Market Equilibrium Price Quantity S D Pm Qm

At a Price Above Equilibrium Price Quantity S D Pm Qm P1 QsQd Qs > QD Surplus Too many goods and services Producers cut price Qd increases Qs decreases Return to equilibrium A surplus is where price is set above equilibrium causing QS>QD

At a Price Below Equilibrium Price Quantity S D Pm Qm P1 QdQs Qd > Qs Shortage Not enough goods and services Consumers bid up price Qd decreases Qs increases Return to equilibrium A shortage is where the price is set below equilibrium causing QD>QS

CONCLUSION A market will tend toward equilibrium If the price is not at equilibrium then market forces will work to move the market back toward equilibrium.

CONSUMER SURPLUS DEFINITION: MEASURED BY: The difference between what consumers are willing to pay and the actual price paid for a commodity The area below the demand curve and above the price line

Consumer Surplus Price Quantity S D Pm Qm Consumer Surplus

Producer Surplus Definition: Measured by: The difference between the revenue received by a producer and the the cost necessary to produce the good The area below the demand curve and above the price line

Producer Surplus Price Quantity S D Pm Qm Producer Surplus

WHY IS EQUILIBRIUM BEST? Equilibrium represents the allocatively efficient point. This is where Consumer Surplus and Producer Surplus are maximised  ie benefits to consumers and producers are at their greatest

WHICH IS THE ALLOCATIVELY EFFICIENT POINT? cars television A B

Which is the allocatively efficient point? cars television A B quantity price Market for Cars S D 100

Which is the allocatively efficent point? cars television A B quantity price Market for Cars S D 100

DEADWEIGHT LOSS When a market does not achieve equilibrium producer and consumer surplus will not be maximised The loss in allocative efficiency is DWL It is measured by the loss of CS and PS not offset by gains to other groups (eg government)

Deadweight Loss Deadweight loss can be caused by: Quotas Price controls Indirect Taxes Subsidies

A Subsidy Price Quantity S D Pm Qm

A Subsidy Price Quantity S D Pm Qm Subsidies reduce costs and increase Supply S+Subsidy

A Subsidy Price Quantity S D Pm Qm Consumers pay the new equilibrium price - Pc S+Subsidy Q’ Pc

A Subsidy Price Quantity S D Pm Qm The per unit subsidy is represented by the vertical distance between the two supply curves S+Subsidy Q’ Pc

A Subsidy Price Quantity S D Pm Qm Producers receive higher price -Pp S+Subsidy Q’ Pc Pp

A Subsidy Price Quantity S D Pm Qm The total cost to the government is represented by the shaded area S+Subsidy Q’ Pc Pp

A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp Original CS

A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp New CS The gain in CS represents the incidence of a subsidy on consumers

A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp Old PS

A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp New PS The gain in PS represents the incidence of a subsidy on producers

A Subsidy Price Quantity S D Pm Qm S+Subsidy Q’ Pc Pp DWL

An Indirect Tax – Sales Tax Price Quantity S D Pm Qm

An Indirect Tax Price Quantity S D Pm Qm Indirect taxes increase costs and shift the supply curve to the left S+tax

An Indirect Tax Price Quantity S D Pm Qm Consumers pay the new equilibrium price - Pc S+tax Pc

An Indirect Tax Price Quantity S D Pm Qm The per unit tax is measured by the vertical distance between the two supply curves S+tax Q’ Pc

An Indirect Tax Price Quantity S D Pm Qm The producer recieves the lower price - Pp S+tax Q’ Pc Pp

An Indirect Tax Price Quantity S D Pm Qm The government receives the shaded area as tax revenue S+tax Q’ Pc Pp

An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp Original CS

An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp New CS The area of tax which was previously CS represents the incidence of the tax on consumers

An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp Original PS

An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp New PS The area of tax which was previously PS represents the incidence of the tax on producers

An Indirect Tax Price Quantity S D Pm Qm S+tax Q’ Pc Pp DWL

A Quota Price Quantity S D Pm Qm

A Quota Price Quantity S D Pm Qm In this example we assume there is no domestic production Q’

A Quota Price Quantity S D Pm Qm A quota is a limit on the number of imports into a country The supply curve becomes vertical at the quota level Q’

A Quota Price Quantity S’ D Pm Qm A quota is a limit on the number of imports into a country The supply curve becomes vertical at the quota level Q’ S

A Quota Price Quantity S’ D Pm Qm The new price is determined at the intersection of the new Supply curve and the original Demand curve - P’ Q’ S P’

A Quota Price Quantity S D Pm Qm Original CS Q’ P’

A Quota Price Quantity S D Pm Qm New CS Q’ P’

A Quota Price Quantity S D Pm Qm Old PS Q’ P’

A Quota Price Quantity S D Pm Qm New PS Q’ P’

A Quota Price Quantity S D Pm Qm DWL Q’ P’

A Maximum Price Price Quantity S D Pm Qm

A Maximum Price Price Quantity S D Pm Qm A maximum price is only effective when set below equilibrium price Pmax

A Maximum Price Price Quantity S D Pm Qm Qs decreases Although consumers would like to buy more producers only supply Qs There is a shortage Pmax Qs Qd

A Maximum Price Price Quantity S D Pm Qm Pmax Original CS Qs

A Maximum Price Price Quantity S D Pm Qm Pmax New CS Qs

A Maximum Price Price Quantity S D Pm Qm Pmax Original PS Qs

A Maximum Price Price Quantity S D Pm Qm Pmax New PS Qs

A Maximum Price Price Quantity S D Pm Qm DWL Pmax Qs

A Minimum Price Price Quantity S D Pm Qm

A Minimum Price Price Quantity S D Pmin Qm Pm A minimum price is only effective when set above equilibrium price

A Minimum Price Price Quantity S D Pmin Qm Pm Qd Qd decreases Although producers would like to sell more they are unable to at this high price

A Minimum Price Price Quantity S D Pmin Qm Pm Original CS Qd

A Minimum Price Price Quantity S D Pmin Qm Pm New CS Qd

A Minimum Price Price Quantity S D Pmin Qm Pm Original PS Qd

A Minimum Price Price Quantity S D Pmin Qm Pm New PS Qd

A Minimum Price Price Quantity S D Pmin Qm Pm DWL Qd

Net Welfare Benefit The combined values of the consumer and producer surpluses is referred to as the net welfare benefit. S D Pm Qm Net welfare benefit.

Allocative Efficiency and Market Equilibrium Markets allocate resources to the production of goods and services that satisfy consumers needs and wants. To be allocatively efficient a market must price and produce at equilibrium.