Chapter - 7

MARKET EQUILIBRIUM

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

 Price mechanism refers to the interaction
of demand and supply in allocating the
scarce resources in an economy.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

From the below table, Market Equilibrium occurs when the quantity demanded is equal to
the quantity supplied, that is - 300 units. The equilibrium price is £60.

Price (£) Quantity Demanded Quantity Supplied

100 80 900
80 190 550
60 300 300
40 480 180
20 700 90

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

 fig: Market Equilibrium curve

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7
AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7
 Using the demand and supply diagrams,
analyze the effect of the following on the
price and quantity of Coca-Cola

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

i) The Fall in the price of Pepsi

Leftward shift of the demand Curve

As Pepsi is a substitute good of Coke, when there is a fall in price of Pepsi, the demand for pepsi will go up - which will in
turn lead to a fall in demand for Coke. Therefore, there is a Downward/Leftward shift of demand curve from D1 to D2.
This results in the quantity demanded of Coke to decrease from Q1 to Q2 and the price will fall from P1 to P2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

ii) Fall in the price of Sugar

As sugar is a raw material required in the production of Coke, if the price of sugar falls, there will
be a fall in the cost of production for Coke- leading to a Rightward shift of the supply curve from
S1 to S2 and as a result, price will fall from P1 to P2 and Quantity Supplied will rise from Q1 to
Q2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

iii) The government imposes 20% tax on soft drinks

The 20% tax placed on soft drinks by the government adds to the cost of production of Coca-cola,
causing a Leftward shift of the Supply curve from S1 to S2 - increasing the price of Coke from P1 to P2
and decreasing the quantity supplied from Q1 to Q2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

iv) Fall in the price of Fast Food

Rightward Shift of the demand Curve

As Fast food is a complementary good of Coke, when the price of fast food falls, the demand for Coke increases. This
leads to an rightward shift of the demand curve from D1 to D2 - resulting in an increase in Quantity demanded for
Coke from Q1 to Q2 and the price to rise from P1 to P2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

Using Demand and Supply diagrams,
analyze the effect of the following on the
price and quantity of Cigarettes

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

i) Tax imposed on the imported cigarettes

Tax imposed on the imported cigarettes is an indirect tax which causes a Leftward shift of
the supply curve from S1 to S2, resulting in a decrease in Quantity supplied from Q1 to Q2
and rising the price of Cigarettes from P1 to P2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

ii) Ban on cigarette advertising

Leftward Shift of the demand Curve

When there is a ban in Cigarette advertising, people will be less informed about the availability of cigarettes in the market and be
less encouraged to buy it - leading to a fall in demand for cigarettes from D1 to D2. This will result in the fall of Quantity demanded
and price from Q1 to Q2 and P1 to P2 respectively.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

iii) Subsidies provided to tobacco farmers

As tobacco is a raw material required in the production of cigarettes, if the farmers get subsidized, their cost of
production will fall and hence, supply will increase, causing a Rightward shift of the supply curve from S1 to S2,
increasing Quantity supplied from Q1 to Q2 and price will fall from P1 to P2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

 iv) Rise in the price of Electric Cigarettes (Vape)

Rightward Shift of the demand Curve

As Electric Cigarettes are a substitute of Cigarettes, when there is a rise in the price of electric cigarettes, the demand for it is likely to go
down; which in turn, will lead to a rise in demand for cigarettes - resulting in an rightward shift of the demand curve from D1 to D2. This
will cause Quantity demanded to shift from Q1 to Q2 and price will increase from P1 to P2.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

3. Car prices in recent years have increased by 110%. Major car producing regions such as Indonesia and Japan have experienced natural disasters like
Earthquake and floods. On the other hand, major car importing countries such as Pakistan, India, Bangladesh and Thailand have had rapid population
growth in the last decade. Analyze, using a demand & supply diagram how these changes might have contributed to the increase in the price of Cars.

Leftward Shift of the Supply curve & Rightward shift of the Demand Curve

As Natural disasters such as flood and earthquake have occured in major car producing region, the supply is likely to fall due to a halt or
delay in production. On the other hand, demographic changes such as rapid population growth in importing regions will increase the
demand. Overall, there will be a leftward shift of the supply curve from S1 to S2 and upward shift of the demand curve from D1 to D2. Price
and Quantity is likely to increase from P1 to P2 and Q1 to Q2 respectively.

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7

 THE END

AUNTORIP KARIM - CLASS VIII ECONOMICS - CHAPTER 7