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Unit 3: Supply and Market Equilibrium

Government imposes price ceiling and price floors to control demand and supply. If the Notes
price ceiling is above the market price, then there is no direct effect. If the price ceiling is set
below the market price, then a “shortage” is created; the quantity demanded will exceed
the quantity supplied.

When a “price floor” is set, a certain minimum amount must be paid for a good or service.
If the price floor is below a market price, no direct effect occurs. If the market price is lower

than the price floor, then a surplus will be generated.
3.6 Keywords

Equilibrium: A state of balance.
Law of supply: More of a good will be supplied the higher its price and vice-versa

Price ceiling: a government-imposed limit on how high a price can be charged on a product.
Price fl oor: government- or group-imposed limit on how low a price can be charged for a
product
Supply: Willingness and ability to produce a specific quantity of output available to consumers

at a particular price over a given period of time.

3.7 Self Assessment

State whether the following statements are true or false:
1. Supply is a positive function of price.

2. A trader has 10 bags of cement in his store. This represents supply of cement.
3. A supply schedule is a table that represents the various amounts of goods available for
supply at various prices.
4. When quantity demanded is more than quantity supplied, the prices tend to fall.

5. Price floor can be imposed by anyone in the market.

Fill in the Blanks
6. ……………. is a position at which there is no surplus or shortage in the economy.
7. As per law of supply, more goods will be supplied at ……………. price.
8. The supply curve is …………….. sloping.

9. There is only one possible price at which quantity supplied is ……………. quantity
demanded
10. In price ceiling, price is purposely held ……………. the equilibrium price.

11. If the market price is lower than the price floor, then ……………. is generated.

3.8 Review Questions

1. When profit for a firm relies on demand, then why is the study of supply important?

2. Draw a supply schedule based on the following data: Number of units supplied of X: 20,
40, 50, 60, 100 and Respective price: ` 30, ` 32, ` 34, ` 36 and ` 38.
3. Using demand and supply analysis explain why the government might wish to control the
price of rice below the market equilibrium price?

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