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General Knowledge Questions
1. Which company's famously advertised vision statement is 'The Network is the Computer'?
(A) Cisco Systems
(B) Lucent Technologies
(C) Sun Microsystems
(D) Nortel Networks
Answer : (C)
2. The software company I-flex Solutions was originally a division of which famous financial services company?
(A) Citicorp
(B) ICICI
(C) HSBC
(D) ABN Amro Bank
Ans : (A)
3. Which former advertising personality has recently been named the Undersecretary of State for 'public diplomacy and public affairs' of the US in an exercise to rebrand the US following the September 11 terrorist strikes?
(A) Charlotte Beers
(B) Jay Chiat
(C) Martin Sorrell
(D) George Lois
Ans : (A)
4. Which premium international range of luggage was recently launched in India by BlowPlast?
(A) Samsonite
(B) Strolley
(C) American Tourister
(D) Delsey
Ans : (D)
5. This year saw the launch of Yahoo!, Amazon.com and the famous launch of the Orange mobile phone service in the UK. Which year was this?
(A) 1992
(B) 1994
(C) 1995
(D) 1993
Ans : (B)
6. Henry Ford revolutionised the car market with the first mass- produced car, the Ford Model T. In which year was it launched?
(A) 1924
(B) 1912
(C) 1908
(D) 1897
Ans : (C)
7. Mr. Shiv Nadar is the Chairman of which of the following groups of companies?
(A) Wipro
(B) HCL
(C) Aptech
(D) None of these
Ans : (B)
8. Which company owns the footwear brand - Stryde?
(A) Woodland
(B) Bata
(C) Tata International
(D) Hindustan Lever
Ans : (C)
9. It was the brand that made David Ogilvy famous. Which shirt brand's ads had the famous man with an eye patch in the 1950s, which catapulted David Ogilvy to fame?
(A) Van Heusen
(B) Arrow Shirts
(C) Hathaway
(D) Dockers
Ans : (C)
10. Dr. Pepper is a famous brand of—
(A) Iced tea
(B) Peppermint
(C) Soft Drinks
(D) None of these
Ans : (C)
11. In the case of a test tube baby—
(A) Fertilization takes place inside the test tube
(B) Development of the baby takes place inside the test tube
(C) Fertilization takes place outside the mother's body
(D) Unfertilized egg develops inside the test tube
Ans : (C)
12. Who elects the President of India?
(A) Lok Sabha
(B) Rajya Sabha
(C) People of India
(D) Parliament and State Assemblies
Ans : (D)
13. The Fundamental Duties were incorporated in the Constitution of India by the—
(A) First Amendment
(B) Tenth Amendment
(C) Thirty-second Amendment
(D) Forty-second Amendment
Ans : (D)
14. The speed of light will be minimum while passing through—
(A) glass
(B) vacuum
(C) air
(D) water
Ans : (A)
15. The time taken by the Sun to revolve around the center of our galaxy is—
(A) 50 mn years
(B) 100 mn years
(C) 250 mn years
(D) 365 mn years
Ans : (C)
16. The oldest monarchy in the world is that of—
(A) Nepal
(B) U K
(C) Spain
(D) Japan
Ans : (D)
17. The Vice-President is elected by an electoral college consisting of—
(A) only elected members of both Housed of Parliament
(B) only Rajya Sabha members
(C) all members of Parliament and State Legislative Assemblies
(D) all members of Lok Sabha and Rajya Sabha
Ans : (D)
18. In which one of the following states of India is it legal for a Hindu male and illegal for a Muslim male to have more than one living wife?
(A) Nagaland
(B) Goa
(C) Himachal Pradesh
(D) Arunachal Pradesh
Ans : (B)
19. Where did Buddha die?
(A) Lumbini
(B) Kusinagara
(C) Pavapuri
(D) Magadha
Ans : (B)
20. What was the main difference between the Indus Valley Civilization and Vedic Civilization?
(A) Indus Valley Civilization was urban, while the Vedic Civilization was rural.
(B) "Pipal" tree was worshiped in Indus Valley Civilization, while "Burgad" tree was worshiped in Vedic Civilization.
(C) The main emphasis in Indus Valley Civilization was on trade while in the Vedic Age was on religion.
(D) Indus Valley Civilization believed in non-violence while Vedic Civilization had no hard and fast rules about violence.
Ans : (A)
21. All of the following are constituents of RNA molecule except—
(A) Adenine
(B) Guanine
(C) Thymine
(D) Uracil
Ans : (C)
22. The father of modern biology is—
(A) Aristotle
(B) Darwin
(C) Mendel
(D) Vesalius
Ans : (A)
23. Which of the following seeds will normalize blood sugar level?
(A) Coriander
(B) Mustard
(C) Cumin
(D) Fenugreek
Ans : (D)
24. The point at which solid, liquid and gaseous forms of a substance co-exist is called—
(A) sublimation point
(B) distillation point
(C) triple point
(D) melting point
Ans : (C)
25. Which among the following substances is used as a lubricant?
(A) Quartz
(B) Silica
(C) Graphite
(D) Nickel
Ans : (C)
26. The weight of an object will be minimum when it is placed at—
(A) The North Pole
(B) The South Pole
(C) The Equator
(D) The center of the Earth
Ans : (D)
27. Earth quake waves travel fastest in—
(A) Soil
(B) Molten rock
(C) Water
(D) Flexible rock
Ans : (C)
28. The angle between the geographical meridian and magnetic meridian is called—
(A) Angle of dip
(B) Angle of declination
(C) Angle of inclination
(D) None of the above
Ans : (B)
29. What is the currency of Mexico?
(A) Lira
(B) Peso
(C) Mexican dollars
(D) Krones
Ans : (B)
30. The Essar group of companies has been promoted by—
(A) Ruias
(B) Ambanis
(C) Goenkas
(D) Kanorias
Ans : (A)
31. One of the following liquor brands is not owned by United Breweries—
(A) Kalyani Black Label
(B) Blue Riband
(C) McDowells
(D) Bagpiper
Ans : (D)
32. Amtrex air conditioners has a technical collaboration with—
(A) Sanyo
(B) Mitsubishi
(C) Hitachi
(D) Carrier
Ans : (D)
33. Marlboro Cigarette is owned by—
(A) ITC
(B) Godfrey-Philips
(C) Philip Morris
(D) British American Tobacco
Ans : (C)
34. Who is the CEO of Microsoft?
(A) Bill Gates
(B) Paul Allen
(C) Larry Ellison
(D) Steve Ballnes
Ans : (D)
35. One of the following is not an Insurance Company—
(A) ICICI Prudential
(B) HDFC Natwest
(C) OM Kotak Mahindra
(D) Birla Sun Life
Ans : (B)
36. What is the currency of Portugal?
(A) Escudo
(B) Guilder
(C) Mark
(D) Schilling
Ans : (A)
37. One of the following personalities is not associated with the Indian auto sector—
(A) Suresh Krishna
(B) Venu Srinivasan
(C) Anand Mahindra
(D) Venugopal Dhoot
Ans : (D)
38. One of the following companies is not in the area of air-conditioning & refrigeration—
(A) BPL
(B) Thermax
(C) Lloyd
(D) Carrier Aircon
Ans : (C)
39. How many countries are a part of the European union?
(A) 18
(B) 15
(C) 21
(D) 12
Ans : (B)
40. Who is the attorney general of United States of America?
(A) Ashcroft
(B) Powell
(C) Rumsfeld
(D) Cheney
Ans : (A)
41. When was the generic domain name (Top Level Domain - TLD) .com introduced?
(A) 1989
(B) 1985
(C) 1994
(D) 1991
Ans : (B)
42. Who is the prime minister of Israel?
(A) Benajamin Netanyahu
(B) Ariel Sharon
(C) Shaul Mofaz
(D) Goldamyer
Ans : (B)
43. What was the significant about the purchase of a kilo of lychees on the French island of Reunion, located in the Indian Ocean?
(A) They were the first lot of lychees exported from India.
(B) It was the first official purchase using the new currency Euro.
(C) It was done by to commemorate the release of the new France with Princess Diana's image on it.
(D) None of these
Ans : (B)
148. Cash Reserve Ratio ( CRR) and Stautory Liquidity Ratio (SLR ) are terms most closely related to which of the following industries/markets—
(A) Stock Exchange
(B) Banking
(C) Mutual Fund
(D) Income Tax
Ans : (B)
45. What is common to all of the following names - Eduardo Camano, Adolfo Rodriguez Saa, Ramon Puerta and Fernando de la Rua?
(A) They were all former Presidents of Argentina.
(B) They are the dreaded drug lords of South America
(C) They own together 70% of the world's Silver mines.
(D) None of these
Ans : (A)
46. The video games X box is a product of—
(A) Sega
(B) Sony
(C) Intel
(D) Microsoft
Ans : (D)
47. It was acknowledged as the second-most dangerous computer virus in history, after the Love Bug virus. Name this virus, which struck in 2001—
(A) Melissa
(B) Code Red
(C) C-Brain
(D) Major Domo
Ans : (B)
48. What does the letters XP stand for in the product Microsoft XP?
(A) Extended product
(B) Extra Pampering
(C) Experience
(D) Entry level product
Ans : (C)
49. Which business and media tycoon won the elections to become Head of State in Italy amidst widespread clouds of scandal?
(A) Guillani Giovanni
(B) Joe Pacci
(C) Antonio Machiaveli
(D) Silvio Berusconi
Ans : (D)
50. Who is the author who created the character Dilbert?
(A) David Scott
(B) Scott Robert
(C) Robert Williams
(D) Scott Adams
Ans : (D)
(A) Cisco Systems
(B) Lucent Technologies
(C) Sun Microsystems
(D) Nortel Networks
Answer : (C)
2. The software company I-flex Solutions was originally a division of which famous financial services company?
(A) Citicorp
(B) ICICI
(C) HSBC
(D) ABN Amro Bank
Ans : (A)
3. Which former advertising personality has recently been named the Undersecretary of State for 'public diplomacy and public affairs' of the US in an exercise to rebrand the US following the September 11 terrorist strikes?
(A) Charlotte Beers
(B) Jay Chiat
(C) Martin Sorrell
(D) George Lois
Ans : (A)
4. Which premium international range of luggage was recently launched in India by BlowPlast?
(A) Samsonite
(B) Strolley
(C) American Tourister
(D) Delsey
Ans : (D)
5. This year saw the launch of Yahoo!, Amazon.com and the famous launch of the Orange mobile phone service in the UK. Which year was this?
(A) 1992
(B) 1994
(C) 1995
(D) 1993
Ans : (B)
6. Henry Ford revolutionised the car market with the first mass- produced car, the Ford Model T. In which year was it launched?
(A) 1924
(B) 1912
(C) 1908
(D) 1897
Ans : (C)
7. Mr. Shiv Nadar is the Chairman of which of the following groups of companies?
(A) Wipro
(B) HCL
(C) Aptech
(D) None of these
Ans : (B)
8. Which company owns the footwear brand - Stryde?
(A) Woodland
(B) Bata
(C) Tata International
(D) Hindustan Lever
Ans : (C)
9. It was the brand that made David Ogilvy famous. Which shirt brand's ads had the famous man with an eye patch in the 1950s, which catapulted David Ogilvy to fame?
(A) Van Heusen
(B) Arrow Shirts
(C) Hathaway
(D) Dockers
Ans : (C)
10. Dr. Pepper is a famous brand of—
(A) Iced tea
(B) Peppermint
(C) Soft Drinks
(D) None of these
Ans : (C)
11. In the case of a test tube baby—
(A) Fertilization takes place inside the test tube
(B) Development of the baby takes place inside the test tube
(C) Fertilization takes place outside the mother's body
(D) Unfertilized egg develops inside the test tube
Ans : (C)
12. Who elects the President of India?
(A) Lok Sabha
(B) Rajya Sabha
(C) People of India
(D) Parliament and State Assemblies
Ans : (D)
13. The Fundamental Duties were incorporated in the Constitution of India by the—
(A) First Amendment
(B) Tenth Amendment
(C) Thirty-second Amendment
(D) Forty-second Amendment
Ans : (D)
14. The speed of light will be minimum while passing through—
(A) glass
(B) vacuum
(C) air
(D) water
Ans : (A)
15. The time taken by the Sun to revolve around the center of our galaxy is—
(A) 50 mn years
(B) 100 mn years
(C) 250 mn years
(D) 365 mn years
Ans : (C)
16. The oldest monarchy in the world is that of—
(A) Nepal
(B) U K
(C) Spain
(D) Japan
Ans : (D)
17. The Vice-President is elected by an electoral college consisting of—
(A) only elected members of both Housed of Parliament
(B) only Rajya Sabha members
(C) all members of Parliament and State Legislative Assemblies
(D) all members of Lok Sabha and Rajya Sabha
Ans : (D)
18. In which one of the following states of India is it legal for a Hindu male and illegal for a Muslim male to have more than one living wife?
(A) Nagaland
(B) Goa
(C) Himachal Pradesh
(D) Arunachal Pradesh
Ans : (B)
19. Where did Buddha die?
(A) Lumbini
(B) Kusinagara
(C) Pavapuri
(D) Magadha
Ans : (B)
20. What was the main difference between the Indus Valley Civilization and Vedic Civilization?
(A) Indus Valley Civilization was urban, while the Vedic Civilization was rural.
(B) "Pipal" tree was worshiped in Indus Valley Civilization, while "Burgad" tree was worshiped in Vedic Civilization.
(C) The main emphasis in Indus Valley Civilization was on trade while in the Vedic Age was on religion.
(D) Indus Valley Civilization believed in non-violence while Vedic Civilization had no hard and fast rules about violence.
Ans : (A)
21. All of the following are constituents of RNA molecule except—
(A) Adenine
(B) Guanine
(C) Thymine
(D) Uracil
Ans : (C)
22. The father of modern biology is—
(A) Aristotle
(B) Darwin
(C) Mendel
(D) Vesalius
Ans : (A)
23. Which of the following seeds will normalize blood sugar level?
(A) Coriander
(B) Mustard
(C) Cumin
(D) Fenugreek
Ans : (D)
24. The point at which solid, liquid and gaseous forms of a substance co-exist is called—
(A) sublimation point
(B) distillation point
(C) triple point
(D) melting point
Ans : (C)
25. Which among the following substances is used as a lubricant?
(A) Quartz
(B) Silica
(C) Graphite
(D) Nickel
Ans : (C)
26. The weight of an object will be minimum when it is placed at—
(A) The North Pole
(B) The South Pole
(C) The Equator
(D) The center of the Earth
Ans : (D)
27. Earth quake waves travel fastest in—
(A) Soil
(B) Molten rock
(C) Water
(D) Flexible rock
Ans : (C)
28. The angle between the geographical meridian and magnetic meridian is called—
(A) Angle of dip
(B) Angle of declination
(C) Angle of inclination
(D) None of the above
Ans : (B)
29. What is the currency of Mexico?
(A) Lira
(B) Peso
(C) Mexican dollars
(D) Krones
Ans : (B)
30. The Essar group of companies has been promoted by—
(A) Ruias
(B) Ambanis
(C) Goenkas
(D) Kanorias
Ans : (A)
31. One of the following liquor brands is not owned by United Breweries—
(A) Kalyani Black Label
(B) Blue Riband
(C) McDowells
(D) Bagpiper
Ans : (D)
32. Amtrex air conditioners has a technical collaboration with—
(A) Sanyo
(B) Mitsubishi
(C) Hitachi
(D) Carrier
Ans : (D)
33. Marlboro Cigarette is owned by—
(A) ITC
(B) Godfrey-Philips
(C) Philip Morris
(D) British American Tobacco
Ans : (C)
34. Who is the CEO of Microsoft?
(A) Bill Gates
(B) Paul Allen
(C) Larry Ellison
(D) Steve Ballnes
Ans : (D)
35. One of the following is not an Insurance Company—
(A) ICICI Prudential
(B) HDFC Natwest
(C) OM Kotak Mahindra
(D) Birla Sun Life
Ans : (B)
36. What is the currency of Portugal?
(A) Escudo
(B) Guilder
(C) Mark
(D) Schilling
Ans : (A)
37. One of the following personalities is not associated with the Indian auto sector—
(A) Suresh Krishna
(B) Venu Srinivasan
(C) Anand Mahindra
(D) Venugopal Dhoot
Ans : (D)
38. One of the following companies is not in the area of air-conditioning & refrigeration—
(A) BPL
(B) Thermax
(C) Lloyd
(D) Carrier Aircon
Ans : (C)
39. How many countries are a part of the European union?
(A) 18
(B) 15
(C) 21
(D) 12
Ans : (B)
40. Who is the attorney general of United States of America?
(A) Ashcroft
(B) Powell
(C) Rumsfeld
(D) Cheney
Ans : (A)
41. When was the generic domain name (Top Level Domain - TLD) .com introduced?
(A) 1989
(B) 1985
(C) 1994
(D) 1991
Ans : (B)
42. Who is the prime minister of Israel?
(A) Benajamin Netanyahu
(B) Ariel Sharon
(C) Shaul Mofaz
(D) Goldamyer
Ans : (B)
43. What was the significant about the purchase of a kilo of lychees on the French island of Reunion, located in the Indian Ocean?
(A) They were the first lot of lychees exported from India.
(B) It was the first official purchase using the new currency Euro.
(C) It was done by to commemorate the release of the new France with Princess Diana's image on it.
(D) None of these
Ans : (B)
148. Cash Reserve Ratio ( CRR) and Stautory Liquidity Ratio (SLR ) are terms most closely related to which of the following industries/markets—
(A) Stock Exchange
(B) Banking
(C) Mutual Fund
(D) Income Tax
Ans : (B)
45. What is common to all of the following names - Eduardo Camano, Adolfo Rodriguez Saa, Ramon Puerta and Fernando de la Rua?
(A) They were all former Presidents of Argentina.
(B) They are the dreaded drug lords of South America
(C) They own together 70% of the world's Silver mines.
(D) None of these
Ans : (A)
46. The video games X box is a product of—
(A) Sega
(B) Sony
(C) Intel
(D) Microsoft
Ans : (D)
47. It was acknowledged as the second-most dangerous computer virus in history, after the Love Bug virus. Name this virus, which struck in 2001—
(A) Melissa
(B) Code Red
(C) C-Brain
(D) Major Domo
Ans : (B)
48. What does the letters XP stand for in the product Microsoft XP?
(A) Extended product
(B) Extra Pampering
(C) Experience
(D) Entry level product
Ans : (C)
49. Which business and media tycoon won the elections to become Head of State in Italy amidst widespread clouds of scandal?
(A) Guillani Giovanni
(B) Joe Pacci
(C) Antonio Machiaveli
(D) Silvio Berusconi
Ans : (D)
50. Who is the author who created the character Dilbert?
(A) David Scott
(B) Scott Robert
(C) Robert Williams
(D) Scott Adams
Ans : (D)
PRODUCTION
MEANING OF PRODUCTION
Production in economics generally
refers to the transformation of inputs into outputs. Inputs are the raw
materials or other productive resources used to produce final products i.e.,
output. In technical terms, production means the creation of utility or
creation of want-satisfying goods and services. Any good become useful for us
or satisfies our want when it is worth consumption. Thus, a good can be made useful
by adding utility. For instance, we cannot consume wheat flour raw when we are
hungry (want), unless it is turned into bread (output). This conversion of
wheat flour into bread is the process of creating utility. Utilities can be
created in three ways. These are the following:
1. By
changing form or shape and size of a good. The powdery wheat flour has been changed to slices of bread. Thus form of the good has been
changed. Likewise, a carpenter giving shape of a chair to a piece of wood or a
chef turning a lump of dough into delicious pizzas, are the examples of
changing shape or size of a good/s and thereby creating utility.
2. Using the scarce goods and services
in proper time when they are most required. Government maintains a buffer stock
so that during the time of crisis, it releases food grains in the market to
meet the demand.
3. By transferring a good from one
place to another where its use is worthwhile. Sand transferred from river side
to construction site increases its utility.
Thus, production is the process of
adding utility to a good through form utility, place utility and time utility.
MEANING OF PRODUCTION FUNCTION
Production function is defined as
the functional relationship between physical inputs and physical outputs.
According to Stigler, “the production
function is name given to the relationship between the rates of input of
productive services and the rate of output of product. It is the economist’s
summary of technological knowledge.” Production function can be expressed
as follows:
Q = f (a, b, c, d…)
Where, Q stands for output, a, b,
c, d…. are the productive resources or inputs that help producing Q
output; f refers to function. Thus Q
is the function of a, b, c,
d….., which means Q depends upon a, b,
c, d…..
Thus a production function shows the
maximum amount of output that can be produced from a given set of inputs in the
existing state of technology.
RETURNS TO A FACTOR AND RETURNS TO
SCALE
There are generally two types of
production functions mostly used in economics. First, the production function
when the quantities of some inputs are kept fixed and the quantity of one or
few input/s are changed. This kind of production functions are studied under
law of variable proportions. These are also called short-run production
function. The short-run is a period during which one or more factors of
production are fixed in amount. There is no time to change plants or equipments
of an enterprise.
Secondly, the production functions
in which all inputs are changed. This forms the subject matter of the law of
returns to scale. These are also called long-run production function. The long
run is a period during which all factors become variable. A new plant can be
constructed in place of an old one.
DETERMINANTS OF PRICE ELASTICITY OF DEMAND
DETERMINANTS
OF PRICE ELASTICITY OF DEMAND
Elasticity of demand differs from
commodity to commodity. The various factors upon which elasticity depends are
the following:
1.
Substitute
goods: A commodity will have elastic demand
if there are good substitutes for
it. This is because when price of a good rises, a consumer will not buy the
good but purchase its substitute.
2.
Nature
of commodity: All necessities
like salt, rice etc that have no substitutes/or less substitutes will have an inelastic demand. People have to purchase
such commodities for their sustenance. Therefore, there will be some demand
despite the changes in price. Demand for luxury goods, on the other hand, will
be elastic. If prices of such commodities rise even a little, consumers refrain
to buy. At the same time a little lowering of price of such commodities attract
a large number of consumers.
3.
Number
of uses of commodity: The larger the
number of uses to which a commodity can
be put, the higher will be its elasticity. Therefore the demand of such goods
will have elastic demand. For example, milk can be used for various purposes
such as for making curd, cake, sweets etc. When its price goes down, demand
increases but a little rise in its price makes demand fall greatly.
4.
Possibility
of postponement of consumption: If there is a
possibility of postponement of
consumption of a commodity then demand will be elastic otherwise inelastic.
Demand for certain goods can be postponed for sometime such as computers,
printers, scanners etc. People may wait till they become cheaper. Therefore,
their demand is elastic. But the demand for food or electricity cannot be
postponed. As such their demand is inelastic.
5.
Percentage
of income spent: The elasticity
of demand is also influenced by the percentage
of income spent on the purchase of a commodity. If the percentage is very less
then the demand will be inelastic. For instance, we spend a very less amount of
our total money income on things like agarbatties (incense sticks), matches,
pens, pencils etc. If prices of such commodities rise also, our demand is not
reduced. Thus, demand of such goods is inelastic.
6.
Fashion: Commodities, which are in fashion, will have inelastic
demand. Fashion minded people do not
compromise with price. Even if price is high, some people will demand more just
because goods are in fashion.
7.
Change
in taste: A habitual
commodity or a commodity for which consumers have developed a taste will have inelastic demand. A chain smoker
always requires a cigarette, whatever the price may be. Likewise, a habitual
paan (betel nut) chewer cannot leave his habit, in spite of rise in price. In
such cases, therefore, demand is elastic.
8.
Price
of the commodity: Very high
priced or very low priced goods have low elasticity whereas moderately priced commodities are quite high-elastic. If a
good is very expensive, demand will not increase much even if there is little
fall in its price. And demand will not increase even at very low prices,
because people have already purchased their requirement at low prices.
CONSUMER BEHAVIOUR
CONSUMER’S
EQUILIBRIUM–UTILITY MAXIMIZATION
The theory of demand starts with the
examination of the behaviour of the consumers. In our everyday life we behave
in different ways while buying and consuming a good or service. The simple
calculations and human reasoning we undertake while doing any transactions have
been transformed into principles which guide us to attain satisfaction or
equilibrium in economic sense. When we go for shopping, we decide beforehand,
what good to buy and how much to spend. It makes sense as we try to get most of
what we are spending. In other words, we always want more of anything and for
that purpose we negotiate and come to an agreed price which we are ready to pay
happily. It is therefore, necessary to be first acquainted with the consumer
behaviour, which forms the basis of the demand theory.
It is assumed that consumers are
rational. Given his money income and the prices of commodities, a consumer
always tries to maximize his satisfaction. That is, to get the maximum welfare
(state of well-being) by spending the given money on various commodities. It is
assumed that the satisfaction a consumer gets by consuming a good is measurable
(measured in terms of money), though in real life it is not possible to measure
satisfaction because it is psychological entity. We only feel the level of
satisfaction and express the same in different ways. We show our satisfaction
by our behaviour like laughing, jumping in excitement or in any other way.
Thus, we cannot measure satisfaction in quantitative terms as we are capable of
measuring time in seconds, weight in kilograms or length in meters. Further,
each consumer is also assumed to be known of what he wants. Moreover, he has
all information regarding market—the goods available, the prices of the goods
at a particular point of time and so on. Every consumer uses this information
in such a way as to maximize his total satisfaction.
To explain consumer’s equilibrium
i.e., how a consumer attains maximum satisfaction by spending his money income
on certain units of commodities, it is worthwhile to be familiar with certain
important terms used in explaining various concepts and theories of demand.
These are explained as under:
Utility
Utility is defined as the power of a
commodity or service to satisfy a human want. Economists have leveled the term
satisfaction as utility. It is subjective concept and therefore varies from person
to person. As already stated, it resides in one’s mind and therefore cannot be
measured in quantitative terms. Though utility and satisfaction are used
synonymously, we should note that utility is the expected satisfaction whereas
satisfaction implies ‘realized satisfaction’.
Total Utility
It is the amount of utility (satisfaction);
a consumer gets by consuming all the units of a commodity. If there are n units of the commodity then the total
utility is the sum of the utilities of all n
units of the commodity. Thus, if there are four units of a commodity, then
total utility is,
U = U1(n1)
+ U2(n2) + U3(n3) + U4(n4)
Where U = total utility; U1…….U4
are the utilities of n1…..n4 units of the commodity.
Thus, if by
consuming first apple, a consumer gets 12 utils of satisfaction, 10 utils from
the second apple, 9 utils from the third and 7 utils from the fourth apple;
then his total utility is,
U = 12 + 10 + 9 + 7 = 38
Thus
utilities of various goods are additive. This means that utilities of different
commodities are independent of one another. The utility derived from one
commodity does not affect that of another.
Marginal Utility
Marginal utility is defined as the
change in the total utility due to a unit change in the consumption of a
commodity per unit of time. It can also be defined as the addition made to the
total utility by consuming an additional unit of a commodity. For example, if
total utility of 3 cups of tea is 18 utils and on consuming the 4th
cup it rises to 20; then marginal utility 20-18 = 2 utils. Thus, by consuming
one more cup of tea, the additional utility, a consumer gets is 2 utils.
Marginal utility can be expressed as,
∆TU
MU =
∆
Q
Where
MU = marginal utility; ∆ΤU = change in total utility; ∆Q
= change in the quantity consumed. ‘Utils’ is the term used by Marshall as a
measuring unit of utility. The following expression can also be used to find
marginal utility:
MU = TUn – TUn-1
Where, TUn
is the total utility of nth unit of
the commodity and TUn-1
utility from the n-1th commodity.
Thus, if TU from the second unit (nth
unit) of apple is 13 and TU from the previous unit (n-1) is 7, then MU is 13 – 7 = 6.
The concept of total utility and
marginal utility is shown in the utility schedule below:
Units of apples
|
Total utility
|
Marginal Utility
|
1
|
7
|
7 – 0 = 7
|
2
|
13
|
13
– 7 = 6
|
3
|
18
|
18 – 13 = 5
|
4
|
22
|
22
– 18 = 4
|
5
|
25
|
25 – 22 = 3
|
6
|
27
|
27
– 25 = 2
|
7
|
28
|
28 – 27 = 1
|
8
|
28
|
28
– 28 = 0
|
When the consumer takes 1st
apple, his total utility is 7 and from the 2nd apple he gets 13 and
so on. The third column shows marginal utility, which diminishes as the
consumer increases units of apples. It is seen that when total utility is
maximum, marginal utility is zero at 8th unit of apple. It is also
seen that total utility is the sum of the marginal utilities of the 1st,
2nd, 3rd, and so on. Thus, at 8th unit of
apple,
TU = MU1 + MU2
+ MU3 + MU4 +…..…+ MUn(8)
i.e. 28 = 7 + 6 + 5 + 4 +…..…+ 0
LAW OF
DIMINISHING MARGINAL UTILITY
One of the very important laws in
regard to the satisfaction of human wants is known as law of diminishing
marginal utility. The law explains common feeling of every consumer. Suppose a
person starts consuming apples one after another. The first apple gives him the
maximum satisfaction as he might be in mood of taking some food at that time
for meeting his appetite. As he takes the second apple, he gets less
satisfaction because by this time he has already met some level of appetite.
The third and more apples yield him lesser satisfaction or utility. It means
that every time the consumer increases his consumption, he gets less and less
satisfaction. The satisfaction also tends to be zero when the consumer feels
totally disgusted to take any more apples. If he takes more, his satisfaction turns
negative or utility now becomes disutility.
Thus law of diminishing marginal
utility states that additional satisfaction a person derives by consuming a
commodity goes on declining as he consumes more and more of a that commodity.
According to Marshall, “The additional
benefit which a person derives from a given
increase of his stock of a thing diminishes with every increase in stock that
he already has.”
Two important reasons for
diminishing marginal utility are the following:
(a) Each
particular want is satiable (can be satisfied): Though there are unlimited
wants, a single want can be satisfied. Thus, when a consumer consumes more and
more of a commodity, his want is satisfied and he does not wish to have any
further increase in the commodity. As such his marginal utility falls when
consumption increases.
(b) Goods
are imperfect substitutes for one another i.e., one good cannot be exactly used in place of another: Satisfaction
from any two goods is not same. Different
goods satisfy different wants. If a good could be perfectly substituted for
another, it would have satisfied other wants. Hence, its marginal utility would
not have fallen but increased.
The law can be explained with the help of a table and
diagram-3.1 below:
Units (Apples)
|
TU
|
MU
|
|
|
|
|
|
1
|
10
|
10
|
|
2
|
18
|
8
|
|
3
|
22
|
4
|
|
4
|
24
|
2
|
|
5
|
25
|
1
|
|
6
|
25
|
0
|
|
7
|
32
|
–7
|
|
8
|
44
|
–12
|
|
|
|
|
As the consumer
goes on consuming more and more units of apples, total utility (TU) increases but
marginal utility (MU) declines continuously and becomes zero at 6th
unit. When consumer consumes further, utility becomes negative. It is to be
noted that when TU is maximum, MU is zero. Let us now derive the MU curve from
the above schedule as under. Marginal utility is measured along Y-axis while
units of apples along X-axis. MU is the marginal curve falling downwards from
left to right. This is diminishing MU curve. It is seen in the Fig. 3.1 below,
that marginal utility is zero when the consumer buys 6th apple. As
he consumes more, marginal utility becomes negative.
The law of diminishing MU has
certain limitations. These are:
1.
If
units of a commodity consumed are not of same size and shape, the law does not hold
good. In the illustration explained above, units of apples are assumed to be of
same shape and size.
2. The law does not hold good when
there is enough time gap between consumption of two units. For instance, if we
take second apple after a long gap of time, we may feel hungry and hence
satisfaction will increase instead of falling.
3. The taste of consumer should not
change for the law to hold good. It means that the person should consume all
units of a good by same desire and pleasure.
4. The law does not apply to money as
it is said that more money a person has, the more he wants.
5. Change in income of the consumer
will falsify the law. If money income of the consumer increases or decreases
during the time of consumption of a particular set of goods, the marginal
utility will not fall as said above.
The law of diminishing marginal
(additional) utility explains consumer’s equilibrium in case of a single
commodity. A consumer will go on purchasing successive units of a commodity till
the marginal utility of the commodity is equal to price. Thus, for a single
commodity x, a consumer is in
equilibrium when the marginal utility of x
is equal to its market price (Px).
Symbolically,
MUx = Px
In case the price goes down, he will
buy more and the marginal utility will come down to the level of price. If
price rises, less will be purchased and the marginal utility rises till it
reaches the new level of price. Thus, equality between marginal utility and
price indicates the position of consumer’s equilibrium when a single commodity
is being purchased and consumed.
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