PRICE DETERMINATION UNDER PERFECT COMPETITION

Q) Define equilibrium price. How is it determined? Or How is the price of a commodity determined in the market? Or Explain the process by which demand and supply forces determine the price of a commodity. A) Meaning of Equilibrium Price: Equilibrium literally means the state of balance or
rest or position of no change. At point of equilibrium, factors determining it are said to be in balance. Demand and supply are two factors determining the price of a commodity in the market. Therefore, equilibrium price is the price at which its two determinants demand and supply are equal, i.e., in balance. The process of price-determination can be explained with the help of a demand-supply schedule and a diagram. Price Demand Supply 2 5> 1 4 4> 2 6 3= 3 8 2< 4 10 1< 5 The above figure depicts the market demand and supply curves of a particular product, denoted respectively by DD and SS. Suppose that, initially, the price in the market for that good is P1. At this price, the consumers demand the quantity D1 and the producers supply the quantity Q1. Obviously, there is a mismatch. Consumers want more than what the producers are willing to supply. There is excess demand equal to AB. Excess demand will create competition among the buyers and push the price upto OP where quantity demanded is equal to quantity supplied and there is no excess demand. Just the opposite happens if initially the price is OP2. The quantity (C) is less than quantity supplied (D). There is excess supply, equal to CD which will create competition among the sellers and lower the price. The price will keep falling as long as there is an excess supply. The situation of zero excess demand and zero excess supply defines market equilibrium. Alternatively, it is defined by the equality between quantity demanded and quantity supplied. E is the equilibrium point. The price OP is called the equilibrium price. Here the market rests. The equilibrium quantity exchanged (between consumers and producers) is equal to OQ. This is how price and quantity are determined in the market. In the schedule at Rs. 6, the quantity demanded matches with quantity supplied, i.e., three.

Q) What happens to equilibrium price and quantity demanded and supplied (equilibrium quantity) when demand and supply changes? A) Effects of changes in Demand and Supply on Equilibrium Price : Equilibrium
price is determined at a point where quantity demanded and supplied are equal. Therefore, if either demand changes or supply changes or both change, equilibrium price and output would be affected. The effects of changes in demand and supply, on equilibrium price and output have been examined under following conditions :I. Changes in Demand : Changes in demand take place due to changes in prices of related goods, changes in income, changes in fashions, tastes and habits of the consumers, etc. When demand changes, demand curve shifts. Due to changes (shifts) in demand curve, supply curve remaining the same, equilibrium price and output change. Demand may increase or decrease. (a) Effect of Change in Demand on Equilibrium Price and Output when supply remains constant : (i) Increase in Demand: When for the commodity DD increases while supply remains constant, equilibrium price will also increase. At the same time, quantity sold and purchased will also increase. This is shown in the graph below. Original equilibrium price is OP and output (DD & SS) is OQ. Keeping supply constant if the demand increases, the demand curve shifts from DD to D1D1. The new equilibrium is established at point E1. The equilibrium price goes up from OP to OP1 and output from OQ to OQ1. Therefore, when demand curve shifts upwards (when demand increases), equilibrium price and output both increase.

(ii) Decrease in Demand: If the demand of a commodity decreases and its supply remains constant, the equilibrium price and output will fall. This is shown in the below-diagram. In this figure, quantity of demand and supply are shown on the OX-axis and price of commodity on the OY-axis. DD is the original demand curve. SS is original supply curve and E is the original equilibrium point. Demand decreases to D 1D1. New demand curve intersects supply curve at E1. Equilibrium price has come down from OP to OP1 and output has also come down from OQ to OQ1.

II. Changes in Supply : Like demand, supply also changes. Changes in supply are brought about due to changes in cost of production, production techniques, changes in excise duties, changes in prices of substitute goods in production, etc. Due to changes in supply, supply curve also shifts. Supply may increase or decrease. (i) Increase in Supply when Demand is Constant: If the supply of a commodity increases and the demand remains constant, its price will fall. It can be made clear with the help of following diagram. Quantities of demand and supply are shown on the OX-axis and price of the commodity on the OY-axis. DD is the original demand curve, SS is the original supply curve and E is the original equilibrium point. SS increases to S1S1. New supply curve cuts the demand curve at E, which is a new equilibrium point. At this equilibrium point, price has come down from OP to OP1 and quantity has gone up from OQ to OQ1. Thus, if the supply increases when demand is constant, the equilibrium price will fall and quantity increases.

(ii) Decrease in Supply when Demand is Constant: If the supply of a commodity decreases but demand remains constant, its price will increase. It can be made clear with the help of following diagram. In this diagram, quantity of demand and supply are shown on the OX-axis and price of commodity on OY-axis. DD is the original demand curve, SS is the original supply curve and E is original equilibrium point. Supply decreases to S1S1. New supply curve cuts demand curve at E1 which is a new equilibrium point. Here the equilibrium price has gone up from OP to OP1 and the quantity decreased from OQ to OQ1. Thus if the supply decreases when demand remains constant, the equilibrium price and output increases.

III. Effect of simultaneous changes in Demand & Supply : Simultaneous changes in demand and supply of a commodity effect the equilibrium price and output. This can be shown in the following parts : (i) If the demand and the supply increase in the same proportion : When increase in demand is equal to increase in supply, the price will remain the same but the equilibrium output would increase as shown in the diagram.

In this diagram, quantities of demand and supply are shown on the OXaxis and price of commodity on the OY-axis. DD is original demand curve, SS is original supply curve and E is original point of equilibrium. OP is equilibrium price and equilibrium output is OQ. Demand increases to D1D1 and supply increases to S1S1 and the new curves intersect each other at E1. It shows that price remains the same because increase in demand and supply are in the same proportion. Equilibrium quantity goes up from OQ to OQ1.

(ii)

If both demand and supply decrease in the same proportion : When decrease in supply is equal to decrease in demand, the price will remain the same but equilibrium output would decrease as shown here. In the Fig. quantities of demand and SS are shown on the OX-axis and the price of the commodity on the OY-axis. DD is the original demand curve, SS is the original supply curve. E is the original point of equilibrium price. Demand decreases to D1D1. Supply decreases to S1S1 and the new curves intersect each other at E1. It shows that the price remains constant because both demand and SS are decreasing in the same proportion. However, the equilibrium quantity decreases to OQ1.

When increase in demand is more than the increase in supply : If the increase in demand is more than the increase in supply, the equilibrium price will increase and also the equilibrium quantity. It is illustrated with the help of a diagram. In the diagram, quantities of demand and supply are shown on the OX-axis and price of the commodity on the OY-axis. DD is original demand curve. SS is the original supply curve and E is point of original equilibrium. Demand increases from DD to D1D1 and supply increases from SS to S1S1. The increase in demand is greater than the increase in quantity supplied. The new curves inter-sect each other at E1. It shows the price has increased to OP1 because increase in demand is more than that of supply; and quantity increases to OQ1.

(iii)

(iv)

When increase in demand is less than the increase in supply : If the increase in supply is more than the increase in demand, the price will fall and the equilibrium quantity goes up as shown. In this diagram, quantities of demand and supply are shown on OX-axis. DD is the original demand curve, SS is the original SS curve and E is the original point of equilibrium. Demand increases to D1D1 and supply increases to S1S1. These new curves intersect each other at E1. It shows that price has decreases from OP to OP1 because increase in supply is more than that of demand, equilibrium quantity has increased from OQ to OQ1.

(v)

When decrease in demand is more than the decrease in supply : If the decrease in demand is more than the decrease in supply, the equilibrium price will fall. In this diagram, quantities of demand and supply are shown on the OX-axis and price of commodity on the OY-axis. DD is the original demand curve, SS is the original supply curve and E is the equilibrium point. The equilibrium price reduces from OP to OP1 in this situation because decrease in demand is more than that of supply. Equilibrium quantity decreases to OQ.

(vi)

When decrease in supply is more than the decrease in demand : If the decrease in supply is more than the decrease in demand, the equilibrium price will increase because of shortage as shown in the below diagram. DD fell to D1D1 marginally and supply decreased enormously from SS to S1S1. As a result, the price has gone up from OP to OP1. Equilibrium quantity decreased from OQ to OQ1 and the Equilibrium point shifted from E to E1.

(vii)

If the increase in demand is more than the decrease in supply : This leads to sharp increase in price from OP to OP1. The equilibrium quantity has gone up from OQ to OQ1 and the equilibrium point has shifted from E to E1.

(viii)

If the increase in supply is more than the decrease in demand : This leads to sharp fall in price from OP to OP1 and increase in quantity from OQ to OQ1 and the equilibrium shifted from E to E1.

(ix)

If the decrease in demand is more than the increase in supply : This leads to sharp fall in price from OP to OP1 and the equilibrium quantity also falls from OQ to OQ1 and the Equilibrium point shifts from E to E1.

(x)

If the decrease in supply is more than the increase in demand : It leads to (a) Sharp increase in price from OP to OP1. (b) Fall in quantity from OQ to OQ1. (c) Equilibrium point shifts from E to E1.

(xi)

If the increase in demand is equal to decrease for supply : Then it leads to (a) Sharp rise in price from OP to OP1. (b) The equilibrium quantity remains same OQ. (c) Equilibrium point shifts from E to E1.

(xii)

If the increase in supply is equal to the decrease in demand : Then it leads to (a) Equilibrium price falls sharply from OP to OP1. (b) Equilibrium quantity remains same, i.e., OQ. (c) Equilibrium point shifts from E to E1.

Q) What happens to equilibrium price and quantity if the Elasticity of Supply is perfectly inelastic and demand changes? A) Equilibrium price (market price) is determined at that point where quantity
demanded is equal to the quantity supplied. Here the elasticity of supply of the commodity is perfectly inelastic. This means supply is fixed and does not change with the changes in price. However, equilibrium price would vary according to changes in demand. (i) Supply in Perfectly Inelastic and Demand Increases : In this case (a) Equilibrium price would increase from OP to OP1. (b) Equilibrium quantity would remain the same. (c) Equilibrium point shifts upwards from E to E1.

In the diagram SS supply curve is vertical which indicates that supply would remain OQ whatever may be the price. DD is the demand curve and E is the point

of equilibrium. The equilibrium price is OP. Demand increases from DD to D1D1. Now the new equilibrium point is E1 where price rises to OP1 but the equilibrium quantity remains same. (ii) Supply in Perfectly Inelastic and Demand Decreases : In this case, the demand curve shifts leftwards / downwards from DD to D1D1 : (a) Equilibrium price falls from OP to OP1. (b) Quantity demanded and supplied would remain same. (c) Equilibrium point shifts down from E to E1.

Q) What happens to Equilibrium Price (Market Price) when demand is perfectly inelastic and supply changes? A) Demand is perfectly inelastic means that demand does not change with changes in
price. (i) Demand is Perfectly Inelastic and Supply Increases here : (a) Equilibrium price goes down from OP to OP1. (b) Equilibrium quantity remains same (OQ). (c) Equilibrium point shifts down from E to E1.

(ii)

Demand is Perfectly Inelastic and Supply Decreases : Here the supply has gone down from SS to S1S1. As a result (a) Equilibrium price has gone up from OP to OP1. (b) Equilibrium quantity remains same (OQ). (c) Equilibrium point has shifted up from E to E1.

Q) What happens to Equilibrium / market price when supply is perfectly elastic and demand changes? A) Supply is perfectly elastic means that the producer is willing to sell any quantity at
the same price. (i) Supply is Perfectly Elastic and Demand Increases. In this case (a) Equilibrium price remains same, i.e., O.P. (b) Equilibrium quantity goes up from OQ to OQ1 (c) Equilibrium point shifts rightwards from E to E1.

(ii)

Supply is Perfectly Elastic and Demand Decreases. Here (a) Equilibrium quantity goes down from OQ to OQ1. (b) Equilibrium price remains same, i.e., OP (c) Equilibrium point shifts leftward from E to E1.

Q) What happens to Equilibrium price and quantity when demand is perfectly elastic and supply changes. A) Demand is perfectly elastic means that at the same price, the consumer is willing to
buy any quantity, i.e., E.d. = . (i) Demand is Perfectly Elastic and Supply Increases. Here (a) Equilibrium price remains same, i.e., O.P. (b) Equilibrium quantity goes up from OQ to OQ1 (c) Equilibrium point shifts rightwards from E to E1.

(ii)

Demand is Perfectly Elastic and Supply decreases. Here, (a) Equilibrium price remains same, i.e., O.P. (b) Equilibrium quantity goes down from OQ to OQ1 (c) Equilibrium point shifts leftwards from E to E1.

Q) How does an increase in demand of a commodity affect its equilibrium price and equilibrium quantity? Explain with the help of a diagram. A) Equilibrium price in the price at which
quantity demanded of a commodity is just equal to quantity supplied. E is the point of Equilibrium where the price is OP and quantity is OQ. Because of increase in demand from DD to D1D1 (i) Equilibrium price goes up from OP to OP1, (ii) Qty. goes up from OQ to OQ1.

Q) What are sources of Demand Shifts? A) Market demand curve can shift because of changes in income, prices of related
goods, tastes or size of the market. (i) A change in Income : Suppose that there is an increase in aggregate income in an economy. As long as a product is normal, the demand curve for it shifts to the right. Both price and quantity increase. For a decrease in income, market price and quantity fall. Therefore, for a normal good, an increase in income leads to increases in the price and quantity exchanged. A decrease in income leads to decrease in the price and quantity exchanged. If it is an inferior good, an increase in income shifts the demand curve to the left. Both price and quantity fall. (ii) A change in the price of a related good in consumption : As the price of a substitute good in consumption rises, the price of a given product rises (demand curve shits to right) and its quantity exchanged increases. As the price of office, rises for some reason, the demand curve of coffee shifts to the left. Tea being a substitute of coffee, the demand curve for tea will shift to the right. The price of tea rises and so does the quantity of tea exchanged.

(iii)

(iv)

Sugar consumption is complementary to tea. Suppose the price of tea goes up. The demand curve for sugar shifts to the left. The price of sugar as well as its quantity will fall. Hence, as the price of a complementary good increases, the price of a given product and its quantity exchanged both decrease. A change in Tastes : A favourable change in taste will cause product price and quantity exchanged will increase. An unfavourable change in taste will cause product price and quantity exchanged will decrease. For example, when jeans became a fashion, the demand curve for it shifted right. Price and quantity of jeans has gone up. A change in Market Size : An increase in population would shift the market demand curve to the right and result in a higher price and a higher quantity, whereas a decrease in the population will do the opposite.

Q) What are the sources of supply shifts? A) (i) Technological Progress : It shifts the supply curve to the right.
Technological progress leads to a fall in price and an increase in quantity exchanged. (ii) Change in Input Prices : Supply curve shifts to the right or left, as an input price decreases or increases. The product price decreases and the quantity rises or the price increases and the quantity falls according to an input price decreases or increases. (iii) Change in Excise Taxes : An increase (decrease) in the excise duty rates shifts the supply curve to the left (right). The price of the product will increase and quantity transacted will decrease as the excise duty rate increases. The price of the product will decrease and the quantity transacted will increase as the excise duty rate decreases. (iv) Increase in the Price of Substitute Goods in Production : An increase in the price of a substitute good in production shifts the supply curve of a given product to the left. An increase (a decrease) in the price of a substitute good in production leads to an increase (a decrease) in price and a decrease (an increase) in quantity. (v) Number of Firms : Even when individual supply curve does not shift, the market supply curve can if the number of suppliers in the market changes. An increase in the number of firms (greater competition) shifts the market supply curve to the right. A decrease in the number of firms, i.e., less competition does the opposite. Thus, price falls and quantity rises or price rises and quantity falls, as there is more or less competition in terms of the number of firms. (vi) Other Factors : Factors like weather, natural disasters such as cyclones, flood, etc., which are results of Natures play, can also effect the supply of a product.

Q) How the Economic Policies of the Government affect the Market Equilibrium? OR What are direct and indirect interventions of the Govt. on Market

Equilibrium? OR What is Price Control or Support Price of the Govt.? A) Market equilibrium is affected not only by the shifts of demand and supply but also
by various government policies. (i) Indirect interventions : There are some policies, e.g., different kinds of taxes and subsidies, that change the market price indirectly via shifting the demand and supply. Sales Taxes and excise taxes are common examples. These are called indirect interventions. (ii) Direct interventions : There are other policies by which prices are fixed directly by the Government. These are : A. PRICE CONTROL : It is thought that if necessary items like sugar, rice, wheat, etc. were left to the play of free market entirely, poor would not be able to afford them at the market-clearing-price. Hence, the Government has adopted a system of price control through ration shops for such commodities. In terms of demand and supply curves, price control means fixing price below the equilibrium price (as the equilibrium price is presumed to be too high). In this figure, P1 is the control price. Since it is below the equilibrium price P, the quantity demanded P1B, exceeds the quantity supplied, P1A. This means everyones demand at the given price, cannot be satisfied. It implies the following : (a) There has to be some rationing an upper limit on the amount that can be purchased within a given time period. (b) Since there is a shortage at the control price, there will always be some buyers who are willing to pay a higher price than the control price and obtain the quantity that they desire. This gives rise to the existence of black markets. B. SUPPORT PRICE : For the growers of essential products, e.g., for farmers who raise sugarcane, wheat etc., there have been support price or price support programmes, meaning price being fixed above the equilibrium price. These programmes are meant to insulate farmers from income fluctuations resulting from price variations in the free market. In the figure, support price is denoted by P1. Since this price is above the equilibrium price P, the quantity supplied (P1B) exceeds the quantity demanded (P1A). There is always some surplus. The Govt. buys the excess supply at the support price.

Q) Give the meaning of excess demand for a product. A) Excess demand for a product means the quantity demanded by consumers is more
than what the producers are willing to supply.

Q) Give the meaning of excess supply of a product. A) Excess supply for a product refers to the situation when the quantity demanded by
consumers is less than what the producers are willing to supply.

Q) Define market equilibrium. A) Market equilibrium is the situation of zero excess demand and zero excess supply,
that is, the situation of equality between quantity demanded and quantity supplied.

Q) Give the meaning of equilibrium price. A) Equilibrium price is the price corresponding to the situation of market equilibrium. It
is the price at which the market rests i.e., there is no pressure either to increase or decrease this price.

Q) For a non-viable industry, where does the supply curve be relative to the demand curve? A) If the demand curve and the supply curve do not intersect with each other at any
positive quantity, it means that the product in question will not be produced in the economy. The industry is not economically viable. For a non-viable industry the price at which any positive amount can be supplied is higher than what the consumers are willing to pay and hence, supply curve lies above the relative demand curve.

In India and many other countries commercial aircraft is such an example, i.e., it is not produced at all. Of course, an industry, which is not viable in one country, can be viable in some other. For example, commercial aircrafts are produced in America, Russia, Britain and France.

Q) How does an increase in the price of a substitute good in consumption affect the equilibrium price? A) An increase in the price of a substitute good in consumption increases the
equilibrium price, as this leads to a shift in the demand curve exhibiting an increase in the quantity demanded of the original good, supply curve remains unchanged and finally equilibrium can be obtained only at a higher equilibrium price.

Q) How does an increase in input price affect the equilibrium quantity exchanged in the product market? A) Due to an increase in the input price the equilibrium quantity exchanged in the
product market decreases as rise in input price leads to an increase in the price of product

causing a leftward shift in the supply curve and no shift or change in the demand curve. Again, new equilibrium can be attained at reduced quantity and at higher price in the product market.

Q) How does a favourable change in taste affect the market price and the quantity exchanged? A) A favourable change in taste will cause the market price and the quantity exchanged
to increase.

Q) How does cost saving technological progress affect the market price and the quantity exchanged? A) A cost saving technological progress adversely affects the quantity exchanged, that
is, it leads to a fall in the market price and an increase in quantity exchanged.

Q) How does an increase in excise tax rate affect the market price and the quantity exchanged? A) An increase in excise tax rate leads to an increase in the market price and fall in the
quantity exchanged.

Q) When will an increase in demand imply an increase in prices but no change in quantity supplied? A) An increase in demand implies an increase in price but no change in quantity
supplied when the demand curve shifts to the right and the supply curve to the left in the same ratio.

Q) What is the relationship between the control price and the equilibrium price? A) Control price is the price fixed below the equilibrium price to help poor consumers
to buy essential commodities like rice.

Q) What is the relationship between the support-price and the equilibrium price? A) Support price is the price being fixed above the equilibrium price to help farmers. Q) Why does a surplus emerge in case of support price? A) There exists always a surplus in one of a support price since support price is above
the equilibrium price, that is, the quantity supplied exceeds the quantity demanded. This surplus of output is purchased by the government.

Q) How does an increase in the income affect the equilibrium price of product?

A) An increase in income results in a higher equilibrium price and quantity exchanged if

the good is normal. If the good is inferior then both the equilibrium price and quantity exchanged will become lower due to an increase in income.

Q) What is meant by economic viability of an industry? A) Economic viability of an industry implies that the product will be produced in the
economy and hence the quantity that will be produced and the price that will be charged in equilibrium are known.

Q) What will be the impact on market price and the quantity exchanged when?
there is a rightward shift in the demand curve. Due to a rightward shift in the demand curve the market-price as well as the quantity exchanged will increase. (c) The Demand Curve being perfectly elastic, shifting out of the supply curve right (or left) leads to an increase (or decrease) in the quantity exchanged and no change in the market price. (d) Both the DD and SS curve decrease in same proportion. A) Market price will remain the same but the quantity exchanged will decrease in the proportion the demand and supply curve decreases. (a) (b)

Q) A severe drought results in a drastic fall in the output of wheat. Analyze how will it affect the market price of wheat? A) A severe drought results in drastic fall in the output of wheat. It will cause a shortage
of the quantity supplied as compared to the quantity demanded. Resultantly, the market price of wheat will become higher and purchase of wheat become out of the reach of lower and lower middle income group of the society. It leads to black marketing. In such situations, the government adopts a system of price-control, i.e., fixing the price lower than the equilibrium price.

Q) Suppose the demand for jeans increases. At the same time, because of an increase in the price of cotton, the supply jeans decreases. How will it affect the price and quantity sold of jeans? A) The increase in the demand of jeans accompanied
by the decrease in its supply due to increased price of cotton leads to an increase in the price of jeans and a fall or rise in quantity sold of jeans depends on the proportionate increase in the demand of jeans and the proportionate decrease in its supply.

Q) Equilibrium price may or may not change with shifts in both demand and supply curves. A) Equilibrium price may or may not change with shifts in both demand and supply
curves. It is only the ratio in which demand and supply will change that will determines whether equilibrium could change or not. If both the forces change in the same ratio the equilibrium price may not change.

Q) How are decisions taken by consumers and producers in a competitive market economy coordinated? A) In a competitive market economy consumers decisions reflected in the demand curve
which is the locus of the quantity demanded by consumers at different prices and the producers decision are reflected in the supply curve. Equilibrium position is equality of quantity demanded by consumers and the quantity the producers are willing to supply reflects perfect coordination between the decisions taken by consumers and producers. The corresponding price is the equilibrium price and the quantity is the equilibrium quantity exchanged.

Q) Trace the effect of demand shifts on equilibrium price and quantity. A) A demand curve shift to the right leads to an increase in both equilibrium price and
quantity demanded but if the demand curve shift to the left will lower both the equilibrium price and quantity demanded.

Q)Give one example each of direct intervention and indirect intervention in the market mechanisms. A) Direct interventions in the market mechanism are the policies by which prices are
fixed directly by the government. For instance, a system of price control and price support programme, while, indirect interventions are the policies announced by the government, that change the market price indirectly via shifting the demand and supply curves. For example, sales tax, excise taxes etc.

Q) Show with the help of a diagram how rationing and black marketing can emerge in a price-control system. A) In terms of demand and supply curves, price control means fixing price below the
equilibrium price as it is presumed to be too high. Since the control price is below the equilibrium price, the quantity demanded exceeds the quantity supplied. This means that everyones demand, at the control price cannot be satisfied. Hence (i) there has to be some rationing an upper limit on the amount that can be purchased within the given time period. (ii) Due to the shortage at the controlled price, there will always be some buyers who are willing to pay a price higher than the control price and obtain the quantity they desire which finally gives rise to the emergence of black marketing.

Q) Answer all questions in terms of shifts in or movements along the demand and supply curves.
(a) In 2001, the Supreme Court of India banned smoking in public places. How is this likely to affect the average price of cigarettes and the quantity sold? A) The average price of cigarettes as well as the quantity sold will decrease due to the resultant downward (leftward) shift in the demand curve. (b) New discoveries of oil reduce the price of petrol and diesel. Consider their effects on the market for new cars. A) Market for new cars will be widened as this is in context of decrease in the price of complementary goods. (c) New environmental regulations require that the drug industry use a more environment friendly technology whose running costs are higher but which discharges less toxic chemical than before. How would it affect the price of drugs? A) Due to the increased cost, the price of drugs will increase.

Q) China is a big manufacturer of telephone instruments. It has recently become a member of WTO, which means that it can sell its product in other member countries like India. Suppose that it does export a large number of telephone instruments to India.
(a) How will it affect the price and quantity sold of telephone instruments in India? A) Due to the increase in the quantity supplied to India, the price of telephone instruments will go down and the quantity sold of these instruments will go up. (b) Suppose that the demand for telephone instruments is relatively elastic. How will it affect Indias total expenditure on telephone instruments? A) Indias total expenditure on telephone instruments will go up because there is opposite relationship between price and T.E., in case of elastic goods.

Q) In the Union budget for year 2002-2003, the excise duty on tea was reduced from Rs.2 per kg. to Rs. 1 per kg. All other things remaining unchanged, how will it affect the market price of tea? A) The market price of tea will decrease. Q) Suppose the price controls on sugar are lifted. How ceteris perbus, will it affect the price and quantity consumed of sugar? A) It leads to a decrease in the quantity consumed of sugar and an increase in its price.

Q) What is a non-viable industry? A) A non-viable industry is one on which the demand and supply curves dont intersect
at any positive level of output. The supply curve lies above the demand curve and thus nothing is produced.

Q) What is meant by black-market? A) It is an illegal market wherein a commodity is sold at a price higher than the one
fixed by the Govt.

Q) What happens to Equilibrium price and quantity if both demand and supply curves shift to the right? A) The equilibrium quantity certainly will go up and the equilibrium price (i) may
remain the same if both DD & SS curves shift to the right in the same ratio, (ii) Equilibrium price will go up if the increase in demand is more than the increase in supply, (iii) Equilibrium price will go down if the increase in SS is more than demand.

Q) What is meant by black-market? A) It is an illegal market wherein a commodity is sold at a price higher than the one
fixed by the Govt.

Q) Evaluate the impact on price and quantity in a particular market of : (a) An increase in consumers income. (b) An increase in the price of a complementary commodity. (c) A decrease in the price of inputs. (d) An increase in the price of a commodity that is a substitute in production for the good in question. A) (a) An increase in consumers income would to lead to an increase in demand.
The demand curve will shift to the right. In case of normal goods, the equilibrium price and quantity demanded and supplied will rise. In case of inferior goods, demand will fall, demand curve will shift to left; Equilibrium price and quantity will fall. (b) An increase in the price of a complementary good result in a decrease in demand; the equilibrium price, quantity demanded and supplied will fall. (c) A decrease in the price of input will result in an increase in supply. As a result, the equilibrium price falls, and the quantity demanded and supplied increases. (d) An increase in the price of a commodity that is a substitute in production for the good in question will lead to a decrease in the supply of the commodity. The equilibrium price will go up, less quantity will be demanded and supplied.

Q) What is a Support Price? A) A produce price fixed by the Government which is above the equilibrium price.

Q) What is Control Price? A) A product price fixed by the Govt., which is below the equilibrium price. Q) What is excess demand? A) It refers to a situation where quantity demanded exceeds quantity supplied. Q) What is excess supply? A) Where quantity supplied is more than quantity demanded. Q) What are excise duties / tax? A) It is a tax imposed on total cost incurred by a firm. Q) What is market equilibrium? A) It occurs when quantity demanded matches quantity supplied, i.e., there is no excess
demand or excess supply.

Q) What is a non-viable industry? A) It is an industry in which costs are too high for any positive output to be produced. Q) How would a reduction in excise duty from Rs. 2 to Rs. 1 per kg. on tea affect the market price and quantity exchanged. A) Market price will come down and quantity supplied will go up. Q) Why does surplus emerge in case of a support price and give its implications? A) Because support price is greater than Equilibrium price. Q) Define equilibrium price. A) Equilibrium price is the price at which quantity demanded of a commodity is just
equal to quantity supplied.

Q) What is equilibrium quantity? A) Equilibrium quantity means the quantity of a commodity which is demanded and
supplied in the market at its equilibrium price.

PRACTICE QUESTION
Q) How does an increase in supply of a commodity affect its equilibrium price and equilibrium quantity? Explain with the help of a diagram. Q) With the help of a suitable diagram, explain the process of determination of equilibrium price of a commodity under perfectly competitive market. Q) Define equilibrium price. Explain with the help of a diagram the effect of an increase in demand of a commodity on its equilibrium price and equilibrium quantity. Q) If the demand and supply of a commodity both increase, the equilibrium price may not change, may increase, may decrease. Explain with diagrams. Q) If at a given price of a commodity there is excess supply, how will the equilibrium price he reached? Explain with the help of a diagram OR Explain the effect of a leftward shift of demand curve of a commodity on its equilibrium price and quantity with the help of a diagram. Q) How is the equilibrium price and equilibrium quantity of a normal good affected by an increase in the income of its buyers? Explain with the help of a diagram. OR At a given price of a commodity, there is

excess demand. Is this price an equilibrium price? If not, how will the equilibrium price be reached (use diagram). Q) Explain the effects of an increase in the income of the buyers of a commodity on its equilibrium price and equilibrium quantity. OR Define equilibrium price. At a given price of a commodity there is excess demand. How will the equilibrium price be reached? Explain. Q) Under what conditions will an increase in DD for a commodity not affect its price? Explain. Q)Equilibrium price may or may not change with shifts in both DD & SS curve. Comment. Q) Suppose the price of tea increases. At the same time, there is an increase in excise duty rates on coffee. How will it effect the market price and quantity sold of coffee? Q) Define equilibrium price. What can be the effects on equilibrium price of a commodity when both DD and SS curves shift to the left? Q) If at a given price of a commodity, there is excess demand how will the equilibrium price be reached? Explain with the help of a diagram. OR Explain with the help of a diagram the effect of a rightward shift of supply curve of a commodity on its equilibrium price and quantity. Q) If the demand and supply of a commodity both increase, the equilibrium price may not change, may increase, may decrease. Explain using diagrams. Q) What happens to price and quantity of DD & SS curves shift to the left?