CBSE Class 12 Economics HOTs Market Equilibrium

Very Short Answer Type Questions

Question. When a firm’s Total Revenue=Total Cost, it cannot cover its normal profit
1. False
2. True
3. Can’t say
4. None of these
Answer : False

Question. What is the normal profit?
Answer : The minimum number of profit which is required to hold an entrepreneur in the production process for the long run is known as normal profit.

Question. Name two features of monopoly market.
Answer : The two important features of monopoly market are.
• There is only one seller in the market and can control the market on his own.
• The seller can make huge profits as compared to the normal profit.

Question. What is a price maker company?
Answer : A price maker company are those companies who can influence the price of a product on its own.

Question. What are the advertisement costs?
Answer : An advertisement cost is a cost which a company has to suffer while promoting their products and services and result in sales. Advertisement can be done through newspaper, TV, radio, magazine, etc.

Question. What is unusual or abnormal profit?
Answer : The unusual or abnormal profits are those when the Total revenue > Total cost.

Higher Order Thinking Skills

Question. Due to decrease in price of pen why does the demand of ink increase?
Answer :These are complementary goods.

Question. When is demand inelastic?
Answer : When percentage change in quantity demanded is less than percentage change in price, the demand is said to be inelastic.

Question. Determine how the following changes (or shifts) will affect market demand curve for a product.
a. A new steel plant comes up in Jharkhand people who were previously unemployed in the area are now employed. How will this affect the demand for colour T.V. and Black and White T.V. in the region?
b. In order to encourage tourism in Goa. The Government of India suggests Indian Airlines to reduce air fare to Goa from the four major cities of Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces the fare to Goa, How will this affect the market demand curve for air travel to Goa?
c. There are train and bus services between New Delhi and Jaipur. Suppose that the train fare between the two cities comes down. How will this affect demand curve for bus travel between the two cities?
Answer :
a. There will be rightward shift in market demand curve for colour and Black and White T.V. This is because of increase of income of the people due to employment in the new steel plant.
b. The demand for travel to Goa will expand in response to reduction in the air fare.
However, this will be reflected by a movement along the demand curve. There will be no shifts in the demand curve.
c. As train fare comes down the demand for bus travel will reduce. Demand curve for the bus travel will shift to the left showing less demand at the same price.

Question. “If a product price increases, a family’s spending on the product has to increase.”
Defend or refute.
Answer : When product price increases, expenditure on the commodity will not increase in the situation when Ed>1 (elasticity of demand is greater than unity). It will increase only in situation when Ed<1. In a situation when Ed=1. Expenditure will remain constant, even when prices rise.

Question. How would you comment on the elasticity of demand when 8% decrease in price of a commodity causes 2% increase in expenditure of the commodity?
Answer : Elasticity of demand must be greater than unity (implying a situation of elastic demand) when expenditure on the commodity responds inversely to any change in price of the commodity.

Question. The elasticity of demand for X is twice the elasticity of demand for Y. Price of X falls by 5% and Price of Y rises by 5% . What will be the % change in the quantity demanded of X and Y?
Answer : Suppose elasticity of demand for Y = 1 , and elasticity of demand for X will be = 2 So, % decrease in qt. demanded of Y will be 5% , because price rises by 5%, and % increase in qt. demanded of X will be 10% , because price falls by 5% .

Question. Given eD = - 0.02, and percentage increase in price = 20%, find change in expenditure on the commodity.
Answer :

(%change in quantity demanded)=-0.02 20=-0.4
Implying 4% decrease in quantity demanded owing to 20% increase in price of the commodity.
We know,
Old expenditure = P Q
New expenditure =P(1+0.2) Q(1-0.04)
Percentage change in expenditure

Implying that expenditure on the commodity increases by 15.2% owing to increase the commodity by 20%. Which is why ed is less than 1.

Very Short Answer Type Questions

Question. When a firm’s Total Revenue=Total Cost, it cannot cover its normal profit
1. False
2. True
3. Can’t say
4. None of these
Answer : False

Question. What is the normal profit?
Answer : The minimum number of profit which is required to hold an entrepreneur in the production process for the long run is known as normal profit.

Question. Name two features of monopoly market.
Answer : The two important features of monopoly market are.
• There is only one seller in the market and can control the market on his own.
• The seller can make huge profits as compared to the normal profit.

Question. What is a price maker company?
Answer : A price maker company are those companies who can influence the price of a product on its own.

Question. What are the advertisement costs?
Answer : An advertisement cost is a cost which a company has to suffer while promoting their products and services and result in sales. Advertisement can be done through newspaper, TV, radio, magazine, etc.

Question. What is unusual or abnormal profit?
Answer : The unusual or abnormal profits are those when the Total revenue > Total cost.

Higher Order Thinking Skills

Question. Due to decrease in price of pen why does the demand of ink increase?
Answer :These are complementary goods.

Question. When is demand inelastic?
Answer : When percentage change in quantity demanded is less than percentage change in price, the demand is said to be inelastic.

Question. Determine how the following changes (or shifts) will affect market demand curve for a product.
a. A new steel plant comes up in Jharkhand people who were previously unemployed in the area are now employed. How will this affect the demand for colour T.V. and Black and White T.V. in the region?
b. In order to encourage tourism in Goa. The Government of India suggests Indian Airlines to reduce air fare to Goa from the four major cities of Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces the fare to Goa, How will this affect the market demand curve for air travel to Goa?
c. There are train and bus services between New Delhi and Jaipur. Suppose that the train fare between the two cities comes down. How will this affect demand curve for bus travel between the two cities?
Answer :
a. There will be rightward shift in market demand curve for colour and Black and White T.V. This is because of increase of income of the people due to employment in the new steel plant.
b. The demand for travel to Goa will expand in response to reduction in the air fare.
However, this will be reflected by a movement along the demand curve. There will be no shifts in the demand curve.
c. As train fare comes down the demand for bus travel will reduce. Demand curve for the bus travel will shift to the left showing less demand at the same price.

Question. “If a product price increases, a family’s spending on the product has to increase.”
Defend or refute.
Answer : When product price increases, expenditure on the commodity will not increase in the situation when Ed>1 (elasticity of demand is greater than unity). It will increase only in situation when Ed<1. In a situation when Ed=1. Expenditure will remain constant, even when prices rise.

Question. How would you comment on the elasticity of demand when 8% decrease in price of a commodity causes 2% increase in expenditure of the commodity?
Answer : Elasticity of demand must be greater than unity (implying a situation of elastic demand) when expenditure on the commodity responds inversely to any change in price of the commodity.

Question. The elasticity of demand for X is twice the elasticity of demand for Y. Price of X falls by 5% and Price of Y rises by 5% . What will be the % change in the quantity demanded of X and Y?
Answer : Suppose elasticity of demand for Y = 1 , and elasticity of demand for X will be = 2 So, % decrease in qt. demanded of Y will be 5% , because price rises by 5%, and % increase in qt. demanded of X will be 10% , because price falls by 5% .

Question. Given eD = - 0.02, and percentage increase in price = 20%, find change in expenditure on the commodity.
Answer :

(%change in quantity demanded)=-0.02 20=-0.4
Implying 4% decrease in quantity demanded owing to 20% increase in price of the commodity.
We know,
Old expenditure = P Q
New expenditure =P(1+0.2) Q(1-0.04)
Percentage change in expenditure

Implying that expenditure on the commodity increases by 15.2% owing to increase the commodity by 20%. Which is why ed is less than 1.