- Bharathi

1
Market Equilibrium

• - Bharathi

2
The Market Mechanism

• Market Mechanism Summary
• 1) Supply and demand interact to determine the
  equilibrium price.
• 2) When not in equilibrium, the market will
  adjust to a shortage or surplus and return to the
  equilibrium.
• 3) Markets must be competitive for the
  mechanism to be efficient.

3
MARKET DEMAND SUPPLY
MARKET DEMAND
MARKET SUPPLY
200 B U Y E R S
200 S E L L E R S
10 20 35 55 80
2,000 4,000 7,000 11,000 16,000
12,000 10,000 7,000 4,000 1,000
Rs.5 4 3 2 1
Rs.5 4 3 2 1
60 50 35 20 5
x
x
EQUILIBRIUM
4
MARKET DEMAND SUPPLY
Price
S
Rs.5 4 Rs3 2 1
Price
Supply
Price
Demand
2,000 4,000 7,000 11,000 16,000
12,000 10,000 7,000 4,000 1,000
Rs.5 Rs.4 Rs.3 Rs.2 Rs.1
Market Equilibrium
Rs.5 Rs.4 Rs.3 Rs.2 Rs.1
D
7
o
Q
2 4 6 8 10 12 14 16
Quantity
5
The Market Mechanism
Y
Price (Rs. per unit)
P
E
Quantity
X
O
Q
6
The Market Mechanism
Price (Rs. per unit)
Quantity
7
The Market Mechanism
8
The Market Mechanism
E
9
Change in Supply
P
D1
S1
S2
P2
Price
P1
o
Q1
Q2
Q
Quantity
10
Change in Demand
D2
S1
D1
P
P2
Price
P1
o
Q1
Q2
Q
11
P
D
Q
D
Q
P
D1
A
D1
S
S
B
D1
P2
D2
P1
P1
P2
Q2 Q1
Q1 Q2
Decrease in Demand
Increase in Demand
Four Possibilities
Q
S
Q
P
P
S
D
D
D
S2
C
S1
S1
P2
S1
P2
P1
P1
Q2 Q1
Q1 Q2
Increase in Supply
Decrease in Suply
12
Change in Supply Change in Demand
D2
S3
D1
S1
D3
S2
P
Q
13
Effects of Government Intervention Price Controls

• If the Government decides that the equilibrium
  price is too high, they may establish a maximum
  allowable ceiling price.

14
TAX SHIFTING AND THE ELASTICITIES OF DEMAND AND
SUPPLY

• When a product is taxed, who ultimately shoulders
  the tax burden depends upon the elasticity of
  demand and supply of the product taxed.
• Usually the tax burden is shared between
  producers and consumers.
• Consumers pay more of the tax, if demand is
  relatively less elastic than supply
• Producers pay more of the tax if demand is
  relatively more elastic than supply.

15
Price Ceilingsand Price Floors

• Price Ceiling
• is a legally established maximum price which a
  seller can charge or a buyer must pay.
• Price Floor
• is a legally established minimum price which a
  seller can charge or a buyer must pay.

16
Price Ceilings

• When the Government imposes a price ceiling
  (i.e., a legal maximum price at which a good can
  be sold) two outcomes are possible
• The price ceiling is not binding.
• The price ceiling is a binding constraint on the
  market, creating shortages.

17
A Binding Price Ceiling
Price
S
Price Ceiling
PE
PC
Shortage
D
QE
QS
QD
Quantity/time
18
Market Impactsof a Price Ceiling

• A Binding Price Ceiling creates. . .
• Shortages (QD gt QS)
• Shortages create
• Queuing
• Discrimination criteria set by sellers
• Bundled pricing with other goods
• Bribery/corruption

19
Price Floors

• When the Government imposes a price floor (i.e.,
  a legal minimum price at which a good can be
  sold) two outcomes are possible
• The price floor is not binding.
• The price floor is a binding constraint on the
  market, creating surpluses.

20
A Binding Price Floor
Price
S
Surplus
PF
Price Floor
PE
D
QS
QE
QD
Quantity/time
21
Market Impactsof a Price Floor

• A Binding Price Floor creates. . .
• Surpluses (QS gt QD)
• Surpluses create
• Discrimination criteria set by buyers
• Examples
• Agricultural Price Supports

22
INCOME FLOW IN AN ECONOMY
23
The Circular Flow of Income
Financial System
C I
3
2
Investment (I)
Consumption (C)
C I G
Imports (IM)
Purchases (G)
Saving (S)
Exports (X)
4
Investors
Government
C I G
1
Consumers
Government
(X IM)
Disposable
5
Taxes
Transfers
6
Income (DI)
24
THANK YOU
bharathi.hrd_at_gmail.com