Market Equilibrium - Class 11 Commerce Economics - Extra Questions

Mention two reasons behind the leftward shift of a supply curve.

Two reasons behind the leftward shift of a supply curve are:
1) When price of the substitute goods rises, the supply of the another product falls and the supply curve of the another product shifts leftward.

2) When the government impose taxes, cost of production rises and the supply curve shifts leftward.


Price and supply of a commodity move in the same direction. Justify the statement.

Price and supply of a commodity move in the same direction.- this is a true statement.Law of supply states that other things remaining constant, there is a positive relationship between price and quantity supplied. When the price rises, supply also rise and vice-versa.Image result for supply curve


Explain five determinants of shift in the supply curve.

When price changes, quantity supplied will change. That is a movement along the same supply curve. When factors other than price changes, supply curve will shift. Here are some determinants of the supply curve.

 

1. Production cost:

Since most private companies’ goal is profit maximization. Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate, government regulation and taxes, etc.

2. Technology:

Technological improvements help reduce production cost and increase profit, thus stimulate higher supply. 

3. Number of sellers:

More sellers in the market increase the market supply.

4. Expectation for future prices:

If producers expect future price to be higher, they will try to hold on to their inventories and offer the products to the buyers in the future, thus they can capture the higher price

5 .Goverment Regulations:

Goverment control the supply with their regulation , they maintain the supply chain in the market



Explain equilibrium price with the help of demand and supply curves.

Equilibrium price level is drawn from the point where demand and supply curves intersect. At this price level, no surplus or deficit is observed. Image result for equilibrium price


Explain with reasons whether you agree or disagree with the following statement.
Increase and expansion in supply means the same.

No, I do not agree with this statement. Increase and expansion in supply are not the same. They are different.
Increase in Supply-
When we say there is an increase in supply or shift in the supply curve to the right then it means the entire supply curve has shifted to the right side. The supply increases when factors other than the price of the commodity changes. Such increase shifts the entire supply curve outward. 
Expansion in Supply-
Expansion of supply shows the changes on the same supply curve. Here there is an upward movement along the same supply curve. The expansion of supply is rooted only in price of the commodity with all the other factors constant.


Distinguish between:
Increase in demand and Decrease in demand.

Increase in DemandDecrease in Demand
(a) Increase in demand refers to a rise in demand due to changes in other factors, price remaining constant.(a) Decrease in demand refers to fall in demand due to changes in other factors, price remaining constant.
(b) Increase in demand occurs when more is purchased at the same price and same quantity is purchased at a higher price.(b) Decrease in demand occurs when less is purchased at the same price or same quantity at lower price.
(c) Increase in demand is a result of
(1) Increase in income
(2) Increase in price of substitutes
(3) Decrease in price of complementary goods
(4) Increase in population/
(5) When goods are in fashion.		(c) Decrease in demand is a result of
(1) Decrease in income.
(2) Decrease in price of substitutes.
(3) Increase in price of complementary goods.
(4) Decrease in population.
(5) When goods go out of fashion.
(d) When there is an increase in demand, the demand curve shifts to the right from $$DD$$ to $$D_{1}D_{2}$$ as shown in the figure.(d) When there is decrease in demand the demand curve shift to the left from $$DD$$ to $$D_{2}D_{2}$$ as shown in the figure.

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Extension of supply and Contraction of supply.

Extension of SupplyContraction of Supply
(a) When the supply of a commodity rises only due to increase in the price of the commodity, then it is said to be extension in supply.(a) When supply of a commodity falls only due to fall in the price of that commodity it is said to be contraction of supply.
(b) Extension in supply is shown by an upward movement to right on the same supply curve.(b) Contraction is shown by the downward movement to left on the same supply curve.

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Distinguish between:
Partial equilibrium and General equilibrium.

Partial EquilibriumGeneral Equilibrium
(a) Micro economics uses partial equilibrium analysis based on the assumption, other things remaining constant.(a) Macro economics uses general equilibrium. It is not based on any` assumption.
(b) Partial equilibrium studies the equilibrium of a consumer, a firm, an industry or a market.(b) It deals with the equilibrium position of the economy as a whole.
(c) It deals with one or two variables at a time. So it is a simple method. It is independent.(c) It deals with all the variables of the economic system simultaneously. So it is sophisticated. There is interdependence between variables.
(d) Partial Equilibrium is regarded as a worm's eye-view.(d) General Equilibrium is a bird's eye-view.


What is meant by price ceiling? Explain its implications.

The government-imposed upper limit on the price of a good or service is called price ceiling. Price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar and it is fixed below the market-determined price since at the market-determined price some section of the population will not be able to afford these goods.
In general, price ceiling accompanied by rationing of the goods may have the following adverse consequences on the consumers:
(a) Each consumer has to stand in long queues to buy the good from ration shops.
(b) Since all consumers will not be satisfied by the quantity of the goods that they get from the fair price shop, some of them will be willing to pay higher price for it. This may result in the creation of black market.


If there is change in any other determinant of supply (other than own price of the concerned commodity), the supply curve must shift to the right or left. Do you agree? Give reason.

Yes. Shift in the supply curve occurs due to factors other than own price of the concerned commodity. The supply curve shifts to the right when (own price of the commodity remaining constant), there is, for example, a fall in the cost of production due to new technology. The supply curve shifts to the left when (own price of the commodity remaining constant), there is , for example, an increase in the cost of production due to higher taxes.


Can price of the commodity ever be zero?

Practically the price of a commodity cannot be zero but theoretically a price of the commodity can be zero in a competitive market. Even if the price is zero the demand for commodity will exist 


Introduction of new technology increases marginal product. How would it affect supply curve of a firm?

Introduction of new technology increases MP (marginal product). It implies a fall in MC (Marginal cost). Accordingly, supply curve of a firm shifts to the right which shows that the producers are now willing to offer more quantity of a commodity at its existing price. 



How is the price of a commodity affected when its demand increases more than supply?

When increase in demand is more than increase in supply. The demand curve will shift more towards the right from DD to D1D1 than the supply curve from SS to S1S1. In the given case the equilibrium quantity as well as the equilibrium price will increase, but the increase in equilibrium price is lesser than the increase in equilibrium quantity. 
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What will be the effect on equilibrium price and quantity of an increase in equal proportion of demand and supply of a commodity?

Other things remaining constant when there is a proportionate increase in demand and supply. That is the rightward shift of demand curve from DD to D1D1 is equal to the rightward shift of supply from SS to S1S1 is equal then there is no change in the equilibrium price but the equilibrium quantity will increase from OQ to OQ1.

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What is meant by price floor?

Floor pricing is the price that the government imposes on how low price can be charged. It is the minimum price that can be charged. Floor price should be more than equilibrium priuce to be effective.



Define price ceiling.

Price ceiling is a Government imposed price control on a commodity. It is done to protect the customers from getting cheated. The government puts a limit on the sellers by giving them a maximum price that can be charged on a product.



Define support price policy.

Support price policy is the price that intends to give subsidy or control the price of a commodity. The government usually offers support price to farmers for selling their agricultural produce. It saves the farmers from getting exploited and offers them adequate consideration. 


What will be the effect of simultaneous change in demand and supply on price?

A. There are 3 cases of decrease in demand and supply.
1) When both demand and supply decrease in the equal proportion the price will remain same but the equilibrium quantity will decrease. 
2) When decrease in demand is more than the decrease in supply both equilibrium quantity and price will decrease.
3) When decrease in demand is less than decrease in supply the equilibrium price will rise and equilibrium quantity will increase.
B. There are 3 cases for increase in demand and supply. 
1) when increase in demand and supply is equal the equilibrium quantity will increase but there will be no change in equilibrium price. 
2) When increase in demand is more than increase in supply there is an increase in equilibrium price as well as quantity but increase in quantity is more than increase in equilibrium price. 
3) When increase in demand is less than increase in supply there is an increase in equilibrium price and equilibrium quantity. 


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

There are three possible situations of a simultaneous rightward shift of both the demand and supply curves:
(i) When demand increases more than supply, equilibrium price and quantity both will rise.
(ii) When demand and supply increase equally, equilibrium price will remain stable and equilibrium quantity will rise.
(iii) When demand increases less than supply, equilibrium price will fall and equilibrium quantity will rise.


Farmers may suffer a loss even when there is a good harvest. Does your supply-demand analysis provide an answer to this paradox?

Owing to their poverty (and immediate need for cash) farmers are often driven to a distressed sale of their produce. But good harvest causes a glut (of supply) in the market. This causes a price-crash. The price may fall so much that the total revenue of the farmer decreases even when his output/sale is more than before.


Explain briefly the concept of equilibrium.

Equilibrium is a state of balance between market demand and market supply. Graphically its a situation where the demand and supply curve intersect. When the market is in equilibrium there are no shortages, the price clears the market and optimum utilisation of resources takes place. The quantity and price at equilibrium is known as equilibrium quantity(Q) and equilibrium price(P). 
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Do you agree with the view that the market absorbs the impact of increase or decrease in demand only through the process of 'extension and contraction of demand and supply? Given reason.

Yes, the market absorbs the impact of increase or decrease through the process of extension/contraction. When there is an increase in demand the price increases thereby further reducing the demand and vice versa. 


In a situation of constant demand, equilibrium quantity does not change even when supply increases or decreases. 

Constant demand is a situation where the change in supply does not affect the demand of the commodity. This is usually in case of inelastic goods, the supply may increase or decrease, price may also change but the quantity that is demanded is fixed. 


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

With increase in input price, the supply curve shifts to the left. Accordingly, equilibrium price increases and equilibrium quantity reduces in the product market. Conversely, when there is decrease in input price, the supply curve shifts to the right, causing decrease in equilibrium price and increase in equilibrium quantity.


How are equilibrium price and quantity affected when income of the consumers increase and  decrease?

In case of normal goods income effect is positive which means with increase in income demand tends to rise whereas with decrease in income demand tends to fall. But, in case of inferior goods the income effect is negative with an increase in income the demand for inferior goods will reduce and vice versa. 


What do you understand by equilibrium price? How do the forces of demand and supply determine the equilibrium price?

Equilibrium price is the price at which quantity demanded is equal to quantity supplied. Forces of demand and supply determine the equilibrium price when they are same and graphically the point at which demand and supply intersect is equilibrium point and price is determined. 


How does improvement in technology and the consequent decline in production cost affect market equilibrium?

Improvement in technology and the consequent decline in production cost will increase in supply and reduce the price of the goods which will lead to increase in demand.


What will be the effects of a decrease in both the market demand and supply of a commodity on its price? Explain.

There are 3 cases of decrease in demand and supply.
1) When both demand and supply decrease in the equal proportion the price will remain same but the equilibrium quantity will decrease. 
2) When decrease in demand is more than the decrease in supply both equilibrium quantity and price will decrease.
3) When decrease in demand is less than decrease in supply the equilibrium price will rise and equilibrium quantity will increase.



What can be the effects on the equilibrium price of a commodity when its demand and supply curves both shift to the right simultaneously?

When both demand and supply shift towards the right there is an increase in demand as well as supply. 
There are 3 cases for increase in demand and supply. 
1) when increase in demand and supply is equal the equilibrium quantity will increase but there will be no change in equilibrium price. 
2) When increase in demand is more than increase in supply there is an increase in equilibrium price as well as quantity but increase in quantity is more than increase in equilibrium price. 
3) When increase in demand is less than increase in supply there is an increase in equilibrium price and equilibrium quantity. 



Show withe the help of diagrams, the effect on equilibrium price and quantity when:
(i) demand is perfectly elastic and supply decreases.
(ii) supply is perfectly elastic and demand increases.

(I)When supply rises the price of the commodity increases and the quantity demanded decreases because of increase in price and shortage of supply in case when demand is elastic. 
(ii) When supply is perfectly elastic and demand increases the price of the commodity might increase and equilibrium quantity will decrease. 


Market for a good is in equilibrium. What is the effect on equilibrium price and quantity if both market demand and market supply of the good increase in the same proportion? Use diagram.

If market is in equilibrium and market demand as well as market supply for a commodity increase in the same proportion the price remains stable, there is no change in the equilibrium price but the equilibrium quantity will increase. 
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At the given price of a commodity, there is excess supply. What changes will establish the equilibrium price? Explain with the help of a diagram.

When there is excess supply in the market the prices of goods are too high and quantity demanded is less than quantity demanded. To cure the situation money supply should be increased by monetary and fiscal policies, and price of goods should be reduced to increase demand and bring the economy at equilibrium. 


Explain the impact of increase in the number of consumers on market equilibrium.

When there is an increase in number of consumers then there will be an increase in demand and the demand curve will shift towards the right thereby increasing the quantity demanded and price of the product. 


"If the demand and supply of a commodity both increase, the equilibrium price may not change, may increase, may decrease." 

There are 3 cases for increase in demand and supply. 
1) when increase in demand and supply is equal the equilibrium quantity will increase but there will be no change in equilibrium price. 
2) When increase in demand is more than increase in supply there is an increase in equilibrium price as well as quantity but increase in quantity is more than increase in equilibrium price. 
3) When increase in demand is less than increase in supply there is an increase in equilibrium price and equilibrium quantity. 


Explain the distinction between "change in quantity supplied" and "change in supply". Use diagram.



Change in Supply

Change in Quantity Supplied
MeaningWhen supply due to the change in all other variables other than the price of a good (i.e. price of the good remains same), then it is referred as change in supply.When supply changes due to change in the price of goods only, assuming other determinants remaining unchanged, then it is referred as change in quantity supplied.
FunctionsIt is represented as
$$Q_x = f(\bar{P}_x, P_y, P_i, T, G, G_F, N_F)$$
It is represented as
$$Q_x = f(P_x, \bar{P}_y, \bar{T}, \bar{P}_i, \bar{G}, \bar{G}_f, \bar{N}_F)$$

Shifts & MovementsIt results in a shift in the supply curve of the firm which can be rightwards or leftwards.
It results in a movement of the supply curve of the firm which can be upward or downward.

Types:The following are its types:
1) Increase in Supply
2) Decrease in Supply
The following are its types:
1) Expansion of Supply
2) Contraction of Supply

Diagram:(Ref. Image 1)(Ref. Image 2)

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What are the effects of price-floor (minimum price ceiling) on the market of a good? Use diagram. 

Price Floor-It means the minimum price fixed by the government for a commodity in the market. It is done with a view to stabilising income of the producers. It also helps stabilising the supply of the commodities in the market. Floor Price is often higher than the equilibrium price of the commodity. This is expected to cause excess supply in the market. 
In the figures excess supply is equal to ab. In India, support price may be cited as an example of floor price. Support price is the assured minimum price offered by the government to the farmers for the purchase of their output. It is offered to the farmers in order to regulate their income. 
Equilibrium Price $$= OP $$
Equilibrium Quantity $$= OL $$
Floor Price $$=OP_1 $$
Excess Supply $$= ab = L_1 L_2$$ 

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Explain the rationale behind the consition of equilibrium of a producer.

The rationale behind the conditions of equilibrium of a producer is profit maximisation. This can be achieved by following the MR-MC approach. According to this approach, a firm will attain its equilibrium and will maximise its profit when the following conditions are met. 
1. Price $$(MR) = MC$$ 
2. $$MC$$ is rising or the slope of the $$MC$$ curve is greater than the slope of the $$MR$$ curve at subsequent output levels beyond the point where $$MC = MR$$
Let us evaluate the first two main conditions carefully. 

Condition-1: Price (MR) = Marginal Cost 
The first condition of the producers equilibrium is that at equilibrium, price must be equal to the $$MC$$. 

Case A: If Price $$(MR) > MC $$ (Ref. image)
Let us analyse what happens if price is greater than the $$MC$$. At output $$OQ_1$$, price is $$KQ_1$$ and the marginal cost is $$LQ_1$$, such that $$KQ_1 > LQ_1$$. Therefore, $$OQ_1$$ is not the profit maximising output. This is due to the fact that the firm can increase its profit by increasing the production of output to $$OQ_2$$.
Case B: If Price $$(MR) < MC $$ (Ref. image)
Let us analyse what happens if price is less than the $$MC$$. At output $$Q3$$, price is $$HQ_3$$ and the marginal cost is $$GQ_3$$, such that $$HQ_3 < GQ_3$$. Therefore, $$OQ_3$$ is not the profit maximising output. This is due to the fact that the firm can increase its profit by reducing its output level to $$OQ_2$$. 
Thus, we can conclude that at profit maximisation output, the equilibrium price (or MR) must be equal to the $$MC$$ curve and it cannot be greater or lesser than the $$MC$$ curve. 

Condition-2: MC curve should be rising at the point of intersection with MR 
Let us analyse two different situations, where $$MC$$ cuts $$MR$$. In the figure, the $$MC$$ curve cuts the price line (or MR) at two different points i.e. at '$$Z$$' and '$$E$$'. The first order condition of profit maximisation, i.e. Price (or MR) $$= MC$$ is fulfilled at both of these points. Now let us evaluate which of the following two cases fulfils the second order condition of profit maximisation. 
Case A: At point '$$Z$$' 
At point '$$Z$$', price is equal to $$MC$$ but $$MC$$ is falling and is negatively sloped. At this point, any output level slightly more than the $$OQ_0$$, the firm is facing price that exceeds the $$MC$$. This implies that the profit can be maximised by increasing output level beyond $$OQ_0$$. Therefore, $$OQ_0$$ is not a profit maximisation output. 
Case a At point '$$E$$' 
To the left of the point '$$E$$', if the firm produces slightly lesser level of output than $$OQ_2$$, then the firm is facing price that exceeds the $$MC$$. This implies that higher profits can be achieved by increasing the level of output to $$OQ_2$$. On the other hand, to the right of the point '$$E$$', if the firm produces slightly higher level of output than $$OQ_2$$, then the firm is facing price that falls short of the $$MC$$. This implies that higher profits can be achieved by reducing the output level to $$OQ_2$$. Thus, the point $$E$$ is the producers equilibrium and $$OQ_2$$ is the profit maximising output level, where Price $$= MC$$ and also $$MC$$ curve is rising. 

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What is minimum price ceiling ? Explain its implications.

Minimum price ceiling means the least price that could be paid for a good or service. It is the price fixed by the government for a good in the market.
The following are the implications of minimum price ceiling:
(i) Assurance to Farmers: The imposition of price ceiling assures that whatever is produced by the farmers will get sold in the market. This implies that the farmers can produce their maximum.
(ii) Assurances of Returns: Due to the price floor, the farmers do not need to bother about the sale of their output. This ensures a minimum guaranteed return to their investment in the production process.
(iii) Higher Income: The minimum guaranteed returns in the form of minimum price and minimum wage to the labourers result in the increase in income of the poor people.


What is a factor market?

Factor market is a system in which factor services are bought and sold.
There are producers ready to hire the services of factors. Again there are factor owners ready to sell the factor services. The system that links the factor owners on the one hand and the producers on the other hand is factor market.
In short, factor market is one where factor services are traded.


What is maximum price ceiling? On what type of goods is it normally imposed? Used diagram.

Price ceiling is the legislated or government imposed maximum level of price that can be charged by the seller. Usually, the government fixes this maximum price much below the equilibrium price, in order to preserve the welfare of the poorer and vulnerable section of the society. Let us understand the effect and rationale behind imposing price ceiling by taking the example of the onion market. 
Let $$DD$$ represents the demand curve depicting the market demand for onions and $$SS$$ represents the supply curve depicting the market supply of onions. The equilibrium as determined by the intersection of market demand curve and market supply curve is at $$E$$ with equilibrium output $$Oq^e$$ and equilibrium price $$OP^e$$. Now, let us suppose that government imposes price ceiling at $$OP^*$$ which is much lower than the equilibrium price $$OP^e$$. The imposition of the price ceiling will enable the poor people to afford onions at a comparatively lower price of $$OP^*$$. Thus, the government by imposing price ceiling interferes the market forces and artificially lowers the market price. However; at $$OP^*$$, there exists an excess demand as the demand for onions $$(q'd)$$ exceeds the supply of the onions $$(q's)$$. 
The Government of India imposes price ceiling in the market of wheat, rice, sugar and other necessity goods. 

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What is equilibrium point?

The equilibrium point is the point of intersection of the demand curve and supply curve of a commodity.


"Demand and supply are like two blades of a pair of scissors". Comment.

The given statement is correct. Both the blades of a pair of scissors are equally important to cut a piece of cloth. Similarly, both demand and supply are needed for determining price in the market. There is no use for demand for a product if there is no supply for the product and supply is not needed if there is no demand for a product. One of the two may play more active role in price determination in the short run. But, both are needed to determine the price in the long run.


What is the definition of market equilibrium?

Market equilibrium refers to the situation when market demand is equal to the market supply.


What do you mean by "producer's equilibrium"?

Producer's equilibrium means that any firm or company that produces a product or service has reached a level of output where it does not wish to change.


Write the assumptions for the producer's equilibrium.

The assumptions for producer's equilibrium are as follows:-
  1. The producer's behavior is rational.
  2. There are two factors (capital and labour) taken into consideration for determining the producer's equilibrium.
  3. Production technique remains constant.


What does the term "equilibrium quantity" mean?

Equilibrium quantity refers to the quantity at which the quantity demanded of a commodity is equal to the quantity supplied.


Define producer's equilibrium "when price remains constant".

When price remains constant, firms can sell any quantity of output at the price fixed by the market. Price or AR remains same at all levels of output. Also, the revenue from every additional unit (MR) is equal to AR. It means, AR curve is same as MR curve. Producer aims to produce that level of output at which MC is equal to MR and MC is greater than MR after MC=MR output level.


What do you mean by "price ceiling"?

Price ceiling refers to fixing the maximum price of a commodity at a level lower than the equilibrium price.


Explain the effect of an increase in income of buyers of a "normal commodity" on its equilibrium price?

An increase in income of buyers will increase the demand for normal goods at the given price ,it will lead to excess demand and competition among buyers, which raises the price.
Increase in price leads to rise in supply and fall in demand and these changes continue till supply and demand become equal at a new equilibrium price so if there is an increase in demand only, equilibrium prices rises.


Give the meaning of equilibrium market price of good.

Equilibrium market price refers to the price at which the quantity demanded of a commodity is equal to the quantity supplied.


What do you mean by "excess demand"?

Excess demand refers to a situation when quantity demanded is more than quantity supplied at the prevailing market price.


Explain the effect of the following on supply curve with the help of diagrams:
a. Increase in price of input.
b. Decrease in taxes.

a. Increase in input prices: Increase in price of factors of production (rent, wages, interest and profit) influence the cost of production of a commodity and thereby its supply. An increase in price of inputs, will increase the cost of production leading to a reduction in profit. This will make the producer reduce the supply of the commodity, shifting the supply curve to the left.
b. Reduction in per unit tax: Government imposes many taxes on production of goods, etc. Such taxes affect supply because it adds to the cost of production. Reduction in per unit tax levied by the government will decrease the cost of production and increase supply by the firms due to higher profit margins. In this case the supply curve will shift towards the right.
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What is the difference between consumer and producer's equilibrium?

The producer and consumer equilibrium are different from each other as outlined below:-
  1. A consumer's equilibrium refers to the point where he or she derives maximum satisfaction by spending money on the consumption of goods and services.
  2. Producer's equilibrium refers to that price and output combination which brings maximum profit to the producer and profit declines as more is produced.


What do you mean by "excess supply"?

Excess supply refers to a situation when the quantity supplied is more than the quantity demanded at the prevailing market price.


Define supply. Explain three reasons for the rightward shift of the supply curve.

Definition of Supply:
"Supply refers to the quantity of a commodity offered for sale at a given price in a given market at a given time."
In simple words, supply means that quantity of a particular commodity which a seller is ready to sell at given price. It is the price which vitally affects the supply of goods.
The rightward shift of the supply curve denotes the increase in supply. Increase in supply is a situation when quantity supplied increases due to the favourable changes in factors other than price.
The reasons for rightward shift of the supply curve are as under:
$$(1)$$ Fall in the price of factors of Production: When prices of factors of production (wages, cost of raw material etc.) decreases, it increases the profit margin of producer/seller which induces him to increase the supply.
$$(2)$$ Increase in the number of firms in the Market: When new firms enter into the market then total supply increases.
$$(3)$$ When the firm expects a fall in the Price of the Commodity: If firms expects that in near future prices are going to be decreased then they increase their present supply at higher prices in order to fetch out more and more profits.



Answer the following question in $$20$$ sentences.
Explain the Market equilibrium with the fixed number of firms with the help of a diagram.

The equilibrium price and quantity are determined at the intersection of the market demand and market supply curves when there is fixed number of firms. 
Figure above illustrates equilibrium for a perfectly competitive market with a fixed number of firms. Here SS denotes the market supply curve and DD denotes the market demand curve for a commodity. The market supply curve SS shows how much of the commodity firms would wish to supply at different prices, and the demand curve DD tells us how much of the commodity, the consumers would be willing to purchase at different prices. Graphically, an equilibrium is a point where the market supply curve intersects the market demand curve because this is where the market demand equals market supply. At any other point, either there is excess supply or there is excess demand. if the prevailing price is p1, the market demand is q1 whereas the market supply is q1’ . Therefore, there is excess demand in the market equal to q1’ q1. Some consumers who are either unable to obtain the commodity at all or obtain it in insufficient quantity will be willing to pay more than p1. The market price would tend to increase. All other things remaining the same as price rises, quantity demanded falls and quantity supplied increases. The market moves towards the point where the quantity that the firms want to sell is equal to the quantity that the consumers want to buy. This happens when price is p* , the supply decisions of the firms only match with the demand decisions of the consumers. Similarly, if the prevailing price is p2, the market supply (q2) will exceed the market demand ( q ‘2 ) at that price giving rise to excess supply equal to q2 ‘ q2. Some firms will not be then able to sell quantity they want to sell; so, they will lower their price. All other things remaining the same as price falls, quantity demanded rises, quantity supplied falls, and at p*, the firms are able to sell their desired output since market demand equals market supply at that price. Therefore, p* is the equilibrium price and the corresponding quantity q* is the equilibrium quantity.

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Suppose the demand and supply curves of salt are given by:
                     $$ { Q }_{ d }=1,000-p,\quad { Q }_{ s }=700+2p $$ 
(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 GST which raises the cost by $$Rs.3$$ per unit of output. How does it affect the equilibrium price and quantity?

(a) Market equilibrium is struck when:
          Market Demand = Market supply
Or,           $$ { Q }_{ d }={ Q }_{ s } $$
               $$1000-p = 700+2p$$
$$\Rightarrow       2p+p=1000-700$$
$$\Rightarrow    3p= 300$$
$$\Rightarrow      p=100$$
wHEN $$p=10,  { Q }_{ d }=1000-p $$ 
                        $$=1000-100=900$$
Equilibrium price = $$100.$$
Equilibrium quantity = $$900$$
(b) When price of an input used to produce salt has increased, new equilibrium price and equilibrium quantity is achieved when:
               $$1000-p=400+2p$$
$$\Rightarrow         2p+p=1000-400$$
$$\Rightarrow           3p=600$$
$$\Rightarrow          p=200$$
When $$p=200$$,        $$ { Q }_{ d }=1000-p $$
                              $$ = 1000-200=800$$
New equilibrium price = $$200.$$
New equilibrium quantity = $$800$$.
Owing to increase in input price, supply curve shifts backward. Consequently, equilibrium price is expected to rise and equilibrium quantity is expected to fall., In tune with this expected result, the new equilibrium price has risen from  $$Rs.100$$ to $$Rs.200$$ and equilibrium quantity has decreased from $$900$$ to$$ 800$$.
(c) When GST is imposed, the supply equation changes as under:
                $$ { Q }_{ d }=700+2\left( p-3 \right)  $$ [ out of the price charged producer has to pay $$Rs.3$$  to the  government ]
Equating supply and demand equations, the equilibrium price is achieved, as under:
             $$ 1000-p=700+2\left( p-3 \right)  $$ 
$$\Rightarrow     1000-p=700+2p-6$$
$$\Rightarrow         2p+p=1000-700+6$$
$$\Rightarrow         3p=306$$
$$\Rightarrow           p=102$$
Equilibrium quantity:
                   $$ 1000-102=898$$ 
Or
                    $$700+2(102-3)=700+198$$
                              $$=898$$
After GST, 
Equilibrium price increases from $$Rs.100$$ to $$Rs.102$$.
Equilibrium quantity reduces from $$900$$ to $$898$$.


Class 11 Commerce Economics Extra Questions