 Welcome to the session of Market Equilibrium. These are the learning outcomes of the session. Before proceeding, let me ask you one question. What is the law of the demand? You may pause the video, think about the question and write down your answer in your notebook. After writing the answer, you can resume the video to see the answer. The law of the demand state that the quantity demanded for the goods or the services are inversely related to the selling price under the condition that all the other determinants are remaining unchanged. So, what is the market equilibrium? The market equilibrium is the state in which the market supply and the demand balances each other. And as a result, the price will become stable. It is a situation where for the particular good or the supply, the demand and the supply are equal. In the diagram as shown, the equilibrium point or the equilibrium price is the P1 and the equilibrium quantity is the Q1. So, at the price P1, the quantity which is supplied is the Q1 and we will have the equilibrium point. So, it is a point where the supply and the demand curve meet each other. It means the supply and the supply of the good is equal to the demand of the good. Generally, over supply of the good or the services cause the prices to go down, which will result the higher in the demand. Balancing effect of the supply and the demand result in the state of the equilibrium. When the market is in equilibrium, there is no tendency for the price to change. We say that market clearing price will be achieved where the buyers and the sellers meet to exchange the money for the goods. The price mechanism refers how the supply and the demand interact to set the market price and the amount of the good that has been sold. At the most prices, the planned demand does not equal to the planned supply and this is the state of this equilibrium because there is either a shortage of the supply or a surplus means excess of the supply because of that the firm has to make a decision of changing the price. The price is determined in a free market by the interaction of the supply and the demand. We can underline these three dynamics laws of the supply and the demand. When the quantity demanded is greater than the quantity which is supplied, the price tends to rise. When the quantity supplied is greater than the quantity demanded, the price tends to fall. In the market, larger the difference between the quantity supplied and the quantity demanded, the greater the pressure on the prices to rise or the prices to fall. When the quantity supplied equal to the quantity demanded, the price have no tendency to change. The price theory answers these questions of interaction of demand and the supply to determine the price of in a competitive market. Let us see an example as given in a table. At the price of 3 units, only at this price the quantity which the producers are willing to produce and the supply is identical to the amount customer are willing to pay. And as a result, there is neither shortage of the supply or nor surplus of the supply, the X at this price. A surplus causes the price to decline and shortage causes the price to rise. If the shortage of the supply means that there is a rise in the price. With neither shortage or nor surplus at the unit 3, there is no reason for the actual price of the commodity or supply X to move along this price. The price is this price is called as what the equilibrium price. The equilibrium represents the situation where there is no tendency to change the price. And it is the state of the balance. It is stated differently that the price of the X will be established where the supply decisions of producers and the demand decisions of buyers are mutually consistent. Graphically the interaction of supply and the demand curve will indicate the equilibrium point E as shown in the figure. If the market price is OP 1, the quantity demanded by the customer will be what? OQ 1. While the quantity which is with the producer wish to supply is what? OQ 2. Now, there is a thus surplus of Q 1 Q 2 at this price will be created. The surplus will need to the downward pressure on the price and so the market price will fall. And at the lower price OP 1, the quantity supplied will be what? OQ 1. While the quantity demanded is what? OQ 2. And therefore, there is will be the shortage of the supply will be created at this price. And it is represented by Q 1 and Q 2. This shortage tends to put the upward pressure on the price. The market price is expected to rise. There is only one price at which the quantity supplied and the quantity demanded are equal. There is no surplus or no shortage, no rise or fall into the price which is called as OP. And thus this refer as an equilibrium position. Let us see what is a ceiling price or price ceiling. A price ceiling keeps the price forum rising above the particular level. This called as a ceiling price. A price ceiling is mandated maximum amount the seller is allowed to charge for the product of service. Usually said by the law, the price ceiling are typically applied to only staples such as food and energy products when such good become unaffordable for the regular customers. Some areas have ceiling to protect the renters from rapidly climbing the rates of the residents. A ceiling price is essentially a type of the price control. A price ceiling can be advantageous for allowing the essentials to be at the affordable price, at least for the temporary. Let us take an example by thinking about the hypothetical town. The rent was fairly stable in that particular town. But when the town was featured in a top 10 place to leave article in the popular magazine, eventually the rent control laws were suppressed or passed. We can use the demand and the supply model, which is shown below to understand how the market changed based on these events. Now in the beginning before the article was published, the equilibrium point is 0, lay at the intersection of the supply curve S0 and the demand curve D0 corresponding to the equilibrium price of $500 and the equilibrium quantity of 15,000 units of rental house. When the article is published, the article inspired the more people will want to move from to this imaginary town. It is shifted a demand curve for rental house to the right side. It is shown in a table and it is shown in a graph from D0 to D1. In the new market, the new equilibrium point will be now even and the price of the rental unit rises to the $600 and equilibrium quantity increased to the 17,000 unit. Now let us suppose that the bunch of the residents were pretty unhappy with the paying of 20% increase in the rent. Now they will pressure the local politicians to pass the rent control law to keep the price at the original equilibrium, which is a $500 for the typical apartment. In the demand and the supply model above the horizontal lines at the price of $500 shows the legally fixed maximum price set by the rent control law. Now, however underlying forces that have been shifted down the demand curve to the right side are still there. At the fixed maximum price of $500, the quantity which is supplied will remain 15,000 rental unit. So, in other words, what will happen? The quantity demanded exceeds the quantity supplied and there will be the shortage of the rental houses will be created. Next is the price floor. The price floor is a situation when the price is charged more than or less than the equilibrium price and determined by the market forces of the demand and the supply. By the observation, it has been found that the lower price floors are ineffective. The price floor has been found to be great importance for the labor wage market. The price floor exists when the price artificially held above the equilibrium price and it is not allowed to fall. So, there are many examples of the price floor. In some cases, the private businesses maintain the price floor while in other cases, the government maintains the price floor. We can take a look at the demand and the supply model which is shown below. To understand the better effect of the government program that creates the price above the equilibrium, let us look into that picture. This particular model represents the market for wheat in the Europe. In the absence of the government intervention, the price of the wheat would be adjust so that the quantity supplied will be equal to the quantity demanded. That is the equilibrium point E0 with the price P0 and the quantity E0. However, the policies to keep the prices high for the farmer keeps the price above what would have been in the market equilibrium level. This price is called as a PF as shown in the figure by the horizontal line in the diagram. This will result in the quantity supplied in excess of the quantity which is demanded because of the increase in the price. So, when the quantity supplied exceeds the quantity demanded, the surplus will be created. These are the references for the session. Thank you.