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

(a)  Perfect competition

(c)  Both monopolistic competition and oligopoly

(c) equal to Average Revenue

The situation when demand changes due to change in own price of the commodity, it is known as ‘change in quantity demanded‘.

As production increases, the difference Average Total Cost (ATC) and Average Variable Cost (AVC) decreases because Average Fixed Cost (AFC) tends to fall.

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.