AE11 – Managerial Economics

Module 2: Market Forces: Demand, Supply,

and Market Equilibrium

Ian Dave B. Custodio

Instructor
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Lesson 4: Market Equilibrium and Governments’

Price Controls
Learning objectives:
a. Define Market Equilibrium
b. Solve Market Equilibrium problems
c. Distinguish Price Ceiling and Price Floor
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Outline
4.1 What is Market Equilibrium?
4.2 Shocking the Equilibrium
4.3 Solving Market Equilibrium Problems
4.4 Price Controls
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4.1 What is Market Equilibrium?

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The point at which
Market Equilibrium Qd=Qs is called the
equilibrium point
- happens when the supply and
demand curves intersect
- this is also where the quantity
demanded and quantity supplied
are equal

Qd = Qs
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If the price exceeds the equilibrium

price, a surplus occurs.
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If the price is below the

equilibrium price, a shortage occurs.
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When demand rises:

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When demand falls:

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When supply rises:

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When supply falls:

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4.2 Shocking the Equilibrium

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When do shocking occurs?

- the equilibrium changes only if a shock occurs that shifts the demand curve or the
supply curve.

- these curves shift if one of the variables we were holding constant changes.

Usually happens when there is technological changes, natural disasters, wars, and
other disruptions in the supply and demand.
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A 40 pesos increase in the price of

Equilibrium Effects of beef shifts the demand of pork

pesos per kg
a Shift of the upward
Demand Curve Which puts an
upward pressure in
the price to a new
e2 equilibrium.
S
350
330 D2
e1

D1
At the original
Excess demand = 12 price there is now
an excess demand

0 176 220 228 232

Q, kg of pork
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A 40 pesos increase in the price of
Equilibrium Effects hogs shifts the supply curve to the left

pesos per kg
of a Shift of the Which puts an upward
Supply Curve pressure in the price to
a new equilibrium.
S2
e2
350 S1
330
e1
D
At the original price
Excess demand = 15
there is now an
excess demand
0 176 205 215 220
Q, kg of pork
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4.3 Solving Market Equilibrium

Problems
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Example #1
Demand: Qd = 286 − 20P Equilibrium:
Supply: Qs = 88 + 40P Qd = Qs
286 − 20P = 88 + 40P
-20P – 40P = 88 - 286
- 60P = - 198
Pe = 3.30
Qe = 286 – 20(3.3) = 220
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Example #2

Demand: Qd = 100 − 5P Equilibrium:

Supply: Qs = 60 + 10P Qd = Qs
100 − 5P = 60 + 10P
-10P – 5P = 60 – 100
-15P = -40
Pe = 2.67
Qe = 100 – 5(2.67) = 86.65
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Example #3

Demand: Qd = 500 − 50p Equilibrium:

Supply: Qs = 350 + 25p Qd = Qs

500− 50p = 350 + 25p
-25p – 50p = 350 - 500
-75p = -150
Pe = 0.50
Qe= 500 – 50(0.50) = 475
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4.4 What are Price Controls?

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Price Controls as intervention of the Government

- in a free-market economy, government implements price control interventions which
changes the market equilibrium conditions.

- these are laws that government enact to regulate prices

Government Interventions:
1. Price Ceiling
2. Price Floor
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Controversy sometimes surrounds the prices and quantities established by demand

and supply, especially for products that are considered necessities.

In some cases, discontent over prices turns into public pressure on politicians, who
may then pass legislation to prevent a certain price from climbing “too high” or falling
“too low.”
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The demand and supply model shows how people and firms will react to the
incentives that these laws provide to control prices, in ways that will often lead to
undesirable consequences.

Alternative policy tools can often achieve the desired goals of price control laws, while
avoiding at least some of their costs and tradeoffs.
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4.5 Price Ceiling

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Price Ceiling
- a legally mandated maximum price to keep the price below the market
equilibrium price.
- keeps a price from rising above a certain level (the “ceiling”)

Examples:
- rents
- fares (private and public transportations)
- gasoline/oil products
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A government imposes price ceilings in order to keep the price of some necessary
good or service affordable.

For example, every after disasters or calamities, prices of basic goods/services always
goes up (gasoline, food, water, etc.).

Government can then implement “price freeze” or price ceilings.

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After Typhoon Odette

Source: https://www.facebook.com/photo?fbid=218561547114749&set=a.163734482597456
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Price Ceiling implemented due to ASF

Source: https://www.facebook.com/photo?fbid=306868444803322&set=a.234206385402862
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Price Ceiling

Source: https://pressbooks.bccampus.ca/uvicecon103/chapter/4-6-price-controls/
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4.6 Price Floor

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Price Floor
- a legally mandated minimum price to keep the price above the market equilibrium
price.
- the lowest price that one can legally pay for some good or service.

Examples:
- agricultural products (palay/rice, corn, etc.)
- salaries/wages (minimum wage)
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Price floors are sometimes called “price supports,” because they support a price by
preventing it from falling below a certain level.

Around the world, many countries have passed laws to create agricultural price
supports. Farm prices and thus farm incomes fluctuate, sometimes widely.

Even if, on average, farm incomes are adequate, some years they can be quite low. The
purpose of price supports is to prevent these swings.
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The most common way price supports work is that the government enters the market
and buys up the product, adding to the demand to keep prices higher than they
otherwise would be.
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Price Floor

Source: https://pressbooks.bccampus.ca/uvicecon103/chapter/4-6-price-controls/
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References:
Baye, M. and Prince, J. (2022). Managerial Economics and Business Strategy 10th Edition. McGraw Hill
Greenlaw, S. A., Shapiro D., (2017). Principles of Economics, 2 nd Edition. OpenStax – Rice University
Principles of Economics (2016). University of Minnesota Libraries Publishing Edition
 THANK YOU!

Ian Dave B. Custodio Western Leyte College

Part-time Instructor College of Accountancy and Business
Western Leyte College A. Bonifacio St., Ormoc City, Leyte
E-mail: [email protected] E-mail: [email protected]
Website: iandavecustodio.github.io Website: wlcormoc.edu.ph
Telephone (Office): (053) 563 7064 local 1121 Telephone: (053) 561 5310 / 255-8549