Economics 3 Marks Question

This may be due to the presence of following factors:

1. Huge set-up costs.
2. Patent rights.
3. License requirements.
4. Control over raw material, etc.

Perfectly elastic supply implies a situation of infinite supply corresponding to a given price. In such a situation, if demand curve shifts to the right, implying increase in demand, there does not arise a situation of excess demand because even at the existing price, supply is infinite. Hence, price remains constant.
If there is decrease in demand, when demand curve shifts to the left, there is no possibility of fall in price. Because even the slightest fall in price would mean zero supply in a situation of perfectly elastic supply curve.

In case of complementary goods, when the price of X falls, demand for commodity Y increases. As a result, demand curve of commodity Y will shift towards right but supply curve remains constant. Due to increase in demand of commodity Y, there will be excess demand. Therefore, supplier will be motivated to increase the price of commodity Y. The equilibrium price and quantity would tend to increase.

Price rigidity means price under oligopoly tends to be fixed or constant despite the changes in demand and cost in the industry.
The firms under oligopoly believe that if they raise the price, the rivals will not follow it but if the firms cut down the price, the rival firms will also do the same. Thus, oligopoly firms prefer to stick at the existing price. This behaviour of oligopoly firms, to maintain a prevailing price is termed as price rigidity.

Three features of perfect competition are as follows:

1. Large Number of Buyers and Sellers Under perfect competition, market is dominated by a large number of buyers and sellers.
2. Homogeneous Product Under this form, all sellers sell identical products. It implies that there is no product differentiation.
3. Free Entry and Exit of Firms In perfect competition, there is no restriction on the entry and exit of the firms. Any firm can enter or leave the market at any time.

Price Discrimination It is a situation when a monopolist charges different prices from different buyers of the same product. This is generally done to maximise profits, e.g. in a monopoly, surgeon in your area may charge low fee from the poor patients and high fee from the rich patients. Product Differentiation It is a situation when different producers under monopolistic competition try to differentiate their product in terms of its shape, size, packing, trademark or brand name. This is done to attract buyers from the rival firms in the market.

When price prevailing in the market is higher than equilibrium price, demand will be less than supply, i.e. there is excess supply in the market. Excess supply will force the market price to slide down causing extension of demand and contraction of supply. The process of extension and contraction would continue till the equilibrium between supply and demand is struck. Thus, equilibrium price will be restored through the free play of market forces.

1. Increase in quantity demanded.
2. Increase in supply.
3. Decrease in supply.
4. Decrease in quantity demanded.

1. Equilibrium price = ₹ 5, Equilibrium quantity = 8kg.
2. Excess demand = 10 - 5 = 5kg.
3. Excess supply = 11 - 6 = 5kg.

In a situation of excess demand, consumers are willing to buy greater amount of a commodity than what the producers are willing to sell. Accordingly, price of the commodity will be pushed up. This will cause expansion of supply and contraction of demand, until the equilibrium is restored.

Under monopoly competition there is a single seller dealing in the market and he holds power over the price he charges for a commodity, that's the reason we consider seller as a price maker. He can charge the price according to the market forces of demand and supply, by controlling the supply of the product.

Perfect knowledge means that both buyers and sellers are fully informed about the market price. Therefore, no firm is in a position to charge a different price and no buyer will pay a higher price. As a result, a uniform price prevails in the market. In case of perfect competition, buyers and sellers have perfect knowledge of the market.

Under perfect competition, the price is determined by the industry because there are large number of sellers of homogeneous product. No single seller by changing the supply can influence the price. So, the firm is a price taker.
A monopolist is a single seller and determines the price himself. He is a price maker. There is no challenge to his price decisions as there are no other firms in the market and there are no close substitutes of his product. Barriers to entry of new firms further strengthen his position as a price maker.

The statement that "an increase in the demand for notebooks raises the quantity of notebooks demanded, but not the quantity supplied," in general, is false. As given figure shows, the increase in demand for notebooks results in an increased quantity supplied.

A perfectly competitive market is dominated by the presence of large number of buyers and sellers of a commodity, which means that there is no such buyer or seller in the market whose purchase or sale is so large as to impact the total sale or purchase in the market. Each buyer/ seller has only a fractional share in the market demand/ market supply. Hence, price is determined by the forces of market demand and market supply. No individual buyer or seller has any control over it. Each buyer/ seller has to accept the price as it is in the market.

Market Price It is the price that exists in the market at a particular point of time, no matter, forces of supply and demand have adjusted themselves or not. Normal Price It is the price that is expected to exist when the forces of demand and supply have fully adjusted themselves. Market price always tends to move around the normal price as shown in the given figure.

Monopoly market structure arises because of the following reasons:

1. Patent Rights These are given to the new product or technology and it gives rise to monopoly as no one can use their technology without permission.
2. Cartel Firm's negotiations with other firms with regards to pricing and output policy also give rise to monopoly.
3. Government Licensing Such licensing to a particular company also gives rise to monopoly.

When market price is below the equilibrium price demand becomes greater than supply and excess demand emerges. Since buyers will not be able to buy all they want to buy there is competition between buyers leading to rise in price. Rise in price couses fall in demand (contraction) and rise in supply (expansion), This continues till the price reaches equilibrium again.

Two features of monopoly are as follows:

1. One Seller and Large Number of Buyers Under monopoly, there is a single producer of a commodity. He may be alone or there may be a group of partners or joint stock company or a state. However, there are a large number of buyers of the product.
2. Restrictions on the Entry of New Firms Under monopoly, there are some restrictions on the entry of new firms into the monopoly industry. Generally, there are patent rights or exclusive control over a technique or raw material.

The equilibrium price remains same in the following cases:

1. When increase in demand is equal to increase in supply.
2. When decrease in demand is equal to decrease in supply.
3. When demand increases and supply is perfectly elastic.
4. When demand decreases and supply is perfectly elastic.
5. When supply increases and demand is perfectly elastic.
6. When supply decreases and demand is perfectly elastic.

1. Government ensures price Floor/ minimum Support price with the tool called buffer stock.
2. If government feels market price is lower than what it ought to be, it would purchase the commodity at higher price from the farmers, producers so as to maintain stock.
3. Government maintain this buffer stock with itself and they real eased in case of shortage of the commodity in future.

The equilibrium price is the price at which market demand and market supply are equal to each other.
It can be shown with the help of following schedule

Price ol a commodity (₹)	Quantity demanded (units)	Ouantity supplied (units)	Statement
1	100	20	D > S
2	80	40
3	60	60	D = S
4	40	80	S > D (Equilibrium price)
5	20	100

It is clear from the schedule that ₹ 3 is the equilibrium price where market demand is equal to market supply (60 units).

Under the long run, when free entry and exit is permitted, there is total changes in quantity but no change in equilibrium price. It happens when the demand curve intersects tile supply curve at equilibrium point. Then Price = minimum Average cost. As a result demand curve shift upward,
It effect, there is no change in price but quantity rises When the number of firms is fixed, the supply curve is upward and demand curve is downward sloping. It results the demand effect more in price than quantity.

The demand curve facing a monopolistically competitive firm is likely to be very elastic because the products produced by the monopolistically competitive firms are close substitutes to each other.
Consequently, Elasticity of Demand is high, i.e. presence of closely substitutable goods makes the firm's demand curve very elastic under monopolistic competition.

Selling costs are the costs incurred by a firm to promote its salés. A firm under perfect competition sells homogeneous products and faces a horizontal straight line demand curve. It can sell whatever amount it wishes to sell at the existing price. So, selling costs are not required.

If the prevailing market price is above the equilibrium price, there will be excess supply. Producers are not able to sell all they want to sell, resulting in competition among the sellers, Price starts falling As a result demand starts rising and supply stars falling These changes continue till the equilibrium is reached.

Following are the three different ways in which oligopoly firms may behave:

1. Firms may collude together and decide not to compete with each other and maximise total profits, as in collusive oligopoly.
2. Under non-collusive oligopoly, firms decide not to collude and hence decide to compete with each other through non-price competition.
3. Firms may produce differentiated products, having their own distinguishing characteristics, as in imperfect oligopoly.

The decisions of the consumers in the market are expressed through market demand schedule and market demand curve. The decisions of the producers are expressed through market supply schedule and market supply curve. The decisions of consumers and producers are coordinated by the interaction of market demand and market supply. This is known as price mechanism, which determines equilibrium in the market.

It is correct that firm under monopolistic competition generates an excess quantity, however it is not a wastage of scarce resources as firms under this form of market produces differentiated goods. So, there are certain consumers who always prefer to consume goods of a particular brand or quality. Hence firm's output will be sold and there will be no wastage.
Also, it helps firms to meet with unforeseen circumstances.

Maximum price ceiling refers to imposition of upper limit on the price of a good by the government. For example, in the diagram OP is price ceiling while equilibrium price is OP1. At this price, the producers are willing to supply only PA (Or OQ1) while consumers demand PB (Or OQ2). The effect of the ceiling is that shortage, equal to AB (O1Q2) is created, which may further lead to black marketing.

Demand curve under monopolistic competition is similar to monopoly. But the main difference between monopoly and monopolistic competition is that under monopolistic competition, demand curve is more elastic. It means that in response to change in price, change in demand is higher. It is because in a monopolistic competitive market, goods have close substitutes and in a monopoly market goods do not have close substitutes.

Sale of the same product at different prices to different buyers is known as price discrimination. For example,

1. The only doctor in the area may charge lower fee from the poor patients as compared to the rich ones.
2. For the same facilities, Indian railways are charging lower fare from the senior citizens than others.

1. Improvement in technology.
2. Fall in input prices.
3. Fall in price of related products, etc.

Under perfect competition there is freedom of entry to firms into industry. When there are abnormal profits, new firms will enter. This will increase supply and price will fall. This process will continue till abnormal profits are wiped out.

1. When demand increases more than supply, equilibrium price increases.
2. When demand and supply increase equally, equilibrium price remains constant.
3. When supply increases more than demand, equilibrium price falls.

Oligopoly is a form of market in which there are only a few firms operating in the market and each firm is very large in size. This leads to huge interdependence among the firms. They generally avoid price competition as a price-cut by one firm may lead to price war, leading to loss of revenue for both firms.

When supply or demand curve tends to shift, new equilibrium is struck through the process of extension and contraction of demand and supply. Generally, any change in demand and supply will cause a situation of either excess demand or deficient demand in relation to supply of the commodity. In a situation of excess demand (D > S), price will tend to rise causing contraction of demand and extension of supply.
This process will continue till new price is reached where demand equals to supply. Likewise in a situation of deficient demand (D < S), price will tend to fall causing extension of demand and contraction of supply. This process will continue till new price is reached where demand equals to supply.

1. When the government imposed lower limit on the price (minimum price) that may be charged for a good or service which is higher than equilibrium price is called price floor.
2. Price Floor is generally imposed on agricultural price support programmes and the minimum wage legislation.
3. Since this price is above equilibrium price, there is excess supply in the market. Since there is surplus, sellers can attempt to sell their product at a price below the floor price.

Price floor means minimum price fixed by the government for a commodity in the market. In most of the countries, the government fixes floor price of most the agricultural products i.e. food grains in India. It is, generally fixed above the equilibrium price.

'Increase' in demand leads to excess demand. Since buyers will not be able to buy all they want to buy, competition among buyers emerge leading to rise in price. Rise in price leads to fall (contraction) in demand and rise (expansion) in supply. This continues till demand is equal to supply at a new equilibrium price which is higher than the earlier price.

Homogeneous products mean the products which are identical in quality, shape, size and colour. So, no producer is in a position to charge a different price of the product it produces. A uniform price prevails in the market. In a perfectly competitive market, commodity is homogeneous (identical). Thus, the buyers find no reason to prefer the product of one seller to the product of another. Hence, the firms are price takers.

Since, the demand curve of XYZ company is downward sloping, it has to lower its price to sell additional units of output. So, we can conclude that the firm is a price-maker, because a price-taker firm's demand curve is parallel to the X-axis. But, here nothing is mentioned regarding Elasticity of Demand, hence XYZ company may have full price control (as under monopoly) or partial control over price (as under monopolistic competition).

Equilibrium is a point when at a given price, quantity demanded is equal to quantity supplied and equilibrium can be attained only at that point. If at a given price, supply is more, it will show excess supply and if demand is more, it will show excess demand. In either case, there will be movement in price and hence quantities, i.e. these are not stable points. Only at equilibrium price, the quantity demanded is equal to quantity supplied and there is no tendency to change from this point.

For certain goods & services, govt. sets minimum price. This minimum price is called minimum price ceiling.
This price is normally set at a level higher than the equilibrium price. This leads to excess supply. Since producers are not able to sell all they want to sell, they illegally sell the good or service below the minimum price.

For certain goods and services, government sets minimum price. This minimum price is called minimum price ceiling.
This price is normally set at a level higher than the equilibrium price. This leads to excess supply. Since producers are not able to sell all they want to sell, they illegally sell the good or service below the minimum price.

Maximum price of a good refers to the maximum price of a good a seller is allowed to charge by government.Since such a price is below the equilibrium price, it leads to shortage because demand is greater than supply at this price. The shortage in turn may lead to black marketing.

The given statement is correct. Both the blades of a pair of scissors are equally important to cut a piece of cloth. Similarly, both demand and supply are needed for determining price in the market. There is no use for demand for a product if there is no supply for the product and supply is not needed if there is no demand for the product. One of the two may play more active role in price determination in the short run. But, both are needed to determine the price in the long run.

1. Black marketing may be termed as a direct consequence of price ceiling.
2. Black market is a market under which the commodity is bought and Sold at a price higher than the maximum fixed by the Government.
3. It arises due to presence of consumers who may be willing to pay higher price for the commodity than to go without it.

Free entry and exit:Under perfect competition, there will be no restriction on the entry and exit of both buyers and sellers. If the existing sellers start making abnormal profits, new sellers should be able to enter the market freely. This will bring down the abnormal profits to the normal level. Similarly, when losses will occur existing sellers may leave the market. However, such free entry or free exit is possible only in the long run, but not in the short-run

1. If the demand for a commodity is perfectly inelastic, i.e., if the demand curve is a vertical straight line, a decrease in supply curve will result only in a change in the equilibrium price, but no change in the equilibrium quantity.
2. If the demand for a commodity is perfectly elastic, i.e., if the demand curve is a horizontal straight line, a decrease in supply curve will result only in change equilibrium quantity, but no change in equilibrium price.

Under monopolistic market, firms are free to enter the industry or leave the industry, however new firms have no absolute freedom of entry in industry. Products of some firms may be legally patented. New firms cannot produce those products, e.g. no rival firm can produce or sell a patented item like Woodland shoes. Still new firms may join any industry if they expect to earn profit. Similarly, a loss making firm may easily leave the industry.