CHRISTINE M.

BAJADA
BSBA BM-2

RESEARCH WORK NO. 3

MARKET EQUILIBRIUM

A situation in which the supply of an item is exactly equal to

its demand.
Since there is neither surplus nor shortagein the market, price tends to
remain stable in this situation.

If price is below the equilibrium

If price was below the equilibrium at P2

then demand would be greater than the
supply. Therefore there is a shortage of
(Q2 Q1)

If there is a shortage, firms will put up

prices and supply more. As price rises
there will be a movement along the
demand curve and less will be demanded.

Therefore price will rise to P until there is no shortage and supply = demand

If price is above the equilibrium

If price was above the equilibrium (e.g.

P1), then supply (Q1) would be greater
than demand (Q3) and therefore there is
too much supply. There is a surplus.

Therefore firms would reduce price and

supply less. This would encourage more demand and therefore the surplus will be
eliminated. The market equilibrium will be at Q2 and Pe.

Equilibrium Price

Open market price at which the quantity of a product supplied

matches the quantity demanded.

Supplier Surplus
It is important for a manufacturer or
product reseller to understand how
current market prices relate to supply
and demand. A price below
equilibrium means you charge less
than you could for a good based on
current market demand. In fact, if
you
keep the price constant, you will
likely run out because market
demand exceeds available supply at a
price below equilibrium. Running out
of stock means missed sales opportunities and potentially
upset customers.
Pricing decisions have a significant affect on
revenue and profits.

Supplier Excess
On the opposite end of the spectrum, a price above
equilibrium means your price exceeds the current supply
and demand balance, which could lead to excess
inventory after customer demand is satisfied. This is a
better situation than running out, but it costs money to
manage extra inventory. Plus, you may end up throwing
out expired or rotten goods. With a price at equilibrium,
you attract more customers.

 First, the demand curve (D)

sloped--higher prices
correspond with smaller
quantities. This negative
indicates the law of
demand.

is negatively
slope

Second, the supply curve(S) is

positively sloped--higher
prices correspond with large
quantities. This positive slope indicates the law of
supply.
EQUILIBRIUM QUANTITY

The quantity that exists when a market is in

equilibrium.
Equilibrium quantity is simultaneously equal to
both the quantity demanded and quantity
supplied.
In a market graph, the equilibrium quantity is
found at the intersection of the demand curve
and the supply curve.
Equilibrium quantity is one of two equilibrium
variables.

First, the demand curve (D) is negatively sloped--higher

prices correspond with smaller
quantities. This negative slope
indicates the law of demand.

Second, the supply curve(S) is positively

sloped--higher prices correspond with
large quantities. This positive slope
indicates the law of supply.

Clearing the Market

Equilibrium quantity results when the market is in

balance, which is equality between quantity demanded

and quantity supplied. The market is clear of any

shortage or surplus. The only quantity that accomplishes
this task is at the intersection of the demand curve and
supply curve.
This is the ONLY quantity that has a balance between
these two quantities. Best of all, because this is
equilibrium, the equilibrium quantity of 400 tapes does
not change and the equilibrium price of 50 cents does not
change unless or until an external force intervenes.

Price Floors
A price floor is the lowest legal price a commodity
can be sold at.
Price floors are used by the government to prevent
prices from being too low.
The most common price floor is the minimum wage-the minimum price that can be payed for labor.
Price floors are also used often in agriculture to try to
protect farmers.
For a price floor to be effective, it must be set above the
equilibrium price. If it's not above equilibrium, then the
market won't sell below equilibrium and the price floor
will be irrelevant.

Description: Minimum wage laws

have been passed in various
countries to determine the
minimum wages to be paid to
the worker. Minimum wages are
formulated from the demand-supply
curve of labour. This helps the
government ensure higher
wages and a good standard
of living for the workers. But this has a flip side too. Price
floor leads to a lesser number of workers than in case of
equilibrium wage.
Equilibrium wage rate is Rs. 3. The price floor is
determined at Rs.4, which is good for workers, who
will earn more than before. But the flip side is that
while at equilibrium there were 30 workers, after the
price floor there are only 20 workers. Thus 10
workers have been laid off. At a wage of Rs. 4 we see
a gap of 20 workers (40 workers are willing to work
but only 20 workers get work), thus giving rise to a
surplus of workers.

Price ceiling
a government-imposed price control or limit on
how high a price is charged for a product.
Governments intend price ceilings to protect
consumers from conditions that could make
necessary commodities unattainable
When a price ceiling is set, a shortage occurs.

WHY IT MATTERS:
The intended goal of price ceilings is to protect
consumers from rapid price increases and price gouging.
But its good intentions come with unintended
consequences (as shown in the example earlier) of supply
shortages and market inefficiencies.

This graph shows a price ceiling. P*

shows the legal price the government
has set, but MB shows the price the
marginal consumer is willing to pay at
Q*, which is the quantity that the
industry is willing to supply.
Since MB > P* (MC), a deadweight
welfare loss results. P' and Q' show
the equilibrium price. At P* the
quantity demanded is greater than the
quantity supplied. This is what causes the shortage.

Sources:

http://economictimes.indiatimes.com/definition/price-floor
http://smallbusiness.chron.com/equilibrium-price-mean-68358.html
http://www.economicshelp.org/microessays/equilibrium/marketequilibrium/
http://www.businessdictionary.com/definition/market-equilibrium.html
http://www.amosweb.com/cgi-bin/awb_nav.pl?
s=wpd&c=dsp&k=equilibrium%20quantity
http://www.investinganswers.com/financialdictionary/economics/price-ceiling-3057