Chapter 13: Market Equilibrium Under Perfect Competition and Effects of Shifts in Demand and Supply PDF

# Chapter 13: Market Equilibrium Under Perfect Competition and Effects of Shifts in Demand and Supply ## Concept of Market Equilibrium: Equilibrium Price and Equilibrium Quantity - Market equilibrium is defined as the state of the market when the demand for a particular commodity is equal to its sup...

# Chapter 13: Market Equilibrium Under Perfect Competition and Effects of Shifts in Demand and Supply ## Concept of Market Equilibrium: Equilibrium Price and Equilibrium Quantity - Market equilibrium is defined as the state of the market when the demand for a particular commodity is equal to its supply, corresponding to a particular price. - In a state of equilibrium, the market clears itself: market demand = market supply of a commodity (Dx = Sx). There is neither excess demand nor excess supply. - The price that prevails in the market is called **equilibrium price**. - The quantity supplied/demanded is called **equilibrium quantity**. ### Market Equilibrium Occurs When Dx= Sx. It Leads To: - **Equilibrium price**, the price which clears the market (Dx = Sx). - **Equilibrium quantity**, the quantity that leaves no excess demand or excess supply in the market (because Sx = Dx). - Equilibrium price implies the situation of equilibrium quantity and equilibrium quantity implies the situation of equilibrium price. ## Determination of Market Equilibrium Under Perfect Competition - Market equilibrium under perfect competition is determined by the forces of market demand and market supply. ### Market Demand - Market demand refers to the sum total of demand for a commodity by all the buyers in the market. - It is indicated by a market demand schedule or market demand curve. ### Market Supply - Market supply refers to the sum total of supply of a commodity by all the firms in the market. - It is indicated by a market supply schedule or market supply curve. ### Market Equilibrium - Market equilibrium is struck when, at the prevailing price in the market, quantity demanded is equal to quantity supplied. - There is no excess demand or excess supply in the market. ## Example of Market Equilibrium Under Perfect Competition - **Price of Commodity-X**: 5, 4, 3, 2, 1 - **Quantity Supplied of Commodity-X**: 50, 40, 30, 20, 10 - **Quantity Demanded of Commodity-X**: 10, 20, 30, 40, 50 - **Excess Supply**: 40, 20, 0, -20, -40 - **Market equilibrium**: **Occurs when price is ₹3 and quantity is 30.** Excess supply occurs when the price is ₹5 and quantity is 50, while excess demand occurs when the price is ₹1 and quantity is 10. ## Excess Supply - Excess supply refers to a situation in which market supply of a commodity is more than its market demand at a given price. - The situation of excess supply arises when the market price is more than the equilibrium price. - In the above example, excess supply occurs when the price is ₹5 because at this price, market supply > market demand. - Pressure of excess supply leads to a fall in market price. Due to fall in price, quantity demanded increases and quantity supplied falls. - At the equilibrium point, market demand = market supply. ## Excess Demand - Excess demand refers to a situation in which market demand for a commodity is more than its market supply at a given price. - The situation of excess demand arises when the market price is less than the equilibrium price. - In the above example, excess demand occurs when the price is ₹2 because at this price, market demand > market supply. - Pressure of excess demand leads to rise in market price. Due to rise in price, quantity demanded decreases and quantity supplied rises. - At the equilibrium point, market demand = market supply. ## Shift (Change) in Demand and Market Equilibrium - Shift in demand has two aspects: - Increase in demand. - Decrease in demand. ### Increase in Demand - When demand increases, the demand curve shifts to the right. - The effect of increase in demand is that equilibrium price rises and equilibrium quantity rises as well. ### Decrease in Demand - When demand decreases, the demand curve shifts to the left. - The effect of decrease in demand is that equilibrium price falls and equilibrium quantity falls as well. ## Shift (Change) in Supply and Market Equilibrium - Shift in supply has two aspects: - Increase in supply. - Decrease in supply. ### Increase in Supply - When supply increases, the supply curve shifts to the right. - Equilibrium price falls and equilibrium quantity rises. ### Decrease in Supply - When supply decreases, the supply curve shifts to the left. - Equilibrium price rises and equilibrium quantity falls. ## Simultaneous Shift (Change) in Demand and Supply and Market Equilibrium - Simultaneous changes in demand and supply can have three outcomes: - The increase in demand is greater than the increase in supply, leading to a rise in equilibrium price and equilibrium quantity. - The increase in demand is equal to the increase in supply, leading to no change in equilibrium price but a rise in equilibrium quantity. - The increase in demand is less than the increase in supply, leading to a fall in equilibrium price and a rise in equilibrium quantity. - The decrease in demand is greater than the decrease in supply, leading to a fall in equilibrium price and equilibrium quantity. - The decrease in demand is equal to the decrease in supply, leading to no change in equilibrium price but a fall in equilibrium quantity. - The decrease in demand is less than the decrease in supply, leading to a rise in equilibrium price and a fall in equilibrium quantity. ## Simple Applications of Tools of Demand and Supply Curves - The following are some examples of how supply and demand curves are used to model real-world scenarios: - **Price Ceiling**: A price ceiling is a maximum price that can be charged for a good or service. It is often imposed by the government to make goods more affordable for consumers, but it can lead to shortages if the price ceiling is set below the equilibrium price. - **Price Floor**: A price floor is a minimum price that can be charged for a good or service. It is often imposed by the government to protect producers, notably farmers. It can lead to surpluses if the price floor is set above the equilibrium price.