Department

Economics for Management StudiesCourse Code

MGEA01H3Professor

vPrinciples of Microeconomics: Market Equilibrium

MARKET EQUILIBRIUM

Linear Equations

We can analyze Demand and Supply and Market equilibrium with linear equations. These are

equations of the form Y = a + bX where a is the Y-intercept, i.e., the value of Y when X is zero,

and b is the slope (rise/run = ∆Y/∆X) of the function. We know that the function is linear, i.e., a

line, because the slope is constant. The slope is negative the Y falls with an increase in X and is

positive if Y increases with an increase in X.

Example: Suppose that the following equations describe the market Demand for and Supply of a

Economics book.

Demand: PD = 120 – 0.2QDSupply: PS = 30 + 0.1QS (P is in $s and Q is in units)

We don’t need to label these equations Demand and Supply since the negative slope of the

first one and the positive slope of the second one tell us that they are Demand and Supply

respectively. Since equilibrium implies that PD = PS we simply equate the right-hand side of each

equation to find equilibrium.

Equilibrium => PD = PS => 120 – 0.2Q = 30 + 0.1Q

90 = 0.3Q => Q = 300

Q = 300 => P = 120 – 0.2*30 = $60 or P = 30 + 0.2*30 = $60

(P must be the same for Demand and Supply at equilibrium Q)

The following diagram depicts these equations and this equilibrium. Note that 120 is the

vertical (Y) intercept for Demand and that 30 is the vertical intercept for Supply. The horizontal

intercept for Demand is 120/0.2 = 600.

- 1 -

Principles of Microeconomics: Market Equilibrium

Demand for and Supply of an Economics Book

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

320

340

360

380

400

420

440

460

480

500

520

540

560

580

600

Quantity

0

20

40

60

80

100

120

140

Price ($s)

Do

Supply

Demand

Po

Qo

GOVERNMENT IMPACT ON MARKETS

1. Fixed Prices

The government can fix prices to achieve policy objectives but there are economic

ramifications.

a) Price Floors (Minimum Prices)

A government may wish to protect producers against low prices by establishing a minimum

price (price floor) for a commodity. The classic commodities for price floors have been

agricultural products such as eggs, milk, or peanuts, but minimum wages and minimum exchange

rates are also common historically. A price floor is effective only if it is above the equilibrium

price since the market would move to the equilibrium price.

Governments assume or hope that the minimum price is a temporary measure to help

producers in a depressed market but the existence of a price floor above the equilibrium price at

that point results in surplus (unsold) commodities. It is difficult to simply decree minimum prices

since some producers will sell below minimum price on the black market thereby driving down the

- 2 -

Principles of Microeconomics: Market Equilibrium

price. Governments usually have to establish the price floor, therefore, by purchasing surplus

commodities.

Example #1. Suppose that the government enacts a minimum price on textbooks by promising to

buy any surplus commodities at $70. The following diagram depicts this situation.

Goverment Price Floor

0

20

40

60

80

100

120

140

160

180

200

220

240

260

280

300

320

340

360

380

400

420

440

460

480

500

520

540

560

580

600

0

20

40

60

80

100

120

140

Price ($s)

Supply

Demand

Po

P

Floor

Qs

Qd

Surplus

We can find the specific amount of the surplus and the cost to the government of the price

floor by calculating the surplus as the difference between the quantity demanded and the quantity

supplied in the market at $70

$70 = 120 – 0.2QD=> Qd = (120 – 70)/0.2 = 250

$70 = 30 + 0.1QS => Qs = (70 – 30)/0.1 = 400

=> Surplus = Qd – Qs = 400 – 250 = 150

Cost to the Government in buying this surplus = 150*70 = $10,500

Total Revenue of Firms = 400 * 70 = $28,000

Total Expenditure of Consumers = 250*70 = $17,500

NOTE: Price floors supported by government purchases have two problems:

- 3 -

**Unlock Document**

###### Document Summary

We can analyze demand and supply and market equilibrium with linear equations. These are equations of the form y = a + bx where a is the y-intercept, i. e. , the value of y when x is zero, and b is the slope (rise/run = d y/d x) of the function. We know that the function is linear, i. e. , a line, because the slope is constant. The slope is negative the y falls with an increase in x and is positive if y increases with an increase in x. Example: suppose that the following equations describe the market demand for and supply of a. Supply: ps = 30 + 0. 1qs (p is in and q is in units) We don"t need to label these equations demand and supply since the negative slope of the first one and the positive slope of the second one tell us that they are demand and supply respectively.

## More from OC32942

###### MGEA01H3 Lecture Notes - Dependent And Independent Variables, Inferior Good, Takers

Lecture Note

###### ECM 10.doc

Lecture Note

###### MGEA01H3 Lecture Notes - Ordinal Utility, Ceteris Paribus, Budget Constraint

Lecture Note

## Classmates also unlocked

###### ECM 10.doc

Lecture Note

###### MGEA01H3 Lecture Notes - Dependent And Independent Variables, Inferior Good, Takers

Lecture Note

###### MGEA01H3 Lecture Notes - Ordinal Utility, Ceteris Paribus, Budget Constraint

Lecture Note

###### MGEA01H3 Lecture Notes - Externality, Marginal Cost, Pareto Efficiency

Lecture Note

###### MGEA01H3 Lecture Notes - Opportunity Cost, Cubic Function, Fixed Capital

Lecture Note

###### MGEA01H3 Lecture Notes - Competitive Equilibrium, Cogeneration, Perfect Competition

Lecture Note

###### MGEA01H3 Lecture Notes - Substitute Good, Lincoln Near-Earth Asteroid Research, One Unit

Lecture Note

###### MGEA01H3 Lecture Notes - Marginal Revenue, Arc Elasticity, Harvest

Lecture Note

###### MGEA01H3 Chapter Notes -Ceteris Paribus, Numerical Analysis, Negative Number

Textbook Note

###### MGEA01H3 Lecture Notes - Remittance, Economic Equilibrium

Lecture Note

###### [MGEA01H3] - Midterm Exam Guide - Ultimate 33 pages long Study Guide!

Study Guide

###### [MGEA01H3] - Final Exam Guide - Ultimate 33 pages long Study Guide!

Study Guide

###### MGEA01H3 Study Guide - Final Guide: Indo, Chevrolet Small-Block Engine, Order Of Newfoundland And Labrador

Exam Note

###### Textbook Notes (93% on the test)

Exam Note

###### MGEA01H3 Lecture Notes - Lecture 1: Human Capital, Pre-Medical, Market Failure

Lecture Note