PRINCIPLES OF ECONOMICS (PRC-03)

DEMAND, SUPPLY AND MARKET EQUILIBRIUM

CHAPTER 02

1- The quantity demanded is

(a) the amount of a good that consumers plan to purchase at a particular price.
(b) independent of the price of the good.
(c) independent of consumers' buying plans.
(d) always equal to the equilibrium quantity

2- Which ONE of the following will cause the demand curve for a good to shift 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

3- The demand curve slopes downward because of:

(a) consumer indifference (b) elasticity of demand
(c) inelastic demand (d) income and substitution effect

4- The law of demand states that, other things remaining the same, the higher the price of a good,
the
(a) smaller is the demand for the good.
(b) smaller is the quantity of the good demanded.
(c) larger is the quantity of the good demanded.
(d) larger is the demand for the good.

5- The quantity demanded (Qd) of a soft drink brand A has decreased. This could be because:
(a) A’s consumers have had an increase in income.
(b) the price of A has increased.
(c) A’s advertising is not as effective as in the past.
(d) the price of rival brand B has increased.

6- The law of demand states that the quantity of a good demanded varies
(a) inversely with its price. (b) directly with population.
(c) directly with income. (d) inversely with the price of substitute goods

7- Which of the following is consistent with the law of demand?

(a) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk
demanded.
(b) An increase in the price of a soda causes a decrease in the quantity of soda demanded.
(c) An increase in the price of a tape causes an increase in the quantity of tapes demanded.
(d) A decrease in the price of juice causes no change in the quantity of juice demanded

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8- Each point on the demand curve reflects

(a) the highest price consumers are willing and able to pay for that particular unit of a good.
(b) the highest price sellers will accept for all units they are producing.
(c) the lowest-cost technology available to produce a good.
(d) all the wants of a given household.

9- The following are causes of shift in demand EXCEPT the one:

(a) Change in income (b) Change in price
(c) Change in fashion (d) Change in prices of substitutes

10- 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

11- A substitute is a good

(a) of higher quality than another good
(b) that is not used in place of another good.
(c) that can be used in place of another good
(d) of lower quality than another good

12- Demand curve in case of Giffen good is:

(a) Negatively sloped (b) Vertical
(c) Positively sloped (d) None of these

13- Normal goods experience an increase in consumption when:

(a) real income increase (b) real income falls
(c) price rises (d) tastes change

14- Ceteris paribus is a Latin term meaning:

(a) “one by one” (b) “equal under the law.”
(c) “other things being equal.” (d) “in accordance with the law.”

15- If the quantity of X increases whenever the price of X decreases, one can conclude that:
(a) the relationship between the price and the quantity of X is direct
(b) the relationship between the price and the quantity of X is inverse
(c) the relationship between the price and the quantity of X is linear
(d) the relationship between the price and the quantity of X is nonlinear

16- A demand curve shows the relationship between the quantity demanded for a commodity
over a given time and:
(a) The tastes of consumer. (b) The money income of consumer
(c) The price of related commodities (d) The price of the commodity

17- When a demand schedule is drawn up. Which of the following is not held constant?
(a) Price of substitutes (b) The price of the good
(c) Price of Complementary goods (d) None of the above

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 PRINCIPLES OF ECONOMICS (PRC-03)

18- Which of the following will NOT cause a shift in the demand curve for compact discs?
(a) a change in the price of pre-recorded cassette tapes.
(b) a change in wealth.
(c) a change in income.
(d) a change in the price of compact discs.

19- 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

20- Increase in the number of buyers in the market would lead to a shift of the demand curve to:
(a) the right (b) the left
(c) upwards along the curse (d) None of the above

21- People buy more of good 1 when the price of good 2 rises. These goods are:
(a) normal goods. (b) complements.
(c) substitutes. (d) inferior goods.

22- A complement is a good

(a) used in conjunction with another good.
(b) used instead of another good.
(c) of lower quality than another good.
(d) of higher quality than another good.

23- Suppose the demand for good Z goes up when the price of good Y goes down. We can say
that goods Z and Y are:
(a) perfect substitutes. (b) unrelated goods.
(c) complements. (d) substitutes.

24- People come to expect that the price of a gallon of gasoline will rise next week. As a result,
(a) next week's supply of gasoline decreases.
(b) the price of a gallon of gasoline falls today.
(c) today's supply of gasoline increases.
(d) today's demand for gasoline increases

25- Inferior goods are those for which demand increases as

(a) income decreases. (b) income increases.
(c) the price of a substitute rises. (d) the price of a substitute falls.

26- A change in the price of a good

(a) shifts the good's demand curve but does not cause a movement along it.
(b) does not shift the good's demand curve but does cause a movement along it.
(c) shifts the good's demand curve and also causes a movement along it.
(d) neither shifts the good's demand curve nor causes a movement along it

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27- A decrease in quantity demanded caused by an increase in price is represented by a

(a) movement up and to the left along the demand curve.
(b) movement down and to the right along the demand curve.
(c) leftward shift of the demand curve.
(d) rightward shift of the demand curve.

28- What effect is working when the price of a good falls and consumers tend to buy it instead of
other goods?
(a) the substitution effect. (b) the ceteris paribus effect.
(c) the total price effect. (d) the income effect

29- If the demand for coffee decreases as income decreases, coffee is

(a) a normal good. (b) a complementary good.
(c) an inferior good. (d) a substitute good

30- The quantity supplied of a good is

(a) equal to the difference between the quantity available and the quantity desired by all
consumers and producers.
(b) the same thing as the quantity demanded at each price.
(c) the amount that the producers are planning to sell at a particular price during a given time
period.
(d) the amount the firm would sell if it faced no resource constraints.

31- All of the following are determinants of supply except:

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

32- Which of the following is consistent with the law of supply?

(a) As the price of calculators rises, the supply of calculators increases, ceteris paribus.
(b) As the price of calculators falls, the supply of calculators increases, ceteris paribus.
(c) As the price of calculators rises, the quantity supplied of calculators increases,
ceteris paribus .
(d) As the price of calculators rises, the quantity supplied of calculators decreases, ceteris
paribus.

33- The price of computer chips used in the manufacture of personal computers has fallen. This
will lead to personal computers.
(a) a decrease in the supply of
(b) a decrease in the quantity supplied of
(c) an increase in the supply of
(d) an increase in the quantity supplied of

34- If a producer can use resources to produce either good A or good B, then A and B are:
(a) substitutes in consumption. (b) complements in consumption.
(c) complements in production. (d) substitutes in production.

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35- Good A and good B are substitutes in production. The demand for good A increases so that
the price of good A rises. The increase in the price of good A shifts the
(a) demand curve for good B rightward.
(b) demand curve for good B leftward.
(c) supply curve of good B rightward.
(d) supply curve of good B leftward.

36- An increase in the number of fast-food restaurants

(a) increases the demand for substitutes for fast-food meals.
(b) raises the price of fast-food meals.
(c) increases the supply of fast-food meals.
(d) increases the demand for fast-food meals

37- In supply of and Demand for a product, an increase in production costs will shift:
(a) Demand Curve to the left (b) Supply Curve to the right
(c) Demand Curve to the right (d) Supply Curve to the left

38- 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 curve
(b) A shift to the right of the supply curve
(c) A shift to the left of the supply curve
(d) A movement up the existing supply curve

39- 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

40- 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

41- A supply schedule shows the relationship between the quantity supplied of a commodity
over a given time and:
(a) Factor prices (b) Technology
(c) Both (a) and (b) (d) The price of the commodity

42- Over the past decade technological improvements that have lowered the cost of producing
an automobile have increased
(a) the demand but not the supply of automobiles.
(b) both the supply and the demand for automobiles.
(c) the supply but not the demand for automobiles.
(d) neither the supply nor the demand for automobiles

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43- Which of the following will shift the supply curve for good X leftward?
(a) a situation in which quantity demanded exceeds quantity supplied
(b) an increase in the cost of the machinery used to produce X
(c) a decrease in the wages of workers employed to produce X
(d) a technological improvement in the production of X

44- Suppose there is excess supply in a market and the price decreases. Which of the following
combinations of events will occur?
(a) There will be a fall in quantity supplied and a rise in quantity demanded.
(b) There will be a fall in quantity supplied and a rise in demand.
(c) There will be a fall in supply and a rise in quantity demanded.
(d) There will be a fall in supply and a rise in demand.

45- Which of the following does NOT shift the supply curve?
(a) an increase in the price of the good
(b) a fall in the price of a substitute in production
(c) a decrease in the wages of labor used in production of the good
(d) a technological advance

46- A decrease in the quantity supplied is represented by a

(a) rightward shift in the supply curve.
(b) movement down the supply curve.
(c) leftward shift in the supply curve.
(d) movement up the supply curve

47-

According to the graph, at a price of $7

(a) There would be a shortage of 40 units.
(b) There would be a surplus of 40 units.
(c) There would be a surplus of 20 units.
(d) The market would be in equilibrium.

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48- Suppose that there is an increase in input prices. We would expect:

(a) Supply to increase. (b) Supply to decrease.
(c) Supply could increase or decrease. (d) Supply to remain unchanged.

49-

At a price of $20:
(a) the market would be in equilibrium.
(b) 600 units would be bought and sold.
(c) there would be no pressure for price to change.
(d) All of the above are true

50- 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

51- Which statement is true of a curve with a constant slope?

(a) it is a straight line (b) it is nonlinear
(c) it runs parallel to Y-axis (d) it runs parallel to X-axis

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

53- A simultaneous decrease in demand and supply will always result in:
(a) a decrease in the equilibrium price
(b) an increase in the equilibrium price
(c) a decrease in the equilibrium quantity
(d) an increase in the equilibrium quantity

54- The intersection of market demand and supply curves for a given commodity determines
(a) The equilibrium price of the commodity
(b) The equilibrium quantity of the commodity
(c) The point of neither surplus nor shortage for the commodity
(d) All of these

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55- Factors determining supply are

(a) Production technology (b) Prices of factors of production
(c) Taxes and subsidies (d) All the above

56- Increase in demand is shown by

(a) Movement along the same demand curve
(b) Shifts of the demand curve
(c) The highest point on the demand curve
(d) Lowest point of the demand curve

57- At the point of equilibrium

a) Only one price prevails (b) Quantity demand = Quantity supplied
(c) The demand curve intersects the supply curve
(d) All the above

58- When there is excess demand in an unregulated market, there is a tendency for
(a) quantity demanded to increase.
(b) quantity supplied to decrease.
(c) price to fall.
(d) price to rise.

59- What will happen to equilibrium price and quantity when the demand curve shifts to the left
and the supply curve shifts to the right
(a) price falls unambiguously but the effect on quantity cannot be determined
(b) both price and quantity falls unambiguously
(c) quantity falls unambiguously but the effect on price cannot be deter mined
(d) the effect on both price and quantity cannot be determined

60- What will happen to equilibrium price and quantity when both the demand and supply
curves shift to the left?
(a) price falls unambiguously but the effect on quantity cannot be determined
(b) both price and quantity falls unambiguously
(c) quantity falls unambiguously but the effect on price cannot be determined
(d) the effect on both price and quantity cannot be determined

61- The minimum price at which a seller is willing to sell a good or provide a service to the
market is called:
(a) Demand price (b) Administered price
(c) reservation price (d) none of the above

62- Market demand curve for a commodity is:

(a) Horizontal summation of the individual demand curve for the commodity
(b) Summation of individual demand curve for 3 years
(c) Demand curve of complementary goods
(d) Demand curve of supplementary goods

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63. If the demand equation for a good is Qd= 20 – P and the supply equation is Qs= 6+1.5P and
the price is set equal to 2.4 below the equilibrium level, there will be an excess demand of
units.

64. 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

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

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

67. What will happen in the rice market if buyers are expecting higher prices in the near future?
(a) The demand for rice will increase. (b) The demand for rice will decrease.
(c) The demand for rice will be unaffected. (d) The supply of rice will increase

68. When we say that a price in a competitive market is "too low to clear the market," we
usually mean that:
(a) the quantity supplied exceeds the quantity demanded at that price.
(b) consumers are not willing to buy enough at that price.
(c) the quantity demanded exceeds the quantity supplied at that price.
(d) no producer can cover costs of production at that price.

69. In the table shown, if the price were $8.

(a) surplus of 30 units would exist and price would tend to fall.
(b) a surplus of 60 units would exist and price would tend to rise.
(c) a surplus of 60 units would exist and price would tend to fall.
(d) a shortage of 30 units would exist and price would tend to rise

70. Rise in demand for leather in foreign market increases the supply of beef 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 will increase
(d) Price of beef will increase and quantity will decrease

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71. 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 increases

72. Which TWO of the following are held constant along the demand curve?
(a) Quantity (b) Income
(c) Price (d) consumer's preferences

73. Which of the following would NOT be a determinant of demand?

(a) the price of related goods (b) income
(c) tastes
(d) the prices of the inputs used to produce the good

74. 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

75. For price stability buffer stock policy can be used by government for:
(a) Agricultural goods (b) Primary goods
(c) Perishable goods (d) All of the above

76. The government introduces a minimum wage rate beyond the 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

77. 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

78. Demand for factors of production is known as:

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

79. Supply curve for Land is:

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

80. Demand for land is:

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

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81. A surplus in goods market will price

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

82. 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

83. Buffer stock helps government:

(a) To protect producers
(b) To encourage production of a particular product
(c) To maintain price stability into market
(d) All of above

84. 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

85. 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

86. Demand contracts due to:

(a) Change in price of the commodity (b) Change in income
(c) decrease in population (d) change in price of substitute

87. If increase in the demand of good X increases the supply of good Y, then X and Y are:
(a) Complement in production (b) substitute
(c) Complement (d) Substitute in production

88. If price of commodity increase,

(a) Demand will expand (b) Demand will contract
(c) Demand become negative (d) Demand will remain constant

89. X and Y both are substitutes. Select any TWO correct statement
(a) Increase in price of X, decrease in demand of Y
(b) decrease in price of X, decrease in demand of Y
(c) Increase in price of X, increase in demand of Y
(d) decrease in price of X, increase in demand of Y

90. Increase in price of substitute in production causes in supply of other.

(a) Increase (b) Decrease
(c) Same (d) None

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91. If supply of X decrease and supply of Y increase, then both are:

(a) Complement in production (b) Substitute in production
(c) Inferior good (d) Giffen good

92. Contraction of supply curve from given graph is:

(a) S1 to S2 (b) S2 to S1
(c) A to B (d) B to A

93. Good which demand increase due to increase in price is called:

(a) Normal good (b) Superior good
(c) Inferior good (d) Giffen good

94. At price ceiling: (Select 2 options)

(a) Increase in consumer surplus (b) decrease in producer surplus
(c) Decrease in consumer surplus (d) Increase in producer surplus

95. ________________refers to a situation where producers are willing to supply smaller quantity at
the same price or same quantity at higher price.
(a) increase in supply (b) decrease in supply
(c) contraction in supply (d) Expansion in supply

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Multiple choice answers

MCQ MCQ MCQ MCQ MCQ Answer
Answer Answer Answer Answer
NO. NO. NO. NO. NO.
1- a 21- c 41- d 61- c 81- a
2- d 22- a 42- c 62- a 82- a
3- d 23- c 43- b 63- 8 83- d
4- b 24- d 44- a 64- d 84- c
5- b 25- a 45- a 65- b 85- d
6- a 26- b 46- b 66- a 86- a
7- b 27- a 47- b 67- a 87- a
8- a 28- c 48- b 68- c 88- b
9- b 29- a 49- d 69- c 89- b,c
10 d 30- c 50- c 70- c 90- b
11 c 31- b 51- a 71- b 91- b
12 c 32- c 52- c 72- b,d 92- d
13 a 33- c 53- c 73- d 93- d
14 c 34- d 54- d 74- d 94- a,b
15 b 35- d 55- d 75- d 95- b
16 d 36- c 56- b 76- d
17 b 37- d 57- d 77- c
18 d 38- c 58- d 78- c
19 c 39- c 59- a 79- a
20 a 40- a 60- c 80- d

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