2. LEARNING OBJECTIVES
At the end of the lesson, students
understand the market equilibrium
Explain the excess demand and
excess supply.
Explain the graphical interaction of
supply and demand
3. 4.0 MARKET EQUILIBRIUM
• The operation of the market
depends on the interaction
between buyers and sellers.
• An equilibrium is the
condition that exists when
quantity supplied and
quantity demanded are
equal.
• At equilibrium, there is no
tendency for the market
price to change.
4. • Only in
equilibrium is
quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
5. 4.1 MARKET DISEQUILIBRIA
• Excess demand, or
shortage, is the
condition that exists
when quantity
demanded exceeds
quantity supplied at the
current price.
• When quantity demanded
exceeds quantity supplied, price
tends to rise until equilibrium is
restored.
6. • Excess supply, or
surplus, is the
condition that exists
when quantity supplied
exceeds quantity
demanded at the
current price.
• When quantity supplied exceeds
quantity demanded, price tends to
fall until equilibrium is restored.
7. Increases in Demand and
Supply
• Higher demand leads to
higher equilibrium price
and higher equilibrium
quantity.
• Higher supply leads to
lower equilibrium price
and higher equilibrium
quantity.
8. Decreases in Demand and
Supply
• Lower demand leads to
lower price and lower
quantity exchanged.
• Lower supply leads to
higher price and lower
quantity exchanged.
9.
10. A
The Graphical Interaction of
Supply and Demand
Price
per
DVD
$5.00
4.00
3.50
3.00
2.50
2.00
1.50
1.00
S
D
Quantity of DVDs supplied and demanded
C
Excess demand
1 2 3 4 5 6 7 8 9 10 11 12
Excess supply
E
12. Module 4: Market Equilibrium 12
•A market equilibrium is a situation where quantity demanded equal quantity supplied.
•In an equilibrium there are no shortages or surpluses.
The Coffee Market
Demand and Supply Schedules
13. 4.2 PRICE CEILING
• If the price of a product is unfairly
high, the government can set a price
ceiling, or a legal maximum price a
seller may charge for a product.
• This purportedly enables consumers
to obtain some “essential” good or
service that they could not afford at
the equilibrium price; however, it also
creates a shortage of the good.
14. 4.3 PRICE FLOOR
• When the price of a good or service is
“too low”, the government can set a
price floor, or a minimum fixed price
that sellers can charge.
• The goal is to provide a sufficient
income for certain groups of resource
suppliers, or producers who would
otherwise receive very low incomes at
the equilibrium price. However, a
surplus of the good is created.
