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- Bharathi

- Bharathi. Market Equilibrium. The Market Mechanism. Market Mechanism Summary 1) Supply and demand interact to determine the equilibrium price. 2) When not in equilibrium, the market will adjust to a shortage or surplus and return to the equilibrium.

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- Bharathi

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  1. - Bharathi Market Equilibrium

  2. The Market Mechanism • Market Mechanism Summary 1) Supply and demand interact to determine the equilibrium price. 2) When not in equilibrium, the market will adjust to a shortage or surplus and return to the equilibrium. 3) Markets must be competitive for the mechanism to be efficient.

  3. MARKET DEMAND & SUPPLY Price Price P QS P QD MARKET DEMAND MARKET SUPPLY 200 B U Y E R S 200 S E L L E R S 10 20 35 55 80 2,000 4,000 7,000 11,000 16,000 12,000 10,000 7,000 4,000 1,000 Rs.5 4 3 2 1 Rs.5 4 3 2 1 60 50 35 20 5 x x EQUILIBRIUM

  4. P QD P QS MARKET DEMAND & SUPPLY Price S Rs.5 4 Rs3 2 1 Price Supply Price Demand 2,000 4,000 7,000 11,000 16,000 12,000 10,000 7,000 4,000 1,000 Rs.5 Rs.4 Rs.3 Rs.2 Rs.1 Market Equilibrium Rs.5 Rs.4 Rs.3 Rs.2 Rs.1 D 7 o Q 2 4 6 8 10 12 14 16 Quantity

  5. S D The Market Mechanism Y Price (Rs. per unit) P E Quantity X O Q

  6. S Surplus P1 If price is above equilibrium Point-Supply exceeds Demand. P D Q The Market Mechanism Price (Rs. per unit) Quantity

  7. Price (Rs per unit) S Surplus P1 Assume the price is P1 , then: 1) Quantity Supplied is > Quantity Demanded 2) Producers lower price. 3) Quantity supplied decreases 4) Equilibrium is restored P2 D Quantity Q1 Q3 Q2 The Market Mechanism

  8. Price (Rs. per unit) S Assume the price is P2, then: 1) Quantity Demanded is greater than quantity Supplied 2) Producers raise price. 3) Quantity supplied increases 4) Equilibrium is restored P3 P2 Shortage D Quantity Q1 Q3 Q2 The Market Mechanism E

  9. Change in Supply P D1 S1 S2 P2 Price P1 o Q2 Q1 Q Quantity

  10. Change in Demand D2 S1 D1 P P2 Price P1 o Q1 Q2 Q

  11. P D Q D Q P D1 A D1 S S B D1 P2 D2 P1 P1 P2 Q2 Q1 Q1 Q2 “Decrease in Demand” “Increase in Demand” Four Possibilities Q S Q P P S D D D S2 C S1 S1 P2 S1 P2 P1 P1 Q2 Q1 Q1 Q2 “Increase in Supply” “Decrease in Suply”

  12. Change in Supply = Change in Demand D2 S3 D1 S1 D3 S2 P Q

  13. Effects of Government Intervention Price Controls • If the Government decides that the equilibrium price is too high, they may establish a maximum allowable ceiling price.

  14. TAX SHIFTING AND THE ELASTICITIES OF DEMAND AND SUPPLY • When a product is taxed, who ultimately shoulders the tax burden depends upon the elasticity of demand and supply of the product taxed. • Usually the tax burden is shared between producers and consumers. • Consumers pay more of the tax, if demand is relatively less elastic than supply • Producers pay more of the tax if demand is relatively more elastic than supply.

  15. Price Ceilingsand Price Floors • Price Ceiling • is a legally established maximum price which a seller can charge or a buyer must pay. • Price Floor • is a legally established minimum price which a seller can charge or a buyer must pay.

  16. Price Ceilings • When the Government imposes a price ceiling (i.e., a legal maximum price at which a good can be sold) two outcomes are possible: • The price ceiling is not binding. • The price ceiling is a binding constraint on the market, creating shortages.

  17. A Binding Price Ceiling Price S Price Ceiling PE PC Shortage D QS QE QD Quantity/time

  18. Market Impactsof a Price Ceiling • A Binding Price Ceiling creates. . . • Shortages (QD > QS) • Shortages create : • Queuing • Discrimination criteria set by sellers • Bundled pricing with other goods • Bribery/corruption

  19. Price Floors • When the Government imposes a price floor (i.e., a legal minimum price at which a good can be sold) two outcomes are possible: • The price floor is not binding. • The price floor is a binding constraint on the market, creating surpluses.

  20. A Binding Price Floor Price S Surplus PF Price Floor PE D QS QD QE Quantity/time

  21. Market Impactsof a Price Floor • A Binding Price Floor creates. . . • Surpluses (QS > QD) • Surpluses create : • Discrimination criteria set by buyers • Examples: • Agricultural Price Supports

  22. INCOME FLOW IN AN ECONOMY

  23. Rest of the World Firms (produce the domestic product) Income (Y) Gross National The Circular Flow of Income Financial System C + I 3 2 Investment (I) Consumption (C) C + I + G Imports (IM) Purchases (G) Saving (S) Exports (X) 4 Investors Government C + I + G + Consumers 1 Government (X – IM) Disposable 5 Taxes Transfers 6 Income (DI)

  24. THANK YOU bharathi.hrd@gmail.com

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