NIOS Class 12 Economics Chapter 22 Price Determination Under Perfect Competition, Solutions to each chapter is provided in the list so that you can easily browse through different chapters NIOS Class 12 Economics Chapter 22 Price Determination Under Perfect Competition and select need one. NIOS Class 12 Economics Chapter 22 Price Determination Under Perfect Competition Question Answers Download PDF. NIOS Study Material of Class 12 Economics Notes Paper 318.
NIOS Class 12 Economics Chapter 22 Price Determination Under Perfect Competition
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Price Determination Under Perfect Competition
Chapter: 22
Module – VIII: Market And Price Determination
TEXT BOOK QUESTIONS WITH ANSWERS
INTEXT QUESTIONS 22.1.
Q.1. Define equilibrium price.
Ans. Equilibrium price of a commodity is the price at which its quantity of demanded and supplied are equal.
Q.2. Which force of price determination is relatively more important and why?
Ans. Both the forces of demand and supply are important. But it is the demand which is relatively more important since it makes the producers produce more goods and sells in the market. Price, under conditions of perfect competition is determined by the interaction of demand and supply. Before Marshall, there was a dispute among economists as to whether the force of demand (i.e., marginal utility) or the force of supply (i.e., cost of production) is more important in determining price. Marshall gave equal importance to both demand (or marginal utility) and supply (or cost of production) in the determination of value or price.
Q.3. Can we have two levels of equilibrium price for demand curve DD and supply curve SS? Support your answer with reason.
Ans. The price at which demand and supply are equal is known as an equilibrium price, since at this price the forces of demand and supply are balanced, or are in equilibrium. The quantity bought and sold (or the amount supplied or demanded) at this equilibrium price is known as equilibrium amount.
If the equality between quantity demanded and supplied does not hold for some price, buyers’ and sellers’ desires are divergent either the amount demanded by buyers is more than that offered by sellers, or the amount offered for supply by sellers is greater than the amount demanded by buyers. In either case, the price will change so as to bring about equality between quantity demanded and quantity supplied.
Q.4. Tick the correct answer:
(i) Point of intersection of demand curve and supply curve shows:
(a) The equilibrium price.
(b) The equilibrium quantity.
(c) Neither of the two.
(d) Both equilibrium price and quantity.
Ans. (d) Both equilibrium price and quantity.
(ii) Equilibrium price of a commodity is the price at which
(a) Quantity demanded and supplied, both rise.
(b) Supply is maximum.
(c) Demand is maximum.
(d) Quantity demanded and supplied are equal.
Ans.(a) Quantity demanded and supplied are equal.
(iii) Equilibrium means
(a) The variables are changing continuously.
(b) Demand and supply are unequal.
(c) The variables show no tendency to change.
(d) None of the above.
Ans. (e) The variables show no tendency to change.
(iv) If at some particular price, the quantity demanded exceeds its quantity supplied, then-
(a) Price will rise.
(b) Demand will fall.
(c) Supply will increase.
(d) All of the above.
Ans. (d) All of the above.
INTEXT QUESTIONS 22.2.
Q.1. What is excess demand?
Ans. Excess demand is the gap between demand and supply when demand is more than supply. If at a given price, the quantity demanded of a commodity exceeds its quantity supplied we have excess demand. For example, in the table, when price is ₹ 2 per kg., demand is 24 kg. while supply is just 16 kg. So this is a situation of excess demand.
Q.2. What is excess supply?
Ans. Excess supply means more supply than demand at a given price.
Q.3. How is equilibrium between demand and supply restored in case of excess demand?
Ans. In case of excess demand, price starts rising as the buyers try to compete out each other. It leads to demand starts contracting and supply expanding. All these movements of price, demand and supply lead to equilibrium.
Q.4. How is equilibrium between demand and supply restored in case of excess supply?
Ans. In case of excess supply, price starts falling as the suppliers try to compete out each other. It leads to demand starts expanding and supply contracting. All these movements of price, demand and supply lead to equilibrium, though at a lower price.
Q.5. Explain the effect of adjustment process on price, demand and supply in case of excess demand.
Ans. In case of excess demand, price starts increasing when the buyers try to compete out each other. It makes the demand starts declining and supply increasing. All these movements of price, demand and supply result in equilibrium.
Q.6. Explain the effect of adjustment process on price, demand and supply in case of excess supply.
Ans. In case of excess supply, price starts declining when the suppliers try to compete out each other. It leads to demand starts expanding and supply contracting. All these movements of price, demand and supply lead to equilibrium, though at a lower price.
INTEXT QUESTIONS 22.3.
Q.1. With the help of diagrams, show the effect of increase and decrease in demand on price when supply remains constant.
Ans.
Effect of Increase in Demand on Price: When at the same price there is greater demand for a commodity, it is called increase in demand. If supply schedule remains the same then an increase in demand raises the equilibrium price of the commodity. Let us explain with he help of a diagram the effect of increase in demand on price, supply schedule remaining the same.
Effect of decrease in demand on price: Decrease in demand means lesser demand at the same price. Decrease in demand means a leftward shift in demand curve as shown in the figure.
Q.2. Show the effect of increase in supply on price of a commodity when its demand is perfectly elastic.
Ans. When the supply increases and when its demand is perfectly elastic, price remains the same. The figure below explains this point.
Q.3. Show the effect of simultaneous decrease in demand and supply on price when supply changes relatively to a greater extent.
Ans.
INTEXT QUESTIONS 22.4.
Q.1. What is ceiling price?
Ans. Ceiling price: When the price prevailing in the market is too high and is affecting the interests of the consumers adversely, the government has to step in and decide ceiling price.
The sellers are not allowed to raise price of their products beyond this ceiling price and thus the interests of the consumers are protected. An example of this may be rent control policy. Suppose the current rent for a particular type of flats is determined at OP which is exorbitant. In such a case, the government can fix the rent arbitrarily at OPc which is lower then OP and will give some relief to tenants (consumers). It may be mentioned that at this controlled rent OPc, the demand for flats (OQDC) exceeds supply of flats (OQSC) and this may lead to unscrupulous practices for which the government may have to take preventive and remedial measures. It may also be mentioned that fixation of price at a level above OP has no point as price mechanism will automatically push the price level back to OP.
Q.2. What is floor price?
Ans. Floor Price: It is not necessary that price determined ‘s always too high. Sometimes it may be too low also. It may happen especially in markets with excessive supply of something. For example, Indian labour market is a market with excessive supply of labour. In such a setting, the wage rate determined by the market forces of demand and supply is generally too low (especially in the market for unskilled labour). To protect workers’ interests in such a case the government may pass minimum wage legislation. Suppose, the wage rate prevailing in the market is OW which is too low. The government may pass minimum wage legislation and fix minimum wages at OW. This minimum wage level is floor price. The government does not allow the price level to go lower than floor price and thus sellers’ interests are protected. (worker is the seller of his labour).
Q.3. What is the need for minimum wages legislation?
Ans. The minimum wage legislation is needed to fix the floor price. The government does not allow the price level to go lower than the floor price and thus the interests of the sellers are protected.
Q.4. Explain ceiling price with the help of graph.
Ans. A price ceiling occurs, when the government puts a legal limit on how high the price of a product can be. In order for a price ceiling to be effective, it must be set below the natural market equilibrium.
When a price ceiling is set, a shortage occurs. For the price that the ceiling is set at, there is more demand than there is at the equilibrium price. There is also less supply than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied. An inefficiency occurs since at the price ceiling quantity supplied the marginal benefit exceeds the marginal cost. This inefficiency is equal to the deadweight welfare loss.
This graph shows a price ceiling. P* shows the legal price the government has set, but MB shows the price the marginal consumer is willing.to pay at Q*, which is the quantity that the industry is willing to supply. Since MB > P* (MC), a deadweight welfare loss results. Pr and Q’ show the equilibrium price. At P* the quantity demanded is greater than the quantity supplied. This is what causes the shortage.
Q. 5. Define equilibrium price.
Ans. The equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect. To determine the equilibrium price, you have to figure out at what price the demand and supply curves intersect.
TERMINAL EXERCISE
Q.1. What is equilibrium price? Explain with the help of diagram.
Ans. Equilibrium price:
(i) Equilibrium price of commodity is the price at which its quantity demanded and quantity supplied are equal.
(ii) If at a given price of the commodity its quantity demanded and quantity supplied are not equal, then price, demand and supply change till the equilibrium price is reached.
(iii) Diagrammatically equilibrium price is determined at the point where demand curve and supply curve intersect with each other.
Q.2. What is excess demand? How is equilibrium between demand and supply restored in case of excess demand?
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