From the following two statements of Assertion (A) and Reasoning (R) suggest the correct code: Assertion (A): The equilibrium price is decided at the level where the quantity demanded equals the quantity supplied. Reason (R): At this level excess of demand and excess of supply both remain zero. Code:
(A) and (R) both are correct and (R) is right explanation of (A).
Understanding Equilibrium Price and Market Forces
In economics, the equilibrium price is a fundamental concept that describes the state where the market for a good or service is balanced. This balance occurs because the quantity that buyers are willing and able to purchase at a certain price exactly matches the quantity that sellers are willing and able to sell at that same price.
Let's examine the given statements regarding the equilibrium price:
Analyzing Assertion (A): Equilibrium Price Definition
Assertion (A): The equilibrium price is decided at the level where the quantity demanded equals the quantity supplied.
This statement provides the standard definition of market equilibrium. In a supply and demand model, the point where the demand curve intersects the supply curve determines the equilibrium price and equilibrium quantity. At this specific price, the amount consumers want to buy is equal to the amount producers want to sell. Therefore, Assertion (A) is correct.
Analyzing Reason (R): Market Condition at Equilibrium
Reason (R): At this level excess of demand and excess of supply both remain zero.
This statement describes the condition of the market when it is at the equilibrium level mentioned in Assertion (A). Let's define 'excess demand' and 'excess supply':
- Excess Demand (Shortage): Occurs when quantity demanded is greater than quantity supplied at a given price. This happens at prices below the equilibrium price.
- Excess Supply (Surplus): Occurs when quantity supplied is greater than quantity demanded at a given price. This happens at prices above the equilibrium price.
At the equilibrium price, where quantity demanded (\(Q_D\)) equals quantity supplied (\(Q_S\)), there is no shortage or surplus. The difference between \(Q_D\) and \(Q_S\) is zero. Therefore, Reason (R) is also correct.
| Price Level | Condition | Effect on Price |
|---|---|---|
| Above Equilibrium Price | Excess Supply ($Q_S > Q_D$) | Price tends to fall |
| Below Equilibrium Price | Excess Demand ($Q_D > Q_S$) | Price tends to rise |
| At Equilibrium Price | $Q_D = Q_S$ (Zero Excess Demand/Supply) | Price is stable |
Relationship Between Assertion (A) and Reason (R)
Assertion (A) states the condition for equilibrium price: \(Q_D = Q_S\). Reason (R) states that at this condition (\(Q_D = Q_S\)), excess demand and excess supply are zero.
The absence of excess demand or excess supply is precisely why the market price stabilizes at the equilibrium level. If there were excess demand, buyers would bid the price up. If there were excess supply, sellers would lower the price to clear stock. Only when both excess demand and excess supply are zero does the price have no pressure to change, defining the equilibrium price. Thus, Reason (R) provides the underlying explanation for the state described in Assertion (A).
Therefore, both Assertion (A) and Reason (R) are correct statements, and Reason (R) is the correct explanation for Assertion (A).
Revision Table: Key Economic Concepts
| Term | Definition |
|---|---|
| Quantity Demanded | Amount of a good/service buyers are willing and able to purchase at a given price. |
| Quantity Supplied | Amount of a good/service sellers are willing and able to sell at a given price. |
| Equilibrium Price | Price where quantity demanded equals quantity supplied. |
| Equilibrium Quantity | Quantity demanded and supplied at the equilibrium price. |
| Excess Demand (Shortage) | $Q_D > Q_S$ |
| Excess Supply (Surplus) | $Q_S > Q_D$ |
Additional Information: Market Equilibrium Dynamics
The concept of market equilibrium is dynamic. Market forces, specifically excess demand and excess supply, act as signals to move the price towards equilibrium. When the price is not at equilibrium, these imbalances create incentives for buyers and sellers to change their behavior, which in turn causes the price to adjust until it reaches the equilibrium level where the market clears.
For example:
- If there is excess demand (shortage), buyers who cannot find the product will offer a higher price, and sellers will see an opportunity to increase prices, leading to a rise in price.
- If there is excess supply (surplus), sellers will have unsold inventory and will lower prices to attract buyers, leading to a fall in price.
This adjustment process continues until the price settles at the equilibrium point where quantity demanded equals quantity supplied, and consequently, excess demand and excess supply are zero.
Important Questions from Demand analysis
The supply curve of cars is expected to shift rightwards with:
i. An increase in the price of cars
ii. A decrease in fuel prices
The supply curve of a normal good is ____________ sloping. It depicts ___________ on the x-axis and ___________ on the y-axis.
The demand curve gives the quantity demanded by the consumer at each ____________.
Which of the following statements is INCORRECT in the context of demand function?
Marginal Product is defined as:
