This document discusses market equilibrium and government intervention in prices. It defines market equilibrium as the situation where there is no tendency for price or quantity to change, which occurs where the market demand curve intersects the market supply curve. The document discusses three methods for determining market equilibrium: numerical analysis, graphical analysis, and mathematical analysis. It then explains how government policies like price ceilings and price floors can control prices and impact market outcomes by creating shortages or surpluses. Price ceilings set a legal maximum price, while price floors set a legal minimum, and the effects of each are illustrated with examples and diagrams.

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.