3

DEMAND &

CHAPTER
SUPPLY
ANALYSIS

Topic list ICMA Syllabus reference

1 Concept of Demand PART-A (3)

2 Law of demand, limitations of the law and it’s practical importance PART-A (3)

3 Determinants of demand PART-A (3)

4 Concept of Supply PART-A (3)

5 Law of Supply, Assumptions and practical importance PART-A (3)

6 Determinants of supply PART-A (3)

7 Reserve price PART-A (3)

8 Relationship between supply and time PART-A (3)

9 Concept of Market and Market equilibrium PART-A (3)

10 Changes in Demand and Supply PART-A (3)

11 Market equilibrium for perishable goods PART-A (3)

12 Consumer & Producer surplus PART-A (3)

INTRODUCTION
Demand is an important concept of economics. Alfred Marshall called it as one of the blade of the scissor of price
mechanism. It has an indirect relationship with the price. The increase in price causes contraction whereas decrease in
price causes extension in demand, which can be shown by the movement along the line. The other factors cause inwards
or outwards (fall or rise) shift in demand curve. Supply is a part of the stock which is offered for sale in the market at given
price per unit of time. The relationship between the price and quantity supplied is positive. Supply is also influenced by the
other factors which entirely shift the supply to rightwards or leftwards. The price at which a producer does not offer his
product for sale is called as the reserve price. Buyers and sellers are the two agents in the market. The demand for a
commodity comes from the potential buyers whereas the supply is given by the potential sellers. The intersection of
demand and supply determines market equilibrium in free market.

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KEY TERMS
Change in demand means shift in demand curve which is caused by the change in factors other than the price of a
commodity.
Change in quantity demanded means increase or decrease in quantity of the commodity in response to a change in its
own price while other things are held constant.
Complements in consumption are those goods which are used together, e.g. car petrol.
Complements in production are those goods which are produced together, e.g. meat and hides; wheat and husk etc. They
are also called as jointly supplied goods.
Consumer surplus is the difference between the marginal utility of a good and the price which a consumer actually pays for
it.
Demand curve is a curve which shows various quantities demanded of a commodity at different prices.
Demand for anything at a given price is the quantity of the commodity, which will be bought per unit of time at that price.
Equilibrium price or market price. The price quantity demanded is equal to the quantity supplied.
Giffen Good is a good for which demand falls with the fall in price & vice versa.
Individual demand means the demand for a commodity by an individual household or an individual firm.
Inferior Good is a good for which demand falls as consumer’s income rises & vice versa, e.g. inferior quality foods and
inferior quality cigarettes.
Law of demand other things remaining same (Ceteris paribus), increase in price causes contraction in demand and
decrease in price causes extension in demand of a commodity.
Law of supply, other things remaining equal, a rise in price of a commodity causes extension whereas a fall in price causes
contraction in supply.
Market demand refers to the collective demand of a commodity at given price by all the individuals and firms in the market
per unit of time.
Market equilibrium is a situation in which the quantity demanded is just equal to the quantity supplied at any price.
Market is a situation in which potential buyers and potential sellers of a commodity or factor come together for the purpose
of exchange.
Need is a basic requirement necessary to live, like bread, clothes, water and shelter.
Normal Good is a good for which demand falls as consumer’s income decreases & vice versa, e.g. AC.
Reserve price is the price which must be offered to a producer/seller induce him to sell his product.
Shortage. Excess demand over supply which occurs at price below the market equilibrium price.
Stock means the quantity stored in the market.
Subsidy means the financial assistance by the government to the producer.
Substitute in consumtion are those goods which are used in place of one another,e.g. mutton and beef.
Substitutes in production are those goods which can be produced in place of one another e.g. tube light and energy
saver; colour T.V. and black and white T.V. etc.
Supply curve is a curve which shows the positive relationship between the price and quantity supplied of a commodity.
Supply means the quantity of a commodity which is offered for sale per unit of time at a given price.
Supply schedule is a table which shows positive relationship between the price and quantity supplied of a commodity.
Surplus means excess supply over demand which occurs at price above the market equilibrium price.
Want means and refers to the human desire for good or service.

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1 CONCEPT OF DEMAND

1.1 WANT, NEED AND DEMAND

Want means and refers to the human desire for good or service.
Need is a basic requirement necessary to live, like bread, clothes, water and shelter.
Demand for anything, at a given price, is the quantity of a commodity which will be bought per unit of
time. Willingness and ability to pay are necessary conditions of demand. Hence, demand is need or want
backed by willingness and power to pay.

1.2 Individual and Market Demand:

Individual demand means the demand for a commodity by a single economic agent. It may be an
individual household or an individual firm whereas the Market demand refers to the collective demand
of a commodity by all the individuals and firms in the market.

2 LAW OF DEMAND:
According to the law of demand other things remaining same (Ceteris paribus), increase in price causes
contraction in demand and decrease in price causes extension in demand. Mathematically, the simple
demand function through which a straight line demand can be derived is given below:
Qd = a-bP
2.1 Assumptions of the Law:
(i) During the analysis of law of demand, consumer income should not change.
(ii) The taste and preferences should remain constant.
(iii) Price of related goods (substitutes and complements) remains stable.
(iv) Population does not change.
(v) There should be no change in season and weather.
(vi) Tax rates should remain same.

2.2 Demand schedule:

The demand schedule refers to the various quantities of a good which a consumer would demand at
different hypothetical prices. The following schedule shows the price of commodity X in rupees per kg
and its quantity demanded in Kgs per day.
Price of commodity X Quantity Demanded
(Rs./Kg) Qd (kg/day)

30 100

20 200

10 300

If the price of Commodity X is rupees 30 per Kg its quantity demanded is 100 Kgs. When the price of X
decreases to rupees 20 per kg its quantity demanded increases to 200 Kgs. This increase in quantity
demanded is called extension in demand because it is due to fall in its own price. With the further fall in
price of X to rupees 10 per kg its quantity demanded extends to 300 Kgs. Thus, the table shows an inverse
relationship between the price and quantity demanded of commodity X.

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2.3 Demand curve:

Demand curve is a curve which shows inverse relationship between price and quantity demanded of a
commodity. The following figure 4.1 shows the price of commodity X on Y-axis and its quantity
demanded on X-axis.

Figure: 3.1
When price of commodity X is Rupees 30 per kg its quantity demanded is 100 Kg. Joining Rs 30 and
100Kg we have point a. If price falls to rupees 20 per kg, the quantity demanded of commodity X extends
to 200kg. Joining Rs20 and 200kg we have point b. If price further falls to rupees 10 per kg, the quantity
demanded of commodity X extends to 300kg. Joining Rs10 and 300kg we have point c. Joining a, b, and
c we have a demand line D. The negative slope of the demand line shows inverse relationship between
price and quantity demanded of commodity X.

2.4 Reasons of negative slope of demand curve:

(i) Income effect:
The demand increases with the fall in price because the purchasing power (real income) of the
consumer increases. So he will be able to purchase more units of commodity than earlier.
(ii) Substitution effect:
A consumer substitutes a cheaper good for dearer good. This increases quantity demanded of a
commodity with fall in its price.
(iii) Diminishing Marginal Utility:
The slope of the demand curve is negative because of the law of diminishing marginal utility. The
law of diminishing marginal utility states that additional utility of every additional unit of a
commodity decreases. Hence, a consumer will be willing to purchase its additional units when it is
offered to him at lower price.

2.5 Limitation of the law:

The law does not apply in the following cases: pm big et

(i) Panic of shortage:

If there is panic of shortage of a commodity in future, its demand will increase even when its price
increases.
(ii) Mark of Distinction:

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The law of demand does not apply if a good being used is considered as a mark of distinction.
(iii) Basic Needs:
Law does not apply on the basic necessaries of life. The consumer will continue to purchase basic
needs like bread, salt, milk, even when their price rises.
(iv) Income:
According to the law of demand, demand of a good or service should decrease with the rise in its
price. But, it will not decrease if consumer income increases with greater magnitude.
(v) Expectations:
If the price rise is expected in future, people will buy more even at higher price. Hence, the law will
not hold.
(vi) Taste and fashion:
If a good goes out of taste or fashion, it’s demand will decrease even at lower price.
(vii) Giffen goods:
Giffen Good is a good for which demand falls with the fall in price & vice versa. The law of demand
does not apply in the case of Giffen goods because the quantity demanded of these goods decreases
with the fall in their price.

2.6 Practical importance of law of demand:

(i) For Price determination:
Demand is one of the important factors of price determination in market. According to
Alfred Marshall, it is one of the “blades” of a scissor.
(ii) For a Producer:
Demand curve is also an average revenue curve for the producer which helps in determining the total
revenue of the producer.
(iii) For a State:
Concept of demand is useful for the state in imposing taxes on goods and services. If a little increase
in tax causes greater decrease in demand then government will abstains from imposing taxes on such
commodity. Such tax reduces total tax revenue.
(iv) For a consumer:
Law of demand helps consumers to rearrange their purchasing pattern. A fall in price increases the
purchasing power of consumer which enables him to buy more than earlier.

2.7 Giffen Good:

Giffen good is a good for which demand decreases with the fall in price & vice versa. The law of demand
does not apply in the case of Giffen goods because the quantity demanded of these goods decreases with
the fall in their price. Sir Robert Giffen observed a strange phenomenon in the case of demand for bread
in England. He observed a fall in demand for bread by labour class when its price decreased. This
happened due to following reasons:
(i) Income effect:
When price of bread fell, the real income of labour increased which enabled them to afford better
food like meat. This decreases quantity demanded of bread with fall in its price.
(ii) Substitution effect:

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When price of bread fell, consumers substituted a cheaper good for dearer good. This increases
quantity demanded of bread with fall in its price. In the case of Giffen good, the negative income
effect overweighs the positive substitution effect.
Following are the necessary conditions for a good to be declared as Giffen:
• Most of the consumer income must be spent on it.
• It should have no close cheaper substitutes.

3 DETERMINANTS OF DEMAND
Determinants of demand are the factors that influence demand. Price of a good is the key determinant
which causes change in quantity demanded while other factors cause change in demand.

3.1 Key determinant-Price of a good:

The price of a good causes movement of the consumer from one point to another point on the same
demand line, which is called as extension or contraction in demand or change in quantity demanded.
Figure 3.2 shows the extension in demand from a to b with the fall in price from P1 to P2 and contraction
in demand from b to a in response to a rise in price from P2 to P1.

Figure: 3.2
3.2 Changes in conditions of demand/ other determinants:
The factors other than price cause inwards or outwards (fall or rise) shift in demand curve. Shift in
demand is known as change in demand. They are also called as causes of shift in demand. While
analysing the effect of following factors on the demand, the price of a good is held constant.

(i) Price of other goods (Substitutes in consumption):

The price of other goods causes inwards or outwards shift in the demand curve as shown in figure
3.3. In case of substitute goods, if the price of a good (e.g. Pepsi ) increases, it will increase demand
of other good (e.g. Coke) causing outward shift in the demand for coke from D to D2 & vice versa.
(ii) Price of other goods (Complements in consumption):
If the goods being used are complementary, the demand of one good (e.g. Petrol) decreases with rise
in price of another good (e.g. Car) causing inward shift in the demand curve for petrol from D to D 1
& vice versa.

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Figure 3.3
(iii) Consumer income:
Change in consumer income causes increase or decrease in demand. The following factors affect
consumer income:
• Tax rates (low tax on income increases disposable income).
• Rate of interest (low rate of interest also increases disposable income).
• Economic growth (increases consumer money income)
The demand for normal goods increases causing outward shift in demand from D to D 2 with the
increase in consumer income and vice versa. Normal Good is a good for which demand falls as
consumer’s income decreases & vice versa, e.g. AC, car etc.
In the case of inferior goods, the demand decreases causing inward shift in the demand curve from
the D to D1 with the increase in consumer income and vice versa. Inferior Good is a good for which
demand falls as consumer’s income rises & vice versa, e.g. inferior quality foods and inferior quality
cigarettes.
(iv) Population:
Increase in population of an area increases the demand for goods and services leading towards
outwards shift in the demand curve from D to D2 where as decrease in population causes inward shift
in demand curve from D to D1.
(v) Taste and preferences:
The taste and preferences also influence the demand. The following factors affect taste and
preferences:
• Advertisement.
• Fashion.
• Health scares.
• Season and weather.
If the taste of a good is developed or consumers attach certain preference to use it, this will increase
the demand for good causing outward shift in the demand curve from D to D2.

(vi) Expectation:

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Expectation about the future changes in price effects the demand curve. If the rise in price of a
product is expected in future, its demand will increase causing outward shift in the demand curve
from D to D2 and vice versa.
(vii) Legislation:
The legislation also influences the demand for a product. Legislation about helmet wearing for
motorcyclists increases the demand for helmet causing outward shift in demand curve from D to D2.

3.3 Change in quantity demanded and Change in demand:

Change in quantity demanded means increase or decrease in quantity of the commodity in response to a
change in its own price while other things are held constant. This is also called as movement along the
demand line.
Change in demand means shift in demand curve which is caused by the change in factors other than the
price of a commodity. It is also called as rise/fall or increase/decrease in demand.

Practice Question 1:
How would the demand for compact disc (CD) change even when its price remains constant in the event of:
(a) A fall in the price of laptop computer;
(b) A fall in the price of Universal Serial Bus (USB);
(c) Free provision of laptop computers by the government to the students scoring more than 80% marks.

3.4 Engel Curve:

Engel curve is a curve showing the relationship between the consumer’s income and quantity demanded
of a good. Engel curve for the normal goods is positively sloped which shows increase in quantity
demanded of normal goods with the increase in consumer income as shown in figure.3.4 (a).
The Engel curve for an inferior good slopes downward from left to right (negative slope) which shows
decrease in quantity demanded of an inferior good with the increase in consumer income and vice versa
as shown in figure 3.4 (b).
Consumer Income
Consumer Income

Engel Curve

Engel Curve

O Quantity O Quantity
Figure: 3.4 (a) Figure: 3.4 (b)

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4 CONCEPT OF SUPPLY

4.1 Supply and stock

Supply means the quantity of a commodity which is offered for sale per unit of time at a given price.
Supply refers to the quantity of a commodity which is actually offered for sale in the market whereas the
stock means the quantity stored in the market. Stock is not offered for sale in the market but it can be
brought into the market at a short notice.

5 LAW OF SUPPLY:
According to the law of supply, other things remaining same, a rise in price of a commodity causes
extension whereas a fall in price causes contraction in supply.
The simple supply function for a straight line supply is given below:

Qs= a+bp

5.1 Assumptions of Law of supply:

(i) Price of other goods (substitutes and complements in production)should remains constant.
(ii) There should be no change in technology.
(iii) Cost of production should remain same.
(iv) No change in taxes and subsidies.
(v) Price of capital goods (machinery, tool, equipment, etc.) remains constant.
(vi) No change in weather and climate.

5.2 Supply schedule:

The supply schedule is a table showing various quantities supplied of a commodity at different prices per
unit of time. The following schedule shows the price of commodity X in rupees and its quantity supplied
in Kgs. Assuming the price of commodity X as rupees 5 per kg, its quantity supplied is 20 Kg. If the price
rises to rupees 10 per kg, the quantity supplied increases to 40 Kgs. With the further rise in price to rupees
15 per kgs, the quantity supplied extends to 60 Kgs. Thus, the table shows the direct relationship between
the price and quantity supplied of commodity X.

Price of commodity X Quantity Supplied

(Rs./Kgs.) Qs (kg/per day)

5 20

10 40

15 60

5.3 Supply curve

Supply curve is a curve which shows the positive relationship between the price and quantity supplied of
a commodity. In figure 3.5, when price of commodity X is rupees 5 per kg its quantity supplied is 20 Kg.
Joining 5 and 20 we have point a.

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Figure: 3.5
If the price increases to rupees 10 per Kg, the quantity demanded extends to 40 Kg. Joining 10 and 40 we
have point b and so on. Joining a, b, and c points we have Supply curve S sloping upward from left to
right which shows direct relation between price and quantity supplied of commodity X.

5.4 Practical importance of law of supply

(i) Price Determination:
Supply, according to Marshall, is equally important in determining the price of a commodity in the
market. As the two blades of scissor are essential to cut cloth, supply is important to determine price
of a product.
(ii) Production Decision:
Increase in price of commodity will increase its supply because it increase profit margin. So, it helps
producers to shift resources from less profitable to more profitable product.
(iii) Economic Growth:
Higher price of a product induces new producers to enter the market which increases total supply of
the product.

6 DETERMINANTS OF SUPPLY
Determinants mean the factors that influence supply.
6.1 Key determinant-Price of the good:
Price of a good causes extension or contraction in supply, leading towards the movement from one
point to another point along the same line as shown in figure in 3.6. Extension and contraction in
supply is also called as change in quantity supplied.

Figure: 3.6

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6.2 Changes in conditions of supply/other determinants:

The following factors shift the entire supply curve. Hence, they are also called as causes of shift in
supply. Shift in supply may also be called as change in supply.
(i) Price of other goods (Substitutes in production):
The price of other goods, like substitutes in production, affects the supply of a commodity.
Substitutes in production are those goods which can be produced in place of one another e.g. tube
light and energy saver; colour T.V. and black and white T.V. etc. In case of substitutes in production,
if the price of one good (e.g. energy saver) increases, the producer will shift the resources from tube
light to energy saver. Thereby the supply of tube light will decrease causing leftward shift in the
supply of tube light from S to S1 and vice versa as shown in figure 3.7
(ii) Price of other goods (Complements in production ):
The price of other goods, like complements in production, affects the supply of a commodity.
Complements in production are those goods which are produced together, e.g. meat and hides;
wheat and husk etc. They are also called as jointly supplied goods. In case of complements in
production, if the price of one good (e.g. Meat) increases, it will increase supply of other good (e.g.
hides) causing rightward shift in the supply of hides from S to S 2 and vice versa as shown in figure
3.7.

Figure 3.7
(iii) Cost of making the good:
Cost of making the good effects the supply of a commodity. If the cost of making a good increases,
its supply will decrease causing leftwards shift in the supply from S to S1 and vice versa as shown in
figure 3.7
(iv) Changes in technology:
If the methods and techniques to produce a commodity improve, it will increase the supply of the
commodity causing rightward shift in the supply curve from S to S2.
(v) Indirect Taxes and subsidy:
The imposition of tax on a commodity decreases the supply, causing leftward shift in the supply
from S to S1.
Tax revenue from indirect tax:
Indirect tax is imposed on the production and consumption of good and services e.g. value added
tax (VAT), general sale tax (GST), excise duty, tariff, etc. The total tax revenue generated from the
indirect tax is calculated by multiplying tax per unit to quantity sold.
Formula: Total tax revenue=indirect tax per unit × quantity sold

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However, the total tax revenue depends upon both demand and supply of a product. Considering
supply in isolation, the diagram becomes simple. In figure 3.8 per unit indirect tax T is imposed on a
product shifts the supply curve upwards from S to S1. The shaded area is the total tax revenue.

Figure 3.8
Subsidy refers to the financial assistance from a government to a producer to boost up the
production of a commodity. The grant of subsidy on the commodity will increase its supply causing
rightwards shift in the supply from S to S2 shown in figure 3.7.
(vi) Other factors:
Other factors such as seasons have an effect on the supply of an agriculture product. A favourable
season increases the supply of agriculture product causing the rightward shift in the supply and vice
versa.

Practice Question 2:
Explain the effect of change in supply of mobile set even when its price does not change in the event of:
(a) A fall in price of raw materials used in the production of mobile sets;
(b) Imposition of per unit tax by the government on the mobile sets;
(c) Introduction of subsidy on the mobile sets

7 RESERVE PRICE
Reserve price is the minimum price at which a producer/seller is willing to sell his product.
The following factors affect the reserve price:
(i) Durability of goods:
The durability of a commodity influences its reserve price. If the commodity is durable, its reserve
price will be higher because a producer can wait until the price increases to a reasonable level. But if
the commodity is perishable, its reserve price will be low and producer will dispose it off as quickly
as possible at the lower price.
(ii) Consumer income:
A consumer having higher disposable income will be willing to pay higher price of a product than a
consumer with low disposable income. Thus, the producer will increase the reserve price of his
product for a consumer with higher income.

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(iii) Liquidity preference:

The liquidity of a seller/producer influences the reserve price of a commodity. If a producer runs
short of liquid cash and he prefers the liquidity, the reserve price of a commodity will be low. If, on
the other hand, a producer has sufficient liquidity, the reserve price will be higher.
(iv) Cost of production:
High cost of production compels producer to set higher reserve whereas low cost of production
induces him to reduce reserve price.
(v) Storage cost:
The storage facility and its cost also influence reserve price of a commodity. If reasonable storage
facility is available at low cost, the reserve price will be higher and a producer will store the
commodity until the price increases to a reasonable level.
(vi) Transportation facilities:
The better transportation facility increases the reserve price of the commodity. Because of the
transport facility the commodity can be sent to far flung areas, where it yields higher price.

8 RELATIONSHIP BETWEEN SUPPLY AND TIME

According to the period of time, the supply can be categorised into following three types.
(i) Market period supply
The market period refers to a very short period of time. Under this period of time, it is not possible to
increase the supply of the product with the increase in price. The supply of perishable commodity
like fish is perfectly inelastic as shown in the figure 3.9
(ii) Short-run supply
Short-run is a period of time in which at least one input is fixed. Under this period the supply can be
changed but less than the change in price. So, the supply will be inelastic as shown in figure 3.10.
(iii) Long-run supply
Long-run supply curve is elastic as shown in figure 3.11. Long-run is sufficient period of time in
which all the inputs are variable. Hence, it will be possible for the producer to increase the supply of
a product with the increase in price.

(Figure: 3.9) (Figure: 3.10) (Figure 3.11)

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9 CONCEPTS OF MARKET AND MARKET EQUILIBRIUM

Market is a situation in which potential buyers and sellers of a commodity or factor come together for the
purpose of exchange.

9.1 Factors influencing the extent/size of the market: NNTSA

The following factors determine whether the market is narrow or wide.
(i) Nature of the commodity.
If a commodity being used is durable, its demand will be wider and it will be sent to far flung areas.
While, on the other hand, if the commodity is perishable, it will not be possible to sell it to remote
areas and it will be sold locally. Thus its demand will be narrow.
(ii) Nature of demand.
I a commodity has multiple uses, its demand will be worldwide or wider. If, on the other hand, the
commodity has single use, its demand will be local and narrow.
(iii) Transport & communication.
The extent of the market for a commodity also depends upon the transport and communication
facilities. In the case of better transport and communication facility, the demand for the commodity
will be wide because it will be easy to send it to other countries.
(iv) Stability and security.
Economic stability and security influences the extent of the market. Secure and stable economic
policies increase the extent of the market whereas insecurity and instability decreases the extent of
market.
(v) Availability of credit.
Availability of credit helps a seller to sell the commodity in other cities or countries. Thus, the
market for the commodity will be wider. If credit facility is not available to the seller, the market for
the commodity will be narrow.

9.2 Kinds of market:

The market can be classified on the basis of time, commodity, area and competition.
(a) According to time:
(i) Daily market/Momentary market:
Daily market is a market for highly perishable goods e.g. fish. The quantity of the perishable
goods is perfectly inelastic which cannot be increased with the increase in price. The supply of
the daily market is for a very short period of time. It is also called as market period supply
(Chapter 4).

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(ii) Short run market

Short run market is a market in which supply of the product can be increased to a certain
extent by increasing only the variable inputs while the fixed inputs like machinery and
technology cannot be changed. Thus, the supply is inelastic in short run period of time
(Chapter 4).
(iii) Long run market
Long run market is a market in which the supply can be increased by increasing all the
inputs. There is no fixed input during long run period of time. Long run period supply LPS is
relatively elastic (Chapter 4).
(b) According to area
(i) Local market
The local market is a market for the goods and services which are bought and sold locally in
the area in which they are produced. The market for milk and ice is local market.
(ii) Regional market:
The regional market is a market which extends to a region. The market for earth-ware may
be classified as regional market.
(iii) National market:
National market is a market for relatively durable goods which can be sold throughout the
country, for example, cloth and vegetable.
(iv) International market:
International market is a market for the goods having worldwide demand, e.g. Petrol, Gold
and computer.
(c) According to commodity
(i) General market:
General market is a market in which variety of goods and services are bought and sold e.g.
Anarkali market in Lahore.
(ii) Specialized market:
Specialized market is a market which deals only in special or one product e.g. Vegetable
market, fruit market and stock market..
(d) Market on the basis of competition
(i) Perfect competition:
Perfect competition (Chapter 6) is a market in which large number of sellers are selling
homogeneous products e.g. egg market, rice market.
(ii) Monopoly
Monopoly ( Chapter 6) is a market in which a single seller controls the whole supply of the
product which has no close substitutes e.g. WAPDA.

(iii) Monopolistic competition:

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Monopolistic competition (Chapter 6) is a market in which a fairly large number of sellers

are selling differentiated products e.g. shoe market and cloth market etc.
(iv) Oligopoly:
Oligopoly (Chapter 6) is a market in which a few sellers are selling homogeneous or
differentiated product, e.g. car market, Petroleum market.

9.3 Market equilibrium:

A situation in which the quantity demanded of a commodity is just equal to the quantity
supplied.

9.4 Schedule
The following schedule shows price, quantity demanded and quantity supplied of commodity X. Suppose
the price of commodity X is Rs.5 per kg, its quantity demanded at this price is 10 kg. If the price
decreases to Rs.4 per kg, its quantity demanded extends to 15 kg. With the further fall in price of
commodity X, its quantity demanded extends to 20 kg and so on. This shows an inverse relationship
between price and quantity demanded of commodity X.

The relationship between price and quantity supplied of commodity X is shown in column 1 and 3. When
the price of commodity X is Rs.5 per kg its quantity supplied is 40 kg. If the price falls to Rs.4 per kg, its
quantity supplied contracts to 30 kg. With a further fall in price to Rs.3 per kg, the quantity supplied
contacts to 20 kg and so on. This shows direct relationship between price and quantity supplied of
commodity X.

Price of commodity X Quantity Demanded Quantity supplied

In (Rs.) Qd (kg) Qs (kg)
5 10 40
4 15 30
3 20 20
2 25 10
1 30 0
The quantity demanded is equal to quantity supplied i.e. 20 kg at price Rs.3 per kg. This is the market
equilibrium. The price at which the quantity demanded is equal to quantity supplied is called equilibrium
price or market price. At this price, quantity demanded is equal to the quantity supplied (i.e.20 kgs).
This quantity is called as market quantity or equilibrium quantity or quantity traded.

9.5 Diagram
The market equilibrium is explained with the help of figure 3.12 given below. The negative slope (falling
downward from left to right) of the demand curve D shows that quantity demanded extends with the fall
in price and vice versa. The positive slope (rising upward from left to right) of the supply curve S shows
that quantity supplied of commodity X decreases with the fall in price and vice versa.
The market is in equilibrium at price rupees 3 where the quantity demanded equals quantity supplied (i.e.
20 kg). Above the market equilibrium, the quantity supplied exceeds quantity demanded which is called

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as surplus. This surplus pressurises the price to fall until the quantity demanded equals the quantity
supplied.
• As the price falls, the consumers extend the demand for a product because they now can better
afford this good.
• The producers will contract the supply at lower price because now it is less worthwhile for them to
sell this good.

Figure: 3.12
The price below the market price shows excess demand over supply which is called shortage. This will
lead towards rise in price until the quantity demanded equals quantity supplied and market is in
equilibrium.
• The rise in price due to shortage, causes contraction in demand by the consumers because they can
now less afford the good than earlier.
• The producers, on the other hand, will extend the supply of the good because it now more profitable
to produce it.

MCQ. If the demand equation for a good is Qd = 20 – P and the supply equation is Qs = 6 + 1.5 P and the price is
set equal to 2.4 above the equilibrium level, there will be an excess:
(a) demand of 6 units (b) supply of 6 units
(c) demand of 12 units (d) supply of 18 units

A. At equilibrium level:
Qd=Qs
20-P=6+1.5P
2.5P=14
P=5.6
P=5.6+2.4
P=8
Qd=20-8
Qd=12
Qs=6+1.5(8)
Qs=18
Qs-Qd=6units

10 EFFECT OF CHANGE DEMAND AND SUPPLY ON THE EQUILIBRIUM:

(i) Change in price and quantity traded of the commodity when its demand changes:

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The following figure 3.13 shows that both the price and quantity traded of commodity increase when
its demand increases from D to D2. Whereas, the price and quantity traded of commodity decrease
with the decrease in demand from D to D1.

Figure: 3.13
(ii) Change in price and quantity traded of the commodity when its supply increases or decreases:
The following figure 3.14 shows the increase in supply from S to S2 which results in fall in price
from P to P2 and increase in quantity traded from Q to Q2. On the other hand, the decrease in supply
of the commodity from S to S1 increases in the price of the commodity from P to P1 and decreases its
quantity traded from Q to Q1.

Figure: 3.14

Practice Question 3:
Explain the possible effect on the price and quantity traded of new cars when:
(a) Price of old car increases;
(b) Price of petrol increases;
(c) Government imposes indirect tax on the production of new cars;
(d) Technology to produce car improves.

(iii) Change in price and quantity traded of the commodity when both demand and supply increase
with the same proportion:

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The following figure 3.15 shows the increase in supply from S to S1 and increase in demand from D
to D1. The magnitude of increase in demand and supply is equal. The new equilibrium will be at
point E1. Thus, the quantity traded of the commodity increases from Q to Q1 while price of the
commodity remains same.

Figure: 3.15
(iv) Change in price and quantity traded if the magnitude of increase in supply is greater than the
increase in demand:
The following figure 3.16 shows that the supply increases from S to S1 while the demand increases
from D to D1. The magnitude of increase in supply is greater than the increase in demand. The new
equilibrium will be at point E1 which shows fall in price from P to P1 and increase in quantity traded
from Q to Q1.

Figure: 3.16

(v) Change in price and quantity traded of the commodity if the proportionate decrease in supply
is greater than the increase in demand:

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The following figure 3.17 shows the decrease in supply from S to S1 and increase in demand from D
to D1. The market equilibrium will shift from E to E1 which increases the price of commodity from P
to P1 whereas quantity traded decreases from Q to Q1.

Figure: 3.17
(vi) Change in price and quantity traded of the commodity when proportionate decrease in supply
is equal to the proportionate increase in demand:
The following figure 3.18 shows the decrease in supply from S to S1 and proportional increase in
demand from D to D1. The new equilibrium shifts from point E to point E1. Thus, the price increases
from P to P1 while quantity traded remains same i.e. Q.

Figure: 3.18

Practice Question 4:
Draw a diagram showing change in price and quantity traded of a commodity when its demand decreases while
its supply increases with equal proportion.

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11 MARKET EQUILIBRIUM FOR PERISHABLE GOODS

So for, mostly durable goods have been discussed. The durable goods can be stored sold for a longer time
because they retain their value. The supply of durable goods increases with the increase in demand.
Hence, it is positively sloped. But, the supply of perishable goods is inelastic and increases up to certain
level with the increase in demand but after this point the increase in demand will only result in an
increase in price as shown in Figure 3.19. The perishable goods like, tomato, strawberry, cannot be stored
for long. With the increase in demand from D to D1, supply increases which result in price rise from P to
P1. A further increase in demand to D2 will increase the price only because the supply cannot be increased
further and it becomes vertical or perfectly inelastic at this stage. Here, the price is determined by demand
only.

Figure: 3.19
12 CONSUMER SURPLUS AND PRODUCER SURPLUS

12.1 Consumer surplus

Consumer surplus is the difference between the marginal utility of a good and the price which a
consumer actually pays for it. If a consumer is willing to pay rupees 60 per kg for apple while the price of
apple in the market is rupees 50 per kg, rupees 10 per kg will be the consumer surplus. Thus, the
consumer surplus may be called as difference between the price a consumer is willing to pay for the
product and the market price. Figure 3.20 shows the consumer surplus above the market price equal to
PAE area.
12.2 Producer surplus:
Producer surplus is the difference between the market price of a good and the price at which a producer
is prepared to sell it. If the producer is willing to sell his apple at rupees 40 per kg whereas the price of
apple in the market is rupees 50 per kg, Rupees 10 per kg will be the producer surplus. In Figure 3.20 the
area below the market price is producer surplus which is BPE.

Figure 3.20

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MULTIPLE CHOICE QUESTIONS

Select appropriate answer of each of the following Multiple Choice Question (MCQ).

(1) Which of the following statement is true of a curve with a constant slope?

(a) It is a straight line (b) It is non linear

(c) It runs parallel to Y-axis (d) It runs parallel to X-axis

(2) If the price of a good falls and the negative income effect outweighs the positive substitution effect, the good is
defined as:

(a) Substitute good (b) Inferior good

(c) Giffen good (d) Public good

(3) If the price of a good falls and the positive substitution effect outweighs the negative income effect, the good is
defined as:

(a) Substitute good (b) Inferior good

(c) Giffen good (d) Public good

(4) Giffen goods are those goods for which the demand decrease when their price:

(a) Increase (b) Decrease

(c) Remain constant (d) Reduce to a certain level

(5) Engel curve has a negative slope for:

(a) Normal goods. (b) Giffen goods.

(c) Necessary of life. (d) Inferior good.

(6) Demand curve for a Giffen good has a:

(a) Negative slope (b) Shape of rectangular hyperbola.

(c) Positive slope. (d) None of the above.

(7) Which one of the following causes inwards shift in Demand curve for a commodity?

(a) Fall in price of substitute good. (b) Decrease in consumer income.

(c) Increase in price of complementary good. (d) All of the above.

(8) The Demand for a commodity shifts outwards if:

(a) Price of complementary good falls and consumer income decreases.

(b) Price of substitute good falls and consumer income increases.

(c) Price of substitute good falls and price of complementary good increases.

(d) Price of substitute good increases and price of complementary good falls.

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(9) Which one of the following does NOT cause movement along the Demand curve?

(a) Fall in price of a commodity. (b) Increase in population.

(c) Rise in price of a commodity. (d) None of the above.

(10) Demand for new car will increase if:

(a) Consumer income increases and price of old car decreases.

(b) Price of old car and petrol increases.

(c) Fall in price of old car is greater than the fall in price of petrol.

(d) Price of petrol falls while price of old car increases.

(11) Demand curve slopes downward because of:

(a) Consumer indifference (b) Elasticity of demand

(c) Inelastic demand (d) Law of diminishing marginal utility

(12) If peas and beans are substitutes of each other, an increase in the price of peas will:
(a) increase the quantity of beans demanded
(b) increase the price of beans and the quantity sold
(c) decrease the quantity of peas sold
(d) all of the above

(13) Which one of the following causes outwards shift in Demand curve?

(a) Fall in taxation (b) Advertisement

(c) Fall in interest rates (d) All of the above

(14) Which one of the following is a qualifying condition for the good to be declared as Giffen?

(a) Most of the consumer budget is spent on the good.

(b) It should have no close cheaper substitutes.

(c) Its demand increases with the rise in its price

(d) All of the above

(15) Good X is a substitute of good Y but complement of good Z. The demand of good X will shift outwards if:

(a) price of good Y falls but price of good Z rises (b) price of both goods Y and Z falls

(c) price of good Y rises but good Z falls (d) price both goods Y and Z rises.

(16) The demand curve has negative slope due to:

(a) Income effect (b) Substitution effect

(c) Both income and substitution effect (d) None of the above

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(17) If the fall in price of good A and rise in price of good B shifts the demand curve of good C inwards, the good C
will be a:

(a) Substitute for good A & B

(b) Complementary for good A &B

(c) Substitute for good A and Complementary for good B

(d) Complementary for good A and Substitute for good B

(18) Demand curve slopes downward because of:

(a) consumer indifference (b) elasticity of demand

(c) inelastic demand (d) law of diminishing marginal utility

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

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

(21) Which of the following pair of goods is termed as jointly supplied?

(a) Lamb and goat (b) Lamb and fodder

(c) Wool and cotton (d) Lamb and wool

(22) New technology makes it possible to produce more of a good at every given price. What effect will this have on
equilibrium price and output in a competitive industry?

(a) Price decreases and output decreases.

(b) Price decreases and output increases.

(c) Price increases and output decreases.

(d) Price increases and output increases.

(23) Which of the following would cause the leftwards shift of the supply curve of an economic good:

(a) An improvement in technology.

(b) An increase in demand for good.

(c) A reduction in general sales tax.

(d) The removal of subsidy paid to the producers.

(24) Long-run supply curve is:

(a) Perfectly inelastic. (b) Negatively sloped elastic supply.

(c) Positively sloped elastic supply. (d) Positively sloped inelastic supply.

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(25) Supply of hides will reduce if:

(a) Price of meat falls. (b) Demand for shoes increases.

(c) Price of meat rises. (d) Price of shoes increases.

(26) Which one of the following does NOT cause rightwards shift in supply.

(a) Grant of subsidy by the government. (b) Increase in population.

(c) Decrease in excise tax. (d) None of the above.

(27) To draw a supply for rice, all but which one of the following are held constant:

(a) Price of inputs. (b) Technology.

(c) Climate and weather (d) Price of rice.

(28) Ceteris paribus, a rise in price of a commodity causes:

(a) Increase in supply. (b) Increase in quantity supplied.

(c) Decrease in quantity supplied. (d) Decrease in supply.

(29) All of the following are determinants of supply except:

(a) Price (b) Income level

(c) Level of technology (d) Objectives of the firms

(30) 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

(31) The minimum price a firm is willing to receive for its product is called:

(a) Minimum price (b) Reserve price

(c) Shadow price (d) Price floor

(32) Which one of the following would shift the supply curve of a good leftwards:

(a) withdrawal of subsidy. (b) imposition of indirect tax.

(c) fall in price of complement in production (d) All of the above

(33) If good A and B are substitute in production while B and C are complements in production. Which one of the
following statements is true?

(a) fall in price of good A and C will shift the supply of good B leftwards

(b) rise in price of good A and fall in price of good C will shift the supply of good B rightwards

(c) fall in price of good A and rise in price of good C will shift the supply of good B leftwards

(d) rise in price of good A and fall in price of good C will shift the supply of good B leftwards

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(34) 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 in production goods go down
(d) prices of complements in production go down

(35) Which of the followings best describes the Giffen good?

(a) Both income effect and substitution effects are in same direction.

(b) The positive substitution effect overweighs the negative income effect.

(c) The negative income effect overweighs the positive substitution effect.

(d) All of the above.

(36) The supply curve of good may shift due to one of the following factors:

(a) Increase or decrease in supply of the good at existing price.

(b) Maintaining the same supply at higher or lower price.

(c) Both (a) and (b).

(d) None of the above.

(37)The Market equilibrium is determined by:

(a) A point at which the budget line is tangent to the indifference curve.

(b) A point on the next highest indifference curve.

(c) A point on the indifference curve that indicates consumer’s satisfaction.

(d) The equality of supply and demand of the product in the market.

(38) Which of the following will NOT influence the size of the market?

(a) Nature of the good. (b) Stability and security.

(c) Price of the good. (d) Transport and communication.

(39) Subsidy is a financial assistance by the government to the producer:

(a) That contributes to help defray cost of production.

(b) That works whereby once a certain level of output of production is reached.

(c) Both (a) and (b)

(d) None of the above.

(40) If the proportionate increase in supply of a commodity is greater than the decrease in demand, what changes in
price and quantity may be possible?

(a) Price rise and quantity decreases. (b) Price rise and quantity increases.

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(c) Price fall and quantity increases. (d) Price fall and quantity decreases.

(41) The market period supply is:

(a) Parallel to x-axis. (b) Sloping upwards positively.

(c) Perpendicular to x-axis. (d) Negatively sloping downwards.

(42) Which one of the following statement is correct?

(a) Equilibrium market price is determined by the market forces of demand and supply.

(b) Regulated market price is determined by the government.

(c) Regulated market price is used to promote social equality.

(d) All of the above.

(43) When the supply of a perishable good becomes perfectly inelastic, the whole price mechanism depends upon:

(a) The movements in demand curve. (b) The supply curve.

(c) Both (a) and (b). (d) None of the above.

(44) An increase in the supply of wool would NOT lead to a change in the price of wool if the demand for:

(a) Wool were perfectly price inelastic. (b) Lamb were perfectly price elastic.

(c) Lamb were perfectly price inelastic. (d) Wool were perfectly price elastic.

(45) If the demand increases but supply decreases with an equal proportion, what change in price and quantity
traded may be possible?

(a) Price decreases but quantity traded remains same

(b) Price increases but quantity traded decreases

(c) Both price and quantity traded increases

(d) Price increases but quantity traded remains constant.

(46) Increase in price and quantity traded of second hand cars may be due to:

(a) Increase in price of new cars and fall in price of petrol

(b) Decrease in price of new cars and rise in price of petrol

(c) Increase in price of new cars as well as petrol

(d) None of the above.

(47) Which one of the following statement is correct?

(a) Changes in conditions of demand and supply leads to new market equilibrium.

(b) Short-term change in supply (e.g. bad harvest) reverts to long-term equilibrium.

(c) Shortage and surpluses in production eventually reverts to long-term equilibrium.

(d) All of the above.

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(48) Which of the following will NOT shift the supply curve to the right?
(a) Rise in price of the good (b) Tax relief on the good
(c) Fall in wage rate (d) Rise in price of jointly supplied good
(49) 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

(50) If the demand equation for a good is Qd = 20 – P and the supply equation is Qs = 6 + 1.5 P and the price is set
equal to 2.4 above the equilibrium level, there will be an excess:
(a) demand of 6 units (b) supply of 6 units
(c) demand of 12 units (d) supply of 18 units

(51) 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

(52) Which of the following statements is NOT true?

(a) Ceteris paribus means other things remaining same
(b) One of the economic goals is to maintain price stability
(c) Normative aspect of economics deals with factual questions
(d) Agent is a decision maker within an economic model

(53) Producer surplus will be zero when:

(a) Demand is perfectly inelastic. (b) Demand is perfectly elastic.

(c) Supply is perfectly inelastic. (d) Supply is perfectly elastic.

(54) Which area in the following diagram shows the Consumer Surplus?

(a) OPEQ (b) OBEQ

(c) APE (d) PEB

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(55) The following shows the market equilibrium of a commodity.

Which area measures the total amount the producer is willing to accept for the equilibrium level of output?

(a) OBEQ (b) OPEQ

(c) OAEQ (d) PEB

(56) Ceteris paribus, with the fall in price of an inferior good, the income effect leads to ____________ in quantity
demanded and substitution effect leads to ____________ in quantity demanded

(a) An increase; a decrease (b) An increase; an increase

(c) A decrease; an increase (d) A decrease; a decrease

(57) The demand curve for a normal good is always

(a) Perfectly elastic (b) Upward sloping
(c) Perfectly inelastic (d) Downward sloping

(58) Which one of the following will NOT shift the demand curve of mobile sets to the rightwards (out wards)?
(a) Increase in consumer income; expected rise in price
(b) Decrease in indirect tax; increase in population
(c) Decrease in tax on income; fall I price of mobile Sims
(d) Using mobile become fashion; price of landline phone rises

(59) The supply curve of good X will shift leftwards when

(a) Production cost of good X rises; government imposes tax on good X
(b) Wage rate falls; technology to produce good X improves
(c) Consumer income falls; government gives subsidies on good X
(d) Price of raw material to produce good X fall; wage rate rises

(60) The following are the demand and supply functions of smart phone

Qd =50 -4p Qs = 15 + 3p
Which of the following is the equilibrium quantity of smart phone
(a) 5 (b) 50
(c) 30 (d) 60

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(61) Which one of the following assumptions does NOT confer to the law of demand?
(a) The prices of related goods are stable. (b) Taxes on income remain same.
(c) Price of the good concerned remains constant. (d) The size of population is stable

(62) Which of the following statements is NOT true?

(a) Microeconomics deals with individual decision-making unit.
(b) Division of labour reduces cost and time.
(c) Positive statement is opinion-based.
(d) Economics is a social science.
(63) Ceteris paribus, if the price of normal good falls, the quantity demanded will increase due to _________ and
____________.
(i) income effect
(ii) price effect
(iii) complementary effect
(iv) substitution effect

(a) (i) and (ii)

(b) (ii) and (iii)
(c) (i) and (iv)
(d) (iii) and (iv)

(64) The demand curve for a Giffen good is always:

(a) Upward sloping (b) Downward sloping
(c) Perfectly inelastic (d) Perfectly elastic
(65) The quantity of a product that producers wish to sell in a market will NOT shift due to:
(i) Product’s own price
(ii) Wage rate
(iii) Production cost
(iv) Direct taxes
(v) Indirect taxes

(a) (i) and (ii)

(b) (iii) and (v)
(c) (i) and (iv)
(d) (iv) and (v)

(66) Which one of the following will NOT shift the demand curve of laptops to the leftwards (inwards)?
(a) Increase in consumer income and expected rise in price
(b) Decrease in consumer income and fall in population
(c) Rise in price of desktop computers and free provision of laptops by the government

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(d) Using laptop is health scare and decrease in advertisement by laptop manufacturers

(67) The supply curve of product A will shift leftwards when:

(a) Production cost of product A rises; government imposes tax on product A
(b) Wage rate falls; technology to produce product A improves
(c) Consumer income falls; government gives subsidies on product A
(d) Price of raw material to produce product A falls; production cost falls

(68) The following are the demand and supply functions of marker:
Qd =20-2p Qs = 8 + 3p
Which of the following is the equilibrium quantity of marker?
(a) 2.4 (b) 15.2
(c) 12 (d) 4

(69) Which one of the following assumptions does NOT confer to the law of supply?
(a) There is no change in the income of consumers
(b) There is no change in production cost
(c) The prices of related goods are stable
(d) Cost of capital goods remains same

(70) The “change in demand” and “change in quantity demanded” have different meanings in economics.
(a) True
(b) False

(71) Which one of the following factor does NOT influence “change in supply”?
(i) Product’s own price
(ii) The price of related products
(iii) Consumer income
(iv) Indirect taxes
(v) Subsidies
(vi) Wage rate

(a) (i) and (ii)

(b) (iii) and (iv)
(c) (i) and (iii)
(d) (iv) only (v)

(72) The part of output which is offered to sale in market is called _________ whereas _________ is the output that is
not offered for sale at given price.
(a) Supply; Stock
(b) Buffer stock; Supply
(c) Actual shipment; sample

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(d) Stock; Supply

(73) Which one of the following factor influences “change in quantity demanded”?
(i) Price of related goods
(ii) Wage rate
(iii) Production cost
(iv) Product’s own price
(v) Population
(vi) Direct taxes

(a) (i) and (ii)

(b) (iii) and (vi)
(c) (iv) only
(d) (vi) only

(74) The graph shows the demand and supply curves for an industry. What would cause a shift in the supply curve
from S to S1?

(a) an increase in the number of firms in the industry

(b) an increase in the number of workers employed

(c) an increase in the productivity of the workforce

(d) an increase in the wage rates paid to workers

(75) In 2010, floods caused severe damage to wheat production in Pakistan. How would this be shown on market
demand and supply diagram for wheat?

Supply curve Demand curve

(a) No change Shift to the right
(b) Shift to the left No change

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(c) Shift to the left Shift to the left

(d) Shift to the right Shift to the left

(76) The movement from “B” to “A” and “B” to “C” in the following diagram is termed as:

(a) Decrease in quantity demanded and increase in quantity demanded.

(b) Fall in demand and rise in demand.
(c) Contraction in demand and extension in demand.
(d) Both (a) and (c)

(77) The diagram shows the demand and supply curves for smartphone. The original equilibrium is at point E. what
will be the new equilibrium point if smartphone become more fashionable and rate of sales tax rises?

(78) A price below the market price will show:

(a) A surplus (b) A shortage

(c) Equilibrium (d) Maximum price

(79) What can cause the supply curve for a product to shift to the right?
(a) an increase in demand for the product
(b) an increase in government subsidies to producers
(c) an increase in indirect taxes on the product
(d) an increase in the costs of production

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(80) In a market there is a shortage of a good. What change would cause the market to come to equilibrium?

(a) an increase in demand. (b) a decrease in supply.

(c) a fall in price. (d) a rise in price.

(81) Four changes affecting the supply of a good are listed below. Which would cause the supply curve to shift to the
left?

(a) a decrease in its market price. (b) an improvement in technology.

(c) an increase in labour productivity. (d) the introduction of a sale tax.

(82) What is NOT held constant in constructing a demand schedule?

(a) the income of consumers. (b) the price of complementary goods.

(c) the price of good itself. (d) the taste of consumers.

(83) Why does an individual’s demand curve generally slope downwards to the right?
(a) The additional satisfaction an individual gets from consuming most goods decreases as
consumption increases.

(b) The additional satisfaction an individual gets from consumption decreases as income rises.

(c) The individual has finite income which is used to attempt to satisfy many wants.

(d) For most goods the price charged by producers falls as the quantity purchased increases.

(84) In calculating the short-run supply schedule for a firm, what is assumed to remain unchanged?
(a) the number of consumers (b) the price of the good

(c) the quantity of raw material inputs (d) the state of technology

(85) A change in the price of a good cause an increase in the quantity of the good demanded.
What would be the nature of the good and the direction of price change for this to be certain to happen?

nature of good price change

(a) inferior fall

(b) inferior rise

(c) normal fall

(d) normal rise

(86) A change in market conditions causes a reduction in supply. This results in a higher price for the product,
which has a downward-sloping demand curve. What must be the outcome of this higher price?

(a) a decrease in the demand for substitutes

(b) a decrease in the quantity demanded
(c) an increase in the factors employed in the industry

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(d) an increase in producer’s revenue

(87) With reference to time, supply can NOT be classified into:

(i) Market period supply
(ii) Short period supply
(iii) Long period supply
(iv) Seasonal supply
(v) Permanent supply

(a) (i) and (ii)

(b) (ii) and (iii)
(c) (iv) and (v)
(d) (i) and (iii)

(88) Which of the following may be the possible outcome of increase in demand for cars?
(i) Price of cars will rise
(ii) price of cars will fall
(iii) Supply will extend
(iv) Equilibrium quantity falls

(a) (i) and (ii)

(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i)i and (iv)

(89) The consumer surplus will increase with the decrease in supply.
(a) True
(b) False

(90) If the demand increases while supply remains constant, the possible outcome will be:
(i) Price will rise
(ii) Producer surplus will decrease
(iii) Producer surplus will increase
(iv) Equilibrium quantity falls

(a) (i) and (ii)

(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i)i and (iv)

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Paper: 02 Business economics

QUESTIONS
1 Explain any four factors on account of which the demand of a product may change even when its price
remains the same. [05]
2 According to the law of demand, supply of a product increases when the price increases.
Briefly describe the other factors that affect the quantum of supply of a product. [05]
3 Differentiate between substitute goods, complimentary goods and independent goods. Give two examples
of each. [05]
4 Describe consumption goods and state the main determinants of demand for these goods.
[05]
5 What is a reserve price? Describe the factors which govern the reserve price of a seller. [05]
6 Describe and differentiate between the concepts of “Change in quantity demanded” and “Change in
demand”. [05]

7 List any four factors which are responsible for each of the following: [05]
• Change in demand.
• Change in supply.
8 What do you understand by ‘Change in Quantity Supplied’ and ‘Change in Supply’ [05]

9 Briefly describe any four exceptions to the law of demand. [05]

10 Define demand curve. Describe the reasons of negative slope of demand curve. [05]

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 3: Demand & supply analysis

3 DEMAND & SUPPLY ANALYSIS

(1) (a) (2) (c) (3) (b) (4) (b)
(5) (d) (6) (c) (7) (d) (8) (d)
(9) (b) (10) (d) (11) (d) (12) (d)
(13) (d) (14) (d) (15) (c) (16) (c)
(17) (c) (18) (d) (19) (d) (20) (c)
(21) (d) (22) (b) (23) (d) (24) (c)
(25) (a) (26) (b) (27) (d) (28) (b)
(29) (b) (30) (a) (31) (b) (32) (d)
(33) (d) (34) (d) (35) (c) (36) (d)
(37) (d) (38) (c) (39) (c) (40) (c)
(41) (c) (42) (d) (43) (a) (44) (d)
(45) (d) (46) (a) (47) (d) (48) (a)
(49) (d) (50) (b) (51) (c) (52) (c)
(53) (d) (54) (c) (55) (b) (56) (c)
(57) (d) (58) (b) (59) (a) (60) (c)
(61) (c) (62) (c) (63) (c) (64) (a)
(65) (c) (66) (a) (67) (a) (68) (b)
(69) (a) (70) (a) (71) (c) (72) (a)
(73) (c) (74) (d) (75) (b) (76) (d)
(77) (b) (78) (b) (79) (b) (80) (d)
(81) (d) (82) (c) (83) (a) (84) (d)
(85) (c) (86) (b) (87) (c) (88) (b)
(89) (b) (90) (b)

101