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![Page 1: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/1.jpg)
Market Equilibrium
Price
Quantity
S
D
Pm
Qm
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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
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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
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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.
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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
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Consumer Surplus
Price
Quantity
S
D
Pm
Qm
Consumer
Surplus
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Producer SurplusProducer Surplus
DefinitionDefinition::
Measured byMeasured 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
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Producer Surplus
Price
Quantity
S
D
Pm
Qm
Producer
Surplus
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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
Allocative Efficiency = A point where no one can be made better off without making someone worse off
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WHICH IS THE ALLOCATIVELY EFFICIENT POINT?
cars
television
A
B
100
60
100200
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Which is the allocatively efficient Which is the allocatively efficient point?point?
cars
television
A
B
100
60
100200 quantity
price
Market for Cars
S
D
100
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Which is the allocatively efficent Which is the allocatively efficent point?point?
cars
television
A
B
100
60
100200 quantity
price
Market for Cars
S
D
100
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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.
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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 .
Price
Quantity
S
D
200 400 600 800
1.80
1.50
1.20
0.90
0.60
0.30
Any price other than $1.20 and any output level other than 400
units will result in a loss of
allocative efficiency
Resources would be either over or under allocated to
production and net welfare
benefit would be reduced.
To maintain allocative
efficiency a market must be able to
move freely to any new equilibrium
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Any changes in the market where the forces of demand and supply are able to freely adjust to market conditions will still result in allocative efficiency.
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A loss of Allocative Efficiency
A loss of allocative efficiency occurs when a market is not allowed to price and produce at equilibrium this will result from :
Price Controls(setting either a minimum or maximum price)Imposition of a sales tax or subsidyImposition of a tariff or a quota (normally relates to internationally traded products)
All of these regulations set by the government will result in a dead weight loss and thus causing net social welfare to fall.
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DEADWEIGHT LOSS
When a market does not achieve equilibrium producer and consumer surplus will not be maximised
The loss in allocative efficiency is DWLIt is measured by the loss of CS and PS
not offset by gains to other groups (eg government)
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Deadweight LossDeadweight Loss
Deadweight loss can be caused by:
• Quotas
• Price controls
• Indirect Taxes
• Subsidies
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A Subsidy
Price
Quantity
S
D
Pm
Qm
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A Subsidy
Price
Quantity
S
D
Pm
Qm
Subsidies reduce costs and increase Supply
S+Subsidy
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A Subsidy
Price
Quantity
S
D
Pm
Qm
Consumers pay the new equilibrium price - Pc
S+Subsidy
Q’
Pc
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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
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A Subsidy
Price
Quantity
S
D
Pm
Qm
Producers receive higher price -Pp
S+Subsidy
Q’
Pc
Pp
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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
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A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp Original CS
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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
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A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp Old PS
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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
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A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp DWL
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An Indirect Tax – Sales Tax
Price
Quantity
S
D
Pm
Qm
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
Indirect taxes increase costs and shift the supply curve to the left
S+tax
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
Consumers pay the new equilibrium price - Pc
S+tax
Pc
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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
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
The producer recieves the lower price - Pp
S+tax
Q’
Pc
Pp
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
The government receives the shaded area as tax revenue
S+tax
Q’
Pc
Pp
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
Original CS
![Page 38: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/38.jpg)
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
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
Original PS
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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
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An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
DWL
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A Quota
Price
Quantity
S
D
Pm
Qm
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A Quota
Price
Quantity
S
D
Pm
Qm
In this example we assume there is no domestic production
Q’
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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’
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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
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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’
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A Quota
Price
Quantity
S
D
Pm
Qm
Original CS
Q’
P’
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A Quota
Price
Quantity
S
D
Pm
Qm
New CS
Q’
P’
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A Quota
Price
Quantity
S
D
Pm
Qm
Old PS
Q’
P’
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A Quota
Price
Quantity
S
D
Pm
Qm
New PS
Q’
P’
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A Quota
Price
Quantity
S
D
Pm
Qm
DWL
Q’
P’
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A Maximum Price
Price
Quantity
S
D
Pm
Qm
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A Maximum Price
Price
Quantity
S
D
Pm
Qm
A maximum price is only effective when set below equilibrium price
Pmax
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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
![Page 55: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/55.jpg)
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
Original CS
Qs
![Page 56: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/56.jpg)
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
New CS
Qs
![Page 57: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/57.jpg)
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
Original PS
Qs
![Page 58: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/58.jpg)
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
New PS
Qs
![Page 59: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/59.jpg)
A Maximum Price
Price
Quantity
S
D
Pm
Qm
DWL
Pmax
Qs
![Page 60: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/60.jpg)
A Minimum Price
Price
Quantity
S
D
Pm
Qm
![Page 61: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/61.jpg)
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
A minimum price is only effective when set above equilibrium price
![Page 62: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/62.jpg)
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
![Page 63: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/63.jpg)
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
Original CS
Qd
![Page 64: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/64.jpg)
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
New CS
Qd
![Page 65: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/65.jpg)
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
Original PS
Qd
![Page 66: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/66.jpg)
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
New PS
Qd
![Page 67: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/67.jpg)
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
DWL
Qd
![Page 68: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/68.jpg)
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.
![Page 69: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/69.jpg)
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 .
Price
Quantity
S
D
200 400 600 800
1.80
1.50
1.20
0.90
0.60
0.30
Any price other than $1.20 and any output level other than 400
units will result in a loss of
allocative efficiency
Resources would be either over or under allocated to
production and net welfare
benefit would be reduced.
To maintain allocative
efficiency a market must be able to
move freely to any new equilibrium
![Page 70: 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.](https://reader030.fdocuments.net/reader030/viewer/2022013101/56649f0d5503460f94c2169c/html5/thumbnails/70.jpg)
Any changes in the market where the forces of demand and supply are able to freely adjust to market conditions will still result in allocative efficiency.
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A loss of Allocative Efficiency
A loss of allocative efficiency occurs when a market is not allowed to price and produce at equilibrium this will result from :
Price Controls(setting either a minimum or maximum price)Imposition of a sales tax or subsidyImposition of a tariff or a quota (normally relates to internationally traded products)
All of these regulations set by the government will result in a dead weight loss and thus causing net social welfare to fall.