Cbse 11 Market Equilbrium Notes

CBSE 11: MICROECONOMICS NADKARNI ACADEMY
MARKET EQUILIBIRUM & PRICE DETERMINATION SUMMARY NOTES
Market refers to all such systems or arrangements that bring the buyers and sellers in contact
with each other to settle the sale and purchase of goods. It is any place where demand of buyers
and supply of sellers interact and does not necessarily mean a physical location.
Perfect Competition
It is a form of market where there are large number of buyers and sellers exchanging a homogenous
commodity. Prices are determined by the market and there is no control of an individual over price.
Features of a perfectly competitive market [Remember any 6 by heart]
1) Large number of Firms: An individual firm does not have any influence on the prices as
the total number of firms are huge. Hence, firms under perfect competition are Price Takers.
2) Large number of Buyers: An individual buyer does not have any influence on the prices as
the total number of buyers are huge. Hence, buyers too are Price Takers.
3) Homogenous Product: products being sold in the market are identical and rules out the
possibility of advertising or sales promotion expense. Hence there are no selling costs
involved in this market.
4) Perfect Knowledge: Both buyers & sellers are aware of the prices in the market. Only one
price prevails in the market which is accepted by all.
5) Free entry & Exit of Firms: No legal restriction on the entry or exit of firms.
6) Independent Decision Making and Freedom from checks: No agreement between the
sellers about production, quantity and price. No restriction about purchase or sale of any
commodity.
7) Perfect Mobility: As product is identical and produced by all sellers, factors can move to
any seller that pay the highest remuneration.
8) No extra transport cost: No additional costs attached while buying product from different
sellers as there is uniform price for the commodity with all sellers.
THREE VITAL CONCLUSIONS

1. Firm under perfect competition is a Price Taker and not a Price Maker. Price is fixed
by Market Forces and no individual buyer or seller can influence the price of homogenous
unit being sold in the market.
2. Demand Curve under Perfect Competition is Perfectly Elastic.
Any amount of quantity can be sold at the same price.
Price
3. A firm under Perfect Competition can only earn Normal Profits in D

the Long Run. When there are extra normal profits, new firms will
enter the market which will increase supply and reduce prices.
When there are extra normal losses, firms will leave industry to
reduce market supply and result in increase of market price. Quantity
MARKET EQUILIBRIUM
Market Equilibrium refers to a state in the market where demand for a commodity it equal to its
supply. It is a situation whereby market clears itself.
The price that prevails at point of equilibrium is called Equilibrium Price.
The quantity that prevails at point of equilibrium is called Equilibrium Quantity.
Price of Commodity Market Demand Market Supply
10 130 25
20 110 40
30 90 55
40 70 70
50 50 85
60 30 100
70 10 115
Y The given diagram represents Market Equilibrium
1) D represents Market Demand which has a negative
relationship between Price and Quantity Demanded
S 2) S represents Market Supply which has a positive
Price
relationship between Price and Quantity Supplied

3) Forces of Demand and Supply operate freely
without any government intervention
E
P
Both Demand and Supply Curves intersect at point E
which is the point of Market Equilibrium
The corresponding Price OP is regarded as the
D Equilibrium Price whereas corresponding Quantity
OQ is regarded as the Equilibrium Quantity.
O Q Quantity X
Equilibrium Price = Ideal Price

This may not be equal to Actual Market Price
Market Price > Equilibrium Price Market Price < Equilibrium Price
At a price higher than Equilibrium Price there At a price lower than Equilibrium Price there
would be Excess Supply would be Excess Demand
Due to excess supply producers will have Due to excess supply producers will have
unsold inventory which they would want to shortage of inventory which would lead to
clear by lowering the market price increase in market price of the commodity
A reduction in price would lead to An increase in price would lead to
expansion of demand & contraction of demand &
contraction of supply expansion of supply
till the excess supply in the market is cleared till the excess demand in the market is cleared
& equilibrium is restored. & equilibrium is restored.
As Market Demand and Supply are Dynamic Factors, they are subject to change
Increase in Demand or Supply leads to Rightward Shift of the Curve
Decrease in Demand or Supply leads to Leftward Shift of the Curve
Refer to Notebook for different cases of Increase & Decrease in market variables
The above concepts were studied with the assumption that there is no Government Intervention
Government Intervention may lead to the two important cases of Price Ceiling and Price Flooring
Price Ceiling (welfare of poor consumers) Y

✓ In under developed and developing countries,
there is scarcity of essentials of life
✓ When essential commodities are scarce, their S
Price
market price is found to be very high

✓ Majority of the poor population finds it
unaffordable and difficult to buy these goods
✓ Government introduces Price Ceiling to fix a E
P
maximum price (lower than equilibrium price) so
that the poor can afford it.
✓ Curves ‘D’ and ‘S’ represent Market Demand & P*
Market Supply respectively. Point ‘E’ is the point
D
of Equilibrium where Demand = Supply and
markets are cleared. This gives rise to O Q Quantity X
Equilibrium Price of OP and Equilibrium
Quantity of OQ.
✓ When government decides to introduce Price Ceiling i.e. fixing a price lower than
equilibrium Price, to that the poor can afford this commodity, it creates a situation of Excess
Demand in the market.
✓ This Excess Demand creates scarcity in the market which causes Partial Hunger.
✓ Government introduces Rationing by fixing maximum quantity (quota) which will be
allocated to each person.
Demerits of Rationing / Price Ceiling
o Stand in long ques to avail allotted quota of the commodity
o Low quality product
o Black Marketing of goods
To eliminate these Demerits, Government has created a system of Direct Benefit Transfer
(DBT) where the difference between Ceiling Rate & Market Rate is transferred to the bank
account of the beneficiary instead of operating through these intermediaries offering benefit.
Price Flooring (welfare of poor producers)

Price Flooring / Minimum Support Price is a
Y government policy tool to ensure that small producers
get incentives for greater production. This is
commonly observed in Indian Agriculture.
S ✓ Farming is a seasonal activity in India and during
Price
harvest there is Excess Supply which leads to price

P* crash and low income for farmers.
✓ Farmers may plan a lower production which may
E result in food shortage in the economy.
P
✓ Government will fix a higher price (Floor Price) than
Equilibrium Price to help the farmers and avoid food
shortage in the country
✓ Curves ‘D’ and ‘S’ represent Market Demand &
D
Market Supply respectively. Point ‘E’ is the point of
O Q Quantity X Equilibrium where Demand = Supply and markets are
cleared.
✓ This gives rise to Equilibrium Price of OP and Equilibrium Quantity of OQ.
✓ When government undertakes Price Flooring the price increase to OP* and results in Excess
Supply in the economy
✓ This Excess Supply is purchased by the government and is used as Buffer Stock which is
distributed amongst the poor through the Public Distribution System to the poor people.

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CBSE 11: MICROECONOMICS NADKARNI ACADEMY

MARKET EQUILIBIRUM & PRICE DETERMINATION SUMMARY NOTES

THREE VITAL CONCLUSIONS

3. A firm under Perfect Competition can only earn Normal Profits in D

relationship between Price and Quantity Supplied

Equilibrium Price = Ideal Price

Price Ceiling (welfare of poor consumers) Y

market price is found to be very high

Price Flooring (welfare of poor producers)

harvest there is Excess Supply which leads to price

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