INDIAN SCHOOL
AL WADI AL KABIR
ECONOMICS-XII
CHAPTER 5: MARKET EQUILIBRIUM
1. What is the meaning of equilibrium price?
Equilibrium price is the price where quantity demanded is equal to quantity supplied
2. If a price is fixed higher than the equilibrium price what will be the state of quantity
demanded and quantity supplied?
There will be excess supply, i.e., quantity supplied will be more than quantity demanded at a
higher price.
3. If price is fixed lower than the equilibrium price what will be the state of quantity demanded
and quantity supplied?
There will be excess demand, i.e., quantity demanded will be more than quantity supplied at
a lower price.
4. What is the meaning of excess supply?
Excess supply means when quantity supplied is more than quantity demanded.
5. What is the meaning of excess demand?
Excess demand is when quantity demanded is more than the quantity supplied.
6. How is the situation of excess demand solved?
In case of excess demand price should be reduced so that demand falls and supply increases
7. How is the situation of excess supply solved?
In situation of excess supply the price should be reduced to clear the market.
8. If demand of a commodity is perfectly elastic, how will the changes in supply effect
equilibrium output?
There will no change in the equilibrium output.
9. If demand is perfectly elastic and supply increases, how will the equilibrium price and output
be affected?
The equilibrium price will remain the same and the equilibrium output will increase
10. How will equilibrium price and output be affected when increase in both supply and demand
are equal?
In this case equilibrium price will remain the same but equilibrium output will increase.
11. What is the role of a competitive firm in the price determination of a commodity?
A competitive firm is a price take up it has no role to play in determination of price.
12. What are the implications of a product being homogeneous under perfect competition?
This implies that the price of the commodity remains the same
13. How is the price of a commodity determined under perfect competition?
It is determined with the help of supply and demand.
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14. What will be the effect of increase in demand on the price and output, when
(i)
Supply of the commodity is perfectly elastic,
(ii)
Supply of the commodity is perfectly inelastic?
(i)
If supply is perfectly elastic, there will be no effect of increase in demand on price,
but output will increase. According to diagram 1, PS is the supply curve and demand
curve shifts from DD to D1D1 due to increase in demand. As a result price remains
the same, i.e., OP but output increase from OQ to OQ1.
(ii)
If supply is perfectly inelastic and demand increases, price will increase but output
will remain the same. In diagram 2, SQ is the supply curve and demand curve shifts
from DD to D1D1 due to increase in demand. As a result price increase from OP to
OP1 but output remains the same, i.e., OQ.
15. How price and output of a commodity will be affected due to a decrease in its demand when:
(i)
Supply of commodity is perfectly inelastic,
(ii)
Supply of the commodity is perfectly elastic?
(i)
If supply is perfectly inelastic and demand decrease, price will decrease but output
will remain the same. In Diagram 1, SQ is perfectly inelastic supply curve and
demand curve shifts from DD to D1D1 due to decrease in demand. With the result
price decrease from OP to OP1, but supply remains the same, i.e., OQ.
(ii)
If supply is perfectly elastic and demand decreases, price will remain the same but
output will decline. In diagram 2, PS is perfectly elastic supply curve and demand
curve shifts from DD to D1D1 due to decrease in demand. With the result price
remains the same, i.e., OP but output decrease from OQ to OQ1.
16. How will the price and output of a commodity be affected as a result of decrease in supply
when:
(i)
Demand is perfectly inelastic,
(ii)
Demand is perfectly elastic?
(i)
If demand is perfectly inelastic and supply decreases, price will increase but output
will remain the same. In Diagram 1, DQ is perfectly inelastic demand curve and
supply curve shifts from SS to S1S1 due to decrease in supply. As a result price
increases from OP to OP1 but output remains the same, i.e., OQ.
(ii)
If demand is perfectly elastic and supply decreases, price will remains the same but
output will decline. In Diagram 2, PD is perfectly elastic demand curve and supply
curve shifts from SS to S1S1 due to decrease in supply, with the result price remains
the same, i.e., OP but output decreases from OQ to OQ1.
QUESTIONS
1.
2.
3.
4.
5.
6.
How is equilibrium price determined?
What is the meaning of excess demand? How is the problem of excess demand solved?
What is the meaning of excess supply? How can this problem be solved?
How do shifts in demand curve affect equilibrium price?
How do shifts in supply curve affect equilibrium price and output?
How do simultaneous shifts in demand and supply affect equilibrium price and output?