Short Questions: 1. What are the three conditions for long-run equilibrium for a firm in perfectly competitive market? Explain and provide adequate diagram. (10) 2. Suppose, initially there is a long run equilibrium in a perfectly competitive market. If suddenly there is a negative demand shock in the market, how the market will adjust to a new long-run equilibrium? Provide adequate graph to supplement your answer. (10) 3. Write down the similarities and differences between perfect competition and perfect price (5) discrimination.

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Inflation and Purchasing Power Theory

In economic terms, Inflation refers to the increase in the costs of various commodities which are used in daily lifestyle like food, clothes, transport, etc. over a specific time. It may lead to a fall in the purchasing power of the people and also affects the exchange rate of the currency because of the price increase. As the purchasing power falls the unit of the currency in the economy falls. When the prices of the commodities are decreased, then the purchasing power of the consumers will rise, then it will lead to deflation and changes the currency of the base economy to that of the foreign economy which will lead to change in exchange rates.