Economics 4 Marks Question

i. Marginal Rate of Substitution refers to the rate at which the consumer is willing to sacrifice one goods to obtain one more unit of the other goods.
ii. A budget line is the line that shows the maximum amount of goods-X or of goods-Y (or the possible combinations of X and Y) that the consumer can buy, given his money income and the prices of the goods X and Y.
Let the two goods be X and Y. We are given P_X = ₹ 4, P = ₹ 5, Consumer's income (M) = ₹ 20. Budget line equation is : Px X + PyY = M or ⇒ 4x + 5y = 20.

Output	TR (Rs.)	TC (Rs.)	Profit (TR -TC)	MR (Rs.)	MC (Rs.)
1	10	12	-2	-	-
2	20	22	-2	10	10
3	30	30	0	10	8
4	40	40	0	10	10
5	50	52	-2	10	12

Equilibrium refers to a state of rest when no change is required. A firm (producer) is said to be in equilibrium when it has no inclination to expand or to contract its output. This state either reflects maximum profits or minimum losses.
There are two methods for determination of Producer’s Equilibrium:
1. Total Revenue and Total Cost Approach (TR-TC Approach)
2. Marginal Revenue and Marginal Cost Approach (MR-MC Approach) According to MR - MC approach, the producer’s equilibrium refers to the stage of that output level at which:
i. MC = MR: As long as MC is less than MR, it is profitable for the producer to go on producing more because it adds to its profits. He stops producing more only when MC becomes equal to MR.
ii. MC is greater than MR after MC = output level. When MC is greater than MR after equilibrium, it means producing more will lead to a decline in profits.
As per the given schedule, the producer will be at equilibrium when he is producing 4 units of output because both the conditions of producers equilibrium are being fulfilled at this point i.e.
i. MC = MR [MC = MR = 10 ].
ii. MC becomes greater than MR after the MC = MR output level [MC = 9, whereas MR = 7 at the 5th unit of output].
iii. Producer won’t be at equilibrium at the 2nd unit of output though MC = MR because MC is not greater than MR after that level of output.

 Differences between change in demand and change in quantity demanded are

Basis	Change in Demand	Change in quantity Demanded
Reason	It is caused by a change in prices of substitutes,change in prices of complementary goods,change in income, etc. other than the own price of the commodity	It is caused by an increase or decrease in the price of the given commodity, keeping other factors constant.
Impact on demand curve	It leads to a shift in the demand curve either rightwards (known as increase in demand)or leftwards(known as decrease in demand)	It leads to a movement along the same demand curve either upwards(known as contraction in demand)or downwards(known as expansion in demand)
Diagrammatic Presentation	Diagrammatically, this is shown as a forward or backward shift in demand curve.	Diagrammatically, this is shown as a downward or an upward movement on the same demand curve.