I.Com (Intermediate in Commerce) Principles of Economics Syllabus

State two important exceptions to the Law of Diminishing Marginal Utility.

Hobbies and collections (stamps, coins), money/wealth, drugs and intoxicants, rare items, and the desire for knowledge — in these cases utility may not diminish (or may increase) with more units.

What is an indifference curve?

An indifference curve is a locus of points showing different combinations of two goods that give the consumer the same level of total satisfaction (utility), so the consumer is indifferent among all combinations on it.

State the four main properties of an indifference curve.

1) It slopes downward (negative slope) from left to right. 2) It is convex to the origin. 3) Two indifference curves never intersect. 4) A higher indifference curve represents a higher level of satisfaction.

What is the Marginal Rate of Substitution (MRS)?

MRS is the rate at which a consumer is willing to give up units of one good to obtain one more unit of another good while remaining on the same indifference curve. MRS diminishes as we move down the curve.

Why is an indifference curve convex to the origin?

Because of the diminishing marginal rate of substitution — as the consumer gets more of one good, they are willing to give up less and less of the other good for it.

What is an indifference map?

An indifference map is a set (family) of indifference curves, where each curve represents a different level of satisfaction; curves farther from the origin show higher satisfaction.

What is a budget line (price line) in indifference curve analysis?

The budget line shows all combinations of two goods that a consumer can buy with a given money income at given prices. It represents the consumer's purchasing power constraint.

What is the condition for consumer's equilibrium under the indifference curve approach?

The consumer is in equilibrium where the budget line is tangent to the highest attainable indifference curve, i.e., where the slope of the budget line equals the MRS (slope of the indifference curve).

State the condition for consumer's equilibrium for a single commodity under the utility (cardinal) approach.

The consumer is in equilibrium where Marginal Utility of the good equals its Price (MU = P), i.e., the marginal utility of the last rupee spent equals the price paid.

State the Law of Equi-Marginal Utility (Law of Substitution) condition for two goods X and Y.

A consumer maximises satisfaction where MUx/Px = MUy/Py, i.e., the marginal utility per rupee (last rupee spent) is equal across all goods, within the income constraint.

What is the Law of Equi-Marginal Utility also known as?

It is also called the Law of Substitution, the Law of Maximum Satisfaction, or Gossen's Second Law.

Define 'demand' in Economics.

Demand is the quantity of a commodity that a consumer is willing and able to buy at a given price during a given period of time. Mere desire without purchasing power is not demand.

State the Law of Demand.

Other things being equal, when the price of a commodity falls, its quantity demanded rises, and when the price rises, its quantity demanded falls. There is an inverse relationship between price and quantity demanded.

Why does the demand curve slope downward from left to right?

Because of the inverse price–quantity relationship, caused by the law of diminishing marginal utility, the income effect, the substitution effect, and the entry of new buyers at lower prices.

State three assumptions of the Law of Demand.

Consumer's income, tastes and preferences, prices of related (substitute and complementary) goods, and expectations about future prices all remain constant (ceteris paribus).

State any three exceptions to the Law of Demand.

Giffen goods, goods of ostentation/prestige (Veblen goods), expectation of future price changes, ignorance of the consumer, and necessities of life — in these cases more may be demanded at a higher price.

What is the difference between a change in quantity demanded and a change in demand?

A change in quantity demanded is movement along the same demand curve due to a price change. A change in demand is a shift of the whole curve due to non-price factors (income, tastes, related goods' prices).

Define 'supply' in Economics.

Supply is the quantity of a commodity that a seller is willing and able to offer for sale at a given price during a given period of time.

State the Law of Supply.

Other things being equal, when the price of a commodity rises, its quantity supplied increases, and when the price falls, its quantity supplied decreases. There is a direct (positive) relationship between price and quantity supplied.

Why does the supply curve slope upward from left to right?

Because of the direct relationship between price and quantity supplied — higher prices give producers more incentive and profit to supply more, so the curve rises from left to right.

What is the difference between a change in quantity supplied and a change in supply?

A change in quantity supplied is movement along the supply curve due to the good's own price change. A change in supply is a shift of the curve due to other factors (cost of inputs, technology, taxes).

Define 'elasticity of demand'.

Elasticity of demand is the degree of responsiveness of quantity demanded to a change in one of its determinants (price, income, or price of related goods).

What are the three main types of elasticity of demand?

Price elasticity of demand, income elasticity of demand, and cross elasticity of demand.

State the formula for price elasticity of demand.

Ed = (Percentage change in quantity demanded) / (Percentage change in price) = (ΔQ/Q) / (ΔP/P). It carries a negative sign due to the inverse relationship.

What does price elasticity of demand equal to 1 (Ed = 1) mean?

Unitary elastic demand: the percentage change in quantity demanded is exactly equal to the percentage change in price.

Distinguish between elastic and inelastic demand using the value of Ed.

Demand is elastic when Ed > 1 (quantity changes more than price) and inelastic when Ed < 1 (quantity changes less than price).

What are perfectly elastic and perfectly inelastic demand?

Perfectly elastic demand: Ed = ∞ (a horizontal demand curve; any tiny price change causes infinite change in quantity). Perfectly inelastic demand: Ed = 0 (a vertical curve; quantity does not change with price).

State the formula for income elasticity of demand and what a positive value indicates.

Ey = (% change in quantity demanded) / (% change in income). A positive value indicates a normal good; a negative value indicates an inferior good.

State the formula for price elasticity of supply.

Es = (Percentage change in quantity supplied) / (Percentage change in price) = (ΔQ/Q) / (ΔP/P). It is normally positive.

What is market equilibrium of demand and supply?

Market equilibrium occurs where the quantity demanded equals the quantity supplied. At this point the demand and supply curves intersect, determining the equilibrium price and equilibrium quantity.

What happens to price when there is excess supply (surplus) versus excess demand (shortage)?

Excess supply (surplus, supply > demand) pushes the price down. Excess demand (shortage, demand > supply) pushes the price up. The market moves back to equilibrium.

What is the meaning of 'production' in Economics?

Production is the process of creating or adding utility to goods and services to satisfy human wants. It involves transforming inputs (factors of production) into output and creating form, place, time, or possession utility.