CBSE class 11 microeconomics notes chapter 11 Price Determination with simple Applications

Chapter  11  Price Determination With Simple Applications

Price Determination: In an economy either the price are determined by the government or by market forces of demand and supply.
Market Equilibrium: It refers to the situation where the market demand and market supply of good is at equilibrium.
Equilibrium price: Price determined by the intersection of market and market supply curves.
Equilibrium quantity: Quantity determined by the intersection of demand and supply curves.
Determination of equilibrium price: Price of a commodity determined by the intersection of demand and supply in the industry.
Market Demand: It is the sum total of all the individual demand in an economy.
Market supply: It is the sum total of all the individual supply in an economy.
Case-1 : When there is Excess demand 


This means market price is lower than the equilibrium price.
In such a situation the prices would be pushed upward due to which suppliers would like supply more(expansion o Q.S) where as buyers would demand less at  higher prices(contraction of Q.D), this would set the equilibrium price.

Case-2 : When there is excess supply

This means market price is higher than equilibrium price.
In such a situation when prices are higher than equilibrium price, the supply would fall, pilling up of stock and now to clear off the stock he would reduces the prices, this would lead to expansion of Q,D and contraction of Q.S and ultimately equilibrium would be attained.

Diagram And chain Effects

(1). Increase in demand:

Chain effect: 

An increase in demand leads to a rightward shift in demand curve from D to D1. When demand increases to D1, it creates an excess demand at the old equilibrium price of OP. this leads to competition among buyers,which raises the price. increases in price leads to rise in supply and fall in demand. these changes 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.


(2).Decreases in demand

Chain effect:

in case of decrease in demand, demand curve shifts to the left from D to D1. when demand decreases to D1, it creates an excess supply at the old equilibrium price of OP. this leads to competition among sellers, which reduces the prices. Decreases 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.
(3). Increase in supply:


Chain effect:
when there is in increase in supply, demand remaining unchanged, the supply curve shifts toward right from S to S1. when supply increases to S1, 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 new equilibrium is established at point E1. equilibrium price falls from OP to OP1 and equilibrium quantity rises from OQ to OQ1.

(4). Decreases in supply:



Chain effect:
When the supply decreases, demand remaining unchanged, then supply curve shifts to the let from S to S2. when supply decreases to S2, it creates an excess demand at the old equilibrium price of OP . this leads to competition among buyers, which rise the price. increase in price leads to rise in supply and fall in demand. these  changes continue till new equilibrium is established at point E2. equilibrium price rises from OP to OP2 and equilibrium quantity fallls from OQ to OQ2.

(5). Decrease in demand = Decrease in supply

Chain effect:

When decrease in demand is proportionately equal to decrease in supply, then leftward shift in demand curve from D to D1 is proportionately equal to leftward shift in supply curve from s to S1. the new equilibrium is determined at E1. As demand and supply decreases in the same proportion, equilibrium price remains same at OP,but equilibrium quantity falls falls from OQ to OQ1.

(6). Increase in demand = increase in supply

Chain effect:When increase in demand is proportionately equal to increase in supply, then rightward shift in demand curve from D to D1 is proportionately equal to rightward shift in supply curve from s to S1. the new equilibrium is determined at E1. As demand and supply increases in the same proportion, equilibrium price remains same at OP,but equilibrium quantity rises from OQ to OQ1  

( 7).  Decrease in demand > Decrease in supply 


Chain effect:
When decrease in demand is proportionately more than decrease in supply, then leftward shift in demand curve from D to D1 is proportionately more than leftward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price falls from OP to OP1 and the new equilibrium quantity falls from OQ to OQ1.

(8). decrease in Demand < Decrease in supply

Chain effect:

When decrease in demand is proportionately Less than decrease in supply, then leftward shift in demand curve from D to D1 is proportionately less than leftward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price rises from OP to OP1 and the new equilibrium quantity falls from OQ to OQ1.

(9).Increase in Demand > Increase in supply

Chain effect:When increase in demand is proportionately more than increase in supply, then rightward shift in demand curve from D to D1 is proportionately more than rightward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price rises from OP to OP1 and the new equilibrium quantity rises from OQ to OQ1.

(10). Increase in Demand < Increase in supply 

Chain effect:
When increase in demand is proportionately less  than increase in supply, then rightward shift in demand curve from D to D1 is proportionately less than rightward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price falls from OP to OP1 and the new equilibrium quantity  rises from OQ to OQ1.

 (11). Decrease in Demand = Increase in supply

Chain effect:

When decrease in demand is proportionately equal to increase in supply, then leftward shift in demand curve from D to D1 is proportionately equal to rightward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price falls from OP to OP1 and the new equilibrium quantity remains the same at OQ.

(12). Decrease in demand > Increase in supply 



Chain effect:
 When decrease in demand is proportionately more than increase in supply, then leftward shift in demand curve from D to D1 is proportionately more than rightward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price falls from OP to OP1 and the new equilibrium quantity falls from OQ to OQ1.

(13). Decrease in Demand < Increase in supply

Chain effect:

When decrease in demand is proportionately less  than increase in supply, then leftward shift in demand curve from D to D1 is proportionately less than rightward shift in supply curve from S to S1.  the new equilibrium is determined at E1, equilibrium price falls from OP to OP1 and the new equilibrium quantity  rises from OQ to OQ1.

(14). Increase in demand = Decrease in supply

Chain effect:

When increase in demand is proportionately equal to decrease in supply, then rightward shift in demand curve from D to D1 is proportionately equal to leftward shift in supply curve from S to S1.  the new equilibrium is determined at E1,  As the increase in demand is proportionately equal to the decrease in supply equilibrium price rises from OP to OP1 and the new equilibrium quantity remains the same at OQ.

(15).Increase in demand > decrease in supply

Chain effect:
When increase in demand is proportionately more  than decrease in supply, then rightward shift in demand curve from D to D1 is proportionately more than rightward shift in supply curve from S to S1.  the new equilibrium is determined at E1, as the increase in demand is proportionately more than the decrease in supply,  equilibrium price rises from OP to OP1 and the new equilibrium quantity  rises from OQ to OQ1.

(16).Increase in demand <  decrease in supply


Chain effect:
When increase in demand is proportionately less  than decrease in supply, then rightward shift in demand curve from D to D1 is proportionately less than leftward shift in supply curve from S to S1.  the new equilibrium is determined at E1, as the increase in demand is proportionately less than the decrease in supply,  equilibrium price rises from OP to OP1 and the new equilibrium quantity  falls from OQ to OQ1.

(17). Change in Demand when Supply is perfectly elastic

Increase in demand 

Chain effect:
When demand increases, the demand curve shifts to the right from D to D1. supply curve S is 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.

Decrease in demand





Chain effect:
When demand decreases, the demand curve shifts to the left from D to D1. supply curve S is horizontal straight line parallel to the X-axis. Due to decrease in demand, the new equilibrium is established at E1. equilibrium quantity falls from OQ to OQ1 but equilibrium price remains same at OP as supply is perfectly elastic.

(18). change in supply when demand is perfectly elastic

Increase in supply 

Chain effect:

When supply increases, the supply curve shifts to the right from S to S1. demand curve D is 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 same at OP as demand is perfectly elastic.

Decrease in supply

Chain effect:
When supply decreases, the supply curve shifts to the left from S to S1. demand curve D is horizontal straight line parallel to the X-axis. Due to decrease in supply, the new equilibrium is established at E2. equilibrium quantity falls from OQ to OQ1 but equilibrium price remains same at OP as demand is perfectly elastic.

(19). change in demand When supply is perfectly inelastic

Increase in Demand

Chain effect:
When demand increases, the demand curve shifts to the right from D to D1. supply curve S is 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 same at OQ as supply is perfectly inelastic.

Decrease in Demand

Chain effect:
When demand decreases, the demand curve shifts to the left from D to D1. supply curve S is vertical straight line parallel to the Y-axis. Due to decrease in demand for the product, the new equilibrium is established at E1. equilibrium price falls from OP to OP1 but equilibrium Quantity remains the same at OQ as supply is perfectly inelastic.

(20). Change in Supply When Demand is perfectly inelastic

Increase in Supply

Chain effect:
When supply increases, the supply curve shifts to the right from S to S1. demand curve D is vertical straight line parallel to the Y-axis. Due to increase in supply for the product, the new equilibrium is established at E1. equilibrium price falls from OP to OP1 but equilibrium Quantity remains same at OQ as supply is perfectly inelastic.

Decrease in supply

Chain effect:
When supply decreases, the supply curve shifts to the left from S to S1. demand curve D is vertical straight line parallel to the Y-axis. Due to decrease in supply, the new equilibrium is established at E1. equilibrium Price rises from OP to OP1 but equilibrium quantity remains same at OP as demand is perfectly elastic.

Government Intervention

some times for the welfare of the consumers government intervenes in the functioning of market forces of demand and supply.(a). Directly: Price ceiling, Floor price(b). Indirectly: by imposing Taxes, by giving subsidies.

Floor Price:

here when for the welfare of the producer, government fixes the price of their producer above equilibrium is called as Minimum support price or floor price 

Implications:

Producer get the best price for their produce and welfare of the producer happens.
Price ceiling:
When the government set the price below the equilibrium price to safe gaurd the interest of consumers.

implications of price ceiling:

(1). Black Market:
A black market is any market in which the commodities are sold at a price higher than the maximum price fixed by govt. Black markets exists because consumers are ready to pay a price more than the price fixed by the govt. to get more of limited amount of commodity available.
(2). Difficulty in obtaining goods from ration shops:
Consumers has to stand in long queues to buy goods from ration shops. sometimes, commodity is not able in the ration shops or goods are of inferior quantity.