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MARKET EQUILIBRIUM

AND THE DETERMINATION


OF PRICES
Market Equlibrium
When the quantity demanded by the consumers at a certain price
is equal to the quantity supplied by firm at the same price level.
The market said to be “at rest”,since the equilibrium price and
equilibrium quantity will remain at levels. (EP=EQ)
If we put the demand curve and the supply curve together in one
graph, the point at which they intersect is the only point which
meets the definition of market equilibrium.
Equilibrium Price and Equilibrium Quantity
 Equilibrium Price. The price at which the quantity demanded
equals the quantity supplied.

 Equilibrium Quantity. The quantity bought and sold at the


equilibrium price.
Supply and Demand Schedule for Ice Cream Cones

Price Quantity Demanded Quantity Supplied

Php 25 2 10

Php 20 4 9

Php 15 7 7

Php 10 9 4

Php 5 10 2
The Equilibrium of Supply and Demand
Price of Ice-
Cream Cone
Supply

Equilibrium price Equilibrium


Php 15.00

Demand

Equilibrium quantity

0 1 2 3 4 5 6 7 8 9 10 11
Quantity of Ice-
Cream Cones
SHORTAGE AND SURPLUS
Shortage. The quantity demanded is greater than
quantity supplied. Prices tend to rise.

Surplus. The quantity demanded is less than quantity


supplied. Prices tends to fall.
Surplus / Excess Supply
Price of Ice-
Cream Cone Surplus

Php 20.00

Php 15.00

Demand

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-
Quantity Quantity
Demanded Supplied Cream Cones
Shortage / Excess Demand
Price of Ice-
Cream Cone
Supply

Php 15.00

Php 10.00

Shortage

0 1 2 3 4 5 6 7 8 9 10 11 Quantity of Ice-Cream Cone


Quantity Quantity
Supplied Demanded
How to solve shortage and
surplus?
Shortage. When condition of shortage occurs, since the goods
sold out fast, consumers push up the price and as prices rise,
firms increase their production while some consumer drop out
of the market.
Surplus. When condition of surplus occurs, producers will
reduce their prices, enticing the consumers to buy more of the
commodity or service.
Movements and Shifts of Demand and
Supply
• Movements
-A change in the price of a good causes a
movement along the demand or supply curve.

• Shift
-A change in different factors affecting demand
and supply causes a shift in the demand and supply
curve itself.
Shift and Movements in the
Demand Curve
A Shifts in the Demand Curve
Price of Banana Cue

B A
Php 10.00

D1

D2
0 10 20
Number of Banana Cue
A Movement Along the Demand Curve

Price of Banana Cue

C
Php 20.00

A
Php 10.00

D1

0 12 20
Number of Banana Cue
Shift and Movements in the
Supply Curve
A Shift of The Supply Curve

Price of Banana cue

S1 S2

Php 15.00 J
G

20 40 Number of Banana Cue


A Movement along the Supply Curve

Price of Supply
banana cue

Php 15.00 G

Php 10.00 F

20 40 Number of Banana Cue


Simultaneous Shifts of the
Supply and Demand Curves
Demand
Price of
Ice-Cream
Cone

Supply
Php 20.00 New equilibrium

Php 10.00
Initial D2
equilibrium

D1

0 1 2 3 4 5 6 7 10 11 Quantity of Ice-
Cream Cone
Supply
Price of Ice- S2
Cream Cone

S1
Php 20.00 New equilibrium

Php 10.00 Initial equilibrium

Demand

0 1 2 3 4 7 10 11 Quantity of Ice-Cream
Cones
Both Demand and Supply
Price of
Large increase
Ice-Cream in demand
Cone
New
S2
equilibrium S1
P2
Small
decrease in
supply

P1 Initial equilibrium D2

D1

0 Q1 Q2 Quantity of Ice-
Cream Cone
Remember:
Shifts in either supply or demand change equilibrium price
and quantity.
Summary of the Effects of Supply and
Demand Shifts
Effect on Effect on
Shift and Equilibrium
How We Say It Equilibrium
Direction
Price Quantity
Demand curve shifts
“Demand decreases.” _ _
left.

Demand curve shifts


“Demand increases.” + +
right.

Supply curve shifts left. “Supply decreases.” + _

Supply curve shifts right. “Supply increases.” _ +


Price Setting or Price Control
Price controls are legal restrictions on how high or low a
market price may go in which the goverment finds it necessary
to intervene in the workings in the market system.
Why Price controls?

During crisis times, emergencies or wars, the government wants


to protect the consumers from rapidly increasing prices.

 If the equilibrium wage given by supply and demand for low


skilled workers is below poverty level, the government can set
a minimum wage.
Two (2) Kinds of Price Controls
Floor Price
• Goverment sets the price floor HIGHER than the
equilibrium or the prevailing market price.
• Minimum price set by the goverment for a good or
service
• Always results in a condition of surplus.
Price controls: Floor Price
• Equilibrium • Floor Price
Price
S Price
D Surplus
D
S
4
4

3
3
Price Ceiling
2
2

100 200 Quantity of


icecreams
100 200 600 Quantity of
icecreams
The surplus can be utilized or by stimulating
consumer demand for the commodity
Why does the government do it?
• To support prices (income) in important sectors of the
economy (eg. Agriculture).
• To protect workers (eg. minimum wages)
Ceiling Price
• A ceiling price is the opposite of a floor price.
• The objective of a ceiling price is to extend a price subsidy to
consumers.
• Goverment sets the price LOWER than the equilibrium price or
in the prevailing market price
• Results in a temporary shortage.
Price controls: Ceiling Price
• Equilibrium • Ceiling Price
Price
S Price
D
D
S
4
4

3
3

Price Ceiling
2
2

Shortage

100 Quantity of
200
icecreams 800 Quantity of
100 200
icecreams
 The shortage can be eliminated by importing , rationing
and injecting buffer stocks to the market
Why would they do it?

• To keep the price down to an acceptable level.


• During wartime price controls may be imposed on essential
items such as petrol, rice etc.
• To help the poor & the disadvantaged
Thank You for
Listening!
Prepared by:
Nina Alyanna B. Marte
BEED-III

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