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Producers / Sellers
Demand
Supply
Equilibrium
Price System
Govt Intervention
Equilibrium Price
Price Ceiling
Equilibrium Quantity
Price Floor
Law of Demand
Law of Demand states that, the quantity demanded of
a product falls when the price of that product rises, ceteris
paribus, and vice-versa.
Income Effect
Substitution Effect
Qd (No. of units)
16
14
100
12
200
10
300
400
500
600
700
800
Qd = 800 50P
1.
2.
3.
4.
5.
6.
Qd (original)
16
14
100
200
12
200
400
10
300
400
800
500
1,000
600
1,200
700
1,400
800
1,600
Qd (new)
600
Change in Demand
Law of Supply
Law of Supply states that, the quantity supplied of a
product increases when the price of that product rises,
ceteris paribus, and vice-versa.
Qs (No. of units)
16
1,200
14
1,000
12
800
10
600
400
200
-200
-400
Qs = -400 + 100P
1.
2.
3.
4.
5.
6.
Qs (original)
Qs (new)
16
1,200
3,000
14
1,000
2,600
12
800
2,200
10
600
1,000
400
1,400
200
1,000
600
-200
200
-400
-200
Change in Supply
Market Mechanism
The Market Mechanism is the tendency in a free market
for price to change until the market clears.
Markets clear when quantity demanded equals quantity
supplied at the prevailing price.
Market clearing price is the price at which markets clear.
Market Mechanism
Market
Equilibrium
Market Mechanism
Demand and Supply Schedule
for Ball pen
Price (P)
Qd
Qs
16
1,200
14
100
1,000
12
200
800
10
300
600
400
400
500
200
600
700
-200
800
-400
Market Equilibrium
E
Qd = 800 50P
Qs = -400 + 100P
Market Mechanism
Demand and Supply interact to determine the marketclearing price.
When not in equilibrium, the market will adjust to
alleviate a shortage or surplus and return the market to
equilibrium.
Markets must be competitive for the mechanism to be
efficient.
Market Mechanism
Market
Disequilibrium:
Surplus
Market Mechanism
Market
Disequilibrium:
Shortage
Increase in
Demand
Increase in
Supply
Government Intervention
Markets are rarely free of government intervention.
Imposed taxes and granted subsidies
Price controls
Price controls usually hold the price above or below the
equilibrium price that will result to either of the following
situations:
Shortage
Surplus
Price Controls
Price Ceiling is the legal maximum price a seller may
charge for a product.
Price Floor is the legal minimum price a seller may
charge for a product.
Price Controls
Price
Ceiling
Price Controls
Price
Floor