NIOS Economics (318) Notes/Answer| Chapter-17|Price determination

NIOS Economics (318) Notes/Answer| Chapter-17|Price determination. Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-17|Price determination

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-17|Price determination

Intext Question

1. Tick() the correct answer

(a) Equilibrium price of a commodity is the price at which:

  1.  supply is maximum
  2. demand is maximum
  3. demand and supply are equal
  4. demand and supply both rise

Ans. (c) demand and supply are equal

(b) Point of intersection of demand curve and supply curve shows:

  1.  the equilibrium quantity
  2. the equilibrium price 
  3. both (a) and (b)
  4. neither (a) nor (b) 

Ans. (c) both (a) and (b)

(c) If at a given price of a commodity its quantity demanded is greater than its quantity supplied then:

  1.  price starts rising 
  2. demand starts falling
  3. supply starts rising 
  4. All of the above happen

Ans. (d) All of the above happen

2. State whether the following statements are true or false: 

(a) Excess demand means more demand than supply at a given price.

Ans. True

(b) Excess supply reduces the price of the commodity.

Ans. True

(c) When there is excess demand, price starts rising and demand starts expanding while supply starts contracting.

Ans. False

(d) When there is excess supply, equilibrium price would be lower than the price at which there is excess supply.

Ans. True

(e) Excess demand raises the price and the demand contracts while supply expands.

Ans. True

(f) Equilibrium price is always greater than the price at which there is excess demand.

Ans. True 

(g) Excess supply means supply is more than demand at a given price.

Ans. True

3. Fill in the blanks:

(a) When demand increases, supply schedules remain the same, the price will __________

Ans, rise

(b) Price of a commodity will __________ if its demand increases and supply decreases.

Ans, rise

(c) If the proportionate decrease in demand is less than the proportionate decrease in supply, price will __________ 

Ans. fall

(d) The demand and supply of a commodity are always equal at__________

Ans. equilibrium price 

(e) Equilibrium price is determined by __________ and__________

Ans. demand, supply

Terminal Exercise

1. What do you mean by excess supply? Explain with the help of the diagram as to what will be the effect of an excess supply on the price of the commodity?

Ans. Excess Supply is the gap between demand and supply when Supply is more than demand. If at a given price, the quantity supplied of a commodity exceeds its quantity demanded we have excess Supply. For example, in the table given, when price is Rs.6 per kg., demand is 16 kg. While supply is just 24 kg, obviously this is a situation of excess Supply.

Consider the following schedule: market demand and market supply of good X are given.

Determination of Equilibrium Price of good X.

Price (Per kg)Market Demand (kg)Market Supply (kg)
61624
51822
42020
32218
22416

When quantity supplied is more than quantity demanded at price of Rs.6 per kg., the suppliers are now worried as they know that because of excess supply, all of their goods might not be sold. Every supplier now wants to ensure that his goods are not left unsold. In a bid to ensure this, the supplier tries to lure consumers by lowering the price to Rs.5 per kg. But other suppliers are also doing precisely the same. So, the price effectively falls to Rs.5 per kg. But even at this relatively lower price, supply still exceeds demand by 4 kg. and so another cycle of offering a lower price starts. This continues till the price reaches the level of 4 per kg where quantity demanded equals quantity supplied. At this price, suppliers have no reason to offer a lower price, as they know that at this price all their goods are going to be sold. So the equilibrium in this case has been brought about by decrease in price, which also contracts supply and expands demand.

We can summarise the process as follows: 

  1.  In case of excess supply, prices start falling, as the suppliers try to compete out each other.
  2. As a result of fall in price, demand starts expanding and supply starts contracting. 
  3. All these movements of price, demand and supply result in getting equilibrium restored, though at a lower price, than before.

2. What do you mean by excess demand? What will be the effect of an excess demand for the commodity on its price? Show with the help of an example.

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 given, when price is Rs 2 per kg., demand is 24 kg. while the supply is just 16 kg. So this is a situation of excess demand. 

Consider the following schedule: market demand and market supply of good X are given.

One very interesting and important feature of the price mechanism is that any disequilibrium is self-correcting. Thus if there is excess demand at any price, price will move in such a way so as to bring equilibrium between demand and supply. At the table, when the price is Rs.2, the quantity demanded is 24 kg but quantity supplied is just 16 kg. So there is excess demand of 24-16-8 kg. In this situation, buyers realise that some of them will have to go without the commodity as supply is less than that of demand. So they compete to buy the product and in the process, offer a higher price. So, effectively the price moves from Rs.2 to Rs.3 per kg. At this relatively higher price, demand contracts from 24 kg to 22 kg and supply expands from 16 to 18 kg. So, the magnitude of excess demand has diminished from 8 kg to 4 kg, but still there is a gap and some of the buyers have still to go without the commodity. So there is still competition, which raises the price further to Rs.4 per kg, where demand contracts further to 20 kg and supply expands to 20 kg. Now, both quantity demanded and quantity supplied are equal. So, the equilibrium has been brought about by increase in price, which also contracts demand and expands supply. We can summarise the process as follows: 

  1. In case of excess demand, price starts rising, as the buyers try to compete out each other.
  2. As a result of the rise in price, demand starts contracting and supply starts expanding. 
  3. All these movements of price, demand and supply result in getting equilibrium restored, though at a higher price, than before.

3. How is the equilibrium price of the commodity determined through demand curve and supply curve? Explain with the help of the diagram.

Ans. The buyer of a commodity demands more of it at a lower price and less of it at a higher price whereas the seller of the commodity supplies more of it at a higher price and less of it at a lower price. These behaviours of buyers and sellers are explained by the law of demand and law of supply. There can be a price of a commodity at which its quantity demanded and supplied will be equal. This price of commodities is called the equilibrium price. Thus equilibrium price of a commodity is the price at which its quantity demanded and supplied are equal.

The process of price determination has also been explained with the help of figure given. In the figure, DD is the demand curve and SS is the supply curve. The negative slope of demand curve DD indicates a negative relation between price of the commodity and its quantity demanded.

Similarly, the positive slope of the supply curve SS indicates a positive relation between price of the commodity and its quantity supplied. Demand curve DD and supply curve SS intersect each other at point E, which is the point of equilibrium at which equilibrium price is ‘4 per kg and equilibrium quantity demanded and supplied is 20 kg. Equilibrium price is also defined as the price at which demand curve and supply curve intersect each other (alternatively, equilibrium price is the price at which quantity demanded of a commodity equals its quantity supplied).

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

4. The equilibrium price of the commodity is determined at a level where market demand is equal to market supply. What will happen if the price is lower or higher than this equilibrium price? 

Ans. Consider the following schedule: market demand and market supply of good X are given.

Let us assume that the initial price is Rs.6 per kg and the respective levels of quantity demanded and supplied are 16 and 24 kg respectively. Obviously, the quantity supplied at this price is exceeding the quantity demanded. So, the suppliers or producers will offer a lower price to the buyers to ensure that their goods do not remain unsold. So, the price gradually moves from Rs.6 to Rs.5 per kg. At this relatively lower price, demand expands to 18 kg while supply contracts to 22 kg (in accordance with the respective laws of demand and supply), but still there is a gap between supply and demand. So the suppliers still feel that all of their goods might not sell in the market as quantity demanded is less than quantity supplied. So, they reduce prices further so as to ensure that their goods do not remain unsold. This process continues till the price level reaches a point where quantity demanded equals quantity supplied. Thus, when the price falls from Rs.5 to Rs.4, quantity demanded as well as quantity supplied is equal to 20 kg. Now the suppliers have no reason to reduce their price further. Hence as long as quantity supplied exceeds the quantity demanded, price of the commodity keeps falling till both become equal.

Note that, when supply exceeds demand, we call it excess supply that causes price to fall till demand and supply become equal to each other.

On the other hand, at a very low price of Rs.2, quantity demanded in 24 kg which is higher than quantity supplied of 16 kg. Since demand is higher than supply, the price of the commodity increases to Rs.3. At Rs.3, the quantity demanded is 22 kg which is still higher than the quantity supplied of 18 kg. This further results in an increase in price to Rs.4 where we find that quantity demanded and supplied have become equal at 20 kg.

Hence as long as quantity demanded exceeds the quantity supplied, the price of the commodity keeps increasing till both demand and supply become equal to each other.

Note that when demand exceeds supply, we call it excess demand that causes price to rise till demand equals supply.

In the example, at Rs.4, demand and supply of the commodity are equal and hence there is no reason for the price to fluctuate from here. Hence Rs.4 is the equilibrium market price. At this price 20 kg is an equilibrium quantity.

5. Market demand and supply schedule of mangoes (per day) are given below:

Price (per kg.)Quantity demanded (in Kg. per day)Quantity supplied (in Kg per day)
9414
7611
588
3105
1123

On the basis of the above table answer the following:

(a) What will be the equilibrium price of mangoes?

Ans. Rs.5

(b) What will be the quantity demanded and supplied at this price?

Ans. 8 kg

(c) What changes will take place if the price is higher than the equilibrium price?

Ans. If the price is higher than the equilibrium price, quantity supplied is greater than quantity demanded, creating a surplus. Prices will fall. 

(d) What changes will take place if the price is less than the equilibrium price?

Ans. If the price is less than the equilibrium price, quantity supplied is less than quantity demanded, creating a shortage. The market is not clear. It is in shortage. Prices will rise because of this shortage.

6. Explain briefly with the help of a diagram the effects of changes in demand and supply of a commodity on its equilibrium price.

Ans. As demand and supply are the twin forces determining the equilibrium price of a commodity, any change in either or both of them is bound to bring in some change in price. We will study, in this section, the effect of change in demand, supply held constant. 

(i) Effect of Increase in demand

When due to any external factor such as rise in population, rise in income of people, demand for a commodity increases (for every price level), the demand curve shifts rightwards. As a result, it now intersects the supply curve at a new, higher level.

which causes the price to rise. As shown in the figure below, initial demand curve DD intersects supply curve SS at point e. The equilibrium price is OP and the equilibrium quantity demanded and supplied are OQ. Now, suppose demand increases and as a result, demand curve shifts rightwards. This new demand curve D’D’ intersects the supply curve SS at point e’. So, the new equilibrium price is OP’ which is higher than the earlier price OP. It may also be noted that the equilibrium quantity demanded and supplied have also risen from OQ to OQ’.

(ii) Effect of Decrease in Demand

When due to any external event such as fall in income level, demand for a commodity falls, the demand curve shifts leftwards. So, this new demand curve intersects supply curve at a lower level which causes the price to fall. As shown in the figure, the initial demand curve DD intersects the supply curve SS at point e.

The equilibrium price is OP and the equilibrium, quantity demanded and supplied are OQ. Now, suppose demand decreases and as a result, demand curve shifts leftwards. This new demand curve D’D’ intersects the supply curve SS at point e’. So, the new equilibrium price is OP’ which is lower than the earlier price OP. It may also be noted that the equilibrium quantity demanded and supplied have also decreased from OQ to OQ’.

(iii) Effect of Increase in Supply

When due to any external factor such as a bumper crop, supply of a commodity increases (for every price level), the supply curve shifts rightwards. As a result, it now intersects the demand curve at a new, lower level, which causes the price to fall. As shown in the figure below, demand curve DD intersects the initial supply curve SS at point e.

The equilibrium price is OP and the equilibrium quantity demanded and supplied Determination are OQ. Now, suppose, supply increases and as a result, supply curve shifts rightwards.

This new supply curve S’S’ intersects demand curve DD at point e’. So, the new equilibrium price is OP’ which is higher than the earlier price OP. It may also be noted that the equilibrium quantity demanded and supplied have fallen from OQ to OQ’.

(iv) Effect of Decrease in Supply

When due to any external event such as paucity of raw material or say, floods or drought, supply for a commodity falls, the supply curve shifts leftwards. So, this new supply curve intersects demand curve at a higher level which causes the price to rise. As shown in the figure, demand curve DD intersects the initial supply curve SS at point e.

The equilibrium price is OP and the equilibrium quantity demanded and supplied are OQ. Now, suppose supply decreases and as a result, supply curve shifts leftwards. This new supply curve S’S’ intersects the demand curve DD at point e’. So the new equilibrium price is OP’ which is higher than the earlier price OP. It may also be noted that the equilibrium quantity demanded and supplied have also decreased from OQ to OQ’.

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