A shopkeeper bought a T.V. at a discount of $30 %$ on the list price of Rs. 24,000. The shopkeeper offers a discount of $10 %$ on the list price to his customer. If the VAT is $10 %$, find the amount paid by the customer and the VAT to be paid by the shopkeeper. A) Rs. 24,760; Rs. 480 B) Rs. 23,760; Rs. 480 C) Rs. 23,760; Rs. 460 D) Rs. 24,750; Rs. 460 E) Rs. 24,760; Rs. 460

1. **Calculation of Purchase Price for Shopkeeper:**The shopkeeper buys the TV at a discount of **30%** on the list price. The list price of the TV is Rs. 24,000. Therefore, the purchase price for the shopkeeper would be: $$ \\text{Purchased Price} = \\text{List Price} - \\left(\\frac{30}{100} \\times \\text{List Price}\\right) $$ $$ \\text{Purchased Price} = 24000 - (0.3 \\times 24000) = 24000 - 7200 = Rs. 16,800. $$ 2. **Selling Price Before VAT:**The shopkeeper sells the TV at a **10% discount**. Therefore, the selling price before VAT is: $$ \\text{Selling Price before VAT} = \\text{List Price} - \\left(\\frac{10}{100} \\times \\text{List Price}\\right) $$ $$ \\text{Selling Price before VAT} = 24000 - (0.1 \\times 24000) = 24000 - 2400 = Rs. 21,600. $$ 3. **Calculation of VAT:**The VAT applied is **10%**. Therefore, the VAT amount is: $$ \\text{VAT} = \\frac{10}{100} \\times \\text{Selling Price before VAT} $$ $$ \\text{VAT} = 0.1 \\times 21600 = Rs. 2160. $$ 4. **Total Amount Paid by Customer:**Finally, the amount paid by the customer including VAT is: $$ \\text{Total Amount} = \\text{Selling Price before VAT} + \\text{VAT} $$ $$ \\text{Total Amount} = 21600 + 2160 = Rs. 23,760. $$ 5. **VAT Paid by Shopkeeper:**The shopkeeper collects Rs. 2160 as VAT from the customer, but he only retains: $$ \\text{VAT to retain} = \\frac{10}{100} \\times (\\text{Selling Price before VAT - Purchased Price}) $$ $$ \\text{VAT to retain} = 0.1 \\times (21600 - 16800) = 0.1 \\times 4800 = Rs. 480. $$ The correct answers are **Total Amount Paid by the Customer: Rs. 23,760** and **VAT to be paid by the Shopkeeper: Rs. 480**. Option B) Rs. 23,760; Rs. 480, is the correct answer.

Pinky scored 40 marks in a test, receiving 3 marks for each correct answer and losing 1 mark for each wrong answer. If 4 marks had been awarded for each correct answer and 2 marks were deducted for each wrong answer, Pinky would have scored 40 marks again. How many questions were there in the test?

Let's find the number of questions Pinky attempted in the test, following the scoring rules provided. We denote: - $x$: the number of correct answers, - $y$: the number of incorrect answers. From the problem, we have two equations based on Pinky's score: 1. Each correct answer scores 3 marks, and each incorrect answer deducts 1 mark. Given that the total score is 40, we can write: $$ 3x - y = 40 \\quad \\text{(Equation 1)} $$ 2. If 4 marks were awarded for each correct answer and 2 marks deducted for each wrong answer for the same result of 40 marks, we express this as: $$ 4x - 2y = 40 $$ Simplifying this, we obtain: $$ 2x - y = 20 \\quad \\text{(Equation 2)} $$ To solve for $x$ and $y$, we subtract Equation 1 from Equation 2: $$ (2x - y) - (3x - y) = 20 - 40 $$ $$ -x = -20 $$ Hence, $$ x = 20 $$ Substituting $x = 20$ back into Equation 1 to solve for $y$: $$ 3(20) - y = 40 $$ $$ 60 - y = 40 $$ $$ y = 20 $$ Thus, the total number of questions Pinky attempted is the sum of correct and incorrect answers: $$ \\text{Total number of questions} = x + y = 20 + 20 = 40 $$ Hence, **Pinky attempted 40 questions** in the test.

A pair of articles was bought for ₹48 at a discount of 25%. What must be the marked price of each of the articles? A) ₹32 B) ₹48 C) ₹26 D) ₹40.5

The correct option is **A) ₹32**. Let's consider the **Total Cost Price (C.P)** of both articles is ₹48, which already includes a 25% discount. To find the individual **Selling Price (S.P)** of each article: $$ S.P. \\text{ of one article} = \\frac{48}{2} = ₹24 $$ Now, let the **Marked Price (M.P)** per article be $x$. We know the articles were bought at a 25% discount, implying they were sold for 75% of the Marked Price: $$ 0.75x = ₹24 $$ To find $x$ (the Marked Price), solve the equation: $$ x = \\frac{24}{0.75} = \\frac{24 \\times 100}{75} = ₹32 $$ Thus, the **Marked Price** of each article is **₹32**.

Substitution effect takes place when price of the commodity becomes: A. relatively cheap B. relatively dear C. stable D. both (a) and (b)

The correct answer is **D. both (a) and (b)**. The **substitution effect** occurs when the price of a commodity becomes either: - **relatively cheap**, making it more attractive compared to other alternatives, or - **relatively dear**, making other alternatives more attractive compared to it. Thus, the substitution effect can be seen when the price dynamics encourage consumers to choose one product over another due to changes in relative cost-effectiveness.

Explain the changes that take place when Aggregate Demand and Aggregate Supply are not equal.

1. **When Aggregate Demand (AD) exceeds Aggregate Supply (AS)** $(AD > AS)$: - This scenario indicates that buyers intend to purchase more goods and services than what producers plan to supply. As a result, **inventories** begin to decrease, falling below desirable levels. Producers respond by increasing their production to restock inventories. This expansion in production elevates the **income level**, which continues to rise until AD and AS reach equilibrium. 2. **When Aggregate Demand (AD) is less than Aggregate Supply (AS)** $(AD < AS)$: - In this case, buyers are interested in purchasing fewer goods and services than producers are willing to supply. Consequently, **inventories** start to build up, exceeding the desired levels. To adjust, producers reduce production and may lay off workers, which leads to **unemployment**. This decrease in production lowers the **income level**, and it continues to decline until AD and AS align once more.

If the rupee is overvalued, it leads to $\\qquad$ in the FOREX market. A. Deficit B. Surplus C. Equilibrium D. Cannot be determined

The correct answer is **A. Deficit**. When the rupee is **overvalued**, it indicates that the value of the rupee is higher compared to its true market value. This situation can lead to a trade **deficit** because an overvalued rupee makes exports more expensive and imports cheaper. As a result, there will be an increase in imports and a decrease in exports, leading to a deficit in the FOREX market.

Explain market equilibrium.

### Market Equilibrium Market equilibrium in a **perfectly competitive market** refers to a state where the quantity of goods that **consumers are willing to buy** (market demand) exactly **matches** the quantity of goods that **producers are willing to sell** (market supply) at a particular price. In this scenario, the market clears, meaning there is neither surplus nor shortage of goods. The **equilibrium price** ($p^{\*}$) is the price at which the quantity demanded equals the quantity supplied. This price results in market stability, where there is no incentive for price changes because all market participants (consumers and producers) have no dissatisfaction with the current market conditions. The **equilibrium quantity** ($q^{\*}$) is the quantity that is bought and sold at the equilibrium price. In mathematical terms, market equilibrium is reached when: $$ q^D(p^\*) = q^S(p^\*) $$ Where: - $q^D(p^\*)$ is the **market demand** at the equilibrium price. - $q^S(p^\*)$ is the **market supply** at the equilibrium price. This balance ensures that the **market is efficient**, with no excess supply (surplus) or excess demand (shortage). Any deviation from this state due to external factors will lead to adjustments driven by market forces, leading back to a new equilibrium.

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

We say there is **excess demand for a commodity in the market** when the **quantity demanded** of the commodity **exceeds** the **quantity supplied** at a particular price. This situation often leads to an upward pressure on prices, as consumers are willing to pay more to obtain the desired quantity of the commodity.

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

We say there is **excess supply** for a commodity in the market when the **quantity supplied by producers is greater than the quantity demanded by consumers** at a specific price. This situation generally leads to **downward pressure on prices**, as producers may lower prices to clear their surplus stock and equate supply to demand.

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

(i) **Above the Equilibrium Price:**When the prevailing market price is above the equilibrium price, the quantity supplied by the firms will be greater than the quantity demanded by consumers. This situation creates **excess supply**. As a result, some firms may not be able to sell all the goods they want to sell. To address this, they might lower their prices to attract more buyers. This leads to a decrease in price towards the equilibrium level, where supply equals demand, and market equilibrium is restored. (ii) **Below the Equilibrium Price:**If the prevailing market price is below the equilibrium price, the scenario is reversed. The quantity demanded by consumers exceeds the quantity supplied by firms, leading to **excess demand**. This shortage means that some consumers who want to buy the product at the lower price may not be able to find it. Consumers might be willing to pay more to secure the goods they need, driving the price up towards the equilibrium level, where the quantity demanded equals the quantity supplied.

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

In a perfectly competitive market with a **fixed number of firms**, the price is determined at the point where the **market supply curve (SS) intersects the market demand curve (DD)**. This intersection represents the balance between the quantity of a commodity that consumers are willing to buy (demand) and the quantity that firms wish to supply (supply) at various prices. ### Key Points: - **Equilibrium:** The equilibrium price ($p^\*$) and quantity ($q^\*$) are determined where the supply and demand curves meet. At this price, the quantity that firms are willing to supply exactly matches the quantity that consumers are willing to purchase. - **Market Behavior:** - **Above $p^\*$:** If the price is above the equilibrium (e.g., $p\_2$), then **excess supply** occurs, leading firms to reduce prices to attract more buyers. - **Below $p^\*$:** Conversely, if the price is below equilibrium (e.g., $p\_1$), then **excess demand** occurs, compelling consumers to bid up the price. - **Market Adjustment:** Prices tend to adjust towards equilibrium, balancing the market by eliminating any excess supply or demand. This self-regulation ensures that the market clears, and no surplus or shortage exists in the long term. This dynamic process, often referred to as the \*'invisible hand'\* in economics, ensures that the resources are allocated efficiently in such a market structure, where the central principle is that the **individual pursuit of self-interest leads to good outcomes for the society as a whole**.

Suppose the price at which equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?

In a perfectly competitive market that allows for free entry and exit of firms, the market price will tend to adjust to the minimum average cost (AC) of the firms. Here's how this process works: 1. **Supernormal Profits Attract Entry:** If the current equilibrium price is above the minimum AC, each firm in the market earns supernormal profit (profit above the normal level that just covers all costs including the opportunity cost of capital). 2. **Entry of New Firms:** The presence of supernormal profits acts as an incentive for new firms to enter the market. As they enter, the market supply curve shifts to the right because the total quantity supplied at every price level increases. 3. **Price Adjustment:** The increase in supply, with demand holding constant, leads to a downward pressure on prices. The market price will continue to fall due to this increasing competition. 4. **Equilibrium at Minimum AC:** The entry of new firms and subsequent price reductions continue until the market price equals the minimum AC. At this point, each firm earns only normal profits (zero economic profits), which is the minimum level of profit necessary to keep them in the market. 5. **No Further Incentives for Entry or Exit:** Once the market price equals the minimum AC, there is no longer any incentive for new firms to enter the market as there are no supernormal profits. Similarly, firms will not exit the market as they are covering all their costs including normal profits. In conclusion, if allowed free entry and exit, and if the current price is above the minimum AC, the market will adjust by seeing an increase in the supply through the entry of new firms, leading to a fall in prices until the price stabilizes at the level of minimum AC. This mechanism ensures that the price in a perfectly competitive market reflects the most efficient production cost of the goods or services provided.

At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is equilibrium quantity determined in such a market?

In a perfectly competitive market where free entry and exit of firms are allowed, the firms will supply at a level of price that equals the **minimum average cost (min AC)** of the firms. This is because the presence of free entry and exit ensures that in the long run, firms only make normal profit (zero economic profit), and any supernormal profits or losses lead to entry or exit of firms until only normal profits remain. Therefore, the equilibrium price in such a market will be equal to the minimum average cost of the firms. The **equilibrium quantity** in such a market is determined at the point where the market demand curve intersects the price line that is equal to the minimum average cost. At this price, the quantity that consumers are willing to buy (from the demand curve) matches the quantity that the firms are willing to supply. This is the quantity at which the market clears, meaning there is no excess supply or excess demand.

How is the equilibrium number of firms determined in a market where entry and exit is permitted?

In a market where entry and exit of firms is permitted, the equilibrium number of firms is determined based on the condition where **each firm earns only normal profits and no super-normal profits or losses**. This is achieved when the price in the market equals the minimum average cost (min AC) of the firms. Here's the detailed breakdown: 1. **Price equals Minimum Average Cost**: When firms can freely enter and exit the market, this mobility ensures that the equilibrium price in the market equals the minimum of the average costs (min AC) of the firms. This is because: - If the price were above min AC, existing firms would earn super-normal profits, attracting new firms to enter the market, which increases supply and drives down the price. - Conversely, if the price were below min AC, firms would incur losses, leading some to exit the market, which decreases supply and pushes up the price. - Equilibrium is reached when price stabilizes at min AC and firms earn just normal profits, with no firm having an incentive to either enter or exit the market. 2. **Equilibrium Quantity and Demand**: At the price level that equals min AC, the quantity that firms choose to supply matches the quantity demanded by consumers. This establishes the market equilibrium quantity. 3. **Determining the Number of Firms**: - The total quantity of goods demanded and supplied in the market at this equilibrium price is known. - Each firm produces where its marginal cost equals the market price (which is equal to min AC at equilibrium). - Assuming each firm produces the same quantity at equilibrium, the number of firms in the market ($n\_0$) can be determined by dividing the total market equilibrium quantity ($q\_0$) by the quantity supplied by each firm ($q\_{0f}$): $$ n\_0 = \\frac{q\_0}{q\_{0f}} $$ Thus, the equilibrium number of firms is the total market equilibrium quantity divided by the quantity each firm supplies at the equilibrium price. This ensures that the market demand is satisfied exactly without allowing for either excess supply or demand, maintaining price stability at the level of each firm’s minimum average cost.

How are equilibrium price and quantity affected when income of the consumers (a) increase? (b) decrease?

### Impact of a Change in Consumers' Income on Equilibrium Price and Quantity Changes in the income of consumers can significantly influence the market equilibrium, affecting both the equilibrium price and quantity. This impact is particularly noticeable in the demand for goods, as income changes alter the consumers' purchasing power. To analyze this, we need to consider two scenarios: 1. **Increase in Income** 2. **Decrease in Income** #### (a) Increase in Income When the consumers' income **increases**, their purchasing power boosts, allowing them to buy more goods. This shift generally leads to an **increase** in the demand for the goods if the goods are **normal goods** (goods for which demand increases with an increase in income). In such a scenario, at every price level, more quantity of the good will be demanded, thereby shifting the demand curve to the **right**. This rightward shift in the demand curve typically causes: - An **increase** in the **equilibrium price** (consumers are willing to pay more) - An **increase** in the **equilibrium quantity** (more of the good is sold at the higher price) Graphically: - Original equilibrium at intersection of demand curve D1 and supply curve S. - New equilibrium at intersection of demand curve D2 (rightward shifted) and supply curve S. - Higher equilibrium price and higher equilibrium quantity. #### (b) Decrease in Income Conversely, when consumers' income **decreases**, their purchasing power diminishes, which generally results in a reduced consumption of normal goods. This leads to a **decrease** in demand, thereby shifting the demand curve to the **left**. In this case, the leftward shift in the demand curve usually results in: - A **decrease** in the **equilibrium price** (lower willingness to pay) - A **decrease** in the **equilibrium quantity** (fewer goods are sold at the lower price) Graphically: - The original equilibrium at the intersection of the demand curve D1 and supply curve S. - The new equilibrium at the intersection of the demand curve D2 (leftward shifted) and supply curve S. - Lower equilibrium price and lower equilibrium quantity. ### Conclusion The direction in which consumers' income changes directly affects the demand for goods, especially if those goods are considered normal goods. This ultimately impacts both the equilibrium price and quantity in a market, as explained in the scenarios above.

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.

To analyze 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, consider the relationship between shoes and socks and how it affects their supply and demand dynamics. Assume that shoes and socks are complementary goods, meaning that they are often purchased together. ### Step-by-Step Analysis: 1. **Defining the Goods**: Shoes and socks are complementary goods. An increase in the price of one can influence the demand for the other. 2. **Change in Price of Shoes**: Suppose the price of shoes increases. 3. **Impact on Demand for Socks**: - Since shoes and socks are complements, the demand for shoes will likely decrease due to the higher price. - A decrease in demand for shoes will likely lead to a decrease in the demand for socks, as fewer people buy shoes and thus need fewer pairs of socks. 4. **Market Demand Curve for Socks**: - The decrease in demand for socks can be represented by a leftward shift of the demand curve for socks $(D\_1 \\to D\_2)$ in the market. - This shift indicates that at any given price, fewer socks will be demanded than before. 5. **Impact on the Price and Quantity of Socks**: - With the decrease in demand, the new equilibrium in the socks market (where supply meets the new demand curve) will be at a lower quantity. - This results in a lower equilibrium quantity and, likely, a lower equilibrium price for socks, assuming the supply of socks remains constant $(S\_0)$. ### Graphical Representation: In a simplified supply and demand diagram for socks: - Let the initial demand curve be $D\_1$ and the initial supply curve be $S\_0$. - The equilibrium is at point $E\_0$ with price $p\_0$ and quantity $q\_0$. - The new demand curve, $D\_2$, reflects decreased demand, shifting leftward. - The new equilibrium point $E\_1$, where $D\_2$ intersects $S\_0$, will have a lower price $p\_1$ and a lower quantity $q\_1$ compared to $p\_0$ and $q\_0$. ### Conclusion: An increase in the price of shoes, assuming shoes and socks are complements, leads to a decrease in demand for socks. This decreased demand results in lower equilibrium quantities and prices in the socks market. The overall price of socks decreases, and the number of pairs of socks bought and sold decreases.

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

**Cross-price elasticity of demand** is crucial to understand the effect of the price change in coffee on the equilibrium price and quantity of tea. The relationship between coffee and tea can be generally described as **substitutive** since both are caffeinated beverages, and consumers might switch between the two based on price and preference. ### Understanding the Effects: 1. **Increase in Coffee Price**: - If the price of coffee increases, consumers may shift their demand to tea, assuming it’s a cheaper alternative. - This shift increases the demand for tea, causing the demand curve for tea to shift to the right. 2. **Decrease in Coffee Price**: - Conversely, if the price of coffee decreases, it becomes more attractive relative to tea, pulling some consumers away from tea. - This results in decreased demand for tea, causing the demand curve to shift left. ### Effect on Equilibrium: - **Rightward shift** (increase in tea demand due to coffee price rise): Leads to a higher equilibrium price and quantity for tea. - **Leftward shift** (decrease in tea demand due to coffee price drop): Leads to a lower equilibrium price and quantity for tea. ### Diagrammatic Representation: Consider the market for tea: - Original equilibrium at intersection of $D\_0$ (initial demand) and $S$ (supply). - Increase in coffee's price shifts tea’s demand curve to $D\_1$ (right shift). - Decrease in coffee’s price leads to demand shift to $D\_2$ (left shift). The diagram will show these three demand curves ($D\_0$, $D\_1$, $D\_2$) intersecting with a consistent supply curve $S$. The intersections determine new equilibriums: - $E\_1$: New equilibrium with higher tea price and quantity when tea demand increases ($D\_1$). - $E\_2$: New equilibrium with lower tea price and quantity when tea demand decreases ($D\_2$). ```plaintext Price of Tea | | S E1 ^ | \ /|\ | | \ / | \ | Increase in Demand | / | \ | | / E \ \ v | S / \ \E2 | / \ \ |__/___________\___\________ Quantity of Venue D0 D2 D1 (D0: original, D1: increased demand, D2: decreased demand) ``` **Important Factors**: - **Substitutability**: The stronger the substitutability between coffee and tea, the greater the shift in the demand curve for tea in response to a change in coffee prices. - **Market Preferences**: If tea and coffee are not close substitutes for some consumers, the effect might be less pronounced. This analysis highlights how a change in coffee prices leads to an opposite reaction in the demand for tea, affecting both the equilibrium price and quantity in the tea market.

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

When the **price of an input used in the production** of a commodity increases, the **marginal cost of production** for firms also increases. This change leads to a **shift in the market supply curve to the left**, as firms will supply less of the commodity at any given price due to the higher cost of production. ### Impact on Equilibrium: 1. **Equilibrium Price**: Increases - Since the supply curve shifts leftward, at the original equilibrium price, there is now excess demand (shortage of the commodity). To balance this, the price of the commodity rises until a new equilibrium is reached where supply equals demand. 2. **Equilibrium Quantity**: Decreases - With the higher production costs leading to decreased profitability at previous levels, firms reduce the quantity they are willing to offer at each price point. Thus, even as the price rises to curb excess demand, the equilibrium quantity available in the market reduces. ### Summary: - An **increase in input prices** results in a **decrease in supply**, given that other factors remain constant. - This leads to a **higher equilibrium price** and a **lower equilibrium quantity** for the commodity in a perfectly competitive market. These shifts prioritize the balancing of market forces where the new equilibrium price compensates for the increased cost, but overall market activity (in terms of quantity) reduces due to higher production costs.

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?

When the price of a substitute good (Y) increases, consumers tend to switch their consumption to good X because it becomes relatively less expensive than good Y. This shift increases the demand for good X. In response to this increased demand, the **demand curve for good X shifts rightward**. Here's what happens as a result: 1. **Excess Demand at the Original Price:** At the original equilibrium price, the quantity demanded of good X now exceeds the quantity supplied, creating excess demand. 2. **Price Adjustment**: This excess demand puts upward pressure on the price of good X, causing the equilibrium price to increase. 3. **Quantity Adjustment**: As the price increases, suppliers are willing to produce more of good X, and hence, the quantity supplied at the new equilibrium also increases. Conclusively: - The **equilibrium price** of good X **increases**. - The **equilibrium quantity** of good X **increases**. This response reflects typical **market dynamics** in perfectly competitive markets when a substitute's price changes.

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 is permitted.

### Comparison of the Effect of Shift in Demand Curve on Equilibrium #### 1. **Fixed Number of Firms** - **Effect on Price and Quantity**: When the number of firms is fixed and the demand curve shifts, both the equilibrium price and quantity will change. - **Rightward Shift**: If demand increases (rightward shift), the equilibrium price and quantity both increase due to excess demand at the initial price. - **Leftward Shift**: If demand decreases (leftward shift), both the equilibrium price and quantity decrease due to excess supply at the initial price. - **Market Response**: The market reaches the new equilibrium by adjusting prices. There is no change in the number of firms, only the prices adjust to equate supply and demand. #### 2. **Free Entry and Exit** - **Effect on Price**: With free entry and exit, the equilibrium price always equals the minimum average cost, irrespective of shifts in the demand curve. This is because any supernormal profits or losses are eliminated by firms entering or exiting the market. - **Effect on Quantity and Number of Firms**: - **Rightward Shift in Demand**: Causes an increase in the equilibrium quantity. More firms will enter the market because of increased demand, keeping the price at the minimum average cost but raising the output. - **Leftward Shift in Demand**: Leads to a decrease in the equilibrium quantity. Some firms exit the market as demand decreases, reducing output but keeping the price constant at the minimum average cost. - **Market Stabilization**: The entry and exit of firms act as a stabilizing force, ensuring that price remains at the minimum average cost. Changes in demand affect the quantity produced and the number of firms but not the price. ### Key Differences: - **Price Stability**: In markets with free entry and exit, prices remain stable at the minimum average cost, showing a contrasting behavior to that seen in markets with a fixed number of firms where prices fluctuate with demand shifts. - **Quantity Adjustment**: Both scenarios adjust quantities in response to demand shifts, but the mechanism differs. With free entry and exit, quantity adjustments are accompanied by changes in the number of firms, which is not the case when the number of firms is fixed. - **Impact on Number of Firms**: Only in the free entry and exit scenario does the number of firms change in response to market conditions, enhancing flexibility in market supply capabilities. These factors illustrate how the structure and flexibility of a market, particularly the ability to freely enter or exit, significantly influence the outcomes of demand shifts, affecting both the stability of prices and the responsiveness of the market to changes in demand.

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

The effect of a simultaneous rightward shift of both the demand and supply curves on the equilibrium price and quantity can be explained diagrammatically as follows: ### Diagrammatic Representation: 1. **Initial Situation**: - Consider a market with an initial demand curve labeled **( D\_0 )** and an initial supply curve labeled **( S\_0 )**. - The intersection of these two curves determines the initial equilibrium, marked as point **( E\_0 )**, with an equilibrium price **( p\_0 )** and equilibrium quantity **( q\_0 )**. 2. **Rightward Shift**: - Both the demand and supply curves shift to the right to **( D\_1 )** and **( S\_1 )** respectively. - This shift might be due to factors like increased consumer income for demand and improved technology or decreased costs for supply. 3. **New Equilibrium**: - The new positions of the demand and supply curves intersect at a new equilibrium point **( E\_1 )**. - Depending on the extent of the shifts, the new equilibrium quantity **( q\_1 )** is definitely higher than **( q\_0 )** because both curves suggest higher quantities at given prices. - The new equilibrium price **( p\_1 )** could increase, decrease, or stay the same. The exact outcome depends on the relative magnitudes of the shifts in the demand and supply curves. ### Conclusion: - A rightward shift in both curves invariably increases the equilibrium quantity. - The change in the equilibrium price depends on which curve shifted more significantly. If the shift in demand is greater than the supply shift, the price increases. If the supply shift is greater, the price decreases. If they shift equally, the price might stay the same. Here is a diagram to illustrate: ``` Price |\ | \ S1 | \ E1 p1 -|---\----------- | \ \ | \E0 \ p0 -|------\-----\--------- | \ \ | \ \ S0 | \ \ | \D0 \D1 |________________________ Quantity q0 q1 ``` - **( S\_0, D\_0 )**: Original supply and demand curves. - **( S\_1, D\_1 )**: New positions after rightward shifts. - **( E\_0 )**: Original equilibrium; **( p\_0, q\_0 )**: Initial equilibrium price and quantity. - **( E\_1 )**: New equilibrium; **( p\_1, q\_1 )**: New equilibrium price and quantity. This demonstrates how market conditions and external factors can simultaneously influence both suppliers and consumers, thus affecting overall market equilibrium.

How are the equilibrium price and quantity affected when (a) both demand and supply curves shift in the same direction? (b) demand and supply curves shift in opposite directions?

(a) **When both demand and supply curves shift in the same direction**: - **Rightward shift of both demand and supply curves**: This scenario generally leads to an **increase** in the equilibrium quantity. The effect on equilibrium price depends on the relative magnitudes of the shifts. If the shift in demand is larger than the shift in supply, the price will increase. If the shift in supply is larger, the price may decrease. If the shifts are equal, the price may remain unchanged. - **Leftward shift of both demand and supply curves**: This scenario generally leads to a **decrease** in the equilibrium quantity. The effect on equilibrium price again depends on the relative magnitudes of the shifts, with similar logic as the rightward shift, affecting the price inversely. (b) **When demand and supply curves shift in opposite directions**: - **Demand increases (shifts right) and supply decreases (shifts left)**: This will lead to an **increase** in the equilibrium price due to increased demand and decreased supply. The effect on equilibrium quantity depends on the magnitudes of shifts. If the demand increase is stronger, quantity may increase; if the supply decrease is stronger, quantity may decrease. - **Demand decreases (shifts left) and supply increases (shifts right)**: This will lead to a **decrease** in the equilibrium price due to decreased demand and increased supply. The effect on equilibrium quantity is similarly dependent on which shift is stronger, potentially leading to an increase if the supply increase dominates, or a decrease if the demand decrease is more significant.

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

In the labour market, the roles of **suppliers** and **demanders** are **reversed** compared to the goods market: 1. **Supply of Labour:** - In the labour market, **households** are the suppliers of labour. They make decisions based on the **trade-off** between earning income and enjoying leisure. - The supply curve for labour is typically **upward sloping**, suggesting that as wages increase, people are willing to work more hours, replacing leisure with work up to a certain wage point. Beyond this point, higher wages might lead to a decrease in labour supply as people prefer more leisure, leading to a **backward bending** supply curve. 2. **Demand for Labour:** - The demand for labour comes from **firms** and is driven by the need for employees to produce goods and services. - The labour demand curve is derived from the **Marginal Revenue Product** of labour (MRP\_L), which is the additional revenue a firm earns from hiring one more unit of labour. This curve is **downward sloping** because of the law of diminishing marginal returns: each additional worker contributes less to output than the previous one, assuming all other inputs are constant. **Differences**: - **Source of Supply and Demand**: In the goods market, firms supply goods and services while consumers demand them. In the labour market, households supply labour, and firms demand it. - **Nature of the Product**: Labour involves offering human time and effort, which is quantified in hours and affects individuals' lifestyle and well-being directly. In contrast, goods markets deal with physical or digital products.

How is the optimal amount of labour determined in a perfectly competitive market?

In a perfectly competitive market, the optimal amount of labor is determined by the principle where a firm equates the **wage rate** ($w$) to the **Marginal Revenue Product of Labor** ($MRP\_L$). Here are the logical steps: 1. **Marginal Product of Labor ($MP\_L$)**: This refers to the additional output produced as a result of employing one more unit of labor. 2. **Marginal Revenue ($MR$)**: In a perfectly competitive market, the marginal revenue is equal to the price of the commodity because the firm can sell any amount of output at the market price. 3. **Marginal Revenue Product of Labor ($MRP\_L$)**: This is calculated as the product of the marginal product of labor and the marginal revenue: $$ MRP\_L = MR \\times MP\_L $$ 4. **Wage Rate ($w$)**: In a perfectly competitive labor market, the wage rate is taken as given by the firm. In equilibrium, the firm will continue to hire labor until the **cost of hiring an additional worker (which is the wage rate, $w$)** is exactly equal to the **added revenue generated from hiring that worker (which is $MRP\_L$)**. Mathematically, this condition is: $$ w = MR \\times MP\_L $$ This decision rule ensures that the firm maximizes its profit, as hiring beyond this point would result in the cost of hiring an additional unit of labor exceeding the revenue it brings in, thus reducing profit. Conversely, hiring less than this level would mean the firm foregoes possible additional profit because the extra unit of labor could produce revenue greater than its cost. In summary, the optimal amount of labor in a perfectly competitive market is determined when the wage rate equals the marginal revenue product of labor. This ensures that the firm's marginal cost of labor is equal to the marginal benefit (revenue) from labor, providing no incentive to adjust labor levels further, achieving labor employment equilibrium.

How is the wage rate determined in a perfectly competitive labour market?

In a **perfectly competitive labour market**, the wage rate is determined through the **interaction of the demand for, and the supply of, labour**, and occurs at the **intersection** of the labour demand and supply curves. 1. **Demand for Labour**: Firms are the demanders of labour in this setting. Each firm demands labour up to the point where the additional revenue generated by the last unit of labour employed (marginal revenue product of labour) equals the wage rate. The **marginal revenue product of labour** is calculated as the product of the marginal product of the last unit of labour and the price at which the firm can sell the output produced by the last unit of labour. Mathematically, it is represented as: \[ MRPL = MR \\times MPL \] where ( MR ) is the marginal revenue and ( MPL ) is the marginal product of labour. 2. **Supply of Labour**: Households supply the labour, making their decisions based on the trade-off between earning income and enjoying leisure. The labour supply curve typically slopes upwards, indicating that higher wages incentivize more labour supply, though in some contexts, if wages get sufficiently high, individuals might prefer more leisure and supply less labour (forming a backward-bending supply curve). 3. **Equilibrium Wage**: The equilibrium wage is established at the point where the demand for labour equals the supply of labour. This wage rate is efficient because it maximizes the total economic welfare of employers and employees in a competitive market scenario. Any deviation from this wage rate will generate either excess supply (unemployment) or excess demand (shortage of workers), leading to market adjustments that push the wage back to equilibrium. Therefore, in summary, the **equilibrium wage** in a perfectly competitive labour market is determined at the price level where the quantity of labour demanded by firms equals the quantity of labour supplied by workers. This occurs at the intersection of the downward-sloping demand curve for labour and the upward-sloping supply curve for labour.

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

In India, one common example of a commodity on which a price ceiling is imposed is **liquefied petroleum gas (LPG)**, used for cooking in households. This is often subsidized by the government to keep it affordable for a larger section of the population. ### Consequences of Price Ceiling: 1. **Excess Demand**: Since the price is kept lower than the equilibrium price, the quantity demanded often exceeds the quantity supplied, leading to shortages. 2. **Long Queues and Waiting Times**: Due to the limited availability against high demand, consumers may have to wait in long queues or experience delays in delivery. 3. **Rationing**: The government may need to ration the commodity to ensure that it is available to a broader base of the population. This could involve setting limits on how much each household can purchase. 4. **Black Markets**: Due to shortages, a black market may emerge where the good is sold at higher prices, defeating the purpose of the price ceiling. 5. **Reduced Quality**: Suppliers might reduce the quality of the commodity to cut costs as they cannot recover their costs fully due to the price ceiling. 6. **Decreased Supply**: Over time, suppliers may reduce the production of the commodity because the lower price does not cover their costs, leading to further shortages. These consequences illustrate the complexities and challenges involved in implementing price controls like a price ceiling.

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 when free entry and exit is permitted. Explain.

In markets where the number of firms is fixed, shifts in the demand curve can have a significant impact on both the price and quantity, but notably a larger effect on the price. This is because, with a fixed number of firms, the market supply curve is less flexible to changes in market conditions like shifts in demand. Here’s how this plays out: - **Fixed Number of Firms**: When the demand curve shifts, say rightward (indicative of an increase in demand), the existing firms might not be able to immediately or adequately increase their production due to capacity constraints, technological limits, or other factors. This inflexibility in adjusting the quantity leads to a more pronounced effect on the price. As the quantity supplied cannot rise significantly in response to the increased demand, the equilibrium price goes up considerably to equilibrate the market. This phenomenon is typical in markets with inelastic supply conditions due to a fixed number of firms. - **Free Entry and Exit**: In contrast, in markets that allow free entry and exit, shifts in the demand curve usually have a smaller effect on the price and a larger effect on the quantity. When demand increases, the price might initially rise, but this higher price acts as a signal and an incentive for new firms to enter the market or for existing firms to expand production. As these new or expanded firms enter the market, they increase the total market supply. This addition in supply tends to dampen the initial price increase caused by the rise in demand. Consequently, the price effect is smaller, and the more significant change occurs in the total quantity supplied and demanded in the market. In summary: - With a **fixed number of firms**, price changes are more profound due to limited supply flexibility. - With **free entry and exit**, quantity adjustments are more significant as firms can enter or exit the market in response to profit opportunities, leading to greater supply elasticity and lesser price volatility. This mechanism enhances the market's ability to adapt to changes in demand without large fluctuations in prices.

A. Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by: $q^D = 700 – p$ $q^S = 500 + 3p for p ≥ 15$ $= 0$ for $0 ≤ p < 15$ Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than Rs 15.What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced? B. Considering the same demand curve as in exercise A, now let us allow for free entry and exit of the firms producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as $q^s\_f = 8 + 3p for p ≥ 20$ $= 0$ for $0 ≤ p < 20$ (a) What is the significance of p = 20? (b) At what price will the market for X be in equilibrium? State the reason for your answer. (c) Calculate the equilibrium quantity and number of firms.

### A. Determination of Market Equilibrium #### Market Supply Being Zero Below Rs 15 The market supply of commodity X being zero at any price less than Rs 15 indicates that producing this commodity is not economically viable for any firm when the price is below Rs 15, likely due to the costs associated with production. This price could represent a minimum operating or break-even price for firms, below which it does not cover their variable costs, making production unprofitable. #### Equilibrium Price and Quantity The equilibrium price and quantity are determined where market demand equals market supply. Given the equations: $$q^D = 700 - p$$ $$q^S = 500 + 3p \\text{ for } p \\geq 15$$ To find the equilibrium, $$700 - p = 500 + 3p$$ Let's solve this equation for $p$. $$700 - 500 = 3p + p$$ $$200 = 4p$$ $$p = \\frac{200}{4} = 50$$ Thus, the equilibrium price $(p^\*) = 50$ Rs. Now, substituting $p^\*$ back into either the demand or supply equation to find the equilibrium quantity $(q^\*)$: $$q^D = 700 - 50 = 650$$ $$q^S = 500 + 3 \\times 50 = 650$$ Thus, the equilibrium quantity $(q^\*) = 650$ units. ### B. Free Entry and Exit of Firms with Identical Firms #### (a) Significance of p = 20 The price $p = 20$ represents the minimum price at which individual firms in this market start production. It suggests the minimum average cost of firm is $20, beyond which the production becomes viable — producing below this cost would result in a loss. #### (b) Market Equilibrium Price with Free Entry and Exit In a market with free entry and exit, the equilibrium price will be equal to the minimum average cost of production, as new firms will enter the market if there is any profit (price greater than average cost) and existing firms will exit if there is a loss (price less than average cost). Since $p = 20$ is the threshold price for production and firms will only operate without loss at this price or higher, thus, the market will be in equilibrium at $p = 20$ Rs. #### (c) Equilibrium Quantity and Number of Firms The market demand at given price $p = 20$: $$q^D = 700 - 20 = 680 \\text{ units}$$ Each firm supplies at $p = 20$: $$q^s\_f = 8 + 3 \\times 20 = 8 + 60 = 68 \\text{ units}$$ Number of firms $(n)$ required to meet market demand: $$n = \\frac{680}{68} = 10 \\text{ firms}$$ Thus, at equilibrium, the market will have 10 firms each producing 68 units, totaling to an equilibrium market supply of 680 units, which matches the market demand.

Suppose the demand and supply curves of salt are given by: $q^D = 1,000 – p$ $q^S = 700 + 2p$ (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 $q^S = 400 + 2p$ How does the equilibrium price and quantity change? Does the change conform to your expectation? (c) Suppose the government has imposed a tax of Rs 3 per unit of sale of salt. How does it affect the equilibrium price and quantity?

### (a) Finding the Equilibrium Price and Quantity For a market in equilibrium, the quantity demanded ($q^D$) equals the quantity supplied ($q^S$). Given: $$ q^D = 1000 - p $$ $$ q^S = 700 + 2p $$ Setting them equal to find the equilibrium: $$ 1000 - p = 700 + 2p $$ Solving for $p$, $$ 1000 - 700 = 2p + p \\ 300 = 3p \\ p^\* = \\frac{300}{3} = 100 $$ Substitute $p^\* = 100$ back into either $q^D$ or $q^S$ to find $q^\*$: $$ q^\* = 1000 - 100 = 900 $$ **Equilibrium price ($p^\*$) is Rs 100 and equilibrium quantity ($q^\*$) is 900 units.** ### (b) Change in Equilibrium Due to Increase in Input Cost The new supply curve after the increase in input cost is: $$ q^S = 400 + 2p $$ Setting the new supply equal to demand for the new equilibrium: $$ 1000 - p = 400 + 2p \\ 1000 - 400 = 2p + p \\ 600 = 3p \\ p^\* = \\frac{600}{3} = 200 $$ Substituting $p^\* = 200$ back into either demand or supply equation to find the new $q^\*$: $$ q^\* = 1000 - 200 = 800 $$ **The new equilibrium price is Rs 200 and the equilibrium quantity is 800 units.** This change in equilibrium conforms with the expectation that an increase in input cost would decrease supply at any given price, leading to a higher equilibrium price and lower equilibrium quantity. ### (c) Impact of a Tax on Equilibrium The tax shifts the supply curve vertically upwards by the amount of the tax. The new supply equation becomes: Supply cost per unit increases by Rs 3, so: $$ q^S = 700 + 2(p - 3) = 700 + 2p - 6 = 694 + 2p $$ Setting the taxed supply equal to demand for the new equilibrium: $$ 1000 - p = 694 + 2p \\ 1000 - 694 = 2p + p \\ 306 = 3p \\ p^\* = \\frac{306}{3} = 102 $$ Substituting $p^\* = 102$ back into either the demand or supply equation to find the new $q^\*$: $$ q^\* = 1000 - 102 = 898 $$ **After applying the tax, the new equilibrium price effectively becomes Rs 105 (Rs 102 paid to the suppliers and Rs 3 as tax), and the equilibrium quantity slightly decreases to 898 units.** This demonstrates that while the tax burden is partly passed on to the consumer in the form of higher prices, part of it is absorbed by the producer leading to a decrease in equilibrium quantity.

Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?

When the government imposes a **price ceiling** on rent, setting it below the current market equilibrium price, this intervention typically aims to make housing more affordable. Here's how it impacts the market: 1. **Excess Demand**: The imposed rent is cheaper than what the market would naturally determine, leading to greater demand for apartments since more people can afford the lower price. However, suppliers (landlords) may not be willing to provide the same quantity of housing at this lower price. 2. **Shortage of Supply**: Due to the lower profitability, some landlords might withdraw from the market, not maintain their properties, or convert them to other more profitable uses. This results in a **reduction in the quantity of apartments supplied**, exacerbating the shortage. 3. **Non-Monetary Costs and Inefficiencies**: - **Waiting Lists and Discrimination**: Landlords may use non-price mechanisms to allocate apartments, such as waiting lists or favoritism, which can lead to inefficiencies and unfair practices. - **Black Market**: A secondary market might emerge where apartments are rented at higher prices unofficially, defeating the purpose of the price control. 4. **Decreased Quality and Investment**: With lower returns on investment, landlords might spend less on maintenance and improvements, leading to a decrease in the quality of housing over time. Overall, while the intention behind a price ceiling on rent is to help those with lower incomes access housing, it can lead to unintended consequences such as shortages, reduced quality of housing, and inefficiencies in the allocation of apartments.

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Market Equilibrium Class 12 Notes and Solutions

Q: If the rupee is overvalued, it leads to $\\qquad$ in the FOREX market. A. Deficit B. Surplus C. Equilibrium D. Cannot be determined

The correct answer is **A. Deficit**. When the rupee is **overvalued**, it indicates that the value of the rupee is higher compared to its true market value. This situation can lead to a trade **deficit** because an overvalued rupee makes exports more expensive and imports cheaper. As a result, there will be an increase in imports and a decrease in exports, leading to a deficit in the FOREX market.

Q: Explain market equilibrium.

### Market Equilibrium Market equilibrium in a **perfectly competitive market** refers to a state where the quantity of goods that **consumers are willing to buy** (market demand) exactly **matches** the quantity of goods that **producers are willing to sell** (market supply) at a particular price. In this scenario, the market clears, meaning there is neither surplus nor shortage of goods. The **equilibrium price** ($p^{\*}$) is the price at which the quantity demanded equals the quantity supplied. This price results in market stability, where there is no incentive for price changes because all market participants (consumers and producers) have no dissatisfaction with the current market conditions. The **equilibrium quantity** ($q^{\*}$) is the quantity that is bought and sold at the equilibrium price. In mathematical terms, market equilibrium is reached when: $$ q^D(p^\*) = q^S(p^\*) $$ Where: - $q^D(p^\*)$ is the **market demand** at the equilibrium price. - $q^S(p^\*)$ is the **market supply** at the equilibrium price. This balance ensures that the **market is efficient**, with no excess supply (surplus) or excess demand (shortage). Any deviation from this state due to external factors will lead to adjustments driven by market forces, leading back to a new equilibrium.

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

We say there is **excess demand for a commodity in the market** when the **quantity demanded** of the commodity **exceeds** the **quantity supplied** at a particular price. This situation often leads to an upward pressure on prices, as consumers are willing to pay more to obtain the desired quantity of the commodity.

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

We say there is **excess supply** for a commodity in the market when the **quantity supplied by producers is greater than the quantity demanded by consumers** at a specific price. This situation generally leads to **downward pressure on prices**, as producers may lower prices to clear their surplus stock and equate supply to demand.

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

(i) **Above the Equilibrium Price:**When the prevailing market price is above the equilibrium price, the quantity supplied by the firms will be greater than the quantity demanded by consumers. This situation creates **excess supply**. As a result, some firms may not be able to sell all the goods they want to sell. To address this, they might lower their prices to attract more buyers. This leads to a decrease in price towards the equilibrium level, where supply equals demand, and market equilibrium is restored. (ii) **Below the Equilibrium Price:**If the prevailing market price is below the equilibrium price, the scenario is reversed. The quantity demanded by consumers exceeds the quantity supplied by firms, leading to **excess demand**. This shortage means that some consumers who want to buy the product at the lower price may not be able to find it. Consumers might be willing to pay more to secure the goods they need, driving the price up towards the equilibrium level, where the quantity demanded equals the quantity supplied.

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Notes - Market Equilibrium | Class 12 Microeconomics | Economics

Comprehensive Class 12 Notes on Market Equilibrium

Understanding market equilibrium is essential for students studying economics. It serves as one of the foundational concepts that illustrate how markets function efficiently under various conditions.

Introduction to Market Equilibrium

Market equilibrium occurs when the quantity of goods supplied equals the quantity of goods demanded. At this point, the market is perfectly balanced, and there is no tendency for the price to change.

Market Demand and Supply

Individual and Market Demand Curve

An individual demand curve shows the quantity of a commodity a consumer is willing to buy at different prices. When aggregated across all consumers, this forms the market demand curve, illustrating how much of the commodity all consumers taken together are willing to purchase at various prices.

Individual and Market Supply Curve

Similarly, an individual supply curve displays the quantity a firm is willing to sell at different prices. The market supply curve is derived by summing up the quantities supplied by all firms at each price level.

Equilibrium, Excess Demand, and Excess Supply

Definition of Equilibrium

At equilibrium, market supply equals market demand. The equilibrium price ((P^*)) is the price at which the quantity supplied (Q(^S)) matches the quantity demanded (Q(^D)).

Excess Demand and Excess Supply

Excess Demand: Occurs when the market demand exceeds the market supply at a particular price.
Excess Supply: Occurs when the market supply exceeds the market demand at a given price.

Out-of-Equilibrium Behaviour

The 'Invisible Hand' Theory

Economist Adam Smith introduced the concept of the 'Invisible Hand,' suggesting that market forces naturally adjust prices towards equilibrium. When there is excess demand, prices tend to rise, reducing quantity demanded and increasing quantity supplied. Conversely, excess supply leads to falling prices.

Market Dynamics and Adjustments

When the market is not in equilibrium, self-adjusting mechanisms push it back towards equilibrium. Prices change in response to excess demand or supply, ensuring that the market eventually settles.

Market Equilibrium with Fixed Number of Firms

Determining Equilibrium Price and Quantity

In a perfectly competitive market with a fixed number of firms, equilibrium is attained at the intersection of the market supply and demand curves. Any deviation from this point creates either excess demand or excess supply.

Market Equilibrium

Effects of Shifts in Demand and Supply

Rightward Shift in Demand: Increases both equilibrium price and quantity.
Leftward Shift in Demand: Decreases both equilibrium price and quantity.
Rightward Shift in Supply: Decreases equilibrium price and increases quantity.
Leftward Shift in Supply: Increases equilibrium price and decreases quantity.

Wage Determination in the Labour Market

Demand for Labour

Firms determine labour demand by employing labour up to the point where the marginal revenue product of labour equals the wage rate. This ensures profit maximisation.

Supply of Labour

Households decide the supply of labour based on a trade-off between income and leisure. At higher wage rates, the opportunity cost of leisure increases, leading individuals to work more, thus producing an upward-sloping labour supply curve.

Shifts in Demand and Supply

Impact on Equilibrium Price and Quantity

Shifts in demand and supply curves result in changes in equilibrium. For instance, if the demand curve shifts rightward due to increased consumer income, the equilibrium price and quantity rise. Conversely, a leftward shift in the supply curve, due to higher input prices, reduces equilibrium quantity and raises prices.

Shifts in Demand and Supply

Free Entry and Exit in the Market

Concept of Free Entry and Exit

When firms can freely enter or exit the market, the equilibrium price equals the minimum average cost of the firms. Supernormal profits attract new firms, while losses cause firms to exit, stabilising the market.

Example with Identical Firms

Consider a market for wheat with identical firms. When the market is in equilibrium at the minimum average cost, firms neither earn excess profit nor incur losses, ensuring market stability.

Government Interventions

Price Ceiling

A price ceiling sets a maximum allowable price for goods. It is usually lower than the equilibrium price to make necessary items affordable. However, it can lead to excess demand and potential shortages.

Price Floor

A price floor sets a minimum price for goods and labour. It is higher than the equilibrium price to ensure fair compensation. However, it can result in excess supply.

graph TD A[Government Intervention] -- Imposes --> B[Price Ceiling] A -- Imposes --> C[Price Floor] B -- Leads to --> D[Excess Demand] C -- Leads to --> E[Excess Supply]

Summary and Key Takeaways

Key Points

Market equilibrium is where market supply equals market demand.
Excess demand and supply drive price adjustments.
Shifts in demand or supply curves alter equilibrium price and quantity.
Free entry and exit bring long-term market stability.
Government interventions like price ceilings and floors can impact market equilibrium.

Practical Applications

Demand-supply analysis is vital in understanding how markets operate under various conditions and is pivotal for policy-making and economic forecasting.

Conclusion

Grasping market equilibrium concepts is crucial for students. These principles are not only essential for exams but also for understanding real-world economic situations and policy decisions.

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Extra Questions - Market Equilibrium | Microeconomics | Economics | Class 12

Calculation of Purchase Price for Shopkeeper:The shopkeeper buys the TV at a discount of 30% on the list price. The list price of the TV is Rs. 24,000. Therefore, the purchase price for the shopkeeper would be: $\text{Purchased Price} = \text{List Price} - \left(\frac{30}{100} \times \text{List Price}\right)$ $\text{Purchased Price} = 24000 - (0.3 \times 24000) = 24000 - 7200 = Rs. 16,800.$
Selling Price Before VAT:The shopkeeper sells the TV at a 10% discount. Therefore, the selling price before VAT is: $\text{Selling Price before VAT} = \text{List Price} - \left(\frac{10}{100} \times \text{List Price}\right)$ $\text{Selling Price before VAT} = 24000 - (0.1 \times 24000) = 24000 - 2400 = Rs. 21,600.$
Calculation of VAT:The VAT applied is 10%. Therefore, the VAT amount is: $\text{VAT} = \frac{10}{100} \times \text{Selling Price before VAT}$ $\text{VAT} = 0.1 \times 21600 = Rs. 2160.$
Total Amount Paid by Customer:Finally, the amount paid by the customer including VAT is: $\text{Total Amount} = \text{Selling Price before VAT} + \text{VAT}$ $\text{Total Amount} = 21600 + 2160 = Rs. 23,760.$
VAT Paid by Shopkeeper:The shopkeeper collects Rs. 2160 as VAT from the customer, but he only retains: $\text{VAT to retain} = \frac{10}{100} \times (\text{Selling Price before VAT - Purchased Price})$ $\text{VAT to retain} = 0.1 \times (21600 - 16800) = 0.1 \times 4800 = Rs. 480.$

The correct answers are Total Amount Paid by the Customer: Rs. 23,760 and VAT to be paid by the Shopkeeper: Rs. 480.

Option B) Rs. 23,760; Rs. 480, is the correct answer.

Follow-up Questions:

NCERT Solutions - Market Equilibrium | Microeconomics | Economics | Class 12

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Market Equilibrium Class 12 Notes and Solutions

Contents

Notes - Market Equilibrium | Class 12 Microeconomics | Economics

Comprehensive Class 12 Notes on Market Equilibrium

Introduction to Market Equilibrium

Market Demand and Supply

Individual and Market Demand Curve

Individual and Market Supply Curve

Equilibrium, Excess Demand, and Excess Supply

Definition of Equilibrium

Excess Demand and Excess Supply

Out-of-Equilibrium Behaviour

The 'Invisible Hand' Theory

Market Dynamics and Adjustments

Market Equilibrium with Fixed Number of Firms

Determining Equilibrium Price and Quantity

Effects of Shifts in Demand and Supply

Wage Determination in the Labour Market

Demand for Labour

Supply of Labour

Shifts in Demand and Supply

Impact on Equilibrium Price and Quantity

Free Entry and Exit in the Market

Concept of Free Entry and Exit

Example with Identical Firms

Government Interventions

Price Ceiling

Price Floor

Summary and Key Takeaways

Key Points

Practical Applications

Conclusion

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NCERT Solutions - Market Equilibrium | Microeconomics | Economics | Class 12

Explain market equilibrium.