Category: Essays

Different factors of production are used in the process of production so as to get maximum profit. If the composition of the factors of production is not profitable, there will be shift of resources from one use to the other so as to increase the profitability by increasing or decreasing outlay in one resource or the other.A change in the price of one factor keeping all other prices constant will require a readjustment of factor proportion. This is due to the fact that change in the price of one factor destroys the equilibrium condition of the equality of price ratios between the two factors and the marginal rate of technical substitution.The concept of elasticity of factor substitution was developed by J.R. Hicks in his book ‘The Theory of Wages’ in…

Different factors of production are used in the process of production so as to get maximum profit. If the composition of the factors of production is not profitable, there will be shift of resources from one use to the other so as to increase the profitability by increasing or decreasing outlay in one resource or the other. A change in the price of one factor keeping all other prices constant will require a readjustment of factor proportion. This is due to the fact that change in the price of one factor destroys the equilibrium condition of the equality of price ratios between the two factors and the marginal rate of technical substitution. The concept of elasticity of factor substitution was developed by J.R. Hicks in his book ‘The Theory of…

Producer always tries to achieve the largest possible volume of output from a given cost outlay on factors with given prices such that these are combined in an optimal manner. Alternatively, producer minimise his cost of production for producing a given level of output. In this way, the producer maximises his profits and produces a given level of output with least cost combination of factors. This least cost combination of factors will be optimum for him.Given iso-cost line and the series of isoquants (isoquant-map), the producer will choose the level of output, where the given iso-cost line is tangent to the highest possible isoquant. In Fig. 7.10 (a), E1 is the point of equilibrium, where isoquant IQ2 is tangent to iso-cost line AB.Given budgeted expenditure, all other points are either…

The relation among marginal utility, total utility and average utility can be understood by a careful study of Table 4.1 and Fig. 4.1. It is clear from this table and figure that initially the total utility curve slopes upwards to the right.This indicates that the total utility will rise with consumption of additional units of the commodity. However, the increase in total utility is not constant, but falls steadily. In other words, the total utility rises at a falling rate. This is shown by corresponding downward or negative slope of the marginal utility curve. In the present example, this happens upto 6 units of the commodity.When the total utility reaches its maximum value, marginal utility becomes zero. Before this point, though marginal utility falls, it always remains positive. In our…

Different producers respond differently to a given change in the price of a commodity. Elasticity of supply explains reactions of producers to a particular change in price.There are five types of elasticity of supply: (1) Perfectly Elastic (Es =?): Supply of a commodity is said to be perfectly elastic, when the supply changes to any extent irrespective of any change in its price. It means that at a price, any quantity of the good can be supplied. But, at a slightly lower price, the firm will not sell at all. It is purely an imaginary concept and can only be explained with the help of an imaginary supply schedule. ADVERTISEMENTS: In this case, the elasticity of supply is infinity and the supply curve is a straight line parallel to the…

The concept of elasticity of substitution was originally introduced by J.R. Hicks in his book ‘The Theory of Wages’ in 1932. The ratio in which the two goods are combined changes when, the process of substitution takes place.Like the substitution affect, elasticity of substitution can be measured at any point on an indifference curve. It is the extent to which one good can be substituted for another (as a result of a change in their price-ratio), if the consumer has to remain on the same indifference curve or in other words, on the same level of satisfaction. ADVERTISEMENTS: The elasticity of goods substitution (es) is the ratio of the proportionate change in the combination in which the two goods are to a given proportionate change in their marginal rate of…

Wells are the common sources of water supply in villages so they should be disinfected regularly to keep the water fit for drinking and domestic purposes.Previously potassium permanganate was used for disinfecting wells but now instead of potassium permanganate, bleaching powder is used for this purpose because it is cheap and quite effective disinfectant.For disinfecting the well following steps are involved: ADVERTISEMENTS: (i) Measurement of well for its depth.(ii) Amount of water in the well.(iii) Amount of bleaching powder required. ADVERTISEMENTS: (iv) Mixing of bleaching powder.(v) Addition of bleaching powder solution in the well.(vi) Ortho-toludine test. (i) Measurement of Well: First of all, the diameter of the well is measured and then its depth is measured in meters by a rope tied with some weight. The rope is lowered in…

The short run equilibrium is characterised by two basic features. First, the average and marginal cost curves are U-shaped. Second, entry or exit of firms is insignificant so that abnormal profits or losses persist in short run. The short run average and marginal cost curves, with their typical U-shapes caused by the inability of the firms to increase some of their fixed factors further, contribute to sustain abnormal profits or losses.They are denoted as SAC (short run average cost), SAVC (short run average variable cost) and SMC (short run marginal cost) instead of the general notation of AC, AVC and MC. Under these two features, the equilibrium of a competitive firm in short run, thus, may involve either abnormal profits or losses or even normal profits as shown in Figures…

Elasticity of demand is defined as the responsiveness of demand to a change in one of its determinants while the other determinants remain unchanged. Some of the elasticities axe defined below. 1. Price Elasticity: It is defined as the responsiveness of demand to a change in price, while other things remain unchanged. ADVERTISEMENTS: Price elasticity is measured as a ratio of the proportionate change in demand to a proportionate change in price. Thus, price elasticity of demand, Ep° is given aswhere, Q2 = quantity demanded at price P2 Ql = quantity demanded at price P1?Q = change in quantity demanded due to a change in price (?P) ADVERTISEMENTS: Q = initial level of demand at initial price PPrice elasticity will be discussed in detail later in the section. 2. Income…

Difference between “Arc Price Elasticity” and “Point Price Elasticity” of Demand are as follows: (i) Arc price elasticity: It is slightly different from the price elasticity as defined above. We have seen that price elasticity is given asHere, changes in demand and price are taken to be proportionate changes to their original levels, Q1 and P1 respectively. If the points are separated by a larger distance on the demand curve, it is customary to express the change in demand and price as a proportion of their average values rather than of their original values. (ii) Point price elasticity: Point price elasticity refers to the price elasticity at a point on the demand curve. In other words, it accounts for the price elasticity of demand in the close proximity of the…