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The normal profit is that level of profit which is just enough to cover the explicit costs and Opportunity costs of die firm. Here, the revenue of the firm is just sufficient to cover all its cost of production.

(i)Average Revenue: It refers to the revenue per unit of output sold. It is obtained by dividing the total revenue by the number of units of output sold.

So, AR = TR/Q where, AR is Average Revenue, TR is Total Revenue and Q is quantities sold. Under perfect competition, the AR will be equal to the market price. This is because, in perfect competitive market, the seller sells his product at the same price which is prevailing in the market. If the seller sells at a lower price, he incurs losses or if he increases the price, he may lose his customers.

The AR curve of a firm is also the demand curve of the customers, because the price paid by the consumer for each unit is the average revenue from the seller’s point of view.

(ii)Marginal Revenue: The Marginal Revenue is the additional revenue’ which the firm earns from the sale of additional units of output. It is obtained as MR = TR_n – TR_n-1 The Marginal Revenue is the change in a firm’s total revenue resulting from the sale of an extra unit of output.

The MR is also calculated with the help of following formula

\(MR =\frac {\textit{Change in Total Revenue}}{\textit{Change in quantity sold}} ,MR = \frac{Δ TR}{Δ Q}\)

Under perfect competition, the price remains same and all the firms sell their products at the existing price. As the price remains same, if the number of units sold gets increased, no doubt the Total Revenue increases but AR and MR remain the same. 

So, the firm’s demand curve, average revenue curve and its marginal revenue curve all coincide in the same horizontal line.

A firm reaches its Break Even Point when its Total Revenue is equal to its Total Cost. At this point, the firm is just willing to stay in the industry. Here, we do not see any attractions for new firms to enter the industry and the existing firms also do not undertake any expansion.

The shut down point is that point where short run Marginal Cost curve cuts Average Variable Cost curve at the minimum. A firm will continue to produce goods as long as the price, is more than or equal to the minimum of Average Variable Cost.

Revenue refers to the money income received by a firm or producer or seller after the sale of commodities.

Perfect competition is a market where there will be existence of large number of buyers and sellers dealing with homogenous products. 

It is a market with the highest level of competition:

(i) Large number of sellers: The first condition which a perfectly competitive market must satisfy is concerned with the sellers’ side of the market. The market must have such a large number of sellers that no one seller is a dominate in the market. No single firm can influence the price of the commodity sellers will be the firms producing the product for sale in the market. These firms must be all relatively small as compared to the market as a whole. Their individual outputs should be just a fraction of the total output in the market. 

(ii) Large number of buyers: There must be such a large number of buyers that no one buyer is able to influence the market price in any way. Each buyer should purchase just a fraction of the market supplies. Further, the buyers should not have any kind of union or association so that they compete for the market demand on an individual basis.

(iii) Homogeneous products: Another prerequisite of perfect competition is that all the firms or sellers must sell completely identical or homogeneous goods. Their products must be considered to be identical by all the buyers in the market. There should not be any differentiation of products by sellers by way of quality, colour, design, packing or other selling conditions of the product. 

(iv) Free Entry and Free exit for firms: Under perfect competition, there is absolutely no restriction on entry of new firms into the industry or the exit of the firms from the industry when they want to leave. This condition must be satisfied especially for the long period equilibrium of the industry. If these four conditions are satisfied, the market is said to be purely competitive. In other words, a market characterized by the presence of these four features is called purely competitive. For a market to be perfect, some conditions of perfection of the market must also be fulfilled.

(v) Perfect mobility: Another feature of perfect competition is that goods and services as well as resources are perfectly mobile between firms. Factors of production can freely move from one occupation to another and from one place to another. There should be no barrier on their movement. No one can have monopoly or control over the factors of production. Goods can be sold at a place where their prices are the highest. There should not be any kind of limitation on the mobility of resources. 

(vi) Absence of transport cost: For the existence of perfect competition, the transport costs should not be considered. All the firms have equal access to the market. Price of the product is not affected by the cost of transportation of goods. 

(vii) Single Price: The market price charged by different sellers does not differ due to location of different sellers in the market. No seller is near or distant to any group of buyers. viii) Price Taker: The firms in the perfect competitive market are price takers. That means, the producers will continue to sell their  goods and services in the price existing in the market. Firms have no control over the price of the product. 

(ix) Absence of selling cost: Under conditions of perfect competition, there is no need of selling costs. Selling costs are the expenditures done to stimulate the sale of product or to change the shape of the demand curve. We know that under perfect competition, goods are completely homogeneous. When they cannot change the price and when their goods and completely similar, firms need not make any expenditure on publicity and advertisement. 

(x) Normal Profit: The firms in perfect competition will be earning normal profit. The normal profit is that profit which is just sufficient to stay in the market.

• Existence of a number of firms to produce a product offering a degree of competition. 
• Nature of commodities as to homegeneous or heterogeneous. 
• Freedom of entry and exit from the industry.

In a perfect competitive market, each firm is a price taker as no single firm can influence the price level. The firms do not have any power over the market. The firm has to accept the existing price and sell its goods or services.

It is the aggregate money expenditure incurred by the firm on all the factors to produce a given quantity of output.

The Average product refers to per unit of output produced with the help of variable factor.

Generally, the term market is a market place where goods are sold and bought. But in Economics, by market we mean a commodity whose buyers and sellers are in direct contact with one another. According to Prof.J.C.Edwards “A market is that mechanism by which buyers and sellers are brought together”.

It is a variable cost for per unit of output. It can be calculated by dividing total variable cost by the total units of output.

Variable costs are the expenses incurred on the variable inputs like raw materials, ordinary labourers, electricity etc.

Types of Elasticity of Demand :

1. Price Elasticity of Demand 

2. Income Elasticity of Demand 

3. Cross Elasticity of Demand

1. Price Elasticity of Demand : It is a ratio of proportionate change in the quantity demanded of a commodity to a given proportionate change in its price.

ed = \(\cfrac{Percentage\, change\,in\, Quantity\, Demanded}{Percentage\, Change\, in\, Price}\)

There are 5 types of Price Elasticity of demand i.e.

1. Perfectly Elastic demand (Ed = ∞) 

2. Perfectly Inelastic demand (Ed = 0) 

3. Unitary Elastic demand (Ed = 1) 

4. Relatively Elastic demand (Ed > 1) 

5. Relatively Inelastic demand (Ed < 1)

2. Income Elasticity of demand : It refers to the degree of responsiveness of a change in the quantity demanded to a change in the income only, other factors including price remaining unchanged.

\(\cfrac{Percentage\, change\,in\, Quantity\, Demanded}{Percentage\, Change\, in\, Income}\)

There are 3 types of Income elasticity i.e:

1. Positive Income elasticity 

2. Negative Income elasticity 

3. Zero Income elasticity

3. Cross Elasticity of Demand : It refers to a change in quantity demanded of one commodity due to a change in the price of other commodity i.e. complementary goods or substitute goods.

\(\cfrac{of\, Commodity 'X'}{Percentage\, Change\, in\, Price\, of\, Commodity\, 'Y'}\)

Cross elasticity of demand are of 3 types i.e.

1. Positive Cross elasticity 

2. Negative Cross elasticity 

3. Zero Cross elasticity

Total product refers to total volume of goods and services produced by a firm during a specified period of time.

The production function can be written as follows: Q = f(R, L, K, O…..) where Q is quantity produced, f is function, R refers to Land, L to labour K to capital, O to organization.

According to Watson, Production function is “the relationship between physical inputs and physical output of a firm”.

Production is the process in which transformation of inputs into output takes place. Here inputs are converted into output. For example, raw cotton is made into cloth.

The concept of Price Elasticity was developed by great neo-classical economist Dr. Alfred Marshall in the year 1890.

According to Dr. Alfred Marshall, “The elasticity or responsiveness of demand in a market is great or small, according to the amount demanded which increases much or little for a given fall in price, and diminishes much or little for a given rise in price.”

Elasticity of demand in fact refers to the degree of responsiveness of the quantity demanded of a commodity to change in the variable on which demand depends.

Types of Elasticity of Demand :

1. Price Elasticity of Demand 

2. Income Elasticity of Demand 

3. Cross Elasticity of Demand

1. Price Elasticity of Demand : It is a ratio of proportionate change in the quantity demanded of a commodity to a given proportionate change in its price.

\(ed = \cfrac{ Percentage\, change\, in\, Quantity\, Demanded}{Percentage\, change\, in\, Price}\)

There are 5 types of Price Elasticity of demand i.e.

1. Perfectly Elastic demand (Ed = ∞) 

2. Perfectly Inelastic demand (Ed = 0) 

3. Unitary Elastic demand (Ed = 1) 

4. Relatively Elastic demand (Ed > 1)

5. Relatively Inelastic demand (Ed < 1)

2. Income Elasticity of demand : It refers to the degree of responsiveness of a change in the quantity demanded to a change in the income only, other factors including price remaining unchanged.

\(\cfrac{ Percentage\, change\, in\, Quantity\, Demanded}{Percentage\, change\, in\, Income}\)

There are 3 types of Income elasticity i.e:

1. Positive Income elasticity 

2. Negative Income elasticity 

3. Zero Income elasticity

3. Cross Elasticity of Demand : It refers to a change in quantity demanded of one commodity due to a change in the price of other commodity i.e. complementary goods or substitute goods.

Percentage change in Quantity demanded

\(\cfrac{of\, Commodity\, 'X'}{Percentage\, in\, Price\, of\, Commodity\, 'Y'}\)

Cross elasticity of demand are of 3 types i.e.

1. Positive Cross elasticity 

2. Negative Cross elasticity 

3. Zero Cross elasticity

Elasticity of demand is affected by a variety of factors as described below.

1. Nature of a Good- The price elasticity of demand depends on the nature of a good. The goods and services can be broadly divided into three categories- Necessities, Luxuries, Jointly-demanded goods. For instance, necessities have inelastic demand (|e_d| < 1). On the other hand, luxury goods have high price elasticity.

2. Substitutes- The demand for a good that has more number of substitutes available will be relatively more elastic. On the contrary, if a good has no close substitutes, then it will have an inelastic demand. 

3. Several Uses- A commodity that can be used for different purposes (such as milk) will have an elastic demand. This is because if the price of this commodity increases, then it will be used only for important purposes leading to a drastic fall in demand. On the contrary, a good that has limited usage will have an inelastic demand. 

4. Consumers' Income- People with very high or very low incomes have an inelastic demand as the change in the price of a good will have lower impact on the consumers' demand for that good. On the contrary, the middle-income earners will have an elastic demand as their demand is very responsive to the prices of goods. 

5. Consumers' Habits- The goods that a consumer is habituated to such as, liquor, cigarettes, etc. have an inelastic demand. A change in the prices of these goods has lesser impact on their demand as the consumer is habituated to these goods and hence cannot reduce their consumption. 

6. Period of Time- In the short run, the demand is inelastic as a consumer would not have the time to change his/her habits and long-time practices. However, in the long run, the demand would be elastic as he/she would get time to change his/her habits. 

7. Income Spent on Goods- The goods that account for a very small proportion of a consumer’s income such as, newspaper, etc. will have an inelastic demand. On the other hand, the goods that account for a very large proportion of a consumer’s income such as, clothes, house rents, etc. will have an elastic demand. 

8. Possibility of Postponement of Demand- Demand for those commodities whose consumption can be postponed will be price elastic. As against this, those commodities that are urgently required and whose consumption cannot be postponed will have an inelastic demand.

TRUE

Elasticity of demand helps in selecting goods and services that can be taxed and on which subsidy should be provided. Thus, the concept of elasticity of demand is used by the finance minister to determine the taxation policy and to fix subsidies.

(iii) Both (A) and (R) are true and (R) is the correct explanation of (A).

The demand for salt is inelastic.

Explanation:

Salt is a necessity good. In addition to this, there are no close substitutes available for salt. Thus, the demand for salt is inelastic i.e. any change in its price will not affect demand.

Cross elasticity of demand is applicable to substitute goods.

Explanation:

Cross elasticity of demand is a concept that is with regard to related goods. It is the measurement of the degree of responsiveness of quantity demanded due to change in the price of related goods. As substitute goods are a kind of related goods, cross elasticity of demand is applicable to such goods.

Income elasticity.

Correct option: (b) Ed = ∞

(iii) Both (A) and (R) are true and (R) is the correct explanation of (A).

1. Cross elasticity of demand 

2. Total outlay 

3. Unitary elastic demand 

4. Cross 

5. Fanta 

6. Tea – Coffee

The word ‘elasticity’ means flexibility or responsiveness. Accordingly, elasticity of demand refers to the responsiveness of demand to the change in various determining factors. We know that the demand for a good depends on a number of factors such as its price, income, tastes, preferences and the price of related goods. Thus, elasticity of demand helps in estimating the change in demand that results from the change in one or more of these factors.

(a) Positive Income Elasticity (Normal goods) 

(b) Negative Income Elasticity (Inferior goods)

(c) Zero Income Elasticity

(a) Positive Income Elasticity : In case of normal goods the income elasticity of demand is positive. When a change in income brings about a change in demand in same direction then income elasticity is positive. There is a direct relationship between income and quantity demanded. Normal goods which include necessities, comforts and luxuries have positive Income Elasticity.

(b) Negative Income Elasticity : Inferior goods have a negative income elasticity. As income increases the demand for inferior goods fall. There is an inverse relation between income and quantity demanded of inferior commodity. Inferior goods are substituted by superior goods.

(c) Zero Income Elasticity : When change in income does not have any effect on the demand for a commodity then the income elasticity is Zero – for E.g. goods like salt, pins etc.

Correct option: (b) perfectly inelastic

Elasticity of Demand refers to the percentage change in demand for a commodity with respect to the percentage change in demand for a commodity with respect to the percentage change in any of the factors affecting demand for that commodity.

TRUE

Total outlay or total expenditure is a method of measuring price elasticity. Total expenditure of a good is defined as the product of its price and the quantity demanded at that price.

Algebraically,

Total Outlay = Price × Quantity Demanded

Percentage change in demand for X/Percentage change in a factor affect ing the demand for X

(1) True

(2) False

Correct option: (d) perfectly inelastic

5 types of price elasticities of demand are: 

• Perfectly elastic demand
• Perfectly inelastic demand
• Highly elastic demand
• Less elastic demand
• Unitary elastic demand

Price elasticity of Demand E_d = \(\frac{\Delta Q}{\Delta P}\times\frac{P}{Q}\) \(=\frac{-60}{2}\times\frac{20}{300}\) = (-) 2

E_d = (-) 2 (Demand is highly elastic as E_d > 1)

Correct option: (a) relatively elastic

Correct option: (b) relatively inelastic

Factors affecting the price elasticity of demand are:

• Nature of commodity
• Availability of substitutes
• Income level
• Level of price
• Number of uses
• Time period
• Habits

The concept of elasticity of demand is used by trade union leaders in collective bargaining. For instance, the trade union leaders can bargain for higher wages if they know that the demand for their labour is inelastic.

The goods that a consumer is habituated to, such as liquor, cigarettes, etc., have inelastic demand. As the consumer is habituated of these goods, a change in the price of these goods has lesser impact on their demand. For example, if a person is habituated of cigarettes a rise in price of it will not have much impact on the demand as it is difficult for the consumer to do away with cigarette. Thus, the demand for such goods is inelastic

Correct option: (ii) (A) is false but (R) is true.

1. Demand at point 'C' is relatively elastic demand. 

2. False, it is relatively inelastic demand. 

3. False, it is relatively elastic demand.

4. False, it is unitary elastic demand. 

5. True, it is perfectly elastic Ed = ∞

A commodity that can be used for different purposes (such as milk) will have an elastic demand. This is because if the price of this commodity increases, it will be used only for important purposes leading to a drastic fall in demand.

The concept of elasticity of demand is used by trade union leaders in collective bargaining. For instance, the trade union leaders can bargain for higher wages if they know that the demand for their labour is inelastic.

The concept of Price Elasticity was developed i by great neo-classical economist Dr. Alfred \ Marshall in the year 1890. According to Dr. Alfred Marshall, "The elasticity or responsiveness of demand in a market is great or small, according to the amount demanded which increases much or little for a given fall in price, and diminishes much or little for a given rise in price. "Elasticity of demand in fact refers to the £ degree of responsiveness of the quantity demanded of a commodity to change in the variable on which demand depends.

Wrong pair : Unitary elastic – Steeper curve

Income Elasticity:

1. Income elasticity of demand is the proportionate change in quantity demanded of a commodity to a given change in the consumer’s income.

2. Income Elasticity of demand are of three types:

• Positive Income Elasticity is found in case of Normal Goods.
• Negative Income Elasticity for inferior goods cheap bread, rice, etc.
• Zero Income Elasticity.

Cross Elasticity:

1. Cross Elasticity of demand is the proportionate change in the quantity demanded of a commodity to a given change in the price of substitute or complementary goods. 

2. Cross Elasticity of demand are of three types:

• Positive Cross Elasticity is found in case of substitute goods like tea and coffee.
• Negative Cross Elasticity is seen in case of Complementary Goods.
• Zero Cross Elasticity in case of unrelated goods like cup and book.