The table gives the equilibrium output and the full employment output of three economies (Rs crore):
| Economy | Equilibrium output | Full employment output |
|---|---|---|
| P | 800 | 1,000 |
| Q | 1,200 | 1,000 |
| R | 1,000 | 1,000 |
Which of the following is correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → P has deficient demand and Q has excess demand; prices tend to fall in P and rise in Q in the long run.
Compare equilibrium output with full employment output. Below it is deficient demand, and prices fall in the long run; above it is excess demand, and prices rise. P (800) is below 1,000; Q (1,200) is above.
Option (1) P has excess demand and Q has deficient demand; prices tend to rise in P and fall in Q in the long run. — Incorrect. The cases are the wrong way round: P has deficient demand, Q has excess demand.
Option (2) Only R is in equilibrium, because equilibrium needs full employment. — Incorrect. Equilibrium need not be at full employment; P and Q are in equilibrium too.
Option (3) P has deficient demand and Q has excess demand; prices tend to fall in P and rise in Q in the long run. — Correct. P deficient, prices fall; Q excess, prices rise.
Option (4) P has deficient demand and Q has excess demand; prices tend to rise in P and fall in Q in the long run. — Incorrect. The cases are right but the price effects are reversed.
NCERT (2026-27): “4.4 Some More Concepts Recall that equilibrium attained at the point of equality of Y and AD by itself does not signify full employment of resources. Equilibrium only means that if left to itself the level of income in the economy will not change even when there is unemployment in the economy. The equilibrium level of output may be more or less than the full employment level of output. If it is less than the full employment of output, it is due to the fact that demand is not enough to employ all factors of production. This situation is called the situation of deficient demand. It leads to decline in prices in the long run. On the other hand, if the equilibrium level of output is more than the full employment level, it is due to the fact that the demand is more than the level of output produced at full employment level. This situation is called the situation of excess demand. It leads to rise in prices in the long run.” |