CHAPTER

ECONOMICS

CHAPTER 3
MARKET
EQUILIBRIUM

© 2009 South-Western, a part of Cengage Learning, all rights reserved

CHAPTER
INTRODUCTION

1.Explains the concept of market equilibrium

2. Determine equilibrium price and quantity
3. Understand the concept of shortage and
surplus
4. Explanation on government intervention
in the market price

© 2009 South-Western, a part of Cengage Learning, all rights reserved

 MARKET EQUILIBRIUM:

Market equilibrium is a situation when quantity

demanded and quantity supplied are equal and there is
no tendency for price or quantity to change.
QD = QS
Quantity that buyers are willing to buy
= Quantity that sellers are willing to sell

Notes:
PE=equilibrium price
QE=equilibrium quantity
 MARKET DISEQUILIBRIUM
*Market disequilibrium is a situation when quantity
demanded is not equal to quantity supplied

1. Surplus

Occurs when Qs> Qd

When the price is higher than equilibrium price
Formula:
Surplus = Qs- Qd

2. Shortage

Occurs when Qd > Qs

When the price is lower than equilibrium price
Formula:
Shortage= Qd – Qs
 Table 1: Market Demand and Supply for
Manggo
Price Qd (kg) Qs (kg) Market Condition
(RM/kg)
1 12 4 Qd>Qs →shortage
= 12 – 4 = 8 kg
2 10 6 Qd>Qs →shortage
= 10 – 6 = 4 kg
3 8 8 Qd=Qs→Equilibrium
Pe=RM3/kg; Qe=8kg
4 5 11 Qs>Qd →Surplus
= 11 – 5 = 6 kg
5 4 12 Qs>Qd →Surplus
= 12 – 4 = 8 kg
Market demand and supply for mango

Price (RM/ kg)

S
Surplus
5
Surplus
4

E
Pe = 3 Equilibrium point

2
Shortage

1
Shortage
D
Quantity (kg)
4 56 Qe=8 10 11 12
 Based on the figure:
*Market equilibrium is determined by intersection
between demand and supply curve
-Equilibrium occurs at point E , where the quantity
demanded is equal to quantity supplied
*at equilibrium point: Pe=Rm3 and Qe=8 kg
-When the price is above than equilibrium price:
*there is an excess supply or surplus
*eq: at rm4, surplus is 6 kg of mangos
-When the price is below than equilibrium price:
*There is an excess demand or shortage
*eg: at rm2, shortage is 4 kg of mangos
 Price (RM) Quantity demanded Quantity supplied (units)
(units)
2 85 72
3 80 73
4 75 75
5 70 77
6 65 79
7 60 81

STUDY QUESTIONS

1. The table shows the quantity demanded and quantity supplied for wheat
at several price levels.
a) Draw the demand and supply curves for wheat.
b) State equilibrium price and quantity?
c) What happens at the price of RM 3?
d) What happens at the price of RM 6?
e) List down two determinants of supply for wheat.
QUESTION 4
Below is the demand and supply schedule for a product.

Price (RM) per Quantity demanded Quantity supplied

box (units) (units)
100 100 60
200 90 70
300 80 80
400 60 90
500 50 100
600 40 110

a. Draw a diagram to show the demand and supply curves for a product.(2 marks)

b. What is the equilibrium price and quantity for a product? (2 marks)

c. What will happen if the product’s price level is set at RM200 per unit? By how much?
(3 marks)
d. What happen if the price of the product is set at RM600 per unit? By how much?
(3 marks)
GOVERNMENT INTERVENTION
IN THE MARKET

 The imposition of certain directives by the

government which interfere with the market
mechanism.
 The imposition is Price control
1. Ceiling price (maximum price)
2. Floor price (minimum price)
 (a) Ceiling Price/Maximum Price
Definition:
A legal price set by the government below the
equilibrium price
Maximum price that the sellers are allowed to
charge
The purpose is to protect consumer’s income
Examples of ceiling price can be seen when
government imposed prices on sugar, cooking oil,
cement, petrol, diesel and so on.
The price are set below the equilibrium price and
sellers not allowed to increase the price.
Figure: fixing the price below the equilibrium level
creates an excess in demand or a shortage (Qd > Qs).
P
S

e
Pe

P1 Ceiling price/maximum price

Shortage D
Q
Qe
Advantages:
- Consumers can buy products at lower prices
- People purchasing power and standard of living increase

Disadvantages:
- Ceiling price lead to black market or illegal activities
- Producers discourage to produce more products
- Producers tends to receive illegal payments from
consumers
 (b) Floor Price/ Minimum Price
Definition:

A legal price set by the government above the equilibrium price

Minimum price that the sellers are required to pay
The purpose is to protect producer’s income
Government will set the price floor when the market price is
extremely low
Examples:
- Government controls the price of paddy to help farmers
increase their income
Figure: fixing the price above the equilibrium level
creates a surplus (Qd < Qs.)

P
Surplus S

P2 Floor price/ minimum

e price
Pe

D
Q
Qe
Advantages:
 The incomes of producers are protected and
standard of living increase
 Encourage producer to produce more products

Disadvantages:
 Consumers have to pay more for goods and
services.
 A surplus lead to wastage of resources
 Higher wage rates will create unemployment
problems as the supply of labor is greater than the
demand for labor.
 Floor Price VS Ceiling Price

Floor Price Ceiling Price

Definition Price is not allowed to Price is not allowed to rise
fall Also known as maximum
Also known as price
minimum price Shortage occur
Surplus occur
Advantages Protects producer’s Consumer purchases
income products at lower price
Higher wage rate
Disadvantages Consumers pay more Emergence of black market
Waste of resources of Reduces quantity produced
production
Creates Producers tends to receive
unemployment illegal payments from
consumers
 Price (RM per Quantity demanded (cases per Quantity supplied (cases per
case) week) week)
8 30 150
7 70 130
6 110 110
5 150 90
4 190 70

a) The table below gives the demand and supply schedules for mango jelly.
b) Using a graph paper, draw the demand and supply curves. Label the curves
as D0 and S0 respectively.
c) State the equilibrium price and quantity.
d) Is there a surplus or shortage at the price of RM 5? By how much?
e) If supply at every price is reduced by 50 cases, what will the
new equilibrium price and quantity be? Show this change in a diagram
f) List 4 determinants of supply
e) If the government fixed the price at RM5, what is the consequence?
What type of price control is implemented?
Who benefit from this action?
 Price (RM/kg) Quantity demanded (kg) Quantity supplied (kg)
8.00 1500 4500
7.50 2000 3500
7.00 2500 2500
6.50 3000 1500
6.00 3500 500
The following are hypothetical demand and supply schedules for ‘ikan bawal.
Based on the table above, answer the following questions.
a) On a graph paper, draw the demand and supply curves
for‘ikan bawal?
b) Determine the equilibrium price and quantity
c) The government gave fishermen subsidy in order to catch more fish.
As a result, the number of fish catched by fishermen increased by 500
kg
at every price level. Show on the same graph, the effect of the
government incentives on the market for ‘ikan bawal’?
d) What is the new equilibrium price and quantity of ‘ikan bawal’? 19