l5 market equiliprium

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© 2012 Pearson Education Prepared by: Fernando Quijano & Shelly Tefft

Managerial Economics

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© 2012 Pearson Education

CHAPTER OUTLINE3Market Equilibrium

Market Equilibrium• Excess Demand• Excess Supply• Changes in Equilibrium

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Market Equilibrium

Excess Supply Excess Demand

Changes in the Demand and Supply Curves

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Equilibrium: A condition that exists when quantity supplied and quantity demanded are equal. At equilibrium: there is no tendency for price to change.

So, equilibrium price is determined when

Qd = Qs

Market Equilibrium

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The Equilibrium Price and Quantity

P Qd QsExcess Demand or Excess Supply

10 4 11Excess supply (surplus) =11-4 = 7

8 6 10Excess supply (surplus) =10-6 = 4

6 9 9Equilibrium Qd=Qs=9

P*=6, Q* = 9

4 12 8Excess demand (shortage) =12-8=4

2 15 7Excess demand (shortage) =15-7=8

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Market Equilibrium Graphically

6 7 8 9 10 11 12 1302468

1012

Qd , Qs

P$

Qd and Qs weekly (1000 Kilo)

D

D

S

S

Excess demand

Excess supply

equilibrium point

P*

Q*

A

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When Qs exceeds Qd at the current price, the price tends to fall. When price falls, Qs is likely to decrease and Qd is likely to increase until an equilibrium price is reached where Qs and Qd are equal.

1- Qs> Qd at the current price.

2- the current price is higher than equilibrium price.

3- excess supply will cause the price to fall up to the equilibrium price (Qd=Qs).

Excess SupplyExcess supply or surplus exists when:

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When Qd exceeds Qs, price tends to rise. When the price in a market rises, Qd falls and Qs rises until an equilibrium is reached at which Qd and Qs are equal and excess demand is eliminated.

Excess Demand, or Shortage exists when: 1- Qd > Qs at the current price.

2- the current price is lower than equilibrium price.

3- Excess demand will cause the price to rise up to the equilibrium price (Qd=Qs).

Excess Demand

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Suppose that the supply & demand for pizza is given by this table

Price Qd Qs Qd’10 3 18 69 4 16 78 5 14 87 6 12 96 7 10 105 8 8 114 9 6 123 10 4 132 11 2 141 12 0 15

9

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Questions?

1- what’s the equilibrium price & equilibrium quantity?2 - If the government sets a price of $8 determine the

size of surplus or shortage?3 - If the government sets a price of $3, determine the

size of surplus or shortage?4 - Suppose that demand for pizza rises at each prise

by 3 units, determine the equilibrium price & equilibrium quantity? And show it graphically?

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Changes In Equilibrium

When does market equilibrium change?

1- Changes in Demand2- Changes in Supply

• When the equilibrium point changes, the equilibrium price and quantity change.

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Changes in Demand

Increase in demand can be caused by: income Prices of substitute goods Prices of complementary goods Changes in tastes in favour of this good Expected Income and prices

Decrease in demand can be caused by: income Prices of substitute goods Prices of complementary goods Changes in tastes in disfavour of this good Expected Income and prices

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The Effect of an Increase in Demand on the Equilibrium

$

D0

D0

D1

D1

6

9 12

7

0 Qd , Qs(1000 K)

P

S

S

e’

e

Q*

P*

D P(equilibrium) + Q (equilibrium)

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The Effect of a Decrease in Demand on the Equilibrium

$

D0

D0

D2

D2

6

96

4

0 Qd , Qs (1000 K)

P

S

S

e’e

Q*

P*


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The change in demand & the elasticity of supply

1.The change in demand in the case of perfectly inelastic supply curve

2. The change in demand in the case of perfectly elastic supply curve

3. The change in demand in the case of elastic and inelastic supply curve

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Supply is perfectly elastic

$

D0

D0

D1

D1

6

9 140 Qd , Qs(1000 K)

P

S

S

e’e

Q*

P* const

ant

D Q (equilibrium)

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Supply is perfectly inelastic

$

D0

D0

D1

D1

6

9

8

0 Qd , Qs(1000 K)

P S

S

e’

e

Q* const

ant

P*

D P(equilibrium)

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The change in demand in the case of elastic and inelastic supply curve

$

D0

D0

D1

D1

6

9 12

7

0 Qd , Qs(1000 K)

PS1

S

e1

e

Q*

P*


S2

e2

8

جدا هام

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Changes in SupplyIncrease in supply of X can be caused by:cost of production or Input prices.level of technology. prices of related product Y (if firms can produce

either X or Y).

Decrease in supply can be caused by: cost of production or Input prices. level of technology. prices of related product Y (if firms can produce

either X or Y).19

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The Effect of an Increase in Supply on The Equilibrium

$

D

D

S1

6

9 13

5

0

P

Qd , Qs (1000 K)

S0

S0

e’e

Q*

P*

S1

S P(equilibrium) + Q (equilibrium)

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The Effect of a Decrease in Supply on the Equilibrium

$

D0

D0

S1

1.2

96

2.4

0 Qd , Qs

P

S0

S0

e’

e

Q*

P*

S1


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The change in supply & the elasticity of demand

The change in supply in the case of perfectly inelastic demand curve

The change in supply in the case of perfectly elastic demand curve

The change in supply in the case of elastic and inelastic demand curve

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Perfectly elastic demand curve

$

D

D

S1

6

9 130

P

Qd , Qs (1000 K)

S0

S0

e’e

Q*

P* const

ant

S1

S Q (equilibrium)

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Perfectly inelastic demand curve

$ D

D

S1

6

9

4

0

P

Qd , Qs (1000 K)

S0

S0

e’

e

Q* consta

nt

P*

S1

S P(equilibrium)

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Elastic & inelastic demand curve

$ D2

D

S1

6

9 13

5

0

P

Qd , Qs (1000 K)

S0

S0

e2

e

Q*

P*

S1


D1e1

10

4

جدا هام Elastic نحو q يتجهInlestic نحو p يتجه

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Questions?A new medical study reports that washing your hair everyday increases the

probability of baldness. Show graphically the effects of this report on the market for shampoo.

The lumber market is currently in equilibrium at a price of $2 per foot. A new technology is developed that reduces waste and increases efficiency in the production of lumber. Show graphically the effect of this new technology in the lumber market.

The impact of students returning to campus in August on the market for pizza in a college town.

The effect of a decrease in wage rate of construction workers on the supply of houses.

Explain whether the following statement is true or false:A simultaneous increase in both demand and supply of a product will

necessarily cause an increase in the equilibrium price and quantity of that product.

If the demand curve for a product shifts to the left and the supply curve for the product shifts to the left, the equilibrium quantity will decrease.

Land in the South can often be used to grow either corn or cotton. Suppose the price of corn increases. This will not affect the market for cotton.

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Market Equilibrium Mathematically

Qd = + β PQs = + δ PThe condition of equilibrium is:

Qd = Qsfor the equilibrium to be achieved:1. The slope of the demand curve and the demand

curve should be different.

2. should be more than for the prices and quantity to be positive.

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Problem 1 (final exam September 2014)

Suppose the demand and supply curves for eggs in the United States are given by the following equations:

Qd = 100 - 20P Qs = 10 + 40P1- find the equilibrium price and quantity using these equations?2- fill in the following table?

3- Use the information in the table to find the equilibrium price and quantity.4- Graph the demand and supply curves and identify the equilibriumprice and quantity.

Price Qd Qs$ 0.50 - -$ 1.00 - -$ 1.50 - -$ 2.00 - -$ 2.50 - -

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Problem 2 (final exam 2013/2014)

Suppose the market demand and market supply of pizza are given by the following equations:

Qd = 120 - 4P Qs = -15 + 5P

1. Graph the supply and demand curves for pizza (at the same diagram).

2. Determine the equilibrium price and quantity of pizza.3. Suppose that the demand equation becomes Q'd =147 - 4P,

given the supply equation: what is the new market equilibrium? show your answer graphically.

4. Using the mid-point formula, calculate the price elasticity of original demand for pizza between $20 and $25.

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Problem 3

Look at the following demand and supply equations, and determine the price and the quantity of equilibrium if possible?? And say why if it is not possible??

Qd = 10 - 2P Qs = 5 + 3P

Qd = 15 + 3P Qs = 10 + 3P

Qd = 5 - 3P Qs = 5 + 5P

Qd = 15 - 5P Qs = 20 + 4P

l5 market equiliprium

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