CBSE Class 12 Economics The Theory of Firm Under Perfect Competition Worksheet

Short Answer Type Questions

Question. Explain, how input prices are a determinant of supply of a good by a firm.
Answer: In case of increase in input price, cost of production tends to rise. Accordingly, producers will supply less of the commodity at its existing price as there is a decrease in producer’s profit.
On the other hand, in case of fall in the prices of inputs,the cost of production tends to fall, leading to an increase in producer’s profit. This induces him to increase his supply.

Question. (i) Explain the effect of rise in input prices on supply of a commodity.
(ii) Explain the effect of fall in prices of inputs on the supply of a good.
Answer: (i) In case of increase in input price, marginal cost tends to rise. Accordingly, producers will supply less of the commodity at its existing price because of a fall in their profits.
(ii) In case of fall in input price, marginal cost will decline. Accordingly, producer will supply more of the commodity at its existing price because
of increase in their profits.

Question. State any three causes of rightward shift in supply curve.
Answer: Causes of rightward shift in supply curve are as follows (any three)
(i) Fall in the price of substitute goods.
(ii) Fall in the price of factors of production.
(iii) Improvement in technology.
(iv) Increase in the number of firms in the market.
(v) Rise in the price of complementary goods.

Question. Explain the situation of zero elasticity of supply with the help of a diagram.
Answer: It refers to a vertical straight line supply curve showing constant supply.
It is shown in the given figure  
  
In such a situation, it is assumed that supply is constant, whatever the changes in price.

Question. Explain any two factors that cause a shift of supply curve.
Answer: Two factors that cause a shift of supply curve are (i) Change in Technology Technological improvement tends to lower the marginal and average costs of production because better technology facilitates higher
output with the same inputs. Accordingly, producers are willing to supply more at the existing price. This implies a rightward shift in supply curve and vice-versa.
(ii) Change in Input Price Input price may increase or decrease. In case of increase in input price, marginal and average costs tend to rise. Accordingly, producers will supply less of the commodity at its existing price. This implies a leftward shift in supply curve and vice-versa. 

Long Answer Type Questions

Question. Explain how changes in prices of other products influence the supply of a given product.
Answer: As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities.
Increase in the prices of substitute goods makes them more profitable in comparison to the given commodity.
As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. e.g. increase in the price of wheat will induce the farmer to use land for cultivation of wheat in place of rice.
Decrease in price of substitute good will shift the supply curve to the right and vice-versa.
In case of complementary goods, if price of one good increases, then supply of its complementary good also increases, conveying a direct relationship. So, rise in the price of car, will cause the supply of petrol to also rise and the supply curve shifts to the rightward advice-versa.

Question. Explain the meaning of increase in supply and increase in quantity supplied with the help of a schedule.
Answer: Increase in SupplyWhen supply of a commodity increases due to favourable changes in factors other than price, it is called increase in supply.
In this situation, supply curve shifts to the right side.
It can be explained with the help of an imaginary schedule  

As, it is clear from the above schedule that supply is increasing at constant prices.
Increase in Quantity SuppliedWhen supply of a commodity increases due to increase in price of a commodity and other factors remaining constant, it is called increase in quantity supplied. In this situation,supply curve moves upward. It can be explained with the help of an imaginary schedule 

Here, we can see that quantity supplied is rising with rise in prices.

Question. Using diagrams, explain various degrees of price elasticity of supply.
Answer: The various degrees of price elasticity of supply are given below (i) Perfectly Elastic Supply In this case, a slight change in price causes infinite change in quantity supplied. The supply curve SS is parallel to X-axis and E_s = ∞, as shown in the figure 


Assertion-Reasoning MCQs

Direction There are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the appropriate option from the options given below
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is true, but Reason (R) is false
(d) Both Assertion (A) and Reason (R) are false

Question. Assertion (A) Extension in supply is caused by change in factors other than own price. This leads to movement along the supply curve.
Reason (R) Change in quantity supplied is an impact of change in other factors leading to shift in supply curve to the right.

Answer: D 

Question. Assertion (A) According to law of supply, as the cost of production increases producer increase selling price and accordingly supply of the good increases.
Reason (R) Increase in price of complementary goods, leads to increase in quantity supply.

Answer: D

Question. Assertion (A) Elasticity of supply is higher for flatter curve compared with a steeper supply curve.
Reason (R) Percentage change of quantity is greater than that of change in price on a flatter supply curve.

Answer: D 

Question. Assertion (A) Elasticity of supply curve passing through the origin always has elasticity equal to unity regardless of the angle it makes.
Reason (R) Slope of supply curve and elasticity of supply are directly proportional.

Answer: C

Question. Assertion (A) Supply of agricultural goods is less elastic in nature.
Reason (R) There are many natural constraints in an agricultural produce which restricts its supply.

Answer: A


Case Study Questions Supply and Price Elasticity of Supply Class 12 Economics


A tariff is a tax placed on the products of foreign countries sold in the United States. Assume, there is a 10% tax on foreign-made automobiles. Who would bear the incidence of this tax? Assume that a Japanese car and a similar American car each sell in the United States at a price of $25,000.
With the 10% tax on the Japanese car ($2,500), the Japanese company would like to raise the price of its car to $27,500. Whether it can do so or not depends on the price elasticity of demand for Japanese cars. If the demand for Japanese cars is relatively inelastic, the quantity demanded will fall very little at the price of $27,500. This means that buyers do not find Japanese and American cars to be close substitutes.
The incidence of the tax would be on the car buyers. On the other hand, if the demand for Japanese cars is relatively elastic, the quantity of
Japanese cars demanded will fall considerably at the price of $27,500. This means that buyers will closely substitute between Japanese and American cars. The Japanese company will have to charge a price close to $25,000 in the United States to be able to compete.
The incidence of the tariff will be on the Japanese automobile companies. In technical language, a tariff on a foreign product that has very elastic demand is called an optimal tariff. The price of the foreign product rises very little in the United States. Most of the tariff is paid by the foreign company as reduced profits. The gain, of course,goes to the United States Government, who collects the money.

Question. Impact of tariff will be higher on supply of cars, if demand is ……… .
(a) less elastic
(b) more elastic
(c) perfectly elastic
(d) perfectly inelatic 

Answer: A

Question. Assertion (A) A tariff has a lower impact on supply if the good is inelastic.
Reason (R) In case of inelastic supply, quantity doesn’t change much due to change in its determinants.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A) 
(c) Assertion (A) is true, but Reason (R) is false 
(d) Both Assertion (A) and Reason (R) are false 

Answer: A

Question. What will be the impact on the supply for American cars, if tariff is imposed on Japanese cars with low price elasticity of supply?
(a) Increase
(b) Decrease
(c) Remain constant
(d) May or may not increase 

Answer: A

Question. As per the above information, which of the following has an impact on the supply of the cars?
(a) Tariff
(b) Consumer’s preferences
(c) Elasticity of supply
(d) All of the above 

Answer: D

Question. With increase in taxes by the government, supply will fall due to ………… .
(a) increase in cost of production
(b) fall in investments
(c) Both (a) and (b)
(d) Neither (a) nor (b) 

Answer: A

Year 2020 has seen many ups and downs in terms of production activities and demand in the whole country. Not only India, the entire world has suffered in a big way due to the outbreak of Corona Virus Pandemic. Since, this Pandemic started in November 2019 in China till Present time our trading relation with China has also been affected,not only this due to boarder conflict as well.
India is now facing the problem of deflationary gap and heading towards a negative growth rate.
Government of India has also announced a relief package to help revive the economic condition of the vulnerable groups.
Slowly and gradually impact has been seen on the market as India’s fuel demand is increased during September 2020.

Question. What was the impact of lockdown in India on supply of essential items?
(a) Remain constant
(b) Increased
(c) Decreased
(d) Can’t be determined 

Answer: B

Question. With increase in supply of essentials goods, its supply curve will ........... .
(a) shift to the right
(b) shift to the left
(c) move upward
(d) move downward 

Answer: A

Question. What will be impact on supply of fuel if demand  increase?
(a) Increase
(b) Decrease
(c) Remain constant
(d) Depends upon availability of fuel in the international market. 

Answer: D

Question. Assertion (A) With the announcement of relief packages by the government, supply of essential commodities will further increase.
Reason (R) Essential goods are necessity of life thus given priority by the government.
Alternatives
(a) Both Assertion (A) and Reason (R) are true and Reason
(R) is the correct explanation of Assertion (A)
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A)
(c) Assertion (A) is true, but Reason (R) is false
(d) Both Assertion (A) and Reason (R) are false 

Answer: B

Question. Elasticity of supply of essential commodities are
(a) highly inelastic
(b) elastic
(c) perfectly inelastic
(d) perfectly elastic 

Answer: A

Question. If the fuel prices increase, it will lead to..........in supply of essential goods.
(a) increase
(b) decrease
(c) remain constant
(d) Either (a) or (b) 

Answer: D