UNIT III

PRODUCER BEHAVIOUR & SUPPLY

CO NCE P T S
P ro d u ctio n
• P roduction function (m eaning)
1. S hort run production function
2. Long run production function
• Return to a factor
• Total product
• Average product
• M arginal product
• Law of variable P roportions/Law of returns to a factor
Co st (sh o rt Ru n Co sts)

F ixed cost
• TFC
• AFC
Reven u e
• Total Revenue (T R)
• Average Revenue (A R)
• M arginal Revenue (M R)
• Relation between them (T R & M R, A R) & M R

P ro d u cer's E q u ilib riu m u sin g M C & M R ap p ro ach

S u p p ly
• M eaning
• F actor affecting individual/m arket supply
• Change in supply/change in Q uality supply
• E lasticity of supply

Points to Remember

 Production Function : It shows the functional relation between

physical inputs and physical output of a good. It can be expressed

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 as Q = f(f1, f2, f3 ...fn). Where Q = Physical output of a good; f1, f2, f3,
........ fn = Physical inputs. Technology remains constant

 Types of Production Function :

There are two types of Production Function.
1. Short-run Production Function : In this production function
one factor of production is variable and all others are fixed.
So, law of return to a factor is applied. It is also called variable
proportion type production function.

We may write this short run production function as: q = f(L, K )

Where L is labour K is fixed capital and q is maximum output

that can be produced
2. Long-run Production Function : In this production function
all the factors of production are variable. So, law of returns to
scale is applied. It is also called constant proportion type
production function.
We may write this as long run production function as: q = f {L,
K} where, L is labour K is capital and q is the maximum product
that can be produced.
• There No fixed factor :
 Total product refers to total amount of a good which is produced by
a firm by using a given unit of variable factor in a given period of
time.
 Average product is the per unit output of variable factor (labour)
employed.

TP
AP 
Units of Variable input

 Marginal product is the change in total product resulting from

employing one additional unit of variable input.
TP
MP  or MPn = TPn – TPn–1
L

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 Relation between Total and Marginal Product
1. As long as marginal product rises, total product increases at
increasing rate. Till point M in Fig. 3.1.
Y
T P/M P N

p ro d u ctio n
M TP

O X
MP
U n its o f va ria b le fa cto r
F ig . 3.1
2. When marginal product starts falling but remains positive, total
product rises at diminishing rate. Point M to N
3. When MP = 0, TP is maximum at point N and 2.
4. When marginal product becomes negative, then total product
starts falling after point N.
Relation betwen MP and AP (in Fig. 3.2)
1. When MP > AP, AP rises point O to K.
2. When MP = AP, AP is maximum and constant at point K.
3. When MP < AP, AP falls after point K.
Y
AP/M P

J
K
AP
O X
Q
U n its o f va ria b le fa cto r M P
F ig . 3.2

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 Returns to a factor : In a short period when additional unit of
variable factor are employed with fixed factors, then returns to a
factor operates. Returns to a factor shows the changes in total
product of a good when only the quantity of one input is increased,
while other inputs kept constant.
 Law of variable proportion : The law states that as we increase
the quantity of only one variable input, keeping other inputs fixed,
the total product increases at increasing rate in the beginning, then
increases at decreasing rate and finally TP falls. According to this
law, change in TP and MP are classify into three phases. (Fig. 3.4)
Y

TP/M P
N

M TP

I II III
O X
MP
Units of variable factor
Fig. 3.4
 Phase I : TP Increases at increasing rate : In the initial
phase as more and more units of variable factor are employed
with fixed factor total physical product increases at increasing
rate, MP increases. Point Q to M or point Q to J Respectively.
 Phase II : TP increases at decreasing rate : As more and
more units of variable factors are employed with fixed factors
then total product increases at diminishing rate, MP decreases
but remains positive point MN point JQ respectively. At the
end of this phase TP maximum and MP becomes zero at point
N and Q respectively.
 Phase III : TP falls : As more and more units of variable factors

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 are employed with fixed factors, total production starts
decreasing and marginal product becomes negative after point
N and point Q respectivey.
 Cost : It is the sum of direct (explicit cost) and indirect cost (implict
cost), including Normal profit.
 Cost : Explicit cost + implicit cost + Normal Profit.
 Explicit Cost : Actual money expenditure incurred by a firm on
the purchase and hiring the factor inputs for the production is called
explicit cost. For example-payment of wages, rent, interest,
purchases of raw materials etc.
 Implicit cost is the estimated cost of self owned resources of the
production used in production process, by the producer or
estimated value of inputs supplied by owner itself. For example
estimate rent of self owned Building, Estimated interest on self
supplied money by the owner.

 Total cost refers to total expenditure

incurred on factor inputs and non factor
input by a firm on production of a given Y TC
quantity of output.
TV C
 Total cost is the sum of total fixed TFC
Co st

cost and total variable cost as shown

in Fig. 3.5.
TC = TFC + TVC or TC = AC × Q O X
O u tp u t
(Fig. 3.5) Fig. 3 .5

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 Total fixed costs is the cost which remains constant at all levels
of output. It is not zero even at zero output level. Therefore, TFC
curve is parallel to X-axis as shown in Fig. 3.5.
TFC = TC – TVC or TFC = AFC × Q
 Total variable cost is the cost which vary with the quantity of output
produced. It is zero at zero level of output. TVC curve is parallel to
TC curve as shown in Fig. 3.5.
TVC = TC – TFC or TVC = AVC × Q.
 Average cost is per unit cost of production of a commodity. It is
the sum of average fixed cost and average variable cost as shown
in Fig. 3.6

Y
AC
Cost

O X
Output
Fig. 3.6

TC
AC  or AC  AFC  AVC
Q
 Average fixed cost is per unit fixed cost of production of a
commodity. AFC goes on decreasing as the level of output
increase. But it never touches X axis. Shape of is rectangular
hyperbola as shown AFC in Fig. 3.7.

Y
Cost

AFC

O X
Output
Fig. 3.7

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 TFC
AFC  or AFC  AC – AVC
Q
 Average variable cost is per unit variable cost of production of a
commodity.
TVC
AVC  or AVC  AC – AFC
Q
 Marginal Cost : It refers to change in TC, due to an additional unit
of a commodity is produced. MC = TC/Q or MCn =TCn-TCn-1
But under short run, it is calculated from TVC. Fig. 3.8

Y
MC
Cost

O X
Output
Fig. 3.8
TVC
MCn  TVCn – TVC or MC 
n –1 Q
Relation Between Short-Term Costs (as shown in Fig. 3.9)

Y AC

AVC
Cost

AFC
O X
Output
Fig. 3.8
 Total cost curve and total variable cost curve remains parallel to
each other. The vertical distance between these two curves is equal
to total fixed cost as shown by TC and TVC in Fig. 3.5

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 TFC curve remains parallel to X-axis and TVC curve remains
parallel to TC curve as shown by TFC, TVC and TC in Fig. 3.5
 With increase in level of output, the vertical distance between AFC
curve and AC curve goes on increasing. On contrary the vertical
distance between AC curve and AVC curve goes on decreasing
because their difference is AFC which keep decreasing with
increase in output but these two curves never intersect because
average fixed cost is never zero.
 Relation between MC and AVC. (Fig. 3.10)

Y
MC
AVC
Cost

O X
Output
Fig. 3.10

 When MC < AVC, AVC falls till point S.

 When MC = AVC, AVC is minimum and constant at point S.
 When MC > AVC, AVC rises after point S.
 Relation between MC and ATC (Fig. 3.11)
 When MC < ATC, ATC falls till point T.
 When MC = ATC, ATC is minimum and Constant at point T.
 When MC > ATC, ATC rises after point T.

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 Y
MC
AC

Cost
T

O X
Output
Fig. 3.11

 Money received from the sale of product is called revenue.

 Total revenue is the total amount of money received by a firm from
the sale of given units of a commodity at a market price.
TR = AR × Q or TR = MR
TR = Price × Quantity Sold.
Price = AR
 Per unit revenue received from the sale of given units of a
commodity is called average revenue. Average revenue is equal
to price. Per unit price of a commodity is also called AR.
TR PQ
AR  or  P  Price
Q Q
 Marginal revenue is net addition to total revenue when one
additional unit of output is sold.
TR
MR  or MRn  TRn – TRn–1
Q
 Relation between TR, AR and MR when more quantity is sold at
the same price i.e., under perfect competition.
(a) Average revenue and marginal revenue remains constant at
all levels of output and AR and MR curves are parallel to
x-axis. AR = MR. Fig. 3.12

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 Y

R e ve n u e
AR = M R

in t.
O X
U n it so ld
F ig . 3.12
(b) Total revenue increases at constant rate and MR remains
constant and TR curve is positively sloped straight line passing
through the origin. Curve shown in Fig. 3.13 TR is 45° line.
Y
TR
R ev e nu e

in t.
45°
O X
U n it so ld
F ig . 3.13
 General Relation between AR and MR (Fig. 3.14)
 When MR > AR, AR rises point O to K.
 When MR = AR, AR is constant and maximum at point K
 When MR < AR, AR falls after point K.
Y
Re ven ve

J
K
AR
O X
Un its Q
Fig. 3 .1 4 MR

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 Concept of Producer's Equilibrium : It refers the stage of level
of output where producer is getting maximum profit or suffering
minimum losses and he has no incentive to increase or decrease
the level of output.
(A) MR and MC Approach : Conditions of producer equilibrium
according to this approach are : Fig. 3.15
(a) MC = MR at point E
(b) MC curve should cut the MR curve from below at the point of
equilibrium as shown at point E in Fig. 3.15.

Y
MC
R e ve n ve

E
U
AR = M R

O X
O u tp u t
F ig . 3.15
Or
MC should be more than MR after the equilibrium point, with
increase in output that is point E. Point U does not fulfill this condition
therefore equillionum be at E point.
 Supply : Refers to the amount of the commodity that a firm or
seller is willing to offer or ready to sell at a certain price, over a
given period of time.
 Factors affecting supply of a commodity :
 Price of the commodity.
 Prices of other related goods.
 Level of Technology.
 Prices of inputs.

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  No. of firms.
 Government policy regarding Taxation and subsidies.
 Goals of the firm.
 Individual Supply Schedule : Refers to the schedule which
shows various quantities of a commodity that an individual firm is
willing and able to offer for sale at various prices during a given
period of time as shown in table 3.1. below

Table 3.1
P in Supply units
10 30
20 50
30 70

 Market supply Schedule : Refers to the schedule which shows

the sum total of various quantities supplied of a commodity by all
sellers or all firms in the market at various prices during a given
period of time as shown in table 3.2 below table 3.2.
Table 3.2
Price Firm A Firm B Firm C Market supply
A+B+C = Mass
10 30 20 10 60
20 50 40 20 110
30 70 60 30 160
40 90 80 40 210

 Stock : Refers to the total quantity of a particular commodity

available with the firm at a particular point of time.
 Supply Schedule : Refers to a tabular presentation which shows
various quantities of a commodity that a producer is willing to supply
at different prices, during a given period of time as shown in table
3.1.

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 Supply curve : Refers to the graphical representation of supply
schedule which represents various quantities of a commodity that
a producer is willing to supply at different prices during given period
of time.
 Slope of supply curve = P/Q
Y
S
Price

P2

P

P1
Q
S

X
O Q1 Q2 Qty.ss.
Fig. 3.17
 Law of Supply : States the direct relationship between price and
quantity of supply of a commodity, keeping other factors constant.
 Price Elasticity of Supply : It refers to the degree of
responsiveness of quantity supplied of a commodity with
reference to a change in price of the commodity. It is always positive
due to direct relationship between price and quantity supplied.
Price Elasticity of Supply (Es)
Percentage change in quantity supplied
=
Percentage change in price
 Methods for measuring price elasticity of supply :
Percentage Method
% change in a quantity supplied
Es 
% change in price
Q P
Or Es  
P Q

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 S1
S0
S S2
Y Y
on
c ti

P rice
P ric e

ra

se
nt

io n

ea
Co

cr
ns

in
S1
pa

V
Ex

S0
S S2
O X O X
Q u a n tity Q u a n tity
F ig . 3 .1 8 F ig . 3 .1 9

MULTIPLE CHOICE QUESTIONS (1 MARK)

1. The cause of upward movement along a supply curve is
(a) Decrease in Price (b) Increase in Income
(c) Decrease in Income (d) Increase in Price

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 2. When Total Revenue is maximum, marginal Revenue is :-
(a) Minimum (b) Maximum
(c) Zero (d) Constant
3. When percentage change in Price is equal to percentage change
in supply :
(a) Es > 1 (b) Es = 1
(c) Es < 1 (d) Es = 0
4. The behaviour of Average Revenue when Total Revenue increases
at constant rate is
(a) Constant (b) Increasing
(c) Decreasing (d) Zero
5. The Behaviour of Total Product when Marginal Product is zero is :
(a) Minimum (b) Maximum
(c) Constant (d) Zero
6. Which cost curve is parallel to x-axis :
(a) AFC (b) TVC
(c) TFC (d) TC
7. If supply curve is parallel to Y-axis :
(a) Es = 0 (b) Es = 
(c) Es = 1 (d) Es > 1
8. When per unit price remains constant
(a) AR > MR (b) AR < MR
(c) AR = MR (d) TR is constant
9. When Total Product is falling then
(a) MP is maximum (b) MP = zero
(c) MP becomes negative (d) MP is falling
10. When Average Product is maximum then
(a) MP > AP (b) MP = AP
(c) MP < AP (d) MP is also maximum

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11. In Phase II (Diminishing Return to a factor) of law of variable
proportrion, total product:
(a) Increase at an increasing rate
(b) Increases at diminishing rate
(c) Falls
(d) Becomes negative
12. Define Total Physical Product (TPP)
13. If the Total Product (TP) is maximum, Marginal Product (MP) will
be _____?
14. The total product (TP) for the first 4 units of variable factor is given
below. Choose the alternatives which shows stage of Increasing
Return to a factor;
(a) 20, 45, 75, 110 (b) 20, 45, 70, 95
(c) 20, 40, 60, 80 (d) 20, 35, 45, 50
15. Define Production Function.
16. What will be the likely behaviour of marginal product, when total
product increases at diminishing rate?
17. In which period all factors of production are variable?
18. State any two factor inputs used in production process.
19. Which of the following is the general shape of AP curve?
(a) ‘U’ Shape (b) ‘S’ shape
(c) Inverse ‘U’ shape (d) Inverse ‘S’ shape
20. The Marginal product curve cuts the average product curve from
_______ at its _______ point.
21. Choose the correct match
(a) Increasing return to a factor
 TP increases at increasing rate
(b) Diminishing return to a factor
 TP decreases

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 (c) Negative Return to a factor
 TP increases at diminishing rate
22. Match the following & choose the correct option.
I MP negative (i) TP decreases
II MP zero (ii) TP maximum
III MP falls but remain positive (iii) TP increases
(a) I  (i), II  (ii), III  (iii) (b) I  (i), II  (iii), III  (ii)
(c) I  (iii), II  (ii), III  (i) (d) I  (ii), II  (iii), III  (i)
23. Which of the following costs can never be zero?
(a) Total variable cost (b) Marginal cost
(c) Average variable cost (d) Average Fixed cost
24. The average cost of 4 units of output is 40. The total fixed cost at
5 units of output is 50. Which will be total variable cost:
(a) 210 (b) 110
(c) 90 (d) 160
25. Name the cost which does not change with change in output.
26. Fill in the blanks:
Cost = Explicit cost + __________ + __________
27. Give two examples of variable cost
28. Which of the following is the shape of TFC curve
(a) ‘U’ shape (b) Inverse ‘U’ shape
(c) ‘S’ shape (d) Straight line parallel to xaxis
29. With the increase of output, AFC continuously __________.
30. Choose the correct match:
TVC
(a) TC  Q

(b) MC  AC × Q
(c) AVC  TVC/ Q
(d) AFC  TFC × Q

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31. Which of the following is correct:
(a) MC = TC – TVC (b) TC = TFC + TVC
(c) MC = TCn + 1 – TVCn (d) TFC = AFC  Q
32. Which of the following cost is included in marginal cost?
(a) Fixed cost
(b) Variable cost
(c) Both fixed and variable cost(d) None of the above
33. 100. Marginal
T h e to ta lre ve n u e (T R ) a t 4 u n its o f le ve lo f o u tp u t is
Revenve (MR) at 5 units of level of output is 15. What will be
Average Revenve (AR) at 5 units of level of output: (in Rupees)
(a) 23 (b) 25
(c) 27 (d) 29
34. If TR = Total Revenue, Q = Quantity of Output,  = change,
n = number of units of commodity, then MR (Marginal Revenue) equals

TR
(a) only (b) TRn – TRn–1 only
Q

(c) Both (a) and (b) (d) AR × Q

35. In which market AR = MR
(a) perfect competition (b) Monopolistic competition
(c) Monopoly (d) Both (b) and (c)
36. A firm can sell more units of a good only by reducing the price of a
commodity. Marginal Revenue of this firm:
(a) Will be more than Average Revenue
(b) Will be equal to Average Revenue
(c) Will be less than Average Revenue
(d) Will be negative

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37. Match the following & choose the correct option:
I. Marginal Revenue MR (i) TRn – TRn – 1
TR
II. Average Revenue (ii) Q
TR
(iii)
Q
(a) I  Both (i) & (ii), II  (iii)
(b) I  (i), II  Both (ii) & (iii)
(c) I  Both (i) & (iii), II  (ii)
(d) I  (iii), II  Both (i) & (ii)
38. A firm can sell more and more quantity of a commodity at a given
price. In such case firm’s marginal Revenue will be _____ Average
Revenue. (Equal to / Greater than / Less than)
39. Average Revenue is always equal to:
(a) Price (b) Marginal Revenue
(c) Average cost (d) None of these
40. What will be the shape of AR curve of a firm, which can sell any
quantity of a commodity at a given price?
41. What will be the shape of MR curve of a firm, which can sell more
quantity of a commodity only by lowering the price?
42. What will be the likely behaviour of AR when TR increases at
constant rate after selling an additional unit of a good.
43. AR (Average Revenue) at 5 units of output is 100. TR at 6 units of
output is 560. The value of MR (Marginal Revenue) at 6 units of
output will be: (in )
(a) 60 (b) 460
(c) 660 (d) 1160
44. Choose the correct match:
(a) TR maximum  MR maximum
(b) TR increases at diminishing rate  MR increases

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 (c) TR increases at constant rate  MR constant
45. Choose the correct match:
(a) MR > AR  AR decreases
(b) MR < AR  AR increases
(c) MR = AR  AR remain constant
46. Define Producer Equilibrium.
47. Fill in the blanks:
Two conditions of producer equilibrium are (i) MR = MC
(ii) ___?____
48. Which of the following is correct in case of TR = TC
(a) Normal Profit (b) Abnormal Profit
(c) Loss (d) None of the above
49. In case of Break Even Point, Which of the following is correct:
(a) TR = TC (b) AR = MC
(c) MR = AC (d) MR = MC
50. Which of the following is the necessary condition of producer’s
equilibrium:
(a) MR = MC (b) After equilibrium MR < MC
(c) MR > MC (d) Both (a) and (b)
51. At the point of producer equilibrium:
(a) MR = MC (b) MR  MC
(c) MR =  MC (d) None of the above
52. At a price of 20, a publisher of book is expected to sell 9,000
copies. If the book is offered for sale at a price of 15, then the
publisher can expect to sell
(a) less than 9,000 copies.
(b) 9,000 copies.
(c) more than 9,000 copies.
(d) It is impossible to predict the effect of a lower price on sales.

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53. If shoes manufacturer is producing shoes faster than people want
to buy them,
(a) there is an excess supply and price can be expected to
decrease.
(b) there is an excess supply and price can be expected to
increase.
(c) there is an excess demand and price can be expected to
decrease.
(d) there is an excess demand and price can be expected to
increase.
54. Car manufactures use many commodities in their production
process. If prices of those commodities increase, then we should
expect downward movement along supply curve True/False.
55. Study the following schedule
Price Quantity
2 20
3 30
4 50
5 90
Is the above schedule that of demand or supply function and why?
...........................................................................................................................
56. Which of the following will NOT shift the market supply curve of
good X?
(a) A change in the cost of inputs used to produce good X.
(b) A change in the technology used to produce X.
(c) A change in the number of sellers of good X.
(d) A change in the price of good X.
57. Which of the following is/are determinant of the supply of good X?
(a) own price of the commodity and number of firms in the industry

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 (b) government policies and state of Technology
(c) price of related goods
(d) All of the above are determinants of the supply of good X.
58. A “decrease in supply” is, graphically, represented by:
(a) A leftward shift in the supply curve.
(b) A rightward shift in the supply curve.
(c) A movement up and to the right along a supply curve.
(d) A moment down and to the left along a supply curve.
59. The supply of a good refers to:
(a) Stock available for sale
(b) Total stock in the warehouse
(c) Actual Production of the good
(d) Various Quanitities of the good offered for sale at various price
at a point of time
60. If sellers expect the price of a good to rise in the future, the result is
(a) an increase in supply today
(b) a decrease in quantity supplied today
(c) an decrease in demand today
(d) and increase in quantity supplied today
61. fill up the blanks by appropriate word given in bracket
Quantity supplied refers to ............... (various quantities/specific
quantity/) of a
commodity a firm is ready to sell at .......... (specific price/different
prices) of the commodity at a point of time.
62. supply schedule is a table showing –
(a) various quantities of a commodity offered for sale at a specific
price at a point of time.
(b) specific quantity of a commodity offered for sale at different
possible prices at a point of time.

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 (c) specific quantity of a commodity offered for sale at a specific
price at a point of time.
(d) various quantities of a commodity offered for sale at different
possible prices at a point of time.
63. The supply of ice cream rises from 100 units to 500 units due to
rise in price of ice cream from 2 per unit to 5 per unit.
This change leads to
(a) Extension in supply (b) contraction in supply
(c) increase in supply (d) decrease in supply
64. Due to increase in GST the supply of Air conditions decease from
20 units to 10 units at same price this situation leads to –
(a) Extension in supply (b) contraction in supply
(c) increase in supply (d) decrease in supply
65. Fill in the blank
The supply curve of coffee shifted to the leftward direction when
price of the substitute good
(tea) ......................... (decrease/increase)
66. In case of extension of supply; we move
(a) from lower point to upper point on same supply curve
(b) To rightward shift on the another supply curve
(c) To leftward shift on the another supply curve
(d) from a upper point to lower point on same supply curve
67. choose the wrong statement
(a) Market supply schedule is the supply schedule of the industry
as a whole.
(b) Because tomato is a perishable commodity, supply of tomato
is less elastic than the supply of furniture.
(c) Price Elasticity of supply is the ratio between percentage

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 change in quantity supplied and precentage change in profit
of a firm ...
(d) law of supply states that there is positive relationship between
price and supply of a commodity. Keeping otherfactors
constant.
68. Read the following statement carefully. write TRUE or FALSE with
reason “Supply of a commodity never changes unless it’s own price
changes”
69. movement along supply curve is
(a) 1change in supply (b) change in quantity supplied
(c) a and b both (d) none of the above
70. Producer is not at equilibrium when MC > MR because.
(a) Profits can be increased by producing more
(b) Profit is less than cost
(c) Both (a) and (b)
(d) None of these
71. For achieving equilibrium output.
(a) MC curve should not cut MR curve form above
(b) MC curve should cut MR curve from below
(c) MC curve should not cut MR curve at all
(d) MC curve should be tangent to MR curve
72. The supply curve of a given good is given as SA. On the basis of
this diagram, answer the following questions.
Y
(i) Shift from S0 to S1 is termed as
S1
(a) Contraction in supply S0
S2
Price

(b) Expansion in supply

(c) Decrease in supply
(d) Increase in supply
O X
Supply

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 (ii) Shift from S0 to S2 is caused by
(a) Decrease in price of given good
(b) Use of absolete technology
(c) Decrease in price of inputs
(d) Increase in tax by government
(iii) Technological up gradation in the good will lead to:
(a) Downward movement along S0
(b) Shift from S0 to S1
(c) Shift from S0 to S2
(d) Upward movement along S0

Answers
1. (d); 2. (c); 3. (b); 4. (a); 5. (b); 6. (c); 7. (a); 8. (c); 9. (c); 10. (b).
11. (b)
12. Total Physical Product refers to total no. of units of a good produced
by a firm in a given period of time by using a given unit of variable
factor.
13. Zero 14. (a)
15. The function showing relationship between physical inputs and
physical output of a good is called productionn function.
16. Marginal product will decrease but remain positive
17. Long Run 18. (a) Labour (b) Capital
19. (c) 20. above, maximum
21. (a) 22. (a)
23. (d) 24. (b)
25. Total fixed cost
26. Implicit cost, Normal Profit
27. Expenditure on casual labour and Raw material
28. (d) 29. decreases

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30. (c) 31. (b)
32. (b) 33. (a)
34. (c) 35. (a)
36. (c) 37. (c)
38. Equal to 39. (a)
40. AR curve will be a straight line pariallel to x axis
41. MR curve will be downward sloping.
42. AR will remain constant
43. (a)
44. (c)
45. (c)
46. Producer Equilibrium refers the stage of level of output where pro-
ducer attains maximum profit and he has no incentive to increase
or decrease the level of output
47. After equilibrium MR < MC
48. (a) 49. (a)
50. (d) 51. (a)
52. (c) 53. (a)
54. (false)
55. This schedule is supply function because increase in price leads to
increase in quantity
56. (d) 57. (d)
58. (a) 59. (d)
60. (b)
61. specific quantity, specific price
62. (d) 63. (a)
64. (d) 65. increase
66. (a) 67. (c)
68. False, supply can change due to factors other than own price of the
concerned commodity such as technology and government's poli-
cies.
69. (b)
70. (c)
71. (b)
72. (i) (c), (ii) (c), (iii) (c)

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 SHORT ANSWER TYPE QUESTION (3-4 MARKS)
1. State the relationship between average product and marginal
product.
2. Explain the law of diminishing returns to a factor? State the reason
for the same.

3. Briefly explain the causes of increasing returns to a factor with the

help of marginal product.

4. Explain the likely behaviour of total product. When only the units of
a variable factor is increased and keeping all other factor fixed.
Use numerical example.
5. Complete the following table :

Units of TP AP MP
Variable input (Units) (Units) (Units)
1 – – 20
2 – – 26
3 66 – –
4 – 19 –
5 – – 4
6. Identity the three phases in the law of variable proportion from
following information :

Units of Variable Input Total Products

(Units)
0 0
1 4
2 14
3 22
4 28
5 32
6 34
7 34
8 32

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 7. Whether following statements are true or false. Give reasons.
(a) Diminishing returns to a factor is applicable only when average
product starts falling.
(b) When marginal product falls. Average product falls.
8. Distinguish between total fixed cost and total variable cost?

9. Explain with the help of a diagram the relationship between average

cost, average variable cost and marginal cost?

10. Why is short run average cost curve 'U' shaped?

11. Whether following statements are true or false give reasons:

(a) Average cost starts increasing when marginal cost starts

increasing.
(b) AC and AVC curves do not intersect each other.
12. Whether following statements are true or false give reasons.

(a) Marginal cost changes at a rate faster than average cost.

(b) As output increases, the difference between AC and AVC
decreases.
13. If the total fixed cost of a firm is Rs. 24, Complete the following
table :

Output AVC TVC MC TC

(Units) (Rs.) (Rs) (Rs) (Rs)
1 50 — — —
2 40 — — —
3 45 — — —

14. Complete the following table :

Output AVC TC MC
1 – 60 –
2 18 – 20

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 3 – – –
4 20 120 18
5 22 – –
15. What changes will take place in total revenue when
(a) Marginal revenue is falling but is positive
(b) Marginal revenue is zero
(c) Marginal revenue is negative
16. Define marginal revenue. Explain the relationship between average
and marginal revenue when price is constant at all levels of output.
17. Draw in a single diagram the average revenue and marginal
revenue curves of a firm which can sell any quantity of the good at
a lower price. Explain with diagram.
18. Complete the following table :

Output Price (Rs.) MR (Rs.) TR (Rs.)

1 – – 10
2 – 4 –
3 – – 15
4 – (–)3 –

19. Whether following statements are true or false give reasons.

(a) AR curve always remain above MR curve.
(b) When AR falls, MR falls faster than AR.
20. What changes should take place in total revenue (TR) so that :
(i) Marginal Revenue is positive and constant.
(ii) Marginal revenue is positive and falling.
21. Complete the following table:

Output AR MR TR
(Units) (Rs.) (Rs) (Rs)
1 10 10 10

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 2 — 8 —
3 8 — —
4 — 0 —
5 — — 20

22. What do you mean by producer's equilibrium? State and briefly

explain the conditions of producer's equilibrium with Marginal
Revenue and Marginal Cost approach. Use diagram/schedule.

OR

Explain producers equilibrium with the help of a numerical example

using marginal revenue and marginal cost approach.

OR
Why is the equality between marginal cost and marginal revenue
ncessary for a firm to be in equilibrium? Is it sufficient to be in
equilibrium? Explain.
23. Distinguish between 'Change in Supply' and 'change in quantity
supplied' with the help of diagram?
24. Differentiate between 'contraction in supply' and 'decrease in
supply'?
25. How does change in price of inputs affect the supply of a good?
26. How does change in price of related goods affect the supply of
given goods?
27. What is a supply schedule? Explain how does change in technology
of producing a good affect the supply of that good.
28. When the price of commodity rises from 10 to 11 per unit, its quantity
supplied rises by 100 units. If its price elasticity of supply is 2. Then
find out its quantity supplied at increased price.
29. Commodities A and B have equal price elasticity of supply. The
supply of A rises from 400 units to 500 units due to a 20% rise in its

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 price. Calculate the percentage fall in supply of B if its price falls by
8%.
30. State three reasons for leftward/rightward shift in supply curve?

LONG ANSWER TYPE QUESTIONS (6 MARKS)

1. Explain diagrammatically the effect on total output when units of
one factor is increased and all other inputs are held constant.
2. State whether the following statement are true of false give reason.
(a) Total product is the area under the marginal product curve.
(b) Total product always increases whether there is increasing
returns or Diminishing return to a factor.
(c) Average product falls only when marginal product is less than
average product.
3. State whether the following statements are true or false:
(a) For the first unit of output MC = AVC.
(b) As soon as marginal cost rises, average variable cost also
starts rising.
(c) Average variable cost can fall even when marginal cost is
rising.
4. State whether the following statements are true or false. Give
reasons:
(a) Average cost curve cuts AVC at its minemum level.
(b) Total cost curve and total variable cost curve are parallel to
each other.
(c) When marginal cost rises, average cost also rises.
5. State whether the following statements are true or false. Give
reasons:
(a) When MR falls, AR falls
(b) When marginal revenue is constant and not equal to zero, then
total revenue will also be constant.

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 (c) When total revenue is constant average revenue will also be
constant.
6. On the basis of following information, identity level of output at which
producer will be in equilibrium using MR-MC approach and also
give reasons :
Output (Units) : 1 2 3 4 5 6
AR (Rs.) 7 7 7 7 7 7
TC (Rs.) 8 15 21 26 33 41
7. What is producer's equilibrium? Explain the condition of producer's
equilibrium through the 'marginal cost and marginal revenue'
approach. Use diagram.
8. What will be the inpact of the following on the supply curve of wheat?
(a) Increase in price of pesticides, fertilizers and HYV seeds.
(b) Increase in price of tomato as it can also be grown on the land
where wheat is grown?
9. State and explain law of supply with the help of a schedule and
diagram?
10. How do the following influence supply of a good. Use diagram:
(a) Taxes on production (b) Technological progress
(c) Fall in price of other goods.
SHORT ANSWER TYPE QUESTION
SOLUTION
13.

Units of TP AP MP
Variable input (Units) (Units) (Units)
0 0 0 –
1 20 20 20
2 46 23 26
3 66 22 20
4 76 19 10
5 80 16 4

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 14.
Units of TP MP
Variable Input (Units) (Units)
0 0 0 First Phase
1 4 4 (Increasing
returns to a
2 14 10 factor)
3 22 8
4 28 6 Second Phase
5 32 4 (Diminishing
returns to a
6 34 2 factor)
7 34 0
(Negative return
8 32 –2 to a factor) Third Phase
15.
Output AVC TFC TVC MC TC
(Units) (Rs.) (Rs) (Rs)
1 50 24 50 50 74
2 40 24 80 30 104
3 45 24 135 55 159
19.

Output Price (Rs.) MR (Rs.) TR (Rs.)

1 10 10 10
2 7 4 14
3 5 1 15
4 3 (–3) 12

% change in Quantity
20. Es 
% change in Price

2
% change in Quantity
10% 
 % change in Price =
1
10
 100 
20% = % change in Quantity
20% of Q0 = 100

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 100
Q0 
20%
Q0 = 500
New Quantity Supplied Q1 = 500 + 100 = 600 units

LONG ANSWER TYPE QUESTIONS

SOLUTION
2.

Output AR (Rs.) TR (Rs.) TC (Rs.) MC (Rs.) MR (Rs.)

1 7 7 8 8 7
2 7 14 15 7 7
3 7 21 21 6 7
4 7 28 26 5 7
5 7 35 33 7 7
6 7 42 41 8 7
The producer will be in equilibrium at 5th units of output because here all
conditions of producer's requlibrium are satisfied i.e., (i) MR = MC and
(ii) MC > MR after MR = MC level of output.

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Exam. Oriented Questions with Answer
VERY SHORT ANSWER QUESTION (1 MARK)
Q. 1. Define production function.
Ans. The function showing relationship between physical inputs and
physical output is called production function.
Q. 2. State the changes in marginal product when total product increases
at decreasing rate.
Ans. When total product increases at increases at diminishing rate,
marginal product decreases but remains positive.
Q. 3. What is meant by return to a factor?
Ans. When only one factor is increased keeping other factors constant,
the resultant increase in output is called return to a factor.
Q. 4. What is meant by Average Physical Product (APP) of a factor input?
Ans. APP is the output per unit of a variable factor i..e. APP = TPP/L.
Q. 5. Define cost.
Ans. Cost refers to the sum of explicit cost, Implicit cost and Normal
profit.
Q. 6. Why is the relationship between MC and AVC similar to the
relationship between MC and AC?
Ans. Because MC is not affected by fixed cost.
Q.7. Define Marginal Cost.
Ans. Marginal cost refers to change in total cost due to additional unit of
a commodity is produced.
Q. 8. What will be the behaviour of AR when MR is zero?
Ans. When MR = 0, TR will be constant and if TR is constant, AR will fall
as output is increased.

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Q. 9. What is break even point?
Ans. The point where TR = TC or AR = AC is called break even point. It
is level of output where firm earns no profit nor incur loss.
Q.10. Define Market Supply.
Ans. Market Supply refers to the sum total of quantity supplied of a
commodity by all sellers or all firms in the market at a certain price
and in a given period of time.

3–4 MARKS QUESTIONS

Q. 1. Explain the likely behaviour of total product under the phase of
increasing return to a factor with the help of numerical example.
Ans. Increasing return to a factor is the first phase of the Law of return to
a factor. When more and more units of a variable factor is combined
with fixed factor up to a certain level total physical product increases
with increasing rate.
Machine Unit of Labour Total Physical Product
1 1 10
1 2 24
1 3 42
Q. 2. With the help of example distinguish between total fixed cost and
total variable cost.
Ans. Total fixed cost Total Variable Cost
1. Fixed cost remains constant 1. Variable cost changes with
at each level of output i.e., it the changes in level of output, it
does not change with change increases or decrease as the
in level of output. output changes.
2. It can not be zero when 2. It is zero when output is zero.
output is zero.
3. Its curve is parallel to x-axis. 3. It curve is parallel to the curve
of total cost.
4. Example : Rent, wages of 4. Example : cost of raw
permanent staff. material, wages of casual
labourer.

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 Q. 3. Draw average cost, average variable cost and marginal cost curves
on a single diagram and explain their relations.
Ans.
Y

MC
AC

AV C
C ost

X
O O u tp u t

For evaluating curves these points should be kept in mind :

1. MC cuts AC and AVC at their lowest points at point G and F
respectively
2. As ouput increases, the difference between AC and AVC
decreases as shown by Ac and AVC curve in figure.
3. Lowest point of AC is right to the lowest point of AVC as point G is
at right side than point F.
Relation between AC, AVC and MC
When MC < AC/ AVC, AC/ AVC decreases
MC = AC/ AVC, AC/AVC constant
MC > AC/AVC, AC/AVC increases
Q. 4. Draw average cost, average variable cost and average fixed cost
curves on a single diagram and explain their relation.
Y
AC
AVC
Cost

AFC
X
O Production

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 1. AC is the vertical summation of AVC and AFC.
2. The difference between AC and AVC falls as output increases but
the difference of AC and AFC increase.
3. As output increases AC and AVC tends to be closer but their curves
do not intersect each other because AFC always remains more
than zero.
Q. 5. Explain the relation between average revenue and marginal
revenue when a firm can sell an additional unit or a good by
lowering the price.
Ans. 1. AR and MR both decreases but MR decrease at a faster rate
than AR.
2. MR become zero and negative but AR can never be zero.
Q. 6. Distinguish between 'change in quantity supplied' and 'change in
supply'.
Ans. Change in Quantity Supplied Change in Supply
1. It refers to the change in 1. It refers to the change in supply
supply due to change in price due to the change in the
of the good determinants of supply other
than price.
2. Determinants of supply other 2. Price of the good remains
than price remains unchanged. unchanged.
3. Law of supply apply. 3. Law of supply does not apply.
4. There is upward and down- 4. Supply curve shifts to leftward
ward movement along the or rightward under this
supply curve in this situation. situation.

S1
S0
S2
se

S Y
ea

Y
cr
De
on
c ti

P ric e
P ric e

ra

se
nt

ea
io
Co

cr
ns

In

S1
pa
Ex

S0
S S2
O X O X
Q u a n tity Q u a n tity

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Q. 7. Explain how does change in price of input affect the supply of a
good.
Ans. Increase in price of Input : Increase in price of input is a cause
of decrease in the supply of a good because the production cost
of a good will increases due to increase in price of input. It will
reduce the profit. So producer will decrease the supply of the good.
Decrease in the price of input : Decrease in price of input is a
cause of increase in supply because when the price of input
decrease the production cost of a good also decreases. Decreases
in cost increases the profit margin. It motivate producer to increase
the supply of the good.
Q. 8. Explain how changes in prices of other products influence the
supply of a given product.
Ans. The supply of a good is inversely influenced with the change in
price of other product which can explain as follows :
A. Rise in Price of Other product : When there is rise in the
price of other product the production of these product become
more profitable due to unchanged cost in comparison of the
production of given product. As a result the producer will
produce more quantity of other product so the supply of given
good will decrease.
B. Fall in the price of Other Product : When there is fall in the
price of other product the production of these product become
less profitable due to unchanged cost in comparison of the
production of given product. As a result producer will produce
less quantity of other product so the factors of production
shifted for the production of given good. It cause an increase
in supply of given good.
S0
Q. 9. Explain how technology advancement S1
Y
brings a positive impact in the supply of a
given product.
P ric e

Ans. Technology advancement reduces per unit

cost and increase the productivity of given S0
factors of production. Due to these S1
O X
reasons production of given product Q u a n tity
becomes more profitable and thus supply of given product

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 increases as shown in Fig. Supply curve shifts hightward from S0S0
to S1S1.
Q. 10. What is the behaviour of average fixed cost as output is increased?
Why is it so?
Ans. AFC falls continuously as output is increased. It is because,
TFC
AFC = TFC remains unchanged even when output is
Q
increased.
Q. 11. An individual is both the owner and the manager of a shop taken
on rent. Identify implicit cost and explicit cost from this information.
Explain.
Ans. Implicit cost : Estimated salary of the owner. Because the owner
would have earned this salary if he had worked with a firm not
owned by him.
Explicit cost : Rent paid. Because it is actual money expenditure
on input.
Q. 12. What is a supply schedule? What is the effect on the supply of a
good when Government gives a subsidy on the production of that
good? Explain.
Ans. A supply schedule is a schedule that shows the quantity supplied
of a commodity at different prices during a given period of time.
When govt. gives a subsidy on the production of a commodity then
production cost decreases and producer gets more profit on the
same price of the commodity. As a result supply of that commodity
increases.
Q. 13. A producer borrows money and opens a shop. The shop premise
is owned by him. Identify implicit cost and Explicit cost on the basis
of this information. Explain.
Ans. Producer open his shop by borrowing money and he has to pay
interest for it. So payment of interest is explicit cost.
Producer provides his own service and open his shop on his own
premise. For this he has not to pay any amount. So imputed salary
for the services provided by producer and imputed rent of shop
are implicit cost.

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Q.14. Examine the effect of
(i) Rise in own price of good X
(ii) Rise in tax rate on good X on the supply curve. Use diagrams:
Ans. (i) Rise in own price of good X:
Rise in own price of good X will lead to a rise in the quantity
supplied, other factors remaining constant. It will lead to upward
movement along same supply curve. It is known as expansion in
supply.
Expansion in Supply
Y
S
B
P'
Price ( )

P
A

S
Q Q'
O
Quantity Supplied X
(ii) Rise in tax rate on
good x: Decrease in supply
Y
S1
Rise in tax rate
S
increases cost of
production and
reduces the profit P A
Price ( )

margin. As a result
supply falls at the
same price & leads
to leftward shift is S
supply curve from
O X
SS to S'S'. It is Q1 Q
known as decrease Quantity Supplied (units)
in supply.

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Q.15. Differentiate between contraction in supply and decrease in supply
with the help of diagram.

Basis Contraction in supply Decrease in supply

Meaning when the quantity It refers to a fall in the

supplied falls due to supply of a good caused
decrease in price, due to any factor other than
keeping other factors the own price of good
constant, it is called
contraction in supply.

Tabular Price supply Price Supply

presentation ( ) (units) ( ) (units)
10 100 15 150
8 80 15 100

Effect on Downward Left ward shift in supply

supply curve movement along same curve
supply curve
 in SS curve The producer will remain The produce will jumplgo
on the some supply curve on to a new supply curve
mean supply curve mean a new supply curve
remain same formed.
Y
S1
Y S
S
A
10 15
Price ( )
Price ( )

B
8

S S
O X O X
80 100 100 150
Quantity Supplied (units) Quantity Supplied (units)

6 MARKS QUESTIONS
Q. 1. Explain the law of variable proportion with the help of diagram/
schedule.

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 OR
What is the likely behaviour of total product/marginal product when
only one input is increased for increasing production? Keeping
other factors constant? Use diagram/Schedule.
Ans. Law of variable proportion state the impact of change in unit of a
variable factor on the physical output. Keeping other factors
constant When more and more unit of a variable factor combined
with fixed factor then total product increases at increasing rate in
the beginning, Then increases at decreasing rate and finally it starts
falling.
Phase I (Increasing Return to a factor): TP increase at an
increasing rate
Phase II (Diminishing Retun to a factor) : TP increases at
diminishing rate
Phase III (Negative Returns to a factor) : TP falls
Behaviour of MP
Phase I MP increases and becomes maximum.
Phase II MP decreases and becomes zero.
Phase III MP becomes negative
Machine Unit of Labour TP (Unit) MP (Unit)
1 1 3 3
1 2 7 4
1 3 12 5
1 4 16 4
1 5 19 3
1 6 21 2
1 7 22 1
1 8 22 0
1 9 21 –1

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 Y

TP P
B
TP

F irst A S econd T hird

P hase P hase P hase

O X
L L 1 U n its o f
Y
va ria b le in p u t

F irst S econd T hird

M PP

P hase P hase P hase

C

X
O L L 1 U n its o f
M P va ria b le in p u t

First Phase : TP increases with increasing rate upto A point. MP

also increase and becomes maximum at point C.
Second Phase : TP increases with diminishing rate and it is
maximum at point B. MP start to decline and becomes zero at D
point.
Third Phase : TP starts to decline and MPP becomes negative.
 Important instruction for giving the answer of above question.
• Do not use diagram for the explanation of this question if it
is instructed to use schedule and do not use schedule if the
explanation of this question asked with the help of diagram.
• Do not explain the behaviour of marginal product with the
help of schedule and diagram. If there is instruction to explain
only the behaviour of total product.
• Do not explain the behaviour of total product with help of
schedule and diagram if there is instruction to explain only
the behaviour of marginal product.
Q. 2. What is producer's equilibrium? Explain the conditions of
producer's equilibrium through the 'marginal cost and marginal

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 revenue' approach. Use diagram/schedule.

Ans. Producer's equilibrium refers the stage of level of output where

producer is attaining maximum profit or mininum loss. The
conditions of producer's equilibrium through the marginal cost and
marginal revenue approach are as follows.

1. Marginal cost should be equal to marginal revenue.

2. With the increase in output after equilibrium marginal cost

should be greater than marginal revenue.
In perfect competition

Output (units) Price (Rs.) MR (Rs.) MC (Rs.)

1 4 4 5

2 4 4 4

3 4 4 3

4 4 4 4

5 4 4 5

Explanation of Conditions

(i) So longs as MC is less than MR, it is profitable for the producer to

go on producing more because it adds to its profits. He stops
producing more when MC becomes equal to MR.

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 (ii) When MC is greater than MR after equilibrium it means the profit
will decline if producer will produce more units of the good.
In the figure, the producer attains equilibrium at E.
Q.3. Read the following case study carefully and answer the questions
that follow:
During January 2020, coronovirus cases began to increase in
China. Entire world is accuring china of pandemic because it had
spread to many other countries. In early March 2020. Indian
government announced country wide lockdown to control the spred
of virous. As result, import of chinese mobile phones got affected
in India.
(a) What will be the effect of above case study on supply curve of
chinese mobile phones in India. (Leftward shift in supply curve/
Downword Movement along same supply curve). Tick the
correct answer. (1 Mark)
(b) Choose the reason for the above effect on supply of chinese
mobile phones. (change in its price/change in factors other
than price) (1 Mark)
(c) Show the above mentioned effect of point no. 01 on supply
curve of chinese mobile phones diagrammatically? (1 Mark)
Ans. (a) Leftward shift in supply curve.
(b) Change in other factors affecting supply other than price.
(c) Y D e cre a se in S u p p ly
S1
L e f t w a rd
s h if t
S

P
P ric e ( )

S1

O X
Q1 Q
Q u a n tity o f C h in e se M o b ile P h o n e s

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Q.4. Read the following case study carefully and answer the following
questions on the base of same.
Suppose person X is running a bakery shop at his home. He has
invested 4,00,000 as capital and has also borrowed 2,00,000
from ABC bank at an interest rate of 8% p.a. He has also hired a
manger at a monthly salary of 15,000/-. The imputed monthly rent
of his bakery shop is 20,000/-.
(a) Define implicit cost. (1 Mark)
(b) Calculate annual implicit cost if imputed annual value of
services of person X is 3,00,000. (1 Mark)
(c) Calculate annual explicit cost? (1 Mark)
(d) Complete the following formula.
Cost = Explicit cost + Implicit cost + ________. (1 Mark)
Ans. (a) Implicit costs are estimated (imputed) values of inputs supplied
by the owner of the production unit himself.
(b) Calculation of Annual Implicit cost:
Annual Implicit cost = Imputed Interest on own capital + annual
rental value of bakery shop + imputed annual value of services
of owner.
Annual implicit cost = ( 4,00,000 × 8%) + ( 20,000 × 12) +
3,00,000
32,000 + 2,40,000 + 3,00,000 = 5,72,000/-
(c) Annual Explicit cost
Annual explicit cost = Interest on borrowing ( 2,00,000 × 8%)
+ annual salary of manager
= 16,000 + 1,80,000 1,96000/-
(d) Cost = Explicit cost + Implicit cost + Normal profit
Q.5. Read the following statements:

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 Assertion (A) and Reason (R)
Choose one of the correct alternative given below:
Assertion (A): Percentage change in quantity supplied due to
percentage change in price of a commodity is called price elasticity
of supply.
Reason (R): Factors other than the price of the commodity are
constant for measuring price elasticity of supply.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the
correct explaination of assertion (A)
(b) Both assertion (A) and Reason (R) are true and Reason (R) is not
the correct explaination of Assertion (A) (c) Assertion (A) is true
but Reason (R) is false. (d) Assertion (A) is false but Reason (R) is
true. (1 Mark)
Answer: Option (a) is the correct answer.
Q.6. Read the following statements:
Assertion (A) and Reason (R) choose one of the correct alternative
given below:
Assertion (A): Producer is in equilibrium when his/her profits are
maximised Reason (R). When MR = MC: profits of the producer
are maximised.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the
correct explaination of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true and Reason (R) is not
the correct explaination of Assertion (A)
(c) Assertion (A) is true but Reason (R) is false
(d) Assertion (A) is false but Reason (R) is true. (1 Mark)

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 Answer: Option (c) is the correct answer.

Explanation of Conditions
(i) So longs as MC is less than MR, it is profitable for the producer to
go on producing more because it adds to its profits. He stops
producing more when MC becomes equal to MR.
(ii) When MC is greater than MR after equilibrium it means the profit
will decline if producer will produce more units of the good.
In both figures, a producer attains equibrium at E.

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