Demand, Supply, and Equilibrium - Class XII

Inflationary gap exists when Aggregate Demand is greater than Aggregate Supply at full employment.

Deficient demand refers to the situation when aggregate demand is short of aggregate supply corresponding to full employment level in the economy. Aggregate supply being perfectly elastic, it converges with aggregate demand at a lower level of output lower than the full employment level of output in the economy. This is a situation of underemployment equilibrium.

Market equilibrium occurs at the price level where the quantity demanded by consumers equals the quantity supplied by producers, which is the intersection of the two curves.

Market supply is influenced by several factors beyond price, including production costs, technology, number of sellers, and expectations of future prices.

Market demand is the horizontal summation of the individual demands of all buyers in the market for a specific good or service.

The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa, representing an inverse relationship.

According to the law of demand, there is an inverse relationship between price and quantity demanded; therefore, if the price rises, the quantity demanded falls.

When the price of a commodity falls, the quantity demanded increases, which is referred to as an expansion of demand.

According to the law of diminishing marginal utility, a rational consumer will stop consuming additional units when the marginal utility of the last unit consumed becomes zero, as consuming more would then decrease total utility.

The law of diminishing marginal utility states that as more units of a commodity are consumed, the additional satisfaction (marginal utility) derived from each subsequent unit decreases, meaning it is inversely related to the quantity consumed.

Aggregate supply refers to the desired level of output in the economy during an accounting year. It is through this output only that the producer sector generates income. 

Aggregate Demand refers to the desired level of expenditure in the economy during an accounting year. It is what people wish to spend on the purchase of goods and services during an accounting year.

Therefore, the point of  intersection between aggregate demand curve and aggregate supply curve is called effective demand as at this point all the output produced in the economy is used by the consumers of the economy owing to full employment. 

The relationship between Average Cost (AC) and Marginal Cost (MC) dictates that when AC is falling, MC must be below AC. When AC is rising, MC must be above AC.

Effective demand depends on supply price. Effective demand refers to that point where aggrgate demand is equal to aggregate supply. Therefore, supply price and demand price are independent.

A rightward shift in the demand curve indicates an increase in demand. With a stable supply curve, this leads to both a higher equilibrium price and a higher equilibrium quantity.

When the demand curve shifts to the right, the new equilibrium point is reached at a higher price and quantity compared to the original equilibrium.

Petrol and cars are complementary goods. When the price of a complement (petrol) rises, the demand for the associated good (cars) falls.

Indirect demand, or derived demand, occurs when the demand for a good or service is a consequence of the demand for something else (e.g., demand for labor is derived from the demand for the product the labor produces).

In the case of unitary elastic demand, the total outlay of the consumer before the price change and after the price change will remain the same. This is a hypothetical case as there is no real life examples for the same. 

True. Life saving medicines have inelastic demand. By inelastic we mean when the price changes that consumer buying habit remains the same. The consumer will not reduce the consumption of a life saving drug is the price increase and vice versa. 

True.  Government expenditure increases Aggregate demand. Its one of the components to determine demand. Aggregate demand takes into account all the expenditure incurred in the country during the year. Government spending can be in the form of welfare, pension etc which increases the purchasing power of the people thereby increasing demand. 

False. If the demand is less than unitary elastic, the total outlay of the consumers will change in the same direction of change in price. In this case when the total expenditure rises with a rise in price and decreases with a fall in price elasticity will be less than 1.  

An increase in demand causes the equilibrium price to rise. On the other hand, a decrease in demand causes the equilibrium price to fall. An increase in supply causes the equilibrium price to fall, while a decrease in supply causes the equilibrium price to rise

Equilibrium market price is a point where the demand equals the supply for a particular commodity. Hence, in the given illustration, demand (700) is equal to supply (700) at Rs.4. Hence, it is equilibrium market price.

If demand decreases and supply increases then equilibrium quantity could go up, down, or stay the same, and equilibrium price will go down. If demand decreases and supply decreases then equilibrium quantity goes down, and the equilibrium price could go up, down, or stay the same

A change in the price of the product leads to movement along the demand curve and not a shift in the demand curve.

An increase in demand while the supply remains unchanged causes equilibrium price and quantity to increase. Due to increase in demand the quantity demanded will increase this will thereby increase competition in the market which will leaf to increase in price of the product. hence, when the price increases demand decreases to reach to equilibrium and new equilibrium quantity and price will be derived.