NCERT Solutions For Class 11 Economics Chapter 9 Market Equilibrium

The basic difference between supply and demand curves in the labour market and goods market is the source of supply and demand. In the goods market, goods are supplied by firms and demanded by households (or consumer). But, in the labour market, suppliers of labour are the households and demand for labour comes from firms.

Equilibrium is the situation where there is no tendency for any change in consumers and producers decisions or a state of rest. Market equilibrium is a situation where market demand & supply forces are at equilibrium. In other words, aggregate quantity that all the firms wish to sell is equal to quantity all the consumers wish to buy.

If there is an increase in price of substitute (Y) of good X then there would be an increase in demand of good X. This increase in demand would shift the demand curve for good X rightward. This rightward shift in the demand would lead the price and quantity demanded of good X to increase from p to p* and q₀ to q* respectively.

The equilibrium number of firms in a market can be determined by dividing the equilibrium quantity of market divided by the supply by each firm.

Equilibrium number of firm =

There is an excess supply for a commodity in the market when market supply exceeds market demand at a particular price. As shown in the diagram below, at price p₁ quantity demanded is q₂ units of output and quantity supplied is q₁ units. Hence there is excess supply for the commodity equal to q₂q₁at price p₁.

a) As there is free entry-exit of firms in the market, the firms would not produce any output below the price Rs 20 because it is the long run average cost for the firms.

b) As there is free entry-exit of firms in the market, the firms would produce at price = minimum LAC which would earn them normal profits. The firms can’t produce at the price greater than this level because then there would be no demand for their good in the market.

c) Equilibrium quantity can be calculated as follow

Quantity Supplied (q^S_f ) by each firm:

q^S_f = 8 + 3p   where p = LAC = 20

q^S_f = 8 + 3 x 20  = 8 + 60 = 68

The quantity demanded can be calculated by substituting price in the demand curve equation

q^D = 700 – p = 700 – 20 = 680

Number equilibrium firms can be calculated by

Equilibrium number of firm

⁼

 ⁼

 = 10

Equilibrium quantity is 680 units and equilibrium number of firms is 10.

₹ 15 is the minimum average variable cost for the firms, no firm will produce any positive level of output between price 0 to ₹ 15, thus market supply of commodity X would be zero at any price below the minimum average variable cost.

To calculate the equilibrium quantity of price we equate the quantity demanded and quantity supplied equations

q^D = q^S

700 – p =500 + 3p

4p = 700- 500

p = ₹ 50

Now, we can substitute the price in quantity demanded or quantity supplied equation to get the equilibrium quantity.

q^D = 700 – p = 700 – 50 = 650

Alternatively,

q^S = 500 + 3p = 500 + 3x50 = 500 + 150 = 650

The equilibrium price and quantity of commodity X are ₹ 50 and 650 units, respectively.

In the long run, free entry and exit of the firms is permitted and under all situations equilibrium price is equal to minimum average cost of all the firms. Even if the demand curve shifts in either direction, the market would supply the desired quantity at the same price.

In the diagram below, the demand curve shifts from DD₁ to DD₂. As we know free entry and exit of firms is permitted, even though the price in market will rise in the short run but in the long run it would again come back to p₀ = Min AC. There is no change in the equilibrium price but the equilibrium quantity increases from q₀ to q*.

In the short run there are fixed number of firms in the market. If there is a shift in demand curve on either side the equilibrium price and quantity change depending on the direction of the shift.

In the diagram below, demand curve shifts from DD₁ to DD₂, given the supply curve SS₁. Due to fixed number of firms in the short run there is an increase equilibrium price from p₀ to p* and increase in equilibrium quantity from q₀ to q₁.

It can be seen from the above diagrams that there is a larger change in price and a smaller change in quantity in the case of free entry and exit compared to when there are fixed number of firms in the market.

There are some essential life saving drugs on which price ceiling has been imposed in India so that they can be availed by all those in need.

Consequences of price ceiling are

1. Excess demand: There would be excess demand of commodity due to reduced prices
2. Black market:  some consumers would be willing to pay higher price for the commodity due to inconvenience caused by excess demand.
3. Rationing of commodity: Due to excess demand there would arise a situation of rationing the commodity, so that it can be availed by all in need.

The effects of shift in demand curve when there are fixed number of firms compared to the situation when entry-exit of firms is permitted

1.  Equilibrium price remains the same in a situation of entry and exit as compared to when there are fixed firms where price increases.
2. Quantity demanded in the case of entry-exit increases more than compared to the situation of fixed firms.
3. Firms can earn super normal profit when there are fixed number of firms.
4. Firms can only earn normal profits in a situation when entry-exit is permitted.

If there is a change in price of input used for production, it leads to either increase or decrease in production costs. Further, depending on the increase or decrease the supply curve of the market moves either leftward or rightward.

In case there is an increase in price of input, it would lead to an increase in cost of the production. This rise in cost would increase the minimum average cost of production which in effect would increase the price of good. Supply curve of the firms would shift leftward which would lead to a leftward shift of market supply curve.

In the diagram below, an increase in price of input leads to rise in cost of production which leads to leftward shift of the supply curve from SS to SS₁. With this shift new equilibrium is established at E₁. At the new equilibrium, price rises from Op* to Op₁and quantity decreases from Oq* to Oq₁.

Similarly, in case of decrease in price of input there would be a decline in cost of production which would increase the supply of good and shift the supply curve rightward from SS to SS₂.

Coffee and tea are substitute for each other. If there is a change in price of one good, demand of the other good is positively affected. If there is an increase in price of coffee then there would be an increase in quantity demanded of tea.

Due to increase in price of coffee, the demand for coffee goes down.Increased price of coffee would lead people to substitute tea for coffee. As a result demand for tea would increase. .

In the graph below,the increase in demand of tea would shift the demand curve rightwards (fromDD₁ to DD₂). This would lead to a new equilibrium at E₂. At the new equilibrium, price of tea increases from Op₁ to Op₂ and quantity demanded increases from Oq₁ to Oq₂.

This shows that an increase (or decrease) in price of coffee would lead to an increase (or decrease)in price and quantity of tea (substitute good).

Shoes and pair of socks are complementary goods. If there is a change in price of one good, demand of the other good is negatively affected. So, if there is an increase in price of shoes then there would be a decline in demand of pair of socks.

Due to increase in price of shoes the demand for shoes goes down, as a result of this demand curve for pair of socks shifts leftward (DD₁ to DD₂). This leftward shift of demand leads to a decline of quantity demanded (from q₂ to q₁) and the equilibrium price (from p₂ to p₁), supply remaining unchanged.This shows that an increase in price of shoes reduces the price of pair of socks (complementary good).

If free entry and exit is allowed in the perfectly competitive market

firms would supply at the price equal to minimum average cost.

P = min AC

If the price is greater than min AC, existing firms would be making super normal profit which will attract new firms to enter the market.Entry of new firms would increase the market supply which would lead to a decline in market price till minimum average cost.

And if the price is less than min AC, then existing firms would be making losses, this would lead some of them to exit the market which in turn would create a situation of excess demand. Excess demand would lead the price to move upward till it gets equal to min AC.

If the equilibrium is attained in the above question above the minimum average cost of the firms constituting the market, the firms would be earning super normal profits. These positive profits would attract new firms to enter the market.

As these firms enter the market there would bean excess supply in the market which would lead to a price fall. This fall in price will continue till the price gets equal to minimum average cost, where firms only earn normal profit and there is no incentive for more firms to enter the market.

i.   If the price prevailing in the market is above the equilibrium price, then there would be a situation of excess supply in the market. Incase of excess supply the market supply is greater than the market demand at the prevailing price.

ii.   If the price prevailing in the market is below the equilibrium price, then there would be a situation of excess demand in the market. Incase of excess demand the market demand is greater than the market supply at the prevailing price.

There is an excess demand for a commodity in the market when market demand exceeds the market supply at a particular price.As shown in the diagram below, at price p₁ quantity demanded is q₂ level of output and quantity supplied is equal to q₁ level of output. Hence there is excess demand for the commodity equal to q₁q₂at price p₁.

Imposing a rent control on price of apartments would lead to excess demand for the apartments. This is due to the consumers who were not able to afford an apartment earlier at the equilibrium price would now start demanding an apartment. The impact of this government measure can be understood better with help of following diagram. Due to imposition of price control at p^c price level, there will be qc level of demand and q’c level of supply and hence there would be q’cqc level of the excess demand. In the short run the supply apartments would remain the same as new apartments can’t be built in a day.

The imposition of rent control though imposed for welfare of the people, it would end up creating shortage in the market. This shortage would prosper black marketing, where the consumers who are willing to pay greater rent than the control price would take the apartment.

(a) To calculate equilibrium price and quantity, we equate the demand and supply equation of salt

q^d = q^s

1,000 – p = 700 + 2p

2p + p = 1000 – 700

p = ₹ 100

To find the equilibrium quantity, we substitute price into demand equation

q = 1000 – 100 = 900 units

The equilibrium price is ₹ 100 and equilibrium quantity is 900 units.

(b) If the price of input for producing salt is changed and new supply is given as

q^s = 400 + 2p

New equilibrium price can be calculated by equating the new supply curve an old demand curve

1,000 – p = 400 + 2p

2p + p = 1000 – 400

3p = 600

p = ₹ 200

To find the equilibrium quantity, we substitute price into demand equation

q = 1000 – p

q = 1000 – 200

q = 800 units

The increase in price of input would raise the cost of producing salt which in turn would increase the price of salt. This increase in price of salt will lead to decline in quantity demanded of salt.

Yes, this change conforms to our expectation.

(c) If government imposes a tax of Rs 3 per unit of sale of salt the price of salt would increase and quantity demanded would fall.

q^S = 700 + 2(p – 3) = 700 + 2p – 6

1,000 – p = 700 + 2p – 6

1000 – 700 = 2p + p – 6

300 = 3p – 6

3p = 300 + 6

3p = 306

p = ₹ 102

To find the equilibrium quantity, we substitute price into demand equation

q = 1000 – 102 = 898 units

Now, equilibrium price has increased to ₹ 102 and equilibrium quantity is decreased by 2 units to898 units from 900 units.

The wage rate in a perfectly competitive labour market is determined at the intersection of downward sloping labour demand curve and upward sloping labour supply curve. The wage rate is equal to the marginal revenue product of the labour.

Labour demand curve represents the total amount of labour demanded by all the firms at different wage rate in the market. Individual firms hire labour up to a point where wage rate is equal to the value of marginal product of labour. The labour demand curve is negatively sloped due to law of diminishing marginal product.  As more and more labour is hired, each additional labour contributes less and less towards the addition in the output of the firm. Thus, market labour demand curve is negatively sloped as it is the aggregation of all individual demand curves.

Labour supply is determined by the households’ decision based on their choice between spending more hours on work and enjoying leisure. Individual labour supply curve is a backward bending curve which shows that after a certain wage rate individual will choose enjoying leisure compared to spending more hours at work.Nevertheless, the market labour supply curve is positively sloped which is obtained after summing up all the individual supply curve because though some individuals may be willing to work less, but many more individuals are attracted to supply more labour.

The optimal amount of labour in a perfectly competitive market is determined by the condition wage equal to value of marginal product of labour.

w = VMP_L

The firm employs labour up to the point where the extra cost incurred by it by employing the last unit of labour is equal to the additional benefit it earns from that last unit. The extra cost of employing an extra labour is wage rate (w).  The extra output produced by employing the extra labour is MP_L and additional revenue earned is MR. So, the extra benefit earned by firm is product of MP_L and MR. This product is called marginal revenue product of labour (MRP_L).

Now, in a perfectly competitive market marginal revenue is equal to price. So, MRP_L is equal to value of marginal product of labour (VMP_L= Price x MP_L).

The firm would keep hiring one unit of labour if VMP_Lis greater than the wage rate, as it leads to more profits and if at some level of output if VMP_L is less than wage rate, it can increase profits by reducing a unit of labour. Given the diminishing marginal product, it is optimal for firm to hire till wage rate is equal to value of marginal product.

(a) If both demand and supply curves shift in same direction

There are two cases under this

1. Increasein Demand and Supply

Under this case we have 3 situations,

• Increase in demand = Increase in Supply

Equilibrium price remains the same at p*, but equilibrium quantity increases from q₀ to q₁.

• Increase in demand > Increase in Supply

Equilibrium price increases from p₀ to p* and equilibrium quantity increases from q₀ to q*.

Change in equilibrium quantity is greater than the change in equilibrium price.

• Increase in demand < Increase in Supply

Equilibrium price decreases from p₀ to p* and equilibrium quantity increases from q₀ to q*.

Change in equilibrium quantity is greater than the change in equilibrium price.

2. Decrease in Demand and Supply

Under this case we have 3 situations

• Decrease in demand = Decrease in Supply

Equilibrium price remains the same at p*, but equilibrium quantity increases from q₀ to q*.

• Decrease in demand > Decrease in Supply

Equilibrium price increases from p* to p₀ and equilibrium quantity decreases from q₀ to q*.

Change in equilibrium quantity is greater than change in equilibrium price.

• Decrease in demand < Decrease in Supply

Equilibrium price increases from p* to p₀ and equilibrium quantity increases from q₀ to q*.

Change in equilibrium quantity is greater than the change in equilibrium price.

(b) If both demand and supply curves shift in opposite direction

There are two cases under this

1. Demand Decreases and Supply Increases

Under this case we have 3 situations

• Decrease in demand = Increase in Supply

Equilibrium quantity remains the same at q*, but equilibrium price decreases from p₀ to p*.

• Decrease in demand > Increase in Supply

Equilibrium quantity increases from q₀ to q* and equilibrium price decreases from p₀ to p*.

Change in equilibrium price is greater than the change in equilibrium quantity.

• Decrease in demand < Increase in Supply

Equilibrium quantity decreases from q₀ to q* and equilibrium price decreases from p₀ to p*.

Change in equilibrium price is greater than the change in equilibrium quantity.

2. Demand Increases and Supply Decreases

Under this case we have 3 situations

• Increase in demand = Decrease in Supply

Equilibrium quantity remains the same at q*, but equilibrium price increases from p₀ to p*.

• Increase in demand > Decrease in Supply

Equilibrium quantity increases from q₀ to q* and equilibrium price increases from p₀ to p*.

Change in equilibrium price is greater than the change in equilibrium quantity.

• Increase in demand < Decrease in Supply

Equilibrium quantity decreases from q₀ to q* and equilibrium price increases from p₀ to p*.

Change in equilibrium price is greater than the change in equilibrium quantity.

If both demand and supply curve shift rightward there are changes or no change in the equilibrium quantity of price and quantity. These changes would depend on the proportion in which the demand and supply curves shift.

Let us look at different situations

1) Both demand & supply curves shift rightward in same proportion

When demand and supply curve both shift rightward in same proportion, the equilibrium price will remain same and quantity demanded will increase.

In the diagram below, SS₁ and DD₁ are the original supply and demand curves. E₁ is the initial equilibrium level. Demand curve shifts rightward from DD₁ to DD₂ and Supply curve shifts from SS₁ to SS₂. The new equilibrium is established at E₂.It can be seen that price remains constant at p* whereas quantity increases from Oq₀ to Oq₁ level of output.

2) Supply shifts more than Demand

When supply shifts rightward more than demand, then the equilibrium price will decline and quantity demanded will increase.

In the diagram below, SS₁ and DD₁ are the original supply and demand curves. E₁ is the initial equilibrium level. Demand curve shifts rightward from DD₁ to DD₂ and Supply curve shifts from SS₁ to SS₂. The new equilibrium is established at E₂. It can be seen that price decreases from p0 to p*whereas quantity increases from Oq₀ to Oq* level of output. The increase in quantity is more than the decline in price.

3) Demand shifts more than Supply

When demand shifts rightward more than supply, then the equilibrium price will increase and quantity demanded will also increase.

In the diagram below, SS₁ and DD₁ are the original supply and demand curves. E₁ is the initial equilibrium level. Demand curve shifts rightward from DD₁ to DD₂ and Supply curve shifts from SS₁ to SS₂. The new equilibrium is established at E₂. It can be seen that price increases from p0 to p* whereas quantity increases from Oq₀ to Oq* level of output. The increase in quantity is more than the increase in price.

(a) Increase in consumers incomes

An increase in consumers’ income increases the purchasing power of people and they start demanding more of normal good and less of inferior good. As a result market demand curve for normal good shifts rightward from DD₁ to DD₂; but the supply curve remains the same.

In the diagram below, with the shift in demand curve quantity supplied is q’₀ and quantity demanded is q₀ at the p₀ level of price. This creates an excess demand (q’₀q₀) in the market which causes rise in price. The new equilibrium is established at E₂. At this new equilibrium, price increases from Op₀ to Op* and quantity increases from Oq’₀ to Oq*.

In case of inferior good: An increase in income increases the purchasing power of people and people start demanding more of normal goods and less of inferior goods. As a result demand curve for inferior goods shifts to left. The price and quantity demanded falls at the new equilibrium price.

(b) Decrease in consumers income

A decrease in consumers’ income decreases the purchasing power of people and they start demanding less of normal good and more of inferior good. As a result market demand curve for normal good shifts leftward from DD₁ to DD₂, but the supply curve remains the same.

In the diagram below, with the shift in demand curve quantity supplied is q₀ and quantity demanded is q’₀ at the p₀ level of price. This creates an excess supply(q’₀q₀)in the market which causes fall in price. The new equilibrium is established at E₂. At this new equilibrium, price decreases from Op₀ to Op* and quantity decreases from Oq₀to Oq*.

In case of inferior good: A decrease in income decreases the purchasing power of people and people start demanding of more of inferior goods. As a result demand curve shifts to the right for inferior goods. The price and quantity demanded rise at the new equilibrium price.

In a perfectly competitive market with fixed number of firms, supply curve represent the total quantity supplied by all the firms in the market at different prices and demand curve represent the total quantity demanded that consumers are willing to purchase at different prices.

The equilibrium price is determined at the intersection of market demand and supply curve. As we can see in diagram below, equilibrium is attained at p* level of price. In case the price is above (or below) the equilibrium price there is a situation of excess supply (or excess demand) in the market.

If the price is p1, the market demand is q2 whereas market supply is q*1. Thus, there is excess demand in the market is equal to q*1q2. In this situation, some consumers at price p1 are not able to obtain the commodity or want more of the commodity would be willing to pay more than p1. This leads to an upward pressure on commodity price and as a result price increases. The price of the commodity would increase till the price p*is attained, where market demand and market supply of the commodity is same.

Similarly, in the situation of excess supply there is a downward pressure on price due to increase in competition among sellers to sell the commodities, some firms will start selling the commodities at the lower price. Thus, commodity price falls till p* price is attained.