Solution of Chapter 5. Market Equilibrium (Introductory Microeconomics Book)

Explain market equilibrium.

When do we say there is excess demand for a commodity in the market?

When do we say there is excess supply for a commodity in the market?

What will happen if the price prevailing in the market is –

(i) Above the equilibrium price?

(ii) Below the equilibrium price?

Explain how price is determined in a perfectly competitive market with fixed number of firms.

Suppose the price at which equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?

At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is equilibrium quantity determined in such a market?

How is the equilibrium number of firms determined in a market where entry and exit is permitted?

How are equilibrium price and quantity affected when income of the consumers

(a) increase? (b) decrease?

Using supply and demand curves, show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.

How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?

If the price of a substitute(Y) of good X increases, what impact does it have on the equilibrium price and quantity of good X?

Compare the effect of shift in demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.

Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

How are the equilibrium price and quantity affected when –

(a) Both demand and supply curves shift in the same direction?

(b) Demand and supply curves shift in opposite directions?

In what respect do the supply and demand curves in the labour market differ from those in the goods market?

How is the optimal amount of labour determined in a perfectly competitive market?

How is the wage rate determined in a perfectly competitive labour market?

Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?

A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exit is permitted. Explain.

Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:

q^D = 700 – p

q^S = 500 + 3p for p ≥ 15

= 0 for 0 ≤ p < 15

Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than Rs 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?

Considering the same demand curve as in exercise 22, now let us allow for free entry and exit of the firms producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained as

(a) What is the significance of p = 20?

(b) At what price will the market for X be in equilibrium? State the reason for your answer.

(c) Calculate the equilibrium quantity and number of firms.

Suppose the demand and supply curves of salt are given by:

q^D = 1,000 – p q^S = 700 + 2p

(a) Find the equilibrium price and quantity.

(b) Now suppose that the price of an input used to produce salt has increased so that the new supply curve is

q^S = 400 + 2p

How does the equilibrium price and quantity change? Does the change conform to your expectation?

(c) Suppose the government has imposed a tax of Rs 3 per unit of sale of salt. How does it affect the equilibrium price and quantity?

Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?