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Equilibrium
Equilibrium is the point of intersection of Demand and
Supply Curves.
Equilibrium can shift if :• Demand Curve Shifts.
• Supply Curve Shifts.
• Both Shift.
This gives rise to eight possibilities
Introductory
Economic
Lecture 5
Recap
Summing UP
Example No. 1
P
S
E`
3.50
3
E
D`
D
6000
6500
Q
Example No. 2
P
S
S`
3
E`
E
2.50
D
6000
7000
Q
Example No. 3
P
S
S`
3
E
E`
D`
D
6000
8000
Q
Example No. 4
P
S
Eo
Pe
E1
D
D`
 Qd
Q
Example No. 5
S`
P
S
E1
Pe
Eo
D
Qd
Q
Example No. 6
S`
P
E1
Pe
S
D`
Eo
D
Qd ?
Q
Example No. 7
P
S
S`
Pe
Eo
E1
D
D`
Qd ?
Q
Example No. 8
P
S`
? Pe
E1
S
Eo
D
D`
Qd
Q
Summarized
D  , S ~,
D~,S,
D,S,
D,S~,
D~,S,
D,S,
D,S,
D,S,
P
P
P?
P
P
P
P
P?
Q
Q
Q
Q
Q
Q?
Q?
Q
Points to note
When D shifts you move along the supply curve
When S shifts you move along the demand curve
When both D & S shift you can think of first
moving along demand curve and then moving
along supply curve or vice versa
The market for butter
Question : What will happen to the equilibrium price and
quantity of butter in each of the following cases?
a. A rise in the price of the margarine. D  , S 
b. A rise in the demand for milk. S ; D  ( if milk is a substitute )
c. A rise in the price of bread. D 
d. A rise in the demand of bread. D 
e. An expected rise in the price of butter in near future. S  D 
f. A Tax on butter production. S 
g. An invention of a new, but expensive, process of removing all
cholesterol from butter , plus the passing of law which states that
all producers must use this process. D  S 
IDENTIFICATION PROBLEM
(Identify the demand for Tennis Balls )
Figure 1
Figure 2
S2
P
30
b
S2
P
S1
30
b
a
a
20
20
S1
D2
D1
D
800
1000
Q
If demand curve has not shifted,
then the evidence allow us to
identify its position.
800
1000
Q
It is difficult to identify just
what is causing the change in
price and quantity
Rationing & supply shocks (alteration
of equilibrium price by the Govt )
• Through Tax :
Tax ( to be paid by the producer ) will
the Supply Price , Supply Curve , P &
Qe
• Through Subsidy :
Subsidy ( to the producer ) will
the Supply Price , Supply Curve ,
P&
Qe
Government intervention : ceiling &
floor
P
Surplus
S
Pf
Price Floor
Q3 – Q1
Pe
E
Q4 – Q2
Pc
D
Price Ceiling
Shortage
Q2
Qe
Q4
Q
Imposition of tax by the government
S1
P
So
P1
Po
Tax
E1
Eo
D
Tax per unit
Q1
Qo
Liters of Petrol
Steps followed
1.
Draw the diagram showing the market conditions before any
change takes place.
2.
Work out if the change ( The increase in Tax) causes a shift in
Supply or demand curve. The tax will effect the supply curveessentially it increases the cost of production.
3.
Work out the directions of the shift.
4.
Draw the shifted Curve on the diagram.
5.
Indicate the new market price and quantity on the diagram.
CONCLUSION: The market Price will increase and the
quantity traded ( bought and sold) will decrease.
Payment of subsidy by the government
So
P
S1
Po
P1
Eo
Subsidy
E1
Subsidy per unit
D
Qo
Q1
C. N. G