CLASS - XI (SESSION 2023-24)

SUBJECT: ECONOMICS (030) DATE:-20/12/2023

Chapter 11:- PRICE DETERMINATION
HANDOUT-2
MODE OF COLLABORATION: Collaborative and Explanatory
1.Special Cases:-
Case I:- Change in demand when Supply is Perfectly Elastic:- When supply is
perfectly elastic, then change in demand does not affect the equilibrium price of the
commodity. It only changes the equilibrium quantity.

A:- Increase In Demand:- When demand increases, the demand curve shifts to the
right from DD to D1D1. Supply curve SS is a horizontal straight line parallel to the
X-axis. Due to increase in demand for the product, the new equilibrium is
established at E1. Equilibrium quantity rises from OQ to OQ1 but equilibrium price
remains same at OP as supply is perfectly elastic.

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B:- Decrease In Demand:- When demand decreases, the demand curve shifts to
the left from D to D1. Supply curve S is a horizontal straight line parallel to the X-axis.
Due to decrease in demand, the new equilibrium is established . Equilibrium quantity
falls from 100 to 80 but equilibrium price remains at 3 as supply is perfectly elastic.

Case II:- Change in Supply when Demand is Perfectly Elastic:- When Demand is
Perfectly Elastic, then change in supply does not affect the equilibrium price of the
commodity. It only changes the equilibrium quantity.
A:- Increase In Supply:- When supply increases, the supply curve shifts to the
right from S1 to S2. Demand Curve DD is a horizontal straight line parallel to the
X-axis. Due to increase in supply for the product, the new equilibrium is established.
Equilibrium quantity rises from Q1 to Q2.

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B:- Decrease In Supply:- When supply decreases, the supply curve shifts to the
left from SS to S1S1. Demand Curve DD is a horizontal straight line parallel to the
X-axis. Due to decrease in supply for the product, the new equilibrium is established
at E1. Equilibrium quantity falls from Q to Q1 but equilibrium price remains same due
to perfectly elastic demand.

Case III:- Change in Demand when Supply is Perfectly Inelastic:-

When supply is perfectly inelastic, then change in demand does not affect the
equilibrium quantity. It only changes the equilibrium price. The change may be either
an ‘ Increase in Demand’ or ‘ Decrease in Demand’.
A:- Increase In Demand:- When demand increases, the demand curve shifts to the
right from DD to D1D1..Supply curve SS is a vertical straight line parallel to the
Y-axis. Due to increase in demand for the product, the new equilibrium is established

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at E1. Equilibrium price rises from OP to OP1 but equilibrium quantity remains the
same at OQ as supply is perfectly inelastic.

B:- Decrease In Demand:- When demand decreases, the demand curve shifts to
the left from D1 to D2. Supply curve SS is a vertical straight line parallel to the
Y-axis. Due to decrease in demand, the new equilibrium is established. Equilibrium
price falls from P1 to P2, but equilibrium quantity remains the same as the supply is
perfectly elastic.

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Case IV:- Change in Supply when Demand is Perfectly Inelastic:-
When demand is perfectly inelastic, then change in supply does not affect the
equilibrium quantity. It only changes the equilibrium price. The change may be either
an ‘Increase in Supply’ or ‘Decrease in Supply’.
A:- Increase In Supply:- When supply increases, the supply curve shifts to the right
from SS to S1S1.. Demand curve DD is a vertical straight line to the Y-axis. Due to
increase in supply for the product, the new equilibrium is established at point E1.
Equilibrium price falls from P to P1 but equilibrium quantity remains the same as
demand is perfectly inelastic.

B:- Decrease In Supply:- When supply decreases, the supply curve shifts to the
left. Due to decrease in supply for the product, the new equilibrium is established.

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Equilibrium price rises but equilibrium quantity remains the same as demand is
perfectly inelastic.

2.Simple Applications Of Tools Of Demand And Supply:-

A.Price Ceiling (Maximum Price Ceiling):-
1. When the government imposes an upper limit on the price (maximum price) of a
good or service which is lower than equilibrium price is called price ceiling.

2. Price ceiling is generally imposed on necessary items like wheat, rice, kerosene
etc.
3. It can be explained with the help of given diagram:
(a) In the given diagram, DD is the market demand curve and SS is the market
supply curve of Wheat.
(b) Suppose, equilibrium price OP is very high for many individuals and they are
unable to afford it at this price.
(c) As wheat is a necessary product, the government has to intervene and impose a
maximum price, which is below the equilibrium level.
(d) When the government fixes the price of a commodity at a level lower than the
equilibrium price (say it fixes the price at OP1, there would be a shortage of the
commodity in the market. Because at this price demand exceeds supply. Quantity
demanded is P1S, while quantity supplied is only P1R. There is, thus, a shortage of
RS quantity at this price (i.e., OP1). In the free market, this excess demand of RS
would have raised the price to the equilibrium level of OP. But, under government
price-control consumers’ demand would remain unsatisfied.
(e) Though the intention of the government was to help the consumers, it would end
up creating a shortage of wheat.
(f) To meet this excess demand, the government may use a Rationing system.
(g) Under the rationing system, a certain part of demand of the consumers is met at
a price lower than the equilibrium price. Under this system, consumers are given

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ration coupons/ Cards to buy essential commodities at a price lower than the
equilibrium price from Fair price/Ration Shop.
(h) Rationing system can create the problem of black market, under which the
commodity is bought and sold at a price higher than the maximum price fixed by the
government.

‘Black Marketing’ as a direct consequence of Price Ceiling:-

Black market is any market in which commodities are sold at a price higher than the
maximum price fixed by the government. Black marketing may be termed as a direct
consequence or implication of price ceiling as it implies a situation where the
commodity under the Government’s control policy is illegally sold at a price higher
than the one fixed by the government. It may primarily arise due to the presence of
consumers who may be willing to pay a higher price for the commodity than to go
without it.

B.Price Floor (Minimum Price Ceiling):-

1. When the government imposes a lower limit on the price (minimum price) that
may be charged for a good or service which is higher than equilibrium price is called
price floor.
2. Price Floor is generally imposed on agricultural price support programmes and
minimum wage legislation.
(a) Agricultural price support programmes: Through an agricultural price support
programme, the government imposes a lower limit on the purchase price for some of
the agricultural goods and the floor is normally set at a level higher than the
market—determined price for these good.
(b) Minimum wage legislation: Through the minimum wage legislation, the
government ensures that the wage rate of the labourers does not fall below a
particular level and here again the minimum wage rate is set above the equilibrium
wage rate.
3. It can be explained with the help of given diagram:
(a) In the given diagram, DD is the market demand curve and SS is the market
supply curve of Wheat.
(b) Suppose, equilibrium price OP is not so profitable for farmers, who have suppose
just faced Drought.

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(c) To help farmers government must intervene and impose price floor of P1; which is
above than equilibrium price.
(d) Since, the price P1 is above the equilibrium price P1 the quantity supplied P1B
exceeds the quantity Quantity Demanded and demanded P1A. There is excess
supply. Supplied of Wheat
(e) In case of excess supply, farmers of these commodities need not sell at prices
lower than the minimum price fixed by the government.
(f) The surplus quantity will be purchased by the government to create the buffer
stock (Buffer stock is a price control measure). If the government does not procure
the excess supply, competition among its sellers would bring down the price to the
level of equilibrium price.

3.Viable Industry and Non-Viable Industry:-

A. Viable industry refers to an industry for which supply curve and demand curve

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intersect each other in positive axes.

B. Non-viable industry refers to an industry for which supply curve and demand
curve never intersect each other in the positive axes. In India, commercial aircraft is
an example of a non-viable industry. It means, aircraft cannot be produced at all.
Note that an industry which is non-viable in one country may be viable for another
country. For instance, commercial aircraft are produced in countries like the USA,
UK, France etc.

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