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CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand Complete Notes

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand Complete Notes

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand : The CBSE envisions a robust, vibrant and holistic school education that will engender excellence in every sphere of human endeavour. The Board is committed to provide quality education to promote intellectual, social and cultural vivacity among its learners. It works towards evolving a learning process and environment, which empowers the future citizens to become global leaders in the emerging knowledge society. The Board advocates Continuous and Comprehensive Evaluation with an emphasis on holistic development of learners. The Board commits itself to providing a stress-free learning environment that will develop competent, confident and enterprising citizens who will promote harmony and peace.

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand Complete Notes

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand : Economics is the social science studying the production, distribution and consumption of goods and services. It is a complex social science that spans from mathematics to psychology. At its most basic, however, economics considers how a society provides for its needs. Its most basic need is survival; which requires food, clothing and shelter. Once those are covered, it can then look at more sophisticated commodities such as services, personal transport, entertainment, the list goes on. Today, this social science known as “Economics” tends to refer only to the type of economic thought which political economists refer to as Neoclassical Economics. It developed in the 18th century based on the idea that Economics can be analysed mathematically and scientifically.

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CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand Complete Notes

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand :  CBSE Basic Concepts and Assignment/ Sample Questions for Class XII  Economics . Based on CBSE and CCE guidelines. The students should read these basic concepts to gain perfection which will help him to get more marks in CBSE examination.

UNIT 2: CONSUMER EQUILIBRIUM AND DEMAND

KEY CONCEPTS

1. UTILITY

   A) MARGINAL UTILITY

   B) LAW OF DIMINISHING MARGINAL UTILITY

2. CONDITIONS OF CONSUMER’S EQUILIBRIUM

3. INDIFFERENCE CURVE ANALYSIS

4. THE CONSUMER’S BUDGET

    A) BUDGET SET

    B) BUDGET LINE

5. PREFERENCES OF THE CONSUMER

    A) INDIFFERENCE CURVE

    B) INDIFFERENCE MAP

6. CONDITIONS OF CONSUMER’S EQUILIBRIUM

7. DEMAND

    A) INDIVIDUAL DEMAND

    B) MARKET DEMAND

    C) DEMAND SCHEDULE

    D) DEMAND CURVE

8. DETERMINANTS OF DEMAND

9. MOVEMENT ALONG THE DEMAND CURVE

    A) EXTENSION

    B) CONTRACTION

10. SHIFT IN THE DEMAND CURVE

    A) INCREASE IN DEMAND

    B) DECREASE IN DEMAND

11. MEASUREMENT OF PRICE ELASTICITY OF DEMAND

     A) TOTAL EXPENDITURE METHOD

     B) PROPORTIONATE METHOD

    C) GEOMETRIC METHOD

12. FACTORS AFFECTING PRICE – ELASTICITY OF DEMAND

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand Complete Notes

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand : When consumers make choices about the quantity of goods and services to consume, it is presumed that their objective is to maximize total utility. In maximizing total utility, the consumer faces a number of constraints, the most important of which are the consumer’s income and the prices of the goods and services that the consumer wishes to consume. The consumer’s effort to maximize total utility, subject to these constraints, is referred to as the consumer’s problem. The solution to the consumer’s problem, which entails decisions about how much the consumer will consume of a number of goods and services, is referred to as consumer equilibrium.

Determination of consumer equilibrium. Consider the simple case of a consumer who cares about consuming only two goods: good 1 and good 2. This consumer knows the prices of goods 1 and 2 and has a fixed income or budget that can be used to purchase quantities of goods 1 and 2. The consumer will purchase quantities of goods 1 and 2 so as to completely exhaust the budget for such purchases. The actual quantities purchased of each good are determined by the condition for consumer equilibrium, which is

This condition states that the marginal utility per dollar spent on good 1 must equal the marginal utility per dollar spent on good 2. If, for example, the marginal utility per dollar spent on good 1 were higher than the marginal utility per dollar spent on good 2, then it would make sense for the consumer to purchase more of good 1 rather than purchasing any more of good 2. After purchasing more and more of good 1, the marginal utility of good 1 will eventually fall due to the law of diminishing marginal utility, so that the marginal utility per dollar spent on good 1 will eventually equal that of good 2. Of course, the amount purchased of goods 1 and 2 cannot be limitless and will depend not only on the marginal utilities per dollar spent, but also on the consumer’s budget.

An example. To illustrate how the consumer equilibrium condition determines the quantity of goods 1 and 2 that the consumer demands, suppose that the price of good 1 is $2 per unit and the price of good 2 is $1 per unit. Suppose also that the consumer has a budget of $5. The marginal utility ( MU) that the consumer receives from consuming 1 to 4 units of goods 1 and 2 is reported in Table . Here, marginal utility is measured in fictional units called utils, which serve to quantify the consumer’s additional utility or satisfaction from consuming different quantities of goods 1 and 2. The larger the number of utils, the greater is the consumer’s marginal utility from consuming that unit of the good. Table also reports the ratio of the consumer’s marginal utility to the price of each good. For example, the consumer receives 24 utils from consuming the first unit of good 1, and the price of good 1 is $2. Hence, the ratio of the marginal utility of the first unit of good 1 to the price of good 1 is 12.

The consumer equilibrium is found by comparing the marginal utility per dollar spent (the ratio of the marginal utility to the price of a good) for goods 1 and 2, subject to the constraint that the consumer does not exceed her budget of $5. The marginal utility per dollar spent on the first unit of good 1 is greater than the marginal utility per dollar spent on the first unit of good 2(12 utils > 9 utils). Because the price of good 1 is $2 per unit, the consumer can afford to purchase this first unit of good 1, and so she does. She now has $5 − $2 = $3 remaining in her budget. The consumer’s next step is to compare the marginal utility per dollar spent on the second unit of good 1 with marginal utility per dollar spent on the first unit of good 2. Because these ratios are both equal to 9 utils, the consumer is indifferent between purchasing the second unit of good 1 and first unit of good 2, so she purchases both. She can afford to do so because the second unit of good 1 costs $2 and the first unit of good 2 costs $1, for a total of $3. At this point, the consumer has exhausted her budget of $5 and has arrived at the consumer equilibrium, where the marginal utilities per dollar spent are equal. The consumer’s equilibrium choice is to purchase 2 units of good 1 and 1 unit of good 2.

The condition for consumer equilibrium can be extended to the more realistic case where the consumer must choose how much to consume of many different goods. When there are N > 2 goods to choose from, the consumer equilibrium condition is to equate all of the marginal utilities per dollar spent,

subject to the constraint that the consumer’s purchases do not exceed her budget.

ONE MARK QUESTIONS AND ANSWERS

1. What do you mean by utility?

Ans :- Utility is the want satisfying power of a commodity.

2. How is total utility derived from marginal utility?

Ans :- Total utility is the sum total of marginal utilities of various units of a commodity.

                          TUn= MU1+MU2+MU3—— +MUn

3. State the law of equi-marginal utility.

Ans :– It states that a consumer gets maximum satisfaction when the ratio of the marginal utilities of two goods and their prices is equal i.e., MUx / Px = MUy / Py

4. What will you say about MU when TU is maximum?

Ans :– MU is zero when TU is maximum

5. Give the reason behind a convex indifference curve.

Ans :– Diminishing marginal rate of substitution.

HOTS QUESTIONS

1. Give the formula for calculating the slope of the budget line.

Ans :- It is equal to the ratio of the prices of the two commodities , i.e., Px / Py

2. Suppose a consumer’s preferences are monotonic. What can you say about his preference ranking over the bundles (10,10),(10,9) and (9,9)?

Ans :- Consumer will monotonically prefer bundle (10,10) to (10,9) and (9,9) and also prefer bundle (10,9) to (9,9)

3. A rise in the income of the consumer leads to a fall in the demand for commodity ‘x’. What type of good is commodity ‘x’?

Ans :- Inferior good

4. What do you mean by substitute and complementary goods? Give two examples each.

Ans :- Substitute goods are those goods which can be used in place of each other. Ex. Tea and Coffee. Complementary goods are those goods which are used together to satisfy a given want. Ex : Car and petrol.

5. Mention one factor that causes a leftward shift of the demand curve.

Ans :- Fall in income of a consumer.

6. What causes a movement along the demand curve of a commodity?

Ans :- When the price of a commodity changes and other factors remain constant, there will be movement along the demand curve.

7. What is demand function?

Ans: – A demand function shows the functional relationship between the quantity demanded and the factors on which demand depends on.

CBSE Class 12 Commerce Economics Consumer Equilibrium And Demand Complete Notes

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