M ARKET EQUILIBRIUM

Market equilibrium exists when quantity demanded (Qd) equals quantity supplied (Qs). It can be determined by the intersection between demand and supply curves. At equilibrium, there is no tendency for the market price to change. Equilibrium Price - The price that balances supply and demand.  On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity - The quantity that balances supply and demand.  On a graph it is the quantity at which the supply and demand curves intersect.

Demand ScheduleSupply Schedule At RM2.00, the quantity demanded is equal to the quantity supplied!

Supply Demand Price of Ice- Cream Cone Quantity of Ice- Cream Cones Equilibrium of Supply and Demand RM

Surplus When Qs exceeds Qd there is excess supply or a surplus Happens when price is above the equilibrium price. Suppliers will lower the price to increase sales, thereby moving toward equilibrium Shortage When Qd exceeds Qs there is excess demand or a shortage. Happens when price is below the equilibrium price. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

Price of Ice- Cream Cone Quantity of Ice- Cream Cones RM Supply Demand Surplus Shortage

W HAT CAUSES A CHANGE IN MARKET EQUILIBRIUM ?  A change in demand  A change in supply Three Steps To Analyzing Changes in Equilibrium u Decide whether supply or demand curve shifts (or both shift). u Decide whether the curve(s) shift(s) to the left or to the right. u Examine how the shift affects equilibrium price and quantity.

E FFECT OF CHANGES IN DEMAND Increase in Demand Price (RM) Qty (Unit) P1P1 P0P0 Q1Q1 Q0Q0 S0S0 D0D0 D1D1 - Increase in demand – D curve shift to the right (D 0 to D 1 ) e.g: increase in population. -New equilibrium (E 0 to E 1 ) -Higher demand leads to higher equilibrium price (P 0 to P 1 ) and higher equilibrium quantity (Q 0 to Q 1 ). E0E0 E1E1

E FFECT OF CHANGES IN DEMAND Decrease in Demand Price (RM) Qty (Unit) P0P0 P1P1 Q0Q0 Q1Q1 S0S0 D1D1 D0D0 -decrease in demand – D curve shift to the left (D 0 to D 1 ) -e.g: decrease in income. -New equilibrium (E 0 to E 1 ) -Lower demand leads to lower equilibrium price (P 0 to P 1 ) and lower equilibrium quantity (Q 0 to Q 1 ). E0E0 E1E1

E FFECT OF CHANGES IN SUPPLY Increase in Supply Price (RM) Qty (Unit) P0P0 P1P1 Q1Q1 Q0Q0 S0S0 S1S1 D0D0 -increase in supply – S curve shift to the right (S 0 to S 1 ) -e.g: increase in numbers of seller. - New equilibrium (E 0 to E 1 ) -Higher supply leads to lower equilibrium price (P 0 to P 1 ) and higher equilibrium quantity (Q 0 to Q 1 ). E0E0 E1E1

E FFECT OF CHANGES IN SUPPLY Decrease in Supply Price (RM) Qty (Unit) P1P1 P0P0 Q0Q0 Q1Q1 S0S0 S1S1 D0D0 -decrease in supply – S curve shift to the left (S 0 to S 1 ) -e.g: increase in cost of production -New equilibrium (E 0 to E 1 ) -Lower supply leads to higher equilibrium price (P 0 to P 1 ) and lower equilibrium quantity (Q 0 to Q 1 ). E1E1 E0E0

Price (RM) Qty (Unit) P0P0 P1P1 Q1Q1 Q0Q0 S0S0 S1S1 D1D1 E0E0 E1E1 C HANGES I N E QUILIBRIUM P RICE & O UTPUT Simultaneous Change: Demand and Supply D0D0 The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.

GOVERNMENT INTERVENTION IN MARKETS MAXIMUM PRICE/CEILING PRICE Government-imposed regulations that prevent prices from rising above a maximum level Price Quantity D S P* Q* The equilibrium price is P* and the, quantity is Q* P1P1 Price ceiling The government imposes a maximum price of P1 Q1Q1 Q2Q2 Suppliers reduce the amount offered to Q 1 but demand would rise to Q 2 creating a shortage Shortages occur Advantage: Consumers purchase at lower price Disadvantages: Shortages Unfair to sellers (lower P) Emergence of black market Exploitation of customers Hoarding activity

GOVERNMENT INTERVENTION IN MARKETS MINIMUM PRICE/FLOOR PRICE Government-imposed regulations that prevent prices from falling below a minimum level Price Quantity D S P* Q* P1P1 Pmin The government imposes a minimum price of P1 Q1Q1 Q2Q2 Surplus Disadvantages: Unfair to consumers (Higher P) Surplus-Waste of resources Unfair to taxpayers – tax used to buy surplus The equilibrium price is P* and the quantity is Q*. Suppliers increase the amount offered to Q 2 but demand drop to Q 1 creating a surplus Advantages: Protects the producer’s income Higher wage rate

PRODUCERS’ SHARE CONSUMERS’ SHARE The tax amount of RM4 is shared equally between buyer and seller EFFECT OF TAXATION INDIRECT TAX Tax that is imposed by the government on producers or sellers but paid by or passed on to end-users Price Quantity D S S1S1 200 The equilibrium price is RM12 and the quantity is Tax = RM4 The government imposes a sales tax of RM4 per carton S curve shift to left from S to S 1 and new equilibrium is RM14 and 200 units

S + tax S O D CONSUMERS SHARE P Q Perfectly inelastic demand

S + tax S O D P Q PRODUCERS’ SHARE Demand is more elastic than supply CONSUMERS' SHARE

S + tax PRODUCERS’’ SHARE P Q O D S Incidence of tax: elastic supply

PRODUCER’ S SHARE CONSUMER’ S SHARE EFFECT OF SUBSIDIES SUBSIDY An incentive from the government to encourage producers to produce more Price Quantity D S S1S1 10 The equilibrium price is RM50 and the quantity is Subsidy = RM10 The government provides a subsidy of RM10 per unit SS curve shifts to the right from S to S 1 and new equilibrium is RM45 and 20 units The subsidy amount of RM10 is shared equally between buyer and seller

EFFECT OF SUBSIDIES Demand less elastic than supply S +sub S O D P Q CONSUMERS’ SHARE PRODUCERS’ SHARE

S D CONSUMERS’ SHARE 40 PRODUCERS’SHARE PRODUCERS’ SHARE’ P Q Demand less elastic than supply S+ sub (RM4)

MARKET FAILURE Market failure exists when a free market is unable to deliver an efficient allocation of resources which leads to a loss of economic efficiency. Causes of market failure 1. Externalities 2. Existence of monopoly power 3. Public goods 4. Incomplete information