Market Equilibrium Notes

Two major brances of
economic reasoning
Positive economics vs. normative ECONOMICS
1. Positive economics - deals with objective or scientific
explanations of the working of the economy and studies how the
economy actually behaves.
2. Normative economics - offers recommendations based on

personal value judgements and makes predictions about what
should be done.
e.g. (1)The elderly have very high medical expenses, and (2)the
government should subsidize there bills.
1. Positive economics - deals with objective or scientific
explanations of the working of the economy and studies how the
economy actually behaves.
2. Normative economics - offers recommendations based on

personal value judgements and makes predictions about what
should be done.
e.g. (1) There has to be free wifi around the campus, because (2) the
internet provides information relevant for researches.
More Examples
a. (1)The rate of inflation has fallen below 10 per cent per annum.
(2) Because the inflation has fallen the government should now
expand its activity.
b. The level of income is higher in the United States than in
Philippines.
c. People in Japan are happier than in Philippines.
d. (1) People should not be encouraged to drink and (2) taxes must
be kept high on alcoholic beverages.
Market Demand, Market
Supply and Market
Equilibrium
Producer-consumer relationship
MARKET
• A market is a group of buyers and sellers of a particular

good or service.
• Buyers determine demand
• Sellers determine supply
• The terms supply and demand refer to the behavior of
people . . . as they interact with one another in markets.
Market Demand vs. Market supply
Market Demand
- The sum (total )of all individual consumers’ demand
for goods and services.
Market supply
- The sum (total) of all individual producers or sellers’
supply of goods and services.
Market Equilibrium
• a condition in which the value or amount of

market demand is equal to the value or
amount of market supply
• D=S (quantity of demand = quantity supply),

market equilibrium quantity
Market Equilibrium Price
• sometimes called “market-determined price”

• The resulting price when market demand is
exactly the same as market supply
MARKET EQUILIBRIUM
QUANTITY
• A competitive market is in equilibrium at the market
price if the quantity supplied equals the quantity
demanded.
• At the market equilibrium, the price is called
equilibrium price.
• . . . and the quantities supplied and demanded are
called the equilibrium quantity.
Market Equilibrium
At $2.00, the quantity demanded is

equal to the quantity supplied
Market Disequilibrium
• a condition when market demand and market supply are
not equal, market imbalance.
• This imbalance will put pressure in the market price such
that the market will continuously adjust until such time that
equilibrium will again be realized.
SHORTAGE- DEMAND > SUPPLY

SURPLUS- SUPPLY > DEMAND
Determination of market equilibrium price
and quantity
Price D S Surplus/shortage Pressure on Price
8 0 < 80 Surplus Downward
4 40 = 40 Neither Equilibrium
3 50 > 30 Shortage Upward

Market Equilibrium
Movement towards market
equilibrium
• If the price is above the equilibrium price,
- quantity supplied > quantity demanded,
- excess supply.
- Sellers cannot sell as much as they want,
- so they will tend to offer buyers a lower price.
• Therefore, the price will tend to move downwards towards
the equilibrium price.
Movement towards market
equilibrium
• If the price is below the equilibrium price,
- quantity demanded > quantity supplied
- excess demand,
- buyers will not be able to buy all they want
to buy,
- so they will tend to offer sellers a higher
price.
• Therefore, the price will tend to move upwards
towards the equilibrium price.
Excess Supply and Excess Demand
• Excess supply – prices tend to fall if quantity

supplied is greater than quantity demanded.
• Excess demand – prices tend to rise if quantity
demanded is greater than quantity supplied.
MARKET DEMAND, supply and
equilibrium
equilibrium
•
equilibrium
• If the demand and supply curve for computers is:
D = 100 - 6P, S = 28 + 3P
Where P is the price of computers, what is the
quantity of computers bought and sold at
equilibrium?
EXERCISE #2. use ½ crosswise
•

Market Equilibrium Notes

Uploaded by

Copyright:

Available Formats

Market Equilibrium Notes

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Market Equilibrium Notes

Uploaded by

Copyright:

Available Formats

Two major brances of

2. Normative economics - offers recommendations based on

2. Normative economics - offers recommendations based on

• A market is a group of buyers and sellers of a particular

• a condition in which the value or amount of

• D=S (quantity of demand = quantity supply),

• sometimes called “market-determined price”

At $2.00, the quantity demanded is

SHORTAGE- DEMAND > SUPPLY

Price D S Surplus/shortage Pressure on Price

8 0 < 80 Surplus Downward

7 10 < 70 Surplus Downward

6 20 < 60 Surplus Downward

5 30 < 50 Surplus Downward

3 50 > 30 Shortage Upward

2 60 > 20 Shortage Upward

1 70 > 10 Shortage Upward

0 80 > 0 Shortage Upward

• Excess supply – prices tend to fall if quantity

You might also like