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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.
