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CBSE Guess > Papers > Important Questions > Class XII > 2012 > Economics > Economics By Mr. Kritika Bhola

CBSE CLASS XII

Unit 2- Consumer Behaviour and Demand

VSA (1 Mark)

• Define Total utility.

A. Total Utility is the sum total of utility derived from the consumption of all the units of a commodity.

• Define Marginal Utility.

A- Marginal utility refers to additional utility on account of the consumption of an additional unit of a commodity.

• How can total utility be derived from marginal utility?

A- TU = ∑ MU

• State the law of equi -marginal utility.

A- The law of equi-marginal utility states that the ratio of marginal utility to price is same in case of all goods when the consumer is in equilibrium.

• What happens to TU when MU is positive?

A- TU goes on increasing .

• What happens to TU when MU is zero?

A- TU is maximum.

• What happens to TU when MU is negative?

A- TU starts diminishing.

• Give the meaning of indifference curve.

A- An IC is the locus of different combinations of the two goods, the consumer consumes with each of the combination having the same utility.

• Define budget line.

A- BL is the graphical presentation of the whole collection of the combinations of the two goods which cost the consumer exactly his income.

• State the reason for convex indifference curve.

A- IC is convex because the marginal rate of substitution continuously declines as the consumer moves downward along the curve.

• Why 2 indifference curves intersect each other?

A- The 2 IC’s intersect each other to show the point of equilibrium.

• Define marginal rate of substitution.

A- MRS is the rate at which the consumer is willing to sacrifice one good to obtain one more unit of the other good.

• What do you mean by monotonic preferences?

A- Monotonic preferences mean that as consumption increases total utility also increases along with.

• What is law of demand?

A- The law of demand states that there is an inverse relation between a change in the price of a good and the consequent change in the demand for that good, assuming no change in all other factors influencing the demand.

• Differentiate between demand schedule and demand curve.

A- A demand schedule shows different quantities of a good consumer is willing to buy at different prices and a demand curve is the graphical representation of a demand schedule.

• When a commodity is called inferior good?

A- A good whose demand by a consumer falls with the rise in income of that consumer is called an inferior good.

• What are normal goods? Give 2 examples.

A- Normal goods are those goods whose demand by a consumer rises with the rise in the income of that consumer. Eg. Milk, Fruits.

• Give one point of difference between substitute goods and complementary goods.

A- Two goods are substitutes if one can be used in place of the other.

Two goods are complementary t each other when they are used jointly.

• Distinguish between change in demand and change in quantity demanded.

A- Change in demand means when the tastes and preferences of the consumer changes and change in qty. demanded means there is change in the amount of good which he is purchasing ,i.e it either increases or decreases.

• Mention one factor each which causes upward and downward movement along the demand curve.

A- Upward and downward movement along the demand curve is due to rise and fall in price of the commodity.

• Mention one factor each which causes leftward and rightward shift in demand curve.

A- Leftward and rightward shift in demand curve is due to decrease and increase in demand at its existing price.

• Define price elasticity of demand.

A- Price elasticity of demand is a measurement of percentage change in demand due to percentage change in own price of the commodity.

• Draw a demand curve which has unitary elastic demand.
• When is demand for a commodity said to be elastic?

A- When the price of a good falls or rises and total expenditure rises or falls respectively, the demand for that good is elastic. The price and expenditure are inversely related. =∞

• When is demand for a commodity said to be inelastic?

A- When the price and expenditure are directly related. Ed= 1. Change in price does not change the quantity demanded.

SA (3/ 4 marks)

• Explain the relationship between total utility and marginal utility with the help of a diagram.
A- Relation between TU and MU

 Qty. TU MU 0 0 - 1 8 8 2 14 6 3 18 4 4 20 2 5 20 0 6 18 -2

TU increases so long as MU is positive
TU is maximum when MU=0
TU starts declining when MU is negative

Explain the law of diminishing marginal utility with the help of an example.
A- Law of DMU states that MU tends to decline as consumption of the commodity increases.

 Consumption Of  X TU MU 1 100 100-0=100 2 190 190-100=90 3 270 270-190=80 4 340 340-270=70 5 400 400-340=60

• Define consumer equilibrium. State the condition in case of a single commodity.
A- Consumer’s equilibrium means allocation of income, by a consumer on goods and services he buys, which give him max. satisfaction.

The conditions in case of single commodity are:-

1. MU = price (consumer will keep on buying till MU>price)
2. Total gain falls as more is purchased after equilibrium ( consumer continues to purchase as long as gain is increasing or constant)

• Explain the condition of consumer equilibrium in case of 2 goods.
A- In case of two goods conditions are:-

1. MU of last unit of money spent on each good is same (Law of equi-marginal utility)

2. MU of a good falls as more of it is consumed.

• Complete the following table

 Amount consumed 1 2 3 4 5 TU 50 90 A 140 150 MU 50 b 30 c d

A- a = 90 + 30 = 120, b = 90- 50 = 40, c = 140 – a (120) = 20, d= 150 – 140 = 10

• If consumers income is 24 & PX= 2 & PY=4. Find out consumer’s equilibrium.

 Units 1 2 3 4 5 6 MUX 20 18 16 14 12 10 MUY 24 21 18 15 12 9

A-
Consumer’s equilibrium is struck when

Equilibrium is attained when 2 units of X and 6 units of Y are purchased.

• Discuss the properties of indifference curves.

A- 1. Indifference curve always slopes downwards from left to right because when the consumer increases the consumption of one good , he must reduce the consumption of the other good.

2. The IC is strictly convex towards the origin because MRS continuously declines as the consumer moves downward along the IC.
3. Higher IC represents higher utility because of the assumption that preferences are monotonic and more qty. consumed means more utility.

 Cardinal utility Ordinal utility It is expressed in exact units It is less realistic It is a psychological phenomenon and cannot be expressed in numerical terms. It is expressed in terms of ranking It is more realistic It can be expressed in numerical terms .

• Define budget line. State its properties.
A- Budget line is the graphical presentation of the whole collection of the combinations of two goods, which costs the consumer exactly his income.

Properties:-

1. It is downward sloping straight line because to buy more of one good , the consumer must reduce the purchase of the other good.
2. It is a straight line because market rate of exchange between the two goods is constant.
3. It is constructed on the basis of consumer’s income and price of both commodities, so change in any one changes the budget line.

• Distinguish between individual demand and market demand.
A- Individual demand function shows how demand for a commodity , by an individual consumer in the market, is related to its various determinants.

Where :price of related goods; Y : consumer’s income; T : Consumer’s tastes & preferences; E : consumer’s exception.

Market demand function shows how market demand for a commodity is related to its various determinants.

Where, N:population size ; : distribution of income.

State any 2 factors that affect the demand of a commodity. How do they affect the demand of a commodity?

A- 1. Price of commodity: When price of a commodity rises it’s demand decreases and vice-versa.
2. Income of the consumer: The demand for normal goods tend to increase with increase in income and demand for inferior goods tend to decrease with increase in income.

• A and B are substitute goods. Explain the effect of fall in the price of A on demand for commodity B.
A- If price of A falls , demand of B will decrease.

• How does the change in income of the household affect the demand for a commodity that it buys?
A- The demand for normal commodity will increase and that of inferior will decrease.

• Distinguish between Substitute goods and complementary goods. Give 2 examples of each.
Substitute goods Complementary goods

 Substitute goods Complementary goods These are goods which substitute for each other such as tea and coffee, ball-pen and ink-pen Increase in price of one increases the demand of other. These are those which complete the demand for each other such as pen and ink, bread and butter Fall in price of one increases the demand of the other

These are goods which substitute for each other such as tea and coffee, ball-pen and ink-pen
Increase in price of one increases the demand of other. These are those which complete the demand for each other such as pen and ink, bread and butter

Fall in price of one increases the demand of the other

• Why do household demand more of a commodity at lower price?
A- They are able to purchase more goods from the same income when prices are lower.

• Distinguish between change in quantity demanded and change in demand. Use diagram

A- Change in qty. demanded refers to increase or decrease in qty. purchased of a commodity in response to decrease or increase in its price , other things remaining constant. There is extension or contraction of demand.

Change in demand of a good is defined as change in demand due to change in the factor other than the price of good. There is backward or forward shift in demand curve.

• Differentiate between increase in demand and expansion in demand with the help of a diagram.
A- Same as above

• Distinguish between decrease in demand and contraction in demand.
A- Same as above
• State 3 reasons for rightward shift in demand curve.

A- 1. When income of consumer increases.
2. when price of substitute good increases.
3. Increase in no. of consumers.

• State 3 reasons for leftward shift in the demand curve.

A- 1. When income of consumer falls.
2. When price of substitute good decreases.
3. Decrease in no. of consumers.

• Explain the geometric method of measuring price elasticity of demand.
A- Geometric method measures elasticity of demand at different points on the demand curve. It is also called ‘point method of measuring elasticity of demand’.

MN is a straight line demand curve sloping downward .It shows that when price is zero, qty. is ON and when price is OM, qty. is zero. P divides the demand curve in two segments – upper and lower.

• Explain 3/4 factors that affect elasticity of demand.

A - 1.Nature of commodity : Necessaries ( salt, sugar, etc.) and jointly demanded goods ( car and petrol) have inelastic demand as change in prices do not effect their demand. Luxuries have elastic demand.

2. Availability of substitutes : Demand for goods which have substitutes is more elastic because when price of a commodity falls in relation to its substitute its demand rises.

3. Income of consumer : People whose income is very high or very low , their demand is inelastic as rise and fall in prices do not effect their demand.

• What will be the elasticity of demand in the following cases-

1. A rise in the price of the commodity increases the total expenditure on it.
Less than unitary elastic.
2. A rise in the price of the commodity reduces the total expenditure on it.
Greater than unitary elastic
3. A change in price of the commodity does not change the total expenditure on it.
Unitary elastic

• How does the availability of substitutes affect the price elasticity of demand?

• Demand for goods which have substitutes is more elastic because when price of a commodity falls in relation to its substitute its demand rises. The consumers will buy more of it in place of its substitute.

• A dentist was charging Rs 300 for a standard cleaning job per month and used to generate Rs 30000. She had increased her price of dental cleaning to Rs 350. As a result of this the total revenue generated was Rs 33250.
What can you conclude about elasticity of demand of her dental service?

A- Ed < 1 because as the price increases the demand also increases.
• A consumer buys 1000 units at Rs 10 per unit. When the price falls he buys 1400 units. If the price elasticity is – 2, what is the new price?

Price is Rs. (10 – 2) = Rs.8
• The market price of good changes from Rs 5 to Rs 4. As a result the demand increases by 12 units. If the price elasticity is – 1.5, find the initial and final quantity demanded.

Q= 40 units
New Quantity demanded is 52 units.

• With the rise in the price by Rs 5, the quantity demanded changes from 100 to 95 units. The price elasticity of demand is – 1.2. Find out price before change.

Price is Rs 120/-

• Calculate price elasticity using Total Expenditure method:
 Price of commodity X Quantity Demanded of X 8 100 10 90 Price of commodity Y Quantity Demanded of Y 8 100 10 80

A- Total Expenditure in case of X is 800 and 900
Elasticity of demand for X is < 1 as in response to rise in price, expenditure has also increased though qty. demanded is reduced.

• Total exp. For Y is 800 and 800

For Y it is = 1 as with increase in price, exp. is the same even though qty. demanded is reduced.
When the price of the commodity is Rs 20 per unit, quantity demanded is 800 units. When the price falls by 10%, quantity demanded rises to 1080 units. Calculate the price elasticity of demand.

• Price elasticity of demand is -2. The consumer buys some quantity of the commodity is Rs 8 per unit. When the price falls he buys 50 % more of the quantity. What is the new price?

New price is 8 – 2= Rs. 6.

• Price elasticity of demand is -3. If the price rises from Rs 10 to 12 per unit, what is the percentage change in demand?
A- Ed= % change in demand
% change in price
-3 = 20%
x
x = % change in demand = 60%

• Price elasticity of a commodity is -1. The consumer buys 50 units when price is Rs 2 per unit. How many units will the consumer buys if the price is Rs 4 per unit. Find out elasticity of demand using total expenditure method.
A- When he buys 50 units for Rs. 2 /unit , his total expenditure is Rs. 100.
Ed= 1, i.e, demand is unitary elastic so total expenditure will not change.
He will buy 25 units if the price is Rs. 4.

LA (6marks)

• Discuss any 6 factors that lead to leftward shift in the demand.

A- Decrease in demand leads to leftward shift in the demand curve. The factors that lead to it are :-
1. When income of consumer falls.
2. When price of the substitute good decreases.
3. When price of the complementary good increases.
4. When taste of the consumer shifts against the commodity due to change in fashion or climate.
5. When price of the commodity is expected to increase or decrease in the near future.
6. Decrease in no. of consumers.

• Explain with the help of a diagram the effect of the following changes on demand of the commodity:
1. A fall in the price of the commodity.

2. A rise in the price of substitute good.

• Explain with the help of a diagram the effect of the following changes on demand of the commodity:
1. An unfavorable change in the taste of the buyer.

A- Pg. 76 Decrease in demand diag.
2. A fall in the income of the buyer if the good is inferior.
A- Pg. 76 Increase in demand diag.

• Explain the effect of the following on market demand of the commodity:
1. Change in the price of related goods
2. Change in the number of buyers

A- Related goods are of two types:-
1. Substitute goods
2. Complementary goods

1. When the price of substitute good rises the demand of the commodity increases i.e the demand curve shifts to right and vice versa

2. When the price of complementary good rises the demand of the commodity decreases i.e the demand curve shifts to left and vice versa

• Explain the term Change in demand. Represent it graphically and state 3 factors that cause change in demand.
A- Change in demand refers to increase or decrease in qty. demanded of a commodity in response to change in other determinants of demand other than price of the same commodity.

Factors causing change in demand:-
1. Rise or Fall in prices of substitutes.
2. Fall or rise in prices of Complements.
3. Fall or rise in income ( in case of inferior good)

• Define price elasticity of demand. Explain the various degrees of price elasticity of demand using diagrams.
A- Price elasticity of demand is a measurement of percentage change in demand due to percentage change in own price of the commodity.
• Explain how the following determine the price of elasticity:

1. Nature of the commodity
2. availability of substitutes
3. postponement of the use

A- 1. Nature of commodity : Necessaries ( salt, sugar, etc.) and jointly demanded goods ( car and petrol) have inelastic demand as change in prices do not effect their demand. Luxuries have elastic demand.

2. Availability of substitutes : Demand for goods which have substitutes is more elastic because when price of a commodity falls in relation to its substitute its demand rises.

3. Postponement of the use : Demand will be elastic for those commodities whose consumption can be postponed.

• Prove that elasticity of demand on a downward sloping straight line is given by the ratio of lower segment and upper segment of the demand curve at that point.
A- Pg. 99

High Order Thinking Skills questions

• If the price of the commodity is given as Rs 2 per unit, calculate the optimal level of consumption:
 No. of units of X 1 2 3 4 5 6 7 8 Total Utility 5 9.5 13.5 17 20 22.5 24.5 26 MU - 4.5 4 3.5 3 2.5 4.5 6

A- The optimum level of consumption is at 7 units as till 6 units the MU keeps on decreasing and when he purchases 7 units his MU starts increasing.
• Give the formula for calculating the slope of the budget line.

• Slope of the budget line = MRE = Qty. of the good sacrificed Qty. of the good obtained

• If the consumer preferences are monotonic, what can you say about the ranking of the following commodity bundles: (10, 10), (10, 9) and (9, 9).
A- The utility of the commodity decreases.

• What happens to the budget set if both prices as well as income double?
A- There is no shift , the BL remains same.

• If the price of X rises and demand for commodity Y falls, how are the 2 goods related?
A- They are complementary goods.

• A rise in the income of the consumer leads to fall in the demand of commodity X. What is commodity X called?
A- Inferior good.

• When demand of a commodity falls to rise in the price of own good, what is it known as?
A- Normal good

• How does increase in income affect the demand for a) Normal good b) Inferior good?
A- Demand of normal good increases and that of inferior good decreases.

• When will rise in the demand known as expansion in demand and when will it be known as increase in demand?

A- When the demand of good increases due to price only, it is called expansion of demand.
When the demand of good increases due to any other factor except price , it is called
Increase in demand.

• Why coefficient of price elasticity of demand is negative?
A- It is negative because the price fall leads to rise in qty.

• What will be the elasticity of demand if the demand curve is a horizontal line parallel to x axis?

A- Elasticity would be equal to infinity at all the points on the curve because a slight rise in price brings a drastic change and reduces the demand to zero.

• What will be the elasticity of demand if demand curve is vertical line parallel to y axis?
A- Elasticity would be equal to zero at all points because there is no effect on demand for the good as the price changes.

• What will be the value of elasticity on a rectangular hyperbola demand curve?
A- Elasticity would be equal to one because total expenditure would be same at all points.

• What is the relationship between slope and elasticity of demand curve?
A- Slope is the change in price over change in demand and elasticity is the measurement of change in demand and price in terms of percentage.

• The demand for Goods X & Y have equal price elasticity. The demand for X rises from 100 units to 250 units due to 20% fall in is price. Calculate the % rise in demand of Y if its price falls by 8%.

• Suppose consumer can afford 6 units of Good 1 & 8 units of Good 2 if he spends his entire income. The price of 2 goods is Rs 6 & Rs 8 respectively. How much is consumer’s income.
A- Good 1 Good 2
6 units @ Rs. 6 8 units @ Rs. 8
Rs.36 Rs. 64 = Rs. 100

• A consumer wants to consume 2 goods. The prices are Rs 4 & Rs 5 respectively. If the consumers income is Rs 20, answer the following questions-

a. Write down the equation of the budget line.
b. How much of Good 2 can he consume if he spends his entire income on that good.
c. What is the slope of Budget line

A-
a. 4X + 5Y = 20
b. 20 / 5 = 4 units
c. Slope =

Submitted By Mr. Kritika Bhola
P.G.T. Accountancy (Vidya Mandir Public School, Sector - 15A, Faridabad)
Phone No. 9910811665
Email: kritikabhola@yahoo.co.in