ECONOMICS(318) IMPORTANT NOTES FOR OCT 2020 EXAM
Q. How is Price Elasticity of demand of a commodity
affected by availability of its cross substitute? Explain.
Demand
for a commodity with large number of substitutes will be more elastic. The
reason is than even a small rise in its prices will induce the buyers to go for
its substitutes. For example, a rise in the price of pepsi encourages buyers to
cope and vice-versa.
Thus availability of close
substitutes makes the demand sensitive to change in the prices. On the other
hand, commodities with few or no substitutes like wheat and salt have less
price elasticity of demand.
Q. Distinguish between short run
production function and long run production function.
Short run production function: A
production function that shows the changes in output when only one factor is
changed while other factor remains constant is termed as a short run production
function. In the example of production function labour (L) is considered as the
variable factor which can be changed to influence the level of output. The
other factor capital (K) is a fixed factor which cannot be changed. The
underlying theory to the short run production function is the “Law of variable
proportion of returns to a factor”.
Long run production function: It
studies the impact on output when all the factors of production can be changed
simultaneously and in the same proportion. So in the long run size of operation
of the firm can be expanded or contracted depending on the fact that factors of
production are increased of decreased. The underlying theory to the long run
production function is the returns to scale.
Q. Explain the relationship between
TPP and MPP.
Answer: The relationship between TPP
and MPP can be explained as given below:
- As long as MPP increases, TPP increases at an increasing rate.
- When MPP falls, but remains positive, TPP increases but at a diminishing rate.
- When MPP becomes zero TPP is maximum.
- IF MPP becomes negative TPP starts decreasing.
Q.
Distinguish between “shift in supply curve” and “movement along the supply
curve”.
In the situations of increase and
decrease in supply there is a shift in the supply curve upwards or downwards as
a case may be. The shift is upward towards the left in the case of decrease in
supply and downward to the right in the case of increase in supply. In the
cases of expansion and contraction of supply, there is movement on the same
supply curve upwards in the case of extension and downward in the case of
contraction.
Q.
Distinguish between change in quantity supplied and change in supply.
Change
in quantity supplied
|
Change
in supply
|
When supply
due to the change in all other variables other than the price of a good (i.e.
price of the good remains same), then it is referred as change in supply.
|
When supply
changes due to change in the price of goods only, assuming other determinants
remaining unchanged, then it is referred as change in quantity supplied.
|
It results in
a shift in the supply curve of the firm which can be rightwards or leftwards.
|
It results in
a movement of the supply curve of the firm which can be upward or downward.
|
The following
are its types:
1) Increase in Supply 2) Decrease in Supply |
The following
are its types:
1) Expansion of Supply 2) Contraction of Supply |
Q.
Explain “Homogenous Product” as the feature of perfect competition.
Homogenous
products mean that products are identical an all respects like quality, colour,
size, weight, design etc. They are perfect substitutes for another. The goods
sold in the market are equal in the eyes of the buyers and they pay some price.
Goods being homogenous, no individual firm can charge higher price.
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