Applied Economics

Governor Pack Road, Baguio City, Philippines 2600

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 6 – Applied Economics Subject Teacher:

THE MARKET EQUILIBRIUM

Module Objectives:
At the end of the module, the students must be able to:
a. explain the concept of market equilibrium.
b. prepare graph for market equilibrium.
c. solve problems on market equilibrium

I. Market Equilibrium, defined.

A market equilibrium is a situation where demand and supply, as economic forces meet at the
same point. The quantity demanded and the quantity supplied are equal given the same level of
price. In a free market (there are many sellers and many buyers), there is a single price which brings
the demand and supply into balance. This is called the equilibrium price.

Consider the schedule for demand and supply:

SUPPLY SCHEDULE
Price (₱) Quantity Demanded Quantity Supplied
(Units) (Units)
1 1,100 200
2 1,000 400
3 900 600
4 800 800
5 700 1,000

In the illustration, if price is at ₱ 4, both the quantity demanded and quantity supplied is at 800 units.
This is the market equilibrium for the given set of data. The price at ₱ 800 is the equilibrium price or
also called as the market clearing price. In its simplest sense, this is the price where sellers bring the
exact quantity of goods to the market which will be bought by the consumers in order to avoid
leftovers, and thus, avoid overproduction and underproduction- both are elements of production
inefficiency.

Illustration 1: Below is the graph for a market equilibrium.

MARKET EQUILIBRIUM
8
S
6
PRICE (₱)

4 equilibrium
2
D
0
200 400 600 800 1,000 1200 1400

QUANTITY

In the graph, the market equilibrium is identified as the intersection point between the demand
and the supply curve. The intersection point in this example is (₱ 4, 800 units).

II. HOW TO COMPUTE FOR THE EQUILIBRIUM PRICE AND QUANTITY: EQUILIBRIUM POINT
Consider the schedule in computing for the market equilibrium:

SUPPLY SCHEDULE
Price (₱) Quantity Demanded Quantity Supplied
(Units) (Units)
1 1,100 200
2 1,000 400
Page 1 of 5
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 6 – Applied Economics Subject Teacher:

STEP 1 : Derive the Demand and Supply Function

Note: The Demand Function should be in this form: Qd = -m P + b

The demand function has a negative slope because of the inverse relationship between
the price and the quantity demanded. This is consistent with the Law of Demand:
(+) P = ( -) QD
( -) P = (+) QD

On the other hand, The Supply Function should be in this form: QS= m P + b

The supply function has a positive slope because of the positive relationship between the
price and the quantity supplied. This is consistent with the Law of Supply:
(+) P = (+) QS
( -) P = ( -) QS

Demand Function
Qd = -m P + b
a. slope (m) review the process in the previous modules

y2−y1
m =
x2−x1

∆QD
= ∆P

Q2−Q1
= P2−P1

1,000−1,100
= 2−1

−100
= 1
= -100  negative slope

b. y-intercept (b)
In this case, point (1, 1,100) will be used in deriving b
Qd = 1,000 units
P =₱1

Qd = -100 P + b
1,100 = -100 (1) + b

1,100 +100 = b
b = 1,200 units

c. set up the demand function

Qd = -100 P + 1,200

Supply Function
Qs =mP+b
slope (m) review the process in the previous modules

y2−y1
m =
x2−x1

Page 2 of 5
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 6 – Applied Economics Subject Teacher:

∆QS
= ∆P

Q2−Q1
=
P2−P1

400−200
= 2−1

200
=
1

= 200  positive slope

a. y-intercept (b)

In this case, point (1, 200) will be used in deriving b

QS = 200 units
P =₱1

QS = 200 (P) + b
200 = 200 (1) + b

200 - 200 = b
b =0

b. set up the supply function

Qs = 200P + 0

STEP 2 : Equate the Demand and Supply Function.

As mentioned earlier, the market equilibrium or the equilibrium point is where the demand
and supply are equal. Thus, using the derived demand
(Qd= -100P + 1,200) and supply (QS = 200P + 0) functions, the market equilibrium is initially set up
as:
Qd = Qs
-100 P + 1,200 = 200 P + 0

STEP 3 : Solve for the Equilibrium Price P.

Using -100 P + 1,200 = 200 P + 0, the equilibrium price is solved as follows:
-100 P + 1,200 = 200 P + 0
1,200-0 = 200 P + 100 P
1,200 = 300 P
P = 1,200 / 300
P = ₱ 4.00

STEP 4 : Solve for the Equilibrium Quantity by substituting the Equilibrium Price to either the
Demand and Supply Function.
Qd= -100 P + 1,200 @ P = 4.00 Qs = 200 P + 0 @ P = 4.00

Qd= -100 (4) + 1,200 Qs = 200 (4) + 0

Qd= -400 + 1,200
Qd= 800 units Qs = 800 units

STEP 5 : Identify the equilibrium point.

Equilibrium Price : ₱ 4.00
Equilibrium Quantity : 800 units
Equilibrium Point : (4, 800)

Page 3 of 5
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 6 – Applied Economics Subject Teacher:

Illustration 2: HOW TO GRAPH THE MARKET EQUILIBRIUM?

MARKET EQUILIBRIUM
8
7 S
6
Qd= 1,200 - 100P
ME Qs= 0 + 200 P
5
PRICE (₱)

4
EP equilibrium
3
2
1 D
0 EQ
200 400 600 800 1,000 1200 1400
QUANTITY

1. Graph the demand and supply function in one graph.

2. Name the demand and supply function.
3. Plot the equilibrium point.
4. Draw a broken line to indicate the equilibrium point.

III. MARKET SHORTAGE AND SURPLUS

Market shortages exist because of the imposition of price controls by the government. A price
control is a means for the government to mandate a legal minimum or legal maximum price a
product should be sold in the market. The legal maximum price for a product is called price ceiling,
while the legal minimum price for a product is called price floor- both has an effect to the
equilibrium point.

MARKET SHORTAGE
There is a market shortage if there is no enough supply to cover for the demands of the consumers.
These are the points in the graph where QD > QS:
Illustration 3: Shortage
MARKET EQUILIBRIUM
8
S
6
PRICE (₱)

4
Shortage
2
D
0 Ceiling
200 400 600 800 1,000 1200 1400
QUANTITY

The shortage, represented by the yellow area is brought about by the imposition of a price ceiling
at ₱ 2.00 below the equilibrium price of ₱ 4.00. If the government would impose a maximum price
below the equilibrium point, consumers would necessarily demand more as the price is low- this is
still consistent with the law of demand. However, production may not be able to keep up due to a
large level of demand.

On the other hand, a market surplus exists if there is too much production of goods which may
cause an excess in the supply or inventories. These are the points in the graph where QD < QS:
Illustration 4: Surplus
MARKET EQUILIBRIUM
8
S
6
Floor
PRICE (₱)

4 Surplus
2

0
D
200 400 600 800 1,000 1200 1400
QUANTITY

Page 4 of 5
 Applied Economics
Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade ___- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 6 – Applied Economics Subject Teacher:

The surplus, represented by the yellow area is brought about by the imposition of a price floor at
₱6.00 which is above the equilibrium price of ₱4.00. If the government would impose a minimum
price above the equilibrium point, sellers, as they are profit driven, would take this chance where
price is high to produce massively without taking into consideration whether the current demand
warrants their profit.

ACTIVITY 6:
INSTRUCTION : Read and analyze the problems. Give what is being asked. If the problem requires for a
solution, make your solutions neat and concise. Put your final answers in a box. Write answers on a long
bon paper (hand-written) and submit the same to your subject teacher.

Given the data for the consumption and production of cotton, determine the equilibrium point:
SUPPLY FOR COTTON
Price per kg. of cotton Quantity Demanded Quantity Supplied
(QD) (QS)
₱ 50 50.25 85.75
₱ 30 55.50 75.25

a. Supply Function (3 points).

b. Demand Function (3 points).
c. Equilibrium point. (5 points)
d. Graph the Market Equilibrium. (5 points)
e. Explain a graph where shortage may exist. Do not exceed 4 sentences. (5 points)
f. Explain a graph where surplus may exist. Do not exceed 4 sentences. (5 points)

References:
1. Azarcon, et al. (2008). Principles of Economics. Baguio City: Valencia Book team.
2. Caoile, P. V. (2017). Applied Economics. Quezon City: Phoenix Publishing House, Inc.

“Life is 10% what happens to me and 90% of how I react to it.”

Charles Swindoll

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