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INTROD UCTION
In Topic 2 we have seen in Topic 2 how quantity

demanded correlates negativelywith price and quantity supplied correlates positively with

price. However, thoserelationshi ps are general. We may have to know how much the quantitydemand ed will decrease

if price increased by 10 percent. In Topic 3, you willlearn about market equilibrium. In other words, we

want to know about the levelof sensitivity of quantity demanded towards price change. This

information isimportant for price determination by firms. On the other hand, for an economist,this

information is vital for policy analysis.

TTo oppi

icc

33

Mar ketE

quili briu

m
By the end of this topic, you should be able to:1.

Demonstrate how equilibrium quantity and price is achieved usingdiagrams and equations;2.

Explain how market equilibrium can change;3. Calculate and interpret price elasticity in

demand, supply elasticitycross elasticity coefficient, and income elasticity;4.

Interpret cross elasticity coefficient, and income elasticity; and5. Apply the concept of

elasticity in market analysis.

LEARNIN G OUTCOM ES

TOPIC 3 MARKET EQUILIBRIUM

45

The sensitivity of quantity towards price change can be measured using theelasticity concept, which will be

discussed in this topic.

MARKET EQUILIB RIUM

What is meant by market equilibrium? How can demand and supply correlate?To show how both

interact in determining price and quantity, we need to drawthe demand and supply curves in one

diagram.The term equilibrium is used in economics to explain a condition when allvariables

have reached an established position with no tendency to change anyfurther. Equilibrium change will only

happen if there is change in other influenceor determinants .At the point of market equilibrium, the

need of buyers is equal to the need of sellers, that is, quantity demanded is equal to quantity supplied at a

certain pricelevel. The particular quantity and price are known as equilibrium quantity

and equilibrium price .From the past discussions, we know that demand curve has a negative

gradientwhereas supply curve has a positive gradient. Figure 3.1 depicts both curvesdrawn in the same diagram. Both

curves intersect at point E. Point E is known as equilibrium point , while P

e

and Q

represent equilibrium price and quantityrespecti vely.

3.1

The point of intersection between the demand and supply curves is the

market equilibrium point .Demand and supply are models that explain the respective

behaviour of consumers and sellers in market.

TOPIC 3 MARKET EQUILIBRIUM

46 Figure 3.1: Market equilibrium

3.1.1 Equilibrium , Surplus

and Shortage
Table 3.1 describes the concept of equilibrium, excess demand

and excess supply.Sometim es excess in demand is referred to shortage, while excess in supply isknown as

surplus. Hence, excess in demand is shown using negative valuewhereas excess in supply using positive

value. Zero surplus value indicatesequilibr ium.

Table 3.1: Market Surplus, Shortage and Equilibrium

Price(RM)Quantit yDemanded (Unit)QuantitySu pplied (Unit)Shortage (-)Surplus (+)Pressure onPrice

1 18 2 -16 Increased2 16 4 -12Increased3 14 6 -8Increased4 12 8 -4Increased5 10 10 0 Equilibrium6 8 12 +4 Decreased7 6 14

+8Decreased8 4 16 +12Decreased9 2 18 +16Decreased

Shortage occurs when quantity demanded exceeds

quantity supplied at a certainprice level. From Table 3.1, shortage or excess demand occurs at the

price of RM1to RM4 per unit. At the price of RM1 shortage is at 16 units and at the price of RM4, shortage had

decreased to 4 units. Shortage will increase the pressure onprice. Therefore, increase in price

will reduce shortage.

TOPIC 3 MARKET EQUILIBRIUM

47

Surplus occurs when quantity supplied exceeds quantity demanded at a certain

pricelevel. Surplus will be reduced when there is decrease in price. Hence, surplus reducesthe pressure on price.

From Table 3.1, we can see that surplus decreases from 16 unitsto 4 units when price is reduced from RM 9 to RM6 per

unit.Equilibrium will be achieved when there is no shortage or surplus. Thus, there isno pressure for a price change. In

Table 3.1, equilibrium is achieved at the priceof RM5 per unit for a quantity of 10 units. Do notice that shortage

will cause priceincrease; whereas surplus will result in price decrease.Figure 3.2 illustrates the condition of

shortage, surplus, equilibrium and pressureon price.

Figure 3.2:

Equilibrium, shortage and surplus

Quantity demanded exceeds quantity supplied

=Quantity supplied exceeds quantity demanded =Think of which refers to shortage

and which refers to surplus .

SELF-CHECK 3.1
In your own words, describe

how a market can achieve equilibrium.Sha re your answer with your classmate.

ACTIVITY 3.1

TOPIC 3 MARKET EQUILIBRIUM

48

3.1.2 Change in Market Equilibrium

Market equilibrium will remain unchanged as long as there are no market forcesaffecting demand and

supply. However, demand and supply always shift to theleft or to the right as a response to changes in other

determinant variables. Hence,change in other variables will result in the change of quantity and

priceequilibrium . (a) Demand Change Generally, changes in

demand or supply lead to predictable effects onequilibrium quantity and price, such as:(i)

When demand increases while supply remains unchanged,equil ibrium price and quantity will also increase. To get a

clearerpicture about the effect of increase in demand towards marketequilibriu m, let us look at Diagram 3.3(a). Curve D

and S are theoriginal demand and supply curve respectively. Point E

0

is the pointof equilibrium for the initial market, that is, where demand curve D
0

intersects with supply curve S. Equilibrium price and equilibriumquan tity are P
0

and Q

respectively. When demand increases, demandcurve D

0 1

will shift to D .D

and E
1

are the new demand curve andnew point of market equilibrium.(ii)

When demand decreases while supply remains unchanged,equil ibrium price and quantity will decrease [Refer

to Figure 3.3(b)].
Figure 3.3: Effect of demand curve shifts towards equilibrium

TOPIC 3 MARKET EQUILIBRIUM

49

(b) Supply Change (i)

When supply increases and demand remains unchanged, equilibriumprice will decrease whereas equilibrium

quantity will increase [Referto Figure 3.4(a)].(ii) When supply decreases and demand remains

unchanged, equilibriumprice will increase whereas equilibrium quantity will decrease

[Referto Figure 3.4(b)].

Figure 3.4: Effect of supply curve shifts towards equilibrium

(c)

Changes in Demand and Supply Changes in both demand and supply lead to predictable effects

onequilibrium quantity or price.(i) When both demand and supply increase, equilibrium

quantity willincrease [Refer to Figure 3.5(a)].(ii) When both demand and supply decrease,

equilibrium quantity willdecrease [Refer to Figure 3.5(b)].

Figure 3.5: Effect of shifts of demand curve

and supply curve in the same direction

PrinsipMikroekonomi
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1.2.1 Problems of Scarcity 1.2.2 Choice and Opportunity Cost 1.3.1 Production Possibility Table 1.3.2 Production Possibility Curve BASIC ECONOMIC QUESTIONS AND ECONOMIC SYSTEMS

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