Question

In a simple way define and give a strong example:

ceterisparibus

Factors of production

inferirvs. normal goods

price control

price ceiling

price floor

deadweight loss

market or social surplus

Answer 1

1. Ceteris paribus means keeping all others factors constant.

Law of demand states that Ceteris paribus, there is inverse relationship between price and quantity demanded. Ceteris paribus means all other factors like income of consumer, price of related good, expectation of consumer, etc are constant.

2. Factors of production are land, labor, capital and entrepreneurship.

3. Normal goods are those goods whose income effect is positive. Increase in income increases demand of normal good and vice-versa. Example; Wheat, rice.

Inferior goods are those goods whose income effect is negative. It means increase in income decreases demand of inferior good and vice-versa. Example; Jawar, Bajra.

4. Price Ceiling: When government fixed price of a product at a level lower than the equilibrium price, the price is called control price or price control by the government. This is done to control the interest of the consumers.

5. Price Floor: When government fixes the price of a product at a level higher than equilibrium price, it is called support price. As a result, the supply becomes in excess of demand. Support price is the minimum guaranteed price at which producers can sell their output to the government if so desired. The main consequence of support price is that consumers have to pay a higher price for the good. On the other hand, the income of the producers goes up. The aim of support price is to insulate the farmers from fluctuations in their income which are caused by price variations in the free market.

Example; Minimum wage set by the government.