MARKET EQUILIBRIUM

On the previous week, Sir Amir had go through a new subtopic in The Pricing Theories chapter which is market equilibrium. Don`t worry guys, at the end end of this subtopic you guys will have a better understanding about what  market equilibrium is. So let`s get started!

Definition of Market Equilibrium.
-Is a situation when quantity demanded and quantity supplied are equal and there is no tendency for price or quantity to change.
                                              
                                           Quantity demanded (Qd) = Quantity Supply(Qs)

Market equilibrium price and quantity
-market equilibrium is determined by the intersection of both the demand and supply curves.

                                              Determinant of equilibrium Price and Quantity

                          
So, market equilibrium of price and quantity is:

Price     :  £16
Quantity:  8 000 units


Market equilibrium based on mathematical form
The demand function and supply for a goods in the market are as follows:

                                         Qd= 140-10P
                                         Qs =20 + 10P
Where,
                              Qd =Quantity demanded
                              Qs = Quantity Supply
                              P    = Price

Shortage and surplus

Shortage is the situation where the price was set up below than equilibrium price. In other words, the quantity demanded is greater than the quantity supplied. In the figure above, there is occurring the excess demand. Therefore, the amount of excess demand (shortage) is (Qd-Qs). If the shortage happened, the rational customer or producer will accept that price and sell back at the market price. 

Surplus is the situation where the price was set up above than equilibrium price. In other words, the quantity supplied is greater than quantity demanded. In figure above, there is occurring the excess supply. The amount of excess surplus can be obtained as follows (Qs- Qd)

Changes in Demand and Supply.

The changes in demand and supply curve will change the market equilibrium. The demand and supply curve will shift based on the following situations.

• The demand curve shifts and supply remains constant.
• The supply curve shift and demand remains constant.
• Changes in demand and supply curves shift simultaneously. 

Changes in demand curve or supply curve are because the factor of determinants demand or determinant of supply.


Supply, demand and government policy.

Maximum Price or Ceiling Price 
Government imposed regulations that prevent prices from rising above a maximum level set by the government which can lead to shortage.

A price ceiling is imposed by the government below the equilibrium price (market price). That price is not allowed to rise above this level but it is allowed to fall below it. 

Problem: emergence of black market
-Black market is where people ignore the government`s price and quantity controls and sell illegally at whatever price equates illegal demand and supply.


Minimum Price or Floor Price

Government imposed regulations that prevent price from falling below a minimum level set by the government which can lead to surplus. 

A  price floor is imposed by the government above the equilibrium price (market price). That price is not allowed to fall below this level but it is allowed to rise above it.