NCERT Solutions for Class 12 Economics Chapter 5: Market Equilibrium (NCERT 2026–27)
These Class 12 Economics Chapter 5 solutions cover Market Equilibrium from the Introductory Microeconomics textbook for the 2026–27 session. The chapter combines consumer behaviour (the market demand curve) and firm behaviour (the market supply curve) to determine the equilibrium price and equilibrium quantity in a perfectly competitive market. You will learn equilibrium with a fixed number of firms and with free entry and exit, the effects of demand and supply shifts, wage determination in the labour market, and the applications of price ceiling and price floor. Below are step-by-step answers to all 25 NCERT exercise questions, with every numerical solved and verified, plus key concepts, extra practice, MCQs, Assertion–Reason and FAQs.
Chapter 5, Market Equilibrium, studies how price and quantity are jointly determined in a perfectly competitive market by bringing together the market demand curve and the market supply curve. An equilibrium is a situation where the plans of all consumers and firms match and the market clears, i.e. market demand equals market supply, qD(p*) = qS(p*). Whenever supply does not equal demand, an ‘Invisible Hand’ raises price under excess demand and lowers it under excess supply until equilibrium is restored. With a fixed number of firms, a rightward (leftward) shift in demand raises (lowers) both equilibrium price and quantity, while a supply shift moves price and quantity in opposite directions. With free entry and exit, price always settles at the firms’ minimum average cost, so demand shifts change only quantity and the number of firms, not price. The chapter also derives wage determination in the labour market (w = MRPL) and applies demand–supply analysis to government price controls — price ceiling (causes shortage) and price floor (causes surplus).
Key Concepts, Terms & Formulas
Equilibrium: a situation where the plans of all consumers and firms in the market match and the market clears — the aggregate quantity firms wish to sell equals the quantity consumers wish to buy (market supply = market demand).
Equilibrium price (p*) and quantity (q*): the price at which the market clears and the quantity bought and sold at that price; graphically, the point where the market demand and supply curves intersect.
Excess demand: at a given price, market demand exceeds market supply (qD > qS); it pushes the price up. It exists at any price below p*.
Excess supply: at a given price, market supply exceeds market demand (qS > qD); it pushes the price down. It exists at any price above p*.
Fixed number of firms vs free entry and exit: with a fixed number of firms, equilibrium is set by demand–supply intersection. With free entry and exit, firms earn only normal profit, so the equilibrium price equals the minimum average cost of the firms (p = min AC).
Marginal Revenue Product of Labour (MRPL): the extra revenue from employing one more unit of labour, MRPL = MR × MPL. A profit-maximising firm hires labour up to w = MRPL. For a perfectly competitive firm MR = price, so this equals the Value of Marginal Product (VMPL = P × MPL).
Price ceiling: a government-imposed maximum price, set below the equilibrium price (e.g. on wheat, rice, sugar, kerosene); it creates excess demand (a shortage) and may need rationing, leading to queues and black markets.
Price floor: a government-imposed minimum price, set above the equilibrium price (e.g. agricultural price-support, minimum wage); it creates excess supply (a surplus) which the government may have to buy up.
Equilibrium condition: qD(p*) = qS(p*) → solve for p*, then substitute back to get q*.
Excess demand: ED(p) = qD − qS (positive when p < p*)
Excess supply: ES(p) = qS − qD (positive when p > p*)
Free entry & exit: p* = min AC; equilibrium number of firms n0 = q0 ÷ q0f (market output ÷ one firm’s output).
Wage determination: w = MRPL = MR × MPL; in perfect competition w = VMPL = P × MPL.
NCERT Exercises — Full Solutions
All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter Exercises. Answers are original and exam-ready; every numerical is solved step by step and verified.
1. Explain market equilibrium.
ANSWERMarket equilibrium is a situation in which the plans of all buyers and sellers match and the market clears — the aggregate quantity that all firms wish to sell equals the quantity that all consumers wish to buy. In other words, market supply equals market demand: qD(p*) = qS(p*).The price at which this happens is the equilibrium price (p*) and the quantity bought and sold at that price is the equilibrium quantity (q*). Graphically, equilibrium is the point where the market demand curve and the market supply curve intersect, since that is where there is neither excess demand nor excess supply (zero excess demand–zero excess supply).
2. When do we say there is excess demand for a commodity in the market?
ANSWERThere is excess demand for a commodity when, at a given price, the market demand for the commodity is greater than its market supply, i.e. qD > qS. This happens at any price below the equilibrium price. Some consumers are unable to obtain the good (or get too little), so they are willing to pay more, and the price tends to rise towards p*.
3. When do we say there is excess supply for a commodity in the market?
ANSWERThere is excess supply for a commodity when, at a given price, the market supply of the commodity is greater than its market demand, i.e. qS > qD. This happens at any price above the equilibrium price. Some firms are unable to sell all they want, so they lower the price, and the price tends to fall towards p*.
4. What will happen if the price prevailing in the market is
(i) above the equilibrium price?(ii) below the equilibrium price?
ANSWER(i) Price above equilibrium: at a price greater than p*, market supply exceeds market demand, so there is excess supply. Some firms cannot sell their desired output, so they cut prices. As price falls, quantity demanded rises and quantity supplied falls until the market returns to equilibrium at p*.(ii) Price below equilibrium: at a price lower than p*, market demand exceeds market supply, so there is excess demand. Some consumers, unable to obtain the good, bid the price up. As price rises, quantity demanded falls and quantity supplied rises until equilibrium is restored at p*.
5. Explain how price is determined in a perfectly competitive market with fixed number of firms.
ANSWERWith a fixed number of firms, price is determined by the interaction of the market demand curve (DD) and the market supply curve (SS). The demand curve slopes downward (more is bought at lower prices) and the supply curve slopes upward (more is supplied at higher prices). Equilibrium occurs at the price where the two curves intersect, because there market demand equals market supply.At any price above this, excess supply forces firms to cut prices; at any price below it, excess demand pushes prices up. The ‘Invisible Hand’ thus drives the price to the level p* where qD(p*) = qS(p*), and the corresponding quantity q* is the equilibrium quantity.
6. 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?
ANSWERIf the equilibrium price is above the minimum average cost, each existing firm earns supernormal profit (price > min AC). With free entry, this profit attracts new firms into the market.As new firms enter, the market supply curve shifts rightward while demand stays unchanged, so the market price falls. Entry continues until the supernormal profit is wiped out — that is, until the price falls to the level of minimum average cost, where every firm earns only normal profit. At p = min AC no further entry is attracted, so this price prevails.
7. 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?
ANSWERWith free entry and exit, firms supply at the price equal to their minimum average cost (p = min AC). At a higher price they earn supernormal profit and new firms enter; at a lower price they make losses and firms exit. Only at p = min AC does each firm earn normal profit, so this is the prevailing equilibrium price.The equilibrium quantity is then determined by the market demand at this price: q0 = qD(min AC). The number of firms adjusts (through entry/exit) so that total market supply exactly equals this quantity demanded at p = min AC.
8. How is the equilibrium number of firms determined in a market where entry and exit is permitted?
ANSWERIn a market with free entry and exit, the equilibrium price is p0 = min AC and the equilibrium quantity q0 is the market demand at that price. At p0, each identical firm supplies a fixed amount q0f. The equilibrium number of firms is the number needed to supply q0 in total:n0 = q0 ÷ q0f (total market output ÷ output of one firm)
9. How are equilibrium price and quantity affected when income of the consumers
(a) increase?(b) decrease?
ANSWERAssume the commodity is a normal good (the usual case) and the number of firms is fixed, so only the demand curve shifts.(a) Income increases: demand for a normal good rises at each price, so the demand curve shifts rightward. At the old price there is excess demand, pushing the price up. Both the equilibrium price and quantity increase.(b) Income decreases: demand for a normal good falls, so the demand curve shifts leftward. At the old price there is excess supply, pulling the price down. Both the equilibrium price and quantity decrease. (For an inferior good the effects would be reversed, since its demand moves opposite to income.)
10. 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.
ANSWERShoes and socks are complementary goods (used together). When the price of shoes rises, fewer shoes are bought, and since socks are worn with shoes, the demand for socks falls at each price. The demand curve for socks shifts leftward (DD0 → DD1), while the supply curve of socks stays unchanged.On the diagram, the new demand curve cuts the unchanged supply curve at a lower point, so the new equilibrium has a lower price of socks and a smaller quantity of socks bought and sold than before. (Diagram: downward-sloping DD0 and DD1, with DD1 to the left, intersecting an upward-sloping SS at points E and the lower-left point E′.)
11. How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.
ANSWERCoffee and tea are substitute goods. Suppose the price of coffee rises: consumers switch from coffee to tea, so the demand for tea increases at each price and the tea demand curve shifts rightward. With the supply of tea unchanged, the new demand curve cuts the supply curve higher up, so the equilibrium price of tea rises and the equilibrium quantity of tea increases.Conversely, if the price of coffee falls, demand for tea shifts leftward, lowering both the equilibrium price and quantity of tea. (Diagram: upward-sloping SS for tea; demand shifts from DD0 to DD1 on the right, moving equilibrium from E to a higher-right point G with larger price and quantity.)
12. How do the equilibrium price and quantity of a commodity change when price of input used in its production changes?
ANSWERA change in an input price shifts the supply curve (demand is unchanged, as it does not depend directly on input prices).If the input price rises: the marginal cost of production rises, so firms supply less at each price — the supply curve shifts leftward. This creates excess demand at the old price, so the equilibrium price rises and the equilibrium quantity falls.If the input price falls: marginal cost falls, the supply curve shifts rightward, the equilibrium price falls and the equilibrium quantity rises. (Price and quantity move in opposite directions, as always with a supply shift.)
13. 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?
ANSWERWhen the price of good Y rises, consumers buy less of Y and switch to its substitute X. So the demand for X increases at every price, and the demand curve for X shifts rightward, with the supply of X unchanged.As a result, at the old price there is excess demand for X, and the equilibrium price of X rises and the equilibrium quantity of X increases.
14. 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.
ANSWERFixed number of firms: a rightward (leftward) shift in demand changes both the equilibrium price and quantity in the same direction — price and quantity both rise (fall). The effect on quantity is relatively small because the supply curve slopes upward.Free entry and exit: the equilibrium price always equals minimum average cost, so a demand shift has no effect on the equilibrium price at all. Instead it changes the equilibrium quantity and the number of firms (both rise with a rightward shift, fall with a leftward shift). The effect on quantity is larger (more pronounced) than with a fixed number of firms, because firms can freely enter or leave to meet the new demand at the same price.
15. Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.
ANSWERWhen both demand and supply curves shift rightward, both shifts increase the equilibrium quantity, so the equilibrium quantity definitely increases (unambiguous).The effect on price is ambiguous: a rightward demand shift tends to raise price while a rightward supply shift tends to lower it. So the equilibrium price may increase, decrease or remain unchanged, depending on the relative magnitudes of the two shifts. (Diagram: DD0→DD1 and SS0→SS1 both shifted right; new intersection E′ lies to the right of E — clearly higher quantity, while its height relative to E depends on which curve shifted more. If the shifts are equal, price stays the same and only quantity rises.)
16. 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?
ANSWER(a) Same direction: the effect on equilibrium quantity is unambiguous — both shifting rightward raises quantity, both shifting leftward lowers it. The effect on equilibrium price is ambiguous (may rise, fall or stay the same) and depends on the magnitudes of the two shifts.(b) Opposite directions: the effect on equilibrium price is unambiguous — if demand shifts left and supply right, price falls; if demand shifts right and supply left, price rises. The effect on equilibrium quantity is ambiguous and depends on the magnitudes of the shifts. (This is summarised in Table 5.1 of the textbook.)
17. In what respect do the supply and demand curves in the labour market differ from those in the goods market?
ANSWERThe basic difference is in the source of demand and supply. In the goods market, households demand goods and firms supply them. In the labour market this is reversed: households supply labour (hours of work) and firms demand labour.A second difference is the shape of the supply curve. An individual’s labour supply curve can be backward bending (beyond a high wage the worker supplies less labour because the income effect dominates the substitution effect), whereas a goods supply curve is upward sloping throughout. However, the market supply curve of labour is still upward sloping because higher wages attract many more workers. Here ‘labour’ means hours of work, not the number of labourers.
18. How is the optimal amount of labour determined in a perfectly competitive market?
ANSWERA profit-maximising firm hires labour up to the point where the extra cost of the last unit of labour equals the extra benefit from it. The extra cost is the wage rate (w); the extra benefit is the marginal revenue product of labour, MRPL = MR × MPL. So the optimal labour employment satisfies:w = MRPL = MR × MPLFor a perfectly competitive firm, MR equals the price of the commodity, so this becomes w = VMPL = P × MPL. If VMPL > w the firm gains by hiring more labour; if VMPL < w it gains by hiring less. The law of diminishing marginal product makes the labour demand curve downward sloping.
19. How is the wage rate determined in a perfectly competitive labour market?
ANSWERIn a perfectly competitive labour market, the wage rate is determined at the intersection of the market demand curve for labour and the market supply curve of labour — where the labour that households wish to supply equals the labour that firms wish to hire.The demand curve for labour is downward sloping (because of diminishing marginal product, less labour is demanded as the wage rises) and the market supply curve of labour is upward sloping (higher wages attract more workers). The equilibrium wage rate w* is set where these two curves cross, and the corresponding employment is l*.
20. Can you think of any commodity on which price ceiling is imposed in India? What may be the consequence of price-ceiling?
ANSWERExamples in India: price ceilings have been imposed on essential items such as wheat, rice, sugar and kerosene, which are distributed through ration/fair-price shops under the public distribution system.Consequences: A price ceiling fixed below the equilibrium price creates excess demand (a shortage). Since supply is limited, the good must be rationed; this may cause (a) consumers standing in long queues at ration shops, and (b) the rise of a black market, as unsatisfied consumers are willing to pay higher prices. So even though the intention is to help consumers, a price ceiling can end up creating shortages.
21. 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.
ANSWERFixed number of firms: the supply curve is upward sloping. When demand shifts (say rightward), the market moves up along this fixed supply curve, so both price and quantity rise. Because the curve is upward sloping, much of the adjustment shows up as a higher price and only a limited rise in quantity.Free entry and exit: the long-run supply is effectively horizontal at p = min AC. A demand shift cannot change this price — new firms simply enter (or leave) to supply the changed quantity at the same minimum-AC price. So the entire adjustment is in quantity (and number of firms), with no change in price.Hence, compared with free entry/exit, a fixed number of firms gives a larger price effect and a smaller quantity effect for the same demand shift.
22. Suppose the demand and supply curve of commodity X in a perfectly competitive market are given by:
qD = 700 − pqS = 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?
ANSWERWhy supply is zero below Rs 15: Rs 15 is the minimum average variable cost / shut-down price for the firms. At any price below Rs 15, the price does not even cover the firms’ minimum average variable cost, so a profit-maximising firm would rather produce nothing (shut down) than incur a larger loss. Hence market supply is zero for p < 15.Equilibrium price: set qD = qS.700 − p = 500 + 3p700 − 500 = 3p + p ⇒ 200 = 4p ⇒ p* = 50 (which is ≥ 15, so it is valid).Equilibrium quantity: q* = 700 − 50 = 650 units.Check: qS = 500 + 3(50) = 500 + 150 = 650 ✓ (demand = supply). So p* = Rs 50 and q* = 650 units.
23. 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
qSf = 8 + 3p for p ≥ 20 = 0 for 0 ≤ p < 20(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.
ANSWER(a) Significance of p = 20: Rs 20 is the minimum average cost of each firm. Below this price a firm cannot cover its average cost, makes a loss, and would exit; only at or above Rs 20 will a firm produce. So p = 20 is the price below which a single firm’s supply is zero.(b) Equilibrium price: with free entry and exit, the market price is always driven to the firms’ minimum average cost, where each firm earns only normal profit. Therefore the equilibrium price is p* = Rs 20. (If price were above 20, supernormal profit would attract entry, pushing price back down to 20; if below 20, firms would exit, raising price to 20.)(c) Equilibrium quantity: from the demand curve at p = 20, qD = 700 − 20 = 680 units. So the market equilibrium quantity is 680.Output of a single firm at p = 20: qSf = 8 + 3(20) = 8 + 60 = 68 units.Number of firms: n0 = q0 ÷ q0f = 680 ÷ 68 = 10 firms. So at equilibrium, price = Rs 20, quantity = 680 units, supplied by 10 identical firms.
24. Suppose the demand and supply curves of salt are given by:
qD = 1,000 − p qS = 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 qS = 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?
ANSWER(a) Original equilibrium: set qD = qS.1000 − p = 700 + 2p ⇒ 1000 − 700 = 2p + p ⇒ 300 = 3p ⇒ p* = 100.q* = 1000 − 100 = 900 units. (Check: 700 + 2(100) = 900 ✓.)(b) After input-price rise (new supply qS = 400 + 2p):1000 − p = 400 + 2p ⇒ 1000 − 400 = 3p ⇒ 600 = 3p ⇒ p* = 200.q* = 1000 − 200 = 800 units. (Check: 400 + 2(200) = 800 ✓.)So the equilibrium price rises from 100 to 200 and the quantity falls from 900 to 800. This conforms to expectation: a higher input price raises marginal cost and shifts the supply curve leftward, which raises price and lowers quantity.(c) Tax of Rs 3 per unit (on the original supply qS = 700 + 2p): a per-unit tax means sellers now keep only (p − 3) of the price, so they supply according to the price they receive: new supply qS = 700 + 2(p − 3) = 700 + 2p − 6 = 694 + 2p.Set demand = new supply: 1000 − p = 694 + 2p ⇒ 1000 − 694 = 3p ⇒ 306 = 3p ⇒ p* = 102.q* = 1000 − 102 = 898 units. So the tax raises the (consumer) price from Rs 100 to Rs 102 and reduces the quantity from 900 to 898 units — the tax shifts the supply curve up/left, raising price and lowering quantity traded.
25. 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?
ANSWERRent control is a form of price ceiling on the rental price of apartments, set below the market-determined (equilibrium) rent. At the lower controlled rent, the quantity of apartments demanded rises while the quantity that owners are willing to rent out falls, creating an excess demand (shortage) of apartments.Impact: more people want apartments than are available at the controlled rent, so there is a shortage. This can lead to long waiting lists/queues and to a black market, where some tenants pay extra (over and above the legal rent) to secure a flat. In the long run, owners may have less incentive to build or maintain rental housing. So, although rent control aims to help common people afford apartments, it ends up causing a shortage of rental housing.
Extra Practice Questions
Short Answer Type Questions
Q1. Define equilibrium price.
ANSWERThe equilibrium price is the price at which the market clears — the quantity that all consumers wish to buy equals the quantity that all firms wish to sell, so there is neither excess demand nor excess supply. It is the price at which the market demand and supply curves intersect.
Q2. Write the algebraic expression for excess demand and state when it is positive.
ANSWERExcess demand ED(p) = qD(p) − qS(p). It is positive at any price below the equilibrium price p*, because there market demand exceeds market supply. At p* it is zero, and above p* it is negative (i.e. there is excess supply).
Q3. The market demand is qD = 200 − p and supply is qS = 120 + p (for p ≥ 10). Find the equilibrium price and quantity.
ANSWERSet 200 − p = 120 + p ⇒ 80 = 2p ⇒ p* = 40. Then q* = 200 − 40 = 160 (check: 120 + 40 = 160). So the equilibrium price is Rs 40 and the equilibrium quantity is 160 units.
Q4. State two adverse consequences of imposing a price ceiling with rationing.
ANSWER(i) Consumers have to stand in long queues at ration/fair-price shops to buy the good. (ii) Because not all consumers are satisfied by the rationed quantity, some are willing to pay more, which can give rise to a black market.
Q5. Why is the market supply curve of labour upward sloping even though an individual’s supply curve may bend backward?
ANSWERAlthough at high wages a single worker may supply less labour (the income effect dominating the substitution effect, giving a backward-bending individual curve), the market supply curve is obtained by adding up all individuals. At higher wages many more people are attracted into work, so the total labour supplied rises with the wage — making the market supply curve upward sloping.
Long Answer Type Questions
Q1. Explain, with the help of demand and supply analysis, how excess demand and excess supply are eliminated and equilibrium is restored in a perfectly competitive market with a fixed number of firms.
ANSWERIn a perfectly competitive market the downward-sloping demand curve DD and upward-sloping supply curve SS intersect at the equilibrium price p* and quantity q*. Suppose the prevailing price is below p*. Then market demand exceeds market supply, creating excess demand. Consumers unable to get the good bid the price up; as price rises, quantity demanded falls and quantity supplied rises, shrinking the excess demand until the market reaches p*. Now suppose the prevailing price is above p*. Market supply exceeds market demand, creating excess supply. Firms unable to sell their output lower the price; as price falls, quantity demanded rises and quantity supplied falls, eliminating the excess supply until the market again settles at p*. Adam Smith called this self-correcting mechanism the ‘Invisible Hand’ — it raises price under excess demand and lowers it under excess supply, always guiding the market to where qD(p*) = qS(p*).
Q2. Explain how equilibrium price, quantity and the number of firms are determined in a perfectly competitive market with free entry and exit. Use a numerical illustration.
ANSWERWith free entry and exit, firms enter when price exceeds minimum average cost (earning supernormal profit) and exit when price is below it (incurring losses). Entry shifts supply rightward and pushes price down; exit shifts supply leftward and pushes price up. The process stops only when each firm earns normal profit, i.e. when the price equals minimum average cost: p* = min AC. The equilibrium quantity is then the market demand at this price, and the number of firms is the total quantity divided by each firm’s output, n0 = q0 ÷ q0f. Illustration: let qD = 200 − p and a single firm’s supply be qSf = 10 + p with min AC at p = 20. Then p* = 20; q0 = 200 − 20 = 180; each firm supplies 10 + 20 = 30; so n0 = 180 ÷ 30 = 6 firms. Thus equilibrium price = Rs 20, quantity = 180 units and number of firms = 6.
Q3. Distinguish between a price ceiling and a price floor, and use demand–supply analysis to explain their effects on the market.
ANSWERA price ceiling is a government-imposed maximum price, set below the equilibrium price (e.g. on wheat, rice, sugar, kerosene, or controlled rent). At this low price the quantity demanded exceeds the quantity supplied, creating excess demand (a shortage); the good must be rationed, which can lead to queues and black markets. A price floor is a government-imposed minimum price, set above the equilibrium price (e.g. agricultural price-support, minimum wage). At this high price the quantity supplied exceeds the quantity demanded, creating excess supply (a surplus); in the case of farm support, the government must buy up the surplus to stop the price from falling. Thus a ceiling protects consumers but causes shortages, while a floor protects producers/workers but causes surpluses — both push the market away from its equilibrium (p*, q*).
MCQs & Assertion–Reason
1. At market equilibrium in a perfectly competitive market:
8. With demand unchanged, a leftward shift of the supply curve causes the equilibrium:
(a) price to rise and quantity to fall (b) price to fall and quantity to rise (c) price to rise and quantity to rise (d) price to fall and quantity to fall
9. When both demand and supply curves shift rightward, the equilibrium quantity:
(a) definitely falls (b) definitely rises (c) stays unchanged (d) may rise, fall or stay the same
10. An agricultural price-support programme is an example of a:
For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.
A-R 1. Assertion: At a price below the equilibrium price, the market price tends to rise.
Reason: At a price below equilibrium there is excess demand, so consumers bid the price up.
A-R 2. Assertion: With free entry and exit, a rightward shift in demand leaves the equilibrium price unchanged.
Reason: Under free entry and exit, the equilibrium price always equals the firms’ minimum average cost.
A-R 3. Assertion: A shift in the supply curve moves equilibrium price and quantity in opposite directions.
Reason: A rightward supply shift lowers price but raises quantity, while a leftward shift raises price but lowers quantity.
A-R 4. Assertion: A price floor set above the equilibrium price leads to excess demand.
Reason: At a price above equilibrium, the quantity supplied exceeds the quantity demanded.
A-R 5. Assertion: The market supply curve of labour is upward sloping.
Reason: An individual worker’s labour supply curve is always upward sloping at every wage.
Answer key: 1-(A), 2-(A), 3-(A), 4-(D), 5-(C).
Exam Tips & Common Mistakes
How to score full marks in this chapter
For every numerical, set qD = qS, solve for p*, then substitute back to find q* — and always verify by plugging p* into both equations. Remember the two golden rules: a demand shift moves price and quantity in the same direction, a supply shift moves them in opposite directions (fixed number of firms). Under free entry/exit, price is fixed at min AC, so only quantity and the number of firms change. For a per-unit tax, rewrite supply in terms of the price sellers receive (p − t). Learn the price ceiling (below p* → shortage) vs price floor (above p* → surplus) distinction, and the wage condition w = MRPL = MR × MPL.
Common mistakes to avoid
Forgetting to check the price range (e.g. a solution p* < 15 in Q22 would be invalid because supply is zero there).
Confusing the effect of a demand shift (same direction for P and Q) with a supply shift (opposite directions).
Thinking a demand shift changes the price under free entry and exit — it does not; only quantity and number of firms change.
Mixing up price ceiling (maximum, below p*, causes shortage) and price floor (minimum, above p*, causes surplus).
For a per-unit tax, forgetting that the supply curve shifts up by the tax (use price received = p − t).
Assuming the individual labour supply curve is upward sloping throughout — it can bend backward; only the market curve is upward sloping.
Frequently Asked Questions
What is Chapter 5 of Class 12 Economics (Introductory Microeconomics) about?
Chapter 5, Market Equilibrium, explains how the equilibrium price and quantity are determined where market demand equals market supply, both with a fixed number of firms and with free entry and exit. It also covers the effects of demand and supply shifts, wage determination in the labour market, and the applications of price ceiling and price floor.
How do you find the equilibrium price and quantity from demand and supply equations?
Set market demand equal to market supply (qD = qS) and solve for the price p*. Then substitute p* back into either the demand or the supply equation to get the equilibrium quantity q*. Always verify that both equations give the same quantity and that p* lies in the valid price range.
What is the difference between a price ceiling and a price floor?
A price ceiling is a government-imposed maximum price set below the equilibrium price (e.g. on wheat or rent); it causes excess demand or a shortage. A price floor is a government-imposed minimum price set above the equilibrium price (e.g. agricultural price-support or minimum wage); it causes excess supply or a surplus.
