NCERT Book Class 12 Economics (Microeconomics) Chapter 5 Market Equilibrium

Chapter 5

Price
Market Equilibrium
Market SS

pf

p*

This chapter will be built on the foundation laid down in Chapters p1
DD
2 and 4 where we studied the consumer and firm behaviour when
they are price takers. In Chapter 2, we have seen that an O q'1 q'1 q* q2 q1
individual’s demand curve for a commodity tells us what quantity Quantity
a consumer is willing to buy at different prices when he takes price
as given. The market demand curve in turn tells us how much of
the commodity all the consumers taken together are willing to
purchase at different prices when everyone takes price as given.
In Chapter 4, we have seen that an individual firm’s supply curve
tells us the quantity of the commodity that a profit-maximising
firm would wish to sell at different prices when it takes price as
given and the market supply curve tells us how much of the
commodity all the firms taken together would wish to supply at
different prices when each firm takes price as given.
In this chapter, we combine both consumers’ and firms’
behaviour to study market equilibrium through demand-supply
analysis and determine at what price equilibrium will be attained.
We also examine the effects of demand and supply shifts on
equilibrium. At the end of the chapter, we will look at some of the
applications of demand-supply analysis.

5.1 EQUILIBRIUM, EXCESS DEMAND, EXCESS SUPPLY
A perfectly competitive market consists of buyers and sellers who
are driven by their self-interested objectives. Recall from Chapters
2 and 4 that objectives of the consumers are to maximise their
respective preference and that of the firms are to maximise their
respective profits. Both the consumers’ and firms’ objectives are
compatible in the equilibrium.
An equilibrium is defined as a situation where the plans of all
consumers and firms in the market match and the market clears.
In equilibrium, the aggregate quantity that all firms wish to sell
equals the quantity that all the consumers in the market wish to
buy; in other words, market supply equals market demand. The
price at which equilibrium is reached is called equilibrium price
and the quantity bought and sold at this price is called equilibrium
quantity. Therefore, (p*, q*) is an equilibrium if
qD(p∗) = qS(p∗)