Consider the following statements regarding the determination of equilibrium with a fixed number of firms: 1. If the prevailing price is lower than the equilibrium price, there will be excess supply in the market. 2. In a situation of excess demand, the market price tends to increase. 3. As price rises, quantity demanded falls and quantity supplied increases, moving the market towards equilibrium. Which of the statements given above is/are correct?

Correct Option The correct option is 2 and 3 only. Explanation Market equilibrium is determined where the quantity demanded by consumers equals the quantity supplied by producers. In a perfectly competitive market with a fixed number of firms, the price mechanism acts as an invisible hand to correct imbalances (excess demand or excess supply) and restore equilibrium. Statement-wise Analysis - Statement 1 is Incorrect. If the prevailing market price is lower than the equilibrium price, the quantity demanded by consumers will exceed the quantity supplied by producers (due to the Law of Demand and Law of Supply). This situation creates excess demand (shortage), not excess supply. Excess supply occurs when the price is higher than the equilibrium price. - Statement 2 is Correct. In a situation of excess demand, consumers compete for the limited available quantity of goods. This competition drives the price upward. As buyers bid higher prices to secure the good, the market price tends to increase. - Statement 3 is Correct. This statement describes the adjustment mechanism following excess demand. As the market price rises: - Quantity demanded falls (movement up along the demand curve). - Quantity supplied increases (movement up along the supply curve). This process continues until the quantity demanded equals the quantity supplied, thereby restoring market equilibrium. Key Takeaway Key Takeaway: When price is below equilibrium, excess demand occurs, causing prices to rise. When price is above equilibrium, excess supply occurs, causing prices to fall. These adjustments move the market toward the equilibrium price where quantity demanded equals quantity supplied.

Consider the following statements regarding the determination of equilibrium with a fixed number of firms:… - NCERT Class 12 Economics MCQ

NCERT Class 12 Economics — Chapter 2: Market Equilibrium

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Consider the following statements regarding the determination of equilibrium with a fixed number of firms:

If the prevailing price is lower than the equilibrium price, there will be excess supply in the market.
In a situation of excess demand, the market price tends to increase.
As price rises, quantity demanded falls and quantity supplied increases, moving the market towards equilibrium.

Which of the statements given above is/are correct?

NCERT textbook question

From NCERT Introductory Microeconomics · Page 72

Options

A2 only
B2 and 3 only
C1 and 2 only
D1, 2 and 3

Did you get this right?

Solution

Correct Option

The correct option is 2 and 3 only.

Explanation

Market equilibrium is determined where the quantity demanded by consumers equals the quantity supplied by producers. In a perfectly competitive market with a fixed number of firms, the price mechanism acts as an invisible hand to correct imbalances (excess demand or excess supply) and restore equilibrium.

Statement-wise Analysis

Statement 1 is Incorrect.
If the prevailing market price is lower than the equilibrium price, the quantity demanded by consumers will exceed the quantity supplied by producers (due to the Law of Demand and Law of Supply). This situation creates excess demand (shortage), not excess supply. Excess supply occurs when the price is higher than the equilibrium price.
Statement 2 is Correct.
In a situation of excess demand, consumers compete for the limited available quantity of goods. This competition drives the price upward. As buyers bid higher prices to secure the good, the market price tends to increase.
Statement 3 is Correct.
This statement describes the adjustment mechanism following excess demand. As the market price rises:
- Quantity demanded falls (movement up along the demand curve).
- Quantity supplied increases (movement up along the supply curve).
This process continues until the quantity demanded equals the quantity supplied, thereby restoring market equilibrium.

Key Takeaway

Key Takeaway: When price is below equilibrium, excess demand occurs, causing prices to rise. When price is above equilibrium, excess supply occurs, causing prices to fall. These adjustments move the market toward the equilibrium price where quantity demanded equals quantity supplied.

Your note

More from Chapter 2: Market Equilibrium

In the context of market equilibrium, what happens when the market demand curve shifts rightward while the supply curve remains unchanged ?

easy

In a market with free entry and exit, if the demand curve shifts to the left: Statements: 1. Firms will enter the market to capture the lower price. 2. The market price will temporarily fall below the minimum average cost. 3. The supply will increase until the price returns to the minimum average cost. Which of the statements given above is/are correct?

hard

What is the primary consequence of a price ceiling accompanied by rationing?

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With reference to the supply of labour by an individual, consider the following statements: 1. An increase in wage rate always leads to an increase in the supply of labour hours by an individual. 2. At high wage rates, the income effect may dominate the substitution effect, leading to a decrease in labour supply. 3. The individual labour supply curve can be backward bending. Which of the statements given above is/are correct?

hard

In a perfectly competitive market, if the market price is above the equilibrium price, there will be:

easy

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