2. Distinguish between microeconomics and macroeconomics.
Answer:
Microeconomics and macroeconomics are two main branches of economics.
Basis Microeconomics Macroeconomics
It studies individual economic units like It studies the overall economy, including national
Definition
consumers, firms, and markets. income, inflation, and employment.
Demand and supply of individual goods, Economic growth, government policies, inflation, and
Focus
pricing, and market structures. unemployment.
Determining the price of a single product in Examining how fiscal policy affects a country’s
Examples
the market. GDP.
2. Explain the Macro Economics.
Solution: Macroeconomics is the branch of economics that studies the behavior and performance of an
economy as a whole. It focuses on aggregates such as national income, unemployment rates, inflation, and
economic growth. The goal is to understand broad economic factors, such as the total production of a country,
its overall employment, and its level of prices.
3. Explain the price elasticity of demand with the point method of elasticity measurement.
Solution: Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in
price. The point method calculates the elasticity at a specific point on the demand curve using the formula:
This method helps determine
whether demand is elastic (greater than 1), unitary (equal to 1), or inelastic (less than 1) at a given price point.
Unit 2: Elasticity of Demand and Supply
4. How can income effect be explained on the basis of the indifference curve approach?
Solution: The income effect in the indifference curve approach explains how a change in income affects the
consumption of goods. If the income of a consumer increases, they can afford to buy more of a good or different
goods. This is shown by a shift to a higher indifference curve, indicating a higher level of satisfaction or utility.
The income effect works alongside the substitution effect, where a change in relative prices influences
consumption choices.
Group C
9. Briefly explain the short-run equilibrium of a firm in monopolistic competition.
Solution: In monopolistic competition, a firm achieves short-run equilibrium when its marginal cost (MC)
equals its marginal revenue (MR), and it produces the quantity where the difference between total revenue and
total cost is maximized. However, in the short run, firms may earn supernormal profits. Over time, the entry of
new firms will erode these profits, leading to normal profits in the long run.
10. Explain the circular flow of income and expenditure in a three-sector economy.
Solution: In a three-sector economy (households, firms, and government), the circular flow of income and
expenditure shows how money moves between these sectors. Households provide labor to firms in exchange for
wages. Firms produce goods and services, which are purchased by households and the government. The
government collects taxes and provides public goods and services. The flow of income is continuous:
households spend on goods, firms receive income, and the government redistributes through welfare programs
and services.
2. Distinguish the concepts of microeconomics and macroeconomics.
Solution:
Microeconomics is the study of individual economic units such as households, firms, and industries. It
focuses on how these entities make decisions regarding the allocation of limited resources and their
interactions in markets.
Macroeconomics, on the other hand, examines the behavior of the entire economy. It studies aggregate
phenomena such as national income, inflation, unemployment, and economic growth.
3. What is demand? Explain its determinants.
Solution: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at
various prices in a given period of time. The main determinants of demand are:
Price of the good: As the price of a good increases, the quantity demanded generally decreases, and
vice versa.
Income of the consumer: Higher income increases demand for normal goods, while demand for
inferior goods may decrease as income rises.
Tastes and preferences: Changes in consumer preferences can increase or decrease demand.
Prices of related goods: The demand for a good can be affected by the price of substitutes or
complements.
Expectations of future prices: If consumers expect prices to rise in the future, they may purchase more
now, increasing demand.
Unit 2: Elasticity of Demand and Supply
4. a) A consumer buys 80 units of a good at a price of Rs.4 per unit. When the price falls, he buys 100
units. If the price elasticity of demand is -1, find out the new price of the goods.
Solution: Price elasticity of demand (PED) is given by the formula:
b) Price elasticity of supply of a good is 5. A producer sells 500 units of this good at Rs.5 per unit. How
much will be sold at the price of Rs.6 per unit?
Solution: Price elasticity of supply (PES) is given by:
Unit 2: Elasticity of Demand and Supply (Continued)
5. 'Price effect is the combination of income and substitution effect.' Describe.
Solution: The price effect is the total change in the quantity demanded of a good when its price changes. It
consists of two effects:
Substitution effect: When the price of a good rises, it becomes less attractive relative to other goods, so
consumers may substitute it with a cheaper alternative. If the price falls, the good becomes relatively
more attractive, and consumers may buy more.
Income effect: A change in price also affects the consumer’s real income or purchasing power. When
the price of a good falls, the consumer's real income increases, allowing them to purchase more of the
good, assuming other factors remain constant.
Group C
9. Explain the properties of the Indifference Curve.
Solution: The properties of an indifference curve are:
1. Downward sloping: Indifference curves slope downwards to the right, indicating that as the quantity of
one good increases, the quantity of the other must decrease to maintain the same level of satisfaction.
2. Convex to the origin: Indifference curves are usually convex, meaning the consumer is willing to give
up less of one good to gain more of the other as they move along the curve.
3. Non-intersecting: Indifference curves do not intersect. If they did, it would imply inconsistent
preferences, which is not possible.
4. Higher curves represent higher levels of satisfaction: Curves further from the origin represent higher
levels of utility because they correspond to higher quantities of goods.
10. Based on the table given below, answer the questions:
Quantity of output: 0, 1, 2, 3, 4
Total Variable Cost: 0, 20, 30, 48, 90
Total Cost: 30, 50, 60, 78, 120
a) Plot the TFC, TVC, and the TC curves.
Solution:
TFC (Total Fixed Cost): TFC is constant, as there is no change with output. From the table, when
output is 0, total cost is 30, which is the fixed cost. Therefore, TFC = Rs.30 for all output levels.
TVC (Total Variable Cost): The TVC is provided in the table.
TC (Total Cost): The TC is also given in the table.
You can plot these curves on a graph, with output on the x-axis and cost on the y-axis.
b) Explain the reason for the shape of short-run total cost curves.
Solution: In the short run, the total cost curve typically has the following characteristics:
Initially, as output increases, total costs rise slowly due to increasing returns to the variable factor (e.g.,
labor).
After a certain point, the law of diminishing returns sets in, and total costs increase at a faster rate as
more of the variable factor is added to the fixed factors.
This results in a convex shape for the total cost curve.
c) Calculate the average fixed cost (AFC), the average variable cost (AVC), the average total cost (ATC),
and the marginal cost (MC).
Solution: Given the data, we can calculate the costs as follows:
AFC = TFC / Output
AVC = TVC / Output
ATC = TC / Output
MC = Change in TC / Change in Output
For each output level, the calculations are:
For 1 unit: AFC = 30/1, AVC = 20/1, ATC = 50/1, MC = (50-30)/(1-0)
For 2 units: AFC = 30/2, AVC = 30/2, ATC = 60/2, MC = (60-50)/(2-1)
