Class 11 Micro economics Chapter 5 MARKET EQUILIBRIUM
NCERT Notes for Class 11 Micro economics Chapter 5 MARKET EQUILIBRIUM, (Economics) exam are Students are taught thru NCERT books in some of state board and CBSE Schools. As the chapter involves an end, there is an exercise provided to assist students prepare for evaluation. Students need to clear up those exercises very well because the questions with inside the very last asked from those.
Sometimes, students get stuck with inside the exercises and are not able to clear up all of the questions. To assist students, solve all of the questions and maintain their studies without a doubt, we have provided step by step NCERT Notes for the students for all classes. These answers will similarly help students in scoring better marks with the assist of properly illustrated Notes as a way to similarly assist the students and answering the questions right.
NCERT Notes for Class 11 Micro economics Chapter 5 MARKET EQUILIBRIUM
Class 11 Micro economics Chapter 5 MARKET EQUILIBRIUM
PRICE MECHANISM: The process of goods and services by Demand and Supply is called price mechanism.
Equilibrium:
- Equilibrium means balance or equal.
- Market equilibrium means a point where market demand and market Supply are equal.
- The price at which Demand and Supply are equal is called equilibrium price.
- The quantity of goods and services sold and bought at equilibrium price is called equilibrium quantity.
- Mathematically it can be written as follows.
𝒒𝒅(𝒑∗) = 𝒒𝒔(𝒑∗)
If can be graphically written as follows.
- In the above diagram p1 is the equilibrium price and Q1 is the equilibrium quantity.
- The situation in which market demand is higher than market Supply at a given price is called excess demand.
- The situation in which market Supply is higher than market Demand at a given price is called excess Supply.
MARKET EQUILIBRIUM WITH FIXED NUMBER OF FIRMS:
- When the number of firms is fixed, as a result the market forces attain equilibrium.
- So the price is determined by Demand and Supply in such a market.
- It can be explained with the help of the following diagram.
- In the above diagram ₹8 is the equilibrium price and 4 units of output is the equilibrium quantity.
- All prices above the equilibrium price leads to excess Supply. Price below the equilibrium price leads to excess demand.
WAGE RATE DETERMINATION IN LABOUR MARKET:
- There is an important difference between product market and factor market.
- In product market demand comes from consumers and Supply comes from firms but in a factor market demand for labour comes from firms and Supply comes from household.
- A firm under perfect Competition employ Labour up to the point where additional cost incurred for the employment of the last unit of labour equal to the additional benefit that is earn from it.
- The additional cost is Wage(W) and the additional benefit is Marginal Revenue product of labour.
- There fore we can say that a firm employ labour up to MRPL.
- The demand curve of labour is a downward sloping curve because declining Marginal product of labour due to the operation of the Las Of Diminishing Returns.
- More labour can be demanded at lower Wage rates.
Market Supply curve of labour is positively sloped with Wage rate. This is because More laboureres will ready to work, when the Wage rate increases. Equilibrium Wage determination is shown by the following diagram.
SHIFT IN DEMAND AND SUPPLY : There are three types of shifts in Demand and Supply. The are following.
- Shifts in Demand while Supply remains unchanged.
- Shifts in Supply while Demand remains unchanged.
- Simultaneous shifts in demand and supply.
Shifts in Demand while Supply remains unchanged:
- The demand curve shifts towards right or left due to the changes in factors other than price.
- Market demand curve shifts to the right or left due to the change in non price factors.
- Market Demand curve has two shifts they are the following.
1).The demand curve shifts rightward and Supply remains the same
- The demand curve shifts towards right due to the favourable conditions such as increase in Consumers Income, decrease of the price of complementary goods, increase in the number of Consumers etc.
- In such a case when the market demand curve shifts rightward and Supply remain the same, equilibrium price and Equilibrium quantity increase.
- This is shown by the following diagram.
2). The Demand curve shifts leftward and Supply remains the same:
- The demand curve shifts towards left due to the unfavourable conditions such as decrease in Consumers Income, increase of the price of complementary goods, decrease in the number of Consumers etc.
- In such a case when the market demand curve shifts leftward and Supply remain the same, equilibrium price and Equilibrium quantity decrease.
- This is shown by the following diagram.
SHIFTS IN SUPPLY CURVE : Market Supply curve shifts due to factors other than price such as price of inputs, technology, unit Tax etc. Shifts in supply may be rightward or leftward.
- Shift of Supply curve rightward and the demand curve remains the same:
- Market Supply curve shifts to the right when the price of inputs decreases, taxes come down, technology improves and the number of firms increases.
- IN such a case, Shift of Supply curve rightward and the demand curve remains the same, equilibrium price decreases and equilibrium quantity increases.
- This is shown by the following diagram.
2. Shift of Supply curve leftward and the demand curve remains the same:
- Market Supply curve shifts to the left when the price of inputs increase, taxes come up, technology outdated and the number of firms decreases.
- IN such a case, Shift of Supply curve leftward and the demand remains the same, equilibrium price increases and equilibrium quantity decreases.
- This is shown by the following diagram.
SIMULTANEOUS SHIFTS OF DEMAND AND SUPPLY: Simultaneous shifts in supply and demand can happen in four possible ways they are the following.
- Both Demand and Supply curves shift rightwards:
- Both Demand and Supply curves shift leftwards :
- Demand curve shifts rightward and Supply curve shifts leftward:
- Demand curve shifts leftwards and Supply curve shifts rightward:
The impacts of these shifts are shown by the following table.
|
SHIFT IN DEMAND |
SHIFT IN SUPPLY |
QUANTITY |
PRICE |
|
RIGHTWARD |
RIGHTWARD |
Increases |
May increase, or may decrease, or may remain unchanged |
|
LEFTWARD |
LEFTWARD |
Decreases |
May increase, or may decrease, or may remain unchanged |
|
RIGHTWARD |
LEFTWARD |
May increase, or may decrease, or may remain unchanged |
Increases |
|
LEFTWARD |
RIGHTWARD |
May increase, or may decrease, or may remain unchanged |
Decreases |
MARKET EQUILIBRIUM WITH FREE ENTRY AND EXIT :
- A firm in the market with free entry and exit earn only normal Profit.
- Firms earn normal profit when price is equal to minimum Average Cost.
- So where there is free entry and exit, equilibrium price will be equal to the minimum point of average cost.
P = minimum AC
Equilibrium of a firm under free entry and exit can be shown by the following diagram.
- In the above diagram ‘E’ is the equilibrium point.
- ‘OP’ is the equilibrium price and ‘OQ’ is the equilibrium quantity.
- In a market With the free entry and exit Number of firms can be calculated with the following equation.
no = qo/qf
SHIFTS IN DEMAND CURVE IN A MARKET WITH FREE ENTRY AND EXIT
- If the Demand curve shifts to the right, equilibrium quantity and equilibrium number of firms will increase, but equilibrium price will remain the same in the market.
- If the Demand curve shifts to the left, equilibrium quantity and equilibrium number of firms will decrease, but equilibrium price will remain the same in the market.
- This is shown by the following diagram.
PRICE CEILING
- The government-imposed upper limit on the price of a good or service is called price ceiling.
- Price ceiling is generally imposed on necessary items like wheat, rice, kerosene, sugar and it is fixed below the market-determined price since at the market-determined price some section of the population will not be able to afford these goods.
- When the government imposed price ceiling the market faces excess demand.
- Then the government issues. ration coupons to the consumers so that no individual can buy more than a certain amount of goods and this stipulated amount of goods are sold through ration shops which are also called fair price shops.
- Price ceiling Causes the following problems.
- Long queues in the ration shops.
- Activities such as black markets
The following diagram shows the price ceiling in a market.
PRICE FLOOR
- For certain goods and services, fall in price below a particular level is not desirable and hence the government sets floors or minimum prices for these goods and services.
- The government imposed lower limit on the price that may be charged for a particular good or service is called price floor.
- Most well- known examples of imposition of price floor are agricultural price support programmes and the minimum wage legislation.
- It causes excess Supply in the market. Such a situation is shown by the following diagram.
