Economics : 2015 : CBSE : [Delhi] : Set- I

The equation of the Budget Line is as below:

       M = Q_xP_x+Q_yP_y

Shifts to the right.

Parallel to the x-axis.

In the table below, the Marginal Rate of Transformation of the Production Possibilities has been calculated.

As can be seen from the table above, as production of good X increases, the Marginal Rate of Transformation also increases. Hence, to produce an additional unit of good X an increasing amount of good Y has to be given up. The increase in the Marginal Rate of Transformation implies that the Production Possibilities curve will be concave.

The Production Possibilities curve shows the different combinations of goods that can be produced in an economy when all the resources are utilized efficiently, given a level of resources and technology.

The ‘Clean India Mission’ will not have any impact on the Production Possibilities curve as the amount of resources and level of technology will remain unchanged. However, it will lead to more efficient utilisation of existing resources.

As seen in the diagram above, it will lead to the economy to move from point A, where resources are not utilised efficiently to point B where all resources are efficiently utilised.
 

Production Possibilities curve shows the different combinations of goods that can be produced in an economy when all the resources are efficiently utilised, given a level of resources and technology.

A large scale outflow in capital implies a reduction in the level of resources in the economy. Thus, as a result of the decrease in resources in the economy, the production possibilities curve will shift inwards. This is shown in the diagram below.

Outflow of capital causes an inward shift in the PPC from PPC₁ to PPC₂.
 

Price elasticity of demand is the change in quantity demanded of a good as a result of a change in price. The law of demand states that, citrus paribus, an increase in price of a good leads to a decline in the quantity demanded of that good. As a result, there exists a negative relationship between price and quantity demanded as reflected by the minus sign in the elasticity of demand.

Elasticity of supply is the change in the quantity of output supplied as a result of a change in the price of the good. As the price of the good rises, the profit margins of the producers also increase. Hence, they have an incentive to produce more. This result in a positive relation between price and quantity supplied, reflected by the plus sign in the elasticity of supply.

The large number of buyers is an important feature of the perfectly competitive market. It is significant because it is this feature which ensures that no buyer has any bargaining price over the price of the good. All the buyers of the good have to purchase the good at the prevailing market price. Thus, because of the large number of buyers in the perfectly competitive market, all the buyers are price takers.

Price ceiling is a situation in which the government sets a price lower than the market equilibrium price. In the diagram below, it can be seen that the price ceiling P₁ is below the market-clearing price of P.

The effect of fixing price at a level lower than market price is that it will force the producers to sell the goods at a lower price. As profits lower, the producers will reduce the quantity of good supplied. On the other hand, at the reduced price, the quantity demanded of the good will rise. As a result, there will be an excess demand for the good in the market.

Given,

Initial Price = Rs. 8

Expenditure = Rs. 1000

Thus, Quantity Demanded = Expenditure/Initial Price

= 1000/8

= 125

After 25 per cent increase,

New Price = Rs. 10

Given,

Expenditure = Rs. 1000

Thus, New Quantity Demanded = 1000/10

= 100

Percentage Change in Price = +25%

Percentage Change in Quantity = 125-100 x 100

125

= 20%

Elasticity of Demand =

(-)Percentage Change in Quantity Demanded

         Percentage Change in Price

= (-)  -20%

       25%

=  0.8

Thus, price elasticity of demand is equal to 0.8.