This chapter explains how market equilibrium is achieved through demand and supply analysis. Understanding this concept helps in analyzing price determination and market dynamics.
Market Equilibrium – Formula & Equation Sheet
Essential formulas and equations from Introductory Microeconomics, tailored for Class 12 in Economics.
This one-pager compiles key formulas and equations from the Market Equilibrium chapter of Introductory Microeconomics. Ideal for exam prep, quick reference, and solving time-bound numerical problems accurately.
Key concepts & formulas
Essential formulas, key terms, and important concepts for quick reference and revision.
Formulas
Market Equilibrium: (p*, q*) where qD(p*) = qS(p*)
p* is the equilibrium price, and q* is the equilibrium quantity where market demand (qD) equals market supply (qS). This indicates the price and quantity at which the market clears.
Excess Demand: ED(p) = qD - qS
ED(p) represents excess demand at price p when demand exceeds supply. This helps to analyze situations where consumers are willing to buy more than what is available.
Excess Supply: ES(p) = qS - qD
ES(p) represents excess supply at price p when supply exceeds demand. This indicates a surplus in the market, often leading prices to fall.
Marginal Revenue Product of Labour: MRP = MR × MPL
MRP is the additional revenue generated from hiring an extra unit of labour (MPL stands for Marginal Product of Labour). This is crucial for firms to determine the optimal labor input.
Value of Marginal Product of Labour: VMP = P × MPL
VMP is the additional value created by employing one more unit of labour at price (P). It guides firms in hiring decisions under perfect competition.
Price Ceiling: P ≤ p* (below equilibrium)
A price ceiling set below the equilibrium price creates excess demand, leading to shortages. It is used by governments to keep prices affordable.
Price Floor: P ≥ p* (above equilibrium)
A price floor set above equilibrium price creates excess supply, leading to surpluses. It is often applied to stabilize farmer incomes in agriculture.
Long-run Equilibrium: P = min AC
In the long run, firms enter or exit the market until economic profits are zero, thus price equals the minimum average cost (min AC) of production.
Shift Right (Demand Increase): P ↑, Q ↑
When demand increases while supply remains constant, both equilibrium price and quantity increase, signaling higher market activity.
Shift Left (Supply Decrease): P ↑, Q ↓
When supply decreases while demand remains constant, the equilibrium price increases, but the equilibrium quantity decreases, indicating potential scarcity.
Equations
qD = 200 - p (0 ≤ p ≤ 200)
This is a linear demand equation indicating quantity demanded (qD) at different price levels (p). Useful to find the demand at specific prices.
qS = 120 + p (p ≥ 10)
This is the supply equation where quantity supplied (qS) is given based on the price (p). Helps gauge the amount producers want to sell.
Equilibrium Price: p* = (qD + qS) / 2
This equation calculates the equilibrium price by averaging the quantities demanded and supplied, ensuring that market equilibrium is highlighted.
q* = qD(p*) = qS(p*)
Calculating equilibrium quantity using demand or supply function evaluated at equilibrium price, confirming consistency between supply and demand.
ED(p) = 200 – p – (120 + p)
Calculating Excess Demand algebraically, providing a formula to assess how much more quantity is demanded than supplied.
ES(p) = (120 + p) - (200 - p)
Calculating Excess Supply algebraically, illustrating how much extra quantity is supplied compared to demand.
Price Adjustment: ΔP = k(ED - ES)
Adjustment equation for price change (ΔP) based on the difference between excess demand (ED) and excess supply (ES), with k representing sensitivity.
Demand Shift Impact: Pnew = Pold ± ΔP
Equation illustrating how shifts in demand affect equilibrium price, with adjustments either increasing or decreasing price based on market reactions.
Supply Shift Impact: Qnew = Qold ± k(ΔS)
Equation indicating how shifts in supply can alter equilibrium quantity, with k denoting the potential magnitude of shift effects.
w = MRP_L
Equation illustrating that the wage rate (w) firms are willing to pay is equal to their Marginal Revenue Product of Labour (MRP_L), guiding hiring decisions.
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