Market Equilibrium

MARKET
EQUILIBRIUM
Market Equilibrium
•To find market equilibrium, we combine
the demand and supply curve onto one
graph.
•The point of intersection of supply and
demand, marks the point of equilibrium.
•At this point of intersection, buyers and
sellers agree on both price and quantity.
pd = ps or qd = qs
Market Equilibrium
(Example)
Given demand function (fd): q = -1/3p + 5 and supply function
(fs): q = 2/3p + 2. Find the market equilibrium and draw the
graph!
Answer:
Market Equilibrium : qd = qs or pd =ps
qd = qs q = -1/3p + 5
-1/3p + 5 = 2/3p + 2 = -1/3(3) + 5
5-2 = 2/3p + 1/3p =4
p=3
Equilibrium point = E (pE, qE) = E (3,4)

Market Equilibrium
(Example)
Market Equilibrium Graph!
fd : q = -1/3p + 5 fs : q = 2/3p + 2
p 0 15 p 0 -3
q 5 0 q 2 0
q fs
5
E (3,4)
2
fd
-3 15 p
Tax Influence on Market Equilibrium
•Tax per Unit
Before Tax After Tax

Demand fd : p = f(q) fdt : p = f(q)
Function
Supply fs : p = f(q) fst : p = f(q) + t
Function
Equilibrium E (pE, qE) Et (pt, qt)
• The Change on Quantity after Tax
Δq = qE - qt
• The Change on Price after Tax
Δp = pt - pE
• Tax per Unit that Consumers paid
tc =Δp = (pt – pE)

• Total Tax that Consumer paid
Tc =(Δp) • (qt)
• Tax per Unit that Producers paid
tp = t - Δp
• Total Tax that Producers paid
Tp =(t-Δp) • (qt)
• Total Tax Collected by Government
T = t • qt
= Tc + Tp
•Percentage Tax
Before Tax After Tax

Demand fd : p = f(q) fdr : p = f(q)
Function
Supply fs : p = f(q) fsr : p = f(q) (1+r)
Function
Equilibrium E (pE, qE) Er (pr, qr)
Tax Influence on Market
Equilibrium (Example)
Given demand and supply function below:
fd: q= -2p+24 fs: q = 2p-10
If the tax per unit that collected by the
government is 1$, find:
a.Equilibrium price and quantity before and after
tax
b.Total Tax collected by the government
c.Total Tax that consumers paid
d.Total Tax that producers paid
e.Draw the Graph!
(Example)
Answer:
a. Equilibrium market before and after tax
- Equilibrium market before tax
fd: q= -2p+24 pd = -1/2q+12
fs: q= 2p-10 ps = 1/2q+5
market equilibrium: pd = ps
pd = ps
-1/2q+12 = 1/2q+5 p = 1/2q+5
-q = -7; qE= 7 pE= 1/2(7)+5 = 17/2
market equilibrium point: E (17/2, 7)
(Example)
Answer:
a. Equilibrium market before and after tax
- Equilibrium market after tax
fdt: p = -1/2q+12
fst: p = 1/2q+5+t = 1/2q+5+1 = 1/2q+6
pd = ps
-1/2q+12 = 1/2q+6 p = 1/2q+6
-q = -6; qt= 6 pt= ½(6)+6 = 9
market equilibrium point: Et (9, 6)
(Example)
Answer:
b. Total Tax collected by the government
T = t.qt
= 1.6 = 6$
c. Total Tax that consumers paid
Tc = Δp . qt
= (pt – pE). qt
= (9-8,5). 6 = 3$
d. Total Tax that producers paid
Tp = (t-Δp). qt
= (1-0,5)6 = 3$
(Example)
• The Graph
fd: q = -2p +24
p 0 12 8,5
24
q 24 0 7
E (17/2, 7) fs: q = 2p -10

7
6 Et (9,6) p 0 5 8,5
q -10 0 7
5 6 8,5 9 12
fst: p = 1/2q +6
p 0 6 9
-10
q -12 0 6
-12
Exercises
fd: q= -2p+10 fs: q = 2p-8
q = quantity (in kg) p= price (in thousand rupiah)
If the tax per unit that collected by the government is
Rp500, find:
a.Equilibrium price and quantity before and after tax
b.Total Tax collected by the government
c.Total Tax that consumers paid
d.Total Tax that producers paid
e.Draw the Graph!
The Effect of Subsidy on Market
Equilibrium
•Subsidy
Before Subsidy After Subsidy

Demand fd : p = f(q) fds : p = f(q)
Function
Supply fs : p = f(q) fss : p = f(q) - s
Function
Equilibrium E (pE, qE) Es (ps, qs)
Equilibrium
• The Change on Quantity after Subsidy
Δq = qs - qE
• The Change on Price after Subsidy
Δp = pE - ps
• Subsidy that Consumers received
sc =Δp = (pE – ps)

Equilibrium
• Total Subsidy received by Consumers
Sc =Δp • qs
• Subsidy that Producers received
sp = s - Δp
• Total Subsidy received by Producers
Sp =(s-Δp) • (qs)
Equilibrium
• Total Subsidy Provided by Government
S = s • qs
= Sc + Sp
fd: q= -2p+24 fs: q = 2p-10
If the subsidy that provided by the government is
1$, find:
a.Equilibrium price and quantity before and after
subsidy
b.Total subsidy provided by the government
c.Total subsidy that consumers received
d.Total subsidy that producers received
e.Draw the Graph!
Answer:
a. Equilibrium market before and after subsidy
- Equilibrium market before subsidy
fd: q= -2p+24 p = -1/2q+12
fs: q= 2p-10 p = 1/2q+5
pd = ps
-1/2q+12 = 1/2q+5 p = 1/2q+5
-q = -7; qE= 7 pE= 1/2(7)+5 = 17/2
market equilibrium point: E (17/2, 7)
Answer:
a. Equilibrium market before and after subsidy
- Equilibrium market after subsidy
fdt: p = -1/2q+12
fst: p = 1/2q+5-s = 1/2q+5-1 = 1/2q+4
pd = ps
-1/2q+12 = 1/2q+4 p = 1/2q+4
-q = -8; qs= 8 ps= ½(8)+4 = 8
market equilibrium point: Es (8, 8)
Answer:
b. Total subsidy provided by the government
S = s . qs
= 1 . 8 = 8$
c. Total Tax that consumers paid
Sc = Δp . qs
= (pE – ps). qs
= (8,5-8). 8 = 4$
d. Total Tax that producers paid
Sp = (s-Δp). qs
= (1-0,5)8 = 4$
• The Graph
fd: q = -2p +24
p 0 12 8,5
24
q 24 0 7
Es (8, 8) fs: q = 2p -10

8
7 E (8,5,7) p 0 5 8,5
q -10 0 7
4 5 8 8,5 12
fss: p = 1/2q +4
p 0 4 8
-8
q -8 0 8
-10
Exercises
Given demand and supply function of Urea Fertilizer
below:
fd: q = -12p+12 fs: q= 3p-3
q = quantity of Urea (in kg) p = price (in thousand rupiah)
If the subsidy that provided by the government is Rp 1000,
find:
a.Equilibrium price and quantity before and after subsidy
b.Total subsidy provided by the government
c.Total subsidy that consumers received
d.Total subsidy that producers received
e.Draw the Graph!
CONSUMPTION
FUNCTION
Consumption Function
• Consumption Function
C = a + bY
• National Income
Y=C+S
• Notation:
C = National Consumption a = autonomous consumption
Y = National Income b = ΔC/ΔY (Marginal Propensity
S = National Saving to Consume (MPC))
Consumption Function (Example)
Given consumption function below (in million rupiah):
C = 40 - 0,4Y
Find:
a.The consumption if Income= 200
b.Saving Function
c.Draw the graph!
Answer:
a.Y = 200; C= 40 - 0,4(200) = 120 million rupiah
b.Y= C+S
S = Y-C = Y – (40 – 0,4Y)
= 1,4Y – 40 or -40 +1,4Y
Consumption Function (Example)
c. The Graph
Y 0 100
C
C 40 0
40
Y
100
Exercise
1. Given consumption function: C = 60+0,4Y.
Determine:
a.Saving function
b.The consumption and saving if Income= 400
c.Draw the graph separately!
2. Given autonomous consumption of a country =

200 with MPC = 0,4. Determine:
a.Consumption and saving function
b.The consumption and saving if Income= 10000
BREAK EVEN
POINT
TOTAL REVENUE FUNCTION
• Total Revenue
R=pxq
• Average Revenue
AR = R/q
= (p x q)/q
• Notation:
R = Total Revenue AR = Average Revenue
p = Price q = Quantity
COST FUNCTION
• Total Cost
C = FC + VC
= FC + v.q
• Average Cost
AC = C/q
• Notation:
C = Total Cost AC = Average Cost
FC = Fixed Cost v = variable cost per unit
VC = Total Variable Cost
Profit and Break Even Point
• Profit
π=R-C
Notation:
π = Profit
• Break Even Point R = Total Revenue
C = Total Cost
R=C FC = Fixed Cost
VC =Total Variable Cost
R = FC + VC p = Price
R – VC = FC q = Quantity
V = Variable Cost per Unit
p.q – v.q = FC
q(p-v) = FC
qE = FC/(p-v)
Break Even Point (Example)
Given cost function: C = 30000 + 100q and total revenue
(R)=200q. Determine:
a.The quantity that needed to make it become BEP
b.If the company wants to gain profit 10000, how many units
should they produce?
Answer:
a.C = R
30000 + 100q = 200q
30000 = 100q
q = 300
b. π= 10000, q=….?
π= R-C 10000 = 200q-(30000 + 100q)
40000 = 100q
q = 400
Exercise
a. The fixed cost to produce a product is $3000.
Variable cost per unit is 40% of the product
price. If the price is $10, find the quantity to
get BEP and how many units should they
produce if they wants to gain profit $1800.
b. Given cost function: C = 10000+50q and R=
100q. Find the quantity to get BEP and if the
company produce 250 units, will they gain
profit or loss?

Market Equilibrium

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Market Equilibrium

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MARKET

Equilibrium point = E (pE, qE) = E (3,4)

•Tax per Unit

Before Tax After Tax

• The Change on Price after Tax

tc =Δp = (pt – pE)

• Tax per Unit that Producers paid

Before Tax After Tax

E (17/2, 7) fs: q = 2p -10

Before Subsidy After Subsidy

• The Change on Price after Subsidy

sc =Δp = (pE – ps)

• Subsidy that Producers received

Es (8, 8) fs: q = 2p -10

2. Given autonomous consumption of a country =

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