ch10 (Market Equilibrium)

Chapter 10 Market Equilibrium:

Chapter 10 Market Equilibrium

What is Equilibrium:

What is Equilibrium Point of Balance Stability In economics Where forces of demand and supply stabilise Every buyer has a seller and vice versa No reason for the market to deviate

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 2,000 90 70 3,000 80 80 4,000 50 110 5,000 30 140

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 Demand > Supply 2,000 90 70 3,000 80 80 4,000 50 110 5,000 30 140

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 Demand > Supply 2,000 90 70 Demand > Supply 3,000 80 80 4,000 50 110 5,000 30 140

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 Demand > Supply 2,000 90 70 Demand > Supply 3,000 80 80 Demand = Supply 4,000 50 110 5,000 30 140

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 Demand > Supply 2,000 90 70 Demand > Supply 3,000 80 80 Demand = Supply 4,000 50 110 Demand < Supply 5,000 30 140

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 Demand > Supply 2,000 90 70 Demand > Supply 3,000 80 80 Demand = Supply 4,000 50 110 Demand < Supply 5,000 30 140 Demand < Supply

Determination of Market Equilibrium:

Determination of Market Equilibrium Demand and supply schedule for air coolers Price of air Market demand of air Market supply of air Situation Coolers (Rs) coolers per week coolers per week 1,000 120 50 Demand > Supply 2,000 90 70 Demand > Supply 3,000 80 80 Demand = Supply 4,000 50 110 Demand < Supply 5,000 30 140 Demand < Supply

Slide 10:

Determination of Market Equilibrium DD – Demand Curve SS – Supply Curve 0 D S Quantity of air coolers Price per unit S D

Slide 11:

Determination of Market Equilibrium 0 D S Quantity of air coolers Price per unit S D E Pt E: equilibrium point

Slide 12:

0 80 3000 D S Quantity of air coolers Price per unit E Determination of Market Equilibrium S D Rs 3,000: Equilibrium Price 80 Air Coolers: Equilibrium Quantity

Determination of Market Equilibrium:

Determination of Market Equilibrium Equilibrium Price Price at which quantity demanded equals quantity supplied Equilibrium Quantity Level of output supplied and demanded at equilibrium price

Determination of Market Equilibrium:

Determination of Market Equilibrium Excess Demand When demand of the commodity is more than the quantity supplied Market price is less than equilibrium price Also termed as Deficient Supply

Slide 15:

0 1000 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Initial price: Rs 1,000

Slide 16:

0 50 1000 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Q D : 120 units Q S : 50 units 120

Slide 17:

0 50 1000 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Excess Demand: 70 units 120 Excess Demand

Slide 18:

0 50 1000 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Shortage leads to price rise 120 Excess Demand

Slide 19:

0 50 1000 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D As price increases: Q D falls Q S rises 120 Excess Demand

Slide 20:

0 50 1000 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Equilibrium attained 120 E 80 3000 Excess Demand

Determination of Market Equilibrium:

Determination of Market Equilibrium Excess Supply When demand of the commodity is less than the quantity supplied Market price is greater than equilibrium price Also termed as Deficient Demand

Slide 22:

0 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D 4000 Initial Price : Rs 4,000

Slide 23:

0 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Q S : 110 units Q D : 50 units 50 110 4000

Slide 24:

0 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Excess Supply: 60 units 50 110 Excess Supply 4000

Slide 25:

0 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Surplus leads to price fall 50 110 Excess Supply 4000

Slide 26:

0 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D As price falls: Q D rises Q S falls 50 110 Excess Supply 4000

Slide 27:

0 D S Quantity of air coolers Price per unit Determination of Market Equilibrium S D Equilibrium attained 50 110 Excess Supply 4000 E 80 3000

Effects of a change in Demand & Supply:

Effects of a change in Demand & Supply The following scenarios are possible: Shift in the demand curve when supply curve is held constant Shift in the supply curve when demand curve is held constant Shift in both the demand and supply curves

Effects of a change in Demand & Supply:

Effects of a change in Demand & Supply The following scenarios are possible: Shift in the demand curve when supply curve is held constant Shift in the supply curve when demand curve is held constant Shift in both the demand and supply curves

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit D 1 E D S D D 1 Demand increases to D 1 D 1

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit D 1 E D S D D 1 H Creates excess demand - EH

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit D 1 E D S D D 1 H Price starts increasing

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit D 1 E D S D D 1 H E 1 Equilibrium attained at E 1

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit D 1 E D S D D 1 H E 1 P 1 Q 1 Pe : Qe :

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Demand decreases to D 2 D 2 D 2 D 2

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Creates excess supply - GE D 2 D 2 G

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Price starts to fall D 2 D 2 G

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S New equilibrium is attained at E 2 D 2 D 2 G E 2

Effects of a shift in the demand curve:

Effects of a shift in the demand curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S D 2 D 2 G E 2 P 2 Q 2 P e : Q e :

Effects of a change in Demand & Supply:

Effects of a change in Demand & Supply The following scenarios are possible: Shift in the demand curve when supply curve is held constant Shift in the supply curve when demand curve is held constant Shift in both the demand and supply curves

Effects of a shift in the supply curve:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price

Slide 44:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Supply increases to S 1 S 1 S 1 S 1

Slide 45:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Creates excess supply - EH S 1 H S 1

Slide 46:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Price starts to fall S 1 H S 1

Slide 47:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Equilibrium attained at E 1 S 1 H E 1 S 1

Slide 48:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S S 1 H E 1 P e : Q e : Q 1 P 1 S 1

Effects of a shift in the supply curve:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price

Effects of a shift in the supply curve:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Supply curve decreases to S 2 S 2 S 2 S 2

Slide 51:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Creates excess demand - GE S 2 G S 2

Slide 52:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Price starts to rise S 2 G S 2

Slide 53:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S New equilibrium attained at E 2 S 2 G E 2 S 2

Slide 54:

Effects of a shift in the supply curve P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S S 2 G E 2 P 2 Q 2 P e : Q e : S 2

Effects of a change in Demand & Supply:

Effects of a change in Demand & Supply The following scenarios are possible: Shift in the demand curve when supply curve is held constant Shift in the supply curve when demand curve is held constant Shift in both the demand and supply curves

Effects of a shift in the demand & supply curves (dd >ss ):

Effects of a shift in the demand & supply curves (dd >ss ) P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price

Slide 57:

Effects of a shift in the demand & supply curves (dd >ss ) P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Demand increases to D 1 D 1 Supply increases to S 1 S 1 DD > SS S 1 D 1 D 1 S 1

Slide 58:

Effects of a shift in the demand & supply curves (dd >ss ) P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S S 1 D 1 D 1 S 1 E 1 New equilibrium attained at E 1

Slide 59:

Effects of a shift in the demand & supply curves (dd >ss ) P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S S 1 D 1 D 1 S 1 E 1 P e : Q e : Q 1 P 1

Effects of a shift in the demand & supply curves (dd < ss ):

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price Effects of a shift in the demand & supply curves (dd < ss )

Slide 61:

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Demand increases to D 1 D 1 Supply increases to S 1 S 1 DD < SS S 1 D 1 D 1 S 1 Effects of a shift in the demand & supply curves (dd < ss )

Slide 62:

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S New equilibrium attained at E 1 S 1 D 1 D 1 S 1 Effects of a shift in the demand & supply curves (dd < ss ) E 1

Slide 63:

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S S 1 D 1 D 1 S 1 Effects of a shift in the demand & supply curves (dd < ss ) E 1 Q 1 P 1 P e : Q e :

Effects of a shift in the demand & supply curves (dd = ss ):

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S E: Initial equilibrium point OQ: Equilibrium quantity OP: Equilibrium price Effects of a shift in the demand & supply curves (dd = ss )

Slide 65:

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S Demand increases to D 1 D 1 Supply increases to S 1 S 1 DD = SS S 1 D 1 D 1 S 1 Effects of a shift in the demand & supply curves (dd = ss )

Slide 66:

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S New equilibrium attained at E 1 S 1 D 1 D 1 S 1 Effects of a shift in the demand & supply curves (dd = ss ) E 1

Slide 67:

P Q O Quantity demanded & supplied per unit of time Price per unit E D S D S S 1 D 1 D 1 S 1 Effects of a shift in the demand & supply curves (dd = ss ) P e : Q e : Q 1 E 1

The free market economy:

The free market economy Advantages of a free-market economy transmits information between buyer and sellers no need for costly bureaucracy incentives to be efficient competitive markets respond to consumer wishes Problems of a free-market economy competition may be limited inequality environment and social goals may be ignored The mixed economy Areas where the government might intervene

Effect of Government Intervention on Equilibrium Price:

Effect of Government Intervention on Equilibrium Price Market not free to determine price Can be Control Price : government fixes market price at a level lower than equilibrium price Support Price : government fixes market price at a level higher than equilibrium price

Control Price:

Control Price Also called ‘Ceiling Price’ Caps the price that can be charged in the market Used for commodities that are essential for the masses eg: Kerosene, Sugar etc Excess demand Quantity demand and supplied per unit of time Price per unit E S D D S O Q s Q e Q d P P e

Control Price:

Control Price Leads to Excess Demand Results in Black Market: Selling commodity at a price higher than ceiling price Hoarding: Stocking supplies to create a further shortfall Remedies Rationing: Amount available is equally divided amongst all buyers irrespective of demand Dual Pricing: Part demand fulfilled by rations; part by free market

Support Price:

Support Price Also termed as Floor Price Minimum price that has to be paid to producers Used by government to protect interests of a certain section of society eg : Support price for food grains, minimum wage legislation Excess supply Quantity demand and supplied per unit of time Price per unit E S D D S O Q s Q e Q d P P e

Support Price:

Support Price Creates excess supply Requires government intervention to clear excess supply Government purchases foodgrains at the support price Helps to maintain market price at levels higher than equilibrium levels

Food Availability Decline (FAD) Theory:

Food Availability Decline (FAD) Theory Propounded by Prof. Amartya Sen Premise is that famines are caused due to lack of distribution channels and not lack of food grains Forces of market can be used to simplify Prof. Sen’s theory of occurrence of famines

FAD Theory:

FAD Theory Assumptions 3 Households exist in the market High Income Middle Income Low Income Situations Normal Starvation Famine

FAD Theory:

FAD Theory Initial demand curves for different economic strata of society and the market Price Quantity demanded O D A Price Quantity demanded O D B Price Quantity demanded O D c Price Quantity demanded O D M Low Income HH Middle Income HH High Income HH Market

Slide 77:

FAD Theory P 1 Price Quantity demanded A 1 O D A P 1 Price Quantity demanded O D B B 1 P 1 Price Quantity demanded O D c C 1 P 1 Price Quantity demanded O D M D 1 S 1 Low Income HH Middle Income HH High Income HH Market Normal Year Supply at S 1 At price OP 1 every strata is able to afford the commodity

Slide 78:

FAD Theory P 1 P 2 Price Quantity demanded A 1 O D A P 1 P 2 Price Quantity demanded B 2 O D B B 1 P 1 P 2 Price Quantity demanded O D c C 2 C 1 P 1 P 2 Price Quantity demanded O D M D 2 D 1 S 1 S 2 Low Income HH Middle Income HH High Income HH Market Bad monsoon Supply at S 2 At price OP 2 low income is unable to afford the commodity - Starvation

Slide 79:

FAD Theory P 1 P 2 P 3 Price Quantity demanded A 1 O D A P 1 P 2 P 3 Price Quantity demanded B 2 O D B B 1 P 1 P 2 P 3 Price Quantity demanded C 3 O D c C 2 C 1 P 1 P 2 P 3 Price Quantity demanded D 3 O D M D 2 D 1 S 1 S 2 S 3 Low Income HH Middle Income HH High Income HH Market Drought Year Supply at S 3 At price OP 3 poor and middle income households unable to afford the commodity - Famines

Economically Unviable Industry:

Economically Unviable Industry Price at which supply is possible is much higher than what consumers are willing to pay Diagrammatically : Demand and supply curves do not intersect in the 1 st quadrant Commercial Aircraft manufacturing in India Quantity demanded and supplied per unit of time Price per unit S D O