FINA 251 Fundamentals of Microeconomics Week 6 2016

FINA 251 Fundamentals of Microeconomics Week 6 2016 Chapter-3 1 Dr. Mazharul Islam

3 Market Equilibrium Dr. Mazharul Islam

3 Lesson Objectives Define market and market equilibrium Explain how demand supply determine prices and quantities bought and sold Use the demand supply model to make predictions about changes in prices and quantities Dr. Mazharul Islam

4 MARKETS DEFINED POTENTIAL BUYERS POTENTIAL SELLERS MARKETS Dr. Mazharul Islam

5 Market A set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms. It determine prices and quantities of goods and services by bringing together two sides of exchange demand supply. Markets are often physical places, such as supermarkets, shopping malls etc. Market also include other mechanisms by which buyers and sellers communicate, like radio television advertisement, telephones etc. There are two types of market in the economy. These are Product market and Resource market. Dr. Mazharul Islam

6 Market Equilibrium Market equilibrium refers a situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the Market. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price. Dr. Mazharul Islam

7 Market Demand Supply CORN OIL P $5 4 3 2 1 QD 10 20 35 55 80 MARKET 200 DEMAND B x 2, 000 U 4, 000 Y 7, 000 E 11, 000 R 16, 000 S P QS $5 4 3 2 1 EQUILIBRIUM 60 50 35 20 5 MARKET 200 SUPPLY S 12, 000 E 10, 000 L 7, 000 L 4, 000 E 1, 000 x R S Dr. Mazharul Islam

8 Market Demand Supply CORN MARKET P QD $52, 000 44, 000 37, 000 11, 000 2 16, 000 1 P $5 S CORN MARKET PQ 4 3 2 1 o Market Clearing Equilibrium S $5 12, 000 4 10, 000 37, 000 24, 000 11, 000 D 2 4 6 8 10 12 14 16 7 Q (in thousand) Dr. Mazharul Islam

9 Market Demand Supply CORN MARKET P QD $52, 000 44, 000 37, 000 11, 000 2 16, 000 1 P $5 4 3 2 1 o Surplus S CORN MARKET PQ At a $4 price S $5 12, 000 more is being 4 supplied than 10, 000 demanded 37, 000 24, 000 11, 000 D 2 4 6 8 10 12 14 16 7 Q (in thousand) Dr. Mazharul Islam

10 Market Demand Supply CORN MARKET P QD $52, 000 44, 000 37, 000 11, 000 2 16, 000 1 P S $5 CORN MARKET PQ 4 At a $2 price more is being 3 demanded than supplied 2 1 o Shortage S $5 12, 000 4 10, 000 37, 000 24, 000 11, 000 D 11 2 4 6 8 10 12 14 16 Q (in thousand) Dr. Mazharul Islam

11 Market Demand Supply P CORN MARKET P QD $52, 000 44, 000 37, 000 11, 000 2 16, 000 1 $5 4 Surplus CORN MARKET S PQ (put downward pressure on the price) S $5 12, 000 4 10, 000 37, 000 24, 000 11, 000 3 2 Shortage 1 o ( Create market pressure for a higher price) 11 2 4 6 8 10 12 14 16 7 D Q (in thousand) Dr. Mazharul Islam

12 Changes in Equilibrium Once a market reaches equilibrium, that price and quantity will prevail until one of the determinants of demand or supply changes. A change in any one of these determinants will usually change equilibrium price and quantity in a predictable way Dr. Mazharul Islam

13 Changes in Equilibrium An increase in demand will cause an increase in the equilibrium price and quantity of a good. The increase in demand causes excess demand at the initial price. Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing output. Dr. Mazharul Islam

14 Changes in Equilibrium A decrease in demand will cause a reduction in the equilibrium price and quantity of a good. The decrease in demand causes excess supply at the initial price. Excess supply will cause price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output Dr. Mazharul Islam

15 Changes in Equilibrium An increase in supply will cause a reduction in the equilibrium price and an increase in the equilibrium quantity of a good. The increase in supply creates an excess supply at the initial price. Excess supply causes the price to fall and quantity demanded to increase. Dr. Mazharul Islam

16 Changes in Equilibrium An decrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good. The decrease in supply creates an excess demand at the initial price. Excess demand causes the price to rise and quantity demanded to decrease. Dr. Mazharul Islam

17 Changes in Equilibrium Dr. Mazharul Islam

18 Changes in Equilibrium S = D P , Q unchanged Dr. Mazharul Islam

19 Changes in Equilibrium The change of demand supply in same directions leads the higher the equilibrium quantity but the change in the equilibrium price is indeterminate. It is depend on how much the demand supply curves have shifted. Dr. Mazharul Islam

20 Changes in Equilibrium S = D P (unchanged) , Q Dr. Mazharul Islam

21 Summary Change in Supply Change in Demand Supply increases Supply decreases Demand increases Demand decreases Equilibrium price change is indeterminate. Equilibrium quantity increases. Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. Dr. Mazharul Islam

22 Now it’s over for today. Do you have any question? Dr. Mazharul Islam