CLASS 12 PPT ON PRICE DETERMINATION AND SIMPLE APPLICATIONS MADE BY AMITESH YADAV

2.  Demand, describing the behaviour of
consumers in the market
 Supply, describing the behaviour of
firms in the market
 Market Equilibrium, connecting
demand and supply and describing
how consumers and producers
interact in the market.

3.  Perfect Competition is a market
structure where each firm is a price-
taker and price is determined by the
market forces of demanded and
supply. We know, equilibrium is
determined when market demand is
equal to market supply.

4.  Market Demand is the sum total of
demand for a commodity by all the
buyers in the market. Its curve
slopes downwards due to operation
of law of demand.

5.  Market Supply is the sum total of
supplies of a commodity by all the
producers in the market . Its curves
slopes upwards due to operation of
law of supply.

6.  Market Equilibrium is determined
when the quantity demanded of a
commodity becomes equal to the
quantity supplied.

7.  In Fig Market Demand
curve DD and market
supply curve SS
intersect each other at
point E, which is the
market equilibrium . At
this point, Rs6 is
determined as the
equilibrium price and 60
chocolates as the
equilibrium Quantity.
This equilibrium price
and quantity has a
tendency to persist.

8.  Any price above Rs6 is not the
equilibrium price as the resulting
surplus, i.e. excess supply would cause
competition among sellers. In order to
sell the excess stock, price would come
down to the equilibrium price of Rs 6.
 Any price below Rs6 is also not the
equilibrium price as due to excess
demand, buyers would be ready to pay
higher price to meet their demand. As a
result, price would rise upto the
equilibrium price of Rs 6.

9.  Each firm is a price-taker industry is the price-
maker.
 Each firm earns only normal profits in the long
run ( as discussed in the previous chapter).
 Decisions of consumers and producers in the
market are coordinated through free flow of
prices known as price mechanism.
 It is assumed that both law of demand and law
of supply operate.
 Equilibrium Price, there is neither shortage nor
excess of demand and supply.
 At equilibrium price, there is neither shortage
nor excess of demand and supply.
 Equilibrium Quantity is the quantity demanded
and supplied at the equilibrium price.

10.  Excess Demand refers to a situation,
when quantity demanded is more
than quantity supplied at the
prevailing market price.

11.  The excess demand of Q1,Q2
will lead to competition
amongst the buyers as each
buyers as each buyer wants
to have the commodity.
 Buyers would be ready to
pay higher price to meet
their demand, which will
lead to rise in price.
 With increase in price,
market demand will fall due
to law of demand and
market supply will rise due
to law of supply.
 The price will continue to
rise till excess demand is
wiped out.

12.  Excess Supply refers to a situation,
where the quantity supplied is more
than the quantity demanded at the
prevailing market price.

13.  Excess Supply of Q1Q2 will
lead to competition amongst
sellers as each seller wants to
sell his product.
 Sellers would be ready to
charge lower price to sell the
excess stock, which will lead
to fall in price.
 With decrease in price,
market supply will fall due to
LAW OF DEMAND .
 The price will continue to fall
till excess supply is wiped out.
This is shown by diagram.
Eventually, price will decrease
to a level where market
demand becomes equal to
market supply at OQ and
equilibrium price of OP is
attained.

14.  Viable Industry refers to an industry
for which supply curve and the
demand curve intersect each other in
positive axes.

15.  In the viable
industry, supply
and demand curves
must intersect at
some positive point
as shown in Fig. As
seen in the given
diagram, both
demand and supply
curves intersect
each other in the
positive range of X-
axis and Y-axis.

16.  Non-Viable Industry refers to an
industry for which supply curve and
demand curve never intersect each
other in the positive axes.

17.  As seen in FIG ,
demand and
supply curve
never intersect
each other in
the positive
range of both
the axes

18.  Equilibrium price and equilibrium
quantity are determined when
quantity demanded is equal to
quantity supplied . So, if there is any
change, which leads to shift in
either demand curve or supply curve
or both, then equilibrium price and
equilibrium quantity are bound to
change.

19.  Change in price of complementary
goods
 Change in price of substitute goods
 Change in income(normal and inferior
goods)
 Change in tastes and preferences
 Expectation of Change in the price in
future
 Change in Population

20.  Change in prices of factors of
production
 Change in prices of other goods
 Change in the state of technology
 Change in the taxation policy
 Expectation of change in price in future
 Change in the goals of firms
 Change in the number of Firms

21.  Change in Demand or shift in the demand
curve occurs due to change in any of the
factors that were assumed constant under
the law of demand. The Change may be
either an 'Increase in Demand' or 'Decrease
in Demand'. Original Market equilibrium is
determined at point E, when the original
demand curve DD and supply curve SS
intersect each other. OQ is the equilibrium
quantity and OP is the equilibrium price.

22.  An Increase in demand (assuming no
change in supply) leads to a
rightward shift in demand curve
from DD to D1D1.

23.  When demand increases
to D1D1, it creates an
excess demand at the
old equilibrium price of
OP. This leads to a
competition among
buyers, which raises the
price. These change
continue till the new
equilibrium is
established at point E1.
As there is an increase
in demand only,
equilibrium price rises
from OP to OP1 and
equilibrium quantity
rises from OQ to OQ1.

24.  In case of decrease in demand
(supply remaining unchanged ),
demand curve shifts to the left from
DD to D2D2.

25.  When Demand decreases
to D2D2, it creates an
excess supply at the old
equilibrium price of OP.
This leads to competition
among sellers, which
reduces the price .
Decrease in price leads to
rise in demand and fall
in supply. These changes
continue till the new
equilibrium is established
at point E2. Equilibrium
price falls from OP to OP2
and equilibrium quantity
falls from OQ to OQ2

26.  Change in supply or shift in the supply
curve occurs due to change in any of
the factors constant under the law of
supply. The change may be either an
'Increase in Supply' or 'Decrease in
Supply'. Original Equilibrium is
determined at point E, when demand
curve DD and the original supply curve
intersect each other. OQ is the
equilibrium quantity and Op is the
equilibrium price.

27.  When there is an increase in supply,
demand remaining unchanged , the
supply curve shifts towards right
from SS to S1S1.

28.  These changes
continue till the
new equilibrium
is established at
point E1.
Equilibrium
price falls from
OP to Op1 and
equilibrium
quantity rises
from OQ to OQ1.

29.  When there is an decrease in supply,
demand remaining unchanged , the
supply curve shifts to the left from to
S2S2.

30.  These changes
continue till the
new established
at point E2.
Equilibrium
price rises from
OP to OP2 and
equilibrium
quantity falls
from OQ to OQ2.

31.  Demand and supply model is very
easy to use, when there is a change
in either demand or supply . However
, inreality, there are number of
situations which leads to
simultaneous changes in both
demand and supply.

32.  Both Demand and Supply decreases
 Both Demand and Supply increase
 Demand decreases and supply
increases
 Demand increases and supply
decreases

33.  Original Equilibrium is determined
at Point E, when the original demand
curve DD and the original supply
curve SS intersects each other. OQ is
the equilibrium quantity and OP is
the equilibrium price.

34.  When decrease in demand
is proportionately equal to
decrease in supply, then
leftward shift in demand
curve from DD to D1D1 is
proportionately equal to
leftward shift in demand
curve from SS to S1S1. The
new Equilibrium is
determined at E1. ASs
demand and supply
decrease in the same pro-
portion, equilibrium price
remains same at OP, but
equilibrium quantity falls
from OQ to OQ1.

35.  The new
equilibrium is
determined at E1,
equilibrium price
falls from OP to
OP1 and
equilibrium
quantity falls
from OQ to OQ1.

36.  The new
equilibrium is
determined at
E1, equilibrium
price rises from
OP to Op1
whereas,
equilibrium
quantity falls
from OQ to
OQ1.

37.  Original Equilibrium is determined
at point E , when the original
demand curve DD and the original
supply curve SS intersect each
other. OQ is the equilibrium quantity
and Op is the equilibrium price.

38.  The new
equilibrium is
determined at E1.
As both demand
and supply
increase in the
same proportion,
equilibrium price
remains the same
at Op, but
equilibrium
quantity rises
from OQ to OQ1.

39.  The new
equilibrium is
determined at
E1, equilibrium
price rises from
Op to Op1 and
equilibrium
quantity rises
from OQ to OQ1.

40.  The new
equilibrium is
determined at
E1, equilibrium
price falls from
OP to OP1
whereas,
equilibrium
quantity rises
from OQ to OQ1.

41.  The effect of simultaneous decreases
in demand and increase in supply on
equilibrium price and equilibrium
quantity is analyzed in the following
three cases:

42.  The new
equilibrium is
determined at
E1, equilibrium
quantity
remains the
same at OQ,
but equilibrium
price falls from
OP to Op1.

43.  The new
equilibrium is
determined at
E1, equilibrium
quantity falls
from OQ to OQ1
and equilibrium
price falls from
OP to OP1.

44.  The new
equilibrium is
determined at
E1, equilibrium
quantity rises
from OQ to OQ1
whereas,
equilibrium
price fall from
OP to OP1.

45.  The effect of increase in demand and
decrease in supply on equilibrium
price and equilibrium quantity is
discussed in the following three
cases:

46.  The new equilibrium
is determined at E1.
As the increase in
demand is
proportionately
equal to the
decreases in supply,
equilibrium
quantity remains
the same at OQ , but
equilibrium price
rises from OP to
OP1.

47.  The new equilibrium
is determined at E1.
As the increase in
demand is
proportionately
more than the
decrease in supply,
equilibrium quantity
rises from OQ to OQ1
and equilibrium
price rises from OP
to OP1.

48.  The new equilibrium
is determined at E1.
As the increase in
demand is
proportionately less
than the decrease in
supply, equilibrium
quantity fall from
OQ to OQ1 whereas,
equilibrium price
rises from OP to
OP1.

49.  The effect on equilibrium price and
equilibrium quantity in the following
four cases:
 Change in supply when Demand is
Perfectly Elastic
 Change in Demand when Supply is
Perfectly Elastic
 Change in Demand when Supply is
perfectly Inelastic
 Change in Supply when Demand is
Perfectly Inelastic

50.  When Supply is perfectly elastic, then
change in demand does not affect the
equilibrium price of the commodity. It only
changes the equilibrium quantity. Original
Equilibrium is determined at point E, when
the original demand curve DD and the
perfectly elastic supply curve SS intersects
each other. OQ is the equilibrium quantity
and OP is the equilibrium price.

51.  Supply Curve SS is a
horizontal straight
line parallel to the X-
axis. Due to increase
in demand for the
product, the new
equilibrium is
established at E1.
Equilibrium quantity
rises from OQ to OQ1
but equilibrium price
remains same at OP as
supply is perfectly
elastic.

52.  Supply Curve SS is a
horizontal straight
line parallel to the x-
axis. Due to decrease
in demand, the new
equilibrium is
established at E2.
Equilibrium quantity
falls from OQ to OQ2
but equilibrium price
remains the same at
Op as supply is
Perfectly elastic.

53.  Original Equilibrium is determined
at point E, when the perfectly elastic
demand curve DD and the original
supply curve SS intersect each other.
OQ is the equilibrium quantity and
Op is the equilibrium price.

54.  Demand Curve DD is a
horizontal straight line
parallel to the X-axis.
Due to increase in supply
for the product, the new
equilibrium is
established at E1.
 Equilibrium quantity
rises from OQ to OQ1
but equilibrium price
remains the same at OP
as demand is perfectly
elastic.

55.  Demand curve DD is a
horizontal straight
line parallel to the x-
axis. Due to decrease
in supply for the
product, the new
equilibrium is
established at E2.
Equilibrium quantity
falls from OQ to OQ2
but equilibrium price
remains same at OP
due to perfectly
elastic demand.

56.  When Supply is perfectly inelastic,
then change in demand does not
affect the equilibrium quantity. It
only changes the equilibrium price.
The change may be either an
'Increase in Demand' or 'Decrease in
Demand'.

57.  Supply curve SS is a
vertical straight line
parallel to the Y-axis
. Due to increase in
demand for the
product, the new
equilibrium is
established at E1.
Equilibrium price
rises from OP to OP1
but equilibrium
quantity remains the
same at OQ as supply
is perfectly inelastic.

58.  Supply curve SS is a
vertical straight line
parallel to the Y-
axis. Due to decrease
in demand, the new
equilibrium is
established at E2.
Equilibrium price
falls from OP to OP2
but equilibrium
quantity remains the
same at OQ as the
supply is perfectly
inelastic

59.  When demand is perfectly inelastic,
then change in supply does not
affect the equilibrium price. The
change may be either an 'Increase in
Supply' or 'Decrease in Supply'.

60.  Demand curve DD is
a vertical straight
line parallel to the
Y-axis. Due to
increase in supply
for the product, the
new equilibrium is
established at point
E1. Equilibrium
price falls from OP
to OP1 but
equilibrium quantity
remains the same at
OQ as demand is
perfectly inelastic.

61.  Demand curve DD is
a vertical straight
line parallel to the
Y-axis. Due to
decrease in supply
for the product, the
new equilibrium is
established at Point
E2. Equilibrium
price rises from OP
to OP2 but
equilibrium
quantity remains
the same at OQ as
demand is perfectly
inelastic.

62.  Price Ceiling
 Price Floor

63.  It refers to fixing the maximum price
of a commodity at a lower level than
the equilibrium price.

64.  The Equilibrium price of OP is
very high and many poor people
are unable to afford wheat at
this price.
 As wheat is an essential
commodity, government
interferes and fixes the
maximum price(Known as Price
Ceiling) at OP1 which is less
than the equilibrium price OP.
 At this controlled price(OP1),the
quantity demanded (OQD)
exceeds the quantity
supplied(OQs) by QsQD.
 It creates a shortage of MN and
some consumers of wheat go
unsatisfied. To meet this excess
demand, government may
enforce the rationing system.

65.  A black market is any market in
which the commodities are sold at a
price higher than the maximum price
fixed by the government.

66.  Consumers have to stand in long
queues to buy goods from ration
shops. Sometimes, commodities are
not available in the ration shops or
goods are of inferior quality.

67.  It refers to the minimum price(above
the equilibrium price), fixed by the
government, which the producers
must be paid for their produce.

68.  Protect the producer’s
interest and to provide
incentive for further
production, government
declares OP2 as the minimum
price (Known as Price Floor)
which is more than the
equilibrium price of OP.
 At this support price(OP2), the
quantity supplied (OQs)
exceeds the quantity
demanded (OQD) by QsQD.
 This creates a situation of
surplus in the market which
is equivalent to MN in the
diagram. The excess supply
may be purchased by the
government either to increase
its buffer stocks or for
exports.

69.  Under Minimum Wage Legislation,
the government aims to ensure that
wage rate of labour does not fall
below a particular level and
minimum wages are set above the
equilibrium wage level (as discussed
in case of price floor).