Q11 of 36 Page 1

What is meant by “diminishing returns to a factor” ? Discuss any two reasons for the operation of diminishing returns to a factor.

Diminishing returns to a factor means that total product or TP increases at a diminishing rate and marginal product or MP falls but remains positive when more units of a variable factor are employed with a given amount of fixed factor.


The two reasons for the operation of diminishing returns to a factor are given below:


i-Factors of production can be substituted for one another, but only till a certain limit. For example, labour can be replaced with machinery or vice-versa but only till a limit. Beyond this, substituting factors is not possible. The factors are imperfect substitutes leading to diminishing returns.


ii- After achieving the optimum combination of variable and fixed factors, the level of efficiency begins to fall, when more units of a variable factor are employed. Thus, the marginal product begins to fall.


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9

In the given diagram, OP is the market determined price and OP1 is the price fixed by the government.


(a) Identify if the diagram represents, price ceiling or price flooring.


(b) Discuss the likely behavior of the market in the given condition.


OR


Suppose the demand and supply equations of a commodity X in a perfectly competitive market are given by :


Qd = 1700 – 2P


Qs = 1300 + 3P


Calculate the value of equilibrium price and equilibrium quantity of the commodity X.


 10

(a) Define price elasticity of demand.

(b) If the price of a commodity rises by 40% and its quantity demanded falls from 150 units to 120 units, calculate the coefficient of price elasticity of demand for the commodity.


 12

Elaborate on three main features of monopoly form of market.

OR


Distinguish between perfect competition and monopolistic competition on the basis of the following :


(a) Number of sellers


(b) Nature of product


(c) Selling cost


 13

Give any two examples of the flow concept.