Economics : 2016 : CBSE : [All India] : Set I

 If Total Fixed Cost (TFC) is zero, then the Average Variable Cost (AVC) and the Average Total Cost (ATC) will be the same.

(c) equal to Average Revenue

Due to factors other than price the change in demand takes place. The factors are as follows:

(i)              Change in consumer’s income

(ii)            Changes in the price of related goods

(iii)          Tastes and preferences of the consumer changes

(iv)          Future expectations related to availability and price of goods changes.

(c)  Both monopolistic competition and oligopoly

(a)  Perfect competition

Minimum price ceiling is also referred as ‘price floor’. In the following diagram, the price floor is depicted.

Price floor refers to the minimum price fixed by the government for a commodity in the market to protect the interest of the producers. The government in most countries fixes floor price for most agricultural products especially for food grains.

In the above diagram, the equilibrium price is OP, but the floor price is OP*, which exceeds the market determined equilibrium price. Due to price ceiling (the price above the equilibrium price) there is excess supply in the market. The government invariably steps out in the market and buys this excess supply to be stored in the form of buffer stocks and be used at the time of shortages.

With the help of the following schedule we can understand the situation when the market price is above the equilibrium price.

With reference to the above schedule, if the market price is 5 (which exceeds the equilibrium price of 3), then the supply of commodity X is 25 units but the demand is of 5 units only. With a view to increase their sales, the sellers will reduce the price till demand is equal to supply.

Suppose the market price is 4 now. At this price, the demand has increased and supply has reduced but still there is excess supply. Demand is of 10 units and supply of 20 units. Excess supply will force the market price to slide down further till the equilibrium between supply and demand i.e. at 3. Thus, equilibrium price will be restored in the free market economy.

Demand is defined as the quantity of a commodity that a consumer is willing and able to purchase in the market in a given period of time.

For example, a consumer demands 15 kg of wheat flour in a month at the price of  30 per kg.

Market demand refers to the total quantity of a commodity that all its buyers are willing to purchase at different prices over a given period of time e.g. demand of all the households for wheat flour priced at 40 per kilogram is 200 kilogram per month.

The factors affecting market demand are:

(i) Price of the commodity

(ii) Price of related goods

(iii) Income of the consumers

(iv) Taste and preference of consumers

(v) Expectations of consumers regarding availability of goods

(vi) Population size

(vii) Distribution of income

(viii) Composition of population