Market equilibrium in Microeconomics subject

Introduction to economics Markets

1. 1
-Bharathi
Market Equilibrium

2. 2
The Market Mechanism
Market Mechanism Summary
1)Supply and demand interact to
determine the equilibrium price.
2) When not in equilibrium, the market
will adjust to a shortage or surplus and
return to the equilibrium.
3)Markets must be competitive for the
mechanism to be efficient.

3. 3
MARKET DEMAND & SUPPLY
Rs.5
4
3
2
1
10
20
35
55
80
Rs.5
4
3
2
1
60
50
35
20
5
200
B
U
Y
E
R
S
PQ
D
Price
MARKET
DEMAND
2,000
4,000
7,000
11,000
16,000
200
S
E
L
L
E
R
S
12,000
10,000
7,000
4,000
1,000
PQ
S
Price
MARKET
SUPPLY
EQUILIBRIUM
x x

4. 4
MARKET DEMAND & SUPPLY
7
S
Q
o
Rs.5
4
Rs3
2
1
2 4 6 8 10 12 14 16
PQ
D
Rs.5
Rs.4
Rs.3
Rs.2
Rs.1
2,000
4,000
7,000
11,000
16,000
Rs.5
Rs.4
Rs.3
Rs.2
Rs.1
12,000
10,000
7,000
4,000
1,000
D
PQ
S
Price
Quantity
Market
Equilibrium
Demand
PriceSupply
Price

5. 5
Quantity
D
S
E
P
O
Q
X
Y
The Market Mechanism
Price
(Rs. per unit)

6. 6
Quantity
D
S
P
Q
Price
(Rs. per unit)
If price is above equilibrium
Point-Supply exceeds
Demand.
P
1
Surplus
The Market Mechanism

7. 7
The Market Mechanism
D
S
Q
1
Assume the price is P
1, then:
1) Quantity Supplied is >
Quantity Demanded
2) Producers lower price.
3) Quantity supplied decreases
4) Equilibrium is restored
P
1
Surplus
Q
2Quantity
Price
(Rs per unit)
P
2
Q
3

8. 8
The Market Mechanism
D
S
Q
1 Q
2
P
2
Shortage
Quantity
Price
(Rs. per unit)
Assume the price is P
2, then:
1) Quantity Demanded is greater
than quantity Supplied
2) Producers raise price
.
3) Quantity supplied increases
4) Equilibrium is restored
Q
3
P
3
E

9. Change in Supply
Q
o
D
1
Quantity
Price
S
1
S
2
P
Q
1Q
2
P
1
P
2

10. Q
o
D
1
Price
S
1P
Q
1Q
2
P
1
P
2
D
2
Change in Demand

11. 11
Four Possibilities
D1 D1 S
A
B
C
D
S
D1
D2
“Increase in Demand”
“Decrease in Demand”
“Increase in Supply”
“Decrease in Suply”
D P Q
D P Q
S Q PP
S Q
D
S1
D
S1
S2
P2
P1
Q1 Q2 Q2 Q1
P2
S1
P1
P2
P1
P1
P2
Q1 Q2 Q2 Q1

12. 12
P
Q
S1
D1
D2
D3
S3
S2
Change in Supply = Change in Demand

13. 13
Effects of Government Intervention
Price Controls
If the Government decides that the
equilibrium price is too high, they may
establish a maximum allowable ceiling
price.

14. 14
When a product is taxed, who ultimately
shoulders the tax burdendepends upon the
elasticity of demand and supply of the
product taxed.
Usually the tax burden is shared between
producers and consumers.
Consumers pay more of the tax, if demand
is relatively less elastic than supply
Producers pay more of the tax if demand is
relatively more elastic than supply.
TAX SHIFTING AND THE ELASTICITIES
OF DEMAND AND SUPPLY

15. 15
Price Ceilings
and Price Floors
Price Ceiling
is a legally established maximum
pricewhich a seller can charge or a
buyer must pay.
Price Floor
is a legally established minimum
pricewhich a seller can charge or a
buyer must pay.

16. 16
Price Ceilings
When the Government imposes a
price ceiling (i.e., a legal
maximum price at which a good
can be sold) two outcomes are
possible:
The price ceiling is not binding.
The price ceiling is a binding
constraint on the market, creating
shortages.

17. 17
A Binding Price Ceiling
S
D
Price
Quantity/time
P
E
Q
E
Price
Ceiling
P
C
Q
S
Q
D
Shortage

18. 18
Market Impacts
of a Price Ceiling
A Binding Price Ceiling creates. . .
Shortages (QD > QS)
Shortages create :
Queuing
Discrimination criteria set by sellers
Bundled pricing with other goods
Bribery/corruption

19. 19
Price Floors
When the Government imposes a
price floor (i.e., a legal minimum
price at which a good can be sold)
two outcomes are possible:
The price floor is not binding.
The price floor is a binding constraint
on the market, creating surpluses.

20. 20
A Binding Price Floor
S
D
Price
Quantity/time
P
E
Q
E
Price Floor
P
F
Q
S
Q
D
Surplus

21. 21
Market Impacts
of a Price Floor
A Binding Price Floor creates. . .
Surpluses (QS > QD)
Surpluses create :
Discrimination criteria set by buyers
Examples:
Agricultural Price Supports

22. 22

23. 23
1
3
6
5
4
2
Investors
Government
Firms
(produce the
domestic product)
Consumers
Financial System
Rest of the
World
The Circular Flow of Income

24. 24