Economics 4 Marks Question

When both demand and supply of a commodity decrease (i.e., when demand and supply curve of a commodity shifts to the left), the equilibrium quantity will fall but the equilibrium price may or may not be affected. There may be three situations:

1. When decrease in demand is more than decrease in supply, equilibrium price will fall.

2. When decrease in demand is less than decrease in supply, equilibrium price will go up.

3. When decrease in demand is equal to decrease in supply, there will be no change in equilibrium price.

• When income falls demand falls.
• Supply remaining unchanged, there is excess supply at the given price.
• This leads to competition among sellers leading to fall in price.
• As a result, demand starts rising and supply starts falling.
• These changes continue till a new equilibrium price is established where demand equals supply.
• Equilibrium price falls.

Difference between monopoly and monopolistic competition are:

S .No	Basis	Monopoly	Monopolistic competition
1.	Meaning	Monopoly is a form of market in which there is a single seller selling a product which has no close substitutes	Monopolistic competition is a form of market in which there are large number of sellers selling differentiated but closely related goods.
2.	Number of sellers and buyers	Under this, there is a single seller of a commodity and large number of buyers.	There are a large number of buyers and sellers. Also, the size of each firm is small. Each firm has a limited share of the market.

Perfectly competitive firms are more efficient than monopolies because in a perfectly competitive market, firms have to accept the price prevailing in the market. So, they adjust their cost and revenue policy according to the prevailing price, thereby making them cost effective. One the other hand, a monopolist is a price-marker. He can formulate his own cost and revenue policy. So, there is no compulsion to control costs. So, firms under perfect competition are more efficient that a monopoly firm.