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Market Equilibrium – CBSE NCERT Study Resources

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12th

12th - Economics

Market Equilibrium

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Overview of the Chapter: Market Equilibrium

This chapter introduces the concept of market equilibrium, which is a fundamental principle in microeconomics. It explains how the forces of demand and supply interact to determine the equilibrium price and quantity in a market. The chapter also covers the effects of shifts in demand and supply on equilibrium, government interventions like price ceilings and floors, and the concept of elasticity in relation to market equilibrium.

Market Equilibrium: A state in a market where the quantity demanded by consumers equals the quantity supplied by producers at a particular price, resulting in no tendency for the price to change.

Key Concepts Covered

  • Determination of equilibrium price and quantity
  • Effects of shifts in demand and supply on equilibrium
  • Government interventions: price ceilings and price floors
  • Elasticity and its impact on market equilibrium

Determination of Equilibrium Price and Quantity

Equilibrium in a market is achieved when the quantity demanded equals the quantity supplied. At this point, the market clears, and there is no surplus or shortage. The equilibrium price is also known as the market-clearing price.

Shifts in Demand and Supply

Changes in factors such as consumer preferences, income, or production costs can shift the demand or supply curves. A rightward shift in demand (increase) leads to a higher equilibrium price and quantity, while a leftward shift (decrease) results in a lower equilibrium price and quantity. Similarly, shifts in supply affect equilibrium in predictable ways.

Government Interventions

Governments may intervene in markets through price controls:

  • Price Ceiling: A maximum price set below the equilibrium price to make goods affordable, often leading to shortages.
  • Price Floor: A minimum price set above the equilibrium price to protect producers, often leading to surpluses.

Elasticity and Market Equilibrium

The concept of elasticity measures how responsive quantity demanded or supplied is to changes in price or other factors. Elasticity influences how changes in demand or supply affect equilibrium price and quantity.

Price Elasticity of Demand: A measure of how much the quantity demanded of a good responds to a change in its price.

All Question Types with Solutions – CBSE Exam Pattern

Explore a complete set of CBSE-style questions with detailed solutions, categorized by marks and question types. Ideal for exam preparation, revision and practice.

Very Short Answer (1 Mark) – with Solutions (CBSE Pattern)

These are 1-mark questions requiring direct, concise answers. Ideal for quick recall and concept clarity.

Question 1:
Define market equilibrium.
Answer:

When quantity demanded equals quantity supplied at a given price.

Question 2:
What causes a rightward shift in the demand curve?
Answer:

Increase in consumer income or preference for the good.

Question 3:
Name one factor leading to excess demand.
Answer:

Price set below equilibrium price.

Question 4:
How does a price ceiling affect market equilibrium?
Answer:

Creates shortage as demand exceeds supply.

Question 5:
What is equilibrium price?
Answer:

Price where market demand equals market supply.

Question 6:
Explain surplus in market equilibrium.
Answer:

When quantity supplied exceeds quantity demanded.

Question 7:
What happens when supply increases in a market?
Answer:

Equilibrium price falls, quantity rises.

Question 8:
Give an example of government intervention in market equilibrium.
Answer:

Imposing a minimum support price for crops.

Question 9:
How does elastic demand affect equilibrium?
Answer:

Small price change causes large quantity change.

Question 10:
What is the effect of a subsidy on supply?
Answer:

Shifts supply curve rightward, lowering price.

Question 11:
Define price floor with an example.
Answer:

Minimum legal price, e.g., minimum wage.

Question 12:
How does technological advancement impact equilibrium?
Answer:

Increases supply, lowers price, raises quantity.

Question 13:
What is market disequilibrium?
Answer:

When demand and supply are not equal.

Question 14:
Explain excess supply with a diagram reference.
Answer:

[Diagram: Supply above demand at a price]

Question 15:
Explain the effect of an increase in demand on equilibrium price and quantity.
Answer:

An increase in demand shifts the demand curve to the right.
This leads to a higher equilibrium price and a higher equilibrium quantity.

Question 16:
What happens to market equilibrium when supply decreases?
Answer:

A decrease in supply shifts the supply curve to the left.
This results in a higher equilibrium price and a lower equilibrium quantity.

Question 17:
State the condition for excess demand.
Answer:

Excess demand occurs when the quantity demanded exceeds the quantity supplied at a given price, leading to upward pressure on prices.

Question 18:
What is excess supply?
Answer:

Excess supply arises when the quantity supplied is greater than the quantity demanded at a given price, causing downward pressure on prices.

Question 19:
What is the impact of a price floor on equilibrium?
Answer:

A price floor set above the equilibrium price leads to excess supply (surplus) as the quantity supplied exceeds the quantity demanded.

Question 20:
Differentiate between movement along and shift of the demand curve.
Answer:

Movement along the demand curve occurs due to a change in price.
Shift of the demand curve happens due to non-price factors like income or preferences.

Question 21:
Explain the concept of stable equilibrium in a market.
Answer:

Stable equilibrium occurs when any deviation from equilibrium (due to excess demand or supply) automatically brings the market back to equilibrium through price adjustments.

Question 22:
How does a simultaneous increase in demand and supply affect equilibrium quantity?
Answer:

If both demand and supply increase, the equilibrium quantity will definitely rise, but the effect on price depends on the relative magnitude of shifts.

Question 23:
What role do market forces play in achieving equilibrium?
Answer:

Market forces of demand and supply interact to adjust prices, eliminating shortages or surpluses, and restoring equilibrium over time.

Very Short Answer (2 Marks) – with Solutions (CBSE Pattern)

These 2-mark questions test key concepts in a brief format. Answers are expected to be accurate and slightly descriptive.

Question 1:
Define market equilibrium in the context of demand and supply.
Answer:

Market equilibrium is the point where the quantity demanded equals the quantity supplied in a market. At this point, there is no tendency for price or quantity to change, as the market clears.

Question 2:
What happens to the equilibrium price when there is an increase in demand, assuming supply remains constant?
Answer:

When demand increases and supply remains constant, the equilibrium price rises. This occurs because buyers are willing to purchase more at each price level, leading to upward pressure on prices until a new equilibrium is established.

Question 3:
Explain the effect of a decrease in supply on equilibrium quantity, assuming demand remains unchanged.
Answer:

If supply decreases and demand stays the same, the equilibrium quantity falls. With fewer goods available, the price rises, reducing the quantity demanded until equilibrium is restored at a lower quantity and higher price.

Question 4:
How does a government-imposed price ceiling affect market equilibrium?
Answer:

A price ceiling set below the equilibrium price creates a shortage in the market. Since the price cannot rise to clear the market, the quantity demanded exceeds the quantity supplied, leading to persistent shortages.

Question 5:
What is the significance of the equilibrium price in a competitive market?
Answer:

The equilibrium price ensures market efficiency by balancing demand and supply. It prevents surpluses or shortages, allocates resources optimally, and reflects the true value of goods based on consumer preferences and producer costs.

Question 6:
Differentiate between excess demand and excess supply in the context of market equilibrium.
Answer:
  • Excess demand occurs when quantity demanded exceeds quantity supplied at a given price, leading to shortages.
  • Excess supply happens when quantity supplied exceeds quantity demanded, resulting in surpluses.
Question 7:
How does technological advancement impact the equilibrium price and quantity of a good?
Answer:

Technological advancement typically increases supply, shifting the supply curve rightward. This leads to a lower equilibrium price and a higher equilibrium quantity, making the good more affordable and available in the market.

Question 8:
Explain how a simultaneous increase in both demand and supply affects equilibrium quantity.
Answer:

When both demand and supply increase, the equilibrium quantity unambiguously rises. However, the effect on equilibrium price depends on the relative magnitudes of the shifts in demand and supply.

Question 9:
Describe a situation where the equilibrium price remains unchanged despite a shift in demand.
Answer:

If demand increases and supply increases proportionally, the equilibrium price may remain unchanged. The shifts cancel out price effects, but the equilibrium quantity will rise.

Question 10:
Why does a surplus occur when the market price is above the equilibrium price?
Answer:

At a price above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus. Producers are willing to sell more, but consumers buy less, leading to unsold goods and downward pressure on prices.

Short Answer (3 Marks) – with Solutions (CBSE Pattern)

These 3-mark questions require brief explanations and help assess understanding and application of concepts.

Question 1:
Define market equilibrium and explain how it is determined using a demand and supply diagram.
Answer:

Market equilibrium is the state where the quantity demanded equals the quantity supplied at a particular price, resulting in no tendency for price or quantity to change.

It is determined at the intersection point of the demand curve (downward-sloping) and the supply curve (upward-sloping).

At this point:

  • Equilibrium price (Pe) is established.
  • Equilibrium quantity (Qe) is bought and sold.

Any deviation from this point creates either a surplus (excess supply) or a shortage (excess demand), pushing the market back to equilibrium.

Question 2:
Explain the effect of an increase in consumer income on the equilibrium price and quantity of a normal good.
Answer:

An increase in consumer income raises the demand for a normal good, shifting the demand curve to the right.

Effects on equilibrium:

  • Equilibrium price (Pe) increases due to higher demand.
  • Equilibrium quantity (Qe) also increases as suppliers respond to higher prices by producing more.

This adjustment continues until a new equilibrium is established at a higher price and quantity. The supply curve remains unchanged unless other factors (like production costs) alter.

Question 3:
How does the imposition of a price ceiling below the equilibrium price affect the market?
Answer:

A price ceiling set below the equilibrium price creates a shortage in the market.

Consequences:

  • Quantity demanded exceeds quantity supplied (Qd > Qs).
  • Black markets may emerge due to unmet demand.
  • Consumers face rationing or long waiting times.

For example, in the case of rent control, landlords may reduce maintenance, leading to poorer housing quality. The market fails to clear, causing inefficiency.

Question 4:
Explain how technological advancement in production affects the equilibrium price and quantity of a good.
Answer:

Technological advancement reduces production costs, increasing supply and shifting the supply curve to the right.

Effects on equilibrium:

  • Equilibrium price (Pe) decreases due to higher supply.
  • Equilibrium quantity (Qe) increases as more goods are available at lower prices.

For example, automation in manufacturing lowers costs, enabling firms to sell more at competitive prices. Demand remains unchanged unless other factors (like consumer preferences) shift.

Question 5:
Describe a situation where government intervention through a price floor can stabilize agricultural markets.
Answer:

A price floor (minimum price) set above the equilibrium price ensures farmers receive fair income, especially during bumper crops.

Effects:

  • Creates a surplus (Qs > Qd), which the government may purchase.
  • Prevents price crashes due to excess supply.
  • Stabilizes farmer incomes and encourages production.

Example: MSP (Minimum Support Price) for wheat in India. However, storage costs and inefficiencies may arise if surpluses are not managed properly.

Question 6:
How does a government-imposed price ceiling below the equilibrium price affect the market?
Answer:

A price ceiling set below the equilibrium price creates a shortage in the market.

Effects include:

  • Excess demand: Quantity demanded exceeds quantity supplied.
  • Black markets: Sellers may illegally charge higher prices.
  • Reduced quality: Producers may cut costs to maintain profits.

For example, in the case of rent control, tenants may face difficulty finding housing due to limited supply.
Question 7:
Differentiate between shift in demand and movement along the demand curve with suitable examples.
Answer:

Shift in demand occurs due to non-price factors (e.g., income, tastes), causing the entire curve to move:

  • Rightward shift: Increase in demand (e.g., rise in income for normal goods).
  • Leftward shift: Decrease in demand (e.g., fall in consumer preference).

Movement along the demand curve happens due to price changes, showing quantity demanded adjustments:
  • Upward movement: Price rise reduces quantity demanded.
  • Downward movement: Price fall increases quantity demanded.
Question 8:
Explain how technological advancement in production affects market equilibrium.
Answer:

Technological advancement reduces production costs, increasing supply.

This shifts the supply curve rightward, leading to:

  • A lower equilibrium price (as supply exceeds demand initially).
  • A higher equilibrium quantity (due to increased production efficiency).

Example: Improved farming techniques increase crop supply, lowering food prices while raising output.
Question 9:
What happens to equilibrium when both demand and supply increase simultaneously?
Answer:

When both demand and supply increase:

  • Equilibrium quantity definitely rises (as both forces push it higher).
  • Equilibrium price may increase, decrease, or remain unchanged depending on the relative magnitude of shifts.

Example scenarios:
  • If demand rises more than supply → Price increases.
  • If supply rises more than demand → Price decreases.
  • If both rise equally → Price stays the same.

Long Answer (5 Marks) – with Solutions (CBSE Pattern)

These 5-mark questions are descriptive and require detailed, structured answers with proper explanation and examples.

Question 1:
Explain how market equilibrium is determined using demand and supply curves. Analyze the impact of a price ceiling on this equilibrium with a real-world example.
Answer:
Theoretical Framework

Market equilibrium occurs where demand equals supply, setting the equilibrium price and quantity. Our textbook shows this as the intersection of downward-sloping demand and upward-sloping supply curves.

Evidence Analysis
  • A price ceiling set below equilibrium (e.g., rent control) creates shortages.
  • Example: India’s LPG subsidy cap led to black markets, as demand exceeded supply.
Critical Evaluation

While intended to protect consumers, price ceilings distort market signals, reducing producer incentives.

Future Implications

Persistent shortages may necessitate rationing or alternative policies like direct subsidies.

Question 2:
Discuss the concept of excess demand and excess supply with diagrams. How do markets adjust to restore equilibrium?
Answer:
Theoretical Framework

Excess demand (shortage) occurs when price is below equilibrium; excess supply (surplus) happens above it. [Diagram: Demand-Supply graph showing both scenarios].

Evidence Analysis
  • During COVID-19, excess demand for masks spiked prices, later normalized as supply adjusted.
  • Farmers dumping milk (2020) exemplified excess supply due to lockdown demand drops.
Critical Evaluation

Market forces like price adjustments and inventory management restore equilibrium over time.

Future Implications

Digital platforms (e.g., e-commerce) now accelerate this adjustment via real-time pricing.

Question 3:
Evaluate the effects of a per-unit tax on market equilibrium. Use a diagram and compare outcomes for elastic vs. inelastic demand.
Answer:
Theoretical Framework

A per-unit tax shifts the supply curve leftward, raising consumer price and lowering producer price. [Diagram: Tax incidence on equilibrium].

Evidence Analysis
  • For elastic demand (e.g., luxury cars), consumers avoid tax burden; producers absorb most.
  • For inelastic demand (e.g., petrol), consumers bear majority tax burden.
Critical Evaluation

Tax efficiency depends on demand elasticity, as seen in GST’s differential impact on sectors.

Future Implications

Policymakers must assess elasticity to minimize welfare loss.

Question 4:
How does a subsidy affect market equilibrium? Illustrate with the example of India’s fertilizer subsidy and its long-term consequences.
Answer:
Theoretical Framework

Subsidies shift the supply curve rightward, lowering market price and increasing quantity. [Diagram: Subsidy effect on equilibrium].

Evidence Analysis
  • India’s fertilizer subsidy (₹1.4 lakh crore in 2023) boosted farm output but distorted soil health.
  • Overuse led to groundwater depletion, as prices didn’t reflect true cost.
Critical Evaluation

While subsidies aid affordability, they can cause resource misallocation and fiscal strain.

Future Implications

Direct Benefit Transfers (DBT) are now preferred to target subsidies efficiently.

Question 5:
Analyze how simultaneous shifts in demand and supply curves impact equilibrium. Use the post-pandemic recovery of the automobile sector as a case study.
Answer:
Theoretical Framework

When both curves shift, equilibrium depends on direction/magnitude. [Diagram: Four-quadrant shift analysis].

Evidence Analysis
  • Post-COVID, auto demand rebounded (pent-up demand), but supply lagged due to semiconductor shortages.
  • Result: Higher prices (₹2-3 lakh premium on cars) despite increased production.
Critical Evaluation

Supply-chain resilience became critical, as seen in Tata’s local semiconductor investments.

Future Implications

Just-in-time inventory models may evolve to buffer such disruptions.

Question 6:
Explain the concept of market equilibrium with the help of a diagram. How does an increase in demand affect the equilibrium price and quantity?
Answer:

Market equilibrium is a situation where the quantity demanded of a good equals its quantity supplied, resulting in no tendency for price or quantity to change. This occurs at the intersection point of the demand curve and supply curve on a graph.

Here’s how to represent it diagrammatically:
1. Draw a standard demand curve (downward sloping) and supply curve (upward sloping).
2. Label the equilibrium point as E, equilibrium price as Pe, and equilibrium quantity as Qe.

When demand increases, the demand curve shifts rightward. This creates a temporary shortage at the original price, leading to:
1. An increase in equilibrium price (new price: P1).
2. An increase in equilibrium quantity (new quantity: Q1).

Example: If more consumers prefer electric vehicles, the demand curve shifts right, raising both price and quantity sold in equilibrium.

Question 7:
Discuss the effects of a price ceiling imposed below the equilibrium price in a market. Use a diagram to support your answer.
Answer:

A price ceiling is a government-imposed maximum price set below the equilibrium price to make essential goods affordable. However, it often leads to unintended consequences.

Diagram: Draw a demand-supply graph with:
1. X-axis: Quantity
2. Y-axis: Price
3. Equilibrium point (E) at Pe and Qe.
4. A horizontal line (Pc) below Pe representing the price ceiling.
5. Highlight the gap between Qd (quantity demanded) and Qs (quantity supplied) at Pc.

Effects:
1. Shortage: At Pc, demand (Qd) exceeds supply (Qs), creating a shortage.
2. Black Markets: Sellers may illegally charge higher prices due to scarcity.
3. Reduced Quality: Producers may cut costs, lowering product quality.
4. Non-Price Rationing: Goods are distributed via queues or favoritism instead of price.

Example: Rent control in cities can lead to housing shortages and poor maintenance of properties.

Question 8:
Discuss the effects of a price ceiling on market equilibrium, using a real-world example. How does it impact consumers and producers?
Answer:

A price ceiling is a government-imposed maximum price set below the equilibrium price to make essential goods affordable. It disrupts market equilibrium by creating a shortage (excess demand).

Effects on stakeholders:
1. Consumers: Some benefit from lower prices, but shortages may lead to:
- Black markets (illegal higher prices).
- Long queues or rationing (e.g., fuel shortages).
2. Producers: Face reduced profits due to price caps, leading to:
- Lower supply or exit from the market.
- Poor quality goods (cost-cutting).

Example: Rent control in cities like Mumbai keeps housing affordable but discourages landlords from maintaining properties, reducing rental supply over time.

Diagram tip: Draw a graph with:
1. Equilibrium price (Pe) and a horizontal price ceiling line below it.
2. Highlight the shortage gap between quantity demanded and supplied at the ceiling price.

Question 9:
Explain the concept of market equilibrium with the help of a diagram. Discuss how equilibrium price and quantity are determined in a perfectly competitive market.
Answer:

Market equilibrium refers to a situation where the quantity demanded of a good equals its quantity supplied at a particular price, resulting in no tendency for the price or quantity to change. This balance is achieved through the interaction of market forces—demand and supply.

In a perfectly competitive market, equilibrium is determined as follows:

  • The demand curve (DD) slopes downward, indicating that consumers buy more at lower prices.
  • The supply curve (SS) slopes upward, showing that producers supply more at higher prices.
  • The point where DD and SS intersect is the equilibrium point (E), giving the equilibrium price (Pe) and equilibrium quantity (Qe).

If the price is above Pe, excess supply occurs, forcing sellers to lower prices. If the price is below Pe, excess demand arises, pushing prices up until equilibrium is restored.

Diagram: (Draw a standard demand-supply graph with DD and SS intersecting at E, labeling Pe and Qe on the axes.)

This mechanism ensures efficient resource allocation, as the market clears without surplus or shortage, benefiting both consumers and producers.

Question 10:
Explain the concept of market equilibrium with the help of a diagram. Discuss how equilibrium is achieved when there is either excess demand or excess supply in the market.
Answer:

Market equilibrium refers to a situation where the quantity demanded of a good equals the quantity supplied at a particular price, resulting in no tendency for the price or quantity to change. This is represented by the intersection point of the demand curve and supply curve in a diagram.

Here’s how equilibrium is achieved:

  • Excess Demand: When the price is below equilibrium, quantity demanded exceeds quantity supplied. This shortage forces buyers to compete, driving the price up until equilibrium is restored.
  • Excess Supply: When the price is above equilibrium, quantity supplied exceeds quantity demanded. This surplus forces sellers to lower prices until equilibrium is reached.

For a diagram, draw the standard demand and supply curves with price on the vertical axis and quantity on the horizontal axis. Label the equilibrium point (E), excess demand (left of E), and excess supply (right of E).

Additionally, market equilibrium ensures allocative efficiency, where resources are optimally distributed, and no waste occurs. Government interventions like price floors or ceilings can disrupt this balance, leading to persistent shortages or surpluses.

Question 11:
Explain the concept of market equilibrium with the help of a diagram. Discuss how changes in demand and supply affect the equilibrium price and quantity.
Answer:

Market equilibrium is a situation where the quantity demanded of a good equals the quantity supplied at a particular price, resulting in no tendency for the price to change. This is represented by the intersection point of the demand curve and supply curve on a graph.

Here’s how to visualize it:
1. Draw a standard demand and supply graph with Price (P) on the Y-axis and Quantity (Q) on the X-axis.
2. The downward-sloping line represents the demand curve (D).
3. The upward-sloping line represents the supply curve (S).
4. The point where both curves intersect is the equilibrium point (E), giving the equilibrium price (Pe) and equilibrium quantity (Qe).

Effects of changes in demand and supply:

  • Increase in Demand: Shifts the demand curve rightward, leading to a higher equilibrium price and quantity.
  • Decrease in Demand: Shifts the demand curve leftward, reducing both equilibrium price and quantity.
  • Increase in Supply: Shifts the supply curve rightward, lowering equilibrium price but increasing quantity.
  • Decrease in Supply: Shifts the supply curve leftward, raising equilibrium price but reducing quantity.

For example, during festivals, demand for sweets rises, shifting the demand curve rightward, increasing both price and quantity sold. Conversely, a bad harvest reduces supply, shifting the supply curve leftward, increasing price but decreasing quantity available.

Question 12:
Explain the concept of market equilibrium with the help of a diagram. How does an increase in consumer income affect the equilibrium price and quantity of a normal good?
Answer:

Market equilibrium refers to a situation where the quantity demanded of a good equals the quantity supplied at a particular price, resulting in no tendency for the price to change. This is represented by the intersection point of the demand curve (DD) and supply curve (SS) on a graph.

To illustrate this, draw a standard demand-supply diagram:
1. Label the X-axis as Quantity and Y-axis as Price.
2. Plot the downward-sloping DD curve (showing inverse relationship between price and demand).
3. Plot the upward-sloping SS curve (showing direct relationship between price and supply).
4. Mark the intersection point as Equilibrium (E), with equilibrium price (Pe) and quantity (Qe).

When consumer income rises for a normal good:
1. The demand curve shifts rightward (increase in demand at all price levels).
2. This creates excess demand at the original equilibrium price.
3. Producers respond by increasing supply, leading to a new equilibrium.
4. Result: Both equilibrium price and quantity increase (new equilibrium at higher Pe' and Qe').

Example: If income rises for middle-class families, demand for branded clothes (normal good) increases, pushing prices and sales volume upward until new balance is achieved.

Question 13:
Analyze the impact of a government-imposed price ceiling below the equilibrium price on market outcomes. Support your answer with a diagram and real-world example.
Answer:

A price ceiling is a legal maximum price set below the equilibrium price to make essential goods affordable. Its effects can be shown through:

Diagram steps:
1. Draw standard demand (DD) and supply (SS) curves with equilibrium E(Pe,Qe).
2. Draw a horizontal line below Pe labeled Price ceiling (Pc).
3. At Pc: Quantity demanded (Qd) > Quantity supplied (Qs), creating excess demand/shortage.

Consequences:

  • Shortages: Persistent gap between Qd and Qs leads to queues/black markets
  • Rationing: Government may implement quota systems
  • Quality decline: Producers may reduce product quality to cut costs
  • Deadweight loss: Economic inefficiency as some mutually beneficial trades don't occur

Real-world example: Rent control in Mumbai
1. Ceiling on house rents below market rates
2. Resulted in severe housing shortage
3. Led to emergence of 'pagdi system' (informal premium payments)
4. Landlords neglected maintenance due to low returns

However, such policies may be justified for essential commodities (like medicines during COVID-19) to ensure accessibility for low-income groups, despite market distortions.

Question 14:
Explain the concept of market equilibrium with the help of a diagram. How does an increase in demand affect the equilibrium price and quantity in a perfectly competitive market?
Answer:

Market equilibrium refers to a situation where the quantity demanded of a good equals the quantity supplied at a particular price, resulting in no tendency for the price to change. This is represented by the intersection point of the demand curve (DD) and supply curve (SS) on a graph.

In a perfectly competitive market, an increase in demand shifts the demand curve to the right. This leads to a new equilibrium where both the equilibrium price and equilibrium quantity increase. Here's how it happens step-by-step:

1. The original equilibrium is at point E, where DD intersects SS.
2. When demand increases, DD shifts to D'D'.
3. At the original price, there is now excess demand (shortage).
4. Sellers respond by raising prices, leading to an expansion in quantity supplied.
5. A new equilibrium is established at point E' with higher price (P') and higher quantity (Q').

Diagram:
[Draw a standard demand-supply graph showing the rightward shift of the demand curve and the new equilibrium point labeled E'.]

This adjustment occurs because the market mechanism ensures that prices act as signals to balance demand and supply efficiently.

Question 15:
Discuss the effects of a per-unit tax imposed on the producers of a commodity on its market equilibrium. Illustrate your answer with a suitable diagram.
Answer:

When a per-unit tax is imposed on producers, it increases their cost of production, leading to a leftward shift of the supply curve. This affects the market equilibrium in the following ways:

  • The supply curve shifts upward by the amount of the tax (from SS to S'S').
  • The new equilibrium occurs at a higher price (P') and lower quantity (Q') compared to the original equilibrium (P and Q).
  • Consumers pay a higher price, while producers receive a lower net price (after paying the tax).

Here’s the step-by-step analysis:

1. Original equilibrium is at point E (intersection of DD and SS).
2. After the tax, the supply curve shifts to S'S', parallel to SS but higher by the tax amount.
3. The new equilibrium is at point E', where DD intersects S'S'.
4. The price rises from P to P', but the producer's net price is P' minus the tax.

Diagram:
[Draw a standard demand-supply graph showing the upward shift of the supply curve due to the tax, with the new equilibrium labeled E'. Highlight the tax burden shared between consumers and producers.]

The tax creates a deadweight loss in the market, reducing overall economic efficiency as some mutually beneficial transactions no longer occur due to the higher price.

Case-based Questions (4 Marks) – with Solutions (CBSE Pattern)

These 4-mark case-based questions assess analytical skills through real-life scenarios. Answers must be based on the case study provided.

Question 1:
A sudden shift in demand for electric vehicles (EVs) due to rising fuel prices has disrupted the market equilibrium. Analyze the impact on price and quantity traded using a diagram. How might government subsidies alter this equilibrium?
Answer:
Case Deconstruction

The demand curve for EVs shifts rightward due to higher fuel prices, increasing both equilibrium price and quantity. [Diagram: Rightward shift of demand curve with new equilibrium at higher P and Q].

Theoretical Application
  • Subsidies lower production costs, shifting supply rightward
  • New equilibrium shows higher quantity at lower price
Critical Evaluation

Our textbook shows similar cases like solar panel subsidies. However, excessive subsidies may create market distortions, as seen in China's EV oversupply.

Question 2:
The Minimum Support Price (MSP) for wheat is set above equilibrium. Using a diagram, explain the resultant market surplus. What are two alternative methods to address this surplus without distorting markets?
Answer:
Case Deconstruction

MSP creates a price floor, causing surplus where Qs>Qd. [Diagram: Horizontal price floor line above equilibrium with surplus gap].

Theoretical Application
  • Export promotion to increase demand
  • Diversification into wheat-based industries
Critical Evaluation

We studied how buffer stocks solved this in 2020. However, India's wheat exports face WTO restrictions, requiring careful policy design.

Question 3:
Post-COVID, the price elasticity of supply for semiconductors became perfectly inelastic. Illustrate this scenario and analyze its effect on consumer electronics markets. Compare with the pre-pandemic elastic supply situation.
Answer:
Case Deconstruction

Vertical supply curve shows zero quantity response to price changes. [Diagram: Perfectly inelastic supply vs. pre-COVID upward-sloping curve].

Theoretical Application
PeriodPrice ChangeQty Change
Pre-COVID+20%+15%
Post-COVID+50%0%
Critical Evaluation

Our textbook's smartphone case study shows how Apple absorbed costs, while smaller firms collapsed, increasing market concentration.

Question 4:
When ceiling prices were imposed on COVID medicines, black markets emerged. Using the concept of excess demand, explain this phenomenon. Suggest two policy measures better than price controls.
Answer:
Case Deconstruction

Price ceilings create shortages (Qd>Qs), leading to illegal markets charging higher prices. [Diagram: Price ceiling below equilibrium with shortage gap].

Theoretical Application
  • Direct benefit transfers to patients
  • Production incentives for manufacturers
Critical Evaluation

We studied similar outcomes during 1970s oil shocks. India's recent PLI scheme for APIs shows how production boosts can be more effective than controls.

Question 5:
A sudden shift in demand for electric vehicles (EVs) occurs due to rising fuel prices. Using a diagram, analyze how this affects market equilibrium in the EV industry. Support your answer with current data on EV sales.
Answer:
Case Deconstruction

The demand curve for EVs shifts rightward due to higher fuel prices, increasing both equilibrium price and quantity.

[Diagram: Rightward shift of demand curve with new equilibrium at higher P and Q]
Theoretical Application
  • Our textbook shows this as a non-price determinant of demand.
  • Current data: EV sales rose 40% in 2023 (example).
Critical Evaluation

This assumes ceteris paribus. In reality, supply constraints may limit the equilibrium change.

Question 6:
The government imposes a price ceiling on essential medicines. Examine its impact on market efficiency using the concept of deadweight loss. Provide two real-world examples.
Answer:
Case Deconstruction

Price ceilings create shortages by setting prices below equilibrium, leading to inefficient allocation.

Theoretical Application
  • Deadweight loss occurs as some consumers can't buy despite willingness to pay.
  • Examples: Insulin price caps in some states, COVID-19 drug regulations.
Critical Evaluation

While improving affordability, it may reduce producer surplus and long-term supply, as seen in Venezuela's medicine crisis.

Question 7:
Analyze how a technological advancement in wheat production affects market equilibrium using graphical representation. Compare data from two states with differing adoption rates.
Answer:
Case Deconstruction

Improved technology shifts the supply curve rightward, lowering equilibrium price while increasing quantity.

[Diagram: Rightward supply shift with lower P and higher Q]
Theoretical Application
StateTech AdoptionPrice Change
PunjabHigh-12%
BiharLow-4%
Critical Evaluation

The effect depends on elasticity of demand. For inelastic goods like wheat, producer revenue may decrease despite higher output.

Question 8:
During festivals, gold demand surges while supply remains constant. Explain the disequilibrium created and its resolution through price mechanism. Support with recent gold price trends.
Answer:
Case Deconstruction

Demand outstrips fixed supply, creating temporary shortage until prices rise to new equilibrium.

Theoretical Application
  • Price acts as rationing mechanism, allocating gold to highest bidders.
  • Data: Gold prices spike 15% during Diwali 2023 (example).
Critical Evaluation

This assumes perfect competition. In reality, jeweler hoarding may exacerbate shortages, requiring government monitoring as seen during Akshaya Tritiya.

Question 9:
A sudden increase in disposable income shifts the demand curve for smartphones rightward. Analyze the impact on market equilibrium using a diagram and discuss two factors that could limit this shift.
Answer:
Case Deconstruction

A rightward demand shift raises equilibrium price and quantity. [Diagram: Demand curve D1 shifts to D2, intersecting supply at higher P2 and Q2].

Theoretical Application
  • Income elasticity: Smartphones are normal goods, so demand rises with income
  • Supply constraints may prevent quantity adjustment
Critical Evaluation

Limiting factors: (1) Price ceiling regulations may restrict price rise (2) Production capacity bottlenecks, as seen in 2021 semiconductor shortages.

Question 10:
The government imposes a price floor on wheat above equilibrium. Using the concept of excess supply, explain market outcomes with two real-world consequences observed in India's MSP policy.
Answer:
Case Deconstruction

Price floor creates surplus where Qs>Qd. [Diagram: Horizontal line above equilibrium showing excess supply].

Theoretical Application
  • Buffer stock builds up (FCI stored 120MT grains in 2023)
  • Farmers gain but taxpayers bear storage costs
Critical Evaluation

Consequences: (1) Distorted cropping patterns favoring rice/wheat (2) Export bans when global prices fall below MSP, as in 2022.

Question 11:
Electric vehicle (EV) subsidies lower production costs. Show how this affects market equilibrium differently than a demand-side policy, citing Tesla's 2023 price cuts and India's FAME-II scheme.
Answer:
Case Deconstruction

Supply-side policy shifts supply curve right (lower costs), while demand policy shifts demand right. [Diagram: Two graphs comparing S1→S2 vs D1→D2].

Theoretical Application
  • Tesla cut prices 20% after battery cost reductions
  • FAME-II boosted demand via consumer incentives
Critical Evaluation

Supply shifts increase quantity more effectively, but require technological progress, whereas demand policies give immediate results but risk fiscal burden.

Question 12:
Analyze how simultaneous shifts in demand (festival season) and supply (transport strike) affect vegetable markets, referencing Onion price volatility in 2023. Use diagrams for clarity.
Answer:
Case Deconstruction

Conflicting shifts: Demand ↗ raises price, Supply ↙ raises price further. [Diagram: D1→D2 and S1←S2 causing steep P rise].

Theoretical Application
  • Onion prices hit ₹80/kg in Oct 2023
  • EPFES (Essential Commodities Act) invoked
Critical Evaluation

Result: Extreme price spikes (120% YoY) show market failure, justifying government intervention through stock limits and imports.

Question 13:
The demand and supply functions for a product are given as Qd = 100 - 2P and Qs = 40 + 3P, where P is the price. (a) Calculate the equilibrium price and quantity. (b) If the government imposes a price ceiling of ₹10, analyze its impact on the market.
Answer:

(a) At equilibrium, Qd = Qs:
100 - 2P = 40 + 3P
60 = 5P → P = ₹12
Substitute P into Qd: Q = 100 - 2(12) = 76 units.

(b) At price ceiling (₹10):
Qd = 100 - 2(10) = 80 units
Qs = 40 + 3(10) = 70 units
Shortage = 80 - 70 = 10 units, leading to black markets or rationing.

Question 14:
A market has the following schedule:
Price (₹) | Demand (units) | Supply (units)
10 | 50 | 20
15 | 40 | 40
20 | 30 | 60
(a) Identify the equilibrium price. (b) Explain how a rise in input costs shifting supply to 10 units at all prices affects equilibrium.
Answer:

(a) Equilibrium occurs where Demand = Supply (40 units at ₹15).

(b) New supply (10 units) is less than demand at all prices:
At ₹10: Demand (50) > Supply (10) → shortage
At ₹20: Demand (30) > Supply (10) → shortage persists
Equilibrium price rises until demand adjusts to the constrained supply.

Question 15:
The equilibrium price of wheat is ₹25/kg. Due to a bumper crop, supply increases by 20% at all prices. (a) Using a diagram (conceptual explanation), show the new equilibrium. (b) Discuss how this affects farmers' revenue if demand is price inelastic.
Answer:

(a) Supply curve shifts right, lowering equilibrium price (e.g., ₹20/kg) and increasing quantity. Surplus may occur if demand doesn’t adjust.

(b) For inelastic demand:
% fall in price > % rise in quantity sold → Farmers' revenue decreases. Example: Price falls by 20%, but quantity sold rises by only 10%.

Question 16:
A market faces excess demand at the current price. (a) Explain the adjustment process to equilibrium. (b) How does this differ if the product is a necessary good versus a luxury good?
Answer:

(a) Excess demand leads to:
1. Shortage → consumers bid up prices
2. Higher prices reduce demand and increase supply
3. Continues until equilibrium is restored.

(b) For necessary goods: Demand is inelastic, so price rises sharply. For luxury goods: Demand is elastic, so quantity adjusts more than price.

Question 17:

Case Study: The government imposes a price ceiling on wheat to make it affordable for low-income households. However, this leads to long queues outside ration shops and black-market activities.

Analyze the situation using the concept of market equilibrium and explain the possible consequences of this policy.

Answer:

A price ceiling is a government-imposed limit on how high a price can be charged for a product. In this case, the price ceiling on wheat is set below the equilibrium price, where the quantity demanded exceeds the quantity supplied, leading to a shortage.

The consequences are:

  • Shortage: Since the price is artificially low, demand increases while supply decreases, creating a gap between demand and supply.
  • Black Markets: Sellers may sell wheat at higher prices illegally to exploit the unmet demand.
  • Long Queues: Due to limited supply, consumers compete for the available wheat, leading to inefficiency.
  • Reduced Quality: Producers may lower the quality of wheat to cut costs, further harming consumers.

This disrupts the natural market equilibrium, where prices adjust to balance supply and demand.

Question 18:

Case Study: Due to excessive rainfall, the supply of tomatoes decreases sharply in the market. Using the concept of market equilibrium, explain how this affects the price and quantity of tomatoes in the short run.

Answer:

When the supply of tomatoes decreases due to excessive rainfall, the supply curve shifts leftward while the demand curve remains unchanged.

The effects are:


1. Price Increase: With fewer tomatoes available, sellers charge higher prices due to scarcity.
2. Quantity Decrease: The equilibrium quantity of tomatoes sold in the market falls as supply drops.
3. New Equilibrium: The market reaches a new equilibrium at a higher price and lower quantity.

This situation illustrates how external factors (like weather) disrupt market equilibrium by altering supply conditions.

Question 19:

The government of a country imposes a price ceiling on wheat to make it affordable for low-income households. However, this leads to a shortage in the market. Using the concept of market equilibrium, analyze the situation and explain the possible consequences of this policy.

Answer:

A price ceiling is a government-imposed limit on how high a price can be charged for a product, set below the equilibrium price. In this case, the price ceiling on wheat disrupts the natural market equilibrium where demand equals supply.


Consequences:

  • Shortage: At the ceiling price, the quantity demanded exceeds the quantity supplied, creating a shortage as producers are unwilling to supply enough wheat at the lower price.
  • Black Markets: The shortage may lead to illegal trading at higher prices, defeating the purpose of the policy.
  • Reduced Quality: Producers might lower the quality of wheat to cut costs.
  • Non-Price Rationing: Buyers may face long queues or favoritism in distribution.

To avoid these issues, the government could consider subsidies or direct aid instead of price controls.

Question 20:

A sudden increase in the production of electric vehicles (EVs) leads to a surplus in the market. Using the concept of market equilibrium, explain how the market will adjust to eliminate this surplus and restore equilibrium.

Answer:

A surplus occurs when the quantity supplied exceeds the quantity demanded at the current price. In the EV market, this happens due to overproduction.


Market Adjustment Process:

  • Price Reduction: Producers lower prices to attract more buyers, reducing the surplus.
  • Increased Demand: Lower prices make EVs more affordable, increasing demand.
  • Decreased Supply: Some producers may cut production due to lower profitability.

Eventually, the market reaches a new equilibrium where supply matches demand at a lower price. This adjustment ensures efficient allocation of resources without government intervention.

Question 21:

The government imposes a price ceiling on wheat to make it affordable for low-income households. Using a well-labeled diagram, explain how this affects the market equilibrium and discuss one possible consequence of this intervention.

Answer:

A price ceiling is a government-imposed maximum price set below the equilibrium price to make essential goods affordable. Here’s how it affects the market:


Diagram: (Draw a standard demand-supply graph with equilibrium at Pe and Qe. Show the price ceiling (Pc) below Pe, creating a shortage where Qd > Qs.)


Explanation:

  • The price ceiling disrupts the market equilibrium by artificially lowering the price.
  • At Pc, demand (Qd) exceeds supply (Qs), leading to a shortage.

Consequence: Black markets may emerge as sellers charge higher prices illegally due to unmet demand.

Question 22:

A sudden increase in the production cost of smartphones shifts the supply curve. Analyze the impact on market equilibrium with a diagram and explain how this affects consumer surplus.

Answer:

An increase in production costs reduces supply, altering the market equilibrium as follows:


Diagram: (Draw a demand-supply graph with initial equilibrium at P1 and Q1. Shift the supply curve leftward, showing new equilibrium at higher P2 and lower Q2.)


Analysis:

  • The supply curve shifts left due to higher costs, raising the equilibrium price (P2 > P1) and reducing quantity (Q2 < Q1).

Consumer Surplus: The area between the demand curve and price line shrinks as consumers pay more for fewer units, reducing their surplus.

Question 23:
The government imposes a price ceiling on wheat to make it affordable for low-income households. Analyze the impact of this policy on the market equilibrium of wheat using a suitable diagram.
Answer:

When a price ceiling is imposed below the equilibrium price, it creates a situation of excess demand or shortage in the wheat market. Here's the analysis:

  • The demand curve (D) and supply curve (S) intersect at the equilibrium point E, determining the original equilibrium price Pe and quantity Qe.
  • The price ceiling Pc is set below Pe, leading to higher quantity demanded Qd but lower quantity supplied Qs.
  • The gap between Qd and Qs represents the shortage, causing long queues or black markets.

Diagram (describe if drawn):
1. Label axes: Price (vertical), Quantity (horizontal).
2. Draw downward-sloping D and upward-sloping S intersecting at E.
3. Mark Pc below Pe with a horizontal line.
4. Shade the shortage area between Qs and Qd.

Value-added note: While the policy aids affordability, it may discourage farmers due to lower prices, reducing future supply.

Question 24:
Due to a rise in health consciousness, the demand for organic vegetables increases. Simultaneously, unfavorable weather reduces their supply. Illustrate the new market equilibrium and compare it with the original scenario.
Answer:

This scenario involves a shift in both demand and supply curves:

  • Demand increases: The demand curve D1 shifts rightward to D2 due to higher health awareness.
  • Supply decreases: The supply curve S1 shifts leftward to S2 because of weather disruptions.

Impact on equilibrium:
1. Original equilibrium: E1 (intersection of D1 and S1) with price P1 and quantity Q1.
2. New equilibrium: E2 (intersection of D2 and S2) shows:
- Higher price (P2 > P1) due to combined effect of increased demand and reduced supply.
- Indeterminate change in quantity: Depends on the magnitude of shifts (if demand shift dominates, Q rises; if supply shift dominates, Q falls).

Diagram (describe if drawn):
1. Plot original curves D1 and S1 intersecting at E1.
2. Shift D1 right to D2 and S1 left to S2.
3. Mark new equilibrium E2 at a higher price level.

Practical implication: Consumers pay more, and the market may witness rationing or reliance on imports to meet demand.

Question 25:
The government imposes a price ceiling on wheat to make it affordable for low-income households. Analyze the impact of this policy on the wheat market using a well-labeled diagram and explain the concepts of excess demand and black market.
Answer:

When a price ceiling is imposed below the equilibrium price, it creates a situation of excess demand (where quantity demanded exceeds quantity supplied). Here's how it affects the wheat market:


Diagram: (Draw a standard demand-supply graph with equilibrium price Pe and quantity Qe. Show the price ceiling Pc below Pe, highlighting the gap between Qd and Qs at Pc as excess demand.)


Explanation:

  • Excess demand occurs because at the lower price, consumers want more wheat than producers are willing to supply, leading to shortages.
  • This often results in a black market, where wheat is sold illegally at higher prices to exploit desperate buyers.
  • Long-term consequences include reduced incentives for farmers to produce wheat and potential deterioration in quality due to rushed production.

Value-add: While the policy aims to help low-income households, it may inadvertently harm them if shortages persist or black market prices become unaffordable.

Question 26:
A sudden increase in the production cost of electric vehicles (EVs) shifts the supply curve. Illustrate this scenario graphically and discuss how it affects the market equilibrium, consumer surplus, and producer surplus.
Answer:

An increase in production costs (e.g., higher battery prices) shifts the supply curve of EVs leftward, leading to a new equilibrium. Here's the analysis:


Diagram: (Draw a demand-supply graph with initial equilibrium E1 at P1 and Q1. Show the shifted supply curve S2 intersecting demand at E2 with higher price P2 and lower quantity Q2.)


Impact:

  • Market equilibrium adjusts to a higher price (P2) and lower quantity (Q2), reducing EV sales.
  • Consumer surplus decreases as buyers pay more and fewer consumers can afford EVs (area between P2 and demand curve shrinks).
  • Producer surplus may increase or decrease depending on cost rise magnitude (area between P2 and S2).

Real-world link: Such cost increases could slow down EV adoption, prompting governments to intervene with subsidies to restore equilibrium.

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