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Market Equilibrium – Class 12 Economics notes, important questions and MCQs

NCERT Class 12 Economics, chapter 5. Notes, key terms, important questions with answers and MCQs.

Chapter overview

Market equilibrium occurs where market demand equals market supply, giving the equilibrium price and quantity. If price is above equilibrium there is excess supply, and if it is below there is excess demand; these push price back to equilibrium. Shifts in demand or supply change the equilibrium. Governments sometimes fix maximum prices (price ceilings) or minimum prices (price floors), causing shortages or surpluses.

Equilibrium and its changes

Equilibrium: quantity demanded = quantity supplied at the equilibrium price.
Excess demand (shortage) raises price; excess supply (surplus) lowers price.
An increase in demand raises both equilibrium price and quantity; an increase in supply lowers price and raises quantity.
When both shift, the effect on price or quantity depends on the relative size of the shifts.

Free entry and exit and fixed number of firms

With a fixed number of firms, equilibrium is where market demand meets the market supply curve.
With free entry and exit, in the long run price equals minimum average cost, and the number of firms adjusts to meet demand at that price.
Labour market: equilibrium wage is where demand for labour (based on marginal revenue product) equals supply of labour.

Price ceiling and price floor

A price ceiling is a maximum price set below equilibrium, as for essential goods; it causes shortage, rationing and black markets.
A price floor is a minimum price set above equilibrium, such as the Minimum Support Price for crops or minimum wages; it causes surplus, which the government may buy and store.

Key terms

Market equilibrium: a situation where market demand equals market supply
Excess demand: a situation where quantity demanded exceeds quantity supplied at the current price
Price ceiling: a legal maximum price set below the equilibrium price
Price floor: a legal minimum price set above the equilibrium price
Rationing: distributing a fixed quantity of a scarce good among consumers through quotas

Important questions with answers

What is a price floor? Give an example.2 marks

A price floor is a legal minimum price fixed by the government above the equilibrium price, so that the price cannot fall below it. Examples are the Minimum Support Price for agricultural crops and minimum wages for workers. It may create excess supply.

Explain the effects of a price ceiling.3 marks

A price ceiling is a maximum price set below the equilibrium price to make essential goods affordable. At this low price quantity demanded exceeds quantity supplied, causing shortage. The government may introduce rationing through ration shops, and black markets may develop where goods are sold illegally at higher prices.

Explain how market equilibrium is determined and how it changes when demand and supply shift.5 marks

Market equilibrium is determined where the market demand curve intersects the market supply curve. At the equilibrium price, the quantity buyers want to buy equals the quantity sellers want to sell. If the price is above equilibrium, quantity supplied exceeds quantity demanded, creating excess supply; sellers compete to sell and the price falls. If the price is below equilibrium, quantity demanded exceeds quantity supplied, creating excess demand; buyers compete and the price rises. Thus the market moves to equilibrium. When demand increases, for example due to higher income for a normal good, the demand curve shifts right, and both equilibrium price and quantity rise; a decrease in demand lowers both. When supply increases, for example due to better technology, the supply curve shifts right, lowering price and raising quantity; a decrease in supply raises price and lowers quantity. When both shift together, the change in quantity or price depends on the relative magnitudes of the shifts; if demand and supply increase equally, quantity rises while price remains unchanged. With free entry and exit, in the long run price settles at minimum average cost and only the number of firms changes.

Quick revision

Equilibrium: demand = supply.
Excess demand raises price; excess supply lowers price.
Demand up: price and quantity up; supply up: price down, quantity up.
Price ceiling → shortage; price floor (MSP) → surplus.

Exam tips

Always show shifts on a diagram with old and new equilibrium points.
Remember: ceiling below equilibrium → shortage; floor above equilibrium → surplus.

Practice MCQs

Market equilibrium occurs where
1. demand is maximum
2. supply is zero
3. demand equals supply
4. price is zero
Show answer
Answer: (c) demand equals supply. There is no shortage or surplus.
When quantity demanded exceeds quantity supplied, there is
1. excess demand
2. excess supply
3. equilibrium
4. surplus
Show answer
Answer: (a) excess demand. Price tends to rise.
The Minimum Support Price for wheat is an example of a
1. price ceiling
2. equilibrium price
3. price floor
4. tax
Show answer
Answer: (c) price floor. It is above the market price.
An increase in demand with supply unchanged leads to
1. lower price and lower quantity
2. higher price and higher quantity
3. lower price and higher quantity
4. no change
Show answer
Answer: (b) higher price and higher quantity. The demand curve shifts right.
An increase in supply with demand unchanged leads to
1. lower price and higher quantity
2. higher price
3. lower quantity
4. no change in price
Show answer
Answer: (a) lower price and higher quantity. The supply curve shifts right.
A price ceiling set below equilibrium price leads to
1. surplus
2. fall in demand
3. equilibrium
4. shortage
Show answer
Answer: (d) shortage. Quantity demanded exceeds supply.
If demand and supply both increase by the same amount, equilibrium price
1. rises
2. remains unchanged
3. falls
4. becomes zero
Show answer
Answer: (b) remains unchanged. Quantity rises but price stays the same.
Under free entry and exit, long-run equilibrium price equals
1. maximum AC
2. average fixed cost
3. minimum AC
4. zero
Show answer
Answer: (c) minimum AC. Firms earn normal profit.

All chapters of Class 12 Economics

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.