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Market Equilibrium

Market Equilibrium

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Published by: HealthyYOU on Aug 06, 2009
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INTRODUCTION TO ECONOMICSWITH LAND REFORM ANDTAXATION
DR. ABRAHAM C. CAMBA JR.
Department of Economics, San Beda College, Mendiola, Manila and Polytechnic University of the Philippines, Sta. Mesa, Manila
DR. AILEEN L. CAMBA
Graduate School and Department of EconomicsPolytechnic University of the Philippines, Sta. Mesa, Manila
Lecture 3
MARKET EQUILIBRIUM PRICE AND QUANTITY 
CONTENTS1.1Equilibrium Price and Quantity1.2Shortages and Surpluses1.3The Effects of Changing Demand and/or Supply1.4Algebraic SolutionsHOMEWORK REFERENCES1.1Equilibrium Price and Quantity
The
market equilibrium
is found at the point at which the market supply and marketdemand curves intersect. The price at the intersection of the market supply curve and
 
the market demand curve is called
equilibrium price
, and the quantity is called the
equilibrium quantity
. At the equilibrium price, the amount that buyers are willing andable to buy is exactly equal to the amount that sellers are willing and able to produce.For instance, at Ph3.00 per piece of ice candy, Annikah and Amartya are willing to buy40 pieces of ice candy per month and sellers are willing to supply 40 pieces of ice candyper month. Neither may be “happy” about the price; the buyers would probably like alower price and the sellers would probably like a higher price. But both buyers andsellers are able to carry out their purchase and sales plan at the Ph3.00 price. At anyother price, either suppliers or demanders would be unable to trade as much as theywould like.Exhibit 1. Market Equilibrium
1.2Shortages and Surpluses
What happens when the market price is not equal to the equilibrium price? Suppose themarket price is above the equilibrium price, it is clear that a
surplus
, or excess quantitysupplied, would exist. That is, at this price, firms would be willing to sell more thandemanders would be willing to buy. To get rid of the unwanted surplus, frustratedsuppliers would cut their price and cut back on production. And as price falls,consumers would buy more, ultimately eliminating the unsold surplus and returning themarket to the equilibrium level.What would happen if the market price of coffee were below the equilibrium price? A
shortage
or excess quantity demanded would exist. Because of shortage, frustratedbuyers would be forced to compete for the existing supply, bidding up the price. Therising price would have two effects:
(1)
Producers would be willing to increase the quantity supplied, and(2)The higher price would decrease the quantity demanded.Together, these two effects would ultimately eliminate the shortage, returning the marketto equilibrium.
1.3The Effects of Changing Demand and/or Supply
Price of cellular phone(per unit)Quantity of cellularphone(units per month)PeQe
SupplyDemand
Equilibriu
 
(1)
Increase in demand and constant supply Increase in Pe and Qe
(2)
Decrease in demand and constant supply Decrease in Pe and Qe
(3)
Constant demand and increase in supply Decrease in Pe and increase in Qe
(4)
Constant demand and decrease in supply
Increase in Pe and decrease in Qe(5)More cases
1.4Algebraic Solutions
A Linear Model: Solution by Elimination of VariablesOne way of finding a solution to an equation system is by successive elimination of variables and equations through substitution.Let Qe = Qd = QsQd = a-bP (a, b >0)Qs = -c+dP (c, d >0)a-bP = -c+dPa+c = bP+dPa+c = (b+d)P
Pe = (a+c)/(b+d)
Qd= a-b[(a+c)/(b+d)]= [a(b+d)-b(a+c)]/(b+d)= (ab+ad-ab-bc)/(b+d)= (ad-bc)/(b+d)Thus, Qd = Qs = Qe = (ad-bc)/(b+d)
HOMEWORK 
Table 1 show the demand and supply schedules for milk.
PriceQdQs(US$ per (cartons per

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