Definition : Equilibrium occurs in a market when

the quantity supplied equals the quantity

demanded and there is no incentive for this
position to change.

Equilibrium price – the price at which quantity

demanded equals quantity supplied.

Equilibrium quantity – the quantity demanded

and supplied at the equilibrium price
o Practical / real life – bargaining process.

o Theory – using demand & supply model.

By putting the two curves together, the intersection
point of the two curves will determine the price at
which the quantity buyers are willing and able to
purchase equals the quantity sellers will offer for
sale.
 Market Equilibrium : a market situation is at
rest when the quantity demanded equal
quantity supplied.

 Surplus : the amount by which the quantity

supplied exceeds the quantity demanded at
the current price (above-equilibrium price).

 Shortage : the amount by which the quantity

demanded exceeds the quantity supplied at
the current price (below-equilibrium price).
Table 6.1: Table 6.1 Price, Quantity Demanded, and Figure 6.1 : Market Equilibrium of Bananas
Quantity Supplied of Bananas

Source : justdan93.wordpress.com(2012) Source : justdan93.wordpress.com(2012)

Equilibium price = $8
Equilibrium quantity = 6000kg

Shortage : at the market price below $8

Surplus : at the market price above $8

 Increase in demand only
Steps to analyze:
 Decrease in demand only
Step 1:
 Increase in supply only Is the event affects DD and/SS?

 Decrease in supply only Step 2:

Does it shift the curve to the right
or left?

 Both demand and supply increase Step 3:

Draw (sketch) a graph to determine
the new equilibrium price and
 Both demand and supply decrease quantity

 Demand increase, supply decrease

 Demand decrease, supply increase

Definition:
 A price ceiling is a  A
government-imposed limit
on the price charged for a
product.
 It is a maximum allowable
price set below the
equilibrium price.
 With a price ceiling, the
government forbids a price
above the maximum. This
can reduce prices below the
market equilibrium price.
Definition:
price floor is a
government-imposed limit
on how low a price can be
charged for a product.
 It is a minimum allowable
price set above the
equilibrium price.
 With a price floor, the
government forbids a price
below the minimum. It
ensures prices stay high so
that product can continue
to be made.
Source: Eka (2011) Source: Eka (2011)
Advantage / Objective:
o Lower prices for consumers.
 Governments imposed price ceilings to
protect consumers from conditions that
could make necessary commodities
unattainable.
Effect:
Creates a shortage that will persist.
 Suppliers find they can't charge what
they had been. As a result, some
suppliers drop out of the market.
This reduces supply. Meanwhile,
consumers find they can now buy the
product for less, so quantity
demanded increases.
Advantage/ Objective:
o To give producers a higher income.
 They are used to increase the income of
farmers producing goods.
Effect:
Creates a surplus.
 Consumers find they must now pay a
higher price for the same product. As
a result, they reduce their purchases
or drop out of the market entirely.
Meanwhile, suppliers find they are
guaranteed a new, higher price than
they were charging before. As a
result, they increase production.
Disadvantages: Disadvantages:
 Leads to waiting lists  Higher prices for
consumers
 The emergence of black
markets.  Waste of resources
(oversupply & inefficient).
 Reduction in quality.
 Creates unemployment.
 Discrimination.
 Not fair to taxpayers.
 Indirect tax is a tax imposed by government on
producers or sellers but paid by or passed to
the consumers.

 Examples: import tax, excise duties, sales tax,

service tax and export duties.

 These taxes are revenue for the government.

 2 types: Ad valorem tax & Specific tax

 Ad valorem tax is based on the value of good.
 Specific tax is based on the quantity sold.
Source: Welker’s Wikinomics (2012)
Tax Burden per unit:
Consumers : $1.25 - $1.05 = $0.20
Producers : $1.55 - $1.25 = $0.30

Total Tax burden:

Consumers : $0.20 X Qtax
Producers : $ 0.30 X Qtax

Tax revenue collected by government:

Method 1: Total tax burden on Consumers + Producers
Method 2: Tax per unit X Qtax
 Subsidy
is an incentive from government to
encourage producers or sellers to produce
more.

 Subsidy would lower the cost of production.

 Example: Malaysian government provides

subsidy for fertilizers, petrol, diesel, etc.
Source: Welker’s Wikinomics (2012)
1. Irvin B. Tucker (2008). Economics for Today’s World (5th Ed.).
International Student Edition. Thomson South-Western.

2. Normala Ismail (2008). Micro Economics (ECO162). Institut

Perkembangan Pendidikan, Universiti Teknologi MARA, UiTM. Shah Alam

3. Roger A. Arnold (2011). Principles of Economics, (10th Ed). South-Western

. Cengage Learning International Edition.

4. Eka’s Corner (2011). Kebajikan Harga. Retrieved from

http://ekaagustianingsih.blogspot.my/2011/11/kebijakan-harga.html

5. Justdan93.wordpres (2012).Supply and Demand: Market Equilibrium.

Retrieved from https://justdan93.wordpress.com/2012/05/05/supply-
and-demandmarket-equilibrium/

6. Welker’s Wikinomics (2012). Government Intervention. Retrieved from

http://image.slidesharecdn.com/sampewwpowerpoint-120718084646-
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