Equilibrium

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Prepared by; RASHAIN PERERA077 059 37 52rashainperera@gmail.com

What is equilibrium?

The market state at which quantity demand equals market supply at a particular price could be simply known as the market equilibrium.

QD = QS

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Key concepts

Equilibrium price Equilibrium quantity Equilibrium point

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Equilibrium point

Determining equilibrium using equations QS = QD

Question;Qd= 600 – 10pQs= 20p

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In-equilibrium point and consequences

Excess demand; Excess quantity demanded by the consumers at the prevailing price level is known as excess demand.

Excess supply; Excess quantity supplied by the producer at the prevailing price level is known as excess supply.

Excess demand price; Demand price less than the equilibrium price is known as the excess demand price.

Excess supply price; Supply price greater than the equilibrium price is known as the excess supply price.

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Price

Quantity

Supply

Demand

Gvt price control

Eq price

Eq qty

Excess demand

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Price

Quantity

Supply

Demand

Gvt price control

Eq price

Eq qty

Excess supply

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Excess demand price

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Excess supply price

Consumer surplus

This occurs when people pay less for a product than they were willing to pay

Determinants of consumer surplus Price paid by the consumer Maximum price willing to pay Amount he bought

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Consumer surplus

Producer surplus

This occurs when suppliers get more for a product than they were willing to earn

Determinants of producer surplus Price received by the supplier Minimum price expected by the

supplier Quantity sold by him

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Producer surplus

Economic surplus

Economic surplus = producer surplus + consumer surplus

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Pro surplu

s

Con surplus

Changes in equilibriumnatural changes

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increase in demand while supply held constant Decrease in demand while supply held constant Increase in supply while demand held constant Decrease in supply while demand held constant

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increase in demand and increase in supply Increase in supply and decrease in demand Decrease in supply and increase in demand Decrease in demand and decrease in supply

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

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Price

Quantity

Supply

Demand

Eq price

Eq qty

Changes in equilibriumas a result of

government intervention

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Government intervention to control price Price floor Price ceiling

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Maximum price legislation/price control/ceiling

The objective of this is to safeguard the interests of consumers and to control prices of essential items such as food at times when they tend to rise

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equilibrium price comes down P to P1 quantity demanded expand from Q to Q3 quantity supplied decreases from Q to Q2 an excess demand is created ( ed= Q3-Q2) a black market price is created at P2 black market is a market in which goods are sold illegally at

prices that violates the legal restrictions economic surplus before the maximum price legislation is

A+B+C+D+E+F consumer surplus after the imposition of the maximum

price legislation is A Note; B and D can also be added to the consumer surplus if

there is no excess cost to the consumer to obtain scarce goods from the market. (Excess cost- time and money that has to be spent to find scarce goods) producer surplus after the imposition of the maximum price

legislation is F loss to the economic surplus is C+E 33

Minimum price legislation/price control/price floor

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equilibrium price increases from P to P2 consumers will decrease the demand from

Q to Q1 consumer surplus before the

implementation of price floor is X+A+B consumer surplus decreases by A+B after

the implementation of the price floor producer surplus before the

implementation of the price floor is D+C producer surplus after the implementation

of the price floor is A+D dead weight loss = B+C

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Government intervention to control the quantity Taxation Subsidies

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Taxations

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price paid by the consumer has been increased from 30 to 35

price received to the producer has been decreased from 30 to 25

equilibrium quantity has decreased from 300 to 250 units consumer expenditure has changed from 30 x 300 to 35 x

250 producer revenue has changed from 30 x 300 to 35 x 250 consumer surplus decreases from A+B+C+D to A producer surplus decreases from H+G+F+I+J to I+J both consumer and producer surpluses reduces by the

quantity of B+C+D+F+G+H government receives a tax revenue of B+C+G+H social welfare reduces by D+F consumer has to bear the tax burden of B+C producer has to bear the tax burden of G+H explaining unit tax using equations

Qst= a + b (p-t)40

Subsidizations

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price paid by the consumer has been decreased from 30 to 25 price received by the producer has been increased from 30 to

35 equilibrium quantity is increased from 300 to 350 units consumer expenditure has changed from 30 x 300 to 25 x 350 producer revenue has changed from 30 x 300 to 25 x 350 consumer surplus has increased from A+B to A+B+I+H+G producer surplus has increased from I+J to I+J+B+C both consumer and producer surpluses has increased by the

quantity of B+C+I+H+G government bears a subsidy expenditure of B+C+F+G+H+I social welfare reduces by the quantity of F consumer receives the advantage of subsidy by the quantity of

I+H+G producer receives the advantage of subsidy by the quantity of

B+C explaining the subsidy using equations

Qss = a + b ( p + s ) 43