1. Market equilibrium
Equilibrium is the price at which quantity demanded equals quantity supplied. It clears the market: no unsold stock and no unmet demand.
From equations Qd = a − bP and Qs = c + dP, set a − bP = c + dP and solve for P, then find Q. Example (imagined Kolhapur jaggery): 120 − 2P = 3P − 30 gives ₹30 and 60 t.
| Price (₹ per kg) | Quantity demanded (t) | Quantity supplied (t) | Situation |
|---|---|---|---|
| 20 | 80 | 30 | Excess demand 50 |
| 25 | 70 | 45 | Excess demand 25 |
| 30 | 60 | 60 | Equilibrium |
| 35 | 50 | 75 | Excess supply 25 |
| 40 | 40 | 90 | Excess supply 50 |
Key terms
- Equilibrium price
The price at which quantity demanded equals quantity supplied.
- Market-clearing
No surplus and no shortage at the ruling price.
2. Excess demand and excess supply
- Excess demand (price below E): buyers compete, the price rises; demand contracts and supply extends. At ₹20: 80 − 30 = 50 t.
- Excess supply (price above E): sellers cut the price, which falls; demand extends and supply contracts. At ₹40: 90 − 40 = 50 t.
During this adjustment no curve shifts: buyers and sellers move along their curves.
Key terms
- Excess demand
Quantity demanded minus quantity supplied at a price below equilibrium.
- Excess supply
Quantity supplied minus quantity demanded at a price above equilibrium.
3. Changes in demand or in supply
- Demand increases: price and quantity both rise. Demand decreases: both fall.
- Supply increases: price falls, quantity rises. Supply decreases: price rises, quantity falls.
To calculate, solve the new pair of equations; the change in quantity is smaller than the shift because the price also changes.
| Change (other side fixed) | Price | Quantity |
|---|---|---|
| Demand increases | Rises | Rises |
| Demand decreases | Falls | Falls |
| Supply increases | Falls | Rises |
| Supply decreases | Rises | Falls |
| Situation | Equation pair | Price (₹) | Quantity (t) |
|---|---|---|---|
| Before the festival | 120 − 2P = 3P − 30 | 30 | 60 |
| Festival demand | 145 − 2P = 3P − 30 | 35 | 75 |
| Health campaign | 95 − 2P = 3P − 30 | 25 | 45 |
Key terms
- Shift
A change in a non-price determinant moves the whole curve.
4. Simultaneous changes
- Same direction: quantity is certain (rises if both increase); price depends on which shift is larger; equal shifts leave the price unchanged.
- Opposite directions: price is certain (rises if demand rises and supply falls); quantity depends on the relative shifts.
Imagined check: Qd = 145 − 2P with Qs = 3P − 5 gives ₹30 and 85 t.
| Demand | Supply | Price | Quantity |
|---|---|---|---|
| Increases | Increases | Depends on relative shifts | Rises |
| Decreases | Decreases | Depends on relative shifts | Falls |
| Increases | Decreases | Rises | Depends on relative shifts |
| Decreases | Increases | Falls | Depends on relative shifts |
| Case | Equation pair | Price (₹) | Quantity (t) |
|---|---|---|---|
| Original | 120 − 2P = 3P − 30 | 30 | 60 |
| Both up by 25 t | 145 − 2P = 3P − 5 | 30 | 85 |
Key terms
- Simultaneous change
Demand and supply shifting in the same period.
5. Price ceiling, rationing and black markets
A price ceiling is a legal maximum set below equilibrium to protect consumers. It creates a shortage (Qd > Qs). The government shares the supply by rationing (ration cards, fair-price shops), and some sellers sell secretly above the limit in a black market.
Imagined atta: at ₹25, Qd = 100 and Qs = 50, a shortage of 50 t.
| Step | Working | Result |
|---|---|---|
| Free-market price | 200 − 4P = 6P − 100 | P = ₹30, Q = 80 t |
| Demand at the ceiling | 200 − 4 × 25 | 100 t |
| Supply at the ceiling | 6 × 25 − 100 | 50 t |
| Shortage | 100 − 50 | 50 t |
Key terms
- Price ceiling
A legal maximum price below equilibrium.
- Rationing
Sharing a scarce good by quota rather than by price.
- Black market
Illegal sale of a controlled good above its legal price.
6. Price floor and minimum support price
A price floor is a legal minimum set above equilibrium to protect producers. It creates a surplus (Qs > Qd). In India, minimum support prices for notified crops are announced by the Government of India on the recommendation of the CACP; public agencies buy the surplus and hold it as buffer stock, part of which goes to ration shops.
Imagined lentils: at 70, Qs = 250 and Qd = 150, a surplus of 100 thousand quintals.
| Step | Working | Result |
|---|---|---|
| Free-market price | 500 − 5P = 5P − 100 | P = 60, Q = 200 |
| Supply at the support price | 5 × 70 − 100 | 250 |
| Demand at the support price | 500 − 5 × 70 | 150 |
| Surplus to procure | 250 − 150 | 100 |
| Gains | Costs and risks |
|---|---|
| Assured, stable income for farmers | Public spending on procurement |
| Buffer stocks for lean years | Storage costs and possible wastage |
| Grain for ration shops | Consumers pay above the free-market price |
| Price ceiling | Price floor | |
|---|---|---|
| Position | Below equilibrium | Above equilibrium |
| Result | Shortage | Surplus |
| Support needed | Rationing | Procurement |
| Helps | Consumers | Producers |
| Risk | Black market | Storage cost, wastage |
Key terms
- Price floor
A legal minimum price above equilibrium.
- Minimum support price
The price at which the government stands ready to buy a notified crop.
- Buffer stock
Grain held by the government to steady supplies and prices.
Exam tips
Common mistakes
- Placing a ceiling above equilibrium (it would have no effect) or a floor below it.
- Saying excess demand shifts the demand curve: the adjustment is a movement along both curves.
- Adding a shift to the old quantity instead of solving the new pair of equations.
- Claiming a definite price change when both curves move the same way by unknown amounts.
- Saying rationing removes a shortage: it only shares it.
How marks are usually awarded
- 1 mark: the correct option or a one-line answer.
- 2 marks: two points, or a labelled diagram with one point.
- 3 marks: working with the answer and a comment.
- 5 marks: each part answered in order with diagrams.
- Board papers also set 4-mark (2 + 2) and 8-mark (4 + 4) questions in parts.