Page 1 CHAPTER 5 MARKET EQUILIBRIUM ? Market Equilibrium: It is defined as the state of rest which is determined by the rational objectives of consumers and producers. The rational objective of consumers is to maximise their satisfaction, given their money income, while that of the producers is to maximise their profit, given their cost structure. ? Equilibrium Price: The price at which the market supply and market demand intersect each other gives equilibrium price and the corresponding quantity of output is called equilibrium output. Symbolically Market Equilibrium is denoted as: Q S (P e ) = Q D (P e ) Q S = Market supply at equilibrium price Q D = Market Demand at equilibrium price P e = Equilibrium price ? Excess Demand – It is defined as a situation where the market demand exceeds the market supply at a particular price. ? Excess Supply – It is defined as a situation where the market demand falls short of the market supply at a particular price. Page 2 CHAPTER 5 MARKET EQUILIBRIUM ? Market Equilibrium: It is defined as the state of rest which is determined by the rational objectives of consumers and producers. The rational objective of consumers is to maximise their satisfaction, given their money income, while that of the producers is to maximise their profit, given their cost structure. ? Equilibrium Price: The price at which the market supply and market demand intersect each other gives equilibrium price and the corresponding quantity of output is called equilibrium output. Symbolically Market Equilibrium is denoted as: Q S (P e ) = Q D (P e ) Q S = Market supply at equilibrium price Q D = Market Demand at equilibrium price P e = Equilibrium price ? Excess Demand – It is defined as a situation where the market demand exceeds the market supply at a particular price. ? Excess Supply – It is defined as a situation where the market demand falls short of the market supply at a particular price. Excess Demand = q ?d – q ?s = 6 units Excess Supply = q ?s – q ?d = 4 units Equilibrium Price = Rs 8 Equilibrium Output = 4 units ? Market Equilibrium under Fixed Number of Firms Shift in Demand and Supply The change in the equilibrium price and quantity with respect to shift in demand and supply is fragmented under three situations: Changes in market demand only Change in market supply only Simultaneous changes in both – market demand and market supply. 1) Changes in market demand The change in market demand can be: a) Increase in demand b) Decrease in demand Effects of Change in Demand with Supply Unchanged on Equilibrium Price and Output Change in Shift in Equilibrium Equilibrium Figure Page 3 CHAPTER 5 MARKET EQUILIBRIUM ? Market Equilibrium: It is defined as the state of rest which is determined by the rational objectives of consumers and producers. The rational objective of consumers is to maximise their satisfaction, given their money income, while that of the producers is to maximise their profit, given their cost structure. ? Equilibrium Price: The price at which the market supply and market demand intersect each other gives equilibrium price and the corresponding quantity of output is called equilibrium output. Symbolically Market Equilibrium is denoted as: Q S (P e ) = Q D (P e ) Q S = Market supply at equilibrium price Q D = Market Demand at equilibrium price P e = Equilibrium price ? Excess Demand – It is defined as a situation where the market demand exceeds the market supply at a particular price. ? Excess Supply – It is defined as a situation where the market demand falls short of the market supply at a particular price. Excess Demand = q ?d – q ?s = 6 units Excess Supply = q ?s – q ?d = 4 units Equilibrium Price = Rs 8 Equilibrium Output = 4 units ? Market Equilibrium under Fixed Number of Firms Shift in Demand and Supply The change in the equilibrium price and quantity with respect to shift in demand and supply is fragmented under three situations: Changes in market demand only Change in market supply only Simultaneous changes in both – market demand and market supply. 1) Changes in market demand The change in market demand can be: a) Increase in demand b) Decrease in demand Effects of Change in Demand with Supply Unchanged on Equilibrium Price and Output Change in Shift in Equilibrium Equilibrium Figure Demand Demand Curve Output Price a) Increase in Demand Rightwards Rise Rise b) Decrease in Demand Leftwards Fall Fall 2) Change in Market Supply The change in market supply can be: a) Increase in Market Supply b) Decrease in Market Supply Effects of Change in Supply with Demand Unchanged on Equilibrium Price and Output Change in Demand Shift in Demand Curve Equilibrium Output Equilibrium Price Figure Page 4 CHAPTER 5 MARKET EQUILIBRIUM ? Market Equilibrium: It is defined as the state of rest which is determined by the rational objectives of consumers and producers. The rational objective of consumers is to maximise their satisfaction, given their money income, while that of the producers is to maximise their profit, given their cost structure. ? Equilibrium Price: The price at which the market supply and market demand intersect each other gives equilibrium price and the corresponding quantity of output is called equilibrium output. Symbolically Market Equilibrium is denoted as: Q S (P e ) = Q D (P e ) Q S = Market supply at equilibrium price Q D = Market Demand at equilibrium price P e = Equilibrium price ? Excess Demand – It is defined as a situation where the market demand exceeds the market supply at a particular price. ? Excess Supply – It is defined as a situation where the market demand falls short of the market supply at a particular price. Excess Demand = q ?d – q ?s = 6 units Excess Supply = q ?s – q ?d = 4 units Equilibrium Price = Rs 8 Equilibrium Output = 4 units ? Market Equilibrium under Fixed Number of Firms Shift in Demand and Supply The change in the equilibrium price and quantity with respect to shift in demand and supply is fragmented under three situations: Changes in market demand only Change in market supply only Simultaneous changes in both – market demand and market supply. 1) Changes in market demand The change in market demand can be: a) Increase in demand b) Decrease in demand Effects of Change in Demand with Supply Unchanged on Equilibrium Price and Output Change in Shift in Equilibrium Equilibrium Figure Demand Demand Curve Output Price a) Increase in Demand Rightwards Rise Rise b) Decrease in Demand Leftwards Fall Fall 2) Change in Market Supply The change in market supply can be: a) Increase in Market Supply b) Decrease in Market Supply Effects of Change in Supply with Demand Unchanged on Equilibrium Price and Output Change in Demand Shift in Demand Curve Equilibrium Output Equilibrium Price Figure a) Increase in Supply Rightwards Fall Rise b)Decrease in Supply Leftwards Rise Fall 3) Simultaneous change in market demand and market supply. The simultaneous change in market demand and market supply affects the equilibrium price and output depends on the magnitude of the change in demand and supply. Effects of Simultaneous Change in Demand and Supply on Equilibrium Price and Output Cases Equilibrium Price Equilibrium Quantity Figure Both demand and supply changes simultaneously in the same direction Page 5 CHAPTER 5 MARKET EQUILIBRIUM ? Market Equilibrium: It is defined as the state of rest which is determined by the rational objectives of consumers and producers. The rational objective of consumers is to maximise their satisfaction, given their money income, while that of the producers is to maximise their profit, given their cost structure. ? Equilibrium Price: The price at which the market supply and market demand intersect each other gives equilibrium price and the corresponding quantity of output is called equilibrium output. Symbolically Market Equilibrium is denoted as: Q S (P e ) = Q D (P e ) Q S = Market supply at equilibrium price Q D = Market Demand at equilibrium price P e = Equilibrium price ? Excess Demand – It is defined as a situation where the market demand exceeds the market supply at a particular price. ? Excess Supply – It is defined as a situation where the market demand falls short of the market supply at a particular price. Excess Demand = q ?d – q ?s = 6 units Excess Supply = q ?s – q ?d = 4 units Equilibrium Price = Rs 8 Equilibrium Output = 4 units ? Market Equilibrium under Fixed Number of Firms Shift in Demand and Supply The change in the equilibrium price and quantity with respect to shift in demand and supply is fragmented under three situations: Changes in market demand only Change in market supply only Simultaneous changes in both – market demand and market supply. 1) Changes in market demand The change in market demand can be: a) Increase in demand b) Decrease in demand Effects of Change in Demand with Supply Unchanged on Equilibrium Price and Output Change in Shift in Equilibrium Equilibrium Figure Demand Demand Curve Output Price a) Increase in Demand Rightwards Rise Rise b) Decrease in Demand Leftwards Fall Fall 2) Change in Market Supply The change in market supply can be: a) Increase in Market Supply b) Decrease in Market Supply Effects of Change in Supply with Demand Unchanged on Equilibrium Price and Output Change in Demand Shift in Demand Curve Equilibrium Output Equilibrium Price Figure a) Increase in Supply Rightwards Fall Rise b)Decrease in Supply Leftwards Rise Fall 3) Simultaneous change in market demand and market supply. The simultaneous change in market demand and market supply affects the equilibrium price and output depends on the magnitude of the change in demand and supply. Effects of Simultaneous Change in Demand and Supply on Equilibrium Price and Output Cases Equilibrium Price Equilibrium Quantity Figure Both demand and supply changes simultaneously in the same direction a) Increase in Demand = Increase in Supply Unchanged Increases b) Increase in Demand > Increase in Supply Increases Increases c) Increase in Demand < Increase in Supply Falls Increases d) Decrease in Demand = Decrease in Supply Unchanged FallsRead More