Very Short Question Answer

1. What is meant by extension in demand?

Extension in demand refers to the increases in demand for a commodity due to fall in its price, other things remaining the same. Extension in demand is also known as the increase in quantity demanded.

2. Define the contraction in demand.

Contraction in demand refers to the decrease in demand for a commodity due to rise in its price, other things remaining the same. Contraction in demand is also known as the decrease in quantity demanded.

3. What is meant by increase in demand?

Increase in demand is defined as the more demand for a commodity due to favourable change in factors other than price of the commodity. This results rightward shifts in demand curve.

4. Point out the cause of increase in demand or rightward shift in demand curve.

The factors causing rightward shift in demand curve or increase in demand are as follows:

  1. Increase in income of the consumer
  2. Rise in price of the substitute goods
  3. Fall in the price of the complementary goods
  4. Expectation of rise in price in the future

5. What is meant by decrease in demand?

Decrease in demand is defined as the less demand for a commodity due to unfavourable change in factors other than price of the commodity. This results leftward shift in demand curve

6. Point out any four causes of decrease in demand or leftward shift in demand curve.

The factors causes of decrease in demand are as follows:

  1. Fall in income of the consumer
  2. Fall in price of substitute goods
  3. Rise in price of complementary goods
  4. Fall in size of population

7. What is supply?

Supply is defined as the quantity of a commodity, which a producer or seller is ready to offer in sale at the given price and period of time. In other words, supply is the quantity of a commodity that a firm or seller is willing and able to offer for sale over a given period of time.

8. Define or state the law of supply.

Law of supply states that when price increases quantity supplied also increases and when price decreases, quantity also decreases, other things remaining the same. In other words, the law of supply states the positive relationship between price and quantity supplied of the commodity, other things remaining the same.

9. What is meant by supply schedule?

Supply schedule is the table that shows different quantities of a commodity supplied by a seller or firm at the different prices in a given period of time.

Short Question Answer

1. What is market economy?

The economy where there is no government intervention in the economic activities and means or factors of production are owned by private sector is called free market economy. In this economy, resources are allocated through market mechanism, i.e., through the operation of demand and supply forces. It is also known as the capitalist economy. Such type of economy is found in many countries of the world like USA, Japan, U.K. etc. These countries became developed and prosperous through the market economy. The major features of market economy are as follows:

  • Private property: There is right of private property in the market economy.
  • Competition: There is competition among the producers or sellers to attract customers in the market economy.
  • Freedom of enterprise and choice: In the market economy, there is freedom to choose occupation by workers, goods and services by consumers and production of goods and services by producers.
  • Limited role of government: In the market economy, government does not interfere the economic activities. Its role is limited to maintain law and order, develop infrastructure, etc.
  • Profit motive: In the free market economy, all the economic activities are undertaken with the aim of earning profit.

2. Distinguish between movement along and shift in demand curve.

The differences between movement along and shift in demand curve are as follows:

Movement along a demand curve

 

Shift in demand curve

 

i. It is caused only by the change in the price of the commodity.

 

i. It is caused by the change in the factors other than price.

 

ii. It is always along the same demand curve, i.e., no new demand curve is drawn.

 

ii. it is shown by drawing new demand curve.

 

iii. If the more quantities of a commodity are demanded with the fall in price of the commodity, it is called extension in demand. In this case, consumer moves downward along the same demand curve.

 

 

iii. If the demand for a commodity rises due to favourable change in factors other than price of the commodity, it is called increase in demand. In this case, demand curve shifts towards right.

iv. If the quantity demanded for a commodity decreases with a rise in price of the commodity, it is called contraction in demand. In this case, the consumer moves upwards along the same demand curve.

 

iv. If the demand for a commodity falls due to unfavourable change factors other than price of the commodity, it is called increase in demand. In this case, demand curve shifts towards left.

 

.v. The position of demand curve remains same.

 

v. The position of demand curve changes.

 

3. Distinguish between movement along a supply curve and shift in supply curve. [5]

The differences between movement along and shift in supply curve are as follows:

Movement along a supply curve

 

Shift in supply curve

 

i. It is caused by the change in the price of the commodity only.

 

i. It is caused by the change in the factors other than price.

 

ii. It is always along the same supply curve, i.e., no new supply curve is drawn. ii. It is shown by drawing new supply curve.

 

 

 

iii. If the more quantities of a commodity are supplied with the rise in price of the commodity, it is called extension in supply. In this case, seller moves upward along the same supply curve.

 

iii. If the supply of a commodity rises due to favourable change in factors other than price of the commodity, it is called increase in supply. In this case, supply curve shifts downwards to the right.

 

 

iv. If the quantity supplied of a commodity decreases with a fall in price of the commodity, it is called contraction in supply. In this case, the consumer moves downwards along the same supply curve.

 

iv. If the supply of a commodity falls due to unfavourable change factors other than price of the commodity, it is called decrease in supply. In this case, supply curve shifts upwards to the left.

 

v. The position of supply curve remains same.

 

v. The position of supply curve changes.

 

4. Explain Features of Market Economy

The major features of market economy are as follows:

  1. Right of private property: The right of private property is a major feature of the market economy. In this economy, state protects private property of citizens and guarantees its use by them for their own benefit. Every citizen has right to own property in any forms he likes and pass its to his successors.
  2. Freedom of enterprise and choice: In the market economy, there is freedom is free to take up any profession or start any business he likes. Consumers are also free to buy goods and services which they want.
  3. Competition: In the free market economy, there is keen competition between sellers to attract customers, among workers to get job and among the buyers to obtain goods to satisfy their wants. Competition promotes best use and efficient allocation of resources in the free market economy.
  4. Consumer’s sovereignty: In the free market economy, there is consumer’s sovereignty. It means that consumers are free to choose goods and services which they would consume: Producers produce goods ands services according to the taste and preference of the consumers.
  5. Self-interest: Market economy is based on the principle of self-interest. It means that individual are free to do as they wish. Firms have interest of maximizing profit, consumers have interest of maximizing satisfaction and workers have interest of choosing job, which offer them maximum wages.
  6. Market mechanism: Market mechanism is the backbone of market economy. In this economy, all the economic problems are solved through the operation demand and supply forces, which determine equilibrium price in the market.
  7. Limited role of government: In the market economy, there is limited role of the government. It does not interfere private economic activities. It plays the role of facilitator, maintains law and order and creates infrastructures.

5. Explain the law of demand.

The law of demand expresses the functional relationship between price of the commodity and its quantity demanded. According to this law, other this being equal, if price of the commodity falls, the quantity demanded of it will rise, and if price of the commodity rises, the quantity demanded of it will fall. Thus, according to this law, there is inverse relationship between price and quantity demanded, other this remaining the same. Assumptions

The law of demand is based on the following assumptions:

  • No change in income of the consumer.
  • No change in price of related goods.
  • No change in taste and fashion of the consumers.
  • No change in season and climate. No change in habit of the consumer.
  • No change in size and composition of the population and
  • No change in expectation of change in price.

Demand Schedule

Demand schedule is a table which shows various quantities of a commodity purchased at the different prices in a given period of time. The hypothetical demand schedule is as a follows:

Price of the Commodity (Rs/Unit)

 

Quantity Demanded (in Unit)

 

10

8

6

4

2

1

2

3

4

5

The above table shows inverse relationship between price and quantity demanded for a commodity. At price Rs. 10 per unit, quantity demand is 1 unit. When price decreases Rs. 8 per unit, quantity demanded increases to 2 units. Similarly, when price falls, quantity demanded rises.

Long Question Answer

1. What is market economy? Explain its features. Definition of Market Economy

Market Economy is defined as the economy where there is no government intervention in the economic activities and means of productive resources or factors of production are owned by the private sector. In this economy, resources are allocated through the market mechanism, i.e., through the operation of demand and supply forces.

Features of Market Economy

The major features of market economy are as follows:

  • Right of private property: The right of private property is a major feature of the market economy. In this economy, state protects private property of citizens and guarantees its use by them for their own benefit. Every citizen has right to own property in any forms he likes and pass its to his successors.
  • Freedom of enterprise and choice: In the market economy, there is freedom is free to take up any profession or start any business he likes. Consumers are also free to buy goods and services which they want.
  • Competition: In the free market economy, there is keen competition between sellers to attract customers, among workers to get job and among the buyers to obtain goods to satisfy their wants. Competition promotes best use and efficient allocation of resources in the free market economy.
  • Consumer’s sovereignty: In the free market economy, there is consumer’s sovereignty. It means that consumers are free to choose goods and services which they would consume: Producers produce goods ands services according to the taste and preference of the consumers.
  • Self-interest: Market economy is based on the principle of self-interest. It means that individual are free to do as they wish. Firms have interest of maximizing profit, consumers have interest of maximizing satisfaction and workers have interest of choosing job, which offer them maximum wages.
  • Market mechanism: Market mechanism is the backbone of market economy. In this economy, all the economic problems are solved through the operation demand and supply forces, which determine equilibrium price in the market.
  • Limited role of government: In the market economy, there is limited role of the government. It does not interfere private economic activities. It plays the role of facilitator, maintains law and order and creates infrastructures.

2. Distinguish between desire and demand. Explain the law of demand.

Difference between Desire and Demand:

Desire refers to just wish to have something, which does not require ability to pay. Since human wants are unlimited, it is not possible to fulfil all desires of people. On the other hand, demand is the desire backed by willingness and ability to pay. The differences between demand and desire can be clearly shown by the help of the following table:

Demand

 

Desire

 

Demand is the desire backed by willingness and ability to pay.

 

Desire is just a wish to have something.

 

Resources are required to be demand.

 

Resources are not required to have desire.

 

Demand is limited because of price of the commodity, income of the consumer, etc.

 

Desires are unlimited.

 

Demand takes place only at the particular time and places

 

Desire may take place anywhere and any time.

 

The desire be to buy a car by rich person may be demand.

 

The desire to buy a car by a poor person just a desire.

 

Law of Demand

The law of demand expresses the functional relationship between price of the commodity and its quantity demanded. According to this law, other this being equal, if the price of the commodity falls, the quantity demanded of it will rise, and if the price of the commodity rises, the quantity demanded of it will fall. Thus, according to this law, there is an inverse relationship between price and quantity demanded, other things remaining the same.

Assumptions

The law of demand is based on the following assumptions:

  • No change in income of the consumer.
  • No change in price of related goods.
  • No change in taste and fashion of the consumers.
  • No change in season and climate. No change in habit of the consumer.
  • No change in size and composition of the population and
  • No change in expectation of change in price.

Demand Schedule

Demand schedule is a table which shows various quantities of a commodity purchased at the different prices in a given period of time. The hypothetical demand schedule is as a follows:

Price of the Commodity (Rs/Unit)

 

Quantity Demanded (in Unit)

 

10

8

6

4

2

1

2

3

4

5

The above table shows inverse relationship between price and quantity demanded for a commodity. At price Rs. 10 per unit, quantity demand is 1 unit. When price decreases Rs. 8 per unit, quantity demanded increases to 2 units. Similarly, when price falls, quantity demanded rises.

Demand Curve

The demand curve is defined as the graphical representation of various quantities of a commodity purchased at the different prices in a given period of time. In other words, it is the graphical representation of demand schedule expressing the relationship between price and quantity demanded for a commodity.

In the given figure, X-axis represents quantity demanded and Y-axis represents price of the commodity. When we plot various price-quantity combinations, we get downward slopping curve DD as shown in the diagram. The downward slopping curve DD is the demand curve. It has negative slope because of inverse relationship between price of the commodity and its quantity demanded.

3. Explain the law of demand. Given its exceptions. [4+6] [HSEB 2071 Supp]

Law of Demand:

Please see the answer of Q.No. 2 (Second Part)

Exceptions to the Law of Demand

The exception to the law of demand means condition in which law of demand does not hold. The exceptions to the law of demand are as follows:

  1. Giffen goods: Giffen goods are those goods which are demanded more at the higher price and less at the lower price. These goods are special type of inferior goods and in case of these goods, law of demand does not hold.
  2. Precious and socially prestigious goods: In case of precious and prestigious goods like diamond, ornaments of gold, etc. law of demand does not hold. Rise in price of these goods leads to rise in demand and vice-versa.
  3. ignorance of the consumer: If consumer is not aware of the competitive price of the commodity, s/he may purchase more quantities of the commodity even at the higher price. In such case, the law of demand doesn’t hold.
  4. Future expectation: If a consumer expects future rise in price of the commodity, s/he will purchase more quantities of the commodity even at the higher price at present and vice-versa. This against the law of demand.
  5. Necessity goods: There is no change in demand for the necessity goods like food stuffs, salt, sugar, etc. even if there price changes. In case of such goods, law of demand does not hold.

4. Explain the law of demand. Why demand increases when price of a commodity falls?

Law of Demand:

Please see the answer of Q.No. 2 (Second Part)

Causes of Increase in Demand when Price Decreases

Causes of Downward Slopping Demand Curve

When price of the commodity decreases, its demand increases and vice-versa. Because of such inverses or negative relationship between price and quantity demanded, the demand curve slopes downward. The causes of downward slopping demand curve are as follows

  • Income effect: When price of a commodity falls, the real income of the consumer increases. Consequently, his purchasing power increases and demand also increases. On the other hand, if price of the commodity increases purchasing power of the consumer will fall. Consequently, demand will decrease.
  • Substitution effect: If price of a commodity decreases, it becomes cheaper in comparison to its substitutes. Consequently, its demand increases and. vice versa.
  • Diminishing marginal utility: According to the law of diminishing marginal utility, the marginal utility of a commodity declines continuously. Therefore, the consumers will buy more quantities of a commodity when its price falls and vice-versa.
  • New consumers creating demand: Whenever the price of a commodity decreases, old consumers continue buying that commodity and new consumers begin to buy it. Consequently, demand increases when price decreases.
  • Different uses: If a commodity has many uses, its demand increases with a fall in its price. For example, electricity has many uses. When its price decreases, its demand increases for many purposes like heating, cooking, cooking, lighting, etc.

5. What is demand? Describe the main determinants of demand.

Demand is defines as the desire backed with willingness and ability to pay. In other words, demand is also defined as the quantity of a commodity that a consumer would buy at a given period of time and price. Determinants of Demand.

The major determinants of demand are as follows:

  1. Price of the commodity: The most important determinant of demand is price of the commodity. Other this remaining the same, when price of the commodity increases, demand decreases and vice-versa. It means that there is inverse relationship between price and quantity demanded. This is also known as the law of demand.
  2. Income of the consumer: Income of the consumer is one of the important factors determining demand. The effect of change in income depends upon the nature of the commodity. In case of normal goods, demand increases with rise income and vice-versa. But in case of inferior goods, demand decreases with rise in income and vice-versa.
  3. Price of related goods: The demand for a commodity also depends upon the price of related goods. There are two types of related goods: complementary and substitute goods. In case of substitute goods like tea and coffee, there is positive relationship between price of one good and demand for another good. On the other hand, in case of complementary goods like ink and ink pen, there is negative relationship between price of one goods and demand for anther good.
  4. Change in size of the population and its composition: The size of the population and its composition also influence demand for a commodity. When size of the population increases, the demand for all goods increases. Similarly, change in composition of population also influences demand. For example; increase in number of female population will cause to increase demand for Saries, Kurtha-salwar, etc.
  5. Advertisement: Advertisement is very important determinant of demand. Goods which are widely advertised become popular and consumers are attracted towards those goods. People also get information about various goods from the advertisement. As a result, demand for those goods increases. vi. Expectation of the consumer: If a consumer expect rise in price of the commodity in the future, s/he will demand more quantities of the commodity at present and vice-versa. Similarly, expectation of shortage in the future also causes rise in demand for the commodity at present.
  6. Taste and preference of the consumer: Demand for a commodity also depends on the taste and preference of the consumer. If taste and preference of a commodity taste and preference of the consumer. The change in consumer’s taste and preference causes change in demand for the commodity. If taste of commodity is in favour of consumer, the demand will increase and vice-versa.

6. What are the causes of the shift in the demand curve ?

The major causes of shift in demand curve are as follows:

  • Change in income: Demand for a commodity changes when income of the consumer changes. The change in demand depends on the nature of the commodity. In case of normal goods, there is positive relationship between income of the consumer and demand. Therefore, rise in income will cause rightward shift in demand curve and fall in income will cause leftward shift in demand curve. But in case of inferior goods, there is negative relationship between income and demand. Therefore, fall in income will cause rightward shift in demand curve and vice-versa.
  • Change in price of related goods: There are two types of related goods: substitute and complementary goods. In case of substitute goods like tea and coffee, if price of tea increases, the demand for coffee will increase and vice versa. Consequently, demand curve for coffee will shift rightward and vice versa. On the other hand, in case of complementary goods like ink and ink pen, if price of ink increases, demand for ink pen will decrease. Consequently, the demand curve for ink pen will shift leftward.
  • Change in population: The demand curve also shift due to change in population and its composition. When size of the population increases, the demand for all goods will increase. Consequently, the demand curve will shift rightward. On the other hand, decrease in size of population will cause fall in demand for all goods, which leads leftward shift in demand curve.
  • Advertisement: Advertisement is an important factor causing shift in demand curve. People can get information about various goods from advertisement. Consequently, they demand more quantities and the demand curve will shift rightward. On the other hand, if advertisement expenditure decreases, demand will decrease, which will lead to leftward shift in demand curve.
  • Expectation of consumer: If a consumer’s expectation is further rise in price in the near future, there will be rise in demand at present. Consequently, the demand curve will shift rightward. On the other hand, it consumer’s expectation is fall in price in the near future, the demand will fall and the demand curve will shift leftward.

7. What is supply? Explain the determinants of supply. [2+8]

Supply is defined as the quantity of a commodity that a seller or a producer is ready to offer for a sale at the given price and time period. There is a positive relationship between quantity supplied and price of the commodity.

The important determinants of supply are as follows:

  • Price of the commodity: The price of the commodity is the most important determinant of supply. There is a direct relationship between price of the commodity and its quantity supplied, other things remaining the same. It means that at the higher price, producers or sellers offer more quantity of a commodity for sale and at a lower price, producers or sellers offer less quantity of the commodity for sale.
  • The price of the other goods: The supply of a particular commodity is inversely related with the price of other commodities. For example, a rise in the price of rice will fall the supply of wheat. This is due to the fact that rise in the price of rice will encourage producers to produce more rice…
  • The price of the factors of production: Supply of commodity is also affected by the price of factors of production. With the rise in the price of factors of production, the cost of production also rises, which results in decreased supply and vice versa.
  • Goal of the firm: If the goal of the firm is to maximize profit, less quantity of the commodity will be offered for sale at a high price. On the other hand, if the goal of the firm is to maximize sales or revenue or maximize output or employment, more will be supplied even at the lower price.
  • Improvement in technology: Improvement in technology has a positive effect on supply of the commodity. It reduces the per unit cost of production. Consequently, profit of the business firm will increase. In order to earn more profit, firms increase supply of the commodity.
  • Government policy: Taxation and subsidy policies of the government also affect market supply of the commodity. Increase in taxation tends to reduce the supply, while subsides tends to induce greater supply of the commodity.
  • Expected future price: If the producers expect, rise in price of the commodity in the near future, current supply of the commodity decreases. On the other hand, if they expect fall in the price, current supply increases.
  • Number of firms: Market supply of a commodity also depends upon the number of firms in the market. Increase in the number of firms implies increase in market supply of the commodity. On the other hand, decrease in the number of firms implies decrease in market supply of the commodity.

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