class xii : topics production possibility curve. concept of demand. shift in demand curve and...

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.

(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.

ObjectivesObjectives

To understand meaning of PPC.To understand meaning of PPC. To understand PPC schedule.To understand PPC schedule. To understand PPC.To understand PPC. To understand why it is concave to the origin. To understand why it is concave to the origin. To understand that any point inside it shows under To understand that any point inside it shows under

utilization of resources , point on it shows full utilization of resources , point on it shows full utilization of resources.utilization of resources.

To understand central problems.To understand central problems.

PRODUCTION POSSIBILITY PRODUCTION POSSIBILITY CURVECURVE

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

A GOOD B GOOD

0 100

1 90

2 70

3 40

4 0

A4

A3

PRODUCTION POSSIBILITY PRODUCTION POSSIBILITY CURVECURVE

B1 B2 B3 B4 B5 O

A5

A2A1

B GOOD

A G

OO

D

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

o P

P

P1

P1GROWTH OF RESOURCES

B GOOD

A G

OO

D

Initial Resources

Z E

W

S

O

A G

OO

D

B GOOD

Y

P

P

Unattainable combination of output

.

Under utilization of resources

..

.

..

.

Full Utilization of resources

.

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

XO

A

B

Use-1 value of output

Rs.6000

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 ?

DEMANDDEMAND Meaning –the quantity of a Meaning –the quantity of a

commodity or service that a commodity or service that a consumer would buy at a given consumer would buy at a given

price and at a given time .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

1. Price of the commodity.

2. Income of the consumer.

3. Price of related goods.

4. Tastes and preferences.

5. Future expectations.

LAW OF DEMANDIf 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 RELATION OF PRICE WITH DEMANDDEMAND

PRICES (Rs.) DEMAND (Qt.)

1 5

2 4

3 3

4 2

5 1

X

Y

O

Quantity

Price

D

D

1

5

1 5

DIFFERENCE

Sr.no Change in Quantity Demand Change in DemandBase of difference

Definition 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

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

Alternative Name

1

2

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.)

Q.D.

Quantity (Units) Description

1 5 pD

Contraction of demand

M

Quantity

Pri

ce

QQ1

N

O

P

P1

D

D

Decrease in demand

EE1

D

D

D1

D1

QQ1OQuantity

Pri

ceY

x

P

Extension of demand

L

K

D

D

Y

Quantity

Pri

ceP

P1

Q Q1O

P1

P1

P1

P1

p

OQ

X

Y

D

PRICE

QUANTITY

E

DD1

D1

E1

Q1Q1

Increase in demand

• 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 ?

Questions

SUPPLY OF GOODS

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

• 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 Commodity.

*Price Of Factors Of Production.*Price Of Factors Of Production.*Productivity Of Factors.*Productivity Of Factors.*Technology.*Technology.*Numbers Of Firms.*Numbers Of Firms.*Policy Of Govt.*Policy Of Govt.*Aim Of Firms.*Aim Of Firms.

• (1) Individual Supply Schedule.

• (2) Market Supply Schedule.

TYPES OF SUPPLY SCHEDULE

The table relating to price and quantity Supplied is called the

supply schedule.

• 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.

Change in quantity

Supplied1. Due to change in

price.

2. Movement along the supply curve.

Change in supply

1. Due to change in other factors.

2. Shift in supply curve.

EXTENSION OF SUPPLYEXTENSION OF SUPPLY

EXTENSION OF SUPPLYEXTENSION 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.

INCREASE IN SUPPLY

INCREASE IN INCREASE IN SUPPLYSUPPLY

• More supply at same price or same supply at less price is called increase in supply.

Increase in SupplyIncrease 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 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.

• 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 is that price at which its two determinants-demand and supply are in balance, or equal.

E

D

D

S

S

P

QO X

Y

Price

Quantity

p

OQ

X

S

D

PRICE

QUANTITY

E

P1

D

S

P2

EXCESS SUPPLY

EXCESS DEMAND

• When supply is constant

S

SD

D

D1

D1

P

Q

P1

Q1

E1

EPrice

QuantityO X

Y

When supply is Perfectly Elastic and increase in demand

D

D D1

D1

E E1S S

Q1QO X

Y

Quantity

Price

P

When Supply is Perfectly Inelastic and demand increases.

Price

QuantityO X

D

D

D1

D1

E

E1

Q

P

P1

Y

S

S

Effect of Decrease In Demand And no change in supply

D

D

D1

D1S

S

E

E1P1

P

QQ1 Quantity

Pri

ce

O X

Y

When Supply is Perfectly ElasticP

rice

P

D1

D1

D

D

SS

QuantityQQ1O X

Y

E1 E

When Supply is Perfectly Inelastic

D

D

D1

D1S

S

E1

EP

P1

Price

QuantityQO

X

Y

Effect of increase in supply and no change in demand

D

DS

S S1

S1Q Q1

E

E1P

P1

Pri

ce

QuantityO X

Y

When Supply is Perfectly InelasticD

D

D1

D1S

S

E1

EP

P1

Price

QuantityQO X

Y

When Demand is Perfectly Elastic

O

S

S

S1

S1

E E1

Q Q1

Price

P

QuantityX

Y

D D

When Demand is Perfectly Inelastic

Q QuantityXO

S

S1

S

S1

E

E1

D

D

Y

Price

P

P1

Effect of Decrease in Supply and no change in Demand

D

D

S

S

S1

S1

P1

P

E1

E

QQ1

Price

O X

Y

Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Inelastic

S

S1

S1

S

Q

Price

P1

P

O X

Y

E1

E

D

D

Quantity DEMANDED AND SUPPLIED

When Demand is Perfectly Elastic

O

Quantity DEMANDED AND SUPPLIED

Price

P

QQ1 X

D D

S

S

S1

S1Y

E1 E

Simultaneous Change in Demand and Supply

• When Changes in Demand and Supply are Equal

D

D

D1

D1

S

S

S1

S1

E E1

Q Q1Quantity

OX

Y

Price

P

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 ?

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 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 COMPONENTS OF AGGREGATE DEMANDDEMAND

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

AS=C+S.AS=C+S. C=CONSUMPTION.C=CONSUMPTION. S=SAVING.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

S

S

II

INCOMEAND EMPLOYMENT

.AD

AS

Y

Y

E

E

INCOMEAND EMPLOYMENT

ADAND AS

SAV.ANDINV.

O

O

INCOMEAND EMPLOYMENT

ADAND AS

o

E

Y

FULL EMPLOYMENT LEVEL

AD

AS

EQUILIBRIUM AT UNDEREMPLOYMENT

INCOMEAND EMPLOYMENT

ADAND AS

o

E1

Y1

FULL EMPLOYMENT LEVEL

AD1

AS

Y

ADEUNDEREMPLOYMENT EQ..

EQUILIBRIUM AT UNDEREMPLOYMENT

INCOMEAND EMPLOYMENT

INCOMEAND EMPLOYMENT

ADAND AS

o

E1

Y1

FULL EMPLOYMENT LEVEL

AD1

AS

Y

ADEUNDEREMPLOYMENT EQ..

AS

AD

AD1E1

O

OVER EMPLOYMENT EQ.

Y

E

INCOMEAND EMPLOYMENT

ADAND AS

FULL EMPLOYMENT LEVEL

• 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.