ECON107
Principles of
Microeconomics
Week 6
SEPTEMBER 2013
Chapter-3
1
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Dr. Mazharul Islam
3
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Market Equilibrium
Dr. Mazharul Islam
3
Lesson Objectives
 Define
market and market equilibrium
 Explain how demand and supply determine
prices and quantities bought and sold
 Use the demand and supply model to make
predictions about changes in prices and
quantities
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MARKETS DEFINED
POTENTIAL
BUYERS
POTENTIAL
SELLERS
MARKETS
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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 and 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.
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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.
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Market Demand and Supply
CORN OIL
CORN OIL
P
$5
4
3
2
1
QD
10
20
35
55
80
MARKET
x
200 DEMAND
B
2,000
U
Y
E
R
S
4,000
7,000
11,000
16,000
P QS
$5
4
3
2
1
EQUILIBRIUM
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MARKET
60
50
35
20
5
x
200 SUPPLY
S 12,000
E
L
L
E
10,000
7,000
4,000
1,000
R
S
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Market Demand and Supply
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
CORN
MARKET
P Q
4
Market
Clearing
Equilibrium
3
2
1
o
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S
$5
$5
4
3
2
1
S
12,000
10,000
7,000
4,000
1,000
D
2
4
6 7 8
10 12 14 16 Q
(in thousand)
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Market Demand and Supply
CORN MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
Surplus
$5
S
P Q
At a $4 price
4
more is being
supplied than
3
demanded
2
1
o
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CORN MARKET
$5
4
3
2
1
S
12,000
10,000
7,000
4,000
1,000
D
2
4
6 7 8
10 12 14 16
Q (in thousand)
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Market Demand and Supply
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
4
At a $2 price
more is being
3
demanded than
supplied
2
Shortage
1
o
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$5
4
3
2
1
S
12,000
10,000
7,000
4,000
1,000
D
2
4
6
8
101112 14 16
Q (in thousand)
Dr. Mazharul Islam
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Market
Demand
and
Supply
P
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
$5
Surplus
CORN
MARKET
S
P Q
(put downward pressure on the price)
4
$5
4
3
2
1
3
2
Shortage
1
( Create market pressure for a higher price)
o
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2
4
6 7 8
101112 14 16
S
12,000
10,000
7,000
4,000
1,000
D
Q (in thousand)
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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
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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.
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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
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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.
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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.
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Changes in Equilibrium
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Changes in Equilibrium
S = D
P , Q unchanged
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Changes in Equilibrium
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Changes in Equilibrium
S = D
P (unchanged) , Q
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Summary
Change in Demand
Change in Supply
Demand increases
Supply
increases
Supply
decreases
Equilibrium
price change
is indeterminate.
Demand decreases
Equilibrium
price falls.
Equilibrium
quantity increases.
Equilibrium
quantity change
is indeterminate.
Equilibrium
price rises.
Equilibrium price
change is indeterminate.
Equilibrium
quantity change
is indeterminate.
Equilibrium
quantity decreases.
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Now it’s over for today. Do you
have any question?
5w/9/2013
Dr. Mazharul Islam