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Question: Define Market Equilibrium. 1. When subsidy is given by Government. 2. When price floor is settle above the equilibrium point.
__________________________________________________________ Name: Ali Shaharyar Roll No: 15366 MBA morning -----------------------------------------------------------------------------------------------
Explanation:
Equilibrium means a state of equality or a state of balance between market demand and supply. Without a shift in demand and supply there will be no change in market price. (Qs=Qd=p)
In the diagram above, the quantity demanded and supplied at price P1 are equal. At any price above P1, supply exceeds demand and at a price below P1, demand exceeds supply. In other words, prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market.
1:
Subsidy:
A subsidy is a payment by the government to suppliers that reduce their costs of production and encourages them to increase output
The subsidy causes the firm's supply curve to shift to the right because the firm's costs are reduced. This means that more can be supplied at each price. Equilibrium price falls from P to P1 and quantity traded expands from Q to Q1. The more inelastic the demand curve the greater the consumer's gain from a subsidy will be. Indeed when demand is perfectly inelastic the consumer gains the entire subsidy because the market price will fall by the entire amount of the subsidy. When demand is relatively elastic, a subsidy will have more of an impact on quantity bought and sold and will cause only a small fall in the market price.
For the price that the ceiling is set at, there is more demand (Q2) than there is at the equilibrium price. There is also less supply (Q1) than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied i.e. shortage