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    Eco415 - Chapter 4 Market Equillibrium

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    IRDINA 'ALIAH MAZLAN

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    Eco415 - Chapter 4 Market Equillibrium

    Uploaded by

    IRDINA 'ALIAH MAZLAN
    24 views13 pages

    Original Title

    ECO415_CHAPTER 4 MARKET EQUILLIBRIUM

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    24 views13 pages

    Eco415 - Chapter 4 Market Equillibrium

    Uploaded by

    IRDINA 'ALIAH MAZLAN

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 13

    MARKET EQUILLIBRIUM

    MADAM HAZALINDA BINTI HARUN


    A market equilibrium is a situation
    when quantity demanded and quantity
    supplied are equal and there is no
    tendency for price or quantity to
    change.

    QDD = QSS
    EQUILIBRIUM PRICE AND
    OUTPUT
    Price Quantity Quantity Market Market Prices
    Demanded Supplied Condition

    5 2 10 SURPLUS Falls

    4 4 8 SURPLUS Falls

    3 6 6 EQUILIBRIUM Equilibrium

    2 8 4 SHORTAGE Rises

    1 10 2 SHORTAGE Rises
    EQUILIBRIUM PRICE AND
    OUTPUT
    6 SURPLUS (QSS > QDD)

    4
    E
    Pric

    3 P*
    e

    SS
    2 DD

    1
    SHORTAGE (QDD > QSS)
    0
    Q*
    2 4 6 8 10
    Quantit
    y
    What causes a change in market equilibrium?
    A change in demand

    A change in supply

    Three Steps To Analyzing Changes in Equilibrium


    ● Decide whether supply or demand curve shifts (or both shift).
    ● Decide whether the curve(s) shift(s) to the left or to the right.
    ● Examine how the shift affects equilibrium price and quantity.
    EFFECT OF CHANGES IN DEMAND
    Increase in Demand
    Price (RM)
    - Increase in demand – D
    curve shift to the right (D0
    S0
    to D1) e.g: increase in
    income, population,no of
    P1 E1
    buyer.
    -New equilibrium (E0 to E1)
    P0 E0 -Higher demand leads to
    higher equilibrium price
    D1 (P0 to P1) and higher
    D0 equilibrium quantity (Q0 to
    Q0 Q1 Qty (Unit)
    Q 1) .
    EFFECT OF CHANGES IN DEMAND
    Decrease in Demand
    Price (RM)

    📫Decrease in demand – D
    S0 curve shift to the left (D0
    to D1)
    📫e.g: decrease in income.
    P0 E0 📫New equilibrium (E0 to E1)
    P2 📫 Lower demand leads to
    E2
    lower equilibrium price
    (P0 to P2) and lower
    D0
    D2
    equilibrium quantity (Q0 to
    Q2).
    Q1 Q0 Qty (Unit)
    EFFECT OF CHANGES IN SUPPLY

    Increase in Supply
    Price (RM)
    -increase in supply – S
    curve
    S0
    shift to the right (S0 to S1)
    S1 -e.g: increase in numbers of
    P0 E0 seller.
    - New equilibrium (E0 to E1)
    P1 E1 -Higher supply leads to
    lower equilibrium price
    (P0 to P1) and higher
    D0 equilibrium quantity (Q0 to
    Q1).
    Q0 Q1 Qty (Unit)
    EFFECT OF CHANGES IN SUPPLY

    Decrease in Supply
    Price (RM)
    -decrease in supply – S
    S2 curve
    shift to the left (S0 to S2)
    S0
    -e.g: increase in cost of
    P2 E1 production
    -New equilibrium (E0 to E2)
    P0 E0 -Lower supply leads to
    higher equilibrium price
    (P0 to P2) and lower
    D0
    equilibrium quantity (Q0 to
    Q2 Q0
    Q2).
    Qty (Unit)
    PRICE CONTROL
    GOVERNMENT INTERVENTION IN MARKETS
    MAXIMUM PRICE/CEILING PRICE
    • Regulations that prevent prices from rising above a maximum level
    • The highest P that can a seller can charge
    Price
    The equilibrium price is P* and the quantity is Q*

    The government imposes a maximum price of P1


    D S
    Suppliers reduce the amount offered to Q1 but
    demand would rise to Q2, creating a shortage
    P*
    Advantage:
    • Consumers purchase at lower price
    • Control inflation
    Price
    P1 ceiling
    Shortages occur
    Disadvantages:
    • Shortages
    • Unfair to sellers (lower P)
    • Emergence of black market
    Q1 Q* Q2 Quantity • Exploitation of customers
    • Hoarding activity
    GOVERNMENT INTERVENTION IN MARKETS
    MINIMUM PRICE/FLOOR PRICE
    • Regulations that prevent prices from falling below a minimum level
    • The lowest P that a seller can charge

    Price
    The equilibrium price is P* and
    the quantity is Q*.
    S
    Surplus The government imposes a
    P1 Pmin minimum price of P1

    Suppliers increase the amount


    P* offered to Q2 but demand drop to
    Q1, creating a surplus

    Advantages:
    • Supports producers’ income
    D • Creates buffer stock

    Disadvantages:
    • Unfair to consumers (Higher P)
    Q1 Q* Q2 Quantity • Surplus-Waste of resources
    •Unfair to taxpayers – tax used
    to buy surplus
    THANK YOU
    FOR YOUR TIME

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