Market In Action

• Market equilibrium changes


  Happen when demand and supply curve shift rightward or leftward
• Change in demand


  1. Demand curve shifts rightward or leftward

  2. Increase in demand results in a greater equilibrium price and quantity

  3. Decrease in demand results in a lower equilibrium price and quantity
• Increase in demand


  • Change in government policy that increases the tax exemption for sport equipment purchases causes demand curve to shift to the right
• Demand change from a to b


  Causes shortage
• Price is forced to increase


  Quantity demanded falls from b to c
• Decrease in demand


  • Customer's anticipation that the price of shoes will fall in near future shifts the demand curve to the left
• Demand change from a to b

  Causes surplus
• Price is forced to decrease


  Quantity demanded rises from b to c
• Change in supply


  1. Supply curve shifts rightward or leftward

  2. Increase in supply results in a lower equilibrium price but greater equilibrium quantity

  3. Decrease in supply results in a greater equilibrium price and lower equilibrium quantity
• Increase in supply


  • Increase in the number of sellers causes supply curve to shift to the right
• Supply change from a to b

  Causes surplus
• Price is forced to drop


  Quantity demanded rises from a to c
• Decrease in supply


  • Increase in the price of casual shoes causes supply curve of sport shoes to shift to the left
• Supply change from a to b

  Causes shortage
• Price is forced to rise


  Quantity demanded falls from a to c
• Effect of shifts in demand or supply on market equilibrium

  • Demand increases
  • Demand decreases
  • Supply increases
  • Supply decreases
• Effect on equilibrium price

  • Increases
  • Decreases
• Effect on equilibrium quantity

  • Increases
  • Decreases
• Price control


  Use of the power of the government to establish prices different from the equilibrium prices that would prevail
• Price ceiling


  • Price ceiling (Pc) is set below the market price (Pe)
  • There will be excess demand or a shortage
  • It may lead to discrimination, and even the development of a black market
  • Government may give subsidy to supplier
• Price floor


  • Price floor is set above the market price
  • There will be a surplus or an excess of supply
  • The government buys up any excess supply of certain commodities to help the producers in particular industries
• The maximum price set by the government for particular goods and services that they believe are being sold too high of a price
• The minimum price set by the government for certain commodities and services that they believe are being sold at a market price that is too low