Market Equilibrium - 1 - Free MCQ Practice Test with solutions, UPSC Indian

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.

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.