CBSE Class 12 Economics Chapter 5 Government Budget and the Economy – NCERT Solutions 2025-26

1. Explain market equilibrium.

Ans: In which marketplace demand is identical to the delivery of the marketplace is known as the market equilibrium. Market equality takes place when deliver = demand. At this factor, there's no tendency for charges to vary. We are saying the rate of cleansing the market has been found.

In the diagram below, the equilibrium price is 60. The equilibrium quantity is 500.

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It also refers to a price at which parties, producers and consumers agree to exchange.

2. When do we say that there is an excess demand for a commodity in the market?

Ans: Excess demand occurs when market demand for a product or service exceeds market supply at a given price. In other words, if the producers are willing to supply less than what is demanded by all consumers at whatever price. When there is an excess of demand in the market, we have an oversupply issue.

3. When do we say that there is an excess supply for a commodity in the market?

Ans: Excess supply occurs when a commodity's supply in the market outnumbers its demand at a given price. In other words, if at any price level, all customers desire a lower quantity than what all suppliers supply, we have an excess supply situation.

4. What will happen if the price prevailing in the market is?

i. Above the equilibrium price

Ans: The price at which market demand and supply are equal is known as the equilibrium price.

When the market price is higher than the equilibrium price, demand will be lower than supply, indicating that there is an excess supply in the market. Excess supply will cause the market price to fall, causing demand to expand and supply to decline. The process of expansion and contraction would continue until supply and demand reached a point of balance. As a result of the free play of market forces, equilibrium price will be restored.

Ii. Below the equilibrium price

Ans: When the market price is below the equilibrium price, demand exceeds supply, indicating that there is surplus demand in the market. Excess demand will induce a rise in market price, forcing demand to reduce and supply to expand. The cycle of contraction and extension would continue until supply and demand reached a point of balance. Through the free play of market forces, the equilibrium price will be restored.

5. Explain how price is determined in a perfectly competitive market with a fixed number of firms.

Ans: The forces of market demand and supply determine the equilibrium price in a completely competitive market. The entire demand for a commodity by all buyers in the market is referred to as market demand. Market supply, on the other hand, refers to the overall supply of a commodity by all market participants. We define equilibrium price as the point when market demand equals market supply, or the point where the market demand curve and the market supply curve connect.

6. Suppose the price at which the equilibrium is attained in exercise 5 is above the minimum average cost of the firms constituting the market. Now if we allow for free entry and exit of firms, how will the market price adjust to it?

Ans: If the equilibrium charge (Rs 8) inside the above discern (of Q-5) is above the minimum of common cost, then it means that the company is earning supernormal income. This example will attract new firms inside the marketplace. As the new firms enter, the enterprise supply of output will even boom. New firms will retain to go into the industry with the intention to lead the rate to fall until it becomes the same to the minimum of the average value. Thus, the supernormal income is worn out and all the corporations earn ordinary profits. When the loose entry and exit of companies is allowed, the equilibrium is decided through the intersection of the call for curve and the 'P =min AC line.

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7. At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is the equilibrium quantity determined in such a market?

Ans: In the long run, due to the loose access and exit of companies, all the firms earn 0 monetary income or normal income. They neither earn ordinary earnings nor peculiar losses. Thus, the loose access and go out function guarantees that in the end the equilibrium charge will be the same to the minimum of average value, no matter whether or not earnings or losses are earned inside the quick run.

The equilibrium is determined by the intersection of purchasers' call for curve and the ' ‘P=min AC’ line. At equilibrium E, the amount supplied through every company is qe on the price (P).

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8. How is the equilibrium number of firms determined in a market where entry and exit is permitted?

Ans: The function of loose access and exit of firms guarantees that all the corporations in a really perfect aggressive market earn ordinary profit, i.e. the market price is constantly the same as the minimum of LAC. No new firm could be attracted to enter the market or no current firm will leave, if the price is the same as the minimum of LAC. accordingly, the variety of companies is determined by way of the equality of fee and the minimum of LAC. The marketplace equilibrium is decided by means of the intersection of marketplace call for curve (D1D1) and the price line. The equilibrium fee is and the equilibrium output is q1. At this equilibrium price, every company produces the equal output q1, as it's widely assumed that every one of the companies are equal. Consequently, on the equilibrium, the range of companies inside the market is equal to the quantity of corporations required to deliver output at rate, and each in turn offering q1f quantity at this rate.
That is n=q1/q1f

Where,

   N= number of firms at market equilibrium

   Q1= the equilibrium quantity demanded

   Q1f= the quantity of output supplied by each firm 

9. How are equilibrium price and quantity affected when income of the consumers

a) Increase

b) Decrease

Ans: 

(a) Whilst there may be boom in profits of customers:-

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If the wide variety of corporations is believed to be fixed, then the boom in consumers’ income will lead to boom in demand of clients which results inside the equilibrium charge to rise.

let us recognize the way it happens:

D1D1 and S1S1 constitute the marketplace demand and market supply respectively. The initial equilibrium takes place at E1, in which the demand and the supply intersect very differently. Due to the increase in client's earnings, the call for curve will shift rightward parallel because of an increase inside the demand of the customers even as the supply curve will stay unchanged.

therefore, there will be a scenario of excess call for, equivalent to qe-q1. therefore, the charge will upward push because of excess call for. The charge will keep rising till it reaches E2 (new equilibrium), wherein D2D2 intersects the supply curve eleven SS. The equilibrium charge increases from P1 to P2 and the equilibrium output will increase from qe to q2 and the equilibrium factor shifts from E1 to E2.

(b) Whilst there's decrease in the earnings of customers:-

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The decrease in consumer's income is depicted by the leftward parallel shift of the demand curve from D1D1 to D2D2 because of the decrease in the demand of consumers.therefore, on the fee pe, there might be an execs deliver (qe-q1), resulting the price to fall. At the new equilibrium (E2), where D2D2 intersects the supply curve, the equilibrium rate falls from to and the equilibrium quantity falls from qe to q2 and the equilibrium factor shifts from E1 to E2. Above referred scenario is possibly most effective in the case of normal items.

10. Using supply and demand curves show how an increase in the price of shoes affects the price of a pair of socks and the number of pairs of socks bought and sold.

Ans: Both footwear and socks are complementary to each different and are used together. Therefore, the boom in shoe rate will discourage the demand for socks. Consequently, due to the lower demand for socks, the demand curve for socks will shift leftwards parallel from D1D1 to D2D2. The deliver last unchanged, on the equilibrium charge, there exists extra supply of socks, which reduces the fee of socks and the new equilibrium can be at E2, with equilibrium charge P2 and equilibrium amount q2. charge decreases from P1 to P2 demand decreases from qe to q2 equilibrium factor shifts from E1 to E2.

11. How will a change in the price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram. 

Ans: Espresso and tea are alternative goods, i.e. they may be used inside the place of each different. An increase or a decrease within the fee of coffee will cause a boom or a decrease inside the call for tea respectively.

The parent below depicts the equilibrium of the tea market. The preliminary demand and delivery of tea is depicted through D1D1 and S1S1 respectively. The initial equilibrium is at E1, with the equilibrium fee (Pe) and equilibrium amount (qe).

Now, if the price of espresso increases, the call for espresso decreases so one can lead to a boom in the call for tea (being an alternative exact), the demand curve of tea will shift rightward parallel and the charge of tea will rise. at the equilibrium price (Pe), there may be an excess demand for tea; therefore, the fee of tea will upward push. This will form the new equilibrium at, with the new equilibrium charge will increase from Pe to P2 and the new equilibrium output q2. As a result, an increase in the rate of espresso, will lead the equilibrium charge of tea to upward push (due to excess call for). Further, the growth in the rate of espresso may also result in the growth in demand for tea as tea is the synthetic precice for coffee.

Now, if the rate of espresso decreases, the call for coffee increases and there will be a decrease inside the call for tea. The demand curve for tea will shift leftward parallel to D2D2. at the equilibrium fee (Pe), there might be an excess supply. Therefore, the charge of tea will fall, if you want to form the brand new equilibrium at E2, with the brand new equilibrium rate falling from Pe to P2 and the brand new equilibrium output decreases from to. As a result, a decrease inside the rate of coffee will lead to a decrease inside the fee of tea and a decrease inside the call for tea, as people will switch over to intake of coffee.

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12. How do the equilibrium price and the quantity of a commodity change when the price of input used in its production changes?

Ans: The cost of production of a commodity is affected by changes in input prices. Let's have a look at the two scenarios. 

(a) Increase in input price: If a firm's input price rises, the firm's cost of production rises as well, the supply of product falls, and the profit margin falls, reducing the firm's motivation to produce and provide the commodity. This will cause the marginal cost curve to shift to the left, followed by a leftward parallel change in an individual firm's supply curve, and finally a leftward shift in the market supply curve.

With the demand curve unchanged, a new equilibrium will emerge at E2, with a higher equilibrium price (P2) and lower output quantity (q2).

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(b) Reduced input price: If a firm's input price falls, the cost of manufacturing falls, the supply of product rises, and the profit margin rises. The marginal cost curve will shift rightward as a result, implying that the firm's supply curve will change rightward as well. As a result, the market supply curve will shift rightward from S1S1 to S2S2 in a parallel fashion. With the demand curve staying unchanged, a new equilibrium will emerge at E2, with a lower equilibrium price (P2) and a greater output quantity level (q2).

13. If the price of a substitute Y of good X increases, what impact does it have on the equilibrium price and quantity of good X?

Ans: X and Y being replacement items, if the fee of Y increases, then it will lessen the call for Y and people will switch to commodity X, for you to raise the demand for X consequently the price of X will boom. growth or lower in fees of substitute items usually immediately impacts the equilibrium price and amount of goods. As a consequence, the call for curve will shift from D1D1 to D2D2. At the present fee P1, there may be an extra demand. because of the pressure of excess demand, the present rate will boom.

consequently, the brand new equilibrium occurs at E2, wherein the brand new demand curve D2D2 intersects the supply curve S1S1. the new equilibrium fee is P2, that is better than P1 and equilibrium quantity is q2, that's better than q1. therefore, due to the growth inside the rate of substitute accurate Y, the equilibrium charge of X will rise and equilibrium output of X can also be better.

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14. Compare the effect of shift in the demand curve on the equilibrium when the number of firms in the market is fixed with the situation when entry-exit is permitted.

Ans: 

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The above parent depicts the cases when the range of firms is constant (within the brief run) and whilst the wide variety of corporations is not constant (in the long run). 'P= min AC represents the longer term charge line, D1D1 and D2D2 constitute the needs inside the brief run and the long run. The factor E1 represents the preliminary equilibrium wherein the call for curve and the delivery curve intersect each other. Now, let us think that the call for curve shifts below the belief that the quantity of corporations are fixed; as a result, the brand new equilibrium will be at Es (within the short run), where the deliver curve S1S1 and the brand new demand curve D2D2 intersect each other. The equilibrium rate is playstation  and equilibrium quantity qs. Now let us analyse the scenario underneath the assumption of unfastened access and go out.

The boom in call for will shift the demand curve rightwards to D2D2. the brand new equilibrium could be at E2. it is the long run equilibrium with equilibrium rate P=min

AC and equilibrium quantity q1. consequently, on evaluating both the cases, we find that when the corporations are given the liberty of access and go out, the equilibrium fee remains the equal and the charge is lower than the quick run equilibrium rate ps while, inside the case of longer term equilibrium amount qL is more than that of the short run qs. Similarly, for leftward demand shift, it can be mentioned that the short run equilibrium price is ps less than the long run equilibrium fee and the fast run equilibrium quantity is much less than the long term equilibrium quantity qL.

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In short, when excess call for increases, it ends in price growth and supernormal profit. This draws new entrants inside the market and results in minimal common price.

15. Explain through a diagram the effect of a rightward shift of both the demand and supply curves on equilibrium price and quantity.

Ans: Whilst both call for and delivery of a commodity will increase, the equilibrium quantity will increase however there'll not be any impact on equilibrium rate. possibilities of following 3 conditions can take place: -

(a) When call for and deliver boom in the same proportion:

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E1 is the preliminary equilibrium with equilibrium fee P1 and equilibrium q1.

Now, let us suppose that the demand increases to D2D2 and the supply growth S2S2 to through the equal proportion. the brand new demand and new deliver curve intersect at E2, that's the brand new equilibrium, with a new equilibrium output q2, but the equal equilibrium rate P1. therefore, an increase in the demand and the supply via the same share leaves the equilibrium fee unchanged.

When demand will increase greater than the increase in deliver: The original demand and deliver curves intersect each different at E1 with preliminary equilibrium rate P1 and preliminary equilibrium output q1. Now, allow us to suppose that the call for will increase and thereby the call for curve shifts to D2D2 the supply curve additionally shifts rightwards to S2S2. however, the boom in deliver is less than the increase in demand. the brand new deliver curve and the brand new call for curve intersect each other at factor E2 with better equilibrium price P2 and better equilibrium output q2

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When the boom in demand is less than the increase in delivery: permit the initial equilibrium be at E1 with the equilibrium price P1 and equilibrium output q1. Now, let us assume that the demand will increase to D2D2 and the delivery will increase to S2S2 in which the boom in supply is extra than that of demand. the brand new call for curve D2D2 and the new delivery curve S2S2 intersect at E2. Therefore, the greater increase in the delivery curve as compared to the demand curve will lead the equilibrium rate to fall and equilibrium output to rise.

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16. How are the equilibrium price and quantity affected when?

(a) Both demand and supply curves shift in the same direction?

Ans: When both the demand and supply curves shift in same direction then following will happen:

(b) Demand and supply curves shift in opposite directions?

Ans:

17. In what respect do the supply and demand curves in the labor market differ from those in the goods market?

Ans: The deliver and demand curves inside the hard work market fluctuate from those in the products marketplace inside the following ways:

i) In an items market, the demand for goods is made by way of consumers or families; even as in an exertion market, the demand for labor is made with the aid of corporations.

ii) In an items marketplace, the delivery of goods is made by companies; at the same time as in an exertions marketplace, the supply of exertions is made by households.

So, in an items marketplace, firms act as suppliers; in an exertions marketplace, families act as suppliers.

18. How is the optimal amount of labor determined in a perfectly competitive market?

Ans: A profit maximizing firm will employ labor up to the point where the extra cost incurred by employing the last unit of labor (wage) equals the additional benefit it earns by employing that unit of labor. That is, Marginal cost of labor = Marginal benefit by labor Or, Wage rate = Marginal Revenue Product 

Or, w = MRP1

Or, w =MR * MPL (as MRPL= MR*MPL )

Or, w =P * MPL (in Perfect Competition Price = MR)

Or, w =VMPL (because VMPL = P * MPL)

The demand for hard work is derived from VMPL and the supply of hard work is definitely sloped. The equilibrium exists at E, wherein the call for for hard work and the supply of exertions intersect each different. The equilibrium wage fee is wand most suitable amount of exertions is qL.

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19. How is the wage rate determined in a perfectly competitive labor market?

Ans: Just like an items marketplace, salary price in an exertions marketplace is decided by means of the intersection of demand and supply of exertions. The charge at which the call for equals the delivery is called the equilibrium salary price. Corresponding hours of exertion are demanded and supplied in the labor market at the equilibrium wage rate. The demand for labor is derived from the value of marginal product of labor (VMPL). We understand that a specific company will hire labor up to a point where the marginal cost of employing the last unit of labor hired equals the marginal benefit earned by the firm by hiring that unit of labor.

Labor is supplied by those households, who need to trade off between working hours (labor) or leisure. The supply of exertions is a high-quality function of wage up to some extent beyond which the supply curve turns into backward bending supply curve.

Below diagram depicts the intersection of demand for exertions and the deliver of hard work that is occurring at the wage charge

here, the equilibrium takes vicinity at E in which DLDL equals SLSL and the equilibrium units of hard work provided and demanded is L.

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20. Can you think of any commodity on which the price ceiling is imposed in India? What may be the consequence of price-ceiling?

Ans: Fee ceiling means identifying lower prices in comparison to market charge of goods. In India, there are many goods on which authorities has imposed price ceiling, so one can keep them available in the reach of the BPL (beneath poverty line) human beings. those goods are kerosene, sugar, wheat, rice, and many others. that are generally available in honest charge shops or Ration shops. it's far typically maintained by using food agency of India which keeps the public Distribution machine in India.

The following are the consequences of price ceiling:

1. Excess demand- Due to artificially imposed price, cutting lower than the equilibrium price leads to the emergence of the problem of excess demand.

2. Fixed Quota-  Each patron receives a hard and fast quantity of products (as in step with quota). the quantity frequently falls short of assembling the character’s requirements. This further leads to the problem of shortage and the patron stays unhappy.

3. Inferior goods- Often it has been found that the goods that are rationed are usually inferior/low quality goods and are adulterated.

4. Black marketing-The desires of a purchaser stay unfulfilled as in line with the quota laid with the aid of the authorities. consequently, a number of the unhappy clients get ready to pay higher rate for the additional amount. This ends in black-advertising and synthetic shortage within the marketplace.

21. A shift in demand curve has a larger effect on price and smaller effect on quantity when the number of firms is fixed compared to the situation when free entry and exits is permitted. Explain.

Ans: In the short run, the number of firms is fixed, however in the long run, it is not.

Now, using the two graphs below, we will illustrate the influence in the short run market:

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When the number of businesses is fixed in the short run – Graph 1.1 – DD represents the demand curve, and E represents the initial equilibrium, where demand and supply overlap.

When demand grows, the demand curve shifts to D1D1, resulting in a new equilibrium E1 in which the supply and demand curves intersect at price P1 and equilibrium quantity Q1. As a result, both the equilibrium price and the quantity rise.

Graph 1.2: The demand curve is represented by DD, and the initial equilibrium is represented by E, where demand and supply intersect.

When demand falls, the demand curve shifts to D2D2, resulting in a new equilibrium E2 where the supply and demand curves cross at price P2 and equilibrium quantity Q2. Both the equilibrium price and quantity fall as a result.

Now, using the two graphs below, we will describe the influence in the long run market:

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When the number of enterprises is not fixed in the long run, but free entry and exit are permitted.

Graph 2.1: The demand curve is represented by DD, and the initial equilibrium is represented by E, where P = Min AC.

When demand grows, the demand curve moves to D1D1, resulting in a new equilibrium E1 with the same price and Q1 as the equilibrium quantity. This means that while the equilibrium price remains constant, the equilibrium quantity increases.

Graph 2.2: The demand curve is represented by DD, and the initial equilibrium is represented by E, where P = Min AC.

When demand falls, the demand curve flips to D2D2, resulting in a new equilibrium E2 with the same price and Q2 as the equilibrium quantity. This means that while the equilibrium price remains constant, the equilibrium quantity decreases.

22. Suppose the demand and supply curve of commodity $X$ in a perfectly competitive market are given by:

qD =700 - p

qs = 500 + 3p for p ≥ 15

= 0 or 0 ≤ p <15

Assume that the market consists of identical firms. Identify the reason behind the market supply of commodity X being zero at any price less than Rs 15. What will be the equilibrium price for this commodity? At equilibrium, what quantity of X will be produced?

Ans: If the authorities impose a rate ceiling by means of rent manipulation Act (the most charge) that may be charged because of the rent of the apartment.

It consequences decline in equilibrium charge because of (i) excess demand of residences (ii) black marketing by way of developers Now as according to the stated, it's miles given that; 

qD =700 - p

qs = 500 + 3p for p ≥ 15

= 0 or 0 ≤ p <15

The marketplace deliver is zero for any fee from Rs 0 to Rs 15 , this is due to the fact, for rate among zero to fifteen, no man or woman company will produce any high-quality degree of output (because the fee is less than the minimal of AVC). therefore, the market deliver curve can be 0. At equilibrium qD = 700 - qs

P = 500 + 3p

-4p= -200

p = 50

Equilibrium price is Rs 50.

Quantity = qs = 500 + 3p

= 500 + 3 (50)

= 500 + 150

= 650

Therefore, the equilibrium quantity is 650 units.

23. Considering the same demand curve as in exercise 22, now let us understand for free entry and exit of the firms producing commodity X. Also assume the market consists of identical firms producing commodity X. Let the supply curve of a single firm be explained?

q*= 8+3p for p ≥ 20

= 0 for 0 ≤ p ≤ Rs 20

(a) What is the significance of p =20?

Ans: As per the question:

q*, = 8 + 3p for p ≥ 20

= 0 for 0 ≤ p < Rs 20

qd =700 – p

For the price between 0 to 20, no firm is going to produce anything as the price in this range is below the minimum of LAC. So, at the price of Rs 20, the price line is equal to the minimum of LAC.

(b) At what price will the market for X be in equilibrium? State the reason for your answer.

Ans: As there exists the freedom of entry and exit of companies, the minimal of   AVC is at Rs 20, also, the rate of Rs 20 is the equilibrium charge. this is due to the fact in the end, all firms earn zero financial earnings, which implies that the rate of Rs 20 is the equilibrium price and at any charge decrease than Rs 20, the firm will circulate out of the marketplace.

(c) Calculate the equilibrium quantity and number of firms. 

Ans:  At equilibrium price of Rs 20

Quantity supplied = qs = 8+3p

= 8+3 (20)

= 68 units

Quantity demanded qd =700-p 

=700-20

qd = 680 units

Number of firms (n) =q4/q*a

N = 680/68

n=10 firms

Therefore,  10 is the number of firms in the market and the equilibrium quantity in 680 units.

24. Suppose the demand and supply curves of salt are given by:

(a) Find the equilibrium price and quantity.

(b) Now, suppose that the price of an input that used to produce salt has increased so, that the new supply curve is qs = 400 + 3p

How does the equilibrium price and quantity change? Does the change conform to your expectation?

(a) Suppose the government has imposed at ax of Rs 3 per unit of sale on salt. How does it affect the equilibrium rice quantity? 

Ans: As per the question:-

(a) At equilibrium price and quantity will be:

1000 – p = 700 + 2p

300 = 3 p

100 = p

P = Rs 100

= 1000 - 100 (Substituting the value of p in equation (1)) dq

= 900 units

So, the equilibrium price is Rs 100 and equilibrium quantity is 900 units.

(b) New quantity supplied q's

q‘s= 400 + 2p

At equilibrium qd =q's 1000 

600 = 3p

200 = p

P = Rs 200

Previous to the boom inside the rate of input, the equilibrium price was Rs a hundred , and after the rise in enter's charge, the equilibrium fee is Rs 2 hundred .

So, the exchange in equilibrium charge in Rs a hundred (200 - 100).

= 4000 - 200 (Subtitling the value of p in equation (1)) dq

= 800 gadgets

The trade in the equilibrium quantity is a hundred devices (i.e. 900 - 800 devices).

yes, this transformation is obvious, as because of the alternate in the input's price, the price of manufacturing salt has expanded as a way to shift the marginal fee curve leftward and pass the supply curve to the left. A leftward shift inside the deliver curve outcomes in a upward push inside the equilibrium fee and a fall inside the equilibrium quantity.

(c) The imposition of tax of Rs 3 consistent with unit of salt sold will enhance the cost of producing salt. this could shift the supply curve leftwards and the amount supplied equation will

become

YS = 700 +2 (p-3)

At equilibrium 

yd = ys

1000 – p = 700 + 2 ( p – 3 )

1000 – p = 700 + 2p – 6

306 = 3p

360/3 = p

P = Rs 102

Substituting the value of p in equation (1)

yd = 1000 - p

yd = 1000 - 102

yd = 898 units

As a consequence, the imposition of tax of Rs three in keeping with unit of salt sold will result in an increase in the rate of salt from Rs 100 to Rs 102. The equilibrium amount falls from 900 devices to 898 gadgets.

25. Suppose the market determined rent for apartments is too high for common people to afford. If the government comes forward to help those seeking apartments on rent by imposing control on rent, what impact will it have on the market for apartments?

Ans:

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The above figure depicts an equilibrium and an effect of fee ceiling (most lease). The marketplace demand for apartments is depicted by way of the D1D1 curve and the supply of flats is depicted via the S1S1. The equilibrium charge determined is R and the equilibrium amount is q. If the government steps in and imposes a rent ceiling (maximum lease) equivalent to RG, then at this rate, there will be an excess demand. the quantity of apartments demanded can be GR, whereas the quantity of flats supplied is qs. So, there exists an extra demand equivalent to qd-qs. On the RG fee, common people can come up with the money for flats to live in, which in advance they have been no longer able to.

However, besides this nice impact of imposition of most rent, it might happen that some landlords indulge inside the exercise of black advertising and provide residences for rent at relatively better charge

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