A MICROECONOMICS

PRESENTATION
EQUILIBRIUM & PRICE
MAKING
 CONTENT:
DEFINITION
PROPERTIES OF EQUILIBRIUM
EFFECT OF A SHIFT IN SUPPLY OR
DEMAND
INTERPRETATIONS
CHANGES IN PRICE AND QUANTITY
SIGNIFICANT INSTANCES:
THE GREAT DEPRESSION
THE GLOBAL RECESSION
 DEFINITION:
“ECONOMIC EQUILIBRIUM IS A STATE OF THE
WORLD WHERE ECONOMIC FORCES ARE
BALANCED AND IN THE ABSENCE OF
EXTERNAL INFLUENCES, THE VALUES OF
ECONOMIC VARIABLES WILL NOT CHANGE.”

“TO PUT IT SIMPLY, IT IS THE POINT AT

WHICH QUANTITY DEMANDED AND
QUANTITY SUPPLIED ARE ‘EQUAL’.”

i.e. ‘QUANTITY DEMANDED=QUANTITY

MARKET EQUILIBRIUM:
 IT REFERS TO A CONDITION
WHERE A MARKET PRICE IS
ESTABLISHED THROUGH
COMPETITION SUCH THAT
THE AMOUNT OF GOODS OR
SERVICES SOUGHT BY
BUYERS IS EQUAL TO THE
AMOUNT OF GOODS OR
SERVICES PRODUCED BY
SELLERS.

 THIS PRICE IS REFERRED

TO AS “EQUILIBRIUM
PRICE” OR “MARKET
CLEARING PRICE”.
PROPERTIES OF
EQUILIBRIUM:
“WHEN THE PRICE IS ABOVE THE EQUILIBRIUM
POINT, THERE IS A SURPLUS OF SUPPLY”

DIFFERENT DEMAND CURVES AND DEMAND CURVES

HAVE DIFFERENT POINTS OF ECONOMIC EQUILIBRIUM.

IN SIMPLE MICROECONOMIC STORIES OF SUPPLY AND

DEMAND IN A MARKET, A STATIC EQUILIBRIUM IS
OBSERVED IN A MARKET.

EQUILIBRIUM MAY BE MULTI MARKET OR GENERAL.

PROPERTIES OF
EQUILIBRIUM:
“EQUILIBRIUM MEANS A BALANCE BETWEEN
SUPPLY FORCES AND DEMAND FORCES”

FOR INSTANCE, AN INCREASE IN SUPPLY WILL

DISRUPT THE EQUILIBRIUM.

THERE WILL BE NO CHANGE IN PRICE OR THE

AMOUNT OF OUTPUT BOUGHT AND SOLD SHORT
OF AN EXOGENOUS SHIFT IN SUPPLY OR
DEMAND i.e.CHANGE IN TECHNOLOGY AND
PEOPLE’S TASTES.
PROPERTIES OF
EQUILIBRIUM(CONT.):
“NOT ALL ECONOMIC EQUILIBRIA ARE
STABLE”

FOR STABILITY IN AN EQUILIBRIUM, A SMALL

DEVIATION FROM EQUILIBRIUM LEADS TO
FORCES THAT RETURN AN ECONOMIC
SUBSYSTEM TOWARD THE ORIGINAL
EQUILIBRIUM.

IF SUPPLY AND DEMAND CURVES INTERSECT

MORE THAN ONCE, THEN BOTH STABLE AND
UNSTABLE EQUILIBRIA ARE FOUND.
EFFECT OF A SHIFT
IN SUPPLY OR
DEMAND:
SUPPLY SHIFT:
EFFECT OF A SHIFT IN
SUPPLY OR DEMAND:
SUPPLY SHIFT:

IF SUPPLY SHIFTS LEFTWARD, A

SHORTAGE WILL DEVELOP AT THE
ORIGINAL PRICE.

PRICE WILL BE BID UP UNTIL QUANTITIES

WILLINGLY BOUGHT AND SOLD ARE
EQUAL, AT NEW EQUILIBRIUM E’.
DEMAND SHIFT:
EFFECT OF A SHIFT IN SUPPLY
OR DEMAND(CONT.):
DEMAND SHIFT:

A SHIFT IN THE DEMAND CURVE LEADS TO

EXCESS DEMAND .

PRICE WILL BE BID UP AS EQUILIBRIUM

PRICE & QUANTITY MOVE UPWARD TO E’’.
INTERPRETATIONS:
ADAM SMITH, A
CLASSICAL
ECONOMIST
MAINTAINED THAT
THE FREE
MARKET WOULD
TEND TOWARD
ECONOMIC
EQUILIBRIUM
THROUGH THE
PRICE
MECHANISM .
PRICE MECHANISM:
THE PRICE MECHANISM IS A TERM THAT REFERS
TO THE ROLE OF PRICE CHANGES IN ALLOCATING
RESOURCES.

IT IS AN OUTCOME OF A MARKET ECONOMY

WHERE THE INTERACTION OF SUPPLY AND
DEMAND CREATES AN EQUILIBRIUM MARKET PRICE
FOR INDIVIDUAL PRODUCTS.

SUPPLIERS USE PRICE AS A GUIDE WHEN DECIDING

HOW MUCH OF AN ITEM TO PRODUCE,AND HAVING
RESOURCES TO EMPLOY.
INTERPRETATIONS(CONT.)
EXCESS SUPPLY(MARKET SURPLUS)

PRICE CUTS

DECREASE IN QTY SUPPLIED

INCREASE IN QTY DEMANDED

ABOLITION OF EXCESS SUPPLY(GLUT)

INTERPRETATIONS:
IN AN UNFETTERED MARKET:

EXCESS DEMAND

INCREASE IN PRICE

REDUCTION IN QTY DEMANDED

INCREASE IN QTY SUPPLIED

CHANGES IN PRICE &
QUANTITY:
SHIFT OF DEMAND:
SHIFT OF DEMAND:

WE START OUT WITH INITIAL

EQUILIBRIUM AT E AND A
QUANTITY OF 10 UNITS.

AN INCREASE IN DEMAND (i.e. A

SHIFT OF THE DEMAND CURVE)
PRODUCES A NEW EQUILIBRIUM OF
15 UNITS AT E’’.
CHANGES IN PRICE &
QUANTITY(CONT.):
MOVEMENT ALONG DEMAND CURVE:
MOVEMENT ALONG
DEMAND CURVE:
AGAIN, WE START OUT WITH
INITIAL EQUILIBRIUM AT E AND
A QUANTITY OF 10 UNITS.

A SHIFT IN SUPPLY RESULTS IN

A MOVEMENT ALONG THE
DEMAND CURVE FROM E TO E’’.
INSTANCES:
THE GREAT
DEPRESSION(1929-193):
IN 1929,THE STOCK MARKETS
PLUMMETED TO AN ALL TIME
LOW.

25% OF THE POPULATION

WAS UNEMPLOYED.

A STEEP DECLINE IN THE

PRICES OF COMMODITIES
WAS OBSERVED.

STILL REMAINS TO BE THE

WORST ECONOMIC CRISIS OF
ALL TIME.
THE GLOBAL
RECESSION(LATE 2000s):
US MONETARY POLICY
LED TO EXCESSIVE
CREATION OF MONEY.

A TREMENDOUS HIKE IN
PRICES OF COMMODITIES
WAS OBSERVED IN MID-
2000s.

THE SUB PRIME CRISIS

ALSO PLAYED A KEY
ROLE IN THE EXPANSION
OF ECONOMIC
MELTDOWN.
Q

&
A
THANK YOU!