MARKET EQUILIBRIUM
Q) What is the main idea of the paragraph?
Answer: The main idea of the paragraph is that market equilibrium is a situation where the quantity of a commodity that buyers are willing to buy is equal to the quantity that sellers are willing to sell.
Q) What are the two main factors that affect market equilibrium?
Answer: The two main factors that affect market equilibrium are supply and demand. Supply is the quantity of a commodity that sellers are willing to sell at a given price, and demand is the quantity of a commodity that buyers are willing to buy at a given price.
Q) What happens when there is an excess supply of a commodity?
Answer: When there is an excess supply of a commodity, the price of the commodity will fall. This is because sellers are willing to sell more of the commodity than buyers are willing to buy, so they have to lower their prices in order to attract buyers.
Q) What happens when there is an excess demand for a commodity?
Answer: When there is an excess demand for a commodity, the price of the commodity will rise. This is because buyers are willing to buy more of the commodity than sellers are willing to sell, so sellers can raise their prices in order to make more money.
Q) What is the role of equilibrium in a market economy?
Answer: Equilibrium is important in a market economy because it helps to ensure that the right amount of goods and services are produced. When the market is in equilibrium, there is no excess supply or demand for any commodity, so the market is able to function efficiently.
Q) What is the main principle of free entry and exit in perfect competition?
Answer: The main principle is that firms can freely enter and leave the market, leading to an equilibrium price where price equals minimum average cost.
Q) How does free entry and exit affect equilibrium price and quantity?
Answer: It ensures the equilibrium price equals the minimum average cost, regardless of demand shifts. Quantity adjusts based on demand changes (increases with a rightward shift, decreases with a leftward shift).
Q) What happens in a perfectly competitive market with a price ceiling?
Answer: A shortage and black market can emerge because the fixed price is below equilibrium, creating excess demand that suppliers can't meet.
Q) What might be the consequences of price rationing for consumers?
Answer: Long queues, dissatisfaction with limited quantities, and the potential for a black market driven by higher prices.
Q) What happens to supply and demand when a price floor is set above equilibrium?
Answer: Excess supply occurs because the imposed price is higher than what buyers are willing to pay, leading to potential government intervention to buy the surplus.
