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Class 12 Market Equilibrium: cheat sheet
CBSE Social Science. Where demand meets supply: equilibrium price and quantity, excess demand and supply, the effect of shifts, free entry and exit, wage = VMPL, and price ceilings and floors.
Key ideas
- Equilibrium is where market demand equals market supply; there is then no pressure on price to change.
- Excess demand pushes the price up and excess supply pushes it down until the market clears.
- With a fixed number of firms, more demand raises price and quantity; more supply lowers price and raises quantity.
- When both curves shift, one result is certain and the other depends on the sizes of the shifts.
- With free entry and exit, price settles at minimum average cost; a rise in demand raises quantity and the number of firms, not the price.
- A firm hires workers until the wage equals the value of marginal product of labour (VMPL = price × MPL).
- A price ceiling below equilibrium causes excess demand (shortages, rationing); a price floor above it causes excess supply (surpluses).
Remember
| Equilibrium (qD = a − bp, qS = c + dp) | a − bp = c + dp → p* = (a − c) ÷ (b + d); q* = a − bp* |
| Excess demand at a ceiling | qD − qS at the ceiling price |
| Excess supply at a floor | qS − qD at the floor price |
| Free entry and exit | p = min AC; number of firms = qD at that price ÷ each firm’s output |
| Value of marginal product | VMPL = p × MPL; hire while VMPL ≥ w |
| Both shift the same way | quantity certain, price uncertain |
| Shift in opposite ways | price certain, quantity uncertain |
Watch out
- Saying a price ceiling causes a surplus (it causes a shortage).
- Expecting price to rise with demand when there is free entry and exit (it stays at min AC).
- Subtracting the wrong way: excess demand is qD − qS.
Worked example
For onions, qD = 250 − 7p and qS = 6p − 10. Find the equilibrium price and quantity.
Working: 13p = 260 → p = 20; q = 250 − 140
Answer: p* = ₹20, q* = 110 units
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