CH-02: DEMAND, SUPPLY AND MARKET EQUILIBRIUM

CHAPTER-02

“DEMAND, SUPPLY AND MARKET

EQUILIBRIUM”

PART-01: DEMAND

1.1 LAW OF DEMAND 38

1.2 INDIVIDUAL AND MARKET DEMAND 39
1.3 WHY IS THE DEMAND CURVE SLOPING DOWNWARD? 40
1.4 EXCEPTIONS OR LIMITATIONS OF THE LAW OF DEMAND 40
1.5 PRACTICAL IMPORTANCE OF LAW OF DEMAND 41
1.6 MOVEMENT ALONG THE DEMAND CURVE AND SHIFT IN DEMAND CURVE: 41

PART-02: SUPPLY

2.1 LAW OF SUPPLY 43

2.2 MOVEMENT ALONG THE SUPPLY CURVE AND SHIFT IN SUPPLY CURVE 44
2.3 RESERVATION PRICE 46

PART-03: MARKETS & PRICE DETERMINATION

1.1 MARKET EQUILIBRIUM 47

1.2 REGULATED PRICE 48
1.3 SHIFT IN DEMAND AND SUPPLY AND THEIR IMPACT ON MARKET EQUILIBRIUM 49
1.4 MARKET FOR PERISHABLE GOODS 51
1.5 MARKET FOR DURABLE GOODS 51

PART-04 E-BUSINESS

E-BUSINESS 52

PART-05: MULTIPLE CHOICE QUESTIONS & TEST-02

MCQ 53
TEST-02 63

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PART-01: DEMAND:

WANT, NEED and DEMAND:

Needs are the basic requirements of a society i.e. food, cloth and shelter. (Inhaler is a need for
asthmatic patient)
Wants are the desires of society i.e. a heavy bike, AC and chocolate etc.

Demand:
Demand is the quantity of goods and services which buyers are willing and able to buy at different
prices in a given period of time.

Every desire or want is not demand. Demand is the combination of want plus purchasing power

Demand = Want + purchasing Power

1.1: LAW OF DEMAND:

Law of Demand:
“Other things remain same (ceteris paribus), when the price of a product increases, its quantity
demanded decreases and when its price decreases, its quantity demanded increases

Ceteris paribus: a Latin expression which means ‘other things remaining same/constant
Qd = f (P)
However, this law will hold true only if following conditions are held constant

Essentials or Assumptions of the law of demand

1) There is no change in average income of consumers.
2) There is no change in population size.
3) No change in Taste, Fashion and weather
4) No change in Future Expectations (regarding the prices of any product)
5) There is no change in advertisement.
6) There is no change in Direct Tax.
7) No change in prices of related goods. (Price of substitute goods and complement goods)

Demand Table/Schedule:
An individual consumer’s demand curve for product A. Let’s consider, quantity demanded of product
A at different prices.
Price Quantity Demanded
Rs. /Kg (kg)
5 1
4 2
3 3
2 4
1 5

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Demand Curve:
Price
5

1 Demand curve (D)

O 1 2 3 4 5
Quantity Demanded
Explanation:
• In the graph, we have measured quantity demanded on x-axis and price on y-axis.
• When price is Rs. 5 per kg. the demand is just 1 kg. As price decrease the quantity d demanded
increases and when price is as low as Rs. 1 per kg, the demand is its highest i.e 5 kg. By joining
these points, we derive demand curve “D” which is downward sloping. It indicates that there
is an inverse relationship between price and quantity demand,

1.2: Individual and Market demand

• Individual Demand: Demand by a single consumer (Household) in the market is called

“Individual Demand”.
• Market Demand: Collective demand of all consumers in the market for a particular good
or service is called “Market Demand”.
• Direct Demand: Demand for final good is called direct demand. e.g. mobile, AC, Apple.
• Derived Demand/Resource Demand: Demand for capital goods or factors of production
is called derived demand

⯈ Market demand schedule and curve

Market demand schedule for Good A with three buyers Mr. A, Mr. B and Mr. C.
Last column is showing the market demand for Good A which is the sum of demand for all buyers
at prevailing market prices.

Price Buyers Market Price

per kg
Mr. A Mr. B Mr. C Demand 5
(Rs.)
4
5 1 2 3 6
4 2 3 4 9 3

3 3 4 5 12 2

2 4 5 6 15 1
1 5 6 7 18
0 3 6 9 12 15 18
Quantity Demanded

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1.3: Why is the demand curve sloping downward:

1) Income Effect of price Increase:

• When price of a product increases, purchasing power (real income) of a consumer decrease.
• People will feel poorer. They will not afford to buy so much of the good with their money.
• This economic theory is known as income effect of a price rise.

2) Substitution Effect of price increase:

When price of a product increases, some existing consumers shift to the other (alternative or
substitute) lower priced good. This is called the substitution effect of a price rise.

3) Law of Diminishing Marginal utility.

1.4: Exceptions or Limitations of the Law of Demand:

There are certain cases wherein the law of demand does not apply. These exceptions or
limitations are as under:

• Basic necessities of life:

The law of demand is not applicable to the basic necessities such as sugar, rice, wheat
because people will keep on buying these commodities regardless of the increase or decrease
in prices.

• Use as confer distinction:

Those goods which possess some distinctive features, are considered as exception of law of
demand. Because as price of such goods increases, their demand increases for a particular
group of society.

• Change in income:
If income of consumer increases, demand of product will increase, even if its price is going
up.

• Ignorance of the consumer:

Due to the lack of market knowledge, consumer may pay the higher price for a product.

• Uncertain conditions:
If high uncertainty is prevailing in the market, and there is a fear of being shortage of a
commodity in near future, people will buy more of it in spite of higher prices.

• Giffin goods:
If price of a good increases its quantity demanded increases and (Vice versa)

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1.5: Practical importance of law of demand:

(i) Price determination:

The law of demand contributes to the determination of price of a certain commodity. Also,
the producer can see the effect on demand due to increase or decrease in price and can take
decisions accordingly.

(ii) Firm’s decision making: The demand schedule helps the entities plan for future by
analyzing the impact of change in prices on the quantity demanded at both; the national and
international level.

(iii) Helpful for finance minister:

It also helps state in raising taxes e.g., if increase in tax causes the price of a commodity to be
increased and decreases demand significantly, then it will not wise to increase tax as overall
amount of the taxable revenue would remain almost the same.

1.6: Movement along the Demand curve, and shift in Demand curve:

Movement along the demand curve (Change in Quantity Demanded)

• If demand of a product changes due to its own price (endogenous factor), (ceteris paribus) it
is called Change in Quantity Demanded.
• It causes Movement along the demand curve (also called Extension and Contraction in
Demand curve).

Price Movement along the Demand Curve

Price

A
P1

P2 B

Demand Curve (D)

Q1 Q2
Quantity Demande d

The figure has shown the movement along demand curve from point a to b or b to a, due to change
in price of the product from P1 to P2 or vice versa.

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Shift in Demand: (Change in Demand)

• If demand of a product changes due to its Non price factors (exogenous factor), i.e., (income,
taste, weather, population size, etc.) it is called Change in Demand.
• It causes shift in demand curve from its original point (also called Rise/Fall in Demand
curve).

Price

10

D1

Demand Curve (D)

D2

5 10 15
Quantity Demanded

An increase in the demand for a product is shown in above diagram as a rightward shift in the demand
curve and vice versa.

Factors responsible for change in demand or shift in demand curve

1. Changes in Income:
If a household's income increases, they may purchase more products irrespective of the
increase in their price, thereby increasing the demand for the product.

2. Taste and preference:

Change of taste or liking/disliking can affect demand for a product. For example, someone likes
to use more of sugar but later taste gets change, the demand will for sugar will fall without
bothering its price.

3. Weather conditions:
During the winter season, the demand for tea or coffee is very high because consumers prefer
such things. However, during the summer season the situation is just the opposite as people
prefer soft drinks.

4. Changes in population:
Demand for most goods and services will increase with increase in population.

5. Changes in advertisement:
A successful advertising campaign for a certain good will increase demand for it.

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6. Price of Substitute Good:

• Substitute Good/competitive good are goods which satisfy the same need and are used in
place of another good.
• An increase in the price of one good A will cause an increase in demand for the other good B
as well as that product will become relatively less expensive.
• E.g Tea and Coffee, Petrol and CNG, butter and Coke and Pepsi.
• XED of substitute goods is positive

7. Price of Complementary Goods:

• Complementary Goods are those goods which are consumed together.
• An increase in the price of one good A will cause decrease in demand for the other good B.
• e.g., cereal and milk, bat and ball, car and petrol.
• XED of complement goods is negative.

PART-02: THEORY OF SUPPLY

Supply:
Supply is the quantity of goods and services which sellers are willing and able to sell at different price
in a given period of time.

Difference between Supply and Stock:

Suppose a farmer has produced 1,000 tons of rice and put into a warehouse waiting for a good price.
Initially he has offered 300 tons of rice at price of Rs. 650 per ton in a market while remaining is left in
the store. In economic theory, the 300 tons which have been offered for sale is considered as supply and
the remaining is called stock.

2.1: LAW OF SUPPLY:

Law of Supply:
If price of a product increases, its quantity supplied increases; and if price of a product decreases, its
quantity supplied decreases, ceteris paribus.

Ceteris paribus: a Latin expression which means ‘other things remaining same/constant
Qs = f (P)
However, this law will hold true only if following conditions are held constant

Essentials or Assumptions of the law of supply:

1) Cost of input (factors of production) remains same.
2) Technology or techniques of production should remain same
3) Indirect taxes and Subsidies on product remain same.
4) Environmental conditions remain same. (For agriculture sector)
5) Number of producers in the market remains same.
6) Government policy do not change over time
7) Prices of the other goods (substitutes in production and complements in production should
remain unaffected.

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Supply Table/Schedule:
The supply schedule shows how much of good sellers are willing and able to sell at different prices.

Price Quantity Supplied

Rs. /Kg (kg)
5 5
4 4
3 3
2 2
1 1

Price
S
Supply Curve:
P0

P1

O Q1 Q0 Quantity Supplied
• A supply curve shows, that keeping all else equal, firms will produce and offer for sale more
of their product at high prices and less for low price
• supply curve will be positively sloped upward due to the positive relationship between price
of the product and quantity supplied in a market.

2.2: Movement along the Supply curve, and shift in Supply curve:

Movement along the Supply curve: (Change in Quantity Supplied)

• If Supply of a product changes due to its own price (endogenous factor), it is called Change
in Quantity Supplied.
• It causes movement along the Supply curve (also called Extension and Contraction in
Supply curve).

Supply Curve (S)

Price

Quantity Supplied

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Shift in Supply: (Change in Supply)

• If Supply of a product changes due to its Non price factors (exogenous factor), it is called
Change in Supply.
• It causes shift in Supply curve from its original point. (Also called Rise/Fall in Supply curve)

Supply Curve (S)

Price

Quantity Supplied

Factors responsible for change in supply or shift in supply curve

1. Resource cost/Input prices:

If price of raw material will increase, it will increase the cost of production and decrease the
supply and profit margin of the firm causes leftward shift in supply curve.

2. State of technology use in production:

Improved technology or techniques of production facilitate firms to produce more units of
output with less resource, causes rightward shift in supply curve. Hence, Profit margin for the
firms increases without changing the price of product to be sold in the market.

3. Indirect Taxes: Business decisions are sensitive to government policies.

Indirect taxes are imposed by the government to goods and services in order to generate
revenue.
Indirect Taxes increase the cost of production and price of the products which reduce the
supply causes leftward shift in supply curve.

4. Subsidies:
Subsidy is a financial assistance given by government to support producer in production
process.
In the case of subsidies, it will decrease cost of production and increase supply causes
rightward shift in supply curve

5. Number of sellers:
Supply of the product increases due to increase in number of sellers in the market causes
rightward shift in supply curve

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5. Substitute in production:
• Substitute in production are goods which are produced in place of another good.
• An increase in the price of one good A will cause decrease in supply for the other good B.
• Example: If profit margin increases in production of school bags, the firms will switch
resources from ladies’ bags to school bags. This substitution in production results in decline
in the supply of ladies’ bags in the market.
• e.g Leather shoe and leather bag, Tube light and Energy savers, Brown and Black shoes

6. Complement in production:
• Complementary are those goods which are produced together.
• An increase in the price of one good A will cause increase in supply for the other good B.
• e.g., Meat and Hide

2.3: RESERVATION PRICE:

Reservation Price is the minimum price which is acceptable by the producer. Below this price,
producer refuses to sell his product.

Significance of the reservation price:

It indicates the price level below which it is not profitable for a firm to supply to the market
.
Factors affecting reservation price:

1) Disposable Income of the buyer:

A firm change reservation price for its commodities according to the disposable income of the
buyers. Higher the consumer income higher the reservation price

2) Substitute goods:
If the substitutes are readily available in the market, then the firm might need to set lower
reservation price for its product and vice versa.

4) Cost of production: Higher cost of production would lead to a higher reservation price and
lower cost of production would result in lower reservation prices.

5) Objectives:
The nature of objectives also plays a key role in the determination of the reservation price for
the firms. For instance, a newly entrant firm has to offered heavy discounts on its products, set
low reservation price in order to capture the market

6) Nature of goods:
Perishable goods have lower reservation price than durable good.

7) Other factors might include the state laws, amount of subsidies, taxes, inflation, economic
conditions etc.

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PART-03: MARKETS & PRICE DETERMINATION

MARKET ENVIRONMENT: Some of the types of market include:

• Local markets
• Regional markets
• National markets
• International markets
• Online or virtual markets

Other types of markets

• Goods market
• Factors or resource market
• Financial markets

THE PRICE MECHANISM:

There are two types of prices that exist in markets:

1. Equilibrium market price: which is determined by market forces, i.e. demand and supply
2. Regulated market price: which is determined by the government,

3.1: Market Equilibrium

Market Equilibrium is a situation at which Quantity demanded is equal to Quantity supplied. At this
equilibrium, Price is said to be Equilibrium market price and Quantity is said to be Equilibrium
market Quantity.

Market Disequilibrium:
Market disequilibrium is a situation where demand is not equal to supply.
1. When Quantity demand is GREATER than supply, there will be a Shortage in the market.
2. When Quantity supply is GREATER than demand, there will be a Surplus in the market.

Tabulation Form:

Price QD QS Comparison of Market Position Price Direction

(Rs.) QD & QS

5 1 5 QD< QS Surplus Will depress the price

4 2 4 QD< QS Surplus Will depress the price
3 3 3 QD= QS Equilibrium Neutral
2 4 2 QD> QS Shortage Will drag the price up
1 5 1 QD> QS Shortage Will drag the price up

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Market Equilibrium Graph:

Market Equilibrium:
Price
Supply (S)
5
Surplus (QS > QD)
4
E
3 Equilibrium Point

2
Shortage (QD > QS)
1
Demand (D)

0 1 2 3 4 5
Quantity
Equilibrium:
The market equilibrium price and quantity come at the intersection of the supply and demand curves.
At a price of Rs3, firms willingly supply what consumers willingly demand.
If a price of Rs. 4 was charged for the good, the supply would exceed demand, there would be a excess
of the good in the market and this would decrease the price. Price would restore back at equilibrium.
If a price of 2 was charged for the good, supply would be less than demand, there would be a shortage
of the good on the market and this would increase the price. . Price would restore back at equilibrium

3.2: REGULATED PRICE:

Regulated price is the price which is set by the government. Government set two types of prices:
1. Minimum price/Price floor (to protect producers)
2. Maximum price/Price ceiling (to protect consumers).

Regulated Price:
Supply (S)

P1 Minimum price
E
Price

P2 Maximum price

Demand (D)

Quantity

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3.3: SHIFT IN DEMAND AND SUPPLY AND THEIR IMPACT ON MARKET EQUILIBRIUM:

Shift in demand and supply occur due to non-price factors:

Effect of change in market equilibrium: (How New market equilibrium is achieved)
Change in market equilibrium affects equilibrium Price and equilibrium Quantity.

Shift in Demand:

1. Rise/Increase in Demand:
Impact of Increase in consumer’s income on market equilibrium:
• Causes rightward shift in Demand curve D0 to D1.
Conclusion:
Increase in Price and Quantity in a market.

Rise in Demand:
Price S0

P1

P0

D1
D0

0 Q0 Q1
Quantity

2. Fall/ Decrease in Demand:

Impact of decrease in demand due to “non-price factors” on market equilibrium:
• Causes leftward shift in Demand curve D0 to D1.
• Conclusion:
Decrease in Price and Quantity

Fall in Demand:
Price S0

P0

P1

D0
D1

0 Q1 Q0
Quantity

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Shift in Supply
3. Increase/Rise in Supply:
Impact of increase in supply due to “non-price factors” on market equilibrium:
• Causes rightward shift in Supply curve S0 to S1.
• Conclusion:
• Price Decrease, Quantity increase
Rise in Supply
S0
Price
S1
P0
P1

D0

0 Q 0 Q1
Quantity

4. Decrease/Fall in Supply:
Impact of decrease in supply due to “non-price factors” on market equilibrium:

• Causes leftward shift in supply curve.

• Conclusion:
Price Increase and Quantity decrease
Fall in Supply:
S1
Price
S0
P1
P0

D0

0 Q 1 Q0
Quantity

Practice Questions:

What will be the effect on market price and quantity? If:

1. Increase in demand and decrease in supply occur simultaneously in a market
2. Increase in demand and increase in supply occur simultaneously in a market
3. Increase in Supply is more than increase in demand occur simultaneously in a market
4. Increase in Supply is less than decrease in demand occur simultaneously in a market

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3.4: MARKET FOR PERISHABLE GOODS:

Perishable goods:
• Perishable goods are those which have less life to store.
• Such goods have short life, and producer doesn’t produce in bulk to store.
• Producers want to get rid of immediately after production of such goods
• Supplies of such goods mostly remain fixed during a course of time in a market
e.g. demand for dairy products, fruits, vegetables, meats etc.
Perishable Good:

Supply (S)
Price
E1
P1

P0 E0

D1

P2 E2

D2 Demand (D0)

0 Q0 Quantity

In this diagram vertical supply curve (perfectly inelastic) shows the supply of perishable goods which once
produced is being offered for sale into market (as cannot be shelved or stored for long time). In perishable
market, price change due to change in demand. D1 shows a rise in demand for perishable goods which is
putting upward pressure on market price and D2 showing fall in demand, putting downward pressure on
market price.

3.5: MARKET FOR DURABLE GOODS:

Durable goods:
• Durable goods are those which have long life and can be stored.
• Typically, these goods are a bit more expensive than perishable.
• In this case the supply curve will be usual positively sloped supply curve then finally vertical).
For example: machinery, motorbike, mobile handsets, etc.

The supply of printers is fixed after a certain quantity available in stock. Although it can be increased
initially by taking more from the store, up to that limit the supply curve will be positively sloped
upward, but once the stock will be exhausted, it will become vertical. After this limit the rising
demand will put drastic pressure on the price of printers.
Durable Good:
Supply (S)
Price

P2 E2

P1 E1

P0 E0 D2

D1
D0

0 Q0 Q1 Quantity

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PART-04 E-BUSINESS
E-business or Online Business
E-business, short form of ‘Electronic Business’, generally refers to business activities using
internet. (Also known as ‘Online Business’).
‘It is the process of buying and selling of goods and services or exchange of information regarding
business activities through digitalized systems including internet’.
E-business refers to shopping of goods and services or exchange of information anytime
anywhere.

E-business and Market decisions

Online business has immense impact on decision making process for both buyers and sellers. It
can impact in following ways:

Benefits for business

• It provides a comparative study of different customer and their needs, which helps business
community to take necessary actions accordingly.
• It helps in reduction of inventory and then reduction in storage and other administrative
expenses.
• It helps business men to find new business partners all over the world.
• It helps in speedy marketing of their products which incur less cost as compared to other
traditional channels.
• No or less need for ‘brick-and-mortar’ business handling.

Benefits for customers

• It helps to provide goods of their interest at their door step.
• It helps customers to get benefits of reverse auction.
• Greater choice for customers which ensures more consumer sovereignty.
• Better price bargains as comparison of prices are accessible.
• Better selection of goods is possible as numerous goods and their sublimities are available on
one click.

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MULTIPLE CHOICE QUESTIONS

2.1) The demand for a Factor of Production is called:

(a) quantity demand (b) derived demand
(c) factor price (d) cost of production

2.2) All of the following are determinants of supply except:

(a) Price (b) income level
(c) level of technology (d) objectives of the firms

2.3) Demand curve slopes downward because of:

(a) Consumer indifference (b) Elasticity of demand
(c) Law of diminishing marginal utility (d) Inelastic demand

2.4) If price of commodity increases

(a) Demand will expand (b) Demand will shift leftward
(c) Demand will contract (d) Demand remains constant

2.5) A movement along a supply curve is caused by a:

(a) change in the unit price of the particular product
(b) change in the number of producers
(c) change in the level of technology
(d) change in supply of the particular product

2.6) If Demand increase with the increase in its price, the concept related to:
(a) Substitute goods (b) Normal goods

(c) Giffen good (d) Inferior good

2.7) Which one of the following will NOT shift the demand curve for a normal good to the left?
(a) A fall in consumers incomes (b) A rise in the price of the normal good

(c) A rise in the price of a complementary good (d) A fall in the price of the substitute good

2.8) Which ONE of the following will cause the demand curve for a good to move to the
right (outwards from the origin)?

(a) A decrease in the costs of producing the good

(b) A fall in the price of the good
(c) An increase in the price of a complementary good
(d) An increase in the price of a close substitute good

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2.9) When the price of a good is held above the equilibrium price, the result will be
(a) excess demand (b) a shortage of the good
(c) a surplus of the good (d) an increase in demand

2.10) Extension of supply curve from the given graph is:

(a) S to S1 (b) S1 to S
(c) A to B (d) B to A

2.11) Due to increase of Price of good A. The demand of good of B decreases. These goods are;
(a) Substitute goods (b) Complementary goods
(c) Club good (d) Inferior good

2.12) Which of the following is held constant along the demand curve?
(a) Price (b) Quantity
(c) Income (d) Both (a) and (b)

2.13) The supply curve would shift to the left when:

(a) price of good goes down (b) taxes of government go down
(c) prices of substitute goods go down (d) prices of complements go down

2.14) What effect on Giffen graph is due to price?

(a) Positive (b) Negative
(c) No (d) Both

2.15) X and Y are substitute in consumption. If price of X increase.

(a) Demand for X decrease (b) Demand for Y decrease
(c) Demand for X increase (d) Demand for Y increase

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2.16) Which one of the following assumptions does NOT confer to the law of demand?
(a) There is no change in the income of consumers
(b) There is no substitute for the good
(c) The prices of related goods are unstable
(d) The size of population is stable

2.17) Movement in demand curve caused by:

(a) Increase in future expectation (b) Increase in price of own product
(c) Increase in population (d) None of these

2.18) In a free market, price is determined by:

(a) The consumers (b) The producers
(c) Cost view (d) Market forces

2.19) If the price of a substitute of commodity X falls, the demand for X will?
(a) Rise (b) Fall
(c) Remains unchanged (d) Both a & b depends on conditions

2.20) All else equal, if demand for a product fall greater than fall in supply, then which of the option will
be the correct option?
(a) price will fall with decrease in quantity (a) Price will rise with increase in quantity
(b) Price will increase with fall in quantity (c) Price will fall with increase in quantity

2.21) Due to COVID-19 world has gone for lockdown. Consequently, in international market the prices for
petroleum products have shown historical cut along with less consumption of Oil too. In economic
theory this is known as?
(a) Contraction in quantity demanded (b) Extension in quantity supply
(c) Fall in demand (d) Fall in supply

2.22) Which one is not a precondition of law of demand?

(a) Price of substitutes (b) Income of the consumer
(c) Wages (d) Population

2.23) Which one is not a precondition of law of supply?

(a) Oil prices (b) Income of the consumer
(c) Wages (d) None of the above

2.24) Rise in demand for Face Masks during Covid-19 is termed as:
(a) Movement along demand curve (b) Rise in demand
(c) Inward shift in demand curve (d) Increase in price of Face Mask

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2.25) Toyota motors has shown historical decline in its sales during Covid-19. In economic terminology it
is known as:
(a) Fall in demand (b) Inward shift in demand curve
(c) Change in demand (d) All of above

2.26) Change in demand and supply due to other factors are described as:
(a) Change in demand and supply (b) Rise or fall in demand and supply
(c) Shift in demand and supply curve (d) All of above

2.27) Fall in supply of a product greater than fall in demand will cause:
(a) Decrease in price and quantity (b) Decrease in price and increase in
quantity
(c) Increase in price and quantity (d) Increase in price and decrease in
quantity
2.28) A price above than market price will show:
(a) A surplus (b) A shortage
(c) Equilibrium (d) Maximum price

2.29) A support price or minimum price always set:

(a) Above than equilibrium price (b) Below than equilibrium price
(c) At equilibrium price (d) It depends upon elasticity

2.30) Rise in demand for leather in foreign market the supply of beef will increase in domestic market. It
will affect market for beef and:
(a) Price and quantity of beef will decrease (b) Price and quantity of beef will increase
(c) Price of beef will decrease and quantity (d) Price of beef will increase and quantity
will increase will decrease

2.31) An increase in price of butter will affect the market for margarine (substitute):
(a) Price and quantity of margarine will decrease
(b) Price and quantity of margarine will increase
(c) Price of margarine will increase and quantity will decrease
(d) Price of margarine will decrease and quantity will increase

2.32) Reservation price is:

(a) Minimum price set by government
(b) Maximum price set by government
(c) Minimum price a producer is willing to get for its product
(d) Maximum price a buyer is willing to pay for its product

2.33) Which one is most important factor of reservation price?

(a) Disposable income of consumer (b) Availability of substitutes
(c) Cost of production (d) All of above

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2.34) Increase in labour productivity can cause:

(a) Shift in supply curve to right (b) Shift in supply curve to left
(c) Shift in demand for labour curve to left (d) Shift in demand for labour curve to right

2.35) A surplus in goods market will price.

(a) Decrease (b) Increase
(c) Remain stable at equilibrium (d) It depends upon market conditions

2.36) Demand for land is:

(a) Less elastic (b) Derived demand
(c) Resource demand (d) b&c

2.37) Supply curve for Land is:

(a) vertical (b) horizontal
(c) negatively sloped (d) positively sloped

2.38) Demand curve for Normal goods is downward sloping to the right because of:
(a) Price effect (b) Income effect
(c) Substitution effect (d) All of above

2.39) Which one of the following rightward shifting in market demand curve?
(a) Change in product price (b) Change indirect taxes
(c) Change in subsidies (d) Change in money income of consumers

2.40) A rise in demand for petrol by motorists likely to follow a rise in:
(a) The price of second-hand car (b) The price of steel
(c) Bus fares (d) Motor vehicle tax

2.41) Demand for factors of production is known as:

(a) Individual demand (b) Market demand
(c) Derived demand (d) Effective demand

2.42) Which of the following is not complement to cars?

(a) Petrol (b) CNG
(c) Navigation Systems (d) I – Phone

2.43) The Demand for fashion goods is not affected by:

(a) Price of goods it self (b) Income of consumers
(c) Quality of product (d) Age

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2.44) If the price of tea falls, which one of the following outcomes would be expected?
(a) A fall in the demand of coffee (b) A rise in price of coffee
(c) A rise in the demand of coffee (d) A fall in the demand of drinking cups

2.45) A good having negative income effect is called:

(a) Normal good (b) Inferior goods
(c) Public good (d) Merit good

2.46) The part of output which not offered to sale in market is called:
(a) Supply (b) Stocks
(c) Buffer stock (d) None of above

2.47) Supply curve of perishable good is always:

(a) Horizontal (b) Vertical
(c) Upward to the right (d) Downward to the right

2.48) Following will cause a leftward shifting in market supply curve.

(a) Increase in price of good (b) Improvement in technology
(c) Increase in direct taxes (d) Increased in indirect taxes

2.49) Indirect taxes & subsidies both increases in the same proportion on a product following will be the
effect on market supply curve.
(a) Supply curve will shift towards right (b) Supply curve will shift towards left
(c) No change (d) Change along the same supply curve

2.50) The government introduces a maximum price below the equilibrium price level. What effect will this
have on market?
(a) Surplus (b) Shortage
(c) No change (d) None of above

2.51) The government introduces a minimum wage rate beyond he equilibrium wage rate. What effect will
this have on labour market.
(a) Unemployment (b) Surplus of labour
(c) Decrease in labour demand (d) All of the above

2.52) X and Y both are substitute. Select any TWO correct statements
(a) Increase in price of X, decrease in demand of Y
(b) Increase in price of X, increase in demand of Y
(c) Decrease in price of X, decrease in demand of Y
(d) Decrease in price of X, increase in demand of Y

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2.53) The diagram shows the demand curve for good A.

What could cause a movement along the curve from 2 to 3?

.
(a) A change in season (b) A change in price of good A
(c) A change in cost of production (d) A change in price of substitute good

2.54) A price floor set above the market equilibrium price is likely to cause
(a) excess supply (b) excess demand
(c) a decrease in price and a decrease in the (d) an increase in price and an increase in
quantity traded the quantity traded

2.55) If the government sets the maximum price of a product below the market equilibrium price, it would
lead to:
(a) excess supply (b) market equilibrium
(c) excess demand (d) economies of scale

2.56) The demand for and supply of a good are in equilibrium. An indirect tax is levied on the good. Which
one of the following will show the new equilibrium?
(a) A shift in the supply curve to the right
(b) A shift in the demand curve to the right
(c) A shift in the supply curve to the left
(d) A shift in the demand curve to the left

2.57) During the year, a flood destroyed significant portion of agricultural land used to produce rice. What
would be the short-run effect on supply diagram for rice?
(a) A movement down the existing supply (b) A shift to the right of the supply curve
curve
(c) A shift to the left of the supply curve (d) A movement up the existing supply
curve

2.58) Which of the following would unambiguously occur when there is a simultaneous?
decrease in demand and supply?
(a) An increase in equilibrium price (b) A decrease in equilibrium price
(c) An increase in equilibrium quantity (d) A decrease in equilibrium quantity

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Data for Questions 59 to 63:

Market Equilibrium: Bringing Demand and Supply Together

Figure 1
2.59) Figure 1 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $7, there is an
(a) excess demand of 8 t-shirts. (b) excess supply of 8 t-shirts.
(c) excess demand of 10 t-shirts. (d) excess supply of 10 t-shirts.

2.60) Figure 1 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $15, there is
an
(a) excess demand of 8 t-shirts. (b) excess supply of 8 t-shirts.
(c) excess demand of 10 t-shirts. (d) excess supply of 10 t-shirts.

2.61) Figure 1 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $7, we would
expect that
(a) demand will decrease until quantity demanded equals quantity supplied.
(b) supply will increase until quantity demanded equals quantity supplied.
(c) price will increase until quantity demanded equals quantity supplied.
(d) there will be no change since the market is in equilibrium.

2.62) Figure 1illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $15, we would
expect that
(a) demand will decrease until quantity demanded equals quantity supplied.
(b) supply will increase until quantity demanded equals quantity supplied.
(c) price will decrease until quantity demanded equals quantity supplied.
(d) there will be no change since the market is in equilibrium.

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2.63) Figure 1illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $10, we would
expect that
(a) demand will decrease until quantity demanded equals quantity supplied.
(b) supply will increase until quantity demanded equals quantity supplied.
(c) price will increase until quantity demanded equals quantity supplied.
(d) there will be no change since the market is in equilibrium.

2.64) If the demand for one good decrease when the price of another good decreases, the two goods are
goods
(a) Normal (b) Inferior
(c) Complementary (d) Substitute

2.65) If the cost of producing a product goes down, this will cause the equilibrium price of the product to
go down, and the equilibrium quantity of the product to go up.
(a) True
(b) False

2.66) If the quantity of a product demanded is greater than the quantity of a product supplied, there is
pressure in the market to push the price downward.
(a) True
(b) False

2.67) If demand and supply both increases simultaneously in same proportion” then market price will
and quantity .
(a) Increase, increase (b) decrease, increase
(c) same, decrease (d) same, increase

Figure 2
Data for Questions 68 to 70:

2.68) Figure 2 illustrates a set of supply and demand curves for hamburgers. Original demand is D1 and
supply is S1. An increase in supply and an increase in quantity demanded are represented by a
movement from

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 CH-02: DEMAND, SUPPLY AND MARKET EQUILIBRIUM

(a) point d to point c. (b) point a to point c.

(c) point d to point b (d) point c to point d

2.69) Figure 2. An increase in demand and an increase in quantity supplied are represented by a
movement from
(a) point b to point a. (b) point c to point d
(c) point d to point a (d) point b to point d

2.70) Figure 2.A decrease in supply and an increase in demand are represented by a movement from
(a) point d to point c. (b) point c to point b.
(c) point b to point d (d) point c to point a

ANSWER KEY

2.1) B 2.2) B 2.3) C 2.4) C

2.5) A 2.6) C 2.7) B 2.8) D
2.9) C 2.10) C 2.11) B 2.12) C
2.13) D 2.14) A 2.15) D 2.16) C
2.17) B 2.18) D 2.19) B 2.20) A
2.21) C 2.22) C 2.23) B 2.24) B
2.25) D 2.26) D 2.27) D 2.28) A
2.29) A 2.30) C 2.31) B 2.32) C
2.33) D 2.34) A 2.35) A 2.36) D
2.37) A 2.38) D 2.39) D 2.40) C
2.41) C 2.42) D 2.43) A 2.44) A
2.45) B 2.46) B 2.47) B 2.48) D
2.49) C 2.50) B 2.51) D 2.52) B,C
2.53) B 2.54) A 2.55) C 2.56) C
2.57) C 2.58) D 2.59) A 2.60) B
2.61) C 2.62) C 2.63) D 2.64) D
2.65) A 2.66) B 2.67) D 2.68) A
2.69) C 2.70) D

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TEST-02

Q-1) Price ceiling is the price which is set by the government to:
a) Protect producer b) Protect consumer
c) Floating exchange rate d) None of the above

Q-2) Select most appropriate answer. Demand contract, if,

a) Price of commodity increases b) Price of substitute decrease
c) Price of complementary increase d) Income of consumer decrease

Q-3) Movement in demand curve caused by:

a) Increase in price of own product b) Increase in future expectation
c) Increase in population d) None

Q-4) Due to flood the agricultural production has been reduced what will be the effect on supply curve?
a) Increase movement along the supply curve
b) Decrease movement along the supply curve
c) Shift supply curve to the right
d) Shift supply curve the left

Q-5) Goods which demand increase as Price increase.

a) Inferior goods b) Giffin goods
c) Normal goods d) Luxury goods
Q-6) Which TWO of the followings are not assumptions of Law of demand?
a) No change in Indirect taxes b) No change in direct taxes

c) Cost of input remain same d) No change in advertisement.

Q-7) Which of the followings is not a Benefit for business as per E-business?
a) No or less need for ‘brick-and-mortar’ business handling.
b) It helps business men to find new business partners all over the world.
c) Better price bargains as comparison of prices are accessible.
d) It provides a comparative study of different customer and their needs

Q-8) In perishable good market, prices are changed due to supply.

a) True b) False

Q-9) If the substitutes are readily available in the market, then the firm might need to set higher
reservation price for its product
a) True b) False

Q-10) If Price of complement in production increases, then supply of other good will be:
a) Increase and decrease equilibrium b) Decrease and decrease equilibrium

c) Increase and increase equilibrium d) Decrease and Increase equilibrium

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