3. 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
3
7. 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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12. 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
12
14. 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
14
19. 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
19
20. 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
20
31. 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
31
33. 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
36. 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
36
40. 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
43. 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
