Consumer Equilibrium Demand (Frequently asked Questions)

Read this article to learn about the most frequently asked questions on consumer equilibrium demand.

Q.1. Define Utility.

Ans. The extent to which a consumer expects a commodity to satisfy his want for same is known as utility of that commodity for him.

Q.2. Define marginal utility.

Ans. Marginal Utility of a commodity is the additional satisfaction derived by consuming one more unit of that commodity.

Q.3. What is meant by consumer’s equilibrium?

Ans. Consumer’s equilibrium is the situation when a consumer gets maximum satisfaction from consumption of one (or more) goods with his given income and price and feels no urge to change.

Q.4. Define ‘Demand’.

Ans. Demand by an individual for a commodity is the quantity of that commodity which he is willing to buy at a particular price in a given period of time.

Q.5. What is law of Demand?

Ans. Inverse relation between price and demand of a good, other things remaining the same, is termed as law of demand.

Q.6. Define market demand.

Ans. Sum total of demands of all the consumers taken together.

Q.7. What are substitute goods?

Ans. Substitute goods are those goods which can be used for each other. For example tea and coffee.

Q.8. How is TU derived from MU?

Ans. TU of a commodity can be obtained by adding marginal utilities of all the units consumed.

Q.9. Define an Indifference curve.

Ans. A curve joining all such points that represent such bundles of two goods among which the consumer is indifferent.

OR

It is a locus of points that show such combinations of two commodities which give the consumer same satisfaction.

Q.10. Define Indifference Map.

Ans. It is the family of indifference curves that represent consumer preferences over all the bundles of the two goods.

Q.11. Define monotonic preference.

Ans. A consumer’s preference is called monotonic if he prefers the bundle which has more of at least one of the goods, when the quantity of the other good is not lowered.

Q.12. Define a budget line.

Ans. Locus of different combinations of the two goods which the consumer can afford by spending his whole income.

Q.13. Define budget set.

Ans. A set of all bundles of two commodities that a consumer can buy with his given income at the given market prices is called the budget set.

Q.14. What will you say about MU when TU is maximum?

The MU will be zero when TU is maximum.

Q.14a. If you are provided commodities free of cost, at what level you would stop consuming those goods?

Ans. The moment MU = O (i.e. point of satiety).

Q.15. Define law of diminishing marginal utility.

Ans. The law of diminishing marginal utility states that as more and more units of a commodity are consumed by a consumer, the marginal utility derived from each successive unit tends to diminish.

Q.16. What is meant by marginal rate of substitution (MRS)?

Ans. Marginal rate of substitution is the quantity of one good that a consumer is willing to sacrifice to get an extra unit of other commodity.

Q.17. Why is MRS always diminishing?

Ans. MRS is always diminishing because the consumer will be willing to sacrifice lesser quantity of other good for each additional unit of a commodity.

Q.18. When does a consumer attain equilibrium according to indifference curve approach?

Ans. According to indifference curve approach, a consumer attains equilibrium at a point where budget line is tangent to indifference curve or slope of budget line and IC-curve is same.

Q.19. State condition of consumer’s equilibrium in case of a single commodity.

Ans. In case of a single commodity, the consumer is at equilibrium when marginal utility in terms of money is equal to the price of the commodity.

i.e., Mu of a Commodity/ Mu of a money= Price of the commodity

Q.20. When is a consumer at equilibrium in case of more than one commodity?

Ans. In case of more than one commodity, a consumer is at equilibrium when:

Q.21. Define ‘change in quantity demanded’.

Ans. The rise or fall in demand of a commodity due to a change in its price alone is called change in quantity demanded.

Q.22. Define ‘change in demand’.

Ans. The rise or fall in demand of a commodity caused by factors other than price of the commodity is called ‘change in demand’.

Q.23. What is meant by ‘expansion of demand’?

Ans. Rise in the quantity demanded of a commodity due to fall in its price alone, keeping other factors constant, is called ‘expansion of demand’.

Q.24. What is meant by ‘contraction of demand’?

Ans. Fall in quantity demanded of a commodity due to rise in its price alone, keeping other factors constant, is called contraction of demand.

Q.25. When does a leftward shift of demand curve take place?

Ans. Demand curve shifts towards left in case of decrease in demand due to factors other than price of a commodity.

Q.26. When is there a rightward shift in demand curve?

Demand curve shifts to the right in case of increase in demand due to factors other than price of a commodity.

Q.27. Give the meaning of market demand.

OR

Define market demand.

Ans. Market demand is the total demand of a commodity by all the households in the market, at different prices in a given time period.

Q.28. Define ‘demand curve’.

Ans. The graphical representation of a demand schedule is called as demand curve.

Q.29. Give one reason for shift in demand curve.

Ans. A demand curve shifts when there is change in a factor other than own price of product.

Q.30. What will be the effect of increase in income of the consumer on the demand curve for a normal good?

Ans. Demand curve for a normal good will shift to the right in case of increase in the income of the consumer.

Q.31. What is cross price effect?

Ans. The effect of change in the price of one commodity on the quantity demanded of the other commodity is known as cross price effect. .

Q.32. What will be the effect of income increase on the demand for an inferior good?

Ans. The demand for an inferior good will decrease if there is increase in the income of a consumer.

Q.33. What is a demand schedule?

Ans. Demand schedule is a tabular statement which shows the quantities demanded of a commodity at different prices during a period of time.

Q.34. Define slope of TU curve.

Ans. MU is the slope of the TU curve, since MU =∆TU/ ∆Q.

Q.35. Define slope of budget line or price line.

Ans. The slope of budget line means at certain given price what is the opportunity cost of a commodity in terms of other commodity sacrificed.

Q.36. Define slope of indifference curve.

Ans. The slope of indifference curve measures the ratio of substitution between the two goods (marginal rate of substitution.)

Q.37. Define saturation point.

Ans. Saturation point is that level of consumption where total utility is maximum and marginal utility is zero.

Q.38. State the law of equimarginal utility.

Ans. The law of equimarginal utility states that to get maximum satisfaction the consumer should spend his limited income in such a way that the utility derived from the last rupee spent on each commodity is equal.

Q.39. What is the slope of indifference curve?

Ans. Slope of indifference curve = ∆Y/ ∆X= MRS_xy

Q.40. Why is an indifference curve convex to the origin?

Ans. An indifference curve is convex to the origin because of diminishing marginal rate of substitution.

Q.41. If an increase in price of X leads to decrease in demand for Y, how are the two goods related?

Ans. X and Y are complementary goods.

Q.42. If an increase in price of X leads to an increase in demand for Y, how are the two good related?

Ans. X and Y are substitutes of each other.

Q.43 .What is meant by inferior good in economics?

OR

In economics, what is an inferior good?

Ans. A good is called inferior when with rise in income, its demand falls.

Q.44. What is meant by normal good in economics?

OR

When is a good called a normal good.

Ans. A good is called a normal good if its demand rises with an increase in the income of the consumer and falls when there is a decrease in the income.

Q.45. If the quantity demanded of a commodity X decreases as the household income increases, what type of good is X?

Ans. X is an inferior good.

Q.46. What happens to the demand for its substitute good when the price of a commodity falls?

Ans. If price of a commodity falls, demand for its substitute will decrease.

Q.47. State any one factor that causes an increase in the demand for a good.

Ans. Increase in income of the consumer will lead to an increase in demand for a good.

Q.48. What happens to TU when MU becomes negative?

Ans. The TU starts falling when MU becomes negative.

Q.49. Define total utility.

Ans. The aggregate utility that a consumer gets from the consumption of a given units of a commodity is called its total utility.

Q.50. What is demand function?

Ans. The demand function shows the relationship between demand of a commodity and the factors that influence its demand.

Q.51. What is the aim of a consumer?

Ans. The aim of a consumer is to get maximum satisfaction by the consumption of goods & services.

Q.52. What is law of demand?

Ans. Law of demand states that other factors remaining constant, demand will be more at lower price and less at higher price.

Q.53. Mention any two determinants of demand other than price of the commodity.

Ans. (i) Income of the consumer.

(ii) Prices of related goods.

Q.54. How is market demand schedule derived from individual demand schedule?

Ans. Market demand schedule can be derived by taking horizontal summation of Individual demand schedules at different prices.

Q.55. Define complementary goods.

Ans. Complementary goods are those goods which are used together to satisfy a given want.

Q.56. What will happen to demand for substitute good of a commodity when price of the commodity rises?

Ans. When the price of a commodity rises, demand for its substitute will increase.

Q.57. What will happen to demand for substitute good of a commodity when price of the commodity falls?

Ans. If the price of a commodity falls, demand for its substitutes will decrease.

Q.58. What will happen to the demand for a commodity if price of complementary good rises?

Ans. The demand for a commodity will fall If price of its complementary good increases.

Q.59. What will happen to the demand for a commodity when price of its complementary good falls?

Ans. The demand for a commodity will increase If price of its complementary good falls.

Q.60. What will be the effect on the demand curve when price of a complementary good rises?

Ans. The demand curve will shift to the left when price of a complementary good rises.

Q.61. What will be the effect on the demand curve when price of a substitute good goes up?

Ans. The demand curve of the commodity will shift to the right if price of substitute good goes up.

Q.62. Give an example of a pair of substitute commodities.

Ans. Tea and Coffee.

Q.63. Give an example of a pair of complementary commodities.

Ans. Car and Petrol.

Q.64. What is meant by direct demand?

Ans. Demand for goods which are used for direct consumption for satisfaction of wants is called direct demand, e.g., Demand for T-shirt, Bread etc.

Q.65. Define giffen goods.

Ans. Giffen goods are those inferior goods whose price effect is positive i.e., when, their price increases its demand also rises, more so their income effect is (-)ve.

Q.66. What is meant by movement along a demand curve?

Ans. Change in quantity demanded of a commodity i.e. due to change in its price is known as movement along the demand curve.

Q.67. How will an increase in the price of coffee affect the demand for tea?

Ans. An increase in the price of coffee will increase the demand for tea since tea and coffee are substitute of each other.

Q.68. Define price elasticity of demand.

Ans. The degree of responsiveness of demand of a commodity due to a change in its price is called price elasticity of demand.

Q.69. How will an increase in the price of tea affect the demand for sugar?

Ans. Increase in the price of tea will reduce the demand for sugar because tea and sugar are complementary goods.

Q.70. How is market demand curve derived from the individual demand curves?

Ans. Market demand curve is derived by horizontal summation of individual demand curves at different prices.

Q.71. What is meant by income effect?

Ans. Income effect means that when the price of a commodity falls, the real income of the consumer increases and vice versa.

Q.72. What is meant by substitution effect?

Ans. Substitution effect means that when the price of a commodity falls it becomes cheaper as compared to its substitutes and people replace a dearer commodity with a cheaper one.

Q.73. What will be the effect on the demand for petrol if prices of cars rise?

Ans. The demand for petrol will fall with a rise in the price of cars.

Q.74. What will be the effect on the demand for cars if price of petrol rises?

Ans. The demand for cars will decrease if price of petrol rises.

Q.75. What will be the effect on demand for coffee if price of tea goes down?

Ans. The demand for coffee will decrease if price of tea goes down.

Q.76. What is a derived demand?

Ans. Goods which are not directly used for consumption have a derived demand, because their demand depends upon demand for some other commodity.

Q.77. What is meant by Joint Demand?

Ans. Joint demand can be defined as demand for a commodity for which other commodities are also jointly required for e.g., demand for a Tea is joint demand for which tea leaves. Burner, Water, Milk etc. are required.

Q.78. What is meant by composite Demand?

Ans. Composite demand can be defined as the demand for a commodity having several uses. e.g., Milk.

Q.79. How will an increase in price of tea affect the demand for coffee?

Ans. An increase in price of tea will lead to an increase in demand for coffee.

Q.80. What will be the effect on market demand of a commodity when its price goes up?

Ans. Market demand will fall when the price of a commodity goes up.

Q.81. How are demand of a commodity and its price related to each other?

Ans. The demand of a commodity and its price are usually inversely related to each other.

Q.82. Name the type of goods, demand for which goes down when the income of the consumer increases?

Ans. “Inferior” i.e. less expensive goods.

Q.83. Name two factors that affect the market demand of a commodity.

Ans. (i) Size of Population

(ii) Distribution of Income

Q.84. If prices are expected to rise in future, what will be the effect of rise in price of the commodity on its demand?

Ans. Current demand will increase because future prices are expected to rise.

Q.85. The price of two goods A and B falls by Re. l per unit. Increase in demand for A is 80 units and that for B is 100 units in the same period. Can we say that the demand for B is more elastic than demand for A?

Ans. No, we cannot comment on elasticity, as elasticity is the measure of percentage change in price and quantity and in this case both cannot be measured in the absence of previous data.

Q.86. What is meant by an elastic demand?

Ans. Demand is said to be elastic if percentage change in quantity demanded is more than the percentage change in price of the commodity.

Q.87. When is the demand of a commodity said to be inelastic?

OR

When is demand for a good said to be inelastic.

Ans. When the proportionate rise in demand is less than the proportionate fall in price.

OR

Proportionate fall in demand is less than proportionate rise in price.

Q.88 When is the demand for a good said to be perfectly inelastic?

Ans. When demand does not change with change in price.

Q.89. Price of a good falls from Rs.l0 to Rs.8. As a result, its demand rises from 80 units to 100 units. What can you say about price elasticity of demand by total expenditure method?

Ans. The total expenditure on the commodity remains the same, thus demand is unitary elastic.

Q.90. If price of a commodity falls by 80% and its quantity demanded increases by 100% what is the nature of demand.

Ans. Since percentage change in quantity demanded is more as compared to the percentage change in the price of the commodity, demand is elastic.

Q.91. How is elasticity of demand measured by Geometrical Method?

Ans. As per the Geometrical Method, elasticity of demand at any point on a straight line demand curve is defined as:

E_d = Lower Portion of Demand Curve/ Upper portion of Demand Curve

Q.92. When is the demand unit elastic?

Ans. If the percentage change in quantity demanded is equal to the percentage change in price of the commodity, the demand is called unit elastic.

Q.93. What will be the shape of a perfectly elastic demand curve?

Ans. A perfectly elastic demand curve will be parallel to X-axis.

Q.94. What is the shape of a perfectly inelastic demand?

Ans. A perfectly inelastic demand curve will be parallel to Y axis.

Q.95. What will be the shape of the demand curve having at every point?

Ans. The shape of demand curve having at every point will be a rectangular hyperbola.

Q.96. How does the availability of close substitutes of a good affect the elasticity of demand of that good?

Ans. A commodity having more close substitutes will have a more elastic demand as compared to a commodity having very few or no close substitutes.

Q.97. When is demand said to be elastic by expenditure method?

Ans. The demand will be elastic if price of the commodity and total expenditure move in the opposite direction.

Q.98. When is demand said to be inelastic by expenditure method?

Ans. As per total expenditure method if price of the commodity and total expenditure move in the same direction, the demand will be inelastic.

Q.99. When is demand said to be unit elastic by expenditure method?

Ans. If an increase or decrease in price of the commodity does not affect the total expenditure, elasticity of demand is unity (e_D=1).

Q.100. Why is elasticity of demand always negative?

Ans. The elasticity of demand is always negative because the price of the commodity and its demand are inversely related to each other.

Q.101. What is the price elasticity of demand for necessities?

Ans. The price elasticity of demand for necessities is less than unity, or the demand for necessities is inelastic.

Q.102. Give the formula for measuring elasticity of demand by percentage method.

Ans. The formula for measuring elasticity by percentage method is as under:

E_d= (-) %change in Quantity demanded / % change in price of the commodity

Q.103. How is price elasticity of demand for a commodity affected by the number of its uses?

Ans. A commodity having more uses will have more elastic demand as compared to the demand for those commodities which have fewer uses.

Q.104. How does the price level of a commodity affect its price elasticity?

Ans. Demand for a commodity is more elastic at higher level of prices as compared to the goods at lower levels of prices.

Q.105. What will be the value of E_D exactly at the middle point of a downward sloping DD curve?

Ans. E_D = (-1) because at this point lower segment is equal to upper segment of demand curve.

Q.106. Why is demand for water inelastic?

Ans. Because it is necessity.

Q.107. If two demand curves intersect with each other, which one will be having higher price elasticity at the point of intersection?

Ans. The flatter the demand curve, higher will be elasticity at the point of intersection.

Q.108. What is budget constraint?

Ans. Budget constraint shows that a consumer can choose only those bundles of two goods which cost either less than or equal to his income.

Q.109. What is the shape of an indifference curve?

Ans. An indifference curve is downward sloping and convex to the origin.

Q.110. Why is an indifference curve downward sloping?

Ans. An indifference curve is downward sloping because if quantity of one commodity is increased the quantity of other is to be reduced in order to maintain the same satisfaction level.

Q.111. What do you mean by the budget set of a consumer?

Ans. A Budget set contains all bundles of two commodities that a consumer can buy with his given income at the given market prices. It contains all bundles in the positive quadrant which are on or below the budget line.

For e.g., if income of the consumer is? 20 and price of ‘x’ commodity is? 2 and price of ‘y’ commodity is t 4. Then, the possible bundles are:- (2, 4), (4, 3), (6, 2), (8,1). Hence budget set is {(2, 4), (4, 3), (6, 2), (8,1)}.

Q.112. Define a budget line.

OR

What is budget line?

Ans. A line on which different points show such bundles of two goods on which total expenditure is equal to consumer’s income (given his income and prices of goods).

OR

All possible combinations of two goods that can be bought by any consumer at certain given income and prices of the goods, when he spends his entire given income on purchase of these two goods only, are shown by Budget line. Consumption possibility line is another name for it.

Q.113.Explain why is the budget line downward sloping?

Ans. Budget line is downward sloping because the money income of the consumer being fixed, he has to give up some quantity of one commodity whenever he decides to have more of another commodity.

Q.114.What happens to the budget line if both the prices as well as the income double?

Ans. In case both prices as well as income double, the consumer will still be able to buy only the same quantity of good 1 (X) and good 2 (Y) as before, thus the budget line will remain unchanged.

Q.115.What is demonstration effect?

Ans. Imitating the consumption pattern of higher income groups by other sections of society is called the demonstration effect or veblon effect.

Q.116.What is the shape of demand curve for giffen goods?

Ans. The demand curve for giffen goods is upward sloping.

Q.117.What type of slope does a demand curve have?

Ans. A demand curve is negatively sloped.

Q.118. What do you mean by monotonic preferences?

Ans. A consumer’s preference will be called monotonic if the consumer prefers the bundle which has more of at least one of the good, when the quantity of the other good is not less.

Q.119 .If a consumer has monotonic preferences, can she be indifferent between the bundles (10,8) and (8,6)?

Ans. No, If the consumer has monotonic preference, she will prefer the bundle (10, 8) since she will be getting more of both the goods as compared to the bundle (8, 6).

Q.120. Suppose a consume/s preferences are monotonic. What can you say about her preferences ranking over the bundles (10,10), (10,9) and (9,9)?

Ans. A consumer having monotonic preferences will:

(i) Prefer to have the bundle (10, 10) instead of the bundle (10, 9) and (9, 9), and

(ii) Prefer the bundle (10, 9) instead of the bundle (9, 9).

Q.121. Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?

Ans. No, the preferences of the friend are not monotonic. For monotonic preference, the bundle (6, 6) should be preferred by him over the bundle (5, 6) as he will be getting one unit more of a good without losing the other good in the bundle (6, 6).

Q.122 .Suppose there was a 4% decrease in the price of a good, and as a result, the expenditure on the good increased by 2%. What can you say about the elasticity of demand?

Ans. Going by the total expenditure method, the change in price and the change in total expenditure are going in opposite direction hence, e_d > 1.