ECON107 Principles of Microeconomics Week 6 SEPTEMBER 2013 1 Chapter-3
Jan 03, 2016
ECON107Principles of
MicroeconomicsWeek 6
SEPTEMBER 2013
1
Chapter-3
3 Market Equilibrium
Lesson Objectives Define market and market equilibrium Explain how demand and supply
determine prices and quantities bought and sold
Use the demand and supply model to make predictions about changes in prices and quantities
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4MARKETS DEFINED
MARKETS
POTENTIALSELLERS
POTENTIALBUYERS
Market
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A set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms. It determine prices and quantities of goods and services by bringing together two sides of exchange demand and supply. Markets are often physical places, such as supermarkets, shopping malls etc. Market also include other mechanisms by which buyers and sellers communicate, like radio television advertisement, telephones etc.There are two types of market in the economy. These are Product market and Resource market.
Market Equilibrium
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Market equilibrium refers a situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the Market.
The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and sold at the equilibrium price.
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$54321
1020355580
$54321
60503520 5
200
B
U
Y
E
R
S
P QD
CORN OILMARKET
DEMAND
2,0004,0007,000
11,00016,000
200
S
E
L
L
E
R
S
12,00010,000
7,0004,0001,000
P QS
CORN OIL
MARKET
SUPPLY
EQUILIBRIUM
x x
Market Demand and Supply
8
Market Demand and Supply
7
SP
Q (in thousand)o
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
CORNMARKET
CORNMARKET
Market Clearing Equilibrium
9
Market Demand and Supply
7
SP
o
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
CORN MARKET CORN MARKETSurplusAt a $4 price
more is being
supplied than
demanded
Q (in thousand)
10
Market Demand and Supply
11
SP
o
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
CORNMARKET
CORNMARKET
At a $2 price
more is being
demanded than
supplied
Shortage
Q (in thousand)
11
Market Demand and Supply
117
SP
o
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$54321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
CORNMARKET
CORNMARKET
Shortage ( Create market pressure for a higher price)
Surplus
(put downward pressure on the price)
Q (in thousand)
Changes in Equilibrium
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Once a market reaches equilibrium,
that price and quantity will prevail until
one of the determinants of demand or
supply changes.
A change in any one of these
determinants will usually change
equilibrium price and quantity in a
predictable way
Changes in Equilibrium
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An increase in demand
will cause an increase
in the equilibrium price
and quantity of a good.The increase in demand causes
excess demand at the initial price. Excess demand will cause
the price to rise, and as price rises
producers are willing to sell more, thereby
increasing output.
Changes in Equilibrium
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A decrease in demand
will cause a reduction
in the equilibrium price
and quantity of a good.
Changes in Equilibrium
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An increase in supply will
cause a reduction in the
equilibrium price and an
increase in the equilibrium
quantity of a good.
Changes in Equilibrium
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An decrease in supply will
cause an increase in the
equilibrium price and a
decrease in the equilibrium
quantity of a good.
Changes in Equilibrium
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Changes in Equilibrium
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SS = D P , Q unchanged = D P , Q unchanged
Changes in Equilibrium
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Changes in Equilibrium
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SS = D P (unchanged) , Q= D P (unchanged) , Q
Summary
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Supply increases Supply decreases
Demand increases Demand decreases
Change in Demand
Ch
an
ge
in
Su
pp
ly
Equilibrium price changeis indeterminate. Equilibrium quantity increases. Equilibrium
price rises. Equilibrium quantity change is indeterminate.
Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases.
Now it’s over for today. Do Now it’s over for today. Do you have any question? you have any question?
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