QUESTIONS EQUILIBRIUM or DEMAND AND SUPPLY

QUESTIONS EQUILIBRIUM or DEMAND AND SUPPLY

‘Equilibrium price is one at which the amount demanded is exactly equal to the amount supplied’. Explain.

  1. Is equilibrium price a stable price?
  2. How will you discuss the effects of changes in demand on equilibrium price?
  3. What do you understand by an increase in supply? What is the effect of an increase irrsupply on price? Illustrate by a diagram.
  4. Explain and illustrate the effects of changes _in both supply and demand on

equilibrium price.

“When the equilibrium price in the market is disturbed, forces are set into motion

which tend to restore it”. Explain and illustrate.

What will be the effect of the following price on and quantity exchanged.

(a)         Demand and supply both increase equally.

(b)         Demand and supply both decrease equally.

(c)         Demand and supply both increase but supply increases more than demand

(d)         Demand and supply both decrease but supply decreases more than demand. A. SHORT ANSWER QUESTIONS

1. What is meant by equilibrium price?

  1. What will be the outcome if price is set (a) above the equilibrium price (b) below the

equilibrium price?

3. What effect will an increase in supply have on price of a good and demand for a

good?

  1. What effect will a decrease in demand have on price and supply of a good?
  2. If there is a surplus of a good, is the price above or below the equilibrium price for that good.

What is Price Floor?

In a market economy, the equilibrium price of a good is determined by the forces of demand and supply. The equilibrium price at which the quantity demanded of a good equals quantity supplied of it, may or may not be desirable. The government, therefore, sometime intervenes’ and tries to keep the price of a good either above or below the

‘equilibrium price. In case the government sets ay minimum price of a good above its equilibrium price, it is named as Price Floor. Price floor results   Surplus

in a surplus of production. Price floor is adopted to (a) stabilize the incomes of the producers. (b) providing a more steady flow of goods at a relatively stable prices.

In figure 8.14 the equilibrium price of a good is OP. The government fixes a minimum price OP1. There is a surplus Qs — Qd.

price-floor

ANSWERS:

  1. In the absence of government intervention, price of a good is determined by its demand and supply. The equilibrium price is the price at which the quantity demanded of a good equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.
    1. (a) If the price is set above the equilibrium, there is a surplus of good and its price falls.

At price below the equilibrium, there is shortage of good and the price rises.

  1. In the short run, other things being equal, an increase in the supply of a good will lower its price and this in turn will cause an extention in demand.
  2. In the short run, other things being equal, a decrease in demand for a good will lower its price and cause a contraction in supply.
  3. In case. the good is surplus in market, the price must be above the equilibrium price. The powerful forces operate to lower the price and move it toward the equilibrium

price while eliminating the surplus.

Related Economics Topics

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