Chapter 3

Market Equilibrium
&
Market Application
 SUBTOPICS:
➢ Determination of equilibrium price and output
➢ Changes in equilibrium price and quantity
➢ Government intervention in the market
 Market Equilibrium?
A market equilibrium is a situation when
quantity demanded and quantity supplied
are equal and there is no tendency for
price or quantity to change.

QDD = QSS
Cont… Market Equilibrium Diagram

Market equilibrium is achieve at

Price RM3 as
Qty DD = Qty SS
Equilibrium point (E) is a point
RM3.00 = Equilibrium price (P* @ PE)
where DD curve intersect
6 units =Equilibrium qty (QE) with SS curve
 What happens at a price below PE
At price RM2,
qty dd (8units) > qty ss (4units)

Calculation of shortage
(qty ss – qty dd)

3 At price RM2,
Qty ss = 4 units
2 Qty dd = 8 units

Therefore amount of shortage

SHORTAGE (QDD > QSS) = 4 units – 8 units
= 4 units

4 6 8
Action:
Seller will increase price until PE. As price increase qty dd will
declines (follow the law of dd) while qty ss will increase (follow
the law of ss) until it reaches an equilibrium where there is no
shortage
 WhatWhat
happens at a price
happens at a above PE
price above PE At price RM4,
SURPLUS (QSS > QDD) qty ss (8units) > qty dd (4units)

Calculation of surplus
(qty ss – qty dd)
4

3 At price RM4,
Qty ss = 8 units
Qty dd = 4 units

Therefore amount of surplus

= 8 units – 4 units
= 4 units

4 6 8

Action:
Seller will decrease price until PE. As price decrease qty dd will increase
(follow the law of dd) while qty ss will decrease (follow the law of ss) until
it reaches an equilibrium where there is no surplus
 Changes in DD

Effect: Increase in DD
➢ DD curve shift to the right (DD1)
➢ New Equil. Point (E1)
➢ PE increases from PE*to PE1, while QE
increases from QE* to QE1
E1
PE1
E Effect: Decrease in DD
➢ DD curve shift to the left (DD2)
E2 ➢ New Equil. Point (E2)
PE2 ➢ PE decreases from PE* to PE2, while QE
DD1
increases from QE* to QE2
DD2

QE2 QE1
 Changes in SS

Effect: Decrease in SS
➢ SS curve shift to the left (SS1)
➢ New Equil. Point (E1)
ss1 ➢ PE increases from PE*to PE1, while
QE decreases from QE* to QE1
E1
PE1 ss2

Effect: Increase in SS
E2
➢ SS curve shift to the right (SS2)
PE2
➢ New Equil. Point (E2)
➢ PE decreases from PE*to PE2,
while QE increases from QE* to
QE1 QE2
QE2
 Government Intervention

• The forms of government interventions are fixing higher

limit or lower limit on prices in certain markets.
• It is known as price control (maximum & minimum price)
• It can be explained using demand & supply analysis
Maximum Price
MAXIMUM PRICE/CEILING PRICE
Legal price set by the gov. which is set below the
PE to prevent producers from rising the price above
it

Purpose@Advantage:
i. Protect Consumers(purchase at lower price)
ii. Prevent price from rising
eg: essential commodities during festive
season
Rent controls on low cost houses
Max.
P1 Price&
Price Disadvantages:
ceiling i. Emergence of black market (producers might
smuggle goods to neighbouring countries
since it is unprofitable to sell those goods
locally)
ii. Creates shortage (qty dd > qty ss)
iii. Producers might involve with illegal activities
(bribery, corruption, hording commodities)
 Who set the maximum price in
Malaysia?

• The Domestic Trade, Cooperatives and Consumerism

(KPDNKK) Ministry has set ceiling prices for 21 types of
food items under the Hari Raya Puasa festive price control
scheme.

• Source:
https://www.thestar.com.my/news/nation/2016/06/17/ceiling-
price-for-food-items
Minimum Price MINIMUM PRICE/FLOOR PRICE
Legal price set by the gov. which is set above the PE
to prevent price of goods & services from falling
below the legal minimum level.
Purpose@Advantage:
i. Protect producer’s income (farmers) from the
P1 Floor Price @ uncertainty of production when price are too low in
Min. price the free market.
ii.Protect employees from exploitation using minimum
wage rate (RM1100; 2019). Minimum wage rate will
benefit low skilled workers by increasing their
income & improving their standard of living.
iii. Discourage consumption of harmful product such
as cigarettes.
iv. Surplus would be kept & stored by the gov. for
future consumption.

Disadvantages:
i. unfair to consumers since they have to pay more.
ii. Wastage of resources due to surplus.
iii. lead to the problem of unemployment
Minimum Wage Rate