Category: CA Foundation

CA Foundation Business Economics Study Material Chapter 2 Theory of Demand and Supply – MCQs

MULTIPLE CHOICE QUESTIONS

Law of Demand and Elasticity of Demand

1. Demand in economic sense means-
(a) mere desire for a commodity
(b) mere ability to pay price of the commodity
(c) mere wiling to pay the price of the commodity
(d) desire backed by ability and willingness to pay for the commodity desired

2. In economics, demand refers to-
(a) quantity demanded at a particular time
(b) quantity demanded backed by ability to pay
(c) quantity demanded of all goods
(d) quantity demanded at a particular price in a given period of time

3. The concept of demand demonstrates that-
(a) demand is always with reference to price
(b) demand is referred to in a given period of time
(c) buyer’s ability and willingness to pay
(d) all the above

4. Demand is a
(a) flow concept Le. quantity per unit of time
(b) stock concept
(c) wealth concept
(d) none of the above

5. Demand concept explains the ________ behaviour in response to change in price of a good.
(a) producer’s
(b) seller’s
(c) consumer’s
(d) none of the above

6. Individual Demand is also called-
(a) industrial demand
(b) market demand
(c) household’s demand
(d) all the above

7. ________ means quantity demanded of a good by a single consumer at various prices per unit of time.
(a) Market Demand
(b) Individual Demand
(c) Industrial Demand
(d) None of the above

8. _______ means the aggregates of the quantities
demanded by all consumers in the market at different prices per unit of time.
(a) Market Demand
(b) Individual Demand
(c) Industrial Demand
(d) Household Demand

9. All but one are the factors which affect individual demand. Find the odd one out.
(a) Price of related good
(b) Income of the consumer
(c) Tastes and preferences of consumer
(d) Number of consumers in the market

10. _________ is a tabular presentation showing different quantities demanded by buyers at different levels of prices in a given period.
(a) Supply Schedule
(b) Demand Schedule
(c) Production Schedule
(d) Cost Schedule

11. A demand schedule is shown as-
(a) a result of increase in the size of the family
(b) a result of change in tastes and preferences
(c) a function of price
(d) all the above

12. Market Demand is the sum total of-
(a) all quantities that producer’s can produce
(b) all quantities actually sold in the market
(c) all quantities demanded by individual households and consumers
(d) all the above

13. Demand of a good of several consumers when added together is called _______ demand.
(a) individual
(b) market
(c) joint
(d) independent

14. When a good can be used to satisfy two or more wants, it is said to have _______ demand.
(a) composite
(b) competitive
(c) joint
(d) market

15. Indirect demand of a good is also known as _______ demand.
(a) direct
(b) derived
(c) joint
(d) competitive

16. Which of the following is a determinant of Individual Demand?
(a) Cost of production
(b) Nature of commodity
(c) Economic Policies of the Government
(d) Tastes and Preferences of consumers

17. Which of the following is NOT the determinant of demand?
(a) Price of the commodity
(b) Price of related commodities
(c) Income of consumer
(d) None of the above

18. How are APPLES and ORANGES related when as a result of rise in price of Apples, demand for Oranges increases?
(a) Substitute goods
(b) Complementary goods
(c) Normal goods
(d) Inferior goods

19. If two goods are complementary then rise in the price of one results in-
(a) rise in demand for the other
(b) fall in demand for the other
(c) rise in demand for both
(d) none of these

20. If the demand for CNG increases as price of petrol increases, the two goods are-
(a) Normal goods
(b) Complementary goods
(c) Substitute goods
(d) Superior goods

21. Comforts lies between-
(a) inferior goods and necessaries
(b) luxuries and inferior goods
(c) necessaries and luxuries
(d) none of the above

22. When price of commodity rises, the demand for it _______ .
(a) rises
(b) contracts
(c) remain constant
(d) becomes negative

23. When the price of petrol goes up, demand for two-wheelers will-
(a) rise
(b) fall
(c) remain same
(d) none of these

24. An increase in the income of a consumer has effect on demand in general.
(a) no
(b) negative
(c) opposite
(d) positive

25. The demand for Scooter and petrol is an example of _______ demand.
(a) joint
(b) composite
(c) competitive
(d) market

26. _______ goods are those goods which are used for the production of other goods.
(a) Durable
(b) Producer’s
(c) Non-Durable
(d) Consumer’s

27. _______ goods are those which are used for final consumption.
(a) Durable
(b) Producer’s
(c) Non-Durable
(d) Consumer’s

28. Bread, Milk, Readymade clothes, T.V., etc. are examples of _______ goods
(a) perishable
(b) producer’s
(c) consumer’s
(d) inferior

29. The goods which cannot be consumed more than once, like milk are known as _______ goods.
(a) non-durable consumer goods
(b) producer’s
(c) inferior
(d) durable consumer goods

30. _______ goods meets only our current demand.
(a) producers
(b) durable consumer goods
(c) non-durable consumer goods
(d) inferior

31. The goods which can be consumed more than once over a period of time are known as _______ goods.
(a) non-durable consumer goods
(b) producer’s
(c) durable consumer goods
(d) inferior

32. When demand of any good depends upon the demand of another good, it is said to have _______ demand.
(a) joint
(b) derived
(c) competitive
(d) direct

33. The total demand for steel in the country denotes _______ demand.
(a) industry
(b) company
(c) both ‘a’ and ‘b’
(d) autonomous

34. If the demand for a product is independent of the demand for other goods, it is called as _______ demand.
(a) company
(b) industry
(c) autonomous
(d) derived

35. If the construction activity in housing sector, infrastructure, etc. rises, the demand for cement will _______ as it has _______ demand.
(a) rise ; autonomous
(b) fall; autonomous
(c) rise ; derived
(d) none of these

36. Demand for steel produced by Tata Iron and Steel Company is an example of _______ demand.
(a) industry
(b) company
(c) autonomous
(d) joint

37. When demand of any good reacts immediately to price changes, income changes, etc. it is said to have _______ demand.
(a) short-run
(b) long-run
(c) very short run
(d) very long run

38. A relative price is-
(a) price expressed in terms of money
(b) what you get paid for babysitting your cousin
(c) the ratio of one price to another
(d) equal to a money price

39. The quantity demanded of a good or service is the amount that-
(a) consumer plan to buy during a given period at a given price.
(b) firms are willing to sell during a given time period at a given price.
(c) a consumer would like to buy but may not be able to afford.
(d) is actually bought during a given period at a given price.

40. Coca-Cola and Thumbs-Up are substitutes. A rise in the price of Coca-Cola will _______ the demand of Thumbs-Up and the quantity demanded of Thumbs-Up will _______ .
(a) increase ; increase
(b) increase;decrease
(c) decrease ; decrease
(d) decrease;increase

41. If the price of Orange Juice falls, the demand for Apple Juice will _______ .
(a) increase
(b) decrease
(c) remain the same
(d) become negative

42. The demand for consumer goods is a _______ demand.
(a) direct
(b) indirect
(c) constant
(d) company

43. If the price of inferior goods fall, the demand for them will _______.
(a) rise
(b) fall
(c) remain constant
(d) become zero

44. The Law of Demand states _______ relation between demand and price of a commodity.
(a) a direct
(b) positive
(c) an indirect
(d) no

45. When total demand for a commodity whose price has fallen increases, it is due to
(a) income effect
(b) substitution effect
(c) complementary effect
(d) price effect

46. With a fall in the price of a commodity
(a) Consumer’s real income increases
(b) Consumer’s money income increases
(c) Consumer’s real income falls
(d) Consumer’s money income falls

47. When we draw a market demand curve, we _______.
(a) do not consider tastes, incomes and all prices
(b) assume that tastes, incomes and all other prices change in the same way price changes
(c) assume that tastes, incomes and all other prices are irrelevant
(d) assume that tastes, incomes and all other prices remain the same

48. All but one of the following are assumed to remain the same while drawing individual’s demand curve for a commodity. Which are is it?
(a) The tastes and preferences of the consumer
(b) Income of consumer
(c) The price of the commodity
(d) The prices of related commodities

49. A fall in price of a commodity leads to _______.
(a) a shift in demand curve
(b) a rise in consumer’s real income
(c) a fall in demand
(d) none of the above

50. If a fall in price of ‘y’ results in a decrease in the sale of ‘x’, the two good appear to be-
(a) substitute goods
(b) complementary goods
(c) inferior goods
(d) neutral goods

51. Which of the following is not a complementary good for pen?
(a) refills
(b) paper
(c) notebook
(d) rice

52. _______ goods are the goods which can be used with equal case in place of each other.
(a) Neutral
(b) Normal
(c) Complementary
(d) Substitute

53. Which of the following pairs of goods are an example of substitutes?
(a) Tea and Sugar
(b) Tea and Coffee
(c) Pen and Ink
(d) Shirt and Trouser

54. When the price of a substitute of good ‘X’ falls, the demand for good ‘X’
(a) rises
(b) falls
(c) remains unchanged
(d) None of these

55. If the demand rises with the rise in consumer’s real income, such a good is called _______.
(a) Normal goods
(b) Neutral goods
(c) Inferior goods
(d) Luxury goods

56. Giffen goods are-
(a) Normal goods
(b) Inferior goods
(c) Luxury goods
(d) Neutral goods

57. As the consumer’s income increases, the demand for necessaries of life will increase _______ to the increase in income.
(a) Less than proportionate
(b) More than proportionate
(c) Proportionate
(d) Nothing can be said

58. As the consumer’s income increases, the demand for comforts and luxuries will increase _______ to the increase in income.
(a) Less than proportionate
(b) More than proportionate
(c) Proportionate
(d) Nothing can be said

59. During boom period in economy, the demand for goods in general _______.
(a) rises
(b) falls
(c) remains same
(d) none of these

60. Larger the size of population of a country _______ is the demand for goods and services in general.
(a) lower
(b) ineffective
(c) neutral
(d) higher

61. In case the consumer expects a steep rise in price of Potatoes in future, his current demand for it will _______.
(a) remain same
(b) fall
(c) rise
(d) none of the above

62. All but one of the good’s demand is not affected by changes in weather conditions-
(a) Ice-cream
(b) Woollen clothes
(c) Cold drinks
(d) Wheat

63. If the government increase the rate of indirect taxes on goods and services, the demand for then will _______ in general.
(a) rise
(b) fall
(c) remain neutral
(d) be ineffective

64. If the government reduces the tax on any pro-duct, the demand for the product _______ in the short run.
(a) rises
(b) falls
(c) remain unchanged
(d) tax has nothing to do with the demand of any product

65. If the demand for petrol remains unchanged with rise in its price, it means petrol is a _______
(a) Normal good
(b) Necessity
(c) Luxury good
(d) Inferior good

66. If quantity demanded of good ‘X’ is plotted against the price of its substitute good ‘Y’, the demand curve will be-
(a) Vertical Straight line
(b) Positively sloped
(c) Horizontal Straight line
(d) Negatively sloped

67. Consider the following figure:

In the above figure, RS part of the demand curve represents-
(a) Superior good
(b) Inferior good
(c) Normal good
(d) Giffen’s good

68. In case of normal goods the income effect is _______
(a) zero
(b) negative
(c) positive
(d) constant

69. Income effect on demand of a good is _______.
(a) positive for normal goods
(b) always positive
(c) negative for normal goods
(d) always negative

70. The Law of Demand is explained by-
(a) Cardinal approach
(b) Ordinal approach
(c) Both ‘a’ and ‘b’
(d) Neither ‘a’ nor ‘b’

71. The Law of Demand refers to functional relation between-
(a) Price & Supply
(b) Price & Cost
(c) Price & Income
(d) Price & Demand

72. The term “Ceteris Paribus” in the Law of Demand means-
(a) All factors except one remain constant
(b) All factors remain constant
(c) All factors are variable
(d) None of the above

73. Which of the following is a variable and influencing factor in the Law of Demand?
(a) Consumer’s Income
(b) Consumer’s Tastes and Preferences
(c) Price of related goods
(d) Price of the good

74. The phrase “Other things being equal” in the Law of Demand means-
(a) Income of the consumer remain unchanged
(b) Price of related goods remain unchanged
(c) Tastes and Preferences of consumer remain unchanged
(d) All the above

75. The total effect of price change of a good is-
(a) Substitution Effect + Income Effect
(b) Substitution Effect + Price Effect
(c) Substitution Effect + Demonstration Effect
(d) Demonstration Effect + Veblen Effect

76. Substitution Effect subscribe to the inverse relation between P_x and Q_x in case of-
(a) normal goods only
(b) inferior goods only
(c) normal and inferior goods both
(d) none of the above

77. Income Effect does not subscribe to the inverse relation between P_x and Q_x in case of-
(a) both normal and inferior goods
(b) inferior goods
(c) normal goods
(d) none of the above

78. The Law of Demand will fail in case of inferior goods only if-
(a) Substitution Effect is greater than Income Effect
(b) Income Effect is greater than’Substitution Effect
(c) Both ‘a’ and ‘b’
(d) Neither ‘a’ nor ‘b’

79. The Law of Demand is a _______ statement.
(a) Positive
(b) Normative
(c) Descriptive
(d) Both ‘a’ and ‘c’

80. _______ refers to the effect of change in the price of a product on the consumer’s purchasing power.
(a) Real Income Effect
(b) Substitution Effect
(c) Consumer’s Surplus
(d) None of the above

81. When the price of Thumbs-up falls, other things being constant, buyers substitute Thumbs-up for Coca-Cola. This is called-
(a) Price Effect
(b) Substitution Effect
(c) Income Effect
(d) Veblen Effect

82. _______ refers to the buyer’s reaction to a change in the relative prices of two products, keeping the total utility constant.
(a) Consumer’s Surplus
(b) Income Effect
(c) Substitution Effect
(d) None of the above

83. The Law of Demand can be explained by-
(a) The Law of Diminishing Marginal Utility
(b) Indifference Curves
(c) Both ‘a’ and ‘b’
(d) Neither ‘a’ nor ‘b’

84. Consumers buy a good till P_x = MU_x. If the price falls, the consumer will reach equilibrium-
(a) at a lower quantity
(b) at a higher quantity
(c) at zero quantity level
(d) all the above

85. “Petrol is becoming cheaper, yet the demand for cars is not rising”. This statement indicates that-
(a) The Law of Demand is not operative for cars
(b) The Law of Demand is operative for petrol
(c) The Demand Curve for cars will shift
(d) All the above

86. Downward slope of the demand curve shows-
(a) positive relationship between price and quantity demanded
(b) inverse relationship between price and quantity demanded
(c) no relationship between price and quantity demanded
(d) none of the above

87. In case of NORMAL GOODS, demand curve shows:
(a) a negative slope
(b) a positive slope
(c) zero slope
(d) none of these

88. Law of Demand fails in case of –
(a) normal goods
(b) Giffen goods
(c) inferior goods
(d) both ‘b’ and ‘c’

89. In case of Giffen’s Paradox, the slope of the demand curve is-
(a) parallel to X-axis
(b) positive
(c) negative
(d) parallel to Y-axis

90. A Giffen good is one for which a small change in price results in-
(a) zero income effect out weighted by a positive substitution effect
(b) zero income effect being equal to zero substitution effect
(c) negative income effect out weighed by a positive substitution effect
(d) none of these

91. The Law of Demand indicates the
(a) direction of change in demand of a commodity
(b) magnitude/amount of change in demand of a commodity
(c) both ‘a’ and ‘b’
(d) elasticity of demand

92. In case of Giffen goods, demand varies _______ with the price.
(a) inversely
(b) directly
(c) proportionately
(d) none of these

93. Analysis of the relationship between demand of a commodity and prices of related commodities is-
(a) Price Demand analysis
(b) Income Demand analysis
(c) Cross Demand analysis
(d) Market Demand analysis

94. _______ observed that when the price of inferior goods fall, the demand for such goods also fall.
(a) Adam Smith
(b) Dr. Alfred Marshall
(c) Ragnar Frisch
(d) Sir Robert Giffens

95. The Law of Demand was propounded by _______ in his book ‘Principles of Economics’.
(a) Lord Keyens
(b) Adam Smith
(c) Dr. Alfred Marshall
(d) Ragnar

96. The tendency of low income group to imitate the consumption pattern of high income group is known as _______ effect.
(a) Demonstration
(b) Copy
(c) Prestige
(d) Veblen

97. The Law of Demand is applicable for _______.
(a) Giffen’s Goods
(b) Prestige Goods
(c) Necessary Goods
(d) Normal Goods

98. When price changes and proportionate change in market demand is more than proportionate change in individual demand implies that the market demand curve is _______ than the individual demand curves.
(a) Steeper
(b) Flatter
(c) Vertical
(d) None of the above

99. A positively sloped demand curve implies
(a) Violation of the law of demand
(b) Giffen good
(c) Income effect is negative and greater than substitution effect
(d) All the above

100. An increase in consumer’s income will increase demand for a _______ but decrease demand for a _______.
(a) substitute good; inferior good
(b) normal good ; inferior good
(c) substitute good ; complementary good
(d) inferior good ; normal good

101. When the quantity of a good that a buyer demands rises when there is growth of purchases by other individuals, such an effect is called _______
(a) Bandwagon Effect
(b) Snob Effect
(c) Veblen Effect
(d) None of the above

102. When the quantity of a commodity that an individual buyer demand falls in response to the growth of purchases by other buyers, such an effect is called _______
(a) Bandwagon Effect
(b) Snob Effect
(c) Veblen Effect
(d) None of the above

103. Some buyer’s demand more of certain commodities at a higher price, such an effect is called _______.
(a) Bandwagon Effect
(b) Snob Effect
(c) Veblen Effect
(d) None of the above

104. The market demand curve in case of Veblen Effect is _______.
(a) steeper
(b) flatter
(c) vertical
(d) horizontal

105. The market demand curve in case of Bandwagon Effect is _______.
(a) less elastic
(b) steeper
(c) flatter
(d) horizontal

106. The market demand curve in case of Snob Effect is _______.
(a) flatter
(b) steeper
(c) less elastic
(d) both ‘b’ and ‘c’

107. A downward sloping Engel Curve shows –
(a) Normal goods
(b) Inferior goods
(c) Substitute goods
(d) Complementary goods

108. Assume that the market demand curve for Dinshaw Ice cream is known and given to us. With summer setting in, price remaining the same the consumers would –
(a) shift to a lower demand curve leftward
(b) move upward along the same demand curve
(c) shift to a higher demand curve rightward
(d) move downward along the same demand curve

109. An exceptional demand curve is one that slopes-
(a) upward to the right
(b) downward to the right
(c) upward to the left
(d) horizontal

110. What will be the impact on the demand curve of CARS when the price of petrol rises?
(a) There will be downward movement on demand curve
(b) Demand curve will shift to left
(c) There will be an upward movement on demand curve
(d) Demand curve will shift to right

111. What will be the impact on the demand curve of DESKTOP COMPUTERS when the price of LAPTOPS increase?
(a) There will be downward movement on demand curve
(b) Demand curve will shift to left
(c) There will be an upward movement on demand curve
(d) Demand curve will shift to right

112. What will be the impact on the demand curve of SUGAR with increase in its price?
(a) Downward movement along the demand curve
(b) Leftward shift of the demand curve
(c) An upward movement along the demand curve
(d) Rightward shift of the demand curve

113. The demand for TROUSERS will lead to _______ due to change in the preference in favour of JEANS.
(a) Extension in Demand of trousers
(b) Increase in Demand of trousers
(c) Contraction in Demand of trousers
(d) Decrease in Demand in trousers

114. The demand curve for BAJRA will when a poor person’s income rises.
(a) shift to the right
(b) shift to the left
(c) be downward sloping
(d) none of the above

115. Match the following—

116. If more is demanded at the same price or the same quantity is demanded at a higher price, it is known as-
(a) Extension of Demand
(b) Contraction of Demand
(c) Increase in Demand
(d) Decrease in Demand

117. A downward movement along the same demand curve means –
(a) more is demanded when the price of good falls
(b) more is demanded at the same price
(c) less is demanded at the same price
(d) less is demanded when the price of good rises

118. A leftward shift of the demand curve shows-
(a) more is demanded at the same price
(b) less is demanded when the price of good rises
(c) less is demanded at the same price
(d) more is demanded when the price of good falls

119. When same quantity of a good is demanded at a lower price, it is known as-
(a) Extension of Demand
(b) Increase in Demand
(c) Contraction of Demand
(d) Decrease in Demand

120. When less quantity is demanded as the price of good rises, there is ________.
(a) Downward movement along the demand curve
(b) Leftward shift of the demand curve
(c) An upward movement along the demand curve
(d) Rightward shift of the demand curve

For Q. Nos. 121 to 124 refer the following demand equation Q = 180 – 6p

121. At what price no one would be willing to buy the commodity?
(a) Rs. 20
(b) Rs. 30
(c) Rs. 40
(d) Rs. 15

122. If the commodity is given free Le. if the demand is autonomous, what is the quantity demanded?
(a) 180
(b) 160
(c) 140
(d) 120

123. If the price of the commodity falls down to Rs. 1, by how much will the quantity demanded change?
(a) 6
(b) 5
(c) 12
(d) 10

124. The total quantity demanded when the price is Rs. 1 p.u. is-
(a) 180
(b) 174
(c) 190
(d) 186

For Q. Nos. 125 to 127 refer the following demand equation
Q_x = 12 – 2 P_x

125. What would be the quantity demanded at a price of Rs. 3?
(a) 4 units
(b) 5 units
(c) 6 units
(d) 8 units

126. What would be the price when quantity demanded is zero?
(a) Rs. 8
(b) Rs. 4
(c) Rs. 5
(d) Rs. 6

127. What would be the quantity demanded when the price is zero?
(a) 12 units
(b) 10 units
(c) 22 units
(d) 20 units

128. The demand function of a commodity ‘X’ is given by Q_x = 20 – 3 P_x. What would be he value of P_x when the corresponding value of Q_x = 14.
(a) Rs. 5
(b) Rs. 4
(c) Rs. 3
(d) Rs. 2

129. At a price of Rs. 10 p.u. the market demand of a commodity is 58 units, out of which consumer ‘A’ has purchased 20 units and consumer ‘B’ has purchased 10 units. How much quantity consumer ‘C’ has purchased?
(a) 28 units
(b) 26 units
(c) 24 units
(d) 22 units

130. The linear demand function is given as- Q = 80 – 20 P. Derive the market demand function when there are 100 consumers in the market.
(a) Q = 8000 – 20 P
(b) Q = 80 – 2000 P
(c) Q = 8000 – 2000 P
(d) None of the above

131. All but one can be referred as Variations in Demand. Which one is not variation in demand?
(a) Movement along the same demand curve
(b) Shifting of demand curve
(c) Changes in the Quantity Demanded
(d) Expansion and Contraction of Demand

132. 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

133. A movement along the demand curve means-
(a) expansion of demand
(b) contraction of demand
(c) changes in the quantity demanded
(d) all the above

134. Change in the demand of a commodity due to the factors other than price is known as-
(a) Increase and Decrease in Demand
(b) Changes in Demand
(c) Shift in Demand
(d) All the above

135. Increase in demand leads to-
(a) Leftward shift of the demand curve
(b) Rightward shift of the demand curve
(c) Upward movement on the same demand curve
(d) Downward movement on the same demand curve

136. Which of the following would result in the shifting of the demand curve?
(a) Increase in the tax on shoes
(b) Growth in the size of population
(c) Changes in weather conditions
(d) All the above

137. Shift in demand does not take place due to-
(a) Change in consumer’s tastes and preferences
(b) Advertisement
(c) Trade conditions
(d) Change in the price of the commodity

138. A rightward shift in the demand curve for Bread would be predicted from-
(a) A decrease in the number of breakfast eaters
(b) A change in tastes
(c) A fall in the price of Bread
(d) A rise in the price of Corn Flakes

139. Consider the following demand curve-

State whether-
(a) The two goods are complementary
(b) The two goods are substitutes
(c) The two goods are not related
(d) None of the above

140. Consider the following figure-

It shows-
(a) Inferior goods
(b) Giffen goods
(c) Normal or Superior goods
(d) All the above

141. Consider the following figure-

Demand
It shows demand curve for-
(a) Necessities
(b) Comforts and Luxuries
(c) Inferior Goods
(d) None of the above

142. Consider the following figure-

It shows demand curve for-
(a) Necessities
(b) Comforts and Luxuries
(c) Inferior Goods
(d) None of the above

143. Consider the following figure-

It shows demand curve for-
(a) Necessities
(b) Comforts and Luxuries
(c) Inferior Goods
(d) None of the above

144. Which of the following is shown in the figure?

(a) An increase in demand
(b) Indifference Curve
(c) Supply Curve
(d) None of the above

145. Other things being equal a decrease in demand can be caused by-
(a) A rise in the price of the commodity
(b) A rise in the income of the commodity
(c) A fall in the price of the commodity
(d) A fall in the income of the consumer

146. A rational consumer is a person who
(a) behaves judiciously all the time
(b) is not influenced by the advertisement
(c) knows the prices of goods in different markets and buy the cheapest
(d) has perfect knowledge of the market

147. A normal demand curve of a commodity-
(a) is vertical straight line curve
(b) has a negative slope
(c) is horizontal straight line curve
(d) has a positive slope

148. If the quantity demanded of a commodity is plotted against the price of a substitute goods ceteris paribus the curve is expected to be-
(a) Vertical
(b) Negatively sloped
(c) Horizontal
(d) Positively sloped

149. Income effect operates when there is an-
(a) increase in real income due to fall in price of the commodity
(b) increase in real income due to rise in price of the commodity
(c) increase in real income due to rise in demand of the commodity
(d) increase in money income due to fall in the price of the commodity

150. Who explained the abnormal shape of demand curve for diamonds through the doctrine of conspicuous consumption?
(a) Thorstein Veblen
(b) Robert Giffen
(c) David Ricardo
(d) Alfred Marshall

151. Conspicuous good are also known as-
(a) prestige goods
(b) snob goods
(c) Veblen goods
(d) all the above

152. Elasticity of demand is defined as the responsiveness of the quantity demanded of a good to changes in
(a) price of the commodity
(b) price of related goods
(c) income of the consumer
(d) all the above

153. ________ was the economist to formulate the concept of price elasticity of demand.
(a) Alfred Marshall
(b) Adam Smith
(c) Paul Samuelson
(d) Edwin Cannon

154. The concept of Elasticity of Demand whenever referred unless otherwise specified always means-
(a) Price Elasticity of Demand
(b) Income Elasticity of Demand
(c) Cross Elasticity of Demand
(d) All the above

155. The concept of price elasticity of demand analyses-
(a) direction of change in response to change in price of the commodity
(b) degree of change in response to change in price of the commodity
(c) absolute change in response to change in price of the commodity
(d) none of these

156. When there is no change in quantity demanded in response to any change in price, it is a situation of-
(a) infinite price elasticity
(b) unitary price elasticity
(c) zero price elasticity
(d) high price elasticity

157. Price Elasticity of Demand is defined as-
(a) Change in quantity demanded ÷ Change in Price
(b) % Change in quantity demanded ÷ % Change in Price
(c) Change in quantity demanded ÷ % Change in Price
(d) % Change in quantity demanded ÷ Change in Price

158. Price Elasticity of Demand is given by-

159. When percentage change demand is less than percentage change in price, demand is-
(a) perfectly elastic
(b) perfectly inelastic
(c) less than unitary elastic
(d) more than unitary elastic

160. When percentage change in demand is equal to percentage change in price, demand is-
(a) perfectly elastic
(b) unitary elastic
(c) perfectly inelastic
(d) more elastic

161. Price Elasticity of demand is always because of relationship between price and quantity demanded
(a) negative ; inverse
(b) positive ; direct
(c) negative ; positive
(d) positive ; inverse

162. Coefficient of price elasticity of demand ranges from to
(a) one ; infinity
(b) zero ; infinity
(c) zero ; one
(d) none of the above

163. When there is an infinite demand at a particular price and demand becomes zero with a slight rise in the price then
(a) demand by commodity is perfectly elastic
(b) E_d = ∞
(c) demand curve is horizontal straight line parallel to X-axis
(d) all the above

164. When percentage in quantity demanded is more than percentage change in price then
(a) demand of commodity is highly elastic
(b) E_d > 1 and demand curve is flatter
(c) E_d < 1 and demand curve is steeper
(d) Only ‘a’ and ‘b’ 1

165. When demand curve is parallel to X-axis, elasticity of demand is-
(a) unity
(b) zero
(c) greater than unity
(d) infinity

166. Which curve is called rectangular hyperbola?
(a) Highly Elastic Demand Curve
(b) Less Elastic Demand Curve
(c) Unitary Elastic Demand Curve
(d) None of the above

167. When demand curve is parallel to Y-axis, elasticity of demand is-
(a) unity
(b) zero
(c) less than unity
(d) more than unity

168. As the demand curve becomes flatter and flatter, the elasticity of demand becomes-
(a) higher
(b) lower
(c) equal to infinity
(d) equal to zero

169. When the demand for a commodity does not change with the increase in its price from Rs. 2 to Rs. 5, then elasticity of demand is
(a) E = ∞
(b) Ed = 0
(c) E_d < 1
(d) E_d > 1

170. Slope of perfectly elastic demand curve is equal to ________
(a) 0
(b) 1
(c) 2
(d) 3

171. On all points of a rectangular hyperbola demand curve, elasticity of demand is –
(a) equal to one
(b) zero
(c) more than one
(d) less than one

172. When slope of demand curve = 0, the elasticity of demand is-
(a) 0
(b) 1
(c) oo
(d) none of the above

173. To say that the demand for a commodity is elastic means-
(a) That the demand curve slopes downward to the right
(b) That more is sold at a lower price
(c) That a rise in price will increase total revenue
(d) That the change in quantity sold is proportionately greater than the change in price

174. A demand curve is perfectly inelastic if-
(a) a rise in price causes a fall in quantity demanded
(b) a fall in price causes rise in sellers total receipts
(c) the commodity in question is very perishable
(d) a change in price does not change quantity demanded

175. When the demand curve is vertical straight line, demapd is-
(a) perfectly elastic
(b) perfectly inelastic
(c) relatively elastic
(d) relatively inelastic

176. For goods with perfectly inelastic demand-
(a) ∆q = 0
(b) ∆q < ∆p
(c) ∆q = ∆p
(d) ∆p = 0

177. For goods with less elastic demand-
(a) ∆q > ∆p
( b) ∆q = ∆p
(c) ∆q < ∆p
(d) none of the above

178. If the demand of a commodity 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

179. Rectangular hyperbola is also called-
(a) Equilateral Hyperbola
(b) Vertical Line
(c) Square
(d) Horizontal Line

180. The factor which generally keeps the price elasticity of demand for a good low is-
(a) Variety of uses of that good
(b) Its low price
(c) Close – substitutes for that good
(d) High proportion of the consumer’s income spent on it

181. If you spend more on rent than on soap, your price elasticity of demand for housing is likely to be-
(a) greater than your price elasticity of demand for soap
(b) less than your price elasticity of demand for soap
(c) equal to your price elasticity of demand for soap
(d) none of the above

182. The demand for common salt has low price elasticity because-
(a) it has no close substitute
(b) it is necessity
(c) it constitutes only a small proportion of consumer’s expenditure
(d) all the above

183. The devaluation of currency would increase the export earnings only when demand for the nation’s exports in foreign market is-
(a) Elastic
(b) Inelastic
(c) Perfectly Inelastic
(d) Unitary Elastic

184. The demand for sugar and tea is usually:
(a) Elastic
(b) Inelastic
(c) Perfectly elastic
(d) Perfectly inelastic

185. Availability of close substitutes makes the demand-
(a) Less elastic
(b) More elastic
(c) Perfectly elastic
(d) Perfectly inelastic

186. Elasticity is greater than unity for-
(a) necessaries
(b) luxuries
(c) complementary goods
(d) inferior goods

187. Complementary goods exhibit ________ elasticity of demand.
(a) low
(b) high
(c) unitary
(d) none of the above

188. All but one of the following commodities has elastic demand. Which one has inelastic demand?
(a) Coca-Cola
(b) Butter for poor person
(c) Cigarettes
(d) Electricity

189. Demand is ________ in the long period than in the short period.
(a) less elastic
(b) perfectly elastic
(c) perfectly inelastic
(d) more elastic

190. The demand for necessities is ________
(a) Highly elastic
(b) Highly inelastic
(c) Slightly elastic
(d) Slightly inelastic

191. If the demand for a commodity is ________, the entire burden of indirect tax will fall on the consumer.
(a) Relatively inelastic
(b) Perfectly inelastic
(c) Relatively elastic
(d) Perfectly elastic

192. Which of the following helps the manager to estimate the demand of a commodity?
(a) Price of the commodity
(b) Price of the substitute commodities
(c) Elasticity of the commodity
(d) All the above

193. The price elasticity of demand for a face cream is estimated to be ONE, no matter what the price or quantity demanded. In this case-
(a) a 1096 increase in price will result in 1096 increase in quantity demanded
(b) a 1096 increase in price will result in 1096 fall in quantity demanded
(c) an increase in price will increase the seller’s revenue
(d) none of the above

194. If demand is ________ then price cuts will ________ spending.
(a) perfectly inelastic ; increase
(b) elastic; increase
(c) elastic; decrease
(d) none of the above

195. Suppose the demand for Dosa at Dosa Plaza is elastic. If the owner of the restaurant is consid¬ering raising the price, it can expect relatively-
(a) large fall in quantity demanded
(b) large fall in demand
(c) small fall in quantity demanded
(d) small fall in demand

196. If a 1096 rise in the price of a commodity causes the demand to fall by 2096
(a) demand was inelastic
(b) demand was infinitely elastic
(c) demand was elastic
(d) none of the above

197. On typical straight line demand curve, the elasticity of demand at a point where it meets the price axis is-
(a) 2
(b) 0.75
(c) 1
(d) infinite

198. On a straight line demand curve the elasticity of demand at the mid-point of the curve is-
(a) 1/2
(b) 2
(c) 0
(d) 1

199. To measure price elasticity over large changes in price we use ________
(a) point elasticity method
(b) arc elasticity method
(c) income elasticity method
(d) none of the above

200. If the demand for a good is elastic, an increase in its price will cause the total expenditure of the consumers of the good to
(a) Remain the same
(b) Increase
(c) Decrease
(d) None of these

201. When the price of Good ‘X’ goes up by 1096 its demand falls from 800 units to 600 units. What is the price elasticity of Good ‘X?
(a) – 2.5 with flatter demand curve
(b) 2.5 with flatter demand curve
(c) – 1.5 with steeper demand curve
(d) 1.5 with steeper demand curve

202. The demand by a consumer for a commodity falls by 1096 when its price increases from ₹ 5 to ₹ 6 per unit. What is the price elasticity of demand?
(a) unitary elastic
(b) 0.5
(c) .8
(d) 1.5

203. 30 units of a commodity is purchased by a consumer at the price of ₹ 46 per unit. When the price rises to ₹ 50 per unit, he buy 15 units only. The co-efficient of elasticity do demand is –
(a) 4.75
(b) 5
(c) 5.75
(d) 6

204. A consumer spends ₹ 40 on a good at a price of ₹ 1 per unit and ₹ 60 at a price of ₹ 2 per unit. The elasticity of demand is-
(a) 0.25
(b) 2.5
(c) .35
(d) 3.5

205. A consumer buy 20 units of a good at ? ₹ 10 p.u. The price elasticity of demand of this good is -1. How much quantity would be demanded by the consumer when the PRICE FALLS to ₹8 p.u.?
(a) 21 units
(b) 22 units
(c) 23 units
(d) 24 units

206. A consumer buy 40 units of a commodity at ₹ 5 per unit. Its Ed = -3. How much demand of quantity he will buy at ₹ 6 per unit?
(a) 15 units
(b) 16 units
(c) 17 units
(d) 18 units

207. The market demand of a commodity at ₹ 4 per unit is 100 units. The price RISES and as a result its market demand falls to 75 units. If E_d = -1, find out its new price.
(a) ₹ 5
(b) ₹ 6
(c) ₹ 7
(d) ₹ 8

208. A consumer buy 80 units of a commodity at ₹ 4 per unit. When the price FALLS, he buy 100 units. If E_d = -1, the new price will be-
(a) ₹ 3.5
(b) ₹ 3
(c) ₹ 2.5
(d) ₹ 2

209. Demand for good ‘X’ is perfectly inelastic. What will be the change in demand if price falls from ₹ 10 per unit to ₹ 5 per unit?
(a) No change in demand
(b) Large change in demand
(c) Medium change in demand
(d) None of the above

210. What happens to total expenditure on a commodity when its price falls and its demand is price elastic?
(a) Total expenditure will remain constant
(b) Total expenditure will fall
(c) Total expenditure will increase
(d) None of the above

211. As the price of a product falls by 7%, the total expenditure on it has gone up by 3.5%. The elasticity of demand of this product is-
(a) E_d = 0
(b) E_d > l
(c) E_d < 1
(d) E_d = 1

212. Let Q_x = 1400/p Find, total expenditure on good ‘X’ when P_x falls from ₹ 6 to ₹ 1 ; derive the value of E_d and what shape the demand curve will take?
(a) ₹ 1400 ; E_d = 1 and rectangular hyperbola
(b) ₹ 1400 ; E_d < 1 and steep demand curve
(c) ₹ 1400 ; E_d > 1 and flatter demand curve
(d) ₹ 2800 ; E_d = 1 and rectangular hyperbola

213. The demand of a commodity was 100 units initially. With the rise in price by ₹ 5, the quantity demanded falls by 5 units. Elasticity of demand is 1.2. Find out the price BEFORE the change in demand.
(a) ₹ 100
(b) ₹ 140
(c) ₹ 120
(d) ₹ 160

214. Regardless of changes in its price, if the quantity demanded of a good remains constant, then the demand curve for the good will be-
(a) horizontal
(b) vertical
(c) positively sloped
(d) negatively sloped

215. The total revenue of the seller will increase with a fall in price if-
(a) demand is unitary
(b) the percentage change in quantity demand¬ed is less than percentage in price
(c) demand is inelastic
(d) the percentage in quantity demanded is greater than the percentage change in price

216. Point elasticity is useful for which of the following situations?
(a) A restaurant is considering increasing the price of dosa from ₹ 100 to ₹ 200
(b) Lakme is considering lowering the price of its lipsticks by 50%
(c) Maruti Car Ltd. lower the price of Alto 800 by ₹ 1,000
(d) None of the above

217. If there are finite change in price and quantity demanded over a stretch on the demand curve, it is called-
(a) Arc elasticity
(b) Point elasticity
(c) Average elasticity
(d) Both ‘a’ and ‘c’

218. The formula used in the Arc Elasticity method is-

219. When price elasticity at a single point on a demand curve is measured, we use ____
(a) Proportionate Method
(b) Geometric Method
(c) Total Expenditure Method
(d) Arc Elasticity

220. The exact and precise co-efficient of elasticity cannot be found by _____ method.
(a) Proportionate Method
(b) Geometric Method
(c) Total Expenditure Method
(d) Arc Elasticity

221. ____ method only classifies elasticity into elastic, inelastic or unitary elastic.
(a) Proportionate Method
(b) Geometric Method
(c) Total Expenditure Method
(d) Arc Elasticity

222. Slope of a demand curve may remain constant but elasticity still can does change. This is-
(a) Absolutely correct as slope of a curve and its elasticity are not the same thing
(b) Absolutely incorrect as slope of a curve and its elasticity are same thing
(c) Partly correct and partly incorrect
(d) None of the above

223. Let slope of demand curve = -0.5. The elasticity of demand will be ____ if initial price is ₹ 20 per unit and initial quantity is 50 units of the commodity
(a) – 0.6
(b) – 0.7
(c) – 0.8
(d) – 0.9

For Q. Nos. 224 to 226 refer the following information. Given –

224. What is the price of the commodity when Quantity Demanded is 20 units ?
(a) ₹ 4
(b) ₹ 5
(c) ₹ 6
(d) ₹ 7

225. What is the price of the commodity when the Quantity Demanded is 30 units?
(a) ₹ 4
(b) ₹ 5
(c) ₹ 6
(d) ₹ 7

226. Using percentage method, the price elasticity of demand is-
(a) 1.5
(b) 2.0
(c) 2.5
(d) 3.0

227. Life saving drugs has ____ demand.
(a) inelastic
(b) elastic
(c) perfectly elastic
(d) perfectly inelastic

228. The price elasticity of demand is 0.5. The percentage change in quantity is 4. What is the percentage in price?
(a) 6
(b) 8
(c) 10
(d) 12

229. When price of a commodity gets doubled, its quantity demanded is reduced to half. The coefficient of price elasticity of demand will be-
(a) – 1
(b) – 0.5
(c) – 1.5
(d) – 2

230. Calculate the price elasticity of demand-

(a) – 1
(b) – 2
(c) – 2.5
(d) – 1.5

231. The price elasticity of demand for good ‘X’ is twice that of good ‘Y’. Price of ‘X’ falls by 5% while that of good ‘Y’ rises by 5%. The percentage change in the quantities demanded of X and Y will be
(a) 10% and 5%
(b) 5% and 10%
(c) 10% and 15%
(d) 15% and 20%

232. A consumer buys a certain quantity of a good at a price of ₹ 10 per unit. When the price falls to ₹ 8 per unit, he buys 40% more quantity. The price elasticity of demand will be-
(a) 8
(b) 6
(c) 4
(d) 2
Consider the following diagram to answer questions from 233 to 234

233. At a price of OP the total expenditure of the consumer is-
(a) OC RP₁
(b) OBTP
(c) BCRT
(d) None of the above

234. At a price of OP₁ the total expenditure of the consumer is-
(d) OC RP₁
(b) OBTP
(c) BCRT
(d) None of the above

235. All demand curves but one indicate same elasticity of demand at all their points-
(a) Horizontal Straight Line Demand Curve
(b) Vertical Straight Line Demand Curve
(c) Relatively Elastic Demand Curve
(d) Rectangular Hyperbola

236. The point where the downward sloping straight line demand curve intercept the horizontal axis, price elasticity of demand is ____ because price at the point is ____
(a) zero ; zero
(b) = 1; zero
(c) > 1 ; zero
(d) < 1 ; zero

237. If the price elasticity of demand is ZERO, it means expenditure on the commodity may ____ with the change in price of the commodity.
(a) increase
(b) decrease
(c) increase or decrease
(d) remain constant

238. The price elasticity of demand is higher, when the price of the commodity is-
(a) higher
(b) lower
(c) constant
(d) zero

239. If 10% increase in price of good ‘X’ causes a 10% increase in expenditure on good ‘X’, elasticity of demand is equal to ____
(a) 2
(b) 3
(c) 1
(d) zero

240. Price of the commodity increases from ₹ 10 to ₹ 12 per unit and expenditure on the commodity increases by 20%, elasticity of demand would be-
(a) 3
(b) zero
(c) 2
(d) 1

241. The income elasticity of demand in case of an inferior good is-
(a) positive
(b) zero
(c) negative
(d) infinite

242. If a good is a luxury, its income elasticity of demand is-
(a) positive & less than one
(b) negative but greater than one
(c) positive and greater than one
(d) zero

243. When a given change in income does not lead to any change in the quantity demanded, it is called as-
(a) negative income elasticity of demand
(b) income elasticity of demand less than one
(c) zero income elasticity of demand
(d) income elasticity of demand is greater than one

244. The goods having zero income elasticity of demand are called goods.
(a) luxury
(b) comfort
(c) necessity
(d) neutral

245. Salt, Match Box, etc. are ____ goods as Σy = 0
(a) neutral
(b) necessary
(c) luxury
(d) none of the above

246. As income rises, the consumer will go in for superior goods and as a result the demand for inferior goods will fall. This implies-
(a) income elasticity of demand less than one
(b) negative income elasticity of demand
(c) zero income elasticity of demand
(d) unitary income elasticity of demand

247. Firms that supply products with higher income elasticity of demand can expect ____ as the economy grows.
(a) rise in sales
(b) fall in sales
(c) constant sales
(d) first rise then

248. Firms that supply products with relatively low income elasticity of demand experience in an economic downturn.
(a) rise in sales
(b) fall in sales
(c) stable sales
(d) none of the above

249. Which one of the following is income inelastic product/service?
(a) Air travel
(b) Visit to water park
(c) Life Saving Drugs
(d) Dinner at a five star hotel

250. The responsiveness of demand of a commodity to the change in income is known as-
(a) price elasticity of
(b) income elasticity demand of demand
(c) cross-elasticity
(d) none of the above of demand

251. The responsiveness of the change in quantity demanded of one commodity due to a change in the price of another commodity is known as-
(a) price elasticity of demand
(b) income elasticity of demand
(c) cross elasticity of demand
(d) none of the above

252. Cross elasticity of demand between two perfect substitutes will be-
(a) low
(b) very high
(c) infinity
(d) very low

253. Complementary goods like tea and sugar have a ____ cross elasticity of demand.
(a) Negative
(b) Positive
(c) Zero
(d) Infinite

Consider the following information to answer Q. Nos. 254 to 256
The following elasticities relating to demand for CORN are given-

• Price Elasticity E_P = 1.50
• Cross Elasticity between the demand for CORN and price of WHEAT = 0.75
• Income Elasticity, E_y = 0.50

254. If the price of corn rises, other things being the same, the consumers will spend ____ on corn.
(a) more
(b) less
(c) same amount
(d) none of the above

255. The above information shows that wheat and corn are ____
(a) neutral goods
(b) necessity
(c) complementary goods
(d) substitute goods

256. If income rises, the share of income spent on corn will-
(a) remain same
(b) increase
(c) fall
(d) none of the above

257. Given – Q_x = 500 – 4 P_x
Find elasticity demand when price = ₹ 25
(a) .50
(b) .25
(c) 1
(d) .75

258. Give – Q_x = 20 – 2 P_x, what is the price elasticity of demand when price is ₹ 5?
(a) 0.50
(b) .25
(c) 1
(d) .75

259. If the amounts of two goods purchased increase or decrease simultaneously when the price of one changes, then the cross elasticity of demand between then is-
(a) one
(b) negative
(c) positive
(d) zero

260. Of the following commodities, which has the lowest elasticity of demand?
(a) Car
(b) Tea
(c) Houses
(d) Salt

261. Suppose your income increases by 20% and demand for a commodity increases by 10%, then the income elasticity of demand is-
(a) infinity
(b) negative
(c) zero
(d) positive

262. Which of the following does not have uniform elasticity of demand at all points?
(a) A downward sloping demand curve
(b) A vertical demand curve
(c) A rectangular hyperbola demand curve
(d) A horizontal demand curve

263. A negative income elasticity of demand for a commodity indicates that as income falls the amount of commodity purchased-
(a) remains unchanged
(b) falls
(c) rises
(d) none of these

264. In which case the elasticity shown by different points of a curve is the same?
(a) A rectangular hyperbola curve
(b) A straight line curve
(c) A downward sloping curve
(d) None of these

265. “The proportional change in quantity purchased divided by the proportional change in price”. The quotation is given by-
(a) Alfred Marshall
(b) Cobb – Douglas
(c) Joan Robionson
(d) Adam Smith

266. If the quantity demanded of a commodity is plotted against the price of a substitute goods, the curve is expected to be-
(a) Vertical
(b) Positively sloped
(c) Horizontal
(d) Negatively sloped

267. Cross elasticity of demand between petrol and automobiles is-
(a) infinite
(b) high
(c) zero
(d) low

268. There are two goods ‘X’ and ‘Y’. The cross elas¬ticity of demand for ‘X’ with respect to price of ‘Y’ is greater than zero, they are-
(a) complementary to each other
(b) complementary goods
(c) substitutes
(d) close substitutes

269. If two demand curves are shooting downward from the same point, then-
(a) flatter curve have greater elasticity of demand
(b) steeper curve have greater elasticity of demand
(c) both curves show same elasticity of demand since they shoot down from the same point
(d) none of the above

270. If income elasticity for the household for good A is 2, then the good is-
(a) necessity item
(b) inferior good
(c) luxury item
(d) neutral good
Consider the following figure to answer Q. Nos. 271 to 273

271. In the figure above elasticity of demand at point ‘D’ is-
(a) < elasticity of demand at point ‘C’
(b) > elasticity of demand at point ‘C’
(c) = elasticity of demand at point ‘C’
(d) None of the above

272. Price at point ‘B’ price is ____ and therefore elasticity of demand is ____
(a) high ; high
(b) low; low
(c) zero ; zero
(d) zero ; high/low

273. The elasticity of demand at point ‘A’ is-
(a) low
(b) infinite
(c) high
(d) zero
Consider the following figure to answer Q. Nos. 274 to 276

274. In the figure above, for a given fall in price to P₁ the change in quantity is highest in case of-
(a) d₁
(b) d₂
(c) d₃
(d) None of the above as all curves shoot from same point

275. Demand curve d₂ is-
(a) more elastic than d₁
(b) less elastic than d₁
(c) more elastic than d₂
(d) none of the above

276. Of the three demand curves highest elasticity is denoted by-
(a) d₁
(b) d₂
(c) d₃
(d) all show same elasticity

277. If the quantity demanded of a commodity is plotted against the price of a complementary good, the demand curve will be-
(a) Negatively sloped
(b) Positively sloped
(c) Vertical
(d) Horizontal

278. Income of a household rises by 10% and its demand for jawar falls by 4%. In this case jawar is ____ good.
(a) Normal
(b) Luxurious
(c) Inferior
(d) Neutral

279. If Cross Elasticity of Demand is equal to Zero, it means that the goods are-
(a) Perfect Substitute goods
(b) Complementary goods
(c) Unrelated goods
(d) Substitutes

280. If the quantity demanded of Tea rises by 5% when the price of Coffee increase by 20%, the Cross Elasticity of demand between Tea and Coffee is-
(a) – 0.25
(b) 0.25
(c) – 4
(d) 4

Theory of Consumer Behaviour

281. Want satisfying power of a commodity is called-
(a) consumption
(b) utility
(c) production
(d) value addition

282. Utility depends on the ____ of a want.
(a) intensity
(b) quality
(c) novelty
(d) uniformity

283. All but one are the commodities that have both utility and usefulness except-
(a) pencil
(b) notebook
(c) tobacco
(d) clothes

284. Utility is-
(a) a subjective and relative concept
(b) morally or ethically colourless
(c) different from pleasure
(d) all the above

285. Utility may be defined as-
(a) power of a commodity to satisfy wants
(b) usefulness of a commodity
(c) desire for a commodity
(d) none of the above

286. The utility of a commodity is ____
(a) its accepted social value
(b) the extent to which it is of practical use
(c) the fact that it is wanted by some people
(d) its relative scarcity

287. Utility is measured in terms of-
(a) Grams
(b) Seconds
(c) Centimeter
(d) Utils

288. Utility is-
(a) usefulness
(b) moral implications
(c) legal implications
(d) none of the above

289. The cardinal approach postulates that utility can be ____
(a) compared
(b) measured
(c) ranked
(d) all the above

290. Cardinal Utility Theory is associated with-
(a) W.S. Jevons
(b) Dr. A. Marshall
(c) H.H. Gossen and Walras
(d) All the above

291. Cardinal Utility approach is also known as-
(a) Indifference Curve Analysis
(b) Hicks and Allen Approach
(c) Marginal Utility Analysis
(d) All the above

292. Marginal Utility Approach is also called-
(a) Ordinal Utility Analysis
(b) Hicks and Allen Approach
(c) Cardinal Utility Analysis
(d) All the above

293. According to marginal utility analysis, utility can be measured as-
(a) 1^st, 2^nd, 3^rd ……
(b) 1,2,3, ……
(c) Nominal numbers
(d) All the above

294. Cardinal measure of utility is required in-
(a) Marginal Utility Theory
(b) Indifference Curve Theory
(c) Revealed Preference Theory
(d) None of the above

295. Which of the following approaches uses MONEY as a measuring rod of utility-
(a) Ordinal
(b) Cardinal
(c) Both ‘a’ and ‘b’
(d) Neither ‘a’ nor ‘b’

296. Which of the theories is applicable under Cardinal Approach to Utility?
(a) Law of Diminishing Marginal Utility
(b) Law of Equi-Marginal Utility
(c) Consumer Surplus Theory
(d) All the above

297. All but one are the assumptions of the Cardinal Utility Theory. Which one is not the assumption?
(a) Rational Consumer
(b) Constant Marginal Utility of money
(c) Perfectly Competitive Market
(d) Independent Utilities

298. Which of the following assumptions ignores the presence of complementary and substitute goods in Cardinal Utility Theory?
(a) Rational Consumer
(b) Constant Marginal Utility of money
(c) Independent Utilities
(d) None of the above

299. The price that a consumer is ready to pay for a commodity represents the utility he is expecting from the commodity means-
(a) Utility is measurable
(b) Utility is not measurable
(c) Money is the measuring rod of utility
(d) Both ‘a’ and ‘c’

300. Consumer makes all calculations carefully and then purchase the commodities in order to maximize his utility means consumer is-
(a) careless
(b) rational
(c) irrational
(d) unpredictable

301. 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 be measured only
(c) Utility can neither be measured nor be ranked in order or preferences
(d) Utility cannot be measured, but can be ranked in order of preferences

302. The cardinal approach to utility assumes marginal utility of money is-
(a) Zero
(b) Constant
(c) Increasing Trend
(d) Decreasing Trend

303. ____ 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

304. _____ is the addition made to the total utility by the consumption of additional unit of a commodity
(a) Marginal Utility
(b) Total Utility
(c) Average Utility
(d) Ordinal Utility

305. Marginal Utility can be stated by-
(a)

(b) Additional utility derived from additional unit of a commodity
(c) TU_n – TU_n-1
(d) All the above

306. Utility of a good can be termed as the ____
(a) Monetary value a consumer gains from consuming a particular good
(b) The difference between what a consumer is willing to pay and actually pays
(c) The satisfaction a consumer derives from the consumption of a particular good
(d) The desire to consume a good

307. Marginal Utility-
(a) is always positive
(b) is always negative
(c) can be positive or negative but not zero
(d) can be positive or negative or zero

308. Total Utility can be calculated as-
(a) TU = Σ MU
(b) TU = MU₁ + MU₂ + MU₃ + MU_n
(c) Both ‘a’ and ‘b’
(d) none of the above

309. When only ONE unit of the commodity is consumed-
(a) MU = TU
(b) MU > TU
(c) MU < TU
(d) none of these

310. When marginal utility is negative, total utility is-
(a) zero
(b) diminishing
(c) maximum
(d) minimum

311. When total utility is maximum, marginal utility becomes-
(a) zero
(b) unity
(c) positive
(d) negative

312. Total Utility is ____ when marginal utility is positive
(a) maximum
(b) diminishing
(c) increasing
(d) minimum

313. When TU is increasing at a diminishing rate, MU must be-
(a) increasing
(b) decreasing
(c) constant
(d) negative

314. MU of a particular commodity at the point of saturation is-
(a) zero
(b) unity
(c) greater than unity
(d) less than unity

315. Which of the following equation is incorrect?

316. The rate of which TU changes is indicated by-
(a) MU
(b) TU
(c) both ‘a’ and ‘b’
(d) none of these

317. With the increase in consumption by ONE unit of the commodity, TU increases from 120 to 150, then marginal utility is-
(a) 50
(b) 1.25
(c) 0.88
(d) 30

318. The shape of MU curve is-
(a) upward sloping
(b) Concave to origin
(c) downward sloping
(d) straight line

319. TU starts diminishing when-
(a) MU is positive
(b) MU is increasing
(c) MU is negative
(d) MU is constant

320. TU curve-
(a) always rises
(b) always falls
(c) first falls and then rises
(d) first rises at a diminishing rate, reaches maximum point and then falls

321. MU curve will be below X-axis when-
(a) MU is positive
(b) MU is negative
(c) MU is zero
(d) MU is constant

322. What is called the point of satiety?
(a) The point where MU >0
(b) The point where MU < 0
(c) The point where MU = 0
(d) None of these

323. ____ states that marginal utility of a good diminishes as the consumer consumers additional units of a good.
(a) The Law of Equi-Marginal Utility
(b) The Law of Diminishing Marginal Utility
(c) Revealed Preference theory
(d) None of the above

324. MU curve of a consumer is also his ____
(a) indifference curve
(b) total utility curve
(c) supply curve
(d) demand curve

325. ____ curve is the slope of the TU curve.
(a) MU Curve
(b) Average Utility Curve
(b) Supply Curve
(d) Indifference Curve

326. At saturation point the slope of total utility curve is ____
(a) rising
(b) falling
(c) zero
(d) none of these

327. Constant Marginal Utility of Money means ___
(a) quantity
(b) importance
(c) composition
(d) Both ‘a’ and ‘c’

328. A curve which first move upwards then down wards is naturally ____
(a) Marginal Utility Curve
(b) Average Utility Curve
(c) Total Utility Curve
(d) Demand Curve

329. The peradox of value means that-
(a) people are irrational in consumption choices
(b) the total utilities yielded by commodities do not necessarily have relationship to their prices
(c) value has no relationship to utility schedule
(d) free goods are goods that are essential to life

330. The value paradox (diamond and water paradox) arises because-
(a) Water has too low price
(b) Value in use differs from utility
(c) Diamonds are too high priced
(d) Value-in-use differs from value-in-exchange

331. In ONE COMMODITY, case, the consumer is at equilibrium when-

332. The second samosa consumed gives lesser satisfaction to Mohan. This is a case of-
(a) Law of Demand
(b) Law of Diminishing Returns
(c) Law of Diminishing Marginal Utility
(d) Law of Supply

333. 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

334. Which of the following is NOT an assumption of Law of Diminishing Marginal Utility?
(a) Homogenity
(b) Continuity
(c) Standard Unit
(d) None of the above

335. MU of one commodity has no relation with MU of another commodity implies-
(a) assumption of uniform quality
(b) assumption of rational consumer
(c) assumption of independent utilities
(d) assumption of reasonable quantity

336. Consumer in consumption of single commodity ‘X’ will be at equilibrium when-
(a) MUx = Px
(b) Mux >Px
(c) Mux < Px
(d) all the above

337. if Mux >Px then consumer-
(a) is not at equilibrium
(b) he will buy more of X good
(c) he will buy less of X good
(d) both ‘a’ and ‘b’

338. Suppose the price of good X is given as ₹ 8 and the MU in terms of money for 4 units is given as-

How many units should a consumer purchase to maximize satisfaction?
(a) 4 units
(b) 3 units
(c) 2 units
(d) 1 unit

339. Following is the utility schedule of a person-

If the commodity is sold for ₹ 4 and MU of one rupee is 5 utils, how many units will the consumer buy to maximize satisfaction?
(a) 1 unit
(b) 2 units
(c) 3 units
(d) 4 units

340. Suppose that an ice-cream is sold for ₹ 30. Ritu has already eaten 3 ice-creams. Her MU from eating the 3rd ice-cream is 90 utils. MU of ₹ 1 is 3 utils. Should she eat more ice-creams or stop?
(a) Stop eating more ice-creams
(b) Continue eating more ice-creams
(c) Stop after eating one more ice-cream
(d) Eat 2 more ice-creams

341. If one burger give you satisfaction of 15 utils and two burgers give total satisfaction of 25 utils, then the marginal utility of second burger is-
(a) 10 utils
(b) 11 utils
(c) 12 utils
(d) 13 utils

342. ____ refers to a situation when a consumer maximizes his satisfaction with his limited income.
(a) Producer’s Equilibrium
(b) General Equilibrium
(c) Consumer’s Equilibrium
(d) None of these

343. The general condition of consumer’s equilibrium with respect to any particular product is-

344. The consumer is in equilibrium and is consuming good-X only. The MU from last unit of good X consumed is 50 utils and Mu_m =10. What is the price of good X?
(a) ₹ 5
(b) ₹ 40
(c) ₹ 10
(d) ₹ 4

345. The principal limitation of utility analysis re¬lates to the basic assumption that utility can be expressed in terms of-
(a) cardinal numbers
(b) ordinal numbers
(c) both ‘a’ and ‘b’
(d) none of these

346. Marginal Utility theory is based on ____ from a good.
(a) actual satisfaction
(b) anticipated satisfaction
(c) realised satisfaction
(d) none of these

347. Which one of the following is the ODD one?
(a) Law of Substitution
(b) Law of Diminishing Marginal Utility
(c) Indifference curve analysis
(d) Law of Variable Proportions

348. Which statement is correct in connection with utility?
1. It is same for all consumer
2. It is a subjective concept
3. It is different for all its consumers
4. It’s a want satisfying power
5. It decreases uniformly for all its consumers
(a) 1, 2 and 3 only
(b) 2, 3 and 4 only
(c) 3, 4 and 5 only
(d) 1, 3 and 5 only

349. The excess of the price which a person would be willing to pay rather than go without the thing over that he actually does pay is called-
(a) extra satisfaction
(b) surplus satisfaction
(c) consumer’s surplus
(d) all the above

350. The doctrine of consumer’s surplus is based on ____
(a) Elasticity of Demand
(b) Indifference Curve Analysis
(c) Law of Substitution
(d) Law of Diminishing Marginal Utility

351. The term optimum allocation of consumer’s expenditure on different goods and services is used in-
(a) Law of Demand
(b) Giffens Paradox
(c) Law of Equi-Marginal Utility
(d) Law of Diminishing Marginal Utility

352. Buyer’s surplus is highest in the case of _____
(a) Luxuries
(b) Comforts
(c) Necessaries
(d) All the above
For Q – Nos. 353 to 355, refer the following figure :

353. In the above figure, the total utility is represented by the area ____
(a) DPR
(b) OQRP
(e) OQRD
(d) none of these

354. In the above figure, the given price is _____ and the consumer for OQ amount of commodity spends a total amount of money equal to the area _____
(a) OP ; POOR
(b) OD ; POOR
(c) OP ; DPR
(d) OD ; DPR

355. In the above figure, the consumer’s surplus is shown by the area-
(a) POOR
(b) DPR
(c) OQRD
(d) none of these
For Q. Nos. 356 and 359 refer the following figure

356. In the above diagram, the consumer’s surplus at the price of P₁ is equal to the area-
(a) P₁CA
(b) P₁OQ₁
(c) Both ‘a’ and ‘b’
(d) none of these

357. In the above diagram when price of the commodity decreases from P₁ to P₂, the gain in consumer’s surplus is equal to ____
(a) AP₃C
(b) AP₂D
(c) P₁P₂DC
(d) AP₃B

358. In the above diagram, when price of the commodity rises from P1 to P3, the loss in consumer’s surplus is equal to ___
(a) AP3B
(b) AP1C
(c) AP2D
(d) P1P3 BC

359. The consumer’s surplus at the price P₁ is ____ than the consumer’s surplus at the price of P₃ but ____ at the price of P₂.
(a) greater; less
(b) less ; greater
(c) same at all the prices
(d) none of these

360. The area of consumer’s surplus is correctly shaded in ____

361. The concept of consumer’s surplus is useful in ____
(a) Distinguishing between value-in-use and value-in-exchange
(b) Comparing the advantages of different places
(c) Useful in cost benefit analysis of projects
(d) All the above

362. Amit divides his income entirely between Good X and Good Y. He allocates his income between these two goods is such a way that he maximizes his satisfaction. His MU from extra unit of Y is 4 Utils and the price of Y is ₹ 40. If the price of X is ₹ 80, how much of X good he consumes per day?
(a) 4
(b) 6
(c) 8
(d) 10

363. A free good is plentiful so as to have no price, will be used upto the point where its marginal utility is ____
(a) zero
(b) highest
(c) lowest
(d) none of these

364. The more rapidly the marginal utility of additional units of a good falls, the will be the elasticity of demand.
(a) more
(b) less
(c) zero
(d) infinite

365. According to utility theory, for a consumer who is maximizing total utility, Mu_a / Mu_b

366. In which of the following fields the concept of consumer’s surplus is useful?
(a) Monetary policy
(b) Tax policy
(c) Investment policy
(d) Fixing remuneration on factors

367. An example of a commodity having consumers surplus is ____
(a) Salt
(b) Branded Shirt
(c) Machinery
(d) Pen

368. Consumer’s surplus means-
(a) difference between market price and individual price
(b) difference between actual and potential price
(c) low price is prevailing
(d) happiness of the consumer

369. Consumer’s surplus is measured with the help of ____
(a) market demand curve
(b) marginal productivity curve
(c) marginal utility curve
(d) none of these

Consider the following details to answer Q. Nos. 370 to 372
Given Px = ₹ 2 and Py = ₹ 1 and income = ₹ 12.
Also given is the utility schedule of good X & Y.

370. How many units of X and Y the consumer will buy in order to maximize utility?
(a) 2 units of X & 6 units of Y
(b) 3 units of X & 5 units of Y
(c) 4 units of X & 4 units of Y
(d) 3 units of X & 6 units of Y

371. What will be the total utility received by the Consumer from the two commoddities
(a) 90
(b) 92
(c) 93
(d) 95

372. How much of total income will the consumer spend on good X and good Y?
(a) ₹ 3 & ₹ 6
(b) ₹ 6 & ₹ 6
(c) ₹ 6 & ₹ 3
(d) ₹ 3 & ₹ 3

373. When the price of both the commodities is same, the consumer attains maximum satisfaction where

374. A consumer will purchase more of Good-x than Good-Y, only when :

375. A locus of constant utility is called the ____
(a) expansion path
(b) utility function
(c) indifference curve
(d) demand function

376. An indifference curve is ____
(a) downward sloping and convex to origin
(b) downward sloping and concave to origin
(c) upward sloping and convex to origin
(d) vertical and parallel to y-axis

377. The slope of indifference curve show-
(a) marginal rate of substitution
(b) level of satisfaction to the consumer
(c) elasticity of indifference curve
(d) none of the above

378. At a point near the right hand below corner of a indifference curve, the MRS of commodity ‘X’ for commodity ‘Y’ is-
(a) very high
(b) very low
(c) zero
(d) neither high nor low

379. As one moves upward towards left along an indifference curve, the MRS of commodity ‘X’ for commodity ‘Y’-
(a) increases
(b) decreases
(c) is constant
(d) fluctuates

380. A higher IC denotes-
(a) a higher level of satisfaction
(b) a lower level of satisfaction
(c) same level of satisfaction
(d) none of the above

381. Which of the following is not a characteristics of the indifference curve-
(a) downward sloping to the right
(b) convex to the origin
(c) intersecting at one point
(d) none of the above

382. IC theory assumes that-
(a) buyers can measure satisfaction
(b) buyers can identify preferred combinations of goods
(c) the prices of the goods are equal
(d) none of the above

383. An IC shows all combinations of two commodities which-
(a) give the same level of satisfaction to the consumer
(b) represent the highest level of satisfaction to the consumer
(c) give the different level of satisfaction to the consumer
(d) none of the above

384. The slope of IC tends to diminish as we move down the curve means-
(a) MRS is constant
(b) MRS is increasing
(c) MRS is decreasing
(d) none of the above

385. Marginal rate of substitution of ‘X’ for ‘Y’ is calculated as-

386. In an indifference map, higher IC indicates :
(a) lower level of satisfaction
(b) same level of satisfaction
(c) higher level of satisfaction
(d) either same or higher level of satisfaction

387. MRS is determined by-
(a) satisfaction level of the consumer
(b) income of the consumer
(c) tastes of the consumer
(d) preferences of the consumer

388. A set of ICs drawn in a graph is called-
(a) indifference curve
(b) indifference map
(c) budget line
(d) budget set

389. An IC is convex to origin because of-
(a) diminishing marginal utility
(b) diminishing marginal productivity
(c) diminishing marginal cost
(d) diminishing marginal rate of substitution

390. Marginal Rate of Substitution indicates the slope of-
(a) budget line
(b) indifference curve
(c) total utility curve
(d) demand curve

391. The slope of IC is different at different points of the curve
(a) Correct
(b) Incorrect
(c) ∴ slope of IC is measured by MRS which falls
(d) Both ‘a’ & ‘c’

392. Only one IC will pass through a given point on an indifference map implies that-
(a) One combination can lie only on one IC
(b) One combination can lie on two ICs.
(c) One combination can lie on as many ICs.
(d) none of the above

393. Considering the map, the satisfaction derived from the combination is _____

(а) A > B, B > C but A > C
(b) A>B>C
(c) A < B > C
(d) C > B > A

394. A consumer may not be in equilibrium at point C or D because _____

(a) MRS_xy = Px / Py
(b) The whole income is not spent
(c) Point E gives higher level of Satisfaction with the same expenditure as on point C and D
(d) Of sufficiency of income

395. On an indifference curve, the MRS falls when-
(a) moving upwards
(b) moving downwards
(c) at the middle
(d) none of these

396. Should a consumer move upward along an IC, his total utility-
(a) First increases and then decreases
(b) First decreases and then increases
(c) Remains constant
(d) Increases

397. Which of the following is not an assumption of ordinal utility analysis?
(a) Consumers are consistent in their preference
(b) Consumers can measure the total utility
(c) Consumers are non-satiated with respect of two goods
(d) None of the above

398. All points on the same IC represent-
(a) Equal satisfaction
(b) Higher satisfaction
(c) Lower satisfaction
(d) All the above

399. IC approach deals with-
(a) One commodity only
(b) Two commodities
(c) Many commodities
(d) No commodities at all

400. If two goods were perfect substitutes of each other, the IC will be-
(a) Curvilinear
(b) linear
(c) right angled
(d) convex to origin

401. A downward sloping linear IC indicates that the rate of MRSxy is-
(a) diminishing
(b) increasing
(c) constant
(d) zero

402. In the case of two perfect substitute goods, the IC will be-
(a) L – shaped
(b) U – shaped
(c) S – shaped
(d) Straight line

403. If a consumer has monotonic preferences, which bundle will he choose?
(a) (10,8)
(b) (8,6)
(c) (10,7)
(d) (8,8)

404. If a consumer has monotonic preferences how would he rank his preference over the bundles (10,9); (9,9) (10,10)-
(a) (10,9) (10,10) ; (9,9)
(b) (10,10) (10,9) ; (9,9)
(c) (9,9) (10,10) ; (10,9)
(d) None of the above

405. When an IC is L shaped, then two goods will be-
(a) Perfect Substitute Goods
(b) Perfect Substitute
(c) Perfect Complementary Goods
(d) Complementary Goods

406. The Other name associated with ordinal approach apart from R.G.D. Allen and J.R. Hicks is-
(a) Edgeworth
(b) Vilfredo Pareto
(c) Slutsky
(d) All the above

407. _____ depicts complete scale of consumer’s tastes and preferences.
(a) Budget Line
(b) MU curve
(c) Indifference curve map
(d) One indifference curve

408. One combination can lie only on one IC means-
(a) Only one IC will pass through the point
(b) Two ICs will pass through the point
(c) As many ICs can pass through the point
(d) None of the above

409. When the quantity of one good is increased in the combination, the quantity of other is reduced to maintain same level of satisfaction. This means that IC is ____
(a) positively sloped
(b) vertical straight line
(c) horizontal straight line
(d) negatively sloped

410. When the combinations on a IC do not represent same level of satisfaction, it means IC is _____
(a) positively sloped
(b) horizontal straight line
(c) vertical straight line
(d) all the above

411. is a graphical representation of all possible combination of two goods which can be purchased given income and prices.
(a) Budget Line
(b) Price Opportunity Line
(c) Consumption Possibility Line
(d) All the above

412. If a combination is below the Budget Line, it indicates that there is-
(a) Underspending by a consumer
(b) Overspending by a consumer
(c) Full spending by a consumer
(d) None of the above

413. All combinations that lie on the budget line are _____
(a) unaffordable by consumer
(b) affordable by consumer
(c) attainable by consumer
(d) Both ‘b’ and ‘c’

414. Each point on the budget line shows-
(a) the ratio of change in MU
(b) the ratio of prices of two goods
(c) Marginal Rate of Substitution .
(d) Both ‘b’ and ‘c’

415. A shift of the budget line, when prices are constant, is due to-
(a) change in demand
(b) change in income
(c) change in preference
(d) change in utility

416. Slope of budget line is indicated by-

417. The budget line of a consumer in the analysis of IC is-
(a) Vertical straight line
(b) Horizontal straight line
(c) Straight line sloping down towards right
(d) Straight line sloping upwards towards right

418. The budget line is not known as-
(a) consumption possibility curve
(b) price line
(c) price opportunity line
(d) isoutility line

419. Refer the following figure-

Figure denotes-
(a) Change in income
(b) Change in price of Good-X
(c) Change in price of Good-Y
(d) Change in the prices of both Good X & Y

420. When the prices of both Good-X and Good-Y change by same percentage, a rise in price will-
(a) shift the budget line upwards
(b) shift the budget line downwards
(c) no shift in budget line
(d) all the above

421. If the budget line does not shift it means-
(a) prices of both goods X & Y has changed by same percentage
(b) there is no change in the prices of both goods X & Y
(c) money income of consumer has changed
(d) income of the consumer and prices of both goods X & Y change by same percentage

422. If price of Goods-X falls and price of Good-Y rises then budget line will-
(a) shift upward
(b) shift downward
(c) rotate
(d) remain same

423. Refer the following figure, what change budget line shows –

(a) Px fails and Py rises
(b) Px rise and Pv falls
(c) Px=Py
(d) none of the above

Refer the following to answer question nos. 424 to 426
A consumer wants to buy two good X and Y. The prices of the two goods are ₹ 4 and ₹ 5 respectively. The consumers income is ₹ 20.

424. If the consumer spends the entire money income to buy only Good-X, how much quantity he can buy of it?
(a) 5 units
(b) 6 units
(c) 4 units
(d) 3 units

425. If the consumer spends the full income only to buy Good-Y, how much quantity he would be able to buy of it-
(a) 5 units
(b) 6 units
(c) 4 units
(d) 3 units

426. The slope of the budget line is-
(a) 0.9
(b) 0.8
(c) 0.7
(d) 0.5

427. A consumer can buy 6 units Good-X and 8 units of Good-Y if he spends his entire income. The prices of the two goods are ₹ 6 and ₹ 8 respectively. What is the consumer’s income.
(a) ₹ 100
(b) ₹ 150
(c) ₹ 200
(d) ₹ 250

428. Ravi consumes Apples and Bananas whose price are ₹ 6 and ₹ 3 p.u. respectively. If he is in the state of equilibrium, the value of marginal rate of substitution is-
(a) 4
(b) 3
(c) 2
(d) 1

429. A budget constraint line is a result of
(a) market price of good X
(b) market price of good Y
(c) income of the consumer
(d) all the above

430. The budget line equation is-

431. The consumer will maximize his satisfaction and will be at equilibrium where-
(a) budget line is tangent to IC
(b) price line crosses on IC
(c) price line does not touch the IC
(d) none of the above

432. How many indifference curves can touch the price line-
(a) Two
(b) One
(c) As many as possible
(d) No IC will touch

433. MRSxy = p_x / p_y where-
(a) consumer is in equilibrium
(b) consumer is not at equilibrium
(c) producer is at equilibrium
(d) none of the above

434. The point where the budget line is tangent to an IC-
(a) equal amounts of goods give equal satisfaction
(b) the ratio of prices of the two goods equals MRS
(c) the prices of the goods are equal
(d) none of the above

435. Maximisation of total utility is an assumption of a consumer in an analysis that is-
(a) Indifference curve approach
(b) Demand analysis
(c) Utility analysis
(d) All the above

436. A consumer is in equilibrium at the point of tangency of his IC and the price line, because-
(a) He cannot go below
(b) He cannot go beyond
(c) He cannot go along
(d) None of the above

437. Which of the following conditions is necessary for utility to be maximum?

Consider the following figure and answer question Nos. 438 and 439

438. The consumer is not at equilibrium at point C, since-
(a) MRSxy > Px / Py
(b) MRSxy = Px / Py
(c) MRSxy < Px / Py (d) None of the above

439. The consumer is at equilibrium at point E, since-
(a) MRSxy > Px / Py
(b) MRSxy = Px / Py
(c) MRSxy < Px / Py
(d) MUx = MUy

440. In a situation where MRSxy > p_x / p_y , the consumer would react by-
(a) reducing the consumption of Good – X
(b) increasing the consumption of Good – Y
(c) increasing the consumption of Good – X
(d) none of these

441. When MRSxy < p_x / p_y , in order to reach equilibrium, the consumption of-
(a) Good-Y should increase
(b) Good-X should increase
(c) Good-Y should decrease
(d) None of these

442. The situation of a consumer is better when-
(a) MRSxy >Px / Py
(b) MRSxy < Px / Py
(c) MRSxy = Px / Py
(d) none of these

Read the following to answer question Nos. 443 and 444
A consumer wants to buy two goods X and Y. He has ₹ 24 to spend. The prices of two goods X and Y are ₹ 4 and ₹ 2 respectively.

443. Which of the following bundles a consumer would be able to buy-
(a) 4X and 5Y
(b) 2X and 7Y
(c) 3Xand6Y
(d) None of the above

444. What will be the MRSxy when the consumer is at equilibrium-
(a) 1:2
(b) 2:1
(c) 1:1
(d) 2:2

445. At the point of equilibrium on Indifference Curve-
(a) Slope of budget line = slope of IC
(b) Slope of budget line > slope of IC
(c) Slope of budget line < slope of IC
(d) None of the above

446. In case of IC approach, an income effect means-
(a) a movement towards X-axis
(b) a movement towards the right
(c) a movement towards another indifference curve
(d) a movement along the indifference curve

447. In the case of substitution effect in IC approach, the consumer moves-
(a) along the same IC from left to right
(b) up and down along the same IC
(c) from a point on IC to a point on budget line
(d) none of these

448. IC is downward sloping from left to right since more X and less Y gives-
(a) less satisfaction
(b) more satisfaction
(c) equal satisfaction
(d) maximum satisfaction

Supply

449. In economics, supply means-
(a) quantity of a commodity which is actually offered for sale at a given price in a given period of time
(b) quantity of a commodity which is offered for sale at a particular price
(c) stock of commodity which is sold at a give price
(d) none of the above

450. Which of the following is not true in case of supply?
(a) Supply is a flow concept
(b) Supply is a stock concept
(c) Supply is directly related to price
(d) Market supply is horizontal summation of the individual supply curves

451. When price rises, quantity supplied-
(a) expand
(b) falls
(c) increases
(d) is unchanged

452. Which of the following statement is correct?
(a) Supply does not depends on Govts, tax policy
(b) Stock is the quantity brought to market for sale
(c) There is difference between stock and supply
(d) Stock and supply are always equal

453. The supply of good refers to-
(a) actual production of a good
(b) total stock of the good
(c) stock available for sale
(d) amount of the good offered for sale at a particular price per unit of time

454. According to law of Supply-
(a) there is positive relation between supply and price
(b) there is negative relation between supply and price
(c) there is constant relation between supply and price
(d) there is no relation between supply and price

455. ______ shows the quantity of goods a producer or seller wishes to sell at a given price level
(a) Average Product Curve
(b) Marginal Product Curve
(c) Supply Curve
(d) Total Product Curve

456. The supply curve slopes-
(a) Slopes downward from left to right
(b) Slopes upwards from left to right
(c) Slopes upward from right to left
(d) None of the above

457. Graphical presentation of supply curve of an individual firm in the market is called-
(a) producer’s demand curve
(b) consumers demand curve
(c) individual supply curve
(d) market supply curve

458. When the state of technology improves, supply
(a) fall
(b) contract
(c) increase
(d) expand

459. When government imposes taxes, supply will
(a) expand
(b) increase
(c) contract
(d) decrease

460. Movement along the supply curve occurs due to-
(a) rise in price of the commodity
(b) fall in price of the commodity
(c) factors other than own price of the commodity
(d) both ‘a’ and ‘b’

461. Supply curve shifts rightward due to-
(a) increase in the number of firms
(b) fall in the price of factors of production
(c) new and better technology
(d) all the above

462. Expansion of supply takes place due to-
(a) change in goal of the firm
(b) rise in price of the commodity
(c) number of firms
(d) technique of production

463. If producer expects an increase in price of goods in the near future, then current supply will:
(a) fall
(b) rise
(c) remain constant
(d) become zero

464. When more units of the good are supplied at a higher price, it is called-
(a) Contraction of supply
(b) Change in supply
(c) Extension in supply
(d) Increase in supply

465. When supply price increases in the short run, the profit of the producer-
(a) Increases
(b) Decreases
(c) Remains constant
(d) Decreases a bit

466. The long-run supply curve of a diminishing cost industry is-
(a) downward sloping to right
(b) upward sloping to left
(c) horizontal
(d) vertical

467. The law of supply does not apply to-
(a) agriculture goods
(b) industrial goods
(c) perishable goods
(d) both ‘a’ and ‘c’

468. When supply falls due to factors other than own price of the commodity, it means-
(a) contraction of supply
(b) decrease in supply
(c) extension of supply
(d) none of these

469. In case of contraction of supply, there is-
(a) an upward movement on supply curve
(b) shift of supply curve to the right
(c) downward movement on supply curve
(d) shift to supply curve to the left

470. In case of increase in supply, there is –
(a) an upward movement on supply curve
(b) shift of supply curve to the right
(c) downward movement on supply curve
(d) shift to supply curve to the left

471. Imposition of a unit tax, shifts the supply curve-
(a) to the right
(b) to the left
(c) to the right as well
(d) none of these as to the left

472. Due to incentives like tax holiday, subsidies which reduces the cost of production, the supply quantity will-
(a) Increase
(b) Decrease
(c) Remain Constant
(d) Become zero

473. In case of failure of rains, floods, etc. the supply of agricultural goods will-
(a) Increase
(b) Decrease
(c) Remain constant
(d) Become zero

474. The percentage change in quantity supplied due to percentage in price is called-
(a) Expansion of supply
(b) inelastic supply
(c) elasticity of supply
(d) changes in supply

475. Elasticity of supply refers to the responsiveness of quantity supplied to changes in its-
(a) Demand
(b) Price
(c) Cost of production
(d) State of technology

476. When supply curve is a vertical straight line, it indicates _____ supply
(a) unitary elastic
(b) perfectly elastic
(c) perfectly inelastic
(d) relatively elastic

477. A straight line supply curve passing through origin forming 50° indicates-
(a) E =0
(b) E_s= 1
(c) E_s > 1
(d) E_s < 1

478. Elasticity of supply for a positively sloped supply cure that starts from price axis is –
(a) zero
(b) greater than one
(c) less than one
(d) equal to one

479. In case of perfectly elastic supply the supply curve is-
(a) rising
(b) vertical
(c) falling
(d) horizontal

480. Supply is relatively elastic in-
(a) very short period
(b) short period
(c) long period
(d) both ‘b’ and ‘c’

481. When supply curve is parallel to X-axis, elasticity of supply is-
(a) zero
(b) infinity
(c) unity
(d) negative

482. If the co-efficient of elasticity of supply is 0.6, the supply is-
(a) perfectly inelastic
(b) inelastic
(c) perfectly elastic
(d) elastic

483. When upward sloping straight line curve shoots up from quantity axis, it implies-
(a) E_s < 1
(b) E_s > 1
(c) E_s = 1
(d) E_s = 0

484. Which of the above curves unitary elastic demand?

(a) Curve A
(b) Curve B
(c) Curve C
(d) all the above

485. Elasticity of supply for a positively sloped supply that shoots from origin
(a) E_s < 1
(b) E_s > 1
(c) E_s = 1
(d) E_s = ∞

486. The supply of perishable goods is-
(a) relatively elastic
(b) relatively inelastic
(c) perfectly elastic
(d) none of the above

487. The supply function of a commodity is given by – Q = 20 + 3 Px. If the price is ₹ 6, the quantity supplied is-
(a) 35 units
(b) 38 units
(c) 40 units
(d) 42 units

Refer the following supply function to answer 0. Nos. 488 to 490
Q_s = -10 + 2p

488. How much quantity is supplied at a price of ₹ 10?
(a) 10 units
(b) 8 units
(c) 12 units
(d) 6 units

489. At which price, the supply would be zero?
(a) ₹ 1
(b) ₹ 3
(c) ₹ 4
(d) ₹ 5

490. Calculate the price at which, the firm is willing to supply 100 units
(a) ₹ 55
(b) ₹ 50
(c) ₹ 45
(d) ₹ 40

491. When price of a commodity falls by 20%, the quantity supplied falls by 25%, the price elasticity of supply is-
(a) 0.75
(b) 1.25
(c) 1.50
(d) 1.75

492. A vegetable vendor sells 80 quintals of potatoes at a price of ₹ 4 p. kg. The elasticity of supply of potatoes is known to be 2. How much quantity will he sell at ₹ 5 p. kg.?
(a) 100 quintals
(b) 110 quintals
(c) 120 quintals
(d) 130 quintals

493. When the price of a good rises from ₹ 15pu to ₹ 19pu, its quantity supplied increases from 75 units to 95 units. The price elasticity of supply is-
(a) 1
(b) 2
(c) 3
(d) 4

494. Total revenue of a firm rises from ₹ 50 to ₹ 100 when the price rises from ₹ 5 pu to ₹ 10 pu. The co-efficient of E_s =
(a) 0
(b) 0.8
(c) 1
(d) 1.2

495. The price of a commodity doubles, to its response the quantity supplied increases 4 times of orig¬inal quantity supplied. The co-efficient of price elasticity of supply is-
(a) 1
(b) 2
(c) 3
(d) 4

496. A price of ₹ 10 p.u. the quantity supplied is 500 units. If the price falls by 10% and quantity supplied falls to 400 units, the co-efficient of price elasticity of supply is-
(a) 1
(b) 2
(c) 3
(d) 4

497. Market forces refer to-
(a) Demand
(b) Supply
(c) Both ‘a’ and ‘b’
(d) Neither ‘a’ nor ‘b’

498. Supply is the-
(a) limited resources that are available with the seller
(b) cost of producing a good
(c) entire relationship between the quantity supplied and the price of good
(d) willingness to produce

499. In a very short period the supply-
(a) can be changed
(b) cannot be changed
(c) can be increased
(d) none of the above

500. If the demand is more than supply, then the pressure on price will be-
(a) upward
(b) downward
(c) constant
(d) none of the above

501. A perfectly inelastic supply curve shooting up from X-axis shows-
(a) constant supply at higher price
(b) constant supply at lower price
(c) constant supply at zero price
(d) all the above

502. What is incorrect about advertisement elasticity?
(a) It is the responsiveness of good’s demand to changes in firm’s expenditure on advertising
(b) It is also called promotional elasticity of demand
(c) Advertising elasticity of demand is typically positive
(d) all the above

503. All but one are correct about demand forecasting. Which one is not correct?
(a) Demand forecasting is the art and science of predicting probable demand of a product in future
(b) Demand forecasting is a simple guesses
(c) It considers past behaviour pattern and prevailing trends in the present
(d) Demand forecasting plays an important role in planning and decision making

504. The burden of forecasting is put on customers in _____ method of demand forecasting
(a) Survey of buyers intentions
(b) collective opinion
(c) Expert opinion
(d) Controlled experiments

505. Delphi technique was developed by-
(a) Schumpeter
(b) Nicholas Kaldor
(c) Olaf Helmer
(d) Hawtrey

506. Collective opinion method of demand forecasting is useful for _____ forecasting.
(a) short run
(b) long run
(c) secular period
(d) none of the above

507. _____ method of forecasting is useful in use of capital goods.
(a) Collective opinion
(b) Expert Opinion
(c) Barometric
(d) Survey of buyer’s intention

508. Which of the following affect the demand for non-durable consumer goods?
(a) Disposable Income
(b) Price
(c) Demography
(d) All the above

509. What would be the shape of the supply curve of T-shirts, if the seller offers to sell any number of T-shirts at ₹ 250?
(a) Vertical
(b) Horizontal
(c) Upward sloping
(d) Downward sloping

510. All the following factors affect the demand for durable consumer goods except-
(a) special facilities for use
(b) credit facilities
(c) disposable income
(d) social status

511. ____ is considered as a ‘naive’ approach to demand forecasting.
(a) Trend Projection Method
(b) Expert Opinion Method
(c) Collective Opinion Method
(d) Regression Analysis

512. Short-term demand forecasting is useful for-
(a) current production scheduling
(b) purchases of. raw materials
(c) inventory of stocks
(d) all the above

513. A firm planning capacity expansion and diversification will go in for-
(a) Short term demand forecasting
(b) Medium term demand forecasting
(c) Long term demand forecasting
(d) Current demand forecasting

Answers

CA Foundation Business Economics Study Material Chapter 2 Theory of Demand and Supply – Supply

MEANING

Supply of a commodity refers to the quantity of commodity offered for sale at a particular price during a given period of time. Thus, the supply of a commodity may be defined as the amount of commodity which the sellers or producers are able and willing to offer for sale at a particular price, during a given period of time.

Thus, defined, the term supply shows the following features:

1. Supply of a commodity is always with reference to a PRICE,
2. Supply of a commodity is to be referred to IN A GIVEN PERIOD OF TIME.
3. Supply of a commodity depends on the ABILITY OF SELLER TO SUPPLY A COMMODITY. However, ability of a seller to supply a commodity depends ON THE STOCK available with him.
4. Supply of a commodity also depends on the WILLINGNESS OF SELLER TO SUPPLY A COMMODITY. A seller’s willingness to supply a commodity depends ON THE DIFFERENCE BETWEEN THE RESERVATION PRICE and the PREVAILING MARKET PRICE.
5. E.g. A dairy farm’s daily supply of milk at the price of Rs. 12 per litre is 600 litres

Determinants of Supply

Supply of a commodity depends on many factors like price of the commodity, price of related goods, prices of factors of production, technology, etc. All determinants of supply can be expressed in the form of supply function as follows-
S_x = f(P_x, P_r, P_f, T, O …….. )
Where – S_x = Quantity supplied of commodity x
f = function of (depends on)
P_x = Price of commodity x
P_r = Price of related commodities
P_f = Prices of factors of production.
T = Technology
O = Objectives/Goals of the firm

Price of the commodity:

• Other things being equal the supply of a commodity is DIRECTLY related with its price.
• It means that, larger quantity of a commodity is offered for sale at higher price and vice versa.
• This is because the profits of the firm increases if the price of its product increases.

Price of the related commodities:

• The supply of a commodity also depends on the prices of related commodities i.e. substitute goods and complementary goods.
• Other things being equal, if the price of a substitute goes up, the firms will be tempted to produce that substitute to get higher profits. E.g. – If the price of coffee rises, the firm would reduce the quantity supplied of tea.
• On the other hand, other things being equal/if price of a complementary good goes up, the supply of the product in question also rises. E.g.- If the prices of fountain pens rise, it may cause an increase in the supply of ink.

Prices of factors of production:

• Supply of a commodity depends on the cost of production. The cost of production itself depends upon the prices of various factors of production.
• So, if the price of any factor of production rises, the production costs would be higher for the same level of output (and vice versa), Hence the supply will tend to decrease.
• Conversely, a fall in the cost of production tends to increase the supply.

State of technology:

• A change in technology affects the supply of commodity.
• A technological progress and improvement in the methods of production increases productivity, reduce the cost of production and increases the profits. As a result more is produced and supplied.
• Also discoveries and innovations bring new variety of goods.

Objectives of the firm:

• The objectives of the firm and business policy pursued by it also affect the supply of the product produced by it.
• Some firms believes in higher margin of profits and lower turnover while others believe in lower margin of profit and higher turnover (i.e. sales) to capture the market or to improve status, goodwill and prestige in the market.

Government Policy:

• The supply of a commodity is also affected by the economic policies followed by the Government.
• The Government may impose taxes on commodities in the form of excise duty, sales tax and import duties or may give subsidies.
• Any increase in such taxes will raise the cost of production and so the quantity supplied will fall. Under such conditions supply will increase only when its price in the market rises.
• Subsidies reduce the cost of production and thus encourages firms to produce and sell more.

Time:

• Supply is a function of time also.
• In a short period, it is not possible to adjust supply to the conditions of demand.
• If the time period is sufficiently long, all possible adjustments can be made in the production apparatus and the supply can be fully adjusted to demand.

Number of firms:
If the number of firms producing a product increases, the market supply of the product will also increase and vice-versa.

Other factors:
Supply of a commodity also depends upon Natural conditions like rainfall, temperature, etc.; industrial and foreign policies, infrastructural facilities; War; market structure; etc.

Law of Supply

• The Law of Supply express the nature of functional relationship between the price of a commodity and its quantity supplied.
• It simply states that supply varies DIRECTLY to the changes in price i.e. supply of a commodity expands when price rises and contracts when price falls.
• “The Law of Supply states that the higher the price, the greater the quantity supplied or the lower the price the smaller the quantity supplied, other things remaining the same.” (Dooley)
• Thus, there is DIRECT RELATIONSHIP between supply and price.
• It is assumed that other determinants of supply are constant and ONLY PRICE IS THE VARIABLE AND INFLUENCING FACTOR.

Thus, the law of supply is based on the following main assumptions:-

• Cost of production remains unchanged even though the price of the commodity changes.
• The technique of production remains unchanged.
• Government policies like taxation policy, trade policy, etc. remains unchanged.
• The prices of related goods remains unchanged.
• The scale of production remains unchanged etc.

The law can be explained with the help of supply schedule and a corresponding supply curve.

• The supply schedule shows that when price rises from Rs.10 per unit to Rs. 20 per unit, the supply also rises from 20 units per week to 30 units per week and so on.
• Thus, it shows a direct relationship between price and quantity supplied other things being equal.
• A supply curve is the supply schedule depicted on the graph. The supply curve shows the same information as the supply schedule.

• In the diagram, the supply curve is sloping upwards from left to right showing a direct relationship between the price and quantity supplied.
• A single point on supply curve show a single price supply relationship E.g. – Point ‘C’ show that if price is Rs. 30, quantity supplied is 40 units.
• The law of supply states that, supply of a commodity varies directly with its price.

But, in some cases, this may not hold true. Hence, the law of supply has the following EXCEPTIONS.

1. When the seller expects a further rise in the prices in future, he may hoard stock of commodity. So the supply at present will fall and vice versa.
2. At higher wage rates, there is tendency among labourers to prefer more leisure than work. As a result when wages rise, labour supply falls.
3. In the case of rare commodities like paintings, coins, etc. the supply is fixed. Whatever the price, it cannot change.
4. In an auction or in all those cases where the seller wants to get rid of his goods, he will sell the goods at whatever price they fetch.

Changes in Quantity Supplied OR Expansion & Contraction of supply OR Movement along a supply curve

• When supply of a commodity changes only due to change in the price of commodity other determinants remaining unchanged, it is called changes in quantity supplied.
• Changes in quantity supplied thus means -expansion of supply & contraction of supply
• When price of a commodity rises, quantity supplied also rises. This is called expansion of supply.
• When price of a commodity falls, quantity supplied also falls. This is called contraction of supply.

As other determinants of supply like price of related commodities, prices of factors of production, state of technology, etc. are assumed to be constant, the position of the supply curve remains the same. The seller will move upwards or downwards on the same supply curve.

In the figure above –

• At price OP quantity supplied is OQ
• With a rise in price to OP₁ the quantity supplied rises from OQ to OQ₁ The co-ordinate point moves up from E to E₁ This is called ‘a rise in quantity supplied’.
• With a fall in price to OP₂ the quantity supplied falls from OQ to OQ₂ The co-ordinate point moves down from E to E₂ This is called ‘a fall in quantity supplied’.

Changes in supply OR Increase and decrease in Supply OR Shift in Supply curve

• When there is change in supply due to change ‘ in factors other than price of the commodity, it is called changes in supply.
• It is the result of change in technology, govt, policies, prices of related goods etc.
• Change in supply means- increase in supply & decrease in supply.
• Price remaining the same when supply rises due to change in factors other than price, it is called increase in supply.
• Likewise, price remaining the same when supply falls due to change in factors other than price, it is called decrease in supply.

In this case the supply curve shifts from its original position to rightward when supply increases and to leftward when supply decreases. Thus, change in supply curve as a result of increase and decrease in supply, is technically called shift in supply curve.

In the figure above-

• Original supply curve is SS. At OP price, OQ quantity is being supplied.
• As the supply changes, the supply curve shifts either to the right (S₁S₁)or to the left (S₂S₂)
• At S₁S₁, OQ₁, quantity is being supplied at the price OP. This shows increase in supply. More quantity is being supplied at same price. It is denoted by rightward shift in supply curve.
• At S₂S₂, OQ₂ quantity is being supplied at the price OP. This shows decrease in supply. Less quantity is being supplied at same price. It is denoted by leftward shift in supply curve.

Elasticity of supply

• Price elasticity of supply measures the degree of responsiveness of quantity supplied of a commodity to a change in its own price.
• In other words, the elasticity of supply shows the degree of change in the quantity supplied in response to change in the price of the commodity.
• Elasticity of supply can be defined “as a ratio of the percentage change in the quantity supplied of a commodity to the percentage change in its own price”.
• It may be expressed as follows –
  
• Since the law of supply establishes positive relationship between price and quantity supplied, the elasticity of supply would be positive.
• However, in case of decreasing cost industry elasticity of supply is negative.
• The value of elasticity co-efficient will vary from zero to infinity.

The elasticity of supply, according to its degree, may be of following types:-

1. Perfectly Inelastic Supply: E_s = 0:
When a change in the price of a commodity has no effect on its quantity supplied, then supply is perfectly inelastic.
E.g. – If price rises by 20% and the quantity supplied remains unchanged then E_s = 0/20 = 0. In this case, the supply curve is a vertical straight line curve parallel to Y-axis as shown in the figure.

The figure shows that, whatever the price quantity supplied of the commodity remains unchanged at OQ.

2. Perfectly Elastic Supply: (E_s = ∞):
When with no change in price or with very little change in price, the supply of a commodity expands or contracts to any extent, the supply is said to be perfectly elastic. In this case, the supply is a horizontal straight line and parallel to X-axis.

The figure shows (E_s = ∞) that, at given price supply is ever increasing.

3. Unit Elastic Supply : (E_s =1):
When the percentage change in price is equal to percentage change in quantity supplied, then the supply is said to be unit elastic.
E.g. – If price rises by 10% and the supply also rises by 10% then, E_s = 10/10=1

In this case the straight line supply curve SS when extended will pass through origin.

4. Relatively/More Elastic Supply: (E_s >1):
When a small change in price leads to big change in quantity supplied, then the supply is said to be relatively or more elastic. E.g. – If price rises by 10% and supply rises by 30% then,
E_s = 30/10 = 3>1. The coefficient of elasticity would be somewhere between ONE and INFINITY. The elastic supply curve is flatter as shown below-

Supply curve SS is flat suggesting that the supply is more elastic. In this case the supply curve SS when extended will pass through Y-axis.

5. Relatively Inelastic Or Less Elastic Supply: (E_s<1).
When a big change in price leads to small change in quantity supplied, then supply is said to relatively inelastic or less elastic.
E.g. – If price rises by 30% and supply rises by 10% then, E_s = 10/30 = 1/3 < 1. The coefficient of elasticity would be somewhere between ZERO and ONE. The supply curve in this case has steep slope as shown below –

Supply curve SS is steeply sloped suggesting that supply is less elastic. In this case the supply curve SS when extended will pass through X-axis.

Measurement of Elasticity of Supply

The different methods of measuring price elasticity of supply are:

1. The Percentage or Ratio or Proportional Method,
2. The Point or Geometric Method, and
3. The Arc Method

1. The Percentage Method:
Thus method is based on the definition of elasticity of supply. The coefficient of price elasticity of supply is measured by taking ratio of percentage change in supply to the percentage change in price. Thus, we measure the elasticity by using the following formula-

• If the coefficient of above ratio is equal to ONE, the supply will be unitary.
• If the coefficient of above ratio is MORE THAN ONE, the supply is relatively elastic.
• If the coefficient of above ratio is LESS THAN ONE, the supply is relatively inelastic.

2. The Point Or Geometric Method:
In point elasticity method, we measure elasticity at a given point on a supply curve.
We can measure E at point ‘R’ in the following manner

• Extend the supply curve ‘S’ towards the extension of X-axis so that it cuts X-axis at T.
• Draw a perpendicular from ‘R’ cutting X-axis at ‘M’
• Take the ratio of intercepts MT and OM.
  E_s = MT/OM

In the figure MT > OM, elasticity is GREATER THAN ONE.

In the adjoining figure, supply curve when extended meets X-axis to the right of the point of origin so that
E_s = MT/OM < 1
i.e. MT<OM and so elasticity is LESS THAN UNITY

In the adjoining figure, supply curve when extended meets X-axis exactly at the point of origin so that
E_s = MT/OM = 1,
i.e. MT = OM and so elasticity of supply is EQUAL TO UNITY/ONE.

3. The Arc Elasticity Method:
Under this method we measure elasticity of supply over an ARC of the supply curve. The arc elasticity is a measured of the “average elasticity” i.e. elasticity at MID-POINT that connects the two points on the supply curve. Thus, an arc is a portion of a curved line, hence a portion of supply curve. The formula used is

Equilibrium Price

• Equilibrium means a market situation where the quantity demanded is equal to quantity supplied. Thus, the two factors determining equilibrium price are market demand and market supply.
• Equilibrium price is the price at which the sellers of a good are willing to sell the quantity which buyers want to buy. Thus, equilibrium price (also called market clearing price) is the price at which demand and supply are equal.
• At equilibrium price both sellers and buyers are satisfied.
• At equilibrium price, there is neither SHORTAGE nor SURPLUS. So at equilibrium price, market is said to be CLEARED.

The following table and figure explains the equilibrium price.

• Equilibrium is struck a point E where the demand and supply curve intersect each other.
• At E, equilibrium price is OP i.e. Rs. 3 and equilibrium quantity is OQ ie. 300 units.
• When the price is Rs. 5 per unit, the quantity demanded is 100 units and quantity supplies is 500 units. It is situation where market demand < market supply and there is excess supply i.e., surplus supply. At a given price, sellers are willing to sell more than what buyers are ready to buy. As a result of pressure of excess supply the market price falls to Rs. 4.
• At a price of Rs. 4, the pressure of excess supply still continues and hence the price falls further to Rs. 3.
• At a price of Rs. 3, the market is CLEARED as the quantity demanded and supplied are equal to each other. There, is no SURPLUS.
• Thus, we can conclude that pressure of excess supply (surplus) reduces the price.
• Similarly, if the price is Rs. 1, the quantity demanded is 500 units and quantity supplied is 100 units. It is a situation where market demand > market supply and there is excess demand or SHORTAGE of supply. As a result of excess demand or SHORTAGE of supply the market price will rise. So long as pressure of excess demand continues price will rise i.e. till point E. At point E, excess demand is eliminated and quantity demand and supplied are equal to each other. The market has CLEARED.
• Thus, we can conclude that pressure of excess demand (shortage of supply) increases the price.
• The equilibrium price is determined by the intersection between demand and supply therefore, it is also called as the MARKET EQUILIBRIUM.