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Q.1 In your views, which definition of economics is according to its

subject matter? Write a detailed note on the division of economics
into micro and macro in the present era.
DEFINITION OF ECONOMICS
Economics is the study of scarcity and its implications for the use of resources,
production of goods and services, growth of production and welfare over time,
and a great variety of other complex issues of vital concern to society.
MICROECONOMICS
Microeconomics is the social science that studies the implications of incentives
and decisions, specifically about how those affect the utilization and distribution
of resources. Microeconomics shows how and why different goods have different
values, how individuals and businesses conduct and benefit from efficient
production and exchange, and how individuals best coordinate and cooperate
with one another. Generally speaking, microeconomics provides a more complete
and detailed understanding than macroeconomics.

DIVISION OF ECONOMICS INTO MICRO AND MACRO IN THE PRESENT ERA

KEY TAKEAWAYS
 Microeconomics studies the decisions of individuals and firms to allocate
resources of production, exchange, and consumption.
 Microeconomics deals with prices and production in single markets and the
interaction between different markets but leaves the study of economy-
wide aggregates to macroeconomics.
 Microeconomists formulate various types of models based on logic and
observed human behavior and test the models against real-world
observations.

UNDERSTANDING MICROECONOMICS
Microeconomics is the study of what is likely to happen (tendencies) when
individuals make choices in response to changes in incentives, prices, resources,
and/or methods of production. Individual actors are often grouped into
microeconomic subgroups, such as buyers, sellers, and business owners. These
groups create the supply and demand for resources, using money and interest
rates as a pricing mechanism for coordination.
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MACROECONOMICS
Macroeconomics, on the other hand, studies the behavior of a country and how
its policies impact the economy as a whole. It analyzes entire industries and
economies, rather than individuals or specific companies, which is why it’s a top-
down approach. It tries to answer questions such as “What should the rate of
inflation be?” or “What stimulates economic growth?”
Macroeconomics analyzes how an increase or decrease in net exports impacts a
nation’s capital account, or how gross domestic product (GDP) is impacted by the
unemployment rate.
Macroeconomics focuses on aggregates and econometric correlations, which is
why governments and their agencies rely on macroeconomics to formulate
economic and fiscal policy. Investors who buy interest-rate-sensitive securities
should keep a close eye on monetary and fiscal policy.
What Is the Basic Difference Between Microeconomics and Macroeconomics?
Microeconomics is the study of how individuals and companies make decisions to
allocate scarce resources. Macroeconomics is the study of an economy as a
whole.

BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON

Meaning The branch of economics The branch of economics

that studies the behavior that studies the behavior of
of an individual consumer, the whole economy, (both
firm, family is known as national and international) is
Microeconomics. known as Macroeconomics.

Deals with Individual economic Aggregate economic

variables variables

Business Applied to operational or Environment and external

Application internal issues issues
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Q.2 Is utility measurable? Also explain the following concepts of

utility:
a) Total Utility
b) Average Utility
c) Marginal Utility
d) Positive Utility
e) Negative Utility

IS UTILITY MEASURABLE?
In the real world, one cannot always measure utility. One cannot add different
types of satisfaction from different goods. For measuring it, it is assumed that
utility of consumption of one good is independent of that of another. It does not
analyze the effect of a change in the price.
WHAT IS UTILITY?
In economics, utility is a term used to determine the worth or value of a good or
service. More specifically, utility is the total satisfaction or benefit derived from
consuming a good or service. Economic theories based on rational choice usually
assume that consumers will strive to maximize their utility.
The economic utility of a good or service is important to understand because it
directly influences the demand, and therefore price, of that good or service. In
practice, a consumer's utility is usually impossible to measure or quantify.
However, some economists believe that they can indirectly estimate what is the
utility of an economic good or service by employing various models.
Total Utility
If utility in economics is cardinal and measurable, the total utility (TU) is defined
as the sum of the satisfaction that a person can receive from the consumption of
all units of a specific product or service.
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Using the example above, if a person can only consume three slices of pizza and
the first slice of pizza consumed yields ten utils, the second slice of pizza
consumed yields eight utils, and the third slice yields two utils, the total utility of
pizza would be twenty utils.
AVERAGE UTILITY
Average utility refers to the utility that is obtained by the consumer per unit of
commodity consumed. It is calculated by dividing the total utility by the number
of units consumed.
Average Utility is that utility in which the total unit of consumption of goods is
divided by number of Total Units. The Quotient is known as Average Utility. For
example—If the Total Utility of 4 bread is 40, then the average utility of 3 bread
will be 12 if the Total Utility of 3 bread is 36 i.e., (36 ÷ 3 = 12).
Marginal Utility
Marginal utility (MU) is defined as the additional (cardinal) utility gained from the
consumption of one additional unit of a good or service or the additional (ordinal)
use that a person has for an additional unit.
Using the same example, if the economic utility of the first slice of pizza is ten utils
and the utility of the second slice is eight utils, the MU of eating the second slice is
eight utils. If the utility of a third slice is two utils, the MU of eating that third slice
is two utils.
Positive Utility
Positive marginal utility occurs when having more of an item brings additional
happiness. Suppose you like eating a slice of cake, but a second slice would bring
you some extra joy. Then, your marginal utility from consuming cake is positive.
Negative Utility
Negative marginal utility is where you have too much of an item, so consuming
more is actually harmful. For instance, the fourth slice of cake might even make
you sick after eating three pieces of cake.
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Q.3 What are the concepts budget line and map of indifference curves
important to understand consumer behavior? Explain with the help of diagram.
CONCEPTS BUDGET LINE
The budget line definition is held to be a straight line with a downward slope
indicating the different combination of two commodities. These two commodities
are purchased by a consumer by the given market price with income allocation. It
is also termed as a budget constraint. It's important to remember that the slope
of the budget line corresponds to the cost ratio of two commodities. The slope of
the budget limitation is particularly significant. Budget line in economics is based
on two essential components – (a) purchasing power or the income of the
consumer, and (b) market price of the two commodities that have been
considered. 
INDIFFERENCE CURVE
An indifference curve is a chart showing various combinations of two goods or
commodities that leave the consumer equally well off or equally satisfied—hence
indifferent—when it comes to having any combination between the two items
that is shown along the curve.
For instance, if you like both hot dogs and hamburgers, you may be indifferent to
buying either 20 hot dogs and no hamburgers, 45 hamburgers and no hot dogs, or
some combination of
the two—for example,
14 hot dogs and 20
hamburgers (see point
“A” in the chart below).
Either combination
provides the same
utility.
Understanding
Indifference Curves
Standard indifference
curve analysis operates
using a simple two-
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dimensional chart. Each axis represents one type of economic good. Along the
indifference curve, the consumer is indifferent between any of the combinations
of goods represented by points on the curve because the combination of goods
on an indifference curve provides the same level of utility to the consumer.

INDIFFERENCE CURVE ANALYSIS

Indifference curves operate under many assumptions; for example, each
indifference curve is typically convex to the origin, and no two indifference curves
ever intersect. Consumers are always assumed to be more satisfied when
achieving bundles of goods on indifference curves that are farther from the origin.
As income increases, an individual will typically shift their consumption level
because they can afford more commodities, with the result that they will end up
on an indifference curve that is farther from the origin—hence better off.
What is the formula for an indifference curve?
The formula used in economics for constructing an indifference curve is:
𝑈(𝑡, 𝑦)=𝑐
where:
 c stands for the utility level achieved on the curve and is constant.
 t and y are the quantities of two different goods, t and y.
Different values of c correspond to different indifference curves, so if we increase
our expected utility, we obtain a new indifference curve that is plotted above and
to the right of the previous one.
What does an indifference curve explain?
An indifference curve is used by economists to explain the tradeoffs that people
consider when they encounter two goods that they wish to buy. Because people
are constrained by a limited budget, they cannot purchase everything. Instead, a
cost-benefit analysis must be considered. Indifference curves visually depict this
tradeoff by showing which quantities of two goods provide the same utility to a
consumer (i.e., where they remain indifferent).
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Q.4 What is meant by equilibrium of a firm? Explain the relationship between

marginal cost and marginal revenue in a case of equilibrium of a firm under
perfect competition with the help of a table and diagram.

A firm is in equilibrium when it has no desire to change (increase or decrease) its

output levels. At the equilibrium point, the firm earns maximum profits. In this
article, we will talk about the equilibrium of the firm along with two approaches
to the producer’s equilibrium.
EQUILIBRIUM OF FIRM:
“A firm is a unit engaged in the production for sale at a profit and with the
objective of maximizing profit.” -Watson
A firm is in equilibrium when it is satisfied with its existing level of output. The
firm wills, in this situation produce the level of output which brings in greatest
profit or smallest loss. When this situation is reached, the firm is said to be in
equilibrium.

WHAT IS MARGINAL REVENUE AND MARGINAL COST?

Marginal revenue is the income gained by selling one additional unit, while
marginal cost is the expense incurred for selling that one unit. Each measure the
incremental change in dollars between varying levels of sales to determine at
what level a company is most efficiently producing and selling goods.
Marginal Revenue and Marginal Cost Approach:
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Joan Robinson used the tools of marginal

revenue and marginal cost to demonstrate
the equilibrium of the firm. According to
this method, the profits of a firm can be
estimated by calculating the marginal
revenue and marginal cost at different
levels of output. Marginal revenue is the
difference made to total revenue by selling
one unit of output. Similarly, marginal cost
is the difference made to total cost by
producing one unit of output. The profits of
a firm will be maximum at that level of output whose marginal cost is equal to
marginal revenue.

Thus, every firm will increase output till

marginal revenue is greater than marginal
cost. On the other hand, if marginal cost
happens to be greater than marginal
revenue the firm will sustain losses. Thus,
it will be in the interest of the firm to
contract the output. It can be shown with
the help of a figure. In fig. 2 MC is the
upward sloping marginal cost curve and MR is the downward sloping marginal
revenue curve. Both these curves intersect each other at point E which
determines the OX level of output. At OX level of output marginal revenue is just
equal to marginal cost.

It means, firm will be maximizing its profits by producing OX output. Now, if the
firm produces output less or more than OX, its profits will be less. For instance, at
OX1 its profits will be less because here MR = JX1, while MC = KX1 So, MR > MC. In
the same fashion at OX2 level of output marginal revenue is less than marginal
cost. Therefore, beyond OX level of output extra units will add more to cost than
to revenue and, thus, the firm will be incurring a loss on these extra units.
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Besides first condition, the second order condition must also be satisfied, if we
want to be in a stable equilibrium position. The second order condition requires
that for a firm to be in equilibrium marginal cost curve must cut marginal revenue
curve from below. If, at the point of equality, MC curve cuts the MR curve from
above, then beyond the point of equality MC would be lower than MR.

Q.5 Write a note on the following: (5+5+5+5=20)

a) Cross elasticity of demand.
b) Demand curve in case of Giffon good case.
c) Income effect.
d) Diminishing marginal rate of substitution.

A) CROSS ELASTICITY OF DEMAND.

The cross elasticity of demand is an economic concept that measures the
responsiveness in the quantity demanded of one good when the price for another
good changes. Also called cross-price elasticity of demand, this measurement is
calculated by taking the percentage change in the quantity demanded of one
good and dividing it by the percentage change in the price of the other good.
KEY CONCEPT
 The cross elasticity of demand is an economic concept that measures the
responsiveness in the quantity demanded of one good when the price for
another good changes.
 The cross elasticity of demand for substitute goods is always positive
because the demand for one good increases when the price for the
substitute good increases.
 Alternatively, the cross elasticity of demand for complementary goods is
negative.
B) DEMAND CURVE IN CASE OF GIFFON GOOD CASE
A GIFFON good is a low income, non-luxury product that defies standard
economic and consumer demand theory. Demand for GIFFON goods rises when
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the price rises and falls when the price falls. In econometrics, this results in an
upward-sloping demand curve, contrary to the fundamental laws of demand
which create a downward sloping demand curve.
The term "GIFFON goods" was coined in the late 1800s, named after noted
Scottish economist, statistician, and journalist Sir Robert GIFFON. The concept of
GIFFON goods focuses on a low income, non-luxury products that have very few
close substitutes.
GIFFON goods can be compared to Veblen goods which similarly defy standard
economic and consumer demand theory but focus on luxury good.

C) INCOME EFFECT
The income effect, in microeconomics, is the resultant change in demand for a
good or service caused by an increase or decrease in a consumer's purchasing
power or real income. As one's income grows, the income effect predicts that
people will begin to demand more (and vice-versa).

So-called normal goods will exhibit this typical pattern. Inferior goods, on the
other hand, may see their demand actually fall as income increases. An example
of such an inferior good could be store-brand items: as people become wealthier
they may opt instead for more expensive name brands,

KEY CONCEPT

 The income effect describes how an increase in income can change the
quantity of goods that consumers will demand.
 For so-called normal goods, as income rises so does the demand for them
(and vice-versa).
 This is reflected in microeconomics via an upward shift in the downward-
sloping demand curve.
 This effect, however, can vary depending on the availability of substitutes
and the good's elasticity of demand.
 For inferior goods, the income effect dominates the substitution effect and
leads consumers to purchase more of a good, and less of substitute goods,
when the price rises.

D) DIMINISHING MARGINAL RATE OF SUBSTITUTION.

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DIMINISHING MARGINAL RATE OF SUBSTITUTION:

First, the want for a particular good is satiable so that as the consumer has more
and more of a good the intensity of his want for that good goes on declining. It is
because of this fall in the intensity of want for a good, say X, that when its stock
increases with the consumer, he is prepared to forego less and less of good Y for
every increment in X.

In the beginning, when the consumer’s stock of good Y is relatively large and his
stock of good X is relatively small, consumer’s marginal significance for good Y is
low, while his marginal significance for good X is high. Owing to higher marginal
significance of good X and lower marginal significance of good Y in the beginning
the consumer will be willing to give up a larger amount of Y for a unit increase in
good X.

But as the stock of good X increases and intensity of desire for it falls, his marginal
significance of good X will diminish and on the other hand, as the stock of good Y
decreases and the intensity of desire for it increases, his marginal significance for
good Y will go up. As a result, therefore, as the individual substitutes more and
more of X for Y, he is prepared to give up less and less of Y for a unit increase in X.

The second reason for the decline in marginal rate of substitution is that the
goods are imperfect substitutes of each other. If two goods are perfect
substitutes of each other, then they are to be regarded as one and the same
good, and therefore increase in the quantity of one and decrease in the quantity
of the other would not make any difference in the marginal significance of the
goods. Thus, in case of perfect substitutability of goods, the increase and
decrease will be virtually in the same good which cancel out each other and
therefore the marginal rate of substitution remains the same and does not
decline.

Thirdly, the principle of diminishing marginal rate of substitution will hold good
only if the increase in the quantity of one good does not increase the want
satisfying power of the other. If with the increase in the stock of good X, the want
satisfying power of good increases, then greater and greater amount of good Y
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will be required to be given up for a unit increase in good X so that consumer’s

satisfaction remains the same.