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Karnataka 2nd PUC Economics Question Bank Chapter 5 Market Equilibrium
2nd PUC Economics Market Equilibrium One Mark Questions and Answers
1. Choose The Correct Answer.
Question 1.
In perfect competition, buyers & sellers are
(a) Price makers
(b) Price takers
(c) Price analysts
(d] None of the above
Answer:
(b) Price takers
Question 2.
A situation where the plans of all consumers and firms in the market match.
(a) Inequilibrium situation
(b) Equilibrium situation
(c) Maximisation situation
(d) Partial Equilibrium situation
Answer:
(b) Equilibrium situation
Question 3.
As a result of increase in the number of firms there is an increase in supply, then supply curve
(a) Shifts towards left
(b) Shifts towards Right
(c) Shifts towards Both sides
(d) None of the above
Answer:
(b) Shifts towards Right
Question 4.
The firms earn super normal profit as long as the price is greater than the mini mum of
(a) Manginal cost
(b) Average cost
(c) Total cost
(d) Fixed cost
Answer:
(c) Average cost
Question 5.
The government imposing upper limit on the price of goods and services is called
(a) Price celling
(b) Selling price
(c) Price floor
(d) None of the above
Answer:
(a) Price ceiling
Question 6.
The government imposed lower limit on the price of goods and service is called
(a) Goods floor Price floor
(b) Service floor
(c) Price floor
(d) None of these
Answer:
(c) Price floor
Question 7.
Equilibrium price may be determined through
(a) Only demand
(b) Only supply
(c) Both demand and supply
(d) none of these
Answer:
(c) Both demand and supply
Question 8.
When there is increase in demand and decrease in supply, equilibrium price
(a) Falls
(b) rises
(c) Constant
(d) None of these
Answer:
(b) rises
II. Fill in the Blanks
1. In a perfectly competitive market, equilibrium occurs when market demand _____ market
supply.
Answer:
Is equal to
2. If the supply curve shifts rightward and demand curve shifts leftward equilibrium price will
be _____
Answer:
Decreasing
3. _____ is determined at the point where the demand for labour and supply of labour curves
intersect.
Answer:
Wage Rate
4. In labour market _____ are the suppliers of labour.
Answer:
Households
5. Due to rightward shifts in both demand and supply curves the equilibrium price remains _____ .
Answer:
Same
6. It is assumed that, in a perfectly competitive market an is _____ at play.
Answer:
Equilibrium Price
7. _____ is a situation where market demand is equal to market supply.
Answer:
Market equilibrium
8. _____ means the minimum price fixed by the government for a commodity in the market
to protect the interest of the producers.
Answer:
Price floor
III. Match the following
Question 1.
Table
1. Adam smith a. Attraction of new firms
2. Price ceiling b. Operation of invisible hand
3. Market equilibrium c. Lower limit on price
4. Possibility of supernormal profit d. Upper limit on price
5. Price floor e. QD = QS
Answers:
1. (b) Operation of invisible hand
2. (d) Upper limit on price
3. (e) QD = QS
4. (a) Attraction of new firms
5. to Lower limit on price
Question 2.
1. Equilibrium
2. Excess Supply
3. Adam Smith
4. Price ceiling
5. Excess Demand
6. Market equilibrium
7. Wage rate
8. Price Floor
a. Invisible Hand
b. DD = SS
c. D1 = S
d. State of Rest
e. Lower limit on the price ola good and service
f. tipper limit on the price of a good and service
g. Market supply > Market demand
h. Market Demand > market supply
Answers:
1. (d) State of Rest
3. (a) Invisible Hand
5. (h) Market Demand > market supply
7. (c) DL=SL
2. (g) Market supply> Market demand
4. (f) Upper limit on the price ola good and service
6. (b)DD=SS
8. (e) Lower limit on the price of a good and service
IV. Answer the following questions in a sentence/word.
Question 1.
Define market equilibrium.
Answer:
Market equilibrium is a situation where market demand is equal to market supply.
Question 2.
What is equilibrium price?
Answer:
The price at which equilibrium is reached is called equilibrium price.
Score More Series : II PUC Economics
Question 3.
When do we say that, there is an excess demand in the market?
Answer:
When market demand exceeds market supply at a price, it is said that excess demand exists in the market at that price.
Question 4.
What is price ceiling?
Answer:
The government-imposed upper limit on the price of a good or service is called price ceiling.
Question 5.
What is price floor?
Answer:
Price floor means the minimum price fixed by the government for a commodity in the market to protect the interest of the producers.
Question 6.
Through which legislation, the government ensures that the wage rate of the labourers does not fall below a perticular level?
Answer:
Through the minimum wage legislation, the government ensures that the wage rate of the labourers does not fall below a particular level
2nd PUC Economics Market Equilibrium Two Marks Questions and Answers
V. Answer the following Questions in 4 Sentences.
Question 1.
Define equilibrium price and Quantity.
Answer:
The price at which equilibrium is reached is called equilibrium price. Whereas, the quantity bought and sold at the equilibrium price is called equilibrium quantity.
Question 2.
How price is determind, when fixed number of firms exist in perfect competition.
Answer:
Price is determined with the help of supply and demand forces when the number of firms is fixed in perfect competition.
Question 3.
Write any two possible ways in which simultaneous shift of both demand and supply curves.
Answer:
The two possible ways are:
- Both supply and demand curves shift rightwards.
- Both supply and demand curves shift leftwards.
Question 4.
What is marginal Revenue product of labour (MRPJ.
Answer:
For each extra unit of labour, she gets an additional benefit equal to marginal revenue times marginal product which is called Marginal Revenue Product of labour (MRPJ.
Question 5.
Distinguish between excess demand and excess supply.
Answer:
If at a price, market supply is greater than market demand, we say that there is an excess supply in the market at that price. If market demand exceeds market supply at a price, it is said that excess demand exists in the market at that price.
Question 6.
How wage is determined in the labour market?
Answer:
The wage rate is determined at the intersection of the demand and supply curves of labour where the demand for and supply of labour balance.
In the diagram, on OX axis we measure Labour and on OY axis we measure Wage. DLDL is Demand curve of labour and SLSL is supply curve of labour. Point ‘E’ is equilibrium point where the demand and supply intersects each other and therefore OW is the wage rate in a perfectly
competitive market.
2nd PUC Economics Market Equilibrium Four Marks Questions and Answers
VI. Answer the following Questions in 12 Sentences.
Question 1.
What is the implication of free entry and exit of firm on market equilibrium. Briefly explain.
Answer:
In the long run, equilibrium price will always be equal to minimum of AC because of free entry and exit of firms in a perfect competitive market and hence all the firms earn zero profit or normal profit.
The equilibrium is determined by the intersection of consumers’ demand curve and the ‘P = min AC’ line. At equilibrium point ‘E’, quantity supplied by each firm is ‘X’ at the price ‘P’.
In the above diagram, on OX axis quantity is measured and on OY axis price is measured. Point ‘E’ is the equilibrium point where Price will be equal to min of AC.
Question2.
Write a table to show the impact of simultaneous shifts on equilibrium.
Answer:
Impact pf simultaneous Shifts on Equilibrium
Question 3.
Write a note on price ceiling and price floor.
Answer:
Price Ceiling: The government-imposed upper limit on the price of a good or service is called price ceiling.
(a) It is generally imposed on necessary items like wheat, rice, kerosene, sugar and it is fixed
below the market-determined price since at the market-determined price some section of the population will not be able to afford to buy these goods.
Let us examine the effect of price ceiling on the market equilibrium through the example of market for wheat.
In the above diagram SS is the market supply curve and DD is the market demand curve for wheat. The equilibrium price and quantity of wheat are P1 and q respectively. When the government imposes price ceiling at P0 which is lower than the equilibrium price level, there will be more demand for wheat in the market. The consumers will demand q2 quantity of wheat where as the firms supply q1 quantity of wheat.
Though the government’s intention was to help the consumer, it could end up creating shortage of wheat.
Price Floor: The government-imposed lower limit on the price that may be charged for a particular good or service is called Price floor. Most well-known examples of imposition of price floor are agricultural price support programmes and the minimum wage legislation.
(b) The government imposes a lower limit on the purchase price for some of the agricultural goods and the floor is normally set at a higher level than the market price.
In the above diagram, it shows market supply curve and market demand curve for a commodity on which price floor is imposed. The equilibrium is determined at price P1 and quantity q. But when the government imposes a floor higher than the equilibrium price at P2, the demand is qt whereas the firms want to supply q2, thereby leading to an excess supply in the market equal to q1q2
2nd PUC Economics Market Equilibrium Six Marks Questions and Answers
VI. Answer the following questions in 20 Sentences.
Question 1.
Explain the simultaneous shifts of demand and supply curve in perfect competition with
the help of diagrams.
Answer:
There can be three situations in this respect which are as follows: (a) Increase in demand is greater than increase in supply:
In the diagram, on OX axis we measure quantity and on OY axis we measure price. DD is the demand curve and SS is the supply curve.
In the diagram, on OX axis we measure quantity and on OY axis we measure price. DD
is the demand curve and SS is the supply curve.
It is clear that the rightward shift in demand curve from DD to D1D1 is proportionately more than the right ward shift in supply curve from SS to S1S1. The new equilibrium point is E1. Equilibrium price rises from OP1 to OP1 and equilibrium quantity increases from OQ to OQ1. It is to be noted that increase in quantity is great r than increase in price.
(b) Increase in demand is exactly equal to increase in supply :
In the diagram, on OX axis we measure quantity A and on OY axis we measure price. DD is the T D, demand curve and SS is the supply curve.
It is clear that rightward shift in demand curve from DD to D1D1 is proportionately equal to the rightward shift in supply curve from S1S1
The new equilibrium point is Er Equilibrium price remains the same but equilibrium quantity increases from OQ to OQ1
(c) Increase in demand is lesser than increase in supply :
In the above diagram, on OX axis we measure quantity and on OY axis we measure price. DD is the demand curve and SS is the supply curve.
It is clear that the rightward shift in demand curve from DD to D1D1 is proportionately less than the right ward shift in supply curve from SS to S1 S1. The new equilibrium point is Er Equilibrium price falls from OP to OP1 and equilibrium quantity increases from OQ to OQ1 It is to be noted that increase in quantity is greater than decrease in price.
Question 2
Explain the market equilibrium with the fixed number of firms with the help of diagram.
Answer:
Equilibrium Under Perfect Competition
In perfect competition both buyers and sellers are price takers. Hence the price of a product is determined by its supply and demand forces.
Equilibrium means a state of rest. It is a position from which there will not be a tendency to move or change is either direction.
At equilibrium price, quantity demanded and supplied will be equal. Both the buyers’ and sellers objectives are satisfied.
Market equilibrium is determined by the forces of market demand and market supply. Market demand refers to the aggregate demand and market supply refers to aggregate supply.
The market supply curve slopes upwards from left to right and market demand curve slopes downwards from left to right. These two curves intersect at a point. This point shows that demand is equal to supply i.e. QD = QS.
This can be shown with the help of demand and supply schedule
| Price of Commodity (in Rs.) | Market Demand (in units) | Market Supply (in units) |
| 10 | 100 | 20 |
| 20 | 80 | 40 |
| 30 | 60 | 60 |
| 40 | 40 | 80 |
| 50 | 20 | 100 |
It is very clear in the table that, when price of commodity is ₹ 10, the Market demand is 100 and Market supply is 20. When the price increases to ₹ 30, market demanded is 60 and market supply is also 60. Therefore, ₹ 30 is the equilibrium price and 60 is market demand and market supply. Any other price more than Rs. 30 leads to excess supply and less than ₹ 30 leads to excess demand.
Diagrammatic representation.
In the above diagram, on OX axis Quantity demanded and supplied is measured and on OY axis Price is measured, SS is the supply curve and DD is the demand curve. E is the intersection point, where demand is OM and supply is also OM. This is the equilibrium quantity. OP is the equilibrium price.
If price falls to 0P1 ; D> S. Demand is excess by KL, the seller want to supply only OM1 quantity of supply but demand will be OM2. The buyers now compete with each other in order to obtain the goods and are ready to pay a higher price than OP1 So, price starts rising till OP level is reached, where both demand and supply are equal.
If price rises to OP2 then, demand will be less than supply. That is supply is excess of demand by NM. Now in order to dispose this excess supply the sellers will compete with each other and in doing so, they will bring down the price to OP.
Conclusion: Thus if price is above or below the equilibrium price, the invisible hand will operate to bring the price to the level at which the quantity supplied will be equal to quantity demanded.
Question 3.
Suppose the demand and supply curves of wheat are given by qD = 200 – P and qs = 120 + P
(a) Find the equilibrium price
(b) Find the equilibrium quantity of demand and supply
(c) Find the quantity of demand and supply when P > equilibrium price
(d) Find the quantity of demand and supply when P < equilibrium price
Answer:
QD = 200 – P & Qs = 120 + P
QD = QS
then, 200 – p = 120 + P 200 – 120 = P + P
80 = 2P
P = 40
∴ Equilibrium price is 40.
Now substituting this value of price we can get the equilibrium quantity of demand and supply. QD
QD = 120 – P
= 200 – 40
QD = 160
QS = 120 +P
= 120 + 40
QS = 160
So at equilibrium price ’40’ QD = 160 & QD = 160
If Price is greater than equilibrium price, then there will be excess supply.
Suppose P = 42
then,
QD = 200 – 42
QD = 158
QD < Qs or Qs > QD
Qs = 120 + 42
QS = 162
If price is less than equilibrium price, then will be excess demand. Suppose p = 38 then,
QD = 200 – 38
QD = 162
QD > Qs or Qs < QD
QS = 120 + 38
QS = 158
Question 1.
Suppose the demand and supply curve of salt are given by:
QD = 1000 – p
QD = 700 + 2p
(a) Find the equilibrium price and quantity
(b) Now suppose that the price oían input used to produce salt has increased so that the new supply curve is QS = 400 + p
How does the equilibrium price and quantity change? Does the change conform to your
expectation?
(c) Suppose the government has imposed a tax oí3 per unit of sale of salt. How does it affect
the equilibrium price and quantity?
Answer:
(a) At equilibrium, QD = QS
QD = 1000 – p
QD = QS
QS = 700 + 2p
1000 – p= 700 +
-p -2p= 700 -1000
-3p = -300
p = -300/-3
p = 100
When p = 100
QD = 1000 – P QD = 1000-100 QD = 900
So, equilibrium price is 100 and the equilibrium quantity is 900 units.
(b) New quantity supplied QS = 400 + 2P
At equilibrium, QD = QS
QD = 1000—p
QS = 700 + 2p
QD = QS
1000 – p= 400 + 2p
-p – 2p= 400 – 1000
-3p = -600
p = -600/-3
p = 200
Earlier to the increase in the price of input, the equilibrium price was ₹ 100, and after the rise in input’s price, the equilibrium price is ₹ 200.
So the change In the equilibrium price in Rs 100 (200 – 100).
When p = 200
QD =1000-p
QD = 1000-200
QD = 200
The change in the equilibrium quantity Is 100 units (i.e. 900 – 800 units).
Yes, this change is obvious, as due to the change in the input’s price, the cost of producing salt
has Increased that will shift the marginal cost curve leftward and move the supply curve to the
left. A leftward shift in the supply curve results in a rise in the equilibrium price and a fall in the
equilibrium quantity
(c) The imposition of tax of ₹ 3 per unit of salt sold will raise the cost of producing salt. This will shift
the supply curve leftwards and the quantity supplied equation will become
QS = 700 + 2(p – 3)
At equilibrium,
QD = QS
QD = 100 – P
QS = 7oo + 2(p – 3)
1000 – P = 700 + 2(p-3)
l000 – p = 700 + 2p-6
1000 – 700 – 6 = 3p
306 = 3P
p = 306/3
P = 102
When p = 102,
QD = 1000 – p QD = 1000 – 102 QD = 898 units
Thus, the imposition of tax of ₹ 3 per unit of salt sold will result in an increase in the price of salt from ₹ 100 to ₹ 102. The equilibrium quantity falls from 900 units to 898 units.