All about Market equilibrium, shifts of supply and demand, and economic policy

1. Market Equilibrium
Maryan Joy Lopez
SST 307

2. Consumers and producers react
differently to price changes. Higher
prices tend to reduce demand while
encouraging supply and lower prices
increases demand while discouraging
supply.
The law of demand and supply suggest
that in a free market, there will be a
single price which brings demand and
supply into balance.
Market
Equilibrium

4. Shifts to Both Demand
And Supply Curves

5. Changes in the underlying factors that
affect demand and supply will
cause shifts in the position of the
demand or supply curve at every price.
Whenever this happens, the original
equilibrium price will no longer equate
demand with supply, and price will
adjust to bring about a return to
equilibrium.

6. Equilibrium
Price
Demand Increases
New
Equilibrium
Price

7. The illustration shows what happens when demand
increases. Originally, the market was in equilibrium
at price P0 and quantity Q0. If demand increases, the
demand curve shifts to the right from D0 to D1. The
quantity demanded associated with the price P0 is
now QD.
Because this is greater than the quantity producers are
providing (still Q0 as determined off the supply
curve), a shortage exists. The market moves from the
original equilibrium price P0 to the new equilibrium
price P1 and from the original equilibrium quantity
Q0 to the new equilibrium quantity, Q1.

8. Equilibrium
Price
New
Equilibrium
Price
Increase in
Supply

9. The impact of an increase in supply is illustrated
above. Originally, the equilibrium price and quantity
are P0 and Q0, respectively. An increase in supply
shifts the supply curve to the right from S0 to S1. The
supply increase immediately creates a surplus because
at P0, the new quantity supplied QS is greater than the
quantity demanded, which is still at Q0.
Because there is a surplus, the good’s price falls from
P0 to the new equilibrium price P1, and the quantity
demanded and quantity supplied move to the new
equilibrium quantity Q1, which is greater than the
original equilibrium quantity Q0.

10. Equilibrium
Price remains
constant

11. The illustration above shows a simultaneous decrease
in both demand and supply — the demand curve shifts
left from D0 to D1, and the supply curve shifts left
from S0 to S1. The original equilibrium price and
quantity are P0 and Q0, corresponding to the
intersection of the original demand and supply curves.
Given the shifts to D1 and S1, the equilibrium quantity
decreases from Q0 to Q1 while the equilibrium price
has not changed — P0 = P1. But note that in this
illustration, the demand and supply curves shift by the
same amount.

12. The Dynamics of
Demand and Supply

13. Shifts in Demand
An increase in demand shifts the
demand curve to the right, and
raises price and output.
A decrease in demand shifts the
demand curve to the left and
reduces price and output.

14. Demand shifts to the right

15. Demand shifts to the left

16. Shifts in Supply
An increase in supply shifts the
supply curve to the right, which
reduces price and increases output.
A decrease in supply shifts the
supply curve to the left, which raises
price but reduces output.

17. Supply shifts to the right

18. Supply shifts to left

19. From that we can conclude that;
1. As the Demand Increases and Supply
remains constant = Higher Prices
2. As the Demand Decreases and Supply
remains constant = Lower Prices
3. As the Supply Increases and Demand
remains constant = Lower Prices
4. As the Supply Decreases and Demand
remains the constant = Higher Prices

20. Factors affecting Shifts in
Demand
1.Changes in Income
2. Change in taste
3.Changes in prices of related goods
and services
4.Change in Demand vs. Change in
quantity Demand

21. Factors Affecting Shifts in
Supply
1.Price of Inputs and Production
Technology
2.Prices of other products from the
same Production process
3.Change in supply and change in
quantity supplied

22. Violations of the Law of
Supply and Demand

23. Price Floors and Price Ceilings
are Price Controls, examples of
government intervention in the
free market which changes the
market equilibrium.

24. Price Floors are minimum prices set by the
government for certain commodities and
services that it believes are being sold in an
unfair market with too low of a price and
thus their producers deserve some
assistance. Price floors are only an issue
when they are set above the equilibrium
price, since they have no effect if they are
set below market clearing price.

25. When they are set above the market price,
then there is a possibility that there will be
an excess supply or a surplus. If this
happens, producers who can't foresee trouble
ahead will produce the larger quantity where
the new price intersects their supply curve.
Unbeknownst to them, consumers will not
buy that many goods at the higher price and
so those goods will go unsold.

26. An example of a price floor is minimum wage laws;
in this case, employees are the suppliers of labor and
the company is the consumer. When the minimum
wage is set above the equilibrium market price for
unskilled labor, unemployment is created (more
people are looking for jobs than there are jobs
available). A minimum wage above the equilibrium
wage would induce employers to hire fewer workers
as well as allow more people to enter the labor
market, the result is a surplus in the amount of labor
available. The equilibrium wage for a worker would
be dependent upon the worker's skill sets along with
market conditions.(needs source)

27. Price Floor

28. Price Ceilings are maximum prices set
by the government for particular goods
and services that they believe are being
sold at too high of a price and thus
consumers need some help purchasing
them. Price ceilings only become a
problem when they are set below the
market equilibrium price.

29. When the ceiling is set below the market price, there
will be excess demand or a supply shortage. Producers
won't produce as much at the lower price, while
consumers will demand more because the goods are
cheaper. Demand will outstrip supply, so there will be
a lot of people who want to buy at this lower price but
can't. Still, if the demand curve is relatively elastic,
then the net effect to consumer surplus will be
positive. Producers are truly harmed, as their surplus
is doubly hit with a reduction in the number of firms
willing to take that lower price, and those who remain
in the market have to take a lower price.

30. Price Ceiling

31. Thank You 