Test: Market Equilibrium - 1 - UPSC MCQ

At equilibrium price quantity demanded and quantity supplied of a commodity are equal. This quantity is called the equilibrium quantity of the commodity. In practical life, the price at which the seller/firm wants to sell a commodity, its quantity supplied may be greater or lesser than its quantity demanded.

Factors that can shift the demand curve for goods and services, causing a different quantity to be demanded at any given price, include changes in tastes, population, income, prices of substitute or complement goods, and expectations about future conditions and prices.

Explanation:


Excess demand is a situation that occurs when the market demand for a product or service exceeds the market supply. In this situation, there are more buyers willing and able to purchase a good or service than there are available units of that good or service.
Key Points:


- Excess demand occurs when the market demand exceeds the market supply.
- Market demand refers to the total quantity of a good or service that all buyers are willing and able to purchase at a given price.
- Market supply refers to the total quantity of a good or service that all sellers are willing and able to produce and offer for sale at a given price.
- Excess demand can lead to a shortage of the product, as there are not enough units available to satisfy all the buyers.
- When there is excess demand, buyers may compete with each other to purchase the limited supply, which can drive up the price of the product.
- Excess demand is an indicator of a seller's market, where sellers have more bargaining power and can potentially increase prices.
- In order to eliminate excess demand and restore equilibrium, either the market supply needs to increase or the market demand needs to decrease.
- Excess demand can be temporary or long-term, depending on the factors influencing supply and demand for the product or service.

Deficient demand is a situation when:
- Market demand is less than market supply
- This means that the quantity of goods or services demanded by consumers is lower than the quantity supplied by producers.
- Market demand refers to the total demand for a product or service in the entire market, considering all consumers.
- Market supply refers to the total supply of a product or service in the entire market, considering all producers.
Explanation:
- Deficient demand occurs when there is an imbalance between the quantity of goods or services that consumers want and the quantity that producers are willing to supply.
- In this situation, there is an excess supply in the market. This can lead to several consequences:
- Lower prices: When there is deficient demand, producers may need to lower their prices to encourage consumers to purchase their products or services.
- Inventory buildup: Producers may end up with excess inventory if they cannot sell all their products. This can lead to additional costs for storage and maintenance.
- Decreased production: Producers may reduce their production levels to align with the lower demand. This can result in layoffs or reduced working hours for employees.
- Economic downturn: Deficient demand can be a sign of a weak economy, as it indicates that consumers are not spending as much as producers are producing.
Example:
- Let's consider the market for smartphones. If the market demand for smartphones is lower than the market supply, we have a deficient demand situation.
- This means that consumers are not buying as many smartphones as producers are producing. As a result, there will be excess inventory of smartphones, and producers may need to lower prices or reduce production levels to address the deficient demand.
Overall, deficient demand is a situation where market demand is less than market supply, indicating an imbalance in the market.

Excess demand occurs when the quantity demanded exceeds the quantity supplied at the current market price. This situation arises when:

1. Price is below equilibrium:

   • When the market price is set lower than the equilibrium price, consumers want to buy more (high quantity demanded), but producers are unwilling to supply enough (low quantity supplied).

   • This creates a shortage (excess demand).

2. Graphical representation:

   • On a supply-demand graph, excess demand appears as a gap between the demand curve (above) and supply curve (below) at the artificially low price.

Why Not the Other Options?

• b) Higher than equilibrium: Leads to excess supply (surplus), not excess demand.

• c) Same as equilibrium: No excess demand or supply; markets clear perfectly.

• d) None of these: Incorrect, as option (a) is the definitive answer.

Key Insight: Excess demand always implies the price is below equilibrium, incentivizing price hikes until balance is restored.

Final Answer: a) Market price is lower than the equilibrium price

 

Deficient demand occurs when the aggregate demand (AD) in an economy is insufficient to purchase all the goods and services produced at full employment, leading to underutilised resources and unemployment. This macroeconomic concept is tied to the Keynesian theory.

Why Option (b) is Correct?

• When the market price is set above the equilibrium price, it leads to:

  • Excess supply: Producers are willing to supply more, but consumers demand less due to higher prices.

  • Unsold goods: Results in inventory buildup, prompting firms to cut production and lay off workers.

  • Deflationary gap: The economy operates below potential output, causing unemployment.

Why Not the Other Options?

• a) Same as equilibrium: No deficient demand; markets clear perfectly.

• c) Below equilibrium: Causes excess demand (shortages), the opposite of deficient demand.

• d) None of these: Incorrect, as (b) directly explains deficient demand.

Key Insight:

Deficient demand is a macroeconomic mismatch where prices (or wages) are sticky downward, preventing adjustment to equilibrium. Higher-than-equilibrium prices reduce spending, perpetuating economic slowdowns.

Final Answer: b) Market price is higher than the equilibrium price

 

In case of excess demand, the demand of a commodity is more than its supply. SO in this case, there will be competition among consumers and every consumer tries to purchase more of a commodity by paying higher prices. This will tend price to rise.

Hence a) Market price rise

Deficient demand refers to the situation when aggregate demand (AD) is less than the aggregate supply (AS) corresponding to full employment level of output in the economy. The situation of deficient demand arises when planned aggregate expenditure falls short of aggregate supply at the full employment level.

Excess demand occurs when the market price falls below the equilibrium price. At this lower price, consumers are willing to purchase more of the good than producers are willing to supply, causing a shortage.

The equilibrium price is where the quantity demanded equals the quantity supplied. If the price is set below this point, the lower price makes the good more attractive to consumers, increasing the quantity demanded, while producers are less willing to supply the good at this lower price, decreasing the quantity supplied. This mismatch results in excess demand.

Answer: C) Quantity demanded equals quantity supplied

Explanation:
Market equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers, resulting in no surplus or shortage. This balance determines the equilibrium price and quantity in the market.