UNIT – 4�� MARKET EQUILIBRIUM � UNDER � PERFECT COMPETITION

MEANING OF MARKET EQUILIBRIUM

Market Equilibrium is defined as a state of

the market when demand for a commodity

is equal to its supply ,corresponding to a

particular price.In short, Market

equilibrium is a state where MDx=MSx

EQUILIBRIUM PRICE

Equilibrium Price is the price at

which market demand=market

supply.

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EQUILIBRIUM QUANTITY

Equilibrium quantity is that quantity which corresponds to equilibriumprice.Equilibrium quantity leaves no excess demand or excess supply in the market because in this situation MDx=MSx

MARKET EQUILIBRIUM UNDER� PERFECT COMPETITION

• Market equilibrium under perfect competition depends upon two forces i.e.

Market Demand and

Market Supply

• Market equilibrium struck at a point where at the prevailing price in the market,quantity demanded is equal to quantity supplied.There is no excess demand or excess supply in the market.

MARKET DEMAND

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

FACTORS AFFECTING MARKET DEMAND

• Income of the buyer
• Price of complementary goods
• Price of related goods
• Taste and preferences
• Environment

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MARKET SUPPLY

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

FACTORS AFFECTING MARKET SUPPLY

• Input price
• Production technique
• Price of related goods
• Business expectations
• Goal of the firm
• Government policy

THREE BASIC ASSUMPTIONS OF � MARKET EQUILIBRIUM UNDER � PERFECT COMPETITION

• Price and quantity supplied are positively related to each other.
• Price and quantity demand are negatively related to each other.
• Forces of supply and demand operate freely without any government intervention.

SITUATION OF EXCESS DEMAND� AND EXCESS SUPPLY

• In case of Excess demand,market demand exceeds market supply.

[MDx>MSx]

• In case of Excess supply,market supply exceeds market demand.

[MSx>MDx]

Situation of excess demand and excess supply is autostabilise because forces of demand and �supply act is such a way that �market again attain its equilibrium.

CHAIN EFFECT OF SHIFT IN DEMAND

Shift in demand refers to increase in demand

or decrease in demand.It occurs owning to

change in determinants of demand ,other than

own price of the commodity.

Shift in demand-

• Increase in demand
• Decrease in demand

CHAIN EFFECT OF SHIFT IN SUPPLY

Shift in supply refers to to increase in supply or

decrease in supply it occurs due to change in

determinants of supply other than own price of

the commodity.

Shift in supply-

• Increase in supply
• Decrease in supply

SIMULTANEOUS INCREASE IN� DEMAND AND SUPPLY

There are three situations-

SITUATION-1:Increase in demand=Increase in supply.

SITUATION-2:Increase in demand>Increase in supply.

SITUATION-3:Increase in demand<Increase in supply.

SITUATION-1:INCREASE IN � DEMAND=INCREASE IN SUPPLY

Here, both demand and supply both are increasing equally.

Equilibrium price remain same.

Equilibrium quantity increases from OQ to OQ1.

Market equilibrium makes a rightward move from E to E1.

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SITUATION-2:INCREASE IN � DEMAND>INCREASE IN SUPPLY

In this situation,

Market equilibrium shifts rightward from E to E1.

Equilibrium price rises from OP to OP1

And

Equilibrium quantity increases from OQ to OQ1.

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SITUATION-3:INCREASE IN� DEMAND<INCREASE IN SUPPLY

In this situation,market equilibrium shifts rightward from E to E1.

Equilibrium price falls from OP to OP1.

Equilibrium quantity increases from OQ to OQ1.

SIMULTANEOUS DECREASE IN � DEMAND AND SUPPLY

There are three situations-

Situation-1:Decrease in demand=Decrease in supply.

Situation-2:Decrease in demand>Decrease in supply.

Situation-3:Decrease in demand<Decrease in supply.

SITUATION-1:DECREASE IN �DEMAND=DECREASE IN SUPPLY

In this situation,

Market equilibrium shifts backward from E to E1.

Equilibrium price remain same.

Equilibrium quantity decreases from OQ to OQ1.

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SITUATION-2:DECREASE IN � DEMAND >DECREASE IN SUPPLY

In this situation, market equilibrium shifts

Leftward from E to E1.

Equilibrium price falls from OP to OP1

And

Equilibrium quantity decreases from OQ to OQ1.

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SITUATION-3:DECREASE IN � DEMAND<DECREASE IN SUPPLY

In this situation,

Market equilibrium shifts leftward from E to E1.

Equilibrium price rises from OP to OP1

And

Equilibrium quantity dereases from OQ to OQ1.

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THANKYOU

EFFORTS BY

SAROJ KUMARI

PGT ECONOMICS