Class 11 Economics Chapter 14 Question Answer | Market Equilibrium | English Medium | ASSEB
Welcome to HSLC Guru! In this article, we present a complete guide to Class 11 Economics Chapter 14 — Market Equilibrium, prepared strictly according to the ASSEB (Assam State School Education Board) syllabus. This chapter brings together the concepts of demand and supply you have learned earlier and shows how the interaction of buyers and sellers determines the price and quantity of a commodity in a competitive market. You will study equilibrium price and quantity, the meaning of excess demand and excess supply, market equilibrium under perfect competition with a fixed and a free number of firms, the effects of shifts in demand and supply (including simultaneous shifts), and the role of government through price ceiling and price floor measures. The summary, textbook questions and answers, additional MCQs, fill in the blanks, true/false statements, and glossary will help you build conceptual clarity and prepare confidently for the ASSEB Class 11 Economics examination.
Summary
Equilibrium Price and Quantity (D = S): A market is said to be in equilibrium when the quantity of a commodity that buyers wish to purchase is exactly equal to the quantity that sellers wish to sell at a given price. This price is called the equilibrium price, and the quantity bought and sold at this price is called the equilibrium quantity. At equilibrium, the market demand curve and the market supply curve intersect each other. There is no tendency for the price to rise or fall because the wishes of buyers and sellers match perfectly. Equilibrium is a state of rest where the forces of demand and supply balance each other. Below the equilibrium price, demand exceeds supply; above the equilibrium price, supply exceeds demand. Both forces push the price back towards equilibrium.
Excess Demand, Excess Supply and Price Adjustment: When the prevailing market price is below the equilibrium price, quantity demanded exceeds quantity supplied. This situation is called excess demand or shortage. Buyers compete with one another to obtain the limited goods, and sellers raise the price. The rising price reduces quantity demanded and increases quantity supplied until equilibrium is restored. On the other hand, when the prevailing price is above the equilibrium price, quantity supplied exceeds quantity demanded. This situation is called excess supply or surplus. Sellers compete to dispose of unsold stocks, and price falls. The falling price encourages buyers and discourages sellers until equilibrium is again reached. Thus, the price mechanism automatically corrects disequilibrium in a free market.
Market Equilibrium under Perfect Competition (Fixed and Free Firms): Under perfect competition with a fixed number of firms in the short run, equilibrium price is determined by the intersection of market demand and market supply. Each firm being a price-taker accepts this price and adjusts its output where price equals marginal cost. In the long run, when firms are free to enter or exit the industry, super-normal profit attracts new firms and losses force existing firms to leave. Entry shifts the supply curve rightward, lowering price; exit shifts it leftward, raising price. This process continues until every firm earns only normal profit, that is, price equals minimum long-run average cost. Hence, in long-run equilibrium under free entry and exit, P = MC = minimum LAC.
Shifts in Demand and Supply, and Government Intervention: A change in any factor other than the price of the commodity (income, tastes, prices of related goods, technology, input prices, weather, etc.) shifts the demand or supply curve. A rightward shift of demand raises both equilibrium price and quantity, while a leftward shift lowers both. A rightward shift of supply lowers price but raises quantity, and a leftward shift raises price but lowers quantity. When demand and supply shift simultaneously, the change in equilibrium price or quantity depends on the relative magnitude of the two shifts; one of them becomes indeterminate without exact data. To protect consumers and producers, the government sometimes fixes a maximum price below equilibrium called a price ceiling (e.g., rent control, ration prices), which leads to shortages and may need rationing. It also fixes a minimum price above equilibrium called a price floor (e.g., minimum support price for farmers, minimum wages for workers), which leads to surpluses and often requires government purchase or storage. Such interventions correct social problems but distort the free working of the market.
Textbook Questions and Answers
1-Mark Questions
Q1. What is meant by market equilibrium?
Answer: Market equilibrium is the situation in which market demand for a commodity is equal to its market supply, so that there is no tendency for price to change.
Q2. Define equilibrium price.
Answer: The price at which quantity demanded equals quantity supplied is called the equilibrium price.
Q3. What is equilibrium quantity?
Answer: The quantity that is bought and sold at the equilibrium price is called the equilibrium quantity.
Q4. What is excess demand?
Answer: Excess demand exists when, at a given price, the quantity demanded is greater than the quantity supplied.
Q5. What is excess supply?
Answer: Excess supply exists when, at a given price, the quantity supplied is greater than the quantity demanded.
Q6. What is a price ceiling?
Answer: A price ceiling is the maximum legal price fixed by the government below the equilibrium price, beyond which sellers cannot charge.
Q7. What is a price floor?
Answer: A price floor is the minimum legal price fixed by the government above the equilibrium price, below which sellers are not allowed to sell.
Q8. Give one example of price ceiling in India.
Answer: Rent control on houses and the issue price of foodgrains in fair price shops are examples of price ceiling.
Q9. Give one example of price floor.
Answer: The Minimum Support Price (MSP) for paddy and wheat declared by the Government of India and the statutory minimum wages for workers are examples of a price floor.
Q10. What happens to equilibrium price when demand increases, supply remaining constant?
Answer: When demand increases and supply remains constant, both equilibrium price and equilibrium quantity rise.
2 to 3-Mark Questions
Q1. Explain how equilibrium price is determined in a competitive market.
Answer: In a competitive market, equilibrium price is determined by the interaction of market demand and market supply. Buyers want to purchase more at lower prices, while sellers want to supply more at higher prices. The price at which the desire of buyers and sellers matches — that is, where the quantity demanded equals the quantity supplied — is called the equilibrium price. At this price, the demand and supply curves intersect, and the market clears with no shortage or surplus.
Q2. Distinguish between excess demand and excess supply.
Answer: Excess demand arises when the prevailing market price is below the equilibrium price; quantity demanded exceeds quantity supplied, leading to a shortage of the commodity. It pushes the price upward. Excess supply arises when the prevailing price is above the equilibrium price; quantity supplied exceeds quantity demanded, leading to a surplus. It pushes the price downward. Both situations are corrected automatically in a free market through price adjustment.
Q3. What is the effect of a leftward shift of the supply curve, demand remaining unchanged?
Answer: A leftward shift of the supply curve indicates that less quantity is supplied at every price. With demand unchanged, at the old equilibrium price there appears excess demand. As a result, the price rises and quantity demanded falls along the same demand curve. The new equilibrium is reached at a higher price and a lower quantity than before.
Q4. Explain the effect of a rightward shift in the demand curve on equilibrium, supply remaining constant.
Answer: A rightward shift in the demand curve means that at every price, consumers demand more of the good (due to higher income, change in tastes, etc.). Supply being constant, at the old equilibrium price excess demand appears. Buyers compete and the price rises. Sellers respond by supplying more, and the new equilibrium is established at a higher price and a higher quantity than before.
Q5. What is the difference between price ceiling and price floor?
Answer: A price ceiling is the maximum price fixed by the government below the equilibrium price to protect consumers (e.g., rent control). It usually creates shortages. A price floor is the minimum price fixed above the equilibrium price to protect producers or workers (e.g., MSP, minimum wages). It usually creates surpluses. Price ceilings benefit buyers; price floors benefit sellers.
Q6. What do you mean by free entry and free exit of firms in long-run equilibrium?
Answer: Free entry means that any new firm can enter the industry whenever existing firms are earning super-normal profit. Free exit means that any existing firm can leave the industry whenever firms are suffering losses. This freedom of entry and exit ensures that in the long run, every firm earns only normal profit, which means price equals minimum long-run average cost (P = min LAC).
5 to 6-Mark Questions
Q1. Explain how equilibrium price and quantity are determined in a perfectly competitive market with the help of a schedule and diagram.
Answer: In a perfectly competitive market, equilibrium is determined where market demand equals market supply. Consider the following schedule:
| Price (Rs.) | Quantity Demanded (units) | Quantity Supplied (units) | Market Situation |
|---|---|---|---|
| 10 | 100 | 20 | Excess Demand |
| 20 | 80 | 40 | Excess Demand |
| 30 | 60 | 60 | Equilibrium |
| 40 | 40 | 80 | Excess Supply |
| 50 | 20 | 100 | Excess Supply |
At Rs. 30, demand and supply are both 60 units; this is the equilibrium price and 60 units is the equilibrium quantity. Below Rs. 30, excess demand pushes the price up; above Rs. 30, excess supply pulls the price down. Diagrammatically, the downward-sloping demand curve DD and the upward-sloping supply curve SS intersect at point E. The price corresponding to E is the equilibrium price (OP) and the quantity is the equilibrium quantity (OQ). Thus, the price mechanism brings about equilibrium automatically.
Q2. Discuss the effect of an increase and a decrease in demand on equilibrium price and quantity, supply remaining unchanged.
Answer: An increase in demand means a rightward shift of the demand curve at every price. With supply unchanged, the new demand curve cuts the supply curve at a higher point. This implies a higher equilibrium price and a higher equilibrium quantity. A decrease in demand means a leftward shift of the demand curve. The new demand curve cuts the supply curve at a lower point, resulting in a lower equilibrium price and a lower equilibrium quantity. Thus, demand and equilibrium price/quantity move in the same direction when supply is constant. Examples: a rise in income raising the demand for a normal good, or a change in fashion reducing the demand for a particular dress.
Q3. Explain the effects of an increase and a decrease in supply on equilibrium, demand remaining unchanged.
Answer: An increase in supply means a rightward shift of the supply curve, indicating that more quantity is supplied at every price (due to better technology, fall in input prices, good harvest, etc.). With demand constant, at the old price excess supply appears, so price falls and quantity demanded rises. The new equilibrium is at a lower price and a higher quantity. A decrease in supply means a leftward shift of the supply curve (due to bad weather, rise in costs, etc.). At the old price excess demand appears, price rises and quantity demanded falls. The new equilibrium is at a higher price and a lower quantity. Hence, supply and equilibrium price move in opposite directions, while supply and equilibrium quantity move in the same direction.
Q4. Discuss the effect of simultaneous shifts in demand and supply on equilibrium price and quantity.
Answer: When both demand and supply shift at the same time, the change in equilibrium depends on the direction and the relative size of the two shifts:
| Case | Effect on Price | Effect on Quantity |
|---|---|---|
| Both demand and supply increase | Indeterminate | Increases |
| Both demand and supply decrease | Indeterminate | Decreases |
| Demand increases, supply decreases | Increases | Indeterminate |
| Demand decreases, supply increases | Decreases | Indeterminate |
The variable that is “indeterminate” depends on the relative magnitude of the two shifts. For example, if both demand and supply increase but the increase in demand is larger than the increase in supply, equilibrium price will rise; if supply increases more, price will fall. Thus, simultaneous shifts make one of the two outcomes (price or quantity) indeterminate without numerical information.
Q5. Explain the meaning of price ceiling and price floor with examples and effects.
Answer: Price Ceiling: A price ceiling is a maximum legal price fixed by the government below the equilibrium price, beyond which sellers cannot charge. It is fixed to make essential goods affordable to the poor. Example: rent control on houses, low prices charged for foodgrains, sugar, kerosene through fair price shops. Effect: At the ceiling price, demand exceeds supply, so a shortage arises. To distribute the limited goods, the government uses ration cards. It can also lead to black marketing and adulteration. Price Floor: A price floor is a minimum legal price fixed above the equilibrium price, below which sellers cannot sell. It is fixed to protect producers (mainly farmers) and workers. Example: Minimum Support Price (MSP) for wheat and paddy, statutory minimum wages. Effect: At the floor price, supply exceeds demand, leading to a surplus. The government has to purchase the surplus to maintain the price (e.g., FCI procurement) or accept some unemployment in the case of a wage floor.
Additional Multiple Choice Questions
Q1. Equilibrium price is the price at which —
(a) Demand exceeds supply
(b) Supply exceeds demand
(c) Demand equals supply
(d) None of these
Answer: (c) Demand equals supply.
Q2. Excess demand causes —
(a) Price to fall
(b) Price to rise
(c) No change in price
(d) Quantity to fall
Answer: (b) Price to rise.
Q3. A price ceiling is fixed —
(a) Above the equilibrium price
(b) Below the equilibrium price
(c) At the equilibrium price
(d) Above or below the equilibrium price
Answer: (b) Below the equilibrium price.
Q4. Minimum Support Price (MSP) is an example of —
(a) Price ceiling
(b) Price floor
(c) Equilibrium price
(d) Free market price
Answer: (b) Price floor.
Q5. Rent control by government is an example of —
(a) Price floor
(b) Price ceiling
(c) Free pricing
(d) MSP
Answer: (b) Price ceiling.
Q6. When demand increases and supply remains constant, equilibrium price —
(a) Falls
(b) Rises
(c) Remains the same
(d) Becomes zero
Answer: (b) Rises.
Q7. If supply increases more than demand, equilibrium price will —
(a) Fall
(b) Rise
(c) Remain the same
(d) Be indeterminate
Answer: (a) Fall.
Q8. Under perfect competition with free entry and exit, in long-run equilibrium —
(a) Firms earn super-normal profit
(b) Firms earn only normal profit
(c) Firms suffer losses
(d) Price is greater than LAC
Answer: (b) Firms earn only normal profit.
Q9. A surplus in the market arises when —
(a) Price is below equilibrium
(b) Price is above equilibrium
(c) Demand equals supply
(d) Government fixes a ceiling
Answer: (b) Price is above equilibrium.
Q10. Both demand and supply increase, but supply increases more. Equilibrium quantity will —
(a) Fall
(b) Rise
(c) Remain unchanged
(d) Be indeterminate
Answer: (b) Rise.
Fill in the Blanks
Q1. The price at which quantity demanded equals quantity supplied is called the __________ price.
Answer: equilibrium.
Q2. Excess demand exerts a/an __________ pressure on price.
Answer: upward.
Q3. A maximum price fixed below equilibrium is called __________.
Answer: price ceiling.
Q4. A minimum price fixed above equilibrium is called __________.
Answer: price floor.
Q5. In long-run perfect competition with free entry and exit, every firm earns only __________ profit.
Answer: normal.
True or False
Q1. At the equilibrium price, there is neither shortage nor surplus.
Answer: True.
Q2. Price ceiling generally creates a surplus in the market.
Answer: False (it creates a shortage).
Q3. A rightward shift of the supply curve, demand remaining unchanged, lowers equilibrium price.
Answer: True.
Q4. When demand and supply both increase, equilibrium quantity rises but the change in price is indeterminate.
Answer: True.
Q5. Minimum Support Price (MSP) is fixed below the equilibrium price.
Answer: False (it is fixed above the equilibrium price).
Glossary
| Term | Meaning |
|---|---|
| Market Equilibrium | State where market demand equals market supply. |
| Equilibrium Price | Price at which quantity demanded equals quantity supplied. |
| Equilibrium Quantity | Quantity bought and sold at the equilibrium price. |
| Excess Demand | Quantity demanded is greater than quantity supplied at a given price. |
| Excess Supply | Quantity supplied is greater than quantity demanded at a given price. |
| Shortage | Another term for excess demand; not enough goods for buyers. |
| Surplus | Another term for excess supply; goods left unsold. |
| Price Ceiling | Maximum legal price fixed by government below equilibrium. |
| Price Floor | Minimum legal price fixed by government above equilibrium. |
| Rent Control | Government-imposed maximum rent on houses; example of price ceiling. |
| Minimum Support Price (MSP) | Minimum price at which the government promises to buy crops from farmers; example of price floor. |
| Minimum Wage | Statutory lowest wage payable to workers; example of price floor. |
| Free Entry and Exit | Freedom of new firms to enter and existing firms to leave an industry without restriction. |
| Normal Profit | The minimum profit needed for a firm to stay in business; included in cost of production. |
| Super-Normal Profit | Profit earned over and above normal profit; attracts new firms in the long run. |
| Simultaneous Shift | Situation where both demand and supply curves shift at the same time. |
| Price Mechanism | Process by which prices automatically adjust demand and supply to reach equilibrium. |
| Government Intervention | Direct involvement of the government in fixing prices to correct market outcomes. |
Extra Short Questions
Q1. What happens to equilibrium price and quantity when both demand and supply decrease equally?
Answer: When both demand and supply decrease by the same amount, equilibrium price remains unchanged but equilibrium quantity falls.
Q2. Why is rationing necessary when government fixes a price ceiling?
Answer: A price ceiling causes excess demand because the legal price is below equilibrium. To distribute the limited supply fairly among many buyers, the government issues ration cards and limits the quantity each household can buy.
Q3. Why does the government procure foodgrains at MSP?
Answer: Since MSP is fixed above the equilibrium price, supply exceeds demand at this price. To make the support price effective and to protect farmers from a price fall, the government (through agencies such as the FCI) purchases the surplus stock of foodgrains.
Q4. Why does a price ceiling often lead to black marketing?
Answer: Since the legal ceiling price is below equilibrium, demand exceeds supply, and many genuine buyers fail to get the commodity through legal channels. Some sellers exploit this scarcity by selling the goods illegally at much higher prices, giving rise to a black market.
Important Points to Remember
1. Equilibrium in a free competitive market is always determined by the interaction of market demand and market supply, not by the wishes of any single buyer or seller.
2. At equilibrium price, there is neither excess demand nor excess supply; the market clears completely. Any deviation from this price sets in motion forces that bring the price back to equilibrium.
3. A rightward shift of demand raises both equilibrium price and quantity; a leftward shift lowers both. A rightward shift of supply lowers price but raises quantity; a leftward shift raises price but lowers quantity.
4. When demand and supply shift simultaneously, the change in equilibrium price or quantity becomes indeterminate without exact information about the magnitudes of the shifts.
5. In long-run perfect competition with free entry and exit, every firm earns only normal profit, and price equals the minimum long-run average cost.
6. A price ceiling fixed below the equilibrium price (such as rent control or ration prices) creates a shortage and may require rationing; a price floor fixed above the equilibrium price (such as MSP and minimum wages) creates a surplus and may require government procurement.
This complete chapter-wise guide on Class 11 Economics Chapter 14 — Market Equilibrium, prepared as per the ASSEB syllabus, will help you understand how prices are formed in a free market, how shifts in demand and supply alter the equilibrium, and how government interventions like price ceilings and price floors affect outcomes. Continue practising with HSLC Guru and best wishes for your ASSEB Class 11 Economics examination.