A MICROECONOMICS PRESENTATION

EQUILIBRIUM & PRICE MAKING

CONTENT:y DEFINITION y PROPERTIES OF EQUILIBRIUM y EFFECT OF A SHIFT IN SUPPLY OR

DEMAND y INTERPRETATIONS y CHANGES IN PRICE AND QUANTITY y SIGNIFICANT INSTANCES: THE GREAT DEPRESSION THE GLOBAL RECESSION

DEFINITION:y 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.

y

TO PUT IT SIMPLY, IT IS THE POINT AT WHICH QUANTITY DEMANDED AND QUANTITY SUPPLIED ARE EQUAL.

i.e. QUANTITY DEMANDED=QUANTITY SUPPLIED

MARKET EQUILIBRIUM:y 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.y THIS PRICE IS REFERRED

TO AS EQUILIBRIUM PRICE OR MARKET CLEARING PRICE.

PROPERTIES OF EQUILIBRIUM:y WHEN THE PRICE IS ABOVE THE

EQUILIBRIUM POINT, THERE IS A SURPLUS SUPPLY

OF

y DIFFERENT DEMAND CURVES AND DEMAND CURVES

HAVE DIFFERENT POINTS OF ECONOMIC EQUILIBRIUM.y IN SIMPLE MICROECONOMIC STORIES OF SUPPLY

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

y EQUILIBRIUM MAY BE MULTI MARKET OR GENERAL.

PROPERTIES OF EQUILIBRIUM:y EQUILIBRIUM MEANS A BALANCE

BETWEEN SUPPLY FORCES AND DEMAND FORCES

y FOR INSTANCE, AN INCREASE IN SUPPLY WILL

DISRUPT THE EQUILIBRIUM.y 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 PEOPLES TASTES.

PROPERTIES OF EQUILIBRIUM(CONT.):y NOT ALL ECONOMIC EQUILIBRIA ARE

STABLEy FOR STABILITY IN AN EQUILIBRIUM, A SMALL

DEVIATION FROM EQUILIBRIUM LEADS TO FORCES THAT RETURN AN ECONOMIC SUBSYSTEM TOWARD THE ORIGINAL EQUILIBRIUM.y 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:y IF SUPPLY SHIFTS LEFTWARD, A

SHORTAGE WILL DEVELOP AT THE ORIGINAL PRICE.y 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:y A SHIFT IN THE DEMAND CURVE LEADS TO

EXCESS DEMAND .

y 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:y THE PRICE MECHANISM IS A TERM THAT REFERS TO THE

ROLE OF PRICE CHANGES IN ALLOCATING RESOURCES.y IT IS AN OUTCOME OF A MARKET ECONOMY WHERE

THE INTERACTION OF SUPPLY AND DEMAND CREATES AN EQUILIBRIUM MARKET PRICE FOR INDIVIDUAL PRODUCTS.y 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:y IN AN UNFETTERED MARKET:

EXCESS DEMAND INCREASE IN PRICE REDUCTION IN QTY DEMANDED INCREASE IN QTY SUPPLIED

CHANGES IN PRICE & QUANTITY:y SHIFT OF DEMAND:

SHIFT OF DEMAND:y WE START OUT WITH INITIAL

EQUILIBRIUM AT E AND A QUANTITY OF 10 UNITS.y 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.):y MOVEMENT ALONG DEMAND CURVE:

MOVEMENT ALONG DEMAND CURVE:y AGAIN, WE START OUT WITH INITIAL

EQUILIBRIUM AT E AND A QUANTITY OF 10 UNITS.y A SHIFT IN SUPPLY RESULTS IN A

MOVEMENT ALONG THE DEMAND CURVE FROM E TO E.

INSTANCES:

THE GREAT DEPRESSION(1929-193):y IN 1929,THE STOCK

MARKETS PLUMMETED TO AN ALL TIME LOW. WAS UNEMPLOYED.

y 25% OF THE POPULATION

y A STEEP DECLINE IN THE

PRICES OF COMMODITIES WAS OBSERVED. THE WORST ECONOMIC CRISIS OF ALL TIME.

y STILL REMAINS TO BE

THE GLOBAL RECESSION(LATE 2000s):y US MONETARY POLICY

LED TO EXCESSIVE CREATION OF MONEY.y A TREMENDOUS HIKE IN

PRICES OF COMMODITIES WAS OBSERVED IN MID2000s.y THE SUB PRIME

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

Q&

A

THANK YOU!