Answer to Question #226708 in Microeconomics for Aamir Shah

Question

Explain graphically how indifference curve analysis can be used to derive a demand curve?

    I.           Explain the Law of diminishing return and why is it applicable especially in agriculture sector?

Answer 1

the demand curve slope downward to the right, because as the price of a good falls both the substitution effect and income effect pull together in increasing the quantity demanded of the good.

From the above diagram, the demand curve DD is derived from the indifference curve in the top panel whereby, the X-axis shows the quantity demanded as in indifference curve and Y-axis is the price per unit of good X. In order to obtain the demand curve, various points K, L, S and T representing the demand schedule are plotted. By joining the points K, L, Sand T we get the required demand curve DD.

The law of diminishing returns refers to the extra returns obtained by employing one more unit of variable input which decreases as a firm keeps on increasing the variable input without increasing the fixed input.The law is applied in agriculture because land is a fixed input in the short run.