MP Board Class 12th Economics Unit 4 Form of Market and price Determination Important Questions

MP Board Class 12th Economics Important Questions Unit 4 Form of Market and price Determination with pdf file solutions. from latest MP Board Book.

Micro Economics Form of Market and price Determination Important Questions

Micro Economics Form of Market and price Determination Objective Type Questions

Questions 1. Choose the correct answers:

Question 1. Main feature of perfectly competitive market is:
(a) Uniform price
(b) Homogeneous product
(c) Large number of buyers and sellers
(d) All of the above.
Answer:
(d) All of the above.

MP Board Solutions

Question 2. The market in which there is free entry and exit is:
(a) Monopolistic competition market
(b) Imperfect competition market
(c) Perfect competitions market
(d) None of these.
Answer:
(c) Perfect competitions market

Question 3. There is inverse relation between demand and price of goods in:
(a) Only monopoly
(b) Only monopolistic competition
(c) Both (a) and (b)
(d) Only perfect competition.
Answer:
(d) Only perfect competition.

Question 4. According to which economist “Price of a commodity is determined by the forces of demand and supply”:
(a) Jevons
(b) Valros
(c) Marshall
(d) None of these.
Answer:
(c) Marshall

Question 5. Not a condition of equilibrium of monopoly firm:
(a) Average revenue = Marginal revenue
(b) Marginal revenue = Marginal cost
(c) Marginal cost curve cuts marginal revenue curve from downwards.
(d) Both (b) and (c).
Answer:
(a) Average revenue = Marginal revenue

Question 6. Market price is found in:
(a) Short period market
(b) Long period market
(c) Very long period market
(d) None of these.
Answer:
(a) Short period market

Question 7. Demand curve of a firm is perfectly elastic in:
(a) Perfect competition
(b) Monopoly
(c) Monopolistic competition
(d) Oligopoly.
Answer:
(a) Perfect competition

MP Board Solutions

Question 2. Fill in the blanks:

  1. The price on which demand and supply are equal, is called ………………..
  2. Price discrimination is possible in ……………….. market.
  3. Increase in total revenue by the sale of additional unit of the commodity is called ………………..
  4. If the supply of any good remains unchanged, and with the increase in demand its ……………….. increases.
  5. In perfect competition market, a firm is a ………………..
  6. Price ceiling is done by the ………………..
  7. In the ………………..period demand force is more effective.
  8. In ………………..market there should be two or more two firms.
  9. A group of firms is called ………………..
  10. The market for petrol is ………………..

Answer:

  1. Normal
  2. Monopolistic
  3. Marginal revenue
  4. Increase
  5. Price takes
  6. Government
  7. Short period
  8. Oligopoly
  9. Industry
  10. International.

MP Board Solutions

Question 3. State true or false:

  1. Market of bricks is provincial.
  2. Normal price is imaginary.
  3. Imperfect competition is a practical approach.
  4. The forces of demand and supply remains in the state of equilibrium for a long period.
  5. Among the forces of demand and supply, either of the two determines the price of the goods.
  6. Under perfect competition firms themselves determine the price.
  7. Under monopolistic competition demand curve is uncertain.

Answer:

  1. False
  2. True
  3. True
  4. False
  5. False
  6. False
  7. True.

Question 4. Match the following:

  1. Gold (a) National market
  2. Clothes (b) Local market
  3. Normal profit (c) International market
  4. Equilibrium of firm (d) AR=MR
  5. Milk (e) Zero profit

Answer:

  1. (c)
  2. (a)
  3. (e)
  4. (d)
  5. (b).

Question 5. Answer the following in one word / sentence:

  1. The market was Tomatoes is known as?
  2. Market price revolves around?
  3. A perfectly competitive firm in the long period earns which type of profit?
  4. Who has given importance to time in the determination of price?
  5. Unusual gain or loss is found in which market competition?
  6. In practical life which competition is not found?

Answer:

  1. Very short period
  2. Normal price
  3. Normal profit
  4. Prof. Marshall
  5. Imperfect competition
  6. In case of perfect competition.

MP Board Solutions

Form of Market and price Determination Very Short Answer Type Questions

Question 1. What is equilibrium price?
Answer:
The price at which the demand and supply of product is equal is called equilibrium point.

Question 2. What is the effect on equilibrium price when demand and supply change?
Answer:
Changes in demand and supply is a normal process. It directly affects the equilibrium price sometimes demand is more than the supply, and supply sometimes exceeds the demand. Increase or decrease in both can cause a fall in equilibrium price.

Question 3. What are the causes of changes in demand?
Answer: Changes in demand can be of many reasons:

  1. Change in income of the consumer.
  2. Change in population.
  3. Change in habits, interest and income of the consumer.
  4. Change in availability of substitute goods.
  5. Change in price of related goods.

Question 4. What are the causes of changes in the supply?
Answer: Following causes can be responsible for the changes in the supply of a goods.

  1. Change in the price of raw material. .
  2. Change in availability of raw material.
  3. Change in the wages of the laborious
  4. Change in price of machinery.
  5. Change in the laws of production.
  6. Change in the techniques of production.

Question 5. Define perfect competition.
Answer:
According to Prof. Marshall:
“The more nearly perfect market is the stronger, the tendency for the same price to be paid for the same thing at the same time in all parts of the market.”

Question 6. What is market price?
Answer:
Market price is also known as short period price which is determined by temporary interaction of demand and supply. It is also known as temporary price.

Question 7. What is normal price?
Answer:
Normal price is a long-term price of any commodity. It is determined with the interaction of demand and supply. It is an imaginary price and is not found in actual life.

MP Board Solutions

Question 8. What is perfect competition?
Answer:
Perfect competition refers to market situation where there are large numbers of ‘buyers and seller’s. They have perfect knowledge about the market. Goods are homogeneous, perfect mobility of the factors of production and one price prevails in the market.

Question 9. What is the effect of large number of buyers and sellers?
Answer:
In perfect competition, the number of buyers and sellers are very large. Each buyer buys a very small part of the product and is unable to influence the price output or price prevailing in the market. Likewise the supply of an individual seller is Very small in comparison to total supply and thus, he is unable to affect the price policy of the product alone by changing his supply.

Question 10. Write three features of Monopolistic competition.
Answer:

  1. There are large number of buyers and sellers selling closely related, but not homogeneous products. Each firm has a limited share/control over the market. Large number of firms leads to competition in the market.
  2. The products of the sellers are differentiated but are close substitute of one another. The products produced by one firm is different from products produced by other firms.
  3. There is free entry and exit of firms.

MP Board Solutions

Question 11. Why there are very few firms in Oligopoly market?
Answer: Following reasons show that why few firms exist in Oligopoly:

  1. Huge set-up costs,
  2. Patent rights,
  3. License requirements,
  4. Control over raw materials, etc,
  5. Presence of cut throat competition among firms.

Question 12. In perfect competition situation sellers and buyers have full knowledge about the market. What is its effect?
Answer:
In perfect competition buyers and sellers both have perfect knowledge about the prevailing market condition. Due to homogeneous product, the sellers can not sell the goods on different prices. This is the reason that the buyers and sellers accept the same price.

Question 13. What do you mean by supply?
Answer:
Supply refers to the quantity of goods available for sale at a given price in a given market at a given time.

Question 14. What do you mean by contraction of supply?
Answer:
Other factors remaining constant when a decrease in price causes fall in supply, it in called contraction of supply.

Question 15. What do you mean by price control?
Answer:
Price control means fixation of price by law. At the controlled price quantity demanded in not equal to quantity supplied. The price is fixed by the government below the equilibrium price. Its aim is to make the goods available to poor.

Form of Market and price Determination Short Answer Type Questions

Question 1. Distinguish between Market Price and Normal Price.
Answer:
Differences between Market Price and Normal Price:
Market Price:

  1. Market price is a short term price.
  2. Market price always fluctuates.
  3. Market price may be less or more than the cost of production.
  4. Market price is the real price.
  5. Demand has got more impact on the determination of price.
  6. Market price can be fixed for both productive and reproductive goods.

Normal Price:

  1. Normal price is the long term price.
  2. Normal price remains stable.
  3. Normal price is always equal to the cost of production.
  4. Normal price is imaginary price.
  5. Supply has more importance in the determination of price.
  6. Normal price is fixed for reproductive goods only.

Question 2. Write the characteristics of Market price?
Answer:
It has the following characteristics:
1. Short period price:
Market price is also known as short period price. In it prices will always be fluctuating. It will be of perishable goods and the demand will always influence the price. In this supply will be rigidly fixed. This will be very short period to meet the demand of the goods. Therefore, it is known as short period price.

2. Demand is active:
In the market price only demand will be. active. On the other hand there will be no effect of supply on it because it is passive. If demand increases price will go up and its vice versa. So, the supply is rigidly fixed in it. In other words supply is inelastic. So, in short period the effect of only demand can be seen on the price line.

3. Proportional relation between demand and supply:
Thirdly, there is proportionate relationship between demand and market price. If the demand increases two times,the price will too go double because the supply is rigidly fixed. Similarly will happen in the case of the fall of the demand. So, it can be said that there is direct relationship between the demand and the market price.

4. Market price is more or less to marginal cost:
Due to passiveness of the supply the market price may be more or less to marginal cost. It is because supply is inelastic. It never be increased. If the demand increases again and again the price will be very high and the marginal cost remain constant. So, it will be lower to price line. The same will be in the case of decrease of demand i.e., it will be high. So, market price can be more or less to marginal cost.

5. Market price is practical:
In our day-to-day life this market price can be seen. In market this price actually we get in our daily life. So, it is true to say that market price is practical and can be realized in our real life. Hence, it is said market price is practical. It can be visualized in our day to day economic life.

MP Board Solutions

Question 3. Write features of normal price.
Answer:
Normal price is long term price determined by the interactions of demand and supply.

  1. Normal price is long term price of durable goods. This price is determined by the interaction of demand and supply.
  2. In normal price both demand and supply are active. So, it has permanent equilibrium. Here, demand and supply both can be increased in due course of time.
  3. Normal price is imaginary price and is not found in actual market.
  4. Normal price is long term price, because it is determined by the permanent forces of demand and supply.
  5. In the determination of normal price, supply has got more importance because the producer has got enough time to meet the demand.
  6. Normal price is generally related with reproductive goods, because it relates with long term period.

Question 4. When is a firm called a price accept-or?
Answer:
A firm is able to accept the price when price of a good is determined by the forces of demand and supply, and at this price firm can sell any amount of goods in the market and no firm can influence the price. The reasons are:

  1. The large number of buyers and sellers cannot affect the supply in the market.
  2. Goods are homogeneous. If any firm changes price higher then the price prevailing in the market, then the buyers will switch on to other firms in the market.
  3. The buyers and sellers have complete knowledge about the market, so each firm is a price taker.

Question 5. What is the effect of free entry and exist of firms in perfect competition?
Answer:
Implication of
freedom of entry and exit of a firm under perfect competition: In perfect competition, there is free entry of new firms and exit of existing firms. New firms induced by large profit can enter the industry whereas in case of loss insufficient firms leave the industry. The implication of this feature of perfect competition is that no firm can earn abnormal profit in the long-run. The firm earns normal profit or minimum profit to remain in business.

Question 6. What will happen if the price prevailing in the market is.
(a) Above the equilibrium price?
(b) Below the equilibrium price?
Answer:
(a) In this case, many more firms will enter the market realizing that they can earn higher profit here than elsewhere. As a result, at prevailing price there will be excess supply in the market. This excess supply will lower the market price and the market price will be equal to equilibrium price.

(b) In this case many firms who are incurring losses will exit the industry. As a result, at a prevailing price, there will be excess demand. The excess demand will raise the market price and the market price will be equal to equilibrium price.

Question 7. Suppose the demand and supply curves of a commodity X in a perfectly competition market are given by,
qd = 700 – P
q= 500 + 3P for P ≥ 15
= 0 for 0 ≤ P ≤ 15.
Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than ₹ 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?
Answer:
In the question qd and qs denote the demand and supply respectively and P denotes the price of commodity X. From the market supply curve, we come to know that below ₹ 15 the market supply is zero. This means that no producer produces commodity X, when its price is below ₹ 15. We know that the firm produces positive quantity of output only when the price of the goods is at least equal to minimum average variable cost of the firms. When the price is below minimum AVC, they produce nothing. Therefore, the minimum average cost of producing commodity X is ₹ 15.
Here, the price is ₹ 15. At equilibrium from the supply curve we get quantity of supply. At equilibrium price,
qd = qs
700 – P = 500 + 3p
– 4 P = – 200
P = 50
Hence, equilibrium price = ₹ 50
Equilibrium quantity = 700 – P
= 700 – 50 = 650

Question 8. Suppose, the demand and supply curves of salt are given by;
qd = 1000 – p
qs = 700 + 2p.

(i) Find equilibrium price and quantity.

(ii) Now suppose that the price of an input used to produce salt increases so that the new supply curve is:
Qs = 400 + 2p.
How does an equilibrium price and quantity change?

(iii) Suppose, that the government has imposed a tax of ₹ 3 per unit of sale. How does it affect the equilibrium price and quantity?

Answer:
(i) At equilibrium price: qD -qs
1000 – p = 700 + 2 p
1000 – 700 = 2p + p
3p = 300
or
p = 100
Equilibrium price = ₹ 100
Equilibrium quantity qD = 1000 – p = 1000 -100 = 900 units
qs = 700 + 2p = 700 + (2 x 100) = 900 units

(ii) New supply curve is: qs = 400 + 2p
At equilibrium price qD = qs
1000 – p = 400 + 2p
1000 – 400 = 2p + p
3p = 600
or
p = 200
Equilibrium price = ₹ 200
Equilibrium quantity
qD = 1000 – p = 1000 – 200 = 800 units
qs = 400 – 2p = 400 + (2 x 200) = 800 units

(iii) New supply curve equation after tax of ₹3 per unit on sale is imposed.
qs = 700 + 2 (p – 3) = 700 + 2p – 6 = 694 + 2p
At equilibrium price: qD =qs
1000 – p = 694 + 2p
1000 – 694 = 2+p + p
3p = 306
or p = 102
Equilibrium price has increased from ₹ 100 to ₹ 102.
Equilibrium quantity:
D = 1000 – p = 1000 – 102 = 898 units
qs = 694 + 2p = 694 + (2 x 102) = 694 + 208 = 898
units Equilibrium quantity has decreased from 900 to 898 units.

MP Board Solutions

Form of Market and price Determination Long Answer Type Questions

Question 1. What are the main features of perfect competition?
Answer:
Following are the main features of perfect competition:
1. Large numbers of buyers and sellers:
In perfect competition, the number of buyers and sellers are very large so that none of the individual buyers or sellers are able to influence the price output policy of the industry (Price prevailing in the market).

2. Homogeneous product:
The second characteristics of a perfectly competitive market is that the product produced by each firm of the industry is homogeneous i. e., all the units of that product produced by different firms are perfect substitutes to each others. Salt, cotton, coal and wheat are homogeneous and the different sellers dealing in such goods cannot increase their prices as the customers (buyer) will leave him and would buy from the other sellers, selling at a lower price. As the goods are identical in all the respects, it is immaterial to the buyer as to who has produced it and he does not have any preference for the product of an individual seller.

3. Uniform price:
Under perfect competition all the units of a commodity are sold at the same price.If a producer tries to sell his products at a higher price than the ruling market price then he will not succeed. This is so, due to the condition of homogeneity of the products, and buyers will not be willing to pay a higher price for this products. They will buy that product from some other producer, who is willing to sell his products at the ruling market price.

4. Free entry or exit of firms:
There must be full freedom for the entrance of the firm. If the industry is gaining profit, the new firms can enter that industry. On the other hand, if the industry is incurring losses, some firms can freely leave the industry, thus enabling other firms to make normal profits.

5. Normal profit:
Under perfect competition all the firms get normal profit only. The marginal cost of the firms equals the marginal revenue. Thus, in the long run a perfectly competitive market gains only normal profit.

6. Uniformity in quality, shape and weight: There should be uniformity in the commodities to be sold in the market. There should not be any change in shape, color, quality and weight of the commodities. If the uniformity will be there, then only same price will be determined for the same type of units.

Question 5. Define perfect competition. Is perfect competition a myth?
Or
“Perfect competition is an imaginary concept” Explain.
Or
“Is perfect competition imaginable “. State the main reason.
Answer:
Mrs. J. Robinson “Perfect competition prevails when the demand for output of each producer is perfectly elastic. This entails first, that the number of sellers is so large so that the output of anyone seller is a negligible, small proportion of the total output of the commodity and second that buyers are alike in respect of their choice of rival sellers so that the market is perfect”.

In real life, we do not find either free competition or full knowledge in markets. So, perfect competition is just an imaginary condition. In practice, perfect competition is a myth and it cannot be seen anywhere. In agricultural products, such as wheat, rice, cotton it can be seen to some extent. Many farmers cultivate wheat, rice etc. in their farms, similarly a number of buyers come to the mantis to purchase goods. But other things and conditions are not found in practice. So, perfect competition is a myth. It is due to the following reasons:

  1. Firstly, for the perfect competition huge number of sellers and buyers are needed. But in practice there are limited number of sellers and buyers. Especially market is ruled by the sellers.
  2. Secondly, there is lack of perfect competition between sellers and buyers. It is because and only a few sellers. Further market is always dominated by the sellers.
  3. Thirdly, the availability of substitution goods are another obstacle in the way of perfect competition. As soon as price increases people change their consumption due to substitution.
  4. Lastly, sometimes the prices of essential goods are determined by the Government of the nations. So, the free operation of law of demand and supply does not play its role in the market.
  5. Expenditure is done transport and advertisement when in perfect competition.such type of expenditure should not occur.
  6. Buyers are not aware of market and so they have not full knowledge of product and its price. On the basis of the above points it is true to say that perfect competition is imaginary and is not easy to be located.
    It is theoretical and only on certain assumptions we can assume it. In our daily life we never see the perfection in the market. That is why economists have called it myth.

for more MP Board Solutions follow on (Google News) and share with your friends.

Leave a Comment