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Mic 3

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Mic 3

  1. 1. Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 1
  2. 2. CHAPTER 3 Market Equilibrium Microeconomics All Rights Reserved © Oxford University Press Malaysia, 2008 3– 2
  3. 3. DEFINITION OF MARKET EQUILIBRIUM Market equilibrium is a situation where quantity demanded and quantity supplied are equal and there is no price or quantity to change. QDD = QSSMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 3
  4. 4. EQUILIBRIUM PRICE AND OUTPUT Market equilibrium is determined by the intersection of the the demand curve and the supply curve. Equilibrium price and quantity refers to the price and quantity that consumers and suppliers are willing to buy and sell. Market equilibrium can be determined using a demand and supply model, graphical illustration and through mathematical equation.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 4
  5. 5. GRAPHICAL ILLUSTRATION OF EQUILIBRIUM PRICE AND OUTPUT A Graphical illustration 6 SURPLUS (QSS > QDD) 5 4 E P* 3 Price SS 2 DD 1 SHORTAGE (QDD > QSS) Q* 0 2 4 6 8 10 QuantityMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 5
  6. 6. GRAPHICAL ILLUSTRATION OFEQUILIBRIUM PRICE AND OUTPUT(CON’T) (1) (2) (3) (4) (5) Price (RM) Quantity Quantity Market Market Demanded Supplied Condition Prices (units) (units) 9.00 2000 10000 SURPLUS Falls 8.50 4000 8000 SURPLUS Falls 8.00 6000 6000 EQUILIBRIUM Equilibrium 7.50 8000 4000 SHORTAGE Rises 7.00 10000 2000 SHORTAGE RisesMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 6
  7. 7. MATHEMATICAL EQUATION OF EQUILIBRIUM PRICE OUTPUT (CON’T) The market demand and supply functions are given below: Market demand, QDD = 38000 – 4000P (equation 1) Market supply, QSS = – 26000 + 4000P (equation 2) To find market equilibrium price and quantity, QDD = QSS QDD = QSS 38000 – 4000P = – 26000 + 4000P 8000P = 64000 P = RM8.00Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 7
  8. 8. MATHEMATICAL EQUATION OF EQUILIBRIUM PRICE OUTPUT (CON’T) Substitute P = 8 into equation 1 and 2 to obtain the quantity. QDD = 38000 – 4000(8) (equation 1) = 6000 units. QSS = – 26000 + 4000(8) (equation 2) = 6000 units. So, the equilibrium quantity, Q = 6000 units.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 8
  9. 9. SHOCKS IN EQUILIBRIUMOnce the market reaches equilibrium level, itremains there so long as no pressure is put onthe prices.Market equilibrium will change when there is ashock that would shift the demand or supplycurve.The shock that shifts the supply and demandcurves are due to changes in non-price factors.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 MICROECONOMICS 93– 9
  10. 10. EFFECT OF CHANGES ON DEMAND ASSUME THAT SUPPLY IS CONSTANT Increase in Price (RM) Demand SS DD curve shifts to the right P1 Equilibrium price and quantity Decrease in P* increases Demand P2 DD1 DD curve shifts to the left DD Equilibrium price DD2 and quantity Quantity decreases Q2 Q* Q1Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 10
  11. 11. EFFECT OF CHANGES ON SUPPLY ASSUME THAT DEMAND IS CONSTANT Price (RM) Increase in Supply SS2 SS curve shifts to the SS right Equilibrium price P2 decreases and Decrease in SS1 quantity increases P* SupplySS curve shifts to P1 the left Equilibrium price DD increases and quantity Quantity Q2 Q* Q1 decreasesMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 11
  12. 12. EFFECT OF CHANGES ON DEMAND AND SUPPLY SUPPLY AND DEMAND INCREASE Price (RM) DD1 Case 1: Increase at SS same magnitude Equilibrium price undetermined and quantity increases P* SS1U DD Quantity Q* Q1Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 12
  13. 13. EFFECT OF CHANGES ON DEMAND AND SUPPLY (CON’T) SUPPLY AND DEMAND DECREASE Price (RM) Case 2: Decrease at SS1 same magnitude SS Equilibrium price undetermined and quantity decreases P* DD DD1 Quantity Q1 Q*Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 13
  14. 14. EFFECT OF CHANGES ON DEMAND AND SUPPLY (CON’T) SUPPLY INCREASE AND DEMAND DECREASES Price (RM) Case 3: Changes in SS different magnitude SS1 Equilibrium price decreases and quantity undetermined P* P1 DD1 DD Q* QuantityMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 14
  15. 15. EFFECT OF CHANGES ON DEMAND AND SUPPLY (CON’T) SUPPLY DECREASES AND DEMAND INCREASES Price (RM) SS1 Case 4: Changes in SS different magnitude Equilibrium price increases P1 and quantity undetermined P* DD1 DD Quantity Q*Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 15
  16. 16. GOVERNMENT INTERVENTION MAXIMUM PRICE MAXIMUM PRICE GOVERNMENT INTERVENTION IN THE MARKET TAXES SASUBSIDIESMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 16
  17. 17. GOVERNMENT INTERVENTION (CON’T) Advantage MAXIMUM PRICE/ Price Consumers purchase SS CEILING PRICE at lower price. Government-imposed regulations prevent prices from rising above the maximum level. Suppliers reduce the amountDisadvantages P* offered to Q1 but demand• Emergence of would rise to Q2 creating a black market. shortage.• Reduction in Price P1 quantity The government imposes a produced. ceiling maximum price of P1.• Producers tend Shortage occurs to receive illegal payments from DD The equilibrium price is P* consumers. and the quantity is Q*. Q1 Q* Q2 QuantityMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 17
  18. 18. GOVERNMENT INTERVENTION (CON’T) Price MINIMUM PRICE/ FLOOR PRICE SS Government-imposed regulations Surplus occurs prevent prices from falling below a minimum level. Advantages P1 Suppliers increase the amount Floor price offered to Q2 but demand drop to • Protects Q1 creating a surplus. producer’s P* income The government imposes a • Higher minimum price of P1 wage rate Disadvantages Consumers pay more. Waste of resources of production DD Creates unemployment The equilibrium price is P* and Q1 Q* Q2 Quantity the quantity is Q*.Microeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 18
  19. 19. EFECT OF TAXATION INDIRECT TAX 4 SS1 RM Tax that is imposed by the government on producers or sellers but paid by or = Price passed on to end-users. x SS Ta The equilibrium price is RM12 and the quantity is 400 units 14 CONSUMER The government imposes a sales tax of ’S SHARE 12 RM4 per carton. PRODUCER ’S SHARE 10 SS curve shift to the left from SS to SS1 and new equilibrium is RM14 and 200 units. The tax amount of RM4 is shared DD equally between buyer and seller. 200 400 QuantityMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 19
  20. 20. Demand less elastic than supply Perfectly inelastic demand PP D S + tax (RM4)15 S + tax S S 16 CONSUMERS’ CONSUMERS’ SHARE SHARE 1212 PRODUCERS’ SHARE11 D O 400 Q 0 400 Q Demand less elastic than supply Incidence of tax: elastic supplyP S + tax P S + tax S S1312 CONSUMERS’ SHARE 121 D PRODUCERS’ 18 SHARE PRODUCER’ SHARE D9 O 400 Q O 400 Q
  21. 21. EFECT OF SUBSIDIES 10 SUBSIDY M R S An incentive from the government to = dy encourage producers to produce Price i bs S1 more. Su The equilibrium price is RM50 and the quantity is 10.50 CONSUME The government provides a subsidy R’S SHARE of RM10 per unit.45 PRODUCER ’S SHARE SS curve shift right from SS to SS140 and new equilibrium is RM45 and 20 units. The subsidy amount of RM10 is shared equally between buyer and D seller. 10 20 QuantityMicroeconomics All Rights Reserved© Oxford University Press Malaysia, 2008 3– 21
  22. 22. EFECT OF PRICE ELASTICITY ON SUBSIDIESDemand is more elastic than supply Demand less elastic than supply P P S + tax (RM4) S 50 S + tax S CONSUMERS’ SHARE5047 CONSUMERS’ SHARE 43 PRODUCERS’ SHARE 40 PRODUCERS’ SHARE D40 D O 10 0 10 Q Q Microeconomics All Rights Reserved © Oxford University Press Malaysia, 2008 3– 22

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