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ECON107 Principles of Microeconomics Week 6 SEPTEMBER 2013

Chapter-3. ECON107 Principles of Microeconomics Week 6 SEPTEMBER 2013. 3. Market Equilibrium. Lesson Objectives. Define market and market equilibrium Explain how demand and supply determine prices and quantities bought and sold

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ECON107 Principles of Microeconomics Week 6 SEPTEMBER 2013

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  1. Chapter-3 ECON107Principles of MicroeconomicsWeek 6SEPTEMBER 2013

  2. 3 Market Equilibrium

  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

  4. POTENTIAL SELLERS POTENTIAL BUYERS MARKETS DEFINED MARKETS

  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.

  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.

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

  8. P QD P QS Market Demand and Supply P CORN MARKET CORN MARKET S $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 $5 4 3 2 1 Market Clearing Equilibrium 12,000 10,000 7,000 4,000 1,000 D 7 o Q (in thousand) 2 4 6 8 10 12 14 16

  9. P QD P QS Market Demand and Supply P S Surplus CORN MARKET CORN MARKET $5 4 3 2 1 At a $4 price more is being supplied than demanded 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o Q (in thousand) 2 4 6 8 10 12 14 16

  10. P QD P QS Market Demand and Supply P CORN MARKET CORN MARKET S $5 4 3 2 1 At a $2 price more is being demanded than supplied 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 11 Q (in thousand) o 2 4 6 8 10 12 14 16

  11. P QD P QS Market Demand and Supply P CORN MARKET CORN MARKET S $5 4 3 2 1 Surplus (put downward pressure on the price) 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage (Create market pressure for a higher price) D 11 7 o Q (in thousand) 2 4 6 8 10 12 14 16

  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

  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.

  14. Changes in Equilibrium • A decrease in demand will cause a reduction in the equilibrium price and quantity of a good.

  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.

  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.

  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.

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

  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.

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

  21. Summary Change in Demand Demand increases Demand decreases Equilibrium Equilibrium price change price falls. Supply is indeterminate. y increases l 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.

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

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