Session-6

Market equilibrium, Price floor, price ceiling

Equilibrium
Equilibrium is a state or
condition at which all forces are
in balance.
The state of equilibrium is a
theoretical concept.
Economic equilibrium is a state
in a market-based economy in
which economic forces – such as
supply and demand – are
balanced.
Economic variables that are in
equilibrium are in their natural
state assuming no impact of
external influences.
 Equilibrium
Price (Rs.) No. of Units No. of Units
  Demanded Supplied
10 25 0
20 15 5
30 10 10
40 5 15
50 0 25
Determination of equilibrium price

Price (Rs.) Qty Demand Qty Supply

5 40 20

10 30 30

15 20 40

20 15 45

25 10 50
Demand equation : Qd = 50 - 2 x P
Supply equation : Qs = 10 + 2 x P

Equilibrium price condition is Qd = Qs

50 – 2 x P = 10 + 2 x P
40 = 4 x P
P = 10

At P = 10, equilibrium Qd = 50 – 2 x 10 = 30
At P = 10, equilibrium Qs = 10 + 2 x 10 = 30
Increase in Demand > Increase in Increase in Demand < Increase in
supply supply
• Stable equilibrium
• Neutral equilibrium
• Unstable equilibrium

Price (Rs.) Qty Demand New Demand Qty Supply New Supply
5 40 60 20 40
10 30 50 30 50
15 20 40 40 60
20 15 35 45 65
25 10 30 50 70
• Forex Market
• Commodity/Derivative Market
• Stock Market
• Money Market
• Product Market
• Services Market
Unstable Equilibrium
Neutral Equilibrium
Price controls by Government
Price floors and price ceilings are government-imposed
minimums and maximums on the price of certain goods or
services.
It is usually done to protect buyers and suppliers or manage
scarce resources during difficult economic times.
Price floors and ceilings are inherently inefficient and lead to
suboptimal consumer and producer surpluses but are
necessary for certain situations.
Minimum prices
Maximum price
Buffer stocks 
Limiting price  
Direct price setting 
Price ceiling
Price ceilings impose a maximum price on certain goods and
services. They are usually put in place to protect vulnerable
buyers or in industries where there are few suppliers.
Price floor
Price floors impose a minimum price on certain goods and
services. They are usually put in place to protect vulnerable
suppliers. 
Explained: Indian government leverage in Covid-19 vaccine pricing | Explained
News,The Indian Express

A Guide to Minimum Wage in India - India Briefing News (india-briefing.com)

MRP (Max Retail Price) Rules Under GST in India | SAG Infotech