This document provides an overview of market equilibrium and how it is impacted by shifts in supply and demand. It defines key economic concepts such as markets, demand and supply curves, equilibrium price and quantity, surplus and shortage. It then explains how equilibrium is impacted by changes in demand and supply, both independently and simultaneously. Special cases involving perfectly inelastic or elastic demand and supply are covered. The document also discusses consumer surplus, producer surplus, total surplus, and how government intervention through price controls can impact equilibrium and result in deadweight loss. Market failures from externalities and ways to internalize externalities are explained.

2. Market Equilibrium and
Effects of Shift in
Demand
and
Supply Curves

3. 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.

4. 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.

5. Types of different Market Structures
•
•
•
•
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly

6. 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.

7. 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

8. Move to Market Equilibrium
Market Equilibrium is a
situation of zero excess
demand and zero excess
supply

9. 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.

10. 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

11. Market Demand and
Supply

12. 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

13. • 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

14. • 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

15. • 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

16. • 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

17. • 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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.

35. 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.

36. 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.

37. Total Surplus
Equilibrium

38. 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.

39. Price Ceiling

40. Price Floor

41. 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

42. Market Failure
A situation when the price mechanism
results in inefficient allocation of
resources.

43. 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

44. 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.

45. 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

46. 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).

47. 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

48. Internalizing Externalities
 Persuasion
 Taxes and Subsidies
 Voluntary Agreements
 Regulations

49. Next