5 Marks Each

Question 15 Marks

Explain the price determination process of market along with a diagram.

Answer

Process of price determination:

A consumer thinks that prices are decided by the producer or seller. But in reality individual producers or sellers do not decide the prices.
Prices are determined by the interaction of market demand and supply.
As per demand schedule, as the price rises the demand decreases where as in supply schedule, as price rises the supply increases. Thus, the demand curve slopes downward from left to right where as the supply curve slopes upward from left to right.
Since supply schedule and demand schedule move in opposite directions, equilibrium is attained only at a point where these two curves intersect each other. This point of intersection is called point of price equilibrium. Such an equilibrium price for goods exists in the market.
Individual sellers take this equilibrium price as a signal to determine prices of their individual products in the market.
In case of perfect competition firms take this price as signal whereas in case of monopoly and oligopoly, markets take this price as a signal. Even a monopolist has to take a price signal from the total demand and total supply.

Example:

The schedule given below shows demand and supply of a commodity at various prices. The diagram shows the demand and supply curve and their interaction.
According to Marshall, the market demand and market supply are called the invisible hands of market and the entire process is invisible. The two curves i.e. the demand curve and supply form a cross as shown in the figure.
In the figure, the demand curve $DD$ and the supply curve SS move in the opposite directions. They intersect at point $‘E’$ which is called the equilibrium point.
At equilibrium point the equilibrium price is $₹ 30$ which can be determined by plotting $EQ. $ At this price, quantity demanded and supplied i.e. $OQ$ is $600$ units. This is called the equilibrium quantity.

Price of a commodity (in ₹)	Demand of commodity (in kg)	Supply of commodity (in kg)
$10$	$1000$	$200$
$20$	$800$	$400$
$30$	$600$	$600$
$40$	$400$	$800$
$50$	$200$	$1000$

Diagram of price determination Case $1:$
If the industry raises its price to $₹ 40$ then ignoring the demand and supply schedules, the total demand contracts to $400$ units from $600$ units while the supply expands to $800$ units. Since demand is lesser than supply as shown by the distance between points $‘a’$ and $‘c’,$ the market price will tend to fall back to $₹ 30.$ This is called the equilibrating process of the market.
Case $2:$
Suppose if price is reduced by the industry to $₹ 20$ by ignoring the demand and supply schedules, the total demand expands to $800$ units while supply contracts to $400$ units. Since demand is greater than supply as shown by the distance between points $‘d’$ and $‘b’,$ the market price will tend to rise back to $₹ 30.$ This again is the invisible process of the market.

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Question 25 Marks

Explain law of supply in detail with the help of a schedule and diagram.

Answer

$(A)$ Law of supply:
“When all other factors affecting supply are assumed to be constant, as price increases, supply expands and as price decreases, supply contracts”. The definition tells that there is a direct and positive relationship between price and supply. This relationship is called law of supply.

Assumptions of law of supply:

Over and above time, several factors affect the supply of a good at a particular point of time. Flowever, at given point of time, the law of supply assumes the effect of all factors on supply other than the price as constant.

In reality, other than price there are some other factors that can influence the supply more. However, we assume these to be constant.

Some important assumptions of law of supply:

Prices of factors of production remain constant.

There is no change in technology.

Level of competition remains the same. In other words, number of sellers in the market remains the same.

Expectations regarding future prices are ignored/held constant.

Other factors like government policy, transport facilities, natural factors, etc. remain constant.

$(B)$ Supply schedule:
A schedule is a data table that shows a seller’s willingness to sell a good at various prices called the supply schedule.

Example:
The table shown here represents the willingness of a seller to sell apples at different prices.

Price of apples per kg (in ₹)	Supply of apples (in kg)
$50$	$200$
$60$	$400$
$70$	$600$
$80$	$800$
$90$	$1000$

Diagram of law of supply

Analysis:

In the diagram, price of apples is represented on $‘Y-$axis and supply of apples on $‘X-$axis.

On plotting these points on the graph we get points $a, b, c, d$ and $e.$ $ x$ These points on the graph show the various price-supply combinations.

As can be seen in the graph, when price is $₹ 50,$ supply is $200 \ kg,$ when price rises to $₹ 60,$ supply extends to $400 \ kg$ and when price rises still further to $₹ 70,$ supply extends to $600 \ kg$ and so on.

The curve $SS$ formed by joining these points is called the supply curve. It has a positive slope.

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Question 35 Marks

Discuss in detail the factors affecting supply.

Answer

Factors that affect supply can be classified under two groups. They are:

Price of the good (product) and
Factors other than price.

$1.$ Price of the good (product):

Price is an important determinant of supply.
A producer sells goods for earning profit. In order to earn higher profit, he supplies more goods when the price of a product rises and less when the price falls.
Thus, there is a positive relationship between price of a good and its supply.

$2.$ Factors other than price:
$(A)$ Price of factors of production cost of production:
Change in cost of production affects its supply.
Example:

When rent paid to the owner of land or wages paid to the labourer, decrease, the cost of production decreases.
When cost of production decreases and if price remains unchanged, the profits increase. Hence, the seller is more willing to sell large quantity. Thus, supply expands when prices of factors of production fall.
On the contrary, if cost of production rises, the situation becomes opposite and the supply contracts.

$(B)$ Level of technology:

When technology advances, time and efforts are saved. Hence, goods in large quantities and better quality can be produced that too with the same or lower costs.
To add to this, if market price does not fall then profits increase and sellers are willing to sell more. Thus, supply expands.

$(C)$ Future expectations about price:
If sellers speculate price of a product to rise in future then they contract the current demand so that they can build up stock for the future and vice, versa. Thus, future expectations about price affect the current supply of goods.
$(D)$ Other factors:
Other factors that increase supply are:

Increase in number of firms producing the product
Existence of political stability in the state
Favorable natural conditions
Presence ,qf efficient law and order and legal systems
Industrial relations are maintained well between owners and workers of production and marketigg activities, etc.
On the other hand, supply decreases when the above factors become negative.

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Question 45 Marks

Explain the concept of expansion-contraction and increase-decrease in supply with the help of diagram.

Answer

Introduction :
The factor affecting supply is called determinate its of supply.
The supply changes because of two things
Change in supply due to change in price.
Change in supply due to change in factors other than price.
If other things remain constant, the change in supply due to changes in price is called expansion - contraction of supply.
It is explained by the law of supply.
Expansion and contraction of supply take place on the same supply curve but the points on supply curve changes.
Generally an increase in price expands the supply and a decrease in price contracts supply.
If the price of the good remains constant, the change in supply due to other factors are called increase-decrease in supply.
An increase in supply shift the supply curve to the right and a decrease in supply curve to the left.
In both cases new supply curve is parallel to original supply curve.

Expansion and Contraction of Supply :

If other things remain constant , the change in supply due to changes in price is called expansion - contraction of supply.
We assume that other factors like price of factors of production, level of technology, policy of government, rumours about future prices, price of relative goods, number of firms are constant.
An increase in price expands the supply and a decrease in price contracts the supply.

Schedule and Diagram :

Price of x Commodity (Rs.)	The supply of x Commodity (Units)
$20$ $30$ $40$ $50$ $60$	$200$ $300$ $400$ $500$ $600$

The supply is measured on $X$ axis and Price is measured on $Y$ axis.
When the price of $x$ commodity is $40$ the supply of $x$ commodity is $400$ units.
It is shown by point a. if the price decrease to $Rs. 30$ the supply of $x$ commodity reduces to $300$ units.
It is shown by point It shows that the supply of $x$ commodity decrease with a decrease in its price.
This shows contraction of supply.
When the price of $x$ commodity is $50$ the supply of $x$ commodity is $500$ units.
If the price increases to $60$ the supply of $x$ commodity raises to $600$ units.
It is shown by point $c.$
It shows that the supply of $x$ commodity increase with an increase in its price.
This shows expansion of supply.
Expansion and contraction of supply takes place on the same supply curve.
The expansion of the supply is shown by the movement from point a to c and contraction of supply is shown by the movement from a to b.
In short, expansion and contraction of supply is price induced.

Increase and Decrease in Supply :

If the price of good remains constant, the changes in supply due to other factors are called increase- decrease in supply.
If other factors like price of factors of production, Level of technology, Policy of government, Rumours about future prices, Price of relative goods, Number of firms etc. raises the supply then it is called increase in supply and if it reduced supply then it is called decrease in supply.
In increase - decrease of supply, the position of supply curve changes.

Schedule and Diagram :

Price of apples in Rs.	Supply of apples in Kg.
20	100
20	200
20	300
20	400
20	500

The supply of $x$ commodity is measured on $X$ axis and price of $x$ commodity is measured on $Y$ axis.
When the price of $x$ commodity is $Rs. 50$ supply of $x$ commodity is $200$ units which is represented by point a.
Suppose the price of $x$ commodity remains same but changes in other factors raise the supply to $300$ units which shown by point b.
An increase in supply shifts the supply curve to the right The new supply $S1 \ S1$ curve is parallel to $S0 \ S0$.
The movement from point a on $S0 \ S0$ to point b on $S1 \ S1$ is called increase in supply.
When the price of $x$ commodity is t $50$ supply of $x$ commodity is $200$ units which is represented by point a.
Suppose the Price of $x$ commodity remains same but changes in other factors reduces the supply to $100$ units which is shown by point c.
The decrease in supply shifts the supply curve to the left.
The new supply $S2 \ S2$ curve is parallel to $S0 \ S0$.
The movement from point a on $S0 \ S0$ to point c on $SA$, is called decreases in supply.
In short, if the price of goods is constant, a decreases in factor cost, decreases in production cost, policy of government in, changes in technology, increase in number of firms etc. raise the supply of $x$ commodity.
Similarly, increase in factor prices, increase in production cost, unfavorable policy of government etc. reduces the supply of $x$ commodity.
An increase in supply shift the supply curve to the right and a decrease in supply curve shifts the supply curve to the left.

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Question 55 Marks

Explain an individual and market supply with the help of diagram.

Answer

Introduction :

The concept of individual supply is important to study the behaviour of the firm in economics.
The concept of market supply is important to study the theories of economics.

Individual Supply :

In economics any producer or traders who decides to sell the particular supply at different price then the supply is called individual supply.
Individual supply curve can be obtained from individual supply schedule.

Schedule :

Price of x Commodity (Rs.)	The supply of Firm ‘A’ (Units)	The supply of Firm ‘B’ (Units)
$10$ $20$ $10$	$100$ $200$ $300$	$200$ $300$ $400$

Explanation :

According to the above schedule in the following figures, we can derive firm $A'$s supply curve by joining different points of their willingness to sell and obtain $SS$ individual supply curve.
In the same way , we can obtain $S_1 \ S_1$ individual supply curve for $B'$s firm.

In the above figure on $OX$ axis supply of $x$ commodity and on $OY$ axis price of $x$ commodity are measured.
Firm A is ready to sell unit of x commodity at different price.
i.e. $100$ units at $Rs. 10$ per unit , $200$ units at $Rs. 20$ per unit, $300$ units at $Rs. 30$ per unit.
This optional point shown by $a, b,$ and $c.$ By joining these points.
We obtained $S1 \ S1$ supply cove of firm $A$
Same as, firm $B$ is ready to sell, units of x commodity at different price.
i.e. $200$ unit at $Rs. 10$ per unit, $300$ units at $Rs. 20$ per unit and $400$ units at $Rs. 30$ per unit.
By joining these $a, b$ and $c$ point, we obtained $S 1 \ S1$, supply curve of firm $B$.
Here it is proved that supply curve of both the firm $A$ and $B$ have positive slope.
It means that when price rise then firms are ready to sell maximum units.
But each firm proportion of sale is different.
So there is change in supply curve slope.
So supply curve of individual firm has positive slope hence, it has different slope.

Market Supply

The total supplies of individual firms in the market are called market supply.
In economics, the study of market supply is important and not the individual supply.
The market supply curve can be obtained based on market schedule.

illustration :

For easy understanding, suppose only two firm $A$ and $B$ in the market.
Following supply is available at different price of $x$ commodity of these two firm at different price of $x$ by totaling we can know the market supply through available supply.

Price of x Commodity	The supply of Firm ‘A’	The supply of Firm ‘B’	Market Supply
$Rs. 10$ $Rs. 20$ $Rs. 30$	$100$ Units $200$ Units $300$ Units	$200$ Units $300$ Units $400$ Units	$300$ Units $500$ Units $700$ Units

Explanation :

As per above schedule in the following figure by adding individual supply of firm $A$ and $B$, market supply of $300$ units at $Rs. 10, 500$ units at $Rs. 20$ and $700$ units at $Rs. 30$ is given.
By joining $A, B, C$ combination we get supply curve of market.

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Question 65 Marks

What is Supply? Explain different factors affecting supply.

Answer

Introduction :

Generally stock and supply are same but in economics both are different.
To understand the concept of supply we need to know about production, stock and supply.

Meaning of Supply :

All the factors remaining constant, at a particular time, the willingness units and capacity of the firm to sell goods is called supply.
E.g. Suppose the producer has $1000$ units of goods $x$ but he is not ready to sell because there is a rumor that the price of goods $x$ will increases in future.
Similarly, if he is not ready to sell $500$ units at prevailing price than supply of goods $x$ is $500$ units.
If the producer wants to sell $1000$ units but stock is $500$ units then supply is $500$ units only.
It means that procedure has the stock of the goods to sell. In this case, $1000$ units of goods $x$ is stock.
If the procedure is not ready to sell any unit, the supply is zero.
In short, all factors remaining constant, at a particular price, at a particular time, the willingness and capacity of the firm to sell goods is called supply.
The supply of the goods can be less than or equal to the stock of the goods.
There is a difference between supply and sell.
The supply of goods is the probability of selling whereas selling is reality

The Factors Affecting Supply :

The factors affecting supply can be classified in to two. divisions:
Price of goods,
Factors other than Price.

- - Price of goods :

- - If all other factors remain constant and price of goods decreases, the supply contracts.
  - If the price increases, the supply also increases.
  - The change in prices of goods influences, the seller will reduce the stock and increases the supply to earn more he seller will place more orders with that supply earn more profit.
  - In this way. if the price Increases, increases, the seller will place more orders with that supply will increase.
  - Thus changes in prices affect the stock and production of goods and also influence supply in the final analysis.

- - Factors other than Price :

- - Even if prices remain constant, there are some factors that influence the supply of goods.
  - Cost of production factors :
    - - Production affects supply most and production depends on cost of production.
      - If the price of commodity is constant but the factors of production vary in cost, supply is affected.
      - E.g. Interest paid on capital, rent paid on land decreases, the cost of production goes down and it becomes quite profitable for the producer.
      - Therefore, the production as well as supply increases.
      - Variation in cost of production affects supply of commodities remarkably.
      - If prices of commodities are constant but improvement of method of production reduces the cost of production and the producer will increases the supply of commodities to increase the profit.
      - On the contrary, if the prices of commodities are constant but if the cost of production increase on account of increase in wages or any other reasons, the producer will reduce the production and Increase the stock to reduce the risk of loss.
      - As a result, the supply will also be reduced.
  - Natural factors :
    - - Natural factors also affect the supply of commodities.
      - e.g. Heavy rains famine, earthquake, cyclone etc.
      - These factors affect the agricultural production adversely and supply decreases.
      - On the contrary, favorable climate helps in increasing the production and supply.
  - Prices of substitutable $($Compatible$)$ Commodities :
    - - Changes in prices of other substitutable commodities also affect the supply of particular commodities.
      - e.g. The price of bajra $($millet$)$ remains constant but if the prices of cotton increases, the farmer will reduce the production of bajra and supply of bajra will decreases while he will grow more cotton and increases the supply of cotton.
  - Transport facilities :
    - - In any country, an if transport and communication facilities become cheap and easily available, commodities can be transported easily, rapidly and cheaply .
      - Therefore, supply increases but if transport facilities are not available easily, supply decreases.
  - Credit facilities / Facilities of loan :
    - - If producers obtain credit facilities and loans at lower rates, they get necessary finance.
      - Thus, capital increases and with increases in production, supply also increases.
      - But if the producers get finances at higher rate of interest, the cost of production increases and supply of production decreases.
  - Government policy :
    - - The policy of government also influences the supply of commodities.
      - If government levied more taxes on production or sale of commodities, the production suffers and supply decreases.
      - On the other hand, if the government announces various reliefs in taxes or subsidies for production units, production increases, resulting in the increase of supply also.
  - Political circumstances :
    - - Political situation in the country also influences supply.
      - If there are instability, terrorism, unrest or chaos in the country, producer experience the feelings of fear and insecurity and therefore, production and supply decreases.
      - On the contrary, if peace, security and Progress prevail in the country, production and supply increases.
  - Rumor :
    - - Rumours regarding price of commodities in the market or government policies affect the supply of the commodities.
      - If there is a rumour about the rise of price in future, the producer restrict will increases the stock and supply will be reduced at the current rate.
      - If there is a remour about restrictions on certain commodities, supply will decreases on a large scale.
  - The number of firms and objects :
    - - A change in number of firms or changes in their objectives affect supply in the long run.
      - If number of firms increases or the size of firms expands it results in larger supply of commodities.
      - On the contrary, if number of firm decreases, production becomes unprofitable and supply decreases in the long run.

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Economics 5 Marks Each

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