NAME MOHAMMED FARHAN
ROLL NO 2414506697
PROGRAM BACHELOR OF BUSINESS
ADMINISTRATION [BBA]
SEMESTER 2
COURSE NAME ECONOMIC THEORY
COURSE CODE DBB1211
SET – 1
Q- 1 What is utility ? Examine the importance of diminishing marginal
utility in demand analysis ?
Ans. People buy goods and services since it provides them with a level of
satisfaction which is referred to as utility. The law of diminishing marginal
utility is used when an individual consumes an item or a product, and
thereafter the satisfaction that they get from the product decreases when
they consume more and more of that product. Hence, when an individual
goes on consuming a commodity with other things being constant then
the marginal utility obtained from its additional units goes on decreasing.
The law of diminishing marginal utility can be shown with help of the
table.
No. of Bananas Marginal utility Total utility
1 8 8
2 6 14
3 4 18
4 2 20
5 0 20
6 -2 18
The table above clearly explains the following points :
a. As the number of bananas goes on increasing, the marginal utility goes
on diminishing. Till the level of consumption is 4 units, marginal utility is
positive and total utility is increasing but at a decreasing rate.
b. Marginal utility becomes zero with the consumption of the 5 th banana
and total utility is maximum, that is, 20 units.
c. Marginal utility becomes negative when the 6 th banana is consumed,
and total utility goes down to 18 units.
Q- 2 Discuss the concept of supply? Also write a note on factors affecting
supply along with suitable examples.
Ans. in economics, supply of goods or services is quantity of a given
product or service that the suppliers are willing to provide to the
consumers at a certain price level during a time period.
The factors affecting supply are :
1. Price of goods – Price plays a significant role in influencing the supply
of a product. According to the law of supply when there is an increase in
the price of goods, the supply of the product also increases. Apart from
this, the price of goods, that is, the substitute and complementary goods,
also have an impact on the supply of a product.
2. Cost of production – The production cost and the supply of goods is
adversely related to each other. When the cost of production goes up then
there would be a decrease in the supply of products for saving resources.
For examples: an increase in the wages of labour, crop failure, poor
environmental conditions etc.
3. Increase in number of sellers – Increase in the number of suppliers will
have an impact on the supply of goods in the market and it will increase
the supply of goods and services that shifts the supply curve towards
right.
4. improvements in technology – The improvements and advancement in
technology have major influence on the supply of a commodity.
5. The efficiency of the supply chain – Management of supply chain and
logistics is required to transport raw materials, inventory, parts and
finished products from a place to another. Transport facility becomes a
major issue because of the non- timely availability of supply of products.
6. Lower taxes – If taxes are lowered then there would be higher supply of
products, whereas the imposition of strict regulations and adding of excise
duty would result in a fall in the supply of goods.
7. Government policies and subsidies – The government plays a significant
role in the supply of products. Due to increase in government subsidies,
the cost of goods is reduced. A good example is the introduction of train
subsidies to reduce the price of train tickets.
8. Changes in prices of related goods
9. Objectives of the firm
Q-3 Elucidate the concept of indifference curve. Also discuss its
characteristics.
Ans. An indifference curve is a chart that tracks various combinations of
two goods or commodities that consumers can choose. Points along the
curve represent combinations that will leave the consumer equally well
off. A consumer is indifferent to changes in a combination as long as it
falls somewhere along the curve.
The characteristics of indifference curve are –
1. All combinations on an indifference curve gives same level of
satisfaction.
2. Higher indifference curve shows higher level of satisfaction.
3. An indifference curve slopes downward to the right.
4. An indifference curve is convex to the point of origin.
5. Two indifference curves do not intersect each other.
6. An indifference curve neither touches Horizontal axis nor vertical axis.
7. Indifference curves are not necessarily parallel to each other.
SET – 2
Q- 4 Elucidate perfect competition. Explain the price determination under
it ?
Ans. A Perfect competition market system that is characterised by several
buyers and sellers. In this form of perfect competition, there are a large
number of buyers and sellers. Since there are so many people and players
in the market, no one of them can bring any change to the prevailing
price in the market. There are many alternatives and choices available in
the market to pursue if anyone tries to bring any changes.
In a perfectly competitive market, numerous factors influence the price of
a commodity. We know that perfectly competitive market situation, there
are a large number of buyers and sellers dealing in homogenous products.
The firms are not affected by any legal, social or technological barriers
while entering and exiting the market under perfect competition. The
price of the goods and services in a perfectly competitive market are
determined at the point where the demand and supply curves intersect
with each other. This intersecting point is known as the equilibrium point
is called equilibrium price, and the quantity demanded and supplied, at
this point, is referred to as equilibrium quantity. The demand under perfect
competitive market is the quantity of a product which the consumers are
ready to buy at a particular price and keeping the other factors constant.
Q-5 Examine the given concepts –
1. Paradox of thrift 2. Multiplier
Ans. 1. Paradox of thrift - The paradox of thrift was a concept put forward
by economist john Maynard Keynes and he believed that people normally
try to save more during the period of economic recession. This results in
the fall of aggregate demand and eventually leads to a decrease in the
economic growth of the country. These situations are not good for the
economy since the investment give lower returns than normal. Hence
Keynes introduced the concept of paradox of thrift which proved the
economical aspect of the people, and he believed that the high increase in
saving will be harmful to the economy.
2. Multiplier – The concept of investment multiplier was that any
alterations in the initial expenditure would have a multiplier effect on the
income and will increase it more than the expenditure in the economy.
This is because when there is a push of new demand in the circular flow of
income within the economy, there will be multiplier effect. This is because
the push of demand on the extra income results in more spending and this
creates more income and the cycle goes on. The multiplier effect is the
increase in final income resulting from any new insertion of speaking.
Q-6 Analyze the marginal productivity theory of wage determination and
Ricardian theory of rent?
Ans. a] marginal productivity theory of wage determination –
This theory was propounded by Henry Wick-steed [ England ]
and John Bates Clark in 1890. As per this theory, wages are computed
based on the demand of labour that determines its price. Hence
according to the marginal productivity theory of wage, under perfect
competition, a worker’s wage is equal to the marginal as well as the
average revenue productivity. This logically implies that marginal revenue
productivity and average revenue productivity [ARP] of a worker
determines the wages payable to him/her. Hence, the wage of a worker is
dependent upon the marginal productivity of the worker.
b] Ricardian Theory of Rent –
The classical economist David Ricardo first propounded the theory of rent
in 1817 in his book “Principles of political Economy and Taxation” which is
also known as the Ricardian Theory of Rent. According to Ricardo, “ Rent is
that portion of the produce of the earth which is paid to the landlord for
the use of original and indestructible power of the soil”. According to this
theory, land differs infertility. Some lands are more fertile and some lands
are less fertile. The difference in the fertility of the soil is the basis of the
determination of this theory. The excess product of fertile land and the
least fertile land is rent. Rent is a differential surplus that arises. Because
of differences in the fertility of the land. Thus, it is measured by the
difference between the produce on intramarginal land and produce on
marginal land.
