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Equilibrium Shortage and Surplus Report

Market equilibrium occurs when the quantity demanded equals the quantity supplied, resulting in no price changes. Shortages arise when demand exceeds supply, prompting price increases, while surpluses occur when supply exceeds demand, leading to price decreases. Government interventions, such as price ceilings and floors, can disrupt equilibrium, causing shortages and surpluses, and various factors can shift supply and demand, affecting equilibrium price and quantity.

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Jeric Tucay
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11 views6 pages

Equilibrium Shortage and Surplus Report

Market equilibrium occurs when the quantity demanded equals the quantity supplied, resulting in no price changes. Shortages arise when demand exceeds supply, prompting price increases, while surpluses occur when supply exceeds demand, leading to price decreases. Government interventions, such as price ceilings and floors, can disrupt equilibrium, causing shortages and surpluses, and various factors can shift supply and demand, affecting equilibrium price and quantity.

Uploaded by

Jeric Tucay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS

Market Equilibrium
 Equilibrium is a state wherein the demand and supply are in balance; Qd=Qs.
 At equilibrium, the quantity of the good that the buyers are willing and able to buy exactly matches
the quantity that the seller are willing and able to sell, and that there is no tendency for price to
change

 Equilibrium is the point where the curves intersect.


o Equilibrium Price. The price at the intersection; The single price that makes the quantity
demanded equal to quantity supplied. Also known as market clearing price
o Equilibrium Quantity. The quantity at the intersection; The single quantity, both bought and
sold, that makes quantity demanded equal to quantity supplied

ECON 201: MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS | Bay-an, Calya-en, Garuela, Osting, Sabado
Aside from equilibrium, two situation exists in the market: Shortage and Surplus

Market Shortage
 Shortage is a situation in which quantity demanded exceeds quantity supplied; Qd > Qs or Qs<Qd
 This signals that the price is too low, and that the producers can and will not supply all the products
that the consumers are willing to buy
 In a competitive market, a shortage will not last. Sellers will raise their price in order to respond to this
situation.

Market Surplus
 Surplus is a situation in which quantity supplies is greater than quantity demanded; Qs>Qd or Qd<Qs
 This signals that the price is too high, and that the consumers will not buy all of the products that the
supplier are willing to supply
 In a competitive market, a shortage will not last. Sellers will lower their price in order to respond to this
situation.

ECON 201: MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS | Bay-an, Calya-en, Garuela, Osting, Sabado
Thus, the activities of many buyers and sellers always push the market price towards the equilibrium price
which is why equilibrium is a market clearing situation where neither shortage or surplus exist.

Price Ceiling and Price Floor


 A price ceiling is a maximum price that seller may charge for a good. Price ceiling set below the
equilibrium price results in shortages.
 A price floor is the minimum price that seller may charge for a good. Price floor set above the
equilibrium price results in surpluses.

Effect of minimum and maximum price in the market


Maximum Price

 The highest price set to sellers to


their products in which they cannot
go above the price; often set by the
government to help the people on
the low incomes to be able to afford
essential goods.

Minimum Price

 The lowest price set to sellers wherein


they are unable to go below the said
price; set by the government to support
industries, especially cheap imports.

Changes in Market Equilibrium


There are many factors that affects and results in changes in the demand and supply. Examples:

 Government intervention may change market equilibrium through taxes and subsidies:
o Import taxes increase cost of imported products causing the equilibrium price to be higher.
o Subsidy paid to farmers will reduce costs of producing farm goods; equilibrium price will be
lower.

ECON 201: MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS | Bay-an, Calya-en, Garuela, Osting, Sabado
 Substituted goods may also change market equilibrium of a good:
o An increase in price of a substitute, makes the demand curve to shift outward making the
market equilibrium to be higher. A decrease results in a lower equilibrium
 Another factor that causes inefficiencies in the pricing of goods in the market is the existence of
externalities – damage to the environment caused by production (ex. Pollution)

Steps in Analyzing Changes in Market Equilibrium


In order to assess where the new equilibrium price and quantity lie following a change in supply or
demand, we should do the following:

1. We decide whether the change affects the supply or demand curve (can be done through checking the
functions)
2. We decide whether the curve shifts inwards or outwards
3. We use the supply and demand diagram to compare the initial and the new equilibrium.

ECON 201: MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS | Bay-an, Calya-en, Garuela, Osting, Sabado
Consumer Surplus
 The benefit to consumers due to
the difference between what
consumers actually pays to
consume a good and what they
would have been willing to pay,
rather than go without the good.
 It can be measured graphically
through checking the area that is
below the demand curve and
above the price

Producer Surplus
 The amount the seller is paid minus
the cost of production
 Graphically, it is the area above the
supply curve and below the price

Example Problem:

1. What is the market equilibrium of the following function?

Ans: (300, 14)

Ans: (6000, 0.80)

ECON 201: MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS | Bay-an, Calya-en, Garuela, Osting, Sabado
2. Considering that Qd= 260 - 8P and Qs= 20 + 4P, solve for the equilibrium price and quantity.

Qd = Qs

260-8P = 20+4P

260-20 = 8P+4P

240 = 12P

20 = P

Qd = Qs

260 - 8P = 20 + 4P

260 - 8(20) = 20 + 4(20)

260 – (160) = 20 + 80

100 = 100

Hence, Pe = 20 and Qe = 100

ECON 201: MARKET EQUILIBRIUM, SHORTAGE AND SURPLUS | Bay-an, Calya-en, Garuela, Osting, Sabado

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