Economics - Market

Demand
Market Equilibrium

• Occurs when the buying decisions of

households and the selling decisions
of producers are equated
• Determines the equilibrium price and
equilibrium quantity bought and sold
in the market

2
 Price ($ per unit)

1
2
3
4
5

0
P

2
Market

4
Units of X (000/week)
S

6 7 8 10 12 14
Equilibrium

16
18
D
Q
Equilibrium price
(cont.)

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3 Jackson and McIver
Slides prepared by Muni Perumal,
 Price ($ per unit)

1
2
3
4
5

0
P

4 2
surplus

Units of X (000/week)
S

6 7 8 10 12 14
16
18
D
Q
Equilibrium price
Market Equilibrium (cont.)

Copyright  2004 McGraw-Hill

Australia Pty Ltd
PPTs t/a Microeconomics 7/e by
4 Jackson and McIver
Slides prepared by Muni Perumal,
 Price ($ per unit)

1
2
3
4
5

0
P

2
Market

4
surplus

shortage
S

Units of X (000/week)
6 7 8 10 12 14
Equilibrium

16
18
D
Q
Equilibrium price
(cont.)

Copyright  2004 McGraw-Hill

Australia Pty Ltd
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5 Jackson and McIver
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Shortage (Excess Demand)
• Occurs when the quantity demanded
exceeds the quantity supplied at the
current price
• Competition amongst buyers eventually
bids up the price until equilibrium is
reached

6
Surplus (Excess Supply)
• Occurs when the quantity supplied
exceeds the quantity demanded at the
current price
• Competition amongst producers
eventually causes the price to decline
until equilibrium is reached

7
Changes in Demand and
Supply
• Changes or shifts will disrupt the
equilibrium
• The market will adjust until once again an
equilibrium is reached
• The equilibrium price and quantity traded
will change

8
 P

0
D1 D2
S
Increase in Demand

D1
rise

Q
D2
Equilibrium

Copyright  2004 McGraw-Hill

price & quantity

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 P

0
D2 D1
S
Decrease in Demand

fall

D2
Q
D1
Equilibrium
price & quantity

Copyright  2004 McGraw-Hill

Australia Pty Ltd
PPTs t/a Microeconomics 7/e by
10 Jackson and McIver
Slides prepared by Muni Perumal,
 P

0
S1

S2
D1
S1
S2
Increase in Supply

D1
rises

Q
Equilibrium

Copyright  2004 McGraw-Hill

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PPTs t/a Microeconomics 7/e by
price falls & quantity

11 Jackson and McIver

Slides prepared by Muni Perumal,
 P

0
S2
S1
D1
S2
S1
Decrease in Supply

D1
falls

Q
Equilibrium

Copyright  2004 McGraw-Hill

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PPTs t/a Microeconomics 7/e by
price rises & quantity

12 Jackson and McIver

Slides prepared by Muni Perumal,
Mathematical Analysis of
Demand and Supply Analysis
Demand Equation p Qd Qs
1
Qd = a – bP
2
Supply Equation 3
4
Qs = a + bP
Example: Complete the above table by
using following demand and
Qd = 20 – 2P supply equations.
Qs = 2 + 4P Also find out Market 13
equilibrium point
Question ?

14