Market Force- Market

Equilibrium
 Market Equilibrium
In competitive markets, buyers and sellers have
no control over prices. When buyers and sellers
interact in a free competitive market, the
equilibrium price and equilibrium quantity is
determined by the intersection of the demand
and supply curves.
During situation A. There is more supply than demand. So left over, Normally Left over leads to
discounts to get rid of them. Therefore, Demand<Supply  pressure on price to go down.
During situation D, There is more demand than supply. If it is not enough, people are offer more
money to get it. Therefore , Demand>Supply  pressure on price to goes up.
Only at C, everybody happy and price stable. That is known as Price Mechanism
Price Mechanism
The forces of market demand and market supply which determine
commodity and factor prices in a free enterprise economy.
 Price will
goes down
in future

Price will
goes up in
future
• If the Equilibrium price is 3 php and
Company A product price is 4php.
What will happen to the Company A
price in future and what is the
current state of the market ?
• Company A price will goes down in
future
• Current status of the market is
surplus
• If the Equilibrium price is 3 php and
Company C product price is 1.5 php.
What will happen to the Company C
price in future and what is the
current state of the market ?
• Company C price will goes up in
future
• Current status of the market is
shortage
 Markets not in equilibrium
(a) Excess Supply (b) Excess demand
If the Price of Price of
Ice Ice
current Supply Supply
Cream Surplus Cream
price is Cones Cones
higher than
Equilibrium $2.50
price then
Quantity 2.00 $2.00
supplied is 1.50
greater Demand Demand
than Quantity Quantity Quantity Quantity
Quantity demanded supplied supplied Shortage
demanded
Demanded 0 4 7 10 0 4 7 10
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price,
the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to
increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level.
In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price,
the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers
chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in
8
both cases, the price adjustment moves the market toward the equilibrium of supply and demand
Markets not in equilibrium
(a) Excess Supply (b) Excess demand
Price of Price of
If the
Ice Ice current
Cream Supply Supply price is
Surplus Cream
Cones Cones lower than
Equilibrium
$2.50 price then
2.00 $2.00
Quantity
supplied is
1.50 less than
Demand Demand
Quantity
Quantity Quantity Quantity Quantity Demanded
demanded supplied supplied Shortage
demanded
0 4 7 10 0 4 7 10
Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones
In panel (a), there is a surplus. Because the market price of $2.50 is above the equilibrium price,
the quantity supplied (10 cones) exceeds the quantity demanded (4 cones). Suppliers try to
increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level.
In panel (b), there is a shortage. Because the market price of $1.50 is below the equilibrium price,
the quantity demanded (10 cones) exceeds the quantity supplied (4 cones). With too many buyers
chasing too few goods, suppliers can take advantage of the shortage by raising the price. Hence, in
9
both cases, the price adjustment moves the market toward the equilibrium of supply and demand
• Market Equilibrium
• A market equilibrium comes at the price which quantity demanded equals
quantity supplied.
• At the equilibrium price, the amount that buyers want to buy is just equal to
the amount that sellers want to sell.
• At that equilibrium, there is no tendency for the price to rise or fall.
• Equilibrium price is also called the “Market Clearing Price”
• No pending order and no left over stock.
Supply and Demand Together

• Example: A change in market equilibrium due to a shift in demand

– During summer, No Junior and Senior High School
– Effect on the market for soimai?
1. No Junior and Senior High School that mean No of Buyer (Demand
Curve) only . There is no other information which will effect supply curve.
2. Demand curve will shifts to the left
3. LOWER equilibrium price; LOWER equilibrium quantity

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During summer, No Junior and Senior High School
What will happen to equilibrium soimai price and equilibrium soimai quantity

Price of
Soimai Supply

20 Initial equilibrium

15
New equilibrium

D2 D1

0 7 10
Quantity of Soimai

• equilibrium soimai price will goes down

• equilibrium soimai quantity will goes down
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• When you are selling butter. Then the price of bread went up. New equilibrium price and
quantity will be
• Demand . Price of related goods- complement.
• Demand curve Shift to left . • Resulting Equilibrium
•
price goes down
• Resulting Equilibrium
Price quantity will goes down
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• For the butter company. When the price of milk goes up. equilibrium price and quantity will
be
• Supply . Input price .
• supply curve Shift to left . • Resulting Equilibrium price
goes up
• Resulting Equilibrium quantity goes
down

Price
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• When there are two butter company bankrupted and close down. equilibrium price and
quantity will be

• Supply . Number of sellers. • Result Equilibrium price goes

• supply curve Shift to left .
up
• Result Equilibrium quantity
goes down
Price
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• When the people has less money and the product is consumer only buys because it is the
only affordable thing .

• Demand . Income- inferior goods • Resulting Equilibrium price goes

• Demand curve Shift to right .
up
• Resulting Equilibrium quantity
Price
goes up
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• You are selling corn and When the other near buy corn shop give 50% discount.

• Demand . Prices of related product – substitute .

• Demand curve Shift to left .
• Resulting Equilibrium price goes down
• Resulting Equilibrium quantity goes down

Price
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• You are selling corn and have to steam the corn with electric stove. When the electricity
price goes up by 20%.

• Supply . Input price . supply curve Shift to left . Result Equilibrium price goes up
Equilibrium Quantity Goes down

Price
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• You are selling soimai . Majority of the consumer loves your soimai that’s why they are
buying it. . When people got additional money.

• Demand . Income- normal goods Demand curve Shift to right .

• Resulting Equilibrium price goes up
• Equilibrium Quantity Goes up

Price
Supply

20 Initial equilibrium

Demand

0 10
Quantity
• when the soimai owner bought new machine

• Supply . Technology . supply curve Shift to right .

• Result Equilibrium price goes down
• Equilibrium Quantity Goes up

.
Price
Supply

20 Initial equilibrium

Demand

0 10
Quantity