TUNKU ABDUL RAHMAN UNIVERSITY COLLEGE

Centre for Pre-University Studies

Course : Foundation in Business

Unit : FPEC1054 Microeconomics
Topic : 3 – MARKET EQUILIBRIUM AND ELASTICITY
(KESEIMBANGAN PASARAN DAN KEANJALAN)

LEARNING OUTCOME – AFTER THIS LESSON STUDENTS WILL BE ABLE TO

- Identify what is market equilibrium
- Identify what is market disequilibrium
- Define price elasticity of demand
- Differentiate between the types of price elasticity of demand

1. MARKET EQUILIBRIUM Ikeseimbangan pasaran) a productor a

goods
Market Equilibrium
• It occurs at a price where quantity demanded is equal to quantity supplied.
• Price is determined by the interaction of demand and supply in the market.
• Equilibrium price is the price at which the quantity demanded is equal to the quantity
supplied.
• The problem of excess supply (a surplus) or excess demand (a shortage) does not occur in
the market.
FinalMarket
* Exam
Equilibrium Diagram

Price (RM)

D S

equilibrium
price
Po Eo

S D

0 Qo Quantity (unit)
equilibrium
quality
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 When the supply and demand curves intersect, the market is in equilibrium. This is where
the quantity demanded and quantity supplied are equal. The corresponding price is the
equilibrium price or market-clearing price, the quantity is the equilibrium quantity. The
market equilibrium is achieved at point Eo when demand equals supply (DD = SS). The
equilibrium price is Po and equilibrium quantity is at Qo.

2. MARKET DISEQUILIBRIUM (KETIDAKSEIMBANGAN PASARAN)

not balanced
• It occurs when the quantity demanded is not equal to the quantity supplied.
• Price is determined by the interaction of demand and supply in the market.
• The price could be above the market equilibrium price leading to a condition where the
quantity supplied is more than the quantity demanded. This will lead to excess supply or a
lebihan=surplus in the market and the producers’ stock of goods increases.
• There will be a wastage of economic resources as goods are overproduced.
• Perishable goods like vegetables and fruits may be purposely destroyed to reduce taking up
storage space. It increases the cost of producers who may need to pay rent for the storage of
goods in warehouses.
• The price could be below the market equilibrium price leading to a condition where the
masalat quantity supplied is less than the quantity demanded. This will lead to excess demand or a
A

kekurangan shortage in the market. A shortage may lead to black market activity (pasaran gelap) in which
some sellers may sell their goods illegally at a higher price to certain consumers.
• The government may have to increase import of goods to overcome the problem of shortage.

Price Qd Qs Situation Direction of price change

0 15 0 15 (Excess dd) Rise
1 12 0 12(Excess dd) Rise
2 9 3 6(Excess dd) Rise
3 6 6 0(Equilibrium) Constant
4 3 9 6(Excess ss) Fall
5 1 12 11(Excess ss) Fall
6 0 15 15(Excess ss) Fall

• Quantity demanded exceeds the quantity supplied – excess demand (shortage)

• Quantity demanded is less than quantity supplied – excess supply (surplus)
• Quantity demanded equals quantity supplied – equilibrium price

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 Market Disequilibrium Diagram

·libr 0
Q Qu
equilibrium
Quantity
Q2
Quantity(unit)

The market equilibrium is achieved at point Eo when demand equals supply (DD = SS).
equilibrium
The equilibrium price is Po and quantity is at Qo. If the price of the good in the market
n

rises to P1, there will be an excess supply or surplus of Q1Q2 because supply is more than

demand. The surplus condition will cause the price of the good to fall to Po. If the price of

the good in the market falls to P2, there will be an excess demand or shortage of Q1Q2 in

the market because demand is more than supply. The shortage condition will cause the

price of the good to rise to Po.

3. PRICE ELASTICITY OF DEMAND (Ed) (KEANJALAN PERMINTAAN HARGA)

test
*
Price Elasticity of Demand can be defined as the change in quantity demanded of a good due to
*
Final the change in price of the good itself, ceteris paribus.

Ed = % change in quantity demand

Ed
Elasticity
% change in price -
Demand
Ed = Q1 - Q0
Q0
________________
P1 - P0
P0

Q1 and P1 => new quantity and new price

Q0 and P0 => original quantity and original price

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 Example : Calculate the price elasticity of demand for apples when the price increases from
RM1.50 (Po) to RM2.00 (P1) and the quantity demanded in the market decreases from 1000
units (Qo) to 900 units.(Q1)

Q1 -
Qo
900-1000 - 100

Qu -

1000 1000

Ed,
-

=
-
0.50
P. -
Po 2- 1.50
1.50

Po 150I
~less than 1

Cinelasticdemandene
value
=-0.3 *
U
C or negative relationship

*al
Categories of Price Elasticity of Demand (5 TYPES) Pricet inverse
and quantity demanded
Quantityb between price
(a). Elastic price elasticity of demand ( 1< Ed < )
* - The percentage change in quantity demanded is greater than the percentage change in the
-
-

price.
-

big
- Example: a 3% rise in price results in a 10% fall in quantity demanded. A fall in price
increases total revenue and a rise in price reduces total revenue.
- The value of elasticity is more than one but less than infinity example 1.5, 2.8, 3.0
- The demand curve is downward sloping and quite flat.

Diagram

r)-apite
M

the
at

> Quantity (unit)

o
QO > Qu
i
4
big elastic
=

small-inelastic
* Elastic price elasticity of demand is indicated by the demand curve DD that is downward
sloping and less steep (quite flat). The percentage change in price is smaller than the
percentage change in quantity demanded. For example, a small percentage decrease in price
from Po to P1, will result in a large percentage increase in quantity demanded from Qo to
Q1. The value of Ed is more than 1 example 1.5, 2.0, 3.8. Example : clothing, handbags,
shoes

ELASTIC DEMAND

CLOTHING

HANDBAGS

* (b). Inelastic price elasticity of demand (0 < Ed < 1)

- The percentage change in quantity demanded is smaller than the percentage change in the
price.
- Example: a 10% rise in price results in a 5% fall in quantity demanded. A fall in price
decreases total revenue and a rise in price increases total revenue.
- The value of elasticity is less than one example 0.1, 0.5, 0.9
- The demand curve is downward sloping and steep. Curam

5
* Diagram

Price (RM)
A

steep
Po I

tp,
7
0 Qo
(+)

QI
D

-
Quantity (unit)
->

Inelastic price elasticity of demand is indicated by the demand curve DD that is

downward sloping and steep. The percentage change in price is greater than the
percentage change in quantity demanded. For example, a large percentage decrease in
price from Po to P1, will result in a small percentage increase in quantity demanded
from Qo to Q1. The value of Ed is less than 1 example 0.2, 0.5. 0.8. Example : rice,
butter, vegetables, fruits

INELASTIC DEMAND

RICE

BUTTER

6
 Elastic/Inelastic Demand
-

see the
change in qualitydemand

Elastic demand Inelastic demand

OEd value is more than 1 &Ed value is less than 1

② The change in
qualitydemanded & The change in
quantity
demanded
small
is
big is

calculate
answer

*
answer I desimen
must point

=-
0.168 --0.17

Ed=value starts from zero until Infinity

elastic -

Quantity change more

(handbag-shoes)
Inelastic -

Quantity change a bit (rice-vegetable)

* (c). Unitary price elasticity of demand (Ed = 1) - unitary
- The percentage change in quantity demanded is equal to the percentage change in price.
- Example: a 10% rise in price results in a 10% fall in quantity demanded. A fall in price or a
rise in price does not change the seller’s total revenue.
- The value of elasticity is one (1).
- The demand curve is rectangular hyperbola in shape.

Diagram

ironrestandfarngbevo
Po
Li
D

isthe

The demand curve is a rectangular hyperbola. The percentage change in quantity

demanded is equal to the percentage change in price. For example, a 10% decrease in price
results in a 10% increase in quantity demanded vice versa. A decrease in price from Po to
P1, will result in an equal percentage rise in quantity demanded from Qo to Q1. The value
of Ed = 1.

* (d). Perfectly inelastic price elasticity of demand (Ed = 0)

- A change in price does not change the quantity demanded.
- The value of elasticity is zero (0).
- The demand curve is a vertical straight line.

Diagram Price (RM)

A
D

aP -

Po-

VPe

0 a. Quantity (unit)
(Constant)
7
 Perfectly inelastic price elasticity of demand is indicated by the demand curve DD that is a
vertical straight line. A change in price does not change the quantity of good demanded. At
price Po, the quantity demanded is Qo and the quantity demanded remains constant at Qo
even if price increases to P1 or decreases to P2. The value of Ed is 0. Example : salt, sugar

SUGAR

SALT

* (e). Perfectly elastic price elasticity of demand (Ed = )

- A very small percentage change in price will lead to an infinite change in quantity demanded.
- When the price falls, the quantity demand increases until infinity and when price rises, this
will cause the quantity demand to fall to zero.
- The value of elasticity is infinity ().
- The demand curve is a horizontal straight line.

Diagram

Price(RM)
Pl
↑
Po DD

!
↓P2
- Quant
8

8
Perfectly elastic price elasticity of demand is indicated by the demand curve DD that is a
horizontal straight line. A small change in price causes a drastic change in the quantity
demanded for the good. At price Po, the quantity demanded is Qo and when the price of
the good rises to P1, the quantity demanded becomes zero. This means that consumers are
not willing to purchase the good when the price rises. If the price of the good falls to P2,
the quantity demanded is infinity. This means a slight fall in price would mean consumers
are willing to buy all goods available in the market. The value of Ed is infinity.

Example

Picture two vending machines placed next to each other, selling drinks. If one of them
sells the same drinks for a higher price than the other, its sales are likely to fall to zero.
On the other hand, when one machine’s drinks are priced less than the other, its sales will
increase infinitely. Such a situation can be considered an example of perfectly elastic
demand.

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 of of
Types elasticity demand
(Ed)demand
5
price
① Elastic price elasticity of demand Elasticity
Price (RM)
N
-
The percentage change in quality
demanded is greater/more than the

". percentage change in price

"I
[quite flat)
-

Shape:Demand
and quite
curve is
flat
downward sloping
Pi
D -value:1EdL*

⑲I
> Quantity
cuniti -

Example:handbags, shoes-clothing

& Inelastic price elasticity of demand

Price (RM) -
The percentage change in
quality
demanded is smaller/less than the
Po ⑧ percentage change in
price

·I
Steep
V
-shape:Demand curve is downward
⑤ sloping and steep
-

Value:OLEdLO
> Quantity
Qo,K1 cuniti -Example:butter-vegetable, fruits
③ Unitary price elasticity of demand
/
One
-value:Ed 1
price (m)
=

Example:None

Do
-

.7 percentage change quality

W -
The in
D demanded is equal than the

- > Quantity
percentage change in price

Qo > Qo cuniti -Shape:rectangular hyperbola

④
Perfectly
inelastic price elasticity of demand

Price (RM) -Value:Ed 0 =

P- Example: Salt& Sugar

-

Poo
-
The change in price of a good
change the
does not
quality
VP- manded
D
> Quantity
amand
is verticalle
Shape:
curve
a
cuniti
-
⑤ Perfectly elastic price elasticity of demand

Price (RM) -value:Ed 00

=

(infinity)
N

Pi -

Example:orange in Florida. USA

D D
Po A small change in price causes

I
-

drasite/infinite chage in the quality

P2 demanded

0
> Quantity
Qu cuniti shape:Demand curve is
-

horizontal straight line

-
For example:At price Do-the quantity demanded is Qo

-If the price increases slightly to PI, the quantity

demanded is
zero as consumers are not willing to
buy a
at
higher price.
If the price decreases slightly
-
to P2. the quantity demanded is
infinite as consumers want to available
buy all goods in the market
 LEARNING OUTCOME – AFTER THIS LESSON STUDENTS WILL BE ABLE TO
- Define price elasticity of supply
- Differentiate between the types of price elasticity of supply

4. PRICE ELASTICITY OF SUPPLY (KEANJALAN PENAWARAN)

Price elasticity of supply can be defined as the change in quantity supplied due to a change in
the price of the good itself.

Es = % change in quantity supplied

% change in price

Es = Q1 - Q0
Q0
________________
P1 - P0
P0

Q1 and P1 => new quantity and new price

Q0 and P0 => original quantity and original price

Example : The diagram below shows the price elasticity of supply for a good.

Price (RM)

S
Pi 8.00

Po 6.00

4.00
S

0 5 10 15 Quantity (unit)
Qo Q

5
10
 Identify the price elasticity of supply when the price of the good increases from RM6.00 (Po) to
RM8.00 (P1).

Answer 15.10
Qi-QO -

Es =
10
Qu
8,00-6.00

P. -
Po 6.80
Do

5
- 10

I
=1.5 (Elastic supply)
Ed =5
types
Categories of Price Elasticity of Supply (3 types) ES 3 =

types
(a). Unitary price elasticity of supply (Es =1)
- The value of elasticity is one (1).
- The supply curve is a straight line that starts from the origin.

Diagram

Price (RM)
So

S1

S2

0 Quantity (unit)
origin

Unitary price elasticity of supply is indicated by the supply curve SS that is upward sloping

that starts from the origin. The value of Es is 1.

11
(b). Elastic price elasticity of supply (Es > 1)
- The percentage change in quantity supplied is greater than the percentage change in the price.
- Example: a 5% rise in price results in a 10% increase in quantity supplied.
- The value of elasticity is more than one example 1.2, 2.5, 3.0
- The supply curve is upward sloping and quite flat.

Diagram
Price (RM)
N
S
Pi

argenter,
R

Po

. cauantity curiti
Elastic price elasticity of supply is indicated by the supply curve SS that is upward sloping and
less steep (quite flat). The percentage change in price is smaller than the percentage change in
quantity supplied. When the price of the good increases by a small percentage from Po to P1,
this will result in a large percentage increase in the quantity supplied from Qo to Q1. The value
of Es is more than 1 example 1.5, 2.0, 3. Example : manufactured goods like clothing, books

Barary Perkilangan

HAND SANITIZERS AND MASKS

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(c). Inelastic price elasticity of supply (Es < 1)
- The percentage change in quantity supplied is smaller than the percentage change in the price.
- Example: a 20% rise in price results in a 10% increase in quantity supplied.
- The value of elasticity is less than one example 0.1, 0.5, 0.8
- The supply curve is upward sloping and steep.

Diagram
Price (RM)
N

S
Di

Ed
Po

S
chage
small

Quantity (unit)
Inelastic price elasticity of supply is indicated by the supply curve SS that is upward sloping
and steep. The percentage change in price is bigger than the percentage change in quantity
supplied. When the price of the good increases by a large percentage from Po to P1, this will
result in a small percentage increase in the quantity supplied from Qo to Q 1. The value of Es
is less than 1 example 0.2, 0.5, 0.9. Example : agricultural goods like vegetables, fruits

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