Market economy part 3
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The document discusses market equilibrium and how it can be impacted by government intervention. It defines equilibrium as the point where quantity demanded equals quantity supplied at a particular price. It then discusses key equilibrium concepts like equilibrium price and quantity. The rest of the document analyzes how price controls, taxes, and subsidies can shift the supply and demand curves and impact equilibrium price, quantity, and economic surplus. Government interventions aim to control prices or quantities but often create unintended consequences like surpluses, shortages or losses of economic surplus.
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Market economy part 3
- 2. Prepared by; RASHAIN PERERA 077 059 37 52 rashainperera@gmail.com
- 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
- 4. Key concepts Equilibrium price Equilibrium quantity Equilibrium point 4
- 6. Determining equilibrium using equations QS = QD Question; Qd= 600 – 10p Qs= 20p 6
- 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. 7
- 8. 8 Price Quantity Supply Demand Gvt price control Eq price Eq qty Excess demand
- 9. 9 Price Quantity Supply Demand Gvt price control Eq price Eq qty Excess supply
- 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
- 16. Economic surplus Economic surplus = producer surplus + consumer surplus 16
- 18. Changes in equilibrium natural changes 18
- 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
- 29. Changes in equilibrium as a result of government intervention 29
- 30. Government intervention to control price Price floor Price ceiling 30
- 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
- 32. 32
- 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
- 34. Minimum price legislation/price control/price floor 34
- 35. 35
- 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
- 37. Government intervention to control the quantity Taxation Subsidies 37
- 38. Taxations 38
- 39. 39
- 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
- 42. 42
- 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