1/2 mark questions

1.State whether the following statement is true or false. Give a reason.

When the equilibrium price of a good is less than its market price, there will be competition
among the sellers. (hots; Delhi 2013)
Ans. True, when the equilibrium price of a good is less than its market price, there will be
competition among the sellers. At a price lower than market price, there will be excess supply,
i.e. supply will be more than demand.

2. 2.Give the meaning of equilibrium. (All India 2009 c)

Ans. Equilibrium is a situation of the market in which demand for a commodity is equal to its
supply, i.e. a situation, which is stable.

3.Define equilibrium price. (All India 2008,2006)

Ans. Equilibrium price is the price at which market demand is equal to market supply.

3/4 marks questions

4.Market for a good is in an equilibrium. There is an increase in demand for this good. Explain
the chain of effects. (Delhi 2011)
or
At a given equilibrium in the market, explain the chain of effects, of increase in demand for a
good. (All India 2010 C)

Ans. The given diagram shows a situation of increase in demand. The demand curve shifts to the
right from DD to D₁D₁ An equilibrium point shifts from E to E1 Consequently, an equilibrium
price and an equilibrium quantity rises from OP to OP₁and OQ to OQ₁ respectively.
The chain effects increase in demand When there is an increase in demand it creates excess
demand (equal to OQ2) at initial price OP and as a result of which price will rise. With rise in
price, demand will start falling (according to Law of Demand) and supply will start rising
(according to Law of Supply), this process will continue till the time we reach new equilibrium
level at E₁ where there is no excess demand.
5.Explain the changes that will take place when in a market the demand for a good is greater than
supply at the prevailing price. (Delhi 2010 c)
Ans. If at a prevailing price, quantity demanded is more than quantity supplied then supplier will
motivate to increase the price of the commodity due to which demand decreases, till it reaches at
the equilibrium price where quantity demanded is equal to quantity supplied.

6.Explain why an equilibrium price of a commodity is determined at that level of output at which
its demand equals its supply. (Delhi 2010 c)
Ans. An equilibrium is a point where quantity demanded is equal to quantity supplied and an
equilibrium can be attained only at that point. If at a given price, supply is more, it will show
excess supply and if demand is more, it will show excess demand. Due to excess supply price
will fall and due to excess demand price will rise. Hence, price will be stable only at an
equilibrium level where demand and supply both are equal.

7.How is an equilibrium price of a commodity determined ?Explain with the help of demand and
supply schedule(Delhi 2009)
or
Explain how market price of a good is determined.Use diagram(All India 2009 c)
or
How is price determined under perfect competition? Explain briefly(All India 2006)
Ans.An equilibrium price is determined by the forces of market demand and market supply
Considering market demand schedule on the one hand and market supply schedule on the other
hand, we identify an equilibrium price as the one where market demand is equal to market
supply i.e. where market demand curve and market supply curve intersect each other.

8.Suppose the price of a good is higher than equilibrium price. Explain the changes that will
establish equilibrium price. (Delhi 2009 c)
Ans. When price prevailing in the market is higher than that of equilibrium price, demand will be
less than supply i.e. there is excess supply in the market. Excess supply will force the market
price to slide down causing extension of demand and contraction of supply. The process of an
extension and contraction would continue till the equilibrium between supply and demand is
struck.
Thus, an equilibrium price will be restored through the free play of market forces of demand and
supply.
9.The demand and supply of a commodity both decreases in the same proportion. Explain its
effects on an equilibrium price and quantity with the help of a diagram.(All India 2008)
Ans. When decrease in supply is equal to decrease in demand, an equilibrium price will remain
the same but an equilibrium output will decrease.

In the given diagram, actual demand curve DD and actual supply curve SS intersect at point E
(i.e. an equilibrium point). At this point, OP is equilibrium price and OQ is equilibrium quantity.
When demand decreases to D₁D₁ and supply decreases to S₁S₁,the new curves intersect each
other at point E1 It shows that an equilibrium price remains constant because both demand and
supply have decreased in the same proportion. However, an equilibrium quantity decreases to
OQ₁.

10.Equilibrium price of an essential medicine is too high. Explain what possible steps can be
taken to bring down an equilibrium price, but only through the market forces. Also explain the
series of changes that will occur in the market.(All India 2013)
Ans. If an equilibrium price of an essential medicine is too high, then its price can be reduced by
opting two ways:
(i) Increase the supply of the commodity.
(ii) Government should provide such essential medicines at subsidised rates.
But as per the question option, (i) would be more appropriate.
Changes that will occur in the market is mentioned below :
In figure, it is clearly depicted that due to an increase in supply, the supply curve shifts to the
right from SS to S₁S₁. The new supply curve S₁S₁ intersects the demand curve at point E₁. An
equilibrium price decreases from OP to OP₁, and quantity increases from OQ to OQ₁ Thus, it is
clear that by increasing the supply of the medicines, its equilibrium price can be brought down as
by doing so, competition will be increased among the producers and consequently, they would be
forced to sell their output at lower cost.
11.Explain the sequence of changes that will take place when there is excess demand of the
commodity.(All India 2011)
or
At a given price, there is an excess demand for a good. Explain how the equilibrium price will be
reached. (Delhi 2007)
Ans. In a situation of excess demand, consumers are willing to buy greater amounts of a
commodity than what the producers are willing to sell. Accordingly, the price of the commodity
will be pushed up. This will cause expansion of supply and contraction of demand. This process
will continue till demand becomes equal to supply and the equilibrium is struck in the market.
The market will reach the point of an equilibrium at a higher price than in a situation of $n
excess demand.

12.Explain the effects of increase in income of buyers of normal commodities on its equilibrium
price. (Delhi 2010)
Ans. For a normal commodity, increase in the income of the consumer” means an increase in its
demand. Accordingly, the demand curve shifts rightward and both an equilibrium price and an
equilibrium quantity tends to increase.
In the given diagram, actual demand curve DD and actual supply curve SS intersect at point E
(i.e. equilibrium point). When the income of the buyer increases, the demand of normal goods
also rises and the demand curve shifts rightward DD to D,D,. As a result, an equilibrium price
and quantity both increase OP to OP₁, and OQ to OQ₁, respectively. Equilibrium point will shift
to rightward i.e. E to E₁.
13.Explain the changes that take place when at a given price of a commodity, there is excess
supply of it. Use a diagram. (Delhi 2006 C)
Ans. When price prevailing in the market is higher than that of equilibrium price, demand will be
less than supply i.e. there is excess supply in the market. Excess supply will force the market
price to slide down causing extension of demand and contraction of supply. The process of an
extension and contraction would continue till the equilibrium between supply and demand is
struck.
Thus, an equilibrium price will be restored through the free play of market forces of demand and
supply.

5 marks questions
14.What is excess demand for a good in a market? Explain its chain of effects on the market for
that good use diagram.(Foreign, 2014)
Ans. Excess demand refers to the situation in which market demand excess market supply
corresponding to a particular price. By definition, equilibrium price refers to the price at which
market demand equals market supply, excess demand in the market will create competition
among the buyer, which will push price upwards, causing contraction in demand (by Law of
Demand) and extension in supply (by Law of Supply).
This process will continue till the equilibrium is achieved, where again market demand equals
market supply. Thus, an equilibrium price will be restored through the free play of market forces.
As shown in the diagram below:
15.Market for a product is in equilibrium. Demand for the product decreases. Explain the chain
of effects of this change till the market again reaches equilibrium. Use diagram.(Delhi 2014, All
India 2014)

In the given figure, DD and SS are the initial demand curve and supply curve respectively. E is
the initial equilibrium point, OQ is the equilibrium quantity and OP is the equilibrium price.
Decrease in demand implies a shift in demand curve to the left. It is indicated by the following
chain of effects.
Decrease in demand implies that less is supplied at the existing price. Given the supply, the price
of the commodity will tend to decrease from OP to OP1 Fall in price will tend to decrease from
OP to OP1 Fall in price will cause extension of demand and contraction of supply. Here,
equilibrium quantity also decreases from OQ to OQ1.

16.Market for a good is in equilibrium. Suppose supply decreases. Giving reasons,explain its
effects on equilibrium price and quantity. Use diagram.(Foreign 2014; Delhi 2009 C)
Ans. A fall in supply will shift the supply curve to the left. This causes a situation of deficiency
of supply (or a situation of excess demand). Accordingly, prices tend to rise. In response to rise
in price,demand tends to contract and supply tends to extend.This process (of contraction of
demand and extension of supply) will continue till, price is reached where quantity demanded is
equal to quantity supplied. This occurs at new equilibrium point E1.