3.MARKET EQUILIBRIUM The market is in equilibrium when ... equilibrium in the market for a particular

3.MARKET EQUILIBRIUM The market is in equilibrium when ... equilibrium in the market for a particular

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  • 3. MARKET EQUILIBRIUM

    Now that you understand demand and supply we can now combine them to explain equilibrium in the market for a particular good or service.

    3.1. Excess supply and demand

    At any other price there is disequilibrium in the form of excess supply and excess demand. When there is disequilibrium, market forces are set in motion to move the market towards equilibrium.

    The demand and supply of potatoes in the market on a particular day

    Definition: The market is in equilibrium when the quantity demanded is equal to the quantity supplied. The price at which this occurs is called equilibrium

    Column 1: shows the various prices for potatoes on a given day (in Rands per kilogram). Column 2: shows the quantity demanded at various prices. Column 3: shows the quantity supplied at various prices. Column 4: shows the difference between quantity demanded and supplied and the last Column 5: shows the direction of the pressure put on the price of the product.

    When the quantity demanded is greater than the quantity supplied there is excess demand – market shortage When the quantity supplied is greater than the quantity demanded there is an excess supply – market surplus.

    To illustrate equilibrium we also make use of a schedule (Demand and Supply schedule) and we make use of a graph (Demand and supply graph)

    Price per potatoes

    (R/kg)

    Quantity demanded

    (R/kg)

    2 3 4 5 6 7

    400 350 300 250 200 150

    Quantity supplied (R/kg)

    0 100 150 250 300 350

    Graph for supply and demand for potatoes on a given day

    QUANTITY

    D AY

    S

    0

    1

    2

    3

    4

    5

    6

    7

    50 100 150 200 250 300 350 400

    S

    SD

    D

    E

    Price of potatoes (R/kg)

    Quantity demanded (R/kg)

    Quantity supplied (R/kg)

    Excess supply / Excess demand

    Pressure on Price

    2

    3

    4

    5

    6

    7

    400

    350

    300

    250

    200

    150

    0

    100

    150

    250

    300

    350

    400 excess demand

    250 excess demand

    150 excess demand

    Equilibrium

    100 excess supply

    200 excess supply

    Upward

    Upward

    Upward

    None

    Downward

    Downward

    61