Microeconomics

Dr. Allah Ditta

Assistant Professor
 Market equilibrium
 At Equilibrium
 Quantity supplied (QD) = Quantity Demanded (QS)
 And price at supplier is willing to sell and demander is willing to
buy matches
How does equilibrium is effected
by demand and supply?
 Since we have studied what is meant by the
equilibrium

 It’s a point where demanders and supplier agree to a

particular quantity to exchange at a certain price.

 Now we will study that what will happen if Demand or

Supply change. Notice they are not quantity demand
or quantity supply this means it is non price factor
which will shift the line.
 What will happened to equilibrium if demand
increases?

 Demand is changed because

of other factors hence
scenario of demander will
change too.
 Like increase in income, will
increase his ability to buy
more hence demand shift
right
 So people with higher income
will be able to afford
expensive items hence price
go up and supply increase too
 What will happen in equilibrium
if Supply rises?
 Now as we know that supply
only increase by non price
factors, so let # of sellers
increase
 It will increase the # of
products in market so supply
shift right
 So there are more products in
market , in order to sell
suppliers have to make them
cheap
 What will happen in equilibrium if Demand
falls?

 Demand is changed because

of other factors hence
scenario of demander will
change too.
 Like decrease in income, will
decrease his ability to buy
hence demand shift left
 So people will have lower
income to afford expensive
items hence price go down
and supply fall with it too.
 What will happen in equilibrium if
Supply falls?
 Now as we know that supply
only change by non price
factors, so let # of sellers
decrease
 It will decrease the # of
products in market so supply
shift left
 So there are less products in
market , and these rare
products will become
expensive
Activity
 What will happen to the equilibrium to gold jewelry
market if

• Increase in tax in the fashion industry

• Strike by labor union for higher wages
• Doctors claim that the artificial jewelry can cause skin
irritation
• Invention of new method to mend the gold metal
helping the jewelers to make jewelry
• THERE IS INCREASE IN PRICE OF GOLD
Price below equilibrium
 If the price is below the equilibrium
a shortage occurs:
 If price is below the equilibrium,
then demander will increase
demand but supplier will reduce
supply hence QS < QD
 There will be too few products in the
market so demander have to pay
high to get it and some poor will not
afford it
 As the price gets high more and
more seller will become able to sell
 Hence they will reach to the
equilibrium
 So because of shortage price will
rise quantity will rise too
Government Intervention

 Some times the equilibrium price is either too high or

too low in the equilibrium so Government tries to
change the price so that it is beneficial for the people.

 This is called Government Intervention

 Price ceiling
Price ceiling - legally mandated
maximum price
 Purpose: keep price below the
market equilibrium price
 Effect: it will create shortage in
output (as QD > QS)
 Examples:
 rent controls
 price controls during wartime
 gas price rationing in 1970s
 Price floor
Price floor - legally mandated minimum
price
 designed to maintain a price above
the equilibrium level
 Effect: it will create surplus in output
(As QS > QD)
 examples:
 agricultural price supports
 minimum wage laws
 Conclusion
 There are two economic agents in the market (Seller and Buyer)
 Cross section of Demand and Supply show the common
agreement point between the demander and supplier
 So the market price and quantity is decided where demand and
supply meet.
 It is called equilibrium because price tries to come back if it is too
high or too low


 ~!~Thanks~!~