Equilibrium Market Prices DP Economics. The concept of the equilibrium price Equilibrium means a state of equality between demand and supply The equilibrium.

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Presentation transcript:

Equilibrium Market Prices DP Economics

The concept of the equilibrium price Equilibrium means a state of equality between demand and supply The equilibrium price in a market is known as the market-clearing price At this price there is no excess demand or excess supply The quantity that producers wish to sell equals the quantity that consumers wish to buy at that price Without a shift in demand and/or supply there will be no change in market price Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market

Demand and Supply Schedules for Oil

The Market Equilibrium Price Quantity Demand P1 Q1 The normal free market equilibrium price is P1 and quantity is Q1 Supply

Excess Demand When market price is lower than the market equilibrium (i.e. P2), demand exceeds supply (a market shortage equal to Q3-Q2) There is therefore upward pressure on market price Price Quantity Demand Pe Qe Supply P1 QsQd

Excess Supply When market price is higher than the market equilibrium, supply exceeds demand (a market surplus) There is therefore downward pressure on the market price Price Quantity Demand Pe Qe Supply P3 QdQs

Shifts in market demand# The demand curve may shift to the right (increase) for several reasons: A rise in the price of a substitute or a fall in the price of a complement An increase in consumers’ income or wealth Changing consumer tastes and preferences in favour of the product A fall in interest rates (i.e. bank borrowing rates or mortgage interest rates) A general rise in consumer confidence and optimism

Changes in market demand Price Quantity D1 Supply P1 Q2 Price Quantity D1 Suppl y P1 Q1 D3 Q3 P3 D2 Q1 P2 An Outward Shift in DemandAn Inward Shift in Demand

Changes in market supply The supply curve may shift outwards if there is: A fall in the costs of production (e.g. a fall in labour or raw material costs) A government subsidy to producers that reduces their costs for each unit supplied Favourable climatic conditions causing higher than yields for agricultural commodities A fall in the price of a substitute in production An improvement in technology leading to higher productivity and efficiency in the production process The entry of new suppliers (firms) into the market*

Changes in market supply Price Quantity S1 Q1 Price Quantity D1 S1 P1 Q1 Q3 P3 D2 Q2 P1 An Outward Shift in Supply An Inward Shift in Supply S2 P2 S3

Shifts in market demand and market supply* Price Quantity D1 S2 P1 Q1 Price Quantity D1 S2 P1 Q1 D2 Q2 P2 D2 Q2 P2 An Outward Shift in Demand and a decrease in Supply An Inward Shift in Demand and a rise in Supply S1

Shifts in market demand and market supply* Price Quantity D1 S1 P1&2 Q1 Price Quantity D2 S2 P1 Q1 D1 Q2 P2 D2 Q2 OR, maybe An Inward Shift in Demand and a decrease in Supply S1 S2

Changes in Equilibrium (Rise in Supply and Demand)