CBSE Class 12 Microeconomics Revision Notes Chapter 5 Market Equilibrium

Market equilibrium occurs when quantity demanded equals quantity supplied at a particular price.

In Class 12 Microeconomics, this chapter explains equilibrium price, excess demand, excess supply, demand-supply shifts, wage determination, price ceiling and price floor.

Market Equilibrium connects consumer behaviour and producer behaviour. Consumers create demand, firms create supply and the market brings both sides together. The price at which buyers want to buy exactly what sellers want to sell is called the equilibrium price.

Use these CBSE Class 12 Microeconomics Revision Notes Chapter 5 for the 2026–27 academic year to revise equilibrium, disequilibrium, shifts in demand and supply, wage determination and government intervention. These notes make Microeconomics Chapter 5 class 12 notes easier to revise through formulas, tables and exam-style explanations.

Key Takeaways

• Market equilibrium: It occurs when market demand equals market supply.
• Excess demand: Demand is greater than supply, so price tends to rise.
• Excess supply: Supply is greater than demand, so price tends to fall.
• Free entry and exit: In long-run equilibrium, price becomes equal to minimum average cost.

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Revise this chapter as a demand-supply chain.

Demand → Supply → Equilibrium → Disequilibrium → Shifts → Applications

Market Equilibrium Class 12 Notes: What This Chapter Covers

Market Equilibrium Class 12 Notes explain how a competitive market reaches a price where buyers and sellers are both satisfied.

This chapter uses concepts from demand and supply. Consumers decide how much to buy at each price. Firms decide how much to sell at each price. Equilibrium is reached when both plans match.

The chapter mainly covers:

• Equilibrium price and quantity
• Excess demand and excess supply
• Market equilibrium with a fixed number of firms
• Market equilibrium with free entry and exit
• Shifts in demand and supply
• Wage determination in labour market
• Price ceiling and price floor

Meaning of Market Equilibrium

Market equilibrium is a situation where the quantity demanded by buyers equals the quantity supplied by sellers.

At this point, the market clears.

Formula:

qD(p*) = qS(p*)

Here:

At equilibrium:

Market Demand = Market Supply

or

qD = qS

Equilibrium Price

Equilibrium price is the price at which quantity demanded equals quantity supplied.

At this price, there is no excess demand and no excess supply.

Equilibrium Quantity

Equilibrium quantity is the quantity bought and sold at the equilibrium price.

At this quantity, buyers get what they want to buy and sellers sell what they want to sell.

Market Clearing

Market clearing means all planned purchases and planned sales are completed at the equilibrium price.

There is no shortage and no surplus.

Excess Demand and Excess Supply

A market may not always be at equilibrium. When quantity demanded and quantity supplied are unequal, the market is in disequilibrium.

Excess Demand

Excess demand occurs when quantity demanded is greater than quantity supplied at the current price.

Formula:

Excess Demand = qD - qS

This usually happens when the market price is below the equilibrium price.

At a low price, buyers want to buy more, but sellers want to sell less. This creates a shortage.

Effect of Excess Demand

When there is excess demand, some buyers are unable to get the commodity. They may be willing to pay a higher price.

So, price tends to rise.

As price rises:

• Quantity demanded falls.
• Quantity supplied rises.
• The market moves toward equilibrium.

Excess Supply

Excess supply occurs when quantity supplied is greater than quantity demanded at the current price.

Formula:

Excess Supply = qS - qD

This usually happens when the market price is above the equilibrium price.

At a high price, sellers want to sell more, but buyers want to buy less. This creates a surplus.

Effect of Excess Supply

When there is excess supply, some sellers are unable to sell their output. They may reduce price to attract buyers.

So, price tends to fall.

As price falls:

• Quantity demanded rises.
• Quantity supplied falls.
• The market moves toward equilibrium.

Excess Demand and Excess Supply Table

Market Equilibrium with Fixed Number of Firms

When the number of firms is fixed, the market supply curve is based on the existing firms.

Equilibrium is found where the market demand curve intersects the market supply curve.

At this point:

qD = qS

The demand curve slopes downward. The supply curve slopes upward. Their intersection gives the equilibrium price and quantity.

How Equilibrium Is Reached

If price is below equilibrium, there is excess demand. Competition among buyers pushes price up.

If price is above equilibrium, there is excess supply. Competition among sellers pushes price down.

This adjustment continues until market demand equals market supply.

Algebraic Example of Market Equilibrium

Suppose market demand and supply are:

qD = 200 - p

qS = 120 + p

At equilibrium:

qD = qS

200 - p = 120 + p

80 = 2p

p = 40

So, equilibrium price is ₹40.

Now substitute p = 40 in either demand or supply equation.

qD = 200 - 40 = 160

qS = 120 + 40 = 160

So, equilibrium quantity is 160 units.

Excess Demand at a Lower Price

If p = ₹25:

qD = 200 - 25 = 175

qS = 120 + 25 = 145

Here, qD > qS.

Excess demand = 175 - 145 = 30 units

So, price tends to rise.

Excess Supply at a Higher Price

If p = ₹45:

qD = 200 - 45 = 155

qS = 120 + 45 = 165

Here, qS > qD.

Excess supply = 165 - 155 = 10 units

So, price tends to fall.

Demand Shifts and Their Effect on Equilibrium

A demand shift means demand changes at every price.

Demand can shift due to changes in:

• Income of consumers
• Tastes and preferences
• Price of related goods
• Number of consumers
• Expectations about future prices

Rightward Shift in Demand

A rightward shift means demand increases.

At the old equilibrium price, demand becomes greater than supply. This creates excess demand.

So, price rises.

As price rises, quantity supplied also rises. The new equilibrium has a higher price and higher quantity.

Leftward Shift in Demand

A leftward shift means demand decreases.

At the old equilibrium price, supply becomes greater than demand. This creates excess supply.

So, price falls.

As price falls, quantity supplied also falls. The new equilibrium has a lower price and lower quantity.

Demand Shift Summary

Memory point:
Demand shift changes equilibrium price and quantity in the same direction.

Supply Shifts and Their Effect on Equilibrium

A supply shift means supply changes at every price.

Supply can shift due to changes in:

• Input prices
• Technology
• Unit tax
• Number of firms
• Expected future prices

Rightward Shift in Supply

A rightward shift means supply increases.

At the old equilibrium price, supply becomes greater than demand. This creates excess supply.

So, price falls.

As price falls, quantity demanded rises. The new equilibrium has a lower price and higher quantity.

Leftward Shift in Supply

A leftward shift means supply decreases.

At the old equilibrium price, demand becomes greater than supply. This creates excess demand.

So, price rises.

As price rises, quantity demanded falls. The new equilibrium has a higher price and lower quantity.

Supply Shift Summary

Memory point:
Supply shift changes equilibrium price and quantity in opposite directions.

Simultaneous Shifts in Demand and Supply

Sometimes both demand and supply shift together. In such cases, the final effect depends on the direction and size of both shifts.

There are four possible cases.

When Both Demand and Supply Increase

Demand shifts right and supply shifts right.

Equilibrium quantity rises.

Equilibrium price may rise, fall or remain unchanged depending on which shift is stronger.

When Both Demand and Supply Decrease

Demand shifts left and supply shifts left.

Equilibrium quantity falls.

Equilibrium price may rise, fall or remain unchanged depending on which shift is stronger.

When Demand Decreases and Supply Increases

Demand shifts left and supply shifts right.

Equilibrium price falls.

Equilibrium quantity may rise, fall or remain unchanged.

When Demand Increases and Supply Decreases

Demand shifts right and supply shifts left.

Equilibrium price rises.

Equilibrium quantity may rise, fall or remain unchanged.

Market Equilibrium with Free Entry and Exit

In a perfectly competitive market, firms may be free to enter or leave the industry.

Free entry and exit affect long-run equilibrium.

What Free Entry Means

Free entry means new firms can enter the market when existing firms are earning supernormal profit.

When new firms enter:

• Market supply increases.
• Supply curve shifts right.
• Price falls.
• Supernormal profit reduces.

Entry continues until firms earn only normal profit.

What Free Exit Means

Free exit means firms can leave the market when they are incurring losses.

When firms exit:

• Market supply decreases.
• Supply curve shifts left.
• Price rises.
• Losses reduce.

Exit continues until remaining firms earn normal profit.

Free Entry and Exit Result

With free entry and exit, equilibrium price becomes equal to minimum average cost.

Formula:

p = min AC

At this price:

• Firms earn normal profit.
• No new firm wants to enter.
• No existing firm wants to leave.

Fixed Firms vs Free Entry and Exit

Wage Determination in Labour Market

Demand and supply analysis can also explain wage determination in a labour market.

In a goods market, firms supply goods and households demand goods.

In a labour market, households supply labour and firms demand labour.

Demand for Labour

A firm hires labour to produce output.

The firm compares the wage paid with the value of the extra output produced by labour.

The firm hires labour up to the point where:

Wage = Value of Marginal Product of Labour

or

w = VMPL

Marginal Revenue Product of Labour

Marginal Revenue Product of Labour is the extra revenue earned by hiring one more unit of labour.

Formula:

MRPL = MR × MPL

Under perfect competition:

MR = Price

So:

VMPL = Price × MPL

The demand curve for labour slopes downward because marginal product of labour falls after a point.

Supply of Labour

Households supply labour in exchange for wages.

When wage rises, two effects are possible:

At lower wage levels, labour supply generally rises with wage.

At very high wage levels, some workers may prefer more leisure. This can create a backward-bending individual labour supply curve.

Wage Equilibrium

The wage rate is determined where labour demand equals labour supply.

At equilibrium:

Labour Demanded = Labour Supplied

The wage at this point is the equilibrium wage.

Price Ceiling and Price Floor

Government may intervene in markets to protect consumers or producers.

The two main interventions are:

• Price ceiling
• Price floor

Price Ceiling

A price ceiling is the maximum price fixed by the government.

It is usually set below the equilibrium price to make essential goods affordable.

Examples may include essential food items such as wheat, rice, sugar or kerosene.

Effect of Price Ceiling

When price ceiling is below equilibrium price:

• Price becomes lower.
• Quantity demanded increases.
• Quantity supplied decreases.
• Shortage occurs.
• Rationing may be needed.

Price Ceiling Table

Price Ceiling Example

Suppose equilibrium price of wheat is ₹40 per kg.

The government fixes price ceiling at ₹30 per kg.

At ₹30:

• Consumers demand more wheat.
• Sellers supply less wheat.
• Excess demand appears.

This shortage may require rationing.

Price Floor

A price floor is the minimum price fixed by the government.

It is usually set above equilibrium price to protect producers.

Minimum support price for agricultural products is an example of price floor.

Effect of Price Floor

When price floor is above equilibrium price:

• Price becomes higher.
• Quantity supplied increases.
• Quantity demanded decreases.
• Surplus occurs.
• Government may need to buy excess stock.

Price Floor Table

Price Ceiling vs Price Floor

Viable and Non-Viable Industries

The concepts of viable and non-viable industries are linked with long-run equilibrium and cost conditions.

Viable Industry

A viable industry is one where firms can produce output and survive in the long run.

In this case, demand is high enough for firms to cover their minimum average cost.

Non-Viable Industry

A non-viable industry is one where firms cannot cover minimum average cost at any positive output level.

In such a case, production is not sustainable in the long run.

Quick Revision Tables for Market Equilibrium

Equilibrium Formula Table

Disequilibrium Table

Shift Effect Table

Simultaneous Shift Table

Government Intervention Table

Important Terms in Market Equilibrium

Common Mistakes in Class 12 Microeconomics Chapter 5 Notes

Useful Links for Class 12 Microeconomics