What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

What is market equilibrium?

The situation where quantity demanded equals quantity supplied, determining the equilibrium price and quantity at which the market clears.

What happens when the market price is above the equilibrium price?

There is excess supply; sellers cut prices to clear unsold stock, pushing the price down towards equilibrium.

What happens when the market price is below the equilibrium price?

There is excess demand; buyers bid the price up, pushing it towards equilibrium.

How does an increase in demand affect equilibrium?

Both the equilibrium price and the equilibrium quantity rise, as the demand curve shifts to the right.

How does an increase in supply affect equilibrium?

The equilibrium price falls while the equilibrium quantity rises, as the supply curve shifts to the right.

What is a price ceiling and what is its effect?

A legal maximum price set below equilibrium; it creates a shortage (excess demand) and may lead to rationing and black markets.

What is a price floor and what is its effect?

A legal minimum price set above equilibrium; it creates a surplus (excess supply), as seen with minimum support prices.

Why does the government fix a minimum support price for crops?

To protect farmers by guaranteeing a remunerative price above the market level, even though it may create surplus stocks.

What is a minimum wage and how does it relate to a price floor?

It is a price floor in the labour market — a minimum wage above the equilibrium wage that can create unemployment (excess supply of labour).

Why can the effect of simultaneous shifts in demand and supply be ambiguous?

Because the change in equilibrium price or quantity depends on the relative magnitudes of the two shifts, which may push in opposite directions.

Market Equilibrium

Class 12 Economics · Introductory Microeconomics · Chapter 5

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Summary

This chapter brings consumers’ demand and firms’ supply together to determine the equilibrium price and quantity in a perfectly competitive market. Equilibrium is the price at which the quantity demanded equals the quantity supplied, so the market clears. If the price is above equilibrium there is excess supply (a surplus), which pushes the price down; if it is below equilibrium there is excess demand (a shortage), which pushes the price up. These automatic forces of competition restore equilibrium. The chapter then studies how shifts in demand and supply curves change the equilibrium. An increase in demand raises both equilibrium price and quantity, while an increase in supply lowers price but raises quantity. When both curves shift simultaneously, the effect on price or quantity may be determinate or ambiguous depending on the relative sizes of the shifts. The model is extended to a market with a fixed number of firms and to free entry and exit, where in the long run firms earn only normal profit. Finally, applications of demand-supply analysis are examined, including government price controls — a price ceiling (a maximum price below equilibrium, as in rationing of essentials, leading to shortages and possible black markets) and a price floor (a minimum price above equilibrium, such as a minimum support price for farm products or a minimum wage, leading to surpluses).

Key terms

Market equilibrium

The price at which quantity demanded equals quantity supplied and the market clears.

Excess demand

The amount by which quantity demanded exceeds quantity supplied at a price below equilibrium.

Excess supply

The amount by which quantity supplied exceeds quantity demanded at a price above equilibrium.

Price ceiling

A government-imposed maximum price set below the equilibrium price.

Price floor

A government-imposed minimum price set above the equilibrium price.

Minimum support price

A price floor at which the government guarantees to buy farmers’ produce.

Extra questions & answers

Try one from this chapter

Market equilibrium occurs at the price where:

Flashcards & interactive practice