Market equilibrium and application of demand and supply theory

4,960 views

Published on

Click Here

http://www.eacademy4u.com/

Online Educational Website For You

Published in: Education, Business, Technology
2 Comments
24 Likes
Statistics
Notes
No Downloads
Views
Total views
4,960
On SlideShare
0
From Embeds
0
Number of Embeds
21
Actions
Shares
0
Downloads
0
Comments
2
Likes
24
Embeds 0
No embeds

No notes for slide

Market equilibrium and application of demand and supply theory

  1. 1. MARKET EQUILIBRIUM ANDAPPLICATION OF DEMAND AND SUPPLY THEORY
  2. 2. MARKET EQUILIBRIUM• Equilibrium is the unique price andquantity established at the intersectionof the supply and the demand curves.• Only at equilibrium does quantitydemanded equal quantity supplied. 2
  3. 3. P The Supply & Demand for Tennis Shoes12090 S Surplus60 Shortage30 D 1,000 2,000 3,000 4,000 Q
  4. 4. • Equilibrium Price = The price level at which the quantity that consumers want to buy equals the quantity sellers want to sell. (Qd = Qs)• Equilibrium Quantity = is achieved when quantity that consumers want to buy and the sellers want to sell are equal
  5. 5. SURPLUS AND SHORTAGE~ A surplus or shortage exists at any pricewhere the quantity demanded and thequantity supplied are not equal.~ When the price of a good is greater thanthe equilibrium price, there is an excessquantity supplied called a surplus.~ When the price is less than theequilibrium price, there is an excessquantity demanded called a shortage. 5
  6. 6. What can cause a shift in a Demand Curve?1. Number of buyers in the market2. Tastes and preferences3. Income4. Expectations of consumers5. Prices of related goods6. Seasonal factors
  7. 7. P The Effects of an increase in Demand on Market Equilibrium$1200 S$900 Shortage$600$300 D2 D1 4 8 12 16 Q
  8. 8. P The Effects of a fall in Demand on Market Equilibrium$40 S$30 Surplus$20$10 D1 D2 10 20 30 40 Q
  9. 9. What can cause a shift in a Supply Curve?1. Number of sellers in the market2. Technology3. Resource prices4. Taxes and subsidies5. Expectations of producers
  10. 10. P The Effects of an increase in Supply on Market Equilibrium$4 S1 S2$3 Surplus$2$1 D 20 40 60 80 Q
  11. 11. P The Effects of a fall in Supply on Market Equilibrium$800 S2$600 S1 Shortage$400$200 D 2 4 6 8 Q
  12. 12. PRICE CONTROLSPrice ceiling is a maximum price that a seller is allowed to charge on his product.Objectives:(3)to protect low income consumers; and(4)to control inflationEffects: (1) shortage in the market (2) unfair to producers (3) emergence of black market (4) producer reduces quality of product (5) larger shortage in LR 12
  13. 13. P Price ceiling on low cost houses results in a$800 Shortage S$600$400 Price ceiling Shortage$200 D 2 4 6 8 Q
  14. 14. PRICE CONTROLSPrice floor is a minimum legal price that a sellercan be paid.Objectives:(1) to help producers earn a decent income(2) to create a buffer stockEffects:(1) surplus in the market(2) unfair to consumers(3) emergence of black market(4) misallocation of resources (real resources andtax money) 14
  15. 15. P A price floor on padi Results in a SurplusWm Price floor S SurplusWe D QD QE QS Q
  16. 16. PRICE ELASTICITY OF DEMAND• Price elasticity of demand is ameasure of the responsiveness of thequantity demanded to a change in price.• Specifically, price elasticity ofdemand is the ratio of the percentagechange in quantity demanded to thepercentage change in price. 16
  17. 17. Price Elasticity of Demand % ∆ in Q demandedEd = % ∆ in price
  18. 18. • Elastic demand is a change of morethan one percent in quantity demandedin response to a one percent change inprice.• Demand is elastic when the elasticitycoefficient is greater than one and totalrevenue (price time quantity) variesinversely with the direction of the pricechange. 18
  19. 19. P Elastic Demand$40$30$20$10 D Q 10 20 30 40
  20. 20. • Inelastic demand is a change of lessthan one percent in quantitydemanded in response to a onepercent change in price.• Demand is inelastic when theelasticity coefficient is less than oneand total revenue varies directly withthe direction of the price change. 20
  21. 21. P Inelastic Demand$40$30$20$10 D Q 10 20 30 40
  22. 22. • Unitary elastic demand is a onepercent change in quantity demanded inresponse to a one percent change inprice.• Demand is unitary elastic when theelasticity coefficient equals one andtotal revenue remains constant as theprice changes. 22
  23. 23. P Unitary elastic Demand$40$30$20 D$10 Q 10 20 30 40
  24. 24. • Perfectly elastic demand is adecline in quantity demanded tozero for even the slightest rise orfall in price.• This is an extreme case in whichthe demand curve is horizontal andthe elasticity coefficient equalsinfinity. 24
  25. 25. P$40$30$20 Perfectly Elastic Demand = D 8$10 Q 10 20 30 40
  26. 26. • Perfectly inelastic demand is nochange in quantity demanded inresponse to price changes.• This is an extreme case in which thethe demand curve is vertical and theelasticity coefficient equals zero. 26
  27. 27. P D$40 Perfectly Inelastic Demand Ed = 0$30$20$10 Q 10 20 30 40
  28. 28. Determinants of price elasticity of demand include(b) the availability of substitutes,(c) the percentage of budget spent on the product,(d) types of goods (luxury vs. necessity),(e) Habits,(f) the length of time allowed for adjustment 28
  29. 29. INCOME ELASTICITY OF DEMAND• Income elasticity of demand is thepercentage change in quantity demandeddivided by the percentage change inincome.• For a normal good or service, incomeelasticity of demand is positive.• For an inferior good or service, incomeelasticity of demand is negative. 29
  30. 30. Income Elasticity of Demand % ∆ in Q demandedEY = % ∆ in income
  31. 31. CROSS ELASTICITY OF DEMAND• Cross elasticity of demand is thepercentage change in the quantitydemanded of one product caused by achange in the price of another product.• When the cross-elasticity of demand isnegative, the two products arecomplements.• When the cross-elasticity of demand ispositive, the two goods are substitutes 31
  32. 32. Cross Elasticity of Demand % ∆ in Q demanded for Good AEC = % ∆ in price of Good B
  33. 33. PRICE ELASTICITY OF SUPPLY• Price elasticity of supply is ameasure of the responsiveness of thequantity demanded to a change inprice.• Price elasticity of supply is the ratioof the percentage change in quantitysupplied to the percentage change inprice. 33
  34. 34. Price Elasticity of Supply % ∆ in Q suppliedES = % ∆ in price
  35. 35. Determinants of price elasticity of supply include(b) gestation period (time required to produce the good)(c) perishables vs. non-perishables(d) change in production cost involved(e) agricultural goods vs. manufactured goods 35
  36. 36. P$40$30$20 Perfectly Elastic Supply = S 8$10 Q 10 20 30 40
  37. 37. P S$40 Perfectly Inelastic Supply Es = 0$30$20$10 Q 10 20 30 40
  38. 38. P Unit Elastic Supply Es = 1$40$30 S .5%$20 .5%$10 10 20 30 40 Q
  39. 39. P Elastic Supply Es > 1 S$40$30$20$10 Q 10 20 30 40
  40. 40. P Inelastic Supply Es < 1$40 S$30$20$10 10 20 30 40 Q

×