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Hello Sir,
75 Consider the following statements:
(1) ‘Equilibrium’ is the selling price above which the number of units demanded by the
market starts to decline.
(2) As the selling price of a product increases, the number of units supplied by the market
will also tend to rise.
Which of these statements is/are correct?
A (1) only
B (2) only
C Both
D NeitherThe answer C. But I went for C since I thought any price above the equilibrium price would cause fall in demand. I couldn’t understand this part.
The equilibrium price is where the supply and demand for goods match and prices are stable. So, (1) is untrue. For normal goods, demand decreases every time prices increase. I think the question is trying to make you think about the revenue curve which hits a maximum then starts to decline.
(2) is true: more profit opportunity attracts more supply.
B is the correct answer.
Thank you for replying Sir.
Sir I’m still confused because I thought that the word ‘above’ was actually pointing out to price which is ‘above’ the equilibrium price which causes the demand to decline.
For normal goods, every time the price rises from its current amount, demand will fall.
There is a price where revenue is maximised. Raise the price and quantity will decrease and these interact to reduce revenue. Lower the price and quantity will increase, but although more goods are being sold at a lower price the result is also lower revenue.
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