Teaching PowerPoint Slides - Chapter 3

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T), 2013 3– 1

CHAPTER 3
MARKET EQUILIBRIUM

DEFINITION OF 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

EQUILIBRIUM PRICE AND
OUTPUT
SURPLUS (QSS > QDD)

6
4
Price
E
3
P* SS
2 DD
1 SHORTAGE (QDD > QSS)

0
Q*
2 4 6 8 10
Quantity

EQUILIBRIUM PRICE AND
OUTPUT
Price Quantity Quantity Market Market Prices

Demanded Supplied Condition
5 2 10 SURPLUS Falls
4 4 8 SURPLUS Falls
3 6 6 EQUILIBRIUM Equilibrium
2 8 4 SHORTAGE Rises
1 10 2 SHORTAGE Rises

CHANGES IN DEMAND
Assume supply is constant
Price (RM) Increase in Demand
-DD curve shifts to the right
SS -Equilibrium price and
quantity increase
P2
P*
P1 DD1
DD
Decrease in Demand DD2
-DD curve shifts to the left
Q1 Q* Q2 Quantity
-Equilibrium price and
quantity decrease

CHANGES IN SUPPLY
Assume demand is constant

Increase in Supply
Price (RM)
SS2 -SS curve shifts to the right
SS -Equilibrium price decreases
and quantity increases
P2
SS1
P*
P1
DD
Decrease in Supply
-SS curve shifts to the left
Q1 Q* Q2 Quantity
-Equilibrium price
increases and quantity
decreases
CHANGES IN BOTH DEMAND
AND SUPPLY
SUPPLY AND DEMAND BOTH INCREASE
Case 1: Same magnitude

Price (RM)
DD1 -Equilibrium
price is
constant and quantity
SS
increases
SS1
P*
DD
Q* Q1 Quantity

CHANGES IN BOTH DEMAND AND
SUPPLY (cont.)
Case 2: Different
Magnitude
Price (RM)
DD1 -Equilibrium price
SS increases and
quantity increases
SS1
P1
P*
DD
Q* Q1 Quantity

CHANGES IN BOTH DEMAND
AND SUPPLY (cont.)
Case 3: Different
Magnitude
Price (RM)
-Equilibrium price
DD1 SS decreases and
quantity increases
SS1
P* Both DD and SS increase

P1  Equilibrium quantity increase
 Equilibrium price is uncertain
DD
Q* Q1 Quantity

CONSUMER SURPLUS
Price of concert ticket CONSUMER SURPLUS

Difference between what a consumer is
willing to pay and what is actually paid.
A
80
The area of the triangle ABC which is the
area under the demand curve and above
60 the equilibrium price of RM40 is the
CONSUMER
CONSUMER SUPRLUS.
SURPLUS
40 C Consumer Surplus = ½ * (80-40)*2=RM40

B
20
DD
0
1 2 3 4 Quantity of concert ticket
PRODUCER SURPLUS
Price of concert ticket

PRODUCER SURPLUS
Difference between what a producer is
paid and what he/she is willing to sell.
SS
80 The area of the triangle DEF which is
the area above the supply curve and
60 below the equilibrium price of RM40 is
the PRODUCER SUPRLUS.
40
E F Producer Surplus = ½ * (40)*2=RM40
PRODUCER
SURPLUS
20
0
D 1 2 3 4 Quantity of concert ticket
MARKET EFFICIENCY
Price of concert ticket ECONOMIC EFFICIENCY

The allocation of resources maximizes
total surplus (consumer surplus plus
SS producer surplus) which received by
80 the society.
Consumer Surplus (CS) = area above

60 equilibrium price and below demand
curve
CONSUMER
SURPLUS Producer Surplus (PS) = area below
40 equilibrium price and above supply curve
PRODUCER
SURPLUS
Total Surplus (TS) = CS + PS
20
0
1 2 3 4 Quantity of concert ticket
MAXIMUM PRICE MINIMUM PRICE
GOVERNMENT INTERVENTION
IN THE MARKET
TAXES SUBSIDIES

GOVERNMENT
INTERVENTION IN MARKETS
MAXIMUM PRICE/CEILING PRICE
Government-imposed regulations that
Price Advantage:
S prevent prices from rising above a
•Consumers purchase maximum level
at lower price
Suppliers reduce the amount offered to Q1 but
demand would rise to Q2 creating a shortage
The equilibrium price is

P* and the quantity is Q*
P*
The government imposes
a maximum price of P1
P1 Price Disadvantages:
ceiling • Emergence of black market
Shortages occur • Reduction in quantity produced
• Producers tend to receive illegal
D payments from consumers
Q1 Q* Q2 Quantity
GOVERNMENT INTERVENTION IN
MARKETS (cont.)
MINIMUM PRICE/FLOOR PRICE
Price Government-imposed regulations
S that prevent prices from falling
Surplus occurs below a minimum level
Advantages:
P1 • Protects the producer’s income
Floor Price
• Higher wage rate
P* Disadvantages: Suppliers increase the amount

• Consumers pay more offered to Q2 but demand drop to
• Waste of resources of
Q1 creating a surplus
production
• Creates unemployment The equilibrium price is
P* and the quantity is Q*.
The government imposes

a minimum price of P1
D
Q1 Q* Q2 Quantity
EFFECT OF TAXATION
S1 4
R M INDIRECT TAX
Price =
x S Tax that is imposed by the
Ta government on producers or sellers
but paid by or passed on to end-users
The equilibrium price is RM12
14 and the quantity is 400
CONSUMER’S
SHARE The government imposes a
12 sales tax of RM4 per carton
PRODUCER’S
SHARE SS curve shift to left from S to S1 and
10 new equilibrium is RM14 and 200 units
The tax amount of RM4 is shared

equally between buyer and seller
D
200 400 Quantity
EFFECT OF SUBSIDIES
S 10
RM SUBSIDY
Price = An incentive from the government to
y
s id encourage producers to produce more
u b S1
S
The equilibrium price is RM50 and
the quantity is 10
50
CONSUMER’S The government provides a
SHARE subsidy of RM10 per unit
45
PRODUCER’S
SHARE
SS curve shifts to the right from S to S1
40 and new equilibrium is RM45 and 20 units
The subsidy amount of RM10 is

shared equally between buyer and
seller
D
10 20 Quantity
MARKET FAILURE
 Market failure exists when a free market is unable to

deliver an efficient allocation of resources which leads to
a loss of economic efficiency.
 Causes of market failure
– Externalities
– Existence of monopoly power
– Public goods
– Incomplete information


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PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2013 3– 1

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

A market equilibrium is a situation when

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

SURPLUS (QSS > QDD)

1 SHORTAGE (QDD > QSS)

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

Price Quantity Quantity Market Market Prices

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

Assume demand is constant

Case 1: Same magnitude

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

P* Both DD and SS increase

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

Price of concert ticket CONSUMER SURPLUS

40 C Consumer Surplus = ½ * (80-40)*2=RM40

Price of concert ticket

Price of concert ticket ECONOMIC EFFICIENCY

Consumer Surplus (CS) = area above

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

The equilibrium price is

P* Disadvantages: Suppliers increase the amount

The government imposes

The tax amount of RM4 is shared

The subsidy amount of RM10 is

 Market failure exists when a free market is unable to

PRINCIPLES OF ECONOMICS Third Edition All Rights Reserved

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