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Market Equilibrium & Price Controls

Market equilibrium occurs at the price where the quantity demanded equals the quantity supplied. This equilibrium price determines the equilibrium quantity in the market. When demand or supply changes, the equilibrium price and quantity adjust accordingly to clear the market. The government can intervene in markets through price controls like price ceilings, which limit the maximum price that can be charged, or price floors, which limit the minimum price. These controls aim to protect consumers or producers but can lead to shortages or surpluses in the market from the new equilibrium.

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960 views13 pages

Market Equilibrium & Price Controls

Market equilibrium occurs at the price where the quantity demanded equals the quantity supplied. This equilibrium price determines the equilibrium quantity in the market. When demand or supply changes, the equilibrium price and quantity adjust accordingly to clear the market. The government can intervene in markets through price controls like price ceilings, which limit the maximum price that can be charged, or price floors, which limit the minimum price. These controls aim to protect consumers or producers but can lead to shortages or surpluses in the market from the new equilibrium.

Uploaded by

Kokila Ambigae
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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The Concept of

Market Equilibrium
Understanding Market Equilibrium
Market price is a price set by
the interaction of supply and
demand
Equilibrium Price Equilibrium Quantity
price at which the quantity output level that corresponds
demanded by consumers to the equilibrium price
and the quantity supplied
by producers are the same
P
S

(Qd=Qs)
E
Pe

Qe Q

http://www.cals.ncsu.edu/course/are012/readings/demand.html
EXCESS DEMAND
Shortage – an amount or extent of
deficiency due to excess demand

E
Pe

A B
P1
Shortage
Qd>Qs
D
QS Qe QD
EXCESS SUPPLY
Surplus - an amount or a quantity in
excess of what is needed or demanded

Surplus S
Qd<Qs
A B
Pe

E
P1

D
QD Qe QS
MARKET EQUILIBRIUM WHEN
THERE IS A CHANGE IN DEMAND
Ex 1. Decrease in no. of Consumers Ex 2. Increase in Income

DEMAND : no. of consumers = purchases DEMAND: income = purchases/spending


PRICE : demand = Prices PRICE: demand = Prices

http://www.tutor2u.net/economics/revision-notes/as-markets-equilibrium-price.html
MARKET EQUILIBRIUM WHEN
THERE IS A CHANGE IN SUPPLY
Ex 1. Increase in workers wages, Ex 2. Improved technology,

SUPPLY : wages = cost of production SUPPLY : technology = production


PRICE : supply = Prices PRICE : supply = Prices

http://www.tutor2u.net/economics/revision-notes/as-markets-equilibrium-price.html
PRICE
Represents the agreement
between the seller and the
buyer in the market
EFFECTS OF A

PRICE
CONTROL
Role of the Government in
pricing
Effects of a Ceiling Price on Market
Equilibrium
S Protect the consumer from
abuses of seller

P0 E

housewife

Ceiling Price
P1
shortage
D
Q1 Q0 Q2
• CEILING PRICE – the maximum selling price; it is a government-imposed
limit on how high a price can be charged on a product
Effects of a Floor Price on Market
Equilibrium
Help the producer recover
surplus their production cost
Floor Price S
P1
farmer

P0 E

D
Q1 Q0 Q2

• FLOOR PRICE – a price support; it is a government-imposed


limit on how low a price can be charged on a product.
GOVERNMENT
Interferes in the market to
help the consumers and
producers

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