Market Equilibrium Under Perfect Competition and Effects of Shift in Demand And Supply | Chapter 13 | Class XI | Economics |

MARKET EQUILIBRIUM UNDER PERFECT COMPETITION AND EFFECTS OF SHIFT IN DEMAND AND SUPPLY

Concept of Market Equilibrium

It is defined as a state of the market when demand for a commodity is equals to its supply corresponding to a particular price. Thus, in a state of equilibrium market demand is equals to market supply of the commodity. There is neither excess demand nor excess supply. Price in the market in such situation is called equilibrium price. Quantity supplied or demanded is called equilibrium quantity.

Determination of Market Equilibrium

Market demand refers to the sum total of demand for a commodity by all the buyers in the market.

Market supply refers to the sum total of supply of a commodity by all the firms in the market.

Price Supply Demand
5 50 10
4 40 20
3 30 30
2 20 40
1 10 50

Assumptions of Market Equilibrium under Perfect Competition

  • Price and quantity demanded are negatively related
  • Price and quantity supplied are positively related
  • Market forces operate freely without any government intervention.

Chain Effect of Shift in Demand 

Increase in Demand

E: The point of initial equilibrium.

Increase in Demand: Demand curve shifts from D1D1 to D2D2. It causes excess demand.

It leads to rise in price from OP1 to OP2

Rise in price causes extension of supply & contraction of demand.

K: New Equilibrium Point

OP: New Equilibrium Price

OQ2: New Equilibrium Quantity.

Decrease in Demand

E: The point of initial equilibrium

Decrease in Demand: Demand curve shifts from D1D1 to D2D2. It causes excess supply

It leads to fall in price from OP1 to OP2

Fall in price causes extension of demand & contraction of supply

K: New Equilibrium Point

OP2: New Equilibrium Price

OQ2: New Equilibrium Quantity.

You may also read Economics and Economy, Central Problem of an Economy, Consumer Equilibrium – Utility Analysis, Consumer Equilibrium – Indifference Curve Analysis, Theory of Demand Change in Demand, Price Elasticity of Demand, Production Function and Returns to a Factor, Concept of Cost, Concept of Revenue, Producer’s Equilibrium, Theory of Supply, Forms of Market for better output, higher scores and greater grasping of the other chapters.

Chain Effect of Shift in Supply

Increase in Supply

E: The point of initial equilibrium

Increase in Supply: supply curve shifts from S1S1 to S2S2. It leads to fall in price from OP1 to OP2

Fall in price causes extension of demand and contraction of supply

K: New Equilibrium Point.

OP1: New Equilibrium Price

OQ2: New Equilibrium Quantity.

Decrease in Supply

E: The point of initial equilibrium

Decrease in supply: supply curve shifts from S1S1 to S2S2

It leads to rise in price from OP1 to OP2

K: New equilibrium point

OP1: New equilibrium price

OQ2: New equilibrium quantity.

Some Exceptional Situations

Effect of Change in Demand when Supply in Perfectly Elastic

When the supply curve is perfectly elastic i.e parallel to X-axis, a change in demand does not affect the equilibrium price. It only changes the equilibrium quantity.

Effect of Change in Demand when Supply is Perfectly Inelastic

When the supply curve is perfectly inelastic i.e parallel to Y-axis, a change in demand does not affect the equilibrium quantity. It only changes the equilibrium price.

Effect of Change in Supply when Demand is Perfectly Elastic

When the demand curve is perfectly elastic i.e parallel to X-axis, a change in supply does not affect the equilibrium price. It only changes the equilibrium quantity.

Effect of Change in Supply when Demand is Perfectly Inelastic

When the demand curve is perfectly inelastic i.e parallel to Y-axis, a change in supply does not affect the equilibrium quantity. It only changes the equilibrium price.

Simultaneously Increase in Demand and Supply 

Increase in Demand  > Increase in Supply

  • It causes excess demand
  • Accordingly, equilibrium price rises and equilibrium quantity increases.
  • Rise in price causes contraction of demand & extension of supply

Increase in Demand = Increase in Supply

  • It keeps supply and demand in a state of equilibrium corresponding to the same price.
  • There is no change in equilibrium price
  • Equilibrium quantity increases.

 Increase in Demand< Increase in Supply

  • It leads to excess supply.
  • Accordingly, equilibrium price falls and equilibrium quantity increases.
  • Fall in price causes extension of demand and contraction of supply

Simultaneously Decrease in Demand and Supply 

Decrease in Demand > Decrease in Supply 

  • It is a situation of excess supply.
  • Equilibrium price tends to fall & equilibrium quantity decreases.
  • Because of a fall in price, there is extension of demand & contraction of supply.

Decrease in Demand = Decrease in Supply 

  • It keeps Supply & Demand in a state of
  • equilibrium corresponding to the same price.
  • There is no change in equilibrium price
  • Equilibrium quantity reduces from OQ1 to OQ2

Decrease in Demand < Decrease in Supply 

  • It is a situation of excess demand.
  • Equilibrium price rises & equilibrium quantity decreases.
  • Because of rise in price, there is contraction of demand and extension of supply.

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