Notes Class 12 Economis Chapter 5 Market Equilibrium

NOTES
CLASS – XII
SUBJECT – ECONOMIC MICROECONOMICS
CHAPTER - 5 MARKET EQUILIBRIUM
1. Concept of Market Equilibrium

 Market Equilibrium refers to a situation where the quantity demanded (Qd) of a good
equals the quantity supplied (Qs) at a particular price. At this price, both consumers and
producers are satisfied, and there is no tendency for price to change.
 Equilibrium Price (Pₑ): The price at which market demand equals market supply.
 Equilibrium Quantity (Qₑ): The quantity bought and sold at the equilibrium price.
2. Determination of Equilibrium
 The equilibrium is determined by the intersection of the demand curve and the supply
curve.
 Demand Curve: A graphical representation of the relationship between price and

quantity demanded, usually downward-sloping.
 Supply Curve: A graphical representation of the relationship between price and quantity
supplied, usually upward-sloping.
When the demand and supply curves intersect, the market reaches equilibrium.
3. Market Disequilibrium
 Excess Demand: Occurs when Qd > Qs at a given price, leading to upward pressure on
price.
 Excess Supply: Occurs when Qs > Qd at a given price, leading to downward pressure on
price.
In both cases, the market will adjust (price changes) until equilibrium is restored.
4. Changes in Market Equilibrium

Market equilibrium can change due to shifts in either the demand or the supply curve,
leading to new equilibrium prices and quantities.
 Shift in Demand:
o Increase in Demand: The demand curve shifts rightward, leading to a higher

equilibrium price and quantity.
o Decrease in Demand: The demand curve shifts leftward, leading to a lower

equilibrium price and quantity.
 Shift in Supply:
o Increase in Supply: The supply curve shifts rightward, leading to a lower

equilibrium price and higher equilibrium quantity.
o Decrease in Supply: The supply curve shifts leftward, leading to a higher

equilibrium price and lower equilibrium quantity.
5. Simultaneous Shifts in Demand and Supply

 When both demand and supply change simultaneously, the final effect on equilibrium
price and quantity depends on the magnitude and direction of the shifts.
o Both Demand and Supply Increase: The equilibrium quantity increases, but the effect
on price is uncertain.
o Both Demand and Supply Decrease: The equilibrium quantity decreases, but the effect
on price is uncertain.
6. Price Ceiling and Price Floor

 Price Ceiling: A legal maximum price that can be charged for a good or service (e.g., rent
control). This usually leads to a shortage (excess demand).
 Price Floor: A legal minimum price that can be charged for a good or service (e.g.,
minimum wage). This usually leads to a surplus (excess supply).
7. Effects of Government Intervention

 Price Control Policies (like ceilings and floors) disturb the natural market equilibrium
and result in inefficiencies such as black markets or unsold surpluses.
 Consumer Surplus: The difference between what consumers are willing to pay and what
they actually pay.
 Producer Surplus: The difference between what producers are willing to accept and
what they actually receive.
 Deadweight Loss: The loss in social surplus that occurs when the market is not in
equilibrium due to external interventions like taxes, price ceilings, or floors.
8. Taxes and Subsidies in Market Equilibrium

 Tax Impact: Imposing a tax on a good shifts the supply curve upward by the amount of
the tax, leading to a higher price for consumers and a lower price received by producers.
o Taxes result in lower equilibrium quantity and deadweight loss.
 Subsidy Impact: Providing a subsidy shifts the supply curve downward, leading to a
lower price for consumers and a higher price received by producers.
o Subsidies increase the equilibrium quantity but can also lead to inefficiencies.
9. Importance of Market Equilibrium

 It ensures efficient allocation of resources as goods are produced and consumed in
optimal quantities.
 Market equilibrium reflects the price at which the intentions of both buyers and sellers
are harmonized.

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NOTES

1. Concept of Market Equilibrium

 Demand Curve: A graphical representation of the relationship between price and

4. Changes in Market Equilibrium

o Increase in Demand: The demand curve shifts rightward, leading to a higher

o Decrease in Demand: The demand curve shifts leftward, leading to a lower

o Increase in Supply: The supply curve shifts rightward, leading to a lower

o Decrease in Supply: The supply curve shifts leftward, leading to a higher

5. Simultaneous Shifts in Demand and Supply

6. Price Ceiling and Price Floor

7. Effects of Government Intervention

8. Taxes and Subsidies in Market Equilibrium

o Taxes result in lower equilibrium quantity and deadweight loss.

9. Importance of Market Equilibrium

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