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# Short Answer Questions: (3 / 4 Marks)

2. Explain briefly why a firm under perfect competition is a price taker not a price maker?
Ans:- A firm under perfect competition is a price taker not a
price maker because the price is determined by the
market forces of demand of supply. This price is known
as equilibrium price. All the firms in the industry have to
sell their outputs at this equilibrium price. The reason is
that, number of firms under perfect competition is so
large. So no firm can influence the price by its supply. All firms produce homogeneous product.

6. Explain the process of price determination under perfect competition with the help of schedule and a
diagram.
Ans:- Equilibrium price is that price which is determined by market forces of demand and supply. At this price
both demand and supply are equal to each other.

Diagrammatically it is determined at the point where demand curve and supply curve intersect each other.
At this point price is known as equilibrium price and quantity is known as equilibrium quantity.

7. When will the equilibrium price not change even if demand and supply increase?
Ans:- When proportionate increase in demand is just equal to proportionate increase in supply. Equilibrium price
will not change. It can be shown in the following diagrams.

## In the above diagram increase in demand is just equal to increase in

supply. Demand curve shift from D to D1 and supply curve shift
from S to S1 which intersect at point E. Thus equilibrium price
remain unchanged at OP though equilibrium quantity increased from
OQ to OQ1.

8. How does increase in price of substitute goods in consumption affect the equilibrium
price of a good? Explain with a diagram.
Ans:- An increase in price of substitute goods (coke) will cause increase in demand for its
related goods (Pepsi) . The demand curve for Pepsi will shift to the right side. The
supply curve of Pepsi remains the same. It will lead to an increase in equilibrium price
of Pepsi and increase in quantity also.
Result: Price increases from OP to OP1.Quantity demand increases from OQ to OQ1

9. How does the equilibrium price of a normal commodity change when income of its buyers falls? Explain the
chain effects.
Ans:-
When income falls demand falls
Supply remaining unchanged .There is excess supply at a given price
This leads to competition among sellers to reduce the price.
As a result demand starts rising and supply starts falling.
These changes continue till a new equilibrium price is established where demand equal supply.
Equilibrium price falls.
11. Show with the help of diagram the effect on equilibrium price and quantity when supply is perfectly inelastic
and demand increases and decreases?
Ans:-
When supply is perfectly inelastic and demand
increases. Demand curve shift to towards right.
The new demand curve D1 intersects the supply
curve at point E1.
Result : Price increases from OP to OP1 and
quantity demand remains unchanged.

## In the above diagram demand curve shift left

wards from D to D1 Price falls from OP to OP1 ,
but quantity remains same.

## LONG ANSWER QUESTIONS (6 MARKS)

1. Equilibrium price may or may not change with shifts in both demand and supply curve. Comment.

Ans:- There can be 3 situations of a simultaneous right wards shift of supply curves and demand curves.

## i) When demand increases more than supply price and

quantity both will increase
When increase in demand is more than increase in
supply price increases from OP to OP1. Quantity
increases from OM to OM1. Increase in price is less than
increase in quantity.

ii) When demand increases less than supply, price will fall but quantity will rise.

## When supply increases more than demand price falls from OP to

OP1 and quantity demand increases from OM to OM1. Decrease in
price is less than increase in quantity.
i) When demand and supply increases equally then equilibrium
price remain same.

## When increase in demand is equal to increase in supply price

remains unchanged at OP. Quantity increases from OQ to OQ1.

3. With the help of demand and supply schedule explain the meaning of
excess demand and its effects on price of a commodity.
Ans:- Demand and supply schedule

## The above schedule shows market demand and market

supply of the commodity at different prices. At the
price of 7 and 6 the market demand is greater than
market supply. This is the situation of excess demand.
There will be competition among the buyers resulting in a
rise in price. Rise in price will result in fall in market
demand and rise in market supply. This reduces the
excess demand. These changes continue till the price rises to Rs. 8 at which excess demand is zero. The
excess demand results in a rise in price of the commodity.

4. Market for a good is in equilibrium. There is increase in demand for the goods. Explain the chain effect of
this change.
Ans:-
Increase in demand shift the demand curve from D to D1 to right
leading to excess demand E E1 at the given price OP.
There will be competition among buyers leading to rise in price.
As price rise supply starts rising (along S) demand starts falling.
These changes continues till D=S at a new equilibrium at E1
The quantity rises to OM to OM1 and price rises OP to OP1
13. When there is simultaneous change in demand & supply of a good, when does the
following happens: 1. The equilibrium price remain same; 2. The equilibrium qty.
remain same. Explain with the help of diagrams.
Ans. 1 .When demand & supply increases or decreases at same proportion.

## When there is a change in both demand

& supply at same proportion, in case of
increase in both, the eqm. price remain
same(OP) but eqm. qty. rises (from OQ
to OQ′). In case of decrease in both at
uniform rate, the eqm. Price remain
same at OP, but eqm. Qty. will fall to
OQ″ from OQ.

2. When demand increases & supply decreases or vice versa at same proportion.
When demand increases & supply
decreases at same proportion, the
eqm. price rises (from EQ to E Q), but 1
qty. remain same (with OQ). On the
contrary, in case of vice versa, the
same thing will happen.

## 1. Under perfect competition, equilibrium price of the commodity is determined by:

(a) Demand for the commodity alone (c) both demand and supply (b) supply of commodity alone (d) the
government

## 2. In the situation of market equilibrium:

(a) Market demand = market supply (b) market demand > market supply
(c) Market demand < market supply (d) none of these

## 3. In a situation of excess supply, market price tends to

(a) rise (b) fall(c) remain constant (d) none of these

## 4. If demand for a product falls, equilibrium price will:

(a) fall (b) rise(c) either of the two (d) neither of the two

## 5. The market price is related to:

(a) short period (b) very short period(c) long period (d) very long period

6. What will be the effect on equilibrium price if supply is decreased without any change in demand?
(a) No change in price (b) Price will fall(c) Price will rise (d) None of these

## 7. A fall in input prices would cause:

(a) fall in equilibrium price and rise in quantity (b) rise in equilibrium price and fall in quantity
(c) fall in equilibrium price as well as quantity (d) rise in equilibrium price as well as quantity

8. Supply being perfectly inelastic, what will be the effect of increase or decrease in demand on price and
equilibrium quantity?
(a) Price increases or decreases respectively (b) No effect on equilibrium quantity
(c) Both (a) and (b) (d) None of these

9. When will increase in supply bring down the price, leaving the quantity demanded unchanged?
(a) When demand for the commodity is perfectly elastic (b) When demand for the commodity is perfectly
inelastic (c) When demand for the commodity is less elastic (d) When demand for the commodity is more elastic

10. What would price ceiling lead to when the maximum price is fixed lower than the equilibrium price?
(a) Excess demand (b) Excess supply (c) Deficient demand (d) None of these

11. The period of time, when supply is fully adjusted to change in demand is called:
(a) short period (b) very short period (c) mid period (d) long period

12. Market supply curve of perishable goods is a vertical straight line parallel to Y-axis. It happens in which of the
following periods?
(a) Long period (b) Short period(c) Very short period (d) All of these

13. The minimum assured price offered by the government to the farmers for the purchase of their output is called:
(a) ceiling price (b) equilibrium price(c) support price (d) market price

14. At PX = 5, demand for Good-X is 30 units and supply of Good-X is 20 units, it is a situation of:
(a) excess demand (b) excess supply (c) equilibrium (d) none of these

## 15. Decrease in the number of consumers causes:

(a) equilibrium price to rise (b) equilibrium price to fall(c) no change in equilibrium price (d) none of these

16. Increase in the income of the buyers (in case of an inferior good) will cause:
(a) fall in equilibrium price and quantity
(b) rise in equilibrium price and quantity
(c) fall in equilibrium price and quantity to rise
(d) rise in equilibrium price and quantity to fall

17. When both the demand and supply curves shift to indicate increase in demand and supply in the same
proportion:
(a) only equilibrium price remains unchanged
(b) only equilibrium quantity remains unchanged
(c) equilibrium price remains unchanged but equilibrium quantity decreases
(d) equilibrium price remains unchanged but equilibrium quantity increases

18. Which of the following statements is correct, in the case of excess demand?
(a) Market supply will be less than market demand (b) Equilibrium price and equilibrium quantity will increase
(c) Both (a) and (b) (d) Neither (a) nor (b)
1.(c) 2.(a) 3.(b) 4. (a) 5. (b) 6. (c) 7. (a) 8.(c) 9. (b)
10. (a) 11. (d) 12. (c) 13. (c) 14. (a) 15. (b) 16. (a) 17. (d) 18. (c)

B. Concept-based Questions

## 1. Define equilibrium price.

Ans. Equilibrium price refers to that price which equates market demand for a commodity with its market
supplv
2. What is meant by equilibrium quantity?
Ans. Equilibrium quantity is that quantity which corresponds to the equilibrium price in the market.

## 3. What is meant by market equilibrium? Or Define market equilibrium.

Ans. Market equilibrium is a situation when market demand is equal to market supply.

## 4. What is meant by excess demand for a product?

Ans. Excess demand refers to the situation in which market demand is more than market supply of a
commodity at a given price.

## 5. What is meant by excess supply of a product?

Ans. Excess supply refers to the situation in which market supply is more than market demand of a
commodity at a given price.

## 6. How is price affected by increase in demand?

Ans. In a situation of increase in demand, other things remaining constant, equilibrium price must rise.

## 7. How is price affected by decrease in demand?

Ans. When demand decreases, equilibrium price must decrease, other things remaining unchanged.

## 8. How is price affected by increase in supply?

Ans. When supply Increases, equilibrium price will decrease, other things being equal.

## 9. How is price affected by decrease in supply?

Ans. When supply decreases, equilibrium price will increase, other things remaning constant.

10. How is the price of a commodity affected when its demand increases more than supply?
Ans. When demand increases more than supply, equilibrium price of a commodity will rise, other things
remaining constant.

11. How is the price of a commodity affected when its demand increases less than supply?
Ans. When demand Increases less than supply, equilibrium price Will fall, other things remaining constant.

12. What will be the effect on equilibrium price and quantity of an increase in equal proportion of demand
and supply of a commodity?
Ans. Other things remaining constant, when demand and supply increase in an equal proportion, there will
be no change in equilibrium price. However, the equilibrium quantity will increase.

## 13. Define price ceiling.

Ans. Ceiling price refers to the maximum price of a commodity that the sellers can charge from the
14. What is meant by price floor?
Ans. Price floor refers to the minimum price fixed by the government for a commodity in the market. It is
done with a view to stabilizing income of the farmers.

## 15. Define support price policy.

Ans. It is the policy of offering minimum price to the farmers for the purchase of their output by the
government.

C. Reason-based Questions
Read the following statements carefully. Write True or False with a reason.

I. Under perfect competition, equilibrium price is determined by the forces of market demand and
market supply.
Ans. True. Under perfect competition, equilibrium price is determined at the point of intersection of market
demand and market supply. An individual firm cannot change it.

## 2. In case of excess demand, equilibrium price must rise.

Ans. True. Excess demand generates pressure of demand on the existing supply. As an immediate impact,
market price rises. It leads to extension of supply and contraction of demand. Finally, equilibrium is
reached In the market where Dx = Sx. But new equilibrium price happens to be higher than the initial
equilibrium price.

3. When there is no excess demand or excess supply in the market, everybody is equally satisfied (or
nobody suffers any shortage).
Ans. False. When there is no excess demand or excess supply, market is cleared. But it does not mean that
everybody is equally satisfied. At the given market price, some people may not be able to buy the
product, and therefore, remain unsatisfied.

4. In a situation of perfectly elastic supply, price of the commodity tends to remain constant, no matter
demand increases or decreases.
Ans. True. The price will remain unchanged with perfectly elastic supply curve, no matter demand increases
or decreases. Because supply responds proportionately to the increase Or decrease in demand.

5. Equilibrium price may not change even when market demand happens to change.
Ans. True. Because market supply may change proportionate to market demand.

6. Price may remain constant even when both supply and demand for a commodity tend to change.
Ans. True. If the demand and supply of a commodity change equally, and in the same direction there be no
change In Its price.

7. Equilibrium price may fall even when market demand tends to rise.
Ans. True. Because supply may rise proportionately greater than the rise in demand.

## 8. In a situation when productivity increases owing to improvement in technology, equilibrium price

tends to fall.
Ans. True. Owing to Improvement In technology, supply of the good jn the market will Increase causing a
rightward shift of the supply curve .Accordingly, equilibrium price Will decrease.

9. In a situation of war when people fear shortage of rice, equilibrium price of rice tends to rise.
Ans. True. Because, fearing shortage of rice, demand curve for rice will shift forward, causing a rise in
equilibrium price.

10. In a situation when import of inputs becomes expensive, equilibrium price of the commodity tends to
rise.
Ans. True. When Import of inputs become expensive, the cost of production rises, leading to a cut in
supplies, The supply curve shifts to the left. Accordingly, equilibrium price of the commodity tends to
rise.
11. In a state of increasing cost of production leading to a substantial cut in production, equilibrium price
will fall.
Ans. False. With a substantial cut in production, supply curve shifts to the left and equilibrium price Will
increase.

12. If population increases, supply curve remains unchanged in the context of market equilibrium.
Ans. True. Population changes affect only the market demand, not the market supply.

13. If consumers tend to buy more corresponding to the existing price of the commodity, supply curve
should shift to the right.
Ans. False. If consumers tend to buy more corresponding to the existing price of the commodity, demand
curve should shift to the right.

14. Market price is always equal to or greater than the support price of a commodity.
Ans. True. In a situation of support price (which is the minimum price assured to the producers), market
price ought to be equal or greater than the support price.

## 3. HOTS & Applications

1. A situation of excess demand or excess supply is automatically corrected under perfect Do you agree?
Explain the process of correction.
Ans. Yes. Under perfect competition, situations of excess demand or excess supply are automatically
corrected through the free play of market forces, called price mechanism.
When there is excess supply:
—Market price decreases.
—Decrease in market price leads to extension of demand and contraction of supply.
—The process of extension and contraction continues till excess supply is eliminated.
—New equilibrium is established with lower price and higher quantity than before.
When there is excess demand:
—Market price increases.
—Increase in market price causes contraction of demand and extension of supply.
—The process of extension and contraction continues till excess demand is eliminated. —New
equilibrium is established with higher price and higher quantity than before.

2. In a situation of constant demand, equilibrium quantity does not change even when supply increases
or decreases. Do you agree?
Ans. Yes. In a situation of constant demand or perfectly Inelastic demand, Increase or decrease in supply
causes a full impact on price of the commodity but equilibrium quantity does not change

3. If elasticity of demand = 00, equilibrium price remain unchanged, no matter supply increases or
decreases. Do you agree?
Ans. Yes, we agree with this. When demand is perfectly elastic (or elasticity of demand 's infinity),
equilibrium price remain unchanged With Increase or decrease in supply. Because (being perfectly
elastic) demand increases or decreases proportionate to the Increase or decrease in supply.

## 4. Equilibrium price never changes in a situation of perfectly elastic supply,

no matter what the demand is. Is it true? Explain diagrammatically.
Ans. Yes, it is true. Equilibrium price will remain unchanged when supply is
perfectly elastic whether demand increases or decreases.
See Fig. Here, price remains constant at OP when demand increases to D1 and decreases to D2

5. In case of inferior goods, a rise in income of the buyers causes a fall in equilibrium price of the
commodity. Comment. Illustrate using a diagram.

Ans. Yes. The income effect for an 'inferior good' is negative. It implies that
for an increase in income of its buyers, the demand for the good falls.
Diagrammatically, demand curve, D, as shown in Fig. 13 shifts
leftward, i.e., from D to DI. The new equilibrium is struck at point El.
The equilibrium price decreases from OP to OPI.

6. In India, retail price of petrol has significantly fallen during the past six months. But, demand for cars
has not shown any significant rise. Use your economics to explain this fact.
Ans. Car and petrol are complementary goods. A significant fall in the price of petrol is expected to induce a
rise in demand for cars. But, it did not happen. The reason is as this:
Car is expensive consumer good. Demand for cars is expected to rise only when: (i) there is a significant
rise in income of the buyers, or (ii) there is a significant fall in the price of cars, or (iii) there is a
significant cut in the interest rate for car loans. None of these factors has shown any positive change
during the past six months. Accordingly, demand for cars has not shown any rise in response to fall in
petrol price in India.

## 7. Explain the effect of increase in income of buyers of a 'normal' commodity on its

equilibrium price.
Ans. An increase in income of buyers will increase the demand for normal goods at the given
price. It will lead to excess demand. This leads to competition among buyers, which raises
the price. Increase in price leads to rise in supply and fall in demand. These changes
continue till supply and demand become equal at a new equilibrium price. As there is an
increase in demand only, equilibrium price rises.

8. What will be the effect on equilibrium price and equilibrium quantity, when price of
complementary goods increases?
Ans. When price of complementary goods increases, keeping other factors constant, then
demand for the given commodity decreases since it becomes relatively expensive to
consume the two commodities (the given commodity and its complement) together. It will
lead to excess supply. This lead to competition among sellers, which reduces the price.
Fall in price leads to decrease in supply and rise in demand. These changes continue till
supply and demand become equal at a new equilibrium price. As there is a decrease in
demand only, both equilibrium price and equilibrium quantity will fall.

9. Explain the effect on equilibrium price when the price of inputs increases.
Ans. When price of input increase, assuming no change in other factors, then the cost of
production rises. As a result, supply decreases due to fall in the profitability level. It will
lead to excess demand. This leads to competition among buyers, which raises the price.
Increase in price leads to rise in supply and fall in demand. These changes continue till
supply and demand become equal at a new equilibrium price. As there is a decrease in
supply only, equilibrium quantity will fall, but equilibrium price will rise.
10. “Demand and supply are like two blades of a pair of scissors”. Comment
Ans. The given statement is correct. Both the blades of a pair of scissors are equally important
to cut a piece of cloth. Similarly, both demand and supply are needed for determining
price in the market. There is no use for demand for a product if there is no supply for the
product and supply is not needed if there is no demand for the product. One of the two
may play more active role in price determination in the short run. But, both are needed to
determine the price in long run.

11. If market demand function is given as: Q =25-2P and market supply as: Q =3P, MD MS
then what will be the equilibrium price and equilibrium quantity?
Ans. At equilibrium, Q = Q MD MS
It means, 25-2P = 3P
Or, 5P = 25
P or Equilibrium price = `5
Putting the value of equilibrium price in the equation of market demand function:
Equilibrium Quantity = 25-2 x 5 = 15 units.

12. When do we say there is excess demand for commodity in the market?
Hint: There is excess demand for a commodity in the market when its quantity demanded is
more than quantity supplied at the prevailing market price.

13. When do we say there is excess supply for commodity in the market?
Hint: There is excess supply for a commodity in the market when its quantity supplied is more
than quantity demanded at the prevailing market price.

## 14. What is happen if the price prevailing in the market is?

(i) Above the equilibrium price?
(ii) Below the equilibrium price?
Ans: (i) If the market price is above the equilibrium price, then there will be a situation of
excess supply in the market.
(ii) If the market price is below the equilibrium price, then there will be a situation of
excess demand in the market.

15. If the price of a substitute (Y) of good X increases, what impact does it have on the
equilibrium price and quantity of good X?
Ans: An increase in price of a substitute (Y) of good X will directly affect the equilibrium price and
quantity of good X. Rise in price of Y will make X relatively cheaper and demand for X will rise.
It will lead to excess demand. It will lead to increase in both equilibrium price and equilibrium
quantity.

16. When equilibrium price of a good is less than its market price, there will be a competition
among the sellers. Defend or refute.
Ans. The given statement is defended. It happens because when the prevailing market price is higher
than the equilibrium price, there will be excess supply and since the sellers will not be able to sell
all they want to sell, there will be a competition among sellers.
4. Multi-disciplinary (Value-based Questions)

I. Do you agree with the view that the market absorbs the impact of increase or decrease in demand only
through the process of 'extension and contraction of demand and supply'? Give reason.
Ans. Yes, it is true that the market absorbs the impact of increase or decrease in demand only through the
process of 'extension and contraction of demand and supply'.
Reason: When there is increase in demand, demand curve shifts to the right Excess demand emerges in
the market. Price tends to be higher than the equilibrium price. It leads to extension of supply and
contraction of demand. It is through this process of extension and contraction that excess demand is
eliminated and new equilibrium is established in the market.
Likewise, when there is decrease in demand, demand curve shifts to the left. Excess supply emerges in
the market. Price tends to be lower than the equilibrium price. It leads to extension of demand and
contraction of supply. It is through this process of extension and contraction that excess supply is
eliminated and new equilibrium is established in the market.

2. What kind of supply shock do you expect in the market when the rice crop is severally damaged by the
drought? How will the market adjust itself to the supply shock? What suggestions would you offer to
tackle the problems arising out of the supply shock?

Ans. When a drought severally damages the rice crop, output of rice will significantly fall. It leads to supply
shock in the market. The supply of rice decreases: supply curve shifts to the left, as in Fig.

## The supply shock (caused by the drought) shifts the supply

curve from S to S1 :supply of rice decreases. As a result, there
is deficient supply (or excess demand) = RE. The pressure of
demand causes price to rise. The rise in price leads to
extension of supply and contraction of demand. Supply
extends from R towards point E1. Demand contracts from
point E to point E1. The equilibrium quantity reduces from OQ
to OQ1. The equilibrium price increases from OP to OP1.

## The problem that emerges has two dimensions:

(i) high price of rice, and (ii) low supply of rice.

The problem of high price of rice can be addressed by fixing a price ceiling. The government can fix
maximum price of rice in the market. Any attempt to charge higher price, higher than the ceiling price
would attract a legal action.
The problem of low supply of rice can be addressed in two ways: (i) The government can release more
rice from its buffer stocks, and (ii) The government can import rice from rest of the world.

3. Farmers may suffer a loss even when there is a good harvest. Does your supply-demand analysis
Ans. Owing to their poverty (and immediate need for cash) farmers are often driven to a distressed sale of
their produce. But good harvest causes a glut (of supply) in the market. This causes a price-crash. The
price may fall so much that the total revenue of the farmer decreases even when his output/ sale is
more than before.
CBSE Questions—Past 4 years

1. Market for a commodity is in equilibrium. Demand for the commodity 'increases'. Explain the chain of
effects of this change till the market again reaches equilibrium. Use diagram.
[CBSE Delhi 2014; (Al) 2014)
Or
Market for a good is in equilibrium. The demand for the good 'increases’. Explain the chain of effects of
this change. [CBSE Delhi 2015; (Al) 2015)

Or
Market for a good is in equilibrium. There is 'increase' in demand for the good. Explain the chain of
effects of this change. [CBSE (F) 2015]

Or
Explain the chain of effects of 'increase' in demand for a good. [CBSE (F) 2016)

2. Market of a commodity is in equilibrium. Demand for the commodity 'decreases', Explain the chain of
effects of this change till the market again reaches equilibrium, Use diagram.
(CBSE DELHI 2014)
Or
Market for a good is in equilibrium. Demand for the good 'decreases'. Explain the chain of effects of
this change. (CBSE Delhi 2015)

3. Market for a product is in equilibrium. Supply of the product 'decreases'. Explain the chain of effects of
this change till the market again reaches equilibrium. Use diagram.
(CBSE Delhi2014)

4. What is ‘excess demand' for a good in a market? Explain its chain of effect on the market for that good.
Use diagram. CBSE (f) 2014)

5. Explain the chain of effects of excess supply of a good on its equilibrium price.
(CBSE Delhi 2017)
7. Explain the effects of ‘maximum price ceiling' on the market of a good. Use diagram.
[Delhi 2015]
8. What are the effects of ‘price floor' (minimum price ceiling) on the market of a good? Use diagram.
(cbse (Al) 2015)
11. Explain the chain effects. If the prevailing market price is below the equilibrium price.
(Delhi 2016)
12. Explain the meaning of 'minimum' price ceiling and its implications. (Cbse F 2016)

13. If the prevailing market price is above the equilibtin price. Explain its Chain effects.
(cbse All 2016)
14. Good Y is a substitute of good X. The price of Y falls. Explain the chain of effects of this
change in the market of X. (Delhi 2017)

15. X and Y are complementary goods. The price of Y falls. Explain the chain of effects of this change in the
market of X. (Delhi 2017)

16. Explain the meaning of excess demand and excess supply with the help of a schedule. Explain their
effect on equilibrium price. (CBSE (Al) 2017)

17. State whether the following statements are true of false. Give reasons for your answer:
(i) When equilibrium price is greater than market price there will be excess supply in the market.
(ii) X and Y are complementary goods. A fall in the price of Y will result in a rise in the price of X.
[CBSE (F) 2017]
False. When equilibrium price is greater than market price there will be excess demand in the market.
Pressure of excess demand will cause a rise in market price causing contraction of demand and
extension of supply. The process of contraction and extension would continue till the equilibrium
between supply and demand is struck. Equilibrium price will again be restored through the free play of
market forces.
(ii) True. A fall in the price of Y leads to increase in demand for X. Accordingly, demand curve shifts
rightward and both equilibrium price and equilibrium quantity tend to increase.]

18. Explain the meaning and implications of maximum price ceiling and minimum price ceiling.
(Cbse (F) 2017]

## 1. Explain market equilibrium.

[Hint: Market equilibrium is a situation of zero excess demand and zero excess supply. Or, it is a
situation where: market demand = market supply.]

## 2. When do we say there is excess demand for a commodity in the market?

[Hint: When market demand exceeds market supply of a commodity at a given price there is excess
demand for a commodity in the market.]

## 3. When do we say there is excess supply for a commodity in the market?

[Hint: When market supply of a commodity is more than market demand for a commodity at the given
price there is excess supply for a commodity in the market.]

4. What will happen if the price prevailing in the market is (i) above the equilibrium price? (ii) below the
equilibrium price?
[Hint: The equilibrium price is the price at which market demand and market supply are equal to each
other.
(i) When price prevailing in the market is above the equilibrium price, demand will be less than supply,
i.e., there is excess supply in the market. Excess supply will force the market price to slide down
causing extension of demand and contraction of supply. The process of extension and contraction
would continue till the equilibrium between supply and demand is struck. Thus, equilibrium price will
be restored through the free play of market forces.
(ii) When price prevailing in the market is below the equilibrium price, demand will be more than
supply, i.e., there is excess demand in the market. Pressure of excess demand will cause a rise in
market price causing contraction of demand and extension of supply. The process of contraction and
extension would continue till the equilibrium between supply and demand is struck. Equilibrium price
will again be restored through the free play of market forces.]

5. Explain how price is determined in a perfectly competitive market with fixed number of firms.

## [Hint: In a perfectly competitive market, equilibrium price is

determined by the forces of market demand and market supply.
Market demand refers to the sum total of demand for a
commodity by all the buyers in the market. Whereas market supply
refers to the sum total of supply of a commodity by all the firms in
the market. Considering market demand schedule (or market
demand curve) on the one hand, and market supply schedule (or market supply curve) on the other,
we identify equilibrium price as the one where market demand = market supply, or where market
demand curve and market supply curve intersect each other.

6. How are equilibrium price and quantity affected when income of the consumers (i) increase? (ii)
decrease?
[Hint: (i) For a normal commodity, an increase in income of the consumers means increase in its
demand. Accordingly, demand curve shifts rightward and both equilibrium price and equilibrium
quantity tend to increase.
(ii) For a normal commodity, a decrease in income of the consumers means decrease in its demand.
Accordingly, demand curve shifts leftward and both equilibrium price and equilibrium quantity tend to
decrease.]

7. How do the equilibrium price and quantity of a commodity change when price of input used in its
production changes?
[Hint: With increase in input price, the supply curve shifts to the left. Accordingly, equilibrium price
increases and equilibrium quantity reduces in the product market. Conversely, when there is decrease
in input price, the supply curve shifts to the right, causing decrease in equilibrium price and increase in
equilibrium quantity.]

8. Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair
of socks and the number of pairs of socks bought and sold.
[Hint: Shoes and socks are complementary goods. Accordingly, demand for socks is expected to fall
with rise in the price of shoes. Thus, demand curve (for socks) shifts
backward. Less will be purchased at the same price. When demand
curve shifts backward, the equilibrium price and quantity will be
affected as shown in Fig. 15.
In Fig. 15, D is the initial demand curve and S is the initial supply curve
related to socks. E is the initial equilibrium where supply and demand
curves intersect each other. OP is the equilibrium price and OQ is the
equilibrium quantity of socks. When the price of shoes increases,
demand curve for socks shifts backward as indicated by DI. Equilibrium price (of a pair of socks) falls
from OP to OPI and equilibrium quantity (number of pairs of socks bought and sold) falls from OQ to
OQI.I

9. How will a change in price of coffee affect the equilibrium price of tea? Explain the effect
on equilibrium quantity also through a diagram.
[Hint: Coffee and tea are substitute goods. Let us assume that the price
of coffee increases. This will cause a shift in demand curve for tea to the
right as shown in Fig. 16. In Fig. 16, D is the initial demand curve and S is
the initial supply curve related to tea. E is the initial equilibrium where
supply and demand curves intersect each other. OP is the equilibrium
price and OQ is the equilibrium quantity of tea. When the price of coffee
increases, demand curve (for tea) shifts forward as indicated by DI. Consequently, equilibrium price
(of tea) increases from OP to OPI and equilibrium quantity increases from OQ to OQI.
In case price of coffee decreases, demand curve for tea would shift to the left. Consequently, new
equilibrium would indicate a fall in equilibrium quantity as well as a fall in equilibrium price.)
10. If the price of a substitute(Y) of Good-X increases, what impact does it have on the equilibrium price
and quantity of Good-X?
[Hint: With increase in the price of the substitute of Good-X, demand curve of Good-X will shift to the
right. Accordingly, equilibrium price and quantity of Good-X would tend to increase.)

11. Explain through a diagram the effect of a rightward shift of both the demand and supply curves on
equilibrium price and quantity.
(Hint: There are three possible situations of a simultaneous rightward shift of both the demand and
supply curves:
(i) When demand increases more than supply, equilibrium price and quantity both will rise. See Fig. (A).
(ii) When demand and supply increase equally, equilibrium price will remain stable and equilibrium
quantity will rise. See Fig. (B).
(iii) When demand increases less than supply, equilibrium price will fall and equilibrium quantity will
rise. See Fig. (C).

12. Suppose the demand and supply curves of salt are given by:
Qd=1,000- p, Qs = 400 + 2p

## (a) Find the equilibrium price and quantity.

(b) Now suppose that the price of an Input used to produce salt has increased so that the new supply
curve is: Qs=400+2p
How does the equilibrium price and quantity change? Does the change conform to your expectation?
(c) Suppose the government has Imposes GST which raises the cost by Rs.3 per unit of output. How
does it affect the equilibrium price and quantity?

[Hint:
(a) Market equilibrium is struck when:
Market Demand = Market Supply Or, Qd = Qs
1,000- p =700+2p
2P + P = 1,000 - 700
3p = 300
P = 100
When p = 100,
Qd = 1,000 -p
= 1,000 – 100
= 900
Equilibrium price = Rs.100.
Equilibrium quantity = 900.

(b) When price of an input used to produce salt has increased, new equilibrium price and equilibrium
quantity is achieved when:
1,000-p = 400 + 2P
2p + p = 1,000-400
3p = 600
p = 200
When p 200,
Qd = 1,000 -p
= 1,000 – 200
= 800

## New equilibrium price = Rs.200

New equilibrturn quantity=800
Owing to increase in input price, supply curve shifts backward. Consequently, equilibrium price
expected to rise and equilibrium quantity is expected to fall. In tune With this expected result, the new
equilibrium price has risen from Rs.100 to Rs.200 and equilibrium quantity has decreased from 900 to
800.

## c) When GST is imposed, the supply equation changes as under:

Qs=700 +2(p — 3) [out of the price charged, the producer has to pay Rs. to the government)
Equating supply and demand equations, the equilibrium price is achieved, as under:
1,000 – p= 700 + 2(p- 3)
1,000 -p = 700 +2p -6
2p+p= 1,000 - 700 + 6
3p = 306
P=102
Equilibrium quantity:
1,000 - 102 = 898
Or
700 + 2(102 - 3) = 700 + 198
= 898
After GST,
Equilibrium price increases from Rs.100 to Rs.102.
Equilibrium quantity reduces from 900 to 898.