Class 12 Economics Market Equilibrium Notes

Class 12 Economics Market Equilibrium Notes

Class 12 Economics

Chapter 5: Market Equilibrium (Quick Revision Notes)

1. Meaning of Market Equilibrium

Market equilibrium is the situation where buyers want to purchase exactly the same quantity that sellers want to sell.

Formula

Demand = Supply

or

QD = QS

At this point:

  • No shortage
  • No surplus
  • Price becomes stable

Equilibrium Price: Price at which demand equals supply.

Equilibrium Quantity: Quantity bought and sold at equilibrium price.

2. Excess Demand

Excess demand occurs when

Demand > Supply

Causes

  • Price is below equilibrium price.

Effects

  • Shortage of goods
  • Buyers compete for goods
  • Price starts increasing

Formula

Excess Demand = Demand − Supply

3. Excess Supply

Excess supply occurs when

Supply > Demand

Causes

  • Price is above equilibrium price.

Effects

  • Unsold stock
  • Sellers reduce prices
  • Price starts falling

Formula

Excess Supply = Supply − Demand

4. Price Adjustment Process

When price is below equilibrium

Demand > Supply

↓

Shortage

↓

Price rises

↓

Market reaches equilibrium

When price is above equilibrium

Supply > Demand

↓

Surplus

↓

Price falls

↓

Market reaches equilibrium

5. Determination of Market Equilibrium

Equilibrium is found where the Demand Curve and Supply Curve intersect.

At this point:

  • Buyers are satisfied.
  • Sellers are satisfied.
  • Market clears automatically.

6. Changes in Equilibrium (Fixed Number of Firms)

A. Increase in Demand

Demand curve shifts right.

Result:

  • Price ↑
  • Quantity ↑

Reasons

  • Increase in income (Normal goods)
  • Increase in population
  • Rise in price of substitute
  • Fall in price of complementary goods
  • Change in taste and preference

B. Decrease in Demand

Demand curve shifts left.

Result:

  • Price ↓
  • Quantity ↓

C. Increase in Supply

Supply curve shifts right.

Result:

  • Price ↓
  • Quantity ↑

Reasons

  • Better technology
  • Fall in input prices
  • More firms enter production

D. Decrease in Supply

Supply curve shifts left.

Result:

  • Price ↑
  • Quantity ↓

Reasons

  • Increase in input cost
  • Natural disasters
  • Increase in taxes
  • Exit of firms

7. Simultaneous Changes in Demand and Supply

SituationPriceQuantity
Demand ↑ Supply ↑DependsIncreases
Demand ↓ Supply ↓DependsDecreases
Demand ↑ Supply ↓IncreasesDepends
Demand ↓ Supply ↑DecreasesDepends

Remember

  • Same direction → Quantity is certain
  • Opposite direction → Price is certain

8. Market Equilibrium with Free Entry and Exit

When firms can freely enter or leave the market:

  • Firms earn only Normal Profit
  • No Supernormal Profit
  • No Loss in the long run

Important Rule

Equilibrium Price = Minimum Average Cost (Min AC)

Effect of Demand Change

Demand increases

  • More firms enter
  • Quantity increases
  • Price remains unchanged

Demand decreases

  • Some firms leave
  • Quantity decreases
  • Price remains unchanged

9. Labour Market

Labour market is different from goods market.

Households

Supply labour.

Firms

Demand labour.

Demand for Labour

A firm hires workers until

Wage = Value of Marginal Product (VMP)

or

Wage = Marginal Revenue Product (MRP)

Labour Demand Curve

Downward sloping because higher wages reduce demand for labour.

Labour Supply Curve

Market labour supply is upward sloping because higher wages encourage more people to work.

Wage Determination

Wage is determined where:

Labour Demand = Labour Supply

10. Price Ceiling

Price ceiling means the government fixes the maximum price.

It is always set:

Below equilibrium price

Objective

To make essential goods affordable.

Examples

  • Rice
  • Wheat
  • Sugar
  • Kerosene

Effects

  • Excess demand
  • Shortage
  • Rationing
  • Black marketing
  • Long queues

11. Price Floor

Price floor means the government fixes the minimum price.

It is always set:

Above equilibrium price

Objective

To protect producers.

Examples

  • Minimum Support Price (MSP)
  • Minimum wages

Effects

  • Excess supply
  • Unsold stock
  • Government purchases surplus

Important Formulae

  1. Equilibrium

QD = QS

  1. Excess Demand

ED = QD − QS

  1. Excess Supply

ES = QS − QD

  1. Equilibrium with Free Entry

Price = Minimum Average Cost

Flow Chart

Demand > Supply
        ↓
   Excess Demand
        ↓
   Price Increases
        ↓
    Equilibrium

Supply > Demand
        ↓
   Excess Supply
        ↓
   Price Decreases
        ↓
    Equilibrium

Important CBSE Exam Points

✔ Equilibrium occurs where Demand = Supply.

✔ Excess demand causes price to rise.

✔ Excess supply causes price to fall.

✔ Increase in demand → Price ↑ Quantity ↑

✔ Increase in supply → Price ↓ Quantity ↑

✔ Price ceiling creates shortage.

✔ Price floor creates surplus.

✔ Under free entry and exit:

  • Price remains equal to Minimum Average Cost.
  • Firms earn only normal profit.

✔ Labour demand depends on Value of Marginal Product (VMP).

One-Page Revision (Last Minute)

  • Market Equilibrium = Demand = Supply
  • Equilibrium Price = Stable Price
  • Equilibrium Quantity = Quantity bought and sold
  • Excess Demand → Price ↑
  • Excess Supply → Price ↓
  • Demand ↑ → Price ↑ Quantity ↑
  • Supply ↑ → Price ↓ Quantity ↑
  • Free Entry → Price = Min AC
  • Price Ceiling → Shortage
  • Price Floor → Surplus
  • Wage determined where Labour Demand = Labour Supply

COMPLETE QUESTION BANK (CLASS 12)

🟢 1. Multiple Choice Questions (MCQs)

Basic Concepts

  1. Market equilibrium occurs when:
    • (A) Demand > Supply
    • (B) Supply > Demand
    • (C) Demand = Supply
    • (D) Price is highest
      Answer: (C)
  2. Excess demand exists when:
    • (A) QD < QS
    • (B) QD > QS
    • (C) QD = QS
    • (D) Price = 0
      Answer: (B)
  3. Excess supply exists when:
    • (A) QD > QS
    • (B) QD < QS
    • (C) QD = QS
    • (D) Demand increases
      Answer: (B)
  4. Equilibrium price is determined at:
    • (A) Highest demand point
    • (B) Lowest supply point
    • (C) Intersection of demand and supply
    • (D) Maximum profit point
      Answer: (C)

Price Mechanism

  1. When price is below equilibrium, the market has:
    • (A) Surplus
    • (B) Shortage
    • (C) Balance
    • (D) No change
      Answer: (B)
  2. When price is above equilibrium, the market has:
    • (A) Shortage
    • (B) Surplus
    • (C) Equilibrium
    • (D) No supply
      Answer: (B)

Demand & Supply Shifts

  1. Increase in demand leads to:
    • (A) Price falls, quantity falls
    • (B) Price rises, quantity rises
    • (C) Price falls, quantity rises
    • (D) Price rises, quantity falls
      Answer: (B)
  2. Increase in supply leads to:
    • (A) Price rises, quantity falls
    • (B) Price falls, quantity rises
    • (C) Price rises, quantity rises
    • (D) Price unchanged
      Answer: (B)

Free Entry & Exit

  1. With free entry and exit, price equals:
    • (A) Marginal cost
    • (B) Minimum average cost
    • (C) Maximum profit
    • (D) Demand price
      Answer: (B)
  2. In long-run competitive equilibrium, firms earn:
  • (A) Supernormal profit
  • (B) Loss
  • (C) Normal profit
  • (D) Zero revenue
    Answer: (C)

Labour Market

  1. Labour demand depends on:
  • (A) Wage only
  • (B) VMP
  • (C) Supply only
  • (D) Population
    Answer: (B)
  1. Wage is determined where:
  • (A) Demand = Supply of goods
  • (B) Demand = Supply of labour
  • (C) Profit = Cost
  • (D) Price = Zero
    Answer: (B)

Government Intervention

  1. Price ceiling is:
  • (A) Minimum price
  • (B) Maximum price
  • (C) Market price
  • (D) Export price
    Answer: (B)
  1. Price floor leads to:
  • (A) Excess demand
  • (B) Excess supply
  • (C) No change
  • (D) Zero price
    Answer: (B)

🟡 2. Fill in the Blanks

  1. Market equilibrium is where ______ equals ______.
    Answer: Demand, Supply
  2. Excess demand occurs when ______ > ______.
    Answer: Demand, Supply
  3. Excess supply occurs when ______ > ______.
    Answer: Supply, Demand
  4. Equilibrium price is determined at the ______ of demand and supply curves.
    Answer: intersection
  5. Price above equilibrium leads to ______ in the market.
    Answer: surplus
  6. Price below equilibrium leads to ______ in the market.
    Answer: shortage
  7. Under free entry and exit, price = ______.
    Answer: minimum average cost
  8. Wage in labour market is determined by ______ of labour demand and supply.
    Answer: intersection
  9. Price ceiling is always fixed ______ equilibrium price.
    Answer: below
  10. Price floor is always fixed ______ equilibrium price.
    Answer: above

🔵 3. True or False

  1. Market equilibrium occurs when demand equals supply. → True
  2. Excess demand occurs when supply is greater than demand. → False
  3. Price rises when there is excess demand. → True
  4. Price ceiling increases market surplus. → False
  5. Price floor creates excess supply. → True
  6. Supply curve is downward sloping. → False
  7. Demand curve shifts due to income change. → True
  8. Free entry leads to supernormal profit in long run. → False
  9. Labour demand is derived from VMP. → True
  10. Equilibrium price changes when demand shifts with fixed firms. → True

🟣 4. Assertion–Reason Questions

Q1

Assertion (A): Excess demand leads to increase in price.
Reason (R): Consumers are willing to pay higher prices when goods are scarce.

✔ Answer: Both A and R are true and R is correct explanation.

Q2

A: Price ceiling leads to shortage.
R: Price ceiling is set above equilibrium price.

✔ Answer: A is true but R is false.

Q3

A: Free entry and exit ensures normal profit.
R: Firms enter when profit is high and exit when loss occurs.

✔ Answer: Both true and R explains A.

Q4

A: Excess supply causes price to fall.
R: Sellers compete to sell unsold stock.

✔ Answer: Both true and R explains A.

🟠 5. Very Short Answer Questions (1–2 marks)

  1. Define market equilibrium.
  2. What is excess demand?
  3. What is excess supply?
  4. What happens when price is above equilibrium?
  5. What happens when price is below equilibrium?
  6. Define price ceiling.
  7. Define price floor.
  8. What is equilibrium price?
  9. What is equilibrium quantity?
  10. What is meant by free entry and exit?

🔴 6. Concept-Based One-Liners

  • Demand = Supply → Equilibrium
  • Demand > Supply → Price increases
  • Supply > Demand → Price decreases
  • Demand increases → Price & quantity increase
  • Supply increases → Price decreases, quantity increases
  • Free entry → Price = Minimum AC
  • Wage = VMP in labour market
  • Price ceiling → shortage
  • Price floor → surplus