Assignment Economics

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Assignment Economics #1 Question: Define Market Equilibrium. 1. When subsidy is given by Government. 2. When price floor is settle above the equilibrium point. __________________________________________________________ Name: Ali Shaharyar Roll No: 15366 MBA morning ----------------------------------------------------------------------------------------------- Market Equilibrium Definition: Equilibrium means a state of equality or a state of balance between market demand and supply Explanati
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   Assignment Economics#1Question:Define Market Equilibrium.1. When subsidy is given by Government.2. When price floor is settle above the equilibrium point. __________________________________________________________Name: Ali ShaharyarRoll No: 15366MBA morning-----------------------------------------------------------------------------------------------    Market EquilibriumDefinition:   Equilibrium means a state of equality or a state of balance between marketdemand and supply   Explanation:   Equilibrium means a state of equality or a state of balance between marketdemand and supply. Without a shift in demand and supply there will be nochange in market price. (Qs=Qd=p)   In the diagram above, the quantity demanded and supplied at price P1 are equal.At any price above P1, supply exceeds demand and at a price below P1, demandexceeds supply. In other words, prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demandor supply will shift the demand or supply curves. This will cause changes in theequilibrium price and quantity in the market.  1:   Subsidy: A subsidy is a payment by the government to suppliers that reducetheir costs of production and encourages them to increase output   When Subsidy Given by Government: Subsidies represent payments to producers by the government which reducetheir variable costs of production and encourages them to expand theiroutput. The effect of a subsidy with a downward sloping demand curve is toincrease the quantity of goods sold and to reduce the market equilibriumprice. This is shown in the diagram below Government subsidies are often offeredto producers of merit goods and services   and industries requiring some protectionfrom low cost international competition. The subsidy causes the firm's  supply curve  to shift to the right becausethe firm's costs are reduced. This means that more can be supplied ateach price. Equilibrium price falls from P to P1 and quantity tradedexpands from Q to Q1.The more inelastic the demand curve the greater the consumer's gainfrom a subsidy will be. Indeed when demand is perfectly inelastic theconsumer gains the entire subsidy because the market price will fall bythe entire amount of the subsidy. When demand is relatively elastic, a  subsidy will have more of an impact on quantity bought and sold andwill cause only a small fall in the market price.  2:When Price floor is settle above the equilibrium point: When the market price of a good or service rises above equilibrium onits own, the number of buyers exhibiting demand for it is reduced. Theonly thing left for the maker of such a good or service to do is to dropthe price to restore the level of demand necessary to make an optimalprofit. This sounds contrary to simple arithmetic, but the fact is that theequilibrium is the price at which consumers get the best deal andsuppliers earn the most profit.The effect of price controls is a common example of when a price isheld artificially above equilibrium price. Equilibrium is established in afree market where the quantity of a good or service supplied is equal tothe quantity demanded. So when government steps in and imposes aprice floor on a good or service (such as milk or even laborFor the price that the ceiling is set at, there is more demand (Q2) thanthere is at the equilibrium price. There is also less supply (Q1) thanthere is at the equilibrium price, thus there is more quantity demandedthan quantity supplied i.e. shortage
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