GENERAL EQUILIBRIUM

The general equilibrium is something that arises when the quantity demanded is equal to the quantity in supply. It is generally termed as the market equilibrium. It can be shown as a graph with both the demand and supply curves. The point at which both these curves intersect is called as the equilibrium point.

Let us see the scenario when the prices rise above the market equilibrium or go below it.

 

Price above Equilibrium

If the price exceeds the equilibrium price, a surplus occurs and there will be competition among the Sellers and price will come down to the equilibrium point.

 

Price below the Equilibrium

If the price is below the equilibrium a shortage occurs and there will be a competition among the buyers and the price will rise to the equilibrium level. See the graph below to understand better.

The equilibrium state can tend to change as a result of changes in four ways. These can be by one of the following:

1. Increase in Demand

When the demand increases in the market to due various reasons, there is a shift to right for the demand curve. With regard to the new demand curve, the point of equilibrium is also seen to have changed and gone a little above the earlier case.

2. Decrease In Demand

3. Increase in Supply

4. The decrease in supply:

 

Price Ceiling

  • It is the legally mandated maximum price beyond which the price is not allowed to rise
  • Purpose is to keep price below the market equilibrium price

 

Examples:

  1. rent controls
  2. price controls during wartime
  3. gas price rationing in1970s

 

  • Price Ceiling does two things:
  1. It reduces the availability
  2. It increases the amount requested
  3. Due of this, there is a shortage of goods seen

 

Price Floor

  • It is the legally mandated minimum price below which the price of the good should not fall.
  • It is designed in order to maintain a price above the equilibrium level

 

Examples:

  1. agricultural price supports
  2. minimum wage laws
  3. MarketFor Unskilled labor: If the Government raises the cost of hiring workers by mandating that all firms provide health insurance for their employees, the cost of this new benefit raises the effective wages to the workforce
  • Thus Price floor does two things:
  • It reduces quantity demanded
  • It increases the quantity supplied

These are certain things about the market equilibrium.

General Equilibrium Homework Help