TOPIC 3

MARKET EQUILIBRIUM &

MARKET APPLICATION
A MARKET SUPPLY AND DEMAND ANALYSIS

Market
Any arrangement in which buyers and sellers
interact to determine the price and quantity of
goods and services exchanged.

So in market there will be both the demand

and supply curve. This interaction will
determine the price and quantity of a product.

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 DEFINITION OF MARKET
EQUILIBRIUM

A market equilibrium is a situation when

quantity demanded and quantity supplied are
equal and there is no tendency for price or
quantity to change.

QDD = QSS
A SCHEDULE OF MARKET DEMAND &
SUPPLY OF PEN
Price Qd Qs Market
(RM) Outcomes
3 500 100
4 400 200
5 300 300
6 200 400
7 100 500

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Price MARKET DEMAND & SUPPLY CURVES OF PEN

Quantity
100 200 300 400 500
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 A MARKET SUPPLY AND DEMAND
ANALYSIS..CONTD

Surplus : A market condition existing at any price

where the quantity supplied is greater than the
quantity demanded.
Shortage :A market condition existing at any
price where the quantity supplied is less than the
quantity demanded.
Equilibrium : A market condition existing at any
price where the quantity demanded and the
quantity supplied are equal.

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 EQUILIBRIUM PRICE AND OUTPUT

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SURPLUS (QSS > QDD)
SS
5

4
Price

P*
E
3

1 DD
SHORTAGE (QDD > QSS)
0
2 4 6 8 10
Quantity
Q*
 EQUILIBRIUM PRICE AND OUTPUT
Price Quantity Quantity Market Condition Changes in market
Demanded Supplied price needed to
achieve
equilibrium
5 2 10 SURPLUS Falls

4 4 8 SURPLUS Falls

3 6 6 EQUILIBRIUM Equilibrium

2 8 4 SHORTAGE Rises

1 10 2 SHORTAGE Rises
 CHANGES IN DEMAND
Assume supply is constant, only demand curve shift

Increase in Demand
Price (RM)
-DD curve shifts to the right
SS (shifting outward)

P2 -Equilibrium price and

quantity increase (P2, Q2)

P*

P1 DD1

Decrease in
DDo
Demand
DD2
-DD curve shifts to
the left (shifting Q1 Q* Q2 Quantity
inward)
-Equilibrium price
and quantity
decrease (P1, Q1)
 CHANGES IN SUPPLY
Assume demand is constant, only supply curve shift

Price (RM) SS2 Increase in Supply

-SS curve shifts to the right
SS -Equilibrium price decreases
and quantity increases (P1, Q2)
P2
SS1
P*

P1
Decrease in DD
Supply
-SS curve shifts to Q1 Q* Q2 Quantity
the left
-Equilibrium price
increases and
quantity decreases
(P2, Q1)
 CHANGES IN BOTH DEMAND AND
SUPPLY
SUPPLY AND DEMAND BOTH INCREASE (shifting outward)

Price (RM) Case 1: Same

magnitude
SSo -Equilibrium price is
SS1 constant and quantity
increases (Q1)

P*

DD1

DDo

Q* Q1 Quantity
 CHANGES IN BOTH DEMAND AND SUPPLY
(cont.)
SUPPLY AND DEMAND BOTH INCREASE (shifting outward)

Price (RM)

SSo

SS1
P1
P*

Case 2: Different DD1

Magnitude
DDo
-Shifting in demand curve is
larger than shifting in supply
curve Q* Q1 Quantity
-Equilibrium price increases
and quantity increases
(P1, Q1)
 CHANGES IN BOTH DEMAND AND SUPPLY
(cont.)
SUPPLY AND DEMAND BOTH INCREASE
Price (RM)

SSo

SS1

P*
P1
DD1
DDo
Case 3: Different
Magnitude Q* Q1 Quantity
Shifting in demand curve is
larger than shifting in supply Both DD and SS increase
curve Equilibrium quantity increase
-Equilibrium price decreases Equilibrium price is uncertain
and quantity increases
 GOVERNMENT
INTERVENTION IN THE
MARKET

MAXIMUM PRICE MINIMUM PRICE

 A. PRICE CONTROL
Equilibrium price (Pe) and quantity (Qe) are
determined by the free forces of market
demand and supply known as Price
mechanism.
If the market equilibrium price (Pe) of certain
goods and services is extremely low or high,
government will intervene by imposing new
price either below or above the Pe.

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 PRICE CONTROLCONT

This new legal price is no longer based

on price mechanism but following
government instruction.

Two types of price control are ceiling

price (maximum price) and floor price
(minimum price).

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 1. CEILING PRICE (MAXIMUM PRICE)

If the price (Pe) of a good is too high,

government will impose new price
known as CEILING PRICE(Pc).
Pc is fixed below the Pe.

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 DIAGRAM ( CEILING PRICE)
Price

SS

Pe

Pc
shortage DD

Quantity
Qe

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 EXPLANATION OF CEILING PRICE

The sellers can sell the goods at any price

below or equal the Pc and it is not allowed to
rise above the Pc.
Therefore Pc is the maximum price the
sellers can charge.
Examples of the goods that are imposed
ceiling price are rice, sugar, cooking oil, rent,
etc.

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 ADVANTAGES OF CEILING PRICE

To help consumers buy at lower prices

Help low income consumer

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 DISADVANTAGES OF CEILING PRICE

Create shortage in the market.

When there is a shortage, desperate consumers
will pay extra to get the goods. This create
black market, whereby prices will go up
again.
Some producers may ask under table money
to offer the goods as they cannot make more
profit at the ceiling price.

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 GOVERNMENT INTERVENTION IN
MARKETS
Advantage: MAXIMUM PRICE/CEILING PRICE
Government-imposed regulations that prevent
Price Consumers purchase at
lower price S prices from rising above a maximum level

Suppliers reduce the amount offered to Q1 but

demand would rise to Q2 creating a shortage
P*
The equilibrium price is P* and the
quantity is Q*

P1 Price The government imposes a

ceiling maximum price of P1
Shortages occur
Disadvantages:
D Emergence of black market
Q1 Q* Q2 Reduction in quantity produced
Quantity
Producers tend to receive illegal
payments from consumers
 2. FLOOR PRICE (MINIMUM PRICE)

If the price (Pe) of a good is too low,

government will impose new price
known as FLOOR PRICE (Pf).
Pf is fixed above the Pe.

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 DIAGRAM ( FLOOR PRICE)
Price

Surplus SS

Pf

Pe

DD

Quantity
Qe

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EXPLANATION OF FLOOR PRICE

The sellers can sell the goods at any

price above or equal the Pf and it is not
allowed to fall below the Pf.
Therefore Pf is the minimum price the
sellers can charge.
Examples of the goods that are
imposed floor price are agriculture
commodities, wage rate, etc.
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ADVANTAGES OF FLOOR PRICE

The incomes of the producers (farmers)

are protected as the government buys up
all the surplus commodities.
Lower paid workers are better off with
high wage rate
The surplus created for example, paddy,
can be stored for the future.

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DISADVANTAGES OF FLOOR PRICE

The consumers have to pay high price.

This price control creates surplus in the
market. (Qs > Qd)
Government has to buy the surplus for such
commodities like cocoa, corn, dairy products
to help farmers.
Sometimes if it is overflow it leads to a waste
of resources and this cause the misused of
taxpayers money by the government.
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 GOVERNMENT INTERVENTION IN MARKETS
Advantages:
(cont.)
Protects the producers
income MINIMUM PRICE/FLOOR PRICE
Government-imposed regulations that prevent
Higher wage rate
Price prices from falling below a minimum level
S
Surplus occurs

The government imposes a

P1 minimum price of P1
Floor Price
Suppliers increase the amount
P* The equilibrium offered to Q2 but demand drop
price is P* and the to Q1 creating a surplus
quantity is Q*.

Disadvantages:
Consumers pay more
D Waste of resources of
production
Q1 Q* Q2 Quantity Creates
unemployment