Class 11 Economics (Mircoeconomics) Chapter 5 Market Equilibrium

Key Concept: Equilibrium Price

a) Equilibrium price

[Solution Description] When the market demand equals the market supply at a particular price, that price is known as the equilibrium price. In this case, since both demand and supply are equal at price \$10, it is called the equilibrium price.

Key Concept: Opportunity Cost

b) It increases

[Solution Description] The opportunity cost of leisure refers to the income forgone by not working. When the wage rate increases, each hour of leisure taken costs more in terms of potential earnings because higher wages mean a higher loss of income for each hour spent on leisure rather than working. Therefore, as wage rates increase, the opportunity cost of leisure also increases.

Key Concept: Supply-Demand Analysis

c) Excess supply

[Solution Description] A price floor set above the equilibrium price results in excess supply because producers are willing to supply more goods than consumers are willing to buy at the higher price. The difference between the quantity supplied and the quantity demanded creates surplus.

Key Concept: Income Effect

c) Normal good

[Solution Description] When consumer income increases, the demand for normal goods typically rises. This is because consumers have more purchasing power and tend to buy more of goods they view as better or desirable. Therefore, an increase in income leading to increased demand indicates that the good is a normal good.

Key Concept: Simultaneous Shifts Analysis, Magnitude of Shifts

c) Equilibrium price increases, equilibrium quantity increases

[Solution Description]

An increase in consumer income leads to a significant rightward shift in demand, indicating higher demand at each price level. Technological advancements result in a smaller rightward shift in supply, meaning more products can be supplied at each price. The larger demand shift compared to the supply shift suggests that the equilibrium quantity will increase, and the equilibrium price will likely rise due to stronger demand pressure than the increased supply.

The magnitude of the shifts dictates that while both the demand and supply have increased, the larger increase in demand relative to supply results in a higher equilibrium price. Simultaneously, the equilibrium quantity increases as both curves shift rightward.

Key Concept: Simultaneous Shift Analysis

c) Equilibrium quantity decreases

[Solution Description] When both demand and supply curves shift leftward, according to the given principle, the equilibrium quantity is expected to decrease. The reason for this is that a leftward shift in either curve individually leads to a reduction in quantity; thus, simultaneous shifts also result in a lower equilibrium quantity.

Key Concept: Policy Evaluation, Advanced Graph Interpretation

b) Subsidizing landlords for maintenance costs, indirectly boosting housing supply.

[Solution Description] A binding price ceiling results in shortages because the price is set below the market equilibrium. Short-term alleviation of these shortages can occur if there is an increase in supply, which could be induced by government subsidies encouraging construction, thereby shifting the supply curve to the right. An increase in supply would reduce the gap between quantity demanded and supplied at the price ceiling level.

Key Concept: Simultaneous Shifts

c) Equilibrium quantity increases.

[Solution Description] When both demand and supply curves shift rightward, the equilibrium quantity will generally increase. Since the magnitude of the demand shift is greater than the supply shift, the net effect would still be an increase in the equilibrium quantity, primarily driven by the stronger increase in demand.

Key Concept: Marginal Revenue Product

a) Hire the worker since MRPL > wage rate

[Solution Description] Since MRPL (\$150) is greater than the wage rate (\$120), it is profitable for the firm to hire the additional worker. This is because hiring the worker will add more to revenue than it costs in wages.

Key Concept: Consumer Impact

b) Some may end up paying higher prices in black markets

[Solution Description] With a price ceiling, the legal maximum price is often lower than the market-clearing price, leading to shortages. Consumers may face limited availability and potentially resort to purchasing goods from black markets at higher prices.

Key Concept: Comparative Analysis

c) The firm should reduce labour.

[Solution Description]

According to economic principles, firms hire labour until the marginal revenue product of labour (MRPL) equals the wage rate. Here, the MRPL (\$25) is less than the wage rate (\$30). This indicates that the firm is overpaying for the labour compared to the revenue generated by an additional worker. Hence, the firm should reduce its labour.

Key Concept: Real-World Application, Policy Impact Analysis

d) Severe apartment shortages.

[Solution Description] The introduction of a price ceiling below equilibrium rent results in excess demand, as the capped price makes renting more affordable, thus attracting more renters. However, landlords are less willing to rent out their apartments at lower prices, reducing supply availability.

Population growth further compounds this issue by shifting the demand curve rightward, increasing the number of potential renters vying for the limited available apartments.

Thus, the combination of a price ceiling and increased demand results in significant excess demand, leading to apartment shortages:

Key Concept: Market Equilibrium

b) Excess supply of labour

[Solution Description]

When the wage rate is set above the equilibrium level, there will be more people willing to work at that higher wage compared to what firms are willing to hire. This creates an excess supply of labour, leading to unemployment as not all workers can find jobs at the increased wage rate.

Key Concept: Real-World Application

b) Leftward shift in supply, increasing prices

[Solution Description]

The introduction of stricter environmental regulations increases production costs for car manufacturers. This typically results in a leftward shift of the supply curve due to decreased supply. As supply decreases, the equilibrium price is expected to rise, and the equilibrium quantity would decrease because there are fewer cars supplied at the previous price levels.

Key Concept: Real-World Application, Equilibrium Adjustment

a) Equilibrium price increases, equilibrium quantity decreases

[Solution Description] A sudden health trend favoring gluten-free products acts as a positive demand shock. Since all bakeries can produce gluten-free products, the demand for their goods increases. Given the fixed number of firms (bakeries), the immediate effect is an increased demand without a change in the number of suppliers. As demand rises, the equilibrium price tends to rise because consumers are willing to pay more for the desired product. However, due to limited capacity, the overall supply cannot immediately meet the increased demand, resulting in a higher equilibrium price and potentially constrained equilibrium quantity until capacities or entries adjust over time.

Key Concept: Equilibrium Quantity

c) 133

[Solution Description] To find the equilibrium quantity, set $$q_D = q_S$$. So, $$300 – 2p = p + 50$$. Solving for $$p$$, we get:

$$300 – 2p = p + 50$$

$$300 – 50 = 3p$$

$$250 = 3p$$

$$p = \frac{250}{3}$$

Substitute $$p = \frac{250}{3}$$ back into either the demand or supply equation to find $$q_{eq}$$:

$$q_{eq} = 300 – 2 \times \frac{250}{3}$$

$$q_{eq} = 300 – \frac{500}{3}$$

$$q_{eq} = \frac{900}{3} – \frac{500}{3}$$

$$q_{eq} = \frac{400}{3}$$

$$q_{eq} \approx 133.33$$

Therefore, the equilibrium quantity is approximately 133.