ECON107 Principles of Microeconomics Week 6 SEPTEMBER 2013

ECON107Principles of

MicroeconomicsWeek 6

SEPTEMBER 2013

1

Chapter-3

3 Market Equilibrium

Lesson Objectives Define market and market equilibrium Explain how demand and supply

determine prices and quantities bought and sold

Use the demand and supply model to make predictions about changes in prices and quantities

3

4MARKETS DEFINED

MARKETS

POTENTIALSELLERS

POTENTIALBUYERS

Market

5

A set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms. It determine prices and quantities of goods and services by bringing together two sides of exchange demand and supply. Markets are often physical places, such as supermarkets, shopping malls etc. Market also include other mechanisms by which buyers and sellers communicate, like radio television advertisement, telephones etc.There are two types of market in the economy. These are Product market and Resource market.

Market Equilibrium

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Market equilibrium refers a situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the Market.

The equilibrium price is the price at which the quantity demanded equals the quantity supplied.

The equilibrium quantity is the quantity bought and sold at the equilibrium price.

7

$54321

1020355580

$54321

60503520 5

200

B

U

Y

E

R

S

P QD

CORN OILMARKET

DEMAND

2,0004,0007,000

11,00016,000

200

S

E

L

L

E

R

S

12,00010,000

7,0004,0001,000

P QS

CORN OIL

MARKET

SUPPLY

EQUILIBRIUM

x x

Market Demand and Supply

8


7

SP

Q (in thousand)o

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

CORNMARKET

CORNMARKET

Market Clearing Equilibrium

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7

SP

o

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

CORN MARKET CORN MARKETSurplusAt a $4 price

more is being

supplied than

demanded

Q (in thousand)

10


11

SP

o

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

CORNMARKET

CORNMARKET

At a $2 price

more is being

demanded than

supplied

Shortage

Q (in thousand)

11


117

SP

o

$5

4

3

2

1

2 4 6 8 10 12 14 16

P QD

$54321

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

D

P QS

CORNMARKET

CORNMARKET

Shortage ( Create market pressure for a higher price)

Surplus

(put downward pressure on the price)

Q (in thousand)

Changes in Equilibrium

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Once a market reaches equilibrium,

that price and quantity will prevail until

one of the determinants of demand or

supply changes.

A change in any one of these

determinants will usually change

equilibrium price and quantity in a

predictable way


13

An increase in demand

will cause an increase

in the equilibrium price

and quantity of a good.The increase in demand causes

excess demand at the initial price. Excess demand will cause

the price to rise, and as price rises

producers are willing to sell more, thereby

increasing output.


14

A decrease in demand

will cause a reduction

in the equilibrium price

and quantity of a good.


15

An increase in supply will

cause a reduction in the

equilibrium price and an

increase in the equilibrium

quantity of a good.


16

An decrease in supply will

cause an increase in the

equilibrium price and a

decrease in the equilibrium

quantity of a good.


17


18

SS = D P , Q unchanged = D P , Q unchanged


19


20

SS = D P (unchanged) , Q= D P (unchanged) , Q

Summary

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Supply increases Supply decreases

Demand increases Demand decreases

Change in Demand

Ch

an

ge

in

Su

pp

ly

Equilibrium price changeis indeterminate. Equilibrium quantity increases. Equilibrium

price rises. Equilibrium quantity change is indeterminate.

Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases.

Now it’s over for today. Do Now it’s over for today. Do you have any question? you have any question?

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ECON107 Principles of Microeconomics Week 6 SEPTEMBER 2013

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