MARKET EQUILIBRIUM  Market equilibrium exists when quantity demanded (Qd) equals quantity supplied (Qs).  It can be determined by the intersection between demand and supply curves.  At equilibrium, there is no tendency for the market price to change.  Equilibrium Price - The price that balances supply and demand.  On a graph, it is the price at which the supply and demand curves intersect.  Equilibrium Quantity - The quantity that balances supply and demand.  On a graph it is the quantity at which the supply and demand curves intersect.

Demand Schedule Supply Schedule At RM4.00, the quantity demanded is equal to the quantity supplied! PRICE (RM) QUANTITYPRICE (RM) QUANTITY

Supply Demand Price Quantity Equilibrium of Supply and Demand

MARKET EQUILIBRIUM SURPLUS  When Qs exceeds Qd there is excess supply or a surplus  Happens when price is above the equilibrium price.  Suppliers will lower the price to increase sales, thereby moving toward equilibrium SHORTAGE  When Qd exceeds Qs there is excess demand or a shortage.  Happens when price is below the equilibrium price.  Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

MARKET EQUILIBRUM Price (RM)Qty DemandedQty Supplied Shortage / Surplus Shortage:30 Shortage: 14 Equilibrium: 50 Surplus: 16 Surplus: 30

Price Quantity Supply Demand Surplus Shortage

MARKET EQUILIBRIUM What causes a change in market equilibrium? Three Steps To Analyzing Changes in Equilibrium  Decide whether supply or demand curve shifts (or both shift).  Decide whether the curve(s) shift(s) to the left or to the right.  Examine how the shift affects equilibrium price and quantity.

MARKET EQUILIBRIUM Effects of changes in demand - Increase in Demand Price (RM) Qty (Unit) P1P1 P0P0 Q1Q1 Q0Q0 S0S0 D0D0 D1D1 - Increase in demand – D curve shift to the right (D 0 to D 1 ) e.g: increase in income. -New equilibrium (E 0 to E 1 ) -Higher demand leads to higher equilibrium price (P 0 to P 1 ) and higher equilibrium quantity (Q 0 to Q 1 ). E0E0 E1E1

MARKET EQUILIBRIUM Effects of changed in demand - Decrease in Demand Price (RM) Qty (Unit) P0P0 P1P1 Q0Q0 Q1Q1 S0S0 D1D1 D0D0 -decrease in demand – D curve shift to the left (D 0 to D 1 ) -e.g: decrease in population. -New equilibrium (E 0 to E 1 ) -Lower demand leads to lower equilibrium price (P 0 to P 1 ) and lower equilibrium quantity (Q 0 to Q 1 ). E0E0 E1E1

MARKET EQUILIBRIUM Effects of changes in supply - Increase in Supply Price (RM) Qty (Unit) P0P0 P1P1 Q1Q1 Q0Q0 S0S0 S1S1 D0D0 -increase in supply – S curve shift to the right (S 0 to S 1 ) -e.g: cost of production decrease - New equilibrium (E 0 to E 1 ) -Higher supply leads to lower equilibrium price (P 0 to P 1 ) and higher equilibrium quantity (Q 0 to Q 1 ). E0E0 E1E1

MARKET EQUILIBRIUM Effects of changes in supply - Decrease in Supply Price (RM) Qty (Unit) P1P1 P0P0 Q0Q0 Q1Q1 S0S0 S1S1 D0D0 -decrease in supply – S curve shift to the left (S 0 to S 1 ) -e.g: number of seller decrease -New equilibrium (E 0 to E 1 ) -Lower supply leads to higher equilibrium price (P 0 to P 1 ) and lower equilibrium quantity (Q 0 to Q 1 ). E1E1 E0E0

Price (RM) Qty (Unit) P0P0 P1P1 Q1Q1 Q0Q0 S0S0 S1S1 D1D1 E0E0 E1E1 MARKET EQUILIBRIUM Simultaneous Change: Demand and Supply D0D0 The relative magnitudes of change in supply and demand determine the outcome of market equilibrium. -Increase in supply is greater than decrease in demand -Price decrease, quantity increase

MARKET EQUILIBRIUM GOVERNMENT INTERVENTION 1.MAXIMUM PRICE/CEILING PRICE 2.MINIMUM PRICE/FLOOR PRICE

MARKET EQUILIBRIUM MAXIMUM PRICE/CEILING PRICE Price Quantity D S P* Q* The equilibrium price is P* and the quantity is Q* P1P1 Price ceiling The government imposes a maximum price of P1 Q1Q1 Q2Q2 Suppliers reduce the amount offered to Q 1 but demand would rise to Q 2, creating a shortage Shortages occur

MARKET EQUILIBRIUM MAXIMUM PRICE/CEILING PRICE  Regulations that prevent prices from rising above a maximum level  The highest P that can a seller can charge Advantage:  Consumers purchase at lower price  Control inflation Disadvantages:  Shortages  Unfair to sellers (lower P)  Emergence of black market  Exploitation of customers  Hoarding activity

MARKET EQUILIBRIUM MINIMUM PRICE/FLOOR PRICE Price Quantity D S P* Q* P1P1 Pmin Q1Q1 Q2Q2 Surplus

MARKET EQUILIBRIUM MINIMUM PRICE/FLOOR PRICE  Regulations that prevent prices from falling below a minimum level  The lowest P that a seller can charge Advantage:  Supports producers’ income  Creates buffer stock Disadvantages:  Unfair to consumers (Higher P)  Surplus-Waste of resources  Unfair to taxpayers – tax used to buy surplus

MARKET EQUILIBRIUM GOVERNMENT INTERVENTION EFFECTS OF TAXATION INDIRECT TAX Tax that is imposed by the government on producers or sellers but paid by or passed on to end-users Example : Sales tax, services tax

PRODUCERS’ SHARE CONSUMERS’ SHARE The tax amount of RM4 is shared equally between buyer and seller MARKET EQUILIBRIUM Price Quantity D S S1S1 80 The equilibrium price is RM4 and the quantity is Tax = RM4 The government imposes a sales tax of RM4 per carton S curve shift to left from S to S 1 and new equilibrium is RM6 and 80 units

S + tax S O D CONSUMERS SHARE P Q Effect of taxation - Perfectly inelastic demand MARKET EQUILIBRIUM

S + tax S O D P Q PRODUCERS’ SHARE Effect of taxation - Demand is more elastic than supply CONSUMERS' SHARE MARKET EQUILIBRIUM

S + tax PRODUCERS’’ SHARE P Q O D S Effect of taxation - elastic supply MARKET EQUILIBRIUM

GOVERNMENT INTERVENTION EFFECTS OF SUBSIDY SUBSIDY An incentive from the government to encourage producers to produce more

PRODUCER’S SHARE CONSUMER’S SHARE MARKET EQUILIBRIUM Price Quantity D S S1S1 80 The equilibrium price is RM15 and the quantity is 80 5 Subsidy = RM10 The government provides a subsidy of RM10 per unit SS curve shifts to the right from S to S 1 and new equilibrium is RM10 and 100 units The subsidy amount of RM10 is shared equally between buyer and seller

Effect of subsidies - Demand less elastic than supply S +sub S O D P Q CONSUMERS’ SHARE PRODUCERS’ SHARE MARKET EQUILIBRIUM 70

S D CONSUMERS’ SHARE 5 PRODUCERS SHARE’ ’ P Q Effect of subsidy - Demand less elastic than supply S+ sub (RM4) MARKET EQUILIBRIUM 70

28 THE END THANK YOU!