Question 1

Q1: 1. Explain market equilibrium.

Accepted Answer

Market equilibrium is a situation where the plans of all consumers and firms in the market match, and the market clears. This occurs at a specific price, known as the equilibrium price, where the total quantity of a commodity that all firms wish to sell (market supply) is exactly equal to the total...

Question 2

Q10: 10. 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 b...

Accepted Answer

Shoes and socks are generally considered complementary goods, meaning they are often used together. An increase in the price of shoes will affect the market for socks as follows: 1.  Effect on Demand for Socks: When the price of shoes increases, consumers will likely buy fewer pairs of shoes. Since...

Question 3

Q11: 11. How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

Accepted Answer

Coffee and tea are substitute goods. If the price of coffee increases, the equilibrium price and quantity of tea will be affected as follows: 1.  Effect on Demand for Tea: When the price of coffee rises, some consumers will switch from drinking coffee to drinking tea, as tea is now relatively cheape...

Question 4

Q12: 12. How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?

Accepted Answer

A change in the price of an input used in the production of a commodity directly affects the cost of production and, therefore, the market supply.    Increase in Input Price: If the price of an input increases, the cost of producing the commodity rises. This makes production less profitable at any g...

Question 5

Q13: 13. 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?

Accepted Answer

If good Y is a substitute for good X, an increase in the price of Y will make good X relatively cheaper and more attractive to consumers. 1.  Effect on Demand for X: Consumers will substitute away from the now more expensive good Y and towards good X. This will cause an increase in the demand for go...

Question 6

Q14: 14. Compare the effect of shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit...

Accepted Answer

The effect of a shift in the demand curve differs significantly between a market with a fixed number of firms and one where free entry and exit are permitted.    Fixed Number of Firms:        When the demand curve shifts to the right, it creates excess demand at the initial price. This pushes both t...

Question 7

Q15: 15. Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

Accepted Answer

When both the demand and supply curves shift to the right, it means that at any given price, consumers want to buy more and firms want to sell more. Effect on Equilibrium Quantity: Since both demand and supply are increasing, the equilibrium quantity will unambiguously increase. The new equilibrium...

Question 8

Q16: 16. How are the equilibrium price and quantity affected when (a) both demand and supply curves shift in the same direction? (b) demand and supply curv...

Accepted Answer

The effects on equilibrium price and quantity depend on the direction and magnitude of the shifts. (a) Both curves shift in the same direction:    Both shift rightwards (increase): The equilibrium quantity will definitely increase. The effect on equilibrium price is ambiguous; it may increase, decre...

Question 9

Q17: 17. In what respect do the supply and demand curves in the labour market differ from those in the goods market?

Accepted Answer

The primary difference between the supply and demand curves in the labour market and the goods market lies in the roles of households and firms.    Source of Demand and Supply:        In the goods market, firms are the suppliers, and households are the demanders.        In the labour market, the rol...

Question 10

Q18: 18. How is the optimal amount of labour determined in a perfectly competitive market?

Accepted Answer

In a perfectly competitive market, a profit-maximising firm determines the optimal amount of labour to employ by comparing the additional cost of hiring one more unit of labour with the additional benefit it generates.    The additional cost of hiring one more unit of labour is the wage rate (w)....

Question 11

Q19: 19. How is the wage rate determined in a perfectly competitive labour market?

Accepted Answer

In a perfectly competitive labour market, the equilibrium wage rate is determined by the interaction of the market demand for labour and the market supply of labour.    Market Demand for Labour: This is the sum of the labour demanded by all individual firms at various wage rates. It is downward slop...

Question 12

Q2: 2. When do we say there is excess demand for a commodity in the market?

Accepted Answer

We say there is excess demand for a commodity in the market when, at a given price, the market demand for that commodity exceeds its market supply. This situation typically occurs when the prevailing market price is below the equilibrium price. At a lower price, consumers are willing to buy more of...

Question 13

Q20: 20. Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?

Accepted Answer

Yes, in India, price ceilings are imposed on several essential commodities to make them affordable for the poorer sections of the population. Examples include wheat, rice, sugar, and kerosene, which are often distributed through the Public Distribution System (PDS) via fair price shops. The conseque...

Question 14

Q21: 21. A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation wh...

Accepted Answer

This statement contains a partial inaccuracy based on the provided text, but the underlying comparison is valid. Let us clarify the effects:    With a Fixed Number of Firms: When demand shifts, the market moves along a fixed, upward-sloping supply curve. A rightward shift in demand will cause both t...

Question 15

Q22: 22. Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:     qᴰ = 700 - p     qˢ = 500 + 3p for p ≥ 15...

Accepted Answer

Reason for Zero Supply below Rs 15: The market supply is zero for any price less than Rs 15 because Rs 15 represents the minimum average variable cost (or the shut-down price) for the identical firms in the market. In the short run, a firm will not produce if the price is less than its minimum avera...

Question 16

Q23: 23. Considering the same demand curve as in exercise 22, now let us allow for free entry and exit of the firms producing commodity X. Also assume the...

Accepted Answer

(a) What is the significance of p = 20? In a market with free entry and exit, firms will only produce in the long run if the price is at least equal to their minimum average cost (min AC). The price p = 20 is the minimum price at which a firm is willing to supply any output. Therefore, p = 20 repres...

Question 17

Q24: 24. Suppose the demand and supply curves of salt are given by:     qᴰ = 1,000 - p   qˢ = 700 + 2p (a) Find the equilibrium price and quantity. (b) Now...

Accepted Answer

(a) Find the equilibrium price and quantity. Set demand equal to supply: qᴰ = qˢ 1,000 - p = 700 + 2p 300 = 3p p = 100 Substitute p = 100 into the demand equation: q = 1,000 - 100 = 900 The equilibrium price is Rs 100 and the equilibrium quantity is 900 units. (b) Change in equilibrium due to increa...

Question 18

Q25: 25. Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking a...

Accepted Answer

If the government imposes control on rent by setting a maximum allowable rent that is below the market-determined equilibrium rent, this policy is known as a price ceiling. The impact on the market for apartments will be as follows: 1.  Shortage of Apartments (Excess Demand): At the legally fixed lo...

Question 19

Q3: 3. When do we say there is excess supply for a commodity in the market?

Accepted Answer

We say there is excess supply for a commodity in the market when, at a given price, the market supply of that commodity is greater than its market demand. This situation usually happens when the prevailing market price is above the equilibrium price. At a higher price, firms are willing to supply mo...

Question 20

Q4: 4. What will happen if the price prevailing in the market is (i) above the equilibrium price? (ii) below the equilibrium price?

Accepted Answer

(i) Above the equilibrium price: If the prevailing price is above the equilibrium price, the quantity supplied will exceed the quantity demanded, leading to a situation of excess supply (or surplus). Firms will be unable to sell all they want to at this high price. To clear their unsold stock, some...

NCERT Solutions