If the prevailing market price is above the equilibrium price, explain its chain of effects.
When the price is above the equilibrium market price of a good (OP), the price ceiling leads to excess of supply. In the diagram, the equilibrium price and quantity are OP and OQ. As the equilibrium price is low for farmers, the government fixes the price floor, i.e. the price level increased from OP to OP1 which leads to a decline in the quantity demand, and therefore, there is excess supply in the market. Here, the competition will increase among the sellers, and hence, the price will come down to the equilibrium point where market demand is equal to market supply.
A consumer consumes only two goods X and Y. Marginal utilities of X and Y is 3 and 4 respectively. Prices of X and Y are Rs 4 per unit each. Is consumer in equilibrium? What will be further reaction of the consumer? Give reasons.
Consumer will attain its equilibrium (maximum satisfaction) at the point, where marginal utility of a product divided by the marginal utility of a rupee, is equal to the price.
Consumer’s equilibrium =
In case of two goods, a consumer equilibrium attain where:
For goods X,
For goods Y,
Hence consumer is not in equilibrium, Thus, in order to attain equilibrium consumer will increase the consumption of good Y and decrease the consumption of good X.
Demand curve of a firm is perfectly elastic under:(Choose the correct alternative)
(a) Perfect competition
(c) Monopolistic competition
Demand curve of a firm is perfectly elastic under Perfect competition.
When does 'change in demand' take place?
Change in demand describes a change or shift in demand due to changes in other determinants of demand in addition to own price of a commodity such as:- Income of consumer, Tastes & Preferences of consumer, Price of substitute goods.
Differentiated products is a characteristic of: (Choose the correct alternative):
(a) Monopolistic competition only
(b) Oligopoly only
(c) Both monopolistic competition and oligopoly
(c) Both monopolistic competition and oligopoly
What is minimum price ceiling? Explain its implications.
Minimum price ceiling means the least price that could be paid for a good or service. It is the price fixed by the government for a good in the market. The government fixes the price on agricultural products and food grains in particular so that the farmers get their fair price of a commodity which otherwise actually can be sold with too low of a price.
Effects of price floor:
(i) Minimum Return: Farmers are ensured with the minimum returns as their products are completely sold in the market at comparatively higher price. This leads to an increase in their level of income.
(ii) Maximum Level of output: The government ensures to buy the full produce of the farmers which are not sold in the market at the price floor. Hence, they are able to produce the maximum level of output.
(iii) Burden on Government: It also puts extra burden on the government revenues. It becomes mandatory for the government to purchase the excess produce, even if it runs a sufficient volume of buffer stocks.
(iv) Higher Taxes: The government also tries to shift the burden (associated with purchasing the excess produce at higher price) to the consumers and the traders in form of higher taxes.
A firm is able to sell any quantity of a good at a given price. The firm's marginal revenue will be:
(Choose the correct alternative):
(a) Greater than Average Revenue
(b) Less than Average Revenue
(c) Equal to Average Revenue
(c) The firm's marginal revenue will be equal to average revenue as marginal revenue is net addition to the revenue when an additional unit is produced.
What is the relation between Average Variable Cost and Average Total Cost, if Total Fixed Cost is zero?
The relation is defined as below,
As we know,
ATC = (TFC+ TVC)/Q
If TFC = 0
Then, ATC = (0+TVC)/Q = AVC
Hence, ATC = AVC, if TFC is zero.
Define demand. Name the factors affecting market demand.
Demand of a commodity is ability and desire to purchase a certain quantity of goods at a given price.
(i) Income of consumers: When the income of a consumer rises, the demand of normal good also rises while the demand for inferior goods decrease with an increase in income.
(ii) Tastes and Preferences: Other factors being constant, if any change prevails in the tastes and Preferences of a consumer, then the demand for such goods will increase leading to shift in demand curve for those goods as compared to goods have no preference.
(iii) Substitute Goods: When there is an increase in the price of a good like - coffee, then demand curve for its substitute tea shifts to the right as people will start consuming more tea than coffee.
(iv) Complementary goods: Those goods which are together used to satisfy the demand are called complementary goods such as Pen & Refill, Petrol and Scooter, An increase in the price of petrol leads to fall in the demand of scooter.
What will be the effect of 10 percent rise in price of a good on its demand if price elasticity of demand is (a) Zero, (b)-1, (c)-2.
(a) When Ed(Elasticity of demand) is zero
Therefore, Percentage change in quantity demand = 0, so it has no effect on demand
(b) Ed = -1, Percentage change in price = 10
Therefore, Percentage change in quantity demand = -10.
(c) Ed = -2, Percentage change in price = 10
Therefore, Percentage change in quantity demanded= -20