Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.
(a) When demand and supply increase in the same proportion: E1 is the initial equilibrium with equilibrium price P1 and equilibrium output q1.Now, let us suppose that the demand increases to D2D2 and the supply increase to S2S2 by the same proportion. The new demand and new supply curve intersect at E2, which is the new equilibrium, with a new equilibrium output q2, but the same equilibrium price P1. Thus, an increase in the demand and the supply by the same proportion leaves the equilibrium price unchanged.
(b) When demand increases more than the increase in supply: The original demand and supply curves intersect each other at E1with initial equilibrium price P1 and initial equilibrium output q1. Now, let us suppose that the demand increases and thereby the demand curve shifts to D2D2; the supply curve also shifts rightwards to S2 S2 . However, the increase in supply is less than the increase in demand. The new supply curve and the new demand curve demand curve intersect each other at point E2 with higher equilibrium price P2 and higher equilibrium output q2.
(c) When the increase in demand is less than the increase in supply: Let the initial equilibrium be at E1with the equilibrium price P1 and equilibrium output 1q. Now, let us suppose that the demand increases to D2D2 and the supply increases to S2S2 ; where the increase in supply is more than that of demand. The new demand curve D2D2 and the new supply curve S2S2 intersect at E2. Thus, the greater increase in supply curve as compared to the demand curve will lead the equilibrium price to fall and equilibrium output to rise.
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?
- 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:-
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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When do we say that there is an excess demand for a commodity in the market?
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Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2
if she spends her entire income. The prices of the two goods are Rs 6 and Rs 8
respectively. How much is the consumer’s income? - Q:-
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.
- Q:-
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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What do you mean by an ‘inferior good’? Give some examples
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Suppose a consumer wants to consume two goods which are available only in
integer units. The two goods are equally priced at Rs 10 and the consumer’s
income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to the consumer, identify those which cost her exactly Rs 40. - Q:-
If a consumer has monotonic preferences, can she be indifferent between the
bundles (10, 8) and (8, 6)? - Q:-
What do the long-run marginal cost and the average cost curves look like?
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Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose the price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.
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Let the production function of a firm be Q=5L1/2K1/2Q=5L1/2K1/2 Find out the maximum possible output that the firm can produce with 100 units of LL and 100 units of KK.
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