CBSE Class 12 Economics: Market Equilibrium with Simple Applications NCERT Solutions

Solution: Market equilibrium is a fundamental economic concept that describes a state where the quantity of a good or service that consumers demand is precisely equal to the quantity that producers supply. This balance occurs at a specific price, known as the equilibrium price, and results in a stable market condition where there is no inherent pressure for the price or quantity to change.

Solution:

Market equilibrium is the state where market demand equals market supply. This equilibrium point is stable, meaning the market tends to return to it if disturbed. The equilibrium price and quantity are determined by the interaction of demand and supply forces.

1. When the price is above the equilibrium price:

If the prevailing market price is higher than the equilibrium price, the quantity supplied by producers will be greater than the quantity demanded by consumers. This situation is known as excess supply or surplus. For example, if the equilibrium price is ₹3, and the market price is ₹5, consumers might demand 1 unit while producers are willing to supply 5 units. This excess supply creates competition among sellers, who will try to sell their surplus stock by lowering the price. As the price falls, the quantity demanded increases (expansion of demand) and the quantity supplied decreases (contraction of supply), moving the market towards the equilibrium point where demand equals supply.

2. When the price is below the equilibrium price:

If the prevailing market price is lower than the equilibrium price, the quantity demanded by consumers will be greater than the quantity supplied by producers. This situation is called excess demand or shortage. For instance, if the equilibrium price is ₹3, and the market price is ₹1, consumers might demand 5 units, but producers are only willing to supply 1 unit. This excess demand leads to competition among buyers, who are willing to pay a higher price to obtain the limited available goods. As the price rises, the quantity demanded decreases (contraction of demand) and the quantity supplied increases (expansion of supply), guiding the market back towards the equilibrium point.

Determination of Equilibrium Price with Diagram:

The equilibrium price is determined at the point where the demand curve (D) and the supply curve (S) intersect. Let's consider a hypothetical market schedule:

Price (₹)

Demand (Units)

Supply (Units)

Surplus (+) or Shortage (-)

Resulting Tendency 1 5 1 (-) 4

Expansion 2 4 2 (-) 2

Expansion 3 3 3 0

Market Equilibrium 4 2 4 (+) 2

Contraction 5 1 5 (+) 4

Contraction

In the schedule, equilibrium is achieved at a price of ₹3, where demand (3 units) equals supply (3 units). At prices below ₹3 (e.g., ₹1 and ₹2), there is excess demand, causing the price to rise. At prices above ₹3 (e.g., ₹4 and ₹5), there is excess supply, causing the price to fall.

Diagram Explanation:

The diagram shows the demand curve (D) sloping downwards and the supply curve (S) sloping upwards. The vertical axis represents price (P), and the horizontal axis represents quantity (Q). The intersection point 'E' of the demand and supply curves represents the market equilibrium. The corresponding price 'P' on the vertical axis is the equilibrium price, and the quantity 'Q' on the horizontal axis is the equilibrium quantity.

If the price is P1 (above equilibrium P), quantity demanded is B and quantity supplied is A. The difference AB represents excess supply. This surplus leads to a fall in price from P1 towards P, causing an upward movement along the supply curve (expansion of supply) and a downward movement along the demand curve (expansion of demand) until equilibrium E is reached.

If the price is P2 (below equilibrium P), quantity demanded is K and quantity supplied is L. The difference KL represents excess demand. This shortage leads to a rise in price from P2 towards P, causing a downward movement along the supply curve (contraction of supply) and an upward movement along the demand curve (contraction of demand) until equilibrium E is reached.

Solution: We say there is excess demand for a commodity in the market when, at the prevailing market price, the quantity that consumers wish to purchase is greater than the quantity that producers are willing to sell. This typically occurs when the market price is set below the equilibrium price. The difference between the quantity demanded and the quantity supplied at this lower price represents the extent of the excess demand or shortage.