Economics 9 Name___________________________________ Score ____________ 2nd Q

MODULE Price and the Interaction of

3
Demand and Supply
Definition of Market Equilibrium
A market is said to be in equilibrium when there is no reason for price and quantity to make further adjustments
because consumers are able to buy all they want to buy and producers are able to sell all they want to sell. At equilibrium, the
quantity of goods and services that consumers are willing to buy matches the quantity of goods and services that producers are
willing to sell.
Market equilibrium is reached when the price has
adjusted to a level at which the quantity demanded equals
the quantity supplied. The price that balances the quantity
demanded and the quantity supplied is the equilibrium
price; the quantity demanded and supplied at that price is
the equilibrium quantity.
Let us review the demand and supply curves in our
example of the market for cellular phones. The figure
below shows that the equilibrium lies on the point where
the price is P 5, 000 and the quantity of cellphones is 160,
000 pieces.
Market naturally moves toward their equilibrium.
A market that is not in equilibrium will tend to move to a
point of equilibrium through changes in price and quantity.
When the market price is above the equilibrium price, the
market price will go down until it reaches equilibrium. And when the market price is below the equilibrium price, the market
price will rise until it reaches the equilibrium level.
But why will the market price adjust when price is not
equal to the equilibrium price? Let us look at the figure below
to understand why the market price naturally moves toward
the equilibrium price.
What happens when the market price is lower than
equilibrium price? At the market price of P4,000, consumers
want to purchase a total of 200,000 pieces, but firms are
willing to sell only 140, 000 pieces. There is a shortage-
quantity demanded exceeds quantity supplied. The shortage,
which is the excess of quantity demanded over quantity
supplied, is 60, 000 pieces of cellphones.
Firms will notice that their products get sold out too
quickly so that some consumers are left with nothing to
purchase. With many buyers chasing a limited supply of goods, firms can take advantage of the situation by raising the price
and would continue to do so until price equals P5, 000, the
equilibrium price.
Now, let us see what happens when the price is higher
than the equilibrium price. Look at the figure below. At the
market price of P6,000, consumers are willing to buy 120,000
pieces of cellphone while the firms are willing to sell 170, 000
pieces. There is a surplus- quantity supplied exceeds quantity
demanded. The surplus, which is the excess of quantity
supplied over quantity demanded, is 50,000 pieces of
cellphone.
The firms will eventually realize they cannot sell all
they want at the going price. They will try to increase sales by
cutting the price and would continue to do so until price equals
P5,000, the equilibrium price.
Economics 9 -page 2 of 2- 2nd Q
Government Intervention and The Market Price
The government imposes restrictions on how high or low a market price may go when it believes that the market price
if a good or service is unfair- too high for many buyers or too low for many sellers. Price control is the term used to describe
the government regulation on the price at which a good can be sold.
Price control can take the form of an imposition of a price ceiling or a price floor. The two kinds of price control are
shown in the figure below.
When the government believes that the market
price is unfair in the sense that it is too high for many
buyers, it sometimes put restrictions on how high a price
may go. The price ceiling is the maximum price above
which the price charged by the suppliers for a
commodity is not permitted to rise. A price ceiling is
usually set for basic needs like food and medication
when natural calamities strike.
As shown below, the price ceiling is set below
the equilibrium price, P*. At the impose price ceiling,
quantity demanded exceeds quantity supplied, so there
is a shortage of cellphones.
When the government believes that the market
price is unfair in the sense that is too low for many sellers, it sometimes put restrictions on how low a price may go. The price
floor is the minimum price below which the price buyers pay for a commodity is not permitted to fall. A price floor is usually
set for agricultural crops is not permitted to fall. A price floor is usually set for agricultural crops in order to keep the income
of farmers from falling toward an unacceptable level.
As shown in the figure, the price floor is set the above the equilibrium price, P*. At the imposed price floor, quantity
supplied exceeds quantity demanded, so there is a surplus of cellphones.
All in all, deliberate restraints on price movements will certainly result in a gap between quantity demanded and
quantity supplied. Therefore, price controls hinder the market from reaching equilibrium.

FT1. Identify whether the situation depicts a surplus, shortage, or equilibrium.

_________1. The quantity supplied of sweet potato in Pasig City Mega Market is 200 kilograms while the quantity demanded
is also 200 kilograms. EQUILIBRIUM
_________2. One hundred pieces of ballpen are needed in Liberato Damian Elementary School, but only 50 pieces are being
sold at Dale’s School Supplies store. SHORTAGE
_________3. The buyers and sellers in a lanzones market agreed on the price of P50.00 for a kilo lanzones. EQULIBRIUM
_________4. There are 90 cavans of rice in the warehouse of Mr. Ramos while only 20 cavans are demanded by consumers.
SURPLUS
_________5. The town residents purchased all the bread sold by Aling Berna and other sellers. EQUILIBRIUM
_________6. Buyers want two dozen of eggs but only ten pieces are being sold in the stores. SHORTAGE
_________7. Six kilograms of tilapia were sold in the wet market, but two extra kilos remain unsold. SURPLUS
_________8. Ten packs of cigarettes were bought in the morning. For unknown reasons, the remaining six packs had not been
bought. SURPLUS
_________9. Jojo and other sellers were able to get home early because all the bananas from Davao were sold.
EQUILIBRIUM
_________10. The stock of food in a school canteen was left untouched because classes were suspended. SURPLUS
FT2. Using a Venn diagram, put on the left side of the diagram
the benefits some consumers get from a price ceiling; right on
the right side the negative effects in the sellers. In the middle,
write the effects of price ceiling on the market as a whole.

FT3. Examine the graph and answer the questions below.

1. At ₱40, quantity demanded is 50.
2. At ₱70, quantity supplied is 60.
3. The equilibrium price is 50 pesos.
4. The equilibrium quantity is 40.
5. If the price floor is set at ₱70, the surplus is 20.
6. At ₱80, excess supply is 30.
7. If the price ceiling is set at ₱20, the shortage is 30.
8. At the price of 40 pesos, quantity demanded is 50.
9. At the price of 80 pesos quantity supplied is 70.
10. At ₱50, quantity supplied is 40 and quantity demanded is 40.
END