Market Equilibrium and
Effects of Shift in
Demand
and
Supply Curves
What is a market?
• It is defined as a mechanism by which
buyers and sellers interact to
determine the price and quantity ...
Features of market
- There must be a commodity which is being
demanded and sold.
- There must be buyers and sellers of the...
Types of different Market Structures

•
•
•
•

Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Perfect Competition Market
It is a market structure in which an individual firm cannot
influence the prevailing market pri...
Market Equilibrium/ Market Clearing
Price
• Forces of demand and supply determine the equilibrium
price and equilibrium qu...
Move to Market Equilibrium

Market Equilibrium is a
situation of zero excess
demand and zero excess
supply
Surplus and Shortage
Surplus (Excess Supply)
A condition in which quantity supplied is
greater than quantity demanded. Sur...
A non viable industry is the one which will not produce
the product in an economy because cost of the product
is too high ...
Market Demand and
Supply
Effects of Changes in Demand and Supply on
Equilibrium Price

• Changes in Demand
It takes place due to :- changes in pric...
• When there is an increase in demand, supply
remaining constant, equilibrium price and
equilibrium quantity both increase...
• When there is a decrease in demand, supply
remaining constant, equilibrium price and
equilibrium quantity both decreases...
• Changes in Supply
It takes place due to :- changes in the cost of production
- changes in production technology
- change...
• When there is an increase in supply, demand
remaining constant, equilibrium price decreases
and equilibrium quantity inc...
• When there is an decrease in supply, demand
remaining constant, equilibrium price increases and
equilibrium quantity dec...
Simultaneous Changes in both Demand and Supply
• When there is an increase in both demand
and supply in same proportion, e...
Simultaneous Changes in both Demand and Supply
• When there is an decrease in both demand
and supply in same proportion, e...
Simultaneous Changes in both Demand and Supply
• When increase in supply is less than the
increase in demand , both equili...
Simultaneous Changes in both Demand and Supply
• When increase in supply is more than the
increase in demand , equilibrium...
Simultaneous Changes in both Demand and Supply
• When decrease in demand is more than the
decrease in supply, both equilib...
Simultaneous Changes in both Demand and Supply
• When decrease in demand is less than the
decrease in supply, equilibrium ...
Simultaneous Changes in both Demand and Supply
• When increase in demand is equal to the
decrease in supply, equilibrium p...
Simultaneous Changes in both Demand and Supply
• When decrease in demand is equal to the
increase in supply, equilibrium p...
Special Cases
• Supply is perfectly Inelastic and Demand
Changes
• When demand increases, supply being perfectly
inelastic...
Special Cases
• When demand decreases, supply being perfectly
inelastic equilibrium price decreases while
equilibrium quan...
Special Cases
• Demand is perfectly Inelastic and Supply
Changes
• When supply increases, demand being perfectly
inelastic...
Special Cases
• When supply decreases, demand being perfectly
inelastic equilibrium price increases while
equilibrium quan...
Special Cases
• Supply is perfectly elastic and Demand Changes
• When demand increases, supply being perfectly elastic
equ...
Special Cases
• When demand decreases, supply being perfectly
elastic equilibrium price remains the same while
equilibrium...
Special Cases
• Demand is perfectly elastic and Supply
Changes
• When supply increases, demand being perfectly
elastic equ...
Special Cases
• When supply decreases, demand being perfectly
elastic equilibrium price remains the same while
equilibrium...
Consumer, Producer and Total Surplus
Consumers’ Surplus (CS)
CS= Maximum buying price - Price paid
The difference between ...
Consumer Surplus
It is the difference between the maximum a consumer
would pay for a good and the price actually paid.

Co...
Producer Surplus
It is the difference between the minimum price a
producer would accept to supply a given quantity of
good...
Total Surplus

Equilibrium
Government Intervention in the
market via Price Controls
Price Ceiling
A government-mandated maximum
price above which leg...
Price Ceiling
Price Floor
Dead Weight Loss
Price
(dollars)
Floor Pricing

D

S

20
A

Equilibrium Price

15
B

0

90

130

180

Quantity of Good X

...
Market Failure
A situation when the price mechanism
results in inefficient allocation of
resources.
Market Failure through Externalities
• What is Externalities?
It is the spill over effects of production or
consumption, f...
Positive Externalities
 A positive externality exists when an individual’s
or group’s actions cause a benefit (beneficial...
Negative Externalities
• A negative externality exists when an individual’s
or group’s actions cause a cost (adverse side
...
Effect of Externalities on Market
Outcomes
 When either negative or positive externalities exist, the
market output is di...
Adjusting for Market Externalities
 Negative and positive externalities can be internalized or
adjusted for in a number o...
Internalizing Externalities
 Persuasion
 Taxes and Subsidies
 Voluntary Agreements
 Regulations
Next
6 market equilibrium-_class
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6 market equilibrium-_class

  1. 1. Market Equilibrium and Effects of Shift in Demand and Supply Curves
  2. 2. What is a market? • It is defined as a mechanism by which buyers and sellers interact to determine the price and quantity of a good or service.
  3. 3. Features of market - There must be a commodity which is being demanded and sold. - There must be buyers and sellers of the commodity. - There must be communication between buyers and sellers. - There must be a place or area where buyers and sellers could interact with each other.
  4. 4. Types of different Market Structures • • • • Perfect Competition Monopoly Monopolistic Competition Oligopoly
  5. 5. Perfect Competition Market It is a market structure in which an individual firm cannot influence the prevailing market price of the product in its own. WHY ? BECAUSE in a perfect competition market there are large number of buyers and sellers that no individual buyer or seller can influence the price of the commodity in the market. Any change in the output supplied by the single firm will not affect the total output of the industry. To an individual producer the price of the commodity is given. They are price takers. No individual buyer can influence the price of the commodity by his decision to vary the amount that he would like to buy – he doesn’t have any bargaining power in the market.
  6. 6. Market Equilibrium/ Market Clearing Price • Forces of demand and supply determine the equilibrium price and equilibrium quantity in a perfectly competitive market. • Equilibrium is struck in the market where Quantity demanded = Quantity supplied
  7. 7. Move to Market Equilibrium Market Equilibrium is a situation of zero excess demand and zero excess supply
  8. 8. Surplus and Shortage Surplus (Excess Supply) A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above equilibrium price. Shortage (Excess Demand) A condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price.
  9. 9. A non viable industry is the one which will not produce the product in an economy because cost of the product is too high and the consumers are not willing to pay a price that will cover the cost. In this case demand and supply curve will not intersect. Price O Supply Curve Demand Curve Quantity
  10. 10. Market Demand and Supply
  11. 11. Effects of Changes in Demand and Supply on Equilibrium Price • Changes in Demand It takes place due to :- changes in price of related goods - changes in income of the consumers - change in taste and preference - change in market size - change in expectations of the consumers
  12. 12. • When there is an increase in demand, supply remaining constant, equilibrium price and equilibrium quantity both increases. D1 price P1 S D E1 E A P O Q Q1 Quantity Demanded and Supplied
  13. 13. • When there is a decrease in demand, supply remaining constant, equilibrium price and equilibrium quantity both decreases. D price P S D1 E E1 P1 O Q1 Q Quantity Demanded and Supplied
  14. 14. • Changes in Supply It takes place due to :- changes in the cost of production - changes in production technology - change in excise tax - change in subsidy - change in price of substitute goods - change in number of firms
  15. 15. • When there is an increase in supply, demand remaining constant, equilibrium price decreases and equilibrium quantity increases. S price P D E P1 O S1 E1 Q Q1 Quantity Demanded and Supplied
  16. 16. • When there is an decrease in supply, demand remaining constant, equilibrium price increases and equilibrium quantity decreases. S1 price P1 P O D E1 S E Q1 Q Quantity Demanded and Supplied
  17. 17. Simultaneous Changes in both Demand and Supply • When there is an increase in both demand and supply in same proportion, equilibrium price remains the same and equilibrium quantity increases. Price D1 S S1 D E E1 P O Q Q1 Quantity Demanded and Supplied
  18. 18. Simultaneous Changes in both Demand and Supply • When there is an decrease in both demand and supply in same proportion, equilibrium price remains the same and equilibrium quantity decreases. Price D S1 S D1 E1 E P O Q1 Q Quantity Demanded and Supplied
  19. 19. Simultaneous Changes in both Demand and Supply • When increase in supply is less than the increase in demand , both equilibrium price and equilibrium quantity increases. Price D1 S D S1 E1 P1 E P O Q Q1 Quantity Demanded and Supplied
  20. 20. Simultaneous Changes in both Demand and Supply • When increase in supply is more than the increase in demand , equilibrium price decreases and equilibrium quantity increases. Price D1 S S1 D P P1 O E E1 Q Q1 Quantity Demanded and Supplied
  21. 21. Simultaneous Changes in both Demand and Supply • When decrease in demand is more than the decrease in supply, both equilibrium price and equilibrium quantity decreases. Price D S1 D1 S E P E1 P1 O Q1 Q Quantity Demanded and Supplied
  22. 22. Simultaneous Changes in both Demand and Supply • When decrease in demand is less than the decrease in supply, equilibrium price increases and equilibrium quantity decreases. Price D S1 S D1 P1 E1 E P O Q1 Q Quantity Demanded and Supplied
  23. 23. Simultaneous Changes in both Demand and Supply • When increase in demand is equal to the decrease in supply, equilibrium price increases and equilibrium quantity remains the same. S1 Price P1 S E1 P D1 E D O Q Quantity Demanded and Supplied
  24. 24. Simultaneous Changes in both Demand and Supply • When decrease in demand is equal to the increase in supply, equilibrium price decreases and equilibrium quantity remains the same. S Price P S1 E P1 D E1 D1 O Q Quantity Demanded and Supplied
  25. 25. Special Cases • Supply is perfectly Inelastic and Demand Changes • When demand increases, supply being perfectly inelastic equilibrium price increases while equilibrium quantity remains the same. Price P1 P S E1 E D1 D O Q Quantity Demanded and Supplied
  26. 26. Special Cases • When demand decreases, supply being perfectly inelastic equilibrium price decreases while equilibrium quantity remains the same. Price P P1 S E E1 D D1 O Q Quantity Demanded and Supplied
  27. 27. Special Cases • Demand is perfectly Inelastic and Supply Changes • When supply increases, demand being perfectly inelastic equilibrium price decreases while equilibrium quantity remains the same. Price P P1 O D E S S1 E1 Q Quantity Demanded and Supplied
  28. 28. Special Cases • When supply decreases, demand being perfectly inelastic equilibrium price increases while equilibrium quantity remains the same. Price P1 P O D E1 S1 S E Q Quantity Demanded and Supplied
  29. 29. Special Cases • Supply is perfectly elastic and Demand Changes • When demand increases, supply being perfectly elastic equilibrium price remains the same while equilibrium quantity increases. Price D D1 P S E O E1 Q Q1 Quantity Demanded and Supplied
  30. 30. Special Cases • When demand decreases, supply being perfectly elastic equilibrium price remains the same while equilibrium quantity decreases. Price D1 D P S E1 O E Q1 Q Quantity Demanded and Supplied
  31. 31. Special Cases • Demand is perfectly elastic and Supply Changes • When supply increases, demand being perfectly elastic equilibrium price remains the same while equilibrium quantity increases. Price S P D E O S1 E1 Q Q1 Quantity Demanded and Supplied
  32. 32. Special Cases • When supply decreases, demand being perfectly elastic equilibrium price remains the same while equilibrium quantity decreases. Price S1 P D E1 O S E Q1 Q Quantity Demanded and Supplied
  33. 33. Consumer, Producer and Total Surplus Consumers’ Surplus (CS) CS= Maximum buying price - Price paid The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid. Producers’ (Sellers’) Surplus (PS) PS = Price received - Minimum Selling price The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. Total Surplus (TS) TS =CS +PS The sum of consumers’ surplus and producers’ surplus.
  34. 34. Consumer Surplus It is the difference between the maximum a consumer would pay for a good and the price actually paid. Consumer’s Surplus is the area above the price line and below the demand curve.
  35. 35. Producer Surplus It is the difference between the minimum price a producer would accept to supply a given quantity of good and the price actually received. Producer’s Surplus is the area below the price line and above the supply curve.
  36. 36. Total Surplus Equilibrium
  37. 37. Government Intervention in the market via Price Controls Price Ceiling A government-mandated maximum price above which legal trades cannot be made. Price Floor A government-mandated minimum price below which legal trades cannot be made.
  38. 38. Price Ceiling
  39. 39. Price Floor
  40. 40. Dead Weight Loss Price (dollars) Floor Pricing D S 20 A Equilibrium Price 15 B 0 90 130 180 Quantity of Good X When price flooring is done at $20, only 90 units of X will be demanded and hence 90 units only will be produced. The dead loss weight is symbolized by triangles A and B
  41. 41. Market Failure A situation when the price mechanism results in inefficient allocation of resources.
  42. 42. Market Failure through Externalities • What is Externalities? It is the spill over effects of production or consumption, for which no compensation is paid. • Types of Externalities - Positive Externalities - Negative Externalities
  43. 43. Positive Externalities  A positive externality exists when an individual’s or group’s actions cause a benefit (beneficial side effect) to be felt by others.  Beekeepers whose bees pollinate nearby flowers  An attractive garden which gives pleasure to others.  Beautiful buildings.
  44. 44. Negative Externalities • A negative externality exists when an individual’s or group’s actions cause a cost (adverse side effect) to be felt by others. • Releasing industrial waste in river or air • Big vehicles causing street congestion • Littering
  45. 45. Effect of Externalities on Market Outcomes  When either negative or positive externalities exist, the market output is different from the socially optimal / ideal output.  In the case of a negative externality, the market is said to overproduce the good connected with the negative externality (the socially optimal output is less than the market output).  In the case of a positive externality, the market is said to under produce the good connected with the positive externality (the socially optimal output is greater than the market output).
  46. 46. Adjusting for Market Externalities  Negative and positive externalities can be internalized or adjusted for in a number of different ways, including persuasion, voluntary agreements, and taxes and subsidies.  Also, regulations may be used to adjust for externalities directly. New Hampshire Public Utilities Commission
  47. 47. Internalizing Externalities  Persuasion  Taxes and Subsidies  Voluntary Agreements  Regulations
  48. 48. Next

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