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Chapter 5 c r P SS Market Equilibrium pf p* This chapter will be built on the foundation laid down in Chapters p1 2 and 4 where we studied the consumer and firm behaviour when DD they are price takers. In Chapter 2, we have seen that an O q1 q1 q* q2 q1 individual’s demand curve for a commodity tells us what quantity Quantity a consumer is willing to buy at different prices when he takes price as given. The market demand curve in turn tells us how much of the commodity all the consumers taken together are willing to purchase at different prices when everyone takes price as given. In Chapter 4, we have seen that an individual firm’s supply curve tells us the quantity of the commodity that a profit-maximising firm would wish to sell at different prices when it takes price as given and the market supply curve tells us how much of the commodity all the firms taken together would wish to supply at different prices when each firm takes price as given. In this chapter, we combine both consumers’ and firms’ behaviour to study market equilibrium through demand-supply analysis and determine at what price equilibrium will be attained. We also examine the effects of demand and supply shifts on equilibrium. At the end of the chapter, we will look at some of the applications of demand-supply analysis. 5.1 E QUILIBRIUM , E XCESS DEMAND , E XCESS SUPPLY A perfectly competitive market consists of buyers and sellers who are driven by their self-interested objectives. Recall from Chapters 2 and 4 that objectives of the consumers are to maximise their respective preference and that of the firms are to maximise their respective profits. Both the consumers’ and firms’ objectives are compatible in the equilibrium. An equilibrium is defined as a situation where the plans of all consumers and firms in the market match and the market clears. In equilibrium, the aggregate quantity that all firms wish to sell equals the quantity that all the consumers in the market wish to buy; in other words, market supply equals market demand. The price at which equilibrium is reached is called equilibrium price and the quantity bought and sold at this price is calledequilibrium quantity. Therefore, (p , q ) is an equilibrium if D ∗ S ∗ q (p ) = q (p ) Reprint 2026-27