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CHAPTER
MARKET EQUILIBRIUM
DEFINITION OF MARKET
EQUILIBRIUM
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
6
5
Price
4
3
E
P*
SS
DD
1
0
2
Q*
6
Quantity
10
Price
Quantity
Demanded
Quantity
Supplied
Market
Condition
Market Prices
10
SURPLUS
Falls
SURPLUS
Falls
EQUILIBRIUM
Equilibrium
SHORTAGE
Rises
10
SHORTAGE
Rises
CHANGES IN DEMAND
Assume supply is constant
Increase in
Demand
Price (RM)
SS
P2
P*
DD1
P1
DD2
Decrease in Demand
-DD curve shifts to the left
-Equilibrium price and quantity
decrease
DD
Q1
Q*
Q2
Quantity
CHANGES IN SUPPLY
Assume demand is constant
Increase in Supply
Price (RM)
SS2
SS
P2
SS1
P*
P1
DD
Decrease in Supply
-SS curve shifts to the left
Q1
Q*
Q2
Quantity
Case 1: Same
magnitude
SS
-Equilibrium price is
constant and
quantity increases
SS1
P*
DD
Q*
Q1
Quantity
DD1
SS
SS1
P1
P*
DD
Case 2: Different
Magnitude
-Equilibrium price
increases and quantity
increases
Principles of Economics second edition
Oxford Fajar Sdn. Bhd. (008974-T) 2010
Q*
Q1
Quantity
DD1
SS
SS1
P*
P1
DD
Case 3: Different
Magnitude
-Equilibrium price
decreases and quantity
increases
Q*
Q1
Quantity
MAXIMUM PRICE
MINIMUM PRICE
TAXES
SUBSIDIES
GOVERNMENT INTERVENTION IN
MARKETS
Price
Advantage:
Consumers purchase at
lower price
P*
Price
ceiling
P1
Shortages occur
D
Q1
Q*
Q2
Quantity
Disadvantages:
Emergence of black market
Reduction in quantity
produced
Producers tend to receive
illegal payments from
consumers
All Rights Reserved
Ch. 3: 12
GOVERNMENT INTERVENTION IN
MARKETS (cont.)
MINIMUM PRICE/FLOOR
PRICE
Price
Surplus occurs
Government-imposed regulations
that prevent prices from falling below
a minimum level
Advantages:
P1
Floor Price
P*
The government
imposes
a minimum
Waste of resources
of production
price of P1
Creates
unemployment
D
Q1
Q*
Q2
Quantity
All Rights Reserved
Ch. 3: 13
EFFECT OF TAXATION
INDIRECT TAX
S1
Price
14
12
10
CONSUMERS
SHARE
PRODUCERS
SHARE
D
200
400
Quantity
All Rights Reserved
Ch. 3: 14
S + tax (RM4)
15
S + tax
S
16
12
11
CONSUMERS
SHARE
CONSUMERS
SHARE
12
PRODUCERS SHARE
D
400
400
S + tax
S + tax
S
13
12
121 PRODUCERS
CONSUMERS' SHARE
SHARE
18
PRODUCERS
SHARE
400
400
EFFECT OF SUBSIDIES
SUBSIDY
Price
S1
50
45
40
CONSUMERS
SHARE
PRODUCERS
SHARE
D
10
20
Quantity
All Rights Reserved
Ch. 3: 16
S+ tax (RM4)
50
S + tax
50
47
CONSUMERS
SHARE
CONSUMERS'S SHARE
43
PRODUCERS
SHARE
40
PRODUCERS SHARE
40
D
O
10
10
MARKET FAILURE
Market failure exists when a free market is unable to