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INTRODUCTION TO ECONOMICS

WITH LAND REFORM AND


TAXATION
DR. ABRAHAM C. CAMBA JR.
Department of Economics, San Beda College, Mendiola, Manila and
Polytechnic University of the Philippines, Sta. Mesa, Manila

DR. AILEEN L. CAMBA


Graduate School and Department of Economics
Polytechnic University of the Philippines, Sta. Mesa, Manila

Lecture 3
MARKET EQUILIBRIUM PRICE AND QUANTITY

CONTENTS

1.1Equilibrium Price and Quantity


1.2Shortages and Surpluses
1.3The Effects of Changing Demand and/or Supply
1.4Algebraic Solutions

HOMEWORK

REFERENCES

1.1 Equilibrium Price and Quantity

The market equilibrium is found at the point at which the market supply and market
demand curves intersect. The price at the intersection of the market supply curve and
the market demand curve is called equilibrium price, and the quantity is called the
equilibrium quantity. At the equilibrium price, the amount that buyers are willing and
able to buy is exactly equal to the amount that sellers are willing and able to produce.
For instance, at Ph3.00 per piece of ice candy, Annikah and Amartya are willing to buy
40 pieces of ice candy per month and sellers are willing to supply 40 pieces of ice candy
per month. Neither may be “happy” about the price; the buyers would probably like a
lower price and the sellers would probably like a higher price. But both buyers and
sellers are able to carry out their purchase and sales plan at the Ph3.00 price. At any
other price, either suppliers or demanders would be unable to trade as much as they
would like.

Exhibit 1. Market Equilibrium

Price of
Supply
cellular phone
(per unit)
Pe
Equilibriu
m

Demand

Qe Quantity of cellular
phone
(units per month)
1.2 Shortages and Surpluses
What happens when the market price is not equal to the equilibrium price? Suppose the
market price is above the equilibrium price, it is clear that a surplus, or excess quantity
supplied, would exist. That is, at this price, firms would be willing to sell more than
demanders would be willing to buy. To get rid of the unwanted surplus, frustrated
suppliers would cut their price and cut back on production. And as price falls,
consumers would buy more, ultimately eliminating the unsold surplus and returning the
market to the equilibrium level.

What would happen if the market price of coffee were below the equilibrium price? A
shortage or excess quantity demanded would exist. Because of shortage, frustrated
buyers would be forced to compete for the existing supply, bidding up the price. The
rising price would have two effects:

(1) Producers would be willing to increase the quantity supplied, and


(2) The higher price would decrease the quantity demanded.
Together, these two effects would ultimately eliminate the shortage, returning the market
to equilibrium.

1.3 The Effects of Changing Demand and/or Supply


(1) Increase in demand and constant supply Increase in Pe and Qe
(2) Decrease in demand and constant supply Decrease in Pe and Qe
(3) Constant demand and increase in supply Decrease in Pe and increase in Qe
(4) Constant demand and decrease in supply  Increase in Pe and decrease in Qe
(5) More cases…

1.4 Algebraic Solutions


A Linear Model: Solution by Elimination of Variables

One way of finding a solution to an equation system is by successive elimination of


variables and equations through substitution.

Let Qe = Qd = Qs

Qd = a-bP (a, b >0)


Qs = -c+dP (c, d >0)

a-bP = -c+dP
a+c = bP+dP
a+c = (b+d)P
Pe = (a+c)/(b+d)

Qd = a-b[(a+c)/(b+d)]
= [a(b+d)-b(a+c)]/(b+d)
= (ab+ad-ab-bc)/(b+d)
= (ad-bc)/(b+d)

Thus, Qd = Qs = Qe = (ad-bc)/(b+d)

HOMEWORK

Table 1 show the demand and supply schedules for milk.

Price Qd Qs
(US$ per (cartons per
carton) day)
1.00 200 100
1.25 175 130
1.50 150 150
1.75 125 170
2.00 100 190

a. What is the equilibrium price and equilibrium quantity of milk?


b. Describe the situation in the milk market if the price were $1.75 a carton and
explain how the market reaches its new equilibrium.
c. A drought decreases the quantity supply by 45 cartons a day at each price. What
is the new equilibrium and how does the market adjust to it?
d. Milk becomes more popular and better feeds increase the quantity of milk. How
do these events influence demand and supply? If there is no drought, do they
create a shortage or a surplus at the equilibrium price in part a? Describe how
the equilibrium price and equilibrium quantity change.

REFERENCES
Case, Karl and Fair, Ray. (2002). Principles of Economics (6th ed.). USA: Prentice Hall.

Mankiw, Gregory. (2002). Principles of Economics (2nd ed.). Forth Worth, Texas: South-
Western/Thomson.

McConnell, Campbell R. and Brue, Stanley L. (2002). Economics: Principles, Problems,


and Policies (15th ed.). New York, NY: McGraw-Hill Companies, Inc.

Samuelson, Paul and Nordhaus, William. (2005). Economics (18th ed.). USA: McGraw-
Hill.

Stiglitz, Joseph E. and Walsh, Carl E. (2002). Economics (3rd ed.). New York, NY: WW
Norton and Company, Inc.

ABOUT THE AUTHORS

Dr. Aileen L. Camba and Dr. Abraham C. Camba Jr. are a wife-and-husband
duo. They are dedicated to the challenge of explaining Economics and
Finance ever more clearly to an ever-growing body of students. They are
passionate about their subjects and about the free expression of blogging.
Please visit their weblogs:
• http://quantcrunchtutor.blogspot.com
• http://get-globaleconomictrends.blogspot.com
• http://tourism7aroundworld.blogspot.com
• http://homebusinessinternetlifestyle.blogspot.com

They can be reached at (632)517-5785 or (63)9056648384, or email them at


quantcrunchtutor@gmail.com.

"Trust in the LORD with all your heart and lean not on your own understanding;
in all your ways acknowledge Him, and He will make your paths straight."
Proverbs 3:5-6

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