Chapter 5 – Market Equilibrium
Q1. What is market equilibrium?
Market equilibrium is the point where quantity demanded equals quantity supplied at a certain price, ensuring no excess demand or supply.
Q2. What is equilibrium price?
The price at which the quantity of a good demanded equals the quantity supplied.
Q3. What is equilibrium quantity?
The quantity of goods bought and sold at the equilibrium price.
Q4. What happens when market price is above equilibrium price?
There is excess supply, leading to competition among sellers and a fall in price until equilibrium is restored.
Q5. What happens when market price is below equilibrium price?
There is excess demand, leading to competition among buyers and a rise in price until equilibrium is achieved.
Q6. What is excess demand?
When quantity demanded exceeds quantity supplied at a given price.
Q7. What is excess supply?
When quantity supplied exceeds quantity demanded at a given price.
Q8. How is market equilibrium determined?
By plotting demand and supply curves; the intersection point gives the equilibrium price and quantity.
Q9. What causes a shift in the demand curve?
Changes in income, tastes, population, price of related goods, or expectations.
Q10. What causes a shift in the supply curve?
Changes in input cost, technology, taxes, weather, or government policies.
Q11. What happens to equilibrium when demand increases?
Price and quantity both increase as the new demand curve intersects the supply curve at a higher point.
Q12. What happens to equilibrium when demand decreases?
Price and quantity both fall as the demand curve shifts leftward.
Q13. What happens when supply increases?
Price falls and quantity rises as supply curve shifts right.
Q14. What happens when supply decreases?
Price rises and quantity falls as the supply curve shifts left.
Q15. What happens when both demand and supply increase?
Quantity increases; effect on price depends on the extent of change in demand vs. supply.
Q16. What happens when both demand and supply decrease?
Quantity decreases; effect on price depends on relative shifts of demand and supply.
Q17. What happens when demand increases and supply decreases?
Price rises sharply; effect on quantity depends on relative change.
Q18. What happens when demand decreases and supply increases?
Price falls sharply; quantity effect depends on magnitude of shifts.
Q19. What is price ceiling?
A maximum price set by the government below the equilibrium price to make goods affordable — e.g., rent control.
Q20. What happens due to price ceiling?
Creates excess demand or shortage as quantity demanded exceeds quantity supplied.
Q21. What is price floor?
A minimum price set above equilibrium price to protect producers — e.g., minimum support price (MSP) for crops.
Q22. What happens due to price floor?
Creates excess supply as quantity supplied exceeds quantity demanded.
Q23. What is rationing?
Government-imposed distribution system used when there’s excess demand due to price ceilings.
Q24. What is black marketing?
Illegal sale of goods at higher prices due to shortages caused by price ceilings.
Q25. What is subsidy?
A financial support given by the government to producers or consumers to reduce the effective price.
Q26. What is the impact of indirect taxes on supply?
Increases production cost, shifts supply curve left, raises equilibrium price and reduces quantity.
Q27. How do subsidies affect equilibrium?
Reduce production cost, shift supply rightward, lower price and increase quantity.
Q28. Why is equilibrium considered stable in perfect competition?
Because any disturbance from equilibrium leads to automatic adjustments by demand and supply forces back to the equilibrium point.
Q29. What is partial equilibrium?
Analysis of equilibrium in a single market, assuming no change in other markets.
Q30. What is general equilibrium?
Simultaneous determination of prices and quantities in all related markets, showing interdependence.