Market equilibrium

 Outline
 1. The interaction of demand & supply
• equilibrium p, q

 2. Movement to a new equilibrium

 3. Impediments to the market

mechanism
 1. The interaction of demand &
supply
 Equilibrium price and quantity
 D = S i.e. market clearing
 Excess demand (shortages)
 Excess supply (gluts)

 Equilibrium - definition
 ‘a point of balance or a point of rest: a
point to which there is a tendency to
move.’
 The determination of market equilibrium
E
(potatoes: monthly)
e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
fig
Quantity (tonnes: 000s)
 The determination of market equilibrium
E
(potatoes: monthly)
e
100
Supply
D d
80
Price (pence per kg)

Cc
60

b SHORTAGE B
40
(300 000)
a A
20

Demand
0
0 100 200 300 400 500 600 700 800
fig
Quantity (tonnes: 000s)
 The determination of market equilibrium
E
(potatoes: monthly)
e
100
Supply
D SURPLUS d
80
Price (pence per kg)

(330 000)
Cc
60

b B
40

a A
20

Demand
0
0 100 200 300 400 500 600 700 800
fig
Quantity (tonnes: 000s)
 The determination of market equilibrium
(potatoes: monthly)
E e
100
Supply
D d
80
Price (pence per kg)

60

b B
40

a A
20

Demand
0
0 100 200 300 Qe 400 500 600 700 800
fig
Quantity (tonnes: 000s)
2. Movement to a new equilibrium

 A) A shift in demand
 e.g. a rise in consumer income
• demand schedule shifts right
• p and q rise
 e.g. a fall in the price of
substitutes
• demand schedule shifts left
• p and q fall
 P
Effect of a shift in the demand curve
S

g
Pe1

D1
O Qe1 Q
fig
 P
Effect of a shift in the demand curve
S

g
Pe1

D1
O Qe1 Q
fig
 P
Effect of a shift in the demand curve
S

g
Pe1

D2

D1
O Qe1 Q
fig
 P
Effect of a shift in the demand curve
S

i
Pe2

g h
Pe1

D2

D1
O Qe1 Qe 2 Q
fig
 2. Movement to a new
equilibrium
 B) A shift in supply
 e.g. costs of production rise e.g.
wages rise
• supply curve shifts left
• p rises and q falls
 e.g. an improvement in
technology
• supply curve shifts right
• p falls and q rises
 P
Effect of a shift in the supply curve

S1

g
Pe 1

D
O Qe 1 Q
fig
 P
Effect of a shift in the supply curve

S1

g
Pe 1

D
O Qe 1 Q
fig
 P
Effect of a shift in the supply curve
S2

S1

g
Pe 1

D
O Qe 1 Q
fig
 Effect of a shift in the supply curve
P
S2

S1

k
Pe 3

j g
Pe 1

D
O Qe3 Qe 1 Q
fig
 2. Movement to a new
equilibrium
 C) Simultaneous shift in
demand and supply
 price of a complement falls e.g.
CD players … AND
 cost of producing CDs falls

 what would happen?

3. Impediments to the operation of
markets
 Competitive markets
 What if government intervenes?
 A) price ceiling (e.g. rents) - under-supply
 B) minimum wage - unemployment -
excess supply
 C) Taxes - e.g. pollution taxes - shift
supply left