UNIT – II – PART - A

1. What is an indifference map? (APRIL 2012) (NOV 2015)

An indifference curve is a curve which represents all those combinations of goods which give
same satisfaction to the consumer. Since all the combinations on an indifference curve give
equal satisfaction to the consumer, the consumer is indifferent among them. In other words,
since all the combinations provide same level of satisfaction the consumer prefers them
equally and does not mind which combination he gets.

2. Write the law of diminishing marginal utility. (APRIL 2012)

The law of diminishing marginal utility is a law of economics stating that as a person
increases consumption of a product while keeping consumption of other products constant,
there is a decline in themarginal utility that person derives from consuming each additional
unit of that product.

3. What is meant by perfectly inelastic demand? (APRIL 2012)

Perfectly inelastic demand is one in which a change in price produce no change in demand.
4. What is demand? (APRIL 2012) (APRIL 2016) (NOV 2012)
The demand in economics means both the desire to purchase as well as the ability to pay for
the good. Demand is different from the quantity demanded. Demand is the quantities that the
buyers are willing and able to buy at alternative prices during the given period of time
whereas quantity demanded is a specific amount that buyers are willing and able to buy at on
price.
5. Define utility. ( APRIL 2013)
The goods satisfy human wants. This want satisfying quality in a good is called Utility.
Utility is that quality in a commodity by virtue of which it is capable of satisfying a human
want. Air, water (free goods) and food, cloth etc. (economic goods) satisfies people’s wants
and hence they possess utility.
6. What are demand schedules? ( APRIL 2013) (APRIL 2017)
A demand schedule is how much of a given product a household would be willing to buy at
different prices. Demand curves are usually derived from demand schedules.
The demand curve is a graph illustrating how much of a given product a household would be
willing to buy at different prices.
7. What is income elasticity of demand? ( APRIL 2013) (NOV 2016)
Income elasticity of demand refers to the percentage change in quantity demanded due to
percentage change in income.
8. State the motives of demand for money. (APRIL 2014)
People demand commodities such as rice, wheat, clothes, etc. because these goods possess
utility. However, money does not possess any utility to directly satisfy the consumers. Money
is wanted by the people are as follows: (a) Transaction Motive (b) Precautionary Motive (c)
Speculative Motive.
9. List the exceptions to the law of demand. (APRIL 2014)
 Conspicuous goods
 Giffen goods
 The law has been derived assuming consumers to be rational and knowledgeable
about market-conditions.
 Similarly, in practice, a household may demand larger quantity of a commodity even
at a higher price because it may be ignorant of the ruling price of the commodity.
Under such circumstances, the law will not remain valid.
 The law of demand will also fail if there is any significant change in other factors on
which demand of a commodity depends.
10. Define price elasticity of demand. (APRIL 2014),(APRIL 2015)
The response of the consumers to a change in the price of a commodity is measured by the
price elasticity of the commodity demand. The responsiveness of changes in quantity
demanded due to changes in price is referred to as price elasticity of demand. The price
elasticity of demand is measured by dividing the percentage change in quantity demanded by
the percentage change in price.
Price Elasticity = Proportionate change in the Quantity Demanded /
Proportionate change in price
Percentage change in quantity demanded
= ----------------------------------------------
Percentage change in price
11. Name the types of elasticity of demand. (APRIL 2014)
 Price Elasticity Of Demand.
 Income Elasticity Of Demand.
 Cross Elasticity Of Demand.
12. State the aspects of income demand relationship. (APRIL 2014)
The income effect represents the change in an individual's or economy's income and shows
how that change impacts the quantity demanded of a good or service. The relationship
between income and quantity demanded is a positive one; as income increases, so does the
quantity of goods and services demanded. For example, when an individual's income
increases, that person demands more goods and services, thus increasing consumption, all
things equal.
13. What are the demand forecasting approaches? (APRIL 2014)
 Survey of Buyer’s-Intentions
 Collective Opinion or Sales Force Competitive Method
 Trend Projection or Time Trend of the Time Series
 Executive Judgment Method
 Economic Indicators
 Controlled Experiments
 Expert’s Opinions
14. What is marginal utility? (APRIL 2015)
Marginal utility measures the added satisfaction derived from a one unit increase in
consumption of a particular good or service, holding consumption of other goods and services
constant. The relationship between demand and marginal utility can explain the behaviour of
demand in relation to price.
15. What is Elasticity of demand? (APRIL 2015) (APRIL 2017)
Elasticity of Demand is a technical term used by economists to describe the degree of
responsiveness of the demand for a commodity due to a fall in its price. A fall in price leads
to an increase in quantity demanded and vice versa.
16. What is marginal revenue? (APRIL 2016)
It refers to the net additional income to the total revenue when an extra unit of the product is
sold. It is equal to the ratio between change in Total revenue and change in total output sold
in the market MR=ΔTC/ΔTO
17. What is marginal rate of substitution? (APRIL 2016) (NOV 2012)
Marginal Rate of Substitution (MRS) is the rate at which the consumer is prepared to
exchange goods X and Y. In the beginning the consumer is consuming 1 unit of food and 12
units of clothing. Subsequently, he gives up 6 units of clothing to get an extra unit of food,
his level of satisfaction remaining the same. The MRS here is 6.
Or
In economics, the marginal rate of substitution (MRS) is the rate at which a consumer is
ready to give up one good in exchange for another good while maintaining the same level of
utility. At equilibrium consumption levels (assuming no externalities), marginal rates of
substitution are identical.
18. State equi – marginal principles (APRIL 2017)
"Law of equi-marginal principle states that to maximise utility, consumers way allocate their
limited incomes among goods and services in such a way that the marginal utilities per dollar
(rupee) of expenditure on the last unit of each good purchased will be equal".
Equi - marginal principle suggests that available resources (inputs) should be so allocated
between the alternative options that the marginal productivity gains (MP) from the various
activities are equalised.
19. What is Indifference schedule? (NOV 2012) (NOV 2016)
An indifference schedule is a list of combination of two commodities, the list being so
arranged that a consumer is indifferent to the combinations, preferring none of them to any of
other.
20. What is Advertising elasticity of demand? (NOV 2012)
Advertising elasticity is a measure of an advertising campaign's effectiveness in generating
new sales. It is calculated by dividing the percentage change in the quantity demanded by the
percentage change in advertising expenditures.
21. What is effective demand? (NOV 2013)
Effective Demand, as opposed to latent demand when a customer/consumer is unable to
satisfy their demand, whether it is due to lack of information about the availability of a
product or due to lack of lack of money. Or effective demand is the “ability” to pay for goods
and services.
22. Define wealth in economics. (NOV 2013)
An individual who is considered wealthy, affluent, or rich is someone who has accumulated
substantial wealth relative to others in their society or reference group. In economics, net
worth refers to the value of assets owned minus the value of liabilities owed at a point in
time.
23. What are durable consumer goods? (NOV 2013)
Durable goods are a category of consumer products that do not need to be purchased
frequently because they are made to last for a long time (usually lasting for three years or
more). They are also called consumer durables or durables.
24. What does demand for a product imply? (NOV 2014)
A situation in which the demand for a product does not increase or decrease correspondingly
with a fall or rise in its price. From the supplier’s viewpoint, this is a highly desirable
situation because price and total revenue are directly related: an increase in price increase
total revenue despite a fall in the quantity demanded. An example of a product with inelastic
demand is gasoline.

25. Define direct demand. (NOV 2014)

Direct demand is the demand for goods and services that directly satisfy consumer desires. In
other words, direct demand is the demand for personal consumption products. The value or
worth of a good or service, its utility, is the prime determinant of direct demand.
26. What is Income effect? (NOV 2015)
Income effect refers to the changes in the real income of the consumer due to changes in
price. Real income may be defined as total units of goods purchased with a given amount of
money. When price of a particular commodity falls, the consumer‘s real income rises, though
money income remains the same. Thus, with the fall in the price of the commodity, the
purchasing power of the real income of the consumer will rise, i.e. the consumer can now
purchase the same amount of commodity with less money or he can now purchase more with
the same money. The reverse also holds good.
27. What do you mean by Isoquant? (NOV 2015)
An isoquant is a firm's counterpart of the consumer's indifference curve. An isoquant is a
curve that shows all the combinations of inputs that yield the same level of output.
'Iso' means equal and 'quant' means quantity. Therefore, an isoquant represents a constant
quantity of output.

28. Demand is law of demand? (NOV 2016)

Demand
The demand for a commodity is its quantity which consumers are able and willing to buy at
various prices during a given period of time.
Law of demand:
There is an inverse relationship between quantity demanded and its price. The people know
that when price of a commodity goes up its demand comes down. When there is decrease in
price the demand for a commodity goes up. There is inverse relation between price and
demand . The law refers to the direction in which quantity demanded changes due to change
in price.
So law of demand and demand inverse relationship.
29. Define ISO-quants(NOV 2016)
“The Iso- quants defined as the different combinations of two resources with which a firm
can produce equal amount of product.”
30. What are the properties of Isoquants? (APRIL 2012)
 Iso-Product Curves Slope Downward from Left to Right.
 Isoquants are Convex to the Origin.
 Two Iso-Product Curves Never Cut Each Other.
 Higher Iso-Product Curves Represent Higher Level of Output.
 Isoquants Need Not be Parallel to Each Other.