Explain the ‘free entry and exit of firms’ feature of monopolistic competition.
Feature of monopolistic competition:
Free entry and exit of firms:
Free entry and exit of firms under monopolistic competition define that firms are free to enter in or exit from the industry at any time according to their wish, that there is no restriction on entry or exit of old or new firms. This implies that there are neither abnormal profits nor any abnormal losses to a firm in the long run.this feature is important as all the firms are able to earn enough profit to continue their production. But entry under monopolistic competition is not so easy and free as the situation prevails under perfect competition.
Given below is the cost schedule of a product produced by a firm. The market price per unit of the product at all levels of output is Rs. 12. Using marginal cost and marginal revenue approach, find out the level of equilibrium output. Give reasons for your answer :
|average cost (in RS)||12||11||10||10||10.4||11|
The producer’s equilibrium refers to the situation in which he maximises his profits. A producer achieves an equilibrium when two conditions are satisfied.
i. MR = MC
ii. MC is rising or the MC curve cuts the MR curve from below.
|units||average cost||total cost||marginal cost|
This table indicates that the two conditions of equilibrium are satisfied only when 5 units of output are produced. It is here that
(i) MR = MC = Rs 12 and
(ii) MC is rising.
The market price per unit of the product is Rs 12. Thus MR = 12.
the first an the other conditions are being met at unit 5. Thus equilibrium output is 5 units.
What is primary deficit?
Primary deficit is the difference between fiscal deficit and interest payments. It indicates the borrowing requirements of the government excluding interest.
Primarydeficit = Fiscal deficit − Interest payments
Give the meaning of involuntary unemployment.
Involuntary unemployment means an unemployment situation where a person who is able to and willing to work at the existing wage rate but is not able to get work.
Explain the conditions of consumer’s equilibrium under indifference curve approach.
Conditions of consumer’s equilibrium using indifference curve analysis:
A consumer will strike his equilibrium at the point where the budget line is tangent to an indifference curve. the optimum point is characterised by the following equality :
Slope of IC = Slope of price line
| -dy | = MRS = | -P1 |
| dx | | P2 |
Equality of marginal rate of substitution and ratio of prices: When the budget lines is tangent to an indifference curve at a point, the absolute value of the slope of the indifference curve and of the budget line are equal at that point, i.e. MRS is equal to the price ratio. The slope of the budget line is the rate at which the consumer can substitute one good for the other in the market. At the optimum, the two rates should be the same.
Thus, a point at which the MRS is greater, the price ratio cannot be optimum, and when the MRS is less than the price, the ratio cannot be optimum.
In the diagram, Point E shows the consumer’s equilibrium where the budget line is tangent to the indifference curve. Consumers’ desire to purchase correspond to the consumer originally purchase, i.e. x1*, x2* shows the optimum bundle.
The ratio of total deposits that a commercial bank has to keep with Reserve Bank of India is called : (choose the correct alternative)
(a) Statutory liquidity ratio
(b) Deposit ratio
(c) Cash reserve ratio
(d) Legal reserve ratio
(c) Cash reserve ratio
Aggregate demand can be increased by : (choose the correct alternative)
(a) increasing bank rate
(b) selling government securities by Reserve Bank of India
(c) increasing cash reserve ratio
(d) none of the above
(d) none of the above
State different phases of the law of variable proportions on the basis of total product. Use diagram.
Explain the geometric method of measuring price elasticity of supply. Use diagram.
Law of variable proportion:
Law of variable proportion states that as more of the variable factor input is combined with the fixed factor input, a point will eventually be reached where the marginal product of the variable factor input starts declining.
|units of fixed factor||units of variable factors||total product|
Stage I: As more units of factor input are used, the total product increases at an increasing rate which is called increasing returns to the factor input.
Stage II: However, when the 4th unit of factor input is used, the diminishing returns sets in, where TP increases at a decreasing rate.
Stage III: TP starts declining from 34 to 10 when the 9th unit is employed
Geometric method measures elasticity at a given point on the supply curve and is also know as ‘Arc method’ or Point method’. this method is a graphical presentation of the elasticity of the supply. the degree of the price elasticity of supply depends on the slope and origin position of the supply curve. There are five possible situations in the elasticity of supply curve.
(a)unitary elasticity of supply (E=1) : where if the straight line supply curve originates from the origin, then the angle of inclination of supply curve, the elasticity of supply will always be equal to one i.e E=1 this supply curve is called unitary elastic supply curve.
(b)less elastic supply (E<1) where if the supply curve originates from the horizontal intercept of quantity axis, then the angle of inclination of supply curve, the elasticity of the supply curve will be less than one i.e (E<1).
(c) more elastic supply (E>1) the more elastic supply curve originates from the vertical intercept of price axis. the value of elasticity of supply originates from the vertical intercept is greater than one i.e (E>1)
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.
Explain the chain of effects of excess supply of a good on its equilibrium price.
Substitute goods refer to goods which can be consumed instead of each other. For example, tea and coffee are substitute goods. If X and Y are substitute goods, then a fall in the price of good Y will lead to a fall in the demand of good X. this is because with a fall in the price of good Y, it will become cheaper in comparison to good X, and the demand for good Y will increase and that of good X will fall.
According to the diagram, DD is the initial demand curve for good X. At price OP, OQ quantity of good X is demanded. With a fall in the price of good Y, the demand for good X falls. Accordingly, the demand curve for good X shifts parallelly leftwards to D′D′. Here, even at the existing price OP, the quantity demand of good X falls to OQ′.
Chain effects of excess supply of a good on its equilibrium price
Consider DD to be the initial demand curve and SS to be the supply curve of the market. Market equilibrium is achieved at Point E, where the demand and supply curves intersect each other. Therefore, the equilibrium price is OP, and the equilibrium quantity demanded is OQ. When there is change in other factors than price, there will be rise in the supply of goods. There will be a shift in the supply curve towards the right to SS1 with an increase in the supply, and the demand curve DD will remain the same. This implies that there will be a situation of excess supply at the equilibrium point.
In the above diagram, there is an excess supply of OQ1 to OQ1
1 units of output at the initial price OP1. Thereby the producers will tend to reduce the price of the output to increase the sale in the market. Profit margin of the firm will come down and slowly some of the firms will tend to quit the market. Because of this, the market supply will decline to OQ2 level of output and the price of the output also gets reduce to the point OP2. Now, the new market equilibrium will be at Point E1, where the new supply curve SS1 intersects the demand curve DD.
Give the meaning of balance of payments.
Balance of payments (BOP) defines a systematic record of all economic transactions between the domestic country and the rest of the world during a particular period of time.In other words it records the inflow of foreign exchange into the country and foreign exchange from the country.