Ncert Solutions for Class 12 Micro Economics Chapter 5 Market Equilibrium

Microeconomics Class 12 Chapter 5 questions and answers: Market Equilibrium ncert solutions

Textbook	NCERT
Class	Class 12
Subject	Economics
Chapter	Chapter 5
Chapter Name	Market Equilibrium class 12 ncert solutions
Category	Ncert Solutions
Medium	English

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Question 1: Explain market equilibrium.

Answer 1: Market equilibrium is a fundamental concept in economics that describes the state in which supply and demand in a market are balanced, resulting in a stable market price. Market equilibrium occurs at the point where the quantity of goods or services that consumers are willing to purchase (demand) equals the quantity that producers are willing to sell (supply). This balance leads to a stable market price, known as the equilibrium price.

Question 2: When do we say there is excess demand for a commodity in the market?

Answer 2: When the market demand exceeds the market supply at a particular price, then the situation that arises is excess demand. In other words, if at any price, the producers are willing to supply comparatively less than what is demanded by all the consumers in the market, then we face the situation of excess demand.

Question 3: When do we say there is excess supply for a commodity in the market?

Answer 3: When the market supply for a commodity is greater than the market demand, it can be understood that there is an excess supply for that commodity in the market.

Question 4: What will happen if the price prevailing in the market is
(i) above the equilibrium price?
(ii) below the equilibrium price?

Answer 4: i) When the price of a product prevailing in the market is above the equilibrium price, supply will be more than demand. Since the product can be sold at a price greater than the equilibrium price, the firm will produce more quantities of the given product and increase the supply. But the demand will be low since the competing firms will also increase their production and supply, creating excess supply.

ii) When the price of a product prevailing in the market is below the equilibrium price, supply will be less than demand. Since the product can only be sold at a price lower than the equilibrium price, the firm will produce fewer quantities of the given product and decrease the supply. The competing firms will also do the same, and therefore the supply will not adequately meet the demand creating excess demand.

Question 5: Explain how price is determined in a perfectly competitive market with fixed number of firms.

Answer 5: In a perfectly competitive market with a fixed number of firms, price is determined by the intersection of the market demand and supply curves. Firms are price takers, meaning they accept the market price without influencing it. When the market price is set, the quantity demanded by consumers will match the quantity supplied by firms at that price, leading to market equilibrium.

If the price is below equilibrium, excess demand will push prices up, while a price above equilibrium will result in excess supply, causing prices to fall. Over time, adjustments in output by existing firms ensure that the market stabilizes at the equilibrium price, where firms earn normal profits in the long run.

Question 6: Suppose the price at which equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?

Answer 6: If the equilibrium price in a perfectly competitive market is above the minimum average cost of the firms, it indicates that firms are earning economic profits. In response to these profits, new firms will be attracted to the market due to free entry. As new firms enter, the market supply will increase, causing the market price to fall.

This process will continue until the price reaches the minimum average cost, at which point firms will earn only normal profits, and no further entry will occur. Ultimately, the market price adjusts downward to eliminate economic profits, leading to a new equilibrium where the price equals the minimum average cost of production.

Question 7: At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is equilibrium quantity determined in such a market?

Answer 7: In a perfectly competitive market with free entry and exit, firms supply at a level where the market price equals the minimum average cost (AC) of production in the long run. At this price, firms earn only normal profits (zero economic profit), which is the point at which no firms have an incentive to enter or exit the market.

The equilibrium quantity is determined by the intersection of the market demand curve and the market supply curve at this price. At this equilibrium point, the quantity demanded by consumers matches the quantity supplied by firms, ensuring market stability. Thus, the long-run equilibrium price and quantity reflect both efficient resource allocation and optimal production levels in the market.

Question 8: How is the equilibrium number of firms determined in a market where entry and exit is permitted?

Answer 8: With the free entry and exit of firms in a perfect competitive market, the equilibrium number of firms can be determined by equilibrium quantity supply per firm. In this type of situation, no new firm is allowed to enter into the market or no existing firm will leave, if the price is equal to the minimum of LAC. Thus, the number of firms is determined by the equality of price and the minimum of LAC.

The market equilibrium is determined by the intersection of market demand curve (D₁D₁) and the price line. The equilibrium price is P1 and the equilibrium output is q1. At this equilibrium price, each firm supplies the same output q1f , as it is assumed that all the firms are identical. Therefore, at the equilibrium, the number of firms in the market is equal to the number of firms required to supply output q1 at price P1, and each in turn supplying q1f amount at this price. That is

Where,
n = number of firms at market equilibrium
q₁ = the equilibrium quantity demanded
q₁f = the quantity of output supplied by each firm 

Question 9: How are equilibrium price and quantity affected when income of the consumers
(a) increase? (b) decrease?

Answer 9: When consumer income increases, the equilibrium price and quantity in the market typically rise, especially for normal goods. Higher incomes lead to increased purchasing power, resulting in greater demand for these goods. As demand shifts to the right, the market equilibrium price rises, and suppliers respond by increasing the quantity supplied to meet the higher demand.

Conversely, when consumer income decreases, the opposite effect occurs. Demand for normal goods tends to fall, causing the demand curve to shift leftward. This reduction in demand leads to a lower equilibrium price and quantity in the market. In contrast, for inferior goods, an increase in income may decrease demand, while a decrease in income may increase demand, thereby affecting the equilibrium price and quantity differently than for normal goods.

Question 10: Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.

Answer 10: Shoes and socks are complementary goods. Accordingly, as the demand for socks is expected to fall with rise in the price of shoes thus the demand curve (for socks) shifts backward. When demand curve shifts backward, the equilibrium price and quantity will be affected as shown in Fig.

In the above fig. D is the initial demand curve and S is the initial supply curve. E is the equilibrium point where D and S intersect each other. OP is the equilibrium price whereas OQ is the equilibrium quantity demanded of socks. When the price of shoes increases, demand curve for socks shifts backward as indicated by D₁. Equilibrium price shifts from E to E₁ and equilibrium quantity falls from OQ to OQ₁.

Question 11: How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

Answer 11: Coffee and tea are regarded as substitutes for each other, and therefore, any price change in coffee will result in changing the demand for tea. It can be said that when the coffee price increases, it will increase the demand for tea and when the coffee price decreases, the demand for tea is reduced.

Diagrammatically it can be represented as:

In the above diagram, when the price of coffee increases (from P to P1), the demand for tea increases which is shown by (Q to Q1).

In the above diagram, when the price of coffee decreases from (P to P1), there is a decrease in demand for tea (Q to Q1).

Question 12: How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?

Answer 12: When the price of an input used in the production of a commodity changes, it directly affects the equilibrium price and quantity of that commodity in the market.

If the price of an input decreases, the production cost for firms also decreases, leading to an increase in supply. This increase in supply shifts the supply curve to the right, resulting in a lower equilibrium price and a higher equilibrium quantity as more of the commodity is produced and sold.

Conversely, if the price of an input increases, production costs rise, causing firms to decrease supply. This shift in the supply curve to the left leads to a higher equilibrium price and a lower equilibrium quantity, as the reduced supply is unable to meet the previous level of demand at the same price.

Therefore, changes in the price of inputs have a significant impact on both the equilibrium price and quantity of the affected commodity.

Question 13: If the price of a substitute(Y) of good X increases, what impact does it have on the equilibrium price and quantity of good X?

Answer 13: If the price of a substitute good (Y) for good X increases, it generally leads to an increase in the equilibrium price and quantity of good X. This occurs because consumers will shift their preference toward good X, viewing it as a more attractive option compared to the now more expensive substitute, good Y.

As demand for good X increases, the demand curve for good X shifts to the right, reflecting higher quantities demanded at each price level. This shift creates upward pressure on the equilibrium price, prompting producers to supply more of good X to meet the increased demand. As a result, both the equilibrium price and quantity of good X rise in the market.

Question 14: Compare the effect of shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.

Answer 14: When the number of firms in the market is fixed. In this situation, Increase in demand will raise both equilibrium price and quantity. When entry and exit of firms in the market are permitted. Here, new firms will be attracted by super normal profits arising due to the excess demand (caused by an increase in demand).

It will result in a fall in price till it becomes equal to minimum AC. Therefore, the equilibrium price remains unchanged. Decrease in demand will result in the fall of both equilibrium price and quantity.

Question 15: Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

Answer 15: A rightward shift in both the demand and supply curves can occur in three situations, as explained below:

1. When both the demand and supply curve increase equally, then there will be no change in the equilibrium price, although there will be a change in the equilibrium point.

This can be depicted with a diagram as follows:

2. When the demand curve increases at a faster rate than the supply curve, there will be a higher equilibrium price and higher output.

3. When the demand curve increases at a slower rate than the supply curve, there will be a fall in equilibrium price and a rise in output.

Question 16: How are the equilibrium price and quantity affected when
(a) both demand and supply curves shift in the same direction?
(b) demand and supply curves shift in opposite directions?

Answer 16:

(a) Demand and Supply Curves Shift in the Same Direction:

1. If demand increases equal to supply: Price remains unchanged, quantity increases.
2. If demand increases more than supply: Price increases, quantity increases.
3. If demand increases less than supply: Price falls, quantity increases.
4. If demand decreases equal to supply: Price remains unchanged, quantity falls.
5. If demand decreases more than supply: Price falls, quantity falls.
6. If demand decreases less than supply: Price rises, quantity falls.

(b) Demand and Supply Curves Shift in Opposite Directions:

1. If demand increases and supply decreases equally: Price increases, quantity remains unchanged.
2. If demand increases more than the decrease in supply: Price increases, quantity increases.
3. If demand increases less than the decrease in supply: Price increases, quantity decreases.
4. If demand decreases and supply increases equally: Price decreases, quantity remains unchanged.
5. If demand decreases more than the increase in supply: Price falls, quantity decreases.
6. If demand decreases less than the increase in supply: Price falls, quantity increases.

Question 17: In what respect do the supply and demand curves in the labour market differ from those in the goods market?

Answer 17: The supply and demand curves in the labour market differ from those in the goods market in the following ways:

1) In a goods market, the demand for goods is made by consumers or households; while in a labour market, the demand for labour is made by firms.

2) In a goods market, the supply of goods is made by firms; while in a labour market, the supply of labour is made by households.

So, in a goods market, firms act as suppliers; in a labour market, households act as suppliers.

Question 18: How is the optimal amount of labour determined in a perfectly competitive market?

Answer 18: In a perfectly competitive market, the optimal amount of labour is determined by considering the cost and benefit that is obtained by employing the additional labour. A firm will hire labourers till that point, where the cost of employing additional labour becomes equal to the benefits derived from it. At that point, it can be said that the marginal cost of labour is equal to the marginal benefit of labour, or the wage rate is equal to the marginal revenue product.

It can be represented as follows:

• W = VMP_L
• Where,
• W = Wage rate
• VMP_L = Value of Marginal Product of Labour

Question 19: How is the wage rate determined in a perfectly competitive labour market?

Answer 19: In a perfectly competitive labor market, the wage rate is determined by the interaction of the demand for and supply of labor. Firms represent the demand side of the labor market, while workers represent the supply side. The demand for labor is based on the productivity of workers and the value of their marginal product to the firm, meaning firms will hire workers up to the point where the wage rate equals the value of the marginal product of labor.

On the other hand, the supply of labor reflects workers’ willingness to work at different wage rates. The equilibrium wage rate is established at the point where the demand for labor equals the supply of labor, ensuring that the number of workers willing to work at that wage rate matches the number of workers firms are willing to hire.

At this equilibrium wage, there is neither excess supply (unemployment) nor excess demand (labor shortages). Any deviation from this equilibrium would adjust automatically, as wage rates rise or fall in response to imbalances in the labor market. This process leads to an efficient allocation of labor, where both firms and workers are satisfied with the wage and employment level.

Question 20: Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?

Answer 20: In India, there are many goods on which government has imposed price ceiling, in order to keep them available within the reach of the BPL (below poverty lime) people. These goods are kerosene, sugar, wheat, rice, etc.

The following are the consequences of price ceiling:

1. Excess demand: Due to artificially imposed price, cutting lower than the equilibrium price leads to the emergence of the problem of excess demand.

2. Fixed Quota: Each consumer gets a fixed quantity of good (as per the quota). The quantity often falls short of meeting the individual’s requirements. This further leads to the problem of shortage and the consumer remains unsatisfied.

3. Inferior goods: Often it has been found that the goods that are rationed are usually inferior goods and are adulterated.

4. Black marketing: The needs of a consumer remains unfulfilled as per the quota laid by the government. Consequently, some of the unsatisfied consumers get ready to pay higher price for the additional quantity. This leads to black-marketing and artificial shortage in the market.

Question 21: A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exit is permitted. Explain

Answer 21: In the short run, the number of firms is fixed, while in the long run, there is no restriction on the number of firms, and free entry-exit is permitted. The following inference can be made from the situation when the market is running with a fixed number of companies (short run).

• 1. When demand increases, both equilibrium price and quantity are raised
• 2. When demand decreases, there is a fall in equilibrium price and quantity

The market situation, when the long run is taking place with free entry and exit of firms, is as follows:

• 1. When demand increases, there is no change in equilibrium price but the output increases.
• 2. When demand decreases, there is no change in equilibrium price, but the production quantity is reduced (less).

Question 22: Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:
q^D = 700 – p
q^S = 500 + 3p for p ≥ 15
= 0 for 0 ≤ p < 15
Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than ₹15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced? 

Answer 22: It is given that;

q_d = 700 − p

q_s = 500 + 3p for p > Rs 15

= 0 for 0 ≤ p < 15

The market supply is zero for any price from Rs 0 to Rs 15, this is because, for price between 0 to 15, no individual firm will produce any positive level of output (as the price is less than the minimum of AVC). Consequently, the market supply curve will be zero.

At equilibrium q_d = q_s

700 − p = 500 + 3p

− p −3p = 500 − 700

− 4p = − 200

p = 50

Equilibrium price is Rs 50.

Quantity = q_s = 500 + 3p

= 500 + 3 (50)

= 500 + 150

= 650

Therefore, the equilibrium quantity is 650 units.

Question 23: Considering the same demand curve as in exercise 22, now let us allow for free entry and exit of the firms producing commodity X. Also assume that the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as
q^S_f = 8 + 3p for p ≥ 20
= 0 for 0 ≤ p < 20
(a) What is the significance of p = 20?
(b) At what price will the market for X be in equilibrium? State the reason for your answer.
(c) Calculate the equilibrium quantity and number of firms.  

Answer 23:

• q^s_f = 8 + 3 p for p ≥ Rs 200
• = 0 for 0 ≤ p < Rs 20.
• qd = 700 − p

(a) For the price between 0 to 20, no firm is going to produce anything as the price in this range is below the minimum of LAC. So, at the price of Rs 20, the price line is equal to the minimum of LAC.

(b) As there exists the freedom of entry and exit of firms, the minimum of AVC is at Rs 20, also, the price of Rs 20 is the equilibrium price. This is because in the long run, all firms earn zero economic profit, which implies that the price of Rs 20 is the equilibrium price and at any price lower than Rs 20, the firm will move out of the market.

(c) At equilibrium price of ₹20.
Quantity supplied = qs = 8 + 3p
= 8 + 3 (20)
qs = 68 units
Quantity demanded qd = 700 − p
= 700 − 20
qd = 680
Number of firms (n)  = q^d / q^s
n=680/68
n = 10 firms
Therefore, the number of firms in the market is 10 and the equilibrium quantity is 680 units.

Question 24: Suppose the demand and supply curves of salt are given by:
q_D = 1,000 – p, q_S = 700 + 2p
(a) Find the equilibrium price and quantity.
(b) Now suppose that the price of an input used to produce salt has increased so that the new supply curve is
q_S = 400 + 2p
How does the equilibrium price and quantity change? Does the change
conform to your expectation?
(c) Suppose the government has imposed a tax of Rs 3 per unit of sale of salt. How does it affect the equilibrium price and quantity?

Answer 24: (a) At equilibrium
q_D = 1000 – p …(1)
q_S = 700 + 2p …(2)
q_D = q_S
1000 − p = 700 + 2p
300 = 3p
100 = p
p = ₹100
q_d = 1000-100
[Substituting the value of p in equation (1)]
= 900 units
So,
the equilibrium price is ₹100 and equilibrium quantity is 900 units.

(b) New quantity supplied (qs) …(3)
q_s = 400 + 2p
At equilibrium q_D = q′S
1000 − p = 400 + 2p
600 = 3p
200 = p
p = ₹200
Prior to the increase in the price of input, the equilibrium price was `100, and after the rise in input’s price, the equilibrium price is ₹200.
So,
the change in the equilibrium price is ₹100 (200 − 100).
q_d = 1000 – P
= 1000 – 200 = 800 units
[Subtitling the value of p in equation (1)]
= 800 units
The change in the equilibrium quantity is 100 units (i.e., 900 − 800 units).
Yes, this change is obvious, as due to the change in the input’s price, the cost of producing salt has increased that will shift the marginal cost curve leftward and move the supply curve to the left. A leftward shift in the supply curve results in a rise in the equilibrium price and a fall in the equilibrium quantity.

(c) The imposition of tax of ₹3 per unit of salt sold will raise the cost of producing salt. This will shift the supply curve leftwards and the quantity supplied equation will become
y_s = 700 + 2(p − 3) …(4)
At equilibrium
y_d = y_s
1000 − p = 700 + 2(p − 3)
1000 − p = 700 + 2p − 6
306 = 3p
p = ₹102
Substituting the value of p in equation (4)
y_d = 1000 − p
y_d = 1000 − 102
y_d= 898 units
Thus, the imposition of tax of ₹3 per unit of salt sold will result in an increase in the price of salt from ₹100 to ₹102. The equilibrium quantity falls from 900 units to 898 units.

Question 25: Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?

Answer 25: If the government imposes rent control to make apartments more affordable for common people, it sets a maximum rent below the market-determined rent. This policy can have significant effects on the apartment market.

Initially, rent control will make apartments more affordable, increasing demand as more people can now afford to rent. However, the lower rent also reduces the incentive for landlords to supply apartments because they earn less income. Over time, this leads to a shortage in the market as the supply of available apartments decreases. Additionally, landlords may reduce maintenance or investment in their properties due to lower profits, leading to a decline in the quality of housing.

In the long run, rent control can create inefficiencies in the market, such as a mismatch between the number of people seeking apartments and the limited supply, making it difficult for many to find housing despite the lower rent. Thus, while rent control helps some renters, it often leads to unintended negative consequences such as shortages, poor housing conditions, and reduced investment in the rental market.