Market Equilibrium

1. Market Equilibrium S Price Pm D Qm Quantity

2. Qs > QD • Surplus • Too many goods and services • Producers cut price • Qd increases • Qs decreases • Return to equilibrium At a Price Above Equilibrium S Price P1 Pm D Qm Qd Qs Quantity A surplus is where price is set above equilibrium causing QS>QD

3. Qd > Qs • Shortage • Not enough goods and services • Consumers bid up price • Qd decreases • Qs increases • Return to equilibrium At a Price Below Equilibrium S Price Pm P1 D Qm Qs Qd Quantity A shortage is where the price is set below equilibrium causing QD>QS

4. Conclusion • A market will tend toward equilibrium • If the price is not at equilibrium then market forces will work to move the market back toward equilibrium.

5. Consumer Surplus The difference between what consumers are willing to pay and the actual price paid for a commodity Definition: Measured by: The area below the demand curve and above the price line

6. Consumer Surplus S Price Consumer Surplus Pm D Qm Quantity

7. Producer Surplus Definition: Measured by: The difference between the revenue received by a producer and the the cost necessary to produce the good The area below the demand curve and above the price line

8. Producer Surplus S Price Producer Surplus Pm D Qm Quantity

9. Why is Equilibrium best? • Equilibrium represents the allocatively efficient point. • This is where Consumer Surplus and Producer Surplus are maximised • ie benefits to consumers and producers are at their greatest

10. Which is the allocatively efficient point? cars A 100 B 60 100 200 television

11. Which is the allocatively efficient point? cars Market for Cars A S price 100 B 60 D 100 100 quantity 200 television

12. Which is the allocatively efficent point? cars Market for Cars A S price 100 B 60 D 100 100 quantity 200 television

13. Deadweight Loss • When a market does not achieve equilibrium producer and consumer surplus will not be maximised • The loss in allocative efficiency is DWL • It is measured by the loss of CS and PS not offset by gains to other groups (eg government)

14. Deadweight Loss • Deadweight loss can be caused by: • Quotas • Price controls • Indirect Taxes • Subsidies

15. A Subsidy S Price Pm D Qm Quantity

16. A Subsidy Subsidies reduce costs and increase Supply S Price S+Subsidy Pm D Qm Quantity

17. A Subsidy Consumers pay the new equilibrium price - Pc S Price S+Subsidy Pm Pc D Qm Q’ Quantity

18. A Subsidy The per unit subsidy is represented by the vertical distance between the two supply curves S Price S+Subsidy Pm Pc D Qm Q’ Quantity

19. A Subsidy Producers receive higher price -Pp S Price Pp S+Subsidy Pm Pc D Qm Q’ Quantity

20. A Subsidy The total cost to the government is represented by the shaded area S Price Pp S+Subsidy Pm Pc D Qm Q’ Quantity

21. A Subsidy S Price Original CS Pp S+Subsidy Pm Pc D Qm Q’ Quantity

22. A Subsidy S Price New CS Pp S+Subsidy Pm The gain in CS represents the incidence of a subsidy on consumers Pc D Qm Q’ Quantity

23. A Subsidy S Price Old PS Pp S+Subsidy Pm Pc D Qm Q’ Quantity

24. A Subsidy S Price New PS Pp S+Subsidy Pm The gain in PS represents the incidence of a subsidy on producers Pc D Qm Q’ Quantity

25. A Subsidy S Price DWL Pp S+Subsidy Pm Pc D Qm Q’ Quantity

26. An Indirect Tax – Sales Tax S Price Pm D Qm Quantity

27. An Indirect Tax S+tax Indirect taxes increase costs and shift the supply curve to the left S Price Pm D Qm Quantity

28. An Indirect Tax S+tax Consumers pay the new equilibrium price - Pc S Price Pc Pm D Qm Quantity

29. An Indirect Tax S+tax The per unit tax is measured by the vertical distance between the two supply curves S Price Pc Pm D Q’ Qm Quantity

30. An Indirect Tax S+tax The producer recieves the lower price - Pp S Price Pc Pm Pp D Q’ Qm Quantity

31. An Indirect Tax S+tax The government receives the shaded area as tax revenue S Price Pc Pm Pp D Q’ Qm Quantity

32. An Indirect Tax S+tax S Price Original CS Pc Pm Pp D Q’ Qm Quantity

33. An Indirect Tax S+tax S Price New CS Pc Pm The area of tax which was previously CS represents the incidence of the tax on consumers Pp D Q’ Qm Quantity

34. An Indirect Tax S+tax S Price Original PS Pc Pm Pp D Q’ Qm Quantity

35. An Indirect Tax S+tax S Price New PS Pc Pm The area of tax which was previously PS represents the incidence of the tax on producers Pp D Q’ Qm Quantity

36. An Indirect Tax S+tax S Price DWL Pc Pm Pp D Q’ Qm Quantity

37. A Quota S Price Pm D Qm Quantity

38. A Quota In this example we assume there is no domestic production S Price Pm D Q’ Qm Quantity

39. A Quota A quota is a limit on the number of imports into a country The supply curve becomes vertical at the quota level S Price Pm D Q’ Qm Quantity

40. A Quota S’ S A quota is a limit on the number of imports into a country The supply curve becomes vertical at the quota level Price Pm D Q’ Qm Quantity

41. A Quota S’ S The new price is determined at the intersection of the new Supply curve and the original Demand curve - P’ Price P’ Pm D Q’ Qm Quantity

42. A Quota S Price P’ Original CS Pm D Q’ Qm Quantity

43. A Quota S Price P’ New CS Pm D Q’ Qm Quantity

44. A Quota S Price P’ Old PS Pm D Q’ Qm Quantity

45. A Quota S Price P’ New PS Pm D Q’ Qm Quantity

46. A Quota S Price P’ DWL Pm D Q’ Qm Quantity

47. A Maximum Price S Price Pm D Qm Quantity

48. A Maximum Price S Price A maximum price is only effective when set below equilibrium price Pm Pmax D Qm Quantity

49. A Maximum Price • Qs decreases • Although consumers would like to buy more producers only supply Qs • There is a shortage S Price Pm Pmax D Qs Qm Qd Quantity

50. A Maximum Price S Price Original CS Pm Pmax D Qs Qm Quantity