Answer 1

Introduction:
It is rightly said that the technique of indifference curves not only helps explain consumer
behaviour and demand but analyses and explains several other economic problems. An
Indifference curve is a graphical depiction representing different quantities of two goods,
provided the consumer satisfaction level is the same. Moreover, it is that graphical
representation which takes into account the locus of points each representing the combined
products.
According to the indifference curve, the satisfaction yielded for the same level of utility
remains constant, i.e., the consumer is indifferent towards the usage/consumption of either of
the two products(combination), considering that both the products provide the same utility.
The other names for the Indifference Curve are Iso-Utility Curve and Equal-Utility Curve.

Let us plot an Indifference Curve for a better understanding by using the below data:
Assumption: The consumer consumes two commodities X and Y. The Total Utility U
remains constant.
We have listed five combinations of a, b, c, d, and e for the two commodities.

Table:
We have the data mentioned below:
Combination Commodity Y (Units) Commodity X (Units) Total Utility

a 25 3 U
b 15 5 U
c 8 9 U
d 4 17 U
e 2 30 U

Here, we are plotting only one set of data for the same utility. If more than one indifference
curve is plotted in the same graph, it is called an Indifference Map.
The below graph indicates that there can be as many points between points a, b, c, d, and e
that would result in the same level of satisfaction to the consumer.
 Indifference Curve for Substitutes X and Y
35
a
30

25
Commodity Y

20 b

15
c
10
d
5 e

0
0 5 10 15 20 25 30
Commodity X

Let us discuss the major properties of the Indifference Curve:

• Indifference Curves are negatively sloped and convex concerning the origin: The
Indifference curve slopes downward from left to right.
Example: If a consumer decides to increase the consumption quantity of Apple (let’s
assume commodity X), then the consumption of the quantity of Oranges (let’s assume
commodity Y) decreases as the consumer sacrifices some unit of commodity Y.
• Higher Indifference Curve represents a higher satisfaction level: Higher Indifference
Curve is an indication of a higher satisfaction level. Here, a higher Indifference Curve
implies that it lies above and to the right of another Indifference Curve.
Example: The below graphical representation indicates that IC2 is a higher
indifference curve than IC1.

• Indifference Curves never intersect with each other: If we assume a hypothetical

circumstance that two Indifference Curves intersect, then, the point of intersection
would indicate that the higher Indifference Curve would have the same level of
satisfaction and utility as the lower Indifference Curve. And this is never possible due
to the assumption that the satisfaction level remains constant for each Indifference
Curve specifically as it would have its own satisfaction level for the combination of
two products when consumed alternatively.
Conclusion:
Indifference curves are mostly used in scenarios where a consumer decides to purchase from
among two different commodities. It can be due to budget constraints that can make a
consumer opt to buy a certain quantity of a product for a commodity and a certain quantity of
a product for another commodity. However, both commodities would provide the same level
of satisfaction and utility to the consumer. The increase in the price of a product may push the
consumer to buy more quantities of its alternate product.
Besides, the Indifference Curve doesn’t consider market behaviour. Hence, it is not multi-
dimensional or dynamic in nature as it is confined to only a two-commodities model.
Moreover, the different vulnerabilities, risks and uncertainties in the market and real life are
not taken into consideration. Therefore, perfect consumer behaviour can’t be determined. It is
run on the assumption that the consumer’s preference for various commodities is fixed or
may fluctuate only between any two commodities. This assumption is highly unrealistic and
eradicates taking into account different options.

Answer 2

We are given the following data at various levels of output of a manufacturing firm.
Output Total Fixed Variable Average Average Average
Cost Cost Cost Fixed Variable Cost
Cost Cost
0 1000 1000
20 1200 1000
40 1300 1000
60 1380 1000
100 1600 1000

Let us find the hypothetical data for the manufacturing firm's total production costs at various
output levels.
Before doing, so let us briefly understand what output is and the cost component mentioned
in the above table.
Output: It is the quantity of goods or services produced in a specific time frame. Else, it is
the number of units of a product produced by using all the necessary resources in any
specified duration of time.
Now, in any production process, when we compute the total cost of production, we need to
consider various costs that are associated directly or indirectly with the production process. It
can be the procurement of raw materials, labour and capital. Also, it can be the explicit cost,
implicit cost, fixed cost, variable cost, opportunity cost, etc.
Therefore, the Total Cost of Production would be the sum of different costs incurred by a
firm/enterprise to either produce a product or provide a service.
Total Cost of a firm (TC) = Fixed Costs (FC) + Variable Costs (VC)
Fixed Cost: Such a type of cost remains unaffected by the change of the output level in the
production. However, if the output level finds a drastic change, then it too shall change and
then remain constant. Also, if the firm doesn’t produce anything, the Fixed Cost shall remain
the same. Examples: Salaries, Utility Bills, Rent and Lease of land and buildings, Taxes, etc.
Variable Cost: Such a type of cost changes with the change in the output level of the firm. If
the output level increases, the requirement for raw materials and labour shall also increase.
Therefore, there will be an increase in the costs to procure raw materials, labour and other
associated resources. This is called Variable Cost.
Average Fixed Cost: It is the fixed cost per unit product. Therefore, it is the Fixed Cost
required to produce a unit of produce or service.
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
So, Average Fixed Cost = 𝑂𝑢𝑡𝑝𝑢𝑡

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Average Variable Cost: It is the variable cost per unit product. Therefore, it is the Variable
Cost required to produce a unit of produce or service.
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
So, Average Variable Cost = 𝑂𝑢𝑡𝑝𝑢𝑡

𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Moreover, Average Cost can be defined as unit cost or the average amount of money
required to produce a product.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
So, Average Cost = 𝑂𝑢𝑡𝑝𝑢𝑡

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
= 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Now, upon applying the above-mentioned formulae, we have the following table:
Output Total Fixed Variable Average Average Average
Cost Cost Cost Fixed Variable Cost
Cost Cost
0 1000 1000 0 - - -
20 1200 1000 200 50 10 60
40 1300 1000 300 25 7.5 32.5
60 1380 1000 380 16.67 6.33 23
100 1600 1000 600 10 6 16
It can be seen from the calculated data that with the increase in production or output, the
average cost has gone down, i.e., the amount of money spent to produce one unit of product
goes down in the production run.
We can see the same in terms of Average Fixed Cost and Average Variable Cost going down.

Answer 3. a

Introduction:
Production on a large scale can be economical when we consider the per-unit cost of any
product. This statement holds for economies of scale. Whenever a firm expands its
production capacity, the average total costs per unit go down as more output is generated
when compared to the previous inputs before the increase in production capacity. This
enhances production efficiency. Such a condition is called Economies of Scale. It provides
cost advantages to the firm/enterprise due to the large scale of operation. It can also be said
that if there is a decrease in cost per unit of output, the scale is increased.

Let us discuss the two types of economies of scale as mentioned below:

1. Internal Economies of Scale: Such economies of scale are internal to the
firm/enterprise and are achieved due to the growth of the firm itself and not by any
exogenous factors.
• Technical Economies can aid a firm’s Internal Economies of Scale by the
usage of superior technology, and making proper use of the by-products/waste
materials.
• By properly marketing and improving the management structure within the
firm, it can achieve to lower the average cost per unit. This will be fuelled by
hiring skilled personnel and experienced managers.

2. External Economies of Scale: The benefits received by a firm due to the growth of the
corresponding industry are called the External Economies of Scale. It is due to
external factors that eventuate the growth in a firm’s production. The firm may be
benefitted due to its location which might help find labour, accessibility to raw
materials, etc.
Some major factors that lead to external economies of scale are cited below:
• Advancement in Transportation and Communication, by all means, play a
major role. This external factor, by default, aids in smoothly acquiring the
necessary resources to increase production in a firm.
• With proper training and education within the industry, a firm can easily reap
the benefits.
• Trade Associations, too, have a bigger role to play. They formulate different
strategies to capture the market. A commonly used strategy is to set the
selling prices for the products in that industry.
 • It is also possible that a firm in an industry may find the necessary support
and assistance from other industries.

Conclusion:
It becomes prevalent for any firm to achieve economies of scale both by internal and external
means. It shall provide sustenance in the long run. Sometimes, external factors may not be
conducive to increasing production. Also, there can be instances that the unit costs may shoot
up in the process of achieving economies of scale. This can happen due to ineffective
communication in a larger workforce at a time when the firm is expanding. A firm also needs
to take care that productivity and efficiency are not compromised as the firm grows and
expands its production. Having mentioned so, it is always the nature of any business to grow
and prosper.

Answer 3. b

Introduction:
Demand is the amount or quantity of any specific product or service that an individual seeks
to purchase at a given cost and at a given time frame from the market. Demand is the
principle that establishes the interaction between the sellers and the consumers for the
products/services the consumer buys.
Demand can be classified based on many different factors such as the number of consumers
for a specific product, the utility of the product or the service, the nature of the product, usage
of the product, etc.

Let us now discuss some important types of demand below:

• Cross Demand: This type of demand shows the interdependency of one commodity
with the other(substitute) due to the increase or decrease of its price. In other words,
the demand for different quantities of products is dependent on the price of its related
products.
Mathematically,
It is expressed as:
DA = f(PB), where,
DA = Demand for commodity A
f is the function
PB = Price of commodity B
Example: Substitutes generally have a positive cross-demand. When the price of tea
increases, the demand for coffee increases.
 Complementary commodities have negative cross-demand. If the price of sugar goes
high, the consumption of tea may go down.

• Composite Demand: When any particular good or service has multiple uses, we call it
composite demand. Here, we can observe an increase in the demand for one product
that reduces the supply of another product. Example: When the demand for milk
increases to make butter, then the supply for other products derived from milk shall
reduce.
If the price of steel increases, the products that are made from steel like utensils, cans,
automobile bodies, etc also increase.

• Derived Demand: This type of demand for a product arises when there is a demand
for other products. The other products may be different or related to the specified
product. It generally holds good for the manufacturer’s goods like raw materials,
intermediate goods, machines and equipment. Moreover, the factors responsible for
production also have a derived demand.
Example: There is a demand for labour in any construction site. When there is a
demand to use computer technology among different businesses, the demand for
computers rises. Hence, the derived demand for the related products of the computer,
too, rises. They can be mice, printers, monitors, external drives, etc.

Conclusion:
Demand reflects all quantities of a good or service that a consumer is willing to purchase at
any/all prices. It is an important concept in economics as it helps generate profit and is vital
for any economy to thrive. Any brand/company when accurately meets the consumer demand
with the supply of the right products/services can gain significant advantages in the market
and industry.