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What will be the effect on equilibrium price and equilibrium quantity, when: (i) number of firms increases and (ii) price of inputs increases. |
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Answer» Solution :(i)Number of firms increases:When number of firms increasekeeping other factors CONSTANT, TOTAL supply, in the market, ALSO increases due to more producers producing the commodity. It shifts the supply curve towards right. Since an increase in number of firms does not have any impact on demand the demand curve remains unchanged. It can be shown with the help of given diagram. The supply curve shifts rightward from SS to `S_(1)S_(1)`. With new supply curve `S_(1)S_(1)` there is excess supPply at initial price OP because at price OP supply is PB and demand is PA, so there is excess supply of AB at price OP Due to this excess supply, competition among the producer will fall the price. Due to this fall in price there is downward movemernt 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 `OP_(1)`, and equilibrium quantity rises from OQ to `OQ_(1)` Conclusion So, due to increase in number of firms, (a) Equilibrium price falls from OP to `OP_(1)` (b) Equilibrium quantity rises from OQ to `OQ_(1)` . (ii) Price of inputs increases: When price of inputs increases, assuming no CHANGE in other factors, then the cost of production rises. As a result, supply decreases due to fall in the profitability level. It shifts the supply curve towards left. Since an increase in the price of inputs does not have any impact on demand, the demand curve remains unchanged. It can be shown with the help of given diagram. In the given figure price is on vertical axis and quantity demanded and supplied is on horizontal axis. The supply curve shifts leftward from SS to `S_(1)S_(1)`. With new supply curve `S_(1)S_(1)`, 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. 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 `OP_(1)` and equilibrium quantity falls from OQ to` OQ_(1)`. Conclusion Due to increase in input price, (i) Equilibrium price rises from OP to OP1. (ii) Equilibrium quantity also falls from OQ to OQ1. ` (##FM_M_ECO_XII_P1_C12_E02_047_S01.png" WIDTH="80%"> ` (##FM_M_ECO_XII_P1_C12_E02_047_S02.png" width="80%"> |
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