Chapter 5: Market Equilibrium

In the short run, the number of firms is fixed, while in the long run, there is no restriction on the number of firms, and free entry-exit is permitted. The following inference can be made from the situation when the market is running with a fixed number of companies (short run).

1. When demand increases, both equilibrium price and quantity are raised

2. When demand decreases, there is a fall in equilibrium price and quantity

The market situation, when the long run is taking place with free entry and exit of firms, is as follows:

1. When demand increases, there is no change in equilibrium price but the output increases.

2. When demand decreases, there is no change in equilibrium price, but the production quantity is reduced (less).

From the question, we can see that

q^d = 700 − p

q^s = 500 + 3p for p ≥ 15

= 0 or 0 ≤ p 15

It can be inferred from the given data that market supply is 0 as the price range defined is less than the minimum average variable cost. There will not be any output, and the supply curve becomes 0.

Now, when the equilibrium state is known

q^d = q^s (At equilibrium)

700 – p= 500+ 3p

3p + p = 200

4p= 200

Or p= 50 (equilibrium price)

Now, the equilibrium quantity can be calculated as qS

q^s= 500 + 3P

= 500+ 3x 50

= 500+ 150

= 650

The total equilibrium quantity produced is 650 units.

q^s_f = 8 + 3 p for p ≥ Rs 200

= 0 for 0 ≤ p < Rs 20.

q^d = 700 – p (Keeping the same value as the previous question)

(a) No firm is going to produce any output for the price range of 0 to 20 as this is below the minimum average variable cost. Losses will be incurred if any output is done at the price range of 0-20. At the price of Rs. 20, the price line will be equal to the minimum of the average variable cost.

(b) In the long run, the firms will be earning zero profit, and also, there is the freedom of entry and exit of firms. So the minimum price for which the market will be in equilibrium for X will be Rs. 20, as it is the minimum average variable cost and any price lower than that will result in the exit of the firm.

(c ) The equilibrium price is Rs. 20 as established. Now equilibrium quantity will be calculated.

As per question

q_s = 8 + 3p

= 8 + 3(20)

= 68

Therefore, 68 units are supplied.

We have

q^d = 700 – p

= 700 – 20

= 680

So, the number of firms can be calculated as

No. of Firms = q^d / q^s

= 680/68

= 10

q^d = 1,000 − p

q^s = 700 + 2p

At equilibrium point q^{d =} q^s

1000- p = 700 + 2p

3p = 300

p= 300/3

= 100

Equilibrium price = Rs. 100

Now q^{d  =} 1000- p

= 1000-100

= 900

Equilibrium quantity = 900 units

(b) As per the question,

q^s = 400 + 2p

We know at equilibrium q^{d =} q^s

Therefore

1000-p = 400+2p

3p = 600

p = 200

The equilibrium price is Rs. 200

q^s = 400 + 2p

= 400 + 2(200)

= 400+ 400

= 800

Equilibrium units = 800

The equilibrium quantity is reduced as the cost of production increases, and it moves the supply curve to the left. This shift brings about an increase in equilibrium price and a reduction in equilibrium quantity.

(c) As per the question

q^s= 700 + 2 (p – 3) As a tax of Rs. 3 added to salt production,

At equilibrium point q^d = q^s

1000 – p = 700 + 2 (p – 3)

1000 – p = 700 + 2p – 6

3p = 1000 – 694

p = 102

Hence, equilibrium price = 102

q^d = 1000 – p

= 1000 – 102

= 898

Hence, equilibrium quantity = 898 units

When the government intervenes in the market for apartments and imposes control on rent, it will bring down the prices. Due to the drop in prices, the demand for apartments will grow. The imposition of a price ceiling will facilitate more people to afford an apartment who would not otherwise be able to pay the rent. It will also make some builders indulge in black marketing.

• Market Equilibrium – It is a market situation where the demand for the commodity is equivalent to its supply.
• Equilibrium Price – It corresponds to the quantity between the market demand and the market supply of a good.
• Equilibrium Quality – It corresponds to the equilibrium price in the marketplace.