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Market Equilibrium. S. Price. Pm. D. Qm. Quantity. 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. - PowerPoint PPT Presentation
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Market Equilibrium
Price
Quantity
S
D
Pm
Qm
At a Price Above Equilibrium
Price
Quantity
S
D
Pm
Qm
P1
QsQd
•Qs > QD
•Surplus
•Too many goods and services
•Producers cut price
•Qd increases
•Qs decreases
•Return to equilibrium
A surplus is where price is set above equilibrium causing QS>QD
At a Price Below Equilibrium
Price
Quantity
S
D
Pm
Qm
P1
QdQs
•Qd > Qs
•Shortage
•Not enough goods and services
•Consumers bid up price
•Qd decreases
•Qs increases
•Return to equilibrium
A shortage is where the price is set below equilibrium causing QD>QS
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.
CONSUMER SURPLUS
DEFINITION:
MEASURED BY:
The difference between what consumers are willing to pay and the actual price paid for a commodity
The area below the demand curve and above the price line
Consumer Surplus
Price
Quantity
S
D
Pm
Qm
Consumer
Surplus
Producer SurplusProducer Surplus
DefinitionDefinition::
Measured byMeasured 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
Producer Surplus
Price
Quantity
S
D
Pm
Qm
Producer
Surplus
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
WHICH IS THE ALLOCATIVELY EFFICIENT POINT?
cars
television
A
B
100
60
100200
Which is the allocatively efficient Which is the allocatively efficient point?point?
cars
television
A
B
100
60
100200 quantity
price
Market for Cars
S
D
100
Which is the allocatively efficent Which is the allocatively efficent point?point?
cars
television
A
B
100
60
100200 quantity
price
Market for Cars
S
D
100
DEADWEIGHT LOSS
When a market does not achieve equilibrium producer and consumer surplus will not be maximised
The loss in allocative efficiency is DWLIt is measured by the loss of CS and PS
not offset by gains to other groups (eg government)
Deadweight LossDeadweight Loss
Deadweight loss can be caused by:
• Quotas
• Price controls
• Indirect Taxes
• Subsidies
A Subsidy
Price
Quantity
S
D
Pm
Qm
A Subsidy
Price
Quantity
S
D
Pm
Qm
Subsidies reduce costs and increase Supply
S+Subsidy
A Subsidy
Price
Quantity
S
D
Pm
Qm
Consumers pay the new equilibrium price - Pc
S+Subsidy
Q’
Pc
A Subsidy
Price
Quantity
S
D
Pm
Qm
The per unit subsidy is represented by the vertical distance between the two supply curves
S+Subsidy
Q’
Pc
A Subsidy
Price
Quantity
S
D
Pm
Qm
Producers receive higher price -Pp
S+Subsidy
Q’
Pc
Pp
A Subsidy
Price
Quantity
S
D
Pm
Qm
The total cost to the government is represented by the shaded area
S+Subsidy
Q’
Pc
Pp
A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp Original CS
A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp New CS
The gain in CS represents the incidence of a
subsidy on consumers
A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp Old PS
A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp New PS
The gain in PS represents the incidence of a
subsidy on producers
A Subsidy
Price
Quantity
S
D
Pm
Qm
S+Subsidy
Q’
Pc
Pp DWL
An Indirect Tax – Sales Tax
Price
Quantity
S
D
Pm
Qm
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
Indirect taxes increase costs and shift the supply curve to the left
S+tax
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
Consumers pay the new equilibrium price - Pc
S+tax
Pc
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
The per unit tax is measured by the vertical distance between the two supply curves
S+tax
Q’
Pc
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
The producer recieves the lower price - Pp
S+tax
Q’
Pc
Pp
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
The government receives the shaded area as tax revenue
S+tax
Q’
Pc
Pp
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
Original CS
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
New CS
The area of tax which was previously CS
represents the incidence of the tax on
consumers
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
Original PS
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
New PS
The area of tax which was previously PS
represents the incidence of the tax on
producers
An Indirect Tax
Price
Quantity
S
D
Pm
Qm
S+tax
Q’
Pc
Pp
DWL
A Quota
Price
Quantity
S
D
Pm
Qm
A Quota
Price
Quantity
S
D
Pm
Qm
In this example we assume there is no domestic production
Q’
A Quota
Price
Quantity
S
D
Pm
Qm
A quota is a limit on the number of imports into a country
The supply curve becomes vertical at the quota level
Q’
A Quota
Price
Quantity
S’
D
Pm
Qm
A quota is a limit on the number of imports into a country
The supply curve becomes vertical at the quota level
Q’
S
A Quota
Price
Quantity
S’
D
Pm
Qm
The new price is determined at the intersection of the new Supply curve and the original Demand curve - P’
Q’
S
P’
A Quota
Price
Quantity
S
D
Pm
Qm
Original CS
Q’
P’
A Quota
Price
Quantity
S
D
Pm
Qm
New CS
Q’
P’
A Quota
Price
Quantity
S
D
Pm
Qm
Old PS
Q’
P’
A Quota
Price
Quantity
S
D
Pm
Qm
New PS
Q’
P’
A Quota
Price
Quantity
S
D
Pm
Qm
DWL
Q’
P’
A Maximum Price
Price
Quantity
S
D
Pm
Qm
A Maximum Price
Price
Quantity
S
D
Pm
Qm
A maximum price is only effective when set below equilibrium price
Pmax
A Maximum Price
Price
Quantity
S
D
Pm
Qm
•Qs decreases
•Although consumers would like to buy more producers only supply Qs
•There is a shortage
Pmax
Qs Qd
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
Original CS
Qs
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
New CS
Qs
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
Original PS
Qs
A Maximum Price
Price
Quantity
S
D
Pm
Qm
Pmax
New PS
Qs
A Maximum Price
Price
Quantity
S
D
Pm
Qm
DWL
Pmax
Qs
A Minimum Price
Price
Quantity
S
D
Pm
Qm
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
A minimum price is only effective when set above equilibrium price
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
Qd
•Qd decreases
•Although producers would like to sell more they are unable to at this high price
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
Original CS
Qd
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
New CS
Qd
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
Original PS
Qd
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
New PS
Qd
A Minimum Price
Price
Quantity
S
D
Pmin
Qm
Pm
DWL
Qd
Net Welfare Benefit
The combined values of the consumer and producer surpluses is referred to as the net welfare benefit.
S
D
Pm
Qm
Net welfare benefit.
Allocative Efficiency and Market Equilibrium
Markets allocate resources to the production of goods and services that satisfy consumers needs and wants.
To be allocatively efficient a market must price and produce at equilibrium .