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NCERT Class 11 Economics Chapter 13 Market Equilibrium
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Market Equilibrium
Chapter: 13
PART – (B) INTRODUCTORY MICROECONOMICS
TEXTUAL QUESTION ANSWERS
1. Explain market equilibrium.
Ans: Market equilibrium is a market state where the supply in the market is equal to the demand in the market. The equilibrium price is the price of a good or service when the supply of it is equal to the demand for it in the market.
2. When do we say there is excess demand for a commodity in the market?
Ans: When market demand surpasses market supply at a given price, it leads to a situation known as excess demand. In other words, if producers are willing to supply less than the total quantity demanded by consumers at a particular price, an excess demand scenario arises.
3. When do we say there is excess supply for a commodity in the market?
Ans: when the quantity of a commodity supplied by producers exceeds the quantity demanded by consumers at a given price.
4. What will happen if the price prevailing in the market is:
(a) above the equilibrium price.
Ans: Above the equilibrium price: There will be a surplus (excess supply) as sellers produce more than buyers are willing to purchase. This will put downward pressure on the price until equilibrium is restored.
(b) below the equilibrium price?
Ans: Below the equilibrium price: There will be a shortage (excess demand) as buyers demand more than sellers are willing to supply. This will put upward pressure on the price until equilibrium is reached.
5. Explain how price is determined in a perfectly competitive market with the fixed number of firms.
Ans: In a perfectly competitive market with a fixed number of firms, the price is determined by the forces of demand and supply.
(i) Market Equilibrium: The interaction of market demand (buyers) and market supply (sellers) determines the equilibrium price and quantity.
The equilibrium price is where quantity demanded = quantity supplied.
If the price is too high, there is a surplus, pushing prices down.
If the price is too low, there is a shortage, pushing prices up.
(ii) Price-Taking Firms: Firms in perfect competition are price takers, meaning they accept the market price as given.
Individual firms cannot influence the price because each one is too small compared to the whole market.
(i) Profit Maximization: Firms produce Marginal Cost (MC) = Market Price (P) to maximize profits.
If P > MC, firms increase output. If P < MC, firms reduce output.
(ii) Long-Run Adjustments: Since the number of firms is fixed, no new firms enter or exit.
Firms continue producing as long as they cover their costs, earning normal profits in the long run.
Thus, in a perfectly competitive market with a fixed number of firms, price is determined by the intersection of market demand and supply, and individual firms adjust output to this price but cannot change it.
6. Suppose the price at which equilibrium is attained above the minimum average cost of the firms constituting the market. Now if we allow the free entry and exit of firms, how will the market price adjust to it?
Ans: If the equilibrium price in a market is above the minimum average cost (AC) of firms, it means that firms are earning supernormal profits (profits above normal levels).
When free entry and exit of firms are allowed, the market undergoes the following adjustments:
(i) Entry of New Firms: Since firms are making supernormal profits, new firms are attracted to the industry. Due to free entry, more firms enter the market, increasing the total market supply. As a result, the market supply curve shifts rightward.
(ii) Decrease in Market Price: With an increase in supply, the equilibrium price starts to fall due to excess supply. The price will continue to decrease until the supernormal profits are completely eliminated.
(iii) Firms Continue Entering Until Normal Profit: New firms will keep entering as long as firms in the market are earning more than normal profit. The process of entry stops when the price falls to a level where it is equal to the minimum average cost (AC) of firms.
At this price:
(a) Firms earn only normal profit (zero economic profit).
(b) There is no further incentive for new firms to enter the market.
(iv) Long-Run Equilibrium: In the long run, the market price adjusts downward to the minimum average cost (AC) of firms.
At this point:
(a) Firms produce at the most efficient level (minimum AC).
(b) No firm earns supernormal profit or incurs losses.
(c) The market reaches a stable equilibrium where only firms that can operate at this cost remain.
When free entry and exit are allowed, any initial supernormal profit attracts new firms, increasing supply and pushing the price down. The process continues until the price reaches the minimum average cost, ensuring only normal profit remains in the long run.
7. At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?
Ans: A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales.
P = Min AC
In a perfectly competitive market, equilibrium price is determined by the forces of market demand and market supply. Market demand refers to the sum total of demand for a commodity by all the buyers in the market. Whereas market supply refers to the sum total of supply of a commodity by all the firms in the market.
8. How is the equilibrium number of firms determined in a market where entry and exit is permitted?
Ans: The equilibrium number of firms in the market is determined by dividing the total quantity demanded and supplied at equilibrium price by the quantity supplied by the firms. In equation
n0 = y0/y0f
where,
n0 stands for equilibrium number of firms.
y0 stands quantity demanded and supplied at the equilibrium price.
y0f stands for the quantity supplied by each firm.
Suppose total quantity demanded and supplied at the equilibrium price is 180 units and each firm supplies 30 units then the equilibrium number of firms will be calculated as under:
9. How is the equilibrium price and quantity affected when income of the consumers (a) increase, (b) decrease?
Ans: Effect of increase in income on equilibrium price and quantity: The equilibrium price and quantity will increase with increase in income of the consumers as shown in the diagram.
Effect of decrease in income on equilibrium price and quantity: With the decrease in income the demand will fall resulting in shifting of demand curve on the left side. The shifting of the demand curve on the left side will decrease the equilibrium price and quantity as shown in the diagram.
10. Using supply and demand curves, show how an increase in the price of shoes affects the price of socks and the number of socks bought and sold.
Ans: Shoes and socks are complementary goods.
Complementary goods are those goods which are used together. Now the price of the shoes increase resulting in a fall in demand for shoes as shown in the diagram.
With the fall in the demand for shoes, the demand for socks will also fall. With the fall in the demand for socks, the price of the socks will decrease as shown in the diagram.
11. How will a change in the price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.
Ans: Tea and coffee are substitute goods. Substitute goods are those goods which can be used in place of each other. There exists a direct relationship between the price and demand of substitute goods. So, the increase in the price of coffee will increase the demand for tea.
The demand curve will shift to the right direction as shown above in the diagram. Now the new demand curve is D1D1 which intersects supply curve SS at E. Hence new equilibrium price and quantity are OP1 and OQ1 respectively. Hence, the equilibrium price and quantity of tea will rise.
Now suppose the price of the coffee decreases resulting into increase in the demand for coffee.
It will cause a fall in demand for tea. So the demand curve will shift leftwards as shown in the diagram. With the shifting of demand curve towards left, the equilibrium price and quantity will fall as shown in the diagram.
Now D0 D0 is a new demand curve which interests the SS supply curve at E1. New equilibrium price and quantity is OP0 (less than OP) and OQ0 (less than OQ). Hence there will be a fall in equilibrium price and quantity of tea.
12. How do the equilibrium price and the quantity of a commodity change when the price of the input used in its production changes?
Ans: If the prices of inputs decrease, the marginal cost would fall. Therefore, the supply curve would shift to the right. With the rightward shifting of the supply curve, the equilibrium price will fall and the quantity will increase as shown in the diagram.
Now the equilibrium price is P₁ mislead of P and quantity OQ₁ in place of OQ.
On the other hand, if the price of inputs increases then the cost of production or marginal cost would rise. Therefore, the supply curve would shift to the left. With the leftward shifting of the supply curve, the equilibrium price will rise and the quantity of the commodity will fall as shown in the diagram.
13. If the price of a substitute (Y) of good X increases, what impact does it have on the equilibrium price and quantity of goods X?
Ans: If the price of good Y (substitute of good X) increases, its demand will fall and people will start consuming its substitute goods X. Thus the demand for good X will increase. With the increase in demand for good X, its demand curve will shift rightwards. With the rightward shift of demand curve, both the equilibrium price and quantity will increase as shown in the diagram.
14. Compare the effect of shift in demand curve on the equilibrium price when the number of firms in the market is fixed with the situation when entry/exit is permitted.
Ans: Comparison: When the demand curve shifts to the right, there will be increase in the equilibrium price when the number of firms is fixed in the market as shown in the figure. On the other hand, if the demand curve shifts to the left the price will fall as shown in the figure. There will be no increase or decrease in the supply as the number of firms are fixed and there is a barrier on the entry and exit of the firms.
Now we take that market where entry and exit is permitted. We know that when we permit free entry and exit from the market, then the market at equilibrium always delivers output at the minimum average cost of the existing firm. Under this condition, even if the demand curve shifts in either direction, at equilibrium the market will supply the desired quantity at the same price as shown in the diagram.
In figure, DD0 is the market demand curve which tells us the quantity demanded by the consumers at various prices and P0 denotes the price at which is equal to minimum average cost of the firms who are still in the market after entry-exit adjustment has taken place. The initial equilibrium is at point E where the demand curve DD0 cuts the P0 = min AC line and the total quantity demanded and supplied is Y0.
Now suppose the demand curve shifts to the right. At price Po, there will be excess demand for the commodity which will push the price up. But the market will be in equilibrium only at P0. So new firms must enter the market to supply this additional demand P and pull the price back to P0. In the figure, with the new demand curve DD₁, the equilibrium quantity is Y, but the equilibrium price is still P0. Here the equilibrium number of firms is more than the earlier equilibrium number of firms. Similarly for a leftward shift of demand curve to D2D2, there will be excess supply at the price P0. But since the equilibrium can be restored only at P0 price, the supply must be eliminated through the exit of some existing firms which will push the price back to P0. Therefore, at the new equilibrium quantity demand and supply will decrease Y₂, whereas the price will remain unchanged at P0. Now the fixed number of firms will be less.
15. Explain through a diagram, the effect of a rightward shift of the demand supply curves and demand remains constant on equilibrium price and quantity.
Ans: Here, we explain the impact of increase in supply on price and output of a commodity, when the demand for the commodity remains the same. Suppose in a year there is a good monsoon in India yielding bumper crops of wheat. This will increase the supply of wheat in the market causing a shift in its supply curve to the right. This impact of increase in supply of wheat on equilibrium price and quantity is graphically depicted in figure. Originally demand curve DD and supply curve SS of wheat intersect at point E and determine equilibrium price of OP and equilibrium quantity OQ exchanged between the sellers and buyers. Now, due to good monsoon resulting in bumper crop of wheat and causing the supply curve of wheat to shift to the right from SS to the new position S₁S1.
The new supply curve intersects the given demand curve DD at point E₁ at which the new lower equilibrium price OP0, and larger equilibrium quantity OQ₁ are determined. Thus, the increase in supply and consequently rightward shift in the supply curve leads to the fall in price and increase in the equilibrium quantity.
16. How are the equilibrium price and quantity affected when:
(a) Both demand and supply curves shift in the same direction?
Ans: Demand and supply curves may shift to rightwards or to leftwards. Suppose demand and supply curves both shift rightwards then the quantity will increase but the equilibrium price may increase, decrease or remains unchanged depending on the ratio between increase in demand and increase in supply. If both demand and supply increases in the same rate, then the equilibrium price remains unchanged as shown in the diagram. P
The equilibrium price will increase if the proportional increase in demand is more than proportional increase in supply. On the other hand, the equilibrium price will fall if the proportional increase in demand is less than proportional increase in supply.
Now we suppose that both demand and supply curves shift leftwards. In this case the equilibrium quantity will decrease but the equilibrium price may increase, decrease or remain unchanged.
(b) Demand and supply curves shift in opposite directions?
Ans: If the shift of the demand curve is leftward and that of supply curve is rightward, then the equilibrium price will decrease and the quantity may increase, decrease or remain unchanged as shown in the diagram.
On the other hand, if the demand curve shifts rightward and the supply curve shifts leftward then the equilibrium price increases, but the quantity may increase, decrease or remain unchanged as shown in the diagram.
17. Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?
Ans: Price ceilings that involve a maximum price below the market price create five important effects: Shortages, Reduction in Product Quality, Wasteful Lines and Other Search Costs, Loss of Gains from Trade & Misallocation of Resources.
18. How is the optimal amount of labour determined in a perfectly competitive market?
Ans: The demand for labour is derived from VMPL and the supply of labour is positively sloped. The equilibrium exists at E, where the demand for labour and the supply of labour intersect each other. The equilibrium wage rate is w and the optimal amount of labour is qL.
19. How is the wage rate determined in a perfectly competitive labour market?
Ans: Wages in perfect competition are determined by the intersection of demand and supply in Panel (a). An individual firm takes the wage W 1 as given. It faces a horizontal supply curve for labor at the market wage, as shown in Panel (b).
20. Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?
Ans: Price ceilings that involve a maximum price below the market price create five important effects: Shortages, Reduction in Product Quality, Wasteful Lines and Other Search Costs, Loss of Gains from Trade & Misallocation of Resources.
21. A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exit is permitted. Explain.
Ans: In the short run, the number of firms is fixed, however in the long run, it is not.
The figure illustrates two scenarios: One where the number of firms is fixed in the short run and another where firms have free entry and exit in the long run. The line P = min AC represents the long-run price level, while D₁D₁ and D₂D₂ represent the demand curves in the short and long run, respectively.
Initially, equilibrium is at E₁, where demand and supply intersect. Suppose the demand curve shifts while the number of firms remains fixed. In this case, the new short-run equilibrium is at Eₛ, where the supply curve meets the new demand curve D₂D₂. The equilibrium price rises to Pₛ, and the equilibrium quantity adjusts to qₛ.
In contrast, when firms can freely enter and exit the market, an increase in demand shifts the demand curve rightward to D₂D₂, establishing a new long-run equilibrium at E₂. Here, the equilibrium price remains at P = min AC, while the equilibrium quantity increases to qₗ.
Comparing both cases, when firms have the freedom to enter and exit, the equilibrium price remains stable and lower than the short-run price Pₛ, while the equilibrium quantity (qₗ) is higher than qₛ. Similarly, for a leftward demand shift, the short-run equilibrium price (Pₛ) drops below the long-run equilibrium price, and the short-run equilibrium quantity (qₛ) is lower than qₗ in the long run.
22. Suppose the demand and supply curves of commodity X in a perfectly competitive market are given by
qd = 700 – P
qs = 500 + 3P for P ≥ 15
= O for O ≤ P < 15
Assume that the market consists of identical firms. Identify the reason, behind the market supply of commodity X being zero at any price less than ₹15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?
Ans: In the question, qd and qs denote the demand and supply respectively and p denotes the price of commodity X. From the market supply curve, we come to know that below ₹15, the market supply is zero. This in turn means that no producer produces commodity X, when its price is below ₹15. We know that the firms produce a positive quantity of output only when the price of the goods is at least equal to the minimum average variable cost of the firms. When the price is below minimum AVC, they produce nothing. Therefore, the minimum average cost of producing commodity X is ₹15.
Here the price is ₹15. At equilibrium from the supply curve we get the quantity of supply.
At equilibrium price
qd = qs
700 – P = 500 + 3P
or – 4P = – 200
P = 50
Hence equilibrium price = ₹50
Equilibrium quantity = 700 – P
= 700 – 50 = 650
23. Considering the same demand curve as in question no. 22, now let us allow for free entry and the existence of the firm’s producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as
qs f• = 8 + 3P for P ≥ 20
= 0 for O ≤ P < 20.
(a) What is the significance of P = 20?
(b) At what price will the market for X be in equilibrium? State the reason for your answer.
(c) Calculate the equilibrium quantity and number of firms.
Ans: Significance of P = 20 is that it is the equilibrium price determined by market demand and market supply forces.
At the price of ₹20, the market for X will be in equilibrium.
Equilibrium quantity = 700 – P
= 700 – 20 = 680
Quantity produced by a firm
= 8 + (3 × 20) = 68
No. of firms = 680/68 = 10.
24. Suppose the demand and supply curves of salt are given by:
qd = 100 – P
qd = 700 + 2P
(a) Find the equilibrium price and quantity.
(b) Now suppose that the price of an input used to produce salt have increased so that the new supply curve is
qs = 400 + 2P.
How does the equilibrium price and quantity change? Does the change confirm your expectation?
(c) Suppose the government has imposed a tax of ₹3 per unit of sale of salt. How does it affect the equilibrium price and quantity?
Ans: (a) Equilibrium Price and Quantity
At equilibrium, qd = qs, so:
100 − P = 700+2P
100 – 700 = 2P + P
− 600 = 3P
P = 200
Substituting P = 200 = into the demand equation:
qd = 100 − 200 = − 100
There seems to be an issue with the given equations.
Did you mean qs = 700 + 2P instead?
If so, solving with 100 – P = 700 + 2P:
100 − 700 = 2P + P
− 600 = 3P
P = 200
qd = 100 − 200 = −100
(b) New Supply Curve: qs = 400 + 2P
Setting qd = qs:
100 − P = 400 + 2P
100 − 400 = 2P + P
− 300 = 3P
P = 100
Substituting P = 100 into qd:
qd = 100 − 100 = 0
(c) Tax of ₹3 per unit
With a tax, the new supply equation becomes:
qs = 400 + 2(P − 3)
qs = 400 + 2P − 6
qs = 394 + 2P
Solving 100 − P =394 + 2P:
100 − 394 = 2P + P
− 294 = 3P
P = 98
25. Suppose the market determined rent for apartments is high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?
Ans: The impact on the market for apartments is as follows:
(a) The consumers will get inferior quality houses. This is because the builders getting lower price will in turn produce low quantity goods in order to reduce their cost of production.
(b) Due to rent control, there will be excess demand for apartments. Every person desiring of having apartments will not be able to get the apartment on rent. There will be a long list of waiters.
(c) Since all the persons seeking apartments on rent control will not get the apartments, some of them will be willing to pay higher rent for the apartments. As a result, there will be black marketing for apartments on rent.
