Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

6.2.1- Equilibrium and Disequilibrium

Equilibrium in general means a state of balance. Forces working in opposite

directions are brought to balance. A position from where there is no
tendency to change unless there is a change in the forces influencing the
equilibrium. Hence equilibrium refers to a state of rest.

With reference to price determination in the market, Equilibrium refers to a

situation in which the quantity demanded of a commodity equals the
quantity supplied of the commodity.

Disequilibrium refers to a situation in the market when the quantity

demanded is not equal to the quantity supplied

6.2.2 – Equilibrium Price- is the price at which the quantity demanded of a

commodity equals the quantity supplied.

At equilibrium price, consumers are willing to purchase the same quantity of

a commodity that producers are willing to sell. This quantity is called
Equilibrium quantity.

When price equals Equilibrium Price and quantity for demand and supply
equals Equilibrium Quantity, there is Market Equilibrium. In this situation, all
three, i.e. price, demand, supply are in equilibrium. There is no tendency for
the price, quantity demanded, quantity supplied to change, unless there is a
change in the forces influencing the equilibrium

Equilibrium price clears the market, since quantity demanded is equal to

quantity supplied. Hence, there is no unsold stock at equilibrium price

Q. What price is determined somewhere between marginal cost of

production and marginal utility?

Page 1 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

Ans. Demand for a good is generated by consumers and he is prepared to pay

a price for it, as it gives him utility. The maximum price that a consumer will
pay for a good will be equal to its marginal utility. Hence, marginal utility sets
the highest price limit for a commodity

Supply of goods is from producers, who incur a cost of production and aim to
earn some profit. The minimum price at which a producer will sell the
commodity must be equal to its marginal cost of production. Hence, marginal
cost of production sets the lowest limit for the price of a commodity

The commonly agreed price between consumers and producers, determined

by the market forces of demand and supply is the equilibrium price, which is
determined somewhere between marginal cost of production (minimum
limit) and marginal utility (maximum limit)

6.3- Equilibrium Price and Quantity in a Competitive Market

Q. How is equilibrium price determined by the market forces of demand and

supply? What mechanism brings about equilibrium?

OR

Q. Illustrate how the forces of demand and supply operate in a market to

determine equilibrium price and quantity

OR

Q. Explain how equilibrium price can be determined with the help of:

i. Demand and supply schedules

ii. Demand and supply curves

Page 2 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

Ans. Price is determined in a competitive market through the interaction of

market demand and market supply. No single consumer or seller can
influence the market price. Market demand is an inverse function of price.
Market supply is directly related to price. The lower the price more is the
quantity demanded and the higher the price more is the quantity supplied.

Combined demand and supply schedules show the operation of the Law of
Demand and Law of Supply in the Schedule below.

Table 6.1: Demand and Supply Schedule for Shirts

Price (₹ Quantity Quantity Market Effect on

per shirt) Demanded Supplied (000 Position (Excess Price
(000 shirts per shirts per Supply, Excess (falls↓,
month) month Demand, rises↑,
Equilibrium equilibrium
quantity) price↔)

1000 30 56 Excess Supply ↓

900 40 50 Excess Supply ↓

800 45 45 Equilibrium ↔

700 55 35 Excess Demand ↑

600 70 20 Excess Demand ↑

At price of ₹800, the quantity demanded equals quantity supplied at 45000

shirts. Hence equilibrium price is ₹800 and equilibrium quantity 45000 shirts.

Page 3 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

At prices below ₹800, quantity demanded exceeds quantity supply. The

amount by which quantity demanded exceeds quantity supply is ‘excess
demand’. Consumers may offer higher prices in this situation of shortage.
Hence a situation of ‘excess demand’, will lead to rise in prices until markets
reach equilibrium price, ₹800 and equilibrium quantity, 45000 shirts.

At prices higher than ₹800, quantity supply exceeds quantity demand. The
amount by which quantity supply exceeds quantity demand is ‘excess
supply’. Producers may sell at a lower price to get rid of excess supply.
Hence, a situation of ‘excess supply’, will lead to fall in prices until markets
reach equilibrium price, ₹800 and equilibrium quantity, 45000 shirts.

At any price above ₹800, a situation of excess supply pushes down the price.
At any price below ₹800, a situation of excess demand pushes up the price.
Only at equilibrium price of ₹800, quantity demand equals quantity supply
and there is no tendency for price, quantity, supply to change.

Page 4 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

Quantity demand and supply is on X-axis. Price is on Y-axis. Demand curve

DD intersects Supply Curve SS at Equilibrium Point E. OP is the Equilibrium
Price and OQ is the Equilibrium Quantity.

If price rises to OP₁, quantity demand falls from PE (=OQ) to P₁A. Quantity
supply increases from PE to P₁B. This creates excess supply AB. Producers
reduce price and eventually again equilibrium price OP prevails.

If price falls to OP₂, quantity demand increases from PE (=OQ) to P₂L.

Quantity supply falls to P₂K. This creates excess demand KL. Consumers offer
higher prices which push up prices and again equilibrium price OP prevails.

{This is a situation of Stable Equilibrium, which, if displaced due to some

small disturbance, brings forces in operation (process of haggling and
bargaining) to restore initial equilibrium}.

In a competitive market, actual price tends to be equilibrium price at which

demand equals supply. This is the supply and demand model. Both forces of
demand and supply are essential to determine the price of a commodity.
Hence demand and supply are similar to “the two blades of a scissor”

6.4.1- Effect of Changes in Demand (Shifts in Demand Curve) on Equilibrium

Price and Equilibrium Quantity

Shift in demand curve (Change in Demand-increase or decrease), Supply

remains constant- Change in equilibrium price and equilibrium quantity

Page 5 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

D₀D₀ and SS are the initial demand and supply curves. E₀ is equilibrium point.
OP₀ equilibrium price. OQ₀ equilibrium quantity.

Increase in Demand causes a rightward shift in Demand Curve. D₀D₀ shifts

rightward to D₁D₁. Supply curve SS is unchanged. At initial price OP₀, there
will emerge a situation of excess demand. This would exert an upward
pressure on the price. The price would continue to rise till it reaches OP₁
where Demand and Supply would be equal again. Intersection of D₁D₁ and SS
gives new Equilibrium Point E₁, OP₁ and OQ₁ are the new Equilibrium Price
and Equilibrium Quantity. Hence Increase in demand (rightward shift of
demand curve) causes an increase in both equilibrium price and equilibrium
quantity

Decrease in Demand causes a leftward shift in Demand Curve. D₀D₀ shifts to

the left to D₂D₂. Supply curve SS is unchanged. At initial price OP₀, there will
emerge a situation of excess supply. This would exert a downward pressure
on the price. The price would continue to fall till it reaches OP₂ where

Page 6 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

Demand and Supply would be equal again. Intersection of D₂D₂ and SS gives
new Equilibrium Point E₂, OP₂ and OQ₂ are the new Equilibrium Price and
Equilibrium Quantity. Hence Decrease in demand (leftward shift of demand
curve) causes a decrease in both equilibrium price and equilibrium quantity

6.4.2- Effect of Changes in Supply (Shifts) on Equilibrium Price and

Equilibrium Quantity

Shift in supply curve (Change in Supply-increase or decrease), Demand

remains constant- Change in equilibrium price and equilibrium quantity

DD and S₀S₀ are the initial demand and supply curves. E₀ is equilibrium point.
OP₀ equilibrium price. OQ₀ equilibrium quantity.

Increase in Supply causes a rightward shift in Supply Curve. S₀S₀ shifts

rightward to S₁S₁. Demand curve DD is unchanged. At initial price OP₀, there
will emerge a situation of excess supply. This would exert a downward
pressure on the price. The price would continue to fall till it reaches OP₁
where Demand and Supply would be equal again. Intersection of S₁S₁ and DD

Page 7 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

gives new Equilibrium Point E₁, OP₁ and OQ₁ are the new Equilibrium Price
and Equilibrium Quantity. Hence Increase in supply (rightward shift in supply
curve) causes a decrease in equilibrium price and increase in equilibrium
quantity

Decrease in Supply causes a leftward shift in Supply Curve. S₀S₀ shifts

leftward to S₂S₂. Demand curve DD is unchanged. At initial price OP₀, there
will emerge a situation of excess demand. This would exert an upward
pressure on the price. The price would continue to rise till it reaches OP₂
where Demand and Supply would be equal again. Intersection of S₂S₂ and DD
gives new Equilibrium Point E₂, OP₂ and OQ₂ are the new Equilibrium Price
and Equilibrium Quantity. Hence Decrease in supply (leftward shift in supply
curve) causes an increase in equilibrium price and decrease in equilibrium
quantity

6.4.3-Effects of Simultaneous Changes (Shifts) in Demand and Supply

1. When Equilibrium Price Remains the Same: When Demand and Supply
increase in the same proportion, equilibrium price remains unchanged,
equilibrium quantity increases.

Page 8 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

DD and SS are the initial demand and supply curves. E is equilibrium point at
intersection of DD and SS curves. OP is equilibrium price. OQ is equilibrium
quantity.

Increase in Demand -causes a rightward shift in Demand Curve from DD to

D₁D₁.

Increase in Supply - causes a rightward shift in Supply Curve from SS to S₁S₁.

Here Increase in Demand is equal to Increase in Supply because they increase

in the same proportion

Equilibrium shifts to E₁ at intersection of D₁D₁ and S₁S₁ curves. Equilibrium

quantity increases from OQ to OQ₁, but price remains unchanged at OP.

2. When Equilibrium Price Rises: When Increase in Demand is more than

increase in supply, both equilibrium price and equilibrium quantity increase

Page 9 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

DD and SS are the initial demand and supply curves. E is equilibrium point at
intersection of DD and SS curves. OP is equilibrium price. OQ is equilibrium
quantity.

Increase in Demand -causes a rightward shift in Demand Curve from DD to

D₁D₁.

Increase in Supply - causes a rightward shift in Supply Curve from SS to S₁S₁.

Both Demand and Supply increase, but increase in demand is by a larger

proportion than increase in supply.

Equilibrium shifts to E₁ at intersection of D₁D₁ and S₁S₁ curves. Equilibrium

price increases from OP to OP₁ and Equilibrium Quantity increases from OQ
to OQ₁

3. When Equilibrium Price Falls: When Increase in Supply is more than

increase in demand, Equilibrium price Falls, but equilibrium quantity
increases

Page 10 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

DD and SS are the initial demand and supply curves. E is equilibrium point at
intersection of DD and SS curves. OP is equilibrium price. OQ is equilibrium
quantity.

Increase in Demand -causes a rightward shift in Demand Curve from DD to

D₁D₁.

Increase in Supply - causes a rightward shift in Supply Curve from SS to S₁S₁.

Both Demand and Supply increase, but increase in Supply is by a larger

proportion than increase in Demand.

Equilibrium shifts to E₁ at intersection of D₁D₁ and S₁S₁ curves. Equilibrium

price decreases from OP to OP₁ and Equilibrium Quantity increases from OQ
to OQ₁

The effects of simultaneous increase in Demand and Supply on equilibrium

price and quantity are shown above. Similarly, the effects of Simultaneous
Decrease in Demand and Supply on equilibrium price and quantity can be
shown by taking D₁D₁ and S₁S₁ as the initial Demand and Supply curves and

Page 11 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

DD and SS as the new Demand and Supply curves. In this case, Equilibrium
Quantity will change from E₁ to E, Equilibrium price will change from OP₁ to
OP and Equilibrium quantity from OQ₁ to OQ.

6.4.4- Some Special Cases of Equilibrium

1. Perfectly Elastic and Perfectly Inelastic Demand Curve:

Q. When will a change in supply have no impact on the equilibrium price of a

commodity? Show with the help of a diagram

Ans. When Demand Curve is perfectly elastic (parallel to X-axis), a change in

supply (Increase or Decrease) causes a change in equilibrium quantity, but
the equilibrium price (OP) remains the same.

Q. When will a change in supply have no impact on the equilibrium quantity

of a commodity? Show with the help of a diagram

Page 12 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

Ans. When Demand Curve is Perfectly Inelastic (Parallel to Y-axis), a change

in supply (Increase or Decrease), causes a change in equilibrium price, but
Equilibrium quantity remains the same (OM).

2. Perfectly Elastic and Perfectly Inelastic Supply Curve:

Q. When will a change in Demand have no impact on the Equilibrium Price of

a commodity? Show with the help of a diagram

Ans. When Supply Curve is perfectly Elastic (parallel to X-axis), a change in

Demand causes a change in equilibrium quantity, but the equilibrium price
(OP) remains the same.

Q. When does the Equilibrium Quantity in a market remain unchanged with a

change in demand? Show with the help of a diagram

Page 13 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

Ans. When Supply Curve is perfectly Inelastic (parallel to Y-axis), a change in

Demand causes a change in equilibrium price, but the equilibrium quantity
remains the same (OM)

6.6- APPLICATIONS OF TOOLS OF DEMAND AND SUPPLY- PRICE CONTROL

1. PRICE CEILING-is the maximum price limit which suppliers can charge
for a commodity. Price Ceiling benefits the consumer. To be meaningful, it
is fixed below the equilibrium price.

2. FLOOR PRICE- is the minimum price at which sellers may sell a

particular good or service. It benefits the producer or supplier. To be
meaningful, it is fixed higher than the equilibrium price.

6.6.1- MAXIMUM PRICE LEGISLATION- PRICE CEILING AND RATIONING

Price ceiling is fixed by the Government and is the maximum legal price
which suppliers can charge for a particular good or service. Example- In
India, price ceiling is generally imposed by government on certain
essential food items like rice, wheat, sugar, especially in situation of food
shortage, on certain essential medicines etc. This is done to ensure that

Page 14 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

essential goods are available at affordable prices (below the market

determined equilibrium price) particularly to lower-income consumers.

Implications of Price Ceiling Policy:

1. Effect on Price and Quantity: Price ceiling has no effect if it is set above
equilibrium price. OP₀ is Equilibrium Price and OQ₀ is equilibrium
quantity. At a higher price OP₁, there will emerge excess supply GH,
which will pull down the price to OP₀ as equilibrium price, OQ₀ as
equilibrium quantity at equilibrium point E.

To be meaningful, price ceiling must be fixed below the equilibrium price.

If Government fixes a price ceiling OP₂ below Equilibrium Price OP₀, there
will be excess demand, leading to shortage KL (quantity demanded OQ₂ -
quantity supplied OQ₁). Hence, at ceiling price OP₂, quantity actually
bought and sold will be OQ₁.

2. Allocation of Available Supply: At a controlled price, supply is less than

demand. Hence the limited supply has to be allocated among buyers at
the controlled price.

Page 15 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

(i) First come, First served: The limited supply is distributed on a first
come first served basis, particularly in times of shortage. People
have to stand in long queues and waste a lot of time
(ii) Allocation by Seller’s Preferences: The shopkeeper will decide who
will get the scarce product. He will normally give preference to his
regular customers
(iii) Rationing: is a system of distribution of a specified quantity of a
commodity, at a price fixed by the Government. The Government
issues a ration card or coupon to each family which enables it to
purchase the specified quantity of the product at fixed price.
Example- BPL families can purchase their quota of food grains from
allocated ration shops against their ration cards.
3. Emergence of Black Marketing: Black Market is a market in which
goods are sold illegally at prices higher than a legally fixed price by the
Government. It occurs due to shortage of goods at the price ceiling
fixed by the Government.

6.6.2- MINIMUM PRICE LEGISLATION – FLOOR PRICE

Government may, sometimes fix a minimum price at which sellers may

sell a particular good or service. This is called Floor Price or Minimum
Support Price. Floor Price or Minimum Support Price (MSP) is fixed to
ensure that producers get a minimum remunerative price for their
product. This will motivate them to produce more. Example- in India,
Government fixes MSP for agricultural products like wheat, rice etc. and
also minimum wages of labour.

Page 16 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

DD demand curve and SS supply curve intersect at Equilibrium point E.

OP₀ is the Equilibrium Price and OQ₀ is the Equilibrium Quantity. If
Government fixes minimum price OP₁ below Equilibrium Price OP₀ it will
have no effect. At this lower price there will be excess demand GH which
will push the price back to Equilibrium Price OP₀.

To be meaningful, Floor price has to be fixed above Equilibrium Price. If

Government fixes the Floor price at OP₂ above Equilibrium Price OP₀,
there will be a situation of excess supply Q₁Q₂= KL.

Effects of Minimum Price:

1. Fixing of Minimum Price causes a surplus of the commodity. Producers

get a higher price OP₂ than equilibrium price, but actual quantity
bought and sold falls to OQ₁, lower than equilibrium quantity OQ₀.
2. Producers may find it difficult to sell their product at the legal
minimum price. Hence to dispose of unsold stock they are compelled

Page 17 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

to flout the minimum price legislation and sell off at prices below
minimum price set by Government
3. To maintain MSP, Government purchases surplus stock unsold at
minimum price from producers. Government of India procures surplus
stock of food grains from farmers at MSP and builds up buffer stocks of
food grain

THE END

Worksheet
1. What is meant by equilibrium price?
2. Define excess demand.
3. Define excess supply.
4. What happens to the equilibrium price of a good when supply of that good
increases?
5. What happens to the price of a good when, demand for the good increases?
6. What would be the effect on equilibrium price when demand and supply increase by
the same magnitude?
7. When will an increase in demand lead to an increase in price, but no change in the
quantity supplied?
8. When will a change in demand have no impact on the equilibrium price of a
commodity? Show with the help of a diagram.
9. When does the equilibrium quantity in a market remain unchanged with a change in
demand? Show it with the help of a diagram.
10. When will a change in supply have no effect on the price of a commodity?
11. When do changes in supply have no effect on the equilibrium quantity?
12. Distinguish between excess demand and excess supply.
13. What do you mean by stable equilibrium?
14. What is price ceiling?
15. What do you mean by floor price?
16. Distinguish between price ceiling and floor price.

Page 18 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

3 Marks Questions:
1. What is meant by equilibrium price? How do the forces of demand and supply
determine the equilibrium price?
2. Explain with the help of a diagram how equilibrium price and equilibrium quantity
are affected by changes in the demand for a commodity, with the supply remaining
constant?
3. Explain with the help of a diagram how equilibrium price of a commodity is affected
by changes in its supply, with demand remaining constant?
4. Equilibrium price remains the same even if its demand and supply both, increase.
Explain with the help of a diagram.
5. How do the following affect the equilibrium price and quantity? Show with the help
of a diagram:
i) A change in consumers’ tastes in favour of the product
ii)A reduction in consumers’ income
iii)An increase in the price of complementary goods.
6. With the help of diagrams, show the effect of change in demand (or shift in demand
curves) on equilibrium price and quantity of a commodity, when:
i) supply curve is perfectly elastic,
ii) supply curve is perfectly inelastic.
7. With the help of diagrams, show the effect of change in supply (or shift in supply
curves) on the price and quantity sold in the following situations:
i) when demand curve is perfectly inelastic,
ii) when demand curve is perfectly elastic.
8. What will be the effect on equilibrium price, when the change in demand is greater
than the change in supply? Explain with the help of a diagram.
9. What will be the effect on equilibrium price, when change in supply is greater than
the change in demand? Explain with the help of a diagram.
10. What is the effect of price ceiling on equilibrium price and output?
11. How is the problem of allocating limited supply tackled due to the effect of price
ceiling on equilibrium price?
12. Explain the emergence of black marketing under, price ceiling.
13. Explain minimum price legislation.
14. Explain the effects of minimum price legislation.

Page 19 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

6 Marks Questions:
1. Explain with the help of diagrams the effects of Simultaneous Changes
(shifts) in demand and supply.
2. Explain the effects of Changes (shifts) in demand and supply on equilibrium price and
equilibrium quantity.
3. Explain the determination of equilibrium price and quantity in a competitive market
with the help of a schedule and a diagram.

MCQs
Q1. What is determined between marginal cost of production and marginal utility?
a) Price
b) Demand
c) Equilibrium Price
d) Supply

Q2. When demand increases in greater proportion than increase in supply, what will be the
effect on
equilibrium price?
a) Equilibrium price falls
b) Equilibrium price rises
c) Equilibrium price remains constant
d) None of the above

Q3. What will be the effect on equilibrium price if demand and supply increase in equal
proportion?
a) Equilibrium price falls
b) Equilibrium price rises
c) Equilibrium price remains constant
d) None of the above
Q4. Displacement due to some small disturbance, brings forces in operation which restore
the initial
equilibrium position is known as?

Page 20 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

a) Price
b) Excess demand
c) Excess supply
d) Stable equilibrium price

Q5. How does an increase in input price affect the equilibrium price and equilibrium
quantity of a product?
a) Equilibrium price rises and equilibrium quantity falls.
b) Equilibrium price falls and equilibrium quantity rises.
c) Equilibrium price and equilibrium quantity remain constant
d) None of the above.

Q6. What will be the effect on equilibrium price and quantity of a given commodity, when
price of a complementary good falls?
a) Equilibrium price rises and equilibrium quantity falls.
b) Equilibrium price falls and equilibrium quantity rises.
c) Equilibrium price and equilibrium quantity remain constant
d) Equilibrium price and equilibrium quantity both increase

Q7. How does decrease in consumer’s income affect the equilibrium price and quantity of
normal goods?
a) Equilibrium price rises and equilibrium quantity falls.
b) Equilibrium price falls and equilibrium quantity rises.
c) Equilibrium price and equilibrium quantity both decrease
d) Equilibrium price and equilibrium quantity both increase.

Q8. When will a change in supply have no effect on the price of a commodity?
a) When demand curve is perfectly inelastic
b) When demand curve is relatively elastic
c) When demand curve is perfectly elastic
d) None of the above

Q9. When does change in supply have no effect on equilibrium quantity?

Page 21 of 24
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Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

a) When demand curve is perfectly elastic

b) When demand curve is relatively elastic
c) When demand curve is perfectly inelastic
d) None of the above

Q10. What situation occurs when market price is more than the equilibrium price?
a) Situation of stable equilibrium
b) Situation of excess demand
c) Situation of excess supply
d) None of the above

Q11. A system of distribution, of a specified quantity of a product, at the price fixed by the
government.
a) Floor price
b) Black Marketing
c) Rationing
d) None of the above

Q12. A market, in which goods are sold illegally, at prices higher than, a legally fixed price
by the government.
a) Price ceiling
b) Minimum Support Price
c) Black Marketing
d) Rationing

Q13. When price is fixed above the equilibrium price by the government, it is known as?
a) Maximum Price Legislation
b) Price Ceiling
c) Minimum Support Price
d) Market price

Q14. When price is fixed below the equilibrium price by the government, it is known as?

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 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

a) Minimum Price Legislation

b) Price Ceiling
c) Minimum Support Price
d) Market price

Q15. Under Price ceiling, which of the following are the methods of allocation of limited
supply by the
Government?
a) Sellers’ Preferences
b) Rationing
c) First come, first served
d) All of the above.

Q16. When will an increase in demand result in an increase in price, but no change in the
quantity supplied?
a) When supply curve is perfectly elastic
b) When supply curve is relatively elastic
c) When supply curve is perfectly inelastic
d) None of the above

Q17. When will a change in demand have no impact on the equilibrium price of a
commodity?
a) When supply curve is perfectly elastic
b) When supply curve is relatively elastic
c) When supply curve is perfectly inelastic
d) None of the above

Q18. What will be the effect on equilibrium price and quantity when there is a fall in the
price of substitute
goods?
a) Equilibrium price rises and equilibrium quantity falls.
b) Equilibrium price falls and equilibrium quantity rises.
c) Equilibrium price and equilibrium quantity both decrease

Page 23 of 24
 Lilavatibai Podar High School, ISC

Academic Year 2024 – 2025

Subject: Economics Grade: 12 C1, C2, Humanities

CHAPTER 6 – MARKET MECHANISM: EQUILIBRIUM PRICE AND QUANTITY IN A COMPETITIVE

MARKET

(NOTES & WORKSHEET)

d) Equilibrium price and equilibrium quantity both increase.

Q19. How does an increase in consumer’s income affect the equilibrium price and quantity
of inferior goods?
a) Equilibrium price rises and equilibrium quantity falls.
b) Equilibrium price falls and equilibrium quantity rises.
c) Equilibrium price and equilibrium quantity both decrease
d) Equilibrium price and equilibrium quantity both increase.

Q20. Which of the following are the main effects of Floor Price?
a) First come first served
b) Rationing
c) Buffer stock by the government
d) Sellers’ Preferences
THE END

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