IGCSE Economics Paper-1: Specimen Questions with Answers 9 - 9 of 64

Question 9

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Essay▾

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

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  • 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.

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