In each microeconomic market, there are factors that affect supply and demand. At the same time, additional factors affect the supply and demand dynamics across an economy at the macroeconomic level. In addition, international factors, including inputs to the economy, will impact supply and demand within a market, either sustaining market equilibrium or leading to market disequilibrium. Understanding the market state (equilibrium or disequilibrium) and the causes at any given time will substantially inform local, national and international business decisions and consumer consumption. Governments are particularly interested in market states and will often intervene via policy settings and regulation to affect economic factors and influence market equilibrium at a macroeconomic or macroeconomic level.
Welcome to Topic 3: Market Equilibrium and Market Failure. In this topic, you will learn about:
- Individual supply, market supply
- Supply factors
- State of demand
- Market equilibrium and disequilibrium.
These relate to the Subject Learning Outcomes:
- Understand the microeconomic models to consider fundamental economic choice for households and firms.
- Interpret economic models, diagrams, and tables to describe the economic situations.
- Explain how government policy influences microeconomic choices and macroeconomic outcomes.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these prior to attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Read Chapter 4, pp. 75-87 of the prescribed text – Mankiw, NG 2016, Principles of microeconomics, 8th edn, Cengage Learning Custom Publishing.
Watch the following two (2) videos, then complete the task.
- Garcia, C 2016, Understanding market failures, streaming video, YouTube
- Pajholden, 2011, 6 types of market failure, streaming video, YouTube
Task: In your reflective journal, write down the key takeouts from these videos. You can access the reflective journal by clicking on ‘Journal’ in the navigation bar for this subject.
It is important to note that market failure is not always a bad thing. In the short term, markets may be readjusting to shocks to the market, which causes disequilibrium. While there may be market failure conditions causing inefficient use of scarce resources, many markets adjust relatively quickly to find a new equilibrium and different supply quality and price.
Read the following two (2) articles about the market for strawberries. You will be required to complete questions during the scheduled seminar that relate to these two articles.
- Long, B 2021, Strawberry growers hurt by lockdown, Queensland Country Life
- Radford, L & Prendergast, J 2021, Strawberry prices have jumped again, so what might happen next?, ABC News
Read the article by Xetra-Gold 2020, Gold price development: ten major influencing factors, Xetra-Gold
Task: Look to develop your understanding of factors that influence gold prices that may also affect other commodities in the economy. Note your responses in your reflective journal.
Task: To develop your understanding of a key supply-side factor, describe a situation of a product or service you have purchased where asymmetrical knowledge existed in favour of the supplier compared to you, the consumer. Note your responses in your reflective journal.
Read the following content.
Market equilibrium
Equilibrium occurs when supply and demand in a market are equal at the prevailing price. Market equilibrium refers to a single market, whereas general equilibrium refers to all markets being in equilibrium simultaneously. When a single market is considered, equilibrium occurs at the price and quantity determined by the intersection of the supply and demand curves or, if supply consistently exceeds demand, at a price of zero with quantity determined by demand. Market equilibrium in the short run can be compatible with firms earning in excess of (or less than) normal profit. In the long run, entry and exit will occur until the marginal firm earns only normal profit unless there are barriers to entry (Oxford Reference n.d.).
Developing an understanding of how prices allocate resources is a fundamental perspective in economics. Many economists, including Mankiw (2016), Backhouse and Medema (2009) and McConnell, Brue and Flynn (2009) have built on the concept of market equilibrium and how prices move with supply and demand, in and out of equilibrium. Often in any transaction or exchange, the question will be asked about an item for sale; “What is it worth?”. Ultimately it is worth the price someone will pay for it. Price reflects the price able to be obtained in the market, and in a single market, supply will be allocating resources to be profitable at the prevailing price.
Learning task 1: Market equilibrium
Using Google Scholar, find an article or book chapter that examines market equilibrium. In your reflective journal, complete the following tasks:
- Define (in your own words) market equilibrium.
- Identify three (3) key takeouts from the article or book chapter that relate to market equilibrium.
Factors influencing supply
Few markets are simple, and a range of supply and demand factors create additional market dynamics. Factors that influence supply include:
- cost of raw materials
- government subsidies/tariffs
- cost of wages
- cost of capital
- availability of labour.
If a market is at its equilibrium price and quantity, then there is no pressure to shift from that point as a natural tension holds the balance. Thus, the quantity supplied and the quantity demanded are balanced. Equilibrium is important to create not only a balanced market but also an efficient market.
When a market is in disequilibrium, over time, the various economic pressures influence either the supply or demand (or both) to move the market toward a new equilibrium. The two (2) key reasons this happens is because:
- There is more supply than what the market is demanding (surplus)
- There is more demand than the market is supplying (shortage).
These balancing dynamics between quality supplied at a price demanded is an ongoing natural function of a free-market economy.
During 2021 in Australia, an unusual market condition arose with fresh strawberries. The fruit was grown, ripe, and ready for harvest. However, with COVID-19 pandemic restrictions reducing the available labour force, harvesting was far more difficult. Consequently, prices fell due to peak supply falling. In addition, demand from interstate markets under lockdown also fell, placing further downward pressure on prices.
Once strawberries are planted, changing the produced supply quantity is impractical. Markets for many fresh foods such as seafood, flowers, and dairy products face turbulent market forces with significant difficulty in adjusting supply in the short term. The efficient allocation of resource objectives indicates that all fresh produce should sell out in day-to-day market dynamics. Pricing may be adjusted rapidly to influence demand. Thus, we saw fresh strawberries at historic lows of around $1.50 a punnet.
Learning task 2: Factors influencing supply
Research the factors influencing supply. Describe these factors and identify an example to demonstrate your understanding.
Complete the Topic 3 Worksheet and save a copy of your answers in your reflective journal.
Non-price determinants of supply
In a given market, changes in one or more of the non-price determinants of supply cause the supply curve to shift (causation). A decrease in supply shifts the supply curve to the left; an increase in supply shifts the supply curve to the right. As Mankiw (2016), Backhouse and Medema (2009) and McConnell, Brue and Flynn (2009) identified, these movement dynamics and the following six (6) factors all affect supply and its equilibrium with demand at a price.
Non-price determinants of supply are:
- Taxes, tariffs and subsidies
- Prices of raw materials and resources
- Technology (changes/improvements)
- Prices of (alternative or substitute) goods
- Expectations of what future prices may be
- Quantity of sellers in the market.
Levers or factors affecting equilibrium include subsidies, taxes, and tariffs. The common government intervention in a market may consist of taxes, excise duty (all forms of taxes) on specific items. For example, alcohol and tobacco products. This increases the price as governments convey that they wish to dampen demand. The government also extracts the tax revenue from consumers into government accounts.
Subsidies
Subsidies are most commonly an incentive type payment by the government to a supplier to subsidise or lower their cost of production and encourage an increase in the supply of the product. This is common in food commodity areas. Governments may also run subsidy programs for goods such as solar panels to encourage solar power production and energy-efficient consumption. This also takes the pressure off the government-owned and maintained electricity infrastructure.
Check out this video on subsidies.
What did you learn from this video? Did you note how the video illustrated the effect on price when the government allocated subsidies to producers and its impact on equilibrium?
Learning task 3: Subsidies
Reflect on subsidies you have encountered in your life. Write two (2) subsidies you have heard of or been affected by in your reflective journal.
Hint: Conduct a Google search to explore different examples of subsidies in other countries.
Government taxes
If you have ever held a job or purchased a product or service, you will likely have been taxed by the government. A tax is a government charge on the price and cost of a good. You may recognise these as products you purchase at the supermarket, such as sugar, flour, or alcohol. It may also be a finished product like cigarettes. The tax generates revenue for the government and is intended to reduce demand for the product because of the higher price charged based on the sellers' price plus the tax.
A tariff is a tax charged by governments at a national level on importing a range of specific goods from overseas, such as luxury imported cars. The government may set a rate, for example, 10-15 % tariff, on any goods it targets, and when these goods are imported, the tariff increases the price and is effectively paid by the consumer. This aims to discourage imports and encourage demand for locally produced substitutes where they may be available.
Learning task 4: Tariffs
Read the following online article by BBC News n.d., US Suspends tariffs on single malt Scotch whisky, BBC.
In your reflective journal, complete the following tasks:
- Describe the key message in the article.
- Identify and describe the international impacts on demand and prices.
Knowledge check
Complete the following two (2) tasks. Click the arrows to navigate between the tasks.
Key takeouts
Congratulations, we made it to the end of the third topic! Some key takeouts from Topic 3:
- Market forces will arrive at an equilibrium, all other things being equal, at a particular price where supply equals demand.
- The Government may deliberately affect prices through taxes.
- Many factors can cause a market to move into disequilibrium.
- Disequilibrium is a common state of many markets, including shortages and surpluses of supply.
- Suppliers and/or governments may seek to shift (contract or expand) the price point of market equilibrium for a range of reasons.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking ‘Join’ to enter the class.
Click here to access your seminar.
The learning tasks are listed below. These will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
This task is based on your pre-seminar task, where you have read the following two (2) articles:
In a breakout room assigned by your lecturer, please answer the three (3) questions and be prepared to report back to the class.
- How did the Sydney and Melbourne COVID-19 lockdowns affect the price of strawberries grown interstate?
- Why are strawberry prices moving in this way at this point in time?
- In other years (without lockdown pandemic conditions) in a normal market, what would you expect to happen with equilibrium price before peak supply point (peak strawberry production) and then after peak supply point.
Watch the video by Galanchuk, A 2019, IB Economics- non price determinants of supply, streaming video, YouTube.
Task: After watching the video, identify factors that may cause shifts in the cost of production that are visible to you, regarding any of your regular purchases of goods? Identify any purchases you make where there are effective substitutes and where there are not. Be prepared to discuss with the class.
Welcome to your post-seminar learning tasks for this week. Please ensure you complete these after attending your scheduled seminar with your lecturer. Your lecturer will advise you if any of these are to be completed during your consultation session. Click on each of the following headings to read more about the requirements for each of your post-seminar learning tasks.
Watch the video by Silz-Caron, K 2016, Equilibrium and taxes, streaming video, YouTube.
Task: Answer the following questions in your reflective journal.
- What are two (2) examples of actions or events that would cause a shift in the supply curve of a specific product in a market? What happens to the supply curve in your two (2) examples?
- If the government introduces a subsidy for dairy farmers producing fresh milk, what would happen with the market's supply curve for fresh milk?
Revise the content from this topic and test your knowledge of this topic and review the additional resources to further your understanding. This will help you to prepare for Assignment 1.
You will be required to complete Quiz 2 for Assessment 1. Select “Quiz 2” from the navigation bar for this subject.
Record your answers to the following questions in your reflective journal and be ready to discuss them with your lecturer during your consultation session.
Part 1: Surge pricing
- What is surge pricing?
- Why does surge pricing exist with rideshare apps?
- What effect does it have on your purchase of these services when surge pricing is triggered?
Part 2: Supply shortage
Think of a purchase you considered making or have made in recent years, where you noticed supply shortages of the product. Then, complete the following:
- Identify the product.
- Describe the impacts of supply shortages on price.
- Describe the effect of supply shortages on your completion of the purchase.
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
- Section 3.3 of Greenlaw, SA & Shapiro, D 2011, Principles of Macroeconomics, OpenStax.
- Chapter 3, p.54-65 of McConnell, C, Brue, S & Flynn, S 2011, Economics: Principles, problems and policies, 18th edn., McGraw-Hill.
References
- Backhouse, RE & Medema, S 2009, ‘On the definition of economics’, Journal of Economic Perspectives, 23(1):221-233.
- Galanchuk, A 2019, IB Economics- non price determinants of supply, streaming video, YouTube, https://youtu.be/qXKptx5z-Aw
- Garcia, C 2016, Understanding market failures, streaming video, YouTube, https://youtu.be/bGa2G7FStuk
- Long, B 2021, Strawberry growers hurt by lockdowns, Queensland Life, www.queenslandcountrylife.com.au/story/7415596/strawberry-growers-urge-shoppers-to-stock-up-as-lockdowns-slash-income/
- Mankiw, NG 2016, Principles of microeconomics, 8th edn., Cengage Learning Custom Publishing.
- McConnell, CR, Brue, SL & Flynn, SM 2009, Economics: Principles, problems and policies, 18th edn., McGraw-Hill Irwin.
- Oxford Reference 2021, Market equilibrium, Oxford University Press, www.oxfordreference.com/view/10.1093/oi/authority.20110803100135910
- pajholden, 2011, 6 types of market failure, streaming video, YouTube, https://youtu.be/jRN6V1rl6v8
- Radford, L & Prendergast, J 2021, Strawberry prices have jumped again, so what might happen next? ABC News, https://www.abc.net.au/news/rural/2021-10-25/whats-going-on-with-strawberry-prices/100558976
- Xetra-Gold 2020, Gold price development: ten major influencing factors, Xetra-Gold, https://www.xetra-gold.com/en/gold-news/gold-price-development-ten-major-influencing-factors/
