 ## NCERT Solutions for Class 12th Microeconomics Chapter 5 – Market Competition

National Council of Educational Research and Training (NCERT) Book Solutions for class 12th
Subject: Economics
Chapter: Chapter 5 – Market Competition

These Class 12th NCERT Solutions for Economics provide detailed, step-by-step solutions to all questions in an Economics NCERT textbook.

for Class 12 Economics Notes.

Class 12th Economics Chapter 5 – Market Competition NCERT Solution is given below.

Question 1. Explain market equilibrium.

Answer Market Equilibrium is a situation where the quantity demanded becomes equal to quantity supplied, corresponding to a particular price.
It means Market demand = Market supply

Question 2. When do we say there is excess demand for a commodity in the market?

Answer When the market demand exceeds market supply of a commodity at a given price then there IS an excess demand for a commodity in the market.

Question 3. When do we say that there is excess supply for a commodity in the market?

Answer When the market supply of a commodity is greater than market  demand at a given price then there is an excess supply for a commodity in
the market.

Question 4. What will happen if the price prevailing in the market is
(i) above the equilibrium price?
(ii) below the equilibrium price?

Answer
(I) If the price prevailing in the market is above equilibrium price, demand will be less than supply, It means a situation of excess supply in the  Market.
(ii) If the price prevailing in the market is below the equilibrium price, demand will be more than supply, It means a situation of excess demand,

Question 5. Explain how price in determined in a perfectly competitive market with fixed number of firms,

Answer Equilibrium price is determined by the market forces of demand and supply in a perfectly competitive market. Where market equilibrium IS
determined when market demand is equal to market supply, under perfect  competition,
Market demand is the sum total of demand for a commodity by all the
(i) buyers In the market. Its curve slopes downward due to law of demand,
(ii) Markel supply is the sum total of supplies of a commodity by all the firms in the market. Its curve slopes upwards due to law of supply Considering market demand schedule on the one hand and market supply schedule on the other, identify equilibrium price on the one where Market demand = Market supply. It means market demand curve and market supply curve intersect each other.

 Price of commodity Market Demand market Supply 5 100 20 7 80 40 9 60 60 11 40 80 15 20 100 Question 6. Suppose the price at which equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now,if we allow for free entry and exit of firms, how win the market price adjust to it?

Answer The equilibrium price is Rs 9 in the above figure of 0-5 which is above the minimum of average cost It Implies that firm is earning super normal profit. This situation attracts new firms, the industry supply of output also increases New firms will continue to enter the industry which
leads the price to fall until it becomes equal to minimum average cost.At this stage firms starts earning normal profit.

Question 7. At what level of price do  the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is
equilibrium quantity determined in such a market?

Answer Equilibrium price will always be equal to minimum average cost in the long run as due to the free entry and exit of the firms, all the firms earn zero economic profit. Question 8. Howis the equilibrium number of firms determined in a market where entry and exit is permitted?

Answer With the free entry and exit, the equilibrium number of firms determined in a market by equilibrium quantity supply per firm
Equilibrium no of firms = Equilibrium quantity/ supply of each firm .

Question 9. How are equilibrium price and quantity affected when income of the consumers
(a) increase?
(b) decrease?

Answer
(i) When income of the consumers increase then demand will also increase. But it is possible only in case of normal goods As result there is an increase in both equilibrium price and equilibrium quantity.
Diagram (i) (ii) When income of consumer decrease. then demand will also decrease (in case of normal goods only). As a result demand curve shifts leftward and both equilibrium price and quantity will decrease.
Diagram (ii) Question 10. Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.

Answer Shoes and socks are complementary goods An increase In the price 0: shoes will cause a decrease in demand of socks It will lead to
excess supply. This leads to competition among sellers, which reduces the price. Fall in price leads to decrease in supply and rise In demand These
changes continue till supply and demand become equal at a new equilibrium price. As a result there is a decrease In demand of both shoes and socks Question 11. How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

Answer Tea and coffee are substitute goods. A change in price of coffee will directly influence the equilibrium price and quantity of tea. As a result
the demand curve of tea will shift to the right (in case of an Increase in the price of coffee). The supply curve of tea remain same this will lead to an
Increase in price 0 tea (P1) and increase in quantity (X1). Question 12. How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?

Answer A change in price of Inputs will directly affect the equilibrium price and quantity of goods.  An increase in the price of an input, increase the unit cost of production of the commodity. This will cause a decrease in the supply of a commodity and leads to a leftward shift of supply curve But the demand curve will remain. the same because market price of commodity will rise and quantity As a result supply will decrease and supply curve shift leftward as in figure Question 13. If the price of a substitute (y) of goods (x) increases, what impact does it have on the equilibrium price and quantity of good x? Answer An increase in price of a substitute (y) of goods (x) will directly affect the equilibrium price and quantity of goods (x). Rise in price of (y)
will relatively cheaper and demand for (x) will rise. It will lead to excess demand. It will lead to increase in both equilibrium price and equilibrium
quantity.

Question 14. Compare the effect of shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.

Answer It demand increase. then it creates excess demand tor the  goods. It will lead to increase in pnce and in supernormal profit. This will attract entry of new firms and It will lead to minimum AC Question 15. Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

Answer As a result equilibrium price remains unchanged. When both demand and supply of a commodity increase the equilibrium quantity will increase but equilibrium price mayor may not be affected. There may be following three situations (I) The equilibrium price will remain the same, If demand and supply of a commodity increase in equal ratio.

Diagram as (ii) Equilibrium price will rise, if both demand and supply increase but Increase in demand is more than the increase in supply.

Diagram as (iii) Equilibrium price will fall, if both demand and supply increase but the increase in demand is less than increase in supply.

Diagram as Question 16. How are the equilibrium price and quantity affected when

(a) both demand and supply curves shift in the same directions?
(b) demand and supply curves shift in opposite directions?

Answer (a) When both demand and supply curves shift In same direction (shift to left) the equilibrium quantity will fall but equilibrium price may or may not be affected There may be three situations (i) Equilibrium price will go up. when decrease In demand is less than decrease in supply.

Diagram (i) (ii) Equilibrium price will fall. when decrease in demand is more than decrease in supply.

Diagram (ii) (iii) No change in equilibrium price. when decrease in demand is equal to decrease In supply.

Diagram (b) When demand and supply curves shift in opposite directions (demand curve shift to left and supply curve to the right), the equilibrium price will fall but the equilibrium quantity mayor may not be affected, There may be three situations
(i) The equilibrium quantity will rise, when decrease in demand is less than increase in supply,

Diagram (i) (ii) The equilibrium quantity will fall, when decrease in demand is more than increase In supply,

Diagram (ii) (iii) No change in equilibrium quantity, when decrease in demand is equal to the increase in supply.

Diagram (iii) Question 17. In what respect do the supply and demand curves in the labour market differ from those in the goods market?

Answer
(i) Supply of labour is provided by households whereas demand for commodities is from the households.
(ii) The supply of commodities is by the firms, whereas demand for labour is by the firms.

Question 18. How is the optimal amount of labour determined in a perfectly competitive market?

Answer The optimal amount of labour determined in a perfectly competitive market as VMPL=W
where W = Wage rate
VMPL = Value of Marginal Product of Labour Here DL = SL (Demand and Supply of labour) thus the OL is the optimal amount of labour at Equilibrium point E.

Question 19. How is the wage rate determined in a perfectly competitive labour market?

Answer The wage rate determined in a perfectly competitive labour market by the intersection of demand and supply of labour DL = SL‘ it occurs equilibrium at point E. It define equilibrium wage and optimal amount of labour. Therefore. OW IS the wage rate in a perfectly competitive market.

Question 20. Can you think of any commodity on which price ceiling is imposed in India? What may be the consequences of price ceiling?

Answer Price ceiling  means the maximum price In this condition the market price below the equilibrium price consequences of price ceiling are
(i) Excess demand
(ii) Emergence of black market
(iii) Rationing due to shortage of supply of the commodity

Question 21. A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exit is permitted.Explain.

Answer Under the long run, when free entry and exit is permitted, there is total changes in quantity but no change in equilibrium price. It happens
when the demand curve intersects tile supply curve at equilibrium point. then Price =minimum Average cost. As a result demand curve shift upward,
It effect, there is no change in price but quantity rises When the number of firms is fixed, the supply curve is upward and demand curve is downward sloping. It results the demand effect more in price than quantity.

Question 22. Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking arguments on rent by imposing control on rent, what impact will it have on the market for apartments?

Answer If the government imposes price ceiling by Rent Control Act (the maximum price) that can be charged as the rent of apartment It results
decline in equilibrium price due to

(i) excess demand of apartments.
(ii) black marketing by builders.

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