CBSE Class 12 Economics Market Equilibrium Revision Notes Set 01

Market Equilibrium It refers to a situation of market in which market demand for a commodity is equal to its market supply, i.e. a situation, which is stable.

Equilibrium Price It is the price at which market demand is equal to market supply.

Equilibrium Quantity It is the quantity which corresponds to equilibrium price.

Assumptions of Equilibrium

• curve should always have a negative slope.
• Supply curve should have a positive slope.

Determination of Equilibrium Price Under Perfect Competition Equilibrium price under perfect competition refers to the price which corresponds to the equality between market demand and market supply.

Excess Demand It refers to the situation in which at a price in the market, demand is more than that of supply [DD>SS], which creates an upward pressure on price.

Excess Supply It refers to the situation in which at a price in the market, supply is more than that of demand [SS>DD], which creates a downward pressure on price.

Effects of Change in Demand On Equilibrium

Increase in demand will shift the demand curve to the right keeping supply constant, it will lead to increase in equilibrium price and quantity and vice-versa . However,

• (i) In case of perfectly elastic supply Increase or decrease in demand does not cause any change in equilibrium price. Only the equilibrium quantity changes, i.e. increases or decreases.
• (ii) In case of perfectly inelastic supply Increase or decrease in demand does not cause any change in equilibrium quantity. Only the equilibrium price changes, i.e. increases or decreases.

Effects of Change in Supply On Equilibrium

When there is change in supply, keeping demand constant, it will shift supply curve to the right. When supply increases it leads to fall in equilibrium price and rise in quantity, on the other hand, when supply decreases, supply curve will shift to the left, causing rise in price and fall in quantity. However,

• In case of perfectly elastic demand Increase or decrease in supply does not cause any change in equilibrium price. Only the equilibrium quantity changes, i.e. Increases or decreases.
• In case of perfectly inelastic demand Decrease in supply results in an increase in price and increase in supply leads to decrease in price. The equilibrium quantity remains constant.

Effects of a Simultaneous Change in Demand and Supply on Equilibrium Price and Quantity

(i)When both demand and supply increases there arises three cases

(a) When increases in demand is more than increase in supply.
Effect Equilibrium price and quantity both increases.

(b) When increase in demand is less than increase in supply.
Effect Equilibrium price will fall and quantity will increase.

(c) When increase in demand is equal to increase in supply;
Effect Equilibrium price constant, quantity increases.

(ii)When both demand and supply decreases, there arises three cases:

(a) When decrease in demand is more than decrease in supply.
Effect Equilibrium price fall and quantity falls.

(b) When decrease in demand is less than decrease in supply.
Effect Equilibrium price rises, quantity falls.

(c) When decrease in demand is equal to decrease supply.
Effect Equilibrium price constant, quantity falls.

Simple Applications of Demand and Supply

(i) Price ceiling It means maximum price of a commodity that the sellers can charge from the buyers. It is fixed by the government to protect the consumers and generally fixed below the equilibrium price.

(ii) Price floor It means the minimum price fixed by the government for a commodity in the market at which a good can be sold. It is fixed in order to protect the producers and generally fixed above the equilibrium price.

(iii) Rationing It ensures the availability of the commodity to the poor consumers who not received the commodity in free market mechanism of the commodity.

(iv) Black marketing It is a situation in which the controlled commodity is sold at a price higher than the price fixed by the government illegally under the desk.

1 Mark Questions

Question. State whether the following statement is true or false. Give reason. When equilibrium price of a good is less than its market price, there will be competition among the sellers. 
Answer: True, when equilibrium price of a good is less than its market price, there will be competition among the sellers. At a price lower than market price, there will be excess supply, i.e. supply will be more than demand.

Question. Give the meaning of equilibrium. 
Answer: Equilibrium is a situation of the market in which demand for a commodity is equal to its supply, i.e. a situation, which is stable.

Question. Define equilibrium price. 
Answer: Equilibrium price is the price at which market demand is equal to market supply.