BCom Notes Part I Economics Market Equilibrium

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Market Equilibrium

Market Equilibrium

Qs. What do you understand by Market Equilibrium?

A price you which both buyer and seller agree is called Market Price.

As we know the consumer want cheaper price for the commodity and seller want higher price. But at a price for which both consumer and seller agree is said to be Equilibrium in the market.

E —-> Shows market Equilibrium.

Po —> is the Equilibrium price for which both consumer and seller agree. consumer agree to buy at this price and seller agree for sale at this price.

Qo —-> is the quantity demanded by consumer at this price and quantity supplied by the supplies.

Simply we define market Equilibrium at that both consumer and producer are satisfy for a fixed price.

Qs. Show the effects of change in Demand and Equilibrium Market?

Find we assume that there is no change in supply schedule.

Now we analyze the effect of changes in demand or Equilibrium considering following type of Supply curve.

1. Relatively Elastic Supply

2. Relatively Inelastic Supply

3. Perfectly Elastic Supply

4. Perfectly Inelastic Supply

1. Relatively Elastic Supply

E ——> Initial Equilibirium Pt in the market.

Po —–> Initial Equilibirium Pt for which both consumer and produce agreed.

DD —–> Initial Demand Curve.

Now Suppose demand Increase then DD will shift upward to the right D,D then as the market demand Increase in result producer increase the price and also increase the quality then new Equilibrium Pt devise E.

D,D, ——> Shows Increase in Demand

E’ ———> New Equilibirium Pt achieve when demand increases

Pi ——–> New Price when Demand increase.

Qi ——–> Quantity Supplied at E’

As we see that due to elastic supply curve the Extension in supply is higher than % Extension in price.

Similarly, If demand curve shift downward to the left due to decrease in demand Equilibrium Pt achieve E.

Where

E ——-> Eq Pt when demand decreases

P2 ——–> Price at new Eq Pt E

Q2 ——–> Quantity Supply at new Eq.Pt E

The contractive in supply is greater in response to % change in price.

2. Relatively Inelastic Supply

In Inelastic Supply the % change in price is higher than % change in supply due to increase in demand.

OR

Contraction or Extension in supply is less than the % change in price.

3. Perfectly Elastic Supply

When increase in demand in perfectly elastic supply there is no effect on price but quantity supply is increase from QQo to QQ1 and new Eq Pt are is E when demand decrease quantity supply decreases QQo to QQ2.

4. Perfectly Inelastic Supply

In Perfectly Inelastic Supply there is no effect on quantity supplied on change in demand but if increase from DD to D2D2 the price increased from Po to P2 if demand decrease the price decrease P1.

Qs. Analyze the shifts in supply on Market Equilibrium?

OR

What effect of shift in Supply on Market Equilibrium?

First we suppose the demand curve is constant and only change in supply take place.

Now we always analyze the effect of shift in supply an Market Equilibrium on demand curve.

1. Elastic demand curve.

2. Inelastic demand curve.

3. Perfectly elastic demand curve.

4. Perfectly inelastic demand curve.

1. Elastic Demand Curve

When supply increase from SS to S1S1 the Equilibrium point shift to E’ and new price and quantity demanded achieve when supply decreases from SS to S2S2 Eq Pt E shift to E and price increases to P2 when quantity demanded decreases to Q2.

Inelastic demand % change in quantity demand is increase or decrease is higher is response to % change in price.

2. Inelastic Demand Curve

Inelastic demand curve % change in quantity demanded is less than % change in price as result of shift in supply curve.

3. Perfectly Elastic Demand Curve

There is no change in price in perfectly elastic demand curve in response to change in supply.

4. Perfectly Inelastic Demand Curve

If supply increase in the Market in perfectly inelastic demand. Supply increased than the quantity required in the market. So the price decreases in order to get new Eq Pt E’ but quantity demand remain constant.

Qs. Discuss the effect of shift in both supply and demand on Equilibrium Market.

As the demand (DD) increase to (D1D1) the new Eq Pt E’ achieve with supply (SS1) but if supply also increase from SS to S1S1 then new Eq Pt achieve. Where both new demand and supply curve intersect each other E and new price P2 will be set for quantity Q2.

When supply is greater than rise in demand. If supply is higher than demand the price automatically be decreases.

If DD shift to DD1 and SS shift to S1S1 the intersect point of D1D1 and S1S1 shows now Eq Pt and we see the price decreases as result.

Increase in Demand and Decrease in Supply

If demand increase to DD1 from DD and supply decrease from SS to S1S1 then new Eq Pt achieve E’ where both new demand and supply intersect out after and we see price is higher in this case price increase from P0 to P1.