Market Equilibrium

1 Mark Questions

1. 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. (Hots; Delhi 2013)

Ans. 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.

2. Give the meaning of equilibrium. (All India 2009 c)

Ans. 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.

1. Define equilibrium price. (All India 2008,2006)

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

3 Mark Questions

1. Market for a good is in an equilibrium. There is an increase in demand for this good. Explain the chain of effects. (Delhi 2011)

or At a given equilibrium in the market, explain the chain of effects, of increase in demand for a good. (All India 2010 C)

Ans. The given diagram shows a situation of increase in demand. The demand curve shifts to the right from DD to D1D1 An equilibrium point shifts from E to E₁ Consequently, an equilibrium price and an equilibrium quantity rises from OP to OP, and OQ to OQ1 respectively.

The chain effects of increase in demand When there is a increase in demand it creates excess demand (equal to O Q₂) at initial price OP and as a result of which price will rise. With rise in price, demand will start falling (according to Law of Demand) and supply will start rising (according to Law of Supply), this process will continue till the time we reach new equilibrium level at <math>\mathfrak{L}_{v}</math> where there is no excess demand.

P Excess demand

Price<br>_d <math>D_1</math>

Q <math>Q_1</math> <math>Q_2</math> Quantity (unit)

Diagram showing situation of excess demand

1. Explain the changes that will take place when in a market the demand for a

good is greater than supply at the prevailing price. (Delhi 2010 c)

Ans. If at a prevailing price, quantity demanded is more than quantity supplied then supplier will motivate to increase the price of the commodity due to which demand decreases, till it reaches at the equilibrium price where quantity demanded is equal to quantity supplied.

1. Explain why an equilibrium price of a commodity is determined at that level

of output at which its demand equals its supply. (Delhi 2010 c)

Ans. An equilibrium is a point where quantity demanded is equal to quantity supplied and an equilibrium can be attained only at that point. If at a given price, supply is more, it will show excess supply and if demand is more, it will show excess demand. Due to excess supply price will fall and due to excess demand price will rise. Hence, price will be stable only at an equilibrium level where demand and supply both are equal.

1. How is an equilibrium price of a commodity determined? Explain with the help of demand and supply schedule(Delhi 2009)

or Explain how market price of a good is determined. Use diagram (All India 2009 c) or

How is price determined under perfect competition? Explain briefly (All India 2006)