# NCERT Solutions for Class 12 Economics Chapter 5: Market Equilibrium

Hello Students. Are you Searching for NCERT Solutions for Class 12 Economics Chapter 5? If yes then you are most welcome to NCERTian. Here we have provided you with the complete Question and Answers of Chapter 5: Market Equilibrium, from Micro Economics textbook. These solutions are written by expert teachers and faculties keeping the need of students in mind.

The NCERT Solutions for Class 12 Economics cover all the questions pertaining to the subject in a very clear and lucid manner. Apart from being highly accurate, these solutions are also very easy to memorize. These solutions are written as per the latest CBSE syllabus and are helpful in clearing doubts. On this solution page, we have provided you with complete overview of the concepts and methods covered in the Chapter 5 of Micro Economics – Market Equilibrium.

## NCERT Solutions for Class 12 Economics Chapter 5

### Market Equilibrium Solutions

#### Q1) Explain market equilibrium.

Answer) It is referred to as that state in the market where supply is equal to demand. When a market is at equilibrium, the corresponding price will not change unless there is an external factor which is instrumental in changing the supply or the demand. Under the condition of market equilibrium, the price at which a product is sold is known as the equilibrium price.

#### Q2) When do we say there is excess demand for a commodity in the market?

Answer) Excess demand occurs when market demand for a product or service exceeds market supply at a given price. In other words, if the producers are willing to supply less than what is demanded by all consumers at whatever price. When there is an excess of demand in the market, we have an oversupply issue.

### Q3) When do we say there is excess supply for a commodity in the market?

Answer) Excess supply occurs when a commodity’s supply in the market outnumbers its demand at a given price. In other words, if at any price level, all customers desire a lower quantity than what all suppliers supply, we have an excess supply situation.

#### Q4) What will happen if the price prevailing in the market is (i) above the equilibrium price? (ii) below the equilibrium price?

Answer) 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 the 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.

#### Q5) Explain how price is determined in a perfectly competitive market with fixed number of firms.

Answer) In a perfectly competitive market with a fixed number of firms, the price will be determined by the supply and demand that exists in the market. Since the demand and supply will be the same, the price of any commodity will be at equilibrium. This is known as the equilibrium price.

#### Q6)

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) When the equilibrium price is greater than the minimum average cost of the firms, more firms will enter the market and produce more quantities of the given commodity. This is due to the high-profit levels that can be gained due to the market’s condition. But in the longer run, the market price will start to fall because of the rise in supply caused by the rush. Therefore, the market equilibrium price will decline and the profit levels will return to normal.

#### Q7) 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) In the long run, due to the loose access and exit of companies, all the firms earn 0 monetary income or normal income. They neither earn ordinary earnings nor peculiar losses. Thus, the loose access and go out function guarantees that in the end the equilibrium charge will be the same to the minimum of average value, no matter whether or not earnings or losses are earned inside the quick run.

The equilibrium is determined by the intersection of purchasers’ call for curve and the ‘ ‘P=min AC’ line. At equilibrium E, the amount supplied through every company is qe on the price (P).

#### Q8) How is the equilibrium number of firms determined in a market where entry and exit is permitted?

Answer) When free entry and exit is permitted, the market price will remain the same as the minimum average cost. Therefore, firms will enter or exit the market. Since there is no profit to be gained by producing the given commodity, no company will be incentivized to enter the market. This is how an equilibrium number of firms is determined in such a market.

#### Q9) How are equilibrium price and quantity affected when income of the consumers (a) increase? (b) decrease?

Answer) a. An increase in the income of the consumers is likely to increase the equilibrium price. Since the consumers have more money to spend, the demand for a given commodity will increase and the quantity of the product produced will also increase.

b. A decrease in the income of the consumers is likely to decrease the equilibrium price. Since the consumers have less money to spend, the demand for a given commodity will decrease and the quantity of the product produced will also decrease.

#### Q10) 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) Shoes and Socks are complementary goods and a change in one product’s price will affect how the other product’s supply. Since shoes and socks are usually bought together, when there is an increase in the price of shoes, the demand for socks will face a decline. Due to the decline in demand for shoes and socks, the number of socks sold and bought will decrease.

#### Q11) 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) Coffee and tea are regarded as substitutes of each other and therefore any price change in coffee will result in changing the demand for the tea. It can be said that when coffee price increases it will increase the demand for the tea and when the coffee price decreases the demand for tea is reduced.

Diagrammatically it can be represented as:

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

#### Q12) How do the equilibrium price and the quantity of a commodity change when price of input used in its production changes?

Answer) The cost of production of a commodity is affected by changes in input prices. Let’s have a look at the two scenarios.

1. Increase in input price: If a firm’s input price rises, the firm’s cost of production rises as well, the supply of product falls, and the profit margin falls, reducing the firm’s motivation to produce and provide the commodity. This will cause the marginal cost curve to shift to the left, followed by a leftward parallel change in an individual firm’s supply curve, and finally a leftward shift in the market supply curve.
2. Reduced input price: If a firm’s input price falls, the cost of manufacturing falls, the supply of product rises, and the profit margin rises. The marginal cost curve will shift rightward as a result, implying that the firm’s supply curve will change rightward as well. As a result, the market supply curve will shift rightward from S1S1 to S2S2 in a parallel fashion.

#### Q13) 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) As X and Y are substitutes of each other, therefore any change in the price of the substitute will have an immediate effect on the price of the other. In this case if price of Y increases then it will result in increase in demand for X and due to this increase in demand there will be a rise in equilibrium price and the quantity of output of the good X.

#### Q14) Compare the effect of shift in the demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.

Answer) When the number of firms is fixed in a market, an increase in demand will result in increased equilibrium price and increased output. Similarly if entry exit is allowed then there will be a decrease in equilibrium price. There will be more entry of firms as all will be looking to earn super normal profit. But entry of more firms causes decrease in profit and all firms will start earning normal profit.

#### Q15) Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

Answer) Rightward shift in both demand and supply curve can occur in three situations as discussed below:

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

This can be depicted with a diagram as:

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

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

#### Q16) 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 a) both demand and supply curves shift in the same direction

Answer b) demand and supply curves shift in opposite directions

#### Q17) In what respect do the supply and demand curves in the labour market differ from those in the goods market?

Answer) The deliver and demand curves inside the hard work market fluctuate from those in the products marketplace inside the following ways:

1. In a goods market, consumers make the demand for goods whereas in a labour market, firms make the demands.
2. In a goods market, firms perform the supply of goods, whereas in a labour market households provide the supply of labour.
3. Firms acts as suppliers in a goods market whereas households act as suppliers in labour market.

#### Q18) How is the optimal amount of labour determined in a perfectly competitive market?

Answer) A profit maximizing firm will employ labor up to the point where the extra cost incurred by employing the last unit of labor (wage) equals the additional benefit it earns by employing that unit of labor. That is, Marginal cost of labor = Marginal benefit by labor Or, Wage rate = Marginal Revenue Product

Or, w = MRP1
Or, w =MR * MPL (as MRPL= MR*MPL )
Or, w =MR * MPL (as MRPL= MR*MPL )
Or, w =VMPL (because VMPL = P * MPL)

#### Q19) How is the wage rate determined in a perfectly competitive labour market?

Answer) In a perfectly competitive labour market the wage rate will be determined by the point of intersection of the demand and supply of labour. The demand for labour is determined by the marginal product of labour. Rate at which demand equals supply is called as equilibrium wage rate.

#### Q20) Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?

Answer) Price ceiling refers to the act of lowering prices as compared to the prevailing market price. This is done to help families below poverty line to survive with essential items. In India price ceiling is implemented on various food items such as wheat, rice and sugar and on fuels such as kerosene oil.

Consequences of price ceiling can be as follows:

1. As the price is artificially imposed by the government, it will lead to excess demand for the goods.
2. The amount of goods allotted is fixed per individual and it may not be sufficient to meet the requirement. Shortage is detected which makes the consumer dissatisfied.
3. It has been often seen that the quality of goods that are sent for supply is not fit for consumption due to adulteration.
4. Due to unfulfilled requirements from the allotted quota, people get ready to pay more for additional goods which leads to black marketing leading to man-made shortage in the market.

#### Q21) 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) In short run the number of firms are fixed while in the long run there are no restriction on number of firms and free entry exit is permitted. The following inference can be made from the situation when market is running with fixed number of companies (short run).

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

Market situation when long run is taking place with free entry and exit of firms:

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).

#### Q22)

Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:
qd = 700 − p
qs = 500 + 3p for p ≥ 15
= 0 or 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 Rs 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?

Answer) If the authorities impose a rate ceiling by means of rent manipulation Act (the most charge) that may be charged because of the rent of the apartment.

It consequences decline in equilibrium charge because of (i) excess demand of residences (ii) black marketing by way of developers Now as according to the stated, it’s miles given that;

qD =700 – p
qs = 500 + 3p for p ≥ 15
= 0 or 0 ≤ p <15

The marketplace deliver is zero for any fee from Rs 0 to Rs 15 , this is due to the fact, for rate among zero to fifteen, no man or woman company will produce any high-quality degree of output (because the fee is less than the minimal of AVC). therefore, the market deliver curve can be 0. At equilibrium qD = 700 – qs

P = 500 + 3p
-4p= -200
p = 50
Equilibrium price is Rs 50.
Quantity = qs = 500 + 3p
= 500 + 3 (50)
= 500 + 150
= 650
Therefore, the equilibrium quantity is 650 units.

#### Q23)

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 the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as

qSf = 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.

qsf = 8 + 3 p for p ≥ Rs 200
= 0 for 0 ≤ p < Rs 20.
qd = 700 – p (Keeping the same value as previous question)

a) No firm is going to produce any output for the price range of 0 to 20 as this is below the minimum of average variable cost. Losses will be incurred if any output is done at the price range 0-20. At the price of Rs.20, the price line will be equal to the minimum of average variable cost.

b) In long run the firms will be earning zero profit and also there is the freedom of entry and exit of firms. So the minimum price for which market will be in equilibrium for X will 20 as it is the minimum average variable cost and any price lower to that will result in exit of the firm.

c) The equilibrium price is Rs.20 as established. Now equilibrium quantity will be calculated:

As per question

qs = 8 + 3p
= 8 + 3(20)
= 68
Therefore, 68 units are supplied.
We have
qd = 700 – p
= 700 – 20
= 680
So, the number of firms can be calculated as
No. of Firms = qd / qs
= 680/68
= 10

#### Q24) Suppose the demand and supply curves of salt are given by:

qd = 1,000 − p qS = 700 + 2p

a) Find the equilibrium price and quantity.
b) Now, suppose that the price of an input that used to produce salt has increased so, that the new supply curve is qs = 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 on salt. How does it affect the equilibrium rice quantity?

Answer a) As per the question

At equilibrium price and quantity will be:

1000 – p = 700 + 2p
300 = 3 p
100 = p
P = Rs 100
= 1000 – 100 (Substituting the value of p in equation (1)) dq
= 900 units
So, the equilibrium price is Rs 100 and equilibrium quantity is 900 units.

Answer b) New quantity supplied q’s

q‘s= 400 + 2p
At equilibrium qd =q’s 1000
600 = 3p
200 = p
P = Rs 200

Previous to the boom inside the rate of input, the equilibrium price was Rs a hundred , and after the rise in enter’s charge, the equilibrium fee is Rs 2 hundred .
So, the exchange in equilibrium charge in Rs a hundred (200 – 100).
= 4000 – 200 (Subtitling the value of p in equation (1)) dq

The equilibrium quantity reduced as cost of production increased and it moves supply curve to the left. This shift brings about increase in equilibrium price and reduction in equilibrium quantity.

Answer c) The imposition of tax of Rs 3 consistent with unit of salt sold will enhance the cost of producing salt. this could shift the supply curve leftwards and the amount supplied equation will become:

YS = 700 +2 (p-3)
At equilibrium
yd = ys
1000 – p = 700 + 2 ( p – 3 )
1000 – p = 700 + 2p – 6
306 = 3p
360/3 = p
P = Rs 102
Substituting the value of p in equation (1)
yd = 1000 – p
yd = 1000 – 102
yd = 898 units

As a consequence, the imposition of tax of Rs three in keeping with unit of salt sold will result in an increase in the rate of salt from Rs 100 to Rs 102. The equilibrium amount falls from 900 devices to 898 gadgets.

#### Q25)

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) When the Government intervenes in the market for apartments and imposes control on rent, it will bring down the prices. Due to the drop in prices, the demand for apartments will grow. The imposition of a price ceiling will facilitate more people to afford an apartment who would not otherwise be able to pay the rent. It will also make some builders to indulge in black marketing.

That’s it. These were the solutions of NCERT Class 12 Economics Chapter 5 – Market Equilibrium. Our team hopes that you have found these solutions helpful for you. If you have any doubt related to this chapter then feel free to comment your doubts below. Our team will try their best to help you with your doubts.