Market Equilibrium | CBSE Class 11 Economics Notes

This note covers market equilibrium, excess demand and excess supply, price adjustment, wage determination, demand and supply shifts, equilibrium with free entry and exit, price ceilings and price floors.

What does market equilibrium mean?

A price taker treats the market price as given. In a perfectly competitive market, many buyers and sellers trade an identical product, have full market information and individually cannot influence price. Free entry and exit form part of this market structure; we first analyse equilibrium with the number of firms fixed.

Consumers seek their preferred purchases, while firms seek to maximise profit, the difference between sales revenue and production cost. Sales revenue means receipts from selling output; production cost means the cost incurred to produce it.

Market demand is the quantity all consumers together are willing to buy at a given price. The market demand curve records these quantities at different prices. Market supply similarly records the quantities all firms together wish to sell at different prices.

Definition: Market equilibrium is a situation in which consumers' and firms' plans match. The market clears because the total quantity firms wish to sell equals the total quantity consumers wish to buy.

How are equilibrium price and quantity related?

The equilibrium price is the price at which these plans match. The equilibrium quantity is the quantity bought and sold at that price. Neither the demand curve nor the supply curve alone determines both values when the number of firms is fixed.

Let p mean price, qD quantity demanded and qS quantity supplied. The labels D and S identify demand and supply, not powers. Let p* and q* denote equilibrium price and quantity; the star identifies an equilibrium value.

qD(p*) = qS(p*)

Here, the brackets mean “evaluated at the price shown”. At p*, both quantities equal q*. Equilibrium therefore involves a common price and matching quantities. It is also a situation of zero excess demand and zero excess supply.

How does price adjust when the market is out of equilibrium?

Excess demand exists when quantity demanded exceeds quantity supplied at the same price. Excess supply exists when quantity supplied exceeds quantity demanded at that price. Comparing quantities at different prices would not establish either imbalance.

Let ED(p) denote excess demand at price p, and ES(p) denote excess supply at price p. The corresponding differences are:

The symbols ≤ and ≥ mean “less than or equal to” and “greater than or equal to”; < means “less than”. In formulas, − means subtraction, × means multiplication and / means division.

ED(p) = qD − qS

ES(p) = qS − qD

What happens below or above the equilibrium price?

1. Below the equilibrium price, consumers wish to buy more than firms wish to supply, producing excess demand.
2. Some consumers who cannot obtain enough of the commodity are willing to pay more, so price tends to rise.
3. Other things remaining the same, the rising price reduces quantity demanded and increases quantity supplied.
4. The adjustment reaches equilibrium when the quantities consumers and firms plan to exchange become equal.

Above the equilibrium price, the sequence is reversed. Some firms cannot sell their desired quantity and lower their price. With other things unchanged, quantity demanded rises and quantity supplied falls until the market clears.

Note: This analysis assumes that price adjustment raises price under excess demand, lowers it under excess supply and succeeds in reaching equilibrium. This coordinating process is called the “Invisible Hand”.

In the graph, DD labels the market demand curve and SS the market supply curve. These are curve names. O marks the origin, where the axes meet.

Price is on the vertical axis and quantity on the horizontal axis. Downward-sloping DD crosses upward-sloping SS at price p* and quantity q*. The horizontal line above p* shows supply exceeding demand; the line below p* shows demand exceeding supply.

See Fig. 5.1 in your NCERT textbook

How can equilibrium and imbalances be calculated in the wheat market?

Consider identical farms producing wheat of the same quality. Here, identical farms means farms with the same cost structure. Price p is measured in rupees per kilogram, while qD and qS are measured in kilograms, abbreviated kg.

The demand rule is qD = 200 − p for prices from zero to Rs 200, and demand is zero above Rs 200. The supply rule is qS = 120 + p at prices of Rs 10 or more, and supply is zero below Rs 10.

How do the equations identify the clearing price?

Worked example 1. Find equilibrium when wheat demand is qD = 200 − p for 0 ≤ p ≤ 200, with zero demand above 200, and supply is qS = 120 + p for p ≥ 10, with zero supply for 0 ≤ p < 10.

Answer: Equate demand and supply: 200 − p* = 120 + p*. Thus 2p* = 80 and p* = Rs 40 per kg. Substitution gives q* = 200 − 40 = 160 kg; supply also equals 120 + 40 = 160 kg.

The calculated price satisfies both equation ranges. Substitution into either equation gives the same quantity because equilibrium requires both plans to match.

How do lower and higher prices compare?

Worked example 2. In the wheat market, qD = 200 − p and qS = 120 + p apply at p = Rs 25 per kg. Calculate demand and supply and identify the imbalance.

Answer: Demand is 200 − 25 = 175 kg, while supply is 120 + 25 = 145 kg. Demand exceeds supply by 30 kg. This is excess demand, and price tends to rise towards the equilibrium price.

Worked example 3. Using wheat demand qD = 200 − p and supply qS = 120 + p at p = Rs 45 per kg, calculate both quantities and identify the imbalance.

Answer: Demand is 200 − 45 = 155 kg, while supply is 120 + 45 = 165 kg. Supply exceeds demand by 10 kg. This is excess supply, and price tends to fall towards the equilibrium price.

For prices where both linear expressions apply, ED(p) = 80 − 2p and ES(p) = 2p − 80. These formulas describe the difference between the two plans. They do not change the price ranges specified for the original demand and supply rules.

How is the wage rate determined in the labour market?

The labour market exchanges hours of work. Labour here means hours supplied, not the number of workers. Households supply labour and firms demand it, reversing their roles in a goods market. The wage rate is the payment for a unit of labour.

Why does a firm demand labour?

Assume labour is the only variable factor, meaning the input whose amount can be changed in this analysis. An input is a resource used in production. The firm takes both the wage rate and its product price as given and aims to maximise profit.

The marginal product of labour, written MPL, is the extra output produced by one more unit of labour. The law of diminishing marginal product means that additional labour produces progressively smaller additions to output under the assumed production conditions.

Marginal revenue, written MR, is the additional earning from selling one extra unit of output. The marginal revenue product of labour, written MRPL, is the extra revenue generated by one more unit of labour.

MRPL = MR × MPL

Let w denote the wage rate. The firm hires labour up to the point where the extra cost of labour equals its extra benefit: w = MRPL.

For a perfectly competitive firm, marginal revenue equals product price. Therefore, MRPL equals the value of marginal product of labour, written VMPL, which is product price multiplied by MPL. Hiring labour is profitable while VMPL exceeds the wage rate.

If VMPL is below the wage rate, reducing employment raises profit. With diminishing marginal product and unchanged product price, a higher wage requires a higher MPL at the chosen employment level. This means less labour is demanded, giving a downward-sloping labour demand curve.

Why can individual and market labour supply differ?

Households choose between income and leisure, time available away from work. A higher wage raises the opportunity cost of leisure, the earnings forgone by choosing leisure instead of working. This encourages more hours of work.

A higher wage also increases purchasing power, encouraging more leisure. At low wages, the first effect dominates; at high wages, the second dominates. The resulting individual labour supply curve bends backwards: beyond a certain wage, further wage increases reduce hours supplied.

The market labour supply curve nevertheless slopes upwards. Although some individuals may work less at higher wages, many more individuals are attracted to supply more labour. Adding individuals' supplies gives market supply; adding firms' demands gives market demand.

The equilibrium wage occurs where market labour demand equals market labour supply. At this wage, the hours households wish to supply match the hours firms wish to hire.

How does a shift in demand change equilibrium?

A demand shift changes the quantity consumers wish to buy at each price. It differs from the change in quantity demanded caused by a movement in the commodity's own price. First consider a fixed number of firms and an unchanged market supply curve.

What follows a rightward or leftward shift?

1. A rightward demand shift means more is demanded at each price, creating excess demand at the old equilibrium price.
2. Some consumers are willing to pay more, so the market price tends to increase.
3. The higher price increases quantity supplied along the unchanged supply curve.
4. The new equilibrium has both a higher price and a larger quantity than before.

A leftward demand shift creates excess supply at the old price. Some firms lower their price to sell their desired quantity. At the new equilibrium, both price and quantity are lower. With supply unchanged, the two equilibrium values move in the same direction.

Both panels place price vertically and quantity horizontally. E marks the initial intersection. Panel (a) moves the demand curve rightwards to a new intersection G, with higher price and quantity. Panel (b) moves demand leftwards to F, with lower price and quantity. The supply curve stays in place.

See Fig. 5.2 in your NCERT textbook

How do incomes and the number of buyers matter?

A normal good is one whose demand increases when consumers' income rises, with other relevant factors unchanged. An inferior good has lower demand when income rises. Therefore, the income effect must be connected to the type of good.

For a normal good such as clothes, with other commodity prices and tastes and preferences constant, we would expect demand to increase at each price after an income rise. The demand curve shifts rightwards. With supply unchanged, equilibrium price and quantity both increase.

An increase in the number of consumers also raises market demand for clothes at each price, other factors unchanged. This change does not itself shift supply. It therefore produces the same direction of change in equilibrium price and quantity as a rightward demand shift.

How does a shift in supply change equilibrium?

A supply shift changes the amount firms wish to sell at each price. Hold the demand curve unchanged. A leftward shift means less is supplied at each price and creates excess demand at the old equilibrium price.

Some consumers are willing to pay more. As price rises, quantity demanded falls along the unchanged demand curve. The new equilibrium therefore has a higher price and lower quantity.

A rightward supply shift creates excess supply at the old price. Some firms lower price, and the new equilibrium has a lower price and higher quantity. With demand unchanged, equilibrium price and quantity move in opposite directions.

How do input prices and the number of firms affect supply?

Marginal cost is the addition to total cost from producing an extra unit of output. A rise in an input price increases the marginal cost of firms using that input, other things remaining constant.

Firms then supply less at each price, shifting market supply leftwards. Input prices do not directly determine consumer demand, so demand remains unchanged in this analysis. Equilibrium price rises and the quantity produced falls.

An increase in the number of firms means more firms supply the commodity at each price. Market supply shifts rightwards while demand stays unchanged. Equilibrium price falls and the quantity produced rises.

E is the initial equilibrium in both panels, with price on the vertical axis. Panel (a) shows a leftward supply shift and a new intersection G with higher price and lower quantity. Panel (b) shows a rightward supply shift and intersection F with lower price and higher quantity. Demand is unchanged.

See Fig. 5.3 in your NCERT textbook

What happens when demand and supply shift together?

Simultaneous shifts occur when both demand and supply change. A result obtained by holding one curve unchanged cannot simply be applied to both equilibrium values. The direction and relative size of the two shifts matter.

When both curves move in the same direction, the direction of the quantity change is definite. When they move in opposite directions, the direction of the price change is definite. The other equilibrium value may increase, decrease or remain unchanged.

Which changes can be predicted without knowing the sizes of the shifts?

Table: Impact of simultaneous shifts on equilibrium

For example, when both curves shift rightwards, both changes support a larger equilibrium quantity. Their effects on price differ: increased demand tends to raise price, while increased supply tends to lower it. The sizes of the shifts determine the final price effect.

Similarly, a leftward demand shift and a rightward supply shift both tend to reduce price. Their quantity effects differ, so the final quantity cannot be determined from directions alone. An unchanged quantity is one possible result, not the general rule.

Note: “May increase, decrease or remain unchanged” expresses a conditional result. It must not be shortened to “remains unchanged”. The latter describes only one possible outcome.

Why does free entry and exit make price equal minimum average cost?

Free entry and exit means firms can enter or leave the market freely. Assume all firms are identical. Average cost, abbreviated AC, is total cost per unit of output. Minimum average cost, written min AC, is its lowest level.

Normal profit is the minimum profit needed to keep a firm in its existing business and is included in its costs. Supernormal profit is profit above normal profit. A loss here means the firm does not cover costs including normal profit.

How does the number of firms adjust?

1. If price exceeds minimum average cost, firms earn supernormal profit, attracting new firms into the market.
2. Entry shifts market supply rightwards while demand remains unchanged, causing price to fall.
3. As price falls, supernormal profit is eventually eliminated. Firms earn normal profit at minimum average cost.
4. If price is below minimum average cost, some firms exit. The resulting rise in price restores normal profit and removes the incentive for further exit.

At the resulting equilibrium, no firm gains an incentive to enter or leave. Each firm earns normal profit. With these assumptions, p = min AC. This is a statement about the equilibrium reached through entry and exit; adjustment can involve a changing price.

The equilibrium market quantity is the amount consumers demand at this price. Thus minimum average cost fixes equilibrium price, while the demand curve determines the quantity that the market must supply at that price.

A downward-sloping market demand curve crosses a horizontal line at minimum average cost. E labels their intersection. The price is read on the vertical axis and equilibrium quantity below E on the horizontal axis.

See Fig. 5.5 in your NCERT textbook

How are quantity and the number of firms calculated with free entry?

Once equilibrium price is known, market demand gives total equilibrium quantity. Divide this total by the quantity supplied by one identical firm to obtain the equilibrium number of firms. Total market output and one firm's output must be kept separate.

Let p₀ be equilibrium price, q₀ total equilibrium quantity, q₀f the output of each firm at that price, and n₀ the equilibrium number of firms. The subscript 0 labels the equilibrium being considered; f identifies an individual firm.

n₀ = q₀ / q₀f

What does the wheat example show?

Worked example 4. Wheat demand is qD = 200 − p for 0 ≤ p ≤ 200, with zero demand above 200. Identical firms enter and exit freely. Each firm's supply is 10 + p kg for p ≥ 20 and zero for 0 ≤ p < 20.

Answer: The minimum average cost corresponds to Rs 20 per kg, so p₀ = 20. Market quantity is q₀ = 200 − 20 = 180 kg. Each firm supplies q₀f = 10 + 20 = 30 kg. Therefore n₀ = 180 / 30 = 6 firms.

The threshold price matters because firms do not produce below minimum average cost when they can leave the market. At a lower price they would incur a loss from production and exit. At the equilibrium price they earn normal profit.

Notice that the calculation uses the individual firm's supply only after market demand has established total output. Multiplying six firms by 30 kg confirms the total supply of 180 kg, matching market demand at Rs 20 per kg.

How do demand shifts differ when entry and exit are allowed?

With identical firms, free entry and exit and unchanged minimum average cost, demand shifts change equilibrium quantity and the number of firms. The equilibrium price remains unchanged. The market supplies the new amount demanded at the same minimum-average-cost price.

What happens after demand increases?

A rightward demand shift creates excess demand at the initial price. Some dissatisfied consumers are willing to pay more, so price tends to rise. The possibility of supernormal profit attracts new firms.

Entry increases supply and eventually removes the supernormal profit. Price returns to its original minimum-average-cost level. At the new equilibrium, quantity and the number of firms are higher, while equilibrium price is unchanged.

What happens after demand decreases?

A leftward demand shift creates excess supply at the initial price. Some firms wish to lower price because they cannot sell their desired quantity. Price tends to decrease, leading some existing firms to leave.

Exit continues until price returns to minimum average cost. The remaining firms supply a smaller total quantity that matches reduced demand. Both equilibrium quantity and the number of firms fall.

Table: Comparison of demand shifts under different entry conditions

A demand shift has a larger effect on quantity when entry and exit are allowed than when the number of firms is fixed. The unchanged final price must be distinguished from the temporary price tendency that encourages entry or exit.

What is a price ceiling and how can rationing affect consumers?

Often, government needs to regulate prices when they are too high or too low compared with desired levels. A price ceiling is a government-imposed upper limit on the price of a good or service.

It is generally imposed on necessary items such as wheat, rice, kerosene and sugar. It is fixed below the market-determined price because some sections of the population cannot afford these goods at that price.

Why does a ceiling create excess demand?

In the wheat market, a ceiling below equilibrium price means consumers wish to buy more than firms wish to supply. Although the intention is to help consumers, the ceiling could end up creating a shortage, a gap between quantity demanded and the smaller quantity supplied.

Let pc denote the ceiling price, qc the quantity demanded at it and q′c the quantity supplied at it. The letter c labels the ceiling case; the prime mark distinguishes the supplied quantity from the demanded quantity in this diagram.

The demand and supply curves intersect at p* and q*. The horizontal ceiling-price line pc lies below p*. Its intersection with supply projects to q′c, to the left of the demand quantity qc. The distance between these quantities represents excess demand.

See Fig. 5.7 in your NCERT textbook

What are the possible limitations of rationing?

Rationing distributes the available quantity by limiting how much each consumer can buy. Ration coupons specify the permitted amount. The stipulated quantity is sold through ration shops, also called fair price shops.

In general, a price ceiling accompanied by rationing may have adverse consequences. Consumers have to stand in long queues. Some are not satisfied with the amount available through fair price shops and are willing to pay more.

This may create a black market, where the good is sold outside the controlled arrangement at a higher price. This is a possible consequence, not a claim that every price ceiling necessarily creates such a market.

What is a price floor and how does it differ from a ceiling?

A price floor is a government-imposed lower limit on the price that may be charged for a good or service. It is used when a fall below a particular price is considered undesirable.

The most well-known examples are agricultural price support programmes, which set minimum purchase prices for some agricultural goods, and minimum wage legislation, which prevents wages from falling below a specified level.

Why does a floor create excess supply?

An agricultural price floor is normally higher than the market-determined price. At a floor above equilibrium price, firms wish to supply more than consumers wish to buy. This creates a surplus, meaning excess supply at the stipulated price.

Let pf denote the floor price, qf the quantity demanded at that price and q′f the quantity firms wish to supply. The mark after q distinguishes supply from demand; f labels the floor case.

Price is vertical and quantity horizontal. The floor-price line lies above the demand-supply intersection at p* and q*. At the floor, quantity demanded lies to the left of q*, while quantity supplied lies to its right. Their separation shows excess supply.

See Fig. 5.8 in your NCERT textbook

Under agricultural price support, the government needs to buy the surplus at the predetermined price to prevent price from falling because of excess supply. Minimum wage legislation similarly sets a wage above the equilibrium wage in the case considered.

Table: Price ceiling and price floor compared

Glossary

• Market equilibrium — A situation where consumers' purchase plans and firms' sales plans match at a common price.
• Equilibrium price — The price at which market quantity demanded equals market quantity supplied.
• Equilibrium quantity — The quantity bought and sold when market demand and market supply are equal.
• Excess demand — The amount by which quantity demanded exceeds quantity supplied at a given price.
• Excess supply — The amount by which quantity supplied exceeds quantity demanded at a given price.
• Demand shift — A change in the quantity demanded at each price, moving the demand curve.
• Supply shift — A change in the quantity supplied at each price, moving the supply curve.
• Normal profit — The minimum profit needed to keep a firm in its existing business.
• Supernormal profit — The profit a firm earns over and above its normal profit.
• Marginal revenue product of labour — The additional revenue from one extra unit of labour, equal to marginal revenue multiplied by marginal product.
• Price ceiling — A government-imposed upper limit on the price of a good or service.
• Price floor — A government-imposed lower limit on the price charged for a good or service.
• Rationing — Distribution of available goods through limits on the amount each consumer can purchase.

Common errors and misconceptions

• Misconception: Equilibrium means demand is zero. Correct: Quantity demanded equals quantity supplied; excess demand and excess supply are zero.
• Misconception: A price below equilibrium creates excess supply. Correct: It creates excess demand in the demand-supply analysis considered here, so price tends to rise.
• Misconception: An income increase raises demand for every good. Correct: Demand increases for normal goods but decreases for inferior goods, other relevant factors unchanged.
• Misconception: Both curves shifting rightwards must raise equilibrium price. Correct: Quantity rises, but price may increase, decrease or remain unchanged depending on the shifts.
• Misconception: Free entry means price never moves during adjustment. Correct: Price tendencies encourage entry or exit; equilibrium returns to unchanged minimum average cost under the stated assumptions.
• Misconception: Labour supply measures the number of workers. Correct: Labour in this analysis means hours of work supplied, and households provide those hours.
• Misconception: A ceiling necessarily creates a black market. Correct: Rationing may leave some consumers willing to pay more, which may create a black market.

Exam-style questions with model answers

Q1. Define market equilibrium and equilibrium price in a perfectly competitive market. [2 marks]

1. Market equilibrium occurs when the total quantity consumers wish to buy matches the total quantity firms wish to sell.
2. The equilibrium price is the price at which this equality occurs and the market clears.

Q2. Wheat demand is qD = 200 − p for 0 ≤ p ≤ 200 and zero above 200; supply is qS = 120 + p for p ≥ 10 and zero for 0 ≤ p < 10. Here p is rupees per kg, and qD and qS are demand and supply in kg. Calculate equilibrium price and quantity. [3 marks]

1. Equilibrium requires quantity demanded to equal quantity supplied at the same price. Equating the applicable expressions gives 200 − p = 120 + p.
2. Rearranging gives 2p = 80, so equilibrium price is Rs 40 per kg. This price lies within both specified ranges.
3. At Rs 40, quantity demanded is 200 − 40 = 160 kg. Quantity supplied is also 120 + 40 = 160 kg, confirming equilibrium.

Q3. In a perfectly competitive market with a fixed number of firms, demand slopes downwards and supply slopes upwards. Both curves remain unchanged. Explain how a price above equilibrium adjusts. [4 marks]

1. At a price above equilibrium, firms wish to supply more than consumers wish to buy, so excess supply exists.
2. Some firms cannot sell the quantity they desire and respond by lowering the price of their commodity.
3. Other things remaining the same, the lower price increases quantity demanded and reduces quantity supplied along the existing curves.
4. The adjustment continues towards the equilibrium price, where the quantity firms wish to sell equals the quantity consumers wish to buy.

Q4. A normal good has an upward-sloping supply curve. Consumers' incomes rise, while other commodity prices, tastes, production conditions and the number of firms remain unchanged. Explain the effect on market equilibrium. [4 marks]

1. For a normal good, an income increase raises demand at each price with the other stated factors unchanged, shifting the demand curve rightwards.
2. The supply curve remains unchanged because production conditions and the number of firms have not changed.
3. At the original equilibrium price there is now excess demand. Some consumers are willing to pay more, so price tends to rise.
4. The market reaches a new intersection on the unchanged supply curve, with both a higher equilibrium price and a greater equilibrium quantity.

Q5. With a fixed number of firms, upward-sloping supply and downward-sloping demand, both market curves shift rightwards. Explain the effects on equilibrium price and quantity, including what cannot be determined without the sizes of the shifts. [3 marks]

1. A rightward demand shift tends to raise both equilibrium price and quantity when supply is unchanged, while a rightward supply shift tends to lower price and raise quantity when demand is unchanged.
2. Both changes support an increase in equilibrium quantity. Therefore, the equilibrium quantity increases when both curves shift rightwards.
3. The price effects oppose each other. Equilibrium price may increase, decrease or remain unchanged, depending on the magnitudes of the two shifts.

Q6. In a perfectly competitive wheat market with upward-sloping supply and downward-sloping demand, the government fixes a price ceiling below equilibrium and distributes available wheat through ration shops using coupons. Explain the ceiling, the imbalance, the allocation method and two possible adverse consequences. [5 marks]

1. A price ceiling is an upper legal limit on price. In this case, it is below the market equilibrium price, aiming to make wheat affordable to consumers.
2. At this lower price, consumers demand more wheat than firms supply. Excess demand results, so the policy could end up creating a shortage of wheat.
3. Rationing allocates the available supply by limiting purchases. Coupons prevent an individual from buying more than the stipulated amount sold through ration or fair price shops.
4. In general, this arrangement may have adverse consequences: consumers have to stand in long queues at ration shops to obtain their allotted wheat.
5. Some consumers may be dissatisfied with their allocation and willing to pay a higher price. This may lead to the creation of a black market.

Q7. The government fixes an agricultural price floor above the equilibrium price in a perfectly competitive market with upward-sloping supply and downward-sloping demand. Explain the imbalance and the purchase needed to maintain the floor. [3 marks]

1. A price floor is a government-imposed lower price limit. Here it prevents the agricultural commodity's price from falling below a level higher than the market equilibrium price.
2. At the floor price, firms wish to supply more than consumers demand. The difference between quantity supplied and quantity demanded is excess supply.
3. To prevent this surplus from pushing price down, the government needs to buy the surplus at the predetermined support price.

Key takeaways

• Market equilibrium matches consumers' purchase plans with firms' sales plans, making quantity demanded equal quantity supplied at the same price.
• Excess demand tends to raise price, while excess supply tends to lower it under the assumed adjustment process.
• With supply unchanged and firms fixed in number, a demand shift moves equilibrium price and quantity in the same direction.
• With demand unchanged, a supply shift moves equilibrium price and quantity in opposite directions.
• Simultaneous shifts can leave either price or quantity uncertain, depending on their directions and relative magnitudes.
• With identical firms and free entry and exit, equilibrium price equals minimum average cost and firms earn normal profit.
• A price ceiling below equilibrium creates excess demand; rationing may bring queues and a black market.
• A price floor above equilibrium creates excess supply; agricultural support requires government purchase of the surplus.

Test yourself

Why is equilibrium described as a market-clearing situation?

The quantity all consumers wish to buy equals the quantity all firms wish to sell at the equilibrium price.

What price tendency follows excess supply?

Some firms lower price because they cannot sell their desired quantity, so market price tends to fall.

Who supplies labour, and what does labour measure here?

Households supply labour. Labour measures hours of work provided, rather than the number of workers.

What happens when both demand and supply shift leftwards?

Equilibrium quantity decreases. Price may increase, decrease or remain unchanged, depending on the magnitudes of the shifts.

Why do supernormal profits attract entry?

New firms enter to earn those profits. Their supply lowers price until supernormal profits are eliminated.

With free entry, identical firms and unchanged minimum average cost, what does increased demand change?

Equilibrium quantity and the number of firms increase, while equilibrium price returns to the same minimum-average-cost level.

Why does a below-equilibrium ceiling create a shortage?

Consumers wish to buy more than firms wish to supply at the controlled price, producing excess demand.

How can the government maintain agricultural support above equilibrium price?

It needs to purchase the surplus at the predetermined price to prevent excess supply from lowering price.