Equilibrium

Equilibrium is the point of intersection of Demand and Supply Curves.

Equilibrium can shift if :-

• Demand Curve Shifts.

• Supply Curve Shifts.

• Both Shift.

This gives rise to eight possibilities

S

D

P

3

6000

E

Example No. 1

6500

3.50

D`

E`

Q

S

D

P

3

6000

E

Example No. 2

7000

2.50

S`

E`

Q

S

D

P

3

6000

E

Example No. 3

S`

D`

8000

E`

Q

S

D

P

Pe

Qd

Example No. 4

D`

E1

Eo

Q

S

D

P

Example No. 5S`

Qd

Pe Eo

E1

Q

S

D

Q

P

Example No. 6

Qd

Pe

S`

D`

?

E1

Eo

S

D

Q

P

Example No. 7

S`

D`

Qd

Pe

?

E1

Eo

S

D

Q

P

Example No. 8

S`

D`

Pe

Qd

?EoE1

Summarized

D , S ~, PQ

D ~ , S , P Q

D , S , P ? QD , S ~ , P QD ~ , S , P QD , S , P Q ?

D , S , P Q ?

D , S , P ? Q

D , S ~, PQ

D ~ , S , P Q

D , S , P ? QD , S ~ , P QD ~ , S , P QD , S , P Q ?

D , S , P Q ?

D , S , P ? Q

Points to note

When D shifts you move along the supply curveWhen D shifts you move along the supply curve

When S shifts you move along the demand curveWhen S shifts you move along the demand curve

When both D & S shift you can think of first moving along demand curve and then moving

along supply curve or vice versa

When both D & S shift you can think of first moving along demand curve and then moving

along supply curve or vice versa

The market for butter

Question : What will happen to the equilibrium price and quantity of butter in each of the following cases?

a. A rise in the price of the margarine. D , S

b. A rise in the demand for milk. S ; D ( if milk is a substitute )

c. A rise in the price of bread. D

d. A rise in the demand of bread. D

e. An expected rise in the price of butter in near future. S D

f. A Tax on butter production. S

g. An invention of a new, but expensive, process of removing all cholesterol from butter , plus the passing of law which states that all producers must use this process. D S

IDENTIFICATION PROBLEM(Identify the demand for Tennis Balls )

D

P

S1

a

b

S2

Figure 1

30

20

1000800

D1

a

b

1000800

S1

S2

D2

Figure 2

30

20

If demand curve has not shifted, then the evidence allow us to identify its position.

It is difficult to identify just what is causing the change in price and quantity

P

Q Q

Rationing & supply shocks ( alteration of equilibrium price by the Govt )

• Through Tax : Tax ( to be paid by the producer ) will the Supply Price , Supply Curve , P &

• Through Subsidy : Subsidy ( to the producer ) willthe Supply Price , Supply Curve , P &

Qe

Qe

Government intervention : ceiling & floor

S

D

P

EPe

Qe

Pf

Pc

Q2 Q4

Shortage

Q4 – Q2

Surplus

Q3 – Q1

Price Ceiling

Price Floor

Q

So

D

P

Qo

Po

TaxP1

S1

Q1 Liters of Petrol

Imposition of tax by the government

Eo

E1

Tax per unit

1. Draw the diagram showing the market conditions before any change takes place.

2. Work out if the change ( The increase in Tax) causes a shift in Supply or demand curve. The tax will effect the supply curve- essentially it increases the cost of production.

3. Work out the directions of the shift.

4. Draw the shifted Curve on the diagram.

5. Indicate the new market price and quantity on the diagram.

Steps followed

CONCLUSION: The market Price will increase and the quantity traded ( bought and sold) will decrease.

S1

D

P

Q1

P1

SubsidyPo

So

Qo C. N. G

Payment of subsidy by the government

E1

Eo

Subsidy per unit