- bharathi
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- Bharathi- Bharathi
Market EquilibriumMarket Equilibrium
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The Market MechanismThe Market Mechanism
Market Mechanism SummaryMarket Mechanism Summary
1)1) Supply and demand interact to Supply and demand interact to determine the equilibrium price.determine the equilibrium price.
2) When not in equilibrium, the market 2) When not in equilibrium, the market will adjust to a shortage or surplus and will adjust to a shortage or surplus and return to the equilibrium.return to the equilibrium.
3)3) Markets must be competitive for Markets must be competitive for the the mechanism to be efficient.mechanism to be efficient.
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MARKET DEMAND & SUPPLY MARKET DEMAND & SUPPLY
Rs.5Rs.544332211
10102020353555558080
Rs.5Rs.544332211
6060505035352020 55
200200
BB
UU
YY
EE
RR
SS
PPQQDD
PricePriceMARKETMARKET
DEMANDDEMAND
2,0002,0004,0004,0007,0007,000
11,00011,00016,00016,000
200200
SS
EE
LL
LL
EE
RR
SS
12,00012,00010,00010,000
7,0007,0004,0004,0001,0001,000
PPQQSS
PricePrice
MARKETMARKET
SUPPLYSUPPLY
EQUILIBRIUMEQUILIBRIUM
xx xx
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MARKET DEMAND & MARKET DEMAND & SUPPLYSUPPLY
77
SS
QQoo
Rs.5Rs.5
44
Rs3Rs3
22
11
2 4 6 8 10 12 14 162 4 6 8 10 12 14 16
PP QQDD
Rs.Rs.55Rs.Rs.44Rs.Rs.33Rs.Rs.22Rs.Rs.11
2,0002,0004,0004,0007,0007,000
11,00011,00016,00016,000
Rs.5Rs.5
Rs.4Rs.4
Rs.3Rs.3
Rs.2Rs.2
Rs.1Rs.1
12,00012,00010,00010,0007,0007,0004,0004,0001,0001,000
DD
PP QQ
SS
PricePrice
QuantityQuantity
MarketMarketEquilibriumEquilibrium
DemandDemand PricePrice SupplySupply
PricePrice
5QuantityQuantity
D
S
EEPP
OO QQ XX
YY
The Market MechanismThe Market Mechanism
PricePrice(Rs. per unit)(Rs. per unit)
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QuantityQuantity
D
S
P
Q
PricePrice(Rs. per unit)(Rs. per unit)
If price is above equilibrium If price is above equilibrium Point-Supply exceedsPoint-Supply exceedsDemand. Demand.
P1
SurplusSurplus
The Market MechanismThe Market Mechanism
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The Market MechanismThe Market Mechanism
D
S
Q1
Assume the price is PAssume the price is P11 , then: , then:
1) Quantity Supplied is > 1) Quantity Supplied is > Quantity Demanded Quantity Demanded 2) Producers lower price.2) Producers lower price.3) Quantity supplied decreases 3) Quantity supplied decreases 4) Equilibrium is restored4) Equilibrium is restored
P1
SurplusSurplus
Q2 QuantityQuantity
PricePrice(Rs per unit)(Rs per unit)
P2
Q3
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The Market MechanismThe Market Mechanism
D
S
Q1 Q2
P2
Shortage
QuantityQuantity
PricePrice(Rs. per unit)(Rs. per unit)
Assume the price is P2, then:1) Quantity Demanded is greater than quantity Supplied2) Producers raise price.
3) Quantity supplied increases 4) Equilibrium is restored
Q3
P3
EE
Change in SupplyChange in Supply
Qo
DD11
Quantity
Pri
ce
Pri
ce
SS11SS22
P
QQ11QQ22
PP11
PP22
QQoo
DD11
Pri
ce
Pri
ce
SS11PP
QQ11 QQ22
PP11
PP22
DD22
Change in DemandChange in Demand
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Four Possibilities
DD11 DD11 SSAA BB
CCDD
SSDD11
DD22
““Increase in Demand”Increase in Demand” “Decrease in Demand”
“Increase in Supply”““Decrease in Suply”Decrease in Suply”
DD PP QQ DD PP QQ
SS QQ PPPP SS QQDD
SS11
DD
SS11SS22
P2P2
P1P1
QQ1 1 QQ22 QQ2 2 Q Q11
P2P2
SS11 P1P1
PP22
PP11PP11
PP22
QQ1 1 QQ22 QQ2 2 QQ11
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PP
S1D1
D2
D3
S3
SS22
Change in Supply = Change in DemandChange in Supply = Change in Demand
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Effects of Government Intervention Effects of Government Intervention Price ControlsPrice Controls
If the Government decides that the If the Government decides that the equilibrium price is too high, they may equilibrium price is too high, they may establish a maximum allowable establish a maximum allowable ceiling ceiling price.price.
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When a product is taxed, who ultimately When a product is taxed, who ultimately shoulders the shoulders the tax burdentax burden depends upon the depends upon the elasticity of demand and supply of the elasticity of demand and supply of the product taxed.product taxed.
Usually the tax burden is shared between Usually the tax burden is shared between producers and consumers.producers and consumers.
Consumers pay more of the tax, if demand Consumers pay more of the tax, if demand is relatively less elastic than supplyis relatively less elastic than supply
Producers Producers pay more of the tax if demand is pay more of the tax if demand is relatively more elastic than supply.relatively more elastic than supply.
TAX SHIFTING AND THE ELASTICITIES TAX SHIFTING AND THE ELASTICITIES OF DEMAND AND SUPPLY OF DEMAND AND SUPPLY
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Price CeilingsPrice Ceilingsand Price Floorsand Price Floors
Price CeilingPrice Ceiling is a legally established is a legally established maximum maximum
priceprice which a seller can charge or a which a seller can charge or a buyer must pay.buyer must pay.
Price FloorPrice Floor is a legally established is a legally established minimum minimum
priceprice which a seller can charge or a which a seller can charge or a buyer must pay.buyer must pay.
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Price CeilingsPrice Ceilings
When the Government imposes a When the Government imposes a price ceiling (i.e., a legal price ceiling (i.e., a legal maximum price at which a good maximum price at which a good can be sold) two outcomes are can be sold) two outcomes are possible:possible: The price ceiling is not binding.The price ceiling is not binding. The price ceiling is a binding The price ceiling is a binding
constraint on the market, creating constraint on the market, creating shortages. shortages.
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A A Binding Binding Price CeilingPrice Ceiling
S
D
Price
Quantity/time
PE
QE
PriceCeiling
PC
QS
QD
Shortage
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Market ImpactsMarket Impactsof a Price Ceilingof a Price Ceiling
A Binding Price Ceiling creates. . .A Binding Price Ceiling creates. . . Shortages (QD > QS)Shortages (QD > QS) Shortages create :Shortages create :
QueuingQueuing Discrimination criteria set by sellersDiscrimination criteria set by sellers Bundled pricing with other goodsBundled pricing with other goods Bribery/corruptionBribery/corruption
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Price FloorsPrice Floors
When the Government imposes a When the Government imposes a price floor (i.e., a legal minimum price floor (i.e., a legal minimum price at which a good can be sold) price at which a good can be sold) two outcomes are possible:two outcomes are possible: The price floor is not binding.The price floor is not binding. The price floor is a binding constraint The price floor is a binding constraint
on the market, creating surpluses.on the market, creating surpluses.
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A A Binding Binding Price FloorPrice Floor
SS
DD
Price
Quantity/time
PE
QE
Price FloorPrice Floor
PF
QS
QD
SurplusSurplus
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Market ImpactsMarket Impactsof a Price Floorof a Price Floor
A Binding Price Floor creates. . .A Binding Price Floor creates. . . Surpluses (QS > QD)Surpluses (QS > QD) Surpluses create :Surpluses create :
Discrimination criteria set by buyersDiscrimination criteria set by buyers Examples:Examples:
Agricultural Price SupportsAgricultural Price Supports
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1
3
6
5
4
2
Investors
Government
Firms(produce the
domestic product)
Consumers
Financial SystemRest of the
World
Saving (S)
Consumption (C
)
Inve
stm
ent (
I) C + I
Gov
ernm
ent
C + I + G
Imports (IM
)
Exports (X)
C +
I + G
+
Transfers
Disposable
Income (DI)
Taxes
Gross
National Income (Y)
(X – IM
)
Purch
ases
(G)
The Circular Flow of IncomeThe Circular Flow of Income
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