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1. Meaning of Equilibrium Price: Equilibrium Price is the price at which quantity demanded of a commodity
is exactly equal to its quantity supplied. Another name for equilibrium price is market price.
2. Excess Demand : When the quantity demanded exceeds the quantity demanded there is an excess demand.
The price this case.
3. Excess Supply: The supply o f a commodity is said to an excess supply when quantity supplied exceeds the
quantity demand. The price will fall in this case.
4. Changes in Equilibrium Prices: Changes in equilibrium prices (or market prices) will occur as a result of
changes in demand and supply.
5. Shift in Demand and Equilibrium Price:
(i) When supply remains constant, the upward shift of the demand curve will cause equilibrium price and
quantity to increase. But the downward shift of the curve will lead to decrease in both equilibrium price and
quantity.
(ii) When supply is perfectly elastic, the upward or downward shift of the demand curve will have no effect on
the equilibrium price. It only causes equilibrium quantity to change.
(iii) When supply is perfectly inelastic, change in demand will affect the equilibrium price but not· the
equilibrium quantity.
6. Shift in Supply and Equilibrium Price:
(i) When demand remains the same, equilibrium price falls and quantity increases with an increase in supply.
But, if supply decreases, equilibrium price rises and quantity falls.
(ii) When the demand is perfectly elastic, change in supply will have no effect on the equilibrium price. But
quantity will increase with increase in supply and decrease with decrease in supply.
(iii) When demand is perfectly inelastic, the rightward shift of the supply curve will reduce the equilibrium
price. But a decrease in supply would increase the equilibrium price.
7. Simultaneous Change in both Demand and Supply:
(i) When increase in supply is equal to increase in demand, equilibrium price will remain unaffected.
(ii) When increase in supply is more than increase in demand, new equilibrium price will fall but equilibrium
quantity will increase.
(iii) When increase in supply is less than increase in demand, new equilibrium price rises. The quantity
bought and sold also increases.
(iv) When decrease in demand and decrease in supply are equal, equilibrium price remains the same but
equilibrium quantity falls.
(v) When decrease in demand is more than decrease in supply, equilibrium price and equilibrium quantity
both fall.
(vi) When decrease in demand is less than decrease in supply, equilibrium price rises but equilibrium
quantity falls.
8. Effect of Change in both Demand and Supply in Reverse Direction:
,(i) When increase in demand and decrease in supply are equal, equilibrium price rises but equilibrium
quantity remains same.
(ii) When increase in demand is more than decrease in supply equilibrium price and equilibrium quantity
both rises.
(iii) When increase in demand is than decrease in supply, equilibrium price rises but equilibrium quantity
falls.
(iv) When increase in demand and increase in supply are equal, equilibrium price falls but equilibrium
quantity remains same.
(v) When decrease in demand is more than increase in supply, equilibrium price and equilibrium quantity
both fall.
(vi) When decrease in demand is less than increase in supply, equilibrium price falls but equilibrium quantity
rises.
9. Special Cases of Market Equilibrium:
(i) When supply is perfectly elastic, then change in demand (increase or decrease in demand) does not affect
the equilibrium price of the commodity. But equilibrium quantity rises in case of increase m demand and
decreases in case of decrease in demand.
(ii) When supply is perfectly inelastic, any change in demand does not affect the equilibrium quantity. But
equilibrium price rises in case of increase in demand and falls in case of decrease in demand.
(iii) When demand is perfectly elastic, then change in supply does not affect the equilibrium price. But
equilibrium quantity rises in case of increase in supply and decrease in case of decrease in supply.
(iv) Quantity: When demand is perfectly inelastic, then change in supply does not have any effect on
equilibrium quantity. But equilibrium price falls in case of increase in supply and rises of decrease in supply.
10. Applications of Tools of Demond and Supply:
Price Control Policies: Price control or regulation means fixation of price by law. At the controlled price,
quantity demanded is not equal to the quantity supplied. The price may be fixed high or below the
equilibrium price depending upon the situation.
(A) Maximum Price Policy or Price Ceiling: We know that if essential goods like sugar, rice, wheat, etc. are
left to free market, poor people will not be able to buy them at the prevailing market determined price.
Equilibrium price is presumed to be very high. In such a situation the Government fixes maximum affordable
price for certain goods which is called price ceiling.
(B) Effects of Price Ceiling:
(i) If ceiling is above the equilibrium price then there will be the condition of excess supply and if it is fixed
below the equilibrium price then there will be the condition of excess demand.
(ii) Allocation of Available Supply:
(a) First come first serve method,
(b) Distributing according to sellers' preferences,
(c) Rationing: It is a system of distribution of a specific quantity of a product at the price fixed by the
Government. Under this system Government issues a ration card to each family 'which enables that
family to buy a specified quantity of the product at a fixed price.
(iii) Black Marketing: Black marketing is a direct consequence of price controls.
(C) Minimum Support Price or Floor Price: The Government may fix the minimum price at which the sellers
may sell a particular goods or service. Such price is known as floor price or minimum support price.
Minimum support price fixed to assure the producers that they get a good price for their product.
Effects of Minimum Price:
(i) Surpluses (ii) Buffer stock (iii) Subsidies
, 1 MARK
QUESTIONS
1. The price at which both demand and supply are equal is called ______
2. If market price is less than the equilibrium price, the situation of arises. ______
3. If market price is more than the equilibrium price, the situation of arises. ______
4. If demand increases and supply remains same, equilibrium price ______
5. If supply increases and demand remains same, equilibrium price ______
6. In case of perfectly elastic demand, increase in supply will ______ the equilibrium price.
7. In case of perfectly inelastic supply, increase in demand will lead to ______
8. When both demand and supply increase by same percentage, equilibrium price ______
8. When demand increases more than increase in supply, equilibrium price _______
10. When demand decreases more than decrease in supply, equilibrium price _______
11. _______and _______ are major implications of price ceiling.
12. _______and _______ are important implications of minimum price.
13. If market price is less than the equilibrium price there will be competition amongst
14. If market price is more than the equilibrium price there will be competition amongst
15. When supply is _______ then change in demand ANSWERSdoes not affect the equilibrium price of the commodity.
1. Equilibrium price 2. Excess demand 3. Excess supply 4 . Increases
5. Decreases 6. Not change 7. Increase in 8. Remains constant
equilibrium price
9. Will increase 10 . Decreases 11. Rationing, Black 12. Buffer stock,
marketing Subsidies
13. Buyers 14 . Sellers 15. Perfectly elastic
B. TRUE OR FALSE
1. Excess supply leads to fall in equilibrium price.
Ans. [False] Excess supply leads to fall in market price but not in equilibrium price. During excess supply,
market price is more than equilibrium price and in order to sell the excess stock, market price continues to
fall till equilibrium price is achieved.
2. Change in supply will not change the equilibrium quantity in case of perfectly elastic demand.
Ans. [False] In case of perfectly elastic demand, equilibrium quantity will vary with change in supply but
equilibrium price remains the same.
3. An increase in price of coffee will lead to rise in equilibrium price of tea.
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