Loading PDF...
Chapter Analysis
Intermediate18 pages • EnglishQuick Summary
The chapter discusses market equilibrium in a perfectly competitive market by combining consumer and firm behavior. It explains how equilibrium is achieved when market supply equals market demand, with the equilibrium price adjusting accordingly. The chapter also explores the effects of shifts in demand and supply, and illustrates practical applications such as government interventions like price ceilings and floors. It concludes with exercises that help reinforce understanding of equilibrium concepts and their applications.
Key Topics
- •Market Equilibrium
- •Demand and Supply Analysis
- •Price Ceilings and Floors
- •Effect of Shifts in Demand and Supply
- •Free Entry and Exit in Markets
- •Normal and Inferior Goods
- •Valuation of Marginal Product
Learning Objectives
- ✓Understand the concept of market equilibrium and how it’s achieved in a competitive market.
- ✓Analyze the impact of government interventions like price ceilings and floors on market equilibrium.
- ✓Examine how shifts in demand or supply affect equilibrium price and quantity.
- ✓Explore the implications of free entry and exit in perfectly competitive markets.
- ✓Distinguish between normal and inferior goods and their demand curves.
- ✓Explain the labor demand curve determination in competitive markets.
Questions in Chapter
Explain market equilibrium.
Page 86
When do we say there is excess demand for a commodity in the market?
Page 86
When do we say there is excess supply for a commodity in the market?
Page 86
What will happen if the price prevailing in the market is (i) above the equilibrium price? (ii) below the equilibrium price?
Page 86
Explain how price is determined in a perfectly competitive market with fixed number of firms.
Page 86
Suppose the price at which equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?
Page 86
At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is equilibrium quantity determined in such a market?
Page 86
How is the equilibrium number of firms determined in a market where entry and exit is permitted?
Page 86
How are equilibrium price and quantity affected when income of the consumers (a) increase? (b) decrease?
Page 87
Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.
Page 87
Additional Practice Questions
How does a price ceiling impact market equilibrium and what are its possible consequences?
mediumAnswer: A price ceiling set below equilibrium price leads to excess demand in the market, creating shortages. Government intervention through rationing may result, and black markets can emerge as consumers try to bypass official prices.
Describe the effect of price floors on surplus and how governments might address this issue.
hardAnswer: Price floors set above equilibrium price result in excess supply or surpluses. To manage this, governments may purchase surpluses or incentivize producers to reduce output, preventing price fallout, common in agriculture or labor markets.
Explain through a diagram how simultaneous shifts in demand and supply can affect equilibrium price and quantity.
hardAnswer: When both demand and supply increase, equilibrium quantity rises while the price impact depends on the magnitude of shifts; if they decrease simultaneously, quantity falls. Opposing shifts lead to price changes with uncertain quantity changes.
Evaluate how a change in consumer income impacts normal and inferior goods using demand curves.
mediumAnswer: An increase in income shifts demand for normal goods to the right, raising equilibrium price and quantity. In contrast, demand for inferior goods shifts left, lowering equilibrium price and quantity.
What role does marginal revenue play in determining the labor demand curve for firms in a competitive market?
mediumAnswer: In competitive markets, labor demand is determined at the point where wage equals the marginal revenue product of labor, reflecting the additional revenue earned by employing an extra unit of labor.