Class 11 Micro Economics- CHAPTER 12 

            Market Equilibrium with Simple Applications

Introduction
This chapter helps to determine the market equilibrium, to define equilibrium price and equilibrium quantity and states how equilibrium changes due to increase and decrease in demand and supply.
Determination of Market Equilibrium under Perfectly Competitive Market
1. Market equilibrium refers to that point which has come to be established under a
given condition of demand and supply and has a tendency to stick to that level, i.e. where Demand = Supply.
2. If due to some disturbance we divert from our position the economic forces will work in such a manner that it could be driven back to its original position, i.e., where Demand = Supply. In short it is the position of rest.
3. It can be explained with the help of the schedule and diagram:
(a) (i) In the given schedule market equilibrium is determined at Price Rs. 3 where Market demand is equal to Market Supply.
(ii) At price 1 and 2, there is excess demand, which leads to rise in price, resulting tendency is expansion in supply.
(iii) Similarly, at price 4 and 5, there is excess supply, which leads to fall in price, resulting tendency is Contraction in supply.

(b) (i) In the given diagram, price is measured on vertical axis, whereas quantity : demanded and supply is measured on horizontal axis.
(ii) Suppose that initially the price in the market is P₁. At this price, the consumer demand P₁B and the producer supply P₁A, i.e. consumers want more than what the producer are willing to supply. There is excess demand equal to AB. So, price cannot stay on P₁ as excess demand will create competition among the buyers and push the price up till we reach equilibrium.

Due to rise in price from P₁ to P₂ there is upward movement along the supply curve (expansion in supply) from A to E and upward movement along the demand curve (contraction in demand) from B to E.
(iii) Similarly, at price supplied P₂L. There is excess supply, equal to KL, which will create competition among the sellers and lower the price. The price will keep falling as long as there is an excess supply.
Due to fall in price from P₂ to P there is downward movement along the supply curve (contraction in supply) from L to E and downward movement along the demand curve (expansion in demand) from K to E.
(iv) The situation of zero excess demand and zero excess supply defines market equilibrium (E). Alternatively, it is defined by the equality between quantity demanded and quantity supplied. The price P is called equilibrium price and quantity Q is called equilibrium quantity.
Effect of Change in Equilibrium due to Increase and Decrease in Demand and Supply
Case I: Increase in Demand
1. An increase in demand leads to rightward shift of demand curve as shown in the figure below:
You Must Know When demand increases, then shifting should be such that initial price remains constant. It is so because increase in demand is the part of the shift in demand in which other factor changes and price remains constant.
Changes in Demand
(1) A to B because of increase in demand (shift in demand)
(2) B to C as price rises because of excess demand which leads to upward movement along the demand curve.

A to C as price rises because of excess demand which leads to upward movement along the supply curve.
2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above figure price is on vertical axis and quantity demanded and supplied is on horizontal axis. But due to increase in demand due to the following reasons the demand curve shifts rightward from DD to D₁D₁.
(i) Price of substitute goods rises.
(ii) Price of complementary goods falls.
(iii) Income of a consumer rises in case of normal goods.
(iv) Income of a consumer falls in case of inferior goods.
(v) When preferences are favourable.
(b) With new demand curve D₁D₁, there is excess demand at initial price OP because at price OP₁ demand is PB and supply is PA, so there is excess demand of AB at price OP.
(c) Due to this excess demand, competition among the consumer will rise the price. With the rise in price, there is upward movement along the demand curve (contraction in demand) from B to C and similarly, there is upward movement along the supply curve (expansion in supply) from A to C . So, finally equilibrium price rises from OP to OP₁, and equilibrium quantity also rises from OQ to OQ₁
Conclusion
Due to increase in demand,
(i) Equilibrium price rises from OP to OP₁
(ii) Equilibrium quantity also rises from OQ to OQ₁
Case II: Decrease in Demand
1. A decrease in demand leads to leftward shift of demand curve as shown in the below figure:
You Must Know
When demand decreases, then shifting should be such that initial price remains constant. It is so because decrease in demand is the part of the shift in demand in which other factor changes and price remains constant.
Changes in Demand
(1) A to B because of decrease in demand (shift in demand)
(2) B to C as price fall because of excess supply which leads to downward movement along the demand curve.

2. (a)A to C as price fall because of excess supply which leads to downward movement along the supply curve.
(i) Price of substitute goods fall.
(ii) Price of complementary goods rise.
(iii) Income of a consumer falls in case of normal goods.
(iv) – Income of a consumer rises in case of inferior goods.
(v) When a preference becomes unfavourable.
(b) With new demand curve D₁D₁, there is excess supply at initial price OP because at price OP demand is Pre and supply is PA so there is excess supply of AB at price OP.
(c) Due to this excess supply, competition among the producer will make the price fall. Due to fall in price there is downward movement along the demand curve
(Expansion in demand) from B to C and similarly there is downward movement along the supply curve (contraction in supply) from A to C. So, finally, the equilibrium price falls from OP to OP₁ and equilibrium quantity also falls from OQ to OQ₁.
Conclusion
Due to decrease in demand,
(i) Equilibrium price falls from OP to OP₁.
(ii) Equilibrium quantity also falls from OQ to OQ₁.
Case III: Increase In Supply
1. An increase in supply leads to rightward shift of supply curve as shown in the below figure:
You Must Know
When supply increases, then shifting should be such that initial price remains constant. It is so because increase in supply is the part of the shift in supply in which other factor changes and price remains constant.
Changes in Supply
(1) A to B because of increase in supply (shift in supply)
(2) B to C as price falls because of excess supply which leads to downward movement along the supply curve.
A to C as price falls because of excess supply which leads to downward movement along the demand curve.

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above figure price is on vertical axis and quantity demanded and supplied is on horizontal axis. But due to increase in supply due to the following reasons:
(i) Fall in the prices of remuneration of factors of production.
(ii) Fall in the prices of other commodities.
(iii) Improvement in technology.
(iv) Change in objective of producer (inducing them to increase supply at the same price.)
(v) Taxation policy of government falls.
(b) The supply curve shifts rightward from SS to S₁S₁. With new supply curve S, S,, there is excess supply at initial price OP because at price OP₁ supply is PB and demand is PA, so there is excess supply of AB at price OP.
(c) Due to this excess supply competition among the producer will make the price fall. Due to this fall in price there is downward movement along the supply curve (Contraction in supply) from B to C and similarly, there is downward movement along the demand curve (Expansion in demand) from A to C. So, finally, equilibrium price falls from OP to OP₁ and equilibrium quantity rises from OQ to OQ₁
Conclusion
Due to increase in supply,
(i) Equilibrium price falls from OP to OP₁.
(ii) Equilibrium quantity rises from OQ to OQ₁.
Case IV: Decrease in Supply
A decrease in supply leads to leftward shift of supply curve as shown in the below figure:
You Must Know
When supply decreases, then shifting should be such that initial price remains constant. It is so because decrease in supply is the part of the shift in supply in which other factor changes and price remains constant.
Changes in Supply
(1) A to B because of decrease in supply (shift in supply)
(2) B to C as price rises because of excess demand which leads to upward movement along the supply curve.
Changes in Demand
A to C as price rises because of excess demand which leads to upward movement along the demand curve.

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above figure price is on vertical axis and quantity demanded and supplied is on horizontal axis. But due to decrease in supply due to the following reasons the supply curve shifts leftward from SS to S₁S₁.
(i) Rise in the prices of remuneration of factors of production.
(ii) Rise in the prices of other goods.
(iii) When the technology becomes outdated.
(iv) Change in objective of producer (inducing them to decrease supply at the same price).
(v) Taxation policy of government rises.
(b) With new supply curve S₁S₁ , there is excess demand at initial price OP because at price OP, supply is PB and demand is PA, so there is excess demand of AB at price OP.
(c) Due to this excess demand competition among the consumer will rise the price. Due to this rise in price there is upward movement along the supply curve (Expansion in supply) from B to C and similarly, there is upward movement along the demand curve (Contraction in demand) from A to C. So, finally, equilibrium price rises from OP to OP₁ and equilibrium quantity falls from OQ to OQ₁.
Conclusion
Due to decrease in supply,
(i) Equilibrium price rises from OP to OP₁
(ii) Equilibrium quantity falls from OQ to OQ₁
Simultaneously Increase and Decrease in Demand and Supply
Case I: Both Demand and Supply Increases: When both demand and supply increases, then there are three possibilities:
Case A: When Demand and Supply both Increase at the Same Rate
1. When demand and supply both increase at the same rate, equilibrium price remains constant and equilibrium quantity rises. It can be shown with the help of the following diagram.

Case B: When demand and supply both increase at the same rate, then equilibrium price remains constant.

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when, “demand and supply both increase at the same rate”, then,
(i) Equilibrium price remains constant at OP and
(ii) Equilibrium quantity rises from OQ to OQ₁
Case B: When demand increases, supply also increases but at a much faster rate l.When demand increases, supply also increases but at a much faster rate, then equilibrium price falls and equilibrium quantity rises as shown below:

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when “demand increases and supply also increases but at a much faster rate”, then,
(i) Equilibrium price falls from OP to OP₁ and
(ii) Equilibrium quantity rises from OQ to OQ₁
Case C: When supply increases, demand also increases but at a much faster rate
1. When supply increases, demand also increases but at a much faster rate, then equilibrium price rises and equilibrium quantity rises as shown below:

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when “supply increases and demand also increases but at a much faster rate” then,
(i) Equilibrium price rises from OP to OP₁ and
(ii) Equilibrium quantity also rises from OQ to OQ₁.
Case II: Both Demand and Supply Decreases: When both demand and supply decreases, then there are three possibilities:
Case A: When Demand and Supply both Decrease at the Same Rate
1. When demand and supply both decrease at the same rate, equilibrium price remains constant and equilibrium quantity falls as shown below:
You Must Know
When demand and supply both decrease at the same rate, equilibrium price remains constant.
Logic
Suppose demand and supply both decrease by 5%, then there is neither excess demand nor excess supply, i.e., why price remains constant.

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when “demand and supply both decrease at the same rate” then,
(i) Equilibrium price remains constant at OP₁ and
(ii) Equilibrium quantity falls from OQ to OQ_1.
Case B : When demand decreases, supply also decreases but at a much faster rate
l. When demand decreases, supply also decreases but at a much faster rate, then equilibrium price rises and equilibrium quantity falls as shown below:

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when “demand decreases, supply also decreases but at a much faster rate” then,
(i) Equilibrium price rises from OP to OP₁ and
(ii) Equilibrium quantity falls from OQ to OQ₁.
Case III: When supply decreases, demand also decreases but at a must faster rate
l.When supply decreases, demand also decreases but at a much faster rate, then equilibrium price and equilibrium quantity both falls as shown below:

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when “supply decreases, demand also decreases but at a much faster rate” then,
(i) Equilibrium price falls from OP to OP₁ and
(ii) Equilibrium quantity falls from OQ to OQ₁
Shift in Demand and Supply in Opposite Direction
Case I: When demand increases and supply decreases at the same rate
1. When demand increases and supply decreases but at the same rate, then equilibrium price rises and equilibrium quantity remains constant as shown below:

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above:
(a) In the above diagram price is measured on vertical axis and quantity demanded and supplied is measured on horizontal axis.
(b) But when, “demand increase and supply decreases but at the same rate”, then,
(i) Equilibrium price rises from OP to OP₁ and
(ii) Equilibrium quantity remains constant at OQ.
Case II: When demand decreases and supply increases at the same rate
1. When demand decrease and supply increases but at the same rate, then equilibrium price falls and equilibrium quantity remains constant as shown below:

2. We assume that initial price is OP and equilibrium quantity is OQ as shown above: (a): In the above diagram price is measured on vertical axis and quantity demanded and supplied are measured on horizontal axis.
(b) But when , “demand decreases and supply increases but at the same rate”, then, (i) Equilibrium price falls from OP to OP₁ and (ii) Equilibrium quantity remains constant at OQ.
Viable Industry and Non-Viable Industry
1. Viable industry refers to an industry for which supply curve and demand curve intersect each other in positive axes.

2. Non-viable industry refers to an industry for which supply curve and demand curve never intersect each other in the positive axes. In India, commercial aircraft is an example of a non-viable industry. It means, aircraft cannot be produced at all. Note that an industry which is non-viable in one country may be viable for another country. For instance, commercial aircraft are produced in countries like USA, UK, France etc.

Simple Applications Of Tools Of Demand And Supply
Price Ceiling (Maximum Price Ceiling)
1. When the government imposes upper limit on the price (maximum price) of a good or service which is lower than equilibrium price is called price ceiling.

2. Price ceiling is generally imposed on necessary items like wheat, rice, kerosene etc.
3. It can be explained with the help of given diagram:
(a) In the given diagram, DD is the market demand curve and SS is the market supply curve of Wheat.
(b) Suppose, equilibrium price OP is very high for many individuals and they are unable to afford at this price.
(c) As wheat is necessary product, government has to intervene and impose price ceiling of Pt, which is below the equilibrium level.
(d) When the government fixes the price of a commodity at a level lower than the equilibrium price (say it fixes the price at OP₁, there would be a shortage of the commodity in the market. Because at this price demand exceeds supply. Quantity demanded is P₁S, while quantity supplied is only P₁R. There is, thus, a shortage of RS quantity at this price (i.e., OP₁). In free market, this excess demand of RS would have raised the price to the equilibrium level of OP. But, under government price-control consumers’ demand would remain unsatisfied.
(e) Though the intension of the government was to help the consumers, it would end up creating shortage of wheat.
(f) To meet this excess demand, government may use Rationing system.
(g) Under rationing system, a certain part of demand of the consumers is met at a price lower than the equilibrium price. Under this system, consumers are given ration coupons/ Cards to buy an essential commodities at a price lower than the equilibrium price from Fair price/Ration Shop.
(h) Rationing system can create the problem of black market, under which the commodity is bought and sold at a price higher than the maximum price fixed by the government.
Price Floor (Minimum Price Ceiling)
1. When the government imposes lower limit on the price (minimum price) that may be charged for a good or service which is higher than equilibrium price is called price floor.
2. Price Floor is generally imposed on agricultural price support programmes and the
minimum wage legislation.
(a) Agricultural price support programmes: Through an agricultural price support programme, the government imposes a lower limit on the purchase price for some of the agricultural goods and the floor is normally set at a level higher than the market—determined price for these good.
(b) Minimum wage legislation: Through the minimum wage legislation, the government ensures that the wage rate of the labourers does not fall below a particular level and here again the minimum wage rate is set above the equilibrium wage rate.
3. It can be explained with the help of given diagram:
(a) In the given diagram, DD is the market demand curve and SS is the market supply curve of Wheat.
(b) Suppose, equilibrium price OP is not so profitable for farmers, who have suppose just faced Drought.

(c) To help farmers government must intervene and impose price floor of P₁; which is above than equilibrium price.
(d) Since, the price P₁ is above the equilibrium price P₁ the quantity supplied P₁B exceeds the quantity Quantity Demanded and demanded P₁A. There is excess supply. Supplied of Wheat
(e) In case of excess supply, farmers of these commodities need not sell at prices lower than the minimum price fixed by the government.
(f) The surplus quantity will be purchased by the government. If the government does not procure the excess supply, competition among its sellers would bring down the price to the level of equilibrium price.
Words that Matter
1. Market equilibrium: It refers to the situation when market demand is equal to the market supply.
2. Equilibrium price: The price at which equilibrium is reached is called equilibrium price.
3. Equilibrium quantity: The quantity bought and sold at the equilibrium price is called equilibrium quantity.
4. Equilibrium point: Equilibrium point is the point of intersection of the demand curve and supply of commodity.
5. Viable industry: It refers to an industry for which supply curve and demand curve intersect each other in positive axes.
6. Non-viable industry: It refers to an industry for which supply curve and demand curve never intersect each other in the positive axis.
7. Price ceiling: When the government imposed upper limit on the price (maximum price) of a good or service which is lower than equilibrium price is called price ceiling.
8. Price floor: When the government imposed lower limit on the price (minimum price) that may be charged for a good or service which is higher than equilibrium price is called price floor.
9. Rationing: Under rationing system, a certain part of demand of the consumers is met at a price lower than the equilibrium price. Under this system, consumers are given ration coupons/ Cards to buy an essential commodities at a price lower than the equilibrium price from Fair price/Ration Shop.
10. Black market: It is a market under which the commodity is bought and sold at a price higher than the maximum price fixed by the government.

                     Class 11 Micro Economics- CHAPTER 11 

                                 Non-Competitive Market

Introduction
This chapter explains non competitive market forms (monopoly, monopolistic competition and oligopoly), their features and differences.
Monopoly
1. Meaning:
(a) ‘Mono’ means single and ‘poly’ means seller, i.e., single seller.
(b) Monopoly is a market situation where there is a single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist.
2. Reasons of Monopoly:
(a) Grant of patent rights
(i) When a company introduces a new product or new technology it applies to the government to grant it patent certificate by which it gets exclusive rights to produce new product or use new technology.
(ii) Patent rights prevent others to produce the same product or use the same technology without obtaining license from the concerned company. Patent rights are granted by the government for a certain number of years.
(iii) For example, Patent certificate was granted to Xerox company for copying machines invented by it, thereby giving rights to monopoly.
(b) Licensing by Government
(i) A monopoly market emerges when government gives a firm license, i.e. exclusive legal rights to produce a given product or service in a particular area or region.
(ii) For example Previously Delhi Vidyut Board (Govt. Board) had the exclusive right to distribute electricity in Delhi. Now after privatization the same rights have been given to two private companies with exclusive areas to serve.
(c) Forming a Cartel
(i) A Cartel is a group of firms which jointly set output and prices so as to exercise monopoly power.
(ii) For example, In 1960, some oil producing companies formed a cartel, called OPEC (Organisation of Petroleum Exporting Countries).
3. Features of Monopoly:
(a) Single Seller
(i) There is only one seller or producer of a commodity in the market.
(ii) As a result, the monopoly firm has full control over the supply of the commodity.
(iii) The monopolist may be an individual, a firm, a group of firms or a government itself.
(iv) Naturally, a monopoly firm can exploit buyers by charging almost any price for its product because of exclusive control over the product.
(v) Monopoly firm itself is the price maker and not the price taker.
(b) Absence of close substitutes of product
(i) The product sold by the monopolist has no close substitute.
(ii) Though, some substitutes of the product may be available, yet they are not close substitutes in the sense that such substitutes are not identical products.
(c) Difficult entry of a new firm
(i) The monopolist controls the situation in such a way that it becomes very difficult for a new firm to enter the monopoly market and compete with the monopolist by producing the same product.
(ii) The monopolist tries his utmost to block entry of a new firm.
(d) Price Discrimination
Price discrimination refers to the practice of charging different prices from different buyers at the same time for the same product.
(e) Price Maker
(i) A monopoly firm has market power and is itself a price-maker. It can choose any price, it likes.
(ii) Unlike perfect competition where as output increases, price remains unchanged.
(iii) In monopoly as output increases or decreases, price changes according to what consumers are willing to pay along the demand curve. It produces and supplies a product to satisfy the entire market.
(iv) It is because a monopoly firm faces the entire demand of the market, that market demand curve is said to be a constraint facing a monopoly firm.
4. Shape of demand curve under monopoly:
(a) As we know in monopoly there is a single seller or firm, that is why like an industry, single seller constitutes the entire market for the product, which has no close substitutes.
(b) So, a monopolist has full freedom and power to fix price for the product.

(c) However, demand of the product is not in the control of monopoly firm. In order to increase the output to be sold, monopolist will have to reduce the price because of price discrimination.
(d) Therefore, a monopoly firm faces a downward sloping demand curve.
(e) The elasticity of demand curve is inelastic because of no close substitute of a commodity.
5. Shape of Average revenue and marginal revenue curve under monopoly
(a) A monopoly firm faces a downward sloping demand curve as more output can be sold only by reducing the price because of price discrimination.

(b) As, we know, Price = Average revenue. So, when price falls means Average revenue falls and when Average revenue fall, then marginal revenue also falls but at a much faster rate. So, Marginal Revenue(MR) is less than Average Revenue (AR).
Monopolistic Competition
1. Meaning:
(a) It refers to a market situation in which there are many firms which sell closely related but differentiated products.
(b) Market for such products are toothpaste, soap, air conditioners etc.
(c) The market is called monopolistic competition since it contains both the competitive element and monopoly element.
2. Features of monopolistic competition
(a) A large number of firms:
(i) The number of firms selling similar product is fairly large, but not very large as in perfect competition.
(ii) As a result, firms are in a position to influence the price of their product due to their branji names.
(b) Product differentiation:
(i) In this type of market situation a producer can produce different products, but that products should be a close substitute to each other.
(ii) Product differentiation means differentiating the product on the basis of brand, colour, shape etc.
(iii) Due to product differentiation each firm under monopolistic competition is in a position to exercise some degree of monopoly (inspite of large number of sellers) because buyers are willing to pay different prices for the same product produced by different firms.
(iv) No doubt, producer has a control over a price, but he knows it very well to maximize the profit price has to be reduced. So, price falls under monopolistic competition due to product differentiation.
(c) Selling cost:
(i) It is the expenses which are incurred for promoting sales or inducing customers to buy a good of a particular brand.
(ii) This includes the cost of advertisement through newspaper, television and radio, and cost on each other sales promotional activities.
Note:
Persuasive Advertising: It refers to advertising so as to lure (attract) consumers avail
from one brand to another.
(d) Free entry and exit of firms:
(i) New firms can enter the market, if found profitable. Similarly, inefficient firms already operating in the market are free to quit the market if they incur losses.
(ii) It is because of this feature that like perfect competition, monopolistic competition also gives rise to normal profit.
(iii) No firm receives abnormal profit in the long run as then new firms can emerge and old ones can expand output and adjust supply with changing demand.
3. Shape of Demand Curve Under Monopolistic Competition
(a) The demand curve faced by a firm is negatively slope, (i.e. when price falls, demand rises) because the firm can sell more only by lowering the price of its product because of product differentiation.

(b) The demand curve in monopolistic competition is highly elastic due to availability of close substitutes as a result, AR curve becomes more flatter.
4. Shape of Average revenue and marginal revenue curve under Monopolistic Competition:
(a) Like a monopoly firm, the firm under monopolistic competition also fixed the price itself subject to certain limitations.

(b) No doubt, producer has a control over a price, but he knows it very well to maximize the profit, price has to be reduced. Price reduce means Average Revenue reduces and average revenue reduces marginal revenue but at a much faster rate. So, under monopolistic competition MR < AR.
Oligopoly
1. Meaning:
(a) The term oligopoly is derived from two Greek words: ‘oligoi’ means few and ‘poleein’ means ‘to sell.’
(b) Oligopoly is a market situation in which an industry has only a few firms (or few large firms producing most of its output) mutually dependent for taking decisions about price and output.
(c) William Fellner defines oligopoly as “Competition among the few”.
(d) In India, markets for carbonated beverages, “National Newspapers” market, mobile services provider, washing products, automobiles, cement, aluminium, etc., are the examples of oligopolistic market. In all these markets there are few firms for each particular product.
2. Types of Oligopoly:
(a) Pure or Perfect Oligopoly:
(i) In the case of pure oligopoly, firms produce homogenous products like copper, iron, steel and aluminium.
(ii) So, decisions by consumers to purchase the goods of a particular firm are influenced by the price considerations.
(b) Imperfect or Impure or Differentiated Oligopoly:
(i) In differentiated oligopoly, firms produce differentiated products such as toilet soap, cigarettes or soft drinks.
(ii) The goods produced by different firms have their own distinguishing characteristics, but they are close substitutes of each other.
(c) Collusive Oligopoly: If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly.
(d) Non-collusive Oligopoly: If firms in an oligopoly market compete with each other, it is called a non-collusive or non-cooperative oligopoly.
3. Features of Oligopoly
(a) Few Large Sellers:
(i) The number of sellers in an oligopoly market is small – when there are two or more than two, but not many sellers.
(ii) What matters is that these few sellers account for most of the industry’s sales.
(iii) These “few” sellers consciously dominate the industry and indulge in intense competition. Each firm is aware of that it possesses a large degree of monopoly power.
(iv) For example, the market for mobile service provider in India is an oligopolist structure as there are only few producers of mobile service provider. There exists severe competition among different firms and each firm tries to manipulate both prices and volume of production to outsmart each other.
(b) Interdependence of Decisions:
(i) Interdependence means that actions of one firm affects the actions of other firms.
(ii) Since the number of sellers is small, each firm has to take into consideration the possible reaction of its competitors, when making decisions.
(iii) The business decision of a single seller will have a substantial impact on the product price, output and profits of the rival firms.
(iv) For example in the “National Newspapers” market, when the “Economic Times” introduced invitation pricing policy—they offered the newspaper at a price of Rs.1.50 on weekdays. The Hindustan Times was forced to reduce its prices from Rs. 2.50 per copy to ? 1.50 per copy on weekdays. When Hindustan Times was celebrating its 75 years of service, they offered the newspaper at Rs. 1/- weekdays. The Times of India responded by matching the price cut.
(c) Non-Price Competition:
(i) Oligopoly firms try to avoid price competition for the fear of price war.
(ii) They use non-price competition methods like better services to customers, advertising, etc. to compete with each other.
(iii) Oligopoly firms are in a position to influence the prices. However, they follow the policy of price stability or price rigidity.
(iv) Price rigidity refers to a situation in which whether there is change in demand and supply the price tends to stay fixed.
(v) If a firm tries to reduce the price the rivals will also react by reducing their prices. Likewise, if it tries to raise the price, other firms will not do so. It will lead to loss of customers for the firm which intended to raise the price.
(vi) So, firms prefer non-price competition instead of price competition.
(d) Barriers to the entry of firms:
(i) The main reason why the number of firms is small is that there are barriers which prevent entry of firms into industry.
(ii) Patents, large capital, control over the crucial raw material etc., prevent new firms from entering into industry.
(iii) Only those who are able to cross these barriers are able to enter.
(e) Role of selling costs:
(i) Due to severe competition and interdependence of the firms various sales promotion techniques are used.
(ii) For example, T.V. commercials war between pepsi and coke.
(iii) It relies more on non-price competition.
(f) Oligopoly firms may produce either a homogeneous or a differentiated product.
(i) Oligopoly firms may sell homogeneous products such as steel, aluminium, LPG cylinders etc. They are called pure oligopolies, as the products of the respective firms are indistinguishable.
(ii) Firms producing differentiated products are called impure oligopolies.
(iii) In case of a pure oligopoly market situation rival firms will rely on “price” or “lowercosts” to compete in the market.
(iv) On the other hand, in case of impure oligopolies, with firms producing differentiated products, firms can use “product variations” and “promotional” strategies to compete.
(g) Group Behaviour:
(i) In an oligopoly situation, there are a few firms who control the entire market and each firm recognizes interdependence in their decision-making.
(ii) So, price-output decisions of a particular firm directly influence the competing firms.
(iii) Instead of independent price and output strategy, oligopoly firms prefer group decisions that will protect the interest of all the firms.
(iv) Group Behaviour means that firms tend to behave as if they were a single firm even though individually they retain their independence.
(h) Indeterminate demand curve facing an oligopoly firm:
(i) The most distinguishing feature of oligopoly is the “interdependence in decision making” of the rival firms.
(ii) The consequence of such interdependence is the high degree of uncertainty regarding the reaction pattern of rival oligopolists.
(iii) Interdependence and uncertainly result in “indeterminateness of the demand curve” facing an oligopolist. The firm cannot assume that his rivals will not react to its decision regarding change in its variables.
(iv) The demand curve facing an oligopoly firm keeps shifting as rival firms react to changes made by this firm. The demand curve thus loses its definiteness and determinateness.
Words that Matter
1. Monopoly: It is a market situation where there is a single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist.
2. Cartel: A Cartel is a group of firms which jointly set output and prices so as to exercise monopoly power.
3. Monopolistic competition: It refers to a market situation in which there are many firms which sell closely related but differentiated products.
4. Product differentiation: It means differentiating the product on the basis of brand, colour, shape etc.
5. Selling cost: It is the expenses which are incurred for promoting sales or inducing customers to buy a good of a particular brand.
6. Persuasive Advertising: It refers to advertising so as to lure consumers avail from
one brand to another.
7. Oligopoly: It is a market situation in which an industry has only a few firms (or few large firms producing most of its output) mutually dependent for taking decisions about price and output.
8. Pure or Perfect Oligopoly: In the case of pure oligopoly, firms produce homogenous products like copper, iron, steel and aluminium.
9. Imperfect or Differentiated Oligopoly: In differentiated oligopoly, firms produce differentiated products such as toilet soap, cigarettes or soft drinks.
10. Collusive Oligopoly: If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly.
(i) The MR and MC schedules
(ii) The quantities for which the MR and MC are equal
(iii) The equilibrium quantity of output and the equilibrium price of the commodity.
(iv) The total revenue, total cost and total profit in equilibrium.
11. Non-collusive Oligopoly: If firms in an oligopoly market compete with each other, it is called a non-collusive or non-cooperative oligopoly.
12. Price rigidity: It refers to a situation in which whether there is change in demand and supply the price tends to stay fixed.

 Class 11 Micro Economics- CHAPTER 10 Perfect Competition

Introduction
This chapter gives the definition of market and its structure, forms of market mainly perfect competition and its features and related concepts (the remaining forms of market being studied in Chapter-12) and short run equilibrium condition under it.
1. Market refers to a region where the buyers and sellers of a commodity come in contact with each other to effect the transactions of purchase and sale of the commodity.
2. Market structure refers to number of firms and types of firms operating in the industry.
3. Three basis on which different market are defined:
(a) Nature of commodity: If homogeneous goods are produced in a market, it is sold at a constant price. If commodity produce is of heterogeneous or differentiated in nature, it may be sold at different prices. If commodity has no close substitute, the seller can charge higher price from the buyer.
(b) Number of buyer and sellers: If there are large number of buyers and sellers, then buyers and sellers are not in a position to influence the price of the commodity. If, there is a single seller of a commodity, then the seller has control over a price.
(c) Entry and exit of a firm: If there is a free entry and exit of a firm, then the price will be stable in the long run. It is so because then the new firm enter the industry induced by large profit, then abnormal profit will be wiped out and if inefficient firms incurring losses are free to leave the industry. In short due to free entry and exit, firm earns normal profit. If there is difficult entry of a new firm (because of patent rights), then a firm can influence the price as it has no fear of competition.
4. Main forms of market are:
(a) Perfect competition
(b) Imperfect competition.
(i) Monopoly
(ii) Monopolistic competition (iii) Oligopoly.
5. Perfect Competition refers to a market situation in which buyers and sellers operate freely and a commodity sells at a uniform Constant) price.
6. Features of Perfect Competition:
(a) Large number of sellers and buyers:
(i) Large number of sellers
• The words ‘large number’ simply states that the number of sellers is large enough to render a single seller’s share in total market supply of the product is insignificant.
• Insignificant share means that if only one individual firm reduces or raises its own supply, the prevailing market price remains unaffected.
• The prevailing market price is the one which was set through the intersection of market demand and market supply forces, for which all the sellers and all the buyers together are responsible.
• One single seller has no option but to sell what it produces at this market determined price. This position of an individual firm in the total market is referred to as price taker. This is a unique feature of a perfectly competitive market.
(ii) Large number of buyers
• The words ‘large number’ simply states that the number of buyers is large enough, that an individual buyer’s share in total market demand is insignificant, the buyers cannot influence the market price on his own by changing his demand.
• This makes a single buyer also a price taker.
To sum up, the feature “large number” indicates ineffectiveness of a single seller or a single buyer in influencing the prevailing market price on its own, rendering him simply a price taker.
(b) Homogeneous Products:
(i) Product sold in the market are homogeneous, i.e., they are identical in all respects like quality, colour, size, weight, design, etc.
(ii) The products sold by different firms in the market are equal in the eyes of the buyers.
(iii) Since, a buyer cannot distinguish between the product of one firm and that of another, he becomes indifferent as to the firms from which he buys.
(iv) The implication of this feature is that since the buyers treat the products as identical they are not ready to pay a different price for the product of any one firm. They will pay the same price for the products of all the firms in the industry. On the other hand, any attempt by a firm to sell its product at a higher price will fail. To sum up, the “homogenous products” feature ensures a uniform price for the products of all the firms in the industry.
(c) Free entry and exit of firms:
(i) Buyers and sellers are free to enter or leave the market at any time they like. New firms induced by large profits can enter the industry whereas losses make inefficient firms to leave the industry.
(ii) The freedom of entry and exit of firms has an important implication. This ensures that no firm can earn above normal profit in the long run. Each firm earns just the normal profit, i.e., minimum necessary to carry on business.
(iii) Suppose the existing firms are earning above normal profits, i.e. positive economic profits. Attracted by the positive profits, the new firms enter the industry. The
industry’s output, i.e. market supply, goes up. The prices come down. New firms continue to enter and the prices continue to fall till economic profits are reduced to zero.
(iv) Now suppose the existing firms are incurring losses. The firms start leaving. The industry’s output starts falling, prices going up, and all this continues till losses are wiped out. The remaining firms in the industry then once again earn just the normal profits.
(v) Only zero economic profit in the long run is the basic outcome of a perfectly competitive market.
(d) Perfect Knowledge about the market:
(i) Perfect Knowledge means both buyers and sellers are fully informed about the market.
(ii) The firms have all the knowledge about the product market and the input markets. Buyers also have perfect knowledge about the product market.
(iii) The implication of perfect knowledge about the product market is that any attempt by any firm to charge a price higher than the prevailing uniform price will fail. The buyers will not pay because they have perfect knowledge. A uniform price prevails in the market.
(iv) Regarding the knowledge about the input markets the implicit assumption is that each firm has an equal access to the technology and the inputs used in the technology.
(ii) No firm has any cost advantage. Cost structure of each firm is the same. All the firms have a uniform cost structure.
(vi) Since there is uniform price and uniform cost in case of all firms, and since profit equals revenue less cost, all the firms earn uniform profits.
(e) Perfect mobility:
(i) There is perfect mobility in the market both for goods and factors of production.
(ii) There should be no restriction on their movement. Goods can be sold at any place.
(iii) Similarly, factors of production can freely move from one place to another or from one occupation to another.
(j) Absence of transportation and selling cost.
(i) In perfect competition, it is assumed that there is no transport cost for consumers who may buy from any firm and also there is no selling cost.
(ii) This insures existence of a single uniform price of the product.
7. Demand Curve and revenue curves under perfect competition


(a) As we know, in perfect competition homogeneous goods are produced. So, price remains constant, which makes the demand curve perfectly elastic.
(b) In perfect competition, homogeneous goods are produced, that is why price remains constant, as price = AR, it means AR remains constant. And if, AR remains constant, then AR = MR as per the

8. In perfect competition, industry is the price maker and firm is the price taker.
(a) As we know, in Perfect competition, homogeneous goods are produced. So, industry cannot charge different price from different firms.
(b) So, industry will give that price to the firm where industry is in equilibrium,
i. e., where Demand = Supply. Any movement from that point would be unstable.
(c) In the above diagram, price, revenue and Cost is measured on vertical axis and units of commodity on horizontal axis. Industry will give OP price to the firm as at that point Demand = supply, i.e., industry is in equilibrium.

The firms will follow the same price and charges same from the consumer.
9. Relationship between TR, AR and MR under perfect competition
(a) In the perfect competition, a firm is a price taker.
(fa) ) It has to sell its product at the same price as given (determined) by the industry. Consequently, price = AR = MR.
(c) Hence, a firm’s AR and MR curve will be a horizontal straight line parallel to X axis.
(d) Since price remains the same, i.e., MR is constant, therefore, TR increases at the constant rate as increase in the output sold.

(e) As a result, TR curve facing a competitive firm is positively sloped straight line. Again, because at zero output Total Revenue is zero therefore, TR curve passes through the origin O as shown in the
10. Break-even Point
(a) Break-even point is the level of output at which total cost of production (Fixed Cost + Variable Cost) per unit just equals to Total Revenue.

(b) At this point the firm has neither profit nor loss. In other words, firm gets only normal profit, which is included in total cost.
(c) Normal profit is a minimum profit, that a firm must get to remain in Production.
11. Shutdown point: Shutdown point is a point where a firm is indifferent between whether to produce or shutdown. In other words, it is a situation when a firm is able to cover its variable costs only.
The condition of shutdown point is:
Price = Minimum of SAVC (Short run average variable cost)
Multiply by output
Price x output = SAVC x output
TR = TVC
Words that Matter
1. Market: It refers to a region where the buyers and sellers of a commodity come in contact with each other to effect the transactions of purchase and sale of the commodity.
2. Market structure: It refers to number of firms and types of firms operating in the industry.
3. Perfect Competition: It refers to a market situation in which buyers and sellers operate freely and a commodity sells at a uniform (Constant) price.
4. Homogeneous Products: Product sold in the market are homogeneous, i.e., they are identical in all respects like quality, colour, size, weight, design, etc.
5. Break-even point: It is the level of output at which total cost of production (Fixed Cost + Variable Cost) per unit just equals to Total Revenue.
6. Shutdown point: It is a point where a firm is indifferent between whether to produce or shutdown. In other words, it is to a situation when a firm is able to cover its variable costs only.

                                Class 11 Micro Economics

                        CHAPTER 9 Producer Equilibrium

Introduction
This chapter contains essentially the concept of producer equilibrium with marginal revenue and marginal cost approach, both when price is constant and when price is falling along with the numericals.
1. Profit refers to the excess of money receipts from the sale of goods and services (i.e, revenue) over the expenditure incurred on producing them (i.e, cost).
For example, if a firm sells goods for Rs. 5 crores after incurring an expenditure of Rs. 3 crores, then profit will be Rs. 2 crores.
2. A producer is said to be in equilibrium when he produces that level of output at which his profits are maximum. Producer’s equilibrium is also known as profit maximisation situation.
3. There are two methods for determination of Producer’s Equilibrium:
(a) Total Revenue and Total Cost Approach (TR – TC Approach)
(b) Marginal Revenue and Marginal Cost Approach (MR – MC Approach)
4. A firm produces and sells a certain amount of a good. The firm’s profit, denoted by π, is defined to be the difference between its total revenue (TR) and its total cost of production (TC). In other words, π= TR – TC

5. Producer’s equilibrium when price is constant with a rise in output under MR/MC approach is determined where,
(a) MR = MC (b) MC must be rising According to Table, both the conditions of equilibrium are satisfied at 4 units of output. MC is equal to MR and MC is rising. MC is more than MR when output is produced after 4 units of output. So, Producer’s Equilibrium will be achieved at 4 units of output.
However, MR is equal to MC at 2 units of output also.
But, second condition is not fulfilled here.
Let us understand the determination of equilibrium o with the help of a diagram.
Producer’s Equilibrium is determined at OQ level of «P output corresponding to point E as at this point, MC MR and MC curve cuts MR curve from below.

In Figure, output is shown on the horizontal axis and £ revenue and costs on the vertical axis. Producer’s Q Units Sold
equilibrium will be determined at OQ level of output corresponding to point E because at this, the following two conditions are met:
(a) MC = MR; (b) MC curve cuts the MR curve from below.
When MR > MC, then producer will continue to produce as long as MR becomes equal to MC. It is so because firm will find it profitable to raise the output level.
When MR < MC, then producer will cut down the production as long as MR becomes equal to MC. It is so because firm will find it Unprofitable to produce an extra unit. So, it starts reducing the level of output till MR = MC.
6. Producer’s equilibrium when price fall with a rise in output under MR/MC approach is determined where,
(a) MR = MC (b) MC must be rising When price falls with the rise in output, MR curve slope downwards. Let us understand this with the help of following table:

According to Table, both the conditions of equilibrium are satisfied at 4 units of output.
MC is equal to MR and MC is rising. MC is more than MR when output is produced
after 4 units of output. So, Producer’s Equilibrium will be achieved at 4 units of output.
Let us understand the determination of equilibrium ^ with the help of a diagram:

Producer’s Equilibrium is determined at OQ level of output corresponding to point E as at this point, MC = MR and MC curve cuts MR curve from below.
In Figure, output is shown on the horizontal axis and revenue and costs on the vertical axis. Producer’s equilibrium will be determined at OQ level of output g corresponding to point E because at this, the following two conditions are met: OQ Units Sold
(a) MC = M, and (b) MC curve cuts the MR curve from below.
When MR > MC, then producer will continue to produce as long as MR becomes equal to MC. It is so because firm will find it profitable to raise the output level.
When MR < MC, then producer will cut down the production as long as MR becomes equal to MC. It is so because firm will find it Unprofitable to produce an extra unit. So, it starts reducing the level of output till MR = MC.
So, the producer is at equilibrium at OQ units of output.
Words that Matter
1. Profit: Profit refers to the excess of revenue over cost.
2. Producer’s equilibrium: A producer is said to be in equilibrium when he produces that level of output at which his profits are maximum. Producer’s equilibrium is also known as profit maximisation situation

      Class 11 Micro Economics- CHAPTER 8 Revenue

Introduction
This chapter is numerically based and comprises of the concepts of revenue, total revenue, average revenue, marginal revenue and their relationships, both when price is constant and when price is falling.
1. Revenue of a firm refers to receipts from the sale of output in a given period.
2. (a) The total money receipt of a firm from the sale of given amount of output is known as Total Revenue.
Total Revenue = Price x Quantity
(b) For example,
(i) if a firm sells 100 chairs at a price of Rs. 200 per chair, the total revenue will be 100 Chairs x Rs. 200 = Rs. 20,000
(ii)

(c)(i)TR is summation of MR: Total Revenue can also be calculated as the sum of marginal revenues of all the units sold.
It means, TR_n = MR₁ + MR₂ + MR₃ +……….+ MR_n
(ii)

3. (a) The per revenue received from the sale of given amount of output is knows as Average Revenue.
(b)As, sellers receive revenue according to price, price and AR are one and the same thing. This can be explained as under,

(c) For example,
(i) if total revenue from the sale of 100 chairs at a price of Rs. 200 per chair is Rs. 20,000,
average revenue will be = Rs. 200
(ii)

(d) A buyer’s demand curve graphically represents the quantities demanded by a buyer at various prices. In other words, it shows the various levels of average revenue at which different quantities of the goods are sold by the seller. Therefore, in economics, it is customary to refer AR curve as the Demand Curve of a firm.
4. (a) Marginal revenue is the additional revenue when an additional unit of output is sold.

(ii) (a) We know that MR is the change in TR when one more unit is sold. However, when change in units sold is more than one, then MR can also be calculated as Change in Total Revenue ATR
Change in number of units AQ
(b) For example: If the total revenue realised from sale of 100 chairs is Rs. 20,000 and that from sale of 110 chairs is Rs. 30,000, the marginal revenue will be,
(ii)

Relationship Between Revenue Curves
Case I: Relationship between Average Revenue and Marginal Revenue when Price is Constant
1. When price remains the same at all output levels, the firm cannot influence the prevailing market price of the commodity. The price is given to it.
2. It can sell any amount of the commodity at this given price. Under such a case firm’s average and marginal revenue remains equal and their curves coincide as shown in given schedule and diagram:

3. It can be seen from the above schedule and diagram that price remains same and equal to MR at all levels of output. As the result of, demand curve (or AR curve) is perfectly elastic.
4. When a firm is able to sell more output at the same price, then AR = MR at all levels of output.
Case II: Relationship between Total Revenue and Marginal Revenue when Price is Constant
1. When price of the commodity is constant, then firms can sell any quantity of output
at a given price.
2. So, MR curve (and AR curve) is a horizontal straight line parallel to the X-axis. Since MR remains constant, TR also increases at a constant rate (see Schedule).

3. Due to this reason, the TR curve is a positively sloped straight line (see Figure). As TR is zero at zero level of output, the TR curve starts from the origin.
Case III: Relationship between Average Revenue and Marginal Revenue when Price Falls
1. When price falls, with rise in output, then AR falls, MR also falls but at a much faster rate. As a result, the revenue from every additional unit (i.e. MR) will be less than AR.
2. As a result, both AR and MR curves slope downwards from left to right. This can be explained with the help of given Schedule and Figure:

3. In the above schedule, both MR and AR fall with increase in output. However, the fall in MR is double than that in AR, i.e., MR falls at a rate which is twice the rate of fall in AR. As a result, MR curve is steeper than the AR curve. When the AR curve is extended till point B, then MR curve cuts the X-axis exactly halfway between the point of origin (O) and point B, so that OA = AB.
Case IV: Relationship between Total Revenue and Marginal Revenue when Price Falls
1. When MR falls and remains positive, than total revenue increase at a diminishing rate.
(a) As per Schedule, till the 5th unit of output, MR falls but remains positive and, thus, TR increases at diminishing rate.
(b) In Figure, the TR curve increases at a diminishing rate (till point P) as long as MR is positive (till point P₁).


2. When MR is zero, then TR is maximum and constant.
(i) As per Schedule, at the 6th unit, MR is zero and TR is at its maximum and constant.
(ii) In Figure, when MR is zero (point P₁), Total Revenue reaches its highest point (point P).
3. When MR is negative, then TR falls.
(i) As per Schedule, after 6th unit, MR not only falls, but also becomes negative due to which TR starts declining.
(ii) In Figure when MR becomes negative (after point P₁), then Total Revenue Falls (after point P).
Words that Matter
1. Revenue: Revenue of a firm refers to receipts from the sale of output in a given period.
2. Total Revenue: The total money receipt of a firm from the sale of given amount of output is known as total Revenue.
3. Average Revenue: The per unit revenue received from the sale of given amount of output is known as Average Revenue.
4. Marginal Revenue: Marginal revenue is the additional revenue when an additional unit of output is sold.

        Micro Economics- CHAPTER 7 Supply

Introduction
Numerical based chapter explaining Supply, determinants of individual supply and market supply, law of supply, movement along the supply, shift in supply, reasons and exceptions to the law of supply, price elasticity of supply and ways to measure it. It also takes into account the factors affecting the price elasticity of supply and concept of time horizon.
1. Stock refers to total quantity of a particular commodity that is available with the firm at a particular point of time.
2. (a) Supply refers to the quantity of a commodity that a firm is willing and able
to offer for sale, at each possible price during a given period of time.
(b) In other words, supply is that part of stock which is actually brought into the market for sale. Stock can never be less than supply.
(c) For example, a seller has a stock of 50 tonnes of sugar in the go down. If the seller is willing to sell 30 tonnes at a price of Rs. 37 per kg, then supply of 30 tonnes is a part of total stock of 50 tonnes.
3. Market supply refers to the quantity of a commodity that all firms are willing and able to offer for sale at each possible price during a given period of time.
4. Factors affecting personal (individual) supply:

(a) Price of the commodity:
(i) Positive relationship exists between price of the commodity and supply of that commodity.
(ii) It means, with the rise in price of the commodity, the supply of that commodity also rises and vice-versa.
(b) Price of the factors of production:
(i) This also influences the supply since price of factors (rent, wages, interest, profit) constitutes the cost of production of a commodity.
(ii) An increase in the price of a factor of production may lead to fall in production of a commodity shifting the supply curve to the left.
(iii) As against it, a producer may supply more of a commodity at a given price if the prices of factors fall shifting the supply curve to the right.
(c) State of technology:
(i) When there is technological progress in the firm, then cost of production will decrease, which leads to increase in the profit margin of the firm and thereby shifts the supply curve rightward.
(ii) Supply of those goods which are being produced with old and inferior technology causing increase in cost of production will decrease the total output and shift the supply curve to the left.
(d) Unit tax:
(t) A unit tax is a tax that the government imposes per unit sale of output.
(ii) For example, suppose that the unit tax imposed by the government is ? 3. Then, if the firm produces and sells 20 units of the goods, the total tax that the firm must pay to the government is 20 * 3 = 60.
(iii) So, if the unit tax increases, the firm’s cost of production increases which will shift the supply curve leftward. Similarly, if the unit tax decreases, the firm’s cost of production decreases, which will shift the supply curve rightward.
(e) Price of other goods:
(i) Suppose a firm produces more than one product with its given resources.
(ii) An increase in the price of other goods induces the firm to produce more of other goods to earn more profit and less of goods whose prices remained unchanged.
(f) Objective of the firm:
(i) Sometimes a firm may be induced to increase supply of a commodity not because it is more profitable, but because its supply is a source of status and prestige in the market.
(ii) Similarly, a firm may increase production just to achieve the goal of maximum sale or maximum employment.
5. Factors affecting Market supply:
(a) Price of the commodity
(b) Price of the factors of production
(c) State of technology
(d) Unit tax
(e) Price of other goods
(f) Objective of the firm
(g) Number of firms in the market:
(i) When the number of firms in the industry increases, market supply also increases due to large number of producers producing that commodity.
(ii) However, market supply will decrease, if some of the firms start leaving the industry due to losses.
(h) Future Expectation regarding price:
(i) If sellers expect a rise in price in near future, current market supply will decrease in order to raise the supply in future at higher prices.
(ii) However, if the sellers fear that the prices will fall in the future, they will increase the present supply to avoid losses in future.
(i) Means of transportation and communication: Proper infrastructural
development, like improvement in the means of transportation and communication, helps in maintaining adequate supply of the commodity.
6. Supply function shows the relationship between quantity supplied for a particular commodity and the factor influencing it.
7. Individual supply function refers to the functional relationship between supply and factors affecting the supply of a commodity.
It is expressed as, Sx = f (P_x , P₀ , P_f, S_t , T, O) Where, S_x  = Supply of the given commodity x.
P_x= Price of the given commodity x.
P₀ = Price of other goods.
P_f = Prices of factors of production.
S_t= State of technology.
T = Taxation policy.
O = Objective of the firm.
8. (a) Market supply function refers to the functional relationship between market supply and factors affecting the market supply of a commodity.
(b) As we know, market supply is affected by all the factors affecting the individual supply.
(c) In addition, it is also affected by some other factors like number of firms, future expectations regarding price and means of transportation and communication. Market supply function is expressed as, S_x = f(P_x, P₀, P_f, S_t, T, O, N, F, M)
Where, S_x = Market supply of given commodity x.
P_x= Price of the given commodity x.
P₀ = Price of other goods.
P_f = Prices of factors of production.
S_t= State of technology.
T = Taxation policy.
O = Objective of the firm.
N = Number of firms.
F = Future expectation regarding price of given commodity x.
M = Means of transportation and communication.
9. Supply schedule is a table showing various quantities of a commodity offered for sale corresponding to different possible prices of that commodity.
Supply schedule is of two types:
(a) Individual supply schedule
(b) Market supply schedule.
10. Individual supply schedule refers to the supply schedule of an individual firm in the market.
Table shows a hypothetical supply schedule for commodity ‘x’.

As seen in the schedule, quantity supplied of commodity x increases with the increase in price. The producer is willing to sell 50 units of x at a price of ? 10. When the price rises to ? 20, supply also rises to 100 units.
11. Market supply schedule refers to supply schedule of all the firms in the market producing a particular commodity.
It is obtained by adding all the individual supplies at each and every level of price. Market supply is calculated as,  S_M= S_A + S_B + ….
Where Sm is the market supply and S_A + S_B+ … are the individual supply of supplier A, supplier B and so on.
Let us understand the derivation of market supply schedule with the help of Table (Assuming that there are only 2 producers A and B in the market).

As seen in table market supply is obtained by adding the supplies of suppliers A and B at different prices. At price of Rs. 10 market supply is 150 units. When price rises to Rs. 20, market supply rises to 300 units. So, market supply schedule also shows the direct relationship between price and quantity supplied.
12. Supply curve refers to a graphical representation of supply schedule. It shows direct relationship between price and quantity supplied, keeping other factor constant. Supply curve is of two types:
(a) Individual Supply Curve (b) Market Supply Curve
13. (a) Individual supply curve refers to a graphical representation of individual supply schedule.
(b) With the help of information given in supply schedule (see table), the supply curve for an individual firm can be drawn as shown in figure:

(c) In figure, quantity supplied is taken on the horizontal axis and price on the vertical axis. At each possible price, there is a quantity, which the firm is willing to sell.
(d) Point ‘A’ shows that 50 units are supplied at the price of Rs. 10. Point ‘B’ shows that 100 units are supplied at Rs. 20.
(e) By joining all the points (A to E), we get a curve that slopes upward. The supply curve SS slopes upward due to positive relationship between price and quantity supplied.
14. (a) Market supply curve refers to a graphical representation of market supply
schedule. It is obtained by horizontal summation of individual supply curves.
(b) Let us graphically convert the market supply schedule (table) into a market supply curve (see figure).

(c) As seen in the diagram, quantity supplied is shown on the horizontal axis and price on the vertical axis. and SB are the individual supply curves.
Market supply curve (SJ) is obtained by horizontal summation of the individual supply curves.
(d) At the price of Rs. 10 per unit both the firms will supply a total number of 150 units. When price rises to Rs. 20 per unit, market supply rises to 300 units.
(e) Market supply curve is also positively sloped
due to positive relationship between price and quantity supplied. Quantity Supplied
15. Market supply curve is flatter than all individual supply curves. It happens because with a rise in price, the proportionate rise in market supply is more than the proportionate rise in individual supplies.
16. (a) Other things being constant (Ceteris Paribus), based on price of the commodity; then it is known as Law of Supply.
It means, quantity supplied of the commodity rises due to rise in price of the commodity and vice-versa.
(b) Ceteris Paribus means:
(i) Price of other commodity remains constant.
(ii) Technology of production should not change.
(iii) Cost of production remains constant.
(iv) Taxation policy of the government should not change.
(v) Objective of the firm remains constant.
(c) The law of supply makes a qualitative statement only and not quantitative. It indicates the direction of change in the amount supplied and it does not indicate the magnitude of change.
(d) Law of supply is one sided. It explains only the effect of change in price on the quantity supplied. It states nothing about the effect of change in quantity supplied on the price of the commodity.
(e) The schedule and diagram are as follows:

Movement Along The Supply Curve Or Change In Quantity Supplied
1. It is based on law of supply which states that quantity supplied of the commodity changes due to the change in price of the commodity.
2. The change in quantity supply due to the change in the price of the commodity is known as Movement along the supply curve. It may be of two types; namely,
(a) Expansion in supply (increase in quantity supplied)
(b) Contraction in supply (decrease in quantity supplied)
3. Expansion in supply (increase in quantity supplied or upward movement along supply curve):
(a) It is based on law of supply which states that quantity supplied of a commodity rises due to the rise in price of the commodity.
(b) The rise in quantity supplied due to the rise in price of the commodity is known as expansion in supply.

(c) In the given diagram price is measured on vertical axis whereas quantity supplied is measured on horizontal axis.
A producer is supplying OQ quantity at OP price. But, due to the rise in price from OP to OP₁, the quantity supplied increases from OQ to OQ₁; which is known as expansion in supply.
4. Contraction in supply (decrease in quantity supplied or Downward movement along Supply Curve):
(a) It is based on law of supply which states that quantity supplied of a commodity falls to the fall in the price of the commodity.
(b) The fall in the quantity supplied due to the fall in price of the commodity is known as contraction in supply.

(c) In the given diagram, quantity supplied is measured on horizontal axis and price is measured on vertical axis. A producer is supplying OQ quantity at OP price.
But, due to fall in price from OP to OP₁, the quantity supply falls from OQ to OQ₁, which is called contraction in supply.
Shift In Supply Curve Or Change In Supply
1. It is based on factor other than price. If supply changes due to the change in the factors other than price, then it is known as shift in supply curve.
2. It may be of two types:
(a) Increase in supply (b) Decrease in supply
(a) Increase in supply:
(i) An increase in supply means that producers now supply more at a given level of price of a commodity.
(ii) It’s conditions are:
• Fall in the prices of remuneration of factors of production.
• Fall in the prices of other commodities.
• Improvement in technology.
• Taxation policy of government falls.
• Change in objective of producer (inducing them to increase supply at the same price.)
(iii) In the given diagram price is measured on vertical axis whereas, quantity supplied is measured on horizontal axis. A producer is supplying OQ quantity at OP price.
But, due to the changes in the factors other than price, the supply curve shifts rightward from SS to S₁S₁.

With the rightward shift in supply curve from SS to S₁S₁, the quantity supplied rises from OQ to OQ₁; which is known as increase in supply.
(b) Decrease in Supply:
(i) A decrease in supply means that producers now supply less at a given level of price of a commodity.
(ii) It’s conditions are:
• Rise in the prices of remuneration of factors of production.
• Rise in the prices pf other goods.
• When the technology becomes outdated.
• Taxation policy of government rises.
• Change in objective of producer (inducing them to decrease supply at the same price).
(iii) In the given diagram, quantity supplied is measured on horizontal axis whereas price is measured on vertical axis. A producer is supplying OQ quantity at OP price.


But, due to changes in the factors other than price the supply curve shifts leftward from SS to S₁S₁
With the leftward shift in the supply curve from SS to
S₁S₁ the quantity supplied falls from OQ to OQ₁, which is known as decrease in supply.
Causes And Exceptions To The Law Of Supply
1. There is a positive relationship between price of the commodity and quantity supplied for that commodity which causes supply curve to slope upward from left to right.
2. It is because of the following reasons:
(a) Change in stock:
(i) With the increase in the price of the commodity sellers are ready to sell more from their old stock of goods.
(ii) On the other hand, when price of a commodity decreases, sellers would like to increase their stock to avoid losses.
(b) Profit and loss: With the rise in price producers generally increase their production in view of higher profit possibilities and vice-versa.
(c) Entry or exit of firms:
(i) When the price of a commodity increases, new firms enter into the industry with the view to earn profits which in turn increases the supply.
(ii) On the other hand, when price starts falling, marginal firms (or inefficient firms) leave the market to avoid expected losses which thereby decreases the supply.
3. Exceptions to law of supply are:
(a) Future expectations:
(i) The law will not apply if there are future expectations for further change in prices.
(ii) For example, if sellers expect further fall in prices in future, they would be ready to sell more even at low prices.
(b) Agricultural goods: The supply of agricultural goods depends more on natural factors such as drought, floods, natural calamities etc. and less on their prices.
(c) Perishable goods: The supply of perishable goods, like milk, vegetables, fish, eggs, etc. is also not affected by their prices. Sellers cannot hold these goods for long.
(d) Rare articles:
(i) In case of some precious and rare goods also, the law of supply does not apply.
(ii) Artistic goods of high quality and poems written by top class poets come under this categoiy. Their supply cannot be increased even when their prices rise.
(e) Backward countries:
(i) The law of supply loses its applicability in backward countries where production and supply cannot be increased merely because of rise in prices.
(ii) Here resources which are urgently required for production are lacking.
Elasticity Of Supply And Price Elasticity Of Supply(PES/ES)
1. The degree of responsiveness of quantity supplied due to the changes in determinants of supply (price of other commodity, price of factors of production, technology, etc.) is known as elasticity of supply.
2. (a) The degree of responsiveness of quantity supplied due to the changes in price of the commodity is known as price elasticity of supply.
(b) It is quantitative statement, i.e., it tells us the magnitude of the change in quantity supplied as a result of change in price.
3. Percentage method/flux method for calculating price elasticity of supply:
According to this method, elasticity is measured as the ratio of percentage change in the quantity supplied to percentage change in the price.
(a) Percentage change in quantity supplied = Injtw Quantity Supplie(J |Q)
(b) Change in Quantity (AQ) = New Quantity (QJ – Initial Quantity (Q)
(c)Price elasticity of supply (ES) = Now,
(d) Change in Price (AP) = New Price (P,) – Initial Price (P)
Proportionate Method: The percentage method can also be converted into the proportionate method: Putting the values of (a), (b), (c) and (d) in the formula of percentage method, we get,









6.Factors Affecting Price Elasticity of Supply:
(a) Nature of the commodity: Elasticity of supply to some extent depends upon the nature of the commodity.
(i) For example, perishable goods have inelastic supply (because their supply cannot be increased or decreased) while the supply of durable goods is elastic.
(ii) Likewise, the supply of agricultural goods is inelastic while it is elastic in case of industrial goods.
(b) Cost of production
(i) If cost of production rises rapidly with the increase in output, there is less incentive to raise the supply with the increase in price. In such cases, supply will be inelastic.
(ii) However, if cost of production increases slowly with the rise in output, supply will increase with the rise in prices. In this case, supply will be more elastic.
(c) Time period
(i) In the market period, supply of a commodity is perfectly inelastic as supply cannot be changed immediately with the change in price.
(ii) In the short period, supply is relatively less elastic as firm can change the supply by changing the variable factors.
(iii) In the long period, supply is more elastic as all the factors can be changed and supply can be easily adjusted as per changes in price.
(d) Technique of production
(i) If simple techniques of production are employed in the production of a commodity, its supply will be elastic.
(ii) On the other hand, it becomes very difficult to change supply (in response to change in price) under complex techniques of production.
(e) Availability of resources and facilities
(i) The production of a commodity requires adequate resources and other facilities like irrigation, power, transportation, banking, etc. The producers feel handicapped in their absence or shortage. Hence, supply becomes inelastic.
(ii) On the other hand, if these resources and facilities are easily and adequately available, producers can easily respond to any change in price.
7. Time Horizons And Supply Curve
Time period which is available to a firm to adjust its supply also plays an important role in the shapes of supply curves.

(a) Short period:
(i) In the short period, supply is relatively less elastic as firm can change the supply by changing the variable factors only, as fixed factors cannot be change during short period.
The supply curve during short period is inelastic, i.e., percentage change in quantity supplied is less than percentage change in price as shown in the adjacent figure.
(b) Long period:

(i) In the long period, supply is more elastic as all the factors can be changed and supply can be easily adjusted as per changes in price.
(ii) The supply curve during long period is elastic, i.e., percentage change in quantity supplied is greater than percentage change in price as shown in the adjacent figure.
(c) Very short period (Market Period):
(i) In very short period (Market Period), it becomes very difficult for a firm to increase its production level even if price of its commodity has increased because factor inputs like new machinery, technical labour, etc. do not become available immediately.
(ii) Under such a situation, individual and market supply curve will take the shape of vertical line parallel to Y-axis as shown in the adjacent figure.
Words that Matter
1. Stock: It refers to total quantity of a particular commodity that is available with the firm at a particular point of time.
2. Supply: It refers to the quantity of a commodity that a firm is willing and able to offer for sale, at each possible price during a given period of time.
3. Market supply: It refers to the quantity of a commodity that all firms are willing and able to offer for sale at each possible price during a given period of time.
4. Supply function: It shows the relationship between quantity supplied for a particular commodity and the factor influencing it.
5. Individual supply function: It refers to the functional relationship between supply and factors affecting the supply of a commodity.
It is expressed as, = f(P_x, P₀, S, T, O)
6. Market supply function: It refers to the functional relationship between market supply and factors affecting the market supply of a commodity.
It is expressed as, Sx = f (P_x, P₀, P_f, S_t, T, O, N, F, M)
7. Supply schedule: It is a table showing various quantities of a commodity offered for sale corresponding to different possible prices of that commodity.
8. Individual supply schedule: It refers to the supply schedule of an individual firm in the market.
9. Market supply schedule: It refers to supply schedule of all the firms in the market producing a particular commodity.
10. Supply curve: It refers to a graphical representation of supply schedule. It shows direct relationship between price and quantity supplied, keeping other factor constant.
11. Individual supply curve: It refers to a graphical representation of individual supply schedule.
12. Market supply curve: It refers to a graphical representation of market supply schedule. It is obtained by horizontal summation of individual supply curves.
13. Law of Supply: It states that price of the commodity and quantity supplied are positively related to each other when other factors remain constant (ceteris paribus).
14. Movement along the supply curve: The change in quantity supply due to the change in the price of the commodity is known as Movement along the supply curve.
15. Expansion in supply: The rise in quantity supplied due to the rise in price of the commodity is known as expansion in supply.
16. Contraction in supply: The fall in the quantity supplied due to the fall in price of the commodity is known as contraction in supply.
17. Shift in supply curve: If supply changes due to the change in the factors other than price, then it is known as shift in supply curve.
18. Increase in Supply: An increase in supply means that producers now supply more at a given level of price of a commodity.
19. Decrease in supply: A decrease in supply means that producers now supply less at a given level of price of a commodity.
20. Elasticity of supply: The degree of responsiveness of quantity supplied due to the changes in determinants of supply (price of other commodity, price of factors of production, technology, etc) is known as elasticity of supply.
21. Price elasticity of supply: The degree of responsiveness of quantity supplied due to the changes in price of the commodity is known as price elasticity of supply.