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class 12 commerce economics study material

class 12 commerce economics study material

class 12 commerce economics study material:- Economics is one of the social sciences, which has great influence on every human being. As economic life and the economy go through changes, the need to ground education becomes essential. While doing so, it is imperative to provide them opportunities to acquire analytical skills to observe and understand the economic realities. At senior secondary stage, the learners are in a position to understand abstract ideas, exercise the power of thinking and to develop their own perception. It is at this stage, the learners are exposed to the rigour of the discipline of economics in a systematic way.

class 12 commerce economics study material

class 12 commerce economics study material

class 12 commerce economics study material

class 12 commerce economics study material:- Economics : Introductory Microeconomics

class 12 commerce economics study material:-central problems of an economy.

Every economy faces three central problems due to scarce availability of resources. This scarcity challenges the best possible usage of these available resources to fulfil the unlimited demands. The three central problems of an economy are as follows:

  1. What to produce and in what quantities?

The very first problem encountered by any economy is to decide what goods are to be produced and in what quantities or amount. There is a lot to be decided; whether to produce consumer goods or luxury goods; agricultural goods or investment goods; whether to cater education and healthcare sector or to strengthen country’s military. An appropriate example was set by the Latin American nation Costa Rica; they dismantled their military in 1949 and invested the money, which earlier was spent on the maintenance of their army, on education and healthcare. Once it is decided, what to produce, the next decision is to estimate the amount or quantity of the production. So the economy constantly struggles to choose what to produce and in what quantities.

  1. How to produce?

The second problem that arrives is how to harvest the given or available resources? That is, what technique is to be used for producing various goods and services? It depends majorly on the nation’s endowment of resources in deciding the optimum technique. It has to be decided whether efficient production is possible through labour-intensive or capital-intensive techniques. This decision rest on the present economic conditions and also that the selected technique shall not only reduce the cost of production but also add to the social and economic welfare. For example, if a country is facing wide unemployment possibly due to huge population, then it is wise to opt for labour-intensive technique so that there is reduction in unemployment.

  1. For whom to produce?

Finally, the purposeful distribution of final goods and services produced (national income) has to be done; that is, who gets what and how much? The economy needs to decide the best suitable mechanism for distribution of the final products among different segments of the society. The objective behind selecting such mechanism is to reduce inequality of income, to reduce poverty and to add to the social welfare and standard of living of people.

class 12 commerce economics study material:-What do you mean by the production possibilities of an economy?

Production possibilities of an economy imply those numerous alternative combinations of goods and services, which a particular economy can produce, with the given technology and employing the available resources fully and efficiently. In other words, it refers to various feasible bundles of goods and services that can be produced together by efficiently utilising the given technology and available resources.

class 12 commerce economics study material:-budget line

A budget line represents the different combinations of two goods that are affordable and are available to a consumer; while being aware of his/her income-level and market prices of both the goods.

Let x1 be the amount of good 1.

x2 be the amount of good 2.

P1 be the price of good 1.

P2 be the price of good 2.

P1x1 = Total money spent on good 1

P1x2 = Total money spent on good 2

Then, the budget line will be:

P1x1 + P2x2 = M

All the consumption bundles on the budget line cost the consumer exactly the equivalent of hi/her income.

class 12 commerce economics study material:-concept of a production function.

The production function of a firm depicts the relationship between the inputs used in the production process and the final output. It specifies how many units of different inputs are needed in order to produce the maximum possible output. Production function is written as:

Qx = f (L, K)


Qx represents units of output x produced.

L represents units of labour employed.

K represents units of capital employed.

The above equation explains that Qx, units of output x are produced by employing L and K units of labour and capital respectively and by a given technology. As the given level of technology appreciates, the output will increase with the same level of capital and labour units.

class 12 commerce economics study material:-What is the total product of an input?

Total product is defined as the sum total of output produced by a firm by employing a particular input. It is also known as the Total Physical Product and is represented as

Where, ∑ represents summation of all outputs and Qx represents units of output x produced by an input.

class 12 commerce economics study material:-What are the characteristics of a perfectly competitive market?

Perfect Competition

This type of market structure refers to the market that consists of a large number of buyers and also a large number of sellers. No individual seller is able to influence the price of an existing product in the market. All sellers in a perfect competition produce homogenous outputs, i.e. the outputs of all the sellers are similar to each other and the products are uniformly priced.

Features of Perfectly Competitive Market

1) A large number of buyers and sellers

There exist a large number of buyers and sellers in a perfectly competitive market. The number of sellers is so large that no individual firm owns the control over the market price of a commodity.

Due to the large number of sellers in the market, there exists a perfect and free competition. A firm acts as a price taker while the price is determined by the ‘invisible hands of market’, i.e. by ‘demand for’ and ‘supply of’ goods. Thus, we can conclude that under perfectly competitive market, an individual firm is a price taker and not a price maker.

2) Homogenous products

All the firms in a perfectly competitive market produce homogeneous products. This implies that the output of each firm is perfect substitute to others’ output in terms of quantity, quality, colour, size, features, etc. This indicates that the buyers are indifferent to the output of different firms. Due to the homogenous nature of products, existence of uniform price is guaranteed.

3) Free exit and entry of firms

In the long run there is free entry and exit of firms. However, in the short run some fixed factors obstruct the free entry and exit of firms. This ensures that all the firms in the long-run earn normal profit or zero economic profit that measures the opportunity cost of the firms either to continue production or to shut down. If there are abnormal profits, new firms will enter the market and if there are abnormal losses, a few existing firms will exit the market.

4) Perfect knowledge among buyers and sellers

Both buyers and sellers are fully aware of the market conditions, such as price of a product at different places. The sellers are also aware of the prices at which the buyers are willing to buy the product. The implication of this feature is that if any individual firm is charging higher (or lower) price for a homogeneous product, the buyers will shift their purchase to other firms (or shift their purchase from the firm to other firms selling at lower price).

5) No transport costs

This feature means that all the firms have equal access to the market. The goods are produced and sold locally. Therefore, there is no cost of transporting the product from one part of the market to other.

6) Perfect mobility of factors of production

There exists geographically and occupationally perfect mobility of factors of production. This implies that the factors of production can move from one place to other and can move from one job to another.

7) No promotional and selling costs

There are no advertisements and promotional costs incurred by the firms. The selling costs under perfectly competitive market are zero.

class 12 commerce economics study material:-How are the total revenue of a firm, market price, and the quantity sold by that firm related to each other?

Total revenue is defined as the total sales proceeds of a producer by selling corresponding level of output. In other words, it is defined as price times the quantity of output sold.

Total Revenue = Price x Quantity of output sold

TR = P x Q


In a perfectly competitive market, the market price is given, i.e., a firm acts as a price taker and cannot influence the price. Hence, a particular firm can influence its TR by altering the quantity of output sold.

class 12 commerce economics study material:-Explain market equilibrium.

Market equilibrium is defined as the state of rest that is determined by the rational objectives of the consumers and the producers (i.e. maximisation of satisfaction and profit respectively). It is a state where the aggregate quantity that all the firms want to sell are purchased by consumers, i.e. market supply equals market demand. At this situation, there is no incentive or tendency for any change in quantity demanded, quantity supplied and price. That is: yd = ys.

class 12 commerce economics study material:-When do we say that there is an excess demand for a commodity in the market?

When the market demand exceeds the market supply at a particular price, then the situation that arises is excess demand. In other words, if at any price, the producers are willing to supply comparatively less than what is demanded by all the consumers in the market, then we face the situation of excess demand.

class 12 commerce economics study material

Recommended Read:- class 12 commerce economics study material

class 12 commerce economics study material

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