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CHAPTER 3 : MARKET EQUILIBRIUM

1. Determination of equilibrium P and Q 2. Effect of changes in dd and ss on equilibrium P and Q 3. Application of dd and ss analysis 4. T & subsidies : effects on P & Q, incidence of T 5. P controls

Determination of P and Q
DEFN : qt dd = qt ss
Determination of mkt P Show how actual P & actual qt bought & sold are determine in free & competitive mkt Concept of , shortages & surplus

Effect of changes in dd and ss on P and Q


i) in dd only ss constant ii) in ss only dd constant iii) Simultaneous in dd & ss both dd & ss will shift Will have few effect on P & qt based on differences in both a) dd & ss b) dd & ss c) dd & ss d) dd & ss Will depend on rate of changes a) dd = ss b) dd > ss c) dd < ss

Application of dd and ss analysis


why P manuf > stable than P agri dd dd agri inelastic, dd manuf elastic ss ss agri inelastic, ss manuf elastic ss of agri fluctuate, ss manuf stable

T & subsidies
Indirect T tax imposed by govt on indv A but burden of paying passed to indv B Subsidy payment by govt to bus @ HH so that can produce at larger qt & lower P
Concept : i) Consumer burden vs producer burden ii) Consumer benefit vs producer benefit

Effect Of Indirect T On P & Qt Consumer burden vs producer burden


P ST S0

PT Pe

Consumer burden Producer burden

D0

QT

Qe

Effect Of Subsidy On P & Qt Consumer benefit vs producer benefit


P S0 Ss

Pe Ps

Consumer Benefit Producer Benefit

D0

Qe

Qs

P Control P Floor
Min P ( P floor) - surplus - at min P, P is not allowed to fall below this level
Advantages For the sake of supplier To create surplus Min w Disadv Consumers have to pay more Unfair to tax payer Inefficient

P Control P Ceiling
Max P ( P ceiling) - shortages - at max P, P is not allowed to rise above this level - reason : war, high inflation - set max P for basic goods so that poor people can afford to buy them

Advantage
Can get goods at lower P

Disadv
Emergence of black mkt the qt produced Exploitation by sellers

P Control P Floor vs P Ceiling


P Pmin

Surplus

Pe
Pmax Shortage D