1. MARKET EQUILIBRIUM
Prepared by: Mdm Noordina bt Ab.Aziz

2. DEFINITION
 Situation which there is no tendency for price or
quantity to change.
 Market demand curve and the market supply curve
intersect.
Qd = Qs

3. 0
1
2
3
4
5
6
5 10 15 20 25 30
D
D
S
Price (RM)
Quantity
E

4.  If Qd > Qs = shortage
 If Qd < Qs = surplus
DETERMINATION OF MARKET EQUILIBRIUM
3 methods:
 Numerical analysis
 Graphical analysis
 Mathematical analysis
(refer page :79 – 82)

5. GOVERNMENT INTERVENTION IN PRICE
CEILING
AND
PRICE FLOOR
(PAGE:98)

6. CONTROLS ON PRICES
 Are usually enacted when policymakers believe the
market price is unfair to buyers or sellers.
 Result in government-created price ceilings and
floors.
© 2011 Cengage South-Western

7. CONTROLS ON PRICES
 Price Ceiling
A legal maximum on the price at which a good can be
sold.
 Price Floor
A legal minimum on the price at which a good can be
sold.

8. HOW PRICE CEILINGS AFFECT MARKET
OUTCOMES
 Two outcomes are possible when the government
imposes a price ceiling:
The price ceiling is not binding if set above the
equilibrium price.
The price ceiling is binding if set below the equilibrium
price, leading to a shortage.

9. FIGURE 1 A MARKET WITH A PRICE CEILING(a) A Price Ceiling That Is Not Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Equilibrium
quantity
4 Price
ceiling
Equilibrium
price
Demand
Supply
3
100
The market clears at
RM3 and the price
ceiling is ineffective.

10. FIGURE 1 A MARKET WITH A PRICE CEILING(b) A Price Ceiling That Is Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
2 Price
ceilingShortage
75
Quantity
supplied
125
Quantity
demanded
Equilibrium
price
3

11. CASE STUDY: THE MINIMUM WAGE
 An important example of a price
floor is the minimum wage.
 Minimum wage laws dictate the
lowest price possible for labor that
any employer may pay.