Market equilibrium
 Outline


1. Demand and supply
2. The interaction of demand & supply
• equilibrium p, q


3. Movement to a new equilibrium
4. Impediments to the market
mechanism
1. The market - demand & supply
 Exchange



markets - prices act as a signal
Producer (supply)
Consumer (demand)
 Competitive

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
market
medium of exchange
competition
full information
strong institutions & social custom
1.1 Consumer demand
 Determinants

of consumer demand
(a) price
• demand curve & demand function

Qd= a - bP
• Movements along the demand curve


Price rise – move up
Price fall – move down
Market demand for potatoes
(monthly)
E
Price (pence per kg)
100
D
80
C
60
Market demand
Point
Price
(pence per kg) (tonnes 000s)
A
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
fig
Quantity (tonnes:
000s)
600
700
800
Consumer demand
 Determinants





of demand (shifts)
(b) income - level & distribution
(c) price of substitutes & complements
(d) demography & age structure
(e) tastes & fashion - advertising
(f) seasonal
• (b)-(f) lead to shifts in the demand curve
1.2 Supply
 Determinants

of supply
price
• supply curve and supply function




technological innovation - product and/or
process
change in price of factor inputs
disasters - natural & human
strikes, regulation, organisation of the
firm
Supply
 The



supply curve & function
Qs = a + bP
Movements along the curve
Shifts in the supply curve
Market supply of potatoes (monthly)
100
Supply
P
80
Price (pence per kg)
a
20 100
60
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
Q
800
2. The interaction of demand &
supply
 Equilibrium



D = S i.e. market clearing
Excess demand (shortages)
Excess supply (gluts)
 Equilibrium

price and quantity
- definition
‘a point of balance or a point of rest:
a point to which there is a tendency
to move.’
The determination of market equilibrium
(potatoes:
monthly)
E
e
100
Price (pence per kg)
Supply
d
D
80
Cc
60
b
40
B
a
A
20
Demand
0
0
100
200
300
400
fig
500
Quantity (tonnes: 000s)
600
700
800
3. Movement to a new equilibrium
 A) A shift

in demand
e.g. a rise in consumer income
• demand schedule shifts right
• p and q rise

e.g. a fall in the price of
substitutes
• demand schedule shifts left
• p and q fall
P
Effect of a shift in the demand curve
S
g
Pe1
D1
O
Q e1
Q
fig
3. Movement to a new
equilibrium
 B) A shift

in supply
e.g. costs of production rise e.g.
wages rise
• supply curve shifts left
• p rises and q falls

e.g. an improvement in
technology
• supply curve shifts right
• p falls and q rises
P
Effect of a shift in the supply curve
S1
g
Pe1
D
O
Q e1
fig
Q
3. Movement to a new
equilibrium
 C)
Simultaneous shift in
demand and supply

price of a complement falls e.g.
CD players … AND
cost of producing CDs falls

what would happen?

4. Impediments to the operation of
markets
 Competitive
markets
 What if government intervenes?



A) price ceiling (e.g. rents) - undersupply
B) minimum wage - unemployment excess supply
C) Taxes - e.g. pollution taxes - shift
supply left