IGCSE Economics Paper-1: Specimen Questions with Answers 9 - 10 of 10

Question number: 9

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Essay Question▾

Describe in Detail

Price of a commodity rises when there is shortage and fall when there is surplus in supply of a commodity in a competitive market. Explain with the help of a diagram.

Explanation

  • In a competitive market, when there is a shortage in supply of a commodity or supply of the commodity is less than its demand, the price of the commodity rises with the increase in demand.

  • On the contrary, if there is a surplus in supply of a commodity and supply of the commodity is more than its demand, the price of the commodity decreases. This can be illustrated with the help of the following diagram.

Supply of a commodity

Supply of a Commodity

  • The OX-axis shows the quantity of a goods and OY-axis shows price of a good. E is the equilibrium point where demand is equal to supply, where at OP price OM quantity of the good is sold. If price is more than the equilibrium price, quantity of the good will is more than its demand by DS. Hence, price will fall.

  • If price is less than the equilibrium price, there will be shortage in quantity of the good than demand by FG. As a result, the price will rise.

Question number: 10

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Describe in Detail

What do you mean by productive and allocative efficiency?

Explanation

Productive Efficiency: Productive efficiency denotes the production possibility curve. It is the locus of all those combinations of two goods that a producer can manufacture with the full utilization of the available resources. The curve is also known as a transformative curve, a production frontier curve, a product substitution curve or an opportunity cost curve. As the producer moves from one point to another, he scarifies one unit of a commodity-Y to get one more unit of commodity-X. All points on the curve AB, i. e. C, D, and E denote the productive efficiency of a firm.

Image of Commodity-Y

Image of Commodity-Y

  • Allocative Efficiency: Allocative efficiency is concerned with that level of production where marginal cost of production is equal to price of a good. It is related to the distribution and allocation of resources.

  • When resources are allocated in an optimal manner and their marginal costs are equal to marginal utility. Point E shows allocative efficiency because at this point marginal utility is equal to marginal cost.

    Allocative Efficiency

    Allocative Efficiency

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