CLASS – XI CBSE BOARD Microeconomics

INTRODUCTORY MICROECONOMICS
Chapter – 1 & 2 - Economics, Economy and Central Problems of an Economy
KEY CONCEPTS:-  ECONOMIC PROBLEM
 ECONOMICS  CAUSES OF AN ECONOMIC PROBLEM
 MICROECONOMICS & MACROECONOMICS  CENTRAL PROBLEMS OF AN ECONOMY
 POSITIVE AND NORMATIVE ECONOOMICS o WHAT TO PRODUCE?
 ECONOMY o HOW TO PRODUCE?
 TYPES OF ECONOMY o FOR WHOM TO PRODUCE?
o MARKET ECONOMY  SOLUTIONS TO CENTRAL PROBLEMS
o PLANNED ECONOMY  SCARCITY OF RESOURCES
o MIXED ECONOMY  OPPORTUNITY COST
- Economics: It is the science of human behaviour which studies the problem of scarcity of resources
and their allocation in such a way that consumer can maximize their satisfaction, producers can
maximize their profits and the society can maximize its welfare.
- Branches of Economics: Microeconomics and Macroeconomics:
Microeconomics: It is the study of individual economic units and individual economic variables
such as demand for a commodity in the market, study of leather industry etc.
Macroeconomics: It studies the aggregates and averages related to the whole economy or it is the
study of economy as whole. For e.g., general price level, national income etc.
- Difference between Microeconomics & Macroeconomics:
Microeconomics Macroeconomics
Studies individual economic unit. Studies economy as a whole.
Focal point is price determination and allocation Focal point is determination of level of national
of resources. income and employment.
Alternative name – Price Theory. Alternate name - Income employment theory.
Method of study – Partial equilibrium analysis. Method of study – General equilibrium analysis.
Vital Components: Vital Components:
- Theory of Consumer Behaviour Theory related to Equilibrium Level of Output
- Theory of Producer Behaviour and Employment, Theory related to Inflationary
- Theory of Price and Deflationary Gap in the Economy, Fiscal and
Monetary Policies, Money Supply and Credit
Creation, Government Budget, Exchange Rate
and BoP (Balance of Payments).
- Positive Economics & Normative Economics:
Positive Economics: Positive economics deals with what is, what was (or) how an economic
problem facing the society is actually solved. It studies about ‘what is’.
Normative Economics: It deals with what ought to be (or) how an economic problem should be
solved. These are suggestions to solve any economic problem.
- Difference between Positive Economics & Normative Economics:
Positive Economics Normative Economics
Deals with economic issues and economic Deals with opinions of the economists related to
behaviour related to past, present or future. economic issues or economic problems.
Deals with ‘what was’, ‘what is’, ‘what would be’. Deals with 'what ought to be’.
These may be true or false. Cannot be termed as true or false.
Verifiable for truth. Not verifiable for truth.
Does not involve value judgement. Involves value judgement.
Does not cause any controversy. It causes controversies.
Ex. In India poverty rate is very high. Ex. Government should apply many PAPs.
- Economy: An economy is a system by which people get their living (people of an area earn their
living). It refers to the set of all production units within a geographical area. The basic activities of
an economy are - production, consumption, exchange, distribution, investment etc.

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CLASS – XI CBSE BOARD Microeconomics
- Types of Economy: There are three types of economy:
Market Economy: It is also called as capitalist economy, laissez-faire economy. It is an economic
system, in which all material means of production are owned and operated by the private with
profit motive. All economic activities are organized through market and competition is the main
feature of this economy. The central problems (what, how and for whom to produce) are solved by
the market forces of demand and supply or price mechanism. In this type of economy:
o Producers are free to produce.
o Consumers are free to consume.
o There is no any government restriction.
Planned Economy: It is also called as centrally planned economy, command economy, socialist
economy. In this economy all material means of production are owned by the government or by a
centrally planned authority. All important decisions regarding production, exchange and
distributions, consumptions of goods and services are made by the government or by a centrally
planned authority. Social welfare is the main objective.
o Producers are not free to produce.
o Consumers are not completely free to consume.
o There is full control of government sector.
Mixed Economy: In this type of economy all the economic decisions are taken by the free play of
market forces but are regulated by the government. They have both profit as well as social welfare
motive.
o Producers are free to produce but within the government guidelines.
o Consumers are free to consume. However government controls through PDS.
o There is partial control of public and private sector both.
- Economic Problem: An economic problem is basically the problem of choice which arises due to
scarcity of resources having alternative uses.
- Causes of an Economic Problem:
o Scarcity of resources.
o Unlimited wants.
o Limited resources having alternative uses.
- Central Problems Of An Economy (Basic Economic Problems):
o Allocation of resources:
 What to produce? (Capital goods or consumer goods + How much quantity)
 How to produce? (Labour intensive or capital intensive technique)
 For whom to produce? (Personal distribution & factoral/functional distribution)
o Full and efficient utilization of resources.
o Growth of resources.
- Solutions To Central Problems:
o Market Economy:
 What to produce: Such products will be produced which offers more profit.
 How to produce: Such technique will be used which reduces cost of production.
 For whom to produce: They will produce for rich section of society.
o Planned Economy:
 What to produce: Such products will be produced which ensures social welfare.
 How to produce: Labour intensive technique (generates employment opportunities).
 For whom to produce: They will produce for poor section of society.
o Mixed Economy:
 Decision regarding what, how and for whom to produce will be taken considering both profit
as well as social welfare.
- Scarcity of Resources: Scarcity of resources means shortage of resources in relation to their
demand. (Unavailability of resources as compared to unlimited human wants).
- Opportunity Cost: It is the cost of next best alternative foregone. It is equal to the value of next best
alternative which is sacrificed or foregone in choosing a given alternative.

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CLASS – XI CBSE BOARD Microeconomics
Chapter – 3 - Consumer’s Equilibrium - Marginal Utility Analysis
KEY CONCEPTS:-  LAW OF DIMINISHING MARGINAL UTILITY
 UTILITY ANALYSIS  LAW OF DIMINISHING MARGINAL UTILITY
 UTILITY o ASSSUMPTIONS
 TYPES OF UTILITY o LIMITATIONS
o TOTAL UTILITY o EXCEPTIONS
o MARGINAL UTILITY  CONCEPT OF CONSUMER’S EQUILIBRIUM
 RELATIONSHIP BETWEEN TU & MU  CONCEPT OF CONSUMER’S SURPLUS
- Utility Analysis: This technique of consumer’s equilibrium has been propounded by Prof. Alfred
Marshal. As per Marshall human behaviour (human satisfaction) can be measured in terms of
numbers (cardinal numbers).
- Utility: It is the want satisfying power of a commodity.
- Types of Utility:
Initial Utility: It is the satisfaction received on consumption of the very 1st unit of any commodity.
At this point TU = MU.
Total Utility: It is the sum total of utility derived from the consumption of all the given units of a
commodity (TU = ∑MU).
Marginal Utility: It is an extra utility derived from consumption of an additional unit of a
commodity (MUn = TUn –Tun-1) (MU = ∆TU/∆Q).
- Relationship between TU & MU:
o At 1st unit both are same.
o When MU is positive TU is increasing.
o When MU is zero TU is maximum.
o When MU is negative TU declines
o MU is the rate of TU. Decreasing MU states that TU increases at a decreasing rate.
o TU is the behaviour of MU.
o TU = ∑MU.
o MUn = TUn –Tun-1/MUn = ∆TU/∆Q.
- Law of Diminishing Marginal Utility: It states that as the consumer consumes more and more
units of a commodity, the marginal utility derived from each successive unit goes on diminishing.
Also known as first law of Gossen. It is considered as Fundamental Psychological Law/ Fundamental
Law of Satisfaction.
When MUx=Zero, it is called as Point of Satiety/Safety/Saturation. (Maximum Satisfaction)
- Law of Diminishing Marginal Utility:
Assumptions of Law of Diminishing Marginal Utility:
o Homogeneous units of commodity.
o Continuous consumption of the commodity.
o Standard units of the commodity.
o No change in taste, preference, income of the consumer.
o No change in prices of substitute goods.
o Consumer is rational and wants to maximize his satisfaction.
o Marginal utility of money remains constant.
o Marginal utility of money is a rupee worth satisfaction that a consumer expects to get by
spending it on goods and services.
Limitations of Law of Diminishing Marginal Utility:
o Satisfaction cannot be measured in terms of numbers.
o There is a change in taste, preference, income of the consumer.
o There is a change in prices of substitute goods.
o Marginal utility of money does not remain constant.
o Rupee worth of satisfaction does not remain same across all goods purchased by the consumer
and equal to marginal utility of money.

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CLASS – XI CBSE BOARD Microeconomics
Exceptions of Law of Diminishing Marginal Utility:
o Rare commodities, monuments, antiques etc.
o Law does not apply to alcoholic drinks.
o Classical music and literary works.
o Miser man.
o Hobbies of collecting coins, stamps etc.
- Concept of Consumer’s Equilibrium: It refers to a situation when the consumer spends his given
income on purchase of a commodity (or commodities) in such a way that yields him maximum
satisfaction.
Elements:
o Marginal utility of money.
o Marginal utility of commodity.
o Price of the commodity.
Single Commodity Case: When the ratio of marginal utility of a commodity and its price are equal
to marginal utility of money. Symbolically:
MUm = MUx/Px
Where,
MUm=Marginal utility of money in terms of utils.
MUx=Marginal utility of commodity ‘x’ in utils.
Px=Price of commodity ‘x’ in rupees.
o If MUx>Px; the consumer will increase the consumption of ‘x’ commodity till MUx equals to Px.
o If MUx<Px; the consumer will decrease the consumption of ‘x’ commodity till MUx equals to Px.
Two or More Than Two Commodity Case: The law of equi-marginal utility states that a consumer
attains his equilibrium by spending his income on two or more than two commodities in such a way
that the ratio of their marginal utilities is equal to the ratio of their prices. Symbolically:
MUm = MUx/Px = MUy/Py
Where,
MUm=Marginal utility of money in terms of utils.
MUx=Marginal utility of commodity ‘x’ in utils.
Px=Price of commodity ‘x’ in rupees.
MUy=Marginal utility of commodity ‘y’ in utils.
Py=Price of commodity ‘y’ in rupees.
o If MUx/Px > MUy/Py; then increase the consumption of ‘x’ and decrease the consumption of ‘y’.
o If MUx/Px < MUy/Py; then increase the consumption of ‘y’ and decrease the consumption of ‘x’.
Assumptions of Consumer’s Equilibrium:
o Utility can be expressed in cardinal numbers, like 1,2,3, …
o Marginal utility of money remains constant.
o Law of diminishing marginal utility holds good.
o Consumer behaves rationally, and aims at the maximization of his satisfaction.
Conditions of Consumer’s Equilibrium:
o Rupee worth of satisfaction should be same across all goods purchased by the consumer and
equal to marginal utility of money.
o Marginal utility of money remains constant.
o Law of diminishing marginal utility holds good.
Limitations of Consumer’s Equilibrium:
o Utilities cannot be measured in terms of numbers.
o Marginal utility of money does not remain constant.
o Other factors remaining constant is an unrealistic assumption.
- Concept of Consumer’s Surplus: It is a situation when MUx>Px.
o Consumer Surplus = What the consumer is ready to pay – What consumer actually pays.
o At the point of equilibrium MUx = Px. At this point consumer surplus is zero.

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CLASS – XI CBSE BOARD Microeconomics
Chapter – 4 - Consumer’s Equilibrium - Indifference Curve Analysis
KEY CONCEPTS:-  CONSUMER’S BUDGET
 INDIFFERENCE CURVE ANALYSIS o BUDGET SET
 ASSUMPTIONS o BUDGET LINE
 PREFERENCES OF THE CONSUMER  PRICE LINE
o INDIFFERENCE SET  EQUATION OF BUDGET LINE
o INDIFFERENCE CURVE  PROPERTIES OF BUDGET LINE
o INDIFFERENCE MAP  SHIFT AND ROTATION OF BUDGET LINE
 MARGINAL RATE OF SUBSTITUTION  CONCEPT OF CONSUMER’S EQUILIBRIUM
 PROPERTIES OF INDIFFERENCE CURVE  LIMITATIONS OF IC ANALYSIS
- Indifference Curve Analysis: This technique of consumer’s equilibrium has been propounded by
Prof. Hicks and Allen. It is based on ordinal utility i.e., a consumer can rank his preference or order
his preference to various combinations of two goods. (Ordinal theory/approach)
- Assumptions:
o Money income of the consumer does not change.
o The consumer spends his income on two goods which are substitutes of each other.
o The consumer’s preference (or scale of preference) for the two goods is well defined. He
consumes more to that product which he is having less and consumes that product less which he
is having more.
o Assumption of ‘monotonic preference’ (Higher consumption of a commodity leads to higher level
of satisfaction).
o The consumer is rational and always tries to maximize his satisfaction in a given situation.
- Preference of the Consumer: It is the preference of the consumer according to which he consumes
the commodities.
o Indifference Set: It is a set of those combinations of two goods which offers the consumer the
same level of satisfaction. So that, the consumer is indifferent across all combinations in his
indifference set.
o Indifference Curve: It is a diagrammatic presentation of an indifference set of a consumer. It is a
locus of all such points which show different combinations of two commodities (like apples and
oranges) offering the same level of satisfaction to the consumer.
o Indifference Map: It is a group of indifference curves showing different levels satisfaction.
- Marginal Rate of Substitution: It refers to the rate at which the consumer is willing to substitute
one good for the other. It is the rate at which the consumer is willing to sacrifice Good-Y (on Y-axis)
for Good-X (on X-axis).
Marginal Rate of Substitution = Slope of IC = ∆Y/∆X = Loss of Good-Y/Gain of Good-X.
- Properties of Indifference Curve:
o An IC slopes downward from left to right (negatively sloped) - To maintain the same level of
satisfaction at each point of IC, if consumption of X commodity increased, then the consumption
of Y commodity has to be reduced.
o ICs are convex to the point of origin – This is because of diminishing marginal rate of
substitution (the rate of sacrifice of units of Y commodity for every additional unit of X
commodity goes on diminishing)
o IC never touches neither X-axis nor Y-axis – It is often assumed that a consumer buys atleast one
combination of two goods to get given level of satisfaction.
o Two indifference curves never intersect each other – Each IC represents a different level of
satisfaction. By the common point on two different ICs, representing different levels of
satisfaction is observed.
o Higher IC represents higher level of satisfaction – A combination on a higher IC will give more
satisfaction then a combination on a lower IC.
- Consumer’s Budget: It is real purchasing power of the consumer from which he can buy certain
quantitative bundles of two goods at a given price.

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CLASS – XI CBSE BOARD Microeconomics
o Budget Set: It refers to attainable combinations of a set of two goods, given price of goods and
income of the consumer.
o Budget Line: It is a line showing different possible combinations of Good ‘X’ and Good ’Y’ which a
consumer can buy with his given and given prices of good X and good Y. It is also called as price
line.
- Price Line: It shows price ratio between good X and good Y.
Price Line = Slope of Budget Line = ∆Y/∆X = Loss of Good-Y/Gain of Good-X.
- Equation of Budget Line:
Equation of Budget line = PxQx + PyQy = Money Income of the Consumer.
Where Px = price of X commodity, Py = price of Y commodity, Qx = quantity of X commodity, Qy =
quantity of Y commodity.
- Properties of Budget Line:
o It is negatively sloped straight line.
o The slope of budget line is equal to price ratio of two commodities.
o It changes its position if either price of the two commodities or income of the consumer changes.
- Shift and Rotation of Budget Line:
o Shift of budget line:
 When income of the consumer increases (Forward/rightward shift).
 When income of the consumer decreases (Backward/ leftward shit).
 When price of both the commodities decreases (Forward/rightward shift).
 When price of both the commodities increases (Backward/ leftward shit).
o Rotation of budget line:
 When price of X commodity increases (Rotate left on X-axis).
 When price of X commodity decreases (Rotate right on X-axis).
 When price of Y commodity increases (Rotate left on Y-axis).
 When price of Y commodity decreases (Rotate right on Y-axis).
- Concept of Consumer’s Equilibrium:
o MRSxy = Ratio of prices (Px/Py) (At the equilibrium point the budget line should be tangent to the
highest possible IC).
o At the point of equilibrium the slope of IC (MRS) should be equal to slope of budget line (Px/Py).
o Diminishing MRSxy. It should be diminishing at the point of equilibrium. IC must be convex.
o Income = Expenditure – At the equilibrium point the money spent is just equal to given income
level of the consumer.
o If MRSxy > Px/Py; then increase the consumption of ‘X’ and decrease the consumption of ‘Y’.
o If MRSxy < Px/Py; then increase the consumption of ‘Y’ and decrease the consumption of ‘X’.
- Limitations of IC Analysis:
o Money income of the consumer does not remain constant.
o Consumer’s scale of preference may change.
o Other thing remaining constant is an unrealistic assumption.

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CLASS – XI CBSE BOARD Microeconomics
Chapter – 5 - Theory of Demand
KEY CONCEPTS:-  WHY DEMAND CURVE SLOPES DOWNWARD?
 DEMAND  EXCEPTIONS OF LAW OF DEMAND
 DEMAND AND QUANTITY DEMANDED  DEMAND CURVE IN CASE OF EXCEPTION
 DEMAND SCHEDULE  MOVEMENT ALONG A DEMAND CURVE
 DEMAND CURVE  SHIFTS IN DEMAND CURVE
 SLOPE OF DEMAND CURVE  PRICE EFFECT
 DEMAND FUNCTION  SUBSTITUTION EFFECT
 LAW OF DEMAND  INCOME EFFECT
 ASSUMPTIONS OF LAW OF DEMAND  CROSS PRICE EFFECT
- Demand: It is the desire to buy a commodity backed with sufficient purchasing power and the
willingness to spend.
- Demand & Quantity Demanded:
o Demand refers to different possible quantities of a commodity that the consumer is ready to buy
at different possible prices of that commodity.
o Quantity demanded refers to a specific quantity to be purchased against a specific price of the
commodity.
- Demand Schedule: Tabular presentation of various quantities of a commodity demanded at
different possible prices at a point of time.
o Individual Demand Schedule: It is a table showing different quantities of a commodity that one
particular buyer/consumer in the market is ready to buy at different possible prices of the
commodity at a point of time.
o Market Demand Schedule: It is a table showing different quantities of a commodity that all the
buyers/consumers in the market are ready to buy at different possible prices of the commodity
at a point of time.
- Demand Curve: Graphical presentation of various quantities of a commodity demanded at different
possible prices at a point of time.
o Individual Demand Curve: It is a graph showing different quantities of a commodity that one
particular buyer/consumer in the market is ready to buy at different possible prices of the
commodity at a point of time.
o Market Demand Curve: It is a graph showing different quantities of a commodity that all the
buyers/consumers in the market are ready to buy at different possible prices of the commodity
at a point of time
- Slope of Demand Curve: Demand curve normally slopes downward, indicating negative (or
inverse) relationship between price of a commodity and its quantity demanded. Slope of demand
curve is estimated as (-) ∆P/∆Q. It shows the ratio between changes in price corresponding to a unit
change in quantity demanded of a commodity. Negative sign indicates the inverse relationship
between price and quantity demanded of a commodity.
- Demand Function: It shows functional relationship between quantity demanded of a commodity
and its various determinants. DX = f (Px, Pr, Y, T, E, N, Yd).
o Individual Demand Function: It shows how demand for a commodity, by an individual consumer
in the market, is related to its various determinants. It is expressed as Dx = f (Px, Pr, Y, T, E).
 Px (Own price of the commodity): Px↑ - Dx↓ and Px↓ - Dx↑ (Inverse relation).
 Pr (Price of related goods) :
(a) Substitute Goods: These are such products which hold similar qualities. Py↑ - Dx↑ and Py↓
- Dx↓ (Positive relation).
(b) Complementary Goods: These are such products which are used together. Py↑ - Dx↓ and
Py↓ - Dx↑ (Inverse relation).
 Y (Income of the consumer) :
(a) Normal Goods: These are such products which are of good quality. Y↑ - Dx↑ and Y↓ - Dx↓
(Positive relation).

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CLASS – XI CBSE BOARD Microeconomics
(b) Inferior Goods: These are such products which are of poor quality. Y↑ - Dx↓ and Y↓ - Dx↑
(Inverse relation).
 T (Taste and preference of the consumer): Favorable - Dx↑ and Unfavorable - Dx↓. (Positive
relation).
 E (Future expected price of the commodity): Ep↑ - Dx↑ and Ep↓ - Dx↓. (Positive relation).
o Market Demand Function: It shows how demand for a commodity, by all the consumers in the
market, is related to its various determinants. It is expressed as. Dx = f (Px, Pr, Y, T, E, N, Yd).
 N (Population size/ Number of buyers): N↑ - Dx↑ and N↓ - Dx↓. (Positive relation).
 Yd (Distribution of income): Equal - Dx↑ and Unequal - Dx↓. (Positive relation).
o Equation of Demand Function = Qd = a – bP
Here, Qd = Quantity demanded of a commodity.
P = Own price of the commodity.
a = Constant, indicating quantity demanded even at zero price.
b = ∆Q/∆P: ratio between change in quantity demanded and change in price. It indicates change
in quantity for a unit change in price.
- Law of Demand: It states that other things remaining constant there is an inverse relationship
between price and quantity demanded of a commodity.
- Assumptions of Law of Demand:
o Price of substitute goods does not change.
o Price of complementary goods does not change.
o Income of the consumer remains constant.
o Taste and preference of the consumer does not change.
o There is no change in future expected price.
o Number of buyers remains constant.
o Distribution of income remains constant.
- Why Demand Curve Slopes Downward?
o Income effect.
o Substitution effect.
o Different uses.
o Number of consumer group.
o Law of diminishing marginal utility.
- Exceptions of Law of Demand:
o Giffen goods.
o Articles of distinction/Veblen goods.
o Future expected price.
o Ignorance of buyers.
o Emergencies.
o Judging the quality of goods with its price.
o Necessities.
- Demand Curve in Case of Exception: Demand curve is positively sloped (upward sloping left to
right).

- Movement along a Demand Curve/Change in Quantity Demanded: It occurs when changes in

quantity demanded takes place due to changes in own price of the commodity other things
remaining constant.
o Extension of Demand: Dx↑ due to Px↓ = Downward movement of demand curve/increase in
quantity demanded.

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CLASS – XI CBSE BOARD Microeconomics
o Contraction of Demand: Dx↓ due to Px↑ = Upward movement of demand curve/decrease in
quantity demanded.
- Shifts in Demand Curve/Change in Demand: It refers to increase or decrease in demand for a
commodity in response to change in other determinants of demand other than the own price of the
commodity.
o Increase in Demand: When demand is more at the same price, due to change in other factors
then there is rightward shift in demand curve and is a situation of increase in demand.
Causes:
 When income of the consumer increases.
 When price of substitute good increases.
 When price of complementary good decreases.
 When taste/preference of the consumer shifts in favour of the commodity (due to change in
fashion or climate).
 When availability of the commodity is expected to reduce in the near future.
o Decrease in Demand: When demand is less at the same price, due to change in other factors then
there is leftward shift in demand curve and is a situation of decrease in demand.
Causes:
 When income of the consumer decreases.
 When price of substitute good decreases.
 When price of complementary good increases.
 When taste/preference of the consumer shifts against the commodity (due to change in
fashion or climate).
 When availability of the commodity is expected to increase in the near future.
- Price Effect: It is change in quantity demanded owing to a change in own price of the commodity,
other things remaining constant.
- Substitution Effect: It is the change in quantity demanded of commodity-X when relative price of
the commodity (Px/Py) changes owing to change in Px. For ex. If Px falls and Py is constant, then
Px/Py falls. It implies that commodity-X is cheaper in relation to commodity-Y. Accordingly, more of
X is purchased in place of Y. This is substitution effect.
- Income Effect: It refers to change in quantity demanded of a commodity when real income of the
consumer changes owing to change in own price of the commodity,
- Cross Price Effect: It is the effect of a change in price of commodity-X on demand for commodity-Y
when X and Y are related goods (X and Y are either substitute goods or complementary goods).
o Substitute Goods: If price of substitute good increases than demand for main product increases.
They have positive relationship between each other. So, demand curve shifts forward. On the
other hand, if price of substitute good decreases than demand for main product also decreases.
They have positive relationship between each other. So, demand curve shifts backward.
o Complementary Goods: If price of complementary good increases than demand for main product
decreases. They have negative relationship between each other. So, demand curve shifts
backward. On the other hand, if price of complementary good decreases than demand for main
product increases. They have negative relationship between each other. So, demand curve shifts
forward.
- Note:
o Normal good is that good whose income effect is positive and price effect is negative.
o Inferior good is that good whose income effect is negative.
o Giffen good is that inferior good whose income effect is negative but price effect is positive.
Demand curve is positively sloped.
o Taste and preference of the buyers are determined by three factors Individual’s likes and dislikes,
trends and fashions and climatic environment. If taste and preference is favorable then demand
for the commodity increases and demand curve shifts forward and if taste and preference is
unfavorable then demand for the commodity decreases and demand curve shifts backward.

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CLASS – XI CBSE BOARD Microeconomics
Chapter – 6 - Price Elasticity of Demand
KEY CONCEPTS:-  RELATION BETWEEN PRICE ELASTICITY OF
 PRICE ELASTICITY OF DEMAND DEMAND AND TOTAL EXPENDITURE
 METHODS OF MEASUREMENT  DEGREES OF PRICE ELASTICITY OF DEMAND
 PERCENTAGE METHOD  FACTORS AFFECTING PRICE ELASTICITY OF
 GEOMETRIC METHOD DEMAND
- Price Elasticity of Demand: It is the ratio between percentage change in quantity demanded of a
commodity and percentage change in own price of the commodity.
Price elasticity of demand = (-) % change in quantity demanded/% change in price.
- Methods of Measurement: There are three methods of measurement:
o Percentage method.
o Geometric method.
o Total expenditure method.
- Percentage Method:
∆
Price elasticity of demand = (-) x .
∆
- Degrees of Price Elasticity of Demand: There are five degrees.
o More than unitary elastic demand/elastic demand (Ed>1): It is a situation when percentage
change in quantity demanded of the commodity is more than percentage change in price of the
commodity. Diagrammatically, it is indicated by a point on the upper segment (upper-half) of the
straight line demand curve. Demand curve is more flat.
o Less than unitary elastic demand/inelastic demand (Ed<1): It is a situation when percentage
change in quantity demanded of the commodity is less than percentage change in price of the
commodity. Diagrammatically, it is indicated by a point on the lower segment (lower-half) of the
straight line demand curve. Demand curve is less flat.
o Unitary elastic demand (Ed=1): It is a situation when percentage change in quantity demanded
of the commodity is equal to percentage change in price of the commodity. Diagrammatically, it
is indicated by a mid-point on the straight line demand curve. It is a situation of rectangular
hyperbola.
o Perfectly elastic demand (Ed=∞): It is a situation when there is a change in quantity demanded
of the commodity without any change in price of the commodity. It is a horizontal straight line
demand curve parallel to X-axis.
o Perfectly inelastic demand (Ed=0): It is a situation when there is no any change in quantity
demanded of the commodity corresponding to change in price of the commodity. It is a vertical
straight line demand curve parallel to Y-axis.
- Factors Affecting Price Elasticity of Demand:
o Nature of the commodity: Necessaries have inelastic demand, luxuries have elastic demand.
o Availability of substitutes: If close substitutes are available then elastic demand and if close
substitutes are not available then inelastic demand.
o Multiple uses: If goods have multiple uses then elastic demand and if goods have no multiple use
then inelastic demand.
o Postponement of uses: If use of the goods can be postponed then elastic demand and if use of the
goods cannot be postponed then inelastic demand.
o Income level of the buyers: Demand is less elastic in case of consumers with high level of income
and demand is more elastic in case of consumers with low level of income.
o Habit of the consumers: Goods which are habitual will have inelastic demand and goods which
are not habitual will have elastic demand.
o Proportion of income spent on that commodity: If less proportion of income is spent on that
commodity then demand will be inelastic and if more proportion of income is spent on that
commodity then demand will be elastic.
o Price level: Goods with high price level have more elastic demand and goods with low price level
will have less elastic demand.

By Utkarsh Dewangan (+91-8962201797) 10

CLASS – XI CBSE BOARD Microeconomics
o Time period: In short run the demand is inelastic and in long period demand in elastic.
- Derivative formula of Ed = (-) x .

Degrees of Price Elasticity of Demand

1. 2. 3.
Price

Price

Price
D D D
Quantity Quantity Quantity
Ed>1 Ed<1 Ed=1
4. 5.
D
Price

Price
D

Quantity Quantity
Ed=∞ Ed=0

By Utkarsh Dewangan (+91-8962201797) 11