Online Self Test
Learn & Practice Quizzes & Challenges Competitive Exams
 

Producer Behaviour and Supply – CBSE NCERT Study Resources

Previous ChapterNext Chapter
Previous Chapter Next Chapter

Study Materials

11th

11th - Economics

Producer Behaviour and Supply

Jump to Question Sets

Overview of the Chapter: Producer Behaviour and Supply

This chapter explores the behavior of producers and the concept of supply in economics. It covers key topics such as production functions, costs, revenue, and the determinants of supply. The chapter helps students understand how producers make decisions to maximize profits and how market conditions influence supply.

Producer Behaviour: The study of how producers make decisions regarding the production of goods and services to maximize profits.

Supply: The quantity of a commodity that producers are willing and able to offer for sale at different prices during a given period of time.

Key Concepts

  • Production Function
  • Short-Run and Long-Run Production
  • Costs of Production (Fixed, Variable, Total, Marginal)
  • Revenue (Total, Average, Marginal)
  • Profit Maximization
  • Determinants of Supply
  • Movement Along the Supply Curve vs. Shift in Supply Curve

Production Function

The production function describes the relationship between inputs (factors of production) and outputs (goods and services). It can be represented as:

Q = f(L, K)

Where Q is output, L is labor, and K is capital.

Costs of Production

Producers incur various costs during production, including:

  • Fixed Costs (FC): Costs that do not change with the level of output (e.g., rent).
  • Variable Costs (VC): Costs that vary with the level of output (e.g., raw materials).
  • Total Costs (TC): Sum of fixed and variable costs (TC = FC + VC).
  • Marginal Cost (MC): The additional cost of producing one more unit of output.

Revenue and Profit Maximization

Revenue is the income earned by producers from selling goods and services. Key revenue concepts include:

  • Total Revenue (TR): Total income from sales (TR = Price × Quantity).
  • Average Revenue (AR): Revenue per unit sold (AR = TR / Q).
  • Marginal Revenue (MR): The additional revenue from selling one more unit of output.

Producers aim to maximize profit, which is the difference between total revenue and total cost (Profit = TR - TC).

Supply and Its Determinants

Supply is influenced by several factors, including:

  • Price of the commodity
  • Cost of production
  • Technology
  • Government policies
  • Prices of related goods

Supply Curve

The supply curve is a graphical representation of the relationship between price and quantity supplied. A movement along the supply curve occurs due to a change in price, while a shift in the supply curve happens due to changes in other determinants of supply.

Law of Supply: There is a direct relationship between price and quantity supplied, assuming other factors remain constant.

All Question Types with Solutions – CBSE Exam Pattern

Explore a complete set of CBSE-style questions with detailed solutions, categorized by marks and question types. Ideal for exam preparation, revision and practice.

Very Short Answer (1 Mark) – with Solutions (CBSE Pattern)

These are 1-mark questions requiring direct, concise answers. Ideal for quick recall and concept clarity.

Question 1:
Define production function.
Answer:
Definition: Relationship between inputs and output in production.
Question 2:
What is marginal product?
Answer:
Definition: Additional output from using one more unit of input.
Question 3:
State the law of diminishing returns.
Answer:

Output increases at a decreasing rate when one input is increased, others constant.

Question 4:
What are fixed costs?
Answer:
Definition: Costs that do not change with output level.
Question 5:
Give one example of variable cost.
Answer:

Raw materials or wages for temporary labor.

Question 6:
What is total revenue?
Answer:
Definition: Total money earned from selling goods or services.
Question 7:
Define supply in economics.
Answer:
Definition: Quantity of a good producers are willing to sell at a price.
Question 8:
What is price elasticity of supply?
Answer:
Definition: Responsiveness of supply to price changes.
Question 9:
Give an example of perfectly elastic supply.
Answer:

Agricultural products in a perfectly competitive market.

Question 10:
What is producer equilibrium?
Answer:
Definition: Output level where profit is maximized.
Question 11:
How does technology affect supply?
Answer:

Improves efficiency, increases supply at lower costs.

Question 12:
What is market supply?
Answer:
Definition: Sum of individual supplies by all producers.
Question 13:
Differentiate between short-run and long-run supply.
Answer:

Short-run: Fixed inputs. Long-run: All inputs variable.

Question 14:
What is meant by total product in production?
Answer:

Total product (TP) refers to the total quantity of output produced by a firm using a given amount of variable input (like labor) while keeping other inputs fixed.

Question 15:
Differentiate between fixed costs and variable costs.
Answer:
  • Fixed costs (FC) do not change with the level of output (e.g., rent).
  • Variable costs (VC) vary directly with production (e.g., raw materials).
Question 16:
What is the law of variable proportions?
Answer:

The law of variable proportions states that as more of a variable input is added to fixed inputs, marginal product initially rises, then falls, and eventually becomes negative.

Question 17:
Define marginal cost.
Answer:

Marginal cost (MC) is the additional cost incurred to produce one more unit of output. It is calculated as the change in total cost divided by the change in quantity.

Question 18:
What is shut-down point for a firm?
Answer:

The shut-down point occurs when a firm's average variable cost (AVC) equals its price. Below this point, the firm cannot cover variable costs and should stop production.

Question 19:
Explain the concept of returns to scale.
Answer:

Returns to scale describe how output changes when all inputs are increased proportionally. Types include:

  • Increasing returns (output rises more than inputs)
  • Constant returns (output rises proportionally)
  • Diminishing returns (output rises less than inputs)

Question 20:
What is the significance of the supply curve?
Answer:

The supply curve shows the relationship between price and the quantity of a good producers are willing to supply. It is usually upward-sloping due to the law of supply.

Question 21:
Define producer's equilibrium.
Answer:

Producer's equilibrium occurs when a firm maximizes profit by producing the output level where marginal cost (MC) equals marginal revenue (MR).

Question 22:
What causes a shift in the supply curve?
Answer:

A shift in the supply curve occurs due to non-price factors like:

  • Changes in input prices
  • Technology improvements
  • Government policies (taxes/subsidies)

Question 23:
Differentiate between short-run and long-run production.
Answer:
  • Short-run: At least one input is fixed (e.g., capital).
  • Long-run: All inputs are variable; firms can adjust scale.
Question 24:
What is elasticity of supply?
Answer:

Elasticity of supply measures how responsive the quantity supplied is to price changes. It is calculated as:
% change in quantity supplied / % change in price.

Very Short Answer (2 Marks) – with Solutions (CBSE Pattern)

These 2-mark questions test key concepts in a brief format. Answers are expected to be accurate and slightly descriptive.

Question 1:
Explain the concept of marginal product.
Answer:

Marginal product (MP) is the additional output produced by employing one more unit of a variable input (like labor), keeping all other inputs constant. It helps firms decide optimal input usage.

Question 2:
What is the law of diminishing returns?
Answer:

The law of diminishing returns states that as more units of a variable input (like labor) are added to fixed inputs (like land), the marginal product initially increases but eventually declines due to overcrowding or inefficiency.

Question 3:
What causes a movement along the supply curve?
Answer:

A movement along the supply curve occurs due to a change in the price of the commodity itself, leading to an expansion (price rise) or contraction (price fall) in supply.

Question 4:
List two factors that cause a shift in the supply curve.
Answer:
  • Change in input prices (e.g., cheaper raw materials shift supply right).
  • Technological advancements (increase efficiency, shifting supply right).
Question 5:
Explain the term price elasticity of supply.
Answer:

Price elasticity of supply (PES) measures how responsive the quantity supplied is to a change in price. It is calculated as:
PES = (% change in quantity supplied) / (% change in price).
Supply is elastic if PES > 1 and inelastic if PES < 1.

Question 6:
How does time period affect supply elasticity?
Answer:

In the short run, supply is less elastic as firms cannot adjust inputs quickly.
In the long run, supply becomes more elastic as firms can expand production capacity or adopt new technology.

Short Answer (3 Marks) – with Solutions (CBSE Pattern)

These 3-mark questions require brief explanations and help assess understanding and application of concepts.

Question 1:
Define production function and explain its two types with examples.
Answer:

The production function is a technical relationship between inputs (like labor and capital) and the maximum output a firm can produce.

Two types:

  • Short-run production function: At least one input (like capital) is fixed. Example: A bakery using the same oven but hiring more workers.
  • Long-run production function: All inputs are variable. Example: A factory expanding both machinery and labor to increase output.
Question 2:
Differentiate between fixed cost and variable cost with suitable examples.
Answer:

Fixed cost (FC) remains constant regardless of output level, like rent or salaries. Example: A shop’s monthly rent.

Variable cost (VC) changes with output, like raw materials. Example: Cost of flour for a bakery increases as more bread is baked.

Key difference: FC exists even at zero output, while VC is zero when production stops.

Question 3:
Explain the concept of marginal product and its relationship with total product.
Answer:

Marginal product (MP) is the additional output from employing one more unit of a variable input (like labor).

Relationship with total product (TP):

  • When MP rises, TP increases at an increasing rate.
  • When MP falls but is positive, TP increases at a decreasing rate.
  • If MP becomes negative, TP starts declining.
Example: Hiring an extra worker may initially boost output (rising MP), but overstaffing can reduce efficiency (negative MP).
Question 4:
What is law of diminishing marginal returns? State its assumptions.
Answer:

The law of diminishing marginal returns states that as more units of a variable input (like labor) are added to fixed inputs (like land), the MP of the variable input eventually declines.

Assumptions:

  • Technology remains unchanged.
  • At least one input is fixed.
  • All units of the variable input are equally efficient.
Example: Overcrowding in a small factory reduces worker productivity.
Question 5:
Describe the shut-down point for a firm in the short run. How is it determined?
Answer:

The shut-down point occurs when a firm’s revenue just covers its variable costs, making it indifferent between producing or shutting down temporarily.

It is determined where:
Price (P) = Minimum average variable cost (AVC).

Below this point, the firm cannot even cover variable costs and should shut down to minimize losses.

Question 6:
Explain how a firm achieves producer’s equilibrium using the MR-MC approach.
Answer:

A firm achieves producer’s equilibrium when it maximizes profit or minimizes loss. Under the MR-MC approach:

Condition 1: Marginal Revenue (MR) = Marginal Cost (MC).
Condition 2: MC must be rising at the equilibrium output.

Example: If MR > MC, the firm should increase output; if MR < MC, it should reduce output until MR = MC.

Question 7:
Define production function and explain its significance in producer behavior.
Answer:

The production function is a technical relationship between inputs (like labor, capital) and output produced by a firm. It shows the maximum output achievable from different combinations of inputs, assuming efficient utilization.

Significance:

  • Helps producers determine the most cost-effective input mix.
  • Guides decisions on scaling production up or down.
  • Forms the basis for calculating marginal product and returns to scale.

Question 8:
Differentiate between fixed costs and variable costs with examples.
Answer:

Fixed costs are expenses that do not change with the level of output (e.g., rent, salaries). Variable costs vary directly with production (e.g., raw materials, electricity).

Examples:

  • Fixed cost: Factory lease payment remains ₹50,000/month even if output is zero.
  • Variable cost: Cost of flour for a bakery increases as more bread is baked.

Question 9:
Explain the concept of marginal product and how it influences production decisions.
Answer:

Marginal product (MP) is the additional output produced by employing one more unit of a variable input (like labor).

Influence on decisions:

  • If MP is rising, hiring more workers increases efficiency.
  • If MP is falling (due to diminishing returns), adding more inputs may not be profitable.
  • Helps identify the optimal input level where cost per unit is minimized.

Question 10:
What is law of supply? State any two factors that can cause a shift in the supply curve.
Answer:

The law of supply states that, other factors remaining constant, the quantity supplied of a good rises as its price increases, and vice versa.

Factors shifting supply curve:

  • Technology: Improved tech reduces production costs, increasing supply.
  • Input prices: Cheaper raw materials shift supply curve rightward.

Question 11:
Describe the relationship between total product, average product, and marginal product using a numerical example.
Answer:

Consider a firm with labor (L) and output (Q):
L=1, Q=10 → TP=10, AP=10, MP=10
L=2, Q=25 → TP=25, AP=12.5, MP=15
L=3, Q=45 → TP=45, AP=15, MP=20

Relationship:

  • When MP > AP, AP rises.
  • When MP < AP, AP falls.
  • TP peaks when MP becomes zero.

Question 12:
Why does the short-run average cost curve typically have a U-shape? Explain with reasons.
Answer:

The U-shape arises due to:

  • Initial downward slope: Spreading of fixed costs over more units and increasing returns to labor reduce average cost.
  • Upward slope later: Diminishing returns set in, making variable costs rise faster than output.

The lowest point of the U is the minimum efficient scale where average cost is minimized.

Long Answer (5 Marks) – with Solutions (CBSE Pattern)

These 5-mark questions are descriptive and require detailed, structured answers with proper explanation and examples.

Question 1:
Explain the law of variable proportions with its three stages using a hypothetical production function. How does it impact a farmer's decision-making?
Answer:
Theoretical Framework

The law of variable proportions states that as we increase one variable input (like labor) while keeping others fixed (like land), output initially rises at an increasing rate, then at a diminishing rate, and eventually declines.

Evidence Analysis
  • Stage 1 (Increasing Returns): More laborers increase wheat yield disproportionately (e.g., 5 workers → 20 quintals).
  • Stage 2 (Diminishing Returns): Adding 6th worker raises output only by 3 quintals (total 23).
  • Stage 3 (Negative Returns): 7th worker reduces output due to overcrowding (total 21).
Critical Evaluation

Our textbook shows farmers optimize at Stage 2. Beyond this, costs outweigh benefits, as seen in Punjab's overworked farmlands.

Question 2:
Compare fixed and variable costs using a table. Why do startups focus on minimizing fixed costs?
Answer:
Theoretical Framework

Fixed costs (rent, salaries) remain constant regardless of output, while variable costs (raw materials) change with production scale.

Evidence Analysis
Cost TypeExampleStartup Impact
FixedOffice rent (₹20k/month)High risk if sales fail
VariableCloud server fees (pay-per-use)Scales with demand
Critical Evaluation

We studied how Zomato initially used cloud kitchens (low fixed costs) to adapt quickly during COVID, unlike traditional restaurants with heavy rentals.

Question 3:
Analyze how economies of scale benefit large corporations like Reliance Jio with two real-world examples.
Answer:
Theoretical Framework

Economies of scale occur when per-unit costs fall as production expands due to factors like bulk purchasing and specialized labor.

Evidence Analysis
  • Jio's fiber-optic network: Serving 400M users reduced average data cost to ₹5/GB vs. ₹50/GB for smaller players.
  • Procurement discounts: Buying 10M smartphones annually gets 30% lower prices from manufacturers.
Critical Evaluation

Our textbook highlights how this creates barriers for new entrants, as seen in Jio capturing 38% market share by 2023 (TRAI data).

Question 4:
Differentiate short-run and long-run production functions using the cement industry. How does time horizon affect supply decisions?
Answer:
Theoretical Framework

In short-run, at least one input (like plant capacity) is fixed, whereas long-run allows adjustment of all inputs.

Evidence Analysis
  • Short-run: Ultratech Cement can only increase labor shifts (max 3/day) to meet Diwali demand spike.
  • Long-run: They build new plants (like 2022 Andhra Pradesh expansion) to permanently raise capacity.
Critical Evaluation

We studied how COVID lockdowns forced short-run cuts (50% staff), but long-run saw automation investments reducing human dependency.

Question 5:
Critically examine the shut-down point for a firm using the case of Vodafone Idea. When should a firm temporarily halt operations?
Answer:
Theoretical Framework

A firm reaches shut-down point when price falls below average variable cost (AVC), making continued operations more costly than stopping.

Evidence Analysis
  • Vodafone Idea's AVC was ₹48/user (2021 data) when ARPU dipped to ₹45, losing ₹3/user daily.
  • Temporary shutdown saved ₹650cr/month in network maintenance until govt relief package.
Critical Evaluation

Our textbook shows this decision preserves capital for future revival, unlike Kingfisher Airlines that ignored AVC and collapsed.

Question 6:
Explain the law of variable proportions with its three stages using a hypothetical production data table.
Answer:
Theoretical Framework

The law of variable proportions states that as we increase one variable input (like labor) while keeping others fixed, output initially rises at an increasing rate, then at a diminishing rate, and eventually declines.


Evidence Analysis
Units of LaborTotal Product (TP)Marginal Product (MP)
11010
22515
33510
4405
538-2

Critical Evaluation

Stage I (Increasing Returns): MP rises (1→2 laborers). Stage II (Diminishing Returns): MP falls but remains positive (3→4 laborers). Stage III (Negative Returns): MP turns negative (5th laborer). Our textbook shows this pattern in agricultural examples.

Question 7:
Compare fixed and variable costs using two real-world business examples. How do they affect short-run production decisions?
Answer:
Theoretical Framework

Fixed costs (e.g., factory rent) remain constant regardless of output, while variable costs (e.g., raw materials) change with production scale.


Evidence Analysis
  • Example 1: A bakery pays ₹10,000 monthly rent (fixed) but flour costs rise with more bread baked (variable)
  • Example 2: Uber drivers face fixed car EMI but variable fuel costs per trip

Critical Evaluation

In short-run, firms continue production if revenue covers variable costs, even with fixed cost losses. Our case studies show this 'shutdown point' concept in pandemic-hit restaurants.

Question 8:
Analyze how returns to scale differ from law of variable proportions using current Indian manufacturing sector data.
Answer:
Theoretical Framework

Returns to scale examine output changes when all inputs change proportionally, unlike the law of variable proportions which studies one variable input.


Evidence Analysis
  • 2023 ASI data shows 22% output jump in auto sector with 20% increase in both labor and capital (increasing returns)
  • Pharma industry exhibits constant returns with proportional input-output growth

Critical Evaluation

While variable proportions govern daily operations, scale economies determine long-term expansion. Textbook examples like Reliance Jio's infrastructure show this distinction.

Question 9:
Why do supply curves slope upward? Validate with 2023 fertilizer price-response data and theoretical exceptions.
Answer:
Theoretical Framework

Supply curves slope upward due to rising marginal costs of production. Higher prices incentivize firms to increase output.


Evidence Analysis
Fertilizer Price (₹/kg)Industry Supply (million tons)
2518.2
3021.7
3524.3

Critical Evaluation

Exceptions include backward bending supply of labor (wage vs work hours) and perishable goods auctions. Our module shows how potato farmers responded to 2023 price hikes.

Question 10:
Critically examine how technological advancements shift supply curves, citing India's solar panel industry (2018-2023).
Answer:
Theoretical Framework

Technology reduces per-unit production costs, causing rightward supply curve shifts by enabling more output at same prices.


Evidence Analysis
  • Solar panel costs fell 62% since 2018 (MNRE data)
  • Annual production capacity grew from 15GW to 48GW

Critical Evaluation

While technology expands supply, our case study shows limitations like rare earth material shortages. The textbook demonstrates similar patterns in mobile manufacturing.

Question 11:
Explain the concept of production function and discuss its types with suitable examples. How does it influence a producer's decision-making process?
Answer:

The production function is a technical relationship between inputs (like labor, capital, land) and output of a firm, showing the maximum output producible from given inputs. It is represented as: Q = f(L, K), where Q is output, L is labor, and K is capital.

There are two main types of production functions:

  • Short-run production function: At least one input (usually capital) is fixed. Example: A bakery with a fixed oven capacity hires more workers to increase output.
  • Long-run production function: All inputs are variable. Example: A car manufacturer expands its factory and hires more workers to scale up production.

The production function influences a producer's decisions by:

  • Helping determine the optimal combination of inputs to minimize costs.
  • Guiding decisions on scaling production up or down based on returns to scale.
  • Assessing efficiency through concepts like total product, marginal product, and average product.

For instance, if a firm observes diminishing marginal returns in the short run, it may plan to invest in more capital in the long run to boost productivity.

Question 12:
Explain the concept of production function with the help of a suitable example. Discuss its short-run and long-run implications for a firm.
Answer:

The production function is a technical relationship between the inputs used in production (like labor, capital, raw materials) and the output produced by a firm. It shows the maximum quantity of output that can be produced from a given set of inputs, assuming efficient utilization of resources.


Example: Consider a bakery producing bread. Its production function may be represented as Q = f(L, K), where Q is the quantity of bread, L is labor (bakers), and K is capital (ovens, flour, etc.).


Short-run implications: In the short run, at least one input (usually capital) is fixed. Here, the firm can only increase output by adding more variable inputs (like labor). However, the law of diminishing returns applies, meaning that after a point, each additional worker contributes less to output due to limited fixed resources.


Long-run implications: In the long run, all inputs are variable. A firm can scale up production by increasing both labor and capital. This allows the firm to achieve economies of scale, where increasing production leads to lower average costs per unit due to efficient resource allocation.


Value-added insight: Understanding the production function helps firms optimize input combinations to minimize costs and maximize output, ensuring better profitability and competitiveness in the market.

Question 13:
Explain the concept of production function with the help of a suitable example. Discuss its importance in understanding producer behaviour.
Answer:

The production function is a technical relationship between inputs (like labor, capital, and raw materials) and the output produced by a firm. It shows the maximum quantity of output that can be produced using different combinations of inputs, given the current technology.

Example: Suppose a farmer grows wheat using labor (L) and land (K). The production function can be represented as:
Q = f(L, K)
Where Q is the quantity of wheat produced, L is labor, and K is land.

Importance in Producer Behaviour:

  • Helps firms determine the most efficient input combination to minimize costs and maximize output.
  • Assists in understanding returns to scale—whether increasing inputs leads to proportional or disproportionate changes in output.
  • Guides decision-making on hiring labor or investing in machinery based on productivity.
  • Forms the basis for cost analysis, as costs depend on input quantities used in production.

For instance, if a firm observes diminishing returns to labor, it may invest in automation to maintain efficiency.

Question 14:
Explain the concept of production function with the help of a suitable example. Discuss its importance in the context of producer behavior.
Answer:

The production function is a technical relationship between inputs (factors of production) and output (goods or services) produced by a firm. It shows the maximum quantity of output that can be produced from a given set of inputs, assuming efficient utilization of resources. Mathematically, it can be represented as: Q = f(L, K), where Q is output, L is labor, and K is capital.

Example: A bakery producing bread uses labor (bakers) and capital (ovens, flour). If it employs 5 workers and 2 ovens, it may produce 100 loaves per day. This relationship is its production function.

Importance in Producer Behavior:

  • Helps firms determine the optimal combination of inputs to minimize costs and maximize output.
  • Assists in understanding returns to scale—whether increasing inputs leads to proportional output growth.
  • Guides decisions on hiring labor or investing in machinery based on efficiency.
  • Forms the basis for cost analysis and profit maximization strategies.

Question 15:
Differentiate between fixed costs and variable costs with examples. How do these costs influence a producer's supply decisions in the short run?
Answer:

Fixed Costs (FC): These are expenses that do not change with the level of output in the short run. They must be paid even if production is zero. Example: Rent for factory space, salaries of permanent staff, or loan repayments.

Variable Costs (VC): These costs vary directly with the level of production. They increase as output rises and decrease when output falls. Example: Raw materials, wages for temporary workers, or electricity bills.

Influence on Supply Decisions:

  • In the short run, a producer continues production if total revenue (TR) covers variable costs (VC), even if fixed costs are not fully recovered (since they are sunk costs).
  • If TR < VC, the firm may shut down temporarily to minimize losses.
  • Producers aim to operate where marginal cost (MC) equals marginal revenue (MR) to maximize profit, considering both fixed and variable costs.

Thus, understanding these costs helps producers decide whether to continue, expand, or halt production.

Question 16:
Explain the concept of production function with the help of a suitable example. Discuss its importance in understanding producer behaviour.
Answer:

The production function is a technical relationship between the physical inputs (like labor, capital, raw materials) and the physical output of a firm. It shows the maximum quantity of output that can be produced from a given set of inputs, assuming the best available technology is used.


Example: Suppose a farmer uses labor (L) and land (K) to produce wheat (Q). The production function can be represented as Q = f(L, K), where Q is the output of wheat, and L and K are the inputs.


Importance in understanding producer behavior:

  • Helps firms determine the most efficient combination of inputs to minimize costs and maximize output.
  • Assists in analyzing the impact of technological changes on production.
  • Provides insights into the law of diminishing returns, which is crucial for decision-making.
  • Enables firms to plan for scaling production up or down based on demand.

Understanding the production function is essential for producers to optimize resources and achieve cost-effective production.

Question 17:
Differentiate between fixed costs and variable costs with examples. How do these costs influence a firm's supply decisions in the short run?
Answer:

Fixed costs (FC) are expenses that do not change with the level of output, such as rent, salaries of permanent staff, or machinery costs. Variable costs (VC), on the other hand, vary directly with the level of production, like raw materials or wages for temporary labor.


Examples:

  • Fixed cost: A bakery pays ₹10,000 per month as rent, regardless of how many cakes it bakes.
  • Variable cost: The cost of flour and sugar increases as the bakery produces more cakes.

Influence on supply decisions:

  • In the short run, firms must cover at least their variable costs to continue production, as fixed costs are already incurred.
  • If the price of the product falls below the average variable cost, the firm may shut down temporarily to minimize losses.
  • Fixed costs act as a barrier to exit, as firms may continue production to recover some of these costs even if profits are low.

Thus, understanding these costs helps firms make informed decisions about production levels and pricing strategies.

Question 18:
Explain the concept of production function and discuss its types with suitable examples. How does it help producers in decision-making?
Answer:

The production function is a technical relationship between inputs (like labor, capital, and raw materials) and the maximum output that can be produced using those inputs. It represents the efficiency of the production process.

Types of Production Function:

  • Short-run Production Function: At least one input is fixed (e.g., capital). For example, a bakery can increase output by hiring more workers but cannot expand its oven capacity immediately.
  • Long-run Production Function: All inputs are variable. For instance, a car manufacturer can expand its factory and hire more labor to increase production.

Role in Decision-Making: The production function helps producers determine the optimal combination of inputs to minimize costs and maximize output. It also assists in understanding the law of diminishing returns and economies of scale, enabling better planning and resource allocation.

Question 19:
What is law of supply? Explain the factors affecting supply of a commodity with real-world examples.
Answer:

The law of supply states that, other factors remaining constant, the quantity supplied of a commodity increases with a rise in its price and decreases with a fall in its price. This is because higher prices incentivize producers to supply more.

Factors Affecting Supply:

  • Price of the Commodity: Higher prices lead to increased supply (e.g., during festivals, toy manufacturers increase supply due to higher demand and prices).
  • Cost of Production: If raw material costs rise, supply may decrease (e.g., a rise in steel prices reduces car supply).
  • Technology: Advanced technology boosts supply (e.g., automation in agriculture increases crop yields).
  • Government Policies: Taxes reduce supply, while subsidies increase it (e.g., subsidies on solar panels increase their supply).
  • Natural Conditions: Favorable weather increases agricultural supply (e.g., good monsoon boosts rice production).

Understanding these factors helps producers adjust supply to market conditions effectively.

Case-based Questions (4 Marks) – with Solutions (CBSE Pattern)

These 4-mark case-based questions assess analytical skills through real-life scenarios. Answers must be based on the case study provided.

Question 1:
A farmer increases the use of fertilizers on his wheat field, expecting higher yield. However, after a certain point, the additional output starts declining. Identify the economic concept behind this and explain its implications for production decisions.
Answer:
Case Deconstruction

The farmer is experiencing the Law of Diminishing Marginal Returns, where adding more of a variable input (fertilizers) to fixed inputs (land) eventually reduces marginal output.

Theoretical Application
  • Initially, output rises, but beyond the optimum input level, productivity falls.
  • This impacts cost efficiency, as more inputs yield less output.
Critical Evaluation

Our textbook shows this law applies in short-run production. For example, excessive labor in a factory can cause congestion, reducing efficiency. Farmers must balance inputs to avoid waste.

Question 2:
A smartphone manufacturer reduces production due to a chip shortage, causing prices to rise. Analyze how this aligns with the Law of Supply and discuss two factors affecting supply in this scenario.
Answer:
Case Deconstruction

The Law of Supply states that lower production reduces supply, increasing prices if demand stays constant.

Theoretical Application
  • Factor 1: Input availability (chip shortage limits production).
  • Factor 2: Technology constraints (inability to substitute chips quickly).
Critical Evaluation

We studied how supply shocks disrupt markets. For example, Toyota faced similar issues during the 2011 tsunami. Producers must diversify suppliers to mitigate risks.

Question 3:
A bakery’s Total Cost (TC) curve shows an initial steep rise, then flattens, before rising sharply again. Interpret this pattern using cost concepts and compare it with the textbook’s TC curve example.
Answer:
Case Deconstruction

The pattern reflects economies of scale (flattening) followed by diseconomies of scale (sharp rise).

Theoretical Application
  • Initial rise: High fixed costs (ovens, rent).
  • Flattening: Spread of fixed costs over more units.
Critical Evaluation

Our textbook shows similar curves for car manufacturers. For example, Tesla’s Gigafactories reduce average costs until overexpansion raises logistics costs. Efficient scale is key.

Question 4:
Two firms, A and B, operate in the same industry. Firm A’s Average Revenue (AR) is ₹200, while Firm B’s is ₹180. Compare their market positions using revenue concepts and suggest why such differences occur.
Answer:
Case Deconstruction

Firm A likely has higher pricing power or product differentiation, as AR reflects price per unit sold.

Theoretical Application
FactorFirm AFirm B
Brand ValueHighLow
Cost ControlEfficientLess efficient
Critical Evaluation

We studied how Apple (high AR) competes with budget brands. Differentiation (e.g., iPhone features) justifies higher AR. Firms must innovate to sustain revenue.

Question 5:
A farmer uses fixed inputs like land and machinery, while variable inputs include seeds and labor. Analyze how his production function changes in the short run vs. long run.
Answer:
Case Deconstruction

In the short run, the farmer cannot change fixed inputs like land, so output depends on variable inputs. Our textbook shows diminishing returns when labor exceeds optimal levels.

Theoretical Application
  • Short run: Production rises initially but plateaus due to fixed land.
  • Long run: All inputs become variable, enabling scale adjustments like buying more machinery.
Critical Evaluation

For example, doubling seeds without expanding land (short run) may yield only 1.5x output, while long-run expansion avoids such inefficiencies.

Question 6:
A toy factory’s marginal cost rises from ₹20 to ₹50 after increasing output. Using cost curves, explain why this happens and its impact on supply decisions.
Answer:
Case Deconstruction

Marginal cost (MC) rises due to overcrowded resources or overtime wages, as per our NCERT examples.

Theoretical Application
  • Higher MC shifts the supply curve leftward, reducing profit margins.
  • Firms may cap production where MC = MR to avoid losses.
Critical Evaluation

For instance, a bakery facing ₹50 MC per unit might reduce daily bread supply unless prices rise proportionally.

Question 7:
Compare perfect competition and monopoly markets using a cost-revenue table for a firm producing 100 units. Highlight key differences in producer behavior.
Answer:
Case Deconstruction
MarketPrice (₹)MC (₹)
Perfect Competition3030
Monopoly5020
Theoretical Application
  • Perfect competition: Price = MC, no surplus.
  • Monopoly: Price > MC, allowing profit maximization.
Critical Evaluation

For example, a wheat farmer (competitive) cannot markup prices, while a patented drug firm (monopoly) can.

Question 8:
A startup’s total revenue grows slower than total cost beyond 500 units. Using break-even analysis, suggest whether it should expand or optimize.
Answer:
Case Deconstruction

Revenue-cost divergence indicates diseconomies of scale, as studied in production costs.

Theoretical Application
  • Optimize: Reorganize labor/tech to lower average costs.
  • Expand: Only if demand is elastic enough to offset rising costs.
Critical Evaluation

For example, a cloud kitchen expanding to 600 orders might face higher delivery costs, making optimization wiser.

Question 9:
A farmer grows wheat using both fixed and variable inputs. Due to monsoon failure, his yield drops by 30%. Analyze how this affects his short-run and long-run production decisions.
Answer:
Case Deconstruction

The farmer faces reduced output due to an external shock (monsoon failure). In the short run, fixed inputs like land remain unchanged, but variable inputs (labor, fertilizers) may be adjusted.

Theoretical Application
  • Short-run: Marginal cost rises due to lower productivity (law of diminishing returns).
  • Long-run: Farmer may switch crops or invest in irrigation (avoiding monsoon dependency).
Critical Evaluation

Our textbook shows similar cases where opportunity cost forces long-run adaptation. Example: Punjab farmers shifting from rice to maize for water conservation.

Question 10:
A toy factory’s total cost curve shifts upward while marginal cost remains constant. Identify possible reasons and their impact on supply elasticity.
Answer:
Case Deconstruction

Upward shift in total cost indicates higher fixed costs (e.g., rent hike). Constant marginal cost suggests no change in per-unit production efficiency.

Theoretical Application
  • Reasons: Increased license fees or wage contracts (fixed obligations).
  • Supply becomes less elastic as producers absorb costs without output adjustment.
Critical Evaluation

We studied how Maruti Suzuki faced similar cost pressures in 2020 but maintained output due to long-term contracts, reflecting inelastic supply.

Question 11:
Compare the shutdown point of a street vendor selling tea (low fixed costs) and a café (high fixed costs) when demand falls by 50%.
Answer:
Case Deconstruction

The vendor and café face identical demand shock but differ in cost structures. Shutdown point occurs when revenue < variable costs.

Theoretical Application
FactorStreet VendorCafé
Fixed CostsLow (cart maintenance)High (rent, salaries)
Shutdown LikelihoodLower (continues if AVC covered)Higher (losses accumulate faster)
Critical Evaluation

Example: During COVID-19, small vendors survived longer than restaurants, validating our textbook’s cost structure analysis.

Question 12:
A tech startup’s marginal product of labor rises after adopting AI tools, but total product declines. Resolve this contradiction using production theory.
Answer:
Case Deconstruction

AI tools enhance per-worker output (marginal product), but total product falls, suggesting workforce reduction.

Theoretical Application
  • AI substitutes labor: Fewer workers operate at higher productivity.
  • Example: Byju’s firing 2,500 employees post-AI integration (2023) despite improved per-employee performance.
Critical Evaluation

We studied how capital-intensive shifts alter production functions. Here, labor becomes redundant despite rising marginal returns, aligning with the substitution effect.

Question 13:
A farmer grows wheat on his land. Due to a sudden increase in the price of fertilizers, his cost of production rises significantly. Analyze how this situation affects his supply curve and producer equilibrium. Use a diagram to support your answer.
Answer:

The increase in the price of fertilizers raises the cost of production for the farmer. This affects both the supply curve and producer equilibrium in the following ways:

  • The supply curve shifts leftward because higher costs reduce the farmer's ability to supply the same quantity of wheat at the original price.
  • The producer equilibrium changes as the farmer now faces higher marginal costs, leading to a reduction in the profit-maximizing output level.

Diagram Explanation:


1. Draw the original supply curve (S1) and demand curve (D) intersecting at equilibrium point E1.
2. Show the new supply curve (S2) shifted leftward due to higher costs, intersecting the demand curve at a new equilibrium point E2.
3. Label the axes (Price on Y-axis, Quantity on X-axis) and mark the equilibrium points clearly.

This situation reflects the law of supply, where higher input costs reduce supply, leading to a higher equilibrium price and lower equilibrium quantity.

Question 14:
A toy manufacturer observes that the price of plastic, a key raw material, has decreased by 20%. Explain the impact of this change on the firm's total cost, marginal cost, and supply curve. Support your answer with a diagram.
Answer:

The decrease in the price of plastic reduces the firm's total cost and marginal cost, leading to the following effects:

  • Total Cost: The overall cost of production decreases, allowing the firm to produce more toys at the same budget.
  • Marginal Cost: The cost of producing each additional unit falls, making it cheaper to expand output.
  • Supply Curve: The supply curve shifts rightward because the firm can now supply more toys at every price level.

Diagram Explanation:


1. Draw the original supply curve (S1) and demand curve (D) intersecting at equilibrium point E1.
2. Show the new supply curve (S2) shifted rightward due to lower costs, intersecting the demand curve at a new equilibrium point E2.
3. Label the axes (Price on Y-axis, Quantity on X-axis) and mark the equilibrium points clearly.

This scenario demonstrates how a reduction in input prices enhances production efficiency, leading to higher supply and lower equilibrium prices in the market.

Question 15:
A farmer in Punjab grows wheat on his 5-acre land. Due to a sudden increase in the price of fertilizers, his cost of production rises significantly. Analyze how this situation affects his supply curve and producer equilibrium using appropriate diagrams.
Answer:

The increase in fertilizer prices raises the cost of production for the farmer. Here's how it impacts his supply curve and producer equilibrium:


1. Supply Curve Shift: The supply curve shifts leftward (from S1 to S2) because higher input costs reduce the farmer's willingness to supply wheat at the same price. This reflects a decrease in supply.


2. Producer Equilibrium: At the original equilibrium (E1), the farmer's profit decreases due to higher costs. To restore equilibrium, the market price must rise (from P1 to P2), leading to a new equilibrium (E2) where the farmer supplies less quantity (Q2 < Q1).


Diagram: Draw a standard supply-demand graph showing the leftward shift of the supply curve, higher equilibrium price, and lower equilibrium quantity.


Value-Add: If the price of wheat does not rise proportionately, the farmer may face reduced profits or even losses, forcing him to reconsider his production scale.

Question 16:
A toy manufacturing company experiences a technological advancement that reduces its per-unit production cost. Explain the impact of this change on the firm's total cost, average cost, and supply curve with suitable diagrams.
Answer:

The technological advancement lowers the per-unit production cost, leading to the following effects:

  • Total Cost (TC): The TC curve shifts downward because the firm can produce the same output at a lower cost.
  • Average Cost (AC): The AC curve also shifts downward, indicating reduced cost per unit of output.
  • Supply Curve: The supply curve shifts rightward (from S1 to S2) as the firm can now supply more toys at each price level due to lower production costs.

Diagram Explanation:
A graph showing the downward shift in the TC and AC curves due to reduced costs.
Another graph illustrating the rightward shift in the supply curve (S1 to S2), reflecting increased supply at all price levels.

Question 17:
A small-scale toy manufacturer observes that hiring one additional worker increases total output from 100 to 130 units per day, but hiring a second additional worker only increases output to 150 units. Explain this phenomenon using the concept of law of diminishing marginal product and its implications on the firm's cost structure.
Answer:

This scenario illustrates the law of diminishing marginal product, which states that as more units of a variable input (like labor) are added to fixed inputs (like machinery), the marginal product eventually declines.


Analysis:

  • First Worker: Marginal Product (MP) = 30 units (130 - 100). This suggests efficient utilization of fixed resources.
  • Second Worker: MP drops to 20 units (150 - 130), indicating diminishing returns as overcrowding or resource constraints arise.

Cost Implications:

  • Marginal Cost: As MP falls, the marginal cost of production rises because more labor is needed per additional unit of output.
  • Average Cost: Initially, average cost may decrease due to specialization, but eventually, it rises as diminishing returns dominate.

Value-Add: The firm must optimize labor usage to minimize costs. Hiring beyond the point of diminishing returns may lead to inefficiency and higher per-unit production costs.

Question 18:
A farmer grows wheat on his 5-acre land. Due to a sudden increase in demand for wheat, he decides to expand production. However, he faces constraints like limited labor and fixed machinery. Analyze the situation using the law of variable proportions and explain the stages he might encounter as he increases labor input.
Answer:

The farmer's situation can be analyzed using the law of variable proportions, which states that as more of a variable factor (like labor) is added to a fixed factor (like land and machinery), output changes in three stages:

  • Stage 1 (Increasing Returns): Initially, adding more laborers increases output at an increasing rate due to better utilization of fixed resources.
  • Stage 2 (Diminishing Returns): After a point, output increases at a diminishing rate as the fixed factor becomes over-utilized, leading to inefficiencies.
  • Stage 3 (Negative Returns): Further addition of labor causes total output to decline due to overcrowding and mismanagement.

The farmer should operate in Stage 2 for optimal production, as Stage 1 underutilizes resources, and Stage 3 is counterproductive.

Question 19:
A toy manufacturer observes that the cost of producing 100 units is ₹10,000, while producing 200 units costs ₹18,000. Calculate the marginal cost and average cost for the additional 100 units. Explain the relationship between these costs using a diagram.
Answer:

To calculate the costs:
Marginal Cost (MC) = Change in Total Cost / Change in Quantity
MC = (₹18,000 - ₹10,000) / (200 - 100) = ₹8,000 / 100 = ₹80 per unit.
Average Cost (AC) = Total Cost / Quantity
AC for 200 units = ₹18,000 / 200 = ₹90 per unit.

The relationship between MC and AC can be shown as:
When MC < AC, AC falls.
When MC > AC, AC rises.
MC intersects AC at its minimum point.

(Diagram: A U-shaped AC curve with MC cutting it from below at the lowest point of AC.)

Question 20:
A farmer in Punjab grows wheat on his 5-acre land. Due to a sudden increase in the price of fertilizers, his cost of production rises significantly. Analyze how this situation affects his supply curve and producer equilibrium. Use relevant diagrams to support your answer.
Answer:

The increase in fertilizer prices raises the cost of production for the farmer, leading to a leftward shift in the supply curve from S1 to S2. This shift indicates a decrease in supply at each price level.


For producer equilibrium, the farmer will now produce less output (Q2 instead of Q1) to maintain profitability, as the marginal cost (MC) curve shifts upward due to higher input costs. The new equilibrium occurs where the higher MC intersects the marginal revenue (MR) curve.


Diagram: Draw two supply curves (S1 and S2) with S2 to the left of S1. Label the equilibrium points (E1 and E2) showing reduced quantity supplied (Q2 < Q1) at the same price level.

Question 21:
A toy manufacturing company experiences a technological advancement that reduces its per-unit production cost. Explain the impact of this change on its total product, marginal product, and supply curve. Support your answer with a diagram.
Answer:

The technological advancement lowers per-unit production cost, leading to:

  • An increase in total product (TP) as more output can be produced with the same inputs.
  • A rise in marginal product (MP) due to higher efficiency, shifting the MP curve upward.
  • A rightward shift in the supply curve (from S1 to S2) as the firm can now supply more at each price level.

Diagram: Draw two supply curves (S1 and S2) with S2 to the right of S1. Label the new equilibrium (E2) showing increased quantity supplied (Q2 > Q1) at the same price.

Chat on WhatsApp