Market Equilibrium

Price S

Pm

Qm
Quantity
 •Qs > QD
At a Price Above Equilibrium
•Surplus

S
•Too many goods
Price
P1
and services
•Producers cut
price
Pm
•Qd increases
•Qs decreases

D
•Return to
equilibrium
Qd Qm Qs Quantity

A surplus is where price is set above

equilibrium causing QS>QD
 •Qd > Qs
At a Price Below Equilibrium
•Shortage
•Not enough
Price S
goods and services
•Consumers bid up
price
Pm
•Qd decreases
•Qs increases
P1

•Return to
D
equilibrium
Qs Qm Qd Quantity

A shortage is where the price is set below

equilibrium causing QD>QS
CONCLUSION

A market will tend toward equilibrium

If the price is not at equilibrium then
market forces will work to move the
market back toward equilibrium.
 CONSUMER SURPLUS
DEFINITION: The difference between what consumers
are willing to pay and the actual price
paid for a commodity

MEASURED BY:
 Consumer Surplus

Price S

Consumer
Pm
Surplus

Qm
Quantity
 Producer Surplus
Definition: The difference between the revenue
received by a producer and the cost
necessary to produce the good

Measured by:
 Producer Surplus

Price S

Producer
Pm
Surplus

Qm
Quantity
 WHY IS EQUILIBRIUM BEST?
Equilibrium represents the allocatively
efficient point.
This is where Consumer Surplus and
Producer Surplus are maximised
ie benefits to consumers and producers are
at their greatest

Allocative Efficiency = A point where no one

can be made better off without making
someone worse off
 WHICH IS THE ALLOCATIVELY
EFFICIENT POINT?

cars

A
100

B
60

100
200 television
 Which is the allocatively efficient point?

cars
Market for Cars
A
100 price S

B
60

D
100 100 quantity
200 television
 Which is the allocatively efficent point?

cars
Market for Cars
A
100 price S

B
60

D
100 quantity
200 television
100
 Net Welfare Benefit

The combined values of the consumer and producer surpluses is referred to as the
net welfare benefit.

S
Net welfare
benefit.

Pm

Qm
 Allocative Efficiency and Market Equilibrium

Markets allocate resources to the production of goods and services that satisfy
consumers needs and wants.

To be allocatively efficient a market must price and produce at equilibrium .

Price S

1.80
Any price other than
Resources
To maintain would be
1.50 $1.20 and anyallocative
output
either over
efficiency or
a under
market
level other than 400
allocated
mustwill
be able to
1.20 units resulttoinmove
a
production
freely and net
to any new
loss of allocative
welfare benefit
equilibrium
0.90 efficiency
would be reduced.

0.60
D
0.30
200 400 600 800
Quantity
Any changes in the market where the forces
of demand and supply are able to freely
adjust to market conditions will still result in
allocative efficiency.
 A loss of Allocative Efficiency
A loss of allocative efficiency occurs when a market is not allowed to price
and produce at equilibrium this will result from :

Price Controls(setting either a minimum or maximum price)

Imposition of a sales tax or subsidy
Imposition of a tariff or a quota (normally relates to internationally traded
products)

All of these regulations set by the government will result in a dead weight
loss and thus causing net social welfare to fall.
DEADWEIGHT LOSS
When a market does not achieve equilibrium producer
and consumer surplus will not be maximised
The loss in allocative efficiency is DWL
It is measured by the loss of CS and PS not offset by
gains to other groups (eg government)
 Deadweight Loss
Deadweight loss can be caused by:
• Quotas
• Price controls
• Indirect Taxes
• Subsidies
 Net Welfare Benefit

The combined values of the consumer and producer surpluses is referred to as the
net welfare benefit.

S
Net welfare
benefit.

Pm

Qm
 Allocative Efficiency and Market Equilibrium

Markets allocate resources to the production of goods and services that satisfy
consumers needs and wants.

To be allocatively efficient a market must price and produce at equilibrium .

Price S

1.80
Any price other than
Resources
To maintain would be
1.50 $1.20 and anyallocative
output
either over
efficiency or
a under
market
level other than 400
allocated
mustwill
be able to
1.20 units resulttoinmove
a
production
freely and net
to any new
loss of allocative
welfare benefit
equilibrium
0.90 efficiency
would be reduced.

0.60
D
0.30
200 400 600 800
Quantity
Any changes in the market where the forces
of demand and supply are able to freely
adjust to market conditions will still result in
allocative efficiency.
 A loss of Allocative Efficiency
A loss of allocative efficiency occurs when a market is not allowed to price
and produce at equilibrium this will result from :

Price Controls(setting either a minimum or maximum price)

Imposition of a sales tax or subsidy
Imposition of a tariff or a quota (normally relates to internationally traded
products)

All of these regulations set by the government will result in a dead weight
loss and thus causing net social welfare to fall.