Important Questions for CBSE Class 12 Micro Economics Chapter 5 - Market Equilibrium

A. Very Short Answer Questions - 1 Mark

1. What is a price taker firm? 

Ans: A price taker firm is one that has no choice but to accept the industry's price due to their less transaction sizes. It has to agree to the price ascertained by the market forces.

2. What is a price maker firm? 

Ans: A price maker firm is one that has the ability to influence prices on its own. A business with market power can increase prices without losing its consumers.

3. An individual firm under perfect competition cannot influence the market price, then who can and how? 

Ans: Under perfect competition, the industry has the ability to affect market prices by increasing or decreasing output.

4. What is cooperative oligopoly? 

Ans: Cooperative oligopoly occurs when firms in an oligopoly market cooperate with one another in deciding pricing and output.

5. What are advertisement costs? 

Ans: Advertisement costs are the expenses made by a company to promote its sales, such as publicity through TV, radio, newspapers, magazines, and so on.

6. What is meant by normal profit? 

Ans: Normal profit is the bare minimum of profit required to keep by an entrepreneur in business in the long run. The profit is higher than the opportunity cost that the business loses for utilizing their resources effectively.

7. What do you mean by abnormal profits? 

Ans: When TR > TC, abnormal profit is a scenario for the firm. Abnormal profits are equivalent to a producer's gains in excess of its opportunity cost.

8. Why is AR equal to MR under perfect competition? 

Ans: Under perfect competition, AR equals MR because the price is constant because the industry is the price maker and the businesses are the price taker. In this scenario, with the revenue for every additional unit of the product MR and AR will be the same to price.

9. What is the selling cost? 

Ans: Selling cost is the expense incurred by a company for the promotion of a sale.

10. In which market form is there product differentiation? 

Ans: Market with monopolistic competition there is product differentiation.

11. What do you mean by patent rights? 

Ans: Patent rights are a company's exclusive right or permission to make a specified output using a specific technology. To get registered, all the information about that specific technology or process must be known to the public in patent application.

12. When a firm’s TR > TC, it cannot cover its normal profit 

a) False 

b) Can’t say 

c) True

d) None of these 

Ans: (a) False

13. The quantity to be sold by a firm under perfect competition is also fixed by the market. 

a) True 

b) Can’t say 

c) None of these 

d) False 

Ans: (d) False

14. A firm maximizes its profits only when MR=MC 

a) False 

b) None of these 

c) True  

d) Cannot say 

Ans: (c) True

15. Under perfect competition, market price can be influenced by both buyers and sellers. 

a) True 

b) False 

c) None of the these 

d) Cannot say 

Ans: (b) False

B. Short answer Questions - 3 or 4 Marks

16. Explain two features of the monopoly market. 

Ans: The following are the two most crucial characteristics of a monopoly market:

i. Sole Seller: As there is only one seller in the market, the seller can influence the market price on its own. A business with market power can increase prices without losing its consumers or competitors.

ii. High Entry Barrier: There exist entry hurdles for new enterprises, allowing sellers to earn abnormal profits that are far higher than usual earnings.

17. Why is the number of firms small in oligopoly? Explain. 

Ans: The fundamental reason for the minimal number of firms in an oligopoly is that there exist barriers that restrict firms from entering the industry. Patents, huge capital requirements, and ownership over crucial raw materials, among other things, prohibit new firms from entering the industry. Only those who can overcome these obstacles will be able to enter and remain in the market.

Therefore, The numbers of firms are small in oligopoly.

18. Explain the implications of a large buyer in a perfectly competitive market? 

Ans: A huge number of buyers are supposed to be so numerous that an individual buyer's percentage of total purchases is so insignificant that he cannot influence market price by purchasing more or less. As a result, the pricing remains unchanged.

Every business in the industry would be earning only normal profits due to the large number of buyers. The buyers are the price takers and have no bargaining power in the market.

19. Explain the implications of the following: 

a) Interdependence between firms in oligopoly 

b) Large number of sellers in perfect competition 

Ans: The implications of the above features are as follows

a) Oligopolies are often made up of a few huge corporations. Because each firm is so huge, its actions have an impact on market circumstances. As a result, rival firms will be aware of a firm's market activity and will respond properly. Mutual interdependence develops when one firm's actions have a significant impact on the other enterprises in the industry.

b) The presence of a large number of buyers and sellers of a commodity dominates a fully competitive market, which implies that there is no such buyer or seller in the market whose purchase or sale is so huge that it affects the overall sale or purchase in the market. Each buyer/seller owns only a little portion of the market demand/supply.

20. Explain briefly why a firm under perfect competition is a price taker not a price maker? 

Ans: Because the price is set by market forces of demand and supply, a firm in perfect competition is a price taker rather than a price maker. This is referred to as the equilibrium price. At this equilibrium price, all firms in the industry must sell their outputs. The reason for this is that the number of enterprises in perfect competition is so high. As a result, no firm's supply can impact the price. Every company makes the same type of goods.

C. Long Answer Questions - 6 Marks

21. Market for a good is in equilibrium. There is simultaneous increase both in demand and supply of the goods. Explain its effects on market price.  

Ans: When there is no motivation for a condition to alter, equilibrium exists. When equilibrium is reached, the amount of goods that customers intend to buy equals the number of goods that producers intend to sell. The market moves to equilibrium due to the rules of demand and supply. The effect of increased demand and supply on equilibrium price and quantity is explored in three separate cases:

i. When increase in demand is equal to increase in supply: When demand increases proportionately to supply increases, the rightward shift in the demand curve from
D1D1  to D2D2 is correspondingly equal to the rightward shift in the supply curve from  S1S1    to S2S2 .  E2  determines the new equilibrium. Because both demand and supply grow in the same proportion, the equilibrium price remains constant at OP1 . while the equilibrium quantity increases from Oq1  to Oq2  .

ii. When increase in demand is greater than increase in supply: When demand increases more than supply increases, the rightward shift in the demand curve from D1D1  to D2D2 is proportionately greater than the rightward movement in the supply curve from S1S1    to S2S2 . The new equilibrium is found at E2 , where the equilibrium price rises from OP1  to OP2 and the equilibrium quantity rises from Oq1  to Oq2  .

iii. When demand increases but less than increase in supply: When demand increases less than supply increases, the rightward shift in the demand curve from D1D1  to D2D2  is proportionately less than the rightward movement in the supply curve from S1S1   to S2S2 . The new equilibrium is determined at E2 . The equilibrium price decreases from OP1  to OP2  while the equilibrium quantity increases from Oq1  to Oq2  .

22. Market for a good is in equilibrium. There is simultaneous decrease both in demand and supply, but there is no change in the market price. Explain with the help of diagram, how it is possible.  

Ans: When the decline in demand exceeds the decrease in supply, the market price does not change. When the decrease in demand is greater than the decrease in supply, the leftward shift in the demand curve from D to D1 is greater than the leftward shift in the supply curve from S to S1 The new equilibrium is established at E2  , the equilibrium price shifts from OP to OP1  , and the equilibrium quantity shifts from OQ to OQ1

23. How does an equilibrium price and an equilibrium quantity of a normal commodity be affected by an increase in an income of the buyers? Explain with the help of a diagram. 

Ans: When a consumer's income rises, the demand curve for ordinary products shifts to the right. The supply curve is unaltered. However, when consumers are prepared to pay a greater price for the same quantity or when their income rises. This will cause the price to soar. As a result, the quantity supplied by the producers would likely increase.

Thus, a rise in demand and the resulting shift in the demand curve to the right affects producer decisions by extending supply in response to a price increase. Finally, you would arrive at a situation in which an equilibrium price and an equilibrium quantity tend to rise in response to an increase in demand.

24. How a fall in the price of tea will affect an equilibrium price of coffee? Explain the chain effects. 

Ans: As the price of tea falls, so does the demand for coffee, which is an alternative to tea. As a result, the coffee demand curve changes to the left. As a result, an equilibrium price tends to fall and an equilibrium quantity tends to fall.

The graph depicts a declining demand condition. The demand curve swings to the left. As a result, both the equilibrium price and quantity are lowering from OP to OP1  and OQ to OQ1

Due to the fall in the price of tea:
i. The Equilibrium price of coffee drops from OP to OP1

ii. The equilibrium quantity also drops from 
OQ to OQ1