Economics — Part 2 MCQs with Explanations

A decrease in demand causes the equilibrium price to Fall. A decrease in demand and an increase in supply will cause a fall in equilibrium price, but the effect on equilibrium quantity cannot be determined.

Price of a product falls by 10% and its demand rises by 30%. The elasticity of demand is 3.

The aspect of taxation which is related to normative economics is Equity of tax.

If elasticity of demand is very low, it shows that the commodity is necessity and has little importance in total budget.

An increase in the supply of a commodity is caused by Improvements in technology, Fall in the prices of other commodities and Fall in the prices of factors of production.

When price is below equilibrium level, there will be Shortage of commodity in the market.

The following are causes of shift in demand except Change in price. A shift in the demand curve is when a determinant of demand, other than price, changes. A shift to the left means demand drops, and vice-versa.

Demand for a commodity refers to a quantity of the commodity demanded at a certain price during any particular period of time.

Elasticity of supply refers to the degree of responsiveness of supply of a commodity to changes in its Price. Elasticity of supply measures the degree of responsiveness of quantity supplied to a change in own price of the commodity. It is also defined as the percentage change in quantity supplied divided by percentage change in price.

When demand is perfectly inelastic, an increase in price will result in an increase in total revenue.

The cost on one thing in terms of the alternative given up is known as Opportunity cost. Opportunity cost is an economics term that refers to the value of what you have to give up in order to choose something else.

When equilibrium price rises but equilibrium quantity remains unchanged, the cause is supply decreases and demand increases. As price increases, it serves as an incentive for suppliers to increase supply and also leads to a fall in demand. It is important to realize that these processes continue to operate until a new equilibrium is established.

If demand is unitary elastic, a 25% increase in price will result in 25% decrease in quantity demanded.

Contraction of demand is the result of Increase in the price of the commodity concerned. The demand for a commodity changes due to a change in price. It is called extension and contraction of demand. When there is decrease in price of commodity there is in increase in demand of that commodity.

According to M. Kalecki, the true measure of the degree of monopoly power is the Ratio between price and marginal cost. Monopoly is the form of market organisation in which there is a single fir m selling a commodity for which there are no close substitutes.

Price of a product is determined in a free market by both demand and supply. In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

When cross elasticity of demand is a large positive number, one can conclude that the good is complement. Two goods that complement each other have a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.

Only price changes and all others like price of related goods, income, taste and preference remain constant, while drawing an individual's Demand curve for a commodity.

Absence of transport cost is not an essential condition of pure competition. If the two conditions of pure competition are fulfilled, there can be no question of monopolistic control. In perfect competition, apart from the absence of monopoly, some other conditions are also essential, e.g., free entry and exit, the absence of transport cost, perfect knowledge.

In market equilibrium, supply is vertical line. The downward sloping demand curve shifts to the right, then Price will rise.

If demand is inelastic, a change in the price will change total revenue in same direction. When demand is price inelastic, a given percentage change in price results in a smaller percentage change in quantity demanded. That implies that total revenue will move in the direction of the price change: an increase in price will increase total revenue, and a reduction in price will reduce it.

Tea and coffee pairs of commodities is an example of substitutes. This is a negative relationship, as is true for all pairs of goods that are complements.

Prices of substitutes should not change is the assumption of law of demand. For example if the price of Coke is decreased then it will lead to fall in the demand for Pepsi even when the price of Pepsi has remain constant as Pepsi is close substitute of Coke, in the same way if the price of Coke is increased than it will lead to rise in demand for Pepsi.

The shape of the demand curve faced by a firm under perfect competition is Horizontal. The demand curve faced by a firm in a perfectly competitive market is infinitely elastic. Graphically, this means that it is a horizontal line at the market price.

Ten rupees is the equilibrium price for good X. If government fixes the price at Rs.5, there is a shortage.

A rise in supply and demand in equal proportion will result in no change in equilibrium price and increase in equilibrium quantity.

Zubair has a special taste for college canteen's hotdogs. The owner of the canteen doubles the prices of hotdogs. Zubair did not respond to the increase in prices and kept on demanding the same quantity of hotdogs. His demand for hotdogs is perfectly inelastic.

In the case of a straight-line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be 1.

MC=MR is the first-order condition for the profit of a firm to be maximum. The Profit Maximization Rule states that if a firm chooses to maximize its profits, it must choose that level of output where Marginal Cost (MC) is equal to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other words, it must produce at a level where MC = MR.

Many buyers and many sellers is one of the assumptions of perfect competition. Yes, in a perfectly competitive market, there are many buyers and many sellers. As a consequence, they have no market power and cannot influence the market price. This is an assumption of the model of perfect competition.

Price and demand are positively correlated in case of Giffen goods. A Giffen good is a product for which demand increases as the price increases and falls when the price decreases.

The coefficient of price-elasticity of demand is smaller than one when the percentage increase in the quantity of a commodity demanded is smaller than the percentage fall in its price.

In Monopoly market structure the degree of control over the price of its product by a firm very large. In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market. It can set any price it wishes since it has all the market power.

A firm under perfect competition is Price taker. In perfect market conditions (also called perfect competition) a firm is a price taker because other firms can enter the market easily and produce a product that is indistinguishable from every other firm's product. This makes it impossible for any firm to set its own prices.

The elasticity of demand of durable goods is greater than unity. Price elasticity of demand for durable goods is generally more elastic in short run than in long run. That is, quantity demanded is more sensitive to price changes of such durable goods in short run and not so much in the long run.

In the case of an inferior good, the income elasticity of demand is Negative. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the demand and may lead to changes to more luxurious substitutes.

Demand curve is the other name that is given to the average revenue curve. Average revenue curve is often called the demand curve due to its representation of the product's demand in the market.

Wheat market comes closest to perfect market. A perfectly competitive firm is called a price taker, because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market. When a wheat grower wants to know what the going price of wheat is, he or she has to go to the computer or listen to the radio to check.

Mr. Raees Ahamd bought 50 litres of petrol when his monthly income was Rs.25000. Now his monthly income has risen to Rs.50,000 and he purchases 100 litres of petrol. His income elasticity of demand for petrol is 1.

Total utility is maximum when Marginal utility is zero. It is based in the law of diminishing marginal utility which says 'as more and more units of a good are consumed, MU i.e level of satisfaction derived from each successive unit goes on falling because desire for that commodity tend to fall.