Economics.pdf

1CPT Sri Sankara Coaching Centre

Important Abbreviations

AMPC : Automatic Mail Processing Centres

APEC : Asia Pacific Economic Co-operation

ASEAN : Association for South East Asian Nations (made on 8-8-1968)

ASEM : Asia Europe meetings

BALCO : Bharat Aluminium Company Limited

BOP : Balance of Payment

BPO : Business Process Outsourcing

BSNL : Bharat Sanchar Nigam Limited

CDS : Current Daily Status

CENVAT : Central Value Added Tax

CMC : CMC Limited

CRR : Cash Reserve Ratio

CSO : Central Statistical Organisation

CWS : Current Weekly Status

DFEC : Duty Free Export Credit

EAS : Employment Assurance Scheme

EGS + AIE : Education Guarantee Scheme and Alternative and Innovative Education

EMR : Exclusive Marketing Rights

EOU : Export Oriented Units

EPCG : Export Promotion Capital Goods

EPZ : Export Processing Zones

EXIM : Export Import Bank of India

FDI : Foreign Direct Investment

FEMA 2000 : Foreign Exchange Management Act

FERA 1973 : Foreign Exchange Regulation Act, 1973

FIEO : Federation of Indian Export organisations

FRA : Forward Rate Agreement

FRBM Act : Fiscal Responsibility and Budget Management Act, 2003

GATT : General Agreement on Trade and Tariff (made on 1-1-1948)

GDF : Global Development Finance

GDR : Global Depositary Receipt

Sri Sankara Coaching Centre CPT

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GRT : Gross Registered Tonnage

HCI : Hotel Corporation of India Limited.

HDI : Human Development Index

HTL : HTL Ltd.

HYVP : High Yielding Varieties Programmes

HZL : Hindustan Zinc Limited

IAY : Indira Awas Yojana

IBP : IBP Company

ICOR : Incremental Capital Output Ratios

ICSID : The International Centre for Settlement of Investment Disputes

IDA : The International Development Association

IFC : The International Finance Corporation

IIM : Indian Institute of Management

1IT : Indian Institute of Technology

IMF : International Monetary Fund

IMR : Infant Mortality Rate

IPCC : Indian Petrochemical Corporation

IRDP : Integrated Rural Development Programme

ISM : Indian System of Medicine

ITDC : India Tourism Development Corporation

JCL : Jessop and Company Limited

JGSY : Jawahar Gram Sammridhi Yojana

KGBV : Kasturba Gandhi Balika Vidyalaya

LFPR : Labour-force participation rate

LJMC : Lagan Jute Machinery Company Limited

MFIL : Modern Food Industries Limited

MIGA : The Multilateral Investment Guarantee Agency

MMR : Maternal Mortality Rate

MODVAT : Modified Value Added Tax

MRTP Act : Monopolies & Restrictive Trade Practices Act

MTA : Multilateral Trade Agreements

MTA : Mid-Term Appraisal

MTNL : Mahanagar Telephone Nigam Limited

3CPT Sri Sankara Coaching CentreMUL : Maruti Udyog Limited

MWS : Million Wells Scheme

NABARD : National Bank for Agriculture and Rural Development

NAFTA : North American Free Trade Agreement (made on 12-8-1992)

NFFWP : National Food for Work Programme

NHDP : National Highways Development Projects

NHPC : National Hydroelectric Power Corporation

NIXI : National Internet Exchange of India

NLM : National Literacy Mission (started in 1998)

NPA : Non-Performing Assets

NPCIL : Nuclear Power Corporation of India Limited

NPE : National Policy on Education

NPEGEL : National Programme for Education of Girls at Elementary Level

NPP : National Population Policy

NRY : Nehru Rozgar Yojana

NSSO : National Sample Survey Organisation

NTPC : National Thermal Power Corporation

OPEC : Organisation of Petroleum Exporting Countries

PCO : Public Call Offices

PDS : Public Distribution System

PLR : Prime Lending Rate

PMGSY : Pradhan Mantri Gram Sadak Yojana

PMIUPEP : Prime Minister's Integrated Urban Poverty Eradication Programme

POL : Petroleum, Oil and Lubricants

PPL : Paradeep Phosphates Limited

PPP : Public Private Partnership

PSK : Prarambhik Shiksha Kosh

PSU : Public Sector Undertaking

QR : Quantitative Restrictions

RRB : Regional Rural Banks

SEB : State Electricity Boards

SEZ : Special Economic Zones

SGRY : Sampoorna Grameen Rojgar Yojana


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SGSY : Swarana Jayanti Gram Swarozgar Yojana

SJSRY : The Swarna Jayanti Shahari Rozgar Yojana

SLR : Statutory Liquidity Ratio

SME : Small & Medium Enterprises

SSA : Sarva Shiksha Abhiyan

T&D : Transmission and Distribution

TLC : Total Literacy Campaign

TRAI : Telecom Regulatory Authority of India

TRC : Tax Reforms Committee

TRIP : Trade Related Intellectual Property Rights

TRP : Tax Return Preparers

UBSP : Urban Basic Services Programmes

UNDP : United Nations Development Programme

UPS : Usual Status

VAMBAY : Valmiki Ambedkar Awas Yojana

VAT : Value Added Tax

VPT : Village Public Telephone

VSAT : Very Small Aperture Terminals

VSNL : Videsh Sanchar Nigam Limited

WFPR : Work Force Participation Rate

WTO : World Trade Organisation

Soviet Union, now called Commonwealth of Independent States.


Q: Define Economics. Discuss the scope of Economics.

1. SCIENCE WEALTH (Classical Approach)"Economics is an inquiry into the nature and causes of the wealth of the nations"

Adam Smith"Economics is the science which deals with wealth"

J. B. Say

CHAPTER 1

NATURE AND SCOPE OF ECONOMICS

DIVISION I

MICRO ECONOMICS

MEANING & NATURE OF ECONOMICS

Features:1. Science (not Art)2. Object of study of Economics: Wealth Creation,

Money Making, etc.

Criticism:1. Money Making Science: As the science of wealth,

economics taught the selfishness and love for money.Therefore, it is not a 'Gospel of Mammon'.

2. Restricted the Scope: Economics is not only thescience of wealth, but also the study of human behaviour.Therefore, it is the science 'the science of Bread& Butter.'

Types of Definition of Eco.

1. Science of Wealth.2. Science of Material Well-

Being3. Science of Choice Making4. Science of Dynamic Growth

and Development

2. SCIENCE OF WELL-BEING"Economics is a study of mankind in the ordinary business of life. It examines that part of individualand social action, which is most closely connected with the attainment and with the use ofthe material requisites of well-being. Thus it is on the one side a study of wealth and on theother and more important side, a part of the study of the man."

Prof. Marshall Features;

Economics is the 'study of wealth' + 'study of mankind'. But, he primarily emphasized on studyof mankind.Thus, he agreed with the classical economists that economics is concerned with wealth, aswealth is an essential element of well-being. But, according to Marshall, wealth is sought forthe welfare of human beings.

Criticism:1. Non-Material things not Considered: For example, the services of teachers, lawyers,

doctors, etc. which are highly essential to promote human welfare.2. Non-Welfare Economic Activities: There are several economic activities, which hardly

promote welfare. For example, the production of guns, drugs, etc. does not promote towelfare. But it is certainly an economic activity.


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"The Range of our inquiry becomes restricted to that part of social welfare that can bebrought directly or indirectly into relation with the measuring rod of money."

A.C. Pigou3. SCIENCE OF CHOICE-MAKING

"Economics is the science, which studies human behaviour as a relationship between ends andscarce means which have alternative uses."

Prof. Robbins Features:

Limited Means: The means needed to satisfy unlimited wants are limited. The scarcity of meansis responsible for most of the economic problem.For example, it is owing to the scarcity of means that an economy is confronted with a centralproblem... what to produce?

Criticism:(a) Scarcity of Means: Robbins definition highlights the 'scarcity of means' as the root of

economic problem. The fact is disproved by the great depression of 1930, when abundanceof goods was responsible for most of the economic problems.

(b) Allocative Role: The critics argue that economics not merely plays an allocative role,but also suggests the ways and means of creation of new resources.

To conclude, despite certain flaws, Robbins definition is certainly more comprehensive in spellingout the meaning and scope of economics.

4. A SCIENCE OF DYNAMIC GROWTH & DEVELOPMENT"Economics is the study of how men and society choose, with or without the use of money,to employ scarce productive resources which could have alternative uses, to produce variouscommodities over time and distribute them for consumption now and in the future amongst variouspeople and groups of society".

Paul A. SamuelsonQ: Describe the Nature of Economics. Is it a Science or Art?

Economics as a Science

What is Science? Why Economics is a Science?

It refers to the systematic body of knowledge,which -

(i) establishes cause and effect relationshipbetween two or more variables,

(ii) is based on such tested and wellexperimented principles and theories,that are universally applicable,

(iii) can be learnt and taught.Examples: Physics, Chemistry,Mathematics, etc.

Economics is also a science, because -(i) Like science, its knowledge is sytematized.(ii) Like science, it establishes the cause and

effect relationship between two economicphenomena.

(iii) Like science, its study depends onestimations.

(iv) Its laws have the ability to predict eventswith reasonable degree of exactness.

It is to be noted that economics cannot predictas accurately as the physical science i.e. physicsand chemistry can. Because, economics dealswith human behaviour, which is highly uncertain.Further, controlled experiment is not possibleon human behaviour.

7CPT Sri Sankara Coaching Centre Economics as an Art

What is Art?Art refers to the systematic body ofknowledge, which enables us to know howto do a thing. Thus Art involves the practicalapplication of personal skills and knowledgeto achieve the desired result. The mainelements of art are -

(i) Personal Skill(ii) Practical Know-how,(iii) Result-oriented(iv) Creativity

Why Economics is an Art?Economics is also an art, because -(i) Personal Skill: Like other art, economics

develops the skills of solving economic problemsin people. For example, the preparation of thebudget and the formulation of budgetary policiesbelong to the domain of economics as an art

(ii) Practical Know-how: Like other artists,economists also apply their knowledge and skillto solve basic economic problems. Moreover, aneconomist has to make various graphs anddiagrams, such as demand curve, supply curve,etc, which are nothing, but a part of art.

(iii) No doubt, economics is Goal-oriented and hasa creative approach.

Positive Science v. Normative SciencePositive Science

(Neutrality between ends)1. Meaning:

It refers to the science that presents thewhole situation, but does not pass valuejudgment.It states- 'what is?' not 'what is to be?'

2. Based upon: Cause and Effect Analysis3. Suggestions:It is not the job of economists to suggest_what to do? A person can spend his moneyeither on liquor or on drugs or on milk or oncinema. It is entirely his business, how to usehis money. An economist should not suggesthim.4. Advocated by: Prof. Robbins, Adam

Smith, etc.

Normative Science(Welfare Economics)

Positive Science + Suggestions.There is a very strong opinion in favour of itsfruit-giving aspect. Economics should be bothlight-giving and fruit-giving.

Ethics

Are given

Marshall, Pigou, Hicks, etc.

Head of Diff. Micro Macro

Micro stands for millionth part of thewhole. Therefore, micro economicsis that part of economics that dealswith the behaviour of individuals, i.e.consumers, producers, suppliers ofresources.

On the other hand, macro economicsanalyses the overall conditions of theeconomy such as total production,total consumption, total saving, totalinvestment, etc. In short, it is concernedwith economic behaviour at the macrolevel.

1. Meaning :

TYPES OF ECONOMICS & METHODS OF STUDY

MICRO ECONOMICS V/S. MACRO ECONOMICSQ: Differentiate between Micro and Macro Economics.


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Conclusion: In fact, it is very difficult to distinguish between micro economics and macro economics.What is macro from the national angle is micro from the world angle. Similarly, what is micro fromnational angle becomes macro from a regional angle. Unless, we define what is the whole, we cannotsay about a phenomenon whether it is micro or macro.

Q: What are the main methods of study? Differentiate between them.

METHODS OF STUDY

Head of Diff. Micro Macro

3. Type of :Analysis

2. Scope of :Study

4. Price :

It includes-(a) Theory of consumer behaviour(b) Theory of Production(c) Theory of Product pricing and

firm's equilibrium in the productmarket

(d) Theory of factor pricing andfirm's equilibrium in the factormarket

It includes-(a) Income and employment theory(b) Trade cycle(c) The financial system of an

economy(d) The financial system of an

economy(e) The fiscal system of an economy(f) The foreign trade and payment

system of an economy

A partial equilibrium analysis, as itdoes not take into consideration thedisturbance in equilibrium price andquantity in one market, which couldlead to a disturbance in the equilibriumprices and quantities in all othermarkets.

A general equilibrium analysis, as ittakes the above situation intoconsideration.

The price determined under microeconomics is called 'relative prices'.

The price determined under macroeconomics is called 'absolute prices'.

Head of Diff. Deductive Method(Abstract, Analytical, Priori Method)

Inductive Method

1. Meaning : Under this method, conclusions aremade on the basic of fundamentalassumptions/accepted axioms/truthsestablished and handed down fromgeneration to generation.Under this method, no market surveyis made and no data is collected.Only on the basis of past experienceare the conclusions made.

Just opposite.Under this method, conclusions aredrawn after analysing every aspectrelevant to the inquiry.

2. Example : Generally, when the price of acommodity rises it is said that thedemand for that commodity will fall.But the actual situation may differ,if the other factors of demand suchas income of consumer, prices ofthe related goods, tastes andpreferences of the consumer, etc.do not remain constant.

If the price of a commodity rises, thenunder this method, at first, the marketsurvey will be made to find out thesituation of the other factors of demandand to see whether the other factorsof demand have changed or not withthe change in price. After analysing allthe facts, the final conclusion will bemade i.e. whether demand will rise orfall.


Conclusion: It is to be noted that the two methods are not opposed to each other and areused side by side in any scientific enquiry. In any scientific enquiry, at first some hypothesis is madeon the basis of deductive method and then this hypothesis is verified through inductive method.

Q: What are the different types of economic systems? Explain.

1. CAPITALIST/FREE ECONOMY

A capitalist economy refers to the economic system in which all the factors of production suchas land, labour, capital, materials, etc. are privately owned. In the capitalist economy, prices of commoditiesare determined by a free play of demand and supply. The government has no control over it. The followingare the main characteristics of this system:1. Private Ownership of Factors of Production.2. Solution of the central problem of production: In the capitalist economy, the problems related

to production are not solved by a 'Central Planning Authority', but by the price mechanism. Thefollowing are the central problems related to production-

(a) What to produce? (b) When to produce?(c) How much to produce? (d) For whom to produce?(e) How to produce? (f) Where to produce?

DIFFERENT ECONOMIC SYSTEMS

Head of Diff. Deductive Method(Abstract, Analytical, Priori Method)

Inductive Method

3. Steps : This method involves the followingsteps :

1. Identify the problem2. Define in technical terms

after making appropriateassumptions

3. Deducing hypothesis4. Testing of hypothesis deduced.

This method involves the following steps:1. Identify the problem2. Collection, classification and

analysis of data through statisticalanalysis

3. Finding reasons for the relation-ship established throughstatistical analysis and to set rulesfor the verification of the principles.

3. Role of Money and Market : In the capital economy, money and market have a very importantrole to play. The price and output of a commodity is determined by the market forces by thefree interplay of demand and supply.

4. Freedom on Consumption (i.e. consumer sovereignty) : In the capitalist economy, the consumeris called king; because every consumer is free to consume whatever he likes. There is no restrictionon consumption by the government. His consumption is automatically restricted by his limitedincome. There are some restrictions by the government on consumption of harmful goods, suchas drugs, liquor etc. is necessary.

Central Economic ProblemTypes Causes

(a) What to produce?(b) How to produce?(c) For whom to produce?(d) What provisions are to be made

for economic growth? (i.e. savings)

Unlimited Wants Limited resources Alternative uses of resources


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5. Freedom of Production : In a capitalist economy, the entrepreneurs enjoy complete freedomto choose any goods for production. Therefore, the entrepreneurs give priority to the goods demandedby the rich consumer and sometimes, they even neglect the needs of the common society.Therefore, some restrictions on this attitude are necessary by the government for the welfareof the community.

6. Profit Motive : In a capitalist economy, the entrepreneurs are guided by profit motive. No doubt,profit motive promotes efficiency, hard work, research and development. But it is beneficial aslong as there is competition in the market. In the absence of competition, i.e. in case of monopoly,this profit motive will induce the entrepreneur to exploit the common person.

SOCIALIST ECONOMY/CONTROLLED ECONOMY

In the controlled economy, the factors of production are not privately owned, but they are collectivelyowned by the whole community represented by the state. The main characteristics of this economyare as follows-

1. Collective Ownership of Means of Production by the whole community representedby state.

2. Solution of the central problems of production by 'Central Planning Authority'.3. Restriction on Consumption: In this economy, although freedom from hunger is guaranteed,

choice of the consumer is restricted by the planned production.4. Restriction on Production: The goods to be produced are determined by the central planning

authority on the basis of certain social goals before the nation.5. Social Welfare: Some examples of social goals are as follows:-

(i) An equitable distribution of national income,(ii) Increasing the pace of economic development,(iii) Full employment,(iv) Reduction of poverty,(v) Balanced regional growth, etc.

MIXED ECONOMY1. Co-existence of Private and Public Sector: Co-existence of private and public sector

is the biggest characteristic of this economy. In fact, there are three sectors in this economy:(a) Private Sector: Capitalist economy- guided by profit motive.(b) Public Sector: Controlled economy - guided by the welfare of the people.(c) Combined Sector

2. Planned Economic System: The mixed economic system is a planned economic system.The central planning authority prepares planning and lays down certain goals for the developmentof the whole economy. The public sector runs to achieve the goals. Moreover, the governmentcreates an atmosphere where the private sector also has to achieve the pre-determinedgoals.

3. Dual Pricing System: In the private sector, the market forces fix the prices. In the public sector, the central planning authority determines the prices. in the combined sector, the government has the authority to fix the prices of essential

goods, such as petrol, kerosene, coal, electricity, etc. The price so fixed is calledadministered price.

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CPT Sri Sankara Coaching Centre

Q: What do you mean by Production Possibility Curve? Meaning :

This curve shows the different possibilities of twocommodities that the economy can produce, when the resourcesare fully employed.

Assumptions in Drawing PPC;1. The amount of productive resources of the economy

are fixed.2. The resources are fully utilised (i.e. they are not

unemployed or underemployed)3. Technology does not change.

Various Production Possibilities

ProductionPossibilities Commodity X Commodity Y Opportunity Cost

$

($ Opportunity cost is assumed to be increasing. It may be constant or decreasing)

PRODUCTION POSSIBILITY CURVE (PPC)

yx

ABCDEF

01

2

34

5

201917

14

100

--

1

2

34

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Presentation of Central Problems by PPC

All points on PPC show thatgoods and services are producedat least cost and no resourcesare wasted, i.e. economy isproductively efficient.

Movement from B to D also knownas greater productive efficiency)may be due to -

Decrease in unemployment

Such change may be due to-

Technological progress

Development of new andbetter ways of doingthings.

Greater capital formation

Population growth

Allocation of Resources Resource Utilisation Economic Growth


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Questions

1. According to Robbins, neutrality betweenends is-(A) Not feasible(B) Not desirable(C) Both (A) and (B)(D) Either (A) or (B)

2. Robbins defined Economics as -(A) Science of wealth(B) Science of material well-being(C) Science of choice making(D) Science of dynamic growth and

development

3. Economics is different from other socialsciences because it is primarily concernedwith the study of ; it is similar to other socialsciences as they are all concerned with thestudy of -(A) limited resources, market behaviour(B) scarcity, human behaviour(C) social behaviour, limited resources(D) Biological behaviour, scarcity

4. Our economy is characterised by -(A) Unlimited wants and needs(B) Unlimited material resources(C) No energy resources(D) Abundant productive labour

5. The Central economic problem is -(A) What to produce?(B) How to produce?(C) For whom to produce?(D) All of above

6. Under a mixed economy -(A) A dual system of pricing exists(B) State regulates prices of essential goods(C) Both (A) and (B)(D) Neither (A) nor (B)

7. If the marginal (additional) opportunity costis a constant, then the PPC would be -(A) Convex(B) Straight line(C) Backward bending(D) Concave

8. Capital-intensive techniques would get chosenin a -(A) Labour-surplus economy(B) Capital-surplus economy(C) Developed economy(D) Developing economy

9. Labour-intensive techniques would get chosenin a -(A) Labour -surplus economy(B) Capital-surplus economy(C) Developed economy(D) Developing economy

10. Which of the following is related to microeconomics?(A) Inflation in the economy(B) Problem of unemployment(C) National income(D) Income from the railways

11. Competitive market structure and inequalityof wealth are the main features of -(A) Mixed economy(B) Socialistic economy(C) Capitalistic economy(D) None of the above

12. Indicate the suitable match -(A) Economics is the science of wealth

- A dam Smith(B) Economics is the science of material

well- being. - Samuelson(C) Economics is the science of choice-

making. - Marshall(D) Economics is the science of growth

and development. - Rabbins

13. State, whether economics is -(A) A positive science only.(B) Neither a positive nor normative science.(C) A science, but not art.(D) A science or an art depending on who

uses economics and for what propose.

14. Who expressed the view that "Economicsis neutral between end" ?(A) Robbins(B) Marshall

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CPT Sri Sankara Coaching Centre(C) Pigou(D) Adam Smith

15. Which of the following is the best generaldefinition of the study of Economics?(A) Inflation and unemployment in a growing

economy(B) Business decision making under foreign

competition(C) Individual and social choice in the face

of scarcity(D) The best way to invest in the stock

market

16. Which of the following embody a more widelyaccepted definition of economics ?(A) "An Inquiry into the Nature and Causes

of the Wealth of Nations."(B) "The part of social welfare which can

be brought directly or indirectly intorelationship with the measuring rod ofmoney."

(C) "A study of mankind in the ordinarybusiness of life material requisites ofwell-being."

(D) "A science, which studies humanbehaviour as a relationship betweenends , which have alternative uses."

17. State which of the following refer to the macroeconomic approaches from a national angle-(A) Per capita income of the country(B) Capital-output ratio in steel industry(C) Income from the railways(D) Both (A) and (B)

18. State which of the following refer to the microeconomic approaches from a national angle-(A) Per capita income of the country(B) Capital-output ratio in steel industry(C) Income from the railways(D) Both (A) and (B)

19. State which of the following refer to microeconomic approaches from a national angle-(A) Unemployment among the educated

people(B) Inflation in the economy(C) Lockout in Indian Airlines(D) Distribution of coal in the country

20. Find the correct match -(A) An Enquiry into the Nature and Causes

of the Wealth of Nations. - A.C. Pigou(B) Science, which deals with wealth. -

Alfred Marshall(C) Economics is the science, which studies

human behavior as a relationshipbetween ends and scarce means, whichhave alternative uses. - Robbins

(D) The range of our enquiry becomesrestricted to that part of social welfarethat can be brought directly or indirectlyinto relation with the measuring rod ofmoney. - Adam Smith

21. The law of scarcity -(A) does not apply to rich/developed

countries(B) applies only to the less developed

countries(C) implies that consumer's wants will be

satisfied in a socialistic system(D) implies that consumer' wants will never

be completely satisfied

22. What implication(s) does resource scarcityhave for the satisfaction of wants?(A) Not all wants can be satisfied.(B) We will never be faced with the need

to make choices.(C) We must develop ways to decrease

our individual wants.(D) The discovery of new natural resources

is necessary to increase our ability tosatisfy wants.

23. Rational decision-making requires that -(A) One's choice be arrived at logically and

without error(B) One's choice be consistent with one's

goals(C) One's choice never varies(D) One makes choices that do not involve

trade-offs

24. In a mixed economy -(A) all economic decisions are taken by

the central authority.(B) all economic decisions are taken by

private entrepreneurs.(C) economic decisions are partly taken

by the state and partly by the privateentrepreneurs.

(D) none of the above


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25. The central problem in economics is thatof -(A) comparing the success of command

versus market economies(B) guaranteeing that production occurs

in the most efficient manner(C) guaranteeing a minimum level of income

for every citizen(D) allocating scarce resources in such

a manner that a society's unlimited needsor wants are satisfied as well as possible

26. Which of the following illustrates a decreasein unemployment using the PPC?(A) A movement down along the PPC(B) A rightward shift of the PPC(C) A movement from a point on the PPC

to a point inside the PPC(D) A movement from a point inside the

PPC to a point on the PPC

27. Which of the following can be regarded asthe laws of economics?(A) There is a direct proportionate change

in the price level with a change in thesupply of money.

(B) Prices are determined by total demandand total supply in the market.

(C) After a point, the marginal increase inoutput shows a falling tendency withevery increase in one or more of thefactors of production.

(D) All of above28. Which of the following can be regarded as

the laws of economics?(A) Marginal propensity to consume shows

a fall with an increase in income.(B) Price of other products show a

sympathetic rise with a rise in the pricesof food grains.

(C) Taxes have no relation with the benefitwhich a person derives from thegovernment.

(D) Economy cannot prosper without hardwork and sincerity of the people.

29. Under a free economy, prices are -(A) regulated(B) determined through free interplay of

demand & supply(C) partly regulated(D) none of these

30. Under a controlled economy -(A) state plays a major role(B) central authority decides how much will

be produced(C) both (A) & (B)(D) neither (A) nor (B)

31. Under a capitalist economy-(A) Government plays a major role(B) Government plays no role(C) Government plays a minor role(D) None of these

32. PPC denotes -(A) level of output(B) maximum output(C) maximum output possible with several

combination of inputs(D) none of these

33. A capitalist economy uses_____as the principalmeans of allocating resources -

(A) Demand(B) Supply(C) Efficiency(D) Price

34. In free market economy, when consumersincrease their purchase of a good and thelevel of _____exceeds_____, then price tendsto rise -

(A) demand, supply(B) supply, demand(C) prices, demand(D) profits, supply.

35. Right to private property is found in -(A) Socialism(B) Capitalism(C) Mixed economy(D) None of these

36. Which of the following does not suggest amacro approach for India?(A) Determining the GNP of India(B) Finding the causes of failure of X and

Co.(C) Identifying the causes of inflation in

India(D) Analysing the causes of failure of industry

in providing large-scale employment

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CPT Sri Sankara Coaching Centre37. Economic goods are considered scarce

resources because they -(A) Cannot be increased in quantity(B) Do not exist in adequate quantity to

satisfy social requirements(C) Are of primary importance in satisfying

social requirements(D) Are limited to man-made goods

38. From the national point of view which of thefollowing indicates micro approach?(A) Per capita income of India(B) Underemployment in agriculture sector(C) Lock-out in TELCO(D) Total savings in India

39. When specifying economic models,economists often make assumptions aboutthe real world. The purpose of assumptionsin economic theory is to -(A) make the model more realistic(B) simplify the model and provide a primary

focus for theory(C) ensure that the model only covers specific

conditions(D) guarantee the accuracy of theory

40. Which of the following is incorrect?(A) The central problem in economics is

that of allocating scarce resources insuch a manner that society's unlimitedneeds are satisfied as well as possible.

(B) In a mixed economy, the governmentand the private sector interact in solvingthe basic economic questions.

(C) Micro economics best describes thestudy of the behaviour of individualagents.

(D) An important theme in economics isthat market systems are better thancommand (socialistic) economies.

41. An example of 'positive' economic analysiswould be -(A) An analysis of the relationship between

the price of food and the quantitypurchased

(B) Determining how much income eachperson should be guaranteed

(C) Determining the fair price for food(D) Deciding how to distribute the output

of the economy

42. Identify the correct statement -(A) In the deductive method logic proceeds

from the particular to the general.(B) Micro and Macro -Economics are

interdependent.(C) In a capitalist economy, the economic

problems are solved by the PlanningCommission.

(D) Higher the prices, lower is the quantitydemanded of a product is a normativestatement.

43. A study of how increases in the corporateincome tax rate will affect the nationalunemployment rate is an example of -(A) Macro economics(B) Descriptive economics(C) Micro economics(D) Normative economics

44. Which of the following statements is correct?(A) In a two-goods economy, the production

possibilities frontier reflects the maximumamount of one good that can be producedwhen a given amount of the other goodis produced,

(B) Micro economics is the study of thebehaviour of the economy as a whole.

(C) Positive economics focuses on welfareof the people of a society.

(D) None of the above.45. Which of the following is likely to cause

an inward shift in a country's PPC?(A) Earthquake destroying resources of the

country(B) Scientists destroying new machines(C) Workers getting jobs in the new metro

project(D) The country finds new reserves of crude

oil

46. In an economy, people have the freedomto buy or not to buy the goods offered inthe market place and this freedom to choosewhat they buy dictates what producers willultimately produce. The key term definingthis condition is -(A) Economic power of choice(B) Consumer sovereignty(C) Positive economy(D) Producer sovereignty


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47. Consider the following table:Production A B C D E F G Hpossibilities

Guns 0 10 20 30 40 50 60 70 Bread 105 100 90 75 55 30 0 45

The opportunity cost of increasing gun'sproduction from 20 to 30 units is equal to-(A) 10 units of bread(B) 15 units of bread(C) 25 units of bread(D) 24 units of bread

48. In Q. 47 above, one moves successivelyfrom point A to points B, C, D, E and F,the opportunity cost of guns -(A) Increases as more of guns are produced(B) Decreases as more of guns are

produced(C) Remains constant as more of guns are

produced(D) Nothing can be said

49. In Q. 47 above, Point D is efficient while,point H (30 guns and 45 loaves of bread)is inefficient. Why?(A) Point D is outside the PPC while point

H is on the PPC.(B) Point D is inside the PPC while point

H is on the PPC.(C) Point D is on the PPC while point H

is inside the PPC.(D) Nothing can be said.

50. Consider the following table:

Production A B C D E FpossibilitiesGoods - A 0 1 2 3 4 5Goods - B 30 28 24 18 10 0

The opportunity cost of increasing Good-A's production from 2 to 4 units is equalto -(A) 10 units of B(B) 14 units of B(C) 24 units of B(D) 2 units of B

51. In Q. 50 above, the opportunity cost of increasingone unit of Good B from 10 units to 18 unitsis -

(A) 3 units of A(B) 1 unit of A(C) 0.125 units of A(E) 0.5 units of A

52. In Q. 50 above, as one moves successivelyfrom point A to point B, C, D, E and F, theopportunity cost of Good A -(A) increases as more of goods A is

produced(B) decreases as more of goods A is

produced(C) remains constant(D) is always equal to one unit of B

53. What is the "Fundamental Premise Basisof Economics"?(A) Natural recourses will always be scarce.(B) Individuals are capable of establishing

goals and acting in a manner consistentwith achievement of those goals.

(C) Individuals choose the alternative inwhich they believe the net gains wouldbe the greatest.

(D) No matter what the circumstances,individual choice always involves a tradeoff.

54. Which of the following is a normativestatement?(A) Planned economies allocate resources

via government departments.(B) Most transitional economies have

experienced problems of falling outputand rising prices over the past decade.

(C) There is a greater degree of consumersovereignty in market economies thanplanned economies.

(D) Reducing inequality should be a majorpriority for mixed economies.

55. Which of the following statements wouldyou consider to be a normative one?(A) Faster economic growth should result

if an economy has a higher level ofinvestment.

(B) Changing the level of interest rates isa better way of managing the economythan using taxation and governmentexpenditure.

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CPT Sri Sankara Coaching Centre(C) Higher level of unemployment will lead

to higher levels of inflation.(D) The average level of growth in the

economy was faster in the 1990s thanthe 1980s.

56. Which of the following statements is correct?(A) Unlike normative economics, positive

economics is based on objective analysisof economic issues.

(B) The opportunity cost of a good is thequantity of other goods sacrificed toget another unit of that good.

(C) Micro economics emphasizesinteractions in the economy as a whole.

(D) None of the above.57. Economics is the study of-

(A) how society manages its unlimitedresources

(B) how to reduce our wants until we aresatisfied

(C) how society manages its scarceresources

(D) how to fully satisfy our unlimited wants58. Which of the following statements is correct?

(A) Robbins has made economics as a formof welfare economics

(B) The law of demand is always true(C) All capital is wealth but all wealth is

not capital(D) None of the above

59. The meaning of the word 'Economic' is mostclosely connected with the word -(A) Extravagant(B) Scarce(C) Unlimited(D) Restricted

60. Which of the following statements is correct?(A) Employment and economic growth are

studied in micro economics.(B) Micro economics deals with balance

of trade(C) Economic condition of a section of the

people is studied in micro economics(D) External value of money is dealt with

in micro economics

61. Which of the following falls under MicroEconomics?(A) National Income(B) General Price level

(C) Factor Pricing(D) National Saving and Investment

62. Which of the following steps relates onlyto deductive method in economics?(A) Testing of hypothesis(B) Collection of data(C) Classification of data(D) Perception of the problem

63. Which point on the PPC shows a "productivelyefficient" level of output?(A) A(B) B(C) C(D) All of above

64. In Q. 63 above, which of the following clearlyrepresents a movement towards greaterproductive efficiency?(A) A movement from point A to point B(B) A movement from point C to point D(C) A movement from point F to point C(D) A movement from

point E to point B

65. Consider the followingdiagram:

The opportunity cost ofincreasing wineproduction from D to E is -(A) 0 litre of grape juice.(B) 5 litres of grape juice.(C) 1 litre of wine.(D) 0.2 litre of wine.

66. In Q. 65 above, assuming that the PPC doesnot shift, which of the following is true?(A) Point A is desirable but is inefficient.(B) Point D represents a more efficient

allocation of resources than points Aand F.


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(C) Point H is desirable but is not attainable.(D) If wine production equals 7 litres, the

maximum amount of grape juice thatcan be produced simultaneously is 28litres.

67. In Q. 65 above, the PPC in the diagramreflects -(A) Increasing opportunity cost of more wine

production and constant opportunitycost of more grape juice production.

(B) Increasing opportunity cost of more wineproduction and decreasing opportunitycost of more grape juice production.

(C) Decreasing opportunity cost of morewine production and decreasing costof more grape juice production.

(D) Increasing opportunity cost of more wineproduction and increasing cost of moregrape juice production.

68. Consider the following figure:

Which point in the above figure shows thatthe two commodities cannot be producedwith given technology?(A) P(B) S(C) Q(D) None of the above

69. In Q. 68 above, which point in the abovefigure shows that the resources are not beingutilised fully?(A) P(B) Q(C) S(D) R

70. In Q. 68 above, which point or points in theabove figure show that outputs are beingproduced at least cost combination ofresources?(A) P(B) Both P and Q

(C) Q(D) Both R and S

71. Consider the following figure:

If the economy is operating at point C, theopportunity cost of producing an additional15 units of bacon is -(A) 40 units of eggs(B) 10 units of eggs(C) 20 units of eggs(D) 30 units of eggs

72. In Q. 71 above, if the economy was operatingat E -(A) the opportunity cost of 20 additional

units of eggs is 10 units of bacon(B) the opportunity cost of 20 additional

units of eggs is 20 units of bacon(C) the opportunity cost of 20 additional

units of eggs is 30 units of bacon(D) 20 additional units of eggs can be

produced with no impact on baconproduction

73. In Q. 71 above, if the economy moves frompoint A to point D, then -(A) the opportunity cost of eggs in terms

of bacon falls(B) the opportunity cost of eggs in terms

of bacon rises(C) the opportunity cost of eggs in terms

of bacon is constant(D) the economy becomes less efficient

74. In Q. 71 above, Point F represents -(A) None of these answers(B) a combination of production that can

be reached, if we reduce the productionof eggs by 20 units.

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CPT Sri Sankara Coaching Centre(C) a combination of production that can

be reached, if there is a sufficient advancein technology.

(D) a combination of production that isinefficient, because there areunemployed resources.

75. In Q. 71 above, which of the followingrepresents a movement towards betterutilisation of existing resources?(A) A movement from point A to point B(B) A movement from point E to point B(C) A movement from point C to point B(D) A movement from point F to point B

76. Which of the following represents the conceptof trade-offs?

Fig : PPC(A) A movement from point A to point B(B) A movement from point F to point C(C) Point E(D) Point F

77. In Q. 76 above, moving from point A to pointD, what happens to the opportunity costof producing each additional unit of consumergoods?(A) increases(B) decreases(C) remains constant(D) increases up to point B, then falls

thereafter

78. In Q. 76 above, which of the following wouldnot move the PPC for this economy closerto point E?(A) A decrease in the amount of unemployed

labour resources(B) A shift in preference towards greater

capital formation(C) An improvement in the overall level of

technology(D) An increase in the population growth

rate

79. In Q. 76 above, what is the opportunity costof moving from point A to point B?(A) 100 units of capital goods(B) 8 units of consumer goods(C) 90 units of capital goods(D) 10 units of capital goods

80. In Q. 76 above, unemployment or underemployment of one or more resources isillustrated by the production at point -(A) A(B) C(C) F(D) E

81. Which of the following combinations of goodscould not be produced with the resourcesthe economy currently has?

(A) a(B) b(C) c(D) d

82. Economics as a positive science shouldbe______between ends.(A) unique(B) socially responsible(C) neutral(D) inspiring

83. The branch of economic theory that dealswith the problem of allocation of resourcesis -(A) micro economics(B) macro economics(C) econometrics(D) none of the above

84. An economy achieves "productive efficiency"when -(A) Resources are employed in their most

highly valued uses.(B) The best resources are employed(C) The total number of goods produced

is greatest(D) Goods and services are produced at

least cost and no resources are wasted


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85. Which of the following would be considereda disadvantage of allocating resources usinga market system?(A) Income will tend to be unevenly

distributed.(B) Significant unemployment may occur.(C) It cannot prevent the wastage of scarce

economic resources.(D) Profit will tend to be low.

86. Which of the following is a reason for thecurvature or bowed out shape of the PPC?(A) Falling unemployment as we move along

the curve(B) The economy having to produce less

of one goods in order to produce moreof another goods

(C) Opportunity costs increase as moreof a good is produced.

(D) None of the above87. Which of the following is a reason for the

negative slops of the PPC?(A) The inverse relationship between the

use of technology and the use of naturalresources

(B) Scarcity, at any point of time we havelimited amounts of productive recourses

(C) Recourses specialisation(D) Increasing opportunity costs

88. If the PPC is linear, which of the followingis true?(A) As the production of goods increases,

the opportunity cost of the goods rises.(B) As the production of goods increases,

the opportunity cost of that good falls.(C) Opportunity costs are constant.(D) The economy is not at full employment

when operating on the PPC.

89. Periods of less than full employmentcorrespond to -(A) points outside the PPC(B) points inside the PPC(C) points on the PPC(D) either point inside or outside the PPC

90. Which of the following would not result ina rightward shift of the PPC?(A) An increase in investment in capital

stock(B) A reduction in the labour unemployment

rate

(C) The discovery of new oil deposits inIndia

(D) An increase in the number of peopletaking management training courses

91. During election campaigns, candidates oftenpromise both more "guns" and more "butter",if they are elected. Assuming unemploymentis not a problem, what possible assumptionare they making but not revealing to theiraudience?(A) There will be a sufficient increase in

the supply of natural recourses usedto produce "guns" and "butter".

(B) There will be an improvement in thetechnology of both "guns" and "butter"production.

(C) There will be an increase in the labourforce.

(D) All of the above92. A PPC is -

(A) convex to origin(B) concave to origin(C) Both (A) and (B)(D) Neither (A) nor (B)

93. What is one of the future consequences ofan increase in the current level of consumptionin India?(A) Slower economic growth in the future(B) Greater economic growth in the future(C) No change in our economic growth rate(D) Greater capital accumulation in the future

94. Which of the following is not a micro economicsubject-matter?(A) The price of mangoes(B) The cost of producing a fire truck for

the fire department of Delhi, India(C) The quantity of mangoes produced for

the mango market(D) The national economy's annual rates

of growth

95. Which of the following is not one of the fourcentral questions that the study of economicsis supposed to answer?(A) Who produces what?(B) When are goods produced?(C) Who consumes what?(D) How are goods produced?

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CPT Sri Sankara Coaching Centre96. Mr. A : My corn harvest this year is poor.

Mr. B : Don't worry. Price increase willcompensate for the fall in quantitysupplied

Mr. C : Climate affects crop yields. Someyears are bad, others are good.

Mr. D : The government ought toguarantee that our income willnot fall. In this conversation, thenormative statement is made by-

(A) Mr. A(B) Mr. B(C) Mr. C(D) Mr. D

97. In 1940, Hitler's air force bombed Rotterdam,a beautiful city in Holland. 25,000 homes,1200 factories, 69 schools and 13 hospitalswere destroyed. Nearly 75,000 people becamehomeless and 1000 people died. 35% ofthe port was gutted by the German army.The above destruction would mean -(A) A complete wipe off of PPC of Rotterdam(B) An outward shift of the PPC of Rotterdam(C) An inward shift of the PPC of Rotterdam(D) A downward movement on the same

PPC of Rotterdam

98. In Q. 97 above, immediately after the war,Rotterdam rebuilt its port with the help ofthe most up-to-date cranes, docks and cargohandling technology. By the end of thereconstruction, ships were loading andunloading faster and at lower cost thananywhere in the world. It became more efficientthan it was before the destruction. This means-(A) Rotterdam has come back to its original

PPC.(B) Rotterdam has shifted to a higher PPC.(C) Rotterdam has shifted to a lower PPC.(D) Nothing can be said.

99. Which of the following is an economic activity?(A) Medical facilities rendered by a

charitable dispensary(B) Teaching one own's child at home(C) A housewife doing household duties(D) Listening to music on the radio

100. The various combinations of goods that canbe produced in an economy, when it uses

its available resources and technologyefficiently are depicted by -(A) demand curve(B) production curve(C) supply curve(D) production possibilities curve

101. Which of the following statements isnormative?(A) Large government deficits cause an

economy to grow more slowly.(B) People work harder if the wage is higher.(C) The unemployment rate should be lower.(D) Printing too much money causes

inflation.

102. Which of the following involves a trade-off?(A) Taking a nap(B) All of these answers involve trade-offs(C) Watching a football game on Saturday

afternoon(D) Going to university

103. Trade-offs are required because wants areunlimited and resources are -(A) economical(B) unlimited(C) efficient(D) scarce

104. Which of the following can be regarded aslaw of economics?(A) Ceteris Paribus, if the price of a

commodity rises the quantity demandedof it will fall.

(B) Higher the income, greater is theexpenditure.

(C) Taxes have no relation to the benefitswhich a person derives from the state.

(D) None of the above105. Which of the following is correct?

(A) Normative economics is not concernedwith value judgment.

(B) A market is a process that reconcilesconsumer decision, production decisionsand labour decisions.

(C) A mixed economy has a certain levelof government intervention in theeconomy along with private sectorownership of the economy.

(D) Both (B) and (C).


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106. Which of the following is correct?(A) The production possibilities frontier

shows the maximum combination ofoutputs that the economy can produceusing all the recourse available.

(B) Increasing opportunity cost implies aproduction possibility frontier concaveto the origin.

(C) Free markets are the markets in whichthe governments do not intervene.

(D) All of the above are correct.

107. State which of the following represents macrofrom the national point of view -(A) Turnover ratio of Reliance Ltd.(B) Capital-output ratio of Indian Industries(C) Debt equity ratio of TELCO(D) All the above

1. C 2. C 3. B 4. A 5. D 6. C 7. B 8. B

9. A 10. D 11. C 12. A 13. D 14. A 15. C 16. D

17. D 18. C 19. C 20. C 21. D 22. A 23. B 24. C

25. D 26. D 27. D 28. A 29. B 30. C 31. C 32. C

33. D 34. A 35. B 36. B 37. B 38. C 39. B 40. D

41. A 42. B 43. A 44. A 45. A 46. B 47. B 48. A

49. C 50. B 51. C 52. A 53. C 54. D 55. B 56. B

57. C 58. C 59. B 60. C 61. C 62. A 63. D 64. C

65. B 66. C 67. D 68. D 69. D 70. B 71. C 72. D

73. B 74. C 75. B 76. A 77. A 78. A 79. D 80. C

81. D 82. C 83. A 84. D 85. A 86. C 87. B 88. C

89. B 90. B 91. D 92. B 93. A 94. D 95. B 96. D

97. C 98. B 99. A 100. D 101. C 102. B 103. D 104. A

105. D 106. D 107. B

Answers-sheet

.

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The word demand refers to the quantity of a commodity or service that the consumers are- willing to purchase, and able to purchase at various prices during a period.

"Demand is an effective desire." Prof. PensionThe word effective desire includes the following five elements:1. Desire2. Means to Purchase. For example, if a poor person desires a car, his desire cannot be

called demand.3. Willingness to use those 'Means' to fulfil the Desire. For example, if a rich miser desirers

a car, then his desire will not be called demand, although there is a desire and meansto purchase. This is because; there is absence of a third element of demand, i.e. willingnessto use those means to fulfil the desire.

4. Price: Demand in economics is always at a price. For example, you will be willing topurchase a pen for Rs. 10/-, but you may not buy that pen if the price is Rs. 100/-

5. Time Period: Demand is always expressed with reference to a particular time period.For example, cars per day, 1000 cars per week etc.

CHAPTER 2

THE THEORY OF DEMAND

MEANING OF DEMAND

DETERMINANTS OF DEMAND

1. Price of the Commodity: Price is the most important factor of demand. Ceteris paribus(i.e. other thing remains constant), when the price of a commodity rises, the demand of the commodityfalls and vice-versa. This is also known as the law of demand.

Price DemandP

D

P

D

Graphically,

Symbolically,

Demand Determinants

1. Price of Commodity2. Price of related goods3. Income of household4. Taste & preferences of consumers5. Composition of population6. Other Factors:

(a) Size of population(b) Education of people(c) Weather situation of the region(d) Distribution of income(e) Advertisement


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In the diagram 2:1, we see that when price increases from P to P1, the demand for the commoditydecreases from Q to Q1, and when price decreases from P to P2, the demand increases from Qto Q2.

2. Price of the Related Goods: There are two types of related goods:-(a) Complementary goods.(b) Substitutes or competing goods.(a) Complementary Goods : Complementary goods are those goods which are used simultaneously.

For example, pen and ink, tea and sugar, etc.Goods (Pen) Complementary Goods (Ink)

P

D

P no change D

P

D

P no change D

(b) Substitutes or Competing Goods : Substitutes are those goods which can be used inplace of one-other. For example: tea and coffee, pepsi and coca-cola, etc.

Goods (Tea) Complementary Goods (Coffee)P

D

P - no change D

P

D

P - no change D

3. Income Level of the Household : To analyse the impact of income on the demand, thegoods can be divided into two categories:

(a) Inferior goods(b) Superior goodsInferior goods: Inferior goods are those that are consumed by poor household. For example,

very low quality wheat, etc.

Income Demand for inferior goodsI

D

I

D

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CPT Sri Sankara Coaching CentreSuperior Goods: Superior goods are those goods that are consumed by a rich household. For

example, the wheat of very high quality, etc. Symbolically,Income Inferior goods Demand for

I

D

I

D

Graphically,

4. Taste and Preference of Consumer : The goods, which are preferred by consumers orwhich are in fashion, will cover a good share of market in comparison to the goods, which are outof fashion. For example, the demand for colour T.V. is higher than that of black & white T.V.

Here, demonstration effect plays an important role. A person's demand for colour TV may beaffected by his seeing is in a friend's house.

5. Composition of Population : For instance, if there are more old age persons in the populationthen the demand for sticks, spectacles etc. will be higher, if there are more children in the population,then the demand for sweets, toys, toffees etc. will be high.

6. Other Factors of Demand : Besides the above, the following factors also affect the demandof a commodity-

(a) Size of population,(b) Education of people,(c) Weather situation of the region,(d) Distribution of income,(e) Advertisement etc.

- Meaning:

LAW OF DEMAND

1. Refer to the Price Factor of Demand on P.No: 182. Ceteris Paribus

- Demand Schedule:The above concept of the law of demand can also be explained through demand schedule and

demand curve:Price (Rs.) Quantity Demand (units)

10 10 8 15 6 20 4 25 2 35


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The above schedule shows that when the price of the commodity was Rs. 10, the demandfor the commodity was 10 units. As the price falls upto Rs. 8, the demand rises up to 15 unites.Similarlywhen the price reaches Rs. 6, the demand rises to 20 units. Thus, the above schedule shows aninverse relationship between price and demand of the commodity.

- Demand Curve:

Demand curve shows the demand of a commodity/service at various prices during a period. Itcan easily be derived by plotting the demand schedule on a graph. The demand curve of the aboveschedule is as follows: In Fig 2.6, the demand curve is

negatively sloped, showing that asthe price of the commodityincreases, the demand for it fallsand vice-versa.

Exceptions to the Law of Demand:

1. Giffen's Paradox: In the case of Giffen goods, when theprice of a commodity falls, the demand for Giffen goodsalso falls and vice-versa. Sir Robert Giffen, an economist, was surprised to find

out that as the price of bread increased, the Britishworkers purchased more bread and not less of it. Thiswas something against the law of demand. Why didthis happen?

The reason given for this is that when the price ofbread went up, it caused such a large decline in thepurchasing power of the poor people that they wereforced to cut down their consumption of meat andother more expensive foods.

Since bread (even after the price rise) was still the cheapest food article, people consumedmore of it and not less when its price went up. Such goods which exhibit 'direct price-demand relationship' are called Giffen goods. Generally, these goods are considered inferiorby consumers and occupy a substantial place in the consumer's budget. Examples ofsuch goods are coarse grains like bajra, low quality rice and wheat etc.

2. Thinking of People (Conspicuous Goods): It is a human thinking that higher the price, higherthe quality, i.e. generally people measure the quality of commodity through its price. Therefore,they try to purchase those commodities whose prices are higher. Thus, here the law of demandfails.

3. Fashionable Product4. Brand Preference. For example: if a consumer prefers the clothes of 'Raymond' brand, then

he will like to wear the clothes of only Raymond brand, even if its price is very high.5. Future Expectation about Price : If the consumers expect that the price of a commodity will

rise in the future due to drought, etc., then they will purchase the commodity in larger quantitiesin the present.

When Does The Law ofDemand Not Operate?

1. Giffen's paradox2. Thinking of people3. Fashionable product4. Brand preference5. Future expectation about

price6. Impulsive purchase.7. Non-operation of Ceteris

paribus

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CPT Sri Sankara Coaching Centre6. Impulsive Purchase : Sometimes, the consumer purchases a commodity without any cool calculation

about its price and utilities. In such cases, the law of demand may fail.7. The inoperation of 'Ceteris Paribus' : If other factors also change with price, then the law

of demand will fail.

- Market Demand Schedule and Market Demand Curve:Market demand schedule is the schedule that shows the total demand for a commodity or service

by all the consumers of a market at various prices.Suppose, if P, Q, R and S are the consumers of a commodity, then the market demand schedule

with imaginary figure will be as follows:

Market Demand SchedulePrice (Rs.) Demand

P Q R S Total5 2 3 4 1 104 3 4 5 2 143 4 5 6 3 182 5 6 7 4 221 6 7 8 5 26

When we plot the above Market demand schedule on a graph, we get the market demand curve,which is as follows:

Why Does Individual Demand Curve or Market Demand Curve Slope Downward?1. Inverse relationship b/w price and quantity demanded.2. The Law of Diminishing Marginal Utility : According to the law of diminishing marginal

utility, as a consumer uses more and more units of a commodity, the marginal utility ofthat commodity goes on decreasing. A consumer will try to extend his consumption tothe point where the marginal utility of the commodity is equal to the price of the commodity.So it is only at a low price at that a consumer would like to purchase more quantitiesof a commodity.

3. Substitution Effect : When the price of a commodity falls, it becomes relatively cheaperthan its substitutes. For example: Tea and coffee are substitutes, if the price of coffeefalls, it will become relatively cheaper than tea. So some people, who were purchasingtea before may now purchase coffee. This will increase the demand for coffee.

4. Income Effect : When the price of a commodity falls, the purchasing power of the consumerincreases and vice-versa. For example, a consumer is consuming one Kg. Apple, whenits price is Rs. 10 per Kg. Now suppose, the price of Apple falls to Rs 5 per Kg. Thisfall in price will increase the purchasing power of the consumer, because now he canpurchase two Kgs. of apple with the same money, i.e. Rs. 10. This will induce the consumerto consume more apples and thus the demand for apples may increase.

Fig.2.7. Market Demand Curve


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EXPANSION & CONTRACTION IN DEMAND

5. Change in the Number of Consumer : When the price of a commodity falls, it comeswithin the purchasing power of some households, who could not afford to purchase it earlier.Thus, a fall in price increases the number of consumers and a rise in price decreasesthe number of consumers.

When the demand for a commodity rises or falls due to change in any other factor, exceptprice, then it is called 'Increase in Demand' and 'Decrease in Demand' respectively.

Such increase or decrease in demand is also known as Shift in demand curve/Changein demand.

The other factors can affect the demand in the following ways:-1. Change in Income: To analyse the impact of change in income of the household on the

demand of goods, the goods can be divided into two categories:(a) Superior Goods.(b) Inferior Goods.Superior Goods: In this case, Ceteris paribus, when the income of a consumer increases,the demand for superior goods also increases. Thus whole of the demand curve shiftsrightward. In the inverse case, the demand for superior goods decreases and the demandcurve shifts leftward, Graphically,

When the demand increases due to a fall in itsprice, it is called expansion in demand, butwhen the demand decreases due to the rise inits price, it is called contraction in demand.

Thus, expansion or contraction takes place onlydue to the change in price, not due to the changein other factors of demand, i.e. other factorsof demand should remain constant.

The expansion or contraction in demand is alsoknown as movement along the demand curve/Change in the quantity demanded.

INCREASE & DECREASE IN DEMAND

Fig. 2.9 shows that the original demandcurve for the superior goods is DD showing thatdemand for the goods is Q at the price P. Nowsuppose the income of the consumer rises, asa result of which the whole of the demand curveshifts the rightward and becomes D2D2. At thisdemand curve, the demand for the commodityis Q2 at the same price (i.e. P). In the sameway, when the income of the consumer falls, thewhole of the demand curve shifts leftward andbecomes D|D|. At this curve, the demand is Q1at the same price i.e. P.

Inferior Goods: In this case of inferior goods, the demand for inferior goods, Ceteris paribus,increases with a fall in income and the whole of demand curve shifts rightward, but thedemand for inferior goods decreases with a rise in income, therefore, the demand curveshifts to the leftward.

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CPT Sri Sankara Coaching Centre2. Change in Price of Related Goods :

(a) Substitutes : In the case of substitus, Ceteris paribus, when the price of substitutesfalls, the demand for a commodity also decreases and therefore the demand curveshifts leftward. In the inverse case, the demand for the commodity increases andthe demand curve shifts rightward.

(b) Complementary Goods : In this case, when the price of complementary goodsrises, the demand for the commodity falls and the demand curve shifts leftward.In the inverse case, i.e. when the price of complementary goods falls, the demandfor a commodity rises and therefore the demand curve shifts rightward.

3. Change in Tastes and Preferences: Changes in taste and preferences of the consumersfor a commodity may increase or decrease the demand for that commodity at the sameprice. Thus, the demand curve will shift rightward or leftward.

4. Change in Income Distribution : If there is a change in income distribution of peoplein such a way that some are gainers and some are losers, then the demand for the goodsthat are preferred by gainers will rise and the demand curve of that goods will shift torightward, but the demand for the goods that are preferred by losers will decrease andthe demand curve of those commodities will shift to leftward.

5. Change in Size of Population : If the population of the city or country decreases, thenthe demand for a commodity will fall and the whole of the demand curve will shift leftward.In the inverse case, the demand curve will shift rightward.

Elasticity of demand refers to the responsiveness of the quantity demanded of a commodityto the change in one of the variables on which the demand depends, i.e. price of the commodity,price of related goods, income level etc.

Elasticity : e = % C h a n g e in th e Q u a n t ity d e m a n d e d

% C h a n g e in P r ic e Types of Elasticity of Demand :

Since demand depends on the price of a commodity, the price of related goods, income of thehousehold etc, there are many kinds of elasticity such as:-

1. Price Elasticity - Methods : (a) Point method; (b) Arc method; (c) Total outlay method.Types : Five

2. Income Elasticity3. Cross Elasticity

1. Price Elasticity

The price elasticity of demand refers to the responsiveness of the quantity demanded of a commodityto the change in price of that commodity. In other words, the price elasticity of demand is the percentagechange in quantity demanded of a commodity divided by the percentage change in its price. Symbolically,

Elasticity ep = % change in the quantity demanded% change in price

2 1

1

2 1

1

q - q x 100

q

- p x 100p

p

=

ELASTICITY OF DEMAND (e)


30

=

1

1

100

100

qx

qp

xp

=

1 2 1

1 2 1

p q qx

q p p

=

Where,pI = Price before change in pricep2 = Price after change in priceq1 = Quantity demanded before change in priceq2 = Quantity demanded after change in priceA = Very small change

Points to be noted :1. Price elasticity will be negative in case of normal goods, as there is negative relationship

between demand of normal goods and its price. While price elasticity will be positive inthe case of Giffen goods due to the positive relationship between the demand for Giffengoods and its price.

2. But for drawing conclusion, we do not consider every sign, we only consider the value.Thus, if 10% change in price leads to 20% change in quantity demanded of goods-X and30% change in quantity demanded of goods-Y, then we get the elasticity of X and Y as20 and 30 respectively, showing that demand for Y is more elastic to price than X. Ifwe had considered minus signs, we would have concluded that X is more elastic thanY, which is not correct.

Measurement of Price Elasticity: There are three methods:-

1. Point Method/Point Elasticity : Under this method, the elasticity of demand is calculatedby keeping only one point as base. The formula is:

ep = Formula-1

= Formula - 2

Examples:1. Suppose the demand for a commodity is 100 units at a price of Rs. 10/-. But, at the

price Rs. 15/-, the demand is 80 units, then-

Point Elasticity : ep =

2. If the demand function is: q = 2000-20p2, thendqdp = -40p

The quantity demanded (q) at price Rs. 5 will be 1500 units. So, e = -40x5x

1500

=-0.66

Point Elasticity on a Linear Demand Curve: Point elasticitycan also be calculated on a straight-line demand curve with the helpof the following formula:

Point Elasticity : ep = =

31

CPT Sri Sankara Coaching CentreOn the basis of the above formula, point elasticity at different points of a straight-line demand

curve will be as follows:

Point Elasticity on a Non-Linear Demand Curve: Consider the Fig. 2.12. In this figure, DDis a non-leaner demand curve. If we are to calculate point-elasticity at point B, then we will draw aline AC tangent to the point B. Now the elasticity can easily be calculated with the help of the followingformula:

Elasticity : e =

Lower SegmentUpper Segment

=

BCABQ

AB < BC,

e > 1

In the same way, the elasticity at the point N :NPe =

MN NP < MNQ

,

e < 1

2. Arc Method: If we want to find the elasticity between the two points of a demand curve,then the problem arises at to what price and quantity should be kept as a base. In such a situation,the average of the two prices and quantities is used. Symbolically,

Arc Elasticity :e =

q2 - q1q2 + q1( ) q2 - q1 p2 + p12

= x p2 - p1 p2 - p1 q2 + q1p2 + p1( )

2

Point to be noted:

When we want to measure price elasticity at a point on the demand curve or for a very smallchange in the price and quantity of a commodity, we use the 'Point Elasticity Method'. However, formeasuring price elasticity over an arc of the demand curve, we use the 'Arc Elasticity Method'.


32

3. Total Outlay Method: Under this method, with the help of total outlay, we try to find whetherthe elasticity is equal to one or less than one or greater than one. It is to be noted that this methodgives only a rough estimate about price elasticity. We cannot find the exact co-efficient of elasticitywith the help of this method. There are three rules in this method: -

(i) If the total outlay does not change with a change in price,the elasticity will be equal to one (e = 1). For instance:

Price (Rs.) Quantity Demanded Outlay (Rs.)10 100 Units 1000 5 200 Units 1000

In the above example, the elasticity will be equal to one, because thetotal outlay does not change due to change in price. (see Fig)(ii) If the total outlay decreases with a rise in price and increaseswith a fall in price, then the elasticity will be greater than one(e > 1). For instance:

Price (Rs.) Quantity Demanded Outlay (Rs.)10 100 Units 10005 240 Units 1200

In the above instance, the elasticity is greater than one, because, asthe price falls from Rs. 10 to Rs. 5, the total outlay increases fromRs. 1000 to Rs. 1200. (See Fig)(iii) If the total outlay increases with a rise in price and decreaseswith a fall in price, then elasticity will be less than one (e < 1).For instance:

Price (Rs.) Quantity Demanded Outlay (Rs.)10 100 Units 10005 120 Units 600

In this case, the elasticity will be less than one, because when theprice falls from Rs. 10 to Rs. 5, the total outlay also falls from Rs.1000 to Rs. 600. (See Fig:)

Types/Degrees of Price Elasticity of DemandNumerical DescriptionValue

1. Perfectly Inelastic e = 0 There is no impact of change in price on the demandof a commodity (See Fig: 2.16)

2. Inelastic 0 < e < 1 % change in quantity demanded < % change in price(See Fig: 2.17)

3. Unitary Elastic e = 1 % change in quantity demanded = % change in price(See Fig: 2.18)

4. Elastic > e > 1 % change in quantity demanded > % change in price(see Fig: 2.19)

5. Perfectly Elastic e = Due to very small change in price, which tends to zero,the quantity demanded changes substantially (see Fig:2.20)

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Fig : 2.18 Fig : 2.16 Fig : 2.17

Fig : 2.19 Fig : 2.20

Determinants of Price Elasticity

1. Availability of Substitutes: The more the substitutes, the more the elasticity. For example,Limca, a cold drink, has many substitutes such as Pepsi, Thumps Up etc. If the price of Limca rises,people will begin to purchase Pepsi or any other cold drink. Thus, the demand for Limca will be elastic.

2. Position of a Commodity in Consumer's Budget: The demand for commodities, which coversa very big slice of a consumer's budget, is generally elastic, but in the inverse case, the demandwill be inelastic. For example, the demand for matches, button etc, is inelastic while the demandfor cloths is elastic.

3. Nature of Commodity: Normally, the demand for luxurious goods is elastic, but of necessitiesis inelastic. For example, the demand for salt is inelastic.

4. Number of Uses of Commodity: If a commodity can be used in many ways, then its demandwill be elastic and vice-versa. For example, the demand for milk is elastic because it can be usedin many ways. If its price rises, it will be used only for feeding the sick and children and if its pricefalls, it can be used in many ways such as in sweets, curd, feeding etc.

5. Consumer Habit: If a consumer is habitual of a commodity, then its demand will be inelastic.

6. Price Range: The demand for goods, whose prices are either very high or very low, is inelastic.However, the demand for goods, whose prices are in the middle range, is elastic.

7. Time Period: The elasticity of demand also depends on the time period, which the consumerstake to adjust their habits. For example, consumers may be used to consume coffee in comparisonto tea. If the price of coffee rises, they may continue to use the same amount of coffee in the shortrun. But in the longer period, they might develop their taste of tea and therefore, the demand for coffeemight fall in the long run.

8. If postponement of consumption is not possible, the demand will be inelastic.


34

2. Income Elasticity

Meaning:

Income Elasticity ei =

=

Where, I = Change in income of consumer; = Change in quantity

I = Income before change in income; q = Quantity before change in income

Types/Degrees of Income Elasticity of DemandNumerical Description

Value1. Perfectly Inelastic ei = 0 There is no impact of change in income on the demand

of a commodity (See Fig: 2. 16)2. Inelastic 0 < ei < 1 % change in quantity demanded < % change in income(See Fig: 2. 17)3. Unitary Elastic ei = 1 % change in quantity demanded = % change in income(See Fig: 2.18)4. Elastic < ei < 1 % change in quantity demanded > % change in income(See Fig: 2.19)5. Perfectly Elastic ei = Due to very small change in income, which tends to zero,

the quantity demanded change substantially (See Fig: 2.20)It is to be noted that:

In case of inferior goods : ei < 0In case of necessary goods : 0 < e < 1In case of luxury (superior) goods : ei > l

(1) If the proportion of income spent on a goods remains the same as income rises, thenincome elasticity is one

(2) If proportion of income spent on a good rises as income rises, then income elasticityis greater than one.

(3) If proportion of income spent on a good decreases as income rises, then income elasticityis less than one

3. Cross ElasticityCross elasticity refers to the responsiveness of the quantity demanded of a commodity to the

change in the price of other goods, i.e. substitute or complementary goods. Symbolically,

Income Elasticity ec

=

= =

qx py x

py qx

35

CPT Sri Sankara Coaching Centrewhere,

qx = Quantity demanded of commodity-X

qx = Change in the quantity demanded of commodity-X

py = Price of commodity-Y

py = Change in the price of commodity-Y

It is to be noted that:-(1) If two goods are perfect substitutes for each other, then ec = ?.(2) If the two goods are unrelated, then ec = 0(3) In case of substitutes, cross elasticity will be positive due to the positive relationship

between the price of a commodity and the demand for its substitutes.(4) In case of complementary goods, cross elasticity will be negative due to the negative

relationship between the price of commodity and the demand for its complementary goods.

1. Demand means -(A) Desire(B) Purchasing ability(C) Desire with purchasing ability(D) None of these

2. The law of demand states -(A) Positive relation between P & Q(B) Negative relation between P & Q(C) Spurious relation between P & Q(D) None of these

3. The Law Of Demand considers constancyof-(A) Tastes and preferences(B) Income of consumer(C) Price of related goods(D) All are true

4. At which of the points given below will theprice elasticity of demand be equal to one?(A) Where average revenue equals zero(B) Where marginal revenue equals 0(C) At the mid-point of the demand curve

between its intersection with the x andy- axes

(D) Where marginal cost equals marginalrevenue

5. Demand depends on -(A) Price of goods and related commodities(B) Size of population(C) Income, tastes and other factors(D) All are true

6. The quantity demanded of Pepsi hasdecreased. The best explanation for this isthat -(A) The price of Coca Cola has increased.(B) Pepsi's advertising is not as effective

as in the past.(C) The price of Pepsi has increased.(D) Pepsi consumers had an increase in

income.

7. Which of the following will not cause a shiftin the demand curve for compact discs?(A) A change in income(B) A change in wealth(C) A change in the price of pre-recorded

cassettes(D) A change in the price of compact discs

8. Given the following four possibilities, whichone results in an increase in total consumerexpenditure?(A) demand is unitary elastic and price falls.(B) demand is elastic and price rises.

Questions


36

(C) demand is inelastic and price falls.(D) demand is inelastic and prices rise.

9. Q = 5 - 7P; This demand function is -(A) Direct demand function(B) Inverse demand function(C) Both are true(D) None of these

10. P = 12 - 8Q; This demand function is -(A) Direct demand function(B) Inverse demand function(C) Both are true(D) None of these

11. If good x is a substitute of good y , then-(A) y is also the substitute of x(B) y may not be substitute of x(C) both are substitutes of each other(D) none of these

12. The formula of price elasticity can be writtenas-

(A) (1/slope of demand curve) xp/q(B) (1/slope of demand curve) x q/p(C) (1/slope of demand curve) x ?p/?q(D) None of these

13. If price elasticity is zero, the slope of thedemand curve is -(A) Zero(B) One(C) More than one(D) Infinite

14. If price elasticity is zero, the demand curvewill be-(A) Horizontal(B) Downward sloping(C) Vertical(D) None of these

15. Demand curve is p = ( a - bq )2, where a,b >0. The demand curve is -(A) Linear(B) Concave(C) Nothing definite can be said(D) Convex

16. The demand curve is p = a - bq, where a,b >0. The demand curve is -(A) Linear(B) Concave

(C) Nothing definite can be said(D) Convex

17. The price elasticity is infinity, the slope ofdemand curve is -(A) zero(B) one(C) infinite(D) more than zeroHint: Stop of DD =

18. The price elasticity is infinite, demand curveis -(A) Downward sloping(B) Vertical(C) Horizontal(D) None of these

19. The quantity demanded does not respondto price change and so the elasticity valueis -(A) one(B) infinite(C) zero(D) none of these

20. If percentage change in quantity demandedis greater than percentage change in price,we have-(A) one(B) infinite(C) zero(D) greater than one

21. If elasticity value is greater than one, it is-(A) inelastic(B) elastic(C) unitary elastic(D) none of these

22. If percentage change in quantity demandedis less than percentage change in price,we have elasticity value as -(A) one(B) zero(C) less than one(D) infinite

23. If elasticity value is less than one, it is -(A) inelastic(B) elastic(C) unitary elastic(D) none of these

37

CPT Sri Sankara Coaching Centre24. If percentage change in quantity demanded

is equal to percentage change in price, theprice elasticity is -(A) one(B) less than zero(C) zero(D) less than one

25. With price at Rs. 9, only 7 oranges arepurchased. But as price falls to Rs. 8, 8oranges were purchased, then the priceelasticity value is-(A) One(B) greater than one(C) less than one(D) zero

26. With price at Rs. 10, only 8 pens werepurchased. But as the price falls to Rs.5,16 pens were purchased, then the priceelasticity value is(A) one(B) less than one(C) greater than one(D) zero

27. Demand is affected by -(A) Ratchet effect(B) Demonstration effect(C) Both (A) and (B)(D) None of these

28. Market demand curve is derived by considering-(A) Independence of consumers' preferences(B) Consumers are selfish(C) Both (A) and (B)(D) None of these

29. Demand curve is upward rising, -(A) if a good is Giffen(B) if a good takes up a small part of a

consumers' budget(C) both (A) and (B)(D) None of the above

30. In the case of inferior goods, the incomeelasticity of demand is(A) Positive(B) Zero(C) Negative(D) Infinite.

31. Increase or decrease in quantity demandedis based on-(A) Shift of the demand curve(B) Movement along the same demand curve(C) Both (A) and (B)(D) None of these

32. Increase or decrease in quantity demandedis based on -(A) Changes in income(B) Only price change(C) Changes in tastes(D) None of these

33. The demand function of any good is -(A) single valued(B) multi-valued(C) may be both (A) and (B)(D) none of these

34. Shift in demand means -(A) A leftward or rightward shift of the demand

curve

(B) The movement along the demand curve(C) Both (A) and (B)(D) None of these

35. Shift of demand may be due to -(A) Change in income, tastes(B) Change in price(C) Both (A) and (B)(D) None of these

36. Shift of demand may be due to -(A) Change in population(B) Change in income distribution(C) Both (A) and (B)(D) None of these

37. If the price of complementary goods rises-(A) Demand curve shifts to left(B) Demand curve shifts to right(C) Both (A) and (B)(D) None of these

38. If the price of substitute good rises -(A) demand curve shifts to left(B) demand curve shifts to right(C) Both (A) and (B)(D) None of these


38

39. Change in demand means -(A) change in quantity demanded(B) change in price(C) shift of demand curve(D) none of these

40. Demand curve is downward sloping due to-(A) Income effect(B) Substitution effect(C) Law of diminishing marginal utility(D) All are true

41. Price elasticity of demand is -(A) The response between price and quantity(B) The response between income &

quantity(C) The response between price & income(D) None of these

42. With P at Rs. 7, only 7 pencils were purchased.But as P falls to Rs. 6, 8 pencils werepurchased. The price elasticity value is -(A) one(B) less than one(C) greater than one(D) zero

43. If a fall in price leads to an increase in totalrevenue, we have elasticity of demand as-(A) greater than one(B) less than one(C) zero(D) infinite

44. If the good is a luxury item, the demandwill be -(A) relatively inelastic(B) relatively elastic(C) cannot be determined(D) none of these

45. If the good has few substitutes, it will be-(A) relatively inelastic(B) relatively elastic(C) perfectly elastic(D) none of these

46. If the good has many uses, it will be -(A) relatively elastic(B) relatively inelastic

(C) perfectly inelastic(D) none of these

47. If the demand for the good is made by aconsumer with high income, it will be -(A) relatively inelastic(B) relatively elastic(C) unit elastic(D) none of these

48. If the good is durable, the demand will be-(A) relatively inelastic(B) relatively elastic(C) nothing definite can be deduced(D) none of these

49. If the good takes up an insignificant shareof consumers' budget, it will be -(A) relatively inelastic(B) relatively elastic(C) nothing definite can be deduced(D) none of these

50. If postponing the consumption of the goodis possible, the demand will be -(A) relatively elastic(B) relatively inelastic(C) perfectly inelastic(D) none of these

51. In the short run, if the price elasticity demandis -(A) relatively elastic(B) perfectly elastic(C) relatively inelastic(D) perfectly inelastic

52. If the price level is high, the good will be-(A) relatively elastic(B) unit elastic(C) relatively inelastic(D) none of these

53. Income elasticity is a relation between -(A) Price & Quantity(B) Income & Quantity(C) Price & Income(D) None of these

54. For a normal good, income elasticity liesbetween -(A) zero & infinity(B) one & infinity

39

CPT Sri Sankara Coaching Centre(C) zero & one(D) none of these

55. For a luxury good, income elasticity is -(A) greater than zero(B) less than zero(C) greater than one(D) less than one

56. For an inferior good, income elasticity is-(A) less than one(B) less than zero(C) greater than zero(D) greater than one

57. If proportion of income spent on a good risesas income rises, then income elasticity is(A) greater than one(B) greater than zero(C) less than one(D) less than zero

58. If the proportion of income spent on a goodremains the same as income rises, thenincome elasticity is -(A) equal to one(B) greater than zero(C) less than one(D) less than zero

59. If the proportion of income spent on a gooddecreases as income rises, then incomeelasticity is -(A) greater than one(B) less than one(C) greater than one(D) less than zero

60. As income rises by 10%, the demand fora good rises by 5% and so the good is -(A) normal good(B) luxury good(C) inferior good(D) nothing definite can be said

61. As income rises by 10%, the demand forbuttons does not rise at all. So buttons haveincome elasticity of -(A) One(B) zero(C) infinite(D) none of these

62. If there are only two goods in the world,we will have -(A) both normal or one normal, one inferior(B) both inferior(C) only (A), but not (B)(D) both (A) and (B)

63. Which of the following would cause a changein the quantity demanded of cars producedin India?(A) a decrease in the average income of

car buyers.(B) an increase in the number of people

over the legal driving age.(C) concerns that the price of cars will

increase next year.(D) a decrease in the price of cars produced

by Indian car companies.

64. If we have two parallel and downward slopingdemand curves, then at the same price, theelasticity of demand will be -(A) same(B) higher for the demand curve closer to

the origin(

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