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Assignment Economics #1

Question: Define Market Equilibrium. 1. When subsidy is given by Government. 2. When price floor is settle above the equilibrium point.

__________________________________________________________ Name: Ali Shaharyar Roll No: 15366 MBA morning -----------------------------------------------------------------------------------------------

Market Equilibrium Definition:

Equilibrium means a state of equality or a state of balance between market demand and supply

Equilibrium means a state of equality or a state of balance between market demand and supply. Without a shift in demand and supply there will be no change in market price. (Qs=Qd=p)

In the diagram above, the quantity demanded and supplied at price P1 are equal. At any price above P1, supply exceeds demand and at a price below P1, demand exceeds supply. In other words, prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market.


A subsidy is a payment by the government to suppliers that reduce their costs of production and encourages them to increase output

When Subsidy Given by Government:

Subsidies represent payments to producers by the government which reduce their variable costs of production and encourages them to expand their output. The effect of a subsidy with a downward sloping demand curve is to increase the quantity of goods sold and to reduce the market equilibrium price. This is shown in the diagram below Government subsidies are often offered to producers of merit goods and services and industries requiring some protection from low cost international competition.

The subsidy causes the firm's supply curve to shift to the right because the firm's costs are reduced. This means that more can be supplied at each price. Equilibrium price falls from P to P1 and quantity traded expands from Q to Q1. The more inelastic the demand curve the greater the consumer's gain from a subsidy will be. Indeed when demand is perfectly inelastic the consumer gains the entire subsidy because the market price will fall by the entire amount of the subsidy. When demand is relatively elastic, a subsidy will have more of an impact on quantity bought and sold and will cause only a small fall in the market price.

2: When Price floor is settle above the equilibrium point:

When the market price of a good or service rises above equilibrium on its own, the number of buyers exhibiting demand for it is reduced. The only thing left for the maker of such a good or service to do is to drop the price to restore the level of demand necessary to make an optimal profit. This sounds contrary to simple arithmetic, but the fact is that the equilibrium is the price at which consumers get the best deal and suppliers earn the most profit. The effect of price controls is a common example of when a price is held artificially above equilibrium price. Equilibrium is established in a free market where the quantity of a good or service supplied is equal to the quantity demanded. So when government steps in and imposes a price floor on a good or service (such as milk or even labor

For the price that the ceiling is set at, there is more demand (Q2) than there is at the equilibrium price. There is also less supply (Q1) than there is at the equilibrium price, thus there is more quantity demanded than quantity supplied i.e. shortage