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INDIFFERENCE CURVE:-
An Indifference curve is the locus of all those combination of any two goods
which give the same level of satisfaction to the consumer. (i.e.) He will be
indifference between that combination and he does not matter if any combination
he gets.
Indifference Schedule:-
Combinations Goods (X) Goods (Y) Level of
satisfactions
A 1 18 S
B 2 13 S
C 3 9 S
D 4 6 S
e 5 4 S
S = Same level of Satisfaction.
In the above schedule there are 5 combinations of 2 goods (X) and (Y)
But all are achieved combinations of (X)and (Y).
The consumer is indifferent between them. It can be explained in
further detail as _
To get one more units of X the consumer prefer to give up 5 units or
Y. The gain in utility of one additional unit of X will exactly compensated
the consumer by the loss of 5 units of Y. Thus the total level of satisfaction
from (1X + 18Y) is equal to (2X + 13Y).
Similarly, the total utility or the level of satisfaction from (2X + 13Y)
is equal to (3X + 9Y) and so on. Since all these combinations gives the same
level of satisfaction they are also known as Iso-utility combination.
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INDIFFERENCE MAP:
An indifference map is consists of a set of indifference curve drawn
together. It shows the scale of preference of consumer for different
combinations of any two goods.
y
P
r
20 o
d
15 u IC3
10 c
t
05 Y IC2
0 IC1
1 2 3 4 5 x
ProductX
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ASSUMPTION OF INDIFFERENCE CURVE
ANALYSIS.
1. A consumer is assumed to buy any two goods in combinations.
2. A consumer can rank the alternative combinations and compare
their level of satisfaction, and he prefers a combination providing
a higher level of satisfaction.
3. It is assumed that utility can be measured in ordinal numbers but
not in cardinal measurements.
4. Consumer is rational and his choices are transitive.
5. The consumer behaviour is assumed to be constant, throughout
the analysis.
6. Indifference curve analysis assumes diminishing marginal rate of
substitution.
0 x1 x2 x
ProductX
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Let us see weather, the indifference curve can slope
upwards
from left to right or that it is horizontal or vertical
as shown in the following figure.
Upward sloping IC1
Y
P
r
o y2 B
d
u
c y1 A
t
Y
0 x1 x2
ProductX
(0 – y1) (0 – y2)
Horizontal
y
4
P
r A B IC1
o
d
u
c
t
Y
x1 x2 x
ProductX
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F.Y.B .CO M
(0 – y1) = (0 – y1)
x1 x
ProductX
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(0 – y1) (0 – y2)
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F.Y.B .CO M
P Y A
r
o y1
d y2 B
u
c y3 C
t D IC1
Y
y4
x1 x2 x3 x4 X
ProductX
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F.Y.B .CO M
R
R1
R2 A
IC2
IC1
Q Q1
Each indifferent curve represents a particular level of
satisfaction to the consumer, which is different from other
Indifference Curve representing different level of satisfaction. If
two indifference curve intercepts (as shown in the above diagram)
it will corresponding to B and C, managed to equal at some other
point A. But is logically meaning less and unacceptable proportion.
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Features of Perfect Competition.
Perfect Competition:- A type of market where there are large
number of buyers and sellers and no buyer or seller influences the
market individually.
Features of Perfect Competition are_
1. Large number of buyers and sellers:- Perfect competition is a
market where there are large number of buyers and sellers. This
feature indicates that both the buyers and sellers do n0t have any
major control over the market and they cannot individually
influence the market. Thus, it means that quantity supplied by a
single seller is so small that it does not affect the market supply
and the price of the commodity produced by hid. Similarly,
quantity demanded by a single buyer does not influence the total
demand and the price of the commodity.
4. Free entry and exist:- Perfect competition allows free entry and
exist for the sellers of the commodity under consideration. The
sellers are free to enter the market at any time as per their wish
and they also can quit the market whenever they want. There are
no legal restrictions on the closing down of the firm.
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they are mobile geographically. If labor and capital move from one
type of job or occupation to other type of job easily which means
they are mobile occupationally.
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Features of Monopoly market.
Monopoly:- Monopoly is a type of market in which there is
only one seller producing a commodity having no close substitute.
1. Single Seller:- In this type of market, there is only one seller
producing a particular commodity.
2. No substitutes:-Monopoly not only implies a single seller but
it also means a single seller producing a commodity having
no close substitutes. If the substitutes are available, there will
be a competition among the firms. Monopoly means a
complete absence of competition. So under monopoly, the
commodity has no close substitutes.
3. No distinction between a firm and industry:- Since there is
only one seller of a commodity, there is only one firm
producing that commodity in the market. So there is no
distinction between the concepts of industry and firm under
monopoly.
4. No free entry and exist:- In the monopoly market, there are
strong barriers to the entry of a new firm in the market. This
prevents new firms from entering the market and so there is
only one firm producing that commodity.
5. Large number of buyers:- Under monopoly there are large
number of buyers in the market who compete with one
another.
6. Downward sloping demand curve:- The demand curve of the
monopoly firm slopes downward indicating that the
monopolist can maximize sales only by reducing the price.
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compete with each other by producing same but differentiated
products.
For example, companies selling toothpaste products like
Colgate, Pepsodent, Close-up, etc. fall under Monopolistic
competition.
1. Large number of Sellers:- In a monopolistic competition
market, there are large number of sellers. Hence no single
seller can control the market supply. Each seller follows his
own course of action. In other words each seller is
independent.
2. Product differentiation:- Product differentiation is the most
important feature of monopolistic competition. Since all
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sellers sell the product which are perfect substitutes for each
other, they go for product differentiation. Every seller makes
efforts to show that his product is superior to other product.
This differentiation is done through Advertisement, brands,
trademarks, designs, packaging, color etc. Thus the products
are not homogeneous under monopolistic competition.
3. Selling costs:- One of the unique features of monopolistic
competition is its selling cost. Selling cost is the cost
incurred by the seller on sales promotion activities like
advertisement, salesman’s service etc. Selling cost enables
the seller to persuade buyers to buy their products than
products from other sellers.
4. Large number of buyers:- There are large number of buyers
in a monopolistic competition market. Thus the buyers
purchase goods by choice and not by chance.
5. Free exist and entry:- There is free entry and exist of firms
under monopolistic competition. There are no barriers for
the firm to enter. Since each firm produces a product which
is little different from others, there is no possibility of more
firms entering the market.
6. Competition :- Competition under monopolistic market is
more as all the firms sell close substitutes. But the
competition is in two dimensional:
1. Price Competition under which the firms were compete
with each other by reducing their products price.
2. Non-price competition under which they compete through
advertisement, and sales promotion activities, etc.
Features of Oligopoly.
Oligopoly :- Oligopoly is an important form of imperfect
competition. In the word Oligopoly ‘Oligo’ means few and ‘poly’
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means seller. Oligopoly therefore refers to the market structure
representing few sellers or firms.
1. Few Firms:- Oligopoly is the market in which few firms
compete with each other. The simplest model of oligopoly is
duopoly. Duopoly is the market structure when only two
firms produce and supply the product. For e.g. Coke and
Pepsi.
2. Nature of the product: In an oligopoly market, all the few
firms produce an identical product. Such an oligopoly market
is called Pure Oligopoly. On the other hand, firms with
product differentiation constitute imperfect oligopoly.
3. Interdependence of Firms: In an oligopoly market, there is
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Scope and Meaning of Economics:-
The subject of economics is concerned with the satisfaction of
human materialistic wants. It also deals with economic problems
that arise out of making a choice. These are choice of goods and
choice of technique. The problem of choice of goods arises because
of _ 1. multiplicity of wants. 2. Wants can be arranged in the order
of their importance. 2. Resources are scarce.
Economic problems relating to choice of technique arise
because factor of production have alternative uses. The root cause
of an economic problem is the scarcity of resources and the study
of economics is concerned with economizing resources. How to
make best uses of resources. Thus according to Somuelson. The
subject of economics is concerned with a following fundamental
problem:-
1. What to produce:- This is the major problem in front of the
nation. A country has to decide the type of product and the
amount of the product to be produced by utilizing the limited
resources as its disposal. Here the firm need to decide
between_
a. Choice between Consumption goods and Capital Goods.
b. Choice between Civil goods and War goods.
c. Choice between Mass goods and Luxury goods.
d. Choice between Private goods and Public goods.
2. How to produce:- How to produce is essentially a problem of
choice of technique. If the country is advanced in its
technological knowledge then it may produce more
production with less fact0r of production and vice versa.
3. For whom to produce:- This is a problem related to
distribution of national income among different factors. In
other words it is the problem of how much share each factor
should be provided in return of their services in the process
of production.
According to ‘Hipsey’ besides the above mentioned
fundamental problems other important problems are_
1. How to achieve full employment
2. How to achieve faster growth.
3. How to achieve efficiency.
4. Productive efficiency.
5. Distributive efficiency.
P 40A
r
o
B
d 30 C
u
c
t 20 D
Y
E
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13
ProductX F
0 1 2 3 4 5 X
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In the diagram, the point A indicates the extreme possibility in
which only the commodity Y is produced. The point F indicates
other extreme possibility where only the commodity X is produced.
Between both extremes we have point B,C,D&E showing different
combinations of two goods X and Y. When all the points are joined,
we get the curve called production possibility curve(PPC).
P 40A
r B H
o
d 30 C
u
c
t 20 D
Y G E
10
F
0 1 2 3 4 5 X
ProductX
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Features of Free Market Economy/Capitalism.
Free market Economy:- It a system of market mechanism refers to an
economic system in which all the means of production are privately
owned. All economic activities like production, distribution,
consumption are very much influenced by the decision taken by the
Private entrepreneurs.
1. Free enterprise: A market economy is a free enterprise economy
where an individual enjoys maximum freedom in economic
matters.
2. Economic freedom: The consumers are allowed free to spend their
income in whatever manner they decide. The producer is also
allowed free to choose the products they produce and invest their
capital whatever way they like. But it should not be used opposed
to public policy.
3. The role of Government: As the economy is based on free
enterprise, the government does not interfere in economic
activities.
4. Profit motive: Profit motive is the central feature of capitalism. It
acts as an incentive and motivate the entrepreneurs to come
forward and bear risks and uncertainties.
5. Price mechanism: Since government interference is almost not
there, the entrepreneurs had to take decision of
➢ What to produce
➢ How to produce
➢ For whom to produce
6. Competition:- A market economy is characterized by competition.
Competition among entrepreneurs improves the efficiency in the
production of goods and services.
Features of Command economy/Socialism/
Planned economy
There is no specific definition of Command economy. However it can be
explained as “ A planned economy is one which is run by a single central
planning authority China is an example of a planned economy.”
1. Means of production: Means of production will be owned by the
society as a whole. They are managed by the state for the benefit of
the society. Under socialism, all labourers are employed by the
state. So there is no scope for exploitation of labour.
2. No private property: Means of production cannot be owned by
private individuals or associations or individuals.
3. Planning:-The state will decide what to produce where to produce
and how to produce. All the production like agriculture, industry,
irrigation and transport will be developed systematically according
to a well prepared plan.
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4. Service motive: Since the production activities are practiced by the
state on behalf of the people. So the main aim is to provide service
to the people.
5. No Competition: Since all the production activities are taken down
by the State there is no competition among the industries.
6. The role of Government: It is fully controlled by the Government.
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Features of Mixed Economy:
Mixed Economy: It is a system in which both capitalist economy and
command economy exist. It means both private and public sectors co –
exist and co – ordinate. It covers the features of both Capitalism and
Socialism.
1. Co-existence of Private and public sectors: Both public and private
sectors exist in a mixed economy. Generally, the public sectors
enter the areas of infrastructure and capital goods industries
which require huge capital and long waiting. The private sectors
enters those areas which are left free by the public sector and
particularly the consumer goods industries. There is also joint
sector in which the state joins hands with the private sectors.
2. Operation of Market Mechanism
3. Operation of Government control.
4. Economic freedom
5. Government regulations
6. Planned economy
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Market economy (Capitalism) Mixed economy(Capital + Social)
1. Definition 1. Definition
2. The means of production are 2. The means of production are
owned by the private owned by the private as well as
enterprises. The decisions of Public enterprises. The decisions
production, distribution, of production, distribution,
exchange are controlled by the exchange are controlled by both
private entrepreneurs. the Private as well as Public
entrepreneurs.
3. All economic activities are 3. All economic activities are
guided by self interest and profit guided by not only self interest
motive. and profit motive but also
service oriented.
4. The decisions of what to 4. The decisions of what to
produce, how to produce & produce, how to produce &
where to produce were mainly in where to produce were mainly
the hands of Private enterprises. there in the hands of
government, which guides both
Public enterprises as well as
Private enterprises.
5. Consumer is the king in a 5. Here both the consumer and
market economy. He can choose the producer is the king. But,
whatever he likes and rejects they have to follow the decisions
what he doesn’t like. The (law) laid down by the
producers are free to invest government bodies from time to
wherever they desire. time.
6. Profit motive and private 6.Profit motive and private
property are the essential property also Service motive and
features. It leads to growth of Public property are the essential
monopolies and high degree of features.
inequality.
Short Note on Micro economics.
“Micro economics is the study of particular firms, particular
households, individual prices, wages, income, individual industries,
particular commodities.
The above definition gives an idea that, Micro economics is
concerned with the study of the behaviour of the individual units. The
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word ‘Micro’ is derived from the Greek word ‘Mikros’ meaning small.
Hence Micro economics means the study of minute or small parts of the
economy.
Short Note on Macro economics.
“ Macro economics deals not with individual income but with the
national income, not with individual prices but with the price levels, not
with individual prices but with the price levels, not with individual output
but with the national output”
Macro economics deals with the economic system as a whole. It
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can be defined as that branch of economic analysis which studies the
behaviour of not one individual unit but all the units combined together.
(i.e.) the study of Aggregates.
The word ‘Macro’ is derived from the Greek word ‘Macros’
meaning large. Hence macro economic is concerned with study of the
entire economy. It makes a telescopic approach to study the function of
an economy. It deals with aggregates like total output, total employment,
total savings, total investment, general price level etc. Since Macro
economics studies the economy in aggregates(large units), it is also
known as lumping method.
Macro economics does not deal with the individual parts of the
economy but with the economy as a whole. It studies the forest as a whole
and not the trees in it.
Micro economics Macro economics
1. The concept of Micro 1. Macro economics is concerned
economics deals with the study with the study of aggregates like
of individual units like national income, employment
consumers, firms etc. etc.
2. It is the traditional economic 2. It is the modern economic
approach followed by the neo- approach followed by modern
classical economists. economists like Keynes.
3. Micro economics analysis the 3. Macro economics analyses the
behaviour of micro variables behaviour of macro variables
such as individual demand, such as national income,
individual supply, price of a aggregate supply, aggregate
particular product, wages for a demand, aggregate savings etc.
particular worker etc.
4. Micro economics is also 4. Macro economics is also
called as Price theory. called as Income theory.
5. The scope of micro 5. Macro economics enjoys
economics is limited. It deals extensive scope. It is concerned
with theory of price and theory with monetary theory, income
of welfare. and employment theory, public
finance, international trade,
trade cycle, economic growth
etc.
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Consumer’s equilibrium :- “A consumer is said to be
equilibrium when he gets maximum level of satisfaction by spending his
limited income on purchase of any two goods”. A rational consumer will
therefore attempt to reach the highest possible indifferent curve and try
to obtain maximum level of satisfaction by spending his limited income.
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2. A consumer has a fixed amount of income to be spend on any two
goods and he is spent his entire income on the purchase of the two
goods and does not save any part of his income.
3. Prices per unit of two goods X and Y are given and remain constant
throughout the analysis.
4. The two goods are perfectly divisible and substitutable to some
extent.
5. All the units of goods are homogeneous.
6. Consumer is a rational person & attempts to get maximum level of
satisfaction.
P A
r Q
o
d R
u IC3
c
t E
Y IC2
T IC1
s IC0
B X
ProductX
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A rational consumer will try to reach the highest possible
Indifference curve given his income and price per unit of the two goods X
and y.
The consumer will not be equilibrium below the Price line because
he will not be spending his entire income and he will not get maximum
level of satisfaction. On the other hand all the combination of X and Y
represented by the IC2 and IC3 are ruled out because his income is not
sufficient to reach any point on the IC2 and IC3.
The consumer equilibrium should be some where n the Budget line
neither below nor above. ‘E’ is the equilibrium point. The consumer will
not be equilibrium at any point on the Budget line above the point E
because MRSxy is greater. Similarly, he will not be equilibrium at any
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point below Equilibrium point E on the Budget line Because MRSxy is
lesser.
= Q
P
= Q X P
P Q
Where: Ep = Price elasticity of demand.
Q = Original demand.
P = Change in price.
Income Elasticity of Demand.
Income Elasticity of Demand refers to the Degree of
responsiveness of demand for a commodity due to a change in
consumer’s income. The formula for measuring income elasticity of
demand is as follows.
Ey = Percentage change in the quantity demanded
Percentage change in income.
Ey = Q X Y
Y Q
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3. Price determination of joint products: In case of joint products like
cotton and cotton seeds, wool and mutton, etc. it is not possible to
calculate the cost of production separately as they are supplied
together. Therefore, the price of each product depends on the
elasticity of demand.
4. Determination of wages: Industrial workers get higher wages, if
the product produced by them has inelastic demand. Because the
producer is able to pay higher wages by fixing higher price for the
product which ha inelastic demand. If the demand is elastic, trade
unions cannot get their wages raised.
5. Pricing under monopoly:-Under discriminating monopoly the
monopolist charges different prices in different markets on the
basis of elasticity of demand.
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