Aman Sadhar, [22-Jun-25 6:39 PM]
Microeconomics –
¶ 1. What is utility? State the two laws of utility. Utility means
the satisfaction a person gets from consuming goods or
services. It helps understand consumer choices. There are two
important laws related to utility:
1. Law of Diminishing Marginal Utility – It says that as a person
consumes more units of the same good, the extra satisfaction
(marginal utility) from each new unit keeps falling. For example,
the first chapati gives more satisfaction than the fourth or fifth.
¶ 2. Law of Equi-Marginal Utility – This law explains how
consumers spend their income to get maximum satisfaction. A
person allocates their money on different goods in such a way
that the satisfaction per rupee spent is equal for all goods. If
not, they will shift spending from one good to another until it
balances.
,Together, these laws help us understand how people make
decisions about what and how much to buy with limited
income.
¶ 2. Explain the law of demand with its assumptions. The law of
demand is a basic principle in economics. It states that when
the price of a good falls, the quantity demanded increases, and
when the price rises, the quantity demanded decreases,
assuming all other things remain constant (ceteris paribus).
This happens because people like to buy more when prices are
low and reduce their demand when prices go up. The demand
curve is downward sloping from left to right.
Assumptions of the Law of Demand:
1. Consumer’s income remains constant.
2. Prices of related goods (substitutes and complements)
remain the same.
3. Tastes and preferences of consumers do not change.
4. No expectation of future price changes.
,If these assumptions are not met, the law may not hold true. It
helps producers decide pricing and output strategies.
¶ 3. What is elasticity of demand? Explain price elasticity.
Elasticity of demand measures how much the quantity
demanded of a good changes when there is a change in its
price, income, or the price of related goods.
Price Elasticity of Demand (PED) is the most common type. It
measures the responsiveness of demand to a change in price. It
is calculated using this formula:
For example, if price falls by 10% and demand rises by 20%, PED
= 2 (elastic).
Types of price elasticity:
1. Perfectly elastic
2. Perfectly inelastic
, 3. Unitary elastic
4. Elastic (>1)
5. Inelastic (<1)
Knowing elasticity helps firms set prices and predict consumer
behavior.
¶ 4. Types of elasticity of demand. Elasticity of demand is not
only about price. It includes several types:
1. Price Elasticity of Demand – Change in quantity due to
change in own price.
2. Income Elasticity of Demand – Change in demand due to
change in consumer’s income. Normal goods have positive
income elasticity; inferior goods have negative.
3. Cross Elasticity of Demand – Change in demand of one good
due to change in price of related good (substitute or
complement).
Microeconomics –
¶ 1. What is utility? State the two laws of utility. Utility means
the satisfaction a person gets from consuming goods or
services. It helps understand consumer choices. There are two
important laws related to utility:
1. Law of Diminishing Marginal Utility – It says that as a person
consumes more units of the same good, the extra satisfaction
(marginal utility) from each new unit keeps falling. For example,
the first chapati gives more satisfaction than the fourth or fifth.
¶ 2. Law of Equi-Marginal Utility – This law explains how
consumers spend their income to get maximum satisfaction. A
person allocates their money on different goods in such a way
that the satisfaction per rupee spent is equal for all goods. If
not, they will shift spending from one good to another until it
balances.
,Together, these laws help us understand how people make
decisions about what and how much to buy with limited
income.
¶ 2. Explain the law of demand with its assumptions. The law of
demand is a basic principle in economics. It states that when
the price of a good falls, the quantity demanded increases, and
when the price rises, the quantity demanded decreases,
assuming all other things remain constant (ceteris paribus).
This happens because people like to buy more when prices are
low and reduce their demand when prices go up. The demand
curve is downward sloping from left to right.
Assumptions of the Law of Demand:
1. Consumer’s income remains constant.
2. Prices of related goods (substitutes and complements)
remain the same.
3. Tastes and preferences of consumers do not change.
4. No expectation of future price changes.
,If these assumptions are not met, the law may not hold true. It
helps producers decide pricing and output strategies.
¶ 3. What is elasticity of demand? Explain price elasticity.
Elasticity of demand measures how much the quantity
demanded of a good changes when there is a change in its
price, income, or the price of related goods.
Price Elasticity of Demand (PED) is the most common type. It
measures the responsiveness of demand to a change in price. It
is calculated using this formula:
For example, if price falls by 10% and demand rises by 20%, PED
= 2 (elastic).
Types of price elasticity:
1. Perfectly elastic
2. Perfectly inelastic
, 3. Unitary elastic
4. Elastic (>1)
5. Inelastic (<1)
Knowing elasticity helps firms set prices and predict consumer
behavior.
¶ 4. Types of elasticity of demand. Elasticity of demand is not
only about price. It includes several types:
1. Price Elasticity of Demand – Change in quantity due to
change in own price.
2. Income Elasticity of Demand – Change in demand due to
change in consumer’s income. Normal goods have positive
income elasticity; inferior goods have negative.
3. Cross Elasticity of Demand – Change in demand of one good
due to change in price of related good (substitute or
complement).
