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Market Equilibrium

Question
CBSEENEC12013408

Market for a good is in equilibrium. The demand for the good 'increases'. Explain the chain of effects of this change.

Solution

Equilibrium is defined as a situation where the plans of all consumers and firms in the market match and the market clears. When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.

Suppose D1 and Sare the initial market demand curve and the initial market supply curve, respectively. The initial equilibrium is established at point E1, where the market demand curve and the market supply curve intersects each other. Accordingly, the equilibrium price is OP and the equilibrium quantity demanded is Oq1
Now, if there is an increase in the market demand, the market demand curve shifts parallely rightwards to D2 from D1, while the market supply curve remains unchanged at S1. This implies that at the initial price OP1, there exist excess demand equivalent to (Oq'1 - Oq1) units. This excess demand will increase competition among the buyers and they will now be ready to pay a higher price to acquire more units of the good. This will further raise the market price. The price will continue to rise till it reaches OP2. The new equilibrium is established at point E2, where the new demand curve Dintersects the supply curve S1.
Hence, an increase in demand with supply remaining constant, results in rise in the equilibrium price as well as the equilibrium quantity.

Some More Questions From Market Equilibrium Chapter

Market for a good is in equilibrium. There is an 'increase' in demand for this good. Explain the chain of effects of this change. Use diagram. 

What is minimum price ceiling? Explain its implications.

If the prevailing market price is above the equilibrium price, explain its chain of effects.

The demand of a commodity when measured through the expenditure approach is inelastic. A fall in its price will result in :
(choose the correct alternative)
(a) no change in expenditure on it.
(b) increase in expenditure on it.
(c) decrease in expenditure on it.
(d) any one of the above

As we move along a downward sloping straight line demand curve from left to right, price elasticity of demand : (choose the correct alternative)
(a) remains unchanged
(b) goes on falling
(c) goes on rising
(d) falls initially then rises

Define market demand.

Show that demand of a commodity is inversely related to its price.
Explain with the help of utility analysis.

Or

Why is an indifference curve negatively sloped? Explain.

When price of a commodity X falls by 10 per cent, its demand rises from 150 units to 180 units. Calculate its price elasticity of demand. How much should be the percentage fall in its price so that its demand rises from 150 to 210 units ?

Complete the following table :

output units  total cost average variable cost marginal cost average fixed cost
0 30       
1     20  
2 68      
3 84 18    
4     18  
5 125 19   6

Good Y is a substitute of good X. The price of Y falls. Explain the chain of effects of this change in the market of X.
Or
Explain the chain of effects of excess supply of a good on its equilibrium price.