MARK ET EQUILIBRIUM

Tutorial Session 05
 •A market equilibrium is defined as a
situation where the plans of all
consumers and firms in the market
match.
•Market equilibrium is the situation
Market where market supply and demand
Equilibrium  balance each other, and as a result
prices become stable.
•At the equilibrium, 
Quantity Demanded = Quantity Supplied 
Buying Price =  Selling Price
Market Equilibrium:
Demand and Supply Schedules

Price Quantity QuantitySupplied

Demanded (Qd) (Qs)
1 18 0
2 Equilibrium16 4
3 Price 14 8
4 12 12 Equilibrium
Quantity
5 10 16
6 8 20
7 6 24
Market Equilibrium:
Demand and Supply Curves

12
Market Equilibrium:
Demand and Supply Equations

   

 
 
When P=1 and Qs = 0;
When P=1 and Qd = 18;  
 

 
 
Market Equilibrium:
Demand and Supply Equations Cont.
When P = 4,
 
 
 
 
Equilibrium Price = 4
Equilibrium Quantity = 12
Disequilibrium  • Imbalances between demand and supply
• When the market is in the state of
disequilibrium, either demand exceeds
supply or supply exceeds demand.

• Demand exceeds supply = Shortage

• Supply exceeds demand = Surplus
Market Disequilibrium:
Surplus (Excess Supply)
(a) Excess Supply
Surplus Price
Supply
Surplus
• When price exceeds equilibrium
$2.50
price, then quantity supplied is
2.00
greater than quantity demanded
There is excess supply or a surplus
Suppliers will lower the price to increase Demand

sales, thereby moving toward equilibrium

4 7 10 Quantity
Quantity Quantity
demanded supplied
Market Disequilibrium:
Shortage (Excess Demand)
(b) Excess Demand
Price
Shortage Supply
• When price is less than equilibrium

price, then quantity demanded exceeds

$2.00
the quantity supplied
1.50
There is excess demand or a shortage
Shortage
Suppliers will raise the price due to too many
Demand
buyers chasing too few goods, thereby moving
toward equilibrium
0 4 7 10 Quantity
Quantity Quantity
supplied demanded
Question 01
Suppose that the market demand and supply for pizza at various
prices in hypothetical economy are given in the table below.

Price of Pizza Quantity

Quantity Supplied
(Rupees per unit) Demanded
150 800 200
170 650 300
190 500 400
210 350 500
230 200 600
a) Derive market demand and market supply equations for “Pizza” in this
economy. (4 marks)
b) Calculate equilibrium price and quantity for Pizza. (4 marks)
c) Calculate consumers’ surplus and producers’ surplus at the equilibrium price.
(6 marks)
d) Explain with illustrations what would happen if the seller wanted to charge
Rs. 170 per pizza? (3 marks)
e) Explain with illustrations what would happen if the seller wanted to charge
Rs. 230 per pizza? (3 marks)
Consumer surplus & Producer surplus
Consumer surplus is the difference between what the consumer
actually pay for a good and the amount he/she is willing to pay.
P
S

P*

D
Q* Q
It is the area under the demand curve & above the price.
Producer surplus is the difference between what the
producer actually receives for the good and the amount
he/she must receive to be willing to provide the good..
P
S

P*

D
Q* Q
It is the area above the supply curve & below the price.
Additional Question

The demand and supply equations for apples in a hypothetical economy are given
below. 

(Qd = Quantity of apples demanded, Qs = Quantity of apples supplied, P = Price

per apple in rupees)
Additional Question

a) Based on the above demand and supply equations, determine the equilibrium
price and quantity.
b) Calculate consumers’ surplus and producers’ surplus at the equilibrium price.
(6 marks)
c) Explain with illustrations what would happen if the seller wanted to charge Rs. 15
per apple? (3 marks)
d) Explain with illustrations what would happen if the seller wanted to charge Rs. 50
per apple? (3 marks)