Class 11 Micro Economics Notes · CBSE

Market Equilibrium under Perfect Competition

Market Equilibrium under Perfect Competition — understanding how equilibrium price and quantity are determined when market demand equals market supply. CBSE Class 11 Microeconomics notes with the chocolate market schedule and graphs.

Last updated: 16 Sep 2026

Notes

The Three Elements of a Market

The concepts of demand and supply help us to understand the motivations and actions of people in their roles as consumers and producers. However, these concepts are of limited use when they are taken separately. They become more useful when they are used together to explain the behaviour of equilibrium in the market.

Demand

Describing the behaviour of consumers in the market.

Market Equilibrium

Connecting demand and supply and describing how consumers and producers interact in the market.

Supply

Describing the behaviour of firms in the market.

This chapter deals with the study of the determination of ‘Market Equilibrium’ and the effects of changes in demand and/or supply on the ‘Market Equilibrium’.

Determination of Market Equilibrium

Market Equilibrium under Perfect Competition

Under perfect competition, market equilibrium is determined when market demand is equal to market supply. Each firm is a price-taker and the price is determined by the market forces of demand and supply.

Market Demand

The sum total of demand for a commodity by all the buyers in the market. Its curve slopes downwards due to the operation of the law of demand.

Market Supply

The sum total of supplies of a commodity by all the producers in the market. Its curve slopes upwards due to the operation of the law of supply.

Both market demand and market supply act as the counteracting forces, which move in the opposite directions.

Market Equilibrium is determined when the quantity demanded of a commodity becomes equal to the quantity supplied.

The price determined corresponding to market equilibrium is known as the equilibrium price and the corresponding quantity is known as the equilibrium quantity. ⭐

Buyers will like to pay as low as possible and sellers will like to charge as high as possible. But market equilibrium will be determined only when both agree to a common price and a common quantity at that price.

This equilibrium price and quantity has a tendency to persist.

Table 11.1: Market Equilibrium under Perfect Competition
Price of Chocolate (₹)	Market Demand (units)	Market Supply (units)	Shortage (−) or Surplus (+)	Remarks
2	100	20	(−) 80	Excess Demand (Market demand > Market supply)
4	80	40	(−) 40
6	60	60	0	Equilibrium Level (Market demand = Market supply)
8	40	80	(+) 40	Excess Supply (Market supply > Market demand)
10	20	100	(+) 80

Market Equilibrium

At point E, ₹6 is determined as the Equilibrium Price and 60 chocolates as the Equilibrium Quantity. Market equilibrium is determined at point E where the demand curve DD and the supply curve SS intersect each other.

Why Any Other Price is Not the Equilibrium Price

Any price above ₹6

Any price above ₹6 is not the equilibrium price as the resulting surplus, i.e. excess supply, would cause competition among sellers. In order to sell the excess stock, price would come down to the equilibrium price of ₹6.

Any price below ₹6

Any price below ₹6 is also not the equilibrium price as due to excess demand, buyers would be ready to pay a higher price to meet their demand. As a result, price would rise up to the equilibrium price of ₹6.

Important Points about Market Equilibrium

Each firm is a price-taker and the industry is the price-maker.

Each firm earns only normal profits in the long run.

Decisions of consumers and producers in the market are coordinated through a free flow of prices known as the price mechanism.

It is assumed that both the law of demand and the law of supply operate.

Equilibrium Price is the price at which the quantity demanded of a commodity is equal to the quantity supplied.

At the equilibrium price, there is neither a shortage nor an excess of demand and supply.

Equilibrium Quantity is the quantity demanded and supplied at the equilibrium price.

Excess Demand

Excess demand refers to a situation when the quantity demanded is more than the quantity supplied at the prevailing market price. Under this situation, the market price is less than the equilibrium price.

In Table 11.1, excess demand occurs at prices of ₹2 and ₹4, when market demand is more than market supply.

Excess Demand

Competition among buyers

1/4

The excess demand of Q₁Q₂ will lead to competition amongst the buyers as each buyer wants to have the commodity.

Excess Supply

Excess supply refers to a situation when the quantity supplied is more than the quantity demanded at the prevailing market price. Under this situation, the market price is more than the equilibrium price.

In Table 11.1, excess supply occurs at prices of ₹8 and ₹10, when market supply is more than market demand.

Excess Supply

Competition among sellers

1/4

Excess supply of Q₁Q₂ will lead to competition amongst sellers as each seller wants to sell his product.

Key Takeaways

Market equilibrium under perfect competition is determined where market demand equals market supply; the price there is the equilibrium price and the quantity is the equilibrium quantity. ⭐
Market demand slopes downward (law of demand); market supply slopes upward (law of supply) — the two are counteracting forces. ⭐
Any price above equilibrium creates excess supply and falls back; any price below equilibrium creates excess demand and rises back — equilibrium has a tendency to persist. ⭐
Excess demand (price below equilibrium) is wiped out as buyers compete, price rises, demand contracts and supply expands. ⭐
Excess supply (price above equilibrium) is wiped out as sellers compete, price falls, supply contracts and demand expands. ⭐
Each firm is a price-taker, the industry is the price-maker, and coordination happens through the price mechanism.