Economy Basic Concepts Part 1 – Market Equilibrium

  • Post category:Economics

Market Equilibrium

A situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the market, price tends to remain stable in this situation. Economy Basic Concepts Part 1 – Market Equilibrium

3.1

How is equilibrium established?

  • Graphically, we say that demand contracts inwards along the curve and supply extend outwards along the curve.
  • Both of these changes are called movements along the demand or supply curve in response to a price change.
  • Demand contracts because at the higher price, the income effect and substitution effect combine to discourage demand.
  • Demand extends at lower prices because the income and substitution effect combine to encourage demand.
  • In terms of supply, higher prices encourage supply, given the supplier’s expectation of higher revenue and profits, and hence higher prices reduce the opportunity cost of supplying more.
  • Lower prices discourage supply because of the increased opportunity cost of supplying more. The opportunity cost of supply relates to the possible alternative of the factors of production.

Consumer Equilibrium

  • The state of balance achieved by an end user of products that refers to the number of goods and services
  • They can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income.

3.2

  • In the diagram, there are two goods X and Y.
  • The consumer’s preference scale for the combination of two goods is exhibited by indifference map.
  • The prices of goods are given and remain constant; the consumer has a given income which sets to limits to his maximizing behaviour

Producer’s Equilibrium

  • It is a situation in which a firm produces that level of output that maximises its profits. When the total profit of a firm is maximum then it is said to be in equilibrium.
  • A firm’s Total profit is defined as TR -TC. When the positive vertical difference between TR and TC is maximum, firm is in equilibrium.

We will try to understand this via MR – MC Approach

MC – Marginal Cost

  • The increase or decrease in the total cost of a production run for making one additional unit of an item.
  • It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for.
  • Marginal costs are variable costs consisting of labour and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses).
  • In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs.
  • it is comparatively very low. The concept of marginal cost is critically important in resource allocation.
  • Because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost.

MR – Marginal Revenue

  • Marginal revenue (Increase in the gross revenue of a firm produced by selling one additional unit of output.

MR – MC APPROACH

  • MR-MC approach in general a firm’s profit-maximizing condition is MR = MC.
  • But for a competitive firm P = MC (Because perfect competition P = AR = MR and MC are rising – Competitive firm chooses its level of output in the rising portion of MC curve.)
  • There are two conditions of Producer’s Equilibrium

Producer’s Equilibrium

  • It is a situation in which a firm produces that level of output that maximises its profits. When the total profit of a firm is maximum then it is said to be in equilibrium.
  • A firm’s Total profit is defined as TR -TC. When the positive vertical difference between TR and TC is maximum, the firm is in equilibrium.

We will try to understand this via MR – MC Approach

MC – Marginal Cost

  • The increase or decrease in the total cost of a production run for making one additional unit of an item.
  • It is computed in situations where the breakeven point has been reached: the fixed costs have already been absorbed by the already produced items and only the direct (variable) costs have to be accounted for.
  • Marginal costs are variable costs consisting of labour and material costs, plus an estimated portion of fixed costs (such as administration overheads and selling expenses).
  • In companies where average costs are fairly constant, marginal cost is usually equal to average cost. However, in industries that require heavy capital investment (automobile plants, airlines, mines) and have high average costs.
  • it is comparatively very low. The concept of marginal cost is critically important in resource allocation.
  • Because, for optimum results, management must concentrate its resources where the excess of marginal revenue over the marginal cost is maximum. Also called choice cost, differential cost, or incremental cost.

MR – Marginal Revenue

  • Marginal revenue (Increase in the gross revenue of a firm produced by selling one additional unit of output.

MR – MC APPROACH

  • MR-MC approach in general a firm’s profit-maximizing condition is MR = MC.
  • But for a competitive firm P = MC (Because perfect competition P = AR = MR and MC are rising – Competitive firm chooses its level of output in the rising portion of MC curve.)
  • There are two conditions of Producer’s Equilibrium

Leave a Reply