2. Determina,on
of
Equilibrium
Market
Prices
• Equilibrium
means
a
state
of
equality
or
balance
between
market
demand
and
supply
• Prices
where
demand
and
supply
are
out
of
balance
are
called
points
of
disequilibrium.
• Most
demand
&
supply
exam
ques@ons
present
the
student
with
an
event(s)
that
causes
either
the
demand
or
supply
curve
(or
both)
to
shiD.
The
student
is
then
expected
to
find
and
analyse
the
new
equilibrium.
Market
Supply
Market
Demand
3. Equilibrium
Market
Prices
–
Supply
and
Demand
Table
Price
Quan,ty
demanded
Quan,ty
supplied
£20
6,000
8,000
£18
7,000
8,000
£16
8,000
8,000
£14
9,000
8,000
£12
10,000
8,000
A
football
club
has
a
fixed
stadium
capacity
of
8,000
seats
and
has
es@mated
the
level
of
demand
at
different
@cket
prices
as
follows:
The
equilibrium
price
in
this
situa@on
is
£16
where
quan@ty
demanded
and
supplied
=
8,000
@ckets.
Supply
&
demand
in
balance.
4. Equilibrium
Prices
in
a
Supply
and
Demand
Diagram
Price
of
Wheat
Quan@ty
of
wheat
Market
Supply
Pe
Qe
Equilibrium
is
a
state
of
balance
between
market
demand
and
supply
–
there
is
no
excess
demand
or
supply
Market
Demand
Pe
is
also
known
as
the
“market
clearing
price”
5. Disequilibrium
–
Excess
Supply
Price
of
Wheat
Quan@ty
of
Wheat
Market
Supply
Pe
Qe
If
the
current
market
price
was
P2,
there
would
be
an
excess
supply
–
of
Q2
–
Q3,
this
will
put
downward
pressure
on
price
Market
Demand
P2
Q2
Q3
Excess
supply
6. Disequilibrium
–
Excess
Demand
Price
of
Wheat
Quan@ty
of
Wheat
Market
Supply
Pe
Qe
If
the
current
market
price
was
P1,
there
would
be
an
excess
demand
–
of
Q1
–
Q4,
this
will
put
upward
pressure
on
price
Market
Demand
P1
Q1
Q4
Excess
demand
7. Equilibrium
Market
Prices
–
Changes
in
Demand
Price
per
kg
Quan,ty
demanded
(1)
Quan,ty
supplied
Quan,ty
demanded
(2)
£10
100
380
240
£9
130
340
270
£8
160
300
300
£7
190
260
330
£6
220
220
360
£5
250
180
390
The
demand
for
and
supply
of
fresh
fish
in
a
local
market
is
shown
in
the
table
below.
The
original
equilibrium
price
is
£6
per
kg
If
market
demand
rises
by
80kg
at
each
and
every
price,
then
the
new
equilibrium
price
will
be
£8
with
300kg
bought
and
sold
8. Changes
in
Equilibrium
Prices
–
Increasing
Demand
Price
of
Coffee
Quan@ty
of
Coffee
Market
Supply
P1
Q1
An
outward
shiD
of
market
demand
(ceteris
paribus)
leads
to
a
rise
in
equilibrium
price
and
an
expansion
of
market
supply
Market
Demand
(1)
Market
Demand
(2)
P2
Q2
If
price
did
not
rise
from
P1
aDer
a
shiD
in
demand
from
D1
to
D,
there
would
be
excess
demand
9. Equilibrium
Market
Prices
–
Changes
in
Supply
Price
per
kg
Quan,ty
demanded
(1)
Quan,ty
supplied
Quan,ty
Supplied
(2)
$40
2,000
3,800
4,700
$35
2,500
3,400
4,300
$30
3,000
3,000
3,900
$25
3,500
2,600
3,500
$20
4,000
2,200
3,100
$15
4,500
1,800
2,700
The
demand
for
and
supply
of
cocoa
beans
in
a
local
market
is
shown
in
the
table
below.
The
original
equilibrium
price
is
$30.
If
market
supply
increases
by
900
tonnes
at
each
price,
then
the
new
equilibrium
price
will
be
£25
with
3,500
tonnes
bought
&
sold
10. Changes
in
Equilibrium
Prices
–
Increasing
Supply
Price
of
Coffee
Quan@ty
supplied
Market
Supply
(1)
Pe
Qe
An
outward
shiD
of
market
supply
(ceteris
paribus)
will
lead
to
a
fall
in
equilibrium
price
and
an
expansion
of
market
demand
Market
Demand
(1)
P2
Q2
Market
Supply
(2)
0
11. Changes
in
Equilibrium
Prices
–
Decreasing
Demand
Price
of
Coffee
Quan@ty
supplied
Market
Supply
(1)
Pe
Qe
An
inward
shiD
of
market
demand
(ceteris
paribus)
leads
to
a
fall
in
equilibrium
price
and
a
contrac@on
of
market
supply
Market
Demand
(1)
P2
Q2
Market
Demand
(2)
0
12. Changes
in
Equilibrium
Prices
–
Decreasing
Supply
Price
of
Coffee
Quan@ty
supplied
Market
Supply
(1)
Pe
Qe
An
inward
shiD
of
market
supply
(ceteris
paribus)
leads
to
a
rise
in
equilibrium
price
and
a
contrac@on
of
market
demand
Market
Demand
(1)
P2
Q2
Market
Supply
(2)
0
13. Moving
from
one
Market
Equilibrium
to
another
Price
of
Rubber
Quan@ty
P1
Q1
An
increase
in
demand
in
the
immediate
period
leads
to
the
price
rising
to
P2,
before
an
expansion
of
supply
takes
effect
Demand
(1)
P3
Q2
Supply
(1)
Demand
(2)
P2
A
B
C
0
14. ShiSs
in
both
Market
Supply
and
Market
Demand
Price
of
Buaer
Quan@ty
P1
Q1
In
this
example
the
size
of
the
outward
shiD
of
market
supply
exceeds
the
increase
in
market
demand.
Both
factors
cause
quan@ty
bought
and
sold
to
rise;
but
the
market
price
will
fall.
D1
P3
Q2
S1
P2
S2
D2
Q3
A
B
C
0
15. Explaining
Possible
Changes
in
Beef
Prices
Price
of
Beef
Quan@ty
of
beef
Average
retail
price
of
beef
in
the
UK
£
per
kg
2010 6.16
2011 6.42
2012 6.99
2013 7.47
What
demand
&
supply
factors
might
explain
the
rising
price
of
beef?
Demand
Factors
Supply
Factors
Rise
in
price
of
beef
subs@tutes
Increase
in
price
of
animal
foodstuffs
Rising
real
incomes
if
YED
>
0
Higher
rents
paid
by
beef
farmers
Change
in
tastes
and
preferences
Rise
in
wages
of
farm
labourers
D1
D2
S1
S2
P1
P2
0
16. Real
World:
Explaining
Changes
in
UK
Footwear
Prices
80
85
90
95
100
105
110
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Consumer
price
index
for
footwear
products
in
UK
Global
compe@@on
from
lower
cost
countries
Intense
retail
compe@@on
on
the
high
street
and
online
Falling
input
costs
have
increased
market
supply
Strong
exchange
rate
–
which
makes
imports
of
shoes
cheaper
17. Likely
Effects
of
Changes
in
UK
Wheat
Prices
0
20
40
60
80
100
120
140
160
180
200
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015*
Price
per
tonne
in
£s
UK
wheat
price,
average
price
per
tonne
(£)
• Lower
prices
may
cause
a
contrac@on
of
wheat
supply
Produc@on
• Lower
revenues
might
damage
incomes
for
farmers
Revenues
and
Profits
• Bread
manufacturers
will
benefit
from
lower
wheat
prices
–
their
input
costs
have
fallen
Manufacturing
costs
18. Equilibrium
Prices
and
Producer
Revenue
Price
of
Rubber
Quan@ty
supplied
P1
Q1
An
outward
shiD
of
demand
will
lead
to
a
higher
price,
an
expansion
of
produc@on
and
a
rise
in
total
producer
revenue
Demand
(1)
P2
Q2
Supply
(1)
Demand
(2)
Total
revenue
at
the
higher
market
price
0
Total
revenue
=
market
price
x
quan@ty
sold
19. Summary
of
Changes
in
Equilibrium
Prices
Equilibrium
prices
change
when
condi@ons
of
demand/supply
alter
ShiS
Equilibrium
Price
Equilibrium
Quan,ty
Demand
increases
Higher
Higher
Demand
decreases
Lower
Lower
Supply
increases
Lower
Higher
Supply
decreases
Higher
Lower
In
analysing
price
changes,
iden@fy
relevant
supply/demand
factors
20. Summary
of
Changes
in
Equilibrium
Prices
Demand Supply
Equilibrium
Price
Equilibrium
Quan,ty
+ + ? +
+ 0 + +
+ -‐ + ?
0 + -‐ +
0 0 0 0
0 -‐ + -‐
-‐ + -‐ +
-‐ 0 -‐ -‐
-‐ -‐ ? -‐
The
possible
outcomes
for
price
and
quan@ty
are
less
certain
when
there
is
more
than
one
change
in
demand
and
supply
condi@ons
21. Regulated
Prices
and
Industry
Regulators
• Not
all
prices
are
set
by
the
free-‐
market
forces
of
supply
and
demand.
• In
Britain,
a
number
of
prices
are
affected
by
regulators
who
may
impose
a
pricing
formula
on
suppliers
• Good
examples
are
rail
fares,
the
cost
of
postage
stamps
and
water
bills.
• In
the
UK
rail
industry,
some
fares
are
unregulated
allowing
train
opera@ng
companies
to
set
their
own
prices.
• But
around
half
of
the
fares
charged
for
rail
travellers
are
set
by
the
rail
regulator.
The
EU
has
capped
mobile
phone
roaming
charges
Many
rail
fares
in
the
UK
are
heavily
regulated
22. 9
8
6
0
1
2
3
4
5
6
7
8
9
10
July
2012
July
2013
July
2014
Price
cap
in
Euro
cents
Mobile
Phone
Price
Caps
Set
by
the
European
Union
70
45
20
0
10
20
30
40
50
60
70
80
July
2012
July
2013
July
2014
Price
cap
in
Euro
cents
per
MB
EU
Price
caps
on
text
messages
(SMS)
EU
Price
caps
on
mobile
data
roaming
ADer
interven@on
by
the
EU
Compe@@on
Commission,
from
15
June
2017,
those
travelling
within
the
EU
will
be
able
to
use
their
mobile
internet
abroad
at
no
extra
charge.
23. Consumer
Price
Index
for
UK
Rail
Fares
2003-‐2014
92.5
96.3
100
104.2
109.4
114.2
120.6
130.5
139.3
146.3
152
157
0
20
40
60
80
100
120
140
160
180
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Consumer
price
index
for
rail
fares
2005=100
Around
45
per
cent
of
UK
rail
fares
are
subject
to
regula@on
(since
2015
this
is
limited
to
the
rate
of
RPI
infla@on.
All
other
fares
are
set
at
a
commercial
rate
by
the
train
opera@ng
companies
such
as
First
Great
Western
and
Virgin
Trains
