Demand and Supply – Market Equilibrium

Demand and Supply – Market Equilibrium

Demand and supply form the foundation of market economics. They determine how prices are set in a free market economy.

Demand

Demand refers to the quantity of a good or service consumers are willing and able to purchase at different prices in a given period.
The law of demand states that, all else being equal, when the price of a good rises, its quantity demanded falls, and vice versa.

Example:

Consider mangoes during the peak season. When mangoes are ₹50/kg, many consumers buy them. If prices rise to ₹120/kg, fewer people are willing to buy, thereby reducing demand.

Factors Affecting Demand

• Price of the good itself
• Income of consumers
• Prices of related goods (substitutes and complements)
• Tastes and preferences
• Expectations about future prices

Supply

Supply refers to the quantity of a good or service producers are willing to offer for sale at different prices in a given period.
The law of supply states that, all else being equal, when the price of a good rises, its quantity supplied also rises, and vice versa.

Example:

If the price of wheat rises, farmers may choose to grow more wheat to benefit from higher prices, thus increasing supply.

Factors Affecting Supply

• Price of the good itself
• Cost of production (labour, raw materials, etc.)
• Technology used in production
• Prices of related goods in production
• Government policies (taxes, subsidies)

Market Equilibrium

Equilibrium occurs when demand equals supply — the point where the quantity demanded matches the quantity supplied at a particular price.

Example:

If at ₹100 per shirt, consumers want to buy 1,000 shirts and producers want to sell 1,000 shirts, the market is in equilibrium at ₹100.

Shifts vs Movement

• Movement along the curve – Caused by price changes of the good itself.
• Shift of the curve – Caused by non-price factors like income, preferences, technology, etc.

Example:

• If onion prices fall from ₹40/kg to ₹30/kg, it’s movement along the demand curve.
• If consumers shift towards healthier foods, reducing demand for soft drinks regardless of price, it’s a shift in demand curve.

Statement-based MCQs

MCQ 1
Consider the following statements:

1. A movement along the demand curve is caused only by a change in the price of the good.
2. If the price of tea increases, the demand for coffee (a substitute) is likely to decrease.
3. If the government provides subsidies to wheat farmers, the supply of wheat is likely to increase.

Which of the statements given above is/are correct?
a) 1 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3

MCQ 2
Consider the following statements:

1. An increase in income will always shift the demand curve for all goods to the right.
2. A decrease in the price of a good will increase its demand, assuming all other factors remain constant.
3. A technological advancement in production will shift the supply curve to the right.

Which of the statements given above is/are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3

MCQ 3
Which of the following factors can shift the demand curve for a product?

1. Changes in consumer tastes and preferences
2. Changes in income levels
3. Changes in the price of related goods

Select the correct answer using the code below:
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3

MCQ 4
Consider the following statements:

1. A change in production technology can shift the supply curve.
2. An increase in input costs will shift the supply curve to the right.
3. Government-imposed price ceilings can lead to excess demand in the market.

Which of the statements given above is/are correct?
a) 1 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3

MCQ 5
In a perfectly competitive market, if the price of a product is above equilibrium price, which of the following will occur?
a) Demand will exceed supply
b) Supply will exceed demand
c) Demand and supply will be equal
d) The product will become a public good