Market Equilibrium

Market equilibrium brings together the demand and supply sides of a perfectly competitive market to explain how prices and quantities are actually determined. In this chapter you will learn that equilibrium occurs at the price where market demand equals market supply, so there is neither excess demand nor excess supply. Excess demand pushes the price up and excess supply pushes it down until equilibrium is restored. You will study the effects of shifts in demand and supply, and of simultaneous shifts, on the equilibrium price and quantity, with a fixed number of firms. With free entry and exit, the long run equilibrium price equals the minimum average cost of firms, and changes in demand are met by a change in the number of firms. The chapter also applies demand and supply to the labour market, where the wage is determined, and to government interventions: a price ceiling, which causes shortages, rationing and black markets, and a price floor such as a minimum support price, which causes surpluses that the government must buy.

Detailed Worksheet: Market Equilibrium Section A - Definitions (10 marks) 1. Define market equilibrium. What is meant by equilibrium price and equilibrium quantity? (2 marks) 2. Distinguish between excess demand and excess supply. (2 marks) 3. What is a price ceiling? Give one example from India. (2 marks) 4. What is a price floor? Give one example. (2 marks) 5. Explain the term invisible hand in the context of market equilibrium. (2 marks) Section B - Calculations and Applications (15 marks) 6. The market demand and supply functions of a good are Qd = 200 - 10p and Qs = 50 + 15p. Calculate the equilibrium price and equilibrium quantity. (3 marks) 7. In the market of question 6, calculate the excess demand or excess supply at p = 4 and at p = 8. Explain how the price will adjust in each case. (3 marks) 8. If the demand function in question 6 changes to Qd = 250 - 10p while supply is unchanged, calculate the new equilibrium price and quantity. State one reason for such a change in demand. (3 marks) 9. In a perfectly competitive market with free entry and exit, the minimum average cost of each identical firm is Rs 10, reached at an output of 15 units. The market demand is Qd = 500 - 20p. Calculate the long run equilibrium price, the market quantity and the number of firms. (3 marks) 10. In the market of question 6, the government fixes a price floor of Rs 8 per unit and promises to buy all the unsold output. Calculate the quantity demanded, the quantity supplied, the surplus, and the amount the government must spend. (3 marks) Section C - Diagrams (10 marks) 11. Draw a diagram showing market equilibrium. Mark the equilibrium point and show excess demand below and excess supply above the equilibrium price. (4 marks) 12. Draw a diagram showing the effect of a price ceiling below the equilibrium price. Mark the shortage and explain why a black market may develop. (3 marks) 13. Draw a diagram showing the effect of an increase in demand on equilibrium price and quantity in a market with free entry and exit of firms. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. Explain with diagrams the effect on equilibrium price and quantity when (i) demand and supply both increase by the same amount, (ii) demand increases more than supply and (iii) supply increases while demand decreases. (5 marks) 15. Compare the effect of an increase in demand on equilibrium price and quantity under (i) a fixed number of firms and (ii) free entry and exit. Explain why price remains constant in the second case. (5 marks) 16. Explain the effects of the minimum support price policy for wheat on farmers, consumers and the government. Analyse the problems of excess stocks and suggest two alternatives. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Show equations and working for every calculation. Draw neat, labelled demand-supply diagrams.