) community welfare only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

71. Mixed Economy is characterized by –

(a) Existence of Private, Public and Joint Sectors
(b) Planned Economy
(c) Balanced Regional Development
(d) All of the above

72. Mixed Economy is characterized by –

(a) Complete private ownership of all factors of production
(b) High levels of inequalities of incomes
(c) Irrelevance of Price Mechanism
(d) None of the above

73. Which of the following is applicable in case of a Mixed Economy?

(a) Free Hand of Price Mechanism for all decision- making aspects
(b) Dual System of Pricing
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(c) No restrictions on Private Enterprises

(d) Absence of Central Planning Authority

74. Prices of essential goods are decided by the Government, and prices of normal goods are
decided by the market forces of demand and supply. This concept is called –
(a) Pricing Mechanism
(b) Market Mechanism
(c) Dual System of Pricing
(d) Unregulated Pricing

75. A Mixed Economy focusses on ensuring –

(a) Productive Efficiency of Capitalism
(b) Distributive Justice of Socialism
(c) Both (a) and (b)
(d) Neither (a) nor (b)

76. In a Mixed Economy, the Government may provide subsidies and other incentives, to make the
Private Sector establish and develop industries in backward regions. This is primarily done to
ensure –
(a) Productive Efficiency
(b) Balanced Regional Development
(c) Profit Motive
(d) All the above

77. In a Mixed Economy, the Private Sector –

(a) are absolute free to make any type of decisions.
(b) works only for social objectives.
(c) are regulated directly and / or indirectly by Government
(d) does not exist at all.

78. Indian Economy is an example of-

(a) Capitalist Economy
(b) Socialist Economy
(c) Mixed Economy
(d) None of the above

79. In India, the Central Planning Authority is called –

(a) State Government
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(b) President of India

(c) Ministry of Economy
(d) Planning Commission

80. In India, areas like Atomic Energy, Defence, etc. are in the hands of –
(a) Private Sector
(b) Public Sector
(c) Joint Sector
(d) All of the above

81. Capitalist Economy –

(a) Encourages Entrepreneurial class
(b) Facilitates economic growth
(c) Ignores human welfare
(d) All of the above

82. Demerits of Capitalistic Economy includes –

(a) Low cost of production
(b) Pre dominance of bureaucracy
(c) Economic inequality
(d) No incentive for hard work

83. Autonomy and Freedom is more in –

(a) Socialistic Economy
(b) Capitalistic Economy
(c) Mixed Economy
(d) All the above

84. Socialistic Economy

(i) Ensures minimum standard of living to all people
(ii) Restricts freedom of individuals
(iii) Does not give importance to personal efficiency and productivity
(iv) Emphasis on equal distribution of wealth
(a) and (ii)
(b) (i), (ii) and (iv)
(c) (i), (ii), (iii) and (iv)
(d) (ii) and (iv)

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85. There is no freedom of choice in a –

(a) Capitalistic Economy
(b) Socialistic Economy
(c) Mixed Economy
(d) None of the above

86. The capitalist Economy uses as principle means of allocation of resources –

(a) Price
(b) Demand
(c) Supply
(d) None of the above

87. Consumer sovereignty is found in which economy?

(a) Capitalist Economy
(b) Socialist Economy
(c) Mixed Economy
(d) Communist Economy

88. Which of the following is used for allocation of resources?

(a) Micro - Economics
(b) Marco - Economics
(c) Econometrics
(d) Descriptive Economics

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ANSWERS to MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
d d b b d d d b c C b d d c c b a a b c

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 .36 37 38 39 40 41
c a b d d d b a a a c a a a d a a c a b d

42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62
a d c b b a b b a d d a c a b b A d b a b

63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82
c c c b c d a c d d b c c b c c d C d c

83 84 85 86 87 88
b c b a a a

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UTILITY ANALYSIS AND

CHAPTER CONSUMER BEHAVIOUR
2

Para No. A. UTILITY ANALYSIS

A.1 Utility
A.2 Approaches to Utility Analysis - Cardinal and Ordinal
Para No. B. CARDINAL APPROACI
B.1 Total and Marginal Utility
B.2 Assumptions in Marginal Utility Analysis and Cardinal Approach
B.3 The Law of Diminishing Marginal Utility
B.3.1 Significance of the Law
B.3.2 Assumptions of and Exceptions to the Law
B.4 Consumer Surplus and Consumer Equilibrium
B.4.1 Consumer's Surplus - Limitations
B.5 The Law of Equi-Marginal Utility
Para No. C. ORDINAL APPROACH
C.1 The Indifference Curve Analysis - Assumptions
C.1.1 Indifference Curves - Meaning
C.1.2 The Indifference Map
C.1.3 Marginal Rate of Substitution (MRS)
C.1.4 Properties of Indifference Curves
C.1.5 The Budget Line or Price Line
C.1.6 Consumer Equilibrium under Indifference Curve approach

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A. UTILITY ANALYSIS

A.1 Utility
1. Utility is the power of a commodity to satisfy a human want.
2. Utility is a subjective aspect and differs from person to person.
3. Utility ≠ Usefulness.
4. Even items like Liquor, Cigarettes, etc. may be said to have utility from an economic viewpoint,
since people want them. In Economics, the concept of utility is ethically neutral.
5. The Utility Theories seeks to explain how a consumer spends his income on different goods and
services so as to attain maximum satisfaction.

A.2 Approaches to Utility Analysis

Utility can be analysed under two approaches -
Approach Cardinal Approach Ordinal Approach
Assumption Utility is a measurable and Utility is not quantifiable, i.e. cannot be
quantifiable aspect, i.e. can be expressed in terms of numbers.
expressed in numbers.
Rationale Human Satisfaction can be Human Satisfaction is a psychological
expressed in monetary terms, and phenomenon, and cannot be measured
the Price of a Commodity in the quantitatively in monetary terms.
market indicates the customers'
level of satisfaction, i.e. he is
ready to pay that price.
Theories • Law of Diminishing Indifference Curve Approach based on
Marginal Utility relative preferences of customers.
• Law of Equi-Marginal
Utility
Economists Alfred Marshall Hicks and Allen
Comparative • Provides the basis for • Dispenses with the assumption of
Advantages Law of Demand. measurability of utility.
• Assumes money • Studies more than one commodity
measurement concept, at a time.
and equates Marginal • Does not assume constancy of
Utility and Price. money.

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• Explains the relationship • Segregates Income Effect from

between Demand, Substitution Effect in study of
Supply and Price. Demand.

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B. CARDINAL APPROACH

B.1 Total and Marginal Utility

1. Total It is the total sum of the utility derived from different units of a
Utility commodity consumed by a consumer.
2. Marginal • It is the additional utility derived from additional unit of a
Utility commodity.
• It is the change in the total utility resulting from a one-unit
change in the consumption of a commodity, per unit of time.

B.2 Assumptions in Marginal Utility Analysis and Cardinal Approach

Assumption Explanation
1. Cardinal (a) This means that Utility is measurable & quantifiable entity, i.e. it
Measurability is a cardinal concept
of Utility (b) A person can express the satisfaction derived from the
consumption of a commodity, quantitative terms, e.g. 10 units of
Utility for every 1 unit consumption of Item A.
2. Independence (a) Utilities / satisfaction derived from different
of Utilities commodities are independent of one another, and does not
affect one another.
(b) The Total Utility which a person gets from the entire lot
of goods purchased by him is derived by the sum total of
the separate utilities of goods.
3. Comparability (a) The satisfaction derived by a person from different
of Utility commodities can be compared.
across goods (b) (b) Thus, it is easy to express which commodity gives
better utility or satisfaction and by how much.
4. Constant (a) Money is the measuring rod of utility.
Marginal (b) The amount of money which a person is prepared to pay
Utility of for a unit of a good rather than go without it, is a
Money measure of the utility which he derives from the good.
(c) It is assumed that the Marginal Utility of Money itself
remains constant. This assumption is required to
facilitate the measurement of utility of commodities in
terms of money.
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B.3 The Law of Diminishing Marginal Utility

1. Law:
a) The additional benefit (Marginal Utility) which a person derives from a given increase in stock
of a thing diminishes with every increase in the stock that he already has.
b) As a consumer takes more units of an item, the extra satisfaction (i.e. Marginal Utility) that he
derives from an extra unit, declines with the increase in the consumption of that item.

2. Explanation / Rationale:
a) Even though the total wants of a person are virtually unlimited, each single want is satiable, i.e.
each want is capable of being satisfied.
b) Since each want is satiable, as a consumer consumes more and more units of an item, the
intensity of his want for the item goes on decreasing, and a point is reached where the
consumer no longer wants it.
c) Further, Goods are imperfect substitutes for each other. If the same goods could have
satisfied other wants also, their marginal utility would not have decreased.

3. Example: This law describes a fundamental tendency of human nature. Suppose, a person has a
liking for eating Mangoes. The first Mango gives him great pleasure. The second Mango gives
him less satisfaction than the earlier one, and so on. If we force him to take 9 Mangoes
continuously, he may lose interest in Mangoes itself. So, the Utility goes on reducing, and
reaches zero. In case of further consumption, utility may also become negative and become a
disutility (causing sickness in the person).

4. Total and marginal Utility Schedules: An example is given below-

Quantity of Mangoes consumed Total Utility (Units of Marginal Utility (Additional

per day Satisfaction) Satisfaction)
0 0 0
1 30 30
2 55 25
3 75 20
4 90 15
5 100 10
6 105 5
7 105 0
8 100 -5
9 90 -10
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Diminishing Marginal Utility Curve

Marginal Utility and Total Utility Curves

• Total Utility increases at a diminishing rate.

• Where the marginal utility is negative, Total Utility decreases.
• MU goes on decreasing and may become negative beyond a certain level of consumption.
• MU Curve slopes downwards from left to the right.
• MU Curve is negatively sloped.

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B.3.1 Significance of the Law

The Law of Diminishing Marginal Utility has the following applications -
1. Law of Diminishing Marginal Utility (MU) forms the basis of the Law of Demand. As price
increases, the quantity demanded goes down, and vice-versa.
2. Law of Diminishing MU indicates the price and Consumer's Equilibrium. Consumer will be
equilibrium if Price = MU. [See Para B.4 below.]
3. Law of Diminishing MU is useful to explain the concept of Consumer's Surplus. [See Para B.4
below.]
4. Price and MU move together up and down. If Price changes, its MU will also change
correspondingly.
5. MU varies inversely with Supply. If the Supply of a Commodity is greater, its MU will be less.
[This means that items which are in abundance, have low MU.]
6. MU of goods increases as the quantity of the complementary goods with the consumer
increases. [Paper and Pen are complementary goods. If a consumer acquires more paper, the MU
of ink also increases.
7. MU of goods decreases as the quantity of the substitute goods with the consumer increases.
[Tea and Coffee are substitute goods. If a consumer purchases more Coffee, the MU of Tea
decreases, since he will prefer to consume the purchased Coffee, than purchase Tea and
consume it.]

B.3.2 Assumptions of and Exceptions to the Law

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A. The law of Diminishing Marginal Utility will hold good only when certain assumptions are met.

Standard Units: The law will be applicable only when the units are of
a suitable size, e.g., number of Mangoes, and not tiny pieces thereof.
So, the different units consumed should consist of standard units.

Homogeneous Units: The different units consumed should be

identical in all respects.

Continuous Consumption: There should be no time gap or interval

between the consumption of one unit and another unit, i.e. there
Should be continuous consumption. So, one mango per day for 9 days When the
will not have diminishing marginal utility, but 9 Mangoes eaten Assumptions
in one day will be covered by this law. of the Law are
violated, then
Cardinal Approach Assumption: The law applies only if the cardinal the law does
approach to measurement of utility (i.e., in monetary terms), is not hold good
assumed.

Constant Income: The law is applicable only when the income of the
Consumer remains constant.

If the Income of the Consumer increases, the law will not hold good.

Constant Taste / Fashion: The habits and tastes of the consumer

must remain unchanged. If customers' taste or liking for an item
increases with additional consumption, then the law will not hold
good.

B. Other Exceptions:
a) Personal Aspects: The Law of Diminishing Marginal Utility does not apply to music, hobbies like
stamp and coin collection, etc. where personal preferences are dominant.
b) Money excluded: The law of diminishing marginal utility is not applicable to money, and items
like gold, etc. where a greater quantity may increase the lust for it.
c) Other Possessions: Utility may be affected by the presence or absence of articles which are
substitutes or complements. So, Utility obtained from tea may be affected if no sugar is
available.

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B.4 Consumer Surplus and Consumer Equilibrium

1. Consumer's Equilibrium:
a) As per the Law of Diminishing MU, the additional consumption of an item leads to decreasing
MU.
b) The Consumer will be willing to purchase an item, so long as the Marginal Utility (additional
satisfaction) derived is equal to the Price of the commodity. [This means, that the consumer
will not buy the item if the Price he pays is more than the additional satisfaction derived from
it.]
c) Thus, the Consumer is in equilibrium when Marginal Utility = Price of the Commodity.
d) Extending the same principle to two or more commodities, Consumer will be in equilibrium if –
MUx MUy MUz
= =
Pricex Pricev Pricez
and so on…

2. Consumer's Surplus:
a) Consumer is in equilibrium when Marginal Utility = Price, and he keeps purchasing till that point.
b) For all earlier units purchased, the Marginal Utility > Price paid. This difference is called
Consumer's Surplus.
c) Since Price is constant for all quantity purchased, he gets extra utility on the overall purchase.
This extra utility or extra surplus is called Consumer's Surplus.
d) Thus, Consumer's Surplus = What a consumer is ready to pay - What he actually pays.

3. Example: Consider the Marginal Utility Schedule given for Mangoes in Para B.3. Suppose the
Price of a Mango is ₹ 20. The Consumer's Equilibrium and Consumer's Surplus is given below -
Marginal Utility
Qtty of Mangoes Total Utility (Units (Additional Price Consumer's
eaten per day of Satisfaction) Satisfaction) Surplus
0 0 0 - -
1 ₹ 30 ₹ 30 ₹ 20 ₹ 10
2 ₹ 55 ₹ 25 ₹ 20 ₹5
3 ₹ 75 ₹ 20 ₹ 20 Nil
4 ₹ 90 ₹ 15 ₹ 20 ₹ -5
5 ₹100 ₹ 10 ₹ 20 ₹ -10
6 ₹ 105 ₹5 ₹ 20 ₹ -15
7 ₹ 105 0 ₹ 20 ₹ -20
8 ₹ 100 ₹ -5 ₹ 20 ₹ -25
9 ₹ 90 ₹ -10 ₹ 20 ₹ -30

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Here, the Consumer is in equilibrium at 3 units, when Price = Marginal Utility, i.e. ₹ 20.
Consumer's Surplus at that level = ₹ 15 (i.e. upto 3 units). [Note: The 3rd unit purchased does
not give any Consumer's Surplus as such, since Price = MU.]
If the Price of the item were ₹ 10, the Consumer will be in equilibrium at 5 units, when Price =
Marginal Utility, i.e. ₹ 10. Consumer's Surplus at that level = ₹ 50 (i.e. upto 5 units).

4. Graphical Representation of Consumer's Surplus:

Note:
• If Market Price = OP, the Consumer will be in equilibrium when he buys OQ units of the
commodity. [Since, at OQ units, MU = Price OP]
• Total Utility = Area under OARQ.
• Price paid = Area under OPRQ.
• So, Consumers' Surplus = Area under APR, i.e. shaded area in the diagram.

B.4.1 Consumer s Surplus - Limitations

1. The concept of Consumer's Surplus is relevant only if the cardinal approach to measurement of
utility (i.e. in monetary terms), is assumed. However, utility cannot always be measured in terms
of money.
2. Consumer's Surplus cannot be measured precisely, since it is difficult to measure the Marginal
Utilities of different units of a commodity consumed by a person.
3. The Consumer's Surplus derived from a commodity is affected by the availability of
substitutes.
4. In case of necessaries, the Marginal Utilities of the first few units are infinitely large. In such
cases, the Consumer's Surplus is always infinite.
5. There is no rule for deriving the utility scale of articles which are used for their prestige
value, e.g., Diamonds. The concept of Consumer's Surplus does not apply in such cases.
6. It is assumed that Marginal Utility of money is constant, which is unrealistic. As more
purchases are made, and the Consumer's stock of money diminishes, the Marginal Utility
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of money also will undergo a change.

B.5 Law of Equi-Marginal Utility

1. Law:
a) If MU of money spent on Commodity A is greater than the MU of money spent on Commodity B,
the Consumer will withdraw some money from the purchase of B, and will spend it on A, till the
MU of money in the two cases becomes equal.
b) The Consumer will attain maximum satisfaction, and will be in equilibrium when MU of money
spent on various | goods that he buys, are equal.

2. Explanation / Rationale: The Consumer will try to maximize his satisfaction when there are
substitutes available in the market. So, he will substitute one item for the other such that his
MU is greater than the Price.

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C. ORDINAL APPROACH

C.1 The Indifferent Curve Analysis - Assumptions

Assumption Explanation
1. Ordinal (a) This means that Utility is not measurable in
Approach monetary terms.
to Utility (b) A person can express the satisfaction derived
from the consumption of a commodity, in relative
or comparative terms (and not quantitative
terms)
2. Rational The Consumer is rational, and possesses full information about
Consumer all the relevant aspects of economic environment in which he
lives.
3. Ranking and (a) The Consumer is capable of ranking all conceivable
Preferences combinations of goods according to the
satisfaction they yield. So, if he is given various
combinations say A, B, C, D, E, he can rank them as
1st Preference, 2nd Preference, etc.
(b) If a Consumer happens to prefer A to B, he cannot
tell quantitatively how much he prefers A to B.
4. Consistency If the Consumer prefers combination A to B, and B to C, then
in Ranking it automatically means that he must prefer combination A to C.
It is assumed that he has consistent consumption pattern
behaviour.
5. Number of If Combination A has more commodities / quantities than
Goods Combination B, then A must be preferred to B. This is because
the customer prefers more to less, and tries to maximize his
satisfaction.

C.1.1 Indifference Curves - Meaning

1. In Indifference Curve Analysis, the Customers' preferences are ranked / arranged in
preference order, rather than measuring them in terms of money.
2. An Indifference Curve (IC) is a curve which represents all those combinations of goods which
gives same satisfaction to the consumer.
3. Since all the combinations on an IC give equal satisfaction to the consumer, he prefers them
equally and does not mind which combination he gets. He is said to be indifferent among
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these combinations.

Marginal Rate of
Combination Oranges Mangoes
Substitution (MRS)
A 15 1 -
B 11 2 4 Oranges per Mango
C 8 3 3 Oranges per Mango
D 6 4 2 Oranges per Mango
E 5 5 1 Orange per Mango

Note: The Consumer gets equal satisfaction for all the combinations given above. So,
satisfaction from-

15 Oranges = = 8 Oranges = =
+ 11 Oranges +3 6 Oranges 5 Oranges
1 Mango + 2 Mangoes Mangoes + 4 Mangoes + 5 Mangoes

C. 1.2 The Indifference Map

1. A set of Indifference Curves is called Indifference Map. An Indifference Map depicts the
complete picture of consumer's tastes and preferences.
2. The consumer is indifferent among the combinations lying on the same IC. However, he prefers
the combinations on the higher IC to the combinations lying on a lower IC, because a higher IC
signifies a higher level of satisfaction. So, IC4> IC3> IC2> IQ.
3. The farther the IC is from the origin, the higher is the satisfaction level.
4. Even though higher levels of satisfaction are identified, it cannot be quantified as such.

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C.1.3 The Marginal Rate of Substitution (MRS)

1. Marginal Rate of Substitution (MRS) indicates how much of one commodity is substituted for
how much of another commodity.
2. MRS is indicated by the slope of an IC at a particular point. Thus, MRS indicates movement
along an IC.
3. MRS shows a decreasing trend (similar to the concept of diminishing MU). The reasons for the
decreasing trend of MRS are the same as for MU. [Refer Point 2 of Para B.3]

C.1.4 Properties of Indifference Curves

The Indifference Curve (IC) has the following properties -
Property of IC Explanation
Downward sloping (a) In a combination, when the quantity of one
to the right commodity is increased, the quantity of
the other commodity is reduced. So, IC is
negatively-sloped.
(b) This is essential, if the level of
satisfaction is to remain the same on an
IC.
Convex to the (a) IC is convex, i.e. L Shaped to the origin,
origin with a bent instead of a right angle.
(b) Convexity of IC is due to diminishing
nature of MRS.
All points on same (a) All the combinations on an IC give
IC =Same equal satisfaction to the Consumer.
satisfaction (b) Thus, the Consumer is said to
indifferent among different points
on an IC.

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Higher levels of (a) In an Indifference Map, every higher (right side)

satisfaction IC represents a higher level of satisfaction to
the consumer.
(b) Combinations lying on a higher IC contain more of
either one or both goods and more goods are
preferred to less of them.
Non-intersecting (a) No two ICs will touch / cut / intersect
each other.
(b) Every higher IC indicates a higher level
of satisfaction. Hence, the same point
/ level of satisfaction cannot lie on two
ICs.
(c) If ICs intersect, the relationship
becomes logically absurd, since it would
show that higher and lower levels are
equal, which is not possible.

C.1.5 The Budget Line or Price Line

1. A Budget Line shows all those combinations of two goods which the consumer can buy spending
his given money income on the two goods at their given prices.
2. Budget Line is also called as - (a) Price Line, (b) Price Opportunity Line, (c) Price-Income Line,
or (d) Budget Constraint Line.
3. Every Point on the Price Line indicates full spending by the Consumer.
4. A Point below the Price Line (Point U) indicates under spending by the Consumer.
5. A Point above the Price Line (Point I) will be beyond the reach of the Consumer, at his present
levels of income and spending.

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C.1.6 Consumer Equilibrium under Indifference Curve Approach

1. Consumers' Equilibrium:
a) A higher IC shows a higher level of satisfaction than a lower one. So, to maximise his
satisfaction, a Consumer will try to reach the highest possible IC.
b) However, his objective of buying higher quantities of goods and obtaining higher satisfaction is
restricted by the Budget Line or Price Line.
c) A Consumer is in equilibrium when he derives the maximum possible satisfaction from the
goods, and is in no position to re-arrange his purchases of goods.

2. Assumptions:
a) The Consumer has a given Indifference Map which shows his scale of preferences for various
combinations of two goods X and Y.
b) The Consumer has a fixed money income which he has to spend wholly on goods X and Y.
c) Prices per unit of Goods X and Y are given and are constant.

3. Explanation:
a) In the given diagram, PL is the Price Line containing points A, B, C, D and E. Every combination
on the Budget Line PL costs, the same to the Consumer.
b) To maximise his satisfaction, the Consumer will try to reach highest or farthest IC, but he will
be forced to remain on the given Price Line. So, he can choose any combination from among only
those which lie on his Price Line.

c) Point C is the point of maximum satisfaction to the Consumer since it lies on the farthest IC,
and also lies on his Price Line.
d) This Point C constitutes the Consumers' Equilibrium and at that level, he will purchase QX and
QY quantities of the two goods X and Y.
e) At Consumers' Equilibrium level, the Price Line is tangential to (i.e. touches) the farthest IC.
f) At the Equilibrium Level, (i.e., tangency point C), the Slopes of the Price Line PL and
Indifference Curve IC3 are equal.

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g) The Consumer will not prefer Points A, B, D and E on his Price Line, since they lie on lower ICs
and give him lower levels of satisfaction.
h) The Consumer will not be able to reach IQ & IQ with his current budget constraints and
income.

4. Relationship of MRS and Price at Equilibrium:

a) At the Equilibrium Level, (i.e. tangency point C), the Slopes of the Price Line PL and
Indifference Curve IC3 are equal.
b)
𝑃𝑥
Slope of Price Line indicates the ratio between the prices of two goods, i.e. Slope = 𝑃𝑦
c) Slope of Indifference Curve indicates Marginal Rate of Substitution of X for Y, i.e. MRSxy =
𝑀𝑈𝑥
𝑀𝑈𝑦
d)
𝑀𝑈𝑥 𝑃𝑥 𝑀𝑈𝑥 𝑀𝑈𝑦
Hence, to achieve equilibrium, MRSxy = 𝑀𝑈𝑦 = 𝑃𝑦 or alternatively, = 𝑃𝑦 = 𝑃𝑥

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UTILIYU ANALYSIS & CARDINAL APPROACH - MCQs

UTILITY
1. When Economists speak of the Utility of a certain product, they are referring to –
(a) Demand for the product
(b) Usefulness of the product in consumption
(c) Satisfaction gained from consuming the product
(d) Rate at which consumers are willing to exchange one good for another

2. Utility may be defined as –

(a) Power of Commodity to satisfy wants
(b) Usefulness of a Commodity
(c) Desire for a Commodity
(d) None of the above

3. Which of the following statements regarding Utility is not true?

(a) Utility is the psychological satisfaction that a Consumer derives by using a particular
product
(b) Utility helps to understand how consumers make choices
(c) Utility is always measurable
(d) Utility is a purely subjective issue.

4. Utility is a –
(a) Subjective concept
(b) Objective concept
(c) Irrelevant concept
(d) Indeterminate concept

5. Utility –
(a) Differs from person to person
(b) Differs from time to time
(c) Differs from product to product
(d) All of the above are correct

6. Utility is applicable –
(a) Only for socially desirable goods (food, etc.)
(b) Only for harmful goods like Liquor, Cigarettes, etc.
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(c) Both (a) and (b)

(d) Neither (a) nor (b)

7. Utility is ethically neutral. This statement is –

(a) True
(b) False
(c) Partially True
(d) Nothing can be said about Utility

8. Which of the following is not a consumption:

(a) Burning of gas when cooking of food
(b) Burning of furniture in an accident of fire
(c) Eating of an Ice-Cream
(d) Burning of crackers on Diwali

9. All wants of individuals are not of:

(a) Equal importance
(b) Immediate importance
(c) Fixed importance
(d) All of the above

CARDINAL APPROACH - BASICS

10. Utility can be measured and quantified under –
(a) Cardinal Approach only
(b) Ordinal Approach only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

11. Which of the following Utility approaches suggest that Utility can be measured and quantified?
(a) Cardinal
(b) Ordinal
(c) Both Cardinal and Ordinal
(d) Neither approach makes such suggestion

12. Under Marginal Utility analysis, Utility is assumed to be a –

(a) Cardinal Concept
(b) Ordinal Concept
(c) Indeterminate Concept
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(d) Infinite Concept

13. Which of the following Utility measurement approaches is based on the Marshallian school of
thought?
(a) Cardinal Utility Approach
(b) Ordinal Utility Approach
(c) Independent Variables Approach
(d) Both (a) and (b)

14. Marshallian utility analysis is known as ______ analysis

(a) cardinal
(b) ordinal
(c) classical
(d) histrorical

15. Who is the main exponent of Marginal Utility Analysis?

(a) Paul Samuelson
(b) Hicks
(c) Keynes
(d) Marshall

16. Marginal Utility Approach to demand was given by

(a) J.R. Hicks
(b) Alfred Marshall
(c) Robbins W
(d) A C Pigou

17. According to Marginal Utility analysis, Utility can be measured in -.

(a) Ranks
(b) Cardinal Numbers
(c) Nominal Values
(d) All of the above

18. Marginal Utility Approach is also called –

(a) Ordinal Utility Analysis
(b) Hicks and Allen Approach
(c) Cardinal Utility Analysis
(d) All of the above
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19. Cardinal Utility Approach is also known as –

(a) Indifference Curve Analysis
(b) Hicks and Allen Approach
(c) Marginal Utility Analysis
(d) All of the above

20. Cardinal Measure of Utility is required in –

(a) Marginal Utility Theory
(b) Indifference Curve Theory
(c) Revealed Preference Theory
(d) None of the above

21. If we make the assumption that Utility can be expressed in numbers, we are adopting –
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

22. Which of the approaches uses Money Measurement Concept for Utility?
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

23. Which of the theories is applicable under Cardinal Approach to Utility?

(a) Law of Diminishing Marginal Utility
(b) Law of Equi-Marginal Utility
(c) Both (a) and (b) and consumer surplus theory
(d) Neither (a) nor (b)

24. Which one of the following assumptions is not necessary for the Cardinal Utility Theory?
(a) Rationality of the Consumer
(b) Constant Marginal Utility of Money
(c) Perfectly Competitive Market
(d) Additivity of Utility

25. Cardinal Approach to Utility analyses –

(a) One Commodity at a time
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(b) Two Commodities at a time

(c) Many Commodities at a time
(d) Does not analyse any Commodity at all

26. Under Cardinal Approach to Utility ,……… is the measuring rod of Utility.
(a) Customer Satisfaction
(b) Relative Preference
(c) Money
(d) All of the above

27. Which of the following is an assumption under Cardinal Approach to Utility Analysis?
(a) Measurability of Utility in monetary terms
(b) Change in Marginal Utility of Money
(c) Utility arises even at zero consumption
(d) All of the above

28. Which of the following is not an assumption under Cardinal Approach to Utility Analysis?
(a) Utilities of goods are independent of one another.
(b) Marginal Utility of Money is constant
(c) Utility is comparable across goods
(d) Utility cannot be measured, but only ranked

29. The Cardinal Approach to Utility Analysis assumes that Utility is measurable and quantifiable.
This means –
(a) Utility can be expressed in numbers
(b) Utility can only be ranked across products
(c) Utility Schedule is derived by the Consumer
(d) All of the above

30. The Cardinal Approach to Utility assumes Marginal Utility of Money is –

(a) Zero
(b) Constant
(c) Increasing Trend
(d) Decreasing Trend

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TOTAL UTILITY AND MARGINAL UTILITY

31. ……… is the sum total of the Utility derived from additional units of a commodity
(a) Average Utility
(b) Marginal Utility
(c) Total Utility
(d) Ordinal Utility

32. ……….. of a commodity is the additional Utility derived by a consumer, by consuming one more
unit of that Commodity.
(a) Total Utility
(b) Marginal Utility
(c) Average Utility
(d) Ordinal Utility

33. Marginal Utility can be stated by –

(a) TUn- TUn-1
(b) Additional Utility derived from additional unit of commodity
(c) Change in Total Utility ÷ Change in Quantity
(d) All of the above

34. Marginal Utility = Additional Utility derived by consuming ……. additional unit of a commodity.
(a) One
(b) Unit
(c) Single
(d) All of the above

35. Marginal Utility –

(a) Will always be positive
(b) Will always be negative
(c) Can be positive or negative but not zero
(d) Can be positive or negative or zero

36. Total Utility –

(a) Will generally be positive
(b) Will generally be negative
(c) Can be positive or negative but not zero
(d) Can be positive or negative or zero

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37. Total Utility is maximum when –

(a) Marginal Utility is zero
(b) Marginal Utility is at its highest point
(c) Marginal Utility is equal to Average Utility
(d) Average Utility is maximum

38. When total utility is increases at a diminishing rate, then marginal utility is ______
(a) Diminishing
(b) Zero
(c) Maximum
(d) One

39. Marginal Utility will always show –

(a) Increasing trend
(b) Decreasing trend
(c) Both (a) and (b)
(d) Neither (a) nor (b)

40. The Marginal Utility Curve is –

(a) Horizontal to Y axis
(b) Demand Curve of that Commodity
(c) Vertical to X axis
(d) None of the above

41. The Total Utility derived by Ram by consuming 10 cups of Coffee is 99, whereas the total
Utility on consumption of 11th Cup is 95. What is the Marginal Utility for 11th cup of Coffee?
(a) -4
(b) 4
(c) 9
(d) -3

42. The Total Utility that Shyam derives after having 4 Mangoes is 10, and the Total Utility on
consuming 5 Mangoes is 9. What is the Marginal Utility for 5th mango?
(a) 1
(b) 0
(c) -1
(d) ±1

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43. Total Utility derived by Ram by eating 10 Cakes is 250. Marginal Utility of the 11th Cake is -60.
What will be the Total Utility for 11 Cakes?
(a) -60
(b) 250
(c) 190
(d) 310

44. Total Utility derived by Ram by eating 6 Apples is 300. Marginal Utility of the 7th Apple is 30.
What will be the Total Utility for 7 Apples?
(a) 330
(b) 270
(c) 300
(d) 30

Use the following Table to answer the next 3 Questions.

No. of units Total utility Marginal utility
0 0
1 3600
2 6800
3 9600
4 12000
5 14000
6 15600
7 16800
8 17600
9 18000

45. What is the Marginal Utility when consumption increases from 4 units to 5 units?
(a) 3000
(b) 1200
(c) 2000
(d) 1500

46. What is the Marginal Utility when consumption increases from 6 units to 7 units?
(a) 3000
(b) 1200
(c) 2000
(d) 1500
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47. What is the Marginal Utility when consumption increases from 8 units to 9 units?
(a) 3000
(b) 400
(c) 2000
(d) 1500

1. Use the following Table and answer the next 13 Questions.

No. of units Total utility Marginal utility
0 0 ?
1 1800 A
2 B 1600
3 4800 C
4 D 1200
5 7000 E
6 F 800
7 8400 G
8 8800 H
9 I 200
10 J 0
11 8800 K
12 L -600

48. Find the value of"?" in the above Table.

(a) 0
(b) 1
(c) 1800
(d) Cannot be determined

49. Find the value of "A" in the above Table.

(a) 0
(b) 1
(c) 1800
(d) Cannot be determined

50. Find the value of "B" in the above Table.

(a) 2
(b) 3400

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(c) 1600
(d) Cannot be determined

51. Find the value of "C" in the above Table.

(a) 3
(b) 4800
(c) 1400
(d) Cannot be determined

52. Find the value of “D” in the above Table.

(a) 6000
(b) 4
(c) 1200
(d) Cannot be determined

53. Find the value of “E” in the above Table.

(a) 7000"
(b) 5
(c) 1000
(d) Cannot be determined

54. Find the value of “F” in the above Table.

(a) 6
(b) 7800
(c) 800
(d) Cannot be determined

55. Find the value of “G” in the above Table.

(a) 7
(b) 8400
(c) 600
(d) Cannot be determined

56. Find the value of “H” in the above Table.

(a) 8800
(b) 400
(c) 8
(d) Cannot be determined
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57. Find the value of “I” in the above Table.

(a) 9000
(b) 200
(c) 9
(d) Cannot be determined

58. Find the value of “J” in the above Table.

(a) 9000
(b) 0
(c) 10
(d) Cannot be determined

59. Find the value of “K” in the above Table.

(a) 200
(b) -200
(c) 11
(d) Cannot be determined

60. Find the value of "L" in the above Table.

(a) 600
(b) -600
(c) 8200
(d) -8200

LAW OF DIMINISHING MARGINAL UTILITY

61. The Law of Diminishing Marginal Utility states that the more a consumer consumes a
product, he derives ……… from additional consumption.
(a) Equal Utility
(b) Higher Utility
(c) Lesser Utility
(d) Infinite Utility

62. Which of the following laws states that the more a consumer consumes a product, the
lesser the Utility he derives from the additional consumption?
(a) Law of Equal - Marginal Utility
(b) Law of Ordinal Utility
(c) Law of Cardinal Utility
(d) Law of Diminishing Marginal Utility
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63. The 2nd glass of Lemon Juice gives lesser satisfaction to a thirsty person. This is a'case
of
(a) Law of Demand
(b) Law of Diminishing Returns
(c) Law of Diminishing Utility
(d) Law of Supply

64. The Law of Diminishing Marginal Utility states that the more a consumer consumes a
product, he derives lower utility from ……….
(a) Additional consumption
(b) Lower consumption
(c) No extra consumption
(d) Infinite consumption

65. After reaching a saturation point, consumption of additional units of the commodity
cause -
(a) Total Utility to fall and Marginal utility to increase.
(b) Total Utility & Marginal Utility both to increase.
(c) Total Utility to fall and Marginal Utility to become negative.
(d) Total Utility to become negative and Marginal Utility to fall.

66. Marginal Utility of a commodity depends on its quantity and is -

(a) Inversely proportional to its quantity
(b) Not proportional to its quantity
(c) Independent of its quantity
(d) None of the above

67. Which of the following is not an assumption of Law of Diminishing Marginal Utility?
(a) Units consumed should be identical in all respects
(b) There is no time gap between consumption
(c) Units consumed should be of a standard
(d) None of the above

68. Which of the following is an assumption of Law of the Law of Diminishing Marginal
Utility?
(a) Perfect Competition
(b) Continuous Consumption
(c) Constant Demand
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(d) Ordinal Approach to Utility

69. Which of the following is an assumption of Law of the Law of Diminishing Marginal
Utility?
(a) Perfect Competition
(b) Cardinal Approach to Utility
(c) Constant Demand
(d) Constant Marginal Utility of Money

70. Which of the following is an assumption of Law of the Law of Diminishing Marginal
Utility?
(a) No effect of Consumer's Personal Tastes and Preferences
(b) Cardinal Approach to Utility
(c) Different Units consumed should be identical in all respects.
(d) All of the above

71. As per the Law of Diminishing Marginal Utility, Continuous Consumption means there
should be ………. between the consumption of one unit and another unit.
(a) Equal time gap or interval
(b) No time gap or interval
(c) Long time gap or interval
(d) Any of the above

72. The Law of Diminishing Marginal Utility does not apply to ………., where personal
preferences are dominant.
(a) Music
(b) Hobbies like Stamp and Coin Collection
(c) Both (a) and (b)
(d) Neither (a) nor (b)

73. The Law of Diminishing Marginal Utility will not hold good if the Income of the
Consumer –
(a) Increases
(b) Decreases
(c) Remains constant
(d) Both (a) and (b)

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74. The Law of Diminishing Marginal Utility is based on the assumption that the habits and
tastes of the consumer -
(a) Must remain unchanged
(b) Changes in the short run
(c) Both (a) and (b)
(d) Nothing can be said

75. If customers' taste or liking for an item increases with additional consumption, then the
Law of Diminishing Marginal Utility will still hold good. This statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

76. One of the assumptions is that the Law of Diminishing Marginal Utility is not applicable
to -
(a) Money
(b) Gold
(c) Both (a) and (b)
(d) Neither (a) nor (b)

77. As per the assumptions to the Law of Diminishing Marginal Utility, in case of money,
gold, etc. a greater quantity may -
(a) Increase the lust and utility thereof
(b) Decrease the lust and utility thereof
(c) Not affect utility at all
(d) Nothing can be said

78. Utility may be affected by the presence or absence of

(a) Substitute Goods
(b) Complementary Goods
(c) Both (a) and (b)
(d) Neither (a) nor (b)

79. Utility obtained from tea may be affected if no sugar is available. This statement is -
(a) True
(b) False
(c) Partially True
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(d) Nothing can be said about Utility

80. Law of Diminishing Marginal Utility applies only if ……….. to measurement of utility is assumed-
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

LAW OF EQUI – MARGINAL UTILITY

81. Which of the following laws say "If a person has a product which can be put to several
uses lie will distribute it among these uses in such a way that it has the same Marginal
Utility'?
(a) Law of Equi-Marginal Utility
(b) Law of Diminishing Marginal Utility
(c) Law of Utility
(d) Law of Diminishing Marginal Returns

82. The Consumer will attain maximum satisfaction, and will be in equilibrium when MU of
money spent on various goods that he buys, are -
(a) Zero
(b) Decreasing
(c) Increasing
(d) Equal

83. The Consumer will attain ………. satisfaction, and will be in equilibrium when MU of
money spent on various goods that he buys, are equal.
(a) Maximum
(b) Minimum
(c) No
(d) Infinite

84. The Consumer will attain maximum satisfaction, and will be ……….. when MU of
money spent on various goods that he buys, are equal.
(a) Irrational
(b) In equilibrium
(c) Rational
(d) In happiness

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85. The Consumer will attain maximum satisfaction, and will be in equilibrium when ………
that he buys, are equal.
(a) MU of different goods
(b) MU of money as such
(c) MU of money spent on various goods
(d) All of the above

86. If MU of money spent on Commodity A is greater than the MU of money spent on Commodity B,
the Consumer will withdraw some money from the purchase of B, and
will spend it on A, till the MU of money in the two cases becomes equal. Which theory
says so?
(a) Theory of Total Utility
(b) Theory of Diminishing Marginal Utility
(c) Theory of Equi-Marginal Utility
(d) Theory of Diminishing Marginal Returns

87. The Law of Equi-Marginal Utility applies because -

(a) The Consumer will try to maximize his satisfaction
(b) There may be substitutes available in the market for every product
(c) Consumer will substitute one item for the other such that his MU > Price.
(d) All of the above

ORDINAL APPROACH - BASICS

88. As per the Ordinal Approach -
(a) Measurement of Utility is not possible through money
(b) Measurement of Utility is possible but it cannot be ranked
(c) Measurement of Utility is not possible in Cardinal Numbers but it can be ranked
(d) Measurement and ranking of Utility is possible

89. If we make the assumption that Utility cannot be expressed in numbers, we are
adopting -
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)
90. In which approach is Utility ranked in order of preferences but not measured and
quantified?
(a) Cardinal
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(b) Ordinal
(c) Independent Variables Approach
(d) Both Cardinal and Ordinal

91. Which of the following statements regarding Ordinal Utility is true?

(a) Utility can be measured, but cannot be ranked in order of preferences
(b) Utility can neither be measured nor be ranked in order of preferences
(c) Utility can be measured and also be ranked in order of preferences
(d) Utility cannot be measured, but can be ranked in order of preferences

92. Ordinal Utility Approach is also called -

(a) Cardinal Utility Analysis
(b) Hicks and Allen Approach
(c) Marshallian Approach
(d) All of the above

93. Ordinal Utility Approach is also called -

(a) Indifference Curve Approach
(b) Hicks and Allen Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

94. Which of the following Economists is not concerned with Ordinal Utility Approach?
(a) Marshall
(b) Hicks
(c) Allen
(d) All the above

95. Which approach suggests that Human Satisfaction is a psychological phenomenon,

and cannot be measured quantitatively in monetary terms?
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

96. Ordinal Approach to Utility analyses -

(a) One Commodity at a time
(b) Two Commodities at a time
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(c) Many Commodities at a time

(d) Does not analyse any Commodity at all

97. Which of the approaches dispenses with the Money Measurement Concept for Utility?
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

98. Which of the approaches helps to explain the Law of Demand?

(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

CONSUMER EQUILIBRIUM & SURPLUS

99. The economic analysis expects the Consumer to behave in a ……… manner.
(a) Rational
(b) Irrational
(c) Emotional
(d) Indifferent.

100. A Rational Person does not act unless -

(a) The action is ethical.
(b) The action leads to Marginal Costs that exceed Marginal Benefits.
(c) The action produces Marginal Benefits that exceed Marginal Costs.
(d) The action makes money for the person

101. Rational decision-making requires that -

(a) One's choices be arrived at logically and without errors.
(b) One's choices be consistent with one's goals
(c) One's choices never vary
(d) One's makes choices that do not involve trade-offs.

102. A Buyer's willingness to pay is that Buyer's -

(a) Minimum amount he is willing to pay for a product.
(b) Producer Surplus.
(c) Consumer Surplus.
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(d) Maximum Amount he is willing- to pay for a product.

103. The Consumer will be willing to purchase an item, so long as the Marginal Utility
(additional satisfaction) derived is equal to the Price of the commodity. This principle is
called -
(a) Consumer Equilibrium
(b) Consumer Surplus
(c) Consumer Advantage
(d) Consumer Exploitation

104. The Consumer is in equilibrium when Marginal Utility from a Commodity equals -
(a) Demand for that Commodity
(b) Supply of that Commodity
(c) Price of the Commodity
(d) All of the above

105. If the Price paid is more than the additional satisfaction derived from that item, the
Consumer will -
(a) Continue buying the item
(b) Stop buying the item
(c) Will start selling the item
(d) Nothing can be said

106. Consumer is in equilibrium and he keeps purchasing till the point –

(a) Marginal Utility = Price
(b) Marginal Utility = Zero
(c) Marginal Utility = negative
(d) Marginal Utility = Quantity

107. Consumer Surplus means -

(a) The area inside the Budget Line.
(b) The area between the Average Revenue and Marginal Revenue curves.
(c) The difference between the maximum amount a person is willing to pay for a
good and its market price.
(d) None of the above.

108. Consumer Surplus is the area -

(a) Below the Demand Curve and above the price
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(b) Above the Supply Curve and below the price

(c) Above the Demand Curve and below the price
(d) Below the Supply Curve and above the price

109. n economics, what a Consumer is ready to pay minus what he actually pays, is termed as -
(a) Consumer's Equilibrium
(b) Consumer's Surplus
(c) Consumer's Expenditure
(d) Any of the above

110. Consumer Surplus can be best represented as -

(a) What a Consumer is ready to pay Less What he actually not pays
(b) What a Producer actually produces Less What he actually pays
(c) What a Consumer is ready to pay Less. What he actually pays
(d) What a Consumer is ready to pay willingly Less What he is forced to pay

111. "The excess of Price which he would be willing to pay rather than go without the thing
over that which he actually does pay in the economic measure of his surplus
satisfaction" is given by
(a) Alfred Marshall
(b) Lionel Robbins
(c) J.R. Hicks
(d) Edge Worth.

112. ______ is defined as the difference between what the consumer is willing to pay for a
product and what he actually pays.
(a) Consumer Surplus
(b) Consumer Burden
(c) Optimum Price
(d) Price Gap

113. The difference between the price a consumer is willing to pay and the price he actually
pays is called
(a) Excess Price
(b) Excess Demand
(c) Consumer Surplus
(d) Exploitation

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114. The law of Consumer Surplus is based on -

(a) Law of Diminishing Marginal Utility
(b) Revealed Preference Theory
(c) Law of Substitution
(d) All of the above

115. From which of the following concept of consumer's surplus has been derived-
(a) Law of diminishing marginal utility
(b) Law of demand
(c) Law of supply
(d) Indifference curve analysis

116. The concept of Consumer Surplus arises since for all earlier units purchased (i.e. prior
to equilibrium point) -
(a) MU < Price
(b) MU = Price
(c) MU > Price
(d) MU = Zero

117. The concept of Consumer Surplus arises due to the reason that -
(a) MU is initially higher than Price
(b) MU is always equal to Price
(c) MU is initially lower than Price
(d) MU is always equal to Zero

118. The concept of Consumer Surplus arises due to the reason that -
(a) MU increases but Price remains constant
(b) MU increases but Price decreases
(c) MU declines but Price remains constant
(d) MU declines but Price increases

119. If MU, is the Marginal Utility of product X and Px is the price of Product X, a Rational
Consumer will consume the Product X until -
(a) MUx > Px
(b) MUx < Px
(c) MUx < Px
(d) MUx = Px

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120. At the point of Consumers' Equilibrium -

(a) Consumers' Surplus is positive
(b) Consumers' Surplus is zero
(c) Consumers' Surplus is negative
(d) Any of these

121. In the concept of Consumer's Equilibrium and Consumer's Surplus, for the quantity
purchased at the equilibrium level -
(a) Consumers' Surplus is positive
(b) Consumers' Surplus is zero
(c) Consumers' Surplus is negative
(d) Any of these

122. In the concept of Consumer's Equilibrium and Consumer's Surplus, for the quantity
purchased at the equilibrium level, Marginal Utility is -
(a) Positive
(b) Zero
(c) Negative
(d) Equal to Price

123. For the quantity purchased at the Consumer's Equilibrium level, is -

(a) Marginal Utility = Price
(b) Consumers' Surplus is Zero
(c) Both (a) and (b)
(d) Neither (a) nor (b)

124. Consumers' Surplus arises in respect of -

(a) All quantities purchased upto Consumers' Equilibrium level
(b) All quantities purchased beyond Consumers' Equilibrium level
(c) Quantities purchased at equilibrium level only
(d) Nothing can be said.

125. A Consumer consumed three units of a product. Marginal Utilities derived from the
three units are ₹ 400, ₹ 350 and ₹ 300, respectively. If the price of the product is ₹ 300
per unit, the Consumer Surplus is -
(a) 0
(b) 50
(c) 100
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(d) 150

126. A Consumer consumed three units of a product. Marginal Utilities derived from the first
two units are ₹ 500 and ₹ 400. If the price of the product is ₹ 300 per unit and the
Consumer is in equilibrium at 3 units, the Marginal Utility of the 3rd unit should be -
(a) 0
(b) 300
(c) 400
(d) 500

127. A Consumer consumed 3 units of a product. Marginal Utilities derived from the first two
units are ₹ 500 and ₹ 400. If the price of the product is ₹ 300 per unit and the
Consumer is in equilibrium at 3 units, the Consumer Surplus will be -
(a) 300
(b) 400
(c) 500
(d) cannot be determined

128. Consumer Surplus is highest in the case of -

(a) Necessities
(b) Luxuries
(c) Comforts
(d) All of the above

129. Which of the following goods give the maximum amount of Consumer Surplus?
(a) Ice cream
(b) Car
(c) Color Television
(d) Water

130. Which of the following statements regarding Consumer Surplus is not true?
(a) Consumer Surplus is useful for designing Government policies and implementing
welfare programs.
(b) Consumer Surplus helps the monopolist in fixing the price of a commodity.
(c) On the basis of Consumer Surplus only domestic trade can be advocated and
international trade should be avoided
(d) Consumer Surplus can also be used to measure the health of an economy.

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131. ______ Consumer Surplus indicates higher level of efficiency in the economy.
(a) Higher
(b) Lower
(c) Balanced
(d) Negative

132. ………... is helpful in designing Government policies and implementing welfare

programs.
(a) Law of Diminishing Returns
(b) Law of Equi-Marginal Utility
(c) Consumer Surplus
(d) Income and Substitution Effects

133. While analyzing Marshall's measure of Consumer's Surplus, we assume -

(a) Imperfect Competition
(b) Perfect Competition
(c) Monopoly
(d) Monopsony

Use the following diagram to answer the next 5 questions. MM is the Marginal Utility Curve.

134. In the above diagram, Market Price at Consumer Equilibrium level is given by -
(a) OA
(b) OC
(c) MM
(d) None of the above

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135. In the above diagram, the Consumer attains Equilibrium level by consuming ……. units.
(a) OA
(b) OC
(c) MM
(d) None of the above

136. In the above diagram, the Consumer's Total Utility is given by -

(a) Area under OMBC
(b) Area under OABC
(c) Area under AMB
(d) Cannot be determined

137. In the above diagram, the total price paid by the Consumer is given by -
(a) Area under OMBC
(b) Area under OABC
(c) Area under AMB
(d) Cannot be determined

138. In the above diagram, the Consumer's Surplus is given by -

(a) Area under OMBC
(b) Area under OABC
(c) Area under AMB
(d) Cannot be determined

139. Suppose that the price of a new bicycle is ₹ 3,000. Nathan values a new bicycle at ₹ 5,000.
What is the value of Total Consumer Surplus if he buys a new bi-cycle? ;
(a) ₹ 5,000
(b) ₹ 3,000
(c) ₹ 2,000
(d) Nil

140. If a buyer's willingness to pay for a new car is ₹ 12,00,000, and she is able to actually
buy it for ₹ 9,00,000, her Consumer Surplus is -
(a) ₹ 12,00,000.
(b) ₹ 3,00,000.
(c) ₹ 9,00,000.
(d) ₹ 0

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141. Suppose there are three identical vases available to be purchased. Buyer 1 is willing to
pay ₹ 30 for one, Buyer 2 is willing to pay ₹ 25 for one, and Buyer 3 is willing to pay ₹
20 for one. If the price is Rs 25, how many vases will be sold and what is the value of j
Consumer Surplus in this market? ;
(a) Three vases will be sold and Consumer Surplus is ₹ 80.
(b) One vase will be sold and Consumer Surplus is ₹ 5.
(c) One vase will be sold and Consumer Surplus is ₹ 30
(d) Two vases will be sold and Consumer Surplus is ₹ 5

142. Consumer stops purchasing the additional units of the commodity when -
(a) Marginal Utility starts declining
(b) Marginal Utility become zero
(c) Marginal Utility is equal to Marginal Utility of Money
(d) Total Utility is increasing

143. Consumer's Surplus left with the consumer under Price Discrimination is - .
(a) Maximum
(b) Minimum
(c) Zero
(d) Not predictable

144. Under which of the following market types will Consumer's Surplus be generally
minimum -
(a) Perfect Competition
(b) Monopoly
(c) Monopolistic Competition
(d) All of the above

145. A Monopolist will try to Consumer's Surplus to his advantage by adopting -

(a) Price Rigidity
(b) Price Exploitation
(c) Price Discrimination
(d) Price Equilibrium

146. In case of two or more products, a Consumer reaches equilibrium when -

(a) MUx/Px = MUy/Py
(b) MUx Px = MUy x Py
(c) MUx + PX = MUy + Py
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(d) MUx/Py = MUy / Px

147. If the value of MUx/Px is more than MUy /Py, then the Consumer -
(a) Will increase the Consumption of Product X reduce Product Y
(b) Will reduce the consumption of Product X and increase Product Y
(c) Will consume more of Product X and Y
(d) Will consume less of Product X and Y

148. If the prices of ice-cream and chocolate are ₹ 40 and ₹ 30 respectively, and the
Marginal Utility of Chocolate is 150, what is the Marginal Utility of icecream assuming
that consumer is at equilibrium?
(a) 112.5
(b) 125
(c) 200
(d) 225

149. Which among the following is the drawback of Consumer Surplus (as explained in
Marginal Utility analysis)?
(a) It is highly hypothetical and imaginary
(b) It ignores interdependence between goods
(c) It cannot be measured in terms of money because Marginal Utility of money
changes
(d) All of the above

150. In case of necessaries, the Marginal Utilities of the first few units are -
(a) Infinite
(b) Zero
(c) There is no Marginal Utility at all
(d) Nothing can be said

151. The Consumer's Surplus derived from a product is …….. by the availability of
substitutes.
(a) Not affected
(b) Affected
(c) Nothing can be said
(d) Substitutes are not available at all

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152. The concept of Consumer's Surplus fails in case of articles which are used for their
prestige value, e.g. Diamonds, etc. This statement is
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

153. The concept of Consumer's Surplus is based on the assumption that Marginal Utility of
Money is
(a) Zero
(b) Negative
(c) Constant
(d) Any of the above

154. The concept of Consumer's Surplus adopts -

(a) Cardinal Approach only
(b) Ordinal Approach only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

155. If we make the assumption that Utility cannot be expressed in monetary terms, the
concept of Consumer's Surplus -
(a) Will still apply
(b) Will not apply
(c) Only Producers' Surplus will arise
(d) Nothing can be said

156. Consumer surplus in case of necessary commodities:

(a)Zero
(a)One
(a)Infinite
(b)None of these

157. When price increases from Rs 200 to Rs 300 and supply increases from 2000 units to
5000 units then calculate elasticity of supply?
()3
(a)0.3
(b)4
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(c) 0.4

158. The consumer is in equilibrium when the following condition is satisfied:

𝑀𝑈𝑥 𝑃𝑥
(a) 𝑀𝑈𝑦 > 𝑃𝑦
𝑀𝑈𝑥 𝑃𝑥
(b) 𝑀𝑈𝑦 < 𝑃𝑦
𝑀𝑈𝑥 𝑃𝑥
(c) = 𝑃𝑦
𝑀𝑈𝑦
(d)None of these

159. In an indifference curve analysis, the consumer attains equilibrium at a point

𝑃𝑥
where the marginal rate of substitution is________ the price ratio 𝑃𝑦
(a)Greater than
(b)Less than
(c) Equal to
(d)Not related to

160. Which of the following statement is not true?

(a)MU is the slope of TU curve
(b)MU is the rate of change of TU
(c) MU cannot be negative
(d)MU can become zero

161. Which of the following statements about indifference curve is not true?
(a)Indifference curve shows price of 2 commodities
(b)Indifference curve is convex to origin
(c)Indifference curve can't touch either of the axis
(d) Two indifference curves can't touch each other

162. ....................................An indifference curve shows marginal rate of

substitution between two commodities
(a)Increasing
(b)Decreasing
(c) Constant
(d)Zero

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ANSWERS to MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
C A C A D C A B D C A A A A D B B C C A

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
A A C C A C A D A B C B D D D A A B B B

41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
A C C A C B B A C B C A C B C B A A B C

61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
C D C A C A D B D D B C D A B C A C A A

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
A D A B C C D C B B D B C A B B B C A C

101 102 103 104 105 106 107 108 109 110
B D A C B A C A B C

111 112 113 114 115 116 117 118 119 120
A A C A A B A C D B

121 122 123 124 125 126 127 128 129 130
B D C A D B A A D C

131 132 133 134 135 136 137 138 139 140
C C B A B A B C C B

141 142 143 144 145 146 147 148 149 150
D C C B C A A C D A
151 152 153 154 155 156 157 158 159 160 161 162
B A C A B A A C C C A B

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ORDINAL APPROACH - MCQs

INDIFFERENCE CURVE APPROACH

1. Indifference Curve Approach to Utility Analysis was given by -
(a) Hicks and Allen
(b) Alfred Marshall
(c) Lionel Robbins
(d) Adam Smith

2. According to Indifference Curve analysis, Utility can be measured in -

(a) Ranks
(b) Cardinal Numbers
(c) Nominal Values
(d) All of the above

3. Indifference Curve Approach is also called -

(a) Ordinal Utility Analysis
(b) Marshallian Approach
(c) Cardinal Utility Analysis
(d) All of the above

4. Ordinal Utility Approach is also known as -

(a) Marginal Utility Analysis
(b) Indifference Curve Analysis
(c) Marshallian Approach
(d) All of the above

5. Ordinal Utility Approach is also known as -

(a) Indifference Curve Analysis
(b) Hicks and Allen Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

6. In Indifference Curve Analysis, the Customers' preferences are -

(a) Ranked / arranged in preference order
(b) Measured in terms of money
(c) Both (a) and (b)
(d) Neither (a) nor (b)
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7. ……… shows various combinations of two products that give same amount of
satisfaction.
(a) Isocost Curve
(b) Indifference Curve
(c) Marginal Utility Curve
(d) Isoquant

8. An Indifference Curve represents all those combinations of goods which gives -

(a) No satisfaction to the Consumer
(b) Lower satisfaction to the Consumer
(c) Higher satisfaction to the Consumer
(d) Equal satisfaction to the Consumer

9. All points on the same Indifference Curve represents

(a) Equal satisfaction
(b) Same satisfaction
(c) Similar satisfaction
(d) All of the above

10. The Consumer is said to be ……… among different points on an IC -

(a) Indifferent
(b) Interesting
(c) Irrational
(d) Intelligent

11. Indifference Curve slopes -

(a) Downward to the right
(b) Upward to the right
(c) Downward to the left
(d) Upward to the left

12. Indifference curve is convex slope, the reason is _________

(a) Increasing Marginal rate of substitution
(b) Constant Marginal rate of substitution
(c) Diminishing Marginal rate of substitution
(d) None of above

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13. Indifference Curve is downward sloping -

(a) Always
(b) Sometimes
(c) Never
(d) None of these

14. Indifference Curve has -

(a) Positive slope
(b) Negative slope
(c) No slope at all
(d) Nothing can be said

15. The reasons for downward sloping curve-

(a) Diminishing MRS
(b) Increasing MRS
(c) Constant MRS
(d) None

16. ……..have a negative slope and cannot intersect each other.

(a) Demand and Supply Curves
(b) Isoquants
(c) Indifference Curves
(d) Both (b) and (c)

17. An Indifference Curve slopes down towards right, since more of one commodity and
less of another result in-
(a) Same satisfaction
(b) Greater satisfaction
(c) Maximum satisfaction
(d) Decreasing expenditure

18. An Indifference Curve is -

(a) Concave to the Origin
(b) Convex to the Origin
(c) Parallel to X Axis
(d) Parallel to Y Axis

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19. Which of the following statements regarding Indifference Curve is not true?
(a) An Indifference Curve always has a positive slope
(b) Indifference Curve slopes downward to the right
(c) Two Indifference Curves intersect each other at equilibrium
(d) Higher level of Indifference Curve shows higher level of Utility

20. Which of the following is a feature of the Indifference Curve?

(a) It always slopes downward to the right
(b) Indifference Curves are always convex to the origin
(c) A higher Indifference Curve represents a higher level of satisfaction
(d) All of the above

21. Which of the following is a property of an Indifference Curve?

(a) It is convex to the origin
(b) The Marginal Rate of Substitution is constant as one moves along an
Indifference Curve
(c) Marginal Utility is constant as one move along an Indifference Curve
(d) Total Utility is greatest where the 45 degree line cuts the Indifference Curve

22. Which of the following is not a property of the Indifference Curve?

(a) Indifference Curves are convex to the origin
(b) Indifference Curves slope downwards from left to right
(c) No two Indifference Curves can cut each other
(d) None of the above

23. Which of the following statements is incorrect?

(a) An Indifference Curve must be downward- sloping to the right
(b) Convexity of a Curve implies that the slope of the curve diminishes as one
moves from left to right
(c) The Elasticity of Substitution between two goods to a Consumer is zero
(d) The total effect of a change in the price of a good on its quantity demanded is
called the Price Effect.

24. Which of the following is not an assumption of the Theory of Demand based on
analysis of Indifference Curves?
(a) Given scale of preferences as between different combinations of two goods
(b) Diminishing Marginal Rate of Substitution
(c) Constant Marginal Utility of money
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(d) Consumers would always prefer more of particular good to less of it, other things
remaining the same

25. Indifference Curve approach assumes -

(a) Rationality
(b) Consistency
(c) Transitivity
(d) All of the above

26. Indifference Curve approach deals with -

(a) One Commodity only
(b) Two Commodities at a time
(c) Many Commodities at a time
(d) No Commodities at all

27. Indifference Curve Approach assumes -

(a) Consumer has full knowledge of all relevant information
(b) All Commodities are homogenous and divisible
(c) Prices of Commodities remain the same throughout the analysis
(d) All of the above.

28. The Indifference Curve Approach does not assume -

(a) Rationality on the parts of consumers
(b) Ordinal Measurement of satisfaction
(c) Consistent consumption pattern behaviour of consumers
(d) Cardinal Measurement of Utility

29. If two goods were perfect substitutes of each other, it means that the Indifference
Curve relating to the two goods -
(a) Will be curvilinear.
(b) Will be linear.
(c) Will be divided into two segments which meet at a right angle.
(d) Will be convex to the origin.

30. When two goods are perfect substitutes of each other, the Indifference Curve is a -
(a) Straight Line on which MRS is constant
(b) Straight Line on which MRS is increasing
(c) Concave on which MRS is diminishing
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(d) Convex on which MRS is constant

31. In the case of two perfect substitutes, the indifference curve will be :
(a) Straight Line
(b) L-shaped
(c) U-shaped
(d) C-shaped

32. When an Indifference Curve is L shaped, then two goods will be -

(a) Perfect Substitute Goods L
(b) Substitute Goods
(c) Perfect Complementary goods
(d) Complementary goods

33. ……………. depicts complete picture of consumer’s tastes and preferences.

(a) Budget Line
(b) Average Cost Curve
(c) Indifference Map
(d) Marginal Revenue Curve

34. A set of ………. is called Indifference Map.

(a) Demand Curves
(b) Marginal Utility Curves
(c) Cost Curves
(d) Indifference Curves

35. Under Indifference Map, even though higher levels of satisfaction are identified, it
cannot be quantified as such. This statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

36. The farther the Indifference Curve is from the origin, then –
(a) The higher is the satisfaction level
(b) The lower is the satisfaction level
(c) The same satisfaction level will be obtained
(d) Nothing can be said about satisfaction
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37. A higher Indifference Curve shows -

(a) A higher level of satisfaction
(b) A higher level of production
(c) A higher level of income
(d) None of the above

38. A higher Indifference Curve shows -

(a) Higher Level of satisfaction
(b) Lower Level of satisfaction
(c) Equal Level of satisfaction as before
(d) Nothing can be said

39. A lower Indifference Curve shows -

(a) A lower level of satisfaction
(b) A lower level of production
(c) A lower level of income
(d) None of the above

40. A lower Indifference Curve shows -

(a) Higher Level of satisfaction
(b) Lower Level of satisfaction
(c) Equal Level of satisfaction as before
(d) Nothing can be said

41. Combinations lying on a higher Indifference Curve contain more of -

(a) One commodity only
(b) Both commodities
(c) Either (a) or (b)
(d) Neither (a) nor (b)

42. The general assumption in Consumer Behaviour under Indifference Curve Analysis is
that more goods are preferred to less of them. This statement is-
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

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43. An Indifference Map can also be drawn such that two Indifference Curves cut each
other. This statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

44. No two ICs will cut or intersect each other. This statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

45. ……….. indicates how much of one commodity is substituted for how much of another
commodity.
(a) Marginal Utility
(b) Marginal Returns
(c) Marginal Rate of Substitution
(d) Marginal Income

46. In the context of Indifference Curve Analysis, MRS stands for -

(a) Marginal Rate of Substitution
(b) Marginal Rate of Satisfaction
(c) Marginal Return of Substitution
(d) Marginal Return of Satisfaction

47. MRS is indicated by -

(a) Slope of an IC at a particular point
(b) Angle between IC and X Axis
(c) Angle between IC and Y Axis
(d) None of the above

48. MRS indicates movement -

(a) From lower IC to higher IC
(b) From higher IC to lower IC
(c) Along an IC
(d) Any of the above

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49. Generally, MRS shows -

(a) Increasing trend
(b) Decreasing trend
(c) Constant trend
(d) No trend at all

50. Decreasing Trend of MRS makes the Indifference Curve

(a) Concave to the Origin
(b) Convex to the Origin
(c) Parallel to X Axis
(d) Parallel to Y Axis

51. If marginal rate of substitution is increasing then shape of indifference curve is ______
(a) Concave
(b) Convex
(c) L-shape
(d) None of these

52. Convexity of IC is due to -

(a) Increasing trend of MRS
(b) Decreasing trend of MRS
(c) Constant trend of MRS
(d) No trend of MRS at all

53. Why does the Indifference Curve Analysis approach operate?

(a) MRS decrease as we go down the Curve
(b) MRS remains constant
(c) MRS increases
(d) Consumer Surplus decreases

54. In order to get maximum satisfaction, the consumer has to work under some
constraints. These constraints are explained by -
(a) Price Line
(b) Budget Line
(c) Both (a) and (b)
(d) Neither (a) nor (b)

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55. A ………. shows all those combinations of two goods which the consumer can buy
spending his given money income on the two goods at their given prices.
(a) Diminishing Utility Curve
(b) Budget Line
(c) Indifference Curve
(d) Demand Curve

56. Budget Line is also called -

(a) Price Line
(b) Price Opportunity Line
(c) Price-Income Line
(d) All of the above

57. Price Line is also called -

(a) Budget Line
(b) Budget Constraint Line
(c) Both (a) and (b)
(d) Neither (a) nor (b)

58. The price line/Budget lint of a consumer is-

(a) Parallel to X-axis
(b) Parallel to Y-axis
(c) Straight line joining two axis
(d) None of the above

59. If a combination is below the Price Line, it indicates that there is -

(a) Under Utilization of Resources
(b) Over Utilization of Resources
(c) Optimum utilization of Resources
(d) None of the above

60. A Point below the Price Line represents -

(a) Over-spending by the Consumer
(b) Under-spending by the Consumer
(c) Full spending by the Consumer
(d) Any of the above

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61. Every Point below the Price Line represents -

(a) Over-spending by the Consumer
(b) Under-spending by the Consumer
(c) Full-spending by the Consumer
(d) Any of the above

62. A Point above the Price Line will be …….. the reach of the Consumer, at his present
levels of income and spending.
(a) Beyond
(b) Within
(c) Either (a) or (b)
(d) Neither (a) nor (b)

63. Budget Line shows all the combinations of …….. products.

(a) Two
(b) Three
(c) Many
(d) None of the above

64. As Consumers' Income and Spending increases, the Price Line or Budget Line -
(a) Remains at the same level
(b) Shifts outward away from the origin
(c) Shifts inward nearer to the origin
(d) Any of the above

65. If Consumers' Income and Spending decreases, the Price Line or Budget Line -
(a) Remains at the same level
(b) Shifts outward away from the origin
(c) Shifts inward nearer to the origin
(d) Any of the above

66. As per Indifference Curve Analysis, to maximise his satisfaction, a Consumer will try
to -
(a) Remain in the same IC
(b) Reduce to a lower IC
(c) Reach the highest possible IC.
(d) Reach the Origin Point

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67. To Consumer's objective of maximising his satisfaction and reaching the highest
possible Indifference Curve is restricted by -
(a) Total Utility Curve
(b) Marginal Utility Curve
(c) Marginal Rate of Substitution
(d) Price Line

68. The Consumer is in Equilibrium at a point where the Budget Line -

(a) Is above an Indifference Curve
(b) Is below an Indifference Curve
(c) Is tangent to an Indifference Curve
(d) Cuts an Indifference Curve

69. A Consumer is at equilibrium when -

(a) Slope of the Price Line is equal to Indifference Curve
(b) He saves 30% of his Income
(c) Borrows an amount equal to his income from the Bank
(d) None of the above

70. At the equilibrium point on Indifference Curve which of the following equation is
satisfied?
(a) MRSxy = MUx ÷ MUy < Px ÷ Py
(b) MRSxy < MU ÷ MUy = Px ÷ Py
(c) MRSxy = MUx ÷ MUy = Px ÷ Py
(d) None of the above

71. At the equilibrium point on Indifference Curve which of the following equation is
satisfied?
𝑀𝑈𝑥 𝑃𝑥
(a) MRSxy = 𝑀𝑈𝑦 = 𝑃𝑦
𝑀𝑈𝑥 𝑀𝑈𝑦
(b) =
𝑃𝑥 𝑃𝑦
(c) Both (a) and (b)
(d) Neither (a) nor (b)

72. At the equilibrium point on Indifference Curve which of the following is satisfied?
(a) Slope of Price Line = Slope of IC
(b) Slope of Price Line > Slope of IC
(c) Slope of Price Line < Slope of IC

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(d) Any of the above

73. MUX of X is 40 and MUy of Y is 30. It the price of Y is ₹ 9 what will be the price of X at
equilibrium?
(a) ₹ 9
(b) ₹ 30
(c) ₹ 15
(d) ₹ 12

74. What will be the Marginal Utility of Product A, if the prices of A and B are ₹ 10 and ₹
20 respectively, and the Marginal Utility of Product B is 50, assuming that the
Consumer is at equilibrium?
(a) ₹ 100
(b) ₹ 25
(c) ₹ 250
(d) ₹ 4

75. The Marginal Utilities of Product A and Product B are 300 and 450 at equilibrium
respectively. If the price of the product B is ? ₹ 60, what is the price of Product A at
equilibrium level?
(a) ₹ 45
(b) ₹ 90
(c) ₹ 40
(d) ₹ 50

76. Under Income Effect, the Consumer -

(a) Moves along the original Indifference Curve
(b) Moves to higher or lower Indifference Curve
(c) Always purchases higher quantities of both the commodities
(d) None of the above.

77. Which of the following is not an assumption in Consumer Equilibrium analysis under
Indifference Curve Approach?
(a) There is a given Indifference Map with different levels of satisfaction
(b) Income of the Consumer is fixed
(c) Prices of Commodities are constant
(d) Only one Commodity is considered for the purposes of analysis

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78. In Consumer Equilibrium analysis under Indifference Curve Approach, the Consumer
is assumed to spend his income ……… on two goods.
(a) Partly
(b) Wholly
(c) Either (a) or (b)
(d) Nothing can be said

79. Indifference curve slopes downwards as one product increase and another
decreases because they give.
(a) Equal satisfaction
(b) Greater Satisfaction
(c) Lesser Satisfaction
(d) None

80. Which of the following is a property of an indifference curve?

(a) It is convex to the origin.
(b) The marginal rate of substitution is constant as you move along an indifference
curve.
(c) Marginal utility is constant as you move along an indifference curve.
(d) Total utility is greatest where the 45-degree line cuts the indifference curve.

ANSWERS to MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
A A A B C A B D D A A C A B A C A B A D

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
A D C C D B D D B A A C C D A A A A A B

41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
C A B A C A A C B B A B A C B D C C A B

61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78
C A A B C C D C A C C A D B C B D B
79 80
A A

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CHAPTER
DEMAND ANALYSIS
3

Para No. A. DEMAND-BASICS

A.1 Meaning of Demand
A.2 Individual and Market Demand
A.3 Price Demand, Income Demand and Cross Demand
A.4 Factors Determining Demand
A.5 Demand Distinctions
Para No. B. THEORY OF DEMAND
B.1 Law of Demand
B.2 Features of the Demand Curve
B.3 Rationale behind the Law of Demand
B.4 Relationship between Law of Utility and Law of Demand
B.5 Exceptions to the Law of Demand
B.6 Expansion and Contraction of Demand
B.7 Increase and Decrease in Demand
B.8 "Movement along" vs. "Shift of" Demand Curve
Para No. C. ELASTICITY OF DEMAND
C.1 Elasticity of Demand
C.2 Price Elasticity of Demand
C.3 Measuring Price Elasticity of Demand
C.4 Point Elasticity of Demand - Method of Derivatives

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C.5 Point Elasticity of Demand - Graphical Method

C.6 Arc Elasticity of Demand
C.7 The Total Outlay Method
C.8 Interpretation of Elasticity Values
C.9 Determinants of Price Elasticity
C.10 Income Elasticity of Demand
C.11 Cross Elasticity of Demand
C.12 Advertisement Elasticity
Para No. D. DEMAND FORECASTING
D.1 Meaning and Usefulness
D.2 Types of Forecasting
D.3 Demand Distinctions
D.4 Factors affecting Demand
D.5 Methods of Demand Forecasting

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A. DEMAND - BASICS

A.1 Demand - Meaning

1. Meaning: 'Demand' refers to the quantity of goods or services, that Consumers are willing and
able to purchase / buy in a given market, at various prices, in a given period of time.

2. Basic Factors: Effective Demand in respect of any goods or services depends on –

a) Desire for a specific commodity, e.g. desire to purchase a cellphone,
b) Means / Resources to purchase the desired commodity, i.e. availability of money to
purchase, [Note: Unless Demand is backed by purchasing power or ability to pay, it does not
constitute Demand.]
c) Willingness to spend, i.e. use those means for that purchase, and
d) Availability of the commodity at a certain - (i) price, (ii) place, or (iii) time.

3. Related Points:
a) Quantity demanded is always expressed at a given price. At different prices, different
quantities of a commodity are generally demanded.
b) Quantity demanded is a flow and not a single isolated purchase. Hence, Demand is
expressed as "quantity per period of time", e.g. 1,000 litres of petrol per day, 10,000 Kg Potato
per week, etc.

A.2 Individual and Market Demand

Basis Individual or Household Demand Industry or Market Demand

Meaning Individual Demand shows the quantities of Market Demand is the demand of the
demand for a commodity, by a particular whole market, (i.e., all Consumers), at
consumer (or household), at various various prices of the commodity.
prices.
Concept It is a sub-system of the Market It is the sum total demand of all
Demand. individuals (or households) in the
market.
Depiction It is depicted by - (a) Individual Demand It is depicted by - (a) Market
Schedule, (b) Individual Demand Curve. Demand Schedule, (b) Market
Demand Curve.

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Note: The total demand for the product of an individual Firm at various prices is known as
Firm's Demand or Individual Seller's Demand.

A.3 Price Demand, Income Demand and Cross Demand

Type It refers to the quantity of goods / Expected Behaviour

services which will be purchased by the
Consumer -
Price At various prices, i.e. (a) higher prices, & (b) At higher prices, lower quantities
Demand lower prices. will be demanded, and vice-versa.
Income At various income levels, i.e. (a) higher • As income levels increase,
Demand income levels, and (b) lower income levels. Superior Goods have
greater demand.
• In case of lower income
levels, Inferior Goods
have higher demand.
Cross Based on change in prices of related Refer Para A.4, Point 2 Below.
Demand commodities, i.e. (a) Complementary, or (b)
Substitute Goods.

Note: Unless otherwise specified, Demand refers to Price Demand only

A.4 Factors Determining Demand

The factors which influence Household Demand for a commodity are –
1. Price of the Commodity:
a) Other things being equal, the Demand of a commodity is inversely related to its Price.
b) Hence, at lower prices, higher quantities will be demanded by the Consumers, and at higher
prices, lesser quantities of the commodity will be demanded.
c) So, a rise in price of a commodity leads to a fall in its purchase quantity, and vice-versa.
d) This happens due to Income Effect and Substitution Effect. [Refer Para B.3]

2. Price of Related Commodities: Related Commodities are of two types - (a) Complementary
Goods, and (b) Competing Goods or Substitutes. The effect of demand is given below -

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Basis Complementary Goods Substitute Goods

Meaning Complementary Goods are goods which
are consumed together or Substitute Goods are goods which can be
simultaneously. used with ease in place of one another.
(a) Tea and Coffee, (b) Ink Pen and Ball
(a) Tea & Sugar, (b) Pen & Ink, (c) Motor
Example Pen, are substitutes for each other, and
Bikes / Cars & Petrol, are used together.
can be used in place of one another easily.
Increase in the price of a commodity will Increase in the price of a commodity will
Demand
decrease the demand for its increase the demand for its substitute,
Effect
complementary goods, and vice-versa. and vice-versa.

Quantity Demanded of Ink

Quantity Demanded of Tea

3. Level of Income of the Household:

a) The Demand for a commodity also depends upon the money income of the household.
b) Generally, the larger the money income of the household, the higher is the quantity
demanded of a particular commodity. But, the change in quantity demanded and change in
income need not be of the same proportion.
c) However, there are certain goods for which quantities demanded decrease with an increase
in money income. These goods are called Inferior Goods, [also called as Giffen Goods, see Para
B.5, Point 2]
d) As income levels increase, the demand for goods satisfying Necessities (i.e. food, clothing,
and shelter) of life, will be less than proportionate to the increase in income.
e) As income levels increase and people become richer, there is a relative decline in importance
of necessities in the overall consumption pattern, and a rise in importance of durable goods
like TV, Car, House, etc.

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4. Tastes and Preferences of Consumers:

a) Demand for a Commodity also depends upon tastes and preferences of Consumers, and
changes therein over a period of time.
b) Goods which are currently in fashion have higher demand than goods which are out of
fashion.
c) Sometimes, Consumers may even discard a commodity even before it is fully utilized and
prefer another item which is in fashion. [Example: Replacement of Laptop / Cellphone with
latest models]
d) Consumers' Tastes and Preferences are also influenced by 'Demonstration Effect', i.e., by
seeing another person use a particular product / commodity, e.g., Music System, Home Theatre,
Ipod, etc.

5. Population Aspects: Demand for a Commodity also depends upon the following aspects –

(a) Size Generally, larger the size of population of a country or a region, higher is
the demand for all commodities as such.
(b) Composition • If the percentage of Senior Citizens in a region, there will be
higher demand for spectacles, walking sticks, etc.
• However, if the population consists of more of children, demand
for toys, baby foods, toffees, etc. will be higher.
(c) Distribution • If there is unequal distribution of income (few rich people and
of Income large majority poor), the propensity to consume of the country will
be relatively less, and so, the demand for Consumer Goods will be
comparatively less.
• However, if the distribution of income is more equal, then the
propensity to consume of the country as a whole will be relatively
high, indicating higher demand for goods.

6. Other Factors: Apart from above, factors such as - (a) Class, (b) Group, (c) Education, (d)
Marital Status, (d) Weather Conditions, (e) Consumer's expectations with regard to future
price, etc. also have an important role in influencing Household Demand.

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A.5 Demand Distinctions

Demand Distinctions

Time Goods Dependency Market

• Short Run • Producers Goods • Derived Demand • Industry Demand
Demand • Consumers Goods • Autonomous • Company Demand
• Long Run • Durable Goods Demand
Demand • Non-Durable
Goods

Time Short Run Demand refers to demand Long run demand refers to demand
with its immediate reaction to price exist irrespective of changes in
changes, income fluctuations etc. Eg: pricing, promotion or product
If electricity rates are reduced the improvement. Eg: In case of reduction
existing users will make greater use of in electricity rates, more and more
Electric appliances. people will be induced to use Electric
appliances.
Goods Producers Goods are those goods Consumer goods are used for final
which are used for the production of consumption Eg: readymade clothes,
other goods. Eg: Machines, prepared food, residential houses, etc.
Locomotives, Ships etc. It may be sub-divided in to
(a) Durable Consumer
Goods are those which
can be consumed more
than once over a period
of time. Eg: car,
refrigerator, ready-
made shirt and umbrella.
(b) Non-Durable Goods are
those which cannot be
consumed more than
once. It meets only
Current Demand. Eg:
Bread, Milk etc.

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Dependency Derived Demand is that a product is Autonomous Demand is that a product

demanded consequent to the purchase whose demand is independent of
of a parent product. Eg: Demand for demand of other goods.
Cement is derived, since directly
related to building activity.
Market Industry Demand is used to denote Company Demand denotes the
the total demand for the products of demand for the products of a
a particular industry. Eg: Total demand particular company, eg: demand for
for steel in the country. steel produced by the Tata Iron and
steel Company.

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B. THEORY OF DEMAND

B.1 Law of Demand

1. Law of Demand:
a) Other things being equal, if the Price of a Commodity falls, its Demand Quantity will rise.
Similarly, if the Price of a Commodity increases, its Demand Quantity will decrease.
b) So, other things being equal, there is an inverse relationship between Price and Quantity
demanded.

2. Other Factors remaining constant:

The other factors which are assumed to be equal or constant are –
a) Prices of related commodities, i.e. (i) Complementary Goods, and (ii) Substitutes,
b) Income Levels of Consumers,
c) Tastes and Preferences of Consumers,
d) Population Aspects, and
e) Other factors which influence demand.

If these other factors undergo a change, then, the inverse relationship between price and
demand quantity may not hold good. So, the constancy of other factors is an important
assumption of the Law of Demand.

Illustration:
Demand Schedule Demand Curve
Demand Quantity Price
(units) (₹)
50 100
100 90
150 80
200 70
250 60
300 50
350 40
400 30

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B.2 Features of the Demand Curve

1. Demand Curve slopes downwards from left to the right.
2. Demand Curve is negatively sloped.
3. Demand Curve is also called Average Revenue (AR) Curve, since the price paid for each unit
by the Consumer, is the Revenue per unit (i.e., Average Revenue) for the Seller.
4. Demand Curve may be sometimes a straight-line or sometimes a free hand curve.
5. The downward sloping Demand Curve explains the Law of Demand, which describes an inverse
Price-Demand relationship.
6. The Market Demand Curve is a lateral summation (totalling) of Individual Demand Curves,
and also slopes downwards from left to the right.

Note: For exceptional or special Demand Curves, refer Para C.8

B.3 Rationale behind the Law of Demand

Other things being equal, if the Price of a Commodity falls, its Demand Quantity will rise, and
vice - versa. This is due to the following reasons –
Reason Explanation
1. Law of Diminishing (a) Consumers will buy more quantity at lower price because
Marginal Utility they want to equalize the marginal utility of commodity and
its price.
(b) The Diminishing marginal utility & equalizing with the
price is the cause for the Downward Sloping demand
curve.
2. Substitution (a) If the price of a commodity falls, it becomes relatively
Effect cheaper than other commodities.
(b) So, Consumers now substitute and use the cheaper
commodity, in place of other commodities which have now
become relatively expensive.
(c) Therefore, the total demand for the cheaper commodity
(i.e. item whose price has fallen) increases.
3. Income Effect (a) When the price of a commodity falls, the Consumer can buy
the same quantity of the commodity with lesser money or he
can buy more of the same commodity with the same money.
(b) Thus, as a result of a fall in prices of the commodity, the
Consumer's Real Income or Purchasing Power increases.
(c) This increase in the Real Income induces him to buy more of
that commodity. Thus, the Demand for that commodity (i.e.
whose price has fallen) increases.
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4. New (a) When the price of a commodity falls, more consumers start
Consumers buying it because some of those who could not afford to buy it
earlier, may now afford to buy it. This increases the number
of Consumers of a commodity at a lower price.
(b) So, as the price of the commodity falls, new buyers will enter
the market, leading to increase in its demand quantity.
5. Difference Uses Different uses of a commodity make the demand curve slope
downwards reacting to changes in price.

B.4 Relationship between the Law of Utility and Law of Demand

Under Cardinal Approach Under Ordinal Approach

i.e., using Law of Diminishing Marginal i.e., using Indifference Curve
Utility, and Law of Equi- Marginal Utility (IC) Approach
1. As per Law of Diminishing 1. As per Indifference
Marginal Utility, the Curve Approach, the
Consumer will be at Consumer will be at
equilibrium, when Price = MU. equilibrium, at a
Hence, at lower prices, he point where his
will buy more, since he will Price Line is
continue purchasing till Price tangential to IC.
= MU. 2. When prices are
2. If the prices of a commodity lower, the Consumer
are lower, the Consumer will will be able to buy
obtain equilibrium at a higher more quantities of
quantity level. Thus, there that item, and
will be an increase in the hence will be able to
quantity demanded, in case reach a higher IC.
of decrease in prices. 3. This leads to an
increase in the
quantity demanded
at lower prices, and
vice-versa.

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B.5 Exceptions to the Law of Demand

The Law of Demand, i.e. inverse relationship between Price and Demand Quantity does not hold
good in the following situations –

Exception Explanation
1. Conspicuous (a) Some Consumers measure the utility of a commodity by its price,
Goods or i.e. if the commodity is expensive they think that it has got more
Prestigious utility.
Goods (b) Thus, if the use of a commodity confers prestige and distinction,
wealthy consumers buy less of that commodity at low price, and
demand more of it at high price. This effect was found out b y
Prof. Veblen in his Doctrine of Conspicuous Consumption &
hence called as "Veblen Effect"
(c) Example: Diamonds — higher the price of diamonds, higher is
the prestige value attached to them, leading to higher demand.
2. Giffen Goods (a) Goods which are considered inferior by the Consumers, and
or Inferior which occupy a substantial place in the Consumer's budget are
Goods generally called 'Giffen Goods'.
(b) Giffen Goods (the name is attributed to Sir Robert Giffen, a
British Economist), exhibit a direct price-demand relationship
(instead of inverse relationship). -
(c) Sir Giffen observed that when the price of bread increased, it
caused a large decline in the purchasing power of the poor
people, so that they were forced to cut down the consumption
of meat and other expensive foods. Thus, inspite of higher
prices, Bread was still the cheapest food article, and people
consumed more of bread when its price went up.
(d) Example: Coarse Grains like bajra, low quality rice, wheat, etc.
3. Basic (a) As the price of a basic necessity of life goes up, the consumer
Necessities has to re-adjust his whole expenditure pattern. So, he may cut
down his expenses on other commodities, and demand more of
the commodity whose prices have increased.
(b) Example: Cooking Gas, Petrol, etc.
4. Conspicuous (a) Demand for certain goods is influenced by the "Demonstration
Necessities Effect", i.e. consumption pattern of a social group to which an
individual belongs.
(b) Due to their constant usage, these goods have become
necessities of life.
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(c) Examples: Television Sets, Refrigerators, Coolers, etc.

5. Expected Price (a) When prices show an increasing trend, Consumers tend to
Change buy larger quantities of those goods, expecting that the
prices in the future will be still higher.
(b) (b) Example: In case of wide-spread drought, people expect
shortage of stock and also increase in prices of foodgrains.
They may get panicky and demand greater quantities of
foodgrains, even though their prices rise.
6. Ignorant A Household may demand larger quantity of a commodity even at a
Consumers higher price, because it may be ignorant of the ruling price of the
commodity.
7. Irrational It is assumed that Consumers are rational and knowledgeable about
Consumers market-conditions. Sometimes, Consumers tend to be irrational and
make impulsive purchases without any cool calculations about price
and usefulness of the product. In such cases, the Law of Demand will
not be applicable.
8. Change in The Law of Demand will not hold good if there is any significant
other factors change in other factors on which demand of a commodity depends,
e.g. change in prices of related commodities, income levels, tastes and
fashion, etc.

B.6 Expansion and Contraction in Demand

1. Meaning: Expansion and Contraction in Demand take place as a result of changes in price, while
all other factors influencing demand remain constant.

2. Movement along the Demand Curve: The position of the Demand Curve remains the same. The
Consumer merely moves downwards or upwards on the same Demand Curve.

3. Example:
a) Basic Data: The present price is ₹ P and quantity demanded is Q units.
b) Expansion: When price falls from P to Pe, the quantity demanded increases from Q to Qe
units, on the same demand curve. This downward movement on the same Demand Curve is called
Expansion of Demand.
c) Contraction: When price rises from P to Pc, the quantity demanded falls from Q to Qc units,
on the same demand curve. This upward movement on the same Demand Curve is called
Contraction of Demand.
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4. Effect: The effects of the two concepts are as under -

Terms Meaning Effect

(a) Expansion Quantity demanded increases, due to Downward movement along the
of Demand decrease in price. same Demand Curve.
(b) Contraction Quantity demanded decreases, due Upward movement along the same
of Demand to increase in price. Demand Curve.

Note: Expansion of Demand is also sometimes called Extension of Demand.

B.7 Increases and Decreases in Demand

1. Meaning: Increase & Decrease in Demand take place as a result of changes in factors other
than price while price remains constant.

2. Shift of Demand Curve: Increase / Decrease in Demand indicates rightward / leftward shift
of the Demand Curve respectively.

3. Effect: The two concepts are as under -

Terms Reasons Effect

Increase • Rise in the price of Substitute Goods, Rightward
in • Fall in the price of Complementary Goods, shift of
Demand • Increase in Income Levels, the
• Change in tastes in favour of this commodity, Demand
• Increase in population, Curve.
• Re-distribution of income to Consumers who favour this
commodity.

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Decrease • Fall in the price of Substitute Goods, Leftward

in Demand • Increase in the price of Complementary Goods, shift of
• Decrease in Income Levels, the
• Change in tastes against this commodity, Demand
• Decrease in population, Curve.
• • Re-distribution of income away from groups/consumers who
favour this commodity.

4. Example:
(a) Basic Data: The present level
of demand is depicted by the
Curve D0.
(b) Increase: When Demand Curve
shifts rightward from D0 to
Di, it is called Increase in
Demand. Increase in Demand
happens when more quantities
are demanded at each price.
(c) Decrease: When Demand Curve
shifts leftward from D0 to D2,
it is called Decrease in
Demand. Decrease in Demand
happens when lesser quantities
are demanded at each price.

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B.8 “Movement along” vs. “Shift of’ Demand Curve

Movement along the Demand Curve Shift of the Demand Curve _
1. Demand Curve remains the same. There is a shift in the Demand
Curve itself. _
2. This arises due to price changes, This arises due to changes in
other factors remaining constant. factors other than price, price
remaining constant.
3. It may be - (a) Expansion, or (b) It may be - (a) Increase, or (b)
Contraction in Demand. Decrease in Demand. „
4. • Expansion = Downward • Increase = Rightward Shift.
Movement. • Decrease = Leftward Shift.
• Contraction = Upward .
Movement.

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C. ELASTICITY OF DEMAND

C. 1 Elasticity of Demand
1. Meaning: Elasticity of Demand is –
a) the responsiveness of the quantity demanded of a commodity, to changes in one of the
variables on which demand depends.
b) the percentage change in quantity demanded, divided by the percentage change in one of
the factors on which demand depends.

2. Factors: Demand depends on various variables / factors and Elasticity is measured in each case
as under -

Factor Name of Elasticity Denoted by

(a) Price of the Commodity Price Elasticity EP
(b) Income of the Consumers Income Elasticity EI
(c) Prices of related commodities Cross Elasticity EC
(d) Availability of Substitutes Substitution Elasticity ES

Note: Generally, Price Elasticity of Demand is referred to as elasticity of demand.

C.2 Price Elasticity of Demand

1. Meaning: Price Elasticity of Demand (EP) measures the responsiveness of quantity demanded of
a commodity, to a change in its price, assuming all other factors (Income, Substitutes and
Prices of Related Commodities) as constant.

2. Formula:
Change in Quantity
% Change in Quantity Demanded
EP = = × 100
Original Quantity
% Change in price Change in Price
Original price
Change in Quantity Change in Price ∆q p ∆q p
= × = × = ×
Original Quantity Original price q ∆p ∆P q

Here, q = quantity, p = price, ∆q = change in quantity, ∆p = change in price.

3. Negative Sign: As per Law of Demand (subject to certain exceptions) Price and Quantity are
inversely related. So, Price Elasticity (calculated under any method) is negative. However, to
draw conclusions, the negative sign is ignored and only the numerical value of Price Elasticity is

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considered.

4. Example:
Quantity Price • % Change in Quantity Demanded = (350 - 500) 4- 500 = 30% (-ve
500 units ₹ 10 ignored)
350 units ₹ 15 • % Change in Price = (15 - 10) 10 = 50%
• So, EP = 30% -i- 50% = 0.6

C.3 Measuring Price Elasticity of Demand

Price Elasticity of Demand can be measured using various methods, some of which are -

1. Percentage Change or Proportional Method, (Refer Para C.2)

2. Point Elasticity - Method of Derivatives, (Refer Para C.4)
3. Point Elasticity -Method of Graphs (Refer Para C.5)
4. Arc Elasticity Method, (Refer Para C.6)
5. Total Outlay Method. (Refer Para C.7)

C.4 Point Elasticity of Demand - Method of Derivatives

1. Meaning:
a) Point Elasticity measures elasticity at a given point on a Demand Curve.
b) This method of measuring price elasticity makes use of derivatives, rather than finite
changes in price & quantity.

2. Formula:
−dq P
EP = × q where "dq/dp" = derivative of quantity with respect to price at a point on the
dp
Demand Curve, "p" = price at that point, and "q" = quantity at that point.

C.5 Point Elasticity of Demand - Graphical Method

1. Graphical Method: Point Elasticity at any point is computed using the formula –
Lower Segment (RHS)
EP =
Upper Segment (LHS)
Note: Elasticity is different at different points on the same Demand Curve, since lengths of
Lower and Upper segments will be differ at various points on the Demand Curve.

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Point EP Reason

A AE is a line, but AA is only

AE
= 00 (infinity a point, hence AA = 0.
AA

B Length of BE > BA.

BE
i.e. > 1
BA

C Length of CE = CA.
CE
i.e. = 1
CA

D Length of DE < DA.

DE
i.e. < 1
DA

EA is a line, but EE is only a

E
DE point, hence EE = 0.
= 0 (zero)
DA

Note: This method is applicable only for Straight Line Demand Curves touching both the axes.

C.6 Arc Elasticity of Demand

1. Arc Elasticity is a measure of the average responsiveness to price changes exhibited by a
Demand Curve over some defined arc (i.e., finite stretch) of the Demand Curve

2. Arc Elasticity measures elasticity in case of large change in prices and quantities (i.e. over an
arc) on the Demand Curve, rather than on a point.

3. Since Point Elasticity differs at various points on the Demand Curve, Arc Elasticity takes the
average of two prices and quantities to measure Elasticity.

q1 −q2 p1 −p2
4. EP = × P1 and p2 are the prices at two points on the arc, and q1 and q2 are the
q1 +q2 p1 +p2
quantities demanded at those two prices.

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C.7 The Outlay Method

1. Meaning: In Total Outlay Method, elasticity of demand for a commodity is calculated by
analysing the changes in Total Expenditure or Outlay of the household (Buyer).
[Note: This constitutes the Total Sales Value from the viewpoint of the Seller]

2. Reasons:
a) Price Elasticity of Demand for a commodity, and
b) Total Expenditure or Outlay made on that commodity by a Household, are related to each
other. So, Total Outlay Method is relevant for calculating Price Elasticity-

3. Example;
Situation Quantity Demanded Price Total Outlay = Quantity ₹ Price
A 1,000 units ₹ 50.00 ₹ 50,000
B 1,500 units ₹ 40.00 ₹ 60,000
C 2,000 units ₹ 37.50 ₹ 75,000
D 2,500 units ₹ 30.00 ₹ 75,000
E 3,000 units ₹ 25.00 ₹ 75,000
F 3,500 units ₹ 20.00 ₹ 70,000
G 4,000 units ₹ 15.00 ₹ 60,000

4. Interpretation: Under Total Outlay Method, the exact co-efficient of elasticity is not
calculated. The elasticity is interpreted as follows -

Elasticity Situation Effect

EP < 1 (less Price and Total Expenditure move in same direction, i.e. Demand is said to
than one) • Due to increase in price of the commodity, the be less elastic, or
Total Expenditure made on that commodity inelastic. [E, F, G
increases, or in Table above]
• Due to decrease in price of the commodity, the
Total Expenditure made on that commodity
decreases.
• In both the above cases, the percentage change in
the quantity demanded is less than the percentage
change in price.
EP = 1 Total Expenditure remains unchanged - Demand is unit
(equal to • Due to change in price of the commodity, the Total elastic. [C, D, E in
one) Expenditure remains the same as before. Table above]

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• Increase in prices is exactly balanced by a

proportionate reduction in the purchase quantity.

EP > 1 Price and Total Expenditure move in opposite directions, Demand is said to
(more i.e. be elastic. [A, B,
than one) • Due to decrease in price of the commodity, the C in Table above]
Total Expenditure made on that commodity
increases, or
• Due to increase in price of the commodity, the
Total Expenditure made on that commodity
decreases.
• • In both the above cases, the percentage change in
quantity demanded is more than the percentage
change in price.

C.8 Interpretation of Elasticity Values

1. Perfectly Inelastic 2. Inelastic or Less 3. Unit Elastic i.e., EP = 1

i.e., Zero Elasticity Elastic i.e., 0 < EP, 1 with 45-degree Straight
line

3b. Unit Elastic i.e., EP = 4. Elastic or More 5. Perfectly Elastic i.e.,

1 with Rectangular Elastic i.e. 1 < EP < ∞ Infinity Elasticity
Hyperbola

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Price Elasticity of Demand can be of any value between zero and infinity- These are described
below -
Numerical Value Description Nature of Demand Demand Curve will
be
1. EP = 0 Quantity demanded does Perfectly (or Vertical Line,
not change as Price completely) parallel to Price (Y)
changes. inelastic Axis.
2. EP greater than 0, Quantity demanded Inelastic, or Less Relatively steeper
but less than 1, i.e. changes by a smaller Elastic Demand Curve.
0 < EP < 1 percentage than Price.
3. Quantity demanded Unit Elastic 45 degree Straight
EP = 0 changes by exactly the Line (or) a
same percentage as Rectangular
Price. Hyperbola
4. EP greater than 1, Quantity demanded Elastic Relatively flatter
but less than changes by a larger Demand Curve.
Infinity, i.e. 1 < EP percentage than Price.
<∞
5. EP = ∞ Purchasers are prepared Perfectly (or Horizontal Line,
to buy all they can obtain infinitely) Elastic parallel to Quantity
at some price, and none (X) Axis.
at all at an even slightly
higher price.

C.9 Determinants of Price Elasticity

Major determinants of Price Elasticity of Demand and their effects are summarized below -
Factor More Elastic Demand Less Elastic Demand
1. Availability Goods which have close or perfect Goods which having few
of substitutes, e.g. Cabbage vs other substitutes, e.g. common salt,
Substitutes green vegetables, Santro vs Maruti petrol, housing, healthcare, etc.
Car, etc.
2. Position in Goods having higher proportion of Goods having lower share in the
Consumer's the Consumers' spending, e.g. Consumers' budget, e.g. common
Budget clothing, provisions & groceries, salt, matches, buttons, etc.
milk, etc. [Consumer spends a [Consumer spends only a small
major portion on these goods, and portion on these goods, and is not
is very sensitive to price changes] very sensitive to price change]

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3. Need Luxury Goods are more elastic to Necessities of life are less
satisfied by price changes. elastic to price changes.
the Goods
4. Number of Goods which can be put to multiple Goods which have a specified or
Uses uses, e.g. Milk can be used for particular use have less elastic
preparation of ghee and sweets. If demand, since they can be and
price of milk increases, its use will should be used only for that
be restricted only to essential purpose.
purposes, like feeding children,
curd preparation, etc.
5. Time Period The long run demand for a The short run demand for a
commodity is more elastic to price. commodity is less sensitive to
This is because, the consumer has changes in prices.
a longer run to adjust his
consumption pattern accordingly.
Example: If the price of petrol
increases, the consumer can do
little in the short run, whereas in
the long run, he can buy a more
fuel efficient car, change the
engine of existing car etc.
6. Immediate Goods, the use of which can be Goods which have to be purchased
vs Later postponed, e.g. building a house, and used immediately, e.g. food,
Use buying furniture, etc. clothing.
7. Consumer Goods which are not habitually Goods which are subject to
Habits used by the Consumer. Consumer Habits, e.g. Cigarette,
Liquor, etc.
8. Tied Goods which have autonomous Goods which are jointly demanded,
Demand demand on their own, and are not e.g. Modular Kitchen and
tied to other goods. Microwave Oven.
9. Price Levels Goods which are in the medium Goods which are either very
range of price levels. expensive or very cheap.

C.10 Income Elasticity of Demand

1. Meaning: Income Elasticity of Demand (EI) measures the responsiveness of quantity demanded
of a commodity, to a change in Consumers' Income, when all other factors (Price of the
Commodity, Substitutes, and Prices of Related Commodities) are constant.

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2. Formula:
% Change in Quantity Demanded
Change in Quantity
% Change in Quantity Demanded ×100
EI = = Original Quantity
% Change in Consumer′ s Income Change in Income
×100
Original Income
Change in Quantity Original Quantity ∆q i ∆q i
= × Change in Quantity = × = ×
Original Quantity q ∆i q q
Here, q = quantity, i = Income, ∆q = change in Quantity, ∆i = change in Income.

3. Sign: Generally, Income Effect is positive, so Income Elasticity of Demand is also positive.
However, there may be negative Income Elasticity in case of Inferior Goods.

4. Interpretation of ET:

(a) Method A: Using "One" as the Dividing (b) Method B: Using "0" as the Dividing
Line Line
E, Type of Spending Nature of EI Description Nature of
Goods Goods
< 1 Proportion of Income spent Necessary <0 Quantity Inferior
on goods decreases, as Goods (negative) decreases as Goods
income increases. Income increases.
= 1 Proportion of Income spent - =0 Quantity does not -
on goods remains same, as change as Income
income increases. changes.
> 1 Proportion of Income spent Luxury >0 Quantity increases Normal
on goods increases, as Goods (positive) as Income Goods
income increases. increases.

5. Examples:
Situation EI Conclusion
(a) Income of a household increases by 10%, 5%
= =0.5 0 < 0.5 < 1. So, Wheat is a
10%
and the demand for Wheat rises by 5%. normal & necessity
goods.
(b) Income of a household increases by 10%, 20%
=2 Since EI >1, TV is an
10%
and the demand for TV rises by 20%. item of Luxurious Goods.
(c) Income of a household increases by 5%, −2%
= 0.4 Since EI < 0, Bajra is an
5%
and the demand for Bajra falls by 2%. inferior commodity in
the
eyes of this household.

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(d) Income of a household increases by 5%, 5%

=1 Since EI = 1, X has
5%
and the demand for Article X rises by 5%. unitary Income
Elasticity.
(e) Income of a household increases by 5%, 0%
=1 Buttons have Zero
5%
and the demand for Buttons does not Income- Elasticity.
change at all.

C.11 Cross Elasticity of Demand

1. Meaning: Cross Elasticity of Demand (EC) measures the responsiveness of quantity demanded
of a commodity, to a change in prices of related commodities, other things remaining constant.

2. Formula:
% Change in Quantity Demanded of Com mod ity X ∆q(x) p(y)
EC = = ×
% Change in Pr ice of Com mod ity Y ∆p(y) q(x)

Here, q(x) = Quantity Demanded of Commodity X, p(y) = Price of Commodity Y,

∆q(x) = Change in Quantity Demanded of X, ∆p(y) = Change in Price of Y

3. Interpretation of EI:
EC Interpretation and Conclusion
(a) EC < 0 (i.e. Demand for a good falls in relation to rise in price of another.
negative) The two goods are mostly complementary to each other. [Note: Negative
EC is also found when the Income Effect on the price change is very
strong.]
(b) EC = 0 The two goods are totally unrelated.
(c) EC > 0 (i.e., Demand for a good rises in response to a rise in price of another. The two
positive) goods are substitutes for each other.
(d) EC = ∞ The two goods are perfect substitutes for each other.

Note: If EC is positive, the goods can be called Substitutes. However, if Ec is negative, the
goods are not always Complementary in nature.

C.12 Advertisement Elasticity

1. Meaning: Advertisement Elasticity of Sales (also called Promotional Elasticity of Demand) is
the responsiveness of a good's demand to changes in the Firm's spending on advertising. It is
the percentage change in demand that occurs for every 1% change in Advertising Expenditure.

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2. Formula:
% Change in Demand ∆q ∆A ∆q A
EA = ÷ = ×
= % Change in Amt spent on Advertising q A A q

Here, ∆q = Change in Demand, q = Original Demand,

∆A = Change in Advertisement A = Original Advertisement
Expenditure, and Expenditure.

3. Sign: Advertising Elasticity is generally positive. Advertisement Elasticity varies between zero
and infinity. Higher the value of Advertising Elasticity, greater will be the responsiveness of
demand to change in advertisement.
EA Interpretation and Conclusion
(a) EA = 0 Demand does not respond to increase in Advertisement Expenditure.
(b) EA > 0 but < 1 Change in Demand is less than proportionate to the change in
Advertisement Expenditure.
(c) EA = 1 Demand changes in the same proportion in which Advertisement
Expenditure changes.
(d) EA > 1 Demand changes at a higher rate than the change in Advertisement
Expenditure.

Note:
Significance: From a Business Firm's viewpoint, Advertisement Elasticity is a tool for –
• measuring the effectiveness of an Advertisement Campaign in leading to new sales, and
• determining the optimum level of advertisement expenditure.

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D. DEMAND FORECASTING

D.1 Meaning and Usefulness

1. Meaning: Forecasting refers to knowing or measuring the status or nature of an event or
variable before it occurs. So, Demand Forecasting –
a) is the art and science of predicting the probable demand for a product or a service at some
future date on the basis of certain past behaviour patterns of some related events and the
prevailing trends in the present.
b) Involves estimating demand scientifically and objectively on the basis of certain facts and
events relevant to forecasting.

2. Usefulness: For efficient business planning, a Business Firm requires a good level of accuracy
with which future events can be predicted. This is more so in the context of mass production,
demand-driven production, etc. Thus, Demand Forecasting serves many purposes, including the
following -
a) To provide information for Budgetary Planning and Cost Control in functional areas of
Finance and Accounting,
b) To provide inputs for efficient Production Planning, Process Selection, Capacity Planning,
Facility Layout and Inventory Management,
c) To ensure Production Scheduling well in advance and obtain all necessary Inputs and
Finances for production,
d) To align Capital Investments to demand expectations, and thus to avoid overproduction and
underproduction, excess of unused capacity and idle resources,
e) To make key decisions in Marketing, e.g., suitable Pricing and Advertisement Strategies,
f) To evaluate various forces which affect demand, i.e., to know about various forces relevant
to the study of demand behaviour.

3. Conditions for Use:

a) There is no simple formula which enables a business to predict the future demand without
applying much thought. The Firm has to apply a proper mix of judgment and scientific formulae
in order to correctly predict the future demand for a product.
b) There should be proper trade-off analysis of the Cost and Time involved in forecasting, in
relation to the Benefits of the information acquired through such Forecasting.

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D.2 Types of Forecasting

1. Based on Area/Scope: Based on the scope and area of coverage, Demand Forecasting can be -

Type Description
International Forecasting done by National or International Institutions (e.g. IMF),
Level covering various Countries.
National Level Forecasting done by a Country's Institutions / Authorities, covering various
or Macro parts of a Country, e.g. general economic environment prevailing in the
Level economy as measured by the Index of Industrial Production (IIP), National
Income, Inflation, General Level of Employment, etc.
Industry Forecasting of the demand for the industry's products as a whole, e.g.
Level demand for Conditioners in India.
Local Level or Forecasting for a given product or service supplied by one Firm in a
Firm- Level specified area, e.g. Demand' for Hitachi Air Conditioners.

2. Based on Time:
Point Short-Term Forecasting Long-Term Forecasting
This involves Forecasting for a short span This involves Forecasting for a longer
Meaning of time (e.g., 6 months to 1 year), period time, e.g., 2 to 5 years, or even
depending of the nature of industry. more in some industries.
This is useful for tactical or operational This is more useful for strategic
Use
decisions. decisions, e.g. increase in Plant Capacity.

D.3 Demand Distinctions

For proper Demand Forecasting, Business Managers should have a clear understanding of the
kind of demand which their products have. Some types of Demand are as under -

1. Demand for Producer's Goods and Demand for Consumer's Goods:

Point Producers' Goods or Capital Goods Consumers' Goods

Meaning Producer's Goods are those which are Consumer's Goods are those which are
used for the production of other goods used for final consumption.
- either Consumer Goods or Producer
Goods themselves.
Examples Machines, Plant, Capital Equipments, Readymade Clothes, Residential Houses,
etc. etc.

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2. Demand for Durable Goods and Demand for Non-Durable Goods:

Point Durable Goods Non-Durable Goods

Meaning Durable Goods do not quickly wear Non Durable Goods are those which
out, can be consumed more than once cannot be consumed more than once. Non-
and yield utility over a period of time. Durables are purchased for current
consumption only.
Examples • Durable Producers' Goods: • Non-Durable Producers' Goods:
Building, Plant & Machinery, Raw Materials, Fuel and Power,
Office Furniture, etc. Packing Items, etc.
• Durable Consumers' Goods: • Non-Durable Consumers' Goods:
Cars, Refrigerators, Mobile Beverages, Bread, Milk, etc.
Phones, etc.

Note: There may be Semi-Durable Goods like, Clothes and Umbrella.

3. Derived Demand and Autonomous Demand:

Point Derived Demand Autonomous Demand

Meaning Here, the Demand for a commodity that Here, the demand for a product is
arises because of the demand for some independent of the demand for
other commodity called 'Parent Product'. other goods. It arises on its own out
of an innate desire of the consumer
to consume or to possess the
commodity.
Examples • Demand for Producer Goods or Note: This distinction is purely
Industrial Inputs, arbitrary, and many times, it is very
• Demand for Complementary Goods, difficult to find out which product is
• Demand for some Consumer Goods, entirely independent of other
e.g. demand for Cement is directly products.
related to building activity.

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4. Industry Demand and Company Demand:

Point Industry Demand Firm Demand or Company Demand

Meaning Industry Demand is the total It is the demand for the product of a particular
demand for the products of a Firm, i.e. the quantity that a firm can dispose o
particular industry. at a given price over a period of time. .
Examples Total Demand for Air Demand for Hitachi Air Conditioners. -
Conditioners in the country.

Note: The Demand for a Firm's product when expressed as a percentage of Industry Demand
signifies the Market Share of the Firm.

5. Short-Run Demand and Long-Run Demand:

Point Short-Run Demand Long-Run Demand

Meaning Short-Run Demand refers to Long-Run Demand refers to demand which
demand with its immediate ultimately exist over a long period, as a
reaction to changes in product result of changes in pricing, promotion or
price and prices of related product improvement, after enough time is
commodities, income fluctuations, allowed to let the market adjust to the new
ability of the consumer to adjust situation. Long-Term Demand depends on
their consumption pattern, their long-term income trends, availability of
susceptibility to advertisement of substitutes, credit facilities, etc.
new products etc.
Examples If Electricity Rates are reduced, If Electricity Rates are reduced, in the long-
in the short run, the existing run, more and more people will be induced to
Users will make greater use of use electric appliances.
electric appliances.

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D.4 Factors affecting Demand

1. Producer Goods:
Producers' Goods or Capital Goods help in further production, and hence the demand for them
is Derived Demand, i.e., derived from the demand of consumer goods they produce. Some
factors that drive the demand for Producer Goods include –

a) Rate of Profitability of the User Industry,

b) Growth Prospects of the User Industry - e.g. higher the profit-making prospects, greater
will be the inducement to demand Capital Goods.
c) Size of the market of the User Industry,
d) Norms of Consumption of Capital Goods per unit of Installed Capacity,
e) Growth Rate of Technology in the User Industry - e.g. Advances in Technology enabling
higher efficiency, reduced cost, and higher productivity of capital will have a positive impact on
investment in Capital Goods,
f) Increase in the Price of a substitutable factor of production, e.g. Increase in Price of
Labour will increase the demand for Capital Goods,
g) Increase in the price of a factor which is complementary, - leading to decrease in the
demand for Capital Goods,
h) Forecast Demand for the goods produced by the User Industry - e.g. if Firms are optimistic
about selling a higher output in future, they will have greater incentive to invest in Producer
Goods,
i) Financing Opportunities for Capital Expansion - lower cost of borrowing and lower
opportunity cost of funds will lead to better capital expansion and demand for Capital Goods.

2. Non-Durable Consumer Goods:

Some factors which influence the demand for these goods are -

a) Disposable Income: Disposable Income = Personal Income less Personal Taxes. Generally,
the demand for a commodity depends upon the Disposable Income of the Household.

b) Price: Demand for a commodity depends upon its own price and the prices of related goods (its
Substitutes and Complements). Generally, the demand for a good is inversely related to its own
price and the price of its complements, it is positively related to the price of its Substitutes.

c) Demography: This involves the characteristics of the population, human as well as non-human,
using the product concerned. Example: Number and Characteristics of Children have an impact
on demand for Toys, Characteristics of Automobiles have an impact on the demand for Tyres
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or Petrol / Diesel, etc.

d) Competition: From an individual Firm's viewpoint, demand for Non-Durable Goods gets
repeated depending on their nature. Non-Durable Goods come in wide varieties and there is
competition among the Sellers to acquire and retain customer loyalty. Such competition may
also be a factor in determining the demand.

3. Durable Consumer Goods:

Some factors which influence the demand for these goods are -

a) Special Facilities: Some Durable Goods require special facilities / infrastructure for their use,
e.g., roads for automobiles, electricity for refrigerators, etc. The existence and growth of
such factors is an important variable that determines the demand for Durable Goods.

b) Family: As Consumer Durables are used by more than one person, the decision to purchase may
be influenced by family characteristics like income of the family, size, age distribution and sex
composition. Such changes in the composition of Households should be considered while
determining the market size of durable goods.

c) Current Holding: Replacement Demand is an important component of the total demand for
durables. Greater the current holdings of Durable Goods, greater will be the replacement
demand. So, all factors that determine Replacement Demand should be considered as a
determinant of the demand for Durable Goods.

d) Timing of Replacement: A Consumer can postpone the replacement of Durable Goods. Whether
a Consumer will go on using the good for a long time or will replace it depends upon factors like
his social status, prestige, level of money income, rate of obsolescence, etc.

e) Others: Demand for Consumer Durables is influenced by their Prices and Credit Facilities
available to buy them.

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D.5 Methods of Demand Forecasting

Some techniques available for Demand Forecasting are –
1. Survey of Buyers' Intentions:

Aspect Description
Meaning This Method involves Direct Interview of potential customers, i.e. to ask them
what they are planning to buy during the forthcoming time period, e.g. a year
(short-run).
Methods Based on the purpose, time available and costs to be incurred, the Survey may be
conducted as -
(a) Complete Enumeration Method - nearly all potential customers are
interviewed about their future purchase plans,
(b) Sample Survey Method - a scientifically chosen sample of potential
customers are interviewed,
(c) End-Use Method - identification of all Final Users, fixing suitable
technical norms of consumption of the product under study, application of
the norms to the desired or targeted levels of output and aggregation -
this is mostly used in forecasting demand for Inputs.
Merits (a) Market or Customer-driven approach.
(b) Useful when bulk of sale is made to Industrial Producers who generally
have definite future plans.
Demerits (a) Useful only for short-run demand forecasting. Better Methods are
required for long-term.
(b) It is not proper to depend wholly on the Buyers' estimates and they should
be used cautiously in the light of the Seller's own judgement.
(c) Customers may themselves misjudge their requirements, may mislead the
Surveyors or their plans may alter due to various factors which are not
identified or visualised at the time of the survey.
(d) Not useful in case of Household Customers, due to reasons like irregularity
in Customers' buying intentions, their inability to foresee their choice
when faced with multiple alternatives, and the possibility that the Buyers'
plans may not be real, but only wishful thinking.

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2. Collective Opinion Method

Aspect Description
Meaning (a) In this Method, Salesmen are required to estimate expected sales in their
respective territories.
(b) (b) This method is also known as Sales Force Opinion Method or Grass
Roots Approach.
Process (a) Estimates are obtained from each Sales in his/her respective Sales Areas.
(b) These estimates are reviewed to eliminate the bias of optimism on the
part of some Salesmen and pessimism on the part of others.
(c) The Revised Estimates are then examined in the light of factors like
proposed changes in Selling Prices, product designs and advertisement
programmes, expected changes in competition, and also changes in secular
forces like purchasing power, income distribution, employment, population,
etc.
(d) Final Estimate of Demand is determined after considering all relevant
factors as described above.
Merits (a) This Method is simple, and based on first hand information of those who
are directly connected with sales.
(b) Useful for Firms having a wide network of Sales Personnel, which can use
their knowledge, experience and skills to forecast future demand.
(a) Salesmen being closest to the Customers are likely to have the most
intimate feel of the reactions of customers to changes in the market.
Hence, it is likely to result in better forecasting.
Demerits (a) The demand figures may be subjective as personal opinions can possibly
influence the forecast.
(b) Salesmen may be unaware of the broader economic changes which may
have a significant impact on future demand.
(c) Useful only for short-run demand forecasting. Better Methods are
required for long-term.

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3. Expert Opinion Method:

Aspect Description
Meaning (a) Professional Market Experts & Consultants have specialized knowledge
and field experience, about the numerous variables that affect demand.
(b) This enables them to provide reasonably reliable estimates of probable
demand in future.
(c) Information Is obtained from these Professionals through unbiased tools
of data collection like Interviews and Questionnaires.

Delphi (a) The Delphi Technique was developed by Olaf Helmer at the Rand
Technique Corporation of the USA.
(b) Here, Firms solicit the opinion of Specialists or Experts through a series
of carefully designed Questionnaires.
(c) Experts are asked to provide forecasts and reasons for their forecasts.
(d) Experts are provided with information and opinion feedbacks of others at
different rounds without revealing the identity of the Opinion Provider.
(e) These opinions are then exchanged among the various experts and the
process goes on until convergence of opinions is arrived at.
Merits (a) Delphi Technique is widely accepted due to its broader applicability and
ability to address complex questions. It also has the advantages of speed
and cheapness.
(b) This Method is best suited in circumstances where intractable changes
are occurring and the relevant knowledge is distributed among Experts.
(c) The Firm now has better demand-related inputs, instead of depending only
upon the opinions of Buyers and Salesmen.
(d) This Method provides a useful way to obtain informed judgments from
diverse experts by avoiding the disadvantages of conventional Panel
Meetings.

4. Statistical Methods: Statistical Methods in forecasting demand are considered superior

because they are more scientific, reliable and free from subjectivity. Some important
Statistical Methods of Demand Forecasting are -

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Aspect Description
Trend (a) A Firm which has been in existence for a reasonably long time would have
Projection accumulated considerable data on sales pertaining to different time
Method periods. Such data, when arranged chronologically, yield a 'Time Series'.
(b) The Time Series relating to Sales represent the past pattern of effective
demand for a particular product. Such data can be used to project the
trend of the Time Series.
(c) The Trend Projection Method assumes that factors responsible for the
past trend in demand will continue to operate in the same manner and to
the same extent as they did in the past in determining the magnitude and
direction of demand in future.
(d) Trend Projection based on Time Series Data can be done by - (i) Graphical
Method, or (ii) fitting Trend Equation or Least Squares Method.
(e) Trend Projection Method is also called Classical Method, and is considered
as a 'naive' approach to Demand Forecasting.
Graphical (a) This involves plotting of the Time Series data on a Graph Paper and
Method fitting a free-hand curve to it passing through as many points as
possible. The direction of the curve shows the trend.
(b) This curve is extended into the future for deriving the forecasts.
(c) It is also known as 'Free Hand Projection Method'.
(d) It is the simplest and least expensive method. However, the main
demerit is that it may show the trend but the projections made
through this method are not very reliable.
Least (a) It is a mathematical procedure for fitting a line to a set of observed data
Squares points in such a manner that the sum of the squared differences between
Method the calculated and observed value is minimised.
(b) This technique is used to find a trend line which best fit the available
data. This trend is then used to project the dependant variable in the
future.
(c) Merits: This method is simple and inexpensive. Also, this method provides
fairly reliable estimates of future demand.
(d) Demerits: (i) The forecast may be considered reliable only for the period
during which the assumption as to past behaviour of variables continuing
into the future, applies, (ii) This Method cannot be used where trend is
cyclical with sharp turning points of troughs and peaks, (iii) This Method
cannot be used for short-term forecasts.

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Regression (a) In this method, a relationship is established between the Quantity

Analysis Demanded (Dependent Variable) and the Independent Variables (or
Explanatory Variables) such as Income, Price of the good, Prices of
related goods, etc.
(b) Once the relationship is established, a Regression Equation (Y = a + bX) is
derived, assuming the relationship to be linear. Sometimes, there could
also be a Curvilinear Relationship between the Dependent and
Independent Variables.
(c) Once the Regression Equation is obtained, the value of Y, i.e. quantity
demanded can be estimated, for any given value of X.

5. Controlled Experiments:

Aspect Description
Meaning (a) In this method, future demand is estimated by conducting market studies
and experiments on consumer behaviour under actual, though controlled,
market conditions.
(b) This is also known as Market Experiment Method.
Process (a) An effort is made to vary separately certain determinants of demand
which can be manipulated, e.g. Price, Advertising, etc. and conduct the
experiments assuming that the other factors would remain constant.
(b) Thus, the effect of demand determinants like price, advertisement,
packaging, etc. on sales can be assessed by either varying them over
different markets or by varying them over different time periods in the
same market. The market divisions herein here must be homogeneous
with regard to income, tastes, etc.
(c) The responses of demand to such changes over a period of time are
recorded and are used for assessing the future demand for the
product.
(d) Example: Different prices would be associated with different sales,
and on that basis the Price- Quantity Relationship is estimated as a
Regression Equation and used for forecasting purposes.
Demerits (a) This method is used relatively less since it is expensive as well as time-
consuming.
(b) Controlled Experiments are risky too because they may lead to
unfavourable reactions from Dealers, Consumers and Competitors.

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(c) It is also difficult to determine what conditions should be taken as

constant and what factors should be regarded as variable so as to
segregate and measure their influence on demand.
(a) It is practically difficult to satisfy the condition of homogeneity of
markets.
Consumer Market Experiments can also be replaced by 'Controlled Laboratory Experiments'
Clinics or 'Consumer Clinics' under which Consumers are given a specified sum of money
and asked to spend in a store on goods with varying prices, packages, displays,
etc. The responses of the consumers are studied and used for Demand
Forecasting.

6. Barometric Method:

Aspect Description
Meaning (a) Meteorologists use the barometer to forecast weather. Likewise,
Economists use economic indicators to forecast trends in business
activities.
(b) To find out the turning points in the economy, e.g. slump to recovery or
from boom to recession, it is necessary to find out the general behaviour
of the economy.
(c) Use of such economic indicators in demand forecasting is called Barometric
Method.
Process (a) An Index of relevant economic indicators is first determined, e.g. GDP,
Rate of Employment, Interest Rates, etc.
(b) Movements in these indicators are used as basis for forecasting the
likely economic environment in the near future.
(c) Three types of Indicators are analysed -
• Leading Indicators - These move up or down ahead of some other series,
e.g. Advance Orders for Capital Goods give an advance indication of
economic prosperity.
• Coincidental Indicators — These move up and down simultaneously with the
level of economic activities - e.g. rate of unemployment.
• Lagging Indicators - These indicators follow a change after some time lag,
e.g. increase in household electrical connections confirm the fact that
heavy construction work was undertaken during the past.
(d) This information is then used to forecast demand prospects of a
product, though not the actual quantity demanded.

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Merits (a) Other Methods are based on past experience and trying to merely
project the past into the future. Such projection is not effective where
there are economic ups and downs. Barometric Method is most
appropriate in such situations.
(b) Other Methods are related with the product concerned. Barometric
Method is a wholistic approach
Demerits (a) Actual quantity demanded is not forecast, only indicative prospects of
estimates can be made.
(b) This method is too expensive and time consuming.

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A. DEMAND BASICS – MCQs

DEMAND BASICS
1. ………. is the want satisfying power of the product.
(a) Demand
(b) Utility
(c) Supply
(d) None of these

2. ………. refers to the quantity of goods or services, those Consumers are willing and
able to purchase / buy in a given market, at various prices, in a given period of time.
(a) Supply
(b) Demand
(c) Utility
(d) Surplus

3. Demand refers to the quantity of goods or services, that ……… are willing and able to
purchase / buy in a given market, at various prices, in a given period of time.
(a) Producers
(b) Investors
(c) Consumers
(d) Government

4. Demand for a commodity refers to -

(a) Desire for the commodity
(b) Need for the commodity
(c) Quantity demanded of that commodity
(d) Quantity of the commodity demanded at a certain price during any particular
period of time

5. On which of the following the Effective Demand for a thing depends?

(a) Desire
(b) Means to purchase (Ability to Buy)
(c) Willingness to use those means
(d) All of these

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6. For want to become an Effective Demand, it must be backed by the -

(a) Ability to buy the product
(b) Necessity to buy the product
(c) Desire to buy the product
(d) Utility of the product

7. Which of the following is an important aspect in Demand?

(a) Ability to buy the product
(b) Willingness to spend
(c) Availability of the product in the market
(d) All of the above

8. In the context of Demand, the availability of money with the Consumer, in order to
purchase the Commodity is called -
(a) Consumer Surplus
(b) Purchasing Power
(c) Cost of Living
(d) Standard of Living

9. Purchasing Power refers to -

(a) Availability of money with the Consumer to purchase the Commodity
(b) Availability of money with the Producer to produce the Commodity
(c) Availability of goods in the market
(d) Availability of substitute goods

10. Purchasing Power refers to -

(a) Desire to buy the product
(b) Necessity to buy the product
(c) Ability to buy the product
(d) Utility of the product

11. Purchasing power of money fall when

(a) Price level increases
(b) Price level decreases
(c) Income level increases
(d) Money supply falls

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12. Unless Demand is backed by purchasing power or ability to pay, it does not constitute
Demand. This statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

13. In the context of Effective Demand, Willingness to spend means -

(a) Availability of Money with Consumers
(b) Readiness to use available money for purchasing a Commodity
(c) Both (a) and (b)
(d) Neither (a) nor (b)

14. For Demand to be effective, the Commodity should be available -

(a) At a certain price
(b) At a certain place
(c) At a certain time
(d) All of the above

15. Demand arises in respect of-

(a) Socially desirable goods, e.g. food, clothing
(b) Harmful goods, e.g. liquor, cigarettes, etc.
(c) Both (a) and (b)
(d) Neither (a) nor (b)

16. Demand arises in respect of -

(a) Capital Goods only
(b) Consumer Goods only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

17. Demand arises in respect of -

(a) Agricultural Commodities only
(b) Industrial Goods only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

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18. Demand arises in respect of -

(a) Tangible Goods and Commodities only
(b) Intangibles and Services only
(c) Both (a) and (b)
(d) Neither (a) nor (b)

19. Demand for Final Consumption arises in -

(a) Household Sector only
(b) Government Sector only
(c) Both Household and Government Sectors
(d) Neither Household nor Government Sector

20. Demand for Intermediate Consumption arises in –

(a) Household Consumers
(b) Government Enterprises only
(c) Corporate Enterprises only
(d) All Producing Sectors of the economy

21. Demand for Resources and Factors of Production is -

(a) Direct Demand
(b) Derived Demand
(c) Irrelevant in Economics
(d) Not a Demand at all

22. The demand for factors of production is demand

(a) Fundamental
(b) Derived
(c) Market
(d) Joint

INDIVIDUAL AND MARKET DEMAND

23. Individual Demand is also called -
(a) Industrial Demand
(b) Market Demand
(c) Household Demand
(d) All of the above

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24. Household Demand is also called -

(a) Producer Demand
(b) Individual Demand
(c) Industry Demand
(d) Market Demand

25. Individual Demand shows the quantities of demand for a commodity at various prices
by -
(a) A particular consumer
(b) The entire market
(c) Both (a) and (b)
(d) Neither (a) nor (b)

26. Industry Demand is also called -

(a) Household Demand
(b) Market Demand
(c) Individual Demand
(d) All of the above

27. Market Demand is also called -

(a) Producer Demand
(b) Individual Demand
(c) Industry Demand
(d) Household Demand

28. Market Demand shows the quantities of demand for a commodity at various prices by
(a) a particular consumer
(b) the entire market
(c) Both (a) and (b)
(d) Neither (a) nor (b)

29. Market Demand is the sum total of-

(a) All quantities that Producers can produce
(b) All quantities actually sold in the market
(c) All quantities demanded by individual households and consumers
(d) All of the above

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30. ……… is the sum total demand of all individuals in the market.
(a) Individual Demand
(b) Market Demand
(c) Household Demand
(d) Firm Demand

31. If A = Household Demand and B = Market Demand, then -

(a) A > B
(b) A < B
(c) A = B = 0
(d) None of the above

32. If Household Demand and Market Demand are equal in a situation, it means that -
(a) There is only one Producer
(b) There is only one Consumer
(c) Both (a) and (b)
(d) Neither (a) nor (b)

33. The total demand for the product of an individual Firm at various prices is known as -
(a) Industrial Demand
(b) Market Demand
(c) Household Demand
(d) Firm Demand

34. If Market Demand and Firm's Demand are equal in a situation, it means that -
(a) There is only one Producer
(b) There is only one Consumer
(c) Both (a) and (b)
(d) Neither (a) nor (b)

35. If Individual Demand = Market Demand = Firm’s Demand, it means that -

(a) There is only one Producer
(b) There is only one Consumer
(c) Both (a) and (b)
(d) Neither (a) nor (b)

36. A relative price is ______

(a) Price expressed in terms of money
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(b) What you get paid for baby-sitting your cousin

(c) The ratio of one money price to another
(d) Equal to a money price

DETERMINANTS OF DEMAND
37. Which of the following influence most the price level in the very short-run period?
(a) Demand
(b) Supply
(c) Cost
(d) Production

38. Which of the following is not a determinant of Demand?

(a) Price of the Commodity
(b) Price of Related Commodities
(c) Level of Consumers' Income
(d) None of these

39. All of the following are determinants of demand except

(a) Tastes and Preferences
(b) Quantity supplied
(c) Income
(d) Price of related goods

40. Which of the following is a determinant of Individual Demand?

(a) Cost of Production
(b) Nature of Product, i.e. socially desirable vs other goods
(c) Tastes and Preferences of Consumers
(d) Economic Policies of the Government

41. When a Consumer prefers a commodity due to prestige attached to it, it is known as -
(a) Substitution Effect
(b) Demonstration Effect
(c) Income Effect
(d) All of the above

42. When a Consumer wants a product by seeing another person use that product, it is
called -
(a) Disturbance Effect
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(b) Comparison Effect

(c) Demonstration Effect
(d) Marshallian Effect

43. Demonstration Effect is generally found in respect of

(a) Necessary Goods
(b) Luxury and Quasi-Luxury Goods
(c) Both (a) and (b)
(d) Neither (a) nor (b)

44. Goods covered by Demonstration Effect can be best described as -

(a) Necessities of Life
(b) Conspicuous Necessities
(c) Absolute Luxuries
(d) All of the above

45. In which of the following will the Demonstration Effect be high?

(a) Water
(b) Rice
(c) Cellphone
(d) Plant and Machinery

46. ………. are goods which are consumed together or simultaneously.

(a) Inferior Goods
(b) Normal Goods
(c) Complementary Goods
(d) Substitute Goods

47. Complementary Goods are goods which are consumed -

(a) Only when the goods are distributed as free compliment to the Consumer
(b) Together or simultaneously
(c) In place of one another
(d) Only at high income levels of Consumer

48. The demand for two-wheelers is likely to decrease with an increase in petrol prices
because two- wheelers and petrol are -
(a) Inferior Goods
(b) Normal Goods
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(c) Complementary Goods

(d) Substitute Goods

49. Which of these is not a Complementary Good for Pen?

(a) Refills
(b) Paper
(c) Notebooks
(d) Wheat

50. If an increase in the price of Blue Jeans leads to an increase in the demand for Tennis
Shoes, then Blue Jeans and Tennis Shoes are -
(a) Complements
(b) Inferior Goods
(c) Normal Goods
(d) Substitutes

51. If two goods are Complements, it means that a rise in the price of one commodity will
lead to -
(a) Upward Shift in demand for the other commodity
(b) Rise in the price of the other commodity
(c) Downward Shift in demand for the other commodity
(d) No shift in the demand for the other commodity

52. In case of Complementary Goods, increase in price of a product will -

(a) Decrease the demand for the other product
(b) Increase the price of the other product
(c) Increase the demand for the other product
(d) Not affect the demand for the other product

53. In case of Complementary Goods, decrease in price of a product will -

(a) Decrease the demand for the other product
(b) Increase the price of the other product
(c) Increase the demand for the other product
(d) Not affect the demand for the other product

54. If X and Y are Complementary Goods, the price of X and the Demand of Y are -
(a) directly related
(b) inversely related
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(c) proportionally related

(d) any of the above

55. If X and Y are Complementary Goods, if there is an increase in Price of X, then -

(a) Demand of X will decrease and Demand of Y will increase.
(b) Demand of X will increase and Demand of Y will decrease.
(c) Demand of X and Y will increase.
(d) Demand of X and Y will decrease.

56. If X and Y are Complementary Goods, if there is an decrease in Price of X, then -

(a) Demand of X will decrease and Demand of Y will increase.
(b) Demand of X will increase and Demand of Y will decrease.
(c) Demand of X and Y will increase.
(d) Demand of X and Y will decrease.

57. ……… are goods which are consumed in place of one another.
(a) Inferior Goods
(b) Normal Goods
(c) Complementary Goods
(d) Substitute Goods

58. Substitute Goods are goods which can be used -

(a) Only when the goods are used for a variety of purposes
(b) Together or simultaneously
(c) In place of one another
(d) Only at high income levels of Consumer

59. Which of the following pairs of goods is an example of Substitutes?

(a) Tea and Sugar
(b) Tea and Coffee
(c) Pen and Ink
(d) Shirt and Trousers

60. Which of the following is an example of Substitutes?

(a) Coffee and Milk
(b) Diamond and Cow
(c) Pen and Ink
(d) Mustard Oil and Coconut Oil
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61. Which of the following pairs of goods in an example of substitutes?

(a) Tea and Sugar
(b) Tea and Coffee
(c) Tea and Ball Pen
(d) Tea and Shirt

62. In case of Substitute Goods, increase in price of a product will -

(a) Decrease the demand for the other product
(b) Increase the price of the other product
(c) Increase the demand for the other product
(d) Not affect the demand for the other product

63. In case of Complementary Goods, decrease in price of a product will -

(a) Decrease the demand for the other product
(b) Increase the price of the other product
(c) Increase the demand for the other product
(d) Not affect the demand for the other product

64. If X and Y are Substitute Goods, the price of X and the Demand of Y are -
(a) Directly related
(b) Inversely related
(c) Proportionally related
(d) Any of the above

65. When the Price of a Substitute of X Commodity falls, the Demand for X -
(a) Rises
(b) Falls
(c) Remains Unchanged
(d) Any of the above.

66. If the Price of Product A increases relative to the Price of Substitute B & C, the demand
for -
(a) B will increase
(b) C will increase
(c) B and C will increase
(d) B and C will decrease

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67. If the Price of Pepsi decreases relative to the Price of Coke and 7-Up, the demand for -
(a) Coke will decrease
(b) 7-Up will decrease
(c) Coke and 7-Up will increase
(d) Coke and 7-Up will decrease

68. If Tea and Coffee are Substitutes, a fall in the Prices of Tea leads to -
(i) Rise in the demand for Tea
(ii) Fall in the supply of Coffee
(iii) Fall in the demand for Coffee
(iv) Rise in the supply of Tea
(a) Both (ii) and (iv) above
(b) Both (i) and (iii) above
(c) Both (ii) and (iii) above
(d) Both (iii) and (iv)

69. If X and Y are Substitute Goods, if there is an increase in Price of X, then -

(a) Demand of X will decrease and Demand of Y will increase.
(b) Demand of X will increase and Demand of Y will decrease.
(c) Demand of X and Y will increase.
(d) Demand of X and Y will decrease.

70. If X and Y are Substitute Goods, if there is an decrease in Price of X, then -

(a) Demand of X will decrease and Demand of Y will increase.
(b) Demand of X will increase and Demand of Y will decrease.
(c) Demand of X and Y will increase.
(d) Demand of X and Y will decrease.

71. In which phase of the business cycle to Producers try to sell out their inventories?
(a) Recession
(b) Prosperity
(c) Boom
(d) Recovery

72. Which of the following Statements is not true about Individual Demand?
(a) The decision to purchase is always influenced by the Income Constraint.
(b) Selection of products and services are based on the Opportunity Cost.
(c) Consumers measure their Opportunity Cost in terms of the price they pay for the
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products and services they forego.

(d) Decision to purchase is never influenced or concerned with the Income
Constraint.

73. What effect does an increase in the price of a product have on the Purchasing Power
of the Consumer?
(a) Increases
(b) Decreases
(c) No effect
(d) Decreases initially, but increases over a period of time

74. The Demand for a commodity also depends upon the money income of the household.
This statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

75. The Demand for a commodity depends only upon the money income of the household.
This statement is-
(a) True;
(b) False
(c) Partially True
(d) Nothing can be said

76. If demand decreases with an increase in money income of Consumers, such goods are
called -
(a) Normal Goods
(b) Inferior Goods
(c) Luxury Goods
(d) All of the above

77. Giffen Goods are –

(a) Normal Goods
(b) Inferior Goods
(c) Luxury Goods
(d) All of the above

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78. Inferior Goods are also called -

(a) Giffen Goods
(b) Marshallian Goods
(c) Hicks and Allen Goods
(d) Normal Goods

79. The Giffen Effect in respect of Inferior Goods was observed in the case of -
(a) Rice and Wheat
(b) Wheat and Meat
(c) Bread and Meat
(d) Bread and Rice

80. As income levels increase, the demand for goods satisfying Necessities of life, will be
…….. to the increase in income.
(a) Less than proportionate
(b) More than proportionate
(c) Proportionate
(d) Nothing can be said

81. If Income Levels increase, and the demand for goods increase by less than
proportionate extent, such goods will be -
(a) Inferior Goods
(b) Necessary Goods
(c) Luxury Goods
(d) Nothing can be said

82. If Income Levels increase, and the demand for goods increase by more than
proportionate extent, such goods will be -
(a) Inferior Goods
(b) Necessary Goods
(c) Luxury Goods
(d) Nothing can be said

83. As Income Levels increase beyond a certain extent, the propensity to consume -
(a) Reduces
(b) Increases
(c) Remains constant
(d) Becomes zero
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84. Generally, larger size of population of a country or a region implies ……… for all
commodities as such.
(a) Higher demand
(b) Lower demand
(c) No demand
(d) Ineffective demand

85. In case of unequal distribution of income in the country, the propensity to consume will
be ….., and demand for Consumer Goods will be …….
(a) Higher, lower
(b) Higher, higher
(c) Lower, higher
(d) Lower, lower

86. If the Consumers expect an increase in prices of the product in the future, its current
demand will be-
(a) Higher
(b) Lower
(c) Nil
(d) Nothing can be said

87. If the Consumers expect a decrease in prices of the product in the future, its current
demand will be -
(a) higher
(b) lower
(c) Nil
(d) Nothing can be said

88. Demand is affected by weather conditions and seasonal aspects also. This statement
is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

89. Demand for Air Conditioners, Water Coolers, Refrigerators show an increase during -
(a) Winter
(b) Summer
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(c) Spring
(d) All Seasons;

90. Large production of ... goods would lead to

higher production in future.
(a) Consumer Goods
(b) Capital Goods
(c) Agricultural Goods
(d) Public Goods

91. Income elasticity of luxury goods

(a) Zero
(b) Positive and greater than one
(c) Positive and lesser than one
(d) Negative and greater than - 1

92. Elasticity of demand under perfect competition is.

(a) One
(b) Two
(c) Zero
(d) Infinite

93. Forecasting of demand is the art and science of predicting the

(a) Actual demand for a product at some future date
(b) Probable demand for a product at some future date
(c) Total demand for a product at some future date
(d) None of these

94. Normally, when the price of a commodity increases its demand:

(a) Remains constant
(b) Increases
(c) Decreases
(d) Zero

95. Additional made to the total utility by the consumption of an additional unit of a commodity
is called:
(a) Total utility
(b) Average utility
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(c) Marginal utility

(d) All of the above

96. Which one of the following is not a method of demand forecasting?

(a) Mathematical method
(b) Statistical method
(c) Expert opinion method
(d) Barometric method

97. In case of inferior commodity the rise in income will result in demand curve:
(a) Upward
(b) Downward
(c) No change
(d) Initially downward but ultimately upward

ANSWERS TO MCQS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
B B C D D A D B A C A A B D C C C C C D

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41
B B C B A B C B C B B B D A C C A D B C B

42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61
C B B C C B C D A C A C B D C D C B D B

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81
C A A B C D B A B A D B A B B B A C A B

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97
C A A D A B A B B B D B C C A B

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B. THEORY OF DEMAND - MCQs

DEMAND CURVE
1. Demand Schedule shows the relation between -
(a) Price and Quantity supplied
(b) Price and Quantity demanded
(c) Income and Quantity supplied
(d) Income and Quantity demanded

2. In a typical Demand Schedule, quantity demanded -

(a) varies directly with price.
(b) varies proportionately with price.
(c) varies inversely with price.
(d) is independent of price.

3. ……… indicates the changes in Consumers' purchasing habits, depending on the price
variation of a particular product.
(a) Total Utility Curve
(b) Demand Schedule
(c) Production Possibility Curve
(d) Purchasing Power Parity

4. A Demand Curve shows -

(a) Quantity demanded of a product at various levels of income of the Consumer.
(b) Quantity demanded of a product, at various levels of price of the product
(c) Amount of money spent by a Consumer on a product at various levels of price
(d) Quantity supplied of a product at various levels of price of the product

5. A Demand Curve deals with -

(a) One product at a time
(b) Two products at a time
(c) Many products at a time
(d) None of the above

6. While drawing the Demand Curve, the change takes place in which of the following
factors?
(a) Supply of the product
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(b) Quality of the product

(c) Price of the product
(d) Technology used in offering the product

7. Generally, the Demand Curve slopes -

(a) Downward from left to right
(b) Upward from left to right
(c) Upward from right to left
(d) Downward from right to left

8. Demand Curve in most cases slopes-

(a) Upward towards left
(b) Vertical and parallel to Y-axis
(c) Downward towards right
(d) Horizontal and parallel to X-axis

9. Demand Curve in most cases has a -

(a) Positive Slope
(b) Negative Slope
(c) Zero Slope
(d) Infinity Slope

10. Demand Curve -

(a) Will be a Straight Line
(b) Will be a Curve
(c) Either (a) or (b)
(d) Neither (a) nor (b)

11. All but one of the following are assumed to remain the same while drawing an individual's
Demand Curve for a product. Which one is it?
(a) Preference of the individual
(b) His monetary income
(c) Price
(d) Price of related goods

12. If regardless of changes in its price, the quantity demanded of a product is unchanged,
then, Demand Curve for that product will be -
(a) Horizontal
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(b) Vertical
(c) Positively Sloped
(d) Negatively Sloped

13. If any quantity at the same price, then, the Demand Curve for that product will be -
(a) Horizontal
(b) Vertical
(c) Positively Sloped
(d) Negatively Sloped

14. What is the other name given to the Demand Curve?

(a) Profit Curve
(b) Average Revenue Curve
(c) Average Cost Curve M
(d) Indifference Curve

15. What is the other name given to the Average Revenue Curve?
(a) Profit Curve
(b) Demand Curve
(c) Average Cost Curve
(d) Indifference Curve

16. Why is the Demand Curve otherwise known as the Average Revenue Curve?
(a) Price paid for each unit by the Consumer, is the Average Revenue per unit for the
Seller
(b) Price paid for each unit by the Consumer, is the Total Revenue for the Seller
(c) Price paid by Consumer is equal to the Seller's willingness to sell the product.
(d) All of the above

17. The Total Area under the Demand Curve of a product measures -
(a) Marginal Utility
(b) Total Utility
(c) Consumer's Surplus
(d) Producers' Surplus

18. If Marginal Utility of a product remains constant, the Demand Curve will be -
(a) Convex
(b) Concave
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(c) Straight line

(d) None of the above

19. In a Demand Curve, the Horizontal Axis will be -

(a) Quantity Demanded
(b) Price of the Product
(c) Income Levels of Consumer
(d) Any of the above

20. In a Demand Curve, the Vertical Axis will be -

(a) Quantity Demanded
(b) Price of the Product
(c) Income Levels of Consumer
(d) Any of the above

21. Which of these is not depicted in a typical Demand Curve?

(a) Quantity Demanded
(b) Price of the Product
(c) Income Levels of Consumer
(d) None of the above

LAW OF DEMAND
22. The Law of Demand is explained by -
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

23. Which of the following can be regarded as law of Demand?

(a) Ceteris Paribus, if Price of a product rises, its quantity demanded will fall
(b) Higher the Income, greater is the expenditure
(c) Taxes have no relation with the benefits which a person derives from the State
(d) None of the above

24. The Law of Demand, assuming other things to remain constant, establishes the
relationship between -
(a) Income of the Consumer and the quantity of a good demanded by him
(b) Price of a good and the quantity demanded
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(c) Price of a good and the demand for its Substitute

(d) Quantity demanded of a good and the relative prices of its complementary goods

25. The Law of Demand refers to -

(a) Price-Supply relationship
(b) Price- Cost relationship
(c) Price-Demand relationship
(d) Price-Income relationship.

26. The Law of Demand is –

(a) A quantitative statement
(b) A qualitative statement
(c) Both (a) and (b)
(d) Neither (a) nor (b)

27. The Law of Demand is a -

(a) Positive Statement
(b) Normative Statement
(c) Both (a) and (b)
(d) Neither (a) nor (b)

28. The Law of Demand is a principle relating to-

(a) Micro-Economics
(b) Macro-Economics
(c) Both (a) and (b)
(d) Neither (a) nor (b)

29. The term "Ceteris Paribus" in the Law of Demand denotes -

(a) All factors remaining constant
(b) All factors except one remaining constant
(c) All factors being variable
(d) All of the above

30. Which of these is a variable factor in the Law of Demand?

(a) Consumers' Income Level
(b) Economic Conditions of Boom / Recession
(c) Quality of the Product
(d) Price of the Product
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31. The condition "other things being equal" in the Law of Demand denotes -
(a) Price of related goods remaining constant
(b) Income Levels remaining constant
(c) Tastes and Preferences remaining constant
(d) All of the above

32. What type of relationship exists between Price and Quantity Demanded?
(a) Direct
(b) Inverse
(c) Positive
(d) Positional

33. As per the Law of Demand, if the Price of a commodity, its Demand
(a) Increases, Decreases
(b) Increases, Increases
(c) Decreases, Increases
(d) Both (a) & (c)

34. Why does the Law of Demand operate?

(a) Income Effect
(b) Substitution Effect
(c) Both (a) and (b)
(d) Neither (a) nor (b)

35. The total effect of a price change of a commodity is

(a) Substitution Effect + Price Effect
(b) Substitution Effect + Income Effect
(c) Substitution Effect + Demonstration Effect
(d) Substitution Effect minus Income Effect

36. When we say that the Demand for a commodity depends upon the money income of the
Consumer, we are referring to -
(a) Income Effect
(b) Substitution Effect
(c) Demonstration Effect
(d) Utility Effect

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37. …….. refers to the effect of a change in the price of a product on the Consumer's
purchasing power.
(a) Law of Equi-Marginal Utility
(b) Income Effect
(c) Substitution Effect
(d) Consumer Surplus

38. As a result of a fall in prices of the commodity, the Consumer's increases.

(a) Real Income
(b) Purchasing Power
(c) Both (a) and (b)
(d) Neither (a) nor (b)

39. If there is a decrease in the prices of a product, the Consumer's Real Income -
(a) Increases
(b) Decreases
(c) Remains constant
(d) Nothing can be said

40. When increase in his Real Income induces a Consumer to buy more of a Commodity
whose prices has fallen, it is called -
(a) Inducement Effect
(b) Substitution Effect
(c) Income Effect
(d) Utility Effect

41. Which of the following statements best describes the Income Effect?
(a) It is the change in quantity demanded as a result of the changes in the income,
keeping other things constant
(b) It is the change in quantity demanded of substitute goods, as a result of change in
the price of a product, keeping the income constant
(c) It is the change in quantity demanded of a product, as a result of change in the real
income because of change the price of the product
(d) It is the change in the price of a good because of a rise or fail in the real income of
the consumer

42. When the price of a Commodity falls, the Consumer

(a) Can buy the same quantity of the commodity with lesser money
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(b) Can buy more of the same commodity with the same money
(c) Both (a) and (b)
(d) Neither (a) nor (b)

43. When the price of a Reynolds pen falls, ceteris paribus, Buyers substitute Reynolds Pen
for other pens that are now relatively more expensive. This is called -
(a) Price Effect
(b) Substitution Effect
(c) Income Effect
(d) Veblen Effect

44. The 'Substitution Effect' takes place due to change in

(a) Income of the Consumer
(b) Prices of the Commodity
(c) Relative Prices of the commodities
(d) All of the above

45. ……… refers to the Consumer's Reaction to a change in the relative prices of two
products, keeping the Total Utility constant.
(a) Consumer Surplus
(b) Income Effect
(c) Substitution Effect
(d) Law of Diminishing Marginal Utility

46. When the price of a product increases, Consumers tend to switch to purchasing the
substitutes of the product. This describes why the Demand Curve for the good -
(a) Shift downward to the left
(b) Shift upward to the right
(c) Slopes downward to the right
(d) Slopes downward to the left

47. Which of the following statement best describes the Substitution Effect?
(a) When the price of a product rises, Consumers stop consuming the product.
(b) When the price of a product rises, Consumers tend to substitute it with a relatively
expensive product
(c) When the price of a product rises, Consumers tend to substitute it with a relatively
inexpensive product
(d) When the price of a product fails, consumers tend to substitute in with a more
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expensive product

48. In normal circumstances, if the Government increases the tax on any product, the
demand for the product ……… in the short run
(a) Increases
(b) Decreases
(c) Remain unchanged
(d) Tax has nothing to do with the demand for any product

49. The segregation between Income Effect and Substitution Effect is adequately explained
by -
(a) Cardinal Approach
(b) Ordinal Approach
(c) Both (a) and (b)
(d) Neither (a) nor (b)

50. When the price of a product falls, its Demand increases because -
(a) New Consumers start buying the product
(b) Existing Consumers buy more quantities of the product
(c) Both (a) and (b)
(d) Neither (a) nor (b)

51. The Law of Demand is explained by –

(a) Law of Diminishing Marginal Utility
(b) Law of Indifference Curves
(c) Both (a) and (b)
(d) Neither (a) nor (b)

52. Under the Law of Diminishing Marginal Utility, Consumers continue buying till Price
equals Marginal Utility. Hence at lower prices -
(a) Higher quantities will be demanded
(b) Lower quantities will be demanded
(c) No quantities will be demanded
(d) All of the above

53. Since Consumers continue buying till Price equals Marginal Utility, if the price of a
product is lower, the Consumer will attain equilibrium -
(a) At a lower quantity level
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(b) At a higher quantity level

(c) At zero quantity level
(d) All of the above

54. Under the Indifference Curve approach, if the price of a product is lower, the Consumer
will attain equilibrium -
(a) At a higher Indifference Curve
(b) At a lower Indifference Curve
(c) At the origin point
(d) At infinity

EXCEPTIONS TO THE LAW

55. Conspicuous Goods are also called -
(a) Necessary Goods
(b) Prestige Goods
(c) Giffen Goods
(d) Basic Goods

56. Conspicuous goods are also called as:

(a) Veblen
(b) Snob
(c) Prestigious
(d) All of the above

57. Conspicuous Goods –

(a) Are an exception the Law of Demand
(b) Follow the Law of Demand
(c) Either (a) or (b)
(d) Neither (a) nor (b)

58. In case of Conspicuous Goods, as the Price increases, the quantity demanded thereof -
(a) Increases
(b) Decreases
(c) Remains constant
(d) Becomes zero

59. When Consumers feel that if the commodity expensive, that it has got more utility, we
are referring to -
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(a) Inferior Goods

(b) Normal Goods
(c) Conspicuous Goods
(d) Giffen Goods

60. Which of the following is an example of Conspicuous Goods?

(a) Diamonds
(b) Cooking Gas
(c) Petrol
(d) Rice

61. Which of the following is not an exception to the Law of Demand?

(a) Conspicuous Goods
(b) Normal Goods
(c) Conspicuous Necessities
(d) Giffen Goods

62. If the demand for Petrol remains the same even after the increase in petrol prices, it
means Petrol is a -
(a) Normal Good
(b) Necessity
(c) Luxury Good
(d) Inferior Good

63. In the case of a Giffen Good, the Demand Curve be

(a) Horizontal
(b) Downward-sloping to the right
(c) Backward falling to the left
(d) Upward-sloping to the right

64. Giffen Goods are those goods -

(a) For which Demand increases as Price increases
(b) Which have a high income elasticity of demand
(c) Which are in short supply
(d) None of these

65. In case of Giffen Goods, Demand Curve will slope -

(a) Upward
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(b) Downward
(c) Horizontal
(d) Vertical

66. An Inferior Commodity is one which is consumed in smaller quantities when the income
of consumer -
(a) Becomes nil
(b) Remains the same
(c) Falls
(d) Rises

67. Giffen Goods are goods which

(a) Are considered inferior by Consumers
(b) Occupy a substantial place in the Consumers budget
(c) Both (a) and (b)
(d) Neither (a) nor (b)

68. Giffen Goods are -

(a) Conspicuous Goods
(b) Normal Goods
(c) Conspicuous Necessities
(d) Inferior Goods

69. When people buy more of a product when its price goes up, the product will be -
(a) Conspicuous Goods
(b) Normal Goods
(c) Inferior Goods
(d) Luxury Goods

70. When due to their constant usage, certain goods have become necessities of life, they
are referred to as -
(a) Conspicuous Goods
(b) Normal Goods
(c) Conspicuous Necessities
(d) Giffen Goods

71. Under which of the following situations the Law of Demand will not operate?
(a) Conspicuous Goods
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(b) Giffen Goods

(c) Absolute Necessities
(d) All of the above

72. Under which of the following situations the Law of Demand will not operate?
(a) Price Change expected by Consumer
(b) Consumer's lack of knowledge about prices
(c) Irrational purchasing pattern by Consumer
(d) All of the above

73. Under which of the following situations the Law of Demand will not operate?
(a) Increase in Consumers' Income Levels
(b) Change in Tastes and Preferences
(c) Both (a) and (b)
(d) Neither (a) nor (b)

EXPANSION / CONTRACTION OF DEMAND

74. Expansion and Contraction of demand for a good occurs as a result of-
(a) Change in Price of the Commodity
(b) Change in Quality of the Commodity
(c) Availability of Cheaper Substitutes
(d) Increase in Consumer Income

75. In case of Expansion and Contraction of Demand, the Demand Curve -

(a) Shifts to the right
(b) Shifts to the left
(c) Remains the same
(d) None of the above

76. Fall in quantity demanded of a product as a result of rise in price is known as –

(a) Change in Demand
(b) Contraction of Demand
(c) Expansion of Demand
(d) Alteration of Demand

77. Rise in quantity demanded of a product as a result of reduction in price is known as -

(a) Change in Demand
(b) Contraction of Demand
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(c) Expansion of Demand

(d) Alteration of Demand

78. Contraction of Demand is the result of-

(a) Decrease in number of Consumers
(b) Increase in Price of the product concerned
(c) Increase in Prices of other goods
(d) Decrease in Incomes of Purchasers

79. Expansion of Demand is the result of -

(a) Increase in number of Consumers
(b) Decrease in Price of the product concerned
(c) Decrease in Prices of other goods
(d) Increase in Incomes of Purchasers

80. A movement along the Demand Curve for soft drinks is best described as -
(a)
(b) Increase in Demand
(c) Decrease in Demand
(d) Change in quantity demanded
(e) Change in Demand

81. In case of Expansion of Demand, there is a -

(a) Inward shift of the Demand Curve
(b) Outward shift of the Demand Curve
(c) Upward movement on the same Curve
(d) Downward movement on the same Curve

82. In case of Contraction of Demand, there is a -

(a) Inward shift of the Demand Curve
(b) Outward shift of the Demand Curve
(c) Upward movement on the same Curve
(d) Downward movement on the same Curve

83. In case of Expansion of Demand, the quantity demanded -

(a) Increases
(b) Decreases
(c) Becomes zero
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(d) Becomes constant

84. In case of Contraction of Demand, the quantity demanded -

(a) Increases
(b) Decreases
(c) Becomes zero
(d) Becomes constant

85. Expansion of Demand is associated with -

(a) Rise in Price, Rise in quantity demanded
(b) Fall in Price, Fail in quantity demanded
(c) Fall in Price, Rise in quantity demanded
(d) Rise in Price, Fall in quantity demanded

86. Contraction of Demand is associated with -

(a) Rise in Price, Rise in quantity demanded
(b) Fall in Price, Fall in quantity demanded
(c) Fall in Price, Rise in quantity demanded
(d) Rise in Price, Fall in quantity demanded

87. Expansion and Contraction of demand for a product occurs as a result of changes in -
(a) Price of the Commodity
(b) Factors other than Price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

88. Change in demand due to change in price is known as ________

(a) Change in demand
(b) Change in quantity demanded
(c) Income demand
(d) Cross demand

INCREASE OR DECREASE IN DEMAND

89. Change in Demand as a result of the factors other than Price is known as –
(a) Shift in Demand
(b) Increases and Decrease in demand
(c) Change in Demand
(d) All of these
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90. Increase in Demand leads to -

(a) Inward shift of the Demand Curve
(b) Outward shift of the Demand Curve
(c) Upward movement on the same Curve
(d) Downward movement on the same Curve

91. Decrease in Demand leads to -

(a) Inward shift of the Demand Curve
(b) Outward shift of the Demand Curve
(c) Upward movement on the same Curve
(d) Downward movement on the same Curve

92. Which of the following results in a shifting of the Demand Curve?

(a) Increase in the tax on cigarettes leading to their fall in demand
(b) Slashing of ad rates by a television channel resulting in a rise in the number of ads
(c) Rise in the electricity charges leading to lesser consumption
(d) All of these

93. In which of the following cases, does a shift in demand take place?
(a) Fall in demand for cigarettes, as a result of increased taxes
(b) Rise in the demand for two wheelers due to decrease in the sales tax
(c) Decline in electric power consumption due to rise in the power charges
(d) Decline in the sales of Diwali crackers due to sudden rains and floods

94. Change in demand, as a result of the factors other than price is known as -
(a) Demand Fluctuation
(b) Contraction / Expansion of Demand
(c) Demand Shrinking
(d) Shift in Demand

95. Shift in demand does not take place due to -

(a) Change in the price of the product
(b) Change in the tastes and preferences
(c) Change in consumer habits
(d) Change in population

96. An Increase in Demand can result from -

(a) Decline in Market Price
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(b) Increase in Income

(c) Reduction in the Price of Substitutes
(d) Increase in the Price of Complements

97. A Decrease in Demand can result from -

(a) Increase in Market Price
(b) [Link] Income
(c) Increase in the Price of Substitutes
(d) Decrease in the Price of Complements

98. A drought in India leads to unusually low level of wheat production. This would lead to a
rise in the price of wheat and fall in the quantity of wheat demanded due to -
(a) Excess Demand at the original price
(b) Excess Supply at the original price
(c) Supply Curve shifting to the right
(d) Demand Curve shifting to the left

99. Suppose consumer tastes shift toward the consumption of apples. Which of the following
statements is an accurate description of the impact of this event on the market for apples?
(a) There is an increase in quantity demanded of apples and in supply of apples.
(b) There is an increase in the demand and supply of apples.
(c) There is an increase in the demand for apples and a decrease in supply of apples.
(d) There is an increase in the demand for apples and an increase in the quantity
supplied

100. In case of Shift in Demand, ……… remains constant.

(a) Income of Consumers
(b) Tastes and Preferences of Consumers
(c) Price of the Product
(d) Quality of the Product

101. Rise in the price of Substitute Goods leads to -

(a) Increase in Demand
(b) Decrease in Demand
(c) Expansion of Demand
(d) Contraction of Demand

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102. Fall in the price of Substitute Goods leads to -

(a) Increase in Demand
(b) Decrease in Demand
(c) Expansion of Demand
(d) Contraction of Demand

103. 0ther things being equal, a fall in the price of complementary good will cause the
______ of the other to rise.
(a) Price
(b) Supply
(c) Demand
(d) Utility

104. A Decrease / Fall in the price of Complementary Goods leads to -

(a) Increase in Demand
(b) Decrease in Demand
(c) Expansion of Demand
(d) Contraction of Demand

105. An Increase in the price of Complementary Goods leads to -

(a) Increase in Demand
(b) Decrease in Demand
(c) Expansion of Demand
(d) Contraction of Demand

106. Increase in Income Levels of Buyers leads to -

(a) Increase in Demand
(b) Decrease in Demand
(c) Expansion of Demand
(d) Contraction of Demand

107. Decrease in Income Levels of Buyers leads to -

(a) Increase in Demand
(b) Decrease in Demand
(c) Expansion of Demand
(d) Contraction of Demand

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108. Which of the factors does not cause Increase in Demand?

(a) Rise in the price of Substitute Goods
(b) Fall in price of this product
(c) Increase in population
(d) Increase in Income Levels of Buyers

109. Increase in Demand is caused by -

(a) Change in Buyer Preferences and Tastes in favour of this commodity
(b) Re-distribution of income to Consumers who favour this commodity
(c) Increase in population
(d) All the above

110. Which of the factors does not cause Decrease in Demand?

(a) Fall in the price of Substitute Goods
(b) Rise in price of this product
(c) Decrease in population
(d) Decrease in Income Levels of Buyers

111. Decrease in Demand is caused by-

(a) Change in Buyer Preferences and Tastes against this commodity
(b) Re-distribution of income away from Consumers who favour this commodity
(c) Decrease in population
(d) All the above

ANSWER TO MCQS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
B C B B A C A C B C C B A B B A B C A B
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
C C A B C B A A B D D B D C B A B C A C
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61
C C B C C C C B B C C A B A B D A A C A B
62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81
B C A A D C D C C D D C A C B C B B C D
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101
C A B C D A B D B A D D D A B B A D C A
102 103 104 105 106 107 108 109 110 111
B C A B A B B D B D

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C. ELASTICITY OF DEMAND - MCQs

ELASTICITY BASICS
1. The concept of Elasticity of Demand was developed by-
(a) Alfred Marshall
(b) Edwin Cannon
(c) Paul Samuelson
(d) Fredric Bonham

2. Two important factors which make difference in the Elasticity of Demand for different
commodities are
(a) Preferences and Income
(b) Income and Expenditure
(c) Quantity and Price of the Commodity
(d) Tax Rates and Level of Income

3. Elasticity of Demand refers to -

(a) The responsiveness of the quantity demanded of a commodity, to changes in
one of the variables on which demand depends.
(b) The percentage change in quantity demanded, divided by the percentage
change in one of the factors on which demand depends.
(c) Both (a) and (b)
(d) Neither (a) nor (b)

4. Elasticity of Demand is attributed to -

(a) Changes in Prices
(b) Changes in Incomes
(c) Both (a) and (b)
(d) Neither (a) nor (b)

5. Elasticity of Demand is measured in case of -

(a) Changes in Price of the Commodity
(b) Changes in Incomes of the Consumers
(c) Changes in Prices of related commodities
(d) All of the above

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6. Which of the following statements regarding Elasticity of Demand is true?

(a) Elasticity can be positive or negative
(b) Elasticity always has a negative value
(c) Elasticity always has a positive value
(d) Elasticity can never be zero

7. Which of the following statements is true with regard to the elasticity of demand?
(a) The elasticity of demand remains same, both in short run and in long run
(b) Demand is more elastic in the short run than in long run
(c) Demand is more inelastic in the long run than in short run
(d) Demand is more elastic in the long run than in short run

8. Price Elasticity of Demand is defined as -

(a) Change in quantity demanded ÷ Change in price
(b) Proportionate change in quantity demanded ÷ Change in Price
(c) Change in quantity demanded ÷ Proportionate change in Price
(d) Proportionate change in quantity demanded ÷ Proportionate change in price

9. Price Elasticity of Demand is defined as the responsiveness of -

(a) Price to a change in quantity demanded
(b) Quantity demanded to a Change in Price
(c) Price to a Change in Income
(d) Quantity demanded to a change in income

10. Price Elasticity of Demand for a product is -

(a) Change in the quantity demanded of the product when price increases by 30%
(b) Percentage increase in the quantity demanded of the product when the price
falls by 1%
(c) Increase in the demand for the product when its price falls by 10%
(d) Decrease in the quantity demanded of the product when its price falls by 1%

11. Price Elasticity of Demand is given by -

(a) ∆p/∆q X q/p
(b) ∆p/∆q X p/q
(c) ∆q/∆p X q/p
(d) ∆q/∆p X p/q

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12. Usually, the demand for Necessities is -

(a) Highly Elastic
(b) Highly Inelastic
(c) Slightly Elastic
(d) Slightly Inelastic

13. Demand for which of the following products is/are relatively inelastic?
(a) Water
(b) Electricity
(c) Movie Tickets
(d) Both (a) and (b)

14. Which of the following products has highly inelastic demand?

(a) Jewellery
(b) Imported sofa set
(c) Salt
(d) Sports car

15. Amongst the following which item has highest Price Elasticity?
(a) Salt
(b) Petrol
(c) Indian Oil's Petrol
(d) Rice

16. In the context of Elasticity of Demand, the paradox of plenty relates more to items in
the -
(a) Services Sector
(b) Agricultural Sector
(c) Mining Sector
(d) Industrial Sector

17. Goods which have more close or perfect substitutes are

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

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18. Goods which have fewer substitutes are -

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

19. Goods having higher proportion of the Consumers' spending are -

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

20. Goods having lower share in the Consumers' Budget are –

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

21. Luxury Goods are considered ………. than Necessity Goods.

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

22. Necessary Goods are considered ………. than Luxury Goods.

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

23. Salt is ………. to price changes than Motor Car.

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

24. Cellphone is ………. to price changes than Bread.

(a) Less Elastic
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(b) Unit Elastic

(c) More Elastic
(d) Zero Elastic

25. Goods which can be put to multiple uses are -

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

26. Goods which have a specified and particular use are

(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

27. Demand for electricity is elastic because -

(a) It is very expensive.
(b) It has a number of close substitutes.
(c) It has alternative uses.
(d) None of the above.

28. Goods in respect of which the Consumers have more time to adjust or modify their
consumption pattern are -
(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

29. Goods in respect of which the Consumers do not have time to adjust their consumption
pattern are -
(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

30. Goods in respect of which the use or consumption can be postponed are -
(a) Less Elastic
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(b) Unit Elastic

(c) More Elastic
(d) Zero Elastic

31. Goods which are required for immediate or urgent consumption are -
(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

32. Medicines have less elastic demand since -

(a) They have alternative uses
(b) They have to be used immediately, and their purchase and use cannot be
delayed
(c) There are fewer substitutes available
(d) All of the above

33. Goods which are subject to Consumer Habits, e.g. Cigarette, Liquor, etc. are -
(a) Less Elastic
(b) Unit Elastic
(c) More Elastic
(d) Zero Elastic

PERFECTLY INELASTIC
34. What would be the value of elasticity of demand, if the demand for the good is perfectly
inelastic?
(a) 0
(b) 1
(c) Infinity
(d) Less than 0

35. If the demand for the good is perfectly inelastic, the Demand Curve will be -
(a) Horizontal Line
(b) Vertical Line
(c) Rectangular Hyperbola
(d) Downward Sloping to the right

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36. A demand curve parallel to y-axis implies

(a) Ep = 0
(b) Ep = 1
(c) Ep < 1
(d) Ep > 1

37. Vertical Demand Curve will show that the price elasticity of demand is -
(a) Perfectly inelastic
(b) Perfectly elastic
(c) Inelastic
(d) Unitary

38. If the demand for a commodity is ………, entire burden of indirect tax will fall on the
consumer.
(a) Relatively inelastic
(b) Perfectly inelastic
(c) Perfectly elastic
(d) Relatively elastic

39. For goods with perfectly inelastic demand -

(a) ∆p > ∆q ,
(b) ∆p = ∆q
(c) ∆p = 0
(d) ∆q = 0

40. If the demand for the good is perfectly inelastic, which of the following is correct?
(a) Quantity does not change at all
(b) Quantity decreases and price falls
(c) Quantity increases and price increases
(d) Quantity increases and price falls

41. If the demand for the good is perfectly inelastic, and E is the measure of Elasticity,
which of the following is true?
(a) E = 0
(b) 0 < E < 1
(c) E = 1
(d) E > 1

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42. If a product has perfectly inelastic demand, and there is a change in its price, which of
the following is correct?
(a) Percent Change in Quantity demanded will be greater than Percent Change in
Price
(b) Percent Change in Quantity demanded will be lesser than Percent Change in
Price
(c) Percent Change in Quantity demanded will be equal to Percent Change in Price
(d) Quantity demanded will not change at all

LESS ELASTIC
43. Identify the factor which generally keeps the Price- Elasticity of Demand for a product
low.
(a) Variety of Uses for that product
(b) Its Low Price
(c) Close Substitutes for that product
(d) High proportion of the Consumer's Income spent on it

44. Identify the coefficient of price-elasticity of demand when the percentage increase in
the quantity demanded of a product is smaller than the percentage fall in its price.
(a) Equal to one
(b) Greater than one
(c) Smaller than one
(d) Zero

45. Price Elasticity of Demand for addictive products like cigarettes and alcohol would be -
(a) Greater than 1
(b) Less than 1
(c) Infinity
(d) One

46. If Electricity Demand is inelastic, and electric rates increase, which of the following is
likely to occur?
(a) Quantity demanded will fall by a relatively large amount
(b) Quantity demanded will fall by a relatively small amount
(c) Quantity demanded will rise in the short run, but fall in the long run
(d) Quantity demanded will fall in the short run, but rise in the long run

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47. For goods with less elastic demand -

(a) ∆q > ∆p
(b) ∆q = ∆p
(c) ∆q < ∆p
(d) ∆q = 1

48. If the demand for the good is less elastic, and E is the measure of Elasticity, which of
the following is true?
(a) E = 0
(b) 0 < E < 1
(c) E = 1
(d) E > 1

49. If the demand for the good is less elastic, the Demand Curve will be - .
(a) Horizontal Line
(b) Vertical Line
(c) Downward Sloping to the right, flatter
(d) Downward Sloping to the right, steeper

50. If a product has less elastic demand, and there is a change in its price, which of the
following is correct?
(a) Percent Change in Quantity demanded will be greater than Percent Change in
Price
(b) Percent Change in Quantity demanded will be lesser than Percent Change in
Price
(c) Percent Change in Quantity demanded will be equal to Percent Change in Price
(d) Quantity demanded will not change at all

51. When the price of a commodity increases from Rs. 8 to Rs. 9 then the demand
decreases by 10%. The price Elasticity of demand is _______
(a) 0.8
(b) 0.9
(c) 1
(d) 1.1

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UNIT ELASTIC
52. If the demand for a good is unit elastic, the value of the elasticity of demand would be -
(a) 0
(b) 1
(c) Infinity
(d) Less than 0

53. If the price of 'X' rises by 10% and the quantity demanded falls by 10%, 'X' has -
(a) Inelastic Demand
(b) Unit Elastic Demand
(c) Zero Elastic Demand
(d) Elastic Demand

54. For goods with unit elastic demand -

(a) ∆q > ∆p
(b) ∆q = ∆p
(c) ∆q < ∆p
(d) ∆q = 1

55. If the demand for the good is unit elastic, and E is the measure of Elasticity, which of
the following is true?
(a) E = 0
(b) 0 < E < 1
(c) E = 1
(d) E > 1

56. If the demand for the good is unit elastic, the Demand Curve will be -
(a) Horizontal Line
(b) Vertical Line
(c) Rectangular Hyperbola
(d) Nothing can be said

57. If the demand for the good is unit elastic, the Demand Curve will be -
(a) 45 degree Straight Line, sloping downward to the right
(b) Rectangular Hyperbola
(c) Either (a) or (b)
(d) Neither (a) nor (b)

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58. Rectangular Hyperbola is also called -

(a) Equilateral Hyperbola
(b) Vertical Line
(c) Square
(d) Horizontal Line

59. If the demand for the good is unit elastic, the Demand Curve will be -
(a) 45 degree Straight Line, sloping downward to the right
(b) Rectangular Hyperbola
(c) Equilateral Hyperbola
(d) Any of the above

60. If a product has unit elastic demand, and there is a change in its price, which of the
following is correct?
(a) Percent Change in Quantity demanded will be greater than Percent Change in
Price
(b) Percent Change in Quantity demanded will be lesser than Percent Change in
Price
(c) Percent Change in Quantity demanded will be equal to Percent Change in Price
(d) Quantity demanded will not change at all

61. In case of Straight-Line demand curve meeting two axes, the Price Elasticity of demand
at a point where the curve meets x-axis would be
(a) 1
(b) ∞
(c) 0
(d) >1

MORE ELASTIC
62. Identify the coefficient of price-elasticity of demand when the percentage increase in
the quantity demanded of a product is more than the percentage fall in its price.
(a) Equal to one
(b) Greater than one
(c) Smaller than one
(d) Zero

63. When quantity demanded changes by larger percentage than Price, Elasticity is
termed as -
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(a) Inelastic
(b) Perfectly elastic
(c) Elastic
(d) Perfectly inelastic

64. Suppose the demand for meals at a medium-priced restaurant is elastic. If the
management of the restaurant is considering raising prices, it can expect a relatively -
(a) Large fall in quantity demanded
(b) Large fall in demand
(c) Small fall in quantity demanded
(d) Small fall in demand

65. For goods with more elastic demand -

(a) ∆q > ∆p
(b) ∆q = ∆p
(c) ∆q < ∆p
(d) ∆q = 1

66. If the demand for the good is more elastic, and E is the measure of Elasticity, which of
the following is true?
(a) E = 0
(b) 0 < E < 1
(c) E = 1
(d) E > 1

67. If the demand for the good is more elastic, the Demand Curve will be -
(a) Horizontal Line
(b) Vertical Line
(c) Downward Sloping to the right, flatter
(d) Downward Sloping to the right, steeper

68. If a product has less elastic demand, and there is a change in its price, which of the
following is correct?
(a) Percent Change in Quantity demanded will be greater than Percent Change in
Price
(b) Percent Change in Quantity demanded will be lesser than Percent Change in
Price
(c) Percent Change in Quantity demanded will be equal to Percent Change in Price
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(d) Quantity demanded will not change at all

PERFECTLY ELASTIC
69. What would be the value of Elasticity of Demand, if the demand for the good is perfectly
elastic?
(a) 0
(b) 1
(c) Infinity
(d) Less than 0

70. If the demand for the good is perfectly elastic, the Demand Curve will be -
(a) Horizontal Line
(b) Vertical Line
(c) Rectangular Hyperbola
(d) Downward Sloping to the right

71. Horizontal Demand Curve will show that the price elasticity of demand is -
(a) Perfectly inelastic
(b) Perfectly elastic
(c) Inelastic
(d) Unitary

72. For goods with perfectly elastic demand -

(a) ∆p > ∆q
(b) ∆p = ∆q
(c) ∆p = 0
(d) ∆q = 0

73. If the demand for the good is perfectly elastic, and E is the measure of Elasticity, which
of the following is true?
(a) E = 0
(b) 0 < E < 1
(c) E > 1
(d) E = Infinity

74. What is the mean by price elasticity of demand greater than 1-

(a) % change in quantity demanded is less than % change in price.
(b) % change in quantity demanded is more than %change in price.
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(c) No change in quantity and price

(d) None of these

75. Horizontal Demand curve, Parallel to X-axis indicates, that the elasticity of Demand is
________
(a) Zero
(b) Infinite
(c) >1
(d) <1

DETERMINANTS OF PRICE ELASTICITY

76. Price Elasticity of Demand would be higher for those products which have -
(a) A larger number of Substitutes
(b) Fewer Substitutes
(c) No Substitutes
(d) Fewer Complementary Goods

77. Demand for a good will tend to be more elastic if it exhibits which of the following
features?
(a) It represents a small part of the consumer's income
(b) The good has many substitutes available
(c) It is a necessity (as opposed to a luxury)
(d) There is little time for the Consumer to adjust to the price change

78. If the Elasticity of Demand for a commodity is perfectly inelastic, then which of the
following is incorrect?
(a) The Commodity must be essential to those who purchase it.
(b) The Commodity must have many substitutes.
(c) The Commodity will be purchased regardless of increase in its price.
(d) The Elasticity of Demand for this Commodity must be equal to zero.

79. Demand for a product will tend to be more inelastic if it exhibits which of the following
characteristics?
(a) The product has many substitutes
(b) The product is a luxury (as opposed to a necessity)
(c) The product is a small part of the Consumer's income
(d) There is a great deal of time for the consumer to adjust to the change in prices

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80. The Elasticity of Substitution between two Perfect Substitutes is-

(a) Zero
(b) Greater than zero
(c) Less than infinity
(d) Infinite

81. Which is correct about price elasticity of demand?

(a) It is several degrees and natures
(b) It is unaffected due to change in price of other goods
(c) It is immeasurable concept
(d) It is due to direction of change in price

PROPORTIONATE METHOD
82. If the demand for a product reduces by 5% as a result of an increase in the price by
25%. What is the Price Elasticity of Demand?
(a) -0.2
(b) -0.5
(c) -0.25
(d) 0.2

83. If Price of Coffee decreases from ₹ 5 to ₹ 4.50, and as a result the Consumer's Demand
for Coffee increase from 60 grams to 75 grams, the absolute Price Elasticity of Demand
of Coffee is -
(a) 1.5
(b) 3.0
(c) 2.0
(d) 2.5

84. If the demand for a product reduces by 2% as a result of an increase in the price by
10%, what is the Price Elasticity of Demand for the product?
(a) +0.20
(b) -0.40
(c) -0.20
(d) +0.40

85. If the Demand for Cricket Balls increases from 50 to 55 because of fall in price from ₹
25 to ₹ 24, what is the Price Elasticity of Demand for Cricket Balls?
(a) (1.0)
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(b) (2.5)
(c) (2)
(d) (5)

86. What is the Price Elasticity of Demand for a product, if an increase in the price of the
good by 2% leads to fall in demand by 3%?
(a) +1.5
(b) -1.5
(c) 1
(d) 0

87. Price of Mangoes increases by 22% and the quantity of mangoes demanded falls by
25%. This indicates that demand for mangoes is -
(a) Elastic
(b) Inelastic
(c) Unitarily elastic
(d) Perfectly elastic

88. Suppose the price of movies seen at a Theatre rises from ₹ 120 to ₹ 200 per person.
The Theatre Manager observes that the rise in price causes attendance at a given
movie to fall from 300 persons to 200 persons. What is the Price Elasticity of Demand
for Movies?
(a) 0.5
(b) 0.8
(c) 1.0
(d) 1.2

89. Suppose a Department Store has a sale on its silverware. If the Price of a plate-setting
is reduced from ₹ 300 to ₹ 200 and the quantity demanded increases from 3,000 plate
settings to 5,000 plate- settings, what is the Price Elasticity of Demand for that item?
(a) 0.8
(b) 2.0
(c) 1.25
(d) 1.5

90. A Store has a special offer on CDs. It reduces the price from ₹ 150 to ₹ 100. The Store
Manager observes that the quantity demanded increases from 700 CDs to 1,400 CDs.
What is the Price Elasticity of Demand for CDs?
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(a) 0.8
(b) 3.0
(c) 1.25
(d) 1.50

91. If a shop raises the price of a product from ₹ 60 to ₹ 100 and quantity demanded falls
from 400 units to 300 units, the Price Elasticity of Demand is -
(a) 0.667
(b) 0.500
(c) 1.000
(d) 0.375

92. A book seller estimates that if the price of a book is increased from ₹ 60 to ₹ 67, the
quantity of books demanded will decrease from 2,035 to 1,946. The Book's Price
Elasticity of Demand is approximately -
(a) 0.4
(b) 0.8
(c) 1.0
(d) 2.5

93. What is the new quantity demanded when Price Elasticity is 1 and price changes from
₹ 15 to ₹ 10 and the original quantity demanded was 10 units?
(a) 15 units
(b) 20 units
(c) 8 units
(d) 12 units

94. What will be the price elasticity if original price is ₹ 5, original quantity is 8 units and
changed price is ₹ 6 changed quantity is 4 units?
(a) 2.5
(b) 2.0
(c) 1.5
(d) 1.0

95. The original price of commodity is ₹ 500 and quantity demanded is 20 kgs. If price rises
to ₹ 750 and quantity demanded reduce to 15 kgs, price elasticity of demand is
_______
(a) 0.25
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(b) 0.50
(c) 1.00
(d) 1.50

96. The price of a tiffin box is ₹100 per unit and the quantity demanded in a market is
25,000 units. Company increased the price to ₹ 125 per unit due to this increase in
price quantity demanded decreases to 1,00,000 units. What will be price elasticity of
demand
(a) 1.25
(b) 0.80
(c) 1.00
(d) None

97. The price of a commodity decreases form 10 to 8 and the quantity demanded of it
increases from 25 to 30 units. Then the coefficient of price elasticity will be _______
(a) 1
(b) -1
(c) 1.5
(d) -1.5

POINT ELASTICITY
98. The Elasticity at a given point on a Demand Curve is known as -
(a) Point Elasticity
(b) Income Elasticity
(c) Arc Elasticity
(d) Cross Elasticity

99. Point Elasticity of Demand is calculated as -

(a) Upper Segment ÷ Lower Segment
(b) Lower Segment ÷ Upper Segment
(c) Either (a) or (b)
(d) Neither (a) nor (b)

100. Point Elasticity is useful for which of the following situations -

(a) The bookstore is considering doubling the price of notebooks
(b) A restaurant is considering lowering the price of its most expensive dishes by
50%
(c) An automobile producer is interested in determining the response of consumers
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to the price of cars being lowered by ÷ 50,000

(d) None of the above

101. Which of the following statements regarding Elasticity of Demand is true?

(a) Elasticity of demand decreases as one goes down a Straight-Line Demand
Curve
(b) Elasticity of Demand increases as one goes down a Straight-Line Demand
Curve
(c) Elasticity of Demand is constant throughout the Straight-Line Demand Curve
(d) None of the above

102. If a point on a Demand Curve of any Product lies on X Axis, then Price Elasticity of
Demand of that commodity at that point will be -
(a) Infinite
(b) More than zero
(c) Less than zero
(d) Zero

103. If a point on a Demand Curve of any Product lies on Y Axis, then Price Elasticity of
Demand of that commodity at that point will be -
(a) Infinite
(b) More than zero
(c) Less than zero
(d) Zero

104. In the case of a Straight Line Demand Curve meeting the two axes, the Price-Elasticity
of Demand at the mid-point of the line would be
(a) 0
(b) 1
(c) 1.5
(d) 2

105. If R point bisects the Demand Curve in two equal parts, then elasticity at R equals -
(a) Zero
(b) Five
(c) Two
(d) One

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106. Point Elasticity at the mid-point on the Straight Line Demand Curve is -
(a) One
(b) Zero
(c) Less than one
(d) Less than zero

107. What is the elasticity between midpoint & upper extreme point of a straight line
continuous demand curve?
(a) Infinite
(b) Zero
(c) >1
(d) <1

ARC ELASTICITY
108. At a price of ₹ 300 per month, there are 30,000 subscribers to Cable TV in a Small
Town. If the Cable Company raises its price to ₹ 400 per month, the number of subscribers will
fall to 20,000. Using the mid-point method for calculating the elasticity,
what is the Price Elasticity of Demand for Cable TV?
(a) 1.4
(b) 0.66
(c) 0.75
(d) 2.0

109. What is the Price Elasticity of Demand when, price changes from ₹ 10 to ₹ 12 and as
a result, demand falls from 6 units to 4 units?
(a) 0.833
(b) 1.6
(c) 2.2
(d) 1.833

110. If the quantity of blankets demanded increases from 4,600 to 5,700 in response to a
decrease in their price from ₹ 220 to ₹ 190, the Price Elasticity of Demand for Blankets
using Arc Method is -
(a) 0.69
(b) 1.0
(c) 1.46
(d) 2 .66

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111. What is the Original Price of a Product when Price Elasticity is 0.71 and Demand
changes from 20 units to 15 units and the new price is ₹ 10? (Use Arc Method for
computation)
(a) ₹ 15
(b) ₹ 18
(c) ₹ 20
(d) ₹ 8

TOTAL OUTLAY / REVENUE METHOD

112. Under Total Outlay Method, if as a result of the decrease in price of a product, the total
expenditure on the product rises, we say that Price Elasticity of Demand is -
(a) Equal to unity
(b) Greater than unity
(c) Less than unity
(d) Zero

113. Under Total Outlay Method, if Price and Consumer's Total Expenditure on the product
move in opposite directions, then, Price Elasticity of Demand is –
(a) Equal to unity
(b) Greater than unity
(c) Less than unity
(d) Zero

114. If the demand for a product is elastic, an increase in its price will cause the Total
Expenditure of the Consumers to -
(a) Remain the same
(b) Increase
(c) Decrease
(d) Any of these

115. If the demand for a product is elastic, an decrease in its price will cause the Total
Expenditure of the Consumers to –
(a) Remain the same
(b) Increase
(c) Decrease
(d) Any of these

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116. Under Total Outlay Method, if as a result of the decrease in price of a product, the total
expenditure on the product decreases, we say that Price Elasticity of Demand is -
(a) Equal to unity
(b) Greater than unity
(c) Less than unity
(d) Zero

117. Under Total Outlay Method, if Price and Consumer's Total Expenditure on the product
move in the same direction, then, Price Elasticity of Demand is -
(a) Equal to unity
(b) Greater than unity
(c) Less than unity
(d) Zero

118. If the demand for a product is inelastic, an increase in its price will cause the Total
Expenditure of the Consumers to -
(a) Remain the same
(b) Increase
(c) Decrease
(d) Any of these

119. If the demand for a product is inelastic, an decrease in its price will cause the Total
Expenditure of the Consumers to –
(a) Remain the same
(b) Increase
(c) Decrease
(d) Any of these

120. Total Expenditure of a Consumer increases if-

(i). Demand is elastic and price rises
(ii). Demand is elastic and price falls
(iii). Demand is inelastic and price rises
(iv). Demand is inelastic and price falls
(a) Only (ii)
(b) Only (iii)
(c) Both (i) and (iii)
(d) Both (ii) and (iii)

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121. Given the following four possibilities, which one results in an increase in Total
Consumer Expenditure?
(a) Demand is unitary elastic and price falls
(b) Demand is elastic and price rises
(c) Demand is inelastic and price falls
(d) Demand is inelastic and price rises

122. Due to change in price of the commodity, the Total Expenditure remains the same as
before, then Elasticity under Total Outlay Method is -
(a) Equal to unity
(b) Greater than unity
(c) Less than unity
(d) Zero

123. When Increase in prices is exactly balanced by a proportionate reduction in the

purchase quantity, then Elasticity under Total Outlay Method is -
(a) Equal to unity
(b) Greater than unity
(c) Less than unity
(d) Zero

124. An increase in price will result in an increase in Total Revenue if -

(a) Percentage Change in quantity demanded is less than the Percentage Change
in Price
(b) Percentage Change in quantity demanded is more than Percentage Change in
price
(c) Demand is elastic
(d) Consumer is operating along a Linear Demand Curve at a point at which the
price is very high and the quantity demanded is very low

125. Which of the following statements regarding Elasticity of Demand is true?

(a) If the demand for the product is inelastic, an increase in price will have a
positive effect on the total revenue of the Firm
(b) If the demand for the product is elastic, an increase in price will have a positive
effect on the total revenue of the Firm
(c) If the demand for the product is inelastic, an increase in price will have a
negative effect on the total revenue of the Firm
(d) If the demand for the product is inelastic, a decrease in price will have a positive
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effect on the total revenue of the Firm

126. A decrease in price will result in an increase in Total Revenue if -

(a) Percentage Change in Quantity Demanded in less than Percentage Change in
Price
(b) Percentage Change in Quantity Demanded is greater than Percentage Change
in Price
(c) Demand is inelastic
(d) Consumer is operating along a Linear Demand Curve at a point at which the
Price is very low and quantity demanded is very high

127. If a good has price elasticity greater than one then -

(a) Demand is unit elastic and a change in price does not affect sellers' revenue.
(b) Demand is elastic and a change in price causes Sellers' Revenue to change in
the opposite direction.
(c) Demand is inelastic and a change in price causes Sellers' Revenue to change
in the same direction.
(d) None of the above is correct.

128. Ceteris paribus, what would be the impact on foreign exchange earnings for a given
falling export prices, if the demand for the country's exports is inelastic?
(a) Foreign Exchange Earnings decrease
(b) Foreign Exchange Earnings increase
(c) No effect on Foreign Exchange Earnings
(d) Foreign Exchange Earnings increase for a brief period and decrease drastically
later on

129. If the Railways are making losses on passenger traffic, they should lower their fares.
The suggested remedy would only work if the demand for Rail Travel had a price
elasticity of -
(a) Zero
(b) Greater than zero but less than one.
(c) One
(d) Greater than one

130. If Cinema Halls are making losses they should lower the ticket fares. This suggestion
would only work if the demand for watching movies in cinema halls had a Price
Elasticity of -
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(a) Zero
(b) Greater than zero but less than one.
(c) One
(d) Greater than one

131. Price Elasticity of demand for a product is zero. If the Firm increases the price of the
product by 10%, Total Revenue of the Firm will -
(a) Not change
(b) Increase to infinity
(c) Fall to zero
(d) Decrease by 10%

INCOME ELASTICITY
132. Income Elasticity of Demand is defined as the responsiveness of -
(a) Price to a change in quantity demanded
(b) Quantity demanded to a Change in Price
(c) Price to a Change in Income
(d) Quantity demanded to a change in income

133. Income Elasticity of Demand is given by -

(a) ∆i/∆q X q/i
(b) ∆i/∆q X i/q
(c) ∆q/∆i X q/i
(d) ∆q/∆i X i/q

134. Positive Income Elasticity implies that as income rises, demand for the commodity -
(a) Rises
(b) Falls
(c) Remains unchanged
(d) Becomes zero

135. If Income-Elasticity is greater than zero, then the product is -

(a) Superior
(b) Normal
(c) Inferior
(d) Both (a) & (b)

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136. ……….. have a positive Income Elasticity of Demand.

(a) Complementary Goods
(b) Substitute Goods
(c) Normal Goods
(d) Inferior Goods

137. For what type of goods does demand fall with rise in income levels of households?
(a) Inferior Goods
(b) Substitutes
(c) Luxuries
(d) Necessities

138. Negative Income Elasticity implies that as income rises, demand for the commodity -
(a) Rises
(b) Falls
(c) Remains unchanged
(d) Becomes zero

139. Generally when income of a consumer increases he goes for superior goods, leading
to fall in demand for inferior goods. It means income elasticity of demand is ______.
(a) Less than one
(b) Negative
(c) Zero
(d) Unitary

140. What type of goods does a consumer eventually stop buying, when his income rises?
(a) Goods with Positive Income Elasticity
(b) Goods with Negative Income Elasticity
(c) Goods with Zero Income Elasticity
(d) No relationship exists between the type of the goods bought and rise in income

141. Goods having negative Income Elasticity are known as –

(a) Normal
(b) Inferior
(c) Superior
(d) Necessities

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142. In case of Inferior Goods, Income Elasticity is -

(a) Zero
(b) Positive
(c) Negative
(d) None

143. In Demand-Supply Analysis, if the income of the Consumer increases, the Demand
Curve for an inferior good -
(a) Shifts upward to the right
(b) Shifts downward to the left
(c) Shifts upward to the left
(d) Shifts downward to the right

144. …….. have a negative Income Elasticity of Demand.

(a) Luxury Goods
(b) Necessities
(c) Normal Goods
(d) Inferior Goods

145. If quantity demanded does not change as Income changes, then Income Elasticity of
Demand is -
(a) Below 1
(b) Above 1
(c) Zero
(d) Between -1 and 0

146. Goods having Zero Income Elasticity are -

(a) Inferior Goods
(b) Normal Goods
(c) Luxury Goods
(d) None of the above

147. If an increase in Consumer Incomes leads to a increase in the demand for Product X,
then Product X is -
(a) A Normal Good
(b) A Substitute Good
(c) An Inferior Good
(d) None of the above
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148. For ………. goods increase in income leads to increase in demand.

(a) Abnormal
(b) Normal
(c) Inferior
(d) Superior

149. If Income Elasticity > 1, it means that proportion of Income spent on goods …….., as
income of the Consumers increases.
(a) Increases
(b) Decreases
(c) Remains constant
(d) Nothing can be said

150. For a product to be called income elastic, its Income Elasticity has to be -
(a) Below 1
(b) Above 1
(c) Zero
(d) Between -1 and 0

151. Services like Air Travel and Movies have an income elasticity of -
(a) More than 1
(b) 0
(c) Less than 1
(d) Between 0 and 1

152. What would be the value of Income Elasticity of demand for the meals in a costly
restaurant?
(a) Lesser than one
(b) Between 0 and 1
(c) 1
(d) More than 1

153. If a good is a Luxury, its Income Elasticity of demand is

(a) Positive and less than 1
(b) Negative but greater than -1
(c) Positive and greater than 1
(d) Zero

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154. Goods having Income Elasticity > 1 are considered as -

(a) Luxury Goods
(b) Necessities
(c) Normal Goods
(d) Inferior Goods

155. The Income of a Household rises by 20%, the demand for Computer rises by 25%, this
means Computer (in Economics) is a/an
(a) Inferior Good
(b) Luxury Good
(c) Necessity
(d) Nothing can be said

156. If Income Elasticity for the household for Product A is 2 then A is -

(a) Necessity Item
(b) Inferior Goods
(c) Luxurious Item
(d) Comfortable Item

157. If the Income Elasticity is greater than one, the commodity is -

(a) Necessity
(b) Luxury
(c) Inferior goods
(d) None of these

158. If Income Elasticity = 1, it means that proportion of Income spent on goods ………, as
income of the Consumers increases.
(a) Increase
(b) Decreases
(c) Remains constant
(d) Nothing can be said

159. If Consumers always spend 15% of their income on food, then the Income Elasticity of
Demand for Food is
(a) 1.50.
(b) 1.15.
(c) 1.00
(d) 0.15.
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160. If Income Elasticity < 1, it means that proportion of Income spent on goods ……., as
income of the Consumers increases.
(a) Increases
(b) Decreases
(c) Remains constant
(d) Nothing can be said

161. Which of the following is not an income-elastic product/service?

(a) Air Travel
(b) Entertainment in an Amusement Park
(c) Life-saving Drugs
(d) Meals in a costly restaurant

162. A Necessity is defined as a good having -

(a) Positive Income Elasticity of Demand
(b) Negative Income Elasticity of Demand
(c) Income Elasticity of Demand less than 1
(d) Price Elasticity of Demand less than 1.

163. Goods having Income Elasticity < 1 are considered as-

(a) Luxury Goods
(b) Necessities
(c) Normal Goods
(d) Inferior Goods

164. Which of the following is not a determinant of the Advertising Elasticity of Demand?
(a) Effect of Time
(b) Stages of Product
(c) Advertising by Competitors
(d) Income Level of the Consumers

165. If income increases by 10% and demand increases by 5%, then income elasticity of
demand is:
(a) +0.5
(b) -0.5
(c) + 0.05
(d) -0.05

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166. Suppose a Consumer's income increases from ₹ 30,000 to ₹ 36,000. As a result, the
consumer increases her purchases of compact discs (CDs) from 25 CDs to 30 CDs.
What is the Income Elasticity of Demand for CDs here?
(a) 0.5
(b) 1.0
(c) 1.5
(d) 2.0

167. If the quantity of CD demanded increases from 260 to 290 in response to an increase
in income from ₹ 9,000 to ₹ 9,800, the Income Elasticity of Demand is approximately -
(a) 3.4
(b) 0.01.
(c) 1.3
(d) 2.3.

168. Concerned about the poor state of the economy, a Car Dealer estimates that if income
decreases by 4%, Car Sales will fall from 352 to 335. Consequently, the Income
Elasticity of Demand for cars is approximately -
(a) -1.2
(b) 0.01
(c) 0.4
(d) 1.2

169. If an Increase In Consumer Incomes leads to a decrease in the demand for Product X,
then Product X is -
(a) A Normal Good
(b) A Substitute Good
(c) An Inferior Good
(d) None of the above

170. Income of a household increases by 10%, and the demand for Wheat rises by 5%.
This means that Wheat is an example of -
(a) Normal Goods
(b) Luxurious Goods
(c) Inferior Goods
(d) Economic Goods

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171. Income of a household increases by 10%, and the demand for TV rises by 20%. This
means that TV is an example of -
(a) Normal Goods
(b) Luxurious Goods
(c) Inferior Goods
(d) Economic Goods

172. Income of a household increases by 5%, and the demand for Bajra falls by 2%. In this
case, Bajra is an example of -
(a) Normal Goods
(b) Luxurious Goods
(c) Inferior Goods
(d) Economic Goods

CROSS ELASTICITY
173. In order to assess the effect of a change in price of one product on the demand for
other products, which type of elasticity is often used?
(a) Cross Elasticity
(b) Income Elasticity
(c) Price Elasticity
(d) Supply Elasticity

174. Cross Elasticity measures the responsiveness of quantity demanded of a commodity

to -
(a) Changes in Price of that Commodity
(b) Changes in Price of other Commodities
(c) Changes in Income Levels of Buyers
(d) All of the above

175. In measuring Cross Elasticity, ……..is / are considered.

(a) Only one product
(b) Two products
(c) Many products
(d) No products

176. Which of the following statements regarding Cross Elasticity is true?

(a) It is always negative
(b) It is always positive
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(c) It can be either positive or negative

(d) It always lies between 0 and 1

177. If Goods X and Y are complementary, their Cross Elasticity is -

(a) Infinity
(b) Greater than zero but less than infinity
(c) Zero
(d) Negative

178. Complementary Goods like tea and sugar have a ……… Cross Elasticity.
(a) Negative
(b) Positive
(c) Zero
(d) Infinite

179. What will be the Slope of Demand Curve when it shows the Cross Elasticity between
two Complementary Goods?
(a) Negative
(b) Positive
(c) Horizontal
(d) None of these

180. Cross Elasticity between Tea and Sugar is -

(a) Less than 0
(b) Greater than 1
(c) Zero
(d) Greater than 0, but less than 1

181. Goods having negative Cross Elasticity are -

(a) Mostly complementary goods
(b) Always complementary goods
(c) Mostly substitute goods
(d) Always substitute goods

182. Negative Cross Elasticity always implies that the goods are complementary in nature.
This statement is -
(a) True
(b) False
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(c) Partially True

(d) Nothing can be said

183. Goods having zero Cross Elasticity are -

(a) Complementary goods
(b) Unrelated goods
(c) Substitute goods
(d) All of the above

184. Cross Elasticity of Demand between Tea and Coffee is -

(a) Positive
(b) Negative
(c) Zero
(d) Infinity

185. If the co-efficient of Cross Elasticity of Demand of X for Y is 3, it means that X and Y
are -
(a) Complementary Goods
(b) Substitute Goods
(c) Inferior Goods
(d) Normal Goods

186. When Cola Companies Coke and Pepsi, introduced Colas in mini bottles at a low price,
the demand for Tea and Coffee is small tea stalls declined drastically. The Cross
Elasticity between the Colas and Tea / Coffee is -
(a) Negative
(b) Positive
(c) Zero
(d) Infinite

187. If two products are good substitutes, the value of Cross Elasticity will be -
(a) Negative
(b) Positive
(c) Zero
(d) No Cross Elasticity exists between two substitute products

188. The cross elasticity of demand between two perfect substitutes will be –
(a) Zero
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(b) Infinity
(c) Very high
(d) Very low

189. Goods having positive Cross Elasticity are -

(a) Mostly complementary goods
(b) Always complementary goods
(c) Mostly substitute goods
(d) Always substitute goods

190. Positive Cross Elasticity always implies that the goods are substitute goods. This
statement is -
(a) True
(b) False
(c) Partially True
(d) Nothing can be said

191. If Cross Elasticity of Demand is Infinity, it means that the goods are -
(a) Perfect Complementary Goods
(b) Perfect Substitute Goods
(c) Inferior Goods
(d) Normal Goods

192. If Cross Elasticity of Demand = Zero, it means that the goods are -
(a) Perfect Complementary Goods
(b) Perfect Substitute Goods
(c) Unrelated Goods
(d) Nothing can be said

193. If Cross Elasticity of Demand between A and B is Zero, it means that between A and
B-
(a) There can be no substitution at all
(b) A can be perfectly substituted for B, and vice- versa.
(c) A and B are Inferior Goods
(d) Nothing can be said

194. If the quantity demanded of Tea increases by 5% when the price of Coffee increases
by 20%, the Cross Elasticity of demand between Tea and Coffee is-
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(a) -0.25
(b) 0.25
(c) -4
(d) 4

195. The Cross Elasticity of monthly demand for ink pen, when the price of gel pen
increases by 25% and demand for ink pen increases by 50% is equal to -
(a) + 2.00.
(b) -2.00.
(c) 2.09.
(d) + 2.09.

196. Cross Elasticity of Demand for Gel Pen when the Price of Refills increases by 20%
and demand for Gel Pens falls by 30% is equal to -
(a) 0.71
(b) + 0.25.
(c) 0.19.
(d) 1.5.

197. If the quantity demanded of Product X increases from 8 to 12 units in response to an

increase in the price of Product Y from ₹ 23 to ₹ 27, the Cross Elasticity of Demand for
X with respect to Price of Y is approximately -
(a) 0.35 and X and Y are Complements.
(b) 0.35 and X and Y are Substitutes.
(c) 2.5 and X and Y are Complements.
(d) 2.5 and X and Y are Substitutes.

198. Which of the following is incorrect?

(a) Cross Elasticity of Demand for two substitutes is positive.
(b) Income Elasticity of Demand is the percentage change in quantity demanded
of a good due to a change in the price of a substitute.
(c) Cross Elasticity of Demand for two complements is negative.
(d) Price Elasticity of Demand is always negative, except for Giffen Goods.

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ALL ELASTICITY COMPUTATION

Use the following data for the next 8 questions.
A Grocery Shop used to sell fresh milk at ₹ 20 per litre, at which price 400 litres of milk were
sold per month. After some time, the price was raised to ₹ 30 per litre. Following are the
consequences:
❖ Only 200 litres of milk was sold every month.
❖ The number of boxes of cereal customers bought went down from 200 to 140.
❖ The number of packets of powdered milk customers bought went up from 90 to 220 per
month.

199. The Price Elasticity of Demand when fresh milk's price increases from ₹ 20 per litre to
₹ 30 per litre is equal to
(a) 2.5
(b) 1.0
(c) 1.66
(d) 2.66

200. What can be said about the Price Elasticity of Demand for Fresh Milk?
(a) It is perfectly elastic.
(b) It is elastic.
(c) It is perfectly inelastic.
(d) It is inelastic.

201. The Cross Elasticity of Demand for Cereals when the price of Fresh Milk increases
from ₹ 20 to ₹ 30 is equal to
(a) -0.6
(b) +0.6
(c) -0.19.
(d) +0.38.

202. What can be said about Fresh Milk & Cereals?

(a) They are Complementary Goods
(b) They are Substitute Goods
(c) They are Unrelated Goods
(d) Nothing can be said

203. The Cross Elasticity of Demand for Powdered Milk, when the price of Fresh Milk
increases from ₹ 20 to ₹ 30 per litre is equal to -
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(a) +1.05.
(b) -1.05.
(c) -2.89.
(d) +2.89

204. What can be said about Fresh Milk and Powdered Milk?
(a) They are Complementary Goods
(b) They are Substitute Goods
(c) They are Unrelated Goods
(d) Nothing can be said

205. If Income of the Consumers increases by 50% and the quantity of Fresh Milk
demanded increases by 30%. What is Income Elasticity of Demand for Fresh Milk?
(a) 0.5
(b) 0.6
(c) 1.25
(d) 1.50

206. We can say that Fresh Milk in economics sense is an example of -

(a) Luxury Goods
(b) Inferior Goods
(c) Normal Goods
(d) Nothing can be said.

Use the following data for the next 8 questions.

A Shopkeeper sells Gel Pen at ₹ 10 per pen. At this price he can sell 120 units per month.
After some time, he raises the price to ₹ 15 per pen. Following the price rise -
❖ Only 50 pens were sold every month.
❖ The number of refills bought went down from 200 to 150.
❖ The number of ink pen customers bought went up from 90 to 150 per month.

207. Price Elasticity of demand when Gel Pen's price increases from ₹ 10 to ₹ 15 per pen
is -
(a) 2.5
(b) 1.0
(c) 1.16
(d) 2.16

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208. What can be said about the Price Elasticity of Demand for Gel Pens?
(a) It is perfectly elastic.
(b) It is elastic.
(c) It is perfectly inelastic.
(d) It is inelastic.

209. The Cross Elasticity of Demand for Refills when the price of Gel Pen increases from ₹
10 to ₹ 15 is -
(a) -0.50
(b) +0.25
(c) -0.19
(d) +0.38

210. What can be said about Gel Pen and Refills?

(a) They are Complementary Goods
(b) They are Substitute Goods
(c) They are Unrelated Goods
(d) Nothing can be said

211. Cross Elasticity of Demand for Ink Pen when the price of Gel Pen increases from ₹ 10
to ₹ 15 is equal to -
(a) +1.33
(b) -1.05
(c) -2.09
(d) +2.09

212. What can be said about Gel Pen and Ink Pens?
(a) They are Complementary Goods
(b) They are Substitute Goods
(c) They are Unrelated Goods
(d) Nothing can be said

213. If Income of the residents of locality increases by 50% and the quantity of Gel Pens
demanded increases by 20%. What is income elasticity of demand for Gel Pen?
(a) 0.4
(b) 0.6
(c) 1.25
(d) 1.50
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214. We can say that Gel Pen in economics sense is an example of -

(a) Luxury Goods
(b) Inferior Goods
(c) Normal Goods
(d) Nothing can be said.

Use the following data for the next 6 questions.

X, Y and Z are three commodities where X and Y are complementary whereas X and
Z are substitutes.
A Shopkeeper sells Commodity X at ₹ 20 per piece. At this price, he is able to sell 100 pieces
of X per month. After some time, he decreases the price of X to ₹ 10 per piece. Consequently -
❖ He is able to sell 150 pieces of X per month.
❖ Demand for Y increases from 25 to 50 units.
❖ Demand for Z decreases from 75 to 50 units.

215. Price Elasticity of Demand (using Arc Method) when Price of X decreases from ₹ 20
per piece to ₹ 10 per piece will be -
(a) 0.6
(b) 1.6
(c) 0.5
(d) 1.5

216. What can be said about the Price Elasticity of Demand for Commodity X?
(a) Demand is unit elastic
(b) Demand is highly elastic
(c) Demand is inelastic
(d) Demand is perfectly elastic

217. Cross Elasticity of Demand for Commodity Y when the Price of X decreases from ₹ 20
per piece to ₹ 10 per piece will be -
(a) -1.5
(b) +1.5
(c) +1
(d) -1

218. Cross Elasticity of Demand for Commodity Z when the price of X decreases from ₹ 20
per piece to ₹ 10 per piece will be -
(a) +1.66
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(b) +0.66
(c) -1.66
(d) -0.66

219. If Income of the Consumers increases by 50% and the demand for X increases by 20%
what will be the Income Elasticity of Demand for X?
(a) 0.04
(b) 0.4
(c) 4.00
(d) -4.00

220. We can say that Commodity X in economic sense is an example of -

(a) Inferior foods
(b) Giffin Goods
(c) Normal Goods
(d) Luxury Goods.

221. Advertisement Elasticity is also known as -

(a) Marketing Elasticity
(b) Promotional Elasticity
(c) Commercial Elasticity
(d) All of the above

222. The responsiveness of a good's demand to changes in the Firm's spending on

advertising is called -
(a) Demand elasticity
(b) Supply elasticity
(c) Advertisement elasticity
(d) None of the above

223. Advertisement Elasticity is the percentage change in

(a) Supply that occurs for every 1% change in Advertising Expenditure.
(b) Demand that occurs for every 1% change in Advertising Expenditure.
(c) Advertisement expense that occurs for every 1% change in Demand.
(d) None of the above

224. Advertising Elasticity is generally

(a) Positive
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(b) Negative
(c) Zero
(d) None of the above

225. Which of the following statements is correct?

(a) Higher the value of Advertising Elasticity, greater will be the responsiveness of
demand to change in advertisement.
(b) Lower the value of Advertising Elasticity, greater will be the responsiveness of
demand to change in advertisement.
(c) Higher the value of Advertising Elasticity, lesser will be the responsiveness of
demand to change in advertisement.
(d) None of the above

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ANSWERS TO MCQS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
A C C C D A D D B B D B D C C B C A C A
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
C A A C C A C C A C A B A A B B B B D A
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
A D B C B B C B D B A B B B C C C A D C
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
C B C A A D C A C A A C D B B A B B C D
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
A A D C B B A A B B D A A A B C B A B C
101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120
A D A B D A C A C C A B B C B C C B C D
121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140
D A A A A B B A B B A D D A D C A B A B
141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160
B C B D C D A B A B A D C A B C B C C B
161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181
C C B D A B C D C A B C A B B C D A A A A
182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201
B B A B B B B D A B C A B A D D B B B A
202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220
A D B B C C B A A A B A C A C D B B C
221 222 223 224 225
B C B A A

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D. DEMAND FORECASTING - MCQs

1. Scientific way of estimating demand is called -

(a) Demand analysis
(b) Demand Testing
(c) Demand Forecasting
(d) Demand Prediction

2. Demand Forecasting helps in -

(a) Production Scheduling
(b) Marketing
(c) Budgetary Planning
(d) All of the above

3. Based on area, Forecasting can be classified as -

(a) Micro and Macro Level
(b) International, National, State and city Level
(c) International, National, Industry and Firm Level
(d) International, National and Local Level

4. Goods which are used for production of other goods

(a) Capital Goods
(b) Consumer Goods
(c) End user Goods
(d) None of the following

5. Goods which are used for final consumption -

(a) Capital Goods
(b) Consumer Goods
(c) Durable Goods
(d) None of the following

6. Goods which can be consumed more than once is called -

(a) Consumer Goods
(b) Producers Goods
(c) Durable Goods
(d) Non-Durable Goods
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7. Goods which cannot be consumed more than once is called -

(a) Consumer Goods
(b) Producers Goods
(c) Durable Goods
(d) Non-Durable Goods

8. Smart Phone is an example of -

(a) Durable Producers' Goods
(b) Durable Consumers' Goods
(c) Non-Durable Producers' Goods
(d) Non-Durable Consumers' Goods

9. Cooking oil is an example of -

(a) Durable Producers' Goods
(b) Durable Consumers' Goods
(c) Non-Durable Producers' Goods
(d) Non-Durable Consumers' Goods

10. Tools and spare parts is an example of -

(a) Durable Producers' Goods
(b) Durable Consumers' Goods
(c) Non-Durable Producers' Goods
(d) Non-Durable Consumers' Goods

11. Increase in Farm Production leads to increase in demand of fertilizers. This is an

example of -
(a) Autonomous Demand
(b) Derived Demand
(c) Dependent Demand
(d) Industry Demand

12. The demand for a product which is independent of the demand for other goods is called -
(a) Independent Demand
(b) Derived Demand
(c) Autonomous Demand
(d) Company Demand

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13. The Demand for a Firm's product when expressed as a percentage of Industry Demand
signifies the ______ of the Firm.
(a) Performance
(b) Return
(c) Yield
(d) Market Share

14. Demand for the product of a particular Firm is called -

(a) Firm Demand
(b) Industry Demand
(c) Derived Demand
(d) Product Demand

15. The Survey method where all potential customers are interviewed about their future
purchase plans
(a) Complete Enumeration Method
(b) Sample Survey Method
(c) End-Use Method
(d) None of the above

16. The Survey method where scientifically chosen sample of potential customers are
interviewed
(a) Complete Enumeration Method
(b) Sample Survey Method
(c) End-Use Method
(d) None of the above

17. The method in which the Salesmen are required to estimate expected sales in their
respective territories
(a) Collective Opinion Method
(b) Sales Force Opinion Method
(c) Grass Roots Approach
(d) All of the above

18. Expert opinions for demand forecasting is used in

(a) Opinion Projection Method
(b) Controlled Experiments
(c) Delphi Technique
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(d) None of the above

19. Tools used by Delphi Technique to forecast demand based on Expert Opinions -
(a) Questionnaire
(b) Interview
(c) Feedback
(d) All of the above

20. Which of the following methods cannot be used for short term forecasting-
(a) Survey Method
(b) Collective Opinion Method
(c) Least Square Method
(d) None of the above

21. Concept of giving the Consumers a specific sum of money and asking them to spend
on goods with varying price, packing, display etc. is called
(a) Consumer Laboratory
(b) Consumer Clinic
(c) Consumer Workshop
(d) Consumer Research Centre

22. The method in which future demand is estimated by conducting market studies and
experiments on consumer behaviour is known as -
(a) Market Research Method
(b) Market Experiment Method
(c) Consumer Behaviour Analysis
(d) Market Response Analysis

23. Which is the Classical Method for demand forecasting?

(a) Trend Projection Method
(b) Graphical Method
(c) Regression Analysis
(d) Last Square Method

24. Graphical Method is also known as -

(a) Classical Method
(b) Free-hand projection method
(c) Index Method
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(d) All of the above

25. The superior method of forecasting is -

(a) Expert Opinion method
(b) Survey method
(c) Statistical method
(d) Barometric method

26. Economic indicators in demand forecasting is called

(a) Trend Projection method
(b) Barometric method
(c) Least Square method
(d) Gauge method

27. Barometric Method has a

(a) Wholistic approach
(b) Product specific approach
(c) Vague approach
(d) None of the above

28. What type of indicator is used in Barometric method of demand forecasting

(a) Leading Indicators
(b) Coincidental Indicators
(c) Lagging Indicators
(d) All of the above

29. Advance indications are given by -

(a) Coincidental Indicators
(b) Leading Indicators
(c) Lagging Indicators
(d) All of the above

30. Indicators that move simultaneously with the level of economic activities is -
(a) Coincidental Indicators
(b) Leading Indicators
(c) Lagging Indicators
(d) All of the above

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31. Indicators that follow a change after some time lag

(a) Coincidental Indicators
(b) Leading Indicators
(c) Lagging Indicators
(d) All of the above

32. Which of the following statements about price elasticity of demand is correct?
(a) Price elasticity of demand is a measure of how much the quantity demanded of a
good responds to a change in the price of that good.
(b) Price elasticity of demand is computed as the percentage change in quantity
demanded divided by the percentage change in price.
(c) Price elasticity of demand in the long run would be different from that of the short
run.
(d) All of the above.

33. Which of the following statements is correct?

(a) With the help of statistical tools, the demand can be forecasted accurately.
(b) The more the number of substitutes of a commodity, more elastic is the demand.
(c) Demand for butter is perfectly elastic.
(d) Gold jewellery will have negative income elasticity.

ANSWERS to MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
C D C A B C D B D A B C D A A B D C D C

21 22 23 24 25 26 27 28 29 30 31 32 33
B B A B C B A D B A C D B

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SUPPLY ANALYSIS AND

CHAPTER EQUILIBRIUM PRICE
4

Para No. A. SUPPLY – BASICS

A.1 Meaning of Supply
A.2 Factors Determining Supply
Para No. B. LAW OF SUPPLY
B.1 Law of Supply
B.2 Features of the Supply Curve
B.3 Increase and Decrease in the Quantity Supplied
B.4 Increase and Decrease in Supply
B.5 "Movement along" and "Shift of" the Supply Curve
Para No. C. ELASTICITY OF SUPPLY
C.1 Elasticity of Supply
C.2 Measuring Elasticity of Supply
C.3 Interpretation of Numerical Values
D. EQUILIBRIUM PRICE AND EFFECT OF INCREASE /
DECREASE IN DEMAND / SUPPLY
D.1 Price Determination
D.2 Effect on Equilibrium Price Increase, Decrease in Demand
D.3 Effect on Equilibrium Price Increase, Decrease in Supply
D.4 Changes in Demand and Supply - Effect on Equilibrium Price

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A. SUPPLY - BASICS

A. 1 Meaning of Supply
1. Meaning: 'Supply' refers to the quantity of goods or services that Producers are willing and
able to offer to the market at various prices during a period of time.

2. Elements of Supply: Supply will be effective only if -

(a) Producer is willing to supply the product, i.e. willingness,
(b) Producer has the resources to produce and supply the product, i.e. ability.

3. Related Points:
(a) Supply is a flow and not a single isolated sale transaction. Hence, Supply is expressed as
"quantity per period of time", e.g. 1,000 litres of petrol per day, 10,000 Kg Potato per week,
etc.
(b) Supply refers to what Firms offer for sale, and not necessarily to what they succeed in
selling.

4. Supply vs Stock: Supply is different from Stock. Stock is the total volume of the commodity
which can be brought into the market for sale at a short notice. Supply refers to the quantity
which is actually brought in the market. Thus, Stock is potential supply.

A.2 Factors Determining Supply

The factors which determine / influence Supply of a commodity in the market are -
1. Price of the Commodity:
(a) Producing Firms are guided by profit motive. So, higher the prices of products, higher the
profits.
(b) So, other things being equal, if the price of the commodity is higher, greater quantities
thereof will be supplied to the market.

2. Prices of Related Commodities:

(a) If the prices of other goods increase, those goods become relatively more profitable to the
Firm to produce and sell. So, supply of the goods in question will fall.
(b) For example, if price of wheat rises, the farmers may shift their lands to wheat production,
rather than other crops, e.g. corn and soyabeans.

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3. Prices of Factors of Production:

(a) Factors of Production refer to the resource inputs used for production of output. These
factors are - (i) Land, (ii) Labour, (iii) Capital, and (iv) Enterprise.
(b) If the cost of a particular factor of production increases, it will lead to an increase in the
cost of production of the goods which use more of that input, than other goods which use less
of that input.
(c) Example: Increase in prices of fertilizers will have a bigger impact on the cost of producing
rice, and a smaller effect on the cost of producing automobiles.
(d) This will lead to changes in the relative profitability of different goods, and will cause
Producers to shift from one type of goods to another.

4. State of Technology:
(a) Inventions and innovations reduce the cost of production in existing products, and also lead
to production of more or better goods.
(b) This causes an increase the supply quantity of new products, and reduction in the supply
quantity of products that are displaced.

5. Government Policy:
(a) Imposition of Commodity Taxes (Excise Duty, Customs Duty, VAT, etc.) increases the cost
of production, and so the quantity supplied of those goods would increase only when its price in
the market rises.
(b) Similarly, Subsidies reduce the cost of production and thus provide an incentive to the Firm
to increase supply.

6. Natural Factors: In case of agricultural commodities, better rainfall, improvement in

irrigation, improved seeds, etc. will increase supply.
Similarly, Failure of rains, floods, fires, etc. will reduce supply.

7. Other Factors: Supply quantity of goods also depends upon factors like - (a) Government's
industrial and foreign policies, (b) goals of the Firm, (c) infrastructural facilities, (d) market
structure, (e) degree of possible adjustment in supply, and (f) time taken into consideration,
etc.

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B. LAW OF SUPPLY

B.1 Law of Supply

1. Law of Supply:
Other things being equal, if the Price of a Commodity falls, its Supply Quantity will also
decrease. Similarly, if the Price of a Commodity increases, its Supply Quantity will increase. So,
other things being equal, there is a direct relationship between Price and Quantity Supplied.

2. Illustration:

Supply Schedule Supply Curve

Price (₹) Supply Qtty (units)

30 50
40 100
50 150
60 200
70 250
80 300
90 350
100 400

B.2 Features of the Supply Curve

3. Supply Curve slopes upwards from left to the right
4. Supply Curve is positively sloped.
5. Supply Curve may be sometimes a straight-line or sometimes a free hand curve.
6. The sloping of the Supply Curve explains the Law of Supply, which describes a direct Price-
Demand relationship.
7. The Market Supply Curve is a lateral summation (totaling) of Individual Supply Curves of all
Producing Firms, and also slopes upwards from left to the right.

Note: For exceptional or special Supply Curves, refer para-C.3

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B.3 Increase and Decrease in the Quantity Supplied

1. Meaning:
Increase or Decrease in the quantity supplied takes place as a result of changes in price, while
all other factors influencing Supply remain constant.

2. Movement on the Supply Curve:

Change in quantity supplied refers to downward or upward movement by the Producer Firm, on
the same Supply Curve. The position of the Supply Curve remains the same.

3. Example:
(a) Present price is P and quantity supplied is Q units.
(b) When price falls from P to Pd, the quantity supplied reduces from Q to Qd units, on the
same supply curve.
(c) Similarly, when price rises from P to Pi, the quantity supplied rises from Q to Qi units, on
the same supply curve.

4. Effect: The effects of the two concepts are as under -

Terms Meaning Effect
(a) Increase in Quantity supplied increases, due Upward movement on the same
Quantity to an increase in price. Supply Curve.
Supplied
(b) Decrease in Quantity supplied decreases, Downward movement on the same
Quantity due to a decrease in price. Supply~ Curve.
Supplied

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B.4 Increase and Decrease in Supply

1. Meaning: Increase & Decrease in Supply take place as a result of changes in factors other than
price, while price remains constant.

2. Shift of Supply Curve: Increase / Decrease in Supply indicates rightward / leftward shift of
the Supply Curve respectively.

3. Effect: The two concepts are as under -

Terms Reasons Effect

(a) Increase • Reduction in the price of Related Rightward
in Supply Commodities, shift of
• Reduction in Cost of Production of this the
Commodity, Supply
• Inventions and Innovations on this Curve.
commodity,
• Subsidies by Government for producing
this commodity, etc.
(b) Decrease • Increase in the price of Related Leftward
in Supply Commodities, shift of
• Increase in Cost of Production of this the
Commodity, Supply
• Technology or fashion change, making the Curve.
commodity outdated,
• Increase in Commodity Taxes on this
commodity, etc.

4. Example:

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(a) Basic Data: The present level of Supply is depicted

by the Curve S0.
(b) Increase in Supply: When Supply Curve shifts
rightward from S0 to S2, it is called Increase in
Supply. It means that more quantities are supplied
at each price.
(c) Decrease in Supply: When Supply Curve shifts
leftward from S0 to Si, it is called Decrease in
Supply. It means that lesser quantities are supplied
at each price.

B.5 “Movement along” and “Shift of” the Supply Curve

Movement along the Supply Curve Shift of the Supply Curve

1. Supply Curve remains the same. There is a shift in the Supply Curve itself.
2. This arises due to price changes, other This arises due to changes in factors other
factors remaining constant. than price, price remaining constant.
3. It is referred to as increase or decrease in It is referred to as increase or decrease in
the quantity supplied. supply.

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C. ELASTICITY OF SUPPLY

C.1 Elasticity of Supply

1. Meaning: Elasticity of Supply is the responsiveness of the quantity supplied of a commodity, to
changes in its price.

2. Formula: Point Elasticity - Percentage or Proportional Method:

Change in Quantity
% Change in Quantity Demanded ×100
Price Elasticity of Supply = EP = = Original Quantity
% Change in price Change in Price
× 100
Original price
Change in Quantity Change in Price ∆q p ∆q p
= × = × ∆p = ∆P × q
Original Quantity Original price q

Here, q = quantity, p = price, ∆q = change in supply quantity, ∆p = change in price.

3. Positive Sign: As per Law of Supply, Price & Quantity are directly related. So, Elasticity will be
positive.

4. Example:
Quantity Price • % Change in Qtty Supplied = (800 - 500) ÷ 500 = 60%
500 units ₹ 10 • % Change in Price = (15 - 10) ÷ 10 = 50%
800 units ₹ 15 • So, EP = 60% ÷ 50% = 1.2

C.2 Measuring Elasticity of Supply

Elasticity of Supply can be measured using various methods, some of which are -
1. Point Elasticity - Percentage Change or Proportional Method - As described above
2. Point Elasticity - Method of Derivatives,
3. Arc Elasticity Method.

A. Point Elasticity of Supply - Method of Derivatives:

dq p
EP = × where "dq/dp" = derivative of quantity with respect to price at a point on the
dp q
Supply Curve, "p"
= price at that point, and "q" = quantity supplied at that point.

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B. Arc Elasticity of Supply:

q1− q p +p
EP = q + q2 × p1 p2 p1and p2 are the prices at two points on the arc, and
1 2 1− 2
q1 and q2 are the quantities supplied at those two prices.

C.3 Elasticity of Supply - Interpretation of Numerical Values

Elasticity of Supply can be of any value between zero and infinity. These are described below -
Numerical Value Description Nature of Supply Supply Curve will
be
1. EP = 0 Quantity supplied does Perfectly (or Vertical Line,
not change as Price completely) parallel to Price (Y)
changes. Inelastic Axis.
2. EP greater than 0, Quantity supplied Inelastic, or Less Relatively steeper
but less than 1, changes by a smaller Elastic Supply Curve.
i.e. 0 < EP < 1 percentage than chanqe
in Price.
3. EP = 1 Quantity supplied Unit Elastic 45 degree Straight
changes by exactly the Line
same percentage as
Price.
4. EP greater than 1, Quantity supplied Elastic Relatively flatter
but less than changes by a larger Supply Curve.
Infinity, i.e. 1 < percentage than change
EP < ∞ in Price.
5. EP = ∞ No change in price, for Perfectly (or Horizontal Line,
any increase / change in infinitely) Elastic parallel to Quantity
quantity supplied. (X) Axis.

1. Perfectly Inelastic i.e. 2. Inelastic or Less Elastic 3. Unit Elastic i.e., EP = 1 45-
Zero Elasticity i.e., 0 < EP < ∞ degree straight line

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Different Measures of Price 4. Elastic or More Elastic 5. Perfectly Elastic i.e.,

Elasticity of Supply, and i.e., 1 < EP < ∞ Infinite Elasticity
Nature of Supply Curves in
each case are given in the
diagrams here.

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D. EQUILIBRIUM PRICE AND EFFECT OF

INCREASE / DECREASE IN DEMAND / SUPPLY

D.1 Price Determination

1. Price Determination:
a) 'Demand' refers to the quantity of goods or services, that Consumers are willing and able to
purchase / buy in a given market, at various prices, in a given period of time.
b) 'Supply' refers to the quantity of goods or services, that Producers are willing and able to
offer in a given market, at various prices, in a given period of time.
c) The interaction between Demand and Supply leads to the determination of Price and
Quantity. It is the level at which both Buyers and Sellers are ready to buy / sell the product.

2. Equilibrium Price: The determination of Equilibrium Price using Demand and Supply is explained
in the following manner -
a) Demand Curve slopes downwards from left to right, while Supply Curve slopes upwards from
left to right.
b) At the point 'E in "the graph, Demand and Supply curves meet each other.
c) Point E constitutes the Stable Equilibrium for the product, other things remaining equal.
d) The Equilibrium Price is .OP, and the quantity bought and sold at that level is OQ units.
e) Thus, the market forces of Demand and Supply lead to the determination of Equilibrium
Price.

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D.2 Effect on Equilibrium Price - Increase, Decrease in Demand

Effect of Increase in Demand Effect of Decrease in Demand

• . As Demand increases from D0 to D1 • . As Demand decreases from D0 to D1
• Equilibrium Price increases from P0 to P1 • Equilibrium Price decreases from P0 to
and P2, and
• Quantity demanded and supplied • Quantity demanded and supplied
increases from Q0 to Q1 decreases from Q0 to Q2

D.3 Effect on Equilibrium Price - Increase, Decrease in Supply

Effect of Increase in Supply Effect of Decrease in Supply

• As Supply increases from S0 to S1 • As Supply increases from S0 to S1
• Equilibrium Price decreases from P0 to • Equilibrium Price increases from P0 to
P1, and P2, and
• Quantity demanded and supplied • Quantity demanded and supplied
increases from Q0 to Q1 decreases from Q0 to Q2

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D.4 Changes in Demand and Supply - Effect on Equilibrium Price

Situation 1:
Change in Demand > Change in Supply

(a) If Increase in Demand > Increase in Supply:

• Equilibrium Price increases from P0 to P1, and
• Quantity demanded & supplied increases from
Q0 to Q1.
• % Increase in Quantity is greater than %
Change in .Price.

(b) If Decrease in Demand > Decrease in

Supply:. _
• Equilibrium Price decreases from
P0 to P1, and
• Quantity demanded & supplied
decreases from Qi to Q0.
• % Decrease in Quantity is greater than %
Change in Price.

Situation 2:
Change in Demand = Change in Supply
(a) If Increase in Demand = Increase in
Supply:
• Equilibrium Price remains same at P, and
• Quantity demanded & supplied increases from
Q0 to Q1
(b) If Decrease in Demand = Decrease in
Supply:
• Equilibrium Price remains same at P, and
• Quantity demanded & supplied decreases
from Q1 to Q0.

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. Situation 3:
Change in Demand < Change in Supply

(a) If Increase in Demand < Increase in Supply:

• Equilibrium Price decreases from P0 to P1, and
• Quantity demanded & supplied increases from
Q0 to Q1
• % Increase in Quantity is greater than %
Change in Price.

(b) If Decrease in Demand < Decrease in Supply:

• Equilibrium Price increases from to P0, and
• Quantity demanded & supplied decreases
from Qt to Q0.
• % Decrease in Quantity is greater than %
Change in Price.

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SUPPLY BASICS & LAW OF SUPPLY - MCQs

SUPPLY BASICS
1. Supply can be referred as -
(a) Those goods which Firms offers for sale
(b) Amount of goods, Firms sells in the market
(c) Amount of goods all people want
(d) None of the above

2. The Supply of a product refers to -

(a) Actual production of the product
(b) Total existing stock of the product
(c) Stock available for sale
(d) Amount of the product offered for sale at a particular price per unit of time

3. Supply of a Commodity is a -
(a) Stock Concept
(b) Flow Concept
(c) Both Stock and Row Concept.
(d) None of these.

4. _______refers to the quantity of goods or services that Producers are willing and able
to offer to the market at various prices during a period of time.
(a) Demand
(b) Supply
(c) Stock
(d) Sales

5. Supply refers to ______

(a) Stock of goods available for sale
(b) Stock of goods
(c) Quantity supplied at a various price during a period of time
(d) Actual production of the goods

6. Supply refers to the quantity of goods or services, that ______ are willing and able to
offer to the market at various prices during a period of time.
(a) Producers
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(b) Consumers
(c) Economists
(d) Accountants

7. Supply Quantity is the same as Sales Quantity. This statement is -

(a) True
(b) False
(c) Partially True
(d) None of the above

8. Supply refers to what Firms offer for sale, and not necessarily to what they succeed in
selling. This statement is -
(a) True
(b) False
(c) Partially True
(d) None of the above

9. To constitute Supply, the Producing Firms must have

(a) Ability, i.e. productive capacity
(b) Willingness, i.e. ready to supply
(c) Both (a) and (b)
(d) Neither (a) nor (b)

10. Supply refers to the _____ by Producing Firms.

(a) Quantities offered for sale
(b) Prices offered
(c) Sales achieved
(d) Profits earned

11. Period in which supply cannot be increased is called

(a) Market Period
(b) Short Run
(c) Long Run
(d) None of these

12. _______ is the total volume of the commodity which can be brought into the market for
sale at a short notice.
(a) Demand
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(b) Supply
(c) Stock
(d) Sales

13. ______ refers to the quantity which is actually brought in the market.
(a) Demand
(b) Supply
(c) Stock
(d) Sales

14. Supply is different from Stock. This statement is

(a) True
(b) False
(c) Partially True
(d) None of the above

15. Stock is potential supply.

(a) True
(b) False
(c) Partially True
(d) None of the above

16. Stock refers to quantity _____ into the market, whereas Supply refers to quantity
_______ into the market.
(a) Actually brought, actually brought
(b) Can be brought, actually brought
(c) Can be brought, actually brought
(d) Can be brought, can be brought

17. The meaning of time element in economics is _______

(a) Calendar time
(b) Clock time
(c) Operational time which supply adjusts with the market demand
(d) None of these

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DETERMINANTS OF SUPPLY
18. Which of the following factors is not a determinant of Supply?
(a) Price of the Commodity
(b) Prices of Related Commodities
(c) Prices of Water and Salt
(d) Prices of Factors of Production

19. Which of the following factors is not a determinant of Supply?

(a) Government's industrial and foreign policies
(b) Market Structure
(c) State of Technology
(d) Income Levels of Consumers

20. Generally, higher the prices of products, higher the _______

(a) Profits of Producing Firms
(b) Satisfaction Level of Consumers
(c) Tax Rates
(d) All of the above

21. Producing Firms are guided by -

(a) Service Motive
(b) Profit Motive
(c) Both (a) and (b)
(d) Neither (a) nor (b)

22. Other things being equal, if the price of the commodity is higher, ______ quantities
thereof will be supplied to the market.
(a) Equal
(b) Lower
(c) Greater
(d) Zero

23. Prices of Related Commodities are not a determinant of supply of a particular

commodity. This statement is-
(a) True
(b) False
(c) Partially True
(d) None of the above
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24. Generally, Supply of a Product X will ______ be if the prices of goods other than X
increase.
(a) Equal
(b) Lower
(c) Greater
(d) Zero

25. Generally, Supply of a Product X will be _______ if the prices of goods other than X
decrease.
(a) Equal
(b) Lower
(c) Greater
(d) Zero

26. Supply of a Product decreases when the prices of other related goods increase. This is
because
(a) Customers start demanding more of other goods
(b) Those goods become relatively more profitable to the Firm to produce and sell
(c) Customers preferences and tastes will change
(d) Producing Firms' profit motive changes

27. If there is an increase in the Prices of Factors of Production, Cost of Production of that
product will -
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

28. If there is an decrease in the Prices of Factors of Production, Cost of Production of that
product will -
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

29. Other things being equal, if the Cost of Production of a commodity is higher, ______
quantities thereof will be supplied to the market.
(a) Equal
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(b) Lower
(c) Greater
(d) Zero

30. Other things being equal, if the Cost of Production of a commodity is lower, ______
quantities thereof will be supplied to the market.
(a) Equal
(b) Lower
(c) Greater
(d) Zero

31. Inventions and Innovations lead to -

(a) Lower Cost of Production in existing products
(b) Production of more or better goods
(c) Both (a) and (b)
(d) Neither (a) nor (b)

32. Other things being equal, if the State of Technology in relation to a commodity
increases, _______ quantities thereof will be supplied to the market.
(a) Equal
(b) Lower
(c) Greater
(d) Zero

33. Inventions and Innovations lead to -

(a) Increase in supply quantity of new products
(b) Reduction in the supply quantity of products that are displaced
(c) Both (a) and (b)
(d) Neither (a) nor (b)

34. Other things being equal, the supply quantity of a product is ______ related to its price.
(a) Directly
(b) Inversely M
(c) Proportionally
(d) Not at all

35. Other things being equal, the supply quantity of a product is ______ related to price of
related goods.
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(a) Directly
(b) Inversely
(c) Proportionally
(d) Not at all

36. Other things being equal, the supply quantity of a product is _______ related to the
Cost of Production of that product.
(a) Directly
(b) Inversely
(c) Proportionally
(d) Not at all

37. Generally, if there is an increase in Commodity Taxes (Excise Duty, Customs Duty,
VAT, etc.) leading to increase in their cost of production, the supply quantity will -
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

38. Generally, if there are incentives like Subsidies which reduce the cost of production, the
supply quantity will -
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

39. In case of failure of rains, floods, fires, etc. the supply of agricultural commodities will –
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

40. In case of better rainfall, improvement in irrigation, improved seeds, etc. the supply of
agricultural commodities will -
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero
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LAW OF SUPPLY AND SUPPLY CURVE

41. Which of the following is the determinant in the Law of Supply?
(a) Technology
(b) Price of related goods
(c) Price of the product
(d) None of these

42. Which of the following is the only determinant that the Law of Supply takes into
account?
(a) Technology
(b) Price of the Product
(c) Quality of the Product
(d) Purchasing Power of Sellers

43. As per Law of Supply, other things being equal, if the Price of a Commodity increases,
its Supply Quantity will
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

44. As per Law of Supply, other things being equal, if the Price of a Commodity decreases,
its Supply Quantity will
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become Zero

45. The assumption "Ceteris Paribus" in the Law of Supply stands for -
(a) Technology remaining constant
(b) Demand remaining constant
(c) Price remaining constant
(d) All factors other than Price remaining constant

46. As per Law of Supply, other things being equal, there is a ______ between Price and
Quantity Supplied.
(a) Direct relationship
(b) Inverse relationship
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(c) Proportional relationship

(d) No relationship

47. _______ shows the quantity of products a producer or seller wishes to sell at a given
price level.
(a) Average Product Curve
(b) Supply Curve
(c) Marginal Product Curve
(d) Total Product Curve

48. Generally, the Supply Curve -

(a) Slopes downwards from left to right
(b) Slopes upwards from right to left
(c) Slopes upwards from left to right
(d) Nothing can be said

49. Generally, the Supply Curve -

(a) Positively sloped
(b) Negatively sloped
(c) Zero-sloped
(d) Nothing can be said

50. Typically, the Supply Curve -

(a) Slopes upward
(b) Slopes downward
(c) Is horizontally straight
(d) Is vertically straight

51. The Supply Curve -

(a) Is always a straight line
(b) Is always a curve
(c) Sometimes a straight line, sometimes a curve
(d) Nothing can be said

52. The Market Supply Curve is a lateral summation (totalling) of Individual Supply Curves
of all Producing Firms. This statement is -
(a) True
(b) False
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(c) Partially True

(d) None of the above

53. What would be the shape of the Supply Curve of the toys, if a Seller offers to sell any
number of toys as ₹ 100?
(a) Vertical
(b) Downward sloping
(c) Horizontal
(d) Upward sloping

INCREASE / DECREASE IN QUANTITY SUPPLIED

54. Increase or Decrease in the quantity supplied occurs due to -
(a) Changes in Price
(b) Changes in Factors other than Price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

55. While recognizing Increase or Decrease in the quantity supplied, we assume _______
remain constant.
(a) Price
(b) All Factors other than Price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

56. When there is a movement on the Supply Curve, we are referring to -

(a) Change in Supply
(b) Change in Quantity Supplied
(c) Both (a) and (b)
(d) Neither (a) nor (b)

57. Change in Quantity Supplied causes -

(a) a movement on the same Supply Curve
(b) shift of the Supply Curve
(c) Both (a) and (b)
(d) Neither (a) nor (b)

58. When there is a change in quantity supplied -

(a) Supply Curve shifts inward or outward
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(b) There is a upward / downward movement on the same Supply Curve

(c) Both (a) and (b)
(d) Neither (a) nor (b)

59. In case of Increase / Decrease in quantity supplied, the position of the Supply Curve
remains the same. This statement is –
(a) True
(b) False
(c) Partially True
(d) None of the above

60. Increase in quantity supplied, due to changes in price, may also be called -
(a) Contraction of Supply
(b) Expansion of Supply
(c) Decrease in Supply
(d) Increase in Supply

61. Increase in quantity supplied, due to changes in price, may also be called -
(a) Contraction of Supply
(b) Expansion of Supply
(c) Decrease in Supply
(d) Increase in Supply

62. When more units of the product are supplied at a higher price, it is called -
(a) Contraction of Supply
(b) Increase in Supply
(c) Change in Supply
(d) Expansion of Supply

63. Contraction of Supply is the result of -

(a) Decrease in the number of Producers
(b) Decrease in the price of the product concerned
(c) Increase in the prices of other goods
(d) Decrease in the Outlay of Sellers

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INCREASE / DECREASE IN SUPPLY

64. Increase or Decrease in Supply occurs due to -
(a) Changes in Price
(b) Changes in Factors other than Price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

65. While recognizing Increase or Decrease in the Supply, we assume ______ remain
constant.
(a) Price
(b) All Factors other than Price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

66. When there is a movement of the Supply Curve, we are referring to -

(a) Change in Supply
(b) Change in Quantity Supplied
(c) Both (a) and (b)
(d) Neither (a) nor (b)

67. Change in Supply means -

(a) A movement on the same Supply Curve
(b) Shift of the Supply Curve
(c) Both (a) and (b)
(d) Neither (a) nor (b)

68. When there is a change in supply -

(a) Supply Curve shifts inward or outward
(b) There is a upward / downward movement on the same Supply Curve
(c) Both (a) and (b)
(d) Neither (a) nor (b)

69. When higher quantities are supplied, due to changes in factors other than price, it is
called
(a) Contraction of Supply
(b) Expansion of Supply
(c) Decrease in Supply
(d) Increase in Supply
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70. When lower quantities are supplied, due to changes in factors other than price, it is called
(a) Contraction of Supply
(b) Expansion of Supply
(c) Decrease in Supply
(d) Increase in Supply

71. Which of the following factors will not result in the shifting of Supply Curve for Software
Packages?
(a) Increase in the wages of computer professionals
(b) Government tariffs on software exports and imports
(c) Fall in the prices of software packages
(d) All of the above result in the shifting of the curve

72. An Increase in the Supply of a product is caused by

(a) Improvements in Technology
(b) Fall in the Prices of other goods
(c) Fall in the Prices of Factors of Production
(d) All of these

73. An Increase in the Supply of a product is caused by

(a) Reduction in the price of Related Commodities
(b) Reduction in Cost of Production of this Commodity
(c) Subsidies by Government for producing this commodity.
(d) All of these

74. An Increase in the Supply of a product is caused by

(a) Inventions and Innovations on this commodity
(b) Reduction in Cost of Production of this Commodity
(c) Reduction in the price of Related Commodities
(d) All of these

75. A Decrease in the Supply of a product is caused by -

(a) Technology or fashion change, making the commodity outdated
(b) Increase in the price of Related Commodities
(c) Increase in Cost of Production of this Commodity
(d) All of these

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Use the following diagram to answer the next 11questions

76. Movement from S0 to S1 is called -

(a) Contraction of Supply
(b) Expansion of Supply
(c) Decrease in Supply
(d) Increase in Supply

77. Movement from S0 to S1 is caused by -

(a) Changes in Price of the product
(b) Changes in Factors other than price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

78. Movement from S0 to S2 is called -

(a) Contraction of Supply
(b) Expansion of Supply
(c) Decrease in Supply
(d) Increase in Supply

79. Movement from S0 to S1 is caused by -

(a) Changes in Price of the product
(b) Changes in Factors other than price
(c) Both (a) and (b)
(d) Neither (a) nor (b)

80. Reduction in the price of Related Commodities will cause a movement from -
(a) Movement from S0 to S1
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all
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81. Increase in the price of Related Commodities will cause a movement from -
(a) Movement from S0 to St
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all

82. Reduction in Cost of Production of this Commodity will cause a movement from -
(a) Movement from S0 to S1
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all

83. Increase in Cost of Production of this Commodity will cause a movement from -
(a) Movement from S0 to Si
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all

84. Inventions and Innovations on this commodity will cause a movement from -
(a) Movement from S0 to S1
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all

85. Technology or fashion change, making the commodity outdated, will lead to -
(a) Movement from S0 to Si
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all

86. If any Subsidies are by Government for producing this commodity, there will be a
movement from -
(a) Movement from S0 to S1
(b) Movement from S0 to S2
(c) Movement on S0 itself
(d) No change at all

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87. According to law of supply, the supply of commodity normally depends on:
(a) Price of relate commodity
(b) Price of commodity
(c) Price of factors of production
(d) Demand for the product

ANSWERS TO MCQs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
A D B B C A B A C A A C B A A B C C D A
21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40
B C B B C B A B B C C C C A B A B A B A
41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
C B A B D A B C A A C A C A B B A B A B
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
A D B B A A B A D C C D D D D C B D B B
81 82 83 84 85 86 87
A B A B A B B

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ELASTICITY AND EQUILIBRIUM PRICE - MCQs

ELASTICITY OF SUPPLY
1. Elasticity of Supply refers to the degree of responsiveness of supply of a good to
changes in its
(a) Demand
(b) Price
(c) Cost of Production
(d) State of Technology

2. Which of the following has the lowest Price Elasticity of Supply?

(a) Luxury Items
(b) Necessities
(c) Perishable Goods
(d) Items that have the least budgetary allocation

3. In which of the following type of product, is the Elasticity of Supply lowest?

(a) Necessities
(b) Luxury Goods
(c) Perishable Goods
(d) Perfect Substitutes

4. Given the Market Demand, the burden of specific tax that will be borne by the
Consumer (Buyer) depends on the -
(a) Price Elasticity of Supply
(b) Price Elasticity of Demand
(c) Consumer's Ability
(d) Type of the Product

5. Elasticity of Supply is given by the formula -

(a) ∆p/∆q X q/p
(b) ∆p/∆q X p/q
(c) ∆q/∆p X q/p
(d) ∆q/∆p X p/

6. Elasticity of Supply can be measured using -

(a) Percentage Change or Proportional Method
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(b) Point Elasticity Method

(c) Arc Elasticity Method
(d) All the above

7. Which of the following method is not used for measuring elasticity of supply?
(a) Arc Method
(b) Percentage Method
(c) Total outlay Method
(d) Point Method

8. If Quantity Supplied increases by 60% for a 50% increase in Price, Elasticity of Supply
is -
(a) -1.2
(b) +1.2
(c) -0.83
(d) +0.83

9. If Price is ₹ 15, quantity supplied is 150 units. If Price is ₹ 25, quantity supplied is 300
units. Compute Price Elasticity of Supply using Arc Method.
(a) -1.09
(b) +1.09
(c) -0.98
(d) +0.98

10. When Supply is perfectly inelastic, Elasticity of Supply is equal to -

(a) +1
(b) 0
(c) -1
(d) Infinity

11. If as a result of a change in price, the quantity supplied of a product remains

unchanged, we conclude that -
(a) Elasticity of Supply is perfectly inelastic
(b) Elasticity of Supply is relatively greater elastic
(c) Elasticity of Supply is inelastic
(d) Elasticity of Supply is relatively less elastic

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12. A Vertical Supply Curve parallel to Y axis implies that the Elasticity of Supply is -
(a) Zero
(b) Infinity
(c) Equal to One
(d) Greater than Zero but less than infinity

13. Elasticity of Supply is greater than one when

(a) Proportionate change in price is greater than proportionate change in supply
(b) Proportionate change in supply is greater than proportionate change in price
(c) Proportionate change in supply is equal to proportionate change in price.
(d) All of the above.

14. If the Elasticity of Supply is Zero, then Supply Curve will be -

(a) Horizontal
(b) Downward Sloping
(c) Upward sloping to the right
(d) Vertical

15. When Supply is perfectly elastic, Elasticity of Supply is equal to -

(a) +1
(b) 0
(c) -1
(d) Infinity

16. A Horizontal Supply Curve parallel to the quantity axis implies that the Elasticity of
Supply is -
(a) Zero
(b) Infinite
(c) Equal to one
(d) Greater than zero but less than one.

17. If the Elasticity of Supply is Infinity, then Supply Curve will be -

(a) Horizontal
(b) Downward Sloping
(c) Upward sloping to the right
(d) Vertical

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18. When change in the quantity supplied is proportionate to the change in the price, the
product is said to have -
(a) Unitary Elastic Supply
(b) Perfectly Elastic Supply
(c) Relatively Elastic Supply
(d) Perfectly Inelastic Supply

19. If the Elasticity of Supply is Infinity, then Supply Curve will be -

(a) Horizontal
(b) Downward Sloping
(c) 45 degrees Straight Line
(d) Vertical

20. If ∆q = Change in Quantity Supplied, ∆p = Change in Price, when Supply is perfectly

inelastic, it means
(a) ∆q = Zero
(b) ∆q > ∆p
(c) ∆q < ∆p
(d) ∆p = Zero

21. If ∆q = Change in Quantity Supplied, ∆p = Change in Price, when Supply is perfectly

elastic, it means -
(a) ∆q = Zero
(b) ∆q > ∆p
(c) ∆q < ∆p
(d) ∆p = Zero

22. If ∆q = Change in Quantity Supplied, ∆p = Change in Price, when Supply is relatively

elastic, it means -
(a) ∆q = Zero
(b) ∆q > ∆p
(c) ∆q < ∆p
(d) ∆p = Zero

23. If ∆q = Change in Quantity Supplied, ∆p = Change in Price, when Supply is relatively

inelastic, it means
(a) ∆q = Zero
(b) ∆q > ∆p
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(c) ∆q < ∆p
(d) ∆p = Zero

24. If ∆q = Change in Quantity Supplied, ∆p = Change in Price, when Supply is relatively

elastic, it means -
(a) ∆q = Zero
(b) ∆q = ∆p
(c) ∆q < ∆p
(d) ∆p = Zero

25. Price is fallen by 20% brings above 10% fall in quantity supplied then elasticity of
supply is ______
(a) 2.0
(b) 0.5
(c) 1.0
(d) 1.5

EQUILIBRIUM PRICE WITH DEMAND & SUPPLY

26. Market Forces refer to -
(a) Demand
(b) Supply
(c) Both (a) and (b)
(d) Neither (a) nor (b)

27. Which of these refer to "Market Forces'?

(a) Price and Output
(b) Demand and Supply
(c) Cost and Revenue
(d) All of the above

28. Demand & Supply interact in determining-

(a) Price and Output
(b) Cost and Revenue
(c) Both (a) and (b)
(d) Neither (a) nor (b)

29. Equilibrium price is where _______

(a) Market supply and market demand are equal
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(b) Firm supply ad market demand are equal

(c) Firm demand and market supply are equal
(d) None of these

30. Generally, the Demand Curve -

(a) Is parallel to X Axis
(b) Is parallel to Y Axis
(c) Slopes upward from left to right
(d) Slopes downward from left to right

31. Generally, the Demand Curve -

(a) Is positively sloped.
(b) Is negatively sloped.
(c) Has both positive and negative slopes
(d) Does not have a slope at all

32. Generally, the Supply Curve -

(a) Is parallel to X Axis
(b) Is parallel to Y Axis
(c) Slopes upward from left to right
(d) Slopes downward from left to right

33. Generally, the Supply Curve -

(a) Is negatively sloped.
(b) Is positively sloped.
(c) Has both positive and negative slopes
(d) Does not have a slope at all

34. In the table below, what will be Equilibrium Price?

Price(in ₹) Demand Qty Supply Qty
1 1000 400
2 900 500
3 800 600
4 700 700
5 600 800
6 500 900
7 400 1000
8 300 1100
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(a) ₹ 2
(b) ₹ 3
(c) ₹ 4
(d) ₹ 5

35. P Q.D. Q.S. 1 500 200 2 450 250 3 400 300 4 350 350 5 300 400 6 250 450 7 200
550 8 150 600 What is equilibrium price
(a) 1
(b) 2
(c) 3
(d) 4

36. Other things being equal, as Demand increases, Equilibrium Price -

(a) decreases
(b) increases
(c) does not change at all
(d) cannot be commented upon.

37. Other things being equal, as Demand increases, Quantity at the Equilibrium Price
level -
(a) increases
(b) decreases
(c) does not change at all
(d) cannot be commented upon.

38. Other things being equal, as Demand increases

(a) Equilibrium Price and Quantity both increase,
(b) Equilibrium Price and Quantity both decrease
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.

39. Other things being equal, as Demand decreases, Equilibrium Price -

(a) decreases
(b) increases
(c) does not change at all
(d) cannot be commented upon

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40. Other things being equal, as Demand decreases, Quantity at the Equilibrium Price
level -
(a) increases
(b) decreases
(c) does not change at all
(d) cannot be commented upon.

41. Other things being equal, as Demand decreases -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.

42. With a given Supply Curve, a decrease in Demand causes-

(a) An overall decrease in price but an increase in equilibrium quantity
(b) An overall increase in price but a decrease in equilibrium quantity
(c) An overall decrease in price and a decrease in equilibrium quantity
(d) No change in overall price but a reduction in equilibrium quantity

43. Other things being equal, as Supply increases, Equilibrium Price -

(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

44. Other things being equal, as Supply increases, Quantity at the Equilibrium Price level
-
(a) Increases
(b) Decreases
(c) Does not change at all
(d) Cannot be commented upon.

45. Other things being equal, as Supply increases -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.

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46. Other things being equal, as Supply decreases, Equilibrium Price -

(a) Decreases
(b) Increases
(c) Does not change at ail
(d) Cannot be commented upon.

47. Other things being equal, as Supply decreases, Quantity at the Equilibrium Price level
(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

48. Other things being equal, as Supply decreases Equilibrium Price and Quantity both
increase.
(a) Equilibrium Price and Quantity both decrease.
(b) Equilibrium Price increases and Quantity decreases.
(c) Equilibrium Price decreases and Quantity increases.
(d) None of the above

49. If increase in demand is greater than the increase in supply, then the Equilibrium
Price -
(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

50. If increase in demand is greater than the increase in supply, then Quantity at the
Equilibrium Price level -
(a) Increases
(b) Decreases
(c) Does not change at all
(d) Cannot be commented upon.

51. If increase in demand is greater than the increase in supply, then -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.
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52. If decrease in demand is greater than the decrease in supply, then the Equilibrium
Price -
(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

53. If decrease in demand is greater than decrease in supply, then the Quantity at the
Equilibrium Price level -
(a) Increases
(b) Decreases
(c) Does not change at all
(d) Cannot be commented upon.

54. If decrease in demand is greater than the decrease in supply, then -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.

55. If increase in demand is equal to the increase in supply, then the Equilibrium Price -
(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

56. If increase in demand is equal to the increase in supply, then the Quantity at the
Equilibrium Price level -
(a) Increases
(b) Decreases
(c) Does not change at all
(d) Cannot be commented upon.

57. If increase in demand is equal to the increase in supply, then -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price remains the same but Quantity increases.
(d) Equilibrium Price remains the same but Quantity increases.
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58. If decrease in demand is equal to the decrease in supply, then the Equilibrium Price -
(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

59. If decrease in demand is equal to the decrease in supply, then the Quantity at the
Equilibrium Price level -
(a) increases
(b) decreases
(c) does not change at all
(d) cannot be commented upon.

60. If decrease in demand is equal to the decrease in supply, then -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price remains the same but Quantity increases.
(d) Equilibrium Price remains the same but Quantity increases.

61. If increase in demand is less than the increase in supply, then the Equilibrium Price -
(a) Decreases
(b) Increases
(c) Does not change at all
(d) Cannot be commented upon.

62. If increase in demand is less than the increase in supply, then the Quantity at the
Equilibrium Price level -
(a) Increases
(b) Decreases
(c) Does not change at all
(d) Cannot be commented upon.

63. If increase in demand is less than the increase in supply, then -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.

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64. If decrease in demand is less than the decrease in supply, then the Equilibrium Price -
(a) decreases
(b) increases
(c) does not change at all
(d) cannot be commented upon.

65. If decrease in demand is less than the decrease in supply, then the Quantity at the
Equilibrium Price level -
(a) Increases
(b) Decreases
(c) Does not change at all.
(d) Cannot be commented upon.

66. If decrease in demand is less than the decrease in supply, then -

(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases.

67. Which of the following situation does not lead to an increase in Equilibrium Price?
(a) An increase in demand, without a change in supply.
(b) A decrease in supply accompanied by an increase in demand.
(c) A decrease in supply without a change in demand.
(d) An increase in supply accompanied by a decrease in demand.

68. If the Supply of a commodity is perfectly elastic, an increase in Demand will result in –
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Increase in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Increase in Equilibrium Price, Equilibrium Quantity remaining constant

69. If the Supply of a commodity is perfectly elastic, a decrease in Demand will result in -
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Decrease in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Decrease in Equilibrium Price, Equilibrium Quantity remaining constant

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70. If the Supply of a commodity is perfectly inelastic, an increase in Demand will result in
-
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Increase in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Increase in Equilibrium Price, Equilibrium Quantity remaining constant

71. If the Supply of a commodity is perfectly inelastic, a decrease in Demand will result in
-
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Decrease in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Decrease in Equilibrium Price, Equilibrium Quantity remaining constant

72. If the Demand of a commodity is perfectly elastic, an increase in Supply will result in -
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Increase in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Increase in Equilibrium Price, Equilibrium Quantity remaining constant

73. If the Demand of a commodity is perfectly elastic, a decrease in Supply will result in -
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Decrease in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Decrease in Equilibrium Price, Equilibrium Quantity remaining constant

74. If the Demand of a commodity is perfectly inelastic, an increase in Supply will result in
-
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Increase in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Increase in Equilibrium Price,. Equilibrium Quantity remaining constant

75. If the Demand of a commodity is perfectly inelastic, a decrease in Supply will result in-
(a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
(c) Decrease in Equilibrium Quantity, Equilibrium Price remaining constant
(d) Decrease in Equilibrium Price, Equilibrium Quantity remaining constant
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76. If a fisherman must sell all of his daily catch before it spoils for whatever price he is
offered once the fish are caught. The Fisherman's Price Elasticity of Supply for fresh
fish is -
(a) Zero
(b) Infinity
(c) One
(d) Cannot be determined

The Below 7 Questions are based on the demand and supply diagrams below. S1 and D1
are the original demand and supply curves. D2 D3, S2 and S3 are possible new demand and
supply curves. Starting from initial equilibrium point (1) what point on the graph is most
likely to result from each change?

77. Assume X is a normal good. Holding everything else constant, assume that income
rises and the price of a factor of production also increases. What point in Figure 1 is
most likely to be the new equilibrium price and quantity?
(a) Point 9
(b) Point 5
(c) Point 3
(d) Point 2

78. We are analyzing the market for good Z. The price of a complement good, good Y,
declines. At the same time, there is a technological advance in the production of good
Z. What point Figure 1 is most likely to be the new equilibrium price and quantity?
(a) Point 4.
(b) Point 5
(c) Point 8
(d) Point 7

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79. Heavy rains in Maharashatra during 2005 and 2006 caused havoc with the rice crop.
What point in Figure 1 is most likely to be the new equilibrium price and quantity?
(a) Point 6
(b) Point 3
(c) Point 7
(d) Point 8

80. Assume that consumers expect the prices on new cars to significantly increase next
year. What point in Figure 1 is most likely to be the new equilibrium price and
quantity?
(a) Point 6
(b) Point 5
(c) Point 3
(d) Point 8

81. What combinations of changes would most likely decrease the equilibrium quantity?
(a) When supply increases and demand decreases.
(b) When demand increases and supply decreases
(c) When supply increases and demand increases.
(d) When demand decreases and supply decreases.

82. When a market is in equilibrium:

(a) No shortages exist.
(b) Quantity demanded equals quantity supplied.
(c) A price is established that clears the market.
(d) All of the above are correct.

83. The market of computers is not in equilibrium, then which of the following statements
is definitely true?
(a) The prices of computer will rise
(b) The prices of computer will fall
(c) The prices of computers will change, but not enough information is given to
determine the direction of the change.
(d) None of the above.

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ANSWERS TO MCQS
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20,

b c c a d d c b b b a a b d d b a a c a.

21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

d b C b b c b a a d b c b c d b a a a b

41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

b c A a d b a b b a a a b b c a c c b d
61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83

a a d b b c d c c d d c c d d a d c b b d d c

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