Economics 4 Marks Question

Quantity (in units)	MU (Utils)	TU (Utils)
1	8	8
2	5	13
3	3	16
4	1	17
5	0	17
6	-1	16

Relationship between total utility and Marginal Utility
• Marginal utility falls but remains positive as long as total utility increases from 1^st unit to 4^th unit of consumption.
• When marginal utility is Zero, total utility is maximum i.e. at 5^th unit of consumption.
• When marginal utility becomes negative, total utility starts falling but remains positive i.e. at 6^th unit of consumption and beyond.

Producer’s Equilibrium: Equilibrium represents a state of no change. A firm is said to be in equilibrium when it does not incline to expand or to contract its output. Producer’s Equilibrium refers to the state where a producer is earning the maximum possible profit by producing a particular level of output. A producer would be in the state of equilibrium if he is earning a maximum profit, i.e. has profit maximisation. It is referred to as 'equilibrium' because a producer has no incentive to move away from this point, as such deviation will reduce his/her profit.
If a firm may suffer losses, and yet continue to stay in the market, it does not suspend its production activity. This happens in a short period. Because in the short period, a firm is confronted with 2 sets of costs – (i) fixed cost, and (ii) variable cost. Fixed cost is incurred even when output is zero. A firm has to bear the loss of fixed costs even when production is stopped. Accordingly, a firm may decide to continue production so long as variable costs are covered. Thus, production may continue as long as TR ≥ TVC.
In this case, the producer will reach its equilibrium at the point where the price is equal to or greater than the minimum of the short-run average variable cost curve (SAVC). This is because if a producer is incurring losses then he must be selling his product at a price lower than the minimum of SAVC. Thus, in order to reach equilibrium, he will have to sell the output at a price that is equal to or greater than the minimum of SAVC.
In case of the long run, when all costs are variable costs, a firm will undertake production only when all costs are covered. Otherwise, it will quit the industry.

i. Change in the income of the consumer also influences his demand for different goods. The demand for normal goods tends to increase with increase in income and vice versa. On the other hand, the demand for inferior goods like coarse grain tends to decrease with increase in income, and vice versa.
ii. Demand for a commodity is also influenced by change in price of related goods. These are of two types-substitute goods and complementary goods. In case of substitute goods, increase in the price of one causes increase in demand for the other and decrease in the price of one causes decrease in the demand for the other. In the case of complementary goods, a fall in the price of one causes increase in the demand for the other and a rise in the price of one causes decrease in the demand for the other.