Market Equilibrium

Excess Supply occurs when the prevailing market price is above the equilibrium price ($P > P^*$), resulting in $Q_s > Q_d$.
1. Producers cannot sell all the goods they have manufactured, causing unsold inventories to accumulate in warehouses.
2. To clear their unsold stock and recover operating cash, competing sellers begin cutting prices ($P \downarrow$).
3. As market price falls, by the Law of Demand, consumers buy more (demand expands). Simultaneously, by the Law of Supply, less profitable production is curtailed (supply contracts).
4. This downward movement continues until market demand once again equals market supply at the equilibrium point ($P^*, Q^*$).

A Price Ceiling is the statutory maximum legal price that sellers are permitted to charge for an essential commodity, imposed by the government BELOW the equilibrium market price to protect poor consumers (e.g., life-saving drugs, kerosene, house rent).
Consequences:
1. Chronic Shortage (Excess Demand): At the subsidized low price, consumer demand far outstrips the quantity producers are willing to supply ($Q_d > Q_s$).
2. Emergence of Black Markets: Because supply is deficient, unscrupulous traders illegally divert goods from fair-price shops and sell them to desperate consumers at exorbitant black-market prices far higher than the free market equilibrium!

A Price Floor is the statutory minimum legal price established by the government ABOVE the equilibrium market price to protect the financial viability of producers or workers (e.g., Minimum Support Price [MSP] for agricultural crops, Minimum Wage legislation).
• Disequilibrium Result: At $P_f > P^*$, quantity supplied exceeds quantity demanded ($Q_s > Q_d$), generating a persistent Excess Supply (Surplus).
• Government Management: To prevent market prices from crashing under the weight of this unsold surplus, the government (through agencies like the Food Corporation of India, FCI) steps into the open market and procures and purchases the entire unsold surplus at the announced MSP, storing it as national buffer food stocks.

At Market Equilibrium, $Q_d = Q_s$:

$$700 - p = 500 + 3p$$

$$700 - 500 = 3p + p$$

$$200 = 4p \implies p^* = \frac{200}{4} = \mathbf{₹50}$$

Substitute $p^* = 50$ into the demand equation:

$$Q^* = 700 - 50 = \mathbf{650 \text{ units}}$$

Check using supply: $Q_s = 500 + 3(50) = 500 + 150 = 650$ units.
Equilibrium Price = ₹50, Equilibrium Quantity = 650 units.

Under free entry and exit, competitive firms earn only Normal Profit ($P = AC$) in the long run. The market price is firmly anchored at the minimum point of the Average Cost curve ($P^* = \min AC$).
• Why Price Does Not Rise with Demand: When market demand increases, the market price temporarily rises, generating supernormal profits. Attracted by these profits, new firms immediately enter the industry. The entry of new firms expands total industry supply, shifting the market supply curve to the right until the market price drops back down to $P^* = \min AC$. In equilibrium, total market quantity increases and the number of firms ($n_0$) increases, but the price remains unchanged at $\min AC$.

Formula:

$$n_0 = \frac{Q_{\text{market}}}{q_f^*}$$

Substitute given values:

$$n_0 = \frac{1,000}{25} = \mathbf{40 \text{ Firms}}$$

The industry will support exactly 40 competitive firms in long-run equilibrium.

• (a) Demand Increases and Supply Decreases in Equal Proportion:
Increased demand pushes price up ($P \uparrow$) and quantity up ($Q \uparrow$). Decreased supply pushes price up ($P \uparrow$) and quantity down ($Q \downarrow$).
Result: The upward price effects reinforce each other, so Equilibrium Price rises substantially ($P^* \uparrow$), while the quantity effects cancel out, leaving Equilibrium Quantity completely unchanged.
• (b) Both Demand and Supply Increase in Equal Proportion:
Increased demand raises price and quantity. Increased supply lowers price and raises quantity.
Result: The price effects cancel out, so Equilibrium Price remains unchanged, while Equilibrium Quantity expands substantially ($Q^* \uparrow$).

• Movement along the Demand Curve (Contraction/Expansion): Caused solely by a change in the commodity's own price, while non-price determinants remain constant. Occurs as an internal adjustment mechanism during market disequilibrium (e.g., price falling from excess supply causes an expansion along the demand curve).
• Shift in Demand Curve (Increase/Decrease): Caused by changes in non-price factors (consumer income, tastes, prices of substitutes/complements) while own price is constant. It represents an external shock that actively disrupts the initial equilibrium, forcing a new equilibrium price and quantity to be established.