Important Questions For NCERT Class 12 Economics Market Equilibrium under Perfect Competition and Effects of Shifts in Demand and Supply

Please refer to Economics Market Equilibrium under Perfect Competition and Effects of Shifts in Demand and Supply Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Market Equilibrium under Perfect Competition and Effects of Shifts in Demand and Supply Class 12 Economics Notes and Questions

The below Class 12 Market Equilibrium under Perfect Competition and Effects of Shifts in Demand and Supply notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

Price Determination under Perfect competition

Equilibrium Price
It refers to that price where demand and supply of product are equal.
Under perfect competition, industry determines the price with the help of market forces of demand and supply.

Market Demand is the function of price of product. Other factors remain constant, there is inverse relationship between price and market demand of product. Therefore, market demand curve is upward sloping from left to right.

Market Supply is the function of price of product. Other factors remain constant, there is inverse relationship between price and market supply of product. Therefore, market supply curve is upward sloping from left to right.

Equilibrium between Market Demand and Market Supply
In a free market, equilibrium price is determined where market demand is equal to market supply.
If demand and supply are not equal at any price then following changes will arise: –
a. If there is excess demand (Demand exceeds Supply) at any particular price, then there will be competition among the buyers, so price will tend to increase.
b. If there is excess supply (Supply exceeds Demand) at any particular price, then there will be competition among the sellers, so price will tend to decrease.
It is explained the help of following hypothetical schedule and diagram: –

Question. Explain the impact of change in demand and supply on equilibrium price and quantity.
Ans. Equilibrium price and quantity maybe affected by change in demand or change in supply or change in both demand and supply.

These situations are given as below: –

I. Only change in Demand
a. Increase in Demand

When there is increase in demand, i.e. rightward shift in demand curve and no change in supply, then price and quantity increase.

Process: With increase in demand caused by change in other factors like increase in price of the substitute goods, decrease in the price of complimentary goods, etc., demand curve shifts rightward from DD to D₁D₁ in the diagram.
This results excess demand QQ, at a given price OP so there will be competition among the buyers, so price will tend to increase till demand and supply become equal. Thus, equilibrium shift from E to E₁, equilibrium price increases from OP to OP₁ and quantity increases from OQ to OQ₂.

b. Decrease in Demand

When there is decrease in demand, i.e. leftward shift in demand curve and no change in supply, then equilibrium price and quantity both decrease.

Process: With decrease in demand caused by change in other factors like decrease in price of substitute goods, increase in price of complimentary goods, etc., demand curve shifts leftward from DD to D₁D₁ in the diagram.
This results excess supply QQ₁ at a given price OP so there will be competitions among the sellers so price will tend to decrease till demand and supply become equal.
Thus, equilibrium point shift from E to E₂, equilibrium price decrease from OP to OP₂.

II. Only change in Supply
a. Increase in Supply

When there is increase in supply, i.e. rightward shift in supply curve and no change in demand then equilibrium price decreases but quantity increases.

Process: With increase in supply caused by change in other factors like decrease in the price of substitute goods, improvement in technology, etc., supply curve shifts rightward from SS to S₁S₁ in the diagram. This results excess supply QQ₁ at a given price OP. So, there will be competition among sellers and price will tend to decrease till demand and supply became equal.
Thus, equilibrium point shift from E to E₁, equilibrium price decrease from OP to OP₁ and quantity increase from OQ to OQ₂.

b. Decrease in Supply

When there is decrease in supply, i.e. leftward shift in supply curve and no change in demand then equilibrium price increases but quantity decreases.

Process: With decrease in supply caused by change in other factors like increase in price of substitute goods, use of obsolete technology, etc., supply curve shifts leftward from SS to S₁S₁ in the diagram. This results excess demand QQ₁ at a given price OP. so, there will be competition among the buyers and price will tend to increase till demand and supply become equal.
Thus, equilibrium price shift from E to E₁, equilibrium price will increase from OP to OP₁ and quantity decrease from OQ to OQ₂

Question. If at a given market price, there is excess demand then how does equilibrium price is attained?
Ans. If at a given market price, there is excess demand or shortage which exist at below the equilibrium price, then following changes in demand and supply will attain equilibrium price: –
a. When there is excess demand, i.e. demand exceeds supply at a particular price of product then there will be competition among the buyers so price will tend to rise.
As price of the product increases, producer increases the quantity supplied due to increase in profit margin which is called expansion of supply.
b. As price of the product increases, consumer decreases the quantity demanded which is called contraction of demand.
The above two process of expansion of supply and contraction of demand decreases the gap of excess demand. This process will continue till demand and supply become equal. So, it will determine equilibrium price. It is explained with help of following diagram: –

In the above diagram, there is excess demand Q₁Q₂ at a given price OP₂. So, there will be competition among the buyers and price tends to rise. The process of expansion of supply and contraction of demand decreases the gap till point E, where demand and supply become equal. Thus, equilibrium price OP₁ is attained.

Question. If at a given market price, there is excess supply then how does equilibrium price is attained?
Ans. If at a given market price, there is excess supply or surplus which exist at below the equilibrium price, then following changes in demand and supply will attain equilibrium price: –
a. When there is excess supply, i.e. supply exceeds demand at a particular price of product then there will be competition among the sellers so price will tend to fall. As price of the product decreases, producer decreases the quantity supplied due to low profit margin which is called contraction of supply.
b. As price of the product decreases, consumer increases the quantity demanded which is called expansion of demand. The above two process of expansion of demand and contraction of supply decreases the gap of excess supply. This process will continue till demand and supply become equal. So, it will determine equilibrium price. It is explained with help of following diagram: –

In the above diagram, there is excess supply Q₁Q₂ at a given price OP₂. So, there will be competition among the sellers and price tends to fall. The process of expansion of demand and contraction of supply decreases the gap till point E, where demand and supply become equal. Thus, equilibrium price OP1 is attained.

Question. What are the causes for shift in supply curve and also explain its impact on equilibrium price and quantity?
Ans. Shift in supply either rightward or leftward is caused by change in other factors which are as below: –

1. Change in price of substitute goods
When the price of substitute good (say rice) increase then substitute good became more profitable to supply. Therefore, supply of given product (say wheat) decreases and shift supply curve leftward. As a result, equilibrium price increase but quantity decrease and vice-versa.

2. Change in Technology
If there is improvement in technology like use modern machines which leads to decrease in per unit cost of production. So, it will increase supply of product and shift supply curve rightward. Thus, equilibrium price decreases but quantity increases and vice-versa.

3. Change in input prices
If prices of inputs like wages, rent, raw material, etc. increase, then it will increase Marginal Cost of product. Therefore, producer decreases the supply and shift supply curve rightward. As a result, equilibrium price increases but quantity decreases and vice-versa.

4. Change in government policies
If government decreases excise tax rate or increases subsidies for producing a product. Therefore, producer increases the supply and shift supply curve rightward. As a result, equilibrium price decreases but quantity increases and vice-versa.

Question. What are the causes for shift in supply curve and also explain its impact on equilibrium price and quantity?
Ans. Shift in supply either rightward or leftward is caused by change in other factors which are as below: –

1. Change in price of substitute goods
When the price of substitute good (say rice) increase then substitute good became more profitable to supply. Therefore, supply of given product (say wheat) decreases and shift supply curve leftward. As a result, equilibrium price increase but quantity decrease and vice-versa.

2. Change in Technology
If there is improvement in technology like use modern machines which leads to decrease in per unit cost of production. So, it will increase supply of product and shift supply curve rightward.
Thus, equilibrium price decreases but quantity increases and vice-versa.

3. Change in input prices
If prices of inputs like wages, rent, raw material, etc. increase, then it will increase Marginal Cost of product. Therefore, producer decreases the supply and shift supply curve rightward.
As a result, equilibrium price increases but quantity decreases and vice-versa.

4. Change in government policies
If government decreases excise tax rate or increases subsidies for producing a product.
Therefore, producer increases the supply and shift supply curve rightward. As a result, equilibrium price decreases but quantity increases and vice-versa.

Non-Viable Industry
It refers to that industry where demand and supply curve do not intersect each other at any positive axis of quantity. Here supply curve always lies above the demand curve. It indicates that consumers are willing to pay the price less than what a producer needs to supply. So, equilibrium price is not determined and there is no sale or purchase of goods.

Application of Demand and Supply

Impact of government interference on equilibrium price.

A. Price ceiling (Maximum Price Policy): Ceiling means maximum limit. Price ceiling refers to maximum price fixed by government which a producer can charge from buyer. It is generally fixed at below the equilibrium price so that products can be easily affordable for the poor sections of the society.

In the above diagram, equilibrium price is OP_e where demand and supply are equal but government fixes the maximum price at OP which results excess demand or shortage of commodity which leads to following consequences: –

1. Policy of rationing: In case of shortage of products government may introduce policy of rationing for distribution of commodities. Rationing means fixing the maximum quantity of product which a consumer can demand. This policy is used to support weaker sections of society who could not be able to receive the product in a free market system.

2. Block marketing: In case of price ceiling, shortage of products may lead to block marketing. It means products can be sold at a price higher than fixed by the government illegally.

B. Floor Price (Support Price Policy): Floor price means fixing minimum price by the government which a producer will get from the sale of his product. Most of the countries, this policy is used to support agricultural producers.

In the diagram, equilibrium price is OP where demand and supply are equal but government fixes minimum price OP₁ which producer will get from the sale of his product. It results surplus stock L₁L₂ in the market which is purchased by the government and called buffer stock.

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