ECONOMICS XII CLASS

CLASS XII : TOPICS PRODUCTION POSSIBILITY CURVE. CONCEPT OF DEMAND. SHIFT IN DEMAND CURVE AND MOVEMENT ALONG THE DEMAND CURVE. CONCEPT OF SUPPLY. SHIFT IN SUPPLY CURVE AND MOVEMENT ALONG THE SUPPLY CURVE. EQUILIBRIUM PRICE.

PRODUCTION POSSIBILITY CURVE. (PPC)

COTENTS DEFINITION OF PRODUCTION POSSIBILITY CURVE. PRODUCTION POSSIBILITY SCHUDLE. PRODUCTION POSSIBILITY CURVE. SHIFT IN PRODUCTION POSSIBILITY CURVE. CURVE SHOWING UNDER UTILIZATION OF RESOURCES AND FULL UTILIZATION OF RESOURCES.

Objectives To understand meaning of PPC. To understand PPC schedule. To understand why it is concave to the origin. To understand that any point inside it shows under utilization of resources , point on it shows full utilization of resources. To understand central problems.

PRODUCTION POSSIBILITY CURVE Production possibility curve is that curve which represents the maximum amount of a pair of goods or services that can both be produced with an economy’s given resources and technique, assuming that all resources are fully employed.

Assumptions of PPC (a) Fixed quantity of factor of production of production. (b) Resources are fully and efficiently utilized. (c) Technology of production remains constant. (d) Assumption of two goods.

PRODUCTION POSSIBILITY SCHUDLE A GOOD B GOOD 100 1 90 2 70 3 40 4

PRODUCTION POSSIBILITY CURVE A1 A2 A3 A4 A GOOD A5 O B1 B2 B3 B4 B5 P B GOOD

Two Basic Properties of PPC (1)Production Possibility Curve Slopes Downwards: Production possibility curve slopes downwards from left to right. It is because in a situation of fuller utilization of the given resources, production of both the goods can not be increased. More of good-Can be produced only with less of good-Y. (2) 1)Production Possibility Curve is concave to the point of origin; It is because to produce each additional unit of good-X, more and more unit of good-Y will have to be sacrificed than before. Opportunity cost of producing every additional unit of good –X tends to increase in terms of loss of production of good-Y.In other words, production will obey the Law of Increasing opportunity cost

P1 GROWTH OF RESOURCES P A GOOD Initial Resources P o P1 B GOOD

Full Utilization of resources Unattainable combination of output . P W . Y . S . . . . A GOOD Z E . Under utilization of resources P O B GOOD

OPPORTUNITY COST Opportunity Cost:- Opportunity Cost refers to value of a factor in its next best (or second best) alternative use. Available Resources One hectare of land and a given package of other inputs Possible uses of land Use-1Production of wheat Use-2 Production of Rice Use -3 Production of maize Market value of production Use-1 Rs. 6000 Use-2 Rs. 5000 Use-3 Rs. 4000 Assumption Technique of production is constant and resources are fully utilized Y A Use-1 value of output Rs.6000 O B X Use-2 value of output Rs. 5000 Opportunity cost of employing resources in use -1=loss of out put in next best alternative use of the given resources which is Rs. 5000 in use -2

Evaluation Define P.P.C. ? What does slope of P.P.C show ? What does the point inside the P.P.C. show ? What does the shifting of P.P.C show ? Can you show the central problems through the P.P.C ?

DEMAND Meaning –the quantity of a commodity or service that a consumer would buy at a given price and at a given time .

Contents of demand Desire for a commodity. Ability to pay. Readiness to spend. Specific time. Specific place. Specific price.

FACTORS AFFECTING DEMAND Price of the commodity. Income of the consumer. Price of related goods. Tastes and preferences. Future expectations.

LAW OF DEMAND If other things remaining the same, when the price of a commodity increases, its demand falls and when the price falls, its demand increases.

Assumptions of law of Demand (1)Income of the consumer remains constant. (2)There is no change in the taste and preference of the consumer. (3)No change in price of the related good. (4)The commodities are normal. (5)There is no expectations of change in price in near future. (6)No new substitute of the commodity are available. (7)No change in the distribution of income and wealth. (8)Other relevant factors like size and composition of population, seasonal and climate factors, economic condition of the country etc. remain unchanged.

RELATION OF PRICE WITH DEMAND PRICES (Rs.) DEMAND (Qt.) 1 5 2 4 3 3 4 2 5 1

Y D 5 Price 1 D O X 1 5 Quantity

DIFFERENCE Sr.no Change in Quantity Demand Change in Demand Base of difference Sr.no Change in Quantity Demand Change in Demand Change in Quantity demanded refers to increase or decrease In quantity purchased of a commodity in response to change in other determinants of demand, other than price of the same commodity. Shifting of the Demand curve (1)Increase in Demand (2)Decrease in Demand Change in Quantity demanded refers to increase or decrease In quantity purchased of a commodity in response to decrease or increase in its price other than its determinants. Movements along the Demand curve (1)Extension of Demand (2)Contraction of Demand Definition 1 2 Alternative Name

Difference between Contraction and Decrease in Demand This is caused only by change in the price of concerned commodity Increase in price of the commodity is the only cause This is caused by change in determinants, other than price of the concerned commodity Several causes: Decrease in income, decrease in price of substitute good, increase in price of complementary good, Price (x) Quantity (Units) 10 30 10 20 Price(Rs.) Quantity (Units) Description 1 5 p Q.D. D

Contraction of demand D P1 N Price M P D Q1 Q O Quantity

Decrease in demand E E1 D D1 Q Q1 O Quantity Price Y x P

Extension of demand Y D P K Price P1 P1 P1 P1 P1 L D Q1 Q O Quantity

Increase in demand PRICE D1 D Y p E E1 D1 D O X QUANTITY Q Q1

Questions VERY SHORT ANSWER TYPE Q .1 Define demand ? Q .2 Define supply ? Q .3 Define demand function ? Q .4 Define supply function ? Q. 5 what do you understand by demand schedule ? Q.6 what do you understand by supply schedule ? Q 7 Explain the law of demand ? Q 8 what are the factors affecting demand ? Q 9 what are the assumptions of law of demand ? Q 10 what are the exceptions to the law of demand ?

CONCEPT OF SUPPLY

SUPPLY OF GOODS

DEFINITION OF SUPPLY The supply of goods is the quantity offered for sale in a given market at a given time at various prices.

Law of Supply The law of supply states that other things remaining constant, the higher the price the greater the quantity supplied or the lower the price the smaller the quantity supplied.

FACTORS AFFECTING SUPPLY Price Of Commodity. *Price Of Factors Of Production. *Productivity Of Factors. *Technology. *Numbers Of Firms. *Policy Of Govt. *Aim Of Firms.

TYPES OF SUPPLY SCHEDULE (1) Individual Supply Schedule. (2) Market Supply Schedule.

SUPPLY SCHEDULE The table relating to price and quantity Supplied is called the supply schedule.

EXTENSION OF SUPPLY Other things being are equal, when quantity supplied of a commodity increases due to rise in its price it is called extension.

DIFFERENCE BETWEEN CHANGE IN QUANTITY SUPPLIED AND CHANGE IN SUPPLY. Due to change in price. Movement along the supply curve. Change in supply Due to change in other factors. Shift in supply curve.

EXTENSION OF SUPPLY

EXTENSION OF SUPPLY EXTENSION OF SUPPLY

CONTRACTION OF SUPPLY Other things being equal, when quantity supplied of a commodity decreases due to fall in its price, it is called contraction of supply.

Contraction of Supply

INCREASE IN SUPPLY

INCREASE IN SUPPLY More supply at same price or same supply at less price is called increase in supply.

Increase in Supply

DECREASE IN SUPPLY Less supply at same price and same supply at more price is called decrease supply.

DECREASE IN SUPPLY

Evaluation What do you mean by supply ? Define the law of supply ? Name any four factors effecting the supply of a commodity. Define the expansion of supply. What do you mean by contraction of supply ?

Equilibrium Price

Index Equilibrium Price Will be Shown by the Diagram Effect of Change in demand on Equilibrium Price- When supply is Constant ,Perfectly Elastic and Perfectly Inelastic Effect of Change in Supply on Equilibrium Price- When Demand is Constant ,Perfectly Elastic and Perfectly Inelastic Effect of Simultaneous Change in Demand and Supply All the Effects Mentioned Above Will be Shown by the Diagrams

HERE ARE SOME PICTURES OF HOUSEHOLD COMMODITIES Rs. 8,000/- Rs. 5/- Rs. 20,000/-

THESE COMMODITIES HAVE DIFFERENT PRICES. LETS KNOW HOW THESE PRICES DETERMINED IN THE MARKET.

Equilibrium Price THE PRICE ON WHICH A COMMODITY IS SOLD AND PURCHASED IN MARKET IS CALLED EQUILIBIRIUM PRICE. EQUILIBIRIUM PRICE IS THAT PRICE ON WHICH THE DEMAND AND SUPPLY OF A COMMODITY IS EQUAL TO EACH OTHER.

SCHEDULE OF EQUILIBIRIUM PRICE PRICE(RS.) QT.SUPPLIED QT.DEMANDED 1 1 5 2 2 4 3 3 3 4 4 2 5 5 1 EQUILIBIRIUM PRICE

Equilibrium Price Y Equilibrium Price is that price at which its two determinants-demand and supply are in balance, or equal. S D E P Price D S O Q X Quantity

EQUILIBIRIUM PRICE S p D PRICE D E P2 S O Q QUANTITY P1 X EXCESS SUPPLY P1 p E EXCESS DEMAND P2 D S O X Q QUANTITY

Change in Demand & Supply Effect of Change in Demand & Supply

Effect of Increase In Demand When supply is constant Y S D E1 P1 Price E P D1 S D O Q Q1 Quantity X

When supply is Perfectly Elastic and increase in demand Price E E1 S S P D D1 O Q Q1 X Quantity

When Supply is Perfectly Inelastic and demand increases. Price E1 P1 E P D1 D S O Q X Quantity

Effect of Decrease In Demand And no change in supply Price D S D1 O X Quantity Q1 Q

When Supply is Perfectly Elastic D Y D1 Price E1 E S S P D D1 O X Q1 Q Quantity

When Supply is Perfectly Inelastic D Y S D1 E P Price E1 P1 D D1 S O Q X Quantity

Effect of increase in supply and no change in demand Price E P E1 P1 S D S1 O Q Q1 X Quantity

When Supply is Perfectly Inelastic D Y S D1 Price E P E1 P1 D D1 S O Q X Quantity

When Demand is Perfectly Elastic Price D D E E1 P S S1 O Q Q1 X Quantity

When Demand is Perfectly Inelastic Price E P P1 E1 S S1 D O Q X Quantity

Effect of Decrease in Supply and no change in Demand Price E1 P1 E P S1 S D O Q1 Q X Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Inelastic Price D Y S E1 P1 E P S1 S D O Q X Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Elastic Price D E1 E D P S1 S O Q1 Q X Quantity DEMANDED AND SUPPLIED

Simultaneous Change in Demand and Supply When Changes in Demand and Supply are Equal D S1 Price E1 E P D1 S D S1 O Q Q1 X Quantity

Evaluation Define the equilibrium price ? How does increase in demand effects equilibrium price when supply is constant? What will be the change in equilibrium price, when demand is perfectly elastic and supply increases ? What will be the change in equilibrium price, when supply is perfectly inelastic and demand decreases ?

AGGREGATE DEMAND AND AGGREGATE SUPPLY

OBJECTIVES To know the meaning and components of AD and AS. To understand the concepts of inflationary and deflationary gap through the diagrams To understand the determination of income and employment through AD /AS and saving and investment.

AGGREGATE DEMAND Aggregate demand refers to the sum total of demand for all the goods and services in the economy as a whole. It is measured in terms of total expenditure on the goods and services in an economy.

COMPONENTS OF AGGREGATE DEMAND AD= C+I+G+(X-M). C= Household consumption expenditure. I=Investment expenditure. G=Govt. Expenditure. (X-M)=Net export (Export- import).

AGGREGATE SUPPLY Aggregate supply refers to the flow of goods and services in an economy. Aggregate supply is the minimum sale proceeds which the producer must get so as to continue production at any given level of employment

COMPONONENTS OF AGGREGATE SUPPLY AS=C+S. C=CONSUMPTION. S=SAVING.

DETERMINATION OF OUTPUT, INCOME AND EMPLOYMENT. : AS/ AD approach Equilibrium level of output, income and employment id determined at the point where aggregate demand and aggregate supply are equal to each other. Equilibrium : AD -=AS Since , AD = C + I and AS = C + S Equality between (C + I) and (C + S) simply implies the equality between saving and investment . so that equilibrium occurs where, AS = AD or S = I Accordingly determination of output, income and employment can be explained in two ways : 1.On the basis of equilibrium between aggregate demand and aggregate supply 2.On the basis of equilibrium saving and investment

EQUILIBRIUM THROUGH AD/AS,S/I. AND AS E O INCOME AND EMPLOYMENT Y SAV. AND INV. S E I I O INCOME AND EMPLOYMENT Y S

EQUILIBRIUM AT FULL EMPLOYMENT AS AD AND AS AD E FULL EMPLOYMENT LEVEL o Y INCOME AND EMPLOYMENT

EQUILIBRIUM AT UNDEREMPLOYMENT AS UNDEREMPLOYMENT EQ.. E AD AD AND AS AD1 E1 FULL EMPLOYMENT LEVEL o Y1 Y INCOME AND EMPLOYMENT

EQUILIBRIUM AT UNDEREMPLOYMENT AS UNDEREMPLOYMENT EQ.. E AD AD AND AS AD1 E1 FULL EMPLOYMENT LEVEL o Y1 Y INCOME AND EMPLOYMENT

EQUILIBRIUM AT OVEREMPLOYMENT AS AD1 OVER EMPLOYMENT EQ. E1 AD AD AND AS E FULL EMPLOYMENT LEVEL INCOME AND EMPLOYMENT O Y

CONCLUSION FULLEMPLOYMENT LEVEL SHOWS ABSENCE OF UNVOULENTRY UNEMPLOYMENT. UNDER EMPLOYMENT LEVEL SHOWS DEFICIENT DEMAND ,ALSO CALLED DEFLATIONARY GAP. OVER EMPLOYMENT LEVEL SHOWS EXCESS DEMAND, ALSO CALLED INFLATIONARY GAP .

Evaluation Define aggregate demand ? What do you mean by aggregate supply ? What are the components of aggregate demand? Explain the full employment level equilibrium of out put, income and employment. Explain the equilibrium of out put, income and employment through the help of AD/AS and Saving and investment.