Updated On : September 14, 2023
Knowing the CBSE Class 11 Economics Syllabus 2022 is a prerequisite for preparing for the main examination.
The board has divided the Economics syllabus into two parts, i.e., Part A and Part B.
Part A consists of Statistics for Economics, while Part B consists of Introductory Microeconomics. The theoretical part of the CBSE Class 11 Economics Syllabus 2022 comprises of 80 marks, while project work consists of 20 marks.
To help you with the exam preparation, we have provided chapter-wise class 11 Economics important questions with answers.
You can go through these questions and enhance your exam preparation. You can also download free study notes for the Economics subject below.
Economics is one of the optional subjects among all the 11th Commerce Subjects.
Let us have a look at the chapter-wise important questions for class 11 economics from below and improve your speed and accuracy in the exam.
Solving Class 11 Economics Sample Papers will help you know the paper's difficulty level and the type of questions asked in the exam.
Check the list of some important questions for class 11 economics chapter 1 provided here and enhance your preparation.
Q. Explain Diamond Water Paradox?
Ans. It is based on the principle of scarcity. Like water is useful, yet it is cheap due to its abundance in the economy. Diamonds are very expensive because they are scarce so, people are ready to pay a high price.
Q. Only scarce goods attract price.” Comment.
Ans. The given statement is correct. All resources are not scarce in the economy. For example, the air we breathe is abundant in relation to wants. Such goods are available free of cost. These goods are known as Non-Economic Goods. On the other hand, some goods are scarce in relation to their wants. For example, petrol, electricity, etc. are scarce in relation to wants. These goods command price and are known as Economic Goods. So, it is rightly said that only scarce goods attract price.
Q. What does the slope of PPF indicate?
Ans. PPF is a downward sloping concave shaped curve.
(i) Its downward slope indicates that in order to increase production of one good, another good need to be sacrificed
(ii) Its concave shape indicates that More and More unit of one good sacrificed in order to produce one unit of another good.
Q. “Scarcity and Choice go together”. Comment.
Ans.All of us want better food, clothing, housing, schooling, entertainment, etc. But resources are not enough to meet all our wants. Even the developed economies cannot satisfy all the needs of people. It means, scarcity of resources is a common feature of every economy and it gives rise to the problem of choice, i. e. how to make the best possible use of available resources. If resources were available in plenty, there would not have been any problem of choice. Hence, economics is concerned with the problem of choice under the conditions of scarcity.
Q. “An economy always produces on, but not inside, a PPC”, Defend or refute the statement.
Ans. The given statement is refuted. An economy operates on PPF, only when resources are fully and efficiently utilized, it means, if there is unemployment or inefficient use of resources, then the economy may operate inside the PPC.
Go through all the important questions for class 11 economics state board for the consumer's behavior chapter.
Q. Law of DMU operates only with continues consumption.
Ans. Law of diminishing marginal utility will operate only when consumption is a continuous process. For example, if one burger is consumed in the morning and another in the afternoon, then the second burger may provide equal or higher satisfaction as compared to the first one.
Q. “Define a budget line. When can it shift to the right?
Ans. Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.
Budget Line shifts to the right when:
(i) When there is an increase in income, assuming no change in prices of the two goods;
(ii) When there is decrease in prices of both the goods, assuming no change in income of the consumer.
Read more: CBSE Class 11 Numerical applications
Q. What changes will take place in TU, when: (i) MU curve remains positive; (ii) MU becomes ‘0’ ; (iii) MU is negative.
Ans. (i) TU will increase, but a diminishing rate; (ii) TU will be maximum; (iii) TU starts falling.
Q. State the conditions of consumer’s equilibrium in the Indifference Curve Analysis and explain the rationale behind these conditions.
Ans. Let the only two goods the consumer consumes are X and Y. The two conditions of equilibrium are:
(1) MRSXY =
(2) MRS falls as more of X is consumed in place of Y
Rationale behind these conditions:
(1) Suppose MRSXY > it means that to obtain one more unit of X , the consumer's willing to sacrifice more units of Y as compared to what is required in the market. It induces the consumer to buy more of X. As a result, MRS falls and continue to fall till it becomes equal to the ratio of prices and the equilibrium is established.
Suppose MRSXY < it means that to obtain one more unit of X , the consumer's willing to sacrifice less units of Y as compared to what is required in the market. It induces the consumer to buy less of X. As a result, MRS increases and continue to rise till it becomes equal to the ratio of prices and the equilibrium is established.
(2) Unless MRS falls as consumer consumes more of X, the consumer will not reach equilibrium again.
Q. A consumer consumes only two goods X and Y whose prices are Rs.4 and Rs.5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibriumRs.Give reasons. What will a rational consumer do in this situationRs.Use utility analysis.
Ans. Given PX = 10, PY = 15 and MUX = 50, MUY = 45. A consumer will be in equilibrium when Substituting values, we find that: Or
Since per rupee MUX is higher than per rupee MUY, consumer is not in equilibrium.
The consumer will buy more of x and less of y. As a result MUX will fall and MUY will rise. The reaction will continue till are equal and consumer is in equilibrium.
Read more: Class 11 Accountancy Sample Papers
Here, we have provided economics class 11 important questions chapter wise for the theory of demand.
Q. “Law of Demand is a Qualitative statement”. Comment.
Ans. Law of demand is only an indicative, and not a quantitative statement. It indicates only the direction, in which the demand will change with a change in price. It says nothing about the magnitude of such a change. For example, price of Pepsi rises from Rs.10 to Rs.12 per bottle, then, as per law of demand, wecan say that the demand for Pepsi will fall. But the law does not give the actual amount by which the demand for Pepsi will decline.
Q. Distinguish between an inferior good and a normal good. Is a good which is inferior for one consumer also inferior for all the consumers? Explain.
Ans. When with the rise in income of the consumer demand fora good increases, that good is a normal good for that consumer. If with rise in income demand for the good decreases than that good is inferior for that consumer. A good is not necessarily inferior for all the consumers. A good which is inferior for a higher income consumer may be a normal good for the lower income consumer. It is not the consumer but the income level of the consumer which determines whether a good is normal or inferior.
Q. Derive the law of demand from the single commodity equilibrium condition “Marginal utility = Price”.
Ans. According to single commodity equilibrium condition, consumer purchases that much quantity of a good at which marginal utility (MU) is equal to price. Given, MU = price. Now suppose, price falls. It will make MU greater than the price and will encourage the consumer to buy more. It shows that when price falls demand rises.
Q. Distinguish between demand by an individual consumer and market demand of a good. Also state the factors leading to fall in demand by an individual consumer.
Ans. Demand by an individual refers to the quantity of a good the consumer is willing to buy at a price during a period of time. While market demand refers to the quantity of a good the consumers of that good are willing to buy at a price during a period of time.
The factors leading to fall in demand by an individual consumers are:
(I) Rise in own price of the normal good.
(ii) Fall in the price of substitute good.
Q. Suppose there are two consumers in the market for good and their demand functions are as follows:
Find out the market demand function.
Ans. From the given demand functions, it can be seen that both the consumers do not want to demand the good for any price above Rs. 15. Both of them demand only at a price less than or equal to Rs. 15. Hence, the market demand will be:
dmarket(p) = d1(p) + d2(p)
dmarket(p) = 20 – p + 30 – 2p
dmarket(p) = 20 – p + 30 – 2p
dmarket(p) = 50 – 3p for any price less than or equal to 15 and dmarket(p) = 0 at any price greater than 15.
Candidates can go through the economics class 11 important questions with answers for the elasticity of demand chapter.
Q. Price elasticity of demand for Milk and Wheat are respectively (-) 0.9 and (-) 0.5. Demand for which one is more elastic and Why?
Ans. Demand for Milk is more elastic as with 1% fall in price of milk, its demand rises by 0.9%. However, in case of wheat, 1 % fall in price raises the demand by just 0.5%.
Q. Differentiate between law of demand and price elasticity of demand.
Ans. (i) Law of demand states the inverse relation between price of a commodity and its quantity demanded, assuming no change in other factors. On the other hand, price elasticity of demand indicates the rate of change in quantity demanded of the commodity due to change in its price.
(ii) Law of Demand reflects the direction of change in demand, whereas, price elasticity of demand measures the magnitude of change in demand.
Q. What is the price elasticity of demand for following demand curves: (i) Straight line demand curve parallel to X-axis; (ii) Straight line demand curve parallel to Y-axis.
Ans. The price elasticity of demand in the following cases will be: (i) Perfectly Elastic Demand; (ii) Perfectly Inelastic Demand.
Q. State with reasons, whether the following items will have elastic or inelastic demand: (i) Matchbox;
(ii) Cold Drink; (iii) Medicines; (iv) Salt; (v) Electricity; (vi) Cigarettes; (vii) Butter for a poor person.
Ans. (i) Matchbox has inelastic demand as consumer has to spend a very small proportion of his income.
(ii) Coke has elastic demand as it has number of substitutes.
(iii) Medicines have inelastic demand as their consumption cannot be postponed.
(iv) NCERT Textbook has inelastic demand as it is a necessity item.
(v) Electricity has elastic demand as it can be put to several uses.
(vi) Cigarettes have inelastic demand as its consumers are habituated.
(vii) Butter for a poor person has elastic demand as it is a luxury item for the poor person.
Q.The price elasticity of demand for good × is known to be twice that of good Y. Price of X falls by 5% while that of good Y rises by 5%. What is the percentage change in the quantities demanded of X and Y?
Percentage fall in price of X = 5%; Percentage rise in price of Y = 5%
Also, price elasticity (Ed) of X is twice of good Y Suppose, ed of Y is 1, then ed of X will be 2.
Therefore, a 5% fall in the price of good × will lead to a 10% rise in the demand for X and a 5% rise in the price of good Y will lead to a 5% fall in the demand for Y.
Ans. Quantity of X will rise by 10%; Quantity of Y will fall by 5%
Check the class 11 economics chapter 5 important questions from below.
Q. Why MP curve cuts AP curve at its maximum point?
Ans. It happens because when AP rises, MP is more than AP. When AP falls, MP is less than AP So, it is only when AP is constant and at its maximum point, that MP is equal to AP. Therefore, MP curve cuts AP curve at its maximum point.
Q. Can AP rise when MP starts declining?
Ans. Yes, AP can rise when MP starts declining. It can happen as long as falling MP is more than AP. However, when MP becomes equal to AP, then further decline in MP will also reduce the AP.
Q. What are the different phases in the Law of Variable Proportions in terms of Total Product? Give reasons behind each phase. Use diagram.
Ans. The Phases are:
Phase I: TP rises at increasing rate, i.e. upto A.
Phase II: TP rises at decreasing rate, i.e. between A and B.
Phase III: TP falls i.e. after B.
Phase 1: Initially variable input is too small as compared to the fixed input, As production starts, there is efficient use of the fixed input, leading to rise in productivity of the variable input on account of division of labour. As a result, TP rises at increasing rate.
Phase II: After a level of output, pressure on fixed input leads to fall in productivity of the variable input. As a result, TP continues to rise but at a decreasing rate.
Phase III: The amount of variable input becomes too large in comparison to the fixed input causing decline in TP.
Q4. Let the production function of a firm be: Q = 2L2K2. Find out the maximum possible output that the firm can produce with 5 units of L and 2 units of K. What is the maximum possible output that the firm can produce with zero unit of L and 10 units of K?
Hint: Maximum possible output with 5 units of L and 2 units of K
Given: Q = 2L2K2 and L = 5 units; K-2 units
Putting the values of L and K in the given production function, we get:
Q = 2(5)2 (2)2 = 200 units
Maximum possible output with 0 unit of L and 10 units of K
Given: Q = 2L2K2 and L = 0 unit; K = 10 units
Putting the values of Land K in the given production function, we get:
Q = 2(5)2 (10)2 = 0 unit.
Q. Find out the maximum possible output for a firm with zero unit of L and 10 units of K when its production function is: Q = 5L + 2K.
Hint: Given: Q = 5L + 2K. and L = 0 units; K- 10 units
Putting the values of L and K in the given production function, we get:
Q = 5(0)+2(10)
Q or Maximum output = 20 units.
Let us have a look at Class 11 Economics important questions for theory of cost chapter.
Q.“The gap between AC and AVC keeps on decreasing with rise in output, but they never meet each other”. Comment.
Ans. The given statement is correct. The gap between AC and AVC keeps on decreasing because the difference between them is AFC, which falls with increase in output. However, AFC can never be zero. Therefore, AC and AVC can never meet each other.
Q. Why does the minimum point of AC curve fall towards right of AVC curve?
Ans. The minimum point of AC curve fall towards right of AVC curve because AC continues to fall due to decreasing AFC even after AVC starts rising.
Q.“MC can be calculated both from total cost and total variable cost and is not affected by total fixed cost”. Discuss
Ans. The given statement is correct. MC is not at all affected by total fixed cost (TFC). MC is addition to TC or TVC when one more unit of output is produced. As TFC remains same with increase in output, MC is independent of fixed cost and is affected just by change in variable costs.
Q. Calculate TFC, if AC and AVC are Rs. 22 and Rs. 18 respectively, at output of 10 units.
Ans. AFC = AC - AVC = Rs.22- Rs. 78 = Rs.4
TFC - AFC × units produced = Rs. 4×10 units
TFC = Rs. 40
Q. Classify the following as fixed cost and variable cost:
(i) Salary to manager of the company.
(ii) Wages to casual labour.
(iii) Payment of insurance premium for insurance of factory.
(iv) Payment for raw material.
(v) Payment of rent of Postpaid connection of Mobile Phone.
(vi) Interest on loan taken from ICICI.
(vii) Electricity charges beyond the minimum rent.
(viii) Payment of rent of the factory building to the landlord.
(ix) Commission to production manager on the basis of number of units produced.
(x) Payment of fuel used in machines.
Ans. Fixed Cost: (i), (iii), (v), (vi), (viii); Variable Cost: (ii), (iv), (vii), (ix). (x).
Check the Class 11 Economics important questions for the chapter theory of revenue from the post below.
Q.Why AR curve under monopolistic competition is more elastic than AR curve under monopoly?
Ans. AR curve under both the markets slope downwards. However, AR curve under monopolistic competition is more elastic as compared to AR curve under monopoly because of presence of close substitutes. AR curve is less elastic in monopoly because of no close substitutes.
Q. Under what market condition does Average Revenue always equal Marginal Revenue? Explain?
Ans. It is under the market condition when a firm can sell more at the given price that AR = MR throughout as production is increased by the firm. It is because the firm is a price taker. It means that price, which is same as AR, remains unchanged throughout. By the average - marginal relationship, AR remains unchanged only when AR = MR throughout.
Q. What is the relation between market price and marginal revenue of a price-taking firm?
Ans. Market price is equal to marginal revenue (MR). It happens because the price-taking firm can sell more quantity of output at the same price. It means, revenue from every additional unit (MR) is equal to price or average revenue (AR) as Price = AR.
Q. Compute the total revenue, marginal revenue and average revenue schedules in the following table. Market price of each unit of the good is Rs. 10.
|(P)||(Q)||TR = P×Q||AR (Price) = TR ÷ Q||MRn = TRn-TRn-1|
Q. What would be shape of demand curve, so that TR curve is: (a) a positively sloped straight line passing through the origin; (b) a horizontal line?
(a) Demand curve or AR curve will be a horizontal straight line parallel to the X-axis because positively sloped straight line TR curve passing through the origin indicates that price (orAR) remains constant at all levels of output.
(b) Demand curve or AR curve will slope downwards from left to right because horizontal TR indicates that TR remains same at levels of output. It is possible only when price (or AR) falls with rise in output.
Go through the Class 11 Economics Important Questions of the producer's equilibrium provided in this post.
Q. Why should MC curve cut MR curve from below to achieve producer’s equilibrium?
Ans. One of the two conditions of the establishment of stable equilibrium of a firm is that its MC curve should cut the MR curve from below, not from above. If the MC curve cuts the MR curve from above, the equilibrium so established shall not be stable as it will be possible to add to profits by producing more. The idea is that beyond the point of equilibrium, the MC should be greater than MR so that further production becomes uneconomical.
Q. A table showing TC and TR of a firm is given. Calculate MC and MR and find out the equilibrium level of output.
|Output (Q)||TC||TR||MC(V||MR (Rs.)|
|(in units)||(Rs.)||(Rs.)||MRn = TRn-TRn-1||MRn = TRn-TRn-1|
The producer achieves equilibrium at 6 units of output. It is because this level of output satisfies both the conditions of producer’s equilibrium:
(i) MC is equal to MR; and
(ii) MC becomes greater than MR after this level of output.
Q. The equality of marginal cost and marginal revenue is a condition necessary for equilibrium, but it is not by itself sufficient to assure the attainment of producer’s equilibrium. Comment.
Ans. The given statement is correct. Equality of marginal revenue (MR) and marginal cost (MC) is only one condition for the equilibrium of the firm. Another condition also needs to be fulfilled for the establishment of the firm’s equilibrium and that is: ‘MC must be greater than MR after MC = MR output level’.
Q. Why is the equality between marginal cost and marginal revenue necessary for a firm to be in equilibrium? Is it sufficient to ensure equilibrium? Explain.
Ans. The producer’s equilibrium conditions are: (i) MC = MR; and (ii) MC > MR after equilibrium.
Suppose MC > MR: In this situation, it will be profitable for the firm to produce more or less depending upon relative changes in MC and MR till MC = MR.
Suppose MC < MR: It will be profitable for the producer to produce more till MC = MR.
MC= MR is not a sufficient condition to ensure equilibrium. Given MC = MR, suppose the behaviour of MC and MR is such that if one more unit is produced, MC becomes less than MR.
Then in this case it will be profitable for the firm to produce more. Therefore, in this case though MC = MR, the producer is not in equilibrium. However, if after MC = MR output, MC becomes greater than MR, it will be most advantageous for the firm to produce only upto MC = MR.
Q. Explain why will a producer not be in equilibrium if the conditions of equilibrium are not met.
Ans. The equilibrium conditions are: (i) MC = MR; and (ii) MC > MR after equilibrium.
Suppose MC = MR condition is not met. Let MC > MR. In this, it will be profitable for the firm to produce more or less depending upon the relative changes in MC and MR till MC = MR. Similarly, if MC < MR, it will also be profitable to produce more till MC = MR.
Now Suppose ‘MC > MR after equilibrium condition is not met’ and MC < MR after equilibrium. In this case, the firm will not be in equilibrium because it can increase its profits by producing more.
Here, we have provided Class 11 Economics important questions for the supply chapter. These questions will help candidates enhance their preparation for the exam.
Q. What is the price elasticity of supply, when: (a) Supply curve passes through the origin; (b) Supply curve is a vertical straight line; (c) Supply curve is a horizontal straight line.
Ans. The price elasticity of supply in the following cases will be:
(i) Unitary elastic Supply
(ii) Perfectly Inelastic Supply
(iii) Perfectly Elastic Supply
Q. There are three different supply curves passing through the origin. Curve A makes an angle of 60°. Curve B makes an angle of 45° and curve C makes an angle of 30°. What will be the price elasticity of curves A, B and C?
Ans. All the three curves: A, B and C will have unitary elastic supply as they all are passing through the origin.
Q. Give one point of difference between individual supply and market supply.
Ans. Individual supply may not strictly follow Law of supply i. e. it is not necessary that supply for an individual always varies directly with price. However, market supply always follows law of supply, i.e. market supply always varies directly with price.
Q. ‘Supply curve is the rising portion of marginal cost curve over and above the minimum of Average Variable cost curve’. Do you agree? Support your answer with valid reason.
Ans. Yes, we do agree with the given statement. No rational producer would like to supply his output to the market if he is unable to recover his per unit variable cost as it would lead to losses between the range of minimum of marginal cost and minimum of average variable cost.
Q. A firm earns a revenue of Rs. 50 when the market price of a good is Rs. 10. The market price increases to Rs. 15 and the firm now earns a revenue of Rs. 150. What is the price elasticity of the firm’s supply curve?
|Price (Rs.)||Total Receipts (Rs.)||Quantity in units (Total Receipts ÷ Price)|
Price Elasticity of Supply (Es) = × = × = 2
Go through the Class 11 Economics Important Questions here and prepare well for the upcoming exam.
Q. How does a firm under monopolistic competition exercise partial control over price?
Ans. A monopolistic competitive firm enjoys partial control over price. It happens because by incurring heavy selling cost, the firm is able to create a differentiated image of its product in the minds of consumers. Products are differentiated on the basis of brand, size, colour, shape, etc. Buyers are attracted to buy a particular product even at a relatively higher price.
Q. “Monopolistic Competition is competition with differentiated products.” Elucidate.
Ans. An important characteristic of monopolistic competition is product differentiation. The competing firms produce products which are close but not perfect substitutes of each other. The products are differentiated on the basis of brand, size, colour, shape, etc. It is on account of this product differentiation, firms have to incur huge selling costs to compete with other firms. So, it is rightly said that ‘Monopolistic Competition is competition with differentiated products’.
Q. Why is the number of firms small in an oligopoly market? Explain.
Ans. The main reason for small number of firms under oligopoly is the ‘Barriers to Entry’, which prevent entry of new firms into the industry. Patents, requirement of large capital, control over crucial raw materials, etc, are some of the other reasons, which prevent new firms from entering into industry. As a result, there are few firms in an oligopoly market.
Q. What happens to profits in the long run if firms are free to enter in the industry?
Ans. When existing firms are earning profit, freedom of entry induces new firms to enter the industry. This raises market supply which in turn leads to fall in market price. Profits fall and continue to fall, till each firm is earning zero economic profit or normal profit.
Q. Explain the ‘Implications’ of the following:
(i) ‘Large Number of Buyers’ under Perfect Competition
(ii) ‘Freedom of Entry and Exit’ to firms under Perfect Competition
(iii) ‘Inter-dependence between Firms’ under Oligopoly
(iv) ‘Non-price Competition’ under Oligopoly
(v) ‘Large number of Sellers’ under Perfect Competition
(vi) ‘Homogeneous Products’ under Perfect Competition
(vii) ‘Barriers to Entry of New Firms’ under Oligopoly
(viii) ‘Few Big Sellers’ under Oligopoly
(ix) ‘Product Differentiation’ under Monopolistic Competition
(x) ‘Perfect Knowledge’ under Perfect Competition
(i) Implication is that no individual buyer is in a position to influence the market price on its own by changing his individual demand.
(ii) Implication is that when existing firms are making profits, new firms enter, raise the output of industry, bring down the market price enough for the firm to earn just only normal profit in the long run. The opposite happens if the existing firms are facing losses.
(iii) Implication is that an individual firm takes into consideration the likely reaction of its rival firms before making a move to change price or output. It is possible because it is assumed that rival firms may react.
(iv) Non-price competition means competition between firms by means other than changing price, like free gift, home service, customer care etc. Implication is that firms in oligopoly prefer non-price competition to avoid price-war because the firm who starts the price-war may be the ultimate loser.
(v) Implication is that no single firm is in a position to influence the market price on its own by changing its own output. Thus, price remains unchanged.
(vi) Implication is that no firm can charge a higher price because no buyer is willing to pay the same. Thus, market price remains the same for all the firms.
(vii) Implication is that such barriers allow only a limited number of firms into oligopoly industries. Such barriers may be in the form of huge capital requirements, patent rights, availability of crucial raw materials etc.
(viii) Implication is that each big seller contributes a fairly large share of total output. This gives an individual seller the power of influencing the market price by changing its own output.
(ix) Implication is that buyers differentiate products of firms various as different. So, they are willing to pay different prices for the products of different firms. This product differentiation gives the power to an individual firm to influence the market price on their own.
(x) Implication is that buyers are fully aware of price in market and sellers of technique of production. Knowledge by buyers further implies that no buyer is willing to pay a higher price for the product of any firm. Knowledge by sellers implies that cost of production is same for all producers.
Here is the list of Class 11 Economics Important questions for the price determination chapter.
Q. Explain the effect of increase in income of buyers of a ‘normal’ commodity on its equilibrium price.
Ans. An increase in income of buyers will increase the demand for normal goods at the given price. It will lead to excess demand. This leads to competition among buyers, which raises the price. Increase in price leads to rise in supply and fall in demand. These changes continue till supply and demand become equal at a new equilibrium price. As there is an increase in demand only, equilibrium price rises.
Q. What will be the effect on equilibrium price and equilibrium quantity, when price of complementary goods increases?
Ans. When price of complementary goods increases, keeping other factors constant, then demand for the given commodity decreases since it becomes relatively expensive to consume the two commodities (the given commodity and its complement) together. It will lead to excess supply. This leads to competition among sellers, which reduces the price. Fall in price leads to decrease in supply and rise in demand. These changes continue till supply and demand become equal at a new equilibrium price. As there is a decrease in demand only, both equilibrium price and equilibrium quantity will fall.
Q. If market demand function is given as: QMD = 25 - 2P and market supply as: QMS = 3P, then what will be the equilibrium price and equilibrium
Ans. At equilibrium, QMD = QMS It means, 25 -2P = 3P Or, 5P = 25
P or Equilibrium Price = Rs. 5.
Putting the value of equilibrium price in the equation of market demand function:
Equilibrium Quantity= 25-2×5=15 units.
Q. Explain the effects of ‘Maximum Price Ceiling’ on the market of a good. Use diagram.
Ans. 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 OPv At this price, the producers are willing to supply only PA (Or OQ1), while consumers demand PB (Or OQ1). The effect of the ceiling is that shortage, equal to A B (Q1Q2), is created, which may further lead to black marketing,
Q. What are the effects of ‘price-floor’ (Minimum Price Ceiling) on the market of a good? Use diagram.
Ans. When government imposes lower limit on a price that may be charged for a particular good or service, it is called Minimum Price Ceiling, e.g. price OP1. At this price, the producers are willing to supply P1B or (OQ2), while consumers demand only P1A (= OQ1). Unable to sell, all they want to sell, the producers may try to illegally sell below the minimum price.
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