Q.A firm finds that quantity demanded and quantity supplied are 30 units when market price is ₹8 per unit. Further, if price is increased to ₹12 per unit, demand reduces to 0 and at a price of ₹5 per unit, the firm is not willing to produce. Assuming the linear relationship between price and quantity in both cases, find the demand function, supply function and consumers' surplus and producers' surplus at equilibrium price.

Market Equilibrium: The Intuition First

Imagine a busy vegetable market on a Saturday morning. Sellers have piles of tomatoes, and buyers are walking around with bags. If the price of tomatoes is very high — say ₹100 per kilo — only a few buyers will pick them up. Most will walk past. The sellers will be left with unsold stock that will rot by evening. Now imagine the price is very low — ₹10 per kilo. Suddenly everyone wants tomatoes, but the sellers run out in ten minutes. Many buyers go home empty-handed.

Neither situation is stable. The high-price scenario frustrates sellers; the low-price scenario frustrates buyers. The market will naturally move toward a price where both sides are satisfied — a price where the quantity buyers want to buy exactly equals the quantity sellers want to sell. That price is the equilibrium price, and the corresponding quantity is the equilibrium quantity.

This is the core idea: market equilibrium is a state of balance where no participant has an incentive to change their behaviour.

The Precise Statement

In economics, we model this using two curves:

• Demand curve: shows how much buyers are willing to purchase at each price (downward sloping — higher price, lower quantity demanded).
• Supply curve: shows how much sellers are willing to offer at each price (upward sloping — higher price, higher quantity supplied).

At the equilibrium price $P^*$, the quantity demanded $Q_d$ equals the quantity supplied $Q_s$. This common quantity is $Q^*$.

If the price is above $P^*$, supply exceeds demand — a surplus. Sellers, stuck with unsold goods, will cut prices to attract buyers, pushing the price down toward $P^*$.

If the price is below $P^*$, demand exceeds supply — a shortage. Buyers, unable to find enough goods, will bid prices up, pushing the price up toward $P^*$.

The market thus acts like an invisible hand, always nudging price toward equilibrium.

A Simple Numerical Example

Suppose the demand for notebooks in a class is:

And the supply from the stationery shop is:

Set them equal:

So the equilibrium price is ₹20. Plug back:

At ₹20, exactly 60 notebooks are bought and sold. No shortage, no surplus.

What Equilibrium Is Not …