Explain how price is determined in a perfectly competitive market with a fixed number of firms.
When the number of firms in a perfectly competitive market is fixed, the firms are operating in the short-run. The equilibrium price is determined by the intersection of market demand curve and supply curve. It is the price at which the market demand equals market supply. If at any price below Pe, let us say Rs 12, there will be an excees supply, which will increases the competition among the sellers and they will reduce the price in order to sell more output. This causes a fall in them price, finally to Rs (Pe), where the demand equals supply. If at any price
lower than Pe, let us say RS 2, there will be an excees demand that will raise the competition among the buyers or consumers and they will be ready to pay higher price for the given output. This will increase the price to Rs 8 (equilibrium price), where the market will reach the equilibrium thus, the invisible hands of market operate automatically whenever there exist excees demand and excees supply; ensuring equilibrium in the market.
Popular Questions of Class 12 Micro Economics
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What is the supply curve of a firm in the long run?
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The market price of a good changes from Rs 5 to Rs 20. As a result, the quantity supplied by a firm increases by 15 units. The price elasticity of the firm’s supply curve is 0.5. Find the initial and final output levels of the firm.
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A firm earns a revenue of Rs 50 when the market price of a good is Rs 10. The market price increases to Rs 15 and the firm now earns a revenue of Rs 150. What is the price elasticity of the firm’s supply curve?
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Distinguish between a centrally planned economy and a market economy.
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How does the imposition of a unit tax affect the supply curve of a firm?
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A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4. - Q:-
What is the relation between market price and average revenue of a price-taking firm?
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What is budget line?
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Suppose there are 20 consumers for a good and they have identical demand functions:
d(p)=10–3pd(p)=10–3p for any price less than or equal to 103103 and d1(p)=0d1(p)=0 at any price greater than 103.
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Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
Recently Viewed Questions of Class 12 Micro Economics
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At which point does the SMC curve intersect the SAC curve? Give a reason in support of your answer.
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Discuss the subject matter of economics.
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What do you mean by the production possibilities of an economy?
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How does the imposition of a unit tax affect the supply curve of a firm?
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The following table gives the average product schedule of labour. Find the total product and marginal product schedules. It is given that the total product is zero at zero level of labour employment.
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What are the total fixed cost, total variable cost and total cost of a firm? How are they related?
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List the three different ways in which oligopoly firms may have.
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How does the budget line change if the price of good 2 decreases by a rupee
but the price of good 1 and the consumer’s income remain unchanged? - Q:-
A consumer wants to consume two goods. The prices of the two goods are Rs 4
and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire
income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on
that good?
(iv) What is the slope of the budget line?
Questions 5, 6 and 7 are related to question 4. - Q:-
If the price of a substitute Y of good X increases, what impact does it have on the equilibrium price and quantity of good X?
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