MSW - Economics Unit - 3

 UNIT - 3

Market and price determination

In a market economy, the interaction of supply and demand determines prices and allocates resources. Here's an explanation of market and price determination in a market economy:

1. Supply: Supply refers to the quantity of goods and services that producers are willing and able to offer for sale at various prices. Suppliers consider factors such as production costs, technological advancements, availability of inputs, and their profit objectives when determining the quantity they are willing to supply at different price levels.
2. Demand: Demand represents the quantity of goods and services that consumers are willing and able to purchase at various prices. Factors influencing demand include consumer preferences, income levels, population demographics, and the prices of related goods or substitutes. As prices decrease, the quantity demanded generally increases, while higher prices tend to result in lower quantities demanded.
3. Equilibrium Price: The equilibrium price is the price at which the quantity supplied equals the quantity demanded in the market. It represents the point of balance between buyers and sellers. In a competitive market, the forces of supply and demand interact to determine this equilibrium price.
4. Market Clearing: At the equilibrium price, the quantity supplied equals the quantity demanded, resulting in a state of market clearing. This means that there is no excess supply (surplus) or excess demand (shortage) in the market. Market clearing indicates that resources are efficiently allocated based on the preferences and choices of buyers and sellers.
5. Shifts in Supply and Demand: Changes in supply and demand conditions can cause shifts in the market equilibrium. For example, an increase in consumer income may lead to higher demand and a higher equilibrium price for certain goods. On the supply side, factors like changes in production costs, technology advancements, or government regulations can influence the quantity supplied and shift the equilibrium.
6. Elasticity of Demand and Supply: The elasticity of demand and supply determines the responsiveness of the quantity demanded or supplied to changes in price. If demand or supply is highly elastic, even small price changes can result in significant shifts in quantity. In contrast, if demand or supply is inelastic, quantity changes less in response to price changes.
7. Market Efficiency: In a competitive market, the interaction of supply and demand promotes efficiency. Prices serve as signals, conveying information about scarcity and value. They incentivize producers to allocate resources where they are most valued and encourage consumers to make decisions based on their preferences and budget constraints. This market efficiency leads to the maximization of overall social welfare.
8. Disequilibrium and Market Adjustments: Markets are dynamic and can experience temporary imbalances between supply and demand. If the market price is below the equilibrium level, a shortage occurs, leading to upward pressure on prices. Conversely, if the market price is above the equilibrium level, a surplus occurs, resulting in downward pressure on prices. These imbalances prompt adjustments as market participants react to changing conditions.
9. Role of Competition: Competition plays a crucial role in market and price determination. In a competitive market, numerous buyers and sellers act independently, without exerting significant control over prices. Competing firms strive to attract customers by offering better products, lower prices, or more favorable terms, which helps maintain a relatively efficient allocation of resources.
10. Market Failures: While market economies generally aim for efficiency, market failures can occur. These are situations where the market mechanism does not lead to an optimal outcome. Market failures can arise from externalities (costs or benefits that affect third parties), public goods with non-excludable benefits, imperfect information, natural monopolies, or inequalities. In such cases, government intervention may be necessary to correct the market failures and achieve more desirable outcomes.
11. Price Signals and Resource Allocation: Prices serve as important signals in a market economy. They convey information about the scarcity of resources, production costs, consumer preferences, and changes in market conditions. These price signals guide producers and consumers in making decisions about resource allocation, production levels, investments, and consumption choices. Prices provide incentives for efficient resource use and help coordinate the activities of various market participants.
12. Price Flexibility: Market economies generally exhibit price flexibility, meaning that prices can adjust relatively quickly in response to changes in supply and demand conditions. Price flexibility allows markets to adapt to changing circumstances, facilitating the efficient allocation of resources. In contrast, centrally planned or regulated economies often experience price rigidities, which can lead to imbalances and inefficiencies.
13. Government Role in Market and Price Determination: In market economies, governments primarily play a role in ensuring the functioning of competitive markets, protecting property rights, enforcing contracts, and addressing market failures. Governments may also regulate certain industries, set standards, provide subsidies or tax incentives, and intervene during times of economic crises or emergencies. However, the extent of government intervention can vary significantly across countries and depends on their economic policies and political ideologies.
14. Global Market Interactions: In today's interconnected world, market and price determination extend beyond national boundaries. Global markets allow for international trade, where prices are influenced by global supply and demand conditions. Factors such as tariffs, trade agreements, exchange rates, and geopolitical events can impact prices in both domestic and international markets.

Understanding market and price determination is essential for analyzing economic behavior, making informed decisions, and studying the overall functioning of a market economy. However, it's important to note that individual markets may exhibit unique characteristics and complexities, and economic theories and models provide frameworks for understanding these dynamics.

Demand and supply are fundamental concepts in economics that describe the behavior of buyers and sellers in a market. Here's a breakdown of demand and supply:

Demand:

• Definition: Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period, assuming other factors remain constant.
• Law of Demand: The law of demand states that, all else being equal, there is an inverse relationship between price and quantity demanded. In other words, as the price of a good increases, the quantity demanded decreases, and vice versa.
• Demand Curve: The demand curve is a graphical representation of the relationship between price and quantity demanded. It slopes downward from left to right, reflecting the inverse relationship between price and quantity demanded.
• Determinants of Demand: Factors that influence demand include consumer income, prices of related goods (substitutes and complements), consumer tastes and preferences, population demographics, and consumer expectations.
• Shifts in Demand: Changes in the determinants of demand can cause a shift in the entire demand curve. If demand increases at every price level, the demand curve shifts to the right (increase in demand). Conversely, if demand decreases at every price level, the demand curve shifts to the left (decrease in demand).

Supply:

• Definition: Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a given period, assuming other factors remain constant.
• Law of Supply: The law of supply states that, all else being equal, there is a direct relationship between price and quantity supplied. In other words, as the price of a good increases, the quantity supplied increases, and vice versa.
• Supply Curve: The supply curve is a graphical representation of the relationship between price and quantity supplied. It slopes upward from left to right, reflecting the direct relationship between price and quantity supplied.
• Determinants of Supply: Factors that influence supply include production costs (such as labor, raw materials, and technology), input prices, technological advancements, government regulations, taxes and subsidies, and producer expectations.
• Shifts in Supply: Changes in the determinants of supply can cause a shift in the entire supply curve. If supply increases at every price level, the supply curve shifts to the right (increase in supply). Conversely, if supply decreases at every price level, the supply curve shifts to the left (decrease in supply).

Equilibrium:

The equilibrium occurs when the quantity demanded equals the quantity supplied in a market. It is determined by the intersection of the demand and supply curves. At equilibrium, there is no excess demand or excess supply in the market.

Changes in demand or supply can lead to a new equilibrium, resulting in changes in price and quantity. For example, if demand increases while supply remains constant, the equilibrium price and quantity will both increase. Conversely, if supply increases while demand remains constant, the equilibrium price will decrease, but the equilibrium quantity will increase.

Understanding demand and supply dynamics helps explain how prices are determined in markets and how changes in market conditions can affect the quantity and price of goods and services exchanged.

Commercialization of Agriculture:

Commercialization of agriculture refers to the transformation of agricultural activities from subsistence farming or traditional practices to a more market-oriented approach. It involves the production of agricultural goods for sale in the market rather than solely for personal consumption. Here's an explanation of the commercialization of agriculture and its relationship to money and credit:

• Market-Oriented Approach: Commercialization of agriculture involves shifting focus from self-sufficiency to producing agricultural goods for sale in the market. Farmers adopt modern techniques, utilize specialized inputs, and aim to maximize profits by meeting market demand and obtaining higher prices for their products.

• Specialization and Crop Selection: Commercialization leads to the specialization of farming activities. Farmers often choose specific crops or livestock based on market demand, profitability, and suitability to the local conditions. They may diversify their production or focus on high-value cash crops instead of subsistence crops.

• Integration into Supply Chains: Commercialized agriculture involves farmers integrating into agricultural supply chains. They may sell their produce directly to consumers, local markets, wholesalers, or agribusinesses. This integration often requires coordination, transportation, and meeting quality standards and regulations.

• Increased Productivity and Efficiency: Commercialization often drives increased productivity and efficiency in agricultural practices. Farmers may adopt modern technologies, improved farming techniques, and better inputs to enhance production and meet market requirements. This can lead to higher yields, improved quality, and cost-effective production.

• Income Generation and Rural Development: Commercialization can contribute to income generation and rural development. By engaging in market-oriented agriculture, farmers have the potential to earn higher incomes, invest in their farms, access better infrastructure, and improve their living standards. It can also create employment opportunities in related sectors such as transportation, processing, and marketing.

Now, let's discuss the relationship between the commercialization of agriculture and money and credit:

Money:

• Medium of Exchange: Commercialization of agriculture relies on the use of money as a medium of exchange. Farmers sell their agricultural produce in exchange for money, which facilitates transactions in the market.

• Price Determination: Money serves as a unit of account and a measure of value. It allows for the determination of prices for agricultural goods, enabling farmers to assess the profitability of their production and make informed decisions.

Credit:

• Capital Investment: Commercialization often requires capital investments in machinery, equipment, infrastructure, and inputs. Farmers may require credit to finance these investments, such as purchasing improved seeds, fertilizers, irrigation systems, or machinery. Credit can help farmers overcome financial barriers and make necessary investments to enhance their production and efficiency.

• Seasonal and Working Capital: Agriculture is often characterized by seasonal cash flows, where income is earned during specific periods of the year. Farmers may require credit to cover their working capital needs during non-harvest periods, such as purchasing inputs, paying labor costs, or meeting household expenses.

• Access to Markets: Credit can help farmers access markets by providing funds for transportation, storage, and marketing activities. It enables them to bring their produce to market, store it if needed, and cover marketing expenses to reach potential buyers.

• Risk Management: Credit facilities, such as agricultural insurance or crop loans, can assist farmers in managing risks associated with weather conditions, pests, or market fluctuations. This allows farmers to mitigate potential losses and stabilize their income streams.

Money and credit play crucial roles in facilitating the commercialization of agriculture. They enable farmers to participate in markets, make investments, manage cash flow, and cope with risks. Access to appropriate financial services, including savings, credit, and insurance, can help farmers maximize the benefits of commercialized agriculture and contribute to their overall economic development.

Types of Banks:

The banking system refers to the network of financial institutions that provide various banking services to individuals, businesses, and governments. It plays a critical role in the economy by facilitating the flow of funds, channeling savings into investments, and offering a range of financial products and services. Here's an overview of the banking system:

1. Commercial Banks: Commercial banks are the most common type of banks. They offer a wide range of services, including accepting deposits, granting loans, facilitating domestic and international payments, providing credit cards, and offering other financial products.
2. Investment Banks: Investment banks primarily focus on providing financial services to corporations, governments, and institutional investors. They assist with underwriting securities issuance, mergers and acquisitions, financial advisory services, and trading activities.
3. Central Banks: Central banks are the monetary authorities of a country and play a crucial role in the banking system. They are responsible for implementing monetary policy, regulating the banking industry, issuing and managing the currency, and maintaining the stability of the financial system.
4. Development Banks: Development banks are specialized institutions that provide long-term financing for developmental projects. They typically focus on sectors such as infrastructure, agriculture, small and medium-sized enterprises (SMEs), and social programs.

Banking Functions and Services:

1. Accepting Deposits: Banks accept various types of deposits, including current accounts, savings accounts, fixed deposits, and recurring deposits. Deposits allow individuals and businesses to store their funds securely while earning interest.
2. Granting Loans and Credit: Banks provide loans and credit to individuals and businesses. These can include personal loans, home loans, car loans, business loans, and lines of credit. Banks assess creditworthiness, set interest rates, and establish repayment terms.
3. Payment Services: Banks facilitate domestic and international payments through services such as electronic fund transfers, check clearing, debit cards, credit cards, and online payment systems.
4. Investment and Wealth Management: Banks offer investment and wealth management services, including brokerage services, asset management, mutual funds, and retirement planning. These services help individuals and institutions manage and grow their wealth.
5. Foreign Exchange Services: Banks provide foreign exchange services, enabling customers to convert currencies and engage in foreign currency transactions for trade or travel purposes.
6. Financial Advisory: Banks offer financial advisory services to individuals and businesses. They provide guidance on investment options, retirement planning, tax planning, risk management, and other financial matters.

Banking Regulations and Supervision:

Banks are subject to regulations and supervision by central banks and regulatory authorities. These regulations aim to ensure the stability and integrity of the banking system, protect depositors' funds, prevent money laundering and fraud, and maintain fair banking practices.

Banking regulations typically cover capital requirements, liquidity standards, risk management, consumer protection, anti-money laundering measures, and reporting requirements. Regulatory authorities oversee compliance and conduct periodic audits and stress tests to assess the financial health of banks.

The banking system is an integral part of the economy, facilitating economic growth, providing financial intermediation, and contributing to the overall stability and development of the financial sector.

Labour supply and saving decision

Labor Supply:

Labor supply refers to the amount of time and effort that individuals are willing and able to allocate to work, either in the form of paid employment or productive activities. Here are some factors that influence labor supply decisions:

1. Wage Rates: Higher wage rates generally encourage individuals to supply more labor as they perceive an increased opportunity cost of leisure time. Conversely, lower wage rates may lead to a decrease in labor supply.
2. Non-Monetary Considerations: Labor supply decisions are not solely driven by monetary factors. Non-monetary considerations such as job satisfaction, work-life balance, career opportunities, and personal preferences can also influence individuals' decisions about how much labor to supply.
3. Education and Skills: The level of education and acquired skills play a significant role in determining an individual's labor supply. Higher levels of education and specialized skills often lead to higher productivity, higher wages, and increased labor supply.
4. Household Factors: Household responsibilities, such as caregiving and household chores, can affect labor supply decisions, particularly for individuals with family obligations. The availability of affordable childcare or support from family members can impact the ability to participate in the labor market.
5. Taxation and Government Benefits: Tax rates and the structure of government benefits can influence labor supply decisions. High marginal tax rates may reduce the incentive to work additional hours, while generous government benefits may create disincentives to seek employment.

Saving Decision:

Saving refers to the act of setting aside a portion of income or resources for future use or investment rather than immediate consumption. Here are some factors that influence saving decisions:

1. Income Level: Higher income levels generally allow individuals to save more, as they have greater financial resources available beyond immediate consumption needs.
2. Future Expectations: Individuals' expectations about future income, expenses, and financial needs can influence their saving decisions. Positive expectations, such as anticipated income growth or upcoming major expenses, may incentivize higher savings.
3. Interest Rates: Interest rates can affect saving decisions by influencing the return on savings. Higher interest rates may encourage individuals to save more, as they can earn greater returns on their savings.
4. Financial Literacy: Financial knowledge and understanding of savings and investment options can impact saving decisions. Individuals with higher financial literacy are more likely to make informed saving choices and allocate their resources effectively.
5. Life Stage and Goals: Saving decisions can vary across different life stages and personal goals. Younger individuals may focus on saving for education, buying a house, or starting a family, while older individuals may prioritize retirement savings or preserving wealth.
6. Economic Stability and Uncertainty: Economic conditions and the level of economic stability or uncertainty can influence saving decisions. During periods of economic instability or uncertainty, individuals may increase their savings as a precautionary measure.

It's important to note that labor supply and saving decisions can vary across individuals and are influenced by a combination of economic, personal, and societal factors. Economic theories and models provide frameworks for understanding these decisions, but individual preferences and circumstances can greatly impact the choices individuals make regarding labor supply and saving.

Function of money

Money serves several important functions in an economy. Here are the main functions of money:

• Medium of Exchange: Money acts as a widely accepted medium of exchange that facilitates transactions. It serves as a common medium through which goods, services, and resources can be bought and sold. By eliminating the need for barter, money makes transactions more efficient and convenient.

• Unit of Account: Money provides a standardized unit of measurement for the value of goods, services, and assets. It allows for the comparison and valuation of different items and facilitates price determination. Money acts as a common denominator that simplifies economic calculations and facilitates economic decision-making.

• Store of Value: Money serves as a store of value, allowing individuals and businesses to save wealth for future use. Money can be held over time and retains its purchasing power. While the value of money may be eroded by inflation or other economic factors, it generally provides a relatively stable way to store wealth compared to perishable or non-durable goods.

• Standard of Deferred Payment: Money enables transactions involving future obligations or debts. It serves as a standard of deferred payment, allowing individuals and businesses to make agreements for future payments and debts. Contracts, loans, mortgages, and credit transactions rely on the expectation that money will retain its value over time.

• Means of Wealth Transfer: Money serves as a means of transferring wealth from one party to another. It allows for the transfer of assets, payment of wages, settlement of debts, and redistribution of resources. Money facilitates economic transactions across geographical boundaries and supports economic activity at various levels.

• Facilitates Specialization and Division of Labor: Money enables specialization and the division of labor in an economy. By acting as a medium of exchange, it allows individuals and businesses to focus on their core competencies and trade for the goods and services they require. This promotes efficiency, productivity, and economic growth.

These functions of money collectively contribute to the smooth functioning of an economy by facilitating transactions, providing a measure of value, enabling savings, supporting economic stability, and promoting economic specialization and efficiency.

Quantity theories of money

The quantity theories of money are economic theories that establish a relationship between the quantity of money in circulation and key economic variables such as prices, output, and economic activity. Two prominent quantity theories of money are the Quantity Theory of Money (QTM) and the Cambridge Quantity Theory of Money. Here's an explanation of these theories:

Quantity Theory of Money (QTM):

The Quantity Theory of Money, often associated with classical economics, posits a direct relationship between the quantity of money in an economy and the price level. The basic equation of the QTM is:

M * V = P * T

where:

M = Money supply

V = Velocity of money (the average number of times a unit of currency is used in transactions during a given period)

P = Price level

T = Transaction volume or the quantity of goods and services exchanged

According to the QTM, if the money supply increases while velocity and transaction volume remain constant, prices will rise to maintain the equilibrium. This theory suggests that changes in the money supply have a proportional impact on the price level. Therefore, increasing the money supply excessively can lead to inflation, while reducing the money supply can result in deflation.

Cambridge Quantity Theory of Money:

The Cambridge Quantity Theory of Money builds upon the QTM but incorporates the role of money demand and the interest rate. It emphasizes the demand for money as a medium of exchange and a store of value. The basic equation of the Cambridge Quantity Theory of Money is:

M * V = P * Y

where:

M = Money supply

V = Velocity of money

P = Price level

Y = Real output or income

In this theory, the focus shifts from transaction volume (T) to real output (Y). It suggests that changes in the money supply can affect the price level and/or real output, depending on how individuals and businesses adjust their money holdings and spending patterns. The velocity of money is seen as more flexible and influenced by factors such as changes in technology, financial innovations, and the availability of credit.

It's important to note that while the quantity theories of money provide insights into the relationship between money and key economic variables, they are simplifications of complex economic systems. Other factors, such as changes in productivity, supply shocks, expectations, and institutional factors, can also influence prices and economic outcomes. Therefore, the quantity theories of money are subject to ongoing debate and refinement in economic analysis.

Determination of money supply and demand

The determination of money supply and demand in an economy involves various factors and influences. Here's an explanation of the key factors that affect the determination of money supply and demand:

Money Supply:

The money supply is determined by the actions of central banks and commercial banks. Central banks have the primary authority to control and regulate the money supply in an economy. They use various monetary policy tools to influence the money supply, including:

1. Open Market Operations: Central banks buy or sell government securities in the open market to inject or withdraw money from the banking system. Purchasing government securities increases the money supply, while selling them decreases it.
2. Reserve Requirements: Central banks establish reserve requirements, which determine the proportion of deposits that banks must hold as reserves. Lowering reserve requirements increases the amount of money banks can lend, thus expanding the money supply.
3. Discount Window Lending: Central banks provide short-term loans to commercial banks through the discount window. By adjusting the interest rates charged on these loans, central banks can encourage or discourage borrowing by commercial banks, thereby affecting the money supply.
4. Commercial banks also play a role in the money supply through their lending and deposit activities. When commercial banks create loans, they effectively increase the money supply by creating new deposits in the banking system.

Money Demand:

Money demand refers to the desire of individuals and institutions to hold money for transactions, precautionary, and speculative purposes. The factors influencing money demand include:

1. Transactional Demand: Individuals and businesses hold money to facilitate daily transactions, such as purchasing goods and services. The level of money demand for transactional purposes depends on the frequency and value of transactions conducted by economic agents.
2. Precautionary Demand: Money is also held as a precautionary measure to meet unexpected expenses or emergencies. The level of money demand for precautionary purposes depends on individuals' income stability, financial confidence, and the availability of alternative sources of liquidity.
3. Speculative Demand: Money can be held as a store of value, particularly in times of uncertainty or when alternative investment opportunities are less attractive. The level of money demand for speculative purposes depends on interest rates, expected returns on alternative investments, and individuals' risk preferences.

The interest rate plays a crucial role in influencing money demand. When interest rates are high, the opportunity cost of holding money increases, leading to a decrease in money demand. Conversely, when interest rates are low, the opportunity cost of holding money decreases, resulting in an increase in money demand.

The interaction between money supply and money demand determines the equilibrium level of the money market. If money supply exceeds money demand, individuals and institutions may attempt to shift their excess money balances into other assets, leading to potential inflationary pressures. Conversely, if money demand exceeds money supply, individuals may reduce spending and investment, potentially leading to deflationary pressures.

Central banks monitor the dynamics of money supply and demand to guide their monetary policy decisions and maintain price stability and overall economic stability in an economy.

Credit creation tools of monetary policy

Credit creation refers to the process by which banks and financial institutions expand the money supply through the creation of credit or loans. Central banks use various tools to influence credit creation as part of their monetary policy objectives. Here are some common credit creation tools used by central banks:

• Reserve Requirements: Central banks establish reserve requirements, which mandate the percentage of deposits that banks must hold as reserves. By changing these requirements, central banks can influence the amount of money banks can lend. Lowering reserve requirements increases the excess reserves available to banks, allowing them to create more loans and expand credit.

• Open Market Operations: Central banks conduct open market operations by buying or selling government securities, such as treasury bills or bonds, in the open market. When central banks purchase government securities, they inject money into the banking system, providing banks with additional reserves to support increased lending and credit creation.

• Discount Window Lending: Central banks provide short-term loans to commercial banks through the discount window. By adjusting the interest rates charged on these loans, central banks can influence the cost of borrowing for commercial banks. Lowering the discount rate makes borrowing cheaper for banks, encouraging them to borrow more from the central bank and subsequently increase credit creation.

• Interest Rate Policy: Central banks use their control over short-term interest rates to influence credit creation. By adjusting the target interest rates, such as the federal funds rate in the case of the U.S. Federal Reserve, central banks influence the cost of borrowing in the interbank market. Changes in interest rates can impact the cost of funds for banks, influencing their lending activities and credit creation.

• Moral Suasion: Central banks may use moral suasion or informal communication channels to influence the lending behavior of banks. They can provide guidance, recommendations, or suggestions to banks on lending practices, loan quality, or targeted sectors. Moral suasion can be a non-binding tool used to encourage or discourage specific lending activities.

• Credit Controls and Macroprudential Policies: In certain circumstances, central banks may impose credit controls or macroprudential policies to directly influence credit creation. These measures can include loan-to-value (LTV) ratio requirements, debt-to-income (DTI) limits, or sector-specific lending restrictions. These policies are aimed at managing systemic risks, promoting financial stability, and preventing excessive credit expansion.

It's important to note that the effectiveness and implementation of these credit creation tools may vary across different countries and central banks. Central banks carefully assess economic conditions, inflationary pressures, financial stability concerns, and other factors when determining the appropriate use of these tools to achieve their monetary policy objectives.

Here are some multiple-choice questions (MCQs) related to market and price determination:

1. In a market economy, prices are primarily determined by:

a) Government regulations

b) Consumer preferences

c) Producer costs

d) Market forces of supply and demand

2. The law of demand states that as the price of a good or service increases:

a) Quantity demanded increases

b) Quantity demanded decreases

c) Quantity supplied increases

d) Quantity supplied decreases

3. The law of supply states that as the price of a good or service increases:

a) Quantity demanded increases

b) Quantity demanded decreases

c) Quantity supplied increases

d) Quantity supplied decreases

4. Equilibrium price in a market is determined by:

a) Government price controls

b) Producer costs

c) Consumer preferences

d) The intersection of supply and demand

5. Surplus occurs in a market when:

a) Quantity demanded exceeds quantity supplied

b) Quantity supplied exceeds quantity demanded

c) Prices are set above the equilibrium price

d) Prices are set below the equilibrium price

6. Shortage occurs in a market when:

a) Quantity demanded exceeds quantity supplied

b) Quantity supplied exceeds quantity demanded

c) Prices are set above the equilibrium price

d) Prices are set below the equilibrium price

7. Price elasticity of demand measures:

a) The responsiveness of quantity demanded to changes in price

b) The responsiveness of quantity supplied to changes in price

c) The impact of consumer income on demand

d) The impact of consumer preferences on demand

8. Price elasticity of supply measures:

a) The responsiveness of quantity demanded to changes in price

b) The responsiveness of quantity supplied to changes in price

c) The impact of producer costs on supply

d) The impact of technology on supply

9. In a competitive market, if there is an increase in demand and no change in supply, the equilibrium price will:

a) Increase

b) Decrease

c) Remain unchanged

d) Cannot be determined without additional information

10. In a competitive market, if there is a decrease in supply and no change in demand, the equilibrium price will:

a) Increase

b) Decrease

c) Remain unchanged

d) Cannot be determined without additional information

Answers:

1. d) Market forces of supply and demand
2. b) Quantity demanded decreases
3. c) Quantity supplied increases
4. d) The intersection of supply and demand
5. b) Quantity supplied exceeds quantity demanded
6. a) Quantity demanded exceeds quantity supplied
7. a) The responsiveness of quantity demanded to changes in price
8. b) The responsiveness of quantity supplied to changes in price
9. a) Increase
10. a) Increase

For MCQs refer to these :

 mcqs-on-forms-of-market-and-price-determination

 class 12 economics forms market and price determination mcqs

 MCQs Price Determination Economics Class 12

 Price Determination and Simple application class-11