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06_FORMS OF MARKET & MARKET EQUILIBRIUM class 12

 

In economics market refers to the whole area where buyers and sellers of a commodity are spread over and are in direct contact with each other.

  1. Area

Market does not confirm to a particular place where buyers and sellers gather for the purchase and sale of goods. It means the whole area in which buyers and sellers of the commodity are spread over.

  1. Buyers and Sellers

Presence of buyers and sellers is very essential for a market. It is not necessary that buyers and sellers should be physically presents, they can establish the constant through letters and telephone.

  1. Commodity

          There must be some commodity which is bought and sold.

  1. Competition

There should exist free competition between buyers and sellers so that only one price prevails for the same commodity throughout the world.

FORM OF MARKET

On the basis of competition, market is divided into 3 forms.

  1. Perfect Competition
  2. Monopoly
  3. Imperfect competition

(a)      Monopolistic competition (b)      Oligopoly      (c)      Duopoly

PERFECT COMPETITON

It is a market situation where there are large number of buyers and sellers selling the identical (similar) products at a uniform price in the market. The firm under perfect competition is price taker.

CHARACTERISTICS/FEATURES

  1. Large Number of Sellers :In the perfectly competitive market, the number of sellers is large. Every individual seller sells an insignificant part of total supply. No seller is in a position to influence the market price either by withdrawing from the market or supplying more.
  2. Large number of Buyers

The number of buyers is also very large. No single buyer is able to influence the market price in anyway. Quantity bought by the buyers is too small to influence the market price. They have to accept the market price.

  1. Free Entry and Exit of the Firms

There is no restrictions on the entry or exist of the firms. If existing firms in the market are making abnormal profits, then new firms will be encouraged to produced the product and make profits. This will increase the supply of the industry. This will reduce the price and profits. The entry of the new firms. Will continue, till the firms start earning normal profits.

Similarly, when the firms are incurring losses, some existing firms will leave the industry. As a result, the market price will rise the exiting of the firms will continue till there are no losses. Firm will earn normal profits in the long run.

Implication :All the firms will earn only normal profits in the long run. The firms will earn abnormal profits or losses in the short run as firms are not in a position to enter or leave the industry in short run .    

  1. Perfect Knowledge

Buyers and sellers both have perfect knowledge about the current and future periods. Under such situation, no seller would sell the commodities below the market price and no buyer would be ready to pay higher prices. It is because of this feature that uniform price prevails in the perfectly competitive market.

Implication :No firm is in a position to charge, different prices and no buyer will pay higher prices. As a result uniform price prevails in the market.

  1. No. Govt. Regulations

There is no govt. interference in this market. Tariffs, subsidies etc. are ruled out.

  1. Perfect Mobility

There is no restriction on the movement of goods and factors of production Goods can be sold at any place, factors of production can freely move from one competitor to another.

  1. Absence of Transportation Cost

Price of the product under the perfect competition is not affected by the transportation cost. No seller is far off   from the group of buyers.

  1. Absence of Selling Cost

Selling cost refers to those expenditure which are incurred by the firm to increase their sales. Under this market, goods are identical and are sold at a uniform price. They cannot charge more. Firms need not to incur any expenditure on advertisement, publicity etc.

  1. Homogeneous Products

Since each firm produces 100% identical products, there products can be readily substituted for each other. So the buyers have no specific preference to purchase from any particular seller only.

Implication :Buyers are ready to pay the same price for all the products of all the firms in the industry. Due to this no individual, sellers is in a position to charge higher prices for his product. This causes uniform price in the market.

 

Demand Curve of Under Perfect Competition

At a given price, every seller can sell a given amount in the market. Perfectly elastic demand AR = MR = Demand curve.

When the price or average revenue, remains the same for all the level of output, its demand curve will be horizontal in shape (parallel to x-axis) OP is the price which is given to the seller.

The price is determined by the industry.

Thus under the perfect comp, firm is a price taker and industry is a price maker.        

INDUSTRY – THE PRICE MAKER AND FIRM – PRICE TAKER

Equilibrium price in a perfect market is determined by industry not by individual firm. The price is determined by the intersection of demand and supply of an industry which is accepted by all the firms, thus, an individual firm is a price taker while industry is a price maker.

 

  1. Can a competitive firm charge higher or lower prices than the equilibrium price?

Ans.   If a competitive firm charge higher prices than the equilibrium price determined by the industry, buyers would not purchase the product instead would start purchasing from other sellers. Thus the firm would be forced to reduce the price to the level of equilibrium price.

          If the firm decides to charge the price less than the equilibrium price all the buyers would like to purchase from it. The firm would not be able to meet the rising demand. As a result, the firm would raise the price of the product to the level of market price.

Price – Determination Under Perfect Competition

 

DD and SS are the demand and supply of an industry intersects at point E and which is an equilibrium point OP is the equilibrium price. At this price quantity demanded and supplied are equal i.e. OQ. An individual firm can sell and amount of output at the given price. Therefore average revenue curve of the individual firm is perfectly elastic which implies the firm does not have any control over the prices of its products. It has to accept the price given by the industry. Thus a firm under perfect competition cannot influence the market price but can adjust the output level to earn maximum profits.

Some Important Definitions

  1. Normal Profits

          Minimum profits which must be received by the firm in order to stay in the business is known as normal profits.

 

  1. Abnormal Profits

Excess of firms earning over the production cost are called abnormal profit.

  1. Losses

If the firms total earning are less than its total production cost the situation is referred as losses.

MONOPOLY

Monopoly consists of 2 words – “Mono” which means single and “poly” which means seller. It is a market situation in which there is one seller. Who has a full control over the supply which has no close substitutes in the market.

In monopoly, there is no distinction between firm and industry.

Features of Monopoly

  1. Single seller and large no. of buyers :

Under monopoly, there is only one seller of a commodity since there is no competition, the firm can earn abnormal profits. In the long run. Because of the single seller, monopolist is the firm as well as industry. The no. of buyer is too large. No single buyer can influence the monopolist price. Buyers have to purchase the commodity at given price or go without it. Buyers have no choice to buy the same commodity from another seller.

  1. No Close substitutes

Under monopoly, there are no close substitutes available of the product sold by the monopolists. Substitutes are those which can be used in place of each other. Therefore cross elasticity of demand is zero i.e.

  1. Restriction on the entry and exist

Under monopoly, new firms cannot enter the industry. Other firms are prohibited to enter the industry. There are some strong barriers that prevent it. Example Indian railways. Because of their feature firm earns abnormal profits in the long run.

  1. Firm is a price maker/control over supply

Monopoly firm has full control over the supply of the goods because.

(i)       There is no competition in the market

(ii)      There are barrier in the entry of new firms in the monopoly market.

 

Therefore, monopolist can influence the market price by varying its supply. It can increase the price by supplying less and reduce the price by supplying more.

 

  1. Price Discrimination :

The art of selling the same product at different price to different buyers is known as price-discrimination. When the monopolists adopt the policy of price discrimination it is known as discriminating monopoly. Price discrimination may take place under the following situation.

(i)       When elasticity of demand for a product are different in different market. The monopolists will charge higher when demand is inelastic, and lower when demand is elastic.

(ii)      When the buyers of one part of the market do not know the prices are lower in other part of the market.

(iii)     When Government permits price discrimination.

 

  1. Nominal Selling Cost

In monopoly, there is no competition, hence, there is no need to incur advertisement cost however nominal selling cost may be incurred to give information to the buyer.

 

 

  1. Negatively Sloped Demand Curve

The monopolist firm faces the downward slopping demand curve or average revenue curve. It means, if he wants to sell more, he can does so by lowering the prices and if he want to sell more he can do so by increasing the prices.

In the figure, AR or D is the demand curve faced by monopolist firm. At OP price, quantity demanded is OQ1 and when the price rises to OP1, the quantity demanded falls to OQ1.  The curve is less elastic because there are no close substitutes available.

 

KINDS OF MONOPOLY

  1. State and Private Monopoly

If the monopolistic company is owned and managed by Government or states it is known as state monopoly e.g. Indian Railway.

If the monopolistic company, is owned and managed by the private entrepreneur, it is known as private monopoly e.g. Xerox (First company for producing photocopy machines).

  1. Simple and Discriminating Monopoly

If the firm charges uniform price from different consumers, it is known as simple monopoly. If the firm charge, different price from different consumers, it is known as discriminating monopoly.

  1. Absolute and Limited Monopoly

Absolute monopoly is one which is not afraid Govt. control, competition or consumer. Such monopoly may charge any higher price.

Limited monopoly may be afraid of Govt. or of possible competitor of or a consumer. Such monopoly will charge price lower than the maxi it can charge.

 

FACTORS AFFECTING MONOPOLIES

 

  1. Control Over Raw Materials

Minerals deposits are concentrated in some region. When the firm owns all the deposits of some specific minerals, it has to face no direct competition.

 

  1. Legal Prohibition

The Govt. may issue license to a particular firm to sell particular product e.g.         patent right.

 

  1. Technical Barriers

In today’s scenario there are no. of producers who are dominated by giant firm they are operating at a very large scale and thus receives economies of scale which reduces the per unit cost.

 

  1. Forming Combinations

If there are many firms in an industry, all the firms can combine together to form one firm which reduces the competition.

  1. Wasteful Duplication of Services

Monopoly may also emerge due to the wasteful duplication of services e.g. public utility services. Huge amount of expenditure is required in there service. These public utility service are known as public utility monopolies.

 

MONOPOLISTIC COMPETITION

 

Meaning

Monopolistic Competition is a market situation where there are large number of buyers and sellers selling closely related goods but not homogeneous e.g. market for tooth paste, T.V.

 

Features

  1. Large Number of Buyers and Sellers

In monopolistic competition the number of sellers is comparatively large but not as large as in the perfect competition. The sellers are not mutually dependent on each other. Therefore individual firms do not bother about the reactions of the rival firms.

 

  1. Product Differentiation

Under this market products of different firms are not homogeneous but are close substitute. Products are differentiated from one another in terms of brand name colour, shape, quality, type. Due to product differentiation firms here enjoy control over prices. Due to this firms have its own price policy.

Implications :Buyers of the product differentiate between the same product produced by different firms. Therefore they are also willing to pay different prices for the same product produced by different firms. This gives power to the firm to influence price of the product.

 

  1. Free Entry and Exit of Firm

Firms under the monopolistic competition are free to enter and leave the industry. New firms may start producing close substitutes of the product and supply, it likewise in the event of losses old firms may quit the industry. It is because of this reason that firms can manage normal profits in the long run.

 

  1. Selling Cost

Under this market new firms tries to promote their sales through advertisement. Advertisement tends to shift the firm’s demand curve to the right. This increase the demand for the firm’s product.

 

  1. Price Policy

Every firm have     its own price policy. It tries to attract more and more customers to its product. Each firm sets its price differently and individually.

 

  1. Non-price Competition

Rival firms compete with one another without changing the price of the product e.g. firms may guarantee of their product while other firms may introduce gifts.

The firms are undertaking non-price competition to promote their sales.

 

7.       Imperfect Knowledge

Buyers and the sellers do not have perfect knowledge about the market conditions. Sometimes the products of different sellers are really the same but consumer know the brand name more than the seller.

  1. Nature of Demand Curve

The firms under the monopolistic competition faces negatively sloped demand curve which is more elastic. This is because of the fact that products have more close substitutes in the market.

 

If the consumer develop the preference for particular brand then the demand curve would be less price elastic than the rival firms.

Demand curve under monopolistic Competition and Monopoly

Both the markets faces downward slopping demand curves. However demand curve under monopolistic competition is more elastic as compare to demand curve under monopoly. This happens because differentiated products under monopolistic competition are close substitutes whereas there are no close substitutes in case of monopoly.

 

OLIGOPOLY MARKET

It is a form of market, where there are few sellers competing among themselves selling homogeneous or differentiated products. The firms are interdependent in the market.

 

Types of Oligopoly

 

  1. Pure or Perfect Oligopoly :

If the firms produce homogeneous products than it is called pure or perfect oligopoly e.g. cement, steel aluminium and chemical producing industries.

 

  1. Imperfect or Differentiated Oligopoly :

If the firm produces differentiated products then it is called differentiated or imperfect oligopoly. For e.g. care (automobiles) cigarettes or soft drinks.

 

  1. Collusive Oligopoly :

If the firms co-operates with each other in determining the price or output of product. It is called collusive oligopoly or co-operative oligopoly.

 

  1. Non-collusive Oligopoly

If firms in an oligopoly market compete with each other, it is called non-collusive oligopoly or non-corporative oligopoly.

Features

  1. Few Sellers and Many Buyers : Under oligopoly, there only few firms, producing a commodity. The product can be homogeneous or differentiated. These firms can influence the price and output by their actions.

Each firm produces significant portion of total output. There exists competition among different firms and each firm try to manipulate both price and volume of production. The number of buyer is large

          Implications :

The number of firms is so small that an action by any firm is likely to affect the other firm. So every firm keep s a close watch on the actions of each other.

 

  1. Homogeneous or Differentiated product :Firms may produce homogeneous or differentiated products. When the firms produce homogeneous product, industry is called pure oligopoly e.g. steel. If the firm produces differentiated product like automobiles, the industry is called differentiated or imperfect oligopoly.

 

  1. Mutual Interdependence :It implies that firms are significantly affected by each other’s price and output decisions. In oligopoly market, a small number of firms compete with each other, the sale of the firm depends on firm’s price and price of other firms. The reduction in the price of one firm may reduce the sale of other firms.

Implications :Change in prices and output by one firm provokes changes from other firms operating in the market.

 

  1. Price Rigidity :Price rigidity means sticking to one price. Under this market, firm cannot change the rice individually because it will lower down their profits. It the firm reduces its price other firms will also do so. Similarly, if the firm increases its prices. Then due to the availability of close substitutes, it will loose all its customers.

 

  1. Difficult Entry of the firms :There are some barriers to the entry of new firms. There can be number of restrictions like cost advantages to the existing firms. These are like economies of scale absolute cost advantage of old firms, patents rights, control over important inputs, etc. only these firms are able to enter the industry which can cross the barriers. As a result firm can earn abnormal profits in the long run.

 

  1. Group Behaviour

          There is complete interdependence among the firms so prices and output decisions of a particular firm directly influence the competiting firms. Inspite of having individual price and output strategy, oligopoly firm prefer group decisions.

It means firms tend to behave as if they are a single firm even though individually they retain their independence.

 

  1. Indeterminate Demand Curve

          Under oligopoly, the behavior of a firm cannot be determined with certainty. So demand curve faced by an oligopolist is uncertain. Any change in price by one firm may change the price of other firm, so demand curve keeps on shifting and it is not definite.

 

Some Important Definitions

Oligopoly

          Oligopoly is a market situation in which there are few firms selling either homogeneous product or closely differentiated products.

Duopoly

          It is the market situation in which there are 2 sellers.

Price Competition

          When firms compete with one another by reducing the prices, it is known as price competition.

Non-price Competition

          When the firms compete by creating want for their product through advertisement, offering gifts, credit schemes, it is known as non-price competition.

 

MARKET EQUILIBRIUM

Market is said to be at equilibrium when the market forces of demand and supply are balanced or equal to each other.

 

Equilibrium Price

It is the price at which the quantity demanded equals the quantity supplied in the market. OP1 is the Equilibrium price.

Equilibrium Quantity

It is the Quantity demanded and supplied at equilibrium price. OQ is the Equilibrium Quantity.

 

EXCESS DEMAND

Excess Demand is defined as a situation in which, at a given price the market demand for a commodity is more than the supply. It is also known as deficient supply. It takes place at the price below the equilibrium price.

In the figure OP is the equilibrium price and OP1 is the market price which is less than the equilibrium price.

 

At OP1 market DD is OQ3

market SS is OQ2.

Since, market demand is greater than market supply, it is termed as excess Demand.

The situation, results in competition among the buyers. This forces the market price to rise up. Rising price reduces the market demand and increases the market supply. Price continues to rise as long as there is excess demand in the market.

EXCESS SUPPLY

It is defined as a situation in which at a given price, market supply of a commodity is more than the demand. It is also known as deficient demand. It takes place at the price above the equilibrium price.

In the figure, OP is the equilibrium price and OP1 is the market price which is more than the equi. Price.

At OP1          market DD is OQ2

market SS is OQ3.

Since market demand is lesser than the market supply, it is termed as excess supply.

Excess supply leads to Competition among the seller as each seller would like to sell more. This results in market price reduction. When the market price decreases, supply falls and demand rises. Falling of price continues till there is excess supply in the market.

 

Q.1.   What will happen to price in the situation of excess demand and excess           supply?

Q.2.   When does the situation of excess supply and excess demand arises?

Q.3.   Suppose the market demand for a good X is given by equation Qd = 500 – 10p and market supply is given by equation Qs = 250 + 15p.

          (a) Find out Quantity demanded and supplied when the price of the good x is `6/unit? What will happen to Px in this situation?

          (b) What is the Equilibrium price prove that Qd = Qs at equilibrium price.

Ans.   (a)      Qd = 500 – 10 p

Qd = 500 – 10 × 6

Þ      440 units

Qs = 250 + 15p

= 250 + 15 × 6 Þ 250 + 90 Þ 340 units

Qd> Qs,

So this will put on upward pressure on prices.

(b)      Since,

Qd = Qs

500 – 10 p = 250 + 15 p

250 Þ 25 p

` 10 = p.

Qd = 500 – 15p

Þ 400 units

 

SHIFT IN DEMAND, SUPPLY AND MARKET EQUILIBRIUM

Shift in Demand

(1)      When supply remains unchanged and demand increases or decreases :

An increase in the demand while supply remaining constant leads to increase in prices and quantity.

 

(2)      When supply is perfectly elastic and demand increases

          Demand increases

 

          Demand decreases

         

(3)      When supply is perfectly inelastic and demand increases

         

          Demand decreases

 

 

Shift in Supply

(1)      When demand remain constant, supply increases or decreases.

         

(2)      When demand is perfectly elastic

 

(3)      When demand is perfectly inelastic

         

 

SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY

(1)      When increases in demand and supply are equal

         

(2)      When increase in Supply is more than change in demand.

         

(3)      When increase in Supply is less than change in Demand.  

         

(4)      When decrease in demand and supply are equal.

         

 

(5)      When decrease in demand is greater than decrease in supply.

         

(6)      When decrease in demand is less than decrease in supply.

         

(7).     When decrease in demand is equal to increase in supply.

         

(8).     When decrease in demand is greater than increase in supply.

         

 

(9).     When decrease in demand is less than the increase in supply.

         

(10).   When increase in demand is equal to decrease in supply.

(11).   When increase in demand is greater than decrease in supply.

(12).   When increase in demand is less than decrease in supply.

APPLICATIONS OF DEMAND AND SUPPLY

(a)      Maximum Price Ceiling

It means maximum price a producers are allowed to charge. Government imposes such a ceiling when it finds that the equilibrium price is high and beyond the reach of common man. Government exercise the option in case of necessary goods like food, medicine etc. Need for such an action arises in case of “shortage”.

In the diagram, the equilibrium price is OP. Suppose the government imposes the prices ceiling OP2. At this price the producer supplies OQ1 and consumer demands OQ2 leading to shortage of Q1Q2.
If the government imposes ceiling and nothing else, it will lead to black marketing. It means illegally charging higher price than set by government. If all the traders are dishonest, the price may rise as high as OP1.

 

Shortage or black marketing will impose public pressure on Government to provide “RATIONING”, through “PUBLIC DISTRIBUTION SYSTEM” called “RATION SHOPS”.

 

(b)      Minimum Price Ceiling

It means that producers are not allowed to sell the goods below some price fixed by the government. This is called floor price or MSP. The need for minimum price ceiling arises when government finds that equilibrium price is too low for the producers. This policy is in the interest of producers. It leads to surplus and illegal selling below the equilibrium price.

For example – Minimum Wage law, agriculture price support programme.

In the diagram, the market forces of demand and supply sets the price at OP. Suppose to protect the producers the Government decides OP1 as the minimum price. Known as price floor which is more than the equilibrium price.

     

At this price, quantity supplied exceeds the quantity demanded by Q1Q2.

This causes a situation of surplus in the market.

For effective minimum support price or price floor, it must be accompanied by government purchases either to increase its buffer stocks or exports.

 

EXERCISE

Multiple Choice Questions

  1. Which of the following statements about price ceiling is accurate?

(a) An effective price ceiling must be at a price below the equilibrium price.

(b) Price ceiling will increase the quantity of good supplied

(c) An effective price ceiling must be at a price more than the equilibrium price

(d) Price ceiling will decrease the quantity demanded

 

  1. _____________ refers to the minimum price, fixed by the government, which is above the equilibrium price.

(a) Price floor                                     (b) Minimum support price

(c) Both (a) and (b)                            (d) Neither (a) nor (b)

 

  1. Which of the following statement is correct in case of non-viable industry?

(a) Supply curve lies above the demand curve

(b) Supply curve lies below the demand curve

(c) Supply curve and demand curve intersect each other

(d) Supply curve coincide with the demand curve

 

  1. What would happen to the Market Equilibrium of a good if decrease in demand is equal to increase in supply.

(a) Equilibrium quantity rises

(b) Equilibrium price rises

(c) Equilibrium quantity remains same

(d) Equilibrium price remains same

 

  1. What will be the effect of increase in price of factor inputs on the equilibrium price ,equilibrium quantity?

(a)                         Equilibrium price will rise and equilibrium quantity will fall

(b) Both equilibrium price and quantity will fall

(c) Equilibrium price will fall and equilibrium quantity will rise

(d) Both equilibrium price and quantity will remain same

 

  1. Both equilibrium price and quantity rise when

(a) Increase in demand > increase in supply

(b) Decreasein in supply when the demand is perfectly inelastic

(c) Increase in supply when the demand is perfectly elastic

(d) Decrease in demand < Increase in su p ply

 

  1. In case of ___________ an increase in demand will lead to rise in equilibrium quantity, but no change in equilibrium price.

(a) Perfectly elastic supply                 (b) Perfectly inelastic supply

(c) Highly elastic supply                    (d) Less elastic supply

 

  1. How does cost saving technology affect the equilibrium price and equilibrium quantity?

(a) Equilibrium price will fall and equilibrium quantity will fall

(b) Equilibrium price will fall and equilibrium quantity will rise

(c) Both equilibrium price and quantity will fall

(d) Both equilibrium price and quantity will rise

 

  1. The individual demand and supply functions of a product are given as :Dx = 10 – 2Px, Sx = 10 + 2Px, where Px stands for price and Dx and Sx respectively stands for quantity demanded and quantity supplied. If there are 4,000 consumers and 1,000 firms in the market, then equilibrium price will be

(a) Rs. 4                (b) Rs. 4.25           (c) Rs. 3              (d) Rs. 5

 

  1. The individual demand and supply functions of a product are given as :Dx = 10 – 2Px, Sx = 20 + 2Px, where Px stands for price and Dx and Sx respectively stands for quantity demanded and quantity supplied. If there are 4,000 consumers and 1,0000 firms in the market, then quantity demanded and supplied at the equilibrium price of Rs. 2.

(a) 20,000             (b) 22,000             (c) 21,000           (d) 24,000

 

  1. Which of the following situation does not lead to an increase in equilibrium price?

(a) An increase in demand without a change in supply

(b) A decrease in supply accompanied by proportionately equal increase in demand

(c) A decrease in supply without a change in demand

(d) An increase in supply accompanied by proportionately equal decrease in demand

 

  1. Suppose consumer taste shifts in favour of apples. As a result, equilibrium quantity will _______ and equilibrium price will _____________.

(a) increase, decrease                         (b) decrease, increase

(c) increase, increase                         (d) decrease, decrease

 

  1. If the price of a commodity is below the equilibrium price, then quantity supplied is ___________ than the quantity demanded. However, if the price is above the equilibrium price, then quantity supplied is _______ than the quantity demanded.

(a) Less, more       (b) Less, less         (c) More ; less     (d) More; more

 

  1. One of the following is not the feature of a perfectly competitive market :

(a) Each firm has negligible share in market supply

(b) Each buyer has negligible share in market demand

(c) The firms are interdependent

(d) The firms are free to leave the market

 

  1. In a perfectly competitive market, products of all the firms are homogeneous because :

(a) All the firms use the same technology

(b) All the products are of same quality

(c) All the products are identical for the buyers

(d) All the above

 

  1. Any departure of price from the equilibrium price must, through a series of actions and reactions, result in

(a) New higher equilibrium price

(b) New lower equilibrium price

(c) Back to the given equilibrium price

(d) Any of the above

 

  1. A simultaneous “decrease” in both demand and supply ultimately results in

(a) Decrease in equilibrium price       (b) Increase in equilibrium price

(c) Neither (a) nor (b)                         (d) Any of the above

 

  1. A price taker firm’s average revenue changes in the following manner as more output is produced

(a) Increases                                      (b) Decreases

(c) Unchanged                                   (d) Initially increases, then decreases

 

  1. Maximum price ceiling refers to

(a) Maximum retail price

(b) Maximum price the buyer is willing to pay

(c) Maximum price at which the seller is willing to sell

(d) Maximum price the producer is legally allowed to charge

 

  1. Maximum price ceiling above the equilibrium price leads to

(a) Excess demand

(b) Excess supply

(c) Neither (a) nor (b)

(d) Either (a) or (b)

 

  1. Minimum price ceiling refers to the minimum price at which

(a) the buyer is willing to buy            (b) the buyer must buy

(c) the seller is willing to sell             (d) the seller must sell

 

  1. Fixation of minimum wage below the equilibrium wage rate leads to

(a) Unemployment                                  (b)                  Overemployment

(c) Neither (a) nor (b)                         (d) Either (a) or (b)

 

1 Mark

  1. Define : (a) Equilibrium Price (b) Equilibrium Quantity (c) Excess Demand.
  2. When does the situation of excess supply arises?
  3. What will be the impact on number of firms when market price is less than Equilibrium.Price?
  4. If the demand is perfectly elastic, what will be the impact of decrease in supply on Equilibrium price?
  5. When the Supply curve is parallel to Y-axis, what will be the impact of rightward shift in Demand curve on Equilibrium Prices?
  6. Under which situation, equilibrium prices changes but Equilibrium Quantity remains constant due to increase in Demand?
  7. Why does the firm do not stop the production even during the situation of losses in short period?
  8. What will be the effect on Equilibrium Price when increase in Demand  is more than increase in Supply?
  9. Under which situation Equilibrium Price remains unaffected when Supply increases but Demand remains unchanged?
  10. When market price is more than Equilibrium price what will be the impact on number of firms?
  11. Under which market form, a firm is a price taker?
  12. Draw AR curve of a firm under perfect competition?
  13. Draw AR and MR curve of a firm in a single diagram under monopolistic competition?
  14. State one characteristic of a perfectly competitive market.
  15. In which market form, the goods are sold at uniform price?
  16. In which market form, there are no-close substitutes of a product.
  17. In which market form, the AR and MR curve of a firm always equal.
  18. What is the market called, where in there are few firms?
  19. In which market form, there is a need for selling or advertisement cost?
  20. What is the market called, where in there are only two sellers?
  21. Which feature separates monopolistic competition from perfectly competitive market?
  22. Identify the market form for the two sellers of the good X and Y, given the following information. Give reason.

OutputPrice of X Price of Y

100             50               50

110             40               50

120             30               50

  1. Will the monopolist, firm, continue to produce in the short run, if a loss is incurred in the short run
  2. A shift in the demand curve has a larger effect on prices and smaller effect on. Quantity, when the number of firms is fixed compared to the situation when free entry and exist is permitted. Explain.
  3. In which market form, there is no need of selling cost?
  4. Explain market Equilibrium?
  5. At a price of Rs. 15 per unit, the Quantity demanded for the good is 200 units while supply is 300 units. What is likely to be the effect on the price of this good?
  6. When do we say, there is excess demand for a commodity in the market?
  7. At what price-higher or lower than the equilibrium price, there will be excess demand in the market?
  8. When will an increase in demand imply an increase in price but no change in equilibrium Quantity.
  9. When will an increase in demand imply an increase in quantity but no change in equilibrium price?
  10. When will a decrease in supply imply an increase in price but no change in quantity?
  11. What will happen to the equilibrium price, when demand is perfectly elastic and supply increases?
  12. Define Equilibrium price.
  13. Define Equilibrium Quantity.

 

3-4 Marks

  1. State three features of perfect competition?
  2. Explain what happens to the profits in the long run, if the firms are free to enter into the industry.
  3. Explain what happens to the losses in the long run, if the firms are free to leave the industry.
  4. Why is a firm under perfect competition is a price taker? Explain.
  5. Explain product differentiation feature of monopolistic competition?
  6. Why the AR curve of a monopoly is less elastic then the AR curve of a monopolistic competition.
  7. What are the implication of product differentiation for the prices charged by the producer in the market?
  8. Why is the AR curve under perfect competition parallel to x-axis and negatively sloped under monopoly.
  9. Give any three points of distinguish between monopoly and monopolistic competition.
  10. What is meant by price being rigid in oligopoly market?
  11. How is the Equilibrium price determined under the perfect competition explain with the help of diagram.
  12. Explain briefly the situation of excess demand/excess supply in the perfectly competition market?
  13. What will happen, if the price prevailing in the market is (a) Above the equilibrium price (b) Below the equilibrium price?
  14. Explain the effect of an increase in the demand and supply of a commodity on the equilibrium price.
  15. What can be the effect on Equilibrium price of a commodity when its demand and supply curve both decreases? Explain with diagram.
  16. If the demand for a commodity increases and supply decreases, what will be the effect on equilibrium price and quantity. Explain with diagram.
  17. If the price of the substitutes of good X increases, what impact does it have on the equilibrium price and quantity of good X.
  18. How does the favourable changes in the tastes for a commodity affects the market price and the Quantity demanded for a commodity. Use diagram.
  19. How does increase in the input prices affect the equilibrium price and quantity e for the commodity.
  20. How does an increase in the income affects the equilibrium price of the commodity.
  21. How will an increase in the income of a buyer of an “inferior good” affect the equilibrium price and equilibrium quantity. Explain with the help of diagram.
  22. In the union budget, the excise Duty on tea is reduced from Rs. 2/bag to Rs. 1/bag, all other things remaining unchanged, how will it effect market price, use diagram.
  23. Using demand and Supply curve show, how an increase in the price of shoes, affect the price of pair of socks and the number of pair of socks bought and sold.

 

6- Marks

  1. Explain the implications of the following

(a)      The feature “Large number of Sellers” under perfect competition.

(b)      The feature “Free entry and Exist” under monopolistic competition.

  1. Define Oligopoly? Explain its features.
  2. How are equilibrium price and quantity affected, when both demand and supply curve shifts in the same direction.
  3. Market for a god is in equilibrium, what is the effect on equilibrium price and quantity, if both market demand and market supply of a good increases in the same proportion? Use diagram.
  4. What do you mean by excess demand? Explain with the help of a diagram, as what will be the effect of excess demand on the price of the commodity.
  5. When will (a) a simultaneous increase (b) simultaneous decrease in the demand and supply does not affect the equilibrium price? Explain with the help of a diagram.
  6. How is the equilibrium price of a good determined. Explain with the help of a diagram.Also explain a situation when both demand and supply curve shifts to the right but equilibrium price remains the same.
  7. Market for a good is in equilibrium .what is the effect on equilibrium price and quantity if the proportionate increase in market demand is greater than the increase in market supply. Use diagram.
  8. Market for a good is in equilibrium. What is the effect on equilibrium price and quantity, if increase in market demand is less than the increase in market supply explain.

 

True or False

 

  1. Under monopolistic competition, a firm has a perfectly elastic demand curve.
  2. A monopolist can sell any quantity he likes at a price.
  3. Price discrimination is a feature of monopolistic competition.
  4. There is no selling cost under monopoly due to the presence of single seller.
  5. A monopoly firm can make abnormal profits in the long period.
  6. A firm under oligopoly are interdependent.
  7. Like price, quantity to be sold by the firm in the perfect competition is also fixed by the industry.
  8. An oligopoly firm faces a downward sloping demand curve.
  9. The demand curve under monopolistic competition is more elastic as compare to demand curve under monopoly.
  10. A monopolist firm has full control over the price and demand of its product.
  11. MSP is effective when government starts selling the goods through PDS.

 

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