Market Equilibrium - Eng
Market Equilibrium - Eng
Market Equilibrium - Eng
MARKET EQUILIBRIUM
The market equilibrium is determined by two forces , demand for and supply of goods.
The demand for the good means the quantity purchased of the goods by the consumer at a given
price. The quantity demanded of the goods is negatively related to it’s price. The supply of the good
means the quantity of the good sold by a seller at a given price. The quantity supplied of the good is
positively related to it’s price.
* The market is in equilibrium when the quantity demanded of the good is equal to it’s
quantity supplied.
Qd=Qs
* The price at which the quantity demanded equal to the quantity supplied is known as
equilibrium price. This is market clearing price.
* The quantity demanded and supplied of the good at equilibrium price is called as
equilibrium quantity.
The following schedule and figure explains the determination of market equilibrium.
* At prices 5 & 4, quantity supplied is greater than the quantity demanded. The situation is
called as excess supply.
* At prices 2 & 1, the quantity demanded is greater than the quantity supplied. The situation is
called as excess demand.
Suppose Q d= 100 – 5P and Q s = 15P – 60. Find equilibrium price and quantity.
Qd=Qs
100 – 5P = 15P + 60
100 – 60 = 15P + 5P
40 = 20P
40/20 = P
2 =P
Equilibrium price = 2
1. Increase in demand :-
* Demand curve is shifted rightward due to increase in demand. * Equilibrium price and quantity
increase.
2. Decrease in demand:-
* Due to decrease in demand the demand curve shifted to leftward * Equilibrium price and quantity
fall.
3. Increase in supply :-
*Due to increase in supply the supply curve shifted rightward. * Equilibrium price falls. *
Equilibrium quantity rises.
4. Decrease in supply :-
* Due to decrease in supply the supply curve shifted to leftward. *Equilibrium price increases*
Equilibrium quantity falls.
1. Price ceiling:-
Government imposed upper limit on the price of a good is called as price ceiling. This policy is also
called as ‘Maximum price fixation’. In this policy price fixes below market equilibrium price. This
policy protects consumers. Government applies price ceiling for the products like rice, sugar,
kerosene wheat etc… When the government fixes the price below equilibrium price, it leads to
excess demand ( demand > supply ).
The price ceiling policy of government can be explained with the help of a figure.
In the figure, curve D represents demand for and the curve S represents supply of goods in the
market. The market equilibrium price is P* and equilibrium quantity is q*. Government imposes the
price below the equilibrium price. Then the quantity demanded (qD) is greater than the quantity
supplied (q S). This is the situation of excess demand for the good in the market. This policy of
government has two important impacts in the market.
(a)Long queues of consumers to buy the goods from the ration shops.(b) Black market:-Goods are
sold in the open market at a price higher than the government fixed price.
2.Price floor:-
Government imposed lower limit on the price of a good is called as price floor. This is the policy of
‘Minimum price fixation’. In this policy, the price fixes above market equilibrium price.
Government applies this pricing policy in the case of products like coconut, pepper, rubber etc.…
This is the ‘support price policy’ for producers.
The price floor policy can be explained with the help of a figure
In the figure, market equilibrium price is P* and the equilibrium quantity is q* when quantity
demanded is equal to the quantity supplied of the good ( demand curve intersects supply curve) The
government fixes the price above the equilibrium price to protect producers. This is the price floor.
This policy is resulted to excess supply because quantity supplied (qs) is greater than the quantity
demanded (qD). As a result the market faces the following impacts.
Impacts of price floor
To prevent price from falling because of excess supply, the government purchases the surplus goods
at the predetermined price. The government increases their buffer stocks.
Price fixes below market equilibrium price Price fixes above market equilibrium price
Products like rice, sugar, kerosene wheat etc... Products like coconut, pepper, rubber etc....
Leads to excess demand ( demand > supply ) Leads to excess supply (supply > demand )
Model question:-
Case 1: Price of sugar per kilogram is rupees 50. Government fixes it’s price at 35/Kg.
Case 2: The market price of rubber R S S 4 per quintal is rupees 15500. But the government fixes
it’s price at 16500/quital.
b) Describe the impacts of these policies in the market with suitable diagrams.
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