PRINCIPLES OF

ECONOMICS

DR. WAEL FATHY

Chapter 5: Market
equilibrium
COURSE SYLLABUS:

 Chapter 1: Basic concepts

 Chapter 2: Economic systems
 Chapter 3: Demand side
 Chapter 4: Supply side
 Chapter 5: Market equilibrium
 Chapter 6: Price elasticity of demand
 Chapter 7: Consumer equilibrium
 Chapter 8: Producer equilibrium
 Chapter 9: National income and the theory of distribution
 Chapter 10: unemployment
CHAPTER (5)

MARKET EQUILIBRIUM

 Main points:
 1- market equilibrium

 2- price ceiling

 3- price floor
 1- MARKET EQUILIBRIUM

P Qs Qd Notes
10 100 300 Qd > Qs (Shortage)
20 200 200 Qd = Qs (Equilibrium)
30 300 100 Qd < Qs (Surplus)
 Market Equilibrium
P
D S
Surplus
E
P*
Shortage
S D
Qd,s
Q*
Qs =Qd
 Example: given the following data:
 Demand Function : Q = 13000 – 500 P

 Supply Function : Q =7000 + 500 P

-A-
 Calculate Q* & P*
 Show your answer on graph
SOLUTION:
The Equilibrium Condition is : QD = QS
Applying the condition then:
13000 – 500 P = 7000 + 500 P
Collecting the similar terms :
13000 - 7000 = 500 P + 500 P
6000 = 1000 P Dividing by 1000
P* = $6 (Equilibrium Price)
Substituting the value of equilibrium price into demand or supply function
we get the equilibrium quantity:
Qd = 13000 – 500 ×(6) = 10000
Qs = 7000 + 500 ×(6) = 10000 Q*=10.000
10000
-B-

Ifgovernment impose tax the price

will increase to 10$
Calculate Qd,Qs
Show your answer on the same
graph.
Qd = 13000 – 500 ×(10) = 8000
Qs = 7000 + 500 ×(10) = 12000

Qs > Qd
Surplus
-C-
 If government Subsidies the price will decrease to 5$
 Calculate Qd,Qs

 Show your answer on the same graph.

Qd = 13000 – 500 ×(5) = 10500
Qs = 7000 + 500 ×(5) = 9500

Qd > Qs
Shortage
 EXAMPLE (2)
Example: given the following data:
Q = 26000 – 1000 P
Q =14000 + 1000 P

 A) Calculate Q* & P*
 B) If government impose tax the price will increase to 10$ ,,
Calculate Qd , Qs
C) Show your answer on graph
 P*= 6 Q*=20000

P=10
Qs= 24000 Qd= 16000
Qs > Qd surplus
 2- PRICE CEILING
Definition of price ceiling: a legal maximum on the price at
which a good can be sold.

*
 3- price floor

 Definition of price floor: a legal minimum on the price at

which a good can be sold.