MARKET EQUILIBRIM and it's application s.pptx

Market equilibrium

1. MARKET EQUILIBRIM and its Applications

2. MARKET EQUILIBRIUM MARKETS : We can represent a market in equilibrium in a graph by showing the combined price and quantity at which the supply and demand curves intersect. Equilibrium is achieved at the price at which quantities demanded and supplied are equal.

3. EQUILIBRIUM Equilibrium is a situation in which the market price has reached the level at which quantity supplied equals quantity demanded. At the equilibrium price , the quantity of the good that buyers are willing and able to buy exactly balances the quantity that sellers are willing and able to sell. Equilibrium price is the price that balances quantity supplied and quantity demanded.

4. EQUILIBRIUM Price Qd Qs Market condition 40 26 4 Shortage 80 24 8 Shortage 120 22 12 Shortage 160 20 20 Equilibrium 200 18 28 Surplus 240 16 36 Surplus

5. EQUILIBRIUM

6. Effect of changes in Demand and Supply on Price Rise of demand pushes up the price while fall of demand depress it. Rise of supply lowers price and fall of demand raises it.

7. EXAMPLE P S D1 D2(rise) D3(fall) 3 60 120 150 90 4 80 110 140 80 5 100 100 130 70 6 120 90 120 60 7 140 80 110 50

8. Effect of change in Demand Shift in demand from Do to D1 and D2 due to change in any non-price factor while supply is constant .

9. Effect of change in supply Shift in supply from S to S1 due to change in any non-price factor while Demand is constant .

10. DEMAND AND SUPPLY INCREASE EQUALLY Shift in both supply and demand with new equilibrium price.

11. DEMAND INCREASE MORE THAN SUPPLY The equilibrium price rises from P1 to P2 and the equilibrium quantity rises from Q1 to Q2.

12. DEMAND RISE LESS THAN SUPPLY The equilibrium price again rises from P1 to P2 but the equilibrium quantity falls from Q1 to Q2.

13. DEMAND AND SUPPLY FALL EQUALLY New Equilibrium occur at high prices.

14. SUPPLY FALL MORE THAN DEMAND DEMAND RISES AND SUPPLY FALLS DEMAND FALLS MORE THAN SUPPLY Note; all steps of change in Equilibrium must cover from book.

15. Quick Quiz On the appropriate diagram, show what happens to the market for pizza if the price of tomatoes rises. • On a separate diagram, show what happens to the market for pizza if the price of hamburgers falls.

16. Applications of Supply and Demand Demand and Supply Model Economists believe there are a small number of fundamental principles that explain how economic agents respond in different situations. Two of these principles, are the laws of demand and supply. Governments can pass laws affecting market outcomes, but no law can negate these economic principles. The laws of supply and demand often become apparent in sometimes unexpected ways, which may undermine the intent of the government policy. 

17. Price Ceilings Price Ceilings: a legal maximum price for a product. Keeps a price from rising above a certain level (the “ceiling”). Governments typically set a price ceiling to protect consumers by making necessary products affordable, but you’ll come to see how this sometimes backfires by creating a market shortage . Consumers, who are also potential voters, sometimes unite behind a political proposal to hold down a certain price.

18. Price Ceilings (cont.) Five major consequences of price ceilings: Shortages Reduced quality Wasted time and resources Deadweight loss, or a loss of gains from trade Misallocation of resources

19. Price Floors Price Floor : a legal minimum price for a product. Price floors are sometimes called “price supports,” because they support a price by preventing it from falling below a certain level.  An example of a price floor is the minimum wage , which is based on the view that someone working full time should be able to afford a basic standard of living. Most common way price supports work is the government enters the market and buys up the product, adding to demand to keep prices higher than they otherwise would be.

20. Price Floors (cont.) Price Control : government laws to regulate prices instead of letting market forces determine price. Neither price ceilings nor price floors cause demand or supply to change. They simply set a price that limits what can be legally charged in the market.

21. Price Controls Example: Katrina Water after Katrina Example The problem originates from the fact that the demand for the good increases suddenly and dramatically.  The question is how to deal with the shortage. How to allocate the limited supply of bottled water among competing needs and wants. When a price ceiling reduces the legal price of a product, businesses have less incentive to supply the product.

22. Price Controls Example: Katrina (cont.) Water after Katrina Example Who gets the limited supply? It could be first come, first serve It could be friends of the seller. In many cases, what results are under-the-table payments by consumers willing to violate the law.  What is certain is that less bottled water gets to consumers than would be the case if the price were allowed to rise.

23. Trade and Efficiency Getting a Good Deal or Making a Good Deal People make transactions because they value the same goods differently at the margin. Marginal Analysis : comparing the benefits and costs of choosing a little more or a little less of a good.

24. Trade and Efficiency (cont.) Getting a Good Deal or Making a Good Deal Law of Diminishing Marginal Utility : as we consume more of a good or service, the utility we get from additional units of the good or service tend to become smaller than what we received from earlier units. Allocative Efficiency : when benefits of trade are maximized and the mix of goods being produced represents the mix that society most desires.

25. Consumer & Producer Surplus Consumer Surplus, Producer Surplus, Social Surplus Consumer Surplus: if we add up the gains at every quantity, we can measure the consumer surplus as the area under the demand curve up to the equilibrium quantity and above the equilibrium price. Producer Surplus : the value to producers of their sales above their cost of production. Social (or economic or total) Surplus : the sum of consumer and producer surplus at some quantity and price of output.

26. Consumer & Producer Surplus (cont.) The market is efficient and both consumer and producer surplus are maximized at the equilibrium point of $5. If the government establishes a price ceiling, a shortage results, which also causes the producer surplus to shrink, and results in inefficiency called  deadweight loss Deadweight Loss : the loss in social surplus that occurs when a market produces an inefficient quantity. If government implements a price floor, there is a surplus in the market, the consumer surplus shrinks, and inefficiency produces deadweight loss.

27. Consumer & Producer Surplus: Graph Calculate Consumer Surplus Step 1  Define the base and height of the consumer surplus triangle. Step 2  Apply the values for base and height to the formula for the area of a triangle.