1. FINA251 Fundamentals of Microeconomics Week 6 2016
HBC608
ECON582
FINA251 Fundamentals of Microeconomics Week
HBC608HBC608
Chapter-3
College of Business – Rabigh
Dr. Mazharul Islam
Finance notes
Finance NotesFinance notes 1

2. 3
Market Equilibrium
Dr. Mazharul Islam

3. Lesson Objectives Define market and market equilibrium
Explain how demand and supply determine prices and quantities bought and sold
Use the demand and supply model to make predictions about changes in prices and quantities
Dr. Mazharul Islam

4. MARKETS DEFINED MARKETS POTENTIAL BUYERS POTENTIAL SELLERS
Dr. Mazharul Islam

5. Market
A set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms.
It determine prices and quantities of goods and services by bringing together two sides of exchange demand and supply.
Markets are often physical places, such as supermarkets, shopping malls etc. Market also include other mechanisms by which buyers and sellers communicate, like radio television advertisement, telephones etc.
There are two types of market in the economy. These are Product market and Resource market.
Dr. Mazharul Islam

6. Market Equilibrium
Market equilibrium refers a situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the Market.
The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and sold at the equilibrium price.
Dr. Mazharul Islam

7. Market Demand and SupplyQD
CORN OIL P QS
CORN OIL
MARKET
DEMAND
MARKET
SUPPLY
200 B U Y E R S
200 S E L R $5 4 3 2 1 10 20 35 55 80
2,000
4,000
7,000
11,000
16,000 $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000 60 50 35 20 5 x x
EQUILIBRIUM
Dr. Mazharul Islam

8. Market Demand and Supply
CORN
MARKET
CORN
MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000
Market
Clearing
Equilibrium $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000 D 7 o
Q (in thousand)
Dr. Mazharul Islam

9. Market Demand and Supply
CORN MARKET
Surplus S $5 4 3 2 1
CORN MARKET P QD P QS
At a $4 price
more is being
supplied than
demanded $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000 $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000 D 7 o
Q (in thousand)
Dr. Mazharul Islam

10. Market Demand and Supply
CORN
MARKET
CORN
MARKET S $5 4 3 2 1 P QD P QS
At a $2 price
more is being
demanded than
supplied $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000 $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000
Shortage D 11 o
Q (in thousand)
Dr. Mazharul Islam

11. Market Demand and Supply
CORN
MARKET
CORN
MARKET S $5 4 3 2 1
Surplus
(put downward pressure on the price) P QD P QS $5 4 3 2 1
2,000
4,000
7,000
11,000
16,000 $5 4 3 2 1
12,000
10,000
7,000
4,000
1,000
Shortage
( Create market pressure for a higher price) D 7 11 o
Q (in thousand)
Dr. Mazharul Islam

12. Changes in Equilibrium
Once a market reaches equilibrium, that price and quantity will prevail until one of the determinants of demand or supply changes.
A change in any one of these determinants will usually change equilibrium price and quantity in a predictable way
Dr. Mazharul Islam

13. Changes in Equilibrium
An increase in demand will cause an increase in the equilibrium price and quantity of a good.
The increase in demand causes excess demand at the initial price. Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing output.
Dr. Mazharul Islam

14. Changes in Equilibrium
A decrease in demand will cause a reduction in the equilibrium price and quantity of a good.
The decrease in demand causes excess supply at the initial price. Excess supply will cause price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output
Dr. Mazharul Islam

15. Changes in Equilibrium
An increase in supply will cause a reduction in the equilibrium price and an increase in the equilibrium quantity of a good.
The increase in supply creates an excess supply at the initial price. Excess supply causes the price to fall and quantity demanded to increase.
Dr. Mazharul Islam

16. Changes in Equilibrium
An decrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good.
The decrease in supply creates an excess demand at the initial price. Excess demand causes the price to rise and quantity demanded to decrease.
Dr. Mazharul Islam

17. Changes in Equilibrium
The change of demand and supply in opposite directions leads to lower the equilibrium price but the change in the equilibrium quantity is indeterminate. It is depend on how much the demand and supply curves have shifted.
As long as only one curve shifts, we can say for sure what will happen to equilibrium price and quantity.
If both curves shift, however, the outcome is less obvious.
Dr. Mazharul Islam

18. Changes in Equilibrium
S = D P , Q unchanged
Dr. Mazharul Islam

19. Changes in Equilibrium
The change of demand and supply in same directions leads the higher the equilibrium quantity but the change in the equilibrium price is indeterminate. It is depend on how much the demand and supply curves have shifted.
Dr. Mazharul Islam

20. Changes in Equilibrium
S = D P (unchanged) , Q
Dr. Mazharul Islam

21. Summary Dr. Mazharul Islam Change in Demand Demand increases
Demand decreases
Equilibrium
Equilibrium
price change
price falls.
Supply
is indeterminate. y l
increases
Equilibrium p p
Equilibrium
quantity change u S
quantity increases.
is indeterminate. n i e g n
Equilibrium
Equilibrium price a h
price rises.
change is indeterminate. C
Supply
decreases
Equilibrium
Equilibrium
quantity change
quantity decreases.
is indeterminate.
Dr. Mazharul Islam

22. Now it’s over for today. Do you have any question?
Dr. Mazharul Islam